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FIRST DIVISION

[G.R. No. 101163. January 11, 1993.]

STATE INVESTMENT HOUSE, INC. , petitioner, vs. COURT OF APPEALS


and NORA B. MOULIC , respondents.

Escober, Alon & Associates for petitioner.


Martin D. Pantaleon for private respondent.

SYLLABUS

1. COMMERCIAL LAWS; NEGOTIABLE INSTRUMENTS; HOLDER IN DUE COURSE;


INSTRUMENTS HELD FREE FROM DEFECTS OF TITLE OF PRIOR PARTIES;
CONSEQUENCES THEREOF; CASE AT BAR. — A prima facie presumption exists that the
holder of a negotiable instrument is a holder in due course. (State Investment House, Inc. v.
Court of Appeals, G.R. No. 72764, 13 July 1989, 175 SCRA 310). Consequently, the burden
of proving that STATE is not a holder in due course lies in the person who disputes the
presumption. In this regard, MOULIC failed. The evidence clearly shows that: (a) on their
faces the post-dated checks were complete and regular; (b) petitioner bought these
checks from the payee, Corazon Victoriano, before their due dates; (c) petitioner took
these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner
was never informed nor made aware that these checks were merely issued to payee as
security and not for value. Consequently, STATE is indeed a holder in due course. As such,
it holds the instruments free from any defect of title of prior parties, and from defenses
available to prior parties among themselves; STATE may, therefore, enforce full payment
of the checks. (Sales v. Court of Appeals, G.R. No. 76788, 22 January 1990; 181 SCRA
296). MOULIC cannot set up against STATE the defense that there was failure or absence
of consideration. MOULIC can only invoke this defense against STATE if it was privy to the
purpose for which they were issued and therefore is not a holder in due course.
2. ID.; ID.; ID.; NOT PREJUDICED BY THE WITHDRAWAL OF MONEY BY THE DRAWER;
CASE AT BAR. — The drawing and negotiation of a check have certain effects aside from
the transfer of title or the incurring of liability in regard to the instrument by the transferor.
The holder who takes the negotiated paper makes a contract with the parties on the face
of the instrument. There is an implied representation that funds or credit are available for
the payment of the instrument in the bank upon which it is drawn (11 Am Jur 589).
Consequently, the withdrawal of the money from the drawee bank to avoid liability on the
checks cannot prejudice the rights of holders in due course. In the instant case, such
withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of
the checks. Under the facts of this case, STATE could not expect payment as MOULIC left
no funds with the drawee bank to meet her obligation on the checks, so that Notice of
Dishonor would be futile.
3. ID.; ID.; GROUNDS FOR THE DISCHARGE THEREOF; NOT PRESENT IN CASE AT BAR.
— That the post-dated checks were merely issued as security is not a ground for the
discharge of the instrument as against a holder in due course. For, the only grounds are
those outlined in Sec. 119 of the Negotiable Instrument Law: "Sec. 119. Instrument; how
discharged. — A negotiable instrument is discharged: (a) By payment in due course by or
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on behalf of the principal debtor; (b) By payment in due course by the party
accommodated, where the instrument is made or accepted for his accommodation; (c) By
the intentional cancellation thereof by the holder; (d) By any other act which will discharge
a simple contract for the payment of money; (e) When the principal debtor becomes the
holder of the instrument at or after maturity in his own right." Obviously, MOULIC may only
invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument.
But, the intentional cancellation contemplated under paragraph (c) is that cancellation
effected by destroying the instrument either by tearing it up, burning it, or writing the word
"cancelled" on the instrument. The act of destroying the instrument must also be made by
the holder of the instrument intentionally. Since MOULIC failed to get back possession of
the post-dated checks, the intentional cancellation of the said checks is altogether
impossible. On the other hand, the acts which will discharge a simple contract for the
payment of money under paragraph (d) are determined by other existing legislations since
Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code which
enumerates the modes of extinguishing obligations. Again, none of the modes outlined
therein is applicable in the instant case as Sec. 119 contemplates of a situation where the
holder of the instrument is the creditor while its drawer is the debtor. In the present action,
the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry
was returned.
4. ID.; ID.; REQUIREMENTS FOR NOTICE OF DISHONOR; EXCEPTIONS THERETO; CASE
AT BAR. — MOULIC may not unilaterally discharge herself from her liability by the mere
expediency of withdrawing her funds from the drawee bank. She is thus liable as she has
no legal basis to excuse herself from liability on her checks to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no
moment. The need for such notice is not absolute; there are exceptions under Sec. 114 of
the Negotiable Instruments Law. Indeed, MOULIC'S actuations leave much to be desired.
She did not retrieve the checks when she returned the jewelry. She simply withdrew her
funds from her drawee bank and transferred them to another to protect herself. After
withdrawing her funds, she could not have expected her checks to be honored. In other
words, she was responsible for the dishonor of her checks, hence, there was no need to
serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or
indorser of the instrument, either verbally or by writing, the fact that a specified instrument,
upon proper proceedings taken, has not been accepted or has not been paid, and that the
party notified is expected to pay it (Martin v. Browns, 75 Ala. 442) In addition, the
Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or
hampering transactions in commercial paper. Thus, the said statute should not be
tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the
necessities in a single case. (Reinhart vs. Lucas, 118 M Va 466, 190 SSE 72).
5. REMEDIAL LAW; EXTRAJUDICIAL FORECLOSURE OF MORTGAGE (ACT 3135);
MORTGAGEE ENTITLED TO CLAIM FROM DEBTOR DEFICIENCY IN THE PROCEEDS OF
SALE; RATIONALE. — Where the proceeds of the sale are insufficient to cover the debt in
an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency
from the debtor. The step thus taken by the mortgagee-bank in resorting to an extra-
judicial foreclosure was merely to find a proceeding for the sale of the property and its
action cannot be taken to mean a waiver of its right to demand payment for the whole
debt. For, while Act 3135, as amended, does not discuss the mortgagee's right to recover
such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting
recovery. In this jurisdiction, when the legislature intends to foreclose the right of a
creditor to sue for any deficiency resulting from foreclosure of a security given to
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guarantee an obligation, it so expressly provides. For instance, with respect to pledges,
Art. 2115 of the Civil Code does not allow the creditor to recover the deficiency from the
sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on
installment basis, in the event of foreclosure, the vendor "shall have no further action
against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary will be void". (Art. 1484 [3] of the Civil Code.) It is clear then that in the absence of
a similar provision in Act No. 3135, as amended, it cannot be concluded that the creditor
loses his right recognized by the Rules of Court to take action for the recovery of any
unpaid balance on the principal obligation simply because he has chosen to extrajudicially
foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by
the mortgagor in the contract of mortgage.

DECISION

BELLOSILLO , J : p

The liability to a holder in due course of the drawer of checks issued to another merely as
security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover
the balance of the obligation, are the issues in this Petition for Review of the Decision of
respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of
jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation
checks in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August
1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to
petitioner State Investment House, Inc. (STATE). cdll

MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before
maturity of the checks. The checks, however, could no longer be retrieved as they had
already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her
funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On
20 December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and
requested that it be paid in cash instead, although MOULIC avers that no such notice was
given her.
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees
and expenses of litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks because
the jewelry was never sold and the checks were negotiated without her knowledge and
consent. She also instituted a Third-Party Complaint against Corazon Victoriano, who later
assumed full responsibility for the checks.

On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party
Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate court
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affirmed the trial court on the ground that the Notice of Dishonor to MOULIC was made
beyond the period prescribed by the Negotiable Instruments Law and that even if STATE
did serve such notice on MOULIC within the reglementary period it would be of no
consequence as the checks should never have been presented for payment. The sale of
the jewelry was never effected; the checks, therefore, ceased to serve their purpose as
security for the jewelry.
We are not persuaded.
The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all,
at the pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder
of the checks in due course. 1
In this regard, Sec. 52 of the Negotiable Instruments Law provides —
"SECTION 52. What constitutes a holder in due course. — A holder in due
course is a holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face; (b) That he became the holder of
it before it was overdue, and without notice that it was previously dishonored, if
such was the fact; (c) That he took it in good faith and for value; (d) That at the
time it was negotiated to him he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it."
LibLex

Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable
instrument is a holder in due course. 2 Consequently, the burden of proving that STATE is
not a holder in due course lies in the person who disputes the presumption. In this regard,
MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were complete
and regular; (b) petitioner bought these checks from the payee, Corazon Victoriano, before
their due dates; 3 (c) petitioner took these checks in good faith and for value, albeit at a
discounted price; and, (d) petitioner was never informed nor made aware that these
checks were merely issued to payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the instruments
free from any defect of title of prior parties, and from defenses available to prior parties
among themselves; STATE may, therefore, enforce full payment of the checks. 4
MOULIC cannot set up against STATE the defense that there was failure or absence of
consideration. MOULIC can only invoke this defense against STATE if it was privy to the
purpose for which they were issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security is not a ground for the
discharge of the instrument as against a holder in due course. For, the only grounds are
those outlined in Sec. 119 of the Negotiable Instrument Law:
"SECTION 119. Instrument; how discharged. — A negotiable instrument is
discharged: (a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument
is made or accepted for his accommodation; (c) By the intentional cancellation
thereof by the holder; (d) By any other act which will discharge a simple contract
for the payment of money; (e) When the principal debtor becomes the holder of
the instrument at or after maturity in his own right."

Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the
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discharge of the instrument. But, the intentional cancellation contemplated under
paragraph (c) is that cancellation effected by destroying the instrument either by tearing it
up, 5 burning it, 6 or writing the word "cancelled" on the instrument. The act of destroying
the instrument must also be made by the holder of the instrument intentionally. Since
MOULIC failed to get back possession of the post-dated checks, the intentional
cancellation of the said checks is altogether impossible.
On the other hand, the acts which will discharge a simple contract for the payment of
money under paragraph (d) are determined by other existing legislations since Sec. 119
does not specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates
the modes of extinguishing obligations. Again, none of the modes outlined therein is
applicable in the instant case as Sec. 119 contemplates of a situation where the holder of
the instrument is the creditor while its drawer is the debtor. In the present action, the
payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was
returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the
mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she
has no legal basis to excuse herself from liability on her checks to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no
moment. The need for such notice is not absolute; there are exceptions under Sec. 114 of
the Negotiable Instruments Law: prcd

"SECTION 114. When notice need not be given to drawer. — Notice of


dishonor is not required to be given to the drawer in the following cases: (a)
Where the drawer and the drawee are the same person; (b) When the drawee is a
fictitious person or a person not having capacity to contract; (c) When the drawer
is the person to whom the instrument is presented for payment; (d) Where the
drawer has no right to expect or require that the drawee or acceptor will honor the
instrument; (e) Where the drawer had countermanded payment."

Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks
when she returned the jewelry. She simply withdrew her funds from her drawee bank and
transferred them to another to protect herself. After withdrawing her funds, she could not
have expected her checks to be honored. In other words, she was responsible for the
dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is
simply bringing to the knowledge of the drawer or indorser of the instrument, either
verbally or by writing, the fact that a specified instrument, upon proper proceedings taken,
has not been accepted or has not been paid, and that the party notified is expected to pay
it. 8
In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating,
not hindering or hampering transactions in commercial paper. Thus, the said statute
should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order
to meet the necessities in a single case. 9
The drawing and negotiation of a check have certain effects aside from the transfer of title
or the incurring of liability in regard to the instrument by the transferor. The holder who
takes the negotiated paper makes a contract with the parties on the face of the
instrument. There is an implied representation that funds or credit are available for the
payment of the instrument in the bank upon which it is drawn. 1 0 Consequently, the
withdrawal of the money from the drawee bank to avoid liability on the checks cannot
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prejudice the rights of holders in due course. In the instant case, such withdrawal renders
the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds
with the drawee bank to meet her obligation on the checks, 1 1 so that Notice of Dishonor
would be futile.
The Court of Appeals also held that allowing recovery on the checks would constitute
unjust enrichment on the part of STATE Investment House, Inc. This is error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the
obligation of Corazon Victoriano and her husband at the time their property mortgaged to
STATE was extrajudicially foreclosed amounted to P1.9 million; the bid price at public
auction was only P1 million. 1 2 Thus, the value of the property foreclosed was not even
enough to pay the debt in full. prcd

Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial
foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the
debtor. 1 3 The step thus taken by the mortgagee-bank in resorting to an extra-judicial
foreclosure was merely to find a proceeding for the sale of the property and its action
cannot be taken to mean a waiver of its right to demand payment for the whole debt. 1 4
For, while Act 3135, as amended, does not discuss the mortgagee's right to recover such
deficiency, it does not contain any provision either, expressly or impliedly, prohibiting
recovery. In this jurisdiction, when the legislature intends to foreclose the right of a
creditor to sue for any deficiency resulting from foreclosure of a security given to
guarantee an obligation, it so expressly provides. For instance, with respect to pledges,
Art. 2115 of the Civil Code 1 5 does not allow the creditor to recover the deficiency from the
sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on
installment basis, in the event of foreclosure, the vendor "shall have no further action
against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary will be void". 1 6
It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it
cannot be concluded that the creditor loses his right recognized by the Rules of Court to
take action for the recovery of any unpaid balance on the principal obligation simply
because he has chosen to extrajudicially foreclose the real estate mortgage pursuant to a
Special Power of Attorney given him by the mortgagor in the contract of mortgage. 1 7

The filing of the Complaint and the Third-Party Complaint to enforce the checks against
MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering
the unpaid balance of the debt of the VICTORIANOs. LLjur

In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in
due course, STATE, without prejudice to any action for recompense she may pursue
against the VICTORIANOs as Third-Party Defendants who had already been declared as in
default.
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a
new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in
the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit,
without prejudice to any action for recompense she may pursue against the VICTORIANOs
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as Third-Party Defendants.
Cost against private respondent.
SO ORDERED.
Cruz, J . and Griño-Aquino, JJ ., concur.
Padilla, J . , took no part, a former partner in law firm — a retained counsel of petitioner.
Footnotes

1. Rollo, pp. 13-14.


2. State Investment House, Inc. v. Court of Appeals, G.R. No. 72764, 13 July 1989; 175
SCRA 310.
3. Per Deeds of Sale of 2 July 1979 and 25 July 1979, respectively; Rollo, p. 13.
4. Salas v. Court of Appeals, G.R. No. 76788, 22 January 1990; 181 SCRA 296.
5. Montgomery v. Schwald, 177 Mo App 75, 166 SW 831; Wilkins v. Shaglund, 127 Neb 589,
256 NW 31.
6. See Henson v. Henson, 268 SW 378.
7. Art. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss
of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or
merger of the rights of creditor and debtor; (5) by compensation; (6) By novation . . .
8. Martin v. Browns, 75 Ala 442.
9. Reinhart v. Lucas, 118 W Va 466, 190 SE 772.

10. 11 Am Jur 589.


11. See Agbayani, Commercial Laws of the Philippines, Vol. 1, 1984 Ed., citing Ellenbogen
v. State Bank, 197 NY Supp 278.

12. TSN, 25 April 1985, pp. 16-17.


13. Philippine Bank of Commerce v. de Vera, No. L-18816, 29 December 1962; 6 SCRA
1029.
14. Medina v. Philippine National Bank, 56 Phil 651.
15. Art. 2115. The sale of the thing pledged shall extinguish the principal obligation,
whether or not the proceeds of the sale are equal to the amount of the principal
obligation, interest and expenses in a proper case . . . If the price of the sale is less,
neither shall the creditor be entitled to recover the deficiency, notwithstanding any
stipulation to the contrary.
16. Art. 1484 [3] of the Civil Code.
17. See Note 14.

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SECOND DIVISION

[G.R. No. 118585. September 14, 1995.]

AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO


TAN, ELISA TAN, TAN YEE, and SPS. MARCIAL SEE and LILIAN TAN ,
petitioners, vs. HON. COURT OF APPEALS, METROPOLITAN BANK
AND TRUST COMPANY, and THE SHERIFF OF MANILA , respondents.

Baldomero S.P. Gatbonton, Jr., for petitioners.


Corpuz & Ejercito Law Offices for respondent Metropolitan Bank & Trust Co.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS; NOVATION AS A MODE OF EXTINGUISHMENT;


CONCEPT. — Novation is the extinguishment of an obligation by the substitution or change
of the obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor. Novation, unlike other
modes of extinction of obligations, is a juridical act with a dual function, namely, it
extinguishes an obligation and creates a new one in lieu of the old. It can be objective,
subjective, or mixed. Objective novation occurs when there is a change of the object or
principal conditions of an existing obligation while subjective novation occurs when there
is a change of either the person of the debtor, or of the creditor in an existing obligation.
When the change of the object or principal conditions of an obligation occurs at the same
time with the change of either in the person of the debtor or creditor a mixed novation
occurs. LexLibris

2. ID.; ID.; ID.; WILL NOT BE ALLOWED UNLESS IT IS CLEARLY SHOWN BY EXPRESS
AGREEMENT, OR BY ACTS OF EQUAL IMPORT. — The well settled rule is that novation is
never presumed. Novation will not be allowed unless it is clearly shown by express
agreement, or by acts of equal import. Thus, to effect an objective novation it is imperative
that the new obligation expressly declare that the old obligation is thereby extinguished, or
that the new obligation be on every point incompatible with the new one. In the same vein,
to effect a subjective novation by a change in the person of the debtor it is necessary that
the old debtor be released expressly from the obligation, and the third person or new
debtor assumes his place in the relation. There is no novation without such release as the
third person who has assumed the debtor's obligation becomes merely a co-debtor or
surety. cdll

3. ID.; ID.; ID.; ID.; APPLICATION IN CASE AT BAR. — The attendant facts herein do not
make a case of novation. There is nothing in the records to show the unequivocal intent of
the parties to novate the three loan agreements through the execution of PN No. BDS-
3065. The provisions of PN No. BDS-3065 yield no indication of the extinguishment of, or
an incompatibility with, the three loan agreements secured by the real estate mortgages
over TCT No. 105233. On its face, PN No. BDS-3065 has these words typewritten:
"secured by REM" and "9. COLLATERAL. This is wholly/partly secured by: (x) real estate,"
which strongly negate petitioners' asseveration that the consolidation of the three loans
effected the discharge of the mortgaged real estate property. The real estate mortgage
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shows that petitioners agreed to apply the real estate property to secure obligations that
they may thereafter obtain including their renewals or extensions with the principals fixed
at P600,000.00, P150,000.00, and P250,000.00 which when added have an aggregate sum
of P1.0 million. PN No. BDS-3605 merely restructured and renewed the three previous
loans to expediently make the loans current. There was no change in the object of the prior
obligations. The consolidation of the three loans, contrary to petitioners' contention, did
not release the mortgaged real estate property from any liability because the mortgage
annotations at the back of TCT No. 105233, in fact, all remained uncancelled, thus
indicating the continuing subsistence of the real estate mortgages. Neither can it be validly
contended that there was a change or substitution in the persons of either the creditor
(Metrobank) or more specifically the debtors (petitioners) upon the consolidation of the
loans in PN No. BDS 3605. The bare fact of petitioners' conversion from a partnership to a
corporation, without sufficient evidence, either testimonial or documentary, that they were
expressly released from their obligations, did not make petitioner AJAX, with its new
corporate personality, a third person or new debtor within the context of a subjective
novation. If at all, petitioner AJAX only became a co-debtor or surety. Without express
release of the debtor from the obligation, any third party who may thereafter assume the
obligation shall be considered merely as co-debtor or surety. Novation arising from a
purported change in the person of the debtor must be clear and express because, to
repeat, it is never presumed. Clearly then, from the aforediscussed points, neither objective
nor subjective novation occurred here. Anent the third assigned error, petitioners posit that
the extrajudicial foreclosure is invalid as it included two unsecured loans: one, the
consolidated loan of P1.0 million under PN BDS No. 3605, and two, the P970,000.00 loan
under PN BDS No. 3583 subsequently extended by Metrobank. CDta

4. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; FORECLOSURE OF MORTGAGE; EXTENT


OF ACTION THEREOF. — An action to foreclose a mortgage is usually limited to the
amount mentioned in the mortgage, but where on the four corners of the mortgage
contracts, as in this case, the intent of the contracting parties is manifest that the
mortgaged property shall also answer for future loans or advancements then the same is
not improper as it is valid and binding between the parties. For merely consolidating and
expediently making current the three previous loans, the loan of P1.0 million under PN BDS
No. 3605, secured by the real estate property, was correctly included in the foreclosure's
bid price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583,
however, was found to be improper by public respondent which ruling we shall not disturb
for Metrobank's failure to appeal therefrom. Nonetheless, the inclusion of PN BDS No.
3583 in the bid price did not invalidate the foreclosure proceedings. As correctly pointed
out by the Court of Appeals, the proceeds of the auction sale should be applied to the
obligation pertaining to PN BDS No. 3605 only, plus interests, expenses and other charges
accruing thereto. It is Metrobank's duty as mortgagee to return the surplus in the selling
price to the mortgagors. Lastly, petitioners cite as supporting authority C & C Commercial
Corp. v. Philippine National Bank where this Court enjoined the foreclosure proceedings for
including unsecured obligations. Petitioners' reliance on the C & C Commercial Corp . v.
Phil. National Bank case is misplaced. In that case, the foreclosure sale included previously
incurred unsecured obligations in favor of PNB which were not in the contemplation of the
mortgage contract, whereas in the instant case, the mortgages were one in providing that
the mortgaged real estate property shall also secure future advancements or loans, as well
as renewals or extensions of the same. cdlex

DECISION
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FRANCISCO , J : p

In its March 30, 1994 decision, public respondent Court of Appeals af rmed the
trial court's judgment upholding the validity of the extrajudicial foreclosure of the real
estate property of petitioners-spouses Marcial See and Lilian Tan, located at Paco
District, Manila covered by TCT 105233, by private respondent Metropolitan Bank and
Trust Company (Metrobank). 1 Petitioners' motion for reconsideration was denied;
hence, this petition for review on certiorari raising the following assignments of errors:
"FIRST: The Honorable Court of Appeals erred in holding that the consolidation of
the three (3) loans granted separately to three entities into a single loan of P1.0
Million was a mere restructuring and did not effect a novation of the loan as to
extinguish the accessory mortgage contracts.

SECOND: The Honorable Court of Appeals erred in not holding that the
consolidated loan of P1.0 Million was not accompanied by the execution of a
new REM, as was done by the Bank in the earlier three (3) loans, and hence, was,
to all legal intents/purposes, unsecured.
THIRD: The Honorable Court of Appeals erred in holding that the inclusion in the
extrajudicial foreclosure of the admittedly unsecured loan of P970,000.00 is a
mere error that does not invalidate said foreclosure, contrary to the
pronouncement in C & C Commercial Corp. vs. PNB, 175 SCRA 1.

FOURTH: The Honorable Court of Appeals erred in not declaring as null and void
the extrajudicial foreclosure undertaken by Metrobank on the property of Sps.
Marcial See and Lilian Tan." 2

The facts as found by public respondent Court of Appeals are as follows:


"It is not disputed that Ylang-Ylang Merchandising Company, a partnership
between Angelita Rodriguez and Antonio Tan, obtained a loan in the amount of
P250,000.00 from the Metropolitan Bank and Trust Company, and to secure
payment of the same, spouses Marcial See and Lilian Tan constituted a real
estate mortgage in favor of said bank over their property in the District of Paco,
Manila, covered by TCT No. 105233 of the Registry of Deeds of Manila. The
mortgage was annotated at the back of the title.
"Subsequently, after the partnership had changed its name to Ajax Marketing
Company albeit without changing its composition, it obtained a loan in the sum
of P150,000.00 from Metropolitan Bank and Trust Company. Again to secure the
loan, spouses Marcial See and Lilian Tan executed in favor of said bank a second
real estate mortgage over the same property. As in the first instance, the mortgage
was duly annotated at the back of TCT No. 105233.
"On February 19, 1979, the partnership (Ajax Marketing Company) was converted
into a corporation denominated as Ajax Marketing and Development Corporation,
with the original partners (Angelita Rodriguez and Antonio Tan) as incorporators
and three (3) additional incorporators, namely, Elisa Tan, the wife of Antonio Tan,
and Jose San Diego and Tessie San Diego. Ajax Marketing and Development
Corporation obtained from Metropolitan Bank and Trust Company a loan of
P600,000.00, the payment of which was secured by another real estate mortgage
executed by spouses Marcial See and Lilian Tan in favor of said bank over the
same realty located in the District of Paco, Manila. Again, the third real estate
mortgage was annotated at the back of TCT No. 105233.
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"In December 1980, the three (3) loans with an aggregate amount of
P1,000,000.00 were re-structured and consolidated into one (1) loan and Ajax
Marketing and Development Corporation, represented by Antonio Tan as Board
Chairman/President and in his personal capacity as solidary co-obligor, and Elisa
Tan as Vice-President/Treasurer and in her personal capacity as solidary co-
obligor, executed a Promissory Note (PN) No. BDS-3605." 3

In their interrelated first and second assignment of errors, petitioners argue that a
novation occurred when their three (3) loans which are all secured by the same real estate
property covered by TCT No. 105233 were consolidated into a single loan of P1.0 million
under Promissory Note No. BDS-3605, thereby extinguishing their monetary obligations
and releasing the mortgaged property from liability.
Basic principles on novation need to be stressed at the outset. Novation is the
extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the object or
principal conditions, or by substituting another in place of the debtor, or by subrogating a
third person in the rights of the creditor. 4 Novation, unlike other modes of extinction of
obligations, is a juridical act with a dual function, namely, it extinguishes an obligation and
creates a new one in lieu of the old. It can be objective, subjective, or mixed. Objective
novation occurs when there is a change of the object or principal conditions of an existing
obligation while subjective novation occurs when there is a change of either the person of
the debtor, or of the creditor in an existing obligation. 5 When the change of the object or
principal conditions of an obligation occurs at the same time with the change of either in
the person of the debtor or creditor a mixed novation occurs. 6
The well settled rule is that novation is never presumed. 7 Novation will not be allowed
unless it is clearly shown by express agreement, or by acts of equal import. Thus, to effect
an objective novation it is imperative that the new obligation expressly declare that the old
obligation is thereby extinguished, or that the new obligation be on every point
incompatible with the new one. 8 In the same vein, to effect a subjective novation by a
change in the person of the debtor it is necessary that the old debtor be released
expressly from the obligation, and the third person or new debtor assumes his place in the
relation. 9 There is no novation without such release as the third person who has assumed
the debtor's obligation becomes merely a co-debtor or surety. 10
The attendant facts herein do not make a case of novation. There is nothing in the records
to show the unequivocal intent of the parties to novate the three loan agreements through
the execution of PN No. BDS-3065. The provisions of PN No. BDS-3065 yield no indication
of the extinguishment of, or an incompatibility with, the three loan agreements secured by
the real estate mortgages over TCT No. 105233. On its face, PN No. BDS-3065 has these
words typewritten: "secured by REM" and "9. COLLATERAL. This is wholly/partly secured
by: (x) real estate," 11 which strongly negate petitioners' asseveration that the
consolidation of the three loans effected the discharge of the mortgaged real estate
property. Otherwise, there would be no sense placing these material provisions. Moreover,
the real estate mortgages contained this common provision, to wit:
"That for and in consideration of credit accommodations obtained from the
MORTGAGEE (Metropolitan Bank and Trust Company), by the MORTGAGOR
and/or AJAX MKTG. & DEV. CORP./AJAX MARKETING COMPANY/YLANG-
YLANG MERCHANDISING COMPANY detailed as follows:
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Nature Date Granted Due Amount or Line
Date
Loans and/or P600,000.00

Advances in 150,000.00

Current account 250,000.00

and to secure the payment of the same and those that may hereafter be obtained
including the renewals or extension thereof.
xxx xxx xxx

"the principal of all of which is hereby fixed at


(P600,000.00/P150,000.00/P250,000.00) . . . as well as those that the
MORTGAGEE may have previously extended or may later extend to the
MORTGAGOR, including interest and expenses or any other obligation owing to
the MORTGAGEE, whether direct or indirect, principal or secondary, as appears in
the accounts, books and records of the MORTGAGEE, the MORTGAGOR hereby
transfer and convey by way of mortgage unto the MORTGAGEE, its successors or
assigns, the parcels of land which are described in the list inserted on page three
of this document and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed
thereon, of which the MORTGAGOR declares that he/it is the absolute owner free
from all liens and encumbrances. However, if the MORTGAGOR shall pay to the
MORTGAGEE, its successors or assigns, the obligation secured by this mortgage
when due, together with interest, and shall keep and perform all and singular the
covenants and agreements herein contained for the MORTGAGOR to keep and
perform, then the mortgage shall be void; otherwise, it shall remain in full force
and effect." 12

The foregoing shows that petitioners agreed to apply the real estate property to secure
obligations that they may thereafter obtain including their renewals or extensions with
the principals xed at P600,000.00, P150,000.00, and P250,000.00 which when added
have an aggregate sum of P1.0 million. PN No. BDS-3605 merely restructured and
renewed the three previous loans to expediently make the loans current. There was no
change in the object of the prior obligations. The consolidation of the three loans,
contrary to petitioners' contention, did not release the mortgaged real estate property
from any liability because the mortgage annotations at the back of TCT No. 105233, in
fact, all remained uncancelled, thus indicating the continuing subsistence of the real
estate mortgages. LLjur

Neither can it be validly contended that there was a change or substitution in the persons
of either the creditor (Metrobank) or more specifically the debtors (petitioners) upon the
consolidation of the loans in PN No. BDS 3605. The bare fact of petitioner's conversion
from a partnership to a corporation, without sufficient evidence, either testimonial or
documentary, that they were expressly released from their obligations, did not make
petitioner AJAX, with its new corporate personality, a third person or new debtor within the
context of a subjective novation. If at all, petitioner AJAX only became a co-debtor or
surety. Without express release of the debtor from the obligation, any third party who may
thereafter assume the obligation shall be considered merely as co-debtor or surety.
Novation arising from a purported change in the person of the debtor must be clear and
express because, to repeat, it is never presumed. Clearly then, from the aforediscussed
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points, neither objective nor subjective novation occurred here.
Anent the third assigned error, petitioners posit that the extrajudicial foreclosure
is invalid as it included two unsecured loans: one, the consolidated loan of P1.0 million
under PN BDS No. 3605, and two, the P970,000.00 loan under PN BDS No. 3583
subsequently extended by Metrobank.
An action to foreclose a mortgage is usually limited to the amount mentioned in
the mortgage, but where on the four corners of the mortgage contracts, as in this case,
the intent of the contracting parties is manifest that the mortgaged property shall also
answer for future loans or advancements then the same is not improper as it is valid
and binding between the parties. 13 For merely consolidating and expediently making
current the three previous loans, the loan of P1.0 million under PN BDS No. 3605,
secured by the real estate property, was correctly included in the foreclosure's bid
price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583,
however, was found to be improper by public respondent which ruling we shall not
disturb for Metrobank's failure to appeal therefrom. Nonetheless, the inclusion of PN
BDS No. 3583 in the bid price did not invalidate the foreclosure proceedings. As
correctly pointed out by the Court of Appeals, the proceeds of the auction sale should
be applied to the obligation pertaining to PN BDS No. 3605 only, plus interests,
expenses and other charges accruing thereto. It is Metrobank's duty as mortgagee to
return the surplus in the selling price to the mortgagors. 14
Lastly, petitioners cite as supporting authority C & C Commercial Corp. v.
Philippine National Bank 15 where this Court enjoined the foreclosure proceedings for
including unsecured obligations. Petitioners' reliance on the C & C Commercial Corp. v.
Phil. National Bank case is misplaced. In that case, the foreclosure sale included
previously incurred unsecured obligations in favor of PNB which were not in the
contemplation of the mortgage contract, whereas in the instant case, the mortgages
were one in providing that the mortgaged real estate property shall also secure future
advancements or loans, as well as renewals or extensions of the same.
Prescinding from the above discussions, the fourth assignment of error
obviously needs no further discussion. LexLib

WHEREFORE, the decision appealed from is hereby AFFIRMED in toto.


SO ORDERED.
Narvasa, C.J., Regalado, Puno, and Mendoza, JJ., concur.
Footnotes

1. Twelfth Division, Martin, J., Ponente, Elbinias, Guerrero, JJ., Concurring.

2. Petition, pp. 6-7; Rollo, pp. 13-14.


3. Decision pp. 67; Rollo, pp. 32-33.
4. FRANCISCO, V.J., Civil Code of the Philippines Annotated and Commented, Bk. IV, Part 1,
p. 676, citing 8 Manresa 417; De Cortes v. Venturanza, 79 SCRA 709, 722-723 (1977).
5. Cochingyan, Jr. v. R & B Surety and Insurance Co., Inc., 151 SCRA 339, 349 (1987).

6. Id.
7. Martinez v. Cavives, 25 Phil. 581, 586-587(1913); Tiu Suico v. Habana, 45 Phil. 707, 713
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(1924); Goñi v. Court of Appeals, 144 SCRA 222, 232 (1986).

8. Article 1292, Civil Code; Zapanta v. Rotaeche, 21 Phil. 154, 159 (1912); Cochingyan, Jr.,
supra.
9. Lopez v. Court of Appeals, 114 SCRA 671, 688 (1982); Mercantile Insurance Co., Inc. v.
Court of Appeals, 196 SCRA 197, 204 (1991).
10. Duñgo v. Lopeña, 116 Phil. 1305 (1962); Lopez v. Court of Appeals, supra.
11. Annex E, Records.
12. Decision of the Court of Appeals dated March 30, 1994, pp. 7-8; Rollo, pp. 33-34.
13. Tady-Y v. Philippine National Bank, 12 SCRA 19 (1964); Julian v. Lutero, 49 Phil. 703
(1926).
14. Gorospe and Sebastian v. Gochangco, 106 Phil. 425, 431 (1959); Caparas v. Yatco, et
al., 89 Phil. 10, 12 (1951).
15. 175 SCRA 1 (1989).

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EN BANC

[G.R. No. 130722. December 9, 1999.]

SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL.


