35.

SPOUSES NILO RAMOS and ELIADORA

RAMOS, Petitioners, vs.RAUL OBISPO and
FAR EAST BANK AND TRUST COMPANY,
Respondents.
Petitioner Nilo Ramos and respondent Raul Obispo
met each other and became best friends while they
were working in Saudi Arabia as contract workers.
Petitioners RAMOS executed a Real Estate Mortgage
(REM) in favor of respondent Far East Bank and
Trust Company over their property. The notarized
REM secured credit accommodations extended to
Obispo in the amount of P1,159,096.00. FEBTC
received a letter from petitioners informing that
Obispo, to whom they entrusted their property to
be used as collateral for a P250,000.00 loan in their
behalf, had instead secured a loan
forP1,159,096.00, and had failed to return their title
despite full payment by petitioners of P250,000.00.
There being no action taken by FEBTC, petitioners
filed a complaint for annulment of real estate
mortgage with damages against FEBTC and Obispo.
Petitioners alleged that they signed the blank REM
form given by Obispo who facilitated the loan with
FEBTC, and that they subsequently received the
loan proceeds of P250,000.00 which they paid in
full through Obispo. With their loan fully settled,
they demanded the release of their title but Obispo
refused to talk or see them, as he is now hiding
from them. Upon verification with the Registry of
Deeds, petitioners said they were surprised to learn
that their property was in fact mortgaged
forP1,159,096.00. Petitioners thus prayed that the
REM be declared void and cancelled; that FEBTC be
ordered to deliver to them all documents pertaining
to the loan and mortgage of Obispo; and that
FEBTC and Obispo be ordered to pay moral
damages and attorneys fees.5
FEBTC averred that petitioners agreed to execute
the REM over their property as partial security for
the loans obtained by Obispo with a total principal
balance ofP2,500,000.00. Since the obligation
secured by the REM remains unpaid, FEBTC
contended that it should not be compelled to
release the mortgage on the subject property.
RTC rendered its Decision in favor of the
petitioners.
FEBTC appealed to the CA which reversed the trial

courts decision and dismissed the complaint,

holding that petitioners were third-party
mortgagors under Article 2085 of the Civil Code
and that they failed to present any evidence to
prove their allegations.
Petitioners filed a motion for reconsideration but it
was denied by the CA. Hence, this petition.
ISSUE:
WON THE CA ERRED WHEN IT SET ASIDE THE
DECISION RENDERED BY THE REGIONAL TRIAL
COURT BY UPHOLDING THE VALIDITY OF THE REAL
ESTATE MORTGAGE AND RULING THAT THE
PETITIONERS WERE ACCOMMODATION
MORTGAGORS OF RESPONDENT RAUL OBISPO
DESPITE THE FACT THAT NO CONSENT TO SUCH
EFFECT WAS GIVEN BY THEM AND THE
PREPARATION THEREOF WAS ATTENDED BY
FRAUDULENT ACTS OR MISREPRESENTATIONS;
HELD: The petition has no merit. We sustain the
decision of the CA.
The validity of an accommodation mortgage is
allowed under Article 2085 of the 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.
While petitioners admitted they knew it was from
FEBTC they will secure a loan, it was unbelievable
for them to simply accept the P250,000.00 loan
proceeds without seeing any document evidencing
release of such amount by the bank containing the
details of the transaction.
Not only that, despite being aware of the absence
of any document, petitioners accepted the
supposed loan proceeds in the form of personal
checks issued by Obispo who claimed to have an
account with FEBTC, instead of checks issued by
the bank itself.
Another disturbing fact is why, despite having
signed the REM contract in their name as
mortgagors, petitioners did not go directly to the
bank to pay their loan. One is also tempted to ask
how petitioners could have possibly arrived at the

amount of amortization payments without having

seen any document from FEBTC pertaining to their
loan account. Such conduct of petitioners in not
bothering to appear before the bank or directly
dealing with it regarding their outstanding
obligation strongly suggests that there was no such
loan account in their name and it was really Obispo
who was the borrower and petitioners were merely
accommodation mortgagors.
It bears stressing that an accommodation
mortgagor, ordinarily, is not himself a recipient of
the loan, otherwise that would be contrary to his
designation as such. We have held that it is not
always necessary that the accommodation
mortgagor be apprised beforehand of the entire
amount of the loan nor should it first be determined
before the execution of the Special Power of
Attorney in favor of the debtor.18 This is especially
true when the words used by the parties indicate
that the mortgage serves as a continuing security
for credit obtained as well as future loan
availments.
it was defendant Obispo who obtained credit
accommodation from defendant FEBTC which he
secured with the mortgage of the subject property.
The property mortgaged was owned by plaintiffsappellees, considered a third party to the loan
obligations of defendant Obispo with defendantappellant FEBTC. It was, thus, a situation
recognized by the last paragraph of Article 2085 of
the Civil Code. The Real Estate Mortgage
admittedly signed by plaintiffs-appellees, on its
face, explicitly states that it is for the security of
"credit accommodations obtained by Raul De Jesus
Obispo," the principal of which is fixed at
P1,159,096.00.
While it is undisputed that plaintiffs-appellees
received the amount of P250,000.00, the record,
however, reveals that they received the said
amount not from defendant FEBTC but from
defendant Obispo. It could be inferred that
theP250,000.00 given by defendant Obispo to
plaintiffs-appellees was some form of remuneration
in lending their title to him as security for his credit
line with defendant-appellant FEBTC.

From all indications, the failure of defendant Obispo

to pay his loan resulted to the prejudice of
plaintiffs-appellees which may have led them to
disown the Real Estate Mortgage they executed in
favor of defendant-appellant FEBTC to
accommodate the loan of defendant Obispo.
There being valid consent on the part of petitioners
as accommodation mortgagors, no reversible error
was committed by the CA in reversing the trial
courts decision which declared the REM as void
and awarded damages to petitioners.
Petition denied.

36. PNB vs SPOUSES ALEJANDRO and MYRNA

REBLANDO,
Facts:
Spouses Reblando obtained PhP 150,000 loan from
PNB. To secure the payment of the loan, the
Reblandos executed a REM over 2 parcels of land
located in General Santos City, the first covered by
Transfer Certificate of Title (TCT) No. T-40839 and
the second by Tax Declaration (TD) No. 59006 and
designated as Cadastral Lot No. 10 (Lot No. 10). A
few years later, the parties agreed to up the loan
value from PhP 150,000 to PhP 260,000. Barely two
weeks after, the parties again agreed to another
increase, this time to PhP 312,000 and executed for
the purpose a second "Amendment to Real Estate
Mortgage. Meanwhile, on July 24, 1995, Alejandro
reblando and the Bliss Development Corporation
(BDC), entered into a Contract to Sell over a
dwelling unit (Unit No. 10). Later developments saw
the Reblandos defaulting in the payment of their
loan obligation, prompting the PNB to commence
extra-judicial foreclosure of the mortgage.
On May 10, 2000, the Reblandos filed a complaint
to declare the nullity of the mortgage over Lot No.
10. According to them, they could not have validly
created a mortgage over Lot No. 10, not being the
owner when the mortgage was constituted. What,
they added, impelled them to include Lot No. 10 in
the mortgage package, albeit it did not belong to
them, was the PNBs "requirement for them to post
Lot No. 10 as additional collateral. PNB countered
and contended that, on February (should be

January) 28, 1992, the Reblandos, via a contract of

REM of even date, already conveyed by way of
mortgage Lot No. 10 covered by TD No. 59006,
inclusive of the Reblandos possessory and other
rights. And together with the lot covered by TCT No.
T-40839, Lot No. 10 is listed as mortgaged property.
RTC: rendered judgment in favor of the Reblandos,
CA affirmed the appealed Decision of the RTC. To
the appellate court, TD No. 59006 in the name of
Alejandro or the Reblandos possession of Lot No.
10 is not determinative of their ownership. The CA
noted in this regard that PNB no less admitted that
it was only in 1995, or three years after the
constitution of the mortgage over Lot No. 10, that
Alejandro bought the property from BDC through
the Contract to Sell covering "Unit No. 10."22 To the
CA, the Contract to Sell is an additional argument
belying the Reblandos ownership over Lot No. 10
at the time of the constitution of the REM.
ISSUE: WON the mortgage constituted over Lot No.
10 valid
HELD:
Article 2085 of the Civil Code provides that a
mortgage contract, to be valid, must have the
following requisites: (a) that it be constituted to
secure the fulfilment of a principal obligation; (b)
that the mortgagor be the absolute owner of the
thing mortgaged; and (c) that the persons
constituting the mortgage have free disposal of
their property, and in the absence of free disposal,
that they be legally authorized for the purpose. The
presence of the second requisiteabsolute
ownershipis the contentious determinative issue.
In fine, the sale of Unit No. 10 to the Reblandos, is
not, without more, proof that respondents did not
own Lot No. 10 at the time of the constitution of the
mortgage. The Contract to Sell of Unit No. 10
presented by respondents has nothing to do with
this case, as it is not in any way related to the
mortgage contract. And as between the Contract to
Sell and TD No. 59006, categorically stating that
respondent Alejandro is the owner of Lot No. 10
since the time of its issuance on September 12,
1990, the latter ought to be the superior evidence
as to who owns Lot No. 10.

Tax receipts and declarations are prima facie proofs

of ownership or possession of the property for
which such taxes have been paid. Coupled with
proof of actual possession of the property, they
may become the basis of a claim for ownership. x x
x
In this case, not only was the tax declaration in
Alejandros name, but also, respondents admittedly
possessed the property mortgaged, their residence
being constructed on it.43 It is for this very reason
that they prayed for injunction before the RTC when
the writ of possession was issued against them.44
There is, therefore, a prima facie proof of ownership
in this case which respondents failed to rebut.
Consequently, the power of Alejandro to subject Lot
No. 10 as collateral to the loan stands.
In sum, respondents failed to prove and the trial
and appellate courts erred in ruling that the
Contract to Sell, supposedly the proof that Lot No.
10 was owned by the government at the time of
the mortgage, covers Lot No. 10, a parcel of land,
when in fact it covers Unit No. 10, a dwelling unit
under the BLISS Development Project. The pieces of
evidence, consisting of the tax declarations and the
annotations, as well as the amendments to the REM
executed and signed by respondents, show that Lot
No. 10 was already owned by Alejandro at the time
of the mortgage. The latter being the owner of the
lot, he then could validly encumber said property
by way of mortgage. Therefore, the REM
constituted is valid, contrary to respondents
insistence that the contract is void for lack of
authority on the part of the mortgagor to encumber
the property used as collateral for the loan.
It is unfortunate that both the RTC and the CA
heavily relied on the Contract to Sell of Unit No. 10
when it is readily apparent that the Contract to Sell,
on which their decisions in favor of the nullity of the
mortgage were anchored, covers a different subject
matter.
The Real Estate Mortgage constituted over Lot No.
10 is hereby declared VALID
37 & 51 UNION BANK OF THE PHILIPPINES, vs. ALAIN* JUNIAT, WINWOOD APPAREL,
INC., WINGYAN APPAREL, INC., NONWOVEN FABRIC PHILIPPINES,Respondents.

To have a binding effect on third parties, a contract of pledge must appear in a public
instrument.
FACTS: Petitioner Union Bank is a universal banking corporation organized and existing under
Philippine laws. Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc.
(Wingyan) are domestic corporations engaged in the business of apparel manufacturing. Both
respondent corporations are owned and operated by respondent Alain Juniat (Juniat), a French
national based in Hongkong. Respondent Nonwoven Fabric Philippines, Inc. (Nonwoven) is a
Philippine corporation engaged in the manufacture and sale of various types of nonwoven
fabrics.
Union Bank filed with the RTC, a Complaint with prayer for the issuance of ex-parte writs of
preliminary attachment and replevin against Juniat, Winwood, Wingyan, and the person in
possession of the mortgaged motorized sewing machines and equipment. Union Bank alleged
that Juniat, acting for and in behalf of Winwood and Wingyan, executed a promissory note and a
Chattel Mortgage over several motorized sewing machines and other allied equipment to secure
their obligation arising from export bills transactions to Union Bank in the amount of
P1,131,134.35; that as additional security for the obligation, Juniat executed a Continuing Surety
Agreement in favor of Union Bank; that the loan remains unpaid; and that the mortgaged
motorized sewing machines are insufficient to answer for the obligation.
RTC issued writs of preliminary attachment and replevin in favor of Union Bank. The writs were
served upon Nonwoven as it was in possession of the motorized sewing machines and
equipment. Although Nonwoven was not impleaded in the complaint filed by petitioner, the RTC
likewise served summons upon Nonwoven since it was in possession of the motorized sewing
machines and equipment.
Nonwoven filed an Answer, contending that the unnotarized Chattel Mortgage executed in favor
of petitioner has no binding effect on Nonwoven and that it has a better title over the motorized
sewing machines and equipment because these were assigned to it by Juniat pursuant to their
Agreement. Juniat, Winwood, and Wingyan, on the other hand, were declared in default for
failure to file an answer within the reglementary period.
Union Bank filed a Motion to Sell Chattels Seized by Replevin, praying that the motorized sewing
machines and equipment be sold to avoid depreciation and deterioration. Before the RTC could
act on the motion, Union Bank sold the attached properties for the amount ofP1,350,000.00.
Nonwowen moved to cite the officers of petitioner in contempt for selling the attached
properties, but the RTC denied the same on the ground that Union Bank acted in good faith.
The RTC of Makati, rendered a Decision in favor of Union Bank. It ruled that both the Chattel
Mortgage in favor of Union Bank and the Agreement in favor of Nonwoven have no obligatory
effect on third persons because these documents were not notarized. However, since the
Chattel Mortgage in favor of Union Bank was executed earlier, it has a better right over the
motorized sewing machines and equipment under the doctrine of "first in time, stronger in right"
(prius tempore, potior jure). Nonwoven moved for reconsideration but the RTC denied the same.
On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of pledge
entered into between Juniat and Nonwoven is valid and binding, and that the motorized sewing
machines and equipment were ceded to Nonwoven by Juniat by virtue of a dacion en pago.
Thus, the CA declared Nonwoven entitled to the proceeds of the sale of the attached properties.
Union Bank sought reconsideration which was denied by the CA.
ISSUE: WON Union Bank had a better right over the machineries seized/levied upon in the
proceedings before the trial court and/or the proceeds of the sale thereof;
Petitioners Arguments Echoing the reasoning of the RTC, Union Bank insists that it has a better
title to the proceeds of the sale. Although the Chattel Mortgage executed in its favor was not
notarized, Union Bank insists that it is nevertheless valid, and thus, has preference over a
subsequent unnotarized agreement. Petitioner further claims that except for the said
agreement, no other evidence was presented by Nonwoven to show that the motorized sewing
machines and equipment were indeed transferred to them by Juniat/Winwood/Wingyan.
Respondent Nonwovens Arguments Nonwoven, on the other hand, claims ownership over the
proceeds of the sale under Article 1544 of the Civil Code on double sale, which it claims can be

applied by analogy in the instant case. Nonwoven contends that since its prior possession over
the motorized sewing machines and equipment was in good faith, it has a better title over the
proceeds of the sale. Nonwoven likewise maintains that Union Bank has no right over the
proceeds of the sale because the Chattel Mortgage executed in its favor was unnotarized,
unregistered, and without an affidavit of good faith.
HELD: 1. Union Bank has a better right. Nonwoven is not entitled to the proceeds of the sale of
the attached properties because it failed to show that it has a better title over the same.
Nonwoven lays claim to the attached motorized sewing machines and equipment pursuant to
the Agreement it entered into with Juniat, to wit:
Hong Kong, 9th May, 1992
With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop, among the
following parties:
a. Redflower Garments Inc. Mrs. Maglipon
b. Nonwoven Fabrics Phils. Inc. Mr. J. Tan
c. Winwood Apparel Inc./Wing Yan Apparel, Inc. Mr. A. Juniat, Mrs. S. Juniat
IT WAS AGREED THAT: a. Settlement of the accounts between Nonwoven and Winwood Apparel,
should be effected as agreed through partial payment by L/C with the balance to be settled at a
later date for which Winwood Apparel agrees to consign 94 sewing machines, 3 snap machines
and 2 boilers, presently in the care of Redflower Garments to the care of Nonwoven Fabrics
Phils. as guarantee. Meanwhile, Nonwoven will resume delivery to Winwood/Win Yang as usual.
x x x x (Emphasis supplied.)
It insists that since the attached properties were assigned or ceded to it by Juniat, it has a better
right over the proceeds of the sale of the attached properties than petitioner, whose claim is
based on an unnotarized Chattel Mortgage.
We do not agree.
Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan and
Winwood, in favor of Union Bank does not bind Nonwoven. However, it must be pointed out that
Union Banks primary cause of action is for a sum of money with prayer for the issuance of exparte writs of attachment and replevin against Juniat, Winwood, Wingyan, and the person in
possession of the motorized sewing machines and equipment. Thus, the fact that the Chattel
Mortgage executed in favor of Union Bank was not notarized does not affect Union Banks cause
of action. Union Bank only needed to show that the loan of Juniat, Wingyan and Winwood
remains unpaid and that it is entitled to the issuance of the writs prayed for. Considering that
writs of attachment and replevin were issued by the RTC, Nonwoven had to prove that it has a
better right of possession or ownership over the attached properties. This it failed to do.
A perusal of the Agreement clearly shows that the sewing machines, snap machines and boilers
were pledged to Nonwoven by Juniat to guarantee his obligation. However, under Article 2096 of
the Civil Code, "[a] pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument." Hence, just like the
chattel mortgage executed in favor of petitioner, the pledge executed by Juniat in favor of
Nonwoven cannot bind petitioner.
Neither can we sustain the finding of the CA that: "The machineries were ceded to THIRD PARTY
NONWOVEN by way of dacion en pago, a contract later entered into by WINWOOD/WINGYAN and
THIRD PARTY NONWOVEN." As aptly pointed out by Union Bank, no evidence was presented by
Nonwoven to show that the attached properties were subsequently sold to it by way of a dacion
en pago. Also, there is nothing in the Agreement to indicate that the motorized sewing
machines, snap machines and boilers were ceded to Nonwoven as payment for the Wingyans
and Winwoods obligation. It bears stressing that there can be no transfer of ownership if the
delivery of the property to the creditor is by way of security. In fact, in case of doubt as to
whether a transaction is one of pledge or dacion en pago, the presumption is that it is a pledge
as this involves a lesser transmission of rights and interests.
In view of the foregoing, we are constrained to reverse the ruling of the CA. Nonwoven is not
entitled to the proceeds of the sale of the attached properties because it failed to show that it
has a better title over the same.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision and the Resolution of the

CA are hereby REVERSED and SET ASIDE. The Decision of the RTC is hereby REINSTATED and
AFFIRMED. SO ORDERED.

38. Land Bank of the Philippines v. Republic

of the Philippines
Facts:
A parcel of land was issued in favor of one Angelito
C. Bugayong. It covered a parcel of land located in
Bocana, Kabacan, Davao City. It was originally
identified and surveyed as marshy and under water
during high tide, it used to be a portion of a dry
river bed near the mouth of Davao River.
The land was initially subdivided into four lots
approved by the Commissioner of Land
Registration. Bugayong sold all of the four lots to
different persons. The first lot, was sold to spouses
Lourdes and Candido Du and said land was
replaced in the name of spouses Du.
Afterwards, the spouses Du further caused the
subdivision of the land into two (2) lots. They sold
one of said lots to spouses Felix and Guadalupe
Dayola. The other remaining lot was retained by
and registered in the names of spouses Du.
Subsequently, Du spouses lot was cancelled and
was replaced in the name of Lourdes Farms, Inc.
subject of this case. Lourdes Farms, Inc. mortgaged
this property to petitioner LBP.
The validity of the parcels of land remained
undisturbed until some residents of the land it
covered, particularly those along Bolton Diversion
Road, filed a formal petition before the Bureau of
Lands.
Investigation and ocular inspection were conducted
by the Bureau of Lands to check the legitimacy of
the parcels of land. They found out that: (1) at the
time Sales Patent was issued to Bugayong, the land
it covered was still within the forest zone; it was
released as alienable and disposable land only on
March 25, 1981, pursuant to BFD Administrative
Order No. 4-1585 and to the provisions of Section
13, Presidential Decree (P.D.) No. 705; (2) the land
was marshy and covered by sea water during high

tide; and (3) Bugayong was never in actual

possession of the land.
In view of the foregoing findings, the Bureau of
Lands resolved that the sales patent in favor of
Bugayong was improperly and illegally issued and
that the Director of Lands had no jurisdiction to
dispose of the subject land.
Upon recommendation of the Bureau of Lands, the
Republic of the Philippines represented by the
Director of Lands, through the Office of the Solicitor
General (OSG), instituted a complaint before the
RTC in Davao for the cancellation of title/patent and
reversion of the land covered into the mass of
public domain. The complaint, as amended, was
filed against Bugayong and other present owners
and mortgagees of the land, such as Lourdes
Farms, Inc. and the latters mortgagee, petitioner
LBP.
In its answer with cross-claim, LBP claimed that it is
a mortgagee in good faith and for value. It prayed
that should lot of Lourdes Farms, Inc. be annulled
by the court, Lourdes Farms, Inc. should be ordered
to pay its outstanding obligations to LBP or to
provide a new collateral security.
The RTC explained that titles issued to private
parties by the Bureau of Lands are void ab initio if
the land covered by it is a forest land. It went
further by stating that if the mother title is void, all
titles arising from the mother title are also void.
Disagreeing with the RTC judgment, LBP appealed
to the CA. It asserted in its appellants brief that it
validly acquired mortgage interest or lien over the
subject property because it was an innocent
mortgagee for value and in good faith. It also
emphasized that it is a government financial
institution.
The CA confirmed that the evidence for the
plaintiff clearly established that the land issued
pursuant to a sales patent granted to defendant
Angelito C. Bugayong was still within the forestal
zone at the time of the grant of the said patent.

