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evident that the intention of the parties was neither to set


aside the previous contracts nor to substitute Exhibit D
FIRST DIVISION therefor.
2. ID; ID; AN OBLIGATION WHICH BECOMES
[G.R. No. 43670. February 25, 1937.] DUE UPON DEMAND IS NOT ONE WITH A TERM. — In
his second assignment of error the defendant contends
PEOPLES BANK & TRUST that the court should have held that the obligation
COMPANY, plaintiff-appellee, vs. W. J. contracted by him was with a term, and the parties not
ODOM, defendant-appellant. having fixed the date of payment, the plaintiff should have
first brought an action to fix said date under article 1128 of
the Civil Code providing that, when it is to be inferred from
Gibbs, McDonough & Ozaeta for appellant. the nature and circumstances of the obligation that it was
intended to grant the debtor time to pay, and the term is
Ohnick & Opisso for appellee. not otherwise stated, the courts should fix the date of the
maturity of the obligation. The contract Exhibit D is a
complement of the contracts Exhibits B and C, hence, its
SYLLABUS
language and the intention of the parties must be
interpreted in relation to and jointly with those of the latter
1. CIVIL CODE; CONTRACTS; EFFECT OF A under the provisions of article 1285 of the same Code. It
SUBSEQUENT CONTRACT EXECUTED BETWEEN THE was expressly stipulated in Exhibits B and C that the
SAME PARTIES; INTERPRETATION. — The defendant obligation contracted by the defendant shall expire and be
contends in his first assigned error that the contract Exhibit due upon demand of the plaintiff, and in view of the fact
D took the place of the previous contracts Exhibits B and that the latter deed was incorporated in Exhibit D as above
C. To resolve this point it is necessary to take into account stated and that the defendants as required by the plaintiff
the intention of the parties expressed in the contract to pay all his indebtedness, it is plain that the obligation
Exhibit D and the terms in which it was drawn. It was was without a term and that it became due and is
executed, according to the contract itself, as a result of the demandable. Wherefore, article 1128 of the Civil Code
increase of the overdraft to P165,000 as well as of the relied upon is not applicable.
additional guaranty given by the defendant consisting of
3. ID; ID; ASSIGNMENT OF RIGHTS TO SECURE
the assignment by the way of guaranty of his rights in the
AN OBLIGATION IS IN EFFECT A MORTGAGE. — The
contracts of lease of the Edward J. Nell Company Building
subject of the third assignment of error is the ruling of the
and of his rights in the land occupied by the said building.
court that the contracts evidenced by Exhibits B, C and D
Clause 3 of said contract stipulated that the contract
are one of mortgage and that the plaintiff's action is for the
Exhibit C of April 26, 1928, was incorporated therein and
foreclosure thereof. The defendant vigorously argued that
also constituted a guaranty of the payment of the overdraft
none of the three contracts is one of mortgage, but an
as increased to P165,000. In the light of these facts, it is
assignment of rights, because in none of said contracts did
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the parties intend to constitute a mortgage. A careful latter, and to foreclose the mortgage of properties to
examination of the documents shows in our opinion that guarantee his obligation. The defendant appealed from the
they were really mortgage contracts inasmuch as they judgment of the Court of First Instance of Manila ordering
were executed to guarantee the principal obligations of the him to pay to the plaintiff the sum of P138,403.68, with 9
defendant consisting of the overdrafts or the indebtedness per cent interest per annum from January 4, 1934, until
resulting therefrom. It positively appears in each of them fully paid, plus P500 as attorney's fees, and the costs. The
that the defendant assigned to the plaintiff all his rights in judgment decreed that the principal and interest should be
the contracts of lease, in the land, and in the insurance paid within three months, failing which the mortgaged
policy, to guarantee his indebtedness resulting from the properties will be sold at public auction, consisting of the
overdrafts. An assignment to guarantee an obligation is in rights title and interest of the defendant in the contracts of
effect a mortgage, and not an absolute conveyance of title lease of the buildings known as the "Sugar News Co.
which confers ownership on the assignee. (Title Guaranty Building" and "Edward J. Nell Co. Building" as well as his
& Surety Co. vs. Witmire, 195 Fed., 41, 44; Polhemus vs. rights, title, and interest in the land on which the two
Trainer, 30 Cal., 685; Campbell vs. Woodstock Iron Co., 83 buildings are constructed, and that the proceeds of the
Ala., 351; Dunham vs. Whitehead, N. Y., 131; Woodward sale should be applied to the payment of the amount of the
vs. Crump, 32 S. W., 195.) In Exhibits C and D it was judgment.
stipulated, among other things, that if the defendant should On January 12, 1927, the defendant entered into a
comply with all the conditions of the contracts and should contract with A. D. Gibbs (Exhibit E) whereby the latter
pay his indebtedness together with interest at 9 per cent authorized him to construct two concrete buildings of three
per annum, the assignments would become null and void, floors each, upon his land on Loaisa Street, District of
otherwise they would remain in full force. If the parties' Binondo, City of Manila, described in a certificate of title
intention, as contended by the defendant, were that the No. 27584. Upon that date, the building known as the
assignments are absolute, and not by way of guaranty or Sugar News Co. Building was completely constructed and
mortgage, the stipulation would not have been made its first floor was occupied by the Peoples Bank & Trust
because it would be inconsistent with the will of the Co., but the two upper floors were not fully equipped; the
contracting parties. other building known as the "Edward J. Nell Co. Building"
was then under construction. Under the contract the
defendant bore all the expenses of construction of the
DECISION "Sugar News Co. Building," and in consideration thereof
Gibbs assigned to him all the rents which the building may
produce for a period of eight (8) years from November 1,
1926, as to the first floor then already occupied, and as to
IMPERIAL, J p: the other floors to be equipped, from the date they are thus
fully equipped. As to the other building, "Edward J. Nell Co.
The plaintiff brought this action to recover from the Building", the parties agreed that the defendant would also
defendant the balance of an overdraft owing to it from the bear all the expenses of construction until it is fully
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completed, and in consideration thereof Gibbs assigned to which he may enter into in the future, and the rights, title
him all the rents which it may produce for a period of eight and interest which he had in the land occupied by the
(8) years and three (3) months from the date of the building according to his contract with A. D. Gibbs on
termination of its construction; this period, however, to be January 12, 1927.
counted from the completion of each floor in the event that On the same date, January 20, 1931, the plaintiff
the floors composing the building should not be completed and the defendant executed Exhibit F, whereby the latter
and equipped at the same time. assigned to the former his right to collect the rents of the
By virtue of contracts entered into with the plaintiff, "Edward J. Nell Company Building" to secure the payment
the defendant obtained an overdraft from the former of the overdraft of P165,000 with interest at 9 per cent per
amounting to P110,000. To secure this overdraft, the annum. The annual rentals then produced by the building
defendant, on April 26, 1928, assigned to the plaintiff all were the following: from Edward J. Nell Company P1,300,
his rights, title and interest in the contracts of lease with the from El Progreso P300 and from the Lyric Film Exchange,
Sugar News Company, Manila Machinery & Supply Co., Inc., successor of France & Goulette, P800.
Inc., and T. Yamamoto of the various portions of the Pursuant to the aforesaid contracts, the defendant
"Sugar News Company Building", as well as the rights, title drew funds upon the plaintiff by way of overdrafts, and on
and interest which he had acquired in the land on which January 4, 1934, his account showed a balance against
the said building was constructed under the contract which him in the amount of P138,403.68, including stipulated
he had with A. D. Gibbs. As additional security, the interest up to said date.
defendant also assigned to the plaintiff his insurance policy
No. 402894 for P100,000 issued by the Manufacturers Life The defendant contends in his first assigned error
Insurance Company (Exhibit C). that the contract Exhibit D took the place of the previous
contracts Exhibits B and C. To resolve this point, it is
The overdraft was increased to P150,000, and to necessary to take into account the intention of the parties
secure the payment thereof the defendant executed expressed in the contract Exhibit D and the terms in which
Exhibit B on September 18, 1928, in favor of the plaintiff, it was drawn. It was executed, according to the contract
whereby he assigned to the latter also by way of guaranty itself, as a result of the increase of the overdraft to
the same securities which he had given for the overdraft of P165,000 as well as of the additional guaranty given by the
P110,000. defendant, consisting of the assignment by way of
On January 20, 1931, the overdraft was again guaranty of his rights in the contracts of lease of the
increased to P165,000, and to guarantee the payment Edward J. Nell Company Building and of his rights in the
thereof the defendant executed Exhibit D whereby he land occupied by the said building. Clause 3 of said
assigned to the plaintiff his rights, title and interest in the contract stipulated that the contract Exhibit C of April 26,
contracts of lease with Edward J. Nell Company, El 1928, was incorporated therein and also constituted a
Progreso Inc., and France & Goulette of various portions of guaranty of the payment of the overdraft as increased to
the "Edward J. Nell Company Building"; in whatever P65,000. In the light of all these facts, it is evident that the
contracts of lease of any portion of the same building
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intention of the parties was neither to set aside the inasmuch as they were executed to guarantee the principal
previous contracts nor to substitute Exhibit D therefor. obligations of the defendant, consisting of the overdrafts or
the indebtedness resulting therefrom. It positively appears
in each of them that the defendant assigned to the plaintiff
In his second assignment of error the defendant all his rights in the contracts of lease, in the land, and in
contends that the court should have held that the the insurance policy to guarantee his indebtedness
obligation contracted by him was with a term, and the resulting from the overdrafts. An assignment to guarantee
parties not having fixed the date of payment, the plaintiff an obligation is in effect a mortgage and not an absolute
should have first brought an action to fix said date under conveyance of title which confers ownership on the
article 1128 of the Civil Code providing that, when it is to assignee. (Title Guaranty & Surety Co vs. Witmire, Fed.,
be inferred from the nature and circumstances of the 41, 44; Polhemus vs. Woodstock Iron Co., 83 Ala., 351;
obligation that it was intended to grant the debtor time to Dunham vs. Whitehead, 21 N. Y., 131; Woodward vs.
pay, and the term is not otherwise stated, the courts should Crump, 32 S. W., 195.) In Exhibits C and D it was
fix the date of the maturity of the obligation. The contract stipulated, among other things, that if the defendant should
Exhibit D is a complement of the contracts Exhibits B and comply with all the conditions of the contracts and should
C, hence, its language and the intention of the parties must pay his indebtedness, together with interest at 9 per cent
be interpreted in relation to and jointly with those of the per annum, the assignments would become null and void,
latter under the provisions of article 1285 of the same otherwise they would remain in full force. If the parties'
Code. It was expressly stipulated in Exhibits B and C that intention, as contended by the defendant, were that the
the obligation contracted by the defendant shall expire and assignments are absolute, and not by way of guaranty or
be due upon demand of the plaintiff, and in view of the fact mortgage, the stipulation would not have been made
that the latter deed was incorporated in Exhibit D as above because it would be inconsistent with the will of the
stated and that the defendant was required by the plaintiff contracting parties. Wherefore, we hold that the third
to pay all his indebtedness, it is plain that the obligation assignment of error is untenable.
was without a term and that it became due and is
demandable. Wherefore, article 1128 of the Civil Code As a corollary of his theory that the contracts are
relied upon is not applicable. absolute conveyances, the defendant contends in his
fourth and last assignment of error that his civil liability has
The subject of the third assignment of error is the ceased and that he does not owe the plaintiff anything.
ruling of the court that the contracts evidenced by Exhibits The conclusions that we have reached in resolving the
B, C and D are one of mortgage and that the plaintiff's next preceding assignment of error show that this last
action is for the foreclosure thereof. The defendant contention of the defendant is equally untenable. The
vigorously argues that none of the three contracts is one of assignments he made not being absolute, and the plaintiff
mortgage, but an assignment of rights, because in none of having established that he has not paid his total overdraft,
said contracts did the parties intend to constitute a inasmuch as he still owes the amount of money above
mortgage. A careful examination of the documents shows, stated, with interest, it is evident that he is not yet relieved
in our opinion, that they were really mortgage contracts of his obligation.
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Before closing, it is necessary to pass upon an


aspect of the case which substantially affects the rights of ||| (Peoples Bank & Trust Co. vs. Odom, G.R. No. 43670,
the defendant. Under the contracts, the plaintiff was
[February 25, 1937], 64 PHIL 126-134)
authorized to collect the rents of the two buildings during
the period of the existence of the contracts of lease, which
period, in turn, might be that fixed in the contract entered
into between the defendant and A. D. Gibbs. We use the
conditional form because the contracts of lease have not
been put in evidence, hence, we cannot point out the
duration thereof with precision. On the other hand, the
plaintiff liquidated the account of the defendant up to
January 4, 1934, only, and in the appealed judgment it was
decreed that the mortgaged rights be sold at public auction
should the defendant fail to pay his indebtedness within
three months. If the indebtedness has already been paid
with the rents which the plaintiff failed to account for, then
there would be no ground to take this step. If the
indebtedness has not yet been fully paid, neither would it
be proper to sell any of the rights in the mortgage contracts
of lease because the latter have already matured
according to the contract with Gibbs. For this reason, it is
necessary to provide for the one and the other case. As to
the insurance policy, nothing can be said about it as the
appealed judgment is silent thereon.

In view of the foregoing, we affirm the appealed
judgment, except that part ordering the public sale of the
mortgaged rights, with the costs to the defendant and
appellant. The plaintiff is ordered to account to the
defendant for the rents received from the two buildings
which have not been included in its liquidation, Exhibit G-4,
and within ten days from notice of this judgment by the
court of origin, it shall file a written liquidation showing the
final state of the account of the defendant. So ordered.
Avanceña, C. J., Villa-Real, Abad Santos, Diaz,
Laurel and Concepcion, JJ., concur.
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EN BANC 1877 of the old Civil Code substantially reproduced in Articles


415 and 2127 respectively of the new Civil Code, the
[G.R. No. L-17500. May 16, 1967.] properties in question being machinery, receptacles,
instruments or replacements intended by the owner of the
tenement for an industry or works which may be carried on in
PEOPLE'S BANK AND TRUST CO. and a building or on a piece of land, and shall tend directly to meet
ATLANTIC, GULF AND PACIFIC CO. OF the needs of the said industry or works, are classified as
MANILA, plaintiffs and immovable properties, therefore not covered by the Chattel
appellants, vs. DAHICAN LUMBER Mortgage Law.
COMPANY, DAHICAN AMERICAN
LUMBER CORPORATION, and CONNELL 3. ID.; ID.; ID.; ID; ID.; SUPPLIERS NOT FINANCIERS
BROS. CO. (PHIL.), defendants and CONSIDERED UNPAID SELLERS. — Unpaid sellers who
appellants. were the suppliers or vendors of the after acquired properties
and not the financiers, like the defendants herein can claim a
right superior to the lien constituted on said properties by
Angel S. Gamboa for defendants-appellants. virtue of the deeds of mortgage under foreclosure.
Laurel Law Offices for plaintiffs-appellants. 4. ID.; ID.; ID.; ID.; ID.; FORECLOSURE PRIOR TO
MATURITY OF PROMISSORY NOTE; WHEN PROPER. —
Although an extension of time was given to the debtor,
SYLLABUS considering that when this complaint was filed the debtor was
insolvent, it follows that the debtor thereby lost the benefit of
1. REAL ESTATE MORTGAGE; STIPULATION INCLUDING the period unless he gives a guaranty or security for the debt
IN THE LIEN AFTER ACQUIRED PROPERTIES; VALIDITY (Art. 1198, New Civil Code). Whereas in this case the guaranty
THEREOF. — A stipulation including in the mortgage lien after given was plainly inadequate, then the foreclosure was proper
acquired properties is common and logical in all cases where because the collection of the notes were not premature.
the properties given as collateral are perishable or subject to
inevitable wear and tear or were intended to be sold, or to be
used — thus becoming subject to the inevitable wear and tear DECISION
— but with the understanding that they shall be replaced with
others to be thereafter acquired by the mortgagor. Such
stipulation is neither unlawful nor immoral, its obvious purpose
being to maintain, to the extent allowed by circumstances, the DIZON, J p:
original value of the properties given as securities.
On September 8, 1948, Atlantic Gulf & Pacific Company of
2. ID.; ID.; ID.; MACHINERIES INTENDED FOR AN Manila, a West Virginia corporation licensed to do business in
INDUSTRY; NATURE THEREOF. — Under Articles 334 and the Philippines, — hereinafter referred to as ATLANTIC —
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sold and assigned all its right in the Dahican lumber Mortgagor may hereafter acquire, construct,
concession to Dahican Lumber Company — hereinafter install, attach, or use in, to, upon, or in
referred to as DALCO — for the total sum of P500,000.00 of connection with the premises, shall
which only the amount of $50,000.00 was paid. Thereafter, to immediately be and become subject to the
develop the concession, DALCO obtained various loans from lien of this mortgage in the same manner and
the People's Bank & Trust Company — hereinafter referred to to the same extent as if now included therein,
as the Bank — amounting, as of July 13, 1950, to and the Mortgagor shall from time to time
P200,000.00. In addition, DALCO obtained, through the Bank, during the existence of this mortgage furnish
a loan of $250,000.00 from the Export-Import Bank of the Mortgagee with an accurate inventory of
Washington D.C., evidenced by five promissory notes of such substituted and subsequently acquired
$50,000.00 each, maturing on different dates, executed by property."
both DALCO and the Dahican American Lumber Corporation,
a foreign corporation and a stockholder of DALCO, — Both mortgages were registered in the Office of the Register of
hereinafter referred to as DAMCO, all payable to the BANK or Deeds of Camarines Norte. In addition thereto DALCO and
its order. DAMCO pledged to the BANK 7,296 shares of stock of
DALCO and 9,286 shares of DAMCO to secure the same
As security for the payment of the abovementioned loans, on obligations.
July 13, 1950 DALCO executed in favor of the BANK — the
latter acting for itself and as trustee for the Export, Import Bank Upon DALCO's and DAMCO's failure to pay the fifth
of Washington D. C. — a deed of mortgage covering live promissory note upon its maturity, the BANK paid the same to
parcels of land situated in the province of Camarines Norte, the Export-Import Bank of Washington D.C. and the latter
together with all the buildings and other improvements existing assigned to the former its credit and the first mortgage
thereon and all the personal properties of the mortgagor securing it. Subsequently, the BANK gave DALCO and
located in its place of business in the municipalities of DAMCO up to April 1, 1953 to pay the overdue promissory
Mambulao and Capalonga, Camarines Norte (Exhibit D). On note.
the same date, DALCO executed a second mortgage on the After July 13, 1950 — the date of execution of the mortgages
same properties in favor of ATLANTIC to secure payment of mentioned above — DALCO purchased various machineries,
the unpaid balance of the sale price of the lumber concession equipment, spare parts and supplies in addition to, or in
amounting to the sum of $450,000.00 (Exhibit G). Both deeds replacement of some of those already owned and used by it
contained the following provision extending the mortgage lien on the date aforesaid. Pursuant to the provision of the
to properties to be subsequently acquired — referred to mortgage deeds quoted heretofore regarding "after acquired
hereafter as "after acquired properties" — by the mortgagor: properties", the BANK requested DALCO to submit complete
"All property of every nature and description lists of said properties but the latter failed to do so. In
taken in exchange or replacement, and all connection with these purchases, there appeared in the books
buildings, machinery, fixtures, tools, of DALCO as due to Connell Bros. Company (Philippines) — a
equipment and other property which the domestic corporation who was acting as the general
purchasing agent of DALCO — hereinafter called CONNEL —
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the sum of P452,860.55 and to DAMCO, the sum of On April 1, 1953, CONNELL filed its answer denying the
P2,151,678.34. material averments of the complaint, and asserting affirmative
defenses and a counterclaim.
On December 16, 1952, the Board of Directors of DALCO in a
special meeting called for the purpose, passed a resolution Upon motion of the parties, the Court, on September 30, 1953,
agreeing to rescind the alleged sales of equipment, spare issued an order transferring the venue of the action to the
parts and supplies by CONNELL and DAMCO to it. Thereafter, Court of First Instance of Manila where it was docketed as
the corresponding agreements of rescission of sale were Civil Case No. 20987.
executed between DALCO and DAMCO, on the one hand, and
between DALCO and CONNELL, on the other. On August 30, 1958, upon motion of all the parties, the Court
ordered the sale of all the machineries, equipment and
On January 23, 1953, the BANK, in its own behalf and that of supplies of DALCO, and the same were subsequently sold for
ATLANTIC, demanded that said agreements be cancelled but a total consideration of P175,000.00 which was deposited in
CONNELL and DAMCO refused to do so. As a result, on court pending final determination of the action. By a similar
February 12, 1953, ATLANTIC and the BANK, commenced agreement one half (P87,500.00) of this amount was
foreclosure proceedings in the Court of First Instance of considered as representing the proceeds obtained from the
Camarines Norte against DALCO and DAMCO. On the same sale of the "undebated properties" (those not claimed by
date they filed an ex-parte application for the appointment of a DAMCO and CONNELL), and the other half as representing
Receiver and/or for the issuance of a writ of preliminary those obtained from the sale of the "after acquired properties".
injunction to restrain DALCO from removing its properties. The
court granted both remedies and appointed George U. Evans After due trial, the Court, on July 15, 1960, rendered Judgment
as Receiver. Upon defendants' motion, however, the court, in as follows:
its order of February 21, 1953, discharged the Receiver. "IN VIEW WHEREOF, the Court:
On March 2, 1953, defendants filed their answer denying the 1. Condemns Dahican Lumber Co. to pay
material allegations of the complaint and alleging several unto People's Bank the sum of P200,000.00
affirmative defenses and a counterclaim. with 7% interest per annum from July 13,
On March 4 of the same year, CONNELL filed a motion for 1950, plus another sum of P100,000.00 with
intervention alleging that it was the owner and possessor of 5% interest per annum from July 13, 1950;
some of the equipments, spare parts and supplies which plus 10% on both principal sums as attorney's
DALCO had acquired subsequent to the execution of the fees;
mortgages sought to be foreclosed and which plaintiffs 2. Condemns Dahican Lumber Co. to pay into
claimed were covered by their lien. In its order of March 18, Atlantic Gulf the sum of P900,000.00 with 4%
1953 the Court granted the motion, as well as plaintiffs' motion interest per annum from July 13, 1950, plus
to set aside the order discharging the Receiver. Consequently, 10% of the principal as attorney's fees;
Evans was reinstated.
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3. Condemns Dahican Lumber Co. to pay "IN VIEW WHEREOF, the dispositive part of
unto Connel Bros. the sum of P425,860.55, the decision is hereby amended in order to
and to pay unto Dahican American Lumber add the following paragraph 6:
Co. the sum of P2,151,678.34 both with legal
interest from the date of the filing of the 6. If the sums mentioned in paragraphs 1 and
respective answers of those parties, plus 10% 2 are not paid within ninety (90) days, the
of the principals as attorney's fees; Court orders the sale at public auction if the
lands object of the mortgages to satisfy the
4. Orders that of the sum realized from the said mortgages and costs of foreclosure."
sale of the properties of P175,000.00, after
deducting the recognized expenses, one half From the above-quoted decision, all the parties appealed.
thereof be adjudicated unto plaintiffs, the Main contentions of plaintiffs as appellants are the following:
Court no longer specifying the share of each that the "after acquired properties" were subject to the deeds
because of their announced intention under of mortgage mentioned heretofore; that said properties were
the stipulation of facts to 'pool their acquired from suppliers other than DAMCO and CONNELL;
resources'; as to the other one-half, the same that even granting that DAMCO and CONNELL were the real
should be adjudicated unto both plaintiffs, and suppliers, the rescission of the sales to DALCO could not
defendant Dahican American and Connell prejudice the mortgage lien in favor of plaintiffs; that
Bros. in the proportion already set forth on considering the foregoing, the proceeds obtained from the sale
page 9, lines 21, 22 and 23 of the body of this of the "after acquired properties" as well as those obtained
decision; but with the understanding that from the sale of the "undebated properties" in the total sum of
whatever plaintiffs and Dahican American and P175,000.00 should have been awarded exclusively to
Connell Bros. should receive from the plaintiffs by reason of the mortgage lien they had thereon; that
P175,000.00 deposited in the Court shall be damages should have been awarded to plaintiffs against
applied to the judgments particularly rendered defendants, all of them being guilty of an attempt to defraud
in favor of each; the former when they sought to rescind the sales already
mentioned for the purpose of defeating their mortgage lien,
and finally, that defendants should have been made to bear all
5. No other pronouncement as to costs; but the expenses of the Receivership, costs and attorney's fees.
the costs of the receivership as to the
debated properties shall be borne by People's On the other hand, defendants-appellants contend that the trial
Bank, Atlantic Gulf, Connell Bros. and court erred: firstly, in not holding that plaintiffs had no cause of
Dahican American Lumber Co., pro rata." action against them because the promissory note sued upon
was not yet due when the action to foreclose the mortgages
On the following day, the Court issued the following was commenced; secondly, in not holding that the mortgages
supplementary decision: aforesaid were null and void as regards the "after acquired
properties" of DALCO because they were not registered in
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accordance with the Chattel Mortgage Law, the court erring, CONNELL, on the other?; and lastly, was the action to
as a consequence, in holding that said properties were subject foreclose the mortgages premature?
to the mortgage lien in favor of plaintiffs; thirdly, in not holding
that the provision of the fourth paragraph of each of said A. Under the fourth paragraph of both deeds of mortgage, it is
mortgages did not automatically make subject to such crystal clear that all property of every nature and description
mortgages the "after acquired properties", the only meaning taken in exchange or replacement, as well as all buildings,
thereof being that the mortgagor was willing to constitute a lien machineries, fixtures, tools, equipments, and other property
over such properties; fourthly, in not ruling that said stipulation that the mortgagor may acquire, construct, install, attach, or
was void as against DAMCO and CONNELL and in not use in, to, upon, or in connection with the premises — that is,
awarding the proceeds obtained from the sale of the "after its lumber concession — "shall immediately be and become
acquired properties" to the latter exclusively; fifthly, in subject to the lien" of both mortgages in the same manner and
appointing a Receiver and in holding that the damages to the same extent as if already included therein at the time of
suffered by DAMCO and CONNELL by reason of the their execution. As the language thus used leaves no room for
depreciation or loss in value of the "after acquired properties" doubt as to the intention of the parties, We see no useful
placed under receivership was damnum absque injuria and, purpose in discussing the matter extensively. Suffice it to say
consequently, in not awarding to said parties the that the stipulation referred to is common, and We might say
corresponding damages claimed in their counterclaim; lastly, logical, in all cases where the properties given as collateral are
in sentencing DALCO and DAMCO to pay the costs of the perishable or subject to inevitable wear and tear or were
Receivership, instead of sentencing plaintiffs to pay attorney's intended to be sold, or to be used — thus becoming subject to
fees. the inevitable wear and tear — but with the understanding —
express or implied — that they shall be replaced with others to
Plaintiffs' brief as appellants submit six assignments of error, be thereafter acquired by the mortgagor. Such stipulation is
while that of defendants also as appellants submit a total of neither unlawful nor immoral, its obvious purpose being to
seventeen. However, the multifarious issues thus before Us maintain, to the extent allowed by circumstances, the original
may be resolved, directly or indirectly, by deciding the value of the properties given as security. Indeed, if such
following issues: properties were of the nature already referred to, it would be
poor judgment on the part of the creditor who does not see to
Firstly, are the so-called "after acquired properties" covered by it that a similar provision is included in the contract.
and subject to the deeds of mortgage subject of foreclosure?;
secondly, assuming that they are subject thereto, are the B. But defendants contend that, granting without admitting,
mortgages valid and binding on the properties aforesaid in that the deeds of mortgage in question cover the "after
spite of the fact that they were not registered in accordance acquired properties" of DALCO, the same are void and
with the provisions of the Chattel Mortgage Law?; thirdly, ineffectual because they were not registered in accordance
assuming again that the mortgages are valid and binding upon with the Chattel Mortgage Law. In support of this and of the
the "after acquired properties", what is the effect thereon, if proposition that, even if said mortgages were valid, they
any, of the rescission of sales entered into, on the one hand, should not prejudice them, the defendants argue (1) that the
between DALCO and DAMCO and between DALCO and deeds do not describe the mortgaged chattels specifically, nor
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were they registered in accordance with the Chattel Mortgage carried on in a building or on a piece of land, and shall tend
Law; (2) that the stipulation contained in the fourth paragraph directly to meet the needs of the said industry or works.
thereof constitutes "mere executory agreements to give a lien"
over the "after acquired properties" upon their acquisition; and On the strength of the above-quoted legal provisions, the
(3) that any mortgage stipulation concerning "after acquired lower court held that inasmuch as "the chattels were placed in
properties" should not prejudice creditors and other third the real properties mortgaged to plaintiffs, they came within
persons such as DAMCO and CONNELL. the operation of Art. 415, paragraph 5 and Art. 2127 of the
new Civil Code."
The stipulation under consideration strongly belies defendants'
contention. As adverted to hereinafter, it states that all We find the above ruling in agreement with our decisions on
property of every nature, buildings, machinery, etc. taken in the subject:
exchange or replacement by the mortgagor "shall immediately (1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that
be and become subject to the lien of this mortgage in the Article 334, paragraph 5 of the Civil Code (old) gives the
same manner and to the same extent as if now included character of real property to machinery, liquid containers,
therein". No clearer language could have been chosen. instruments or replacements intended by the owner of any
Conceding, on the other hand, that it is the law in this building or land for use in connection with any industry or trade
jurisdiction that, to affect third persons, a chattel mortgage being carried on therein and which are expressly adapted to
must be registered and must describe the mortgaged chattels meet the requirements of such trade or industry.
or personal properties sufficiently to enable the parties and (2) In Cu Unjieng Hijos vs. Mabalacat Sugar Co., 58 Phil. 439,
any other person to identify them, We say that such law does We held that a mortgage constituted on a sugar central
not apply to this case. includes not only the land on which it is built but also the
As the mortgages in question were executed on July 13, 1950 buildings, machinery and accessories installed at the time the
with the old Civil Code still in force, there can be no doubt that mortgage was constituted as well as the
the provisions of said code must govern their interpretation buildings, machinery andaccessories belonging to the
and the question of their validity. It happens, however, that mortgagor, installed after the constitution thereof.
Articles 334 and 1877 of the old Civil Code are substantially It is not disputed in the case at bar that the "after acquired
reproduced in Article 415 and 2127, respectively, of the new properties" were purchased by DALCO in connection with, and
Civil Code. It is, therefore, immaterial in this case whether we for use in the development of its lumber concession and that
take the former or the latter as guide in deciding the point they were purchased in addition to, or in replacement of those
under consideration. already existing in the premises on July 13, 1950. In law,
Article 415 does not define real property but enumerates what therefore, they must be deemed to have
are considered as such, among them being machinery, been immobilized, with the result that the real estate
receptacles, instruments or replacements intended by the mortgages involved herein — which were registered as such
owner of the tenement for an industry or works which may be — did not have to be registered a second time as chattel
mortgages in order to bind the "after acquired properties" and
affect third parties.
12

of its lumber concession, and agreed further that the same


shall become immediately subject to the lien constituted by the
But defendants, invoking the case of Davao Sawmill questioned mortgages. There is also abundant evidence in the
Company vs. Castillo, 61 Phil. 709, claim that the "after record that DAMCO and CONNELL had full notice of such
acquired properties" did not become immobilizedbecause stipulation and had never thought of disputing its validity until
DALCO did not own the whole area of its lumber concession the present case was filed. Consequently, all of them must be
all over which said properties were scattered. deemed barred from denying that the properties in question
The facts in the Davao Sawmill case, however, are not on all had become immobilized.
fours with the ones obtaining in the present. In the former, the What We have said heretofore sufficiently disposes of all the
Davao Sawmill Company, Inc. had repeatedly treated the arguments adduced by defendants in support of their
machinery therein involved as personal property by executing contention that the mortgages under foreclosure are void, and,
chattel mortgages thereon in favor of third parties, while in the that, even if valid, are ineffectual as against DAMCO and
present case the parties had treated the "after acquired CONNELL.
properties" as real properties by expressly and unequivocally
agreeing that they shall automatically become subject to the Now to the question of whether or not DAMCO and CONNELL
lien of the real estate mortgages executed by them. In the have rights over the "after acquired properties" superior to the
Davao Sawmill decision it was, in fact, stated that "the mortgage lien constituted thereon in favor of plaintiffs. It is
characterization of the property as chattels by the appellant is defendants' contention that in relation to said properties they
indicative of intention and impresses upon the property the are "unpaid sellers"; that as such they had not only a superior
character determined by the parties" (61 Phil. 712, Emphasis lien on the "after acquired properties" but also the right to
supplied). In the present case, the characterization of the "after rescind the sales thereof to DALCO.
acquired properties" as real property was made not only by
one but by both interested parties. There is, therefore, more This contention — it is obvious — would have validity only if it
reason to hold that such consensus impresses upon the were true that DAMCO and CONNELL were the suppliers or
properties the character determined by the parties who must vendors of the "after acquired properties". According to the
now be held in estoppel to question it. record, plaintiffs did not know their exact identity and
description prior to the filing of the case at bar because
Moreover, quoted in the Davao Sawmill case was that of DALCO, in violation of its obligation under the mortgages, had
Valdez vs. Central Altagracia Inc. (225 U.S. 58) where it was failed and refused therefore to submit a complete list thereof.
held that while under the general law of Puerto Rico machinery In the course of the proceedings, however, when defendants
placed on property by a tenant does not become immobilized, moved to dissolve the order of receivership and the writ of
yet, when the tenant places it there pursuant to contract that it preliminary injunction issued by the lower court, they attached
shall belong to the owner, it then becomes immobilized as to to their motion the lists marked as Exhibits 1, 2 and 3
that tenant and even as against his assignees and creditors describing the properties aforesaid. Later on, the parties
who had sufficient notice of such stipulation. In the case at bar agreed to consider said lists as identifying and describing the
it is not disputed that DALCO purchased the "after acquired "after acquired properties", and engaged the services of
properties" to be placed on, and be used in the development auditors to examine the books of DALCO so as to bring out the
13

details thereof. The report of the auditors and its annexes The claim that Belden, of ATLANTIC, had given his consent to
(Exhibits V, V-1 — V-4) show that neither DAMCO nor the rescission, expressly or otherwise, is of no consequence
CONNELL had supplied any of the goods of which they and does not make the rescission valid and legally effective. It
respectively claimed to be the unpaid seller; that all items were must be stated clearly, however, in justice to Belden, that, as a
supplied by different parties, neither of whom appeared to be member of the Board of Directors of DALCO, he opposed the
DAMCO or CONNELL; that, in fact, CONNELL collected a 5 resolution of December 16, 1952 passed by said Board and
per cent service charge on the net value of all items it claims the subsequent rescission of the sales.
to have sold to DALCO and which, in truth, it had purchased
for DALCO as the latter's general agent; that CONNELL had to Finally, defendants claim that the action to foreclose the
issue its own invoices in addition to those of the real suppliers mortgages filed on February 12, 1953 was premature because
in order to collect and justify such service charge. the promissory note sued upon did not fall due until April 1 of
the same year, concluding from this that, when the action was
Taking into account the above circumstances together with the commenced, the plaintiffs had no cause of action. Upon this
fact that DAMCO was a stockholder and CONNELL was not question the lower court says the following in the appealed
only a stockholder but the general agent of DALCO, their claim judgment:.
to be the suppliers of the "after acquired properties" would
seem to be preposterous. The most that can be claimed on the "The other is the defense of prematurity of the
basis of the evidence is that DAMCO and CONNELL probably causes of action in that plaintiffs as a matter
financed some of the purchases. But if DALCO still owes them of grace, conceded an extension of time to
any amount in this connection, it is clear that, pay up to 1 April, 1953 while the action was
as financiers, they can not claim any right over the "after filed on 12 February 1953, but as to this, the
acquired properties" superior to the lien constituted thereon by Court taking it that there is absolutely no
virtue of the deeds of mortgage under foreclosure. Indeed, the debate that Dahican Lumber Co., was
execution of the rescission of sales mentioned heretofore insolvent as of the date of the filing of the
appears to be but a desperate attempt to better or improve complaint, it should follow that the debtor
DAMCO and CONNELL's position by enabling them to thereby lost the benefit to the period.
assume the role of "unpaid suppliers" and thus claim a '. . . unless he gives a guaranty or security for
vendor's lien over the "after acquired properties". The attempt, the debt . . .' (Art. 1198, New Civil Code);
of course, is utterly ineffectual, not only because they are not
the "unpaid sellers" they claim to be but also because there is and as the guaranty was plainly inadequate
abundant evidence in the record showing that both DAMCO since the claim of plaintiffs reached in the
and CONNELL had known and admitted from the beginning aggregate, P1,200,000 excluding interest
that the "after acquired properties" of DALCO were meant to while the aggregate price of the 'after-
be included in the first and second mortgages under acquired' chattels claimed by Connell under
foreclosure. the rescission contracts was P1,614,675.94,
Exh. 1, Exh. V, report of auditors, and as a
matter of fact, almost all the properties were
14

sold afterwards for only P175,000.00, page exclusively to the plaintiffs in payment of the money
47, Vol. IV, and the Court understanding that obligations secured by the mortgages under foreclosure.
when the law permits the debtor to enjoy the
benefits of the period notwithstanding that he On the question of plaintiffs' right to recover damages from the
is insolvent by his giving a guaranty for the defendants, the law (Articles 1313 and 1314 of the New Civil
debt, that must mean a new and efficient Code) provides that creditors are protected in cases of
guaranty, must concede that the causes of contracts intended to defraud them, and that any third person
action for collection of the notes were not who induces another to violate his contract shall be liable for
premature." damages to the other contracting party. Similar liability is
demandable under Arts. 20 and 21 — which may be given
Very little need be added to the above. Defendants, however, retroactive effect (Arts. 2252-53) — or under Arts. 1902 and
contend that the lower court had no basis for finding that, 2176 of the Old Civil Code.
when the action was commenced, DALCO was insolvent for
purposes related to Article 1198, paragraph 1 of the Civil
Code. We find, however, that the finding of the trial court is The facts of this case, as stated heretofore, clearly show that
sufficiently supported by the evidence particularly the DALCO and DAMCO, after failing to pay the fifth promissory
resolution marked as Exhibit K which shows that on December note upon its maturity, conspired jointly with CONNELL to
16, 1952 — in the words of the Chairman of the Board — violate the provisions of the fourth paragraph of the mortgages
DALCO was "without funds, neither does it expect to have any under foreclosure by attempting to defeat plaintiffs' mortgage
funds in the foreseeable future" (p. 64, record on appeal). lien on the "after acquired properties". As a result, the plaintiffs
The remaining issues, namely, whether or not the proceeds had to go to court to protect their rights thus jeopardized.
obtained from the sale of the "after acquired properties" should Defendants' liability for damages is therefore clear.
have been awarded exclusively to the plaintiffs or to DAMCO However, the measure of the damages suffered by the
and CONNELL, and if in law they should be distributed among plaintiffs is not what the latter claim, namely, the difference
said parties, whether or not the distribution should be pro-rata between the alleged total obligation secured by the mortgages
or otherwise; whether or not plaintiffs are entitled to damages; amounting to around P1,200,000.00, plus the stipulated
and lastly, whether or not the expenses incidental to the interest and attorney's fees, on the one hand, and the
Receivership should be borne by all the parties on a pro-rata proceeds obtained from the sale of the "after acquired
basis or exclusively by one or some of them are of a properties", and of those that were not claimed neither by
secondary nature as they are already impliedly resolved by DAMCO nor CONNELL, on the other. Considering that the
what has been said heretofore. sale of the real properties subject to the mortgages under
As regard the proceeds obtained from the sale of the "after foreclosure has not been effected, and considering further the
acquired properties" and the "undebated properties", it is clear, lack of evidence showing that the true value of all the
in view of our opinion sustaining the validity of the mortgages properties already sold was not realized because their sale
in relation thereto, that said proceeds should be awarded was under stress, We feel that We do not have before Us the
true elements or factors that should determine the amount of
15

damages that plaintiffs are entitled to recover from defendants.


It is, however, our considered opinion that, upon the facts
established, all the expenses of the Receivership, which was
deemed necessary to safeguard the rights of the plaintiffs,
should be borne by all the defendants, jointly and severally, in
the same manner that all of them should pay to the plaintiffs,
jointly and severally, the attorney's fees awarded in the
appealed judgment.
In consonance with the portion of this decision concerning the
damages that the plaintiffs are entitled to recover from the
defendants, the record of this case shall be remanded below
for the corresponding proceedings.
Modified as above indicated, the appealed judgment is
affirmed in all other respects. With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal, Bengzon,
J.P., Zaldivar, Sanchez and Castro, JJ., concur.
||| (People's Bank and Trust Co. v. Dahican Lumber Co., G.R.
No. L-17500, [May 16, 1967], 126 PHIL 354-371)
16

FIRST DIVISION it, although of course obliged, when exercising said right, to
preserve and maintain the superiority of the prior mortgagee's
[G.R. No. 54224-25. August 16, 1989.] rights.
3. ID.; ID.; STIPULATIONS FORBIDDING THE OWNER
ANTONIO TAMBUNTING and AURORA FROM ALIENATING THE IMMOVABLE MORTGAGED,
TAMBUNTING, petitioners, vs. REHABILITATION EXPRESSLY DECLARED VOID BY LAW. — While covenants
FINANCE CORPORATION (now Development prohibiting the owner from constituting a later over property
Bank of the Philippines), HEIRS OF JOSE registered under the Torrens Act have been held to be legally
ESCUETA AND ELEUTERIA ESCUETA, permissible, stipulations "forbidding the owner from alienating
DEMETRIO HERNANDEZ CANDELARIA the immovable mortgaged," are expressly declared void by
PAGUIO and THE COURT OF law. It is clear then that the stipulation against "subsequent
APPEALS, respondents. 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
Jose W. Diokno for petitioners. favor of the R.F.C. The assignment was not a subsequent
mortgage or encumbrance, licitly comprehended by the
Teves, Campos & Lim for respondent Heirs of Jose prohibitory stipulation, but was actually a sale or conveyance
and Eleuteria Escueta. of all their rights in the encumbered real property — in truth, an
Alberto, Salazar & Associates for respondent alienation of the immovable — which could not lawfully be
Candelaria Paguio and Heirs of Demetrio Hernandez. forbidden.
4. ID.; ID.; RIGHTS OF FIRST AND SECOND
MORTGAGEES. — The execution by the Escuetas of a
SYLLABUS
second over their property had the effect of subjecting the
same property to the payment of two obligations. Both
1. OBLIGATIONS AND CONTRACTS; CONTRACT, NOT mortgage debts had to be paid by the mortgagors. If they
IMPAIRED BY ANY LEGAL INFIRMITIES, ENFORCEABLE failed to pay either or both, the unpaid mortgagee had the right
TO THE LETTER BY THE COURTS. — A contract is the law to look to the property for satisfaction. Each mortgagee had
between the parties and, absent any showing that its the right to foreclose the mortgage; but obviously, the second
provisions are wholly or in part contrary to law, morals, good mortgagee's right was inferior and subordinate to the first.
customs, public order, or public policy, will be enforced to the Prior foreclosure by the second mortgagee could not affect the
letter by the Courts. first mortgagee's rights at all; and if the first mortgagee
foreclosed first, the second mortgagee had the right to
2. ID.; MORTGAGE; RIGHT OF MORTGAGOR TO SELL
redeem; i.e., pay the first mortgagee's credit together with all
PROPERTY SUBJECT TO MORTGAGE, NOT LOST. — A
due interests and charges and thus acquire the property
mortgagor, by encumbering his property, does not ordinarily
mortgaged, subject to the right of redemption of the mortgagor.
lose the right to sell the same or create another mortgage over
17

DECISION and in virtue thereof, took possession of the foreclosed


property. 7
About eight (8) months after the foreclosure sale,
NARVASA, J p: the Tambuntings as second mortgagees, offered to
redeem the property. 8 The RFC agreed, subject to the
A contract is the law between the parties and, Escuetas' right of redemption as former thereof. 9 Their
absent any showing that its provisions are wholly or in part agreement was reduced to writing, entitled "Deed of
contrary to law, morals, good customs, public order, or Conditional Sale." Under it, the RFC sold the property in
public policy, will be enforced to the letter by the Courts. question to the Tambuntings for P74,643.98, 20% of which
Application of this fundamental principle is all that is (P14,928.89) was given as down payment, and the
required to resolve the controversy at bar. 1 balance was amortized over a period of ten (10)
years. 10 The deed also contained the following
The root of the dispute is traceable to loans
stipulation, 11 among others:
obtained by the Spouses Jose and Eleuteria Escueta from
the Rehabilitation Finance Corporation (RFC) in the This contract may be evoked within one (1)
aggregate sum of P59,000.00. The loan were secured by a year from September 16, 1955 at the option
mortgage constituted by said spouses over land (and of the vendor should the former owner
improvements thereon) owned by them, covered by exercise his right to redeem the property
Transfer Certificates of Title Numbered 493 (39774) and herein sold. In case the property is redeemed
494 (39775) of the Registry of Deeds of Pasay City. 2 or repurchased within said period by the
former or his successor-in-interest, the vendor
Later, and with the consent of the RFC, the
shall refund to the vendees any and all
Escuetas created a second mortgage over the same
amounts that the vendees may have paid to
property as security for a loan in the amount of P16,000.00
the vendor under the conditional sale with
obtained by them from the Spouses Antonio and Aurora
interest as provided for by law, rendering,
Tambunting. 3 Both first and second mortgage were
thereby the instrument automatically null and
recorded in the Registry of Deeds of Pasay City. 4
void and without effect.
The Escuetas defaulted in the payment of both
loans. The Tambunting consequently instituted an action of The Tambuntings took possession, and
foreclosure of their second mortgage in the Court of First commenced to collect the rentals from the tenants thereof
Instance of Pasay City. 5 Some three months later, the after notifying them of the deed of conditional sale in their
RFC commenced proceedings for the extra-judicial favor. 12 In this connection , the deed also provided that in
foreclosure of its mortgage, which resulted in the sale at the event of redemption by the former owner, "all rentals
public auction of the mortgaged property to the highest collected will be deducted from the redemption price." 13
bidder, the RFC itself, subject to the right of redemption of About a month later, the Escuetas learned of the
the mortgagors, the Escuetas. 6 The RFC then applied for sale in favor of the Tambunting. Three (3) days before the
and obtained a writ of possession from the proper Court expiry of the stipulated redemption period, the Escuetas,
18

having been unable to raise the amount to effect The Tambuntings also amended their complaint in
redemption, assigned their right to repurchase to the the first action. 19 They alleged that —
spouses Demetrio Hernandez and Candelaria Paguio in 1) the deed of assignment of the Escueta's
consideration of the sum of P15,000.00. 14 On the day right of redemption in favor of the Hernandez
following, Hernandez went to the RFC and exercised the was null and void because "fictitious or
right of redemption assigned to him by making a deposit of simulated," and violative of the Deed of
P19,088.89, and formally undertaking to pay the balance Second Mortgage of which the assignors and
of the repurchase price in fixed monthly installments over a the assignees had notice;
period of ten (10) years at 6% interest per annum, these
being the terms specified by the RFC for redemption, set 2) the redemption sought to be exercised by
out in its Chairman's letter sent to the Escuetas there the Hernandezes was invalid because (a) the
months after the foreclosure. 15 amount deposited (down payment of
The RFC then notified the Tambunting that their P19,088.89 was not the full redemption price
contract of conditional sale was deemed revoked in view of (P55,000.00) exclusive of costs, insurance
the redemption by Hernandez, the Escuetas' successor-in- premiums, interest, taxes, attorney's fees and
interest. 16 liquidated damages, and (b) was not
accompanied by an offer pay the
On the same day the Tambunting wrote to the Tambuntings' mortgage credit; and
RFC, "vehemently" protesting the acceptance by the RFC
of the redemption by the Hernandezes "as not in 3) if the verdict in Civil Case No. 1686-P
accordance with law." 17 And some three weeks uphold the redemption by the Hernandezes
afterwards, they instituted in the Court of First Instance of and the RFC's right to revoke its contract of
Pasay City, an action against the RFC, the Escueta conditional sale with the Tambuntings, then
Spouses, and the Hernandez Spouses, for (1) the the latter's second mortgage should be
nullification of (a) the deed of assignment by the Escuetas enforced on the property in question.
in favor of the Hernandez Spouses, (b) the latter's The two cases were consolidated, 20 and decided
redemption of the property in question, and (c) the RFC's jointly. 21 The Trail Court's judgment went against the
revocation of its deed of conditional sale with the Tambuntings, and disposed of the cases as follows:
Tambunting; (2) the declaration of the validity of said deed
of conditional sale in their favor; (3) the payment of 1) the preliminary injunction earlier issued,
damages by the defendants; and (4) the payment by the restraining the defendants from taking
Escuetas, particularly, of rentals in arrears for their use and possession of the property in question was
occupation of one of the apartments standing on the lifted and set aside;
mortgaged property. This action, docketed as Case No. 2) the Deed of Conditional Sale between the
1686-P, was the Tambunting's second involving the same RFC (which had in the meantime become the
property, their first, Case No. 1565-P, being one for the Development Bank of the Philippines [DBP])
foreclosure of their second mortgage. 18
19

and the Spouses Tambuntings was declared that petitioners are also entitled to the damages prayed for
null and void; under the(ir) complaint."
3) the Deed of Assignment of the Escuetas' The Tambuntings' appeal must be rejected and
right of redemption in favor of the dismissed for lack of merit.
Hernandezes was pronounced to be valid and In the first place, the matter of whether or not the
subsisting; and assignment was fictitious is an issue of facts and its
4) the Tambuntings were ordered to refund to resolution by the Court of Appeals is, by firmly established
the Escuetas and Hernandezes "whatever and long observed principle, final and conclusive on this
excess rentals there may be from plaintiffs' Court. Moreover, the Escuetas' right to redeem the
(Tambuntings') collection on the mortgaged property within one (1) year from September 16, 1955 was
properties after deducting therefrom the down never in any doubt. As much is explicit in the Deed of
payment of P14,928.80 and the monthly Conditional Sale already referred to which documented the
amortizations paid by said defendant RFC Tambuntings' redemption of the property as second
under said Deed of Conditional Sale, and . . . mortgagees and provided for its own automatic invalidation
to pay the costs." upon the exercise by the Escuetas (or their successor-in-
interest) of their own right redemption said period.
Now, the theory of a factitious transfer of the
The Tambuntings appealed to the Court Appeals, Escuetas, right of redemption is sustainable only on the
but there they fared no better. That Court affirmed the Trail premise that such transfer somehow enlarged the scope of
Court's decision in toto 22 and subsequently denied the the right or extended the period within it might be
Tambuntings motion for reconsideration. 23 Hence, their exercised. It did neither, however. Its only effect was to put
present recourse to this Court. the transferee in the shoes of the Escuetas, with exactly
the same obligations to fulfill as redemptioner and
The Tambuntings' submissions in this Court are precisely the same period of time within which to do so. As
substantially the same as those they laid before both the far as the Escuetas were concurred, there was no
Trial Court and the Court of Appeals, to wit: advantage to be gained, no benefit to be derived, no
1) the Escuetas' deed of assignment in favor of the premium in simulating a transfer which altered none of the
Hernandez Spouses violated the terms of the conditions for a valid redemption, whether exercised by
Tambuntings' mortgage' and was fictitious, to boot; themselves or by a transferee.
2) even if the assignment were valid had been no In short, the Escuetas had nothing to gain by going
valid exercise of the right of redemption thereby assigned; behind the scenes, as it were, and making redemption
and through a dummy. And even if it be assumed that they in
3) the assignment was "designed to deprive fact did so, that the redemption had been made for them
petitioners (Tambuntings of the credit they extended; so and on their behalf by the Hernandezes to whom; they had
"fictitiously" assigned their right of redemption, this would
20

be utterly inconsequential, not only because as already registered under the Torrens Act have been held to be legally
pointed out, there is no question about their (the Escuetas') permissible, 26 stipulations "forbidding the owner from
being entitled to redeem, but also because the redemption alienating the immovable mortgaged," are expressly declared
was made strictly according to the terms — as to down void by law. 27 It is clear then that the stipulation against
payment and other conditions — laid down by the RFC "subsequent agreements" above mentioned had not been
itself, by the way, these terms were precisely the same as breached by the assignment by the Escuetas (to the
those under the Tambuntings were initially allowed to Hernandezes) of their right of redemption in connection with
redeem, it is illogical and improper, to say the least, for the the mortgage constituted in favor of the R.F.C. The
latter not to impugn them. assignment was not a subsequent mortgage or encumbrance,
Also untenable is the contention that the deed of licitly comprehended by the prohibitory stipulation, but was
assignment executed by the Escuetas in favor of the actually a sale or conveyance of all their rights in the
Hernandez Spouses was violative of the Tambuntings' encumbered real property — in truth, an alienation of the
second mortgage and therefore, inefficacious. A immovable — which could not lawfully be forbidden. Moreover,
mortgagor, by encumbering his property, does not since the subject of the assignment to the Hernandezes had
ordinarily lose the right to sell the same or create another "connection with the first mortgage with the R.F.C.," it did not
mortgage over it, although of course obliged, when fall within, but was explicitly excepted from, the prohibitory
exercising said right, to preserve and maintain the stipulation in question. Finally, it should not be forgotten that
superiority of the property of subsequent encumbrances is since the Tambuntings, in their own deed of conditional sale
implicit in the grant of the right of redemption by Section 6 with the R.F.C., had accepted without demur the provision that
of ACT 3135, as amended, in cases of extra-judicial said contract could be revoked within one (1) year from
foreclosure of mortgage, to "any person having a lien on September 16, 1955 at the option of the RFC, as vendor,
the property subsequent to the mortgage or deed of trust should the former owner (Escueta) exercise his right to
under which the property is sold," in addition to the "debtor, redeem the property; and that the redemption of the property
his successor in interest or any judicial creditor or within said period by "the former owner or his successor-in-
judgment creditor of said debtor." 24 interest" would render their instrument of conditional sale
"automatically null and void and without effect" 28 they cannot
To be sure, the deed of second mortgage executed by the assume a position inconsistent with said provision.
Escuetas in favor of Aurora Tambunting married to Antonio L.
Tambunting, 25 does contain a provision that "the property The execution by the Escuetas of a second over
mortgaged shall not be . . . the subject of any new or their property had the effect of subjecting the same
subsequent contracts or agreements, saving and excepting property to the payment of two obligations. Both mortgage
those having connection with the first mortgage with the RFC, debts had to be paid by the mortgagors. If they failed to
without first securing the written permission and consent of the pay either or both, the unpaid mortgagee had the right to
MORTGAGES." But provision can only construed as directed look to the property for satisfaction. Each mortgagee had
against subsequent mortgages or encumbrances, not to an the right to foreclose the mortgage; but obviously, the
alienation of the immovable itself. For while covenants second mortgagee's right was inferior and subordinate to
prohibiting the owner from constituting a later over property the first. Prior foreclosure by the second mortgagee could
21

not affect the first mortgagee's rights at all; and if the first Conditional Sale executed consequent upon that
mortgagee foreclosed first, the second mortgagee had the redemption between the RFC and the Tambuntings,
right to redeem; i.e., pay the first mortgagee's credit expressly provided in language that could not be made any
together with all due interests and charges and thus plainer that — 30
acquire the property mortgaged, subject to the right of This contract may be revoked within one (1)
redemption of the mortgagor. LexLib year from September 16, 1955 at the option
On the other hand, the assignment by the Escuetas of the vendor should the former owner
of their right of redemption ( as regards both mortgage exercise his right to redeem the property
obligations) to the Hernandezes Spouses operated as a herein sold. In case the property is redeemed
transfer of the property, together recorded encumbrances. or repurchased within said period by the
The acquisition by the Hernandezes of the Escuetas' right former owner or hid successor-in-interest, the
over the property carried with it the assumption of the vendor shall refund to the vendees any and
obligations burdening the property, as recorded in the all amounts that the vendees may have paid
Registry of Property, i.e., the mortgage debts in favor of to the vendor under the conditional sale with
the RFC (DBP) and the Tambuntings. The Hernandezes, interest as provided for by law, rendering
by stepping into the Escuetas' shoes as assignees, had thereby this instrument automatically null and
the obligation to pay the mortgage debts. otherwise, these void and without effect.
debts would and could be enforced against the property
subject of the assignment. Stated otherwise, the The Court has been cited to no fact or argument
Hernandezes, by the assignment, obtained the right to invalidating this stipulation. The Tambuntings make no
remove the burdens on the property subject thereof by claim that their consent to the deed of conditional sale was
paying the obligation thereby secured; that is to say, they in any manner flawed, or that the stipulation is contrary to
had the right of redemption as regards the first mortgage, law, morals, good customs, public order, or public
to be exercised within the time and in the manner policy. 31 The stipulation is a perfectly legitimate one. The
prescribed by law and the mortgage deed; and as regards, Tambunting are bound by it.
the second mortgage, sought to be judicially foreclosed but There is no dispute either about the fact that the
yet unforeclosed, they had the so-called equity of redemption by the Hernandezes, as assignees of the
redemption. 29 mortgagor spouses, the Escuetas, was made within the
The Tambunting were perfectly within their rights time and in the manner laid down by law and the RFC
when they offered to redeem the property in question after itself. Their redemption was deemed by the RFC to have
it had been foreclosed and acquired at public auction by been properly exercised. The RFC therefore revoked its
the RFC. And it was correct for the RFC, in accepting the contract with the Tambuntings, as it was bound to pursuant
Tambuntings' offer and acquiescing to their redemption of to the explicit provision thereof above quoted — indeed,
the property, tomake such redemption subject to the that contract was, by its terms, rendered "automatically null
Escuetas' own right of redemption, which was eligible and void and without effect" by the redemption — and
,against the RFC itself . Hence it was that the Deed of executed in the Hernandezes' favor a deed of conditional
22

sale, substantially identical to that earlier signed in favor of Hernandezes, as assignees of the Escuetas, are bound to
the Tambuntings. pay to the Tambuntings within ninety (90) days from finality
of that determination in default of which the property shall
be sold at public auction in accordance with the provisions
Nor can there be any question about the effects of of Rule 68 of the Rules of Court. Costs against
that redemption by the Hernandezes as far as the petitioners. LLjur
Tambuntings are concerned. By reason thereof —
Cruz, Gancayco, Griño-Aquino and Medialdea,
1) the Tambuntings acquired the right to a refund of JJ., concur
"any and all amounts that . . . (they) may have paid to the .
. . (RFC [DBP]) under the conditional sale with interest as ||| (Tambunting Rehabilitation Finance Corp., G.R. No. 54224-
provided for by law;" and 25, [August 16, 1989], 257 PHIL 503-515)
2) their credit against the Escuetas, and their right
to foreclose the second mortgage given as security
therefor — and now still subject of Civil Case No. 1656-P
of the CFI (now RFC) of Pasay City — remained
unaffected and intacts, subject, of course, to the equity of
redemption which the Hernandezes may exercise as
assignees of the Escuetas.
WHEREFORE, the petition for review
on certiorari is DENIED, and the judgment of the Court of
Appeals thereby challenged is AFFIRMED, with the
modification hereinafter decreed. The case is accordingly
remanded to the Trial Court for a determination not only of
(1) the "excess rentals there may be from plaintiffs' (the
Tambuntings') collection on the mortgaged properties" to
be refunded by said Tambuntings to the "defendants
spouses Escueta and Hernandez" — counted from the
date that the Tambuntings were notified in writing by the
RFC of the revocation of the deed of conditional sale
executed in their favor — "after deducting therefrom the
down payment of P14,928.80 and the monthly
amortizations paid by said plaintiffs to defendant RFC
under said Deed of Conditional Sale," as ordained by the
judgment of the Trial Court, but also (2) the balance of the
Tambuntings' mortgage credit against the Escuetas,
together with all stipulated interests and charges, which the
23

