FIRST DIVISION

JOSE C. TUPAZ IV and G.R. No. 145578

PETRONILA C. TUPAZ,
Petitioners,
Present:
Davide, Jr., C.J.,
Chairman,
- versus - Quisumbing,
Ynares-Santiago,
Carpio, and
Azcuna, JJ.

THE COURT OF APPEALS and

BANK OF THE PHILIPPINE Promulgated:
ISLANDS,
Respondents. November 18, 2005

x-------------------------------------------------x

DECISION

CARPIO, J.:

The Case

This is a petition for review[1] of the Decision[2] of the Court of Appeals dated 7
September 2000 and its Resolution dated 18 October 2000. The 7 September 2000
Decision affirmed the ruling of the Regional Trial Court, Makati, Branch 144 in a case
for estafa under Section 13, Presidential Decree No. 115. The Court of Appeals
Resolution of 18 October 2000 denied petitioners motion for reconsideration.

The Facts

Petitioners Jose C. Tupaz IV and Petronila C. Tupaz (petitioners) were Vice-President for
Operations and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation
(El Oro Corporation). El Oro Corporation had a contract with the Philippine Army to
supply the latter with survival bolos.

To finance the purchase of the raw materials for the survival bolos, petitioners, on
behalf of El Oro Corporation, applied with respondent Bank of the Philippine Islands
(respondent bank) for two commercial letters of credit. The letters of credit were in
favor of El Oro Corporations suppliers, Tanchaoco Manufacturing Incorporated[3]
(Tanchaoco Incorporated) and Maresco Rubber and Retreading Corporation[4]
(Maresco Corporation). Respondent bank granted petitioners application and issued
Letter of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco Incorporated and Letter of
Credit No. 2-00914-5 for P294,000 to Maresco Corporation.

Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts
in favor of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV
(petitioner Jose Tupaz) signed, in his personal capacity, a trust receipt corresponding to
Letter of Credit No. 2-00896-3 (for P564,871.05). Petitioner Jose Tupaz bound himself
to sell the goods covered by the letter of credit and to remit the proceeds to
respondent bank, if sold, or to return the goods, if not sold, on or before 29 December
1981.

On 9 October 1981, petitioners signed, in their capacities as officers of El Oro

Corporation, a trust receipt corresponding to Letter of Credit No. 2-00914-5 (for
P294,000). Petitioners bound themselves to sell the goods covered by that letter of
credit and to remit the proceeds to respondent bank, if sold, or to return the goods, if
not sold, on or before 8 December 1981.

After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to
El Oro Corporation, respondent bank paid the former P564,871.05 and P294,000,
respectively.

Petitioners did not comply with their undertaking under the trust receipts. Respondent
bank made several demands for payments but El Oro Corporation made partial
payments only. On 27 June 1983 and 28 June 1983, respondent banks counsel[5] and
its representative[6] respectively sent final demand letters to El Oro Corporation. El
Oro Corporation replied that it could not fully pay its debt because the Armed Forces of
the Philippines had delayed paying for the survival bolos.

Respondent bank charged petitioners with estafa under Section 13, Presidential
Decree No. 115 (Section 13)[7] or Trust Receipts Law (PD 115). After preliminary
investigation, the then Makati Fiscals Office found probable cause to indict petitioners.
The Makati Fiscals Office filed the corresponding Informations (docketed as Criminal
Case Nos. 8848 and 8849) with the Regional Trial Court, Makati, on 17 January 1984
and the cases were raffled to Branch 144 (trial court) on 20 January 1984. Petitioners
pleaded not guilty to the charges and trial ensued. During the trial, respondent bank
presented evidence on the civil aspect of the cases.

The Ruling of the Trial Court

On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on
reasonable doubt. However, the trial court found petitioners solidarily liable with El Oro
Corporation for the balance of El Oro Corporations principal debt under the trust
receipts. The dispositive portion of the trial courts Decision provides:
WHEREFORE, judgment is hereby rendered ACQUITTING both accused Jose C. Tupaz, IV
and Petronila Tupaz based upon reasonable doubt.

However, El Oro Engraver Corporation, Jose C. Tupaz, IV and Petronila Tupaz, are
hereby ordered, jointly and solidarily, to pay the Bank of the Philippine Islands the
outstanding principal obligation of P624,129.19 (as of January 23, 1992) with the
stipulated interest at the rate of 18% per annum; plus 10% of the total amount due as
attorneys fees; P5,000.00 as expenses of litigation; and costs of the suit.[8]

In holding petitioners civilly liable with El Oro Corporation, the trial court held:

[S]ince the civil action for the recovery of the civil liability is deemed impliedly
instituted with the criminal action, as in fact the prosecution thereof was actively
handled by the private prosecutor, the Court believes that the El Oro Engraver
Corporation and both accused Jose C. Tupaz and Petronila Tupaz, jointly and solidarily
should be held civilly liable to the Bank of the Philippine Islands. The mere fact that
they were unable to collect in full from the AFP and/or the Department of National
Defense the proceeds of the sale of the delivered survival bolos manufactured from
the raw materials covered by the trust receipt agreements is no valid defense to the
civil claim of the said complainant and surely could not wipe out their civil obligation.
After all, they are free to institute an action to collect the same.[9]

Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their
acquittal operates to extinguish [their] civil liability and (2) at any rate, they are not
personally liable for El Oro Corporations debts.

The Ruling of the Court of Appeals

In its Decision of 7 September 2000, the Court of Appeals affirmed the trial courts
ruling. The appellate court held:

It is clear from [Section 13, PD 115] that civil liability arising from the violation of the
trust receipt agreement is distinct from the criminal liability imposed therein. In the
case of Vintola vs. Insular Bank of Asia and America, our Supreme Court held that
acquittal in the estafa case (P.D. 115) is no bar to the institution of a civil action for
collection. This is because in such cases, the civil liability of the accused does not arise
ex delicto but rather based ex contractu and as such is distinct and independent from
any criminal proceedings and may proceed regardless of the result of the latter. Thus,
an independent civil action to enforce the civil liability may be filed against the
corporation aside from the criminal action against the responsible officers or
employees.

xxx

[W]e hereby hold that the acquittal of the accused-appellants from the criminal charge
of estafa did not operate to extinguish their civil liability under the letter of credit-trust
receipt arrangement with plaintiff-appellee, with which they dealt both in their
personal capacity and as officers of El Oro Engraver Corporation, the letter of credit
applicant and principal debtor.
Appellants argued that they cannot be held solidarily liable with their corporation, El
Oro Engraver Corporation, alleging that they executed the subject documents
including the trust receipt agreements only in their capacity as such corporate officers.
They said that these instruments are mere pro-forma and that they executed these
instruments on the strength of a board resolution of said corporation authorizing them
to apply for the opening of a letter of credit in favor of their suppliers as well as to
execute the other documents necessary to accomplish the same.

Such contention, however, is contradicted by the evidence on record. The trust receipt
agreement indicated in clear and unmistakable terms that the accused signed the
same as surety for the corporation and that they bound themselves directly and
immediately liable in the event of default with respect to the obligation under the
letters of credit which were made part of the said agreement, without need of
demand. Even in the application for the letter of credit, it is likewise clear that the
undertaking of the accused is that of a surety as indicated [in] the following words: In
consideration of your establishing the commercial letter of credit herein applied for
substantially in accordance with the foregoing, the undersigned Applicant and Surety
hereby agree, jointly and severally, to each and all stipulations, provisions and
conditions on the reverse side hereof.

xxx

Having contractually agreed to hold themselves solidarily liable with El Oro Engraver
Corporation under the subject trust receipt agreements with appellee Bank of the
Philippine Islands, herein accused-appellants may not, therefore, invoke the separate
legal personality of the said corporation to evade their civil liability under the letter of
credit-trust receipt arrangement with said appellee, notwithstanding their acquittal in
the criminal cases filed against them. The trial court thus did not err in holding the
appellants solidarily liable with El Oro Engraver Corporation for the outstanding
principal obligation of P624,129.19 (as of January 23, 1992) with the stipulated interest
at the rate of 18% per annum, plus 10% of the total amount due as attorneys fees,
P5,000.00 as expenses of litigation and costs of suit.[10]

Hence, this petition. Petitioners contend that:

1.
A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE CIVIL LIABILITY
OF PETITIONERS[;]

2.
GRANTING WITHOUT ADMITTING THAT THE QUESTIONED OBLIGATION WAS
INCURRED BY THE CORPORATION, THE SAME IS NOT YET DUE AND PAYABLE;

3.
GRANTING THAT THE QUESTIONED OBLIGATION WAS ALREADY DUE AND
PAYABLE, xxx PETITIONERS ARE NOT PERSONALLY LIABLE TO xxx RESPONDENT BANK,
SINCE THEY SIGNED THE LETTER[S] OF CREDIT AS SURETY AS OFFICERS OF EL ORO,
AND THEREFORE, AN EXCLUSIVE LIABILITY OF EL ORO; [AND]

4.
IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE SIMULATED AND
VOID.[11]

The Issues

The petition raises these issues:

(1) Whether petitioners bound themselves personally liable for El Oro Corporations
debts under the trust receipts;
(2) If so
(a)

whether petitioners liability is solidary with El Oro Corporation; and

(b)
whether petitioners acquittal of estafa under Section 13, PD 115 extinguished
their civil liability.

The Ruling of the Court

The petition is partly meritorious. We affirm the Court of Appeals ruling with the
modification that petitioner Jose Tupaz is liable as guarantor of El Oro Corporations
debt under the trust receipt dated 30 September 1981.

On Petitioners Undertaking Under

the Trust Receipts

A corporation, being a juridical entity, may act only through its directors, officers, and
employees. Debts incurred by these individuals, acting as such corporate agents, are
not theirs but the direct liability of the corporation they represent.[12] As an
exception, directors or officers are personally liable for the corporations debts only if
they so contractually agree or stipulate.[13]

Here, the dorsal side of the trust receipts contains the following stipulation:

To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this Trust Receipt the goods
described herein, I/We, jointly and severally, agree and promise to pay to you, on
demand, whatever sum or sums of money which you may call upon me/us to pay to
you, arising out of, pertaining to, and/or in any way connected with, this Trust Receipt,
in the event of default and/or non-fulfillment in any respect of this undertaking on the
part of the said . I/we further agree that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any steps
or exhaust any legal remedies that you may have against the said . before making
demand upon me/us.[14] (Capitalization in the original)

In the trust receipt dated 9 October 1981, petitioners signed below this clause as
officers of El Oro Corporation. Thus, under petitioner Petronila Tupazs signature are the
words Vice-PresTreasurer and under petitioner Jose Tupazs signature are the words
Vice-PresOperations. By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporations obligation. In Ong v. Court of
Appeals,[15] a corporate representative signed a solidary guarantee clause in two
trust receipts in his capacity as corporate representative. There, the Court held that
the corporate representative did not undertake to guarantee personally the payment
of the corporations debts, thus:

[P]etitioner did not sign in his personal capacity the solidary guarantee clause found
on the dorsal portion of the trust receipts. Petitioner placed his signature after the
typewritten words ARMCO INDUSTRIAL CORPORATION found at the end of the solidary
guarantee clause. Evidently, petitioner did not undertake to guaranty personally the
payment of the principal and interest of ARMAGRIs debt under the two trust receipts.

Hence, for the trust receipt dated 9 October 1981, we sustain petitioners claim that
they are not personally liable for El Oro Corporations obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner
Jose Tupaz signed alone, we find that he did so in his personal capacity. Petitioner Jose
Tupaz did not indicate that he was signing as El Oro Corporations Vice-President for
Operations. Hence, petitioner Jose Tupaz bound himself personally liable for El Oro
Corporations debts. Not being a party to the trust receipt dated 30 September 1981,
petitioner Petronila Tupaz is not liable under such trust receipt.

The Nature of Petitioner Jose Tupazs Liability

Under the Trust Receipt Dated 30 September 1981

As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:

To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this Trust Receipt the goods
described herein, I/We, jointly and severally, agree and promise to pay to you, on
demand, whatever sum or sums of money which you may call upon me/us to pay to
you, arising out of, pertaining to, and/or in any way connected with, this Trust Receipt,
in the event of default and/or non-fulfillment in any respect of this undertaking on the
part of the said . I/we further agree that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any steps
or exhaust any legal remedies that you may have against the said . Before making
demand upon me/us. (Underlining supplied; capitalization in the original)

The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself
solidarily liable with El Oro Corporation for the latters debt under that trust receipt.

This is error.
In Prudential Bank v. Intermediate Appellate Court,[16] the Court interpreted a
substantially identical clause[17] in a trust receipt signed by a corporate officer who
bound himself personally liable for the corporations obligation. The petitioner in that
case contended that the stipulation we jointly and severally agree and undertake
rendered the corporate officer solidarily liable with the corporation. We dismissed this
claim and held the corporate officer liable as guarantor only. The Court further ruled
that had there been more than one signatories to the trust receipt, the solidary liability
would exist between the guarantors. We held:

Petitioner [Prudential Bank] insists that by virtue of the clear wording of the xxx clause
x x x we jointly and severally agree and undertake x x x, and the concluding sentence
on exhaustion, [respondent] Chis liability therein is solidary.

xxx

Our xxx reading of the questioned solidary guaranty clause yields no other conclusion
than that the obligation of Chi is only that of a guarantor. This is further bolstered by
the last sentence which speaks of waiver of exhaustion, which, nevertheless, is
ineffective in this case because the space therein for the party whose property may
not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense
of exhaustion (excussion) may be raised by a guarantor before he may be held liable
for the obligation. Petitioner likewise admits that the questioned provision is a solidary
guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however,
described the guaranty as solidary between the guarantors; this would have been
correct if two (2) guarantors had signed it. The clause we jointly and severally agree
and undertake refers to the undertaking of the two (2) parties who are to sign it or to
the liability existing between themselves. It does not refer to the undertaking between
either one or both of them on the one hand and the petitioner on the other with

respect to the liability described under the trust receipt. xxx

Furthermore, any doubt as to the import or true intent of the solidary guaranty clause
should be resolved against the petitioner. The trust receipt, together with the
questioned solidary guaranty clause, is on a form drafted and prepared solely by the
petitioner; Chis participation therein is limited to the affixing of his signature thereon.
It is, therefore, a contract of adhesion; as such, it must be strictly construed against
the party responsible for its preparation.[18] (Underlining supplied; italicization in the
original)

However, respondent banks suit against petitioner Jose Tupaz stands despite the
Courts finding that he is liable as guarantor only. First, excussion is not a pre-requisite
to secure judgment against a guarantor. The guarantor can still demand deferment of
the execution of the judgment against him until after the assets of the principal debtor
shall have been exhausted.[19] Second, the benefit of excussion may be waived.[20]
Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz waived
excussion when he agreed that his liability in [the] guaranty shall be DIRECT AND
IMMEDIATE, without any need whatsoever on xxx [the] part [of respondent bank] to
take any steps or exhaust any legal remedies xxx. The clear import of this stipulation
is that petitioner Jose Tupaz waived the benefit of excussion under his guarantee.