With respect to LBPs contention that it was a

mortgagee in good faith and for value, the CA
declared, citing Republic v. Reyes that:
mortgagees of non-disposable lands where titles
thereto were erroneously
issued acquire no protection under the land
registration law. Appellants-mortgagees proper
recourse therefore is to pursue their claims against
their respective mortgagors and debtors.
When LBPs motion for reconsideration was denied,
it resorted to the petition at bar.
Issue:
Whether or not Land Bank of the Philippines is a
purchaser (mortgagee) for value and in good faith
over the subject land
Ruling:
No.The contention that LBP has an interest over the
subject land as a mortgagee has no merit. The
mortgagor, Lourdes Farms, Inc. from which LBP
supposedly obtained its alleged interest has never
been the owner of the mortgaged land. Acquisition
of the subject land by Lourdes Farms, Inc. is legally
impossible as the land was released as alienable
and disposable only on March 25, 1981. Even at
present, no one could have possessed the same
under a claim of ownership for the period of thirty
(30) years required under Section 48(b) of
Commonwealth Act No. 141, as amended. Hence,
LBP acquired no rights over the land.
Under Article 2085 of the Civil Code, it is essential
that the mortgagor be the absolute owner of the
thing mortgaged, to wit:
ARTICLE 2085. The following requisites are
essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the
fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or
mortgage have the free disposal of their property,

and in the absence thereof, that they be legally

authorized for the purpose.
Since Lourdes Farms, Inc. is not the owner of the
land, it does not have the capacity to mortgage it
to LBP.
As correctly pointed out by the OSG, mortgagees of
non-disposable lands, titles to which were
erroneously issued, acquire no protection under the
Land Registration Law.
Even assuming that LBP was able to obtain its own
TCT over the property by means of its mortgage
contract with Lourdes Farms, Inc., the title must
also be cancelled because it was not validly issued
to Bugayong. Forest lands cannot be owned by
private persons. It is not registerable whether the
title is a Spanish title or a Torrens title. It is well
settled that a certificate of title is void when it
covers property of public domain classified as
forest or timber or mineral land. Any title issued
covering non-disposable lots even in the hands of
an alleged innocent purchaser for value shall be
cancelled.
Contrary to the argument of LBP, since the title is
void, it could not have become inconvertible. Even
prescription may not be used as a defense against
the Republic.

39.) JOSE ABAD VS. SPOUSES CEASAR AND

VIVIAN GUIMBA
FACTS:
Respondent Spouses Guimba are the registered
owners of a parcel of land covered by TCT No. PT80617. On March 7, 1997, Vivian entrusted her
copy of the duplicate certificate of title to Gemma
de la Cruz to serve as collateral for Vivians
application for a loan. Afterwards, Gemma was
notified by Vivian that she had changed her mind,
and was no longer interested in obtaining the loan.
Vivian was informed that the certificate has been
deposited in the vault of the Bank of South East
Asia, but was advised by the latter that the TCT was

not there. In November 1997, Vivian received a

telegram from Jose Abad, a stranger, reminding her
of the impending maturity of her mortgage. This
was the first time that the spouses learned of any
actual mortgage involving their own property. They
filed an adverse claim on their own title and met
with the petitioner to settle the matter.
Respondents filed with the RTC, a complaint against
Abad and De la Cruz for annulment and cancelation
of mortgage. They likewise filed with the MTC a
criminal case against De la Cruz for falsification of
public document. The petitioner argued that he had
met De la Cruz and a couple posing as the Guimba
spouses on March 1997 and who also asked him for
a loan and presented the duplicate copy of TCT No.
PT-80617 as collateral. Petitioner also admitted that
he had given the loan of P 335,000. The RTC ruled
that the instrument was a forgery and hence, an
absolute nullity. Denying their MR, the RTC ruled
that the petitioner was not a mortgagee in good
faith because he had not made the necessary
inquiries about the true identity of the persons
introduced as owners. Skipping the CA, petitioner
lodged his petition for review directly to the SC.
ISSUE:
WON Abad was a mortgagee for value and in good
faith.
HELD:
NO. The RTC Decision is consistent with
jurisprudence. A person who deals with registered
land through someone who is not the registered
owner is expected to look behind the certificate of
title and examine all factual circumstances, in order
to determine if the mortgagor/vendee has the
capacity to transfer any interest in the land.
Moreover, the law requires a higher degree of
prudence from one who buys from a person who is
not the registered owner.
Thus, Abad was not a mortgagee in good faith, not
because he neglected to ascertain the authenticity
of the title, but because he did not check if the
person he was dealing with had any authority to
mortgage the property. On the theory that
respondents are guilty of laches for belatedly
registering an adverse claim is untenable. The law
does not compel them to file and adverse claim.
And that there is no equitable basis for the

application of laches. Laches is a doctrine in equity

and may not be invoked to resist the enforcement
of a legal right.

40. Edilberto Cruz and Simplicio Cruz vs. BANCOM Finance Corp. (Union Bank now) Art. 2085
Facts:
Brothers Fr. Edilberto and Simplicio were the registered owners of a 33.9 hectare agricultural land
located in Bulacan. In 1978, defendant Sulit offered to purchase the land. The asking price was
P700k, but Sulit only had P25k which was accepted by Edilberto as earnest money with the
agreement that the title would be transferred to Sulit upon full payment of the price (675k).
Sulit failed to pay the balance and proposed to Edilberto to transfer the property to her but the
latter refused. But Sulit succeeded in having the plaintiffs execute a document of sale of the land
in favor of Sanchez who would then obtain a bank loan in her name using the land as collateral
by capitalizing on the close relationship of Sanchez with the plaintiffs. On the same day, Sanchez
executed another deed of absolute sale over the land in favor of Sulit. In both documents, it
appeared that the consideration for the sale was only P150k. Sulit was able to transfer the title of
the property under her name.
Sanchez undertook to pay the plaintiffs the balance of the actual price of the land. In a Special
Agreement, Sulit assumed Sanchezs obligation, stipulating to pay the plaintiffs the said amount.
Sulit managed to obtain a loan from Union Bank (P569k) secured by a mortgage over the land
now under her name. Plaintiffs filed this complaint for reconveyance of the land because of
Sulits failure to pay and her disappearance from her usual address.
Union Bank filed a motion to intervene, claiming priority as mortgagee in g.f. and that its contract
of mortgage had been executed before the annotation of plaintiffs interest in the title.
Subsequently, Sulit defaulted in her payment to Union Bank and her mortgage was foreclosed.
Union Bank was the highest bidder and was issued a certificate of sale over the land.
RTC: In favor of plaintiffs. The contract between the plaintiffs and Sanchez was absolutely
simulated thus, the 2nd contract of sale between Sanchez and Sulit produced no legal effect.
Union Bank was not a mortgagee in gf thus it cannot claim priority over the property.
CA: Reversed the decision of RTC. The deeds of sale were valid and binding. Thus, the contract of
mortgage is valid. Plaintiffs intended to be bound by the contracts of sale because they executed
a special agreement to enforce the payment of the balance of the purchase price. Union bank is
in gf.
Issue: WON the Deeds of Sale and Mortgage is valid. No
Ruling:
A contact is absolutely simulated when the parties do not intend to be bound at all by it. An
absolutely simulated contract is void. Although the Deed of Sale between the plaintiffs and
Sanchez stipulated a consideration of P150k there was actually no payment as evidence by the
testimony of Edilberto and as was corroborated by Sanchez. Union Bank never offered any
evidence to refute their testimonies.
The alleged buyers (Sanchez and Sulit) never made any attempt to assert their right of
ownership over the land. The records clearly show the Deeds of Sale were executed over the
same property on the same date. 6 days thereafter, it was mortgaged by Sulit to Federal
Insurance Company but the mortgage was cancelled when she again mortgage the land to Union
Bank. It is undisputed that plaintiffs did not receive any proceed from the loan.
Clearly, the deeds of sale were executed merely to use the property as collateral to secure a
loan. The execution of the two documents on the same day sustains the position of petitioners
that the Contracts of Sale were absolutely simulated, and that they received no consideration
therefor. The failure of Sulit to take possession of the property purportedly sold to her was a clear
badge of simulation that rendered the whole transaction void and without force and effect. The
fact that she was able to secure a Certificate of Title to the subject property in her name did not

vest her with ownership over it. A simulated deed of sale has no legal effect; consequently any
TCT issued in consequence thereof should be cancelled. A simulated contract is not a recognized
mode of acquiring ownership.
Union Bank claims that, being an innocent mortgagee, it should not be required to conduct an
exhaustive investigation on the mortgagors title before extending a loan. The rule that persons
dealing with registered lands can rely solely on the certificate of title does not apply to banks. A
banking institution is expected to exercise due diligence before entering into a mortgage
contract.
As correctly observed by the RTC, Union Bank should have taken into consideration the following:
price of the sale (P150k for a 33.9 hectare agri land was too cheap even in 1978); why did
Sanchez sell the property for the same price to Sulit on the same date when she supposedly
acquired it from the plaintiffs; in an area as big as that, why did they not verify if there were
squatters; being agricultural land, there might be tenants to be compensated. Union Bank did
not conduct an ocular inspection, in which they could have discovered that possession of the
land was neither with Sanchez nor Sulit. In addition, Union Bank was already aware that there
was an adverse claim and notice of lis pendens annotated on the certificate of tile when it
registered the mortgage. The adverse claim and the notice of lis pendens were annotated on the
title Oct 30, 1979 and Dec 10, 1979, respectively; the REM was registered only on March 14,
1980. Union Banks failure to register the REM before the annotations resulted in the mortgage
being binding only between it and Sulit.
On the question of who has a preferential right over the property, the long-standing rule, as
provided by Article 2085 of the Civil Code, is that only the absolute owner of the property can
constitute a valid mortgage on it. In case of foreclosure, a sale would result in the transmission
only of whatever rights the seller had over of the thing sold.
In the instant case, the two Deeds of Sale were absolutely simulated; hence, null and void. Thus,
they did not convey any rights that could ripen into valid titles. Necessarily, the subsequent real
estate mortgage constituted by Sulit in favor of respondent was also null and void, because the
former was not the owner thereof. There being no valid real estate mortgage, there could also be
no valid foreclosure or valid auction sale, either. At bottom, respondent cannot be considered
either as a mortgagee or as a purchaser in good faith. This being so, petitioners would be in the
same position as they were before they executed the simulated Deed of Sale in favor of Sanchez.
They are still the owners of the property.

41 Manolo P. Cerna v. The Honorable Court of

Appeals and Conrad C. Leviste
Facts:
Celerino Delgado and Conrad Leviste entered into a
loan agreement which was evidenced by a
promissory note. It was worded as follows: FOR
VALUE RECEIVED, I, CELERINO DELGADO, with
postal address at 98 K11 St., Kamias Rd., Quezon
City, promise to pay to the order of CONRAD C.
LEVISTE, NINETY (90) DAYS after date, at his office
at 215 Buendia Ave., Makati Rizal, then total sum of
SEVENTEEN THOUSAND FIVE HUNDRED
(P17,500.00) PESOS, Philippine Currency without
necessity of demand, with interest at the rate of
TWELVE (12%) PERCENT per annum"
On the same date, Delgado executed a chattel
mortgage over a Willys jeep owned by him.
Delgado, acting as attorney-in-fact of Cerna, also

mortgaged a Taurus car owned by the latter.

This period lapsed without Delgado paying the loan.
This prompted Leviste to file a collection suit
against Delgado and Cerna as solidary debtors.
Cerna filed a motion to dismiss for lack of cause of
action as well as the death of Delgado (DENIED)
The case was elevated to the CA through a petition
for certiorari, mandamus and prohibition (DENIED)
Issue:
Is Cerna solidarily liable with Delgado (deceased)
for the promissory note?
Ruling:
NO! Only Delgado signed the promissory note and
accordingly, he was the only one bound by the
contract of loan. Nowhere did it appear in the
promissory note that petitioner was a co-debtor.
There is no legal provision, nor jurisprudence in our
jurisdiction, which makes a third person who
secures the fulfillment of anothers obligation by
mortgaging his own property to be solidarily bound
with the principal obligor.
A chattel mortgage may be "an accessory contract"
to a contract of loan, but that fact alone does not
make a third party mortgagor solidarily bound with
the principal debtor in fulfilling the principal
obligation that is, to pay the loan.
The signatory to the principal contract loan
remains to be primarily bound. It is only upon the
default of the latter that the creditor may have
recourse on the mortgagors by foreclosing the
mortgaged properties in lieu of an action for the
recovery of the amount of the loan.
And the liability of the third party mortgagors
extends only to the property mortgaged. Should
there be any deficiency; the creditor has recourse
on the principal debtor.
The Special Power of Attorney did not make Cerna a
mortgagor. All it did was authorize Delgado to
mortgage certain properties belonging to petitioner
in compliance with the requirement in Article 2085
of the Civil Code, which provides: That the persons
constituting the pledge or mortgage have the free
disposal of their property, and in the absence
thereof, that they be legally authorized for that
purpose.
Further, Leviste, having chosen to file the collection
suit, could not now run after Cerna for the

satisfaction of the debt. This is even more true in

this case because the death of the principal debtor,
Delgado. Leviste was pursuing a money claim
against a deceased person.
A person holding a mortgage against the estate of
a deceased person may abandon such security, and
prosecute his claim before the committee, and
share in the distribution of the general assets of the
estate.
He may, at his own election, foreclose the
mortgage and realize upon his security. But the law
does NOT provide that he may have both remedies.
If he elects one, he must abandon the other. If he
fails in one, he fails uttely.
While there is merit in the substantial allegations of
the petition, it must be DISMISSED on procedural
grounds res judicata, in particular. The facts of
this case reveal that the decision under review is
the 2nd certiorari and prohibition case that Cerna
lodged against the judge trying the civil case. The
decision of the CA denying the petition for
certiorari, prohibition and mandamus had already
attained finality.

42. Sps. Nestor and Ma. Nona Borromeo, petitioner, vs. CA and Equitable Savings
Bank (ESB), respondents.
Facts: The spouses were client depositors of Equitable PCI Bank (ECPIB) for more than 12 years.
Sometime in 1999, they were offered an own a home loan program by the latter and
subsequently, they applied for a loan in the amount of 4 million.
In view of this, they executed a REM over their land located at Loyola Grand Villas, Q.C.
consisting of 303 sq. m. including the proposed house that was subsequently built thereon. They
signed blank loan documents such as the loan agreement, promissory notes and even the REM
with the understanding that they executed the same in favor of EPCIB.
From 2001 to 2002, EPCIB was able to release 3.6 million in 4 installments to the spouses while
the balance of 400 thousand was not drawn by the latter. The spouses contended that despite
repeated verbal requests to EPCIB, the latter still failed to furnish them their (spouses) copies of
the loan documents, this in addition to the fact that the interest rate of 14% to 17% that was
charged against them was more than the 11% or 11.5% rate they had agreed upon.
For these reasons, the spouses protested against ECPIB by purposely not drawing the remaining
balance of the loan and stopping the payment of the loan amortizations still due. Until the time
they stopped, the spouses made total payments approximately amounting to 500 thousand.
ECPIB argued that the withholding of the loan documents until the full release of the amount
loaned was an established practice and that the interest rates at the time of the first four
installments ranged from 9.5% to 16%. Thus they warned the spouses that failure to pay their
obligation would result in the foreclosure of the REM.
Subsequently, the spouses received the copies of the loan documents they had been asking the
bank for and upon seeing the same, they found out that the Loan Agreement designated ESB as
lender and mortgagor, instead of EPCIB. When they were unable to pay for the loan in full, ESB
sought the extra-judicial foreclosure of the property. To protect their interests, the spouses filed a
complaint for Injunction, Annulment of Mortgage with Damages and with Prayer for Temporary

Restraining Order and Preliminary and Mandatory Injunction against EPCIB and respondent ESB
with the RTC.
The RTC initially dismissed the case, but on MR, it granted the issuance of the preliminary
injunction. It found that petitioners were bound to suffer grave injustice if they were deprived of
their property before the RTC could rule on the validity of the REM constituted on the same. On
appeal by ESB, the CA reversed the trial court on the ground that pending said courts
determination of the validity of the REM, its validity should be presumed. Moreover, it held that
the foreclosure would not result in any grave or irreparable damage to the spouses. Their MR
having been denied, the spouses sought recourse to the SC.
ISSUEs: WoN the REM was valid; WoN the writ of preliminary injunction should be issued to
enjoin the foreclosure of the REM
Ruling: No. The right of foreclosure cannot be exercised against the spouses by any person
other than the creditor-mortgagee or its assigns. Under the New Civil Code, Contracts take
effect only between the parties, their assigns and heirs xxx. An extrajudicial foreclosure
instituted by a third party to the Loan Agreement and the REM would, therefore, be a violation of
spouses rights over their property.
The civil law principle of relativity of contracts provides that contracts can only bind the parties
who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such
contract and has acted with knowledge thereof. Since a contract may be violated only by the
parties thereto as against each other, a party who has not taken part in it cannot sue for
performance, unless he shows that he has a real interest affected thereby.
ESB although a wholly-owned subsidiary of EPCIB, has an independent and separate juridical
personality from its parent company. The fact that a corporation owns all of the stocks of another
corporation, taken alone, is not sufficient to justify their being treated as one entity. A corporation
has a separate personality distinct from its stockholders and other corporations to which it may
be conducted.
In this case, ESB did not have the right to foreclose the REM even after default since this right
can only be claimed by the creditor-mortgagor, EPCIB; and, consequently, the extrajudicial
foreclosure of the REM by respondent would be in violation of spouses property rights.
Following the above premise, the answer to the second issue would be in the AFFIRMATIVE. The
sole object of a preliminary injunction is to maintain the status quo until the merits can be heard.
A preliminary injunction is an order granted at any stage of an action prior to judgment of final
order, requiring a party, court, agency, or person to refrain from a particular act or acts. It is a
preservative remedy to ensure the protection of a partys substantive rights or interests pending
the final judgment on the principal action. A plea for an injunctive writ lies upon the existence of
a claimed emergency or extraordinary situation which should be avoided for, otherwise, the
outcome of a litigation would be useless as far as the party applying for the writ is concerned.
In this case, the extrajudicial foreclosure of the property pending the final determination by the
RTC of the complaint for annulment of the REM and claim for damages would result in an
injustice to the spouses since they will be tied up in litigation for the recovery of their property
while their debt to the real creditor-mortgagee, EPCIB, would remain unpaid and continue to
accrue interest and other charges should the RTC eventually rule that the foreclosure is invalid.
Hence, a writ of Preliminary Injunction should be issued.
43 Rafael Martelino et al vs National Home Mortgage Finance Corp. (NHMFC) and
Home development mutual fund (HDMF)
Facts:
Petitioners obtained housing loans from respondents. However, respondents directly released
the loans to the subdivision developer, Shelter Phils. Inc. (Shelter)
Then, Shelter failed to complete the subdivision project. Petitioners were compelled to spend
their own resources to improve the subdivision roads and alleys.
Instead of suspending the payment of amortizations by petitioners for Shelters failure to
complete the subdivision, respondents charged petitioners with interests and penalties when
they did not pay their amortizations, and initiated foreclosure of the mortgaged property of

