Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17500 May 16, 1967

PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO. OF
MANILA, plaintiffs-appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION and
CONNELL BROS. CO. (PHIL.), defendants-appellants.

Angel S. Gamboa for defendants-appellants.

Laurel Law Offices for plaintiffs-appellants.

DIZON, J.:

On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation
licensed to do business in the Philippines — hereinafter referred to as ATLANTIC — sold and
assigned all its rights in the Dahican Lumber concession to Dahican Lumber Company —
hereinafter referred to as DALCO — for the total sum of $500,000.00, of which only the amount
of $50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained various loans
from the People's Bank & Trust Company — hereinafter referred to as the BANK — amounting,
as of July 13, 1950, to P200,000.00. In addition, DALCO obtained, through the BANK, a loan of
$250,000.00 from the Export-Import Bank of Washington D.C., evidenced by five promissory
notes of $50,000.00 each, maturing on different dates, executed by both DALCO and the
Dahican America Lumber Corporation, a foreign corporation and a stockholder of DALCO, —
hereinafter referred to as DAMCO, all payable to the BANK or its order.

As security for the payment of the abovementioned loans, on July 13, 1950 DALCO executed in
favor of the BANK — the latter acting for itself and as trustee for the Export-Import Bank of
Washington D.C. — a deed of mortgage covering five parcels of land situated in the province of
Camarines Norte together with all the buildings and other improvements existing thereon and all
the personal properties of the mortgagor located in its place of business in the municipalities of
Mambulao and Capalonga, Camarines Norte (Exhibit D). On the same date, DALCO executed a
second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid
balance of the sale price of the lumber concession amounting to the sum of $450,000.00 (Exhibit
G). Both deeds contained the following provision extending the mortgage lien to properties to be
subsequently acquired — referred to hereafter as "after acquired properties" — by the
mortgagor:

All property of every nature and description taken in exchange or replacement, and all
buildings, machinery, fixtures, tools equipment and other property which the Mortgagor
may hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with
the premises, shall immediately be and become subject to the lien of this mortgage in the
same manner and to the same extent as if now included therein, and the Mortgagor shall
from time to time during the existence of this mortgage furnish the Mortgagee with an
accurate inventory of such substituted and subsequently acquired property.

Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In
addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and
9,286 shares of DAMCO to secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK
paid the same to the Export-Import Bank of Washington D.C., and the latter assigned to the
former its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and
DAMCO up to April 1, 1953 to pay the overdue promissory note.

After July 13, 1950 — the date of execution of the mortgages mentioned above — DALCO
purchased various machineries, equipment, spare parts and supplies in addition to, or in
replacement of some of those already owned and used by it on the date aforesaid. Pursuant to
the provision of the mortgage deeds quoted theretofore regarding "after acquired properties," the
BANK requested DALCO to submit complete lists of said properties but the latter failed to do so.
In connection with these purchases, there appeared in the books of DALCO as due to Connell
Bros. Company (Philippines) — a domestic corporation who was acting as the general
purchasing agent of DALCO — thereinafter called CONNELL — the sum of P452,860.55 and to
DAMCO, the sum of P2,151,678.34.

On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the
purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and
supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission
of sale were executed between DALCO and DAMCO, on the one hand and between DALCO and
CONNELL, on the other.

On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said
agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on February
12, 1953; ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First
Instance of Camarines Norte against DALCO and DAMCO. On the same date they filed an ex-
parte application for the appointment of a Receiver and/or for the issuance of a writ of preliminary
injunction to restrain DALCO from removing its properties. The court granted both remedies and
appointed George H. Evans as Receiver. Upon defendants' motion, however, the court, in its
order of February 21, 1953, discharged the Receiver.

On March 2, 1953, defendants filed their answer denying the material allegations of the
complaint and alleging several affirmative defenses and a counterclaim.

On March 4 of the same year, CONNELL, filed a motion for intervention alleging that it was the
owner and possessor of some of the equipments, spare parts and supplies which DALCO had
acquired subsequent to the execution of the mortgages sought to be foreclosed and which
plaintiffs claimed were covered by the lien. In its order of March 18,1953 the Court granted the
motion, as well as plaintiffs' motion to set aside the order discharging the Receiver.
Consequently, Evans was reinstated.

On April 1, 1953, CONNELL filed its answer denying the material averment of the complaint, and
asserting affirmative defenses and a counterclaim.

Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the
venue of the action to the Court of First Instance of Manila where it was docketed as Civil Case
No. 20987.

On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the
machineries, equipment and supplies of DALCO, and the same were subsequently sold for a
total consideration of P175,000.00 which was deposited in court pending final determination of
the action. By a similar agreement one-half (P87,500.00) of this amount was considered as
representing the proceeds obtained from the sale of the "undebated properties" (those not
claimed by DAMCO and CONNELL), and the other half as representing those obtained from the
sale of the "after acquired properties".

After due trial, the Court, on July 15, 1960, rendered judgment as follows:
 IN VIEW WHEREFORE, the Court:

1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000,00
with 7% interest per annum from July 13, 1950, Plus another sum of P100,000.00 with
5% interest per annum from July 13, 1950; plus 10% on both principal sums as attorney's
fees;

2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of P900,000.00 with
4% interest per annum from July 3, 1950, plus 10% on both principal as attorney's fees;

3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of P425,860.55,
and to pay unto Dahican American Lumber Co. the sum of P2,151,678.24 both with legal
interest from the date of the filing of the respective answers of those parties, 10% of the
principals as attorney's fees;

4. Orders that of the sum realized from the sale of the properties of P175,000.00, after
deducting the recognized expenses, one-half thereof be adjudicated unto plaintiffs, the
court no longer specifying the share of each because of that announced intention under
the stipulation of facts to "pool their resources"; as to the other one-half, the same should
be adjudicated unto both plaintiffs, and defendant Dahican American and Connell Bros.
in the proportion already set forth on page 9, lines 21, 22 and 23 of the body of this
decision; but with the understanding that whatever plaintiffs and Dahican American and
Connell Bros. should receive from the P175,000.00 deposited in the Court shall be
applied to the judgments particularly rendered in favor of each;

5. No other pronouncement as to costs; but the costs of the receivership as to the

debated properties shall be borne by People's Bank, Atlantic Gulf, Connell Bros., and
Dahican American Lumber Co., pro-rata.

On the following day, the Court issued the following supplementary decision:

IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to
add the following paragraph 6:

6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the
Court orders the sale at public auction of the lands object of the mortgages to satisfy the
said mortgages and costs of foreclosure.

From the above-quoted decision, all the parties appealed.

Main contentions of plaintiffs as appellants are the following: that the "after acquired properties"
were subject to the deeds of mortgage mentioned heretofore; that said properties were acquired
from suppliers other than DAMCO and CONNELL; that even granting that DAMCO and
CONNELL were the real suppliers, the rescission of the sales to DALCO could not prejudice the
mortgage lien in favor of plaintiffs; that considering the foregoing, the proceeds obtained from the
sale of the "after acquired properties" as well as those obtained from the sale of the "undebated
properties" in the total sum of P175,000.00 should have been awarded exclusively to plaintiffs by
reason of the mortgage lien they had thereon; that damages should have been awarded to
plaintiffs against defendants, all of them being guilty of an attempt to defraud the former when
they sought to rescind the sales already mentioned for the purpose of defeating their mortgage
lien, and finally, that defendants should have been made to bear all the expenses of the
receivership, costs and attorney's fees.

On the other hand, defendants-appellants contend that the trial court erred: firstly, in not holding
that plaintiffs had no cause of action against them because the promissory note sued upon was
not yet due when the action to foreclose the mortgages was commenced; secondly, in not
holding that the mortgages aforesaid were null and void as regards the "after acquired
properties" of DALCO because they were not registered in accordance with the Chattel Mortgage
Law, the court erring, as a consequence, in holding that said properties were subject to the
mortgage lien in favor of plaintiffs; thirdly, in not holding that the provision of the fourth paragraph
of each of said mortgages did not automatically make subject to such mortgages the "after
acquired properties", the only meaning thereof being that the mortgagor was willing to constitute
a lien over such properties; fourthly, in not ruling that said stipulation was void as against
DAMCO and CONNELL and in not awarding the proceeds obtained from the sale of the "after
acquired properties" to the latter exclusively; fifthly, in appointing a Receiver and in holding that
the damages suffered by DAMCO and CONNELL by reason of the depreciation or loss in value
of the "after acquired properties" placed under receivership was damnum absque injuria and,
consequently, in not awarding, to said parties the corresponding damages claimed in their
counterclaim; lastly, in sentencing DALCO and DAMCO to pay attorney's fees and in requiring
DAMCO and CONNELL to pay the costs of the Receivership, instead of sentencing plaintiffs to
pay attorney's fees.

Plaintiffs' brief as appellants submit six assignments of error, while that of defendants also as
appellants submit a total of seventeen. However, the multifarious issues thus before Us may be
resolved, directly or indirectly, by deciding the following issues:

Firstly, are the so-called "after acquired properties" covered by and subject to the deeds of
mortgage subject of foreclosure?; secondly, assuming that they are subject thereto, are the
mortgages valid and binding on the properties aforesaid inspite of the fact that they were not
registered in accordance with the provisions of the Chattel Mortgage Law?; thirdly, assuming
again that the mortgages are valid and binding upon the "after acquired properties", what is the
effect thereon, if any, of the rescission of sales entered into, on the one hand, between DAMCO
and DALCO, and between DALCO and CONNELL, on the other?; and lastly, was the action to
foreclose the mortgages premature?

A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of
every nature and description taken in exchange or replacement, as well as all buildings,
machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire,
construct, install, attach; or use in, to upon, or in connection with the premises — that is, its
lumber concession — "shall immediately be and become subject to the lien" of both mortgages in
the same manner and to the same extent as if already included therein at the time of their
execution. As the language thus used leaves no room for doubt as to the intention of the parties,
We see no useful purpose in discussing the matter extensively. Suffice it to say that the
stipulation referred to is common, and We might say logical, in all cases where the properties
given as collateral are perishable or subject to inevitable wear and tear or were intended to be
sold, or to be used — thus becoming subject to the inevitable wear and tear — but with the
understanding — express or implied — that they shall be replaced with others to be thereafter
acquired by the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose
being to maintain, to the extent allowed by circumstances, the original value of the properties
given as security. Indeed, if such properties were of the nature already referred to, it would be
poor judgment on the part of the creditor who does not see to it that a similar provision is
included in the contract.

B. But defendants contend that, granting without admitting, that the deeds of mortgage in
question cover the "after acquired properties" of DALCO, the same are void and ineffectual
because they were not registered in accordance with the Chattel Mortgage Law. In support of
this and of the proposition that, even if said mortgages were valid, they should not prejudice
them, the defendants argue (1) that the deeds do not describe the mortgaged chattels
specifically, nor were they registered in accordance with the Chattel Mortgage Law; (2) that the
stipulation contained in the fourth paragraph thereof constitutes "mere executory agreements to
give a lien" over the "after acquired properties" upon their acquisition; and (3) that any mortgage
stipulation concerning "after acquired properties" should not prejudice creditors and other third
persons such as DAMCO and CONNELL.
The stipulation under consideration strongly belies defendants contention. As adverted to
hereinbefore, it states that all property of every nature, building, machinery etc. taken in
exchange or replacement by the mortgagor "shall immediately be and become subject to the lien
of this mortgage in the same manner and to the same extent as if now included therein". No
clearer language could have been chosen.

Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a
chattel mortgage must be registered and must describe the mortgaged chattels or personal
properties sufficiently to enable the parties and any other person to identify them, We say that
such law does not apply to this case.

As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in
force, there can be no doubt that the provisions of said code must govern their interpretation and
the question of their validity. It happens however, that Articles 334 and 1877 of the old Civil Code
are substantially reproduced in Articles 415 and 2127, respectively, of the new Civil Code. It is,
therefore, immaterial in this case whether we take the former or the latter as guide in deciding the
point under consideration.

Article 415 does not define real property but enumerates what are considered as such, among
them being machinery, receptacles, instruments or replacements intended by owner of the
tenement for an industry or works which may be carried on in a building or on a piece of land,
and shall tend directly to meet the needs of the said industry or works.

On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the
chattels were placed in the real properties mortgaged to plaintiffs, they came within the operation
of Art. 415, paragraph 5 and Art. 2127 of the New Civil Code".

We find the above ruling in agreement with our decisions on the subject:

(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of the Civil
Code (old) gives the character of real property to machinery, liquid containers, instruments or
replacements intended by the owner of any building or land for use in connection with any
industry or trade being carried on therein and which are expressly adapted to meet the
requirements of such trade or industry.

(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a mortgage
constituted on a sugar central includes not only the land on which it is built but also the buildings,
machinery and accessories installed at the time the mortgage was constituted as well as the
buildings, machinery and accessories belonging to the mortgagor, installed after the constitution
thereof .

It is not disputed in the case at bar that the "after acquired properties" were purchased by
DALCO in connection with, and for use in the development of its lumber concession and that
they were purchased in addition to, or in replacement of those already existing in the premises
on July 13, 1950. In Law, therefore, they must be deemed to have been immobilized, with the
result that the real estate mortgages involved herein — which were registered as such — did not
have to be registered a second time as chattel mortgages in order to bind the "after acquired
properties" and affect third parties.

But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709, claim
that the "after acquired properties" did not become immobilized because DALCO did not own the
whole area of its lumber concession all over which said properties were scattered.

The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining in the
present. In the former, the Davao Sawmill Company, Inc., had repeatedly treated the machinery
therein involved as personal property by executing chattel mortgages thereon in favor of third
parties, while in the present case the parties had treated the "after acquired properties" as real
properties by expressly and unequivocally agreeing that they shall automatically become subject
to the lien of the real estate mortgages executed by them. In the Davao Sawmill decision it was,
in fact, stated that "the characterization of the property as chattels by the appellant is indicative of
intention and impresses upon the property the character determined by the parties" (61 Phil. 112,
emphasis supplied). In the present case, the characterization of the "after acquired properties" as
real property was made not only by one but by both interested parties. There is, therefore, more
reason to hold that such consensus impresses upon the properties the character determined by
the parties who must now be held in estoppel to question it.

Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia, Inc. (225
U.S. 58) where it was held that while under the general law of Puerto Rico, machinery placed on
property by a tenant does not become immobilized, yet, when the tenant places it there pursuant
to contract that it shall belong to the owner, it then becomes immobilized as to that tenant and
even as against his assignees and creditors who had sufficient notice of such stipulation. In the
case at bar it is not disputed that DALCO purchased the "after acquired properties" to be placed
on, and be used in the development of its lumber concession, and agreed further that the same
shall become immediately subject to the lien constituted by the questioned mortgages. There is
also abundant evidence in the record that DAMCO and CONNELL had full notice of such
stipulation and had never thought of disputed validity until the present case was filed.
Consequently all of them must be deemed barred from denying that the properties in question
had become immobilized.

What We have said heretofore sufficiently disposes all the arguments adduced by defendants in
support their contention that the mortgages under foreclosure are void, and, that, even if valid,
are ineffectual as against DAMCO and CONNELL.

Now to the question of whether or not DAMCO CONNELL have rights over the "after acquired
properties" superior to the mortgage lien constituted thereon in favor of plaintiffs. It is defendants'
contention that in relation to said properties they are "unpaid sellers"; that as such they had not
only a superior lien on the "after acquired properties" but also the right to rescind the sales
thereof to DALCO.

This contention — it is obvious — would have validity only if it were true that DAMCO and
CONNELL were the suppliers or vendors of the "after acquired properties". According to the
record, plaintiffs did not know their exact identity and description prior to the filing of the case bar
because DALCO, in violation of its obligation under the mortgages, had failed and refused
theretofore to submit a complete list thereof. In the course of the proceedings, however, when
defendants moved to dissolve the order of receivership and the writ of preliminary injunction
issued by the lower court, they attached to their motion the lists marked as Exhibits 1, 2 and 3
describing the properties aforesaid. Later on, the parties agreed to consider said lists as
identifying and describing the "after acquire properties," and engaged the services of auditors to
examine the books of DALCO so as to bring out the details thereof. The report of the auditors
and its annexes (Exhibits V, V-1 — V4) show that neither DAMCO nor CONNELL had supplied
any of the goods of which they respective claimed to be the unpaid seller; that all items were
supplied by different parties, neither of whom appeared to be DAMCO or CONNELL that, in fact,
CONNELL collected a 5% service charge on the net value of all items it claims to have sold to
DALCO and which, in truth, it had purchased for DALCO as the latter's general agent; that
CONNELL had to issue its own invoices in addition to those o f the real suppliers in order to
collect and justify such service charge.

Taking into account the above circumstances together with the fact that DAMCO was a
stockholder and CONNELL was not only a stockholder but the general agent of DALCO, their
claim to be the suppliers of the "after acquired required properties" would seem to be
preposterous. The most that can be claimed on the basis of the evidence is that DAMCO and
CONNELL probably financed some of the purchases. But if DALCO still owes them any amount
in this connection, it is clear that, as financiers, they can not claim any right over the "after
acquired properties" superior to the lien constituted thereon by virtue of the deeds of mortgage
under foreclosure. Indeed, the execution of the rescission of sales mentioned heretofore appears
to be but a desperate attempt to better or improve DAMCO and CONNELL's position by enabling
them to assume the role of "unpaid suppliers" and thus claim a vendor's lien over the "after
acquired properties". The attempt, of course, is utterly ineffectual, not only because they are not
the "unpaid sellers" they claim to be but also because there is abundant evidence in the record
showing that both DAMCO and CONNELL had known and admitted from the beginning that the
"after acquired properties" of DALCO were meant to be included in the first and second
mortgages under foreclosure.

The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or
otherwise, is of no consequence and does not make the rescission valid and legally effective. It
must be stated clearly, however, in justice to Belden, that, as a member of the Board of Directors
of DALCO, he opposed the resolution of December 15, 1952 passed by said Board and the
subsequent rescission of the sales.

Finally, defendants claim that the action to foreclose the mortgages filed on February 12, 1953
was premature because the promissory note sued upon did not fall due until April 1 of the same
year, concluding from this that, when the action was commenced, the plaintiffs had no cause of
action. Upon this question the lower court says the following in the appealed judgment;

The other is the defense of prematurity of the causes of action in that plaintiffs, as a
matter of grace, conceded an extension of time to pay up to 1 April, 1953 while the action
was filed on 12 February, 1953, but, as to this, the Court taking it that there is absolutely
no debate that Dahican Lumber Co., was insolvent as of the date of the filing of the
complaint, it should follow that the debtor thereby lost the benefit to the period.

x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code);

and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the
aggregate, P1,200,000 excluding interest while the aggregate price of the "after-
acquired" chattels claimed by Connell under the rescission contracts was P1,614,675.94,
Exh. 1, Exh. V, report of auditors, and as a matter of fact, almost all the properties were
sold afterwards for only P175,000.00, page 47, Vol. IV, and the Court understanding that
when the law permits the debtor to enjoy the benefits of the period notwithstanding that
he is insolvent by his giving a guaranty for the debt, that must mean a new and efficient
guaranty, must concede that the causes of action for collection of the notes were not
premature.

Very little need be added to the above. Defendants, however, contend that the lower court had
no basis for finding that, when the action was commenced, DALCO was insolvent for purposes
related to Article 1198, paragraph 1 of the Civil Code. We find, however, that the finding of the
trial court is sufficiently supported by the evidence particularly the resolution marked as Exhibit K,
which shows that on December 16, 1952 — in the words of the Chairman of the Board —
DALCO was "without funds, neither does it expect to have any funds in the foreseeable future."
(p. 64, record on appeal).

The remaining issues, namely, whether or not the proceeds obtained from the sale of the "after
acquired properties" should have been awarded exclusively to the plaintiffs or to DAMCO and
CONNELL, and if in law they should be distributed among said parties, whether or not the
distribution should be pro-rata or otherwise; whether or not plaintiffs are entitled to damages;
and, lastly, whether or not the expenses incidental to the Receivership should be borne by all the
parties on a pro-rata basis or exclusively by one or some of them are of a secondary nature as
they are already impliedly resolved by what has been said heretofore.
As regard the proceeds obtained from the sale of the of after acquired properties" and the
"undebated properties", it is clear, in view of our opinion sustaining the validity of the mortgages
in relation thereto, that said proceeds should be awarded exclusively to the plaintiffs in payment
of the money obligations secured by the mortgages under foreclosure.

On the question of plaintiffs' right to recover damages from the defendants, the law (Articles 1313
and 1314 of the New Civil Code) provides that creditors are protected in cases of contracts
intended to defraud them; and that any third person who induces another to violate his contract
shall be liable for damages to the other contracting party. Similar liability is demandable under
Arts. 20 and 21 — which may be given retroactive effect (Arts. 225253) — or under Arts. 1902
and 2176 of the Old Civil Code.

The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing
to pay the fifth promissory note upon its maturity, conspired jointly with CONNELL to violate the
provisions of the fourth paragraph of the mortgages under foreclosure by attempting to defeat
plaintiffs' mortgage lien on the "after acquired properties". As a result, the plaintiffs had to go to
court to protect their rights thus jeopardized. Defendants' liability for damages is therefore clear.

However, the measure of the damages suffered by the plaintiffs is not what the latter claim,
namely, the difference between the alleged total obligation secured by the mortgages amounting
to around P1,200,000.00, plus the stipulated interest and attorney's fees, on the one hand, and
the proceeds obtained from the sale of "after acquired properties", and of those that were not
claimed neither by DAMCO nor CONNELL, on the other. Considering that the sale of the real
properties subject to the mortgages under foreclosure has not been effected, and considering
further the lack of evidence showing that the true value of all the properties already sold was not
realized because their sale was under stress, We feel that We do not have before Us the true
elements or factors that should determine the amount of damages that plaintiffs are entitled
recover from defendants. It is, however, our considered opinion that, upon the facts established,
all the expenses of the Receivership, which was deemed necessary to safeguard the rights of the
plaintiffs, should be borne by the defendants, jointly and severally, in the same manner that all of
them should pay to the plaintiffs, jointly a severally, attorney's fees awarded in the appealed
judgment.

In consonance with the portion of this decision concerning the damages that the plaintiffs are
entitled to recover from the defendants, the record of this case shall be remanded below for the
corresponding proceedings.

THIRD DIVISION

G.R. No. 152168 December 10, 2004

HEIRS OF THE LATE SPOUSES AURELIO AND ESPERANZA BALITE; Namely, ANTONIO
T. BALITE, FLOR T. BALITE-ZAMAR, VISITACION T. BALITE-DIFUNTORUM, PEDRO T.
BALITE, PABLO T. BALITE, GASPAR T. BALITE, CRISTETA T. BALITE and AURELIO T.
BALITE JR., All Represented by GASPAR T. BALITE,petitioners,
vs.
RODRIGO N. LIM, respondent.

DECISION
PANGANIBAN, J.:

A deed of sale that allegedly states a price lower than the true consideration is nonetheless
binding between the parties and their successors in interest. Furthermore, a deed of sale in
which the parties clearly intended to transfer ownership of the property cannot be presumed to
be an equitable mortgage under Article 1602 of the Civil Code. Finally, an agreement that
purports to sell in metes and bounds a specific portion of an unpartitioned co-owned property is
not void; it shall effectively transfer the seller’s ideal share in the co-ownership.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 11,
2002 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 65395. The decretal portion of the
Decision reads as follows:

"IN THE LIGHT OF ALL THE FOREGOING, the Decision of the Court a quo subject of
the appeal is hereby SET ASIDE AND REVERSED and another Decision is hereby
rendered as follows:

1. The "Deed of Absolute Sale" (Exhibit "A") is valid only insofar as the pro
indiviso share of Esperanza Balite over the property covered by Original Certificate of
Title No. 10824 is concerned;

2. The Register of Deeds is hereby ordered to cancel Transfer Certificate of Title No.
6683 and to issue another over the entirety of the property covered by Original Certificate
of Title No. 10824, upon the payment of the capital gains tax due, as provided for by law,
(based on the purchase price of the property in the amount of P1,000,000.00), with the
following as co-owners, over the property described therein:

a) Each of the [petitioners] over an undivided portion of 975 square meters;

b) The [respondent], with an undivided portion of 9,751 square meters.

3. The [respondent] is hereby ordered to pay to the [petitioners] the amount

of P120,000.00, within a period of five (5) months from the finality of the Decision of this
Court;

4. In the event that the [respondent] refuses or fails to remit the said amount to the
[petitioner] within the period therefor, the rights and obligations of the parties shall be
governed by Republic 6552 (Maceda Law)."3

The Facts

The CA summarized the facts in this manner:

"The spouses Aurelio x x x and Esperanza Balite were the owners of a parcel of land,
located [at] Poblacion (Barangay Molave), Catarman, Northern Samar, with an area of
seventeen thousand five hundred fifty-one (17,551) square meters, [and] covered by
Original Certificate of Title [OCT] No. 10824. When Aurelio died intestate [in 1985, his
wife], Esperanza Balite, and their children, x x x [petitioners] Antonio Balite, Flor Balite-
Zamar, Visitacion Balite-Difuntorum, Pedro Balite, Pablo Balite, Gaspar Balite, Cristeta
(Tita) Balite and Aurelio Balite, Jr., inherited the [subject] property and became co-
owners thereof, with Esperanza x x x inheriting an undivided [share] of [9,751] square
meters.

"In the meantime, Esperanza x x x [became] ill and was in dire need of money for her
hospital expenses x x x. She, through her daughter, Cristeta, offered to sell to Rodrigo
Lim, [her] undivided share x x x for the price of P1,000,000.00. x x x Esperanza x x x and
Rodrigo x x x agreed that, under the "Deed of Absolute Sale", to be executed by
Esperanza x x x over the property, it will be made to appear that the purchase price of
the property would be P150,000.00, although the actual price agreed upon by them for
the property was P1,000,000.00.

"On April 16, 1996, Esperanza x x x executed a "Deed of Absolute Sale" in favor of
Rodrigo N. Lim over a portion of the property, covered by [OCT] No. 10824, with an area
of 10,000 square meters, for the price of P150,000.00 x x x.

[They] also executed, on the same day, a "Joint Affidavit" under which they declared that
the real price of the property was P1,000,000.00, payable to Esperanza x x x, by
installments, as follows:

1. P30,000.00 – upon signing today of the document of sale.

2. P170,000.00 – payable upon completion of the actual relocation survey of the

land sold by a Geodetic Engineer.

