1

[G.R. No. 134330. March 1, 2001]

SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners, vs. PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and
ARSENIA ESLABON, respondents.
D E C I S I O N
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision
[1]
and Resolution
[2]
in CA-G.R. No. 53865 of the Court of Appeals
[3]
dated
May 21, 1998 and June 29, 1998, respectively, which modified the Decision
[4]
dated April 30, 1996 of the Regional Trial Court of Roxas City,
Branch 19 in a suit
[5]
for Declaration of Nullity of the Contract of Mortgage.
The facts are as follows:
Eduarda Belo owned an agricultural land with an area of six hundred sixty one thousand two hundred eighty eight (661,288) square
meters located in Timpas, Panitan, Capiz, covered and described in Transfer Certificate of Title (TCT for brevity) No. T-7493. She leased a
portion of the said tract of land to respondents spouses Marcos and Arsenia Eslabon in connection with the said spouses sugar plantation
business. The lease contract was effective for a period of seven (7) years at the rental rate of Seven Thousand Pesos (P7,000.00) per year.
To finance their business venture, respondents spouses Eslabon obtained a loan from respondent Philippine National Bank (PNB for
brevity) secured by a real estate mortgage on their own four (4) residential houses located in Roxas City, as well as on the agricultural land
owned by Eduarda Belo. The assent of Eduarda Belo to the mortgage was acquired through a special power of attorney which she executed in
favor of respondent Marcos Eslabon on June 15, 1982.
Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation, extrajudicial foreclosure proceedings against the
mortgaged properties were instituted by respondent PNB. At the auction sale on June 10, 1991, respondent PNB was the highest bidder of
the foreclosed properties at Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00).
In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale at public auction of her agricultural land on June
10, 1991 as well as the registration of the Certificate of Sheriffs Sale in its favor on July 1, 1991, and the one-year period to redeem the
land.
Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique and Florencia Belo under a deed of absolute sale of
proprietary and redemption rights.
Before the expiration of the redemption period, petitioners spouses Belo tendered payment for the redemption of the agricultural land
in the amount of Four Hundred Eighty Four Thousand Four Hundred Eighty Two Pesos and Ninety Six Centavos (P484,482.96), which includes
the bid price of respondent PNB, plus interest and expenses as provided under Act No. 3135.
However, respondent PNB rejected the tender of payment of petitioners spouses Belo. It contended that the redemption price should be
the total claim of the bank on the date of the auction sale and custody of property plus charges accrued and interests amounting to Two
Million Seven Hundred Seventy Nine Thousand Nine Hundred Seventy Eight and Seventy Two Centavos (P2,779,978.72).
[6]
Petitioners
spouses disagreed and refused to pay the said total claim of respondent PNB.
On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of Roxas City, Civil Case No. V-6182 which is an action
for declaration of nullity of mortgage, with an alternative cause of action, in the event that the accommodation mortgage be held to be valid,
to compel respondent PNB to accept the redemption price tendered by petitioners spouses Belo which is based on the winning bid price of
respondent PNB in the extrajudicial foreclosure in the amount of Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos
(P447,632.00) plus interest and expenses.
In its Answer, respondent PNB raised, among others, the following defenses, to wit:
x x x
77. In all loan contracts granted and mortgage contracts executed under the 1975 Revised Charter (PD 694, as
amended), the proper rate of interest to be charged during the redemption period is the rate specified in the mortgage
contract based on Sec. 25
[7]
of PD 694 and the mortgage contract which incorporates by reference the provisions of the PNB
Charters. Additionally, under Sec. 78 of the General Banking Act (RA No. 337, as amended) made applicable to PNB pursuant
to Sec. 38 of PD No. 694, the rate of interest collectible during the redemption period is the rate specified in the mortgage
contract.
78. Since plaintiffs failed to tender and pay the required amount for redemption of the property under the provisions of
the General Banking Act, no redemption was validly effected;
[8]

x x x
After trial on the merits, the trial court rendered its Decision dated April 30, 1996 granting the alternative cause of action of spouses
Belo, the decretal portion of which reads:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of plaintiffs Spouses Enrique M. Belo and Florencia G. Belo
and against defendants Philippine National Bank and Spouses Marcos and Arsenia Eslabon:
1. Making the injunction issued by the court permanent, insofar as the property of Eduarda Belo covered by Transfer Certificate
of Title No. T-7493 is concerned;
2

2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo to redeem only Eduarda Belos property situated
in Brgy. Timpas, Panitan, Capiz, and covered by Transfer Certificate of Title No. T-7493 by paying only its bid price of
P447,632.00, plus interest and other charges provided for in Section 30, Rule 39 of the Rules of Court, less the loan value, as
originally appraised by said defendant Bank, of the foreclosed four (4) residential lots of defendants Spouses Marcos and
Arsenia Eslabon; and
3. Dismissing for lack of merit the respective counterclaims of defendants Philippine National Bank and spouses Marcos and
Arsenia Eslabon.
With costs against defendants.
SO ORDERED.
[9]

Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to the Court of Appeals. In its Decision rendered
on May 21, 1998, the appellate court, while upholding the decision of the trial court on the validity of the real estate mortgage on Eduarda
Belos property, the extrajudicial foreclosure and the public auction sale, modified the trial courts finding on the appropriate redemption price
by ruling that the petitioners spouses Belo should pay the entire amount due to PNB under the mortgage deed at the time of the
foreclosure sale plus interest, costs and expenses.
[10]

Petitioners spouses Belo sought reconsideration
[11]
of the said Decision but the same was denied by the appellate court in its
Resolution promulgated on June 29, 1998, ratiocinating, thus:
Once more, the Court shies away from declaring the nullity of the mortgage contract obligating Eduarda Belo as co-mortgagor, considering
that it has not been sufficiently established that Eduarda Belos assent to the special power of attorney and to the mortgage contract was
tainted by any vitiating cause. Moreover, in tendering an offer to redeem the property (Exhibit 20, p. 602 Record) after its extrajudicial
foreclosure, she has thereby admitted the validity of the mortgage, as well as the transactions leading to its inception. Eduarda Belo, and the
appellees as mere assignees of Eduardas right to redeem the property, are therefore estopped from questioning the efficacy of the mortgage
and its subsequent foreclosure.
[12]

The appellate court further declared that petitioners spouses Belo are obligated to pay the total banks claim representing the
redemption price for the foreclosed properties, as provided by Section 25 of P.D. No. 694, holding that:
On the other hand, the courts ruling that the appellees, being the assignee of the right of repurchase of Eduarda Belo, were bound by the
redemption price as provided by Section 25 of P.D. 694, stands. The attack on the constitutionality of Section 25 of P.D. 694 cannot be
allowed, as the High Court, in previous instances, (Dulay v. Carriaga, 123 SCRA 794 [1983]; Philippine National Bank v. Remigio, 231 SCRA
362 [1994]) has regarded the said provision of law with respect, using the same in determining the proper redemption price in foreclosure of
mortgages involving the PNB as mortgagee.
The terms of the said provision are quite clear and leave no room for qualification, as the appellees would have us rule. The said rule, as
amended, makes no specific distinction as to assignees or transferees of the mortgagor of his redemptive right. In the absence of such
distinction by the law, the Court cannot make a distinction. As admitted assignees of Eduarda Belos right of redemption, the appellees
succeed to the precise right of Eduarda including all conditions attendant to such right.
Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code) will extend to apply in the redemption stage of the
mortgage.
As we have previously remarked, Section 25 of P.D. 694 is a sanctioned deviation from the rule embodied in Rule 39, Section 30 of the Rules
of Court, and is a special protection given to government lending institutions, particularly, the Philippine National Bank. (Dulay v.
Carriaga, supra)
[13]

Hence, the instant petition.
During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo, agreed to limit the assignment of errors to the following:
x x x x x x x x x
II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL COURT ON THE BASIS OF THE ASSIGNMENT OF ERRORS
ALLEGED BY PETITIONERS IN THEIR BRIEF:
(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA BELO IN FAVOR OF RESPONDENT ESLABON WAS NULL
AND VOID;
(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT MARCOS ESLABON UNDER SAID INVALID SPECIAL
POWER OF ATTORNEY IS ALSO NULL AND VOID;
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB ACTED IN BAD FAITH AND CONNIVED
WITH RESPONDENTS-DEBTORS ESLABONS TO OBTAIN THE CONSENT OF EDUARDA BELO, PETITIONERS PREDECESSOR,
THROUGH FRAUD.
3

IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB WAS NEGLIGENT IN THE PERFORMANCE
OF ITS DUTY AS COMMERCIAL MONEY LENDER.
V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO, PETITIONERS PREDECESSOR, HAD WAIVED THE RIGHT
TO QUESTION THE LEGALITY OF THE ACCOMMODATION MORTGAGE.
VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY HOLDING THAT ON REDEMPTION, PETITIONERS
SHOULD PAY THE ENTIRE CLAIM OF PNB AGAINST RESPONDENTS-DEBTORS ESLABONS.
VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD PETITIONERS DECIDE TO PAY THE ENTIRE CLAIM OF
RESPONDENT PNB AGAINST THE RESPONDENTS-DEBTORS ESLABONS, PETITIONERS SHALL SUCCEED TO ALL THE RIGHTS
OF RESPONDENT PNB WITH THE RIGHT TO REIMBURSEMENT BY RESPONDENTS-DEBTORS, ESLABONS.
VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD PETITIONERS DECIDE NOT TO EXERCISE THEIR RIGHT OF
REDEMPTION, PETITIONERS SHALL BE ENTITLED TO THE VALUE OF THEIR IMPROVEMENTS MADE IN GOOD FAITH AND FOR
THE REAL ESTATE TAX DUE PRIOR TO THE FORECLOSURE SALE.
[14]