EN BANC the prior sale of the properties by petitioners to PWHAS. It also


requested the Register of Deeds for the cancellation of the
[G.R. No. 130722. December 9, 1999.] 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
SPS. REYNALDO K. LITONJUA and necessary in case of subsequent encumbrance or alienation of
ERLINDA P. LITONJUA and PHIL. WHITE the subject properties. PWHAS was able to redeem the
HOUSE AUTO SUPPLY, mortgaged properties by tendering the redemption price to the
INC., petitioners, vs. L & R CORPORATION, deputy sheriff because private respondent refused to accept
VICENTE M. COLOYAN in his capacity as the payment. The Register of Deeds, however, refused to
Acting Registrar of the Register of Deeds annotate the Certificate of Redemption issued by the sheriff on
of Quezon City thru Deputy Sheriff the copies of the titles of the subject properties. Petitioners
ROBERTO R. GARCIA, respondents. 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
Bugaring, Piedad Oliva and Associates Law Offices for an Affidavit of Consolidation of Ownership. Thereafter, the
petitioners. Register of Deeds cancelled Transfer Certificates of Title No.
Gancayco, Balasbas and Santos Law Offices for private 197232 and 197233 and in lieu thereof issued Transfer
respondent. 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
SYNOPSIS 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
Petitioner spouses Litonjua obtained loans from private
lower court dismissed the complaint upon its finding that the
respondent L & R Corporation. The loans were secured by
sale between the spouses Litonjua and PWHAS was null and
mortgage constituted by the spouses upon their two parcels of
void and unenforceable against L & R Corporation and the
land and the improvements thereon located in Cubao, Quezon
redemption made was also null and void. On appeal, the Court
City. The mortgage was duly registered with the Register of
of Appeals affirmed the decision of the trial court. Hence, the
Deeds of Quezon City. The spouses Litonjua, however, sold to
present petition. The issue revolved on the validity and
Philippine Whitehouse Auto Supply, Inc. (PWHAS) the parcels
enforceability of the provision in the mortgage contract
of land they had previously mortgaged to private respondent.
granting the mortgage the right of first refusal, and the validity
When the petitioners defaulted in the payment of their loans,
of the redemption effected by PWHAS on the account of the
private respondent foreclosed the mortgage. At the auction
spouses Litonjua.
sale, private respondent was the highest bidder. When private
respondent presented the Certificate of Sale issued by the The Supreme Court ruled that the provision in the mortgage
Sheriff to the Register of Deeds for registration, it learned of contract granting the mortgagee the right of first refusal is not
24

binding on the parties being contrary to law and a pronouncement therein that such a stipulation violates Article
circumvention of Article 2130 of the New Civil Code. According 2130 of the New Civil Code. Both the lower court and the
to the Court, the provision creates an unconscionable Court of Appeals in its Amended Decision rationalized that
advantage for the mortgagee and amounts to a virtual since paragraph 8 of the subject Deed of Real Estate
prohibition on the owner to sell his property. Accordingly, the Mortgage contains no absolute prohibition against the sale of
sale made by the spouses Litonjua to PWHAS, the property mortgaged but only requires the mortgagor to
notwithstanding the lack of prior written consent of L & R obtain the prior written consent of the mortgagee before any
Corporation, is valid. The Court also ruled that the redemption such sale, Article 2130 is not violated thereby. This
effected by PWHAS to redeem the subject properties for the observation takes a narrow and technical view of the
account of the spouses Litonjua is valid. PWHAS merely stipulation in question without taking into consideration the end
stepped into the shoes of the spouses Litonjua on account of result of requiring such prior written consent. True, the
the sale and was in effect, their successor-in-interest. As such, provision does not absolutely prohibit the mortgagor from
it has the right to redeem the property foreclosed by L & R selling his mortgaged property; but what it does not outrightly
Corporation. The right of PWHAS to redeem the subject prohibit, it nevertheless achieves. For all intents and purposes,
properties finds support in Section 6 of Act 3135 which gives the stipulation practically gives the mortgagee the sole
not only the mortgagor-debtor the right to redeem, but also his prerogative to prevent any sale of the mortgaged property to a
successor-in-interest. As the vendee of the subject properties, third party. The mortgagee can simply withhold its consent and
PWHAS qualifies as such a successor-in-interest of the thereby, prevent the mortgagor from selling the property. In
spouses Litonjua. 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
SYLLABUS Litonjua to PWHAS, notwithstanding the lack of prior written
consent of L & R Corporation, is valid.
1. CIVIL LAW; CONTRACTS; MORTGAGE; BEING 2. ID.; ID.; ID.; REDEMPTION EFFECTED BY THE
CONTRARY TO LAW; PARAGRAPH 8 OF THE SUBJECT PURCHASER OF THE MORTGAGED PROPERTIES VALID;
DEED OF REAL ESTATE MORTGAGE IS NOT BINDING AS VENDEE OF THE SUBJECT PROPERTIES; THE
UPON THE PARTIES; THE SUBJECT PROVISION PURCHASER QUALIFIES AS A SUCCESSOR-IN-INTEREST
CREATES AN UNCONSCIONABLE ADVANTAGE FOR THE OF THE MORTGAGOR-SPOUSES AND HAS THE RIGHT
MORTGAGE AND AMOUNTS TO A VIRTUAL PROHIBITION TO REDEEM THE MORTGAGED PROPERTIES UNDER
ON THE OWNER TO SELL HIS MORTGAGED PROPERTY SECTION 6 OF ACT 3135. — Coming now to the issue of
AND IN CIRCUMVENTION OF ARTICLE 2130 OF THE NEW whether the redemption offered by PWHAS on account of the
CIVIL CODE. — Insofar as the validity of the questioned spouses Litonjua is valid, we rule in the affirmative. The sale
stipulation prohibiting the mortgagor from selling his by the spouses Litonjua of the mortgaged properties to
mortgaged property without the consent of the mortgagee is PWHAS is valid. Therefore, PWHAS stepped into the shoes of
concerned, therefore, the ruling in the Tambunting case is still the spouses Litonjua on account of such sale and was in
the controlling law. Indeed, we are fully in accord with the effect, their successor-in-interest. As such, it had the right to
25

redeem the property foreclosed by L & R Corporation. of the spouses Litonjua, within the one-year period should
Again, Tambunting, supra, clarified that — ". . . The acquisition have been accepted as valid by L & R Corporation. However,
by the Hernandezes' of the Escuetas' rights over the property while the sale is, indeed, valid, the same is rescissible
carried with it the assumption of the obligations burdening the because it ignored L & R Corporation's right of first refusal.
property, as recorded in the Registry of the Property, ie., Foreseeing a possible rescission of the sale, the spouses
mortgage debts in favor of the RFC (DBP) and the Litonjua contend that with the restoration of the original status
Tambuntings. The Hernandezes', by stepping into the quo, with no sale having been made, they should now be
Escuetas' shoes as assignees, had the obligation the allowed to redeem the subject properties, the period of
obligation to pay the mortgage debts, otherwise, these debts redemption having been suspended during the period of
would and could be enforced against the property subject of litigation. In effect, the spouses Litonjua want to retain
the assignment. Stated otherwise, the Hernandezes, by the ownership of the same. We cannot, however, sanction this
assignment, obtained the right to remove the burdens of the belated reversal of the spouses Litonjua's decision to sell. To
property subject thereof by paying the obligations thereby do so would afford them undue advantage on account of the
secured; that is to say, they had the right of redemption as appreciation of the value of the subject properties in the
regards the first mortgage, to be exercised within the time and intervening years when they precisely were the ones who
in the manner prescribed by law and the mortgage deed; and violated and ignored the right of first refusal of L & R
as regards the second mortgage, sought to be judicially Corporation over the same. Moreover, it must be stressed that
foreclosed but yet unforeclosed, they had the so-called equity in rescinding the sale made to PWHAS, the purpose is to
of redemption." The right of PWHAS to redeem the subject uphold and enforce the right of first refusal of L & R
properties finds supports in Section 6 of Act 3135 itself which Corporation.
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 DECISION
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 YNARES-SANTIAGO, J p:
RESCISSIBLE BECAUSE THE MORTGAGORS IGNORED
THE MORTGAGEE'S RIGHT OF FIRST REFUSAL. — All May a mortgage contract provide: (a) that the mortgagor
things considered, what then are the relative rights and cannot sell the mortgaged property without first obtaining the
obligations of the parties? To recapitulate: the sale between consent of the mortgagee and that, otherwise, the sale made
the spouses Litonjua and PWHAS is valid, notwithstanding the without the mortgagee's consent shall be invalid; and (b) for a
absence of L & R Corporation's prior written consent hereto. right of first refusal in favor of the mortgagee? LibLex
Inasmuch as the sale of PWHAS was valid, its offer to redeem
and its tender of the redemption price, as successor-in-interest
26

The controversy stems from loans obtained by the spouses made without its prior written consent, the same should not
Litonjua from L & R Corporation in the aggregate sum of have been registered and/or annotated.
P400,000.00; P200,000.00 of which was obtained on August
6, 1974 and the remaining P200,000.00 obtained on March 27, On March 10, 1981, or seven months after the foreclosure
1978. The loans were secured by a mortgage 1 constituted by sale, PWHAS, for the account of the spouses Litonjua,
the spouses upon their two parcels of land and the tendered payment of the full redemption price to L & R
improvements thereon located in Cubao, Quezon City covered Corporation in the form of China Bank Manager's Check No.
by Transfer Certificates of Title No. 197232 and 197233, with HOF-M O12623 in the amount of P238,468.04. 6 L & R
an area of 599 and 1,436 square meters, respectively. The Corporation, however, refused to accept the payment, hence,
mortgage was duly registered with the Register of Deeds of PWHAS was compelled to redeem the mortgaged properties
Quezon City. through the Ex-Oficio Sheriff of Quezon City. On March 31,
1981, it tendered payment of the redemption price to the
On July 14, 1979, the spouses Litonjua sold to Philippine Deputy Sheriff through China Bank Manager's Check No.
White House Auto Supply, Inc. (PWHAS) the parcels of land HOF-O14750 in the amount of P240,798.94. 7 The check was
they had previously mortgaged to L & R Corporation for the deposited with the Branch Clerk of Court who issued Receipt
sum of P430,000.00. 2 The sale was annotated at the back of No. 7522484 8 for the full redemption price of the mortgaged
the respective certificates of title of the properties. 3 properties. Accordingly, the Deputy Sheriff issued a Certificate
of Redemption in favor of the spouses Litonjua dated March
Meanwhile, with the spouses Litonjua having defaulted in the 31, 1981. 9
payment of their loans, L & R Corporation initiated extrajudicial
foreclosure proceedings with the Ex-Oficio Sheriff of Quezon In a letter of the same date, the Deputy Sheriff informed L & R
City. On July 23, 1980, the mortgaged properties were sold at Corporation of the payment by PWHAS of the full redemption
public auction to L & R Corporation as the only bidder for the price and advised it that it can claim the payment upon
amount of P221,624.58. 4 When L & R Corporation presented surrender of its owner's duplicate certificates of title. 10
its corresponding Certificate of Sale issued by Deputy Sheriff
Roberto B. Garcia, to the Quezon City Register of Deeds for On April 2, 1981, the spouses Litonjua presented for
registration on August 15, 1980, it learned for the first time of registration the Certificate of Redemption issued in their favor
the prior sale of the properties made by the spouses Litonjua to the Register of Deeds of Quezon City. The Certificate also
to PWHAS upon seeing the inscription at the back of the informed L & R Corporation of the fact of redemption and
certificates of title. Thus, on August 20, 1980, it wrote a directed the latter to surrender the owner's duplicate
letter 5 to the Register of Deeds of Quezon City requesting for certificates of title within five days. 11
the cancellation of the annotation regarding the sale to On April 22, 1981, L & R Corporation wrote a letter to the
PWHAS. L & R Corporation invoked a provision in its Sheriff, copy furnished to the Register of Deeds, stating: (1)
mortgage contract with the spouses Litonjua stating that the that the sale of the mortgaged properties to PWHAS was
mortgagee's prior written consent was necessary in case of without its consent, in contravention of paragraphs 8 and 9 of
subsequent encumbrance or alienation of the subject their Deed of Real Estate Mortgage; and (2) that it was not the
properties. Thus, it argued that since the sale to PWHAS was spouses Litonjua, but PWHAS, who was seeking to redeem
27

the foreclosed properties, when under Articles 1236 and 1237 Litonjua and PWHAS against herein respondents before the
of the New Civil Code, the latter had no legal personality or then Court of First Instance of Quezon City, Branch 9,
capacity to redeem the same. 12 docketed as Civil Case No. Q-33362. 20 On February 10,
1987, the lower court rendered its Decision 21 dismissing the
On the other hand, on May 8 and June 8, 1981, the spouses Complaint upon its finding that the sale between the spouses
Litonjua asked the Register of Deeds to annotate their Litonjua and PWHAS was null and void and unenforceable
Certificate of Redemption as an adverse claim on the titles of against L & R Corporation and that the redemption made was
the subject properties on account of the refusal of L & R also null and void. LexLib
Corporation to surrender the owner's duplicate copies of the
titles to the subject properties. With the refusal of the Register On appeal, the decision of the trial court was set aside by the
of Deeds to annotate their Certificate of Redemption, the Court of Appeals in its Decision dated June 22, 1994, 22 on
Litonjua spouses filed a Petition 13 on July 17, 1981 against L the ground that the sale made to PWHAS as well as the
& R Corporation for the surrender of the owner's duplicate of redemption effected by the spouses Litonjua were valid.
Transfer Certificates of Title No. 197232 and 197233 before However, the same was subsequently reconsidered and set
the then Court of First Instance of Quezon City, Branch IV, aside in an Amended Decision dated September 11, 1997. 23
docketed as Civil Case No. 32905.
Hence, the instant Petition on the following issues:
On August 15, 1981, while the said case was pending, L & R
Corporation executed an Affidavit of Consolidation of (1) whether or not paragraphs 8 and 9 of the
Ownership. 14 Thereafter, on August 20, 1981, the Register of Real Estate Mortgage are valid and
Deeds cancelled Transfer Certificates of Title No. 197232 and enforceable;
197233 and in lieu thereof, issued Transfer Certificates of Title (2) whether or not the sale of the mortgaged
No. 28005415 and 28055 16 in favor of L & R Corporation, properties by the spouses Litonjua to
free of any lien or encumbrance. PWHAS, without the knowledge and
With titles issued in its name, L & R Corporation advised the consent of L & R Corporation, is valid
tenants of the apartments situated in the subject parcels of and enforceable;
land that being the new owner, the rental payments should be (3) whether or not PWHAS had the right to
made to them, and that new lease contracts will be executed redeem the foreclosed properties on
with interested tenants before the end of August, the account of the spouses Litonjua;
1981. 17 Upon learning of this incident from their tenants, the and
spouses Litonjua filed an adverse claim 18 and a notice of lis
pendens 19 with the Register of Deeds. In the process, they (4) whether or not there was a valid
learned that the prior sale of the properties in favor of PWHAS redemption.
was not annotated on the titles issued to L & R. Paragraphs 8 and 9 of the subject Deed of Real Estate
A complaint for Quieting of Title, Annulment of Title and Mortgage read as follows —
Damages with preliminary injunction was filed by the spouses
28

"8. That the MORTGAGORS shall not sell, was erroneously cited to have held that the prohibition in a
dispose of, mortgage, nor in any other mortgage contract against the encumbrance, sale or disposal
manner encumber the real property/properties of the property mortgaged without the consent of the
subject of this mortgage without the prior mortgagee is valid. No similar prohibition forbidding the owner
written consent of the MORTGAGEE; of mortgaged property from (subsequently) mortgaging the
immovable mortgaged is found in our laws, making the ruling
9. That should the MORTGAGORS decide to in Philippine Industrial Co., supra, perfectly valid. On the other
sell the real property/properties subject of this hand, to extend such a ruling to include subsequent sales or
mortgage, the MORTGAGEE shall be duly alienation runs counter not only to Philippine Industrial Co.,
notified thereof by the MORTGAGORS, and itself, but also to Article 2130 of the New Civil Code.
should the MORTGAGEE be interested to
purchase the same, the latter shall be given
priority over all the other prospective
buyers;"24 Meanwhile in De la Paz v. Macondray & Co., Inc., 27 it was
held that while an agreement of such nature does not nullify
There is no question that the spouses Litonjua violated both the subsequent sale made by the mortgagor, the mortgagee is
the aforesaid provisions, selling the mortgaged properties to authorized to bring the foreclosure suit against the mortgagor
PWHAS without the prior written consent of L & R Corporation without the necessity of either notifying the purchaser or
and without giving the latter notice of such sale nor priority including him as a defendant. At the same time, the purchaser
over PWHAS. of the mortgaged property was deemed not to have lost his
equitable right of redemption.
Re: Validity of prohibition against subsequent
sale of mortgaged property without prior In Bonnevie v. Court of Appeals, 28 where a similar provision
written consent of mortgagee and validity of appeared in the subject contract of mortgage, the petitioners
subsequent sale to PWHAS. therein, to whom the mortgaged property were sold without the
written consent of the mortgagee, were held as without the
Petitioners defend the validity of the sale between them by right to redeem the said property. No consent having been
arguing that paragraph 8 violates Article 2130 of the New Civil secured from the mortgagee to the sale with assumption of
Code which provides that "(A) stipulation forbidding the owner mortgage by petitioners therein, the latter were not validly
from alienating the immovable mortgaged shall be void." substituted as debtors. It was further held that since their rights
In the case of Philippine Industrial Co. v. El Hogar Filipino and were never recorded, the mortgagee was charged with the
Vallejo, 25 a stipulation prohibiting the mortgagor from obligation to recognize the right of redemption only of the
entering into second or subsequent mortgages was held valid. original mortgagors-vendors. Without discussing the validity of
This is clearly not the same as that contained in paragraph 8 the stipulation in question, the same was, in effect, upheld.
of the subject Deed of Real Estate Mortgage which also Again, in Cruz v. Court of Appeals, 29 while a similar provision
forbids any subsequent sale without the written consent of the was recognized and applied, no discussion as to its validity
mortgagee. Yet, in Arancillo v. Rehabilitation Finance was made since the same was not raised as an issue. LibLex
Corporation, 26 the case of Philippine Industrial Co.,supra,
29

On the other hand, in Tambunting v. Rehabilitation but was actually a sale or conveyance of all
Finance Corporation, 30 the validity of a similar provision was their rights in the encumbered real property —
specifically raised and discussed and found as invalid. It was in truth, an alienation of the immovable —
there ratiocinated that — which could not lawfully be forbidden.
Moreover, since the subject of the assignment
"To be sure, the deed of second mortgage to the Hernandezes had 'connection with the
executed by the Escuetas in favor of Aurora first assignment with the R.F.C.', it did not fall
Tambunting, married to Antonio L. within, but was explicitly excepted from, the
Tambunting, does contain a provision that 'the prohibitory stipulation in question. Finally, it
property mortgaged shall not be . . . the should not be forgotten that since the
subject of any new or subsequent contracts of Tambuntings, in their own deed of conditional
agreements, saving and excepting those sale with the R.F.C., had accepted without
having connection with the first mortgage with demur the provision that said contract could
the RFC, without first securing the written be revoked within one (1) year from
permission and consent of the September 16, 1955 at the option of the RFC,
MORTGAGEE'. But the provision can only be as vendor, should the former owner (Escueta)
construed as directed against subsequent exercise his right to redeem the property; and
mortgages or encumbrances, not to an that the redemption of the property within said
alienation of the immovable itself. For while period by 'the former owner or his successor-
covenants prohibiting the owner from in-interest' would render their instrument of
constituting a later mortgage over property conditional sale 'automatically null and void
registered under the Torrens Act have been and without effect', they cannot now assume
held to be legally permissible (Phil. Industrial a position inconsistent with said provision.
Co. v. El Hogar Filipino, et al., 45 Phil. 336, (emphasis, Ours)
341-342; Bank of the Philippines v. Ty Camco
Sobrino, 57 Phil. 801), stipulations 'forbidding Earlier, in PNB v. Mallorca, 31 it was reiterated that a real
the owner from alienating the immovable mortgage is merely an encumbrance; it does not extinguish
mortgaged' are expressly declared void by the title of the debtor, whose right to dispose — a principal
law (Art. 2130, Civil Code). It is clear that the attribute of ownership — is not thereby lost. Thus, a mortgagor
stipulation against 'subsequent agreements' had every right to sell his mortgaged property, which right the
above mentioned had not been breached by mortgagee cannot oppose.
the assignment by the Escuetas (to the
Hernandezes) of their right of redemption in In upholding the validity of the stipulation in question, the
connection with the mortgage constituted in amended Decision relied on the cases of Cruz v. Court of
favor of the R.F.C. The assignment was not a Appeals, supra, and Medida v. Court of Appeals. 32 According
subsequent mortgage or encumbrance, licitly to the Court of Appeals, said cases, are not only more recent
comprehended by the prohibitory stipulation,
30

that that of Tambunting, supra, but are also more applicable to Decision rationalize that since paragraph 8 of the subject Deed
the issue at bar. of Real Estate Mortgage contains no absolute prohibition
against the sale of the property mortgaged but only requires
We are not convinced. the mortgagor to obtain the prior written consent of the
As we have mentioned, although a similar provision was mortgagee before any such sale, Article 2130 is not violated
recognized and applied in Cruz v. Court of Appeals, supra, no thereby. This observation takes a narrow and technical view of
discussion as to its validity was made since the same was not the stipulation in question without taking into consideration the
raised as an issue. Thus, it cannot be said that the specific end result of requiring such prior written consent. True, the
pronouncement in the Tambunting case that such a stipulation provision does not absolutely prohibit the mortgagor from
can only be construed as against subsequent mortgages or selling his mortgaged property; but what it does not outrightly
encumbrances but not to an alienation of the immovable itself, prohibit, it nevertheless achieves. For all intents and purposes,
which is prohibited under Article 2130, was abandoned the stipulation practically gives the mortgagee the sole
thereby. On the other hand, the facts in the case of Medida prerogative to prevent any sale of the mortgaged property to a
v. Court of Appeals, are different from those in the present third party. The mortgagee can simply withhold its consent and
case for what was in issue in the said case was a second thereby, prevent the mortgagor from selling the property. This
mortgage over a foreclosed property during the period of creates an unconscionable advantage for the mortgagee and
redemption. Thus, the ruling in Medida quoted in the Amended amounts to a virtual prohibition on the owner to sell his
Decision that "what is delimited is not the mortgagor's jus mortgaged property. In other words, stipulations like those
dispodendi, as an attribute of ownership, but merely the rights covered by paragraph 8 of the subject Deed of Real Estate
conferred by such act of disposal which may correspondingly Mortgage circumvent the law, specifically, Article 2130 of the
be restricted," actually refers to the fact that the only rights New Civil Code.
which a mortgagor can legally transfer, cede and convey after Being contrary to law, paragraph 8 of the subject Deed of Real
the foreclosure of his properties are the right to redeem the Estate Mortgage is not binding upon the parties. Accordingly,
land, and the possession use and enjoyment of the same the sale made by the spouses Litonjua to PWHAS,
during the period of redemption. It has no connection or notwithstanding the lack of prior written consent of L & R
reference to the right of a mortgagor to sell his mortgaged Corporation, is valid. LLpr
property without the required consent of the mortgagee. To be
sure, there is absolutely nothing in Medida that upholds the Re: Validity of redemption effected by
validity of the stipulation in controversy. PWHAS on the account of the spouses
Litonjua
Insofar as the validity of the questioned stipulation prohibiting
the mortgagor from selling his mortgaged property without the Coming now to the issue of whether the redemption offered by
consent of the mortgagee is concerned, therefore, the ruling in PWHAS on account of the spouses Litonjua is valid, we rule in
the Tambunting case is still the controlling law. Indeed, we are the affirmative. The sale by the spouses Litonjua of the
fully in accord with the pronouncement therein that such a mortgaged properties to PWHAS is valid. Therefore, PWHAS
stipulation violates Article 2130 of the New Civil Code. Both stepped into the shoes of the spouses Litonjua on account of
the lower court and the Court of Appeals in its Amended such sale and was in effect, their successor-in-interest. As
31

such, it had the right to redeem the property foreclosed by L & It is clear from the records that PWHAS offered to redeem the
R Corporation. Again, Tambunting, supra,clarifies that — subject properties seven (7) months after the date of
registration of the foreclosure sale, well within the one year
". . . . The acquisition by the Hernandezes of period of redemption.
the Escuetas' rights over the property carried
with it the assumption of the obligations Re: Validity and enforceability of stipulation
burdening the property, as recorded in the granting the mortgagee the right of first
Registry of Property, i.e., the mortgage debts refusal
in favor of the RFC (DBP) and the
Tambuntings. The Hernandezes, by stepping While petitioners question the validity of paragraph 8 of their
into the Escuetas' shoes as assignees, had mortgage contract, they appear to be silent insofar as
the obligation to pay the mortgage debts, paragraph 9 thereof is concerned. Said paragraph 9 grants
otherwise, these debts would and could be upon L & R Corporation the right of first refusal over the
enforced against the property subject of the mortgaged property in the event the mortgagor decides to sell
assignment. Stated otherwise, the the same. We see nothing wrong in this provision. The right of
Hernandezes, by the assignment, obtained first refusal has long been recognized as valid in our
the right to remove the burdens on the jurisdiction. The consideration for the loan-mortgage includes
property subject thereof by paying the the consideration for the right of first refusal. L & R Corporation
obligations thereby secured; that is to say, is in effect stating that it consents to lend out money to the
they had the right of redemption as regards spouses Litonjua provided that in case they decide to sell the
the first mortgage, to be exercised within the property mortgaged to it, then L & R Corporation shall be given
time and in the manner prescribed by law and the right to match the offered purchase price and to buy the
the mortgage deed; and as regards the property at that price. Thus, while the spouses Litonjua had
second mortgage, sought to be judicially every right to sell their mortgaged property to PWHAS without
foreclosed but yet unforeclosed, they had the securing the prior written consent of L & R Corporation, they
so-called equity of redemption." had the obligation under paragraph 9, which is a perfectly valid
provision, to notify the latter of their intention to sell the
The right of PWHAS to redeem the subject properties finds property and give it priority over other buyers. It is only upon
support in Section 6 of Act 3135 itself which gives not only the failure of L & R Corporation to exercise its right of first refusal
mortgagor-debtor the right to redeem, but also his successors- could the spouses Litonjua validly sell the subject properties to
in-interest. As vendee of the subject properties, PWHAS others, under the same terms and conditions offered to L & R
qualifies as such a successor-in-interest of the spouses Corporation.
Litonjua.
What then is the status of the sale made to PWHAS in
Re: Validity of redemption made 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
32

rescissible. The case of Guzman, Bocaling & Co In the case at bar, PWHAS cannot claim ignorance of the right
v. Bonnevie 33 is instructive on this point — of first refusal granted to L & R Corporation over the subject
properties since the Deed of Real Estate Mortgage containing
"The respondent court correctly held that the such a provision was duly registered with the Register of
Contract of Sale was not voidable Deeds. As such, PWHAS is presumed to have been notified
but rescissible. Under Article 1380 to 1381(3) thereof by registration, which equates to notice to the whole
of the Civil Code, a contract otherwise valid world.
may nonetheless be subsequently rescinded
by reason of injury to third persons, like We note that L & R Corporation had always expressed its
creditors. The status of creditors could be willingness to buy the mortgaged properties on equal terms as
validly accorded the Bonnevies for they had PWHAS. Indeed, in its Answer to the Complaint filed, L & R
substantial interests that were prejudiced by Corporation expressed that it was ready, willing and able to
the sale of the subject property to the purchase the subject properties at the same purchase price of
petitioner without recognizing their right of first P430,000.00, and was agreeable to pay the difference
priority under the Contract of Lease. between such purchase price and the redemption price of
P249,918.77, computed as of August 13, 1981, the expiration
According to Tolentino, rescission is a of the one-year period to redeem. That it did not duly exercise
remedy granted by law to the contracting its right of first refusal at the opportune time cannot be taken
parties and even to third persons, to secure against it, precisely because it was not notified by the spouses
reparation for damages caused to them by a Litonjua of their intention to sell the subject property and
contract, even if this should be valid, by thereby, to give it priority over other buyers.
means of the restoration of things to their
condition at the moment prior to the All things considered, what then are the relative rights and
celebration of said contract. It is a relief obligations of the parties? To recapitulate:, the sale between
allowed for one of the contracting parties and the spouses Litonjua and PWHAS is valid, notwithstanding the
even third persons from all injury and damage absence of L & R Corporation's prior written consent thereto.
the contract may cause, or to protect some Inasmuch as the sale to PWHAS was valid, its offer to redeem
incompatible and preferential right created by and its tender of the redemption price, as successor-in-interest
the contract. Rescission implies a contract of the spouses Litonjua, within the one-year period should
which, even if initially valid, produces a lesion have been accepted as valid by L & R Corporation. However,
or pecuniary damage to someone that while the sale is, indeed, valid, the same is rescissible
justifies its invalidation for reasons of equity." because it ignored L & R Corporation's right of first refusal.
(underscoring, Ours) Foreseeing a possible rescission of the sale, the spouses
Litonjua contend that with the restoration of the original status
It was then held that the Contract of Sale there, which violated quo, with no sale having been made, they should now be
the right of first refusal, was rescissible. cdasia allowed to redeem the subject properties, the period of
redemption having been suspended during the period of
33

litigation. In effect, the spouses Litonjua want to retain representing the difference from the
ownership of the same. We cannot, however, sanction this purchase price of P430,000.00 in the
belated reversal of the spouses Litonjua's decision to sell. To rescinded sale;
do so would afford them undue advantage on account of the
appreciation of the value of the subject properties in the (e) Deleting the awards for moral and
intervening years when they precisely were the ones who exemplary damages and attorney's
violated and ignored the right of first refusal of L & R fees to the respondents.
Corporation over the same. Moreover, it must be stressed that No pronouncement as to costs.
in rescinding the sale made to PWHAS, the purpose is to
uphold and enforce the right of first refusal of L & R SO ORDERED.
Corporation. Bellosillo, Melo, Puno, Kapunan, Panganiban, Quisumbing,
WHEREFORE, the Decision appealed from is hereby Purisima, Pardo, Buena, Gonzaga-Reyes and De Leon, Jr.,
AFFIRMED with the following MODIFICATIONS: JJ., concur.

(a) Ordering the rescission of the sale of the Davide, Jr., C.J. and Mendoza, J., join Justice Vitug in his
mortgaged properties concurring and dissenting opinion.
between petitioners spouses Reynaldo
and Erlinda Litonjua and Philippine
White House Auto Supply, Inc. and Separate Opinions
ordering said spouses to return to
Philippine White House Auto Supply, VITUG, J ., concurring and dissenting:
Inc. the purchase price of
P430,000.00; At the pith of the controversy are two stipulations in a real
estate mortgage contract, to wit: (a) that the mortgagor cannot
(c) Disallowing, due to the rescission of the
sell the mortgaged property without the written consent of the
sale made in its favor, the redemption
mortgagee, and (b) that the latter has a "right of first refusal" in
made by Philippine White House Auto
any projected sale of the hypothecated property. LLphil
Supply, Inc. and ordering Quezon City
Sheriff Roberto Garcia to return to it Outlined below is a factual backdrop of the case.
the "redemption" check of
P240,798.94; The spouses Reynaldo and Erlinda Litonjua (Litonjua spouses)
contracted a loan from L & R Corporation in the sum of
(d) Allowing respondent L & R Corporation to P400,000.00 drawn in two tranches — P200,000.00 on 06
retain its consolidated titles to the August 1974 and the other P200,000.00 on 27 March 1978.
foreclosed properties but ordering it to The loan was secured by a real estate mortgage constituted
pay to the Litonjua spouses the by the spouses on their two parcels of land located in Cubao,
additional sum of P189,201.96 Quezon City, covered by Transfer Certificates of Title ("TCT")
34

No. 197232 and 197233, measuring 599 and 1,436 sq. m., Quezon City to compel L & R Corporation to surrender the
respectively. The contract provided, inter alia, that the duplicate certificates of title.
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 During the pendency of the case, L & R Corporation executed
mortgagors decided to sell the property. 1 The mortgage was an "Affidavit of Consolidation of Ownership," on the basis of
duly registered with the Register of Deeds of Quezon City. which the Register of Deeds cancelled TCT No. 197232 and
While the mortgage obligation was still outstanding, the 197233 and, in lieu thereof, issued TCT No. 280054 and
Litonjua spouses sold the two parcels of land to Philippine 280055 in favor of L & R Corporation free from any lien or
White House Auto Supply, Inc. (PWHAS), for the amount of encumbrance. L & R Corporation thereupon advised the
P430,000.00. The sale was annotated at the back of the tenants of the apartment units on the subject lots to tender
certificate of title. rental payments to the corporation as being the new owner.

When the Litonjuas defaulted in the payment of the loan, L & R Apprised of the foregoing, the Litonjua spouses filed a
Corporation initiated extrajudicial foreclosure of the mortgage. complaint for "Quieting of Title, Annulment of Title and
The mortgaged parcels were sold at public auction to L & R Damages." The trial court dismissed the complaint on the
Corporation, it being the sole bidder, on 23 July 1980. On 15 thesis that the sale between the spouses Litonjua and
August 1980, when L & R presented its certificate of sale to PWHAS, as well as the redemption subsequently made, was
the Register of Deeds of Quezon City, it was informed of the null and void and unenforceable against L & R Corporation.
previous sale made by the Litonjua spouses to PWHAS. L & R On appeal, the judgment of the trial court was set aside by the
Corporation thereupon sought from the Register of Deeds the Court of Appeals in its decision of 22 June 1994; however, on
cancellation of the annotation of sale to PWHAS calling 11 September 1997, the appellate court reconsidered and
attention to the proviso in the mortgage agreement enjoining reversed its previous stand.
the Litonjua spouses from selling the property.
There appears to be some merit in the instant petition.
Later, PWHAS, for the account of the Litonjua spouses,
tendered payment of the full redemption price to L & R The stipulation in the real estate mortgage which prohibits the
Corporation. Upon the latter's refusal to honor the redemption, mortgagor from selling the mortgaged property without the
PWHAS tendered the amount with the Branch Clerk of Court; written consent of the mortgagee contravenes the law. Article
correspondingly, the Deputy Sheriff issued a certificate of 2130 of the New Civil Code holds that a stipulation
redemption in favor of the Litonjua spouses. The Certificate of forbidding the owner from alienating the immovable
Redemption, however, could not be registered because L & R mortgaged shall be void. The phrase "without (the) written
Corporation would not surrender the owner's duplicate consent of the mortgagee," added by the parties in their
certificates of title. When the Register of Deeds likewise contract is of no real comfort to the mortgagee and did nothing
refused to annotate the certificate of redemption as an adverse but to stress, indeed, the restriction against what should
claim on the titles covering the two parcels of land, the otherwise be an unimpeded right of the mortgagor to alienate
Litonjuas filed a petition with the then Court of First Instance of the property. The clear intention of the law is to outlaw a
35

stipulation that would effectively prevent the mortgagor from Most importantly, a rescissory action in consonance with
freely conveying the property during the life of the mortgage. Article 1380, in relation to Article 1381, paragraph (3), of the
Needless to state, the injunction of the law may not be New Civil Code 6 so invoked (by citing Guzman, Bocaling &
circumvented, whether directly or indirectly, by the parties. Co. vs. Bonnevie 7 ) as the authority for the rescission of the
sale between the Litonjua spouses and PWHAS is here off the
I am, therefore, in complete accord with the majority in mark unfortunately. An action for rescission under said
concluding that "the sale made by the spouses Litonjua to provisions of the Code is merely subsidiary and relates to
PWHAS, notwithstanding the lack of prior written consent of L the specific instance when a debtor, in an attempt to
& R Corporation, is valid," and that as such successor-in- defraud his creditor, enters into a contract with another
interest of the Litonjuas, PWHAS has a "right to redeem the that deprives the creditor to recover his just claim and
property foreclosed by L & R Corporation." LLphil leaves him with no other legal means, than by rescission,
What I find quite difficult to accept, with all due respect, is the to obtain reparation. 8 Hence, the rescission is only to the
pre-emptive and peremptory pronouncement in extent necessary to cover the damages caused pursuant to
the ponencia that the sale between the Litonjuas and PWHAS Article 1384 of the Civil Code. Verily, the case and factual
is rescissible because it ignored the "right of first refusal" of L settings in the instant controversy (for "Quieting of Title,
& R Corporation. I must stress that a right of first refusal is not Annulment of Title and Damages with Preliminary Injunction")
a perfected contract. 2 Neither does it qualify as an option initiated by the Litonjua spouses and PWHAS against herein
under the second paragraph of Article 1479, 3 which itself respondents is neither the occasion nor the proper forum for
must be supported by a consideration separate and distinct such an issue to be considered. 9
from the price itself, 4 nor an offer which Article 1319 5 of the To sum up, the only matter called for to be said, in my view, is
Code requires to be definitive and certain both as to object and that part of the ponencia which concludes that the sale
cause of the contemplated agreement. Even while the object between the Litonjua spouses and PWHAS is a valid and
in a "right of first refusal" might be determinate, the exercise of subsisting contract which has accorded to PWHAS, by
the right, nevertheless, would still be dependent not only on stepping into the shoes of the sellers, a corresponding
the grantor's eventual intention to enter into a binding juridical entitlement to redeem the foreclosed property.
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 WHEREFORE, I vote to REVERSE and SET ASIDE the
first refusal can be the proper subject of an action for specific appealed amended judgment and to REINSTATE the original
performance but, of course, neither would it be correct to say decision, dated 22 June 1994, of the appellate court. prcd
that a breach of such right would be totally inconsequential. A
grantor who unjustly discards his own affirmation violates the ||| (Spouses Litonjua v. L & R Corp., G.R. No. 130722,
basic dogma in human relations so well expressed as in Article [December 9, 1999], 378 PHIL 145-169)
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.
36

EN BANC 5. JURISDICTION; CANCELLATION OF CERTIFICATES OF


TITLE; WHEN CADASTRAL COURT HAS JURISDICTION. —
[G.R. No. L-22538. October 31, 1967.] A cadastral court has jurisdiction to entertain a petition for the
cancellation of a certificate of title where the registered owner
has been lawfully divested of his title to the property and there
PHILIPPINE NATIONAL BANK, petitioner- is no substantial controversy in regard thereto between the
appellee, vs. PRIMITIVA petitioner and any other interested party.
MALLORCA, oppositor-appellant.

Ramon B. de los Reyes for petitioner-appellee. DECISION


Eugenio G. Gemarino for oppositor-appellant.

SANCHEZ, J p:
SYLLABUS
Disputed by appellant Primitiva Mallorca is the correctness of
the order of the Court of First Instance of Iloilo, sitting as a
1. MORTGAGES; NATURE OF RECORDED MORTGAGE;
Cadastral Court, 1 directing her to surrender to the Register of
EFFECT OF CHANGES IN OWNERSHIP. — A recorded real
Deeds her co-owner's copy of Transfer Certificate of Title No.
estate mortgage is a right in rem, a lien inseparable from the
T-24256. This is necessary to enable the Philippine National
property mortgaged. Until discharged, it follows the property. It
Bank 2to secure in its name Torrens title to the property
subsists notwithstanding changes of ownership; all
involved which it acquired in a foreclosure sale upon mortgage
subsequent purchasers of the property must respect the
executed in its favor.
mortgage, whether the transfer to them be with or without the
consent of the mortgagee. The background facts may be recited as follows:
2. ID.; ID.; INDIVISIBILITY OF MORTGAGE. — A real estate Way back in 1950, Ruperta Lavilles mortgaged a 48,965
mortgage is indivisible. Each and every parcel of land under square meter-parcel of land situate in Passi, Iloilo (Lot 1504,
mortgage answers for the totality of the debt. Passi Cadastral Survey) to the PNB as security for a loan of
P1,800.00. The lot was covered by Transfer Certificate of Title
3. ID.; EFFECT OF REGISTRATION. — Registration of the
27070 in the name of Ruperta Lavilles. The mortgage was duly
mortgage in the Register of Deeds is notice to all persons of
recorded.
the existence thereof.
On January 12, 1958, while the mortgage above described
4. ID.; RIGHT OF REDEMPTION; FAILURE TO EXERCISE.
was in full force and effect, and without PNB's knowledge and
— Failure of the owner of a parcel of land mortgaged to
consent, Ruperta Lavilles sold to appellant Primitiva Mallorca
exercise his right of redemption ends his interest in the land
20,000 square meters of the mortgaged land.
and estops him from denying the mortgage lien thereon.
37

On January 17, 1958, Mallorca moved the Iloilo cadastral court Primitiva Mallorca failed to exercise her right of redemption as
to have the sale to her duly annotated on the title, 3 and, for decreed by the court.
the purpose, to require PNB to surrender the owner's copy of
TCT 27070 to the Register of Deeds. Thus, the final deed of sale in favor of PNB, dated February
19, 1962, was presented to the Register of Deeds on April 10,
The court order of February 3, 1958 directed PNB to deliver 1962 for registration. The latter refused to register without
said TCT 27070 to the Register of Deeds, and warned that Mallorca's co- owner's copy of TCT 24256. By letter of May 18,
"[t]he mortgage in favor of the Philippine National Bank is duly 1962, the Register of Deeds required Mallorca to surrender
registered in the Office of the Register of Deeds and to said copy. She did not comply.
whomsoever the land is sold the vendee will assume the
responsibility of complying with the provisions of the And so, PNB lodged the present petition for consolidation of
mortgage." title in the cadastral court. The bank prayed that Mallorca's co-
owner's copy of TCT 24256 be declared null and void, and that
The Register of Deeds then cancelled TCT 27070, issued a the Register of Deeds be directed to cancel the same and to
new one, TCT 24256, making two co-owner's copies of the title issue a new title in the name of PNB, upon payment of the
— one each for Ruperta Lavilles and for Primitiva Mallorca. legal fees.
PNB's mortgage lien was annotated on both copies.
By order of August 18, 1962, the court a quo required Mallorca
Ruperta Lavilles failed to pay her mortgage debt. PNB, on "to deliver the co-owner's duplicate copy of TCT 24256 to the
April 16, 1958, foreclosed the mortgage extrajudicially. On Register of Deeds within a period of five (5) days."
May 12, 1958, a certificate of sale was issued to PNB as the
highest bidder in the foreclosure sale. This certificate of sale Mallorca appealed this order to the Court of Appeals. 6 The
was registered with the Register of Deeds of Iloilo. latter, however, in its resolution of February 18, 1964, certified
the case to this Court, as the issues present questions of law.
In March, 1959, Mallorca sued PNB to enforce her right of
redemption, with damages. 4 1 Appellant's stand is that her undivided interest consisting of
20,000 square meters of the mortgaged lot, remained
On February 9, 1960, judgment was rendered in the case just unaffected by the foreclosure and subsequent sale to PNB.
stated, dismissing the claim for damages but declaring Because, so she argues, she was not a party to the real estate
Mallorca "entitled to exercise her right of redemption with mortgage in favor of PNB, and she "neither secured nor
respect to the 20,000 square meters sold to her by Ruperta contracted a loan" with said bank. What PNB foreclosed, she
Lavilles within the period specified by law." maintains, "was that portion belonging to Ruperta Lavilles
only", not the part belonging to her.
Mallorca's appeal from this judgment was, on June 18, 1960,
denied by the lower court — it was filed out of time. Her move Appellant's position clashes with precepts well-entrenched in
to reconsider was rejected. She then went to the Court of law. By Article 2126 of the Civil Code, 7 a "mortgage directly
Appeals on mandamus. On January 14, 1961, the appellate and immediately subjects the property upon which it is
court denied the same for lack of merit. 5 imposed, whoever the possessor may be, to the fulfillment of
the obligation for whose security it was constituted." Sale or
38

transfer cannot affect or release the mortgage. A purchaser is affect the mortgage, as the latter follows the property whoever
necessarily bound to acknowledge and respect the the possessor may be." 15
encumbrance to which is subjected the purchased thing and
which is at the disposal of the creditor "in order that he, under On Primitiva Mallorca's part, she cannot rightfully deny the
the terms of the contract, may recover the amount of his credit mortgage lien on the portion of the land she purchased. First.
therefrom." 8 For, a recorded real estate mortgage is a right in Registration of the mortgage in the Register of Deeds is notice
rem, a lien on the property whoever its owner may to all persons of the existence thereof. 16 Second. By express
be. 9 Because the personality of the owner is disregarded; the provision of Section 39 of the Land Registration Act, "every
mortgage subsists notwithstanding changes of ownership; the subsequent purchaser of registered land who takes a
last transferee is just as much of a debtor as the first one; and certificate of title for value in good faith shall hold the same
this, independent of whether the transferee knows or not the free of all encumbrance except those noted on said
person of the mortgagee. 10 So it is, that a mortgage lien certificate." 17 Clear implication exists that if an encumbrance
is inseparable from the property mortgaged. All subsequent is so noted, that purchaser is bound thereby. Third. Mallorca
purchasers thereof must respect the mortgage, whether the herself petitioned the court to order PNB to deliver the owner's
transfer to them be with or without the consent of the copy of TCT 27070 to the Register of Deeds for annotation of
mortgagee. For, the mortgage, until discharged, follows the Mallorca's interest, as heretofore adverted to. And the court, in
property. 11 giving its stamp of approval to the petition, expressly directed
that "to whomsoever the land is sold the vendee will assume
And then, militating against appellant's cause is one other the responsibility of complying with the provisions of the
special feature of a real mortgage — its indivisibility. 12 This mortgage." Fourth.Mallorca's own co-owner's copy of the title
Court has understood mortgage indivisibility in the sense that issued to her carried PNB's mortgage lien. Fifth. The fact that
each and every parcel under mortgage answers for the totality Mallorca failed to exercise her right of redemption, which she
of the debt. 13 sought to enforce in a judicial court, ends her interest to the
land she claims, and, doubtless, estops her from denying
It does not really matter that the mortgagee, as in this case, PNB's mortgage lien thereon.
did not oppose the subsequent sale. Naturally, because the
sale was without PNB's knowledge. Even if such knowledge is We, accordingly, rule that PNB has the right to consolidate its
chargeable to PNB, its failure to object to the sale could not title on the entire lot mortgaged by Ruperta Lavilles in its favor,
have any impairing effect upon its rights as mortgagee. After including the P20,000 square meter-undivided interest of
all, a real mortgage is merely an encumbrance; it does not Primitiva Mallorca. And this, by virtue of the foreclosure sale
extinguish the title of the debtor, whose right to dispose — a and the expiry of Mallorca's right of redemption.
principal attribute of ownership — is not thereby lost. 14 And,
on the assumption that PNB recognized the efficaciousness of
the sale by Ruperta Lavilles of a portion of the mortgaged land 2. In a final effort to overturn the order under review, appellant
to Primitiva Mallorca, which Lavilles "had the right to make" espouses the thesis that the lower court, acting as a cadastral
and which anyway PNB "cannot oppose", PNB cannot be court, is without jurisdiction in the premises. Her syllogism is
prejudiced thereby, for, at all events, "such sale could not this: she is questioning the right of PNB to declare TCT 24256
39

as null and void insofar as the 20,000 square meter-undivided Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon,
portion is concerned; the issue is thus raised to the level of J.P., Zaldivar, Castro, Angeles and Fernando. JJ., concur.
"contentious litigation"; and, going by jurisprudence, 18 a
cadastral court is devoid of power to act thereon. ||| (Philippine National Bank v. Primitiva Mallorca, G.R. No. L-
22538, [October 31, 1967], 128 PHIL 747-754)
The precedents appellant depends on cannot
serve as authority in her case. For, those cases
involved unresolved issues. Here, the question she
presents — whether her undivided share in the lot is
encumbered or unencumbered — has been definitely
passed upon in the redemption case she brought against
PNB (Civil Case 5149, Court of First Instance of Iloilo).
Mallorca herself acknowledged the validity of that
encumbrance when she commenced said civil case. Given
the facts, PNB's petition to consolidate title falls under the
rule that a cadastral court has jurisdiction to entertain a
petition for the cancellation of an outstanding certificate of
title where the registered owner has been lawfully
divested of his title thereof. 19 For, the truth is that this
case presents no substantial controversy. As held in the
case of Castillo vs. Ramos, supra, pp. 814-815 —
"where a petition concerning the cancellation
of any encumbrance noted on a Torrens
certificate of title is filed within the record of
the land registration case in which the basic
decree was entered and there is no
substantial controversy in regard thereto
between the petitioner and any other
interested party, such petition may be
considered as a mere incidental matter in
such land registration case and may therein
be acted upon by the proper court." 20
Upon the record as it stands, the lower court order of August
18, 1962 is, as it is hereby, affirmed.
Costs against oppositor-appellant. So ordered.
40

SECOND DIVISION order, praying that the relief of foreclosure and sale at
public auction be granted. The trial court denied the motion
[G.R. No. 138292. April 10, 2002.] and ruled that the petitioner deemed to have abandoned
its lien on the property mortgaged when it opted to file an
action for collection of a sum of money. Hence, this appeal
KOREA EXCHANGE BANK, petitioner, vs. before the Supreme Court.
FILKOR BUSINESS INTEGRATED, INC.,
The Supreme Court granted the petition. According
KIM EUNG JOE, and LEE HAN
SANG, respondents. to the Court, the allegations in the petitioner's complaint
and its prayer that the mortgaged property be foreclosed
and sold at public auction indicated that petitioner's action
Romulo Mabanta Buenaventura Sayoc & Delos Angeles for was one for foreclosure of real estate mortgage. Thus, the
petitioner. trial court erred in concluding that petitioner has
abandoned its mortgage lien on Filkor property, and that
Donardo R. Paglinawan for private respondents. what it had filed was an action for collection of a sum of
money. The Court modified the decision to include that the
mortgaged property of Filkor be ordered foreclosed and
SYNOPSIS sold at public auction in the event of respondent's failure to
pay its obligations within a certain period.
Respondent Filkor Business Integrated, Inc. (Filkor)
incurred several obligations in the form of cash and letters
of credit from herein petitioner Korean Exchange Bank. In SYLLABUS
order to secure payment of all its obligations, Filkor
executed a real estate mortgage of the improvements 1. REMEDIAL LAW; ACTIONS; PLEADINGS; ALLEGATIONS
constructed on a lot which it was leasing from the Cavite IN THE COMPLAINT AND THE CHARACTER OF THE
Export Processing Zone Authority. Respondents Kim Eung RELIEF SOUGHT DETERMINE THE NATURE OF AN
Joe and Lee Han Sang also executed continuing ACTION; APPLICATION IN CASE AT BAR. — Petitioner's
suretyship binding them jointly and severally with Filkor to allegations in its complaint, and its prayer that the mortgaged
pay the latter's obligations to petitioner. As the property be foreclosed and sold at public auction, indicate that
respondents failed to make good on their obligations, petitioner's action was one for foreclosure of real estate
petitioner filed a civil case with the Regional Trial Court of mortgage. We have consistently ruled that what determines
Cavite and moved for summary judgment. The trial court the nature of an action, as well as which court or body has
granted the motion, then rendered judgment in favor of the jurisdiction over it, are the allegations of the complaint and the
petitioner. The trial court, however, failed to order that the character of the relief sought. In addition, we find no indication
property of Filkor be foreclosed and sold at public auction whatsoever that petitioner had waived its rights under the real
in the event that Filkor fails to pay its obligations. Petitioner estate mortgage executed in its favor. Thus, the trial court
filed a motion for partial reconsideration of the trial court's erred in concluding that petitioner had abandoned its mortgage
41

lien on Filkor's property, and that what it had filed was an This petition assails the order 1 dated April 16, 1999 of the
action for collection of a sum of money. Petitioner's action Regional Trial Court of Cavite City, Branch 88, in Civil Case
being one for foreclosure of real estate mortgage, it was No. N-6689. Said order denied petitioner's partial motion for
incumbent upon the trial court to order that the mortgaged reconsideration of the trial court's order 2 dated March 12,
property be foreclosed and sold at public auction in the event 1999 whereby respondents were ordered to pay petitioner
that respondent Filkor fails to pay its outstanding obligations. various sums of U.S. dollars as payment of the former's
This is pursuant to Section 2 of Rule 68 of the 1997 Rules of various loans with interest but omitted to state that the
Civil Procedure. ETaHCD property mortgaged as security for said loans be foreclosed
and sold at public auction in case respondents fail to pay their
2. ID.; APPEAL; APPEAL TO THE SUPREME COURT; PURE obligations to petitioner ninety days from entry of judgment.
QUESTION OF LAW AS A GROUND, PRESENT IN CASE AT
BAR. — On the propriety of the present appeal, we note that The facts are summarized from the findings of the trial court.
what petitioner impugns is the determination by the trial court
of the nature of action filed by petitioner, based on the On January 9, 1997, respondent Filkor Business Integrated,
allegations in the complaint. Such a determination as to the Inc. (Filkor), borrowed US$140,000 from petitioner Korea
correctness of the conclusions drawn from the pleadings Exchange Bank, payable on July 9, 1997. Of this amount, only
undoubtedly involves a question of law. As the present appeal US$40,000 was paid by Filkor. 3
involves a question of law, petitioner appropriately filed it with In addition, Filkor executed nine trust receipts in favor of
this Court, pursuant to Section 1 of Rule 45 of the 1997 Rules petitioner, from June 26, 1997 to September 11, 1997.
of Civil Procedure, which provides: SECTION 1. Filing of However, Filkor failed to turn over to petitioner the proceeds
petition with Supreme Court. – A party desiring to appeal from the sale of the goods, or the goods themselves as
by certiorari from a judgment or final order or resolution of the required by the trust receipts in case Filkor could not sell
Court of Appeals, the Sandiganbayan, the Regional Trial Court them. 4
or other courts whenever authorized by law, may file with the
Supreme Court a verified petition for review on certiorari. The In the period from June 9, 1997 to October 1, 1997, Filkor also
petition shall raise only questions of law which must be negotiated to petitioner the proceeds of seventeen letters of
distinctly set forth. There is no dispute with respect to the fact credit issued by the Republic Bank of New York and the
that when an appeal raises only pure questions of law, this Banque Leumi France, S.A. to pay for goods which Filkor sold
Court has jurisdiction to entertain the same. to Segerman International, Inc. and Davyco, S.A. When
petitioner tried to collect the proceeds of the letters of credit by
presenting the bills of exchange drawn to collect the proceeds,
they were dishonored because of discrepancies.5
DECISION
Prior to all the foregoing, in order to secure payment of all its
obligations, Filkor executed a Real Estate Mortgage on
February 9, 1996. It mortgaged to petitioner the improvements
QUISUMBING, J p: belonging to it constructed on the lot it was leasing at the
Cavite Export Processing Zone Authority. 6 Respondents Kim
42

Eung Joe and Lee Han Sang also executed Continuing A summary of judgment is one granted by the
Suretyships binding themselves jointly and severally with court upon motion by a party for an
respondent Filkor to pay for the latter's obligations to expeditious settlement of the case, there
petitioner. 7 appearing from the pleadings, depositions,
admissions and affidavits that there are no
As respondents failed to make good on their obligations, important questions or issues of fact involved
petitioner filed Civil Case No. N-6689 in the Regional Trial (except as to the amount of damages) and
Court of Cavite City, docketed as "Korea Exchange Bank vs. that, therefore, the moving party is entitled to
Filkor Business Integrated, Inc." In its complaint, petitioner a judgment as a matter of law (Sections 1, 2,
prayed that (a) it be paid by respondents under its twenty- 3, Rule 35, 1997 Rules of Civil Procedure).
seven causes of action; (b) the property mortgaged be
foreclosed and sold at public auction in case respondents The court having taken into account the
failed to pay petitioner within ninety days from entry of pleadings of the parties as well as the
judgment; and (c) other reliefs just and equitable be granted. 8 affidavits attached to the motion for summary
judgment and having found that there is
Petitioner moved for summary judgment pursuant to Section 1, indeed no genuine issue as to any material
Rule 35 of the 1997 Rules of Civil Procedure. On March 12, fact and that plaintiff is entitled to a summary
1999, the trial court rendered its order granting petitioner's of judgment as a matter of law, hereby
motion, reasoning as follows: renders judgment for the plaintiff and against
xxx xxx xxx the defendants, ordering said defendants
jointly and severally to pay plaintiff, as follows
It appears that the only reason defendants ...9
deny all the material allegations in the
complaint is because the documents attached The trial court then rendered judgment in favor of petitioner,
thereto are mere photocopies and not the granting its prayers under all its twenty-seven causes of
originals thereof. Section 7, Rule 8 of the action. It, however, failed to order that the property mortgaged
Rules of Court allows copies of documents to by respondent Filkor be foreclosed and sold at public auction
be attached to the pleading as an exhibit. in the event that Filkor fails to pay its obligations to petitioner.
Defendants are, therefore, deemed to have
admitted the genuineness and due execution Petitioner filed a motion for partial reconsideration of the trial
of all actionable documents attached to the court's order, praying that the aforesaid relief of foreclosure
complaint inasmuch as they were not and sale at public auction be granted. In an order dated April
specifically denied, pursuant to Section 8 of 16, 1999, the trial court denied petitioner's motion, ruling as
the Rule 8 of the Rules of Court. follows:

In the case at bar, there is clearly no Plaintiff, in opting to file a civil action for the
substantial triable issue, hence, the motion for collection of defendants obligations, has
summary judgment filed by plaintiff is proper.
43

abandoned its mortgage lien on the property BECAUSE IT FILED A SIMPLE


subject of the real estate mortgage. COLLECTION CASE. 11
The resultant issue is whether or not petitioner's complaint
before the trial court was an action for foreclosure of a real
The issue has already been resolved estate mortgage, or an action for collection of a sum of money.
in Danao vs. Court of Appeals, 154 SCRA In addition, we must also determine if the present appeal was
446, citing Manila Trading and Supply Co. vs. correctly lodged before us rather than with the Court of
Co Kim, et al., 71 Phil. 448, where the Appeals.
Supreme Court ruled that:
In petitioner's complaint before the trial court, Paragraph 183
The rule is now settled that a thereof alleges:
mortgage creditor may elect to waive
his security and bring, instead, an 183. To secure payment of the obligations of
ordinary action to recover the defendant Corporation under the First to the
indebtedness with the right to execute Twenty-Seventh Cause of Action, on
a judgment thereon on all the February 9, 1996, defendant Corporation
properties of the debtor including the executed a Real Estate Mortgage by virtue of
subject matter of the mortgage, which it mortgaged to plaintiff the
subject to the qualification that if he improvements standing on Block 13, Lot 1,
fails in the remedy by him elected, he Cavite Export Processing Zone, Rosario,
cannot pursue further the remedy he Cavite, belonging to defendant Corporation
has waived. SHaATC covered by Tax Declaration No. 5906-1 and
consisting of a one-story building called
WHEREFORE, the Partial Motion for warehouse and spooling area, the
Reconsideration filed by the plaintiff of the guardhouse, the cutting/sewing area building
Court's Order dated March 12, 1999 is hereby and the packing area building. (A copy of the
denied for lack of merit. Real Estate Mortgage is attached hereto as
SO ORDERED. 10 Annex "SS" and made an integral part
hereof.) 12
Hence, the present petition, where petitioner ascribes the
following error to the trial court. This allegation satisfies in part the requirements of Section 1,
Rule 68 of the 1997 Rules of Civil Procedure on foreclosure of
THE REGIONAL TRIAL COURT OF CAVITE real estate mortgage, which provides:
CITY ERRED IN RULING THAT
PETITIONER HAD ABANDONED THE REAL SECTION 1. Complaint in action for
ESTATE MORTGAGE IN ITS FAVOR, foreclosure. – In an action for the foreclosure
of a mortgage or other encumbrance upon
real estate, the complaint shall set forth the
44

date and due execution of the mortgage; its indicate that petitioner's action was one for foreclosure of real
assignments, if any; the names and estate mortgage. We have consistently ruled that what
residences of the mortgagor and the determines the nature of an action, as well as which court or
mortgagee; a description of the mortgaged body has jurisdiction over it, are the allegations of the
property; a statement of the date of the note complaint and the character of the relief sought. 16 In addition,
or other documentary evidence of the we find no indication whatsoever that petitioner had waived its
obligation secured by the mortgage, the rights under the real estate mortgage executed in its favor.
amount claimed to be unpaid thereon; and the Thus, the trial court erred in concluding that petitioner had
names and residences of all persons having abandoned its mortgage lien on Filkor's property, and that
or claiming an interest in the property what it had filed was an action for collection of a sum of
subordinate in right to that of the holder of the money.
mortgage, all of whom shall be made
defendants in the action. Petitioner's action being one for foreclosure of real estate
mortgage, it was incumbent upon the trial court to order that
In Paragraph 183 above, the date and due execution of the the mortgaged property be foreclosed and sold at public
real estate mortgage are alleged. The properties mortgaged auction in the event that respondent Filkor fails to pay its
are stated and described therein as well. In addition, the outstanding obligations. This is pursuant to Section 2 of Rule
names and residences of respondent Filkor, as mortgagor, 68 of the 1997 Rules of Civil Procedure, which provides:
and of petitioner, as mortgagee, are alleged in paragraphs 1
and 2 of the complaint. 13 The dates of the obligations SEC. 2. Judgment on foreclosure for payment
secured by the mortgage and the amounts unpaid thereon are or sale. - If upon the trial in such action the
alleged in petitioner's first to twenty-seventh causes of court shall find the facts set forth in the
action. 14 Moreover, the very prayer of the complaint before complaint to be true, it shall ascertain the
the trial court reads as follows: amount due to the plaintiff upon the mortgage
debt or obligation, including interest and other
WHEREFORE, it is respectfully prayed that charges as approved by the court, and costs,
judgment be rendered: and shall render judgment for the sum so
found due and order that the same be paid to
xxx xxx xxx the court or to the judgment obligee within a
2. Ordering that the property mortgaged be period of not less than ninety (90) days nor
foreclosed and sold at public auction in case more than one hundred twenty (120) days
defendants fail to pay plaintiff within ninety from entry of judgment, and that in default of
(90) days from entry of judgment. such payment the property shall be sold at
public auction to satisfy the judgment. (Italics
xxx xxx xxx 15 supplied.)
Petitioner's allegations in its complaint, and its prayer that the Accordingly, the dispositive portion of the decision of the trial
mortgaged property be foreclosed and sold at public auction, court dated March 12, 1999, must be modified to comply with
45

the provisions of Section 2 of Rule 68 of the 1997 Rules of SO ORDERED.