3. P200,000.00 – payable on or before May 15, 1996.

4. P200,000.00 – payable on or before July 15, 1996.

5. P200,000.00 – payable on or before September 15, 1996.

6. P200,000.00 – payable on or before December 15, 1996.

"Only Esperanza and two of her children, namely, Antonio x x x and Cristeta x x x, knew
about the said transaction. x x x Geodetic Engineer Bonifacio G. Tasic conducted a
subdivision survey of the property and prepared a "Sketch Plan" showing a portion of the
property, identified as Lot 243 with an area of 10,000 square meters, under the name
Rodrigo N. Lim.

"The "Sketch Plan" was signed by Rodrigo x x x and Esperanza. Thereafter, Rodrigo x x
x took actual possession of the property and introduced improvements thereon. He
remitted to Esperanza x x x and Cristeta x x x sums of money in partial payments of the x
x x property for which he signed "Receipts".

"Gaspar, Visitacion, Flor, Pedro and Aurelio, Jr. x x x learned of the sale, and on August
21, 1996, they wrote a letter to the Register of Deeds [RD] of Northern Samar, [saying]
that they [were] not x x x informed of the sale of a portion of the said property by their
mother x x x nor did they give their consent thereto, and requested the [RD] to:

"x x x hold in abeyance any processal or approval of any application for

registration of title of ownership in the name of the buyer of said lot, which has
not yet been partitioned judicially or extrajudicially, until the issue of the
legality/validity of the above sale has been cleared."

"On August 24, 1996, Antonio x x x received from Rodrigo x x x, the amount
of P30,000.00 in partial payment of [the] property and signed a "Receipt" for the said
amount, declaring therein that "the remaining balance of P350,000.00 shall personally
and directly be released to my mother, Esperanza Balite, only." However, Rodrigo x x x
drew and issued RCBC Check No. 309171, dated August 26, 1996, [payable] to the
order of Antonio Balite in the amount of P30,000.00 in partial payment of the property.

"On October 1, 1996, Esperanza x x x executed a "Special Power of Attorney" appointing

her son, Antonio, to collect and receive, from Rodrigo, the balance of the purchase price
of the x x x property and to sign the appropriate documents therefor.

"On October 23, 1996, Esperanza signed a letter addressed to Rodrigo informing the
latter that her children did not agree to the sale of the property to him and that she was
withdrawing all her commitments until the validity of the sale is finally resolved:

xxx xxx xxx

"On October 31, 1996, Esperanza died intestate and was survived by her aforenamed
children.

"[Meanwhile], Rodrigo caused to be published, in the Samar Reporter, on November 14,

21 and 28, 1996, the aforesaid "Deed of Absolute Sale". Earlier, on November 21, 1996,
Antonio received the amount of P10,000.00 from Rodrigo for the payment of the estate
tax due from the estate of Esperanza.

"Also, the capital gains tax, in the amount of P14,506.25, based on the purchase price
of P150,000.00 appearing on the "Deed of Absolute Sale", was paid to the Bureau of
Internal Revenue which issued a "Certification" of said payments, on March 5, 1997,
authorizing the registration of the "Deed of Absolute Sale" x x x. However, the [RD]
refused to issue a title over the property to and under the name of Rodrigo unless and
until the owner’s duplicate of OCT No. 10824 was presented to [it]. Rodrigo filed a
"Petition for Mandamus" against the RD with the Regional Trial Court of Northern
Samar (Rodrigo Lim versus Fernando Abella, Special Civil Case No. 48). x x x. On
June 13, 1997, the court issued an Order to the RD to cancel OCT No. 10824 and to
issue a certificate of title over Lot 243 under the name of Rodrigo.

"On June 27, 1997, [petitioners] filed a complaint against Rodrigo with the Regional Trial
Court of Northern Samar, entitled and docketed as "Heirs of the Spouses Aurelio
Balite, et al. versus Rodrigo Lim, Civil Case No. 920, for "Annulment of Sale,
Quieting of Title, Injunction and Damages x x x, [the origin of the instant case.]

xxx xxx xxx

"The [petitioners] had a "Notice of Lis Pendens", dated June 23, 1997, annotated, on
June 27, 1997, at the dorsal portion of OCT No. 10824.

"In the meantime, the RD cancelled, on July 10, 1997, OCT No. 10824 and issued
Transfer Certificate of Title [TCT] No. 6683 to and under the name of Rodrigo over Lot
243. The "Notice of Lis Pendens" x x x was carried over in TCT No. 6683.

"Subsequently, Rodrigo secured a loan from the Rizal Commercial Banking Corporation
in the amount of P2,000,000.00 and executed a "Real Estate Mortgage" over the
[subject] property as security therefor.

"On motion of the [petitioners], they were granted x x x leave to file an "Amended
Complaint" impleading the bank as [additional] party-defendant. On November 26, 1997,
[petitioners] filed their "Amended Complaint".
 The [respondent] opposed the "Amended Complaint" x x x contending that it was
improper for [petitioners] to join, in their complaint, an ordinary civil action for the
nullification of the "Real Estate Mortgage" executed by the respondent in favor of the
Bank as the action of the petitioners before the court was a special civil action.

"On March 30, 1998, the court issued an Order rejecting the "Amended Complaint" of the
petitioners on the grounds that: (a) the Bank cannot be impleaded as party-defendant
under Rule 63, Section 1 of the 1997 Rules of Civil Procedure; (b) the "Amended
Complaint" constituted a collateral attack on TCT No. 6683. The [petitioners] did not file
any motion for the reconsideration of the order of the court."4

The trial court dismissed the Complaint and ordered the cancellation of the lis
pendens annotated at the back of TCT No. 6683. It held that, pursuant to Article 493 of the Civil
Code, a co-owner has the right to sell his/her undivided share. The sale made by a co-owner is
not invalidated by the absence of the consent of the other co-owners. Hence, the sale by
Esperanza of the 10,000-square-meter portion of the property was valid; the excess from her
undivided share should be taken from the undivided shares of Cristeta and Antonio, who
expressly agreed to and benefited from the sale.

Ruling of the Court of Appeals

The CA held that the sale was valid and binding insofar as Esperanza Balite’s undivided share of
the property was concerned. It affirmed the trial court’s ruling that the lack of consent of the co-
owners did not nullify the sale. The buyer, respondent herein, became a co-owner of the property
to the extent of the pro indiviso share of the vendor, subject to the portion that may be allotted to
him upon the termination of the co-ownership. The appellate court disagreed with the averment
of petitioners that the registration of the sale and the issuance of TCT No. 6683 was ineffective
and that they became the owners of the share of Esperanza upon the latter’s death.

The CA likewise rejected petitioners’ claim that the sale was void allegedly because the actual
purchase price of the property was not stated in the Deed of Absolute Sale. It found that the true
and correct consideration for the sale was P1,000,000 as declared by Esperanza and respondent
in their Joint Affidavit. Applying Article 13535 of the Civil Code, it held that the falsity of the price or
consideration stated in the Deed did not render it void. The CA pointed out, however, that the
State retained the right to recover the capital gains tax based on the true price of P1,000,000.

The appellate court rejected petitioners’ contention that, because of the allegedly unconscionably
low and inadequate consideration involved, the transaction covered by the Deed was an
equitable mortgage under Article 1602 of the Civil Code. Observing that the argument had never
been raised in the court a quo, it ruled that petitioners were proscribed from making this claim, for
the first time, on appeal.

The CA further held that the remaining liability of respondent was P120,000. It relied on the
Receipt dated August 24, 1996, which stated that his outstanding balance for the consideration
was P350,000. It deducted therefrom the amounts of P30,000 received by Antonio on August 27,
1996; and P200,000, which was the amount of the check dated September 15, 1996, issued by
respondent payable to Esperanza.

Finally, the appellate court noted that the mortgage over the property had been executed after
the filing of the Complaint. What petitioners should have filed was a supplemental complaint
instead of an amended complaint. Contrary to respondent’s argument, it also held that the bank
was not an indispensable party to the case; but was merely a proper party. Thus, there is
no necessity to implead it as party-defendant, although the court a quo had the option to do so.
And even if it were not impleaded, the appellate court ruled that the bank would still have been
bound by the outcome of the case, as the latter was a mortgagee pendente lite over real estate
that was covered by a certificate of title with an annotated lis pendens.
Hence, this Petition.6

Issues

In their Memorandum, petitioners present the following issues:

"A

"Whether or not the [CA] seriously erred in not deciding that the Deed of Absolute Sale
dated April 16, 1996 is null and void on the grounds that it is falsified; it has an unlawful
cause; and it is contrary to law and/or public policy.

"B

"Whether or not the [CA] gravely erred in not finding that the amount paid by [respondent]
is only three hundred twenty thousand (P320,000.00) pesos and that respondent’s claim
that he has paid one million pesos except P44,000.00 as balance, is fraudulent and false.

"C

"Whether or not the [CA] seriously erred in not deciding that at the time the Deed of Sale
was registered x x x on May 30, 1997, said Deed of Sale can no longer bind the property
covered by OCT No. 10824 because said land had already become the property of all the
petitioners upon the death of their mother on October 31, 1996 and therefore such
registration is functus of[f]icio involving a null and void document.

"D

"Whether or not the [CA] seriously erred in not ruling that petitioners’ amended complaint
dated November 27, 1997 was proper and admissible and deemed admitted to conform
to evidence presented.

"E

"Whether or not the [CA] seriously erred in not declaring that TCT No. T-6683 in the
name of Respondent Rodrigo N. Lim is null and void and all dealings involving the same
are likewise null and void and/or subject to the decision of the case at bar in view of the
notice of lis pendens annotated therein.

"F

"Even assuming but without admitting that the Deed of Sale is enforceable, the
respondent court seriously erred in not deciding that the consideration is unconscionably
low and inadequate and therefore the transaction between the executing parties
constitutes an equitable mortgage.

"G

"The [CA] greatly erred in not rendering judgment awarding damages and attorney’s
fee[s] in favor of petitioners among others."7

In sum, the issues raised by petitioners center on the following: 1) whether the Deed of Absolute
Sale is valid, and 2) whether there is still any sum for which respondent is liable.
 The Court’s Ruling

The Petition has no merit.

First Issue:

Validity of the Sale

Petitioners contend that the Deed of Absolute Sale is null and void, because the undervalued
consideration indicated therein was intended for an unlawful purpose -- to avoid the payment of
higher capital gains taxes on the transaction. According to them, the appellate court’s reliance on
Article 1353 of the Civil Code was erroneous. They further contend that the Joint Affidavit is not
proof of a true and lawful cause, but an integral part of a scheme to evade paying lawful taxes
and registration fees to the government.

We have before us an example of a simulated contract. Article 1345 of the Civil Code provides
that the simulation of a contract may either be absolute or relative. In absolute simulation, there
is a colorable contract but without any substance, because the parties have no intention to be
bound by it. An absolutely simulated contract is void, and the parties may recover from each
other what they may have given under the "contract."8 On the other hand, if the parties state a
false cause in the contract to conceal their real agreement, such a contract is relatively
simulated. Here, the parties’ real agreement binds them.9

In the present case, the parties intended to be bound by the Contract, even if it did not reflect the
actual purchase price of the property. That the parties intended the agreement to produce legal
effect is revealed by the letter of Esperanza Balite to respondent dated October 23, 199610 and
petitioners’ admission that there was a partial payment of P320,000 made on the basis of the
Deed of Absolute Sale. There was an intention to transfer the ownership of over 10,000 square
meters of the property . Clear from the letter is the fact that the objections of her children
prompted Esperanza to unilaterally withdraw from the transaction.

Since the Deed of Absolute Sale was merely relatively simulated, it remains valid and
enforceable. All the essential requisites prescribed by law for the validity and perfection of
contracts are present. However, the parties shall be bound by their real agreement for a
consideration of P1,000,000 as reflected in their Joint Affidavit.11

The juridical nature of the Contract remained the same. What was concealed was merely the
actual price. Where the essential requisites are present and the simulation refers only to the
content or terms of the contract, the agreement is absolutely binding and enforceable12 between
the parties and their successors in interest.

Petitioners cannot be permitted to unmake the Contract voluntarily entered into by their
predecessor, even if the stated consideration was included therein for an unlawful purpose. "The
binding force of a contract must be recognized as far as it is legally possible to do so."13 However,
as properly held by the appellate court, the government has the right to collect the proper taxes
based on the correct purchase price.

Being onerous, the Contract had for its cause or consideration the price of P1,000,000. Both this
consideration as well as the subject matter of the contract -- Esperanza’s share in the property
covered by OCT No. 10824 -- are lawful. The motives of the contracting parties for lowering the
price of the sale -- in the present case, the reduction of capital gains tax liability -- should not be
confused with the consideration.14 Although illegal, the motives neither determine nor take the
place of the consideration. 15

Deed of Sale not an

Equitable Mortgage
Petitioner further posits that even assuming that the deed of sale is valid it should only be
deemed an equitable mortgage pursuant to Articles 1602 and 1604 of the Civil Code, because
the price was clearly inadequate. They add that the presence of only one of the circumstances
enumerated under Article 1602 would be sufficient to consider the Contract an equitable
mortgage. We disagree.

For Articles 1602 and 1604 to apply, two requisites must concur: one, the parties entered into a
contract denominated as a contract of sale; and, two, their intention was to secure an existing
debt by way of mortgage.16

Indeed, the existence of any of the circumstances enumerated in Article 1602, not a concurrence
or an overwhelming number thereof, suffices to give rise to the presumption that a
contract purporting to be an absolute sale is actually an equitable mortgage.17 In the present case,
however, the Contract does not merely purport to be an absolute sale. The records and the
documentary evidence introduced by the parties indubitably show that the Contract is, indeed,
one of absolute sale. There is no clear and convincing evidence that the parties agreed upon a
mortgage of the subject property.

Furthermore, the voluntary, written and unconditional acceptance of contractual commitments

negates the theory of equitable mortgage. There is nothing doubtful about the terms of, or the
circumstances surrounding, the Deed of Sale that would call for the application of Article 1602.
The Joint Affidavit indisputably confirmed that the transaction between the parties was a sale.

When the words of a contract are clear and readily understandable, there is no room for
construction. Contracts are to be interpreted according to their literal meaning and should not be
interpreted beyond their obvious intendment.18The contract is the law between the parties.

Notably, petitioners never raised as an issue before the trial court the fact that the document did
not express the true intent and agreement of the contracting parties. They raised mere
suppositions on the inadequacy of the price, in support of their argument that the Contract should
be considered as an equitable mortgage.

We find no basis to conclude that the purchase price of the property was grossly inadequate.
Petitioners did not present any witness to testify as to the market values of real estate in the
subject’s locale. They made their claim on the basis alone of the P2,000,000 loan that
respondent had been able to obtain from the Rizal Commercial Banking Corporation. This move
did not sufficiently show the alleged inadequacy of the purchase price. A mortgage is a mere
security for a loan. There was no showing that the property was the only security relied upon by
the bank; or that the borrowers had no credit worthiness, other than the property offered as
collateral.

Co-Ownership

The appellate court was correct in affirming the validity of the sale of the property insofar as
the pro indiviso share of Esperanza Balite was concerned.

Article 493 of the Civil Code19 gives the owner of an undivided interest in the property the right to
freely sell and dispose of such interest. The co-owner, however, has no right to sell or alienate a
specific or determinate part of the thing owned in common, because such right over the thing is
represented by an aliquot or ideal portion without any physical division. Nonetheless, the mere
fact that the deed purports to transfer a concrete portion does not per se render the sale
void.20 The sale is valid, but only with respect to the aliquot share of the selling co-owner.
Furthermore, the sale is subject to the results of the partition upon the termination of the co-
ownership.
Hence, the transaction between Esperanza Balite and respondent could be legally recognized
only in respect to the former’s pro indiviso share in the co-ownership. As a matter of fact, the
Deed of Absolute Sale executed between the parties expressly referred to the 10,000-square-
meter portion of the land sold to respondent as the share of Esperanza in the conjugal property.
Her clear intention was to sell merely her ideal or undivided share in it. No valid objection can be
made against that intent. Clearly then, the sale can be given effect to the extent of 9,751 square
meters, her ideal share in the property as found by both the trial and the appellate courts.

Transfer of Property

During her lifetime, Esperanza had already sold to respondent her share in the subject parcel;
hence her heirs could no longer inherit it. The property she had transferred or conveyed no
longer formed part of her estate to which her heirs may lay claim at the time of her death. The
transfer took effect on April 16, 1996 (the date the Deed of Absolute Sale was executed), and not
on May 30, 1997, when the Deed of Absolute Sale was registered. Thus, petitioners’ claim that
the property became theirs upon the death of their mother is untenable.

Second Issue:

Respondent’s Liability

Petitioners insist that the appellate court erred in holding that respondent’s outstanding liability on
the Deed of Sale was P120,000, when the Receipts on record show payments in the total
amount of P320,000 only. They argue that the August 24, 1996 Receipt, on which the appellate
court based its conclusion, was unreliable.

To begin with, this Court is not a trier of facts. 21 It is not its function to examine and determine the
weight of the evidence. Well-entrenched is the doctrine that only errors of law,22 and not of facts,
are reviewable by this Court in a petition for review on certiorari under Rule 45 of the Revised
Rules of Court. Philippine Airlines, Inc. v. Court of Appeals23 has held that factual findings of the
Court of Appeals are binding and conclusive upon the Supreme Court. These findings may be
reviewed24 only under exceptional circumstances such as, among others, when the inference is
manifestly mistaken;25 the judgment is based on a misapprehension of facts;26 findings of the trial
court contradict those of the CA;27 or the CA manifestly overlooked certain relevant and
undisputed facts that, if properly considered, would justify a different conclusion.28

Although the factual findings of the two lower courts were not identical, we hold that in the
present case, the findings of the CA are in accord with the documents on record. The trial court
admitted in evidence the August 24, 1996 Receipt signed by Antonio Balite. Interestingly, he was
never presented in the lower court to dispute the veracity of the contents of that Receipt,
particularly the second paragraph that had categorically stated the outstanding balance of
respondent as of August 24, 1996, to be P350,000. Furthermore, the evidence shows that
subsequent payments of P30,000 and P200,000 were made by the latter. Thus, we affirm the
CA’s Decision holding that the remaining unpaid balance of the price was P120,000.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against the
petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
 EN BANC

G.R. No. L-26371 September 30, 1969

MOBIL OIL PHILIPPINES, INC., plaintiff-appellant,

vs.
RUTH R. DIOCARES, ET AL., defendants-appellees.

Faylona, Berroya, Norte and Associates for plaintiff-appellant.

Vivencio G. Ibrado Jr. for defendants-appellees.

FERNANDO, J.:

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

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

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

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

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

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

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

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

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

Such a conclusion does not commend itself for approval. The codal provision is clear and
explicit. Even if the instrument were not recorded, "the mortgage is nevertheless binding between
the parties." The law cannot be any clearer. Effect must be given to it as written. The mortgage
subsists; the parties are bound. As between them, the mere fact that there is as yet no
compliance with the requirement that it be recorded cannot be a bar to foreclosure. 1awphîl .nèt

A contrary conclusion would manifest less than full respect to what the codal provision ordains.
The liability of the mortgagor is therein explicitly recognized. To hold, as the lower court did, that
no foreclosure would lie under the circumstances would be to render the provision in question
nugatory. That we are not allowed to do. What the law requires in unambiguous language must
be lived up to. No interpretation is needed, only its application, the undisputed facts calling for
it. 11
Moreover to rule as the lower court did would be to show less than fealty to the purpose that
animated the legislators in giving expression to their will that the failure of the instrument to be
recorded does not result in the mortgage being any the less "binding between the parties." In the
language of the Report of the Code Commission: "In article [2125] an additional provision is
made that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding
between the parties." 12 We are not free to adopt then an interpretation, even assuming that the
codal provision lacks the forthrightness and clarity that this particular norm does and, therefore,
requires construction, that would frustrate or nullify such legislative objective.

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

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

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-48696 November 28, 1942

FELIZA ZUBIRI, petitioner,

vs.
LUCIO QUIJANO, respondent.

E.P. Virata and Ferrier, Gomez and Sotelo for petitioner.

Virola and Leuterio for respondent.

PARAS, J.:

This is an appeal from a decision of the Court of Appeals holding that the contract dated May 15,
1934, purporting to be a two-year pacto de retro sale of three parcels of land from the petitioner,
Feliza Zubiri, to the respondent, Lucio Quijano, is an equitable mortgage, sentencing the former
to pay to the latter, within three months, the alleged purchase price of P700, with legal interest
from the date of the filing of the complaint (November 15, 1937), and ordering that, in default of
payment, the land be sold at public auction and the proceeds of the sale applied to the
satisfaction of the judgment, without special pronouncement as to costs.

Under the first assignment, the petitioner contends that the Court of Appeals erred in ordering the
sale of the land in case of non-payment of the judgment, on the ground that the contract relied
upon by the respondent, not having been registered in accordance with the Land Registration
Act, cannot operate as a mortgage so as to justify its foreclosure. There is no merit in the
contention. The contract, evidencing a pacto de retro sale which is unquestionably more
disadvantageous to the petitioner, has been held to be an equitable mortgage and, from its very
nature, the lien thereby created ought not to be defeated by requiring compliance with the
formalities necessary to the validity of a voluntary real estate mortgage, as long as the land
remains in the hands of the petitioner and the rights of innocent third parties are not affected. In
the case of Correa vs. Mateo and Icasiano (55 Phil., 79), wherein an unrecorded pacto de
retro sale was construed as an equitable mortgage, it was held that the plaintiff had the right
"within sixty days after final judgment, for a failure to pay the amount due and owing him, to
foreclose his mortgage in a proper proceeding and sell all or any part of the ten parcels of land to
satisfy his debt."

Under the second assignment, the petitioner alleges that the Court of Appeals erred in not finding
that he had paid to the respondent usurious interest amounting (as found by the Court of First
Instance of Mindoro) to P950. The pronouncements of the Court of Appeals, to wit, "pero
rechazamos la pretension de la demandada, aceptada por el Tribunal a quo, de que el
demandante percibio interes usurarios" and "Con respeto a la alegacion sobre usura, la misma
nos parece insostenible," being conclusions of fact, must be accepted for the purposes of the
present appeal, since we cannot make contrary findings without re-examining the evidence, and
we are not authorized to do this.

It results that the Court of Appeals did not commit any error. In the exercise, however, of our
equity jurisdiction, and especially considering that the present complaint did not originally seek
the recovery of a debt, that the petitioner obtained a favorable judgment in the Court of First
Instance and that the vote in the Court of Appeals was three to two, we are inclined to hold that
the petitioner should be sentenced to pay interest only from the date our decision becomes final.
As thus modified, the appealed decision is affirmed, with costs against the petitioner.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22331 June 6, 1967

IN RE: PETITION FOR CONSOLIDATION OF TITLE IN THE VENDEES OF A HOUSE AND

THE RIGHTS TO A LOT.
MARIA BAUTISTA VDA. DE REYES, ET AL., vendees-petitioners-appellees.
RODOLFO LANUZA, vendor,
vs.
MARTIN DE LEON, intervenor-appellant.

Erasmo R. Cruz and C. R. Pascual for intervenor-appellant.

Augusto J. Salas for vendees-petitioners-appellees.

REGALA, J.:

Rodolfo Lanuza and his wife Belen were the owners of a two-story house built on a lot of the
Maria Guizon Subdivision in Tondo, Manila, which the spouses leased from the Consolidated
Asiatic Co. On January 12, 1961, Lanuza executed a document entitled "Deed of Sale with Right
to Repurchase" whereby he conveyed to Maria Bautista Vda. de Reyes and Aurelia R. Navarro
the house, together with the leasehold rights to the lot, a television set and a refrigerator in
consideration of the sum of P3,000. The deed reads:
 DEED OF SALE WITH RIGHT TO REPURCHASE KNOW ALL MEN BY THESE
PRESENTS:

That I, RODOLFO LANUZA, Filipino, of legal age, married to Belen Geronimo,

and residing at 783-D Interior 14 Maria Guizon, Gagalangin, Tondo, Manila,
hereby declare that I am the true and absolute owner of a new two storey house
of strong materials, constructed on a rented lot — Lot No. 12 of the Maria Guizon
Subdivision, owned by the Consolidated Asiatic Co. — as evidenced by the
attached Receipt No. 292, and the plan of the subdivision, owned by said
company.

That for and in consideration of the sum of THREE THOUSAND PESOS

(P3,000.00) which I have received this day from Mrs. Maria Bautista Vda. de
Reyes, Filipino, of legal age, widow; and Aurelia Reyes, married to Jose S.
Navarro, Filipinos, of legal ages, and residing at 1112 Antipolo St., Tondo,
Manila, I hereby SELL, CEDE, TRANSFER, AND CONVEY unto said Maria
Bautista Vda. de Reyes, her heirs, succesors, administrators and assigns said
house, including my right to the lot on which it was constructed, and also my
television, and frigidaire "Kelvinator" of nine cubic feet in size, under the following
conditions:

I hereby reserve for myself, my heirs, successors, administrators, and assigns

the right to repurchase the above mentioned properties for the same amount of
P3,000.00, without interest, within the stipulated period of three (3) months from
the date hereof. If I fail to pay said amount of P3,000.00, within the stipulated
period of three months, my right to repurchase the said properties shall be
forfeited and the ownership thereto shall automatically pass to Mrs. Maria
Bautista Vda. de Reyes, her heirs, successors, administrators, and assigns,
without any Court intervention, and they can take possession of the same. 1äwphï1.ñët

IN WITNESS WHEREOF, we have signed this contract in the City of Manila, this
12th day of January, 1961.

s/t RODOLFO LANUZA s/t MARIA BAUTISTA VDA. DE REYES

Vendor Vendee

s/t AURELIA REYES WITH MY MARITAL CONSENT:

Vendee s/t JOSE S. NAVARRO

When the original period of redemption expired, the parties extended it to July 12, 1961 by an
annotation to this effect on the left margin of the instrument. Lanuza's wife, who did not sign the
deed, this time signed her name below the annotation.

It appears that after the execution of this instrument, Lanuza and his wife mortgaged the same
house in favor of Martin de Leon to secure the payment of P2,720 within one year. This
mortgage was executed on October 4, 1961 and recorded in the Office of the Register of Deeds
of Manila on November 8, 1961 under the provisions of Act No. 3344.

As the Lanuzas failed to pay their obligation, De Leon filed in the sheriff's office on October 5,
1962 a petition for the extra-judicial foreclosure of the mortgage. On the other hand, Reyes and
Navarro followed suit by filing in the Court of First Instance of Manila a petition for the
consolidation of ownership of the house on the ground that the period of redemption expired on
July 12, 1961 without the vendees exercising their right of repurchase. The petition for
consolidation of ownership was filed on October 19. On October 23, the house was sold to De
Leon as the only bidder at the sheriffs sale. De Leon immediately took possession of the house,
secured a discharge of the mortgage on the house in favor of a rural bank by paying P2,000 and,
on October 29, intervened in court and asked for the dismissal of the petition filed by Reyes and
Navarro on the ground that the unrecorded pacto de retro sale could not affect his rights as a
third party.