Rafael Martelino and threatened to foreclose the mortgages of the other petitioners.
As a result, petitioners filed a petition for declaratory relief and prohibition against respondents
before the RTC of Caloocan praying for the suspension of payment to Shelter.
Summonses were served only to NHMFC and Sheriff Castillo.
NHMFC filed a motion to dismiss on ground that RTC has no jurisdiction because the petition
should have been filed with HLURB.
RTC dismissed the petition on ground that HDMF was not notified of the preliminary injunction
hearing and the foreclosure of the mortgage by respondents constituted a breach of RA 8501
(Housing loan condonation act), thus, rendered the petition for declaratory relief improper. The
proper remedy, RTC ruled, was an ordinary civil action.
CA affirmed RTC decision holding that preliminary injunction was not valid against HDMF
because it was not notified of the hearing for lack of summons. Also, it did not entertain the issue
of whether the petition for declaratory relief can be converted to an ordinary action for it was not
raised before the RTC.
Issue: WON the petition for declaratory relief and prohibition was properly dismissed.
Held:
The act of initiating foreclosure proceedings was a breach of RA 8501 and rendered the action
for declaratory relief improper.
Under Rule 63, sec 1, a person must file a petition for declaratory relief before breach or
violation of a deed, will, contract, statute ordinance or any other govt regulation.
The petition may be entertained only before the breach or violation of the statute, deed,
contract, etc. to which it refers. Where the law or contract has already been contravened prior to
the filing of an action for declaratory relief, the court can no longer assume jurisdiction over the
action.
o In this case, petitioners had stated in their petition that respondents assessed them interest
and penalties on their outstanding loans, initiated foreclosure proceedings against Rafael
Martelino and threatened to foreclose the mortgages of the other petitioners, all in disregard of
their right to suspend payment to Shelter for its failure to complete the subdivision.
o Meaning, petitioners had already suspended paying their amortizations. The actual suspension
of payments defeated the purpose of the action to secure an authoritative declaration of their
right to suspend payment. Thus, RTC can no longer assume jurisdiction over the action for
declaratory relief because its subject was breached before the action was filed.
Petition for prohibition is also improper. Prohibition is a remedy against proceedings that are
without or in excess of jurisdiction, or with grave abuse of discretion, there being no appeal or
other plain, speedy adequate remedy in the ordinary course of law.
o In this case, the petition did not impute lack of jurisdiction or grave abuse of discretion
committed by respondents regarding the foreclosure proceedings.
What petitioners should have done?
They should have applied for condonation of penalties under RA 8501 and restructuring of their
loans instead of filing an erroneous petition before the RTC. Also, they could raise vefore the
HDMF, the negligence of respondents who released the loans to Shelter despite its failure to
complete the subdivision.
The HDMF could then determine if the ground is a justifiable cause for non-payment of
amortization.
44 Spouses Lehner and Ludy Martires vs Manelia Chua
Facts:
Subject matter of the present controversy involves 24 memorial lots located in Holy Cross
Memorial Park, Novaliches, Quezon City. This property is owned by respondent Manelia Chua and
her mother, Florencia R Calagos as co-owners.
Respondent, on Dec. 18, 1995 borrowed P150,000 from the petitioners which was secured by a
real estate mortgage over the abovementioned property. Additionally, she bound herself to pay a
monthly interest of 8% and an additional 10% in case of default.
When respondent failed to settle her obligation, the petitioners, without foreclosure of

mortgage, transferred ownership of said lots to their name via a Deed of Transfer.
On June 23, 1997, respondent filed a complaint with the RTC of QC a complaint against the
petitioners, management of Holy Cross and the Registry of Deeds of QC for annulment of the
contract of mortgage between her and petitioner on the ground that the interest rates imposed
were unjust and exorbitant. Respondent as well sought the accounting of her liability under the
law and that the RD and Hoy Cross be ordered to re-convey the disputed property to her.
On Nov 20, 1998, respondent moved to amend her complaint to include allegation that she
later discovered that ownership of the subject lots was transferred in the name of petitioners by
virtue of a forged Deed of Transfer and Affidavit of Warranty. She prayed that this be annulled.
This was not opposed by petitioners.
The RTC ruled against the respondent and ordered her to pay the spouses and Holy Cross for
damages as well as attorneys fees.
This was affirmed by the CA with modification as to the awards given by the RTC.
On Motion for Reconsideration filed by the respondent which was opposed by the petitioners,
the CA reversed its own ruling and ruled:
1. Deed of Transfer and Affidavit of Warranty were void ab initio.
2. The loan is subjected to an interest of 12% per annum.
3. Holy Cross and RD were directed to revert the registration of ownership in the name of the
respondent.
4. Respondent is ordered to pay her loan subjected to an interest rate of 12% per annum after
deducting the payments already made.
The CA held that the mortgage is in fact an equitable mortgage where intent of the respondent
was merely as security for her loan and that the consideration is inadequate.
A motion for reconsideration and a second motion for reconsideration filed by petitioner were
both denied by the CA.
Issue:
1. Whether or not the Deed of Transfer executed constituted an equitable mortgage.
Ruling:
An equitable mortgage has been defined as one which, although lacking in some formality, or
form or words, or other requisites demanded by a statute, nevertheless reveals the intention of
the parties to charge real property as security for a debt, there being no impossibility nor
anything contrary to law in this intent.
One of the circumstances provided for under Article 1602 of the Civil Code, where a contract
shall be presumed to be an equitable mortgage, is "where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the payment of a debt or the
performance of any other obligation." In the instant case, it has been established that the intent
of both petitioners and respondent is that the subject property shall serve as security for the
latter's obligation to the former. As correctly pointed out by the CA, the circumstances
surrounding the execution of the disputed Deed of Transfer (irregularity found pertaining to
notarizing the document as claimed by the petitioners) would show that the said document was
executed to circumvent the terms of the original agreement and deprive respondent of her
mortgaged property without the requisite foreclosure.
Since the original transaction between the parties was a mortgage, the subsequent assignment
of ownership of the subject lots to petitioners without the benefit of foreclosure proceedings,
partakes of the nature of a pactum commissorium, as provided for under Article 2088 of the Civil
Code.
Pactum commissorium is a stipulation empowering the creditor to appropriate the thing given
as guaranty for the fulfillment of the obligation in the event the obligor fails to live up to his
undertakings, without further formality, such as foreclosure proceedings, and a public sale.
In the instant case, evidence points to the fact that the sale of the subject property, as proven
by the disputed Deed of Transfer, was simulated to cover up the automatic transfer of ownership
in petitioners' favor. While there was no stipulation in the mortgage contract which provides for
petitioners' automatic appropriation of the subject mortgaged property in the event that
respondent fails to pay her obligation, the subsequent acts of the parties and the circumstances
surrounding such acts point to no other conclusion than that petitioners were empowered to
acquire ownership of the disputed property without need of any foreclosure.

 The Court cannot fathom why respondent would agree to transfer ownership of the subject
property, whose value is much higher than her outstanding obligation to petitioners. Considering
that the disputed property was mortgaged to secure the payment of her obligation, the most
logical and practical thing that she could have done, if she is unable to pay her debt, is to wait
for it to be foreclosed. She stands to lose less of the value of the subject property if the same is
foreclosed, rather than if the title thereto is directly transferred to petitioners. This is so because
in foreclosure, unlike in the present case where ownership of the property was assigned to
petitioners, respondent can still claim the balance from the proceeds of the foreclosure sale, if
there be any. In such a case, she could still recover a portion of the value of the subject property
rather than losing it completely by assigning its ownership to petitioners.
Petition is DENIED.

45. mercado vs. ca and san miguel

corporation
facts:
Leonides Mercado had been distributing respondent
San Miguel Corporations (SMCs) beer products in
Quiapo, Manila since 1967. In 1991, SMC extended
to him a P7.5 million credit line allowing him to
withdraw goods on credit. To secure his purchases,
Mercado assigned three China Banking Corporation
(CBC) certificates of deposit amounting to P5
million1 to SMC and executed a continuing hold-out
agreement stating:
Any demand made by [SMC] on [CBC], claiming
default on my/our part shall be conclusive on [CBC]
and shall serve as absolute authority for [CBC] to
encash the [CBC certificates of deposit] in
accordance with the third paragraph of this HoldOut Agreement, whether or not I/we have in fact
defaulted on any of my/our obligations with [SMC],
it being understood that the issue of whether or not
there was factual default must be threshed out
solely between me/us and [SMC]
He also submitted three surety bonds from Eastern
Assurance and Surety Corporation (EASCO) totaling
P2.6 million.2
On February 10, 1992, SMC notified CBC that
Mercado failed to pay for the items he withdrew on

credit. Consequently, citing the continuing hold-out

agreement, it asked CBC to release the proceeds of
the assigned certificates of deposit. CBC approved
SMBs request and informed Mercado.
On March 2, 1992, Mercado filed an action to annul
the continuing hold-out agreement and deed of
assignment in the Regional Trial Court (RTC) of
Manila, Branch 55.3 He claimed that the continuing
hold-out agreement allowed forfeiture without the
benefit of foreclosure. It was therefore void
pursuant to Article 2088 of the Civil Code.4
Moreover, Mercado argued that he had already
settled his recent purchases on credit but SMC
erroneously applied the said payments to his old
accounts not covered by the continuing hold-out
agreement (i.e., purchases made prior to the
extension of the credit line).
On March 18, 1992, SMC filed its answer with
counterclaim against Mercado. It contended that
Mercado delivered only two CBC certificates of
deposit amounting to P4.5 million5 and asserted
that the execution of the continuing hold-out
agreement and deed of assignment was a
recognized business practice. Furthermore, because
Mercado admitted his outstanding liabilities, SMC
sought payment of the lees products he withdrew
(or purchased on credit) worth P7,468,153.75.6
On April 23, 1992, SMC filed a third-party complaint
against EASCO.7 It sought to collect the proceeds of
the surety bonds submitted by Mercado.
On September 14, 1994, Mercado filed an urgent
manifestation and motion seeking the dismissal of
the complaint. He claimed that he was no longer
interested in annulling the continuing hold-out
agreement and deed of assignment. The RTC,
however, denied the motion.8 Instead, it set the
case for pre-trial. Thereafter, trial ensued.
During trial, Mercado acknowledged the accuracy of
SMCs computation of his outstanding liability as of
August 15, 1991. Thus, the RTC dismissed the
complaint and ordered Mercado and EASCO (to the
extent of P2.6 million or the value of its bonds) to
jointly and severally pay SMC the amount of
P7,468,153.75.9

Aggrieved, Mercado and EASCO appealed to the

Court of Appeals (CA)10 insisting that Mercado did
not default in the payment of his obligations to
SMC.
On December 14, 2004, the CA affirmed the RTC
decision in toto.11 Mercado and EASCO both moved
for reconsideration but their respective motions
were denied.12
On October 28, 2005, EASCO filed a petition for
review on certiorari in this Court13 but eventually
agreed to settle its liability with SMC.14 The
petition was terminated on September 19, 2007.15
Meanwhile, Mercado passed away and was
substituted by his heirs, petitioners Racquel D.
Mercado, Jimmy D. Mercado, Henry D. Mercado,
Louricar D. Mercado and Virgilio D. Mercado.
Petitioners subsequently filed this petition asserting
that the CA erred in affirming the RTC decision in
toto. The said decision (insofar as it ordered
Mercado to pay SMC P7,468,153.75) was void.
SMCs counterclaim was permissive in nature.
Inasmuch as SMC did not pay docket fees, the RTC
never acquired jurisdiction over the counterclaim.
issue: whether or not the CA erred in affirming the
RTC decision in toto
held:
A counterclaim (or a claim which a defending party
may have against any party)16 may be
compulsory17 or permissive. A counterclaim that
(1) arises out of (or is necessarily connected with)
the transaction or occurrence that is the subject
matter of the opposing partys claim; (2) falls within
the jurisdiction of the court and (3) does not require
for its adjudication the presence of third parties
over whom the court cannot acquire jurisdiction, is
compulsory.18 Otherwise, a counterclaim is merely
permissive.
When Mercado sought to annul the continuing holdout agreement and deed of assignment (which he
executed as security for his credit purchases), he in
effect sought to be freed from them. While he
admitted having outstanding obligations, he

nevertheless asserted that those were not covered

by the assailed accessory contracts. For its part,
aside from invoking the validity of the said
agreements, SMC therefore sought to collect the
payment for the value of goods Mercado purchased
on credit. Thus, Mercados complaint and SMCs
counterclaim both touched the issues of whether
the continuing hold-out agreement and deed of
assignment were valid and whether Mercado had
outstanding liabilities to SMC. The same evidence
would essentially support or refute Mercados claim
and SMCs counterclaim.
Based on the foregoing, had these issues been tried
separately, the efforts of the RTC and the parties
would have had to be duplicated. Clearly, SMCs
counterclaim, being logically related to Mercados
claim, was compulsory in nature.19 Consequently,
the payment of docket fees was not necessary for
the RTC to acquire jurisdiction over the subject
matter.
WHEREFORE, the petition is hereby DENIED.

46 FORT BONIFACIO DEVELOPMENT

CORPORATION petitioner, vs.YLLAS LENDING
CORPORATION and JOSE S. LAURAYA, in his
official capacity as President
Facts: Fort Bonifacio Dev. Corp. (FBDC) executed a
lease contract in favor of Tirreno, Inc. (Tirreno) over
a unit at the Entertainment Center - Phase 1. They
notarized it on the day of its execution. Tirreno
used the leased premises for Savoia Ristorante and
La Strega Bar.
Two provisions in the lease contract are pertinent to
the case. Section 20, which is about the
consequences in case of default of the lessee, and
Section 22, which is about the lien on the
properties of the lease.
1999 - Tirreno began to default in its lease
payments
July 2000 - He have arrears by P5,027,337.91
19 Sept 2000 - FBDC found need to send Tirreno a
written notice of termination
22 Sep 2000 - FBDC entered and occupied the
leased premises. FBDC also appropriated the

equipment and properties left by Tirreno (pursuant

to Section 22)
Tirreno filed an action for forcible entry against
FBDC before the Municipal Trial Court of Taguig.
Tirreno also filed a complaint for specific
performance with a prayer for the issuance of a
temporary restraining order and/or a writ of
preliminary injunction against FBDC before the
Regional Trial Court (RTC) of Pasig City. RTC
dismissed because of forum-shopping.
4 March 2002 - Yllas Lending Corporation and Jose
S. Lauraya (President) caused the sheriff to serve
an alias writ of seizure against FBDC. On the same
day, FBDC served on the sheriff an affidavit of title
and third party claim. FBDC found out that Yllas
filed a complaint for Foreclosure of Chattel
Mortgage with Replevin against Tirreno on 27 Sept
2001. That complaint alleged that they lent a total
of P1.5 million to Tirreno and two others and Tirreno
executed a Deed of Chattel Mortgage in favor of
Yllas as security for the loan (Furniture, Fixtures and
Equipment of Savoia Ristorante and La Strega Bar,
a restaurant owned and managed by Tirreno).
Despite FBDC's service upon him of an affidavit of
title and third party claim, the sheriff proceeded
with the seizure of certain items from FBDC's
premises and delivered the same to Yllas.
FBDC's filed Third-Party Claim over the properties of
[Tirreno] which were seized and delivered by the
sheriff and Motion to Intervene and to Admit
Complaint in Intervention.
Yllas posit that the basis of [FBDC's] third party
claim being anchored on the aforesaid Contract [of]
Lease is baseless. [Respondents] contend that the
stipulation of the contract of lease partakes of a
pledge which is void under Article 2088 of the Civil
Code for being pactum commissorium.
Trial court stated that the present case raises the
question of who has a better right over the
properties of Tirreno
Trial court - declared that Section 22 of the lease
contract between FBDC and Tirreno is void. Section
22 of the lease contract pledges the properties
found in the leased premises as security for the
payment of the unpaid rentals. Moreover, Section
22 provides for the automatic appropriation of the
properties owned by Tirreno in the event of its
default in the payment of monthly rentals to FBDC.

Since Section 22 is void, it cannot vest title of

ownership over the seized properties. Therefore,
FBDC cannot assert that its right is superior to
respondents, who are the mortgagees of the
disputed properties.
FBDC filed the present petition before this Court to
review pure questions of law
Issue: trial court erred in dismissing FBDC's third
party claim upon the trial court's erroneous
interpretation that FBDC has no right of ownership
over the subject properties because Section 22 of
the contract of lease is void for being a pledge and
a pactum commissorium
Ruling:Respondents, as well as the trial court,
contend that Section 22 constitutes a pactum
commissorium, a void stipulation in a pledge
contract. FBDC, on the other hand, states that
Section 22 is merely a dacion en pago.
Articles 2085 and 2093 of the Civil Code enumerate
the requisites essential to a contract of pledge: (1)
the pledge is constituted to secure the fulfillment of
a principal obligation; (2) the pledgor is the
absolute owner of the thing pledged; (3) the
persons constituting the pledge have the free
disposal of their property or have legal
authorization for the purpose; and (4) the thing
pledged is placed in the possession of the creditor,
or of a third person by common agreement. Article
2088 of the Civil Code prohibits the creditor from
appropriating or disposing the things pledged, and
any contrary stipulation is void.
On the other hand, Article 1245 of the Civil Code
defines dacion en pago, or dation in payment, as
the alienation of property to the creditor in
satisfaction of a debt in money. Dacion en pago is
governed by the law on sales. Philippine National
Bank v. Pineda13 held that dation in payment
requires delivery and transmission of ownership of
a thing owned by the debtor to the creditor as an
accepted equivalent of the performance of the
obligation. There is no dation in payment when
there is no transfer of ownership in the creditor's
favor, as when the possession of the thing is merely
given to the creditor by way of security.
Section 22, gives FBDC a means to collect payment
from Tirreno in case of termination of the lease

contract or the expiration of the lease period and

there are unpaid rentals, charges, or damages. The
existence of a contract of pledge, however, does
not arise just because FBDC has means of
collecting past due rent from Tirreno other than
direct payment. The trial court concluded that
Section 22 constitutes a pledge because of the
presence of the first three requisites of a pledge:
Tirreno's properties in the leased premises secure
Tirreno's lease payments; Tirreno is the absolute
owner of the said properties; and the persons
representing Tirreno have legal authority to
constitute the pledge. However, the fourth
requisite, that the thing pledged is placed in the
possession of the creditor, is absent. There is noncompliance with the fourth requisite even if
Tirreno's personal properties are found in FBDC's
real property. Tirreno's personal properties are in
FBDC's real property because of the Contract of
Lease, which gives Tirreno possession of the
personal properties. Since Section 22 is not a
contract of pledge, there is no pactum
commissorium.
FBDC claims that Section 22 authorizes FBDC to
take whatever properties that Tirreno left to pay off
Tirreno's obligations.
We agree with FBDC.
A lease contract may be terminated without judicial
intervention - This stipulation is in the nature of a
resolutory condition, for upon the exercise by the
[lessor] of his right to take possession of the leased
property, the contract is deemed terminated. This
kind of contractual stipulation is not illegal. Or a
lease contract may contain a forfeiture clause.
We allow FBDC's forfeiture of Tirreno's properties in
the leased premises. By agreement between FBDC
and Tirreno, the properties are answerable for any
unpaid rent or charges at any termination of the
lease. Such agreement is not contrary to law,
morals, good customs, or public policy. Forfeiture of
the properties is the only security that FBDC may
apply in case of Tirreno's default in its obligations.
WHEREFORE, we GRANT the petition. We SET ASIDE
the Orders of RTC.

47. VICTORIA YAU CHU, assisted by her

husband MICHAEL CHU vs. HON. COURT OF
APPEALS, FAMILY SAVINGS BANK and/or CAMS
TRADING ENTERPRISES, INC.