Petitioners challenge the appreciation of the facts of the appellate court, pointing out the following facts which the appellate court
allegedly failed to fully interpret and appreciate:
1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an accommodation mortgagor and that she has no
personal liability to respondent PNB.
x x x
2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. D) used to bind Eduarda Belo as accommodation
mortgagor authorized the agent Eslabons to borrow and mortgage her agricultural land for her (Eduarda Belo) use and
benefit. Instead, said PNB SPA Form No. 74 was used by debtors Eslabons and PNB to bind Eduarda Belo as accommodation
mortgagor for the crop loan extended by PNB to the Eslabons.
3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without specifying the amount of the loan to be
granted by respondent PNB to the respondents-debtors Eslabons upon assurance by the PNB manager that the SPA was
merely a formality and that the bank will not lend beyond the value of the four (4) [Roxas City] residential lots located in
Roxas City mortgaged by respondents-debtors Eslabons (see Exhibit D; Eduarda Belos deposition, Exhibit V, pp. 7 to 24).
4. That PNB did not advise Eduarda Belo of the amount of the loan granted to the Eslabons, did not make demands upon her for
payment, did not advise her of Eslabons default. The pre-auction sale notice intended for Eduarda Belo was addressed and
delivered to the address of the debtors Eslabons residence at Baybay, Roxas City, not to the Belo Family House which is the
residence of Eduarda Belo located in the heart of Roxas City. The trial court stated in its Decision that the PNB witness Miss
Ignacio admitted that through oversight, no demand letters were sent to Eduarda Belo, the accommodation mortgagor (see
p. 7, RTC Decision).
x x x
5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the loan which was unpaid at the time of the
extrajudicial foreclosure sale was only P789,897.00.
x x x
6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belos agricultural landexpressly reserved the
right to question the legality of the accommodation mortgage in the event that said tender to redeem was rejected by
PNB (Exh. I).
[15]

Petitioners present basically two (2) issues before this Court. First, whether or not the Special Power of Attorney (SPA for brevity), the
real estate mortgage contract, the foreclosure proceedings and the subsequent auction sale involving Eduarda Belos property are
valid. Second, assuming they are valid, whether or not the petitioners are required to pay, as redemption price, the entire claim of
respondent PNB in the amount of P2,779,978.72 as of the date of the public auction sale on June 10, 1991.
On the first issue, the petitioners contend that the SPA is void for the reason that the amount for which the spouses Eslabon are
authorized to borrow from respondent bank was unlimited; and that, while the SPA states that the amount loaned is for the benefit of
Eduarda Belo, it was in fact used for the benefit of the respondents spouses Eslabon. For the said reasons petitioners contend that the
mortgage contract lacks valid consent, object and consideration; that it violates a concept in the law of agency which provides that the
contract entered into by the agent must always be for the benefit of the principal; and, that it does not express the true intent of the parties.
The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the subsequent auction sale of Eduarda
Belos property are valid and legal.
First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to petitioners failure to appeal the same after
the trial court rendered its decision affirming their validity. After the trial court rendered its decision granting petitioners
their alternative cause of action, i.e., that they can redeem the subject property on the basis of the winning bid price of respondent PNB,
petitioners did not anymore bother to appeal that decision on their first cause of action. If they felt aggrieved by the trial courts decision
upholding the validity of the said two (2) documents, then they should have also partially appealed therefrom but they did not. It is an abuse
of legal remedies for petitioners to belatedly pursue a claim that was settled with finality due to their own shortcoming. As held in Caliguia v.
National Labor Relations Commission,
[16]
where a party did not appeal from the Labor Arbiters decision denying claims for actual, moral and
exemplary damages and instead moved for immediate execution, the decision then became final as to him and by asking for its execution, he
was estopped from relitigating his claims for damages.
Second, well-entrenched is the rule that the findings of trial courts which are factual in nature, especially when affirmed
by the Court of Appeals, deserve to be respected and affirmed by the Supreme Court, provided it is supported by substantial
4

evidence.
[17]
The finding of facts of the trial court to the effect that Eduarda Belo was not induced by the manager of
respondent PNB but instead that she freely consented to the execution of the SPA is given the highest respect as it was
affirmed by the appellate court. In the case at bar, the burden of proof was on the petitioners to prove or show that there was alleged
inducement and misrepresentation by the manager of respondent PNB and the spouses Eslabon. Their allegation that Eduarda Belo only
agreed to sign the SPA after she was assured that the spouses Eslabon would not borrow more than the value of their own four (4) residential
lots in Roxas City was properly objected to by respondent PNB.
[18]
Also their contention that Eduarda Belo signed the SPA in blank was
properly objected to by respondent PNB on the ground that the best evidence was the SPA. There is also no proof to sustain petitioners
allegation that respondent PNB acted in bad faith and connived with the debtors, respondents spouses Eslabon, to obtain Eduarda Belos
consent to the mortgage through fraud. Eduarda Belo very well knew that the respondents spouses Eslabon would use her property as
additional mortgage collateral for loans inasmuch as the mortgage contract states that the consideration of this mortgage is
hereby initially fixed at P229,000.00.
[19]
The mortgage contract sufficiently apprises Eduarda Belo that the respondents spouses Eslabon can
apply for more loans with her property as continuing additional security. If she found the said provision questionable, she should have
complained immediately. Instead, almost ten (10) years had passed before she and the petitioners sought the annulment of the said
contracts.
Third, after having gone through the records, this Court finds that the courts a quo did not err in holding that the SPA executed by
Eduarda Belo in favor of the respondents spouses Eslabon and the Real Estate Mortgage executed by the respondents spouses in favor of
respondent PNB are valid. It is stipulated in paragraph three (3) of the SPA that Eduarda Belo appointed the Eslabon spouses to make,
sign, execute and deliver any contract of mortgage or any other documents of whatever nature or kind .... which may be necessary or proper
in connection with the loan herein mentioned, or with any loan which my attorney-in-fact may contract personally in his own name
...
[20]
This portion of the SPA is quite relevant to the case at bar. This was the main reason why the SPA was executed in the first place
inasmuch as Eduarda Belo consented to have her land mortgaged for the benefit of the respondents spouses Eslabon. The SPA was not
meant to make her a co-obligor to the principal contract of loan between respondent PNB, as lender, and the spouses Eslabon, as
borrowers. The accommodation real estate mortgage over her property, which was executed in favor of respondent PNB by the respondents
spouses Eslabon, in their capacity as her attorneys-in-fact by virtue of her SPA, is merely an accessory contract.
Eduarda Belo consented to be an accommodation mortgagor in the sense that she signed the SPA to authorize respondents spouses
Eslabons to execute a mortgage on her land. Petitioners themselves even acknowledged that the relation created by the SPA and the
mortgage contract was merely that of mortgagor-mortgagee relationship. The SPA form of the PNB was utilized to authorize the spouses
Eslabon to mortgage Eduarda Belos land as additional collateral of the Eslabon spouses loan from respondent PNB. Thus, the petitioners
contention that the SPA is void is untenable. Besides, Eduarda Belo benefited, in signing the SPA, in the sense that she was able to collect
the rentals on her leased property from the Eslabons.
[21]

An accommodation mortgage is not necessarily void simply because the accommodation mortgagor did not benefit from the same. The
validity of an accommodation mortgage is allowed under Article 2085 of the New Civil Code which provides that (t)hird persons who are not
parties to the principal obligation may secure the latter by pledging or mortgaging their own property. An accommodation mortgagor,
ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his designation as such. It is not always necessary that
the accommodation mortgagor be appraised beforehand of the entire amount of the loan nor should it first be determined before the
execution of the SPA for it has been held that:
(real) mortgages given to secure future advancements are valid and legal contracts; that the amounts named as consideration in said
contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered. A mortgage given to secure advancements is a continuing security and is not
discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid.
[22]

Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to respondent PNB manifesting her intent to redeem
the property is a waiver of her right to question the validity of the SPA and the mortgage contract as well as the foreclosure and the sale of
her subject property. Petitioners claim that her letter was not an offer to redeem as it was merely a declaration of her intention to
redeem. Respondent PNBs answer to her letter would have carried certain legal effects. Had respondent PNB accepted her letter-offer, it
would have surely bound the bank into accepting the redemption price offered by Eduarda Belo. If it was her opinion that her SPA and the
mortgage contract were null and void, she would not have manifested her intent to redeem but instead questioned their validity before a
court of justice. Her offer was a recognition on her part that the said contracts are valid and produced legal effects. Inasmuch as Eduarda
Belo is estopped from questioning the validity of the contracts, her assignees who are the petitioners in the instant case, are likewise
estopped from disputing the validity of her SPA, the accommodation real estate mortgage contract, the foreclosure proceedings, the auction
sale and the Sheriffs Certificate of Sale.
The second issue pertains to the applicable law on redemption to the case at bar. Respondent PNB maintains that Section 25 of
Presidential Decree No. 694 should apply, thus:
SEC. 25. Right of redemption of foreclosed property Right of possession during redemption period. - Within one year from the registration
of the foreclosure sale of real estate, the mortgagor shall have the right to redeem the property by paying all claims of the Bank against him
on the date of the sale including all the costs and other expenses incurred by reason of the foreclosure sale and custody of the property, as
well as charges and accrued interests.
[23]

Additionally, respondent bank seeks the application to the case at bar of Section 78 of the General Banking Act, as amended by P.D.
No. 1828, which states that -
In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted
before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public
auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the
purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective
mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due under the mortgage
deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses
5

incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the
income received from the property.
[24]

On the other hand, petitioners assert that only the amount of the winning bidders purchase together with the interest thereon and on
all other related expenses should be paid as redemption price in accordance with Section 6 of Act No. 3135 which provides that:
Sec. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successor in
interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage
or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of
the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty six,
inclusive, of the Code of Civil Procedure
[25]
, in so far as these are not inconsistent with the provisions of this Act.
Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:
SEC. 28. Time and manner of, and amounts payable on, successive redemptions; notice to be given and filed. -The judgment obligor, or
redemptioner, may redeem the property from the purchaser, at any time within one (1) year from the date of the registration of the
certificate of sale, by paying the purchaser the amount of his purchase, within one per centum per month interest thereon in addition, up to
the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase,
and interest on such last named amount at the same rate; and if the purchaser be also a creditor having a prior lien to that of the
redemptioner, other than the judgment under which such purchase was made, the amount of such other lien, with interest. (Ital ics
supplied)
xxx xxx xxx
This Court finds the petitioners position on that issue to be meritorious.
There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation mortgagor. The Pre-trial Order and respondent
PNBs brief contain a declaration of this fact. The dispute between the parties is whether Section 25 of P.D. No. 694 applies to an
accommodation mortgagor, or her assignees. The said legal provision does not make a distinction between a debtor-mortgagor and an
accommodation mortgagor as it uses the broad term mortgagor. The appellate court thus ruled that the provision applies even to an
accommodation mortgagor inasmuch as the law does not make any distinction. We disagree. Where a word used in a statute has both a
restricted and a general meaning, the general must prevail over the restricted unless the nature of the subject matter or the context in which
it is employed clearly indicates that the limited sense is intended.
[26]
It is presumed that the legislature intended exceptions to its language
which would avoid absurd consequences of this character.
[27]
In the case at bar, the qualification to the general rule applies. The same
provision of Section 25 of P.D. No. 694 provides that the mortgagor shall have the right to redeem the property by paying all claims of the
Bank against him. From said provision can be deduced that the mortgagor referred to by that law is one from whom the bank has a claim in
the form of outstanding or unpaid loan; he is also called a borrower or debtor-mortgagor. On the other hand, respondent PNB has no claim
against accommodation mortgagor Eduarda Belo inasmuch as she only mortgaged her property to accommodate the Eslabon spouses who are
the loan borrowers of the PNB. The principal contract is the contract of loan between the Eslabon spouses, as borrowers/debtors, and the
PNB as lender. The accommodation real estate mortgage (which secures the loan) is only an accessory contract. It is our view and we hold
that the term mortgagor in Section 25 of P.D. No. 694 pertains only to a debtor-mortgagor and not to an accommodation mortgagor.
It is well settled that courts are not to give a statute a meaning that would lead to absurdities. If the words of a statute are susceptible
of more than one meaning, the absurdity of the result of one construction is a strong argument against its adoption, and in favor of such
sensible interpretation.
[28]
We test a law by its result. A law should not be interpreted so as not to cause an injustice. There are laws which
are generally valid but may seem arbitrary when applied in a particular case because of its peculiar circumstances. We are not bound to
apply them in slavish obedience to their language.
[29]

The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair and unjust to accommodation mortgagors and
their assignees. Forcing an accommodation mortgagor like Eduarda Belo to pay for what the principal debtors (Eslabon spouses) owe to
respondent bank is to punish her for the accommodation and generosity she accorded to the Eslabon spouses who were then hard pressed for
additional collaterals needed to secure their bank loan. Respondents PNB and spouses Eslabons very well knew that she merely consented to
be a mere accommodation mortgagor.
The circumstances of the case at bar also provide for ample reason why petitioners cannot be made to pay the entire liability of the
principal debtors, Eslabon spouses, to respondent PNB.
The trial court found that respondent PNBs application for extrajudicial foreclosure and public auction sale of Eduarda Belos mortgaged
property
[30]
was filed under Act No. 3135, as amended by P.D. No. 385. The notice of extrajudicial sale, the Certificate of Sheriffs Sale, and
the letter it sent to Eduarda Belo did not mention P. D. No. 694 as the basis for redemption. As aptly ruled by the trial court -
In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for value of their redemption rights, PNB should have at
least advised them that redemption would be governed by its Revised Charter or PD 69, and not by Act 3135 and the Rules of Court, as
commonly practiced This practice of defendant Bank is manifestly unfair and unjust to these redemptioners who are caught by surprise and
usually taken aback by the enormous claims of the Bank not shown in the Notice of Extrajudicial Sale or the Certificate of Sheriffs Sale, as in
this case.
[31]

Moreover, the mortgage contract explicitly provides that . the mortgagee may immediately foreclose this mortgage judicially in
accordance with the Rules of Court or extrajudicially in accordance with Act No. 3135, as amended and Presidential Decree No.
385...
[32]
Since the mortgage contract in this case is in the nature of a contract of adhesion as it was prepared solely by respondent, it has
to be interpreted in favor of petitioners. The respondent bank however tries to renege on this contractual commitment by seeking refuge in
the 1989 case ofSy v. Court of Appeals
[33]
wherein this Court ruled that the redemption price is equal to the total amount of indebtedness to
6

the banks claim inasmuch as Section 78 of the General Banking Act is an amendment to Section 6 of Act No. 3135, despite the fact that the
extrajudicial foreclosure procedure followed by the PNB was explicitly under or in accordance with Act No. 3135.
In the 1996 case of China Banking Corporation v. Court of Appeals,
[34]
where the parties also stipulated that Act No. 3135 is the
controlling law in case of foreclosure, this Court ruled that;
By invoking the said Act, there is no doubt that it must govern the manner in which the sale and redemptionshall be effected. Clearly, the
fundamental principle that contracts are respected as the law between the contracting parties finds application in the present case, specially
where they are not contrary to law, morals, good customs and public policy.
[35]

More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases,
[36]
that the General Banking Act and P.D. No. 694
shall prevail over Act No. 3135 with respect to the redemption price, does not apply here inasmuch as in the said cases the redemptioners
were the debtors themselves or their assignees, and not an accommodation mortgagor or the latters assignees such as in the case at bar. In
the said cases, the debtor-mortgagors were required to pay as redemption price their entire liability to the bank inasmuch as they were
obligated to pay their loan which is a principal obligation in the first place. On the other hand, accommodation mortgagors as such are not in
anyway liable for the payment of the loan or principal obligation of the debtor/borrower. The liability of the accommodation mortgagors
extends only up to the loan value of their mortgaged property and not to the entire loan itself. Hence, it is only just that they be allowed to
redeem their mortgaged property by paying only the winning bid price thereof (plus interest thereon) at the public auction sale.
One wonders why respondent PNB invokes Act No. 3135 in its contracts without qualification and yet in the end appears to disregard
the same when it finds its provisions unfavorable to it. This is unfair to the other contracting party who in good faith believes that respondent
PNB would comply with the contractual agreement.
It is therefore our view and we hold that Section 78 of the General Banking Act, as amended by P.D. No. 1828, is inapplicable to
accommodation mortgagors in the redemption of their mortgaged properties.
While the petitioners, as assignees of Eduarda Belo, are not required to pay the entire claim of respondent PNB against the principal
debtors, spouses Eslabon, they can only exercise their right of redemption with respect to the parcel of land belonging to Eduarda Belo, the
accommodation mortgagor. Thus, they have to pay the bid price less the corresponding loan value of the foreclosed four (4) residential lots
of the spouses Eslabon.
The respondent PNB contends that to allow petitioners to redeem only the property belonging to their assignor, Eduarda Belo, would
violate the principle of indivisibility of mortgage contracts. We disagree.
Article 2089 of the Civil Code of the Philippines, provides that:
A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as the
debt is not completely satisfied.
Neither can the creditors heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs
who have not been paid.
From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees
only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is
specially answerable is satisfied.
There is no dispute that the mortgage on the four (4) parcels of land by the Eslabon spouses and the other mortgage on the property of
Eduarda Belo both secure the loan obligation of respondents spouses Eslabon to respondent PNB. However, we are not persuaded by the
contention of the respondent PNB that the indivisibility concept applies to the right of redemption of an accommodation mortgagor and her
assignees. The jurisprudence in Philippine National Bank v. Agudelo
[37]
is enlightening to the case at bar, to wit:
x x x x x x x x x
However, Paz Agudelo y Gonzaga (the principal) x x x gave her consent to the lien on lot No. 878 x x x. This acknowledgment, however,
does not extend to lots Nos. 207 and 61 inasmuch as, although it is true that a mortgage is indivisible as to the contracting parties and as to
their successors in interest (Article 1860, Civil code), it is not so with respect to a third person who did not take part in the constitution
thereof either personally or through an agent x x x. Therefore, the only liability of the defendant-appellant Paz Agudelo y Gonzaga is that
which arises from the aforesaid acknowledgment but only with respect to the lien and not to the principal obligation secured by the mortgage
acknowledged by her to have been constituted on said lot No. 878 x x x. Such liability is not direct but a subsidiary one.
[38]