WHITE HOUSE AUTO SUPPLY, INC. , petitioners, vs . L & R
CORPORATION, VICENTE M. COLOYAN in his capacity as Acting
Registrar of the Register of Deeds of Quezon City thru Deputy
Sheriff ROBERTO R. GARCIA , respondents.

Bugaring, Piedad Oliva and Associates Law Offices for petitioners.


Gancayco, Balasbas and Santos Law Offices for private respondent.

SYNOPSIS

Petitioner spouses Litonjua obtained loans from private respondent L & R Corporation. The
loans were secured by mortgage constituted by the spouses upon their two parcels of
land and the improvements thereon located in Cubao, Quezon City. The mortgage was duly
registered with the Register of Deeds of Quezon City. The spouses Litonjua, however, sold
to Philippine Whitehouse Auto Supply, Inc. (PWHAS) the parcels of land they had previously
mortgaged to private respondent. When the petitioners defaulted in the payment of their
loans, private respondent foreclosed the mortgage. At the auction sale, private respondent
was the highest bidder. When private respondent presented the Certificate of Sale issued
by the Sheriff to the Register of Deeds for registration, it learned of the prior sale of the
properties by petitioners to PWHAS. It also requested the Register of Deeds for the
cancellation of the annotation regarding the sale to PWHAS. It invoked a provision in the
mortgage contract with the spouses Litonjua stating that the mortgagee's prior written
consent was necessary in case of subsequent encumbrance or alienation of the subject
properties. PWHAS was able to redeem the mortgaged properties by tendering the
redemption price to the deputy sheriff because private respondent refused to accept the
payment. The Register of Deeds, however, refused to annotate the Certificate of
Redemption issued by the sheriff on the copies of the titles of the subject properties.
Petitioners then filed a petition against private respondent Corporation for the surrender
of the owner's duplicate transfer certificates of title. While the case was pending, private
respondent executed an Affidavit of Consolidation of Ownership. Thereafter, the Register
of Deeds cancelled Transfer Certificates of Title No. 197232 and 197233 and in lieu
thereof issued Transfer Certificates of Title No. 280054 and 28055 in favor of private
respondent corporation, free of any lien or encumbrance. A complaint for Quieting of Title,
Annulment of Title and Damages with preliminary injunction was filed by the petitioners
spouses Litonjua and PWHAS against respondents before the then Court of First Instance
of Quezon City. The lower court dismissed the complaint upon its finding that the sale
between the spouses Litonjua and PWHAS was null and void and unenforceable against L
& R Corporation and the redemption made was also null and void. On appeal, the Court of
Appeals affirmed the decision of the trial court. Hence, the present petition. The issue
revolved on the validity and enforceability of the provision in the mortgage contract
granting the mortgage the right of first refusal, and the validity of the redemption effected
by PWHAS on the account of the spouses Litonjua.
The Supreme Court ruled that the provision in the mortgage contract granting the
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mortgagee the right of first refusal is not binding on the parties being contrary to law and a
circumvention of Article 2130 of the New Civil Code. According to the Court, the provision
creates an unconscionable advantage for the mortgagee and amounts to a virtual
prohibition on the owner to sell his property. Accordingly, the sale made by the spouses
Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R Corporation,
is valid. The Court also ruled that the redemption effected by PWHAS to redeem the
subject properties for the account of the spouses Litonjua is valid. PWHAS merely stepped
into the shoes of the spouses Litonjua on account of the sale and was in effect, their
successor-in-interest. As such, it has the right to redeem the property foreclosed by L & R
Corporation. The right of PWHAS to redeem the subject properties finds support in
Section 6 of Act 3135 which gives not only the mortgagor-debtor the right to redeem, but
also his successor-in-interest. As the vendee of the subject properties, PWHAS qualifies as
such a successor-in-interest of the spouses Litonjua.

SYLLABUS

1. CIVIL LAW; CONTRACTS; MORTGAGE; BEING CONTRARY TO LAW; PARAGRAPH 8


OF THE SUBJECT DEED OF REAL ESTATE MORTGAGE IS NOT BINDING UPON THE
PARTIES; THE SUBJECT PROVISION CREATES AN UNCONSCIONABLE ADVANTAGE FOR
THE MORTGAGE AND AMOUNTS TO A VIRTUAL PROHIBITION ON THE OWNER TO SELL
HIS MORTGAGED PROPERTY AND IN CIRCUMVENTION OF ARTICLE 2130 OF THE NEW
CIVIL CODE. — Insofar as the validity of the questioned stipulation prohibiting the
mortgagor from selling his mortgaged property without the consent of the mortgagee is
concerned, therefore, the ruling in the Tambunting case is still the controlling law. Indeed,
we are fully in accord with the pronouncement therein that such a stipulation violates
Article 2130 of the New Civil Code. Both the lower court and the Court of Appeals in its
Amended Decision rationalized that since paragraph 8 of the subject Deed of Real Estate
Mortgage contains no absolute prohibition against the sale of the property mortgaged but
only requires the mortgagor to obtain the prior written consent of the mortgagee before
any such sale, Article 2130 is not violated thereby. This observation takes a narrow and
technical view of the stipulation in question without taking into consideration the end
result of requiring such prior written consent. True, the provision does not absolutely
prohibit the mortgagor from selling his mortgaged property; but what it does not
outrightly prohibit, it nevertheless achieves. For all intents and purposes, the stipulation
practically gives the mortgagee the sole prerogative to prevent any sale of the mortgaged
property to a third party. The mortgagee can simply withhold its consent and thereby,
prevent the mortgagor from selling the property. In other words, stipulations like those
covered by paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon
the parties. Accordingly, the sale made by the spouses Litonjua to PWHAS,
notwithstanding the lack of prior written consent of L & R Corporation, is valid.
2. ID.; ID.; ID.; REDEMPTION EFFECTED BY THE PURCHASER OF THE MORTGAGED
PROPERTIES VALID; AS VENDEE OF THE SUBJECT PROPERTIES; THE PURCHASER
QUALIFIES AS A SUCCESSOR-IN-INTEREST OF THE MORTGAGOR-SPOUSES AND HAS THE
RIGHT TO REDEEM THE MORTGAGED PROPERTIES UNDER SECTION 6 OF ACT 3135. —
Coming now to the issue of whether the redemption offered by PWHAS on account of the
spouses Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of the
mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the
spouses Litonjua on account of such sale and was in effect, their successor-in-interest. As
such, it had the right to redeem the property foreclosed by L & R Corporation. Again,
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Tambunting, supra, clarified that — ". . . The acquisition by the Hernandezes' of the
Escuetas' rights over the property carried with it the assumption of the obligations
burdening the property, as recorded in the Registry of the Property, ie., mortgage debts in
favor of the RFC (DBP) and the Tambuntings. The Hernandezes', by stepping into the
Escuetas' shoes as assignees, had the obligation the obligation to pay the mortgage
debts, otherwise, these debts would and could be enforced against the property subject of
the assignment. Stated otherwise, the Hernandezes, by the assignment, obtained the right
to remove the burdens of the property subject thereof by paying the obligations thereby
secured; that is to say, they had the right of redemption as regards the first mortgage, to
be exercised within the time and in the manner prescribed by law and the mortgage deed;
and as regards the second mortgage, sought to be judicially foreclosed but yet
unforeclosed, they had the so-called equity of redemption." The right of PWHAS to redeem
the subject properties finds supports in Section 6 of Act 3135 itself which gives not only
the mortgagor-debtor the right to redeem, but also his successor-in-interest. As vendee of
the subject properties, PWHAS qualifies as such a successor-in-interest of the spouses
Litonjua. It is clear from the records that PWHAS offered to redeem the subject properties
seven (7) months after the date of registration of the foreclosure sale, well within the one
year period of redemption.
3. ID.; ID.; ID.; WHILE THE SALE IS VALID, THE SAME IS RESCISSIBLE BECAUSE THE
MORTGAGORS IGNORED THE MORTGAGEE'S RIGHT OF FIRST REFUSAL. — All things
considered, what then are the relative rights and obligations of the parties? To
recapitulate: the sale between the spouses Litonjua and PWHAS is valid, notwithstanding
the absence of L & R Corporation's prior written consent hereto. Inasmuch as the sale of
PWHAS was valid, its offer to redeem and its tender of the redemption price, as
successor-in-interest of the spouses Litonjua, within the one-year period should have been
accepted as valid by L & R Corporation. However, while the sale is, indeed, valid, the same
is rescissible because it ignored L & R Corporation's right of first refusal. Foreseeing a
possible rescission of the sale, the spouses Litonjua contend that with the restoration of
the original status quo, with no sale having been made, they should now be allowed to
redeem the subject properties, the period of redemption having been suspended during
the period of litigation. In effect, the spouses Litonjua want to retain ownership of the
same. We cannot, however, sanction this belated reversal of the spouses Litonjua's
decision to sell. To do so would afford them undue advantage on account of the
appreciation of the value of the subject properties in the intervening years when they
precisely were the ones who violated and ignored the right of first refusal of L & R
Corporation over the same. Moreover, it must be stressed that in rescinding the sale made
to PWHAS, the purpose is to uphold and enforce the right of first refusal of L & R
Corporation.

DECISION

YNARES-SANTIAGO , J : p

May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged
property without first obtaining the consent of the mortgagee and that, otherwise, the sale
made without the mortgagee's consent shall be invalid; and (b) for a right of first refusal in
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favor of the mortgagee? LibLex

The controversy stems from loans obtained by the spouses Litonjua from L & R
Corporation in the aggregate sum of P400,000.00; P200,000.00 of which was obtained on
August 6, 1974 and the remaining P200,000.00 obtained on March 27, 1978. The loans
were secured by a mortgage 1 constituted by the spouses upon their two parcels of land
and the improvements thereon located in Cubao, Quezon City covered by Transfer
Certificates of Title No. 197232 and 197233, with an area of 599 and 1,436 square meters,
respectively. The mortgage was duly registered with the Register of Deeds of Quezon City.
On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc.
(PWHAS) the parcels of land they had previously mortgaged to L & R Corporation for the
sum of P430,000.00. 2 The sale was annotated at the back of the respective certificates of
title of the properties. 3
Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L & R
Corporation initiated extrajudicial foreclosure proceedings with the Ex-Oficio Sheriff of
Quezon City. On July 23, 1980, the mortgaged properties were sold at public auction to L &
R Corporation as the only bidder for the amount of P221,624.58. 4 When L & R Corporation
presented its corresponding Certificate of Sale issued by Deputy Sheriff Roberto B. Garcia,
to the Quezon City Register of Deeds for registration on August 15, 1980, it learned for the
first time of the prior sale of the properties made by the spouses Litonjua to PWHAS upon
seeing the inscription at the back of the certificates of title. Thus, on August 20, 1980, it
wrote a letter 5 to the Register of Deeds of Quezon City requesting for the cancellation of
the annotation regarding the sale to PWHAS. L & R Corporation invoked a provision in its
mortgage contract with the spouses Litonjua stating that the mortgagee's prior written
consent was necessary in case of subsequent encumbrance or alienation of the subject
properties. Thus, it argued that since the sale to PWHAS was made without its prior
written consent, the same should not have been registered and/or annotated.
On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the account of
the spouses Litonjua, tendered payment of the full redemption price to L & R Corporation
in the form of China Bank Manager's Check No. HOF-M O12623 in the amount of
P238,468.04. 6 L & R Corporation, however, refused to accept the payment, hence, PWHAS
was compelled to redeem the mortgaged properties through the Ex-Oficio Sheriff of
Quezon City. On March 31, 1981, it tendered payment of the redemption price to the
Deputy Sheriff through China Bank Manager's Check No. HOF-O14750 in the amount of
P240,798.94. 7 The check was deposited with the Branch Clerk of Court who issued
Receipt No. 7522484 8 for the full redemption price of the mortgaged properties.
Accordingly, the Deputy Sheriff issued a Certificate of Redemption in favor of the spouses
Litonjua dated March 31, 1981. 9
In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the payment
by PWHAS of the full redemption price and advised it that it can claim the payment upon
surrender of its owner's duplicate certificates of title. 10
On April 2, 1981, the spouses Litonjua presented for registration the Certificate of
Redemption issued in their favor to the Register of Deeds of Quezon City. The Certificate
also informed L & R Corporation of the fact of redemption and directed the latter to
surrender the owner's duplicate certificates of title within five days. 11
On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the
Register of Deeds, stating: (1) that the sale of the mortgaged properties to PWHAS was
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without its consent, in contravention of paragraphs 8 and 9 of their Deed of Real Estate
Mortgage; and (2) that it was not the spouses Litonjua, but PWHAS, who was seeking to
redeem the foreclosed properties, when under Articles 1236 and 1237 of the New Civil
Code, the latter had no legal personality or capacity to redeem the same. 1 2
On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the Register of
Deeds to annotate their Certificate of Redemption as an adverse claim on the titles of the
subject properties on account of the refusal of L & R Corporation to surrender the owner's
duplicate copies of the titles to the subject properties. With the refusal of the Register of
Deeds to annotate their Certificate of Redemption, the Litonjua spouses filed a Petition 13
on July 17, 1981 against L & R Corporation for the surrender of the owner's duplicate of
Transfer Certificates of Title No. 197232 and 197233 before the then Court of First
Instance of Quezon City, Branch IV, docketed as Civil Case No. 32905.
On August 15, 1981, while the said case was pending, L & R Corporation executed an
Affidavit of Consolidation of Ownership. 14 Thereafter, on August 20, 1981, the Register of
Deeds cancelled Transfer Certificates of Title No. 197232 and 197233 and in lieu thereof,
issued Transfer Certificates of Title No. 280054 15 and 28055 16 in favor of L & R
Corporation, free of any lien or encumbrance.
With titles issued in its name, L & R Corporation advised the tenants of the apartments
situated in the subject parcels of land that being the new owner, the rental payments
should be made to them, and that new lease contracts will be executed with interested
tenants before the end of August, 1981. 17 Upon learning of this incident from their
tenants, the spouses Litonjua filed an adverse claim 18 and a notice of lis pendens 19 with
the Register of Deeds. In the process, they learned that the prior sale of the properties in
favor of PWHAS was not annotated on the titles issued to L & R.
A complaint for Quieting of Title, Annulment of Title and Damages with preliminary
injunction was filed by the spouses Litonjua and PWHAS against herein respondents
before the then Court of First Instance of Quezon City, Branch 9, docketed as Civil Case No.
Q-33362. 20 On February 10, 1987, the lower court rendered its Decision 21 dismissing the
Complaint upon its finding that the sale between the spouses Litonjua and PWHAS was
null and void and unenforceable against L & R Corporation and that the redemption made
was also null and void. LexLib

On appeal, the decision of the trial court was set aside by the Court of Appeals in its
Decision dated June 22, 1994, 22 on the ground that the sale made to PWHAS as well as
the redemption effected by the spouses Litonjua were valid. However, the same was
subsequently reconsidered and set aside in an Amended Decision dated September 11,
1997. 23
Hence, the instant Petition on the following issues:
(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid
and enforceable;
(2) whether or not the sale of the mortgaged properties by the spouses
Litonjua to PWHAS, without the knowledge and consent of L & R
Corporation, is valid and enforceable;

(3) whether or not PWHAS had the right to redeem the foreclosed properties
on the account of the spouses Litonjua; and

(4) whether or not there was a valid redemption.


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Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows —
"8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any
other manner encumber the real property/properties subject of this mortgage
without the prior written consent of the MORTGAGEE;
9. That should the MORTGAGORS decide to sell the real property/properties
subject of this mortgage, the MORTGAGEE shall be duly notified thereof by the
MORTGAGORS, and should the MORTGAGEE be interested to purchase the same,
the latter shall be given priority over all the other prospective buyers;" 24

There is no question that the spouses Litonjua violated both the aforesaid provisions,
selling the mortgaged properties to PWHAS without the prior written consent of L & R
Corporation and without giving the latter notice of such sale nor priority over PWHAS.
Re: Validity of prohibition against subsequent sale of mortgaged property without
prior written consent of mortgagee and validity of subsequent sale to PWHAS.

Petitioners defend the validity of the sale between them by arguing that paragraph 8
violates Article 2130 of the New Civil Code which provides that "(A) stipulation forbidding
the owner from alienating the immovable mortgaged shall be void."
In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo, 2 5 a stipulation
prohibiting the mortgagor from entering into second or subsequent mortgages was held
valid. This is clearly not the same as that contained in paragraph 8 of the subject Deed of
Real Estate Mortgage which also forbids any subsequent sale without the written consent
of the mortgagee. Yet, in Arancillo v. Rehabilitation Finance Corporation, 2 6 the case of
Philippine Industrial Co., supra, was erroneously cited to have held that the prohibition in a
mortgage contract against the encumbrance, sale or disposal of the property mortgaged
without the consent of the mortgagee is valid. No similar prohibition forbidding the owner
of mortgaged property from (subsequently) mortgaging the immovable mortgaged is
found in our laws, making the ruling in Philippine Industrial Co., supra, perfectly valid. On
the other hand, to extend such a ruling to include subsequent sales or alienation runs
counter not only to Philippine Industrial Co., itself, but also to Article 2130 of the New Civil
Code.

Meanwhile in De la Paz v. Macondray & Co., Inc., 27 it was held that while an agreement of
such nature does not nullify the subsequent sale made by the mortgagor, the mortgagee is
authorized to bring the foreclosure suit against the mortgagor without the necessity of
either notifying the purchaser or including him as a defendant. At the same time, the
purchaser of the mortgaged property was deemed not to have lost his equitable right of
redemption.
In Bonnevie v. Court of Appeals, 28 where a similar provision appeared in the subject
contract of mortgage, the petitioners therein, to whom the mortgaged property were sold
without the written consent of the mortgagee, were held as without the right to redeem the
said property. No consent having been secured from the mortgagee to the sale with
assumption of mortgage by petitioners therein, the latter were not validly substituted as
debtors. It was further held that since their rights were never recorded, the mortgagee was
charged with the obligation to recognize the right of redemption only of the original
mortgagors-vendors. Without discussing the validity of the stipulation in question, the
same was, in effect, upheld.
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Again, in Cruz v. Court of Appeals, 29 while a similar provision was recognized and applied,
no discussion as to its validity was made since the same was not raised as an issue. LibLex

On the other hand, in Tambunting v. Rehabilitation Finance Corporation, 30 the validity of a


similar provision was specifically raised and discussed and found as invalid. It was there
ratiocinated that —
"To be sure, the deed of second mortgage executed by the Escuetas in favor of
Aurora Tambunting, married to Antonio L. Tambunting, does contain a provision
that 'the property mortgaged shall not be . . . the subject of any new or
subsequent contracts of agreements, saving and excepting those having
connection with the first mortgage with the RFC, without first securing the written
permission and consent of the MORTGAGEE'. But the provision can only be
construed as directed against subsequent mortgages or encumbrances, not to an
alienation of the immovable itself. For while covenants prohibiting the owner
from constituting a later mortgage over property registered under the Torrens Act
have been held to be legally permissible (Phil. Industrial Co. v. El Hogar Filipino, et
al., 45 Phil. 336, 341-342; Bank of the Philippines v. Ty Camco Sobrino, 57 Phil.
801), stipulations 'forbidding the owner from alienating the immovable
mortgaged' are expressly declared void by law (Art. 2130, Civil Code). It is clear
that the stipulation against 'subsequent agreements' above mentioned had not
been breached by the assignment by the Escuetas (to the Hernandezes) of their
right of redemption in connection with the mortgage constituted in favor of the
R.F.C. The assignment was not a subsequent mortgage or encumbrance, licitly
comprehended by the prohibitory stipulation, but was actually a sale or
conveyance of all their rights in the encumbered real property — in truth, an
alienation of the immovable — which could not lawfully be forbidden. Moreover,
since the subject of the assignment to the Hernandezes had 'connection with the
first assignment with the R.F.C.', it did not fall within, but was explicitly excepted
from, the prohibitory stipulation in question. Finally, it should not be forgotten that
since the Tambuntings, in their own deed of conditional sale with the R.F.C., had
accepted without demur the provision that said contract could be revoked within
one (1) year from September 16, 1955 at the option of the RFC, as vendor, should
the former owner (Escueta) exercise his right to redeem the property; and that the
redemption of the property within said period by 'the former owner or his
successor-in-interest' would render their instrument of conditional sale
'automatically null and void and without effect', they cannot now assume a
position inconsistent with said provision. (emphasis, Ours)

Earlier, in PNB v. Mallorca, 3 1 it was reiterated that a real mortgage is merely an


encumbrance; it does not extinguish the title of the debtor, whose right to dispose — a
principal attribute of ownership — is not thereby lost. Thus, a mortgagor had every right to
sell his mortgaged property, which right the mortgagee cannot oppose.
In upholding the validity of the stipulation in question, the amended Decision relied on the
cases of Cruz v. Court of Appeals, supra, and Medida v. Court of Appeals. 3 2 According to
the Court of Appeals, said cases, are not only more recent that that of Tambunting , supra,
but are also more applicable to the issue at bar.
We are not convinced.
As we have mentioned, although a similar provision was recognized and applied in Cruz v.
Court of Appeals, supra, no discussion as to its validity was made since the same was not
raised as an issue. Thus, it cannot be said that the specific pronouncement in the
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Tambunting case that such a stipulation can only be construed as against subsequent
mortgages or encumbrances but not to an alienation of the immovable itself, which is
prohibited under Article 2130 , was abandoned thereby. On the other hand, the facts in the
case of Medida v. Court of Appeals, are different from those in the present case for what
was in issue in the said case was a second mortgage over a foreclosed property during
the period of redemption. Thus, the ruling in Medida quoted in the Amended Decision that
"what is delimited is not the mortgagor's jus dispodendi, as an attribute of ownership, but
merely the rights conferred by such act of disposal which may correspondingly be
restricted," actually refers to the fact that the only rights which a mortgagor can legally
transfer, cede and convey after the foreclosure of his properties are the right to redeem
the land, and the possession use and enjoyment of the same during the period of
redemption. It has no connection or reference to the right of a mortgagor to sell his
mortgaged property without the required consent of the mortgagee. To be sure, there is
absolutely nothing in Medida that upholds the validity of the stipulation in controversy.
Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling
his mortgaged property without the consent of the mortgagee is concerned, therefore, the
ruling in the Tambunting case is still the controlling law. Indeed, we are fully in accord with
the pronouncement therein that such a stipulation violates Article 2130 of the New Civil
Code. Both the lower court and the Court of Appeals in its Amended Decision rationalize
that since paragraph 8 of the subject Deed of Real Estate Mortgage contains no absolute
prohibition against the sale of the property mortgaged but only requires the mortgagor to
obtain the prior written consent of the mortgagee before any such sale, Article 2130 is not
violated thereby. This observation takes a narrow and technical view of the stipulation in
question without taking into consideration the end result of requiring such prior written
consent. True, the provision does not absolutely prohibit the mortgagor from selling his
mortgaged property; but what it does not outrightly prohibit, it nevertheless achieves. For
all intents and purposes, the stipulation practically gives the mortgagee the sole
prerogative to prevent any sale of the mortgaged property to a third party. The mortgagee
can simply withhold its consent and thereby, prevent the mortgagor from selling the
property. This creates an unconscionable advantage for the mortgagee and amounts to a
virtual prohibition on the owner to sell his mortgaged property. In other words, stipulations
like those covered by paragraph 8 of the subject Deed of Real Estate Mortgage circumvent
the law, specifically, Article 2130 of the New Civil Code.
Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not
binding upon the parties. Accordingly, the sale made by the spouses Litonjua to PWHAS,
notwithstanding the lack of prior written consent of L & R Corporation, is valid. LLpr

Re: Validity of redemption effected by PWHAS on the account of the spouses


Litonjua

Coming now to the issue of whether the redemption offered by PWHAS on account of the
spouses Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of the
mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the
spouses Litonjua on account of such sale and was in effect, their successor-in-interest. As
such, it had the right to redeem the property foreclosed by L & R Corporation. Again,
Tambunting, supra, clarifies that —
". . . . The acquisition by the Hernandezes of the Escuetas' rights over the property
carried with it the assumption of the obligations burdening the property, as
recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC
(DBP) and the Tambuntings. The Hernandezes, by stepping into the Escuetas'
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shoes as assignees, had the obligation to pay the mortgage debts, otherwise,
these debts would and could be enforced against the property subject of the
assignment. Stated otherwise, the Hernandezes, by the assignment, obtained the
right to remove the burdens on the property subject thereof by paying the
obligations thereby secured; that is to say, they had the right of redemption as
regards the first mortgage, to be exercised within the time and in the manner
prescribed by law and the mortgage deed; and as regards the second mortgage,
sought to be judicially foreclosed but yet unforeclosed, they had the so-called
equity of redemption."

The right of PWHAS to redeem the subject properties finds support in Section 6 of Act
3135 itself which gives not only the mortgagor-debtor the right to redeem, but also his
successors-in-interest. As vendee of the subject properties, PWHAS qualifies as such a
successor-in-interest of the spouses Litonjua.
Re: Validity of redemption made

It is clear from the records that PWHAS offered to redeem the subject properties seven
(7) months after the date of registration of the foreclosure sale, well within the one year
period of redemption.
Re: Validity and enforceability of stipulation granting the mortgagee the right of
first refusal

While petitioners question the validity of paragraph 8 of their mortgage contract, they
appear to be silent insofar as paragraph 9 thereof is concerned. Said paragraph 9 grants
upon L & R Corporation the right of first refusal over the mortgaged property in the event
the mortgagor decides to sell the same. We see nothing wrong in this provision. The right
of first refusal has long been recognized as valid in our jurisdiction. The consideration for
the loan-mortgage includes the consideration for the right of first refusal. L & R
Corporation is in effect stating that it consents to lend out money to the spouses Litonjua
provided that in case they decide to sell the property mortgaged to it, then L & R
Corporation shall be given the right to match the offered purchase price and to buy the
property at that price. Thus, while the spouses Litonjua had every right to sell their
mortgaged property to PWHAS without securing the prior written consent of L & R
Corporation, they had the obligation under paragraph 9, which is a perfectly valid provision,
to notify the latter of their intention to sell the property and give it priority over other
buyers. It is only upon failure of L & R Corporation to exercise its right of first refusal could
the spouses Litonjua validly sell the subject properties to others, under the same terms
and conditions offered to L & R Corporation.
What then is the status of the sale made to PWHAS in violation of L & R Corporation's
contractual right of first refusal? On this score, we agree with the Amended Decision of the
Court of Appeals that the sale made to PWHAS is rescissible. The case of Guzman,
Bocaling & Co v. Bonnevie 3 3 is instructive on this point —
"The respondent court correctly held that the Contract of Sale was not voidable
but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract
otherwise valid may nonetheless be subsequently rescinded by reason of injury to
third persons, like creditors. The status of creditors could be validly accorded the
Bonnevies for they had substantial interests that were prejudiced by the sale of
the subject property to the petitioner without recognizing their right of first priority
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under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the
contracting parties and even to third persons, to secure reparation for damages
caused to them by a contract, even if this should be valid, by means of the
restoration of things to their condition at the moment prior to the celebration of
said contract. It is a relief allowed for one of the contracting parties and even third
persons from all injury and damage the contract may cause, or to protect some
incompatible and preferential right created by the contract. Rescission implies a
contract which, even if initially valid, produces a lesion or pecuniary damage to
someone that justifies its invalidation for reasons of equity."
(underscoring, Ours)

It was then held that the Contract of Sale there, which violated the right of first refusal, was
rescissible. cdasia

In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L
& R Corporation over the subject properties since the Deed of Real Estate Mortgage
containing such a provision was duly registered with the Register of Deeds. As such,
PWHAS is presumed to have been notified thereof by registration, which equates to notice
to the whole world.
We note that L & R Corporation had always expressed its willingness to buy the mortgaged
properties on equal terms as PWHAS. Indeed, in its Answer to the Complaint filed, L & R
Corporation expressed that it was ready, willing and able to purchase the subject
properties at the same purchase price of P430,000.00, and was agreeable to pay the
difference between such purchase price and the redemption price of P249,918.77,
computed as of August 13, 1981, the expiration of the one-year period to redeem. That it
did not duly exercise its right of first refusal at the opportune time cannot be taken against
it, precisely because it was not notified by the spouses Litonjua of their intention to sell the
subject property and thereby, to give it priority over other buyers.
All things considered, what then are the relative rights and obligations of the parties? To
recapitulate:, the sale between the spouses Litonjua and PWHAS is valid, notwithstanding
the absence of L & R Corporation's prior written consent thereto. Inasmuch as the sale to
PWHAS was valid, its offer to redeem and its tender of the redemption price, as
successor-in-interest of the spouses Litonjua, within the one-year period should have been
accepted as valid by L & R Corporation. However, while the sale is, indeed, valid, the same
is rescissible because it ignored L & R Corporation's right of first refusal.
Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the
restoration of the original status quo, with no sale having been made, they should now be
allowed to redeem the subject properties, the period of redemption having been
suspended during the period of litigation. In effect, the spouses Litonjua want to retain
ownership of the same. We cannot, however, sanction this belated reversal of the spouses
Litonjua's decision to sell. To do so would afford them undue advantage on account of the
appreciation of the value of the subject properties in the intervening years when they
precisely were the ones who violated and ignored the right of first refusal of L & R
Corporation over the same. Moreover, it must be stressed that in rescinding the sale made
to PWHAS, the purpose is to uphold and enforce the right of first refusal of L & R
Corporation.
WHEREFORE, the Decision appealed from is hereby AFFIRMED with the following
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MODIFICATIONS:
(a) Ordering the rescission of the sale of the mortgaged properties
between petitioners spouses Reynaldo and Erlinda Litonjua and
Philippine White House Auto Supply, Inc. and ordering said spouses to
return to Philippine White House Auto Supply, Inc. the purchase price
of P430,000.00;
(c) Disallowing, due to the rescission of the sale made in its favor, the
redemption made by Philippine White House Auto Supply, Inc. and
ordering Quezon City Sheriff Roberto Garcia to return to it the
"redemption" check of P240,798.94;
(d) Allowing respondent L & R Corporation to retain its consolidated
titles to the foreclosed properties but ordering it to pay to the
Litonjua spouses the additional sum of P189,201.96 representing the
difference from the purchase price of P430,000.00 in the rescinded
sale;
(e) Deleting the awards for moral and exemplary damages and
attorney's fees to the respondents.
No pronouncement as to costs.
SO ORDERED.
Bellosillo, Melo, Puno, Kapunan, Panganiban, Quisumbing, Purisima, Pardo, Buena,
Gonzaga-Reyes and De Leon, Jr., JJ., concur.
Davide, Jr., C.J. and Mendoza, J., join Justice Vitug in his concurring and dissenting opinion.

Separate Opinions
VITUG , J ., concurring and dissenting :

At the pith of the controversy are two stipulations in a real estate mortgage contract, to
wit: (a) that the mortgagor cannot sell the mortgaged property without the written consent
of the mortgagee, and (b) that the latter has a "right of first refusal" in any projected sale of
the hypothecated property. LLphil

Outlined below is a factual backdrop of the case.


The spouses Reynaldo and Erlinda Litonjua (Litonjua spouses) contracted a loan from L &
R Corporation in the sum of P400,000.00 drawn in two tranches — P200,000.00 on 06
August 1974 and the other P200,000.00 on 27 March 1978. The loan was secured by a
real estate mortgage constituted by the spouses on their two parcels of land located in
Cubao, Quezon City, covered by Transfer Certificates of Title ("TCT") No. 197232 and
197233, measuring 599 and 1,436 sq. m., respectively. The contract provided, inter alia,
that the mortgagors were enjoined from conveying the mortgaged property without the
written consent of the mortgagee and that the mortgagee had a right of first refusal in the
event the mortgagors decided to sell the property. 1 The mortgage was duly registered
with the Register of Deeds of Quezon City.

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While the mortgage obligation was still outstanding, the Litonjua spouses sold the two
parcels of land to Philippine White House Auto Supply, Inc. (PWHAS), for the amount of
P430,000.00. The sale was annotated at the back of the certificate of title.
When the Litonjuas defaulted in the payment of the loan, L & R Corporation initiated
extrajudicial foreclosure of the mortgage. The mortgaged parcels were sold at public
auction to L & R Corporation, it being the sole bidder, on 23 July 1980. On 15 August 1980,
when L & R presented its certificate of sale to the Register of Deeds of Quezon City, it was
informed of the previous sale made by the Litonjua spouses to PWHAS. L & R Corporation
thereupon sought from the Register of Deeds the cancellation of the annotation of sale to
PWHAS calling attention to the proviso in the mortgage agreement enjoining the Litonjua
spouses from selling the property.
Later, PWHAS, for the account of the Litonjua spouses, tendered payment of the full
redemption price to L & R Corporation. Upon the latter's refusal to honor the redemption,
PWHAS tendered the amount with the Branch Clerk of Court; correspondingly, the Deputy
Sheriff issued a certificate of redemption in favor of the Litonjua spouses. The Certificate
of Redemption, however, could not be registered because L & R Corporation would not
surrender the owner's duplicate certificates of title. When the Register of Deeds likewise
refused to annotate the certificate of redemption as an adverse claim on the titles
covering the two parcels of land, the Litonjuas filed a petition with the then Court of First
Instance of Quezon City to compel L & R Corporation to surrender the duplicate
certificates of title.