Facts: Since 1980, the petitioner, Victoria Yau Chu,

had been purchasing cement on credit from CAMS
Trading Enterprises, Inc. (hereafter "CAMS Trading"
for brevity). To guaranty payment for her cement
withdrawals, she executed in favor of Cams Trading
deeds of assignment of her time deposits in the
total sum of P320,000 in the Family Savings Bank
(hereafter the Bank). Except for the serial numbers
and the dates of the time deposit certificates, the
deeds of assignment, which were prepared by her
own lawyer, uniformly provided
... That the assignment serves as a collateral or
guarantee for the payment of my obligation with
the said CAMS TRADING ENTERPRISES, INC. on
account of my cement withdrawal from said
company, per separate contract executed between
us.
Cams Trading notified the Bank that Mrs. Chu had
an unpaid account with it in the sum of P314,6
39.75. It asked that it be allowed to encash the
time deposit certificates which had been assigned
to it by Mrs. Chu. It submitted to the Bank a letter
of Mrs. Chu admitting that her outstanding account
with Cams Trading was P404,500. After verbally
advising Mrs. Chu of the assignee's request to
encash her time deposit certificates and obtaining
her verbal conformity thereto, the Bank agreed to
encash the certificates.It delivered to Cams Trading
the sum of P283,737.75 only, as one time deposit
certificate lacked the proper signatures. Upon being
informed of the encashment, Mrs. Chu demanded
from the Bank and Cams Trading that her time
deposit be restored. When neither complied, she
filed a complaint to recover the sum of P283,737.75
from them. The case was docketed in the Regional
Trial Court of Makati, Metro Manila (then CFI of
Rizal, Pasig Branch XIX).
The trial court dismissed the complaint for lack of
merit.
Chu appealed to the Court of Appeals which
affirmed the dismissal of her complaint.
Issue: Whether or not the Court of Appeals erred
1) In not annulling the encashment of her time

deposit certificates as a pactum commissorium;

and
2) In not finding that the obligations secured by her
time deposits had already been paid.
Ruling: Petition has no merit.
The encashment of the deposit certificates was not
a pacto commissorio which is prohibited under Art.
2088 of the Civil Code. A pacto commissorio is a
provision for the automatic appropriation of the
pledged or mortgaged property by the creditor in
payment of the loan upon its maturity. The
prohibition against a pacto commissorio is intended
to protect the obligor, pledgor, or mortgagor
against being overreached by his creditor who
holds a pledge or mortgage over property whose
value is much more than the debt. Where, as in this
case, the security for the debt is also money
deposited in a bank, the amount of which is even
less than the debt, it was not illegal for the creditor
to encash the time deposit certificates to pay the
debtors' overdue obligation, with the latter's
consent.
Whether the debt had already been paid as now
alleged by the debtor, is a factual question which
the Court of Appeals found not to have been proven
for the evidence which the debtor sought to
present on appeal, were receipts for payments
made prior to July 18, 1980. Since the petitioner
signed on July 18, 1980 a letter admitting her
indebtedness to be in the sum of P404,500, and
there is no proof of payment made by her
thereafter to reduce or extinguish her debt, the
application of her time deposits, which she had
assigned to the creditor to secure the payment of
her debt, was proper. The Court of Appeals did not
commit a reversible error in holding that it was so.
WHEREFORE, the petition for review is denied.
48 UY TONG V. CA
FACTS
Petitioners Uy Tong and Kho Po Giok (SPOUSES) used to be the owners of Apartment No. 307 of
the Ligaya Building, together with the leasehold right for ninety- nine (99) years over the land on
which the building stands. The land is registered in the name of Ligaya Investments, Inc owned
the building which houses the apartment units but sold Apartment No. 307 and leased a portion
of the land in which the building stands to the SPOUSES.
The SPOUSES purchased from private respondent Bayanihan Automotive, Inc. (BAYANIHAN)
seven (7) units of motor vehicles for a total amount of P47,700.00 payable in three (3)
installments. The transaction was evidenced by a written "Agreement"
After making a downpayment of P7,700.00, the SPOUSES failed to pay the balance of

P40,000.00. Due to these unpaid balances, BAYANIHAN filed an action for specific performance
against the SPOUSES docketed as Civil Case No. 80420 with the Court of First Instance of Manila.
Judgement was rendered in favor of Bayanihan
Pursuant to said judgment, an order for execution pending appeal was issued by the trial court
and a deed of assignment over Apartment No. 307 of the Ligaya Building together with the
leasehold right over the land on which the building stands. The SPOUSES acknowledged receipt
of the sum of P3,000.00 more or less, paid by BAYANIHAN pursuant to the said judgment.
Notwithstanding the execution of the deed of assignment the SPOUSES remained in possession
of the premises. Subsequently, they were allowed to remain in the premises as lessees for a
stipulated monthly rental
Despite the expiration of the said period, the SPOUSES failed to surrender possession of the
premises in favor of BAYANIHAN. This prompted BAYANIHAN to file an ejectment case. This action
was however dismissed on the ground that BAYANIHAN was not the real party in interest, not
being the owner of the building.
After demands to vacate the subject apartment made by BAYANIHAN's counsel was again ignored
by the SPOUSES, an action for recovery of possession with damages was filed with the Court of
First Instance of Manila, decision in said case was rendered in favor of BAYANIHAN. The SPOUSES
appealed to the Court of Appeals. The respondent Court of Appeals affirmed in toto the decision
ISSUE: WON The deed of assignment is null and void because it is in the nature of a pactum
commissorium and/or was borne out of the same.
HELD:
No. The two elements for pactum commissorium to exist: (1) that there should be a pledge or
mortgage wherein a property is pledged or mortgaged by way of security for the payment of the
principal obligation; and (2) that there should be a stipulation for an automatic appropriation by
the creditor of the thing pledged or mortgaged in the event of non-payment of the principal
obligation within the stipulated period.
A perusal of the terms of the questioned agreement evinces no basis for the application of the
pactum commissorium provision. First, there is no indication of 'any contract of mortgage
entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the
SPOUSES defaulted in their payments of the second and third installments of the trucks they
purchased, BAYANIHAN filed an action in court for specific performance. The trial court rendered
favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of their
obligation and in case of failure to do so, to execute a deed of assignment over the property
involved in this case. The SPOUSES elected to execute the deed of assignment pursuant to said
judgment.
Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of
the trial court to exact fulfillment of the obligation, which, by its very nature is ". . anathema to
the concept of pacto commissorio" [Northern Motors, Inc. v. Herrera, G.R. No. L-32674, February
22, 1973, 49 SCRA 392]. And even granting that the original agreement between the parties had
the badges of pactum commissorium, the deed of assignment does not suffer the same fate as
this was executed pursuant to a valid judgment
The SPOUSES are deemed to have admitted the deed's genuineness and due execution. Besides,
they themselves admit that ". . . the contract was duly executed and that the same is genuine"

49. Sps. Enrique and Florencia Belo vs. PNB

and spouses eslabon

FACTS: Eduarda Belo owned an agricultural land

with an area of 661,288 square meters located in
Capiz. She leased a portion of the said tract of land

to respondents spouses in connection with the said

spouses' sugar plantation business. The lease
contract was effective for a period of 7 years and a
rate of P7,000.
To finance their business venture, respondents
spouses obtained a loan from respondent PNB
secured by a REM on their residential houses and
the agricultural land leased. The assent of Eduarda
Belo to the mortgage was acquired through a
special power of attorney (SPA) which she executed
in favor of respondent spouses.
Inasmuch as the respondents spouses Eslabon
failed to pay their loan obligation, extrajudicial
foreclosure proceedings against the mortgaged
properties were instituted by respondent PNB. ,
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
Sheriff's 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 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 P484,482.96 w/c includes the bid price of PNB
and interest and expenses. 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
P2,779,978.72. Petitioners refused to pay said
amount.
Petitioner initiated a case in the RTC 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. RTC granted the
alternative cause of petitioners.
On appeal, the CA modified the decision of the RTC.
It stated that the appropriate redemption price is
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.

ISSUE: 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
HELD: The Court finds the petitioners' position on
this issue to be meritorious.
Respondent PNB maintains that Section 25 of
Presidential Decree No. 694 should apply, thus:
SECTION 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.
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 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.
On the other hand, petitioners assert that only the
amount of the winning bidder's 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:
SECTION 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 , in so
far as these are not inconsistent with the provisions
of this Act.
There is no doubt that Eduarda Belo, assignor of
the petitioners, is an accommodation mortgagor.
The Pre-trial Order and respondent PNB's 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. It is presumed
that the legislature intended exceptions to its
language which would avoid absurd consequences
of this character. 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 debtormortgagor. 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.
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 collateral needed to
secure their bank loan. Respondents PNB and
spouses Eslabons very well knew that she merely
consented to be a mere accommodation mortgagor.
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 debtor's heir who has paid a
part of the debt cannot ask for the proportionate

extinguishment of the pledge or mortgage as the

debt is not completely satisfied. Neither can the
creditor's heir who received his share of the debt
return the pledge or cancel the mortgage, to the
prejudice of the other heirs who have not been
paid. From these provisions is excepted the case in
which, there being several things given in
mortgage or pledge, each one of them guarantees
only a determinate portion of the credit. The
debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially
answerable is satisfied.
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.
From the wording of the law, indivisibility arises
only when there is a debt, that is, there is a debtorcreditor 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 PNB's 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
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 Belo's

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.

50. PHILIPPINE NATIONAL BANK, petitioner,

vs. HON. RUSTICO DE LOS REYES, AMANDO
ARANA and JULIA REYES, respondents.
Respondent spouses mortgaged 6 parcels of land
located at Cantilla, Sorsogon to petitioner bank
(PNB) to secure the payment of a loan of
P10,000.00. 2 of these are covered by free patent
titles while the other 4 are untitled and covered
only by tax declarations.
For failure of respondent spouses to pay the loan
after its maturity, petitioner bank effected the
extrajudicial foreclosure of the mortgage and
purchased the same at public auction. The
certificate of sale was duly registered with the
Register of Deeds. After the one-year redemption
period expired without respondent spouses having
exercised their right or redemption, petitioner
executed and registered an affidavit of
consolidation of ownership over the six (6) parcels
of land and new titles were issued in its name for
the two (2) parcels covered by free patent titles
and the corresponding tax declarations for the four
(4) parcels were placed in its name.
Jose Barrameda, then the manager of petitioner's
Sorsogon Branch, sent a letter to respondent
spouses informing them of the consolidation of title
and inviting them to repurchase the lands .
Subsequently, petitioner entered into a contract to
sell the 6 parcels of land to one Gerardo Badong.
Petitioner informed respondent spouses of the
transaction in a letter.
respondent spouses instituted a case for legal
redemption of the six (6) parcels of land, invoking
the Public Land Act, with damages. Petitioner filed
its answer granting to respondent spouses the right
to repurchase the two (2) parcels of land covered
by free patent titles, but refused the redemption of
the other four (4) lots covered by tax declarations.

At the pre-trial the parties stipulated:

XXXX6. That the Philippine National Bank is willing
to have the two parcels of titled land redeemed but
not the untitled parcels. Plaintiffs counsel advanced
the view that the mortgage is indivisible and
therefore the plaintiffs have the right to redeem all
the parcels, the titled as well as the untitled.
the lower court rendered a decision holding that
respondent spouses are entitled to redeem the six
(6) parcels of land on the theory of "indivisibility of
mortgage.
Acting on petitioner's motion for the
reconsideration of said decision, the lower court
ruled that the applicability of the doctrine of
"indivisibility of mortgage" was deemed to have
been waived by petitioner when it agreed to the
redemption of the two (2) titled lots, and it allowed
the redemption of said four (4) lots for reasons of
equity.
Upon the other hand, the theory of private
respondents is that the mortgage is indivisible,
hence the right to redeem the titled parcels
necessarily includes the untitled ones.
ISSUE: Whether or not the rule on the indivisibility
of mortgage is applicable in this case at bar.
HELD: the rule on the indivisibility of mortgage
finds no application to the case at bar. The
particular provision of the Civil Code referred to
provides:
Art. 2089. 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 debtor's heir who has paid a part of
the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long
as the debt is not completely satisfied.
Neither can the creditor's heir who received his
share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who
have not been paid.
From these provisions is excepted the case in
which, there being several things given in
mortgage or pledge, each one of these 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
especially answerable is satisfied.
From the foregoing, it is apparent that what the law
proscribes is the foreclosure of only a portion of the
property or a number of the several properties
mortgaged corresponding to the unpaid portion of
the debt where before foreclosure proceedings
partial payment was made by the debtor on his
total outstanding loan or obligation. This also
means that the debtor cannot ask for the release of
any portion of the mortgaged property or of one or
some of the several lots mortgaged unless and until
the loan thus, secured has been fully paid,
notwithstanding the fact that there has been a
partial fulfillment of the obligation. Hence, it is
provided that the debtor who has paid a part of the
debt cannot ask for the proportionate
extinguishment of the mortgage as long as the
debt is not completely satisfied.
That the situation obtaining in the case at bar is not
within the purview of the aforesaid rule on
indivisibility is obvious since the aggregate number
of the lots which comprise the collaterals for the
mortgage had already been foreclosed and sold at
public auction. There is no partial payment nor
partial extinguishment of the obligation to speak of.
The aforesaid doctrine, which is actually intended
for the protection of the mortgagee, specifically
refers to the release of the mortgage which secures
the satisfaction of the indebtedness and naturally
presupposes that the mortgage is existing. Once
the mortgage is extinguished by a complete
foreclosure thereof, said doctrine of indivisibility
ceases to apply since, with the full payment of the
debt, there is nothing more to secure. Neither does
the instant case fall within the exception
contemplated in the last two paragraphs of Article
2089 in which, there being several things given in
mortgage, each of them guarantees only a
determinate portion of the account. There is no
proof or any averment to that effect.
It is an essential requisite to the validity of a
mortgage that the mortgagor be the absolute
owner of the property, mortgaged. Since the
mortgage is absolutely null and void and ineffective
from its inception, petitioner, as mortgagee,

acquires no better rights, the registration of the

mortgage notwithstanding. Nor would the
subsequent acquisition by the mortgagor of title
over said properties through the issuance of free
patents thereover validate and legalize the
mortgage thereon under the doctrine of estoppel,
since upon the issuance of said patents, the lots in
question are thereby brought under the operation
of the Public Land Act which prohibits the taking of
said properties for the satisfaction of debts
contracted prior to the expiration of five (5) years
from the date of the issuance of the patents

52. Sicam v. Jorge

Facts: Lulu Jorge pawned several pieces of jewelry

with Agencia de R. C. Sicam to secure a loan.
On October 19, 1987, two armed men entered the
pawnshop and took away whatever cash and
jewelry were found inside the pawnshop vault.
Sicam sent respondent Lulu a letter informing her
of the loss of her jewelry due to the robbery
incident in the pawnshop. Respondent Lulu
expressed disbelief stating that when the robbery
happened, all jewelry pawned were deposited with
Far East Bank near the pawnshop since it had been
the practice that before they could withdraw,
advance notice must be given to the pawnshop so
it could withdraw the jewelry from the bank.
Respondent Lulu then requested petitioner Sicam
to prepare the pawned jewelry for withdrawal on
but petitioner Sicam failed to return the jewelry.
Respondent Lulu is seeking indemnification for the
loss of pawned jewelry and payment of damages.
Petitioner is interposing the defense of caso fortuito
on the robber committed against the pawnshop.
Issue:Whether or not Sicam is liable for the loss of
the pawned articles in their possession.
Held: YES. The provision on pledge, particularly
Article 2099 of the Civil Code, provides that the

creditor shall take care of the thing pledged with

the diligence of a good father of a family. This
means that petitioners must take care of the pawns
the way a prudent person would as to his own
property.
A review of the records clearly shows that
petitioners failed to exercise reasonable care and
caution that an ordinarily prudent person would
have used in the same situation. Petitioners were
guilty of negligence in the operation of their
pawnshop business. No sufficient precaution and
vigilance were adopted by petitioners to protect the
pawnshop from unlawful intrusion. There was no
clear showing that there was any security guard at
all.
Sicams admission that the vault was open at the
time of robbery is clearly a proof of petitioners
failure to observe the care, precaution and
vigilance that the circumstances justly demanded.
Petitioner Sicam testified that once the pawnshop
was open, the combination was already off. Instead
of taking the precaution to protect them, they let
open the vault, providing no difficulty for the
robbers to cart away the pawned articles.
In contrast, the robbery in this case took place in
1987 when robbery was already prevalent and
petitioners in fact had already foreseen it as they
wanted to deposit the pawn with a nearby bank for
safekeeping. Moreover, unlike in Austria, where no
negligence was committed, we found petitioners
negligent in securing their pawnshop as earlier
discussed.

53.) LIM TAY VS. COURT OF APPEALS

FACTS:
On 8 January 1980, Sy Guiok secured a loan from
Lim Tay in the amount of P40,000 payable within 6
months. To secure the payment of the aforesaid
loan and interest thereon, Guiok executed a
Contract of Pledge in favor of Lim Tay. He pledged
his 300 shares of stock in the Go Fay & Company
Inc. Guiok obliged himself to pay interest on said
loan at the rate of 10% per annum from the date of

said contract of pledge.

On the same date, Alfonso Sy Lim secured a loan,
from Lim Tay in the amount of P40,000 payable in 6
months. To secure the payment of his loan, Sy Lim
executed a "Contract of Pledge" covering his 300
shares of stock in Go Fay & Co. Under said contract,
Sy Lim obliged himself to pay interest on his loan at
the rate of 10% per annum from the date of the
execution of said contract.
The contract provided that Lim Tay was merely
authorized to foreclose the pledge upon maturity of
the loans, not to own them. The foreclosure is not
automatic, for it must be done in a public or private
sale.
Guiok and Sy Lim endorsed their respective shares
of stock in blank and delivered the same to Lim Tay.
However, Guiok and Sy Lim failed to pay their
respective loans and the accrued interests thereon
to Lim Tay.
In October 1990, Lim Tay filed a "Petition for
Mandamus" against Go Fay & Co., with SEC praying
that an order be issued directing the corporate
secretary to register the stock transfers and issue
new certificates in favor of Lim Tay; and ordering
the corporation to pay all dividends due and
unclaimed on the said certificates to Lim Tay. In the
interim, Sy Lim died. Guiok and the Intestate Estate
of Alfonso Sy Lim, represented by Conchita Lim,
filed their Answer-In-Intervention with the SEC.
The SEC hearing officer dismissed Lim Tay's
Complaint on the ground that although the SEC had
jurisdiction over the action, he failed to prove the
legal basis for the secretary of the Corporation to
be compelled to register stock transfers in favor of
Lim Tay and to issue new certificates of stock under
his name. His appeal was denied by SEC. He
appealed with CA.
The CA debunked Lim Tay's claim that he had
acquired ownership over the shares by virtue of
novation, holding that Guiok's and Sy Lim's
endorsement and delivery of the shares were
pursuant to Articles 2093 and 2095 of the Civil
Code and that Lim Tay's receipt of dividends was in
compliance with Article 2102 of the same Code.
Arguments of Lim Tay: He contends that it has
acquired ownership of the shares "through
extraordinary prescription," pursuant to Article
1132 of the Civil Code, and through respondents'
subsequent acts, which amounted to a novation of

the contracts of pledge. Petitioner also claims that

there was dacion en pago, in which the shares of
stock were deemed sold to petitioner, the
consideration for which was the extinguishment of
the loans and the interests thereon. Petitioner
likewise claims that laches bars respondents from
recovering the subject shares.
ISSUE:
WON Lim Tay is the owner of the shares previously
subjected to pledge, for him to cause the
registration of said shares in his own name.
HELD: NO.
Lim Tay's ownership over the shares was not yet
perfected when the Complaint was filed. The
contract of pledge certainly does not make him the
owner of the shares pledged.
Further, whether prescription effectively transferred
ownership of the shares, whether there was a
novation of the contracts of pledge, and whether
laches had set in were difficult legal issues, which
were unpleaded and unresolved when Lim Tay
asked the corporate secretary of Go Fay to effect
the transfer, in his favor, of the shares pledged to
him. Lim Tay has failed to establish a clear legal
right.
Lim Tay's contention that he is the owner of the
said shares is completely without merit. Lim Tay
does not have any ownership rights at all. At the
time Lim Tay instituted his suit at the SEC, his
ownership claim had no prima facie leg to stand on.
At best, his contention was disputable and
uncertain.
Lim Tay cannot claim to have acquired ownership
over the certificates of stock through extraordinary
prescription, as provided for in Article 1132 of the
Civil Code. What is required by Article 1132 is
possession in the concept of an owner. Herein, Lim
Tay's possession of the stock certificates came
about because they were delivered to him pursuant
to the contracts of pledge. His possession as a
pledgee cannot ripen into ownership by
prescription. Lim Tay expressly repudiated the
pledge, only when he filed his Complaint and
claimed that he was not a mere pledgee, but that
he was already the owner of the shares.
Based on the foregoing, Lim Tay has not acquired
the certificates of stock through extraordinary

prescription. Neither did Lim Tay acquire the shares

by virtue of a novation of the contract of pledge.
Novation cannot be presumed by Guiok's and Sy
Lim's indorsement and delivery of the certificates
of stock covering the 600 shares, nor Lim Tay's
receipt of dividends from 1980 to 1983, nor the fact
that Guiok and Sy Lim have not instituted any
action to recover the shares since 1980. Novation is
never presumed inferred.
Notes: There is a contract of pledge between Guiok
(respondent) and Lim Tay (petitioner) & Sy Lim
(respondent) and Lim Tay (petitioner). What was
mortgaged? 300 shares of stock in the Go Fay &
Company Inc. by Guiok and 300 shares of stock in
the Go Fay & Company Inc. by Sy Lim. Date January 8, 1980.