x x x x x x x x x
Wherefore, it is hereby held that the liability contracted by the aforesaid defendant-appellant Paz Agudelo y Gonzaga is merely subsidiary to
that of Mauro A. Garrucho (the agent), limited to lot No. 87.
7

x x x x x x x x x
From the wordings of the law, indivisibility arises only when there is a debt, that is, there is a debtor-creditor relationship. But, this
relationship is wanting in the case at bar in the sense that petitioners are assignees of an accommodation mortgagor and not of a debtor-
mortgagor. Hence, it is fair and logical to allow the petitioners to redeem only the property belonging to their assignor, Eduarda Belo.
With respect to the four (4) parcels of residential land belonging to the Eslabon spouses, petitioners - being total strangers to said lots -
lack legal personality to redeem the same. Fair play and justice demand that the respondent PNBs interest of recovering its entire bank
claim should not be at the expense of petitioners, as assignees of Eduarda Belo, who is not indebted to it. Besides, the letter
[39]
sent by
respondent PNB to Eduarda Belo states that your (Belo) mortgaged property/ies with PNB covered by TCT # T-7493 was/were sold at public
auction ..... It further states that You (Belo) have, therefore, one year from July 1, 1991 within which to redeem your mortgaged
property/ies, should you desire to redeem it. Respondent PNB never mentioned that she was bound to redeem the entire mortgaged
properties including the four (4) residential properties of the spouses Eslabon. The letter was explicit in mentioning Eduarda Belos property
only. From the said statement, there is then an admission on the part of respondent PNB that redemption only extends to the subject
property of Eduarda Belo for the reason that the notice of the sale limited the redemption to said property.
WHEREFORE, the petition is partially granted in that the petitioners are hereby allowed to redeem only the property, covered and
described in Transfer Certificate of Title No. T-7493-Capiz registered in the name of Eduarda Belo, by paying only the bid price less the
corresponding loan value of the foreclosed four (4) residential lots of the respondents spouses Marcos and Arsenia Eslabon, consistent with
the Decision of the Regional Trial Court of Roxas City in Civil Case No. V-6182.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.
G.R. No. L-32116 April 2l, 1981
RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners,
vs.
THE COURT OF APPEALS and MAXIMA CASTRO, respondents.

DE CASTRO, * J.:
This is a petition for review by way of certiorari of the decision
1
of the Court of Appeals in CA-G.R. No. 39760-R entitled "Maxima Castro,
plaintiff-appellee, versus Severino Valencia, et al., defendants; Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes,
defendants-appellants," which affirmed in toto the decision of the Court of First Instance of Manila in favor of plaintiff- appellee, the herein
private respondent Maxima Castro.
On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of Caloocan to apply for an
industrial loan. It was Severino Valencia who arranged everything about the loan with the bank and who supplied to the latter the personal
data required for Castro's loan application. On December 11, 1959, after the bank approved the loan for the amount of P3,000.00, Castro,
accompanied by the Valencia spouses, signed a promissory note corresponding to her loan in favor of the bank.
On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal amount of loan for P3,000.00. They signed a
promissory note (Exhibit "2") corresponding to their loan in favor of the bank and had Castro affixed thereon her signature as co-maker.
The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150 square meters, covered by Transfer
Certificate of Title No. 7419 of the Office of the Register of Deeds of Manila.
On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent a notice of sheriff's sale addressed to
Castro, announcing that her property covered by T.C.T. No. 7419 would be sold at public auction on March 10, 1961 to satisfy the obligation
covering the two promissory notes plus interest and attorney's fees.
Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was scheduled for March 10, 1961 was
postponed for April 10, 1961. But when April 10, 1961 was subsequently declared a special holiday, the sheriff of Manila sold the property
covered by T.C.T. No. 7419 at a public auction sale that was held on April 11, 1961, which was the next succeeding business day following
the special holiday.
Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on February 13, 1961, when she learned for the
first time that the mortgage contract (Exhibit "6") which was an encumbrance on her property was for P6.000.00 and not for P3,000.00 and
that she was made to sign as co-maker of the promissory note (Exhibit "2") without her being informed of this.
On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank and Desiderio, the Spouses Valencia, Basilio
Magsambol and Arsenio Reyes as defendants in Civil Case No. 46698 before the Court of First Instance of Manila upon the charge, amongst
others, that thru mistake on her part or fraud on the part of Valencias she was induced to sign as co-maker of a promissory note (Exhibit "2")
and to constitute a mortgage on her house and lot to secure the questioned note. At the time of filing her complaint, respondent Castro
deposited the amount of P3,383.00 with the court a quo in full payment of her personal loan plus interest.
In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is concerned of the promissory note (Exhibit "2")
and mortgage (Exhibit "6") insofar as it exceeds P3,000.00; for the discharge of her personal obligation with the bank by reason of a deposit
of P3,383.00 with the court a quo upon the filing of her complaint; for the annulment of the foreclosure sale of her property covered by T.C.T.
No. 7419 in favor of Arsenio Reyes; and for the award in her favor of attorney's fees, damages and cost.
8

In their answers, petitioners interposed counterclaims and prayed for the dismissal of said complaint, with damages, attorney's fees and
costs.
2

The pertinent facts arrived from the stipulation of facts entered into by the parties as stated by respondent Court of Appeals are as follows:
Spawning the present litigation are the facts contained in the following stipulation of facts submitted by the parties
themselves:
1. That the capacity and addresses of all the parties in this case are admitted .
2. That the plaintiff was the registered owner of a residential house and lot located at Nos. 1268-1270 Carola Street,
Sampaloc, Manila, containing an area of one hundred fifty (150) square meters, more or less, covered by T.C.T. No. 7419
of the Office of the Register of Deeds of Manila;
3. That the signatures of the plaintiff appearing on the following documents are genuine:
a) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 7, 1959 in the amount of P3,000.00
attached as Annex A of this partial stipulation of facts;
b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of the Rural Bank of Caloocan for the
amount of P3,000.00 as per Annex B of this partial stipulation of facts;
c) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 11, 1959, signed only by the
defendants, Severino Valencia and Catalina Valencia, attached as Annex C, of this partial stipulation of facts;
d) Promissory note in favor of the Rural Bank of Caloocan, dated December 11, 1959 for the amount of P3000.00, signed
by the spouses Severino Valencia and Catalina Valencia as borrowers, and plaintiff Maxima Castro, as a co-maker,
attached as Annex D of this partial stipulation of facts;
e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima Castro, in favor of the Rural Bank of
Caloocan, to secure the obligation of P6,000.00 attached herein as Annex E of this partial stipulation of facts;
All the parties herein expressly reserved their right to present any evidence they may desire on the circumstances
regarding the execution of the above-mentioned documents.
4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol, sent a notice of sheriff's sale, address
to the plaintiff, dated February 13, 1961, announcing that plaintiff's property covered by TCT No. 7419 of the Register of
Deeds of the City of Manila, would be sold at public auction on March 10, 1961 to satisfy the total obligation of P5,728.50,
plus interest, attorney's fees, etc., as evidenced by the Notice of Sheriff's Sale and Notice of Extrajudicial Auction Sale of
the Mortgaged property, attached herewith as Annexes F and F-1, respectively, of this stipulation of facts;
5. That upon the request of the plaintiff and defendants-spouses Severino Valencia and Catalina Valencia, and with the
conformity of the Rural Bank of Caloocan, the Sheriff of Manila postponed the auction sale scheduled for March 10, 1961
for thirty (30) days and the sheriff re-set the auction sale for April 10, 1961;
6. That April 10, 1961 was declared a special public holiday; (Note: No. 7 is omitted upon agreement of the parties.)
8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's property covered by T.C.T. No. 7419 and
defendant, Arsenio Reyes, was the highest bidder and the corresponding certificate of sale was issued to him as per
Annex G of this partial stipulation of facts;
9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of Consolidation of Ownership, a copy of
which is hereto attached as Annex H of this partial stipulation of facts;
10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the final deed of sale in favor of the
defendant, Arsenio Reyes, in the amount of P7,000.00, a copy of which is attached as Annex I of this partial stipulation of
facts;
11. That the Register of Deeds of the City of Manila issued the Transfer Certificate of Title No. 67297 in favor of the
defendant, Arsenio Reyes, in lieu of Transfer Certificate of Title No. 7419 which was in the name of plaintiff, Maxima
Castro, which was cancelled;
9