As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations principal debt and
other accessory liabilities (as stipulated in the trust receipt and as provided by law)
under the trust receipt dated 30 September 1981. That trust receipt (and the trust
receipt dated 9 October 1981) provided for payment of attorneys fees equivalent to
10% of the total amount due and an interest at the rate of 7% per annum, or at such
other rate as the bank may fix, from the date due until paid xxx.[21] In the
applications for the letters of credit, the parties stipulated that drafts drawn under the
letters of credit are subject to interest at the rate of 18% per annum.[22]

The lower courts correctly applied the 18% interest rate per annum considering that
the face value of each of the trust receipts is based on the drafts drawn under the
letters of credit. Based on the guidelines laid down in
Eastern Shipping Lines, Inc. v. Court of Appeals,[23] the accrued stipulated interest
earns 12% interest per annum from the time of the filing of the Informations in the
Makati Regional Trial Court on 17 January 1984. Further, the total amount due as of the
date of the finality of this Decision will earn interest at 18% per annum until fully paid
since this was the stipulated rate in the applications for the letters of credit.[24]

The accounting of El Oro Corporations debts as of 23 January 1992, which the trial
court used, is no longer useful as it does not specify the amounts owing under each of
the trust receipts. Hence, in the execution of this Decision, the trial court shall
compute El Oro Corporations total liability under each of the trust receipts dated 30
September 1981 and 9 October 1981 based on the following formula:[25]

TOTAL AMOUNT DUE = [principal + interest + interest on interest] partial payments

made[26]
Interest = principal x 18 % per annum x no. of years from due date[27] until finality of
judgment

Interest on interest = interest computed as of the filing of the complaint (17 January
1984) x 12% x no. of years until finality of judgment

Attorneys fees is 10% of the total amount computed as of finality of judgment

Total amount due as of the date of finality of judgment will earn an interest of 18% per
annum until fully paid.

In so delegating this task, we reiterate what we said in Rizal Commercial Banking

Corporation v. Alfa RTW Manufacturing Corporation[28] where we also ordered the trial
court to compute the amount of obligation due based on a formula substantially
similar to that indicated above:

The total amount due xxx [under] the xxx contract[] xxx may be easily determined by
the trial court through a simple mathematical computation based on the formula
specified above. Mathematics is an exact science, the application of which needs no
further proof from the parties.

Petitioner Jose Tupazs Acquittal did not

Extinguish his Civil Liability

The rule is that where the civil action is impliedly instituted with the criminal action,
the civil liability is not extinguished by acquittal

[w]here the acquittal is based on reasonable doubt xxx as only preponderance of

evidence is required in civil cases; where the court expressly declares that the liability
of the accused is not criminal but only civil in nature xxx as, for instance, in the
felonies of estafa, theft, and malicious mischief committed by certain relatives who
thereby incur only civil liability (See Art. 332, Revised Penal Code); and, where the civil
liability does not arise from or is not based upon the criminal act of which the accused
was acquitted xxx.[29] (Emphasis supplied)

Here, respondent bank chose not to file a separate civil action[30] to recover payment
under the trust receipts. Instead, respondent bank sought to recover payment in
Criminal Case Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose
Tupaz, his acquittal did not extinguish his civil liability. As the Court of Appeals
correctly held, his liability arose not from the criminal act of which he was acquitted
(ex delito) but from the trust receipt contract (ex contractu) of 30 September 1981.
Petitioner Jose Tupaz signed the trust receipt of 30 September 1981 in his personal
capacity.

On the other Matters Petitioners Raise

Petitioners raise for the first time in this appeal the contention that El Oro Corporations
debts under the trust receipts are not yet due and demandable. Alternatively,
petitioners assail the trust receipts as simulated. These assertions have no merit.
Under the terms of the trust receipts dated 30 September 1981 and 9 October 1981,
El Oro Corporations debts fell due on 29 December 1981 and 8 December 1981,
respectively.

Neither is there merit to petitioners claim that the trust receipts were simulated.
During the trial, petitioners did not deny applying for the letters of credit and
subsequently executing the trust receipts to secure payment of the drafts drawn under
the letters of credit.

WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of
Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with the
following MODIFICATIONS:

1)
El Oro Engraver Corporation is principally liable for the total amount due under
the trust receipts dated 30 September 1981 and 9 October 1981, as computed by the
Regional Trial Court, Makati, Branch 144, upon finality of this Decision, based on the
formula provided above;
2)
Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporations total debt
under the trust receipt dated 30 September 1981 as thus computed by the Regional
Trial Court, Makati, Branch 144; and

3)
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable under the trust
receipt dated 9 October 1981.

SO ORDERED.

G.R. No. L-26449

May 15, 1969

LUZON STEEL CORPORATION, represented by TOMAS AQUINO CU, plaintiff-appellant,

vs.
JOSE O. SIA, defendant,
TIMES SURETY & INSURANCE CO. INC., surety-appellee.

German A. Sipin for plaintiff-appellant.

Galicano S. Calapatia for surety-appellee.

REYES, J.B.L., J.:

Direct appeal from two orders, dated 19 May and 5 June 1965, issued by the Court of
First Instance of Manila (Judge Francisco Arca presiding), in its Civil Case No. 54913,
entitled Luzon Steel Corporation, plaintiff vs. Metal Manufacturing of the Philippines,

Inc., and Jose O. Sia, defendants, whereby the court aforesaid quashed a writ of
execution issued against the Times Surety & Insurance Co., Inc., and cancelled the
undertaking of said surety company.

The essential and uncontroverted facts of the case may be summarized as follows:

Luzon Steel Corporation has sued Metal Manufacturing of the Philippines and Jose O.
Sia, the former's manager, for breach of contract and damages. It obtained a writ of
preliminary attachment of the properties of the defendants, but the attachment was
lifted upon a P25,000.00 counterbond executed by the defendant Sia, as principal, and
the Times Surety & Insurance Co., Inc. (hereinafter designated as the surety), as
solidary guarantor, in the following terms:

WHEREFORE, we JOSE O. SIA, as principal and the TIMES SURETY & INSURANCE CO.,
INC., as Surety, in consideration of the dissolution of attachment, hereby jointly and
severally bind ourselves in the sum of Twenty Five Thousand Pesos (P25,000.00),
Philippine Currency, to answer for the payment to the plaintiff of any judgment it may
recover in the action in accordance with Section 12, Rule 59, of the Rules of Court. (pp.
32, 45, Rec. on Appeal.)

Issues having been joined, plaintiff and defendant (without intervention of the surety)
entered into a compromise whereby defendant Sia agreed to settle the plaintiff's claim
in the following manner:

1. That the defendant shall settle with the Plaintiff the amount of TWENTY FIVE
THOUSAND (P25,000.00) PESOS, in the following manner: FIVE HUNDRED (P500.00)
PESOS, monthly for the first six (6) months to be paid at the end of every month and
to commence in January, 1965, and within one month after paying the last installment
of P500.00, the balance of P22,000.00 shall be paid in lump sum, without interest. It is
understood that failure of the Defendant to pay one or any installment will make the
whole obligation immediately due and demandable and that a writ of execution will be
issued immediately against Defendants bond.lawphi1.et

The compromise was submitted to the court and the latter approved it, rendered
judgment in conformity therewith, and directed the parties to comply with the same
(Record on Appeal, page 22).

Defendant having failed to comply, plaintiff moved for and obtained a writ of execution
against defendant and the joint and several counterbond. The surety, however, moved
to quash the writ of execution against it, averring that it was not a party to the

compromise, and that the writ was issued without giving the surety notice and
hearing. The court, overruling the plaintiff's opposition, set aside the writ of execution,
and later cancelled the counterbond, and denied the motion for reconsideration.
Hence this appeal.

Main issues posed are (1) whether the judgment upon the compromise discharged the
surety from its obligation under its attachment counterbond and (2) whether the writ
of execution could be issued against the surety without previous exhaustion of the
debtor's properties.

Both questions can be solved by bearing in mind that we are dealing with a
counterbond filed to discharge a levy on attachment. Rule 57, section 12, specifies
that an attachment may be discharged upon the making of a cash deposit or filing a
counterbond "in an amount equal to the value of the property attached as determined
by the judge"; that upon the filing of the counterbond "the property attached ... shall
be delivered to the party making the deposit or giving the counterbond, or the person
appearing on his behalf, the deposit or counterbond aforesaid standing in place of the
property so released".

The italicized expressions constitute the key to the entire problem. Whether the
judgment be rendered after trial on the merits or upon compromise, such judgment
undoubtedly may be made effective upon the property released; and since the
counterbond merely stands in the place of such property, there is no reason why the
judgment should not be made effective against the counterbond regardless of the
manner how the judgment was obtained.

Squarely on the point, and rebutting the appellee's apprehension that the compromise
could be the result of a collusion between the parties to injure the surety, is our
decision in Anzures vs. Alto Surety & Insurance Co., Inc., et al., 92 Phil. 742, where this
Court, through former Chief Justice Paras, ruled as follows:

Under section 12, Rule 59, of the Rules of Court, the bond filed, as in this case, for the
discharge of an attachment is "to secure the payment to the plaintiff of any judgment
he may recover in the action," and stands "in place of the property so released". It
follows that the order of cancellation issued by the respondent judge is erroneous.
Indeed, judgment had already been rendered by the Court of First Instance of Manila in
civil case No. 11748, sentencing Benjamin Aguilar to pay the sum of P3,500.00 to the
petitioner; and it is not pretended that said judgment is a nullity. There is no point in
the contention of the respondent Surety Company that the compromise was entered
into without its knowledge and consent, thus becoming as to it essentially fraudulent.
The Surety is not a party to civil case No. 11748 and, therefore, need not be served
with notice of the petition for judgment. As against the conjecture of said respondent

that the parties may easily connive by means of a compromise to prejudice it, there is
also the likelihood that the same end may be attained by parties acting in bad faith
through a simulated trial. At any rate, it is within the power of the Surety Company to
protect itself against a risk of the kind.

Wherefore, the order of the respondent Judge cancelling the bond in question is set
aside. So ordered with costs against the respondent Alto Surety & Insurance Co., Inc.

The lower court and the appellee herein appear to have relied on doctrines of this
Court concerning the liability of sureties in bonds filed by a plaintiff for the issuance of
writs of attachment, without discriminating between such bonds and those filed by a
defendant for the lifting of writs of attachment already issued and levied. This
confusion is hardly excusable considering that this Court has already called attention
to the difference between these kinds of bonds. Thus, in Cajefe vs. Judge Fernandez, et
al., L-15709, 19 October 1960, this Court pointed out that

The diverse rule in section 17 of Rule 59 for counterbonds posted to obtain the lifting
of a writ of attachment is due to these bonds being security for the payment of any
judgment that the attaching party may obtain; they are thus mere replacements of the
property formerly attached, and just as the latter may be levied upon after final
judgment in the case in order to realize the amount adjudged, so is the liability of the
countersureties ascertainable after the judgment has become final. This situation does
not obtain in the case of injunction counterbonds, since the sureties in the latter case
merely undertake "to pay all damages that the plaintiff may suffer by reason of the
continuance ... of the acts complained of" (Rule 60, section 6) and not to secure
payment of the judgment recovered.1

It was, therefore, error on the part of the court below to have ordered the surety bond
cancelled, on the theory that the parties' compromise discharged the obligation of the
surety.

As declared by us in Mercado vs. Macapayag, 69 Phil. 403, 405-406, in passing upon

the liability of counter sureties in replevin who bound themselves to answer solidarily
for the obligations of the defendants to the plaintiffs in a fixed amount of P912.04, to
secure payment of the amount that said plaintiff be adjudged to recover from the
defendants,2

the liability of the sureties was fixed and conditioned on the finality of the judgment
rendered regardless of whether the decision was based on the consent of the parties
or on the merits. A judgment entered on a stipulation is nonetheless a judgment of the
court because consented to by the parties.

But the surety in the present case insists (and the court below so ruled) that the
execution issued against it was invalid because the writ issued against its principal,
Jose O. Sia, et al., defendants below, had not been returned unsatisfied; and the surety
invoked in its favor Section 17 of Rule 57 of the Revised Rules of Court (old Rule 59),
couched in the following terms:

SEC. 17. When execution returned unsatisfied, recovery had upon bond. If the
execution be returned unsatisfied in whole or in part, the surety or sureties on any
counterbond given pursuant to the provisions of this rule to secure the payment of the
judgment shall become charged on such counter-bond, and bound to pay to the
judgment creditor upon demand, the amount due under the judgment, which amount
may be recovered from such surety or sureties after notice and summary hearing in
the same action.

The surety's contention is untenable. The counterbond contemplated in the rule is

evidently an ordinary guaranty where the sureties assume a subsidiary liability. This is
not the case here, because the surety in the present case bound itself "jointly and
severally" (in solidum) with the defendant; and it is prescribed in Article 2059,
paragraph 2, of the Civil Code of the Philippines that excusion (previous exhaustion of
the property of the debtor) shall not take place "if he (the guarantor) has bound
himself solidarily with the debtor". The rule heretofore quoted cannot be construed as
requiring that an execution against the debtor be first returned unsatisfied even if the
bond were a solidary one; for a procedural rule may not amend the substantive law
expressed in the Civil Code, and further would nullify the express stipulation of the
parties that the surety's obligation should be solidary with that of the defendant.

A second reason against the stand of the surety and of the court below is that even if
the surety's undertaking were not solidary with that of the principal debtor, still he
may not demand exhaustion of the property of the latter, unless he can point out
sufficient leviable property of the debtor within Philippine territory. There is no record
that the appellee surety has done so. Says Article 2060 of the Civil Code of the
Philippines:

ART. 2060. In order that the guarantor may make use of the benefit of excussion, he
must set it up against the creditor upon the latter's demand for payment from him,
and point out to the creditor available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt.

A third reason against the thesis of appellee is that, under the rule and its own terms,
the counter-bond is only conditioned upon the rendition of the judgment. Payment
under the bond is not made to depend upon the delivery or availability of the property

previously attached, as it was under Section 440 of the old Code of Civil Procedure.
Where under the rule and the bond the undertaking is to pay the judgment, the
liability of the surety or sureties attaches upon the rendition of the judgment, and the
issue of an execution and its return nulla bona is not, and should not be, a condition to
the right to resort to the bond. 3

It is true that under Section 17 recovery from the surety or sureties should be "after
notice and summary hearing in the same action". But this requirement has been
substantially complied with from the time the surety was allowed to move for the
quashal of the writ of execution and for the cancellation of their obligation.

WHEREFORE, the orders appealed from are reversed, and the court of origin is ordered
to proceed with the execution against the surety appellee, Times Surety & Insurance
Co., Inc. Costs against said appellee.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-28030

January 18, 1982

THE IMPERIAL INSURANCE, INC., petitioner,

vs.
HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Rizal, Quezon
City Branch IV, ROSA V. REYES, PEDRO V. REYES and CONSOLACION V. REYES,
respondents.

