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Credit Transactions 1

Case Notes/Digests

ACME SHOE CO. V. CA

Issue

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to
obligations yet to be contracted or incurred?

Facts

Petitioner Chua Pac, the president and general manager of co-petitioner “Acme Shoe, Rubber & Plastic Corporation,”
executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers
Bank of the Philippines. The mortgage stood by way of security for petitioner’s corporate loan of three million pesos
(P3,000,000.00). In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it
obtained from respondent bank additional financial accommodations 1oi tong P2,700,000.00. 2 These borrowings were on
due date also fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos
(P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the loan was not
settled at maturity. 3 Respondent bank thereupon applied for an extrajudicial foreclosure of the chattel mortgage, (Note:
The previous loans were paid in full, and no agreement as to the constitution of any chattel mortgage were reached in this
point.) hereinbefore cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an action for
injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City
(Civil Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel
mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.

Ruling

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the
faithful performance of the obligation by the principal debtor is secured by the PERSONAL COMMITMENT of another (the
guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured
by an ENCUMBRANCE OF PROPERTY — in pledge, the placing of movable property in the possession of the creditor;
in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate
mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a
written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to
apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit — upon the essential
condition that if the principal obligation becomes due and the debtor defaults, then the property encumbered can be
alienated for the payment of the obligation, 7 but that should the obligation be duly paid, then the contract is
AUTOMATICALLY extinguished proceeding from the accessory character 8 of the agreement. As the law so puts it, once the
obligation is complied with, then the contract of security becomes, ipso facto, null and void.

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these
future debts are accurately described, 10 a chattel mortgage, however, can only cover obligations existing at the time the
mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted
can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or
arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a
fresh chattel mortgage or by amending the old contract (A promise to mortgage is different from a contract of mortgage.)
conformably with the form prescribed by the Chattel Mortgage Law. 11 Refusal on the part of the borrower to execute the
agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 2
Case Notes/Digests

financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts
extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel
Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted
that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties
(not against third persons acting in good faith 12 ), the fact, however, that the statute has provided that the parties to the
contract must execute an oath that makes it obvious that the debt referred to in the law is a current, not an obligation
that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel
mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. The significance of the ruling to
the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with the full payment
of the P3,000,000.00 loan, 16 there no longer was any chattel mortgage that could cover the new loans that were
concluded thereafter.

NAVOA v. CA

Procedural Aspect

On 17 December 1977 private respondents filed with the Regional Trial Court of Manila an action against petitioners for
collection of various sums of money based on loans obtained by the latter. On 3 January 1978 petitioners filed a motion to
dismiss the complaint on the ground that the complaint stated no cause of action and that plaintiffs had no capacity to sue.
(Which was dismissed.) We cannot sustain the petition. Petitioners are now estopped from assailing the appellate
jurisdiction of the Court of Appeals after receiving an adverse judgment therefrom. 3 Having participated actively in the
proceedings before the appellate court, petitioners can no longer question its authority.

Petitioners submit that private respondents failed to specify in their complaint a fixed period within which petitioners
should pay their obligations; that instead of stating that petitioners failed to discharge their obligations upon maturity
private respondents sought to collect on the checks which were issued to them merely as security for the loans; and, that
private respondents failed to make a formal demand on petitioners to satisfy their obligations before filing the action.

Facts

That sometime in February, 1977, when the Reycard Duet was in Manila, plaintiff Teresita (respondent) got acquainted
with defendant Olivia (petitioner) in the jewelry business, the former selling the jewelries of the latter; that to the
Reycard Duet alone, plaintiff Teresita sold jewelries worth no less than ONE HUNDRED TWENTY THOUSAND (P120,000.00)
PESOS in no less than twenty (20) transactions; that even when the Reycards have already left, their association continued,
and up to the month of August, 1977, plaintiff Teresita sold for defendant Olivia jewelries worth no less than TWENTY
THOUSAND (P20,000.00) PESOS, in ten (10) transactions more or less. That sometime in the months of June and
July of 1977, defendant Olivia, on two occasions, ASKED FOR A LOAN from plaintiff Teresita, for the purpose of investing
the same in the purchase of jewelries, which loan were secured by personal checks of the former; that in connection with
these loans, defendant promised plaintiff a participation in an amount equivalent to one half (1/2) of the profit to be
realized; that on these loans, plaintiff was given a share in the amount of P1,200.00 in the first transaction, and in the
second transaction, the sum of P950.00.

A cause of action is the fact or combination of facts which affords a party a right to judicial interference in his behalf. The
requisites for a cause of action are: (a) a right in favor of the plaintiff by whatever means and under whatever law it arises
or is created, (b) an obligation on the part of the defendant to respect and not to violate such right; and, (c) an act or
omission on the part of the defendant constituting a violation of the plaintiff’s right or breach I obligation of the defendant

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 3
Case Notes/Digests

to the plaintiff. 4 Briefly stated, it is the reason why the litigation has come about; it is the act or omission of defendant
resulting in the violation of someone’s right.

In determining the existence of a cause of action, only the statements in the complaint may properly be considered.
Lack of cause of action must appear on the face of the complaint and its existence may be determined only by the
allegations of the complaint, consideration of other facts being proscribed and any attempt to prove extraneous
circumstances not being allowed.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, such as what petitioners did in the
case at bar, he is regarded as having hypothetically admitted all the averments thereof. The test of sufficiency of the facts
found in a complaint as constituting a cause of action is whether or not admitting the facts alleged the court can render a
valid judgment upon the same in accordance with the prayer thereof. The hypothetical admission extends to the relevant
and material facts well pleaded in the complaint and inferences fairly deducible therefrom. Hence, if the allegations in a
complaint furnish sufficient basis by which the complaint can be maintained, the same should not be dismissed
regardless of the defense that may be assessed by the defendants.

In their first cause of action private respondents Eduardo and Teresita Domdoma alleged that petitioner
Olivia Navoa obtained from the latter a ring valued at P15,000.00 and issued as security therefor a check for the same
amount dated 15 August 1977 with the condition that if the ring was not returned within fifteen (15) days the ring would
be considered sold; and, after the lapse of the period, private respondent Teresita Domdoma asked to deposit the check
but petitioner Olivia Navoa requested the former not to deposit it in the meantime; that when Teresita Domdoma
deposited the check after holding it for sometime the same was dishonored for lack of funds. Private respondent Teresita
Domdoma sought to collect the amount ofP15,000.00 plus interest from 15 August 1977 until fully paid.

In the second to the sixth causes of action it was alleged that private respondents granted loans to petitioners in different
amounts on different dates. All these loans were secured by separate checks intended for each amount of loan obtained
and dated one month after the contracts of loan were executed. That when these checks were deposited on their due dates
they were all dishonored by the bank. As a consequence, private respondents prayed that petitioners be ordered to pay
the amounts of the loans granted to them plus one percent interest monthly from the dates the checks were dishonored
until fully paid.

All the loans granted to petitioners are secured by corresponding checks dated a month after each loan was obtained. In
this regard, the term security is defined as a means of ensuring the enforcement of an obligation or of protecting some
interest in property. It may be personal, as when an individual becomes a surety or a guarantor; or a property security, as
when a mortgage, pledge, charge, lien, or other device is used to have property held, out of which the person to be made
secure can be compensated for loss. 7 Security is something to answer for as a promissory note. 8 That is why a secured
creditor is one who holds a security from his debtor for payment of a debt. 9 From the allegations in the complaint there is
no other fair inference than that the loans were payable one month after they were contracted and the checks issued by
petitioners were drawn to answer for their debts to private respondents.

Petitioners failed to make good the checks on their due dates for the payment of their obligations. Hence, private
respondents filed the action with the trial court precisely to compel petitioners to pay their due and demandable
obligations. Art. 1169 of the Civil Code is explicit — those obliged to deliver or to do something incur in delay from the time
the 3oi to judicially or extrajudicially demands from them the fulfillment of their obligation. The continuing
refusal of petitioners to heed the demand of private respondents stated in their complaint unmistakably shows the
existence of a cause of action on the part of the latter against the former.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 4
Case Notes/Digests

PEOPLE V. CONCEPCION

By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine National Bank, Venancio
Conception, President of the Philippine National Bank, between April 10, 1919, and May 7, 1919, authorized an extension of
credit in favor of “Puno y Conception, S. en C.” (It was described in the decision as copartnership.) in the amount of
P300,000. This special authorization was essential in view of the memorandum order of President Conception dated May
17, 1918, limiting the discretional power of the local manager at Aparri, Cagayan, to grant loans and discount negotiable
documents to P5,000, which, in certain cases, could be increased to P10,000. Pursuant to this authorization, credit
aggregating P300,000, was granted the firm of “Puno y Conception, S. en C.,” the only security required consisting of six
demand notes. The notes, together with the interest, were taken up and paid by July 17, 1919.

Section 35 of Act No. 2747 (The crime which the accused was charged and subsequently convicted of in the lower court.),
effective on February 20, 1918, just mentioned, to which reference must hereafter repeatedly be made, reads as follows:
“The National Bank shall not, directly or indirectly, grant loans to any of the members of the board of directors of the
bank nor to agents of the branch banks.” Section 49 of the same Act provides: “Any person who shall violate any of the
provisions of this Act shall be punished by a fine not to exceed ten thousand pesos, or by imprisonment not to exceed five
years, or by both such fine and imprisonment.” These two sections were in effect in 1919 when the alleged unlawful acts
took place, but were repealed by Act No. 2938, approved on January 30, 1921.

Credit v. Loan

The “credit” of an individual means his ability to borrow money by virtue of the confidence or trust reposed by a lender
that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490; Bouvier’s Law Dictionary.) A “loan” means
the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or
implied, to repay the sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without
interest. (Payne vs. Gardiner [1864], 29 N.Y., 146, 167.) The concession of a “credit” necessarily involves the granting of
“loans” up to the limit of the amount fixed in the “credit.”

Loan v. Discounting

Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an actual, live transaction. But
in its last analysis, to discount a paper is only a mode of loaning money, with, however, these distinctions: (1) In a
discount, interest is deducted in advance, while in a loan, interest is taken at the expiration of a credit; (2) a discount is
always on double-name paper; a loan is generally on single-name paper.

Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not discounts, yet the
conclusion is inevitable that the demand notes signed by the firm “Puno y Concepcion, S. en C.” were not discount paper
but were mere evidences of indebtedness, because (1) interest was not deducted from the face of the notes, but was paid
when the notes fell due; and (2) they were single-name and not double-name paper.

Indirect Loan?

In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to the intention of the
Legislature. In this instance, the purpose of the Legislature is plainly to erect a wall of safety against temptation for a
director of the bank. The prohibition against indirect loans is a recognition of the familiar maxim that no man may serve
two masters — that where personal interest clashes with fidelity to duty the latter almost always suffers. If, therefore, it is
shown that the husband is financially interested in the success or failure of his wife’s business venture, a loan to a

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 5
Case Notes/Digests

partnership of which the wife of a director is a member, falls within the prohibition. A loan, therefore, to a partnership of
which the wife of a director of a bank is a member, is an indirect loan to such director.

That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the acknowledged fact that in
this instance the defendant was tempted to mingle his personal and family affairs with his official duties, and to permit the
loan of P300,000 to a partnership of NO ESTABLISHED REPUTATION AND WITHOUT ASKING FOR COLLATERAL SECURITY.
(The purpose of the law is to protect the stockholders, depositors and creditors of a bank from any temptations that will be
entertained by the said officer.)

Effect of the repeal

It has been the holding, and it must again be the holding, that where an Act of the Legislature which penalizes an offense,
such repeal does not have the effect of thereafter depriving the courts of jurisdiction to try, convict, and sentence offenders
charged with violations of the old law.

Good faith as a defense

(Respondent argued that he acted based on the ruling made by the Insular General.) Under the statute which the defendant
has violated, criminal intent is not necessarily material. The doing of the inhabited act, inhibited on account of public policy
and public interest, constitutes the crime. And, in this instance, as previously demonstrated, the acts of the President of the
Philippine National Bank do not fall within the purview of the rulings have controlling effect.

REPUBLIC V. PNB

The Republic of the Philippines filed on September 25, 1957 before the Court of First Instance of Manila a complaint for
escheat of certain unclaimed bank deposits balances under the provisions of Act No. 3936 against several banks, among
them the First National City Bank of New York. It is alleged that pursuant to Section 2 of said Act defendant banks
forwarded to the Treasurer of the Philippines a statement under oath of their respective managing officials of all the credits
and deposits held by them in favor of persons known to be dead or who have not made further deposits or withdrawals
during the period of 10 years or more.

In its answer the First National City Bank of New York claims that, while it admits that various savings deposits, pre-war
inactive accounts, and sundry accounts contained in its report submitted to the Treasurer of the Philippines pursuant to Act
No. 3936, 5oi tong more than P100,000.00, which remained dormant for 10 years or more, are subject to escheat, however
it has inadvertently included in said report certain items amounting to P18,589.89 which, properly speaking, are not
credits or deposits within the contemplation of Act No. 3936. Hence, it prayed that said items be not included in the claim
of plaintiff.

After hearing the court a quo rendered judgment holding that cashier’s or manager’s checks and demand drafts as those
which defendant wants excluded from the complaint come within the purview of Act No. 3936, but not the telegraphic
transfer payment orders which are of different category. Consequently, the complaint was dismissed with regard to the
latter. But, after a motion to reconsider was filed by defendant, the court a quo changed its view and held that even said
demand drafts do not come within the purview of said Act and so amended its decision accordingly. Plaintiff has appealed.

And as correctly stated by the trial court, the term “credit” in its usual meaning is a sum credited on the books of a
company to a person who appears to be entitled to it. It presupposes a creditor-debtor relationship, and may be said to
imply ability, by reason of property or estates, to make a promised payment (In Re Ford, 14 F. 2d 848, 849). It is the
correlative to debt or indebtedness, and that which is due to any person, as distinguished from that which he owes. The

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 6
Case Notes/Digests

same is true with the term “deposits” in banks where the relationship created between the depositor and the bank is that
of creditor and debtor (Article 1980, Civil Code.)

On the other hand, a bill of exchange (with reference to the demand drafts and telegraphic orders) within the meaning of
our Negotiable Instrument Law (Act No. 2031) does not operate as an assignment of funds in the hands of the drawee who
is not liable on the instrument until he accepts it. This is the clear import of Section 127. It says: “A bill of exchange of itself
does not operate as an assignment of the funds in the hands of the drawee available for the payment thereon and the
drawee is not liable on the bill unless and until he accepts the same.” In other words, in order that a drawee may be liable
on the draft and then become obligated to the payee it is necessary that he first accepts the same. In fact, our law
requires that with regard to drafts or bills of exchange there is need that they be presented either for acceptance or for
payment within a reasonable time after their issuance or after their last negotiation thereof as the case may be (Section 71,
Act 2031). Failure to make such presentment will discharge the drawer from liability or to the extent of the loss caused by
the delay (Section 186, Ibid.) Since it is admitted that the demand drafts herein involved have not been presented either for
acceptance or for payment, the inevitable consequence is that the appellee bank never had any chance of accepting or
rejecting them. Verily, appellee bank never became a debtor of the payee concerned and as such the aforesaid drafts
cannot be considered as credits subject to escheat within the meaning of the law.

But a demand draft is very different from a cashier’s or manager’s check, contrary to appellant’s pretense, for it has been
held that the latter is a primary obligation of the bank which issues it and constitutes its written promise to pay upon
demand. A cashier’s check is a check of the bank’s cashier on his or another bank. It is in effect a bill of exchange drawn by
a bank on itself and accepted in advance by the act of its issuance”.

The case, however, is different with regard to a telegraphic payment order. It is said that as the transaction is for the
establishment of a telegraphic or cable transfer, the agreement to remit creates a contractual obligation and has been
termed a purchase and sale transaction (9 C.J.S. 368). The purchaser of a telegraphic transfer upon making payment
completes the transaction insofar as he is concerned, though insofar as the remitting bank is concerned the contract is 6oi
tong until the credit is established (Ibid.). We agree with the following comment of the Solicitor General: “This is so because
the drawer bank was already paid the value of the telegraphic transfer payment order. In the particular cases under
consideration it appears in the books of the defendant bank that the amounts represented by the telegraphic payment
orders appear in the names of the respective payees. If the latter choose to demand payment of their telegraphic transfers
at the time the same was (were) received by the defendant bank, there could be no question that this bank would have to
pay them. Now, the question is, if the payees decide to have their money remain for sometime in the defendant bank, can
the latter maintain that the ownership of said telegraphic payment orders is now with the drawer bank? The latter was
already paid the value of the telegraphic payment orders otherwise it would not have transmitted the same to the
defendant bank. Hence, it is absurd to say that the drawer banks are still the owners of said telegraphic payment orders.”

HERRERA V. PETROPHIL

On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintiff-appellant advance
rentals for the first eight years, subtracting therefrom the amount of P101,010.73, the amount it computed as constituting
the interest or discount for the first eight years, in the total sum P180,288.47. On August 20, 1970, the defendant-appellee,
explaining that there had been a mistake in computation, paid to the plaintiff-appellant the additional sum of P2,182.70,
thereby reducing the deducted amount to only P98,828.03. On October 14, 1974, the plaintiff-appellant sued the
defendant-appellee for the sum of P98,828.03, with interest, claiming this had been illegally deducted from him in
violation of the Usury Law. 4 He also prayed for moral damages and attorney’s fees. In its answer, the defendant-appellee
admitted the factual allegations of the complaint but argued that the amount deducted was not usurious interest but a

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 7
Case Notes/Digests

discount given to it for paying the rentals in advance for eight years. 5 Judgment on the pleadings was rendered for the
defendant.

As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is clearly denominated a
“LEASE AGREEMENT.” Nowhere in the contract is there any showing that the parties intended a loan rather than a lease.
The provision for the payment of rentals in advance cannot be construed as a repayment of a loan because there was no
grant or forbearance of money as to constitute an indebtedness on the part of the lessor. On the contrary, the defendant-
appellee was discharging its obligation in advance by paying the eight years rentals, and it was for this advance payment
that it was getting a rebate or discount.

The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the parties may establish
such stipulations, clauses, terms and condition as they may want to include; and as long as such agreements are not
contrary to law, morals, good customs, public policy or public order, they shall have the force of law between them. There
is no usury in this case because no money was given by the defendant-appellee to the plaintiff-appellant, nor did it allow
him to use its money already in his possession. 9 There was neither loan nor forbearance but a mere discount which the
plaintiff-appellant allowed the defendant-appellee to deduct from the total payments because they were being made in
advance for eight years. The discount was in effect a reduction of the rentals which the lessor had the right to determine,
and any reduction thereof, by any amount, would not contravene the Usury Law.

***The difference between a discount and a loan or forbearance is that the former does not have to be repaid. The loan
or forbearance is subject to repayment and is therefore governed by the laws on usury. 10 To constitute usury, “there must
be loan or forbearance; the loan must be of money or something circulating as money; it must be repayable absolutely and
in all events; and something must be exacted for the use of the money in excess of and in addition to interest allowed by
law.” It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding between the
parties that the money lent shall or may be returned; (3) that for such loan a greater rate or interest that is allowed by law
shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to take more than the legal rate for the use
of money loaned. Unless these four things concur in every transaction, it is safe to affirm that no case of usury can be
declared.

SAURE IMPORT & EXPORT V. DBP

In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance Corporation (RFC),
before its conversion into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the
construction of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price
of the jute mill machinery and equipment; and P9,100.00 as additional working capital. Parenthetically, it may be
mentioned that the jute mill machinery had already been purchased by Saura on the strength of a letter of credit
extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its release
without first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank. On January 7, 1954 RFC passed
Resolution No. 145 approving the loan application for P500,000.00, to be secured by a first mortgage on the factory
buildings to be constructed, the land site thereof, and the machinery and equipment to be installed.

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board of
Governors, for certain reasons stated in the resolution, “to reexamine all the aspects of this approved loan . . . with special
reference as to the advisability of financing this particular project based on present conditions obtaining in the
operations of jute mills, and to submit his findings thereon at the next meeting of the Board.” On April 13, 1954 the loan
documents were executed: the promissory note, with F.R. Halling, representing China Engineers, Ltd., as one of the co-
signers; and the corresponding deed of mortgage, which was duly registered on the following April 17. It appears, however,
that despite the formal execution of the loan agreement the re-examination contemplated in Resolution No. 736
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 8
Case Notes/Digests

proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc.,
was present, it was decided to reduce the loan from P500,000.00 to P300,000.00.

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers Ltd. Jointly
and severally with the other co-signers, wrote RFC that his company no longer wished to avail of the loan and therefore
considered the same cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC that the
registration of the mortgage be withdrawn.

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. “will
at any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by
you.” (Thereafter the respondent restored the original terms of the loan which is 500k. with the additional stipulation that
raw materials should be available within the vicinity of the factory.)

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was
explained that the certification by the Department of Agriculture and Natural Resources was required “as the intention of
the original approval (of the loan) is to develop the manufacture of sacks on the basis of locally available raw materials.”
This point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the
factory he was building in Davao was for the manufacture of bags from local raw materials. The cover page of its brochure
(Exh. M) describes the project as a “Joint venture by and between the Mindanao Industry Corporation and the Saura Import
and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners, floor
mattings, carpets, draperies, OUT OF 100% LOCAL RAW MATERIALS, PRINCIPAL KENAF.” The explanatory note on page 1 of
the same brochure states that the venture “is the first serious attempt in this country to use 100% locally grown raw
materials notably kenaf which is presently grown commercially in the Island of Mindanao where the proposed jutemill is
located.

Saura, Inc. did not pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955
RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on
August 6, 1954, over the SAME PROPERTY in favor of the Prudential Bank and Trust Co., under which contract Saura, Inc.
had up to December 31 of the same year within which to pay its obligation on the trust receipt heretofore mentioned. It
appears further that for failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15,
1955.

On January 9, 1964, ALMOST 9 YEARS AFTER THE MORTGAGE IN FAVOR OF RFC WAS CANCELLED at the request of Saura,
Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to
comply with its obligation to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff
from completing or paying contractual commitments it had entered into, in connection with its jute mill project. The trial
court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the
defendant was guilty of breach thereof.

Ruling

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was
approved by resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact alone
falls short of resolving the basic claim that the defendant failed to fulfill its obligation and that the plaintiff is therefore
entitled to recover damages.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 9
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It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be
constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was in
line with such assumption that when RFC, by Resolution No. 9033 approved on December 17, 1954, restored the loan to the
original amount of P500,000.00, it imposed two conditions, to wit: “(1) that the raw materials needed by the borrower-
corporation to carry out its operation are available in the immediate vicinity; and (2) that there is prospect of increased
production thereof to provide adequately for the requirements of the factory.” The imposition of those conditions was by
no means a deviation from the terms of the agreement, but rather a step in its implementation. There was nothing in said
conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954, namely — “that the
proceeds of the loan shall be utilized exclusively for the following purposes: for construction of factory building —
P250,000.00; for payment of the balance of purchase price of machinery and equipment — P240,900.00; for working
capital — P9,100.00.” Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its
letter of January 21, 1955, stating that local jute “will not be available in sufficient quantity this year or probably next year,”
and asking that out of the loan agreed upon the sum of P67,586.09 be released “for raw materials and labor.” This was a
deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a
diversion of part of the proceeds of the loan to purposes other than those agreed upon.

When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the
implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to comply with RFC’s
conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked that the
mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the nature of
mutual desistance — what Manresa terms “mutuo disenso” 1 — which is a mode of extinguishing obligations. It is a
concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the
parties can cause its extinguishment.

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract by
RFC, or even point out that the latter’s stand was legally unjustified. Its request for cancellation of the mortgage carried no
reservation of whatever rights it believed it might have against RFC for the latter’s noncompliance. In 1962 it even applied
with DBP for another loan to finance a rice and corn project, which application was disapproved. (Implying that the
previous loan agreement has been vacated ever since.) It was only in 1964, nine years after the loan agreement had been
cancelled at its own request, that Saura, Inc. brought this action for damages. All these circumstances demonstrate beyond
doubt that the said agreement had been extinguished by mutual desistance — and that on the initiative of the plaintiff-
appellee itself.

BONNEVIE V. CA

The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First Instance of Rizal against
respondent Philippine Bank of Commerce sought the annulment of the Deed of Mortgage dated December 6, 1966
executed in favor of the Philippine Bank of Commerce by the spouses Jose M. Lozano and Josefa P. Lozano as well as the
extrajudicial foreclosure made on September 4, 1968. It alleged among others that (a) the Deed of Mortgage lacks
consideration and (b) the mortgage was executed by one who was not the owner of the mortgaged property. It further
alleged that the property in question was foreclosed pursuant to Act No. 3135 as amended, without, however, complying
with the condition imposed for a valid foreclosure. Granting the validity of the mortgage and the extrajudicial foreclosure, it
finally alleged that respondent Bank should have accepted petitioner’s offer to redeem the property under the principle of
equity and justice.

On the other hand, the answer of defendant Banks, now private respondent herein, specifically denied most of the
allegations in the complaint and raised the following affirmative defenses: (a) that the defendant has not given its consent,

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much less the requisite written consent, to the sale of the mortgaged property to plaintiff and the assumption by the latter
of the loan secured thereby; (b) that the demand letters and notice of foreclosure were sent to Jose Lozano at his address;
(c) that it was notified for the first time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that the
law on contracts requires defendant’s consent before Jose Lozano can be released from his bilateral agreement with the
former and doubly so, before plaintiff may be substituted for Jose Lozano and Alfonso Lim; I that the loan of P75,000.00
which was secured by mortgage, after two renewals remain unpaid despite countless reminders and demands; (f) that the
property in question remained registered in the name of Jose M. Lozano in the land records of Rizal and there was no
entry, notation or indication of the alleged sale to plaintiff; (g) that it is an established banking practice that payments
against accounts need not be personally made by the debtor himself; and (h) that it is not true that the mortgage, at the
time of its execution and registration, was without consideration as alleged because the execution and registration of the
securing mortgage, the signing and delivery of the promissory note and the disbursement of the proceeds of the loan are
mere implementation of the basic consensual contract of loan.

After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul S.V. Bonnevie filed a motion for intervention.
The intervention was premised on the Deed of Assignment executed by petitioner Honesto Bonnevie in favor of
petitioner Raoul S.V. Bonnevie covering the rights and interests of petitioner Honesto Bonnevie over the subject property.

As clearly seen from the foregoing issues raised, petitioners’ course of action is three-fold. They primarily attack the validity
of the mortgage executed by the Lozano spouses in favor of respondent Bank. Next, they attack the validity of the
extrajudicial foreclosure and finally, appeal to justice and equity. In attacking the validity of the deed of mortgage, they
contended that when it was executed on December 6, 1966 there was yet no principal obligation to secure as the loan of
P75,000.00 was not received by the Lozano spouses “so much so that in the absence of a principal obligation, there is want
of consideration in the accessory contract, which consequently impairs its validity and fatally affects its very existence.”

This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly seen that the
mortgage deed was executed for and on condition of the loan granted to the Lozano spouses. The fact that the latter did
not collect from the respondent Bank the consideration of the mortgage on the date it was executed is immaterial. A
contract of loan being a consensual contract, the herein contract of loan was perfected at the same time the contract of
mortgage was executed. The promissory note executed on December 12, 1966 is only an evidence of indebtedness and
does not indicate lack of consideration of the mortgage at the time of its execution.

Petitioners admit that they did not secure the consent of respondent Bank to the sale with assumption of mortgage.
Coupled with the fact that the sale/assignment was not registered so that the title remained in the name of the Lozano
spouses, insofar as respondent Bank was concerned, the Lozano spouses could rightfully and validly mortgage the property.
Respondent Bank had every right to rely on the certificate of title. It was not bound to go behind the same to look for flaws
in the mortgagor’s title, the doctrine of innocent purchaser for value being applicable to an innocent mortgagee for value.
(Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48). Another argument for the respondent Bank is that
a mortgage follows the property whoever the possessor may be and subjects the fulfillment of the obligation for whose
security it was constituted. Finally, it can also be said that petitioners voluntarily assumed the mortgage when they entered
into the Deed of Sale with Assumption of Mortgage. They are, therefore, estopped from impugning its validity whether on
the original loan or renewals thereof.

The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not being a party to the Deed
of Sale with Assumption of Mortgage, it can validly claim that it was not aware of the same and hence, it may not be
obliged to notify petitioners. Secondly, petitioner Honesto Bonnevie was not entitled to any notice because as of May 14,
1968, he had transferred and assigned all his rights and interests over the property in favor of intervenor Raoul Bonnevie
and respondent Bank was not likewise informed of the same. For the same reason, Raoul Bonnevie is not entitled to

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notice. Most importantly, Act No. 3135 does not require personal notice on the mortgagor. In the case at bar, the notice of
sale was published in the Luzon Courier on June 30, July 7 and July 14, 1968 and notices of the sale were posted for not less
than twenty days in at least three (3) public places in the Municipality where the property is located. Petitioners were thus
placed on CONSTRUCTIVE notice.

(As to the argument of publication.) To be a newspaper of general circulation, it is enough that “it is published for the
dissemination of local news and general information; that it has a bona fide subscription list of paying subscribers; that it
is published at regular intervals.” (Basa vs. Mercado, 61 Phil. 632). The newspaper need not have the largest circulation so
long as it is of general circulation. (Banta vs. Pacheco, 74 Phil. 67). The testimony of three witnesses that they do read the
Luzon Weekly Courier is no proof that said newspaper is not a newspaper of general circulation in the province of Rizal.

On the question of whether or not the petitioners had a right to redeem the property, We hold that the Court of Appeals
did not err in ruling that they had no right to redeem. No consent having been secured from respondent Bank to the sale
with assumption of mortgage by petitioners, the latter were not validly substituted as debtors. In fact, their rights were
never recorded and hence, respondent Bank is charged with the obligation to recognize the right of redemption only of
the Lozano spouses. But even granting that as purchaser or assignee of the property, as the case may be, the petitioners
had acquired a right to redeem the property, petitioners failed to exercise said right within the period granted by law. The
certificate of sale in favor of appellee was registered on September 2, 1968 and the one year redemption period expired on
September 3, 1969. It was not until September 29, 1969 that petitioner Honesto Bonnevie first wrote respondent and
offered to redeem the property. Moreover, on September 29, 1969, Honesto had at that time already transferred his rights
to intervenor Raoul Bonnevie.

CENTRAL BANK V. CA

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan
application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate
mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which
mortgage was annotated on the said title the next day. The approved loan application called for a lump sum P80,000.00
loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio
M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M.
Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3
years from the date of execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.), An advance interest
for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the partial release of
P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by
the Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its
vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance.

On June 14, 1968, the Monetary Board, after finding that Island Savings Bank failed to put up the required capital to
restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines
and instructed the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank. On August 1, 1968,
Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an application for the
extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the
sheriff scheduled the auction for January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific
performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to
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deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings
Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered,
to rescind the real estate mortgage (pp. 32-43, rec.).

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance
decision by affirming the dismissal of Sulpicio M. Tolentino’s petition for specific performance, but it ruled that Island
Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan.

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they
undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for
that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. De Quirino vs. Pelarca, 29 SCRA 1 [1969]); and when one
party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is
not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay
was the consideration for the obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino
executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such
date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank’s delay in furnishing the
entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank
issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such
prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The
power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by law.

The Monetary Board Resolution No. 1049 issued on August 13, 1965 cannot interrupt the default of Island Savings Bank in
complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank
from making new loans and investments, and nowhere did it prohibit Island Savings Bank from releasing the balance of
loan agreements PREVIOUSLY contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge
the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs.
Afzelins and Afzelins, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-
fulfillment of an obligation but instead it is taken as a BREACH of the contract by him.

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to
P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect
the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed
P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot
be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. Tolentino of the pre-deducted interest
was an exercise of his right to it, which right exist independently of his right to demand the completion of the P80,000.00
loan. The exercise of one right does not affect, much less neutralize, the exercise of the other.

It is the obligation of the bank’s officials and employees that before they approve the loan application of their customers,
they must investigate the existence and valuation of the properties being offered as a loan security. The recent rush of
events where collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the importance of
this responsibility. The mere reliance by bank officials and employees on their customer’s representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever, bank officials and
employees totally rely on the representation of their customers as to the valuation of the loan collateral, the bank shall
bear the risk in case the collateral turn out to be over-valued.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M.
Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in

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either case. But since Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No.
967, WE cannot grant specific performance in favor of Sulpicio M. Tolentino.

The promissory note gave rise to Sulpicio M. Tolentino’s reciprocal obligation to pay the P17,000.00 loan when it falls due.
His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to
rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved
party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of
P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in
default as there was no date for him to perform his reciprocal obligation to pay.

The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no consideration was then in existence, as
there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate
mortgage void for lack of consideration. It is not necessary that any consideration should pass at the time of the execution
of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). It may either be a prior or subsequent matter.
But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it
is created as a binding contract to pay (Parks vs. Sherman, Vol. 176 N.W. p. 583, cited in the 8 th ed., Jones on Mortgage, Vol.
2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such
failure.

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real estate mortgage of
Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate
mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of
21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00
debt. The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the
debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply.

REPUBLIC V. BAGTAS

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three
bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one
year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the
book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another
period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one
bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V.
Bagtas wrote to the Director of Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he
reiterated his desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General.
On 19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls could not be
reduced and that they either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to
pay the book value of the three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila
the Republic of the Philippines commenced an action against him praying that he be ordered to return the three bulls
loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P499.62,
both with interests, and costs; and that other just and equitable relief be granted it (civil No. 12818).

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and
order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the
Secretary of Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of
Animal Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date of

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acquisition, to which depreciation the Auditor General did not object, he could not return the animals nor pay their value
and prayed for the dismissal of the complaint.

Felicidad M. Bagtas, the surviving spouse of the defendant Jose V. Bagtas who died on 23 October 1951 and as
administratrix of his estate, was notified. On 7 January 1959 she filed a motion alleging that on 26 June 1952 the two bulls,
Sindhi and Bhagnari, were returned to the Bureau of Animal Industry and that sometime in November 1953 the third bull,
the Sahiniwal, died from gunshot wounds inflicted during a Huks raid on Hacienda Felicidad Intal, and praying that the
writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected
to her motion.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huks in November 1953 upon the
surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was
due to force majeure she is relieved from the duty of the returning the bull or paying its value to the appellee. The
contention is without merit. The loan by the appellee to the late defendant José V. Bagtas of the three bulls for breeding
purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull,
was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends
that the contract was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it
should suffer its loss due to force majeure A contract of commodatum is essentially gratuitous.1 If the breeding fee be
considered a compensation, then the contract WOULD BE A LEASE of the bull. Under article 1671 of the Civil Code the
lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull
after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942
of the Civil Code imposes liability on him.

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of
one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it
was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had
each an appraised book value, to wit: the Sindhi, at P1,176.46; the Bhagnari, at P1,320.56 and the Sahiniwal; at P744.46. It
was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be
exempt from liability.

The appellant’s contention that the demand or prayer by the appellee for the return of the bull or the payment of its value
being a money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October
1951, is not altogether without merit. However, the claim that his civil personality having ceased to exist the trial court lost
jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that After a
party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of
the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as
may be granted. (The lawyer of the deceased failed to notify the court about the death of his client.) As the appellant
already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum of P859.63,
the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the
administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion
filed on 7 January 1959 by the appellant for the quashing of the writ of execution.

MINA V. PASCUAL

Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his lifetime, on March 12,
1874, a lot in the center of the town of Laoag, the capital of the Province of Ilocos Norte, the property having been
awarded to him through its purchase at a public auction held by thealcalde mayor of that province. The lot has a frontage

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of 120 meters and a depth of 15. Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a
part of the said lot, embracing 14 meters of its frontage by 11 meters of its depth.

Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta Pascual were recognized
likewise without discussion, though it is not said how, and consequently are entitled to the said building, or rather, as
Ruperta Pascual herself stated, to only six-seventh of one-half of it, the other half belonging, as it appears, to the plaintiffs
themselves, and the remaining one-seventh of the first one-half to the children of one of the plaintiffs, Elena de Villanueva.
The fact is that the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse; while the
plaintiffs are undoubtedly the owners of the part of the lot occupied by that building, as well also as of the remainder
thereof.

This was the state of affairs when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor children, the herein
defendants, petitioned the Court of First Instance of Ilocos Norte for authorization to sell “the six-sevenths of the one-
half of the warehouse, of 14 by 11 meters, together with its lot.” The plaintiffs — that is, Alejandra Mina et al. — opposed
the petition of Ruperta Pascual for the reason that the latter had included therein the lot occupied by the warehouse, which
they claimed was their exclusive property. All this action was taken in a special proceeding in re guardianship.

It was then that the plaintiffs commenced the present action for the purpose of having the sale of the said lot declared
null and void and of no force and effect.

The obvious purport of the clause “although there existed and still exists a commodatum,” etc., appears to be that it is a
part of the decision of the Supreme Court and that, while finding the plaintiffs to be the owners of the lot, we recognized in
principle the existence of a commodatum under which the defendants held the lot. Nothing could be more inexact.
Possibly, also, the meaning of that clause is that, notwithstanding the finding made by the Supreme Court that the plaintiffs
were the owners, these former and the defendants agree that there existed, and still exists, a commodatum, etc. But such
an agreement would not affect the truth of the contents of the decision of this court, and the opinion held by the litigants
in regard to this point could have no bearing whatever on the present decision. What is essentially pertinent to the case is
the fact that the defendants agree that the plaintiffs have the ownership, and they themselves only the use, of the said
lot.

He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a transfer of the ownership
of the thing, it is evident that he who has only the mere use of the thing cannot transfer its ownership. The sale of a thing
effected by one who is not its owner is null and void. The defendants never were the owners of the lot sold. The sale of it
by them is necessarily null and void. One cannot convey to another what he has never had himself.

The purchaser could not acquire anything more than the interest that might be held by a person to whom realty in
possession of the vendor might be sold, for at a judicial auction nothing else is disposed of. What the minor children of
Ruperta Pascual had in their possession was the ownership of the six-sevenths part of one-half of the warehouse and the
use of the lot occupied by this building. This, and nothing more, could the Chinaman Cu Joco acquire at that sale: not the
ownership of the lot; neither the other half, nor the remaining one-seventh of the said first half, of the warehouse.
Consequently, the sale made to him of this one-seventh of the one-half and the entire other half of the building was null
and void, and likewise with still more reason the sale of the lot the building occupies.

It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another shall be for a certain
period. Francisco Fontanilla did not fix any definite period of time during which Andres Fontanilla could have the use of
the lot whereon the latter was to erect a stone warehouse of considerable value, and so it is that for the past thirty years
the lot has been used by both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco,
now in possession of the lot, should pay rent for it at the rate of P5 a month, would destroy the theory of the
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commodatum sustained by them, since, according to the second paragraph of the aforecited article 1740, “commodatum is
essentially gratuitous,” and, if what the plaintiffs themselves aver on page 7 of their brief is to be believed, it never entered
Francisco’s mind to limit the period during which his brother Andres was to have the use of the lot, because he expected
that the warehouse would eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of Andres,
which did not come to pass for the reason that Fructuoso died before his uncle Andres. With that expectation in view, it
appears more likely that Francisco intended to allow his brother Andres a surface right; but this right supposes the payment
of an annual rent, and Andres had the gratuitous use of the lot.

CATHOLIC VICAR APOSTOLIC V. CA

Respondent Court of Appeals, in affirming the trial court’s decision, sustained the trial court’s conclusions that the Decision
of the Court of Appeals, dated May 4, 1977 in CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court,
touched on the ownership of lots 2 and 3 in question; that the two lots were possessed by the predecessors-in-interest of
private respondents under claim of ownership in good faith from 1906 to 1951; that petitioner had been in possession of
the same lots as bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for
registration in 1962; that petitioner had just been in possession as owner for eleven years, hence there is no possibility of
acquisitive prescription which requires 10 years possession with just title and 30 years of possession without; that the
principle of res judicata on these findings by the Court of Appeals will bar a reopening of these questions of fact; and that
those facts may no longer be altered.

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No. 38830-R,
affirmed by this Court, We see no error in respondent appellate court’s ruling that said findings are res judicata between
the parties. They can no longer be altered by presentation of evidence because those issues were resolved with finality a
long time ago. To ignore the principle of res judicata would be to open the door to endless litigations by continuous
determination of issues without end.

Private respondents were able to prove that their predecessors’ house was borrowed by petitioner Vicar after the church
and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they
became 16oi ton in commodatum and the petitioner the bailee. The bailees’ failure to return the subject matter
of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the
property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for
taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary
acquisitive prescription because of the absence of just title.

QUINTOS V. BECK

The plaintiff brought this action to compel the defendant to return to her certain furniture which she lent him for his use.
She appealed from the judgment of the Court of First Instance of Manila which ordered that the defendant return to her
the three gas heaters and the four electric lamps found in the possession of the Sheriff of said city, that she call for the
other furniture from the said Sheriff of Manila at her own expense, and that the fees which the sheriff may charge for the
deposit of the furniture be paid pro rata by both parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff and as such occupied the latter’s house on M. H. del Pilar street, No. 1175. On
January 14, 1936, upon the novation of the contract of lease between the plaintiff and the defendant, the former
GRATUITOUSLY granted to the latter the use of the furniture described in the third paragraph of the stipulation of facts,
subject to the condition that the defendant would return them to the plaintiff upon the latter’s demand. The plaintiff sold
the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant of the
conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of lease. There after the
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 17
Case Notes/Digests

plaintiff required the defendant to return all the furniture transferred to him for his use. The defendant answered that she
may call for them in the house where they are found. On November 5, 1936, the defendant, through another person, wrote
to the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7 th of the same month,
the defendant wrote another letter to the plaintiff informing her that he could not give up the three gas heaters and the
four electric lamps because he would use them until the 15 th of the same month when the lease is due to expire. The
plaintiff refused to get the furniture in view of the fact that the defendant had declined to make delivers of all of them. On
November 15th, before vacating the house, the defendant deposited with the Sheriff all the furniture belonging to the
plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue. In the custody of the said sheriff.

The contract entered into between the parties is one of commodatum, because under it the plaintiff gratuitously granted
the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant
bound himself to return the furniture to the plaintiff, upon the latter’s demand (clause 7 of the contract, Exhibit A; articles
1740, paragraph 1, and 1741 of the Civil Code) The obligation voluntarily assumed by the defendant to return the furniture
upon the plaintiff’s demand, means that he should return all of them to the plaintiff at the latter’s residence or house. The
defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his
benefit the three gas heaters and the four electric lamps.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter’s demand, the Court
could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant’s behest.
The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the
offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps.

As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the defendant in
case of his inability to return some of the furniture, because under paragraph 6 of the stipulation of facts, the defendant
has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to deliver some of the
furniture, the value thereof should be later determined by the trial Court through evidence which the parties may desire to
present.

The defendant was the one who breached the contract of commodatum, and without any reason he refused to return and
deliver all the furniture upon the plaintiff’s demand. In these circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

CEBU INTERNATIONAL V. CA

On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred thousand (P500,000.00) pesos, in
cash. Petitioner issued a promissory note to mature on May 27, 1991. The note for five hundred sixteen thousand, two
hundred thirty-eight pesos and sixty-seven centavos (P516,238.67) covered private respondents placement plus interest at
twenty and a half (20.5%) percent for thirty-two (32) days. On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter
the CHECK) for five hundred fourteen thousand, three hundred ninety pesos and ninety-four centavos (P514,390.94) in
favor of the private respondent as proceeds of his matured investment plus interest. The CHECK was drawn from
petitioners current account number 0011-0803-59, maintained with the Bank of the Philippine Islands (BPI), main branch at
Makati City.

Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on several occasions, that he be
paid in cash. CIFC refused the request, and instead instructed private respondent to wait for its ongoing bank reconciliation
with BPI. Thereafter, private respondent, through counsel, made a formal demand for the payment of his money market
placement. In turn, CIFC promised to replace the CHECK but required an impossible condition that the original must first
be surrendered.
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 18
Case Notes/Digests

On July 13, 1992, CIFC (after respondent filed an action for recovery of his investment.) sought to recover its lost funds and
formally filed against BPI, a separate civil action [4] for collection of a sum of money with the RTC-Makati, Branch 147. The
collection suit alleged that BPI unlawfully deducted from CIFCs checking account, counterfeit checks amounting to one
million, seven hundred twenty-four thousand, three hundred sixty-four pesos and fifty-eight centavos (P1,724,364.58). The
action included the prayer to collect the amount of the CHECK paid to Vicente Alegre but dishonored by BPI. Meanwhile, in
response to Alegres complaint with RTC-Makati, Branch 132, CIFC filed a motion for leave of court to file a third-party
complaint against BPI.BPI was impleaded by CIFC to enforce a right, for contribution and indemnity, with respect to Alegres
claim. CIFC asserted that the CHECK it issued in favor of Alegre was genuine, valid and sufficiently funded. On July 23,
1992, the trial court granted CIFCs motion. However, BPI moved to dismiss the third-party complaint on the ground of
pendency of another action with RTC-Makati, Branch 147. Acting on the motion, the trial court dismissed the third-party
complaint on November 4, 1992, after finding that the third party complaint filed by CIFC against BPI is similar to its
ancillary claim against the bank, filed with RTC-Makati Branch 147.

Ruling

On the first issue, petitioner contends that the provisions of the Negotiable Instruments Law (NIL) are the pertinent laws to
govern its money market transaction with private respondent, and not paragraph 2 of Article 1249 of the Civil Code.
Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for the payment of the
CHECK. Consequently, when BPI offset the value of CHECK against the losses from the forged checks allegedly committed by
the private respondent, the check was deemed paid.

Considering the nature of a money market transaction, the above-quoted provision should be applied in the present
controversy. As held in Perez vs. Court of Appeals,[10] a money market is a market dealing in standardized short-term
credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through
a middle man or dealer in open market. In a money market transaction, the investor is a lender who loans his money to a
borrower through a middleman or dealer.

In the case at bar, the money market transaction between the petitioner and the private respondent is in the nature of a
loan. The private respondent accepted the CHECK, instead of requiring payment in money. Yet, when he presented it to
RCBC for encashment, as early as June 17, 1991, the same was dishonored by non-acceptance, with BPIs annotation: Check
(is) subject of an investigation. (There was an allegation of forgery committed by respondent against petitioner.) These
facts were testified to by BPIs manager. Under these circumstances, and after the notice of dishonor, [12] the holder has an
immediate right of recourse against the drawer,[13] and consequently could immediately file an action for the recovery of
the value of the check.

In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by
the use of a check. A check is not a legal tender, and therefore cannot constitute valid tender of payment. Since a
negotiable instrument is ONLY A SUBSTITUTE for money and not money, the delivery of such an instrument does not, by
itself, operate as payment (citation omitted). A check, whether a managers check or ordinary check, is not legal tender, and
an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the 18oi to or
creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished
and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3.)

Turning now to the second issue, when the bank deducted the amount of the CHECK from CIFCs current account, this did
not ipso facto operate as a discharge or payment of the instrument. Although the value of the CHECK was deducted from
the funds of CIFC, it was not delivered to the payee, Vicente Alegre. Instead, BPI offset the amount against the losses it
incurred from forgeries of CIFC checks, allegedly committed by Alegre. The confiscation of the value of the check was
agreed upon by CIFC and BPI. (Through a compromise agreement.)
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 19
Case Notes/Digests

The compromise agreement could not bind a party who did not sign the compromise agreement nor avail of its
benefits.[19] Thus, the stipulations in the compromise agreement is unenforceable against Vicente Alegre, not a party
thereto. His money could not be the subject of an agreement between CIFC and BPI. Although Alegres money was in
custody of the bank, the bank’s possession of it was not in the concept of an owner. BPI cannot validly appropriate the
money as its own. (As provided by Art. 1317 — NCC)

BPIs confiscation of Alegres money constitutes garnishment without the parties going through a valid proceeding in
court. Garnishment is an attachment by means of which the plaintiff seeks to subject to his claim the property of the
defendant in the hands of a third person or money owed to such third person or a garnishee to the defendant. [21] The
garnishment procedure must be upon proper order of RTC-Makati, Branch 62, the court who had jurisdiction over the
collection suit filed by BPI against Alegre. In effect, CIFC has not yet tendered a valid payment of its obligation to the private
respondent. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as
payment to the 19oi to for the formers obligation and demanding that the latter accept the same.

MAMBULAO LUMBER V. PNB

On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch of defendant PNB and the
former offered real estate, machinery, logging and transportation equipments as collaterals. The application, however, was
approved for a loan of P100,000 only. To secure the payment of the loan, the plaintiff mortgaged to defendant PNB a
parcel of land, together with the buildings and improvements existing thereon, situated in the poblacion of Jose
Panganiban (formerly Mambulao), province of Camarines Norte.

On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for which the plaintiff signed a
promissory note wherein it promised to pay to the PNB the said sum in five equal yearly installments at the rate of
P6,528.40 beginning July 31, 1957, and every year thereafter, the last of which would be on July 31, 1961. On October 19,
1956, the PNB made another release of P15,500 as part of the approved loan granted to the plaintiff and so on the said
date, the latter executed another promissory note wherein it agreed to pay to the former the said sum in five equal yearly
installments at the rate of P3,679.64 beginning July 31, 1957, and ending on July 31, 1961.

The plaintiff failed to pay the amortization on the amounts released to and received by it. Repeated demands were made
upon the plaintiff to pay its obligation but it failed or otherwise refused to do so. Upon inspection and verification made by
employees of the PNB, it was found that the plaintiff had already stopped operation about the end of 1957 or early part of
1958.

On November 19, 1961, the plaintiff sent separate letters, posted as registered air mail matter, one to the Naga Branch of
the PNB and another to the Provincial Sheriff of Camarines Norte, protesting against the foreclosure of the real estate and
chattel mortgages on the grounds that they could not be effected unless a Court’s order was issued against it (plaintiff) for
said purpose and that the foreclosure proceedings, according to the terms of the mortgage contracts, should be made in
Manila. In said letter to the Naga Branch of the PNB, it was intimated that if the public auction sale would be suspended
and the plaintiff would be given an extension of ninety (90) days, its obligation would be settled satisfactorily because an
important negotiation was then going on for the sale of its “whole interest” for an amount more than sufficient to liquidate
said obligation.

In a letter dated December 14, 1961 (but apparently posted several days later), the plaintiff sent a bank draft for P738.59
to the Naga Branch of the PNB, allegedly in full settlement of the balance of the obligation of the plaintiff after the
application thereto of the sum of P56,908.00 representing the proceeds of the foreclosure sale of parcel of land described
in Transfer Certificate of Title No. 381. In the said letter, the plaintiff reiterated its request that the foreclosure sale of the

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 20
Case Notes/Digests

mortgaged chattels be discontinued on the grounds that the mortgaged indebtedness had been fully paid and that it could
not be legally effected at a place other than the City of Manila.

On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the plaintiff acknowledging the remittance of
P738.59 with the advice, however, that as of that date the balance of the account of the plaintiff was P9,161.76, to which
should be added the expenses of guarding the mortgaged chattels at the rate of P4.00 a day beginning December 19,
1961. It was further explained in said letter that the sum of P57,646.59, which was stated in the request for the foreclosure
of the real estate mortgage, did not include the 10% attorney’s fees and expenses of the sale. Accordingly, the plaintiff was
advised that the foreclosure sale scheduled on the 21 st of said month would be stopped if a remittance of P9,161.76, plus
interest thereon and guarding fees, would be made.

On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff in Jose Panganiban, Camarines
Norte, and they informed Luis Salgado, Chief Security Guard of the premises, that the properties therein had been
auctioned and bought by the PNB, which in turn sold them to Mariano Bundok. Upon being advised that the purchaser
would take delivery of the things he bought, Salgado was at first reluctant to allow any piece of property to be taken out of
the compound of the plaintiff. The employees of the PNB explained that should Salgado refuse, he would be exposing
himself to a litigation wherein he could be held liable to pay big sum of money by way of damages. Apprehensive of the risk
that he would take, Salgado immediately sent a wire to the President of the plaintiff in Manila, asking advice as to what he
should do. In the meantime, Mariano Bundok was able to take out from the plaintiff’s compound two truckloads of
equipment.

Ruling

In the statement of account of the appellant as of September 22, 1961, submitted by the PNB, it appears that in arriving at
the total indebtedness of P57,646.59 as of that date, the PNB had compounded the principal of the loan and the accrued
6% interest thereon each time the yearly amortizations became due, and on the basis of these compounded amounts
charged additional delinquency interest on them up to September 22, 1961; and to this erroneously computed total of
P57,646.59, the trial court added 6% interest per annum from September 23, 1961 to November 21 of the same year. In
effect, the PNB has claimed, and the trial court has adjudicated to it, interest on accrued interests from the time the various
amortizations of the loan became due until the real estate mortgage executed to secure the loan was extra-judicially
foreclosed on November 21, 1961. This is an error. Section 5 of Act No. 2655 expressly provides that in computing the
interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned,
except by agreement, or in default thereof, whenever the debt is judicially claimed. This is also the clear mandate of
Article 2212 of the new Civil Code which provides that interest due shall earn legal interest only from the time it is judicially
demanded, and of Article 1959 of the same code which ordains that interest due and unpaid shall not earn interest. Of
course, the parties may, by stipulation, capitalize the interest due and unpaid, which as added principal shall earn new
interest; but such stipulation is nowhere to be found in the terms of the promissory notes involved in this case. Clearly
therefore, the trial court fell into error when it awarded interest on accrued interests, without any agreement to that effect
and before they had been judicially demanded.

There is really no evidence of record to support the conclusion that the PNB is entitled to the amount awarded as expenses
of the extra-judicial foreclosure sale. The court below committed error in applying the provisions of the Rules of Court for
purposes of arriving at the amount awarded. It is to be borne in mind that the fees enumerated under paragraphs k and n,
Section 7, of Rule 130 (now Rule 141) are demandable, only by a sheriff serving processes of the court in connection with
judicial foreclosure of mortgages under Rule 68 of the new Rules, and not in cases of extra-judicial foreclosure of
mortgages under Act 3135. The law applicable is Section 4 of Act 3135 which provides that the officer conducting the sale is
entitled to collect a fee of P5.00 for each day of actual work performed in addition to his expenses in connection with the

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 21
Case Notes/Digests

foreclosure sale. Admittedly, the PNB failed to prove during the trial of the case, that it actually spent any amount in
connection with the said foreclosure sale. Neither may expenses for publication of the notice be legally allowed in the
absence of evidence on record to support it.

Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever the fees stipulated appear
excessive, unconscionable, or unreasonable, because a lawyer is primarily a court officer charged with the duty of assisting
the court in administering impartial justice between the parties, and hence, the fees should be subject to judicial control.
From the stipulation in the mortgage contract earlier quoted, it appears that the agreed fee is 10% of the total
indebtedness, irrespective of the manner the foreclosure of the mortgage is to be effected. The agreement is perhaps fair
enough in case the foreclosure proceedings is prosecuted judicially but, surely, it is unreasonable when, as in this case, the
mortgage was foreclosed extra-judicially, and all that the attorney did was to file a petition for foreclosure with the sheriff
concerned. It is to be assumed though, that the said branch attorney of the PNB made a study of the case before deciding
to file the petition for foreclosure; but even with this in mind, we believe the amount of P5,821.35 is far too excessive a fee
for such services. Considering the above circumstances mentioned, it is our considered opinion that the amount of
P1,000.00 would be more than sufficient to compensate the work aforementioned.

From the foregoing illustration or computation, it is clear that there was no further necessity to foreclose the mortgage of
herein appellant’s chattels on December 21, 1961; and on this ground alone, we may declare the sale of appellant’s chattels
on the said date, illegal and void. But we take into consideration the fact that the PNB must have been led to believe that
the stipulated 10% of the unpaid loan for attorney’s fees in the real estate mortgage was legally maintainable, and in
accordance with such belief, herein appellee bank insisted that the proceeds of the sale of appellant’s real property was
deficient to liquidate the latter’s total indebtedness. Be that as it may, however, we still find the subsequent sale of herein
appellant’s chattels illegal and objectionable on other grounds.

To the foregoing conclusion, We disagree. While the law grants power and authority to the mortgagee to sell the
mortgaged property at a public place in the municipality where the mortgagor resides or where the property is situated, 8
this Court has held that the sale of a mortgaged chattel may be made in a place other than that where it is found, provided
that the owner thereof consents thereto; or that there is an agreement to this effect between the mortgagor and the
mortgagee. 9 But when, as in this case, the parties agreed to have the sale of the mortgaged chattels in the City of Manila,
which, any way, is the residence of the mortgagor, it cannot be rightly said that mortgagee still retained the power and
authority to select from among the places provided for in the law and the place designated in their agreement over the
objection of the mortgagor. In providing that the mortgaged chattel may be sold at the place of residence of the mortgagor
or the place where it is situated, at the option of the mortgagee, the law clearly contemplated benefits not only to the
mortgagor but to the mortgagee as well. Their right arising thereunder, however, are personal to them; they do not affect
either public policy or the rights of third persons. They may validly be waived. So, when herein mortgagor and mortgagee
agreed in the mortgage contract that in cases of both judicial and extra-judicial foreclosure under Act 1508, as amended,
the corresponding complaint for foreclosure or the petition for sale should be filed with the courts or the Sheriff of Manila,
as the case may be, they waived their corresponding rights under the law. The correlative obligation arising from that
agreement have the force of law between them and should be complied with in good faith.

Liam Law v. Olympic Sawmill

It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant partnership and
defendant Elino Lee Chi, as the managing partner. The loan became ultimately due on January 31, 1960, but was not paid
on that date, with the debtors asking for an extension of three months, or up to April 30, 1960. On March 17, 1960, the
parties executed another loan document. Payment of the P10,000.00 was extended to April 30, 1960, but the obligation
was increased by P6,000.00.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 22
Case Notes/Digests

Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960, plaintiff instituted this
collection case. Defendants admitted the P10,000.00 principal obligation, but claimed that the additional P6,000.00
constituted usurious interest.

On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff “the amount of P10,000.00 plus the
further sum of P6,000.00 by way of liquidated damages . . . with legal rate of interest on both amounts from April 30,
1960.” It is from this judgment that defendants have appealed.

Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation, “it is
presumed that it exists and is lawful, unless the debtor proves the contrary”. No evidentiary hearing having been held, it
has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court’s
finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960, representing
loss of interest income, attorney’s fees and incidentals.

The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery of the
usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the allegation of usury, the
defendant shall be deemed to have admitted the usury. The provision does not apply to a case, as in the present, where it is
the defendant, not the plaintiff, who is alleging usury. Moreover, for sometime now, usury has been legally non-existent.
Interest can now be charged as lender and borrower may agree upon. 4 The Rules of Court in regards to allegations of
usury, procedural in nature, should be considered repealed with retroactive effect.

Sps. Florante Bautista v. Pilar Dev’t

In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and lot in Pilar Village, Las Pinas, Metro Manila.
To partially finance the purchase, they obtained from the Apex Mortgage & Loan Corporation (Apex) a loan in the amount
of P100,180.00. They executed a promissory note on December 22, 1978 obligating themselves, jointly and severally, to pay
the “principal sum of P100,180.00 with interest rate of 12% and service charge of 3%” for a period of 240 months, or
twenty years, from date, in monthly installments of P1,378.83. Late payments were to be charged a penalty of one and one-
half per cent (1 ½%) of the amount due. In the same promissory note, petitioners authorized Apex to “increase the rate of
interest and/or service charges” without notice to them in the event that a law, Presidential Decree or any Central Bank
regulation should be enacted increasing the lawful rate of interest and service charges on the loan.[4] Payment of the
promissory note was secured by a second mortgage on the house and lot purchased by petitioners.

Petitioner spouses failed to pay several installments. On September 20, 1982, they executed another promissory note in
favor of Apex. This note was in the amount of P142,326.43 at the increased interest rate of twenty-one per cent (21%) per
annum with no provision for service charge but with penalty charge of 1 ½% for late payments. Payment was to be made
for a period of 196 months or 16.33 years in monthly installments of P2,576.68, inclusive of principal and interest.
Petitioner spouses also authorized Apex to “increase/decrease the rate of interest and/or service charges” on the note in
the event any law or Central Bank regulation shall be passed increasing or decreasing the same.

In November 1983, petitioner spouses again failed to pay the installments. On June 6, 1984, Apex assigned the second
promissory note to respondent Pilar Development Corporation without notice to petitioners.

In their answer, petitioner spouses mainly contended that the terms of the second promissory note increasing the interest
rate to 21% and the escalation clauses authorizing Apex to increase interest rates pursuant to any law or Central Bank
regulation are null and void in the absence of a de-escalation clause in the same note. After pre-trial, both parties
submitted the case for decision on the sole issue of the interest rate.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 23
Case Notes/Digests

Issue

The controversy in this petition involves the rate of interest respondent creditor is entitled to collect on petitioners’ loan:
whether it be 12% under the promissory note of December 22, 1978, or 21% under the promissory note of September 20,
1982.

Ruling

The first promissory note was cancelled by the express terms of the second promissory note. To cancel is to strike out, to
revoke, rescind or abandon, to terminate.[16] In fine, the first note was revoked and terminated. Simply put, it was
novated. The extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which
extinguishes or modifies the first is a novation.[17] Novation is made either by changing the object or principal conditions,
referred to as an objective or real novation; or by substituting the person of the debtor or subrogating a third person to the
rights of the creditor, which is known as subjective or personal novation.[18] In both objective and subjective novation, a
dual purpose is achieved—an obligation is extinguished and a new one is created in lieu thereof.[19] Novation may either
be express, when the new obligation declares in unequivocal terms that the old obligation is extinguished; or implied, when
the new obligation is on every point incompatible with the old one.[20] Express novation takes place when the contracting
parties expressly disclose that their object in making the new contract is to extinguish the old contract, otherwise the old
contract remains in force and the new contract is merely added to it, and each gives rise to an obligation still in force.

Novation has four (4) essential requisites: (1) the existence of a previous valid obligation; (2) the agreement of all parties to
the new contract; (3) the extinguishment of the old contract; and (4) the validity of the new one.[22] In the instant case, all
four requisites have been complied with. The first promissory note was a valid and subsisting contract when petitioner
spouses and Apex executed the second promissory note. The second promissory note absorbed the unpaid principal and
interest of P142,326.43 in the first note which amount became the principal debt therein, payable at a higher interest rate
of 21% per annum. Thus, the terms of the second promissory note provided for a higher principal, a higher interest rate,
and a higher monthly amortization, all to be paid within a shorter period of 16.33 years. These changes are substantial and
constitute the principal conditions of the obligation.[23] Both parties voluntarily accepted the terms of the second note;
and also in the same note, they unequivocally stipulated to extinguish the first note. Clearly, there was animus novandi,
an express intention to novate.[24] The first promissory note was cancelled and replaced by the second note. This second
note became the new contract governing the parties’ obligations.

When the second promissory note was executed on September 20, 1982, Central Bank Circulars Nos. 705 and 712 were
already in effect. These Circulars fixed the effective interest rate for secured loan transactions with maturities of more than
730 days, i.e, two (2) years, at 21% per annum. The interest rate of 21% provided in the second promissory note was
therefore authorized under these Circulars.

The question of whether the escalation clauses in the second promissory note are valid is irrelevant. Respondent
corporation has signified that it is collecting petitioners’ debt only at the fixed interest rate of 21% per annum, as expressly
agreed upon in the second promissory note, not at the escalated rates authorized under the escalation clauses. (The
assignment was valid because it was stipulated that the consent of the debtor is not required – rather, despite the absence
of notice, it is only good for the purpose of imposing the date where the debtor would pay the new assignee.)

Tolentino v. Gonzales

Sometime prior to the 28th day of November, 1922, the appellants (petitioners) purchased of the Luzon Rice Mills, Inc., a
piece or parcel of land with the camarin located thereon, situated in the municipality of Tarlac of the Province of Tarlac for
the price of P25,000, promising to pay therefor in three installments. One of the conditions of that contract of purchase

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 24
Case Notes/Digests

was that on failure of the purchaser (plaintiffs and appellants) to pay the balance of said purchase price or any of the
installments on the date agreed upon, the property bought would revert to the original owner.

On the 7th day of November, 1922 the representative of the vendor of the property in question wrote a letter to the
appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of said indebtedness was not paid, an
action would be brought for the purpose of recovering the property, together with damages for non compliance with the
condition of the contract of purchase.

According to Exhibits B and D, which represent the account rendered by the vendor, there was due and payable upon said
contract of purchase on the 30th day of November, 1922, the sum P16,965.09. Upon receiving the letter of the vendor of
said property of November 7, 1922, the purchasers, the appellants herein, realizing that they would be unable to pay the
balance due, began to make an effort to borrow money with which to pay the balance due, began to make an effort to
borrow money with which to pay the balance of their indebtedness on the purchase price of the property involved. Finally
an application was made to the defendant for a loan for the purpose of satisfying their indebtedness to the vendor of said
property. After some negotiations the defendants agreed to loan the plaintiffs to loan the plaintiffs the sum of P17,500
upon condition that the plaintiffs execute and deliver to him a pacto de retro of said property.

It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the absolute sale of the property,
entered into a contract with the purchaser by virtue of which she became the “tenant” of the purchaser. It has been the
uniform theory of this court, due to the severity of a contract of pacto de retro, to declare the same to be a mortgage and
not a sale whenever the interpretation of such a contract justifies that conclusion. There must be something, however, in
the language of the contract or in the conduct of the parties which shows clearly and beyond doubt that they intended the
contract to be a “mortgage” and not a pacto de retro.

In the present case the plaintiffs allege in their complaint that the contract in question is a pacto de retro. They admit that
they signed it. They admit they sold the property in question with the right to repurchase it. The terms of the contract
quoted by the plaintiffs to the defendant was a “sale” with pacto de retro, and the plaintiffs have shown no circumstance
whatever which would justify us in construing said contract to be a mere “loan” with guaranty. In every case in which this
court has construed a contract to be a mortgage or a loan instead of a sale with pacto de retro, it has done so, either
because the terms of such contract were incompatible or inconsistent with the theory that said contract was one of
purchase and sale.

Usury, generally speaking, may be defined as contracting for or receiving something in excess of the amount allowed by law
for the loan or forbearance of money—the taking of more interest for the use of money than the law allows. It seems that
the taking of interest for the loan of money, at least the taking of excessive interest has been regarded with abhorrence
from the earliest times.

It will be noted that said statute imposes a penalty upon a “loan” or forbearance of any money, goods, chattels or credits,
etc. The central idea of said statute is to prohibit a rate of interest on “loans.” A contract of “loan” differs materially from
a contract of “rent.” In a contract of “rent” the owner of the property does not lose his ownership. He simply loses his control
over the property rented during the period of the contract. In a contract of “loan” the thing loaned becomes the property of
the obligor. In a contract of “rent” the thing still remains the property of the lessor. He simply loses control of the same in a
limited way during the period of the contract of “rent” or lease. In a contract of “rent” the relation between the contractors
is that of landlord and tenant. In a contract of “loan” of money, goods, chattels or credits, the relation between the parties is
that of obligor and 24oi to. “Rent” may be defined as the compensation either in money, provisions, chattels, or labor,
received by the owner of the soil from the occupant thereof. It is defined as the return or compensation for the possession of
some corporeal inheritance, and is a profit issuing out of lands or tenements, in return for their use. It is that, which is to
paid for the use of land, whether in money, labor or other thing agreed upon. A contract of “rent” is a contract by which one
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 25
Case Notes/Digests

of the parties delivers to the other some nonconsumable thing, in order that the latter may use it during a certain period and
return it to the former; whereas a contract of “loan”, as that word is used in the statute, signifies the delivery of money or
other consumable things upon condition of returning an equivalent amount of the same kind or quantity, in which cases it is
called merely a “loan.” In the case of a contract of “rent,” under the civil law, it is called a “commodatum.”