54. Clementino Imperial vs. Mariano Santiago

facts:
A complaint was filed by Imperial, President of the
Board of Laoang Shipping Corporation, charging
respondent Santiago, Sheriff of the RTC of Makati
City with Grave Abuse of Authority and Grave
Misconduct for the illegal foreclosure of a pledge on
the vessel M/V Angela Ceferina.
Respondent denies the alleged illegal foreclosure.
He stressed that the foreclosure and auction sale
was done in a legal and appropriate manner and
that he issued a Certificate of Sale attesting that by
virtue of a contract of pledge executed by Richard
Tang Tepace, for and in behalf of Laoang Shipping
Corporation, respondent sold the vessel M/V Angela
Ceferina in a public auction to Zoilo Uy, the highest
bidder for P3.5m, conducted in front of the main
entrance of the Gusali ng Katarungan, Zobel St.,
Makati City.
complainant contends that the alleged valid
foreclosure is belied by a Certification of Atty.
Escasinas, Clerk of Court and Ex-Officio Sheriff,
stating that: per records of the court, the alleged
foreclosure of pledge does not appear to have been
filed or properly docketed in the record; the
prescribed filing and commission on sale fees does
not appear to have been paid; the public sale of the
vessel could not physically be done in front of the
Gusali ng Katarungan in Makati since the vessel

could not be brought to said location; the pledge

cannot be legally foreclosed in Makati City since it
was executed in the City of Manila; the pledge does
not conform to the legal requirements; the alleged
publication of the notice of the Sheriffs sale did not
pass through the raffle required before publication
by any newspaper could be had; there is no record
in the Office of the Clerk of Court and Ex-Officio
Sheriff of the raffle first being done because no
petition had been filed with the said office; the
posting of Sheriffs sale does not appear to have
been certified to and does not comply with the
requirements of Certification of the posting of
Affidavit; Laoang Shipping Corporation which
appears in the Registration of Ownership to be the
owner of the vessel, with address at Laoang, N.
Samar, was never notified; there was no notice
made to MARINA where the vessel is registered;
respondent could not feign that he advised Zoilo Uy
to pay the necessary fees required by the Office of
the Clerk of Court after the auction sale;
respondent issued a Certificate of Sale to Zoilo Uy
without ensuring that the said fees were actually
and properly paid; and respondent conspired with
Richard Tepace and Zoilo Uy to deprive him
(complainant) of his vessel by way of a false
Certificate of Sale.
Judge Morales found respondent guilty of Grave
Abuse of Authority and Grave Misconduct. She
pointed out that respondent evidently treated an
extra-judicial foreclosure based on mortgage and a
foreclosure based on a pledge as similar, if not the
same; that such error cannot be treated as
insignificant since the law treats the two securities
as different, and it was inexcusable negligence, if
not gross ignorance of the law on the part of the
respondent to ignore such statutory differences.
Judge Morales added that even the foreclosure
proceeding adopted by the respondent was invalid
inasmuch as the Certification of the Clerk of Court
affirmed the non-existence of the foreclosure, the
filing and recording, as well as payment of the
necessary fees; and, that respondent in fact
admitted his negligence as regards the payment of
the necessary filing and docket fees. The Office of
the Court Administrator (OCA) adopted the findings
of the Investigating Judge and recommended to the
Court the dismissal of respondent from the service.
Issue: WON Santiago committed grave abuse of

authority and grave misconduct. - yes

Ruling:
"Art. 2112. The creditor to whom the credit has not
been satisfied in due time, may proceed before a
Notary Public to the sale of the thing pledged. This
sale shall be made at a public auction, and with
notification to the debtor and the owner of the
thing pledged in a proper case, stating the amount
for which the public sale is to be held. If at the first
auction the thing is not sold, a second one with the
same formalities shall be held; and if at the second
auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall
be obliged to give an acquittance for his entire
claim."
It is expressly provided for in Article 2112 that only
a notary public can conduct a public auction after
proper notice is sent to the debtor and owner of the
thing pledged.
In claiming that he followed the procedure required
in the foreclosure of a chattel mortgage, and in
admitting before the Investigating Judge that he is
well-aware that the proper requirement of law is
that a petition for foreclosure of mortgage, real
estate or chattel, must be filed first with the Clerk
of Court before foreclosure or auction may
commence, he sealed his fate. This is because the
records lay bare the following facts:
1. Respondent totally ignored the specific reference
in paragraph 4 of the Pledge Agreement that Article
2112 of the Civil Code is the applicable law.
2. No petition for foreclosure of chattel mortgage
was ever filed before the Clerk of Court. Despite the
lack of petition, respondent proceeded with the
auction sale.
3. The prescribed filing and commission on sale
fees were not paid yet respondent signed the
certificate of sale merely because he trusted that
Tepace will pay the fees. The explanation of
respondent that: "its only on my good faith and
thats only my procedure because others usually
pay", is absolutely weak and completely absurd.
4. The certificate of sale was not even forwarded to
the Office of the Clerk of Court, and bears only the
signature of respondent.
5. When the Investigating Judge inquired why he
did not recall the certification since no fees were
paid, respondent replied that he simply forgot the
transaction. Forgetfulness or failure to remember is

never a rational or acceptable explanation.

6. Respondent failed to controvert the amounts
received by him totalling P165K, as shown by the
unofficial receipt issued and signed by him.
Respondent grossly violated the yardstick of public
service imposed in Section 1, Article XI of our
Constitution that a public office is a public trust;
that public officers and employees must serve with
the highest degree of responsibility, integrity,
loyalty and efficiency; and that they must at all
times remain accountable to the people. No other
office in the government service exacts a greater
demand for moral righteousness and uprightness
from an employee than in the judiciary.
The Court will not tolerate any Court employees
conduct, act or omission that violates the norm of
public accountability and diminishes or tends to
diminish the faith of the people in the judiciary. By
the very nature of their functions, sheriffs must
conduct themselves with propriety and decorum,
and above all else, be above suspicion. He is
DISMISSED from service with prejudice to reemployment in any government agency and
government-owned or controlled corporation and
with forfeiture of all retirement benefits, except
accrued leave credits.

55. Insurance Life Assurance Company, Ltd.

Vs. Robert Young
Facts:
Robert Young, together with this associates and corespondents, acquired by purchase Home Bankers
Savings and Trust Co. (now Insular Savings Bank)
from the Licaros family for P65M. Young and his
group obtained 55% equity in the bank, while Jorge
Go and his group owned the remaining 45%.
Subsequently, the Bank granted respondents and
others individual loans in the total amount of
P153B, secured by promissory notes.
Benito Araneta, a stockholder of the bank, offered
to purchase 99.82% of the outstanding capital for
P340B, subject to the condition that the ownership
of all the shares will be consolidated in Youngs
name. Araneta paid young P14B as part of the
downpayment.
However, Araneta backed out from the intended

sale and demanded the return of his downpayment.

Meanwhile, Youngs loan from Interbank became
due, cause his serious financial problem. Thus he
engaged the services of Asian Oceanic Investment
House a domestic company owned and controlled
by another petitioner, Insular Life Assurance Co.,
Ltd.
Asian Oceanic, Young and Insular Life entered into a
Credit Agreement extending a P200B loan to Young.
Young executed on the same day a Deed of Pledge
over 1,324,8664 shares which represented 99.82%
of the outstanding capital of the Bank.
The next day, he also executed a promissory note
in favor of Insular Life in the same amount, with an
interest rate of 26% per annum to mature 120 days
from execution.
On October 1, 1991, Insular Life and Insular Life
Pension Fund formally informed Young of their
intention to acquire 30% and 12%, respectively, of
the Banks outstanding shares, subject to due
diligence audit and proper documentation.
Young and Insular Life entered into a MOA wherein
Insular Life and its Pension Fund agreed to
purchase 830,630 common shares and 311,572
common shares, respectively, for a total
consideration of P198B.
The MOA was also subject to condition precedents
that (1) Young shall infuse additional capital of
P50B into the Bank; and (2) Insular Life and its
Pension Fund shall undertake a due diligence audit
on the Bank to determine whether the provision of
P60B doubtful account made by Young is sufficient.
Auction sales were held on two consecutive days,
but the shares were not sold on both days. Thus
Insular Life appropriated to itself not only the
original 1,324,864 shares but also the 250,000
shares subsequently issued by the Bank and
delivered to Insular Life by way of pledge. Insular
Life thus gave Young an acquittance of his entire
claim.
Young and his associates filed with the RTC a
complaint against the Bank, Insular life and its
counsel (Atty. Jimenez) for annulment of notarial
sale, specific performance and damages. The
complaint alleged, inter alia, that the notarial sale
conducted by Atty. Jimenez is void as it does not
comply with the requirement of notice of second

auction sale.
Only Young answered the counterclaim of Insular
Life, hence his associates were declared in default.
The RTC rendered a decision, dismissing the
counterclaim against Young.
CA reversed. It ruled that the MOA prepared by
Insular Life is binding between the parties, as it was
not validly rescinded. It also concluded that Youngs
loan with Insular Life is deemed fully paid based on
the representation and warranty in the MOA that
the entire proceeds of the sale shall be used to
pay off the outstanding debt of Robert T. Young to
Insular Life.
Issue:
Was the MOA between Young and Insular Life, a
deed of sale?
Was the auction sale void due to the sending of
separate notice for the second auction by Insular
Life?

Ruling:
1st Issue
NO. The MOA is merely a contract to sell, since the
parties therein specifically undertook to enter into a
contract of sale if the stipulated conditions are met
and the representation and warranties given by
Young prove to be true.
It must be emphasized that the MOA did not convey
title to the shares of Insular Life. If ever there was
delivery of the said shares to Insular Life, it was
because they were pledged by Young to Insular Life
under the Credit Agreement.
It would be unfair on the part of Young to demand
compliance by Insular Life of its obligations when
he himself was remiss in his own. Neither can he
feign ignorance of the stipulation in the MOA since
it is presumed that he read the same and was
satisfied with its provisions before he affixed his
signature therein.
The fact that no deed of sale was subsequently
executed by the parties confirms the conclusion
that no sale transpired between them.

2nd Issue:
NO. Article 2112 of the Civil Code provides: The
creditor to whom the credit has not been satisfied
in due time, may proceed before a Notary Public for
the sale of the thing pledged. The sale shall be
made at a public auction and with notification to
the debtor and the owner of the things pledged in a
proper case, stating the amount for which the
public sale is to be held. If at the first auction the
thing is not sold, a second one with the same
formalities shall be held; and if at the second
auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall
be obliged to give an acquittance for his entire
claim.
Clearly there is no prohibition contained in the law
against the sending of one notice for the first and
second public auction as was done here by
petitioner Insular Life.
The purpose of the law in requiring notice is to
sufficiently apprise the debtor and the pledgor that
the thing pledged to secure payment of the loan
will be sold in a public auction and the proceeds
thereof shall be applied to satisfy the debt.

56. Eufemia Balatico Vda. De Agatep,

petitioner, vs. Roberta Rodriguez and Natalia
Aguinaldo Vda. De Lim, respondents.

Facts: Respondent Lim previously owned the

subject property of this case, a parcel of land
located at Zinundungan, Lasam, Cagayan, with an
area of 1,377 sq. m.
She mortgaged the same to PNB, Tuguegarao
Branch, to secure a loan of 30 thousand which she
obtained from said bank. Due to her inability to pay
her loan, PNB was prompted to foreclose the
property. The same was later sold at public auction
to PNB as highest bidder. After the expiration of the
1 year redemption period, the TCT of Lim was
cancelled and a new TCT was issued in favor of the
bank.
Unbeknownst to the Bank, Lim sold the subject
property to Isaac Agatep, husband of herein

petitioner, on August 18, 1976, while the mortgage

was still in effect. However, the sale was not
registered, and neither did Lim deliver the title to
either of the spouse Agatep. Nonetheless, the
Agateps took possession of the same, fenced it with
barbed wire and introduced improvements thereon.
Subsequently, Agatep died in 1978. Despite his
death, his heirs, including herein petitioner,
continued to possess the property.
In 1993, the property was sold by PNB to herein
respondent Rodriguez, the daughter of Lim. Thus,
on January 27, 1995, petitioner filed a complaint for
reconveyance and/or damages with the RTC
against the respondents. Later, she amended her
complaint to implead PNB as a party defendant.
The RTC dismissed the amended complaint for
Agateps failure to file her Pre-Trial Brief and ruled
on the original complaint in favor respondents but
awarded damages in favor of petitioner. Her MR
being denied, she appealed to the CA which also
denied the same. Her MR having been denied, she
sought recourse to the SC.
ISSUEs: a) WoN the CA erred in sustaining the RTC
when it passed upon the merits of petitioner's
cause of action against PNB notwithstanding the
fact that the complaint against the latter was
already dismissed; b) WoN PNB is a mortgagee in
good faith; c) WoN PNB acquired ownership of the
property despite the fact that the same was not
delivered to it
Ruling: a) No. While it is true that the judgment of
the trial and appellate courts in the present case
could not bind the PNB for the latter is not a party
to the case, this does not mean that the trial and
appellate courts are precluded from making
findings which are necessary for a just, complete
and proper resolution of the issues raised in the
present case. The Court found no error in the
determination by the trial and appellate courts of
the question of whether or not PNB was a
mortgagee, buyer and, later on, seller in good faith
as this would bear upon the ultimate issue of
whether petitioner is entitled to reconveyance.
b) Yes. PNB is an innocent mortgagee for value.
When the lots were mortgaged to PNB by Lim, the
titles thereto were in the latter's name, and they
showed neither vice nor infirmity. In accepting the
mortgage, PNB was not required to make any
further investigation of the titles to the properties

being given as security, and could rely entirely on

what was stated in the aforesaid title. The public
interest in upholding the indefeasibility of a
certificate of title, as evidence of the lawful
ownership of the land or of any encumbrance
thereon, protects a buyer or mortgagee who, in
good faith, relies upon what appears on the face of
the certificate of title.
c) Yes. Under the New Civil Code, When the sale is
made through a public instrument, the execution
thereof shall be equivalent to the delivery of the
thing which is the object of the contract, if from the
deed the contrary does not appear or cannot
clearly be inferred. Moreover, the buyer in a
foreclosure sale becomes the absolute owner of the
property purchased if it is not redeemed during the
period of one year after the registration of the sale.
Therefore, prior physical delivery or possession is
not legally required since the execution of the Deed
of Sale in favor of PNB, after the expiration of the
redemption period, is deemed equivalent to
delivery.
As to Agateps contention that the execution of a
public document in favor of PNB did not constitute
sufficient delivery to it because the property
involved is in the actual and adverse possession of
her and her husband, it must be noted that
petitioner and her husband's possession of the
disputed lot is derived from their right as buyers of
the subject parcel of land. As buyers or transferees,
petitioner and her husband simply stepped into the
shoes of Lim, who, prior to selling the subject
property to them, mortgaged the same to PNB. As
Lim's successors-in-interest, their possession could
not be said to be adverse to that of Lim. Thus, they
are also bound to recognize and respect the
mortgage entered into by the latter.
It bears to reiterate the undisputed fact, in the
instant case, that Lim mortgaged the subject
property to PNB prior to selling the same to
petitioner's husband. One of the characteristics of a
contract of mortgage is that it is inseparable from
the property. It adheres to the property regardless
of who its owner may subsequently be.
Agatep cannot also feign ignorance of the existence
of the mortgage when they bought the property. It
is settled that registration in the public registry is
notice to the whole world. Every xxx mortgage xxx
affecting registered land shall, if registered, filed or

entered in the Office of the Register of Deeds of the

province or city where the land to which it relates
lies, be constructive notice to all persons from the
time of such registering, filing or entering. Under
the rule of notice, it is presumed that the purchaser
has examined every instrument of record affecting
the title. Such presumption may not be rebutted.
He is charged with notice of every fact shown by
the record and is presumed to know every fact
shown by the record and to know every fact which
an examination of the record would have disclosed.
This presumption cannot be overcome by any claim
of innocence or good faith. Otherwise, the very
purpose and object of the law requiring a record
would be destroyed.
The rule that all persons must take notice of the
facts which the public record contains is a rule of
law. It must be absolute; any variation would lead
to endless confusion and useless litigation. In the
present case, since the mortgage contract was
registered, petitioner may not claim lack of
knowledge thereof as a valid defense. The
subsequent sale of the property to petitioner's
husband cannot defeat the rights of PNB as the
mortgagee and, subsequently, the purchaser at the
auction sale whose rights were derived from a prior
mortgage validly registered. Hence, Agatep is not
entitled to reconveyance.

57. Teresita Monzon vs Sps. James and Maria

Rosa Nieves Relova and Sps. Bienvenido and
Eufracia Perez vs Addio Properties, Inc.

Facts:
Monzon executed a promissory note in favor of
Sps. Perez for an amount of P600K which was
secured by a 300 sq. m. lot in Tagaytay. Then, a
deed of absolute sale over the lot was executed by
Monzon in favor of Sps. Perez.
Monzon executed another promissory note
amounting to P200K in favor of Sps. Relova which
was secured by a 200 sq. m. lot which was another
portion of the lot sold to Sps. Perez. Then, Mozon
executed a deed of conditional sale in favor of Sps.

Relova.
Coastal lending corporation extra-judicially
foreclosed the entire property including the
mortgaged portions and subsequently sold to the
spouses because of Monzons indebtedness to
Coastal.
Addio Porperties inc was the winning bidder. It
paid the amount of the property and the residue
was left in the custody of the court.
Both spouses filed a petition for injunction
praying that Monzon be held liable to the spouses
of P1.6M and that the residue of the amount paid
be delivered to them.
Monzon claims that the spouses could no longer
ask for the enforcement of the promissory notes
because she had already performed her obligation
by dacion en pago as evidenced by the absolute
deed of sale and conditional deed of sale.
RTC rendered decision in favor of respondents
holding Monzon liable to the spouses for the
amount being claimed and ordered the clerk of
court to deliver the residual amount to them.
Monzon filed an appeal with RTC and granted the
same because after the spouses presented
evidence ex parte, Monzon was not given the
opportunity to present her evidence and the
CA dismissed the appeal made to RTC holding
that Monzon cannot complain that she was denied
due process because she was given ample
opportunity to defend her interest.
Issue: WON spouses are entitled to the residual
amount which was in custody of the court and WON
Monzon is liable to the spouses for the amount of
the notes.
Held:
1st issue: Spouses not entitled to the residue of the
purchase price
Rule 68, sec. 4. Disposition of proceeds of sale.
The amount realized from the foreclosure sale of
the mortgaged property shall, after deducting the
costs of the sale, be paid to the person foreclosing
the mortgage, and when there shall be any balance
or residue, after paying off the mortgage debt due,
the same shall be paid to junior encumbrancers in
the order of their priority, to be ascertained by the
court, or if there be no such encumbrancers or
there be a balance or residue after payment to
them, then to the mortgagor or his duly authorized
agent, or to the person entitled to it.

 However, Rule 68 governs the judicial foreclosure

of mortgages. Extra-judicial foreclosure of
mortgages, which was what transpired in this case,
is governed by Act 3135.
Under Act 3135 does not grant to junior
encumbrances the right to receive the balance of
the purchase price. The only right given to second
mortgagees in said issuances is the right to redeem
the foreclosed property pursuant to Section 6 of Act
No. 3135:
o Sec. 6. Redemption. In all cases in which an
extrajudicial sale is made under the special power
hereinbefore referred to, the debtor, his successors
in interest or any judicial creditor or judgment
creditor of said debtor, or any person having a lien
on the property subsequent to the mortgage or
deed of trust under which the property is sold, may
redeem the same at any time within the term of
one year from and after the date of the sale.
o Hence, the spouses were not entitled to the
residue because the property was foreclosed extrajudicially. Rules of court does not apply.
2nd issue: Issue is remanded to RTC
The rule is now settled that a mortgage creditor
may elect to waive his security and bring, instead,
an ordinary action to recover the indebtedness with
the right to execute a judgment thereon on all the
properties of the debtor including the subject
matter of the mortgage, subject to the qualification
that if he fails in the remedy elected by him, he
cannot pursue further the remedy he has waived.
However, due to the fact that construing
respondents Petition for Injunction to be one for a
collection of sum of money would entail a waiver by
the respondents of the mortgage executed over the
subject properties, we should proceed with caution
before making such construction. We, therefore,
resolve that upon the remand of this case to the
trial court, respondents should be ordered to
manifest whether the Petition for Injunction should
be treated as a complaint for the collection of a
sum of money.
o If respondents answer in the affirmative, then the
case shall proceed with the presentation of the
evidence for the defense. If Monzon would be
successful in proving her defense of dacion en
pago, there would, in effect, be a double sale of the
mortgaged properties: the same properties were
sold to both respondents and to herein intervenor

Addio Properties, Inc. If, pursuant to the rules on

double sales, respondents are entitled to the
properties, their remedy is to file the proper action
to recover possession. If, pursuant to said rules,
Addio Properties, Inc. is entitled to the properties,
respondents remedy is to file an action for
damages against Monzon.
o If respondents answer in the negative, the case
shall be dismissed, without prejudice to the
exercise of respondents rights as mortgage
creditors. If respondents mortgage contract was
executed before the execution of the mortgage
contract with Addio Properties, Inc., respondents
would be the first mortgagors. Pursuant to Article
2126, they would be entitled to foreclose the
property as against any subsequent possessor
thereof. If respondents mortgage contract was
executed after the execution of the mortgage
contract with Addio Properties, Inc., respondents
would be the second mortgagors. As such, they are
entitled to a right of redemption pursuant to
Section 6 of Act No. 3135.