FERNANDEZ, J.:

This is a petition for certiorari to review the decision of the Court of Appeals in CA-G.R.
No. 38824-R promulgated on July 19, 1967 entitled "The Imperial Insurance, Inc.,
petitioner vs. Hon. Walfrido de los Angeles, Judge of the Court of First Instance of Rizal,
Branch IV, Quezon City, et al, respondents," the dispositive part of which reads:

WHEREFORE, the instant petition is dismissed and the writ of preliminary injunction
issued by the Court on January 31, 1967, is hereby dissolved, with costs against
petitioner.

SO ORDERED. 1

As found by the Court of Appeals, the uncontroverted facts are:

It appears that herein private respondent Rosa V. Reyes is the plaintiff in Civil Case N.
Q-8213 of the Court of First Instance of Rizal, Branch IV, Quezon City, entitled, 'Rosa V.
Reyes vs, Felicisimo V. Reyes, etc.,' where she obtained a writ of preliminary
attachment and, accordingly, levied upon all the properties of the defendant,
Felicisimo V. Reyes, in said case. The other two herein private respondents, namely,
Pedro V. Reyes and Consolacion V. Reyes, are the plaintiffs in Civil Case No. Q-5214 of
the same court entitled, 'Pedro V. Reyes, etc.,' and likewise, obtained a writ of
preliminary attachment and, accordingly, levied upon all the properties of the
defendant, Felicisimo V. Reyes, in said case.

For the dissolution of the attachments referred to above, the herein petitioner, The
Imperial Insurance, Inc., as surety, and Felicisimo V. Reyes, as principal, posted a
'defendant's bond for dissolution of attachment' in the amount of P60,000.00 in Civil
Case No. Q-5213 and another bond of the same nature in the amount of P40,000.00 in
Civil Case No. Q-5214.

Civil Cases Nos. Q-5213 and 5214 were jointly tried and the decision therein rendered
was in favor of the plaintiffs. This decision was affirmed by this Court on appeal in
cases CA-G.R. NOS. 33783-R and 33784-R. The decision of this Court, having become
final, the records of the cases were remanded to the Court of First Instance of Rizal,
Quezon City Branch, for execution of judgment.

Accordingly, on June 24, 1966, the Court below, presided by the herein respondent
Judge, Hon. Walfrido de los Angeles, issued the writs of execution of judgment in said
cases. However, on August 20, 1966, the Provincial Sheriff of Bulacan returned the
writs of execution' unsatisfied in whole or in part'.

On September 9, 1966, private respondents filed a 'motion for recovery on the surety
bonds'. Thereafter, said private respondents, thru counsel, sent a letter of demand
upon petitioner asking the latter to pay them the accounts on the counter-bonds. On
September 24, 1966, petitioner filed its 'opposition' to the private respondents "Motion
for recovery on the surety bonds'. Respondent Judge, in his order, dated November 10,
1966, rendered judgment against the counter-bonds.

On November 15, 1966, private respondents filed an ex parte motion for writ of
execution' without serving copy thereof on petitioner.

In the meantime, on or about November 23 1966, petitioner filed a 'motion for

reconsideration' of the order, dated November 10, 1966. This motion was, however,
denied by the respondent Judge on January 9, 1967.

On or about January 11, 1967, petitioner filed its 'notice of intention to appeal' from
the final orders of the respondent Judge, dated November 10, 1966 and January 9.
1967.

On January 19, 1967, the respondent Judge issued an order granting the issuance of
the writ of execution against the bonds riled by the petitioner (Exhibit J, petition). 2

On January 25, 1967, the petitioner filed a petition for certiorari with prayer for for
preliminary injunction with the Court of Appeals to restrain the enforcement of the writ
of execution. 3

The petition was given due course and on January 30, 1967 a writ of preliminary
injunction was issued. 4 After the parties had submitted their respective pleadings and
memoranda in lieu of oral argument, the Court of Appeals rendered the decision now
under review.

The defendant, Felicisimo V. Reyes, in the abovementioned cases died during the
pendency of the trial. He was duly substituted by his surviving spouse, Emilia T. David,
an administratrix of his intestate estate. 5

The petitioner assigns as errors allegedly committed by the Court of Appeals the
following:

THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE RESPONDENT JUDGE
COULD LEGALLY ISSUE THE WRIT OF EXECUTION AGAINST THE PETITIONER AS SURETY
IN A COUNTERBOND (BOND TO DISSOLVE ATTACHMENT) ON THE BASIS OF AN EXPARTE MOTION FOR EXECUTION WHICH WAS NEITHER SERVED UPON THE SURETY NOR
SET FOR HEARING.

II

THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE PLAINTIFF WHO
OBTAINED A JUDGMENT AGAINST THE DEFENDANT MAY LEGALLY CHOOSE 'TO GO
DIRECTLY' AFTER THE SURETY IN A COUNTERBOND WITHOUT PRIOR EXHAUSTION OF
THE DEFENDANTS PROPERTIES.

III

THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE 'JUDGMENT'
RENDERED AGAINST THE MENTIONED COUNTERBONDS IS A 'FINAL ORDER' IN THE
CONTEMPLATION OF SECTION 2, RULE 41 OF THE REVISED RULES OF COURT AND,
THEREFORE, APPEALABLE.

IV

THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT IN THE ABSENCE OF
AN EXPRESS PROVISION OF THE REVISED RULES OF COURT, THE PROCEDURE
FOLLOWED BY THE SHERIFF IN THE EXECUTION OF THE JUDGMENT ON THE 'SURVIVING
CLAIMS', WHEN THE DEFENDANT DIED DURING THE PENDENCY OF THE TRIAL OF HIS
CASE AND BEFORE JUDGMENT WAS DULY SUBSTITUTED BY THE COURT APPOINTED
ADMINISTRATRIX OF HIS ESTATE, SHOULD HAVE BEEN THE SAME AS THE PROCEDURE
SET OUT IN SECTION (f), RULE 57 RESPECTING THE EXECUTION OF A WRIT OF
PRELIMINARY ATTACHMENT OF PROPERTIES IN CUSTODIALEGIS. 6

Anent the first error, the petitioner contends that the Court of Appeals erred in holding
that the respondent judge could legally issue the writ of execution against the
petitioner as surety in a counterbond (bond to dissolve attachment) on the basis of an
ex parte motion for execution which was allegedly never served upon the surety nor

set for hearing. This contention is devoid of merit.

The counterbonds filed to lift the writs of attachment executed by the herein
petitioner, The Imperial Insurance, Inc., for and in behalf of the deceased defendant
Felicisimo V. Reyes in favor of the plaintiffs, private respondents herein Rosa V. Reyes
and Consolacion V. Reyes in Civil Case No. Q-5214 docketed with the Court of First
Instance of Rizal, Branch IV, Quezon City, are clearly the bonds contemplated under
Sec. 17, Rule 57 of the Rules of Court which provides:

Sec. 17. When execution returned unsatisfied, recovery had upon bond. If the
execution be returned unsatisfied in whole or in part, the surety or sureties on any
counterbond given pursuant to the provisions of this rule to secure the payment of the
judgment shall become charged on such counter-bond, and bound to pay to the
judgment creditor upon demand, the amount due under the judgment, which amount
may be recovered from such surety or sureties after notice and summary hearing in
the same action.

This section allows the counterbond filed to lift an attachment to be charged only after
notice and summary hearing in the same action.

The records show that the notice and hearing requirement was substantially complied
with in the instant case.

Prior to the filing of the ex parte motion for a writ of execution, the respondents filed a
motion for recovery on the surety bonds where the petitioner was duly notified and the
said motion was heard on September 24, 1966. 7 Moreover, on November 23, 1966
the petitioner filed a motion for reconsideration of the order dated November 10, 1966
rendering judgment against the petitioner on its counter-bonds in the amount of
P60,000.00 in Civil Case No. Q-5213 and P40,000.00 in Civil Case No. Q-5214. 8 The
respondent judge set the hearing of the ex parte motion for writ of execution together
with the motion for reconsideration of the order dated November 10, 1966 on
December 17, 1966 at 8:30 o'clock in the morning. 9 The petitioner received the
notice of the said hearing on December 9, 1966 as evidenced by Registry Return
Receipt No. 40122. 10 On January 9, 1967, the respondent Judge issued an order
denying the motion for reconsideration dated November 23, 1966 for lack of merit. 11
in an order dated January 19, 1967, the motion for writ of execution was granted by
the respondent judge. 12

It is thus clear from indubitable documents on record that the requirements of notice
and hearing had been satisfactorily complied with by the respondents. The first error
assigned is overruled.

The petitioner asserts that the Court of Appeals gravely erred in holding that the
plaintiff who obtained judgment against the defendant may legally choose "to go
directly" after the surety in a counterbond without prior exhaustion of the defendant's
properties. This contention is likewise not meritorious.

Although the counterbond contemplated in the aforequoted Sec. 17, Rule 57, of the
Rules of Court is an ordinary guaranty where the sureties assume a subsidiary liability,
the rule cannot apply to a counterbond where the surety bound itself "jointly and
severally" (in solidum) with the defendant as in the present case. The counterbond
executed by the deceased defendant Felicisimo V. Reyes, as principal, and the
petitioner, The Imperial Insurance, Inc., as solidary quarantor to lift the attachment in
Civil Case No. Q-5213 is in the following terms:

WHEREFORE, WE, FELICISIMO V. REYES, of legal age, Filipino, and with postal address
at San Jose, San Miguel, Bulacan and/or 1480 Batangas Street, Sta. Cruz, Manila, as
PRINCIPAL and THE IMPERIAL INSURANCE, INC., a corporation duly organized and
existing under the laws of the Philippines, as SURETY, in consideration of the
dissolution of said attachment, hereby JOINTLY AND SEVERALLY, bind ourselves in the
sum of SIXTY THOUSAND PESOS ONLY (P60,000.00), Philippine Currency, under the
condition that in case the plaintiff recovers judgment in the action, the defendant shall
pay the sum of SIXTY THOUSAND PESOS (P60,000.00), Philippine Currency, being the
amount release for attachment, to be applied to the payment of the judgment, or in
default thereof, the Surety will, on demand, pay to the plaintiff said amount of SIXTY
THOUSAND PESOS ONLY (P60,000.00), Philippine Currency. (Capitalizations supplied).

Manila, Philippines, June 30,1960. 13

The counterbond executed by the same parties in Civil Case No. Q-5214, likewise
states.

WHEREFORE, we, FELICISIMO V. REYES, of legal age, Filipino, and with postal address
at San Jose, San Miguel, Bulacan, and/or 1480 Batangas Street, Sta. Cruz, Manila, as
PRINCIPAL and THE IMPERIAL INSURANCE, INC., a corporation duly organized and
existing under the laws of the Philippines, as SURETY, in consideration of the
dissolution of said attachment, hereby JOINTLY and SEVERALLY, bind ourselves in the
sum of FORTY THOUSAND PESOS ONLY (P40,000.00), Philippine Currency, under the
condition that in case the plaintiff recover judgment in the action the defendant shall
pay the sum of FORTY THOUSAND PESOS ONLY (P40,000.00), Philippine Currency,
being the amount released for attachment, to be applied to the payment of the
judgment, or in default thereof, the Surety will, on demand, pay to the plaintiffs said
amount of FORTY THOUSAND PESOS ONLY (P40,000.00), Philippine Currency.

(Emphasis supplied).

Manila, Philippines, June 30th, 1960. 14

Clearly, the petitioner, the Imperial Insurance, Inc., had bound itself solidarily with the
principal, the deceased defendant Felicisimo V. Reyes. In accordance with Article 2059,
par. 2 of the Civil Code of the Philippines, 15 excussion (previous exhaustion of the
property of the debtor) shall not take place "if he (the guarantor) has bound himself
solidarily with the debtor." Section 17, Rule 57 of the Rules of Court cannot be
construed that an "execution against the debtor be first returned unsatisfied even if
the bond were a solidary one, for a procedural rule may not amend the substantive
law expressed in the Civil Code, and further would nullify the express stipulation of the
parties that the surety's obligation should be solidary with that of the defendant." 16

Hence the petitioner cannot escape liability on its counter-bonds based on the second
error assigned.

As regards the third error, the petitioner submits that the Court of Appeals erred in not
holding that the order dated November 10, 1966 rendering judgment against the
counter-bonds, as well as the order dated January 9, 1967, denying the motion for
reconsideration thereof, and the order of the writ of execution dated January 19, 1967
are final and appealable in accordance with Sec. 2, Rule 41 of the Rec. Rules of Court.
This submission is also without merit.

To recover against the petitioner surety on its counter-bonds it is not necessary to file
a separate action. Recovery and execution may be had in the same Civil Cases Nos. Q5213 and Q-5214, as sanctioned by Sec. 17, Rule 57, of the Revised Rules of Court.

The decision in Civil Cases Nos. Q-5213 and Q-5214, having become final, the
respondent judo issued the writs of execution in said cases. On August 20, 1966, the
Provincial Sheriff of Bulacan returned the writs of execution "unsatisfied in whole or in
part." 17

Sec. 12, Rule 57 of the Revised Rules of Court 18 specifies that an attachment may be
discharged upon the making of a cash deposit or filing a counterbond "in an amount
equal to the value of the property attached as determined by the judge"; and that
upon filing the counterbond "the property attached shall be delivered to the party
making the deposit or giving the counterbond or the person appearing in his behalf,
the deposit or counterbond standing in place of the property so released."

The counter-bonds merely stand in place of the properties so released. They are mere
replacements of the properties formerly attached, and just as the latter may be levied
upon after final judgment in the case in order to realize the amount adjudged so is the
liability of the counter sureties ascertainable after the judgment has become final. 19

The judgment having been rendered against the defendant, Felicisimo V. Reyes, the
counter-bonds given by him and the surety, The Imperial Insurance, Inc., under Sec.
12, Rule 57 are made liable after execution was returned unsatisfied. Under the said
rule, a demand shall be made upon the surety to pay the plaintiff the amount due on
the judgment, and if no payment is so made, the amount may be recovered from such
surety after notice and hearing in the same action. A separate action against the
sureties is not necessary. 20

In the present case, the demand upon the petitioner surety was made with due notice
and hearing thereon when the private respondents filed the motion for recovery on the
surety bonds dated September 9, 1966 and to which the petitioner filed their
opposition dated September 24, 1966. 21

Therefore, all the requisites under Sec. 17, Rule 57, being present, namely: (1) the writ
of execution must be returned unsatisfied, in whole or in part; (2) the plaintiff must
demand the amount due under the judgment from the surety or sureties, and (3)
notice and hearing of such demand although in a summary manner, complied with,
the liability of the petitioner automatically attaches.

In effect, the order dated November 10, 1966 rendering judgment against the counterbonds was a superfluity. The respondent judge could have issued immediately a writ of
execution against the petitioner surety upon demand.