In the present case the property in question was sold. It was an absolute sale with the right only to repurchase. During the
period of redemption the purchaser was the absolute owner of the property. During the period of redemption the vendor
was not the owner of the property. During the period of redemption the vendor was a tenant of the purchaser. During the
period of redemption the relation which existed between the vendor and the vendee was that of landlord and tenant. That
relation can only be terminated by a repurchase of the property by the vendor in accordance with the terms of the said
contract. The contract was one of rent. The contract was not a loan, as that word is used in Act No. 2655.

Consolidated Bank v. CA

The instant petition for review seeks to partially set aside the July 26, 1993 Decision[1] of respondent Court of Appeals in
CA-G.R. CV No. 29950, insofar as it orders petitioner to reimburse respondent Continental Cement Corporation the amount
of P490,228.90 with interest thereon at the legal rate from July 26, 1988 until fully paid.

On July 13, 1982, respondents Continental Cement Corporation (hereinafter, respondent Corporation) and Gregory T. Lim
(hereinafter, respondent Lim) obtained from petitioner Consolidated Bank and Trust Corporation Letter of Credit No. DOM-
23277 in the amount of P1,068,150.00 On the same date, respondent Corporation paid a marginal deposit of P320,445.00
to petitioner. The letter of credit was used to purchase around five hundred thousand liters of bunker fuel oil from
Petrophil Corporation, which the latter delivered directly to respondent Corporation in its Bulacan plant. In relation to the
same transaction, a trust receipt for the amount of P1,001,520.93 was executed by respondent Corporation, with
respondent Lim as signatory.

Claiming that respondents failed to turn over the goods covered by the trust receipt or the proceeds thereof, petitioner
filed a complaint for sum of money with application for preliminary attachment[3] before the Regional Trial Court of
Manila. In answer to the complaint, respondents averred that the transaction between them was a simple loan and not a
trust receipt transaction, and that the amount claimed by petitioner did not take into account payments already made by
them. Respondent Lim also denied any personal liability in the subject transactions. In a Supplemental Answer, respondents
prayed for reimbursement of alleged overpayment to petitioner of the amount of P490,228.90.

Moreover, petitioners contention that the marginal deposit made by respondent Corporation should not be deducted
outright from the amount of the letter of credit is untenable. Petitioner argues that the marginal deposit should be
considered only after computing the principal plus accrued interests and other charges. However, to sustain petitioner on
this score would be to countenance a clear case of unjust enrichment, for while a marginal deposit earns no interest in
favor of the debtor-depositor, the bank is not only able to use the same for its own purposes, interest-free, but is also able
to earn interest on the money loaned to respondent Corporation. Indeed, it would be onerous to compute interest and
other charges on the face value of the letter of credit which the petitioner issued, without first crediting or setting off the
marginal deposit which the respondent Corporation paid to it. Compensation is proper and should take effect by operation
of law because the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the
concurrent amount.

Hence, the interests and other charges on the subject letter of credit should be computed only on the balance of
P681,075.93, which was the portion actually loaned by the bank to respondent Corporation.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 26
Case Notes/Digests

Neither do we find error when the lower court and the Court of Appeals set aside as invalid the floating rate of interest
exhorted by petitioner to be applicable. “I, WE jointly and severally agree to any increase or decrease in the interest rate
which may occur after July 1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of
1% per month until the amount/s or installment/s due and unpaid under the trust receipt on the reverse side hereof is/are
fully paid”. We agree with respondent Court of Appeals that the foregoing stipulation is invalid, there being no reference
rate set either by it or by the Central Bank, leaving the determination thereof at the sole will and control of petitioner.

While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that
interest rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, there should
always be a reference rate upon which to peg such variable interest rates. In other words, unlike the stipulation subject of
the instant case, the interest rate involved in the Polotan case is designed to be based on the prevailing market rate. On the
other hand, a stipulation ostensibly signifying an agreement to any increase or decrease in the interest rate, without
more, cannot be accepted by this Court as valid for it leaves solely to the creditor the determination of what interest rate
to charge against an outstanding loan.

The recent case of Colinares v. Court of Appeals[12] appears to be foursquare with the facts obtaining in the case at bar.
There, we found that inasmuch as the debtor received the goods subject of the trust receipt before the trust receipt itself
was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of
execution of the trust receipt, ownership over the goods was already transferred to the debtor. This situation is
inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the
bank and are only released to the importer in trust AFTER THE LOAN IS GRANTED.

In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the trust receipt occurred
long before the trust receipt itself was executed. More specifically, delivery of the bunker fuel oil to respondent
Corporations Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982.[13] Further, the oil was used
up by respondent Corporation in its normal operations by August, 1982.[14] On the other hand, the subject trust receipt
was only executed nearly two months after full delivery of the oil was made to respondent Corporation, or on September 2,
1982.

The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of
confidence in the handling of money or goods (Mala prohibita in nature) to the prejudice of another regardless of whether
the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations,
as shown by several receipts issued by PBC acknowledging payment of the loan.

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the
threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such
agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort
to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had
happened in this case. Eventually, PBC showed its true colors and admitted that it was only after collection of the money, as
manifested by its Affidavit of Desistance. Thus, we agree that respondents Gregory T. Lim and his spouse cannot be made
personally liable since respondent Lim entered into and signed the contract clearly in his official capacity as Executive Vice
President. The personality of the corporation is separate and distinct from the persons composing it.

Colinares v. CA & People of the Philippines

On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board 2x4x, 300 SF tanguile wood tiles 12x12, 260 SF
Marcelo economy tiles and 2 gallons UMYLIN cement adhesive from CM Builders Centre for the construction project.[1] The
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 27
Case Notes/Digests

following day, 31 October 1979, Petitioners applied for a commercial letter of credit[2] with the Philippine Banking
Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders Centre. PBC approved the letter of
credit[3] for P22,389.80 to cover the full invoice value of the goods. Petitioners signed a pro-forma trust receipt[4] as
security. On 31 October 1979, PBC debited P6,720 from Petitioners marginal deposit as partial payment of the loan. On 7
May 1980, PBC wrote[6] to Petitioners demanding that the amount be paid within seven days from notice. Instead of
complying with PBCs demand, Veloso confessed that they lost P19,195.83 in the Carmelite Monastery Project and
requested for a grace period of until 15 June 1980 to settle the account. On 14 January 1983, Petitioners were charged with
the violation of P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of the Revised Penal Code in an Information
which was filed with Branch 18, Regional Trial Court of Cagayan de Oro City.

During trial, petitioner Veloso insisted that the transaction was a clean loan as per verbal guarantee of Cayo Garcia Tuiza,
PBCs former manager. He and petitioner Colinares signed the documents without reading the fine print, only learning of
the trust receipt implication much later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust
receipt was a mere formality. (Which later, they were convicted by the RTC.) The trial court considered the transaction
between PBC and Petitioners as a trust receipt transaction under Section 4, P.D. No. 115. It considered Petitioners use of
the goods in their Carmelite monastery project an act of disposing as contemplated under Section 13, P.D. No. 115, and
treated the charge invoice[19] for goods issued by CM Builders Centre as a document within the meaning of Section 3
thereof. It concluded that the failure of Petitioners to turn over the amount they owed to PBC constituted estafa.

Issue

The core issues raised in the petition are the denial by the Court of Appeals of Petitioners Motion for New Trial and the true
nature of the contract between Petitioners and the PBC. As to the latter, Petitioners assert that it was an ordinary loan, not
a trust receipt agreement under the Trust Receipts Law.

Ruling

Petitioners could not have been unaware that the two-page document exists. The Disclosure Statement itself states,
NOTICE TO BORROWER: YOU ARE ENTITLED TO A COPY OF THIS PAPER WHICH YOU SHALL SIGN.[29] Assuming Petitioners
copy was then unavailable, they could have compelled its production in court,[30] which they never did. Petitioners have
miserably failed to establish the second requisite of the rule on newly discovered evidence. Petitioners themselves
admitted that they searched again their voluminous records, meticulously and patiently, until they discovered this new and
material evidence only upon learning of the Court of Appeals decision and after they were shocked by the penalty
imposed.[31] Clearly, the alleged newly discovered evidence is mere forgotten evidence that jurisprudence excludes as a
ground for new trial.

Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any transaction by and between a
person referred to as the entruster, and another person referred to as the entrustee, whereby the entruster who owns or
holds absolute title or security interest over certain specified goods, documents or instruments, releases the same to the
possession of the entrustee upon the latters execution and delivery to the entruster of a signed document called a trust
receipt wherein the entrustee binds himself to hold the designated goods, documents or instruments with the obligation to
turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the
trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt.

There are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money
received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second
is covered by the provision which refers to merchandise received under the obligation to return it (devolvera) to the owner.
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 28
Case Notes/Digests

A thorough examination of the facts obtaining in the case at bar reveals that the transaction intended by the parties was
a simple loan, not a trust receipt agreement.

Petitioners received the merchandise from CM Builders Centre on 30 October 1979. On that day, ownership over the
merchandise was already transferred to Petitioners who were to use the materials for their construction project. It was
only a day later, 31 October 1979, that they went to the bank to apply for a loan to pay for the merchandise.

This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and only
released to the importer in trust SUBSEQUENT TO THE GRANT of the loan. The bank acquires a security interest in the
goods as holder of a security title for the advances it had made to the entrustee.[35] The ownership of the merchandise
continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise has
already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or
successor in interest.[36] To secure that the bank shall be paid, it takes full title to the goods at the very beginning and
continues to hold that title as his indispensable security until the goods are sold and the vendee is called upon to pay for
them; hence, the importer has never owned the goods and is not able to deliver possession.[37] In a certain manner, trust
receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported
merchandise as soon as he has paid its price.

Trust receipt transactions are intended to aid in financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or purchased.

The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the
owner.[45] Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in
the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by
several receipts issued by PBC acknowledging payment of the loan.

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the
threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such
agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort
to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had
happened in this case. Eventually, PBC showed its true colors and admitted that it was only after collection of the money, as
manifested by its Affidavit of Desistance.

REPUBLIC V. GRIJALDO

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of Taiwan, Ltd. In Bacolod
City, in the total sum of P1,281.97 with interest at the rate of 6% per annum, compounded quarterly. These loans are
evidenced by five promissory notes executed by the appellant in favor of the Bank of Taiwan, all notes without due dates,
but because the loans were due one year after they were incurred. To secure the payment of the loans the appellant
executed a chattel mortgage on the standing crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran,
Negros Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the Trading with the
Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. Were vested in the Government of the

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 29
Case Notes/Digests

United States. Pursuant to the Philippine Property Act of 1946 of the United States, these assets, including the loans in
question, were subsequently transferred to the Republic of the Philippines by the Government of the United States under
Transfer Agreement dated July 20, 1954. On September 29, 1954 the appellee, Republic of the Philippines, represented by
the Chairman of the Board of Liquidators, made a written extrajudicial demand upon the appellant for the payment of the
account in question. The record shows that the appellant had actually received the written demand for payment, but he
failed to pay.

On January 17, 1961 the appellee (petitioner) filed a complaint in the Justice of the Peace Court of Hinigaran, Negros
Occidental, to collect from the appellant the unpaid account in question. The Justice of the Peace Of Hinigaran, after
hearing, dismissed the case on the ground that the action had prescribed. The appellee appealed to the Court of First
Instance of Negros Occidental and on March 26, 1962 the court a quo rendered a decision ordering the appellant to pay the
appellee the sum of P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per annum compounded quarterly
from the date of the filing of the complaint until full payment was made. The appellant was also ordered to pay the sum
equivalent to 10% of the amount due as attorney’s fees and costs.

In discussing the first point of contention, the appellant maintains that the appellee has no privity of contract with the
appellant. It is claimed that the transaction between the Taiwan Bank, Ltd. And the appellant, so that the appellee, Republic
of the Philippines, could not legally bring action against the appellant for the enforcement of the obligation involved in said
transaction. This contention has no merit. It is true that the Bank of Taiwan, Ltd. Was the original creditor and the
transaction between the appellant and the Bank of Taiwan was a private contract of loan. However, pursuant to the Trading
with the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and under Vesting Order No. P-4,
dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which was declared to be under the
jurisdiction of the enemy country (Japan), were vested in the United States Government and the Republic of the
Philippines, the assets of the Bank of Taiwan, Ltd. Were transferred to and vested in the Republic of the Philippines. The
successive transfer of the rights over the loans in question from the Bank of Taiwan, Ltd. To the United States Government,
and from the United States Government to the government of the Republic of the Philippines, made the Republic of the
Philippines the successor of the rights, title and interest in said loans, thereby creating a privity of contract between the
appellee and the appellant.

The word “privy” denotes the idea of succession ... hence an assignee of a credit, and one subrogated to it, etc. will be
privies; in short, he who by succession is placed in the position of one of those who contracted the judicial relation and
executed the private document and appears to be substituting him in the personal rights and obligation is a privy.

The United States of America acting as a belligerent sovereign power seized the assets of the Bank of Taiwan, Ltd. Which
belonged to an enemy country. The confiscation of the assets of the Bank of Taiwan, Ltd. Being an involuntary act of war,
and sanctioned by international law, the United States succeeded to the rights and interests of said Bank of Taiwan, Ltd.
Over the assets of said bank. As successor in interest in, and transferee of, the property rights of the United States of
America over the loans in question, the Republic of the Philippines had thereby become a privy to the original contracts of
loan between the Bank of Taiwan, Ltd. And the appellant. It follows, therefore, that the Republic of the Philippines has a
legal right to bring the present action against the appellant Jose Grijaldo.

The appellant likewise maintains, in support of his contention that the appellee has no cause of action, that because the
loans were secured by a chattel mortgage on the standing crops on a land owned by him and these crops were lost or
destroyed through enemy action his obligation to pay the loans was thereby extinguished. This argument is untenable.
The terms of the promissory notes and the chattel mortgage that the appellant executed in favor of the Bank of Taiwan,
Ltd. Do not support the claim of appellant. The obligation of the appellant under the five promissory notes was not to
deliver a determinate thing namely, the crops to be harvested from his land, or the value of the crops that would be

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 30
Case Notes/Digests

harvested from his land. Rather, his obligation was to pay a generic thing — the amount of money representing the total
sum of the five loans, with interest. The transaction between the appellant and the Bank of Taiwan, Ltd. Was a series of five
contracts of simple loan of sums of money. “By a contract of (simple) loan, one of the parties delivers to another ... money
or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid.” (Article
1933, Civil Code) The obligation of the appellant under the five promissory notes evidencing the loans in questions is to pay
the value thereof; that is, to deliver a sum of money — a clear case of an obligation to deliver, a generic thing. The chattel
mortgage on the crops growing on appellant’s land simply stood as a security for the fulfillment of appellant’s obligation
covered by the five promissory notes, and the loss of the crops did not extinguish his obligation to pay, because the account
could still be paid from other sources aside from the mortgaged crops.

This contention of the appellant has no merit. Firstly, it should be considered that the complaint in the present case was
brought by the Republic of the Philippines not as a nominal party but in the exercise of its sovereign functions, to protect
the interests of the State over a public property. Under paragraph 4 of Article 1108 of the Civil Code prescription, both
acquisitive and extinctive, does not run against the State. This Court has held that the statute of limitations does not run
against the right of action of the Government of the Philippines (Government of the Philippine Islands vs. Monte de Piedad,
etc., 35 Phil. 738-751).

Contracts stipulating for payments presumably in Japanese war notes may be enforced in our Courts after the liberation to
the extent of the just obligation of the contracting parties and, as said notes have become worthless, in order that justice
may be done and the party entitled to be paid can recover their actual value in Philippine Currency, what the debtor or
defendant bank should return or pay is the value of the Japanese military notes in relation to the peso in Philippine
Currency obtaining on the date when and at the place where the obligation was incurred unless the parties had agreed
otherwise.

TAN V. VALDEHUEZA

The decision a quo was rendered by the Court of First Instance of Misamis Occidental (Branch I) in an action instituted by
the plaintiff-appellee Lucia Tan against the defendants-appellants Arador Valdehueza and Rediculo Valdehueza (docketed
as civil case 2574) for (a) declaration of ownership and recovery of possession of the parcel of land described in
the first cause of action of the complaint, and (b) consolidation of ownership of two portions of another parcel of
(unregistered) land described in the second cause of action of the complaint, purportedly sold to the plaintiff in two
separate deeds of pacto de retro.

That the parcel of land described in the first cause of action was the subject matter of the public auction sale held on May 6,
1955 at the Capitol Building in Oroquieta, Misamis Occidental, wherein the plaintiff was the highest bidder and as such a
Certificate of Sale was executed by MR. VICENTE D. ROA who was then the Ex-Officio Provincial Sheriff in favor of
LUCIA TAN the herein plaintiff. Due to the failure of defendant Arador Valdehueza to redeem the said land within the
period of one year as being provided by law, MR. VICENTE D. ROA who was then the Ex-Officio Provincial Sheriff executed
an ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA TAN.

That defendants ARADOR VALDEHUEZA and REDICULO VALDEHUEZA have executed two documents of DEED OF PACTO DE
RETRO SALE in favor of the plaintiff herein, LUCIA TAN of two portions of a parcel of land which is described in the second
cause of action with the total amount of ONE THOUSAND FIVE HUNDRED PESOS (P1,500.00), Philippine Currency, copies of
said documents are marked as “Annex D” and “Annex E”, respectively and made as integral parts of this stipulation of facts.

Relying on Section 3 of Rule 17 of the Rules of Court which pertinently provides that a dismissal for failure to prosecute
“shall have the effect of an adjudication upon the merits,” the Valdehuezas submit that the dismissal of civil case 2002
operated, upon the principle of res judicata, as a bar to the first cause of action in civil case 2574. We rule that this
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 31
Case Notes/Digests

contention is untenable as the causes of action in the two cases are not identical. Case 2002 was for injunction against the
entry into and the gathering of nuts from the land, while case 2574 seeks to “remove any doubt or cloud of the plaintiff’s
ownership.

Applying the test of absence of inconsistency between prior and subsequent judgments, 2 we hold that the failure of Tan, in
case 2002, to secure an injunction against the Valdehuezas to prevent them from entering the land and gathering nuts is
not inconsistent with her being adjudged, in case 2574, as owner of the land with right to recover possession thereof. Case
2002 involved only the possession of the land and the fruits thereof, while case 2574 involves ownership of the land, with
possession as a mere attribute of ownership. The judgment in the first case could not and did not encompass the judgment
in the second, although the second judgment would encompass the first. Moreover, the new Civil Code provides that
suitors in actions to quiet title “need not be in possession of said property.”

The trial court treated the registered deed of pacto de retro as an equitable mortgage but considered the unregistered
deed of pacto de retro “as a mere case of simple loan, secured by the property thus sold under pacto de retro,” on the
ground that no suit lies to foreclose an unregistered mortgage. It would appear that the trial judge had not updated himself
on law and jurisprudence; he cited, in support of his ruling, article 1875 of the old Civil Code and decisions of this
Court circa 1910 and 1912.

Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of a mortgage even as
between the parties, but under article 2125 of the new Civil Code (in effect since August 30, 1950), this is no longer so.
The Valdehuezas having remained in possession of the land and the realty taxes having been paid by them, the contracts
which purported to be pacto de retro transactions are presumed to be equitable mortgages, 5 whether registered or not,
there being no third parties involved.

The imposition of legal interest on the amounts subject of the equitable mortgages, P1,200 and P300, respectively, is
without legal basis, for, “No interest shall be due unless it has been expressly stipulated in writing.” (Article 1956, new Civil
Code) Furthermore, the plaintiff did not pray for such interest; her thesis was a consolidation of ownership, which was
properly rejected, the contracts being equitable mortgages.

JARDENIL V. SOLAS

Issue

This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is defendant-appellee bound to pay
the stipulated interest only up to the date of maturity as fixed in the promissory note, or up to the date payment is
effected? This question is, in our opinion, controlled by the express stipulation of the parties.

Ruling

Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity, or until March 31, 1934.
As the contract is silent as to whether after that date, in the event of non- payment, the debtor would continue to pay
interest, we cannot, in law, indulge in any presumption as to such interest; otherwise, we would be imposing upon the
debtor an obligation that the parties have not chosen to agree upon. Article 1755 of the Civil Code provides that “interest
shall be due only when it has been expressly stipulated.”

A writing must be interpreted according to the legal meaning of its language (section 286, Act No. 190, now section 58, Rule
123), and only when the wording of the written instrument appears to be contrary to the evident intention of the parties
that such intention must prevail. (Article 1281, Civil Code.) There is nothing in the mortgage deed to show that the terms
employed by the parties thereto are at war with their evident intent. On the contrary, the act of the mortgagee of granting
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San Beda College Alabang School of Law
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to the mortgagor, on the same date of the execution of the deed of mortgage, an extension of one year from the date of
maturity within which to make payment, without making any mention of any interest which the mortgagor should pay
during the additional period (see Exhibit B attached to the complaint), indicates that the true intention of the parties was
that no interest should be paid during the period of grace. What reasons the parties may have therefor, we need not here
seek to explore.

RADIO WEALTH FINANCE V. DEL ROSARIO

On March 2, 1991, Spouses Vicente and Maria Sumilang del Rosario (herein respondents), jointly and severally executed,
signed and delivered in favor of Radiowealth Finance Company (herein petitioner), a Promissory Note 5 for P138,948.
Thereafter, respondents defaulted on the monthly installments. Despite repeated demands, they failed to pay their
obligations under their Promissory Note.

On June 7, 1993, petitioner filed a Complaint 7 for the collection of a sum of money before the Regional Trial Court of
Manila, Branch 14. 8 During the trial, Jasmer Famatico, the credit and collection officer of petitioner, presented in evidence
the respondents’ check payments, the demand letter dated July 12, 1991, the customer’s ledger card for the respondents,
another demand letter and Metropolitan Bank dishonor slips. Famatico admitted that he did not have personal knowledge
of the transaction or the execution of any of these pieces of documentary evidence, which had merely been endorsed to
him.

Respondents filed on July 29, 1994 a Demurrer to Evidence 10 for alleged lack of cause of action. On November 4, 1994,
the trial court dismissed 11 the complaint for failure of petitioner to substantiate its claims, the evidence it had presented
being merely hearsay. On appeal, the Court of Appeals (CA) reversed the trial court and remanded the case for further
proceedings.

Petitioner claims that respondents are liable for the whole amount of their debt and the interest thereon, after they
defaulted on the monthly installments. Respondents, on the other hand, theorize that the action for immediate
enforcement of their obligation is premature because its fulfillment is dependent on the sole will of the debtor. Hence, they
consider that the proper court should first fix a period for payment, pursuant to Articles 1180 and 1197 of the Civil Code.

Ruling

Defendants who present a demurrer to the plaintiff’s evidence retain the right to present their own evidence, if the trial
court disagrees with them; if the court agrees with them, but on appeal, the appellate court disagrees with both of them
and reverses the dismissal order, the defendants lose the right to present their own evidence. 16 The appellate court shall,
in addition, resolve the case and render judgment on the merits, inasmuch as a demurrer aims to discourage prolonged
litigations.

Applying Rule 33, Section 1 of the 1997 Rules of Court, the CA should have rendered judgment on the basis of the evidence
submitted by the petitioner. While the appellate court correctly ruled that “the documentary evidence submitted by the
[petitioner] should have been allowed and appreciated . . .,” and that “the petitioner presented quite a number of
documentary exhibits . . . enumerated in the appealed order,” 18 we agree with petitioner that the CA had sufficient
evidence on record to decide the collection suit. A remand is not only frowned upon by the Rules, it is also logically
unnecessary on the basis of the facts on record.

This contention is untenable. (Referring to respondents.) The act of leaving blank the due date of the first installment did
not necessarily mean that the debtors were allowed to pay as and when they could. If this was the intention of the parties,
they should have so indicated in the Promissory Note. However, it did not reflect any such intention.

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San Beda College Alabang School of Law
Credit Transactions 33
Case Notes/Digests

On the contrary, the Note expressly stipulated that the debt should be amortized monthly in installments of P11,579 for
twelve consecutive months. While the specific date on which each installment would be due was left blank, the Note
clearly provided that each installment should be payable each month. Furthermore, it also provided for an acceleration
clause and a late payment penalty, both of which showed the intention of the parties that the installments should be paid
at a definite date. Had they intended that the debtors could pay as and when they could, there would have been no need
for these two clauses.

Verily, the contemporaneous and subsequent acts of the parties manifest their intention and knowledge that the monthly
installments would be due and demandable each month. 20 In this case, the conclusion that the installments had already
became due and demandable is bolstered by the fact that respondents started paying installments on the Promissory
Note, even if the checks were dishonored by their drawee bank. We are convinced neither by their avowals that the
obligation had not yet matured nor by their claim that a period for payment should be fixed by a court.

Petitioner, in its Complaint, prayed for “14% interest per annum from May 6, 1993 until fully paid.” We disagree. The Note
already stipulated a late payment penalty of 2.5 percent monthly to be added to each unpaid installment until fully paid.
Payment of interest was not expressly stipulated in the Note. Thus, it should be deemed included in such penalty. In
addition, the Note also provided that the debtors would be liable for attorney’s fees equivalent to 25 percent of the
amount due in case a legal action was instituted and 10 percent of the same amount as liquidated damages. Liquidated
damages, however, should no longer be imposed for being unconscionable. 24 Such damages should also be deemed
included in the 2.5 percent monthly penalty. Furthermore, we hold that petitioner is entitled to attorney’s fees, but only in
a sum equal to 10 percent of the amount due which we deem reasonable under the proven facts.

CASA FILIPINA V. DEPUTY EXEC. SECRETARY

On June 30, 1986, private respondent Jose Valenzuela, Jr. filed a complaint against petitioner Casa Filipina Development
Corporation before the Office of Appeals, Adjudication and Legal Affairs (OAALA) of the then Human Settlements
Regulatory Commission (now Housing and Land Use Regulatory Board) for its failure to execute and deliver the deed of sale
and transfer certificate of title. He alleged therein that on May 2, 1984, he entered into a contract to sell with petitioner for
the purchase of a 120 sq. m. lot denominated as Lot 8, Block 9, Phase II of Casa Filipina, Sucat II, Bo. San Dionisio,
Parañaque, Metro Manila, for a total purchase price of P68,400.00 with P16,416.00 as downpayment and the balance of
P51,984.00 to be paid in 12 equal monthly installments of P4,915.16 with 24% interest per annum starting September 3,
1984; that on October 7, 1985, he made his full and final payment under O.R. No. 6266; that despite full payment of the
lot, petitioner refused to execute the necessary deed of absolute sale and deliver the corresponding transfer certificate of
title to him; that since October 1985, he had offered to pay for or reimburse petitioner the expenses for the transfer of the
title but the latter refused to accept the same; and that he was constrained to hire a lawyer for a fee to protect his
interests.

For petitioner’s defense, it contended that private respondent’s action is premature because of his failure to comply with
the other conditional requirements of their contract such as payment of transfer expenses, and that had the latter paid said
fees, it would have been very much willing to effect the transfer of the title.

Mainly, petitioner asseverates that in granting both remedies of specific performance and rescission, public respondent
ignored a well-pronounced rule that these remedies cannot be availed at the same time. There is no evidence showing that
private respondent had offered to pay the expenses for the transfer of the title. Furthermore, the amount of 24% interest
imposed by the OAALA in case of refund is high and without basis: firstly, HLURB Resolution No. R-421, series of 1988,
strictly enjoins the maximum interest to be awarded in case of refund to 12%; secondly, although condition no. 1 of their
contract to sell provides for said rate of interest, it merely applies to interest on installment payments but not with respect
to refunds; thirdly, since the contract between them is not a forbearance of money or loan, the doctrine laid down in the
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San Beda College Alabang School of Law
Credit Transactions 34
Case Notes/Digests

case of Reformina v. Tomol, Jr., G.R. No. 59096, 139 SCRA 260 applies, that is, except where the action involves forbearance
of money or loan, interest which courts may award is only up to 12% (should be 6%). Finally, inasmuch as issuance of the
title has not yet been effected because of the take over by Comsavings Bank of the Royal Savings Bank, the period specified
under Section 25 of P.D. No. 957 has not begun to run for the purpose of redemption.

Ruling

The ruling in Reformina v. Tomol, it must be underscored, deals exclusively with cases where damages in the form of
interest is due but no specific rate has been previously set by the parties. In such cases, the legal interest of 12% per
annum (former rate of interest, now it is 6% via BSP circular) must be applied. In the present case, however, the interest
rate of 24% per annum was mutually agreed upon by petitioner and private respondent in their contract to sell — this was
the interest rate imposed on private respondent for the payment of the installments on the contract price and there is no
reason why this same interest rate should not be equally applied to petitioner which is guilty of violating the reciprocal
obligation.

Section 25 of P.D. No. 957 imposes an obligation on the part of the owner or developer, in the event the mortgage over the
lot or unit is outstanding at the time of the issuance of the title to the buyer, to redeem the mortgage or the corresponding
portion thereof within six months from such issuance. We focus Our attention on the period of “six months” to be reckoned
“from the issuance of the title.” Supposing there is no such issuance of the title, as in this case, from what event is the six
month period to be counted? Or, will this period not begin to run at all unless the title has been issued? The argument of
petitioner that the issuance of the title is a prerequisite to the running of the six month period of redemption, fails to
convince Us. Otherwise, the owner or developer can readily concoct a thousand and one reasons as justifications for its
failure to issue the title and in the process, prolong the period within which to deliver the title to the buyer free from any
liens or encumbrances. Additionally, by not issuing/delivering the title of the lot to private respondent upon full payment
thereof, petitioner has already violated the explicit mandate of the first sentence of Section 25 of P.D. No. 957. If We were
to count the six month period of redemption from the belated issuance of the title, petitioner will have a lot to gain from
its own non-observance of said provision.

SECURITY BANK V. RTC

Issue

Questions of law which are of first impression are sought to be resolved in this case: Should the rate of interest on a loan or
forbearance of money, goods or credits, as stipulated in a contract, far in excess of the ceiling prescribed under or pursuant
to the Usury Law, prevail over Section 2 of Central Bank Circular No. 905 which prescribes that the rate of interest thereof
shall continue to be 12% per annum? Do the Courts have the discretion to arbitrarily override stipulated interest rates of
promissory notes and thereby impose a 12% interest on the loans, in the absence of evidence justifying the imposition of a
higher rate? The sole issue to be settled in this petition is whether or not the 23% rate of interest per annum agreed upon
by petitioner bank and respondents is allowable and not against the Usury Law.

Facts

On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No. TL/74/178/83 in favor of
petitioner Security Bank and Trust Co. (SBTC) in the total amount of One Hundred Thousand Pesos (P100,000.00) payable in
six monthly installments with a stipulated interest of 23% per annum up to the fifth installment. On July 28, 1983,
respondent Eusebio again executed Promissory Note No. TL/74/1296/83 in favor of petitioner SBTC. Respondent bound
himself to pay the sum of One Hundred Thousand Pesos (P100,000.00) in six (6) monthly installments plus 23% interest per
annum. Finally, another Promissory Note No. TL/74/1491/83 was executed on August 31, 1983 in the amount of Sixty Five

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 35
Case Notes/Digests

Thousand Pesos (P65,000.00). Respondent agreed to pay this note in six (6) monthly installments plus interest at the rate of
23% per annum. (A total of 3 notes were issued all at 23% interest per annum.)

Upon the failure and refusal of respondent Eusebio to pay the aforestated balance payable, a collection case was filed in
court by petitioner SBTC. 5 On March 30, 1993, the court a quo rendered a judgment in favor of petitioner SBTC.

From the examination of the records, it appears that indeed the agreed rate of interest as stipulated on the three (3)
promissory notes is 23% per annum. 8 The applicable provision of law is the Central Bank Circular No. 905 which took effect
on December 22, 1982. CB Circular 905 was issued by the Central Bank’s Monetary Board pursuant to P.D.
1684 empowering them to prescribe the maximum rates of interest for loans and certain forbearances.

In PNB v. CA: “P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding
any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In
fine, they can agree to adjust, upward or downward, the interest previously stipulated.”

All the promissory notes were signed in 1983 and, therefore, were already covered by CB Circular No. 905. Contrary to the
claim of respondent court, this circular did not repeal nor in anyway amend the Usury Law but simply suspended the
latter’s effectivity.

The rate of interest was agreed upon by the parties freely. Significantly, respondent did not question that rate. It is not for
respondent court a quo to change the stipulations in the contract where it is not illegal. Furthermore, Article 1306 of the
New Civil Code provides that contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. We find no
valid reason for the respondent court a quo to impose a 12% rate of interest on the principal balance owing to petitioner by
respondent in the presence of a valid stipulation. In a loan or forbearance of money, the interest due should be that
stipulated in writing, and in the absence thereof, the rate shall be 12% per annum. 13 Hence, only in the absence of a
stipulation can the court impose the 12% rate of interest. The promissory notes were signed by both parties voluntarily.
Therefore, stipulations therein are binding between them. Respondent Eusebio, likewise, did not question any of the
stipulations therein. In fact, in the Comment filed by respondent Eusebio to this court, he chose not to question the
decision and instead expressed his desire to negotiate with the petitioner bank for “terms within which to settle his
obligation.”

PHILIPPINE NATIONAL BANK V. CA

In July 1982, the private respondent applied for, and was granted by petitioner PNB, a credit line of 321.8 million, secured
by a real estate mortgage, for a term of two (2) years, with 18% interest per annum. Private respondent executed in favor of
the PNB a Credit Agreement, two (2) promissory notes in the amount of P900,000.00 each, and a Real Estate Mortgage
Contract. The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18% interest per annum
“within the limits allowed by law at any time depending on whatever policy it [PNB] may adopt in the future; Provided,
that, the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board.”

On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8 million “will expire on July 4,
1984,”(2) “[i]f renewal of the line for another year is intended, please submit soonest possible your request,” and (3) the
“present policy of the Bank requires at least 30% reduction of principal before your line can be renewed.” (pp. 86-87, Rollo.)
Complying, private respondent on June 25, 1984, paid PNB P540,000 00 (30% of P1.8 million) and requested that “the
balance of P1,260,000.00 be renewed for another period of two (2) years under the same arrangement” and that “the
increase of the interest rate of my mortgage loan be from 18% to 21%” (p. 87, Rollo.). On August 10, 1984, PNB informed

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San Beda College Alabang School of Law
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Case Notes/Digests

private respondent that “we cannot give due course to your request for preferential interest rate in view of the following
reasons: Existing Loan Policies of the bank requires 32% for loan of more than one year; our present cost of funds has
substantially increased.” Like rubbing salt on the private respondent’s wound, the petitioner informed private respondent
on October 29, 1984, that “the interest rate on your outstanding line/loan is hereby adjusted from 41% p.a. to 48%
p.a. (42% prime rate plus 6% spread) effective 25 October 1984.”

Issue

The assignments of error raised in PNB’s petition for review can be resolved into a single legal issue of whether the bank,
within the term of the loan which it granted to the private respondent, may unilaterally change or increase the interest
rate stipulated therein at will and as often as it pleased.

Ruling

In the first place, although Section 2, PD. No. 116 of January 29, 1973, authorizes the Monetary Board to prescribe the
maximum rate or rates of interest for loans or renewal thereof and to change such rate or rates whenever warranted by
prevailing economic and social conditions, it expressly provides that “such changes shall not be made oftener than once
every twelve months.” In this case, PNB, over the objection of the private respondent, and without authority from the
Monetary Board, within a period of only four (4) months, increased the 18% interest rate on the private respondent’s loan
obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those
increases were null and void, for if the Monetary Board itself was not authorized to make such changes oftener than once
a year, even less so may a bank which is subordinate to the Board.

Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did agree in the Deed of Real Estate
Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract “to such increase within the
rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe” (Exh. 5-e-1) or “within the limits allowed
by law” (Promissory Notes, Ex’s. 2, 3, and 4), no law was ever passed in July to November 1984 increasing the interest
rates on loans or renewals thereof to 32%, 41% and 48% (per annum), and no documents were executed and delivered by
the debtor to effectuate the increases. In the present case, the PNB relied on its own Board Resolution No. 681 (Exh.
10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are
neither laws nor resolutions of the Monetary Board.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates but it did not authorize the
PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48%
within a span of four (4) months, in violation of PD. 116 which limits such changes to “once every twelve months.” Besides
violating PD. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent’s loan, violated
the mutuality of contracts ordained in Article 1308 of the Civil Code.

In order that obligations arising from contracts may have the force of law between the parties, there must
be mutuality between the parties based on their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita
Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of
the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It
would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on
equal footing, the weaker party’s (the debtor) participation being reduced to the alternative “to take it or leave it” (Qua vs.
Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 37
Case Notes/Digests

PNB’S successive increases of the interest rate on the private respondent’s loan, over the latter’s protest, were arbitrary as
they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms “may be amended only by an
instrument in writing signed by the party to be bound as burdened by such amendment.” The increases imposed by PNB
also contravene Art. 1956 of the Civil Code which provides that “no interest shall be due unless it has been expressly
stipulated in writing.”

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per annum, hence, he
is not bound to pay a higher rate than that.

ROYAL SHIRT V. CO BON TIC

The principal issues in the Municipal Court was the nature of the sale of the 350 pairs of shoes by plaintiff to defendant —
whether it was an outright sale as contended by the plaintiff, or a sale merely on consignment as claimed by the
defendant who wanted to return the shoes not yet sold by him. There was also involved the question of the amount
already paid by the defendant to the plaintiff. The Municipal Court held that the contract was of sale on consignment; that
of the 350 pairs of shoes consigned, 207 pairs were sold at the rate of P8 a pair, amounting to a total of P1,656; and that
defendant had paid the sum of P1,028 to plaintiff on account of the purchase price of the shoes sold, excluding the amount
of P420, value of Check No. 790264 issued by defendant as payment but returned to him by the plaintiff and not replaced
with cash. Judgment was rendered sentencing the defendant to pay plaintiff the sum of P628 with interest thereon at the
legal rate from the date of the filing of the complaint, and to return to plaintiff the 143 pairs of shoes still unsold, unless he
preferred to retain and pay for them at the rate of P8 a pair within a period of fifteen days from receipt of a copy of the
decision.

The defendant appealed from the judgment to the Court of First Instance of Manila, and after trial, the appellate court held
that the transaction involved was one of outright sale at P7 per pair of shoes, sales tax included, the court accepting the
version given by the plaintiff to the effect that on the basis of the order slip (Exhibit A), the defendant had 9 days from
delivery of the shoes to make his choice of the two alternatives, that is to consider the sale of the 350 pairs of shoes
closed at the flat rate of P7 per pair, sales tax included, or, at the expiration of 9 days to pay for the shoes sold at P8 per
pair, and to return the remaining unsold ones to plaintiff; and that, inasmuch as defendant, at the expiration of the 9 days
stipulated, failed to return the shoes, and actually began making partial payments on account of the purchase price agreed
upon, the transaction in the nature of a straight sale, was considered closed. The court also found as did the Municipal
Court that the amount of P420 represented by Check No. 790624 was never replaced or exchanged for cash by the
defendant upon its return to him, and consequently, it may not be considered as part payment.

It will also be noticed (The subsequent conduct of the parties was considered by the Court as provided in Art. 1371 –
NCC)that the defendant in making said notations of payment considered the full purchase price of the 350 pairs of shoes at
P7.00 or P2,450, and it was against said total that he had been making the payments, putting down the balance after each
payment. For instance, after paying P500 on account, he put P1,950 as balance, and after paying another P528, he put
down as balance P1,422. In other words, he obviously accepted the straight sale to him on credit of the whole 350 pairs of
shoes for P2,450 and made partial payments on account thereof. In making said partial payments, he made no mention
whatsoever of the number of shoes sold by him and the number of shoes remaining unsold, which he should have done
had the sale been on the assignment basis. On the other hand, he merely mentioned the balance of the purchase price
after deducting the several partial payments made by him. Furthermore, if the sale had been on consignment, a stipulation
as to the period of time for the return of the unsold shoes should have been made; but evidently that had not been done
and defendant kept the shoes unsold more or less indefinitely, but giving the same excuse that he could not return them to
the plaintiff because he did not know where to return them. The plaintiff Royal Shirt Factory, Inc., is quite well- known. It
has a store at the Escolta and according to the invoice (Exhibit B), it is an importer, wholesaler and manufacturer, and it

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 38
Case Notes/Digests

could not have been hard, much less impossible for the defendant to return the shoes unsold by him had the transaction
really been a sale on consignment. So, on this issue of the nature of the transaction between the parties, we agree with the
trial court that it was a straight sale at the rate of P7 per pair of shoes.

The decision appealed from sentences the defendant to pay to the plaintiff P1,422 with interest at 12 per cent per annum
from August 27, 1948, plus 25 per cent of the same sum for attorney’s fees, besides costs. This rate of interest and the 25
per cent for attorney’s fees appears in Exhibit “B” in printed form as terms or conditions. In Exhibit “A”, the order slip, the
conditions of sale also printed provide for 20 per cent only as attorney’s fees and no rate of interest in case of litigation.
Had the defendant signed Exhibit “A”, which he did not, he would have been bound by it and would be liable to 20 per
cent of any amount due from him, but because of the absence of stipulation as to the rate of interest he would be paying
only the legal rate of 6 per cent per annum. There is no explanation of this difference in conditions of sale about rate of
interest and attorney’s fees found in the order slip (Exhibit “A”) and the invoice (Exhibit “B”) both of the plaintiff. Anyway,
neither did the defendant sign Exhibit “B”. If we hold defendant bound by Exhibit “B” at all, it is because of his tacit
acceptance of the total value of 350 pairs of shoes and by his notation against if of his partial payments. We do not think it
fair for him to be bound also by the printed terms of the conditions of sale. Moreover, we find under said printed form the
clause in pencil: “as agreed with Mr. Chebat.” We may even say that said clause in handwriting may be considered as having
overruled what was printed as to the rate of interest and the attorney’s fees. We therefore hold that the defendant should
only pay 6 per cent interest on the amount due him from the date of the filing of the complaint, with costs, and nothing for
attorney’s fees. It is also interesting to note that this was the same ruling of the Municipal Court on this point.

SONCUYA V. AZARRAGA

It appears from the allegations of the complaint thus amended that the plaintiff has four causes of action. Under the first
cause he seeks to recover from the defendants the sum of P118,635.68 as damages, which he alleges to have been caused
by the defendants in fraudulently depriving him of the possession of four parcels of land with a total area of 296 hectares,
58 ares and 92 centares, which they, with knowledge that said real properties belonged to him exclusively, registered in
their names in the registry of property and mortgaged in favor of “Hijos de I. de la Rama” to pay a certain obligation which
they had contracted with the Panay Municipal Cadastre. Under the second cause, plaintiff seeks to recover P6,080 as the
supposed value of the heads of cattle belonging to him, which the tenants of the defendants had slaughtered. Under the
third cause, he seeks payment of the sum of P5,575 as the supposed value of 1,115 coconut trees which he had planted
on the four parcels of land in question. Under the fourth and last cause of action, plaintiff prays that the defendants
surnamed Azarraga, with the exception of Joaquin Azarraga, be ordered to make up to 123 hectares, 13 ares and 99
centares the land which the latter had sold to him, because plaintiff did not take possession of the land, except a portion
thereof, having an area of 72 hectares, 83 ares and 5 centares. In other words, the defendants should deliver to the
plaintiff AN ADDITIONAL 50 hectares, 30 ares and 94 centares inasmuch as the participation of said Joaquin Azarraga in
the estate left to him and his brothers, his co-defendants herein, by their common grandfather, Juan Azarraga y Galvez,
which Joaquin Azarraga sold to plaintiff, had that area according to the deed of partition, executed by all of them, and the
plan of said estate which was subsequently drawn up.

In their answer of February 26, 1931, the defendants Azarraga interposed a general denial of each and all the allegations of
the plaintiff’s complaint, excepting those relating to their personal circumstances. They, in turn, alleged the following
special defenses: First, that the complaint does not allege facts constituting causes of action,; second, that the plaintiff
and his predecessor in interest were negligent in failing to inscribe in the office of the register of deeds the supposed
encumbrances in their favor over the lands in question, granting that said encumbrances had ever existed; third, that the
plaintiff knew and was personally informed that the lands aforesaid would be surveyed at their instance and inscribed in
their names as their own property, but that he did nothing to defend or protect his rights either during the pendency of the
proceedings for the registration of the lands in question or during the period prescribed by law after the issuance of a

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San Beda College Alabang School of Law
Credit Transactions 39
Case Notes/Digests

decree and title, within which the validity of the same may be assailed; fourth, that at the time of filing their application for
registration as well as of the issuance of the decree ordering the inscription in their names in the registry of property of the
lands in question, they were the sole owners of the same, and that admitting for the sake of argument the theory of the
plaintiff that he had a right to said lands, it was nothing more than an expectation that he would be someday their owner;
fifth, that the plaintiff had no right to apply for or obtain from the court a writ of preliminary injunction, wherefore, that
obtained was illegal; and sixth, that the right of action of the plaintiff, if any, had prescribed.

Supplemental Facts

By reason of the proceedings had in case No. 11489 of the Court of First Instance of Manila, entitled “Testate Estate of the
Deceased Juan Azarraga y Galvez”, the defendants surnamed Azarraga became indebted to Attorney Leodegario Azarraga,
who represented them in said case, for attorney’s fees, which on October 21, 1919 the court, which took cognizance of the
case, fixed at P3,000.

About nine months after the court approved Exhibit A, or to be exact, on June 9, 1920, which was long before the expiration
of the period of five years within which the defendants Azarraga were bound to pay Attorney Leodegario Azarraga his fees,
which had been fixed at P3,000, said attorney decided to sell and did sell to the plaintiff his credit against the defendants
for the sum of P2,500 with all the rights inherent therein in accordance with the agreements and stipulations appearing in
said document (Exhibit C). One of said agreements was that Attorney Leodegario Azarraga would take possession of the
said parcels of land and, occupy the same, if he so desired, without paying any rent or annuity, until his fees shall have
been fully paid. Said parcels were identical with lots Nos. 81, 82 and 83 described in paragraph II of the plaintiff’s second
amended complaint.

When the plaintiff became the creditor of the defendants Azarraga by virtue of the sale and cession which Attorney
Azarraga had made in his favor of the rights which said attorney had under Exhibit A, he .Allowed the defendants an
extension of a few years over the five years within which they would have to pay him his credit, or up to February 16, 1926,
but with the express condition that they would pay him interest at the rate of 12 per cent per annum, from August 30, 1924
(Exhibit 5). This term was later extended to April 26, 1926 on the request of the defendants, but also with the condition that
they would pay the plaintiff the same interest of 12 per cent. (Exhibits L and M.) The plaintiff granted another extension to
expire on October 31, 1928, but subject to the condition that instead of seven thousand and odd pesos, which undoubtedly
referred to the interest of 12 per cent per annum charged the defendants, they should pay him P12,000 (Exhibit 2). In said
two amounts of P7,000 and P12,000 the sum of P4,000 which the plaintiff had given to the defendant Joaquin Azarraga and
which will be dealt with further in detail, was included.

By virtue of the transfer made to him by Joaquin Azarraga and also of the terms and conditions enumerated in said Exhibit
A, the plaintiff took possession of practically the WHOLE LAND of the defendants Azarraga, located in Bay-ang, placing
therein livestock from the month of August, 1920 and in the same year built sheepfolds therein, besides erecting some wire
fences. When the plaintiff took possession of part of the land in question in August, 1920 and another part thereof in
February, 1922, after the execution in his favor of the deed of transfer, which is a clarification of Exhibit E, he found fruit-
bearing and young coconut trees, the latter being more numerous. In 1925, 1926 and 1927, Joaquin Azarraga, either by
himself or his laborers, planted therein hundreds of coconut trees of which but a few hundreds, as was the case with the
old ones, remained on account of the long droughts or of destructive animals or other causes.

Between the date of the execution of the document Exhibit A [January 20, 1919) and the date of said letter; Exhibit 2
(October 9, 1928), the defendants secured the inscription in the registry of property and the issuance in their favor of the
corresponding certificate of title of the lands described in original certificate of title Nos. 9785, by virtue of the decree of
registration of October 27, 1925 (Exhibit Q). Of this fact the plaintiff had full knowledge by reason of the letter dated July 9,
1924, which was sent to him by the defendant Juan Azarraga, wherein the latter, besides asking for an extension of three
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San Beda College Alabang School of Law
Credit Transactions 40
Case Notes/Digests

years, informed him (plaintiff) of the registration proceedings which were then going on. (Exhibit 1.) The plaintiff did not
then nor thereafter take any step to oppose the same, or to ask at least for the revision of the decree of registration,
which was issued later, within the period of one year prescribed by law.

As clearly proven as the foregoing are the facts that the defendant “Hijos de I. de la Rama” entered into a contract with its
co-defendants Azarraga for the purpose of granting them a credit of P25,000, having delivered to them on different
occasions after the execution by said defendants of a deed of mortgage Exhibit 16 in its favor on September 20, 1929, as
part of the aforementioned sum, the total amount of P16,000. The Azarragas needed said amount for carrying on the
business for which the defendant Panay Municipal Cadastre, Inc., had been organized, as set forth in said Exhibit 16 and
clarified in Exhibit 17.

Issues

Section 5 Was the contract entered into by the Azarraga brothers, the defendants herein, with Attorney Leodegario
Azarraga from whom the plaintiff derived his right, a sale with pacto de retro, or an assignment in
payment of a debt, or was it an antichresis partaking of the nature of what was anciently known as pacto
comisorio, or a mortgage, or was it merely a loan with real estate security?

II. Was the contract executed by the defendant Joaquin Azarraga, on the one hand, and the plaintiff, on the other,
embodied in Exhibit E, a sale with pacto de retro or simply a loan with real estate security?

Ruling

The first question offers no difficulty if account is taken of the established facts and the conduct of the interested parties
after the expiration of the term of five years fixed in Exhibit A. When the plaintiff extended the period to February 16, 1926
within which the defendants Azarraga could pay him his credit, but imposed on them the condition that they pay him 12
per cent annual interest from August 30, 1924 on the principal of P3,000 (Exh. 5) and gave them another extension up to
April 26, 1926, under the same conditions as regard interest (Exh. M), what perhaps could have been considered as an
antichresis or pacto comisorio — not an assignment in payment of a debt, or a sale with pacto de retro because there is
nothing in Exhibit A to indicate that such was the intention of the defendants Azarraga or, at least, that they bound
themselves to deliver the land in question to the plaintiff and that the latter should pay them the value thereof; and
because there was what may be considered the resolutory condition of five years — was converted into a simple loan by
the decisive circumstance that plaintiff chose to collect thereafter, and the obligors agreed to pay him, 12 per cent annual
interest. IT IS ONLY IN CONTRACTS OF LOAN, WITH OR WITHOUT GUARANTY, THAT INTEREST MAY BE DEMANDED
(articles 1108, 1740, 1755, 1868, 1876, and 1881 of the Civil Code). As a matter of fact, the contract embodied in Exhibit A
was novated by Exhibits 5 and M, and the plaintiff wanted to have it novated for the third time by means of Exhibit 2. It
does not appear of record, however, that the defendants Azarraga ever assented to the latter novation. Perhaps, their
refusal to agree to the same was due to the fact that the plaintiff wanted to raise their old obligation (P3,000 or P2,700 of
all the Azarraga brothers, plus P4,000 which Joaquin Azarraga alone owed, which two accounts both the plaintiff and the
defendants considered as amounting to P7,000, exclusive of the annual interest of 12 per cent) to the round sum of
P12,000. From all this it may easily be inferred that the obligation which the defendants had imposed upon themselves by
Exhibit A had ceased to exist and became a simple loan with security, if so desired, of the lands in question, but without
prejudice to third parties as neither Exhibit A nor the deed of assignment Exhibit C, executed by Leodegario Azarraga in
favor of the plaintiff, was inscribed in the registry of deeds.

There is also no difficulty in disposing of the second question, considering the various novations which, as has been said,
had taken place and had been extended not only to the Azarraga brothers with respect to their obligation of P3,000 or
P2,700, but also to the defendant Joaquin Azarraga as regard his personal debt of P4,000. We must not lose sight of the fact
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San Beda College Alabang School of Law
Credit Transactions 41
Case Notes/Digests

that the plaintiff never considered the contract entered into by him with Joaquin Azarraga as, strictly speaking, a sale
with pacto de retro. And if he had ever considered it as such, it is, nevertheless, true that he novated it on February 16,
1926, considering it from that time on as a simple loan, inasmuch as on that date he began to charge the said defendant 12
per cent annual interest with the latter’s assent and conformity. This clearly appears in Exhibit M which must be considered
together with paragraphs 7 and 8 of Exhibit E, as the plaintiff himself does in his brief (brief for the plaintiff as appellant,
pages 4 and 5), because the term of five years to which said Exhibit E refers and which should have expired on February 16,
1926 was extended by the said plaintiff, by Exhibit M, up to April 26, 1926 under the aforementioned condition that he
should be paid 12 per cent annual interest.

Consequently, the contention of the defendants that the plaintiff did not and could never receive the lands in question as
an assignment in payment of a debt, and much less did he acquire them by purchase with pacto de retro, is well taken. It
must also be noted that at no time did the plaintiff claim any rights of dominion over the lands since he did not even
intimate to the defendants, either directly or indirectly, that for their failure to pay him his credit within the time
provided therefor, he became the absolute owner thereof. Notwithstanding the fact that all the extensions he had given
defendants had expired, he did not, even only for tax declaration purposes, declare the lands as his property. Having
reached this conclusion, it is needless to state that the plaintiff has no right to the various sums which he seeks in his
complaint and to which he refers in the first and last errors assigned by him. If, as has been shown, he never became the
owner of the lands in question, he can neither claim payment of the value of the same nor ask to be indemnified for the
deprivation of their possession. The plaintiff, moreover, has no reason to complain that his lien, if his right over said lands
could be termed as such, was not annotated in the certificate of title which the defendants Azarraga had obtained, or that
the latter did not ask that it be stated therein that the lands to which it refers are charged with his credit against them;
inasmuch as he was himself negligent in that he did not ask the court, while the registration case relating to said lands was
being heard, for the annotation of what he considered necessary to protect his rights, and in not seeking the revision or
modification of the decree of registration within the period of one year provided for that purpose.

RELUCIO V. BRILLANTE

On 22 October 1979, private respondent Zeida B. Brillante-Garfin filed a complaint in the lower court for specific
performance with damages against petitioner Irene P. Relucio, to compel the latter to: (a) execute, in compliance with the
Contract to Buy and Sell in question, a final deed of sale in favor of the former over two (2) residential subdivision lots in the
Mariano Village Subdivision, Naga City; and (b) construct paved roads on the northern and southern sides of the lots, as
well as “necessary facilities, improvements, infrastructures and other forms of development of the subdivision area.”
Private respondent alleged that the lots, which have a total contract price of P10,800.00, have already been paid for, as she
had already paid P200.00 as down payment, and had subsequently completed payment of 128 equal monthly installments
of P89.45 each amounting to P11,450.00; that as the law allows the charging of interest only as monetary interest or as
compensatory interest, none of which have obtained in her case, as she had never incurred in delay in the payment of
installments due, the stipulated interest of six percent (6%) per annum on the outstanding balance is null and void; and
that the amount of P650.00 representing overpayment be returned to her.

Petitioner resisted the complaint, maintaining that private respondent, contrary to the latter’s allegations, is obliged to
pay interest on the installment payments of the unpaid outstanding balance EVEN IF paid on their “due dates” per
schedule of payments; that private respondent had actually been in arrears in the amount of P4,269.40, representing such
interest as of June 1979, which therefore entitled petitioner to cancel the contract in question. Petitioner then prayed for
judicial affirmance of her Notarial Notice of Cancellation over the said contract in question.

Issues

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San Beda College Alabang School of Law
Credit Transactions 42
Case Notes/Digests

Two issues are presented for resolution in this petition: (1) whether or not private respondent has fully paid the stipulated
price in the contract so as to be entitled lawfully to demand the execution of a deed of absolute sale in her favor. This issue
in turn will depend on the question of whether or not petitioner may validly charge interest on installment payments,
notwithstanding that private respondent had been prompt in her monthly payments; and (2) whether or not petitioner’s
notice of cancellation was valid and effective.

Ruling

Examination of the record shows that the questioned Contract to Buy and Sell the subdivision lots provided for payment by
private respondent of the sum of P200.00 as downpayment, and that “the balance [of P10,600.00] shall be paid in 180
monthly installments at P89.45 per month, including interest rate at six percent (6%) per annum, until the purchase price is
fully paid.” 3 This stipulation clearly specified that an interest charge of six percent (6%) per annum was included in the
monthly installment price: private respondent could not have helped noticing that P89.45 multiplied by 180 monthly
installments equals P16,101.00, and not P10,600.00. The contract price of P10,800.00 may thus be seen to be the cash
price of the subdivision lots, that is, the amount payable if the price of the lots were to be paid in cash and in full at the
execution of the contract; it is not the amount that the vendor will have received in the aggregate after fifteen (15) years
if the vendee shall have religiously paid the monthly installments. To suppose, as private respondent argues, that mere
prompt payment of the monthly installments as they fell due would obviate application of the interest charge of six percent
(6%) per annum, is to ignore that simple economic fact. That economic fact is, of course, recognized by law, which
authorizes the payment of interest when contractually stipulated for by the parties 4 or when implied in recognized
commercial custom or usage.

Article 1956 of the Civil Code authorizes payment of interest in a contract of loan when expressly stipulated in writing. In
the case at bar, the financial situation is no different from that obtaining had private respondent buyer borrowed
P10,600.00 from a bank, and used that amount to pay the cash price of the two (2) lots to petitioner, and repaying the loan
from the bank by installments over fifteen (15) years with six percent (6%) interest per annum. Petitioner vendor has in
effect herself financed the purchase of the two (2) lots on the installment plan.

Despite private respondent’s failure to fully pay the stipulated price of the two lots in question, petitioner, however, could
not validly rescind the contract not being lawfully entitled to do so. Petitioner failed to rebut private respondents’
allegations that the former had failed to introduce required improvements in the subdivision; the former’s bare allegation
that the improvements have already been donated to the city government was not accepted by the trial court.

STATE INVESTMENTS V. CA

On 5 April 1982, respondent spouses Rafael and Refugio Aquino pledged certain shares of stock to petitioner State
Investment House, Inc. (“State”) in order to secure a loan of P120,000.00 designated as Account No. IF 82-0631-AA. Prior to
the execution of the pledge, respondent spouses, as an accommodation to and together with the spouses Jose and
Marcelina Aquino, signed an agreement (Account No. IF-82-1375-AA) with petitioner State for the latter’s purchase of
receivables amounting to P375,000.00. When Account No. IF-82-0631-AA fell due, respondent spouses paid the same
partly with their own funds and partly from the proceeds of another loan which they obtained also from petitioner State
designated as Account No. IF-82-0904-AA. This new loan was secured by the same pledge agreement executed in relation
to Account No. IF-820631-AA. (First account) When the new loan matured, State demanded payment. Respondents
expressed willingness to pay, requesting that upon payment, the shares of stock pledged be released. Petitioner State
denied the request on the ground that the loan which it had extended to the spouses Jose and Marcelina Aquino (Account
No. IF-82-1379-AA) had remained unpaid.

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San Beda College Alabang School of Law
Credit Transactions 43
Case Notes/Digests

On 29 June 1984, Atty. Rolando Salonga sent to respondent spouses a Notice of Notarial Sale stating that upon request of
State and by virtue of the pledge agreement, he would sell at public auction the shares of stock pledged to State. This
prompted respondents to file a case before the Regional Trial Court of Quezon City alleging that the intended foreclosure
sale was illegal because from the time the obligation under Account No. IF-82-0904-AA became due, they had been able
and willing to pay the same, but petitioner had insisted that respondents pay even the loan account of Jose and
Marcelina Aquino which had not been secured by the pledge. It was further alleged that their failure to pay their loan
(Account No. IF-82-0904-AA) was excused because the petitioner State itself had prevented the satisfaction of the
obligation.

On appeal, the Court of Appeals affirmed in toto the new decision of the trial court, holding that the loan extended to Jose
and Marcelina Aquino, having been executed prior to the pledge was not covered by the pledge which secured only loans
executed subsequently. Thus, upon payment of the loan under Code No. IF-0904-AA, the shares of stock should be
released. The decisions of the Court of Appeals and of Judge Fortun became final and 43oi tong.

Petitioner State appealed Judge Tirona’s decision to the Court of Appeals; the appeal was dismissed. The Court of Appeals
agreed with Judge Tirona that no interest need be paid and added that the clarificatory (Tirona) decision of the trial court
merely restated what had been provided for in the earlier (Fortun) decision; that the Tirona decision did not go beyond
what had been adjudged in the earlier decision. The motion for reconsideration filed by petitioner was accordingly denied.

E]ven a judgment which has become final and 43oi tong may be clarified under certain circumstances. The dispositive
portion of the judgment may, for instance, contain an error clearly CLERICAL IN NATURE (perhaps best illustrated by an
error in arithmetical computation) or an ambiguity arising from inadvertent omission, which error may be rectified or
ambiguity clarified and the omission supplied by reference primarily to the body of the decision itself. Supplementary
reference to the pleadings previously filed in the case may also be resorted to by way of corroboration of the existence of
the error or of the ambiguity in the dispositive part of the judgment. ‘[W]here there is ambiguity caused by an omission or
mistake in the dispositive portion of a decision, the court may clarify such ambiguity by an amendment even after the
judgment had become final, and for this purpose it may resort to the pleadings filed by the parties, the court’s findings of
facts and conclusions of law as expressed in the body of the decision.’

It thus appears that the Fortun decision was ambiguous in the sense that it was cryptic. We believe that in these
circumstances, we must assume that Judge Fortun meant to decide in accordance with law, that we cannot fairly assume
that Judge Fortun was grossly ignorant of the law, or that he intended to grant the respondent spouses relief to which they
were not entitled under law. Thus, the ultimate question which arises is: if respondent Aquino spouses were not in delay,
what should they have been held liable for in accordance with law?

We believe and so hold that since respondent Aquino spouses were held not to have been in delay, they were properly
liable only for: (a) the principal of the loan or P110,000.00; and (b) regular or monetary interest in the amount of seventeen
percent (17%) per annum. They were not liable for penalty or compensatory interest, fixed by the promissory note in
Account No. IF-82-0904-AA at two percent (2%) per month or twenty-four (24%) per annum. It must be stressed in this
connection that under Article 2209 of the Civil Code which provides that the appropriate measure for damages in case of
DELAY in discharging an obligation consisting of the payment of a sum or money, is the payment of penalty interest at the
rate agreed upon; and in the absence of a stipulation of a particular rate of penalty interest, then the payment of additional
interest at a rate equal to the regular monetary interest; and if no regular interest had been agreed upon, then payment of
legal interest or six percent (6%) per annum.

The fact that the respondent Aquino spouses were not in default did not mean that they, as a matter of law, were
relieved from the payment not only of penalty or compensatory interest at the rate of twenty-four percent (24%) per
annum but also of regular or monetary interest of seventeen percent (17%) per annum. The regular or monetary interest
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San Beda College Alabang School of Law
Credit Transactions 44
Case Notes/Digests

continued to accrue under the terms of the relevant promissory note until actual payment is effected. The payment of
regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is returned to the
creditor, regular interest continues to accrue since the debtor continues to use such principal amount.

Where the creditor unjustly refuses to accept payment, the debtor desirous of being released from his obligation must
comply with two (2) conditions: (a) tender of payment; and (b) consignation of the sum due. Tender of payment must be
accompanied or followed by consignation in order that the effects of payment may be produced. Thus, in Llamas v.
Abaya, 5 the Supreme Court stressed that a written tender of payment alone, without consignation in court of the sum
due, does not suspend the accruing of regular or monetary interest.

For the respondent spouses to continue in possession of the principal of the loan amounting to P110,000.00 and to
continue to use the same after maturity of the loan without payment of regular or monetary interest, would constitute
unjust enrichment on the part of the respondent spouses at the expense of petitioner State even though the spouses had
not been guilty of mora. It is precisely this unjust enrichment which Article 1256 of the Civil Code prevents by requiring, in
addition to tender of payment, the consignation of the amount due in court which amount would thereafter be deposited
by the Clerk of Court in a bank and earn interest to which the creditor would be entitled.

EASTERN SHIPPING LINES V. CA

Issue

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goods can
be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker; (b)
whether the payment of legal interest on an award of loss or damage is to be computed from the time the complaint is
filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to
above, is twelve percent (12%) or six percent (6%).

Facts

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel `SS EASTERN
COMET’ owned by defendant Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B). The shipment was insured
under plaintiff’s Marine Insurance Policy No. 81/01177 for P36,382,466.38. Upon arrival of the shipment in Manila on
December 12, 1981, it was discharged unto the custody of defendant Metro Port Services, Inc. The latter excepted to one
drum, said to be in bad order, which damage was unknown to plaintiff. “On January 8 and 14, 1982, defendant Allied
Brokerage Corporation made deliveries of the shipment to the consignees’ warehouse. The latter excepted to one drum
which contained spillages, while the rest of the contents was adulterated/fake. “Plaintiff contended that due to the
losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence
of defendants. Claims were presented against defendants who failed and refused to pay the same.

Defendants filed their respective answers, traversing the material allegations of the compliant contending that: As for
defendant Eastern Shipping it alleged that the shipment was discharged in good order from the vessel unto the custody of
Metro Port Service so that any damage/losses incurred after the shipment was INCURRED AFTER THE SHIPMENT WAS
TURNED OVER to the latter, is no longer its liability (p. 17, Record); Metroport averred that although subject shipment
was discharged unto its custody, portion of the same WAS ALREADY in bad order (p. 11, Record); Allied Brokerage alleged
that plaintiff has no cause of action against it, not having negligent or at fault for the shipment was already in damage and

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 45
Case Notes/Digests

bad order condition when received by it, but nonetheless, it still exercised extra ordinary care and diligence in he
handling/delivery of the cargo to consignee in the same condition shipment was received by it.

Ruling

The common carrier’s duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are
surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered
to, or until the lapse of a reasonable time for their acceptance, by the person entitled to receive them (Arts. 1736-1738,
Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).When the goods
shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe
that diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine
National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of
course, exceptional cases when such presumption of fault is not observed but these cases, enumerated in Article 1734 1 of
the Civil Code, are exclusive, not one of which can be applied to this case.

As to interests

But then upon the provisions of Article 2213 of the Civil Code, interest ‘cannot be recovered upon unliquidated claims or
damages, except when the demand can be established with reasonable certainty.’ And as was held by this Court in Rivera
vs. Perez 4 , L-6998, February 29, 1956, if the suit were for damages, ‘unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof (Montilla c. Corporacion de P. P. Agustinos, 25 Phil. 447;
Lichauco v. Guzman, 38 Phil. 302),’ then, interest ‘should be from the date of the decision.’”

In Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The case was for damages occasioned by an
injury to person and loss of property. The trial court awarded private respondent Pedro Manabat actual and compensatory
damages in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying
on the Reformina v. Tomol case, this Court 8 modified the interest award from 12% to 6% interest per annum but sustained
the time computation thereof, i.e., from the filing of the complaint until fully paid.

In Nakpil and Sons vs. Court of Appeals: There should be no dispute that the imposition of 12% interest pursuant to Central
Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of any money,
goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260
[1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no interest is actually imposed
provided the sums referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of
such final judgment, that will cause the imposition of the interest.

The subsequent case of American Express International, Inc., vs. International Appellate Court: this Court, while recognizing
the right of the private respondent to recover damages, held the award, however, for moral damages by the trial court,
later sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and
rendered a new one, “ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00)
Pesos as moral damages, with six (6%) percent interest thereon computed from the finality of this decision until paid.”
(Emphasis supplied).

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz: (upon the filing of petition for certiorari
alleging GAD on the part of CA) it is to be noted that the Court of Appeals ordered the payment of interest ‘at the legal
rate’ from the time of the filing of the complaint. . . . Said circular [Central Bank Circular No. 416] does not apply to actions

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San Beda College Alabang School of Law
Credit Transactions 46
Case Notes/Digests

based on a breach of employment contract like the case at bar.” The Court reiterated that the 6% interest per annum on
the damages should be computed from the time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas, 14 decided on
08 May 1992, involved the expropriation of certain parcels of land. The Court said: (T)he transaction involved is clearly not a
loan or forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid on the amount of just compensation for the properties
expropriated is manifestly in the form of indemnity for DAMAGES FOR THE DELAY IN THE PAYMENT thereof. Therefore,
since the kind of interest involved in the joint judgment of the lower court sought to be enforced in this case is interest by
way of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply.”

In the “ first group,” (Reformina, Phil. Rabbit Bus Lines, Florendo and NAPOCOR cases) the basic issue focus on the
application of either the 6% (under the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily
discernible in these cases that there has been a consistent holding that the Central Bank Circular imposing the 12% interest
per annum applies only to loans or forbearance 16 of money, goods or credits, as well as to judgments involving such loan
or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction
involves the payment of indemnities in the concept of damage arising from the breach of a delay in the performance of
obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

The “second group,” (Malayan, Nakpil and Sons and American Express cases) did not alter the pronounced rule on the
application of the 6% or 12% interest per annum, 17 depending on whether or not the amount involved is a loan or
forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the “first group” which
remained consistent in holding that the running of the legal interest should be from the time of the filing of the complaint
until fully paid, the “second group” varied on the commencement of the running of the legal interest.

Guidelines (old) in Interests

Section 5 When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII
on “Damages” of the Civil Code govern in determining the measure of recoverable damages. 20

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money,
the interest due should be that which may have been stipulated in writing. 21 Furthermore, the interest due shall itself
earn legal interest from the time it is JUDICIALLY demanded.(Compound interests)(22 In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 23 of the Civil Code.

2. When a obligation, NOT constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall begin
to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty CANNOT
BE SO REASONABLY ESTABLISHED at the time the demand is made, the interest shall begin to run only from the date of

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San Beda College Alabang School of Law
Credit Transactions 47
Case Notes/Digests

the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount of finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and 47oi tong, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

SC MEGAWORLD CONSTRUCTION V. CA

S.C. Megaworld Construction and Development Corporation (petitioner) bought electrical lighting materials from Genlite
Industries, a sole proprietorship owned by Engineer Luis U. Parada (respondent), for its Read-Rite project in Canlubang,
Laguna. The petitioner was unable to pay for the above purchase on due date, but blamed it on its failure to collect under
its sub-contract with the Enviro Kleen Technologies, Inc. (Enviro Kleen). It was however able to persuade Enviro Kleen to
agree to settle its above purchase, but after paying the respondent P250,000.00 on June 2, 1999, 4 Enviro Kleen stopped
making further payments, leaving an outstanding balance of P816,627.00. It also ignored the various demands of the
respondent, who then filed a suit in the RTC.

The petitioner in its answer denied liability, claiming that it was released from its indebtedness to the respondent by reason
of the novation of their contract, which, it reasoned, took place when the latter accepted the partial payment of Enviro
Kleen in its behalf, and thereby acquiesced to the substitution of Enviro Kleen as the new debtor in the petitioner’s place.

We have emphasized, time and again, that verification is a formal, not a jurisdictional requisite, as it is mainly intended to
secure an assurance that the allegations therein made are done in good faith or are true and correct and not mere
speculation. The Court may order the correction of the pleading, if not verified, or act on the unverified pleading if the
attending circumstances are such that a strict compliance with the rule may be dispensed with in order that the ends of
justice may be served. Moreover, granting that Leonardo has no personal knowledge of the transaction subject of the
complaint below, Section 4 of Rule 7 provides that the verification need not be based on the verifier’s personal knowledge
but even only on authentic records. Sales invoices, statements of accounts, receipts and collection letters for the balance of
the amount still due to the respondent from the petitioner are such records. There is clearly substantial compliance by the
respondent’s attorney-in-fact with the requirement of verification.

Sole proprietorship as real party in interest?

As the sole proprietor of Genlite Industries, there is no question that the respondent is the real party in interest who stood
to be directly benefited or injured by the judgment in the complaint below. There is then no necessity for Genlite Industries
to be impleaded as a party-plaintiff, since the complaint was already filed in the name of its proprietor, Engr. Luis U. Parada.
To heed the petitioner’s sophistic reasoning is to permit a dubious technicality to frustrate the ends of substantial justice.

Issue of Novation

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new
debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 27 It is “the substitution of a
new contract, debt, or obligation for an existing one between the same or different parties.” Thus, in order to change the
person of the debtor, the former debtor must be expressly released from the obligation, and the third person or new
debtor must assume the former’s place in the contractual relation. 29 Article 1293 speaks of substitution of the debtor,
which may either be in the form of expromision or delegacion, as seems to be the case here. In both cases, the old debtor
must be released from the obligation, otherwise, there is no valid novation.

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San Beda College Alabang School of Law
Credit Transactions 48
Case Notes/Digests

From the circumstances obtaining below, we can infer no clear and unequivocal consent by the respondent to the release
of the petitioner from the obligation to pay the cost of the lighting materials. In fact, from the letters of the respondent to
Enviro Kleen, it can be said that he retained his option to go after the petitioner if Enviro Kleen failed to settle the
petitioner’s debt.

The settled rule is that novation is never presumed, 33 but must be clearly and unequivocally shown. 34 In order for a new
agreement to supersede the old one, the parties to a contract must expressly agree that they are abrogating their old
contract in favor of a new one. 35 Thus, the mere substitution of debtors will not result in novation, 36 and the fact that
the creditor accepts payments from a third person, who has assumed the obligation, will result merely in the addition of
debtors and not novation, and the creditor may enforce the obligation against both debtors. 37 If there is no agreement
as to solidarity, the first and new debtors are considered obligated jointly.

As to the issue of Art. 2209

A clerical mistake is one which is visible to the eyes or obvious to the understanding; an error made by a clerk or a
transcriber; a mistake in copying or writing. 43 The Latin maxims Error placitandi aequitatem non tollit (“A clerical error
does not take away equity”), and Error scribentis nocere non debit(“An error made by a clerk ought not to injure; a clerical
error may be corrected”) are apt in this case. 44 Viewed against the landmark case of Medel v. CA,45 an award of interest
of 20% per month on the amount due is clearly excessive and iniquitous. It could not have been the intention of the trial
court, not to mention that it is way beyond what the plaintiff had prayed for below. (Since the original demand made by the
respondent was for 2% only and not 20% as it was a mere clerical error on the part of the lower court.)

Article 2209 of the Civil Code provides that “[i]f the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six percent per annum.” Pursuant to the said
provision, then, since there is no finding of a stipulation by the parties as to the imposition of interest, only the amount of
12% per annum 47 may be awarded by the court by way of damages in ITS DISCRETION, not two percent (2%) per month,
following the guidelines laid down in the landmark case of Eastern Shipping Lines v. Court of Appeals (refer to the guidelines
under Eastern Shipping Case)

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as follows:
The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money, goods, or credits, as
well as to judgments involving such loan or forbearance of money, goods, or credit, while the 6% per annum under Art.
2209 of the Civil Code applies “when the transaction involves the payment of indemnities in the concept of damage
arising from the breach or a delay in the performance of obligations in general,” with the application of both rates
reckoned “from the time the complaint was filed until the [adjudged] amount is fully paid.” In either instance, the
reckoning period for the commencement of the running of the legal interest shall be subject to the condition “that the
courts are vested with discretion, depending on the equities of each case, on the award of interest.” 52 (Citations omitted
and emphasis ours).

Pursuant, then, to Central Bank Circular No. 416, issued on July 29, 1974, 53 in the absence of a written stipulation, the
interest rate to be imposed in judgments involving a forbearance of credit shall be 12% per annum, up from 6% under
Article 2209 of the Civil Code.This was reiterated in Central Bank Circular No. 905, which suspended the effectivity of
the Usury Law from January 1, 1983. 54 But if the judgment refers to payment of interest as damages arising from a
breach or delay in general, the applicable interest rate is 6% per annum, following Article 2209 of the Civil Code.55 Both
interest rates apply from judicial or extrajudicial demand until finality of the judgment. But from the finality of the
judgment awarding a sum of money until it is satisfied, the award shall be considered a forbearance of credit, regardless

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 49
Case Notes/Digests

of whether the award in fact pertained to one, and therefore during this period, the interest rate of 12% per annum for
forbearance of money shall apply.

But notice must be taken that in Resolution No. 796 dated May 16, 2013, the Monetary Board of the Bangko Sentral ng
Pilipinas approved the revision of the interest rate to be imposed for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest. Thus, under BSP
Circular No. 799, issued on June 21, 2013 and EFFECTIVE ON JULY 1, 2013, THE SAID RATE OF INTEREST IS NOW BACK AT
SIX PERCENT (6%).

ADVOCATES FOR TRUTH IN LENDING V. BSP

Main Issue

Petitioners, claiming that they are raising issues of transcendental importance to the public, filed directly with this Court
this Petition for Certiorari under Rule 65 of the 1997 Rules of Court, seeking to declare that the Bangko Sentral ng Pilipinas
Monetary Board (BSP-MB), replacing the Central Bank Monetary Board (CB-MB) by virtue of Republic Act (R.A.) No. 7653,
has no authority to continue enforcing Central Bank Circular No. 905, 1 issued by the CB-MB in 1982, which
“suspended” Act No. 2655, or the Usury Law of 1916.

Facts

R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15, 1948, empowered the CB-MB to, among
others, set the maximum interest rates which banks may charge for all types of loans and other credit operations, within
limits prescribed by the Usury Law.

On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving the CB-MB authority to
prescribe different maximum rates of interest which may be imposed for a loan or renewal thereof or the forbearance
OF ANY MONEY, goods or credits, provided that the changes are effected gradually and announced in advance.

In its Resolution No. 2224 dated December 3, 1982, 3 the CB-MB issued CB Circular No. 905, Series of 1982, effective on
January 1, 1983. Section 1 of the Circular, under its General Provisions, removed the ceilings on interest rates on LOANS OR
FORBEARANCE OF ANY money, goods or credits. (In effect suspending the effectivity of the Usury Law)

Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-MB was authorized only
to prescribe or set the maximum rates of interest for a loan or renewal thereof or for the forbearance of any money, goods
or credits, and to change such rates whenever warranted by prevailing economic and social conditions, the changes to be
effected gradually and on scheduled dates; that nothing in P.D. No. 1684 authorized the CB-MB to lift or suspend the limits
of interest on all credit transactions, when it issued CB Circular No. 905. They further insist that under Section 109 of R.A.
No. 265, the authority of the CB-MB was clearly only to fix the banks’ maximum rates of interest, but always within the
limits prescribed by the Usury Law.

They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-day Treasury bills (T-
bills), 13 then known as “Jobo” bills 14shot up to 40% per annum, as a result. The banks immediately followed suit and re-
priced their loans to rates which were even higher than those of the “Jobo” bills. Petitioners thus assert that CB Circular No.
905 is also unconstitutional in light of Section 1 of the Bill of Rights, which commands that “no person shall be deprived of
life, liberty or property without due process of law, nor shall any person be denied the equal protection of the laws.”

Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision similar to Section 109 of R.A. No. 265, and
therefore, in view of the repealing clause in Section 135 of R.A. No. 7653, the BSP-MB has been stripped of the power

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San Beda College Alabang School of Law
Credit Transactions 50
Case Notes/Digests

either to prescribe the maximum rates of interest which banks may charge for different kinds of loans and credit
transactions, or to suspend Act No. 2655 and continue enforcing CB Circular No. 905.

Ruling

I. No Locus Standi to File

While the Court may have shown in recent decisions a certain toughening in its attitude concerning the question of legal
standing, it has nonetheless always made an exception where the transcendental importance of the issues has been
established, notwithstanding the petitioners’ failure to show a direct injury. 27 In CREBA v. ERC, 28 the Court set out the
following instructive guides as determinants on whether a matter is of transcendental importance, namely: (1) the
character of the funds or other assets involved in the case; (2) the presence of a clear case of disregard of a constitutional
or statutory prohibition by the public respondent agency or instrumentality of the government; and (3) the lack of any
other party with a more direct and specific interest in the questions being raised. Further, the Court stated in Anak
Mindanao Party-List Group v. The Executive Secretary 29 that the rule on standing will not be waived where these
determinants are not established.

In the instant case, there is no allegation of misuse of public funds in the implementation of CB Circular No. 905. Neither
were borrowers who were actually affected by the suspension of the Usury Law joined in this petition. Absent any showing
of transcendental importance, the petition must fail.

II. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No. 905.

The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been recognized and upheld
in many cases. As the Court explained in the landmark case of Medel v. CA, 36 citing several cases, CB Circular No. 905 “did
not repeal nor in anyway amend the Usury Law but simply suspended the latter’s effectivity;” 37 that “a [CB] Circular
cannot repeal a law, [for] only a law can repeal another law;” 38 that “by virtue of CB Circular No. 905, the Usury Law has
been rendered ineffective;” 39 and “Usury has been legally non-existent in our jurisdiction. Interest can now be charged as
lender and borrower may agree upon.” The illegality of usury is wholly the creature of legislation. A Central Bank Circular
cannot repeal a law. Only a law can repeal another law.

Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld the parties’ freedom of
contract to agree freely on the rate of interest. It cited Article 1306 of the New Civil Code, under which the contracting
parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.

III. The BSP-MB has authority to enforce CB Circular No. 905.

A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks, whereas under Section 1-a
of the Usury Law, as amended, the BSP-MB may prescribe the maximum rate or RATES OF INTEREST FOR ALL LOANS or
renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority such as
consumer loans, as well as such loans made by pawnshops, finance companies and similar credit institutions. It even
authorizes the BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including deposits
and deposit substitutes, or loans of financial intermediaries.

Moreover, the rule is settled that repeals by implication are not favored, because laws are presumed to be passed with
deliberation and full knowledge of all laws existing pertaining to the subject. 46 An implied repeal is predicated upon the

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San Beda College Alabang School of Law
Credit Transactions 51
Case Notes/Digests

condition that a substantial conflict or repugnancy is found between the new and prior laws. Thus, in the absence of an
express repeal, a subsequent law cannot be construed as repealing a prior law unless an irreconcilable inconsistency and
repugnancy exists in the terms of the new and old laws. 47 We find no such conflict between the provisions of Act 2655
and R.A. No. 7653.

IV. The lifting of the ceilings for interest rates does not authorize stipulations charging excessive, unconscionable, and
iniquitous interest.

It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise interest rates to levels which
will either enslave their borrowers or lead to a hemorrhaging of their assets.

Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for being contrary to
morals, if not against the law. 51Indeed, under Article 1409 of the Civil Code,these contracts arc deemed inexistent and
void ab initio, and therefore cannot be ratified, nor may the right to set up their illegality as a defense be waived.

Nonetheless, the nullity of the stipulation of usurious interest does not affect the lender’s right to recover the principal of a
loan, nor affect the other terms thereof. 52 Thus, in a usurious loan with mortgage, the right to foreclose the mortgage
subsists, and this right can be exercised by the creditor upon failure by the debtor to pay the debt due. The debt due is
considered as without the stipulated excessive interest, and a legal interest of 12% per annum will be added in place of the
excessive interest formerly imposed.

FIRST UNITED CONSTRUCTORS V. BAYANIHAN AUTOMATIVE

Petitioner First United Constructors Corporation (FUCC) and petitioner Blue Star Construction Corporation (Blue Star) were
associate construction firms sharing financial resources, equipment and technical personnel on a case-to-case basis. From
May 27, 1992 to July 8, 1992, they ordered six units of dump trucks from the respondent, a domestic corporation engaged
in the business of importing and reconditioning used Japan-made trucks, and of selling the trucks to interested buyers who
were mostly engaged in the construction business.

The parties established a good business relationship, with the respondent extending service and repair work to the units
purchased by the petitioners. The respondent also practiced liberality towards the petitioners in the latter’s manner of
payment by later on agreeing to payment on terms for subsequent purchases.

On September 19, 1992, FUCC ordered from the respondent one unit of Hino Prime Mover that the respondent delivered
on the same date. On September 29, 1992, FUCC again ordered from the respondent one unit of Isuzu Transit Mixer that
was also delivered to the petitioners. For the two purchases, FUCC partially paid in cash, and the balance through post-
dated checks.

Upon presentment of the checks for payment, the respondent learned that FUCC had ordered the payment stopped. The
respondent immediately demanded the full settlement of their obligation from the petitioners, but to no avail. Instead, the
petitioners informed the respondent that they were withholding payment of the checks due to the breakdown of one of
the dump trucks they had earlier purchased from respondent, specifically the second dump truck delivered on May 27,
1992.

In their answer, the petitioners averred that they had stopped the payment on the two checks worth P735,000.00 because
of the respondent’s refusal to repair the second dump truck; and that they had informed the respondent of the defects in
that unit but the respondent had refused to comply with its warranty, compelling them to incur expenses for the repair
and spare parts. They prayed that the respondent return the price of the defective dump truck worth P830,000.00 minus
the amounts of their two checks worth P735,000.00, with 12% per annum interest on the difference of P90,000.00 from
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San Beda College Alabang School of Law
Credit Transactions 52
Case Notes/Digests

May 1993 until the same is fully paid; that the respondent should also reimburse them the sum of P247,950.00 as their
expenses for the repair of the dump truck, with 12% per annum interest from December 16, 1992, the date of demand,
until fully paid; and that the respondent pay exemplary damages as determined to be just and reasonable but not less than
P500,000, and attorney’s fees of P50,000 plus P1,000.00 per court appearance and other litigation expenses.

It was the position of the respondent that the petitioners were not legally justified in withholding payment of the unpaid
balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer due the alleged defects in second dump
truck because the purchase of the two units was an entirely different transaction from the sale of the dump trucks, the
warranties for which having long expired.

In its decision promulgated on July 26, 2004, 5 however, the CA affirmed the judgment of the RTC. It held that the remedy
of recoupment could not be properly invoked by the petitioners because the transactions were different; that the
expenses incurred for the repair and spare parts of the second dump truck were not a proper subject of recoupment
because they did not arise out of the purchase of the Hino Prime Mover and the Isuzu Transit Mixer; and that the
petitioners’ claim could not also be the subject of legal compensation or set-off, because the debts in a set-off should be
liquidated and demandable.

Issue

There is no longer any question that the petitioners were liable to the respondent for the unpaid balance of the purchase
price of the Hino Prime Mover and the Isuzu Transit Mixer. What remain to be resolved are strictly legal, namely: one,
whether or not the petitioners validly exercised the right of recoupment through the withholding of payment of the unpaid
balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer; and, two, whether or not the costs of
the repairs and spare parts for the second dump truck delivered to FUCC on May 27, 1992 could be offset for the
petitioners’ obligations to the respondent.

Ruling

Recoupment (reconvencion) is the act of rebating or recouping a part of a claim upon which one is sued by means of a legal
or equitable right resulting from a counterclaim arising out of the same transaction. 7 It is the setting up of a demand
arising from the same transaction as the plaintiff’s claim, to abate or reduce that claim.

The CA was correct. It was improper for petitioners to set up their claim for repair expenses and other spare parts of the
dump truck against their remaining balance on the price of the prime mover and the transit mixer they owed to
respondent. Recoupment must arise out of the contract or transaction upon which the plaintiff’s claim is founded. 9 To be
entitled to recoupment, therefore, the claim must arise from the same transaction, i.e., the purchase of the prime mover
and the transit mixer and not to a previous contract involving the purchase of the dump truck. That there was a series of
purchases made by petitioners could not be considered as a single transaction, for the records show that the earlier
purchase of the six dump trucks WAS A SEPARATE AND DISTINCT TRANSACTION from the subsequent purchase of the
Hino Prime Mover and the Isuzu Transit Mixer. Consequently, the breakdown of one of the dump trucks did not grant to
petitioners the right to stop and withhold payment of their remaining balance on the last two purchases.

A debt is liquidated when its existence and amount are determined. 12 Accordingly, an unliquidated claim set up as a
counterclaim by a defendant can be set off against the plaintiff’s claim from the moment it is liquidated by
judgment. 13 Article 1290 of the Civil Code provides that when all the requisites mentioned in Article 1279 of the Civil
Code are present, compensation takes effect by OPERATION OF LAW, and extinguishes both debts to the concurrent
amount. With petitioners’ expenses for the repair of the dump truck being already established and determined with
certainty by the lower courts, it follows that legal compensation could take place because all the requirements were

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 53
Case Notes/Digests

present. Hence, the amount of P71,350.00 should be set off against petitioners’ unpaid obligation of P735,000.00, leaving a
balance of P663,650.00, the amount petitioners still owed to respondent.

We deem it necessary to modify the interest rate imposed by the trial and appellate courts. The legal interest rate to be
imposed from February 11, 1993, the time of the extrajudicial demand by respondent, should be 6% per annum in the
absence of any stipulation in writing in accordance with Article 2209 of the Civil Code.

SPS. ANDAL V. PNB

On September 7, 1995, [petitioners-spouses] obtained a loan from [respondent bank] in the amount of P21,805,000.00, for
which they executed twelve (12) promissory note [undertaking] to pay [respondent bank] the principal loan with varying
interest rates of 17.5% to 27% per interest period. It was agreed upon by the parties that the rate of interest may be
increased or decreased for the subsequent interest periods, with prior notice to [petitioners-spouses], in the event of
changes in interest rates prescribed by law or the Monetary Board or in the bank’s overall cost of funds.

To secure the payment of the said loan, [petitioners-spouses] executed in favor of [respondent bank] a real estate
mortgage using as collateral five (5) parcels of land including all improvements therein, all situated in Batangas City
(registered in the name of the petitioners.)

Subsequently, [respondent bank] advised [petitioners-spouses] to pay their loan obligation, otherwise the former will
declare the latter’s loan due and demandable. On July 17, 2001, [petitioners-spouses] paid P14,800,000.00 to [respondent
bank] to avoid foreclosure of the properties subject of the real estate mortgage. Accordingly, [respondent bank] executed a
release of real estate mortgage over the parcels of land covered by TCT Nos. T-31193 and RT-363 (3351). However, despite
payment . . . , [respondent bank] proceeded to foreclose the real estate mortgage, particularly with respect to the three
(3) parcels of land.

In their amended complaint, [petitioners-spouses] alleged that they tried to religiously pay their loan obligation to
[respondent bank], but the exorbitant rate of interest unilaterally determined and imposed by the latter prevented the
former from paying their obligation. [Petitioners-spouses] also alleged that they signed the promissory notes in blank,
relying on the representation of [respondent bank] that they were merely proforma [sic] bank requirements. Further,
[petitioners-spouses] alleged that the unilateral increase of interest rates and exorbitant penalty charges are akin to unjust
enrichment at their expense, giving [respondent bank] no right to foreclose their mortgaged properties.

Respondent bank appealed the above judgment of the trial court to the CA. Its main contention is that the lower court
erred in ordering the re-computation of petitioners-spouses’ loans and applying the interest rate of 6% per annum.
According to respondent bank, the stipulation on the interest rates of 17.5% to 27%, subject to periodic adjustments, was
voluntarily agreed upon by the parties; hence, it was not left to the sole will of respondent bank. Thus, the lower court
erred in reducing the interest rate to 6% and in setting aside the penalty charges, as such is contrary to the principle of the
obligatory force of contracts under Articles 1315 and 1159 of the Civil Code.

The CA ruled: However, we do not agree with the trial court in fixing the rate of interest of 6%. It is well-settled that when
an obligation is breached and consists in the payment of a sum of money, i.e., loan or forbearance of money, the interest
due shall be that which may have been stipulated in writing. In the absence of stipulation, the rate of interest shall be 12%
interest per annum to be computed from default, i.e., from judicial or extra-judicial demand and subject to the provisions of
Article 1169 of the Civil Code. Since the interest rates printed in the promissory notes are void for the reasons above-stated,
the rate of interest to be applied to the loan should be 12% per annum only. The CA, consequently, dismissed respondent
bank’s appeal and affirmed the decision of the trial court with the modification that the rate of interest shall be 12% per
annum instead of 6%.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 54
Case Notes/Digests

Further, the CA held: Notably, this Court disregarded the stipulated rate[s] of interest on the subject promissory notes after
finding that the same are iniquitous and exorbitant, and for being violative of the principle of mutuality of contracts.
Nevertheless, in Equitable PCI Bank v. Ng Sheung Ngor, the Supreme Court ruled that because the escalation clause was
annulled, the principal amount of the loan was subject to the original or stipulated interest rate of interest, and that upon
maturity, the amount due was subject to legal interest at the rate of 12% per annum. In this case, while we similarly
annulled the escalation clause contained in the promissory notes, this Court opted not to impose the original rates of
interest stipulated therein for being excessive, the same being 17.5% to 27% per interest period.

While the decisions of the Special Seventh Division and the Ninth Division of this Court in CA-G.R. CV No. 75303 and in CA-
G.R. No. 76029 are final and 54oi tong, the same merely have persuasive effect but do not outweigh the decisions of the
Supreme Court which we are duty-bound to follow, conformably with the principle of stare decisis. The doctrine of stare
decisis enjoins adherence to judicial precedents. It requires courts in a country to follow the rule established in a decision
of the Supreme Court thereof. That decision becomes a judicial precedent to be followed in subsequent cases by all courts
in the land. The doctrine of stare decisis is based on the principle that once a question of law has been examined and
decided, it should be deemed settled and closed to further argument.

SC Ruling

It is clear from the contract of loan between petitioners-spouses and respondent bank that petitioners-spouses, as
borrowers, agreed to the payment of interest on their loan obligation. That the rate of interest was subsequently declared
illegal and unconscionable does not entitle petitioners-spouses to stop payment of interest. It should be emphasized that
only the rate of interest was declared void. The stipulation requiring petitioners-spouses to pay interest on their loan
remains valid and binding. They are, therefore, liable to pay interest from the time they defaulted in payment until their
loan is fully paid.

In addition, pursuant to Circular No. 799, series of 2013, issued by the Office of the Governor of the Bangko Sentral ng
Pilipinas on 21 June 2013, and in accordance with the ruling of the Supreme Court in the recent case of Dario Nacar v.
Gallery Frames and/or Felipe Bordey, Jr., 20 effective 1 July 2013, the rate of interest for the loan or forbearance of any
money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum. Accordingly, the rate of interest of 12% per annum on petitioners-spouses’
obligation shall apply from 20 May 2011 — the date of default — until 30 June 2013 only. From 1 July 2013 until fully paid,
the legal rate of 6% per annum shall be applied to petitioners-spouses’ unpaid obligation.

CASTELO V. CA

On 15 October 1982, petitioners Antonio Castelo, Bernabe Banson, Lourdes Banson and Pompeyo Depante entered into a
contract denominated as a “Deed of Conditional Sale” with private respondent Milagros Dela Rosa involving a parcel of
land located in 1524 España Street, Sampaloc, Manila, 84.19 square meters in area. The agreed price of the land was Two
Hundred Sixty Nine Thousand, Four Hundred and Eight Pesos (P269,408.00). Upon signing the contract, private respondent
paid petitioners One Hundred Six Thousand Pesos (106,000.00) leaving a balance of One Hundred Sixty Thousand Four
Hundred Sixty Thousand Four Hundred and Eight Pesos (P163,408.00).

Private respondent Dela Rosa was unable to pay the remaining balance on or before 30 June 1983. The RTC, in a decision
dated 17 August 1984 rendered by Judge Antonio Q. Malaya, ordered the rescission of the Deed of Conditional Sale.
Petitioners then went on Certiorari to the Court of Appeals questioning the trial court’s decision rescinding the Deed of
Conditional Sale. They claimed that rescission of the contract was only an alternative relief available under the Civil Code,
while they in their complaint before the RTC, had asked for specific performance with damages. Consequently, the CA
reversed the decision of the RTC.
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 55
Case Notes/Digests

A writ of execution of the 21 November 1986 judgment of the Court of Appeals was issued by the trial court on 2
September 1988. Accordingly, a Sheriff’s Notice to Pay Judgment was served on private respondent Dela Rosa requiring her
to pay petitioners a total of One Hundred Ninety Seven Thousand Seven Hundred Twenty Three Pesos and Sixty Eight
Centavos (P197,723.68).

Petitioners filed a motion for reconsideration and a separate motion for alias writ of execution contending that the sum of
P197,723.68, based on the Sheriff’s own computation, was erroneous. They argued that the obligation of private
respondent was to pay (a) interest at the rate of twelve percent (12%) per annum plus (b) one percent (1%) penalty charge
per month, from default, i.e, from 1 January 1983.

In an Order of 18 April 1990, the trial court denied the motion for alias writ of execution and the motion for
reconsideration. In denying petitioner’s motions, the trial court stated that it did not have authority to enlarge the scope
of the dispositive portion of the Court of Appeals’ decision which was the subject of execution. Moreover, the trial court
continued, the phrase “to pay interest” found in the dispositive portion of the Court of Appeals’ 21 November 1986
decision did not refer to the stipulation in the “Deed of Conditional Sale” but rather to the legal rate of interest imposed by
the Court of Appeals which started to run from 12 February 1987, the date of entry of judgment. Had it intended otherwise,
the Court of Appeals would have declared so.

Issue

The question we must resolve is whether or not there is an ambiguity or clerical error and inadvertent omission in the
dispositive portion of the decision of Castro-Bartolome, J., dated 21 November 1986, which may legitimately be clarified by
referring to the body of the decision and perhaps even the pleadings filed before her. (With reference to the phrase “to pay
interest”.)

Ruling

The established doctrine is that when the dispositive portion of a judgment, which has become final and 55oi tong, contains
a clerical error or an ambiguity arising from an inadvertent omission, such error or ambiguity may be clarified by reference
to the body of the decision itself.

‘[W]here there is ambiguity caused by an omission or mistake in the dispositive portion of a decision, the court may clarify
such ambiguity by an amendment even after the judgment had become final, and for this purpose it may resort to the
pleadings filed by the parties, the court’s findings of facts and conclusions of law as expressed in the body of the decision.”

The dispositive portion itself failed to specify expressly whether Castro-Bartolome, J. was referring to the payment of
interest in accordance with the terms and conditions of the “Deed of Conditional Sale” or whether, as Luna, J. was to hold
almost four (4) years later that the requirement of “to pay interest” related, not to the interest provisions of the
Conditional Sale Deed between petitioners and private respondent, but rather to legal interest on the amount of the unpaid
balance of the purchase price of the land which would begin to accrue from the date of the entry of the Castro-Bartolome
judgment on 12 February 1987.

It thus appears that the Castro-Bartolome decision was ambiguous in the sense that it was too cryptic. Examination of the
body of that decision, however, sheds no light on the reference intended by Castro-Bartolome, J. in directing private
respondent “to pay interest.” Luna, J. himself had resort to “fair interpretation.” We believe that, in these circumstances,
we must assume that Mme. Justice Castro-Bartolome meant to decide in accordance with law; that we cannot fairly assume
that she was unfamiliar with the applicable law or that she had intended to grant petitioners less than that they were

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 56
Case Notes/Digests

entitled to under the law. Thus, the important question is: under the circumstances which were before Castro-
Bartolome, J., what should private respondent dela Rosa have been held liable for in accordance with law?

We believe and so hold that the phrase “to pay interest,” found in the dispositive portion of the Castro-Bartolome decision
must, under applicable law, refer to the interest stipulated by the parties in the Deed of Conditional Sale which they had
entered into on 15 October 1982. We note, in the first place, that the phrase “to pay interest” comes close upon the heels
of the preceding phrase “to comply with her obligation under the conditional sale to pay the balance — of P163,408.00.” A
strong inference thus arises that the “interest” required to be paid is the interest stipulated as part of the “obligation [of
private respondent dela Rosa] under the conditional sale [agreement] to pay the balance of [the purchase price of the
land].”

Under Article 2209, the appropriate measure for damages in case of DELAY IN DISCHARGING an obligation consisting of
the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties.
In the absence of a stipulation of a particular rate of penalty interest, payment of additional interest at a rate equal to the
regular or monetary interest, becomes due and payable. Finally, if no regular interest had been agreed upon by the
contracting parties, then the damages payable will consist of payment of legal interest 10 which is six percent (6%) or, in the
case of loans or forbearances of money, twelve percent (12%) per annum. 11 Applying Article 2209 to the instant case, we
must refer to the “Deed of Conditional Sale” which, as already noted, had specifically provided for “interest at the rate of
12% per annum” and a “1% penalty charge a month [to] be imposed on their remaining diminishing balance.” There was, it
thus appears, no need for the subsequent Luna, J. decision to refer at all to the payment of legal interest from the time of
entry of the Castro-Bartolome decision.

The contention of private respondent that Article 2209 of Civil Code is not applicable in this case because the interest
referred to therein is given as compensation for the use of money, not for the incurring of delay as in the instant
case, 12 need not detain us for long. Article 2209 governs transactions involving the payment of indemnity in the concept
of damages arising from delay in the discharge of obligations consisting of the payment of a sum of money. 13 The
“obligation consisting in the payment of a sum of money” referred to in Article 2209 is not confined to a loan or
forbearance of money. The Court has, for instance, consistently applied Article 2209 in the determination of the interest
properly payable where there was default in the payment of the price or consideration under a contract of sale 14 as in the
case at bar. Article 2209 has also been applied by this Court in cases involving an action for damages for injury to persons
and loss or property; 15 to actions for damages arising from unpaid insurance claims; 16 and an action involving the
appropriate rate of interest on just compensation that is payable for expropriated lands.

We turn, therefore, to the examination of the contractual stipulation on interest which we quoted in full earlier. The
question is whether, during the period of 1 January 1983 up to 30 June 1983, 12% interest per annum plus 1% penalty
charge a month was payable “on the remaining diminishing balance;” or whether during the period from 1 January 1983 to
30 June 1983, only12% per annum interest was payable while the 1% per month penalty charge would in addition begin to
accrue on any balance remaining unpaid as of 1 July 1983.

We believe that the contracting parties intended the latter view of their stipulation on interest; for if the parties had
intended that during the grace period from 1 January 1983 to 30 June 1983, interest consisting of 12% per annum
plus another 12% per annum (equivalent to 1% per month), or a total of 24% per annum, was payable, then they could have
simply said so. Instead, the parties distinguished between interest at the rate of 12% per annum and the 1% a
month penalty charge. The interpretation we adopt is also supported by the principle that in case of ambiguity in contract
language, that interpretation which establishes a less onerous transmission of rights or imposition of lesser burdens which
permits greater reciprocity between the parties, is to be adopted.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 57
Case Notes/Digests

ATLANTIC GULF V. CA

Sometime in 1982, petitioner company commenced the construction of a steel fabrication plant in the Municipality of
Bauan, Batangas, necessitating dredging operations at the Batangas Bay in an area adjacent to the real property of private
respondents. As an offshoot of said dredging operations, an action for damages against herein petitioner Atlantic Gulf and
Pacific Company of Manila, Inc. was filed by Carlito D. Castillo which was docketed as Civil Case No. 10276, and another
action by Cristeta Castillo for herself and as guardian of Cornelio Castillo, docketed as Civil Case No. 10696.

Private respondents alleged that during the on-going construction of its steel and fabrication yard, petitioner’s personnel
and heavy equipment trespassed into the adjacent parcels of land belonging to private respondents without their
consent. These heavy equipment damaged big portions of private respondents’ property which were further used by
petitioner as a depot or parking lots without paying any rent therefor, nor does it appear from the records that such use of
their land was with the former’s conformity. Private respondents further alleged that as a result of the dredging operation
of petitioner company, the sea silt and water overflowed and were deposited upon their land. Consequently, the said
property which used to be agricultural lands principally devoted to rice production and each averaging an annual net
harvest of 75 cavans, could no longer be planted with palay as the soil became infertile, salty, unproductive and
unsuitable for agriculture. (Which the petitioner argued that the salty nature of the land was brought about by recent
typhoon that struck the place “Ruping”.)

Ruling

Hence, on this aspect of its recourse, petitioner cannot expect a reversal since it is a basic rule that only questions of law
may be raised in an appeal by certiorari under Rule 45 of the Rules of Court. The jurisdiction of the Supreme Court in cases
thus brought to it from the Court of Appeals is limited to reviewing and revising the errors of law imputed to it. 9 It is not
the function of this Court to analyze or weigh such evidence all over again. Its jurisdiction is limited to reviewing errors of
law that might have been committed by the lower court. Barring a showing that the factual findings complained of are
totally devoid of support in the record or that they are so glaringly erroneous as to constitute serious abuse of discretion,
such findings must stand, for the Supreme Court is not expected or required to examine or contrast the oral and
documentary evidence submitted by the parties.

However, this Court finds that respondent Court of Appeals committed a reversible error of law in increasing the amount of
damages awarded to private respondents by the court a quo. Respondent appellate court exceeded its jurisdiction when it
modified the judgment of the trial court by increasing the award of damages in favor of private respondents who, in the
first place, did not interpose an appeal therefrom. This being the case, they are presumed to be satisfied with the
adjudication made by the lower court. As to them, the judgment of the court below may be said to have attained finality.

CRISMINA GARMENTS V, CA

During the period from February 1979 to April 1979, the [herein petitioner], which was engaged in the export of girls’
denim pants, contracted the services of the [respondent], the sole proprietress of the D’ Wilmar Garments, for the sewing
of 20,762 pieces of assorted girls[‘] denims supplied by the [petitioner] under Purchase Orders Nos. 1404, dated February
15, 1979, 0430 dated February 1, 1979, 1453 dated April 30, 1979. The [petitioner] was obliged to pay the [respondent], for
her services, in the total amount of P76,410.00.

At first, the [respondent] was told that the sewing of some of the pants w[as] defective. She offered to take delivery of the
defective pants. However, she was later told by [petitioner]’s representative that the goods were already good. She was
told to just return for her check of P76,410.00. However, the [petitioner] failed to pay her the aforesaid amount. This
prompted her to hire the services of counsel who, on November 12, 1979, wrote a letter to the [petitioner] demanding

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 58
Case Notes/Digests

payment of the aforesaid amount within ten (10) days from receipt thereof. On February 7, 1990, the [petitioner]’s [v]ice-
[p]resident-[c]omptroller, wrote a letter to [respondent]’s counsel, averring, inter alia, that the pairs of jeans sewn by her,
numbering 6,164 pairs, were defective and that she was liable to the [petitioner] for the amount of P49,925.51 which was
the value of the damaged pairs of denim pants and demanded refund of the aforesaid amount.

The Court of Appeals (CA) affirmed the trial court’s ruling, except for the award of attorney’s fees which was
deleted. 9 Subsequently, the CA denied the Motion for Reconsideration.

The controversy revolves around petitioner’s payment of the price beyond the period prescribed in a contract for a piece of
work. Article 1589 of the Civil Code provides that “[t]he vendee [herein petitioner] shall owe interest for the period
between the delivery of the thing and the payment of the price . . . should he be in default, from the time of judicial or
extrajudicial demand for the payment of the price.” The only issue now is the applicable rate of interest for the late
payment.

In Reformina v. Tomol Jr., 15 this Court stressed that the interest rate under CB Circular No. 416 applies to (1) loans; (2)
forbearance of money, goods or credits; or (3) a judgment involving a loan or forbearance of money, goods or credits.
Cases beyond the scope of the said circular are governed by Article 2209 of the Civil Code, 16 which considers interest a
form of indemnity for the delay in the performance of an obligation. (Guidelines are provided by the Eastern Shipping case.)

In Keng Hua Paper Products Co., Inc. v. CA, 20 we also ruled that the monetary award shall earn interest at twelve percent
(12%) per annum from the date of the finality of the judgment until its satisfaction, regardless of whether or not the case
involves a loan or forbearance of money. The interim period is deemed to be equivalent to a forbearance of credit.

Because the amount due in this case arose from a contract for a piece of work, not from a loan or forbearance of money,
the legal interest of six percent (6%) per annum should be applied. Furthermore, since the amount of the demand could be
established with certainty when the Complaint was filed, the six percent (6%) interest should be computed from the filing of
the said Complaint. But after the judgment becomes final and 58oi tong until the obligation is satisfied, the interest should
be reckoned at twelve percent (12%) per year.

Private respondent maintains that the twelve percent (12%) interest should be imposed, because the obligation arose from
a forbearance of money. 22This is erroneous. In Eastern Shipping, 23 the Court observed that a “forbearance” in the
context of the usury law is a “contractual obligation of lender or creditor to refrain, during a given period of time, from
requiring the borrower or debtor to repay a loan or debt then due and payable.” Using this standard, the obligation in this
case was obviously not a forbearance of money, goods or credit.

PILIPINAS BANK V. CA

In Civil Case No. 239-A, private respondent filed a complaint against petitioner and its president, Constantino Bautista, for
collection of a sum of money. The complaint alleged: (1) that petitioner and Greatland Realty Corporation (Greatland)
executed a “Dacion en Pago,” wherein Greatland conveyed to petitioner several parcels of land in consideration of the sum
of P7,776,335.69; (2) that Greatland assigned P2,300,000.00 out of the total consideration of the Dacion en Pago, in favor
of private respondent; and (3) that notwithstanding her demand for payment, petitioner in bad faith, refused and failed to
pay the said amount assigned to her.

Petitioner, while admitting the execution of the Dacion en Pago, claimed: (1) that its former president had no authority to
enter into such agreement; (2) that it never ratified the same; and (3) that assuming arguendo that the agreement was
binding, the conditions stipulated therein were never fulfilled.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 59
Case Notes/Digests

Dismissing petitioner’s defenses as unmeritorious, the trial court ruled in favor of private respondent. The trial court
ordered petitioner and its co-defendant, jointly and severally, to pay private respondent.

On October 30, 1986, the Court of Appeals modified the Order dated April 3, 1985, by limiting the execution pending
appeal against petitioner to P5,517,707.00 and deferring the execution of the award for moral, exemplary and nominal
damages to await the final judgment of the main case in CA-G.R. No. 06017. On June 17, 1987, the Supreme Court in G.R.
No. L-76506 affirmed the Order dated October 30, 1986 of the Court of Appeals.

It must be recalled that while private respondent was able to collect P5,517,707.00 from petitioner pursuant to the writ of
advance execution allowed in CA-G.R. No. SP No. 05909, the final judgment in the main case (CA-G.R. No. 06017) awarded
to private respondent damages in the total amount of only P2,655,000.00 (P2,300,000.00 representing the amount
assigned by Greatland to private respondent, P100,000.00 as moral damages; P25,000.00 as exemplary damages and
attorney’s fees equivalent to 10% of the P2,300,000.00), together “with interest on the amount of P2,300,000.00 at the
legal rate starting July 24, 1981, date when demand was first made (Exh. “F” and “G”).”

On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess payment, fixed the interest rate
due on the amount of P2,300,000.00 at 12% per annum as proposed by private respondent, instead of 6% per annum as
proposed by petitioner.

The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by private respondent against
petitioner “involves forbearance of money, as the principal award to plaintiff-appellee (private respondent) in the amount
of P2,300,000.00 was the overdue debt of defendant-appellant to her since July 1981. The case is, in effect, a simple
collection of the money due to plaintiff-appellee, as the unpaid creditor from the defendant bank, the debtor” (Resolution,
p. 3; Rollo, p. 33). Applying Central Bank Circular No. 416, the Court of Appeals held that the applicable rate of interest is
12% per annum.

Ruling

Presidential Decree No. 116 authorized the Monetary Board to prescribe the maximum rate or rates of interest for the loan
or renewal thereof or the forbearance of any money, goods or credits and amended the Usury Law (Act No. 2655) for that
purpose. Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the Monetary Board of Central
Bank issued Central Bank Circular No. 416. Note that Circular No. 416, fixing the rate of interest at 12% per annum, deals
with (1) loans; (2) forbearance of any money, goods or credit; and (3) judgments.

In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], the Court held that the judgments spoken of and referred to in Circular
No. 416 are “judgments in litigation involving loans or forbearance of any money, goods or credits. Any other kind of
monetary judgment which has nothing to do with nor involving loans or forbearance of any money, goods or credits does
not fall within the coverage of the said law for it is not, within the ambit of the authority granted to the Central Bank.”

The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland as consideration for
THE SALE of several parcels of land by Greatland to petitioner. The amount of P2,300,000.00 was assigned by Greatland in
favor of private respondent. The said obligation therefore arose from a contract of purchase and sale and not from a
contract of loan or mutuum. Hence, what is applicable is the rate of 6% per annum as provided in Article 2209 of the Civil
Code of the Philippines and not the rate of 12% per annum as provided in Circular No. 416.

Private respondent was paid in advance the amount of P5,517,707.00 by petitioner pursuant to the order for the execution
pending appeal of the judgment of the trial court. On appeal, the Court of Appeals reduced the total damages to
P3,619,083.33, leaving a balance of P1,898,623.67 to be refunded by private respondent to petitioner. In an execution

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 60
Case Notes/Digests

pending appeal, funds are advanced by the losing party to the prevailing party with the implied obligation of the latter to
repay the former, in case the appellate court cancels or reduces the monetary award.

Under Section 5 of Rule 39 of the Revised Rules of Court where “the judgment executed is reversed totally or partially on
appeal, the trial court, on motion, after the case is remanded to it, may issue such orders of restitution, as equity and
justice may warrant under the circumstances.” It was to guarantee the restitution contemplated by Section 5 of Rule 39 of
the Revised Rules of Court that private respondent was required by the trial court to post a bond before the writ of advance
execution was issued.

AC ENTERPRISES V. CONSTRUCTION INDUSTRY

In their Second Motion For Partial Reconsideration, private respondent insists that it is entitled to interests at the rate of
12% per annum on the monetary award given them by the Construction Industry Arbitration Commission (CIAC). It
contends that under Executive Order No. 1008 dated February 4, 1985 and the Rules of Procedure Governing Construction
Arbitration, arbitral awards are final and “inappealable (sic)” and pursuant to our ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals, 234 SCRA 78 (1994), monetary awards in all judgments that became final and 60oi tong, regardless of the
nature of the obligation, shall bear legal interest of 12% per annum.

In Reformina v. Tomol, Jr., 139 SCRA 260 (1985), we made clear that the award of legal interest at 12% per annum under
said Central Bank Circular shall be adjudged only in cases involving the loan or forbearance of money (See also Pilipinas
Bank v. Court of Appeals, 225 SCRA 268 [1993]). However, in Eastern Shipping Lines, Inc., we held that when the judgment
awarding a sum of money becomes final and 60oi tong, the monetary award shall earn interest at 12% per annum from the
date of such finality until its satisfaction, regardless of whether the case involves a loan or forbearance of money. The
reason is that this interim period is deemed to be by then equivalent to a forbearance of credit.

It appears that private respondent equated, and wrongly at that, the term “final and inappealable (sic)” as used in E.O. No.
1008 and the Rules of Procedure Governing Construction Arbitration with the term “final and 60oi tong” as used in Eastern
Shipping Lines, Inc.

A “final and inappealable (sic)” judgment is not the same as a “final and 60oi tong” one. The former becomes 60oi tong
only as in the case of an award by the CIAC after the lapse of 30 days from receipt of notice thereof and no petition for
review to the Supreme Court is made (Rules of Procedure Governing Construction Arbitration, Art. XVI, Sec. 1). While the
petition for review does not automatically suspend the execution of the award of the CIAC, the Supreme Court may direct
a stay of execution. In case at bench, the Court issued a temporary restraining order to stay the execution of the award
(Resolution, October 14, 1991).

The CIAC award did not come “final and 60oi tong” until after service of a copy of the Resolution dated April 8, 1992 of this
Court, denying the motion for reconsideration. The award was fully paid to private respondent on May 6, 1992 (Rollo, p.
456). We consider the interest that accrued from April 8 to May 6, 1992, a period of less than a month, as de minimis as to
warrant its charging against the award.

TIO KHE CHIO V. CA

Issue

The issue in this petition for certiorari and prohibition is the legal rate of interest to be imposed in actions for damages
arising from unpaid insurance claims. Petitioner Tio Khe Chio claims that it should be twelve (12%) per cent pursuant to
Articles 243 and 244 of the Insurance Code while private respondent Eastern Assurance and Surety Corporation (EASCO)
claims that it should be six (6%) per cent under Article 2209 of the Civil Code.
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 61
Case Notes/Digests

Facts

On December 18, 1978, petitioner Tio Khe Chio imported one thousand (1,000) bags of fishmeal valued at $36,000.30 from
Agro Impex, S.A. Dallas, Texas, U.S.A. The goods were insured with respondent EASCO and shipped on board the M/V
Peskov, a vessel owned by Far Eastern Shipping Company. When the goods reached Manila on January 28, 1979, they were
found to have been damaged by sea water which rendered the fishmeal useless. Petitioner filed a claim with EASCO and
Far Eastern Shipping. Both refused to pay. Whereupon, petitioner sued them before the then Court of First Instance of
Cebu, Branch II for damages. EASCO, as the insurer, filed a counterclaim against the petitioner for the recovery of
P18,387.86 representing the unpaid insurance premiums.

On June 30, 1982, the trial court rendered judgment ordering EASCO and Far Eastern Shipping to pay petitioner solidarily
the sum of P105,986.68 less the amount of P18,387.86 for unpaid premiums with interest at the legal rate from the filing of
the complaint, the sum of P15,000.00 as attorney’s fees and the costs.

In disputing the aforesaid decision of the Court of Appeals, petitioner maintains that not only is it unjust and unfair but it is
also contrary to the correct interpretation of the fixing of interest rates under Sections 243 and 244 of the Insurance Code.
And since petitioner’s claims are based on an insurance contract, then it is the Insurance Code which must govern and
not the Civil Code.

Simply put, the aforecited sections of the Insurance Code are not pertinent to the instant case. They apply only when the
court finds an unreasonable delay or refusal in the payment of the claims.

Neither does Circular No. 416 of the Central Bank which took effect on July 29, 1974 pursuant to Presidential Decree No.
116 (Usury Law) which raised the legal rate of interest from six (6%) to twelve (12%) per cent apply to the case at bar as
contended by the petitioner. The adjusted rate mentioned in the circular refers only to loans or forbearances of money,
goods or credits and court judgments thereon but not to court judgments for damages arising from injury to persons and
loss of property which does not involve a loan.

In the case of Philippine Rabbit Bus Lines, Inc. vs. Cruz, G.R. No. 71017, July 28, 1986, 143 SCRA 158, the Court declared that
the legal rate of interest is six (6%) per cent per annum, and not twelve (12%) per cent, where a judgment award is based
on an action for damages for personal injury, not use or forbearance of money, goods or credit. In the same vein, the Court
held in GSIS vs. Court of Appeals, G.R. No. 52478, October 30, 1986, 145 SCRA 311, that the rates under the Usury Law
(amended by P.D. 116) are applicable only to interest by way of compensation for the use or forbearance of money,
interest by way of damages is governed by Article 2209 of the Civil Code.

PHILIPPINE NATIONAL BANK V. CA

On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank (Capitol), deposited the questioned
check (for P97,650.00 php) in its savings account with said bank. In turn, Capitol deposited the same in its account with the
Philippine Bank of Communications (PBCom) which, in turn, sent the check to petitioner for clearing. Petitioner cleared the
check as good and, thereafter, PBCom credited Capitol’s account for the amount stated in the check. However, on October
19, 1981, petitioner returned the check to PBCom and debited PBCom’s account for the amount covered by the check, the
reason being that there was a “material alteration” of the check number. PBCom, as collecting agent of Capitol, then
proceeded to debit the latter’s account for the same amount, and subsequently, sent the check back to petitioner.
Petitioner, however, returned the check to PBCom.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 62
Case Notes/Digests

On the other hand, Capitol could not, in turn, debit F. Abante Marketing’s account since the latter had already withdrawn
the amount of the check as of October 15, 1981. Capitol sought clarification from PBCom and demanded the re-crediting of
the amount. PBCom followed suit by requesting an explanation and re-crediting from petitioner.

Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial Court of Manila against PBCom
which, in turn, filed a third-party complaint against petitioner for reimbursement/indemnity with respect to the claims of
Capitol. Petitioner, on its part, filed a fourth-party complaint against F. Abante Marketing.

Ruling

Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted provision of the Negotiable
Instruments Law. It maintains that under Section 125(f), any change that alters the effect of the instrument is a material
alteration. An alteration is said to be material if it alters the effect of the instrument. 7 It means an unauthorized change in
an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or
numbers or other changes to an incomplete instrument relating to the obligation of a party. 8 In other words, a material
alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable Instruments
Law.

In his book entitled “Pandect of Commercial Law and Jurisprudence,” Justice Jose C. Vitug opines that “an innocent
alteration (generally, changes on items other than those required to be stated under Sec. 1, N.I.L.) and spoliation
(alterations done by a stranger) will not avoid the instrument, but the holder may enforce it only according to its original
tenor.”

The case at the bench is unique in the sense that what was altered is the serial number of the check in question, an item
which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable
Instruments Law. The aforementioned alteration did not change the relations between the parties. The name of the drawer
and the drawee were not altered.

Petitioner claims that even if the author of the certification issued by the Ministry of Education and Culture (MEC) was not
presented, still the best evidence of the material alteration would be the disputed check itself and the serial number
thereon. Petitioner thus assails the refusal of respondent court to give weight to the certification because the author
thereof was not presented to identify it and to be cross-examined thereon.

The one who signed the certification was not presented before the trial court to prove that the said document was really
the document he prepared and that the signature below the said document is his own signature. Neither did petitioner
present an eyewitness to the execution of the questioned document who could possibly identify it. 16 Absent this proof, we
cannot rule on the authenticity of the contents of the certification. Moreover, as we previously emphasized, there was no
material alteration on the check, the change of its serial number not being substantial to its negotiability.

Anent the third issue — whether or not the drawee bank may still recover the value of the check from the collecting bank
even if it failed to return the check within the twenty-four (24) hour clearing period because the check was tampered —
suffice it to state that since there is no material alteration in the check, petitioner has no right to dishonor it and return it to
PBCom, the same being in all respects negotiable.

SENTINEL INSURANCE V. CA

Petitioner Sentinel Insurance Co., Inc., was the surety in a contract of suretyship entered into on November 15, 1974 with
Nemesio Azcueta, Sr., who is doing business under the name and style of ‘Malayan Trading’ as reflected in SICO Bond No.
G(16)00278 where both of them bound themselves, ‘jointly and severally, to fully and religiously guarantee the
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compliance with the terms and stipulations of the credit line granted by private respondent Rose Industries, Inc., in favor
of Nemesio Azcueta, Sr., in the amount of P180,00.00.’ Between November 23 to December 23, 1974, Azcueta made
various purchases of tires, batteries and tire tubes from the private respondent but failed to pay therefor, prompting the
latter to demand payment but because Azcueta failed to settle his accounts, the case was referred to the Insurance
Commissioner who invited the attention of the petitioner on the matter and the latter cancelled the Suretyship Agreement
on May 13, 1975 with due notice to the private respondent. Meanwhile, private respondent filed with the respondent court
of Makati a complaint for collection of sum of money against herein petitioner and Azcueta, docketed as Civil Case No.
21248 alleging the foregoing antecedents end praying that said defendants be ordered to pay jointly and severally unto the
plaintiff.

The decision having become final and 63oi tong, the prevailing party moved for its execution which respondent judge
granted and pursuant thereto, a notice of attachment and levy was served by respondent Provincial Sheriff upon the
petitioner. On the same day, however, the latter filed a motion for ‘clarification of the judgment as to its real and true
import because on its face, it would appear that aside from the 14% interest imposed on the principal obligation, an
additional 2% every 45 days corresponding to the additional penalty has been imposed against the petitioner which
imposition would be usurious and could not have been the intention of respondent Judge.’ But the move did nor prosper
because on May 22, 1971, the judge denied the motion on the theory that the judgment, having become final and 63oi
tong, it can no longer be amended or corrected.”

CA Ruling

That there was a mistake in the dispositive portion of the decision cannot be denied considering that in the complaint filed
against the petitioner, the prayer as specifically stated in paragraph (b) was to ‘order the latter to pay interest at 14% per
annum and damage dues at the rate of 2% every 45 days commencing from April 30, 1975 up to the time the amount is
fully paid.’ But this notwithstanding the respondent court in its questioned decision decreed the petitioner ‘to pay the
interest on the principal obligation at the rate of 14% per annum and 2% every 45 days commencing from April 30, 1975
until the amount is fully paid,’ so that, as petitioner correctly observes, it would appear that on top of the 14% per annum
on the principal obligation, another 2% interest every 45 days commencing from April 30, 1975 until the amount is fully paid
has been imposed against him (petitioner). In other words, 365 days in one year divided by 45 days equals 8-1/9 which,
multiplied by 2% as ordered by respondent judge would amount to a little more than 16%. Adding 16% per annum to the
14% interest imposed on the principal obligation would be 30% which is veritably usurious and this cannot be
countenanced, much less sanctioned by any court of justice.

Ruling of the Court

To clarify an ambiguity or correct a clerical error in the judgment, the court may resort to the pleadings filed by the
parties, the findings of fact and the conclusions of law expressed in the text or body of the decision.

The findings made by respondent court did not actually nullify the judgment of the trial court. More specifically, the
statement that the imposition of 2% interest every 45 days commencing from April 30, 1975 on top of the 14% per annum
(as would be the impression from a superficial reading of the dispositive portion of the trial court’s decision) would be
usurious is a sound observation. It should, however, be stressed that such observation was on the theoretical assumption
that the rate of 2% is being imposed as interest, not as damage dues which was the intendment of the trial court.

While interest forms part of the consideration of the contract itself, damage dues (penalties, and so forth) are usually
made payable only in case of default or non-performance of the contract. 11 Also, although interest is subject to the
provisions of the Usury Law, 12 there is no policy or provision in such law preventing the enforcement of damage dues
although the effect may be to increase the sum payable beyond the prescribed ceiling rates.
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San Beda College Alabang School of Law
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Significantly, it bears mention that on several occasions before petitioner moved for a clarificatory judgment, it offered to
settle its account with private respondent without assailing the imposition of the aforementioned damage dues.
Respondent court demonstrably did not err in ordering the clarification of the decision of the trial court by amending the
questioned part of its dispositive portion to include therein the phrase “damage dues” to modify the stated rate of 2%, and
thereby obviate any misconception that it is being imposed as interest.

PHILAM ACCIDENT INSURANCE V. CA

Private respondent was the plaintiff and the petitioner was the defendant in Civil Case No. 2414 of the Court of First
Instance of La Union. The decision was appealed by the petitioner to the Court of Appeals in CA-G.R. No. 52675-R but was
affirmed on February 7, 1977. The petitioner was advised by the respondent and her counsel that the payment was not in
full satisfaction of the judgment because the former had to pay compound interest or an additional sum of P10,375.77.
Upon refusal of the petitioner to pay the sum additionally claimed, the private respondent secure a writ of execution for
the same which the former sought to quash over the opposition of the latter.

The questioned Order cannot be sustained. The judgment which was sought to be executed ordered the payment of
SIMPLE “legal interest” only. It said nothing about the payment of compound interest. Accordingly, when the respondent
judge ordered the payment of compound interest he went beyond the confines of his own judgment which had been
affirmed by the Court of Appeals and which had become final. Fundamental is the rule that execution must conform to that
ordained or decreed in the dispositive part of the decision. Likewise, a court cannot, except for clerical errors or omissions,
amend a judgment that has become final.

Private respondent invokes Sec. 5 of the Usury Law which reads in part as follows: “In computing the interest on any
obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by
agreement, or, in default thereof, whenever the debt is judicially claimed in which last case it shall draw six per centum per
annum interest . . .” as well as Art. 2212 of the Civil Code which stipulates: “Interest due shall earn legal interest from the
time it is judicially demanded, although the obligation may be silent upon this point.” Both legal provisions are in
applicable for they contemplate the presence OF STIPULATED OR CONVENTIONAL INTEREST WHICH HAD ACCRUED
WHEN DEMAND WAS JUDICIALLY MADE. In this case no interest had been stipulated by the parties. In other words, there
was no accrued conventional interest which could further earn interest upon judicial demand.

SANTULAN V. HON. JUDGE FULE

This case is about the collection of legal interest on the sum of P30,000 as the value of improvements on a foreshore land,
which interest was not included in this Court’s decision of December 15, 1977 in Santulan vs. Executive Secretary, L-28021,
80 SCRA 548.

In that decision this Court affirmed the order of the Undersecretary of Agriculture and Natural Resources dated December
14, 1954 which gave due course to the lease application of Julian Santulan provided that he reimbursed Antonio Lusin the
appraised value of the existing improvements (pp. 574-5, 80 SCRA).

When the case was remanded to the trial court, Judge Fule in his order of September 2, 1981 directed the heirs of Santulan
to reimburse the heirs of Lusin the sum of P30,000 as the value of the improvements “with legal interest” from 1955 until
paid. He affirmed said order in his order of January 13, 1982. Santulan’s heirs appealed under Republic Act No. 5440 from
the order imposing 6% legal interest.

We hold that the order is devoid of legal basis. It is obviously not sanctioned by article 2209 of the Civil Code which provides
that “if the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for

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damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence
of stipulation, the legal interest, which is six percent per annum.”

Santulan’ s obligation to reimburse Lusin the value of his improvements was intended to avoid unjust enrichment.
INTEREST WAS NOT demanded by Lusin when the case was pending in the administrative agencies and in the courts. This
Court’s final judgment, which is the law of the case, did not provide for interest. There is no reason for the trial court to add
interest to the judgment. See Cariaga vs. Laguna Tayabas Bus. Co., 114 Phil. 1219.

The exaction of interest is not only illegal. It is also manifestly unjust under the facts of this protracted controversy. Lusin
and his heirs have received the fruits of the disputed land since they have been in possession thereof. As noted in Trillana
vs. Manansala, 96 Phil. 865, no interest is to be satisfied because THE FRUITS GATHERED BY THE POSSESSOR ARE
CONSIDERED AS INTEREST.

RUIZ V. HON. JUDGE CANEBA

Private respondents Zenaida Sangalang and Adolfo Cruz are common-law spouses and owners in common of a 2-storey
house and lots described in Transfer Certificate of Title (TCT) No. 56053 of the Registry of Deeds of Caloocan City but
registered only in the name of Zenaida Sangalang. Petitioners, the spouses Eulalio M. Ruiz and Iluminada M. Ruiz are the
lessees of Door No. 1 of the aforesaid two storey house divided into 2 doors, for a monthly rental of P650.00. Sometime on
November 19, 1982, Eulalio Ruiz and Zenaida Sangalang executed an agreement where it was provided that Ruiz will buy
the house and lot for the sum of P175,000.00. It was also stipulated that the Ruiz spouses will continue paying the monthly
rental of P650.00 until the amount of P175,000.00 shall have been fully satisfied.

There is no dispute that the following payments were made by Ruiz: P65,000.00 to Sangalang as down payment and
P21,119.62 to the Bank on the assumed mortgage. There is disagreement however as to the amount paid to Sangalang on
the balance of P78,500.00. Sangalang maintains that she received only P33,793.00 while Ruiz insists that they paid
P53,073.00.

In any event, the trial court found that the Ruiz spouses failed to pay in full the balance of P78,500.00 on or before
December 31, 1983 as stipulated and even on the extended period of March 22, 1984. Hence, the Ruiz spouses are not
entitled to their prayer for specific performance with damages. In the same breath, the trial court decided that it is only fair
that Zenaida Sangalang return/refund to the Ruiz spouses the payment made by the latter. Further, it ruled that the Ruiz
spouses shall continue to pay the agreed amount of rental in the amount of P650.00 until the property is surrendered to
Sangalang. (No appeal was made because for failure to pay the prescribed docket fees.)

Issue

The principal issue to be resolved in the instant petition is: whether or not there is an ambiguity in the dispositive portion of
the May 15, 1986 decision sufficient to warrant the questioned order of the respondent court amending subject final and
65oi tong judgment. But the bone of contention in this case is the exact amount to be returned by Sangalang to the Ruiz
spouses which was not spelled out by the trial court. The Ruizes claim that they are entitled to a refund of P124,192.62 plus
24% interest compounded annually, the alleged legal rate under Central Bank Circular, or a total amount of P169,414.95.

Ruling

The only set-off specified by the trial court in the assailed May 15, 1986 decision were the lost profits suffered by
Sangalang because of the annotation of the notice of lis pendens on her title by the Ruiz spouses which were considered
compensated by the increase in value of the property due to the repair made by the latter. Moreover, it appearing that
there was in fact a part execution of pars. 1 and 2 of the dispositive portion of the 1986 decision against the Ruizes, it is but
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proper that the amount to be paid by Sangalang is the total payments made by the petitioners in the amount of
P124,192.62.

Anent the Ruizes’ claim of interest as aforementioned, it has been held in the case of Santulan v. Fule, 133 SCRA 762 (1984)
that where the court judgment which did not provide for interest is already final, there is no reason to add interest in the
judgment. Interest was not demanded by the Ruizes when the case was pending before the lower court, hence, there is no
reason for this Court to grant such claim. As ruled by this Court, such claim is groundless since the decision and orders
sought to be enforced do not direct the payment of interest and have long become final.

Finally, as to Sangalang’s claim for P1,500.00 as monthly rental for Door No. 2, the records show that such claim was never
raised in the trial court. The issue of additional rentals was brought up by Sangalang only when the motion for execution of
par. 3 of the dispositive portion of the decision was filed by the Ruiz spouses (Rollo, p. 189). It is a basic rule that an issue
which was not raised in the court below cannot be raised for the first time on appeal as it would be offensive to the basic
rules of fair play, justice and due process. Consequently, Sangalang’s claim cannot be granted.

Hence, since the May 15, 1986 decision has long become final and 66oi tong and in fact has been partly executed, the
respondent judge had lost its jurisdiction thereon. He has exceeded his authority, considering that the trial court has no
authority to modify or vary the terms and conditions of a final and 66oi tong judgment. What remains in his authority in
relation thereto is purely the ministerial enforcement or execution of the judgment. (Christian Lit. Crusade, supra; Baclayan
vs. CA, supra.) Therefore, for having substantially affected the final and 66oi tong judgment such Order of the respondent
judge dated July 27, 1988 is null and void for lack of jurisdiction, including the entire proceedings held for the purpose
(Marcopper Mining vs. Briones,supra).