The parties1 thereafter entered into a stipulation of facts on which this opinion is mainly based
and submitted the case for decision. In confirming the ownership of Reyes and Navarro in the
house and the leasehold right to the lot, the court said:

It is true that the original deed of sale with pacto de retro, dated January 12, 1961, was
not signed by Belen Geronimo-Lanuza, wife of the vendor a retro, Rodolfo Lanuza, at the
time of its execution. It appears, however, that on the occasion of the extension of the
period for repurchase to July 12, 1961, Belen Geronimo-Lanuza signed giving her
approval and conformity. This act, in effect, constitutes ratification or confirmation of the
contract (Annex "A" Stipulation) by Belen Geronimo-Lanuza, which ratification validated
the act of Rodolfo Lanuza from the moment of the execution of the said contract. In short,
such ratification had the effect of purging the contract (Annex "A" Stipulation) of any
defect which it might have had from the moment of its execution. (Article 1396, New Civil
Code of the Philippines; Tang Ah Chan and Kwong Koon vs. Gonzales, 52 Phil. 180)

Again, it is to be noted that while it is true that the original contract of sale with right to
repurchase in favor of the petitioners (Annex "A" Stipulation) was not signed by Belen
Geronimo-Lanuza, such failure to sign, to the mind of the Court, made the contract
merely voidable, if at all, and, therefore, susceptible of ratification. Hence, the
subsequent ratification of the said contract by Belen Geronimo-Lanuza validated the said
contract even before the property in question was mortgaged in favor of the intervenor.

It is also contended by the intervenor that the contract of sale with right to repurchase
should be interpreted as a mere equitable mortgage. Consequently, it is argued that the
same cannot form the basis for a judicial petition for consolidation of title over the
property in litigation. This argument is based on the fact that the vendors a
retro continued in possession of the property after the execution of the deed of sale
with pacto de retro. The mere fact, however, that the vendors a retro continued in the
possession of the property in question cannot justify an outright declaration that the sale
should be construed as an equitable mortgage and not a sale with right to repurchase.
The terms of the deed of sale with right to repurchase (Annex "A" Stipulation) relied upon
by the petitioners must be considered as merely an equitable mortgage for the reason
that after the expiration of the period of repurchase of three months from January 12,
1961.

Article 1602 of the New Civil Code provides:

"ART. 1602. The contract shall be presumed to be in equitable mortgage, in any

of the following cases;

xxx xxx xxx

"(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed.

xxx xxx xxx

In the present case, it appears, however, that no other instrument was executed between
the parties extending the period of redemption. What was done was simply to annotate
 on the deed of sale with right to repurchase (Annex "A" Stipulation) that "the period to
repurchase, extended as requested until July 12, 1961." Needless to say, the
purchasers a retro, in the exercise of their freedom to make contracts, have the power to
extend the period of repurchase. Such extension is valid and effective as it is not contrary
to any provision of law. (Umale vs. Fernandez, 28 Phil. 89, 93)

The deed of sale with right to repurchase (Annex "A" Stipulation) is embodied in a public
document. Consequently, the same is sufficient for the purpose of transferring the rights
of the vendors a retro over the property in question in favor of the petitioners. It is to be
noted that the deed of sale with right to repurchase (Annex "A" Stipulation) was executed
on January 12, 1961, which was very much ahead in point of time to the execution of the
real estate mortgage on October 4, 1961, in favor of intervenor (Annex "B" Stipulation). It
is obvious, therefore, that when the mortgagors, Rodolfo Lanuza and Belen Geronimo
Lanuza, executed the real estate mortgage in favor of the intervenor, they were no longer
the absolute owners of the property since the same had already been sold a retro to the
petitioners. The spouses Lanuza, therefore, could no longer constitute a valid mortgage
over the property inasmuch as they did not have any free disposition of the property
mortgaged. (Article 2085, New Civil Code.) For a valid mortgage to exist, ownership of
the property mortgaged is an essential requisite. A mortgage executed by one who is not
the owner of the property mortgaged is without legal existence and the registration
cannot validate. (Philippine National Bank vs. Rocha, 55 Phil. 497).

The intervenor invokes the provisions of article 1544 of the New Civil Code for the reason
that while the real estate mortgage in his favor (Annex "B" Stipulation) has been
registered with the Register of Deeds of Manila under the provisions of Act No. 3344 on
November 3, 1961, the deed of sale with right to repurchase (Annex "A" Stipulation)
however, has not been duly registered. Article 1544 of the New Civil Code, however,
refers to the sale of the same property to two or more vendees. This provision of law,
therefore, is not applicable to the present case which does not involve sale of the same
property to two or more vendees. Furthermore, the mere registration of the property
mortgaged in favor of the intervenor under Act No. 3344 does not prejudice the interests
of the petitioners who have a better right over the property in question under the old
principle of first in time, better in right. (Gallardo vs. Gallardo, C.B., 46 O.G. 5568)

De Leon appealed directly to this Court, contending (1) that the sale in question is not only
voidable but void ab initio for having been made by Lanuza without the consent of his wife; (2)
that the pacto de retro sale is in reality an equitable mortgage and therefore can not be the basis
of a petition for consolidation of ownership; and (3) that at any rate the sale, being unrecorded,
cannot affect third parties.

We are in accord with the trial court's ruling that a conveyance of real property of the conjugal
partnership made by the husband without the consent of his wife is merely voidable. This is clear
from article 173 of the Civil Code which gives the wife ten years within which to bring an action
for annulment. As such it can be ratified as Lanuza's wife in effect did in this case when she gave
her conformity to the extension of the period of redemption by signing the annotation on the
margin of the deed. We may add that actions for the annulment of voidable contracts can be
brought only by those who are bound under it, either principally or subsidiarily (art. 1397), so that
if there was anyone who could have questioned the sale on this ground it was Lanuza's wife
alone.

We also agree with the lower court that between an unrecorded sale of a prior date and a
recorded mortgage of a later date the former is preferred to the latter for the reason that if the
original owner had parted with his ownership of the thing sold then he no longer had the
ownership and free disposal of that thing so as to be able to mortgage it again. Registration of
the mortgage under Act No. 3344 would, in such case, be of no moment since it is understood to
be without prejudice to the better right of third parties.2 Nor would it avail the mortgagee any to
assert that he is in actual possession of the property for the execution of the conveyance in a
public instrument earlier was equivalent to the delivery of the thing sold to the vendee.3

But there is one aspect of this case which leads us to a different conclusion. It is a point which
neither the parties nor the trial court appear to have sufficiently considered. We refer to the
nature of the so-called "Deed of Sale with Right to Repurchase" and the claim that it is in reality
an equitable mortgage. While De Leon raised the question below and again in this Court in his
second assignment of error, he has not demonstrated his point; neither has he pursued the
logical implication of his argument beyond stating that a petition for consolidation of ownership is
an inappropriate remedy to enforce a mortgage.

De Leon based his claim that the pacto de retro sale is actually an equitable mortgage on the fact
that, first, the supposed vendors (the Lanuzas) remained in possession of the thing sold and,
second, when the three-month period of redemption expired the parties extended it. These are
circumstances which indeed indicate an equitable mortgage.4 But their relevance emerges only
when they are seen in the perspective of other circumstances which indubitably show that what
was intended was a mortgage and not a sale.These circumstances are:

1. The gross inadequacy of the price. In the discussion in the briefs of the parties as well as in
the decision of the trial court, the fact has not been mentioned that for the price of P3,000, the
supposed vendors "sold" not only their house, which they described as new and as being made
of strong materials and which alone had an assessed value of P4,000, but also their leasehold
right television set and refrigerator, "Kelvinator of nine cubic feet in size." indeed, the petition for
consolidation of ownership is limited to the house and the leasehold right, while the stipulation of
facts of the parties merely referred to the object of the sale as "the property in question." The
failure to highlight this point, that is, the gross inadequacy of the price paid, accounts for the error
in determining the true agreement of the parties to the deed.

2. The non-transmission of ownership to the vendees. The Lanuzas, the supposed vendors did
not really transfer their ownership of the properties in question to Reyes and Navarro. What was
agreed was that ownership of the things supposedly sold would vest in the vendees only if the
vendors failed to pay P3,000. In fact the emphasis is on the vendors payment of the amount
rather than on the redemption of the things supposedly sold. Thus, the deed recites that —

If I (Lanuza) fail to pay said amount of P3,000.00 within the stipulated period of three
months, my right to repurchase the said properties shall be forfeited and the ownership
thereto automatically pass to Mrs. Maria Bautista Vda. de Reyes . . . without any Court
intervention and they can take possession of the same.

This stipulation is contrary to the nature of a true pacto de retro sale under which a vendee
acquires ownership of the thing sold immediately upon execution of the sale, subject only to the
vendor's right of redemption.5 Indeed, what the parties established by this stipulation is an odious
pactum commissorium which enables the mortgages to acquire ownership of the mortgaged
properties without need of foreclosure proceedings. Needless to say, such a stipulation is a
nullity, being contrary to the provisions of article 2088 of the Civil Code.6 Its insertion in the
contract of the parties is an avowal of an intention to mortgage rather than to sell.7

3. The delay in the filing of the petition for consolidation. Still another point obviously overlooked
in the consideration of this case is the fact that the period of redemption expired on July 12, 1961
and yet this action was not brought until October 19, 1962 and only after De Leon had asked on
October 5, 1962 for the extra-judicial for closure of his mortgage. All the while, the Lanuzas
remained in possession of the properties they were supposed to have sold and they remained in
possession even long after they had lost their right of redemption.

Under these circumstances we cannot but conclude that the deed in question is in reality a
mortgage. This conclusion is of far-reaching consequence because it means not only that this
action for consolidation of ownership is improper, as De Leon claims, but, what is more that
between the unrecorded deed of Reyes and Navarro which we hold to be an equitable mortgage,
and the registered mortgage of De Leon, the latter must be preferred. Preference of mortgage
credits is determined by the priority of registration of the mortgages,8 following the maxim "Prior
tempore potior jure" (He who is first in time is preferred in right.)9 Under article 2125 of the Civil
Code, the equitable mortgage, while valid between Reyes and Navarro, on the one hand, and the
Lanuzas, on the other, as the immediate parties thereto, cannot prevail over the registered
mortgage of De Leon.

Wherefore, the decision appealed from is reversed, hence, the petition for consolidation is
dismissed. Costs against Reyes and Navarro.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-4373 February 2, 1909

SAMUEL BISCHOFF, plaintiff-appellant,

vs.
JUAN D. POMAR and THE COMPAÑIA GENERAL DE TABACOS DE FILIPINAS, defendants-
appellees.

Espiridion Guanko, for appellant.

Jose M. Arroyo, for appellee.

TORRES, J.:

Without prejudice to the issuance of a statement of the basis upon which this court affirms the
judgment of the lower court of February 28, 1907, appealed from, by virtue whereof it is held that
the steam sugar mill fitted with a portable 8-horsepower boiler, with its attachments and a
complete tramway with rails and other fittings and fifteen small cars, all of which were at the
Hacienda San Jose, should be considered as included in the mortgage executed by Romana
Ganzon in favor of Lazaro Mota, which mortgage was afterwards transferred and conveyed by
the mortgagor to the Compañia General de Tabacos, we absolve the defendants without special
ruling as to costs, and reserve in favor of the plaintiff, Samuel Bischoff, the right of action which
he may have to recover from Romana Ganzon the sum paid for that property, and said judgment
is hereby affirmed without special ruling as to the costs in this instance.

Arellano, C.J., Mapa, Carson, Willard, and Tracey, JJ., concur.

BASIS OF THE DECISION.

FEBRUARY 6, 1909.

TORRES, J.:

On the 27th of December, 1905, counsel for Samuel Bischoff filed a complaint, alleging that the
latter was the owner of the steam sugar mill fitted with a portable 8-horse-power boiler with its
attachments, a complete tramway with rails and other fittings for a distance of not less than 3
kilometers, and fifteen small cars, all of which were at the Hacienda San Jose, of San Carlos,
occidental Negros; that the defendant Compañia de Tabacos had asked and obtained from the
Court of First Instance, in or about the month of October of the same year, the appointment of a
receive for the property of Romana Ganzon, among which property that the described above was
included at the instance of the defendant as belonging to the debtor Ganzon; that at the
designation of the Compañia de Tabacos Juan Pomar was appointed receiver and upon taking
charge of the property of the said Romana Ganzon he did not confine himself thereto, but
unlawfully and without any right whatever took possession, as receive, of the property of the
plaintiff herein before described; that notwithstanding the repeated demands made by the
plaintiff, Bischoff, the latter was unable to secure from the defendants the return of the said
property; that they refused to deliver the said property to him and continued to use the same to
the prejudice of the plaintiff, whose loss and damages amounted to P30 a day; the plaintiff
therefore prayed that judgment be entered in his favor, declaring that the property described in
the first paragraph of the complaint belonged to him, and that the said defendants be ordered to
pay the said losses and damages with costs.

In his written answer, counsel for the Compañia General de Tabacos denied the allegations 1, 4,
6, 7, and 8 of the complaint, and as a defense alleged, that under a public instrument executed
before the notary Gregorio Yulo, on the 20th of July, 1900, Lazaro Mota y Ayo loaned to Romana
Ganzon or Tanson, widow of Vega, the sum of 11,209 pesos, payable at the expiration of two
years from the date of the instrument, and as a security for her debt, the said Romana Ganzon
mortgaged to her creditor, Mota, the sugar plantation called San Jose, situated in the sitio of
Sibungcogon, barrio of San Carlos, in the town of Calatrava, Occidental Negros; that by another
instrument executed on October 8, 1900, Lazaro Mota and Romana Ganzon agreed to increase
the said mortgage credit by a further sum of 4,177.20 pesos; that this was duly paid to the
debtor, whose total indebtedness thus amounted to 15,386.20 pesos, the said mortgage
remaining as security for both amounts; that by another instrument executed on September 6,
1902, before the same notary, the loan or debt was further increased by the sum of 6,037.73
pesos, which Mota delivered to Ganzon; this last amount, added to the previous 15,386.20
pesos, makes a total of 21,423.93 pesos, and it was agreed upon between the parties in this last
instrument that, if Ganzon was not able to pay the creditor Mota on or before July 20, 1904, the
mortgaged hacienda would be disposed of at public auction, together with its buildings,
machinery and agricultural implements, and the whole amount of the indebtedness would be
collected from the proceeds thereof; that this instrument was entered in the registry of property
on October 11, 1902; that by an instrument dated September 30, 1904, Lazaro Mota y Ayo
unreservedly transferred the said credit, free of all incumbrance, together with all of the rights, to
the Compañia General de Tabacos for the sum of P21,423.93, subrogating to the latter all his
rights with respect to the collection of the debt from Ganzon; that by another instrument dated
December 10, 1904, Roman Ganzon created a mortgage in favor of the said company on the
aforesaid Hacienda of San Jose for all the amounts owed, which amounts are the said
P21,423.93 transferred by Mota to the Compañia General de Tabacos, and P31,195.99 plus
P422.61 as interest at 10 per cent on Mota's credit, making a grand total of P53,042.53, said
instrument being entered in the registry of property; that the aforesaid steam sugar mill and
portable 8-horsepower boiler, the tramway, with all its fittings, appurtenances, and rails, and all
the cars upon the above-mentioned Hacienda of San Jose, are fixtures thereon, and the
machinery, vessels, implements, and utensils are necessary for the working of said hacienda and
formed an integral part of the same when the said mortgages were executed; that the plaintiff
Bischoff was informed and knew of said mortgages prior to making the alleged purchase of the
goods mentioned in his complaint; that the property referred to in the complaint, together with the
hacienda of San Jose, was mortgaged to the creditor company as security for its loan of
P53,042.53; the said mortgage still stands because neither Romana Ganzon nor the plaintiff
have paid it; that the credit of the Compañia General de Tabacos, secured by the said
mortgages, is anterior and preferent to the purchase alleged by the plaintiff, and, therefore, the
defendant prays that judgment be entered in his favor dismissing the complaint; that all the
property claimed by the plaintiffs as his own property, be held to be included in the mortgage in
favor of the Compañia General de Tabacos, and that the mortgage credit of the said Compañia
General de Tabacos be declared as preferred.
The other defendant, Juan Pomar, in his answer denied the allegations contained in the
complaint, and as a defense set forth that by virtue of an order of the Court of First Instance of
Occidental Negros, dated September 27, 1905, in the matter of The Compañia General de
Tabacos vs. Romana Ganzon or Tanson, viuda de Vega, the deponent was appointed receiver
of the property claimed in the complaint; that both of the petitioner and the Compañia Tabacalera
had executed the bonds required by law in the amounts of P12,000 and P6,000, respectively,
which bonds were approved on the 31st of October of the same year; that after being duly sworn,
he was appointed receiver, assumed the duties of his office, and took charge of the said property
with no other interest than the faithful and exact compliance of his duties; for this reason he
prayed that the complaint be dismissed with costs.

At the trial of the case evidence was adduced by both parties and their exhibits were made of
record. On February 28, 1907, the court below rendered judgment, holding that the steam sugar
mill and 8-horsepower portable boiler and fittings, the tramway, rails and cars upon the Hacienda
of San Jose, should be considered as included in the mortgage executed by Romana Ganzon in
favor of Lazaro Mota, which mortgage was transferred to the Compañia General de Tabacos and
ratified in favor of the latter by the debtor; the defendants were therefore absolved of the
complaint without costs, and such right of action was reserved to Samuel Bischoff as he may be
entitled for the return from Romana Ganzon of whatever sum he paid for the said property.

From the above judgment the plaintiff appealed and moved that the same be set aside and a
new trial granted; his motion was overruled, to which overruling he excepted and presented the
corresponding bill of exceptions; the latter was approved by the court below submitted to this
court.

Supposing that the steam sugar mill and portable boiler, and the tramway with fifteen small
wagons, rail, and other fittings, mounted at the Hacienda San Jose and in use thereon, were
improvements upon said hacienda, are they to be considered for this sole reason as necessarily
included in the mortgage of the said hacienda, even though not specifically described in the
instruments as included therein?

The plaintiff avers, without proof, that the said articles were excluded from the mortgage of the
Hacienda San Jose were they are to be found, because in the instruments wherein the Hacienda
San Jose was repeatedly mortgaged, far from it being stated that, by agreement between the
contracting parties, the objects claimed the complaint should be understood to be positively
excluded, in the successive mortgage deeds executed by Romana Ganzon in favor of Lazaro
Mota y Ayo on July 20 and October 8, 1900, and September 6, 1902, Exhibit D, as security for
the increasing loans made by the latter, the debtor mortgaged her Hacienda San Jose with the
improvements thereon to guarantee the payment of the total sum of 21,423.93 pesos; in the last
instrument, as well as in the previous ones, it is stated that the warehouse, farmhouse, furnaces,
machinery, and the described land that constitutes the said hacienda shall be liable for the
payment of her total indebtedness, the legal interest thereon, and loss and damages and costs in
case of judicial proceedings having to be instituted; said instrument, like the previous ones, was
recorded in the registry of property, and is should be noted that by express desire of the
contracting parties, in the successive documents of indebtedness of 1900, the mortgage of the
hacienda with the improvements thereon was maintained, and was afterwards repeated in the
last instrument.

Owing to the non -payment of the said sum of P21,423.93, notwithstanding the demands made
upon and extensions of time granted to the debtor, on September 30, 1904, the creditor, Lazaro
Mota, assigned and transferred the said Tabacos by means of a public instrument which was
recorded in the registry, and appears as Exhibit B herein.

In the private document marked as Exhibit A, dated September 10, 1902, it appears that the
Compañia General de Tabacos opened an anual credit of P15,000 under the conditions therein
stated, the debtor having offered as security the said hacienda with the cattle, buildings, and two
steam engines, and stating in addition, that the said hacienda with its buildings, machinery, and
cattle had already been mortgaged by her to Lazaro Mota.

Moreover, even in the instrument on the 10th of December, 1904, when Romana Ganzon
created a mortgaged in favor of the Compañia General de Tabacos to guarantee her debt of
P53,042.53, she designated the said hacienda with all the improvements, buildings, machinery,
and carabaos thereon, and in addition declared that the same hacienda and its dependencies
were already mortgaged to the said Lazaro Mota.

So that in the instruments of mortgage above referred to, three of which are anterior to the sale a
retro, effected on the 8th of November, 1904, upon which the plaintiff bases his claim, the
improvements on the Hacienda San Jose, among which is the machinery that was already
mounted, appear as expressly mortgaged at the time of executing the instrument of mortgage of
September 6, 1902, and later on, that of transfer of the mortgage credit on the 30th of
September, 1904, to the Compañia General de Tabacos.

From none of the said instruments does it appear that the contracting parties had expressly
agreed to exclude the said machinery and tramway from the repeated mortgages, of said
hacienda, so that no value would be given to the words written therein proving in an
unquestionable manner that it was the will of the contracting parties to include the lien all the
improvements upon the hacienda, among which was the machinery mounted thereon for the
needs of the said hacienda:

Article 110 of the Mortgage Law in force reads:

A mortgage extends to natural increase, improvements, growing crop, and rents not
collected when the obligation falls due, and the value of indemnities allowed or due the
owner for insurance on the property mortgaged, or by virtue of condemnation by right of
eminent domain.

The same precept is repeated in detail and more extensively in the following article 111 of said
law.

Article 1877 of the Civil Code contains the same precept but treats as greater length than in the
preinserted article 110 of the Mortgage Law; it is as follows:

A mortgage includes the natural accessions, improvements, growing fruits, and rents not
collected when the obligation is due, and the amount of the indemnities granted or due
the owner by the underwriters of the property mortgaged or by virtue of the exercise of
eminent domain by reason of public utility, with the declarations, amplifications, and
limitations established by law, in case the estate continues in the possession of the
person who mortgaged it, as well as when it passes into the hands of a third person.

As may be seen from the doctrine established by the Supreme Court of Washington in its
decision in the matter of The Royal Insurance Company vs. R. Miller, liquidator, and Amadeo (26
Sup. Ct. Rep., 461) the above quoted legal precepts in force in these Islands are in accord with
the American laws:

3. Mortgage — Right of Mortgagee to Insurance on Harvested Crop. — The avails of

insurance on sugar and molasses coming into the sugar house on a sugar plantation as
the result of the manufacture of a crop growing thereon when the insurance was effected
inure to the benefit of the mortgagee in a mortgage of the realty and the fruits thereof if
the loss occurred after the execution of the mortgage, under the Porto Rico Mortgage
Law of 1880, which subjects to a mortgage of real property the crops growing or
harvested when the mortgage fails due, "but not yet removed or warehoused," and the
 indemnities awarded or due the owner of the realty either for the insurance or for the
crops, provided the damage occurred after the creation of the mortgage.

4. Mortgage — Right of Mortgage to Sue for Insurance without Exhausting Other

Remedies. — The mortgage creditor in a mortgage governed by the civil law may sue for
the avails of the insurance subject to his mortgage without first exhausting his remedies
against other property embraced by the mortgaged.

So that even though no mention had been made of said machinery and tramway in the mortgage
instrument, the mortgage of the property whereon they are located is understood by law to
extend to them and they must be considered as included therein, as well as all other
improvements, unless there was an express stipulation between the parties that they should be
excluded. Such exclusion, however, certainly does not appear in the record; on the contrary, they
are manifestly included in the mortgage.

It has already been stated that the machinery in question was already mounted on said property
and was in use thereon when the mortgage given to secure the debt of Romana Ganzon to the
original creditor, Lazaro Mota was created; but even if these were not so, article 111 of the
Mortgage Law, hereinbefore cited, provides that the following shall be considered as mortgaged
with the estate, provided they belong to the owner of said estate, although they not be mentioned
in the contract:

1. Chattels permanently located in a building, either useful or ornamental, or for the

service of some industry even though they were placed there after the creation of the
mortgage.

It should be noted that the said machinery and tramway were exclusively owned by Romana
Ganzon, the owner of the hacienda, and that at the time when the mortgage was made they had
not yet been sold a retro to the plaintiff Bischoff; this sale was effected on November 8, 1904,
long after the property was mortgaged.

Given the rights of dominion possessed by Romana Ganzon over the articles in question it is not
possible to deny that she had the right to dispose of them, as she did, by sale under pacto de
retro to the plaintiff, but the alienation thereof does not release them from the encumbrance to
which they are subjected until the redeemed from the mortgage that weighs upon them, since the
right of the creditor limits that the owner of the thing mortgaged, and the purchaser, is necessarily
bond to acknowledge and respect the encumbrance to which is subjected the purchased thing
and which is at the disposal of the said creditor in order that he, under the terms of the contract,
may recover the amount of his credit therefrom.

If it be true and inconvertible fact that at the time the plaintiff Bischoff acquired under pacto de
retro the machinery and the tramway in question, they were already affected by and included in
the mortgaged of the Hacienda San Jose, the placing of the said hacienda, together with all of
the property existing thereon in the hands of a receiver at the instance of the creditor, the
Compañia General de Tabacos, has not occasioned any damage to the plaintiff, inasmuch as the
defendant limited itself to the duty of the plaintiff to respect the encumbrance that burdens of the
property acquired by him under these conditions, and therefore, he cannot acquired any right to
indemnity for loss and damages, for the reason that he purchased goods that were already liable
to the credit of the company that was the creditor of Romana Ganzon and which latter sold them
on pacto de retro; he therefore did not obtain possession of the same.

For the above considerations, and accepting the conclusion contained in the judgment appealed
from so far as they agree with the foregoing, it is our opinion that the same should be affirmed,
without any ruling as to the costs of this instance.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-14303 March 24, 1960

REHABILITATION FINANCE CORPORATION, plaintiff-appellant,

vs.
ALTO SURETY and INSURANCE COMPANY, INC., oppositor-appellee.

Jesus A. Avanceña and Federico G. Cabling for appellant.

Raul A. Aristorenas and Benjamin Relova for appellee.

BARRERA, J.:

This is an appeal from an order of the Court of First Instance of Camarines Sur, sitting as a land
registration court (in Special Proceeding No. 781—G.L.R.O. Rec. No. 14837) denying appellant's
petition under Section 112 of Act No. 496 for cancellation of the annotation of appellee's second
mortgage on appellant's transfer certificate of title No. 1155 of the Register of Deeds of
Camarines Sur.