As correctly held by the Court of Appeals:

In fact, respondent Judge could have even issued a writ of execution against petitioner
on its bond immediately after its failure to satisfy the judgment against the defendant
upon demand, since liability on the bond automatically attaches after the writ of
execution against the defendant was returned unsatisfied as held in the case of Tijan
vs. Sibonghanoy, CA-G.R. No. 23669-R, December 11, 1927. 22

Moreover, the finality and non-appealability of the order dated November 10, 1966 is
made certain and absolute with the issuance of the order of execution dated January

19, 1967 23 upon the filing of the ex parte motion for writ of execution 24 of which the
petitioner was duly notified by the respondent Judge and which was duly heard. 25 The
general rule is that an order of execution is not appealable, otherwise a case would
never end. The two exceptions 26 to this rule are: (1) where the order of execution
varies the tenor of the judgment; and (2) when the terms of the judgment are not very
clear, and there is room for interpretation. The case at bar does not fall under either
exception. There is no showing that the order of execution varies the tenor of the
judgment in Civil Cases Nos. Q-5213 and Q-5214, nor of the order dated November 10,
1966, but is in fact, in consonance therewith and the terms of the judgment are clear
and definite, therefore, the general rule of non-appealability applies.

It is no longer necessary to discuss the fourth error assigned because of this Court's
finding that the liability expressly assumed by the petitioner on the counter-bonds is
solidary with the principal debtor, the deceased defendant, Felicisimo V. Reyes. As a
solidary guarantor, the petitioner, the Imperial Insurance, Inc., is liable to pay the
amount due on such counter-bonds should the creditors, private respondents herein,
choose to go directly after it. 27

Under the law and under their own terms, the counter-bonds are only conditioned
upon the rendition of the judgment. As held by this Court in the aforecited case of
Luzon Steel Corporation vs. Sia 28 "where under the rule and the bond the
undertaking is to pay the judgment, the liability of the surety or sureties attaches upon
the rendition of the judgment, and the issue of an execution and its return nulla bona
is not, and should not be a condition to the right to resort to the bond." Thus, it
matters not whether the Provincial Sheriff of Bulacan, in making the return of the writ
of execution served or did not serve a copy thereof with notice of attachment on the
administratrix of the intestate estate of Felicisimo V. Reyes and filed a copy of said writ
with the office of the clerk of court with notice in accordance with See. 7 (f), Rule 57 of
the Revised Rules of Court. The petitioner surety as solidary obligor is liable just the
same.

WHEREFORE, the decision of the Court of Appeals promulgated on July 19,1967 in CAG.R. NO. 38824-R is affirmed and the order of the respondent judge dated January 19,
1967 and all writs or orders issued in consequence or in pursuance thereof are also
affirmed. The court of origin is hereby ordered to proceed with the execution against
the petitioner surety, the Imperial Insurance Inc., with costs against said petitioner.

SO ORDERED.

[G.R. No. 109941. August 17, 1999]

PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE COURT OF APPEALS (Former

Ninth Division) and LEONILA TOMACRUZ, respondents.
DECISION
GONZAGA-REYES, J.:

This is a petition for review by way of certiorari under Rule 45 of the Revised Rules of
Court of the decision of the Court of Appeals[1] dated November 29, 1991 in CA-G.R.
CV No. 27779 affirming the decision[2] of the Regional Trial Court of Quezon City,
Branch 88, dated June 14, 1990 in Civil Case No. Q-89-2483 and the Resolution of the
Court of Appeals dated April 27, 1993 denying petitioner's Motion for Reconsideration.

The pertinent facts, as found by the trial court and affirmed by respondent court, are
briefly narrated as follows:

Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent

Leonila Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon.[3]
Petitioner told private respondent that Luanzon has been engaged in business as a
contractor for twenty years and she invited private respondent to lend Luanzon money
at a monthly interest rate of five percent (5%), to be used as capital for the latter's
business. Private respondent, persuaded by the assurances of petitioner that
Luanzon's business was stable and by the high interest rate, agreed to lend Luanzon
money in the amount of P150,000. On June 22, 1987, Luanzon issued and signed a
promissory note acknowledging receipt of the P150,000 from private respondent and
obliging herself to pay the former the said amount on or before August 22, 1987.[4]
Petitioner signed the promissory note, affixing her signature under the word
"guarantor." Luanzon also issued a postdated Solidbank check no. CA418437 dated
August 22, 1987 payable to Leonila Tomacruz in the amount of P150,000.[5]
Subsequently, Luanzon replaced this check with another postdated Solidbank check
no. 432945 dated December 22, 1987, in favor of the same payee and covering the
same amount.[6] Several checks in the amount of P7,500 each were also issued by
Luanzon and made payable to private respondent.[7]

Private respondent made a written demand upon petitioner for payment, which
petitioner did not heed. Thus, on May 8, 1989, private respondent filed a case for the
collection of a sum of money with the Regional Trial Court (RTC) of Quezon City, Branch
88, against Luanzon and petitioner herein, impleading Mariano Baylon, husband of
petitioner, as an additional defendant. However, summons was never served upon
Luanzon.

In her answer, petitioner denied having guaranteed the payment of the promissory
note issued by Luanzon. She claimed that private respondent gave Luanzon the
money, not as a loan, but rather as an investment in Art Enterprises and Construction,
Inc. - the construction business of Luanzon. Furthermore, petitioner avers that,
granting arguendo that there was a loan and petitioner guaranteed the same, private
respondent has not exhausted the property of the principal debtor nor has she
resorted to all the legal remedies against the principal debtor as required by law.
Finally, petitioner claims that there was an extension of the maturity date of the loan
without her consent, thus releasing her from her obligation.[8]

After trial on the merits, the lower court ruled in favor of private respondent. In its
Decision dated June 14, 1990, it stated that -

The evidence and the testimonies on record clearly established a (sic) fact that the
transaction between the plaintiff and defendants was a loan with five percent (5%)
monthly interest and not an investment. In fact they all admitted in their testimonies
that they are not given any stock certificate but only promissory notes similar to
Exhibit B wherein it was clearly stated that defendant Luanzon would pay the amount
of indebtedness on the date due. Postdated checks were issued simultaneously with
the promissory notes to enable the plaintiff and others to withdraw their money on a
certain fixed time. This shows that they were never participants in the business
transaction of defendant Luanzon but were creditors.

The evidences presented likewise show that plaintiff and others loan their money to
defendant Luanzon because of the assurance of the monthly income of five percent
(5%) of their money and that they could withdraw it anytime after the due date add to
it the fact that their friend, Pacionaria Baylon, expresses her unequivocal gurarantee
to the payment of the amount loaned.

xxx xx xxx

WHEREFORE, premises considered, judgment is hereby rendered against the

defendants Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the sum of
P150,000.00, with interest at the legal rate from the filing of this complaint until full
payment thereof, to pay the total sum of P21,000.00 as attorneys fees and costs of
suit.[9]

On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence, this
present case wherein petitioner makes the following assignment of errors -

I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE RESPONDENT

TOMACRUZ WAS A CREDITOR OF DEFENDANT LUANZON AND NOT AN INVESTOR IN
THE CONSTRUCTION BUSINESS OF ART ENTERPRISES & CONSTRUCTION, INC.

II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT BAYLON WAS A

"GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A") THE RESPONDENT COURT
ERRED IN RULING THAT PETITIONER-APPELLANT BAYLON IS LIABLE TO THE PRIVATE
RESPONDENT BECAUSE THE LATTER HAS NOT TAKEN STEPS TO EXHAUST THE
PROPERTY OF THE PRINCIPAL DEBTOR AND HAS NOT RESORTED TO ALL THE LEGAL
REMEDIES PROVIDED BY LAW AGAINST THE DEBTOR, DEFENDANT LUANZON.

III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT BAYLON WAS A

GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22, 1987, THE LOWER
COURT ERRED IN RESOLVING THAT SHE WAS NOT RELEASED FROM HER GUARANTY BY
THE SUBSEQUENT TRANSACTIONS BETWEEN THE RESPONDENT-APPELLANT AND
DEFENDANT LUANZON.

At the outset, we note that petitioners claim that the factual findings of the lower
court, which were affirmed by the Court of Appeals, were based on a misapprehension
of facts and contradicted by the evidence on records[10] is a bare allegation and
devoid of merit. As a rule, the conclusions of fact of the trial court, especially when
affirmed by the Court of Appeals, are final and conclusive and cannot be reviewed on
appeal by the Supreme Court.[11] Although this rule admits of several exceptions,[12]
none of the exceptions are in point in the present case. The factual findings of the
respondent court are borne out by the record and are based on substantial evidence.

Petitioner claims that there is no loan to begin with; that private respondent gave
Luanzon the amount of P150,000, not as a loan, but rather as an investment in the
construction project of the latter.[13] In support of her claim, petitioner cites the use
by private respondent of the words investment, dividends, and commission in her
testimony before the lower court; the fact that private respondent received monthly
checks from Luanzon in the amount of P7,500 from July to December, 1987,
representing dividends on her investment; and the fact that other employees of the
Development Bank of the Philippines made similar investments in Luanzons
construction business.[14]

However, all the circumstances mentioned by petitioner cannot override the clear and
unequivocal terms of the June 22, 1987 promissory note whereby Luanzon promised to
pay private respondent the amount of P150,000 on or before August 22, 1987. The
promissory note states as follows:

June 22, 1987

To Whom It May Concern:

For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount of
ONE HUNDRED FIFTY THOUSAND PESOS ONLY (P150,000.00) on or before August 22,
1987.

The above amount is covered by _____ Check No. _____ dated August 22, 1987.

(signed)

ROSITA B. LUANZON

GURARANTOR:

(signed)

PACIONARIA O. BAYLON

Tel. No. 801-28-00

18 P. Mapa St., DBP Village

Almanza, Las Pinas, M.M.[15]

If the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulation shall control.[16] Resort to
extrinsic aids and other extraneous sources are not necessary in order to ascertain the
parties' intent when there is no ambiguity in the terms of the agreement.[17] Both
petitioner and private respondent do not deny the due execution and authenticity of
the June 22, 1987 promissory note. All of petitioner's arguments are directed at
uncovering the real intention of the parties in executing the promissory note, but no

amount of argumentation will change the plain import of the terms thereof, and
accordingly, no attempt to read into it any alleged intention of the parties thereto may
be justified.[18] The clear terms of the promissory note establish a creditor-debtor
relationship between Luanzon and private respondent. The transaction at bench is
therefore a loan, not an investment.

It is petitioner's contention that, even though she is held to be a guarantor under the
terms of the promissory note, she is not liable because private respondent did not
exhaust the property of the principal debtor and has not resorted to all the legal
remedies provided by the law against the debtor.[19] Petitioner is invoking the benefit
of excussion pursuant to article 2058 of the Civil Code, which provides that -

The guarantor cannot be compelled to pay the creditor unless the latter has exhausted
all the property of the debtor, and has resorted to all the legal remedies against the
debtor.

It is axiomatic that the liability of the guarantor is only subsidiary.[20] All the
properties of the principal debtor must first be exhausted before his own is levied
upon. Thus, the creditor may hold the guarantor liable only after judgment has been
obtained against the principal debtor and the latter is unable to pay, for obviously the
exhaustion of the principals property - the benefit of which the guarantor claims cannot even begin to take place before judgment has been obtained.[21] This rule is
embodied in article 2062 of the Civil Code which provides that the action brought by
the creditor must be filed against the principal debtor alone, except in some instances
when the action may be brought against both the debtor and the principal debtor.[22]

Under the circumstances availing in the present case, we hold that it is premature for
this Court to even determine whether or not petitioner is liable as a guarantor and
whether she is entitled to the concomitant rights as such, like the benefit of excussion,
since the most basic prerequisite is wanting - that is, no judgment was first obtained
against the principal debtor Rosita B. Luanzon. It is useless to speak of a guarantor
when no debtor has been held liable for the obligation which is allegedly secured by
such guarantee. Although the principal debtor Luanzon was impleaded as defendant,
there is nothing in the records to show that summons was served upon her. Thus, the
trial court never even acquired jurisdiction over the principal debtor. We hold that
private respondent must first obtain a judgment against the principal debtor before
assuming to run after the alleged guarantor.

IN VIEW OF THE FOREGOING, the petition is granted and the questioned Decision of
the Court of Appeals dated November 29, 1991 and Resolution dated April 27, 1993
are SET ASIDE. No pronouncement as to costs.

SO ORDERED.

[G.R. No. 151060. August 31, 2005]

JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA. ANA,

petitioners, vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION,
respondent.
[G.R. No. 151311. August 31, 2005]

NARCISO V. CRUZ, petitioner, vs. PHILIPPINE EXPORT and FOREIGN LOAN GUARANTEE
CORPORATION, respondent.
DECISION
TINGA, J.:

Before us are consolidated petitions questioning the Decision[1] of the Court of

Appeals (CA) in CA-G.R. CV No. 61318, entitled Philippine Export and Foreign Loan
Guarantee Corporation v. JN Development Corporation, et al., which reversed the
Decision of the Regional Trial Court (RTC) of Makati, Branch 60.

On 13 December 1979, petitioner JN Development Corporation (JN) and Traders Royal

Bank (TRB) entered into an agreement whereby TRB would extend to JN an Export
Packing Credit Line for Two Million Pesos (P2,000,000.00). The loan was covered by
several securities, including a real estate mortgage[2] and a letter of guarantee from
respondent Philippine Export and Foreign Loan Guarantee Corporation (PhilGuarantee),
now Trade and Investment Development Corporation of the Philippines, covering
seventy percent (70%) of the credit line.[3] With PhilGuarantee issuing a guarantee in
favor of TRB,[4] JN, petitioner spouses Rodrigo and Leonor Sta. Ana[5] and petitioner
Narciso Cruz[6] executed a Deed of Undertaking[7] (Undertaking) to assure repayment
to PhilGuarantee.

It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October
1980 TRB requested PhilGuarantee to make good its guarantee.[8] PhilGuarantee
informed JN about the call made by TRB, and inquired about the action of JN to settle
the loan.[9] Having received no response from JN, on 10 March 1981 PhilGuarantee
paid TRB Nine Hundred Thirty Four Thousand Eight Hundred Twenty Four Pesos and
Thirty Four Centavos (P934,824.34).[10] Subsequently, PhilGuarantee made several
demands on JN, but the latter failed to pay. On 30 May 1983, JN, through Rodrigo Sta.
Ana, proposed to settle the obligation by way of development and sale of the
mortgaged property.[11] PhilGuarantee, however, rejected the proposal.

PhilGuarantee thus filed a Complaint[12] for collection of money and damages against
herein petitioners.