JOVEN V. VENTURANZA

“Plaintiff Felix Cortes y Ochoa and Noel J. Cortes filed the instant action for foreclosure of real estate against the defendants
Gregorio Venturanza, Mary E. Venturanza, Jose Oledan and Erlinda M. Oledan. The complaint alleges that plaintiff Felix
Cortez y Ochoa was the original owner of nine (9) parcels of land covered by Transfer Certificates of Title Nos. 21334 to
21342, inclusive, while plaintiff Noel J. Cortes was likewise the original owner of twenty-four (24) parcels of land covered by
Transfer Certificates of Title Nos. 21343, 21345, 21347 to 21367, inclusive, all of the land records of Bulacan; that on
October 24, 1958 said plaintiffs sold and delivered to the defendants all the above-mentioned thirty-three (33) parcels of
land with all the improvements thereon for the total sum of P716,573.90 of which defendants agreed to pay jointly and
severally the plaintiffs the sum of P100,000.00 upon the signing and execution of a deed of sale and P40,000.00 on January
1, 1959 thereby leaving a balance of P576,573.90 which the defendants agreed and bound themselves to pay plaintiffs
jointly and severally within three (3) years from January 1, 1959 with interest thereon at the rate of 6% per annum; that
defendants further agreed and bound themselves to secure the payment of the said balance of P576,573.90 with a first
mortgage upon the said 33 parcels of land with improvements; that the defendants have already paid the plaintiffs the
total sum of P140,000.00; that of the unpaid balance owing to plaintiffs, P169,484.24 pertain(ing)s to plaintiff Felix Cortes
and P407,089.66 pertains to plaintiff Noel J. Cortes; that upon the registration of the deed of sale and mortgage with the
office of the register of deeds of Bulacan new certificates of title for the 33 parcels of land were issued in the names of the
defendants and the mortgage obligation was noted thereon; that the mortgage obligation fell due on January 1, 1962, but
despite repeated demands for payment, defendants failed and refused to pay the said balance of P576,573.90 to
plaintiffs; that from the time the mortgage obligation fell due and demandable up to December 1, 1962 the total interest
due from the defendants on the balance of their obligation is P103,783.32 computed at the stipulated interest of 6% per
annum; that it stipulated in the deed of sale with purchase money mortgage that in the event or default by defendants to
pay the obligation secured by the mortgage and a suit is brought for the foreclosure of the mortgage or any other legal

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proceedings is instituted for the enforcement of plaintiffs’ right, defendants would he obligated and bound to pay the
plaintiffs reasonable compensation for attorney’s fees which plaintiffs fixed at P50,000.00.

Defendants Spouses Venturanza admit the allegations of the complaint regarding plaintiffs’s former ownership of the lands
in question as well as their execution of the mortgage in favor of plaintiffs but allege that they are at present the registered
owners of the same parcels of land by virtue of the sale thereof made to them; they likewise admit the allotment of
payment to plaintiffs of the balance of their obligation but allege that the said balance has not yet become due and
demandable so that they have not incurred in default. As special affirmative defense defendants Venturanza allege that
the document designated as deed of sale with purchase money mortgage does not express the true intent and agreement
of the parties with respect to the manner of payment of the balance of the purchase price, the truth being that
defendants will pay the balance of the purchase price in the amount of P576,573.90 to the plaintiffs, and the latter agreed,
as soon as defendants will have received from the Land Tenure Administration the purchase price (just compensation for
the sale.)of their (defendants’) hacienda in Bugo, Cagayan de Oro in the amount of P360,000.00 which hacienda is the
object of exporpiration proceedings before the Court of First Instance of said City; that it was agreed moreover that
defendants will complete payment of the balance of the purchase price upon the consummation of the sale of their other
hacienda at Buhi, Camarines Sur to one Mr. De Castro for P837,000.00 more or less; that this negotiation was known to
plaintiffs who agreed to wait for the sale of the same properties by defendants; that the property in question was bought
by defendant for speculative purposes. As second special and affirmative defenses defendants allege that the deed of sale
with purchase money mortgage had been novated by a subsequent agreement regarding the manner and period of
payment to be made by defendants and that, therefore, the cause of action has not yet accrued.

Defendants Jose Oledan and Erlinda M. Oledan deny the material allegations of the complaint with respect to the mortgage
obligation alleging that plaintiff’s cause of action against them has been extinguished and, therefore, did not become due
against them on January 1, 1962; that even as regards their co-defendants Venturanzas the mortgage obligation did not
become due on January 1, 1962 there having been a novation of the original agreement which affected material changes
in the manner and condition of time of payment of the balance of the mortgage obligation. By way of affirmative
defenses defendants Oledans alleged that the deed of sale with purchase money mortgage fails to express the true intent
and agreement of the parties thereto insofar as the nature of the liability of the defendants is concerned, the true intention
being to hold them (defendants Oledan) obligated unto plaintiffs only to the extent of the proportion of their share,
ownership and interests in the property conveyed; that their obligation to plaintiffs has been extinguished by novation; that
their obligation to plaintiffs has been extinguished by the assumption of the obligation by defendants Venturanza as
provided for in the agreement among defendants dated December 28, 1959, such assumption of the obligation being
made’ with full knowledge (of) and consent of plaintiffs which partakes of the character of a novation of the original
agreement and that by their failure to seasonably interrupt any opposition to the assumption of any obligation by
defendants Venturanza and to take appropriate action thereon, plaintiffs have waived their right to proceed against them.

Issues

a. Whether, upon the filing by plaintiffs of their complaint against the defendants on December 12, 1962, the obligation of
the defendants had not yet become due and demandable and, hence, the complaint was filed prematurely.

b. Whether the payment of P576,573.90 with interest thereon at the stipulated rate of 6% per annum was to be made
dependent upon the consummation of the sale of the two haciendas of defendants Venturanzas and, hence, there was a
novation of the contract of sale with purchase money mortgage, Exhibit B, as a result of a change in the manner of
payment.

c. Whether the sale on December 28, 1959 by the defendants Oledans to their co-defendants Venturanzas, of all their rights
and interests in the property, subject-matter of the deed of sale with purchase money mortgage, Exhibit B, likewise
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constituted a novation thereof and, therefore, had the effect of discharging the defendants Oledans from their original
obligation to the plaintiffs.

Ruling

With respect to the first issue — whether the complaint was find prematurely — there is no dispute that plaintiffs filed
their complaint on December 12, 1962; that under the terms of the contract, the pertinent portion of which is quoted
above, the defendants were given until January 1, 1962 within which to pay their obligation; and that January 1, 1962 had
passed without the defendants having paid to the plaintiffs the sum of P576,573.90 and the corresponding interest thereon
notwithstanding repeated demands for payment made upon and duly received by them (Exhs. D, D-3, E, E-3, pp. 72, 73, 73-
A, 74-75, Folder of Exhibits). Therefore, when plaintiffs filed the complaint on December 12, 1962, the effects of default as
against the defendants had already arisen. Besides, no less than the defendants Venturanzas themselves admitted in their
brief that they were delayed in the payment of the balance of their obligation to the plaintiffs. One cannot admit being
delayed in the payment of his obligation unless he believes that his obligation is already due and demandable. Stated
otherwise, there is no delay if the obligation is not yet due.

The alleged cause of their default in paying the balance of the price, is not force majeure nor an act of God. Hence, their
failure to pay is not justified.

With respect to the second issue, defendants Venturanzas contend that the three-year period provided for in
the Deed of Sale with Purchase Money Mortgage, Exhibit B, was dependent on the date when they would be
able to collect the purchase price of the two properties they were trying to sell. For this purpose, they claim
that Dr. Cortes, one of the plaintiffs, granted them an extension of time within which to pay and this act of Dr.
Cortes constituted a novation of the contract.

This claim of defendants Venturanzas is equally devoid of merit. A careful reading of the Deed of Sale with Purchase Money
Mortgage, Exhibit B, reveals the conspicuous absence of any provision making the consummation of the said contract
dependent on the ability of defendants Venturanzas to collect the purchase price of their two haciendas. If this were the
intention of the parties, they should have clearly stated it in the contract. It is true the defendants wrote two letters to Dr.
Cortes and/or his lawyer (Exhibits H and I-Venturanza, p. 90, Folder of Exhibits), wherein the defendants Venturanzas
requested an extension of time within which to pay and Dr. Cortes admitted having been informed of the alleged projected
sale of defendants Venturanzas’ properties. Dr. Cortes, however, vehemently denied having given said defendants any
extension of time.

The deed of sale with purchase money mortgage clearly indicates that the balance of P576,573.90 shall be paid by the
defendants, jointly and severally, within three (3) years from January 1, 1959, with interest at the rate of 6% per annum,
until fully paid. On January 1, 1962, the defendants failed and refused to pay their obligation. This is a clear case of an
obligation with a definite period ex die, which period was incidentally established for the benefit of the defendants. The
evidence presented by the plaintiffs to substantiate these facts approaches moral certainty, not merely preponderance of
evidence. Hence, defendants’ defense of novation as to the period for payment, fails.

On the contrary, the terms of said exhibit are so clear and leave no doubt with respect to the intention of the contracting
parties. Hence, the literal meaning of its stipulations shall control (Art. 1370, New Civil Code). This is so because the
intention of the parties is clearly manifested and they are presumed to intend the consequences of their voluntary acts
(Sec. 5, par. [c], Rule 131, Revised Rules of Court). There being nothing in the deed, Exhibit B, which would argue against its
enforcement, it follows that there is no ground or reason why it should not be given effect.

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San Beda College Alabang School of Law
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Case Notes/Digests

With respect, however, to the interest due to the plaintiffs on the indebtedness of the defendants, WE are reminded of the
mandate of Article 2212 of the New Civil Code.

Per stipulation, plaintiffs are entitled to collect from defendants interest at the rate of six per centum (6%) per annum on
the remaining balance of P576,573.90 from January 1, 1959. Hence, for the period from January 1, 1959 to December 12,
1962, the date of the filing of the complaint, plaintiffs are entitled to collect from the defendants, by way of interest at six
percent per annum, the sum of P136,482.13. Applying the aforequoted legal provision, this amount of P136,482.13 should
be added to the principal of P576,573.90, making a total of P713,056.03, which shall earn legal interest stipulated at six
percent per annum from December 13, 1962 until fully paid. Such interest is not due to stipulation; rather it is due to the
mandate of the law hereinbefore quoted.

RCBC V. CA

GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation, RCBC
Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYU’s application for
approval by RCBC’s executive committee. A credit facility in the amount of P30 million was initially granted. Upon GOYU’s
application and Uy’s and Lao’s recommendation, RCBC’s executive committee increased GOYU’s credit facility to P50
million, then to P90 million, and finally to P117 million. As security for its credit facilities with RCBC, GOYU executed two
real estate mortgages and two chattel mortgages in favor of RCBC, which were registered with the Registry of Deeds at
Valenzuela, Metro Manila. Under each of these four mortgage contracts, GOYU committed itself to insure the mortgaged
property with an insurance company approved by RCBC, and subsequently, to endorse and deliver the insurance policies to
RCBC.

On April 27, 1992, one of GOYU’s factory buildings in Valenzuela was gutted by fire. Consequently, GOYU submitted its
claim for indemnity on account of the loss insured against. MICO denied the claim on the ground that the insurance policies
were either attached pursuant to writs of attachments/garnishments issued by various courts or that the insurance
proceeds were also claimed by other creditors of GOYU alleging better rights to the proceeds than the insured. In an
interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of Manila (Branch 3), confirmed
that GOYU’s other creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained their
respective writs of attachments from various courts, covering an aggregate amount of P14,938,080.23, and ordered that
the proceeds of the ten insurance policies be deposited with the said court minus the aforementioned P14,938,080.23.
Accordingly, on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC.

Issue

This Court, however, discerns one primary and central issue, and this is, whether or not RCBC, as mortgagee, has any right
over the insurance policies taken by GOYU, the mortgagor, in case of the occurrence of loss.

Ruling

As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed several mortgage
contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that GOYU shall insure the mortgaged
property with any of the insurance companies acceptable to RCBC. GOYU indeed insured the mortgaged property with
MICO, an insurance company acceptable to RCBC. Based on their stipulations in the mortgage contracts, GOYU was
supposed to endorse these insurance policies in favor of and deliver them, to RCBC. Alchester Insurance Agency, Inc.,
MICO’s underwriter from whom GOYU obtained the subject insurance policies, preferred the nine endorsements (see Exh.
“1-Malayan”; to “9-Malayan”; also Exh.” 51-RCBC” to “59-RCBC”), copies of which were delivered to GOYU, RCBC, and

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MICO. However, because these endorsements do not bear the signature of any officer of GOYU, the trial court, as well as
the Court of Appeals, concluded that the endorsements are defective.

It is settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgaged
property, such that each one of them may insure the same property for his own sole benefit. There is no question that
GOYU could insure the mortgaged property for its own exclusive benefit. In the present case, although it appears that
GOYU obtained the subject insurance policies naming itself as the sole payee, the intentions of the parties as shown by
their contemporaneous acts, must be given due consideration in order to better serve the interest of justice and equity.

RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation in the
mortgage contracts. We find such reliance to be justified under the circumstances of the case. GOYU failed to seasonably
repudiate the authority of the person or persons who prepared such endorsements. Over and above this, GOYU continued,
in the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the occurrence of the loss
insured against, it was too late for GOYU to disown the endorsements for any imagined or contrived lack of authority of
Alchester to prepare and issue said endorsements. If there had not been actually an implied ratification of said
endorsements by virtue of GOYU’s inaction in this case, GOYU is at the very least estopped from assailing their operative
effects. To permit GOYU to capitalize on its non-confirmation of these endorsements while it continued to enjoy the
benefits of the credit facilities of RCBC which believed in good faith that there was due endorsement pursuant to their
mortgage contracts, is to countenance grave contravention of public policy, fair dealing, good faith, and justice. Such an
unjust situation, the Court cannot sanction. Under the peculiar circumstances obtaining in this case, the Court is bound to
recognize RCBC’s right to the proceeds of the insurance policies if not for the actual endorsement of the policies, at least on
the basis of the equitable principle of estoppels.

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insurance shall
exclusively apply to the interest of the person in whose name or for whose benefit it is made. The peculiarity of the
circumstances obtaining in the instant case presents a justification to take exception to the strict application of said
provision, it having been sufficiently established that it was the intention of the parties to designate RCBC as the party for
whose benefit the insurance policies were taken out.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being exclusively payable to RCBC
by reason of the endorsement by Alchester to RCBC, which we already ruled to have the force and effect of an
endorsement by GOYU itself, these 8 policies can not be attached by GOYU’s other creditors up to the extent of the GOYU’s
outstanding obligation in RCBC’s favor. Section 53 of the Insurance Code ordains that the insurance proceeds of the
endorsed policies shall be applied exclusively to the proper interest of the person for whose benefit it was made. In this
case, to the extent of GOYU’s obligation with RCBC, the interest of GOYU in the subject policies had been transferred to
RCBC effective as of the time of the endorsement. These policies may no longer be attached by the other creditors of
GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless forthwith be dismissed for being moot
and academic in view of the results reached herein. Only the two other policies amounting to P19,646,224.92 may be
validly attached, garnished, and levied upon by GOYU’s other creditors. To the extent of GOYU’s outstanding obligation with
RCBC, all the rest of the other insurance policies above-listed which were endorsed to RCBC, are, therefore, to be released
from attachment, garnishment, and levy by the other creditors of GOYU.

The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are dated after the
fire. It failed to consider that said notes had for their origin transactions consummated prior to the fire. Thus, careful
attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewals of Promissory Notes
No. 908-91 and 952-91, loans already availed of by GOYU.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 71
Case Notes/Digests

The two courts below erred in failing to see that the promissory notes which they ruled should be excluded for bearing
dates which are after that of the fire, are mere renewals of previous ones. The proceeds of the loan represented by these
promissory notes were admittedly received by GOYU. There is ample factual and legal basis for giving GOYU’s judicial
admission of liability in the amount of P116,301,992.60 full force and effect.

It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers of the
mortgaged property will, nonetheless, have to be applied as payment against GOYU’s obligation. But, contrary to the lower
courts’ findings, payments effected by GOYU prior to January 21, 1993 should no longer be deducted. Such payments had
obviously been duly considered by GOYU, in its aforequoted letter dated March 9, 1993, wherein it admitted that its past
due account totaled P116,301,992.60 as of January 21, 1993.

The need for the payment of interest due upon the principal amount of the obligation, which is the cost of money to RCBC,
the primary end and the ultimate reason for RCBC’s existence and being, was duly recognized by the trial court when it
ruled favorably on RCBC’s counterclaim, ordering GOYU “to pay its loan obligation with RCBC in the amount of
P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the respective promissory notes (without
surcharges and penalties) per computation, pp. 14-A, 14-B, 14-C” (Record, p. 479).

The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surcharges and
penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties despite express
stipulation therefor in a valid agreement, may not equally justify non-payment of interest. The charging of interest for loans
forms a very essential and fundamental element of the banking business, which may truly be considered to be at the very
core of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any interest at all. We
fail to find justification for the Court of Appeals’ outright deletion of the payment of interest as agreed in upon the
respective promissory notes. This constitutes gross error. (Guidelines have been provided in Eastern Shipping Case.)

Surcharges and Penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages. In
exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the
circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and
penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable.
What may be iniquitous and unconscionable in one case, may be totally just and equitable in another. This provision of law
will have to be applied to the established facts of any given case. Given the circumstances under which GOYU found itself
after the occurrence of the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the penalty
charges of 36%, to be definitely iniquitous and unconscionable. The Court tempers these rates to 2% and 3%, respectively.
Furthermore, in the light of GOYUs offer to pay the amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit “BB”),
which RCBC refused, we find it more in keeping with justice and equity for RCBC not to charge additional interest,
surcharges, and penalties from that time onward.

In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two simultaneous
remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other for foreclosure. In doing
so, said the appellate court, the second action is deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-
199). The Court of Appeals was too accommodating in giving due consideration to this argument of GOYU, for the
foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R CV No. 46247, the case having been
elevated by RCBC.

BRIONES V. CAMMAYO

Defendants executed the real estate mortgage, Annex ‘A’ of the complaint, as security for the loan of P1,200.00 given to
defendant Primitivo P. Cammayo upon the usurious agreement that defendant pays to the plaintiff and that the plaintiff
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 72
Case Notes/Digests

reserve and secure, as in fact plaintiff reserved and secured himself, out of the alleged loan of P1,500.00 as interest the sum
of P300.00 for one year. That although the mortgage contract, Annex ‘A’ was executed for securing the payment of
P1,500.00 for a period of one year, without interest, the truth and the real fact is that plaintiff delivered to the defendant
Primitivo P. Cammayo only the sum of P1,200.00 and withheld the sum of P300.00 which was intended as advance
interest for one year. That on account of said loan of P1,200.00, defendant Primitivo P. Cammayo paid to the plaintiff
during the period from October 1955 to July 1956 the total sum of P330.00 which plaintiff, illegally and unlawfully refuse
to acknowledge as part payment of the account but as in interest of the said loan for an extension of another term of one
year. (Not for the principal amount, rather it was applied for the payment of interests.) That said contract of loan entered
into between plaintiff and defendant Primitivo P. Cammayo is a usurious contract and is contrary to law, morals, good
customs, public order or public policy and is, therefore, inexistent and void from the beginning (Art. 1407 Civil Code).

On September 7, 1962, Briones filed an unverified reply in which he merely denied the allegations of the counterclaim.
Thereupon the defendants moved for the rendition of a summary judgment on the ground that, upon the record, there was
no genuine issue of fact between the parties. The Municipal Court granted the motion and rendered judgment sentencing
the defendants to pay the plaintiff the sum of P1,500.00, with interests thereon at the legal rate from February 22, 1962,
plus the sum of P150.00 as attorney’s fees. From this judgment, the defendants appealed.

Issue

It is not now disputed that the contract of loan in question was tainted with usury. The only questions to be resolved,
therefore, are firstly, whether the creditor is entitled to collect from the debtor the amount representing the principal
obligation; secondly, in the affirmative, if he is entitled to collect interests thereon, and if so, at what rate.

Ruling

The Usury Law penalizes any person or corporation who, for any loan or renewal thereof or forbearance, shall collect or
receive a higher rate or greater sum or value than is allowed by law, and provides further that, in such case, the debtor may
recover the whole interest, commissions, premiums, penalties and surcharges paid or delivered, with costs and attorney’s
fees, in an appropriate action against his creditor, within two (2) years after such payment or delivery (Section 6, Act 2655,
as amended by Acts 3291 and 3998). Construing the above provision, We held in Go Chioco vs. Martinez, 45 Phil. 256 that
even if the contract of loan is declared usurious the creditor is entitled to collect the money actually loaned and the legal
interest due thereon.

In all the above cited cases it was recognized and held that under Act 2655 a usurious contract is void; that the creditor had
no right of action to recover the interest in excess of the lawful rate; but that this did not mean that the debtor may keep
the principal received by him as loan — thus unjustly enriching himself to the damage of the creditor.

The view has been expressed, however, that the ruling thus consistently adhered to should now be abandoned because
Article 1957 of the new Civil Code — a subsequent law — provides that contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against usury, shall be void, and that in such cases “the borrower may
recover in accordance with the laws on usury.” From this the conclusion is drawn that the whole contract is void and that,
therefore, the creditor has no right to recover — not even his capital.

The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a nullity the legal
terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this regard: “In case of a divisible
contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.”

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 73
Case Notes/Digests

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause
of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated
interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal.

Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6, any person who for a
loan shall have paid a higher rate or greater sum or value than is allowed in said law, may recover the whole interest paid.
The New Civil Code, in Article 1413 states: “Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of payment.” Article 1413, in speaking of “interest paid in
excess of the interest allowed by the usury laws” means the whole usurious interest: that is, in a loan of P1,000, with
interest of 20% per annum or P200 for one year, if the borrower pays said P200, the whole P200 is the usurious interest,
not just that part thereof in excess of the interest allowed by law. It is in this case that the law does not allow division. The
whole stipulation as to interest is void, since payment of said interest is illegal. The only change effected, therefore, by
Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in excess of that allowed by law, which
the Usury Law already provided for, but to add that the same can he recovered “with interest thereon from the date of
payment.”

The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on
usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to
payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly
enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a
further deterrence to usury.

The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action. And in
case of such demand, and the debtor incurs in delay, the debt earns interest from the date of the demand. Such interest is
not due to stipulation, for there was none, the same being void. Rather, it is due to the general provision of law that in
obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil
Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt with interest thereon at the
legal rate, from the date of filing of the complaint.”

ANGEL JOSE WAREHOUSE V. CHELDA ENTERPRISES

Plaintiff corporation filed suit in the Court of First Instance of Manila on May 29, 1964 against the partnership Chelda
Enterprises and David Syjueco, its capitalist partner, for recovery of alleged unpaid loans in the total amount of
P20,880.00, with legal interest from the filing of the complaint, plus attorney’s fees of P5,000.00. Alleging that post dated
checks issued by defendants to pay said account were dishonored, that defendants’ industrial partner, Chellaram I.
Mohinani, had left the country, and that defendants have removed or disposed of their property, or are about to do so,
with intent to defraud their creditors, preliminary attachment was also sought.

Answering, defendants averred that they obtained four loans from plaintiff in the total amount of P26,500.00, of which
P5,620.00 had been paid, leaving a balance of P20,880.00; that plaintiff charged and deducted from the loan usurious
interest thereon, at rates of 2% and 2.5% per month, and, consequently, plaintiff has no cause of action against defendants
and should not be permitted to recover under the law. A counterclaim for P2,000.00 attorney’s fees was interposed.

Issue

Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may the creditor
recover the principal of the loan? (2) Should attorney’s fees be awarded in plaintiff’s favor?

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 74
Case Notes/Digests

Ruling

Since, according to the appellants, a usurious loan is void due to illegality of cause or object the rule of pari
delicto expressed in Article 1411, supra, applies, so that neither party can bring action against each other. Said rule,
however, appellants add, is modified as to the borrower, by express provision of the law (Art. 1413, New Civil Code),
allowing the borrower to recover interest paid in excess of the interest allowed by the usury law. As to the lender, no
exception is made to the rule; hence, he cannot recover on the contract. So — they continue — the New Civil Code
provisions must be upheld as against the Usury Law, under which a loan with usurious interest is not totally void, because
of Article 1961 of the New Civil Code, that: “Usurious contracts shall be governed by the Usury Law and other special
laws, so far as they are not inconsistent with this Code.”

We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same as Article 1305 of the Old
Civil Code. Therefore, said provision is no warrant for departing from previous interpretation that, as provided in the Usury
Law (Act No. 2655, as amended), a loan with usurious interest is not totally void but void only as to the interest. True, as
stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a contract’s nullity proceeds from
illegality of the cause or object of said contract.

However, appellants fail to consider that a contract of loan with usurious interest consists of principal and accessory
stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon. And said two
stipulations are divisible in the sense that the former can still stand without the latter. Article 1273, Civil Code, attests to
this: “The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall
leave the former in force.”

The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a nullity the legal
terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this regard: “In case of a divisible
contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.” In simple loan with
stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract
(Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since it is the only one that is illegal.

Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6, any person who for a
loan shall have paid a higher rate or greater sum or value than is allowed in said law, may recover the whole interest paid.
The New Civil Code, in Article 1413 states: “Interest paid in excess of the interest allowed by the usury laws may be
recovered by the debtor, with interest thereon from the date of payment.” Article 1413, in speaking of “interest paid in
excess of the interest allowed by the usury laws” means the whole usurious interest: that is, in a loan of P1,000, with
interest of 20% per annum or P200 for one year, if the borrower pays said P200, the whole P200 is the usurious interest,
not just that part thereof in excess of the interest allowed by law. It is in this case that the law does not allow division. The
whole stipulation as to interest is void, since payment of said interest is illegal. The only change effected, therefore, by
Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in excess of that allowed by law, which
the Usury Law already provided for, but to add that the same can he recovered “with interest thereon from the date of
payment.”

The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on
usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to
payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly
enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a
further deterrence to usury.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 75
Case Notes/Digests

The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action. And in
case of such demand, and the debtor incurs in delay, the debt earns interest from the date of the demand. Such interest is
not due to stipulation, for there was none, the same being void. Rather, it is due to the general provision of law that in
obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil
Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt with interest thereon at the
legal rate, from the date of filing of the complaint.”

PRIVATE DEVELOPMENT V. CA

ON MAY 21, 1974, Davao Timber Corporation, DATICOR for brevity, and the Private Development Corporation (PDCP)
entered into a loan agreement 3whereby PDCP extended to DATICOR a loan in foreign currency equivalent to US$
265,000.00 and another in the amount of P2,500,000.00 for the purpose of establishing a kiln drying and woodworking
plant in Mati, Davao Oriental. It was stipulated in the loan agreement, that the foreign currency loan was to be paid with
an interest rate of eleven and three fourths (11-3/4%) per cent per annum on the disbursed amount of the foreign
currency; and the peso loan at the rate of twelve (12%) per cent per annum on the disbursed amount of the peso loan
outstanding, commencing on the several dates on which disbursements of the proceeds of the loans were made.

The loans were originally secured by a first mortgage 5 executed by Ernesto del Rosario, President of DATICOR, in his
personal capacity, and his sister, Lourdes C. Cuerva, as third party mortgagors on a parcel of land which they owned in
common. On December 28, 1976, the third party mortgagors, Del Rosario and Cuerva partitioned this mortgaged property
which they owned in common, such that said parcel was re-surveyed and two certificates of titles were issued, each with
an area of 3,854 square meters, one in the name of Del Rosario and the other in the name of Cuerva.

Thereafter, PDCP executed a partial release of mortgage 6 on the parcel of land owned by Cuerva, on the condition that in
lieu thereof, DATICOR was to mortgage an additional five (5) parcels of land consisting of prime industrial lands with
buildings thereon. As a consequence, DATICOR executed an Addendum to Mortgage 7 in favor of PDCP. DATICOR likewise
executed a Deed of Chattel Mortgage 8 on the machineries and equipments attached to the land in Davao Oriental as
added security for said loans.

The approved value of the parcel of land of Del Rosario, including the building thereon, was P12,000,000.00 while the
appraised value of the DATICOR properties consisting of the five parcels of land in Davao Oriental, including the buildings
and structure thereon and the machineries and equipments, is at least P15,000,000.00 or a total of P27,000,000.00 for the
loan of about P4.4 million pesos. (Which is way more than the value procured by DATICOR in its loan with petitioner.)

PDCP asked DATICOR to pay a service fee of one (1%) per cent per annum on the outstanding balance of the peso loan to
cover the cost of administering DATICOR’s account and supervision of the project. 9 This service fee was subsequently
increased to six (6%) per cent per annum in addition to the twelve (12%) per cent per annum interest on the peso
loan. 10 Furthermore, DATICOR was asked to pay penalty charges at the rate of two (2%) per cent per month. A total of
P3,000,000.00 was already paid by Del Rosario to PDCP and which the latter applied to interests, service fees and penalty
charges, such that according to PDCP, DATICOR still has an outstanding balance on the principal loan of P10,887,856.99 as
of May 15, 1983.

Del Rosario and Cuerva then filed a complaint 13 on March 31, 1982 against the PDCP in the Court of First Instance of
Manila in Civil Case No. 82-8088 for violation of the Usury Law, annulment of contract and damages with prayer for the
issuance of a writ of preliminary injunction. On April 13, 1982, a restraining order 14 was issued by the Court of First
Instance of Manila. DATICOR filed another case on April 1, 1982 in the Court of First Instance of Davao Oriental seeking a
writ of injunction to prevent PDCP from foreclosing its properties in Davao, and likewise praying for the annulment of the
loan contract as it is in violation of the Usury Law and damages.
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 76
Case Notes/Digests

Ruling

Inasmuch as the loan agreement herein was entered into on May 21, 1974, the prevailing law applicable is Act No. 2655,
otherwise known as the Usury Law, as amended by P.D. No. 116, which took effect on January 29, 1974. The usury
law therefore, as amended by Presidential Decree 116, fixed all interest rates for all loans with MATURITY OF MORE THAN
360 days at twelve (12%) per cent per annum including premiums, fines and penalties.

It is to be noted that PDCP was charging penalties at the rate of two (2%) per cent per month or an effective rate of twenty
four (24%) per cent per annum on the peso loan and one-half (1/2%) per cent per month or an effective six (6%) per cent
per annum on the foreign currency loan. It is therefore very clear that PDCP has been charging and imposing interests in
violation of the prevailing usury laws.

In the beginning, PDCP was charging a total of nineteen (19%) per cent interest per annum on the peso loan and eighteen
and three-fourths (18-3/4%) per cent on the foreign currency loan. Since the penalty charges was increased to two (2%) per
cent per month with regard to the peso loan, PDCP began charging a total of forty two (42%) per cent per annum on the
peso loan, clearly in violation of the usury law.

The law should not be interpreted to mean forfeiture of the principal loan as that would be unjustly enriching the borrower.
The unpaid principal debt still stands and remains valid but the stipulation as to the usurious interest is void,
consequently, the debt is to be considered without stipulation as to the interest.

The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on
usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to
payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly
enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a
further deterrence to usury. The principal debt remaining without stipulation for payment of interest can thus be recovered
by judicial action.

Petitioner further contends that the cause of action of Ernesto del Rosario in Civil Case No. 82-8088 is barred by
prescription and that there is a pending case before the Court of First Instance of Mati, Davao with the same cause of
action.

The aforesaid articles (Arts. 1410 and 1957) therefore state that all usurious stipulations are void and as such, an action to
annul such usurious stipulations does not prescribe.

SANCHEZ V. BUENVIAJE

On August 25, 1976, Alejo Sanchez sued Teodoro Sanchez and Leonor Santilles in the Municipal Court of Bato, Camarines
Sur, for the recovery of P2,000.00 which the latter had promised to pay in two notes. Said notes also contained stipulations
for interest at the rate of 10% per month. The Municipal Court rendered judgment ordering Teodoro Sanchez only to pay to
Alejo Sanchez P2,000.00 plus interest thereon at the legal rate from the filing of the complaint.

Teodoro appealed to the Court of First Instance of Camarines Sur which rendered the following judgment:

“WHEREFORE, the judgment rendered by the lower court is hereby AFFIRMED with modification as to costs. Judgment is
hereby rendered, ordering the defendant to pay his indebtedness to plaintiff in the total sum of P2,000.00, plus interest
thereon at the legal rate from the filing of the complaint in this case to actual payment. Defendant to pay double the costs
of this suit.” (Rollo, p. 30.)

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 77
Case Notes/Digests

In his petition for review, Teodoro claims that in a loan with usurious interest both the loan and the usurious interest are
void.

Alejo was required to comment on the petition but it appears that he died sometime in the latter part of 1980 and the early
part of 1981. (Rollo, p. 42.) Accordingly, his children were impleaded as respondents and required to file comment which
they failed to do despite notice to them.

The absence of comment on the part of the private respondents notwithstanding, We resolve the petition without any
difficulty.

It is now well-settled that: “the Usury Law (Act No. 2655), by its letter and spirit, does not deprive the lender of his right to
recover of the borrower the money actually loaned — this only in the case that the interest collected is usurious. The law,
as it is now, does not provide for the forfeiture of the capital in favor of the debtor in usurious contract . . .” (Lopez and
Javelona vs. El Hogar Filipino, 47 Phil. 249, 275 [1925].)

True it is that in Briones vs. Cammayo, L-23559, Oct. 4, 1971; 41 SCRA 404, Chief Justice Concepcion and now Chief Justice
Fernando concurred with Justice Castro who opined that both loan and usurious interest are void. However, it must be
emphasized that eight other justices maintained that only the usurious interest is void but not the principal obligation.

CA AGRO-INDUSTRIAL DEVELOPMENT V. CA

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into an
agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of P350,625.00. Of
this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3) postdated checks. Among
the terms and conditions of the agreement embodied in a Memorandum of True and Actual Agreement of Sale of Land
were that the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the
owner’s copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be
deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a
representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio
Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company,
a domestic banking corporation hereinafter referred to as the respondent Bank. After the execution of the contract, two (2)
renter’s keys were given to the renters — one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key
remained in the possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and
the other for the renter’s key, and can be opened only with the use of both keys. Petitioner claims that the certificates of
title were placed inside the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00 per
square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a total of
P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed the
production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the
respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of title. However, when opened
in the presence of the Bank’s representative, the box yielded no such certificates. Because of the delay in the
reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the
petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a
complaint 2 for damages against the respondent Bank with the Court of First Instance (now Regional Trial Court) of Pasig,
Metro Manila which docketed the same as Civil Case No. 38382.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 78
Case Notes/Digests

In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action because of
paragraphs 13 and 14 of the contract of lease (Exhibit “2”); corollarily, loss of any of the items or articles contained in the
box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as well as
attorney’s fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim.

The unfavorable verdict is based on the trial court’s conclusion that under paragraphs 13 and 14 of the contract of lease,
the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are binding on the
parties.

Ruling

We agree with the petitioner’s contention that the contract for the rent of the safety deposit box is not an ordinary
contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is
a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19 the contract in the
case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643
because the full and absolute possession and control of the safety deposit box was not given to the renters — the
petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the
renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter’s
key. In this case, the said key had a duplicate which was made so that both renters could have access to the box.

Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also relied
upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first paragraph of such
provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such
documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter
being present.

We observe, however, that the deposit theory itself does not altogether find unanimous support even in American
jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a bank
renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the
bailment being for hire and mutual benefit.

Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of
funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into
orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs,
public order or public policy. The depositary’s responsibility for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is
found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 2 6 In the absence of any
stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. 27 Hence, any
stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud,
negligence or delay would be void for being contrary to law and public policy.

Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to
assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box
itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to
the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 79
Case Notes/Digests

using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void
and ineffective.

Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed,
but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank’s
exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of the
impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that
respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates
of title were withdrawable from the safety deposit box only upon both parties’ joint signatures, and that no evidence was
submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This
in turn flows from this Court’s determination that the contract involved was one of deposit. Since both the petitioner and
the Pugaos agreed that each should have one (1) renter’s key, it was obvious that either of them could ask the Bank for
access to the safety deposit box and, with the use of such key and the Bank’s own guard key, could open the said box,
without the other renter being present.

DELGADO V. BONNEVIE

When Pedro Bonnevie and Francisco Arandez formed in Nueva Caceres, Ambos Camarines, a regular general partnership
for engaging in the business of threshing paddy (grains convertible into rice), Vicente Delgado undertook to deliver to them
paddy for this purpose to be cleaned and returned to him as rice, with the agreement of paying them 10 centimos for
each cavan and to have returned in rice one-half the amount received as paddy.

On February 6, 1909, Vicente Delgado appeared in the Court of First Instance of Ambos Camarines with said receipts,
demanding return of the said 2,003 and a half cavanes of paddy, or in the absence thereof, of the price of said article at the
rate of 3 persons the cavan or 6,009 pesos and 50 centimos, with interest thereon at 6 per cent a year reckoning from
November 21, 1905, until complete payment, and the costs. The plaintiff asked that the interest run from November 21,
1905, because on the date his counsel demanded of the defendants, Bonnevie and Arandez, their partnership having been
dissolved, that they settle the accounts in this matter.

With reference to the first, it is acknowledged that the obligation of the appellants arose primarily out of the contract of
deposit, but this deposit was later converted into a contract of hire of services, and this is true. But it is also true that, after
the object of the hire of services had been fulfilled, the rice in every way remained as a deposit in the possession of the
appellants for them to return to the depositor at any time they might be required to do so, and nothing has relieved them
of this obligation; neither the dissolution of the partnership that united them, nor the revolutionary movement of a political
character that seems to have occurred in 1898, nor the fact that they may at some time have lost possession of the rice.

With reference to the second question, or under title of deposit or hire of services, the possession of the appellants can in
no way amount to prescription, for the thing received on deposit or for hire of services could not prescribe, since for every
prescription of ownership the possession must be in the capacity of an owner, public, peaceful, and uninterrupted (Civil
Code, 1941); and the appellants could not possess the rice in the capacity of owners, taking for granted that the depositor
or lessor never could have believed that he had transferred to them ownership of the thing deposited or leased, but
merely the care of the thing on deposit and the use or profit thereof; which is expressed in legal terms by saying that the
possession of the depositary or of the lessee is not adverse to that of the depositor or lessor, who continues to be the
owner of the thing which is merely held in trust by the depositary or lessee.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 80
Case Notes/Digests

In strict law, the deposit, when it is of fungible goods received by weight, number, or measurement, becomes a mutual
loan, by reason of the authorization which the depositary may have from the depositor to make use of the goods deposited.
(Civil Code, 1768, and Code of Commerce, 309.)

But in the present case neither was there authorization of the depositor nor did the depositaries intend to make use of
the rice for their own consumption or profit; they were merely released from the obligation of returning the same thing
and contracted in lieu thereof the obligation of delivering something similar to the half of it, being bound by no fixed terms,
the opposite of what happens in a mutual loan, to make the delivery or return when and how it might please the depositor.

BANK OF THE PHILIPPINE ISLANDS V. CA

Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), an officer and stockholder of Eastern,
held at least one joint bank account (“and/or” account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-
interest of petitioner Bank of the Philippine Islands (BPI). Sometime in March 1975, a joint checking account (“and”
account) with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account
of Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The
money therein was placed in the money market.

Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as “Additional Working Capital,”
evidenced by the “Disclosure Statement on Loan/Credit Transaction” (Disclosure Statement) signed by CBTC through its
branch manager, Ceferino Jimenez, and Eastern, through Lim, as its President and General Manager. 4 The loan was
payable on demand with interest at 14% per annum.

For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00 payable on demand to the order
of CBTC with interest at 14% per annum. 5 The note was signed by Lim both in his own capacity and as President and
General Manager of Eastern. No reference to any security for the loan appears on the note. In the Disclosure Statement,
the box with the printed word “UNSECURED” was marked with “X”. — meaning unsecured, while the line with the words
“this loan is wholly/partly secured by” is followed by the typewritten words “Hold-Out on 1:1 on C/A No. 2310-001-42,”
which refers to the joint account of Velasco and Lim with a balance of P331,261.44.

In addition, Eastern and Lim, and CBTC signed another document entitled “Holdout Agreement,” also dated 18 August
1978, 6 wherein it was stated that “as security for the Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a
holdout on said [Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged
interests therein as these may appear as a result of final and definitive judicial action or a settlement between and among
the contesting parties thereto.”

In the meantime, a case for the settlement of Velasco’s estate was filed with Branch 152 of the RTC of Pasig, entitled “In re
Intestate Estate of Mariano Velasco,” and docketed as Sp. Proc. No. 8959. In the said case, the whole balance of
P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco’s estate. On 9
September 1986, the intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the
joint account of Lim and Velasco and authorized the heirs to divide among themselves the amount withdrawn.

Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the RTC of Manila a complaint against
Lim and Eastern demanding payment of the promissory note for P73,000.00. The complaint was docketed as Civil Case No.
87-42967 and was raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo. Defendants Lim
and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of the
Holdout Agreement and the interests thereon after deducting the amount due on the promissory note.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 81
Case Notes/Digests

On 22 April 1992, BPI failed the instant petition alleging therein that the Holdout Agreement in question was subject to a
suspensive condition stated therein, viz., that the “P331,261.44 shall become a security for respondent Lim’s promissory
note only if respondents’ Lim and Eastern Plywood Corporation’s interests to that amount are established as a result of a
final and definitive judicial action or a settlement between and among the contesting parties thereto.” 15 Hence, BPI
asserts, the Court of Appeals erred in affirming the trial court’s decision dismissing the complaint on the ground that it was
the duty of CBTC to debit the account of the defendants to set off the amount of P73,000.00 covered by the promissory
note.

Private respondents Eastern and Lim dispute the “suspensive condition” argument of the petitioner. They interpret the
findings of both the trial and appellate courts that the money deposited in the joint account of Velasco and Lim came from
Eastern and Lim’s own account as a finding that the money deposited in the joint account of Lim and Velasco “rightfully
belong[ed] to Eastern Plywood Corporation and/or Benigno Lim.” And because the latter are the rightful owners of the
money in question, the suspensive condition does not find any application in this case and the bank had the duty to set off
this deposit with the loan. They add that the ruling of the lower court that they own the disputed amount is the final and
definitive judicial action required by the Holdout Agreement; hence, the petitioner can only hold the amount of P73,000.00
representing the security required for the note and must return the rest.

Ruling

The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note is an unconditional promise
to pay the said amount, and as stated by the respondent Court of Appeals, “[t]here is no question that the promissory note
is a negotiable instrument.” 17 It further correctly ruled that BPI was not a holder in due course because the note was not
indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid transfer to make BPI
a holder in due course. It acquired the note from CBTC by the contract of merger or sale between the two banks. BPI,
therefore, took the note subject to the Holdout Agreement.

We disagree, however, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear from paragraph
02 thereof that CBTC, or BPI as its successor-in-interest, had every right to demand that Eastern and Lim settle their liability
under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco’s joint account to the
payment of the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is under no duty
or obligation to make the application. 18 To apply the deposit to the payment of a loan is a privilege, a right of set-off
which the bank has the option to exercise.

Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any way
precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan. What it
provides is an alternative, not an exclusive, method of enforcing its claim on the note. When it demanded payment of the
debt directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit subject of the
Holdout Agreement to the payment of the promissory note for P73,000.00. Its suit for the enforcement of the note was
then in order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A
No. 2310-001-42 which BPI should have debited. The Court of Appeals also erred in affirming such dismissal.

The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the return of the
P331,261.44 20 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980
of the Civil Code expressly provides that “[f]ixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan.” In Serrano vs. Central Bank of the Philippines, 21 we held that
bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship
then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an
ordinary bank deposit; hence, it was payable on demand of the depositor.
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 82
Case Notes/Digests

The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As
the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved
of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the
account. The petitioner should not have allowed such withdrawal because IT HAD ADMITTED in the Holdout Agreement
the questioned ownership of the money deposited in the account. As early as 12 May 1979, CBTC was notified by the
Corporate Secretary of Eastern that the deposit in the joint account of Velasco and Lim was being claimed by them and that
one-half was being claimed by the heirs of Velasco.

Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw the account.
BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do
so. The authorization given to the heirs of Velasco cannot be construed as a final determination or adjudication that the
account belonged to Velasco. We have ruled that when the ownership of a particular property is disputed, the
determination by a probate court of whether that property is included in the estate of a deceased is merely provisional
in character and cannot be the subject of execution.

Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had no right to
pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive
payment is indisputable. The payment of the money deposited with BPI that will extinguish its obligation to the creditor-
depositor is payment to the person of the creditor or to one authorized by him or by the law to receive it. 25 Payment
made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or
negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error
induced by fraud of a third person. 26 The payment then by BPI to the heirs of Velasco, even if done in good faith, did not
extinguish its obligation to the true depositor, Eastern.

TEOFISTO GUINGONA JR. V. CITY FISCAL OF MANILA

As can be gleaned from the above, the instant petition seeks to prohibit public respondents from proceeding with the
preliminary investigation of I.S. No. 81-31938, in which petitioners were charged by private respondent Clement David, with
estafa and violation of Central Bank Circular No. 364 and related regulations regarding foreign exchange transactions
principally, on the ground of lack of jurisdiction in that the allegations of the charged, as well as the testimony of private
respondent’s principal witness and the evidence through said witness, showed that petitioners’ obligation is civil in nature.

From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan Association, (hereinafter called
NSLA) the sum of P1,145,546.20 on time deposits, P13,531.94 on savings account deposits (jointly with his sister, Denise
Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment and US$50,000.00 under a
receipt dated June 8, 1980 (all jointly with Denise Kuhne), that David was induced into making the aforestated
investments by Robert Marshall, an Australian national who was allegedly a close associate of petitioner Guingona Jr., then
NSLA President, petitioner Martin, then NSLA Executive Vice-President and petitioner Santos, then NSLA General Manager;
that on March 21, 1981 NSLA was placed under receivership by the Central Bank, so that David filed claims therewith for his
investments and those of his sister; that on July 22, 1981 David received a report from the Central Bank that only
P305,821.92 of those investments were entered in the records of NSLA; that, therefore, the respondents in I.S. No. 81-
31938 misappropriated the balance of the investments, at the same time violating Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange transactions; that after demands, petitioner Guingona Jr. paid only
P200,000.00, thereby reducing the amounts misappropriated to P959,078.14 and US$75,000.00.

But, after the presentation of David’s principal witness, petitioners filed the instant petition because: (a) the production of
the Promissory Notes, Banker’s Acceptance, Certificates of Time Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were novated
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 83
Case Notes/Digests

when Guingona, Jr. and Martin assumed them; and (b) David’s principal witness allegedly testified that the duplicate
originals of the aforesaid instruments of indebtedness were all on file with NSLA, contrary to David’s claim that some of his
investments were not recorded (Petition, pp. 8-9).

Issue

As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public respondents acted without
jurisdiction when they investigated the charges (estafa and violation of CB Circular No. 364 and related regulations
regarding foreign exchange transactions) subject matter of I.S. No. 81-31938.

Ruling

Moreover, the records reveal that when the aforesaid bank was placed under receivership on March 21, 1981,
petitioners Guingona and Martin, upon the request of private respondent David, assumed the obligation of the bank to
private respondent David by executing on June 17, 1981 a joint promissory note in favor of private respondent
acknowledging an indebtedness of P1,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory note was based on the
statement of account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness
assumed appears to be bigger than the original claim because of the added interest and the inclusion of other deposits of
private respondent’s sister in the amount of P116,613.20.

It must be pointed out that when private respondent David invested his money on time and savings deposits with the
aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. It
should be noted that fixed, savings, and current deposits of money in banks and similar institutions are not true deposits.
They are considered simple loans and, as such, are not preferred credits (Art. 1980 Civil Code).

Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank
deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans (Art. 1980,
Civil Code; Gullas vs. Phil. National Bank, 62 Phil. 519). Current and savings deposits are loans to a bank because it can use
the same. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a
breach of trust arising from a depository’s failure to return the subject matter of the deposit”

Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and
debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the
contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and
to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to
return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not
constitute estafa through misappropriation punishable under Article 315, par. 1(b) of the Revised Penal Code, but it will
only give rise to civil liability over which the public respondents have no jurisdiction.

It can be readily noted from the above quoted provisions that in simple loan (mutuum), as contrasted to commodatum, the
borrower acquires ownership of the money, goods or personal property borrowed. Being the owner, the borrower can
dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof”.

But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would
constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal
liability was deemed avoided, because when the aforesaid bank was placed under receivership by the Central Bank,
petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in
the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 84
Case Notes/Digests

trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the
petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the
deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as
a debtor. Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the rise of
criminal liability as long as it occurs prior to the filing of the criminal information in court.

DURAN V. IAC

The antecedent facts showed that petitioner Circe S. Duran owned two (2) parcels of land (Lots 5 and 6, Block A, Psd 32780)
covered by Transfer Certificate of Title No. 1647 of the Register of Deeds of Caloocan City which she had purchased from
the Moja Estate. She left the Philippines in June 1954 and returned in May 1966.

On May 13, 1963, a Deed of Sale of the two lots mentioned above was made in favor of Circe’s mother, Fe S. Duran who, on
December 3, 1965, mortgaged the same property to private respondent Erlinda B. Marcelo-Tiangco. When petitioner Circe
S. Duran came to know about the mortgage made by her mother, she wrote the Register of Deeds of Caloocan City
informing the latter that she had not given her mother any authority to sell or mortgage any of her properties in the
Philippines. Failing to get an answer from the registrar, she returned to the Philippines. Meanwhile, when her mother, Fe S.
Duran, failed to redeem the mortgage properties, foreclosure proceedings were initiated by private respondent Erlinda B.
Marcelo-Tiangco and, ultimately, the sale by the sheriff and the issuance of Certificate of Sale in favor of the latter.

Petitioner Circe S. Duran claims that the Deed of Sale in favor of her mother Fe S. Duran is a forgery, saying that at the time
of its execution in 1963 she was in the United States. On the other hand, the adverse party alleges that the signatures of
Circe S. Duran in the said Deed are genuine and, consequently, the mortgage made by Fe S. Duran in favor of private
respondent is valid.

Ruling of CA

With respect to the issue as to whether the signature of petitioner Circe S. Duran in the Deed of Sale is a forgery or not,
respondent appellate court held the same to be genuine because there is the presumption of regularity in the case of a
public document and “the fact that Circe has not been able to satisfactorily prove that she was in the United States at the
time the deed was executed in 1963. Her return in 1966 does not prove she was not here also in 1963, and that she did not
leave shortly after 1963. She should have presented her old passport, not her new one. But even if the signatures were a
forgery, and the sale would be regarded as void, still it is Our opinion that the Deed of Mortgage is VALID, with respect to
the mortgagees, the defendants-appellants. While it is true that under Art. 2086 of the Civil Code, it is essential that the
mortgagor be the absolute owner of the property mortgaged, and while as between the daughter and the mother, it was
the daughter who still owned the lots, STILL insofar as innocent third persons are concerned the owner was already the
mother (Fe S. Duran) inasmuch as she had already become the registered owner (Transfer Certificates of Title Nos. 2418
and 2419). The mortgagee had the right to rely upon what appeared in the certificate of title, and did not have to inquire
further. If the rule were otherwise, the efficacy and conclusiveness of Torrens Certificate of Titles would be futile and
nugatory. Thus the rule is simple: the fraudulent and forged document of sale may become the root of a valid title if the
certificate has already been transferred from the name of the true owner to the name indicated by the forger.

Ruling of the Court

Guided by previous decisions of this Court, good faith consists in the possessor’s belief that the person from whom he
received the thing was the owner of the same and could convey his title (Arriola vs. Gomez dela Serna, 14 Phil. 627). Good
faith, while it is always to be presumed in the absence of proof to the contrary, requires a well-founded belief that the
person from whom title was received was himself the owner of the land, with the right to convey it (Santiago vs. Cruz, 19
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 85
Case Notes/Digests

Phil. 148). There is good faith where there is an honest intention to abstain from taking any unconscientious advantage
from another (Fule vs. Legare, 7 SCRA 351). Otherwise stated, good faith is the opposite of fraud and it refers to the state of
mind which is manifested by the acts of the individual concerned. In the case at bar, private respondents, in good faith
relied on the certificate of title in the name of Fe S. Duran and as aptly stated by respondent appellate court “[e]ven on the
supposition that the sale was void, the general rule that the direct result of a previous illegal contract cannot be valid (on
the theory that the spring cannot rise higher than its source) cannot apply here for We are confronted with the functionings
of the Torrens System of Registration. The doctrine to follow is simple enough: a fraudulent or forged document of sale
may become the ROOT of a valid title if the certificate of title has already been transferred from the name of the true
owner to the name of the forger or the name indicated by the forger.”

Thus, where innocent third persons relying on the correctness of the certificate of title issued, acquire rights over the
property, the court cannot disregard such rights and order the total cancellation of the certificate for that would impair
public confidence in the certificate of title; otherwise everyone dealing with property registered under the torrens system
would have to inquire in every instance as to whether the title had been regularly or irregularly issued by the court. Indeed,
this is contrary to the evident purpose of the law. Every person dealing with registered land may safely rely on the
correctness of the certificate of title issued therefor and the law will in no way oblige him to go behind the certificate to
determine the condition of the property. Stated differently, an innocent purchaser for value relying on a torrens title issued
is protected. A mortgagee has the right to rely on what appears in the certificate of title and, in the absence of anything to
excite suspicion, he is under no obligation to look beyond the certificate and investigate the title of the mortgagor
appearing on the face of said certificate.

Likewise, We take note of the finding and observation of respondent appellate court in that petitioners were guilty of 85oi
tong85 by laches “in not bringing the case to court within a reasonable period. Antero Gaspar, husband of Circe, was in the
Philippines in 1964 to construct the apartment on the disputed lots. This was testified to by Circe herself (tsn., p. 41, Nov.
27, 1973). In the process of construction, specifically in the matter of obtaining a building permit, he could have discovered
that the deed of sale sought to be set aside had been executed on May 13, 1963 (the building permit needed an application
by the apparent owner of the land, namely, Circe’s mother, Fe S. Duran). And then again both plaintiffs could have
intervened in the foreclosure suit but they did not. They kept silent until almost the last moment when they finally decided,
shortly before the sheriff’s sale, to file a third-party claim. Clearly, the plaintiffs can be faulted for their 85oi tong85 by
laches.”

CABUHAT V. CA

Mary Ann Arede was barely three days old when appellant Mercedes Arede informally adopted her as the latter’s own
daughter. In December, 1972, appellant purchased a parcel of land situated in Bagbag, Ligtong, Rosario, Cavite comprising
an area of 1,313 square meters. The said land was registered by appellant in Mary Ann Arede’s name and the
corresponding title was issued by the Register of Deeds of Cavite on December 9, 1972 as Transfer Certificate of Title No. T-
56225. According to appellant, the said title was always in her possession which she kept in a locked drawer in her
residence.

Upon reaching the age of majority and unknown to appellant, Mary Ann Arede obtained a reconstituted owner’s duplicate
of TCT No. T-56225 (Exhibit “D”) thru the use of a falsified court order (Exhibit “B”) supposedly issued by the Regional Trial
Court of Cavite, Branch 17, on December 16, 1988, whereby the court purportedly directed the Register of Deeds of Cavite
to issue another owner’s duplicate copy of TCT No. T-56225, which Mary Ann Arede claimed to have lost. Using this
reconstituted title, Mary Ann Arede mortgaged the land to the Rural Bank of Noveleta, Cavite on February 28, 1989. Upon
release of the mortgage, the land was again mortgaged by Mary Ann Arede on May 16, 1990, this time to appellee

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Flordeliza Cabuhat for the amount of P300,000.00, which mortgage was registered by appellee on the following day at the
Register of Deeds of Cavite.

It appeared however that prior to the second mortgage on May 16, 1990, the subject lot was sold by Mary Ann Arede to
appellant Mercedes Arede in consideration of the sum of P100,000.00 as evidenced by a Deed of Sale dated January 17,
1990 (Annex E, Record, p. 17). Unfortunately, this sale was not registered by appellant. Hence, upon knowledge of the
mortgage to appellee Cabuhat, appellant was prompted to commence the instant suit for annulment of title.

Mercedes appealed to the Court of Appeals, seeking a reversal of the portion of the above-quoted decision upholding the
mortgage lien in Flordeliza’s favor. Mercedes argued that mortgage lien was invalid because: (1) the registration was
procured through the presentation of a forged owner’s duplicate certificate of title, in violation of Section 53 of Presidential
Decree 1529; and (2) the mortgage constituted when Mary Ann was no longer the absolute owner of the subject property
contravened Article 2085 of the New Civil Code.

On January 9, 1995, the Court of Appeals rendered judgment granting the late Mercedes’ appeal (she died during the
pendency of the appeal), reversing and setting aside the trial court’s decision upholding the mortgage lien in favor of
Flordeliza.

Ruling

The Court of Appeals, in reversing the decision of the trial court, relied solely on the provisions of Article 2085 of the New
Civil Code, which states, in part, that for a mortgage to be valid, the persons constituting the pledge or mortgage should
have the free disposal of their property, and in the absence thereof, they should be legally authorized for the purpose. It
also cited the 1954 case of Parqui v. PNB, 3 wherein the mortgage was declared null and void since the registration thereof
was procured by the presentation of a forged deed.

However, it is well-settled that even if the procurement of a certificate of title was tainted with fraud and
misrepresentation, such defective title may be the source of a completely legal and valid title in the hands of an innocent
purchaser for value. Just as an innocent purchaser for value may rely on what appears in the certificate of title, a mortgagee
has the right to rely on what appears in the title presented to him, and in the absence of anything to excite suspicion, he is
under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of the
said certificate. 6 Furthermore, it is a well-entrenched legal principle that when an innocent mortgagee who relies upon the
correctness of a certificate of title consequently acquires rights over the mortgaged property, the courts cannot disregard
such rights.

Article 2085 of the Civil Code, which requires that the mortgagor must have free disposal of the property, or at least have
legal authority to do so, admits of exceptions. In quite a number of instances, this Court has ruled that the said provision
does not apply where the property involved is registered under the Torrens System.

Setting aside the general rule and applying instead the exception is not without legal or statutory basis. In the case
of Medina v. Chanco, 10 we held: It is very clear from Section 55 of the Land Registration Act that although an original
owner of a registered land may seek the annulment of a transfer thereof on the ground of fraud, such a remedy, however,
is “without prejudice to the rights of any innocent holder for value” of the certificate of title.

Then in Penullar v. PNB, 11 this Court resolved a similar issue ruling that Section 38 of the Land Registration Act places an
innocent mortgagee for value under the mantle of protection accorded to innocent purchasers for value.
Furthermore, Section 39 of Act No. 496 provides that every person receiving a certificate of title in pursuance of a decree of

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registration, and every subsequent purchaser (or mortgagee) of registered land who takes a certificate of title for value in
good faith, shall hold the same free of all encumbrance except those noted on said certificate.

The court does not intend to disregard the long line of its decisions holding that “where innocent third persons, relying on
the correctness of the certificate of title thus issued, acquire rights over the property, the court cannot disregard such rights
and order the total cancellation of the certificate.” It is true that the effect of such cancellation would be to impair public
confidence in the certificate of title, for everyone dealing with property registered under the Torrens System would have to
inquire in every instance as to whether the title has been regularly or irregularly issued. This is contrary to the evident
purpose of Act 496, Sec. 39, as “innocent purchasers for value” or any innocent lessee, mortgagee or other encumbrances
for value. A mortgagee has the right to rely on what appears in the certificate of title, and in the absence of anything to
excite suspicion, is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on
the face of the certificate.

On the basis of these statutory provisions, this Court has uniformly held that when a mortgagee relies upon what appears
on the face of a Torrens title and loans money in all good faith on the basis of the title in the name of the mortgagor, only
thereafter to learn that the latter’s title was defective, being thus an innocent mortgagee for value, his or her right or lien
upon the land mortgaged must be respected and protected, even if the mortgagor obtained her title thereto through fraud.

In the case at bar, there is no doubt that petitioner was an innocent mortgagee for value. When Mary Ann mortgaged the
subject property, she presented to petitioner Flordeliza an owner’s duplicate certificate of title that had been issued by the
Register of Deeds. The title was neither forged nor fake. Petitioner had every right to rely on the said title which showed
on its face that Mary Ann was the registered owner. There was no reason to suspect that Mary Ann’s ownership was
defective. Besides, even if there had been a cloud of doubt, Flordeliza would have found upon verification with the
Register of Deeds that Mary Ann was the titled owner (insofar as the RD is concerned, she is the registered owner
notwithstanding the fact that the court order was falsified) and that the original title on file with the said office was free
from any lien or encumbrance, and that no adverse claim of ownership was annotated thereon.

Petitioner’s reliance on the clean title of Mary Ann was reinforced by the fact that the latter had previously mortgaged the
same property to a bank which accepted the property as collateral on the strength of the same owner’s duplicate copy of
the title presented by Mary Ann. Certainly, petitioner Flordeliza cannot be expected or obliged to inquire whether the said
owner’s duplicate copy presented to her was regularly or irregularly issued, when by its very appearance there was no
reason to doubt its validity. Where there is nothing in the certificate of title that would indicate any cloud or vice in the
ownership of the property, or any encumbrance thereon, the mortgagee is not required to explore further than what the
certificate of title on its face indicates in search of any hidden defect or inchoate right that may thereafter defeat her right
thereto.

In fact, respondent never questioned petitioner Flordeliza’s good faith in accepting the subject property as security for the
loan and in having the mortgage registered and annotated on the title. Neither was there an allegation that the petitioner
was a party or even privy to Mary Ann’s alleged fraudulent acts to secure another owner’s duplicate copy. There is,
therefore, no reason to doubt petitioner’s good faith in entering into the mortgage transaction with Mary Ann.

We are not unmindful of the fact that both petitioner and respondent are innocent parties who have been forced to litigate
due to the duplicitous acts of Mary Ann, who has not even bothered to make an appearance or participate throughout the
litigation of this case. Nevertheless, there is an equitable maxim that between two innocent persons, the one who made it
possible for the wrong to be done should be the one to bear the resulting loss. 18 It cannot be denied that Mercedes, in her
failure or neglect to register the sale in her favor made it possible for Mary Ann to mortgage the subject property to the
petitioner. Having failed to properly safeguard her own rights, she cannot ask the courts to come to her rescue, when to do

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San Beda College Alabang School of Law
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so would be at the expense of an innocent mortgagee in good faith. The law and jurisprudence dictate that petitioner’s
right as a registered mortgagee in good faith and for value is better deserving of protection.

FRANCISCO REALTY V. CA

Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private respondents, the
spouses Romulo and Erlinda Javillonar, in consideration of which the latter executed the following documents:
(a) a promissory note, dated November 27, 1991, stating an interest charge of 4% per month for six months; (b) a deed of
mortgage over realty covered by TCT No. 58748, together with the improvements thereon; and (c); an undated deed of sale
of the mortgaged property in favor of the mortgagee, petitioner A. Francisco Realty.

The interest on the said loan was to be paid in four installments: half of the total amount agreed upon (P900,000.00) to be
paid in advance through adeduction from the proceeds of the loan, while the balance to be paid monthly by means of
checks post-dated March 27, April 27, and May 27, 1992. The promissory note expressly provided that upon “failure of the
MORTGAGOR [private respondents] to pay the interest without prior arrangement with the MORTGAGEE [petitioner], full
possession of the property will be transferred and the deed of sale will be registered.” 3 For this purpose, the owner’s
duplicate of TCT No. 58748 was delivered to petitioner A Francisco Realty.

Petitioner claims that private respondents failed to pay the interest and, as a consequence, it registered the sale of the land
in its favor on February 21, 1992. As a result, TCT No. 58748 was cancelled and in lieu thereof TCT No. PT-85569 was issued
in the name of petitioner A. Francisco Realty. (subsequently, the respondents acquired a new loan amounting to 2.5m php)

Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly interest from May 1992, plus
surcharges. As respondent spouses refused to vacate, petitioner filed the present action for possession before the Regional
Trial Court in Pasig City.

In their answer, respondents admitted liability on the loan but alleged that it was not their intent to sell the realty as the
undated deed of sale was executed by them merely as an additional security for the payment of their loan. Furthermore,
they claimed that they were not notified of the registration of the sale in favor of petitioner A.. Francisco Realty and that
there was no interest then unpaid as they had in fact been paying interest even subsequent to the registration of the sale.
As an alternative defense, respondents contended that the complaint was actually for ejectment and, therefore, the
Regional Trial Court had no jurisdiction to try the case. As counterclaim, respondents sought the cancellation of TCT No. PT-
85569 as secured by petitioner and the issuance of a new title evidencing their ownership of the property.

Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial court and dismissed the
complaint against them. The appellate court ruled that the Regional Trial Court had no jurisdiction over the case because it
was actually an action for unlawful detainer which is exclusively cognizable by municipal trial courts. Furthermore, it ruled
that, even presuming jurisdiction of the trial court, the deed of sale was void for being in fact a pactum
commissorium which is prohibited by Art. 2088 of the Civil Code.

Ruling of the Court

We think the appellate court is in error. What really distinguishes an action for unlawful detainer from a possessory action
(accion publiciana) and from a reivindicatory action (accion reivindicatoria) is that the first is limited to the question of
possession de facto.

An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms of an ejectment suit that may
be filed to recover possession of real property. Aside from the summary action of ejectment, accion publiciana or the

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San Beda College Alabang School of Law
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plenary action to recover the right of possession and accion reivindicatoria or the action to recover ownership which
includes recovery of possession, make up the three kinds of actions to judicially recover possession. Dctai

Illegal detainer consists in withholding by a person from another of the possession of a land or building to which the latter is
entitled after the expiration or termination of the former’s right to hold possession by virtue of a contract, express or
implied An ejectment suit is brought before the proper inferior court to recover physical possession only or possession de
facto and not possession de jure, where dispossession has lasted for not more than one year. Forcible entry and unlawful
detainer are quieting processes and the one-year time bar to the suit is in pursuance of the summary nature of the action.
The use of summary procedure in ejectment cases is intended to provide an expeditious means of protecting actual
possession or right to possession of the property. They are not processes to determine the actual title to an estate. If at all,
inferior courts are empowered to rule on the question of ownership raised by the defendant in such suits, only to resolve
the issue of possession. Its determination on the ownership issue is, however, not conclusive.

The allegations in both the original and the amended complaints of petitioner before the trial court clearly raise issues
involving more than the question of possession, to wit: (a) the validity of the transfer of ownership to petitioner; (b) the
alleged new liability of private respondents for P400,000.00 amonth from the time petitioner made its demand on them to
vacate; and (c) the alleged continuing liability of private respondents under both loans to pay interest and surcharges on
such.

On the second issue, the Court of Appeals held that, even “on the assumption that the trial court has jurisdiction over the
instant case,” petitioner’s action could not succeed because the deed of sale on which it was based was void, being in the
nature of a pactum commissorium prohibited by Art. 2088 of the Civil Code.

With respect to this question, the ruling of the appellate court should be affirmed. Petitioner denies, however, that the
promissory notes contain apactum commissorium.

Petitioner contends: What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the deed of
mortgage providing for the automatic conveyance of the mortgaged property in case of the failure of the debtor to pay the
loan, Thus, before Article 2088 can find application herein, the subject deed of mortgage must be scrutinized to determine
if it contains such a provision giving the creditor the right “to appropriate the things given by way of mortgage without
following the procedure prescribed by law for the foreclosure of the mortgage.