Eustaquio Palma registered owner of a parcel of land with its improvements, located in San
Agustin, Iriga, Camarines Sur, covered by Transfer Certificate of Title No. 12—Camarines Sur,
executed a first mortgage to secure a loan of P20,000.00, in favor of the Rehabilitation Finance
Corporation (RFC), and subsequently, with the consent of the RFC, a second mortgage over the
same property, in favor of Alto Surety & Insurance Company, Inc. (Alto). Both mortgages were
duly registered in the Office of the Register of Deeds of Camarines Sur and annotated on the
corresponding certificate of title. Upon failure of the mortgagor to settle the P20,000.00 loan on
its maturity, RFC foreclosed the mortgage extrajudicially under Act 3135 as authorized in the
deed of mortgage and the property was sold in public auction under the direction of the Provincial
Sheriff of Camarines Sur on April 17, 1951 in favor of mortgagee RFC as the highest bidder for
the sum of P11,211.68.

Six months later, mortgagor Palma, by a deed of assignment dated October 15, 1951,
transferred and conveyed all his rights, title and interest in and to the mortgaged property to the
spouses Anacleto Trinidad and Rosa S. de Trinidad, the assignees assuming the obligation of
paying the repurchase price of the auctioned property. Within the year of redemption, that is, on
December 29, 1951, the assignee-spouses and the RFC executed a "Deed of Resale" whereby
the mortgaged property was resold and reconveyed in favor of the "redemptioners, their heirs,
assignees and successors in interest". However, instead of paying the whole redemption price,
only P5,500 was paid on hand and the sum of P21,505.11, balance of the total indebtedness
including 6% interest was agreed to be paid in ten annual amortizations.

On April 3, 1952, Alto, as junior encumbrancer, wrote the RFC inquiring as to the actual status of
the property subject to redemption expiring on April 17, 1952. In its reply dated April 9, 1952,
RFC advised Alto that the auctioned property had already been sold to the Trinidad spouses
"under a deed of redemption on the installment plan".

This notwithstanding, the RFC, on October 2, 1952, executed an affidavit consolidating

ownership on the purchased property, stating therein that the period of redemption had expired
on April 18, 1952 without the debtor or any lien-holder thereon exercising said right of redemption
or repurchase. This affidavit, together with the deed of sale evidencing its (RFC's) purchase of
the property at public auction were registered on December 16, 1953, by virtue of which, RFC
was able to secure the cancellation of Transfer Certificate of Title No. 12, in the name of the
owner-mortgagor Eustaquio Palma, and the issuance of a new title in its name (T.C.T. No. 1155).
The second mortgage in favor of Alto, however, was carried and annotated at the back of the
new title.

It is this annotation on its certificate of title No. 1155 that the RFC sought to have cancelled,
alleging that with the consolidation and transfer to it as the first mortgagee of the mortgagee's
rights on the property, the junior encumbrancer's lien on the same property had ceased. Alto, the
second mortgagee, opposed the petition contending that with the execution of the Deed of
Resale between RFC and the spouses Anacleto Trinidad and Rosa S. de Trinidad, assignees of
the mortgagor, the mortgaged property had been completely released from the first mortgage
and the second mortgage had been automatically transformed into a first lien on the property.

From the order denying the petition for cancellation, RFC appealed to the Court of Appeals. The
case, however, was certified to this Court, the questions raised therein being purely of law.

As stated by the lower court: "The only question at issue is whether the annotation of the second
mortgage in favor of the oppositor on the back of Transfer Certificate of Title No. 1155 was made
in accordance with law". The petition for cancellation was filed by the RFC and the original
registration case, under Section 112 of Act 496, on the alleged ground that the lien in favor of
Alto had already ceased. In opposing this petition, Alto claimed that with the execution of the
deed of resale between RFC and the Spouses Anacleto and Rosa S. de Trinidad, (Exhibit J),
there had been a valid exercise by the latter, as the mortgagor's successors-in-interest, of the
right of redemption, thus justifying the retention of the encumbrance in favor of the junior
mortgagee in the certificate of title covering the property.

The court a quo acted correctly in denying, under the circumstances, the petition to cancel the
annotation of the second mortgage at the back of the title covering the property originally owned
by Eustaquio Palma. It has been consistently held by this Court, that the relief afforded by
Section 112 of the Land Registration Act may only be allowed if "there is a unanimity among the
parties, or there is no adverse claim or serious objection on the part of any party in interest;
otherwise, the case becomes controversial and should be threshed out in an ordinary case.1 In
another case, this Court2 has held that "Section 112 authorizes, in our opinion, only alterations
which do not impair rights recorded in the decree, or alterations which, if they do prejudice such
rights, are consented to by all parties concerned or alterations to correct obvious mistakes". This
doctrine is but sound and proper. The proceedings provided in the Land Registration Act being
summary in nature, they are inadequate for the litigation of issues properly pertaining to ordinary
civil actions,3 thus, questions involving ownership of or title to a real property,4 or relating to the
validity or cancellation or discharge of a mortgage should properly be ventilated in an ordinary
proceeding."5

There is another reason why the petition must be denied. Granting arguendo that the
extrajudicial foreclosure proceeding instituted by the RFC is proper and justified, since the junior
encumbrancer was admittedly not notified thereof, the foreclosure of the first mortgage cannot be
considered to have terminated or extinguished the rights of said junior encumbrancer over the
property.

An interest in the mortgaged property acquired subsequent to the (first) mortgage may be
divested or barred only by making the holder thereof a party to the proceedings to foreclose
(Kurz vs. Pappas, 146 So. 100, 107 Fla. 861; Mediterranean Corp. vs. Pappas, 146 So. 106, 107
Fla. 876). (Emphasis supplied.)

While as a general rule, the junior encumbrancer is not a necessary party to a suit to foreclose by
a senior mortgagee, it is always proper and prudent to join him as a defendant, both to give an
opportunity to defend and to extinguish his right of redemption (Lee vs. Slemons, 150 So. 792,
112 Fla. 675; Woodward vs. Householder, 289 S.W. 571, 315 Mo. 1155).
When a senior mortgagee forecloses and becomes the purchaser at his own foreclosure sale,
but the holder of a subsequent mortgage or other subordinate interest has not been joined or has
been eliminated from the proceeding, equity will keep the senior mortgage alive against the
subsequent encumbrance and the senior mortgagee will be entitled to an action de novo to
reforeclose the mortgage as to the omitted persons (Van Meter vs. Field, 159 P. 2d 546, 195 Okl.
55; Rives vs. Stanford, 106 P. 2d 1101).

In view of the foregoing, the decision appealed from denying the first mortgagee's petition to
cancel the annotation of the second mortgage at the back of Transfer Certificate of Title No.
1155, is hereby affirmed, without prejudice to the proper adjudication, in an appropriate ordinary
action, of the respective rights of the parties herein as a result of the execution of the Deed of
Resale, Exhibit J. The petitioner-appellant shall pay the costs. It is so ordered.

THIRD DIVISION

G.R. No. 141974 August 9, 2004

BPI FAMILY SAVINGS BANK, INC., petitioner,

vs.
SPS. JANUARIO ANTONIO VELOSO AND NATIVIDAD VELOSO, respondents.

DECISION

CORONA, J.:

Before us is a petition for review of the decision1 dated February 14, 2000 of the Court of Appeals
affirming the decision of the Regional Trial Court, Branch 94, Quezon City,2 which upheld the
validity of the extra-judicial foreclosure proceedings initiated by Family Bank and Trust Company
(Family Bank) on the mortgaged properties of respondent spouses Januario Antonio Veloso and
Natividad Veloso but allowed the latter to redeem the same properties.

On January 8, 1983, respondent spouses obtained a loan of P1,300,000 from petitioner’s

predecessor-in-interest Family Bank and Trust Company. To secure payment of the loan,
respondent spouses executed in favor of the bank a deed of mortgage over three parcels of land,
with improvements, registered in their names under TCT Nos. 272227, 272228 and 272229 of
the Registry of Deeds of Quezon City.

On February 9, 1983, respondents, for value received, executed a promissory note

for P1,300,000. Subsequently, however, respondents defaulted in the monthly installments due
on their loan. When efforts to update the account failed, Family Bank instituted extra-judicial
foreclosure proceedings on the respondents’ mortgaged properties.

On July 1, 1985, the properties were sold at public auction with Family Bank as the highest
bidder for P2,782,554.66.

On August 5, 1985, Family Bank assigned all its rights and interests in the foreclosed properties
to petitioner BPI Family Bank, Inc. (BPI).
On August 28, 1985, the sheriff’s certificate of sale was registered with the Registry of Deeds of
Quezon City.

On July 24, 1986, respondents, through counsel, wrote BPI offering to redeem the foreclosed
properties for P1,872,935. This was, however, rejected by petitioner.

On August 27, 1986, respondents filed in the RTC of Quezon City, Branch 94, a complaint for
annulment of foreclosure, with consignation and prayer for damages. On motion of respondents,
the trial court, in an order dated August 27, 1986, allowed respondents to deposit with the clerk
of court the sum of P1,500,000 representing the redemption price. Thereafter, trial on the merits
ensued.

Meanwhile, in Branch 76 of the Regional Trial Court of Quezon City, BPI was able to secure a
writ of possession over the foreclosed properties. This prompted respondents to file with the
Court of Appeals a petition for certiorari with preliminary injunction docketed as CA-G.R. SP No.
22681. On October 8, 1990, the Court of Appeals resolved to grant respondents’ motion for
preliminary mandatory injunction.

Eventually, however, in a decision promulgated on May 31, 1991, the Court of Appeals, in CA-
G.R. SP No. 22681, resolved the issue of possession in favor of BPI and accordingly lifted the
preliminary mandatory injunction it had earlier issued, denying altogether respondents’ petition.
From this decision, respondents came to this Court via a petition for review which was, however,
denied in a resolution dated January 13, 1992. The resolution affirmed, in effect, petitioner’s right
to the possession of the subject properties.

On December 16, 1992, upon motion of respondents and despite the opposition of petitioner,
Branch 94 ordered the release of P1,400,000 of the consigned amount to respondents, with the
balance of P100,000 to take the place of the injunction bond to answer for whatever damages
petitioner might suffer because of the issuance of the preliminary injunction (previously issued
and later lifted) in favor of respondents.

Finally, on August 18, 1995, after almost a decade of protracted litigation, the trial court rendered
a decision declaring the validity of the extra-judicial foreclosure of the mortgaged properties of
respondents but allowed the redemption of the same at a redemption price of P2,140,000.

BPI elevated the matter to the Court of Appeals which affirmed the trial court’s decision, with
modification:

WHEREFORE, subject to the modification declaring P2,678,639.80 as the redemption

price due the appellant, the decision appealed from is hereby AFFIRMED in all other
respects.3

Hence, the instant petition based on the following assigned errors:

THE HONORABLE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN

A WAY NOT IN ACCORD WITH LAW AND THE APPLICABLE DECISIONS OF THIS
HONORABLE COURT WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT
AND ALLOWED THE RESPONDENTS TO REDEEM THE FORECLOSED PROPERTY.

II

ASSUMING FOR THE SAKE OF ARGUMENT, BUT WITHOUT ADMITTING, THAT THE
HONORABLE COURT OF APPEALS DID NOT ERR IN AFFIRMING THE DECISION OF
 THE TRIAL COURT, NEVERTHELESS IT DECIDED A QUESTION OF SUBSTANCE IN
A WAY NOT IN ACCORD WITH LAW AND THE APPLICABLE DECISIONS OF THIS
HONORABLE COURT WHEN IT FIXED THE REDEMPTION PRICE TO BE PAID BY
RESPONDENTS TO PETITIONER AT ONLY P2,678,639.80 AND SHALL ONLY EARN
1% PER MONTH UNDER SECTION 28, RULE 39 OF THE 1997 RULES OF CIVIL
PROCEDURE.

The fact is that, at the time of the foreclosure sale on July 1, 1985, respondent spouses Veloso
had already defaulted on their loan to petitioner’s predecessor-in-interest family bank. In a real
estate mortgage, when the principal obligation is not paid when due, the mortgagee has the right
to foreclose on the mortgage and to have the property seized and sold, and to apply the
proceeds to the obligation.4 foreclosure is proper if the debtor is in default in the payment of his
obligation.5 and in this case, the validity of the extra-judicial foreclosure on July 1, 1985 was
confirmed by both the trial court and the court of appeals. We find no reason to question it.

The sole question therefore that remains to be resolved is: did respondent spouses comply with
all the requirements for the redemption of the subject properties?

We answer in the negative.

The general rule in redemption is that it is not sufficient that a person offering to redeem
manifests his desire to do so. The statement of intention must be accompanied by an actual and
simultaneous tender of payment. This constitutes the exercise of the right to repurchase.6

In several cases7 decided by the Court where the right to repurchase was held to have been
properly exercised, there was an unequivocal tender of payment for the full amount of the
repurchase price. Otherwise, the offer to redeem is ineffectual.8 Bona fide redemption necessarily
implies a reasonable and valid tender of the entire repurchase price, otherwise the rule on the
redemption period fixed by law can easily be circumvented. As explained by this Court in Basbas
vs. Entena:9

x x x the existence of the right of redemption operates to depress the market value of the
land until the period expires, and to render that period indefinite by permitting the tenant
to file a suit for redemption, with either party unable to foresee when final judgment will
terminate the action, would render nugatory the period of two years fixed by the statute
for making the redemption and virtually paralyze any efforts of the landowner to realize
the value of his land. No buyer can be expected to acquire it without any certainty as to
the amount for which it may be redeemed, so that he can recover at least his investment
in case of redemption. In the meantime, the landowner’s needs and obligations cannot be
met. It is doubtful if any such result was intended by the statute, absent clear wording to
that effect.

Consequently, in this case, the offer by respondents on July 24, 1986 to redeem the foreclosed
properties for P1,872,935 and the subsequent consignation in court of P1,500,000 on August 27,
1986, while made within the period10 of redemption, was ineffective since the amount offered and
actually consigned not only did not include the interest but was in fact also way below
the P2,782,554.66 paid by the highest bidder/purchaser of the properties during the auction sale.

In Bodiongan vs. Court of Appeals,11 we held:

In order to effect a redemption, the judgment debtor must pay the purchaser the
redemption price composed of the following: (1) the price which the purchaser paid for
the property; (2) interest of 1% per month on the purchase price; (3) the amount of any
assessments or taxes which the purchaser may have paid on the property after the
purchase; and (4) interest of 1% per month on such assessments and taxes x x x.
Furthermore, Article 1616 of the Civil Code of the Philippines provides:

The vendor cannot avail himself of the right to repurchase without returning to the vendee
the price of the sale x x x.

It is not difficult to understand why the redemption price should either be fully offered in legal
tender or else validly consigned in court. Only by such means can the auction winner be assured
that the offer to redeem is being made in good faith.

The sum of P1,400,000 consigned by respondents in Branch 94 was subsequently withdrawn by

them, leaving only P100,000 to take the place of the injunction bond. This would have been
tantamount to requiring petitioner to accept payment by installments as there would have
necessarily been an indefinite extension of the redemption period.12 If a partial payment can bind
the winning bidder or purchaser in an auction sale, by what rule can the payment of the balance
be determined? Petitioner could not be expected to entertain an offer of redemption without any
assurance that respondents could pay the repurchase price immediately. A contrary rule would
leave the buyers at foreclosure sales open to harassment by expectedly angry debtors and
cause unnecessary prolongation of the redemption period, contrary to the policy of the law.

Whether or not respondents were diligent in asserting their willingness to pay is irrelevant.
Redemption within the period allowed by law is not a matter of intent but a question of payment
or valid tender of the full redemption price within said period.

The disposition of the instant case in the trial court unnecessarily dragged for almost a decade.
Now, it is on its 18thyear and still respondents have not tendered the full redemption price. Nor
have they consigned the full amount, if only to prove their willingness and ability to pay. This
would have evidenced their good faith.

The law granted respondents the right of redemption. But in so granting that right, the law
intended that their offer to redeem be valid and effective, accompanied by an actual tender of the
redemption price. Fixing a definite term within which the property should be redeemed is meant
to avoid prolonged economic uncertainty over the ownership of the thing sold. In the case at bar,
the offer was not a legal and effective exercise of the right of redemption contemplated by law,
hence, refusal of the offer by petitioner was completely justified.

Finally, respondents cannot argue that the law on equity should prevail. Equity applies only in the
absence of, and never against, statutory law or judicial rules of procedure.13

WHEREFORE, the appealed decision of the Court of Appeals is hereby REVERSED and SET
ASIDE. The complaint filed by respondents, the spouses Veloso, is hereby dismissed.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-26538 March 21, 1968

MELECIO ROSARIO and ROMEO C. RAMIREZ, plaintiffs-appellees,

vs.
TAYUG RURAL BANK, INC., ET AL., defendants,
TAYUG RURAL BANK, INC., defendant-appellant.

Fernandez B. Ferrer for plaintiffs-appellees.

De Vera, Yeneza & Cabornay for defendant-appellant.

CASTRO, J.:

This case was certified to us by the Court of Appeals pursuant to section 17 of Republic
Act 296, as amended, because the appellant raises only questions of law.

At the threshold is the principal question of whether the period for redemption of property
sold at public auction by virtue of an extrajudicial foreclosure under Act 3135, as amended, is to
be reckoned from the date the sheriff executes the certificate of sale or from the date the
certificate of sale is recorded in the Registry of Deeds.

The antecedent facts are not disputed. Romeo C. Ramirez borrowed P440 from the Tayug
Rural Bank, to secure which Melecio Rosario mortgaged in favor of the bank his 15,000-square
meter land covered by TCT 9562. Ramirez made several payments on the loan so that on
maturity date (February 15, 1955), his remaining indebtedness was only P170. But because he
failed to settle his obligation in full, the bank, after giving the required notices, extrajudicially
foreclosed the mortgage. The provincial sheriff, on July 21, 1961, sold the land at public auction
for the unpaid amount of P208.53 in favor of the bank, to which the corresponding certificate of
sale was issued on the same day. The certificate of sale was, however, recorded in the Registry
of Deeds only on November 16, 1962. Five days thereafter, or on November 21, 1962, the bank
sold the land to the defendant Nenita Vergara for P1,600.

In the meantime, or on August 22, 1962, Ramirez remitted the sum of P100 to the bank as
a deposit for redemption. And on November 7, 1963, he wrote the bank, offering to redeem the
property by paying the unpaid balance together with interests and expenses. He enclosed a
money order for P108.53; this sum plus what he had previously deposited amounted to P208.53.
The bank, however, refused to accept the offer, contending that the one year redemption period
began to run on July 21, 1961 and, therefore, had already slipped away. Hence, Melecio Rosario
and Romeo Ramirez sued the bank and Nenita Vergara, to compel these two defendants to
accept payment and to reconvey the property. Nenita Vergara defaulted.

On the basis of the stipulation of facts and documentary evidence submitted by the parties,
the lower court rendered judgment as follows: 1äwphï1.ñët

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of plaintiffs,

particularly Melecio Rosario, the registered owner of the land in question under Transfer
Certificate of Title No. 9562, ordering the Tayug Rural Bank and defendant Nenita
Vergara to permit Melecio Rosario to redeem the property in question by paying the
amount of indebtedness remaining on July 21, 1961, plus interest at the rate of 1% a
month from said date until the day of redemption. And the redemption shall have to be
done within thirty (30) days from the time the present decision shall have become final
and executory.

The Tayug Rural Bank and defendant Nenita Vergara are also sentenced to pay
the plaintiffs by way of attorney's fees and litigation expenses the amount of P100.00.

Defendants, besides, shall pay the costs.

Hence, the present recourse by the bank.

 The judgment a quo must be affirmed.

This Court has already spelled out with sufficient clarity its position on this matter.1 And in
the most recent case of Arsenio Reyes vs. Antonio Noblejas, L-23691, November 25, 1967,
1967D PHILD 520, we rejected the very same theory now espoused by the appellant. There, we
explicitly and emphatically stated that the redemption period should be reckoned from the date of
registration of the certificate of sale and not from the date of the auction sale.

In that case, the provincial sheriff, on the strength of an extrajudicial foreclosure under Act
3135, sold at public auction, on February 6, 1963, certain properties mortgaged to the Philippine
National Bank. The corresponding certificate of sale was issued to the highest bidder on
February 21, 1963, which certificate fixed the date of the auction sale as the starting point of the
one-year redemption period. The certificate of sale was not, however, recorded in the office of
the Register of Deeds. When the affidavit of consolidation of ownership was sought to be
registered on February 10, 1963, the Register of Deeds refused for the reason that the
redemption period had not yet expired. The Land Registration Commission sustained the
Register of Deeds.

The question upon which the case turned was: In an extrajudicial foreclosure of real estate
mortgage under Act 3135, when does the period of redemption of the auctioned property start?
We resolved this question in this wise:

It is the theory of petitioner that in sales of property at public auction pursuant to an

extrajudicial foreclosure of real estate mortgage under Act 3135, as amended by Act No.
4118, the period of redemption should be reckoned from the date of the auction sale
which, he contends, is the express mandate of Section 6 of Act No. 3135:

Section 6. In all cases in which the extrajudicial sale is made under the
special power hereinbefore referred to, the debtor, his successors in interest, or
any judicial creditor or judgment creditor of said debtor, or any person having a
lien on the property subsequent to the mortgage or deed of trust under which the
property is sold, may redeem the same at any time within the term of one year
from and after the date of sale; and such redemption shall be governed by the
provisions of sections 464 to 466, inclusive, of the Code of Civil Procedure,
insofar as these are not inconsistent with the provisions of this Act.

On the other hand the Land Registration Commissioner is of the opinion that the
above-quoted provision is not the only pertinent and controlling law on the matter,
especially when it is taken into consideration that the land involved is registered land
under the Torrens system. He maintains, and so held in the resolution appealed from,
that Section 6 of Act 3135 should be applied to the present case together with: (1)
sections 30 to 35 of Rule 39 of the Revised Rules of Court with regard to redemption; (2)
Section 27, Rule 39 of the said Rules and Section 71 of Act 496 with regard to the filing
(registration) of the sheriff's certificate of sale; and (3) Section 50 of Act 496, with regard
to the registration of the certificate of sale so as to consider the land conveyed and
affected under the Land Registration Act.

The ruling of the Land Registration Commissioner must be sustained. Section 27,
Rule 39 of the Revised Rules of Court provides that the certificate of sale executed by
the sheriff in a public auction sale must be filed (registered) in the Office of the Register
of Deeds of the province where the land is situated. This is a mandatory requirement.
Failure to register the certificate of sale violates the said provision of law and, construed
in relation with Section 50 of the Land Registration Law (Act 496), shall not take effect as
conveyance or bind the land covered by a torrens title because "the act of registration is,
the operative act to convey and affect the land." So the redemption period, for purposes
of determining the time when a final deed of sale may be executed or issued and the
 ownership of the registered land consolidated in the purchaser at an extrajudicial
foreclosure sale under Act 3135, should be reckoned from the date of registration of the
certificate of sale in the office of the register of deeds concerned and not from the date of
the public auction sale.

The appellant in the case at bar argues, however that actual notice is equivalent to
registration, and that as between the immediate parties registration is not necessary to give
effect to the deed of sale since registration is intended only to protect the buyer from claims of
third persons who subsequently acquire the property. This argument does not bail out the
appellant. We have examined the cases cited, and we note that they involved voluntary
transactions such as contract of sale, 2 pacto de retro, 3 quitclaim, 4 and not forced transfers such
as execution or foreclosure sales.

This argument was embellished in Reyes vs. Noblejas, supra, but this Court was not
impressed. Thus,

But it is further argued by the petitioner that the rules could not be applied to this
case where there are no third parties involved. He cites a number of authorities . . . to the
effect that as between the parties, registration is not necessary to bind the immediate
parties to a transaction involving registered land. He would then conclude that since the
only purpose of registration is to protect the buyer from third party claims, it stands to
reason that when as in this case, there are no third party claimants to the land,
registration is not necessary and the sale between the parties should be made to take
effect from the date of the auction sale. We are not impressed by the argument.
Apparently, herein petitioner failed to see the "other side of the coin" and overlooked the
doctrine, also well settled, that the registration required by Section 50 of the Land
Registration Law is intended primarily for the protection of innocent third persons, i.e.,
persons who, without knowledge of the sale and in good faith, have acquired rights to the
property. . . . The same protection to third parties is obviously one of the objects of
Section 27, Rule 39 of the Revised Rules of Court in requiring that the certificate of sale
issued by the sheriff in the auction sale be registered in the office of the register of deeds,
for the purpose of the legislature in providing for our present system of registration is to
afford some means of publicity so that persons dealing with real property may reach the
records and thereby acquire security against instruments the execution of which has not
been revealed. Redemption is not the concern merely of the auction vendee and the
mortgagor, but also of the latter's successors in interest or any judicial creditor or
judgment creditor of said mortgagor, or any person having a lien on the property
subsequent to the mortgage under which the property has been sold. It is precisely for
this reason that the certificate of sale should be registered, for only upon such
registration may it legally be said that proper notice, though constructive, has been
served unto possible redemptioners contemplated in the law. We have to conclude,
therefore, that the date of sale mentioned in Section 6 of Act 3135, as amended, should
be construed to mean the date of registration of the certificate of sale in the office of the
Register of Deeds concerned. Only after the lapse of the twelve-month redemption period
from the date of registration of the certificate of sale and in the absence of any
redemptioner within the said period may the deed of final sale be executed in favor of the
purchaser who may then consolidate the title of the property in his favor. Consequently,
we have to declare that the Land Registration Commissioner was right in ordering the
Register of Deeds of Rizal to deny the registration of the deed of sale and the affidavit of
consolidation of ownership, the simultaneous registration of which documents was
sought by herein petitioner even before the certificate of sale issued by the sheriff was
registered.