In its Decision dated 20 August 1998, the RTC dismissed PhilGuarantees Complaint as
well as the counterclaim of petitioners. It ruled that petitioners are not liable to
reimburse PhilGuarantee what it had paid to TRB. Crucial to this holding was the
courts finding that TRB was able to foreclose the real estate mortgage executed by JN,
thus extinguishing petitioners obligation.[13] Moreover, there was no showing that
after the said foreclosure, TRB had demanded from JN any deficiency or the payment
of the difference between the proceeds of the foreclosure sale and the actual loan.[14]
In addition, the RTC held that since PhilGuarantees guarantee was good for only one
year from 17 December 1979, or until 17 December 1980, and since it was not
renewed after the expiry of said period, PhilGuarantee had no more legal duty to pay
TRB on 10 March 1981.[15] The RTC likewise ruled that Cruz cannot be held liable
under the Undertaking since he was not the one who signed the document, in line with
its finding that his signature found in the records is totally different from the signature
on the Undertaking.[16]

According to the RTC, the failure of TRB to sue JN for the recovery of the loan precludes
PhilGuarantee from seeking recoupment from the spouses Sta. Ana and Cruz what it
paid to TRB. Thus, PhilGuarantees payment to TRB amounts to a waiver of its right
under Art. 2058 of the Civil Code.[17]

Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The appellate court
reversed the RTC and ordered petitioners to pay PhilGuarantee Nine Hundred Thirty
Four Thousand Six Hundred Twenty Four Pesos and Thirty Four Centavos
(P934,624.34), plus service charge and interest.[18]

In reaching its denouement, the CA held that the RTCs finding that the loan was
extinguished by virtue of the foreclosure sale of the mortgaged property had no
factual support,[19] and that such finding is negated by Rodrigo Sta. Anas testimony
that JN did not receive any notice of foreclosure from PhilGuarantee or from TRB. [20]
Moreover, Sta. Ana even offered the same mortgaged property to PhilGuarantee to
settle its obligations with the latter.[21]

The CA also ruled that JNs obligation had become due and demandable within the oneyear period of effectivity of the guarantee; thus, PhilGuarantees payment to TRB
conformed with its guarantee, although the payment itself was effected one year after
the maturity date of the loan.[22] Contrary to the trial courts finding, the CA ruled that
the contract of guarantee was not extinguished by the alleged lack of evidence on
PhilGuarantees consent to the extensions granted by TRB to JN.[23] Interpreting Art.

2058 of the Civil Code,[24] the appellate court explained that while the provision
states that the guarantor cannot be compelled to pay unless the properties of the
debtor are exhausted, the guarantor is not precluded from waiving the benefit of
excussion and paying the obligation altogether.[25]

Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery of his
signature in the Undertaking, the evidence presented not being sufficient to overcome
the presumption of regularity of the Undertaking which is a notarized document. [26]

Petitioners sought reconsideration of the Decision and prayed for the admission of
documents evidencing the foreclosure of the real estate mortgage, but the motion for
reconsideration was denied by the CA for lack of merit. The CA ruled that the
documentary evidence presented by petitioners cannot be considered as newly
discovered evidence, it being already in existence while the case was pending before
the trial court, the very forum before which it should have been presented. Besides, a
foreclosure sale per se is not proof of petitioners payment of the loan to
PhilGuarantee, the CA added.[27]

So now before the Court are the separate petitions for review of the CA Decision. JN
and the spouses Sta. Ana, petitioners in G.R. No. 151060, posit that the CA erred in
interpreting Articles 2079, 2058, and 2059 of the Civil Code in its Decision.[28]
Meanwhile, petitioner Narciso Cruz in G.R. No. 151311 claims that the CA erred when it
held that petitioners are liable to PhilGuarantee despite its payment after the
expiration of its contract of guarantee and the lack of PhilGuarantees consent to the
extensions granted by TRB to JN. Moreover, Cruz questions the reversal of the ruling of
the trial court anent his liability as a signatory to the Undertaking.[29]

On the other hand, PhilGuarantee maintains that the date of default, not the actual
date of payment, determines the liability of the guarantor and that having paid TRB
when the loan became due, it should be indemnified by petitioners.[30] It argues that,
contrary to petitioners claim, there could be no waiver of its right to excussion more
explicit than its act of payment to TRB very directly.[31] Besides, the right to excussion
is for the benefit of the guarantor and is not a defense for the debtor to raise and use
to evade liability.[32] Finally, PhilGuarantee maintains that there is no sufficient
evidence proving the alleged forgery of Cruzs signature on the Undertaking, which is a
notarized document and as such must be accorded the presumption of regularity.[33]

The Court finds for PhilGuarantee.

Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.[34] The

guarantor who pays for a debtor, in turn, must be indemnified by the latter.[35]
However, the guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor and resorted to all the legal remedies against
the debtor.[36] This is what is otherwise known as the benefit of excussion.

It is clear that excussion may only be invoked after legal remedies against the
principal debtor have been expanded. Thus, it was held that the creditor must first
obtain a judgment against the principal debtor before assuming to run after the
alleged guarantor, for obviously the exhaustion of the principals property cannot even
begin to take place before judgment has been obtained.[37] The law imposes
conditions precedent for the invocation of the defense. Thus, in order that the
guarantor may make use of the benefit of excussion, he must set it up against the
creditor upon the latters demand for payment and point out to the creditor available
property of the debtor within the Philippines sufficient to cover the amount of the debt.
[38]

While a guarantor enjoys the benefit of excussion, nothing prevents him from paying
the obligation once demand is made on him. Excussion, after all, is a right granted to
him by law and as such he may opt to make use of it or waive it. PhilGuarantees
waiver of the right of excussion cannot prevent it from demanding reimbursement
from petitioners. The law clearly requires the debtor to indemnify the guarantor what
the latter has paid.[39]

Petitioners claim that PhilGuarantee had no more obligation to pay TRB because of the
alleged expiration of the contract of guarantee is untenable. The guarantee, dated17
December 1979, states:

In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is

made to pay its obligation arising under the aforesaid guarantee PHILGUARANTEE shall
pay the BANK the amount of P1.4 million or 70% of the total obligation unpaid

....

This guarantee shall be valid for a period of one (1) year from date hereof but may be
renewed upon payment by JNDC of the guarantee fee at the same rate of 1.5% per
annum.[40]

The guarantee was only up to 17 December 1980. JNs obligation with TRB fell due on
30 June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980.
That payment was actually made only on 10 March 1981 does not take it out of the

terms of the guarantee. What is controlling is that default and demand on

PhilGuarantee had taken place while the guarantee was still in force.

There is likewise no merit in petitioners claim that PhilGuarantees failure to give its
express consent to the alleged extensions granted by TRB to JN had extinguished the
guarantee. The requirement that the guarantor should consent to any extension
granted by the creditor to the debtor under Art. 2079 is for the benefit of the
guarantor. As such, it is likewise waivable by the guarantor. Thus, even assuming that
extensions were indeed granted by TRB to JN, PhilGuarantee could have opted to
waive the need for consent to such extensions. Indeed, a guarantor is not precluded
from waiving his right to be notified of or to give his consent to extensions obtained by
the debtor. Such waiver is not contrary to public policy as it is purely personal and
does not affect public interest.[41] In the instant case, PhilGuarantees waiver can be
inferred from its actual payment to TRB after the latters demand, despite JNs failure to
pay the renewal/guarantee fee as indicated in the guarantee.[42]

For the above reasons, there is no basis for petitioners claim that PhilGuarantee was a
mere volunteer payor and had no legal obligation to pay TRB. The law does not
prohibit the payment by a guarantor on his own volition, heedless of the benefit of
excussion. In fact, it recognizes the right of a guarantor to recover what it has paid,
even if payment was made before the debt becomes due,[43] or if made without
notice to the debtor,[44] subject of course to some conditions.

Petitioners invocation of our ruling in Willex Plastic Industries, Corp. v. Court of

Appeals[45] is misplaced, if not irrelevant. In the said case, the guarantor claimed that
it could not be proceeded against without first exhausting all of the properties of the
debtor. The Court, finding that there was an express renunciation of the benefit of
excussion in the contract of guarantee, ruled against the guarantor.

The cited case finds no application in the case a quo. PhilGuarantee is not invoking the
benefit of excussion. It cannot be overemphasized that excussion is a right granted to
the guarantor and, therefore, only he may invoke it at his discretion.

The benefit of excussion, as well as the requirement of consent to extensions of

payment, is a protective device pertaining to and conferred on the guarantor. These
may be invoked by the guarantor against the creditor as defenses to bar the
unwarranted enforcement of the guarantee. However, PhilGuarantee did not avail of
these defenses when it paid its obligation according to the tenor of the guarantee
once demand was made on it. What is peculiar in the instant case is that petitioners,
the principal debtors themselves, are muddling the issues and raising the same
defenses against the guarantor, which only the guarantor may invoke against the
creditor, to avoid payment of their own obligation to the guarantor. The Court cannot

countenance their self-seeking desire to be exonerated from the duty to reimburse

PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves
at the expense of PhilGuarantee.

Petitioners assert that TRBs alleged foreclosure of the real estate mortgage over the
land executed as security for the loan agreement had extinguished PhilGuarantees
obligation; thus, PhilGuarantees recourse should be directed against TRB, as per the
pari-passu provision[46] in the contract of guarantee.[47] We disagree.

The foreclosure was made on 27 August 1993, after the case was submitted for
decision in 1992 and before the issuance of the decision of the court a quo in 1998.
[48] Thus, foreclosure was resorted to by TRB against JN when they both had become
aware that PhilGuarantee had already paid TRB and that there was a pending case
filed by PhilGuarantee against petitioners. This matter was not raised and proved in
the trial court, nor in the appeal before the CA, but raised for the first time in
petitioners motion for reconsideration in the CA. In their appellants Brief, petitioners
claimed that there was no need for the defendant-appellee JNDC to present any
evidence before the lower court to show that indeed foreclosure of the REM took place.
[49] As properly held by the CA,

Firstly, the documents evidencing foreclosure of mortgage cannot be considered as

newly discovered evidence. The said documents were already subsisting and should
have been presented during the trial of the case. The alleged foreclosure sale was
made on August 23, 1993 while the decision was rendered by the trial court on August
20, 1998 about five (5) years thereafter. These documents were likewise not submitted
by the defendants-appellees when they submitted their appellees Brief to this Court.
Thus, these cannot be considered as newly discovered evidence but are more correctly
ascribed as suppressed forgotten evidence Secondly, the alleged foreclosure sale is
not proof of payment of the loan by defendant-appellees to the plaintiffs-appellants.
[50]

Besides, the complaint a quo was filed by PhilGuarantee as guarantor for JN, and its
cause of action was premised on its payment of JNs obligation after the latters default.
PhilGuarantee was well within its rights to demand reimbursement for such payment
made, regardless of whether the creditor, TRB, was subsequently able to obtain
payment from JN. If double payment was indeed made, then it is JN which should go
after TRB, and not PhilGuarantee. Petitioners have no one to blame but themselves,
having allowed the foreclosure of the property for the full value of the loan despite
knowledge of PhilGuarantees payment to TRB. Having been aware of such payment,
they should have opposed the foreclosure, or at the very least, filed a supplemental
pleading with the trial court informing the same of the foreclosure sale.

Likewise, petitioners cannot invoke the pari-passu clause in the guarantee, not being
parties to the said agreement. The clause is clearly for the benefit of the guarantor
and no other.

The Court notes the letter[51] of Rodrigo Sta. Ana offering, by way of settlement of JNs
obligations to PhilGuarantee, the very same parcel of land mortgaged as security for
the loan agreement. This further weakens the position of petitioners, since it becomes
obvious that they acknowledged the payment made by PhilGuarantee on their behalf
and that they were in fact willing to negotiate with PhilGuarantee for the settlement of
the said obligation before the filing of the complaint a quo.

Anent the issue of forgery, the CA is correct in reversing the decision of the trial court.
Save for the denial of Narciso Cruz that it was not his signature in the Undertaking and
the perfunctory comparison of the signatures, nothing in the records would support
the claim of forgery. Forgery cannot be presumed and must be proved by clear,
positive and convincing evidence and the burden of proof lies on the party alleging
forgery.[52] Mere denial will not suffice to overcome the positive value of the
Undertaking, which is a notarized document, has in its favor the presumption of
regularity, and carries the evidentiary weight conferred upon it with respect to its due
execution.[53] Even in cases where the alleged forged signature was compared to
samples of genuine signatures to show its variance therefrom, this Court still found
such evidence insufficient.[54] Mere variance of the signatures cannot be considered
as conclusive proof that the same were forged.[55]

WHEREFORE, the consolidated petitions are DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 61318 is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-27249

July 31, 1970

MANILA SURETY & FIDELITY CO., INC., plaintiff-appellant,

vs.
NOEMI ALMEDA, doing business under the name and style of ALMEDA TRADING,
GENEROSO ESQUILLO and NATIONAL MARKETING CORPORATION, defendantsappellees.

De Santos & Delfino for plaintiff-appellant.

Government Corporate Counsel Leopoldo M. Abellera and Trial Attorney Arsenio J.

Mepale for defendant-appellee National Marketing Corporation.

REYES, J.B.L., J.:

This is an appeal from the ruling of the Court of First Instance of Manila, rendered in
Civil Case No. 62518, that the insolvency of a debtor-principal does not release the
surety from its obligation to the creditor under the bond.

The lower court found that on 4 December 1961, Noemi Almeda, married to Generoso
Esquillo, and doing business under the name and style of Almeda Trading, entered into
a contract with the National Marketing Corporation (NAMARCO) for the purchase of
goods on credit, payable in 30 days from the dates of deliveries thereof. As required
by' the NAMARCO, a bond for P5,000.00, undertaken by the Manila Surety & Fidelity
Co., Inc. (Exhibit "A"), was posted by the purchaser to secure the latter's faithful
compliance with the terms of the contract. The agreement was later supplemented on
17 October 1962 and a new bond for the same amount of P5,000.00, also undertaken
by the Manila Surety & Fidelity Co., Inc. (Exhibit "C"), 1 was given in favor of the
NAMARCO The bonds uniformly contained the following provisions:

2.
Should the Principal's account on any purchase be not paid on time, then
the Surety, shall, upon demand, pay said account immediately to the NAMARCO;

3.
Should the account of the Principal exceed the amount of FIVE THOUSAND
(P5,000.00) PESOS, Philippine Currency, such excess up to twenty (20%) per cent of

said amount shall also be deemed secured by this Bond;

4.
The Surety expressly waives its right to demand payment and notice of nonpayment and agreed that the liability of the Surety shall be direct and immediate and
not contingent upon the exhaustion by the NAMARCO of whatever remedies it may
have against the Principal and same shall be valid and continuous until the obligation
so guaranteed is paid in full; and

5.
The Surety also waives its right to be notified of any extension of the terms
of payment which the NAMARCO may give to the Principal, it being understood that
were extension is given to satisfy the account, that such extension shall not extinguish
the guaranty unless the same is made against the express wish of the Surety.