The contention is patently without merit. To sustain the theory of petitioner would be to allow a subversion of the
prohibition in Art. 2088. In Nakpil v. Intermediate Appellate Court, 15 which involved the violation of a constructive trust, no
deed of mortgage was expressly executed between the parties in that case. Nevertheless, this Court ruled that an
agreement whereby property held in trust was ceded to the trustee upon failure of the beneficiary to pay his debt to the
former as secured by the said property was void for being a pactum commissorium.

Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to be pacto de retro sales but
found actually to be equitable mortgages.

Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgage’s mere act of registering the mortgaged
property in his own name upon the mortgagor’s failure to redeem the property amounted to the excise of the privilege
of a mortgagee in a pactum commissorium.

Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of respondent spouses to pay
interest, ownership of the property would be automatically transferred to petitioner A. Francisco Realty and the deed of
sale in its favor would be registered, are in substance apactum commissorium.

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San Beda College Alabang School of Law
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Hey embody the two elements of pactum commissorium as laid; down in Uy Tong v. Court of Appeals, 20 to wit: The
aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or
mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and
(2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in
the event of non-payment of the principal obligation within the stipulated period.

DBP V. CA & LYDIA CUBA

Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated May 13, 1974 from the
Government; 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; As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of
her Leasehold Rights; Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the terms of the
Promissory Notes; Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP appropriated the
leasehold Rights of plaintiff Lydia Cuba over the fishpond in question; 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; 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.

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; Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale; Defendant DBP
thereafter sent a Notice of Rescission thru Notarial Act dated March 13, 1984, and which was received by plaintiff Lydia
Cuba; After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights of the fishpond in question;
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; That the DBP thereafter executed a
Deed of Conditional Sale in favor of defendant Agripina Caperal on August 6, 1984; Thereafter, defendant Caperal was
awarded Fishpond Lease Agreement No. 2083-A on December 28, 1984 by the Ministry of Agriculture and Food.

Issue

The principal issue presented was whether the act of DBP in appropriating to itself CUBA’s leasehold rights over the
fishpond in question without foreclosure proceedings was contrary to Article 2088 of the Civil Code and, therefore, invalid.
CUBA insisted on an affirmative resolution. DBP stressed that it merely exercised its contractual right under the
Assignments of Leasehold Rights, which was not a contract of mortgage. Defendant Caperal sided with DBP. (The RTC ruled
in favor of Cuba, while it was reversed on appeal by the Court of Appeals.

Ruling

It is undisputed that CUBA obtained from DBP three separate loans 90oi tong 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.”

Simultaneous with the execution of the notes was the execution of “Assignments of Leasehold Rights” 8 where CUBA
assigned her leasehold rights and interest on a 44-hectare fishpond, together with the improvements thereon. As pointed
out by CUBA, the deeds of assignment constantly referred to the assignor (CUBA) as “borrower”; the assigned rights, as
mortgaged properties; and the instrument itself, as mortgage contract. Moreover, under condition no. 22 of the deed, it
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San Beda College Alabang School of Law
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was provided that “failure to comply with the terms and condition of any of the loans shall cause all other loans to become
due and demandable and all mortgages shall be foreclosed.” And, condition no. 33 provided that if “ foreclosure is actually
accomplished, the usual 10% attorney’s fees and 10% liquidated damages of the total obligation shall be imposed.” There
is, therefore, no shred of doubt that a mortgage was intended. Besides, in their stipulation of facts the parties admitted
that the assignment was by way of security for the payment of the loans. In People’s Bank & Trust Co. vs. Odom, 9 this
Court had the occasion to rule that an assignment to guarantee an obligation is in effect a mortgage.

We find no merit in DBP’s contention that the assignment novated the promissory notes in that the obligation to pay a sum
of money the loans (under the promissory notes) was substituted by the assignment of the rights over the fishpond (under
the deed of assignment). As correctly pointed out by CUBA, the said assignment merely complemented or supplemented
the notes; both could stand together. The former was only an accessory to the latter. Contrary to DBP’s submission, the
obligation to pay a sum of money remained, and the assignment merely served as security for the loans covered by the
promissory notes. Significantly, both the deeds of assignment and the promissory notes were executed on the same dates
the loans were granted. Also, the last paragraph of the assignment stated: “The assignor further reiterates and states all
terms, covenants and conditions stipulated in the promissory note or notes covering the proceeds of this loan, making said
promissory note or notes, to all intent and purposes, an integral part thereof.”

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. (The parties intended in this case to have them as a mere security for the loans.)

We do not, however, buy CUBA’s argument that condition no. 12 of the deed of assignment constituted pactum
commissorium. 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.

Condition no. 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon
CUBA’s failure to pay the loan on time. It merely provided for the appointment of DBP as attorney-in-fact with authority,
among other things, to sell or otherwise dispose of the said real rights, in case of default by CUBA, and to apply the
proceeds to the payment of the loan. This provision is a standard condition in mortgage contracts and is in conformity
with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the mortgage and alienate the
mortgaged property for the payment of the principal obligation.

DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As admitted by it during the
pre-trial, it had “without 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. It is obvious from the above-
quoted paragraphs that DBP had appropriated and taken ownership of CUBA’s leasehold rights merely on the strength of
the deed of assignment.

DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of appropriating the leasehold rights.
As stated earlier, condition no. 12 did not provide that CUBA’s default would operate to vest in DBP ownership of the said
rights. Besides an assignment to guarantee an obligation, as in the present case, is virtually a mortgage and not an
absolute conveyance of title which confers ownership on the assignee.

At any rate, DBP’s act of appropriating CUBA’s 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.
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San Beda College Alabang School of Law
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The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop her from questioning
DBP’s act of appropriation. Estoppel is unavailing in this case. As held by this Court in some cases, 13 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 estoppels.

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 spouses] to
pay their loan amortizations.” 14 This only goes to show that DBP was aware of the necessity of foreclosure proceedings.

HECHANOVA V. ADIL

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.

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.”

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 in 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.

REYES V. SIERRA

On January 3, 1961, Vicente Reyes filed an application for registration of his title to a parcel of land situated in Antipolo,
Rizal and covered by Plan Psu-189753 of the Bureau of Lands. In his application, he declared that he acquired the land by
inheritance from his father who died sometime in 1944. Applicant is one of the heirs of the deceased Vicente Reyes Sr. but
the other heirs executed a deed of quit claim in favor of the applicant.

The notice of initial hearing was published in the Official Gazette, and a copy thereof was posted in a conspicuous place in
the land in question and in the municipal building of Antipolo, Rizal. An opposition was filed by the Director of Lands,
Francisco Sierra and Emilio Sierra. An Order of General Default was issued on June 28, 1962. A motion to set aside an
interlocutory default order was filed by Alejandra, Felimon, Aurelio, Apolonio, Constancio, Cirilo, all surnamed Sierra and
Antonia Santos, thru counsel, and the trial court issued an Order on February 4, 1966 amending the general order of default
so as to include the aforementioned movants as oppositors.

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San Beda College Alabang School of Law
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The land applied for was originally owned by Basilia Beltran’s parents, and upon their death in 1894, Basilia inherited the
property. On April 19, 1926, Basilia Beltran, a widow, borrowed from applicant’s father, Vicente Reyes, Sr. the amount of
P100.00 and secured the loan with the piece of land in question.

Since the execution of this document, Vicente Reyes, Sr. began paying the realty taxes up to the time of his death in 1944,
after which, his children continued paying the taxes. Basilia Beltran died in 1938 before Reyes could recover from the loan.

Applicant, in seeking the registration of the land, relied on his belief that the property belongs to his father who bought the
same from Basilia Beltran, as borne out by his testimony during the trial on direct examination.

From the above-quoted testimony of applicant, it is evident that he considered the document marked Exhibit “D” as
contract of Saleand not as a mortgage. Oppositors contended that the words “isinangla,” “na ipananagutan sa inutang na
halagang isang daang piso,” “Kahit isangla o ipagbili,” etc., manifest that the document should be treated as a mortgage,
antichresis, or pactum commissorium and not as an absolute sale or pacto de retro sale.

Ruling

The Court is of the opinion that Exhibit “D” is a mortgage contract. The intention of the parties at the time of the execution
of the contract must prevail, that is, the borrowing and lending of money with security. The use of the word Debt (utang) in
an agreement helps to point out that the transaction was intended to be a loan with mortgage, because the term “utang”
implies the existence of a creditor-debtor relationship. The Court has invariably upheld the validity of an agreement or
understanding whereby the lender of money has taken a deed to the land as security for repayment of the loan.

The fact that the real transaction between the parties was a borrowing and lending, will, whenever, or however, it may
appear, show that a deed, absolute on its face, was intended as a security for money; and whenever it can be ascertained
to be a security for money, it is only a mortgage, however artfully it may be disguised.” The whole case really turns on the
question of whether the written instrument in controversy was a mortgage or a conditional sale . . . The real intention of
the parties at the time the written instrument was made must govern in the interpretation given to it by the courts . . . The
correct test, where it can be applied, is the continued existence of a debt or liability between the parties. If such exists,
the conveyance may be held to be merely a security for the debt or an indemnity against the liability.”

The doctrine has been firmly established from an early day that when the character of a mortgage has attached at the
commencement of the transaction, so that the instrument, whatever be its form, is regarded in equity as a mortgage, that
character of mortgage must and will always continue. If the instrument is in its essence a mortgage, the parties cannot by
any stipulations, however express and positive, render it anything but a mortgage or deprive it of the essential attributes
belonging to a mortgage in equity.”

Obviously, from the nature of the transaction, applicant’s predecessor-in-interest is a mere mortgagee, and ownership of
the thing mortgaged is retained by Basilia Beltran, the mortgagor. The mortgagee, however, may recover the loan,
although the mortgage document evidencing the loan was non-registrable being a purely private instrument. Failure of
mortgagor to redeem the property does not automatically vest ownership of the property to the mortgagee, which would
grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of
the New Civil Code. The act of applicant in registering the property in his own name upon mortgagor’s failure to redeem the
property would amount to a pactum commissorium which is against good morals and public policy.

In declaring applicant as the “true and rightful owner of the land in question,” the trial court held that applicant and his
predecessor-in-interest acquired ownership over the property by means of prescription having been in constructive
possession of the land applied for since 1926, applying Arts. 1134 and 1137 of the New Civil Code.

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San Beda College Alabang School of Law
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Applicant in his testimony on cross-examination, admitted that he and his father did not take possession of the property
but only made use of the same for the purpose of spending vacation there, which practice they discontinued for the last 23
years. Possession of the property must be in the concept of an owner. This is a fundamental principle of the law of
prescription in this jurisdiction. In the case at bar, the possession of applicant was not adverse, nor continuous.

An applicant for registration of title must prove his title and should not rely on the absence or weakness of the evidence of
the oppositors. For purposes of prescription, there is just title when adverse claimant came into possession of the property
through one of the modes recognized by law for the acquisition of ownership (Art. 1129, New Civil Code). Just title must be
proved and is never presumed (Art. 1131, New Civil Code). Mortgage does not constitute just title on the part of the
mortgagee since ownership is retained by the mortgagor.

The belief of applicant that he owns the property in question which he inherited from his father cannot overthrow the fact
that the transaction is a mortgage. The doctrine “once a mortgage always a mortgage” has been firmly established
whatever be its form. (Macapinlac vs. Gutierrez Rapide, supra) The parties cannot by any stipulation, however express and
positive, render it anything but a mortgage. No right passes to applicant except that of a mortgage since one cannot acquire
a right from another who was not in possession thereof. A derivative right cannot rise higher than its source.

PHILIPPINE NATIONAL BANK V. BANATAO

On November 16, 1962, Banatao, et al. (plaintiffs-respondents) initiated an action docketed as Civil Case No. 1600 against
Marciano Carag (one of the defendants-respondents) before the Regional Trial Court (RTC), Branch IV, Tuguegarao,
Cagayan. 2 The action was for the recovery of real property (disputed property) situated at Malabac, Iguig, Cagayan. The
disputed property was a new land formation on the banks of the Cagayan River — an accretion to Lot 3192 of the Iguig
Cadastre — that the plaintiffs-respondents claimed as the owners of the adjoining Lot 3192. The defendants-respondents,
on the other hand, were the occupants of the disputed property.

The records show that while the case was pending, the defendants-respondents (particularly the spouses Pedro Soriano
and Paz Tagacay, the spouses Eugenio Soriano and Maria Cauilan, the spouses Benjamin Tagacay and Fausta Agustin, and
Milagros B. Carag — wife of Marciano Carag) were able to secure homestead patents evidenced by Original Certificates of
Title (OCTs) issued in their names, denominated as OCT Nos. 24800, 24801, 25217, and 25802, respectively. 3 The OCTs
were issued in 1965 and 1966, and all bear the proviso that, in accordance with the Public Land Act, the patented
homestead shall neither be alienated nor encumbered for five (5) years from the date of the issuance of the patent.

Armed with their OCTs, the defendants-respondents separately applied for loans with the Philippine National Bank (PNB or
the bank)secured by real estate mortgages on their respective titled portions of the disputed property. The bank approved
the mortgages, relying solely on the OCTs which, at the time, did not contain any notice of lis pendens or annotation of
liens and encumbrances. The PNB mortgages were annotated on the defendants-respondents’ respective OCTs also in the
years 1965 and 1966.

The records disclose that on March 29, 1973, while the case was pending before the trial court, the bank extrajudicially
foreclosed the property covered by OCT No. 24800 issued to the spouses Pedro Soriano and Paz Tagacay. The bank was
declared the highest bidder in the ensuing public auction. The spouses Soriano failed to redeem the foreclosed property,
resulting in the consolidation of title in the bank’s name; hence, the issuance on October 3, 1985 of TCT No. T-65664 in the
name of the bank.

On February 28, 1991, the plaintiffs-respondents and the defendants-respondents entered into a compromise agreement
whereby ownership of virtually the northern half of the disputed property was ceded to the plaintiffs-respondents, while
the remaining southern half was given to the defendants-respondents. 10 In the same compromise agreement, the

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San Beda College Alabang School of Law
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defendants-respondents acknowledged their indebtedness to petitioner PNB and bound themselves to pay their respective
obligations to the bank, including the interests accruing thereon. Petitioner PNB, however, was not a party to the
compromise agreement.

The compromise agreement disposed of the first two causes of action filed by plaintiffs-respondents Banatao, et al. against
defendants-respondents Carag, et al., namely, the actions for (1) recovery of real property; and (2) cancellation of the OCTs,
thereby settling the question of ownership between them. The trial court approved the compromise agreement in toto. The
appellate court, in turn, upheld the trial court, but it proceeded to discuss on the third cause of action (for annulment of
mortgage), concluding that the mortgages were void because the mortgagors were not the absolute owners of the
mortgaged properties.

Ruling

It is basic in law that a compromise agreement, as a contract, is binding only upon the parties to the compromise, and not
upon non-parties. This is the doctrine of relativity of contracts. Consistent with this principle, a judgment based entirely on
a compromise agreement is binding only on the parties to the compromise the court approved, and not upon the parties
who did not take part in the compromise agreement and in the proceedings leading to its submission and approval by the
court. Otherwise stated, a court judgment made solely on the basis of a compromise agreement binds only the parties to
the compromise, and cannot bind a party litigant who did not take part in the compromise agreement.

Judgment based on a compromise affects only participating litigants — A partial decision, stemming from an amicable
settlement among two of several parties to an action, binds only the parties so participating in the settlement. This decision
never becomes final with respect to the parties who did not take part in the settlement confirmed by the partial decision
aforesaid.

Following Castañeda, the judgment on compromise rendered by the trial court in this case, and later affirmed by the
appellate court, is final with respect only to the plaintiffs-respondents and defendants-respondents, but not with respect to
the PNB. Hence, the trial court’s judgment on compromise which settles the issue of ownership over the properties in
question is but a partial decision that does not completely decide the case and cannot bind the PNB.

In its assailed decision, the CA, while recognizing the liability of the defendants-respondents to the PNB, declared that the
mortgagors, not being the absolute owners of the mortgaged properties as agreed upon in the compromise agreement, do
not have the right to constitute the mortgage. This conclusion is legally incorrect as the CA capitalized on the ownership
issue settled between the plaintiffs-respondents and the defendants-respondents in invalidating the PNB mortgages,
without hearing the side of the PNB as mortgagee, and later, co-owner of the disputed property. As discussed above, the
compromise agreement cannot bind the bank, a non-party to the agreement; necessarily, the ownership issue which was
settled by the compromise agreement cannot be made applicable to the bank without hearing it.

Our own review of the records of the case shows that the appellate court was not without basis to properly dispose of all
the causes of action, including the annulment of mortgage issue, had it fully scrutinized the records of the case. A glaring
fact that escaped the scrutiny of both the trial and appellate courts, and which would have led them to the quick and
correct disposition of the annulment issue (and of the entire case, given the compromise agreement), is the proviso against
alienation or encumbrance of lands granted by homestead patent — a fact plainly evident upon a facial examination of
the OCTs involved.

This inscription reproduces Section 118 18 of the Public Land Act, 19 as amended, which contains a proscription against the
alienation or encumbrance of homestead patents within five years from issue. The rationale for the prohibition, reiterated

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San Beda College Alabang School of Law
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in a line of cases, first laid down in Pascua v. Talens 20 states that “. . . homestead laws were designed to distribute
disposable agricultural lots of the State to land-destitute citizens for their home and cultivation. Pursuant to such
benevolent intention the State prohibits the sale or encumbrance of the homestead (Section 116, now Section 118) within
five years after the grant of the patent. . . . . It aims to preserve and keep in the family of the homesteader that portion of
public land which the State had gratuitously given to him.”

The present case deserves exactly the same treatment, and the PNB cannot claim that it is a mortgagee in good faith. The
proscription against alienation or encumbrance is unmistakable even on a cursory reading of the the OCTs. Thus, one who
contracts with a homestead patentee is charged with knowledge of the law’s proscriptive provision that must necessarily
be read into the terms of any agreement involving the homestead. Under the circumstances, the PNB simply failed to
observe the diligence required in the handling of its transactions and thus made the fatal error of approving the loans
secured by mortgages of properties that cannot, in the first place, be mortgaged.

Both the defendants-respondents and the bank are to be faulted for the invalidity of the mortgages. We cannot, however,
apply the doctrine of pari delicto in accordance with the ruling that the doctrine does not apply when the contract is
prohibited by law. 23 A saving factor for the bank under the situation is that a mortgage is merely an accessory agreement
and does not affect the principal contract of loan. The mortgages, while void, can still be considered as instruments
evidencing the indebtedness of defendants-respondents to the PNB in a proper case for the collection of the defendants-
respondents’ loans.

MANILA BANKING CORP V. TEODORO

On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in favor of plaintiff a
Promissory Note (No. 11487) for the sum of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per
annum. Defendants failed to pay the aid amount inspite of repeated demands and the obligation as of September 30, 1969
stood at P15,137.11 including accrued interest and service charge.

On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio Teodoro, Jr. (Son) executed in
favor of plaintiff two Promissory Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively, payable in 120
days at 12% interest per annum. Father and Son made a partial payment on the May 3, 1966 Promissory Note but none on
the June 20, 1966 Promissory Note, leaving still an unpaid balance of P8,934.74 as of September 30, 1969 including accrued
interest and service charge.

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignment of Receivables from the
Emergency Employment Administration in the sum of P44,635.00. The Deed of Assignment provided that it was for and in
consideration of certain credits, loans, overdrafts and other credit accommodations extended to defendants as security
for the payment of said sum and the interest thereon, and that defendants do hereby remise, release and quitclaim all its
rights, title, and interest in and to the accounts receivables.’

For failure of defendants to pay the sums due on the Promissory Note, this action was instituted on November 13, 1969,
originally against the Father, Son, and the latter’s wife. Because the Father died, however, during the pendency of the suit,
the case as against him was dismissed under the provisions of Section 21, Rule 3 of the Rules of Court. The action, then is
against defendant Son and his wife for the collection of the sum of P15,037.11 on Promissory Note No. 14487; and against
defendant Son for the recovery of P8,394.74 on Promissory Notes Nos. 11515 and 11699, plus interest on both amounts at
12% per annum from September 30, 1969 until fully paid, and 10% of the amounts due as attorney’s fees.

Issue

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San Beda College Alabang School of Law
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The major issues raised in this case are as follows: (1) whether or not the assignment of receivables has the effect of
payment of all the loans contracted by appellants from appellee bank; and (2) whether or not appellee bank must first
exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against appellants for
collections of loan under the promissory notes which are plaintiff’s bases in the action for collection in Civil Case No. 78178.

Ruling

It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not transfer the ownership
of the receivables to appellee bank and release appellants from their loans with the bank incurred under promissory notes
Nos. 11487, 11515 and 11699. The Deed of Assignment provided that it was for and in consideration of certain credits,
loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by appellee bank, and
as security for the payment of said sum and the interest thereon; that appellants as assignors, remise, release, and
quitclaim to assignee bank all their rights, title and interest in and to the accounts receivable assigned (1 st paragraph). It was
further stipulated that the assignment will also stand as a continuing guaranty for future loans of appellants to appellee
bank and correspondingly the assignment shall also extend to all the accounts receivable; appellants shall also obtain in the
future, until the consideration on the loans secured by appellants from appellee bank shall have been fully paid by them.

The character of the transactions between the parties is not, however, determined by the language used in the document
but by their intention. Thus, the Court, quoting from the American Jurisprudence: The characters of the transaction
between the parties is to be determined by their intention, regardless of what language was used or what the form of the
transfer was. If it was intended to secure the payment of money, it must be construed all a pledge. However, even though a
transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained
by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that
a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be
treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of
the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such a transaction if they
are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and ambiguous language or other circumstances excluding an intent to pledge.

Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said to have been
constituted by virtue of a dation in payment for appellants’ loans with the bank evidenced by promissory note Nos. 11487,
11515 and 11699 which are the subject of the suit for collection in Civil Case No. 78178. At the time the deed of
assignment was executed, said loans were non-existent yet. The deed of assignment was executed on January 24, 1964
(Exh. “G”), while promissory note No. 11487 is dated April 25, 1966 (Exh. “A”), promissory note 11515, dated May 3, 1966
(Exh. “B”), promissory note 11699, on June 20, 1966 (Exh. “C”). At most, it was a dation in payment for P10,000.00, the
amount of credit from appellee bank indicated in the deed of assignment. At the time the assignment was executed, there
was no obligation to be extinguished except the amount of P10,000.00. Moreover, in order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each other (Article 1292, New Civil Code).

Obviously, the deed of assignment was intended as collateral security for the bank loans of appellants, as a continuing
guaranty for whatever sums would be owing by defendants to plaintiff, as stated in stipulation No. 9 of the deed. In case of
doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being
the lesser transmission of rights and interestd.

The obligation of appellants under the promissory notes not having been released by the assignment of receivables,
appellants remain as the principal debtors of appellee bank rather than mere guarantors. The deed of assignment merely
guarantees said obligations. That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all
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San Beda College Alabang School of Law
Credit Transactions 98
Case Notes/Digests

the property of the debtor, and has resorted to all the legal remedies against the debtor, under Article 2058 of the New
Civil Code does not therefore apply to them. It is of course of the essence of a contract of pledge or mortgage that when
the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the
payment to the creditor (Article 2087, New Civil Code). In the instant case, appellants are both the principal debtors and the
pledgors or mortgagors. Resort to one is, therefore, resort to the other.

Appellee bank did try to collect on the pledged receivables. As the Emergency Employment Agency (EEA) which issued the
receivables had been abolished, the collection had to be coursed through the Office of the President which disapproved the
same (Record on Appeal, p. 16). The receivable became virtually worthless leaving appellants’ loans from appellee bank
unsecured. It is but proper that after their repeated demands made on appellants for the settlement of their obligations,
appellee bank should proceed against appellants. It would be an exercise in futility to proceed against a defunct office for
the collection of the receivables pledged.

LAO V. CA

On June 24, 1992, (herein Private Respondent Better Homes Realty and Housing Corporation) filed with the Metropolitan
Trial Court of Quezon City, a complaint for unlawful detainer, on the ground that (said private respondent) is the owner of
the premises situated at Unit I, No. 21 N. Domingo Street, Quezon City, evidenced by Transfer Certificate of Title No. 22184
of the Registry of Deeds of Quezon City; that (herein Petitioner Manuel Lao) occupied the property without rent, but on
(private respondent’s) pure liberality with the understanding that he would vacate the property upon demand, but despite
demand to vacate made by letter received by (herein petitioner) on February 5, 1992, the (herein petitioner) refused to
vacate the premises.

In his answer to the complaint, (herein petitioner) claimed that he is the true owner of the house and lot located at Unit 1,
No. 21 N. Domingo Street, Quezon City; that the (herein private respondent) purchased the same from N. Domingo Realty
and Development Corporation but the agreement was actually a loan secured by mortgage; and that plaintiff’s cause of
action is foraccion publiciana outside the jurisdiction of an inferior court.

On appeal to the Regional Trial Court of Quezon City, 4 on March 30, 1993, the latter court rendered a decision reversing
that of the Metropolitan Trial Court, and ordering the dismissal of the (private respondent’s) complaint for lack of merit,
with costs taxed against (private respondent).

In its decision, the Regional Trial Court held that the subject property was acquired by (private respondent) from N.
Domingo Realty and Development Corporation, by a deed of sale, and (private respondent) is now the registered owner
under Transfer Certificate of Title No. 316634 of the Registry of Deeds of Quezon City, but in truth the (petitioner) is the
beneficial owner of the property because the real transaction over the subject property was not a sale but a loan secured
by a mortgage thereon.” (Which was reversed by the CA)

Ruling

The Court of Appeals held that as a general rule, the issue in an ejectment suit is possession de facto, not possession de
jure, and that in the event the issue of ownership is raised as a defense, the issue is taken up for the limited purpose of
determining who between the contending parties has the better right to possession. Beyond this, the MTC acts in excess of
its jurisdiction. However, we hold that this is not a hard and fast rule that can be applied automatically to all unlawful
detainer cases.

Section 11, Rule 40 of Rules of Court provides that “[a] case tried by an inferior court without jurisdiction over the subject
matter shall be dismissed on appeal by the Court of First Instance. But instead of dismissing the case, the Court of First

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San Beda College Alabang School of Law
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Instance, in the exercise of its original jurisdiction, may try the case on the merits if the parties therein file their pleadings
and go to the trial without any objection to such jurisdiction.” After a thorough review of the records of this case, the Court
finds that the respondent appellate court failed to apply this Rule and erroneously reversed the RTC Decision.

Private Respondent Better Homes Realty and Housing Corporation anchored its right in the ejectment suit on a contract of
sale in which petitioner (through their family corporation) transferred the title of the property in question. Petitioner
contends, however, that their transaction was not an absolute sale, but an equitable mortgage.

In determining the nature of a contract, the Court looks at the intent of the parties and not at the nomenclature used to
describe it. Pivotal to deciding this issue is the true aim and purpose of the contracting parties as shown by the terminology
used in the covenant, as well as “by their conduct, words, actions and deeds prior to, during and immediately after
executing the agreement.” 16 In this regard, parol evidence becomes admissible to prove the true intent and agreement of
the parties which the Court will enforce even if the title of the property in question has already been registered and a new
transfer certificate of title issued in the name of the transferee.

The law enumerates when a contract may be presumed to be an equitable mortgage under Art. 1602 – NCC.

We find the agreement between the private respondent and N. Domingo Realty & Housing Corporation, as represented by
petitioner, manifestly one of equitable mortgage. First, possession of the property in the controversy, remained with
Petitioner Manuel Lao who was the beneficial owner of the property, before, during and after the alleged sale. 20 It is
settled that a “pacto de retro sale should be treated as a mortgage where the (property) sold never left the possession of
the vendors.” 21 Second, the option given to Manuel Lao to purchase the property in controversy had been extended
twice 22 through documents executed by Mr. Tan Bun Uy, President and Chairman of the Board of Better Homes Realty &
Housing Corporation. The wording of the first extension is a refreshing revelation that indeed the parties really intended to
be bound by a loan with mortgage, not by a pacto de retro. It reads, “On June 10, 88, this option is extended for another
sixty days to expired (sic) on Aug. 11, 1988. The purchase price is increased to P137,000.00. Since Mr. Lao borrow (sic)
P20,000.00 from me.” 23 These extensions clearly represent the extension of time to pay the loan given to Manuel Lao
upon his failure to pay said loan on its maturity. Mr. Lao was even granted an additional loan of P20,000.00 as evidenced of
the above quoted document. Third, unquestionably, Manuel Lao and his brother were in such “dire need of money” that
they mortgaged their townhouse units registered under the name of N. Domingo Realty Corporation, the family
corporation put up by their parents, to Private Respondent Better Homes Realty & Housing Corporation. In retrospect, it is
easy to blame Petitioner Manuel Lao for not demanding a reformation of the contract to reflect the true intent of the
parties. But this seeming inaction is sufficiently explained by the Lao brother’s desperate need for money, compelling them
to sign the document purporting to be a sale after they were told that the same was just for “formality.”

Moreover, since the borrower’s urgent need for money places the latter at a disadvantage I the lender who can thus dictate
the terms of their contract, the Court, in case of ambiguity, deems the contract to be one which involves the lesser
transmission of rights and interest over the property in controversy.

As ruled out by the trial court: “The evidence of record indicates that while as of April 4, 1988 (the date of execution of the
Deed of Absolute Sale whereby the N. Domingo and Realty & Development Corporation purportedly sold the townhouse
and lot subject of this suit to [herein private respondent Better Homes Realty & Housing Corporation] for P 100,000.00) said
N. Domingo Realty and Development Corporation (NDRDC, for short) was the registered owner of the subject property
under Transfer Certificate of Title (TCT) No. 316634 of the Registry of Deeds for Quezon City, (herein petitioner Manuel Lao)
in fact was and has been since 1975 the beneficial owner of the subject property and, thus, the same was assigned to him
by the NDRDC, the family corporation set up by his parents and of which (herein petitioner) and his siblings are directors.
That the parties’ real transaction or contract over the subject property was not one of sale but, rather, one of loan secured
by a mortgage thereon is unavoidably inferable from the following facts of record, to (herein petitioner’s) possession of the
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San Beda College Alabang School of Law
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Case Notes/Digests

subject property, which started in 1975 yet, continued and remained even after the alleged sale of April 4, 1988; (herein
private respondent) executed an option to purchase in favor (herein petitioner) as early as April 2, 1988 or two days before
(herein private respondent) supposedly acquired ownership of the property; the said option was renewed several times and
the price was increased with each renewal (thus, the original period for the exercise of the option was up to June 11, 1988
and the price was P109,000.00; then on June 10, 1988, the option was extended for 60 days or until August 11, 1988 and
the price was increased to P137,000.00; and then on August 11, 1988, the option was again extended until November 11,
1988 and the price was increased to P158,840.00); and, the Deed of Absolute Sale of April 4, 1988 was registered and the
property transferred in the name of (private respondent) only on May 10, 1989, per TCT No. 22184 of the Registry of Deeds
for Quezon City (Arts. 1602, nos. 2, 3, & 6, & 1604, Civil Code). Indeed, if it were true, as it would have the Court believe,
that (private respondent) was so appreciative of (petitioner’s) alleged facilitation of the subject property’s sale to it, it is
quite strange why (private respondent) some two days before such supposed sale would have been minded and inclined to
execute an option to purchase allowing (petitioner) to acquire the property — the very same property it was still hoping to
acquire at the time. Certainly what is more likely and thus credible is that, if (private respondent) was indeed thankful that
it was able to purchase the property, it would not given (petitioner) any option to purchase at all.

STATE INVESTMENT HOUSE V. CA

‘Records show that on October 15, 1969, Contract to Sell No. 36 was executed by the Spouses Canuto and Ma. Aranzazu
Oreta, and the Solid Homes, Inc. (SOLID), involving a parcel of land identified as Block No. 8, Lot No. 1, Phase I of the Capitol
Park Homes Subdivision, Quezon City, containing 511 square meters for a consideration of P39,347.00. Upon signing of the
contract, the spouses Oreta made payment amounting to P7,869.40, with the agreement that the balance shall be payable
in monthly installments of P451.70, at 12% interest per annum.

‘On November 4, 1976, SOLID executed several real estate mortgage contracts in favor of State Investment Homes, (sic) Inc.
(STATE) over its subdivided parcels of land, one of which is the subject lot covered by Transfer Certificate of Title No.
209642.

‘For Failure of SOLID to comply with its mortgage obligations contract, STATE extrajudicially foreclosed the mortgaged
properties including the subject lot on April 6, 1983, with the corresponding certificate of sale issued therefor to STATE
annotated at the back of the titles covering the said properties on October 13, 1983.

‘On June 23, 1984, SOLID thru a Memorandum of Agreement negotiated for the deferment of consolidation of ownership
over the foreclosed properties by committing to redeem the properties from STATE.

‘On August 15, 1988, the spouses filed a complaint before the Housing and Land Use Regulatory Board, HLURB, against the
developer SOLID and STATE for failure on the part of SOLID “to execute the necessary absolute deed of sale as well as to
deliver title to said property . . . in violation of the contract to sell despite full payment of the purchase price as of January
7, 1981. In its Answer, SOLID, by way of alternative defense, alleged that the obligations under the Contract to Sell has
become so difficult the herein respondents be partially released from said obligation by substituting subject lot with
another suitable residential lot from another subdivision which respondents own/operates.” Upon the other hand, STATE,
to which the subject lot was mortgaged, averred that unless SOLID pays the redemption price of P125,1955.00, (sic) it has
“a right to hold on and not release the foreclosed properties.”

In a decision dated May 19, 1994, respondent court sustained the judgment of the Office of the President. Hence, this
petition substantially anchored on these two alleged errors, namely: (1) error in ruling that that private respondent spouses
Oreta’s unregistered rights over the subject property are superior to the registered mortgage
rights of petitioner State Investment House, Inc. (STATE); and (2) error in not applying the settled rule that persons dealing
with property covered by Torrens certificate of title are not required to go beyond what appears on the face of the title.
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 101
Case Notes/Digests

Ruling

In fact, petitioner admits the superior rights of respondents-spouses Oreta over the subject property as it did not pray for
the nullification of the contract between respondents-spouses and SOLID, but instead asked for the payment of the release
value of the property in question, plus interest, attorney’s fees and costs of suit against SOLID or, in case of the latter’s
inability to pay, against respondents-spouses before it can be required to release the title of the subject property in
favor of the respondent spouses. 3 And even if we were to pass upon the first assigned error, we find respondent court’s
ruling on the matter to be well-founded. STATE’s registered mortgage right over the property is inferior to
that of respondents-spouses’ unregistered right. The unrecorded sale between respondents-spouses and SOLID is preferred
for the reason that if the original owner (SOLID, in this case) had parted with his ownership of the thing sold then he no
longer had ownership and free disposal of that thing so as to be able to mortgage it again. 4Registration of the mortgage
is of no moment since it is understood to be without prejudice to the better right of third parties.

Anent the second issue, petitioner asserts that a purchaser or mortgagee of land/s covered under the Torrens System “is
not required to do more than rely upon the certificate of title [for] it is enough that the [purchaser or mortgagee] examines
the pertinent certificateof title [without] need [of] look[ing] beyond such title.” 6

As a general rule, 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 defect or inchoate right that may subsequently defeat his right thereto. This rule
however, admits of an exception as where the purchaser or mortgagee, has knowledge of a defect or lack of title in his
vendor, or that he was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the
title of the property in litigation. 7 In this case, petitioner was well aware that it was dealing with SOLID, a business entity
engaged in the business of selling subdivision lots. In fact, the OAALA found that “at the time the lot was mortgaged,
respondent State Investment House, Inc., [now petitioner] had been aware of the lot’s location and that said lot formed
part of Capital Park/Homes Subdivision.” 8 In Sunshine Finance and Investment Corp. v. Intermediate
Appellate Court, 9 the Court, noting petitioner therein to be a financing corporation, deviated from the general rule that a
purchaser or mortgagee of a land is not required to look further than what appears on the face of the Torrens Title.

We take judicial notice of the uniform practice of financing institutions to investigate, examine and assess the real
property offered as security for any loan application especially where, as in this case, the subject property is a subdivision
lot located at Quezon City, M.M. It is a settled rule that a purchaser or mortgagee cannot close its eyes to facts which
should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no
defect in the title of the vendor or mortgagor. 12 Petitioner’s constructive knowledge of the defect in the title of the subject
property, or lack of such knowledge due to its negligence, takes the place of registration of the rights of respondents-
spouses. Respondent court thus correctly ruled that petitioner was not a purchaser or mortgagee in good faith; hence
petitioner can not solely rely on what merely appears on the face of the Torrens Title.

SPS. FLANCIA V. CA

In the complaint, plaintiffs allege that they purchased from defendant corporation a parcel of land known as Lot 12, Blk. 3,
Phase III-A containing an area of 128.75 square meters situated in Prater Village Subd. II located at Brgy. Old Balara, Quezon
City; that by virtue of the contract of sale, defendant corporation authorized plaintiffs to transport all their personal
belongings to their house at the aforesaid lot; that on December 24, 1992, plaintiffs received a copy of the execution
foreclosing [the] mortgage issued by the RTC, Branch 98 ordering defendant Sheriff Sula to sell at public auction several lots
formerly owned by defendant corporation including subject lot of plaintiffs; that the alleged mortgage of subject lot is null
and void as it is not authorized by plaintiffs pursuant to Art. 2085 of the Civil Code which requires that the mortgagor
must be the absolute owner of the mortgaged property; that as a consequence of the nullity of said mortgage, the
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execution foreclosing [the] mortgage is likewise null and void; that plaintiffs advised defendants to exclude subject lot from
the auction sale but the latter refused. Plaintiffs likewise prayed for damages in the sum of P50,000.00.

Defendant Genato, then filed his answer averring that on May 19, 1989 co-defendant Oakland Development Resources
Corporation mortgaged to Genato two (2) parcels of land covered by TCT Nos. 356315 and 366380 as security and guaranty
for the payment of a loan in the sum of P2,000,000.00; that it appears in the complaint that the subject parcel of land is an
unsubdivided portion of the aforesaid TCT No. 366380 which covers an area of 4,334 square meters more or less; that said
real estate mortgage has been duly annotated at the back of TCT No. 366380 on May 22, 1989; that for non-payment of the
loan of P2,000,000.00 defendant Genato filed an action for foreclosure of real estate mortgage against co-defendant
corporation; that after [trial], a decision was rendered by the Regional Trial Court of Quezon City, Branch 98 against
defendant corporation which decision was affirmed by the Honorable Court of Appeals; that the decision of the Court of
Appeals has long become final and thus, the Regional Trial Court, Brach 98 of Quezon City issued an Order dated December
7, 1992 ordering defendant Sheriff Ernesto Sula to cause the sale at public auction of the properties covered by TCT No.
366380 for failure of defendant corporation to deposit in Court the money judgment within ninety (90) days from receipt of
the decision of the Court of Appeals; that plaintiffs have no cause of action against defendant Genato; that the alleged
plaintiffs’ Contract to Sell does not appear to have been registered with the Register of Deeds of Quezon City to affect
defendant Genato and the latter is thus not bound by the plaintiffs’ Contract to Sell; that the registered mortgage is
superior to plaintiffs’ alleged Contract to Sell and it is sufficient for defendant Genato as mortgagee to know that the
subject TCT No. 366380 was clean at the time of the execution of the mortgage contract with defendant corporation and
defendant Genato is not bound to go beyond the title to look for flaws in the mortgagor’s title; that plaintiffs’ alleged
Contract to Sell is neither a mutual promise to buy and sell nor a Contract of Sale. Ownership is retained by the seller,
regardless of delivery and is not to pass until full payment of the price; that defendant Genato has not received any advice
from plaintiffs to exclude the subject lot from the auction sale, and by way of counterclaim, defendant Genato prays for
P150,000.00 moral damages and P20,000.00 for attorney’s fees.

Ruling

Under the Art. 2085 of the Civil Code, the essential requisites of a contract of mortgage are: (a) that it be constituted to
secure the fulfillment of a principal obligation; (b) that the mortgagor be the absolute owner of the thing mortgaged; and
(c) that the persons constituting the mortgage have the free disposal of their property, and in the absence thereof, that
they be legally authorized for the purpose.

In the contract between petitioners and Oakland, aside from the fact that it was denominated as a contract to sell, the
intention of Oakland not to transfer ownership to petitioners until full payment of the purchase price was very clear. Acts of
ownership over the property were expressly withheld by Oakland from petitioner. All that was granted to them by the
“occupancy permit” was the right to possess it. Clearly, when the property was mortgaged to Genato in May 1989, what
was in effect between Oakland and petitioners was a contract to sell, not a contract of sale. Oakland retained absolute
ownership over the property.

Ownership is the independent and general power of a person over a thing for purposes recognized by law and within the
limits established thereby. 10 According to Art. 428 of the Civil Code. Aside from the jus utendi and the jus
abutendi 11 inherent in the right to enjoy the thing, the right to dispose, or the jus disponendi, is the power of the owner to
alienate, encumber, transform and even destroy the thing owned.

State Investment House (previous case) is completely inapplicable to the case at bar. A contract of sale and a contract to sell
are worlds apart. State Investment House clearly pertained to a contract of sale, not to a contract to sell which was what
Oakland and petitioners had. In State Investment House, ownership had passed completely to the buyers and therefore, the
former owner no longer had any legal right to mortgage the property, notwithstanding the fact that the new owner-buyers
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San Beda College Alabang School of Law
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had not registered the sale. In the case before us, Oakland retained absolute ownership over the property under the
contract to sell and therefore had every right to mortgage it.

Just as an innocent purchaser for value may rightfully rely on what appears in the certificate of title, a mortgagee has the
right to rely on what appears in the title presented to him. In the absence of anything to arouse suspicion, he is under no
obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of the said
certificate.

PREMIERE DEVELOPMENT BANK V. CA

At the core of the controversy is a 2,660-square meter parcel of land, denominated as Lot 23 of the subdivision plan Fls-
2804-D of SWO-17514, registered under TCT No. 9780 of the Manila Registry, located as it were in Matandang Balara, which
used to be a part of the then district of Caloocan, City of Manila. The creation of Quezon City which found Lot 23 within its
borders saw the transfer of the corresponding property records to the new political unit and the generation of new
certificates of title to reflect territorial changes. As thus transferred, TCT No. 9780 was assigned title number TCT No.9780
(693).

Two (2) different persons with exactly the same name, i.e., Vicente T. Garaygay, each claimed exclusive ownership of Lot
23 by virtue of an owner’s duplicate certificate each had possession of during the period material covering said lot. One
held TCT No. 9780, supra, and the other, TCT No. 9780 (693), supra. The technical description of the land appearing in one
copy corresponds exactly with that in the other. The date “June 14, 1944” appears on the face of both copies as a common
date of entry. One, however, contained certain features, markings, and/or entries not found in the other and vice versa.

On April 17, 1979, one of the two Vicente T. Garaygays, a resident of Cebu City (hereinafter referred to as Garaygay of
Cebu), executed a deed of sale 4over the lot described in and covered by his TCT No. 9780 (693) in favor of his
nephew, Joselito P. Garaygay (“Joselito”, hereinafter). The sale notwithstanding, the owner’s duplicate certificate remained
for some time in the seller’s possession.

In another transaction, the other Vicente T. Garaygay, a resident of Rizal (hereinafter referred to as Garaygay of Rizal), sold
to Liberto G. Yambao andJesus B. Rodriguez the same property described in TCT 9780. “YCM Compound, Angono, Rizal” is
set out in the February 11, 1986 conveying deed 5 as the seller’s residence. Buyers Yambao and Rodriguez would later sell a
portion of their undivided interests on the land to Jesus D. Morales.

Then came the June 11, 1988 fire that gutted a portion of the Quezon City hall and destroyed in the process the original
copy of TCT No. 9780 (693) on file with the Registry of Deeds of Quezon City. Barely a month later, a certain Engr. Hobre
filed an application, signed by Garaygay of Cebu, for the reconstitution of the burned original on the basis of the latter’s
owner’s duplicate certificate. One Engr. Felino Cortez of the Land Registration Authority (LRA) did the follow-up on the
application. After due proceedings, the LRA issued an order of reconstitution, 7 by virtue of which Garaygay of Cebu
acquired reconstituted TCT No. RT-1764 (9780) (693). Afterwards the sale by Garaygay in Cebu, the buyer, Joselito,
subdivided the lots into 3, the first one has been sold to another person, the remaining 2 lots were assigned as shares of
stock in favor of Century realty while after securing another TCT, mortgaged the same in favor of the petitioner.

Clashing claims of ownership first came to a head when, sometime in May 1990, Liberato G. Yambao and his agents forcibly
prevented Joselito’s hired hands from concrete-fencing the subject property. The police and eventually the National
Bureau of Investigation (NBI) entered into the picture. In the meantime, Yambao, Rodriguez and Morales as pro
indiviso buyers of Lot No. 23, caused the annotation on December 17, 1990, January 16, 1991 and February 15, 1991 of
their respective adverse claims on Joselito’s TCT Nos. 14414, 14415 and 14416. They then filed with the Regional Trial Court

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San Beda College Alabang School of Law
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at Quezon City suit against Joselito, Century Realty and Premiere Bank for quieting of title and annulment of said
defendants’ fake titles with prayer for damages.

In his testimony (during trial), Yambao stated having noticed, when Garaygay of Rizal offered to sell Lot 23, that the
corners and the portion of Exhibit “B” containing the owner’s personal circumstances were torn and related the owner’s
explanation as to how these oddities came about. He also testified that, to assure himself of the genuineness of the seller’s
owner’s duplicate certificate, he and Garaygay of Rizal repaired to the Quezon City Registry to compare his (Garaygay of
Rizal’s) copy with the original copy on file with the registry, and discovered that the only difference was that the owner’s
duplicate bears the title number “9780”, while the original had “9780 (693)” typewritten on a straight line. 17 As told by
Yambao, Garaygay of Rizal’s explanation for the figure difference is that “693” was not affixed on his (Garaygay of Rizal’s)
title because he never, in first place, presented the same to the Quezon City Registry for correction or affixture. He also
testified that when he (Yambao) asked for Garaygay of Rizal’s identification, the latter presented his voter’s ID duly issued
by the COMELEC and he added that they went to the area which is being sold, and the companions who were present there
assured him that GOR was the real owner thereof. To the trial court, plaintiffs’ evidence preponderated over those of the
defendants’ whose main witness, Garaygay of Cebu, gave inconsistent testimony, while Joselito hedged on his answer
regarding a cousin connected with LRA. Going against the defendants’ cause, the trial court further observed dubious
circumstances surrounding the reconstitution of TCT 9780 (693), the more disturbing of which is the admitted
participation of LRA personnel in the reconstitution process. The CA on appeal, affirmed the decision in toto. The latter
court ruled that the title of the defendant is a public document, thus its due execution need not be proven as it enjoys a
presumption of regularity, unlike that of petitioner’s – a private one, which must be proven first under existing rules.

Main Issue: Who among the 2 Garaygays is the real owner of the disputed lots.

Other than paying taxes from 1949 to 1990 39 (mistakenly stated by respondent court as from 1949 to 1960),
however, Garaygay of Cebu — and this holds true for his nephew Joselito — did not appear before the current stand-off to
have exercised dominion over Lot 23. For one, it has not been shown that Garaygay of Cebu was at any time in possession
of the property in question, unlike his namesake from Rizal who managed to place the property under the care of certain
individuals who built semi-permanent structure-dwelling houses thereon without so much of a protest from Garaygay of
Cebu or his nephew Joselito after the latter purportedly bought the property. For another, neither Garaygay of Cebu nor his
nephew Joselito ever instituted any action to eject or recover possession from the occupants of Lot 23. This passivity
bespeaks strongly against their claim of ownership. It has been said that a party’s failure to raise a restraining arm or a
shout of dissent to another’s possession for an unreasonably long period is simply contrary to his claim of ownership.

Instances that prove GOC’s title as spurious:

1. The document was notarized by a person who is not appointed as a notary public.
2. The reconstitution has been attended by a member of the LRA (special interests were considered suspicious since
Engr. Cortez was neither a friend nor relative of GOC or Joselito. The most logical point accdg to the court is since
Joselito and GOC planned to have a joint venture, to sell the disputed property by subdividing It for easy profit,
clearly appears that these LRA members/officials will stand to profit from it.)

The rule that a subsequent declaration of a title as null and void is not a ground for nullifying the contractual right of a
purchaser, mortgagee or other transferees in good faith, with the exceptions thereto, is well-settled. Where the certificate
of title is in the name of the seller or mortgagor, the innocent purchaser or mortgagee for value has the right to rely on
what appears on the certificate without inquiring further. 41 In the absence of anything to excite or arouse suspicion, or
except when the party concerned had actual knowledge of facts or circumstances that should impel a reasonably cautious
person to make such further inquiry, said purchaser or mortgagee is without obligation to look beyond the certificate and
investigate the title of the seller or mortgagor. Thus, where innocent third persons, relying on the correctness of the
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San Beda College Alabang School of Law
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certificate, acquire rights over the property as buyer or mortgagee, the subsequent declaration of nullity of title is not a
ground for nullifying the right of such buyer or mortgagee.

A study of the record shows that TCT 14414 covering Lot 23-A that Toundjis contracted to buy from Joselito carried an
annotation that it 105oi tong105105stratively reconstituted. Records also indicate that Toundjis knew at the time of the
sale that Joselito did not have possession of the lot inasmuch as she agreed to pay the balance of the purchase price as
soon as the seller can fence off the property and surrender physical possession thereof to her. It cannot be
overemphasized, that Premiere Bank, being in the business of extending loans secured by real estate mortgage, is familiar
with rules on land registration. As such, it was, as here, expected to exercise more care and prudence than private
individuals in their dealing with registered lands. 47Accordingly, given inter alia the suspicion-provoking presence of
occupants other than the owner on the land to be mortgaged, it behooved Premiere Bank to conduct a more exhaustive
investigation on the history of the mortgagor’s title. That Premiere Bank accepted in mortgage the property in question
notwithstanding the existence of structures on the property and which were in actual, visible and public possession of a
person other than the mortgagor, constitutes gross negligence amounting to bad faith. 48 Premier Bank is thus not entitled
to have its lien annotated on the genuine title.

DELA MERCED V. GSIS

A transferee 105oi ton lite of registered land, whose title bears a notice of a pending litigation involving his transferor’s title
to the said land, is bound by the outcome of the litigation, whether it be for or against his transferor. Given this principle,
the modification of the final decision against the transferor in order to include the transferee 105oi ton lite does not violate
the doctrine of immutability of final judgments. His inclusion does not add to or change the judgment; it is only a legal
consequence of the established doctrine that a final judgment binds the privy of a litigating party.

The Case

This case involves five registered parcels of land located within the Antonio Subdivision, Pasig City — Lots 6, 7, 8, and 10 of
Block 2 and Lot 8 of Block 8 (subject properties). These lots were originally owned by, and titled in the name of, Jose C.
Zulueta (Zulueta), as evidenced by Transfer Certificate of Title (TCT) No. 26105. 8 TCT No. 26105 contains several lots, other
than the subject properties, within the Antonio Subdivision. Later, the Zulueta spouses mortgaged 9 several lots contained
in TCT No. 26105 to the GSIS, which eventually foreclosed on the mortgaged properties, including the subject properties.
Upon consolidation of GSIS’s ownership, TCT No. 26105 in Zulueta’s name was cancelled, and TCT No. 23554 10 was issued
in GSIS’s name.

Upon learning of the foreclosure, petitioners’ predecessor, Francisco Dela Merced (Dela Merced) filed a
complaint 12 praying for the nullity of the GSIS foreclosure on the subject properties (Lots 6, 7, 8, and 10 of Block 2 and Lot
8 of Block 8) on the ground that he, not the Zuluetas, was the owner of these lots at the time of the
foreclosure. Dela Merced also impleaded Victor and Milagros Manlongat, 13 who were claiming Lot 6, Block 2 by virtue of a
sale executed by the GSIS in their daughter’s (Elizabeth Manlongat) favor. 14 DelaMerced argued that, due to the nullity
of GSIS’s foreclosure over the subject properties, it had no ownership right that could be transferred to Elizabeth
Manlongat.

Dela Merced caused the annotation of lis pendens 15 on GSIS’s TCT No. 23554 on September 21, 1984 in order to protect
his interests in the subject properties. Dela Merced died in 1988 and was substituted by his heirs, the petitioners in the
instant case.

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San Beda College Alabang School of Law
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After a protracted litigation, the case reached this Court as G.R. No. 140398. On September 11, 2001, a Decision 16 was
rendered in petitioners’ favor. The Court nullified GSIS’s foreclosure of the subject properties because these lots were never
part of its mortgage agreement with the Zulueta spouses.

The issue of GSIS’s alleged exemption under RA 8291 had been finally decided against GSIS in G.R. No. 173391, when this
Court denied GSIS’s petition for review. The denial rendered the CA Decision in CA-G.R. SP No. 87821 final and 106oi
tong. GSIS’s attempt to resurrect the same issue by interjecting the same in this proceeding is barred by the principle of
“law of the case,” which states that “determinations of questions of law will generally be held to govern a case throughout
all its subsequent stages where such determination has already been made on a prior appeal to a court of last
resort.” 49 The Decision in G.R. No. 173391 allowing the execution of the judgment against GSIS is the “law of the case” and
controls the proceedings below which are already in the execution stage.

A notice of lis pendens is an announcement to the whole world that a particular real property is in litigation, serving as a
warning that one who acquires an interest over said property does so at his own risk, or that he gambles on the result of
the litigation over the said property.” 50 The effect of the annotation of lis pendens on future transactions over the subject
property is discussed by an authority on land titles and registration: Once a notice of lis pendens has been duly registered,
any cancellation or issuance of the title of the land involved as well as any subsequent transaction affecting the same,
would have to be subject to the outcome of the litigation. In other words, upon the termination of the litigation there can
be no risk of losing the property or any part thereof as a result of any conveyance of the land or any encumbrance that may
be made thereon posterior to the filing of the notice of lis pendens.

It is not disputed that petitioners caused the annotation of lis pendens on TCT No. 23554, which covers Lots 7 and 8 of Block
2, as early as September 21, 1984. 52 On July 29, 1985 and August 24, 1998, TCT No. 23554 was cancelled with respect to
Lots 7 and 8 of Block 2 and new individual titles were issued to Victorino and Dimaguila. Both titles had the notice of lis
pendens which was carried over from TCT No. 23554. Ineluctably, both Victorino and Dimaguila had notice of the litigation
involving GSIS’s ownership over the subject properties, and were bound by the outcome of the litigation. When a
transferee 106oi ton lite takes property with notice of lis pendens, such transferee undertakes to respect the outcome of
the litigation. As held in Selph v. Vda. De Aguilar, 53 an order to cancel the transferor’s title may be enforced against his
transferee, whose title is expressly subject to the outcome of the litigation by the fact of the annotation of lis pendens.

The existence of these entries on Dimaguila’s and Victorino’s titles bars any defense of good faith 54 against petitioners and
effectively makes Dimaguila and Victorino mere privies of GSIS and subject to whatever rights GSIS might have in the
subject properties, which (as it turns out) is none at all. What Dimaguila and Victorino possess are derivative titles of
the GSIS’s title over Lots 7 and 8 of Block 2, which this Court has finally adjudicated to be null and void. Given the legal
maxim that a spring cannot rise higher than its source, it follows that Dimaguila’s and Victorino’s titles, or any other title
over the subject properties that are derived from TCT No. 23554 of theGSIS, are likewise null and void. As explained by this
Court in another case, the title obtained by the transferee 106oi ton lite affords him no special protection; he cannot invoke
the rights of a purchaser in good faith and cannot acquire better rights than those of his predecessor-in-interest.

The Court cannot accept GSIS’s theory that the dispositive portion of the Decision in G.R. No. 140398 is enforceable only
against GSIS’s title because it does not contain the phrase “and all its derivative titles.” GSIS’s narrow interpretation would
render nugatory the principle that a final judgment against a party is binding on his privies and successors-in-interest. We
cannot sustain this interpretation. In Cabresos v. Judge Tiro, 61 the Court upheld the respondent judge’s issuance of an alias
writ of execution against the successors-in-interest of the losing litigant despite the fact that these successors-in-interest
were not mentioned in the judgment and were never parties to the case. The Court explained that an action is binding on
the privies of the litigants even if such privies are not literally parties to the action. Their inclusion in the writ of execution

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San Beda College Alabang School of Law
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does not vary or exceed the terms of the judgment. In the same way, the inclusion of the “derivative titles” in the writ of
execution will not alter the Decision in G.R. No. 140398 ordering the cancellation of GSIS’s title.

The RD claimed that it cannot execute the order to cancel the GSIS’s titles over Lot 10, Block 2 and Lot 8, Block 8 because it
has no record of GSIS’s title over these two lots. The RD theorized that these lots are included in a ‘mother title’ in GSIS’s
possession and would still have to be segregated therefrom. To effectuate such segregation, the RD needed the technical
descriptions of the two lots and the ‘mother title.’ Thus, petitioners ask that the GSIS be compelled to surrender its title
over, as well as the technical descriptions of, Lot 10, Block 2 and Lot 8, Block 8.

GSIS refused to turn over the needed documents and information, claiming that these acts go beyond what were ordered in
the Decision in G.R. No. 140398. GSIS’s protestations ring hollow.

The order contained in the Decision in G.R. No. 140398 is for the RD to cancel GSIS’s titles over Lot 10, Block 2 and Lot 8,
Block 8, inter alia. Whether these titles are individual or contained in a mother title is of no consequence. The RD has to
cause their cancellation. If the cancellation can only be carried out by requiring GSIS or the Bureau of Lands to provide the
necessary information, then they can be compelled to do so. Otherwise, the Court’s decision would be rendered
inefficacious, and GSIS would retain ostensible ownership over the lots by the simple expedience that they are included in a
mother title, instead of individual titles. That result is manifestly contrary to the Court’s ruling and would subvert the very
purpose of bringing this case for a complete resolution.

When a judgment calls for the issuance of a new title in favor of the winning party (as in the instant case), it logically follows
that the judgment also requires the losing party to surrender its title for cancellation. It is the only sensible way by which
the decision may be enforced. To this end, petitioners can obtain a court order requiring the registered owner to surrender
the same and directing the entry of a new certificate of title in petitioners’ favor. 65 The trial court should have granted
petitioners’ motion for supplemental writ of execution as it had authority to issue the necessary orders to aid the execution
of the final judgment.

NAVARRO V. SECOND LAGUNA DEVELOPMENT BANK

Subject of this suit is the 1/6 portion of a parcel of land located in Alabang, Muntinlupa, known as Lot No. 1513-A, Plan Psd-
51043, consisting of 345 square meters and covered by TCT No. (244200) 114525 of the Registry of Deeds of Makati City.

Records show that the late Catalino Navarro and his wife Consuelo Hernandez originally owned Lot No. 1513-A. On
December 4, 1968, they sold 5/6 of the unsegregated portion of the lot to their children, namely, Leticia, Esther, Benjamin,
Luciana and Leoniza, all surnamed Navarro. By virtue of the sale, TCT No. 244200 was issued in their names. Spouses
Benjamin and Rosita Navarro, herein petitioners, are listed therein as co-owners of the property.

On March 18, 1978, without the knowledge and consent of petitioners, spouses Donalito Velasco and Esther Navarro,
conspiring with the latter’s sister Luciana Navarro, executed a falsified Deed of Absolute Sale wherein they made it
appear that the entire lot was sold to said spouses Velasco for P35,000.00. TCT No. 244200 was thus cancelled and in lieu
thereof, TCT 114526 was issued in the names of spouses Velasco. Subsequently, they mortgaged the property to
respondent Second Laguna Development Bank to secure payment of a loan.

On June 30, 1987, upon failure of spouses Velasco to pay their loan, respondent bank had the mortgage foreclosed. On
August 8, 1988 and January 5, 1990, petitioners, introducing themselves as attorneys-in-fact of Esther Navarro-Velasco,
wrote respondent bank, offering to redeem the property for P450,000.00. However, they failed to do so. Hence, ownership
thereof was consolidated in the name of respondent bank under TCT No. 168230 issued on February 1, 1990.

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San Beda College Alabang School of Law
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On April 3, 1990, respondent bank sold the lot to respondent spouses Isaac Guzman and Vilma Esporlas and on May 18,
1990, TCT No. 169929 3 was issued in their names. Thereupon, petitioners impleaded spouses Guzman as additional
defendants in Civil Case No. 90-849. Petitioners alleged that said spouses were purchasers in bad faith because they knew
of the pending litigation concerning the property.

In Rural Bank of Compostela vs. Court of Appeals, 8 this Court held that the rule that persons dealing with registered lands
can rely solely on the certificate of title does not apply to banks because 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. Thus, in Cruz vs. Bancom Finance Corporation, 9 this Court stressed that a
mortgagee-bank is expected to exercise greater care and prudence before entering into a mortgage contract, even those
involving registered lands. 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.

In entering into the mortgage contract with spouses Velasco, there was no indication that respondent bank acted in bad
faith. Spouses Velasco presented to the bank their TCT No. 114256 showing they were then the absolute owners thereof.
Indeed, there were no circumstances or indications that aroused respondent bank’s suspicion that the title was defective.

As to the validity of the sale of the property to respondent spouses Guzman, this Court agrees with the finding of the Court
of Appeals that petitioners are estopped from assailing the same.

Article 1431 of the Civil Code states that “through 108oi tong108 an admission or representation is rendered conclusive
upon the person making it, and cannot be denied or disproved as against the person relying thereon.” A person, who by his
deed or conduct has induced another to act in a particular manner, is barred from adopting an inconsistent position,
attitude or course of conduct that thereby causes loss or injury to another. 10

It bears reiterating that in their two letters to respondent bank earlier mentioned, petitioners did not state that spouses
Velasco falsified their signatures appearing in the Deed of Absolute Sale. Nor did they question the validity of the mortgage
and its foreclosure. Indeed, those letters could have led respondent bank to believe that petitioners recognized the validity
of the Deed of Absolute Sale and the mortgage as well as its subsequent foreclosure.

URSAL V. CA

The spouses Jesus and Cristita Moneset (Monesets) are the registered owners of a 333-square meter land together with a
house thereon situated at Sitio Laguna, Basak, Cebu City covered by Transfer Certificate of Title No. 78374. 3 On January 9,
1985, they executed a “Contract to Sell Lot & House” in favor of petitioner Winifreda Ursal (Ursal). Petitioner paid the down
payment and took possession of the property. She immediately built a concrete perimeter fence and an artesian well, and
planted fruit bearing trees and flowering plants thereon which all amounted to P50,000.00. After paying six monthly
installments, petitioner stopped paying due to the Monesets’ failure to deliver to her the transfer certificate of title of the
property as per their agreement; and because of the failure of the Monesets to turn over said title, petitioner failed to have
the contract of sale annotated thereon.

Unknown to petitioner, the Monesets executed on November 5, 1985 an absolute deed of sale in favor of Dr. Rafael
Canora, Jr. over the said property for P14,000.00. 6 On September 15, 1986, the Monesets executed another sale, this time
with pacto de retro with Restituto Bundalo. 7 On the same day, Bundalo, as attorney-in-fact of the Monesets, executed a
real estate mortgage over said property with Rural Bank of Larena (hereafter Bank) located in Siquijor for the amount of
P100,000.00. 8 The special power of attorney made by the Monesets in favor of Bundalo as well as the real estate mortgage
was then annotated on the title on September 16, 1986. 9 For the failure of the Monesets to pay the loan, the Bank served
a notice of extrajudicial foreclosure dated January 27, 1988 on Bundalo.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 109
Case Notes/Digests

On September 30, 1989, Ursal filed an action for declaration of non-effectivity of mortgage and damages against the
Monesets, Bundalo and the Bank. She claimed that the defendants committed fraud and/or bad faith in mortgaging the
property she earlier bought from the Monesets with a bank located in another island, Siquijor; and the Bank acted in bad
faith since it granted the real estate mortgage in spite of its knowledge that the property was in the possession of
petitioner.

The Monesets answered that it was Ursal who stopped paying the agreed monthly installments in breach of their
agreement. 12 The Bank, on the other hand, averred that the title of the property was in the name of “Cristita Radaza
Moneset married to Jesus Moneset” and did not show any legal infirmity.

Trial on the merits proceeded. Thereafter, the Regional Trial Court of Cebu City, Branch 24, rendered its decision finding
that Ursal is more credible than the Monesets and that the Monesets are liable for damages for fraud and breach of the
contract to sell; As to the real estate mortgage, the trial court held that the same was valid and the Bank was not under any
obligation to look beyond the title, although the present controversy could have been avoided had the Bank been more
astute in ascertaining the nature of petitioner’s possession of the property. (Which was affirmed by the CA on appeal.)

The crux of petitioner’s contention is that the Bank failed to look beyond the transfer certificate of title of the property for
which it must be held liable.

Ruling

We agree. Banks cannot merely rely on certificates of title in ascertaining the status of mortgaged properties; as their
business is impressed with public interest, they are expected to exercise more care and prudence in their dealings than
private individuals. 31Indeed, the rule that persons dealing with registered lands can rely solely on the certificate of title
does not apply to banks.

Our agreement with petitioner on this point of law, notwithstanding, we are constrained to refrain from granting the
prayers of her petition, to wit: that the Deed of Real Estate Mortgage be declared as non-effective and non-enforceable as
far as petitioner is concerned; that she be declared as the absolute owner of the house and lot in question; that the
Monesets be ordered to execute a deed of absolute sale covering the subject property; and that the Bank be ordered to
direct the collection or payment of the loan of P100,000.00 plus interest from the Monesets for they were the ones who
received and enjoyed the said loan. 35

The reason is that, the contract between petitioner and the Monesets being one of “Contract to Sell Lot and House,”
petitioner, under the circumstances, never acquired ownership over the property and her rights were limited to demand
for specific performance from the Monesets, which at this juncture however is no longer feasible as the property had
already been sold to other persons.

A contract to sell is a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the
subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the
prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price.

In such contract, the prospective seller expressly reserves the transfer of title to the prospective buyer, until the happening
of an event, which in this case is the full payment of the purchase price. What the seller agrees or obligates himself to do is
to fulfill his promise to sell the subject property when the entire amount of the purchase price is delivered to him. Stated
differently, the full payment of the purchase price partakes of a suspensive condition, the non-fulfillment of which prevents
the obligation to sell from arising and thus, ownership is retained by the prospective seller without further remedies by the
prospective buyer.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 110
Case Notes/Digests

A contract to sell may further be distinguished from a conditional contract of sale, in that, the fulfillment of the suspensive
condition, which is the full payment of the purchase price, will not automatically transfer ownership to the buyer although
the property may have been previously delivered to him. The prospective vendor still has to convey title to the prospective
buyer by entering into a contract of absolute sale. While in a conditional contract of sale, the fulfillment of the suspensive
condition renders the sale absolute and affects the seller’s title thereto such that if there was previous delivery of the
property, the seller’s ownership or title to the property is automatically transferred to the buyer.

In this case, the parties not only titled their contract as “Contract to Sell Lot and House” but specified in their agreement
that the vendor shall only execute a deed of absolute sale on the date of the final payment by vendee. 42 Such provision
signifies that the parties truly intended their contract to be that of contract to sell.

Since the contract in this case is a contract to sell, the ownership of the property remained with the Monesets even after
petitioner has paid the down payment and took possession of the property. In Flancia vs. Court of Appeals, 44 where the
vendee in the contract to sell also took possession of the property, this Court held that the subsequent mortgage
constituted by the owner over said property in favor of another person was valid since the vendee retained absolute
ownership over the property. 45 At most, the vendee in the contract to sell was entitled only to damages.