Finally, the appellant bank objects to the redemption on the ground that the amount
tendered is inadequate to meet the redemption price. Considering, however, that the sum
tendered was the amount of the purchase price paid at the auction sale and that the tender was
timely made and in good faith, we believe that the ends of justice would be better served by
affording the appellees the opportunity to redeem the property by paying the bank the auction
purchase price plus 1% interest per month thereon up to the time of redemption. This Court laid
down the correct formula in Castillo vs. Nagtalon, L-17079, January 29, 1962, as follows:

The procedure for the redemption of properties sold at execution sale is prescribed
in Section 26, Rule 39, of the Rules of Court. Thereunder, the judgment debtor or
redemptioner may redeem the property from the purchaser, within 12 months after the
sale, by paying the purchaser the amount of his purchase, with 1% per months interest
thereon up to the time of redemption, together with the taxes paid by the purchaser after
the purchase, if any. In other words, in the redemption of properties sold at an execution
sale, the amount payable is no longer the judgment debt but the purchase price.
Considering that appellee tendered payment only of the sum of P317.44 whereas the
three parcels of land she was seeking to redeem were sold for the sums of P1,240,
P21,00, and P30,00, respectively the aforementioned amount of P317.44 is insufficient to
effectively release the properties. However, the tender of payment was timely made and
in good faith; in the interest of justice we incline to give the appellee opportunity to
complete the redemption purchase of the three parcels, as provided in Section 26, Rule
39 of the Rules of Court, within fifteen (15) days from the time this decision becomes final
and executory. In this wise, justice is done to the appellee who had been made to pay
more than her share in the judgment, without doing an injustice to the purchaser who
shall get the corresponding interest of 1% per month on the amount of his purchase up to
the time of redemption.

ACCORDINGLY, the judgment a quo is affirmed, at appellant's cost.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-49101 October 24, 1983

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,

vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF
COMMERCE, respondents.

Edgardo I. De Leon for petitioners.

Siguion Reyna, Montecillo & Associates for private respondent.

GUERRERO, J:

Petition for review on certiorari seeking the reversal of the decision of the defunct Court of
Appeals, now Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto Bonnevie
vs. Philippine Bank of Commerce, et al.," promulgated August 11, 1978 1 as well as the
Resolution denying the motion for reconsideration.

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 said justice.

On the other hand, the answer of defendant Bank, 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, 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; (e) that the loan of P75,000.00 which was
secured by mortgage, after two renewals remain unpaid despite countless reminders and
demands; of 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 SV 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 SV Bonnevie covering the rights and
interests of petitioner Honesto Bonnevie over the subject property. The intervention was
ultimately granted in order that all issues be resolved in one proceeding to avoid multiplicity of
suits.

On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads
as follows:

WHEREFORE, all the foregoing premises considered, judgment is hereby

rendered dismissing the complaint with costs against the plaintiff and the
intervenor.

After the motion for reconsideration of the lower court's decision was denied, petitioners
appealed to respondent Court of Appeals assigning the following errors:

1. The lower court erred in not finding that the real estate mortgage executed by
Jose Lozano was null and void;

2. The lower court erred in not finding that the auction sale decide on August 19,
1968 was null and void;

3. The lower court erred in not allowing the plaintiff and the intervenor to redeem
the property;

4. The lower court erred in not finding that the defendant acted in bad faith; and
 5. The lower court erred in dismissing the complaint.

On August 11, 1978, the respondent court promulgated its decision affirming the decision of the
lower court, and on October 3. 1978 denied the motion for reconsideration. Hence, the present
petition for review.

The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby
adopt the facts found the trial court and found by the Court of Appeals to be consistent with the
evidence adduced during trial, to wit:

It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the
owners of the property which they mortgaged on December 6, 1966, to secure
the payment of the loan in the principal amount of P75,000.00 they were about to
obtain from defendant-appellee Philippine Bank of Commerce; that on December
8, 1966, executed in favor of plaintiff-appellant the Deed of Sale with Mortgage ,,
for and in consideration of the sum of P100,000.00, P25,000.00 of which amount
being payable to the Lozano spouses upon the execution of the document, and
the balance of P75,000.00 being payable to defendant- appellee; that on
December 6, 1966, when the mortgage was executed by the Lozano spouses in
favor of defendant-appellee, the loan of P75,000.00 was not yet received them,
as it was on December 12, 1966 when they and their co-maker Alfonso Lim
signed the promissory note for that amount; that from April 28, 1967 to July 12,
1968, plaintiff-appellant made payments to defendant-appellee on the mortgage
in the total amount of P18,944.22; that on May 4, 1968, plaintiff-appellant
assigned all his rights under the Deed of Sale with Assumption of Mortgage to his
brother, intervenor Raoul Bonnevie; that on June 10, 1968, defendant-appellee
applied for the foreclosure of the mortgage, and notice of sale was published in
the Luzon Weekly Courier on June 30, July 7, and July 14, 1968; that auction
sale was conducted on August 19, 1968, and the property was sold to defendant-
appellee for P84,387.00; and that offers from plaintiff-appellant to repurchase the
property failed, and on October 9, 1969, he caused an adverse claim to be
annotated on the title of the property. (Decision of the Court of Appeals, p. 5).

Presented for resolution in this review are the following issues:

Whether the real estate mortgage executed by the spouses Lozano in favor of
respondent bank was validly and legally executed.

II

Whether the extrajudicial foreclosure of the said mortgage was validly and legally
effected.

III

Whether petitioners had a right to redeem the foreclosed property.

IV

Granting that petitioners had such a right, whether respondent was justified in
refusing their offers to repurchase the 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." (Petitioners' Brief, par. 1, p. 7).

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 also argued that granting the validity of the mortgage, the subsequent renewals of the
original loan, using as security the same property which the Lozano spouses had already sold to
petitioners, rendered the mortgage null and void,

This argument failed to consider the provision 2 of the contract of mortgage which prohibits the
sale, disposition of, mortgage and encumbrance of the mortgaged properties, without the written
consent of the mortgagee, as well as the additional proviso that if in spite of said stipulation, the
mortgaged property is sold, the vendee shall assume the mortgage in the terms and conditions
under which it is constituted. These provisions are expressly made part and parcel of the Deed of
Sale with Assumption of Mortgage.

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.

Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following
grounds:

a) petitioners were never notified of the foreclosure sale.

b) The notice of auction sale was not posted for the period required by law.

c) publication of the notice of auction sale in the Luzon Weekly Courier was not in
accordance with law.

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 not likewise informed of the same. For the same reason, Raoul Bonnevie
is not entitled to notice. Most importantly, Act No. 3135 does not require personal notice on the
mortgagor. The requirement on notice is that:

Section 3. Notice shall be given by posting notices of the sale for not less than
twenty days in at least three public places of the municipality or city where the
property is situated, and if such property is worth more than four hundred pesos,
such notice shall also be published once a week for at least three consecutive
weeks in a newspaper of general circulation in the municipality or city

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.

The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said
case involved a judicial foreclosure and the sale to the vendee of the mortgaged property was
duly registered making the mortgaged privy to the sale.

As regards the claim that the period of publication of the notice of auction sale was not in
accordance with law, namely: once a week for at least three consecutive weeks, the Court of
Appeals ruled that the publication of notice on June 30, July 7 and July 14, 1968 satisfies the
publication requirement under Act No. 3135 notwithstanding the fact that June 30 to July 14 is
only 14 days. We agree. Act No. 3135 merely requires that such notice shall be published once a
week for at least three consecutive weeks." Such phrase, as interpreted by this Court in Basa vs.
Mercado, 61 Phil. 632, does not mean that notice should be published for three full weeks.

The argument that the publication of the notice in the "Luzon Weekly Courier" was not in
accordance with law as said newspaper is not of general circulation must likewise be
disregarded. The affidavit of publication, executed by the Publisher, business/advertising
manager of the Luzon Weekly Courier, stares that it is "a newspaper of general circulation in ...
Rizal, and that the Notice of Sheriff's sale was published in said paper on June 30, July 7 and
July 14, 1968. This constitutes prima facie evidence of compliance with the requisite publication.
Sadang vs. GSIS, 18 SCRA 491).

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.

Whether or not the notice of auction sale was posted for the period required by law is a question
of fact. It can no longer be entertained by this Court. (see Reyes, et al. vs. CA, et al., 107 SCRA
126). Nevertheless, the records show that copies of said notice were posted in three
conspicuous places in the municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig
Municipal Market and Pasig Municipal Hall. In the same manner, copies of said notice were also
posted in the place where the property was located, namely: the Municipal Building of San Juan,
Rizal; the Municipal Market and on Benitez Street. The following statement of Atty. Santiago
Pastor, head of the legal department of respondent bank, namely:

Q How many days were the notices posted in these two places, if
you know?
 A We posted them only once in one day. (TSN, p. 45, July 25,
1973)

is not a sufficient countervailing evidence to prove that there was no compliance with the posting
requirement in the absence of proof or even of allegation that the notices were removed before
the expiration of the twenty- day period. A single act of posting (which may even extend beyond
the period required by law) satisfies the requirement of law. The burden of proving that the
posting requirement was not complied with is now shifted to the one who alleges non-
compliance.

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. Thru 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.

On the question of whether or not respondent Court of Appeals erred in holding that respondent
Bank did not act in bad faith, petitioners rely on Exhibit "B" which is the letter of lose Lozano to
respondent Bank dated December 8, 1966 advising the latter that Honesto Bonnevie was
authorized to make payments for the amount secured by the mortgage on the subject property,
to receive acknowledgment of payments, obtain the Release of the Mortgage after full payment
of the obligation and to take delivery of the title of said property. On the assumption that the letter
was received by respondent Bank, a careful reading of the same shows that the plaintiff was
merely authorized to do acts mentioned therein and does not mention that petitioner is the new
owner of the property nor request that all correspondence and notice should be sent to him.

The claim of appellants that the collection of interests on the loan up to July 12, 1968 extends the
maturity of said loan up to said date and accordingly on June 10, 1968 when defendant applied
for the foreclosure of the mortgage, the loan was not yet due and demandable, is totally incorrect
and misleading. The undeniable fact is that the loan matured on December 26, 1967. On June
10, 1968, when respondent Bank applied for foreclosure, the loan was already six months
overdue. Petitioners' payment of interest on July 12, 1968 does not thereby make the earlier act
of respondent Bank inequitous nor does it ipso facto result in the renewal of the loan. In order
that a renewal of a loan may be effected, not only the payment of the accrued interest is
necessary but also the payment of interest for the proposed period of renewal as well. Besides,
whether or not a loan may be renewed does not solely depend on the debtor but more so on the
discretion of the bank. Respondent Bank may not be, therefore, charged of bad faith.

WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby
AFFIRMED. Costs against petitioners.

SO ORDERED.

THIRD DIVISION

G.R. No. 139884 February 15, 2001

SPOUSES OCTAVIO and EPIFANIA LORBES, petitioners,
vs.
COURT OF APPEALS, RICARDO DELOS REYES and JOSEFINA CRUZ, respondents.

GONZAGA-REYES, J.:

This petition for review on certiorari arose from an action for reformation of instrument and
damages originally filed with the Regional Trial Court of Antipolo, Rizal, Branch 74, the decision
on which was reviewed and reversed by the Third Division of the Court of Appeals.

Petitioners were the registered owners of a 225-square meter parcel of land located in Antipolo,
Rizal covered by Transfer Certificate of Title No. 165009. Sometime in August 1991, petitioners
mortgaged this property to Florencio and Nestor Carlos in the amount of P150,000.00.

About a year later, the mortgage obligation had increased to P500,000.00 and fearing
foreclosure of the property, petitioners asked their son-in-law, herein private respondent Ricardo
delos Reyes, for help in redeeming their property. Private respondent delos Reyes agreed to
redeem the property but because he allegedly had no money then for the purpose he solicited
the assistance of private respondent Josefina Cruz, a family friend of the delos Reyeses and an
employee of the Land Bank of the Philippines. 1âwphi 1.nêt

It was agreed that petitioners will sign a deed of sale conveying the mortgaged property in favor
of private respondent Cruz and thereafter, Cruz will apply for a housing loan with Land Bank,
using the subject property as collateral. It was further agreed that out of the proceeds of the loan,
P500,000.00 will be paid to the Carloses as mortgagees, and an such balance will be applied by
petitioners for capital gains tax, expenses for the cancellation of the mortgage to the Carloses,
transfer of title to Josefina Cruz, and registration of a mortgage in favor of Land Bank.1 Moreover,
the monthly amortization on the housing loan which was supposed to be deducted from the
salary of private respondent Cruz will be reimbursed by private respondent delos Reyes.

On September 29, 1992, the Land Bank issued a letter of guarantee in favor of the Carloses,
informing them that Cruz’s loan had been approved. On October 22, 1992, Transfer Certificate of
Title No. 165009 was cancelled and Transfer Certificate of Title No. 229891 in the name of
Josefina Cruz was issued in lieu thereof.2 On November 25, 1992, the mortgage was discharged.

Sometime in 1993, petitioners notified private respondent delos Reyes that they were ready to
redeem the property but the offer was refused. Aggrieved, petitioners filed on July 22, 1994 a
complaint for reformation of instrument and damages with the RTC of Antipolo, Rizal, docketed
as Civil Case No. 94-3296.

In the complaint, petitioners claimed that the deed was merely a formality to meet the
requirements of the bank for the housing loan, and that the real intention of the parties in
securing the loan was to apply the proceeds thereof for the payment of the mortgage
obligation.3 They alleged that the deed of sale did not reflect the true intention of the parties, and
that the transaction was not an absolute sale but an equitable mortgage, considering that the
price of the sale was inadequate considering the market value of the subject property and
because they continued paying the real estate taxes thereto even after the execution of the said
deed of sale. Petitioners averred that they did not see any reason why private respondents would
retract from their original agreement other than that they (petitioners) and the members of their
family resigned en masse from the Mahal Namin Organization, of which private respondent delos
Reyes was the president and chairman of the board of directors, and private respondent Cruz
was the treasurer. In the same complaint, they demanded moral damages, exemplary damages,
and attorney’s fees.
On July 29, 1996, the trial court issued a temporary restraining order enjoining private
respondents from ejecting petitioners from the premises of the disputed property; this was soon
replaced by a writ of preliminary injunction.

Summons and a copy of the complaint were served upon private respondents on August 1, 1994.
Private respondents filed their answer beyond the reglamentary period, or only on September 1,
1994. Thus, on September 5, 1994, petitioners filed a motion to declare private respondents in
default, which the trial court granted in an order dated September 16, 1994. On September 30 of
the same year, petitioners presented their evidence ex parte before the trial court. The principal
witness presented was petitioner Octavio Lorbes, whose testimony was corroborated by his son,
Atty. Salvador Lorbes.

On October 12, 1994, private respondents filed a motion to lift order of default and to strike out
evidence presented ex parte, which the court denied in an order dated October 26, 1994.

On June 20, 1995, the trial court rendered judgment in favor of petitioners, upon finding that: (1)
the Deed of Absolute Sale dated October 21, 1992 did not reflect the true intention of the parties,
and (2) the transaction entered into between petitioners and Cruz was not an absolute sale but
an equitable mortgage, considering that the price stated in the Deed of Absolute Sale was
insufficient compared to the value of the property, petitioners are still in possession of the
property, and petitioners had continued to pay the real estate taxes thereon after the execution of
the said deed of sale. As explained by the trial court in its decision:

The foregoing uncontroverted facts clearly show that the transaction entered into
between the plaintiffs and the defendants is not an absolute sale but merely an equitable
mortgage as the sale was executed in order to secure a loan from a certain bank to save
the property from the danger of foreclosure and to use it as collateral thereof for bank
loan purposes and that the same does not reflect the real intention of the parties in
executing the said Deed of Sale. The court notes that at the time the transaction and the
Deed of Absolute Sale was executed by the plaintiffs sometime in 1992, the prevailing
market value of the lot alone was P400,000.00 per square meter such that the lot alone
consisting of 255 square meters, excluding the house and improvements thereon would
already cost more than a million pesos already hence, the consideration of P600,000.00
in the said Deed of Sale is considerably insufficient compared to the value of the
property. Further, the plaintiffs are still in possession of the subject property and had
been paying the realty taxes thereon even after the execution of the sale and the transfer
of the title from the plaintiffs to defendant Josephine Cruz which clearly evinces the true
badge of the transaction which occurred between the plaintiffs and defendants as that of
an equitable mortgage and not an absolute sale and that the plaintiffs were only
compelled to enter into the said transaction of sale with the defendants as the former
were in extreme need of money in order to redeem their only conjugal property and to
save it from being foreclosed for non-payment of the mortgage obligation and that it was
never the intention of the plaintiffs to sell the property to the defendants, as it was their
agreement that plaintiffs can redeem the property or any member of the family thereof,
when they become financially stable.4

The dispositive portion of the trial court’s decision thus provides:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the

plaintiffs and against the defendants, ordering the latter jointly and severally, as follows:

1. To reconvey the subject property to the plaintiffs upon payment of the price
stipulated in the contract of sale;

2. To pay plaintiffs the sum of P50,000.00 as moral damages;

 3. To pay plaintiffs the sum of P50,000.00 as and by way of attorney’s fees plus
P1,000.00 per court appearance;

4. To pay the costs of suit.

SO ORDERED.5

The Court of Appeals reversed the above decision, finding that private respondents were denied
due process by the refusal of the trial court to lift the order of default against them, and that the
transaction between petitioners and Cruz was one of absolute sale, not of equitable mortgage. It
also held the RTC decision to be constitutionally infirm for its failure to clearly and distinctly state
the facts and the law on which it is based.

The Court of Appeals held that the reformation of the Deeds of Absolute Sale in the instant case
is improper because there is no showing that such instrument failed to express the true intention
of the parties by reason of mistake, fraud, inequitable conduct, or accident in the execution
thereof.6 To the Court of Appeals, the transaction was unmistakably a contract of sale, as
evidenced by the numerous supporting documents thereto, such as the Contract to Sell dated
June 1992, Affidavit of Waiver/Assignment dated August 14, 1992, Receipt of Partial Advance
Payment dated September 9, 1992, and Transfer Certificate of Title No. 229891 issued in the
name of private respondent Cruz. Going over the indicators giving rise to a presumption of
equitable mortgage cited in the decision of the RTC, the Court of Appeals held: (1) inadequacy of
price is material only in a sale with right to repurchase, which is not the case with herein
petitioners and Cruz; moreover, the estimate of the market value of the property came only from
the bare testimony of petitioner Octavio Lorbes, (2) petitioners’ remaining in possession of the
property resulted only from their refusal to vacate the same despite the lawful demands of private
respondent Cruz, and (3) there was no documentary evidence that petitioners continued paying
the taxes on the disputed property after the execution of the Deed of Absolute Sale.

In its decision, the Court of Appeals also pointed out that under the usual arrangement of pacto
de retro the vendor of the property is a debtor of the vendee, and the property is used as security
for his obligation. In the instant case, the mortgage creditors (the Carloses) are third persons to
the Deed of Absolute Sale.

This petition raises three issues before the Court: (1) whether respondent court erred in ruling
that the Deed of Absolute Sale dated October 21, 1992 was an equitable mortgage, (2) whether
respondent court erred in ruling that by declaring private respondents in default they were denied
due process of law, and (3) whether respondent court erred in ruling that the trial court’s decision
violates the constitutional requirement that it should clearly and distinctly state the facts and the
law on which it is based.7

We shall first deal with the second and third issues, these being preliminary matters.

Well-settled is the rule that courts should be liberal in setting aside orders of default for
judgments of default are frowned upon, unless in cases where it clearly appears that the
reopening of the case is intended for delay.8 The issuance of orders of default should be the
exception rather than the rule, to be allowed only in clear cases of obstinate refusal by the
defendant to comply with the orders of the trial court.9

Under the factual milieu of this case, the RTC was indeed remiss in denying private respondents’
motion to lift the order of default and to strike out the evidence presented by petitioners ex parte,
especially considering that an answer was filed, though out of time. We thus sustain the holding
of the Court of Appeals that the default order of the RTC was immoderate and in violation of
private respondents’ due process rights. However, we do not think that the violation was of a
degree as to justify a remand of the proceedings to the trial court, first, because such relief was
not prayed for by private respondents, and second, because the affirmative defenses and
evidence that private respondents would have presented before the RTC were capably ventilated
before respondent court, and were taken into account by the latter in reviewing the correctness of
the evaluation of petitioners’ evidence by the RTC and ultimately, in reversing the decision of the
RTC. This is evident from the discussions in the decision of the Court of Appeals, which cited
with approval a number of private respondents’ arguments and evidence, including the
documents annexed to their opposition to the issuance of a writ of preliminary injunction filed with
the RTC.10 To emphasize, the reversal of respondent court was not simply on due process
grounds but on the merits, going into the issue of whether the transaction was one of equitable
mortgage or of sale, and so we find that we can properly take cognizance of the substantive
issue in this case, while of course bearing in mind the inordinate manner by which the RTC
issued its default order.

As regards the third issue, we reverse for being unfounded the holding of the Court of Appeals
since the RTC decision, some parts of which we even reproduced in our earlier discussions,
clearly complied with the constitutional requirement to state clearly and distinctly the facts and
the law on which it was based.

Thus, the one issue essential to the resolution of this case is the nature of the transaction
between petitioners and private respondent Cruz concerning the subject parcel of land. Did the
parties intend for the contested Deed of Absolute Sale to be a bona fide and absolute
conveyance of the property, or merely an equitable mortgage?

On the outset, it must be emphasized that there is no conclusive test to determine whether a
deed absolute on its face is really a simple loan accommodation secured by a mortgage.11 "The
decisive factor in evaluating such agreement is the intention of the parties, as shown not
necessarily by the terminology used in the contract but by all the surrounding circumstances,
such as the relative situation of the parties at that time, the attitude, acts, conduct, declarations of
the parties, the negotiations between them leading to the deed, and generally, all pertinent facts
having a tendency to fix and determine the real nature of their design and understanding. As
such, documentary and parol evidence may be submitted and admitted to prove the intention of
the parties."12

The conditions which give way to a presumption of equitable mortgage, as set out in Article 1602
of the Civil Code, apply with equal force to a contract purporting to be one of absolute
sale.13 Moreover, the presence of even one of the circumstances laid out in Article 1602, and not
a concurrence of the circumstances therein enumerated, suffices to construe a contract of sale to
be one of equitable mortgage.14 This is simply in consonance with the rule that the law favors the
least transmission of property rights.15

Thus, under Article 1602 of the Civil Code, a contract shall be presumed to be an equitable
mortgage when --- (a) the price of a sale with right to repurchase is unusually inadequate; (b) the
vendor remains in possession as lessee or otherwise; (c) upon or after the expiration of the right
of repurchase another instrument extending the period of redemption or granting a new period is
executed; (d) the purchaser retains for himself a part of the purchase price; (e) the vendor binds
himself to pay the taxes on the thing sold; and, (f) in any other case where it may be fairly
inferred that the real intention of the parties is that the transaction shall secure the payment of a
debt or the performance of any other obligation.

Applying the foregoing considerations to the instant case, the Court finds that the true intention
between the parties for executing the Deed of Absolute Sale was not to convey ownership of the
property in question but merely to secure the housing loan of Cruz, in which petitioners had a
direct interest since the proceeds thereof were to be immediately applied to their outstanding
mortgage obligation to the Carloses.

It is not disputed that before the execution of the Deed of Absolute Sale petitioners’ mortgage
obligation to the Carloses as nearing maturity and they were in dire need of money to meet the
same. Hence, they asked for the help of their son-in-law delos Reyes who in turn requested Cruz
to take out a housing loan with Land Bank. Since collateral is a standard requirement of banks in
giving out loans, it was made to appear that the subject property was sold to Cruz so she can
declare the same as collateral for the housing loan. This was simply in line with the basic
requirement in our laws that the mortgagor be the absolute owner of the property sought to be
mortgaged.16Consistent with their agreement, as soon as the housing loan was approved, the full
amount of the proceeds were immediately turned over to petitioners, who promptly paid
P500,000.00 therefrom to the Carloses in full satisfaction of their mortgage obligation. The
balance was spent by petitioners in transferring title to the property to Cruz and registering the
new mortgage with Land Bank.

Understandably, the Deed of Absolute Sale and its supporting documents do not reflect the true
arrangement between the parties as to how the loan proceeds are to be actually applied because
it was not the intention of the parties for these documents to do so. The sole purpose for
preparing these documents was to satisfy Land Bank that the requirement of collateral relative to
Cruz’s application for a housing loan was met.

Were we to accept, as respondent court had, that the loan that Cruz took out with Land Bank
was indeed a housing loan, then it is rather curious that Cruz kept none of the loan proceeds but
allowed for the bulk thereof to be immediately applied to the payment of petitioners outstanding
mortgage obligation. It also strains credulity that petitioners, who were exhausting all means to
save their sole conjugal real property from being foreclosed by the Carloses, would concurrently
part with the same in favor of Cruz.

Such urgent prospect of foreclosure helps to explain why petitioners would subscribe to an
agreement like the Deed of Absolute Sale in the herein case, which on its face represents their
unconditional relinquishment of ownership over their property. Passing upon previous similar
situations the Court has declared that "while it was true that plaintiffs were aware of the contents
of the contracts, the preponderance of the evidence showed however that they signed knowing
that said contracts did not express their real intention, and if they did so notwithstanding this, it
was due to the urgent necessity of obtaining funds. "Necessitous men are not, truly speaking,
free men; but to answer a present emergency, will submit to any terms that the crafty may
impose upon them.’"17

The facts further bear out that petitioners remained in possession of the disputed property after
the execution of the Deed of Absolute Sale and the transfer of registered title to Cruz in October
1992. Cruz made no demand on petitioners to vacate the subject premises until March 19,
1994;18 interestingly, this was two days after petitioners signified their intention to redeem the
property by paying the full amount of P600,000.00.19 On this basis, the finding of respondent
court that petitioners remained in possession of the property only because they refused to vacate
on Cruz’s demand is not accurate because the records reflect that no such demand was made
until more than a year since the purported sale of the property.

Copies of realty tax receipts attached to the record also show that petitioners continued paying
for the taxes on the property for the period 1992 to 1994,20 or after the property was supposed to
have been sold to Cruz.

From the above, the Court is satisfied that enough of the circumstances set out in Article 1602 of
the Civil Code are attendant in the instant case, as to show that the true arrangement between
petitioners and private respondent Cruz was an equitable mortgage.

That a transfer certificate of title was issued in favor of private respondent Cruz also does not
import conclusive evidence of ownership or that the agreement between the parties was one of
sale. As was stated in Oronce vs. Court of Appeals,21 citing Macapinlac vs. Gutierrez Repide22:
 xxx it must be borne in mind that the equitable doctrine xxx to the effect that any
conveyance intended as security for a debt will be held in effect to be a mortgage,
whether so actually expressed in the instrument or not, operates regardless of the form of
the agreement chosen by the contracting parties as the repository of their will. Equity
looks through the form and considers the substance; and no kind of engagement can be
adopted which will enable the parties to escape from the equitable doctrine to which
reference is made. In other words, a conveyance of land, accompanied by registration in
the name of the transferee and the issuance of a new certificate, is no more secured from
the operation of the equitable doctrine than the most informal conveyance that could be
devised.