The records show that on 8 June 1965, the marketing firm demanded from the
purchaser Almeda Trading the settlement of its back accounts which, as of 15 May
1965, allegedly amounted to P16,335.09. Furnished with copy of the NAMARCO's
demand- letter, the surety company thereafter also wrote to the said purchaser urging
it to liquidate its unsettled accounts with the NAMARCO (Exhibit "E-1"). It appears,
however, that previous to this, or on 26 March 1965, Generoso Esquillo instituted
voluntary insolvency proceeding in the Court of First Instance of Laguna (Sp. Proc. No.
SP-181), and by order of said court of 6 April 1965, he was declared insolvent, with
listed credits amounting to P111,873.00 2 and properties valued at P39,0,00.00. In the
meeting of the named creditors of the insolvent held on 14 May 1965 for the purpose
of electing the assignee of his properties, the NAMARCO was represented and its
contingent claim duly registered. 3

On 10 September 1965, the Manila Surety & Fidelity Co., Inc., commenced in the Court
of First Instance of Manila Civil Case No. 62518 against the spouses Noemi Almeda and
Generoso Esquillo, and the NAMARCO, to secure its release from liability under the
bonds executed in favor of NAMARCO. The action was based on the allegation that the
defendant spouses had become insolvent and that defendant NAMARCO had rescinded
its agreement with them and had already demanded payment of the outstanding
accounts of the couple.

Defendant NAMARCO filed its answer denying the averments of the complaint and
setting up, as affirmative defenses, lack of cause of action and the court's want of
jurisdiction. On 16 December 1966, the court rendered judgment sustaining
NAMARCO's contention that the insolvency of the debtor-principal did not discharge
the surety's liability under the bond. Thus, the complaint was dismissed and plaintiff
surety company was ordered to pay off the indebtedness of the defendant spouses to
the NAMARCO to the extent of its (the Surety's) undertaking, plus attorneys' fees and
costs. From this decision, plaintiff surety interposed the present appeal.

Plaintiff-appellant's action to secure its discharge from the suretyship was based on
Article 2071 of the Civil Code, 4 Which provides the surety with certain protective
remedies that may be resorted to before he has paid, but after he has become liable
to do so. 5

Upon the other hand, the lower court's ruling, now on appeal, is anchored on an
equally explicit provision of the Insolvency law ( Act 1956, as amended), to writ:.

SEC. 68. ...

No discharge (of the insolvent from his obligations) shall release, discharge or affect
any person liable for the same debt, for or with the debtor, either as partner, joint
contractor, indorser, surety, or otherwise.

The issue posed by this appeal, therefore, is whether a surety can avail itself of the
relief, specifically afforded in Article 2071 of the Civil Code and be released from its
liability under the bonds, notwithstanding a prior declaration of the insolvency of the
debtor-principal in an insolvency proceeding.

We see no reversible error in the decision appealed.

There is no question that under the bonds posted in favor of the NAMARCO in this
case, the surety company assumed to make immediate payment to said firm of any
due and unsettled accounts of the debtor-principal, even without demand and notice
of the debtor's non-payment, the surety, in fact, agreeing that its liability to the
creditor shall be direct, without benefit of exhaustion of the debtor's properties, and to
remain valid and continuous until the guaranteed obligation is fully satisfied. In short,
appellant secured to the creditor not just the payment by the debtor-principal of his
accounts, but the payment itself of such accounts. Clearly, a contract of suretyship
was thus created, the appellant becoming the insurer, not merely of the debtor's
solvency or ability to pay, but of the debt itself. 6 Under the Civil Code, with the
debtor's insolvency having been judicially recognized, herein appellant's resort to the
courts to be released from the undertaking thus assumed would have been
appropriate. 7 Nevertheless, the guarantor's action for release can only be exercised
against the principal debtor and not against the creditor, as is apparent from the
precise terms of the legal provision. "The guarantor" (says Article 2071 of the Civil
Code of the Philippines) "even before having paid, may proceed against the principal
debtor ------------------ to obtain a release from the guaranty ---------------." The juridical
rule grants no cause of action against the creditor for a release of the guaranty, before

payment of the credit, for a plain reason: the creditor is not compellable to release the
guaranty (which is a property right) against his will. For, the release of the guarantor
imports an extinction of his obligation to the creditor; it connotes, therefore, either a
remission or a novation by subrogation, and either operation requires the creditor's
assent for its validity (See Article 1270 and Article 1301). Especially should this be the
case where the principal debtor has become insolvent, for the purpose of a guaranty is
exactly to protect the creditor against such a contingency.

In what manner, then, can the article operate? Where the debtor can not make full
payment, the release of the guarantor can only be obtained with the assent of the
creditor, by persuading the latter to accept an equally safe security, either another
suitable guaranty or else a pledge or mortgage. Absent the creditor's consent, the
principal debtor may only proceed to protect the demanding guarantor by a
counterbond or counter guaranty, as is authorized by the codal precept (Article 2071
in fine). To this effect is the opinion of the Spanish commentator, Scaevola, in his
explanations to Article 1843 of the Spanish Civil Code (from which Article 2071 of our
Code is derived). Says Scaevola:

Como se prestaran tales garantias al fiador? Lo contesta el aludido parrafo final del
Articulo 1843. Se hara por uno de estos dos modos: ora consiguiendo el deudor que el
acreedor abandone libremente aquella fianza, lo cual ocurrira dandole el deudor otra
garantia analoga, ya por razon de la persona fiadora, ya ofreciendole el deudor al
mismo fiador, pero continuando este como tal, una garantia que lo ponga a cubierto
de los procedimientos del acreedor y del peligro de insolvencia del deudor. (Scaevola
Codigo Civil, 2d Ed., Vol. 28, pp. 651652).

The appellant's troubles are compounded by the fact that when the complaint for
release from suretyship was filed in the Manila court on 10 September 1965, the
insolvency case in the Laguna court was already pending and the debtor-principal
Generoso Esquillo had been judicially declared an insolvent. By the time the appellant
sued, therefore, the insolvency court had already acquired jurisdiction over all the
debtor's properties and of all claims by and against him, to the exclusion of any other
court. 8 In the circumstances, the lawful recourse of the guarantor of an obligation of
the insolvent would be to file a contingent claim in the insolvency proceeding, if his
rights as such guarantor or surety are not to be barred by the subsequent discharge of
the insolvent debtor from all his liabilities. 9

In the case at bar, it is true that the guaranteed claim of NAMARCO was registered or
filed in the insolvency proceeding. But appellant can not utilize this fact in support of
its petition for release from the assumed undertaking. For one thing, it is almost a
certainty that creditor NAMARCO can not secure full satisfaction of its credit out of the
debtor's properties brought into the insolvency proceeding. Considering that under the
contract of suretyship, which remains valid and subsisting, the entire obligation may
even be demanded directly against the surety itself, the creditor's act in resorting first

to the properties of the insolvent debtor is to the surety's advantage At least, the
latter would be answerable only for whatever amount may remain not covered or
unsatisfied by the disposition of the insolvent's properties, 1 0 with the right to go
against debtor-principal after it has made the necessary payment to the creditor. For
another, the fact that the debtor- principal may be discharged from all his outstanding
obligations in the insolvency case would not benefit the surety, as to relieve it of its
liability under the surety agreement. That is so provided in Section 68 of the
Insolvency Act which shall be controlling in the case.

Finally, even supposing that the present action is not blocked by the insolvency
proceedings because it does not aim at reducing the insolvent's assets, but only at
having the suretyship substituted by other equivalent security, still it is difficult to see
how the principal debtor, with his business, property and assets impounded by the
insolvency court, can obtain other securities with which to replace the guaranty given
by the plaintiff-appellant. The action at bar would seem, under the circumstances,
destined to end in futility.

WHEREFORE, with the modification that appellant's liability shall be limited to the
payment of whatever amount may remain due to the appellee NAMARCO and is
unsatisfied in the insolvency proceeding, but not to exceed the amount of the surety's
undertaking under the bonds, the decision appealed from is affirmed in all other
respects. Costs against appellant surety company.

G.R. No. L-31789

June 29, 1972

ANTONIO R. BANZON and ROSA BALMACEDA, petitioners,

vs.
HON. FERNANDO CRUZ, Spouses PEDRO CARDENAS and LEONILA BALUYOT and
ASSOCIATED INSURANCE & SURETY COMPANY, INC. represented by INSURANCE
COMMISSIONER in her capacity as LIQUIDATOR OF ASSOCIATED INSURANCE & SURETY
COMPANY, INC., respondents.

L. T. Castillo for petitioners.

Dakila F. Castro & Associates for respondents spouses Pedro Cardenas and Leonila
Baluyot.

Feliberto V. Castillo for respondent Associated Insurance & Surety Co., Inc.

Office of the Solicitor General Felix Q. Antonio, Assistant Solicitor General Dominador
L. Quiroz and Solicitor Lolita O. Galang for respondent Insurance Commissioner, etc.

TEEHANKEE, J.:p

An original action to enjoin respondent court from forcing a writ of possession and
order of demolition over one of two Caloocan City lots originally owned by petitionersspouses pending the outcome of their suit for reconveyance of said lots from private
respondents.

Sometime in 1952, Maximo Sta. Maria obtained crop loans from the Philippine National
Bank (hereinafter referred as the bank). Respondent Associated Insurance & Surety
Co., Inc. (hereinafter referred to as Associated) acted as surety of Sta. Maria, filing
surety bonds in favor of the bank to answer for prompt repayment of the loans.
Petitioner Antonio R. Banzon and Emilio Ma. Naval in turn acted as indemnitors of
Associated and were obligated to indemnify and hold harmless Associated from any
liability thus acting as surety of the loan. Sta. Maria failed to pay his obligations to the
bank, which accordingly demanded payment from Associated as surety.

Instead of paying the bank, Associated filed a complaint dated November 19, 1956
with the Court of First Instance of Manila 1 against debtor Sta. Maria and indemnitors
Banzon and Naval, alleging that the outstanding obligations of Sta. Maria with the
bank guaranteed by it amounted to P6,100.00, P9,346.44 and P14,811.32, or a total of
P30,257.86, excluding interest. On December 11, 1957, the said court rendered
judgment ordering Sta. Maria, Banzon and Naval "to pay jointly and severally unto
plaintiff for the benefit of the Philippine National Bank" the amounts mentioned above,
with interest thereon at 12% per annum, P593.76 for premiums and documentary
stamps due, and 15% attorney's fees, "the 15% and the interest to be paid for the
benefit only of the plaintiff."

What happened thereafter is narrated in the decision of this Court rendered on

November 29, 1968 in the appeal instituted by petitioner Banzon and his spouse, copetitioner Rosa Balmaceda, from a subsequent action of Associated in the Court of
First Instance of Rizal wherein the Rizal court ordered Banzon to surrender for
cancellation his owner's duplicates of titles to his two Caloocan City lots which had
been levied upon and purchased at the execution sale by Associated in supposed
satisfaction of the Manila court's judgment, docketed as Case L-23971 of this Court,

entitled Associated Ins. & Surety Co. Inc. plaintiff-appellee vs. Antonio Banzon and
Rosa Balmaceda, defendants-appellants, 2 as follows:

As the above decision 3 became final and executory, the corresponding writ of
execution was issued and levy was made upon the properties of the judgment debtor
Antonio R. Banzon covered by Transfer Certificates of Title Nos. 39685 and 53759
issued in his name by the Register of Deeds of Rizal. The first covered a parcel of land
containing an area of 650 square meters situated in Barrio Calaanan, Caloocan, Rizal,
and the second, another parcel of 650 square meters situated in the same barrio of
the same municipality. After the proceedings required by law in connection with
execution sales, the aforesaid properties were sold, the judgment creditor, Associated
Insurance and Surety Co., Inc., having been the highest bidder, for the total sum of
P41,000.00. The Sheriff of Rizal issued in its favor the corresponding certificate of sale
dated June 27, 1957, which was duly registered on June 30, 1959. As the period of
redemption expired on June 20, 1960 without the judgment debtor or any proper party
having exercised it, the judgment creditor and purchaser obtained in due time the
corresponding final certificate of sale, which was likewise duly registered.

In view of the foregoing, herein petitioner-appellee made demands upon Antonio R.

Banzon to deliver to it the owner's duplicate of Certificate of Title Nos. 39685 and
53759 mentioned heretofore, but the latter refused to do so. As a result it filed in the
Court of First Instance of Rizal in Case No. 3885, G.L.R.O. Record No. 11267, a petition
for an order directing Antonio R. Banzon to present his owner's duplicate of Certificae
of Title Nos. 89685 and 53759 to the Register of Deeds of Rizal for cancellation, and
for another order directing the Register of Deeds of Rizal to cancel said duplicates and
to issue new transfer certificates of title covering the properties in the name of
petitioner.

Banzon filed his opposition to the petition claiming mainly that (1) the decision of the
Court of First Instance of Manila in Civil Case No. 31237 was void as far as he was
concerned because he had never been summoned in connection therewith, an that (2)
the levy and sale of the properties covered by the petition were likewise void because
they were conjugal properties belonging to him and his wife, Rosa Balmaceda.

After a hearing on the motion and opposition mentioned above, the lower court, on
February 7, 1961, rendered a decision whose dispositive portion is as follows:

"In view of the foregoing, judgment is hereby rendered in favor of the petitioner
granting the relief prayed for. The oppositors are hereby ordered to surrender to the
Register of Deeds of Rizal the Certificate of Title in question for cancellation and let a
new one be issued in the name of the petitioner."

In this appeal interposed by them, the Banzons seek a reversal of the above decision
upon the same grounds relied upon in their opposition filed in the lower court. 4

This Court in its decision of November 29, 1968 affirmed the decision of the trial court,
relying upon the lower court's findings on Banzon's failure to substantiate his claims
which "would amount to a deprivation of (Banzon's) property without due process of
law" had he but discharged his burden of proof, thus:

With respect to appellant's contention that Antonio R. Banzon had not been duly
served with summons in connection with Civil Case No. 31237 of the Court of First
Instance of Manila, it is enough for us to quote here the pertinent portions of the wellconsidered decision of the lower court

"With respect to the first contention of oppositors, the latter in effect contends that not
having been served by summons, Antonio Banzon never became a party defendant to
the aforesaid civil case and hence not bound by any judgment rendered therein. It is
erroneous on the part of the petitioner to contend that the objection as to lack of
jurisdiction on the defendant's person has been waived for said waiver applies only
when summons has been served although defectively, such as one not served by the
proper officer. If the contention of the oppositor were true, that is, no summons was
ever served upon him and that he was completely unaware of the proceedings in the
civil case aforementioned, the properties in question could not be levied upon for that
would amount to a deprivation of oppositor's property without due process of law.

"The burden, however, rests upon the oppositors to prove that there was in fact no
service of summons and this, the court believes, the oppositors have failed to
substantiate with sufficient evidence. It is a fundamental rule that the regularity of all
official actions and proceedings will be presumed until the contrary is proved. In said
civil case No. 31237, the records show, particularly the answer and the motion to
dismiss, that the proceedings were conducted by counsel in behalf of all the
defendants therein including the oppositor, Antonio Banzon. The presumption
therefore, of the regularity of the proceedings as against said defendant will be
maintained including the fact that either summons was duly served or that the
defendant Banzon voluntarily appeared in court without such summons. It is therefore
incumbent upon the oppositors to rebut this presumption with competent and proper
evidence such as the return made by the sheriff who served the summons in question.
This, however, the oppositors have not met.