Civil Procedure. This modification is subject to any appeal filed
by respondents of said decision. Bellosillo, Mendoza and De Leon, Jr., JJ., concur.

On the propriety of the present appeal, we note that what ||| (Korea Exchange Bank v. Filkor Business Integrated, Inc.,
petitioner impugns is the determination by the trial court of the G.R. No. 138292, [April 10, 2002], 430 PHIL 170-179)
nature of action filed by petitioner, based on the allegations in
the complaint. Such a determination as to the correctness of
the conclusions drawn from the pleadings undoubtedly
involves a question of law. 17 As the present appeal involves a
question of law, petitioner appropriately filed it with this Court,
pursuant to Section 1 of Rule 45 of the 1997 Rules of Civil
Procedure, which provides:
SECTION 1. Filing of petition with Supreme
Court. – A party desiring to appeal
by certiorari from a judgment or final order or
resolution of the Court of Appeals, the
Sandiganbayan, the Regional Trial Court or
other courts whenever authorized by law, may
file with the Supreme Court a verified petition
for review on certiorari. The petition shall raise
only questions of law which must be distinctly
set forth. (Italics supplied).
There is no dispute with respect to the fact that when an
appeal raises only pure questions of law, this Court has
jurisdiction to entertain the same. 18
WHEREFORE, the petition is GRANTED. The Order dated
March 12, 1999, of the Regional Trial Court of Cavite City,
Branch 88, in Civil Case No. N-6689 is hereby MODIFIED, to
state that the mortgaged property of respondent Filkor be
ordered foreclosed and sold at public auction in the event said
respondent fails to pay its obligations to petitioner within ninety
(90) days from entry of judgment.
No pronouncement as to costs. DASCIc
46

THIRD DIVISION issuance of the said Writ of Execution by claiming that the
150-day period for petitioner to pay the judgment obligation
[G.R. No. 128567. September 1, 2000.] 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
HUERTA ALBA RESORT petitioner was notified of the Entry of Judgment and it expired
INC., petitioner, vs. COURT OF APPEALS on September 11, 1994. Subsequently, the trial court
and SYNDICATED MANAGEMENT GROUP confirmed the sale of subject properties to the private
INC., respondents. 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.
Benjamin C. Santos & Ofelia Calcetas-Santos and Santos This is the first time petitioner asserted its right to redeem the
Parungao Aquino & Santos for petitioner. subject properties under Section 78 of R.A. No. 337 (General
Oben, Ventura Defensor. Banking Act). The trial court allowed the petitioner to redeem
the subject properties. However, in a Petition for Certiorari,
Abola Associates for petitioner. Prohibition and Mandamus filed by private respondents, the
Court of Appeals set aside the said Order of the trial court.
Atienza Tabora Del Rosario & Castillo Law Office for
Hence, this petition. THCSAE
respondents.
The Court ruled that the claim that petitioner is entitled to the
beneficial provisions of Section 78 of R.A. No. 337 — since
SYNOPSIS private respondent's predecessor-in-interest is a credit
institution — is in the nature of a compulsory counterclaim
Private respondent Syndicated Management Group, Inc. which should have been averred in petitioner's answer to the
(SMGI), as mortgagee-assignee of Intercom Fund Resource, complaint for judicial foreclosure. The failure of petitioner to
Inc., filed a complaint for judicial foreclosure of four parcels of seasonably assert its alleged right under Section 78 of R.A.
land mortgaged by petitioner Huerta Alba Resort, Inc. before No. 337 precludes it from so doing at this late stage of the
the Regional Trial Court of Makati City. The trial court ruled in case. Estoppel may be successfully invoked if the party fails to
favor of private respondent and ordered the petitioner to pay raise the question in the early stages of the proceedings.
all its obligations within a period of not less than 150 days from Hence, in conformity with the ruling in Limpin vs. IAC (166
receipt of the decision. The appeals to the Court of Appeals as SCRA 87), the sale of the subject properties, operated to
well as the Petition for Certiorari to the Supreme Court filed by divest the rights of all the parties to the action and to vest their
petitioner were all dismissed. The dismissal became final and rights in private respondent. There then existed only what is
executory and it was entered in the Book of Entries of known as the equity of redemption, which is simply the right of
Judgment on March 14, 1994. Accordingly, a writ of execution the petitioner to extinguish the mortgage and retain ownership
was issued and the auction sale of the subject properties was of the property by paying the secured debt within the 90-day
set on September 6, 1994. The petitioner then questioned the period after judgment became final. There being an explicit
47

finding by the Court of Appeals in its decision that the herein in the purchaser, subject to such rights of redemption as may
petitioner failed to exercise its equity of redemption within the be allowed by law. Such rights exceptionally 'allowed by law'
prescribed period, redemption can no longer be effected. The (i.e., even after confirmation by an order of the court) are those
confirmation of the sale and the issuance of the transfer granted by the charter of the Philippine National Bank (Acts
certificates of title covering the subject properties to private No. 2747 and 2938), and the General Banking Act(R.A.
respondent was in order. The trial court, therefore, has the 337). These laws confer on the mortgagor, his successors in
ministerial duty to place private respondent in the possession interest or any judgment creditor of the mortgagor, the right to
of subject properties. 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
SYLLABUS date of registration of the certificate of sale in the Registry of
Property. But, to repeat, no such right of redemption exists in
1. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; case of judicial foreclosure of a mortgage if the mortgagee is
FORECLOSURE OF REAL ESTATE MORTGAGE; EQUITY not the PNB or a bank or banking institution. In such a case,
OF REDEMPTION AND RIGHT OF REDEMPTION; the foreclosure sale, 'when confirmed by an order of the court.
DISTINGUISHED. — On the distinction between the equity of . . . shall operate to divest the rights of all the parties to the
redemption and right of redemption, the case of Gregorio Y. action and to vest their rights in the purchaser.' There then
Limpin vs. Intermediate Appellate Court, comes to the fore. exists only what is known as the equity of redemption. This is
Held the Court in the said case: "The equity of redemption is, simply the right of the defendant mortgagor to extinguish the
to be sure, different from and should not be confused with mortgage and retain ownership of the property by paying the
the right of redemption. The right of redemption in relation to a secured debt within the 90-day period after the judgment
mortgage — understood in the sense of a prerogative to re- becomes final, in accordance with Rule 68, or even after the
acquire mortgaged property after registration of the foreclosure foreclosure sale but prior to its confirmation.
sale — exists only in the case of the extrajudicial foreclosure 2. ID.; ID.; ID.; BENEFICIAL PROVISIONS OF SECTION 78
of the mortgage. No such right is recognized in OF GENERAL BANKING ACT MUST BE RAISED AS
a judicialforeclosed of the mortgage. No such right is COMPULSORY COUNTERCLAIM. — [A]t the earliest
recognized in a judicial foreclosed except only where the opportunity, when it submitted its answer to the complaint for
mortgagee is the Philippine National Bank or a bank or judicial foreclosure, petitioner should have alleged that it was
banking institution. Where a mortgage is foreclosed entitled to the beneficial provisions of Section 78 of R.A. No.
extrajudicially, Act 3135 grants to the mortgagor the right of 337 but again, it did not make any allegation in its answer
redemption within one (1) year from the registration of the regarding any right thereunder. It bears stressing that the
sheriff's certificate of foreclosure sale. Where the foreclosure is applicability of Section 78 of R.A. No. 337 hinges on the
judicially effected, however, no equivalent right of redemption factual question of whether or not private respondent's
exists. The law declares that a judicial foreclosure sale, when predecessor in interest was a credit institution. As was held
confirmed by an order of the court, . . . shall operate to divest in Limpin, a judicial foreclosure sale, "when confirmed by an
the rights of all the parties to the action and to vest their rights order of the court, . . . shall operate to divest the rights of all
48

the parties to the action and to vest their rights in the ventilated, before the Court of Appeals in CA-G.R. No. 35086
purchaser, subject to such rights of redemption as may be its alleged right under Section 78 of R.A. No. 337; but
allowed by law," which confer on the mortgagor, his petitioner never did do so. cDAITS
successors in interest of any judgment creditor of the
mortgagor, the right to redeem the property sold on 4. ID.; ID.; ID.; ID.; ID.; PRINCIPLE OF ESTOPPEL APPLIES.
foreclosure after confirmation by the court of the judicial — The failure of petitioner to seasonably assert its alleged
foreclosure sale. Thus, the claim that petitioner is entitled to right under Section 78 of R.A. No. 337precludes it from so
the beneficial provisions of Section 78 of R.A. No. 337 — since doing at this late stage of the case. Estoppel may be
private respondent's predecessor-in-interest is a credit successfully invoked if the party fails to raise the question in
institution — is in the nature of a compulsory counterclaim the early stages of the proceedings. Thus, "a party to a case
which should have been averred in petitioner's answer to the who failed to invoke his claim in the main case, while having
complaint for judicial foreclosure. the opportunity to do so, will be precluded, subsequently, from
invoking his claim, even if it were true, after the decision has
3. ID.; ID.; ID.; ID.; NOT ALLEGED BY PETITIONER IN become final, otherwise the judgment may be reduced to a
EARLY STAGES OF PROCEEDINGS. — [I]t was too late in mockery and the administration of justice may be placed in
the day for petitioner to invoke a right to redeem under Section disrepute."
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- 5. ID.; CIVIL PROCEDURE; COUNTERCLAIM;
parte Motion for Clarification, petitioner failed to allege and ELUCIDATED. — ". . . A counterclaim is, most broadly, a
prove that private respondent's predecessor in interest was a cause of action existing in favor of the defendant against the
credit institution . . . So also, when it presented before the trial plaintiff. More narrowly, it is a claim which, if established,
court an Exception to the Order and Motion to Set Aside said will defeat or in some way qualify a judgment or relief to which
Order dated October 13, 1994, petitioner again was silent on plaintiff is otherwise entitled. It is sometimes defined as any
its alleged right under Section 78 of R.A. No. 337 . . . Then, cause of action arising in contract available against any action
too, nothing was heard from petitioner on its alleged right also arising in contract and existing at the time of the
under Section 78 of R.A. No. 337 and of the predecessor in commencement of such an action. It is frequently defined by
interest of private respondent as a credit institution, when the the codes as a cause of action arising out of the contract or
trial court came out with an order on February 10, 1995, transaction set forth in the complaint as the foundation of the
confirming the sale of subject properties in favor private plaintiff's claim, or connected with the subject of the action."
respondent and declaring that all pending incidents with "The counterclaim is in itself a distinct and independent cause
respect to the Order dated September 26, 1994 had become of action, so that when properly stated as such, the defendant
moot and academic. Similarly, when petitioner filed on becomes, in respect to the matters stated by him, an actor,
February 27, 1995 a Motion for Clarification with the Court of and there are two simultaneous actions pending between the
Appeals, seeking "clarification" of the date of commencement same parties, wherein each is at the same time both a plaintiff
of the one (1) year redemption period for the subject properties and a defendant. Counterclaim is an offensive as well as a
. . . If petitioner were really acting in good faith, it would have defensive plea and is not necessarily confined to the justice of
49

the plaintiffs claim. It represents the right of the defendant to the case" is not entirely accurate. The "law of the case" is not
have the claims of the parties counterbalanced in whole or in simply that the defendant possesses an equity of redemption.
part, and judgment to be entered in excess, if any. A As the Court has stated, the "law of the case" holds that
counterclaim stands on the same footing, and is to be tested petitioner has the equity of the redemption without any
by the same rules, as if it were an independent action." qualification whatsoever, that is, without the right of
redemption afforded by Section 78 of R.A. No. 337. Whether
6. ID.; ID.; ID.; PURPOSE. — ". . . The rules of counterclaim or not the "law of the case" is erroneous is immaterial, it still
are designed to enable the disposition of a whole controversy remains the "law of the case." A contrary rule will contradict
of interested parties' conflicting claims, at one time and in one both the letter and spirit of the rulings of the Court of Appeals
action, provided all parties' be brought before the court and the in CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-
matter decided without prejudicing the rights of any G.R. 38747, which clearly saw through the repeated attempts
party." ScHADI of petitioner to forestall so simple a matter as making the
7. ID.; ID.; EXECUTION OF JUDGMENT; ERRONEOUS FOR security given for a just debt to answer for its
THE TRIAL COURT TO ALLOW A PARTY AT THIS STAGE payment. HATICc
TO INTRODUCE EVIDENCE AND OVERRULE THE LAW OF 9. ID.; SPECIAL CIVIL ACTIONS; FORECLOSURE OF REAL
THE CASE. — [T]he trial court erred in still allowing petitioner ESTATE MORTGAGE; EQUITY OF REDEMPTION CAN NO
to introduce evidence that private respondent's predecessor- LONGER BE EFFECTED FOR FAILURE TO EXERCISE
in-interest was a credit institution, and to thereafter rule that WITHIN THE PRESCRIBED PERIOD. — [T]he sale of the
the petitioner was entitled to avail of the provisions of Section subject properties, as confirmed by the Order dated February
78 of R.A. No. 337. In effect, the trial court permitted the 10, 1995 of the trial court in Civil Case No. 89-5424 operated
petitioner to accomplish what the latter failed to do before the to divest the rights of all the parties to the action and to vest
Court of Appeals, that is, to invoke its alleged right under their rights in private respondent. There then existed only what
Section 78 of R.A. 337although the Court of Appeals in CA- is known as the equity of redemption, which is simply the right
G.R. No. 35086 already found that 'the question of whether the of the petitioner to extinguish the mortgage and retain
Syndicated Management Council Group, Inc. is a bank or ownership of the property by paying the secured debt within
credit institution was never brought before (the Court of the 90-day period after the judgment became final. There
Appeals) squarely." The said pronouncement by the Court of being an explicit finding on the part of the Court of Appeals in
Appeals unerringly signified that petitioner did not make a its Decision of September 30, 1994 in CA-G.R. No. 35086 —
timely assertion of any right under Section 78 of R.A. No. that the herein petitioner failed to exercise its equity of
337 in all the stages of the proceedings below. redemption within the prescribed period, redemption can no
8. ID.; ID.; ID.; LAW OF THE CASE; REMAINS AS IT IS, longer be effected. The confirmation of the sale and the
WHETHER OR NOT IT IS ERRONEOUS IS IMMATERIAL. — issuance of the transfer certificates of title covering the subject
There is, . . . merit in private respondent's contention that to properties to private respondent was then, in order. The trial
allow petitioner to belatedly invoke its right under Section 78 court therefore, has the ministerial duty to place private
of R.A. No. 337 will disturb the "law of the case." However, respondent in the possession of subject properties.
private respondent's statement of what constitutes the "law of
50

DECISION Makati City, the herein private respondent sought the


foreclosure of four (4) parcels of land mortgaged by petitioner
to Intercon Fund Resource, Inc. ("Intercon").
PURISIMA, J. p: Private respondent instituted Civil Case No. 89-5424 as
mortgagee-assignee of a loan amounting to P8.5 million
Litigation must at some time be terminated, even at the risk of obtained by petitioner from Intercon, in whose favor petitioner
occasional errors. Public policy dictates that once a judgment mortgaged the aforesaid parcels of land as security for the
becomes final, executory and unappealable, the prevailing said loan.
party should not be denied the fruits of his victory by some
subterfuge devised by the losing party. Unjustified delay in the In its answer below, petitioner questioned the assignment by
enforcement of a judgment sets at naught the role of courts in Intercon of its mortgage right thereover to the private
disposing justiciable controversies with finality. respondent, on the ground that the same was ultra vires.
Petitioner also questioned during the trial the correctness of
The Case the charges and interest on the mortgage debt in question.
At bar is a petition assailing the Decision, dated November 14, On April 30, 1992, the trial court, through the then Judge now
1996, and Resolution, dated March 11, 1997, of the Court of Court of Appeals Justice Buenaventura J. Guerrero, came out
Appeals in CA-G.R. No. 38747, which set aside the Order, with its decision "granting herein private respondent SMGI's
dated July 21, 1995 and Order, dated September 4, 1997, of complaint for judicial foreclosure of mortgage", disposing as
the Regional Trial Court of Makati City, in Civil Case No. 89- follows: aSECAD
5424. The aforesaid orders of the trial court held that petitioner
had the right to redeem subject pieces of property within the "WHEREFORE, judgment is hereby rendered
one-year period prescribed by Section 78 of Republic Act No. ordering defendant to pay plaintiff the
337 otherwise known as the General Banking Act. following:
Section 78 of R.A. No. 337 provides that "in case of a (1) P8,500,000.00 representing the principal
foreclosure of a mortgage in favor of a bank, banking or credit of the amount due;
institution, whether judicially or extrajudicially, the mortgagor
(2) P850,000.00 as penalty charges with
shall have the right, within one year after the sale of the real
interest at 6% per annum, until fully paid;
estate as a result of the foreclosure of the respective
mortgage, to redeem the property." (3) 22% per annum interest on the above
principal from September 6, 1998, until fully
The Facts
paid;
The facts that matter are undisputed:
(4) 5% of the sum total of the above amounts,
In a complaint for judicial foreclosure of mortgage with as reasonable attorney's fees; and,
preliminary injunction filed on October 19, 1989, docketed as
Civil Case No. 89-5424 before the Regional Trial Court of (5) Costs.
51

All the above must be paid within a period of Accordingly, on July 15, 1994 a writ of execution issued and,
not less than 150 days from receipt hereof by on July 20, 1994, a Notice of Levy and Execution was issued
the defendant. In default of such payment, the by the Sheriff concerned, who issued on August 1, 1994 a
four parcels of land subject matter of the suit Notice of Sheriff's Sale for the auction of subject properties on
including its improvements shall be sold to September 6, 1994.
realize the mortgage debt and costs, in the
manner and under the regulations that govern
sales of real estate under execution." 1 On August 23, 1994, petitioner filed with the same trial court
Petitioner appealed the decision of the trial court to the Court an Urgent Motion to Quash and Set Aside Writ of Execution
of Appeals, the appeal docketed as CA-G.R. CV No. 39243 ascribing to it grave abuse of discretion in issuing the
before the Sixth Division of the appellate court, which questioned Writ of Execution. To support its motion, petitioner
dismissed the case on June 29, 1993 on the ground of late invited attention and argued that the records of the case were
payment of docket fees. still with the Court of Appeals and therefore, issuance of the
writ of execution was premature since the 150-day period for
Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner to pay the judgment obligation had not yet lapsed
petitioner came to this Court via a petition for certiorari, and petitioner had not yet defaulted in the payment thereof
docketed as G.R. No. 112044, which this court resolved to since no demand for its payment was made by the private
dismiss on December 13, 1993, on the finding that the Court of respondent. In petitioner's own words, the dispute between the
Appeals erred not in dismissing the appeal of petitioner. parties was "principally on the issue as to when the 150-day
period within which Huerta Alba may exercise its equity of
Petitioner's motion for reconsideration of the dismissal of its redemption should be counted."
petition in G.R. No. 112044 was denied with finality in this
Court's Resolution promulgated on February 16, 1994. On In its Order of September 2, 1994, the lower court denied
March 10, 1994, leave to present a second motion for petitioner's urgent motion to quash the writ of execution in Civil
reconsideration in G.R. No. 112044 or to submit the case for Case No. 89-5424, opining that subject judgment had become
hearing by the Court en banc was filed, but to no avail. The final and executory and consequently, execution thereof was a
Court resolved to deny the same on May 11, 1994. LibLex matter of right and the issuance of the corresponding writ of
execution became its ministerial duty.
On March 14, 1994, the Resolution dated December 13, 1993,
in G.R. No. 112044 became final and executory and was Challenging the said order granting execution, petitioner filed
entered in the Book of Entries of Judgment. once more with the Court of Appeals another petition
for certiorari and prohibition with preliminary injunction,
On July 4, 1994, private respondent filed with the trial court of docketed as C.A.-G.R. SP No. 35086, predicated on the same
origin a motion for execution of the Decision promulgated on grounds invoked for its Motion to Quash Writ of Execution.
April 30, 1992 in Civil Case No. 89-5424. The said motion was
granted on July 15, 1994. 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
52

awarded subject bidded pieces of property. The covering computing the 150-day period. Petitioner may
Certificate of Sale issued in its favor was registered with the have until September 11, 1994. within which
Registry of Deeds on October 21, 1994. to pay the amounts covered by the judgment,
such period has already expired by this
On September 7, 1994, petitioner presented an Ex- time, and therefore, this Court has no more
Parte Motion for Clarification asking the trial court to "clarify" reason to pass upon the parties' opposing
whether or not the twelve (12) month period of redemption for contentions, the same having become moot
ordinary execution applied in the case. and academic." 2(underscoring
On September 26, 1994, the trial court ruled that the period of supplied). IcaHTA
redemption of subject property should be governed by the rule Petitioner moved for reconsideration of the Decision of the
on the sale of judicially foreclosed property under Rule 68 of Court of Appeals in C.A.-G.R. SP No. 35086. In its Motion for
the Rules of Court. Reconsideration dated October 18, 1994, petitioner theorized
Thereafter, petitioner then filed an Exception to the Order that the period of one hundred fifty (150) days should not be
dated September 26, 1994 and Motion to Set Aside Said reckoned with from Entry of Judgment but from receipt on or
Order, contending that the said Order materially altered the before July 29, 1994 by the trial court of the records of Civil
Decision dated April 30, 1992 "which declared that the Case No. 89-5424 from the Court of Appeals. So also,
satisfaction of the judgment shall be in the manner and under petitioner maintained that it may not be considered in default,
the regulation that govern sale of real estate under execution." even after the expiration of 150 days from July 29, 1994,
because prior demand to pay was never made on it by the
Meanwhile, in its Decision of September 30, 1994, the Court of private respondent. According to petitioner, it was therefore,
Appeals resolved the issues raised by the petitioner in C.A.- premature for the trial court to issue a writ of execution to
G.R. SP No. 35086, holding that the one hundred-fifty day enforce the judgment.
period within which petitioner may redeem subject properties
should be computed from the date petitioner was notified of The trial court deferred action on the Motion for Confirmation
the Entry of Judgment in G.R. No. 112044; and that the 150- of the Certificate of Sale in view of the pendency of petitioner's
day period within which petitioner may exercise its equity of Motion for Reconsideration in CA-G.R. SP No. 35086.
redemption expired on September 11, 1994. On December 23, 1994, the Court of Appeals denied
Thus: petitioner's motion for reconsideration in CA-G.R. SP No.
35086. Absent any further action with respect to the denial of
"Petitioner must have received the resolution the subject motion for reconsideration, private respondent
of the Supreme Court dated February 16, presented a Second Motion for Confirmation of Certificate of
1994 denying with finality its motion for Sale before the trial court.
reconsideration in G.R. No. 112044 before
March 14, 1994, otherwise the Supreme As regards the Decision rendered on September 30, 1994 by
Court would not have made an entry of the Court of Appeals in CA G.R. SP No. 35086 it became final
judgment on March 14, 1994. While, and executory on January 25, 1995.
53

On February 10, 1995, the lower court confirmed the sale of the entry of judgment made by the appellate
subject properties to the private respondent. The pertinent court.
Order declared that all pending incidents relating to the Order
dated September 26, 1994 had become moot and academic. But we never made any pronouncement on
Conformably, the Transfer Certificates of Title to subject the one-year right of redemption of petitioner
pieces of property were then issued to the private respondent. because, in the first place, the foreclosure in
this case is judicial. and as such the
On February 27, 1995, petitioner filed with the Court of mortgagor has only the equity not the right of
Appeals a Motion for Clarification seeking "clarification" of the redemption . . . . While it may be true that
date of commencement of the one (1) year period for the under Section 78 of R.A. 337 as amended,
redemption of the properties in question. otherwise known as the General Banking Act,
a mortgagor of a bank, banking or credit
In its Resolution dated March 20, 1995, the Court of Appeals institution, whether the foreclosure was
merely noted such Motion for Clarification since its Decision done judicially orextrajudicially, has a period
promulgated on September 30, 1994 had already become final of one year from the auction sale within which
and executory; ratiocinating thus: to redeem the foreclosed property, the
"We view the motion for clarification filed by question of whether the Syndicated
petitioner, purportedly signed by its proprietor, Management Group, Inc., is a bank or credit
but which we believe was prepared by a institution was never brought before us
lawyer who wishes to hide under the cloak of squarely, and it is indeed odd and strange
anonymity, as a veiled attempt to buy time that petitioner would now sarcastically ask a
and to delay further the disposition of this rhetorical question in its motion for
case. clarification." 3 (Emphasis supplied).

Our decision of September 30, 1994 never Indeed, if petitioner did really act in good faith, it would have
dealt on the right and period of redemption of ventilated before the Court of Appeals in CA-G.R. No. 35086
petitioner, but was merely circumscribed to its pretended right under Section 78 of R.A. No. 337 but it
the question of whether respondent judge never did so.
could issue a writ of execution in its Civil Case At the earliest opportunity, when it filed its answer to the
No. 89-5424 . . . . complaint for judicial foreclosure, petitioner should have
We further ruled that the one-hundred fifty averred in its pleading that it was entitled to the beneficial
day period within which petitioner may provisions of Section 78 of R.A. No. 337; but again, petitioner
exercise its equity of redemption should be did not make any such allegation in its answer.
counted, not from the receipt of respondent From the said Resolution, petitioner took no further step such
court of the records of Civil Case No. 89-5424 that on March 31, 1995, the private respondent filed a Motion
but from the date petitioner was notified of
54

for Issuance of Writ of Possession with the trial extrajudicially, pursuant to the above quoted
court. THCSEA Section 78 of RA 337, as amended.
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 However, the pivotal issue here is whether or not the
Possession. defendant lost its right of redemption by virtue of the
assignment of its mortgage debt by Intercon to plaintiff, which
On May 2, 1995, in opposition to private respondent's Motion is not a bank or credit institution. The issue is resolved in the
for Issuance of writ of Possession, petitioner filed a "Motion to negative. The right of redemption in this case is vested by law
Compel Private Respondent to Accept Redemption." It was the and is therefore an absolute privilege which defendant may not
first time petitioner ever asserted the right to redeem subject lose even though plaintiff-assignee is not a bank or credit
properties under Section 78 of R.A. No. 337, the General institution (Tolentino versus Court of Appeals, 106 SCRA 513).
Banking Act; theorizing that the original mortgagee, being a Indeed, a contrary ruling will lead to a possible circumvention
credit institution, its assignment of the mortgage credit to of Section 78 because all that may be needed to deprive a
petitioner did not remove petitioner from the coverage of defaulting mortgagor of his right of redemption is to assign his
Section 78 of R.A. No. 337. Therefore, it should have the right mortgage debt from a bank or credit institution to one which is
to redeem subject properties within one year from registration not. Protection of defaulting mortgagors, which is the avowed
of the auction sale, theorized the petitioner which concluded policy behind the provision, would not be achieved if the ruling
that in view of its "right of redemption," the issuance of the were otherwise. Consequently, defendant still possesses its
titles over subject parcels of land to the private respondent right of redemption which it may exercise up to October 21,
was irregular and premature. 1995 only, which is one year from the date of registration of
the certificate of sale of subject properties (GSIS versus
In its Order of July 21, 1995, the trial court, presided over by Iloilo, 175 SCRA 19, citing Limpin versus IAC, 166 SCRA 87).
Judge Napoleon Inoturan, denied private respondent's motion
for a writ of possession, opining that Section 78 of the General Since the period to exercise defendant's right
Banking Act was applicable and therefore, the petitioner had of redemption has not yet expired, the
until October 21, 1995 to redeem the said parcels of land, said cancellation of defendant's transfer
Order ruled as follows: certificates of title and the issuance of new
ones in lieu thereof in favor of plaintiff are
"It is undisputed that Intercon is a credit therefore illegal for being premature, thereby
institution from which defendant obtained a necessitating reconveyance (see Sec. 63
loan secured with a real estate mortgage over (a) PD 1529, as amended).
four (4) parcels of land. Assuming that the
mortgage debt had not been assigned to WHEREFORE, the Court hereby rules as
plaintiff, there is then no question that follows:
defendant would have a right of redemption in
case of foreclosure, judicially or (1) The Motion for Issuance of Writ of
Possession is hereby denied;
55

(2) Plaintiff is directed to accept the for entertaining the same, the Court referred the petition to the
redemption on or before October 21, Court of Appeals, for proper determination.
1995 in an amount computed
according to the terms stated in the Docketed as G.R. No. 387457 on November 14, 1996, the
Writ of Execution dated July 15, 1994 Court of Appeals gave due course to the petition and set aside
plus all other related costs and the trial court's Order dated July 21, 1995 and Order dated
expenses mentioned under Section September 4, 1995.
78, RA 337, as amended; and In its Resolution of March 11, 1997, the Court of Appeals
(3) The Register of Deeds of denied petitioner's Motion for Reconsideration of the Decision
Valenzuela, Bulacan is directed (a) to promulgated on November 14, 1996 in CA-G.R. No.
reconvey to the defendant the 38747. ESCacI
following titles of the four (4) parcels of Undaunted, petitioner has come to this Court via the present
land, namely TCT Nos. V-38878, V- petition, placing reliance on the assignment of errors, that:
38879, V-38880, and V-38881, now in
the name of plaintiff, and (b) to register I
the certificate of sale dated October 7, THE RESPONDENT COURT OF APPEALS
1994 and the Order confirming the ERRED GRAVELY IN HOLDING THAT THE
sale dated February 10, 1995 by a COURT OF APPEALS (TWELFTH DIVISION)
brief memorandum thereof upon the IN CA G.R. SP NO. 35086 HAD RESOLVED
transfer certificates of title to be issued "WITH FINALITY" THAT PETITIONER
in the name of defendant, pursuant to HUERTA ALBA HAD NO RIGHT OF
Sec. 63 (a) PD 1529, as amended. REDEMPTION BUT ONLY THE EQUITY OF
The Omnibus Motion dated June 5, 1995, REDEMPTION.
together with the Opposition thereto, is now II
deemed resolved.
THE RESPONDENT COURT OF APPEALS
SO ORDERED." 4 ERRED GRAVELY IN IGNORING THAT
Private respondent interposed a Motion for Reconsideration PETITIONER HUERTA ALBA POSSESSES
seeking the reversal of the Order but to no avail. In its Order THE ONE-YEAR RIGHT OF REDEMPTION
dated September 4, 1995, the trial court denied the same. UNDER SECTION 78, R.A. NO. 337 (THE
GENERAL BANKING ACT).
To attack and challenge the aforesaid order of July 21, 1995
and subsequent Order of September 4, 1995 of the trial court, III
the private respondent filed with this court a Petition THE RESPONDENT COURT OF APPEALS
for Certiorari, Prohibition and Mandamus, docketed as G.R. ERRED GRAVELY IN HOLDING THAT
No. 121893, but absent any special and cogent reason shown
56

PRIVATE RESPONDENT SYNDICATED And by way of Reply, petitioner argued, that:


MANAGEMENT GROUP, INC. IS ENTITLED
TO THE ISSUANCE OF A WRIT OF I.
POSSESSION OVER THE SUBJECT THE COURT OF APPEALS IN CA G.R. SP
PROPERTY. 5 NO. 35086 COULD NOT HAVE POSSIBLY
In its comment on the petition, private respondent countered RESOLVED THEREIN — WHETHER WITH
that: FINALITY OR OTHERWISE — THE ISSUE
OF PETITIONER HUERTA ALBA'S RIGHT
"A. THE HONORABLE COURT OF OF REDEMPTION UNDER SECTION
APPEALS CORRECTLY HELD THAT 78, R.A. NO. 337.
IT RESOLVED WITH FINALITY IN
C.A.-G.R. SP NO. 35086 THAT II.
PETITIONER ONLY HAD THE RIGHT THERE IS NO ESTOPPEL HERE.
OF REDEMPTION IN RESPECT OF PETITIONER HUERTA ALBA INVOKED ITS
THE SUBJECT PROPERTIES. RIGHT OF REDEMPTION UNDER SECTION
B. THE PETITION IS AN INSIDIOUS AND 78, R.A. NO. 337 IN TIMELY FASHION, i.e.,
UNDERHANDED ATTEMPT TO AFTER CONFIRMATION BY THE COURT
EVADE THE FINALITY OF VARIOUS OF THE FORECLOSURE SALE, AND
DECISIONS, RESOLUTIONS AND WITHIN ONE (1) YEAR FROM THE DATE
ORDERS WHICH HELD THAT, OF REGISTRATION OF THE CERTIFICATE
PETITIONER ONLY POSSESSES OF SALE.
THE EQUITY OF REDEMPTION IN III.
RESPECT OF THE SUBJECT
PROPERTIES. THE PRINCIPLE OF 'THE LAW OF THE
CASE' HAS ABSOLUTELY NO BEARING
C. PETITIONER IS BARRED BY ESTOPPEL HERE:
FROM BELATEDLY RAISING THE
ISSUE OF ITS ALLEGED 'RIGHT OF (1)
REDEMPTION. THE RIGHT OF REDEMPTION UNDER
D. IN HOLDING THAT THE PETITIONER SECTION 78, R.A. NO. 337 IS IN FACT
HAD THE 'RIGHT OF REDEMPTION' PREDICATED UPON THE FINALITY AND
OVER THE SUBJECT PROPERTIES, CORRECTNESS OF THE DECISION IN
THE TRIAL COURT MADE A CIVIL CASE NO. 89-5424. AaHcIT
MOCKERY OF THE 'LAW OF THE (2)
CASE."' 6
57

THUS, THE RTC'S ORDER RECOGNIZING BEGIN WITH. IT ORDERS NOTHING; IT


PETITIONER HUERTA ALBA'S RIGHT OF ADJUDICATES NOTHING.
REDEMPTION UNDER SECTION 78, R.A.
NO. 337 DOES NOT IN ANY WAY HAVE (3)
THE EFFECT OF AMENDING, MODIFYING, PETITIONER HUERTA ALBA'S RIGHT OF
OR SETTING ASIDE THE DECISION IN REDEMPTION UNDER SECTION 78, R.A.
CIVIL CASE NO. 89-5424. NO. 37 WAS NOT AN ISSUE AND WAS NOT
The above arguments and counter-arguments advanced relate IN ISSUE, AND COULD NOT HAVE
to the pivotal issue of whether or not the petitioner has the POSSIBLY BEEN AN ISSUE NOR IN ISSUE,
one-year right of redemption of subject properties under IN CA G.R. SP NO. 35086.
Section 78 of Republic Act No. 337 otherwise known as (4)
the General Banking Act.
THE 30 SEPTEMBER 1994 DECISION IN CA
The petition is not visited by merit. G.R. SP NO. 35086 HAVING ALREADY
Petitioner's assertion of right of redemption under Section 78 BECOME FINAL EVEN BEFORE THE
of Republic Act No. 337 is premised on the submission that FILING OF THE MOTION FOR
the Court of Appeals did not resolve such issue in CA-G.R. SP CLARIFICATION, THE COURT OF
No. 35086; contending thus: APPEALS NO LONGER HAD ANY
JURISDICTION TO ACT OF THE MOTION
(1) OR ANY OTHER MATTER IN CA G.R. SP
NO. 35086, EXCEPT TO MERELY NOTE
BY NO STRETCH OF LOGIC CAN THE 20 THE MOTION.
MARCH 1995 RESOLUTION IN CA G.R. SP
NO. 35086 BE INTERPRETED TO MEAN II.
THE COURT OF APPEALS HAD RESOLVED
'WITH FINALITY' THE ISSUE OF WHETHER IN STARK CONTRAST, THE ISSUE OF
PETITIONER HUERTA ALBA HAD THE PETITIONER HUERTA ALBA'S RIGHT OF
RIGHT OF REDEMPTION WHEN ALL THAT REDEMPTION UNDER SECTION 78, R.A.
THE RESOLUTION DID WAS TO MERELY NO. 337 WAS DIRECTLY RAISED AND
NOTE THE MOTION FOR CLARIFICATION. JOINED BY THE PARTIES, AND THE SAME
DULY RESOLVED BY THE TRIAL COURT.
(2)
III.
THE 20 MARCH 1995 RESOLUTION IN CA
G.R. SP NO. 35086 IS NOT A FINAL THE RIGHT OF REDEMPTION UNDER
JUDGMENT, ORDER OR DECREE. IT IS SECTION 78 OF R.A. NO. 337 IS
NOT EVEN A JUDGMENT OR ORDER TO MANDATORY AND AUTOMATICALLY
58

EXISTS BY LAW. THE COURTS ARE DUTY- a judicial foreclosure except only where the
BOUND TO RECOGNIZE SUCH RIGHT. mortgagee is the Philippine National Bank or
a bank or banking institution.
IV.
Where a mortgage is
EQUITABLE CONSIDERATIONS WEIGH foreclosed extrajudicially, Act 3135 grants to
HEAVILY IN FAVOR OF PETITIONER the mortgagor the right of redemption within
HUERTA ALBA, NOT THE LEAST OF one (1) year from the registration of the
WHICH IS THE WELL-SETTLED POLICY OF sheriff's certificate of foreclosure sale.
THE LAW TO AID RATHER THAN DEFEAT
THE RIGHT OF REDEMPTION. Where the foreclosure is judicially effected,
however, no equivalent right of redemption
V. exists. The law declares that a judicial
THEREFORE THE 21 JULY 1995 AND 04 foreclosure sale 'when confirmed be an order
SEPTEMBER 1995 ORDERS OF THE TRIAL of the court, . . . shall operate to divest the
COURT ARE VALID AND PROPER IN rights of all the parties to the action and to
ACCORDANCE WITH THE MANDATE OF vest their rights in the purchaser, subject to
THE LAW. such rights of redemption as may be allowed
by law.' Such rights exceptionally 'allowed by
From the various decisions, resolutions and orders a quo it law' (i.e., even after confirmation by an order
can be gleaned that what petitioner has been adjudged to of the court) are those granted by the charter
have was only the equity of redemption over subject of the Philippine National Bank (Acts No.
properties. On the distinction between the equity of redemption 2747 and 2938), and the General Banking
and right of redemption, the case of Gregorio Y. Limpin vs. Act (R.A. 337). These laws confer on the
Intermediate Appellate Court, 7 comes to the fore. Held the mortgagor, his successors in interest or any
Court in the said case: judgment creditor of the mortgagor, the right
"The equity of redemption is, to be sure, to redeem the property sold on foreclosure —
different from and should not be confused after confirmation by the court of the
with the right of redemption. foreclosure sale — which right may be
exercised within a period of one (1) year,
The right of redemption in relation to a counted from the date of registration of the
mortgage – understood in the sense of a certificate of sale in the Registry of Property.
prerogative to re-acquire mortgaged property
after registration of the foreclosure sale –
exists only in the case of But, to repeat, no such right of redemption
the extrajudicial foreclosure of the mortgage. exists in case of judicial foreclosure of a
No such right is recognized in mortgage if the mortgagee is not the PNB or a
59

bank or banking institution. In such a case, Petitioner failed to seasonably invoke its purported right under
the foreclosure sale, 'when confirmed by an Section 78 of R.A. No. 337.
order of the court. . . shall operate to divest
the rights of all the parties to the action and to Petitioner avers in its petition that the Intercon, predecessor in
vest their rights in the purchaser.' There then interest of the private respondent, is a credit institution, such
exists only what is known as the equity of that Section 78 of Republic Act No. 337 should apply in this
redemption. This is simply the right of the case. Stated differently, it is the submission of petitioner that it
defendant mortgagor to extinguish the should be allowed to redeem subject properties within one
mortgage and retain ownership of the year from the date of sale as a result of the foreclosure of the
property by paying the secured debt within mortgage constituted thereon.
the 90-day period after the judgment The pivot of inquiry here therefore, is whether the petitioner
becomes final, in accordance with Rule 68, or seasonably invoked its asserted right under Section 78 of R.A.
even after the foreclosure sale but prior to its No. 337 to redeem subject properties.
confirmation.
Petitioner theorizes that it invoked its "right" in "timely fashion",
Section 2, Rule 68 provides that — that is, after confirmation by the court of the foreclosure sale,
'. . . If upon the trial . . . the court shall find the and within one (1) year from the date of registration of the
facts set forth in the complaint to be true, it certificate of sale. Indeed, the facts show that it was only on
shall ascertain the amount due to the plaintiff May 2, 1995 when, in opposition to the Motion for Issuance of
upon the mortgage debt or obligation, Writ of Possession, did petitioner file a Motion to Compel
including interest and costs, and shall render Private Respondent to Accept Redemption, invoking for the
judgment for the sum so found due and order very first time its alleged right to redeem subject properties
the same to be paid into court within a period under to Section 78 of R.A. No. 337.
of not less than ninety (90) days from the date In light of the aforestated facts, it was too late in the day for
of the service of such order, and that in petitioner to invoke a right to redeem under Section 78 of R.A.
default of such payment the property be sold No. 337. Petitioner failed to assert a right to redeem in several
to realize the mortgage debt and costs.' crucial stages of the proceedings.
This is the mortgagor's equity (not right) of For instance, on September 7, 1994, when it filed with the trial
redemption which, as above stated, may be court an Ex-part Motion for Clarification, petitioner failed to
exercised by him even beyond the 90-day allege and prove that private respondent's predecessor in
period 'from the date of service of the order,' interest was a credit institution and therefore, Section 78
and even after the foreclosure sale itself, of R.A. No. 337 was applicable. Petitioner merely asked the
provided it be before the order of confirmation trial court to clarify whether the sale of subject properties was
of the sale. After such order of confirmation, execution sale or judicial foreclosure sale.
no redemption can be effected any
longer." 8 (Emphasis supplied)
60

So also, when it presented before the trial court an Exception done judicially orextrajudicially, has a period
to the Order and Motion to Set Aside Said Order dated of one year from the auction sale within which
October 13, 1994, petitioner again was silent on its alleged to redeem the foreclosed property, the
right under Section 78 of R.A. No. 337, even as it failed to question of whether the Syndicated
show that private respondent's predecessor in interest is a Management Group. Inc., is bank or credit
credit institution. Petitioner just argued that the aforementioned institution was never brought before us
Order materially altered the trial court's Decision of April 30, squarely, and it is indeed odd and strange
1992. that petitioner would now sarcastically ask a
rhetorical question in its motion for
Then, too, nothing was heard from petitioner on its alleged clarification." 9 (Emphasis supplied). AaHcIT
right under Section 78 of R.A. No. 337 and of the predecessor
in interest of private respondent as a credit institution, when If petitioner were really acting in good faith, it would have
the trial court came out with an order on February 10, 1995, ventilated before the Court of Appeals in CA-G.R. No. 35086
confirming the sale of subject properties in favor of private its alleged right under Section 78 ofR.A. No. 337; but petitioner
respondent and declaring that all pending incidents with never did do so.
respect to the Order dated September 26, 1994 had become
moot and academic. Indeed, at the earliest opportunity, when it submitted its
answer to the complaint for judicial foreclosure, petitioner
Similarly, when petitioner filed on February 27, 1995 a Motion should have alleged that it was entitled to the beneficial
for Clarification with the Court of Appeals, seeking provisions of Section 78 of R.A. No. 337 but again, it did not
"clarification" of the date of commencement of the one (1) year make any allegation in its answer regarding any right
redemption period for the subject properties, petitioner never thereunder. It bears stressing that the applicability of Section
intimated any alleged right under Section 78 of R.A. No. 78 of R.A. No. 337 hinges on the factual question of whether
337 nor did it invite attention to its present stance that private or not private respondent's predecessor in interest was a credit
respondent's predecessor-in-interest was a credit institution. institution. As was held in Limpin, a judicial foreclosure sale,
Consequently, in its Resolution dated March 20, 1995, the "when confirmed by an order of the court, . . . shall operate to
Court of Appeals ruled on the said motion thus: 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
"But we never made any pronouncement on may be allowed by law'," 10 which confer on the mortgagor,
the one-year right of redemption of petitioner his successors in interest or any judgment creditor of the
because, in the first place, the foreclosure in mortgagor, the right to redeem the property sold on
this case is judicial, and as such. the foreclosure after confirmation by the court of the judicial
mortgagor has only the equity, not the right of foreclosure sale. Thus, the claim that petitioner is entitled to
redemption, . . . While it may be true that the beneficial provisions of Section 78 of R.A. No. 337 — since
under Section 78 of R.A. 337 as amended, private respondent's predecessor-in-interest is a credit
otherwise known as the General Banking Act, institution — is in the nature of a compulsory counterclaim
a mortgagor of a bank, banking or credit
institution, whether the foreclosure was
61

which should have been averred in petitioner's answer to the an independent


compliant for judicial foreclosure. action." 12 (emphasis supplied)
". . . A counterclaim is, most broadly, a cause The very purpose of a counterclaim would have been served
of action existing in favor of the defendant had petitioner alleged in its answer its purported right under
against the plaintiff. More narrowly, it is a Section 78 of R.A. No. 337:
claim whic, if established,will defeat or in
some way qualify a judgment or relief to which ". . . The rules of counterclaim are designed to
plaintiff is otherwise entitled. It is sometimes enable the disposition of a whole controversy
defined as any cause of action arising in of interested parties' conflicting claims, at one
contract available against any action also time and in one action, provided all parties' be
arising in contract and existing at the time of brought before the court and the matter
the commencement of such an action. It is decided without prejudicing the rights of any
frequently defined by the codes as a cause of party." 13
action arising out of the contract or The failure of petitioner to seasonably assert its alleged right
transaction set forth in the complaint as the under Section 78 of R.A. No. 337 precludes it from so doing at
foundation of the plaintiff's claim, or this late stage case. Estoppel may be successfully invoked if
connected with the subject of the the party fails to raise the question in the early stages of the
action." 11 (emphasis supplied) proceedings. 14 Thus, "a party to a case who failed to invoke
"The counterclaim is in itself a distinct and his claim in the main case, while having the opportunity to do
independent cause of action, so that when so, will be precluded, subsequently, from invoking his claim,
properly stated as such, the defendant even if it were true, after the decision has become final,
becomes, in respect to the matters stated by otherwise the judgment may be reduced to a mockery and the
him, an actor, and there are two simultaneous administration of justice may be placed in disrepute." 15
actions pending between the same parties, All things viewed in proper perspective, it is decisively clear
wherein each is at the same time both a that the trial court erred in still allowing petitioner to introduce
plaintiff and a defendant. Counterclaim is an evidence that private respondent's predecessor-in-interest was
offensive as well as a defensive plea and is a credit institution, and to thereafter rule that the petitioner was
not necessarily confined to the justice of the entitled to avail of the provisions of Section 78 of R.A. No. 337.
plaintiff's claim. It represents the right of the In effect, the trial court permitted the petitioner to accomplish
defendant to have the claims of the parties what the latter failed to do before the Court of Appeals, that is,
counterbalanced in whole or in part, and to invoke its alleged right under Section 78 of R.A. No.
judgment to be entered in excess, if any. A 337 although the Court of Appeals in CA-G.R. No. 35086
counterclaim stands on the same footing, and already found that 'the question of whether the Syndicated
is to be tested by the same rules, as if it were Management Council Group, Inc. is a bank or credit institution
was never brought before (the Court of Appeals) squarely."
62

The said pronouncement by the Court of Appeals unerringly of petitioner to forestall so simple a matter as making the
signified that petitioner did not make a timely assertion of any security given for a just debt to answer for its payment.
right under Section 78 of R.A. No. 337 in all the stages of the
proceedings below. 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
Verily, the petitioner has only itself to blame for not alleging at their rights in private respondent. There then existed only what
the outset that the predecessor-in-interest of the private is known as the equity of redemption, which is simply the right
respondent is a credit institution. Thus, when the trial court, of the petitioner to extinguish the mortgage and retain
and the Court of Appeals repeatedly passed upon the issue of ownership of the property by paying the secured debt within
whether or not petitioner had the right of redemption or equity the 90-day period after the judgment became final. There
of redemption over subject properties in the decisions, being an explicit finding on the part of the Court of Appeals in
resolutions and orders, particularly in Civil Case No. 89-5424, its Decision of September 30, 1994 in CA-G.R. No. 35086 —
CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R. that the herein petitioner failed to exercise its equity of
SP No. 38747, it was unmistakable that the petitioner was redemption within the prescribed period, redemption can no
adjudged to just have the equity of redemption without any longer be effected. The confirmation of the sale and the
qualification whatsoever, that is, without any right of issuance of the transfer certificates of title covering the subject
redemption allowed by law. HCITcA properties to private respondent was then, in order. The trial
The "law of case" holds that petitioner has the court therefore, has the ministerial duty to place private
equity of redemption without any qualification. respondent in the possession of subject properties. aSTAcH

There is, therefore, merit in private respondent's contention WHEREFORE, the petition is DENIED, and the assailed
that to allow petitioner to belatedly invoke its right under decision of the Court of Appeals, declaring null and void the
Section 78 of R.A. No. 337 will disturb the "law of the case." Order dated 21 July 1995 and Order dated 4 September 1997
However, private respondent's statement of what constitutes of the Regional Trial Court of Makati City in Civil Case No. 89-
the "law of the case" is not entirely accurate. The "law of the 5424, AFFIRMED. No pronouncement as to costs.
case" is not simply that the defendant possesses an equity of SO ORDERED.
redemption. As the Court has stated, the "law of the case"
holds that petitioner has the equity of the redemption without Melo, Vitug, Panganiban and Gonzaga-Reyes, JJ., concur.
any qualification whatsoever, that is, without the right of
redemption afforded by Section 78 of R.A. No. 337. Whether Footnotes
or not the "law of the case" is erroneous is immaterial, it still ||| (Huerta Alba Resort Inc. v. Court of Appeals, G.R. No.
remains the "law of the case". A contrary rule will contradict 128567, [September 1, 2000], 394 PHIL 22-48)
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
63

THIRD DIVISION case of a judicial foreclosure of a mortgage. The only


exemption is when the mortgagee is the Phil. National Bank or
[G.R. No. 137792. August 12, 2003.] a bank or a banking institution. Since the mortgagee in this
case is not one of those mentioned, no right of redemption
exists in favor of petitioners. They merely have an equity of
SPOUSES RICARDO ROSALES and redemption which is their right, as mortgagor, to extinguish the
ERLINDA SIBUG, petitioners, vs. SPOUSES mortgage and retain ownership of the property by paying the
ALFONSO and LOURDES SUBA, THE CITY secured debt prior to the confirmation of the foreclosure sale.
SHERIFF OF MANILA,respondents. Petitioners, in this case, failed to exercise this equity of
redemption.
Bayani G. Diwa for petitioners.
SYLLABUS
David B. Agoncillo for respondents.