58 Corinthian Gardens Association Inc. vs Spouses Reynaldo Tanjuangco et al

Facts:
The Tanjangcos were the owners of lot nos 68 and 69 while the Cuasos owned lot no 65 where
both properties are located at Corinthian Gardens Subdivision in Quezon City managed by the
petitioner.
Before the construction of the Cuasos house on lot no 65, they engaged the services of Engr
De Dios to conduct a relocation survey of the property. As was mentioned also in the facts,
Corinthian has conducted periodic ocular inspection in order to determine the compliance with
the approved plans pursuant to their Manual of Rules and Regulations. Unfortunately, it was later
on found out that the Cuasos constructed their house with their perimeter fence encroaching 87
square meters of lot 69 owned by the Tanjuangcos.
Settlements failed, prompting the Tanjuangcos to file a complaint with the RTC of Quezon City
against the spouses upon their failure to demolish the perimeter fence. In turn, the Cuasos filed
a third-party complaint against Corinthian, Engr De Dios and the builder.
The RTC ruled in favor of the Tanjuangcos. In its ruling, the RTC stated that the fence
encroached on the property of the Tanjuangcos. However, it ruled that the Cuasos were builders
in good faith and gave the Tanjuangcos the option to sell and the Cuasos the option to buy. That
in the event the parties disagree, the perimeter fence should be demolished and ordered the
Cuasos as well to pay monthly rentals. The builder was also found negligent while the case
against Corinthian and Engr De Dios was dismissed.
With the motion for reconsideration of the Tanjuangcos, Cuasos and the builder having been
denied, the parties appealed the said decision to the CA.
The CA reversed the RTC and held that the Cuasos acted in bad faith. The CA further held that
the Tanjuangcos have the right to demand the demolition of the perimeter wall after reimbursing
the Cuasos for the preservation of it. Further, the CA ordered the Cuasos to pay monthly rentals.
The third party complaint, passed upon by the CA, ruled that Corinthian, Engr De Dios and the
builder were all found to be negligent and were ordered to contribute to the judgment sums and

amounts awarded.
It was only Corinthian who filed a motion for reconsideration which was however denied.
Corinthian filed a petition for review with the SC and required the parties to submit a
memoranda.
The Tanjuangcos moved for a partial entry of judgment of the CA decision which was granted
by the latter. Then they moved for the execution of said judgment.
Issues:
1. Whether Corinthian was negligent under the circumstances and, if so, whether such
negligence contributed to the injury suffered by the Tanjangcos.
Ruling:
Undeniably, the perimeter fence of the Cuasos encroached on Lot 69 owned by the Tanjangcos
by 87 square meters as duly found by both the RTC and the CA in accordance with the evidence
on record. As a result, the Tanjangcos suffered damage in having been deprived of the use of that
portion of their lot encroached upon.
A negligent act is an inadvertent act; it may be merely carelessly done from a lack of ordinary
prudence and may be one which creates a situation involving an unreasonable risk to another
because of the expectable action of the other, a third person, an animal, or a force of nature. A
negligent act is one from which an ordinary prudent person in the actor's position, in the same or
similar circumstances, would foresee such an appreciable risk of harm to others as to cause him
not to do the act or to do it in a more careful manner.
We agree with the CA when it aptly held:
Corinthian cannot and should not be allowed to justify or excuse its negligence by claiming that
its approval of the Cuasos building plans was only limited to a so-called "table inspection;" and
not actual site measurement. To accept some such postulate is to put a premium on negligence.
Corinthian was not organized solely for the defendants Cuasos. It is also the subdivision of the
plaintiffs-spouses Tanjangcos - and of all others who have their dwelling units or abodes therein.
Pertinently, its Manual of Rules and Regulations stipulates in Section 3 thereof (under the
heading Construction), thus:
A. Rules and Regulations
No new construction can be started unless the building plans are approved by the Associationand
the appropriate Builders cash bond and pre-construction fees are paid. The Association will not
allow the entry of construction materials and process identification cards for workers if the above
conditions are not complied with. Likewise, all renovations, repairs, additions and improvements
to a finished house except electrical wiring, will have to be approved by the Association. Water
service connection of a homeowner who undertakes construction work without prior approval of
the Association will be cut-off in addition to the sanctions previously mentioned.
By its Manual of Rules and Regulations, it is reasonable to assume that Corinthian, through its
representative, in the approval of building plans, and in the conduct of periodic inspections of ongoing construction projects within the subdivision, is responsible in insuring compliance with the
approved plans, inclusive of the construction of perimeter walls, which in this case is the subject
of dispute between the Tanjangcos and the Cuasos. It is not just or equitable to relieve Corinthian
of any liability when, by its very own rules, it imposes its authority over all its members to the
end that "no new construction can be started unless the plans are approved by the Association
and the appropriate cash bond and pre-construction fees are paid." Moreover, Corinthian can
impose sanctions for violating these rules. Thus, the proposition that the inspection is merely a
"table inspection" and, therefore, should exempt Corinthian from liability, is unacceptable. After
all, if the supposed inspection is merely a "table inspection" and the approval granted to every
member is a mere formality, then the purpose of the rules would be defeated. Compliance
therewith would not be mandatory, and sanctions imposed for violations could be disregarded.
Corinthian's imprimatur on the construction of the Cuasos' perimeter wall over the property of
the Tanjangcos assured the Cuasos that everything was in order.
The petition is DENIED

59. josefina cenas and the provincial sheriff of

rizal vs. sps. antonio santos and dra. rosario
santos and hon. pedro navarro, judge cfi-rizal
branch 3
facts:
On May 3, 1976, the spouses Jose Pulido and
Iluminada M. Pulido mortgaged to Pasay City
Savings and Loan Association, Inc. their land
covered by TCT No. 471634, subject of this case, to
secure a loan of P10,000.00. The said mortgage
was registered with the Registry of Deeds on the
same date and was duly annotated in the title of
the property.
On May 18, 1976, the said mortgaged land was
levied upon by the City Sheriff of Quezon City
pursuant to a writ of execution issued by the then
Court of First Instance of Quezon City in Civil Case
No. Q-2029 entitled, "Milagros C. Punzalan vs.
Iluminada Manuel-Pulido"; and eventually, on July
19, 1976, the same was sold to herein petitioner
Josefina B. Cenas who was the highest bidder in the
execution sale.
On January 18, 1977, Pasay City Savings and Loan
Association, Inc. assigned to petitioner Cenas all its
rights, interests, and participation to the said
mortgage, for the sum of P8,110.00, representing
the unpaid principal obligation of the Pulidos as of
October 6, 1976, including interest due and legal
expenses. Thus, petitioner became the purchaser
at the public auction sale of the subject property as
well as the assignee of the mortgage constituted
thereon.
On July 19, 1977, herein private respondent Dra.
Rosario M. Santos redeemed the said property,
paying the total sum of P15,718.00, and was
accordingly issued by the City Sheriff of Quezon
City a Certificate of Redemption.
On April 17, 1977, petitioner Cenas, as the assignee
of the mortgage loan of the Pulidos which remained
unpaid, filed with the Office of the Provincial Sheriff
of Rizal, a verified petition for extra-judicial
foreclosure of the mortgage constituted over the
subject property. Accordingly, the subject property

was advertised for sale at public auction on May 15,

1978.
On the other hand, private respondents, spouses
Antonio P. Santos and Dra. Rosario M. Santos,
apprised of the impending auction sale of the said
property, filed an affidavit of adverse claim with the
Provincial Sheriff of Rizal, claiming that they had
become the absolute owners of the property by
virtue of Certificate of Redemption, dated July 20,
1977, issued by the City Sheriff of Quezon City; and
on May 11, 1978, filed with the respondent court a
verified Petition for Prohibition with Preliminary
Injunction to enjoin the Provincial Sheriff of Rizal
from proceeding with the public auction sale of the
property in question. To this petition, petitioners
filed their Answer on May 18, 1978.
Private respondents filed a Motion to Amend
Petition together with the Amended Petition, which
was opposed by the petitioners. The trial court, in
its Order of July 17, 1978, denied the motion and
ordered the parties to submit simultaneous
memoranda.
After the parties have submitted their respective
memoranda, the trial court rendered its judgment
dated August 28, 1978 in favor of private
respondents, the dispositive portion of which reads:
WHEREFORE, premises considered, the respondent
Provincial Sheriff of Rizal and any other persons
acting in his behalf are hereby enjoined from
proceeding with the auction sale predicated upon
the petition for extra-judicial foreclosure prayed for
by respondent Josefina B. Cenas.
The trial court held that the redemption of the
subject property effected by the herein private
respondents, "wipe out and extinguished the
mortgage executed by the Pulido spouses favor of
the Pasay City Savings and Loan Association, Inc."
Petitioners filed a Motion for Reconsideration but
the trial court, in its Order of December 4, 1978,
denied the same. Hence, the instant petition.
The First Division of this Court, in the Resolution of
March 2, 1979, gave due course to the petition.

Petitioners failed to file their brief on June 9, 1979

while respondents failed to file their brief within the
required period. Consequently, this case was
considered submitted for decision without
respondent's brief in the resolution of November
26, 1979.
issue:
whether or not the redemption of the questioned
property by herein private respondents wiped out
and extinguished the pre-existing mortgage
obligation of the judgment debtor, Iluminada M.
Pulido for the security of which (mortgage debt) the
subject property had been encumbered.
held:
The answer is in the negative.
Section 30, Rule 39 of the Rules of Court, provides
for the time, manner and the amount to be paid to
redeem a sold by virtue of a writ of execution.
Pertinent portion reads:
Sec. 30. Time and manner of, and amounts payable
on, successive redemptions. Notice to be given and
filed. The judgment debtor, or redemptioner,
may redeem the property from the purchaser, at
any time within twelve (12) months after the sale,
on paying the purchaser the amount of his
purchase, with one per centum per month interest
thereon in addition, up to the time of redemption,
together with the amount of any assessments or
taxes which the purchaser may have paid thereon
after purchase, and interest on such last-named
amount at the same rate; and if the purchaser be
also a creditor having a prior lien to that of the
redemptioner, other than the judgment under
which such purchase was made, the amount of
such other lien, with interest. . . . . (Emphasis
supplied)
Under the above-quoted provision, if the purchaser
is also a creditor having a prior lien to that of the
redemptioner, other than the judgment under
which such purchase was made, the redemptioner
has to pay, in addition to the prescribed amounts,
such other prior lien of the creditor-purchaser with
interest.

In the instant case, it will be recalled that on May

3,1976, the Pulidos mortgaged the subject property
to Pasay City Savings and Loan Association, Inc.
who, in turn, on January 8, 1977, assigned the
same to petitioner Cenas. Meanwhile, on July 19,
1976, pursuant to the writ of execution issued in
Civil Case No. Q-2029 (Petitioner Cenas is not a
party in this case No. Q-2029), the subject property
was sold to petitioner Cenas, being the highest
bidder in the execution sale. On July 19, 1977,
private respondent Dra. Rosario M. Santos
redeemed the subject property. Therefore, there is
no question that petitioner Cenas as assignee of
the mortgage constituted over the subject
property, is also a creditor having a prior
(mortgage) lien to that of Dra. Rosario M. Santos.
Accordingly, the acceptance of the redemption
amount by petitioner Cenas, without demanding
payment of her prior lien the mortgage
obligation of the Pulidos cannot wipe out and
extinguish said mortgage obligation. The mortgage
directly and immediately subjects the property
upon which it is imposed, whoever the possessor
may be, to the fulfillment of the obligation for
whose security it was constituted (Art. 2126, Civil
Code). Otherwise stated, a mortgage creates a real
right which is enforceable against the whole world.
Hence, even if the mortgaged property is sold (Art.
2128) or its possession transferred to another (Art.
2129), the property remains subject to the
fulfillment of the obligation for whose security it
was constituted (Padilla, Civil Code annotated, Vol.
VII, p. 207, 1975 ed.).
It will be noted that Rule 39 of the Rules of Court is
silent as to the effect of the acceptance by the
purchaser, who is also a creditor, having a prior lien
to that of the redemptioner, of the redemption
amount, without demanding payment of her prior
lien. Neither does it provide whether or not the
redemption of the property sold in execution sale
freed the redeemed property from prior liens.
However, where the prior lien consists of a
mortgage constituted on the property redeemed, as
in the case at bar, such redemption does not
extinguish the mortgage (Art. 2126). Furthermore,
a mortgage previously registered, like in the instant
case, cannot be prejudiced by any subsequent lien
or encumbrance annotated at the back of the

certificate of title (Gonzales v. Intermediate

Appellate Court, 157 SCRA 587 [1988]).
Moreover, it must be stressed that private
respondents redeemed the property in question as
"successor in interest" of the judgment debtor, and
as such are deemed subrogated to the rights and
obligations of the judgment debtor and are bound
by exactly the same condition relative to the
redemption of the subject property that bound the
latter as debtor and mortgagor (Sy vs. Court of
Appeals, 172 SCRA 125 [1989]; citing the case of
Gorospe vs. Santos, G.R. No. L-30079, January 30,
1976, 69 SCRA 191). Private respondents, by
stepping in the judgment debtor's shoes, had the
obligation to pay the mortgage debt, otherwise, the
debt would and could be enforced against the
property mortgaged (Tambunting vs. Rehabilitation
Finance Corporation, 176 SCRA 493 [1989]).
Nevertheless, considering the lapse of time that the
parties have been in status quo and the fact that
private respondents erroneously believed that the
questioned property was freed from any lien after
the redemption, equity dictates that the foreclosure
be allowed only after the private respondents shall
have been afforded the chance to settle the
mortgage obligation but failed to do so.
WHEREFORE, the questioned August 28, 1978
judgment of the trial court is Reversed and Set
Aside. Petitioner Josefina B. Cenas may proceed
with the foreclosure of the mortgaged property
after the private respondents shall have failed to
settle the mortgage debt plus interest and legal
expenses, within thirty (30) days from finality of
this decision.

60. STAR TWO (SPV-AMC), INC., Petitioner,

vs.PAPER CITY CORPORATION OF THE
PHILIPPINES, Respondent.
Facts: Paper City applied for and was granted the
following loans and credit accommodations in peso
and dollar denominations by RCBC: P10,000,000.00
on 8 January 1990, P14,000,000.00 on 19 July
1990, P10,000,000.00 on 28 June 1991, and

P16,615,000.00 on 28 November 1991 - (total =

P110,000,000.00).The loans were secured by four
(4) Deeds of Continuing Chattel Mortgages on its
machineries and equipments found inside its paper
plants. It was partly secured by various parcels of
land covered by TCT Nos. T-157743, V-13515, V1184, V-1485, V-13518 and V-13516 situated in
Valenzuela City pursuant to five (5) Deeds of Real
Estate Mortgage
RCBC executed a unilateral Cancellation of Deed of
Continuing Chattel Mortgage (through its Branch
Operation Head Joey P. Singh and Asst. Vice
President Anita O.) over the merchandise and
stocks-in-trade covered by the continuing chattel
mortgages. RCBC, Metrobank and Union Bank
(creditor banks with RCBC instituted as the trustee
bank) entered into a Mortgage Trust Indenture (MTI)
with Paper City. In the said MTI, Paper City acquired
an additional loan of P170,000,000.00)from the
creditor banks in addition to the previous loan from
RCBC amounting to P110,000,000.00 thereby
increasing the entire loan to a total of
P280,000,000.00. The new loan obligation of
P170,000,000.00 would be secured by the same
five (5) Deeds of Real Estate Mortgage and
additional real and personal properties.
MTI was later amended to increase the
contributions of the RCBC and Union Bank, they
executed a Deed of Amendment to MTI but still
included as part of the mortgaged properties by
way of a first mortgage the various machineries
and equipments.
A Second Supplemental Indenture was executed to
increase the amount of the loan from
P280,000,000.00 to P408,900,000.00 secured
against the existing properties composed of land,
building, machineries and equipments and
inventories.
Finally, a Third Supplemental Indenture ncrease the
existing loan obligation of P408,900,000.00 to
P555,000,000.00 with an additional security
composed of a newly constructed two-storey
building and other improvements, machineries and
equipments.
economic crisis ensued which made it difficult for
Paper City to meet the terms of its obligations
leading to payment defaults. RCBC filed a Petition
for Extrajudicial Foreclosure Against the Real Estate
Mortgage (extra-judicial foreclosure of eight (8)

parcels of land including all improvements)

Paper City then had an outstanding obligation with
the creditor banks adding up to Nine Hundred One
Million Eight Hundred One Thousand Four Hundred
Eighty-Four and 10/100 Pesos (P901,801,484.10),
inclusive of interest and penalty charges.
Certificate of Sale was executed certifying that the
eight (8) parcels of land with improvements thereon
were sold in the amount of P702,351,796.28 in
favor of the creditor banks RCBC, Union Bank and
Metrobank as the highest bidders.
This foreclosure sale prompted Paper City to file a
Complaint alleging that the extra-judicial sale of the
properties and plants was null and void due to lack
of prior notice and attendance of gross and evident
bad faith on the part of the creditor banks. In the
alternative, it prayed that in case the sale is
declared valid, to render the whole obligation of
Paper City as fully paid and extinguished, also to
exclude the machines because they are already
deteriorating.
trial court disputed machineries and equipments
are chattels by agreement of the parties through
their inclusion in the four (4) Deeds of Chattel
Mortgage dated 28 January 1990, 19 July 1990, 28
June 1991 and 28 November 1991. It further ruled
that the deed of cancellation executed by RCBC on
25 August 1992 was not valid because it was done
unilaterally and without the consent of Paper City
and the cancellation only refers to the
merchandise/stocks-in-trade and not to
machineries and equipments.
RCBCs MR was denied. so it filed with the CA a
Petition for Certiorari under Rule 65.
Paper Citys Arguments - Paper City refuted the
claim of RCBC that it gave its consent to consider
the machineries and equipments as real properties.
argued further that the subject machineries and
equipments were not included in the foreclosure of
the mortgage on real properties particularly the
eight (8) parcels of land. Further, the Certificate of
Sale of the Foreclosed Property referred only to
"lands and improvements" without any
specification and made no mention of the inclusion
of the subject properties.
RCBCs arguments - RCBC admitted that there was
indeed a provision in the MTI mentioning a chattel
mortgage in the amount of P13,800,000.00.
However, it justified that its inclusion in the MTI was

merely for the purpose of ascertaining the amount

of the loan to be extended to Paper City. It
reiterated its position that the machineries and
equipments were no longer treated as chattels but
already as real properties following the MTI.
CA- affirmed
issue: Whether the Cancellation of Deed of
Continuing Mortgage dated 25 August 1992 is valid
despite the fact that it was executed without the
consent of the mortgagor Paper City
Ruling: yes.By contracts, all uncontested in this
case, machineries and equipments are included in
the mortgage in favor of RCBC, in the foreclosure of
the mortgage and in the consequent sale on
foreclosure also in favor of petitioner.
Repeatedly, the parties stipulated that the
properties mortgaged by Paper City to RCBC are
various parcels of land including the buildings and
existing improvements thereon as well as the
machineries and equipments, which as stated in
the granting clause of the original mortgage, are
"more particularly described and listed that is to
say, the real and personal properties listed in
Annexes A and B x x x of which the Paper City is
the lawful and registered owner." Significantly,
Annexes "A" and "B" are itemized listings of the
buildings, machineries and equipments typed
single spaced in twenty-seven pages of the
document made part of the records.
if the language used is as clear as day and readily
understandable by any ordinary reader, there is no
need for construction- The petitioner, other creditor
banks and Paper City intended from the very first
execution of the indentures that the machineries
and equipments enumerated in Annexes "A" and
"B" are included. Obviously, with the continued
increase in the amount of the loan, totaling
hundreds of millions of pesos, Paper City had to
offer all valuable properties acceptable to the
creditor banks.
The plain and obvious inclusion in the mortgage of
the machineries and equipments of Paper City
escaped the attention of the CA which, instead,
turned to another "plain language of the MTI" that
"described the same as personal properties." It was
error for the CA to deduce from the "description"
exclusion from the mortgage.
The MTIs did not describe the equipments and
machineries as personal property. Had the CA

looked into Annexes "A" and "B" which were

referred to by the phrase "real and personal
properties," it could have easily noted that the
captions describing the listed properties were
"Buildings," "Machineries and Equipments," "Yard
and Outside," and "Additional Machinery and
Equipment." No mention in any manner was made
in the annexes about "personal property." Notably,
while "personal" appeared in the granting clause of
the original MTI, the subsequent Deed of
Amendment specifically stated that:
x x x The machineries and equipment listed in
Annexes "A" and "B" form part of the improvements
listed above and located on the parcels of land
subject of the Mortgage Trust Indenture and the
Real Estate Mortgage.
Law and jurisprudence provide and guide that even
if not expressly so stated, the mortgage extends to
the improvements. Article 2127 of the Civil Code
provides:
Art. 2127. The mortgage extends to the natural
accessions, to the improvements, growing fruits,
and the rents or income not yet received when the
obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from
the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the
declarations, amplifications and limitations
established by law, whether the estate remains in
the possession of the mortgagor, or it passes into
the hands of a third person.
Article 111 of the old Mortgage Law provides that
chattels permanently located in a building, either
useful or ornamental, or for the service of some
industry even though they were placed there after
the creation of the mortgage shall be considered as
mortgaged with the estate, provided they belong to
the owner of said estate.

61. Luis Castro vs CA

FACTS:
On 15 August 1974, Cabanatuan City Colleges
obtained a loan from the Bancom Development
Corporation. In order to secure the indebtedness,
the college mortgaged to Bancom two parcels of

land. The parcels were both within the school site.