During the pendency of the case, L & R Corporation executed an "Affidavit of Consolidation
of Ownership," on the basis of which the Register of Deeds cancelled TCT No. 197232 and
197233 and, in lieu thereof, issued TCT No. 280054 and 280055 in favor of L & R
Corporation free from any lien or encumbrance. L & R Corporation thereupon advised the
tenants of the apartment units on the subject lots to tender rental payments to the
corporation as being the new owner.
Apprised of the foregoing, the Litonjua spouses filed a complaint for "Quieting of Title,
Annulment of Title and Damages." The trial court dismissed the complaint on the thesis
that the sale between the spouses Litonjua and PWHAS, as well as the redemption
subsequently made, was null and void and unenforceable against L & R Corporation.
On appeal, the judgment of the trial court was set aside by the Court of Appeals in its
decision of 22 June 1994; however, on 11 September 1997, the appellate court
reconsidered and reversed its previous stand.
There appears to be some merit in the instant petition.
The stipulation in the real estate mortgage which prohibits the mortgagor from selling
the mortgaged property without the written consent of the mortgagee contravenes the
law. Article 2130 of the New Civil Code holds that a stipulation forbidding the owner
from alienating the immovable mortgaged shall be void . The phrase "without (the)
written consent of the mortgagee," added by the parties in their contract is of no real
comfort to the mortgagee and did nothing but to stress, indeed, the restriction against
what should otherwise be an unimpeded right of the mortgagor to alienate the property.
The clear intention of the law is to outlaw a stipulation that would effectively prevent the
mortgagor from freely conveying the property during the life of the mortgage. Needless to
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state, the injunction of the law may not be circumvented, whether directly or indirectly, by
the parties.
I am, therefore, in complete accord with the majority in concluding that "the sale made by
the spouses Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R
Corporation, is valid," and that as such successor-in-interest of the Litonjuas, PWHAS has a
"right to redeem the property foreclosed by L & R Corporation." LLphil

What I find quite difficult to accept, with all due respect, is the pre-emptive and peremptory
pronouncement in the ponencia that the sale between the Litonjuas and PWHAS is
rescissible because it ignored the "right of first refusal" of L & R Corporation. I must stress
that a right of first refusal is not a perfected contract. 2 Neither does it qualify as an option
under the second paragraph of Article 1479, 3 which itself must be supported by a
consideration separate and distinct from the price itself, 4 nor an offer which Article 1319
5 of the Code requires to be definitive and certain both as to object and cause of the
contemplated agreement. Even while the object in a "right of first refusal" might be
determinate, the exercise of the right, nevertheless, would still be dependent not only on
the grantor's eventual intention to enter into a binding juridical relation but also on terms,
including the price, that obviously are yet to be fixed. It would be absurd to suggest that a
right of first refusal can be the proper subject of an action for specific performance but, of
course, neither would it be correct to say that a breach of such right would be totally
inconsequential. A grantor who unjustly discards his own affirmation violates the basic
dogma in human relations so well expressed as in Article 19 of the Civil Code to the effect
that every person is expected to act with justice, give another is due and observe honesty
and good faith. When ignored, the legal feasibility of an action for damages is a matter
now long settled.
Most importantly , a rescissory action in consonance with Article 1380, in relation to
Article 1381, paragraph (3), of the New Civil Code 6 so invoked (by citing Guzman, Bocaling
& Co. vs. Bonnevie 7 ) as the authority for the rescission of the sale between the Litonjua
spouses and PWHAS is here off the mark unfortunately. An action for rescission under
said provisions of the Code is merely subsidiary and relates to the specific
instance when a debtor, in an attempt to defraud his creditor, enters into a
contract with another that deprives the creditor to recover his just claim and
leaves him with no other legal means, than by rescission, to obtain reparation . 8
Hence, the rescission is only to the extent necessary to cover the damages caused
pursuant to Article 1384 of the Civil Code. Verily, the case and factual settings in the
instant controversy (for "Quieting of Title, Annulment of Title and Damages with
Preliminary Injunction") initiated by the Litonjua spouses and PWHAS against herein
respondents is neither the occasion nor the proper forum for such an issue to be
considered. 9
To sum up, the only matter called for to be said, in my view, is that part of the ponencia
which concludes that the sale between the Litonjua spouses and PWHAS is a valid and
subsisting contract which has accorded to PWHAS, by stepping into the shoes of the
sellers, a corresponding entitlement to redeem the foreclosed property.
WHEREFORE, I vote to REVERSE and SET ASIDE the appealed amended judgment and to
REINSTATE the original decision, dated 22 June 1994, of the appellate court. prcd

Footnotes

1. See Exhibits "14" & "15", Deed and Amendment of Real Estate Mortgage, respectively,
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Folder of Exhibits.

2. See Exhibit "U", Deed of Absolute Sale, id.


3. See Exhibits "3-A" & "4-A", Annotations on Transfer Certificates of Title Nos. 197232 and
197233, respectively, id.

4. See Exhibits "C" & "5", Certificate of Sale, id.


5. Exhibit "18", id.

6. See Exhibits "G" & "2", Letter of PWHAS to L & R Corporation, id.
7. See Exhibit "D", Letter of PWHAS to Sheriff Roberto Garcia, id.

8. See Exhibit "X", id.

9. Exhibit "F", id.


10. See Exhibit "E", Letter of Sheriff Roberto Garcia to L & R Corporation, id.

11. See Exhibit "I", Letter of the Register of Deeds of Quezon City to L & R Corporation, id.

12. See Exhibits "Y" and "13", Letter of L & R Corporation to Sheriff Roberto Garcia, id.
13. Exhibit "J", id.

14. Exhibit "O" and "8", id.


15. Exhibit "P" and "9", id.

16. Exhibit "Q" and "10", id.

17. See Annex "O" of Complaint; Records p. 38.


18. Exhibit "V", id.

19. Exhibit "W", id.


20. Records, pp. 1-39.

21. Id., pp. 437-447.


22. Petition, Annex "B"; Rollo, pp. 69-81.
23. Petition, Annex "A"; Rollo, pp. 46-68.

24. Exhibit "14-A", Folder of Exhibits.


25. G.R. No. 20482, 45 Phil. 336 [1923].

26. G.R. No. 4602, 89 Phil. 801 [1951].

27. G.R. No. 44072, 66 Phil. 402 [1938].


28. G.R. No. 49101, 125 SCRA 122, 135 [1983].

29. G.R. No. 90369, 191 SCRA 170, 173 [1990].


30. G.R. Nos. 54224-25, 176 SCRA 493, 502-503 [1989].

31. G.R. No. 22538, 128 SCRA 747 [1967].

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32. G.R. No. 98334, 208 SCRA 887 [1992].

33. G.R. No. 86150, 206 SCRA 668, 675 [1992].

VITUG, J., concurring and dissenting:


1. 8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other
manner encumber the real property/properties subject of this mortgage without the prior
consent of the MORTGAGEE (Deed and Amendment of Real Estate Mortgage ).

9. That should the MORTGAGORS decide to sell the real property/properties subject of
this mortgage, the MORTGAGEE shall be duly notified thereof by the MORTGAGORS,
and should the MORTGAGEE be interested to purchase the same, the latter shall be
given priority over all the other prospective buyers (Deed and Amendment of Real
Estate Mortgage ).

2. Ang Yu Asuncion vs. Court of Appeals, 238 SCRA 602.


3. Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain
is binding upon the promissor if the promise is supported by a consideration distinct
from the price. (New Civil Code)

4. Cronico vs. J. M. Tuason and Co., 78 SCRA 331; Serra vs. Court of Appeals, 229 SCRA
60; Nool vs. Court of Appeals, 276 SCRA 149.
5. Consent is manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a counter-offer.

Acceptance made by letter or telegram does not bind the offerer except from
the time it came to his knowledge. The contract, in such a case, is presumed to have
been entered into in the place where the offer was made.
6. Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by
law.

Art. 1381. The following contracts are rescissible:


(1) Those which are entered into by guardians whenever the wards whom they
represent suffer lesion by more than one-fourth of the value of the things which are the
object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the
lesion stated in the preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them ;
(4) Those which refer to things under litigation if they have been entered into by
the defendants without the knowledge and approval of the litigants or of competent
judicial authority;

(5) All other contracts specially declared by law to be subject to rescission.


7. 206 SCRA 668.

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8. The existence of an intention to prejudice creditors is evinced either by the presumption
established in Article 1387 or by proof presented in the trial of the case. (Air France vs.
Court of Appeals, 245 SCRA 485).
9. See Gatchalian vs. Manalo, 68 Phil. 708.

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THIRD DIVISION

[G.R. No. 100635. February 13, 1995.]

SPOUSES RAMON TARNATE and ERLINDA TARNATE , petitioners, vs.


HONORABLE COURT OF APPEALS, HON. JUDGE REGIONAL TRIAL
COURT BATANGAS and IBAAN RURAL BANK, INC. , respondents.

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; SUMMARY JUDGMENT; WHEN


PROPER; RULE AND EXCEPTION; CASE AT BAR. — Summary judgment is proper when,
except with respect to the amount of damages, there is no veritable issue on any
material fact, and the moving party is entitled to such summary judgment as a matter
of course. The appellate court clearly did not commit error in concluding that summary
judgment could be had in the case at bench. Neither the existence of the loans and the
mortgage deeds, nor the fact of default on the due repayments, is disputed.
Concededly, the bank has had the unquestioned right to foreclose on the mortgages. It
is a settled rule that a mortgagee may recover any deficiency in the mortgage account
which is not realized in a foreclosure sale, and that the action for recovery of that
deficiency may be filed even during the redemption period. The contention that
petitioners have been made to believe by respondent bank that the loans extended to
them would be for long-term, not short-term, accommodations does not appear to
indeed be a real genuine issue. The loan documents admittedly executed by the parties
clearly contradict petitioners’ asseverations. The parties must have realized that when
the terms of an agreement are unequivocally reduced to writing, such as in this case,
they hardly can be controverted by oral evidence to the contrary.
2. ID.; ID.; ID.; OPPORTUNITY TO SUBMIT OPPOSITION THEREOF; OBSERVED
IN CASE AT BAR. — Petitioners decry their not having been given an opportunity to
submit their opposition to the motion for summary judgment. This contention is simply
not true. The bank served on petitioners’ counsel a copy, through registered mail, of its
motion for summary judgment (albeit "returned unclaimed"). Upon petitioners’
manifestation of its failure to receive that copy, the court a quo set the motion, as well
as the incidents that followed, for hearing. Since neither petitioners nor respondent
bank appeared, the court considered the matter submitted for resolution. Four months
having elapsed without the motion being yet resolved, respondent bank, on 18 May
1985, moved for an early resolution. Close to a year later, or on 15 April 1986, a second
motion was filed to resolve the pending matter. On 30 April 1986, the motion for
summary judgment was finally granted. During the interim, no further step was taken by
herein petitioners. After an evaluation of the pleadings before it, the court a quo,
rendered judgment, on 19 June 1986, in favor of the bank.
3. ID.; SPECIAL CIVIL ACTIONS;; FORECLOSURE OF MORTGAGE; FAILURE TO
REDEEM THEREOF; EFFECT. — Anent the contention that the property has been sold at
an extremely low price, suffice it to say that, if correct, it would have, in fact, favored an
easy redemption of the property. That remedy could have well been availed of but
petitioners did not. Neither can the charge of irregularity in the foreclosure sale for lack
of notice and publication be seriously considered. The records of the case immediately
belie such a claim. In their supplemental answer, petitioners have called attention to
respondent bank’s consolidation of ownership over the mortgaged property during the
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pendency of this case. We see nothing wrong in this action of the bank. Upon a failure
to redeem a foreclosed realty, the consolidation of title becomes a matter of right on
the part of the auction buyer.

DECISION

VITUG , J : p

This petition for review on certiorari disputes the decision, dated 20 March 1991,
of the Court of Appeals, as well as its resolution of 26 June 1991 denying the motion
for reconsideration of said decision, that has af rmed a summary judgment of the
court a quo.
The facts, gathered from the questioned decision, may be summarized thusly: cdasia

In order to secure various loans obtained from the Ibaan Rural Bank, Inc., the
spouses Ramon and Erlinda Tarnate, along with Vicente Templo and Manuel Villacorte,
executed real estate mortgages over different parcels of land, each covered by a
Transfer Certificate of Title ("TCT"), all situated in Mataas na Lupa, Lipa City.
When the loans were not repaid at maturity, the hypothecated parcels of land
were extrajudicially foreclosed by the bank in accordance with Act No. 3135. At the
auction, the bank gave the highest bids. The corresponding certi cates of sale were
issued in favor of the bank on 07 October 1981. llcd

On 03 May 1982, the bank commenced an action to recover the remaining


de ciency on the total indebtedness. It averred that while the loan secured by the
mortgage on TCT No. T-37203 amounted to P99,190.97, the foreclosed property,
however, was sold for just P46,512.00, thus leaving a balance of P52,678.97; that with
regard to the loan of P146,429.38, secured by TCT No. 37204, the auction sale brought
in an amount of P46,440.00, similarly resulting in a de ciency of P99,989.38; that the
obligation secured by TCT No. 37202 was for P96,259.16, but its foreclosure merely
commanded an auction price of P42,156.00, or a de cit of P54,103.16; and that
relative to the P136,304.63 loan, covered by a mortgage on TCT No. 37751, the winning
bid price of P65,232.00 was likewise short by P71,072.63. In their answer, the
defendants, questioned the validity of the extrajudicial foreclosure of the mortgaged
parcels of land but, by and large, maintained that the complaint had been led
prematurely since the redemption period at the time had yet to expire.
A pre-trial conference was held. The bank was accorded a period of up to ten
(10) days to formally submit its motion for summary judgment. The defendants were
also given (10) days from receipt of said motion within which to present their
opposition. On 13 October 1983, the bank led a motion for summary judgment. On 17
November 1983, it manifested that counsel for the defendants was furnished, by
registered mail, a copy of its motion but that the same was "returned unclaimed." The
bank prayed that the defendants be deemed to have waived their right to oppose the
motion. On 21 November 1983, the defendants sought to have their supplemental
answer with counterclaim admitted, stating that during the pendency of the case, the
bank applied for, and was granted, the consolidation of ownership over the foreclosed
property. The bank led a counter-manifestation and opposition. The court a quo set
these incidents for hearing on 10 January 1984, but neither of the parties appeared. The
trial court forthwith considered the motion for summary judgment, as well as the
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pleadings related thereto, submitted for resolution.
On 19 June 1986, the court a quo finally rendered judgment thusly:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff as follows:
"1. Under the first cause of action, ordering the defendants spouses Ramon
Tarnate and Erlinda Tarnate to pay the plaintiff the sum of P52,678.97, with
interest thereon at the legal rate per annum starting from October 7, 1981 until
fully paid;

"2. Under the second cause of action, ordering the defendants Spouses
Ramon Tarnate and Erlinda Tarnate to pay plaintiff the sum of P99,989.38 with
legal rate of interest thereon from October 7, 1981 until fully paid;

"3. Under the third cause of action, ordering the defendants Spouses Ramon
Tarnate and Erlinda Tarnate and Vicente Templo to pay, jointly and severally, the
plaintiff the sum of P54,103.16 with legal rate of interest Thereon per annum
from October 7, 1981 until fully paid;

"4. Under the fourth cause of action, ordering the defendants Spouses Ramon
Tarnate and Erlinda Tarnate and Manuel Villacorte to pay, jointly and severally,
the plaintiff the sum of P71,072.63 with legal rate of interest thereon per annum
from October 7, 1981 until fully paid;

"5. Under all the causes of action, ordering the defendants to pay, jointly and
severally, the plaintiff attorney's fees in the amount equivalent to 10% of the sum
due and payable; and

"6. The costs of suit.

"SO ORDERED." 1

The defendants brought the case to the Court of Appeals. On 20 March 1991, the
appellate court af rmed the assailed decision of the court a quo and dismissed the
appeal for lack of merit. The motion for reconsideration led by the defendant-
appellants was denied by the appellate court in its resolution of 26 June 1991.
In the instant recourse, the spouses Ramon and Erlinda Tarnate merely reiterated
the claim that they had made before the appellate court to the effect that: cdasia

"1. THE LOWER COURT ERRED IN NOT GIVING THE DEFENDANTS-


APPELLANTS THE OPPORTUNITY TO FILE THEIR OPPOSITION TO
MOTION FOR SUMMARY JUDGMENT.

"2. THE LOWER COURT ERRED IN RENDERING JUDGMENT BASED ON THE


PLEADINGS IN FAVOR OF THE PLAINTIFF-APPELLEE AND AGAINST
DEFENDANTS-APPELLANTS.
"3. THE LOWER COURT ERRED IN GRANTING THE MOTION FOR SUMMARY
JUDGMENT.
"4. THE LOWER COURT ERRED IN DENYING DEFENDANTS-APPELLANTS
MOTION TO ADMIT SUPPLEMENTAL ANSWER WITH COUNTERCLAIM." 2

The petition is bereft of merit.


Summary judgment is proper when, except with respect to the amount of
damages, there is no veritable issue on any material fact, and the moving party is
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entitled to such summary judgment as a matter of course. 3 The appellate court clearly
did not commit error in concluding that summary judgment could be had in the case at
bench. Neither the existence of the loans and the mortgage deeds, nor the fact of
default on the due repayments, is disputed. Concededly, the bank has had the
unquestioned right to foreclose on the mortgages. It is a settled rule that a mortgage
may recover any de ciency in the mortgage account which is not realized in a
foreclosure sale, 4 and that the action for recovery of that de ciency may be led even
during the redemption period. 5

The contention that petitioner have been made to believe by respondent bank
that the loans extended to them would be for long-term, not short-term,
accommodations does not appear to indeed be a real genuine issue. The loan
documents admittedly executed by the parties clearly contradict petitioners’
asseverations. The parties must have realized that when the terms of an agreement are
unequivocally reduced to writing, such as in this case, they hardly can be controverted
by oral evidence to the contrary.
Petitioners deny their not having been given an opportunity to submit their
opposition to the motion for summary judgment. This contention is simply not true. cdasia

The bank served on petitioners' counsel a copy, through registered mail, of its
motion for summary judgment (albeit "returned unclaimed"). 6 Upon petitioners’
manifestation of its failure to receive that copy, the court a quo set the motion, as well
as the incidents that followed, for hearing. Since neither petitioners nor respondent
bank appeared, the court considered the matter submitted for resolution. Four months
having elapsed without the motion being yet resolved, respondent bank, on 18 May
1985, moved for an early resolution. Close to a year later, or on 15 April 1986, a second
motion was led to resolve the pending matter. On 30 April 1986, the motion for
summary judgment was nally granted. During the interim, no further step was taken by
herein petitioners. After an evaluation of the pleadings before it, the court a quo,
rendered judgment, on 19 June 1986, in favor of the bank.
Anent the contention that the property has been sold at an extremely low price,
suf ce it to say that, if correct, it would have, in fact, favored an easy redemption of the
property. 7 That remedy could have well been availed of but petitioners did not. Neither
can the charge of irregularity in the foreclosure sale for lack of notice and publication
be seriously considered. The records of the case immediately belie such a claim
(Annexes "A," "B," "C," and "D," Motion for Summary Judgment, pp. 67-70, Records).
In their supplemental answer, petitioners have called attention to respondent
bank’s consolidation of ownership over the mortgaged property during the pendency of
this case. We see nothing wrong in this action of the bank. Upon a failure to redeem a
foreclosed realty, the consolidation of title becomes a matter of right on the part of the
auction buyer.
The award of attorney's fees made by the court a quo has not been questioned in
petitioners' appeal to the Court of Appeals. It is too late in the day to do it now.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED in toto. Costs
against petitioners. cdasia

SO ORDERED.
Feliciano, Romero, Melo and Francisco, JJ., concur.
Footnotes
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1. Rollo, pp. 103-104.
2. Rollo, pp. 8-9.
3. "Sec. 3. Motion and proceedings thereon. — The motion shall be served at least ten (10)
days before the time specified for the hearing. The adverse party prior to the day of
hearing may serve opposing affidavits. After the hearing, the judgment sought shall be
rendered forthwith if the pleadings, depositions, and admissions on file together with the
affidavits, show that, except as to the amount of damages, there is no genuine issue as
to the material fact and that the moving party is entitled to a judgment as a matter of
law." (Rule 34, Revised Rules of Court.)
4. State Investment House, Inc. vs. Court of Appeals, 217 SCRA 32; Bicol Savings & Loan
Association vs. Guinhawa, 188 SCRA 642; Prudential Bank vs. Martinez, 189 SCRA 612;
D evelopment Bank of the Phil. vs. Mirang, 66 SCRA 141.

5. Development Bank of the Philippines vs. Vda. de Moll, 43 SCRA 82.


6. "Sec. 8. Completeness of service. — Personal service is complete upon actual delivery.
Service by ordinary mail is complete upon the expiration of five (5) days after mailing,
unless the court otherwise provides. Service by registered mail is complete upon actual
receipt by the addressee; but if he fails to claim his mail from the post office within five
(5) days from the date of first notice of the postmaster, service shall take effect at the
expiration of such time." (Rule 13, Rules of Court)

7. See Prudential Bank vs. Martinez, 189 SCRA 612.

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THIRD DIVISION

[G.R. No. 128567. September 1, 2000.]

HUERTA ALBA RESORT INC. , petitioner, vs . COURT OF APPEALS and


SYNDICATED MANAGEMENT GROUP INC. , respondents.

Benjamin C. Santos & Ofelia Calcetas-Santos and Santos Parungao Aquino & Santos for
petitioner.
Oben, Ventura Defensor.
Abola Associates for petitioner.
Atienza Tabora Del Rosario & Castillo Law Office for respondents.

SYNOPSIS

Private respondent Syndicated Management Group, Inc. (SMGI), as mortgagee-assignee


of Intercom Fund Resource, Inc., filed a complaint for judicial foreclosure of four parcels of
land mortgaged by petitioner Huerta Alba Resort, Inc. before the Regional Trial Court of
Makati City. The trial court ruled in favor of private respondent and ordered the petitioner
to pay all its obligations within a period of not less than 150 days from receipt of the
decision. The appeals to the Court of Appeals as well as the Petition for Certiorari to the
Supreme Court filed by petitioner were all dismissed. The dismissal became final and
executory and it was entered in the Book of Entries of Judgment on March 14, 1994.
Accordingly, a writ of execution was issued and the auction sale of the subject properties
was set on September 6, 1994. The petitioner then questioned the issuance of the said
Writ of Execution by claiming that the 150-day period for petitioner to pay the judgment
obligation had not yet lapsed. This issue was again raised by petitioner to the Court of
Appeals. The Court of Appeals ruled that the 150-day period should be computed from the
date the petitioner was notified of the Entry of Judgment and it expired on September 11,
1994. Subsequently, the trial court confirmed the sale of subject properties to the private
respondent. When the private respondent filed a motion for a Writ of Possession, again it
was opposed by petitioner by filing a motion to compel private respondent to accept
redemption. This is the first time petitioner asserted its right to redeem the subject
properties under Section 78 of R.A. No. 337 (General Banking Act). The trial court allowed
the petitioner to redeem the subject properties. However, in a Petition for Certiorari,
Prohibition and Mandamus filed by private respondents, the Court of Appeals set aside the
said Order of the trial court. Hence, this petition. THCSAE

The Court ruled that the claim that petitioner is entitled to the beneficial provisions of
Section 78 of R.A. No. 337 — since private respondent's predecessor-in-interest is a credit
institution — is in the nature of a compulsory counterclaim which should have been averred
in petitioner's answer to the complaint for judicial foreclosure. The failure of petitioner to
seasonably assert its alleged right under Section 78 of R.A. No. 337 precludes it from so
doing at this late stage of the case. Estoppel may be successfully invoked if the party fails
to raise the question in the early stages of the proceedings. Hence, in conformity with the
ruling in Limpin vs. IAC (166 SCRA 87), the sale of the subject properties, operated to
divest the rights of all the parties to the action and to vest their rights in private
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respondent. There then existed only what is known as the equity of redemption, which is
simply the right of the petitioner to extinguish the mortgage and retain ownership of the
property by paying the secured debt within the 90-day period after judgment became final.
There being an explicit finding by the Court of Appeals in its decision that the herein
petitioner failed to exercise its equity of redemption within the prescribed period,
redemption can no longer be effected. The confirmation of the sale and the issuance of the
transfer certificates of title covering the subject properties to private respondent was in
order. The trial court, therefore, has the ministerial duty to place private respondent in the
possession of subject properties.

SYLLABUS

1. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; FORECLOSURE OF REAL ESTATE


MORTGAGE; EQUITY OF REDEMPTION AND RIGHT OF REDEMPTION; DISTINGUISHED. —
On the distinction between the equity of redemption and right of redemption, the case of
Gregorio Y. Limpin vs. Intermediate Appellate Court, comes to the fore. Held the Court in
the said case: "The equity of redemption is, to be sure, different from and should not be
confused with the right of redemption. The right of redemption in relation to a mortgage —
understood in the sense of a prerogative to re-acquire mortgaged property after
registration of the foreclosure sale — exists only in the case of the extrajudicial foreclosure
of the mortgage. No such right is recognized in a judicial foreclosed of the mortgage. No
such right is recognized in a judicial foreclosed except only where the mortgagee is the
Philippine National Bank or a bank or banking institution. Where a mortgage is foreclosed
extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1)
year from the registration of the sheriff's certificate of foreclosure sale. Where the
foreclosure is judicially effected, however, no equivalent right of redemption exists. The
law declares that a judicial foreclosure sale, when confirmed by an order of the court, . . .
shall operate to divest the rights of all the parties to the action and to vest their rights in
the purchaser, subject to such rights of redemption as may be allowed by law. Such rights
exceptionally 'allowed by law' (i.e., even after confirmation by an order of the court) are
those granted by the charter of the Philippine National Bank (Acts No. 2747 and 2938),
and the General Banking Act (R.A. 337). These laws confer on the mortgagor, his
successors in interest or any judgment creditor of the mortgagor, the right to redeem the
property sold on foreclosure — after confirmation by the court of the foreclosure sale —
which right may be exercised within a period of one (1) year, counted from the date of
registration of the certificate of sale in the Registry of Property. But, to repeat, no such
right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is
not the PNB or a bank or banking institution. In such a case, the foreclosure sale, 'when
confirmed by an order of the court. . . . shall operate to divest the rights of all the parties to
the action and to vest their rights in the purchaser.' There then exists only what is known as
the equity of redemption. This is simply the right of the defendant mortgagor to extinguish
the mortgage and retain ownership of the property by paying the secured debt within the
90-day period after the judgment becomes final, in accordance with Rule 68, or even after
the foreclosure sale but prior to its confirmation.
2. ID.; ID.; ID.; BENEFICIAL PROVISIONS OF SECTION 78 OF GENERAL BANKING ACT
MUST BE RAISED AS COMPULSORY COUNTERCLAIM. — [A]t the earliest opportunity, when
it submitted its answer to the complaint for judicial foreclosure, petitioner should have
alleged that it was entitled to the beneficial provisions of Section 78 of R.A. No. 337 but
again, it did not make any allegation in its answer regarding any right thereunder. It bears
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stressing that the applicability of Section 78 of R.A. No. 337 hinges on the factual question
of whether or not private respondent's predecessor in interest was a credit institution. As
was held in Limpin, a judicial foreclosure sale, "when confirmed by an order of the court, . . .
shall operate to divest the rights of all the parties to the action and to vest their rights in
the purchaser, subject to such rights of redemption as may be allowed by law," which
confer on the mortgagor, his successors in interest of any judgment creditor of the
mortgagor, the right to redeem the property sold on foreclosure after confirmation by the
court of the judicial foreclosure sale. Thus, the claim that petitioner is entitled to the
beneficial provisions of Section 78 of R.A. No. 337 — since private respondent's
predecessor-in-interest is a credit institution — is in the nature of a compulsory
counterclaim which should have been averred in petitioner's answer to the complaint for
judicial foreclosure.
3. ID.; ID.; ID.; ID.; NOT ALLEGED BY PETITIONER IN EARLY STAGES OF PROCEEDINGS.
— [I]t was too late in the day for petitioner to invoke a right to redeem under Section 78 of
R.A. No. 337. Petitioner failed to assert a right to redeem in several crucial stages of the
proceedings. For instance, on September 7, 1994, when it filed with the trial court an Ex-
parte Motion for Clarification, petitioner failed to allege and prove that private
respondent's predecessor in interest was a credit institution . . . So also, when it presented
before the trial court an Exception to the Order and Motion to Set Aside said Order dated
October 13, 1994, petitioner again was silent on its alleged right under Section 78 of R.A.
No. 337 . . . Then, too, nothing was heard from petitioner on its alleged right under Section
78 of R.A. No. 337 and of the predecessor in interest of private respondent as a credit
institution, when the trial court came out with an order on February 10, 1995, confirming
the sale of subject properties in favor private respondent and declaring that all pending
incidents with respect to the Order dated September 26, 1994 had become moot and
academic. Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification
with the Court of Appeals, seeking "clarification" of the date of commencement of the one
(1) year redemption period for the subject properties . . . If petitioner were really acting in
good faith, it would have ventilated, before the Court of Appeals in CA-G.R. No. 35086 its
alleged right under Section 78 of R.A. No. 337; but petitioner never did do so. cDAITS

4. ID.; ID.; ID.; ID.; ID.; PRINCIPLE OF ESTOPPEL APPLIES. — The failure of petitioner to
seasonably assert its alleged right under Section 78 of R.A. No. 337 precludes it from so
doing at this late stage of the case. Estoppel may be successfully invoked if the party fails
to raise the question in the early stages of the proceedings. Thus, "a party to a case who
failed to invoke his claim in the main case, while having the opportunity to do so, will be
precluded, subsequently, from invoking his claim, even if it were true, after the decision has
become final, otherwise the judgment may be reduced to a mockery and the
administration of justice may be placed in disrepute."

5. ID.; CIVIL PROCEDURE; COUNTERCLAIM; ELUCIDATED. — ". . . A counterclaim is,


most broadly, a cause of action existing in favor of the defendant against the plaintiff.
More narrowly, it is a claim which, if established, will defeat or in some way qualify a
judgment or relief to which plaintiff is otherwise entitled. It is sometimes defined as any
cause of action arising in contract available against any action also arising in contract and
existing at the time of the commencement of such an action. It is frequently defined by the
codes as a cause of action arising out of the contract or transaction set forth in the
complaint as the foundation of the plaintiff's claim, or connected with the subject of the
action." "The counterclaim is in itself a distinct and independent cause of action, so that
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when properly stated as such, the defendant becomes, in respect to the matters stated by
him, an actor, and there are two simultaneous actions pending between the same parties,
wherein each is at the same time both a plaintiff and a defendant. Counterclaim is an
offensive as well as a defensive plea and is not necessarily confined to the justice of the
plaintiffs claim. It represents the right of the defendant to have the claims of the parties
counterbalanced in whole or in part, and judgment to be entered in excess, if any. A
counterclaim stands on the same footing, and is to be tested by the same rules, as if it
were an independent action."
6. ID.; ID.; ID.; PURPOSE. — ". . . The rules of counterclaim are designed to enable the
disposition of a whole controversy of interested parties' conflicting claims, at one time and
in one action, provided all parties' be brought before the court and the matter decided
without prejudicing the rights of any party." ScHADI

7. ID.; ID.; EXECUTION OF JUDGMENT; ERRONEOUS FOR THE TRIAL COURT TO ALLOW
A PARTY AT THIS STAGE TO INTRODUCE EVIDENCE AND OVERRULE THE LAW OF THE
CASE. — [T]he trial court erred in still allowing petitioner to introduce evidence that private
respondent's predecessor-in-interest was a credit institution, and to thereafter rule that the
petitioner was entitled to avail of the provisions of Section 78 of R.A. No. 337. In effect, the
trial court permitted the petitioner to accomplish what the latter failed to do before the
Court of Appeals, that is, to invoke its alleged right under Section 78 of R.A. 337 although
the Court of Appeals in CA-G.R. No. 35086 already found that 'the question of whether the
Syndicated Management Council Group, Inc. is a bank or credit institution was never
brought before (the Court of Appeals) squarely." The said pronouncement by the Court of
Appeals unerringly signified that petitioner did not make a timely assertion of any right
under Section 78 of R.A. No. 337 in all the stages of the proceedings below.
8. ID.; ID.; ID.; LAW OF THE CASE; REMAINS AS IT IS, WHETHER OR NOT IT IS
ERRONEOUS IS IMMATERIAL. — There is, . . . merit in private respondent's contention that
to allow petitioner to belatedly invoke its right under Section 78 of R.A. No. 337 will disturb
the "law of the case." However, private respondent's statement of what constitutes the
"law of the case" is not entirely accurate. The "law of the case" is not simply that the
defendant possesses an equity of redemption. As the Court has stated, the "law of the
case" holds that petitioner has the equity of the redemption without any qualification
whatsoever, that is, without the right of redemption afforded by Section 78 of R.A. No. 337.
Whether or not the "law of the case" is erroneous is immaterial, it still remains the "law of
the case." A contrary rule will contradict both the letter and spirit of the rulings of the Court
of Appeals in CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-G.R. 38747, which
clearly saw through the repeated attempts of petitioner to forestall so simple a matter as
making the security given for a just debt to answer for its payment. HATICc

9. ID.; SPECIAL CIVIL ACTIONS; FORECLOSURE OF REAL ESTATE MORTGAGE; EQUITY


OF REDEMPTION CAN NO LONGER BE EFFECTED FOR FAILURE TO EXERCISE WITHIN
THE PRESCRIBED PERIOD. — [T]he sale of the subject properties, as confirmed by the
Order dated February 10, 1995 of the trial court in Civil Case No. 89-5424 operated to
divest the rights of all the parties to the action and to vest their rights in private
respondent. There then existed only what is known as the equity of redemption, which is
simply the right of the petitioner to extinguish the mortgage and retain ownership of the
property by paying the secured debt within the 90-day period after the judgment became
final. There being an explicit finding on the part of the Court of Appeals in its Decision of
September 30, 1994 in CA-G.R. No. 35086 — that the herein petitioner failed to exercise its
equity of redemption within the prescribed period, redemption can no longer be effected.
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The confirmation of the sale and the issuance of the transfer certificates of title covering
the subject properties to private respondent was then, in order. The trial court therefore,
has the ministerial duty to place private respondent in the possession of subject
properties.