Petitioner attributes her decision to stop paying installments to the failure of the Monesets to comply with their agreement
to deliver the transfer certificate of title after the down payment of P50,000.00. On this point, the trial court was correct in
holding that for such failure, the Monesets are liable to pay damages pursuant to Art. 1169 of the Civil Code on reciprocal
obligations. 47The vendors’ breach of the contract, notwithstanding, ownership still remained with the Monesets and
petitioner cannot justify her failure to complete the payment.

In this case, petitioner instituted an action for “Declaration of Non-Effectivity of Mortgage with Damages” four years from
the date of her last installment and only as a reaction to the foreclosure proceedings instituted by respondent Bank. After
the Monesets failed to deliver the TCT, petitioner merely stopped paying installments and did not institute an action for
specific performance, neither did she consign payment of the remaining balance as proof of her willingness and readiness
to comply with her part of the obligation. As we held in San Lorenzo Development Corp. vs. Court of Appeals, 50 the
perfected contract to sell imposed on the vendee the obligation to pay the balance of the purchase price. There being an
obligation to pay the price, the vendee should have made the proper tender of payment and consignation of the price in
court as required by law. Consignation of the amounts due in court is essential in order to extinguish the vendee’s
obligation to pay the balance of the purchase price. 51 Since there is no indication in the records that petitioner even
attempted to make the proper consignation of the amounts due, the obligation on the part of the Monesets to transfer
ownership never acquired obligatory force.

In other words, petitioner did not acquire ownership over the subject property as she did not pay in full the equal price of
the contract to sell. Further, the Monesets’ breach did not entitle petitioner to any preferential treatment over the
property especially when such property has been sold to other persons.

In a contract to sell, there being no previous sale of the property, a third person buying such property despite the
fulfillment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a
buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property. There is no double
sale in such case. Title to the property will transfer to the buyer after registration because there is no defect in the owner-
seller’s title per se, but the latter, of course, may be sued for damages by the intending buyer.

In this case, the lower courts found that the property was sold to Dr. Canora and then to Bundalo who in turn acted as
attorney-in-fact for the Monesets in mortgaging the property to respondent Bank. The trial court and the CA erred in giving
petitioner the preferential right to redeem the property as such would prejudice the rights of the subsequent buyers who
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 111
Case Notes/Digests

were not parties in the proceedings below. While the matter of giving petitioner preferential right to redeem the property
was not put in issue before us, in the exercise of our discretionary power to correct manifest and palpable error, we deem it
proper to delete said portion of the decision for being erroneous.

Petitioner’s rights were limited to asking for specific performance and damages from the Monesets. Specific performance,
however, is no longer feasible at this point as explained above. This being the case, it follows that petitioner never had any
cause of action against respondent Bank. Having no cause of action against the bank and not being an owner of the subject
property, petitioner is not entitled to redeem the subject property.

RCBC V. CA

GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation, RCBC
Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYU’s application for
approval by RCBC’s executive committee. A credit facility in the amount of P30 million was initially granted. Upon GOYU’s
application and Uy’s and Lao’s recommendation, RCBC’s executive committee increased GOYU’s credit facility to P50
million, then to P90 million, and finally to P117 million. As security for its credit facilities with RCBC, GOYU executed two
real estate mortgages and two chattel mortgages in favor of RCBC, which were registered with the Registry of Deeds at
Valenzuela, Metro Manila. Under each of these four mortgage contracts, GOYU committed itself to insure the mortgaged
property with an insurance company approved by RCBC, and subsequently, to endorse and deliver the insurance policies to
RCBC.

On April 27, 1992, one of GOYU’s factory buildings in Valenzuela was gutted by fire. Consequently, GOYU submitted its
claim for indemnity on account of the loss insured against. MICO denied the claim on the ground that the insurance policies
were either attached pursuant to writs of attachments/garnishments issued by various courts or that the insurance
proceeds were also claimed by other creditors of GOYU alleging better rights to the proceeds than the insured. In an
interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of Manila (Branch 3), confirmed
that GOYU’s other creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained their
respective writs of attachments from various courts, covering an aggregate amount of P14,938,080.23, and ordered that
the proceeds of the ten insurance policies be deposited with the said court minus the aforementioned P14,938,080.23.
Accordingly, on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC.

Issue

This Court, however, discerns one primary and central issue, and this is, whether or not RCBC, as mortgagee, has any right
over the insurance policies taken by GOYU, the mortgagor, in case of the occurrence of loss.

Ruling

As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed several mortgage
contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that GOYU shall insure the mortgaged
property with any of the insurance companies acceptable to RCBC. GOYU indeed insured the mortgaged property with
MICO, an insurance company acceptable to RCBC. Based on their stipulations in the mortgage contracts, GOYU was
supposed to endorse these insurance policies in favor of and deliver them, to RCBC. Alchester Insurance Agency, Inc.,
MICO’s underwriter from whom GOYU obtained the subject insurance policies, preferred the nine endorsements (see Exh.
“1-Malayan”; to “9-Malayan”; also Exh.” 51-RCBC” to “59-RCBC”), copies of which were delivered to GOYU, RCBC, and
MICO. However, because these endorsements do not bear the signature of any officer of GOYU, the trial court, as well as
the Court of Appeals, concluded that the endorsements are defective.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 112
Case Notes/Digests

It is settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgaged
property, such that each one of them may insure the same property for his own sole benefit. There is no question that
GOYU could insure the mortgaged property for its own exclusive benefit. In the present case, although it appears that
GOYU obtained the subject insurance policies naming itself as the sole payee, the intentions of the parties as shown by
their contemporaneous acts, must be given due consideration in order to better serve the interest of justice and equity.

RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation in the
mortgage contracts. We find such reliance to be justified under the circumstances of the case. GOYU failed to seasonably
repudiate the authority of the person or persons who prepared such endorsements. Over and above this, GOYU continued,
in the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the occurrence of the loss
insured against, it was too late for GOYU to disown the endorsements for any imagined or contrived lack of authority of
Alchester to prepare and issue said endorsements. If there had not been actually an implied ratification of said
endorsements by virtue of GOYU’s inaction in this case, GOYU is at the very least estopped from assailing their operative
effects. To permit GOYU to capitalize on its non-confirmation of these endorsements while it continued to enjoy the
benefits of the credit facilities of RCBC which believed in good faith that there was due endorsement pursuant to their
mortgage contracts, is to countenance grave contravention of public policy, fair dealing, good faith, and justice. Such an
unjust situation, the Court cannot sanction. Under the peculiar circumstances obtaining in this case, the Court is bound to
recognize RCBC’s right to the proceeds of the insurance policies if not for the actual endorsement of the policies, at least on
the basis of the equitable principle of estoppels.

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insurance shall
exclusively apply to the interest of the person in whose name or for whose benefit it is made. The peculiarity of the
circumstances obtaining in the instant case presents a justification to take exception to the strict application of said
provision, it having been sufficiently established that it was the intention of the parties to designate RCBC as the party for
whose benefit the insurance policies were taken out.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being exclusively payable to RCBC
by reason of the endorsement by Alchester to RCBC, which we already ruled to have the force and effect of an
endorsement by GOYU itself, these 8 policies can not be attached by GOYU’s other creditors up to the extent of the GOYU’s
outstanding obligation in RCBC’s favor. Section 53 of the Insurance Code ordains that the insurance proceeds of the
endorsed policies shall be applied exclusively to the proper interest of the person for whose benefit it was made. In this
case, to the extent of GOYU’s obligation with RCBC, the interest of GOYU in the subject policies had been transferred to
RCBC effective as of the time of the endorsement. These policies may no longer be attached by the other creditors of
GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless forthwith be dismissed for being moot
and academic in view of the results reached herein. Only the two other policies amounting to P19,646,224.92 may be
validly attached, garnished, and levied upon by GOYU’s other creditors. To the extent of GOYU’s outstanding obligation with
RCBC, all the rest of the other insurance policies above-listed which were endorsed to RCBC, are, therefore, to be released
from attachment, garnishment, and levy by the other creditors of GOYU.

The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are dated after the
fire. It failed to consider that said notes had for their origin transactions consummated prior to the fire. Thus, careful
attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewals of Promissory Notes
No. 908-91 and 952-91, loans already availed of by GOYU.

The two courts below erred in failing to see that the promissory notes which they ruled should be excluded for bearing
dates which are after that of the fire, are mere renewals of previous ones. The proceeds of the loan represented by these

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 113
Case Notes/Digests

promissory notes were admittedly received by GOYU. There is ample factual and legal basis for giving GOYU’s judicial
admission of liability in the amount of P116,301,992.60 full force and effect.

It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers of the
mortgaged property will, nonetheless, have to be applied as payment against GOYU’s obligation. But, contrary to the lower
courts’ findings, payments effected by GOYU prior to January 21, 1993 should no longer be deducted. Such payments had
obviously been duly considered by GOYU, in its aforequoted letter dated March 9, 1993, wherein it admitted that its past
due account totaled P116,301,992.60 as of January 21, 1993.

The need for the payment of interest due upon the principal amount of the obligation, which is the cost of money to RCBC,
the primary end and the ultimate reason for RCBC’s existence and being, was duly recognized by the trial court when it
ruled favorably on RCBC’s counterclaim, ordering GOYU “to pay its loan obligation with RCBC in the amount of
P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the respective promissory notes (without
surcharges and penalties) per computation, pp. 14-A, 14-B, 14-C” (Record, p. 479).

The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surcharges and
penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties despite express
stipulation therefor in a valid agreement, may not equally justify non-payment of interest. The charging of interest for loans
forms a very essential and fundamental element of the banking business, which may truly be considered to be at the very
core of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any interest at all. We
fail to find justification for the Court of Appeals’ outright deletion of the payment of interest as agreed in upon the
respective promissory notes. This constitutes gross error. (Guidelines have been provided in Eastern Shipping Case.)

Surcharges and Penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages. In
exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the
circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and
penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable.
What may be iniquitous and unconscionable in one case, may be totally just and equitable in another. This provision of law
will have to be applied to the established facts of any given case. Given the circumstances under which GOYU found itself
after the occurrence of the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the penalty
charges of 36%, to be definitely iniquitous and unconscionable. The Court tempers these rates to 2% and 3%, respectively.
Furthermore, in the light of GOYUs offer to pay the amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit “BB”),
which RCBC refused, we find it more in keeping with justice and equity for RCBC not to charge additional interest,
surcharges, and penalties from that time onward.

In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two simultaneous
remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other for foreclosure. In doing
so, said the appellate court, the second action is deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-
199). The Court of Appeals was too accommodating in giving due consideration to this argument of GOYU, for the
foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R CV No. 46247, the case having been
elevated by RCBC.

RAMIREZ VS. CA

It appears that on December 29, 1965, private respondents spouses Loreto Claravall and Victoria Claravall executed a deed
of sale in favor of the spouses Francisco Ramirez, Jr. and Carolina Ramirez covering a parcel of land, including improvements
thereon, situated in Ilagan, Isabela. On even date, another instrument was executed granting the spouses Claravall an
option to repurchase the property within a period of two years from December 29, 1965 but not earlier nor later than the
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 114
Case Notes/Digests

month of December, 1967. 1At the expiration of the two-year period, the Claravalls failed to redeem the property,
prompting them to file a complaint against the spouses Francisco Ramirez, Jr. and Carolina Ramirez to compel the latter to
sell the property back to them.

After trial, judgment was rendered in favor of the spouses Ramirez which was, on appeal, affirmed by the Court of Appeals.
On review, however, this Court, finding that the Deed of Absolute Sale with option to repurchase executed by private
respondents in favor of the spouses Ramirez was one of equitable mortgage. The decision of this Court having become final
and 114oi tong, 6 possession of the property was turned over to private respondents after they settled their obligation to
the spouses Ramirez.

Following the death of Francisco Ramirez, Jr. or on November 21, 1994, private respondents filed a complaint 7 before the
RTC of Ilagan for accounting and damages against herein petitioners alleging that the spouses Ramirez acted fraudulently
and in bad faith in refusing and obstructing the redemption of the property by private respondents from January 1, 1968 up
to December 31, 1993 during which petitioners were receiving rentals from the tenants of the property which must be
accounted for and returned to private respondents; before the possession of the property was turned over to private
respondents, petitioners “vandalized, destroyed and carried away many portion[s]/parts” of the improvements on the
property, causing damages amounting to Five Hundred Thousand (P500,000.00) Pesos which petitioners must pay and be
liable for.

Ruling

In their complaint in Civil Case No. 834, aside from the recovery of rentals, private respondents raised the issue of damages
arising from petitioners’ alleged destruction of some improvements on the property, which latter issue was not touched
upon in petitioners’ Motion to Dismiss.

The issue of damages arising from the alleged destruction of improvements on the property could not of course have been
raised in Civil Case No. 2043 for such issue arose only upon the execution of this Court’s final decision in said case.

In other words, the fourth of the following requisites of res judicata, to wit: (1) the former judgment must be final; (2) it
must have been rendered by a court having jurisdiction over the subject matter and the parties; (3) it must be a judgment
on the merits; and (4)there must be between the first and second action identity of parties, identify of subject matter, and
identity of causes of action, 27 is not present, there being no identity of causes of action between the two cases. For while
the cause of action in Civil Case No. 2043 arose from the spouses Ramirez’s alleged refusal to allow redemption of the
property, one of the causes of action in Civil Case No. 834 arose from the alleged damage to the improvements on the
property attributed to petitioners before it was turned over to the sheriff upon execution of the final judgment in the first
case. In fine, Civil Case No. 834 is not barred by the judgment in Civil Case No. 2043.

It is a well-established doctrine that the mortgagor’s default does not operate to vest the mortgagee the ownership of the
encumbered property 30 and the act of the mortgagee in registering the mortgaged property in his own name upon the
mortgagor’s failure to redeem the property amounts to pactum commissorium, 31 a forfeiture clause declared by this Court
as contrary to good morals and public policy and, therefore, void. 32 Before perfect title over a mortgaged property may
thus be secured by the mortgagee, he must, in case of non-payment of the debt, foreclose the mortgage first and
thereafter purchase the mortgaged property at the foreclosure sale. 33

In fine, the ownership of the property was not vested to the spouses Ramirez upon private respondents’ failure to pay their
indebtedness, the registration of the property in the former’s names notwithstanding, absent any showing that they
foreclosed the mortgage and purchased the property at a foreclosure sale.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 115
Case Notes/Digests

PRUDENTIAL BANK V. ALVIAR

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of land in San Juan, Metro
Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July 1975, they
executed a deed of real estate mortgage in favor of petitioner Prudential Bank to secure the payment of a loan worth
P250,000.00. 2 This mortgage was annotated at the back of TCT No. 438157. On 4 August 1975, respondents executed the
corresponding promissory note, PN BD#75/C-252, covering the said loan, which provides that the loan matured on 4 August
1976 at an interest rate of 12% per annum with a 2% service charge, and that the note is secured by a real estate mortgage
as aforementioned.

On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for P2,640,000.00, secured by D/A
SFDX #129, signifying that the loan was secured by a “hold-out” on the mortgagor’s foreign currency savings account with
the bank under Account No. 129, and that the mortgagor’s passbook is to be surrendered to the bank until the amount
secured by the “hold-out” is settled. 5

On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband and wife were
President and Chairman of the Board and Vice President, 6 respectively, PN BD#76/C-430 covering P545,000.000. As
provided in the note, the loan is secured by “Clean-Phase out TOD CA 3923,” which means that the temporary overdraft
incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan in compliance with a Central Bank
circular directing the discontinuance of overdrafts. 7

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a straight loan of
P545,000.00, the proceeds of which shall be used to liquidate the outstanding loan of P545,000.00 TOD. The letter likewise
mentioned that the securities for the loan were the deed of assignment on two promissory notes executed by Bancom
Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and
transportation equipment. 8

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of G.B. Alviar Realty and
Development, Inc. and for the release of the real estate mortgage for the P450,000.00 loan covering the two (2) lots located
at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The payment was acknowledged by
petitioner who accordingly released the mortgage over the two properties. 9

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property covered by TCT No.
438157. Per petitioner’s computation, respondents had the total obligation of P1,608,256.68, covering the three (3)
promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345 for P382,680.83, and PN BD#76/C-340 for
P545,000.00, plus assessed past due interests and penalty charges. The public auction sale of the mortgaged property was
set on 15 January 1980. 10

Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction with the RTC of
Pasig, 11claiming that they have paid their principal loan secured by the mortgaged property, and thus the mortgage should
not be foreclosed. For its part, petitioner averred that the payment of P2,000,000.00 made on 6 March 1979 was not a
payment made by respondents, but by G.B. Alviar Realty and Development Inc., which has a separate loan with the bank
secured by a separate mortgage. (Later on, the lower court granted the motion for foreclosure)

Petitioner maintains that the “blanket mortgage clause” or the “dragnet clause” in the real estate mortgage expressly
covers not only the P250,000.00 under PN BD#75/C-252, but also the two other promissory notes included in the
application for extrajudicial foreclosure of real estate mortgage. 20 Thus, it claims that it acted within the terms of the
mortgage contract when it filed its petition for extrajudicial foreclosure of real estate mortgage.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 116
Case Notes/Digests

Issue

The instant case thus poses the following issues pertaining to: (i) the validity of the “blanket mortgage clause” or the
“dragnet clause”; (ii) the coverage of the “blanket mortgage clause”; and consequently, (iii) the propriety of seeking
foreclosure of the mortgaged property for the non-payment of the three loans.

Ruling

A “blanket mortgage clause,” also known as a “dragnet clause” in American jurisprudence, is one which is specifically
phrased to subsume all debts of past or future origins. Such clauses are “carefully scrutinized and strictly
construed.” 38 Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which
may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on
each new transaction. 39 A “dragnet clause” operates as a convenience and accommodation to the borrowers as it makes
available additional funds without their having to execute additional security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording fees, et cetera. 40 Indeed, it has been settled in a long line of decisions
that mortgages given to secure future advancements are valid and legal contracts, 41 and the amounts named as
consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and other indebtedness can be gathered.

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate mortgage to
secure not only the P250,000.00 loan from the petitioner, but also future credit facilities and advancements that may be
obtained by the respondents. The terms of the above provision being clear and unambiguous, there is neither need nor
excuse to construe it otherwise.

In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN BD#76/C-345,
executed by Don Alviar was secured by a “hold-out” on his foreign currency savings account, while PN BD#76/C-430,
executed by respondents for Donalco Trading, Inc., was secured by “Clean-Phase out TOD CA 3923” and eventually by a
deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of
A.U. Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. The matter of PN
BD#76/C-430 has already been discussed. Thus, the critical issue is whether the “blanket mortgage” clause applies even to
subsequent advancements for which other securities were intended, or particularly, to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a
“dragnet clause” so worded as to be broad enough to cover all other debts in addition to the one specifically secured will be
construed to cover a different debt, although such other debt is secured by another mortgage. 44 The contrary thinking
maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is otherwise secured as
to its entirety, at least to anything other than a deficiency after exhausting the security specified therein, 45 such deficiency
being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from the
arrangement. 46

The latter school represents the better position. The parties having conformed to the “blanket mortgage clause” or
“dragnet clause,” it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans
need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. In other words, the
sufficiency of the first security is a corollary component of the “dragnet clause.” But of course, there is no prohibition, as in
the mortgage contract in issue, against contractually requiring other securities for the subsequent loans. Thus, when the
mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in
reliance solely on the original security with the “dragnet clause,” but rather, on the new security given. This is the “reliance
on the security test.”
Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 117
Case Notes/Digests

Hence, based on the “reliance on the security test,” the California court in the cited case made an inquiry whether the
second loan was made in reliance on the original security containing a “dragnet clause.” Accordingly, finding a different
security was taken for the second loan no intent that the parties relied on the security of the first loan could be inferred, so
it was held. The rationale involved, the court said, was that the “dragnet clause” in the first security instrument constituted
a continuing offer by the borrower to secure further loans under the security of the first security instrument, and that when
the lender accepted a different security he did not accept the offer. 47

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention, a
mortgage containing a “dragnet clause” will not be extended to cover future advances unless the document evidencing the
subsequent advance refers to the mortgage as providing security therefor. 49

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-payment
of all the three promissory notes. While the existence and validity of the “dragnet clause” cannot be denied, there is a need
to respect the existence of the other security given for PN BD#76/C-345. The foreclosure of the mortgaged property should
only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for the
second promissory note. As held in one case, where deeds absolute in form were executed to secure any and all kinds of
indebtedness that might subsequently become due, a balance due on a note, after exhausting the special security given for
the payment of such note, was in the absence of a special agreement to the contrary, within the protection of the
mortgage, notwithstanding the giving of the special security. 50 This is recognition that while the “dragnet clause” subsists,
the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be
resorted to. TEDHaA

One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a contract of
adhesion, to which respondents’ only participation was the affixing of their signatures or “adhesion” thereto. 51 A contract
of adhesion is one in which a party imposes a ready-made form of contract which the other party may accept or reject, but
which the latter cannot modify.

UNION BANK V. CA

In a memorandum of agreement dated May 27, 1992, D’Rossa Incorporated (DRI) agreed to mortgage its parcels of land
covered by TCT Nos. S-24740 and S-24747 in favor of Union Bank of the Philippines (Union Bank) as security for the credit
facility of Josephine Marine Trading Corporation (JMTC). JMTC availed P3 million from the credit line.

Subsequently, Union Bank increased the credit facility of JMTC to P27 million, from which JMTC availed US$700,503.64 or
P18,318,170.18. Upon JMTC’s failure to pay its obligation, Union Bank instituted foreclosure proceedings on DRI’s
properties. On September 20, 1996, DRI’s properties were auctioned where Union Bank was declared the highest bidder for
P15,300,000.00.

On February 26, 1997, DRI filed a supplemental complaint seeking to declare the public sale as null. It claimed that its
liability is only P3 million which was the liability incurred by JMTC under its first agreement with Union Bank. However,
Union Bank alleged that DRI was liable to JMTC’s total outstanding obligations, regardless of whether it was incurred during
or subsequent to the first agreement.

Issue
The foregoing issues can be summed up into: (a) whether the Court of Appeals erred in holding that the liability of DRI is
limited only to P8.61 million; and (b) whether the Court of Appeals erred in finding the foreclosure sale of DRI’s mortgaged
properties as null for lack of republication of the notice of sale.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 118
Case Notes/Digests

Ruling

The foregoing provisions clearly show the parties’ intent to constitute DRI’s real estate properties as continuing securities,
liable for the current as well as the future obligations of JMTC. Indeed, a mortgage liability is usually limited to the amount
mentioned in the contract, but where the intent of the contracting parties is manifest that the mortgage property shall
also answer for future loans or advancements, the same is valid and binding between the parties. 12 In this case, DRI
expressly agreed to secure all the obligations of JMTC, whether presently owing or subsequently incurred. Thus, its liability
is not limited to P8.61 million only.

A “blanket mortgage clause,” also known as a “dragnet clause” in American jurisprudence, is one which is specifically
phrased to subsume all debts of past or future origins. Such clauses are “carefully scrutinized and strictly construed.”
Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be
known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new
transaction. A “dragnet clause” operates as a convenience and accommodation to the borrowers as it makes available
additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing
costs, costs of extra legal services, recording fees, et cetera. Indeed, it has been settled in a long line of decisions that
mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in
said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the
instrument the intent to secure future and other indebtedness can be gathered.

Even if DRI is considered as an accommodation mortgagor only, its liability would still exceed P8.61 million. It is well to note
that DRI, through its President, Rose D. Teodoro, agreed to secure not only the present obligations of JMTC but also those
that may be incurred after the execution of the mortgage contract. DRI also actively participated in facilitating the increase
of JMTC’s credit facility. It appears from the tenor of the foregoing letter that, more than just being a third-party mortgagor,
DRI was actively involved in the business and operations of JMTC. Likewise, the evidence presented during the proceedings
in the trial court reveal that DRI acknowledged and consented to the renewal and increase of the credit facilities of
JMTC. 17 Thus, by agreeing to secure JMTC’s future loans or advancements with its real properties, DRI is estopped from
questioning the foreclosure proceedings conducted upon the failure of JMTC to pay its obligations to Union Bank.

Concerning DRI’s allegation of lack of republication, the same is without factual or legal basis. Other than its bare
allegations, DRI did not present proof that there was no republication of the notice of sale. On the other hand, Union Bank
presented a Certificate of Posting 18 executed by Sheriff Norberto Magsajo and the Affidavit of Publication by Veronica
Arguilla, the General Manager of Pilipino Newsline, attesting to the publication of the notice on August 29, September 5
and 12, 1996. 19 The original issues of Pilipino Newsline where the notice was republished were also attached in the
records. Verily, in the face of such overwhelming evidence, there is no reason why the regularity and validity of the
mortgage foreclosure should not be upheld as the trial court did.

Foreclosure proceedings have in their favor the presumption of regularity and the burden of evidence to rebut the same is
on the party that seeks to challenge the proceedings. 20 Likewise, the presumption of regularity in the performance of duty
applies in this case in favor of the Sheriff. 21 These presumptions have not been rebutted by convincing and substantial
evidence by DRI. HcSaTI

It is settled that the principal object of a notice of sale is not so much to notify the mortgagor as to inform the public in
general of the nature and condition of the property to be sold, and of the time, place, and terms of the sale. 22 In fact,
personal notice to the mortgagor in extrajudicial foreclosure proceedings is not even necessary, unless stipulated. 23 Yet it
cannot be argued that DRI was left in the dark regarding the exact date of the sale. In a letter dated September 19, 1996, its
counsel wrote the Sheriff of Makati requesting that the sale on September 20, 1996 be held in abeyance in view of their

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 119
Case Notes/Digests

pending petition for the issuance of a temporary restraining order. This proves that DRI knew of the scheduled sale and
cannot therefore claim to have been deprived of the opportunity to participate therein.

MAGLAQUE V. PLANTERS DEVELOPMENT BANK

The spouses Egmidio Maglaque and Sabina Payawal were the owners of a parcel of land, situated in the municipality of San
Miguel, province of Bulacan, with an area of Four Hundred Sixty Four (464) square meters, more or less, and a residential
house of strong materials erected thereon. On March 19, 1974, the spouses Maglaque obtained a loan of two thousand
(P2,000.00) pesos from the Bulacan Development Bank 6evidenced by a promissory note, payable on or before March 19,
1975, in two installments, the first payment of P1,000.00, shall be due on September 19, 1974, and the second payment of
P1,000.00, shall be due on March 19, 1975, with interest at 12% per annum. To secure the loan, the spouses executed a
deed of real estate mortgage on the above-described parcel of land, including its improvements.

On September 15, 1978, for non-payment in full of the loan, the bank extra-judicially foreclosed on the real estate
mortgage, through the Provincial Sheriff of Bulacan, who conducted a public auction sale of the mortgaged property
pursuant to the authority provided for in the deed of real estate mortgage. The bank was the highest bidder. On March 24,
1980, after the lapse of the redemption period, the bank consolidated its title to the property, and became its registered
owner under Transfer Certificate of Title No. T-259923 of the Registry of Deeds of Bulacan.

On September 4, 1980, David Maglaque, as heir of the deceased spouses Egmidio Maglaque and Sabina Payawal, filed with
the Court of First Instance of Bulacan, Branch 04, Baliuag, Bulacan, a complaint for annulment of the sale conducted by the
Provincial Sheriff of Bulacan, reconveyance of title, with damages, and injunction. On September 24, 1980, the bank sold
the property to the spouses Angel S. Beltran and Erlinda C. Beltran, for thirty thousand (P30,000.00) pesos.

On February 28, 1989, the trial rendered decision dismissing the complaint for lack of merit or insufficiency of evidence.
(Affirmed by the CA.)

Ruling

As to the first assigned error, the rule is that a secured creditor holding a real estate mortgage has three (3) options in case
of death of the debtor. These are: “(1) to waive the mortgage and claim the entire debt from the estate of the mortgagor as
an ordinary claim; “(2) to foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and “(3) to rely on
the mortgage exclusively, foreclosing the same at anytime before it is barred by prescription, without right to file a claim for
any deficiency.” Obviously, respondent bank availed itself of the third option.

MCCULLOUGH V. VELOSO

On March 23, 1920, the plaintiff corporation, E. C. McCullough & Co., Inc., sold to Mariano Veloso the property known as
“McCullough Building,” consisting of a land, with the building thereon, described in the certificate of title No. 13274, for the
price of P700,000, Veloso having paid P50,000 cash on account at the execution of the contract, the balance of P650,000 to
be paid, according to the contract, as follows: P50,000 on May 1, 1920; P100,000 on October 31 of the same year; P100,000
on April 1, 1921; P100,000 on April 1, 1922; P100,000 on April 1, 1923; P100,000 on April 1, 1924, and P100,000 on April 1,
1925, all of said amounts to draw interest at the rate of 7 percent per annum, payable semestrally on the first days of April
and October of each year. Veloso agreed, furthermore, to pay 10 percent of the amount of the debt, as attorney’s fee, in
the event that a judicial action should be necessary for the collection of the whole or a part of the debt. Veloso assumed
also the obligation to insure the property for not less than P500,000 as well as to pay all legal taxes that might be imposed
upon the property, and in the event of his failure to do so, the plaintiff should pay said taxes at the expense of Veloso, with
the right to recover of him the amounts thus paid, with interest at 7 per cent per year. To secure the payment of these

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 120
Case Notes/Digests

amounts, Veloso mortgaged the property purchased, this encumbrance having been noted on the certificate of the title No.
13274. It was, finally, stipulated that in case of failure on the part of Veloso to comply with any of the stipulations contained
in the mortgage deed, all the installments with the interest thereon shall become due, and the creditor shall then have the
right to bring the proper action for the collection of the part of the debt.

On August 21, 1920, Mariano Veloso, in turn, sold the property, with the improvements thereon for P100,000 to Joaquin
Serna, who agreed to respect the mortgage of the property in favor of the plaintiff and to assume Mariano Veloso’s
obligation to pay the plaintiff the balance due of the estate on the respective dates when payments should be made
according to the contract between Mariano Veloso and the plaintiff, dated March 20, 1920.

Veloso paid P50,000 on account of the P650,000, and Serna made several payments up to the total sum of P250,000.
Subsequently, however, neither Veloso, nor Serna, made any payment upon the last installments, by virtue of which delay,
the whole obligation became due, and Veloso lost the right to the installments stipulated in his contract with the plaintiff.
Later on Clarke & Larkin, accountants, made a liquidation of the debt of Mariano Veloso in favor of the plaintiff, including
the interest due, with the result that on March 26, 1923, Veloso owed exactly P510,047.34. The accuracy of this statement
of the account is not disputed.

The defendant contends that having sold the property to Serna, and the latter having assumed the obligation to pay the
plaintiff the unpaid balance of the price secured by the mortgage upon the property, he was relieved from this obligation
and it then devolved upon Serna to pay the plaintiff. This means that as a consequences of the contract between the
defendant and Serna, the contract between the defendant and the plaintiff was novated by the substitution of Serna as a
new debtor. This is untenable. In order that this novation may take place, the law requires the consent of the creditor (art.
1205 of the Civil Code). The plaintiff did not intervene in the contract between Veloso and Serna and did not expressly give
his consent to this substitution. Novation must be express, and cannot be presumed.

In connection with the contention of the defendant, the fact that the plaintiff did not oppose the sale subsequently made
by the defendant to Serna of the mortgaged property does not mean anything. The mortgage is merely an encumbrance
upon the property and does not extinguish the title of the debtor, who does not, therefore, lose his principal attribute as
owner, that is, the right to dispose. This being so, the fact that the plaintiff recognized the efficaciousness of that sale
cannot prejudice him, which sale the defendant had the right to make and the plaintiff cannot oppose and which, at all
events, could not affect the mortgage, as the latter follows the property whoever the possessor may be. (Art. 1876 of the
Civil Code)

The defendant argues in his court that the law novation is not applicable to the contract of mortgage. This point of view of
the defendant, leaving aside all question as to novation, his claim appears still more clearly to be groundless. The effects of
a transfer of a mortgaged property to a third person are well determined by the Civil Code. According to article 1879 of this
Code, the creditor may demand of the third person in possession of the property mortgaged payment of such part of the
debt, as is secured by the property in his possession, in the manner and form established by law. The Mortgage Law in force
at the promulgation of the Civil Code and referred to in the latter, provided, among other things, that the debtor should not
pay the debt upon its maturity after a judicial or notarial demand for payment has been made by the creditor upon him.
(Art. 135 of the Mortgage Law of the Philippines of 1889.) According to this, the obligation of the new possessor to pay the
debt originated only from the right of the creditor to demand payment of him, it being necessary that a demand for
payment should have previously been made upon the debtor and the latter should have failed to pay. And even if these
requirements were complied with, still the third possessor might abandon the property mortgaged, and in that case it is
considered to be in the possession of the debtor. (Art. 136 of the same law.) This clearly shows that the spirit of the Civil
Code is to let the obligation of the debtor to pay the debt stand although the property mortgaged to secure the payment of
said debt may have been transferred to a third person. While the Mortgage Law of 1893 eliminated these provisions, it

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 121
Case Notes/Digests

contained nothing indicating any change in the spirit of the law in this respect. Article 129 of this law, which provides for
the substitution of the debtor by the third person in possession of the property, for the purpose of the giving of the notice,
does not show this change and has reference to a case where the action is directed only against the property burdened
with the mortgage. (Art. 168 of the Regulation.)

Finally, the fact that the plaintiff has received payments from Serna on account of Veloso’s debt is of no importance, for this
is, at most, a payment by a third person, which, while it may create a juridical relation between Serna and Veloso, cannot
affect the relation between the latter and the plaintiff, except that the obligation thus paid is discharged.

PHILIPPINE TRUST COMPANY V. CA

Plaintiff Forfom Development Corporation is engaged in agricultural business and real estate development and owns
several parcels of land in Pampanga. It is the registered owner of two (2) parcels of land subject of the present controversy,
situated in Angeles City, Pampanga, under Transfer Certificate of Title Nos. 10896 and 64884 consisting of 1,126,530 and
571,014 square meters, respectively. Sometime in 1989, plaintiff received a letter from the Department of Agrarian Reform
with the names Ma. Teresa Limcauco and Ellenora Limcauco as addressees. Upon verification with the DAR and the Register
of Deeds made by plaintiff’s Vice-President at that time, Mr. Jose Marie L. Ramos, plaintiff discovered that the subject
properties had already been transferred in the names of said Ma. Teresa Limcauco and Ellenora Limcauco who were never
known to plaintiff or its employees. Plaintiff’s Board of Directors decided to seek the assistance of the National Bureau of
Investigation (NBI) to conduct an investigation on the matter. On November 23, 1989, plaintiff caused the annotation of its
adverse claim on TCT No. 75533 of the Registry of Deeds of Angeles City.

(1)A “Deed of Absolute Sale” dated March 6, 1987 was executed over the lot covered by TCT No. 64884 in favor of Ellenora
Vda. De Limcauco for the price of P500,000.00. A separate “Deed of Absolute Sale” dated October 5, 1987 was likewise
executed over the property covered by TCT No. 10896 in favor of Ma. Teresa Limcauco in consideration of P500,000.00. In
both instruments, the signature of the plaintiff’s President, Felix H. Limcauco was forged. Likewise, a certification to the
effect that plaintiff’s Board of Directors had duly approved the sale contained the forged signature of plaintiff’s President,
Felix H. Limcauco.

(4)Although the property covered by TCT No. 10896 has already been subdivided into different lots and covered by
separate titles in the name of Ma. Teresa Limcauco, said lots were not yet transferred or conveyed to third parties. But as to
the property covered by TCT No. 64884, said certificate of title was cancelled and a new certificate of title, TCT No.
75436/T-378 was issued in the name of Ellenora Vda. De Limcauco. On September 23, 1987, a Deed of Absolute Sale was
executed by Ellenora Vda. De Limcauco in favor of defendant Raul P. Claveria whereby the property covered by TCT No.
64884 was supposedly sold to said defendant for the sum of P5,139,126.00. On September 24, 1987, TCT No. 75436/T-378
was cancelled and a new certificate of title, TCT No. 75533 was issued in the name of defendant Raul P. Claveria. On
October 21, 1987, defendant spouses Raul and Elea Claveria mortgaged the property with the defendant Philippine Trust
Company to guarantee a loan in the amount of P8,000,000.00, which mortgage was duly registered and annotated as Entry
No. 2858 in TCT No. 75533.

On December 26, 1989, plaintiff instituted the present action against the defendants Ma. Teresa Limcauco, Ellenora D.
Limcauco, spouses Raul P. Claveria and Elea R. Claveria, Philippine Trust Company and the Register of Deeds of Angeles City.
The Complaint alleged conspiratorial acts committed by said defendants who succeeded in causing the fraudulent transfer
of registration of plaintiff’s properties in the names of Ma. Teresa Limcauco and Ellenora D. Limcauco and the subdivision of
the land covered by TCT No. 10896 over which separate titles have been issued.

Christian Arbiol
San Beda College Alabang School of Law
Credit Transactions 122
Case Notes/Digests

On January 21, 1994, petitioner Philippine Trust Company (Philtrust) filed a Notice of Appeal, alleging that the lower court
erred in declaring Transfer Certificate of Title No. 75533-Angeles City void and in concluding that it was a mortgagee in bad
faith. Philtrust further claims that Forfom was negligent with its property. (The CA affirmed the decision of the RTC.)

According to the Court of Appeals, Philtrust was negligent in its credit investigation procedures and its standards for
granting of loans, as shown by (a) its previously extending unsecured and uncollateralized loans to the spouses Raul and
Elea Claveria, and (b) its failure to discover the latter’s statement of a fictitious address in the mortgage contract and being
the subject of estafa cases. The Court of Appeals agreed with the trial court’s finding that Philtrust acted in haste in the
execution of the mortgage and loan contracts, as the property, assessed only at more than P2 million and allegedly
purchased at more than P5 million, was made to secure the principal loan obligation of P8 million.

The appellate court further took note of Philtrust’s refusal to present the records and details of its transactions with the
spouses Claveria despite being pressed to do so by Forfom. The Court of Appeals found this circumstance cast serious
doubt on Philtrust’s allegation that it was a mortgagee in good faith.

Issue

The determination of the case at bar, therefore, hinges on the resolution of the first two issues, which deal with whether
Philtrust is a mortgagee in good or bad faith.

Ruling

It is settled that banks, their business being impressed with public interest, are expected to exercise more care and
prudence than private individuals in their dealings, even those involving registered lands. 18 The rule that persons dealing
with registered lands can rely solely on the certificate of title does not apply to banks. 19 Consequently, Philtrust should
prove that it exercised extraordinary diligence required of it in approving the mortgage contract in favor of the spouses
Claveria.

It baffles us how Philtrust can argue that the promissory note and Deed of Mortgage executed by the spouses Claveria, and
the TCT of the subject property, can prove its allegations that (a) the mortgage was granted after it was satisfied of the
spouses’ credit worthiness; (b) the latter was able to maintain a satisfactory record of payment early on; or (c) it followed
the standard operating procedures in accepting property as security, including having investigators visit the subject
property and appraise its value. The mere fact that Philtrust accepted the subject property as security most certainly does
not prove that it followed the standard operating procedure in doing so. As regards Philtrust’s claim that the Answer to
Interrogatories, being a notarized document, is conclusive as to the truthfulness of its contents, we deem it necessary to
clarify the doctrines cited by Philtrust on this matter.

Public records made in the performance of a duty by a public officer” include those specified as public documents under
Section 19 (a), Rule 132 of the Rules of Court and the acknowledgement, 21 affirmation or oath, 22 or jurat 23 portion of
public documents under Section 19 (c). Hence, under Section 23, notarized documents are merely proof of the fact which
gave rise to their execution (e.g., the notarized Answer to Interrogatories in the case at bar is proof that Philtrust had been
served with Written Interrogatories), and of the date of the latter (e.g., the notarized Answer to Interrogatories is proof
that the same was executed on October 12, 1992, the date stated thereon), 24 but is not prima facie evidence of the facts
therein stated. Additionally, under Section 30 of the same Rule, the acknowledgement in notarized documents is prima
facie evidence of the execution of the instrument or document involved (e.g., the notarized Answer to Interrogatories
is prima facie proof that petitioner executed the same).

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San Beda College Alabang School of Law
Credit Transactions 123
Case Notes/Digests

The reason for the distinction lies with the respective official duties attending the execution of the different kinds of public
instruments. Official duties are disputably presumed to have been regularly performed. 26 As regards affidavits, including
Answers to Interrogatories which are required to be sworn to by the person making them, 27 the only portion thereof
executed by the person authorized to take oaths is the jurat. The presumption that official duty has been regularly
performed therefore applies only to the latter portion, wherein the notary public merely attests that the affidavit was
subscribed and sworn to before him or her, on the date mentioned thereon. Thus, even though affidavits are notarized
documents, we have ruled that affidavits, being self-serving, must be received with caution. 28

Philtrust, therefore, presented no evidence rebutting the following badges of bad faith shown in the records of the case.
Even though circumstantial, the following adequately prove by preponderance of evidence that Philtrust was aware of the
fraudulent scheme perpetrated upon Forfom:

A. Within a period of less than one year, Philtrust extended unsecured loans amounting to P7,300,000.00 to the
spouses Claveria;
B. Although the spouses Claveria had declared their residence to be in the plush subdivision in Ayala Alabang,
Philtrust was content to receive as security a land outside Metro Manila, which was only recently acquired by the
said spouses.
C. It is presumed that evidence willfully suppressed would be adverse if produced. 34 When pressed in the Request
for Interrogatories for details of the investigation of the bank, and for the names of the persons who allegedly
visited the subject property and the alleged home of the spouses Claveria, and the names of the bank officers who
dealt with said spouses, Philtrust refused to do so.
D. Philtrust persistently refused to cooperate with the National Bureau of Investigation (NBI) in its investigation of the
fraudulent scheme perpetrated against Forfom, as testified by NBI agents Alberto V. Ramos and Pastor T.
Pangan, 42 and as shown in NBI Investigation Report NBI-NCR 10-11-90 90-2-5507.
E. Had Philtrust properly conducted a credit investigation of the spouses Claveria, it would have easily discovered
that they did not reside and never resided in the address declared by them, as revealed in the investigation by the
NBI 44 and declared by the association of homeowners in the New Alabang subdivision.

PNB V. SPS. MARANON

The controversy at bar involves a 152-square meter parcel of land located at Cuadra-Smith Streets, Downtown, Bacolod
(subject lot) erected with a building leased by various tenants. The subject lot was among the properties mortgaged by
Spouses Rodolfo and Emilie Montealegre (Spouses Montealegre) to PNB as a security for a loan. In their transactions with
PNB, Spouses Montealegre used Transfer Certificate of Title (TCT) No. T-156512 over the subject lot purportedly registered
in the name of Emilie Montealegre (Emilie).

When Spouses Montealegre failed to pay the loan, PNB initiated foreclosure proceedings on the mortgaged properties,
including the subject lot. In the auction sale held on August 16, 1991, PNB emerged as the highest bidder. It was issued the
corresponding Certificate of Sale dated December 17, 1991 7 which was subsequently registered on February 4, 1992.

Before the expiration of the redemption period or on July 29, 1992, Spouses Marañon filed before the RTC a complaint
for Annulment of Title, Reconveyance and Damages 9 against Spouses Montealegre, PNB, the Register of Deeds of Bacolod
City and the Ex-Officio Provincial Sheriff of Negros Occidental. The complaint, docketed as Civil Case No. 7213, alleged that
Spouses Marañon are the true registered owners of the subject lot by virtue of TCT No. T-129577 which was illegally
cancelled by TCT No. T-156512 under the name of Emilie who used a falsified Deed of Sale bearing the forged signatures of
Spouse Marañon 10 to effect the transfer of title to the property in her name.

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San Beda College Alabang School of Law
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In its Answer, 11 PNB averred that it is a mortgagee in good faith and for value and that its mortgage lien on the property
was registered thus valid and binding against the whole world.

On June 2, 2006, the RTC rendered its Decision 13 in favor of the respondents after finding, based on the expert testimony
of Colonel Rodolfo Castillo, Head of the Forensic Technology Section of Bacolod City Philippine National Police, that the
signatures of Spouses Marañon in the Deed of Sale presented by Spouses Montealegre before the Register of Deeds to
cause the cancellation of TCT No. T-129577 were forged. Hence, the RTC concluded the sale to be null and void and as such
it did not transfer any right or title in law. PNB was adjudged to be a mortgagee in good faith whose lien on the subject lot
must be respected.

Ruling

It is readily apparent from the facts at hand that the status of PNB’s lien on the subject lot has already been settled by the
RTC in its Decision dated June 2, 2006 where it was adjudged as a mortgagee in good faith whose lien shall subsist and be
respected. The decision lapsed into finality when neither of the parties moved for its reconsideration or appealed.

Being a final judgment, the dispositions and conclusions therein have become immutable and unalterable not only as
against the parties but even the courts. This is known as the doctrine of immutability of judgments which espouses that a
judgment that has acquired finality becomes immutable and unalterable, and may no longer be modified in any respect
even if the modification is meant to correct erroneous conclusions of fact or law and whether it will be made by the court
that rendered it or by the highest court of the land.

Hence, as correctly argued by PNB, the issue on its status as a mortgagee in good faith have been adjudged with finality and
it was error for the CA to still delve into and, worse, overturn, the same. The CA had no other recourse but to uphold the
status of PNB as a mortgagee in good faith regardless of its defects for the sake of maintaining stability of judicial
pronouncements. “The main role of the courts of justice is to assist in the enforcement of the law and in the maintenance
of peace and order by putting an end to judiciable controversies with finality. Nothing better serves this role than the long
established doctrine of immutability of judgments.”

The protection afforded to PNB as a mortgagee in good faith refers to the right to have its mortgage lien carried over and
annotated on the new certificate of title issued to Spouses Marañon 35 as so adjudged by the RTC. Thereafter, to enforce
such lien thru foreclosure proceedings in case of non-payment of the secured debt, 36 as PNB did so pursue. The principle,
however, is not the singular rule that governs real estate mortgages and foreclosures attended by fraudulent transfers to
the mortgagor.

Rent, as an accessory follow the principal. 37 In fact, when the principal property is mortgaged, the mortgage shall include
all natural or civil fruits and improvements found thereon when the secured obligation becomes due as provided in Article
2127 of the Civil Code.

Consequently, in case of non-payment of the secured debt, foreclosure proceedings shall cover not only the hypothecated
property but all its accessions and accessories as well.

However, the rule is not without qualifications. In Castro, Jr. v. CA 42 the Court explained that Article 2127 is predicated on
the presumption that the ownership of accessions and accessories also belongs to the mortgagor as the owner of the
principal. After all, it is an indispensable requisite of a valid real estate mortgage that the mortgagor be the absolute owner
of the encumbered property. [A]ll improvements subsequently introduced or owned by the mortgagor on the encumbered
property are deemed to form part of the mortgage. That the improvements are to be considered so incorporated only if so

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San Beda College Alabang School of Law
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owned by the mortgagor is a rule that can hardly be debated since a contract of security, whether, real or personal, needs
as an indispensable element thereof the ownership by the pledgor or mortgagor of the property pledged or mortgaged.

Corollary, any evidence sufficiently overthrowing the presumption that the mortgagor owns the mortgaged property
precludes the application of Article 2127. Otherwise stated, the provision is irrelevant and inapplicable to mortgages and
their resultant foreclosures if the mortgagor is later on found or declared to be not the true owner of the property, as in the
instant case.

It is beyond question that PNB’s mortgagors, Spouses Montealegre, are not the true owners of the subject lot much less of
the building which produced the disputed rent. The foreclosure proceedings on August 16, 1991 caused by PNB could not
have, thus, included the building found on the subject lot and the rent it yields. PNB’s lien as a mortgagee in good faith
pertains to the subject lot alone because the rule that improvements shall follow the principal in a mortgage under Article
2127 of the Civil Code does not apply under the premises. Accordingly, since the building was not foreclosed, it remains a
property of Spouses Marañon; it is not affected by non-redemption and is excluded from any consolidation of title made by
PNB over the subject lot. Thus, PNB’s claim for the rent paid by Tolete has no basis.

It must be remembered that there is technically no juridical tie created by a valid mortgage contract that binds PNB to the
subject lot because its mortgagor was not the true owner. But by virtue of the mortgagee in good faith principle, the law
allows PNB to enforce its lien. We cannot, however, extend such principle so as to create a juridical tie between PNB and
the improvements attached to the subject lot despite clear and undeniable evidence showing that no such juridical tie
exists.

Lastly, it is worthy to note that the effects of the foreclosure of the subject lot is in fact still contentious considering that as
a purchaser in the public sale, PNB was only substituted to and acquired the right, title, interest and claim of the mortgagor
to the property as of the time of the levy. 44 There being already a final judgment reconveying the subject lot to Spouses
Marañon and declaring as null and void Emilie’s purported claim of ownership, the legal consequences of the foreclosure
sale, expiration of the redemption period and even the consolidation of the subject lot’s title in PNB’s name shall be
subjected to such final judgment.

ARGUELLES V. RURAL BANK

On December 1, 1990, Fermina M. Guia sold the south portion of the land with an approximate area of 1,350 square meters
to the spouses Petronio and Macaria Arguelles. 5 Although the spouses Arguelles immediately acquired possession of the
land, the Deed of Sale was neither registered with the Register of Deeds nor annotated on OCT No. P-12930. At the same
time, Fermina M. Guia ordered her son Eddie Guia and the latter’s wife Teresita Guia to subdivide the land covered by OCT
No. P-12930 into three lots and to apply for the issuance of separate titles therefor, to wit: Lot 3-A, Lot 3-B, and Lot 3-C.
Thereafter, she directed the delivery of the Transfer Certificate of Title (TCT) corresponding to Lot 3-C to the vendees of the
unregistered sale or the spouses Arguelles. However, despite their repeated demands, the spouses Arguelles claimed that
they never received the TCT corresponding to Lot 3-C from the spouses Guia. Nevertheless, in accordance with the
instructions of Fermina M. Guia, the spouses Guia succeeded in cancelling OCT No. P-12930 on August 15, 1994 and in
subdividing the lot.

On August 18, 1997, the spouses Guia obtained a loan in the amount of P240,000 from the respondent Malarayat Rural
Bank and secured the loan with a Deed of Real Estate Mortgage 7 over Lot 3-C. The loan and Real Estate Mortgage were
made pursuant to the Special Power of Attorney 8 purportedly executed by the registered owner of Lot 3-C, Fermina M.
Guia, in favor of the mortgagors, spouses Guia. Moreover, the Real Estate Mortgage and Special Power of Attorney were
duly annotated in the memorandum of encumbrances of TCT No. T-83944 covering Lot 3-C.

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San Beda College Alabang School of Law
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The spouses Arguelles alleged that it was only in 1997 or after seven years from the date of the unregistered sale that they
discovered from the Register of Deeds of Batangas City the following facts: (1) subdivision of Lot 3 into Lots 3-A, 3-B, and 3-
C; (2) issuance of separate TCTs for each lot; and (3) the annotation of the Real Estate Mortgage and Special Power of
Attorney over Lot 3-C covered by TCT No. T-83944. Two years thereafter, or on June 17, 1999, the spouses Arguelles
registered their adverse claim 9 based on the unregistered sale dated December 1, 1990 over Lot 3-C.

On July 22, 1999, the spouses Arguelles filed a complaint 10 for Annulment of Mortgage and Cancellation of Mortgage Lien
with Damages against the respondent Malarayat Rural Bank with the RTC, Branch 86, of Taal, Batangas. In asserting the
nullity of the mortgage lien, the spouses Arguelles alleged ownership over the land that had been mortgaged in favor of
the respondent Malarayat Rural Bank. On August 16, 1999, the respondent Malarayat Rural Bank filed an Answer with
Counterclaim and Cross-claim 11 against cross-claim-defendant spouses Guia wherein it argued that the failure of the
spouses Arguelles to register the Deed of Sale dated December 1, 1990 was fatal to their claim of ownership.

The RTC found that the spouses Guia were no longer the absolute owners of the land described as Lot 3-C and covered by
TCT No. T-83944 at the time they mortgaged the same to the respondent Malarayat Rural Bank in view of the unregistered
sale in favor of the vendee spouses Arguelles. Thus, the RTC annulled the real estate mortgage, the subsequent foreclosure
sale, and the corresponding issuance of the certificate of title. Moreover, the RTC declared that the respondent Malarayat
Rural Bank was not a mortgagee in good faith as it failed to exercise the exacting degree of diligence required from banking
institutions. (On appeal to the CA it was reversed.)

Issue

In fine, the issue in this case is whether the respondent Malarayat Rural Bank is a mortgagee in good faith who is entitled to
protection on its mortgage lien.

Ruling

At the outset, we note that the issue of whether a mortgagee is in good faith generally cannot be entertained in a petition
filed under Rule 45 of the 1997 Rules of Civil Procedure, as amended. 15 This is because the ascertainment of good faith or
the lack thereof, and the determination of negligence are factual matters which lay outside the scope of a petition for
review on certiorari. 16 However, a recognized exception to this rule is when the RTC and the CA have divergent findings of
fact 17 as in the case at bar.

There is, however, a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his
title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public
policy. This is the doctrine of “mortgagee in good faith” based on the rule that all persons dealing with the property covered
by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the
title. The public interest in upholding the indefeasibility of a certificate of title, as evidence of lawful ownership of the land
or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of
the certificate of title.

In Bank of Commerce v. Spouses San Pablo, Jr., 19 we declared that indeed, a mortgagee has a right to rely in good faith on
the certificate of title of the mortgagor of the property offered as security, and in the absence of any sign that might
arouse suspicion, the mortgagee has no obligation to undertake further investigation.

However, in Bank of Commerce v. Spouses San Pablo, Jr., 20 we also ruled that “[i]n cases where the mortgagee does not
directly deal with the registered owner of real property, the law requires that a higher degree of prudence be exercised by
the mortgagee. While one who buys from the registered owner does not need to look behind the certificate of title, one

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San Beda College Alabang School of Law
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who buys from one who is not the registered owner is expected to examine not only the certificate of title but all factual
circumstances necessary for [one] to determine if there are any flaws in the title of the transferor, or in [the] capacity to
transfer the land.”

Moreover, in a long line of cases, we have consistently enjoined banks to exert a higher degree of diligence, care, and
prudence than individuals in handling real estate transactions.

In Ursal v. Court of Appeals, 25 we held that where the mortgagee is a bank, it cannot rely merely on the certificate of title
offered by the mortgagor in ascertaining the status of mortgaged properties. Since its business is impressed with public
interest, the mortgagee-bank is duty-bound to be more cautious even in dealing with registered lands. 26 Indeed, the rule
that person dealing with registered lands can rely solely on the certificate of title does not apply to banks. Thus, before
approving a loan application, it is a standard operating practice for these institutions to conduct an ocular inspection of the
property offered for mortgage and to verify the genuineness of the title to determine the real owners thereof. The
apparent purpose of an ocular inspection is to protect the “true owner” of the property as well as innocent third parties
with a right, interest or claim thereon from a usurper who may have acquired a fraudulent certificate of title thereto.

Respondent should have diligently conducted an investigation of the land offered as collateral. Although the Report of
Inspection and Credit Investigation found at the dorsal portion of the Application for Agricultural Loan 29 proved that the
respondent Malarayat Rural Bank inspected the land, the respondent turned a blind eye to the finding therein that the “lot
is planted [with] sugarcane with annual yield (crops) in the amount of P15,000.” 30 We disagree with respondent’s stance
that the mere planting and harvesting of sugarcane cannot reasonably trigger suspicion that there is adverse possession
over the land offered as mortgage. Indeed, such fact should have immediately prompted the respondent to conduct further
inquiries, especially since the spouses Guia were not the registered owners of the land being mortgaged. They merely
derived the authority to mortgage the lot from the Special Power of Attorney allegedly executed by the late Fermina M.
Guia. Hence, it was incumbent upon the respondent Malarayat Rural Bank to be more cautious in dealing with the spouses
Guia, and inquire further regarding the identity and possible adverse claim of those in actual possession of the property.

Since the subject land was not mortgaged by the owner thereof and since the respondent Malarayat Rural Bank is not a
mortgagee in good faith, said bank is not entitled to protection under the law. The unregistered sale in favor of the spouses
Arguelles must prevail over the mortgage lien of respondent Malarayat Rural Bank.

DSM CONSTRUCTION V. CA & MEGAWORLD

As can be gleaned from Megaworld, petitioner and respondent entered into agreements for the construction of a
condominium project owned by respondent called “The Salcedo Park”, with petitioner as contractor. In the course of the
project’s construction, differences with respect to billings arose between the parties. Petitioner thus filed a complaint for
compulsory arbitration before the CIAC claiming payment for approximately P97 Million as the outstanding balance due
from respondent pursuant to the agreements. On 19 October 2001, the CIAC rendered a decision partially granting both
petitioner’s and respondent’s claims, with a net award of Sixty Two Million Seven Hundred Sixty Thousand Five Hundred
Fifty Eight Pesos and Forty Nine Centavos (P62,760,558.49) in favor of petitioner.

This award was affirmed by the Court of Appeals, which however permanently enjoined petitioner from registering its
contractor’s lien on all except six (6) units of the condominium project. 7 This step was in line with respondent’s
manifestation that the principal award of P62,760,558.49 in petitioner’s favor can be covered by the value of six (6)
condominium units. Seven (7) condominium units, however, were eventually levied upon as a result of respondent’s act of
substituting two (2) units for the one already paid for by the buyer-spouses, Shaul and Rina Golan. 8 The execution sale of
the levied properties did not push through after this Court issued a TRO dated 12 July 2002 upon respondent’s filing of a
petition in G.R. No. 153310. HIESTA
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San Beda College Alabang School of Law
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Thereafter, the Court promulgated its Decision 9 dated 2 March 2004 affirming the judgment of the Court of Appeals and
lifting the TRO that was then still in effect. Finding no merit in respondent’s motions for reconsideration, 10 the Court
subsequently issued an entry of judgment dated 12 August 2004.

Its judgment having become final and 128oi tong, the CIAC issued an Order 11 dated 3 November 2004 giving the parties
ten (10) working days within which to agree on the satisfaction of the arbitral award, otherwise a writ of execution will be
issued. As the parties could not come to terms, the CIAC issued an alias writ of execution on 22 November 2004.

On 26 November 2004, respondent sought to clarify if the writ of execution shall be limited to six condominium units in
consonance with the Court of Appeals’ observation in its decision in the first case that the petitioner’s claims can be
satisfied by the value of only six units. The CIAC replied in the negative. In an Order 13 dated 3 December 2003, it stated
that nowhere in its Decision or in its Orderdated 3 November 2004 did it provide that the payment of the judgment debt
should be made in the form of six condominium units. It expounded that the mention of the six units was only brought up
by the appellate court in relation to the provisional remedy of securing the judgment debt which is interim/temporary in
nature. (Later on 3 more additional units were attached to satisfy the judgment debt.)

Issue

The particular issues are: (i) whether the alias writ should have been expressly qualified in limiting the execution to just six
condominium units; (ii) whether the alias writ conformed to the requirement under Section 8I, Rule 39 of the Rules of Civil
Procedure that the specific amount due must be stated; (iii) whether the 6% interest as specified in the alias writ should be
applied on a per annum basis, or on a flat rate. The Court shall also resolve whether the Makati City RTC sheriffs acted
correctly in levying the 10 condominium units, pursuant to such writ of execution.

Ruling

As petitioner correctly argues, there is no ambiguity in the Court of Appeal’s pronouncement, that is, that the principal
award of P62 million can be covered by six condominium units. However, such pronouncement did not make allowances for
the interests of 6% and 12% imposed by the CIAC because the alleged limit related merely to the provisional remedy, not
the eventual execution of the judgment. The six unit limit was never intended by the Court of Appeals to operate in
perpetuity as to sanction recovery of the principal award sans legal interest.

The replacement increased the number of units levied upon from six (6) to seven (7). This weakens respondent’s reliance on
the purported six (6)-unit limit since its own act renders it in 128oi tong128. By 128oi tong128 is meant that an admission or
representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person
relying thereon. 34 Since respondent instigated the resultant increase of the units levied upon, both petitioner and the CIAC
cannot be faulted for assuming that the rest of the condominium units may also be levied upon on execution.

Next, respondent ascribes to the alias writ 35 is the supposed failure to state the specific amount due. This allegedly vests
the sheriffs the judicial function of determining the total amount ought to be satisfied by the judgment.

A perusal of the alias writ convinces this Court that it complies substantially with the requirements of law. It states the
principal award sought to be satisfied, as well as the percentage to be imposed thereon as interest. It even specifies the
lawful fees that are due to the sheriffs for the satisfaction of the judgment. 36 Respondent makes much of the fact that
petitioner made its own computation of the amount to be satisfied which the sheriffs allegedly followed.

Rule 39, Sec. 8I cited above precisely requires the movant to specify the amount sought to be satisfied so the Court fails to
see why petitioner should be faulted for doing so. If the objection hinges on the fact that the exact mathematical
computation did not appear in the alias writ itself, respondent could easily have moved that said computation be
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San Beda College Alabang School of Law
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Case Notes/Digests

incorporated by the CIAC thereon. Such perceived deficiency is certainly not sufficient to justify recourse to a special civil
action for certiorari to have the alias writ declared null and void in its entirety.

Moreover, respondent’s contention that the unregistered buyers’ right over the property is superior to that of the
judgment obligor has no basis. The fact that the contracts to buy and sell are unregistered and the properties in question
are still in the name of respondent underlines the fact that the sales are not absolute. The units are clearly still owned by
respondent and not by the alleged buyers. Under Section 51 of the Property Registration Decree (PD 1529), the act of
registration is the operative act which conveys or affects the land in so far as third persons are concerned.

Respondent’s reliance on jurisprudence holding that buyers’ rights of ownership over condominium units even if
unregistered are superior over registered encumbrances is misplaced. The cases cited clearly indicated that the parties
involved were the condominium buyers and mortgage creditors. A mortgage creditor is not synonymous to a judgment
creditor contrary to what respondent asserts. While the law expects a mortgage creditor to inquire as a reasonably
prudent man would regarding the encumbrances on the property in question, no such knowledge is imputed to a judgment
creditor who merely seeks the satisfaction of the judgment awarded in his favor.

CASTRO V. CA

On 15 August 1974, Cabanatuan City Colleges obtained a loan from the Bancom Development Corporation. In order to
secure the indebtedness, the college mortgaged to Bancom two parcels of land covered by TCT No. T-45816 and No. T-
45817 located in Cabanatuan City. The parcels were both within the school site. While the mortgage was subsisting, the
college board of directors agreed to lease to petitioners a 1,000-square-meter portion of the encumbered property on
which the latter, eventually, built a residential house. Bancom, the mortgagee, was duly advised of the matter.

The school defaulted in the due payment of the loan. In time, Bancom extrajudicially foreclosed on the mortgage, and the
mortgaged property was sold at public auction on 22 August 1979 with Bancom coming out to be the only bidder. A
certificate of sale was accordingly executed by the provincial sheriff in favor of Bancom. Subsequently, the latter assigned
its credit to herein private respondent Union Bank of the Philippines.

On 10 October 1984, following the expiration of the redemption period without the college having exercised its right of
redemption, private respondent consolidated title to the property. On 08 May 1985, private respondent filed with the
Regional Trial Court of Nueva Ecija, Branch XXVIII in Cabanatuan City, an ex-partemotion for the issuance of a writ of
possession not only over the land and school buildings but also the residential house constructed by petitioners.

Issue

Shorn of unrelated matters, 9 the basic question raised in the petition relates to the proper application of Article 2127 of
the Civil Code.

Ruling

This article extends the effects of the real estate mortgage to accessions and accessories found on the hypothecated
property when the secured obligation becomes due. The law is predicated on an assumption that the ownership of such
accessions and accessories also belongs to the mortgagor as the owner of the principal. 10 The provision 11 has thus been
seen by the Court, in a long line of cases beginning in 1909 with Bischoff vs. Pomar, 12 to mean that all improvements
subsequently introduced or owned by the mortgagor on the encumbered property are deemed to form part of the
mortgage. That the improvements are to be considered so incorporated only if so owned by the mortgagor is a rule that
can hardly be debated since a contract of security, whether real or personal, needs as an indispensable element thereof

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San Beda College Alabang School of Law
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the ownership by the pledgor or mortgagor of the property pledged or mortgaged. 13 The rationale should be clear
enough — in the event of default on the secured obligation, the foreclosure sale of the property would naturally be the
next step that can expectedly follow. A sale would result in the transmission of title to the buyer which is feasible only if the
seller can be in a position to convey ownership of the thing sold (Article 1458, Civil Code). It is to say, in the instant case,
that a foreclosure would be ineffective unless the mortgagor has title to the property to be foreclosed. 14

It may not be amiss to state, in passing, that in respect of the lease on the foreclosed property, the buyer at the foreclosure
sale merely succeeds to the rights and obligations of the pledgor-mortgagor subject, however, to the provisions of Article
1676 of the Civil Code, on its possible termination.

PRUDENTIAL BANK V. ALVIAR1

LITONJUA ET AL., V. L&R CORPORATION

Issue

May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged property without first obtaining the
consent of the mortgagee and that, otherwise, the sale made without the mortgagee’s consent shall be invalid; and (b) for a
right of first refusal in favor of the mortgagee?

The Case

The controversy stems from loans obtained by the spouses Litonjua from L & R Corporation in the aggregate sum of
P400,000.00; P200,000.00 of which was obtained on August 6, 1974 and the remaining P200,000.00 obtained on March 27,
1978. The loans were secured by a mortgage 1 constituted by the spouses upon their two parcels of land and the
improvements thereon located in Cubao, Quezon City covered by Transfer Certificates of Title No. 197232 and 197233, with
an area of 599 and 1,436 square meters, respectively. The mortgage was duly registered with the Register of Deeds of
Quezon City.

On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc. (PWHAS) the parcels of land they
had previously mortgaged to L & R Corporation for the sum of P430,000.00. 2 The sale was annotated at the back of the
respective certificates of title of the properties. 3

Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L & R Corporation initiated
extrajudicial foreclosure proceedings with the Ex-Oficio Sheriff of Quezon City. On July 23, 1980, the mortgaged properties
were sold at public auction to L & R Corporation as the only bidder for the amount of P221,624.58. 4 When L & R
Corporation presented its corresponding Certificate of Sale issued by Deputy Sheriff Roberto B. Garcia, to the Quezon City
Register of Deeds for registration on August 15, 1980, it learned for the first time of the prior sale of the properties made by
the spouses Litonjua to PWHAS upon seeing the inscription at the back of the certificates of title. Thus, on August 20, 1980,
it wrote a letter 5 to the Register of Deeds of Quezon City requesting for the cancellation of the annotation regarding the
sale to PWHAS. L & R Corporation invoked a provision in its mortgage contract with the spouses Litonjua stating that the
mortgagee’s prior written consent was necessary in case of subsequent encumbrance or alienation of the subject
properties. Thus, it argued that since the sale to PWHAS was made without its prior written consent, the same should not
have been registered and/or annotated.