Before we fully set aside this issue, it will be recalled that the instant petition originated as a
complaint for reformation filed before the RTC of Antipolo, Rizal. The Court of Appeals found
petitioners’ action for reformation unmeritorious because there was no showing that the failure of
the deed of sale to express the parties’ true intention was because of mistake, fraud, inequitable
conduct, or accident.23 Indeed, under the facts of the present case, reformation may not be
proper for failure to fully meet the requisites in Article 1359 of the Civil Code, and because as the
evidence eventually bore out the contested Deed of Absolute Sale was not intended to reflect the
true agreement between the parties but was merely to comply with the collateral requirements of
Land Bank. However, the fact that the complaint filed by petitioners before the trial court was
categorized to be one for reformation of instrument should not preclude the Court from passing
upon the issue of whether the transaction was in fact an equitable mortgage as the same has
been squarely raised in the complaint and had been the subject of arguments and evidence of
the parties. Thus we have held that it is not the caption of the pleading but the allegations therein
that determine the nature of the action, and the Court shall grant relief warranted by the
allegations and the proof even if no such relief is prayed for.24

Finally, on the award of damages. Considering the due process flaws that attended the default
judgment of the RTC, and applying the rule adopted by this Court that in instances where no
actual damages are adjudicated the awards for moral and exemplary damages may be
reduced,25 we reduce the award for moral damages in the instant case from P50,000.00 to
P30,000.00. At the same time, we sustain the award of attorney’s fees in the amount of
P50,000.00, it being clear that petitioners were compelled to incur expenses and undergo the
rigors of litigation to recover their property.
1âw phi1.nêt

WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE. The
decision of the Regional Trial Court of Antipolo, Rizal is REINSTATED, with
the MODIFICATION that the award of moral damages is reduced to P30,000.00, and in all other
respects AFFIRMED. Costs against private respondents.

SO ORDERED.

[G.R. No. 153710.September 2, 2002]

SPS. ZOTOMAYOR vs. PEDRO RUBIO, et al.

THIRD DIVISION

Gentlemen:
Quoted hereunder, for your information, is a resolution of this Court dated 02 SEPT 2002.

G.R. No. 153710(Sps. Vivencio Javier and Feliza Zotomayor vs. Pedro, Venancio, Candelaria, Elvira,
Ben & Julia, all surnamed Rubio, The Honorable Court of Appeals.)

Before us is a petition for review under Rule 45 with a prayer for Preliminary Injunction which seeks
to set aside the resolution of the Court of Appeals dated May 23, 2002 which dismissed for lack of
merit a Petition for Reopening/Annulment of Judgment filed before it, the pertinent portions of
which held:

Plaintiffs-appellees have now filed a Petition for Reopening/Annulment of Judgment under Rule 47
of the 1997 Rules of Civil Procedure, praying to give due course to herein petition by reopening,
reconsidering and setting aside the decision rendered in this case.

Unfortunately for plaintiffs-appellees, there is no such remedy in the Court of Appeals as a petition
to reopen a case where a decision has already been rendered. The proper remedy is appeal to the
Supreme Court by petition for review on certiorari under Rule 45, to be taken within the 15-day
reglementary period.

Likewise, there is no such remedy in the Court of Appeals as a petition to annul its own judgment.
Rule 47 applies only to annulment by the Court of Appeals of judgment or final orders and
resolutions in civil actions of Regional Trial Courts for which the ordinary remedies of new trial,
appeal, petition for relief or other appropriate remedies are no longer available through no fault of
the petitioner (Section 1 of Rule 47, underlining supplied).

WHEREFORE, premises considered, plaintiffs-appellees' Petition for Reopening/Annulment of

Judgment is DISMISSED outright for absolute lack of merit.

The pertinent facts as culled from the records are as follows:

On May 15, 1979, petitioner spouses Vivencio and Feliza Javier secured two loans from a certain Tito
Santos (now deceased), husband of Rufina Santos, now also deceased, who are both predecessors-
in-interest of herein private respondents, all surnamed Rubio. The two loans granted by Tito Santos
were in the total amount of One Hundred Three Thousand Eight Hundred Nine and Fifty-Six
Centavos (P103,809.56) as evidenced by a promissory note which was to mature on May 15, 1980.

According to the agreement of the parties in their "Kasunduan," Sixty-Three Thousand Eight
Hundred Nine Pesos and Fifty-Six Centavos (P63,809.56) of the loan was to be paid in the form of
gravel and sand to be extracted by Tito Santos from the quarry-concession of the then debtors and
herein petitioners Javier, granted to them by the Bureau of Mines. Under the terms of their
"Kasunduan," Tito Santos was to avail of the concession of petitioner-spouses until the value of the
gravel and sand extracted reached the amount of Sixty-Three Thousand Eight Hundred Nine Pesos
and Fifty-Six Centavos (P63,809.56). The other loan amounting to Forty Thousand Pesos (P40,000.00)
was to be paid within a period of one (1) year and was secured by a real estate mortgage on
petitioners' property consisting of Ten Thousand Two Hundred Eleven (10,211) square meters
situated at Bo. Oogong, Sta. Cruz, Laguna and covered by TCT No. T-84259.

The parties also agreed that, despite full payment of Sixty-Three Thousand Eight Hundred Nine Pesos
and Fifty-Six Centavos (P63,809.56) in the form of gravel and sand, if the other loan of Forty
Thousand Pesos (P40,000.00) remained unpaid after one year, then Tito Santos (predecessor-in-
interest of private respondents) had the option to either continue extracting from the quarry until
such time as the value of the extracted materials reached Forty Thousand Pesos (P40,000.00) or
foreclose the property covered by the mortgage. In any case, it was agreed that once the loan was
fully paid, the real estate mortgage, executed on May 16, 1979, was to be discharged.
However, Tito Santos failed to extract quarry materials from petitioners' concession since the latter's
permit from the Bureau of Mines had already expired on April 26, 1979. For petitioners' failure to
pay the first loan of Sixty-Three Thousand Eight Hundred Nine Pesos and Fifty-Six Centavos
(P63,809.56), Tito Santos commenced a collection suit docketed as Civil Case SC-2096 against the
spouses Javier.

Before the case could be decided on the merits, however, the parties executed a compromise
agreement wherein the spouses Javier admitted their indebtedness of Sixty-Three Thousand Eight
Hundred Nine Pesos and Fifty-Six Centavos (P63,809.56) and obligated themselves to pay the same.

On April 24, 1986, the trial court rendered judgment based on the compromise agreement. When
petitioners again failed to comply with the judgment within the specified time, a writ of execution
was issued. Petitioners, in partial satisfaction thereof, issued a check in the amount of Fifty
Thousand Pesos (P50,000.00).

In the meantime, in 1981, since petitioners also reneged on their obligation to pay their second loan
of Forty Thousand Pesos (P40,000.00) which was secured by the real estate mortgage, Tito Santos
foreclosed on petitioners' property. The foreclosure was annotated on petitioners' TCT No. T-84259.

In 1984, Tito Santos died. In 1989, Rufina Santos, his surviving spouse, had petitioners' TCT No. T-
84259 cancelled and a new title (TCT No. T-116652) issued in her name.

In December 1990, herein petitioners filed a complaint against Rufina Santos for "Annulment of
Certificate of Title and Damages" before the Regional Trial Court of Laguna.

In their complaint, petitioners alleged that their entire indebtedness to Tito Santos for One Hundred
Three Thousand Eight Hundred Nine and Fifty-Six Centavos (P103,809.56) had been fully paid in the
form of gravel and sand quarried by Santos from their concession. They also alleged that Tito Santos,
despite petitioners' full payment of their loan, still foreclosed on the mortgage.

In her answer to the complaint, Rufina Santos denied that petitioners paidtheir loan of P103,809.56
in the form of quarry materials and alleged by way of affirmative defense that petitioners, in the
action against them for collection of sum of money docketed as Civil Case No. SC-20965, even
admitted their failure to pay the two loans within the period agreed upon.

Private respondents also declared that the mortgage on petitioners' property was foreclosed due to
the non-payment of the Forty Thousand Pesos (P40,000.00) loan and only after several chances to
pay were given to herein petitioners. They contended that petitioner-spouses' action was a mere
ploy to pre-empt private respondents' intended petition for a writ of possession.

After trial on the merits, the trial court on November 27, 1995 ruled for the then plaintiffs
(petitioners herein) and declared the new title issued in the name of Rufina Santos as null and void.

In ruling favorably for the petitioners, the trial court simply held that the contract entered into by
the parties with respect to the Forty Thousand Pesos (P40,000.00) loan was not a real estate
mortgage but a contract of antichresis. There being no mortgage to foreclose, according to the
court, the new transfer certificate of title issued in the name of Rufina Santos was null and void.

Rufina Santos died during the pendency of the case and was duly substituted by her legal heirs,
private respondents in this case.

The trial court's decision was appealed by herein private respondents to the Court of Appeals.

Before the appellate court, private respondents asserted that the trial court erred when it ruled that
a contract of antichresis existed between the parties since the language of the Deed of Real Estate
Mortgage executed between them was explicit that petitioners were indebted to private
respondents in the amount of Forty Thousand Pesos (P40,000.00) and that the lot in Laguna was the
security for its payment.

According to private respondents, neither the facts of the case nor the evidence supported the
conclusion of the trial court. They claimed that Tito Santos, during his lifetime, neither acquired
possession of the mortgaged property nor profited from the fruits thereof during the interval
between the execution of the mortgage and its execution,[3]cralaw two of the indispensable
attributes of antichresis.

Private respondents also pointed out that the trial court's decision was void since its ruling went
beyond the issues raised by the parties in their respective pleadings.

The Court of Appeals found the appeal meritorious and reversed the trial court. The appellate court
held that since issues in a case are determined by the allegations in the pleadings and only issues
contained in the pre-trial brief and pre-trial order should be threshed out during the trial, the trial
court erred when it resolved the validity of the mortgage contract since the records showed that the
only issues for determination during the trial were simply: (1) whether the second loan of Forty-
Thousand Pesos (P40,000.00) was ever paid by petitioners to Tito Santos and (2) whether or not the
foreclosure of the real estate mortgage on the Oogong property was attended by fraud, deceit and
misrepresentation.

The appellate court criticized the trial court for deciding the case not on the issues presented by the
parties but on a question which was not even the issue in the case before it.

The Court of Appeals also assailed the conclusion of the trial court on the existence of a contract of
antichresis. In ruling for the private respondents, the appellate court reasoned out:

In any event, the conclusion of the trial court that the contract entered into by Tito Santos
andappellee-spouses is a contract of antichresis is without factual and legal basis. Under Article 2132
ofthe Civil Code, a contract is one of antichresis when "the creditor acquires the right to receive the
fruits of an immovable of his debtor, with the obligation to apply them to the payment of the
interest of the loan,if owing, and thereafter to the principal of his credit."Thus, when a contract of
loan with security does not stipulate that the creditor would apply the fruits of his debtor's
"immovable" to the interestof the loan when owing, and thereafter to the principal, the contract is
not a contract of antichresis but a contract of mortgage.

To be sure, the "Kasunduan" which supplemented the Deed of Real Estate Mortgage executed by
appellee-spouses and Tito Santos gave the latter the option to extract quarry materials from the
concession of the former and apply the value thereof to the payment of the P40,000.00 portion of
appellee-spouses' loan. The aforesaid agreement, however, does not qualify the subject contract of
mortgage as one of antichresis. First, the use of the concession is not the "immovable"
contemplated by law, the fruits of which is to be applied towards the payment of the interest of the
loan, if owing, and thereafter to the principal. Second, the concession for quarry extraction is merely
a privilege granted to appellee-spouses by the government. It is not an immovable property that can
be used as security for the payment of an obligation. Third, and more importantly, the concession
was in fact not used as security for appellee-spouses' loan. Rather, it is the property of appellee-
spouses as a collateral for the P40,000.00 portion of the loan. Thus, the "Kasunduan" was merely a
mode of payment, separate and distinct from the real estate mortgage. [Emphasis supplied]

As to the central issue of whether the Forty Thousand Pesos (P40,000.00) loan secured by mortgage
was ever paid, the appellate court found that while several receipts were presented by petitioners
during trial, such receipts did not show that they were issued with reference to the quarry materials
extracted by Tito Santos but merely indicated the number of hauling trips taken during the
corresponding period stated therein. Furthermore, the receipts presented did not bear the
signatures of either petitioners or private respondents but that of a third person.

The Court of Appeals also took into account the fact that petitioner spouses, in an earlier collection
case filed against them, admitted the existence and non-payment of the debt due the private
respondents despite the supposed receipts. The appellate court also ruled out fraud, deceit or
misrepresentation in the foreclosure of the Oogong property.

All told, the Court of Appeals, in its decision dated July 5, 2001, reversed the trial court and
dismissed the complaint for annulment of title and damages filed by petitioners. The appealed case
was decided without the appellee's brief since the appellees (herein petitioners) failed to file one
despite sufficient notice.

Petitioners herein filed a "Manifestation with Motion for Reconsideration" with the Court of Appeals
praying that they be given a chance to submit their appellees' brief in view of the fact that they did
not know that their counsel failed to file it.

On October 3, 2001, the Court of Appeals denied the aforestated Motion for Reconsideration and
held:

Considering that a decision has already been rendered, appellees' prayer that they be given a chance
to submit their brief is DENIED.

Considering further that the motion (should be period) for filing a motion for reconsideration is non-
extendible, their prayer that they be likewise extended 'consideration' is also DENIED.[6]cralaw

Undaunted, petitioners, assisted by a new counsel, filed on March 13, 2002 a Petition for Reopening
and/or Annulment of Judgment under Rule 47 of the 1997 Rules of Civil Procedure which the
appellate court again dismissed for lack of merit on the ground that both were improper remedies.

Hence, the instant petition.

Before this Court, petitioners insist that, in the interest of substantial justice, the reopening of the
case or annulment of judgment should be allowed. They argue that the decision rendered by the
Court of Appeals was null and void since such was rendered without their appellees' brief. This
allegedly prevented them from presenting their side of the controversy, thus depriving them of due
process.

Furthermore, petitioners maintain that the negligence of their counsel should not bind them since
they were allegedly given false promises to purposely keep them ignorant of the developments in
the suit.

The petition is without merit.

While it is true that a "motion to reopen" is not specifically prescribed as a remedy under the Rules
of Court, it is still an accepted procedural recourse, deriving validity and acceptance from long
established usage. However, it is also a settled rule that this remedy may be availed of only after
either or both parties have formally offered and closed their evidence but before judgment.

In the case at bar, the motion to reopen was filed after judgment, thus rendering it an improper
remedy.

Moreover, Section 1, Rule 47 of the 1997 Rules of Civil Procedureexplicitly provides:

SECTION 1. Coverage. This Rule shall govern the annulment by the Court of Appeals of judgments or
final orders and resolutions in civil actions of Regional Trial Courts for which the ordinary remedies
of new trial, appeal, petition for relief or other appropriate remedies are no longer available through
no fault of the petitioner. (Emphasis Supplied)

The appellate court was thereforecorrect when it held that the extraordinary action to annul a final
judgment applies only to the annulment by the Court of Appeals of judgments or final orders and
resolutions in civil actions of Regional Trial Courts but never as a remedy to annul its own judgments.

More importantly, the remedy of annulment under Rule 47 is restricted to the grounds specifically
provided for by the Rules of Court: a) lack of jurisdiction and b) extrinsic fraud.

The extrinsic fraud which will invalidate a final judgment must refer to some fraudulent act of the
prevailing party committed outside trial which prevents the losing party from presenting his side. It
does not refer to the negligence of the petitioner's lawyer[8]cralaw. The Court of Appeals was
therefore correct in dismissing the petition since petitioners' allegation on the existence of extrinsic
fraud had neither factual nor legal basis.

The assertion of petitioners on the lack of due process (allegedly since their case was decided
without their having filed their appellees' brief due to the negligence of their counsel) must also fail.

A review of the records reveals that the Court of Appeals dispensed with the appellees' brief only
after sufficient notice had been given to herein petitioners. Losing a case on account of counsel's
negligence is a bitter pill to swallow for any litigant. But then, the Court is duty bound to observe its
rules and procedures. Time and again, this Court has held that rules of procedure, especially those
prescribing specific time frames within which certain acts must be done, should not be taken lightly
nor ignored for such rules are necessary for the proper, efficient and orderly discharge of judicial
functions.

As to the issue of negligence of counsel, suffice it to say that clients are bound by the mistakes and
omissions of their counsel whom they themselves hired[9]cralaw although in the case at bar, we
seriously doubt if the filing of the appellees' brief in the Court of Appeals would have made much
difference in the face of the convincing evidence of non-payment by petitioners herein (appellees in
the Court of Appeals) of their financial obligations to Tito Santos.

WHEREFORE, there being no reversible error, the petition is hereby DENIED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-9451 March 29, 1957

OLAF N. BORLOUGH, petitioner,

vs.
FORTUNE ENTERPRISES, INC. and THE HONORABLE COURT OF APPEALS (2nd
DIVISION), respondents.
Arturo M. del Rosario and Alfredo G. Fernando for petitioner.
Laurel & Salonga for respondents.

LABRADOR, J.:

Appeal by certiorari against a judgment of the Court of Appeals, Second Division. The facts of
the case have been briefly stated as follows:

On March 8, 1952, the United Car Exchange sold to the Fortune Enterprises, Inc., the
following described car —

Make: Chevrolet (1947); Plate No. 34-1465

Type : Sedan; Motor No. EAA-20834 (Exhibit D).

The same car was sold by the Fortune Enterprises, Inc. to one Salvador Aguinaldo, and
for not having paid it in full, the latter executed on the same date a promissory note in the
amount of P2,400 payable in 20 installments including interest thereon at 12 per cent per
annum, the last of which installments fell due on January 9, 1953 (Exhibit "A").

To secure the payment of this note, Aguinaldo executed a deed of chattel mortgage over
said car. The deed was duly registered in the office of the Register of Deeds of Manila at
1:12 p.m. on March 11, 1952 (Exhibit "B"). As the buyer-mortgagor defaulted in the
payment of the installments due, counsel for Fortune Enterprises Inc. addressed a letter
on May 16, 1952 (Exhibit "C"), requesting him to make the necessary payment and to
keep his account up to date, to that no court action would be resorted to.

It further appears that the above-described car found its way again into the United Car
Exchange which sold the same in cash for P4,000 to one O. N. Borlough on April 6,
1952. Accordingly, he registered it on the following day with the Motor Vehicles Office.
(Decision, Court of Appeal.).

It also appears from the record that defendant 0. N. Borlough took possession of the vehicle from
the time he purchased it, On July 10, 1952, Fortune Enterprises, Inc. brought action against
Salvador Aguinaldo to recover the balance of the purchase price. Borlough filed a third-party
complaint, claiming the vehicle. Thereupon, Fortune Enterprises, Inc. amended its complaint,
including Borlough as a defendant and alleging that he was in connivance with Salvador
Aguinaldo and was unlawfully hiding and concealing the vehicle in order to evade seizure by
judicial process. Borlough answered alleging that he was in legal possession thereof, having
purchased it in good faith and for the full price of P4,000, and that he had a certificate of
registration of the vehicle issued by the Motor Vehicles Office, and he prayed for the dismissal of
the complaint, the return of the vehicle and for damages against the plaintiff.

The vehicle was seized by the sheriff of Manila on August 4, 1952 and was later sold at public
auction. The Court of First Instance rendered judgment in favor of Borlough, and against plaintiff,
ordering the latter to pay Borlough the sum of P4,000, with interest at 6 per cent per annum, from
the date of the seizure of the car on August 4, 1952, and in addition thereto, attorney's fees in the
sum of P1,000.

Upon appeal to the Court of Appeals, this court rendered judgment ordering that Emil B. Fajardo
pay Borlough P4,000 plus attorney's fees and that plaintiff pay to Borlough any amount received
by it in excess of its credits and judicial expenses. The reason for the modification of the
judgment is that the mortgage was superior, being prior in point of time, to whatever rights may
have been acquired by Borlough by reason of his possession and by the registration of his title in
the Motor Vehicle Office.
The question involved in the appeal in this case is one of law and may be stated thus: As
between a prior mortgage executed over a motor vehicle, registered under the Chattel Mortgage
Law only, without annotation thereof in the Motor Vehicles Office, and a subsequent registration
of the vehicle in the Motor Vehicles Office accompanied by actual possession of the motor
vehicle, which should prevail. While the question can be resolved by the general principles found
in the Civil Code and expressly stated in Article 559, there is no need resorting thereto (the
general principles) in view of the express provisions of the Revised Motor Vehicles Law, which
expressly and specifically regulate the registration, sale or transfer and mortgage of motor
vehicles. The following provisions of said law may help decide the legal question now under
consideration:

SEC. 5 (c) Reports of motor vehicle sales. — On the first day of each month, every
dealer in motor vehicles shall furnish the Chief of the Motor Vehicles Office a true report
showing the name and address of each purchase of a motor vehicle during the previous
month and the manufacturer's serial number and motor number; a brief description of the
vehicle, and such other information as the Chief of the Motor Vehicles Office may require.

SEC. 5 (e) Report of mortgages. — Whenever any owner hypothecates or mortgage any
motor vehicle as surety for a debt or other obligation, the creditor or person in whose
favor the mortgage is made shall, within seven days, notify the Chief of the Motor
Vehicles Office in writing to the effect, stating the registration number of the motor
vehicle, date of mortgage, names and addresses of both parties, and such other
information as the Chief of the Motor Vehicles Office may require. This notice shall be
signed jointly by the parties to the mortgage.

On termination, cancellation or foreclosure of the mortgage, a similar written notice

signed by both parties, shall be forwarded to the Chief of the Motor Vehicles Office by the
owner.

These notice shall be filed by the Chief of the Motor Vehicles Office in the motor records,
and in the absence of more specific information, shall be deemed evidence of the true
status of ownership of the motor vehicle. (Revised Motor Vehicles Law.)

It is to be noted that under section 4 (b) of the Revised Motor Vehicles Law the Chief of the Motor
Vehicles Office is required to enter or record, among other things, transfers of motor vehicles
"with a view of making and keeping the same and each all of them as accessible as possible to
and for persons and officers properly interested in the same," and to "issue such reasonable
regulations governing the search and examination of the documents and records . . . as will be
consistent with their availability to the public and their safe and secure prevention."

Two recording laws are here being invoked, one by each contending party — the Chattel
Mortgage Law (Act No. 1508), by the mortgagor and the Revised Motor Vehicles Law (Act No.
3992), by a purchaser in possession. What effect did the passenger of the Revised Motor
Vehicles Law have on the previous enactment?

The Revised Motor Vehicles Law is a special legislation enacted to "amend and compile the laws
relative to motor vehicles," whereas the Chattel Mortgage Law is a general law covering
mortgages of all kinds of personal property. The former is the latest attempt to assemble and
compile the motor vehicle laws of the Philippines, all the earlier laws on the subject having been
found to be very deficient in form as well as in substance (Villar and De Vega, Revised Motor
Vehicles Law, p. 1); it had been designed primarily to control the registration and operation of
motor vehicles (section 2, Act No. 3992).

Counsel for petitioner contends that the passage of the Revised Motor Vehicles Law had the
effect of repealing the Chattel Mortgage Law, as regards registration of motor vehicles and of the
recording of transaction affecting the same. We do not believe that it could have been the
intention of the legislature to bring about such a repeal. In the first place, the provisions of the
Revised Motor Vehicles Law on registration are not inconsistent with does of the Chattel
Mortgage Law. In the second place, implied repeals are not favored; implied repeals are
permitted only in cases of clear and positive inconsistency. The first paragraph of section 5
indicates that the provisions of the Revised Motor Vehicles Law regarding registration and
recording of mortgage are not incompatible with a mortgage under the Chattel Mortgage Law.
The section merely requires report to the Motor Vehicles Office of a mortgage; it does not state
that the registration of the mortgage under the Chattel Mortgage Law is to be dispensed with. We
have, therefore, an additional requirements in the Revised Motor Vehicles Law, aside from the
registration of a chattel mortgage, which is to report a mortgage to the Motor Vehicles Office, if
the subject of the mortgage is a motor vehicle; the report merely supplements or complements
the registration.

The recording provisions of the Revised Motor Vehicles Law, therefore, are merely
complementary to those of the Chattel Mortgage Law. A mortgage in order to affect third persons
should not only be registered in the Chattel Mortgage Registry, but the same should also be
recorded in the motor Vehicles Office as required by section 5 (e) of the Revised Motor Vehicles
Law. And the failure of the respondent mortgage to report the mortgage executed in its favor had
the effect of making said mortgage ineffective against Borlough, who had his purchase registered
in the said Motor Vehicles Office.

On failure to comply with the statute, the transferee's title is rendered invalid as against a
subsequent purchaser from the transferor, who is enabled by such failure of compliance
to retain the indicia of ownership, such as a subsequent purchaser in good faith, or a
purchaser from a conditional buyer in possession; and the lien of a chattel mortgage
given by the buyer to secure a purchase money loan never becomes effective in such
case as against an innocent purchaser. (60 Corpus Juris Secundum, p. 171.)

One holding a lien on a motor vehicle, in so far as he can reasonably do so, must protect
himself and others thereafter dealing in good faith by complying and requiring compliance
with the provisions of the laws concerning certificates of title to motor vehicles, such as
statutes providing for the notation of liens or claims against the motor vehicle certificate
of title or manufacturer's certificate, or for the issuance to the mortgagee of a new
certificate of ownership. Where the lien holder has satisfied himself that the existence of
the lien is recited in the certificate of title, he has done all that the law contemplates that
he should do, and there is notice to the public of the existing lien, which continues valid
until the record shows that it has been satisfied and a new certificate issued on legal
authority, even through another certificate which does not disclose the lien is procured as
the result of false statements made in the application therefore, and the vehicle is
purchased by a bona fide purchaser.

The holder of a lien who is derelict in his duty to comply and require compliance with the
statutory provisions acts at his own peril, and must suffer the consequence of his own
negligence; and accordingly, he is not entitled to the lien as against a subsequent
innocent purchaser filed as provided by other chattel mortgage statutes. The rule is
otherwise, however, as against claimants not occupying the position of innocent
purchaser, such as a judgment creditor, or one acquiring title with actual notice of an
unregistered lien, and the statutes do not protect a purchaser holding under registered
title if a link in the title is forgery. Moreover, such statute will not impair vested rights of a
mortgage under a chattel mortgage duly recorded. (60 C.J.S., pp. 181-182.)