12. That after defendant, Arsenio Reyes, had consolidated his title to the property as per T.C.T. No. 67299, plaintiff filed
a notice of lis pendens with the Register of Deeds of Manila and the same was annotated in the back of T.C.T. No. 67299
as per Annex J of this partial stipulation of facts; and
13. That the parties hereby reserved their rights to present additional evidence on matters not covered by this partial
stipulation of facts.
WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of facts be approved and admitted by this
Honorable Court.
As for the evidence presented during the trial, We quote from the decision of the Court of Appeals the statement thereof, as follows:
In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old widow who cannot read and write the
English language; that she can speak the Pampango dialect only; that she has only finished second grade (t.s.n., p. 4,
December 11, 1964); that in December 1959, she needed money in the amount of P3,000.00 to invest in the business of
the defendant spouses Valencia, who accompanied her to the defendant bank for the purpose of securing a loan of
P3,000.00; that while at the defendant bank, an employee handed to her several forms already prepared which she was
asked to sign on the places indicated, with no one explaining to her the nature and contents of the documents; that she
did not even receive a copy thereof; that she was given a check in the amount of P2,882.85 which she delivered to
defendant spouses; that sometime in February 1961, she received a letter from the Acting Deputy Sheriff of Manila,
regarding the extrajudicial foreclosure sale of her property; that it was then when she learned for the first time that the
mortgage indebtedness secured by the mortgage on her property was P6,000.00 and not P3,000.00; that upon
investigation of her lawyer, it was found that the papers she was made to sign were:
(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and Exh. 1);
(b) Promissory note dated December 11, 1959 for the said loan of P3,000.00 (Exh- B-2);
(c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants Valencia spouses as borrowers and
appellee as co-maker (Exh. B-4 or Exh. 2).
The auction sale set for March 10, 1961 was postponed co April 10, 1961 upon the request of defendant spouses Valencia
who needed more time within which to pay their loan of P3,000.00 with the defendant bank; plaintiff claims that when
she filed the complaint she deposited with the Clerk of Court the sum of P3,383.00 in full payment of her loan of
P3,000.00 with the defendant bank, plus interest at the rate of 12% per annum up to April 3, 1961 (Exh. D).
As additional evidence for the defendant bank, its manager declared that sometime in December, 1959, plaintiff was
brought to the Office of the Bank by an employee- (t.s.n., p 4, January 27, 1966). She wept, there to inquire if she could
get a loan from the bank. The claims he asked the amount and the purpose of the loan and the security to he given and
plaintiff said she would need P3.000.00 to be invested in a drugstore in which she was a partner (t.s.n., p. 811. She
offered as security for the loan her lot and house at Carola St., Sampaloc, Manila, which was promptly investigated by the
defendant bank's inspector. Then a few days later, plaintiff came back to the bank with the wife of defendant Valencia A
date was allegedly set for plaintiff and the defendant spouses for the processing of their application, but on the day fixed,
plaintiff came without the defendant spouses. She signed the application and the other papers pertinent to the loan after
she was interviewed by the manager of the defendant. After the application of plaintiff was made, defendant spouses had
their application for a loan also prepared and signed (see Exh. 13). In his interview of plaintiff and defendant spouses,
the manager of the bank was able to gather that plaintiff was in joint venture with the defendant spouses wherein she
agreed to invest P3,000.00 as additional capital in the laboratory owned by said spouses (t.s.n., pp. 16-17)
3

The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the Court of First Instance of Manila, the dispositive
portion of which reads:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment and:
(1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff herein;
(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as the amount thereof exceeds the sum
of P3,000.00 representing the principal obligation of plaintiff, plus the interest thereon at 12% per annum;
(3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged property held on April 11, 1961, as well as
all the process and actuations made in pursuance of or in implementation thereto;
(4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of Caloocan, Inc., is only the amount of
P3,000.00, plus the interest thereon at 12% per annum, as of April 3, 1961, and orders that plaintiff's deposit of
P3,383.00 in the Office of the Clerk of Court be applied to the payment thereof;
10

(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio Reyes the purchase price the latter paid
for the mortgaged property at the public auction, as well as reimburse him of all the expenses he has incurred relative to
the sale thereof;
(6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to pay defendant Rural Bank of Caloocan, Inc.
the amount of P3,000.00 plus the corresponding 12% interest thereon per annum from December 11, 1960 until fully
paid; and
Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and spouses Severino D. Valencia and Catalina
Valencia to pay plaintiff, jointly and severally, the sum of P600.00 by way of attorney's fees, as well as costs.
In view of the conclusion that the court has thus reached, the counterclaims of defendant Rural Bank of Caloocan, Inc.,
Jose Desiderio, Jr. and Arsenio Reyes are hereby dismissed, as a corollary
The Court further denies the motion of defendant Arsenio Reyes for an Order requiring Maxima Castro to deposit rentals
filed on November 16, 1963, resolution of which was held in abeyance pending final determination of the case on the
merits, also as a consequence of the conclusion aforesaid.
4

Petitioners Bank and Jose Desiderio moved for the reconsideration
5
of respondent court's decision. The motion having been denied,
6
they
now come before this Court in the instant petition, with the following Assignment of Errors, to wit:
I
THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT OF THE PROMISSORY NOTE, EXHIBIT 2, AND
THE MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT RESPONDENT MAXIMA CASTRO VIS-A-VIS PETITIONER BANK
DESPITE THE TOTAL ABSENCE OF EITHER ALLEGATION IN THE COMPLAINT OR COMPETENT PROOF IN THE EVIDENCE OF
ANY FRAUD OR OTHER UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN BY PETITIONERS IN PROCURING THE
EXECUTION OF SAID CONTRACTS FROM RESPONDENT CASTRO.
II
THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING PREJUDICIALLY AGAINST PETITIONERS, AS
BASIS FOR THE PARTIAL ANNULMENT OF THE CONTRACTS AFORESAID ITS FINDING OF FRAUD PERPETRATED BY THE
VALENCIA SPOUSES UPON RESPONDENT CASTRO IN UTTER VIOLATION OF THE RES INTER ALIOS ACTA RULE.
III
THE COURT OF APPEAL ERRED IN NOT HOLDING THAT, UNDER THE FACTS FOUND BY IT, RESPONDENT CASTRO IS
UNDER ESTOPPEL TO IMPUGN THE REGULARITY AND VALIDITY OF HER QUESTIONED TRANSACTION WITH PETITIONER
BANK.
IV
THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN PETITIONERS AND RESPONDENT CASTRO, THE
LATTER SHOULD SUFFER THE CONSEQUENCES OF THE FRAUD PERPETRATED BY THE VALENCIA SPOUSES, IN AS MUCH
AS IT WAS THRU RESPONDENT CASTRO'S NEGLIGENCE OR ACQUIESCENSE IF NOT ACTUAL CONNIVANCE THAT THE
PERPETRATION OF SAID FRAUD WAS MADE POSSIBLE.
V
THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE DEPOSIT BY RESPONDENT CASTRO OF P3,383.00
WITH THE COURT BELOW AS A TENDER AND CONSIGNATION OF PAYMENT SUFFICIENT TO DISCHARGE SAID
RESPONDENT FROM HER OBLIGATION WITH PETITIONER BANK.
VI
THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND BINDING UPON RESPONDENT CASTRO THE HOLDING
OF THE SALE ON FORECLOSURE ON THE BUSINESS DAY NEXT FOLLOWING THE ORIGINALLY SCHEDULED DATE
THEREFOR WHICH WAS DECLARED A HOLIDAY WITHOUT NECESSITY OF FURTHER NOTICE THEREOF.
The issue raised in the first three (3) assignment of errors is whether or not respondent court correctly affirmed the lower court in declaring
the promissory note (Exhibit 2) invalid insofar as they affect respondent Castro vis-a-vis petitioner bank, and the mortgage contract (Exhibit
6) valid up to the amount of P3,000.00 only.
11