DECISION

PURISIMA , J. : p

Litigation must at some time be terminated, even at the risk of occasional errors. Public
policy dictates that once a judgment becomes final, executory and unappealable, the
prevailing party should not be denied the fruits of his victory by some subterfuge devised
by the losing party. Unjustified delay in the enforcement of a judgment sets at naught the
role of courts in disposing justiciable controversies with finality.
The Case
At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution, dated
March 11, 1997, of the Court of Appeals in CA-G.R. No. 38747, which set aside the Order,
dated July 21, 1995 and Order, dated September 4, 1997, of the Regional Trial Court of
Makati City, in Civil Case No. 89-5424. The aforesaid orders of the trial court held that
petitioner had the right to redeem subject pieces of property within the one-year period
prescribed by Section 78 of Republic Act No. 337 otherwise known as the General Banking
Act.
Section 78 of R.A. No. 337 provides that "in case of a foreclosure of a mortgage in favor of
a bank, banking or credit institution, whether judicially or extrajudicially, the mortgagor
shall have the right, within one year after the sale of the real estate as a result of the
foreclosure of the respective mortgage, to redeem the property."
The Facts
The facts that matter are undisputed:
In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on
October 19, 1989, docketed as Civil Case No. 89-5424 before the Regional Trial Court of
Makati City, the herein private respondent sought the foreclosure of four (4) parcels of
land mortgaged by petitioner to Intercon Fund Resource, Inc. ("Intercon").
Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a loan
amounting to P8.5 million obtained by petitioner from Intercon, in whose favor petitioner
mortgaged the aforesaid parcels of land as security for the said loan.
In its answer below, petitioner questioned the assignment by Intercon of its mortgage
right thereover to the private respondent, on the ground that the same was ultra vires.
Petitioner also questioned during the trial the correctness of the charges and interest on
the mortgage debt in question.
On April 30, 1992, the trial court, through the then Judge now Court of Appeals Justice
Buenaventura J. Guerrero, came out with its decision "granting herein private respondent
SMGI's complaint for judicial foreclosure of mortgage", disposing as follows: aSECAD

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"WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the
following:
(1) P8,500,000.00 representing the principal of the amount due;
(2) P850,000.00 as penalty charges with interest at 6% per annum, until fully
paid;
(3) 22% per annum interest on the above principal from September 6, 1998,
until fully paid;
(4) 5% of the sum total of the above amounts, as reasonable attorney's fees;
and,

(5) Costs.
All the above must be paid within a period of not less than 150 days from receipt
hereof by the defendant. In default of such payment, the four parcels of land
subject matter of the suit including its improvements shall be sold to realize the
mortgage debt and costs, in the manner and under the regulations that govern
sales of real estate under execution." 1

Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal
docketed as CA-G.R. CV No. 39243 before the Sixth Division of the appellate court, which
dismissed the case on June 29, 1993 on the ground of late payment of docket fees.
Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via a
petition for certiorari, docketed as G.R. No. 112044, which this court resolved to dismiss
on December 13, 1993, on the finding that the Court of Appeals erred not in dismissing the
appeal of petitioner.
Petitioner's motion for reconsideration of the dismissal of its petition in G.R. No. 112044
was denied with finality in this Court's Resolution promulgated on February 16, 1994. On
March 10, 1994, leave to present a second motion for reconsideration in G.R. No. 112044
or to submit the case for hearing by the Court en banc was filed, but to no avail. The Court
resolved to deny the same on May 11, 1994. LibLex

On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044 became
final and executory and was entered in the Book of Entries of Judgment.
On July 4, 1994, private respondent filed with the trial court of origin a motion for
execution of the Decision promulgated on April 30, 1992 in Civil Case No. 89-5424. The
said motion was granted on July 15, 1994.
Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a Notice of
Levy and Execution was issued by the Sheriff concerned, who issued on August 1, 1994 a
Notice of Sheriff's Sale for the auction of subject properties on September 6, 1994.

On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash
and Set Aside Writ of Execution ascribing to it grave abuse of discretion in issuing the
questioned Writ of Execution. To support its motion, petitioner invited attention and
argued that the records of the case were still with the Court of Appeals and therefore,
issuance of the writ of execution was premature since the 150-day period for petitioner to
pay the judgment obligation had not yet lapsed and petitioner had not yet defaulted in the
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payment thereof since no demand for its payment was made by the private respondent. In
petitioner's own words, the dispute between the parties was "principally on the issue as to
when the 150-day period within which Huerta Alba may exercise its equity of redemption
should be counted."
In its Order of September 2, 1994, the lower court denied petitioner's urgent motion to
quash the writ of execution in Civil Case No. 89-5424, opining that subject judgment had
become final and executory and consequently, execution thereof was a matter of right and
the issuance of the corresponding writ of execution became its ministerial duty.
Challenging the said order granting execution, petitioner filed once more with the Court of
Appeals another petition for certiorari and prohibition with preliminary injunction, docketed
as C.A.-G.R. SP No. 35086, predicated on the same grounds invoked for its Motion to
Quash Writ of Execution.
On September 6, 1994, the scheduled auction sale of subject pieces of properties
proceeded and the private respondent was declared the highest bidder. Thus, private
respondent was awarded subject bidded pieces of property. The covering Certificate of
Sale issued in its favor was registered with the Registry of Deeds on October 21, 1994.
On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification asking the
trial court to "clarify" whether or not the twelve (12) month period of redemption for
ordinary execution applied in the case.
On September 26, 1994, the trial court ruled that the period of redemption of subject
property should be governed by the rule on the sale of judicially foreclosed property under
Rule 68 of the Rules of Court.
Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994 and
Motion to Set Aside Said Order, contending that the said Order materially altered the
Decision dated April 30, 1992 "which declared that the satisfaction of the judgment shall
be in the manner and under the regulation that govern sale of real estate under execution."
Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the
issues raised by the petitioner in C.A.-G.R. SP No. 35086, holding that the one hundred-fifty
day period within which petitioner may redeem subject properties should be computed
from the date petitioner was notified of the Entry of Judgment in G.R. No. 112044; and that
the 150-day period within which petitioner may exercise its equity of redemption expired
on September 11, 1994.
Thus:
"Petitioner must have received the resolution of the Supreme Court dated February
16, 1994 denying with finality its motion for reconsideration in G.R. No. 112044
before March 14, 1994, otherwise the Supreme Court would not have made an
entry of judgment on March 14, 1994. While, computing the 150-day period.
Petitioner may have until September 11, 1994. within which to pay the amounts
covered by the judgment, such period has already expired by this time, and
therefore, this Court has no more reason to pass upon the parties' opposing
contentions, the same having become moot and academic." 2 (underscoring
supplied). IcaHTA

Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.-G.R.
SP No. 35086. In its Motion for Reconsideration dated October 18, 1994, petitioner
theorized that the period of one hundred fifty (150) days should not be reckoned with from
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Entry of Judgment but from receipt on or before July 29, 1994 by the trial court of the
records of Civil Case No. 89-5424 from the Court of Appeals. So also, petitioner
maintained that it may not be considered in default, even after the expiration of 150 days
from July 29, 1994, because prior demand to pay was never made on it by the private
respondent. According to petitioner, it was therefore, premature for the trial court to issue
a writ of execution to enforce the judgment.
The trial court deferred action on the Motion for Confirmation of the Certificate of Sale in
view of the pendency of petitioner's Motion for Reconsideration in CA-G.R. SP No. 35086.
On December 23, 1994, the Court of Appeals denied petitioner's motion for
reconsideration in CA-G.R. SP No. 35086. Absent any further action with respect to the
denial of the subject motion for reconsideration, private respondent presented a Second
Motion for Confirmation of Certificate of Sale before the trial court.
As regards the Decision rendered on September 30, 1994 by the Court of Appeals in CA
G.R. SP No. 35086 it became final and executory on January 25, 1995.
On February 10, 1995, the lower court confirmed the sale of subject properties to the
private respondent. The pertinent Order declared that all pending incidents relating to the
Order dated September 26, 1994 had become moot and academic. Conformably, the
Transfer Certificates of Title to subject pieces of property were then issued to the private
respondent.
On February 27, 1995, petitioner filed with the Court of Appeals a Motion for Clarification
seeking "clarification" of the date of commencement of the one (1) year period for the
redemption of the properties in question.
In its Resolution dated March 20, 1995, the Court of Appeals merely noted such Motion for
Clarification since its Decision promulgated on September 30, 1994 had already become
final and executory; ratiocinating thus:
"We view the motion for clarification filed by petitioner, purportedly signed by its
proprietor, but which we believe was prepared by a lawyer who wishes to hide
under the cloak of anonymity, as a veiled attempt to buy time and to delay further
the disposition of this case.
Our decision of September 30, 1994 never dealt on the right and period of
redemption of petitioner, but was merely circumscribed to the question of whether
respondent judge could issue a writ of execution in its Civil Case No. 89-5424 . . . .

We further ruled that the one-hundred fifty day period within which petitioner may
exercise its equity of redemption should be counted, not from the receipt of
respondent court of the records of Civil Case No. 89-5424 but from the date
petitioner was notified of the entry of judgment made by the appellate court.
But we never made any pronouncement on the one-year right of redemption of
petitioner because, in the first place, the foreclosure in this case is judicial. and as
such the mortgagor has only the equity not the right of redemption . . . . While it
may be true that under Section 78 of R.A. 337 as amended, otherwise known as
the General Banking Act, a mortgagor of a bank, banking or credit institution,
whether the foreclosure was done judicially or extrajudicially , has a period of one
year from the auction sale within which to redeem the foreclosed property, the
question of whether the Syndicated Management Group, Inc., is a bank or credit
institution was never brought before us squarely, and it is indeed odd and strange
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that petitioner would now sarcastically ask a rhetorical question in its motion for
clarification." 3 (Emphasis supplied).

Indeed, if petitioner did really act in good faith, it would have ventilated before the Court of
Appeals in CA-G.R. No. 35086 its pretended right under Section 78 of R.A. No. 337 but it
never did so.
At the earliest opportunity, when it filed its answer to the complaint for judicial foreclosure,
petitioner should have averred in its pleading that it was entitled to the beneficial
provisions of Section 78 of R.A. No. 337; but again, petitioner did not make any such
allegation in its answer.
From the said Resolution, petitioner took no further step such that on March 31, 1995, the
private respondent filed a Motion for Issuance of Writ of Possession with the trial court.
THCSEA

During the hearing called on April 21, 1995, the counsel of record of petitioner entered
appearance and asked for time to interpose opposition to the Motion for Issuance of Writ
of Possession.
On May 2, 1995, in opposition to private respondent's Motion for Issuance of writ of
Possession, petitioner filed a "Motion to Compel Private Respondent to Accept
Redemption." It was the first time petitioner ever asserted the right to redeem subject
properties under Section 78 of R.A. No. 337, the General Banking Act; theorizing that the
original mortgagee, being a credit institution, its assignment of the mortgage credit to
petitioner did not remove petitioner from the coverage of Section 78 of R.A. No. 337.
Therefore, it should have the right to redeem subject properties within one year from
registration of the auction sale, theorized the petitioner which concluded that in view of its
"right of redemption," the issuance of the titles over subject parcels of land to the private
respondent was irregular and premature.
In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon Inoturan,
denied private respondent's motion for a writ of possession, opining that Section 78 of the
General Banking Act was applicable and therefore, the petitioner had until October 21,
1995 to redeem the said parcels of land, said Order ruled as follows:
"It is undisputed that Intercon is a credit institution from which defendant
obtained a loan secured with a real estate mortgage over four (4) parcels of land.
Assuming that the mortgage debt had not been assigned to plaintiff, there is then
no question that defendant would have a right of redemption in case of
foreclosure, judicially or extrajudicially, pursuant to the above quoted Section 78
of RA 337, as amended.

However, the pivotal issue here is whether or not the defendant lost its right of redemption by
virtue of the assignment of its mortgage debt by Intercon to plaintiff, which is not a bank or credit
institution. The issue is resolved in the negative. The right of redemption in this case is vested by
law and is therefore an absolute privilege which defendant may not lose even though plaintiff-
assignee is not a bank or credit institution (Tolentino versus Court of Appeals, 106 SCRA 513).
Indeed, a contrary ruling will lead to a possible circumvention of Section 78 because all that may
be needed to deprive a defaulting mortgagor of his right of redemption is to assign his mortgage
debt from a bank or credit institution to one which is not. Protection of defaulting mortgagors,
which is the avowed policy behind the provision, would not be achieved if the ruling were
otherwise. Consequently, defendant still possesses its right of redemption which it may exercise
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up to October 21, 1995 only, which is one year from the date of registration of the certificate of
sale of subject properties (GSIS versus Iloilo, 175 SCRA 19, citing Limpin versus IAC, 166 SCRA
87).
Since the period to exercise defendant's right of redemption has not yet expired,
the cancellation of defendant's transfer certificates of title and the issuance of
new ones in lieu thereof in favor of plaintiff are therefore illegal for being
premature, thereby necessitating reconveyance (see Sec. 63 (a) PD 1529, as
amended).

WHEREFORE, the Court hereby rules as follows:


(1) The Motion for Issuance of Writ of Possession is hereby denied;
(2) Plaintiff is directed to accept the redemption on or before October
21, 1995 in an amount computed according to the terms stated in the Writ
of Execution dated July 15, 1994 plus all other related costs and expenses
mentioned under Section 78, RA 337, as amended; and
(3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to
reconvey to the defendant the following titles of the four (4) parcels of
land, namely TCT Nos. V-38878, V-38879, V-38880, and V-38881, now in
the name of plaintiff, and (b) to register the certificate of sale dated
October 7, 1994 and the Order confirming the sale dated February 10, 1995
by a brief memorandum thereof upon the transfer certificates of title to be
issued in the name of defendant, pursuant to Sec. 63 (a) PD 1529, as
amended.

The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is
now deemed resolved.

SO ORDERED." 4

Private respondent interposed a Motion for Reconsideration seeking the reversal of the
Order but to no avail. In its Order dated September 4, 1995, the trial court denied the same.
To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of
September 4, 1995 of the trial court, the private respondent filed with this court a Petition
for Certiorari, Prohibition and Mandamus, docketed as G.R. No. 121893, but absent any
special and cogent reason shown for entertaining the same, the Court referred the petition
to the Court of Appeals, for proper determination.
Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due
course to the petition and set aside the trial court's Order dated July 21, 1995 and Order
dated September 4, 1995.
In its Resolution of March 11, 1997, the Court of Appeals denied petitioner's Motion for
Reconsideration of the Decision promulgated on November 14, 1996 in CA-G.R. No.
38747. ESCacI

Undaunted, petitioner has come to this Court via the present petition, placing reliance on
the assignment of errors, that:
I
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT
THE COURT OF APPEALS (TWELFTH DIVISION) IN CA G.R. SP NO. 35086 HAD
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RESOLVED "WITH FINALITY" THAT PETITIONER HUERTA ALBA HAD NO RIGHT
OF REDEMPTION BUT ONLY THE EQUITY OF REDEMPTION.
II

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT


PETITIONER HUERTA ALBA POSSESSES THE ONE-YEAR RIGHT OF
REDEMPTION UNDER SECTION 78, R.A. NO. 337 (THE GENERAL BANKING ACT).
III

THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT


PRIVATE RESPONDENT SYNDICATED MANAGEMENT GROUP, INC. IS ENTITLED
TO THE ISSUANCE OF A WRIT OF POSSESSION OVER THE SUBJECT PROPERTY.
5

In its comment on the petition, private respondent countered that:


"A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT
RESOLVED WITH FINALITY IN C.A.-G.R. SP NO. 35086 THAT PETITIONER
ONLY HAD THE RIGHT OF REDEMPTION IN RESPECT OF THE SUBJECT
PROPERTIES.
B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO
EVADE THE FINALITY OF VARIOUS DECISIONS, RESOLUTIONS AND
ORDERS WHICH HELD THAT, PETITIONER ONLY POSSESSES THE
EQUITY OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.

C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE


ISSUE OF ITS ALLEGED 'RIGHT OF REDEMPTION.
D. IN HOLDING THAT THE PETITIONER HAD THE 'RIGHT OF REDEMPTION'
OVER THE SUBJECT PROPERTIES, THE TRIAL COURT MADE A MOCKERY
OF THE 'LAW OF THE CASE."' 6

And by way of Reply, petitioner argued, that:


I.
THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY
RESOLVED THEREIN — WHETHER WITH FINALITY OR OTHERWISE — THE ISSUE
OF PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78,
R.A. NO. 337.

II.
THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT
OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IN TIMELY FASHION, i.e.,
AFTER CONFIRMATION BY THE COURT OF THE FORECLOSURE SALE, AND
WITHIN ONE (1) YEAR FROM THE DATE OF REGISTRATION OF THE
CERTIFICATE OF SALE.
III.

THE PRINCIPLE OF 'THE LAW OF THE CASE' HAS ABSOLUTELY NO BEARING


HERE:
(1)

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THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT
PREDICATED UPON THE FINALITY AND CORRECTNESS OF THE DECISION IN
CIVIL CASE NO. 89-5424.
AaHcIT

(2)
THUS, THE RTC'S ORDER RECOGNIZING PETITIONER HUERTA ALBA'S RIGHT OF
REDEMPTION UNDER SECTION 78, R.A. NO. 337 DOES NOT IN ANY WAY HAVE
THE EFFECT OF AMENDING, MODIFYING, OR SETTING ASIDE THE DECISION IN
CIVIL CASE NO. 89-5424.

The above arguments and counter-arguments advanced relate to the pivotal issue of
whether or not the petitioner has the one-year right of redemption of subject properties
under Section 78 of Republic Act No. 337 otherwise known as the General Banking Act.
The petition is not visited by merit.
Petitioner's assertion of right of redemption under Section 78 of Republic Act No. 337 is
premised on the submission that the Court of Appeals did not resolve such issue in CA-
G.R. SP No. 35086; contending thus:
(1)

BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R.


SP NO. 35086 BE INTERPRETED TO MEAN THE COURT OF APPEALS HAD
RESOLVED 'WITH FINALITY' THE ISSUE OF WHETHER PETITIONER HUERTA
ALBA HAD THE RIGHT OF REDEMPTION WHEN ALL THAT THE RESOLUTION DID
WAS TO MERELY NOTE THE MOTION FOR CLARIFICATION.

(2)
THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL
JUDGMENT, ORDER OR DECREE. IT IS NOT EVEN A JUDGMENT OR ORDER TO
BEGIN WITH. IT ORDERS NOTHING; IT ADJUDICATES NOTHING.

(3)
PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A.
NO. 37 WAS NOT AN ISSUE AND WAS NOT IN ISSUE, AND COULD NOT HAVE
POSSIBLY BEEN AN ISSUE NOR IN ISSUE, IN CA G.R. SP NO. 35086.

(4)
THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY
BECOME FINAL EVEN BEFORE THE FILING OF THE MOTION FOR
CLARIFICATION, THE COURT OF APPEALS NO LONGER HAD ANY JURISDICTION
TO ACT OF THE MOTION OR ANY OTHER MATTER IN CA G.R. SP NO. 35086,
EXCEPT TO MERELY NOTE THE MOTION.
II.

IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBA'S RIGHT OF


REDEMPTION UNDER SECTION 78, R.A. NO. 337 WAS DIRECTLY RAISED AND
JOINED BY THE PARTIES, AND THE SAME DULY RESOLVED BY THE TRIAL
COURT.
III.

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THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS
MANDATORY AND AUTOMATICALLY EXISTS BY LAW. THE COURTS ARE DUTY-
BOUND TO RECOGNIZE SUCH RIGHT.

IV.

EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER


HUERTA ALBA, NOT THE LEAST OF WHICH IS THE WELL-SETTLED POLICY OF
THE LAW TO AID RATHER THAN DEFEAT THE RIGHT OF REDEMPTION.

V.
THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE
TRIAL COURT ARE VALID AND PROPER IN ACCORDANCE WITH THE MANDATE
OF THE LAW.

From the various decisions, resolutions and orders a quo it can be gleaned that what
petitioner has been adjudged to have was only the equity of redemption over subject
properties. On the distinction between the equity of redemption and right of redemption,
the case of Gregorio Y. Limpin vs. Intermediate Appellate Court, 7 comes to the fore. Held
the Court in the said case:
"The equity of redemption is, to be sure, different from and should not be
confused with the right of redemption.

The right of redemption in relation to a mortgage – understood in the sense of a


prerogative to re-acquire mortgaged property after registration of the foreclosure
sale – exists only in the case of the extrajudicial foreclosure of the mortgage. No
such right is recognized in a judicial foreclosure except only where the mortgagee
is the Philippine National Bank or a bank or banking institution.

Where a mortgage is foreclosed extrajudicially , Act 3135 grants to the mortgagor


the right of redemption within one (1) year from the registration of the sheriff's
certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no equivalent right of
redemption exists. The law declares that a judicial foreclosure sale 'when
confirmed be an order of the court, . . . shall operate to divest the rights of all the
parties to the action and to vest their rights in the purchaser, subject to such rights
of redemption as may be allowed by law.' S uch rights exceptionally 'allowed by
law' (i.e., even after confirmation by an order of the court) are those granted by
the charter of the Philippine National Bank (Acts No. 2747 and 2938), and the
General Banking Act (R.A. 337). These laws confer on the mortgagor, his
successors in interest or any judgment creditor of the mortgagor, the right to
redeem the property sold on foreclosure — after confirmation by the court of the
foreclosure sale — which right may be exercised within a period of one (1) year,
counted from the date of registration of the certificate of sale in the Registry of
Property.

But, to repeat, no such right of redemption exists in case of judicial foreclosure of


a mortgage if the mortgagee is not the PNB or a bank or banking institution. In
such a case, the foreclosure sale, 'when confirmed by an order of the court. . .
shall operate to divest the rights of all the parties to the action and to vest their
rights in the purchaser.' There then exists only what is known as the equity of
redemption. This is simply the right of the defendant mortgagor to extinguish the
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mortgage and retain ownership of the property by paying the secured debt within
the 90-day period after the judgment becomes final, in accordance with Rule 68,
or even after the foreclosure sale but prior to its confirmation.
Section 2, Rule 68 provides that —

'. . . If upon the trial . . . the court shall find the facts set forth in the complaint to
be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt
or obligation, including interest and costs, and shall render judgment for the sum
so found due and order the same to be paid into court within a period of not less
than ninety (90) days from the date of the service of such order, and that in
default of such payment the property be sold to realize the mortgage debt and
costs.'

This is the mortgagor's equity (not right) of redemption which, as above stated,
may be exercised by him even beyond the 90-day period 'from the date of service
of the order,' and even after the foreclosure sale itself, provided it be before the
order of confirmation of the sale. After such order of confirmation, no redemption
can be effected any longer." 8 (Emphasis supplied)

Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337.
Petitioner avers in its petition that the Intercon, predecessor in interest of the private
respondent, is a credit institution, such that Section 78 of Republic Act No. 337 should
apply in this case. Stated differently, it is the submission of petitioner that it should be
allowed to redeem subject properties within one year from the date of sale as a result of
the foreclosure of the mortgage constituted thereon.
The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its
asserted right under Section 78 of R.A. No. 337 to redeem subject properties.
Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after confirmation
by the court of the foreclosure sale, and within one (1) year from the date of registration of
the certificate of sale. Indeed, the facts show that it was only on May 2, 1995 when, in
opposition to the Motion for Issuance of Writ of Possession, did petitioner file a Motion to
Compel Private Respondent to Accept Redemption, invoking for the very first time its
alleged right to redeem subject properties under to Section 78 of R.A. No. 337.
In light of the aforestated facts, it was too late in the day for petitioner to invoke a right to
redeem under Section 78 of R.A. No. 337. Petitioner failed to assert a right to redeem in
several crucial stages of the proceedings.
For instance, on September 7, 1994, when it filed with the trial court an Ex-part Motion for
Clarification, petitioner failed to allege and prove that private respondent's predecessor in
interest was a credit institution and therefore, Section 78 of R.A. No. 337 was applicable.
Petitioner merely asked the trial court to clarify whether the sale of subject properties was
execution sale or judicial foreclosure sale.
So also, when it presented before the trial court an Exception to the Order and Motion to
Set Aside Said Order dated October 13, 1994, petitioner again was silent on its alleged
right under Section 78 of R.A. No. 337, even as it failed to show that private respondent's
predecessor in interest is a credit institution. Petitioner just argued that the
aforementioned Order materially altered the trial court's Decision of April 30, 1992.
Then, too, nothing was heard from petitioner on its alleged right under Section 78 of R.A.
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No. 337 and of the predecessor in interest of private respondent as a credit institution,
when the trial court came out with an order on February 10, 1995, confirming the sale of
subject properties in favor of private respondent and declaring that all pending incidents
with respect to the Order dated September 26, 1994 had become moot and academic.
Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the
Court of Appeals, seeking "clarification" of the date of commencement of the one (1) year
redemption period for the subject properties, petitioner never intimated any alleged right
under Section 78 of R.A. No. 337 nor did it invite attention to its present stance that private
respondent's predecessor-in-interest was a credit institution. Consequently, in its
Resolution dated March 20, 1995, the Court of Appeals ruled on the said motion thus:
"But we never made any pronouncement on the one-year right of redemption of
petitioner because, in the first place, the foreclosure in this case is judicial, and as
such. the mortgagor has only the equity, not the right of redemption, . . . While it
may be true that under Section 78 of R.A. 337 as amended, otherwise known as
the General Banking Act, a mortgagor of a bank, banking or credit institution,
whether the foreclosure was done judicially or extrajudicially , has a period of one
year from the auction sale within which to redeem the foreclosed property, the
question of whether the Syndicated Management Group. Inc., is bank or credit
institution was never brought before us squarely, and it is indeed odd and strange
that petitioner would now sarcastically ask a rhetorical question in its motion for
clarification." 9 (Emphasis supplied). AaHcIT

If petitioner were really acting in good faith, it would have ventilated before the Court of
Appeals in CA-G.R. No. 35086 its alleged right under Section 78 of R.A. No. 337; but
petitioner never did do so.
Indeed, at the earliest opportunity, when it submitted its answer to the complaint for
judicial foreclosure, petitioner should have alleged that it was entitled to the beneficial
provisions of Section 78 of R.A. No. 337 but again, it did not make any allegation in its
answer regarding any right thereunder. It bears stressing that the applicability of Section
78 of R.A. No. 337 hinges on the factual question of whether or not private respondent's
predecessor in interest was a credit institution. As was held in Limpin, a judicial
foreclosure sale, "when confirmed by an order of the court, . . . shall operate to divest the
rights of all the parties to the action and to vest their rights in the purchaser, subject to
such rights of redemption as may be allowed by law'," 1 0 which confer on the mortgagor,
his successors in interest or any judgment creditor of the mortgagor, the right to redeem
the property sold on foreclosure after confirmation by the court of the judicial foreclosure
sale. Thus, the claim that petitioner is entitled to the beneficial provisions of Section 78 of
R.A. No. 337 — since private respondent's predecessor-in-interest is a credit institution —
is in the nature of a compulsory counterclaim which should have been averred in
petitioner's answer to the compliant for judicial foreclosure.
". . . A counterclaim is, most broadly, a cause of action existing in favor of the
defendant against the plaintiff. More narrowly, it is a claim whic, if established,
will defeat or in some way qualify a judgment or relief to which plaintiff is
otherwise entitled. It is sometimes defined as any cause of action arising in
contract available against any action also arising in contract and existing at the
time of the commencement of such an action. It is frequently defined by the
codes as a cause of action arising out of the contract or transaction set forth in
the complaint as the foundation of the plaintiff's claim, or connected with the
subject of the action." 1 1 (emphasis supplied)
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"The counterclaim is in itself a distinct and independent cause of action, so that
when properly stated as such, the defendant becomes, in respect to the matters
stated by him, an actor, and there are two simultaneous actions pending between
the same parties, wherein each is at the same time both a plaintiff and a
defendant. Counterclaim is an offensive as well as a defensive plea and is not
necessarily confined to the justice of the plaintiff's claim. It represents the right of
the defendant to have the claims of the parties counterbalanced in whole or in
part, and judgment to be entered in excess, if any. A counterclaim stands on the
same footing, and is to be tested by the same rules, as if it were an independent
action." 1 2 (emphasis supplied)
The very purpose of a counterclaim would have been served had petitioner alleged in its
answer its purported right under Section 78 of R.A. No. 337:
". . . The rules of counterclaim are designed to enable the disposition of a whole
controversy of interested parties' conflicting claims, at one time and in one action,
provided all parties' be brought before the court and the matter decided without
prejudicing the rights of any party." 1 3

The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No.
337 precludes it from so doing at this late stage case. Estoppel may be successfully
invoked if the party fails to raise the question in the early stages of the proceedings. 1 4
Thus, "a party to a case who failed to invoke his claim in the main case, while having the
opportunity to do so, will be precluded, subsequently, from invoking his claim, even if it
were true, after the decision has become final, otherwise the judgment may be reduced to
a mockery and the administration of justice may be placed in disrepute." 1 5
All things viewed in proper perspective, it is decisively clear that the trial court erred in still
allowing petitioner to introduce evidence that private respondent's predecessor-in-interest
was a credit institution, and to thereafter rule that the petitioner was entitled to avail of the
provisions of Section 78 of R.A. No. 337. In effect, the trial court permitted the petitioner to
accomplish what the latter failed to do before the Court of Appeals, that is, to invoke its
alleged right under Section 78 of R.A. No. 337 although the Court of Appeals in CA-G.R. No.
35086 already found that 'the question of whether the Syndicated Management Council
Group, Inc. is a bank or credit institution was never brought before (the Court of Appeals)
squarely." The said pronouncement by the Court of Appeals unerringly signified that
petitioner did not make a timely assertion of any right under Section 78 of R.A. No. 337 in
all the stages of the proceedings below.

Verily, the petitioner has only itself to blame for not alleging at the outset that the
predecessor-in-interest of the private respondent is a credit institution. Thus, when the trial
court, and the Court of Appeals repeatedly passed upon the issue of whether or not
petitioner had the right of redemption or equity of redemption over subject properties in
the decisions, resolutions and orders, particularly in Civil Case No. 89-5424, CA-G.R. CV No.
39243, CA-G.R. SP No. 35086, and CA-G.R. SP No. 38747, it was unmistakable that the
petitioner was adjudged to just have the equity of redemption without any qualification
whatsoever, that is, without any right of redemption allowed by law. HCITcA

The "law of case" holds that petitioner has the equity of redemption without any
qualification.

There is, therefore, merit in private respondent's contention that to allow petitioner to
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belatedly invoke its right under Section 78 of R.A. No. 337 will disturb the "law of the case."
However, private respondent's statement of what constitutes the "law of the case" is not
entirely accurate. The "law of the case" is not simply that the defendant possesses an
equity of redemption. As the Court has stated, the "law of the case" holds that petitioner
has the equity of the redemption without any qualification whatsoever, that is, without the
right of redemption afforded by Section 78 of R.A. No. 337. Whether or not the "law of the
case" is erroneous is immaterial, it still remains the "law of the case". A contrary rule will
contradict both the letter and spirit of the rulings of the Court of Appeals in CA-G.R. SP No.
35086, CA-G.R. CV No. 39243, and CA-G.R. 38747, which clearly saw through the repeated
attempts of petitioner to forestall so simple a matter as making the security given for a
just debt to answer for its payment.
Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as
confirmed by the Order dated February 10, 1995 of the trial court in Civil Case No. 89-5424
operated to divest the rights of all the parties to the action and to vest their rights in
private respondent. There then existed only what is known as the equity of redemption,
which is simply the right of the petitioner to extinguish the mortgage and retain ownership
of the property by paying the secured debt within the 90-day period after the judgment
became final. There being an explicit finding on the part of the Court of Appeals in its
Decision of September 30, 1994 in CA-G.R. No. 35086 — that the herein petitioner failed to
exercise its equity of redemption within the prescribed period, redemption can no longer
be effected. The confirmation of the sale and the issuance of the transfer certificates of
title covering the subject properties to private respondent was then, in order. The trial
court therefore, has the ministerial duty to place private respondent in the possession of
subject properties. aSTAcH

WHEREFORE, the petition is DENIED, and the assailed decision of the Court of Appeals,
declaring null and void the Order dated 21 July 1995 and Order dated 4 September 1997
of the Regional Trial Court of Makati City in Civil Case No. 89-5424, AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
Melo, Vitug, Panganiban and Gonzaga-Reyes, JJ., concur.
Footnotes

1. Rollo, pp. 87-88.


2. Decision, p. 5; Rollo, p. 93.

3. Resolution, pp. 1-2; Rollo, pp. 366-367.

4. Rollo, pp. 14-15.


5. Rollo, p. 4.
6. Rollo, p. 390.
7. 166 SCRA 87.

8. Ibid., pp. 93-95.


9. Rollo, pp. 366-367.
10. Limpin vs. Intermediate Appellate Court, supra, p. 94.

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11. The Revised Rules of Court in the Philippines, Volume I, Francisco, Vicente J., p. 462
citing: 47 Am. Jur. 709-710.

12. Ibid., p. 464 citing: 47 Am. Jur., 717.


13. Ibid, p. 463 citing: Kuenzel vs. Universal Carloading and Distributing Co., (1939) 29 F.
Supp. 407
14. Corona vs. Court of Appeals, 214 SCRA 378, 392.
15. Applications of Estoppel in Litigation, 216 SCRA 826, 834 citing: Tuazon vs. Arca, 23
SCRA 1308, 1312.

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SECOND DIVISION

[G.R. No. 114418. September 21, 1995.]

ESTANISLAO BODIONGAN , petitioner, vs. COURT OF APPEALS and


LEA SIMEON , respondents.

Egbert S. Capalla for petitioner.