The above authorities leave no room for doubt that purchaser O. N. Borlough's right to the
vehicle as against the previous and prior mortgage Fortune Enterprises, Inc., which failed to
record its lien in accordance with the Revised Motor Vehicles Law, should be upheld.
For the foregoing consideration, the judgment of the Court of Appeals is hereby reversed and
that of the Court of First Instance affirmed, with costs against respondent.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19207 December 21, 1922

W. R. GIBERSON, plaintiff-appellee,
vs.
A. N. JUREIDINI BROS., INC., defendant-appellant.

Del Rosario and Del Rosario for appellant.

McVean and Vickers and Block, Johnston and Greenbaum for appellee.

MALCOLM, J.:

This is an appeal from a judgment rendered by the Honorable Adolph Wislizenus, Judge of First
Instance of Cebu, finding in favor of each of plaintiff's four causes of action, and authorizing the
recovery by the plaintiff, the receiver in insolvency proceedings in civil case No. 3586, of various
goods, wares, merchandise, credits, and money transferred by H. K. Motoomul & Co. to A. N.
Jureidini Bros., Inc., on May 24, 1921, and June 13, 1921.

H. K. Motoomul & Co. was, at the times mentioned in the complaint, a partnership doing
business in the cities of Cebu and Iloilo. Sometime prior to May 24, 1921, the company became
financially embarrassed. A. N. Jureidini Bros., Inc., a larger creditor of Motoomul & Co., became
aware of the precarious condition of the latter, because of the diminishing payments on account
of a debt. Ultimately, Motoomul & Co. delivered to Jureidini Brothers, on May 24, 1921, one of
the debtor's Iloilo stores known as Bazar Aguila de Oro. On the same day also, credits receivable
belonging to Motoomul & Co. were transferred to Jureidini Bros. Still later, on June 13, 1921,
another stock of goods belonging to Motoomul & Co. passes to Jureidini Bros. The documents
evidencing these transfer appears in the record.

Within thirty days after these assignments were made, or, to be exact, on June 22, 1921, a
number of creditors of H. K. Motoomul & Co. initiated successfully involuntary insolvency
proceedings against it. Later, action was brought by the receiver appointed by the court, with the
results above related.

The above constitute the principal facts, which are accurately stated in the decision of the trial
court. In so far as the ten assignments of error made in this court relate to question of fact, we
may say, generally, that we agree with the findings of the trial judge.

It would be possible to forego consideration of many of appellant's point, because he himself

announces on page 46 of the bill of exceptions, "That the defendant has not filed the bond
required by the court, because it agrees to the judgment being executed in accordance with law,
except so far as concerns the second cause of action." We prefer, however, not to hold appellant
to this allegation or admission in his own pleadings, and propose, therefore, to comment on the
various assignments of error.
Addressing attention directly to appellant's third, fifth, sixth, and eight assignments of error, the
court clearly did not err in holding that the transfer or assignments must be revoked, because
made for the purpose of giving A. N. Jureidini Bros., Inc., preference over the other creditors of
H. K. Motoomul & Co. The provisions of section 70 of the Insolvency Law (Act No. 1956), were
placed on the statute books to cover exactly such a situation, and to give equal rights to all of the
creditors of the insolvent. The evidence discloses that A. N. Jureidini Bros., Inc. had reasonable
cause to believe that H. K. Motoomul & Co. was insolvent.

With reference to appellant's first and seventh assignments of error, no one denies that H. K.
Motoomul & Co. was indebted to A. N. Jureidini Bros., Inc., for a considerable sum of money.
This reason, alone, however, gives the creditor no right to a preference. But, in this connection,
appellant relies on Exhibit 1, which purports to be a chattel mortgage executed in the sum of
P100,000 by H. Dialdas Motoomul and A. N. Jureidini Bros., Inc., on December 1, 1919, but not
registered until May 5, 1921. The operative words in the alleged mortgage make reference to the
list A, and the only description of the property contained in this list is: "1. A store No. 79 on
Magallanes Street, municipality of Cebu, formerly belonging to T. Thakurdas, with all the
merchandise, effects, wares, and other bazar goods contained on the said store. 2. A store No.
19 on Real Street, Iloilo, Panay, P. I., formerly belonging to Guillermo Asayas, with all the
merchandise, effects, wares and other bazar goods contained in the said store." The document
contains no oath as required by our Chattel Mortgage Law.

The trial judge held, and properly, that Exhibit 1 was invalid because the oath required by law did
not appear therein, and because the subject-matter was not described therein with sufficient
particularity. The Chattel Mortgage Law, in its section 5, in describing what shall be deemed
sufficient to constitute a good chattel mortgage, includes the requirements of an affidavit of good
faith appended to the mortgage and recorded therewith. It has been held by reputable courts that
the absence of the affidavits vitiates a mortgage as against creditors and subsequent
encumbrancers. (People vs. Burns [1910], 161 Mich., 169; 137 A. S. R., 466, and notes; Deseret
National Bank vs. Kidman [1903], 25 Utah, 379; 95 A. S. R., 856.) Section 7 of the Chattel
Mortgage Law provides that "The description of the mortgage property shall be such as to enable
the parties to the mortgage, or any other person, after reasonable inquiry and investigation, to
identify the same." Identification of the mortgaged property would be impossible in this case. lawphil.net

Moreover, if there should exist any doubt on the questions we have just discussed, they should
be thrashed out in the insolvency proceedings. Our constant ruling has been that the court
having possession of the property of the insolvent has ancillary jurisdiction to hear and determine
all questions concerning the title, possession, or control of the same. (De Amuzategui vs.
Macleod [1915], 33 Phil., 80; De Krafft vs. Velez [1916], 34 Phil., 854; Mitsui Bussan Kaisha vs.
Hongkong & Shanghai Banking Corporation [1917], 36 Phil., 27.)

With reference to the proper valuation of the merchandise, which is the subject of appellant's
second and fourth assignments of error, we find sufficient evidence in the record to support the
findings of the trial court. The documents of transfer did not accurately appraise the value of the
property.

As to the credits amounting to P16,892.72, assigned by H. K. Motoomul & Co. to the defendant,
the evidence discloses that with the possible exception of P1,117.06 paid by Florentino Espiritu
and P400 paid by Panjoomul Fulsidas, none of the rest have been collected. Hence, appellant's
ninth assignment of error should be sustained in part. The assignee takes the property in the
same plight and condition that the bankrupt held it. (Winsor vs. McLellan [1843], 2 Story 492;
Fed. Cas. No. 17887; Stewart vs. Platt [1879], 101 U. S., 739.)

Judgment is affirmed, with the sole modification that the defendant, under plaintiff's second
cause of action, shall turn over to the plaintiff only such portions of the credits as have been
realized, but the evidences of indebtedness shall pass to the receiver for such action as may be
proper. Without special finding as to costs in this instance, it is so ordered.
 SECOND DIVISION

G.R. No. 150673 February 28, 2003

SUPERLINES TRANSPORTATION COMPANY, INC., and MANOLET LAVIDES, petitioners,

vs.
ICC LEASING & FINANCING CORPORATION, respondent.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, of the Decision1 of the Court of Appeals in CA-G.R. No. 65126 reversing on appeal the
Decision2 of Branch 142 of the Regional Trial Court of Makati City in Civil Case No. 97-816.

The Antecedents

In 1995, Superlines Transportation Co., Inc. (Superlines, for brevity) decided to acquire five new
buses from the Diamond Motors Corporation for the price of ₱10,873,582.00. However,
Superlines lacked financial resources for the purpose. By virtue of a board resolution, Superlines
authorized its President and General Manager, Manolet Lavides, a graduate of the Ateneo de
Manila School of Law and a businessman for twenty years, to look for and negotiate with a
financing corporation for a loan for the purchase of said buses.

Lavides negotiated with ICC Leasing & Financing Corporation (ICC, for brevity) through the
latter’s Assistant Vice-President for Operations Aida F. Albano, for a financial scheme for the
planned purchase. ICC agreed to finance the purchase of the new buses via a loan and
proposed a three-year term for the payment thereof at a fixed interest rate of 22% per annum.
The new buses to be purchased were to be used by Superlines as security for the loan. ICC
required Superlines to submit certificates of registration of the said buses under the name of
Superlines before the appropriate document was executed by the parties and their transactions
consummated. On October 19, 1995, Diamond Motors Corporation sold to Superlines five new
buses under Vehicle Invoice Nos. 9225 to 9229.3Superlines, through Lavides, acknowledged
receipt of the buses.

On November 22, 1995, the vehicle invoices were filed with the Land Transportation Office which
then issued certificates of registration covering the five buses under the name of
Superlines.4 With the buses now registered under its name, Superlines, through Lavides,
executed two documents, namely: a deed of chattel mortgage over the said buses as security for
the purchase price of the buses in the amount of ₱13,114,287.005 loaned by ICC to Superlines,
which deed was annotated on the face of said certificates of registration, and a promissory note
in favor of ICC binding and obliging itself to pay to the latter the amount of ₱10,873,582.00 in
monthly installments of ₱415,290.00, the first installment to start on December 23, 1995, with
interest thereon at the rate of 22% per annum until full payment of said amount6 in favor of
Superlines and ICC covenanted in said deed that:

Effective upon the breach of any condition of this mortgage, and in case of loss or damage of the
mortgaged property/ies and in addition to the remedies herein stipulated, the MORTGAGEE is
hereby appointed attorney-in-fact of the MORTGAGOR with full power and authority, by the use
of force if necessary, to take actual possession of the mortgaged property/ies without the
necessity of any judicial order or any other permission or power, to remove, sell or dispose of the
mortgaged property/ies, and collect rents therefor, to execute bill of sale, lease or agreements
that may be deemed convenient; to make repairs or improvements in the mortgaged property/ies
and pay the same and perform any other act which the MORTGAGEE may deem convenient for
the proper administration of the mortgaged property/ies; and to file, prove, justify, prosecute,
compromise or settle insurance claims with the insurance company, without the participation of
the MORTGAGOR, under such terms and conditions as the Mortgagee as attorney-in-fact may
consider fair and reasonable. The payment of any expenses advanced by the MORTGAGEE or
its assigns in connection with the purpose indicated herein is also guaranteed by this mortgage.
Any amount received from the sale, disposal or administration abovementioned may be executed
by the MORTGAGEE by virtue of this power and applied to the satisfaction of the obligations
hereby secured, which act is hereby ratified.

The MORTGAGEE shall have the option of selling the property/ies either at public or private sale
at the municipality or at the capital of the province where it may be situated at the time; or at any
municipality where the MORTGAGEE may have a branch, office, or at Metro Manila, the
MORTGAGOR hereby waiving all rights to any notice of such sale.

The MORTGAGOR hereby expressly waives the term of thirty (30) days or any other term
granted or which may hereafter be granted him/it by law as the period which must elapse before
the MORTGAGEE or its assigns shall be entitled to foreclose this mortgage, it being expressly
understood and agreed that the MORTGAGEE may foreclose this mortgage at any time after the
breach of any condition hereof.

It is further agreed that in case of the sale at public auction under foreclosure proceedings of the
property/ies herein mortgaged, or of any part thereof, the MORTGAGEE shall be entitled to bid
for the properties so sold, or for any part thereof, to buy the same, or any part thereof, and to
have the amount of his/its bid applied to the payment of the obligations secured by this mortgage
without requiring payment in cash of the amount of such bid.

The remedies of the MORTGAGEE under the powers hereby conferred upon him/it shall be and
are in addition to and cumulative with such right of action as the said MORTGAGEE or the
assigns may have in accordance with the present or any future laws of the Philippines.7

Superlines and Lavides executed a Continuing Guaranty to pay jointly and severally in favor of
ICC the amount of ₱13,114,285.00.8 ICC drew and delivered to Superlines Metrobank Check No.
0661909113, dated November 23, 1995, payable to the account of Superlines in the amount of
₱10,873,582.00,9 representing the net proceeds of the loan. The latter acknowledged receipt of
the check in Cash Voucher No. 0.0769.10 Superlines remitted the said check to Diamond Motors
Corporation in full payment of the purchase price of the new buses.

After paying only seven monthly amortizations for the period of December 1995 to June 1996,
Superlines defaulted in the payment of its obligation to ICC.11 On April 2, 1997, ICC wrote
Superlines demanding full payment of its outstanding obligation, which as of March 31, 1997
amounted to ₱12,606,020.55.12 However, Superlines failed to heed said demand.

ICC filed a complaint13 for collection of sum of money with prayer for a writ of replevin on April 21,
1997 with Branch 142 of the Regional Trial Court of Makati City against Superlines and Lavides.
The case was entitled "ICC Leasing & Finance Corporation vs. Superlines Transportation Co.,
Inc., et al." and docketed as Civil Case No. 97-816. ICC alleged, by way of alternative cause of
action, that:

xxx xxx xxx

13. In the event that the Plaintiff fails to locate and/or seize the above-described mortgaged
vehicles from Defendant, its agents and/or assigns, or any such person other than said
Defendant or its representatives, Defendant is obligated to pay Plaintiff the sum of
P12,072,895.59, and an amount equivalent to 5% of the total amount due from Defendant as and
for attorney’s fees, plus expenses of collection, the costs of suit and cost of Replevin Bond.

ICC prayed that after due proceedings, judgment be rendered in its favor, thus:
WHEREFORE, it is respectfully prayed that:

1. A Writ of Replevin be issued, ordering the Court Sheriff and/or any of his deputies, to
seize from Defendant, its agents and/or assigns, or any such person other than said
Defendant or its representatives in possession thereof at present, the above-described
vehicles wherever they may be found, to take and keep the same in custody and, to
dispose of them in accordance with Section 6, Rule 60 of the Revised Rules of Court.

2. Judgment be rendered in favor of the Plaintiff and against the Defendant, as follows:

a) Declaring that Plaintiff is entitled to the possession of the subject properties in

accordance with the terms and conditions of the Chattel Mortgage;

b) Ordering Defendant, in case the amount realized from the sale of the
mortgaged properties shall be insufficient to cover its total indebtedness, to pay
the Plaintiff the deficiency;

c) Ordering Defendant to pay Plaintiff the expenses of litigation and costs of suit,
including the costs of the Replevin Bond, plus the stipulated attorney’s fees.

As to the –

ALTERNATIVE CAUSE OF ACTION

Ordering Defendants to pay the outstanding principal balance of P12,072,895.59, to pay the
costs of suit, expenses of litigation and the costs of the Replevin Bond, plus an amount
equivalent to 5% of the total amount due as and for attorney’s fees.

In the meantime, the trial court issued a writ of seizure for the five mortgaged buses.14 On May 29,
1997, the sheriff took possession of the five buses in compliance with the writ of seizure issued
by the trial court.15 Thereafter, ICC instituted extra-judicial foreclosure proceedings over the
subject buses. An auction sale was held on July 2, 1997. ICC offered a bid of ₱7,200,000.00 for
the motor vehicles and was declared the winning bidder, resulting in a deficiency of
P5,406,029.55. In addition, ICC incurred necessary expenses in the amount of ₱920,524.62.
Superlines thus still owed ICC the amount of ₱6,326,556.17.

In their Answer with Counterclaim, Superlines and Lavides asserted that the real agreement of
the parties was one of financing a sale of personal property, the prices for which shall be payable
on installments. Relying on Article 1484(3) of the Civil Code, Superlines and Lavides claimed that
since the chattel mortgage on subject buses was already foreclosed by ICC, the latter had no
further action against Superlines and Lavides for the unpaid balance of the price. They
interposed compulsory damages in the total amount of ₱750,000.00 excluding costs of suit.

Leonardo Serrano, Jr., the Executive Vice-President and Chief Operations Officer of ICC,
testified that the transaction forged by ICC and Superlines was an amortized commercial loan
and not a consumer loan, because under the latter transaction, ICC should have paid the price of
the purchase of its customers (Superlines) directly to the suppliers. However, ICC did not do
business directly with Diamond Motors Corporation; it transacted directly with Superlines. ICC
remitted the purchase price of the buses directly to Superlines and not to Diamond Motors
Corporation. ICC had no contract with Diamond Motors Corporation.

On the other hand, Lavides testified that he and ICC’s Assistant Vice-President for Operations
Aida Albano agreed on a consumer loan for the financing of the purchase of the buses, with ICC
as the vendor, and Superlines as the vendee, of said buses; and that ICC had a special
arrangement with Diamond Motors Corporation on the purchase by Superlines of the buses.
On June 1, 1999, the trial court rendered a decision ordering the dismissal of the case and for
ICC to pay damages and litigation expenses to Superlines and Lavides, the decretal portion of
which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered DISMISSING the instant
complaint and ORDERING plaintiff to pay defendants the following:

1. The sum of P150,000.00 as and for attorney’s fees;

2. The sum of P300,000.00 as moderate damages;

3. The sum of P50,000.00 as litigation expenses and

4. The costs of suit.

SO ORDERED.16

The trial court found that, as testified to by Lavides, ICC and Superlines forged a consumer loan
agreement and not an amortized commercial loan. It further declared that, as testified to by
Lavides, there was a special arrangement for the purchase by ICC of said buses. The trial court
finally stated that Superlines purchased the buses from ICC, the purchase price therefor payable
in monthly installments. ICC appealed the trial court’s decision to the Court of Appeals. On July
30, 2001, the appellate court rendered a decision reversing the decision of the RTC and ordering
Superlines and Lavides to pay the deficiency claim of ICC. The decretal portion thereof reads:

In view of the foregoing, it is Our conclusion that plaintiff-appellant is entitled to the deficiency
claim of ₱5,376,543.96 (Exh. "F-1", p. 155 Record), plus costs of ₱71,807.22 for the Replevin
Bond (Exh. "H", p. 156, Record) and attorney’s fees of ₱508,000.00 (Exh. "G", p. 156, Record).

WHEREFORE, the appealed Decision is REVERSED and SET ASIDE and a new one is
rendered ordering defendants to pay jointly and severally the sum of P5,956,351.18 to the
plaintiff.

SO ORDERED.17

The Court of Appeals stated that ICC and Superlines entered into an amortized commercial loan
agreement with ICC as creditor-mortgagee and Superlines as debtor-mortgagor, and ordered
Superlines and Lavides to pay to ICC jointly and severally the sum of ₱5,956,351.18 as
deficiency.18

It further declared that it was Diamond Motors Corporation and not ICC which sold the subject
buses to Superlines. It held that no evidence had been presented by Superlines to show that ICC
bought the said buses from Diamond Motors Corporation under a special arrangement and that
ICC sold the buses to Superlines. The appellate court also ruled that Article 1484(3) is applicable
only where there is vendor-vendee relationship between the parties and since ICC did not sell
the buses to Superlines, the latter cannot invoke said law.

Hence, this petition.

Petitioners contend that the appellate court committed serious errors of law and/or grave abuse
of discretion amounting to excess or lack of jurisdiction:

1. In concluding that Article 1484 (3) of the Civil Code is inapplicable to the instant
transaction between the parties, and in holding that said transaction was an "amortized
commercial loan", the same being patently contrary to the unrebutted evidence as well as
 the admissions of the respondent’s sole witness that the parties may "verbally" agree as
regards the financial scheme applied for and that the chattel mortgage, promissory note
and other documents executed in the case of a "commercial loan" are no different from
those documents executed in the case of a "consumer loan".

2. In concluding that the respondent is in any event entitled to deficiency judgment as it is

deemed to have chosen the remedy of exacting fulfillment of the obligation under
paragraph (1) of Article 1484 of the Civil Code, the same being patently contrary to
incontestable fact that what respondent availed of in the instant case is foreclosure of the
chattel mortgage and not the alternative prayer contained in the relief portion of its
complaint.19

Anent the first assignment of error, petitioners aver that the findings of the Court of Appeals that
the transaction forged by petitioners and private respondent was an amortized commercial loan
and not a consumer loan are belied by the evidence on record, more specifically the testimony of
Lavides and that of respondent’s witness Leonardo Serrano, Jr. The Promissory Note and
Chattel Mortgage executed by petitioner Superlines and the Continuing Guaranty executed by
both petitioners are not conclusive of the nature of the transaction concluded by them, private
respondent and Diamond Motors Corporation. Petitioners further claim that the appellate court
also ignored the unrebutted testimony of Lavides that respondent and Diamond Motors
Corporation forged a special arrangement under which the latter will expedite the issuance of the
certificates of registration over the buses under the name of Superlines. Petitioners also argue
that the word "vendee" in Article 1484(3) of the New Civil Code is used in its generic term, and
hence, it may mean an assignee or a mortgagee such as respondent.

For its part, respondent contends that the findings and conclusions of the Court of Appeals were
buttressed by the documentary and testimonial evidence on record which should prevail over
those of the trial court:

We do not agree with the lower court that Art. 1484 (3) of the New Civil Code is applicable to the
instant case. DIAMOND is the seller of the five units of buses and not the plaintiff. No convincing
evidence, except the self-serving testimony of defendant Manolet Lavides, was presented to
prove that there was an internal arrangement between the plaintiff, as financing agent, and
Diamond, as seller of the buses. In fact, defendant Lavides admitted under oath that DIAMOND
and plaintiff did not enter into transaction over the sale of the buses (TSN, February 26, 1999, p.
12). The conclusion of the lower court that the parties entered into a financing scheme covered
by Article 1484 (3) of the New Civil Code is therefore unsubstantiated.

The evidence shows that the transaction between the parties was an "amortized commercial
loan" to be paid in installments. Defendants failed to prove that a "special arrangement"
regarding the nature of the transaction was agreed upon between the plaintiff and the
defendants. Aida Albano, plaintiff’s employee who allegedly agreed with the request of defendant
Manolet Lavides for a special arrangement, was not presented. It bears emphasizing that
whoever alleges fraud or mistake affecting a transaction must substantiate his allegation, since it
is presumed that a person takes ordinary care of his concerns and private transactions have
been fair and regular (Mangahas vs. CA, 304 SCRA 375). If indeed defendant Manolet Lavides,
a law graduate from a prestigious law school (TSN, February 26, 1999, p. 3) and a successful
businessman for twenty (20) years ...., who admits to having meticulously examined the subject
documents ... intended a financing scheme covered by Art. 1484 of the New Civil Code, he
should have objected to the contents of the documents and incorporated therein his true intent.20

At the core of petitioners’ case is their claim that the findings of facts of the Court of Appeals and
its conclusions anchored thereon are belied by the evidence on record in contrast to those of the
trial court. It bears stressing, however, that in a petition for review on certiorari, only questions of
law may be raised in said petition. The jurisdiction of this Court in cases brought to it from the
Court of Appeals is confined to reviewing and reversing the errors of law ascribed to it, findings of
facts being conclusive on this Court. The Court is not tasked to calibrate and assess the
probative weight of evidence adduced by the parties during trial all over again.21 In those
instances where the findings of facts of the trial court and its conclusions anchored on said
findings are inconsistent with those of the Court of Appeals, this Court does not automatically
delve into the record to determine which of the discordant findings and conclusions should
prevail and to resolve the disputed facts for itself. This Court is tasked to merely determine which
of the findings of the two tribunals are conformable to the facts at hand.22 So long as the findings
of facts of the Court of Appeals are consistent with or are not palpably contrary to the evidence
on record, this Court shall decline to embark on a review on the probative weight of the evidence
of the parties. Indeed, in Tan vs. Lim,23this Court, citing its ruling in Hermo vs. Court of
Appeals,24 held that it is the findings of the Court of Appeals and not those of the trial court which
are final and conclusive on this Court. The rule is not without exception. This Court may review
the findings of facts of the Court of Appeals and its conclusions based thereon if the inference
made by the appellate court from its findings of facts is manifestly erroneous, absurd or
impossible, or when the judgment of the said court is premised on a misappreciation of facts.25

In this case, the findings of facts of the Court of Appeals and its conclusions anchored thereon
are in terra firma, buttressed as they are by the evidence on record. The Court of Appeals
correctly ruled that the findings of facts, deductions, and conclusions of the trial court are not
warranted by the evidence on record.

Petitioners failed to adduce a preponderance of evidence to prove that respondents and

Diamond Motors Corporation entered into a special arrangement relative to the issuance of
certificates of registration over the buses under the name of petitioner Superlines. Petitioners
were also unable to prove that respondent purchased from Diamond Motors Corporation the new
buses. In contrast, the vehicle invoices of Diamond Motors Corporation26irrefragably show that it
sold the said buses to petitioner Superlines. The net proceeds of the loan were remitted by
respondent to petitioner Superlines and the latter remitted the same to Diamond Motors
Corporation in payment of the purchase price of the buses. In fine, respondent and Diamond
Motors Corporation had no direct business transactions relative to the purchase of the buses and
the payment of the purchase price thereof.

As aptly observed by the Court of Appeals, petitioner Lavides is a graduate of the Ateneo de
Manila University School of Law. He had been in business for twenty years or so. It is incredible
that petitioner Superlines through petitioner Lavides never required respondent and Diamond
Motors Corporation to execute a deed evidencing their special agreement or arrangement if
indeed they had one.

The trial court indulged in a non sequitur when it quoted part of the testimony of Leonardo
Serrano, Jr. out of context and used it as anchor for its finding that respondent and Diamond
Motors Corporation forged a special arrangement. The testimony of Leonardo Serrano, Jr. is as
follows:

ATTY. FABIE

Q Now, on page 12 of the transcript of stenographic notes of October 9, 1998, to the

question of Atty. Agcaoili, the question is this and I quote:

Q - Now, after that visit to the office of Superlines Inc. in Atimonan, Quezon what other
circumstances or events transpired in connection with the evaluation or approval of the
loan of the defendants Superlines?"

And your answer was this:

A - The regular paper requirements, meaning the way the loan proposal and the approval
report inclusive of credit showing credit checking was presented for approval by our
Executive Committee."

ATTY. FABIE

What is this ‘regular papers requirement’ you are referring to, Mr. Witness?

WITNESS

A Those papers that are presented to the Executive Committee, Sir.

ATTY. FABIE

Q Papers that are presented to the Executive Committee?

WITNESS

A This will include evaluation report of the corporations financial statement credit
checking from his creditors and this will include evidence of the collaterals being
presented for the loan, Sir.

ATTY. FABIE

Q In this particular case of Superlines Transportation Company, those requirements were

complied with, Mr. Witness?

WITNESS

A Yes, Sir.

ATTY. FABIE

Q By way, in consumer loan, these papers are practically the same, am I correct, Mr.
Witness?

WITNESS

A In consumer loan, sometimes we have additional requirements, Sir.

ATTY. FABIE

Q What is that, Mr. Witness?

WITNESS

A Because they are individual applicants, we require them to submit their certificate of
employment with the corresponding amount of their salary, Sir.