Respondent court declared that the consent of Castro to the promissory note (Exhibit 2) where she signed as co-maker with the Valencias as
principal borrowers and her acquiescence to the mortgage contract (Exhibit 6) where she encumbered her property to secure the amount of
P6,000.00 was obtained by fraud perpetrated on her by the Valencias who had abused her confidence, taking advantage of her old age and
ignorance of her financial need. Respondent court added that "the mandate of fair play decrees that she should be relieved of her obligation
under the contract" pursuant to Articles 24
7
and 1332
8
of the Civil Code.
The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the mortgage contract (Exhibit 6) was deemed
valid up to the amount of P3,000.00 only which was equivalent to her personal loan to the bank.
Petitioners argued that since the Valencias were solely declared in the decision to be responsible for the fraud against Castro, in the light of
the res inter alios acta rule, a finding of fraud perpetrated by the spouses against Castro cannot be taken to operate prejudicially against the
bank. Petitioners concluded that respondent court erred in not giving effect to the promissory note (Exhibit 2) insofar as they affect Castro
and the bank and in declaring that the mortgage contract (Exhibit 6) was valid only to the extent of Castro's personal loan of P3,000.00.
The records of the case reveal that respondent court's findings of fraud against the Valencias is well supported by evidence. Moreover, the
findings of fact by respondent court in the matter is deemed final.
9
The decision declared the Valencias solely responsible for the
defraudation of Castro. Petitioners' contention that the decision was silent regarding the participation of the bank in the fraud is, therefore,
correct.
We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias. For one, no claim was made on this in the
lower court. For another, petitioners did not submit proof to support its contention.
At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory note (Exhibit 2) and the mortgage
contract (Exhibit 6), they also misrepresented to the bank Castro's personal qualifications in order to secure its consent to the loan. This must
be the reason which prompted the bank to contend that it was defrauded by the Valencias. But to reiterate, We cannot agree with the
contention for reasons above-mentioned. However, if the contention deserves any consideration at all, it is in indicating the admission of
petitioners that the bank committed mistake in giving its consent to the contracts.
Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias both Castro and the bank
committed mistake in giving their consents to the contracts. In other words, substantial mistake vitiated their consents given. For if Castro
had been aware of what she signed and the bank of the true qualifications of the loan applicants, it is evident that they would not have given
their consents to the contracts.
Pursuant to Article 1342 of the Civil Code which provides:
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual.
We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage contract (Exhibit 6) binding on
Castro beyond the amount of P3,000.00, for while the contracts may not be invalidated insofar as they affect the bank and Castro on the
ground of fraud because the bank was not a participant thereto, such may however be invalidated on the ground of substantial mistake
mutually committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias. Thus, in the case ofHill vs.
Veloso,
10
this Court declared that a contract may be annulled on the ground of vitiated consent if deceit by a third person, even without
connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract.
Petitioners argued that the amended complaint fails to contain even a general averment of fraud or mistake, and its mention in the prayer is
definitely not a substantial compliance with the requirement of Section 5, Rule 8 of the Rules of Court. The records of the case, however, will
show that the amended complaint contained a particular averment of fraud against the Valencias in full compliance with the provision of the
Rules of Court. Although, the amended complaint made no mention of mistake being incurred in by the bank and Castro, such mention is not
essential in order that the promissory note (Exhibit 2) may be declared of no binding effect between them and the mortgage (Exhibit 6) valid
up to the amount of P3,000.00 only. The reason is that the mistake they mutually suffered was a mere consequence of the fraud perpetrated
by the Valencias against them. Thus, the fraud particularly averred in the complaint, having been proven, is deemed sufficient basis for the
declaration of the promissory note (Exhibit 2) invalid insofar as it affects Castro vis-a-vis the bank, and the mortgage contract (Exhibit 6)
valid only up to the amount of P3,000.00.
The second issue raised in the fourth assignment of errors is who between Castro and the bank should suffer the consequences of the fraud
perpetrated by the Valencias.
In attributing to Castro an consequences of the loss, petitioners argue that it was her negligence or acquiescence if not her actual connivance
that made the fraud possible.
Petitioners' argument utterly disregards the findings of respondent Court of Appeals wherein petitioners' negligence in the contracts has been
aptly demonstrated, to wit:
A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the plaintiff-appellee to several interviews.
If this were true why is it that her age was placed at 61 instead of 70; why was she described in the application (Exh. B-
1-9) as drug manufacturer when in fact she was not; why was it placed in the application that she has income of
12

P20,000.00 when according to plaintiff-appellee, she his not even given such kind of information -the true fact being that
she was being paid P1.20 per picul of the sugarcane production in her hacienda and 500 cavans on the palay
production.
11

From the foregoing, it is evident that the bank was as much , guilty as Castro was, of negligence in giving its consent to the contracts. It
apparently relied on representations made by the Valencia spouses when it should have directly obtained the needed data from Castro who
was the acknowledged owner of the property offered as collateral. Moreover, considering Castro's personal circumstances her lack of
education, ignorance and old age she cannot be considered utterly neglectful for having been defrauded. On the contrary, it is demanded of
petitioners to exercise the highest order of care and prudence in its business dealings with the Valencias considering that it is engaged in a
banking business a business affected with public interest. It should have ascertained Castro's awareness of what she was signing or made
her understand what obligations she was assuming, considering that she was giving accommodation to, without any consideration from the
Valencia spouses.
Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to believe that they were authorized to speak
and bind her. She cannot now be permitted to deny the authority of the Valencias to act as her agent for one who clothes another with
apparent authority as her agent is not permitted to deny such authority.
The authority of the Valencias was only to follow-up Castro's loan application with the bank. They were not authorized to borrow for her. This
is apparent from the fact that Castro went to the Bank to sign the promissory note for her loan of P3,000.00. If her act had been understood
by the Bank to be a grant of an authority to the Valencia to borrow in her behalf, it should have required a special power of attorney executed
by Castro in their favor. Since the bank did not, We can rightly assume that it did not entertain the notion, that the Valencia spouses were in
any manner acting as an agent of Castro.
When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a promissory note (Exhibit 2) and mortgaged (Exhibit
6) Castro's property to secure said loan, the Valencias acted for their own behalf. Considering however that for the loan in which the Valencias
appeared as principal borrowers, it was the property of Castro that was being mortgaged to secure said loan, the Bank should have exercised
due care and prudence by making proper inquiry if Castro's consent to the mortgage was without any taint or defect. The possibility of her
not knowing that she signed the promissory note (Exhibit 2) as co-maker with the Valencias and that her property was mortgaged to secure
the two loans instead of her own personal loan only, in view of her personal circumstances ignorance, lack of education and old age
should have placed the Bank on prudent inquiry to protect its interest and that of the public it serves. With the recent occurrence of events
that have supposedly affected adversely our banking system, attributable to laxity in the conduct of bank business by its officials, the need of
extreme caution and prudence by said officials and employees in the discharge of their functions cannot be over-emphasized.
Question is, likewise, raised as to the propriety of respondent court's decision which declared that Castro's consignation in court of the
amount of P3,383.00 was validly made. It is contended that the consignation was made without prior offer or tender of payment to the Bank,
and it therefore, not valid. In holding that there is a substantial compliance with the provision of Article 1256 of the Civil Code, respondent
court considered the fact that the Bank was holding Castro liable for the sum of P6,000.00 plus 12% interest per annum, while the amount
consigned was only P3,000.00 plus 12% interest; that at the time of consignation, the Bank had long foreclosed the mortgage extrajudicially
and the sale of the mortgage property had already been scheduled for April 10, 1961 for non-payment of the obligation, and that despite the
fact that the Bank already knew of the deposit made by Castro because the receipt of the deposit was attached to the record of the case, said
Bank had not made any claim of such deposit, and that therefore, Castro was right in thinking that it was futile and useless for her to make
previous offer and tender of payment directly to the Bank only in the aforesaid amount of P3,000.00 plus 12% interest. Under the foregoing
circumstances, the consignation made by Castro was valid. if not under the strict provision of the law, under the more liberal considerations
of equity.
The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public auction of the mortgaged property that was held
on April 11, 1961.
Petitioners contended that the public auction sale that was held on April 11, 1961 which was the next business day after the scheduled date of
the sale on April 10, 1961, a special public holiday, was permissible and valid pursuant to the provisions of Section 31 of the Revised
Administrative Code which ordains:
Pretermission of holiday. Where the day, or the last day, for doing any act required or permitted by law falls on a
holiday, the act may be done on the next succeeding business day.
Respondent court ruled that the aforesaid sale is null and void, it not having been carried out in accordance with Section 9 of Act No. 3135,
which provides:
Section 9. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public
places of the municipality or city where the property is situated, and if such property is worth more than four hundred
pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general
circulation in the municipality or city.
We agree with respondent court. The pretermission of a holiday applies only "where the day, or the last day for doing any act required or
permitted by law falls on a holiday," or when the last day of a given period for doing an act falls on a holiday. It does not apply to a day fixed
by an office or officer of the government for an act to be done, as distinguished from a period of time within which an act should be done,
which may be on any day within that specified period. For example, if a party is required by law to file his answer to a complaint within fifteen
(15) days from receipt of the summons and the last day falls on a holiday, the last day is deemed moved to the next succeeding business
day. But, if the court fixes the trial of a case on a certain day but the said date is subsequently declared a public holiday, the trial thereof is
13

not automatically transferred to the next succeeding business day. Since April 10, 1961 was not the day or the last day set by law for the
extrajudicial foreclosure sale, nor the last day of a given period but a date fixed by the deputy sheriff, the aforesaid sale cannot legally be
made on the next succeeding business day without the notices of the sale on that day being posted as prescribed in Section 9, Act No. 3135.
WHEREFORE, finding no reversible error in the judgment under review, We affirm the same in toto. No pronouncement as to cost.
SO ORDERED.
Teehankee (Acting, C.J.) Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.
[G.R. No. 118342. January 5, 1998]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and LYDIA CUBA, respondents.
[G.R. No. 118367. January 5, 1998]
LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and AGRIPINA P.
CAPERAL, respondents.
D E C I S I O N
DAVIDE, JR., J.:
These two consolidated cases stemmed from a complaint
[1]
filed against the Development Bank of the Philippines (hereafter DBP) and
Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of Pangasinan, Branch 54. The said
complaint sought (1) the declaration of nullity of DBPs appropriation of CUBAs rights, title, and interests over a 44-hectare fishpond located
in Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the annulment of the Deed of Conditional Sale executed in her
favor by DBP; (3) the annulment of DBPs sale of the subject fishpond to Caperal; (4) the restoration of her rights, title, and interests over
the fishpond; and (5) the recovery of damages, attorneys fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective pleadings, the trial court conducted a pre-trial where
CUBA and DBP agreed on the following facts, which were embodied in the pre-trial order:
[2]