While the mortgage was subsisting, the college
board of directors agreed to lease to petitioners a
1,000-square-meter portion of the encumbered
property on which the latter, eventually, built a
residential house. Bancom, the mortgagee, was
duly advised of the matter. The school defaulted in
the due payment of the loan. In time, Bancom
extrajudicially foreclosed on the mortgage, and the
mortgaged property was sold at public auction on
22 August 1979 with Bancom coming out to be the
only bidder. A certificate of sale was accordingly
executed by the provincial sheriff in favor of
Bancom. Subsequently, the latter assigned its
credit to herein private respondent Union Bank of
the Philippines. On 10 October 1984, following the
expiration of the redemption period without the
college having exercised its right of redemption,
private respondent consolidated title to the
property.
On 08 May 1985, private respondent filed with the
RTC an ex-parte motion for the issuance of a writ of
possession not only over the land and school
buildings but also the residential house constructed
by petitioners which was granted. The ex-officio
provincial sheriff, in implementing the writ, thereby
also sought the vacation of the premises by
petitioners. When the latter refused, private
respondent filed an ex-parte motion for a special
order directing the physical ouster of the
occupants. On 23 May 1986, petitioners formally
entered their appearance proceedings to oppose
the ex-parte motion. Petitioners averred that, the
owners of the residential house which they
themselves had built foreclosed property with the
prior knowledge of the mortgagee, they not be
ousted simply on the basis of a petition for a writ of
possession under Act No. 3135.
On 27 May 1986, the lower court, nevertheless,
issued an order granting private respondents
motion. Petitioners sought reconsideration of the
order but the lower court denied the motion. on 13
June 1986. 5 It ruled that the residential building
was included in the writ of possession pursuant to
Article 2127 of the Civil Code. Private respondent
still sought clarification of the Order, praying that
the court issue another order specifically

mentioning the residential house to be among the

property which the sheriff should deliver to it. 6
Although the court found no need to clarify its
previous ruling, "in the interest of justice and to
obviate any possible misunderstanding between
the parties,"
ISSUE: whether or not a residential house, which
was constructed by a lessee on a portion of the
leased property therefore encumbered under a real
estate mortgage by the lessor, can be rightly
covered by a writ of possession following the
foreclosure sale of the mortgaged land
HELD:
"Art. 2127. The mortgage extends to the natural
accessions, to the improvements, growing fruits,
and the rents or income not yet received when the
obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from
the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the
declarations, amplifications and limitations
established by law, whether the estate remains in
the possession of the mortgagor, or passes into the
hands of a third person."cralaw virtua1aw library
This article extends the effects of the real estate
mortgage to accessions and accessories found on
the hypothecated property when the secured
obligation becomes due. The law is predicated on
an assumption that the ownership of such
accessions and accessories also belongs to the
mortgagor as the owner of the principal. 10 The
provision 11 has thus been seen by the Court, in a
long line of cases beginning in 1909 with Bischoff v.
Pomar, 12 to mean that all improvements
subsequently introduced or owned by the
mortgagor on the encumbered property are
deemed to form part of the mortgage. That the
improvements are to be considered so incorporated
only if so owned by the mortgagor is a rule that can
hardly be debated since a contract of security,
whether real or personal, needs as an
indispensable element thereof the ownership by
the pledgor or mortgagor of the property pledged
or mortgaged. 13 The rationale should be clear
enough in the event of default on the secured
obligation, the foreclosure sale of the property

would naturally be the next step that can

expectedly follow. A sale would result in the
transmission of title to the buyer which is feasible
only if the seller can be in a position to convey
ownership of the thing sold (Article 1458, Civil
Code). It is to say, in the instant case, that a
foreclosure would be ineffective unless the
mortgagor has title to the property to be
foreclosed. 14
It may not be amiss to state, in passing, that in
respect of the lease on the foreclosed property, the
buyer at the foreclosure sale merely succeeds to
the rights and obligations of the pledgor-mortgagor
subject, however, to the provisions of Article 1676
of the Civil Code, on its possible termination. 15
WHEREFORE, the decision of the Court of Appeals is
REVERSED and SET ASIDE, and a new one is
entered declaring the residential house owned by
petitioners to have been improperly included in the
writ of possession issued by the court a quo. No
costs.

62. JOSEFINA B. CENAS and THE PROVINCIAL

SHERIFF OF RIZAL vs. SPS. ANTONIO P.
SANTOS and DRA. ROSARIO M. SANTOS and
HON. PEDRO C. NAVARRO, Presiding Judge,
CFI-Rizal, Br. III

Facts:
The spouses Jose Pulido and Iluminada M. Pulido
mortgaged to Pasay City Savings and Loan
Association, Inc. their land covered by TCT No.
471634, subject of this case, to secure a loan of
P10,000.00. The said mortgage was registered with
the Registry of Deeds on the same date and was
duly annotated in the title of the property.
The said mortgaged land was levied upon by the
City Sheriff of Quezon City pursuant to a writ of
execution issued by the then Court of First Instance
of Quezon City in Civil Case No. Q-2029 entitled,
"Milagros C. Punzalan vs. Iluminada Manuel-Pulido";
and eventually, the same was sold to herein
petitioner Josefina B. Cenas who was the highest
bidder in the execution sale.

Pasay City Savings and Loan Association, Inc.

assigned to petitioner Cenas all its rights, interests,
and participation to the said mortgage, for the sum
of P8,110.00, representing the unpaid principal
obligation of the Pulidos, including interest due and
legal expenses. Thus, petitioner became the
purchaser at the public auction sale of the subject
property as well as the assignee of the mortgage
constituted thereon.
Herein private respondent Dra. Rosario M. Santos
redeemed the said property, paying the total sum
of P15,718.00, and was accordingly issued by the
City Sheriff of Quezon City a Certificate of
Redemption.
Petitioner Cenas, as the assignee of the mortgage
loan of the Pulidos which remained unpaid, filed
with the Office of the Provincial Sheriff of Rizal, a
verified petition for extra-judicial foreclosure of the
mortgage constituted over the subject property.
Accordingly, the subject property was advertised
for sale at public auction.
On the other hand, private respondents, spouses
Antonio P. Santos and Dra. Rosario M. Santos,
apprised of the impending auction sale of the said
property, filed an affidavit of adverse claim with the
Provincial Sheriff of Rizal, claiming that they had
become the absolute owners of the property by
virtue of Certificate of Redemption issued by the
City Sheriff of Quezon City; and filed with the
respondent court a verified Petition for Prohibition
with Preliminary Injunction to enjoin the Provincial
Sheriff of Rizal from proceeding with the public
auction sale of the property in question..
The trial court rendered its judgment in favor of
private respondents. The trial court held that the
redemption of the subject property effected by the
herein private respondents, "wipe out and
extinguished the mortgage executed by the Pulido
spouses favor of the Pasay City Savings and Loan
Association, Inc."
Petitioners filed a Motion for Reconsideration but
the trial court denied the same. Hence, the instant
petition.
Issue: Whether or not the redemption of the
questioned property by herein private respondents
wiped out and extinguished the pre-existing
mortgage obligation of the judgment debtor,
Iluminada M. Pulido for the security of which

(mortgage debt) the subject property had been

encumbered.
Ruling: No.
Under Section 30, Rule 39 of the Rules of Court, if
the purchaser is also a creditor having a prior lien
to that of the redemptioner, other than the
judgment under which such purchase was made,
the redemptioner has to pay, in addition to the
prescribed amounts, such other prior lien of the
creditor-purchaser with interest.
In the instant case, it will be recalled that the
Pulidos mortgaged the subject property to Pasay
City Savings and Loan Association, Inc. who, in turn,
assigned the same to petitioner Cenas. Meanwhile,
pursuant to the writ of execution issued in the Civil
Case No. Q-2029 (Petitioner Cenas is not a party in
this case No. Q-2029), the subject property was
sold to petitioner Cenas, being the highest bidder in
the execution sale, private respondent Dra. Rosario
M. Santos redeemed the subject property.
Therefore, there is no question that petitioner
Cenas as assignee of the mortgage constituted
over the subject property, is also a creditor having
a prior (mortgage) lien to that of Dra. Rosario M.
Santos. Accordingly, the acceptance of the
redemption amount by petitioner Cenas, without
demanding payment of her prior lien the
mortgage obligation of the Pulidos cannot wipe
out and extinguish said mortgage obligation. The
mortgage directly and immediately subjects the
property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the
obligation for whose security it was constituted
(Art. 2126, Civil Code). Otherwise stated, a
mortgage creates a real right which is enforceable
against the whole world. Hence, even if the
mortgaged property is sold (Art. 2128) or its
possession transferred to another (Art. 2129), the
property remains subject to the fulfillment of the
obligation for whose security it was constituted.
Where the prior lien consists of a mortgage
constituted on the property redeemed, as in the
case at bar, such redemption does not extinguish
the mortgage (Art. 2126). Furthermore, a mortgage
previously registered, like in the instant case,
cannot be prejudiced by any subsequent lien or
encumbrance annotated at the back of the
certificate of title.

Moreover, it must be stressed that private

respondents redeemed the property in question as
"successor in interest" of the judgment debtor, and
as such are deemed subrogated to the rights and
obligations of the judgment debtor and are bound
by exactly the same condition relative to the
redemption of the subject property that bound the
latter as debtor and mortgagor. Private
respondents, by stepping in the judgment debtor's
shoes, had the obligation to pay the mortgage
debt, otherwise, the debt would and could be
enforced against the property mortgaged.
Nevertheless, considering the lapse of time that the
parties have been in status quo and the fact that
private respondents erroneously believed that the
questioned property was freed from any lien after
the redemption, equity dictates that the foreclosure
be allowed only after the private respondents shall
have been afforded the chance to settle the
mortgage obligation but failed to do so.
WHEREFORE, the questioned judgment of the trial
court is Reversed and Set Aside. Petitioner Josefina
B. Cenas may proceed with the foreclosure of the
mortgaged property after the private respondents
shall have failed to settle the mortgage debt plus
interest and legal expenses, within thirty (30) days
from finality of this decision.

63 VEGA V. SSS
Magdalena V. Reyes (Reyes) owned a piece of titled land in Pilar Village, Las Pias City. She got a
housing loan from respondent Social Security System (SSS) for which she mortgaged her land.
However, she asked the petitioner spouses Antonio and Leticia Vega (the Vegas) to assume the
loan and buy her house and lot since she wanted to emigrate.
Upon inquiry with the SSS, an employee there told the Vegas that the SSS did not approve of
members transferring their mortgaged homes. The Vegas could, however, simply make a private
arrangement with Reyes provided they paid the monthly amortizations on time. This practice,
said the SSS employee, was commonplace. Armed with this information, the Vegas agreed for
Reyes to execute in their favor a deed of assignment of real property with assumption of
mortgage and paid Reyes P20,000.00 after she undertook to update the amortizations before
leaving the country. The Vegas then took possession of the house
Reyes did not readily execute the deed of assignment. She left the country and gave her sister,
Julieta Reyes Ofilada (Ofilada), a special power of attorney to convey ownership of the property.
Ofilada finally executed the deed promised by her sister to the Vegas. Ofilada kept the original
and gave the Vegas two copies. The latter gave one copy to the Home Development Mortgage
Fund and kept the other. Unfortunately, a storm in 1984 resulted in a flood that destroyed the
copy left with them.
The Vegas learned that Reyes did not update the amortizations for they received a notice to
Reyes from the SSS concerning it. They told the SSS that they already gave the payment to
Reyes but, since it appeared indifferent, Vegas updated the amortization themselves and paid

P115,738.48 to the SSS, through Antonio Vegas personal check. They negotiated seven
additional remittances and the SSS accepted P8,681.00 more from the Vegas.
Respondent Pilar Development Corporation (PDC) filed an action for sum of money against Reyes
before the Regional Trial Court (RTC) of Manila in Civil Case 93-6551. PDC claimed that Reyes
borrowed from Apex Mortgage and Loans Corporation (Apex) P46,500.00 to buy the lot and
construct a house on it. The RTC rendered judgment, ordering Reyes to pay the PDC the loan of
P46,398.00 plus interest and penalties. Failed to do so, RTC issued a writ of execution against
Reyes and its Sheriff levied on the property in Pilar Village.
RTC sheriff published a notice for the auction sale of the property. He also served on the Vegas
notice of that sale. Vegas filed an affidavit of third party claimant and a motion for leave to admit
a motion in intervention to quash the levy on the property. Vegas got a telegram hat the SSS
intended to foreclose on the property to satisfy the unpaid housing debt of P38,789.58. the
Vegas requested the SSS in writing for the exact computation of the indebtedness and for
assurance that they would be entitled to the discharge of the mortgage and delivery of the
proper subrogation documents upon payment. They also sent a P37,521.95 managers check
that the SSS refused to accept
Vegas filed an action for consignation, damages, and injunction with application for preliminary
injunction and temporary restraining order against the SSS, the PDC, and the sheriff of RTC
Branch 19. the SSS released the mortgage to the PDC. A writ of possession subsequently evicted
the Vegas from the property.
RTC decided in favor of the Vegas. It ruled that the SSS was barred from rejecting the Vegas final
payment of P37,521.95 and denying their assumption of Reyes debt, given the SSS previous
acceptance of payments directly from them. The RTC ordered the PDC to deliver to the Vegas the
certificate of title covering the property. SSS appealed to the Court of Appeals reversed the RTC
decision[24] for the reasons that the Vegas were unable to produce the deed of assignment of
the property in their favor and that such assignment was not valid as to PDC.
ISSUE
whether or not Reyes validly sold her SSS-mortgaged property to the Vegas.
HELD
No. When a mortgagor sells the mortgaged property to a third person, the creditor may demand
from such third person the payment of the principal obligation. The reason for this is that the
mortgage credit is a real right, which follows the property wherever it goes, even if its ownership
changes. Article 2129 of the Civil Code gives the mortgagee, here the SSS, the option of
collecting from the third person in possession of the mortgaged property in the concept of
owner.More, the mortgagor-owners sale of the property does not affect the right of the
registered mortgagee to foreclose on the same even if its ownership had been transferred to
another person. The latter is bound by the registered mortgage on the title he acquired.
Under Article 1237 of the Civil Code, the Vegas who paid the SSS amortizations except the last
on behalf of Reyes, without the latters knowledge or against her consent, cannot compel the SSS
to subrogate them in her rights arising from the mortgage. Further, said the CA, the Vegas claim
of subrogation was invalid because it was done without the knowledge and consent of the SSS as
required under the mortgage agreement
After the mortgage debt to SSS had been paid, however, the latter had no further justification for
withholding the release of the collateral and the registered title to the party to whom Reyes had
transferred her right as owner. Under the circumstance, the Vegas had the right to sue for the
conveyance to them of that title, having been validly subrogated to Reyes rights

64. Teoco vs. Metrobank

FACTS: Spouses Co was the registered owner of two

parcels of land situated in Samar. One of the
spouses, Ramon Co, mortgaged the said parcels of

land to Metrobank for a sum of P200,000.00. The

properties were sold to Metrobank in an
extrajudicial foreclosure sale under Act No. 3135.
One year after the registration of the Certificates of
Sale, the titles to the properties were consolidated
in the name of Metrobank for failure of Ramon Co
to redeem the same within the one year period
provided for by law.
Metrobank filed a petition for the issuance of a writ
of possession against the spouses Co. However,
since the spouses Co were no longer residing in the
Philippines at the time the petition was filed, the
trial court ordered Metrobank to effect summons by
publication against the spouses Co.
The brothers Teoco filed an answer-in-intervention
alleging that they are the successors-in-interest of
the spouses Co, and that they had duly and validly
redeemed the subject properties within the
reglementary period provided by law. The brothers
Teoco thus prayed for the dismissal of Metrobanks
petition for a writ of possession, and for the
nullification of the TCTs issued in the name of
Metrobank. The brothers Teoco further prayed for
the issuance in their name of new certificates of
title.
Metrobank, in its reply, alleged that the amount
deposited by the brothers Teoco as redemption
price was not sufficient, not being in accordance
with Section 78 of the General Banking Act.
Metrobank also said the assignment of the right of
redemption by the spouses Co in favor of the
brothers Teoco was not properly executed, as it
lacks the necessary authentication from the
Philippine Embassy.
The RTC was informed that the brothers Teoco had
deposited the amount of P356,297.57 to the clerk
of court. The RTC ordered Metrobank to disclose
whether it is allowing the brothers Teoco to redeem
the subject properties. Metrobank refused to accept
the amount deposited by the brothers Teoco,
alleging that they are obligated to pay the spouses
Cos subsequent obligations to Metrobank as well.
The brothers Teoco claimed that they are not bound
to pay all the obligations of the spouses Co, but
only the value of the property sold during the public
auction.
RTC- rendered its decision in favor of the brothers
Teoco. According to the RTC, the case filed by

Metrobank should be dismissed since intervenor

Juan C. Teoco, Jr., by his tender of P356,297.57 to
Metrobank, within the reglementary period of
redemption of the foreclosed property, had legally
and effectively redeemed the subject properties
from Metrobank.
CA- in favor of Metrebonk. the CA held that the
brothers Teoco were not able to effectively redeem
the subject properties, because the amount
tendered was insufficient, and the brothers Teoco
have not sufficiently shown that the spouses Cos
right of redemption was properly transferred to
them.
ISSUE: Whether or not the CA erred in holding that
the petitioners failed to redeem the subject
properties within the reglamentary period of one
year and that the redemption price tendered is
insufficient.
HELD: We find that neither petitioners, the brothers
Teoco, nor respondent, Metrobank, were able to
present sufficient evidence to prove whether the
additional loans granted to the spouses Co by
Metrobank were covered by the mortgage
agreement between them. The brothers Teoco
failed to present any evidence of the supposed
trust receipt agreement between Metrobank and
the spouses Co, or an evidence of the supposed
payment by the spouses Co of the other loans
extended by Metrobank. Metrobank, on the other
hand, merely relied on the stipulation on the
mortgage deed that the mortgage was intended to
secure "the payment of the same (P200,000.00
loan) and those that may hereafter be obtained."
However, there was no mention whatsoever of the
mortgage agreement in the succeeding loans
entered into by the spouses Co.
While we agree with Metrobank that mortgages
intended to secure future advancements are valid
and legal contracts, entering into such mortgage
contracts does not necessarily put within its
coverage all loan agreements that may be
subsequently entered into by the parties. If
Metrobank wishes to apply the mortgage contract
in order to satisfy loan obligations not stated on the
face of such contract, Metrobank should prove by a
preponderance of evidence that such subsequent
obligations are secured by said mortgage contract

and not by any other form of security.

In order to prevent any injustice to, or unjust
enrichment of, any of the parties, this Court holds
that the fairest resolution is to allow the brothers
Teoco to redeem the foreclosed properties based on
the amount for which it was foreclosed
(P255,441.14 plus interest). This is subject,
however, to the right of Metrobank to foreclose the
same property anew in order to satisfy the
succeeding loans entered into by the spouses Co, if
they were, indeed, covered by the mortgage
contract. The right of Metrobank to foreclose the
mortgage would not be hampered by the transfer
of the properties to the brothers Teoco as a result of
this decision, since Article 2127 of the Civil Code
provides:
Art. 2127. The mortgage extends to the natural
accessions, to the improvements, growing fruits,
and the rents or income not yet received when the
obligation becomes due, and to the amount of the
indemnity granted or owing to the proprietor from
the insurers of the property mortgaged, or in virtue
of expropriation for public use, with the
declarations, amplifications and limitations
established by law, whether the estate remains in
the possession of the mortgagor, or it passes into
the hands of a third person.
Further, Article 2129 of the Civil Code provides:
Art. 2129. The creditor may claim from a third
person in possession of the mortgaged property,
the payment of the part of the credit secured by
the property which said third person possesses, in
the terms and with the formalities which the law
establishes.
The mortgage directly and immediately subjects
the property upon which it is imposed, whoever the
possessor may be to the fulfillment of the
obligation for whose security it was constituted.
Otherwise stated, a mortgage creates a real right
which is enforceable against the whole world.
Hence, even if the mortgage property is sold or its
possession transferred to another, the property
remains subject to the fulfillment of the obligation
for whose security it was constituted.
Thus, the redemption by the brothers Teoco shall be
without prejudice to the subsequent foreclosure of

same properties by Metrobank in order to satisfy

other obligations covered by the Real Estate
Mortgage.