Donatilo C . Macamay for private respondent. cdasia

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; SATISFACTION OF JUDGMENT; REDEMPTION


PRICE OF PROPERTIES AT AN EXTRAJUDICIAL FORECLOSURE SALE; RULE. — The price
for the redemption of properties at an extrajudicial foreclosure sale is, according to
Section 6 of Act 3135, fixed by Section 30 of Rule 39 of the Revised Rules of Court. 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. The redemption price must be
for the full amount, otherwise the offer to redeem will be ineffectual. And if the tender is for
less than the entire amount, the purchaser may justly refuse acceptance thereof.
2. ID.; ID.; ID.; ID.; ID.; AWARD OF ATTORNEY'S FEES, NOT INCLUDED; CASE AT BAR. —
In the instant case, the redemption price covers the purchase price of P309,000.00 plus
1% interest thereon per month for twelve months at P37,080.00. Petitioner does not claim
any taxes or assessments he may have paid on the property after his purchase. He,
however, adds P5,000.00 to the price to cover the attorney's fees awarded him by the trial
court in Civil Case No. OZ-1177. In the redemption of property sold at an extrajudicial
foreclosure sale, the amount payable is no longer the judgment debt but the purchase
price at the auction sale. In other words, the attorney's fees awarded by the trial court
should not have been added to the redemption price because the amount payable is no
longer the judgment debt, but that which is stated in Section 30 of Rule 39. The
redemption price for the mortgaged properties in this case should therefore be
P346,080.00, not P351,080.00.
3. ID.; ID.; ID.; ID.; RULE THEREON, LIBERALLY INTERPRETED IN FAVOR OF THE
ORIGINAL OWNER OF THE PROPERTY. — Inasmuch as in the instant case tender of the
redemption price was timely made and in good faith, and the deficiency in said price is not
substantial, we incline to give private respondent the opportunity to complete the
redemption of her properties within fifteen days from the time this decision becomes final.
It is well to recall our earlier pronouncements on this matter: "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 P1,240.00, P21,000.00 and P30,000.00,
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,
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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 this purchase up to the time of redemption. The
rule on redemption is liberally interpreted in favor of the original owner of the property. The
fact alone that he is allowed the right to redeem clearly demonstrates the tenderness of
the law toward him in giving him another opportunity, should his fortunes improve, to
recover his lost property. This benign motivation would be frustrated by a too-literal
reading that would subordinate the warm spirit of the rule to its cold language." dctai

DECISION

PUNO , J : p

This petition for review on certiorari seeks to annul and set aside the Decision dated
October 25, 1993 and the Resolution dated March 3, 1994 of the Court of Appeals in CA-
G.R. CV No. 36314. cdasia

The antecedent facts are as follows:


On October 4, 1982, respondent Lea Simeon obtained from petitioner Estanislao
Bodiongan and his wife a loan of P219,117.39 secured by a mortgage on three (3) parcels
of land with a four-storey hotel building and personal properties located at Gango, Ozamiz
City. The three (3) lots were covered by Transfer Certificates of Title Nos. T-6530, T-6531
and T-6532 in the name of private respondent.
Private respondent failed to pay the loan. Petitioner thus instituted against her Civil Case
No. OZ-1177 with the Regional Trial Court, Branch 15, Ozamiz City for collection of sum of
money or foreclosure of mortgage. Judgment was rendered by the trial court on October
11, 1984 ordering private respondent to pay petitioner, P220,459.71, at the legal rate of
interest and P5,000.00 as attorney's fees, and in case of non-payment, to foreclose the
mortgage on the properties. The dispositive portion of the decision reads as follows: cdtai

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against


defendant LEA SIMEON ordering the defendant LEA SIMEON to pay the plaintiff
the following:

1. P220,459.71 with legal rate of interest starting March 30, 1983, until fully
paid;

2. P5,000.00 as reimbursement of plaintiff's attorney's fees; cdt

3. In case of non-payment of the above amounts, the equitable mortgage


(Exhibit "C") be ordered foreclosed and sold at public auction to settle the
obligation; and

4. To pay the costs." 1

This decision was af rmed on March 21, 1986 by the Court of Appeals in CA-G.R.
CV No. 05367 and later became final and executory. aisadc

Private respondent again failed to pay the judgment debt, hence, the mortgaged
properties were foreclosed and sold on execution on January 12, 1987. At the auction
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sale, petitioner submitted to the sheriff a written bid of P309,000.00 and at the same
time reserved in said bid a de ciency claim of P439,710.57. 2 The properties were
awarded to petitioner as sole bidder and a certi cate of sale was issued in his name
and registered with the Register of Deeds of Ozamiz City.
Petitioner then took possession of the properties after filing, per order of the trial
court, a guaranty bond of P350,000.00 to answer for any damage thereon during the
redemption period. cdll

On January 8, 1988, private respondent offered to redeem her properties and


tendered to the Provincial Sheriff a check in the amount of P337,580.00. This amount
was based on a tentative computation by the sheriff. 3 The check was received by
petitioner on the same day after which the sheriff issued a certi cate of redemption to
private respondent also on the same day. 4
On January 11, 1988, petitioner, claiming additional interest at 38% per annum,
moved to correct the computation of the redemption price and to suspend the
issuance of a writ of possession pending computation. The motion was denied by the
trial court. On July 8, 1988, the trial court issued the said writ and private respondent
took possession of her properties.
On October 4, 1988, petitioner instituted against private respondent Civil Case
No. OZ-1480-R with the Regional Trial Court, Branch 15, Ozamiz City for annulment of
redemption and con rmation of the foreclosure sale on the ground of insuf ciency of
the redemption price. On October 7, 1988, petitioner consigned the redemption money
with the court. 5
On November 25, 1991, the trial court dismissed the complaint but reduced the
12% interest rate on the purchase price to 6%, and thus, on the counterclaim, ordered
petitioner to refund private respondent the excess 6% plus P10,000.00 and P5,000.00
for moral damages and attorney's fees, as follows: cdasia

"WHEREFORE, premises considered, plaintiff's complaint is hereby dismissed,


with costs against him.

On the counterclaim, plaintiff Engr. Estanislao Bodiongan is ordered to refund the


6% interest in excess of the 12% granted him in the computation which is not the
legal rate allowed in the Civil Code, to pay defendant Lea Simeon the further sum
of P10,000.00 as moral damages and the sum of P5,000.00 as attorney's fees." 6

The Court of Appeals in CA-G.R. CV No. 36314 af rmed the trial court's decision
except for the refund of the 6% interest, to wit: cdtai

"WHEREFORE, premises considered, the judgment appealed from is hereby


AFFIRMED subject to the modification on the amount of interest due, such that,
the legal rate of interest due is 1% per month or 12% for 12 months in the case at
bar and not 6% as ruled by the trial court. Costs against appellant." 7

Hence, this petition.


Petitioner claims before us that under the Revised Rules of Court, the redemption
price for the mortgaged properties should be P351,080.00. Since private respondent
actually tendered P337,580.00 which is short by P13,500.00, this price was inadequate
thereby rendering redemption ineffectual. aisadc

The price for the redemption of properties at an extrajudicial foreclosure sale 8


is, according to Section 6 of Act 3135, xed by Section 30 of Rule 39 of the Revised
Rules of Court 9 which reads as follows:
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"SECTION 30. Time and manner of , and amounts payable on, successive
redemptions. Notice to be given and filed. — The judgment debtor, or
redemptioner, may redeem the property from the purchaser, at any time within
twelve (12) months after the sale, on paying the purchaser the amount of his
purchase, with one per centum per month interest thereon in addition, up to the
time of redemption, together with the amount of any assessments or taxes which
the purchaser may have paid thereon after purchase, and interest on such last-
named amount at the same rate; and if the purchaser be also a creditor having a
prior lien to that of the redemptioner, other than the judgment under which such
purchase was made, the amount of such other lien, with interest. Property so
redeemed may again be redeemed within sixty (60) days after the last redemption
upon payment of the sum paid on the last redemption, with two per centum
thereon in addition, and the amount of any assessments or taxes which the last
redemptioner may have paid thereon after redemption by him, with interest on
such last-named amount, and in addition, the amount of any liens held by said
last redemptioner prior to his own, with interest. The property may be again, and
as often as a redemptioner is so disposed, redeemed from any previous
redemptioner within sixty (60) days after the last redemption, on paying the sum
paid on the last previous redemption, with two per centum thereon in addition,
and the amounts of any assessments or taxes which the last previous
redemptioner paid after the last redemption thereon, with interest thereon, and the
amount of any liens held by the last redemptioner prior to his own, with interest.

Written notice of any redemption must be given to the officer who made the sale
and a duplicate filed with the registrar of deeds of the province, and if any
assessments or taxes are paid by the redemptioner or if he has or acquires any
lien other than that upon which the redemption was made, notice thereof must in
like manner be given to the officer and filed with the registrar of deeds; if such
notice be not filed, the property may be redeemed without paying such
assessments, taxes, or liens."cdta

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. The
redemption price must be for the full amount, otherwise the offer to redeem will be
ineffectual. 10 And if the tender is for less than the entire amount, the purchaser may
justly refuse acceptance thereof. 11 In the instant case, the redemption price covers the
purchase price of P309,000.00 plus 1% interest thereon per month for twelve months
at P37,080.00. Petitioner does not claim any taxes or assessments he may have paid
on the property after his purchase. He, however, adds P5,000.00 to the price to cover
the attorney's fees awarded him by the trial court in Civil Case No. OZ-1177.
In the redemption of property sold at an extrajudicial foreclosure sale, the
amount payable is no longer the judgment debt but the purchase price at the auction
sale. 12 In other words, the attorney's fees awarded by the trial court should not have
been added to the redemption price because the amount payable is no longer the
judgment debt, but that which is stated in Section 30 of Rule 39. The redemption price
for the mortgaged properties in this case should therefore be P346,080.00, not
P351,080.00.
Private respondent's tender was P337,580.00 which is still short by P8,500.00.
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The Provincial Sheriff declared that private respondent ordered him to deduct from the
redemption price the value of certain personal properties in the hotel. During
petitioner's possession of the lots, he sold some of the furniture, water pump and
electrical installations in the hotel and appropriated the proceeds to himself without
private respondent's knowledge and approval. cdasia

Petitioner does not deny the fact that he sold the personal properties and
appropriated the proceeds of P13,500.00 to himself. He has expressly admitted this in
his written bid to the sheriff. He, however, cannot be considered in estoppel because
the deduction for the loss of the personal properties was not authorized under Section
30 of Rule 39. In the rst place, the sheriff should not have issued the certi cate of
redemption without a nal determination of the amount of the redemption price. 13
This unauthorized deduction of the value of private respondent's personal properties
and the sheriff's overzealousness in issuing the certi cate of redemption are
aggravated by the fact that private respondent later sought for and was actually
compensated for the said loss. cdll

After taking possession of the lots and hotel, private respondent moved in Civil
Case No. OZ-1177 to charge the loss of her personal properties to the guaranty bond
posted by petitioner. The trial court awarded her P108,246.00 — with P23,246.00 for
the "loss of her properties" and P85,000.00 for "unrealized income of the hotel." 14 The
order of the trial court was af rmed by the Court of Appeals in CA-G.R. CV No. 31384
and this became nal and executory after the Supreme Court dismissed petitioner's
petition for review in G.R. No. 112344. 15
Indeed, if we were to allow the deduction of the value of private respondent's
personal properties from the redemption price, this will amount to double
compensation and unjust enrichment at the expense of petitioner. 16 On the other hand,
it would be highly unjust to deprive private respondent of her right to redeem by a strict
application of the Rules of Court. It must be remembered that the policy of the law is to
aid rather than defeat the right of redemption. 17 Inasmuch as in the instant case
tender of the redemption price was timely made and in good faith, and the de ciency in
said price is not substantial, we incline to give private respondent the opportunity to
complete the redemption of her properties within fteen days from the time this
decision becomes final. It is well to recall our earlier pronouncements on this matter: cdtai

"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 P1,240.00, P21,000.00 and P30,000.00, 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. 18

"The rule on redemption is liberally interpreted in favor of the original owner of the
property. The fact alone that he is allowed the right to redeem clearly
demonstrates the tenderness of the law toward him in giving him another
opportunity, should his fortunes improve, to recover his lost property. This benign
motivation would be frustrated by a too-literal reading that would subordinate the
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warm spirit of the rule to its cold language." 19

IN VIEW WHEREOF, the petition is DENIED and the Decision in CA-G.R. CV No. 36314 is
affirmed with the modification that private respondent be allowed to complete the
redemption price by paying to petitioner the difference of P8,500.00 at 1% interest per
month 20 from January 8, 1988 until full payment thereof within fifteen (15) days from the
time this decision becomes final and executory. cdt

SO ORDERED.
Narvasa, C.J., Regalado, Mendoza and Francisco, JJ., concur.
Footnotes

1. Records, pp. 74-75.


2. Records, p. 122, Exhibit C.
3. Records, p. 85, Exhibit E.
4. Records, p. 123, 125-126, Exhibits 4 and 6.

5. Records, p. 90, Exhibit I.


6. Rollo, p. 18.
7. Rollo, p. 25.
8. After the foreclosure order in Civil Case No. OZ-1177, the court, with the acquiescence of
both parties, applied the provisions of Act 3135 on extrajudicial foreclosure of mortgage.
9. Philippine National Bank v. Court of Appeals, 140 SCRA 360, 364-365 [1985].
10. State Investment House, Inc. vs. Court of Appeals, 215 SCRA 734 [1992]; Belisario v.
Intermediate Appellate Court, 165 SCRA 101 [1989].
11. Aparri v. Court of Appeals, 13 SCRA 611 [1965]; Ordoñez v. Villaroman, 44 O.G. No. 6,
2226 [1948].
12. Philippine National Bank v. Court of Appeals, 140 SCRA 360 [1985]; Dulay v. Carriaga,
123 SCRA 794 [1983]; Castillo v. Nagtalon, 4 SCRA 48 [1962].
13. cf ., Morales v. CFI of Cavite, Br. V, 146 SCRA 375 [1986].
14. G.R. No. 112344, Rollo, p. 5.

15. Id., Id., p. 25.


16. Baes v. Court of Appeals, 224 SCRA 562, 565 [1993].
17. Tibajia v. Court of Appeals, 193 SCRA 581 [1991]; De los Reyes v. Intermediate
Appellate Court, 176 SCRA 394 [1989].
18. Castillo v. Nagtalon, 4 SCRA 48, 54 [1962]; see also Rosario v. Tayug Rural Bank, Inc.,
22 SCRA 1220 [1968].
19. De los Reyes v. Intermediate Appellate Court, 176 SCRA 394, 403 [1989].
20. Rosario v. Tayug Rural Bank, Inc., supra at 1222 and 1226.

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SECOND DIVISION

[G.R. No. 26844. September 27, 1927.]

ISABEL FLORES , plaintiff-appellant, vs . TRINIDAD LIM , defendant-


appellee.

Sumulong, Lavides & Hilado and DeWitt, Perkins & Brady for appellant.
Vicente Sotto for appellee.

SYLLABUS

1. WHEN PURCHASER IS NOT ENTITLED TO POSSESSION. — A purchaser at a


sheriff's sale of real property sold on an ordinary execution is not legally entitled to the
possession of the property sold during the period of redemption.
2. WHEN PURCHASER IS NOT ENTITLED TO MONEY EXPENDED FOR
IMPROVEMENTS. — A purchaser of such real property who obtains possession at or
about the time of the sale by force and without the knowledge and consent of the
judgment debtor, and during the period of redemption plants thereon a large number of
coconut trees and makes extensive improvements, does so at his peril and is not
entitled to the return of the money so expended as a condition precedent to the right of
redemption.
3. THE LAW SPECIFIES AND DEFINES WHAT THE REDEMPTIONER MUST PAY
TO REDEEM. — As to such a sale the law speci es and de nes what the redemptioner
is required to pay to redeem, and in the absence of something unusual or an
extraordinary expense incurred in the preservation of the property and to be approved
by the court, the redemptioner will not be required to pay and other or greater amount.
STATEMENT
January 20, 1923, plaintiff's land was sold at sheriff's sale to the defendant for
P1,603.78. It is in the barrio of Pinaninding, municipality of Laguimanoc — formerly
Atimonan — Province of Tayabas, and is about seventy-three hectares, on which were
164 coconut bearing trees and 1,000 non-bearing, and about 300 buri trees. The usual
certi cate of sale was issued to the defendant under the provisions of section 463 of
the Code of Civil Procedure. Prior to the one year period of redemption, plaintiff made a
formal demand upon the defendant, under the provisions of section 469 of the same
Code, for an accounting of the fruits and pro ts derived by her from the land, so that
the plaintiff might have credit for the amount received on the money required for
redemption from the sale.
The instant case is brought by the plaintiff to redeem, and it is alleged that at the
time of the sale, the defendant took the actual, physical possession of the property, and
has refused and still refuses to render an account of the fruits and pro ts, to plaintiff's
damage in the sum of P1,000, and she prays judgment that the defendant be ordered to
render an itemized account, the amount of which should be deducted from the price of
the redemption; that plaintiff have the right to redeem; and that defendant pay her
P1,000 as damages and costs.
For answer the defendant makes a general and speci c denial, and as a special
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defense alleges that her rights of ownership over the land arise rather from a purchase
made from the Government which had con scated the land for a delinquency in the
payment of the land tax than from her acquisition of it at public auction. That the
plaintiff has not repurchased the land within one year, and the offer to redeem was
made out of time. Defendant consented to the redemption upon the condition only that
the plaintiff should pay the purchase price of the land, P6,371.19, the value of the
improvements, P217.07, the amount of the land tax, and alleges that plaintiff offered to
pay only the sum of P2,500, and promising to pay that little by little, which offer the
defendant rejected. That the action was brought for the purpose of delaying the matter,
and to gain time in which to obtain the money to redeem. That the defendant has been
improving the land up to the present date, and she prays that she be absolved from the
complaint, and in the event redemption is allowed, that plaintiff be required to pay her
the value of the improvements made on the land in question. As a reply plaintiff made a
general and speci c denial of all of the new matters alleged in the answer, and as a
special defense, alleged that the defendant had no legal right to make such
improvements, and that they were made without her knowledge, and that she is not
liable for such improvements.
The evidence was taken upon such issues, and the trial court rendered judgment
giving plaintiff the right to redeem the land upon the payment to the defendant within
fteen days from notice the following amounts: (a) The price of the land at the auction
sale with legal interest thereon up to this date; (b) the amount of the land tax paid by
the defendant with legal interest up to this date; and (c) the sum of P15,000, the value
of the improvements made by the defendant on the land, and in case redemption is not
made within that period, the right is lost, and relieved the defendant from rendering an
account.
On appeal the plaintiff assigns the following errors:
"ERROR NO. 1
"The trial court erred in sentencing plaintiff to reimburse defendant in the
sum of P15,000 for improvements alleged to have been introduced by said
defendant in the land in suit, altho said improvements were placed thereon by
defendant with manifest bad faith.
ERROR NO. 2
"The trial court erred in not ordering defendant to account to plaintiff for
fruits and bene ts received by said defendant from the land, and credit plaintiff
against the amount due for its redemption the value of said fruits and benefits.
"ERROR NO. 3
"The trial court erred in denying plaintiff's motion for new trial on the
ground of fraud and newly discovered evidence, that excessive indemnity was
granted, and that the decision was not justi ed by the evidence and that the same
was against the law."

DECISION

JOHNS , J. p

The lower court having found that the plaintiff has a legal right to redeem, and the
defendant not having appealed from that portion of the decision, the only question
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before this court is the amount which the plaintiff should pay to redeem. The property
was sold to the defendant at sheriff's sale under the provisions of Chapter XIX of the
Code of Civil Procedure, section 461 of which provides:
"When the purchaser of any personal property, capable of manual delivery,
pays the purchase money, the officer making the sale must deliver to the
purchaser the property, and, if desired, execute and deliver to him a certificate of
sale. Such sale conveys to the purchaser all the right which the debtor had in such
property on the day the execution or attachment was levied."
Section 463, among other things, provides:
"Upon a sale of real property, the purchaser shall be substituted, to, and
acquire all the right, interest, title, and claim of the judgment debtor thereto,
subject to the right of redemption as hereinafter provided. The officer must give to
the purchaser a certificate of sale containing:
"1. A particular description of the real property sold;
"2. The price paid for each distinct lot or parcel;
"3. The whole price by him paid;
"4. The date when the right of redemption expires."
Construing that section, this court in Pabico vs. Ong Pauco (43 Phil., 572), said:
"The sheriff's action in placing the defendant, as the purchaser at the
execution sale, in possession of the land was absolutely without warrant of law,
was null and void ab initio, and not merely voidable, and no special action for
setting the proceedings aside are therefore required. In executing a judgment the
duties of the sheriff are merely ministerial; he simply carries out the orders of the
court. If the writ of execution or other order of the court does not command or
direct him to deliver the possession of real property to a certain person, he has no
authority whatever to do so and in undertaking to eject the party in possession
and deliver such possession to some one else, he becomes a mere trespasser. In
such case, the person to whom possession is delivered is also a trespasser and
the fact that he has been aided by another trespasser can constitute no defense.
" 'The act of going on the property and excluding the lawful possessor
therefrom necessarily implies the exertion of force over the property, and this is all
that is necessary.
" 'If a trespasser enters upon land in open daylight, under the very eyes of
the person already clothed with lawful possession, but without the consent of the
latter, and there plants himself and excludes such prior possessor from the
property, the action of forcible entry and detainer can unquestionably be
maintained, even though no force is used by the trespasser other than such as is
necessarily implied from the mere acts of planting himself on the ground and
excluding the other party.' "
Among other things, section 465 of the Code of Civil Procedure provides:
"The judgment debtor, or redemptioner, may redeem the property from the
purchaser, at any time within twelve months after the sale, on paying the
purchaser the amount of his purchase, with one per cent per month interest
thereon in addition, up to the time of redemption, together with the amount of any
assessments or taxes which the purchaser may have paid thereon after purchase,
and interest on such last-named amount at the same rate."
That is to say, the statute speci cally provides that the redemptioner may
redeem within twelve months after the sale by paying the purchaser the amount of his
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purchase, with interest thereon at one per cent per month from the date of the
purchase to the time of redemption, together with the amount of any assessments or
taxes which the purchaser may have paid after the purchase, with interest thereon at
the same rate. The statute having speci ed what the redemptioner should pay to
redeem, it follows that she is not required to pay anything not specified in the statute.
The lower court found that immediately after the purchase, the defendant
entered upon and took possession of the premises, and that at the time of the trial, she
had planted 8,000 coconut trees on the land at an expense of P15,000, and that to
redeem the property it was not only necessary for the plaintiff to pay the amounts
speci ed in section 465 of the Code above quoted, but in addition thereto and in order
to redeem the property, she must pay the defendant the further sum of P15,000, the
cost and the value of the 8,000 coconut trees planted on the property by the defendant.
That was error. It nulli es the plain and express provisions of the statute, and there is
no legal principle upon which it can be sustained.
The record shows that immediately after the sale, the defendant took the actual,
physical possession of the property and drove off the employees of the plaintiff.
A purchaser of real property at an ordinary execution sale is not entitled to
possession of the land or the accruing rents and pro ts until after the period of
redemption has expired and the legal title to the land has become vested in him.
The defendant had no legal right to possession of the land in question, and,
hence, she was a trespasser from the time she took possession during the whole
period of redemption. Being such a trespasser, and under the provisions of section 465
of the Code of Civil Procedure, the defendant cannot recover from the plaintiff any
money which she expended for the planting of the coconut trees.
It is claimed that after the sale the plaintiff had said that she would not redeem,
and that the defendant expended the money relying upon that statement. The evidence
of that nature was verbal and is more or less hearsay, and to say the least, it is not clear
or convincing. We are dealing with real property, the title to which is passed by written
conveyance, judicial sale, will or descent, and it would be very dangerous to hold that
the right of redemption can be waived by parol testimony. Be that as it may, the
evidence should be both clear and convincing and free from any doubt.
Su ce it to say that upon that point, there is a failure of proof. It is possible that
a case could arise where the purchaser at a sheriff's sale pending the period of
redemption might be forced to make certain improvements for the preservation of the
property, and in equity and good conscience, he would then be entitled to receive the
reasonable cost of such improvements as a condition precedent to the right of
redemption. But that is not this case, and is & matter wholly outside of the record. The
alleged improvements here were not made for the preservation of the property, and
were apparently made for the sole purpose of preventing redemption. Defendant's
contention would nullify the express provisions of the statute, and would put it beyond
the power of a judgment debtor to redeem any real property sold on execution. It is the
policy of the law to aid rather than to defeat the right of redemption.
Under the provisions of section 469 of the Code of Civil Procedure, the plaintiff
made a demand upon the defendant for an accounting, and it was the legal duty of the
defendant to comply with that demand. That section also provides that for failure to
comply with the demand, the redemptioner "may bring an action to compel an
accounting and disclosure of such rents and pro ts, and until fteen days from and
after the nal determination of such action, the right of redemption is extended to such
redemptioner or debtor."
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In legal effect, the lower court held that such a demand was made, and that by
reason thereof, the period of redemption was extended. But found that "the defendant
is not under obligation to render a detailed account of the products of the coconut and
buri trees planted on the land." Technically speaking, the defendant should have been
required to render an accounting, but under all the circumstances, and in view of the
fact that no large amount is involved, we are not disposed to disturb that finding.
The judgment of the lower court, requiring the plaintiff to pay the defendant
P15,000, as one of the conditions for the redemption of the property, is reversed, but
the judgment as to the payment of " (a) the price of said land at the auction sale with
the legal interest thereon up to this day;" and "(b ) the amount of the land tax paid by the
defendant with legal interest up to this date" is in all things and respects a rmed, with
costs. So ordered.
Johnson, Street, Malcolm, Villamor, Romualdez, and Villa-Real, JJ., concur.

Separate Opinions
AVANCEÑA , C. J., concurring and dissenting :

I agree, in part, with the a rmation of the judgment appealed from. I also agree
with the revocation in regard to ordering the plaintiff to reimburse the defendant in the
sum of P15,000, the value of the improvements made on the land, because the law, I
understand, does not require this reimbursement in order to effect the legal
redemption. (Sec. 465, Code of Civil Procedure.)
But, I do not agree with the nding made in the majority decision that the
defendant illegally possessed the land purchased by her during the year allowed the
plaintiff for redemption and that she was a trespasser. It seems that this nding is
based principally upon the decision rendered by this court in the case of Pabico vs. Ong
Pauco (43 Phil., 572). In that case the sheriff, after having sold the real property at
public auction in order to execute the judgment, placed the purchaser in possession
thereof. But, I think, in that case the court only declared that after the sale the functions
of the sheriff, being purely ministerial, ceased and he was under no obligation to place
the purchaser in possession of the property sold. If the court then held that the
purchaser was a trespasser and his possession was illegal, it was because the real
property sold to him was, and for a period of ten years, had been in the possession of
another, who was not the judgment debtor in that case.
In the present case no one claims any right to the land except the plaintiff.
In my opinion, defendant's possession of the land in question after she bought it
at public auction and during the year xed for the right of redemption by the plaintiff-
judgment-debtor, was legal. According to section 463 of the Code of Civil Procedure,
which is quoted in the majority decision, the effect of this sale, as regards the
defendant, was to substitute the plaintiff and to acquire all her right, interest and title to
the land, except the right of redemption. Possession being one of the rights which the
plaintiff had to the land, this possession naturally passed to the defendant. It seems
absurd to say that the defendant, by virtue of the purchase, substituted the plaintiff and
acquired all her right, interest and title to the land, but not the right of possession, as
would necessarily be the case if, in spite of the provision contained in said section 463,
the defendant's Possession of the land should be considered illegal after having
purchased it and during the year granted the judgment debtor for the redemption.
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The same provision of section 469 of the Code of Civil Procedure which
authorizes the purchaser, during the year of redemption, to receive from the tenant the
rent or the compensation for the use or occupation of the land, and which imposes
upon the purchaser the obligation to deduct he amount of this rent and that of the
products which he has received from the redemption price which the judgment debtor
has to reimburse him with to effect the redemption, shows that the law takes it for
granted that the purchaser is in possession of the property purchased by him during
this time. This same idea implies that this section grants the judgment debtor the right
to demand that the purchaser render an account, any time during the period of
redemption, of the money received by him in the way of rents and products. These
provisions would be useless if it were not taken for granted that the purchaser had
received these rents and products during this time and was, therefore, in possession of
the property sold to him.
Furthermore, inasmuch as it must be taken for granted that the property sold had
been seized before the sale and had passed to the possession of the sheriff, after the
sale the possession is no longer in the sheriff, whose functions have ceased from that
time except to execute, in due time, the proper deed of sale in favor of the purchaser.
On the other hand, I do not believe that it can be maintained that this possession must
be returned to the judgment debtor during the period of redemption. Consequently, the
conclusion seems inevitable that the possession of the property thus sold must pass
to the purchaser.
Aside from the plaintiff's right of redemption, I believe that the defendant has the
right to be reimbursed, at least for the increase in value that the land acquired by reason
of the expense incurred in improving it, as she was a possessor in good faith (art. 453,
Civil Code) and because the plaintiff should not enrich herself at the expense of another
and should pay what has enriched her.
The Civil Code requires that in order to exercise the right of redemption, the
useful expenditures made on the thing sold should be reimbursed. (Arts. 1518 and
1525.) While the Civil Code is not applicable to this case, but section 465 of the Code of
Civil Procedure, which provides for this redemption and which does not require
reimbursement in order to exercise the same, yet I believe that under the same
principles of justice that inspired the provisions of the Civil Code, the defendant has the
same right, although not as a limitation of the right of redemption by the plaintiff.

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SECOND DIVISION

[G.R. No. 146717. November 22, 2004.]

TRANSFIELD PHILIPPINES, INC. , petitioner, vs . LUZON HYDRO


CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP
LIMITED and SECURITY BANK CORPORATION , respondents.

DECISION

TINGA , J : p

Subject of this case is the letter of credit which has evolved as the ubiquitous and
most important device in international trade. A creation of commerce and businessmen,
the letter of credit is also unique in the number of parties involved and its supranational
character.
Petitioner has appealed from the Decision 1 of the Court of Appeals in CA-G.R. SP
No. 61901 entitled "Trans eld Philippines, Inc . v. Hon. Oscar Pimentel, et al.," promulgated
on 31 January 2001. 2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter,
LHC) entered into a Turnkey Contract 3 whereby petitioner, as Turnkey Contractor,
undertook to construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power
station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the
Project). Petitioner was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project. 4
The Turnkey Contract provides that: (1) the target completion date of the Project
shall be on 1 June 2000, or such later date as may be agreed upon between petitioner and
respondent LHC or otherwise determined in accordance with the Turnkey Contract; and (2)
petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the
Turnkey Contract, among which are variations, force majeure, and delays caused by LHC
itself. 5 Further, in case of dispute, the parties are bound to settle their differences through
mediation, conciliation and such other means enumerated under Clause 20.3 of the
Turnkey Contract. 6
To secure performance of petitioner's obligation on or before the target completion
date, or such time for completion as may be determined by the parties' agreement,
petitioner opened in favor of LHC two (2) standby letters of credit both dated 20 March
2000 (hereinafter referred to as "the Securities"), to wit: Standby Letter of Credit No.
E001126/8400 with the local branch of respondent Australia and New Zealand Banking
Group Limited (ANZ Bank) 7 and Standby Letter of Credit No. IBDIDSB-00/4 with
respondent Security Bank Corporation (SBC) 8 each in the amount of US$8,988,907.00. 9
In the course of the construction of the project, petitioner sought various EOT to
complete the Project. The extensions were requested allegedly due to several factors
which prevented the completion of the Project on target date, such as force majeure
occasioned by typhoon Zeb , barricades and demonstrations. LHC denied the requests,
however. This gave rise to a series of legal actions between the parties which culminated
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in the instant petition.
The rst of the actions was a Request for Arbitration which LHC led before the
Construction Industry Arbitration Commission (CIAC) on 1 June 1999. 10 This was
followed by another Request for Arbitration, this time led by petitioner before the
International Chamber of Commerce (ICC) 11 on 3 November 2000. In both arbitration
proceedings, the common issues presented were: [1] whether typhoon Zeb and any of its
associated events constituted force majeure to justify the extension of time sought by
petitioner; and [2] whether LHC had the right to terminate the Turnkey Contract for failure
of petitioner to complete the Project on target date. CcHDSA

Meanwhile, foreseeing that LHC would call on the Securities pursuant to the
pertinent provisions of the Turnkey Contract, 12 petitioner — in two separate letters 13
both dated 10 August 2000 — advised respondent banks of the arbitration proceedings
already pending before the CIAC and ICC in connection with its alleged default in the
performance of its obligations. Asserting that LHC had no right to call on the Securities
until the resolution of disputes before the arbitral tribunals, petitioner warned respondent
banks that any transfer, release, or disposition of the Securities in favor of LHC or any
person claiming under LHC would constrain it to hold respondent banks liable for
liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that
pursuant to Clause 8.2 14 of the Turnkey Contract, it failed to comply with its obligation to
complete the Project. Despite the letters of petitioner, however, both banks informed
petitioner that they would pay on the Securities if and when LHC calls on them. 15
LHC asserted that additional extension of time would not be warranted; accordingly
it declared petitioner in default/delay in the performance of its obligations under the
Turnkey Contract and demanded from petitioner the payment of US$75,000.00 for each
day of delay beginning 28 June 2000 until actual completion of the Project pursuant to
Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would
call on the securities for the payment of liquidated damages for the delay. 16
On 5 November 2000, petitioner as plaintiff led a Complaint for Injunction, with
prayer for temporary restraining order and writ of preliminary injunction, against herein
respondents as defendants before the Regional Trial Court (RTC) of Makati. 17 Petitioner
sought to restrain respondent LHC from calling on the Securities and respondent banks
from transferring, paying on, or in any manner disposing of the Securities or any renewals
or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary restraining
order on the same day. The case was docketed as Civil Case No. 00-1312 and ra ed to
Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000,
extending the temporary restraining order for a period of seventeen (17) days or until 26
November 2000. 18
The RTC, in its Order 19 dated 24 November 2000, denied petitioner's application for
a writ of preliminary injunction. It ruled that petitioner had no legal right and suffered no
irreparable injury to justify the issuance of the writ. Employing the principle of "independent
contract" in letters of credit, the trial court ruled that LHC should be allowed to draw on the
Securities for liquidated damages. It debunked petitioner's contention that the principle of
"independent contract" could be invoked only by respondent banks since according to it
respondent LHC is the ultimate bene ciary of the Securities. The trial court further ruled
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that the banks were mere custodians of the funds and as such they were obligated to
transfer the same to the bene ciary for as long as the latter could submit the required
certification of its claims.
Dissatis ed with the trial court's denial of its application for a writ of preliminary
injunction, petitioner elevated the case to the Court of Appeals via a Petition for Certiorari
under Rule 65, with prayer for the issuance of a temporary restraining order and writ of
preliminary injunction. 20 Petitioner submitted to the appellate court that LHC's call on the
Securities was premature considering that the issue of its default had not yet been
resolved with nality by the CIAC and/or the ICC. It asserted that until the fact of delay
could be established, LHC had no right to draw on the Securities for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain
its call on and use of the Securities as payment for liquidated damages. It averred that the
Securities are independent of the main contract between them as shown on the face of the
two Standby Letters of Credit which both provide that the banks have no responsibility to
investigate the authenticity or accuracy of the certi cates or the declarant's capacity or
entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary
restraining order, enjoining LHC from calling on the Securities or any renewals or
substitutes thereof and ordering respondent banks to cease and desist from transferring,
paying or in any manner disposing of the Securities.
However, the appellate court failed to act on the application for preliminary
injunction until the temporary restraining order expired on 27 January 2001. Immediately
thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total amount of
US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The
appellate court expressed conformity with the trial court's decision that LHC could call on
the Securities pursuant to the rst principle in credit law that the credit itself is
independent of the underlying transaction and that as long as the bene ciary complied
with the credit, it was of no moment that he had not complied with the underlying contract.
Further, the appellate court held that even assuming that the trial court's denial of
petitioner's application for a writ of preliminary injunction was erroneous, it constituted
only an error of judgment which is not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner led the instant Petition for Review raising the following
issues for resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE
INVOKED BY A BENEFICIARY THEREOF WHERE THE BENEFICIARY'S CALL
THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES
BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S DISPUTES BY THE
APPROPRIATE TRIBUNAL.HAaScT

WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE
AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHC'S
CALL THEREON IS WRONGFUL.

WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE


DAMAGE IN THE EVENT THAT:
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A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND
SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING
BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF
THE DISPUTES BETWEEN PETITIONER AND LHC.

B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY


DRAWN FROM THE SECURITIES. 21

Petitioner contends that the courts below improperly relied on the "independence
principle" on letters of credit when this case falls squarely within the "fraud exception rule."
Respondent LHC deliberately misrepresented the supposed existence of delay despite its
knowledge that the issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the
Securities pursuant to the principle against unjust enrichment and that, under the premises,
injunction was the appropriate remedy obtainable from the competent local courts.
On 25 August 2003, petitioner led a Supplement to the Petition 22 and
Supplemental Memorandum, 23 alleging that in the course of the proceedings in the ICC
Arbitration, a number of documentary and testimonial evidence came out through the use
of different modes of discovery available in the ICC Arbitration. It contends that after the
ling of the petition facts and admissions were discovered which demonstrate that LHC
knowingly misrepresented that petitioner had incurred delays — notwithstanding its
knowledge and admission that delays were excused under the Turnkey Contract — to be
able to draw against the Securities. Reiterating that fraud constitutes an exception to the
independence principle, petitioner urges that this warrants a ruling from this Court that the
call on the Securities was wrongful, as well as contrary to law and basic principles of
equity. It avers that it would suffer grave irreparable damage if LHC would be allowed to
use the proceeds of the Securities and not ordered to return the amounts it had wrongfully
drawn thereon.
In its Manifestationdated 8 September 2003, 24 LHC contends that the
supplemental pleadings led by petitioner present erroneous and misleading information
which would change petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004, 25 petitioner alleges that on 18
February 2004, the ICC handed down its Third Partial Award, declaring that LHC wrongfully
drew upon the Securities and that petitioner was entitled to the return of the sums
wrongfully taken by LHC for liquidated damages.
LHC led a Counter-Manifestation dated 29 June 2004, 26 stating that petitioner's
Manifestation dated 12 April 2004 enlarges the scope of its Petition for Review of the 31
January 2001 Decision of the Court of Appeals. LHC notes that the Petition for Review
essentially dealt only with the issue of whether injunction could issue to restrain the
bene ciary of an irrevocable letter of credit from drawing thereon. It adds that petitioner
has led two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled
"Trans eld Philippines Inc . v. Luzon Hydro Corporation," in which the parties made claims
and counterclaims arising from petitioner's performance/misperformance of its
obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled "Transfield
Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which
is an action to enforce and obtain execution of the ICC's partial award mentioned in
petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's
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Memorandum, LHC stresses that the question of whether the funds it drew on the subject
letters of credit should be returned is outside the issue in this appeal. At any rate, LHC
adds that the action to enforce the ICC's partial award is now fully within the Makati RTC's
jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-
shopping by keeping this appeal and at the same time seeking the suit for enforcement of
the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 2003 27 contends that the
Court of Appeals correctly dismissed the petition for certiorari. Invoking the independence
principle, SBC argues that it was under no obligation to look into the validity or accuracy of
the certi cation submitted by respondent LHC or into the latter's capacity or entitlement
to so certify. It adds that the act sought to be enjoined by petitioner was already fait
accompli and the present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003
28 posits that its actions could not be regarded as unjusti ed in view of the prevailing
independence principle under which it had no obligation to ascertain the truth of LHC's
allegations that petitioner defaulted in its obligations. Moreover, it points out that since the
Standby Letter of Credit No. E001126/8400 had been fully drawn, petitioner's prayer for
preliminary injunction had been rendered moot and academic.
At the core of the present controversy is the applicability of the "independence
principle" and "fraud exception rule" in letters of credit. Thus, a discussion of the nature and
use of letters of credit, also referred to simply as "credits," would provide a better
perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand
all its facets is to recognize that it is an entity unto itself. The relationship between the
bene ciary and the issuer of a letter of credit is not strictly contractual, because both
privity and a meeting of the minds are lacking, yet strict compliance with its terms is an
enforceable right. Nor is it a third-party bene ciary contract, because the issuer must
honor drafts drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the bank's customer cannot draw on the letter, it does not
function as an assignment by the customer to the bene ciary. Nor, if properly used, is it a
contract of suretyship or guarantee, because it entails a primary liability following a
default. Finally, it is not in itself a negotiable instrument, because it is not payable to order
or bearer and is generally conditional, yet the draft presented under it is often negotiable.
29

In commercial transactions, a letter of credit is a nancial device developed by


merchants as a convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of the goods before
paying. 30 The use of credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale settings have come to be known as
standby credits. 31
There are three signi cant differences between commercial and standby credits.
First, commercial credits involve the payment of money under a contract of sale. Such
credits become payable upon the presentation by the seller-bene ciary of documents that
show he has taken a rmative steps to comply with the sales agreement. In the standby
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type, the credit is payable upon certi cation of a party's nonperformance of the
agreement. The documents that accompany the bene ciary's draft tend to show that the
applicant has not performed. The bene ciary of a commercial credit must demonstrate by
documents that he has performed his contract. The bene ciary of the standby credit must
certify that his obligor has not performed the contract. 32
By de nition, a letter of credit is a written instrument whereby the writer requests or
authorizes the addressee to pay money or deliver goods to a third person and assumes
responsibility for payment of debt therefor to the addressee. 33 A letter of credit, however,
changes its nature as different transactions occur and if carried through to completion
ends up as a binding contract between the issuing and honoring banks without any regard
or relation to the underlying contract or disputes between the parties thereto. 34
Since letters of credit have gained general acceptability in international trade
transactions, the ICC has published from time to time updates on the Uniform Customs
and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit
area. The vast majority of letters of credit incorporate the UCP. 35 First published in 1933,
the UCP for Documentary Credits has undergone several revisions, the latest of which was
in 1993. 36
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 3 7 this Court ruled
that the observance of the UCP is justi ed by Article 2 of the Code of Commerce which
provides that in the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by usages and customs generally observed.
More recently, in Bank of America, NT & SA v. Court of Appeals, 3 8 this Court ruled that
there being no speci c provisions which govern the legal complexities arising from
transactions involving letters of credit, not only between or among banks themselves but
also between banks and the seller or the buyer, as the case may be, the applicability of the
UCP is undeniable. IaSAHC

Article 3 of the UCP provides that credits, by their nature, are separate transactions
from the sales or other contract(s) on which they may be based and banks are in no way
concerned with or bound by such contract(s), even if any reference whatsoever to such
contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept
and pay draft(s) or negotiate and/or ful ll any other obligation under the credit is not
subject to claims or defenses by the applicant resulting from his relationships with the
issuing bank or the bene ciary. A bene ciary can in no case avail himself of the contractual
relationships existing between the banks or between the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or bene ciary of the
credit once the draft and the required documents are presented to it. The so-called
"independence principle" assures the seller or the bene ciary of prompt payment
independent of any breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or not. Under this
principle, banks assume no liability or responsibility for the form, su ciency, accuracy,
genuineness, falsi cation or legal effect of any documents, or for the general and/or
particular conditions stipulated in the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods represented by any documents, or for the
good faith or acts and/or omissions, solvency, performance or standing of the consignor,
the carriers, or the insurers of the goods, or any other person whomsoever. 39
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The independent nature of the letter of credit may be: (a) independence in toto
where the credit is independent from the justi cation aspect and is a separate obligation
from the underlying agreement like for instance a typical standby; or (b) independence
may be only as to the justi cation aspect like in a commercial letter of credit or repayment
standby, which is identical with the same obligations under the underlying agreement. In
both cases the payment may be enjoined if in the light of the purpose of the credit the
payment of the credit would constitute fraudulent abuse of the credit. 40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case
and assuming it is so, it is a defense available only to respondent banks. LHC, on the other
hand, contends that it would be contrary to common sense to deny the bene t of an
independent contract to the very party for whom the bene t is intended. As bene ciary of
the letter of credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the
credit is stipulated as irrevocable, there is a de nite undertaking by the issuing bank to pay
the bene ciary provided that the stipulated documents are presented and the conditions
of the credit are complied with. 41 Precisely, the independence principle liberates the
issuing bank from the duty of ascertaining compliance by the parties in the main contract.
As the principle's nomenclature clearly suggests, the obligation under the letter of credit is
independent of the related and originating contract. In brief, the letter of credit is separate
and distinct from the underlying transaction.
Given the nature of letters of credit, petitioner's argument — that it is only the issuing
bank that may invoke the independence principle on letters of credit — does not impress
this Court. To say that the independence principle may only be invoked by the issuing
banks would render nugatory the purpose for which the letters of credit are used in
commercial transactions. As it is, the independence doctrine works to the bene t of both
the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial
transactions, not for the bene t of the issuing bank but mainly for the bene t of the parties
to the original transactions. With the letter of credit from the issuing bank, the party who
applied for and obtained it may con dently present the letter of credit to the bene ciary as
a security to convince the bene ciary to enter into the business transaction. On the other
hand, the other party to the business transaction, i.e., the bene ciary of the letter of credit,
can be rest assured of being empowered to call on the letter of credit as a security in case
the commercial transaction does not push through, or the applicant fails to perform his
part of the transaction. It is for this reason that the party who is entitled to the proceeds of
the letter of credit is appropriately called "beneficiary."
Petitioner's argument that any dispute must rst be resolved by the parties, whether
through negotiations or arbitration, before the bene ciary is entitled to call on the letter of
credit in essence would convert the letter of credit into a mere guarantee. Jurisprudence
has laid down a clear distinction between a letter of credit and a guarantee in that the
settlement of a dispute between the parties is not a pre-requisite for the release of funds
under a letter of credit. In other words, the argument is incompatible with the very nature
of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on
the contract entered into by the applicant and the bene ciary, there would be no practical
and beneficial use for letters of credit in commercial transactions.

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Professor John F. Dolan, the noted authority on letters of credit, sheds more light on
the issue:
The standby credit is an attractive commercial device for many of the
same reasons that commercial credits are attractive. Essentially, these credits are
inexpensive and e cient. Often they replace surety contracts, which tend to
generate higher costs than credits do and are usually triggered by a factual
determination rather than by the examination of documents. HTCISE

Because parties and courts should not confuse the different functions of
the surety contract on the one hand and the standby credit on the other, the
distinction between surety contracts and credits merits some re ection. The two
commercial devices share a common purpose. Both ensure against the obligor's
nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete
the obligor's performance, usually by hiring someone to complete that
performance. Surety contracts, then, often involve costs of determining whether
the obligor defaulted (a matter over which the surety and the bene ciary often
litigate) plus the cost of performance. The bene t of the surety contract to the
bene ciary is obvious. He knows that the surety, often an insurance company, is
a strong nancial institution that will perform if the obligor does not. The
bene ciary also should understand that such performance must await the
sometimes lengthy and costly determination that the obligor has defaulted. In
addition, the surety's performance takes time.
The standby credit has different expectations. He reasonably expects that
he will receive cash in the event of nonperformance, that he will receive it
promptly, and that he will receive it before any litigation with the obligor (the
applicant) over the nature of the applicant's performance takes place. The
standby credit has this opposite effect of the surety contract: it reverses the
financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the bene ciary
until the bene ciary establishes the fact of the obligor's performance. The
bene ciary may have to establish that fact in litigation. During the litigation, the
surety holds the money and the bene ciary bears most of the cost of delay in
performance.
In the standby credit case, however, the bene ciary avoids that litigation
burden and receives his money promptly upon presentation of the required
documents. It may be that the applicant has, in fact, performed and that the
bene ciary's presentation of those documents is not rightful. In that case, the
applicant may sue the bene ciary in tort, in contract, or in breach of warranty; but,
during the litigation to determine whether the applicant has in fact breached the
obligation to perform, the bene ciary, not the applicant, holds the money. Parties
that use a standby credit and courts construing such a credit should understand
this allocation of burdens. There is a tendency in some quarters to overlook this
distinction between surety contracts and standby credits and to reallocate
burdens by permitting the obligor or the issuer to litigate the performance
question before payment to the beneficiary. 42

While it is the bank which is bound to honor the credit, it is the bene ciary who has
the right to ask the bank to honor the credit by allowing him to draw thereon. The situation
itself emasculates petitioner's posture that LHC cannot invoke the independence principle
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and highlights its puerility, more so in this case where the banks concerned were
impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their
releases of the amounts due under the Securities. Owing to the nature and purpose of the
standby letters of credit, this Court rules that the respondent banks were left with little or
no alternative but to honor the credit and both of them in fact submitted that it was
"ministerial" for them to honor the call for payment. 43
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The
relevant provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this
Contract, the Contractor at its cost shall on the Commencement Date provide
security to the Employer in the form of two irrevocable and con rmed standby
letters of credit (the "Securities"), each in the amount of US$8,988,907, issued and
con rmed by banks or nancial institutions acceptable to the Employer . Each of
the Securities must be in form and substance acceptable to the Employer and
may be provided on an annually renewable basis. 44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall
pay to the Employer by way of liquidated damages ("Liquidated Damages for
Delay") the amount of US$75,000 for each and every day or part of a day that
shall elapse between the Target Completion Date and the Completion Date ,
provided that Liquidated Damages for Delay payable by the Contractor shall in
the aggregate not exceed 20% of the Contract Price. The Contractor shall pay
Liquidated Damages for Delay for each day of the delay on the following day
without need of demand from the Employer.

8.7.2 The Employer may , without prejudice to any other method of


recovery, deduct the amount of such damages from any monies due, or to
become due to the Contractor and/or by drawing on the Security ." 45

A contract once perfected, binds the parties not only to the ful llment of what has
been expressly stipulated but also to all the consequences which according to their nature,
may be in keeping with good faith, usage, and law. 46 A careful perusal of the Turnkey
Contract reveals the intention of the parties to make the Securities answerable for the
liquidated damages occasioned by any delay on the part of petitioner. The call upon the
Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative
recourse available to it upon the happening of the contingency for which the Securities
have been proffered. Thus, even without the use of the "independence principle," the
Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of
default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the
Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that
there is already a breach in the Turnkey Contract knowing fully well that this is yet to be
determined by the arbitral tribunals. It asserts that the "fraud exception" exists when the
bene ciary, for the purpose of drawing on the credit, fraudulently presents to the
con rming bank, documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. In such a situation, petitioner
insists, injunction is recognized as a remedy available to it. ICTHDE

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Citing Dolan's treatise on letters of credit, petitioner argues that the independence
principle is not without limits and it is important to fashion those limits in light of the
principle's purpose, which is to serve the commercial function of the credit. If it does not
serve those functions, application of the principle is not warranted, and the commonlaw
principles of contract should apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely
intertwined with the fact of default which is the self-same issue pending resolution before
the arbitral tribunals. To be able to declare the call on the Securities wrongful or fraudulent,
it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in
the performance of its obligation. Unfortunately for petitioner, this Court is not called upon
to rule upon the issue of default — such issue having been submitted by the parties to the
jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement. 47
Would injunction then be the proper remedy to restrain the alleged wrongful draws
on the Securities?
Most writers agree that fraud is an exception to the independence principle.
Professor Dolan opines that the untruthfulness of a certi cate accompanying a demand
for payment under a standby credit may qualify as fraud su cient to support an injunction
against payment. 48 The remedy for fraudulent abuse is an injunction. However, injunction
should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes
fraudulent abuse of the independent purpose of the letter of credit and not only fraud
under the main agreement; and (c) irreparable injury might follow if injunction is not
granted or the recovery of damages would be seriously damaged. 49
In its complaint for injunction before the trial court, petitioner alleged that it is
entitled to a total extension of two hundred fty-three (253) days which would move the
target completion date. It argued that if its claims for extension would be found
meritorious by the ICC, then LHC would not be entitled to any liquidated damages. 50
Generally, injunction is a preservative remedy for the protection of one's substantive
right or interest; it is not a cause of action in itself but merely a provisional remedy, an
adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or
preventive remedy to secure the rights of a party in a pending case is entirely within the
discretion of the court taking cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds and in the manner provided by law.
51

Before a writ of preliminary injunction may be issued, there must be a clear showing
by the complaint that there exists a right to be protected and that the acts against which
the writ is to be directed are violative of the said right. 52 It must be shown that the
invasion of the right sought to be protected is material and substantial, that the right of
complainant is clear and unmistakable and that there is an urgent and paramount
necessity for the writ to prevent serious damage. 53 Moreover, an injunctive remedy may
only be resorted to when there is a pressing necessity to avoid injurious consequences
which cannot be remedied under any standard compensation. 54
In the instant case, petitioner failed to show that it has a clear and unmistakable
right to restrain LHC's call on the Securities which would justify the issuance of preliminary
injunction. By petitioner's own admission, the right of LHC to call on the Securities was
contractually rooted and subject to the express stipulations in the Turnkey Contract. 55
Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the
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right to draw upon the Securities in case of default, as provided in Clause 4.2.5, in relation
to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling
upon any of the Securities, stating the nature of the default for which the claim on
any of the Securities is to be made, provided that no notice will be required if the
Employer calls upon any of the Securities for the payment of Liquidated
Damages for Delay or for failure by the Contractor to renew or extend the
Securities within 14 days of their expiration in accordance with Clause 4.2.2. 56
8.7.2 The Employer may, without prejudice to any other method of
recovery, deduct the amount of such damages from any monies due, or to
become due, to the Contractor and/or by drawing on the Security. 57

The pendency of the arbitration proceedings would not per se make LHC's draws on
the Securities wrongful or fraudulent for there was nothing in the Contract which would
indicate that the parties intended that all disputes regarding delay should rst be settled
through arbitration before LHC would be allowed to call upon the Securities. It is therefore
premature and absurd to conclude that the draws on the Securities were outright
fraudulent given the fact that the ICC and CIAC have not ruled with nality on the existence
of default.
Nowhere in its complaint before the trial court or in its pleadings led before the
appellate court, did petitioner invoke the fraud exception rule as a ground to justify the
issuance of an injunction. 58 What petitioner did assert before the courts below was the
fact that LHC's draws on the Securities would be premature and without basis in view of
the pending disputes between them. Petitioner should not be allowed in this instance to
bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive
relief. Matters, theories or arguments not brought out in the proceedings below will
ordinarily not be considered by a reviewing court as they cannot be raised for the rst time
on appeal. 59 The lower courts could thus not be faulted for not applying the fraud
exception rule not only because the existence of fraud was fundamentally interwoven with
the issue of default still pending before the arbitral tribunals, but more so, because
petitioner never raised it as an issue in its pleadings led in the courts below. At any rate,
petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHC's
call upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending
issues before the arbitral tribunals prior to taking action to enforce the Securities. But, as
earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it was
merely enforcing its rights in accordance with the tenor thereof. Obligations arising from
contracts have the force of law between the contracting parties and should be complied
with in good faith. 60 More importantly, pursuant to the principle of autonomy of contracts
embodied in Article 1306 of the Civil Code, 61 petitioner could have incorporated in its
Contract with LHC, a proviso that only the nal determination by the arbitral tribunals that
default had occurred would justify the enforcement of the Securities. However, the fact is
petitioner did not do so; hence, it would have to live with its inaction.
With respect to the issue of whether the respondent banks were justi ed in
releasing the amounts due under the Securities, this Court reiterates that pursuant to the
independence principle the banks were under no obligation to determine the veracity of
LHC's certi cation that default has occurred. Neither were they bound by petitioner's
declaration that LHC's call thereon was wrongful. To repeat, respondent banks'
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undertaking was simply to pay once the required documents are presented by the
beneficiary.
At any rate, should petitioner nally prove in the pending arbitration proceedings
that LHC's draws upon the Securities were wrongful due to the non-existence of the fact of
default, its right to seek indemni cation for damages it suffered would not normally be
foreclosed pursuant to general principles of law.
Moreover, in a Manifestation, 62 dated 30 March 2001, LHC informed this Court that
the subject letters of credit had been fully drawn. This fact alone would have been
sufficient reason to dismiss the instant petition.
HAICTD

Settled is the rule that injunction would not lie where the acts sought to be enjoined
have already become fait accompli or an accomplished or consummated act. 63 In Ticzon
v. Video Post Manila, Inc. 64 this Court ruled that where the period within which the former
employees were prohibited from engaging in or working for an enterprise that competed
with their former employer — the very purpose of the preliminary injunction — has expired,
any declaration upholding the propriety of the writ would be entirely useless as there
would be no actual case or controversy between the parties insofar as the preliminary
injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had
rendered the instant petition moot — for any declaration by this Court as to propriety or
impropriety of the non-issuance of injunctive relief could have no practical effect on the
existing controversy. 65 The other issues raised by petitioner particularly with respect to
its right to recover the amounts wrongfully drawn on the Securities, according to it, could
properly be threshed out in a separate proceeding.
One nal point. LHC has charged petitioner of forum-shopping. It raised the charge
on two occasions. First, in its Counter-Manifestation dated 29 June 2004 66 LHC alleges
that petitioner presented before this Court the same claim for money which it has led in
two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332
before the RTC of Makati. LHC argues that petitioner's acts constitutes forum-shopping
which should be punished by the dismissal of the claim in both forums. Second, in its
Comment to Petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum
dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same
time pursuing Civil Case No. 04-332 — wherein petitioner pressed for judgment on the
issue of whether the funds LHC drew on the Securities should be returned — petitioner
resorted to forum-shopping. In both instances, however, petitioner has apparently opted
not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of
several judicial remedies in different courts, simultaneously or successively, all
substantially founded on the same transactions and the same essential facts and
circumstances, and all raising substantially the same issues either pending in, or already
resolved adversely, by some other court. 67 It may also consist in the act of a party against
whom an adverse judgment has been rendered in one forum, of seeking another and
possibly favorable opinion in another forum other than by appeal or special civil action of
certiorari, or the institution of two or more actions or proceedings grounded on the same
cause on the supposition that one or the other court might look with favor upon the other
party. 68 To determine whether a party violated the rule against forum-shopping, the test
applied is whether the elements of litis pendentia are present or whether a nal judgment
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in one case will amount to res judicata in another. 69 Forum-shopping constitutes
improper conduct and may be punished with summary dismissal of the multiple petitions
and direct contempt of court. 7 0
Considering the seriousness of the charge of forum-shopping and the severity of the
sanctions for its violation, the Court will refrain from making any de nitive ruling on this
issue until after petitioner has been given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fteen
(15) days from notice.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ ., concur.

Footnotes

1. Penned by Justice Candido V. Rivera, concurred in by Justices Conchita Carpio-Morales and


Rebecca de Guia-Salvador.
2. Rollo, pp. 52—61.

3. Id. at 62—252.

4. Id. at 75—76.
5. Clause 1.1, Volume II of the Turnkey Contract, Rollo, p. 81.

6. 20.3 Dispute Resolution.


If at anytime any dispute or difference shall arise between the Employer and the Contractor in
connection with or arising out of this Contract or the carrying out of the Works, the
parties together shall in good faith exert all efforts to resolve such dispute or difference
by whatever means they deem appropriate, including conciliation, mediation and seeking
the assistance of technical, accounting or other experts. At the request of any party, the
chief executives of the Employer and the Contractor shall meet in a good-faith effort to
reach an amicable settlement of the dispute or difference. Any dispute or difference that
the parties are unable to resolve within a reasonable time may, at the option of either
party, be referred to arbitration in accordance with Clause 20.4. (Id. at 179)

7. Annex "C," Rollo, pp. 254—256.


8. Annex "D," Id. at 257—259.

9. Clause 4.2.1, Volume II of the Turnkey Contract, Id. at 94.

10. Id. at 261—265.


11. Id. at 359—382.

12. Turnkey Contract, Clause 4.2.5, Rollo, p. 94, in relation to Clause 8.7.1., Rollo, p. 132.
13. Annex "H," Rollo, pp. 287—289; Annex "H-1," Rollo, pp. 320—322.

14. Clause 8.2. Time for Completion.

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The Contractor shall complete all the Works, including the Tests on Completion, in accordance
with the Program on or before the Target Completion Date. (Rollo, p. 125)
15. Vol. 1, Rollo, pp. 355—357.

16. 8.7.1. If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the
Employer by way of liquidated damages ("Liquidated Damages for Delay ") the amount
of US$75,000 for each and every day or part of a day that shall elapse between the
Target Completion Date and the Completion Date, provided that Liquidated Damages for
Delay payable by the Contractor shall in the aggregate not exceed 20% of the Contract
Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay
on the following day without need of demand from the Employer.

17. Annex "L," Rollo, pp. 383—402.


18. Annex "N," Id. at 406—409.

19. Annex "O," Id. at 412—423.

20. Docketed as CA-G.R. SP No. 61901.


21. Rollo, pp. 25—26.

22. Vol. II; Id. at 2—78.


23. Id. at 79—92.

24. Id. at 95—98.

25. Id. at 109—113.


26. Id. at 666—671.

27. Id. at 598—607.

28. Id. at 619—630.


29. Joseph, Letters of Credit: The Developing Concepts and Financing Functions, 94 BANKING
LAW JOURNAL 850—851 [1977] cited in M. KURKELA, LETTERS OF CREDIT UNDER
INTERNATIONAL TRADE LAW, 321 (1985).
30. Bank of America v. Court of Appeals, G.R. No. 105395, 10 December 1993, 228 SCRA 357
citing William S. Shaterian, EXPORT-IMPORT BANKING: THE INSTRUMENTS AND
OPERATIONS UTILIZED BY AMERICAN EXPORTERS AND IMPORTERS AND THEIR
BANKS IN FINANCING FOREIGN TRADE, 284—374 (1947).

31. E&H Partners v. Broadway Nat'l Bank, 39 F. Supp. 2d 275, (United States Circuit Court, S .D .
New York) No. 96 Civ. 7098 (RLC), 19 October 1998 <http: //www.westlaw.com>.
32. J. DOLAN, THE LAW OF LETTERS OF CREDIT, REVISED Ed. (2000).

33. 24 A WORDS AND PHRASES 590, Permanent Edition.


34. Ibid.

35. JACKSON & DAVEY, INTERNATIONAL ECONOMIC RELATIONS, 53 (2nd ed.).

36. ICC Publication No. 500.


37. 146 Phil. 269 (1970).
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38. G.R. No. 105395, 10 December 1993, 228 SCRA 357.

39. Article 15, UCP.

40. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 286—287 (1985).
41. Art. 10, UCP.

42. Supra note 32 at 1—27.


43. Rollo, pp. 604 and 624.

44. Emphasis supplied; Id. at 94.

45. Emphasis supplied; Id. at 132.


46. Art. 1315, Civil Code.

47. Clause 20.4.1, Turnkey Contract, Rollo, p. 179.


48. Supra note 32 at 2—63.

49. M. KURKELA, LETTERS OF CREDIT UNDER INTERNATIONAL TRADE LAW, 309 (1985).

50. Rollo, p. 391.


51. Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 415 Phil. 43.

52. Shin v. Court of Appeals, G.R. No. 113627, 6 February 2001, 351 SCRA 257.
53. Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551; Philippine
Economic Zone Authority v. Vianzon, G.R. No. 131020, 20 July 2000, 336 SCRA 309;
Valencia v. Court of Appeals, G.R. No. 119118, 19 February 2001, 352 SCRA 72; Crystal v.
Cebu International School, G.R. No. 135433, 4 April 2001, 356 SCRA 296; Ong Ching Kian
Chuan v. Court of Appeals, 415 Phil. 365 (2001).
54. Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494 (2001).
55. Rollo, p. 31.

56. Emphasis supplied; Id. at 94—95.


57. Id. at 132.

58. Vide Annex "L," Rollo. pp. 392—399; Petition for Certiorari, CA Rollo, pp. 7—43.

59. Salafranca v. Philamlife Village Homeowners Association, Inc., 360 Phil. 652; Ruby
Industrial Corporation v. Court of Appeals, 348 Phil. 480; Victorias Milling Co., Inc. v.
Court of Appeals, 389 Phil. 184.
60. Article 1159, Civil Code.

61. Art. 1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.

62. Rollo, p. 493.


63. Aznar Brothers Realty Company v. Court of Appeals, G.R. No. 128102, 7 March 2000, 327
SCRA 359; Soriano v. Court of Appeals, 416 Phil. 226 (2001); Rodil Enterprises v. Court of
Appeals, G.R. No. 129609, 29 November 2001, 371 SCRA 79; Unionbank of the
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Philippines v. Court of Appeals, 370 Phil. 837 (1999).
64. 389 Phil. 20 (2000).

65. BLACK'S LAW DICTIONARY, p. 1008, citing Leonhart v. McCormick, D.C. Pa., 395 F. Supp.
1073.
66. Vol. II, Rollo, pp. 666—669.

67. Tantoy, Sr. v. Court of Appeals, G.R. No. 141427, April 20, 2001, 357 SCRA 329.

68. Bangko Silangan Development Bank v. Court of Appeals, 412 Phil. 755 (2001).
69. Tirona v. Alejo, G.R. No. 129313, October 10, 2001, 367 SCRA 17; Manalo v. Court of
Appeals, G.R. No. 141297, October 8, 2001, 366 SCRA 752.
70. Tantoy, Sr. v. Court of Appeals, supra note 67.; Caviles v. Seventeenth Division, Court of
Appeals, G.R. No. 126857, September 18, 2002, 389 SCRA 306.

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SPECIAL SECOND DIVISION

[G.R. No. 146717. May 19, 2006.]

TRANSFIELD PHILIPPINES, INC. , petitioner, vs . LUZON HYDRO


CORPORATION, AUSTRALIA AND NEW ZEALAND BANKING GROUP
LIMITED and SECURITY BANK CORPORATION , respondents.

RESOLUTION

TINGA , J : p

The adjudication of this case proved to be a two-stage process as its constituent


parts involve two segregate but equally important issues. The rst stage relating to the
merits of the case, speci cally the question of the propriety of calling on the securities
during the pendency of the arbitral proceedings, was resolved in favor of Luzon Hydro
Corporation (LHC) with the Court's Decision 1 of 22 November 2004. The second stage
involving the issue of forum-shopping on which the Court required the parties to submit
their respective memoranda 2 is disposed of in this Resolution.
The disposal of the forum-shopping charge is crucial to the parties to this case on
account of its profound effect on the nal outcome of the international arbitral
proceedings which they have chosen as their principal dispute resolution mechanism. 3
LHC claims that Trans eld Philippines, Inc. (TPI) is guilty of forum-shopping when it
filed the following suits:
1. Civil Case No. 04-332 led on 19 March 2004, pending before the Regional
Trial Court (RTC) of Makati, Branch 56 for con rmation, recognition and
enforcement of the Third Partial Award in case 11264 TE/MW, ICC
International Court of Arbitration, entitled Trans eld Philippines, Inc . v.
Luzon Hydro Corporation. 4
2. ICC Case No. 11264/TE/MW, Trans eld Philippines, Inc . v. Luzon Hydro
Corporation led before the International Court of Arbitration, International
Chamber of Commerce (ICC) a request for arbitration dated 3 November
2000 pursuant to the Turnkey Contract between LHC and TPI;

3. G.R. No. 146717, Trans eld Philippines, Inc . v. Luzon Hydro Corporation,
Australia and New Zealand Banking Group Limited and Security Bank
Corp. led on 5 February 2001, which was an appeal by certiorari with
prayer for TRO/preliminary prohibitory and mandatory injunction, of the
Court of Appeals Decision dated 31 January 2001 in CA-G.R. SP No.
61901. AHEDaI

a. CA-G.R. SP No. 61901 was a petition for review of the Decision in


Civil Case No. 00-1312, wherein TPI claimed that LHC's call on the
securities was premature considering that the issue of default has
not yet been resolved with nality; the petition was however denied
by the Court of Appeals;

b. Civil Case No. 00-1312 was a complaint for injunction with prayer
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for temporary restraining order and/or writ of preliminary injunction
dated 5 November 2000, which sought to restrain LHC from calling
on the securities and respondent banks from transferring or paying
of the securities; the complaint was denied by the RTC.