1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated May 13, 1974 from the
Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines in the amounts
of P109,000.00; P109,000.00; and P98,700.00 under the terms stated in the Promissory Notes dated September 6, 1974;
August 11, 1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the terms of the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP appropriated the Leasehold Rights of
plaintiff Lydia Cuba over the fishpond in question;
6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question, defendant
DBP, in turn, executed a Deed of Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the same
fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the Manager DBP, Dagupan City dated
November 6, 1979 and December 20, 1979. DBP thereafter accepted the offer to repurchase in a letter addressed to
plaintiff dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new Fishpond Lease Agreement No. 2083-
A dated March 24, 1980 was issued by the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding
her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional Sale, she entered with the DBP a
temporary arrangement whereby in consideration for the deferment of the Notarial Rescission of Deed of Conditional Sale,
plaintiff Lydia Cuba promised to make certain payments as stated in temporary Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13, 1984, and which was received by
plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights of the fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over the fishpond in question, DBP advertised in the
SUNDAY PUNCH the public bidding dated June 24, 1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant Agripina Caperal on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on December 28, 1984 by the Ministry of
Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre-trial order.
[3]

Trial was thereafter had on other matters.
14

The principal issue presented was whether the act of DBP in appropriating to itself CUBAs leasehold rights over the fishpond in question
without foreclosure proceedings was contrary to Article 2088 of the Civil Code and, therefore, invalid. CUBA insisted on an affirmative
resolution. DBP stressed that it merely exercised its contractual right under the Assignments of Leasehold Rights, which was not a contract of
mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBPs taking possession and ownership of the property without
foreclosure was plainly violative of Article 2088 of the Civil Code which provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.
It disagreed with DBPs stand that the Assignments of Leasehold Rights were not contracts of mortgage because (1) they were given as
security for loans, (2) although the fishpond land in question is still a public land, CUBAs leasehold rights and interest thereon are alienable
rights which can be the proper subject of a mortgage; and (3) the intention of the contracting parties to treat the Assignment of Leasehold
Rights as a mortgage was obvious and unmistakable; hence, upon CUBAs default, DBPs only right was to foreclose the Assignment in
accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for being a clear case of pactum
commissorium expressly prohibited and declared null and void by Article 2088 of the Civil Code. It then concluded that since DBP never
acquired lawful ownership of CUBAs leasehold rights, all acts of ownership and possession by the said bank were void. Accordingly, the Deed
of Conditional Sale in favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale in favor of defendant Caperal, as
well as the Assignment of Leasehold Rights executed by Caperal in favor of DBP, were also void and ineffective.
As to damages, the trial court found ample evidence on record that in 1984 the representatives of DBP ejected CUBA and her
caretakers not only from the fishpond area but also from the adjoining big house; and that when CUBAs son and caretaker went there on 15
September 1985, they found the said house unoccupied and destroyed and CUBAs personal belongings, machineries, equipment, tools, and
other articles used in fishpond operation which were kept in the house were missing. The missing items were valued at about P550,000. It
further found that when CUBA and her men were ejected by DBP for the first time in 1979, CUBA had stocked the fishpond with 250,000
pieces of bangus fish (milkfish), all of which died because the DBP representatives prevented CUBAs men from feeding the fish. At the
conservative price of P3.00 per fish, the gross value would have been P690,000, and after deducting 25% of said value as reasonable
allowance for the cost of feeds, CUBA suffered a loss of P517,500. It then set the aggregate of the actual damages sustained by CUBA
at P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely representing to the Bureau of Fisheries that it had
foreclosed its mortgage on CUBAs leasehold rights. Such representation induced the said Bureau to terminate CUBAs leasehold rights and to
approve the Deed of Conditional Sale in favor of CUBA. And considering that by reason of her unlawful ejectment by DBP, CUBA suffered
moral shock, degradation, social humiliation, and serious anxieties for which she became sick and had to be hospitalized the trial court found
her entitled to moral and exemplary damages. The trial court also held that CUBA was entitled to P100,000 attorneys fees in view of the
considerable expenses she incurred for lawyers fees and in view of the finding that she was entitled to exemplary damages.
In its decision of 31 January 1990,
[4]
the trial court disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of defendant Development Bank of the Philippines in appropriating
for its own interest, without any judicial or extra-judicial foreclosure, plaintiffs leasehold rights and interest over the fishpond land
in question under her Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the defendant Development Bank of the
Philippines and plaintiff (Exh. E and Exh. 1) and the acts of notarial rescission of the Development Bank of the Philippines relative
to said sale (Exhs. 16 and 26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the Development Bank of the Philippines and
defendant Agripina Caperal (Exh. F and Exh. 21), the Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of
defendant Agripina Caperal (Exh. 23) and the Assignment of Leasehold Rights dated February 12, 1985 executed by defendant
Agripina Caperal in favor of the defendant Development Bank of the Philippines (Exh. 24) as void ab initio;
4. ORDERING defendant Development Bank of the Philippines and defendant Agripina Caperal, jointly and severally, to restore to
plaintiff the latters leasehold rights and interests and right of possession over the fishpond land in question, without prejudice to
the right of defendant Development Bank of the Philippines to foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following amounts:
a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS (P1,067,500.00), as and for actual damages;
b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral damages;
c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary damages;
15

d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and for attorneys fees;
6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to defendant Agripina Caperal the sum of ONE
MILLION FIVE HUNDRED THIRTY-TWO THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS (P1,532,610.75)
representing the amounts paid by defendant Agripina Caperal to defendant Development Bank of the Philippines under their
Deed of Conditional Sale.
CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The former sought an increase in the amount of
damages, while the latter questioned the findings of fact and law of the lower court.
In its decision
[5]
of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in declaring that the deed of assignment was
null and void and that defendant Caperal could not validly acquire the leasehold rights from DBP; (2) contrary to the claim of DBP, the
assignment was not a cession under Article 1255 of the Civil Code because DBP appeared to be the sole creditor to CUBA - cession
presupposes plurality of debts and creditors; (3) the deeds of assignment represented the voluntary act of CUBA in assigning her property
rights in payment of her debts, which amounted to a novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was
estopped from questioning the assignment of the leasehold rights, since she agreed to repurchase the said rights under a deed of conditional
sale; and (5) condition no. 12 of the deed of assignment was an express authority from CUBA for DBP to sell whatever right she had over the
fishpond. It also ruled that CUBA was not entitled to loss of profits for lack of evidence, but agreed with the trial court as to the actual
damages of P1,067,500. It, however, deleted the amount of exemplary damages and reduced the award of moral damages from P100,000
to P50,000 and attorneys fees, from P100,000 to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating Cubas leasehold rights and interest under
Fishpond Lease Agreement No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the deed of conditional sale
between CUBA and DBP; and (4) the deed of conditional sale between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal,
and the assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered DBP to turn over possession of the property to
Caperal as lawful holder of the leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as actual damages; P50,000 as moral
damages; and P50,000 as attorneys fees.
Since their motions for reconsideration were denied,
[6]
DBP and CUBA filed separate petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and attorneys fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of Appeals erred (1) in not holding that the
questioned deed of assignment was a pactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding that the deed of
assignment effected a novation of the promissory notes; (c) in holding that CUBA was estopped from questioning the validity of the deed of
assignment when she agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in reducing the amounts of moral
damages and attorneys fees, in deleting the award of exemplary damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000, each of which was covered by a promissory
note. In all of these notes, there was a provision that: In the event of foreclosure of the mortgage securing this notes, I/We further bind
myself/ourselves, jointly and severally, to pay the deficiency, if any.
[7]