ATTY. FABIE

Q You mean to say that consumer loan are specifically for individual and entities are not
supposed to apply in consumer loans, is that what you mean, Mr. Witness?
WITNESS

A As a matter of practice, we classify them as consumer loan, loans for individuals, Sir.

ATTY. FABIE

Q For individuals only?

WITNESS

A Yes, sir.

ATTY. FABIE

Q So, you did not extend consumer loans to corporations other than individuals, Mr.
Witness?

WITNESS

A For companies or corporations, we classified them as commercial loan already, Sir.

ATTY. FABIE

Q Although the scheme adopted on both loans are the same or would be the same, Mr.
Witness?

WITNESS

A In consumer loan, Sir, usually it is for purposes of buying a car or a motor vehicle, Sir.

ATTY. FABIE

Q That is the normal practice, Mr. Witness?

WITNESS

A Yes, Sir. That is the normal practice.

ATTY. FABIE

Q But arrangement can be made by your company regarding the nature of the
transaction, am I correct? Specific arrangement?

WITNESS

A What do you mean?

ATTY. FABIE

Q That you may depart from certain requirements between your company and the
applicant? Mr. Witness?

WITNESS
A When the company ......

ATTY. FABIE

Q In special cases?

WITNESS

A When the company is presented with a loan proposal, we require them to submit
documents depending on the loan proposal, Sir.

ATTY. FABIE

Q Now, did Superlines Transportation Company or Mr. Lavides present to you a loan
proposal and where is that now, Mr. Witness?

WITNESS

A The loan proposal of Mr. Lavides, Mr. Witness?

ATTY. FABIE

Q Yes, in writing?

WITNESS

A No, not in writing?

ATTY. FABIE

Q No written loan proposal, Mr. Witness?

WITNESS

A It was verbally told to us the purpose of his loan, Sir.

ATTY. FABIE

Q Now, is that normal in your corporation, Mr. Witness?

WITNESS

A In the practice?

ATTY. FABIE

Q I am asking you whether that is normal in your corporation that you do not require any
written loan proposal from the applicants, Mr. Witness?

WITNESS

A We do not, Sir.
ATTY. FABIE

Q Even in consumer loan, Mr. Witness?

WITNESS

A We only require when the consumer or individual is applying. Then we require him to
submit the application form.

ATTY. FABIE

Q So, there is an application form, Mr. Witness?

WITNESS

A For consumer loan, yes.

ATTY. FABIE

Q And in commercial loan, you don’t require the applicant to submit a written loan
proposal, Mr. Witness?

WITNESS

A As a matter of (loan) marketing consideration, anybody who wants ....

ATTY. FABIE

Q I am asking you whether that is normal in your operation like Superlines?

WITNESS

A This .....

ATTY. AGCAOILI

Already answered, Your Honor.

ATTY. FABIE

I am asking him now to specific, Your Honor.

COURT

Witness may answer.

WITNESS

A That is not normal. Sorry. That is normal. We do not require them. That is the regular
practice.

ATTY. FABIE
 Q And why not?

ATTY. AGCAOILI

Objection, misleading. It was already answered that that was the normal practice, Your
Honor.

ATTY. FABIE

Q Why do you not require the applicants to submit papers or written loan proposal, Mr.
Witness?

WITNESS

A Because in our business marketing consideration, we finance companies after

evaluation of a particular account and if this account is credit worthy, we sometimes do
away with it, Sir.

ATTY. FABIE

Q So, what is normal is that you ask for written loan proposal and what is sometimes not
normal is that you do not require them to submit any loan proposal, Mr. Witness?

WITNESS

A We....

ATTY. AGCAOILI

I think counsel is already (arguing) with the witness, Your Honor. The question has been
asked several times and the witness consistently answered in the same fashion.

ATTY. FABIE

The Court will know ....

COURT

The answer he gave was that with marketing considerations, we do not require papers in
consumer loan because the client is credit worthy risk. Sometimes we do not require
submission of papers anymore. That is the answer. Alright, proceed.

ATTY. FABIE

I think that is all for the witness, Your Honor.27

Leonardo Serrano, Jr. never testified that respondent and Diamond Motors Corporation had a
special arrangement relative to the registration of the new buses. The mere admission of the
witness that respondent in the course of its business transactions allowed special arrangements
does not constitute proof that it in fact had a special arrangement with Diamond Motors
Corporation relative to the registration of the new buses.

The evidence on record shows that under the Promissory Note, Chattel Mortgage and Continuing
Guaranty, respondent was the creditor-mortgagee of petitioner Superlines and not the vendor of
the new buses. Hence, petitioners cannot find refuge in Article 1484(3) of the New Civil Code. As
correctly held by the Court of Appeals, what should apply was the Chattel Mortgage executed by
petitioner Superlines and respondent in relation to the Chattel Mortgage Law.28 This Court had
consistently ruled that if in an extra-judicial foreclosure of a chattel mortgage a deficiency exists,
an independent civil action may be instituted for the recovery of said deficiency. To deny the
mortgagee the right to maintain an action to recover the deficiency after foreclosure of the chattel
mortgage would be to overlook the fact that the chattel mortgage is only given as security and
not as payment for the debt in case of failure of payment.29 Both the Chattel Mortgage Law and
Act 3135 governing extra-judicial foreclosure of real estate mortgage, do not contain any
provision, expressly or impliedly, precluding the mortgagee from recovering deficiency of the
principal obligation.

In a case of recent vintage, this Court held that if the proceeds of the sale are insufficient to cover
the debt in an extra-judicial foreclosure of the mortgage, the mortgagee is still entitled to claim
the deficiency from the debtor:

To begin with, it is settled that if the proceeds of the sale are insufficient to cover the debt in an
extrajudicial foreclosure of the mortgage, the mortgagee is entitled to claim the deficiency from
the debtor. For when the legislature intends to deny the right of a creditor to sue for any
deficiency resulting from foreclosure of security given to guarantee an obligation it expressly
provides as in the case of pledges [Civil Code, Art. 2115] and in chattel mortgages, while silent
as to the mortgagee’s right to recover, does not, on the other hand, prohibit recovery of
deficiency. Accordingly, it has been held that a deficiency claim arising from the extrajudicial
foreclosure is allowed.30

In the case of PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals,31 this Court declared
that under Section 14 of the Chattel Mortgage Law, the mortgagor is entitled to recover the
balance of the proceeds, upon satisfaction of the principal obligation and costs, thus there is a
corollary obligation on the part of the debtor-mortgagor to pay the deficiency in case of a
reduction in the price at public auction.

In fine then, the Court of Appeals correctly ruled that respondent is entitled to a deficiency
judgment against the petitioners.

IN LIGHT OF THE FOREGOING, the petition is DENIED. The Decision of the Court of Appeals
dated July 30, 2001 appealed from is AFFIRMED in toto. With costs against petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-4637 June 30, 1952

JOSE A. LUNA, petitioner,

vs.
DEMETRIO B. ENCARNACION, Judge of First Instance of Rizal, TRINIDAD REYES and
THE PROVINCIAL SHERIFF OF RIZAL, respondents.

Jose S. Fineza for petitioner.

BAUTISTA ANGELO, J.:

On September 25, 1948, a deed designated as chattel mortgage was executed by Jose A. Luna
in favor of Trinidad Reyes whereby the former conveyed by way of first mortgage to the latter a
certain house of mixed materials stated in barrio San Nicolas, municipality of Pasig, Province of
Rizal, to secure the payment of a promissory note in the amount of P1,500, with interest at 12
per cent per annum. The document was registered in the office of the register of deeds for the
Province of Rizal. The mortgagor having filed to pay the promissory note when it fell due, the
mortgage requested the sheriff of said province to sell the house at public auction so that with its
proceeds the amount indebted may be paid notifying the mortgagor in writing of the time and
place of the sale as required by law. The sheriff acceded to the request and sold the property to
the mortgagee for the amount covering the whole indebtedness with interest and costs. The
certificate of sale was issued by the sheriff on May 28, 1949. After the period for the redemption
of the property had expired without the mortgagor having exercised his right to repurchase, the
mortgagee demanded from the mortgagor the surrender of the possession of the property, but
the later refused and so on October 13, 1950, she filed a petition in the Court of First Instance of
Rizal praying that the provincial sheriff be authorized to place her in possession of the property
invoking in her favor the provisions of Act No. 3135, as amended by Act No. 4118.

When the petition came up for hearing before the court on October 25, 1950, Jose A. Luna, the
mortgagor, opposed the petition on the following grounds: (1) that Act No. 3135 as amended by
Act No. 4118 is applicable only to a real estate mortgage; (2) that the mortgage involved herein is
a chattel mortgage; and (3) that even if the mortgage executed by the parties herein be
considered as real estate mortgage, the extra-judicial sale made by the sheriff of the property in
question was valid because the mortgage does not contain an express stipulation authorizing the
extra-judicial sale of the property. After hearing, at which both parties have expressed their views
in support of their respective contentions, respondent judge, then presiding the court, overruled
the opposition and granted the petition ordering the provincial sheriff of Rizal, or any of this
disputives, to immediately place petitioner in possession of the property in question while at the
same time directing the mortgagor Jose A. Luna to vacate it and relinquish it in favor of
petitioner. It is from this order that Jose A. Luna desires now to obtain relief by filing this petition
for certioraricontending that the respondent judge has acted in excess of his jurisdiction.

The first question which petitioner poses in his petition for certiorari is that which relates to the
validity of the extra-judicial sale made by the provincial sheriff of Rizal of the property in question
in line with the request of the mortgagee Trinidad Reyes. It is contended that said extra-judicial
sale having been conducted under the provisions of Act No. 3135, as amended by Act No. 4118,
is invalid because the mortgage in question is not a real estate mortgage and, besides, it does
not contain an express stipulation authorizing the mortgagee to foreclose the mortgage extra-
judicially.

There is merit in this claim. As may be gleaned from a perusal of the deed signed by the parties
(Annex "C"), the understanding executed by them is a chattel mortgage, as the parties have so
expressly designated, and not a real estate mortgage, specially when it is considered that the
property given as security is a house of mixed materials which by its very nature is considered as
personal property. Such being the case, it is indeed a mistake for the mortgagee to consider this
transaction in the light of Act No. 3135, as amended by Act No. 4118, as was so considered by
her when she requested to provincial sheriff to sell it extra-judicially in order to secure full
satisfaction of the indebtedness still owed her by the mortgagor. It is clear that Act No. 3135, as
amended, only covers real estate mortgages and is intended merely to regulate the extra-judicial
sale of the property mortgaged if and when the mortgagee is given a special power or express
authority to do so in the deed itself, or in a document annexed thereto. These conditions do not
here obtain. The mortgage before us is not a real estate mortgage nor does it contain an express
authority or power to sell the property extra-judicially.

But regardless of what we have heretofore stated, we find that the validity of the sale in question
may be maintained, it appearing that the mortgage in question is a chattel mortgage and as such
it is covered and regulated by the Chattel Mortgage Law, Act No. 1508. Section 14 of this Act
allows the mortgagee through a public officer in almost the same manner as that allowed by Act
No. 3135, as amended by Act No. 4118, provided that the requirements of the law relative to
notice and registration are complied with. We are not prepared to state if these requirements of
the law had been complied with in the case for the record before us is not complete and there is
no showing to that effect. At any rate, this issue is not how important because the same can be
treshed out when the opportunity comes for its determination, nor is it necessary for us to
consider it in reaching a decision in the present case. Suffice it to state that for the present we
are not expressing any opinion on this matter which concerns the validity of the sale in question
for the reason that this opinion will only be limited to a matter of procedure relative to the step
taken by the mortgagee in securing the possession of the property involved.

In the supposition that the sale of the property made by the sheriff has been made in accordance
with law, and the question he is confronted is how to deliver the possession of the property to the
purchaser in case of refusal to surrender its possession on the part of the debtor or mortgagor,
the remedy of the purchaser according to the authorities, is to bring an ordinary action for
recovery of possession (Continental Gin Co. vs. Pannell, 160 P., 598; 61 Okl., 102; 14 C.J.S., pp.
1027, 1028). The purchaser cannot take possession of the property by force either directly or
through the sheriff. And the reason for this is "that the creditor's right of possession is conditioned
upon the fact of default, and the existence of this fact may naturally be the subject of
controversy" (Bachrah Motor Co. vs. Summers, 42 Phil., 3, 6). The creditor cannot merely file a
petition for a writ of possession as was done by Trinidad Reyes in this case. Her remedy is to file
an ordinary action for recovery of possession in ordered that the debtor may be given an
opportunity to be heard not only in regarding possession but also regarding the obligation
covered by the mortgage. The petition she has filed in the lower court, which was not even
docketed, is therefore improper and should be regarded.

Wherefore, the order subject of the present petition for certiorari is hereby set aside, with costs
against respondent Trinidad Reyes.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-27132 April 29, 1971

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
MANILA INVESTMENT & CONSTRUCTION, INC. and CIPRIANO S. ALLAS defendants-
appellants.

Medina, Pajarillo, Magtalas and Sadao for plaintiff-appellee.

Aristorenas, Relova and Opeña for defendants-appellants.

DIZON, J.:
In Civil Case No. 33074 of the Court of First Instance of Manila, Branch XV entitled "Philippine
National Bank vs. Manila Investment & Construction, Inc., et al.," decision was rendered on
December 26, 1957, its dispositive portion being partly as follows:

IN VIEW WHEREOF, judgment is rendered condemning defendants, jointly and

severally, to pay plaintiff:

(1) Under the first cause of action the sum of P88,939.48 with daily interest of
P12,77385 plus 1/4% commission or P194.6689 for every 30 days or a fraction
thereof, plus 10% on the principal as attorney's fees and the cost;

(2) On the second cause of action the sum of P356,913.01, plus P48,464 03 and
1/4% or P629.31 for every 30 days or fraction thereof that the amount remain
outstanding and unpaid plus 10% of the principal as attorney's fees, and the cost.

In case of non-payment of the amounts adjudged, the decision also provided for the sale at
public auction of the personal properties covered by the chattel mortgage executed by the
defendants in favor of the plaintiff Bank, and for the disposition of the proceeds in accordance
with law.

After the decision had become executory, instead of having the mortgaged personal properties
sold at public auction, the parties agreed to have them sold, and were in fact sold, at
a private sale. The net proceeds obtained therefrom amounting to P256,941.70 were applied to
the partial satisfaction of the above judgment.

On August 11, 1964, that is, more than five years but less than ten years from the date when the
decision aforesaid became executory, the Philippine National Bank filed in the same Court of
First Instance of Manila an action to revive it. On October 21, 1964, the defendants filed their
answer in which, after admitting some of the allegations of the complaint and denying others,
they interposed the following affirmative defenses:

1. That sometime after the judgment rendered by the Court of First Instance of
Manila in Civil Case No. 33074 became final and executory, plaintiff sold to
various parties in a private sale the mortgaged properties specifically mentioned
in the judgment to be foreclosed and sold at public auction hence the proceeds
thereof must therefore be accounted by plaintiff to the defendants in order that
the same be properly and accordingly applied to the judgment.

2. That notwithstanding the aforesaid sale which was effected sometime in 1958,
plaintiff never rendered an accounting of the proceeds of the sale of the
mortgaged properties to the defendants;

3. That plaintiff has no cause of action in reviving the aforesaid judgment not until
it has rendered proper accounting to the defendants of the proceeds of the
aforesaid sale.

Thereafter, the parties submitted a stipulation of facts, paragraph 3 thereof being of the following
tenor:

3.—That as of August 11, 1964, here remains the sum of P382,388.47 still
unsatisfied which is arrived at in the manner specified in Annex "A".

After the parties had submitted their respective memorandum, the court rendered on August 30,
196,6 the appealed decision whose dispositive portion reads as follows:
 WHEREFORE, the Court renders judgment ordering the defendants to pay the
plaintiff, jointly and severally, the amount of THREE HUNDRED EIGHTY TWO
THOUSAND THREE HUNDRED THIRTY EIGHT AND 47/100 (P382,338.47)
PESOS, with interest at the legal rate from August 12, 1964 until fully paid. Costs
against the defendants.

The defendants appealed to secure a reversal of the above decision claiming firstly, that the
action instituted below is not the proper remedy; secondly, that the private sale of the mortgaged
personal properties was null and void, and lastly, that the appellee is not entitled to a deficiency
judgment.

We are of the opinion that, upon the facts of the case and the law thereto applicable, appellants'
contentions are without merit.

In relation to the first, it is true that the decision rendered in Civil Case 33074 of the Court of First
Instance of Manila provided for the sale at public auction of the personal properties covered by
the chattel mortgage executed in favor of the Bank, but it is likewise true that said personal
properties were sold at a private sale by agreement between the parties. Besides, We see
nothing illegal, immoral or against public order in such agreement entered into freely and
voluntarily. In line with the provisions of the substantive law giving the contracting parties full
freedom to contract provided their agreement is not contrary to law, morals, good customs, public
order or public policy (Article 1306, Civil Code of the Philippines), We held in Philippine National
Bank vs. De Poli thus:

Under article 1255 of the Civil Code (Art. 1306 New Civil Code), the contracting
parties may stipulate that in case of violation of the conditions of the mortgage
contract, the creditor may sell, at private sale and without previous advertisement
or notice, the whole or part of the good mortgaged for the purpose of applying the
proceeds thereof on the payment of the debt. Said stipulation is not contrary to
law or public order, and therefore it is valid. (Emphasis supplied).

As the disposition of the mortgaged personalities in a private sale was by agreement between
the parties, it is clear that appellants are now in estoppel to question it except on the ground of
fraud or duress — pleas that they do not invoke. They do not even claim that the private sale
agreed upon had caused them substantial prejudice.

Appellants contend likewise that, instead of the action to revive the judgment rendered in its
favor, the appellee Bank should have filed a motion in Civil Case 33074 of the Court of First
Instance of Manila for the rendition of a deficiency judgment. It is to be borne in mind, in this
connection, that the action for revival was instituted after the lapse of five but of less than ten
years from the time the decision sought to be revived became executory. Having thus become
stale or dormant, it was not subject to execution by mere motion. Consequently, before the
judgment creditor could move for the rendition of a deficiency judgment and for the issuance of
the corresponding writ of execution, it had to seek the revival of the decision in accordance with
law. In Bank, etc. vs. Greene 61 Phil. 654, We held that "A judgment foreclosing a mortgage
which has lost executory force by the lapse of five years may be revived by filing a complaint
based thereon." This, precisely, is what the appellee Bank did.

Technically, the original judgment, rendered by the Court of First Instance of Manila in Civil Case
No. 33074 should have been literally revived, but the record shows that at the hearing of the
action below the parties formally stipulated that the unpaid portion of the amount due under the
decision in favor of the Bank was the sum of P383,388.47 only, after taking into account all the
payments made by the judgment debtors up to the date the stipulation of facts was submitted to
the lower court. Consequently, the deficiency judgment that may be rendered in Civil Case No.
33074 and the writ of execution that may be issued to enforce the same shall be only for said
amount.
Lastly, it is appellants' contention that the appellee Bank is not entitled to a deficiency judgment,
invoking the provisions of Article 2115 of the new Civil Code. The issue thus raised was already
resolved in the negative in Ablaza vs. Ignacio, G.R. No.
L-11466, promulgated on March 23, 1958 where We said, inter alia, the following:

We are of the opinion that the trial court is in error. It is clear from Article 2141
that the provisions of the New Civil Code on pledge shall apply to a chattel
Mortgage only in so far as they are not counter to any provision of the Chattel
Mortgage Law, otherwise the provisions of the latter will not apply. Here we find
that the provisions of the Chattel Mortgage with regard to the effects of the
foreclosure of a chattel mortgage are precisely contrary to the provisions of
Article 2115 which were applied by the trial Court.

xxx xxx xxx

Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other
authors in 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. (Manila
Trading and Supply Co., vs. Tamaraw Plantation Co., 47 Phil. 513; Emphasis
supplied.)

It is clear, therefore, that the proceeds of the sale of the mortgaged personal properties of the
herein appellants constitute only a pro tanto satisfaction of the monetary award made by the
court and the appellee Bank is entitled to collect the balance.

WHEREFORE, the decision appealed from is hereby affirmed, with costs.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 106435 July 14, 1999

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES

and HIRAM DIDAY R. PULIDO, petitioners,
vs.
HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES, respondents.

GONZAGA-REYES, J.:
Before Us for review on certiorari is the decision of the respondent Court of Appeals in C.A. G.R.
C.V. No. 27861, promulgated on April 23, 1992, 1 affirming in toto the decision of the Regional
Trial Court of Makati 2 to a award respondent bank's deficiency claim, arising from a loan secured
by chattel mortgage.

The antecedents of the case are as follows:

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.

On February 8, 1990, the RTC of Makati rendered a decision on the case, the dispositive portion
of which we reproduce as follows:

WHEREFORE, judgment is hereby rendered ordering the defendants to pay

jointly and severally plaintiff the (1) sum of P4,366,332.46 representing the
deficiency claim of the latter as of March 31, 1984, plus 21% interest per annum
and other charges from April 1, 1984 until the whole amount is fully paid and (2)
the costs of the suit. SO ORDERED." 4

The Court of Appeals affirmed the RTC decision. Hence, this Petition.

The petition raises the following grounds:

1. Respondent appellate court gravely erred in not reversing the decision of the
trial court, and in not holding that the public auction sale of petitioner PAMECA's
chattels were tainted with fraud, as the chattels of the said petitioner were bought
by private respondent as sole bidder in only 1/6 of the market value of the
property, hence unconscionable and inequitable, and therefore null and void.

2. Respondent appellate court gravely erred in not applying by analogy Article

1484 and Article 2115 of the Civil Code by reading the spirit of the law, and taking
into consideration the fact that the contract of loan was a contract of adhesion.

3. The appellate court gravely erred in holding the petitioners Herminio Teves,
Victoria Teves and Hiram Diday R. Pulido solidarily liable with PAMECA Wood
Treatment Plant, Inc. when the intention of the parties was that the loan is only
for the corporation's benefit.

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 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 courtr. 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. 10

Petitioners also question the ruling of respondent court, affirming the RTC, to hold private
petitioners, officers and stockholders of petitioner PAMECA, liable with PAMECA for the
obligation under the loan obtained from respondent bank, contrary to the doctrine of separate
and distinct corporate personality. 11 Private petitioners contend that they became signatories to
the promissory note "only as a matter of practice by the respondent bank", that the promissory
note was in the nature of a contract of adhesion, and that the loan was for the benefit of the
corporation, PAMECA, alone. 12

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. 15

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 foreclosire 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.

Sec. 14 of Act No. 1508, as amended, or the chattel Mortgage Law, states:

xxx xxx xxx

The officer making the sale shall, within thirty days thereafter, make in writing a
return of his doings and file the same in the office of the Registry of Deeds where
the mortgage is recorded, and the Register of Deeds shall record the same. The
fees of the officer for selling the property shall be the same as the case of sale on
execution as provided in Act Numbered One Hundred and Ninety, and the
amendments thereto, and the fees of the Register of Deeds for registering the
officer's return shall be taxed as a part of the costs of sale, which the officer shall
pay to the Register of Deeds. The return shall particularly describe the articles
sold, and state the amount received for each article, and shall operate as a
discharge of the lien thereon created by the mortgage. The proceeds of such sale
 shall be applied to the payment, first, of the costs and expenses of keeping and
sale, and then to the payment of the demand or obligation secured by such
mortgage, and the residue shall be paid to persons holding subsequent
mortgages in their order, and the balance, after paying the mortgage, shall be
paid to the mortgagor or persons holding under him on demand. (Emphasis
supplied).

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. As explained in Manila Trading
and Supply Co. vs. Tamaraw Plantation Co. 17, cited in Ablaza vs. Ignacio, supra:

While it is true that section 3 of Act No. 1508 provides that "a chattel mortgage is
a conditional sale", it further provides that it "is a conditional sale of personal
property as security for the payment of a debt, or for the performance of some
other obligation specified therein." The lower court overlooked the fact that the
chattels included in the chattel mortgage are only given as security and not as a
payment of the debt, in case of a failure of payment.

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 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.

We find no reason to disturb the ruling in Ablaza vs Ignacio, and the cases reiterating it. 18

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. 19

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. 1âwphi1.nêt

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.

We likewise affirm private petitioners' joint and several liability with petitioner corporation in the
loan. As found by the trial court and the Court of Appeals, the terms of the promissory note
unmistakably set forth the solidary nature of private petitioners' commitment. Thus:

On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT
PLANT, INC., a corporation organized and existing under the laws of the
Philippines, with principal office at 304 El Hogar Filipina Building, San Juan,
Manila, promise to pay to the order of DEVELOPMENT BANK OF THE
PHILIPPINES at its office located at corner Buendia and Makati Avenues, Makati,
Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN THOUSAND
EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$
267,881.67) with interest at the rate of three per cent (3%) per annum over DBP's
borrowing rate for these funds. Before the date of maturity, we hereby bind
ourselves, jointly and severally, to make partial payments as follows:

xxx xxx xxx

In case of default in the payment of any installment above, we bind ourselves to

pay DBP for advances . . .
 xxx xxx xxx

We further bind ourselves to pay additional interest and penalty charges on loan
amortizations or portion thereof in arrears as follows:

xxx xxx xxx

In addition to the above, we also bind ourselves to pay for bank advances for
insurance premiums, taxes . . .

xxx xxx xxx

We further bind ourselves to reimburse DBP on a pro-rata basis for all costs
incurred by DBP on the foreign currency borrowings from where the loan shall be
drawn . . .

xxx xxx xxx

In case of non-payment of the amount of this note or any portion of it on demand,

when due, or any other amount or amounts due on account of this note, the
entire obligation shall become due and demandable, and if, for the enforcement
of the payment thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is
constrained to entrust the case to its attorneys, we jointly and severally bind
ourselves to pay for attorney's fees as provided for in the mortgage contract, in
addition to the legal fees and other incidental expenses. In the event of
foreclosure of the mortgage securing this note, we further bind ourselves jointly
and severally to pay the deficiency, if any. (Emphasis supplied) 21

The promissory note was signed by private petitioners in the following manner:

PAMECA WOOD TREATMENT PLANT, INC.

By:

(Sgd) HERMINIO G. TEVES

(For himself & as President of above-named corporation)

(Sgd) HIRAM DIDAY PULIDO

(Sgd) VICTORIA V. TEVES 22

From the foregoing, it is clear that private petitioners intended to bind themselves solidarily with
petitioner PAMECA in the loan. As correctly submitted by respondent bank, private petitioners
are not made to answer for the corporate act of petitioner PAMECA, but are made liable because
they made themselves co-makers with PAMECA under the promissory note.

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of
Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against
petitioners.

SO ORDERED.