REMEDIAL LAW; CIVIL PROCEDURE; EXECUTION OF


SYNOPSIS JUDGMENT; NO RIGHT OF REDEMPTION IN A JUDICIAL
FORECLOSURE OF MORTGAGE; EXEMPTION; CASE AT
After the petitioners-judgment debtors failed to pay the BAR. — Since the parties' transaction is an equitable
judgment debt, the trial court issued a writ of execution mortgage and that the trial court ordered its foreclosure,
ordering the sale of the property subject of litigation for the execution of judgment is governed by Sections 2 and 3, Rule
satisfaction of the judgment. The property was sold at public 68 of the 1997 Rules of Civil Procedure, as amended . . .
auction and the respondents were the highest bidders. The Clearly, as a general rule, there is no right of redemption in a
trial court issued an order confirming the sale of the property to judicial foreclosure of mortgage. The only exemption is when
the respondents and subsequently granted respondent's the mortgagee is the Philippine National Bank or a bank or a
prayer for a writ of possession. The petitioners filed a motion banking institution. Since the mortgagee in this case is not one
for reconsideration of the trial court's orders, but were denied. of those mentioned, no right of redemption exists in favor of
The CA dismissed their petition for certiorari for lack of merit, petitioners. They merely have an equity of redemption, which,
holding that there is no right of redemption in case of judicial to reiterate, is simply their right, as mortgagor, to extinguish
foreclosure of mortgage. Hence, this petition for review. the mortgage and retain ownership of the property by paying
the secured debt prior to the confirmation of the foreclosure
In denying the petition, thereby affirming the CA decision on sale. However, instead of exercising this equity of redemption,
appeal, the Supreme Court ruled that since the parties' petitioners chose to delay the proceedings by filing several
transaction is an equitable mortgage and the trial court manifestations with the trial court. Thus, they only have
ordered its foreclosure, execution of judgment is governed by themselves to blame for the consequent loss of their property.
Sections 2 and 3, Rule 68 of the 1997 Rules of Civil
Procedure, as amended. There is no right of redemption in
64

DECISION and the Register of Deeds of Manila shall


cancel Transfer Certificate of Title No. 150540
in the name of the Macaspacs (Exh. E) and
issue new title in the name of Sibug;
SANDOVAL-GUTIERREZ, J p:
(4) For non-compliance by Sibug
Challenged in the instant petition for review on certiorari are and Rosales of the directive in paragraph (2)
the Resolutions 1 dated November 25, 1998 and February 26, of this dispositive portion, let the property be
1999 of the Court of Appeals dismissing the petition sold in accordance with the Rules of Court for
for certiorari in CA G.R. SP No. 49634, "Spouses the release of the mortgage debt and the
Ricardo Rosales and Erlinda Sibug vs. Alfonso and issuance of title to the purchaser.
Lourdes Suba."
"SO ORDERED." 3
On June 13, 1997, the Regional Trial Court, Branch 13, Manila
rendered a Decision 2 in Civil Cases Nos. 94-72303 and 94- The decision became final and executory. Spouses Ricardo
72379, the dispositive portion of which reads: and Erlinda Rosales, judgment debtors and herein petitioners,
failed to comply with paragraph 2 quoted above, i.e., to deposit
"WHEREFORE, judgment is rendered: with the Clerk of Court, within 90 days from finality of the
Decision, P65,000.00, etc., to be paid to Felicisimo Macaspac
(1) Declaring the Deed of Sale of Exhibit D, G
and Elena Jiao. This prompted Macaspac, as judgment
and I, affecting the property in question, as an
creditor, to file with the trial court a motion for execution.
equitable mortgage;
Petitioners opposed the motion for being premature, asserting
(2) Declaring the parties Erlinda Sibug and
that the decision has not yet attained finality. On March 5,
Ricardo Rosales, within 90 days from finality
1998, they filed a manifestation and motion informing the court
of this Decision, to deposit with the Clerk of
of their difficulty in paying Macaspac as there is no correct
Court, for payment to the parties Felicisimo
computation of the judgment debt.
Macaspac and Elena Jiao, the sum of
P65,000.00, with interest at nine (9) percent On February 23, 1998, Macaspac filed a supplemental motion
per annum from September 30, 1982 until for execution stating that the amount due him is P243,864.08.
payment is made, plus the sum of P219.76 as
reimbursement for real estate taxes; Petitioners failed to pay the amount. On March 25, 1998, the
trial court issued a writ of execution ordering the sale of the
(3) Directing the parties Felicisimo Macaspac property subject of litigation for the satisfaction of the
and Elena Jiao, upon the deposit on their judgment.
behalf of the amounts specified in the
foregoing paragraph, to execute a deed of On May 15, 1998, an auction sale of the property was held
reconveyance of the property in question to wherein petitioners participated. However, the property was
Erlinda Sibug, married to Ricardo Rosales, sold for P285,000.00 to spouses Alfonso and Lourdes Suba,
65

herein respondents, being the highest bidders. On July 15, of the order dated July 15, 1998 confirming the sale of the
1998, the trial court issued an order confirming the sale of the property to said respondents.
property and directing the sheriff to issue a final deed of sale in
their favor. On November 25, 1998, the CA dismissed outright the petition
for lack of merit, holding that there is no right of redemption in
On July 28, 1998, Macaspac filed a motion praying for the case of judicial foreclosure of mortgage. Petitioners' motion for
release to him of the amount of P176,176.06 from the reconsideration was also denied.
proceeds of the auction sale, prompting petitioners to file a
motion praying that an independent certified public accountant Hence this petition.
be appointed to settle the exact amount due to movant In the main, petitioners fault the Appellate Court in applying
Macaspac. the rules on judicial foreclosure of mortgage. They contend
Meanwhile, on August 3, 1998, the Register of Deeds of that their loan with Macaspac is unsecured, hence, its
Manila issued a new Transfer Certificate of Title over the payment entails an execution of judgment for money
subject property in the names of respondents. under Section 9 in relation to Section 25, Rule 39 of the 1997
Rules of Civil Procedure, as amended, 4 allowing the
On August 18, 1998, respondents filed with the trial court a judgment debtor one (1) year from the date of registration
motion for a writ of possession, contending that the of the certificate of sale within which to redeem the
confirmation of the sale "effectively cut off petitioners' equity of foreclosed property.
redemption." Petitioners on the other hand, filed a motion for
reconsideration of the order dated July 15, 1998 confirming the Respondents, upon the other hand, insist that petitioners are
sale of the property to respondents. actually questioning the decision of the trial court dated June
13, 1997 which has long become final and executory; and that
On October 19, 1998, the trial court, acting upon both motions, the latter have no right to redeem a mortgaged property which
issued an order (1) granting respondents' prayer for a writ of has been judicially foreclosed.
possession and (2) denying petitioners' motion for
reconsideration. The trial court ruled that petitioners have no Petitioners' contention lacks merit. The decision of the trial
right to redeem the property since the case is for judicial court, which is final and executory, declared the transaction
foreclosure of mortgage under Rule 68 of the 1997 Rules of between petitioners and Macaspac an equitable mortgage.
Civil Procedure, as amended. Hence, respondents, as In Matanguihan vs. Court of Appeals, 5 this Court defined an
purchasers of the property, are entitled to its possession as a equitable mortgage as "one which although lacking in some
matter of right. formality, or form or words, or other requisites demanded by a
statute, nevertheless reveals the intention of the parties to
Forthwith, petitioners filed with the Court of Appeals a petition charge real property as security for a debt, and contains
for certiorari, docketed as CA-G.R. SP No. 49634, alleging that nothing impossible or contrary to law." An equitable mortgage
the trial court committed grave abuse of discretion amounting is not different from a real estate mortgage, and the lien
to lack or excess of jurisdiction in issuing a writ of possession created thereby ought not to be defeated by requiring
to respondents and in denying their motion for reconsideration compliance with the formalities necessary to the validity of a
voluntary real estate mortgage. 6 Since the parties' transaction
66

is an equitable mortgage and that the trial court ordered its parties to the action and to vest their rights in
foreclosure, execution of judgment is governed by Sections 2 the purchaser, subject to such rights of
and 3, Rule 68 of the 1997 Rules of Civil Procedure, as redemption as may be allowed by law.
amended, quoted as follows:
xxx xxx xxx."
SEC. 2. Judgment on foreclosure for payment
or sale. — If upon the trial in such action the In Huerta Alba Resort, Inc. vs. Court of Appeals, 7 we held
court shall find the facts set forth in the that the right of redemption is not recognized in a judicial
complaint to be true, it shall ascertain the foreclosure, thus:
amount due to the plaintiff upon the mortgage "The right of redemption in relation to a
debt or obligation, including interest and other mortgage-understood in the sense of a
charges as approved by the court, and costs, prerogative to re-acquire mortgaged property
and shall render judgment for the sum so after registration of the foreclosure sale-exists
found due and order that the same be paid to only in the case of the extrajudicial
the court or to the judgment obligee within a foreclosure of the mortgage. No such right is
period of not less that ninety (90) days nor recognized in a judicial foreclosure except
more than one hundred twenty (120) days only where the mortgagee is the Philippine
from the entry of judgment, and that in default National bank or a bank or a banking
of such payment the property shall be sold at institution.
public auction to satisfy the judgment.
"Where a mortgage is foreclosed
extrajudicially, Act 3135 grants to the
SEC. 3. Sale of mortgaged property, effect. — mortgagor the right of redemption within one
When the defendant, after being directed to (1) year from the registration of the sheriff's
do so as provided in the next preceding certificate of foreclosure sale.
section, fails to pay the amount of the "Where the foreclosure is judicially
judgment within the period specified therein, effected, however, no equivalent right of
the court, upon motion, shall order the redemption exists. The law declares that a
property to be sold in the manner and under judicial foreclosure sale, 'when confirmed
the provisions of Rule 39 and other by an order of the court, . . . shall operate
regulations governing sales of real estate to divest the rights of all the parties to the
under execution. Such sale shall not effect action and to vest their rights in the
the rights of persons holding prior purchaser, subject to such rights of
encumbrances upon the property or a part redemption as may be allowed by
thereof, and when confirmed by an order of law.' Such rights exceptionally 'allowed by
the court, also upon motion, it shall operate to law' (i.e., even after the confirmation by an
divest the rights in the property of all the order of the court) are those granted by the
67

charter of the Philippine National Bank (Act of the sale. After such order of confirmation,
Nos. 2747 and 2938), and the General no redemption can be effected any
Banking Act (R.A. 337).These laws confer on longer." (Italics supplied)
the mortgagor, his successors in interest or
any judgment creditor of the mortgagor, the Clearly, as a general rule, there is no right of redemption in a
right to redeem the property sold on judicial foreclosure of mortgage. The only exemption is when
foreclosure—after confirmation by the court of the mortgagee is the Philippine National Bank or a bank or a
the foreclosure sale—which right may be banking institution. Since the mortgagee in this case is not one
exercised within a period of one (1) year, of those mentioned, no right of redemption exists in favor of
counted from the date of registration of the petitioners. They merely have an equity of redemption, which,
certificate of sale in the Registry of Property. to reiterate, is simply their right, as mortgagor, to extinguish
the mortgage and retain ownership of the property by paying
"But, to repeat, no such right of redemption the secured debt prior to the confirmation of the foreclosure
exists in case of judicial foreclosure of a sale. However, instead of exercising this equity of redemption,
mortgage if the mortgagee is not the PNB or a petitioners chose to delay the proceedings by filing several
bank or banking institution. In such a case, manifestations with the trial court. Thus, they only have
the foreclosure sale, 'when confirmed by an themselves to blame for the consequent loss of their property.
order of the court, . . . shall operate to divest
the rights of all the parties to the action and to WHEREFORE, the petition is DENIED. The Resolutions of the
vest their rights in the purchaser.' There then Court of Appeals dated November 25, 1998 and February 26,
exists only what is known as the equity of 1999 in CA G.R. SP No. 49634 are AFFIRMED. EaISDC
redemption. This is simply the right of the SO ORDERED.
defendant mortgagor to extinguish the
mortgage and retain ownership of the Puno, Panganiban, Corona, and Carpio Morales, JJ ., concur.
property by paying the secured debt within ||| (Spouses Rosales v. Spouses Suba, G.R. No. 137792,
the 90-day period after the judgment
[August 12, 2003], 456 PHIL 127-135)
becomes final, in accordance with Rule 68,
or even after the foreclosure sale but prior to
its confirmation.
xxx xxx xxx
"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
68

THIRD DIVISION City Sheriff, which was docketed as EJF Case No. 92-5-15,
covered the following properties:
[G.R. No. 170215. August 28, 2007.] TCT NO. 13196
"A parcel of land (Lot 701, plan 11-5121 Amd-
SPS. ESMERALDO and ELIZABETH 2) situated at Mandaue City, bounded on the
SUICO, petitioners, vs. PHILIPPINE NE., and SE., by lot no. 700; on the SW. by
NATIONAL BANK and HON. COURT OF lots nos. 688 and 702; on the NW. by lot no.
APPEALS, respondents. 714, containing an area of 2,078 sq. m. more
or less."
TAX DECL. NO. 00553
DECISION
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot No. 700-C-1; bounded on the
North by Lot No. 701 & 700-B; on the South
CHICO-NAZARIO, J p:
by Lot No. 700-C-3; on the East by lot no.
700-C-3 and on the West by Lot no. 688,
Herein petitioners, Spouses Esmeraldo and Elizabeth Suico,
containing an area of 200 square meters,
obtained a loan from the Philippine National Bank (PNB)
more or less." HTaIAC
secured by a real estate mortgage 1 on real properties in the
name of the former. The petitioners were unable to pay their TAX DECL. NO. 00721
obligation prompting the PNB to extrajudicially foreclose the
mortgage over the subject properties before the City Sheriff of "Two (2) parcels of land situated at Tabok,
Mandaue City under EJF Case No. 92-5-15. Mandaue City, Cad. lot nos. 700-C-3 and
700-C-2; bounded on the North by Lot Nos.
The petitioners thereafter filed a Complaint against the PNB 700-C-1 and 700-B; on the South by Lot No.
before the Regional Trial Court (RTC) of Mandaue City, 700-D; on the East by Lot Nos. 695 and 694;
Branch 55, docketed as Civil Case No. MAN-2793 for and on the West by Lot Nos. 688 and 700-C-
Declaration of Nullity of Extrajudicial Foreclosure of 1, containing an aggregate area of 1,683 sq.
Mortgage. 2 m. more or less." IDaEHS
The Complaint alleged that on 6 May 1992, PNB filed with the TAX DECL. NO. 0237
Office of the Mandaue City Sheriff a petition for the
extrajudicial foreclosure of mortgage constituted on the "A parcel of land situated at Tabok, Mandaue
petitioners' properties (subject properties) for an outstanding City, Cad. Lot no. 700-B. Bounded on the NE.
loan obligation amounting to P1,991,770.38 as of 10 March by (Lot 699) 109, (Lot No. 69) 110, on the SE
1992. The foreclosure case before the Office of the Mandaue (Lot 700-C) 115, on the NW. (Lot 700-A) 112
69

and on the SW. (Lot 701) 113; containing an excess of petitioners' obligation, the latter averred that the
area of .1785 HA more or less." AaEcHC extrajudicial foreclosure conducted over the subject properties
by the Mandaue City Sheriff, as well as the Certificate of Sale
TAX DECL. NO. 9267 and the Certificate of Finality of Sale of the subject properties
"A parcel of land situated at Tabok, Mandaue issued by the Mandaue City Sheriff, in favor of PNB, were all
City, Cad. Lot no. 700-A. Bounded on the NE. null and void.
by (Lot 699) 109, on the South West by (Lot Petitioners, in their Complaint in Civil Case No. MAN-2793,
701) 113, on the SE. by (Lot 700-B) 111, and prayed for: caSDCA
on the NW. by (lot 714) 040039; containing an
area of .1785 HA more or less." 3 a) Declaring the Nullity of Extra-judicial
Foreclosure of Mortgage under EJF
Petitioners claimed that during the foreclosure sale of the Case No. 92-5-15 including the
subject properties held on 30 October 1992, PNB, as the lone certificate of sale and the final deed of
bidder, offered a bid in the amount of P8,511,000.00. By virtue sale of the properties affected;
of the said bid, a Certificate of Sale of the subject properties
was issued by the Mandaue City Sheriff in favor of PNB. PNB b) Order[ing] the cancellation of the
did not pay to the Sheriff who conducted the auction sale the certificates of titles and tax declaration
amount of its bid which was P8,511,000.00 or give an already in the name of [herein
accounting of how said amount was applied against respondent] PNB and revert the same
petitioners' outstanding loan, which, as of 10 March 1992, back to herein [petitioners']
amounted only to P1,991,770.38. Since the amount of the bid name; CAaSED
grossly exceeded the amount of petitioners' outstanding
obligation as stated in the extrajudicial foreclosure of c) Ordering the [PNB] to pay [petitioners]
mortgage, it was the legal duty of the winning bidder, PNB, to moral damages amounting to more
deliver to the Mandaue City Sheriff the bid price or what was than P1,000,000.00; Exemplary
left thereof after deducting the amount of petitioners' damages of P500,000.00; Litigation
outstanding obligation. PNB failed to deliver the amount of expenses of P100,000.00 and
their bid to the Mandaue City Sheriff or, at the very least, the attorney's fees of P300,000.00. 4
amount of such bid in excess of petitioners' outstanding PNB filed a Motion to Dismiss 5 Civil Case No. MAN-2793
obligation. citing the pendency of another action between the same
One year after the issuance of the Certificate of Sale, PNB parties, specifically Civil Case No. CEB-15236 before the RTC
secured a Certificate of Final Sale from the Mandaue City of Cebu City entitled, PNB v. Sps. Esmeraldo and Elizabeth
Sheriff and, as a result, PNB transferred registration of all the Suico where PNB was seeking the payment of the balance of
subject properties to its name. HDAaIc petitioners' obligation not covered by the proceeds of the
auction sale held on 30 October 1992. PNB argued that these
Owing to the failure of PNB as the winning bidder to deliver to two cases involve the same parties. Petitioners opposed the
the petitioners the amount of its bid or even just the amount in Motion to Dismiss filed by PNB. 6 Subsequently, the Motion to
70

Dismiss Civil Case No. MAN-2793 was denied in the Order of cancellation of the certificates of titles and tax
the RTC dated 15 July 1997; 7 thus, PNB was constrained to declaration already in the name of
file its Answer. 8 [respondent] PNB, if any, and revert the same
back to the [petitioners'] name; ordering
PNB disputed petitioners' factual narration. PNB asserted that [respondent] PNB to cause a new foreclosure
petitioners had other loans which had likewise become due. proceeding, either judicially or extra-judicially.
Petitioners' outstanding obligation of P1,991,770.38 as of 10
March 1992 was exclusive of attorney's fees, and other export Furnish parties thru counsels copy of this
related obligations which it did not consider due and order. 10 DSETcC
demandable as of said date. PNB maintained that the
outstanding obligation of the petitioners under their regular and In granting the nullification of the extrajudicial foreclosure of
export-related loans was already more than the bid price of mortgage, the RTC reasoned that given that petitioners had
P8,511,000.00, contradicting the claim of surplus proceeds other loan obligations which had not yet matured on 10 March
due the petitioners. Petitioners were well aware that their total 1992 but became due by the date of the auction sale on 30
principal outstanding obligation on the date of the auction sale October 1992, it does not justify the shortcut taken by PNB
was P5,503,293.21. TIHCcA and will not excuse it from paying to the Sheriff who conducted
the auction sale the excess bid in the foreclosure sale. To
PNB admitted the non-delivery of the bid price to the sheriff allow PNB to do so would constitute fraud, for not only is the
and the execution of the final deed of sale, but claimed that it filing fee in the said foreclosure inadequate but, worse, the
had not transferred in its name all the foreclosed properties same constitutes a misrepresentation regarding the amount of
because the petition to register in its name Transfer the indebtedness to be paid in the foreclosure sale as posted
Certificates of Title (TCT) No. 37029 and No. 13196 were still and published in the notice of sale. 11 Such misrepresentation
pending. is fatal because in an extrajudicial foreclosure of mortgage,
notice of sale is jurisdictional. Any error in the notice of sale is
On 2 February 1999, the RTC rendered its Decision 9 in Civil fatal and invalidates the notice. 12
Case No. MAN-2793 for the declaration of nullity of the
extrajudicial foreclosure of mortgage, the dispositive portion of When the PNB appealed its case to the Court of
which states: CTSDAI Appeals, 13 the appellate court rendered a Decision 14 dated
12 April 2005, the fallo of which provides: ADCIca
WHEREFORE, based on the foregoing,
judgment is rendered in favor of [herein WHEREFORE, premises considered, the
petitioners] Sps. Esmeraldo & Elizabeth Suico instant appeal is GRANTED. The questioned
and against [herein respondent], Philippine decision of the Regional Trial Court of
National Bank (PNB), declaring the nullity of Mandaue City, Branch 55 dated February 2,
Extrajudicial Foreclosure of Mortgage under 1999 is hereby REVERSED and SET ASIDE.
EJF Case No. 92-5-15, including the Accordingly, the extra judicial foreclosure of
certificate of sale and the final deed of sale of mortgage under EJF 92-5-15 including the
the subject properties; ordering the certificate of sale and final deed of sale
71

executed appurtenant thereto are hereby action to recover such surplus. In fine, the
declared to be valid and binding. 15 failure of the [PNB] to remit the surplus, if any,
is not tantamount to a non-compliance of
In justifying reversal, the Court of Appeals held: DSacAE statutory requisites that could constitute a
A careful scrutiny of the evidence extant on jurisdictional defect invalidating the sale. This
record would show that in a letter dated situation only gives rise to a cause of action
January 12, 1994, [petitioners] expressly on the part of the [petitioners] to recover the
admitted that their outstanding principal alleged surplus from the [PNB]. This ruling is
obligation amounted to P5.4 Million and in in harmony with the decisional rule that in
fact offered to redeem the properties at P6.5 suing for the return of the surplus proceeds,
Million. They eventually increased their offer the mortgagor is deemed to have affirmed the
at P7.5 Million as evidenced by that letter validity of the sale since nothing is due if no
dated February 4, 1994. And finally on May valid sale has been made. 16 aIHCSA
16, 1994, they offered to redeem the Petitioners filed a Motion for Reconsideration 17 of the
foreclosed properties by paying the whole foregoing Decision, but the Court of Appeals was not
amount of the obligation by installment in a persuaded. It maintained the validity of the foreclosure sale
period of six years. All those offers made by and, in its Amended Decision dated 28 September 2005, it
the [petitioners] not only contradicted their merely directed PNB to pay the deficiency in the filing fees,
very assertion that their obligation is merely holding thus:
that amount appearing on the petition for
foreclosure but are also indicative of the fact WHEREFORE, Our decision dated April 12,
that they have admitted the validity of the 2005 is hereby AMENDED. [Herein
extra judicial foreclosure proceedings and in respondent PNB] is hereby required to pay
effect have cured the impugned defect. Thus, the deficiency in the filing fees due on the
for the [petitioners] to insist that their petition for extra judicial foreclosure sale to be
obligation is only over a million is unworthy of based on the actual amount of mortgage
belief. Oddly enough, it is evident from their debts at the time of filing thereof. In all other
acts that they themselves likewise believe respects, Our decision subject of herein
otherwise. petitioners'] motion for reconsideration is
hereby AFFIRMED. 18 cda
Unflinching, petitioners elevated the case before this
Even assuming that indeed there was a Court via the present Petition for Review essentially seeking
surplus and the [PNB] is retaining more than the nullification of the extrajudicial foreclosure of the mortgage
the proceeds of the sale than it is entitled, this constituted on the subject properties. Petitioners forward two
fact alone will not affect the validity of the sale reasons for declaring null and void the said extrajudicial
but simply gives the [petitioners] a cause of foreclosure: (1) the alleged defect or misrepresentation in the
72

notice of sheriff's sale; and/or (2) failure of PNB to pay and fatal to the validity of the notice, and also to the sale made
tender the price of its bid or the surplus thereof to the sheriff. pursuant thereto. 21
Petitioners argue that since the Notice of Sheriff's Sale stated All these considered, we are of the view that the Notice of Sale
that their obligation was only P1,991,770.38 and PNB bidded in this case is valid. Petitioners failed to convince this Court
P8,511,000.00, the said Notice as well as the consequent sale that the difference between the amount stated in the Notice of
of the subject properties were null and void. SEIcAD Sale and the amount of PNB's bid resulted in discouraging or
misleading bidders, depreciated the value of the property or
It is true that statutory provisions governing publication of prevented it from commanding a fair price. DaScCH
notice of mortgage foreclosure sales must be strictly complied
with, and that even slight deviations therefrom will invalidate The cases cited by the RTC in its Decision do not apply
the notice and render the sale at least herein. San Jose v. Court of Appeals 22 refers to a Notice of
voidable. 19 Nonetheless, we must not also lose sight of the Sheriff's Sale which did not state the correct number of the
fact that the purpose of the publication of the Notice of transfer certificates of title of the property to be sold. This
Sheriff's Sale is to inform all interested parties of Court considered the oversight as a substantial and fatal error
the date, time and place of the foreclosure sale of the real which resulted in invalidating the entire notice. The case
property subject thereof. Logically, this not only requires that of Community Savings and Loan Association, Inc. v. Court of
the correct date, time and place of the foreclosure sale appear Appeals 23 is also inapplicable, because the said case refers
in the notice, but also that any and all interested parties be to an extrajudicial foreclosure tainted with fraud committed by
able to determine that what is about to be sold at the therein petitioners, which denied therein respondents the right
foreclosure sale is the real property in which they have an to redeem the property. It actually has no reference to a Notice
interest. 20 of Sale.
Considering the purpose behind the Notice of Sheriff's Sale, We now proceed to the effect of the non-delivery by PNB of
we disagree with the finding of the RTC that the discrepancy the bid price or the surplus to the petitioners. ISTECA
between the amount of petitioners' obligation as reflected in
the Notice of Sale and the amount actually due and collected The following antecedents are not disputed:
from the petitioners at the time of the auction sale constitute For failure to pay their loan obligation secured by a real estate
fraud which renders the extrajudicial foreclosure sale null and mortgage on the subject properties, PNB foreclosed the said
void. DTEAHI mortgage. In its petition for foreclosure sale under ACT No.
Notices are given for the purpose of securing bidders and to 3135 filed before the Mandaue City Sheriff, PNB stated therein
prevent a sacrifice of the property. If these objects are that petitioners' total outstanding obligation amounted to
attained, immaterial errors and mistakes will not affect the P1,991,770.38. 24 PNB bidded the amount of P8,511,000.00.
sufficiency of the notice; but if mistakes or omissions occur in Admittedly, PNB did not pay its bid in cash or deliver the
the notices of sale, which are calculated to deter or mislead excess either to the City Sheriff who conducted the bid or to
bidders, to depreciate the value of the property, or to prevent it the petitioners after deducting the difference between the
from bringing a fair price, such mistakes or omissions will be amount of its bid and the amount of petitioners' obligation in
the Notice of Sale. The petitioners then sought to declare the
73

nullity of the foreclosure, alleging that their loan obligation mandates that in the absence of a third-party claim, the
amounted only to P1,991,770.38 in the Notice of Sale, and purchaser in an execution sale need not pay his bid if it does
that PNB did not pay its bid in cash or deliver to petitioner the not exceed the amount of the judgment; otherwise, he shall
surplus, which is required under the law. 25 DTaSIc pay only the excess. 27
On the other hand, PNB claims that petitioners' loan obligation The raison de etre is that it would obviously be senseless for
reflected in the Notice of Sale dated 10 March 1992 did not the Sheriff or the Notary Public conducting the foreclosure sale
include their other obligations, which became due at the date to go through the idle ceremony of receiving the money and
of the auction sale on 10 October 1992; as well as interests, paying it back to the creditor, under the truism that the
penalties, other charges, and attorney's fees due on the said lawmaking body did not contemplate such a pointless
obligation. 26 application of the law in requiring that the creditor must bid
under the same conditions as any other bidder. It bears
Pertinent provisions under Rule 39 of the Rules of Court on stressing that the rule holds true only where the amount of the
extrajudicial foreclosure sale provide: DHTECc bid represents the total amount of the mortgage
SEC. 21. Judgment obligee as purchaser. — debt. 28 CDAHIT
When the purchaser is the judgment obligee, The question that needs to be addressed in this case is:
and no third-party claim has been filed, he considering the amount of PNB's bid of P8,511,000.00 as
need not pay the amount of the bid if it against the amount of the petitioners' obligation of
does not exceed the amount of his P1,991,770.38 in the Notice of Sale, is the PNB obliged to
judgment. If it does, he shall pay only the deliver the excess? ACETSa
excess. (Emphasis supplied.)
Petitioners insist that the PNB should deliver the excess. On
SEC. 39. Obligor may pay execution against the other hand PNB counters that on the date of the auction
obligee. — After a writ of execution against sale on 30 October 1992, petitioners' other loan obligation
property has been issued, a person indebted already exceeded the amount of P1,991,770.38 in the Notice
to the judgment obligor may pay to the sheriff of Sale.
holding the writ of execution the amount of his
debt or so much thereof as may be necessary Rule 68, Section 4 of the Rules of Court provides: CDHacE
to satisfy the judgment, in the manner
prescribed in section 9 of this Rule, and the SEC. 4. Disposition of proceeds of sale. —
sheriff's receipt shall be a sufficient discharge The amount realized from the foreclosure sale
for the amount so paid or directed to be of the mortgaged property shall, after
credited by the judgment obligee on the deducting the costs of the sale, be paid to the
execution. EICScD person foreclosing the mortgage, and when
there shall be any balance or residue, after
Conspicuously emphasized under Section 21 of Rule 39 is that paying off the mortgage debt due, the same
if the amount of the loan is equal to the amount of the bid, shall be paid to junior encumbrancers in the
there is no need to pay the amount in cash. Same provision order of their priority, to be ascertained by the
74

court, or if there be no such encumbrancers Thus it has been held that if the mortgagee is retaining more of
or there be a balance or residue after the proceeds of the sale than he is entitled to, this fact alone
payment to them, then to the mortgagor or his will not affect the validity of the sale but simply give the
duly authorized agent, or to the person mortgagor a cause of action to recover such
entitled to it. surplus. 31 ECDaAc
Under the above rule, the disposition of the proceeds of the In the case before us, PNB claims that petitioners' loan
sale in foreclosure shall be as follows: TICAcD obligations on the date of the auction sale were already more
than the amount of P1,991,770.38 in the Notice of Sale. In
(a) first, pay the costs fact, PNB claims that on the date of the auction sale,
(b) secondly, pay off the mortgage petitioners' principal obligation, plus penalties, interests,
debt SCDaET attorneys fees and other charges were already beyond the
amount of its bid of P8,511,000.00.
(c) thirdly, pay the junior encumbrancers, if
any in the order of priority After a careful review of the evidence on record, we find that
the same is insufficient to support PNB's claim. Instead, what
(d) fourthly, give the balance to the is available on record is petitioner's Statement of Account as
mortgagor, his agent or the person prepared by PNB and attached as Annex A 32 to its Answer
entitled to it. 29 EHScCA with counterclaim. 33 In this Statement of Account, petitioners'
Based on the foregoing, after payment of the costs of suit and principal obligation with interest/penalty and attorney's fees as
satisfaction of the claim of the first mortgagee/senior of 30 October 1992 already amounted to
mortgagee, the claim of the second mortgagee/junior P6,409,814.92. cdphil
mortgagee may be satisfied from the surplus proceeds. The Although petitioners denied the amounts reflected in the
application of the proceeds from the sale of the mortgaged Statement of Account from PNB, they did not interpose any
property to the mortgagor's obligation is an act of payment, not defense to refute the computations therein. Petitioners' mere
payment by dacion; hence, it is the mortgagee's duty to return denials, far from being compelling, had nothing to offer by way
any surplus in the selling price to the mortgagor. Perforce, a of evidence. This then enfeebles the foundation of petitioners'
mortgagee who exercises the power of sale contained in a protestation and will not suffice to overcome the computation
mortgage is considered a custodian of the fund and, being of their loan obligations as presented in the Statement of
bound to apply it properly, is liable to the persons entitled Account submitted by PNB. 34
thereto if he fails to do so. And even though the mortgagee is
not strictly considered a trustee in a purely equitable sense, Noticeably, this Statement of Account is the only piece of
but as far as concerns the unconsumed balance, the evidence available before us from which we can determine the
mortgagee is deemed a trustee for the mortgagor or owner of outstanding obligations of petitioners to PNB as of the date of
the equity of redemption. 30 the auction sale on 10 October 1992. CaHAcT
It did not escape the attention of this Court that petitioners
wrote a number of letters to PNB almost two years after the
75

auction sale, 35 in which they offered to redeem the property. from the time it is judicially demanded. In the
In their last letter, petitioners offered to redeem their absence of stipulation, the rate of interest
foreclosed properties for P9,500,000.00. However, these shall be 12% per annum to be computed from
letters by themselves cannot be used as bases to support default, i.e., from judicial or extrajudicial
PNB's claim that petitioners' obligation is more than its bid of demand under and subject to the provisions
P8,500,000.00, without any other evidence. There was no of Article 1169 of the Civil Code. cDIHES
computation presented to show how petitioners' obligation
already reached P9,500,000.00. Petitioners could very well 2. When an obligation, not constituting a loan
have offered such an amount on the basis of the value of the or forbearance of money, is breached, an
foreclosed properties rather than their total obligation to PNB. interest on the amount of damages awarded
We cannot take petitioners' offer to redeem their properties in may be imposed at the discretion of the
the amount of P9,500,000.00 on its face as an admission of court at the rate of 6% per annum. No
the amount of their obligation to PNB without any supporting interest, however, shall be adjudged on
evidence. unliquidated claims or damages except when
or until the demand can be established with
Given that the Statement of Account from PNB, being the only reasonable certainty. Accordingly, where the
existing documentary evidence to support its claim, shows that demand is established with reasonable
petitioners' loan obligations to PNB as of 30 October 1992 certainty, the interest shall begin to run from
amounted to P6,409,814.92, and considering that the amount the time the claim is made judicially or
of PNB's bid is P8,511,000.00, there is clearly an excess in the extrajudicially (Art. 1169, Civil Code) but when
bid price which PNB must return, together with the interest such certainty cannot be so reasonably
computed in accordance with the guidelines laid down by the established at the time the demand is made,
court in Eastern Shipping Lines v. Court of the interest shall begin to run only from the
Appeals, 36 regarding the manner of computing legal date the judgment of the court is made (at
interest, viz: HIaTDS which time the quantification of damages may
be deemed to have been reasonably
II. With regard particularly to an award of ascertained). The actual base for the
interest in the concept of actual and computation of legal interest shall, in any
compensatory damages, the rate of interest, case, be on the amount finally adjudged.
as well as the accrual thereof, is imposed, as
follows: 3. When the judgment of the court awarding a
sum of money becomes final and executory,
1. When the obligation is breached, and it the rate of legal interest, whether the case
consists in the payment of a sum of falls under paragraph 1 or paragraph 2,
money, i.e., a loan or forbearance of money, above, shall be 12% per annum from such
the interest due should be that which may finality until its satisfaction, this interim period
have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest
76

being deemed to be by then an equivalent to until payment thereof, is deemed to be equivalent to a


a forbearance of credit. IEHaSc forbearance of credit." Thus, in accordance with the
pronouncement in Eastern Shipping, the rate of 12% per
In Philippine National Bank v. Court of Appeals, 37 it was held annum should be imposed, to be computed from the time the
that: judgment becomes final and executory until fully
The rate of 12% interest referred to in Cir. 416 satisfied. CIaHDc
applies only to: CAcEaS It must be emphasized, however, that our holding in this case
Loan or forbearance of money, or to cases does not preclude PNB from proving and recovering in a
where money is transferred from one person proper proceeding any deficiency in the amount of petitioners'
to another and the obligation to return the loan obligation that may have accrued after the date of the
same or a portion thereof is adjudged. Any auction sale.
other monetary judgment which does not WHEREFORE, premises considered, the Decision of the
involve or which has nothing to do with loans Court of Appeals dated 12 April 2005 is MODIFIED in that the
or forbearance of any, money, goods or credit PNB is directed to return to the petitioners the amount of
does not fall within its coverage for such P2,101,185.08 with interest computed at 6% per annum from
imposition is not within the ambit of the the time of the filing of the complaint until its full payment
authority granted to the Central Bank. When before finality of judgment. Thereafter, if the amount adjudged
an obligation not constituting a loan or remains unpaid, the interest rate shall be 12% per
forbearance of money is breached then an annum computed from the time the judgment became final and
interest on the amount of damages awarded executory until fully satisfied. Costs against private
may be imposed at the discretion of the court respondent. cDCSET
at the rate of 6% per annum in accordance
with Art. 2209 of the Civil Code. Indeed, the SO ORDERED.
monetary judgment in favor of private
respondent does not involve a loan or Ynares-Santiago, Austria-Martinez, Nachura and Reyes,
forbearance of money, hence the proper JJ., concur.
imposable rate of interest is six (6%) per cent. ||| (Spouses Suico v. Philippine National Bank, G.R. No.
Using the above rule as yardstick, since the responsibility of 170215, [August 28, 2007], 558 PHIL 265-284)
PNB arises not from a loan or forbearance of money which
bears an interest rate of 12%, the proper rate of interest for the
amount which PNB must return to the petitioners is only 6%.
This interest according to Eastern Shipping shall be computed
from the time of the filing of the complaint. However, once the
judgment becomes final and executory, the "interim period
from the finality of judgment awarding a monetary claim and
77

SECOND DIVISION on the part of respondent judge in denying petitioners' motion


for summary judgment. 2
[G.R. No. 91779. February 7, 1991.] The antecedents of this case are clear and undisputed.
Sometime on April 15, 1988, petitioners filed Civil Case No.
GRAND FARMS, INC. and PHILIPPINE 2816-V-88 in the Regional Trial Court of Valenzuela, Metro
SHARES Manila for annulment and/or declaration of nullity of the
CORPORATION, petitioners, vs. COURT OF extrajudicial foreclosure proceedings over their mortgaged
APPEALS, JUDGE ADRIAN R. OSORIO, as properties, with damages, against respondents clerk of court,
Presiding Judge of the Regional Trial deputy sheriff and herein private respondent Banco Filipino
Court, Branch 171, Valenzuela Metro Savings and Mortgage Bank. 3
Manila; ESPERANZA ECHIVERRI, as Clerk Soon after private respondent had filed its answer to the
of Court & Ex-Officio Sheriff of the complaint, petitioners filed a request for admission by private
Regional Trial Court of Valenzuela, Metro respondent of the allegation, inter alia, that no formal notice of
Manila; SERGIO CABRERA, as Deputy intention to foreclose the real estate mortgage was sent by
Sheriff-in-Charge; and BANCO FILIPINO private respondent to petitioners. 4
SAVINGS AND MORTGAGE
BANK, respondents. Private respondent, through its deputy liquidator, responded
under oath to the request and countered that petitioners were
"notified of the auction sale by the posting of notices and the
Balgos & Perez for petitioners. publication of notice in the Metropolitan Newsweek, a
newspaper of general circulation in the province where the
Sycip, Salazar, Hernandez & Gatmaitan for private
subject properties are located and in the Philippines on
respondent.
February 13, 20 and 28, 1988." 5
On the basis of the alleged implied admission by private
DECISION respondent that no formal notice of foreclosure was sent to
petitioners, the latter filed a motion for summary judgment
contending that the foreclosure was violative of the provisions
of the mortgage contract, specifically paragraph (k) thereof
REGALADO, J p: which provides:

The propriety of a summary judgment is raised in issue in the "k) All correspondence relative to this
instant petition, with herein petitioners appealing the decision 1 Mortgage, including demand letters,
of respondent court in CA-G.R. SP No. 17535, dated summons, subpoena or notifications of any
November 29, 1989, which found no grave abuse of discretion judicial or extrajudical actions shall be sent to
the Mortgagor at the address given above or
at the address that may hereafter be given in
78

writing by the Mortgagor to the Mortgagee, xxx xxx xxx


and the mere act of sending any
correspondence by mail or by personal "d) Effective upon the breach of any
delivery to the said address shall be valid and conditions of the mortgage and in addition to
effective notice to the Mortgagor for all legal the remedies herein stipulated, the Mortgagee
purposes, and the fact that any is hereby likewise appointed attorney-in-fact
communication is not actually received by the of the Mortgagor with full powers and
Mortgagor, or that it has been returned authority, with the use of force, if necessary,
unclaimed to the Mortgagee, or that no to take actual possession of the mortgaged
person was found at the address given, or property, without the necessity for any judicial
that the address is fictitious, or cannot be order or any permission of power to collect
located, shall not excuse or relieve the rents, to eject tenants, to lease or sell the
Mortgagor from the effects of such notice;" 6 mortgaged property, or any part thereof, at
public or private sale without previous notice
The motion was opposed by private respondent which argued or advertisement of any kind and execute the
that petitioners' reliance on said paragraph (k) of the mortgage corresponding bills of sale, lease or other
contract fails to consider paragraphs (b) and (d) of the same agreement that may be deemed convenient,
contract, which respectively provide as follows: to make repairs or improvement to the
mortgaged property and pay for the same and
"b) . . . For the purpose of extra-judicial perform any other act which the Mortgagor
foreclosure, the Mortgagor (plaintiff) hereby may deem convenient . . ." 7
appoints the Mortgagee (BF) his attorney-in-
fact to sell the property mortgaged, to sign all On February 27, 1989, the trial court issued an order, denying
documents and perform any act requisite and petitioners' motion for summary judgment. 8 Petitioners'
necessary to accomplish said purpose and to motion for reconsideration was likewise denied by respondent
appoint its substitutes as such attorney-in- judge on the ground that genuine and substantial issues exist
fact, with the same powers as above- which require the presentation of evidence during the trial, to
specified. The Mortgagor hereby expressly wit: (a) whether or not the loan has matured; (b) whether or not
waives the term of thirty (30) days or any private respondent notified petitioners of the foreclosure of
other term granted or which may hereafter be their mortgage; (c) whether or not the notice by publication of
granted him by law as the period which must the foreclosure constitutes sufficient notice to petitioners under
elapse before the Mortgagee shall be entitled the mortgage contract; (d) whether or not the applicant for
to foreclose this mortgage, it being specifically foreclosure of the mortgage was a duly authorized
understood and agreed that the said representative of private respondent; and (e) whether or not
Mortgagee may foreclose this mortgage at the foreclosure was enjoined by a resolution of this Court. 9
any time after the breach of any conditions
hereof . . ." Petitioners thereafter went on a petition for certiorari to
respondent court attacking said orders of denial as having
79

been issued with grave abuse of discretion. As earlier extrajudicial foreclosure was ever sent to petitioners prior
adverted to, respondent court dismissed the petition, holding thereto. This omission, by itself, rendered the foreclosure
that no personal notice was required to foreclose since private defective and irregular for being contrary to the express
respondent was constituted by petitioners as their attorney-in- provisions of the mortgage contract. There is thus no further
fact to sell the mortgaged property. It further held that necessity to inquire into the other issues cited by the trial
paragraph (k) of the mortgage contract merely specified the court, for the foreclosure may be annulled solely on the basis
address where correspondence should be sent and did not of such defect.
impose an additional condition on the part of private
respondent to notify petitioners personally of the foreclosure. While private respondent was constituted as their attorney-in-
Respondent court also denied petitioners motion for fact by petitioners, the inclusion of the aforequoted paragraph
reconsideration, hence the instant petition. LibLex (k) in the mortgage contract nonetheless rendered personal
notice to the latter indispensable. As we stated in Community
We rule for petitioners. Savings & Loan Association, Inc., et al. vs. Court of Appeals,
at al., 13 where we had the occasion to construe an identical
The Rules of Court authorize the rendition of a summary provision:
judgment if the pleadings, depositions and admissions on file,
together with the affidavits, show that, except as to the amount "One other important point that militates
of damages, there is no issue as to any material fact and that against the petitioners' first ground for this
the moving party is entitled to a judgment as a matter of law. petition is the fact that no notice of the
10 Although an issue may be raised formally by the pleadings foreclosure proceedings was ever sent by
but there is no genuine issue of fact, and all the facts are CSLA to the deceased mortgagor Antonio
within the judicial knowledge of the court, summary judgment Esguerra or his heirs in spite of an express
may be granted. 11 stipulation in the mortgage agreement to that
effect. Said Real Estate Mortgage provides, in
The real test, therefore, of a motion for summary judgment is Sec. 10 thereof that:
whether the pleadings, affidavits and exhibits in support of the
motion are sufficient to overcome the opposing papers and to '(10) All correspondence
justify a finding as a matter of law that there is no defense to relative to this mortgage, including
the action or that the claim is clearly meritorious. 12 demand letters, summons,
subpoenas, or notifications of any
Applying said criteria to the case at bar, we find petitioners' judicial or extrajudicial actions shall be
action in the court below for annulment and/or declaration of sent to the Mortgagor at the address
nullity of the foreclosure proceedings and damages ripe for given above or at the address that
summary judgment. Private respondent tacitly admitted in its may hereafter be given in writing by
answer to petitioners' request for admission that it did not send the Mortgagor to the Mortgagee, and
any formal notice of foreclosure to petitioners. Stated the mere act of sending any
otherwise, and as is evident from the records, there has been correspondence by mail or by
no denial by private respondent that no personal notice of the personal delivery to the said
80

address shall be valid and effective on the property in question are fatally
notice to the Mortgagor for all legal defective and are not binding on the
purposes, . . .' (Emphasis in the deceased debtor-mortgagor or to his
original text.) heirs' (p. 37, Rollo)
"The Court of Appeals, in appreciating the "Hence, even on the premise that there was
foregoing provision ruled that it 'is an no attendant fraud in the proceedings, the
additional stipulation between the parties. As failure of the petitioner bank to comply with
such, it is the law between them and as it not the stipulation in the mortgage document is
contrary to law, morals, good customs and fatal to the petitioners' cause."
public policy, the same should be complied
with faithfully (Article 1306, New Civil Code of We do not agree with respondent court that paragraph (k) of
the Philippines). Thus, while publication of the the mortgage contract in question was intended merely to
foreclosure proceedings in the newspaper of indicate the address to which the communications stated
general circulation was complied with, therein should be sent. This interpretation is rejected by the
personal notice is still required, as in the case very text of said paragraph as above construed. We do not
at bar, when the same was mutually agreed see any conceivable reason why the interpretation placed on
upon by the parties as additional condition of an identically worded provision in the mortgage contract
the mortgage contract. Failure to comply with involved in Community Savings & Loan Association, Inc.
this additional stipulation would render illusory should not be adopted with respect to the same provision
Article 1306 of the New Civil Code of the involved in the case at bar.
Philippines' (p. 37, Rollo). Nor may private respondent validly claim that we are
supposedly interpreting paragraph (k) in isolation and without
taking into account paragraphs (b) and (d) of the same
"On the issue of whether or not CSLA notified contract. There is no irreconcilable conflict between, as in fact
the private respondents of the extrajudicial a reconciliation should be made of, the provisions of
foreclosure sale in compliance with Sec. 10 of paragraphs (b) and (d) which appear first in the mortgage
the mortgage agreement the Court of Appeals contract and those in paragraph (k) which follow thereafter and
found as follows: necessarily took into account the provisions of the preceding
two paragraphs. 14 The notices respectively mentioned in
'As the record is bereft of any paragraphs (d) and (k) are addressed to the particular
evidence which even impliedly indicate purposes contemplated therein. Those mentioned in
that the required notice of the paragraph (k) are specific and additional requirements
extrajudicial foreclosure was ever sent intended for the mortgagors so that, thus apprised, they may
to the deceased debtor-mortgagor take the necessary legal steps for the protection of their
Antonio Esguerra or to his heirs, the interests such as the payment of the loan to prevent
extrajudicial foreclosure proceedings
81

foreclosure or to subsequently arrange for redemption of the


property foreclosed.
What private respondent would want is to have paragraph (k)
considered as non-existent and consequently disregarded, a
proposition which palpably does not merit consideration.
Furthermore, it bears mention that private respondent having
caused the formulation and preparation of the printed
mortgage contract in question, any obscurity that it imputes
thereto or which supposedly appears therein should not favor
it as a contracting party. 15
Now, as earlier discussed, to still require a trial
notwithstanding private respondent's admission of the lack of
such requisite notice would be a superfluity and would work
injustice to petitioners whose obtention of the relief to which
they are plainly and patently entitled would be further delayed.
That undesirable contingency is obviously one of the reasons
why our procedural rules have provided for summary
judgments.
WHEREFORE, the decision appealed from is hereby
REVERSED and SET ASIDE and this case is REMANDED to
the court of origin for further proceedings in conformity with
this decision. This judgment is immediately executory. prLL
SO ORDERED.
Melencio-Herrera, Padilla and Sarmiento, JJ., concur.
Paras, J., took no part. Son is with respondent's counsel.
||| (Grand Farms, Inc. v. Court of Appeals, G.R. No. 91779,
[February 7, 1991], 271 PHIL 788-797)
82

SECOND DIVISION properties included lots in Quezon City, Manila, Pampanga


and Bulacan in the name of Ricardo C. Silverio, married to
[G.R. No. 178242. January 20, 2009.] Beatriz Sison; a lot in Tagaytay in the name of Ricardo C.
Silverio; lots in Nueva Ecija in the name of RCSMC; lots in
Baguio and Benguet in the name of Delta Motors; a lot in
HEIRS OF NORBERTO J. Zambales in the name of RCSMC; and a lot in Rizal
QUISUMBING, petitioners, vs. PHILIPPINE (actually Pasong Tamo, Makati) including improvements in
NATIONAL BANK and SANTIAGO LAND the name of Komatsu (hereafter referred to as Pasong
DEVELOPMENT Tamo property). cACEHI
CORPORATION,respondents.
By letter 4 dated April 8, 1985, Quisumbing made a
formal tender of redemption to PNB for the
abovementioned properties, with the request that he be
DECISION informed within 10 days of the total amount of the
redemption prices so "he would know how much to pay".
Quisumbing furnished the sheriffs who conducted the
CARPIO-MORALES, J p: * sales, as well as the registers of deeds in the various
localities where the properties are situated, with a copy of
From the Court of Appeals Decision 1 of February said tender letter.
14, 2007 denying petitioners' appeal from the Decision 2 of Acting on Quisumbing's tender of redemption, the
the Regional Trial Court, Branch 62, Makati City in Civil PNB, by letter of April 15, 1985, requested copies of the
Case No. 10513, they come to this Court on petition for Deeds of Assignment so that it may "have a basis to reply
review on certiorari. CSTcEI to" his request. 5 Quisumbing furnished PNB with copies of
Culled from the eight-volume records of the case the Deeds, requesting a reply to his tender letter and
are the following facts: requested for the computation of the total amount of
redemption price for which he gave PNB until April 30,
In 1984, spouses Ricardo C. Silverio and Beatriz 1985 to do so. Before PNB could reply, however, or on
Sison-Silverio (spouses Silverio) and Ricardo C. Silverio as April 23, 1985, Quisumbing executed an Affidavit of
Chairman of the Board of the following companies, namely Redemption, 6 furnishing PNB, the sheriffs and the
Delta Motors Corporation (Delta Motors), Komatsu registers of deeds a copy thereof.
Industries (Komatsu), R.C. Silverio Management
Corporation (RCSMC), through Deeds of Before the one-year redemption period expired,
Assignment 3 dated April 11 and 12, 1985, assigned to PNB, by letter dated May 3, 1985, 7 denied Quisumbing's
Atty. Norberto J. Quisumbing (Quisumbing) their rights of offer of redemption on the ground that the Deeds of
redemption with respect to various real properties which Assignment were invalid for not having been registered
herein respondent Philippine National Bank (PNB) had and for being against Art. 1491 (5) of the Civil Code; that
foreclosed and acquired as the highest bidder. The the tender was not proper because it was not
83

accompanied by actual money payment; and that the as an additional defendant for it to be bound by all prior
amount Quisumbing offered was way below that required proceedings.
under Sec. 25 of P.D. No. 694.
By Decision dated July 6, 1992, the appellate court
Quisumbing thus filed a Complaint 8 before the granted the petition of petitioners and nullified the trial
Regional Trial Court (RTC) of Makati 9 against PNB to court's Order granting SLDC's intervention. SLDC
compel it to allow him to exercise his right of redemption appealed to this Court via certiorari, docketed as G.R. No.
over the foreclosed properties and to inform him of the total 106194.
amount of redemption price. At the same time, he caused
By Decision 12 of January 28, 1997, the Court
the annotation of a notice of lis pendens on the certificates
dismissed SLDC's petition and affirmed the appellate
of title of the properties.
court's decision, ruling that SLDC is a transfereependente
In its Answer, 10 PNB contended that Quisumbing lite and, as such, could no longer intervene as the law
had no cause of action as his tender offer was "pro-forma", already considers it joined or substituted in the pending
as the same was unaccompanied by cash payment; that action, hence, bound by all prior proceedings and barred
the offer was not in accordance with Section 25 of P.D. No. from presenting a new or different claim. cdasia
694, as amended; that the assignment of rights made in
SLDC thereupon filed a Motion for Partial
Quisumbing's favor was ineffectual because the same was
Substitution in Civil Case No. 10513, which was granted on
not registered and annotated on the certificates of title of
April 14, 1998.
the properties; that the Deeds of Assignment executed by
RSCMC, Komatsu and Delta Motors were defectively By Decision 13 of October 24, 2000, the trial court
acknowledged as public instruments; and that the dismissed petitioner's Amended Complaint as against
assignments were barred by Article 1491 (5) of the Civil PNB, as well as that against SLDC, ruling that Quisumbing
Code. 11 During the pendency of the case, Quisumbing did not make a valid tender of redemption as it was not
died, hence, he was substituted by his heirs-herein accompanied by cash payment; that Sec. 25 of P.D. No.
petitioners on September 14, 1990. 694 is not unconstitutional and was applicable not only to
direct debtors/mortgagors but constructively also to
On December 8, 1989, with the approval by Branch
accommodation mortgagors following Nepomuceno v.
149 of the Makati RTC, the herein other respondent
RFC. 14Aggrieved, petitioners appealed to the Court of
Santiago Land Development Corporation (SLDC)
Appeals. cCESTA
intervened, it having purchased pendente lite from PNB
the Pasong Tamo property, and adopted in its Answer-in- By the assailed Decision of February 14, 2007, the
Intervention PNB's defenses as set forth in its Answer, and appellate court affirmed the trial court's decision, holding
raised additional defenses. that there was no valid offer to redeem the properties
owing to Quisumbing's failure to validly tender payment;
Petitioners thus filed before the appellate court a
and that even if his filing of the complaint was considered
Petition for Certiorari, docketed as CA-G.R. SP No. 25826,
as judicial redemption, it was still ineffectual due to non-
questioning, inter alia, the trial court's grant of SLDC's
tender of the redemption price. On account of such ruling,
move to intervene, arguing that SLDC should have joined
84

the appellate court no longer ruled on the issue of the spouses Silverio still, the redemption price would be based
constitutionality of Sec. 25 of P.D. 694 and on the validity on the value of the properties foreclosed, not on the
of the Deeds of Assignment. Petitioners' motion for obligations of the debtor, as what PNB insists on doing.
reconsideration having been denied by Resolution dated
In its Comment, 16 PNB, averring that what
June 5, 2007, this present petition was filed. HIAcCD
petitioners are raising are questions of fact, maintains that
Petitioners insist that Quisumbing made a valid the Deeds of Assignment are void for being against public
tender of redemption because he did not have to tender policy because at the time they were executed,
the redemption prices due to, so they claim, PNB's outright Quisumbing was already the lawyer not only of the
refusal to accept or allow any redemption, and that he spouses Silverio but also of Komatsu and the other
perfected a 'judicial redemption' following Tioseco v. companies, the properties of which were being foreclosed.
CA. 15 They assail the ruling of the trial court that spouses
In its separate Comment, 17 SLDC argues that the
Silverio were accommodation mortgagors or direct
present petition, insofar as the Pasong Tamo property is
debtors/mortgagors and that Sec. 25 of P.D. No.
concerned, is barred by res judicata, the Court in Komatsu
694 applies to accommodation mortgagors, as well as the
Industries (Phils.) Inc. v. Philippine National Bank and
trial and appellate court's ruling that Sec. 25 is not
Santiago Land Development Corporation and Maximo
unconstitutional despite its being violative, so petitioners
Contreras, (Komatsu case) 18having declared PNB's
contend, of the due process and equal protection clauses
extrajudicial foreclosure of the said property and eventual
of the Constitution.
sale to SLDC valid. It adds that, since in G.R. No. 106194
Petitioners maintain that Sec. 25 applies only to or the "Intervention Case", it was held that a
debtors-mortgagors, hence, the case at bar should have purchaser pendente lite — SLDC is bound by the outcome
been governed by the general law on redemption — Sec. 6 of the case instituted by the transferor — PNB, then
of Republic Act No. 3135 vis a vis Rule 39, Sec. 30. In Quisumbing, as transferee pendente lite of Komatsu's right
support of their position, they draw attention to the fact that to redeem the Pasong Tamo property, "must also
all the certificates of sale state that the proceedings/sale necessarily be bound by the outcome of theKomatsu case"
were pursuant to an "extra-judicial foreclosure of real — and that, perforce, "if he cannot intervene, then neither
estate mortgage under RA 3135 as amended", without any can he be allowed to file or maintain a separate
mention whatsoever of P.D. No. 694. Petitioners thus case". HETDAa
conclude that Sec. 25 of P.D. No. 694 should be struck
Maintaining that Quisumbing's "judicial redemption"
down for being void for vagueness; and that it is arbitrary
should not be allowed, SLDC contends that since
and unreasonable because it grants a preferred position to
redemption is inconsistent with the claim of invalidity of a
PNB which may abuse to unjustly enrich itself at the
foreclosure sale, then Komatsu's act of assigning its right
expense of mortgagors, hence, violative of the right to due
of redemption to Quisumbing was incompatible with its
process.
earlier remedy of contesting the validity of PNB's
At all events, they argue that assuming that Sec. 25 foreclosure and is, therefore, prohibited.
applies to accommodation mortgagors such as the
85

SLDC further avers that Sec. 25 of PD No. that if, indeed, the purpose of said provision is to protect
694 does not violate the due process clause, its provision the government's investment in PNB, then it has ceased to
requiring the mortgagors to pay the redemption price being exist due to the privatization of said institution and, as
in line with the purpose of the law, viz. "to protect the such, Sec. 25 should be struck down. aDIHTE
investment of the government in the institution".
The pivotal issue that needs to be resolved is
Aside from reiterating their previous arguments, whether the original plaintiff, Atty. Norberto J. Quisumbing,
petitioners, in their Consolidated Reply, 19 refute SLDC's made a valid tender of redemption.
and PNB's arguments. They contend that the action is not
The Court rules in the negative.
barred by res judicata because in the Komatsu case, the
Court "contemplated" that the issue of validity of the Sec. 25 of P.D. No. 694 otherwise known as the
exercise of redemption would not be resolved in that case Revised Charter of the Philippine National Bank enacted
but in Civil Case No. 10513, and the reason why on May 8, 1975 provides:
Quisumbing was not required to intervene in Komatsu was Section 25. Right of redemption of foreclosed
because he was not a party thereto, and the case involved property Right of possession during
annulment of the foreclosure sale, not the exercise of the redemption period. — Within one year from
right of redemption. the registration of the foreclosure sale of real
Petitioners further maintain that the issue of estate, the mortgagor shall have the right
whether the assignment of rights made in Quisumbing's to redeem the property by paying all
favor was barred for being against public policy (under Art. claims of the Bank against him on the date
1491[5] of the Civil Code) can no longer be raised as an of the sale including all the costs and
issue, respondents having failed to raise it in the other expenses incurred by reason of the
proceedings below; and assuming arguendo that it had foreclosure sale and custody of the
been raised, said provision would not apply, as what were property, as well as charges and accrued
assigned were merely the rights of redemption, not the interests. HTSaEC
properties themselves, and Quisumbing did not represent
The Bank may take possession of the
Komatsu or the other companies in the annulment of
foreclosed property during the redemption
foreclosure proceedings.
period. When the Bank takes possession
In a Supplemental Petition 20 filed on August 28, during such period, it shall be entitled to the
2007, petitioners submit that the sale of the Philippine fruits of the property with no obligation to
Government's remaining minority shares (12.28%) in the account for them, the same being considered
PNB on August 1, 2007 reinforces their argument that if compensation for the interest that would
Sec. 25 of P.D. No. 694 is made applicable to otherwise accrue on the account. Neither
accommodation mortgagors, the same should be struck shall the Bank be obliged to post a bond for
down for being unconstitutional, as it would then be the purpose of such possession. (Emphasis
violative of the equal protection clause. And they assert supplied)
86