1 Refer to p.113 onwards


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San Beda College Alabang School of Law
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Case Notes/Digests

With the refusal of the Register of Deeds to annotate their Certificate of Redemption, the Litonjua spouses filed a
Petition 13 on July 17, 1981 against L & R Corporation for the surrender of the owner’s duplicate of Transfer Certificates of
Title No. 197232 and 197233 before the then Court of First Instance of Quezon City, Branch IV, docketed as Civil Case No.
32905.

On August 15, 1981, while the said case was pending, L & R Corporation executed an Affidavit of Consolidation of
Ownership. 14Thereafter, on August 20, 1981, the Register of Deeds cancelled Transfer Certificates of Title No. 197232 and
197233 and in lieu thereof, issued Transfer Certificates of Title No. 280054 15 and 28055 16 in favor of L & R Corporation,
free of any lien or encumbrance.

With titles issued in its name, L & R Corporation advised the tenants of the apartments situated in the subject parcels of
land that being the new owner, the rental payments should be made to them, and that new lease contracts will be
executed with interested tenants before the end of August, 1981. 17 Upon learning of this incident from their tenants, the
spouses Litonjua filed an adverse claim 18 and a notice of lis pendens 19 with the Register of Deeds. In the process, they
learned that the prior sale of the properties in favor of PWHAS was not annotated on the titles issued to L & R.

Ruling

There is no question that the spouses Litonjua violated both the aforesaid provisions, selling the mortgaged properties to
PWHAS without the prior written consent of L & R Corporation and without giving the latter notice of such sale nor priority
over PWHAS.

Petitioners defend the validity of the sale between them by arguing that paragraph 8 violates Article 2130 of the New Civil
Code which provides that “(A) stipulation forbidding the owner from alienating the immovable mortgaged shall be void.”

As we have mentioned, although a similar provision was recognized and applied in Cruz v. Court of Appeals, supra, no
discussion as to its validity was made since the same was not raised as an issue. Thus, it cannot be said that the specific
pronouncement in theTambunting case that such a stipulation can only be construed as against subsequent mortgages or
encumbrances but not to an alienation of the immovable itself, which is prohibited under Article 2130, was abandoned
thereby. On the other hand, the facts in the case of Medida v. Court of Appeals, are different from those in the present case
for what was in issue in the said case was a second mortgage over a foreclosed property during the period of redemption.
Thus, the ruling in Medida quoted in the Amended Decision that “what is delimited is not the mortgagor’s jus dispodendi, as
an attribute of ownership, but merely the rights conferred by such act of disposal which may correspondingly be
restricted,” actually refers to the fact that the only rights which a mortgagor can legally transfer, cede and convey after the
foreclosure of his properties are the right to redeem the land, and the possession use and enjoyment of the same during
the period of redemption. It has no connection or reference to the right of a mortgagor to sell his mortgaged property
without the required consent of the mortgagee. To be sure, there is absolutely nothing in Medida that upholds the validity
of the stipulation in controversy.

Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged property without
the consent of the mortgagee is concerned, therefore, the ruling in the Tambunting case is still the controlling law. Indeed,
we are fully in accord with the pronouncement therein that such a stipulation violates Article 2130 of the New Civil Code.
Both the lower court and the Court of Appeals in its Amended Decision rationalize that since paragraph 8 of the subject
Deed of Real Estate Mortgage contains no absolute prohibition against the sale of the property mortgaged but only requires
the mortgagor to obtain the prior written consent of the mortgagee before any such sale, Article 2130 is not violated
thereby. This observation takes a narrow and technical view of the stipulation in question without taking into consideration

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San Beda College Alabang School of Law
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the end result of requiring such prior written consent. True, the provision does not absolutely prohibit the mortgagor from
selling his mortgaged property; but what it does not outrightly prohibit, it nevertheless achieves. For all intents and
purposes, the stipulation practically gives the mortgagee the sole prerogative to prevent any sale of the mortgaged
property to a third party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling
the property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the
owner to sell his mortgaged property. In other words, stipulations like those covered by paragraph 8 of the subject Deed of
Real Estate Mortgage circumvent the law, specifically, Article 2130 of the New Civil Code.

Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the parties. Accordingly,
the sale made by the spouses Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is
valid.

Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses Litonjua is valid, we rule
in the affirmative. The sale by the spouses Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS
stepped into the shoes of the spouses Litonjua on account of such sale and was in effect, their successor-in-interest. As
such, it had the right to redeem the property foreclosed by L & R Corporation.

He right of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself which gives not only the
mortgagor-debtor the right to redeem, but also his successors-in-interest. As vendee of the subject properties, PWHAS
qualifies as such a successor-in-interest of the spouses Litonjua.

While petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent insofar as
paragraph 9 thereof is concerned. Said paragraph 9 grants upon L & R Corporation the right of first refusal over the
mortgaged property in the event the mortgagor decides to sell the same. We see nothing wrong in this provision. The right
of first refusal has long been recognized as valid in our jurisdiction. The consideration for the loan-mortgage includes the
consideration for the right of first refusal. L & R Corporation is in effect stating that it consents to lend out money to the
spouses Litonjua provided that in case they decide to sell the property mortgaged to it, then L & R Corporation shall be
given the right to match the offered purchase price and to buy the property at that price. Thus, while the spouses Litonjua
had every right to sell their mortgaged property to PWHAS without securing the prior written consent of L & R Corporation,
they had the obligation under paragraph 9, which is a perfectly valid provision, to notify the latter of their intention to sell
the property and give it priority over other buyers. It is only upon failure of L & R Corporation to exercise its right of first
refusal could the spouses Litonjua validly sell the subject properties to others, under the same terms and conditions offered
to L & R Corporation.

What then is the status of the sale made to PWHAS in violation of L & R Corporation’s contractual right of first refusal? On
this score, we agree with the Amended Decision of the Court of Appeals that the sale made to PWHAS is rescissible. (Based
on the fact that substantial damage was done on the creditors, which they can no longer recover the property that was sold,
similar to Sales Law.)

LUZON DEVELOPMENT BANK V. CONQUILLA

Feliciano Conquilla was the president of an educational institution located at Noveleta Cavite and known as Columbia
College. He was joined by his children Benedicto, Cornelio and Dorotea in mortgaging the three properties on which the
school sat and titled in their names as TCT No. T-593582 to 84 to secure a loan from the Luzon Development Bank. The
transaction underwent a series of amendments. Initially, on March 7, 1996, they borrowed P4,720,000, which was
increased to P7,220,000 on April 2 by way of aPromissory Note and Amendment Of Real Estate Mortgage. The Promissory
Note appears to have been signed by the four in their personal capacities, but Feliciano’s name in the Amendment of Real
Estate Mortgage was preceded by the telling phrase Columbia College By. An amount of P2,500,000 was specifically
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earmarked for building construction. On May 2, they acknowledged a loan of P10,000,000 in a promissory note signed by
them again without any qualification, and raising the amount for building construction to P2,780,000.

“After some months, Feliciano Conquilla applied for a restructuring of the loan. He wrote the bank that they had sought
extra funding to finish the school building, and with the increased enrollment that would follow on the heels of their
expansion program, assured that their loan obligations would be met. The request granted, they again issued on December
27, 1996 a Promissory Notefor P12,242,000 payable monthly for the next five years.

“They failed to deliver on their promise, and by March 1998, their unpaid amortizations rose to more than P4 million. To
prevent the impending foreclosure of the mortgaged properties, Feliciano filed in the name of Columbia College with the
RTC of Cavite City [C]ivil [C]ase N-6659 against Luzon Development Bank and the notary public[,] Rolando Torres. This suit
was filed on February 18, 1998. (But was dismissed) The next day, March 12, Feliciano Conquilla[,] joined by his wife Salud[,]
filed case N-6669 in his own name[,] which still fell in the sala of Judge [Lock], praying for the same remedy of injunction
against the foreclosure. On a motion to dismiss, he ruled that the complaint was a rehash of the one made in N-6659 and
already dismissed. (basing its decision on res judicata)

“With the cases out of the way, the properties were auctioned off to Luzon Development Bank. In June, it advised
Columbia College through Feliciano of its right to buy back the lots within the redemption period. Not amenable to this
solution, Feliciano Conquilla and his children filed the present case in January 1999, their final trump card against the
inevitable outcome of the foreclosure proceeding.

“As the plaintiffs in LP 99-0019, the Conquillas alleged in their complaint that of the amount of the loan of P7.2 million
agreed to on April 2, 1996, the defendant Luzon Development Bank failed to release to them the amount of P1,940,000,
thus causing a breach of contract and rendering the foreclosure premature. The contract obligation was, furthermore,
increased to over P12 million without further releases. Even as it bidded for the properties in the amount of over P18
million, it failed to turn over to them the difference between this price and the amount of the actual releases, representing
a balance of about P13 million.”

Issue

After going over the arguments of petitioner, the Court believes that the resolution of this case hinges on the principal issue
of whether the dismissal of the First Case on the ground of failure to establish a cause of action operates as res judicata on
the Third Case.

Ruling

A case is barred by prior judgment or res judicata when the following requisites concur: (1) the former judgment is final; (2)
it is rendered by a court having jurisdiction over the subject matter and the parties; (3) it is a judgment or an order on the
merits; (4) there is — between the first and the second actions — identity of parties, of subject matter, and of causes of
action.

Preliminarily, we have to determine the actual ground for the dismissal of Civil Case No. N-6659. According to the CA, the
ground for dismissal could not possibly be “failure to establish [respondents’] cause of action,” as stated by the trial court,
because there was no hearing on the case. Rather, the CA ruled that the ground for dismissal could only be “failure
to state a cause of action” in the light of the fact that the trial court had looked only at the allegations in the Complaint. 24

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“Cause of action” is the act or omission by which a party violates a right of another. 25 It contains three elements: (1) a
right existing in favor of the plaintiff, (2) a duty on the part of the defendant to respect the right of the plaintiff, and (3) a
breach of the defendant’s duty.

Civil Case No. N-6659 stated a cause of action: first, plaintiff (Respondent Feliciano) had a right to apply for an injunction to
enjoin a premature foreclosure — a foreclosure before December 27, 2001; second, defendant (petitioner herein) had a
duty not to foreclose the mortgage prematurely; third, the alleged breach arose when defendant applied for foreclosure in
1998, three years prior to the stipulated maturity of the loan.

From the foregoing, it is clear that plaintiff had a cause of action to apply for an injunction on the basis of the alleged
breach. In other words, the allegations in the Complaint are sufficient to enable the trial court to grant the relief prayed for.
Therefore, we do not agree that there was a “failure to state a cause of action”; on the contrary, there was no “insufficiency
of allegations” in the pleading.

To repeat, the actual ground for dismissal was the insufficiency of the factual basis for the action. 26 It may be raised at
any time after the questions of fact shall have been resolved on the basis of stipulations, admissions, or evidence
presented. 27 Usually, the declaration that a plaintiff failed to establish a cause of action is postponed until after the parties
are given the opportunity to present all relevant evidence on questions of fact.

While it is indisputable that there was no trial on the merits in Civil Case No. N-6659, the ruling was nonetheless a judgment
on the merits. Escarte v. Office of the President 36 held that a ruling based on a motion to dismiss, without any trial on the
merits or formal presentation of evidence, can still be a judgment on the merits.

“Merits” has been defined as a matter of substance in law, as distinguished from a matter of form; it refers to the real or
substantial grounds of action or defense, as contrasted with some technical or collateral matter raised in the course of the
suit. 37 A judgment is “on the merits” when it amounts to a legal declaration of the respective rights and duties of the
parties, based upon the disclosed facts.

It is axiomatic that to invoke res judicata, absolute identity of parties is not required. A substantial identity of parties is
sufficient. 59There is substantial identity of parties when there is a community of interest between a party in the first
case and that in the second one, even if the latter party was not impleaded in the first case. 60

In the instant controversy, the Complaint alleged that Columbia College, Inc., was the only debtor. 61 But the CA found that
the Promissory Note given to petitioner contained the signatures of all the four registered owners, without any
qualification. 62 A Promissory Note is defined as “an unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to
order or to bearer.” 63 This definition shows that the makers or signatories of a promissory note have the duty to pay the
amount stated on it.

Therefore, it is only logical that the present respondents were debtors, together with Columbia College, Inc. This fact
explains why they are also claiming the balance of the loan, instead of merely asking for the nullification of the foreclosure
of their property. Together with Columbia College, Inc., they are interested in annulling the contracted loan and in
preventing the foreclosure of the properties.

Moreover, we find that Columbia College, Inc. claimed that it had mortgaged its properties to petitioner bank and executed
the Promissory Note. 64 Reconciling this fact with the finding of the CA that respondents were the mortgagors, 65 we can
only come to the conclusion that they and Columbia College were not only common debtors; all of them were also
mortgagors.

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Therefore, they were all parties to the same Contract, protecting the same interests, and seeking the same relief. Clearly,
the actions were instituted for the protection of the common interest of respondents in the loan and the mortgage. They
shared an identity of interest from which flowed an identity of relief sought; that is, to have the foreclosure nullified. Their
identity of interest in the loan and the mortgaged property is enough to hold them privy-in-law; this fact meets the
substantive requisite of identity of parties.

The cause of action in the First Case arose from petitioner’s alleged premature foreclosure of the mortgage. On the other
hand, the Third Case involves three alternative causes of action: (1) nullification of the foreclosure and the auction sale, (2)
release of the balance of the loan, or (3) recovery of the excess proceeds of the sale.

Respondents insist that the two cases involve different causes of action, allegedly because the First Case seeks to prevent,
and the Third Case to nullify, the foreclosure. 67 However, hornbook is the rule that identity of causes of action does not
mean absolute identity. Otherwise, a party could easily escape the operation of res judicata by changing the form of the
action or the relief sought. 68

The test to determine whether the causes of action are identical is to ascertain whether the same evidence will sustain
both actions, or whether there is an identity in the facts essential to the maintenance of the two actions. If the same facts
or evidence would sustain both, the two actions are considered the same, and a judgment in the first case is a bar to the
subsequent action. 69

The validity of the foreclosure in Civil Case No. LP 99-0019 is assailed by respondents on the ground of
prematurity. 70 Despite the stipulation that the loan would mature only on December 27, 2001, the foreclosure of their
mortgage took place on March 16, 1998. 71Notably, that cause of action was the same as that raised, considered, and
conclusively passed upon in Civil Case No. N-6659. In the latter case, Respondent Feliciano sought to prevent foreclosure by
also contending that it was premature. 72

In order to obtain the reliefs sought, respondents in both cases should have presented proof that the bank had no right to
foreclosebefore December 27, 2001. By applying the “same evidence” test, it becomes readily apparent that the evidence
or facts needed to sustain the cause of action in Civil Case No. N-6659 is the same as the evidence or facts needed to allow
relief in Civil Case No. LP 99-0019. Tellingly, the first cause of action in Civil Case No. LP 99-0019 (nullification of foreclosure)
is identical with that in Civil Case No. N-6659 (injunction of foreclosure).

A different fate befalls the third alternative cause of action in Civil Case No. LP 99-0019, which is for recovery of the excess
proceeds of the foreclosure sale. Respondents allege that the mortgaged property was sold for P18,462,900, which
allegedly far exceeded the amount of loan agreed upon by the parties. 80

Under the “same evidence” test, this is a different cause of action from an injunction of foreclosure. As already discussed,
Civil Case No. N-6659 requires proof that the mortgagee had no right to foreclose; on the other hand, the alternative cause
of action in Civil Case No. LP 99-0019 requires proof that the bid price of the mortgaged property was in excess of the
contracted loan. The two issues require different sets of evidence; there is no identity of causes of action. TSEcAD

Moreover, the recovery of the excess proceeds of the sale was not and could not be included in Civil Case No. N-6659,
because it was a new cause of action that had arisen only after the foreclosure. It was not barred by res judicata, because it
could not have been raised then. This is the only matter that may be remanded to the trial court.

If it is proven that the mortgaged property was foreclosed and sold for an amount exceeding the loan contracted,
respondent must be allowed to recover the excess. 81 By the accessory nature of mortgage, the mortgagee has the right to

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foreclose the mortgaged property only to the extent of the loan secured by it. Any decision to the contrary abets unjust
enrichment.

To stress, the recovery of the excess proceeds of the sale is the only cause of action that should be remanded to the lower
court.

The lower court should no longer inquire into the validity of the mortgage loan and the right to foreclose. The resolution
of these two matters have reached finality in Civil Case No. N-6659, which decided that petitioner had the right to foreclose
on the presumption that the mortgage was also valid. If respondents are allowed to question the validity of the mortgage
loan all over again, the consequent foreclosure would likewise have to be subjected to a review, which is no longer possible
by operation of res judicata. Forever barred now are all questions regarding the validity of the Mortgage Contract and the
subsequent foreclosure, questions that have been directly adjudged or could have been raised and adjudged in Civil Case
No. N-6659.

SYCAMORE VENTURES V. SPS. PAZ

Sixteen years ago (or sometime in 1997), Sycamore and the spouses Paz obtained from respondent Metropolitan Bank and
Trust Company (Metrobank) a credit line of P180,000,000.00, secured by 10 real estate mortgages 4 over Sycamore’s 11
parcels of land, 5together with their improvements. 6 Sycamore and the spouses Paz withdrew from the credit line the total
amount of P65,694,914.26, evidenced by 13 promissory notes. 7

Because the petitioners failed to pay their loan obligations and for violations of the terms and conditions of their 13
promissory notes, Metrobank instituted extrajudicial foreclosure proceedings over the six real estate mortgages, pursuant
to Act No. 3135, as amended.8 The public auction sale was set for various dates — March 22, 2000, April 23, 2000 and May
23, 2000 — but the sale did not take place because Sycamore and the spouses Paz asked for postponements.

Metrobank subsequently restructured Sycamore and the spouses Paz’s loan, resulting in the issuance of one promissory
note denominated as PN No. 751622 736864.92508.000.99, in lieu of the 13 promissory notes 9 previously issued, and the
execution of a single real estate mortgage covering the 12 parcels of land.

Despite reminders, Sycamore and the spouses Paz still failed to settle their loan obligations, compelling Metrobank to file a
second petition for auction sale, which was set for October 25, 2002.

On October 16, 2002, Sycamore and the spouses Paz once again asked for the postponement of the October 25, 2002 public
auction sale; they asked that the sale be moved to November 26, 2002, but this time Metrobank refused to give in.

On November 25, 2002, Sycamore and the spouses Paz filed before the RTC, Branch 43, San Fernando Pampanga, a
complaint for the annulment of the contract and of the real estate mortgage. They likewise asked for the issuance of a
temporary restraining order(TRO). SCADIT

The petitioners disputed Metrobank’s alleged unilateral and arbitrary reduction of the mortgaged properties’ appraisal
value from P1,200.00 to P300.00-P400.00 per square meter. They likewise sought the maintenance of the status quo, to
enjoin Metrobank, and to prevent it from proceeding with the extrajudicial foreclosure.

Sycamore and the spouses Paz contend that the CA erred in setting aside the RTC’s order granting their motion for
appointment of independent commissioners. They argue that it had the effect of preventing the RTC’s determination of
a critical question of fact —i.e., the determination of the mortgaged properties’ true valuation — which, they insist, is an
issue that needs to be resolved prior to the determination of the foreclosure’s validity.

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They claim that before resolving the said issue, the RTC has to decide the following prejudicial questions, namely:

(1) Whether Metrobank validly reduced the mortgaged properties’ valuation; and

(2) Whether Metrobank can validly foreclose the mortgaged properties at a further reduced valuation. 17

Lastly, Sycamore and the spouses Paz invoke this Court’s intervention to prevent an unfair situation where the mortgage
foreclosure, based on Metrobank’s arbitrary and unilateral reduction of the properties’ appraisal value, would deprive them
of all their properties and, at the same time, leave a deficiency of P500,000,000.00.

Issue

The core issue for our determination is whether the determination of the mortgaged properties’ appraisal value constitutes
a prejudicial question that warrants the suspension of the foreclosure proceedings. Simply put, is the appraisal value of
the mortgaged properties material in the mortgage foreclosure’s validity?

Ruling

A secured creditor may institute against the mortgage debtor either a personal action for the collection of the debt, a real
action to judicially foreclose the real estate mortgage, or an extrajudicial judicial foreclosure of the mortgage. The
remedies, however, are alternative, not cumulative, and the election or use of one remedy operate as a waiver of the
others.

[I]n the absence of express statutory provisions, a mortgage creditor may institute against the mortgage debtor either a
personal action for debt or a real action to foreclose the mortgage. In other words, he may pursue either of the two
remedies, but not both. By such election, his cause of action can by no means be impaired, for each of the two remedies is
complete in itself. Thus, an election to bring a personal action will leave open to him all the properties of the debtor for
attachment and execution, even including the mortgaged property itself. And, if he waives such personal action and
pursues his remedy against the mortgaged property, an unsatisfied judgment thereon would still give him the right to
sue for a deficiency judgment, in which case, all the properties of the defendant, other than the mortgaged property, are
again open to him for the satisfaction of the deficiency. In either case, his remedy is complete, his cause of action
undiminished, and any advantages attendant to the pursuit of one or the other remedy are purely accidental and are all
under his right of election.

In brief, Act No. 3135 recognizes the right of a creditor to foreclose a mortgage upon the mortgagor’s failure to pay his/her
obligation. In choosing this remedy, the creditor enforces his lien through the sale on foreclosure of the mortgaged
property. The proceeds of the sale will then be applied to the satisfaction of the debt. In case of a deficiency, the mortgagee
has the right to recover the deficiency resulting from the difference between the amount obtained in the sale at public
auction, and the outstanding obligation at the time of the foreclosure proceedings. 20 aTHCSE

Certain requisites must be established before a creditor can proceed to an extrajudicial foreclosure, namely: first, there
must have been the failure to pay the loan obtained from the mortgagee-creditor; second, the loan obligation must be
secured by a real estate mortgage; and third, the mortgagee-creditor has the right to foreclose the real estate mortgage
either judicially or extrajudicially.

Act No. 3135 outlines the notice and publication requirements and the procedure for the extrajudicial foreclosure which
constitute a condition sine qua non for its validity. Specifically, Sections 2, 3 and 4 of the law prescribe the formalities of
the extrajudicial foreclosure proceeding.

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San Beda College Alabang School of Law
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All the above provisions are quoted verbatim to stress that Act No. 3135 has no requirement for the determination of the
mortgaged properties’ appraisal value. Nothing in the law likewise indicates that the mortgagee-creditor’s appraisal value
shall be the basis for the bid price. Neither is there any rule nor any guideline prescribing the minimum amount of bid, nor
that the bid should be at least equal to the properties’ current appraised value. What the law only provides are the
requirements, procedure, venue and the mortgagor’s right to redeem the property. When the law does not provide for the
determination of the property’s valuation, neither should the courts so require, for our duty limits us to the interpretation
of the law, not to its augmentation.

Under the circumstances, we fail to see the necessity of determining the mortgaged properties’ current appraised value.
We likewise do not discern the existence of any prejudicial question, anchored on the mortgaged properties’ appraised
value, that would warrant the suspension of the foreclosure proceedings. ACTISD

For greater certainty, a prejudicial question is a prior issue whose resolution rests with another tribunal, but at the same
time is necessary in the resolution of another issue in the same case. 21 For example, there is a prejudicial question where
there is a civil action involving an issue similar or intimately related to the issue raised in a criminal action, and the
resolution of the issue in the civil action is determinative of the outcome of the criminal action.

As so defined, we do not see how the motion for the appointment of independent commissioners can serve as a prejudicial
question. It is not a main action but a mere incident of the main proceedings; it does not involve an issue that is
intimately related to the foreclosure proceedings; and lastly, the motion’s resolution is not determinative of the
foreclosure’s outcome.

On this point alone, the petition should be denied. But even if Metrobank’s reduced appraised value were lesser than the
mortgaged properties’ current valuation, the petition would still fail.

There is no question in this case that Sycamore and the spouses Paz failed to settle their loan obligations to Metrobank as
they fell due. (In fact, there were multiple or repeated failures to pay.) There is likewise no dispute on the total amount of
their outstanding loan obligation. Sycamore and the spouses Paz also acknowledged Metrobank’s right to foreclose when
they asked for the sale’s postponement. (All the requisites for the Extrajudicial foreclosure were present in this score.)

We have held in a long line of cases that mere inadequacy of price per se will not invalidate a judicial sale of real property.
It is only when the inadequacy of the price is grossly shocking to the conscience or revolting to the mind, such that a
reasonable man would neither directly nor indirectly be likely to consent to it, that the sale shall be declared null and void.
This rule, however, does not strictly apply in the case of extrajudicial foreclosure sales where the right of redemption is
available.

BORROMEO V. CA

Petitioners were client-depositors of EPCIB for more than 12 years. Petitioners alleged that sometime in mid-1999, the
branch manager of EPCIB, J.P. Rizal Branch, offered a loan to the petitioners under its “Own-a-Home Loan Program.”
Petitioners applied for a loan of P4,000,000.00 and were informed of the approval of their loan application sometime in
October 1999. It was in the early part of 2000 that petitioners signed blank loan documents consisting of the Loan
Agreement, Promissory Notes, a Real Estate Mortgage (REM) and Disclosure Statements.

To secure the payment of the loan, petitioners executed an REM over their land, registered under Transfer Certificate of
Title (TCT) No. N-203923, located at Loyola Grand Villas, Quezon City, consisting of 303 square meters; and the proposed
house that was to be built thereon. 6 Petitioners asserted that even if the loan documents were signed in blank, it was
understood that they executed the REM in favor of EPCIB. 7

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From April 2001 to September 2002, respondent released a total amount of P3,600,000.00 in four installments, while the
balance of P400,000.00 was not drawn by petitioners. 8 On the other hand, petitioners started to pay their monthly
amortizations on 21 April 2001. 9

Petitioners made repeated verbal requests to EPCIB to furnish them their copies of the loan documents. 10 On 6 August
2003, they sent the president of EPCIB a letter 11 which reiterated their request for copies of the loan documents. In
addition, petitioners stated that the interest rate of 14% to 17% that was charged against them was more than the interest
rate of 11 % or 11.5% that the parties agreed upon. They further claimed that they purposely did not draw the remaining
balance of the loan in the amount of P400,000.00 and stopped paying their loan amortizations to protest EPCIB’s
continued failure to provide them copies of the loan documents and its imposition of an interest rate higher than that
agreed upon. From the time petitioners began paying their monthly amortizations on 21 April 2001 until the time they
stopped, petitioners made total payments of approximately P500,000.00.

In reply to the petitioners’ letter dated 6 August 2003, the Vice President of EPCIB, Gary Vargas, sent to the petitioners a
letter 13 dated 27 August 2003 explaining that as a matter of practice, their clients were given original copies of the loan
documents only UPON FULL RELEASE of the amount loaned. EPCIB clarified that since petitioners’ loan had not been fully
released, the original documents were not yet sent to them. Petitioners were also informed that the applicable interest rate
was set at the time the loan was released, not at the time the loan was approved, and that the prevailing interest when the
first four installments of the loan were released ranged from 9.5% to 16%.

Finally, on 3 October 2003, petitioners received copies of the loan documents which they had earlier signed in
blank. 16 According to petitioners, they were surprised to find out that the Loan Agreement and REM designated
respondent ESB as lender and mortgagor, instead of EPCIB with whom they allegedly entered into the agreement. However,
in contrast to the Loan Agreement and the REM, the four Promissory Notes designated EPCIB as the lender. (In addition,
there was alteration of the rates of interest to be paid.)

On 3 March 2004, the RTC granted petitioners’ motion for reconsideration and ordered the issuance of a preliminary
injunction after declaring that the validity of the REM was yet to be determined. It found that petitioners were bound to
suffer grave injustice if they were deprived of their property before the RTC could rule on the validity of the REM
constituted on the same. On the other hand, it held that respondent’s interest was amply protected, since petitioners’
mortgaged property was valued at P12,000,000.00, which was more than sufficient to answer for petitioner’s obligation
pegged at P4,097,261.00, and respondent’s REM over said property remained in effect. Moreover, petitioners posted a
bond in the amount of P3,500,000.00 to cover their unpaid liabilities. (On appeal, it was reversed by the CA.)

Issue

The only issue that needs to be determined in this case is whether or not a writ of preliminary injunction should be issued
to enjoin the foreclosure and public auction of petitioner’s property during the proceedings and pending determination of
the main cause of action for annulment of the REM on said property. By no means is this a final determination of the merits
of the main case still before the RTC.

Ruling

As such, a writ of preliminary injunction may be issued only upon clear showing of an actual existing right to be protected
during the pendency of the principal action. The twin requirements of a valid injunction are the existence of a right and its
actual or threatened violations. Thus, to be entitled to an injunctive writ, the right to be protected and the violation against
that right must be shown. 33

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San Beda College Alabang School of Law
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In this case, petitioners’ rights to their property is restricted by the REM they executed over it. Upon their default on the
mortgage debt, the right to foreclose the property would be vested upon the creditor-mortgagee. 34 Nevertheless, the
right of foreclosure cannot be exercised against the petitioners by any person other than the creditor-mortgagee or its
assigns. (Art. 1311 – NCC)

It is clear that under Article 1311 of the Civil Code, contracts take effect only between the parties who execute
them. 35 Where there is no privity of contract, there is likewise no obligation or liability to speak about. 36 The civil law
principle of relativity of contracts provides that contracts can only bind the parties who entered into it, and it cannot favor
or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof. 37 Since a contract
may be violated only by the parties thereto as against each other, a party who has not taken part in it cannot sue for
performance, unless he shows that he has a real interest affected thereby. 38

In the instant case, petitioners assert that their creditor-mortgagee is EPCIB and not respondent. While ESB claims that
petitioners have had transactions with it, particularly the five check payments made in the name of ESB, it fails to
categorically state that ESB and not EPCIB is the real creditor-mortgagor in this loan and mortgage transaction. This Court
finds the position taken by the petitioners to be more credible. The four Promissory Notes designate EPCIB as the
“lender.” 39 In a letter dated 19 December 2002, addressed to Home Guaranty Corporation, EPCIB Vice President Gary
Vargas even specified petitioners’ loan as one of its housing loans for which it sought insurance coverage. 40 Records also
show that petitioners repeatedly dealt with EPCIB. When the petitioners complained of not receiving the loan documents
and the allegedly excessive interest charges, they addressed their letter dated 3 August 2003 to the president of
EPCIB. 41 The response, which explained the loan transactions in detail in a letter dated 27 August 2003, was written by
Gary Vargas, EPCIB Vice President. 42 Of almost three years’ amortization, the checks were issued by petitioners in the
name of EPCIB, except only for five checks which were issued in respondent’s name. 43 ACIDTE

Respondent, although a wholly-owned subsidiary of EPCIB, has an independent and separate juridical personality from its
parent company. The fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to
justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence shall be
respected, and the liability of the parent corporation, as well as the subsidiary, shall be confined to those arising from their
respective businesses. A corporation has a separate personality distinct from its stockholders and other corporations to
which it may be conducted. 44 Any claim or suit of the parent corporation cannot be pursued by the subsidiary based solely
on the reason that the former owns the majority or even the entire stock of the latter. EASIHa

From a perusal of the records, petitioners did not enter into a Loan Agreement and REM with respondent. Respondent,
therefore, has no right to foreclose the subject property even after default, since this right can only be claimed by the
creditor-mortgagor, EPCIB; and, consequently, the extrajudicial foreclosure of the REM by respondent would be in violation
of petitioners’ property rights.

This Court takes note of the fact that in several cases 45 the Court denied the application for a Writ of Preliminary
Injunction that would enjoin an extrajudicial foreclosure of a mortgage, and declared that foreclosure is proper when the
debtors are in default of the payment of their obligation. Where the parties stipulated in their credit agreements, mortgage
contracts and promissory notes that the mortgagee is authorized to foreclose the mortgaged properties in case of default
by the mortgagors, the mortgagee has a clear right to foreclosure in case of default, making the issuance of a Writ of
Preliminary Injunction improper. However, the doctrine in these cases is not applicable to the case at bar where the
identity of the creditor-mortgagor is highly disputable.

This Court emphasizes that the determination of who is the creditor-mortgagee is only for purposes of determining the
propriety of issuing a writ of preliminary injunction, based on the evidence presented before the hearing for the issuance
of a preliminary injunction. It will not bar the RTC from making its own determination as to who is the true creditor-
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mortgagee after trial and presentation of evidence on the main case. To establish the essential requisites for a preliminary
injunction, the evidence submitted by the plaintiff need not be conclusive and complete. The plaintiffs are only required
to show that they have an ostensible right to the final relief prayed for in their complaint.

The sole object of a preliminary injunction is to maintain the status quo until the merits can be heard. A preliminary
injunction is an order granted at any stage of an action prior to judgment of final order, requiring a party, court, agency, or
person to refrain from a particular act or acts. It is a preservative remedy to ensure the protection of a party’s substantive
rights or interests pending the final judgment on the principal action. A plea for an injunctive writ lies upon the existence of
a claimed emergency or extraordinary situation which should be avoided for, otherwise, the outcome of a litigation would
be useless as far as the party applying for the writ is concerned.

ROXAS V. CA

Petitioner Blanca Consuelo Roxas is the owner of a parcel of land (Lot No. 3108) located at Tanza Norte, Panay, Capiz,
containing an area of 14.7238 hectares and covered by Tax Declaration No. 5129. On December 22, 1969, she executed a
special power of attorney appointing her brother, the late Manuel Roxas, as her attorney-in-fact for the purpose of applying
for an agricultural loan with private respondent Rural Bank of Dumalag, Inc. using said land as collateral. Armed with said
special power of attorney, Manuel Roxas applied for, was granted and received an agricultural loan in the amount of
P2,000.00 from private respondent on December 26, 1969. As security for the loan, he executed the corresponding real
estate mortgage over the subject land.

October 24, 1973, private respondent foreclosed the real estate mortgage for failure to pay the loan on maturity. On
January 7, 1974, the subject land was sold at public auction to private respondent, being the highest bidder for P3,009.37.
For failure to exercise the right of redemption, private respondent consolidated its ownership over the subject land. On
October 4, 1982, possession thereof was taken from Jennifer Roxas, daughter of Manuel Roxas, and delivered by the sheriff
to private respondent. Cdpr

On September 2, 1981, petitioner filed a complaint for cancellation of foreclosure of mortgage and annulment of auction
sale against private respondent before the Regional Trial Court of Roxas City, docketed as Civil Case No. V-4543.

In her complaint, petitioner claimed that Manuel Roxas never informed her about the approval of the loan. When the loan
matured, she did not receive any demand for payment from private respondent nor was there any information from
Manuel Roxas about the maturity of the loan. The foreclosure did not comply with the requirement of giving written
notices to all possible redemptioners, neither did Manuel Roxas inform her about the foreclosure. In 1974, she learned of
the foreclosure from a certain Rosario Pelobello. In that same year, she went to private respondent to inquire about the
status of her loan, that is, the amount of her total account and for that matter, she asked for a statement of account. Her
request was refused or ignored. After repeated requests therefor went unheeded, she consulted her lawyer, who sent a
letter to private respondent, requesting for said statement of account. On May 10, 1981, she wrote another letter to
private respondent, reiterating her previous request. Private respondent finally replied, informing petitioner that it already
foreclosed the subject land and it can no longer be redeemed since the redemption period has expired on March 6, 1975.
Petitioner was able to obtain her statement of account only on August 19, 1981. She consigned with the trial court the
amount of P4,194.50 as redemption price of the subject land.

Refuting the claims of petitioner, private respondent contended in its answer that petitioner never cared about the
payment of her loan although she knew of the status of her account; that she was duly notified of the foreclosure and
public auction sale since notice to Manuel Roxas, her agent, was notice to the principal; that the sheriff duly posted copies
of the notice of foreclosure sale in conspicuous public places before the actual auction sale; and that she acted negligently
in not taking steps to redeem the subject land.
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The trial court ratiocinated that private respondent failed to give notice of foreclosure to petitioner as owner of the
property and there was no compliance with the requirements of Section 5 of Republic Act No. 720, 3 as amended
by Republic Act No. 5939. The notices of foreclosure were posted in the municipality where the subject land was located
and in Roxas City, but not in the barrio. Moreover, there was no affidavit of the sheriff who conducted the sale, attached to
the records of the case.

Ruling

It is settled doctrine that failure to publish notice of auction sale as required by the statute constitutes a jurisdictional
defect which invalidates the sale. 6 Even slight deviations therefrom are not allowed. 7

Section 5 of R.A. No. 720, as amended by R.A. No. 5939, provides that notices of foreclosure should be posted in at least
three (3) of the most conspicuous public places in the municipality AND BARRIO where the land mortgaged is situated.

In the case at bar, the Certificate of Posting which was executed by the sheriff states that he posted three (3) copies of the
notice of public auction sale in three (3) conspicuous public places in the municipality of Panay, where the subject land was
situated and in like manner in Roxas City, where the public auction sale took place. 8 It is beyond dispute that there was a
failure to publish the notices of auction sale as required by law. Section 5 provides further that proof of publication shall be
accomplished by an affidavit of the sheriff or officer conducting the foreclosure sale. In this case, the sheriff executed a
certificate of posting, which is not the affidavit required by law. The rationale behind this is simple: an affidavit is a sworn
statement in writing whereas a certificate is merely a statement in writing. Strict compliance with the aforementioned
provision is mandated. We, therefore, cannot sustain the view of respondent court that there was substantial compliance
with Section 5 of R.A. No. 720, as amended, with respect to the affidavit of posting by the sheriff and the non-posting of the
required notice in the barrio where the land mortgaged is situated. Instead, We declare the foreclosure and public auction
sale of the subject land void.

SALAZAR V. TORRES

The original action was brought by respondents Justiniana de Torres, et al., against petitioner Gregorio Salazar to foreclose
a real estate mortgage.

In its order of October 30, 1956, the trial court approved the joint motion for judgment. It would appear, however, that
petitioner Salazar paid only P1,030.00, failing to pay the balance of P1,866.50. As a result, respondents asked for the
issuance of the writ of execution and a writ of foreclosure was issued, which resulted in the sale at public auction on
February 25, 1957 of the mortgaged property to three of the four respondents in the sum of P2,034.00 to satisfy the
balance of the judgment in the amount of P1,866.50, plus the sheriff’s fees and costs incurred in the sale, amounting to
P167.50.

On February 28, 1957, respondents moved to confirm the Sheriff’s sale, but upon objection of petitioner on the ground that
the sale had been made to only three of the four respondents, and that there was no proof that the fourth respondent,
Bonifacia de Torres, had been paid her share of the proceeds of the sale, the trial court denied the motion to confirm and
ordered the property to be sold anew at public auction.

After due notice and publication, the second auction sale was made on September 24, 1957 in the course of which,
petitioner submitted a written bid which he handed to the Sheriff, in the amount of P2,069.00, to cover the judgment credit
of P1,866.50 and the costs of the second foreclosure sale amounting to P202.50. However, the Sheriff returned petitioner’s
bid after respondents had made their bid for P2,257.34, representing the balance of the judgment, the Sheriff’s fees and
the costs of the sale at public auction, which the Sheriff considered to be the highest bid. A deed of sale was subsequently

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issued to respondents, without requiring them to pay down the amount of the bid for the reason that they were the
judgment creditors. On October 1, 1957, respondents moved to confirm the second sale. On his part, petitioner filed two
motions: one dated October 3, 1957, to declare the judgment debtor (himself), as the highest bidder and to set aside the
sale; and the other dated October 4, 1957, to stay confirmation of the sale until after his motion to annul the same had
been acted upon. It is petitioner’s contention that although respondents’ bid was higher than his, nevertheless, the former
was void since respondents did not actually pay down or offer to pay the amount of their bid of P2,257.34; that Bonifacia de
Torres’ participation in the bid was illegal and unauthorized, she having previously waived whatever cause or causes of
action she had against him; that his bid of P2,069.00 representing the judgment credit of P1,866.50 and the costs of the
second sale amounting to P202.50 fully satisfied the obligation and so should have been accepted as the highest bid.

The trial court held the motion of respondents to confirm the sale, in abeyance. In an order of November 21, 1957, the trial
court upheld the right of Bonifacia de Torres to participate in the bid, at the same time declaring untenable petitioner’s
petition regarding the failure of respondents to pay down the amount of their bid, saying that being judgment creditors,
they need not pay down their bid unless it exceeded the amount of the judgment, in which case, they had to pay only the
excess. At the same time, the lower court sustained the sufficiency of petitioner’s bid for P2,069.00, saying that he need not
pay the expenses incurred in the first auction sale, which was set aside. In conclusion, the court alternatively gave
defendant-petitioner an unextendible period of two days within which to pay the amount of his bid of P2,069.00 to the
Sheriff, otherwise, the plaintiffs-respondents were equally given an unextendible period of two days within which to pay to
the Sheriff the sum of P167.50, representing the excess over the balance of the judgment, including the lawful Sheriff’s fees
and costs chargeable to the defendants, after which the sale would be confirmed.

It will be observed that the appealed order of November 21, 1957 neither set aside nor confirmed the foreclosure sale of
September 27, 1957, but it held confirmation in abeyance so as to give petitioner an opportunity to pay to the Sheriff the
amount of his bid. The same opportunity was alternatively given to the respondents to pay to the Sheriff the excess of their
bid over the judgment credit. But even after the payment by respondents of the said amount because of the failure of
petitioner to take advantage of the opportunity accorded to him by the court, still, the proceedings were not ended for the
reason that the court had yet to confirm the sale, which would have been the final act to consummate and complete the
foreclosure sale.

The sale of property under foreclosure procedure must be confirmed by the court. . . . a sale by the sheriff does not have
the effect of transferring the property sold until the same is confirmed by a decree of the court. Thus it appears that the
confirming of a sale is a very important order. The title of the property cannot pass to the purchaser until the sale is
confirmed. The court may decline to confirm the sale for good cause shown, and the same set aside and order a new sale.
While the court may or may not confirm the sale within his discretion, we are of the opinion that, whatever his order is, the
interested parties may appeal therefrom if they feel themselves aggrieved.”

A foreclosure sale is not complete until it is confirmed, and before said confirmation, the court retains control of the
proceedings by exercising a sound discretion in regard to it, either granting or withholding confirmation as the rights and
interests of the parties and the ends of justice may require. From this standpoint, the order of November 21, 1957 which
neither set aside nor confirmed the foreclosure sale was merely interlocutory in character.

SPS. AGBADA V. INTER-URBAN DEVELOPERS INC.

On 21 February 1991 petitioner-spouses Guillermo Agbada and Maxima Agbada borrowed P1,500,000.00 from
respondent Inter-Urban Developers, Inc. through its president, Simeon L. Ong Tiam. 1 To secure the loan, the parties
concurrently executed a Deed of Real Estate Mortgage over a parcel of land and the improvements thereon situated in
Tandang Sora, Quezon City owned by the spouses. 2 The loan was payable within six (6) months from 21 February 1991 at
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three percent (3%) interest per month, otherwise, failure to discharge the loan within the stipulated period would
entitle Inter-Urban Developers, Inc. to foreclose the mortgage judicially or extra-judicially. 3 The spouses failed to pay the
loan within the six-month period despite several out-of-court demands made by respondent Inter-Urban Developers, Inc.

On 10 December 1993 Inter-Urban Developers, Inc. filed with the Regional Trial Court of Quezon City, Branch 105, a
complaint for foreclosure of real estate mortgage. 5 On 2 March 1994, without assistance of counsel, the spouses filed their
unverified answer admitting that they had borrowed the amount of P1,500,000.00 from respondent and had executed the
real estate mortgage to secure the loan but denying that it was payable within six (6) months and at three percent (3%)
interest per month. 6 As affirmative defense they alleged in their answer that —

[petitioner-spouses] and Simeon L. Ong Tiam, then acting for and in behalf of [Inter-Urban Developers], were compadre
and comadre, for this reason, after the execution of the Real Estate Mortgage Contract . . . [Spouses Guillermo and Maxima
Agbada] were only charged with interest at legal rate and the period for the said contract is five (5) years from execution
thereof .That the said contract is merely simulated and for formality sake only. That the claim or demand set forth in the
plaintiff’s complaint is not yet due and demandable, thus, the complaint states no cause of action against the defendants.

Petitioner-spouses did not appeal the Summary Judgment nor did they pay the judgment debt. On 31 May 1995 Inter-Urban
Developers, Inc. moved for a decree of foreclosure which the spouses did not oppose nor did they attend the hearing on the
motion.16 On 14 July 1995 the trial court granted the motion and issued a decree of foreclosure. 17 On 19 August 1996
respondent moved for an order authorizing the sale of the mortgaged real estate for failure of the spouses to pay the
judgment debt. 18 Once again the petitioner-spouses did not oppose the motion nor did they attend the hearing
thereon. 19 On 26 August 1996 the trial court ordered the foreclosure sale of the mortgaged property. 20 On 10 September
1996 Inter-Urban Developers, Inc. moved ex parte for the appointment of a special sheriff to attend to the foreclosure sale
since no sheriff was assigned in RTC-Br. 105. 21 On 11 September 1996, acting on the ex parte motion, the trial court
ordered the Ex-Oficio Sheriff to designate a special sheriff to carry out the foreclosure sale. 22 On 6 November 1996 the
mortgaged real estate was sold at public auction to respondent Inter-Urban Developers, Inc. as highest bidder for
P4,637,092.74 which was supposed to be in full satisfaction of the judgment debt.

On 3 April 1997, upon motion of Inter-Urban Developers, Inc. and despite petitioner-spouses’ opposition thereto on the
ground that the purchase price of the mortgaged property was below its appraised value according to an appraisal
report, the trial court confirmed the sale in favor of Inter-Urban Developers, Inc. 24 The trial court ruled that it could not
have given weight to the appraisal report since this report was not authenticated nor was the appraiser presented as
witness during the hearing of the motion to allow Inter-Urban Developers, Inc. an opportunity to cross-examine on the
appraised value of the property.

On 26 February 1999 the petitioner-spouses filed a Motion to Tender the Full Obligation of the Defendant Spouses alleging
that they had paid their obligation worth P6,307,532.66 32 in the form of cashier’s check which they left with the maid of
the counsel of record for Inter-Urban Developers, Inc. 33 On 21 July 1999 the trial court denied the motion.

Petitioner-spouses argue that they were deprived of due process when their defense, i.e., that the real estate mortgage
carries a default interest rate and matures only on the fifth year following its execution on 21 February 1991, was
considered sham and refused full blown trial, contrary to our ruling in Paz v. Court of Appeals. On February 2, 1991, plaintiff
Guillermo Agbada, being then an official of a security agency which is a sister company of respondent Inter-Urban
Developer and because of financial problem faced by the couple, arranged with Simeon Lee Ong Tiam (his
close compadre, being the sponsor and godfather in the wedding of his daughter and said Ong Tiam being the President of
Inter-Urban Development) obtained a loan from respondent corporation under the agreement, in view of their relationship,

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that the loan would only carry legal interest, and would be payable within a period of 5 years. It is to be noted at this point
that Inter-Urban Developers is not a money lending or financial institution but is engaged in real estate development and
the granting of loans was not part of its principal business. It was clearly understood by petitioners as well as by the
responsible officers of Inter-Urban, particularly, Simeon Lee Ong and the other officers, who, in fact, have close family ties
and relationship with petitioners, that the loan was only an accommodation, hence, the charging only of nominal interest
and its repayment within a period of 4(sic) years. Petitioners were convinced to sign what they were then informed was
only a formality, a sham deed of mortgage which on its face purported to show that a rate of interest different from that
initially agreed upon appeared and the period of maturity of the loan was changed from 5 years to 6 months.

On the other hand, respondent Inter-Urban Developers, Inc. claims that petitioner-spouses did not deny under oath the
authenticity and due execution of the real estate mortgage document, hence, were barred from setting up the defense that
the interest rate and maturity provisions of the loan and mortgage contract were different from those stipulated in the
written agreement. 44 Respondent further argues that the alleged promise made by Simeon Ong Tiam even if true cannot
be enforced against Inter-Urban Developers, Inc. since there is nothing to show that he was authorized to enter into the
alleged contemporaneous agreement. Finally, respondent asserts that there were other remedies available to petitioners
which they failed to exhaust by their own negligence, thus rendering the petition for annulment of judgment clearly
unavailing and that they voluntarily submitted to the jurisdiction of the trial court by seeking affirmative relief from the
effects of the assailed Summary Judgment.

Ruling

In the instant case, the allegation of deprivation of due process took more than four (4) years of hibernation, so to speak,
from 13 January 1995 when the trial court promulgated its Summary Judgment only to resurrect after failed attempts to
thwart the transfer of title over the foreclosed real estate in favor of respondent Inter-Urban Developers, Inc. Evidently,
petitioner-spouses are barred by laches from assailing the regularity of the Summary Judgment as shown not only by their
silence when they should have defended their alleged right to establish their understanding of the interest rate and
maturity of the loan and mortgage contract, but also by their full and knowing participation in the proceedings, with the
assistance of counsel, leading to the confirmation of the foreclosure sale in favor of respondent Inter-Urban Developers, Inc.

It bears stressing that the proper remedy to seek reversal of judgment in an action for foreclosure of real estate mortgage is
not a petition for annulment of judgment but an appeal from the judgment itself or from the order confirming the sale of
the foreclosed real estate. Since petitioner-spouses failed to avail of appeal without sufficient justification, they cannot
conveniently resort to the action for annulment for otherwise they would benefit from their own inaction and negligence.

While it is true that contracting parties may establish stipulations, clauses, terms and conditions as they may deem
convenient provided they are not contrary to law, morals, good customs, public order, or public policy, the parol evidence
rule forbids any addition to or contradiction of the terms of an agreement reduced into writing by testimony purporting to
show that, at or before the signing of the document, other or different terms were orally agreed upon by the parties. As
applied herein, the alleged terms of the contemporaneous agreement between petitioner-spouses and Simeon Ong Tiam
cannot be proved for they are not embodied in the mortgage deed but exist only in their faint recollection. Only the terms
of the loan and mortgage agreement providing for six (6) months maturity from date of execution thereof and the interest
rate of three percent (3%) per month are worth considering and implementing.

Petitioner-spouses cannot invoke any of the exceptions to the parol evidence rule, more particularly, the alleged failure of
the writing to express the true intent and agreement of the parties. The exception obtains only where the written contract
is so ambiguous or obscure in terms that the contractual intention of the parties cannot be understood from a mere
reading of the instrument, thus necessitating the reception of relevant extrinsic evidence of the contractual provision in
dispute to enable the court to make a proper interpretation of the instrument. 54 However, in the case at bar, the loan and
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mortgage deed is clear and without ambiguity, mistake or imperfection in specifying the maturity of the loan exactly after
six (6) months from date of execution thereof at interest rate of three percent (3%) per month, and certainly these
unmistakable terms forbid petitioner-spouses from introducing evidence aliunde of the alleged contemporaneous
agreement in violation of the parol evidence rule.

Indeed the literal meaning of the stipulations is bolstered by the intention of the parties as inferred from their
contemporaneous and subsequent acts. 55 It is a matter of record that, without hesitation, petitioner Guillermo Agbada
asked for the postponement of the pre-trial conference through a one-page handwritten letter addressed to the trial judge
admitting liability for the due and demandable loan: “Hindi 146oi t nais makipaglaban 146oi t sa kasong ito dahilan 146oi
tong perang ito ay dapat ko pong bayaran.” 56 Furthermore, when proceedings had been ongoing in the trial court for
more than four (4) years, petitioner-spouses plainly assailed the finding of the trial court I the appraised value of the
foreclosed property, without more, thus strongly implying their acquiescence to the due and demandable loan, and in fact
attempted to pay the loan completely and recover the foreclosed lot and improvements thereon by tendering a cashier’s
check worth P6,307,532.66 through a house help.

He maneuvering of petitioner-spouses before the trial court reinforces our belief that their claim is unfounded. They
contradicted themselves when they claimed that the loan was interest-free and then in another vein contended that it bore
the statutory rate of interest, only to change their recollection subsequently to a nominal rate of interest. Petitioner-
spouses would also vacillate with respect to the alleged reason for respondent Inter-Urban Developers, Inc. to agree to
different maturity and interest-rate provisions since the answer filed before the trial court would assign as cause therefor
the personal relationship between them and Simeon Ong Tiam although their memorandum before this Court would assert
that the preferential treatment was due to petitioner Guillermo Agbada’s employment as consultant of a sister company
of Inter-Urban Developers, Inc. It is fatal to petitioner-spouses’ case, not to mention a misuse of precious court resources,
for them not to recall and convey in precise manner the stipulations of the purported concurrent agreement with Simeon
Ong Tiam when the alleged side contract is the very defense sought to be heard in a full-blown trial.

Finally, we find no merit in petitioner-spouses’ claim that the purchase price of the mortgaged real property was way below
its appraised value. To begin with, they deliberately withheld the presentation of their own evidence which might have
proved this matter and thus unfortunately deprived respondent Inter-Urban Developers, Inc. the opportunity to cross-
examine whatever such evidence would tend to establish. Equally significant, the low purchase price could have worked in
the petitioner-spouses’ favor if they promptly exercised their equity of redemption. As held in Tarnate v. Court of
Appeals, 64 “[a]nent the contention that the property has been sold at an extremely low price, suffice it to say that, if
correct, it would have, in fact, favored an easy redemption of the property. That remedy could have well been availed of
but petitioners did not.”

PNB V. SPS. CABATINGAN


Respondent spouses Tomas Cabatingan and Agapita Edullantes obtained two loans, secured by a real estate mortgage, 1 in
the total amount of P421,200 2 from petitioner Philippine National Bank. However, they were unable to fully pay their
obligation despite having been granted more than enough time to do so. 3 Thus, on September 25, 1991, petitioner
extrajudicially foreclosed on the mortgage pursuant to Act 3135. 4

Thereafter, a notice of extrajudicial sale 5 was issued stating that the foreclosed properties would be sold at public auction
on November 5, 1991 between 9:00 a.m. and 4:00 p.m. at the main entrance of the office of the Clerk of Court on San
Pedro St., Ormoc City.

Pursuant to the notice, the properties were sold at public auction on November 5, 1991. The auction began at 9:00 a.m.
and was concluded after 20 minutes with petitioner as the highest bidder. Petitioners claimed that the provision quoted

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above must be observed strictly. Thus, because the public auction of the foreclosed properties was held for only 20 minutes
(instead of seven hours as required by law), the consequent sale was void. 6

On March 16, 1993, respondent spouses filed in the Regional Trial Court (RTC) of Ormoc City, Branch 12 a complaint for
annulment of extrajudicial foreclosure of real estate mortgage and the November 5, 1991 auction sale.

Issue

The issue here is whether a sale at public auction, to be valid, must be conducted the whole day from 9:00 a.m. until 4:00
p.m. of the scheduled auction day.

Ruling

A creditor may foreclose on a real estate mortgage only if the debtor fails to pay the principal obligation when it falls
due. 15Nonetheless, the foreclosure of a mortgage does not ipso facto extinguish a debtor’s obligation to his creditor. The
proceeds of a sale at public auction may not be sufficient to extinguish the liability of the former to the latter. 16 For this
reason, we favor a construction of Section 4 of Act 3135 that affords the creditor greater opportunity to satisfy his claim
without unduly rewarding the debtor for not paying his just debt.

The word “between” ordinarily means “in the time interval that separates.” 17 Thus, “between the hours of nine in the
morning and four in the afternoon” merely provides a time frame within which an auction sale may be conducted.
Therefore, a sale at public auction held within the intervening period provided by law (i.e., at any time from 9:00 a.m. until
4:00 p.m.) is valid, without regard to the duration or length of time it took the auctioneer to conduct the proceedings.

In this case, the November 5, 1991 sale at public auction took place from 9:00 a.m. to 9:20 a.m. Since it was conducted
within the time frame provided by law, the sale was valid.

PEREZ V. PNB

On August 29, 1939, Vicente Perez mortgaged Lot No. 286-E of the Kabankalan Cadastre, with Transfer Certificate of Title
No. 29530, to the appellant Philippine National Bank, Bacolod Branch, in order to secure payment of a loan of P2,500, plus
interest, payable in yearly installments. On October 7, 1942, Vicente Perez, mortgagor, died intestate, survived by his
widow and children (appellees herein). At that time, there was an outstanding balance of P1,917.00, and corresponding
interest, on the mortgage indebtedness.

On October 18, 1946, the widow of Perez instituted Special Proceedings No. 512 of the Court of First Instance of Occidental
Negros, for the settlement of the estate of Vicente Perez. The widow was appointed Administratrix, and notice to creditors
was duly published. The Bank did not file a claim. The project of partition was submitted on July 18, 1956; it was approved
and the properties distributed accordingly. Special Proceeding No. 512 was then closed.

It appears also that, as early as March of 1947, the widow of the late Vicente Perez inquired by letter from the Bank the
status of her husband’s account and she was informed that there was an outstanding balance thereon of P2,758.84 earning
a daily interest of P0.4488. She was furnished a copy of the mortgage and, on April 2, 1947, a copy of the Tax Declaration
(Rec. App. Pp. 45 48).

On January 2, 1963, the Bank, pursuant to authority granted it in the mortgage deed, caused the mortgaged properties to
be extrajudicially foreclosed. The Provincial Sheriff accordingly sold Lot No. 286-E at auction, and it was purchased by the
Bank. In the ordinary course, after the lapse of the year of redemption, Certificate of Title No. T-29530 in the name of

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Vicente Perez was cancelled, and Certificate T-32066, dated May 11, 1962, was issued in the name of the Bank. The widow
and heirs of Perez were not notified.

Three months later, on August 25, 1962, the widow and heirs of Vicente Perez instituted this case against the Bank in the
court below, seeking to annul the extra-judicial foreclosure sale and the transfer of the Certificate of Title, as well as to
recover damages, claiming that the Bank had acted illegally and in bad faith. The Bank answered, denying the charges.

Ruling

The lower court held that the Rule inhibits any extra-judicial foreclosure of the mortgage constituted by a deceased debtor-
mortgagor. A vigorous and able dissenting opinion, subscribed by Justices Street, Villamor and Ostrand, held that an extra
judicial foreclosure was authorized.

The ruling in Pasno vs. Ravina not having been reiterated in any other case, we have carefully reexamined the same, and
after mature deliberation have reached the conclusion that the dissenting opinion is more in conformity with reason and
law. Of the three alternative courses that section 7, Rule 87 (now Rule 86), offers the mortgage creditor, to wit, (1) to waive
the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim; (2) foreclose the
mortgage judicially and prove any deficiency as an ordinary claim; and (3) to rely on the mortgage exclusively, foreclosing
the same at any time before it is barred by prescription, without right to file a claim for any deficiency, the majority opinion
in Pasno vs. Ravina, in requiring a judicial foreclosure, virtually wipes out the third alternative conceded by the Rules to the
mortgage creditor, and which would precisely include extra-judicial foreclosures by contrast with the second alternative.
This result we do not consider warranted by the text of the Rules; and, in addition, the recognition of the creditor’s right to
foreclose extra-judicially presents undoubted advantages for the estate of the mortgagor, as pointed out by the dissenting
opinion in Pasno vs. Ravina, supra. In the light of these considerations, we have decided to overrule the majority decision, in
said case, and uphold the right of the mortgage creditor to foreclose extra-judicially in accordance with section 7, Rule 86,
of the Revised Rules (old Rule 87)

The argument that foreclosure by the Bank under its power of sale is barred upon death of the debtor, because agency is
extinguished by the death of the principal, under Article 1732 of the Civil Code of 1889 and Article 1919 of the Civil Code of
the Philippines, neglects to take into account that the power to foreclosure is not an ordinary agency that contemplates
exclusively the representation of the principal by the agent, but is primarily an authority conferred upon the mortgagee for
the latter’s own protection. It is, in fact, an ancillary stipulation supported by the same causa or consideration for the
mortgage and forms an essential and inseparable part of that bilateral agreement. As can be seen in the preceding
quotations from Pasno vs. Ravina, 54 Phil. 382, both the majority and the dissenting opinions conceded that the power to
foreclose extrajudicially survived the death of the mortgagor, even under the law prior to the Civil Code of the Philippines
now in force.

Nevertheless, while upholding the validity of the appellant Bank’s foreclosure, we can not close our eyes to the fact that the
Bank was apprised since 1947 of the death of its debtor, Vicente Perez, yet it failed and neglected to give notice of the
foreclosure to the latter’s widow and heirs, as expressly found by the court a quo. Such failure, in effect, prevented them
from blocking the foreclosure through seasonable payment, as well as impeded their effectuating a seasonable redemption.
In view of these circumstances, it is our view that both justice and equity would be served by permitting herein appellees to
redeem the foreclosed property within a reasonable time, by paying the capital and interest of the indebtedness up to the
time of redemption, plus foreclosure and useful expenses, less any rents and profits obtained by the Bank from and after
the same entered into its possession.

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San Beda College Alabang School of Law
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GUANCO V. ANTOLO

Isidro Antolo, a resident of Funda, Hamtic, Antique, applied for a P600.00 loan from the Rural Bank of Sibalom (RBS)
(Antique), Inc. 2 To secure payment thereof, Antolo executed a Real Estate Mortgage 3 on July 19, 1976 over a parcel of
land covered by Transfer Certificate of Title (TCT) No. N-10216 located in San Jose, Antique. The deed was annotated at the
dorsal portion of the title on the same date. 4 He likewise executed in favor of RBS a promissory note dated July 24, 1976,
to be due and demandable on April 21, 1977.5 Sometime thereafter, Antolo transferred his residence to North Baybay,
Barangay Pahanocoy, Bacolod City, where he found work, without, however, leaving any forwarding address to RBS. 6

On March 5, 1977, RBS, through its Manager, Manuelita C. Mañosa, sent a letter to Antolo reminding him that his loan was
to mature on April 21, 1977, and that he was expected at the bank on said date. 7 As gleaned from the registry return
receipt covering the letter, it was received by Mrs. Nelna Jaranilla. 8 However, Antolo did not go to the RBS or pay his loan
on its maturity date. aCTcDS

In a letter 9 dated May 10, 1977, Mañosa again requested him to pay his account with RBS, otherwise the real estate
mortgage would be foreclosed. Antolo failed to pay his loan account. The RBS, through counsel, then sent a letter dated
June 21, 1977, declaring that unless Antolo paid his loan account including the accrued interest thereon within ten (10) days
from notice thereof, appropriate legal action would be taken against him to protect its rights and interests. 10

In a letter 11 dated December 7, 1983, Antolo inquired how much his loan account with the bank was, including accrued
interests, to enable him to “redeem” his title. The bank replied via a letter 12 dated December 20, 1983, informing Antolo
that his loan account had already been paid on August 29, 1977, as evidenced by Official Receipt No. 5280, and that
consequently, the owner’s duplicate of his title had already been released. In a letter 13 dated January 10, 1984, Antolo
informed RBS that he had no knowledge that his loan account had been paid and the owner’s duplicate of title over the
mortgaged property released. Antolo furnished the Central Bank of the Philippines with a copy of his letter.

In a letter 14 to the Central Bank dated April 28, 1986, Antolo complained that RBS had released the owner’s duplicate of
his title to a third-party which he had not authorized. He made inquiries from the Register of Deeds and discovered that TCT
No. N-10216 had been cancelled by a Certificate of Sale 15 executed by the Provincial Sheriff through Deputy Sheriff
Bonifacio L. Alvior. It appears on the face of the said certificate that Antolo’s property was sold at a public auction held at
10:00 a.m. on August 19, 1977 at the Provincial Capitol, San Jose, Antique, in favor of one Luisa Guanco for P775.00, who
was allegedly the sole bidder. The certificate of sale was annotated at the dorsal portion of his title on April 30, 1977, and a
Final Deed of Sale 16 was executed in favor of Guanco on August 28, 1978 by Deputy Sheriff Alvior for P930.00;
consequently, the deed was annotated at the dorsal copy of TCT No. N-10216 on September 5, 1978. On October 9, 1978,
TCT No. N-10216 was cancelled by TCT No. 12131 17 under the name of Luisa Guanco. The latter declared the property in
her name under Tax Declaration No. 6842 18 and paid the realty taxes thereon. 19

On November 4, 1986, Antolo filed a complaint against Luisa Guanco and her husband Leonardo Guanco, Provincial Sheriff
Alvior and the RBS, for annulment of the sheriff’s sale, recovery of ownership with damages.

In their answer to the complaint, the defendant spouses averred that Luisa Guanco was a purchaser in good faith.
Moreover, Antolo was estopped from assailing the extrajudicial foreclosure of his property and the sale thereof at public
auction because he had tarried for years before filing his complaint.

Petitioners insist that the Real Estate Mortgage was extrajudicially foreclosed and the property covered by said deed was
sold at public auction on August 19, 1977; petitioner Luisa Guanco paid the loan account on August 29, 1977 as evidenced
by Official Receipt No. 5280; and respondent failed to prove that he was not notified of the foreclosure and the sale of the
property at public auction. Petitioners claim that the deputy sheriff is presumed to have performed his duties in accordance

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with law. Moreover, respondent is estopped from assailing the validity of the foreclosure proceedings, the certificate of
sale, the final certificate of sale and TCT No. 12131 issued on October 9, 1978, because he filed his complaint only on
November 4, 1986.

Petitioner Luisa Guanco further insists that she is a purchaser in good faith. There is no evidence on record that she had
knowledge of any flaw or defect in the auction sale. It is unfair and unjust for respondent to retrieve the property,
considering that he had already received P850.00 under the deed of sale with right to repurchase, including the proceeds of
a loan from RBS. She points out that in this wise, respondent benefited twice from the property.

In his Comment on the petition, respondent averred that the decision and the resolution of the CA are in accord with the
law and the evidence on record.

Ruling

First. Under Section 5 of Republic Act No. 720, as amended by Rep. Act No. 7939, the provincial sheriff is mandated to post
a notice of the foreclosure of the real estate mortgage in at least three of the most conspicuous public places not only in
the municipality but also in the barrio where the land mortgaged is situated during the 60-day period immediately
preceding the public auction. In this case, the provincial sheriff failed to comply with the law. It appears on the face of the
Final Deed of Sale executed by Deputy Sheriff Alvior that the petition for extrajudicial foreclosure of the real estate
mortgage purportedly filed with the said office was dated July 21, 1977. The deputy sheriff set the .977, or less than a
month after the filing of the said petition, short of the 60 day-period under Section 5 of Rep. Act No. 720, as amended.

Second. Deputy Sheriff Bonifacio Alvior made it appear in the Certificate of Sale that he sold the property to petitioner Luisa
Guanco, allegedly the lone bidder for P775.00. 48 Moreover, the deputy sheriff certified in the Final Deed of Sale dated
August 28, 1977 that he sold the property to petitioner Luisa Guanco on August 19, 1977 not only for P775.00 but also for
P930.00. However, the entries made by Deputy Sheriff Alvior in the Certificate of Sale and Final Deed of Sale were belied by
no less than petitioner Luisa Guanco herself, and also by Manuelita Mañosa, the President and Manager of RBS. Petitioner
Luisa Guanco testified that she paid the loan account of respondent, amounting to P930.00, to RBS in July 1977. Petitioner
Luisa Guanco did not claim that she paid P775.00 or even P930.00 to Deputy Sheriff Bonifacio Alvior on August 19, 1977.

Third. What happened was that the petitioner Luisa Guanco arrived at the Office of the RBS, on August 29, 1977, paid
respondent’s loan account of P775.00 and was issued Official Receipt No. 5280. Since respondent’s loan account had been
paid, there was no more need for the extrajudicial foreclosure of the real estate mortgage. The RBS released the real estate
mortgage, as well as the owner’s duplicate of TCT No. N-10216, to petitioner Luisa Guanco without respondent’s
authorization. The foregoing is buttressed by Mañosa’s letter to respondent dated December 20, 1983 stating that, per
bank records, his loan account had been paid on August 29, 1977 per Official Receipt No. 5280 and that his owner’s
duplicate of TCT No. N-10216 “was also redeemed and released.” 51 This was confirmed by the letter dated March 28, 1984
of the Special Assistant to the Governor of the Central Bank to respondent that based on the records of the RBS.