"Moreover, the circumstances of the case all the more bear out the strength of this
presumption when it considered that the oppositor Antonio Banzon received a notice
of execution and levy of these properties and notice of the sale of the same at public
auction. Had the oppositors have been prejudiced by being deprived of due process,

they should have filed either a third party claim upon the property levied or an
injunction proceeding to prevent its sale at public auction, nor would they have
allowed the consummation of the sale and the lapse of one year within which the
redemption would have been exercised. These facts gravely militate against the merits
of the opposition, not only insofar as it strengthens the aforesaid presumption of
regularity, but also insofar as they are indicative of the fact that the properties levied
upon are not conjugal property or even if they were that the debt involved was one
which redound to the benefit of the family for which the conjugal partnership may be
held liable."

Appellants' second contention namely, that the properties now in question are their
conjugal properties, is belied by the record before us which shows that Transfer
Certificate of Title Nos. 39685 and 53759 were issued in the name of Antonio R.
Banzon. Moreover, there is no sufficient evidence in the record to show that the
properties were acquired during appellants' marriage.

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby affirmed, with
costs. 5

It has now been exposed that notwithstanding the judgment of December 11, 1957
obtained from the Manila court by Associated and executed by it against petitioner
Banzon as indemnitor " for the benefit of the Philippine National Bank," and which
judgment it obtained and executed on the representation to the said court that the
bank was exacting payment from it as surety of the debtor Sta. Maria's loans, and that
it was therefore enforcing Banzon's undertaking as indemnitor in turn to indemnify it,
that it never discharged its liability as surety to the bank nor ever made any payment
to the bank, whether in money or property, to discharge Sta. Maria's outstanding
obligations as guaranteed by it.

As will be shown later, this suit of Associated against Banzon as indemnitor and the
execution against him of the judgment obtained in trust "for the benefit of the
PhiIippine National Bank" were absolutely premature and uncalled for, since Article
2071 of the Civil Code permits the surety, even before having paid, to proceed only
"against the principal debtor ... (4) when the debt has become demandable, by reason
of the expiration of the period for payment" and that "the action of the guarantor is to
obtain release from the guaranty, or to demand a security that shall protect him from
any proceedings by the creditor and from the danger of insolvency of the debtor."

In fact, since the bank failed to exact payment from Associated as surety of the debtor
Maximo Sta. Maria's matured obligations, the bank itself filed on February 10, 1961, its
own complaint with the Court of First Instance of Pampanga against principal debtor
Maximo Sta. Maria, his six brothers and sisters (who had executed a special power of

attorney in Sta. Maria's favor to mortgage a 16-hectare parcel of land jointly owned by
all of them as security also for the bank's loans), and Associated itself, surety, as
defendants, for the collection of the outstanding obligations due from the principal
debtor, Maximo Sta. Maria.

After trial, the court ordered all the defendants jointly and severally to pay the bank
the outstanding amounts due on the crop loans to Sta. Maria, which as of that much
later date, August 20, 1963, amounted only to P6,100.00 and P9,346.44 or a total of
P15,446.44, exclusive of interests. It should be noted therefore, that the debtor Sta.
Maria had been making payments all along to the bank on account of his crop loans so
much so that by 1963, the total principal due and amount outstanding thereon
amounted only to P15,446.44. This amounts to practically one-half of the advance
judgment for the total amount of P30,257.86, excluding interests, obtained by
Associated six (6) years earlier in 1957 against Banzon " for the benefit of the
Philippine National Bank" allegedly as the amount due from Sta. Maria and which
Associated as surety would have to pay the bank, and which as it turns out, Associated
never paid to the bank.

These facts and figures are of record in this Court's decision of August 29, 1969, in
Philippine National Bank vs. Sta. Maria, et al.," wherein it is further recorded that
"(D)efendant Maximo Sta. Maria and his surety, defendant Associated Insurance &
Surety Co., Inc. who did not resist the action, did not appeal the judgment (sentencing
all defendants jointly and severally to pay the bank the above referred to principal
amount of P15,446.44, excluding interests)."

This Court sustained the appeal taken by the debtor Maximo Sta. Maria's brothers and
sisters, and reversed the lower court's judgment against them, as follows:

... This appeal has been taken by his six brothers and sisters, defendants-appellants
who reiterate in their brief their main contention in their Answer to the complaint that
under the special power of attorney, Exh. E, they had not given their brother, Maximo,
the authority to borrow money but only to mortgage the real estate jointly owned by
them; and that if they are liable at all, their liability should not go beyond the value of
the property which they had authorized to be given as security for the loans obtained
by Maximo. In their answer, defendants-appellants had further contended that they
did not benefit whatsoever from the loans, and that the plaintiff bank's only recourse
against them is to foreclose on the property which they had authorized Maximo to
mortgage.

We find the appeal of defendants-appellants, except for defendant Valeriana Sta. Maria
who had executed another special power of attorney, Exh. E-1, expressly authorizing
Maximo to borrow money on her behalf, to be well taken.

1.
Plaintiff bank has not made out a cause of action against defendantsappellants (except Valeriana), so as to hold them liable for the unpaid balances of the
loans obtained by Maximo under the chattel mortgages executed by him in his own
name alone.

xxx

xxx

xxx

6.
Finally, as to the 10% award of attorney's fees, this Court believes that
considering the resources of plaintiff bank and the fact that the principal debtor,
Maximo Sta. Maria, had not contested the suit, an award of five (5%) per cent of the
balance due on the principal, exclusive of interests, i.e., a balance of P6,100.00 on the
first cause of action and a balance of P9,846.44 on the second cause of action, per the
bank's statements of August 20, 1968, (Exhs. Q-1 and BB-1 respectively) should be
sufficient.

WHEREFORE, the judgment of the trial court against defendant-appellants Emeteria,

Teofilo, Quintin, Rosario and Leonila, all surnamed Sta. Maria is hereby reversed and
set aside, with costs in both instances against plaintiff. The judgment against
defendant-appellant Valeriana Sta. Maria is modified in that her liability is held to be
joint and not solidary, and the award of attorney's fees is reduced as set forth in the
preceding paragraph, without costs in this instance.

The bank thus collected directly from its debtor Sta. Maria the amounts owing to it,
with Associated never having put in one centavo. Per the bank's letter dated February
20, 1970 to Associated, it informed Associated that the amounts of its judgment credit
against judgment defendants in the aforementioned case terminated by this Court's
decision of August 29, 1969, "had already been satisfied as of February 16, 1970 by
virtue of the payment made by and thru the Provincial Sheriff of Bataan on the
proceeds of the extra-judicial sale of the mortgaged properties of defendants Sta.
Marias," in view of which "we (Philippine National Bank) have now released the
Associated Insurance & Surety Co., Inc. of its joint obligation with Maximo Sta. Maria et
al. in the aforementioned case." 7

This should have put an end to the matter and Banzon's two lots therefore restored
fully to his ownership, but for certain complications involving the intervention of the
other private respondents, the spouses Pedro Cardenas and Leonila Baluyot, and
Associated's own unjustifiable actions, as shall presently be seen.

According to the Banzons' petition at bar, sometime in 1965, even before ownership

over the two parcels of land belonging to the Banzons could be consolidated in the
name of Associated (since the judgment was " for the benefit of the Philippine National
Bank" and it had not discharged its surety's liability to the bank), Associated "in clear
collusion and confederation with (respondent) Pedro Cardenas, allowed and permitted
the latter to execute and levy one of the two parcels of land (that covered by T.C.T. No.
39685-Rizal, Lot 6, Block No. 176 of subdivision plan Psd-2896, G.L.R.O. Rec. No.
11267) for a judgment debt of P5,100.00 (of Associated in favor of Cardenas) 8
notwithstanding that the property in question was worth P130,000.00 more or less,
and further notwithstanding the fact that said respondent (Associated) knew the
property was merely being held in trust by it for the benefit of the Philippine National
Bank and therefore, not being the legal owner thereof, it cannot validly dispose of it in
any manner." 9 Respondent Cardenas being allegedly the lone bidder in the auction
sale for execution of his P5,100.00-judgment against Associated was awarded the
property in full satisfaction of his judgment, and eventually succeeded in having
Banzon's title cancelled and a new one, T.C.T. No. 8567-Caloocan City issued thereto in
his name, notwithstanding that Associated's right thereto was still sub-judice in
Associated vs. Banzon, to be resolved much later yet by this Court's decision of
November 29, 1968. Associated made no move to question or challenge this action of
Cardenas, notwithstanding an order for its liquidation and dissolution issued on
December 31, 1965 by the Court of First Instance of Manila and eventually affirmed by
this Court per resolution of June 20, 1968 in G.R. No. L-38934. Nor did Associated make
any effort to resist execution on said property of Banzon's, knowing as it did that its
interest in said property was impressed with a trust character since the clear tenor and
intent of the judgment granted against Banzon nominally in its favor but expressly "
for the benefit of the Philippine National Bank" was to make the execution and
operation of the judgment contingent or conditioned upon Associated's being made or
compelled to pay the bank, which contingency never materialized.

The Cardenas spouses thereafter filed with the Court of First Instance of Rizal,
Caloocan City Branch XII, Reg. Case No. C-211 (LRC Case No. 112167) entitled "Pedro
Cardenas, et al., petitioners vs. Antonio Banzon, et al., respondents," to secure
possession from the Banzons of the lot covered by T.C.T. No. 8567. A writ of possession
was issued in said case on May 21, 1965, but the enforcement thereof was held in
abeyance in view of the filing with the same court of Civil Case No. C-531 entitled
"Antonio Banzon, et al. vs. Pedro Cardenas and Leonila Baluyot, Associated Insurance
and Surety Co., Inc. and Benito Macrohon." Banzon's complaint in Civil Case No. C-531
was, however, dismissed on August 6, 1969, on the ground that "the matter of the
legality of the transfer of ownership of the property in question from the plaintiff to the
Associated Insurance & Surety Co., Inc., has been upheld by the Supreme Court in its
decision promulgated on November 29, 1968, and consequently the transfer to the
spouses Pedro Cardenas and Leonila Baluyot must perforce be considered also as valid
and legal."

Consequently, respondent Cardenas filed a motion on October 13, 1969, in Case No. C211 for the issuance of an alias writ of possession; this was granted on October 23,
1969. The alias writ was served on Banzon, who refused to vacate the premises and to

remove the improvements thereon. In view of this, an order was issued on December
9, 1969, for the issuance of a writ of demolition, but its enforcement was held in
abeyance because a temporary restraining order, later changed to a writ of
preliminary injunction, was issued by the Court of Appeals on December 13, 1969, in
view of the filing by the Banzons with the said appellate court of a petition for
injunction. 10

On February 28, 1970 the Court of Appeals rendered judgment dismissing the petition
because it found the same to be allegedly "merely a device to prevent the execution
of a final judgment by the filing of a new suit based upon the same grounds which
have already been interposed and passed upon in the case where the final judgment
had already been rendered ... ." Cardenas thereafter filed a motion for the
enforcement of the order of demolition and writ of possession previously issued in Reg.
Case No. C-211. On March 13, 1970, Judge Fernando A. Cruz of the Court of First
Instance of Rizal, Caloocan City Branch XII, issued an order granting the motion. 11

On March 13, 1970, the Banzons having learned of the bank's release of Associated as
of February 20,1970, supra, accordingly filed a complaint for reconveyance and
damages with the Court of First Instance of Manila against respondents Associated and
the Cardenas spouses. 12 In their complaint, the Banzons impute bad faith, collusion
and confederation between Associated and the Cardenases with regard to the latter's
prematurely obtaining T.C.T. No. 8567 covering one of Banzon's lots in their name. The
Banzons therein alleged for the first time their new cause of action based on the
subsequent development that the Philippine National Bank had collected directly on
February 16, 1970 from the principal debtor Sta. Maria the loan guaranteed by
Associated (which amounted only to a principal of P15,446.44 as of August, 1963,
excluding interests or just one-half of the premature judgment for P30,257.88
excluding interests obtained by Associated six (6) years earlier in 1957 against Banzon
in trust and for the benefit of the bank allegedly as the amount owed by Sta. Maria
and to be discharged by Associated, which Associated never discharged); 12a and that
the bank, per its letter of February 20, 1970 had therefore absolutely released
Associated of any liability on its surety undertaking. 12b The Banzons therefore prayed
for the return and reconveyance of their two parcels of land covered by T.C.T. No. 8567
(in Cardenas' name) and No. 53759 (still in Banzon's name), in discharge of
Associated's implied trust not to unjustly enrich itself and appropriate Banzon's
properties at absolutely no cost to itself.

On March 16, 1970, the Sheriff of Caloocan City served upon the Banzons copy of the
aforesaid order giving them until March 20, 1970, within which to deliver possession of
the parcel of land covered by T.C.T. No. 8567, and to remove the improvements
thereon; otherwise, the said sheriff would proceed to enforce the same.

Petitioners Banzons therefore came to this Court on March 20, 1970, by means of the
present petition for injunction. At petitioners' instance, the Court on March 24, 1970

restrained respondents and their representatives from enforcing the questioned writ of
execution and order of demolition, and respondent Associated from disposing in any
manner of its alleged rights and interests over the two lots in question.