On the other hand, under Act No. 3135, AN ACT purchase, with one per centum per month
TO REGULATE THE SALE OF PROPERTY UNDER interest thereon in addition, up to the time
SPECIAL POWERS INSERTED IN OR ANNEXED TO of redemption, together with the amount of
REAL ESTATE MORTGAGES (which took effect on March any assessments or taxes which the
6, 1924), as amended by Act. No. 4118, redemption of purchaser may have paid thereon after
extra-judicially foreclosed properties is undertaken as purchase, and interest on such last named
follows: amount of the same rate; and if the
purchaser be also a creditor having a prior
SEC. 6. In all cases in which an extrajudicial
lien to that of the redemptioner, other than
sale is made under the special power
the judgment under which such purchase
hereinbefore referred to, the debtor, his
was made, the amount of such other lien,
successors in interest or any judicial creditor
with interest. (Emphasis supplied) HICSaD
or judgment creditor of said debtor, or any
person having a lien on the property As to the requisites for a valid tender of redemption
subsequent to the mortgage or deed of trust in case of extra-judicially foreclosed properties by
under which the property is sold, may banks, Banco Filipino Savings and Mortgage Bank, Inc., v.
redeem the same at any time within the Court of Appeals, 21 instructs:
term of one year from and after the date of
the sale; and such redemption shall be Section 6 of Act 3135 provides for the
governed by the provisions of sections requisites for a valid redemption, thus:
four hundred and sixty-four to four SEC. 6. In all cases in which an
hundred and sixty-six, inclusive, of the extrajudicial sale is made under the
Code of Civil Procedure, in so far as these special power hereinbefore referred to,
are not inconsistent with the provisions of this the debtor, his successors in interest
Act. (Emphasis supplied) or any judicial creditor or judgment
And the pertinent provision of the Code of Civil creditor of said debtor, or any person
Procedure, now Section 28 of Rule 39 of the Revised having a lien on the property
Rules of Civil Procedure, reads: subsequent to the mortgage or deed
of trust under which the property is
SEC. 28. Time and manner of, and amounts sold, may redeem the same at any
payable on, successive redemptions; notice time within the term of one year from
to be given and filed. — The judgment and after the date of sale; and such
obligor, or redemptioner, may redeem the redemption shall be governed by the
property from the purchaser, at any time provisions of sections four hundred
within one (1) year from the date of the and sixty-four to four hundred and
registration of the certificate of sale, by sixty-six, inclusive, of the Code of Civil
paying the purchaser the amount of his Procedure, insofar as these are not
87

inconsistent with the provisions of this Clearly, the right of redemption should be
Act. exercised within the specified time limit, which
is one year from the date of registration of the
However, considering that petitioner is a certificate of sale. The redemptioner should
banking institution, the determination of the make an actual tender in good faith of the
redemption price is governed by Section 78 of full amount of the purchase price as
the General Banking Act which provides: provided above, i.e., the amount fixed by
In the event of foreclosure, whether the court in the order of execution or the
judicially or extrajudicially, of any amount due under the mortgage deed, as
mortgage on real estate which is the case may be, with interest thereon at
security for any loan granted before the rate specified in the mortgage, and all
the passage of this Act or under the the costs, and judicial and other expenses
provisions of this Act, the mortgagor or incurred by the bank or institution
debtor whose real property has been concerned by reason of the execution and
sold at public auction, judicially or sale and as a result of the custody of said
extrajudicially, for the full or partial property less the income received from the
payment of an obligation to any bank, property.
banking or credit institution, within the xxx xxx xxx
purview of this Act shall have the right,
within one year after the sale of the In BPI Family Savings Bank, Inc. vs. Veloso,
real estate as a result of the we held:
foreclosure of the respective
mortgage, to redeem the property by The general rule in redemption is that it is
paying the amount fixed by the court in not sufficient that a person offering to
the order of execution, or the amount redeem manifests his desire to do so. The
due under the mortgage deed, as the statement of intention must be
case may be, with interest thereon at accompanied by an actual and
the rate specified in the mortgage, and simultaneous tender of payment. This
all the costs, and judicial and other constitutes the exercise of the right to
expenses incurred by the bank or repurchase. ISCDEA
institution concerned by reason of the xxx xxx xxx
execution and sale and as a result of
the custody of said property less the Whether or not respondents were diligent in
income received from the asserting their willingness to pay is
property. SHaIDE irrelevant. Redemption within the period
allowed by law is not a matter of intent but
a question of payment or valid tender of
88

the full redemption price within said fide tender of the redemption price, while
period. (Emphasis supplied) proper, may be unessential. (Emphasis
supplied)
Evidently, whether the redemption is being made
under Act No. 3135 or the General Banking Act, as For this exception to apply, however, certain conditions
amended by Presidential Decree No. 1828, or under P.D. must be met, viz.:
No. 694, the mortgagor or his assignee is required to It should, however, be noted that in Hi-Yield
tender payment to make said redemption valid — Realty, Inc. v. Court of Appeals, we held that
something which petitioners' predecessor failed to do. The the action for judicial redemption should
only instance when this rule may be construed be filed on time and in good faith, the
liberally, i.e., allow the non-simultaneous tender of redemption price is finally determined and
payment, is if a judicial action is instituted by the paid within a reasonable time, and the rights
redemptioner. 22 aDICET of the parties are respected. Stated
Petitioner however claims, citing Banco otherwise, the foregoing interpretation has
Filipino Savings and Mortgage Bank v. Court three critical dimensions: (1) timely
of Appeals and Lee Chuy Realty Corporation redemption or redemption by expiration
v. Court of Appeals that in case of date; (2) good faith as always, meaning,
disagreement over the redemption price, the the filing of the action must have been for
redemptioner may preserve his right of the sole purpose of determining the
redemption through judicial action which must redemption price and not to stretch the
be filed within the one-year period of redemptive period indefinitely; and (3)
redemption. The filing of a court action to once the redemption price is determined
enforce redemption, being equivalent to a within a reasonable time, the redemptioner
formal offer to redeem, would have the effect must make prompt payment in full.
of preserving his redemptive rights and (Emphasis supplied) EHACcT
"freezing" the expiration of the one-year
While Quisumbing filed the Complaint on May 7,
period. Bona fide tender of the redemption
1985, days or even weeks before the expiration of the one-
price, within the prescribed period is only
year redemption period reckoned from the dates of
essential to preserve the right of redemption
registration of the different certificates of sale, it cannot be
for future enforcement beyond such period of
said that he was motivated by good faith when he filed the
redemption and within the period prescribed
Complaint, as contemplated in the above ruling. For the
for the action by the statute of
Complaint was filed not for the sole purpose of determining
limitations. Where the right to redeem is
the redemption price, but, as Quisumbing himself admitted
exercised through judicial action within
on direct examination, it was to seek the annulment of Sec.
the reglementary period, the offer to
25 of P.D. No. 694, thus:
redeem, accompanied by a bona
89

Q: And what is the purpose of your not yet executed — have not yet been
present suit? executed?
A: To compel the redemption, because the A: Well, there might have been a delay in the
redemption were (sic) disallowed execution of the Deeds of
unless the entire obligation rather than Assignment; but since I was certain
just leaving the purchase price of the that PNB will reject a redemption,
foreclosure sale is paid. The purpose not in accordance with Sec. 25 of
of suit therefore, is to seek the its charter. In other words, just
annulment of that provision of offering the purchase price derive from
Section 25 of the Revised . . . we began the process of
Chapter (sic)of the Philippine redemption early. Besides, the
National Bank, which provides that Philippine National Bank, in some
redemption can be effected only by cases, in other creditors of . .
paying the entire claim of the . 24 IcTEAD
Philippine National Bank, against in
this case, Delta Motors Corporation. xxx xxx xxx (Emphasis and underscoring
As the Complaint alleges the sale . . . supplied)
contrary to law, moral, customs, public Clearly, from the admissions reflected in the testimony,
security, since the law favors in the Quisumbing's filing of the Complaint was not solely due to
long line of decisions of the right of a mere disagreement in the redemption price; rather, it was
redemption. Second, with such a because he was not willing to pay whatever amount PNB
provision no one can get a fair price at would compute on the basis of Sec. 25 of P.D. No. 694. By
a foreclosure sale of an individual questioning the constitutionality of said provision,
property. 23 (Emphasis and Quisumbing, wittingly delayed the redemption, since he
underscoring supplied) must have known that raising the issue of constitutionality
And on cross-examination, when questioned why he wrote of a statute in any suit would result in a litigious process
to PNB on April 8, 1985 offering to redeem the property which could stretch for an indefinite period as, in fact, the
when the Deeds of Assignment in his favor were not yet history of the present case shows. More importantly, his
executed, Quisumbing replied: act of executing his Affidavit of Redemption on April 23,
1985 and alleging therein his oft-repeated excuse of
xxx xxx xxx "PNB's refusal to allow him to redeem the subject
Q: The Deeds of Assignment were executed properties" even before PNB could provide him the
either on April 12 or 11 in the case of computations by April 30, 1985, as he himself requested in
Komatsu, 1985. Why did you write his April 23, 1985 letter, and before PNB's actual refusal as
PNB a tender of letter as early as April stated in its May 3, 1985 letter, reflected that from the very
8 when the Deeds of Assignment were beginning, his mindset was that if any redemption would
90

be had, the same should be made according to his terms


and conditions and under Act No. 3135, not P.D. No. 694.
Indubitably, such actuations belie good faith and,
therefore, the exception as enunciated in Tolentino case
would not apply. aCASEH
Had Quisumbing believed in good faith that Act No.
3135 was applicable, he could have tendered the amount
as computed thereunder, if only to show that he was able
and willing to redeem the properties.
Respecting the issues raised by petitioners that
Sec. 25 of P.D. No. 694 is unconstitutional, the same has
been rendered moot and academic by the full privatization
of PNB pursuant to E.O. 80 25 which repealed said P.D.,
as well as the subsequent sale of the remaining shares of
the government on August, 2007 which converted it from a
government financial institution to a private banking
institution.
The foregoing discussions render it unnecessary to
address the other points pleaded by petitioners, such as
the validity of the Deeds of Assignment, whether the
Silverio spouses are accommodation mortgagors or direct
debtors/mortgagors, or whether the suit is barred by the
principle of res judicata.TCIHSa
WHEREFORE, the petition is DENIED. The
February 14, 2007 Decision of the Court of Appeals and
the June 5, 2007 Resolution in CA-G.R. CV No. 69337 are
AFFIRMED.
Costs against petitioner.
SO ORDERED.
Tinga, Chico-Nazario, ** Velasco, Jr. and Brion,
JJ., concur.
||| (Heirs of Quisumbing v. Philippine National Bank, G.R. No.
178242, [January 20, 2009], 596 PHIL 831-846)
91

FIRST DIVISION During the public auction, the mortgaged properties were sold
for P3,500,000.00 to respondent. Accordingly, a Certificate of
[G.R. No. 195540. March 13, 2013.] Sale was issued to respondent on January 26, 2001. On
February 16, 2001, the Certificate of Sale was registered and
inscribed on TCT Nos. T-152630, T-151655 and T-
GOLDENWAY MERCHANDISING 214528. 5 aTcIAS
CORPORATION, petitioner, vs. EQUITABLE
PCI BANK, respondent. In a letter dated March 8, 2001, petitioner's counsel offered to
redeem the foreclosed properties by tendering a check in the
amount of P3,500,000.00. On March 12, 2001, petitioner's
counsel met with respondent's counsel reiterating petitioner's
DECISION intention to exercise the right of redemption. 6 However,
petitioner was told that such redemption is no longer possible
because the certificate of sale had already been registered.
VILLARAMA, JR., J p: Petitioner also verified with the Registry of Deeds that title to
the foreclosed properties had already been consolidated in
Before the Court is a petition for review on certiorari which favor of respondent and that new certificates of title were
seeks to reverse and set aside the Decision 1 dated issued in the name of respondent on March 9, 2001.
November 19, 2010 and Resolution 2 dated January 31, 2011 On December 7, 2001, petitioner filed a complaint 7 for
of the Court of Appeals (CA) in CA-G.R. CV No. 91120. The specific performance and damages against the respondent,
CA affirmed the Decision 3 dated January 8, 2007 of the asserting that it is the one-year period of redemption under Act
Regional Trial Court (RTC) of Valenzuela City, Branch 171 No. 3135 which should apply and not the shorter redemption
dismissing the complaint in Civil Case No. 295-V-01. period provided in Republic Act (R.A.) No. 8791. Petitioner
The facts are undisputed. argued that applying Section 47 of R.A. 8791 to the real estate
mortgage executed in 1985 would result in the impairment of
On November 29, 1985, Goldenway Merchandising obligation of contracts and violation of the equal protection
Corporation (petitioner) executed a Real Estate Mortgage in clause under the Constitution. Additionally, petitioner faulted
favor of Equitable PCI Bank (respondent) over its real the respondent for allegedly failing to furnish it and the Office
properties situated in Valenzuela, Bulacan (now Valenzuela of the Clerk of Court, RTC of Valenzuela City with a Statement
City) and covered by Transfer Certificate of Title (TCT) Nos. T- of Account as directed in the Certificate of Sale, due to which
152630, T-151655 and T-214528 of the Registry of Deeds for petitioner was not apprised of the assessment and fees
the Province of Bulacan. The mortgage secured the Two incurred by respondent, thus depriving petitioner of the
Million Pesos (P2,000,000.00) loan granted by respondent to opportunity to exercise its right of redemption prior to the
petitioner and was duly registered. 4 registration of the certificate of sale.
As petitioner failed to settle its loan obligation, respondent In its Answer with Counterclaim, 8 respondent pointed out that
extrajudicially foreclosed the mortgage on December 13, 2000. petitioner cannot claim that it was unaware of the redemption
92

price which is clearly provided in Section 47 of R.A. No. 8791, parties expressly and categorically agreed that the foreclosure
and that petitioner had all the opportune time to redeem the of the real estate mortgage shall be in accordance with Act No.
foreclosed properties from the time it received the letter of 3135. Citing Co v. Philippine National Bank 11 petitioner
demand and the notice of sale before the registration of the contended that the right of redemption is part and parcel of the
certificate of sale. As to the check payment tendered by Deed of Real Estate Mortgage itself and attaches thereto upon
petitioner, respondent said that even assuming arguendo such its execution, a vested right flowing out of and made
redemption was timely made, it was not for the amount as dependent upon the law governing the contract of mortgage
required by law. and not on the mortgagee's act of extrajudicially foreclosing
the mortgaged properties. This Court thus held in said case
On January 8, 2007, the trial court rendered its decision that "Under the terms of the mortgage contract, the terms and
dismissing the complaint as well as the counterclaim. It noted conditions under which redemption may be exercised are
that the issue of constitutionality of Sec. 47 of R.A. No. deemed part and parcel thereof whether the same be merely
8791 was never raised by the petitioner during the pre-trial and conventional or imposed by law."
the trial. Aside from the fact that petitioner's attempt to redeem
was already late, there was no valid redemption made Petitioner then argues that applying Section 47 of R.A. No.
because Atty. Judy Ann Abat-Vera who talked to Atty. Joseph 8791 to the present case would be a substantial impairment of
E. Mabilog of the Legal Division of respondent bank, was not its vested right of redemption under the real estate mortgage
properly authorized by petitioner's Board of Directors to contract. Such impairment would be violative of the
transact for and in its behalf; it was only a certain Chan Guan constitutional proscription against impairment of obligations of
Pue, the alleged President of petitioner corporation, who gave contract, a patent derogation of petitioner's vested right and
instruction to Atty. Abat-Vera to redeem the foreclosed clearly changes the intention of the contracting parties.
properties. 9 EDcICT Moreover, citing this Court's ruling in Rural Bank of Davao
City, Inc. v. Court of Appeals 12 where it was held that
Aggrieved, petitioner appealed to the CA which affirmed the "Section 119 prevails over statutes which provide for a shorter
trial court's decision. According to the CA, petitioner failed to period of redemption in extrajudicial foreclosure sales", and
justify why Section 47 of R.A. No. 8791 should be declared in Sulit v. Court of Appeals, 13 petitioner stresses that it has
unconstitutional. Furthermore, the appellate court concluded always been the policy of this Court to aid rather than defeat
that a reading of Section 47 plainly reveals the intention to the mortgagor's right to redeem his property.
shorten the period of redemption for juridical persons and that
the foreclosure of the mortgaged properties in this case Petitioner further argues that since R.A. No. 8791 does not
when R.A. No. 8791 was already in effect clearly falls within provide for its retroactive application, courts therefore cannot
the purview of the said provision. 10 retroactively apply its provisions to contracts executed and
consummated before its effectivity. Also, since R.A. 8791 is a
Petitioner's motion for reconsideration was likewise denied by general law pertaining to the banking industry while Act No.
the CA. 3135 is a special law specifically governing real estate
In the present petition, it is contended that Section 47 of R.A. mortgage and foreclosure, under the rules of statutory
No. 8791 is inapplicable considering that the contracting construction that in case of conflict a special law prevails over
93

a general law regardless of the dates of enactment of both However, Section 47 of R.A. No. 8791 otherwise known as
laws, Act No. 3135 clearly should prevail on the redemption "The General Banking Law of 2000" which took effect on June
period to be applied in this case.HIAcCD 13, 2000, amended Act No. 3135. Said provision reads:
The constitutional issue having been squarely raised in the SECTION 47. Foreclosure of Real Estate
pleadings filed in the trial and appellate courts, we shall Mortgage. — In the event of foreclosure,
proceed to resolve the same. whether judicially or extrajudicially, of any
mortgage on real estate which is security for
The law governing cases of extrajudicial foreclosure of any loan or other credit accommodation
mortgage is Act No. 3135, 14 as amended by Act No. 4118. granted, the mortgagor or debtor whose real
Section 6 thereof provides: property has been sold for the full or partial
SEC. 6. In all cases in which an extrajudicial payment of his obligation shall have the right
sale is made under the special power within one year after the sale of the real
hereinbefore referred to, the debtor, his estate, to redeem the property by paying the
successors-in-interest or any judicial creditor amount due under the mortgage deed, with
or judgment creditor of said debtor, or any interest thereon at the rate specified in the
person having a lien on the property mortgage, and all the costs and expenses
subsequent to the mortgage or deed of trust incurred by the bank or institution from the
under which the property is sold, may redeem sale and custody of said property less the
the same at any time within the term of one income derived therefrom. However, the
year from and after the date of the sale; and purchaser at the auction sale concerned
such redemption shall be governed by the whether in a judicial or extrajudicial
provisions of sections four hundred and sixty- foreclosure shall have the right to enter upon
four to four hundred and sixty-six, inclusive, of and take possession of such property
the Code of Civil Procedure, 15 in so far as immediately after the date of the confirmation
these are not inconsistent with the provisions of the auction sale and administer the same in
of this Act. accordance with law. Any petition in court to
enjoin or restrain the conduct of foreclosure
The one-year period of redemption is counted from the date of proceedings instituted pursuant to this
the registration of the certificate of sale. In this case, the provision shall be given due course only upon
parties provided in their real estate mortgage contract that the filing by the petitioner of a bond in an
upon petitioner's default and the latter's entire loan obligation amount fixed by the court conditioned that he
becoming due, respondent may immediately foreclose the will pay all the damages which the bank may
mortgage judicially in accordance with the Rules of Court, or suffer by the enjoining or the restraint of the
extrajudicially in accordance with Act No. 3135, as amended. foreclosure proceeding. CaASIc
94

Notwithstanding Act 3135, juridical must clearly establish the basis therefor. Otherwise, the
persons whose property is being sold petition must fail. 19
pursuant to an extrajudicial foreclosure, shall
have the right to redeem the property in Petitioner's contention that Section 47 of R.A. 8791 violates
accordance with this provision until, but not the constitutional proscription against impairment of the
after, the registration of the certificate of obligation of contract has no basis.
foreclosure sale with the applicable Register The purpose of the non-impairment clause of the
of Deeds which in no case shall be more Constitution 20 is to safeguard the integrity of contracts
than three (3) months after foreclosure, against unwarranted interference by the State. As a rule,
whichever is earlier. Owners of property that contracts should not be tampered with by subsequent laws
has been sold in a foreclosure sale prior to that would change or modify the rights and obligations of the
the effectivity of this Act shall retain their parties. 21 Impairment is anything that diminishes the efficacy
redemption rights until their expiration. of the contract. There is an impairment if a subsequent law
(Emphasis supplied.) changes the terms of a contract between the parties, imposes
Under the new law, an exception is thus made in the case of new conditions, dispenses with those agreed upon or
juridical persons which are allowed to exercise the right of withdraws remedies for the enforcement of the rights of the
redemption only "until, but not after, the registration of the parties. 22 cEISAD
certificate of foreclosure sale" and in no case more than three Section 47 did not divest juridical persons of the right to
(3) months after foreclosure, whichever comes first. 16 redeem their foreclosed properties but only modified the time
May the foregoing amendment be validly applied in this case for the exercise of such right by reducing the one-year period
when the real estate mortgage contract was executed in 1985 originally provided in Act No. 3135. The new redemption
and the mortgage foreclosed when R.A. No. 8791 was already period commences from the date of foreclosure sale, and
in effect? expires upon registration of the certificate of sale or three
months after foreclosure, whichever is earlier. There is
We answer in the affirmative. likewise no retroactive application of the new redemption
period because Section 47 exempts from its operation those
When confronted with a constitutional question, it is properties foreclosed prior to its effectivity and whose owners
elementary that every court must approach it with grave care shall retain their redemption rights under Act No. 3135.
and considerable caution bearing in mind that every statute is
presumed valid and every reasonable doubt should be Petitioner's claim that Section 47 infringes the equal protection
resolved in favor of its constitutionality. 17 For a law to be clause as it discriminates mortgagors/property owners who are
nullified, it must be shown that there is a clear and unequivocal juridical persons is equally bereft of merit.
breach of the Constitution. The ground for nullity must be clear
and beyond reasonable doubt. 18 Indeed, those who petition The equal protection clause is directed principally against
this Court to declare a law, or parts thereof, unconstitutional undue favor and individual or class privilege. It is not intended
to prohibit legislation which is limited to the object to which it is
directed or by the territory in which it is to operate. It does not
95

require absolute equality, but merely that all persons be The right of redemption being statutory, it must be exercised in
treated alike under like conditions both as to privileges the manner prescribed by the statute, 29 and within the
conferred and liabilities imposed. 23 Equal protection permits prescribed time limit, to make it effective. Furthermore, as with
of reasonable classification. 24 We have ruled that one class other individual rights to contract and to property, it has to give
may be treated differently from another where the groupings way to police power exercised for public welfare. 30 The
are based on reasonable and real distinctions. 25 If concept of police power is well-established in this jurisdiction.
classification is germane to the purpose of the law, concerns It has been defined as the "state authority to enact legislation
all members of the class, and applies equally to present and that may interfere with personal liberty or property in order to
future conditions, the classification does not violate the equal promote the general welfare." Its scope, ever-expanding to
protection guarantee. 26 meet the exigencies of the times, even to anticipate the future
where it could be done, provides enough room for an efficient
We agree with the CA that the legislature clearly intended to and flexible response to conditions and circumstances thus
shorten the period of redemption for juridical persons whose assuming the greatest benefits. 31
properties were foreclosed and sold in accordance with the
provisions of Act No. 3135. 27 The freedom to contract is not absolute; all contracts and all
rights are subject to the police power of the State and not only
The difference in the treatment of juridical persons and natural may regulations which affect them be established by the State,
persons was based on the nature of the properties foreclosed but all such regulations must be subject to change from time to
— whether these are used as residence, for which the more time, as the general well-being of the community may require,
liberal one-year redemption period is retained, or used for or as the circumstances may change, or as experience may
industrial or commercial purposes, in which case a shorter demonstrate the necessity. 32 Settled is the rule that the non-
term is deemed necessary to reduce the period of uncertainty impairment clause of the Constitution must yield to the loftier
in the ownership of property and enable mortgagee-banks to purposes targeted by the Government. The right granted by
dispose sooner of these acquired assets. It must be this provision must submit to the demands and necessities of
underscored that the General Banking Law of 2000, crafted in the State's power of regulation. 33 Such authority to regulate
the aftermath of the 1997 Southeast Asian financial crisis, businesses extends to the banking industry which, as this
sought to reform the General Banking Act of 1949 by Court has time and again emphasized, is undeniably imbued
fashioning a legal framework for maintaining a safe and sound with public interest. 34
banking system. 28 In this context, the amendment introduced
by Section 47 embodied one of such safe and sound practices Having ruled that the assailed Section 47 of R.A. No. 8791 is
aimed at ensuring the solvency and liquidity of our banks. It constitutional, we find no reversible error committed by the CA
cannot therefore be disputed that the said provision amending in holding that petitioner can no longer exercise the right of
the redemption period in Act 3135 was based on a reasonable redemption over its foreclosed properties after the certificate of
classification and germane to the purpose of the law. AETcSa sale in favor of respondent had been registered. aTIEcA
This legitimate public interest pursued by the legislature further WHEREFORE, the petition for review
enfeebles petitioner's impairment of contract theory. on certiorari is DENIED for lack of merit. The Decision dated
November 19, 2010 and Resolution dated January 31, 2011 of
96

the Court of Appeals in CA-G.R. CV No. 91120 are


hereby AFFIRMED.
With costs against the petitioner.
SO ORDERED.
Sereno, C.J., Leonardo-de Castro, Bersamin and Reyes,
JJ., concur.
||| (Goldenway Merchandising Corp. v. Equitable PCI Bank,
G.R. No. 195540, [March 13, 2013], 706 PHIL 427-441)
97

SECOND DIVISION appellate court any affirmative relief other than the ones
granted in the decision of the court below. He cannot impugn
[G.R. No. 98334. May 8, 1992.] the correctness of a judgment not appealed from by him. He
cannot assign such errors as are designed to have the
judgment modified. All that said appellee can do is to make a
MANUEL D. MEDIDA, Deputy Sheriff of the counter-assignment of errors or to argue on issues raised at
Province of Cebu, CITY SAVINGS BANK the trial only for the purpose of sustaining the judgment in his
(formerly Cebu City Savings and Loan favor, even on grounds not included in the decision of the
Association, Inc.) and TEOTIMO court a quo nor raised in the appellant's assignment of errors
ABELLANA, petitioners, vs. COURT OF or arguments.
APPEALS and SPS. ANDRES DOLINO and
PASCUALA DOLINO, respondents. 3. CIVIL LAW; SPECIAL CONTRACTS; MORTGAGE; RIGHT
OF ABSOLUTE OWNERSHIP OVER THE MORTGAGED
PROPERTY BY MORTGAGOR; REMAINS DURING THE
Gines N. Abellana for petitioner. PERIOD OF REDEMPTION. — Since the mortgagor remains
as the absolute owner of the property during the redemption
Dionisio U. Flores for private respondent. period and has the free disposal of his property, there would
be compliance with the requisites of Article 2085 of the Civil
Code for the constitution of another mortgage on the property.
SYLLABUS
To hold otherwise would create the inequitable situation
wherein the mortgagor would be deprived of the opportunity,
1. REMEDIAL LAW; CIVIL PROCEDURE; EXECUTION OF which may be his last recourse, to raise funds wherewith to
JUDGMENT; REDEMPTIONER; DEFINED. — A redemptioner timely redeem his property through another mortgage thereon.
is defined as a creditor having a lien by attachment, judgment Coming back to the present controversy, it is undisputed that
or mortgage on the property sold, or on some part the real estate mortgage in favor of petitioner bank was
thereof, subsequent to the judgment under which the property executed by respondent spouses during the period of
was sold. Of course, while in extrajudicial foreclosure the sale redemption. We reiterate that during said period it cannot be
contemplated is not under a judgment but the proceeding said that the mortgagor is no longer the owner of the
pursuant to which the mortgaged property was sold, a foreclosed property since the rule up to now is that the right of
subsequent mortgage could nevertheless be legally a purchaser at a foreclosure sale is merely inchoate until after
constituted thereafter with the subsequent mortgagee the period of redemption has expired without the right being
becoming and acquiring the rights of a redemptioner, aside exercised. The title to land sold under mortgage foreclosure
from his right against the mortgagor. remains in the mortgagor or his grantee until the expiration of
the redemption period and conveyance by the master's deed.
2. ID.; ID.; APPEAL; EFFECT ON PARTY NOT APPEALING
To repeat, the rule has always been that it is only upon the
FROM THE DECISION OF THE LOWER COURT. — An
expiration of the redemption period, without the judgment
appellee who has not himself appealed cannot obtain from the
debtor having made use of his right of redemption, that the
98

ownership of the land sold becomes consolidated in the The facts which gave rise to the institution of the aforesaid civil
purchaser. Parenthetically, therefore, what actually is effected case in the trial court, as found by respondent Court of
where redemption is seasonably exercised by the judgment or Appeals, are as follows:
mortgage debtor is not the recovery of ownership of his land,
which ownership he never lost, but the elimination from his title "On October 10, 1974 plaintiff spouses,
thereto of the lien created by the levy on attachment or alarmed of losing their right of redemption
judgment or the registration of a mortgage thereon. The over lot 4731 of the Cebu City Cadastre and
American rule is similarly to the effect that the redemption of embraced under TCT No. 14272 from Mr.
property sold under a foreclosure sale defeats the inchoate Juan Gandioncho, purchaser of the aforesaid
right of the purchaser and restores the property to the same lot at the foreclosure sale of the previous
condition as if no sale had been attempted. Further, it does not mortgage in favor of Cebu City Development
give to the mortgagor a new title, but merely restores to him Bank, went to Teotimo Abellana, president of
the title freed of the encumbrance of the lien foreclosed. defendant Association, to obtain a loan of
P30,000.00. Prior thereto or on October 3,
1974, their son Teofredo Dolino filed a similar
loan application for Twenty-Five Thousand
DECISION (P25,000.00) Pesos with lot No. 4731 offered
as security for the Thirty Thousand
(P30,000.00) Pesos loan from defendant
association. Subsequently, they executed a
REGALADO, J p:
promissory note in favor of defendant
The core issue in this case is whether or not a mortgagor, association. Both documents indicated that
whose property has been extrajudicially foreclosed and sold at the principal obligation is for Thirty Thousand
the corresponding foreclosure sale, may validly execute a (P30,000.00) Pesos payable in one year with
mortgage contract over the same property in favor of a third interest at twelve (12%) percent per annum.
party during the period of redemption. "When the loan became due and demandable
The present appeal by certiorari assails the decision 1 of without plaintiff paying the same, defendant
respondent Court of Appeals in CA-G.R. CV No. 12678 where association caused the extrajudicial
it answered the question posed by the foregoing issue in the foreclosure of the mortgage on March 16,
negative and modified the decision 2 of the then Court of First 1976. After the posting and publication
Instance of Cebu in Civil Case No. R-18616 wherein the requirements were complied with, the land
validity of said subsequent mortgage was assumed and the was sold at public auction on April 19, 1976 to
case was otherwise disposed of on other grounds. defendant association being the highest
bidder. The certificate of sale was issued on
April 20, 1976 and registered on May 10,
1976 with the Register of Deeds of Cebu.
99

"On May 24, 1971 (sic, 1977), no redemption 1. Declaring ineffective the extrajudicial
having been effected by plaintiff, TCT No. foreclosure of the mortgage over Lot No.
14272 was cancelled and in lieu thereof TCT 4731 of the Cadastral Survey of Cebu;
No. 68041 was issued in the name of
defendant association." 3 2. Ordering the cancellation of Transfer
Certificate of Title No. 63041 of the Registry
xxx xxx xxx of Deeds of the City of Cebu in the name of
defendant Cebu City Savings and Loan
On October 18, 1979, private respondents filed the aforestated Association, Inc. and the corresponding
Civil Case No. R-18616 in the court a quo for the annulment of issuance of a new transfer certificate to
the sale at public auction conducted on April 19, 1976, as well contain all the annotations made in TCT No.
as the corresponding certificate of sale issued pursuant 14272 of the plaintiffs Pascuala Sabellano,
thereto. married to Andres Dolino;
In their complaint, private respondents, as plaintiffs therein, 3. Ordering the plaintiffs aforenamed to pay
assailed the validity of the extrajudicial foreclosure sale of their the defendant Cebu City Savings and Loan
property, claiming that the same was held in violation of Act Association, Inc. the unpaid balance of the
No. 3135, as amended, and prayed, inter alia, for the loan, plus interest; and reimbursing said
cancellation of Transfer Certificate of Title No. 68041 issued in defendant the value of any necessary and
favor of therein defendant City Savings and Loan Association, useful expenditures on the property after
Inc., now known as City Savings Bank and one of the deducting any income derived by said
petitioners herein. defendant from the property.
In its answer, the defendant association therein denied the For this purpose, defendant Association is
material allegations of the complaint and averred, among given 15 days from receipt hereof within
others, that the present private respondent spouses may still which to submit its statement of the amount
avail of their right of redemption over the land in question. due it from the plaintiffs Dolino, with notice to
On January 12, 1983, after trial on the merits, the court below them. The payment to be made by the
rendered judgment upholding the validity of the loan and the plaintiffs shall be within ninety (90) days from
real estate mortgage, but annulling the extrajudicial their receipt of the order approving the
foreclosure sale inasmuch as the same failed to comply with amount due the defendant Cebu City Savings
the notice requirements in Act No. 3135, as amended, under and Loan Association, Inc.
the following dispositive part: No award of damages or costs to either party.
"WHEREFORE, the foregoing premises SO ORDERED." 4
considered and upon the view taken by the
Court of this case, judgment is hereby Not satisfied therewith, herein private respondents interposed
rendered, as follows: a partial appeal to respondent court with respect to the second
100

and third paragraphs of the aforequoted decretal portion, Said respondent court declared the real estate mortgage in
contending that the lower court erred in (1) declaring that the question null and void for the reason that the mortgagor
mortgage executed by the therein plaintiff spouses Dolino is spouses, at the time when the said mortgage was executed,
valid; (2) permitting therein Cebu City Savings and Loan were no longer the owners of the lot, having supposedly lost
Association, Inc. to collect interest after the same foreclosure the same when the lot was sold to a purchaser in the
proceedings and auction sale which are null and void from the foreclosure sale under the prior mortgage. This holding cannot
beginning; (3) not ordering the forfeiture of the capital or be sustained.
balance of the loan with usurious interest; and (4) not
sentencing therein defendant to pay damages and attorney's Preliminarily, the issue of ownership of the mortgaged property
fees to plaintiffs. 5 was never alleged in the complaint nor was the same raised
during the trial, hence that issue should not have been taken
On September 28, 1990, respondent Court of Appeals cognizance of by the Court of Appeals. An issue which was
promulgated its decision modifying the decision of the lower neither averred in the complaint nor ventilated during the trial
court, with this adjudication: in the court below cannot be raised for the first time on appeal
as it would be offensive to the basic rule of fair play, justice
and due process. 8
"WHEREFORE, PREMISES CONSIDERED, Nonetheless, since respondent Court took cognizance thereof
the decision appealed from is hereby and, in fact, anchored its modificatory judgment on its
MODIFIED declaring as void and ineffective ratiocination of that issue, we are inclined to liberalize the rule
the real estate mortgage executed by so that we can in turn pass upon the correctness of its
plaintiffs in favor of defendant association. conclusion. We may consider such procedure as analogous to
With this modification, the decision is the rule that an unassigned error closely related to an error
AFFIRMED in other respects." 6 properly assigned, or upon which the determination of the
Herein petitioners then filed a motion for reconsideration which question properly assigned is dependent, may be considered
was denied by respondent court in its resolution dated March by an appellate court. 9 We adopt this approach since, after
5, 1991, hence the present petition which, in synthesis, all, both lower courts agreed upon the invalidity of the
postulates that respondent court erred in declaring the real extrajudicial foreclosure but differed only on the matter of the
estate mortgage void, and also impugns the judgment of the validity of the real estate mortgage upon which the
trial court declaring ineffective the extrajudicial foreclosure of extrajudicial foreclosure was based.
said mortgage and ordering the cancellation of Transfer In arriving at its conclusion, respondent court placed full
Certificate of Title No. 68041 issued in favor of the reliance on what obviously is an obiter dictum laid down in the
predecessor of petitioner bank. 7 course of the disquisition in Dizon vs. Gaborro, et al. which we
The first submission assailing the judgment of respondent shall analyze. 10 For, as explicitly stated therein by the Court,
Court of Appeals is meritorious. llcd "(t)he basic issue to be resolved in this case is whether the
'Deed of Sale with Assumption of Mortgage' and the `Option to
purchase Real Estate,' two instruments executed by and
101

between petitioner Jose P. Dizon and Alfredo G. Gaborro had already been foreclosed and sold
(defendant below) on the same day, October 6, 1959, extrajudicially, and purchased by the
constitute in truth and in fact an absolute sale of the three mortgage creditor, a third party. It becomes,
parcels of land therein described or merely an equitable therefore, necessary, to determine the legality
mortgage or conveyance thereof by way of security for of said rights and obligations arising from the
reimbursement or repayment by petitioner Jose P. Dizon of foreclosure and sale proceedings not only
any and all sums which may have been paid to the between the two contracting parties to the
Development Bank of the Philippines and the Philippine instruments executed between them but also
National Bank by Alfredo G. Gaborro . . ." Said documents in so far as the agreement affects the rights of
were executed by the parties and the payments were made by the third party, the purchaser Bank.
Gaborro for the debt of Dizon to said banks after the
Development Bank of the Philippines had foreclosed the xxx xxx xxx
mortgage executed by Dizon and during the period of "Under the Revised Rules of Court, Rule 39,
redemption after the foreclosure sale of the mortgaged Section 33, the judgment debtor remains in
property to said creditor bank. llcd possession of the property foreclosed and
The trial court held that the true agreement between the sold, during the period of redemption. If the
parties therein was that Gaborro would assume and pay the judgment debtor is in possession of the
indebtedness of Dizon to the banks and, in consideration property sold, he is entitled to retain it, and
thereof, Gaborro was given the possession and enjoyment of receive the fruits, the purchaser not being
the properties in question until Dizon shall have reimbursed entitled to such possession. (Riosa vs.
him for the amount paid to the creditor banks. Accordingly, the Verzosa, 26 Phil. 86; Velasco vs.
trial court ordered the reformation of the documents to the Rosenberg's, Inc., 32 Phil. 72; Pabico vs.
extent indicated and such particular relief was affirmed by the Pauco, 43 Phil. 572; Power vs. PNB, 54 Phil.
Court of Appeals. This Court held that the agreement between 54; Gorospe vs. Gochangco, L-12735, Oct.
the parties is one of those innominate contracts under Article 30, 1959).
1307 of the Civil Code whereby the parties agreed "to give and xxx xxx xxx
to do" certain rights and obligations, but partaking of the nature
of antichresis. "Upon foreclosure and sale, the purchaser is
entitled to a certificate of sale executed by the
Hence, on appeal to this Court, the judgment of the Court of sheriff. (Section 27, Revised Rules of Court).
Appeals in that case was affirmed but with the following After the termination of the period of
pronouncements: redemption and no redemption having been
"The two instruments sought to be reformed made, the purchaser is entitled to a deed of
in this case appear to stipulate rights and conveyance and to the possession of the
obligations between the parties thereto properties. (Section 35, Revised Rules of
pertaining to and involving parcels of land that Court). The weight of authority is to the effect
102

that the purchaser of land sold at public foreclosure sale, thereby divesting the
auction under a writ of execution has only an petitioner of his full right as owner thereof to
inchoate right to the property, subject to be dispose and sell the lands." (Emphasis ours.)
defeated and terminated within the period of
12 months from the date of sale, by a It was apparently the second reason stated by the Court in
redemption on the part of the owner. said case which was relied upon by respondent court in the
Therefore, the judgment debtor in possession present case on which to premise its conclusion. Yet, as
of the property is entitled to remain therein demonstrated by the relevant excerpts above quoted, not only
during the period for redemption. (Riosa vs. was that obiter therein unnecessary since evidently no sale
Verzosa, 26 Phil. 86, 89; Gonzales vs. was concluded, but even inaccurate, if not inconsistent, when
Calimbas, 51 Phil. 355). considered in the context of the discussion in its entirety. If, as
admitted, the purchaser at the foreclosure sale merely
"In the case before Us, after the extrajudicial acquired an inchoate right to the property which could ripen
foreclosure and sale of his properties, into ownership only upon the lapse of the redemption period
petitioner Dizon retained the right to redeem without his credit having been discharged, it is illogical to hold
the lands, the possession, use and enjoyment that during that same period of twelve months the mortgagor
of the same during the period of redemption. was "divested" of his ownership, since the absurd result would
And these are the only rights that Dizon could be that the land will consequently be without an owner
legally transfer, cede and convey unto although it remains registered in the name of the mortgagor.
respondent Gaborro under the instrument
captioned Deed of Sale with Assumption of That is why the discussion in said case carefully and
Mortgage (Exh. A-Stipulation), likewise the felicitously states that what is divested from the mortgagor is
same rights that said respondent could only his "full right as owner thereof to dispose (of) and sell the
acquire in consideration of the latter's promise lands," in effect, merely clarifying that the mortgagor does not
to pay and assume the loan of petitioner have the unconditional power to absolutely sell the land since
Dizon with DBP and PNB. the same is encumbered by a lien of a third person which, if
unsatisfied, could result in a consolidation of ownership in the
"Such an instrument cannot be legally lienholder but only after the lapse of the period of redemption.
considered a real and unconditional sale of Even on that score, it may plausibly be argued that what is
the parcels of land, firstly, because there was delimited is not the mortgagor's jus disponendi, as an attribute
absolutely no money consideration therefor, of ownership, but merely the rights conferred by such act of
as admittedly stipulated, the sum of disposal which may correspondingly be restricted.
P131,831.91 mentioned in the document as
the consideration `receipt of which was At any rate, even the foregoing considerations and arguments
acknowledged' was not actually paid; and, would have no application in the case at bar and need not
secondly, because the properties had already here be resolved since what is presently involved is a
been previously sold by the sheriff at the mortgage, not a sale, to petitioner bank. Such mortgage does
not involve a transfer, cession or conveyance of the property
103

but only constitutes a lien thereon. There is no obstacle to the exercised. 12 The title to land sold under mortgage foreclosure
legal creation of such a lien even after the auction sale of the remains in the mortgagor or his grantee until the expiration of
property but during the redemption period, since no distinction the redemption period and conveyance by the master's
is made between a mortgage constituted over the property deed. 13 To repeat, the rule has always been that it is only
before or after the auction sale thereof. upon the expiration of the redemption period, without the
judgment debtor having made use of his right of redemption,
that the ownership of the land sold becomes consolidated in
Thus, a redemptioner is defined as a creditor having a lien by the purchaser. 14
attachment, judgment or mortgage on the property sold, or on Parenthetically, therefore, what actually is effected where
some part thereof, subsequentto the judgment under which the redemption is seasonably exercised by the judgment or
property was sold. 11 Of course, while in extrajudicial mortgage debtor is not the recovery of ownership of his land,
foreclosure the sale contemplated is not under a judgment but which ownership he never lost, but the elimination from his title
the proceeding pursuant to which the mortgaged property was thereto of the lien created by the levy on attachment or
sold, a subsequent mortgage could nevertheless be legally judgment or the registration of a mortgage thereon. The
constituted thereafter with the subsequent mortgagee American rule is similarly to the effect that the redemption of
becoming and acquiring the rights of a redemptioner, aside property sold under a foreclosure sale defeats the inchoate
from his right against the mortgagor. prcd right of the purchaser and restores the property to the same
In either case, what bears attention is that since the mortgagor condition as if no sale had been attempted. Further, it does not
remains as the absolute owner of the property during the give to the mortgagor a new title, but merely restores to him
redemption period and has the free disposal of his property, the title freed of the encumbrance of the lien foreclosed. 15
there would be compliance with the requisites of Article 2085 We cannot rule on the plaint of petitioners that the trial court
of the Civil Code for the constitution of another mortgage on erred in declaring ineffective the extrajudicial foreclosure and
the property. To hold otherwise would create the inequitable the sale of the property to petitioner bank. The court below
situation wherein the mortgagor would be deprived of the spelled out at length in its decision the facts which it
opportunity, which may be his last recourse, to raise funds considered as violative of the provisions of Act No. 3135, as
wherewith to timely redeem his property through another amended, by reason of which it nullified the extrajudicial
mortgage thereon. foreclosure proceeding and its effects. Such findings and
Coming back to the present controversy, it is undisputed that ruling of the trial court are already final and binding on
the real estate mortgage in favor of petitioner bank was petitioners and can no longer be modified, petitioners having
executed by respondent spouses during the period of failed to appeal therefrom. prLL
redemption. We reiterate that during said period it cannot be An appellee who has not himself appealed cannot obtain from
said that the mortgagor is no longer the owner of the the appellate court any affirmative relief other than the ones
foreclosed property since the rule up to now is that the right of granted in the decision of the court below. 16 He cannot
a purchaser at a foreclosure sale is merely inchoate until after impugn the correctness of a judgment not appealed from by
the period of redemption has expired without the right being him. He cannot assign such errors as are designed to have the
104

judgment modified. All that said appellee can do is to make a


counter-assignment of errors or to argue on issues raised at
the trial only for the purpose of sustaining the judgment in his
favor, even on grounds not included in the decision of the
court a quo nor raised in the appellant's assignment of errors
or arguments. 17
WHEREFORE, the decision of respondent Court of Appeals,
insofar as it modifies the judgment of the trial court, is
REVERSED and SET ASIDE. The judgment of said trial court
in Civil Case No. R-18616, dated January 12, 1983, is hereby
REINSTATED.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Nocon, JJ ., concur.
||| (Medida v. Court of Appeals, G.R. No. 98334, [May 8,
1992], 284-A PHIL 404-416)
105

EN BANC judicial foreclosure, but the underlying principle is the same,


that the mortgage is but a security and not a satisfaction of
[G.R. No. L-18816. December 29, 1962.] indebtedness.
3. ID.; ID.; ID.; EXTRAJUDICIAL FORECLOSURE UNDER
PHILIPPINE BANK OF ACT NO. 3135 IS NOT WAIVER OF RIGHT TO PAYMENT
COMMERCE, plaintiff-appellee, vs. TOMAS FOR WHOLE DEBT. — It can not be concluded that the
DE VERA, defendant-appellant. creditor loses his right given him under the Mortgage Law and
recognized in the Rules of Court, to take action for the
recovery of any unpaid balance on the principal obligation,
Natividad T . Perez for defendant-appellant. simply because he has chosen to foreclose his mortgage
extra-judicially, pursuant to a special power of attorney given
Sumulong, Sumulong & Libongco for plaintiff-appellee. him by the mortgagor in the mortgage contract. As stated by
this Court in Medina vs. Philippine National Bank (56 Phil.
651), a case analogous to the one at bar, the step taken by the
SYLLABUS
mortgagee-bank in resorting to extra-judicial foreclosure under
Act No. 3135, was merely to find a proceeding for sale, and its
1. MORTGAGE LAW; LAND REGISTRATION LAW; action can not be taken to mean a waiver of its right to
EXTRAJUDICIAL FORECLOSURE. — Article 2131 of the demand the payment of the whole debt."
New Civil Code, provides that "form, extent and consequences
of a mortgage, both as to its constitution, modification and
extinguishment, and as to other matters not included in this
Chapter, shall be governed by the provision of the Mortgage DECISION
and of the Land Registration Law." Under the Mortgage Law,
which is still in force, the mortgagee has the right to claim for
the deficiency resulting between the price obtained in the sale BARRERA, J p:
of the real property at public auction and the outstanding
obligation at the time of the foreclosure proceedings. This is an appeal 1 taken by defendant Tomas de Vera from
the decision of the Court of First Instance of Manila (in Civil
2. ID.; ID.; DEFICIENCY JUDGMENT. — Under the Rules of
Case No. 35169) ordering him to pay to plaintiff Philippine
Court (Sec. 6, Rule 70) upon the sale of any real property,
Bank of Commerce, his outstanding obligation of P99,033.20,
under an order for a sale to satisfy a mortgage or other
with 6% interest from April 16, 1956 until fully paid, and
encumbrances thereon, if there be a balance due to the
P5,000.00 as attorney's fees, plus costs. pred
plaintiff after applying the proceeds of the sale, the court, upon
motion, should render a judgment against the defendant for The facts of the case, which are undisputed, are briefly stated
any such balance for which, by the record of the case, he may in the trial court's decision, to wit:
be personally liable to the plaintiff. It is true that this refers to a
106

"By virtue of a contract (Exh. A), entitled "The Sheriff, acting accordingly, sold at public
'Consolidation of First Real Estate Mortgage auction the two parcels of land covered by
and Deed of Assignment', executed on April TCT No. 1631 and No. 37641 to the highest
26, 1951, defendant Tomas de Vera is bidder, which was the plaintiff creditor in this
indebted to the plaintiff in the total amount of case, Philippine Bank of Commerce, for the
P127,312.24, guaranteed by a real estate amount of P86,700.00, and the corresponding
mortgage of the defendant's land, particularly certificate of sale was issued by the Sheriff of
described in TCT No. 1631 of the Register of Pasay City (Exh. C) dated April 16, 1956. The
Deeds of Pasay City and in TCT No. 37641 of plaintiff now, thru the present action, seeks to
the Register of Deeds of the City of Rizal recover from the defendant the balance of his
(now Pasay City), with the same terms and obligation after deducting the price of the land
conditions embodied in the original Deed of sold at public auction, of which, together with
Real Estate Mortgage and the Deed of the interest up to January 31, 1958, there
Assignment of Real Estate Mortgage, both remained an outstanding balance of
dated February 28, 1947. Presumably, both P99,033.20 as per the Statement of Account
documents and the document Exh. A, were (Exh. D). liblex
registered in the Registry of Deeds of Pasay
City. On the basis of the foregoing facts, the trial court rendered the
decision above adverted to.
"Upon maturity of the defendant's obligation
on March 10, 1956, and despite several The sole issue to be resolved in this case is whether the trial
demands, the defendant failed to pay the court acted correctly in holding appellee Bank entitled to
outstanding balance of his obligation in the recover from appellant the sum of P99,033.20 as deficiency
amount of P99,033.20 as of January 31, arising after the extrajudicial foreclosure, under Act No. 3135,
1958, under the contract Exh. A, for which as amended, of the mortgaged properties in question. It is
reason, the plaintiff filed a petition with the urged, on appellant's part, that since Act No. 3135, as
Sheriff of Pasay City on March 14, 1956 (Exh. amended, is silent as to the mortgagee's right to recover
B) to sell the properties, subject to the Real deficiency arising after an extrajudicial foreclosure sale of
Estate Mortgage executed and duly recorded mortgage, he (mortgagee) may not recover the same.
in the Registry of Deeds on May 17, 1949, for A reading of the provisions of Act No. 3135, as amended, (re
the sum of P150,000.00. Another document, extra-judicial foreclosure) discloses nothing, it is true, as to the
Assignment of Real Estate Mortgage, was mortgagee's right to recover such deficiency. But neither do
executed on the same day, May 17, 1947, we find any provision thereunder which expressly or impliedly
which two documents, were later on prohibits such recovery.
consolidated on April 26, 1951, in the
document Exh. A. Article 2131 of the new Civil Code, on the contrary, expressly
provides that "the form, extent and consequences of a
107

mortgage, both as to its constitution, modification and mortgagee, the latter may proceed in a proper
extinguishment, and as to other matters not included in this action against the debtor mortgagor for the
Chapter, shall be governed by the provisions of the Mortgage deficiency of the former's obligation. It is of no
Law and of the Land Registration Law." Under the Mortgage importance whether the buyer of the highest
Law, which is still in force, the mortgagee has the right to claim bidder in the public auction is the creditor
for the deficiency resulting from the price obtained in the sale itself.
of the real property at public auction and the outstanding
obligation at the time of the foreclosure proceedings. (See "By following the defendant's theory, there
Soriano vs. Enriquez, 24 Phil. 584; Banco de Islas Filipinas vs. may occur a ridiculous situation in which,
Concepcion e Hijos, 53 Phil. 86; Banco Nacional vs. Barreto, when the amount of the loan is very much
53 Phil. 101.) Under the Rules of Court (Sec. 6, Rule 70), bigger than the value of the mortgaged
"Upon the sale of any real property, under an order for a sale property, by abandonment or default of the
to satisfy a mortgage or other encumbrances thereon, if there debtor mortgagor, his obligation may
be a balance due to the plaintiff after applying the proceeds of automatically be reduced in quantity, against
the sale, the court, upon motion, should render a judgment the will and consent of the creditor
against the defendant for any such balance for which, by the mortgagee, and in prejudice of the latter,
record of the case he may be personally liable to the plaintiff, . which situation is absurd and not
. . ." It is true that this refers to a judicial foreclosure, but the contemplated by Act No. 3135, as
underlying principle is the same, that the mortgage is but a amended." cdasia
security and not a satisfaction of indebtedness. As the trial Let it be noted that when the legislature intends to foreclose
court correctly observed: the right of a creditor to sue for any deficiency resulting from
". . . the real estate mortgage does not, in any the foreclosure of the security given to guarantee the
way, limit nor minimize the amount of the obligation, it so expressly provides. Thus, in respect to
obligation. Its only purpose is to guarantee pledges, Article 2115 of the new Civil Code expressly states: ".
the fulfillment of said obligation and, in case . . . If the price of the sale is less (than the amount of the
of default on the part of the debtor mortgagor, principal obligation) neither shall the creditor be entitled to
the creditor mortgagee may execute the recover the deficiency, notwithstanding any stipulation to the
obligation on the real property given as a contrary." Likewise, in the event of a foreclosure of a chattel
mortgage by way of judicial or extra-judicial mortgage on the thing sold in installments "he (the vendor)
foreclosure, according to our statutes and shall have no further action against the purchaser to recover
procedure. Therefore, by analogy and any unpaid balance of the price. Any agreement to the
applying the same principle of equity, if after contrary shall be void" (Article 1484, paragraph 3, ibid). It is
the sale of the mortgaged property at public then clear that in the absence of a similar provision in Act No.
auction, there is a resulting deficiency in the 3135, as amended, it can not be concluded that the creditor
application for the payment of the obligation loses his right given him under the Mortgage Law and
of the debtor mortgagor to the creditor recognized in the Rules of Court, to take action for the
108

recovery of any unpaid balance of the principal obligation,


simply because he has chosen to foreclose his mortgage
extra-judicially pursuant to a special power of attorney given
him by the mortgagor in the mortgage contract. As stated by
this Court in Medina vs. Philippine National Bank (56 Phil.
651), a case analogous to the one at bar, the step taken by the
mortgagee-bank in resorting to extra-judicial foreclosure under
Act No. 3135, was "merely to find a proceeding for the sale,
and its action can not be taken to mean a waiver of its right to
demand the payment of the whole debt." pred

WHEREFORE, finding no reversible error in the decision


appealed from the court a quo, the same is hereby affirmed
with costs against the defendant appellant. So ordered.
Bengzon, C.J ., Padilla, Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L. and Paredes, JJ ., concur.
Dizon, Regala and Makalintal, JJ ., took no part.
||| (Philippine Bank of Commerce v. De Vera, G.R. No. L-
18816, [December 29, 1962], 116 PHIL 1326-1330)
109

THIRD DIVISION City Sheriff, which was docketed as EJF Case No. 92-5-15,
covered the following properties:
[G.R. No. 170215. August 28, 2007.] TCT NO. 13196
"A parcel of land (Lot 701, plan 11-5121 Amd-
SPS. ESMERALDO and ELIZABETH 2) situated at Mandaue City, bounded on the
SUICO, petitioners, vs. PHILIPPINE NE., and SE., by lot no. 700; on the SW. by
NATIONAL BANK and HON. COURT OF lots nos. 688 and 702; on the NW. by lot no.
APPEALS, respondents. 714, containing an area of 2,078 sq. m. more
or less."
TAX DECL. NO. 00553
DECISION
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot No. 700-C-1; bounded on the
North by Lot No. 701 & 700-B; on the South
CHICO-NAZARIO, J p:
by Lot No. 700-C-3; on the East by lot no.
700-C-3 and on the West by Lot no. 688,
Herein petitioners, Spouses Esmeraldo and Elizabeth Suico,
containing an area of 200 square meters,
obtained a loan from the Philippine National Bank (PNB)
more or less." HTaIAC
secured by a real estate mortgage 1 on real properties in the
name of the former. The petitioners were unable to pay their TAX DECL. NO. 00721
obligation prompting the PNB to extrajudicially foreclose the
mortgage over the subject properties before the City Sheriff of "Two (2) parcels of land situated at Tabok,
Mandaue City under EJF Case No. 92-5-15. Mandaue City, Cad. lot nos. 700-C-3 and
700-C-2; bounded on the North by Lot Nos.
The petitioners thereafter filed a Complaint against the PNB 700-C-1 and 700-B; on the South by Lot No.
before the Regional Trial Court (RTC) of Mandaue City, 700-D; on the East by Lot Nos. 695 and 694;
Branch 55, docketed as Civil Case No. MAN-2793 for and on the West by Lot Nos. 688 and 700-C-
Declaration of Nullity of Extrajudicial Foreclosure of 1, containing an aggregate area of 1,683 sq.
Mortgage. 2 m. more or less." IDaEHS
The Complaint alleged that on 6 May 1992, PNB filed with the TAX DECL. NO. 0237
Office of the Mandaue City Sheriff a petition for the
extrajudicial foreclosure of mortgage constituted on the "A parcel of land situated at Tabok, Mandaue
petitioners' properties (subject properties) for an outstanding City, Cad. Lot no. 700-B. Bounded on the NE.
loan obligation amounting to P1,991,770.38 as of 10 March by (Lot 699) 109, (Lot No. 69) 110, on the SE
1992. The foreclosure case before the Office of the Mandaue (Lot 700-C) 115, on the NW. (Lot 700-A) 112
110

and on the SW. (Lot 701) 113; containing an excess of petitioners' obligation, the latter averred that the
area of .1785 HA more or less." AaEcHC extrajudicial foreclosure conducted over the subject properties
by the Mandaue City Sheriff, as well as the Certificate of Sale
TAX DECL. NO. 9267 and the Certificate of Finality of Sale of the subject properties
"A parcel of land situated at Tabok, Mandaue issued by the Mandaue City Sheriff, in favor of PNB, were all
City, Cad. Lot no. 700-A. Bounded on the NE. null and void.
by (Lot 699) 109, on the South West by (Lot Petitioners, in their Complaint in Civil Case No. MAN-2793,
701) 113, on the SE. by (Lot 700-B) 111, and prayed for: caSDCA
on the NW. by (lot 714) 040039; containing an
area of .1785 HA more or less." 3 a) Declaring the Nullity of Extra-judicial
Foreclosure of Mortgage under EJF
Petitioners claimed that during the foreclosure sale of the Case No. 92-5-15 including the
subject properties held on 30 October 1992, PNB, as the lone certificate of sale and the final deed of
bidder, offered a bid in the amount of P8,511,000.00. By virtue sale of the properties affected;
of the said bid, a Certificate of Sale of the subject properties
was issued by the Mandaue City Sheriff in favor of PNB. PNB b) Order[ing] the cancellation of the
did not pay to the Sheriff who conducted the auction sale the certificates of titles and tax declaration
amount of its bid which was P8,511,000.00 or give an already in the name of [herein
accounting of how said amount was applied against respondent] PNB and revert the same
petitioners' outstanding loan, which, as of 10 March 1992, back to herein [petitioners']
amounted only to P1,991,770.38. Since the amount of the bid name; CAaSED
grossly exceeded the amount of petitioners' outstanding
obligation as stated in the extrajudicial foreclosure of c) Ordering the [PNB] to pay [petitioners]
mortgage, it was the legal duty of the winning bidder, PNB, to moral damages amounting to more
deliver to the Mandaue City Sheriff the bid price or what was than P1,000,000.00; Exemplary
left thereof after deducting the amount of petitioners' damages of P500,000.00; Litigation
outstanding obligation. PNB failed to deliver the amount of expenses of P100,000.00 and
their bid to the Mandaue City Sheriff or, at the very least, the attorney's fees of P300,000.00. 4
amount of such bid in excess of petitioners' outstanding PNB filed a Motion to Dismiss 5 Civil Case No. MAN-2793
obligation. citing the pendency of another action between the same
One year after the issuance of the Certificate of Sale, PNB parties, specifically Civil Case No. CEB-15236 before the RTC
secured a Certificate of Final Sale from the Mandaue City of Cebu City entitled, PNB v. Sps. Esmeraldo and Elizabeth
Sheriff and, as a result, PNB transferred registration of all the Suico where PNB was seeking the payment of the balance of
subject properties to its name. HDAaIc petitioners' obligation not covered by the proceeds of the
auction sale held on 30 October 1992. PNB argued that these
Owing to the failure of PNB as the winning bidder to deliver to two cases involve the same parties. Petitioners opposed the
the petitioners the amount of its bid or even just the amount in Motion to Dismiss filed by PNB. 6 Subsequently, the Motion to
111