Fourth. The RBS had no copy of any petition for the extrajudicial foreclosure of the real estate mortgage filed with the
Office of the Provincial Sheriff. 53 The RBS did not, in fact, file any because the loan account of respondent had already
been paid. However, petitioner Luisa Guanco and the deputy sheriff made it appear that a public auction sale took place on
August 19, 1977, that she purchased the property for P775.00 on said date, that respondent failed to redeem the property
within the requisite period, and, consequently, a final deed of sale was executed on August 28, 1977. The only conclusion is
that Deputy Sheriff Alvior made it appear in the certificate of sale that a sale at public auction was conducted on August 19,
1977, and that respondent failed to redeem the property within one year from registration of the sale. This was clearly
done to enable petitioner Luisa Guanco to secure a torrens title over the property in her name. Unless it was made to

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appear that a sale at public auction was conducted and that the requisite redemption period had lapsed, no torrens title
over the property can be issued by the Register of Deeds to and under the name of petitioner.

SPS. CERTEZA V. PHILIPPINE SAVINGS BANK

Petitioners obtained a P1,255,000.00 loan from respondent Philippine Savings Bank (PS Bank), [2] secured by two parcels of
land, with all the buildings and improvements existing thereon, covered by Transfer Certificate of Title Nos. N-208706 and
N-208770.[3]

Petitioners failed to pay their outstanding obligation despite demands hence PS Bank instituted on May 8, 2002, an action
for Extrajudicial Foreclosure of the Real Estate Mortgage pursuant to Act No. 3135, [4] as amended.

During the auction sale conducted on February 18, 2003, PS Bank emerged as the sole and highest bidder.[5] A
corresponding Certificate of Sale dated February 20, 2003 was issued in favor of PS Bank, which was registered with the
Registry of Deeds of Quezon City on March 25, 2003.[6] During the period of redemption, on December 1, 2003, PS Bank
filed an Ex-parte Petition[7] for Writ of Possession with the Regional Trial Court (RTC) of Quezon City, which was granted in
an Order[8] dated September 21, 2004, after the period of redemption for the foreclosed property had already expired.

On January 20, 2005, petitioners filed an Omnibus Motion for Leave to Intervene and to Stay Issuance or Implementation
of Writ of Possession,[9] attaching therein their Petition-in-Intervention[10] pursuant to Sec. 8 of Act No. 3135. They sought
the nullification of the extrajudicial foreclosure sale for allegedly having been conducted in contravention of the procedural
requirements prescribed in A.M. No. 99-10-05-0 (Re: Procedure in Extrajudicial Foreclosure of Real Estate Mortgages) and
in violation of herein petitioners right to due process.

PS Bank opposed[11] the motion citing Manalo v. Court of Appeals[12] where we held that (T)he issuance of an order granting
the writ of possession is in essence a rendition of judgment within the purview of Section 2, Rule 19 of the Rules of
Court. PS Bank also argued that with the issuance of the trial courts Order on September 21, 2004, the Motion for Leave to
Intervene can no longer be entertained.

Petitioners allege that the contents of their Omnibus Motion together with the Petition-in-Intervention, although entitled
as such, sought the nullification of the February 18, 2003 extrajudicial foreclosure sale and the cancellation of both the
certificate of sale and the writ of possession issued in favor of PS Bank. [22] They further submit that the writ of possession is
null and void because of patent irregularities in the conduct of the foreclosure sale. [23] In support of their contention,
petitioners argue that A.M. No. 99-10-05-0 which took effect on January 15, 2000, requires that there must be at least two
participating bidders in an auction sale.

Ruling

The law governing cases of extrajudicial foreclosure of mortgage is Act No. 3135.

The requirement for at least two participating bidders provided in the original version of paragraph 5 of A.M. No. 99-10-05-
0 is not found in Act No. 3135. Hence, in the Resolution[26] of the Supreme Court en banc dated January 30, 2001, we made
the following pronouncements:

It is contended that this requirement is now found in Act No. 3135 and that it is impractical and burdensome, considering
that not all auction sales are commercially attractive to prospective bidders.

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The observation is well taken. Neither Act No. 3135 nor the previous circulars issued by the Court governing extrajudicial
foreclosures provide for a similar requirement. The two-bidder rule is provided under P.D. No. 1594 and its implementing
rules with respect to contracts for government infrastructure projects because of the public interest involved. Although
there is a public interest in the regularity of extrajudicial foreclosure of mortgages, the private interest is predominant. The
reason, therefore, for the requirement that there must be at least two bidders is not as exigent as in the case of contracts
for government infrastructure projects.

On the other hand, the new requirement will necessitate republication of the notice of auction sale in case only one bidder
appears at the scheduled auction sale. This is not only costly but, more importantly, it would render naught the binding
effect of the publication of the originally scheduled sale. x x x

Thus, as amended by the January 30, 2001 Resolution, paragraph 5 of A.M. No. 99-10-05-0 now reads:

5. The name/s of the bidder/s shall be reported by the sheriff or the notary public who conducted the sale to the Clerk of
Court before the issuance of the certificate of sale.[27]

Hence, the CA correctly ruled that it is no longer required to have at least two bidders in an extrajudicial foreclosure of
mortgage.[28]

Subsequently, on August 7, 2001, we further resolved other matters relating to A.M. No. 99-10-05-0, specifically on: (1)
period of redemption of properties with respect to the change introduced by Republic Act No. 8791 (The General Banking
Law of 2000) to Act No. 3135; (2) ceiling on sheriffs fees; and (3) payment of filing fees prescribed in the Rules of Court in
addition to sheriffs fees.[29]

Pursuant to A.M. No. 99-10-05-0, as amended by the Resolutions of January 30, 2001 and August 7, 2001, the then Court
Administrator (now Associate Justice of this Court) Presbitero J. Velasco, Jr., issued Circular No. 7-2002[30] dated January 22,
2002 which became effective on April 22, 2002.[31] Section 5(a) of the said circular states:

Sec. 5. Conduct of the extra-judicial foreclosure sale

a. The bidding shall be made through sealed bids which must be submitted to the Sheriff who shall conduct the sale
between the hours of 9 a.m. and 4 p.m. of the date of the auction (Act 3135, Sec. 4). The property mortgaged shall be
awarded to the party submitting the highest bid and in case of a tie, an open bidding shall be conducted between the
highest bidders. Payment of the winning bid shall be made either in cash or in managers check, in Philippine currency,
within five (5) days from notice.

The use of the word bids (in plural form) does not make it a mandatory requirement to have more than one bidder for an
auction sale to be valid. A.M. No. 99-10-05-0, as amended, no longer prescribes the requirement of at least two bidders for
a valid auction sale. We further held that Except for errors or omissions in the notice of sale which are calculated to deter or
mislead bidders, to depreciate the value of the property, or to prevent it from bringing a fair price, simple mistakes or
omissions are not considered fatal to the validity of the notice and the sale made pursuant thereto. [32]

YU V. PHILIPPINE COMMERCE INTERNATIONAL BANK

Under a Real Estate Mortgage dated August 15, 19942 and Amendments of Real Estate Mortgage dated April 4, 1995 3 and
December 4, 1995,4 spouses Vicente Yu and Demetria Lee-Yu (petitioners) and spouses Ramon T. Yu and Virginia A. Tiu, or
Yu Tian Hock aka Victorino/Vicente Yu, mortgaged their title, interest, and participation over several parcels of land located

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in Dagupan City and Quezon City, in favor of the Philippine Commercial International Bank (respondent) as security for the
payment of a loan in the amount of P9,000,000.00.5

As the petitioners failed to pay the loan, the interest, and the penalties due thereon, respondent filed on July 21, 1998 with
the Office of the Clerk of Court and Ex-Officio Sheriff of the Regional Trial Court of Dagupan City a Petition for Extra-Judicial
Foreclosure of Real Estate Mortgage on the Dagupan City properties.6 On August 3, 1998, the City Sheriff issued a Notice of
Extra-Judicial Sale scheduling the auction sale on September 10, 1998 at 10:00 o’clock in the morning or soon thereafter in
front of the Justice Hall, Bonuan, Tondaligan, Dagupan City.7

At the auction sale on September 10, 1998, respondent emerged as the highest bidder.8 On September 14, 1998, a
Certificate of Sale was issued in favor of respondent. 9 On October 1, 1998, the sale was registered with the Registry of
Deeds of Dagupan City.

About two months before the expiration of the redemption period, or on August 20, 1999, respondent filed an Ex-Parte
Petition for Writ of Possession before the Regional Trial Court of Dagupan City.

On September 30, 1999, petitioners filed a Motion to Dismiss and to Strike Out Testimony of Rodante Manuel stating that
the Certificate of Sale dated September 14, 1998 is void because respondent violated Article 2089 of the Civil Code on the
indivisibility of the mortgaged by conducting two separate foreclosure proceedings on the mortgage properties in Dagupan
City and Quezon City and indicating in the two notices of extra-judicial sale that petitioners’ obligation
is P10,437,015.2012 as of March 31, 1998, when petitioners are not indebted for the total amount of P20,874,031.56.13

In the meantime, petitioners filed a complaint for Annulment of Certificate of Sale before the Regional Trial Court of
Dagupan City, docketed as Civil Case No. 99-03169-D and raffled to Branch 44 (RTC Branch 44).

Ruling

Anent the first issue, the Court finds that petitioners have a mistaken notion that the indivisibility of a real estate mortgage
relates to the venue of extra-judicial foreclosure proceedings. The rule on indivisibility of a real estate mortgage is provided
for in Article 2089 of the Civil Code. Therefore, the debtor’s heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as the debt is not completely satisfied.

Neither can the creditor’s heir who received his share of the debt return the pledge or cancel the mortgage, to the
prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of
them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for
which each thing is specially answerable is satisfied.

This rule presupposes several heirs of the debtor or creditor25 and therefore not applicable to the present case.
Furthermore, what the law proscribes is the foreclosure of only a portion of the property or a number of the several
properties mortgaged corresponding to the unpaid portion of the debt where, before foreclosure proceedings, partial
payment was made by the debtor on his total outstanding loan or obligation. This also means that the debtor cannot ask for
the release of any portion of the mortgaged property or of one or some of the several lots mortgaged unless and until the
loan thus secured has been fully paid, notwithstanding the fact that there has been partial fulfillment of the obligation.
Hence, it is provided that the debtor who has paid a part of the debt cannot ask for the proportionate extinguishment of
the mortgage as long as the debt is not completely satisfied. 26 In essence, indivisibility means that the mortgage obligation

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cannot be divided among the different lots,27 that is, each and every parcel under mortgage answers for the totality of the
debt.

Where the application concerns the extrajudicial foreclosure of mortgages of real estates and/or chattels in different
locations covering one indebtedness, only one filing fee corresponding to such indebtedness shall be collected. The
collecting Clerk of Court shall, apart from the official receipt of the fees, issue a certificate of payment indicating the
amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels
mortgaged and their respective locations, which certificate shall serve the purpose of having the application docketed
with the Clerks of Court of the places where the other properties are located and of allowing the extrajudicial
foreclosures to proceed thereat. (Emphasis supplied)

The indivisibility of the real estate mortgage is not violated by conducting two separate foreclosure proceedings on
mortgaged properties located in different provinces as long as each parcel of land is answerable for the entire debt.
Petitioners’ assumption that their total obligation is P20,874,030.40 because the two notices of extra-judicial sale indicated
that petitioners’ obligation is P10,437,015.2031 each, is therefore flawed. Considering the indivisibility of a real estate
mortgage, the mortgaged properties in Dagupan City and Quezon City are made to answer for the entire debt
of P10,437,015.29.32

As to the second issue, that is, whether a civil case for annulment of a certificate of sale is a prejudicial question to a
petition for issuance of a writ of possession, this issue is far from novel and, in fact, not without precedence.

In the present case, Civil Case No. 99-01369-D and Spec. Proc. No. 99-00988-D are both civil in nature. The issue in Civil Case
No. 99-01369-D is whether the extra-judicial foreclosure of the real estate mortgage executed by the petitioners in favor of
the respondent and the sale of their properties at public auction are null and void, whereas, the issue in Spec. Proc. No. 99-
00988-D is whether the respondent is entitled to a writ of possession of the foreclosed properties. Clearly, no prejudicial
question can arise from the existence of the two actions. The two cases can proceed separately and take their own
direction independently of each other.

Nevertheless, there is a need to correct the CA’s view that petitioners violated Section 8 of Act No. 3135 and disregarded
the proscription on multiplicity of suits by instituting a separate civil suit for annulment of the certificate of sale while there
is a pending petition for issuance of the writ of possession in a special proceeding.

Under the provision above cited, the mortgagor may file a petition to set aside the sale and for the cancellation of a writ of
possession with the trial court which issued the writ of possession within 30 days after the purchaser mortgagee was given
possession. It provides the plain, speedy, and adequate remedy in opposing the issuance of a writ of possession. 35 Thus, this
provision presupposes that the trial court already issued a writ of possession. In Sps. Ong v. Court of Appeals, 36 the Court
elucidated:

The law is clear that the purchaser must first be placed in possession of the mortgaged property pending proceedings
assailing the issuance of the writ of possession. If the trial court later finds merit in the petition to set aside the writ of
possession, it shall dispose in favor of the mortgagor the bond furnished by the purchaser. Thereafter, either party may
appeal from the order of the judge in accordance with Section 14 of Act 496, which provides that "every order, decision,
and decree of the Court of Land Registration may be reviewed…in the same manner as an order, decision, decree or
judgment of a Court of First Instance (RTC) might be reviewed." The rationale for the mandate is to allow the purchaser to
have possession of the foreclosed property without delay, such possession being founded on his right of ownership.

United Coco Planters Bank v. CA

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San Beda College Alabang School of Law
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On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a
Credit Agreement whereby the latter could avail from the former credit of up to a
maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. The spouses
Beluso constituted, other than their promissory notes, a real estate mortgage over
parcels of land in Roxas City. However, the spouses Beluso alleged that the amounts covered by
these last two promissory notes were never released or credited to their account and, thus, claimed that
the principal indebtedness was only P2 Million. In any case, UCPB applied interest rates on the different
promissory notes ranging from 18% to 34%. From 1996 to February 1998 the spouses Beluso were able to
pay the total sum of P763,692.03.

From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty
on the obligations of the spouses Beluso. On 2 September 1998, UCPB demanded that
the spouses Beluso pay their total obligation of P2,932,543.00 plus 25% attorneys fees,
but the spouses Beluso failed to comply therewith. On 28 December 1998, UCPB
foreclosed the properties mortgaged by the spouses Beluso to secure their credit line,
which, by that time, already ballooned to P3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and
Damages against UCPB with the RTC of Makati City. (Which was also affirmed by the
CA.) The Court of Appeals held that the imposition of interest in the following provision found in the
promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor were
determined solely by petitioner UCPB

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Northern Motors v. Coquia

Respondent Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration of this Court's resolution of
August 29, 1975. In that resolution, it was held that the lien of Northern Motors, Inc., as chattel mortgagee, over certain
taxicabs is superior to the levy made on the said cabs by Honesto Ong, the assignee of the unsecured judgment creditor of
the chattel mortgagor, Manila Yellow Taxicab Co., Inc.

On the other hand, Northern Motors, Inc. in its motion for the partial reconsideration of the same August 29 resolution,
prayed for the reversal of the lower court's orders cancelling the bond filed by Filwriters Guaranty Assurance Corporation.
Northern Motors, Inc. further prayed that the sheriff should be required to deliver to it the proceeds of the execution sale
of the mortgaged taxicabs without deducting the expenses of execution.

Respondents' motion for reconsideration. — Honesto Ong in his motion invokes his supposed "legal and equity status" vis-a-
vis the mortgaged taxicabs. He contends that his only recourse was to levy upon the taxicabs which were in the possession
of the judgment debtor, Manila Yellow Taxicab Co. Inc., whereas, Northern Motors, Inc., as unpaid seller and mortgagee,
"has still an independent legal remedy" against the mortgagor for the recovery of the unpaid balance of the price.

That contention is not a justification for setting aside the holding that Ong had no right to levy upon the mortgaged taxicabs
and that he could have levied only upon the mortgagor's equity of redemption. The essence of the chattel mortgage is that
the mortgaged chattels should answer for the mortgage credit and not for the judgment credit of the mortgagor's
unsecured creditor. The mortgagee is not obligated to file an "independent action" for the enforcement of his credit. To
require him to do so would be a nullification of his lien and would defeat the purpose of the chattel mortgage which is to
give him preference over the mortgaged chattels for the satisfaction of his credit. (See art. 2087, Civil Code)

It is relevant to note that intervenor Filinvest Credit Corporation, the assignee of a portion of the chattel mortgage credit,
realized that to vindicate its claim by independent action would be illusory. For that pragmatic reason, it was constrained to
enter into a compromise with Honesto Ong by agreeing to pay him P145,000. That amount was characterized by Northern
Motors, Inc. as the "ransom" for the taxicabs levied upon by the sheriff at the behest of Honesto Ong.

Honesto Ong's theory that Manila Yellow Taxicab's breach of the chattel mortgage should not affect him because he is not
privy of such contract is untenable. The registration of the chattel mortgage is an effective and binding notice to him of its
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existence Ong Liong Tiak vs. Luneta Motor Company, 66 Phil 459). The mortgage creates a real right (derecho real, jus in
re or jus ad rem, XI Enciclopedia Juridica Española 294) or a lien which, being recorded, follows the chattel wherever it goes.

The other arguments of Honesto Ong in his motion may be boiled down to the proposition that the levy made by
mortgagor's judgment creditor against the chattel mortgagor should prevail over the chattel mortgage credit. That
proposition is devoid of any legal sanction and is glaringly contrary to the nature of a chattel mortgage. To uphold that
contention is to destroy the essence of chattel mortgage as a paramount encumbrance on the mortgaged chattel.

Respondent Ong admits "that the mortgagee's right to the mortgaged property is superior to that of the judgment
creditor". But he contends that the rights of the purchasers of the cars at the execution sale should be respected. He
reasons out they were not parties to the mortgage and that they acquired the cars prior to the mortgagee's assertion of its
rights thereto.

That contention is not well-taken. The third-party claim filed by Northern Motors, Inc. should have alerted the purchasers
to the risk which they were taking when they took part in the auction sale. Moreover, at an execution sale the buyers
acquire only the right of the judgment debtor which in this case was a mere right or equity of redemption. The sale did
not extinguish the pre-existing mortgage lien.

Some arguments adduced by Honesto Ong in his motion were intended to protect the interests of the mortgagor, Manila
Yellow Taxicab Co., Inc., which he erroneously characterized as a "respondent" (it is not a respondent in this case). Ong
argues that the proceeds of the execution sale, which was held on December 18, 1974, should be delivered to Northern
Motors, Inc. "only to such extent as has exceeded the amount paid by respondent Manila Yellow Taxicab to" Northern
Motors, Inc. That argument is not clear. Ong probably means that the installments already paid by Manila Yellow Taxicab
Co., Inc. to Northern Motors, Inc. should be deducted from the proceeds of the execution sale. If that is the point which
Ong is trying to put across, and it is something which does not directly affect him, then, that matter should be raised by
Manila Yellow Taxicab Co., Inc. in the replevin case, Civil Case No. 20536 of the Court of First Instance of Rizal, Pasig Branch
VI, entitled "Northern Motors, Inc. versus Manila Yellow Taxicab Co., Inc. et al."

Ong's contention, that the writ of execution, which was enforced against the seven taxicabs (whose sale at public auction
was stopped) should have precedence over the mortgage lien, cannot be sustained. Those cabs cannot be sold at an
execution sale because, as explained in the resolution under reconsideration, the levy thereon was wrongful.

The motion for reconsideration of Ong and the sheriff should be denied.

Northern Motors, Inc., in its instant motion for partial reconsideration, reiterates its petition for the reinstatement of the
bond filed by Filwriters Guaranty Assurance Corporation. If the said bond is not reinstated or if the lower court's orders
cancelling it are allowed to stand, the aforementioned Civil Cases Nos. 20536 and 21065 would be baseless or futile actions
against the surety. That injustice should be corrected. Hence, our resolution of August 29, 1975, insofar as it did not disturb
the lower court's orders cancelling the indemnity bonds, should be reconsidered.

Northern Motors, Inc. further prays for the reconsideration of that portion of our resolution allowing the sheriff to deduct
expenses from the proceeds of the execution sale for the eight taxicabs which sale was held on December 18, 1974. It
argues that Honesto Ong or Manila Yellow Taxicab Co., Inc. should shoulder such expenses of execution.

We already held that the execution was not justified and that Northern Motors, Inc., as mortgagee, was entitled to the
possession of the eight taxicabs. Those cabs should not have been levied upon and sold at public auction to satisfy the
judgment credit which was inferior to the chattel mortgage. Since the cabs could no longer be recovered because
apparently they had been transferred to persons whose addresses are unknown (see par. 12, page 4, Annex B of motion),

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the proceeds of the execution sale may be regarded as a partial substitute for the unrecoverable cabs (See arts. 1189[2] and
1269, Civil Code; Urrutia & Co. vs. Baco River Plantation Co., 26 Phil. 632). Northern Motors, Inc. is entitled to the entire
proceeds without deduction of the expenses of execution.

PNB v. RBL Enterprises

Preliminary

Having released fifty percent of the loan proceeds on the basis of the signed loan and mortgage contracts, petitioner can no
longer require the borrowers to secure the lessor's conformity to the Mortgage Contract as a condition precedent to the
release of the loan balance. The conformity of the lessor was not necessary to protect the bank's interest, because
respondents were unquestionably the absolute owners of the mortgaged property. Furthermore, the registration of the
mortgage created a real right to the properties which, in subsequent transfers by the mortgagor, the transferees are legally
bound to respect.

The Case

Sometime in 1987, [respondents] opened a prawn hatchery in San Enrique, Negros Occidental, and for this purpose, leased
from Nelly Bedrejo a parcel of land where the operations were conducted; Sometime in 1987, [respondents] opened a
prawn hatchery in San Enrique, Negros Occidental, and for this purpose, leased from Nelly Bedrejo a parcel of land where
the operations were conducted; PNB partially released to [respondents] on several dates, the total sum of P1,000,000.00
less the advance interests, which amount [respondents] used for introducing improvements on the leased property where
the hatchery business was located.

During the mid-part of the construction of the improvements, PNB refused to release the balance of P1,000,000.00
allegedly because [respondents] failed to comply with the bank's requirement that Nelly Bedrejo should execute an
undertaking or a 'lessors' conformity' provided in Real Estate and Chattel Mortgage contract dated August 3, 1989, which
states, 'PAR. 9.07. It is a condition of this mortgage that while the obligations remained unpaid, the acquisition by the
lessor of the permanent improvements covered by this Real Estate Mortgage as provided for in the covering Lease
Contract, shall be subject to this mortgage. For this purpose, the mortgagor hereby undertakes to secure the lessor's
conformity hereto'.

For said alleged failure of [respondents] to comply with the additional requirement and the demand of PNB to pay the
released amount of P1,000,000.00, PNB foreclosed the mortgaged properties, to the detriment of [respondents]. Due to
the non-release of the remaining balance of the loan applied for and approved, the productions-operations of the business
were disrupted causing losses to [respondents], and thereafter, to the closure of the business.

On June 29, 1990, [Petitioner] PNB filed its Answer with Counterclaim alleging that the lessors' conformity was not an
additional requirement but was already part of the terms and conditions contained in the Real Estate and Chattel
Mortgage dated August 3, 1989, executed between [respondents] and [petitioner]; and that the release of the balance of
the loan was conditioned on the compliance and submission by the [respondents] of the required lessors' conformity.

On November 8, 1993, a writ of preliminary injunction was issued by the court a quo prohibiting PNB and the Provincial
Sheriff of Negros Occidental from implementing the foreclosure proceedings including the auction sale of the properties of
the [respondents] subject matter of the real [estate] and chattel mortgages.”

Ruling of the RTC and CA

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The Regional Trial Court (RTC) ruled that Philippine National Bank (PNB) had breached its obligation under the Contract of
Loan and should therefore be held liable for the consequential damages suffered by respondents. The trial court held that
PNB's refusal to release the balance of the loan was unjustified for the following reasons: 1) the bank's partial release of
the loan of respondents had estopped it from requiring them to secure the lessor's signature on the Real Estate and
Chattel Mortgage Contract; 2) Nelly Bedrejo, the lessor, had no interest in the property and was not in any manner
connected with respondents' business; thus, the fulfillment of the condition was legally impossible; and 3) the interests of
PNB were amply protected, as the loan had overly been secured by collaterals with a total appraised value of P3,088,000.

The RTC further observed that while the loan would mature in three years, the lease contract between Bedrejo and
respondents would expire in ten years. According to a provision in the Contract, upon its expiration, all improvements
found on the leased premises would belong to the lessor. Thus, in the event of nonpayment of the loan at its maturity, PNB
could still foreclose on those improvements, the subject of the chattel mortgage.

Affirming the lower court, the CA held that Nelly Bedrejo, who was not a party to the Mortgage Contract, could not be
compelled to affix her signature thereto. The appellate court further ruled that the registration of the mortgage not only
revealed PNB's intention to give full force and effect to the instrument but, more important, gave the mortgagee ample
security against subsequent owners of the chattels.

Ruling of the Court

If the parties truly intended to suspend the release of the P1,000,000 balance of the loan until the lessor's conformity to the
Mortgage Contract would have been obtained, such condition should have been plainly stipulated either in that Contract or
in the Credit Agreement. The tenor of the language used in paragraph. 9.07, as well as its position relative to the whole
Contract, negated the supposed intention to make the release of the loan subject to the fulfillment of the clause. From a
mere reading thereof, respondents could not reasonably be expected to know that it was petitioner's unilateral intention to
suspend the release of the P1,000,000 balance until the lessor's conformity to the Mortgage Contract would have been
obtained.

Respondents had complied with all the requirements set forth in the recommendation and approval sheet forwarded by
petitioner's main office to the Bacolod branch for implementation; and the Credit Agreement had been executed
thereafter. Naturally, respondents were led to believe and to expect the full release of their approved loan accommodation.
This belief was bolstered by the initial release of the first P1,000,000 portion of the loan.

In the instant case, there is a clear and categorical showing that when the parties have finally executed the contract of loan
and the Real Estate and Chattel Mortgage Contract, the applicant complied with the terms and conditions imposed by
defendant bank on the recommendation and approval sheet, hence, defendant bank waived its right to further require the
plaintiffs other conditions not specified in the previous agreement. Should there [appear] any obscurity after such
execution, the same should not favor the party who caused such obscurity. Therefore, such obscurity must be construed
against the party who drew up the contract. Art. 1377 of the Civil Code applies . . . [even] with greater force [to] this type of
contract where the contract is already prepared by a big concern and [the] other party merely adheres to it.

Nowhere did PNB explicitly state that the release of the second half of the loan accommodation was subject to the
mortgagor's procurement of the lessor's conformity to the Mortgage Contract. Absent such a condition, the efficacy of the
Credit Agreement stood, and petitioner was obligated to release the balance of the loan. Its refusal to do so constituted a
breach of its reciprocal obligation under the Loan Agreement.

The records show that all the real estate and chattel mortgages were registered with the Register of Deeds of Bago City,
Negros Occidental, and annotated at the back of the mortgaged titles. Thus, petitioner had ample security to protect its

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interest. As correctly held by the appellate court, the lessor's nonconformity to the Mortgage Contract would not cause
petitioner any undue prejudice or disadvantage, because the registration and the annotation were considered sufficient
notice to third parties that the property was subject to an encumbrance. 9

Article 2126 of the Civil Code describes the real nature of a mortgage: it is a real right following the property, such that in
subsequent transfers by the mortgagor, the transferee must respect the mortgage. A registered mortgage lien is considered
inseparable from the property inasmuch as it is a right in rem. 10 The mortgage creates a real right or a lien which, after
being recorded, follows the chattel wherever it goes. Under Article 2129 of the same Code, the mortgage on the property
may still be foreclosed despite the transfer.

Indeed, even if the mortgaged property is in the possession of the debtor, the creditor is still protected. To protect the
latter from the former's possible disposal of the property, the chattel mortgage is made effective against third persons by
the process of registration.

PNB violated the Loan Agreement when it refused to release the P1,000,000 balance. As regards the partial release of that
amount, over which respondents executed three Promissory Notes, the bank is deemed to have complied with its
reciprocal obligation. The Promissory Notes compelled them to pay that initial amount when it fell due. Their failure to pay
any overdue amortizations under those Promissory Notes rendered them liable thereunder.

Since PNB failed to release the P1,000,000 balance of the loan, the Real Estate and Chattel Mortgage Contract became
unenforceable to that extent. Relevantly, we quote this Court's ruling in Central Bank of the Philippines v. Court of
Appeals: "The consideration of the accessory contract of real estate mortgage is the same as that of the principal
contract. For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract
of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or
unenforceable debt. "[W]hen there is partial failure of consideration, the mortgage becomes unenforceable to the extent of
such failure. Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the
mortgage, the mortgage cannot be enforced for more than the actual sum due.”

PAMECA Wood Treatment Plant v. CA & DBP

On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of US$267,881.67, or the
equivalent of P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner PAMECA, through its President,
petitioner Herminio C. Teves, executed a promissory note for the said amount, promising to pay the loan by installment. As
security for the said loan, a chattel mortgage was also executed over PAMECA's properties in Dumaguete City, consisting
of inventories, furniture and equipment, to cover the whole value of the loan.

On January 18, 1984, and upon petitioner PAMECA's failure to pay, respondent bank extrajudicially foreclosed the chattel
mortgage, and, as sole bidder in the public auction, purchased the foreclosed properties for a sum of P322,350.00. On June
29, 1984, respondent bank filed a complaint for the collection of the balance of P4,366,332.46 3 with Branch 132 of the
Regional Trial Court of Makati City against petitioner PAMECA and private petitioners herein, as solidary debtors
with PAMECA under the promissory note.

Arguments of the Parties

Relative to the first ground, petitioners contend that the amount of P322,350.00 at which respondent bank bid for and
purchased the mortgaged properties was unconscionable and inequitable considering that, at the time of the public sale,
the mortgaged properties had a total value of more than P2,000,000.00. According to petitioners, this is evident from an
inventory dated March 31, 1980, 5 which valued the properties at P2,518,621.00, in accordance with the terms of the

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chattel mortgage contract 6 between the parties that required that the inventories "be maintained at a level no less than P2
million". Petitioners argue that respondent bank's act of bidding and purchasing the mortgaged properties for P322,350.00
or only about 1/6 of their actual value in a public sale in which it was the sole bidder was fraudulent, unconscionable and
inequitable, and constitutes sufficient ground for the annulment of the auction sale.

To this, respondent bank contends that the above-cited inventory and chattel mortgage contract were not in fact submitted
as evidence before the RTC of Makati, and that these documents were first produced by petitioners only when the case was
brought to the Court of Appeals. 7 The Court of Appeals, in turn, disregarded these documents for petitioners' failure to
present them in evidence, or to even allude to them in their testimonies before the lower court. 8 Instead, respondent
court declared that it is not at all unlikely for the chattels to have sufficiently deteriorated as to have fetched such a low
price at the time of the auction sale. 9 Neither did respondent court find anything irregular or fraudulent in the
circumstance that respondent bank was the sole bidder in the sale, as all the legal procedures for the conduct of a
foreclosure sale have been complied with, thus giving rise to the presumption of regularity in the performance of public
duties.

Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that Articles 1484 13 and 2115 14 of the
Civil Code be applied in analogy to the instant case to preclude the recovery of a deficiency claim.

Ruling

Petitioners are not the first to posit the theory of the applicability of Article 2115 to foreclosures of chattel mortgage. In the
leading case of Ablaza vs. Ignacio, 16 the lower court dismissed the complaint for collection of deficiency judgment in view
of Article 2141 of the Civil Code, which provides that the provisions of the Civil Code on pledge shall also apply to chattel
mortgages, insofar as they are not in conflict with the Chattel Mortgage Law. It was the lower court's opinion that, by virtue
of Article 2141, the provisions of Article 2115 which deny the creditor-pledgee the right to recover deficiency in case the
proceeds of the foreclosure sale are less than the amount of the principal obligation, will apply.

This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law regarding the
effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article 2115 in relation to Article
2141, may not be applied to the case.

It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run inconsistent with
those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged extinguishes the entire principal
obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the principal
obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon
satisfaction of the principal obligation and costs.

Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a
corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at public
auction.

The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage, given as
security, should sell for more than the amount of the indebtedness secured, that the creditor would be entitled to the full
amount for which it might be sold, even though that amount was greatly in excess of the indebtedness. Such a result
certainly was not contemplated by the legislature when it adopted Act No. 1508. There seems to be no reason supporting
that theory under the provision of the law. The value of the chattels changes greatly from time to time, and sometimes
very rapidly. If, for example, the chattels should greatly increase in value and a sale under that condition should result in
largely overpaying the indebtedness, and if the creditor is not permitted to retain the excess, then the same token would

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require the debtor to pay the deficiency in case of a reduction in the price of the chattels between the date of the contract
and a breach of the condition.

Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on the question of chattel mortgages,
have said, that 'in case of a sale under a foreclosure of a chattel mortgage, there is no question that the mortgagee or
creditor may maintain an action for the deficiency, if any should occur.' And the fact that Act No. 1508 permits a private
sale, such sale is not, in fact, a satisfaction of the debt, to any greater extent than the value of the property at the time of
the sale. The amount received at the time of the sale, of course, always requiring good faith and honesty in the sale, is only
a payment, pro tanto, and an action may be maintained for a deficiency in the debt.”

Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As correctly
pointed out by the trial court, the said article applies clearly and solely to the sale of personal property the price of which
is payable in installments. Although Article 1484, paragraph (3) expressly bars any further action against the purchaser to
recover an unpaid balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing sold, should
the vendee's failure to pay cover two or more installments, this provision is specifically applicable to a sale on
installments.

To accommodate petitioners' prayer even on the basis of equity would be to expand the application of the provisions of
Article 1484 to situations beyond its specific purview, and ignore the language and intent of the Chattel Mortgage Law.
Equity, which has been aptly described as "justice outside legality", is applied only in the absence of, and never against,
statutory law or judicial rules of procedure.

We are also unable to find merit in petitioners' submission that the public auction sale is void on grounds of fraud and
inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of Appeals did they
attempt to prove inadequacy of price through the documents, i.e., the "Open-End Mortgage on Inventory" and inventory
dated March 31, 1980, likewise attached to their Petition before this Court. Basic is the rule that parties may not bring on
appeal issues that were not raised on trial.

Having nonetheless examined the inventory and chattel mortgage document as part of the records, We are not convinced
that they effectively prove that the mortgaged properties had a market value of at least P2,000,000.00 on January 18, 1984,
the date of the foreclosure sale. At best, the chattel mortgage contract only indicates the obligation of the mortgagor to
maintain the inventory at a value of at least P2,000,000.00, but does not evidence compliance therewith. The inventory, in
turn, was as of March 31, 1980, or even prior to April 17, 1980, the date when the parties entered into the contracts of loan
and chattel mortgage, and is far from being an accurate estimate of the market value of the properties at the time of the
foreclosure sale four years thereafter. Thus, even assuming that the inventory and chattel mortgage contract were duly
submitted as evidence before the trial court, it is clear that they cannot suffice to substantiate petitioners' allegation of
inadequacy of price.

Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged properties in the public sale does
not warrant the conclusion that the transaction was attended with fraud. Fraud is a serious allegation that requires full
and convincing evidence, 20 and may not be inferred from the lone circumstance that it was only respondent bank that
bid in the sale of the foreclosed properties. The sparseness of petitioners' evidence in this regard leaves Us no discretion
but to uphold the presumption of regularity in the conduct of the public sale.

Makati Leasing v. Wereaver

It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing and Finance Corporation,
the private respondent Wearever Textile Mills, Inc., discounted and assigned several receivables with the former under a

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Receivable Purchase Agreement. To secure the collection of the receivables assigned, private respondent executed a
Chattel Mortgage over certain raw materials inventory as well as a machinery described as an Artos Aero Dryer Stentering
Range.

Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the properties mortgage to it.
However, the Deputy Sheriff assigned to implement the foreclosure failed to gain entry into private respondent's premises
and was not able to effect the seizure of the aforedescribed machinery. Petitioner thereafter filed a complaint for judicial
foreclosure with the Court of First Instance of Rizal, Branch VI, docketed as Civil Case No. 36040, the case before the lower
court.LexLib

Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the enforcement of which was
however subsequently restrained upon private respondent's filing of a motion for reconsideration. After several incidents,
the lower court finally issued on February 11, 1981, an order lifting the restraining order for the enforcement of the writ of
seizure and an order to break open the premises of private respondent to enforce said writ. The lower court reaffirmed its
stand upon private respondent's filing of a further motion for reconsideration.

On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private respondent and removed the
main drive motor of the subject machinery.

The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein private respondent, set aside
the Orders of the lower court and ordered the return of the drive motor seized by the sheriff pursuant to said Orders, after
ruling that the machinery in suit cannot be the subject of replevin, much less of a chattel mortgage, because it is a real
property pursuant to Article 415 of the new Civil Code, the same being attached to the ground by means of bolts and the
only way to remove it from respondent's plant would be to drill out or destroy the concrete floor, the reason why all that
the sheriff could do to enforce the writ was to take the main drive motor of said machinery. The appellate court rejected
petitioner's argument that private respondent is estopped from claiming that the machine is real property by constituting a
chattel mortgage thereon.

The next and the more crucial question to be resolved in this petition is whether the machinery in suit is real or personal
property from the point of view of the parties, with petitioner arguing that it is a personalty, while the respondent claiming
the contrary, and was sustained by the appellate court, which accordingly held that the chattel mortgage constituted
thereon is null and void, as contended by said respondent.

A similar, if not identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court, speaking through Justice
J.B.L. Reyes, ruled: "Although there is no specific statement referring to the subject house as personal property, yet by
ceding, selling or transferring a property by way of chattel mortgage defendants-appellants could only have meant to
convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to
make an inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which
defendants-appellants merely had a temporary right as lessee, and although this can not in itself alone determine the status
of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the
mortgagors, intended to treat the house as Personalty. Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre,
Inc. & Leung Yee vs. F.L. Strong Machinery & Williamson, wherein third persons assailed the validity of the chattel
mortgage, it is the defendants-appellants themselves, as debtors mortgagors, who are attacking the validity of the chattel
mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants appellants, having treated the
subject house as personalty.”

Examining the records of the instant case, We find no logical justification to exclude the rule out, as the appellate court did,
the present case from the application of the abovequoted pronouncement. If a house of strong materials, like what was
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involved in the above Tumalad case, may be considered as personal property for purposes of executing a chattel mortgage
thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is
absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or
purpose, may not be likewise treated as such. This is really because one who has so agreed is estopped from denying the
existence of the chattel mortgage.

In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals lays stress on the fact
that the house involved therein was built on a land that did not belong to the owner of such house. But the law makes no
distinction with respect to the ownership of the land on which the house is built and We should not lay down distinctions
not contemplated by law.

It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is indicative
of intention and impresses upon the property the character determined by the parties. As stated in Standard Oil Co. of New
York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by agreement treat as personal property
that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby.

Private respondent contends that estoppel cannot apply against it because it had never represented nor agreed that the
machinery in suit be considered as personal property but was merely required and dictated on by herein petitioner to sign a
printed form of chattel mortgage which was in a blank form at the time of signing. This contention lacks persuasiveness. As
aptly pointed out by petitioner and not denied by the respondent, the status of the subject machinery as movable or
immovable was never placed in issue before the lower court and the Court of Appeals except in a supplemental
memorandum in support of the petition filed in the appellate court. Moreover, even granting that the charge is true, such
fact alone does not render a contract void ab initio, but can only be a ground for rendering said contract voidable, or
annullable pursuant to Article 1390 of the new Civil Code, by a proper action in court. There is nothing on record to show
that the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. On the other hand,
as pointed out by petitioner and again not refuted by respondent, the latter has indubitably benefited from said contract.
Equity dictates that one should not benefit at the expense of another. Private respondent could not now therefore, be
allowed to impugn the efficacy of the chattel mortgage after it has benefited therefrom.

Montserrat v. Ceron

The plaintiff herein, Enrique Monserrat, was the president and manager of the Manila Yellow Taxicab Co., Inc., and the
owner of 1,200 common shares of stock thereof.

On March 25, 1930, in consideration of the interest shown and the financial aid extended him in the organization of the
corporation by Carlos G. Ceron, one of the defendants herein, Enrique Monserrat assigned to the former the usufruct of
half of the aforesaid common shares of stock, the corresponding certificate of stock No. 7, having been issued in the name
of said Carlos G. Ceron to that effect on March 24, 1930. (Exhibit 1.) Said assignment or transfer only gave the transferee
the right to enjoy, during his lifetime, the profits which might be derived from the shares assigned him, prohibiting him
from selling, mortgaging, encumbering, alienating or otherwise exercising any act implying absolute ownership of all or any
of the shares in question, the transferor having reserved for himself and his heirs the right to vote derived from said shares
of stock and to recover the ownership thereof at the termination of the usufruct (Exhibit A). Stock certificate No. 7 was
recorded in the name of Carlos G. Ceron and the aforesaid deed of transfer Exhibit A, was noted by himself as secretary, on
page 22 of the Stock and Transfer Book of the Manila Yellow Taxicab Co., Inc.

By way of defense, the defendants herein alleged that on February 20, 1931, Eduardo R. Matute, president of the
defendant corporation, Erma, Inc., and the defendant Carlos G. Ceron, appeared at the plaintiff's office on Mabini Street,
Manila, and there Ceron, at a distance of about three meters from the plaintiff, showed Matute the stock book of the
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Manila Yellow Taxicab Co., Inc. Matute did not see the annotation on page 22 thereof regarding Exhibit A which, according
to Ceron, was executed two months after March 25, 1930, the date on which it appears to have been executed. Ceron
alleges that, upon instructions of the plaintiff, he did not make any notation of said document in the stock book until May 5,
1931, the date on which the shares of stock in question were to be sold at public auction to satisfy his debt to Matute.

On February 26, 1931, Carlos G. Ceron mortgaged to Eduardo R. Matute some shares of stock of the Manila Yellow Taxicab
Co., Inc., among which were the 600 common shares of stock in question, for the sum of P30,000. Ceron endorsed to
Matute the certificate of stock Exhibit 1, of which Matute has been in possession ever since. When Ceron mortgaged the
shares in question to Matute, he did not inform Matute of the existence of the document, Exhibit A, and the latter never
had any knowledge thereof. When he was asked by the plaintiff whether he succeeded in carrying out his transaction with
Matute, Carlos G. Ceron informed him of the aforesaid mortgage at the beginning of March 1931. Ceron continued as
secretary of the Manila Yellow Taxicab Co., Inc., until May 5, 1931.

The first question to decide in the present appeal is whether or not it is necessary to enter upon the books of the
corporation a mortgage constituted on common shares of stock in order that such mortgage may be valid and may have
force and effect as against third persons.

The legal provision just quoted does not require any entry except of transfers of shares of stock in order that such transfers
may be valid as against third persons. Now, what did the Legislature mean in using the word "transfer"?

According to the legal provision just quoted, although a chattel mortgage, accompanied by delivery of the mortgaged thing,
transfers the title and ownership thereof to the mortgage creditor, such transfer is not absolute but constitutes a mere
security for the payment of the mortgage debt, the transfer in question becoming null and void from the time the mortgage
debtor complies with his obligation to pay his debt.

In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17; 34 Okl., 662; 46 L. R. A. [N. S.], 455), cited in
Words and Phrases, second series, vol. 4, p. 978, the following appears:

"A 'transfer' is the act by which the owner of a thing delivers it to another with the intent of passing the rights which he
has in it to the latter, and a chattel mortgage is not within the meaning of such term.”

Therefore, the chattel mortgage is not the transfer referred to in section 35 of Act No. 1459 commonly known as the
Corporation Law, which transfer should be entered and noted upon the books of a corporation in order to be valid, and
which, as has already been said, means the absolute and unconditional conveyance of the title and ownership of a share
of stock.

If, in accordance with said section 35 of the Corporation Law, only the transfer or absolute conveyance of the ownership of
the title to a share need be entered and noted upon the books of the corporation in order that such transfer may be valid,
therefore, inasmuch as a chattel mortgage of the aforesaid title is not a complete and absolute alienation of the dominion
and ownership thereof, its entry and notation upon the books of the corporation is not a necessary requisite to its validity.

The evidence shows that when Matute as president of Erma, Inc., went to the office of the Manila Yellow Taxicab Co., Inc.,
at Mabini Street, Manila, on February 20, 1931, to examine the Stock and Transfer Book of the said corporation, for the
purpose of ascertaining the actual status of Carlos G. Ceron's shares of stock, Ceron as secretary of said corporation and in
charge of said stock book, showed it to him, and Matute found nothing but that the shares in question were recorded
therein in the name of said Carlos G. Ceron, free from all liens and encumbrances and no reference made to the deed
Exhibit A. The defendant, Carlos G. Ceron himself, testified that when he mortgaged his shares, he said nothing to Erma,
Inc., about the existence of the deed, Exhibit A, for fear he might not succeed in obtaining the loan he applied for, with the

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said shares as security, and that the notation of Exhibit A in question appearing in the books of the corporation was placed
there only on May 5, 1931, the same date on which the 600 common shares were to have been sold at public auction,
together with the preferred shares, which were delivered to the sheriff for that purpose by Erma, Inc., in view of Carlos G.
Ceron's default in the payment of the loan secured by them. From the time said shares of stock in question were mortgaged
by Carlos G. Ceron on February 26, 1931, the corresponding certificate has been in possession of the defendant entity,
Erma, Inc., without any notation thereon relative to the deed Exhibit A. It is obvious, therefore, that the defendant entity
Erma, Inc., as a conditional purchaser of the shares of stock in question given as security for the payment of his credit,
acquired in good faith Carlos G. Ceron's right and title to the 600 common shares of stock evidenced by certificate No. 7 of
the Manila Yellow Taxicab Co., Inc., and as such conditional purchaser in good faith, it is entitle to the protection of the law.

Davao Sawmill v. Castillo

The Davao Saw Mill Co., Inc., is the holder of a lumber concession from the Government of the Philippine Islands. It has
operated a sawmill in the sitio of Maa, barrio of Tigatu, municipality of Davao, Province of Davao. However, the land upon
which the business was conducted belonged to another person. On the land the sawmill company erected a building which
housed the machinery used by it. Some of the implements thus used were clearly personal property, the conflict concerning
machines which were placed and mounted on foundations of cement. In the contract of lease between the sawmill
company and the owner of the land there appeared the following provision:

"That on the expiration of the period agreed upon, all the improvements and buildings introduced and erected by the
party of the second part shall pass to the exclusive ownership of the party of the first part without any obligation on its
part to pay any amount for said improvements and buildings; also, in the event the party of the second part should leave
or abandon the land leased before the time herein stipulated, the improvements and buildings shall likewise pass to the
ownership of the party of the first part as though the time agreed upon had expired: Provided, however, That the
machineries and accessories are not included in the improvements which will pass to the party of the first part on the
expiration or abandonment of the land leased.”

As connecting up with the facts, it should further be explained that the Davao Saw Mill Co., Inc., has on a number of
occasions treated the machinery as personal property by executing chattel mortgages in favor of third persons. One of such
persons is the appellee by assignment from the original mortgagees.

It is machinery which is involved; moreover, machinery not intended by the owner of any building or land for use in
connection therewith, but intended by a lessee for use in a building erected on the land by the latter to be returned to the
lessee on the expiration or abandonment of the lease.

A similar question arose in Puerto Rico, and on appeal being taken to the United States Supreme Court, it was held that
machinery which is movable in its nature only becomes immobilized when placed in a plant by the owner of the property
or plant, BUT NOT when so placed by A TENANT, a usufructuary, or any person having only a temporary right, unless such
person acted as the agent of the owner.

Torres v. Limjap

In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime, executed in their favor a chattel mortgage (Exhibit
A) on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia Henson, to secure a loan of P7,000, although it was
made to appear in the instrument that the loan was for P20,000.

In the second case the plaintiffs alleged that they were the heirs of the late Don Florentino Torres; and that Jose B. Henson,
in his lifetime, executed in favor of Don Florentino Torres a chattel mortgage (also Exhibit A) on his three drug stores

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known as Henson's Pharmacy, Farmacia Henson and Botica Hensonina, to secure a loan of P50,000, which was later
reduced to P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only security by agreement
of the parties.

In both cases the plaintiffs alleged that the defendant violated the terms of the mortgage and that, in consequence thereof
they became entitled to the possession of the chattels and to foreclose their mortgages thereon. Upon the petition of the
plaintiffs and after the filing of the necessary bonds, the court issued in each case an order directing the sheriff of the City
of Manila to take immediate possession of said drug stores.

In his second assignment of error the appellant attacks the validity of the stipulation in said mortgages authorizing the
mortgagor to sell the goods covered thereby and to replace them with other goods thereafter acquired. He insists that a
stipulation authorizing the disposal and substitution of the chattels mortgaged does not operate to extend the mortgage to
after-acquired property, and that such stipulation is in contravention of the express provision of the last paragraph of
section 7 of Act No. 1508.

In order to give a correct construction to the above-quoted provision of our Chattel Mortgage Law (Act No. 1508), the spirit
and intent of the law must first be ascertained. When said Act was placed on our statute books by the United States
Philippine Commission on July 2, 1906, the primary aim of that law-making body was undoubtedly to promote business and
trade in these Islands and to give impetus to the economic development of the country. Bearing this in mind, it could not
have been the intention of the Philippine Commission to apply the provision of section 7 above quoted to stores open to
the public for retail business, where the goods are constantly sold and substituted with new stock, such as drug stores,
grocery stores, dry- goods stores, etc. If said provision were intended to apply to this class of business, it would be
practically impossible to constitute a mortgage on such stores without closing them, contrary to the very spirit and purpose
of said Act, Such a construction would bring about a handicap to trade and business, would restrain the circulation of
capital, and would defeat the purpose for which the law was enacted, to wit, the promotion of business and the economic
development of the country.

In the interpretation and construction of a statute the intent of the law-maker should always be ascertained and given
effect, and courts will not follow the letter of a statute when it leads away from the true intent and purpose of the
Legislature and to conclusions inconsistent with the spirit of the Act.

A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and binding - where the
after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is
purchased with the proceeds of the sale of such goods, etc.”

Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations relating to after-acquired and
substituted chattels. His views are based on the decisions of the supreme courts of several states of the Union. He says:

"A mortgage may, by express stipulations, be drawn to cover goods put in stock in place of others sold out from time to
time. A mortgage may be made to include future acquisitions of goods to be added to the original stock mortgaged, but the
mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage. Where a mortgage
covering the stock in trade, furniture, and fixtures in the mortgagor's store provides that 'all goods, stock in trade, furniture,
and fixtures hereafter purchased by the mortgagor shall be included in and covered by the mortgage,' the mortgage covers
all after-acquired property of the classes mentioned, and, upon foreclosure, such property may be taken and sold by the
mortgagee the same as the property in possession of the mortgagor at the time the mortgage was executed.”

In harmony with the foregoing, we are of the opinion (a) that the provision of the last paragraph of section 7 of Act No.
1508is not applicable to drug stores, bazars and all other stores in the nature of a revolving and floating business; (b) that

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the stipulation in the chattel mortgages in question, extending their effect to after- acquired property, is valid and binding;
and (c) that the lower court committed no error in not permitting the defendant-appellant to introduce evidence tending to
show that the goods seized by the sheriff were in the nature of after-acquired property.

With reference to the third assignment of error, we agree with the lower court that, from the facts of record, the
defendant-appellant is estopped from contesting the validity of the mortgages in question. This feature of the case has
been very ably and fully discussed by the lower court in its decision, and said discussion is made, by reference, a part of this
opinion.

Tolentino v. Baltazar

The object of this litigation is a parcel of land located in the barrio of Sagana, municipality of Laur, province of Nueva Ecija.
Angel Baltazar filed therefor a homestead application which was approved by the Director of Lands on August 14, 1940.
Subsequently, on or April 1, 1941, he mortgaged the present and future improvements on said land to Pastor Tolentino,
for the sum of P1,500, with the understanding that if the same were not paid, with interest thereon at the rate of 12% a
year, within six (6) years, Tolentino could elect, either to foreclose the mortgage or to compel the debtor to execute a deed
of absolute sale of said improvements. After the death of Angel Baltazar in 1945, his widow and children conveyed to his
son Basilio Baltazar their rights and interest in and to said land. Apparently relying upon this conveyance, on August 28,
1946, Basilio Baltazar filed with the Bureau of Lands a petition praying that the homestead application in his father's name
be cancelled, and that, in lieu thereof, his own (Basilio's) application be admitted. This petition was soon granted.
Subsequently, Homestead Patent No. V-8832 was issued to Basilio Baltazar, and upon the authority thereof, he secured, on
October 23, 1951, Original Certificate of Title No. P-790 in his name.

On October 20, 1952, Tolentino instituted the present action against the estate of Angel Baltazar, deceased, his son Basilio
Baltazar, and the Director of Lands, for the cancellation of said Original Certificate of Title No. P-790, upon the ground that
Basilio Baltazar had secured it by fraud.

In due course, the Court of First Instance of Nueva Ecija rendered a decision holding that Basilio Baltazar had not been
guilty of fraud in securing the homestead patent and certificate of title in his name; that the Director of Lands was estopped
from imputing fraud to Basilio Baltazar, it being the duty of said office to know that the land in question had been originally
applied for, not by Basilio Baltazar, but by Angel Baltazar; that said land is no longer part of the public domain, and, hence,
beyond the jurisdiction and concern of said officer, a patent and a certificate of title having already been issued to Basilio
Baltazar; that Tolentino has merely a money claim that should be filed against the estate of the deceased, Angel Baltazar,
and does not warrant cancellation of Basilio Baltazar's patent and certificate of title and consequently, dismissing plaintiff's
complaint, as well as the cross-claim of the Director of Lands, and sentencing Tolentino to pay P1,000.00 to Basilio Baltazar
"as damages for attorney's fees", apart from the costs. (Which was affirmed by the CA.)

Pursuant to this provision a land acquired by homestead patent may neither be encumbered or alienated from the date of
the approval of the corresponding homestead application and for a period of five (5) years after the issuance of the
patent, nor be held liable for any debt contracted within such period of time. However, said section 118 explicitly permits
the encumbrance, by mortgage or pledge, of the improvements and crops on the land, without any limitation in point of
time. Although the parties to a contract may treat certain improvements and crops as chattels, insofar as they are
concerned, it is now settled in this jurisdiction that, in general, and insofar as the PUBLIC ARE CONCERNED, such
improvements, if falling under the provisions of Article 415 ,of the Civil Code of the Philippines, are immovable property
(Evangelista vs. Alto Surety & Insurance Co., Inc., L-11139, April 23, 1958; Manarag vs. Ofilada, 52 Off. Gaz., 3954;
Republic vs. Ceniza, et al., L-4169, December 17, 1951; Leung Yee vs. Strong Machinery Co., 37 Phil., 644). As a
consequence, a mortgage constituted on said improvements must be susceptible of registration as a real estate mortgage
and of annotation on the certificate of title to the land of which they form part, although the land itself may not be subject
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to said encumbrance, if the debt guaranteed thereby was contracted within the period stated in said section 118
of Commonwealth Act No. 141. Otherwise, the provision authorizing the mortgage of the improvements would be
defeated.

The Court of Appeals held that Tolentino had no personality to bring this action, and that it could not order the cancellation
of the certificate of title of Basilio Baltazar because the only person who could apply for such relief, the Director of Lands,
had abandoned his appeal from the decision of the court of first instance. However, the legal provision granting said right
exclusively to the Director of Lands affects plaintiff's cause of action, not his personality to institute the present case.
Moreover, the Director of Lands did not abandon his appeal. The record shows that he gave notice of his intention to
appeal and asked that plaintiff's record on appeal be considered as his own record on appeal. It is true that this petition was
not officially approved by the court. However, it would appear that the Director of Lands had been led to believe the
contrary, for the clerk of court of Nueva Ecija notified the parties that the record on appeal had been forwarded to the
Court of Appeals for purposes of the appeal taken by the plaintiff and the Director of Lands.Although such belief was
erroneous, and the appeal of such officer had not been duly perfected, this condition was the result, evidently, not
of intent to abandon the appeal, but of error or negligence of the officer called upon to take the steps necessary therefor.

At any rate, even if Basilio Baltazar had not been guilty of fraud in securing the homestead patent and the certificate of title
in his favor, it has been established that when plaintiff saw the children of Angel Baltazar shortly after his death, they
promised to pay his debt in favor of Pastor Tolentino. In other words, Basilio Baltazar knew, before he got said patent and
the certificate of title, that the present and future improvements of the land were subject to a valid and subsisting
mortgage in favor of Pastor Tolentino and acknowledged the same. Hence, he must be deemed to have secured such
patent and title subject to a subsisting trust, insofar as plaintiff's mortgage is concerned, and, under plaintiff's prayer for
such relief as may be deemed just and equitable, this action may be considered as one to compel the defendant to execute
the instrument necessary for the registration of said mortgage and its annotation on plaintiff's certificate of title.

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Dizon v. Gaborro

Issue

The basic issue to be resolved in this case is whether the 'Deed of Sale with Assumption of Mortgage', trial Option to
Purchase Real Estate". two instruments executed by trial between Petitioner Jose P. Dizon trial Alfredo G. Gaborro
(defendant below) on the same day, October 6, 1959 constitute in truth trial in fact an absolute sale of the three parcels of
land therein described or merely an equitable mortgage or conveyance thereof by way of security for reimbursement,
refund or repayment by petitioner Jose P. Dizon of any trial all sums which may have been paid to the Development Bank of
the Philippines trial the Philippine National Bank by Alfredo G. Gaborro (later substituted herein by his wife Pacita de
Guzman Gaborro as administratrix of the estate of Alfredo G. Gaborro) who had died during the pendency of the case.

The Case

The antecedent facts established in the record are not disputed. Petitioner Jose P. Dizon was the owner of the three (3)
parcels of land, subject matter of this litigation, situated in Mabalacat, Pampanga with an aggregate area of 130.58
hectares, as evidenced by Transfer Certificate of Title No. 15679. He constituted a first mortgage lien in favor of the
Development Bank of the Philippines in order to secure a loan in the sum of P38,000.00 trial a second mortgage lien in favor
of the Philippine National Bank to cure his indebtedness to said bank in the amount of P93,831.91.

Petitioner Dizon having defaulted in the payment of his debt, the Development Bank of the Philippines foreclosed the
mortgage extrajudicially pursuant to the provisions of Act No. 3135. On May 26, 1959, the hinds were sold to the DBP for-
P31,459.21, which amount covered the loan, interest trial expenses, trial the corresponding "Certificate of Sale," (Exhibit A-
2, Exhibit 1b was executed in favor of the said On November 12, 1959, Dizon himself executed the deed of sale (Exhibit Al
over the properties in favor of the DBP which deed was recorded in the Office of the Register of Deeds on October 6, 1960.

Sometime prior to October 6, 1959 Alfredo G. Gaborro trial Jose P. Dizon met. Gaborro became interested in the lands of
Dizon. Dizon originally intended to lease to Gaborro the property which had been lying idle for some time. But as the
mortgage was already foreclosed by the DPB trial the bank in fact purchased the lands at the foreclosure sale on May 26,
1959, they abandoned the projected lease. They then entered into the following contract on October 6, 1959 captioned as
“Deed of Sale with Assumption of Mortgage.” The second contract executed the same day, October 6, 1959 is called
Option to Purchase Real Estate. The sum of P131,813.91 which purports to be the consideration of the sale was not
actually paid by Alfredo G. Gaborro to the petitioner. The said amount represents the aggregate debts of the petitioner
with the Development Bank of the Philippines trial the Philippine National Bank.

After the execution of the conditional e to him Gaborro made several payments to the DBP and PNB. He introduced
improvements, cultivated the kinds raised sugarcane and other crops and appropriated the produce to himself. He will paid
the land taxes thereon.

On July 5, 1961, Jose P. Dizon through his lawyer, Atty. Leonardo Abola, wrote a letter to Gaborro informing him that he is
formally offering reimburse Gaborro Of what he paid to the banks but without, however, tendering any cash, and
demanding an accounting of the income and of the pro contending that the transaction they entered into was one of
antichresis. Gaborro did not accede to the demands of the petitioner, whereupon, on JULY 30, 1962, Jose P. Dizon instituted
a complaint in the Court of First Instance of Pampanga, Gaborro, alleging that the documents Deed of Sale With
Assumption of Mortgage and the Option to Purchase Real Estate did not express the true intention and agreement bet.
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between the parties. Petitioner Dizon, as Plaintiff below, contended that the two deeds constitute in fact a single
transaction that their real agreement was not an absolute (sale) of the land but merely an equitable mortgage or
conveyance by way of security for the reimbursement or refund by Dizon to Gaborro of any and all sums which the latter
may have paid on account of the mortgage debts in favor of the DBP and the PNB. Plaintiff prayed that defendant Gaborro
be ordered to accept plaintiff's offer to reimburse him of what he paid to the banks; to surrender the possession of the
lands to plaintiff; to make an accounting of all the fruits, produce, harvest and other income which he had received from
the three (3) parcels of land; and to pay the plaintiff for the loss of two barns and for damages.

In its answer, the DBP specifically denied the material averments of the complaint and stated that on October 6, 1959, the
plaintiff Dizon was no longer the owner of the land in question because the DBP acquired them at the extrajudicial
foreclosure sale held on May 26, 1959, and that the only right which plaintiff possessed was a mere right to redeem the
lands under Act 3135 as amended.

Ruling

Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor remains in possession of the property
foreclosed and sold, during the period of redemption. If the judgment debtor is in possession of the property sold, he is
entitled to retain it and receive the fruits, the purchaser not being entitled to such possession. A judgment debtor, whose
property is levied on execution, may transfer his right of redemption to any one whom he may desire. The right to redeem
land sold under execution within 12 months is a property right and may be sold voluntarily by its owner and may also be
attached and sold under execution.

Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed by the sheriff. (Section 27, Revised
Rules of Court) After the termination of the period of redemption and no redemption having been made, the purchaser is
entitled to a deed of conveyance and to the possession of the properties. (Section 35, Revised Rules of Court). The weight
of authority is to the effect that the purchaser of land sold at public auction under a writ of execution only has an inchoate
right in the property, subject to be defeated and terminated within the period of 12 months from the date of sale, by a
redemption on the part of the owner. Therefore, the judgment debtor in possession of the property is entitled to remain
therein during the period allowed for redemption.

In the case before Us, after the extrajudicial foreclosure and sale of his properties, petitioner Dizon retained the right to
redeem the lands, the possession, use and enjoyment of the same during the period of redemption. And these are the only
rights that Dizon could legally transfer, cede and convey unto respondent Gaborro under the instrument captioned Deed of
Sale with Assumption of Mortgage (Exh. A-Stipulation), likewise the same rights that said respondent could acquire in
consideration of the latter's promise to pay and assume the loan of petitioner Dizon with DBP and PNB.

Such an instrument cannot be legally considered a real and unconditional sale of the parcels of land, firstly, because there
was absolutely no money consideration therefor, as admittedly stipulated the sum of P131,831.91 mentioned in the
document as the consideration "receipt of which was acknowledged" was not actually paid; and secondly, because the
properties had already been previously sold by the sheriff at the foreclosure sale, thereby divesting the petitioner of his full
right as owner thereof to dispose and sell the lands.

In legal consequence thereby, respondent Gaborro as transferee of these certain limited rights or interests under Exh. A-
Stipulation, cannot grant to petitioner Dizon more that said rights, such ac the option Co purchase the lands as stipulated in
the document called Option to Purchase Real Estate (Exhibit B-Stipulation), This is necessarily so for the reason that
respondent Gaborro did not purchase or acquire the full title and ownership of the properties by virtue of the Deed of Sale
With Assumption of Mortgage (Exh. A Stipulation), earlier executed between them which We have ruled out as an absolute
sale. The only legal effect of this Option Deed is the grant to petitioner the right to recover the properties upon reimbursing
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respondent Gaborro of the total sums of money that the latter may have paid to DBP and PNB on account of the mortgage
debts, the said right to be exercised within the stipulated 5 years period.

In the light of the foreclosure proceedings and sale of the properties, a legal point of primary importance here, as well as
other relevant facts and circumstances, We agree with the findings of the trial and appellate courts that the true intention
of the parties is that respondent Gaborro would assume and pay the indebtedness of petitioner Dizon to DBP and PNB, and
in consideration therefor, respondent Gaborro was given the possession, the enjoyment and use of the lands until
petitioner can reimburse fully the respondent the amounts paid by the latter to DBP and PNB, to accomplish the following
ends: (a) payment of the bank obligations; (b) make the lands productive for the benefit of the possessor, respondent
Gaborro, (c) assure the return of the land to the original owner, petitioner Dizon, thus rendering equity and fairness to all
parties concerned.

In view of all these considerations, the law and Jurisprudence, and the facts established. We find that the agreement
between petitioner Dizon and respondent Gaborro is one of those inanimate contracts under Art. 1307 of the New Civil
Code whereby petitioner and respondent agreed "to give and to do" certain rights and obligations respecting the lands and
the mortgage debts of petitioner which would be acceptable to the bank. but partaking of the nature of the antichresis
insofar as the principal parties, petitioner Dizon and respondent Gaborro, are concerned.

On the issue of the accounting of the fruits, harvests and other income received from the three parcels of land from
October 6, 1959 up to the present, prayed and demanded by Dizon of Gaborro or the Judicial Administratrix of the latter's
estate, We hold that in fairness and equity and in the interests of justice that since We have ruled out the obligation of
petitioner Dizon to reimburse respondent Gaborro of any interests and land taxes that have accrued or been paid by the
latter on the loans of Dizon with DBP and PNB, petitioner Dizon in turn is not entitled to an accounting of the fruits,
harvests and other income received by respondent Gaborro from the lands, for certainly, petitioner cannot have both
benefits and the two may be said to offset each other.

De Barretto v. Villanueva

It will be recalled that, with Court authority, Rosario Cruzado sold all her right, title, and interest and that of her children in
the house and lot herein involved to Pura L. Villanueva for P19,000.00. The purchaser paid P1,500 in advance, and executed
a promissory note for the balance of P17,500.00. However, the buyer could only pay P5,500 on account of the note, for
which reason the vendor obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was able to
secure a clean certificate of title (No. 32526), and mortgaged the property to appellant Magdalena C. Baretto, married to
Jose G. Barretto, to secure a loan of P30,000.03, said mortgage having been duly recorded.

Pura Villanueva defaulted on the mortgage loan in favor of Barreto. The latter foreclosed the mortgage in her favor,
obtained judgment, and upon its becoming final asked for execution on 31 July 1958. On 14 August 1958, Cruzado filed a
motion for recognition for her "vendor's lien" in the amount of P12,000.00 plus legal interest, invoking Articles 2242, 2243,
and 2249 of the new Civil Code. After hearing, the court below ord