On the other hand, TPI claims that it is LHC which is guilty of forum-shopping when it
raised the issue of forum-shopping not only in this case, but also in Civil Case No. 04-332,
and even asked for the dismissal of the other case based on this ground. Moreover, TPI
argues that LHC is relitigating in Civil Case No. 04-332 the very same causes of action in
ICC Case No. 11264/TE/MW, and even manifesting therein that it will present evidence
earlier presented before the arbitral tribunal. 5
Meanwhile, ANZ Bank and Security Bank moved to be excused from ling a
memorandum. They claim that with the nality of the Court's Decision dated 22 November
2004, any resolution by the Court on the issue of forum-shopping will not materially affect
their role as the banking entities involved are concerned. 6 The Court granted their
respective motions.
On 1 August 2005, TPI moved to set the case for oral argument, positing that the
resolution of the Court on the issue of forum-shopping may have signi cant implications
on the interpretation of the Alternative Dispute Resolution Act of 2004, as well as the
viability of international commercial arbitration as an alternative mode of dispute
resolution in the country. 7 Said motion was opposed by LHC in its opposition led on 2
September 2005, with LHC arguing that the respective memoranda of the parties are
su cient for the Court to resolve the issue of forum-shopping. 8 On 28 October 2005, TPI
led its Manifestation and Reiterative Motion 9 to set the case for oral argument, where it
manifested that the International Chamber of Commerce (ICC) arbitral tribunal had issued
its Final Award ordering LHC to pay TPI US$24,533,730.00 (including the
US$17,977,815.00 proceeds of the two standby letters of credit). TPI also submitted a
copy thereof with a Supplemental Petition 1 0 to the Regional Trial Court (RTC), seeking
recognition and enforcement of the said award. 1 1
The essence of forum-shopping is the ling of multiple suits involving the same
parties for the same cause of action, either simultaneously or successively, for the
purpose of obtaining a favorable judgment. 1 2 Forum-shopping has likewise been de ned
as the act of a party against whom an adverse judgment has been rendered in one forum,
seeking and possibly getting a favorable opinion in another forum, other than by appeal or
the special civil action of certiorari, or the institution of two or more actions or
proceedings grounded on the same cause on the supposition that one or the other court
would make a favorable disposition. 1 3
Thus, for forum-shopping to exist, there must be (a) identity of parties, or at least
such parties as represent the same interests in both actions; (b) identity of rights asserted
and relief prayed for, the relief being founded on the same facts; and (c) the identity of the
two preceding particulars is such that any judgment rendered in the other action will,
regardless of which party is successful, amount to res judicata in the action under
consideration. 1 4
There is no identity of causes of action between and among the arbitration case, the
instant petition, and Civil Case No. 04-332.
The arbitration case, ICC Case No. 11264 TE/MW, is an arbitral proceeding
commenced pursuant to the Turnkey Contract between TPI and LHC, to determine the
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primary issue of whether the delays in the construction of the project were excused delays,
which would consequently render valid TPI's claims for extension of time to nish the
project. Together with the primary issue to be settled in the arbitration case is the equally
important question of monetary awards to the aggrieved party. DHaEAS

On the other hand, Civil Case No. 00-1312, the precursor of the instant petition, was
led to enjoin LHC from calling on the securities and respondent banks from transferring
or paying the securities in case LHC calls on them. However, in view of the fact that LHC
collected the proceeds, TPI, in its appeal and petition for review asked that the same be
returned and placed in escrow pending the resolution of the disputes before the ICC
arbitral tribunal. 1 5
While the ICC case thus calls for a thorough review of the facts which led to the
delay in the construction of the project, as well as the attendant responsibilities of the
parties therein, in contrast, the present petition puts in issue the propriety of drawing on
the letters of credit during the pendency of the arbitral case, and of course, absent a nal
determination by the ICC Arbitral tribunal. Moreover, as pointed out by TPI, it did not pray
for the return of the proceeds of the letters of credit. What it asked instead is that the said
moneys be placed in escrow until the nal resolution of the arbitral case. Meanwhile, in
Civil Case No. 04-332, TPI no longer seeks the issuance of a provisional relief, but rather
the issuance of a writ of execution to enforce the Third Partial Award.
Neither is there an identity of parties between and among the three (3) cases. The
ICC case only involves TPI and LHC logically since they are the parties to the Turnkey
Contract. In comparison, the instant petition includes Security Bank and ANZ Bank, the
banks sought to be enjoined from releasing the funds of the letters of credit. The Court
agrees with TPI that it would be ineffectual to ask the ICC to issue writs of preliminary
injunction against Security Bank and ANZ Bank since these banks are not parties to the
arbitration case, and that the ICC Arbitral tribunal would not even be able to compel LHC to
obey any writ of preliminary injunction issued from its end. 1 6 Civil Case No. 04-322, on the
other hand, logically involves TPI and LHC only, they being the parties to the arbitration
agreement whose partial award is sought to be enforced. ACDTcE

As a fundamental point, the pendency of arbitral proceedings does not foreclose


resort to the courts for provisional reliefs. The Rules of the ICC, which governs the parties'
arbitral dispute, allows the application of a party to a judicial authority for interim or
conservatory measures. 1 7 Likewise, Section 14 of Republic Act (R.A.) No. 876 (The
Arbitration Law) 1 8 recognizes the rights of any party to petition the court to take
measures to safeguard and/or conserve any matter which is the subject of the dispute in
arbitration. In addition, R.A. 9285, otherwise known as the "Alternative Dispute Resolution
Act of 2004," allows the ling of provisional or interim measures with the regular courts
whenever the arbitral tribunal has no power to act or to act effectively. 1 9
TPI's veri ed petition in Civil Case No. 04-332, led on 19 March 2004, was
captioned as one "For: Con rmation, Recognition and Enforcement of Foreign Arbitral
Award in Case 11264 TE/MW, ICC International Court of Arbitration, 'Trans eld Philippines,
Inc. v. Luzon Hydro Corporation (Place of arbitration: Singapore)." 2 0 In the said petition,
TPI prayed:
1. That the THIRD PARTIAL AWARD dated February 18, 2004 in Case No.
11264/TE/MW made by the ICC International Court of Arbitration, the signed
original copy of which is hereto attached as Annex "H" hereof, be con rmed,
recognized and enforced in accordance with law.
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2. That the corresponding writ of execution to enforce Question 31 of the said
Third Partial Award, be issued, also in accordance with law.
3. That TPI be granted such other relief as may be deemed just and equitable,
and allowed, in accordance with law. 2 1

The pertinent portion of the Third Partial Award 2 2 relied upon by TPI were the
answers to Questions 10 to 26, to wit:
"Question 30

Did TPI [LHC] wrongfully draw upon the security?


Yes
"Question 31

Is TPI entitled to have returned to it any sum wrongfully taken by LHC for
liquidated damages?

Yes
"Question 32

Is TPI entitled to any acceleration costs? TPI is entitled to the reasonable


costs TPI incurred after Typhoon Zeb as a result of LHC's 5 February 1999
Notice to Correct. 2 3

According to LHC, the ling of the above case constitutes forum-shopping since it is
the same claim for the return of US$17.9 Million which TPI made before the ICC Arbitral
Tribunal and before this Court. LHC adds that while Civil Case No. 04-332 is styled as an
action for money, the Third Partial Award used as basis of the suit does not authorize TPI
to seek a writ of execution for the sums drawn on the letters of credit. Said award does
not even contain an order for the payment of money, but instead has reserved the
quanti cation of the amounts for a subsequent determination, LHC argues. In fact, even
the Fifth Partial Award, 2 4 dated 30 March 2005, does not contain such orders. LHC insists
that the declarations or the partial awards issued by the ICC Arbitral Tribunal do not
constitute orders for the payment of money and are not intended to be enforceable as
such, but merely constitute amounts which will be included in the Final Award and will be
taken into account in determining the actual amount payable to the prevailing party. 2 5
R.A. No. 9825 provides that international commercial arbitrations shall be governed
shall be governed by the Model Law on International Commercial Arbitration ("Model Law")
adopted by the United Nations Commission on International Trade Law (UNCITRAL). 2 6
The UNCITRAL Model Law provides:
ARTICLE 35. Recognition and enforcement
(1) An arbitral award, irrespective of the country in which it was made, shall
be recognized as binding and, upon application in writing to the competent court,
shall be enforced subject to the provisions of this article and of article 36.
ADHcTE

(2) The party relying on an award or applying for its enforcement shall supply
the duly authenticated original award or a duly certi ed copy thereof, and the
original arbitration agreement referred to in article 7 or a duly certi ed copy
thereof. If the award or agreement is not made in an o cial language of this
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State, the party shall supply a duly certi ed translation thereof into such
language.

Moreover, the New York Convention, 2 7 to which the Philippines is a signatory,


governs the recognition and enforcement of foreign arbitral awards. The applicability of
the New York Convention in the Philippines was con rmed in Section 42 of R.A. 9285. Said
law also provides that the application for the recognition and enforcement of such awards
shall be led with the proper RTC. While TPI's resort to the RTC for recognition and
enforcement of the Third Partial Award is sanctioned by both the New York Convention
and R.A. 9285, its application for enforcement, however, was premature, to say the least.
True, the ICC Arbitral Tribunal had indeed ruled that LHC wrongfully drew upon the
securities, yet there is no order for the payment or return of the proceeds of the said
securities. In fact, Paragraph 2142, which is the nal paragraph of the Third Partial Award,
reads:
2142. All other issues, including any issues as to quantum and costs, are
reserved to a future award. 2 8

Meanwhile, the tribunal issued its Fifth Partial Award 2 9 on 30 March 2005. It
contains, among others, a declaration that while LHC wrongfully drew on the securities, the
drawing was made in good faith, under the mistaken assumption that the contractor, TPI,
was in default. Thus, the tribunal ruled that while the amount drawn must be returned, TPI
is not entitled to any damages or interests due to LHC's drawing on the securities. 3 0 In the
Fifth Partial Award, the tribunal ordered:
6. Order
6.1 General

166. This Fifth Partial Award deals with many issues of quantum. However, it
does not resolve them all. The outstanding quantum issues will be
determined in a future award . It will contain a reconciliation of the
amounts awarded to each party and a determination of the net amount
payable to Claimant or Respondent, as the case may be.
167. In view of this the Tribunal will make no orders for payment in this Fifth
Partial Award. The Tribunal will make a number of declarations concerning
the quantum issues it has resolved in this Award together with the
outstanding liability issues. The declarations do not constitute orders
for the payment of money and are not intended to be enforceable
as such. They merely constitute amounts which will be included
in the Final Award and will be taken into account in determining
the actual amount payable . 3 1 (Emphasis Supplied.)

Further, in the Declarations part of the award, the tribunal held:


6.2 Declarations

168. The Tribunal makes the following declarations:


xxx xxx xxx

3. LHC is liable to repay TPI the face value of the securities drawn claimed by
TPI in respect of the drawdown of the securities. EIDTAa

xxx xxx xxx. 3 2


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Finally, on 9 August 2005, the ICC Arbitral tribunal issued its Final Award, in essence
awarding US$24,533,730.00, which included TPI's claim of U$17,977,815.00 for the return
of the securities from LHC. 3 3
The fact that the ICC Arbitral tribunal included the proceeds of the securities shows
that it intended to make a nal determination/award as to the said issue only in the Final
Award and not in the previous partial awards. This supports LHC's position that when the
Third Partial Award was released and Civil Case No. 04-332 was led, TPI was not yet
authorized to seek the issuance of a writ of execution since the quanti cation of the
amounts due to TPI had not yet been settled by the ICC Arbitral tribunal. Notwithstanding
the fact that the amount of proceeds drawn on the securities was not disputed the
application for the enforcement of the Third Partial Award was precipitately led. To
repeat, the declarations made in the Third Partial Award do not constitute orders for the
payment of money.
Anent the claim of TPI that it was LHC which committed forum-shopping, su ce it
to say that its bare allegations are not sufficient to sustain the charge.
WHEREFORE, the Court RESOLVES to DISMISS the charges of forum-shopping led
by both parties against each other.
No pronouncement as to costs.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.

Footnotes
1. 443 SCRA 307.

2. Resolution dated 27 April 2005, rollo, 1213-1219.


3. The growth of international commercial arbitration (ICA) is both a rejection of the non-
binding conciliation and mediation process and a retreat from the vicissitudes and
uncertainties of international business litigation. More positively, the mechanism offers
predictability and neutrality as a forum and allows the parties to select and shape the
procedures and costs of dispute resolution. On the other hand, ICA procedures are often
informal and not laden with legal rights. R. H. FOLSOM, M. W. GORDON, J. A.
SPANOGLE, JR., INTERNATIONAL BUSINESS TRANSACTIONS, pp. 1113-1114 (2nd ed., 1
year published).
4. The award purportedly held that LHC wrongfully drew on the securities; and that TPI is
entitled to the return of the said sums, liquidated damages, and liquidation costs.
5. Rollo, pp. 1289-1293.
6. ANZ Bank's Motion to be Excused, id. at 1220; Security Bank's Motion to be Excused,
temporary rollo.
7. Motion for Leave to Set Case for Oral Argument, id. at 1747-1751.
8. Opposition, id. at 1757-1760.

9. Id. at 1763-1767.

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10. Id. at 1823-1829.
11. TPI also submitted a copy of the Award, id. at 1768-1818.
12. Mondragon Leisure and Resorts Corporation v. United Coconut Planters Bank, G.R. No.
154187, 14 April 2004, 427 SCRA 585, 590.
13. Roxas v. Court of Appeals, G.R. No. 139337, 15 August 2001, 363 SCRA 207, 217.
14. Korea Exchange Bank v. Hon. Rogelio C. Gonzales, et al., G.R. Nos. 142286-87, 15 April
2005, 456 SCRA 224, 243, citing Benedicto v. Court of Appeals, G.R. No. 125359, 4
September 2001, 364 SCRA 334.

15. Rollo, p. 1270.


16. Id. at 1267.
17. Art. 23 (2), Rules of Arbitration of the International Chamber of Commerce provides:
Before the file is transmitted to the Arbitral tribunal and in appropriate circumstances
even thereafter, the parties may apply to any competent judicial authority for interim or
conservatory measures. The application of a party to a judicial authority for
such measure or for the implementation of any such measure ordered by an
Arbitral tribunal shall not be deemed to be an infringement or a waiver of the
arbitration agreement and shall not affect the relevant powers reserved to the
Arbitral tribunal . Any such application and any measures taken by the judicial
authority must be notified without delay to the Secretariat. The Secretariat shall inform
the Arbitral tribunal thereof. (emphasis supplied)
18. Section 14. Subpoena and subpoena duces tecum. — Arbitrators shall have the power
to require any person to attend a hearing as a witness. They shall have the power to
subpoena witnesses and documents when the relevancy of the testimony and the
materiality thereof has been demonstrated to the arbitrators. Arbitrators may also require
the retirement of any witness during the testimony of any other witness. All of the
arbitrators appointed in any controversy must attend all the hearings in that matter and
hear all the allegations and proofs of the parties; but an award by the majority of them is
valid unless the concurrence of all of them is expressly required in the submission or
contract to arbitrate. The arbitrator or arbitrators shall have the power at any time, before
rendering the award, without prejudice to the rights of any party to petition the
court to take measures to safeguard and/or conserve any matter which is the
subject of the dispute in arbitration . (Emphasis supplied.)

19. Sec. 28, R.A. No. 9285. Grant of Interim Measure of Protection. (a) It is not incompatible
with an arbitration agreement for a party to request, before constitution of the tribunal,
from a Court an interim measure of protection and for the Court to grant such measure.
After constitution of the arbitral tribunal and during arbitral proceedings, a request for
an interim measure of protection, or modification thereof, may be made with
the arbitral tribunal or to the extent that the arbitral tribunal has no power to
act or is unable to act effectively, the request may be made with the Court . . . .
. (Emphasis supplied.)
20. Rollo, p. 672.
21. Id. at 680.
22. Id. at 661.
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23. Third Partial Award, id. at 114-664.
24. Id. at 1685-1743.
25. Id. at 1665-66.
26. Rep. Act No. 9285, Sec. 19.
27. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed at
New York on 10 June 1958, and ratified by the Philippines under Senate Resolution No.
71.

28. Rollo, p. 663.


29. Id. at 1685-1703.
30. Id. at 1703-1705.
31. Id. at 1741.
32. Id. at 1741-1742.
33. Final Award, id. at 1768-1815.

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THIRD DIVISION

[G.R. No. 74886. December 8, 1992.]

PRUDENTIAL BANK , petitioner, vs. INTERMEDIATE APPELLATE


COURT, PHILIPPINE RAYON MILLS INC. and ANACLETO R. CHI ,
respondents.

SYLLABUS

1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS; LETTER OF CREDIT;


CONSTRUED. — A letter of credit is defined as an engagement by a bank or other person
made at the request of a customer that the issuer will honor drafts or other demands for
payment upon compliance with the conditions specified in the credit. Through a letter of
credit, the bank merely substitutes its own promise to pay for the promise to pay of one of
its customers who in return promises to pay the bank the amount of funds mentioned in
the letter of credit plus credit or commitment fees mutually agreed upon.
2. ID.; ID.; ID.; PRESENTMENT FOR ACCEPTANCE, NOT NECESSARY IN CASE AT BAR.
— The transaction in the case at bar stemmed from Philippine Rayon's application for a
commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the
former's contract to purchase and import loom and textile machinery from Nissho
Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the
application. The drawee was necessarily the herein petitioner. It was to the latter that the
drafts were presented for payment. There was no need for acceptance as the issued
drafts are sight drafts. They are, pursuant to Section 7 of the Negotiable Instruments Law
(NIL), payable on demand. Presentment for acceptance is defined as the production of a
bill of exchange to a drawee for acceptance. Contrary to both courts' pronouncements,
Philippine Rayon immediately became liable thereon upon petitioner's payment thereof.
Such is the essence of the letter of credit issued by the petitioner. A different conclusion
would violate the principle upon which commercial letters of credit are founded because in
such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner,
respectively, would be placed at the mercy of Philippine Rayon even if the latter had already
received the imported machinery and the petitioner had fully paid for it. Presentment for
acceptance is necessary only in the cases expressly provided for in Section 143 of the
Negotiable Instruments Law (NIL).
3. ID.; ID.; ACCEPTANCE OF A BILL, EXPLAINED. — The acceptance of a bill is the
signification by the drawee of his assent to the order of the drawer; this may be done in
writing by the drawee in the bill itself, or in a separate instrument.
4. ID.; TRUST RECEIPTS LAW (P.D. 115), TRUST RECEIPT TRANSACTION, DEFINED. —
Under P.D. No. 115, otherwise known as the Trust Receipts Law, which took effect on 29
January 1973, a trust receipt transaction is defined as "any transaction by and between a
person referred to in this Decree as the entruster, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or holds absolute title or
security interests over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter's execution and delivery to the
entruster of a signed document called the trust receipt wherein the entrustee binds
himself to hold the designated goods, documents or instruments in trust for the entruster
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and to sell or otherwise dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the goods, instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt, or for other purposes substantially equivalent
to any one of the following: . . ."
5. ID.; ID.; VIOLATIONS THEREOF; PENDENCY OF CRIMINAL ACTION, NOT A LEGAL
OBSTACLE TO A SEPARATE CIVIL ACTION. — Although petitioner commenced a criminal
action for the violation of the Trust Receipts Law, no legal obstacle prevented it from
enforcing the civil liability arising out of the trust receipt in a separate civil action. Under
Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds
of the sale of goods, documents or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance with
the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article 315, paragraph 1(b) of the Revised Penal Code. Under Article 33 of
the Civil Code, a civil action for damages, entirely separate and distinct from the criminal
action, may be brought by the injured party in cases of defamation, fraud and physical
injuries. Estafa falls under fraud.
6. ID.; ID.; ID.; PENALTY WHEN VIOLATION COMMITTED BY JURIDICAL ENTITIES. — A
close examination of Sec. 13 of P.D. No. 115 reveals that the penalty referred to therein
which shall be imposed upon the directors, officers, employees or other officials or
persons of the corporation, partnership, association or other judicial utility is
imprisonment, the duration of which would depend on the amount of the fraud as provided
for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations,
partnerships, associations and other juridical entities cannot be put in jail. However, it is
these entities which are made liable for the civil liability arising from the criminal offense.
This is the import of the clause "without prejudice to the civil liabilities arising from the
criminal offense."
7. CIVIL LAW; CONTRACTS; GUARANTY; VALIDITY THEREOF. — The attestation by
witnesses and the acknowledgment before a notary public are not required by law to make
a party liable on the instrument. The rule is that contracts shall be obligatory in whatever
form they may have been entered into, provided all the essential requisites for their validity
are present; however, when the law requires that a contract be in some form in order that it
may be valid or enforceable, or that it be proved in a certain way, that requirement is
absolute and indispensable. With respect to a guaranty, which is a promise to answer for
the debt or default of another, the law merely requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified.
While the acknowledgment of a surety before a notary public is required to make the same
a public document, under Article 1358 of the Civil Code, a contract of guaranty does not
have to appear in a public document.
8. ID.; ID.; ID.; DEFENSE OF EXCUSSION; NOT A CONDITION SINE QUA NON FOR THE
INSTITUTION OF ACTION AGAINST GUARANTOR. — Under Article 2058 of the Civil Code,
the defense of exhaustion (excussion) may be raised by a guarantor before he may be held
liable for the obligation. However, excussion is not a condition sine qua non for the
institution of an action against the guarantor. In Southern Motors, Inc. vs. Barbosa (99 Phil.
263, 268 [1956]), this Court stated: "4. Although an ordinary personal guarantor — not a
mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may,
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prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to
a deferment of the execution of said judgment against him until after the properties of the
principal debtor shall have been exhausted to satisfy the obligation involved in the case."
9. ID.; ID.; CONTRACT OF ADHESION; CONSTRUCTION THEREOF. — Any doubt as to
the import or true intent of the solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a
form drafted and prepared solely by the petitioner; Chi's participation therein is limited to
the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it must
be strictly construed against the party responsible for its preparation.
10. REMEDIAL LAW; CIVIL PROCEDURE; PERMISSIVE JOINDER OF PARTIES;
RATIONALE. — There was then nothing procedurally objectionable in impleading private
respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. Section
6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. This is
the equity rule relating to multifariousness. It is based on trial convenience and is designed
to permit the joinder of plaintiffs or defendants whenever there is a common question of
law or fact. It will save the parties unnecessary work, trouble and expense.
11. CIVIL LAW; CONTRACTS; GUARANTY; GUARANTOR; LIABILITY IN CASE AT BAR. —
Chi's liability is limited to the principal obligation in the trust receipt plus all the
accessories thereof including judicial costs; with respect to the latter, he shall only be
liable for those costs incurred after being judicially required to pay. Interest and damages,
being accessories of the principal obligation, should also be paid; these, however, shall run
only from the date of the filing of the complaint. Attorney's fees may even be allowed in
appropriate cases. In the instant case, the attorney's fees to be paid by Chi cannot be the
same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered
by the guaranty and not the full extent of the latter's liability. All things considered, he can
be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.

DECISION

DAVIDE, JR. , J : p

Petitioner seeks to review and set aside the decision 1 of public respondent Intermediate
Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which
affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of
First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter
involved an action instituted by the petitioner for the recovery of a sum of money
representing the amount paid by it to the Nissho Company Ltd. of Japan for textile
machinery imported by the defendant, now private respondent, Philippine Rayon Mills, Inc.
(hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi.

The facts which gave rise to the instant controversy are summarized by the public
respondent as follows:
"On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into
a contract with Nissho Co., Ltd. of Japan for the importation of textile
machineries under a five-year deferred payment plan (Exhibit B, Plaintiff's Folder
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of Exhibits, p. 2). To effect payment for said machineries, the defendant-appellant
applied for a commercial letter of credit with the Prudential Bank and Trust
Company in favor of Nissho. By virtue of said application, the Prudential Bank
opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1).
Against this letter of credit, drafts, were drawn and issued by Nissho (Exhibits X,
X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank
through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their
faces, two of these drafts (Exhibits X and X-1, Ibid., pp. 65-66) were accepted by
the defendant-appellant through its president, Anacleto R. Chi, while the others
were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the defendant-appellant which accepted delivery of the same. To
enable the defendant-appellant to take delivery of the machineries, it executed, by
prior arrangement with the Prudential Bank, a trust receipt which was signed by
Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company
(Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished by two
sureties who, by the very terms and conditions thereof, were to be jointly and
severally liable to the Prudential Bank should the defendant-appellant fail to pay
the total amount or any portion of the drafts issued by Nissho and paid for by
Prudential Bank. The defendant-appellant was able to take delivery of the textile
machineries and installed the same at its factory site at 69 Obudan Street,
Quezon City.
Sometime in 1967, the defendant-appellant ceased business operation (sic). On
December 29, 1969, defendant-appellant's factory was leased by Yupangco
Cotton Mills for an annual rental of P300,000.00 (Exhibit I, Ibid., p. 22). The lease
was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all
the textile machineries in the defendant-appellant's factory were sold to AIC
Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29)

The obligation of the defendant-appellant arising from the letter of credit and the
trust receipt remained unpaid and unliquidated. Repeated formal demands
(Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt
yielded no result. Hence, the present action for the collection of the principal
amount of P956,384.95 was filed on October 3, 1974 against the defendant-
appellant and Anacleto R. Chi. In their respective answers, the defendants
interposed identical special defenses, viz., the complaint states no cause of
action; if there is, the same has prescribed; and the plaintiff is guilty of laches." 2

On 15 June 1978, the trial court rendered its decision the dispositive portion of which
reads:
"WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine
Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under
Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974
until fully paid. LLphil

Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the
same not having been accepted by defendant Philippine Rayon Mills, Inc.,
plaintiff's cause of action thereon has not accrued, hence, the instant case is
premature.

Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff


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is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's
fees.
With costs against defendant Philippine Rayon Mills, Inc.

SO ORDERED." 3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the
said court to reverse or modify the decision, petitioner alleged in its Brief that the trial
court erred in (a) disregarding its right to reimbursement from the private respondents for
the entire unpaid balance of the imported machines, the total amount of which was paid to
the Nissho Company Ltd., thereby violating the principle of the third party payor's right to
reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and
under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the
responsible officer of defendant corporation, liable under Section 13 of P.D. No 115 for the
entire unpaid balance of the imported machines covered by the bank's trust receipt
(Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a
guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at
least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the
assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code
and the related evidence and jurisprudence which provide that such liability had already
attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its
liability to pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-1" to "X-
11"); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before
the latter could be held liable thereon. 4
In its decision, public respondent sustained the trial court in all respects. As to the first and
last assigned errors, it rules that the provision on unjust enrichment, Article 2142 of the
Civil Code, applies only if there is no express contract between the parties and there is a
clear showing that the payment is justified. In the instant case, the relationship existing
between the petitioner and Philippine Rayon is governed by specific contracts, namely the
application for letters of credit, the promissory note, the drafts and the trust receipt. With
respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented
to and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally
paying the amounts stated therein. The public respondent did not agree with the
petitioner's claim that the drafts were sight drafts which did not require presentment for
acceptance to Philippine Rayon because paragraph 8 of the trust receipt presupposes
prior acceptance of the drafts. Since the ten (10) drafts were not presented and accepted,
no valid demand for payment can be made. LLphil

Public respondent also disagreed with the petitioner's contention that private respondent
Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and
based on his signature on the solidary guaranty clause at the dorsal side of the trust
receipt. As to the first contention, the public respondent ruled that the civil liability
provided for in said Section 13 attaches only after conviction. As to the second, it
expressed misgivings as to whether Chi's signature on the trust receipt made the latter
automatically liable thereon because the so-called solidary guaranty clause at the dorsal
portion of the trust receipt is to be signed not by one (1) person alone, but by two (2)
persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is
not acknowledged before a notary public. Besides, even granting that it was executed and
acknowledged before a notary public, Chi cannot be held liable therefor because the
records fail to show that petitioner had either exhausted the properties of Philippine Rayon
or had resorted to all legal remedies as required in Article 2058 of the Civil Code. As
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provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor
is merely accessory and subsidiary, respectively. Chi's liability would therefore arise only
when the principal debtor fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the public respondent in its
Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986
submitting the following legal issues:
"I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY
ERRED IN DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST
THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO
NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART.
1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL
PRINCIPLE AGAINST UNJUST ENRICHMENT;
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE
TRUST RECEIPT (EXH. C);
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF
RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT;
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE
GUARANTOR; AND IF SO, HAS HIS LIABILITY AS SUCH ALREADY ATTACHED;
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF
RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE
PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE
PETITIONER UNDER THE TRUST RECEIPT (EXH. C);
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS
RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE
DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM
RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO
PETITIONER." 7

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the
filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the
latter by the petitioner; both parties were also required to submit their respective
memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:

1. Whether presentment for acceptance of the drafts was indispensable to


make Philippine Rayon liable thereon;

2. Whether Philippine Rayon is liable on the basis of the trust receipt;


3. Whether private respondent Chi is jointly and severally liable with
Philippine Rayon for the obligation sought to be enforced and if not, whether he
may be considered a guarantor; in the latter situation, whether the case should
have been dismissed on the ground of lack of cause of action as there was no
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prior exhaustion of Philippine Rayon's properties. cdrep

Both the trial court and the public respondent ruled that Philippine Rayon could be held
liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been
accepted by the latter after due presentment. The liability for the remaining ten (10) drafts
(Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for
acceptance. In short, both courts concluded that acceptance of the drafts by Philippine
Rayon was indispensable to make the latter liable thereon. We are unable to agree with this
proposition. The transaction in the case at bar stemmed from Philippine Rayon's
application for a commercial letter of credit with the petitioner in the amount of
$128,548.78 to cover the former's contract to purchase and import loom and textile
machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan.
Petitioner approved the application. As correctly ruled by the trial court in its Order of 6
March 1975: 9
". . . By virtue of said Application and Agreement for Commercial Letter of Credit,
plaintiff bank 1 0 was under obligation to pay through its correspondent bank in
Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said
letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the
defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills,
Inc., was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso
(sic) Company, Ltd. against said plaintiff bank together with any accruing
commercial charges, interest, etc. pursuant to the terms and conditions stipulated
in the Application and Agreement of Commercial Letter of Credit Annex "A"."

A letter of credit is defined as an engagement by a bank or other person made at the


request of a customer that the issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit. 1 1 Through a letter of credit, the
bank merely substitutes its own promise to pay for the promise to pay of one of its
customers who in return promises to pay the bank the amount of funds mentioned in the
letter of credit plus credit or commitment fees mutually agreed upon. 1 2 In the instant case
then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts
were presented for payment. In fact, there was no need for acceptance as the issued
drafts are sight drafts. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 1 3 The said
section reads:
"SECTION 143. When presentment for acceptance must be made. —
Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to fix the maturity
of the instrument; or

(b) Where the bill expressly stipulates that it shall be presented


for acceptance; or

(c) Where the bill is drawn payable elsewhere than at the


residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any


party to the bill liable."

Obviously then, sight drafts do not require presentment for acceptance.

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The acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer; 1 4 this may be done in writing by the drawee in the bill itself, or in a separate
instrument. 1 5
The parties herein agree, and the trial court explicitly ruled, that the subject drafts are sight
drafts. Said the latter: LLpr

". . . In the instant case the drafts being at sight, they are supposed to be payable
upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc.
time within which to pay the same. The first two drafts (Annexes C & D, Exh. X &
X-1) were duly accepted as indicated on their face (sic), and upon such
acceptance should have been paid forthwith. These two drafts were not paid and
although Philippine Rayon Mills ought to have paid the same, the fact remains
that until now they are still unpaid." 1 6

Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7
provides:
"SECTION 7. When payable on demand. — An instrument is payable on
demand —
(a) When so it is expressed to be payable on demand, or at
sight, or on presentation; or
(b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as


regards the person so issuing, accepting, or indorsing it, payable on demand."
(Emphasis supplied)

Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity
of any accepted draft, bill of exchange or indebtedness shall not be extinguished or
modified" 1 7 does not, contrary to the holding of the public respondent, contemplate
prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was
not even necessary in the first place because the drafts which were eventually issued
were sight drafts. And even if these were not sight drafts, thereby necessitating
acceptance, it would be the petitioner — and not Philippine Rayon — which had to
accept the same for the latter was not the drawee. Presentment for acceptance is
defined as the production of a bill of exchange to a drawee for acceptance. 1 8 The trial
court and the public respondent, therefore, erred in ruling that presentment for
acceptance was an indispensable requisite for Philippine Rayon's liability on the drafts
to attach. Contrary to both courts' pronouncements, Philippine Rayon immediately
became liable thereon upon petitioner's payment thereof. Such is the essence of the
letter of credit issued by the petitioner. A different conclusion would violate the
principle upon which commercial letter of credit are founded because in such a case,
both the beneficiary and the issuer. Nissho Company Ltd. and the petitioner,
respectively, would be placed at the mercy of Philippine Rayon even if the latter had
already received the imported machinery and the petitioner had fully paid for it. The
typical setting and purpose of a letter of credit are described in Hibernia Bank and
Trust Co. vs. J. Aron & Co., Inc., 1 9 thus:
"Commercial letters of credit have come into general use in international sales
transactions where much time necessarily elapses between the sale and the
receipt by a purchaser of the merchandise, during which interval great price
changes may occur. Buyers and sellers struggle for the advantage of position.
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The seller is desirous of being paid as surely and as soon as possible, realizing
that the vendee at a distant point has it in his power to reject on trivial grounds
merchandise on arrival, and cause considerable hardship to the shipper. Letters of
credit meet this condition by affording celerity and certainty of payment. Their
purpose is to insure to a seller payment of a definite amount upon presentation of
documents. The bank deals only with documents. It has nothing to do with the
quality of the merchandise. Disputes as to the merchandise shipped may arise
and be litigated later between vendor and vendee, but they may not impede
acceptance of drafts and payment by the issuing bank when the proper
documents are presented."

The trial court and the public respondent likewise erred in disregarding the trust receipt
and in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chi Ho, 2 0 this
Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 2 1 thus:
"By this arrangement a banker advances money to an intending importer, and
thereby lends the aid of capital, of credit, or of business facilities and agencies
abroad, to the enterprise of foreign commerce. Much of this trade could hardly be
carried on by any other means, and therefore it is of the first importance that the
fundamental factor in the transaction, the banker's advance of money and credit,
should receive the amplest protection. Accordingly, in order to secure that the
banker shall be repaid at the critical point — that is, when the imported goods
finally reach the hands of the intended vendee — the banker takes the full title to
the goods at the very beginning; he takes it as soon as the goods are bought and
settled for by his payments or acceptances in the foreign country, and he
continues to hold that title as his indispensable security until the goods are sold
in the United States and the vendee is called upon to pay for them. This security is
not an ordinary pledge by the importer to the banker, for the importer has never
owned the goods, and moreover he is not able to deliver the possession; but the
security is the complete title vested originally in the bankers, and this
characteristic of the transaction has again and again been recognized and
protected by the Courts. Of course, the title is at bottom a security title, as it has
sometimes been called, and the banker is always under the obligation to
reconvey; but only after his advances have been fully repaid and after the
importer has fulfilled the other terms of the contract."