Dismiss Civil Case No. MAN-2793 was denied in the Order of cancellation of the certificates of titles and tax
the RTC dated 15 July 1997; 7 thus, PNB was constrained to declaration already in the name of
file its Answer. 8 [respondent] PNB, if any, and revert the same
back to the [petitioners'] name; ordering
PNB disputed petitioners' factual narration. PNB asserted that [respondent] PNB to cause a new foreclosure
petitioners had other loans which had likewise become due. proceeding, either judicially or extra-judicially.
Petitioners' outstanding obligation of P1,991,770.38 as of 10
March 1992 was exclusive of attorney's fees, and other export Furnish parties thru counsels copy of this
related obligations which it did not consider due and order. 10 DSETcC
demandable as of said date. PNB maintained that the
outstanding obligation of the petitioners under their regular and In granting the nullification of the extrajudicial foreclosure of
export-related loans was already more than the bid price of mortgage, the RTC reasoned that given that petitioners had
P8,511,000.00, contradicting the claim of surplus proceeds other loan obligations which had not yet matured on 10 March
due the petitioners. Petitioners were well aware that their total 1992 but became due by the date of the auction sale on 30
principal outstanding obligation on the date of the auction sale October 1992, it does not justify the shortcut taken by PNB
was P5,503,293.21. TIHCcA and will not excuse it from paying to the Sheriff who conducted
the auction sale the excess bid in the foreclosure sale. To
PNB admitted the non-delivery of the bid price to the sheriff allow PNB to do so would constitute fraud, for not only is the
and the execution of the final deed of sale, but claimed that it filing fee in the said foreclosure inadequate but, worse, the
had not transferred in its name all the foreclosed properties same constitutes a misrepresentation regarding the amount of
because the petition to register in its name Transfer the indebtedness to be paid in the foreclosure sale as posted
Certificates of Title (TCT) No. 37029 and No. 13196 were still and published in the notice of sale. 11 Such misrepresentation
pending. is fatal because in an extrajudicial foreclosure of mortgage,
notice of sale is jurisdictional. Any error in the notice of sale is
On 2 February 1999, the RTC rendered its Decision 9 in Civil fatal and invalidates the notice. 12
Case No. MAN-2793 for the declaration of nullity of the
extrajudicial foreclosure of mortgage, the dispositive portion of When the PNB appealed its case to the Court of
which states: CTSDAI Appeals, 13 the appellate court rendered a Decision 14 dated
12 April 2005, the fallo of which provides: ADCIca
WHEREFORE, based on the foregoing,
judgment is rendered in favor of [herein WHEREFORE, premises considered, the
petitioners] Sps. Esmeraldo & Elizabeth Suico instant appeal is GRANTED. The questioned
and against [herein respondent], Philippine decision of the Regional Trial Court of
National Bank (PNB), declaring the nullity of Mandaue City, Branch 55 dated February 2,
Extrajudicial Foreclosure of Mortgage under 1999 is hereby REVERSED and SET ASIDE.
EJF Case No. 92-5-15, including the Accordingly, the extra judicial foreclosure of
certificate of sale and the final deed of sale of mortgage under EJF 92-5-15 including the
the subject properties; ordering the certificate of sale and final deed of sale
112

executed appurtenant thereto are hereby action to recover such surplus. In fine, the
declared to be valid and binding. 15 failure of the [PNB] to remit the surplus, if any,
is not tantamount to a non-compliance of
In justifying reversal, the Court of Appeals held: DSacAE statutory requisites that could constitute a
A careful scrutiny of the evidence extant on jurisdictional defect invalidating the sale. This
record would show that in a letter dated situation only gives rise to a cause of action
January 12, 1994, [petitioners] expressly on the part of the [petitioners] to recover the
admitted that their outstanding principal alleged surplus from the [PNB]. This ruling is
obligation amounted to P5.4 Million and in in harmony with the decisional rule that in
fact offered to redeem the properties at P6.5 suing for the return of the surplus proceeds,
Million. They eventually increased their offer the mortgagor is deemed to have affirmed the
at P7.5 Million as evidenced by that letter validity of the sale since nothing is due if no
dated February 4, 1994. And finally on May valid sale has been made. 16 aIHCSA
16, 1994, they offered to redeem the Petitioners filed a Motion for Reconsideration 17 of the
foreclosed properties by paying the whole foregoing Decision, but the Court of Appeals was not
amount of the obligation by installment in a persuaded. It maintained the validity of the foreclosure sale
period of six years. All those offers made by and, in its Amended Decision dated 28 September 2005, it
the [petitioners] not only contradicted their merely directed PNB to pay the deficiency in the filing fees,
very assertion that their obligation is merely holding thus:
that amount appearing on the petition for
foreclosure but are also indicative of the fact WHEREFORE, Our decision dated April 12,
that they have admitted the validity of the 2005 is hereby AMENDED. [Herein
extra judicial foreclosure proceedings and in respondent PNB] is hereby required to pay
effect have cured the impugned defect. Thus, the deficiency in the filing fees due on the
for the [petitioners] to insist that their petition for extra judicial foreclosure sale to be
obligation is only over a million is unworthy of based on the actual amount of mortgage
belief. Oddly enough, it is evident from their debts at the time of filing thereof. In all other
acts that they themselves likewise believe respects, Our decision subject of herein
otherwise. petitioners'] motion for reconsideration is
hereby AFFIRMED. 18 cda
Unflinching, petitioners elevated the case before this
Even assuming that indeed there was a Court via the present Petition for Review essentially seeking
surplus and the [PNB] is retaining more than the nullification of the extrajudicial foreclosure of the mortgage
the proceeds of the sale than it is entitled, this constituted on the subject properties. Petitioners forward two
fact alone will not affect the validity of the sale reasons for declaring null and void the said extrajudicial
but simply gives the [petitioners] a cause of foreclosure: (1) the alleged defect or misrepresentation in the
113

notice of sheriff's sale; and/or (2) failure of PNB to pay and fatal to the validity of the notice, and also to the sale made
tender the price of its bid or the surplus thereof to the sheriff. pursuant thereto. 21
Petitioners argue that since the Notice of Sheriff's Sale stated All these considered, we are of the view that the Notice of Sale
that their obligation was only P1,991,770.38 and PNB bidded in this case is valid. Petitioners failed to convince this Court
P8,511,000.00, the said Notice as well as the consequent sale that the difference between the amount stated in the Notice of
of the subject properties were null and void. SEIcAD Sale and the amount of PNB's bid resulted in discouraging or
misleading bidders, depreciated the value of the property or
It is true that statutory provisions governing publication of prevented it from commanding a fair price. DaScCH
notice of mortgage foreclosure sales must be strictly complied
with, and that even slight deviations therefrom will invalidate The cases cited by the RTC in its Decision do not apply
the notice and render the sale at least herein. San Jose v. Court of Appeals 22 refers to a Notice of
voidable. 19 Nonetheless, we must not also lose sight of the Sheriff's Sale which did not state the correct number of the
fact that the purpose of the publication of the Notice of transfer certificates of title of the property to be sold. This
Sheriff's Sale is to inform all interested parties of Court considered the oversight as a substantial and fatal error
the date, time and place of the foreclosure sale of the real which resulted in invalidating the entire notice. The case
property subject thereof. Logically, this not only requires that of Community Savings and Loan Association, Inc. v. Court of
the correct date, time and place of the foreclosure sale appear Appeals 23 is also inapplicable, because the said case refers
in the notice, but also that any and all interested parties be to an extrajudicial foreclosure tainted with fraud committed by
able to determine that what is about to be sold at the therein petitioners, which denied therein respondents the right
foreclosure sale is the real property in which they have an to redeem the property. It actually has no reference to a Notice
interest. 20 of Sale.
Considering the purpose behind the Notice of Sheriff's Sale, We now proceed to the effect of the non-delivery by PNB of
we disagree with the finding of the RTC that the discrepancy the bid price or the surplus to the petitioners. ISTECA
between the amount of petitioners' obligation as reflected in
the Notice of Sale and the amount actually due and collected The following antecedents are not disputed:
from the petitioners at the time of the auction sale constitute For failure to pay their loan obligation secured by a real estate
fraud which renders the extrajudicial foreclosure sale null and mortgage on the subject properties, PNB foreclosed the said
void. DTEAHI mortgage. In its petition for foreclosure sale under ACT No.
Notices are given for the purpose of securing bidders and to 3135 filed before the Mandaue City Sheriff, PNB stated therein
prevent a sacrifice of the property. If these objects are that petitioners' total outstanding obligation amounted to
attained, immaterial errors and mistakes will not affect the P1,991,770.38. 24 PNB bidded the amount of P8,511,000.00.
sufficiency of the notice; but if mistakes or omissions occur in Admittedly, PNB did not pay its bid in cash or deliver the
the notices of sale, which are calculated to deter or mislead excess either to the City Sheriff who conducted the bid or to
bidders, to depreciate the value of the property, or to prevent it the petitioners after deducting the difference between the
from bringing a fair price, such mistakes or omissions will be amount of its bid and the amount of petitioners' obligation in
the Notice of Sale. The petitioners then sought to declare the
114

nullity of the foreclosure, alleging that their loan obligation mandates that in the absence of a third-party claim, the
amounted only to P1,991,770.38 in the Notice of Sale, and purchaser in an execution sale need not pay his bid if it does
that PNB did not pay its bid in cash or deliver to petitioner the not exceed the amount of the judgment; otherwise, he shall
surplus, which is required under the law. 25 DTaSIc pay only the excess. 27
On the other hand, PNB claims that petitioners' loan obligation The raison de etre is that it would obviously be senseless for
reflected in the Notice of Sale dated 10 March 1992 did not the Sheriff or the Notary Public conducting the foreclosure sale
include their other obligations, which became due at the date to go through the idle ceremony of receiving the money and
of the auction sale on 10 October 1992; as well as interests, paying it back to the creditor, under the truism that the
penalties, other charges, and attorney's fees due on the said lawmaking body did not contemplate such a pointless
obligation. 26 application of the law in requiring that the creditor must bid
under the same conditions as any other bidder. It bears
Pertinent provisions under Rule 39 of the Rules of Court on stressing that the rule holds true only where the amount of the
extrajudicial foreclosure sale provide: DHTECc bid represents the total amount of the mortgage
SEC. 21. Judgment obligee as purchaser. — debt. 28 CDAHIT
When the purchaser is the judgment obligee, The question that needs to be addressed in this case is:
and no third-party claim has been filed, he considering the amount of PNB's bid of P8,511,000.00 as
need not pay the amount of the bid if it against the amount of the petitioners' obligation of
does not exceed the amount of his P1,991,770.38 in the Notice of Sale, is the PNB obliged to
judgment. If it does, he shall pay only the deliver the excess? ACETSa
excess. (Emphasis supplied.)
Petitioners insist that the PNB should deliver the excess. On
SEC. 39. Obligor may pay execution against the other hand PNB counters that on the date of the auction
obligee. — After a writ of execution against sale on 30 October 1992, petitioners' other loan obligation
property has been issued, a person indebted already exceeded the amount of P1,991,770.38 in the Notice
to the judgment obligor may pay to the sheriff of Sale.
holding the writ of execution the amount of his
debt or so much thereof as may be necessary Rule 68, Section 4 of the Rules of Court provides: CDHacE
to satisfy the judgment, in the manner
prescribed in section 9 of this Rule, and the SEC. 4. Disposition of proceeds of sale. —
sheriff's receipt shall be a sufficient discharge The amount realized from the foreclosure sale
for the amount so paid or directed to be of the mortgaged property shall, after
credited by the judgment obligee on the deducting the costs of the sale, be paid to the
execution. EICScD person foreclosing the mortgage, and when
there shall be any balance or residue, after
Conspicuously emphasized under Section 21 of Rule 39 is that paying off the mortgage debt due, the same
if the amount of the loan is equal to the amount of the bid, shall be paid to junior encumbrancers in the
there is no need to pay the amount in cash. Same provision order of their priority, to be ascertained by the
115

court, or if there be no such encumbrancers Thus it has been held that if the mortgagee is retaining more of
or there be a balance or residue after the proceeds of the sale than he is entitled to, this fact alone
payment to them, then to the mortgagor or his will not affect the validity of the sale but simply give the
duly authorized agent, or to the person mortgagor a cause of action to recover such
entitled to it. surplus. 31 ECDaAc
Under the above rule, the disposition of the proceeds of the In the case before us, PNB claims that petitioners' loan
sale in foreclosure shall be as follows: TICAcD obligations on the date of the auction sale were already more
than the amount of P1,991,770.38 in the Notice of Sale. In
(a) first, pay the costs fact, PNB claims that on the date of the auction sale,
(b) secondly, pay off the mortgage petitioners' principal obligation, plus penalties, interests,
debt SCDaET attorneys fees and other charges were already beyond the
amount of its bid of P8,511,000.00.
(c) thirdly, pay the junior encumbrancers, if
any in the order of priority After a careful review of the evidence on record, we find that
the same is insufficient to support PNB's claim. Instead, what
(d) fourthly, give the balance to the is available on record is petitioner's Statement of Account as
mortgagor, his agent or the person prepared by PNB and attached as Annex A 32 to its Answer
entitled to it. 29 EHScCA with counterclaim. 33 In this Statement of Account, petitioners'
Based on the foregoing, after payment of the costs of suit and principal obligation with interest/penalty and attorney's fees as
satisfaction of the claim of the first mortgagee/senior of 30 October 1992 already amounted to
mortgagee, the claim of the second mortgagee/junior P6,409,814.92. cdphil
mortgagee may be satisfied from the surplus proceeds. The Although petitioners denied the amounts reflected in the
application of the proceeds from the sale of the mortgaged Statement of Account from PNB, they did not interpose any
property to the mortgagor's obligation is an act of payment, not defense to refute the computations therein. Petitioners' mere
payment by dacion; hence, it is the mortgagee's duty to return denials, far from being compelling, had nothing to offer by way
any surplus in the selling price to the mortgagor. Perforce, a of evidence. This then enfeebles the foundation of petitioners'
mortgagee who exercises the power of sale contained in a protestation and will not suffice to overcome the computation
mortgage is considered a custodian of the fund and, being of their loan obligations as presented in the Statement of
bound to apply it properly, is liable to the persons entitled Account submitted by PNB. 34
thereto if he fails to do so. And even though the mortgagee is
not strictly considered a trustee in a purely equitable sense, Noticeably, this Statement of Account is the only piece of
but as far as concerns the unconsumed balance, the evidence available before us from which we can determine the
mortgagee is deemed a trustee for the mortgagor or owner of outstanding obligations of petitioners to PNB as of the date of
the equity of redemption. 30 the auction sale on 10 October 1992. CaHAcT
It did not escape the attention of this Court that petitioners
wrote a number of letters to PNB almost two years after the
116

auction sale, 35 in which they offered to redeem the property. from the time it is judicially demanded. In the
In their last letter, petitioners offered to redeem their absence of stipulation, the rate of interest
foreclosed properties for P9,500,000.00. However, these shall be 12% per annum to be computed from
letters by themselves cannot be used as bases to support default, i.e., from judicial or extrajudicial
PNB's claim that petitioners' obligation is more than its bid of demand under and subject to the provisions
P8,500,000.00, without any other evidence. There was no of Article 1169 of the Civil Code. cDIHES
computation presented to show how petitioners' obligation
already reached P9,500,000.00. Petitioners could very well 2. When an obligation, not constituting a loan
have offered such an amount on the basis of the value of the or forbearance of money, is breached, an
foreclosed properties rather than their total obligation to PNB. interest on the amount of damages awarded
We cannot take petitioners' offer to redeem their properties in may be imposed at the discretion of the
the amount of P9,500,000.00 on its face as an admission of court at the rate of 6% per annum. No
the amount of their obligation to PNB without any supporting interest, however, shall be adjudged on
evidence. unliquidated claims or damages except when
or until the demand can be established with
Given that the Statement of Account from PNB, being the only reasonable certainty. Accordingly, where the
existing documentary evidence to support its claim, shows that demand is established with reasonable
petitioners' loan obligations to PNB as of 30 October 1992 certainty, the interest shall begin to run from
amounted to P6,409,814.92, and considering that the amount the time the claim is made judicially or
of PNB's bid is P8,511,000.00, there is clearly an excess in the extrajudicially (Art. 1169, Civil Code) but when
bid price which PNB must return, together with the interest such certainty cannot be so reasonably
computed in accordance with the guidelines laid down by the established at the time the demand is made,
court in Eastern Shipping Lines v. Court of the interest shall begin to run only from the
Appeals, 36 regarding the manner of computing legal date the judgment of the court is made (at
interest, viz: HIaTDS which time the quantification of damages may
be deemed to have been reasonably
II. With regard particularly to an award of ascertained). The actual base for the
interest in the concept of actual and computation of legal interest shall, in any
compensatory damages, the rate of interest, case, be on the amount finally adjudged.
as well as the accrual thereof, is imposed, as
follows: 3. When the judgment of the court awarding a
sum of money becomes final and executory,
1. When the obligation is breached, and it the rate of legal interest, whether the case
consists in the payment of a sum of falls under paragraph 1 or paragraph 2,
money, i.e., a loan or forbearance of money, above, shall be 12% per annum from such
the interest due should be that which may finality until its satisfaction, this interim period
have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest
117

being deemed to be by then an equivalent to until payment thereof, is deemed to be equivalent to a


a forbearance of credit. IEHaSc forbearance of credit." Thus, in accordance with the
pronouncement in Eastern Shipping, the rate of 12% per
In Philippine National Bank v. Court of Appeals, 37 it was held annum should be imposed, to be computed from the time the
that: judgment becomes final and executory until fully
The rate of 12% interest referred to in Cir. 416 satisfied. CIaHDc
applies only to: CAcEaS It must be emphasized, however, that our holding in this case
Loan or forbearance of money, or to cases does not preclude PNB from proving and recovering in a
where money is transferred from one person proper proceeding any deficiency in the amount of petitioners'
to another and the obligation to return the loan obligation that may have accrued after the date of the
same or a portion thereof is adjudged. Any auction sale.
other monetary judgment which does not WHEREFORE, premises considered, the Decision of the
involve or which has nothing to do with loans Court of Appeals dated 12 April 2005 is MODIFIED in that the
or forbearance of any, money, goods or credit PNB is directed to return to the petitioners the amount of
does not fall within its coverage for such P2,101,185.08 with interest computed at 6% per annum from
imposition is not within the ambit of the the time of the filing of the complaint until its full payment
authority granted to the Central Bank. When before finality of judgment. Thereafter, if the amount adjudged
an obligation not constituting a loan or remains unpaid, the interest rate shall be 12% per
forbearance of money is breached then an annum computed from the time the judgment became final and
interest on the amount of damages awarded executory until fully satisfied. Costs against private
may be imposed at the discretion of the court respondent. cDCSET
at the rate of 6% per annum in accordance
with Art. 2209 of the Civil Code. Indeed, the SO ORDERED.
monetary judgment in favor of private
respondent does not involve a loan or Ynares-Santiago, Austria-Martinez, Nachura and Reyes,
forbearance of money, hence the proper JJ., concur.
imposable rate of interest is six (6%) per cent. ||| (Spouses Suico v. Philippine National Bank, G.R. No.
Using the above rule as yardstick, since the responsibility of 170215, [August 28, 2007], 558 PHIL 265-284)
PNB arises not from a loan or forbearance of money which
bears an interest rate of 12%, the proper rate of interest for the
amount which PNB must return to the petitioners is only 6%.
This interest according to Eastern Shipping shall be computed
from the time of the filing of the complaint. However, once the
judgment becomes final and executory, the "interim period
from the finality of judgment awarding a monetary claim and
118

SECOND DIVISION 94-2878. On 5 April and 27 November 1995, CEDEC


obtained from BPI Family additional loans of P2,160,000
[G.R. No. 176019. January 12, 2011.] and P1,140,000, respectively, and again mortgaged the
same properties. These latter mortgages were duly
annotated on the titles under Entry Nos. 95-6861 and 95-
BPI FAMILY SAVINGS BANK, 11041, respectively, on the same day the loans were
INC., petitioner, vs. obtained.
GOLDEN POWER DIESEL SALES
CENTER, INC. and RENATO C. Despite demand, CEDEC defaulted in its mortgage
TAN, respondents. obligations. On 12 October 1998, BPI Family filed with
the ex-officio sheriff of the Regional Trial Court of Pasay
City (RTC) a verified petition for extrajudicial foreclosure of
real estate mortgage over the properties under Act No.
DECISION 3135, as amended. 4
On 10 December 1998, after due notice and
publication, the sheriff sold the properties at public
CARPIO, J p: auction. BPI Family, as the highest bidder, acquired the
properties for P13,793,705.31. On 14 May 1999, the
The Case Certificate of Sheriff's Sale, dated 24 February 1999, was
This is a petition for review 1 of the 13 March 2006 duly annotated on the titles covering the properties.
Decision 2 and 19 December 2006 Resolution 3 of the On 15 May 1999, the one-year redemption period
Court of Appeals in CA-G.R. SP No. 78626. In its 13 March expired without CEDEC redeeming the properties. Thus,
2006 Decision, the Court of Appeals denied the titles to the properties were consolidated in the name
petitioner BPI Family Savings Bank, Inc.'s (BPI Family) of BPI Family. On 13 September 2000, the Registry of
petition for mandamus and certiorari. In its 19 December Deeds of Pasay City issued new titles, TCT Nos. 142935
2006 Resolution, the Court of Appeals denied BPI Family's and 142936, in the name of BPI Family.
motion for reconsideration.
However, despite several demand letters, CEDEC
The Facts refused to vacate the properties and to surrender
On 26 October 1994, CEDEC Transport, Inc. possession to BPI Family. On 31 January 2002,BPI Family
(CEDEC) mortgaged two parcels of land covered by filed an Ex-Parte Petition for Writ of Possession over the
Transfer Certificate of Title (TCT) Nos. 134327 and 134328 properties with Branch 114 of the Regional Trial Court of
situated in Malibay, Pasay City, including all the Pasay City (trial court). In its 27 June 2002 Decision, the
improvements thereon (properties), in favor of BPI Family trial court granted BPI Family's petition. 5 On 12 July 2002,
to secure a loan of P6,570,000. On the same day, the the trial court issued the Writ of Possession. TcEAIH
mortgage was duly annotated on the titles under Entry No.
119

On 29 July 2002, respondents denied BPI Family's motion and ordered the sheriff to
Golden Power Diesel Sales Center, Inc. and Renato C. suspend the implementation of the alias writ of
Tan 6 (respondents) filed a Motion to Hold Implementation possession. 12 According to the trial court, "the order
of the Writ of Possession. 7 Respondents alleged that they granting the alias writ of possession should not affect third
are in possession of the properties which they acquired persons holding adverse rights to the judgment obligor."
from CEDEC on 10 September 1998 pursuant to the Deed The trial court admitted that in issuing the first writ of
of Absolute Sale with Assumption of Mortgage (Deed of possession it failed to take into consideration respondents'
Sale). 8 Respondents argued that they are third persons complaint before Branch 111 claiming ownership of the
claiming rights adverse to CEDEC, the judgment obligor property. The trial court also noted that respondents were
and they cannot be deprived of possession over the in actual possession of the properties and had been
properties. Respondents also disclosed that they filed a updating the payment of CEDEC's loan balances
complaint before Branch 111 of the Regional Trial Court of with BPI Family. Thus, the trial court found it necessary to
Pasay City, docketed as Civil Case No. 99-0360, for the amend its 12 September 2002 Order and suspend the
cancellation of the Sheriff's Certificate of Sale and an order implementation of the writ of possession until Civil Case
to direct BPI Family to honor and accept the Deed of No. 99-0360 is resolved.
Absolute Sale between CEDEC and respondents. 9
BPI Family filed a motion for reconsideration. In its
On 12 September 2002, the trial court denied 20 June 2003 Resolution, the trial court denied the
respondents' motion. 10 Thereafter, the trial court issued motion. 13
an alias writ of possession which was served upon CEDEC
BPI Family then filed a petition
and all other persons claiming rights under them.
for mandamus and certiorari with application for a
However, the writ of possession expired without temporary restraining order or preliminary injunction before
being implemented. On 22 January 2003, BPI Family filed the Court of Appeals. BPI Family argued that the trial court
an Urgent Ex-Parte Motion to Order the Honorable Branch acted with grave abuse of discretion amounting to lack or
Clerk of Court to Issue Alias Writ of Possession. In an excess of jurisdiction when it ordered the suspension of the
Order dated 27 January 2003, the trial court implementation of the alias writ of possession. According
granted BPI Family's motion. to BPI Family, it was the ministerial duty of the trial court to
grant the writ of possession in its favor considering that it
Before the alias writ could be implemented,
was now the owner of the properties and that once issued,
respondent Renato C. Tan filed with the trial court an
the writ should be implemented without delay.
Affidavit of Third Party Claim 11 on the properties. Instead
of implementing the writ, the sheriff referred the matter to The Court of Appeals dismissed BPI Family's
the trial court for resolution. petition. The dispositive portion of the 13 March 2006
Decision reads:
On 11 February 2003, BPI Family filed an Urgent
Motion to Compel Honorable Sheriff and/or his Deputy to WHEREFORE, the instant Petition for Writ of
Enforce Writ of Possession and to Break Open the Mandamus and Writ of Certiorari with
properties. In its 7 March 2003 Resolution, the trial court Application for a TRO and/or Preliminary
120

Injunction is hereby DENIED. The The Honorable Court of Appeals seriously


twin Resolutions dated March 7, 2003 and erred in upholding the finding of the
June 20, 2003, both issued by the public Honorable Regional Trial Court that despite
respondent in LRC Case No. 02-0003, the fact that private respondents merely
ordering the sheriff to suspend the stepped into the shoes of mortgagor CEDEC,
implementation of the Alias Writ of being the vendee of the properties in
Possession issued in favor of the petitioner, question, they are categorized as third
and denying its Urgent Omnibus persons in possession thereof who are
Motion thereof, respectively, are claiming a right adverse to that of the
hereby AFFIRMED. debtor/mortgagor CEDEC.
SO ORDERED. 14 B.
BPI Family filed a motion for reconsideration. In its The Honorable Court of Appeals gravely
19 December 2006 Resolution, the Court of Appeals erred in sustaining the aforementioned twin
denied the motion. CaAIES orders suspending the implementation of the
The Ruling of the Court of Appeals writ of possession on the ground that the
annulment case filed by private respondents
The Court of Appeals ruled that the trial court did is still pending despite the established ruling
not commit grave abuse of discretion in suspending the that pendency of a case questioning the
implementation of the alias writ of possession because legality of a mortgage or auction sale cannot
respondents were in actual possession of the properties be a ground for the non-issuance and/or non-
and are claiming rights adverse to CEDEC, the judgment implementation of a writ of possession. 15
obligor. According to the Court of Appeals, the principle
that the implementation of the writ of possession is a mere The Ruling of the Court
ministerial function of the trial court is not without The petition is meritorious.
exception. The Court of Appeals held that the obligation of
the court to issue an ex parte writ of possession in favor of BPI Family argues that respondents cannot be
the purchaser in an extrajudicial foreclosure sale ceases to considered "a third party who is claiming a right adverse to
be ministerial once it appears that there is a third party in that of the debtor or mortgagor" because respondents, as
possession of the property who is claiming a right adverse vendee, merely stepped into the shoes of CEDEC, the
to that of the debtor or mortgagor. vendor and judgment obligor. According to BPI Family,
respondents are mere extensions or successors-in-interest
The Issues of CEDEC. BPI Family also argues that the pendency of an
BPI Family raises the following issues: action questioning the validity of a mortgage or auction
sale cannot be a ground to oppose the implementation of a
A.
writ of possession.
121

On the other hand, respondents insist that they are filing of such petition, collect the fees
third persons who claim rights over the properties adverse specified in paragraph eleven of section one
to CEDEC. Respondents argue that the obligation of the hundred and fourteen of Act Numbered Four
court to issue an ex parte writ of possession in favor of the hundred and ninety-six, as amended by Act
purchaser in an extrajudicial foreclosure sale ceases to be Numbered Twenty-eight hundred and sixty-
ministerial once it appears that there is a third party in six, and the court shall, upon approval of the
possession of the property who is claiming a right adverse bond, order that a writ of possession issue,
to that of the judgment obligor. addressed to the sheriff of the province in
which the property is situated, who shall
In extrajudicial foreclosures of real estate
execute said order immediately. AcIaST
mortgages, the issuance of a writ of possession is
governed by Section 7 of Act No. 3135, as amended, This procedure may also be availed of by the
which provides: purchaser seeking possession of the foreclosed property
SECTION 7. In any sale made under the bought at the public auction sale after the redemption
provisions of this Act, the purchaser may period has expired without redemption having been
petition the Court of First Instance (Regional made. 16
Trial Court) of the province or place where the In China Banking Corporation v. Lozada, 17 we
property or any part thereof is situated, to give ruled:
him possession thereof during the redemption
period, furnishing bond in an amount It is thus settled that the buyer in a
equivalent to the use of the property for a foreclosure sale becomes the absolute owner
period of twelve months, to indemnify the of the property purchased if it is not redeemed
debtor in case it be shown that the sale was during the period of one year after the
made without violating the mortgage or registration of the sale. As such, he is entitled
without complying with the requirements of to the possession of the said property and
this Act. Such petition shall be made under can demand it at any time following the
oath and filed in form of an ex parte motion in consolidation of ownership in his name and
the registration or cadastral proceedings if the the issuance to him of a new transfer
property is registered, or in special certificate of title. The buyer can in fact
proceedings in the case of property registered demand possession of the land even during
under the Mortgage Law or under section one the redemption period except that he has to
hundred and ninety-four of the Administrative post a bond in accordance with Section 7
Code, or of any other real property of Act No. 3135, as amended. No such bond
encumbered with a mortgage duly registered is required after the redemption period if the
in the office of any register of deeds in property is not redeemed. Possession of the
accordance with any existing law, and in each land then becomes an absolute right of the
case the clerk of the court shall, upon the purchaser as confirmed owner. Upon
122

proper application and proof of title, the also held by the third party adversely to the judgment
issuance of the writ of possession obligor.
becomes a ministerial duty of the
In this case, BPI Family invokes the general rule
court. 18 (Emphasis supplied)
that they are entitled to a writ of possession because
Thus, the general rule is that a purchaser in a respondents are mere successors-in-interest of CEDEC
public auction sale of a foreclosed property is entitled to a and do not possess the properties adversely to CEDEC.
writ of possession and, upon an ex partepetition of the Respondents, on the other hand, assert the exception and
purchaser, it is ministerial upon the trial court to issue the insist that they hold the properties adversely to CEDEC
writ of possession in favor of the purchaser. and that their possession is a sufficient obstacle to the ex
parte issuance of a writ of possession in favor
There is, however, an exception. Section 33, Rule of BPI Family.
39 of the Rules of Court provides:
Respondents' argument fails to persuade the Court.
Section 33. Deed and possession to be given It is clear that respondents acquired possession over the
at expiration of redemption period; by whom properties pursuant to the Deed of Sale which provides
executed or given. — . . . that for P15,000,000 CEDEC will "sell, transfer and
Upon the expiration of the right of redemption, convey" to respondents the properties "free from all liens
the purchaser or redemptioner shall be and encumbrances excepting the mortgage as may be
substituted to and acquire all the rights, title, subsisting in favor of the BPI FAMILY SAVINGS
interest and claim of the judgment obligor to BANK." 21 Moreover, the Deed of Sale provides that
the property as of the time of the levy. The respondents bind themselves to assume "the payment of
possession of the property shall be given to the unpaid balance of the mortgage indebtedness of the
the purchaser or last redemptioner by the VENDOR (CEDEC) amounting to P7,889,472.48, as of
same officer unless a third party is actually July 31, 1998, in favor of the aforementioned mortgagee
holding the property adversely to the (BPI Family) by the mortgage instruments and does hereby
judgment obligor. (Emphasis supplied) further agree to be bound by the precise terms and
conditions therein contained." 22 THEDCA
Therefore, in an extrajudicial foreclosure of real
property, when the foreclosed property is in the possession In Roxas v. Buan, 23 we ruled:
of a third party holding the same adversely to the judgment It will be recalled that Roxas' possession of
obligor, the issuance by the trial court of a writ of the property was premised on its alleged sale
possession in favor of the purchaser of said real property to him by Valentin for the amount of
ceases to be ministerial and may no longer be done ex P100,000.00. Assuming this to be true, it is
parte. 19 The procedure is for the trial court to order a readily apparent that Roxas holds title to and
hearing to determine the nature of the adverse possesses the property as Valentin's
possession. 20 For the exception to apply, however, the transferee. Any right he has to the property is
property need not only be possessed by a third party, but necessarily derived from that of Valentin. As
123

transferee, he steps into the latter's shoes. tenant, and usufructuary possess the property
Thus, in the instant case, considering that the in their own right, and they are not merely the
property had already been sold at public successor or transferee of the right of
auction pursuant to an extrajudicial possession of another co-owner or the owner
foreclosure, the only interest that may be of the property. 27
transferred by Valentin to Roxas is the right to
redeem it within the period prescribed by law. In this case, respondents cannot claim that their
Roxas is therefore the successor-in-interest of right to possession over the properties is analogous to any
Valentin, to whom the latter had conveyed his of these. Respondents cannot assert that their right of
interest in the property for the purpose of possession is adverse to that of CEDEC when they have
redemption. Consequently, Roxas' occupancy no independent right of possession other than what they
of the property cannot be considered adverse acquired from CEDEC. Since respondents are not holding
to Valentin. 24 the properties adversely to CEDEC, being the latter's
successors-in-interest, there was no reason for the trial
In this case, respondents' possession of the court to order the suspension of the implementation of the
properties was premised on the sale to them by CEDEC writ of possession.
for the amount of P15,000,000. Therefore, respondents
Furthermore, it is settled that a pending action for
hold title to and possess the properties as CEDEC's
annulment of mortgage or foreclosure sale does not stay
transferees and any right they have over the properties is
the issuance of the writ of possession. 28The trial court,
derived from CEDEC. As transferees of CEDEC,
where the application for a writ of possession is filed, does
respondents merely stepped into CEDEC's shoes and are
not need to look into the validity of the mortgage or the
necessarily bound to acknowledge and respect the
manner of its foreclosure. 29 The purchaser is entitled to a
mortgage CEDEC had earlier executed in favor
writ of possession without prejudice to the outcome of the
of BPI Family. 25 Respondents are the successors-in-
pending annulment case. 30
interest of CEDEC and thus, respondents' occupancy over
the properties cannot be considered adverse to CEDEC. In this case, the trial court erred in issuing its 7
March 2003 Order suspending the implementation of the
Moreover, in China Bank v. Lozada, 26 we
alias writ of possession. Despite the pendency of Civil
discussed the meaning of "a third party who is actually
Case No. 99-0360, the trial court should not have ordered
holding the property adversely to the judgment obligor."
the sheriff to suspend the implementation of the writ of
We stated:
possession. BPIFamily, as purchaser in the foreclosure
The exception provided under Section 33 of sale, is entitled to a writ of possession without prejudice to
Rule 39 of the Revised Rules of the outcome of Civil Case No. 99-0360.
Court contemplates a situation in which a
WHEREFORE, we GRANT the petition. We SET
third party holds the property by adverse title
ASIDE the 13 March 2006 Decision and the 19 December
or right, such as that of a co-owner, tenant or
2006 Resolution of the Court of Appeals in CA-G.R. SP
usufructuary. The co-owner, agricultural
124

No. 78626. We SET ASIDE the 7 March and 20 June 2003


Resolutions of the Regional Trial Court, Branch 114, Pasay
City. We ORDER the sheriff to proceed with the
implementation of the writ of possession without prejudice
to the outcome of Civil Case No. 99-0360.
SO ORDERED. HcTDSA
Nachura, Peralta, Abad and Mendoza, JJ., concur.
||| (BPI Family Savings Bank v. Golden Power Diesel Sales
Center, Inc., G.R. No. 176019, [January 12, 2011], 654 PHIL
382-394)
125

SECOND DIVISION design, construction, commissioning, testing and completion of


the Project. 4
[G.R. No. 146717. November 22, 2004.] The Turnkey Contract provides that: (1) the target completion
date of the Project shall be on 1 June 2000, or such later date
TRANSFIELD PHILIPPINES, as may be agreed upon between petitioner and respondent
INC., petitioner, vs. LUZON HYDRO LHC or otherwise determined in accordance with the Turnkey
CORPORATION, AUSTRALIA and NEW Contract; and (2) petitioner is entitled to claim extensions of
ZEALAND BANKING GROUP LIMITED and time (EOT) for reasons enumerated in the Turnkey Contract,
SECURITY BANK among which are variations, force majeure, and delays caused
CORPORATION, respondents. 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
DECISION
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
TINGA, J p: favor of LHC two (2) standby letters of credit both dated 20
March 2000 (hereinafter referred to as "the Securities"), to wit:
Subject of this case is the letter of credit which has evolved as Standby Letter of Credit No. E001126/8400 with the local
the ubiquitous and most important device in international branch of respondent Australia and New Zealand Banking
trade. A creation of commerce and businessmen, the letter of Group Limited (ANZ Bank) 7 and Standby Letter of Credit No.
credit is also unique in the number of parties involved and its IBDIDSB-00/4 with respondent Security Bank Corporation
supranational character. (SBC) 8 each in the amount of US$8,988,907.00. 9
Petitioner has appealed from the Decision 1 of the Court of In the course of the construction of the project, petitioner
Appeals in CA-G.R. SP No. 61901 entitled "Transfield sought various EOT to complete the Project. The extensions
Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated were requested allegedly due to several factors which
on 31 January 2001. 2 prevented the completion of the Project on target date, such
On 26 March 1997, petitioner and respondent Luzon Hydro as force majeure occasioned by typhoon Zeb, barricades and
Corporation (hereinafter, LHC) entered into a Turnkey demonstrations. LHC denied the requests, however. This gave
Contract 3 whereby petitioner, as Turnkey Contractor, rise to a series of legal actions between the parties which
undertook to construct, on a turnkey basis, a seventy (70)- culminated in the instant petition.
Megawatt hydro-electric power station at the Bakun River in The first of the actions was a Request for Arbitration which
the provinces of Benguet and Ilocos Sur (hereinafter, the LHC filed before the Construction Industry Arbitration
Project). Petitioner was given the sole responsibility for the Commission (CIAC) on 1 June 1999. 10 This was followed by
126

another Request for Arbitration, this time filed by petitioner On 5 November 2000, petitioner as plaintiff filed a Complaint
before the International Chamber of Commerce (ICC) 11 on 3 for Injunction, with prayer for temporary restraining order and
November 2000. In both arbitration proceedings, the common writ of preliminary injunction, against herein respondents as
issues presented were: [1] whether typhoon Zeb and any of its defendants before the Regional Trial Court (RTC) of
associated events constituted force majeure to justify the Makati. 17 Petitioner sought to restrain respondent LHC from
extension of time sought by petitioner; and [2] whether LHC calling on the Securities and respondent banks from
had the right to terminate the Turnkey Contract for failure of transferring, paying on, or in any manner disposing of the
petitioner to complete the Project on target date. CcHDSA Securities or any renewals or substitutes thereof. The RTC
issued a seventy-two (72)-hour temporary restraining order on
Meanwhile, foreseeing that LHC would call on the Securities the same day. The case was docketed as Civil Case No. 00-
pursuant to the pertinent provisions of the Turnkey 1312 and raffled to Branch 148 of the RTC of Makati.
Contract, 12 petitioner — in two separate letters 13 both dated
10 August 2000 — advised respondent banks of the arbitration After appropriate proceedings, the trial court issued
proceedings already pending before the CIAC and ICC in an Order on 9 November 2000, extending the temporary
connection with its alleged default in the performance of its restraining order for a period of seventeen (17) days or until 26
obligations. Asserting that LHC had no right to call on the November 2000. 18
Securities until the resolution of disputes before the arbitral
tribunals, petitioner warned respondent banks that any The RTC, in its Order 19 dated 24 November 2000, denied
transfer, release, or disposition of the Securities in favor of petitioner's application for a writ of preliminary injunction. It
LHC or any person claiming under LHC would constrain it to ruled that petitioner had no legal right and suffered no
hold respondent banks liable for liquidated damages. irreparable injury to justify the issuance of the writ. Employing
the principle of "independent contract" in letters of credit, the
As petitioner had anticipated, on 27 June 2000, LHC sent trial court ruled that LHC should be allowed to draw on the
notice to petitioner that pursuant to Clause 8.2 14 of the Securities for liquidated damages. It debunked petitioner's
Turnkey Contract, it failed to comply with its obligation to contention that the principle of "independent contract" could be
complete the Project. Despite the letters of petitioner, invoked only by respondent banks since according to it
however, both banks informed petitioner that they would pay respondent LHC is the ultimate beneficiary of the Securities.
on the Securities if and when LHC calls on them. 15 The trial court further ruled that the banks were mere
custodians of the funds and as such they were obligated to
LHC asserted that additional extension of time would not be transfer the same to the beneficiary for as long as the latter
warranted; accordingly it declared petitioner in default/delay in could submit the required certification of its claims.
the performance of its obligations under the Turnkey Contract
and demanded from petitioner the payment of US$75,000.00 Dissatisfied with the trial court's denial of its application for a
for each day of delay beginning 28 June 2000 until actual writ of preliminary injunction, petitioner elevated the case to
completion of the Project pursuant to Clause 8.7.1 of the the Court of Appeals via a Petition for Certiorari under Rule 65,
Turnkey Contract. At the same time, LHC served notice that it with prayer for the issuance of a temporary restraining order
would call on the securities for the payment of liquidated and writ of preliminary injunction. 20 Petitioner submitted to
damages for the delay. 16 the appellate court that LHC's call on the Securities was
127

premature considering that the issue of its default had not yet judgment which is not correctible by certiorari, unlike error of
been resolved with finality by the CIAC and/or the ICC. It jurisdiction.
asserted that until the fact of delay could be established, LHC
had no right to draw on the Securities for liquidated damages. Undaunted, petitioner filed the instant Petition for
Review raising the following issues for resolution:
Refuting petitioner's contentions, LHC claimed that petitioner
had no right to restrain its call on and use of the Securities as WHETHER THE "INDEPENDENCE
payment for liquidated damages. It averred that the Securities PRINCIPLE" ON LETTERS OF CREDIT MAY
are independent of the main contract between them as shown BE INVOKED BY A BENEFICIARY
on the face of the two Standby Letters of Credit which both THEREOF WHERE THE BENEFICIARY'S
provide that the banks have no responsibility to investigate the CALL THEREON IS WRONGFUL OR
authenticity or accuracy of the certificates or the declarant's FRAUDULENT.
capacity or entitlement to so certify. WHETHER LHC HAS THE RIGHT TO CALL
In its Resolution dated 28 November 2000, the Court of AND DRAW ON THE SECURITIES BEFORE
Appeals issued a temporary restraining order, enjoining LHC THE RESOLUTION OF PETITIONER'S AND
from calling on the Securities or any renewals or substitutes LHC'S DISPUTES BY THE APPROPRIATE
thereof and ordering respondent banks to cease and desist TRIBUNAL. HAaScT
from transferring, paying or in any manner disposing of the WHETHER ANZ BANK AND SECURITY
Securities. BANK ARE JUSTIFIED IN RELEASING THE
However, the appellate court failed to act on the application for AMOUNTS DUE UNDER THE SECURITIES
preliminary injunction until the temporary restraining order DESPITE BEING NOTIFIED THAT LHC'S
expired on 27 January 2001. Immediately thereafter, CALL THEREON IS WRONGFUL.
representatives of LHC trooped to ANZ Bank and withdrew the WHETHER OR NOT PETITIONER WILL
total amount of US$4,950,000.00, thereby reducing the SUFFER GRAVE AND IRREPARABLE
balance in ANZ Bank to US$1,852,814.00. DAMAGE IN THE EVENT THAT:
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 A. LHC IS ALLOWED TO CALL AND
pursuant to the first principle in credit law that the credit itself is DRAW ON, AND ANZ BANK
independent of the underlying transaction and that as long as AND SECURITY BANK ARE
the beneficiary complied with the credit, it was of no moment ALLOWED TO RELEASE,
that he had not complied with the underlying contract. Further, THE REMAINING BALANCE
the appellate court held that even assuming that the trial OF THE SECURITIES PRIOR
court's denial of petitioner's application for a writ of preliminary TO THE RESOLUTION OF
injunction was erroneous, it constituted only an error of
128

THE DISPUTES BETWEEN proceeds of the Securities and not ordered to return the
PETITIONER AND LHC. amounts it had wrongfully drawn thereon.
B. LHC DOES NOT RETURN THE In its Manifestationdated 8 September 2003, 24 LHC contends
AMOUNTS IT HAD that the supplemental pleadings filed by petitioner present
WRONGFULLY DRAWN erroneous and misleading information which would change
FROM THE SECURITIES. 21 petitioner's theory on appeal.
Petitioner contends that the courts below improperly relied on In yet another Manifestation dated 12 April 2004, 25 petitioner
the "independence principle" on letters of credit when this case alleges that on 18 February 2004, the ICC handed down its
falls squarely within the "fraud exception rule." Respondent Third Partial Award, declaring that LHC wrongfully drew upon
LHC deliberately misrepresented the supposed existence of the Securities and that petitioner was entitled to the return of
delay despite its knowledge that the issue was still pending the sums wrongfully taken by LHC for liquidated damages.
arbitration, petitioner continues.
LHC filed a Counter-Manifestation dated 29 June
Petitioner asserts that LHC should be ordered to return the 2004, 26 stating that petitioner's Manifestation dated 12 April
proceeds of the Securities pursuant to the principle against 2004 enlarges the scope of its Petition for Review of the 31
unjust enrichment and that, under the premises, injunction was January 2001 Decision of the Court of Appeals. LHC notes
the appropriate remedy obtainable from the competent local that the Petition for Review essentially dealt only with the issue
courts. of whether injunction could issue to restrain the beneficiary of
an irrevocable letter of credit from drawing thereon. It adds
On 25 August 2003, petitioner filed a Supplement to the that petitioner has filed two other proceedings, to wit: (1) ICC
Petition 22 and Supplemental Memorandum, 23 alleging that Case No. 11264/TE/MW, entitled "Transfield Philippines
in the course of the proceedings in the ICC Arbitration, a Inc. v. Luzon Hydro Corporation," in which the parties made
number of documentary and testimonial evidence came out claims and counterclaims arising from petitioner's
through the use of different modes of discovery available in the performance/misperformance of its obligations as contractor
ICC Arbitration. It contends that after the filing of the petition for LHC; and (2) Civil Case No. 04-332, entitled "Transfield
facts and admissions were discovered which demonstrate that Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56
LHC knowingly misrepresented that petitioner had incurred of the RTC of Makati, which is an action to enforce and obtain
delays — notwithstanding its knowledge and admission that execution of the ICC's partial award mentioned in
delays were excused under the Turnkey Contract — to be able petitioner's Manifestation of 12 April 2004.
to draw against the Securities. Reiterating that fraud
constitutes an exception to the independence principle, In its Comment to petitioner's Motion for Leave to File
petitioner urges that this warrants a ruling from this Court that Addendum to Petitioner's Memorandum, LHC stresses that the
the call on the Securities was wrongful, as well as contrary to question of whether the funds it drew on the subject letters of
law and basic principles of equity. It avers that it would suffer credit should be returned is outside the issue in this appeal. At
grave irreparable damage if LHC would be allowed to use the 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
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Case No. 04-332. LHC asserts that petitioner is engaged in honor drafts drawn against a letter regardless of problems
forum-shopping by keeping this appeal and at the same time subsequently arising in the underlying contract. Since the
seeking the suit for enforcement of the arbitral award before bank's customer cannot draw on the letter, it does not function
the Makati court. as an assignment by the customer to the beneficiary. Nor, if
properly used, is it a contract of suretyship or guarantee,
Respondent SBC in its Memorandum, dated 10 March because it entails a primary liability following a default. Finally,
2003 27 contends that the Court of Appeals correctly it is not in itself a negotiable instrument, because it is not
dismissed the petition for certiorari. Invoking the independence payable to order or bearer and is generally conditional, yet the
principle, SBC argues that it was under no obligation to look draft presented under it is often negotiable. 29
into the validity or accuracy of the certification submitted by
respondent LHC or into the latter's capacity or entitlement to In commercial transactions, a letter of credit is a financial
so certify. It adds that the act sought to be enjoined by device developed by merchants as a convenient and relatively
petitioner was already fait accompli and the present petition safe mode of dealing with sales of goods to satisfy the
would no longer serve any remedial purpose. seemingly irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer, who wants
In a similar fashion, respondent ANZ Bank in to have control of the goods before paying. 30 The use of
its Memorandum dated 13 March 2003 28 posits that its credits in commercial transactions serves to reduce the risk of
actions could not be regarded as unjustified in view of the nonpayment of the purchase price under the contract for the
prevailing independence principle under which it had no sale of goods. However, credits are also used in non-sale
obligation to ascertain the truth of LHC's allegations that settings where they serve to reduce the risk of
petitioner defaulted in its obligations. Moreover, it points out nonperformance. Generally, credits in the non-sale settings
that since the Standby Letter of Credit No. E001126/8400 had have come to be known as standby credits. 31
been fully drawn, petitioner's prayer for preliminary injunction
had been rendered moot and academic. There are three significant differences between commercial
and standby credits. First, commercial credits involve the
At the core of the present controversy is the applicability of the payment of money under a contract of sale. Such credits
"independence principle" and "fraud exception rule" in letters become payable upon the presentation by the seller-
of credit. Thus, a discussion of the nature and use of letters of beneficiary of documents that show he has taken affirmative
credit, also referred to simply as "credits," would provide a steps to comply with the sales agreement. In the standby type,
better perspective of the case. the credit is payable upon certification of a party's
The letter of credit evolved as a mercantile specialty, and the nonperformance of the agreement. The documents that
only way to understand all its facets is to recognize that it is an accompany the beneficiary's draft tend to show that the
entity unto itself. The relationship between the beneficiary and applicant has not performed. The beneficiary of a commercial
the issuer of a letter of credit is not strictly contractual, credit must demonstrate by documents that he has performed
because both privity and a meeting of the minds are lacking, his contract. The beneficiary of the standby credit must certify
yet strict compliance with its terms is an enforceable right. Nor that his obligor has not performed the contract. 32
is it a third-party beneficiary contract, because the issuer must
130

By definition, a letter of credit is a written instrument whereby Consequently, the undertaking of a bank to pay, accept and
the writer requests or authorizes the addressee to pay money pay draft(s) or negotiate and/or fulfill any other obligation
or deliver goods to a third person and assumes responsibility under the credit is not subject to claims or defenses by the
for payment of debt therefor to the addressee. 33 A letter of applicant resulting from his relationships with the issuing bank
credit, however, changes its nature as different transactions or the beneficiary. A beneficiary can in no case avail himself of
occur and if carried through to completion ends up as a the contractual relationships existing between the banks or
binding contract between the issuing and honoring banks between the applicant and the issuing bank.
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 Thus, the engagement of the issuing bank is to pay the seller
international trade transactions, the ICC has published from or beneficiary of the credit once the draft and the required
time to time updates on the Uniform Customs and Practice documents are presented to it. The so-called "independence
(UCP) for Documentary Credits to standardize practices in the principle" assures the seller or the beneficiary of prompt
letter of credit area. The vast majority of letters of credit payment independent of any breach of the main contract and
incorporate the UCP. 35 First published in 1933, the UCP for precludes the issuing bank from determining whether the main
Documentary Credits has undergone several revisions, the contract is actually accomplished or not. Under this principle,
latest of which was in 1993. 36 banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect
In Bank of the Philippine Islands v. De Reny Fabric Industries, of any documents, or for the general and/or particular
Inc., 37 this Court ruled that the observance of the UCP is conditions stipulated in the documents or superimposed
justified by Article 2 of the Code of Commerce which provides thereon, nor do they assume any liability or responsibility for
that in the absence of any particular provision in the Code of the description, quantity, weight, quality, condition, packing,
Commerce, commercial transactions shall be governed by delivery, value or existence of the goods represented by any
usages and customs generally observed. More recently, documents, or for the good faith or acts and/or omissions,
in Bank of America, NT & SA v. Court of Appeals, 38 this solvency, performance or standing of the consignor, the
Court ruled that there being no specific provisions which carriers, or the insurers of the goods, or any other person
govern the legal complexities arising from transactions whomsoever. 39
involving letters of credit, not only between or among banks
themselves but also between banks and the seller or the The independent nature of the letter of credit may be: (a)
buyer, as the case may be, the applicability of the UCP is independence in toto where the credit is independent from the
undeniable. IaSAHC justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or (b)
Article 3 of the UCP provides that credits, by their nature, are independence may be only as to the justification aspect like in
separate transactions from the sales or other contract(s) on a commercial letter of credit or repayment standby, which is
which they may be based and banks are in no way concerned identical with the same obligations under the underlying
with or bound by such contract(s), even if any reference agreement. In both cases the payment may be enjoined if in
whatsoever to such contract(s) is included in the credit.
131

the light of the purpose of the credit the payment of the credit party who applied for and obtained it may confidently present
would constitute fraudulent abuse of the credit. 40 the letter of credit to the beneficiary as a security to convince
the beneficiary to enter into the business transaction. On the
Can the beneficiary invoke the independence principle? other hand, the other party to the business transaction, i.e., the
Petitioner insists that the independence principle does not beneficiary of the letter of credit, can be rest assured of being
apply to the instant case and assuming it is so, it is a defense empowered to call on the letter of credit as a security in case
available only to respondent banks. LHC, on the other hand, the commercial transaction does not push through, or the
contends that it would be contrary to common sense to deny applicant fails to perform his part of the transaction. It is for this
the benefit of an independent contract to the very party for reason that the party who is entitled to the proceeds of the
whom the benefit is intended. As beneficiary of the letter of letter of credit is appropriately called "beneficiary."
credit, LHC asserts it is entitled to invoke the principle. Petitioner's argument that any dispute must first be resolved
As discussed above, in a letter of credit transaction, such as in by the parties, whether through negotiations or arbitration,
this case, where the credit is stipulated as irrevocable, there is before the beneficiary is entitled to call on the letter of credit in
a definite undertaking by the issuing bank to pay the essence would convert the letter of credit into a mere
beneficiary provided that the stipulated documents are guarantee. Jurisprudence has laid down a clear distinction
presented and the conditions of the credit are complied between a letter of credit and a guarantee in that the
with. 41 Precisely, the independence principle liberates the settlement of a dispute between the parties is not a pre-
issuing bank from the duty of ascertaining compliance by the requisite for the release of funds under a letter of credit. In
parties in the main contract. As the principle's nomenclature other words, the argument is incompatible with the very nature
clearly suggests, the obligation under the letter of credit is of the letter of credit. If a letter of credit is drawable only after
independent of the related and originating contract. In brief, settlement of the dispute on the contract entered into by the
the letter of credit is separate and distinct from the underlying applicant and the beneficiary, there would be no practical and
transaction. beneficial use for letters of credit in commercial transactions.