Simultaneous with the execution of the notes was the execution of Assignments of Leasehold Rights
[8]
where CUBA assigned her
leasehold rights and interest on a 44-hectare fishpond, together with the improvements thereon. As pointed out by CUBA, the deeds of
assignment constantly referred to the assignor (CUBA) as borrower; the assigned rights, as mortgaged properties; and the instrument itself,
as mortgage contract. Moreover, under condition no. 22 of the deed, it was provided that failure to comply with the terms and condition of
any of the loans shall cause all other loans to become due and demandable and all mortgages shall be foreclosed. And, condition no. 33
provided that if foreclosure is actually accomplished, the usual 10% attorneys fees and 10% liquidated damages of the total obligation shall
be imposed. There is, therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by way of security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights.
In Peoples Bank & Trust Co. vs. Odom,
[9]
this Court had the occasion to rule that an assignment to guarantee an obligation is in effect a
mortgage.
We find no merit in DBPs contention that the assignment novated the promissory notes in that the obligation to pay a sum of money
the loans (under the promissory notes) was substituted by the assignment of the rights over the fishpond (under the deed of assignment). As
correctly pointed out by CUBA, the said assignment merely complemented or supplemented the notes; both could stand together. The former
was only an accessory to the latter. Contrary to DBPs submission, the obligation to pay a sum of money remained, and the assignment
merely served as security for the loans covered by the promissory notes. Significantly, both the deeds of assignment and the promissory
notes were executed on the same dates the loans were granted. Also, the last paragraph of the assignment stated: The assignor further
reiterates and states all terms, covenants, and conditions stipulated in the promissory note or notes covering the proceeds of this loan,
making said promissory note or notes, to all intent and purposes, an integral part hereof.
Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for the plain and simple reason that
there was only one creditor, the DBP. Article 1255 contemplates the existence of two or more creditors and involves the assignment of all the
debtors property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which reads: Dation in payment, whereby
property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on sales. It bears stressing that the
assignment, being in its essence a mortgage, was but a security and not a satisfaction of indebtedness.
[10]

16

We do not, however, buy CUBAs argument that condition no. 12 of the deed of assignment constituted pactum commissorium. Said
condition reads:
12. That effective upon the breach of any condition of this assignment, the Assignor hereby appoints the Assignee his Attorney-in-fact with
full power and authority to take actual possession of the property above-described, together with all improvements thereon, subject to the
approval of the Secretary of Agriculture and Natural Resources, to lease the same or any portion thereof and collect rentals, to make repairs
or improvements thereon and pay the same, to sell or otherwise dispose of whatever rights the Assignor has or might have over said property
and/or its improvements and perform any other act which the Assignee may deem convenient to protect its interest. All expenses advanced
by the Assignee in connection with purpose above indicated which shall bear the same rate of interest aforementioned are also guaranteed by
this Assignment. Any amount received from rents, administration, sale or disposal of said property may be supplied by the Assignee to the
payment of repairs, improvements, taxes, assessments and other incidental expenses and obligations and the balance, if any, to the payment
of interest and then on the capital of the indebtedness secured hereby. If after disposal or sale of said property and upon application of total
amounts received there shall remain a deficiency, said Assignor hereby binds himself to pay the same to the Assignee upon demand, together
with all interest thereon until fully paid. The power herein granted shall not be revoked as long as the Assignor is indebted to the Assignee
and all acts that may be executed by the Assignee by virtue of said power are hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for the payment of
the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of
non-payment of the principal obligation within the stipulated period.
[11]

Condition no. 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon CUBAs failure to
pay the loan on time. It merely provided for the appointment of DBP as attorney-in-fact with authority, among other things, to sell or
otherwise dispose of the said real rights, in case of default by CUBA, and to apply the proceeds to the payment of the loan. This provision is a
standard condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose
the mortgage and alienate the mortgaged property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As admitted by it during the pre-trial, it
had [w]ithout foreclosure proceedings, whether judicial or extrajudicial, appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over
the fishpond in question. Its contention that it limited itself to mere administration by posting caretakers is further belied by the deed of
conditional sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the herein vendees [Cuba spouses] the
former acquired all the rights and interest of the latter over the above-described property;

The title to the real estate property [sic] and all improvements thereon shall remain in the name of the Vendor until after the purchase price,
advances and interest shall have been fully paid. (Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership of CUBAs leasehold rights merely on
the strength of the deed of assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of appropriating the leasehold rights. As stated
earlier, condition no. 12 did not provide that CUBAs default would operate to vest in DBP ownership of the said rights. Besides, an
assignment to guarantee an obligation, as in the present case, is virtually a mortgage and not an absolute conveyance of title which confers
ownership on the assignee.
[12]

At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of Article 2088 of the Civil Code, which forbids a creditor
from appropriating, or disposing of, the thing given as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop her from questioning DBPs act of
appropriation. Estoppel is unavailing in this case. As held by this Court in some cases,
[13]
estoppel cannot give validity to an act that is
prohibited by law or against public policy. Hence, the appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code
and to public policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should have foreclosed the mortgage, as has been
stipulated in condition no. 22 of the deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26
October 1979, addressed to the Minister of Agriculture and Natural Resources and coursed through the Director of the Bureau of Fisheries and
Aquatic Resources, DBP declared that it had foreclosed the mortgage and enforced the assignment of leasehold rights on March 21, 1979 for
failure of said spouses [Cuba spouces] to pay their loan amortizations.
[14]
This only goes to show that DBP was aware of the necessity of
foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of Fisheries cancelled CUBAs original
lease permit, approved the deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which were predicated on such false
representation, as well as the subsequent acts emanating from DBPs appropriation of the leasehold rights, should therefore be set aside. To
validate these acts would open the floodgates to circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the consequent auction sale for failure to
comply with the requirements laid down by law, such as Act No. 3135, as amended.
[15]
With more reason that the sale of property given as
security for the payment of a debt be set aside if there was no prior foreclosure proceeding.
Hence, DBP should render an accounting of the income derived from the operation of the fishpond in question and apply the sai d
income in accordance with condition no. 12 of the deed of assignment which provided: Any amount received from rents, administration,
17

may be applied to the payment of repairs, improvements, taxes, assessment, and other incidental expenses and obligations and the balance,
if any, to the payment of interest and then on the capital of the indebtedness.
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he
has duly proved. Such compensation is referred to as actual or compensatory damages.
Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty.
[16]
A court cannot rely
on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend upon competent proof that they have
been suffered by the injured party and on the best obtainable evidence of the actual amount thereof.
[17]
It must point out specific facts which
could afford a basis for measuring whatever compensatory or actual damages are borne.
[18]

In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages consisting of P550,000 which represented
the value of the alleged lost articles of CUBA and P517,500 which represented the value of the 230,000 pieces of bangus allegedly stocked in
1979 when DBP first ejected CUBA from the fishpond and the adjoining house. This award was affirmed by the Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not proved by clear evidence. Other than the testimony of
CUBA and her caretaker, there was no proof as to the existence of those items before DBP took over the fishpond in question. As pointed out
by DBP, there was not inventory of the alleged lost items before the loss which is normal in a project which sometimes, if not most often, is
left to the care of other persons. Neither was a single receipt or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985, CUBA included losses of property as among the damages resulting from DBPs take-
over of the fishpond. Yet, it was only in September 1985 when her son and a caretaker went to the fishpond and the adjoining house that
she came to know of the alleged loss of several articles. Such claim for losses of property, having been made before knowledge of the
alleged actual loss, was therefore speculative. The alleged loss could have been a mere afterthought or subterfuge to justify her claim for
actual damages.
With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of bangus which died when DBP took
possession of the fishpond in March 1979, the same was not called for. Such loss was not duly proved; besides, the claim therefor was
delayed unreasonably. From 1979 until after the filing of her complaint in court in May 1985, CUBA did not bring to the attention of DBP the
alleged loss. In fact, in her letter dated 24 October 1979,
[19]
she declared:
1. That from February to May 1978, I was then seriously ill in Manila and within the same period I neglected the management and
supervision of the cultivation and harvest of the produce of the aforesaid fishpond thereby resulting to the irreparable loss in the produce of
the same in the amount of about P500,000.00 to my great damage and prejudice due to fraudulent acts of some of my fishpond workers.
Nowhere in the said letter, which was written seven months after DBP took possession of the fishpond, did CUBA intimate that upon
DBPs take-over there was a total of 230,000 pieces of bangus, but all of which died because of DBPs representatives prevented her men
from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of sufficient basis.
In view, however, of DBPs act of appropriating CUBAs leasehold rights which was contrary to law and public policy, as well as its false
representation to the then Ministry of Agriculture and Natural Resources that it had foreclosed the mortgage, an award of moral damages in
the amount of P50,000 is in order conformably with Article 2219(10), in relation to Article 21, of the Civil Code. Exemplary or corrective
damages in the amount of P25,000 should likewise be awarded by way of example or correction for the public good.
[20]
There being an award
of exemplary damages, attorneys fees are also recoverable.
[21]

WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is hereby REVERSED, except as to the award
of P50,000 as moral damages, which is hereby sustained. The 31 January 1990 Decision of the Regional Trial Court of Pangasinan, Branch
54, in Civil Case No. A-1574 is MODIFIED setting aside the finding that condition no. 12 of the deed of assignment constituted pactum
commissorium and the award of actual damages; and by reducing the amounts of moral damages from P100,000 to P50,000; the exemplary
damages, from P50,000 to P25,000; and the attorneys fees, fromP100,000 to P20,000. The Development Bank of the Philippines is hereby
ordered to render an accounting of the income derived from the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income statement of DBP, as well as the statement of the account
of Lydia P. Cuba, and for the determination of each partys financial obligation to one another.
SO ORDERED.
Bellosillo, Vitug, and Kapunan, JJ., concur.