As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 2 2 trust receipts:
". . . [I]n a certain manner. . . partake of the nature of a conditional sale as
provided by the Chattel Mortgage Law, that is, the importer becomes absolute
owner of the imported merchandise as soon as he has paid its price. The
ownership of the merchandise continues to be vested in the owner thereof or in
the person who has advanced payment, until he has been paid in full, or if the
merchandise has already been sold, the proceeds of the sale should be turned
over to him by the importer or by his representative or successor in interest."

Under P.D. No. 115, otherwise known as the Trust Receipts Law, which took effect on 29
January 1973, a trust receipt transaction is defined as "any transaction by and between a
person referred to in this Decree as the entruster, and another person referred to in this
Decree as the entrustee, whereby the entruster, who owns or holds absolute title or
security interests over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter's execution and delivery to the
entruster of a signed document called the trust receipt wherein the entrustee binds
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himself to hold the designated goods, documents or instruments in trust for the entruster
and to sell or otherwise dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the goods, instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt, or for other purposes substantially equivalent
to any one of the following: . . . ."
It is alleged in the complaint that private respondents "not only have presumably put said
machinery to good use and have profited by its operation and/or disposition but very
recent information that (sic) reached plaintiff bank that defendants already sold the
machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of
the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity,
defendants have willfully violated their duty to account for the whereabouts of the
machinery covered by the trust receipt or for the proceeds of any lease; sale or other
disposition of the same that they may have made, notwithstanding demands therefor;
defendants have fraudulently misapplied or converted to their own use any money realized
from the lease, sale, and other disposition of said machinery." 2 3 While there is no specific
prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the sale of
the machinery covered by the trust receipt, such relief is covered by the general prayer for
"such further and other relief as may be just and equitable on the premises." 2 4 And
although it is true that the petitioner commenced a criminal action for the violation of the
Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising
out of the trust receipt in a separate civil action. Under Section 13 of the Trust Receipts
Law, the failure of an entrustee to turn over the proceeds of the sale of goods, documents
or instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable under the provisions of Article 315,
paragraph 1(b) of the Revised Penal Code. 2 5 Under Article 33 of the Civil Code, a civil
action for damages, entirely separate and distinct from the criminal action, may be brought
by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under
fraud. cdll

We also conclude, for the reason hereinafter discussed, and not for that adduced by the
public respondent, that private respondent Chi's signature in the dorsal portion of the trust
receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal
portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause",
reads:
"In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying
with the foregoing, we jointly and severally agree and undertake to pay on
demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money
which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to
pay arising out of or pertaining to, and/or in any event connected with the default
of and/or non-fulfillment in any respect of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not
have to take any steps or exhaust its remedy against aforesaid:
before making demand on me/us.
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(Sgd.) Anacleto R. Chi
ANACLETO R. CHI" 2 6

Petitioner insists that by virtue of the clear wording of the statement, specifically the
clause ". . . we jointly and severally agree and undertake . . .," and the concluding sentence
on exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
"With respect to the second argument, we have our misgivings as to whether the
mere signature of defendant-appellee Chi of (sic) the guaranty agreement, Exhibit
"C-1", will make it an actionable document. It should be noted that Exhibit "C-1"
was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1"
shows that it was to be signed and executed by two persons. It was signed only
by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but
no one signed in that capacity. The last sentence of the guaranty clause is
incomplete. Furthermore, the plaintiff-appellant also failed to have the purported
guarantee clause acknowledged before a notary public. All these show that the
alleged guaranty provision was disregarded and, therefore, not consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully
executed and acknowledged still defendant-appellee Chi cannot be held liable
thereunder because the records show that the plaintiff-appellant had neither
exhausted the property of the defendant-appellant nor had it resorted to all legal
remedies against the said defendant-appellant as provided in Article 2058 of the
Civil Code. The obligation of a guarantor is merely accessory under Article 2052
of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore,
the liability of the defendant-appellee arises only when the principal debtor fails to
comply with his obligation." 2 7

Our own reading of the questioned solidary guaranty clause yields no other conclusion
than that the obligation of Chi is only that of a guarantor. This is further bolstered by the
last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in
this case because the space therein for the party whose property may not be exhausted
was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion
(excussion) may be raised by a guarantor before he may be held liable for the obligation.
Petitioner likewise admits that the questioned provision is a solidary guaranty clause,
thereby clearly distinguishing it from a contract of surety. It, however, described the
guaranty as solidary between the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and severally agree and undertake" refers
to the undertaking of the two (2) parties who are to sign it or to the liability existing
between themselves. It does not refer to the undertaking between either one or both of
them on the one hand and the petitioner on the other with respect to the liability described
under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e.,
it can be enforced to its full extent against any one of them.
Furthermore, any doubt as to the import or true intent of the solidary guaranty clause
should be resolved against the petitioner. The trust receipt, together with the questioned
solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's
participation therein is limited to the affixing of his signature thereon. It is, therefore, a
contract of adhesion; 2 8 as such, it must be strictly construed against the party
responsible for its preparation. 2 9
Neither can We agree with the reasoning of the public respondent that this solidary
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guaranty clause was effectively disregarded simply because it was not signed and
witnessed by two (2) persons and acknowledged before a notary public. While indeed, the
clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who
signed the same did not make his act an idle ceremony or render the clause totally
meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses
and the acknowledgment before a notary public are not required by law to make a party
liable on the instrument. The rule is that contracts shall be obligatory in whatever form they
may have been entered into, provided all the essential requisites for their validity are
present; however, when the law requires that a contract be in some form in order that it
may be valid or enforceable, or that it be proved in a certain way, that requirement is
absolute and indispensable. 3 0 With respect to a guaranty, 3 1 which is a promise to answer
for the debt or default of another, the law merely requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified.
3 2 While the acknowledgment of a surety before a notary public is required to make the
same a public document, under Article 1358 of the Civil Code, a contract of guaranty does
not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary liability
of Chi, namely the criminal proceedings against the latter for the violation of P.C. No. 115.
Petitioner claims that because of the said criminal proceedings, Chi would be answerable
for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public
respondent rejected this claim because such civil liability presupposes prior conviction as
can be gleaned from the phrase "without prejudice to the civil liability arising from the
criminal offense." Both are wrong. The said section reads:

"SECTION 13. Penalty Clause. — The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered by a trust
receipt to the extent of the amount owing to the entruster or as appears in the
trust receipt or to return said goods, documents or instruments if they were not
sold or disposed of in accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight
hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If
the violation or offense is committed by a corporation, partnership, association or
other juridical entities, the penalty provided for in this Decree shall be imposed
upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense."

A close examination of the quoted provision reveals that it is the last sentence which
provides for the correct solution. It is clear that if the violation or offense is committed by
a corporation, partnership, association or other juridical entities, the penalty shall be
imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense. The penalty referred to is imprisonment, the duration of which
would depend on the amount of the fraud as provided for in Article 315 of the Revised
Penal Code. The reason for this is obvious: corporations, partnerships, associations and
other juridical entities cannot be put in jail. However, it is these entities which are made
liable for the civil liability arising from the criminal offense. This is the import of the clause
"without prejudice to the civil liabilities arising from the criminal offense." And, as We
stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of
the Civil Code, petitioner was acting well within its rights in filing an independent civil
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action to enforce the civil liability arising therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case
against private respondent Chi. The trial court based the dismissal, and the respondent
Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any
capacity — either as surety or as guarantor — because his signature at the dorsal portion
thereof was useless; and even if he could be bound by such signature as a simple
guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay until
after petitioner has exhausted and resorted to all legal remedies against the principal
debtor, Philippine Rayon. The records fail to show that petitioner had done so. 33 Reliance
is thus placed on Article 2058 of the Civil Code which provides:
"ARTICLE 2058. The guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor, and has resorted to
all the legal remedies against the debtor."

Simply stated, there is as yet no cause of action against Chi.


We are not persuaded. Excussion is not a condition sine qua non for the institution of an
action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 3 4 this Court stated:
"4. Although an ordinary personal guarantor — not a mortgagor or pledgor —
may demand the aforementioned exhaustion, the creditor may, prior thereto,
secure a judgment against said guarantor, who shall be entitled, however, to a
deferment of the execution of said judgment against him until after the properties
of the principal debtor shall have been exhausted to satisfy the obligation
involved in the case."

There was then nothing procedurally objectionable in impleading private respondent Chi as
a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section
6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:
"SECTION 6. Permissive joinder of parties. — All persons in whom or against
whom any right to relief in respect to or arising out of the same transaction or
series of transactions is alleged to exist, whether jointly, severally, or in the
alternative, may, except as otherwise provided in these rules, join as plaintiffs or
be joined as defendants in one complaint, where any gotten of law or fact
common to all such plaintiffs or to all such defendants may arise in the action;
but the court may make such orders as may be just to prevent any plaintiff or
defendant from being embarrassed or put to expense in connection with any
proceedings in which he may have no interest."

This is the equity rule relating to multifariousness. It is based on trial convenience and is
designed to permit the joinder of plaintiffs or defendants whenever there is a common
question of law or fact. It will save the parties unnecessary work, trouble and expense. 3 5
However, Chi's liability is limited to the principal obligation in the trust receipt plus all the
accessories thereof including judicial costs; with respect to the latter, he shall only be
liable for those costs incurred after being judicially required to pay. 3 6 Interest and
damages, being accessories of the principal obligation, should also be paid; these,
however, shall run only from the date of the filing of the complaint. Attorney's fees may
even be allowed in appropriate cases. 3 7
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be
paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty
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and not the full extent of the latter's liability. All things considered, he can be held liable for
the sum of P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint as
against private respondent Chi and condemning petitioner to pay him P20,000 00 as
attorney's fees.
In the light of the foregoing, it would no longer be necessary to discuss the other issues
raised by the petitioner.
WHEREFORE, the instant Petition is hereby GRANTED. The appealed Decision of 10 March
1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9
(Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are
hereby REVERSED and SET ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the
twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust
receipt (Exhibit "C'), and ordering it to pay petitioner: (a) the amounts due thereon
in the total sum of P956,384.95 as of 15 September 1974, with interest thereon at
six percent (6%) per annum from 16 September 1974 until it is fully paid, less
whatever may have been applied thereto by virtue of foreclosure of mortgages, if
any; (b) a sum equal to ten percent (10%) of the aforesaid amount as attorney's
fees; and (c) the costs.

2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust


receipt and ordering him to pay the face value thereof, with interest at the legal
rate, commencing from the date of the filing of the complaint in Civil Case No Q-
19312 until the same is fully paid as well as the costs and attorney's fees in the
sum of P10,000.00 if the writ of execution for the enforcement of the above
awards against Philippine Rayon Mills, Inc. is returned unsatisfied.

Costs against private respondents.


SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ ., concur.
Footnotes

1. Rollo, 39-47; per Associate Justice Crisolito Pascual, concurred in by Associate Justices
Jose C. Campos, Jr. and Serafin E. Camilon.

2. Rollo, 39-41.

3. Rollo, 81-83.
4. Brief for Appellant, 1-4; Rollo, 85, et seq.

5. Rollo, 45-46.
6. Id., 48.

7. Rollo, 16.

8. Id., 131.
9. Record on Appeal, 123.

10. Herein petitioner.


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11. Black's Law Dictionary, Fifth ed., 813; DAVIDSON, KNOWLES, FORSYTHE AND
JESPERSEN, Business Law, Principles and Cases, 1984 ed., 390.

12. ROSE, Money and Capital Markets, 1983 ed., 692.


13. Act No. 2031.

14. Section 132, NIL.

15. Sections 133 and 134, Id.


16. Rollo, 66.

17. Id., 17.


18. AGBAYANI, A.F., Commercial Laws of the Philippines, 1987 ed., vol. 1, 409, citing
Windham Bank vs. Norton, 22 Conn, 213, 56 Am. Dec. 397.

19. 134 Misc. 18, 21-22, 233 N.Y.S. 486, 490-491, cited in Johnston vs. State Bank, 195
N.W. 2d 126, 130-131 (Iowa 1972), and excerpted in CORMAN, Commercial Law, Cases
and Materials, 1976 ed., 622.
20. 53 Phil. 874, 876-877 [1928]; see also, Samo vs. People, 115 Phil. 346 [1962].

21. 206 Fed., 726.

22. 63 Phil. 814, 821 [1936].


23. Record on Appeal, 6-7.

24. Id., 9.
25. Even before P.D. No. 115, these acts covered by Section 13 were already considered as
estafa; see People vs. Yu Chai Ho, supra.; Samo vs. People, supra.; Robles vs. Court of
Appeals, 199 SCRA 195 [1991].

26. Record on Appeal, 43.


27. Rollo, 45-46.

28. Sweet Lines, Inc. vs. Teves, 83 SCRA 361 [1978]; Angeles vs. Calasanz, 135 SCRA 323
[1985].
29. Western Guaranty Corp. vs. Court of Appeals, 187 SCRA 652 [1990]; BPI Credit Corp. vs.
Court of Appeals, 204 SCRA 601 [1991].

30. Article 1356, Civil Code.


31. Article 2047 of the Civil Code defines it as follows:

"By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so."
32. Article 1403 (2)(b), Civil Code.

33. Rollo, 75.

34. 99 Phil. 263, 268 [1956].


35. FRANCISCO, V.J., The Revised Rules of Court, vol. I, 1973 ed., 258.

36. Second paragraph, Article 2055, Civil Code; see National Marketing Corp. vs. Marquez,
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26 SCRA 722 [1969]; Republic vs. Pal-Fox Lumber Co., Inc., 43 SCRA 365 [1972].
37. Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 100 Phil. 679
[1957]; Philippine National Bank vs. Luzon Surety Co., Inc., 68 SCRA 207 [1975].

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FIRST DIVISION

[G.R. No. L-24821. October 16, 1970.]

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs. DE RENY


FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA
CARCERENY alias AURORA C. GONZALES, defendants-appellants.

Aviado & Aranda for plaintiff-appellee.


S. Emiliano Calma for defendants-appellants.

SYLLABUS

1. COMMERCIAL LAW; LETTERS OF CREDIT; TERMS OF COMMERCIAL LETTER OF CREDIT


AGREEMENTS, BINDING. — Where appellants agreed, under the terms of the Commercial
Letter of Credit Agreements, that the Bank shall not be responsible for the existence,
character, quality, quantity, conditions, packing, value or delivery of the property purporting
to be represented by the documents; nor, for any difference in character, quality, quantity,
condition, or value of the property from that expressed in documents, or for partial or
incomplete shipment, etc., said appellants have no recourse but to comply with the
covenant.
2. ID.; ID.; CUSTOMS AND USAGES IN INTERNATIONAL BANKING AND FINANCIAL
CIRCLES. — Where it is proven as a fact that a custom exists to the effect that a bank is not
duty bound to verify whether what has been described in the letters of credit or drafts or
shipping documents actually tallies with what was loaded aboard the ship, appellants
cannot shift the burden of loss to the bank arising from the violation by their vendor of its
presentation. Article 10 of the Uniform Customs and Practices for Documentary Credits
Fixed for the Thirteenth Congress of International Chamber of Commerce to which the
Philippines is a signatory nation provides that, "in documentary credit operations, all
parties concerned deal in documents and not in goods. Payment, negotiation or
acceptance against documents in accordance with the terms and conditions of a credit by
a Bank authorized to do so binds the party giving the authorization to-take up the
documents and reimburse the Bank making the payment, negotiation or acceptance."

DECISION

CASTRO , J. :

This is an appeal from the decision of the Court of First Instance of Manila ordering the
defendants-appellants to pay to the Bank of the Philippine Islands (hereinafter referred to
as the Bank), jointly and severally, the value of the credit it extended to them in several
letters of credit which the Bank opened at the behest of the defendants-appellants to
finance their importation of dyestuffs from the United States, which however turned out to
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be mere colored chalk upon arrival and inspection thereof at the port of Manila.
The record shows that on four (4) different occasions in 1961, the De Reny Fabric
Industries, Inc., a Philippine corporation through its co-defendants-appellants, Aurora
Carcereny, alias Aurora C. Gonzales, and Aurora T. Tuyo, president and secretary,
respectively of the corporation, applied to the Bank for four (4) irrevocable commercial
letters of credit to cover the purchase by the corporation of goods described in the
covering L/C applications as "dyestuffs of various colors" from its American supplier, the
J.B. Distributing Company. All the applications of the corporation were approved, and the
corresponding Commercial L/C Agreements were executed pursuant to banking
procedures. Under these agreements, the aforementioned officers of the corporation
bound themselves personally as joint and solidary debtors with the corporation. Pursuant
to banking regulations then in force, the corporation delivered to the Bank peso marginal
deposits as each letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved as well as the peso marginal
deposits made were, respectively, as follows:
Date Application Amount Marginal
& L/C No Deposit
Oct. 10, 1961 61/1413 $57,658.38 P 43,407.33
Oct. 23, 1961 61/1483 $25,867.34 19,473.64
Oct. 30, 1961 61/1495 $19,408.39 14,610.88
Nov. 10, 1961 61/1564 $26,687.64 20,090.90

TOTAL $129,621.75 P97,582.75

By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of
credit addressed to its correspondent banks in the United States, with uniform
instructions for them to notify the beneficiary thereof, the J.B. Distributing Company, that
they have been authorized to negotiate the latter's sight drafts up to the amounts
mentioned therein, respectively, if accompanied, upon presentation, by a full set of
negotiable clean "on board" ocean bills of lading, covering the merchandise appearing in
the L/Cs, that is, dyestuffs of various colors. Consequently, the J.B. Distributing Company
drew upon, presented to and negotiated with these banks, its sight drafts covering the
amounts of the merchandise ostensibly being exported by it, together with clean bills of
lading, and collected the full value of the drafts up to the amounts appearing in the L/Cs as
above indicated. These correspondent banks then debited the account of the Bank of the
Philippine Islands with them up to the full value of the drafts presented by the J.B.
Distributing Company, plus commission thereon, and, thereafter, endorsed and forwarded
all documents to the Bank of the Philippine Islands.
In the meantime, as each shipment (covered by the abovementioned letters of credit)
arrived in the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the
Bank amounting, in the aggregate, to P90,000. Further payments were, however,
subsequently discontinued by the corporation when it became established, as a result of a
chemical test conducted by the National Science Development Board, that the goods that
arrived in Manila were colored chalks instead of dyestuffs.
The corporation also refused to take possession of these goods, and for this reason, the
Bank caused them to be deposited with a bonded warehouse paying therefor the amount
of P12,609.64 up to the filing of its complaint with the court below on December 10, 1962.
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On October 24, 1963 the lower court rendered its decision ordering the corporation and its
co-defendants (the herein appellants) to pay to the plaintiff-appellee the amount of
P291,807.46, with interest thereon, as provided for in the L/C Agreements, at the rate of
7% per annum from October 31, 1962 until fully paid, plus costs.
It is the submission of the defendants-appellants that it was the duty of the foreign
correspondent banks of the Bank of the Philippine Islands to take the necessary
precaution to insure that the goods shipped under the covering L/Cs conformed with the
item appearing therein, and, that the foregoing banks having failed to perform this duty, no
claim for recoupment against the defendants-appellants, arising from the losses incurred
for the non-delivery or defective delivery of the articles ordered, could accrue.
We can appreciate the sweep of the appellants' argument, but we also find that it is
nestled hopelessly inside a salient where the valid contract between the parties and the
internationally accepted customs of the banking trade must prevail. 1
Under the terms of their Commercial Letter of Credit Agreements with the Bank, the
appellants agreed that the Bank shall not be responsible for the "existence, character,
quality, quantity, conditions, packing, value, or delivery of the property purporting to be
represented by documents; for any difference in character, quality, quantity, condition, or
value of the property from that expressed in documents," or for "partial or incomplete
shipment, or failure or omission to ship any or all of the property referred to in the Credit,"
as well as "for any deviation from instructions, delay, default or fraud by the shipper or
anyone else in connection with the property the shippers or vendors and ourselves
[purchasers] or any of us." Having agreed to these terms, the appellants have, therefore, no
recourse but to comply with their covenant. 2
But even without the stipulation recited above, the appellants cannot shift the burden of
loss to the Bank on account of the violation by their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial below that banks, in providing
financing in international business transactions such as those entered into by the
appellants, do not deal with the property to be exported or shipped to the importer, but
deal only with documents. The Bank introduced in evidence a provision contained in the
"Uniform Customs and Practices for Commercial Documentary Credits Fixed for the
Thirteenth Congress of International Chamber of Commerce," to which the Philippines is a
signatory nation. Article 10 thereof provides:
"In documentary credit operations, all parties concerned deal in
documents and not in goods.—Payment, negotiation or acceptance against
documents in accordance with the terms and conditions of a credit by a
Bank authorized to do so binds the party giving the authorization to take up
the documents and reimburse the Bank making the payment, negotiation or
acceptance."

The existence of a custom in international banking and financing circles negating any duty
on the part of a bank to verify whether what has been described in letters of credits or
drafts or shipping documents actually tallies with what was loaded aboard ship, having
been positively proven as a fact, the appellants are bound by this established usage. They
were, after all, the ones who tapped the facilities afforded by the Bank in order to engage in
international business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This is
without prejudice to the Bank, in proper proceedings in the court below in this same case,
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proving and being reimbursed additional expenses, if any, it has incurred by virtue of the
continued storage of the goods in question up to the time this decision becomes final and
executory.
Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor
and Makasiar, JJ., concur.
Concepcion, C.J., is on official leave.

Footnotes

1. The power of our courts to accept in evidence, international custom as evidence of a general
practice accepted as law, may be said to be derived from both Constitutional as well as
statutory sources. Section 3, Article II of the Constitution provides that "The Philippines
renounces war as an instrument of national policy, and adopts the generally accepted
principles of international law as a part of the law of the Nation." Art. 9 of the New Civil
Code provides that "No court or judge shall decline to render judgment by reason of the
silence, obscurity or insufficiency of the law," and Art. 12 of the same Code provides that
"A custom must be proved as a fact, according to the rules of evidence." The Code of
Commerce, in its Article 2, likewise provides that "Acts of commerce, whether those who
execute them be merchants or not, and whether specified in this Code or not, should be
governed by the provisions contained in it, in their absence, by the usages of commerce
generally observed in each place; and in the absence of both rules, by those of the civil
law." "Those acts contained in this Code and all others of analogous character, shall be
deemed acts of commerce." It must be noted that certain principles governing the
issuance, acceptance and payment of letters of credit are specifically provided for in the
Code of Commerce.

2. Article 12 of the Commercial Letter of Credit Agreement provides, inter alia: "The users of the
Credit shall be deemed our agents and we assume all risks of their acts or omissions.
Neither you nor your correspondents shall be responsible: for the existence, character,
quality, quantity, condition, packing, value, or delivery of the property purporting to be
represented by documents; for any difference in character, quality, quantity, condition, or
value of the property from that expressed in documents; . . . for partial or incomplete
shipment, or failure or omission to ship any or all of the property referred to in the Credit;
. . . for any deviation from instructions, delay, default or fraud by the shipper or anyone
else in connection with the property or the shipping thereof; . . . for any breach of
contract between the shipper or vendors and ourselves or any of us; . . . We are
responsible to you for all obligations imposed upon you with respect to the Credit or the
relative drafts, documents or property. In furtherance and extension and not in limitation
of the specific provisions hereinbefore set forth, we agree that any action taken by you or
by any correspondent of yours under or in connection with the Credit or the relative
drafts, documents or property, if taken in good faith, shall be binding on us and shall not
put you or your correspondent under any resulting liability to us; and we make like
agreement as to any inaction or omission, unless in breach of good faith."

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FIRST DIVISION

[G.R. No. 73271. May 29, 1987.]

SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA , defendants-


appellants, vs. INSULAR BANK OF ASIA AND AMERICA , plaintiff-appellee.

DECISION

MELENCIO-HERRERA , J : p

This case was appealed to the Intermediate Appellate Court which, however, certified the
same to this Court, the issue involved being purely legal.
The facts are not disputed.
On August 20, 1975 the spouses Tirso and Loreta Vintola (the VINTOLAS, for short), doing
business under the name and style "Dax Kin International," engaged in the manufacture of
raw sea shells into finished products, applied for and were granted a domestic letter of
credit by the Insular Bank of Asia and America (IBAA), Cebu City. 1 in the amount of
P40,000.00. The Letter of Credit authorized the bank to negotiate for their account drafts
drawn by their supplier, one Stalin Tan, on Dax Kin International for the purchase of puka
and olive seashells. In consideration thereof, the VINTOLAS, jointly and severally, agreed to
pay the bank "at maturity, in Philippine currency, the equivalent of the aforementioned
amount or such portion thereof as may be drawn or paid, upon the faith of the said credit
together with the usual charges."
On the same day, August 20, 1975, having received from Stalin Tan the puka and olive
shells worth P40,000.00, the VINTOLAS executed a Trust Receipt agreement with IBAA,
Cebu City. Under that Agreement, the VINTOLAS agreed to hold the goods in trust for IBAA
as the "latter's property with liberty to sell the same for its account, "and "in case of sale" to
turn over the proceeds as soon as received to IBAA. The due date indicated in the
document was October 19, 1975.
Having defaulted on their obligation, IBAA demanded payment from the VINTOLAS in a
letter dated January 1, 1976. The VINTOLAS, who were unable to dispose of the shells,
responded by offering to return the goods. IBAA refused to accept the merchandise, and
due to the continued refusal of the VINTOLAS to make good their undertaking, IBAA
charged them with Estafa for having misappropriated, misapplied and converted for their
own personal use and benefit the aforesaid goods. During the trial of the criminal case the
VINTOLAS turned over the seashells to the custody of the Trial Court.
On April 12, 1982, the then Court of First Instance of Cebu, Branch VII, acquitted the
VINTOLAS of the crime charged, after finding that the element of misappropriation or
conversion was in-existent. Concluded the Court:
"Finally, it should be mentioned that under the trust receipt, in the event of default
and/or non-fulfillment on the part of the accused of their undertaking, the bank is
entitled to take possession of the goods or to recover its equivalent value together
with the usual charges. In either case, the remedy of the Bank is civil and not
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criminal in nature. . . ." 2

Shortly thereafter, IBAA commenced the present civil action to recover the value of the
goods before the Regional Trial Court of Cebu, Branch XVI.
Holding that the complaint was barred by the judgment of acquittal in the criminal case,
said Court dismissed the complaint. However, on IBAA's motion, the Court granted
reconsideration and: LLpr

"1. Order(ed) defendants jointly and severally to pay the plaintiff the sum of
Seventy Two Thousand Nine Hundred Eighty Two and 27/100 (P72,982.27),
Philippine Currency, plus interest of 14% per annum and service charge of one
(1%) per cent per annum computed from judicial demand and until the obligation
is fully paid;

"2. Order(ed) defendants jointly and severally to pay attorney's fees to the
plaintiff in the sum of Four Thousand (P4,000.00) pesos, Philippine Currency,
plus costs of the suit." 3

The VINTOLAS rest their present appeal on the principal allegation that their acquittal in
the Estafa case bars IBAA's filing of the civil action because IBAA had not reserved in the
criminal case its right to enforce separately their civil liability. They maintain that by
intervening actively in the prosecution of the criminal case through a private prosecutor,
IBAA had chosen to file the civil action impliedly with the criminal action, pursuant to
Section 1, Rule 111 of the 1985 Rules on Criminal Procedure, reading:
"Section 1. Institution of criminal and civil action. — When a criminal action is
instituted, the civil action for the recovery of civil liability arising from the offense
charged is impliedly instituted with the criminal action, unless the offended party
expressly waives the civil action or reserves his right to institute it separately. . . ."

and that since the judgment in the criminal case had made a declaration that the facts
from which the civil action might arise did not exist, the ling of the civil action arising
from the offense is now barred, as provided by Section 3-b of Rule 111 of the same
Rules providing:
"(b) Extinction of the penal action does not carry with it extinction of the civil,
unless the extinction proceeds from a declaration in a final judgment that the fact
from which the civil might arise did not exist. In other cases, the person entitled to
the civil action may institute it in the jurisdiction in the manner provided by law
against the person who may be liable for restitution of the thing and reparation or
indemnity for the damage suffered."

Further, the VINTOLAS take the position that their obligation to IBAA has been
extinguished inasmuch as, through no fault of their own, they were unable to dispose of the
seashells, and that they have relinguished possession thereof to the IBAA, as owner of the
goods, by depositing them with the Court.
The foregoing submission overlooks the nature and mercantile usage of the transaction
involved. A letter of credit-trust receipt arrangement is endowed with its own distinctive
features and characteristics. Under that set-up, a bank extends a loan covered by the
Letter of Credit, with the trust receipt as a security for the loan. In other words, the
transaction involves a loan feature represented by the letter of credit, and a security
feature which is in the covering trust receipt. LLpr

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Thus, Section 4 of P.D. No. 115 defines a trust receipt transaction as:
". . . any transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as the entrustee,
whereby the entruster, who owns or holds absolute title or security interests
over certain speci ed goods, documents or instruments, releases the same
to the possession of the entrustee upon the latter's execution and delivery to
the entruster of a signed document called a 'trust receipt' wherein the
entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the
goods, documents or instrument thereof to the extent of the amount owing
to the entruster or as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions speci ed in the trust receipt, or for
other purposes substantially equivalent to any one of the following:

1. In the case of goods or documents, (a) to sell the goods or procure their
sale, . . ."

A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a


"security interest" in the goods. "It secures an indebtedness and there can be no such thing
as security interest that secures no obligation." 4 As defined in our laws:
(h) "Security Interest means a property interest in goods, documents or
instruments to secure performance of some obligations of the entrustee or of
some third persons to the entruster and includes title, whether or not expressed to
be absolute, whenever such title is in substance taken or retained for security
only." 5

As elucidated in Samo vs. People 6 "a trust receipt is considered as a security transaction
intended to aid in financing importers and retail dealers who do not have sufficient funds
or resources to finance the importation or purchase of merchandise, and who may not be
able to acquire credit except through utilization, as collateral of the merchandise imported
or purchased."
Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the
goods. It was merely the holder of a security title for the advances it had made to the
VINTOLAS. The goods the VINTOLAS had purchased through IBAA financing remain their
own property and they hold it at their own risk. The trust receipt arrangement did not
convert the IBAA into an investor; the latter remained a lender and creditor.
". . . for the bank has previously extended a loan which the L/C represents to
the importer, and by that loan, the importer should be the real owner of the
goods. If under the trust receipt, the bank is made to appear as the owner, it
was but an arti cial expedient, more of a legal ction than fact, for if it were
so, it could dispose of the goods in any manner it wants, which it cannot do,
just to give consistency with the purpose of the trust receipt of giving a
stronger security for the loan obtained by the importer. To consider the bank
as the true owner from the inception of the transaction would be to disregard
the loan feature thereof. . . ." 7

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably
claim that because they have surrendered the goods to IBAA and subsequently deposited
them in the custody of the court, they are absolutely relieved of their obligation to pay their
loan because of their inability to dispose of the goods. The fact that they were unable to
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sell the seashells in question does not affect IBAA's right to recover the advances it had
made under the Letter of Credit. In so arguing, the VINTOLAS conveniently close their eyes
to their application for a Letter of Credit wherein they expressly obligated themselves in
these terms: LLphil

"IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in
Philippine Currency the equivalent of the above amount or such portion thereof as
may be drawn or paid upon the faith of said credit together with the usual
charges. . . ." (Exhibit "A").

They further agreed that their marginal deposit of P8,000.00, later increased to
P11,000.00.
"be applied, without further proceedings or formalities to pay or reduce our
obligation under this letter of credit or its corresponding Trust Receipt ."
(Emphasis supplied) 8

The foregoing premises considered, it follows that the acquittal of the VINTOLAS in the
Estafa case is no bar to the institution of a civil action for collection. It is inaccurate for the
VINTOLAS to claim that the judgment in the estafa case had declared that the facts from
which the civil action might arise, did not exist, for, it will be recalled that the decision of
acquittal expressly declared that "the remedy of the Bank is civil and not criminal in nature."
This amounts to a reservation of the civil action in IBAA's favor, for the Court would not
have dwelt on a civil liability that it had intended to extinguish by the same decision. 9 The
VINTOLAS are liable ex contractu for breach of the Letter of Credit — Trust Receipt,
whether they did or they did not "misappropriate, misapply or convert" the merchandise as
charged in the criminal case. 1 0 Their civil liability does not arise ex delicto, the action for
the recovery of which would have been deemed instituted with the criminal action (unless
waived or reserved) and where acquittal based on a judicial declaration that the criminal
acts charged do not exist would have extinguished the civil action. 1 1 Rather, the civil suit
instituted by IBAA is based ex contractu and as such is distinct and independent from any
criminal proceedings and may proceed regardless of the result of the latter. Under the
situational circumstances of the parties, they are governed by Article 31 of the Civil Code,
explicitly providing:
"Art. 31. When the civil action is based on an obligation not arising from the
act or omission complained of as a felony, such civil action may proceed
independently of the criminal proceedings and regardless of the result of the
latter."

WHEREFORE, finding no reversible error in the judgment appealed from, the same is hereby
AFFIRMED. No costs.
SO ORDERED.
Yap (Chairman), Narvasa, Cruz, Gancayco and Sarmiento, JJ., concur.
Feliciano, J., is on leave.
Footnotes

1. The IBAA has since merged with the Philippine Commercial and Industrial Bank, with the
latter as the surviving bank.

2. Pp. 11 & 12, Original Record.


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3. P. 2, Appellants' Brief, p. 16, Rollo.
4. 48 Cal. Jur. 633, section 4.
5. Section 3, P.D. No. 115.

6. L-17603-04, May 31, 1962, 5 SCRA 354, citing 53 Am. Jur. 961.
7. Sia vs. People, L-30896, April 28, 1983, 121 SCRA 655.

8. Application for Commercial Letter of Credit, Exhibit "A," p. 5, Original Record.


9. PNB vs. Catipon, L-6662, January 31, 1956, 98 Phil. 286.

10. PNB vs. Catipon, supra.


11. Section 3 (b) Rule 111, Rules of Court.

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