Given the nature of letters of credit, petitioner's argument — Professor John F. Dolan, the noted authority on letters of
that it is only the issuing bank that may invoke the credit, sheds more light on the issue:
independence principle on letters of credit — does not impress The standby credit is an attractive commercial
this Court. To say that the independence principle may only be device for many of the same reasons that
invoked by the issuing banks would render nugatory the commercial credits are attractive. Essentially,
purpose for which the letters of credit are used in commercial these credits are inexpensive and efficient.
transactions. As it is, the independence doctrine works to the Often they replace surety contracts, which
benefit of both the issuing bank and the beneficiary. tend to generate higher costs than credits do
Letters of credit are employed by the parties desiring to enter and are usually triggered by a factual
into commercial transactions, not for the benefit of the issuing determination rather than by the examination
bank but mainly for the benefit of the parties to the original of documents. HTCISE
transactions. With the letter of credit from the issuing bank, the
132

Because parties and courts should not surety contract: it reverses the financial
confuse the different functions of the surety burden of parties during litigation.
contract on the one hand and the standby
credit on the other, the distinction between In the surety contract setting, there is no duty
surety contracts and credits merits some to indemnify the beneficiary until the
reflection. The two commercial devices share beneficiary establishes the fact of the obligor's
a common purpose. Both ensure against the performance. The beneficiary may have to
obligor's nonperformance. They function, establish that fact in litigation. During the
however, in distinctly different ways. litigation, the surety holds the money and the
beneficiary bears most of the cost of delay in
Traditionally, upon the obligor's default, the performance.
surety undertakes to complete the obligor's
performance, usually by hiring someone to In the standby credit case, however, the
complete that performance. Surety contracts, beneficiary avoids that litigation burden and
then, often involve costs of determining receives his money promptly upon
whether the obligor defaulted (a matter over presentation of the required documents. It
which the surety and the beneficiary often may be that the applicant has, in fact,
litigate) plus the cost of performance. The performed and that the beneficiary's
benefit of the surety contract to the presentation of those documents is not
beneficiary is obvious. He knows that the rightful. In that case, the applicant may sue
surety, often an insurance company, is a the beneficiary in tort, in contract, or in breach
strong financial institution that will perform if of warranty; but, during the litigation to
the obligor does not. The beneficiary also determine whether the applicant has in fact
should understand that such performance breached the obligation to perform, the
must await the sometimes lengthy and costly beneficiary, not the applicant, holds the
determination that the obligor has defaulted. money. Parties that use a standby credit and
In addition, the surety's performance takes courts construing such a credit should
time. understand this allocation of burdens. There
is a tendency in some quarters to overlook
The standby credit has different expectations. this distinction between surety contracts and
He reasonably expects that he will receive standby credits and to reallocate burdens by
cash in the event of nonperformance, that he permitting the obligor or the issuer to litigate
will receive it promptly, and that he will the performance question before payment to
receive it before any litigation with the obligor the beneficiary. 42
(the applicant) over the nature of the
applicant's performance takes place. The While it is the bank which is bound to honor the credit, it is the
standby credit has this opposite effect of the beneficiary who has the right to ask the bank to honor the
credit by allowing him to draw thereon. The situation itself
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emasculates petitioner's posture that LHC cannot invoke the provided that Liquidated Damages for Delay
independence principle and highlights its puerility, more so in payable by the Contractor shall in the
this case where the banks concerned were impleaded as aggregate not exceed 20% of the Contract
parties by petitioner itself. Price. The Contractor shall pay Liquidated
Damages for Delay for each day of the delay
Respondent banks had squarely raised the independence on the following day without need of demand
principle to justify their releases of the amounts due under the from the Employer.
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 8.7.2 The Employer may, without prejudice to
to honor the call for payment. 43 any other method of recovery, deduct the
amount of such damages from any monies
Furthermore, LHC has a right rooted in the Contract to call on due, or to become due to the Contractor
the Securities. The relevant provisions of the Contract read, and/or by drawing on the Security." 45
thus:
A contract once perfected, binds the parties not only to the
4.2.1. In order to secure the performance of fulfillment of what has been expressly stipulated but also to all
its obligations under this Contract, the the consequences which according to their nature, may be in
Contractor at its cost shall on the keeping with good faith, usage, and law. 46 A careful perusal
Commencement Date provide security to the of the Turnkey Contract reveals the intention of the parties to
Employer in the form of two irrevocable and make the Securities answerable for the liquidated damages
confirmed standby letters of credit (the occasioned by any delay on the part of petitioner. The call
"Securities"), each in the amount of upon the Securities, while not an exclusive remedy on the part
US$8,988,907, issued and confirmed by of LHC, is certainly an alternative recourse available to it upon
banks or financial institutions acceptable to the happening of the contingency for which the Securities have
the Employer. Each of the Securities must be been proffered. Thus, even without the use of the
in form and substance acceptable to the "independence principle," the Turnkey Contract itself bestows
Employer and may be provided on an upon LHC the right to call on the Securities in the event of
annually renewable basis. 44 default.
8.7.1 If the Contractor fails to comply with Next, petitioner invokes the "fraud exception" principle. It avers
Clause 8.2, the Contractor shall pay to the that LHC's call on the Securities is wrongful because it
Employer by way of liquidated damages fraudulently misrepresented to ANZ Bank and SBC that there
("Liquidated Damages for Delay") the amount is already a breach in the Turnkey Contract knowing fully well
of US$75,000 for each and every day or part that this is yet to be determined by the arbitral tribunals. It
of a day that shall elapse between the Target asserts that the "fraud exception" exists when the beneficiary,
Completion Date and the Completion Date, for the purpose of drawing on the credit, fraudulently presents
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to the confirming bank, documents that contain, expressly or is not granted or the recovery of damages would be seriously
by implication, material representations of fact that to his damaged. 49
knowledge are untrue. In such a situation, petitioner insists,
injunction is recognized as a remedy available to it. ICTHDE In its complaint for injunction before the trial court, petitioner
alleged that it is entitled to a total extension of two hundred
Citing Dolan's treatise on letters of credit, petitioner argues fifty-three (253) days which would move the target completion
that the independence principle is not without limits and it is date. It argued that if its claims for extension would be found
important to fashion those limits in light of the principle's meritorious by the ICC, then LHC would not be entitled to any
purpose, which is to serve the commercial function of the liquidated damages. 50
credit. If it does not serve those functions, application of the
principle is not warranted, and the commonlaw principles of Generally, injunction is a preservative remedy for the
contract should apply. protection of one's substantive right or interest; it is not a
cause of action in itself but merely a provisional remedy, an
It is worthy of note that the propriety of LHC's call on the adjunct to a main suit. The issuance of the writ of preliminary
Securities is largely intertwined with the fact of default which is injunction as an ancillary or preventive remedy to secure the
the self-same issue pending resolution before the arbitral rights of a party in a pending case is entirely within the
tribunals. To be able to declare the call on the Securities discretion of the court taking cognizance of the case, the only
wrongful or fraudulent, it is imperative to resolve, among limitation being that this discretion should be exercised based
others, whether petitioner was in fact guilty of delay in the upon the grounds and in the manner provided by law. 51
performance of its obligation. Unfortunately for petitioner, this
Court is not called upon to rule upon the issue of default — Before a writ of preliminary injunction may be issued, there
such issue having been submitted by the parties to the must be a clear showing by the complaint that there exists a
jurisdiction of the arbitral tribunals pursuant to the terms right to be protected and that the acts against which the writ is
embodied in their agreement. 47 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
Would injunction then be the proper remedy to restrain the material and substantial, that the right of complainant is clear
alleged wrongful draws on the Securities? and unmistakable and that there is an urgent and paramount
necessity for the writ to prevent serious damage. 53 Moreover,
Most writers agree that fraud is an exception to the an injunctive remedy may only be resorted to when there is a
independence principle. Professor Dolan opines that the pressing necessity to avoid injurious consequences which
untruthfulness of a certificate accompanying a demand for cannot be remedied under any standard compensation. 54
payment under a standby credit may qualify as fraud sufficient
to support an injunction against payment. 48 The remedy for In the instant case, petitioner failed to show that it has a clear
fraudulent abuse is an injunction. However, injunction should and unmistakable right to restrain LHC's call on the Securities
not be granted unless: (a) there is clear proof of fraud; (b) the which would justify the issuance of preliminary injunction. By
fraud constitutes fraudulent abuse of the independent purpose petitioner's own admission, the right of LHC to call on the
of the letter of credit and not only fraud under the main Securities was contractually rooted and subject to the express
agreement; and (c) irreparable injury might follow if injunction stipulations in the Turnkey Contract. 55 Indeed, the Turnkey
135

Contract is plain and unequivocal in that it conferred upon LHC disputes between them. Petitioner should not be allowed in
the right to draw upon the Securities in case of default, as this instance to bring into play the fraud exception rule to
provided in Clause 4.2.5, in relation to Clause 8.7.2, thus: sustain its claim for the issuance of an injunctive relief.
Matters, theories or arguments not brought out in the
4.2.5 The Employer shall give the Contractor proceedings below will ordinarily not be considered by a
seven days' notice of calling upon any of the reviewing court as they cannot be raised for the first time on
Securities, stating the nature of the default for appeal. 59 The lower courts could thus not be faulted for not
which the claim on any of the Securities is to applying the fraud exception rule not only because the
be made, provided that no notice will be existence of fraud was fundamentally interwoven with the
required if the Employer calls upon any of the issue of default still pending before the arbitral tribunals, but
Securities for the payment of Liquidated more so, because petitioner never raised it as an issue in its
Damages for Delay or for failure by the pleadings filed in the courts below. At any rate, petitioner
Contractor to renew or extend the Securities utterly failed to show that it had a clear and unmistakable right
within 14 days of their expiration in to prevent LHC's call upon the Securities.
accordance with Clause 4.2.2. 56
Of course, prudence should have impelled LHC to await
8.7.2 The Employer may, without prejudice to resolution of the pending issues before the arbitral tribunals
any other method of recovery, deduct the prior to taking action to enforce the Securities. But, as earlier
amount of such damages from any monies stated, the Turnkey Contract did not require LHC to do so and,
due, or to become due, to the Contractor therefore, it was merely enforcing its rights in accordance with
and/or by drawing on the Security. 57 the tenor thereof. Obligations arising from contracts have the
The pendency of the arbitration proceedings would not per force of law between the contracting parties and should be
se make LHC's draws on the Securities wrongful or fraudulent complied with in good faith. 60 More importantly, pursuant to
for there was nothing in the Contract which would indicate that the principle of autonomy of contracts embodied in Article
the parties intended that all disputes regarding delay should 1306 of the Civil Code, 61 petitioner could have incorporated
first be settled through arbitration before LHC would be in its Contract with LHC, a proviso that only the final
allowed to call upon the Securities. It is therefore premature determination by the arbitral tribunals that default had occurred
and absurd to conclude that the draws on the Securities were would justify the enforcement of the Securities. However, the
outright fraudulent given the fact that the ICC and CIAC have fact is petitioner did not do so; hence, it would have to live with
not ruled with finality on the existence of default. its inaction.

Nowhere in its complaint before the trial court or in its With respect to the issue of whether the respondent banks
pleadings filed before the appellate court, did petitioner invoke were justified in releasing the amounts due under the
the fraud exception rule as a ground to justify the issuance of Securities, this Court reiterates that pursuant to the
an injunction. 58 What petitioner did assert before the courts independence principle the banks were under no obligation to
below was the fact that LHC's draws on the Securities would determine the veracity of LHC's certification that default has
be premature and without basis in view of the pending occurred. Neither were they bound by petitioner's declaration
136

that LHC's call thereon was wrongful. To repeat, respondent One final point. LHC has charged petitioner of forum-shopping.
banks' undertaking was simply to pay once the required It raised the charge on two occasions. First, in its Counter-
documents are presented by the beneficiary. Manifestation dated 29 June 2004 66LHC alleges that
petitioner presented before this Court the same claim for
At any rate, should petitioner finally prove in the pending money which it has filed in two other proceedings, to wit: ICC
arbitration proceedings that LHC's draws upon the Securities Case No. 11264/TE/MW and Civil Case No. 04-332 before the
were wrongful due to the non-existence of the fact of default, RTC of Makati. LHC argues that petitioner's acts constitutes
its right to seek indemnification for damages it suffered would forum-shopping which should be punished by the dismissal of
not normally be foreclosed pursuant to general principles of the claim in both forums. Second, in its Comment to
law. Petitioner's Motion for Leave to File Addendum to Petitioner's
Moreover, in a Manifestation, 62 dated 30 March 2001, LHC Memorandum dated 8 October 2004, LHC alleges that by
informed this Court that the subject letters of credit had been maintaining the present appeal and at the same time pursuing
fully drawn. This fact alone would have been sufficient reason Civil Case No. 04-332 — wherein petitioner pressed for
to dismiss the instant petition. HAICTD 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
Settled is the rule that injunction would not lie where the acts apparently opted not to respond to the charge.
sought to be enjoined have already become fait accompli or an Forum-shopping is a very serious charge. It exists when a
accomplished or consummated act. 63 In Ticzon v. Video Post party repetitively avails of several judicial remedies in different
Manila, Inc. 64 this Court ruled that where the period within courts, simultaneously or successively, all substantially
which the former employees were prohibited from engaging in founded on the same transactions and the same essential
or working for an enterprise that competed with their former facts and circumstances, and all raising substantially the same
employer — the very purpose of the preliminary injunction — issues either pending in, or already resolved adversely, by
has expired, any declaration upholding the propriety of the writ some other court. 67 It may also consist in the act of a party
would be entirely useless as there would be no actual case or against whom an adverse judgment has been rendered in one
controversy between the parties insofar as the preliminary forum, of seeking another and possibly favorable opinion in
injunction is concerned. another forum other than by appeal or special civil action
In the instant case, the consummation of the act sought to be of certiorari, or the institution of two or more actions or
restrained had rendered the instant petition moot — for any proceedings grounded on the same cause on the supposition
declaration by this Court as to propriety or impropriety of the that one or the other court might look with favor upon the other
non-issuance of injunctive relief could have no practical effect party. 68 To determine whether a party violated the rule
on the existing controversy. 65 The other issues raised by against forum-shopping, the test applied is whether the
petitioner particularly with respect to its right to recover the elements of litis pendentia are present or whether a final
amounts wrongfully drawn on the Securities, according to it, judgment in one case will amount to res judicata in
could properly be threshed out in a separate proceeding. another. 69 Forum-shopping constitutes improper conduct and
137

may be punished with summary dismissal of the multiple


petitions and direct contempt of court. 70
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 definitive 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 fifteen (15) days from notice.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ .,
concur.

||| (Transfield Philippines, Inc. v. Luzon Hydro Corp., G.R. No.


146717, [November 22, 2004], 485 PHIL 699-731)
138

THIRD DIVISION production of a bill of exchange to a drawee for acceptance.


Contrary to both courts' pronouncements, Philippine Rayon
[G.R. No. 74886. December 8, 1992.] 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
PRUDENTIAL BANK, petitioner, vs. INTERM upon which commercial letters of credit are founded because
EDIATE APPELLATE COURT, PHILIPPINE in such a case, both the beneficiary and the issuer, Nissho
RAYON MILLS INC. and ANACLETO R. Company Ltd. and the petitioner, respectively, would be
CHI, respondents. 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
SYLLABUS only in the cases expressly provided for in Section 143 of
the Negotiable Instruments Law (NIL).
1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS;
3. ID.; ID.; ACCEPTANCE OF A BILL, EXPLAINED. — The
LETTER OF CREDIT; CONSTRUED. — A letter of credit is
acceptance of a bill is the signification by the drawee of his
defined as an engagement by a bank or other person made at
assent to the order of the drawer; this may be done in writing
the request of a customer that the issuer will honor drafts or
by the drawee in the bill itself, or in a separate instrument.
other demands for payment upon compliance with the
conditions specified in the credit. Through a letter of credit, the 4. ID.; TRUST RECEIPTS LAW (P.D. 115), TRUST RECEIPT
bank merely substitutes its own promise to pay for the promise TRANSACTION, DEFINED. — Under P.D. No. 115, otherwise
to pay of one of its customers who in return promises to pay known as the Trust Receipts Law, which took effect on 29
the bank the amount of funds mentioned in the letter of credit January 1973, a trust receipt transaction is defined as "any
plus credit or commitment fees mutually agreed upon. transaction by and between a person referred to in this Decree
as the entruster, and another person referred to in this Decree
2. ID.; ID.; ID.; PRESENTMENT FOR ACCEPTANCE, NOT
as the entrustee, whereby the entruster, who owns or holds
NECESSARY IN CASE AT BAR. — The transaction in the
absolute title or security interests over certain specified goods,
case at bar stemmed from Philippine Rayon's application for a
documents or instruments, releases the same to the
commercial letter of credit with the petitioner in the amount of
possession of the entrustee upon the latter's execution and
$128,548.78 to cover the former's contract to purchase and
delivery to the entruster of a signed document called the trust
import loom and textile machinery from Nissho Company, Ltd.
receipt wherein the entrustee binds himself to hold the
of Japan under a five-year deferred payment plan. Petitioner
designated goods, documents or instruments in trust for the
approved the application. The drawee was necessarily the
entruster and to sell or otherwise dispose of the goods,
herein petitioner. It was to the latter that the drafts were
documents or instruments with the obligation to turn over to
presented for payment. There was no need for acceptance as
the entruster the proceeds thereof to the extent of the amount
the issued drafts are sight drafts. They are, pursuant to
owing to the entruster or as appears in the trust receipt or the
Section 7 of the Negotiable Instruments Law (NIL), payable on
goods, instruments themselves if they are unsold or not
demand. Presentment for acceptance is defined as the
139

otherwise disposed of, in accordance with the terms and prejudice to the civil liabilities arising from the criminal
conditions specified in the trust receipt, or for other purposes offense."
substantially equivalent to any one of the following: . . ."
7. CIVIL LAW; CONTRACTS; GUARANTY; VALIDITY
5. ID.; ID.; VIOLATIONS THEREOF; PENDENCY OF THEREOF. — The attestation by witnesses and the
CRIMINAL ACTION, NOT A LEGAL OBSTACLE TO A acknowledgment before a notary public are not required by
SEPARATE CIVIL ACTION. — Although petitioner law to make a party liable on the instrument. The rule is that
commenced a criminal action for the violation of the Trust contracts shall be obligatory in whatever form they may have
Receipts Law, no legal obstacle prevented it from enforcing been entered into, provided all the essential requisites for their
the civil liability arising out of the trust receipt in a separate civil validity are present; however, when the law requires that a
action. Under Section 13 of the Trust Receipts Law, the failure contract be in some form in order that it may be valid or
of an entrustee to turn over the proceeds of the sale of goods, enforceable, or that it be proved in a certain way, that
documents or instruments covered by a trust receipt to the requirement is absolute and indispensable. With respect to a
extent of the amount owing to the entruster or as appears in guaranty, which is a promise to answer for the debt or default
the trust receipt or to return said goods, documents or of another, the law merely requires that it, or some note or
instruments if they were not sold or disposed of in accordance memorandum thereof, be in writing. Otherwise, it would be
with the terms of the trust receipt shall constitute the crime of unenforceable unless ratified. While the acknowledgment of a
estafa, punishable under the provisions of Article 315, surety before a notary public is required to make the same a
paragraph 1(b) of the Revised Penal Code. Under Article 33 of public document, under Article 1358 of the Civil Code, a
the Civil Code, a civil action for damages, entirely separate contract of guaranty does not have to appear in a public
and distinct from the criminal action, may be brought by the document.
injured party in cases of defamation, fraud and physical
injuries. Estafa falls under fraud. 8. ID.; ID.; ID.; DEFENSE OF EXCUSSION; NOT A
CONDITION SINE QUA NON FOR THE INSTITUTION OF
6. ID.; ID.; ID.; PENALTY WHEN VIOLATION COMMITTED ACTION AGAINST GUARANTOR. — Under Article 2058 of
BY JURIDICAL ENTITIES. — A close examination of Sec. 13 the Civil Code, the defense of exhaustion (excussion) may be
of P.D. No. 115 reveals that the penalty referred to therein raised by a guarantor before he may be held liable for the
which shall be imposed upon the directors, officers, employees obligation. However, excussion is not a condition sine qua non
or other officials or persons of the corporation, partnership, for the institution of an action against the guarantor. In
association or other judicial utility is imprisonment, the duration Southern Motors, Inc. vs. Barbosa (99 Phil. 263, 268 [1956]),
of which would depend on the amount of the fraud as provided this Court stated: "4. Although an ordinary personal guarantor
for in Article 315 of the Revised Penal Code. The reason for — not a mortgagor or pledgor — may demand the
this is obvious: corporations, partnerships, associations and aforementioned exhaustion, the creditor may, prior thereto,
other juridical entities cannot be put in jail. However, it is these secure a judgment against said guarantor, who shall be
entities which are made liable for the civil liability arising from entitled, however, to a deferment of the execution of said
the criminal offense. This is the import of the clause "without judgment against him until after the properties of the principal
140

debtor shall have been exhausted to satisfy the obligation considered, he can be held liable for the sum of P10,000.00 as
involved in the case." attorney's fees in favor of the petitioner.
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 DECISION
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
DAVIDE, JR., J p:
the affixing of his signature thereon. It is, therefore, a contract
of adhesion; as such, it must be strictly construed against the Petitioner seeks to review and set aside the decision 1 of
party responsible for its preparation. public respondent Intermediate Appellate Court (now Court of
10. REMEDIAL LAW; CIVIL PROCEDURE; PERMISSIVE Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which
JOINDER OF PARTIES; RATIONALE. — There was then affirmed in toto the 15 June 1978 decision of Branch 9
nothing procedurally objectionable in impleading private (Quezon City) of the then Court of First Instance (now
respondent Chi as a co-defendant in Civil Case No. Q-19312 Regional Trial Court) of Rizal in Civil Case No. Q-19312. The
before the trial court. Section 6, Rule 3 of the Rules latter involved an action instituted by the petitioner for the
of Court on permissive joinder of parties explicitly allows it. recovery of a sum of money representing the amount paid by it
This is the equity rule relating to multifariousness. It is based to the Nissho Company Ltd. of Japan for textile machinery
on trial convenience and is designed to permit the joinder of imported by the defendant, now private respondent, Philippine
plaintiffs or defendants whenever there is a common question Rayon Mills, Inc. (hereinafter Philippine Rayon), represented
of law or fact. It will save the parties unnecessary work, trouble by co-defendant Anacleto R. Chi.
and expense.
11. CIVIL LAW; CONTRACTS; GUARANTY; GUARANTOR; The facts which gave rise to the instant controversy are
LIABILITY IN CASE AT BAR. — Chi's liability is limited to the summarized by the public respondent as follows:
principal obligation in the trust receipt plus all the accessories
thereof including judicial costs; with respect to the latter, he "On August 8, 1962, defendant-appellant
shall only be liable for those costs incurred after being Philippine Rayon Mills, Inc. entered into a
judicially required to pay. Interest and damages, being contract with Nissho Co., Ltd. of Japan for the
accessories of the principal obligation, should also be paid; importation of textile machineries under a five-
these, however, shall run only from the date of the filing of the year deferred payment plan (Exhibit B,
complaint. Attorney's fees may even be allowed in appropriate Plaintiff's Folder of Exhibits, p. 2). To effect
cases. In the instant case, the attorney's fees to be paid by Chi payment for said machineries, the defendant-
cannot be the same as that to be paid by Philippine Rayon appellant applied for a commercial letter of
since it is only the trust receipt that is covered by the guaranty credit with the Prudential Bank and Trust
and not the full extent of the latter's liability. All things Company in favor of Nissho. By virtue of said
141

application, thePrudential Bank opened Letter its factory site at 69 Obudan Street, Quezon
of Credit No. DPP-63762 for $128,548.78 City.
(Exhibit A, Ibid., p. 1). Against this letter of
credit, drafts, were drawn and issued by Sometime in 1967, the defendant-appellant
Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, ceased business operation (sic). On
66 to 76), which were all paid by December 29, 1969, defendant-appellant's
the Prudential Bank through its correspondent factory was leased by Yupangco Cotton Mills
in Japan, the Bank of Tokyo, Ltd. As indicated for an annual rental of P300,000.00 (Exhibit
on their faces, two of these drafts (Exhibits X I, Ibid., p. 22). The lease was renewed on
and X-1, Ibid., pp. 65-66) were accepted by January 3, 1973 (Exhibit J, Ibid., p. 26). On
the defendant-appellant through its president, January 5, 1974, all the textile machineries in
Anacleto R. Chi, while the others were not the defendant-appellant's factory were sold to
(Exhibits X-2 to X-11, Ibid., pp. 66 to 76). AIC Development Corporation for
P300,000.00 (Exhibit K, Ibid., p. 29)
Upon the arrival of the machineries,
the Prudential Bank indorsed the shipping The obligation of the defendant-appellant
documents to the defendant-appellant which arising from the letter of credit and the trust
accepted delivery of the same. To enable the receipt remained unpaid and unliquidated.
defendant-appellant to take delivery of the Repeated formal demands (Exhibits U, V, and
machineries, it executed, by prior W, Ibid., pp. 62, 63, 64) for the payment of the
arrangement with the Prudential Bank, a trust said trust receipt yielded no result. Hence, the
receipt which was signed by Anacleto R. Chi present action for the collection of the
in his capacity as President (sic) of principal amount of P956,384.95 was filed on
defendant-appellant company (Exhibit October 3, 1974 against the defendant-
C, Ibid., p. 13). appellant and Anacleto R. Chi. In their
respective answers, the defendants
At the back of the trust receipt is a printed interposed identical special defenses, viz., the
form to be accomplished by two sureties who, complaint states no cause of action; if there
by the very terms and conditions thereof, is, the same has prescribed; and the plaintiff
were to be jointly and severally liable to is guilty of laches." 2
the Prudential Bank should the defendant-
appellant fail to pay the total amount or any On 15 June 1978, the trial court rendered its decision the
portion of the drafts issued by Nissho and dispositive portion of which reads:
paid for by Prudential Bank. The defendant- "WHEREFORE, judgment is hereby rendered
appellant was able to take delivery of the sentencing the defendant Philippine Rayon
textile machineries and installed the same at Mills, Inc. to pay plaintiff the sum of
P153,645.22, the amounts due under Exhibits
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"X" & "X-1", with interest at 6% per annum assumption that Chi is a simple guarantor, Articles 2059, 2060
beginning September 15, 1974 until fully and 2062 of the Civil Code and the related evidence and
paid. LLphil jurisprudence which provide that such liability had already
attached; (f) contravening the judicial admissions of Philippine
Insofar as the amounts involved in drafts Rayon with respect to its liability to pay the petitioner the
Exhs. "X" (sic) to "X-11", inclusive, the same amounts involved in the drafts (Exhibits "X", "X-1" to "X-11");
not having been accepted by defendant and (g) interpreting "sight" drafts as requiring acceptance by
Philippine Rayon Mills, Inc., plaintiff's cause of Philippine Rayon before the latter could be held liable
action thereon has not accrued, hence, the thereon. 4
instant case is premature.
In its decision, public respondent sustained the trial court in all
Insofar as defendant Anacleto R. Chi is respects. As to the first and last assigned errors, it rules that
concerned, the case is dismissed. Plaintiff is the provision on unjust enrichment, Article 2142 of the Civil
ordered to pay defendant Anacleto R. Chi the Code, applies only if there is no express contract between the
sum of P20,000.00 as attorney's fees. parties and there is a clear showing that the payment is
With costs against defendant Philippine justified. In the instant case, the relationship existing between
Rayon Mills, Inc. the petitioner and Philippine Rayon is governed by specific
contracts, namely the application for letters of credit, the
SO ORDERED." 3 promissory note, the drafts and the trust receipt. With respect
Petitioner appealed the decision to the to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had
then Intermediate Appellate Court. In urging the said court to not been presented to and were not accepted by Philippine
reverse or modify the decision, petitioner alleged in its Brief Rayon, petitioner was not justified in unilaterally paying the
that the trial court erred in (a) disregarding its right to amounts stated therein. The public respondent did not agree
reimbursement from the private respondents for the entire with the petitioner's claim that the drafts were sight
unpaid balance of the imported machines, the total amount of drafts which did not require presentment for acceptance to
which was paid to the Nissho Company Ltd., thereby violating Philippine Rayon because paragraph 8 of the trust receipt
the principle of the third party payor's right to reimbursement presupposes prior acceptance of the drafts. Since the ten (10)
provided for in the second paragraph of Article 1236 of the drafts were not presented and accepted, no valid demand for
Civil Code and under the rule against unjust enrichment; (b) payment can be made. LLphil
refusing to hold Anacleto R. Chi, as the responsible officer of Public respondent also disagreed with the petitioner's
defendant corporation, liable under Section 13 of P.D. No contention that private respondent Chi is solidarily liable with
115 for the entire unpaid balance of the imported machines Philippine Rayon pursuant to Section 13 of P.D. No. 115 and
covered by the bank's trust receipt (Exhibit "C"); (c) finding that based on his signature on the solidary guaranty clause at the
the solidary guaranty clause signed by Anacleto R. Chi is not a dorsal side of the trust receipt. As to the first contention, the
guaranty at all; (d) controverting the judicial admissions of public respondent ruled that the civil liability provided for in
Anacleto R. Chi that he is at least a simple guarantor of the said Section 13 attaches only after conviction. As to the
said trust receipt obligation; (e) contravening, based on the
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second, it expressed misgivings as to whether Chi's signature III. WHETHER OR NOT ON THE BASIS OF
on the trust receipt made the latter automatically liable thereon THE JUDICIAL ADMISSIONS OF
because the so-called solidary guaranty clause at the dorsal RESPONDENT CHI HE IS LIABLE
portion of the trust receipt is to be signed not by one (1) THEREON AND TO WHAT EXTENT;
person alone, but by two (2) persons; the last sentence of the
same is incomplete and unsigned by witnesses; and it is not IV. WHETHER OR NOT RESPONDENT CHI
acknowledged before a notary public. Besides, even granting IS MERELY A SIMPLE GUARANTOR; AND
that it was executed and acknowledged before a notary public, IF SO, HAS HIS LIABILITY AS SUCH
Chi cannot be held liable therefor because the records fail to ALREADY ATTACHED;
show that petitioner had either exhausted the properties of V. WHETHER OR NOT AS THE
Philippine Rayon or had resorted to all legal remedies as SIGNATORY AND RESPONSIBLE OFFICER
required in Article 2058 of the Civil Code. As provided for OF RESPONDENT PHIL. RAYON
under Articles 2052 and 2054 of the Civil Code, the obligation RESPONDENT CHI IS PERSONALLY
of a guarantor is merely accessory and subsidiary, LIABLE PURSUANT TO THE PROVISION
respectively. Chi's liability would therefore arise only when the OF SECTION 13, P.D. 115;
principal debtor fails to comply with his obligation. 5
VI. WHETHER OR NOT RESPONDENT
Its motion to reconsider the decision having been denied by PHIL. RAYON IS LIABLE TO THE
the public respondent in its Resolution of 11 June PETITIONER UNDER THE TRUST RECEIPT
1986, 6 petitioner filed the instant petition on 31 July 1986 (EXH. C);
submitting the following legal issues:
VII. WHETHER OR NOT ON THE BASIS OF
"I. WHETHER OR NOT THE THE JUDICIAL ADMISSIONS
RESPONDENT APPELLATE COURT GRIEV RESPONDENT PHIL. RAYON IS LIABLE TO
OUSLY ERRED IN DENYING PETITIONER'S THE PETITIONER UNDER THE DRAFTS
CLAIM FOR FULL REIMBURSEMENT (EXHS. X, X-1 TO X-11) AND TO WHAT
AGAINST THE PRIVATE RESPONDENTS EXTENT;
FOR THE PAYMENT PETITIONER MADE
TO NISSHO CO. LTD. FOR THE BENEFIT VIII. WHETHER OR NOT SIGHT DRAFTS
OF PRIVATE RESPONDENT UNDER ART. REQUIRE PRIOR ACCEPTANCE FROM
1283 OF THE NEW CIVIL CODE OF THE RESPONDENT PHIL. RAYON BEFORE THE
PHILIPPINES AND UNDER THE GENERAL LATTER BECOMES LIABLE TO
PRINCIPLE AGAINST UNJUST PETITIONER." 7
ENRICHMENT; In the Resolution of 12 March 1990, 8 this Court gave due
II. WHETHER OR NOT RESPONDENT CHI course to the petition after the filing of the Comment thereto by
IS SOLIDARILY LIABLE UNDER THE private respondent Anacleto Chi and of the Reply to the latter
TRUST RECEIPT (EXH. C); by the petitioner; both parties were also required to submit
144

their respective memoranda which they subsequently of Japan under a five-year deferred payment plan. Petitioner
complied with. approved the application. As correctly ruled by the trial court in
its Order of 6 March 1975: 9
As We see it, the issues may be reduced as
follows: ". . . By virtue of said Application and
Agreement for Commercial Letter of Credit,
plaintiff bank 10 was under obligation to pay
1. Whether presentment for acceptance of the through its correspondent bank in Japan the
drafts was indispensable to make Philippine drafts that Nisso (sic) Company, Ltd.,
Rayon liable thereon; periodically drew against said letter of credit
from 1963 to 1968, pursuant to plaintiff's
2. Whether Philippine Rayon is liable on the contract with the defendant Philippine Rayon
basis of the trust receipt; Mills, Inc. In turn, defendant Philippine Rayon
3. Whether private respondent Chi is jointly Mills, Inc., was obligated to pay plaintiff bank
and severally liable with Philippine Rayon for the amounts of the drafts drawn by Nisso (sic)
the obligation sought to be enforced and if Company, Ltd. against said plaintiff bank
not, whether he may be considered a together with any accruing commercial
guarantor; in the latter situation, whether the charges, interest, etc. pursuant to the terms
case should have been dismissed on the and conditions stipulated in the Application
ground of lack of cause of action as there was and Agreement of Commercial Letter of Credit
no prior exhaustion of Philippine Rayon's Annex "A"."
properties. cdrep A letter of credit is defined as an engagement by a bank or
Both the trial court and the public respondent ruled that other person made at the request of a customer that the issuer
Philippine Rayon could be held liable for the two (2) drafts, will honor drafts or other demands for payment upon
Exhibits "X" and "X-1", because only these appear to have compliance with the conditions specified in the
been accepted by the latter after due presentment. The liability credit. 11 Through a letter of credit, the bank merely
for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" substitutes its own promise to pay for the promise to pay of
inclusive) did not arise because the same were not presented one of its customers who in return promises to pay the bank
for acceptance. In short, both courts concluded that the amount of funds mentioned in the letter of credit plus credit
acceptance of the drafts by Philippine Rayon was or commitment fees mutually agreed upon. 12 In the instant
indispensable to make the latter liable thereon. We are unable case then, the drawee was necessarily the herein petitioner. It
to agree with this proposition. The transaction in the case at was to the latter that the drafts were presented for payment. In
bar stemmed from Philippine Rayon's application for a fact, there was no need for acceptance as the issued drafts
commercial letter of credit with the petitioner in the amount of are sight drafts. Presentment for acceptance is necessary only
$128,548.78 to cover the former's contract to purchase and in the cases expressly provided for in Section 143 of
import loom and textile machinery from Nissho Company, Ltd.
145

the Negotiable Instruments Law (NIL). 13 The said section Philippine Rayon Mills Inc. time within which
reads: to pay the same. The first two drafts (Annexes
C & D, Exh. X & X-1) were duly accepted as
"SECTION 143. When presentment for indicated on their face (sic), and upon such
acceptance must be made. — Presentment acceptance should have been paid forthwith.
for acceptance must be made: These two drafts were not paid and although
(a) Where the bill is payable Philippine Rayon Mills ought to have paid the
after sight, or in any other case, where same, the fact remains that until now they are
presentment for acceptance is still unpaid." 16
necessary in order to fix the maturity Corollarily, they are, pursuant to Section 7 of the NIL, payable
of the instrument; or on demand. Section 7 provides:
(b) Where the bill expressly "SECTION 7. When payable on demand. —
stipulates that it shall be presented for An instrument is payable on demand —
acceptance; or
(a) When so it is expressed to
(c) Where the bill is drawn be payable on demand, or at sight, or
payable elsewhere than at the on presentation; or
residence or place of business of the
drawee. (b) In which no time for
payment is expressed.
In no other case is presentment for
acceptance necessary in order to render any Where an instrument is issued, accepted, or
party to the bill liable." indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
Obviously then, sight drafts do not require presentment for payable on demand." (Emphasis supplied)
acceptance.
Paragraph 8 of the Trust Receipt which reads: "My/our
The acceptance of a bill is the signification by the drawee of liability for payment at maturity of any accepted draft, bill of
his assent to the order of the drawer; 14 this may be done in exchange or indebtedness shall not be extinguished or
writing by the drawee in the bill itself, or in a separate modified" 17 does not, contrary to the holding of the public
instrument. 15 respondent, contemplate prior acceptance by Philippine
The parties herein agree, and the trial court explicitly ruled, Rayon, but by the petitioner. Acceptance, however, was
that the subject drafts are sight drafts. Said the latter: LLpr not even necessary in the first place because the drafts
which were eventually issued were sight drafts. And even if
". . . In the instant case the drafts being at these were not sight drafts, thereby necessitating
sight, they are supposed to be payable upon acceptance, it would be the petitioner — and not Philippine
acceptance unless plaintiff bank has given the Rayon — which had to accept the same for the latter was
146

not the drawee. Presentment for acceptance is defined as documents. It has nothing to do with the
the production of a bill of exchange to a drawee for quality of the merchandise. Disputes as to the
acceptance. 18 The trial courtand the public respondent, merchandise shipped may arise and be
therefore, erred in ruling that presentment for acceptance litigated later between vendor and vendee,
was an indispensable requisite for Philippine Rayon's but they may not impede acceptance of drafts
liability on the drafts to attach. Contrary to both courts' and payment by the issuing bank when the
pronouncements, Philippine Rayon immediately became proper documents are presented."
liable thereon upon petitioner's payment thereof. Such is
the essence of the letter of credit issued by the petitioner. The trial court and the public respondent likewise erred in
A different conclusion would violate the principle upon disregarding the trust receipt and in not holding that Philippine
which commercial letter of credit are founded because in Rayon was liable thereon. In People vs. Yu Chi
such a case, both the beneficiary and the issuer. Nissho Ho, 20 this Court explains the nature of a trust receipt by
Company Ltd. and the petitioner, respectively, would be quoting In re Dunlap Carpet Co., 21 thus:
placed at the mercy of Philippine Rayon even if the latter "By this arrangement a banker advances
had already received the imported machinery and the money to an intending importer, and thereby
petitioner had fully paid for it. The typical setting and lends the aid of capital, of credit, or of
purpose of a letter of credit are described in Hibernia Bank business facilities and agencies abroad, to
and Trust Co. vs. J. Aron & Co., Inc., 19 thus: the enterprise of foreign commerce. Much of
"Commercial letters of credit have come into this trade could hardly be carried on by any
general use in international sales transactions other means, and therefore it is of the first
where much time necessarily elapses importance that the fundamental factor in the
between the sale and the receipt by a transaction, the banker's advance of money
purchaser of the merchandise, during which and credit, should receive the amplest
interval great price changes may occur. protection. Accordingly, in order to secure that
Buyers and sellers struggle for the advantage the banker shall be repaid at the critical point
of position. The seller is desirous of being — that is, when the imported goods finally
paid as surely and as soon as possible, reach the hands of the intended vendee —
realizing that the vendee at a distant point has the banker takes the full title to the goods at
it in his power to reject on trivial grounds the very beginning; he takes it as soon as the
merchandise on arrival, and cause goods are bought and settled for by his
considerable hardship to the shipper. Letters payments or acceptances in the foreign
of credit meet this condition by affording country, and he continues to hold that title as
celerity and certainty of payment. Their his indispensable security until the goods are
purpose is to insure to a seller payment of a sold in the United States and the vendee is
definite amount upon presentation of called upon to pay for them. This security is
documents. The bank deals only with not an ordinary pledge by the importer to the
147

banker, for the importer has never owned the entruster, who owns or holds absolute title or security interests
goods, and moreover he is not able to deliver over certain specified goods, documents or instruments,
the possession; but the security is the releases the same to the possession of the entrustee upon the
complete title vested originally in the bankers, latter's execution and delivery to the entruster of a signed
and this characteristic of the transaction has document called the trust receipt wherein the entrustee binds
again and again been recognized and himself to hold the designated goods, documents or
protected by the Courts. Of course, the title is instruments in trust for the entruster and to sell or otherwise
at bottom a security title, as it has sometimes dispose of the goods, documents or instruments with the
been called, and the banker is always under obligation to turn over to the entruster the proceeds thereof to
the obligation to reconvey; but only after his the extent of the amount owing to the entruster or as appears
advances have been fully repaid and after the in the trust receipt or the goods, instruments themselves if they
importer has fulfilled the other terms of the are unsold or not otherwise disposed of, in accordance with
contract." the terms and conditions specified in the trust receipt, or for
other purposes substantially equivalent to any one of the
As further stated in National Bank vs. Viuda e Hijos de following: . . . ."
Angel Jose, 22 trust receipts:
". . . [I]n a certain manner. . . partake of the It is alleged in the complaint that private respondents "not only
nature of a conditional sale as provided by the have presumably put said machinery to good use and have
Chattel Mortgage Law, that is, the importer profited by its operation and/or disposition but very recent
becomes absolute owner of the imported information that (sic) reached plaintiff bank that defendants
merchandise as soon as he has paid its price. already sold the machinery covered by the trust receipt to
The ownership of the merchandise continues Yupangco Cotton Mills," and that "as trustees of the property
to be vested in the owner thereof or in the covered by the trust receipt, . . . and therefore acting in
person who has advanced payment, until he fiduciary (sic) capacity, defendants have willfully violated their
has been paid in full, or if the merchandise duty to account for the whereabouts of the machinery covered
has already been sold, the proceeds of the by the trust receipt or for the proceeds of any lease; sale or
sale should be turned over to him by the other disposition of the same that they may have made,
importer or by his representative or successor notwithstanding demands therefor; defendants have
in interest." fraudulently misapplied or converted to their own use any
money realized from the lease, sale, and other disposition of
said machinery." 23 While there is no specific prayer for the
delivery to the petitioner by Philippine Rayon of the proceeds
Under P.D. No. 115, otherwise known as the Trust Receipts of the sale of the machinery covered by the trust receipt, such
Law, which took effect on 29 January 1973, a trust receipt relief is covered by the general prayer for "such further and
transaction is defined as "any transaction by and between a other relief as may be just and equitable on the
person referred to in this Decree as the entruster, and another premises." 24 And although it is true that the petitioner
person referred to in this Decree as the entrustee, whereby the commenced a criminal action for the violation of the Trust
148

Receipts Law, no legal obstacle prevented it from enforcing We further agree that
the civil liability arising out of the trust receipt in a separate civil the PRUDENTIAL BANK AND TRUST
action. Under Section 13 of theTrust Receipts Law, the failure COMPANY does not have to take any steps
of an entrustee to turn over the proceeds of the sale of goods, or exhaust its remedy against aforesaid:
documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in before making demand on me/us.
the trust receipt or to return said goods, documents or (Sgd.) Anacleto R. Chi
instruments if they were not sold or disposed of in accordance ANACLETO R. CHI" 26
with the terms of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article 315, Petitioner insists that by virtue of the clear wording of the
paragraph 1(b) of the Revised Penal Code. 25 Under Article statement, specifically the clause ". . . we jointly and severally
33 of the Civil Code, a civil action for damages, entirely agree and undertake . . .," and the concluding sentence on
separate and distinct from the criminal action, may be brought exhaustion, Chi's liability therein is solidary.
by the injured party in cases of defamation, fraud and physical In holding otherwise, the public respondent ratiocinates as
injuries. Estafa falls under fraud. cdll follows:
We also conclude, for the reason hereinafter discussed, and "With respect to the second argument, we
not for that adduced by the public respondent, that private have our misgivings as to whether the mere
respondent Chi's signature in the dorsal portion of the trust signature of defendant-appellee Chi of (sic)
receipt did not bind him solidarily with Philippine Rayon. The the guaranty agreement, Exhibit "C-1", will
statement at the dorsal portion of the said trust receipt, which make it an actionable document. It should be
petitioner describes as a "solidary guaranty clause", reads: noted that Exhibit "C-1" was prepared and
"In consideration of the PRUDENTIAL BANK printed by the plaintiff-appellant. A perusal of
AND TRUST COMPANY complying with the Exhibit "C-1" shows that it was to be signed
foregoing, we jointly and severally agree and and executed by two persons. It was signed
undertake to pay on demand to only by defendant-appellee Chi. Exhibit "C-1"
the PRUDENTIAL BANK AND TRUST was to be witnessed by two persons, but no
COMPANY all sums of money which the one signed in that capacity. The last sentence
said PRUDENTIAL BANK AND TRUST of the guaranty clause is incomplete.
COMPANY may call upon us to pay arising Furthermore, the plaintiff-appellant also failed
out of or pertaining to, and/or in any event to have the purported guarantee clause
connected with the default of and/or non- acknowledged before a notary public. All
fulfillment in any respect of the undertaking of these show that the alleged guaranty
the aforesaid: provision was disregarded and, therefore, not
consummated.
PHILIPPINE RAYON MILLS, INC.
149

But granting arguendo that the guaranty is not divisible as between them, i.e., it can be enforced to its
provision in Exhibit "C-1" was fully executed full extent against any one of them.
and acknowledged still defendant-appellee
Chi cannot be held liable thereunder because Furthermore, any doubt as to the import or true intent of the
the records show that the plaintiff-appellant solidary guaranty clause should be resolved against the
had neither exhausted the property of the petitioner. The trust receipt, together with the questioned
defendant-appellant nor had it resorted to all solidary guaranty clause, is on a form drafted and prepared
legal remedies against the said defendant- solely by the petitioner; Chi's participation therein is limited to
appellant as provided in Article 2058 of the the affixing of his signature thereon. It is, therefore, a contract
Civil Code. The obligation of a guarantor is of adhesion; 28 as such, it must be strictly construed against
merely accessory under Article 2052 of the the party responsible for its preparation. 29
Civil Code and subsidiary under Article 2054 Neither can We agree with the reasoning of the public
of the Civil Code. Therefore, the liability of the respondent that this solidary guaranty clause was effectively
defendant-appellee arises only when the disregarded simply because it was not signed and witnessed
principal debtor fails to comply with his by two (2) persons and acknowledged before a notary public.
obligation." 27 While indeed, the clause ought to have been signed by two (2)
Our own reading of the questioned solidary guaranty clause guarantors, the fact that it was only Chi who signed the same
yields no other conclusion than that the obligation of Chi is did not make his act an idle ceremony or render the clause
only that of a guarantor. This is further bolstered by the last totally meaningless. By his signing, Chi became the sole
sentence which speaks of waiver of exhaustion, which, guarantor. The attestation by witnesses and the
nevertheless, is ineffective in this case because the space acknowledgment before a notary public are not required by
therein for the party whose property may not be exhausted law to make a party liable on the instrument. The rule is that
was not filled up. Under Article 2058 of the Civil Code, the contracts shall be obligatory in whatever form they may have
defense of exhaustion (excussion) may be raised by a been entered into, provided all the essential requisites for their
guarantor before he may be held liable for the obligation. validity are present; however, when the law requires that a
Petitioner likewise admits that the questioned provision is contract be in some form in order that it may be valid or
a solidary guaranty clause, thereby clearly distinguishing it enforceable, or that it be proved in a certain way, that
from a contract of surety. It, however, described the guaranty requirement is absolute and indispensable. 30 With respect to
as solidary between the guarantors; this would have been a guaranty, 31 which is a promise to answer for the debt or
correct if two (2) guarantors had signed it. The clause "we default of another, the law merely requires that it, or some note
jointly and severally agree and undertake" refers to the or memorandum thereof, be in writing. Otherwise, it would be
undertaking of the two (2) parties who are to sign it or to the unenforceable unless ratified. 32 While the acknowledgment of
liability existing between themselves. It does not refer to the a surety before a notary public is required to make the same
undertaking between either one or both of them on the one a public document, under Article 1358 of the Civil Code, a
hand and the petitioner on the other with respect to the liability contract of guaranty does not have to appear in a public
described under the trust receipt. Elsewise stated, their liability document.
150

And now to the other ground relied upon by the petitioner as A close examination of the quoted provision reveals that it is
basis for the solidary liability of Chi, namely the criminal the last sentence which provides for the correct solution. It is
proceedings against the latter for the violation of P.C. No. 115. clear that if the violation or offense is committed by
Petitioner claims that because of the said criminal a corporation, partnership, association or other juridical
proceedings, Chi would be answerable for the civil liability entities, the penalty shall be imposed upon the directors,
arising therefrom pursuant to Section 13 of P.D. No. 115. officers, employees or other officials or persons therein
Public respondent rejected this claim because such civil responsible for the offense. The penalty referred to is
liability presupposes prior conviction as can be gleaned from imprisonment, the duration of which would depend on the
the phrase "without prejudice to the civil liability arising from amount of the fraud as provided for in Article 315 of the
the criminal offense." Both are wrong. The said section reads: 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
"SECTION 13. Penalty Clause. — The failure are made liable for the civil liability arising from the criminal
of an entrustee to turn over the proceeds of offense. This is the import of the clause "without prejudice to
the sale of the goods, documents or the civil liabilities arising from the criminal offense." And, as
instruments covered by a trust receipt to the We stated earlier, since that violation of a trust receipt
extent of the amount owing to the entruster or constitutes fraud under Article 33 of the Civil Code, petitioner
as appears in the trust receipt or to return was acting well within its rights in filing an independent civil
said goods, documents or instruments if they action to enforce the civil liability arising therefrom against
were not sold or disposed of in accordance Philippine Rayon.
with the terms of the trust receipt shall The remaining issue to be resolved concerns the propriety of
constitute the crime of estafa, punishable the dismissal of the case against private respondent Chi. The
under the provisions of Article Three hundred trial court based the dismissal, and the respondent Court its
and fifteen, paragraph one (b) of Act affirmance thereof, on the theory that Chi is not liable on the
Numbered Three thousand eight hundred and trust receipt in any capacity — either as surety or as guarantor
fifteen, as amended, otherwise known as the — because his signature at the dorsal portion thereof was
Revised Penal Code. If the violation or useless; and even if he could be bound by such signature as a
offense is committed by a corporation, simple guarantor, he cannot, pursuant to Article 2058 of the
partnership, association or other juridical Civil Code, be compelled to pay until after petitioner has
entities, the penalty provided for in this exhausted and resorted to all legal remedies against the
Decree shall be imposed upon the directors, principal debtor, Philippine Rayon. The records fail to show
officers, employees or other officials or that petitioner had done so. 33 Reliance is thus placed
persons therein responsible for the offense, on Article 2058 of the Civil Code which provides:
without prejudice to the civil liabilities arising
from the criminal offense." "ARTICLE 2058. The guarantor cannot be
compelled to pay the creditor unless the latter
151

has exhausted all the property of the debtor, orders as may be just to prevent any plaintiff
and has resorted to all the legal remedies or defendant from being embarrassed or put
against the debtor." to expense in connection with any
proceedings in which he may have no
Simply stated, there is as yet no cause of action against interest."
Chi.
We are not persuaded. Excussion is not a condition sine qua This is the equity rule relating to multifariousness. It is based
non for the institution of an action against a guarantor. on trial convenience and is designed to permit the joinder of
In Southern Motors, Inc. vs. Barbosa, 34this Court stated: plaintiffs or defendants whenever there is a common question
of law or fact. It will save the parties unnecessary work, trouble
"4. Although an ordinary personal guarantor and expense. 35
— not a mortgagor or pledgor — may
demand the aforementioned exhaustion, the However, Chi's liability is limited to the principal obligation in
creditor may, prior thereto, secure a judgment the trust receipt plus all the accessories thereof including
against said guarantor, who shall be entitled, judicial costs; with respect to the latter, he shall only be liable
however, to a deferment of the execution of for those costs incurred after being judicially required to
said judgment against him until after the pay. 36 Interest and damages, being accessories of the
properties of the principal debtor shall have principal obligation, should also be paid; these, however, shall
been exhausted to satisfy the obligation run only from the date of the filing of the complaint. Attorney's
involved in the case." fees may even be allowed in appropriate cases. 37

There was then nothing procedurally objectionable in In the instant case, the attorney's fees to be paid by Chi
impleading private respondent Chi as a co-defendant in Civil cannot be the same as that to be paid by Philippine Rayon
Case No. Q-19312 before the trial court. As a matter of since it is only the trust receipt that is covered by the guaranty
fact, Section 6, Rule 3 of the Rules of Court on permissive and not the full extent of the latter's liability. All things
joinder of parties explicitly allows it. It reads: considered, he can be held liable for the sum of P10,000.00 as
attorney's fees in favor of the petitioner.
"SECTION 6. Permissive joinder of parties. —
All persons in whom or against whom any Thus, the trial court committed grave abuse of discretion in
right to relief in respect to or arising out of the dismissing the complaint as against private respondent Chi
same transaction or series of transactions is and condemning petitioner to pay him P20,000 00 as
alleged to exist, whether jointly, severally, or attorney's fees.
in the alternative, may, except as otherwise In the light of the foregoing, it would no longer be necessary to
provided in these rules, join as plaintiffs or be discuss the other issues raised by the petitioner.
joined as defendants in one complaint, where
any gotten of law or fact common to all such WHEREFORE, the instant Petition is hereby GRANTED. The
plaintiffs or to all such defendants may arise appealed Decision of 10 March 1986 of the public respondent
in the action; but the court may make such in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9
152

(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.
||| (Prudential Bank v. Intermediate Appellate Court, G.R. No.
74886, [December 8, 1992], 290-A PHIL 1-24)
153

THIRD DIVISION Customs and Practice for Documentary Credit (U.C.P. for
short) in the letter of credit resulted in the applicability of the
[G.R. No. 94209. April 30, 1991.] said rules in the governance of the relations between the
parties. And even if the U.C.P. was not incorporated in the
letter of credit, we have already ruled in the affirmative as to
FEATI BANK & TRUST COMPANY (now the applicability of the U.C.P. in cases before us. In Bank of
CITYTRUST BANKING P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the
CORPORATION), petitioner, vs. THE observance of the U.C.P. in this jurisdiction is justified by
COURT OF APPEALS, and BERNARDO E. Article 2 of the Code of Commerce. Article 2 of the Code of
VILLALUZ, respondents. Commerce enunciates that in the absence of any particular
provision in the Code of commerce, commercial transactions
shall be governed by the usages and customs generally
Pelaez, Adriano & Gregorio for petitioner. observed. There being no specific provision which governs the
Ezequiel S. Consulta for private respondent. legal complexities arising from transactions involving letters of
credit not only between the banks themselves but also
between banks and seller and/or buyer, the applicability of the
SYLLABUS U.C.P. is undeniable.
3. ID.; ID.; ID.; IRREVOCABLE CREDIT AND CONFIRMED
1. COMMERCIAL LAW; BANKING LAWS; LETTER OF LETTER OF CREDIT, DIFFERENTIATED.— An irrevocable
CREDIT; DOCUMENTS TENDERED MUST STRICTLY credits refers to the duration of the letter of credit. What it
CONFORM TO THE TERMS OF LETTER OF CREDIT. — It is simply means is that the issuing bank may not without the
a settled rule in commercial transactions involving letters of consent of the beneficiary (seller) and the applicant (buyer)
credit that the documents tendered must strictly conform to the revoke his undertaking under the letter. The issuing bank does
terms of the letter of credit. The tender of documents by the not reserve the right to revoke the credit. On the other hand, a
beneficiary (seller) must include all documents required by the confirmed letter of credit pertains to the kind of obligation
letter. A correspondent bank which departs from what has assumed by the correspondent bank. In this case, the
been stipulated under the letter of credit, as when it accepts a correspondent bank gives an absolute assurance of the
faulty tender, acts on its own risks and it may not thereafter be beneficiary that it will undertake the issuing bank's obligation
able to recover from the buyer or the issuing bank, as the case as its own according to the terms and conditions of the credit.
may be, the money thus paid to the beneficiary. Thus the rule (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-
of strict compliance. 83) Hence, the mere fact that a letter of credit is irrevocable
does not necessarily imply that the correspondent bank in
2. ID.; ID.; ID.; UNIFORM CUSTOMS AND PRACTICE FOR
accepting the instructions of the issuing bank has also
DOCUMENTARY CREDIT (U.C.P.); APPLICABILITY
confirmed the letter of credit.
JUSTIFIED BY ARTICLE 2 OF THE CODE OF
COMMERCE. — Moreover, the incorporation of the Uniform
154

4. ID.; ID.; ID.; CLASSIFICATIONS OF CORRESPONDENT therefore that when the petitioner refused to negotiate with the
BANK'S FUNCTIONS. — In commercial transactions involving private respondent, the latter has no cause of action against
letters of credit, the functions assumed by a correspondent the petitioner for the enforcement of his rights under the letter.
bank are classified according to the obligations taken up by it. (See Kronman and Co., Inc. v. Public National Bank of New
The correspondent bank may be called a notifying bank, a York, supra)
negotiating bank, or a confirming bank. In case of a notifying
bank, the correspondent bank assumes no liability except to 6. CIVIL LAW; OBLIGATIONS AND CONTRACT; TRUST;
notify and/or transmit to the beneficiary the existence of the EXPLAINED. — A trust has been defined as the "right,
letter of credit. (Kronman and Co., Inc. v. Public National Bank enforceable solely in equity, to the beneficial enjoyment of
of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import property the legal title to which is vested to another." The
Banking, p. 292, cited in Agbayani, Commercial Laws of the concept of a trust presupposes the existence of a specific
Philippines, Vol. 1, p. 76) A negotiating bank, on the other property which has been conferred upon the person for the
hand, is a correspondent bank which buys or discounts a draft benefit of another. In order therefore for the trust theory of the
under the letter of credit. Its liability is dependent upon the private respondent to be sustained, the petitioner should have
stage of the negotiation. If before negotiation, it has no liability had in its possession a sum of money as specific fund
with respect to the seller but after negotiation, a contractual advanced to it by the issuing bank and to be held in trust by it
relationship will then prevail between the negotiating bank and in favor of the private respondent. This does not obtain in this
the seller. (Scanlon v. First National Bank of Mexico, 162 N.E. case.
567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in 7. ID.; ID.; ID.; A LETTER OF CREDIT DOES NOT CONVEY
Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76) THAT A SUM OF MONEY IS BEING HELD IN TRUST. — The
In the case of a confirming bank, the correspondent bank mere opening of a letter of credit, it is to be noted, does not
assumes a direct obligation to the seller and its liability is a involve a specific appropriation of a sum of money in favor of
primary one as if the correspondent bank itself had issued the the beneficiary. It only signifies that the beneficiary may be
letter of credit. (Shaterian, Export-Import Banking, p. 294, cited able to draw funds upon the letter of credit up to the
in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. designated amount specified in the letter. It does not convey
77) the notion that a particular sum of money has been specifically
5. ID.; ID.; ID.; ID.; NOTIFYING BANK; CASE AT BAR. — In reserved or has been held in trust.
this case, the letter merely provided that the petitioner "forward 8. ID.; ID.; GUARANTY; INCONSISTENT WITH AN
the enclosed original credit to the beneficiary." Considering the IRREVOCABLE CREDIT. — The theory of guarantee relied
aforesaid instruction to the petitioner by the issuing bank, the upon the by the Court of Appeals has to necessarily fail. The
Security Pacific National Bank, it is indubitable that the concept of guarantee vis-a-vis the concept of an irrevocable
petitioner is only a notifying bank and not a confirming bank as credit are inconsistent with each other. In the first place, the
ruled by the courts below. A notifying bank is not privy to the guarantee theory destroys the independence of the bank's
contract of sale between the buyer and the seller, its responsibility from the contract upon which it was opened. In
relationship is only with that of the issuing bank and not with the second place, the nature of both contracts is mutually in
the beneficiary to whom he assumes no liability. It follows conflict with each other. In contracts of guarantee, the
155

guarantor's obligation is merely collateral and it arises only GUTIERREZ, JR., J p:


upon the default of the person primarily liable. On the other
hand, in an irrevocable credit the bank undertakes a primary This is a petition for review seeking the reversal of the decision
obligation. (See National Bank of Eagle Pass, Tex. v. of the Court of Appeals dated June 29, 1990 which affirmed
American National Bank of San Francisco, 282 F. 73 [1922]) the decision of the Regional Trial Court of Rizal dated October
20, 1986 ordering the defendants Christiansen and the
9. ID.; ID.; AGENCY; RELATIONSHIP BETWEEN ISSUING petitioner, to pay various sums to respondent Villaluz, jointly
BANK AND NOTIFYING BANK IS SIMILAR TO AGENCY. — and severally.
The relationship between the issuing bank and the notifying
bank, on the contrary, is more similar to that of an agency and The facts of the case are as follows:
not that of a guarantee. It may be observed that the notifying
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the
bank is merely to follow the instructions of the issuing bank
then defendant Axel Christiansen 2,000 cubic meters of lauan
which is to notify or to transmit the letter of credit to the
logs at $27.00 per cubic meter FOB.
beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It After inspecting the logs, Christiansen issued purchase order
does not undertake any assurance that the issuing bank will No. 76171.
perform what has been mandated to or expected of it. As an
agent of the issuing bank, it has only to follow the instructions On the arrangements made and upon the instructions of the
of the issuing bank and to it alone is it obligated and not to the consignee, Hanmi Trade Development, Ltd., de Santa Ana,
buyer with whom it has no contractual relationship. California, the Security Pacific National Bank of Los Angeles,
California issued Irrevocable Letter of Credit No. IC-46268
10. STATUTORY CONSTRUCTION; CONTROVERSY IS available at sight in favor of Villaluz for the sum of $54,000.00,
DECIDED ON WHAT THE LAW IS; LAW IS ALSO TO the total purchase price of the lauan logs.
GOVERN FUTURE RELATIONS AMONG PEOPLE. — We
are aware of the injustice committed by Christiansen on the
private respondent but we are deciding the controversy on the The letter of credit was mailed to the Feati Bank and Trust
basis of what the law is, for the law is not meant to favor only Company (now Citytrust) with the instruction to the latter that it
those who have been oppressed, the law is to govern future "forward the enclosed letter of credit to the beneficiary."
relations among people as well. Its commitment is to all and (Records, Vol. I, p. 11)
not to a single individual. The faith of the people in our justice
system may be eroded if we are to decide not what the law The letter of credit further provided that the draft to be drawn is
states but what we believe it should declare. Dura lex sed lex. on Security Pacific National Bank and that it be accompanied
by the following documents:
"1. Signed Commercial Invoice in four copies
DECISION showing the number of the purchase order
and certifying that —
156

a. All terms and conditions of and Han Mi Trade Development Company,


the purchase order have been Ltd., Seoul, Korea.
complied with and that all logs are
fresh cut and quality equal to or better 4. Certification from Han-Axel Christiansen,
than that described in H.A. Ship and Merchandise Broker, stating that
Christiansen's telex #201 of May 1, logs have been approved prior to shipment in
1970, and that all logs have been accordance with terms and conditions of
marked "BEV-EX". corresponding purchase Order. (Record, Vol.
1 pp. 11-12)
b. One complete set of
documents, including 1/3 original bills Also incorporated by reference in the letter of credit is the
of lading was airmailed to Consignee Uniform Customs and Practice for Documentary Credits (1962
and Parties to be advised by Hans- Revision).
Axel Christiansen, Ship and The logs were thereafter loaded on the vessel "Zenlin Glory"
Merchandise Broker. cdll which was chartered by Christiansen. Before its loading, the
c. One set of non-negotiable logs were inspected by custom inspectors Nelo Laurente,
documents was airmailed to Han Mi Alejandro Cabiao, Estanislao Edera from the Bureau of
Trade Development Company and Customs (Records, Vol. I, p. 124) and representatives Rogelio
one set to Consignee and Parties to Cantuba and Jesus Tadena of the Bureau of Forestry
be advised by Hans-Axel Christiansen, (Records, Vol. I, pp. 16-17) all of whom certified to the good
Ship and Merchandise Broker. condition and exportability of the logs.