65. SPS. FELINO S. SAMATRA and CHARLITA

ISIDRO, petitioners, vs. RITA S. VDA. DE
PARIAS, respondent.
The case at bar originated from an agrarian case
involving two (2) agricultural lots all situated in Sto.
Domingo, Nueva Ecija. These lots were originally
owned by spouses Donato Samatra and Macaria
Sana. Petitioner FELINO SAMATRA and respondent
RITA S. VDA. DE PARIAS are their legitimate
children.
the spouses mortgaged one of the agricultural lots
and the homelot to the Rural Bank of Sto. Domingo
Inc. to secure their P2,500.00 loan. A year later, the
spouses constituted another real estate mortgage
over the other lot in favor of the same bank to
secure their second loan of P1,300.00.
While the mortgages were still subsisting,
mortgagor Donato Samatra executed a
Kasunduang Buwisan sa Sakahan constituting his
daughter, respondent Rita S. Vda. de Parias, as
agricultural lessee over the mortgaged lots, without
the consent of the mortgagee bank.
When the mortgagors-spouses failed to pay their
loans upon maturity, the mortgagee bank
extrajudicially foreclosed the mortgages over the
subject lots. At a public auction, the lots were sold
to the mortgagee bank as the sole and highest
bidder.
Negotiations were conducted between the manager
of the mortgagee bank and the heirs of the
mortgagor-spouses, with the bank offering the heirs
priority to repurchase the lots. Respondent Rita S.
Vda. de Parias and her son showed interest in the
offer. Thus, it was agreed that respondent would
buy back the lots by gradually depositing small
amounts for the repurchase of the properties until
the full purchase price is paid and, thereafter, the

mortgagee bank would execute the corresponding

deed of sale in favor of respondent.
Initially, the agreement was carried out by the
respondent. Later, however, respondent and her
son discontinued depositing money in their account
for the repurchase of the lots. Thus, the mortgagee
bank construed their silence and inaction as a lack
of further interest to continue with the agreed plan
of sale.
Petitioner Felino Samatra, one of the heirs of the
mortgagor-spouses and a brother of respondent,
expressed his intention to repurchase the lots from
the bank. Consequently, the bank sold the lots to
petitioners FELINO SAMATRA and CHARLITA ISIDRO.
The sale was duly registered and title was issued in
the name of petitioners.
When respondent learned about the sale, she
immediately went to the bank and declared that
she was ready to buy them back. Respondent
adamantly held on to the lots and continued her
possession claiming right over them as agricultural
lessee.
Respondent filed an agrarian case with the RTC
against the mortgagee bank and the petitioners to
annul the sale by the mortgagee bank of said lots
to petitioners, claiming right of pre-emption or legal
redemption as agricultural tenant and homelot
possessor of the subject lots.
In their Answer, petitioners argued that respondent
was not an agricultural lessee over the subject lots
as it was their parents, mortgagor-spouses Donato
Samatra and Macaria Sana, who personally
cultivated the lots as previous owners.
the trial court rendered a decision in favor of the
petitioners. It found that respondent was not a
bonafide lessee of the lands as she did not present
proof that she personally cultivated them. Not
being a bonafide agricultural lessee, the trial court
ruled that respondent has no right of pre-emption
and legal redemption over said lots.
On appeal, the Court of Appeals ruled that
respondent is a bonafide lessee. However, it denied
her the right of pre-emption as she was already
given by the bank sufficient opportunity to exercise

it but she failed to avail of it. It also held that

respondent did not possess the right of redemption
as the sale by the mortgagee bank of the disputed
lands to petitioners was not unknown to her.
Petitioners motion for reconsideration was denied.
Hence this petition.
Issue: WHETHER OR NOT THE TENANCY CONTRACT
ENTERED INTO BETWEEN THE MORTGAGORSSPOUSES DONATO SAMATRA AND MACARIA SANA
WITH RESPONDENT RITA S. PARIAS DURING THE
EFFECTIVITY OF THE MORTGAGE WAS LEGAL AND
VALID.
Held: Legal and valid.
Petitioners insist that the tenancy contract was
illegal as the mortgagor-spouses cannot validly
enter into an agricultural lease agreement with
respondent during the effectivity of the mortgage
contract.
We disagree. The Court of Appeals correctly applied
Article 2130 of the Civil Code which renders void
any stipulation forbidding the owner from alienating
the immovable mortgaged (pacto de non aliendo)
property. It is settled that a real estate mortgage
does not extinguish the title of the debtor. He does
not lose his right to use or dispose of the
mortgaged property (jus disponendi) which is one
of the principal attributes of ownership. Thus, in the
case at bar, the mortgagor-spouses were well
within their rights when they constituted
respondent as an agricultural lessee and the
legality of the leasehold contract cannot be validly
assailed on this ground.

66. LITONJUA and ERLINDA P. LITONJUA and

PHIL. WHITE HOUSE AUTO SUPPLY, INC. vs. L
& R CORPORATION
May a mortgage contract provide: (a) that the
mortgagor cannot sell the mortgaged property
without first obtaining the consent of the
mortgagee and that, otherwise, the sale made
without the mortgagee's consent shall be invalid;
and (b) for a right of first refusal in favor of the
mortgagee?

FACTS: Sps Litonjua loaned from L & R Corporation

in the sum of P400K. The loans were secured by a
mortgage constituted by the sps upon their two
parcels of land and the improvements.
The Sps sold to Philippine White House Auto
Supply, Inc. (PWHAS) the parcels of land they had
previously mortgaged to L & R Corporation for the
sum of P430k. The sale was annotated at the back
of the respective CTCs.
Meanwhile, with the Sps having defaulted in the
payment of their loans, L & R Corporation initiated
extrajudicial foreclosure proceedings. The
mortgaged properties were sold at public auction to
L & R Corporation as the only bidder. When L & R
Corporation presented its corresponding Certificate
of Sale to the QC RD for registration, it learned for
the first time of the prior sale of the properties
made by the sps. Thus, it wrote a letter to the
RDQC requesting for the cancellation of the
annotation regarding the sale to PWHAS. L & R
Corporation invoked a provision in its mortgage
contract stating that the mortgagee's prior written
consent was necessary in case of subsequent
encumbrance or alienation of the subject
properties.
7 months after the foreclosure sale, PWHAS, for the
account of the sps, tendered payment of the full
redemption price to L & R. L & R, however, refused
to accept the payment, hence, PWHAS was
compelled to redeem the mortgaged properties. It
tendered payment of the redemption price to the
Deputy Sheriff. Accordingly, the Deputy Sheriff
issued a Certificate of Redemption in favor of the
sps.
Deputy Sheriff informed L & R Corporation of the
payment by PWHAS of the full redemption price
and advised it that it can claim the payment upon
surrender of its owner's duplicate certificates of
title.
The Sps presented for registration the Certificate of
Redemption issued in their favor. The Certificate
also informed L & R of the fact of redemption and
directed the latter to surrender the OCT within five
days.
L & R wrote a letter to the Sheriff, stating: (1) that
the sale of the mortgaged properties to PWHAS was
without its consent, in contravention of their Deed
of REM; and (2) that it was not the sps Litonjua, but
PWHAS, who was seeking to redeem the foreclosed

properties, when under Arts. 1236 and 1237 of the

NCC, the latter had no legal personality or capacity
to redeem the same.
x the spouses filed a Petition against L & R
Corporation for the surrender of the owner's
duplicate of TCTs before the then CFI of QC. While
the said case was pending, L & R Corporation
executed an Affidavit of Consolidation of
Ownership. Thereafter, RD cancelled the TCTs and
in lieu thereof, issued new TCTs in favor of L & R
Corporation, free of any lien or encumbrance.
A complaint for Quieting of Title, Annulment of Title
and Damages with preliminary injunction was filed
by the spouses and PWHAS against herein
respondents. The lower court rendered dismissing
the Complaint upon its finding that the sale
between the sps and PWHAS was null and void and
unenforceable against L & R and that the
redemption made was also null and void.
On appeal, the decision of the trial court was set
aside by the CA, on the ground that the sale made
to PWHAS as well as the redemption effected by
the spouses were valid. However, the same was
subsequently reconsidered and set aside in an
Amended Decision.
Hence, the instant Petition on the following
ISSUES:
(1) WON paragraphs 8 and 9 of the Real Estate
Mortgage are valid and enforceable; (8, invalid; 9
VALID)
(2) WON the sale of the mortgaged properties by
the spouses to PWHAS, without the knowledge and
consent of L & R Corporation, is valid and
enforceable; (valid but RESCISSIBLE)
(3) WON PWHAS had the right to redeem the
foreclosed properties on the account of the
spouses; (valid) and
(4) WON there was a valid redemption. (valid)
Paragraphs 8 and 9 of the subject Deed of Real
Estate Mortgage read as follows
8. That the MORTGAGORS shall not sell, dispose of,
mortgage, nor in any other manner encumber the
real property/properties subject of this mortgage
without the prior written consent of the
MORTGAGEE;
9. That should the MORTGAGORS decide to sell the
real property/properties subject of this mortgage,
the MORTGAGEE shall be duly notified thereof by
the MORTGAGORS, and should the MORTGAGEE be

interested to purchase the same, the latter shall be

given priority over all the other prospective
buyers;
HELD: 1. There is no question that the spouses
violated both the aforesaid provisions, selling the
mortgaged properties to PWHAS without the prior
written consent of L & R Corporation and without
giving the latter notice of such sale nor priority over
PWHAS.
Validity of prohibition against subsequent sale of
mortgaged property without prior written consent
of mortgagee and validity of subsequent sale to
PWHAS
Sps defend the validity of the sale between them
by arguing that par 8 violates Article 2130 of the
New Civil Code which provides that "(A) stipulation
forbidding the owner from alienating the
immovable mortgaged shall be void."
XX such a stipulation violates Article 2130 of the
NCC. Both the lower court and the CA in its
Amended Decision rationalize that since par 8 of
the subject Deed of REM contains no absolute
prohibition against the sale of the property
mortgaged but only requires the mortgagor to
obtain the prior written consent of the mortgagee
before any such sale, Article 2130 is not violated
thereby. True, the provision does not absolutely
prohibit the mortgagor from selling his mortgaged
property; but what it does not outrightly prohibit, it
nevertheless achieves. For all intents and purposes,
the stipulation practically gives the mortgagee the
sole prerogative to prevent any sale of the
mortgaged property to a third party. The mortgagee
can simply withhold its consent and thereby,
prevent the mortgagor from selling the property.
This creates an unconscionable advantage for the
mortgagee and amounts to a virtual prohibition on
the owner to sell his mortgaged property. In other
words, stipulations like those covered by par 8 of
the subject Deed of REM circumvent the law,
specifically, Article 2130 of the NCC.
Being contrary to law, par. 8 of the subject Deed of
REM is not binding upon the parties. Accordingly,
the sale made by the spouses to PWHAS,
notwithstanding the lack of prior written consent of
L & R Corporation, is valid.
Validity of redemption effected by PWHAS on the
account of the spouses Litonjua
The sale by the spouses of the mortgaged

properties to PWHAS is valid. Therefore, PWHAS

stepped into the shoes of the spouses on account
of such sale and was in effect, their successor-ininterest. As such, it had the right to redeem the
property foreclosed by L & R Corporation.
The right of PWHAS to redeem the subject
properties finds support in Section 6 of Act 3135
itself which gives not only the mortgagor-debtor the
right to redeem, but also his successors-in-interest.
As vendee of the subject properties, PWHAS
qualifies as such a successor-in-interest of the
spouses Litonjua.
Validity of redemption made
It is clear from the records that PWHAS offered to
redeem the subject properties 7 months after the
date of registration of the foreclosure sale, well
within the one year period of redemption.
Validity and enforceability of stipulation granting
the mortgagee the right of first refusal
While petitioners question the validity of par. 8 of
their mortgage contract, they appear to be silent
insofar as paragraph 9 thereof is concerned. Said
paragraph 9 grants upon L & R Corporation the
right of first refusal over the mortgaged property in
the event the mortgagor decides to sell the same.
We see nothing wrong in this provision. The right of
first refusal has long been recognized as valid in
our jurisdiction. The consideration for the loanmortgage includes the consideration for the right of
first refusal. L & R Corporation is in effect stating
that it consents to lend out money to the spouses
provided that in case they decide to sell the
property mortgaged to it, then L & R Corporation
shall be given the right to match the offered
purchase price and to buy the property at that
price. Thus, while the spouses had every right to
sell their mortgaged property to PWHAS without
securing the prior written consent of L & R
Corporation, they had the obligation under
paragraph 9, which is a perfectly valid provision, to
notify the latter of their intention to sell the
property and give it priority over other buyers. It is
only upon failure of L & R Corporation to exercise
its right of first refusal could the spouses Litonjua
validly sell the subject properties to others, under
the same terms and conditions offered to L & R
Corporation.
What then is the status of the sale made to PWHAS
in violation of L & R Corporation's contractual right

of first refusal? On this score, we agree with the

Amended Decision of the Court of Appeals that the
sale made to PWHAS is rescissible. The case of
Guzman, Bocaling & Co. v. Bonnevie
According to Tolentino, rescission is a remedy
granted by law to the contracting parties and even
to third persons, to secure reparation for damages
caused to them by a contract, even if this should be
valid, by means of the restoration of things to their
condition at the moment prior to the celebration of
said contract. It is a relief allowed for one of the
contracting parties and even third persons from all
injury and damage the contract may cause, or to
protect some incompatible and preferential right
created by the contract. Rescission implies a
contract which, even if initially valid, produces a
lesion or pecuniary damage to someone that
justifies its invalidation for reasons of equity.
It was then held that the Contract of Sale there,
which violated the right of first refusal, was
rescissible.
In the case at bar, PWHAS cannot claim ignorance
of the right of first refusal granted to L & R
Corporation over the subject properties since the
Deed of REM containing such a provision was duly
registered with the RD. As such, PWHAS is
presumed to have been notified thereof by
registration, which equates to notice to the whole
world.
We note that L & R Corporation had always
expressed its willingness to buy the mortgaged
properties on equal terms as PWHAS. XX That it did
not duly exercise its right of first refusal at the
opportune time cannot be taken against it,
precisely because it was not notified by the
spouses of their intention to sell the subject
property and thereby, to give it priority over other
buyers.
All things considered, what then are the relative
rights and obligations of the parties? To
recapitulate:, the sale between the spouses
Litonjua and PWHAS is valid, notwithstanding the
absence of L & R Corporation's prior written
consent thereto. Inasmuch as the sale to PWHAS
was valid, its offer to redeem and its tender of the
redemption price, as successor-in-interest of the
spouses, within the one-year period should have
been accepted as valid by the L & R Corporation.
However, while the sale is, indeed, valid, the same

is rescissible because it ignored L & R Corporation's

right of first refusal.
WHEREFORE, the Decision appealed from is hereby
AFFIRMED with the following MODIFICATIONS:
(a) Ordering the rescission of the sale of the
mortgaged properties between petitioners spouses
Reynaldo and Erlinda Litonjua and Philippine White
House Auto Supply, Inc. and ordering said spouses
to return to Philippine White House Auto Supply,
Inc. the purchase price of P430,000.00;
(c) Disallowing, due to the rescission of the sale
made in its favor, the redemption made by
Philippine White House Auto Supply, Inc. and
ordering Quezon City Sheriff Roberto Garcia to
return to it the "redemption" check of P240,798.94;
(d) Allowing respondent L & R Corporation to retain
its consolidated titles to the foreclosed properties
but ordering it to pay to the Litonjua spouses the
additional sum of P189,201.96 representing the
difference from the purchase price of P430,000.00
in the rescinded sale;
(e) Deleting the awards for moral and exemplary
damages and attorney's fees to the respondents.
No pronouncement as to costs.
SO ORDERED.

67. Servicewide Specialists v. Courrt of

Appeals

Facts: In 1975, respondent spouses Atty. Jesus and

Elizabeth Ponce bought on installment a Holden
Torana vehicle from C. R. Tecson Enterprises. They
executed a promissory note and a chattel mortgage
on the vehicle dated December 24, 1975 in favor of
the C. R. Tecson Enterprises to secure payment of
the note. The mortgage was registered both in the
Registry of Deeds and the Land Transportation
Office. On the same date, C.R. Tecson Enterprises,
in turn, executed a deed of assignment of said
promissory note and chattel mortgage in favor of
Filinvest Credit Corporation with the conformity of
respondent spouses. The latter were aware of the
endorsement of the note and the mortgage to
Filinvest as they in fact availed of its financing
services to pay for the car.

In 1976, respondent spouses transferred and

delivered the vehicle to Conrado R. Tecson by way
of sale with assumption of mortgage. Subsequently,
in 1978, Filinvest assigned all its rights and interest
over the same promissory note and chattel
mortgage to petitioner Servicewide Specialists Inc.
without notice to respondent spouses. Due to the
failure of respondent spouses to pay the
installments under the promissory note from
October 1977 to March 1978, and despite demands
to pay the same or to return the vehicle, petitioner
was constrained to file before the Regional Trial
Court of Manila on May 22, 1978 a complaint for
replevin with damages against them.
In their answer, respondent spouses denied any
liability claiming they had already returned the car
to Conrado Tecson pursuant to the Deed of Sale
with Assumption of Mortgage. Thus, they filed a
third party complaint against Conrado Tecson
praying that in case they are adjudged liable to
petitioner, Conrado Tecson should reimburse them.
Issue: Whether or not the assignment of a credit
requires notice to the debtor in order to bind him.
Whether or not the respondent spouses needed to
notify or secure the consent of petitioners
predecessor to the alienation of the vehicle.
Rulings: Only notice to the debtor of the
assignment of credit is required. His consent is not
required. In contrast, consent of the creditormortgagee to the alienation of the mortgaged
property is necessary in order to bind said creditor.
To evade liability, respondent spouses invoked
Article 1626 of the Civil Code which provides that
the debtor who, before having knowledge of the
assignment, pays his creditor shall be released
from the obligation. They argue that they were not
notified of the assignment made to petitioner. This
provision, however, is applicable only where the
debtor pays the creditor prior to acquiring
knowledge of the latters assignment of his credit.
It does not apply, nor is it relevant, to cases of nonpayment after the debtor came to know of the
assignment of credit. This is precisely so since the
debtor did not make any payment after the
assignment.

In the case at bar, what is relevant is not the

assignment of credit between petitioner and its
assignor, but the knowledge or consent of the
creditors assignee to the debtor-mortgagors sale
of the property to another.
When the credit was assigned to petitioner, only
notice to but not the consent of the debtormortgagor was necessary to bind the latter.
Applying Article 1627 of the Civil Code, the
assignment made to petitioner includes the
accessory rights such as the mortgage. Article
2141, on the other hand, states that the provisions
concerning a contract of pledge shall be applicable
to a chattel mortgage, such as the one at bar,
insofar as there is no conflict with Act No. 1508, the
Chattel Mortgage Law. As provided in Article 2096
in relation to Article 2141 of the Civil Code, a thing
pledged may be alienated by the pledgor or owner
with the consent of the pledgee. This provision is
in accordance with Act No. 1508 which provides
that a mortgagor of personal property shall not
sell or pledge such property, or any part thereof,
mortgaged by him without the consent of the
mortgagee in writing on the back of the mortgage
and on the margin of the record thereof in the
office where such mortgage is recorded. Although
this provision in the chattel mortgage has been
expressly repealed by Article 367 of the Revised
Penal Code, yet under Article 319 (2) of the same
Code, the sale of the thing mortgaged may be
made provided that the mortgagee gives his
consent and that the same is recorded.[6] In any
case, applying by analogy Article 2128 of the Civil
Code to a chattel mortgage, it appears that a
mortgage credit may be alienated or assigned to a
third person. Since the assignee of the credit steps
into the shoes of the creditor-mortgagee to whom
the chattel was mortgaged, it follows that the
assignees consent is necessary in order to bind
him of the alienation of the mortgaged thing by the
debtor-mortgagor. This is tantamount to a novation.
As the new assignee, petitioners consent is
necessary before respondent spouses alienation of
the vehicle can be considered as binding against
third persons. Petitioner is considered a third
person with respect to the sale with mortgage
between respondent spouses and third party
defendant Conrado Tecson.

In this case, however, since the alienation by the

respondent spouses of the vehicle occurred prior to
the assignment of credit to petitioner, it follows
that the former were not bound to obtain the
consent of the latter as it was not yet an assignee
of the credit at the time of the alienation of the
mortgaged vehicle.
The next question is whether respondent spouses
needed to notify or secure the consent of
petitioners predecessor to the alienation of the
vehicle. The sale with assumption of mortgage
made by respondent spouses is tantamount to a
substitution of debtors. In such case, mere notice to
the creditor is not enough, his consent is always
necessary as provided in Article 1293 of the Civil
Code. Without such consent by the creditor, the
alienation made by respondent spouses is not
binding on the former. On the other hand, Articles
1625, 1626 and 1627 of the Civil Code on
assignment of credits do not require the debtors
consent for the validity thereof and so as to render
him liable to the assignee. The law speaks not of
consent but of notice to the debtor, the purpose of
which is to inform the latter that from the date of
assignment he should make payment to the
assignee and not to the original creditor. Notice is
thus for the protection of the assignee because
before said date, payment to the original creditor is
valid.
When Tecson Enterprises assigned the promissory
note and the chattel mortgage to Filinvest, it was
made with respondent spouses tacit approval.
When Filinvest in turn, as assignee, assigned it
further to petitioner, the latter should have notified
the respondent spouses of the assignment in order
to bind them. This, they failed to do. The testimony
of petitioners witness that notice of assignment
was sent to respondent spouses was stricken off
the record. Having asserted the affirmative on the
issue of notice, petitioner should have
substantiated its allegations in order to obtain a
favorable judgment. In civil cases, the burden is on
the party who would be defeated if no evidence is
given on either side. Being the plaintiff in the trial
below, petitioner must establish its case, relying on
the strength of its own evidence and not upon the
weakness of that of its opponent. The consent to

the assignment given by respondent spouses to

Filinvest cannot be construed as the spouses
knowledge of the assignment to petitioner precisely
because at the time of the assignment to the latter,
the spouses had earlier sold the vehicle to another.
One thing, however, that militates against the
posture of respondent spouses is that although
they are not bound to obtain the consent of the
petitioner before alienating the property, they
should have obtained the consent of Filinvest since
they were already aware of the assignment to the
latter. So that, insofar as Filinvest is concerned, the
debtor is still respondent spouses because of the
absence of its consent to the sale. Worse, Filinvest
was not even notified of such sale. Having
subsequently stepped into the shoes of Filinvest,
petitioner acquired the same rights as the former
had against respondent spouses. The defenses that
could have been invoked by Filinvest against the
spouses can be successfully raised by petitioner.
Therefore, for failure of respondent spouses to
obtain the consent of Filinvest thereto, the sale of
the vehicle to Conrado R. Tecson was not binding
on the former. When the credit was assigned by
Filinvest to petitioner, respondent spouses stood on
record as the debtor-mortgagor.