2. Tally sheets in quadruplicate. After the loading of the logs was completed, the Chief Mate,
Shao Shu Wang issued a mate receipt of the cargo which
3. 2/3 Original Clean on Board Ocean Bills of stated the same are in good condition (Records, Vol. I, p. 363).
Lading with Consignee and Parties to be However, Christiansen refused to issue the certification as
advised by Hans Axel Christiansen, showing required in paragraph 4 of the letter of credit, despite several
Freight Prepaid and marked Notify: requests made by the private respondent.
Han Mi Trade Development Company, Ltd., Because of the absence of the certification by Christiansen,
Santa Ana, California. the Feati Bank and Trust Company refused to advance the
payment on the letter of credit.
Letter of Credit No. 46268 dated June 7,
1971. The letter of credit lapsed on June 30, 1971, (extended,
however up to July 31, 1971) without the private respondent
Han Mi Trade Development Company, Ltd., receiving any certification from Christiansen. LLpr
P.O. Box 10480, Santa Ana, California 92711
157

The persistent refusal of Christiansen to issue the certification 1. Christiansen be ordered to issue the
prompted the private respondent to bring the matter before the certification required of him under the Letter
Central Bank. In a memorandum dated August 16, 1971, the of Credit;
Central Bank ruled that:
2. Upon issuance of such certification, or, if
". . . pursuant to the Monetary Board the court should find it unnecessary, FEATI
Resolution No. 1230 dated August 3, 1971, in BANK be ordered to accept negotiation of the
all log exports, the certification of the lumber Letter of Credit and make payment thereon to
inspectors of the Bureau of Forestry . . . shall Villaluz;
be considered final for purposes of
negotiating documents. Any provision in any 3. Order Christiansen to pay damages to the
letter of credit covering log exports requiring plaintiff. (Rollo, p. 39)
certification of buyer's agent or representative On or about 1979, while the case was still pending trial,
that said logs have been approved for Christiansen left the Philippines without informing the Court
shipment as a condition precedent to and his counsel. Hence, Villaluz, filed an amended complaint
negotiation of shipping documents shall not to make the petitioner solidarily liable with Christiansen.
be allowed." (Records, Vol. I, p. 367)
The trial court, in its order dated August 29, 1979, admitted the
Meanwhile, the logs arrived at Inchon, Korea and were amended complaint.
received by the consignee, Hamni Trade Development
Company, to whom Christiansen sold the logs for the amount After trial, the lower court found:
of $37.50 per cubic meter, for a net profit of $10 per cubic "The liability of the defendant
meter. Hanmi Trade Development Company, on the other CHRISTIANSEN is beyond dispute, and the
hand sold the logs to Taisung Lumber Company at Inchon, plaintiff's right to demand payment is
Korea. (Rollo, p. 39) absolute. Defendant CHRISTIANSEN having
Since the demands by the private respondent for Christiansen accepted delivery of the logs by having them
to execute the certification proved futile, Villaluz, on loaded in his chartered vessel the 'Zenlin
September 1, 1971, instituted an action for mandamus and Glory' and shipping them to the consignee,
specific performance against Christiansen and the Feati Bank his buyer Han Mi Trade in Inchon, South
and Trust Company (now Citytrust) before the then Court of Korea (Art. 1585, Civil Code), his obligation to
First Instance of Rizal. The petitioner was impleaded as pay the purchase order had clearly arisen and
defendant before the lower court only to afford complete relief the plaintiff may sue and recover the price of
should the court a quo order Christiansen to execute the the goods (Art. 1595, id). prLL
required certification. "The Court believes that the defendant
The complaint prayed for the following: CHRISTIANSEN acted in bad faith and deceit
and with intent to defraud the plaintiff,
158

reflected in and aggravated by, not only his negotiating bank for and in behalf of the
refusal to issue the certification that would issuing bank, it in effect accepted a trust
have enabled without question the plaintiff to reposed on it, and became a trustee in
negotiate the letter of credit, but his accusing relation to plaintiff as the beneficiary of the
the plaintiff in his answer of fraud, letter of credit. As trustee, it was then duty
intimidation, violence and deceit. These bound to protect the interests of the plaintiff
accusations said defendant did not attempt to under the terms of the letter of credit, and
prove, as in fact he left the country without must be held liable for damage and loss
ever notifying his own lawyer. It was to the resulting to the plaintiff from its failure to
Court's mind a pure swindle. perform that obligation.
"The defendant Feati Bank and Trust "Furthermore, when the defendant BANK
Company, on the other hand, must be held assumed the role of a notifying and
liable together with his (sic) co-defendant for negotiating BANK it in effect represented to
having, by its wrongful act, i.e., its refusal to the plaintiff that, if the plaintiff complied with
negotiate the letter of credit in the absence of the terms and conditions of the letter of credit
CHRISTIANSEN's certification (in spite of the and presents the same to the BANK together
Central Bank's ruling that the requirement with the documents mentioned therein the
was illegal), prevented payment to the said BANK will pay the plaintiff the amount of
plaintiff. The said letter of credit, as may be the letter of credit. The Court is convinced
seen on its face, is irrevocable and that it was upon the strength of this letter of
the issuing bank, the Security Pacific National credit and this implied representation of the
Bank in Los Angeles, California, undertook by defendant BANK that the plaintiff delivered
its terms that the same shall be honored upon the logs to defendant CHRISTIANSEN,
its presentment. On the other hand, the considering that the issuing bank is a foreign
notifying bank, the defendant Feati Bank and bank with whom plaintiff had no business
Trust Company, by accepting the instructions connections and CHRISTIANSEN had not
from the issuing bank, itself assumed the very offered any other Security for the payment of
same undertaking as the issuing bank under the logs. Defendant BANK cannot now be
the terms of the letter of credit. allowed to deny its commitment and liability
under the letter of credit: Cdpr
xxx xxx xxx
"The Court likewise agrees with the plaintiff 'A holder of a promissory note
that the defendant BANK may also be held given because of gambling who
liable under the principles and laws on both indorses the same to an innocent
trust and estoppel. When the defendant holder for value and who assures said
BANK accepted its role as the notifying and party that the note has no legal defect,
159

is in estoppel from asserting that there plaintiff in connection with the logs
had been an illegal consideration for shipment in question;
the note, and so, he has to pay its
value.' (Rodriguez v. Martinez, 5 Phil. "c) P10,000.00 as temperate
67).' damages (for trips made to Bacolod
and Korea).
"The defendant BANK, in insisting upon the
certification of defendant CHRISTIANSEN as "All three foregoing sums shall be with
a condition precedent to negotiating the letter interest thereon at 12% per annum from
of credit, likewise in the Court's opinion acted September 1, 1971, when the complaint was
in bad faith, not only because of the clear filed, until fully paid:
declaration of the Central Bank that such a "d) P70,000.00 as moral
requirement was illegal, but because the damages;
BANK with all the legal counsel available to it,
must have known that the condition was void "e) P30,000.00 as exemplary
since it depended on the sole will of the damages; and
debtor, the defendant CHRISTIANSEN. (Art. "f) P30,000.00 as attorney's
1182, Civil Code)" (Rollo, pp. 29-31) fees and litigation expense." (Rollo, p.
On the basis of the foregoing the trial court on October 20, 28)
1986, ruled in favor of the private respondent. The dispositive The petitioner received a copy of the decision on November 3,
portion of its decision reads: 1986. Two days thereafter, or on November 5, 1986, it filed a
'WHEREFORE, judgment is hereby rendered notice of appeal.
for the plaintiff, ordering the defendants to pay On November 10, 1986, the private respondent filed a motion
the plaintiff, jointly and severally, the following for the immediate execution of the judgment on the ground
sums: that the appeal of the petitioner was frivolous and dilatory.
"a) $54,000.00 (US), or its The trial court ordered the immediate execution of its judgment
peso equivalent at the prevailing rate upon the private respondent's filing of a bond.
as of the time payment is actually
made, representing the purchase price The petitioner then filed a motion for reconsideration and a
of the logs; motion to suspend the implementation of the writ of execution.
Both motions were, however, denied. Thus, petitioner filed
before the Court of Appeals a petition for certiorari and
"b) P17,340.00, representing prohibition with preliminary injunction to enjoin the immediate
government fees and charges paid by execution of the judgment. LibLex
160

The Court of Appeals in a decision dated April 9, 1987 granted 157). Feati Bank did notify Villaluz of such
the petition and nullified the order of execution, the dispositive letter of credit. In fact, as such negotiating
portion of the decision states: bank, even before the letter of credit was
presented for payment, Feati Bank had
"WHEREFORE, the petition for certiorari is already made an advance payment of
granted. Respondent Judge's order of P75,000.00 to Villaluz in anticipation of such
execution dated December 29, 1986, as well presentment. As the negotiating bank, Feati
as his order dated January 14, 1987 denying Bank, by notifying Villaluz of the letter of
the petitioner's urgent motion to suspend the credit in behalf of the issuing bank (Security
writ of execution against its properties are Pacific), confirmed such letter of credit and
hereby annulled and set aside insofar as they made the same also its own obligation. This
are sought to be enforced and implemented ruling finds support in the authority cited by
against the petitioner Feati Bank & Trust Villaluz:
Company, now Citytrust Banking Corporation,
during the pendency of its appeal from the "A confirmed letter of credit is one in which
adverse decision in Civil Case No. 15121. the notifying bank gives its assurance also
However, the execution of the same decision that the opening bank's obligation will be
against defendant Axel Christiansen who did performed. In such a case, the notifying bank
not appeal said decision may proceed will not simply transmit but will confirm the
unimpeded. The Sheriff's levy on the opening bank's obligation by making it also its
petitioner's properties, and the notice of sale own undertaking, or commitment, or guaranty
dated January 13, 1987 (Annex M), are or obligation." (Ward & Harfield, 28-29, cited
hereby annulled and set aside. (Rollo, p. 44) in Agbayani, Commercial Laws, 1978 edition,
p. 77). LLphil
A motion for reconsideration was thereafter filed by the private
respondent. The Court of Appeals, in a resolution dated June Feati Bank argues further that it would be
29, 1987 denied the motion for reconsideration. considered as the negotiating bank only upon
negotiation of the letter of credit. This stance
In the meantime, the appeal filed by the petitioner before the is untenable. Assurance, commitments or
Court of Appeals was given due course. In its decision dated guaranties supposed to be made by notifying
June 29, 1990, the Court of Appeals affirmed the decision of banks to the beneficiary of a letter of credit,
the lower court dated October 20, 1986 and ruled that: as defined above, can be relevant or
1. Feati Bank admitted in the "special and meaningful only with respect to a future
negative defenses" section of its answer that transaction, that is, negotiation. Hence, even
it was the bank to negotiate the letter of credit before actual negotiation, the notifying bank,
issued by the Security Pacific National Bank by the mere act of notifying the beneficiary of
of Los Angeles, California. (Record, pp. 156,
161

the letter of credit, assumes as of that Bank which had directly dealt with Villaluz,
moment the obligation of the issuing bank. Feati Bank may be sued properly on specific
performance as a procedural means by which
2. Since Feati Bank acted as guarantor of the the relief sought by Villaluz may be
issuing bank and in effect also of the latter's entertained. (Rollo, pp. 32-33)
principal or client, i.e. Hans Axel-Christiansen.
(sic) Such being the case, when Christiansen The dispositive portion of the decision of the Court of Appeals
refused to issue the certification, it was as reads:
though refusal was made by Feati Bank Itself
Feati Bank should have taken steps to secure WHEREFORE, the decision appealed from is
the certification from Christiansen; and, if the affirmed; and accordingly, the appeal is
latter should still refuse to comply, to hale him hereby dismissed. Costs against the
to court. In short, Feati Bank should have petitioner. (Rollo. p. 33)
honored Villaluz's demand for payment of his Hence, this petition for review.
logs by virtue of the irrevocable letter of credit
issued in Villaluz's favor and guaranteed by The petitioner interposes the following reasons for the
Feati Bank. allowance of the petition.

3. The decision promulgated by this Court in First Reason


CA-G.R. Sp No. 11051, which contained the THE RESPONDENT COURT
statement "Since Villaluz' draft was not drawn ERRONEOUSLY CONCLUDED FROM THE
strictly in compliance with the terms of the ESTABLISHED FACTS AND INDEED, WENT
letter of credit, Feati Bank's refusal to AGAINST THE EVIDENCE AND DECISION
negotiate it was justified," did not dispose of OF THIS HONORABLE COURT, THAT
this question on the merits. In that case, the PETITIONER BANK IS LIABLE ON THE
question involved was jurisdiction or LETTER OF CREDIT DESPITE PRIVATE
discretion, and not judgment. The quoted RESPONDENT'S NON-COMPLIANCE WITH
pronouncement should not be taken as a THE TERMS THEREOF.
preemptive judgment on the merits of the
present case on appeal. Second Reason
4. The original action was for "mandamus THE RESPONDENT COURT COMMITTED
and/ or specific performance." Feati Bank AN ERROR OF LAW WHEN IT HELD THAT
may not be a party to the transaction between PETITIONER BANK, BY NOTIFYING
Christiansen and Security Pacific National PRIVATE RESPONDENT OF THE LETTER
Bank on the one hand, and Villaluz on the OF CREDIT, CONFIRMED SUCH CREDIT
other hand; still, being guarantor or agent of AND MADE THE SAME ALSO ITS
Christiansen and or Security Pacific National
162

OBLIGATION AS GUARANTOR OF THE followed as stated in the letter. There is no


ISSUING BANK. discretion in the bank or trust company to
waive any requirements. The terms of the
Third Reason letter constitutes an agreement between the
THE RESPONDENT COURT LIKEWISE purchaser and the bank." (p. 743)
COMMITTED AN ERROR OF LAW WHEN IT Although in some American decisions, banks are granted a
AFFIRMED THE TRIAL COURT'S little discretion to accept a faulty tender as when the other
DECISION. (Rollo, p. 12) documents may be considered immaterial or superfluous, this
The principal issue in this case is whether or not a theory could lead to dangerous precedents. Since a bank
correspondent bank is to be held liable under the letter of deals only with documents, it is not in a position to determine
credit despite non-compliance by the beneficiary with the whether or not the documents required by the letter of credit
terms thereof? llcd are material or superfluous. The mere fact that the document
was specified therein readily means that the document is of
The petition is impressed with merit. vital importance to the buyer.
It is a settled rule in commercial transactions involving letters Moreover, the incorporation of the Uniform Customs and
of credit that the documents tendered must strictly conform to Practice for Documentary Credit (U.C.P. for short) in the letter
the terms of the letter of credit. The tender of documents by of credit resulted in the applicability of the said rules in the
the beneficiary (seller) must include all documents required by governance of the relations between the parties.
the letter. A correspondent bank which departs from what has
been stipulated under the letter of credit, as when it accepts a And even if the U.C.P. was not incorporated in the letter of
faulty tender, acts on its own risks and it may not thereafter be credit, we have already ruled in the affirmative as to the
able to recover from the buyer or the issuing bank, as the case applicability of the U.C.P. in cases before us.
may be, the money thus paid to the beneficiary. Thus the rule In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we
of strict compliance. pronounced that the observance of the U.C.P. in this
In the United States, commercial transactions involving letters jurisdiction is justified by Article 2 of the Code of
of credit are governed by the rule of strict compliance. In the Commerce. Article 2 of the Code of Commerce enunciates
Philippines, the same holds true. The same rule must also be that in the absence of any particular provision in the Code of
followed. Commerce, commercial transactions shall be governed by the
usages and customs generally observed.
The case of Anglo-South American Trust Co. v. Uhe et al. (184
N.E. 741 [1933]) expounded clearly on the rule of strict There being no specific provision which governs the legal
compliance. complexities arising from transactions involving letters of credit
not only between the banks themselves but also between
"We have heretofore held that these letters of banks and seller and or buyer, the applicability of the U.C.P. is
credit are to be strictly complied with, which undeniable. LibLex
documents, and shipping documents must be
163

binds the party giving the authorization to take


up documents and reimburse the bank which
The pertinent provisions of the U.C.P. (1962 Revision) are: has effected the payment, acceptance or
Article 3. negotiation." (Emphasis Supplied)

"An irrevocable credit is a definite undertaking Under the foregoing provisions of the U.C.P., the bank may
on the part of the issuing bank and constitutes only negotiate, accept or pay, if the documents tendered to it
the engagement of that bank to the are on their face in accordance with the terms and conditions
beneficiary and bona fide holders of drafts of the documentary credit. And since a correspondent bank,
drawn and or documents presented like the petitioner, principally deals only with documents, the
thereunder, that the provisions for payment, absence of any document required in the documentary credit
acceptance or negotiation contained in the justifies the refusal by the correspondent bank to negotiate,
credit will be duly fulfilled, provided that all the accept or pay the beneficiary, as it is not its obligation to look
terms and conditions of the credit are beyond the documents. It merely has to rely on the
complied with. completeness of the documents tendered by the beneficiary.

"An irrevocable credit may be advised to a In regard to the ruling of the lower court and affirmed by the
beneficiary through another bank (the Court of Appeals that the petitioner is not a notifying bank but
advising bank) without engagement on the a confirming bank, we find the same erroneous.
part of that bank, but when an issuing bank The trial court wrongly mixed up the meaning of an irrevocable
authorizes or requests another bank to credit with that of a confirmed credit. In its decision, the trial
confirm its irrevocable credit and the latter court ruled that the petitioner, in accepting the obligation to
does so, such confirmation constitutes a notify the respondent that the irrevocable credit has been
definite undertaking of the confirming bank . . transmitted to the petitioner on behalf of the private
." respondent, has confirmed the letter.
Article 7. The trial court appears to have overlooked the fact that an
"Banks must examine all documents with irrevocable credit is not synonymous with a confirmed credit.
reasonable care to ascertain that they appear These types of letters have different meanings and the legal
on their face to be in accordance with the relations arising from there varies. A credit may be an
terms and conditions of the credit." irrevocable credit and at the same time a confirmed credit or
vice-versa. cdphil
Article 8.
An irrevocable credit refers to the duration of the letter of
"Payment, acceptance or negotiation against credit. What is simply means is that the issuing bank may not
documents which appear on their face to be without the consent of the beneficiary (seller) and the applicant
in accordance with the terms and conditions (buyer) revoke his undertaking under the letter. The issuing
of a credit by a bank authorized to do so, bank does not reserve the right to revoke the credit. On the
164

other hand, a confirmed letter of credit pertains to the kind of In the case of a confirming bank, the correspondent bank
obligation assumed by the correspondent bank. In this case, assumes a direct obligation to the seller and its liability is a
the correspondent bank gives an absolute assurance to the primary one as if the correspondent bank itself had issued the
beneficiary that it will undertake the issuing bank's obligation letter of credit. (Shaterian, Export-Import Banking, p. 294, cited
as its own according to the terms and conditions of the credit. in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
(Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-
83) In this case, the letter merely provided that the petitioner
"forward the enclosed original credit to the beneficiary."
Hence, the mere fact that a letter of credit is irrevocable does (Records, Vol. I, p. 11) Considering the aforesaid instruction to
not necessarily imply that the correspondent bank in accepting the petitioner by the issuing bank, the Security Pacific National
the instructions of the issuing bank has also confirmed the Bank, it is indubitable that the petitioner is only a notifying
letter of credit. Another error which the lower court and the bank and not a confirming bank as ruled by the courts
Court of Appeals made was to confuse the obligation assumed below. cdphil
by the petitioner.
If the petitioner was a confirming bank, then a categorical
In commercial transactions involving letters of credit, the declaration should have been stated in the letter of credit that
functions assumed by a correspondent bank are classified the petitioner is to honor all drafts drawn in conformity with the
according to the obligations taken up by it. The correspondent letter of credit. What was simply stated therein was the
bank may be called a notifying bank, a negotiating bank, or a instruction that the petitioner forward the original letter of credit
confirming bank. to the beneficiary.
In case of a notifying bank, the correspondent bank assumes Since the petitioner was only a notifying bank, its responsibility
no liability except to notify and or transmit to the beneficiary was solely to notify and or transmit the documentary of credit
the existence of the letter of credit. (Kronman and Co., Inc. v. to the private respondent and its obligation ends there.
Public National Bank of New York, 218 N.Y.S. 616 [1926];
Shaterian, Export-Import Banking, p. 292, cited in Agbayani, The notifying bank may suggest to the seller its willingness to
Commercial Laws of the Philippines, Vol. 1, p. 76) A negotiate, but this fact alone does not imply that the notifying
negotiating bank, on the other hand, is a correspondent bank bank promises to accept the draft drawn under the
which buys or discounts a draft under the letter of credit. Its documentary credit.
liability is dependent upon the stage of the negotiation. If A notifying bank is not a privy to the contract of sale between
before negotiation, it has no liability with respect to the seller the buyer and the seller, its relationship is only with that of the
but after negotiation, a contractual relationship will then prevail issuing bank and not with the beneficiary to whom he assumes
between the negotiating bank and the seller. (Scanlon v. First no liability. It follows therefore that when the petitioner refused
National Bank of Mexico, 162 N.E. 667 [1928]; Shaterian, to negotiate with the private respondent, the latter has no
Export-Import Banking, p. 293, cited in Agbayani, Commercial cause of action against the petitioner for the enforcement of
Laws of the Philippines, Vol. 1, p. 76) his rights under the letter. (See Kronman and Co., Inc. v.
Public National Bank of New York, supra)
165

In order that the petitioner may be held liable under the letter, which the latter granted. From these circumstances, a logical
there should be proof that the petitioner confirmed the letter of conclusion that can be gathered is that the letter of credit was
credit. merely to serve as a collateral.
The records are, however, bereft of any evidence which will At the most, when the petitioner extended the loan to the
disclose that the petitioner has confirmed the letter of credit private respondent, it assumed the character of a negotiating
The only evidence in this case, and upon which the private bank. Even then, the petitioner will still not be liable, for a
respondent premised his argument, is the P75,000.00 loan negotiating bank before negotiation has no contractual
extended by the petitioner to him. relationship with the seller.
The private respondent relies on this loan to advance his The case of Scanlon v. First National Bank
contention that the letter of credit was confirmed by the (supra) perspicuously explained the relationship between the
petitioner. He claims that the loan was granted by the seller and the negotiating bank, viz:
petitioner to him, "in anticipation of the presentment of the
letter of credit." "It may buy or refuse to buy as it chooses.
Equally, it must be true that it owes no
The proposition advanced by the private respondent has no contractual duty toward the person for whose
basis in fact or law. That the loan agreement between them be benefit the letter is written to discount or
construed as an act of confirmation is rather far-fetched, for it purchase any draft drawn against the credit.
depends principally on speculative reasoning. No relationship of agent and principal, or of
trustee and cestui, between the receiving
As earlier stated, there must have been an absolute assurance bank and the beneficiary of the letter is
on the part of the petitioner that it will undertake the issuing established." (P. 568)
bank's obligation as its own. Verily, the loan agreement it
entered into cannot be categorized as an emphatic assurance Whether therefore the petitioner is a notifying bank or a
that it will carry out the issuing bank's obligation as its own. negotiating bank, it cannot be held liable. Absent any definitive
proof that it has confirmed the letter of credit or has actually
The loan agreement is more reasonably classified as an negotiated with the private respondent, the refusal by the
isolated transaction independent of the documentary credit. petitioner to accept the tender of the private respondent is
Of course, it may be presumed that the petitioner loaned the justified.
money to the private respondent in anticipation that it would In regard to the finding that the petitioner became a "trustee in
later be paid by the latter upon the receipt of the letter. Yet, we relation to the plaintiff (private respondent) as the beneficiary
would have no basis to rule definitively that such "act" should of the letter of credit," the same has no legal basis.
be construed as an act of confirmation.
The private respondent no doubt was in need of money in
loading the logs on the ship "Zenlin Glory" and the only way to
satisfy this need was to borrow money from the petitioner
166

A trust has been defined as the "right, enforceable solely in We also find erroneous the statement of the Court of Appeals
equity, to the beneficial enjoyment of property the legal title to that the petitioner "acted as a guarantor of the issuing bank
which is vested to another." (89 C.J.S. 712) and in effect also of the latter's principal or client, i.e., Hans
Axel Christiansen."
The concept of a trust presupposes the existence of a specific
property which has been conferred upon the person for the It is a fundamental rule that an irrevocable credit is
benefit of another. In order therefore for the trust theory of the independent not only of the contract between the buyer and
private respondent to be sustained, the petitioner should have the seller but also of the credit agreement between the issuing
had in its possession a sum of money as specific fund bank and the buyer. (See Kingdom of Sweden v. New York
advanced to it by the issuing bank and to be held in trust by it Trust Co., 96 N.Y.S. 2d 779 [1949]) The relationship between
in favor of the private respondent. This does not obtain in this the buyer (Christiansen) and the issuing bank (Security Pacific
case. LibLex National Bank) is entirely independent from the letter of credit
issued by the latter.
The mere opening of a letter of credit, it is to be noted, does
not involve a specific appropriation of a sum of money in favor The contract between the two has no bearing as to the
of the beneficiary. It only signifies that the beneficiary may be noncompliance by the buyer with the agreement between the
able to draw funds upon the letter of credit up to the latter and the seller. Their contract is similar to that of a
designated amount specified in the letter. It does not convey contract of services (to open the letter of credit) and not that of
the notion that a particular sum of money has been specifically agency as was intimated by the Court of Appeals. The
reserved or has been held in trust. unjustified refusal therefore by Christiansen to issue the
certification under the letter of credit should not likewise be
What actually transpires in an irrevocable credit is that the charged to the issuing bank.
correspondent bank does not receive in advance the sum of
money from the buyer or the issuing bank. On the contrary, As a mere notifying bank, not only does the petitioner not have
when the correspondent bank accepts the tender and pays the any contractual relationship with the buyer, it has also nothing
amount stated in the letter, the money that it doles out comes to do with the contract between the issuing bank and the buyer
not from any particular fund that has been advanced by the regarding the issuance of the letter of credit. LibLex
Issuing bank, rather it gets the money from its own funds and
then later seeks reimbursement from the issuing bank. The theory of guarantee relied upon by the Court of Appeals
has to necessarily fail. The concept of guarantee vis-a-vis the
Granting that a trust has been created, still, the petitioner may concept of an irrevocable credit are inconsistent with each
not be considered a trustee. As the petitioner is only a other.
notifying bank, its acceptance of the instructions of the issuing
bank will not create estoppel on its part resulting in the In the first place, the guarantee theory destroys the
acceptance of the trust. Precisely, as a notifying bank, its only independence of the bank's responsibility from the contract
obligation is to notify the private respondent of the existence of upon which it was opened. In the second place, the nature of
the letter of credit. How then can such create estoppel when both contracts is mutually in conflict with each other. In
that is its only duty under the law? contracts of guarantee, the guarantor's obligation is merely
collateral and it arises only upon the default of the person
167

primarily liable. On the other hand, in an irrevocable credit the documents. Thus, whether or not the buyer has performed his
bank undertakes a primary obligation. (See National Bank of responsibility towards the seller is not the bank's problem.
Eagle Pass, Tex v. American National Bank of San Francisco,
282 F. 73 [1922]) We are aware of the injustice committed by Christiansen on
the private respondent but we are deciding the controversy on
The relationship between the issuing bank and the notifying the basis of what the law is, for the law is not meant to favor
bank, on the contrary, is more similar to that of an agency and only those who have been oppressed, the law is to govern
not that of a guarantee. It may be observed that the notifying future relations among people as well. Its commitment is to all
bank is merely to follow the instructions of the issuing bank and not to a single individual. The faith of the people in our
which is to notify or to transmit the letter of credit to the justice system may be eroded if we are to decide not what the
beneficiary. (See Kronman v. Public National Bank of New law states but what we believe it should declare. Dura lex sed
York, supra). Its commitment is only to notify the beneficiary. It lex. llcd
does not undertake any assurance that the issuing bank will
perform what has been mandated to or expected of it. As an Considering the foregoing, the materiality of ruling upon the
agent of the issuing bank, it has only to follow the instructions validity of the certificate of approval required of the private
of the issuing bank and to it alone is it obligated and not to respondent to submit under the letter of credit, has become
buyer with whom it has no contractual relationship. insignificant.

In fact the notifying bank, even if the seller tenders all the In any event, we affirm the earlier ruling of the Court of
documents required under the letter of credit, may refuse to Appeals dated April 9, 1987 in regard to the petition before it
negotiate or accept the drafts drawn thereunder and it will still for certiorari and prohibition with preliminary injunction, to wit:
not be held liable for its only engagement is to notify and or "There is no merit in the respondent's
transmit to the seller the letter of credit. contention that the certification required in
Finally, even if we assume that the petitioner is a confirming condition No. 4 of the letter of credit was
bank, the petitioner cannot be forced to pay the amount under "patently illegal." At the time the letter of credit
the letter. As we have previously explained, there was a failure was issued there was no Central Bank
on the part of the private respondent to comply with the terms regulation prohibiting such a condition in the
of the letter of credit. letter of credit. The letter of credit (Exh. C)
was issued on June 7, 1971, more than two
The failure by him to submit the certification was fatal to his months before the issuance of the Central
case. The U.C.P. which is incorporated in the letter of credit Bank Memorandum on August 16, 1971
ordains that the bank may only pay the amount specified disallowing such a condition in a letter of
under the letter if all the documents tendered are on their face credit. In fact the letter of credit had already
in compliance with the credit. It is not tasked with the duty of expired on July 30, 1971 when the Central
ascertaining the reason or reasons why certain documents Bank memorandum was issued. In any event,
have not been submitted, as it is only concerned with the it is difficult to see how such a condition could
be categorized as illegal or unreasonable
168

since all that plaintiff Villaluz, as seller of the


logs, could and should have done was to
refuse to load the logs on the vessel "Zenlin
Glory", unless Christiansen first issued the
required certification that the logs had been
approved by him to be in accordance with the
terms and conditions of his purchase order.
Apparently, Villaluz was in too much haste to
ship his logs without taking all due
precautions to assure that all the terms and
conditions of the letter of credit had been
strictly complied with, so that there would be
no hitch in its negotiation." (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the
petition and hereby NULLIFIES and SETS ASIDE the decision
of the Court of Appeals dated June 29, 1990. The amended
complaint in Civil Case No. 15121 is DISMISSED.
SO ORDERED.
Feliciano, Bidin and Davide, Jr., JJ., concur.
Fernan, C.J., took no part.

||| (Feati Bank & Trust Co. v. Court of Appeals, G.R. No.
94209, [April 30, 1991], 273 PHIL 832-855)
169

FIRST DIVISION with what was loaded aboard the ship, appellants cannot shift
the burden of loss to the bank arising from the violation by
[G.R. No. L-24821. October 16, 1970.] 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
BANK OF THE PHILIPPINE which the Philippines is a signatory nation provides that, "in
ISLANDS, plaintiff-appellee, vs. DE RENY documentary credit operations, all parties concerned deal in
FABRIC INDUSTRIES, INC., AURORA T. documents and not in goods. Payment, negotiation or
TUYO and AURORA acceptance against documents in accordance with the terms
CARCERENYalias AURORA C. and conditions of a credit by a Bank authorized to do so binds
GONZALES, defendants-appellants. the party giving the authorization to-take up the documents
and reimburse the Bank making the payment, negotiation or
acceptance."
Aviado & Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.
DECISION
SYLLABUS

CASTRO, J.:
1. COMMERCIAL LAW; LETTERS OF CREDIT; TERMS OF
COMMERCIAL LETTER OF CREDIT AGREEMENTS,
This is an appeal from the decision of the Court of First
BINDING. — Where appellants agreed, under the terms of the
Instance of Manila ordering the defendants-appellants to pay
Commercial Letter of Credit Agreements, that the Bank shall
to the Bank of the Philippine Islands (hereinafter referred to as
not be responsible for the existence, character, quality,
the Bank), jointly and severally, the value of the credit it
quantity, conditions, packing, value or delivery of the property
extended to them in several letters of credit which the Bank
purporting to be represented by the documents; nor, for any
opened at the behest of the defendants-appellants to finance
difference in character, quality, quantity, condition, or value of
their importation of dyestuffs from the United States, which
the property from that expressed in documents, or for partial or
however turned out to be mere colored chalk upon arrival and
incomplete shipment, etc., said appellants have no recourse
inspection thereof at the port of Manila.
but to comply with the covenant.
The record shows that on four (4) different occasions in 1961,
2. ID.; ID.; CUSTOMS AND USAGES IN INTERNATIONAL
the De Reny Fabric Industries, Inc., a Philippine corporation
BANKING AND FINANCIAL CIRCLES. — Where it is proven
through its co-defendants-appellants, Aurora
as a fact that a custom exists to the effect that a bank is not
Carcereny, alias Aurora C. Gonzales, and Aurora T. Tuyo,
duty bound to verify whether what has been described in the
president and secretary, respectively of the corporation,
letters of credit or drafts or shipping documents actually tallies
applied to the Bank for four (4) irrevocable commercial letters
170

of credit to cover the purchase by the corporation of goods therein, respectively, if accompanied, upon presentation, by a
described in the covering L/C applications as "dyestuffs of full set of negotiable clean "on board" ocean bills of lading,
various colors" from its American supplier, the J.B. Distributing covering the merchandise appearing in the L/Cs, that is,
Company. All the applications of the corporation were dyestuffs of various colors. Consequently, the J.B. Distributing
approved, and the corresponding Commercial L/C Agreements Company drew upon, presented to and negotiated with these
were executed pursuant to banking procedures. Under these banks, its sight drafts covering the amounts of the
agreements, the aforementioned officers of the corporation merchandise ostensibly being exported by it, together with
bound themselves personally as joint and solidary debtors with clean bills of lading, and collected the full value of the drafts up
the corporation. Pursuant to banking regulations then in force, to the amounts appearing in the L/Cs as above indicated.
the corporation delivered to the Bank peso marginal deposits These correspondent banks then debited the account of the
as each letter of credit was opened. Bank of the Philippine Islands with them up to the full value of
the drafts presented by the J.B. Distributing Company, plus
The dates and amounts of the L/Cs applied for and approved commission thereon, and, thereafter, endorsed and forwarded
as well as the peso marginal deposits made were, all documents to the Bank of the Philippine Islands.
respectively, as follows:
In the meantime, as each shipment (covered by the
Date Application Amount abovementioned letters of credit) arrived in the Philippines, the
Marginal De Reny Fabric Industries, Inc. made partial payments to the
& L/C No Deposit Bank amounting, in the aggregate, to P90,000. Further
Oct. 10, 1961 61/1413 payments were, however, subsequently discontinued by the
$57,658.38 P 43,407.33 corporation when it became established, as a result of a
chemical test conducted by the National Science Development
Oct. 23, 1961 61/1483 Board, that the goods that arrived in Manila were colored
$25,867.34 19,473.64 chalks instead of dyestuffs.
Oct. 30, 1961 61/1495 The corporation also refused to take possession of these
$19,408.39 14,610.88 goods, and for this reason, the Bank caused them to be
Nov. 10, 1961 61/1564 deposited with a bonded warehouse paying therefor the
$26,687.64 20,090.90 amount of P12,609.64 up to the filing of its complaint with the
TOTAL $129,621.75 P97,582.75 court below on December 10, 1962.

By virtue of the foregoing transactions, the Bank issued On October 24, 1963 the lower court rendered its decision
irrevocable commercial letters of credit addressed to its ordering the corporation and its co-defendants (the herein
correspondent banks in the United States, with uniform appellants) to pay to the plaintiff-appellee the amount of
instructions for them to notify the beneficiary thereof, the J.B. P291,807.46, with interest thereon, as provided for in the L/C
Distributing Company, that they have been authorized to Agreements, at the rate of 7% per annum from October 31,
negotiate the latter's sight drafts up to the amounts mentioned 1962 until fully paid, plus costs.
171

It is the submission of the defendants-appellants that it was shipped to the importer, but deal only with documents. The
the duty of the foreign correspondent banks of the Bank of the Bank introduced in evidence a provision contained in the
Philippine Islands to take the necessary precaution to insure "Uniform Customs and Practices for Commercial Documentary
that the goods shipped under the covering L/Cs conformed Credits Fixed for the Thirteenth Congress of International
with the item appearing therein, and, that the foregoing banks Chamber of Commerce," to which the Philippines is a
having failed to perform this duty, no claim for recoupment signatory nation. Article 10 thereof provides:
against the defendants-appellants, arising from the losses
incurred for the non-delivery or defective delivery of the "In documentary credit
articles ordered, could accrue. operations, all parties concerned deal in
documents and not in goods.—
We can appreciate the sweep of the appellants' argument, but Payment, negotiation or acceptance
we also find that it is nestled hopelessly inside a salient where against documents in accordance with
the valid contract between the parties and the internationally the terms and conditions of a credit by a
accepted customs of the banking trade must prevail. 1 Bank authorized to do so binds the party
giving the authorization to take up the
Under the terms of their Commercial Letter of Credit documents and reimburse the Bank
Agreements with the Bank, the appellants agreed that the making the payment, negotiation or
Bank shall not be responsible for the "existence, character, acceptance."
quality, quantity, conditions, packing, value, or delivery of the
property purporting to be represented by documents; for any The existence of a custom in international banking and
difference in character, quality, quantity, condition, or value of financing circles negating any duty on the part of a bank to
the property from that expressed in documents," or for "partial verify whether what has been described in letters of credits or
or incomplete shipment, or failure or omission to ship any or all drafts or shipping documents actually tallies with what was
of the property referred to in the Credit," as well as "for any loaded aboard ship, having been positively proven as a fact,
deviation from instructions, delay, default or fraud by the the appellants are bound by this established usage. They
shipper or anyone else in connection with the property the were, after all, the ones who tapped the facilities afforded by
shippers or vendors and ourselves [purchasers] or any of us." the Bank in order to engage in international business.
Having agreed to these terms, the appellants have, therefore,
no recourse but to comply with their covenant. 2 ACCORDINGLY, the judgment a quo is affirmed, at
defendants-appellants' cost. This is without prejudice to the
But even without the stipulation recited above, the appellants Bank, in proper proceedings in the court below in this same
cannot shift the burden of loss to the Bank on account of the case, proving and being reimbursed additional expenses, if
violation by their vendor of its prestation. any, it has incurred by virtue of the continued storage of the
goods in question up to the time this decision becomes final
It was uncontrovertibly proven by the Bank during the trial and executory.
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
172

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.
||| (Bank of the Philippine Islands v. De Reny Fabric Industries,
Inc., G.R. No. L-24821, [October 16, 1970], 146 PHIL 269-
275)
173

FIRST DIVISION 3. Prohibiting the petitioner from selling,


encumbering, transferring, or
[G.R. No. 160732. June 21, 2004.] disposing in any manner any of its
properties except in the ordinary
course of business;
METROPOLITAN WATERWORKS AND
SEWERAGE SYSTEM, petitioner, vs. HON. 4. Prohibiting the petitioner from making any
REYNALDO B. DAWAY, in his capacity as payment of its liabilities, outstanding
Presiding Judge of the Regional Trial as at the date of the filing of the
Court of Quezon City, Branch 90 and petition;
MAYNILAD WATER SERVICES, xxx xxx xxx
INC., respondents.
Subsequently, on November 27, 2003, public respondent,
acting on two Urgent Ex Parte motions 2 filed by respondent
Maynilad, issued the herein questioned Order 3 which stated
DECISION that it thereby:
"1. DECLARES that the act of MWSS in
commencing on November 24, 2003 the
AZCUNA, J p: process for the payment by the banks of
US$98 million out of the US$120 million
On November 17, 2003, the Regional Trial Court (RTC) of standby letter of credit so the banks have to
Quezon City, Branch 90, made a determination that the make good such call/drawing of payment of
Petition for Rehabilitation with Prayer for Suspension of US$98 million by MWSS not later than
Actions and Proceedings filed by Maynilad Water Services, November 27, 2003 at 10:00 P.M. or any
Inc. (Maynilad) conformed substantially to the provisions similar act for that matter, is violative of the
of Sec. 2, Rule 4 of the Interim Rules of Procedure on above-quoted sub-paragraph 2.) of the
Corporate Rehabilitation (Interim Rules). It forthwith issued a dispositive portion of this Court's Stay Order
Stay Order 1 which states, in part, that the court was thereby: dated November 17, 2003.
xxx xxx xxx 2. ORDERS MWSS through its
2. Staying enforcement of all claims, whether officers/officials to withdraw under pain of
for money or otherwise and whether contempt the written certification/notice of
such enforcement is by court action or draw to Citicorp International Limited dated
otherwise, against the petitioner, its November 24, 2003 and DECLARES void any
guarantors and sureties not solidarily payment by the banks to MWSS in the event
liable with the petitioner; such written certification/notice of draw is not
withdrawn by MWSS and/or MWSS receives
174

payment by virtue of the aforesaid standby Dollar. Failing to get what it desired, Maynilad issued a Force
letter of credit." Majeure Notice on March 8, 2001 and unilaterally suspended
the payment of the concession fees. In an effort to salvage the
Aggrieved by this Order, petitioner Manila Waterworks & Concession Agreement, the parties entered into a
Sewerage System (MWSS) filed this petition for review by way Memorandum of Agreement (MOA) 7 on June 8, 2001 wherein
of certiorari under Rule 65 of the Rules of Court questioning Maynilad was allowed to recover foreign exchange losses
the legality of said order as having been issued without or in under a formula agreed upon between them. Sometime in
excess of the lower court's jurisdiction or that the court a August 2001 Maynilad again filed another Force Majeure
quo acted with grave abuse of discretion amounting to lack or Notice and, since MWSS could not agree with the terms of
excess of jurisdiction. 4 said Notice, the matter was referred on August 30, 2001 to the
Antecedents of the Case Appeals Panel for arbitration. This resulted in the parties
agreeing to resolve the issues through an amendment of the
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement on October 5, 2001, known as
Concession Agreement a twenty-year period to manage, Amendment No. 1, 8 which was based on the terms set down
operate, repair, decommission and refurbish the existing in MWSS Board of Trustees Resolution No. 457-2001, as
MWSS water delivery and sewerage services in the West amended by MWSS Board of Trustees Resolution No. 487-
Zone Service Area, for which Maynilad undertook to pay the 2001, 9 which provided inter alia for a formula that would allow
corresponding concession fees on the dates agreed upon in Maynilad to recover foreign exchange losses it had incurred or
said agreement 5 which, among other things, consisted of would incur under the terms of the Concession Agreement.
payments of petitioner's mostly foreign loans.
As part of this agreement, Maynilad committed, among other
To secure the concessionaire's performance of its obligations things, to:
under the Concession Agreement, Maynilad was required
under Section 6.9 of said contract to put up a bond, bank a) infuse the amount of UD$80.0 million as
guarantee or other security acceptable to MWSS. additional funding support from its
stockholders;
In compliance with this requirement, Maynilad arranged on
July 14, 2000 for a three-year facility with a number of foreign b) resume payment of the concession fees;
banks, led by Citicorp International Limited, for the issuance of and
an Irrevocable Standby Letter of Credit 6 in the amount of
US$120,000,000 in favor of MWSS for the full and prompt c) mutually seek the dismissal of the cases
performance of Maynilad's obligations to MWSS as pending before the Court of Appeals
aforestated. and with Minor Dispute Appeals Panel.

Sometime in September 2000, respondent Maynilad requested However, on November 5, 2002, Maynilad served upon
MWSS for a mechanism by which it hoped to recover the MWSS a Notice of Event of Termination, claiming that MWSS
losses it had allegedly incurred and would be incurring as a failed to comply with its obligations under the Concession
result of the depreciation of the Philippine Peso against the US Agreement and Amendment No. 1 regarding the adjustment
mechanism that would cover Maynilad's foreign exchange
175

losses. On December 9, 2002, Maynilad filed a Notice of Early THE PRIVATE RESPONDENT
Termination of the concession, which was challenged by MAYNILAD SUBJECT TO
MWSS. This matter was eventually brought before the REHABILITATION.
Appeals Panel on January 7, 2003 by MWSS. 10 On
November 7, 2003, the Appeals Panel ruled that there was no 2. DID THE HONORABLE PRESIDING
Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) JUDGE ACT WITH LACK OR
of the Concession Agreement and that, therefore, Maynilad EXCESS OF JURISDICTION OR
should pay the concession fees that had fallen due. COMMIT A GRAVE ERROR OF LAW
IN HOLDING THAT THE
The award of the Appeals Panel became final on November PERFORMANCE BOND
22, 2003. MWSS, thereafter, submitted a written notice 11 on OBLIGATIONS OF THE BANKS
November 24, 2003, to Citicorp International Limited, as agent WERE NOT SOLIDARY IN NATURE.
for the participating banks, that by virtue of Maynilad's failure
to perform its obligations under the Concession Agreement, it 3. DID THE HONORABLE PRESIDING
was drawing on the Irrevocable Standby Letter of Credit and JUDGE GRAVELY ERR IN
thereby demanded payment in the amount of ALLOWING MAYNILAD TO IN
US$98,923,640.15. EFFECT SEEK A REVIEW OR
APPEAL OF THE FINAL AND
Prior to this, however, Maynilad had filed on November 13, BINDING DECISION OF THE
2003, a petition for rehabilitation before the court a quo which APPEALS PANEL.
resulted in the issuance of the Stay Order of November 17,
2003 and the disputed Order of November 27, 2003. 12 In support of the first issue, petitioner maintains that as a
matter of law, the US$120 Million Standby Letter of Credit and
Petitioner's Case Performance Bond are not property of the estate of the debtor
Petitioner hereby raises the following issues: Maynilad and, therefore, not subject to the in rem rehabilitation
jurisdiction of the trial court.
1. DID THE HONORABLE PRESIDING
JUDGE GRAVELY ERR AND/OR Petitioner argues that a call made on the Standby Letter of
ACT PATENTLY WITHOUT Credit does not involve any asset of Maynilad but only assets
JURISDICTION OR IN EXCESS OF of the banks. Furthermore, a call on the Standby Letter of
JURISDICTION OR WITH GRAVE Credit cannot also be considered a "claim" falling under the
ABUSE OF DISCRETION purview of the stay order as alleged by respondent as it is not
AMOUNTING TO LACK OR EXCESS directed against the assets of respondent Maynilad.
OF JURISDICTION IN Petitioner concludes that the public respondent erred in
CONSIDERING THE declaring and holding that the commencement of the process
PERFORMANCE BOND OR ASSETS for the payment of US$98 million is a violation of the order
OF THE ISSUING BANKS AS PART issued on November 17, 2003.
OR PROPERTY OF THE ESTATE OF
176

Respondent Maynilad's Case We will discuss the first two issues raised by petitioner as
Respondent Maynilad seeks to refute this argument by these are interrelated and make up the main issue of the
alleging that: petition before us which is, did the rehabilitation court sitting as
such, act in excess of its authority or jurisdiction when it
a) the order objected to was strictly and precisely worded and enjoined herein petitioner from seeking the payment of the
issued after carefully considering/evaluating the import of the concession fees from the banks that issued the Irrevocable
arguments and documents referred to by Maynilad, MWSS Standby Letter of Credit in its favor and for the account of
and/or creditors Chinatrust Commercial Bank and Suez in respondent Maynilad?
relation to admissions, pleadings and/or pertinent
records 13 and that public respondent had the authority to The public respondent relied on Sec. 1, Rule 3 of the Interim
issue the same; Rules on Corporate Rehabilitation to support its jurisdiction
over the Irrevocable Standby Letter of Credit and the banks
b) public respondent never considered nor held that the that issued it. The section reads in part "that jurisdiction over
Performance bond or assets of the issuing banks are part or those affected by the proceedings is considered acquired upon
property of the estate of respondent Maynilad subject to the publication of the notice of commencement of proceedings
rehabilitation and which respondent Maynilad has not and has in a newspaper of general circulation" and goes further to
never claimed to be; 14 define rehabilitation as an in remproceeding. This provision is
a logical consequence of the in rem nature of the proceedings,
c) what is relevant is not whether the performance bond or where jurisdiction is acquired by publication and where it is
assets of the issuing banks are part of the estate of necessary that the assets of the debtor come within the court's
respondent Maynilad but whether the act of petitioner in jurisdiction to secure the same for the benefit of creditors. The
commencing the process for the payment by the banks of reference to "all those affected by the proceedings" covers
US$98 million out of the US$120 million performance bond is creditors or such other persons or entities holding assets
covered and/or prohibited under sub-paragraphs 2.) and 4.) of belonging to the debtor under rehabilitation which should be
the stay order dated November 17, 2003; HATICc reflected in its audited financial statements. The banks do not
d) the jurisdiction of public respondent extends not only to the hold any assets of respondent Maynilad that would be material
assets of respondent Maynilad but also over persons and to the rehabilitation proceedings nor is Maynilad liable to the
assets of "all those affected by the proceedings . . . upon banks at this point.
publication of the notice of commencement; 15 " and
Respondent Maynilad's Financial Statement as of December
31, 2001 and 2002 do not show the Irrevocable Standby Letter
of Credit as part of its assets or liabilities, and by respondent
e) the obligations under the Standby Letter of Credit are not Maynilad's own admission it is not. In issuing the clarificatory
solidary and are not exempt from the coverage of the stay order of November 27, 2003, enjoining petitioner from claiming
order. from an asset that did not belong to the debtor and over which
Our Ruling it did not acquire jurisdiction, the rehabilitation court acted in
excess of its jurisdiction.
177

Respondent Maynilad insists, however, that it is Sec. 6(b), irrevocable letter of credit, the bank undertakes a primary
Rule 4 of the Interim Rules that supports its claim that the obligation. We have also defined a letter of credit as an
commencement of the process to draw on the Standby Letter engagement by a bank or other person made at the request of
of Credit is an enforcement of claim prohibited by and under a customer that the issuer shall honor drafts or other demands
the Interim Rules and the order of public respondent. of payment upon compliance with the conditions specified in
the credit. 17
Respondent Maynilad would persuade us that the above
provision justifies a leap to the conclusion that such an Letters of credit were developed for the purpose of insuring to
enforcement is prohibited by said section because it is a "claim a seller payment of a definite amount upon the presentation of
against the debtor, its guarantors and sureties not solidarily documents 18 and is thus a commitment by the issuer that the
liable with the debtor" and that there is nothing in the Standby party in whose favor it is issued and who can collect upon it
Letter of Credit nor in law nor in the nature of the obligation will have his credit against the applicant of the letter, duly paid
that would show or require the obligation of the banks to be in the amount specified in the letter. 19 They are in
solidary with the respondent Maynilad. effect absolute undertakings to pay the money advanced or
the amount for which credit is given on the faith of the
We disagree. instrument. They are primary obligations and not accessory
First, the claim is not one against the debtor but against an contracts and while they are security arrangements, they are
entity that respondent Maynilad has procured to answer for its not converted thereby into contracts of guaranty. 20 What
non-performance of certain terms and conditions of the distinguishes letters of credit from other accessory contracts,
Concession Agreement, particularly the payment of is the engagement of the issuing bank to pay the seller once
concession fees. the draft and other required shipping documents are presented
to it. 21 They are definite undertakings to pay at sight once the
Secondly, Sec. 6(b) of Rule 4 of the Interim Rules does not documents stipulated therein are presented.
enjoin the enforcement of all claims against guarantors and
sureties, but only those claims against guarantors and sureties Letters of Credits have long been and are still governed by the
who are not solidarily liable with the debtor. Respondent provisions of the Uniform Customs and Practice for
Maynilad's claim that the banks are not solidarily liable with the Documentary Credits of the International Chamber of
debtor does not find support in jurisprudence. Commerce. In the 1993 Revision it provides in Art. 2 that "the
expressions Documentary Credit(s) and Standby Letter(s) of
We held in Feati Bank & Trust Company v. Court of Credit mean any arrangement, however made or described,
Appeals 16 that the concept of guarantee vis-à-vis the concept whereby a bank acting at the request and on instructions of a
of an irrevocable letter of credit are inconsistent with each customer or on its own behalf is to make payment against
other. The guarantee theory destroys the independence of the stipulated document(s)" and Art. 9 thereof defines the liability
bank's responsibility from the contract upon which it was of the issuing banks on an irrevocable letter of credit as a
opened and the nature of both contracts is mutually in conflict "definite undertaking of the issuing bank, provided that the
with each other. In contracts of guarantee, the guarantor's stipulated documents are presented to the nominated bank or
obligation is merely collateral and it arises only upon the the issuing bank and the terms and conditions of the Credit are
default of the person primarily liable. On the other hand, in an
178

complied with, to pay at sight if the Credit provides for sight said surety can be sued separately to enforce his liability as
payment." 22 surety for the debts or obligations of the debtor. The debts or
obligations for which a surety may be liable include future
We have accepted, in Feati Bank and Trust Company v. Court debts, an amount which may not be known at the time the
of Appeals 23 and Bank of America NT & SA v. Court of surety is given.
Appeals, 24 to the extent that they are pertinent, the
application in our jurisdiction of the international credit The terms of the Irrevocable Standby Letter of Credit do not
regulatory set of rules known as the Uniform Customs and show that the obligations of the banks are not solidary with
Practice for Documentary Credits (U.C.P) issued by the those of respondent Maynilad. On the contrary, it is issued at
International Chamber of Commerce, which we said in Bank of the request of and for the account of Maynilad Water Services,
the Philippine Islands v. Nery 25 was justified under Art. 2 of Inc., in favor of the Metropolitan Waterworks and Sewerage
the Code of Commerce, which states: System, as a bond for the full and prompt performance of the
obligations by the concessionaire under the Concession
"Acts of commerce, whether those who Agreement 28 and herein petitioner is authorized by the banks
execute them be merchants or not, and to draw on it by the simple act of delivering to the agent a
whether specified in this Code or not should written certification substantially in the form Annex "B" of the
be governed by the provisions contained in it; Letter of Credit. It provides further in Sec. 6, that for as long as
in their absence, by the usages of commerce the Standby Letter of Credit is valid and subsisting, the Banks
generally observed in each place; and in the shall honor any written Certification made by MWSS in
absence of both rules, by those of the civil accordance with Sec. 2, of the Standby Letter of Credit
law." regardless of the date on which the event giving rise to such
The prohibition under Sec. 6(b) of Rule 4 of the Interim Rules Written Certification arose. 29
does not apply to herein petitioner as the prohibition is on the Taking into consideration our own rulings on the nature of
enforcement of claims against guarantors or sureties of the letters of credit and the customs and usage developed over
debtors whose obligations are not solidary with the debtor. The the years in the banking and commercial practice of letters of
participating banks' obligation are solidary with respondent credit, we hold that except when a letter of credit specifically
Maynilad in that it is a primary, direct, definite and an absolute stipulates otherwise, the obligation of the banks issuing letters
undertaking to pay and is not conditioned on the prior of credit are solidary with that of the person or entity
exhaustion of the debtor's assets. These are the same requesting for its issuance, the same being a direct, primary,
characteristics of a surety or solidary obligor. absolute and definite undertaking to pay the beneficiary upon
Being solidary, the claims against them can be pursued the presentation of the set of documents required therein.
separately from and independently of the rehabilitation case, The public respondent, therefore, exceeded his jurisdiction, in
as held in Traders Royal Bank v. Court of Appeals 26 and holding that he was competent to act on the obligation of the
reiterated in Philippine Blooming Mills, Inc. v. Court of banks under the Letter of Credit under the argument that this
Appeals, 27 where we said that property of the surety cannot was not a solidary obligation with that of the debtor. Being a
be taken into custody by the rehabilitation receiver (SEC) and solidary obligation, the letter of credit is excluded from the
179

jurisdiction of the rehabilitation court and therefore in enjoining appellate court." In this situation, it had no other remedy but to
petitioner from proceeding against the Standby Letters of seek recourse to us through this petition for certiorari.
Credit to which it had a clear right under the law and the terms
of said Standby Letter of Credit, public respondent acted in In Silvestre v. Torres and Oben, 33 we said that it is not
excess of his jurisdiction. enough that a remedy is available to prevent a party from
making use of the extraordinary remedy ofcertiorari but that
such remedy be an adequate remedy which is equally
beneficial, speedy and sufficient, not only a remedy which at
Additional Issues some time in the future may offer relief but a remedy which will
We proceed to consider the other issues raised in the oral promptly relieve the petitioner from the injurious acts of the
arguments and included in the parties' memoranda: lower tribunal. It is the inadequacy — not the mere absence —
of all other legal remedies and the danger of failure of justice
1. Respondent Maynilad argues that petitioner had a plain, without the writ, that must usually determine the propriety
speedy and adequate remedy under the Interim Rules itself of certiorari. 34
which provides in Sec. 12, Rule 4 that the court may on motion
or motu proprio, terminate, modify or set conditions for the 2. Respondent Maynilad argues that by commencing the
continuance of the stay order or relieve a claim from coverage process for payment under the Standby Letter of Credit,
thereof. We find, however, that the public respondent had petitioner violated an immediately executory order of the court
already accomplished this during the hearing set for the two and, therefore, comes to Court with unclean hands and should
Urgent Ex Parte motions filed by respondent Maynilad on therefore be denied any relief.
November 21 and 24, 2003, 30 where the parties including the
creditors, Suez and Chinatrust Commercial "presented their It is true that the stay order is immediately executory. It is also
respective arguments." 31 The public respondent then ruled, true, however, that the Standby Letter of Credit and the banks
"after carefully considering/evaluating the import of the that issued it were not within the jurisdiction of the
arguments and documents referred to by Maynilad, MWSS rehabilitation court. The call on the Standby Letter of Credit,
and/or the creditors Chinatrust Commercial Bank and Suez in therefore, could not be considered a violation of the Stay
relation to the admissions, the pleadings, and/or pertinent Order.
portions of the records, this court is of the considered and 3. Respondent's claim that the filing of the petition pre-empts
humble view that the issue must perforce be resolved in favor the original jurisdiction of the lower court is without merit. The
of Maynilad." 32 Hence to pursue their opposition before the purpose of the initial hearing is to determine whether the
same court would result in the presentation of the same petition for rehabilitation has merit or not. The propriety of the
arguments and issues passed upon by public respondent. stay order as well as the clarificatory order had already been
Furthermore, Sec. 5, Rule 3 of the Interim Rules would passed upon in the hearing previously had for that purpose.
preclude any other effective remedy questioning the orders of The determination of whether the public respondent was
the rehabilitation court since they are immediately executory correct in enjoining the petitioner from drawing on the Standby
and a petition for review or an appeal therefrom shall not stay Letter of Credit will have no bearing on the determination to be
the execution of the order unless restrained or enjoined by the made by public respondent whether the petition for
180

rehabilitation has merit or not. Our decision on the instant


petition does not pre-empt the original jurisdiction of the
rehabilitation court.
WHEREFORE, the petition for certiorari is GRANTED. The
Order of November 27, 2003 of the Regional Trial Court of
Quezon City, Branch 90, is hereby declared NULL AND VOID
and SET ASIDE. The status quo Order herein previously
issued is hereby LIFTED. In view of the urgency attending this
case, this decision is immediately executory.
No costs.
SO ORDERED. AIaSTE
Davide, Jr., C .J ., Panganiban and Carpio, JJ ., concur.
Ynares-Santiago, J ., is on leave.

||| (Metropolitan Waterworks and Sewerage System v. Daway,


G.R. No. 160732, [June 21, 2004], 476 PHIL 659-678)