Respondents Cardenas spouses filed in due course their Answer dated April 2, 1970,
admitting in effect the antecedents of the case as recited above, citing even this
Court's decision of November 29, 1968 in Associated vs. Banzon, supra, which
affirmed the money judgment in favor of Associated " for the benefit of the Philippine
National Bank" 13 but alleging that ownership to one parcel (Lot 6, Block 176 covered
by T.C.T. No. 8567) "has already absolutely and irrevocably vested in herein
respondent Pedro Cardenas." 14 Said respondents further averred that "there is no
longer anything that may be restrained," since per the sheriff's return of March 23,
1970, he enforced on said date respondent court's writ of possession and demolition
order and demolished all the improvements erected in the premises. 15

To this petitioners countered that "the special deputy sheriff of Rizal did succeed in
demolishing the building erected on that lot in question. This he did notwithstanding
the fact that he has been duly informed by petitioner Banzon of the existence of a
restraining order in this case. However, after accomplishing his purpose, he and his
men left the premises." 16

Most relevant, however, was a pleading entitled "Explanation and Manifestation" dated
April 25, 1970 filed by Atty. Feliberto Castillo, as former counsel for Associated "in the
interest of justice and in the name of truth and as an officer of the Court," wherein
with respect to the summons for Associated received by his law office, he manifests:

3.
That he is entertaining a serious doubt whether he could still represent the
Associated Insurance & Surety Co., Inc. in view of the fact that in Civil Case No. 56995
of the Court of First Instance of Manila, entitled "Republic of the Philippines,
represented by the Insurance Commissioner vs. Associated Insurance Surety Co., Inc."
the said Court of First Instance of Manila ordered the liquidation and dissolution of this
surety company, which was appealed to the Court of Appeals, CA-G. R. No. 37985-R
but affirmed the decision of the Court of First Instance of Manila in a decision
promulgated on January 3, 1968, which was appealed again by the Associated
Insurance & Surety Co., Inc to the Honorable Tribunal, G.R. No. L-29834, also affirming
the decision of the Court of Appeals by denying the petition for writ of certiorari in its
resolution of June 20, 1968, and therefore, since then, the decision of the Court of First
Instance of Manila ordering the liquidation and dissolution of the Associate Insurance &
Surety Co., Inc. became final and executory, an thereafter, the Insurance
Commissioner demanded the surrender of books, documents and other papers of this
surety company, an as a matter of fact, books, documents and other papers salvaged
were already surrendered to the Insurance Commissioner for liquidation of this
company, so that by virtue thereof, the Insurance Commissioner being the liquidator
appointed by the court to liquidate the Associated Insurance & Surety Co., Inc., is now

the legal representative of this surety company to whom a copy of this paper will be
furnished." 17

In his "Explanation and Manifestation," Atty. Castillo further states that his law office
was the counsel for Associated in the cases involved in these proceedings, viz., Civil
Case No. 31237 of the Court of First Instance of Manila, Case No. 3885, G.L.R.O. Record
No. 11267 of the Court of First Instance of Rizal, for consolidation in Associated's favor
of T.C.T. No. 29685-Rizal and T.C.T. No. 53759-Rizal, and in G.R. No. L-23971 of the
Supreme Court, Associated vs. Banzon, supra, affirming on November 29, 1968 the
Rizal court's judgment for consolidation; and

That since Associated was ordered liquidated and dissolved by the Manila court of
first instance in Civil Case No. 56995, as affirmed by the Court of Appeals in CA-G.R.
No. 37985-R, which became final upon this Court's denial of review per its resolution of
June 20, 1968 in G.R. No. L-28934, the Insurance Commissioner as the appointed
liquidator of Associated is the legal representative thereof who may duly act for
Associated and upon whom summons should be served;

That even before the promulgation of the Supreme Court decision on November 29,
1968 in Associated vs. Banzon he, as counsel for Associated, never attempted to
secure new titles for his said client, considering that its ownership over the parcel of
land covered by them was then "still sub judice;"

That even after the promulgation of the said Supreme Court decision, he never
attempted to secure new titles for his client, because by that time Associated had
already been ordered dissolved and liquidated, hence, to be represented in all
instances by the Insurance Commissioner as liquidator;

That he wonders how respondent Pedro Cardenas was able to secure T.C.T. No. 8567
(formerly T.C.T. No. 39685-Rizal) in his name in 1965, when Associated, which really
owed Cardenas a certain sum, could only secure new titles over the parcels of land
after not before November 29, 1968, when the Supreme Court's decision in G.R.
No. L-23971 was promulgated; and that in his opinion, the issuance to respondent
Cardenas of T.C.T. No. 8567 was "fraudulent and irregular for being without basis when
the same was issued, so that the register of deeds of Caloocan City committed some
sort of mistakes or negligence in issuing this title to respondent Pedro Cardenas, and
as such, this T.C.T. No. 8567 is null and void and without force and effect and calls for
an investigation of the guilty parties responsible for the issuance of this T.C.T. No. 8567
in the name of respondent Pedro Cardenas, who might have committed some
falsifications;" (for indeed how could Cardenas cause title to said lot to be transferred
to Associated for him in turn levy against it for his P5,100.00 judgment against
Associated when Associated's case against Banzon for such transfer and consolidation

of title was then still pending appeal before this Court, and Associated's judgment
against Banzon was one of trust, expressly therein declared to be "for the benefit of
the Philippine National Bank?") 18 and

That "anybody who will attempt to offer the said parcel of land for sale would be
committing a crime as the position of the same belongs exclusively to the Insurance
Commissioner who is the liquidator of the Associated Instance & Security Co., Inc.;
consequently, the petitioner should not entertain any worry as said parcel of land is
not being disposed of not only because the power to sell the same exclusively belongs
to the Insurance Commissioner but also because the Associated Insurance & Surety
Co., has no titles yet over these parcels of land as it did not attempt to secure any
even before and after the promulgation of the decision of the Honorable Tribunal in
G.R. No. 23971 in view of the circumstances earlier explained."

On May 11, 1970, we issued summons on the Insurance Commissioner as liquidator of

Associated to answer the petition. In her answer filed on May 29, 1970, the Acting
Insurance Commissioner through the Solicitor General disclaimed knowledge of
practically all the allegations of the petition for lack of knowledge or information
sufficient to form a belief as to their truth, manifesting that she first learned of the
material facts averred in the petition when she received copy of Atty. Castillo's
"Explanation and Manifestation", because the records and documents pertinent to this
case were not among those surrendered to her, and affirming she is the liquidator of
Associated by virtue of the Manila court's order dated December 31, 1965 of
liquidation and dissolution of said corporation, as follows:

3.
That the herein Acting Insurance Commissioner is liquidator of Associated
Insurance & Surety Co., Inc. by virtue of an order of liquidation and dissolution of said
corporation dated December 31, 1965, by the Court of First Instance of Manila in Civil
Case No. 56995, which decision was affirmed on appeal by the Court of Appeals in its
decision (CA-G.R. No. 37895) dated January 3, 1968, which decision was again
affirmed on appeal by this Honorable Tribunal when it denied the petition for a writ of
certiorari in its Resolution of June 20, 1968 (G.R. No. L-38934) and which on July 9,
1968, became final and executory;

4.
That by virtue of the aforesaid decision, the Insurance Commissioner as
liquidator of Associated Insurance & Surety Co., Inc., is vested by authority of law with
the title to all of the property, contracts, and rights of action of said corporation as of
the date of the order of liquidation (Sec. 175-C, par. 3 of the Insurance Act, as
amended);

5.
That any subsequent sale or disposition of the property of said corporation
without the knowledge and consent of the herein Acting Insurance Commissioner and

approval but the Liquidation Court is contrary to law and null and void;

6.
That after the aforesaid order of liquidation and dissolution became final and
executory, the Acting Insurance Commissioner demanded for the surrender of all the
books, documents and properties of Associated Insurance & Surety Co., Inc. However,
the records and documents pertinent to the above-entitled case were not among those
surrendered to the Insurance Commissioner and it was only upon receipt of the
"Explanation and Manifestation" of Atty. Feliberto Castillo, dated April 25, 1970, and
the present "Petition" that she came to know for the first time of the alleged facts
averred in this case." 19

A "Motion to Dissolve Temporary Restraining Order and to Dismiss Petition" was filed
on February 12, 1971, by respondents spouses Cardenas and Baluyot. They contend
that the restraining order issued by this Court should be dissolved, and the petition
itself, insofar as they are concerned, be dismissed, because the petition is predicated
on petitioners' complaint for reconveyance and damages in Civil Case No. 79244
before Branch VIII of the Court of First Instance of Manila, and the said court issued an
order on October 28, 1970, dismissing the said complaint with respect to defendants
therein Cardenas and Baluyot, which dismissal was not appealed and became final and
executory on January 5, 1971, per entry of judgment attached to the motion.
Consequently, according to these respondents, the temporary restraining order issued
by this Court enjoining the enforcement of the writ of execution and the order of
demolition in Reg. Case No. C-211 of the Court of First Instance of Rizal, has become
inoperative and without any legal basis, the present petition has lost its legal basis,
and petitioners have no more cause of action against respondents Cardenas and
Baluyot. The said order of dismissal of the complaint against these respondents was
issued pursuant to Section 5, Rule 16 of the Rules of Court, after a preliminary hearing
on the affirmative defenses of bar by prior judgment and lack of cause of action set up
by said respondents in their answer, with the lower court opinion that petitioners'
action was already barred by the prior judgments of this Court of November 29, 1968
in Associated vs. Banzon and of the Court of Appeals of February 28, 1970 in Banzon
vs. Hon. Fernando Cruz, supra. 20

The Solicitor General filed on March 29, 1971 on behalf of the Insurance Commissioner
as liquidator of Associated a strong opposition to the motion to dissolve the restraining
order and dismiss the petition. 21 The commissioner-liquidator after complaining that
"she is still demanding for the surrender of all the books, documents and properties of
Associated" and that "it was only upon receipt on March 11, 1971 of the voluminous
records of the cases handled by counsel Feliberto V. Castillo for (Associated) that (her)
undersigned counsel have verified and confirmed the truth of the status of the
different cases," contends inter alia as follows:

18. That, however, during the pendency of the aforesaid appeal of petitioner Antonio
R. Banzon with this Honorable Tribunal and while the case was still sub-judice,

particularly on February 8, 1964, the herein respondent Pedro Cardenas as winning

party in a case entitled "Pedro Cardenas vs. Victoria Vda. de Tengco and Pablo Tuazon,"
Civil Case No. 36174, Court of First Instance of Manila, and where the Associated
Insurance and Surety Co., Inc. was surety for the defendants therein, executed and
levied upon one of the parcels of lands involved in the aforesaid appeal. Ultimately,
Pedro Cardenas was able to acquire the land in question (Lot No. 6, Block No. 176,
then covered by T.C.T. No. 39685) as highest bidder, for the judgment debt of
defendants in said action, plus incidental expenses for the sum of P5,100.00 only;

19.
That subsequently thereafter, said respondents Cardenas, thru some
scheme and devise, succeeded in having the title of said parcel of land transferred in
their names under T.C.T. No. 8567, Registry of Deeds of Caloocan City, on May 5, 1965,
at a time when the Associated Insurance & Surety Co., Inc. had not yet earned the
authority to consolidate in its name said property, as the case was then pending with
this Honorable Tribunal. As alleged in paragraph 18 hereof, the question of
consolidation was resolved by this Honorable Tribunal on February 28, 1968; 21a

20.
That by the nature of the decision in Civil Case No. 31237, CFI, Manila, as
alleged in paragraph 15 hereof, the property or sums of money recovered from
defendants therein shall be reserved for the benefit of the Philippine National Bank for
the purpose of paying the principal debtor's (Maximo Sta. Maria's) obligation therein,
and consequently, the Associated Insurance & Surety Co., Inc. shall hold the property
in question or the sums recovered in said action, in trust and for the purpose of paying
the aforesaid obligation of Maximo Sta. Maria. 22

21.
That the Associated Insurance & Surety Co., Inc. failed to pay from its own
funds under its surety undertaking, nor from funds realized from the property levied
upon by virtue of the decision in Civil Case No. 31237, CFI, Manila, but on the other
hand, the principal debtor Sta. Maria paid his own obligation the Philippine National
Bank thus, releasing it (Associated Insurance & Surety Co., Inc.) from its obligation
under the suretyship undertaking with respect to said obligation of Maximo Sta. Maria,
and similarly herein petitioner Antonio R. Banzon was released from this obligation as
co-indemnitor in said undertaking;

22.
That in fairness to petitioners Antonio R. Banzon and Rosa Balmaceda, the
two parcels of land executed and levied upon by virtue of the decision in Civil Case No.
31237, Court of First Instance of Manila, deserve to be reconveyed to them;

23.
That one of the lots involved, namely, Lot No. 6, Block No. 176 covered by
T.C.T. No. 8567, Registry of Deeds of Caloocan City, in the names of the present
respondents Pedro Cardenas and Leonila Baluyot, being one of the two parcels of lands
levied upon in Civil Case No. 31237 but transferred to respondents under dubious

circumstances and patently unauthorized by law, should be ordered reconveyed to the

Associated Insurance Co., Inc. through the Insurance Commissioner for the purpose
stated in the next preceding paragraph, as the transaction on the transfer of said
parcel of land to them is null and void from the very beginning." 23

Petitioners likewise oppose the motion of the Cardenases. They contend that the
present petition is not solely predicated on their complaint for reconveyance and
damages in Civil Case No. 79244 for, as admitted by the Insurance Commissioner,
they are entitled to the reconveyance of the lot covered by T.C.T. No. 8567 and for
contribution or indemnification for damages which they may recover from Associated;
that respondents Cardenases secured said title fraudulently and irregularly without
any legal basis, hence, said title having been anomalously issued, is null and void and
without force and effect, and, that, as stated by Insurance Commissioner-liquidator, in
fairness and justice to petitioners, the two parcels of land levied in favor of Associated
by virtue of the decision on Civil Case No. 31237 should be reconveyed to them; and
that to dissolve the temporary restraining order and to dismiss the present petition
would leave petitioners without a legal remedy.

In a minute resolution dated April 19, 1971, the Court denied the said motion of
respondents Cardenas and Baluyot "to dissolve temporary restraining order and to
dismiss petition."

1.
The immediate objectives of this petition are: (a) to enjoin respondent Judge
Fernando Cruz of the Court First Instance of Rizal, Caloocan City Branch, and
respondents Pedro Cardenas and Leonila Baluyot, and their representatives, from
enforcing the writ of execution and of demolition issued by said respondent Judge in
Reg. Case No. C-211 in relation to the lot covered by T.C.T. No 8567; and (b) to enjoin
respondent Associated from disposing its alleged rights and interests in the two lots
covered by T.C.T. No. 8567 and T.C.T. No. 53759, the injunction in both cases to be
made effective during the pendency of the reconveyance case, Civil Case No. 79244,
filed by petitioners as plaintiffs before the Manila court of first instance.

The real and substantive objectives of the petition are to seek the rightful restoration
and reconveyance to petitioners Banzons of their two Caloocan city lots, covered by
T.C.T. No. 53759 (still in Banzon's name, but on the back whereof is annotated the
sheriff's final deed of sale in favor of Associated) and by T.C.T. No. 8567 (in the name
of respondents Cardenases) on the fundamental ground that Associated's levy in
execution of said lots was in trust for the benefit of the Philippine National Bank for the
purpose of paying the bank the loan obligation of Maximo Sta. Maria which Associated
had guaranteed as surety and against which liability Banzon in turn as indemnitor had
undertaken to indemnify and hold harmless Associated.

Now, the basic 1957 judgment of the Manila court sentencing Banzon to pay
Associated a total of P30,257.86 excluding interest, " for the benefit of the Philippine
National Bank" expressly made of record the said court's intent and disposition that
the execution and operation of its judgment against Banzon were contingent and
conditioned upon Associated as plaintiff-surety actually paying or being made or
compelled to pay the bank-creditor an equivalent amount as guaranteed by it. That
this is so is made more evident when we consider the provisions of Article 2071 of the
Civil Code which permit the surety to file such an advance suit against the principal
debtor (not against an indemnitor such as Banzon) only to obtain release from the
guaranty or security against the danger of the debtor's insolvency. Where the debtor
directly discharged his loan obligation to the bank which in turn released Associated
from its suretyship liability without Associated having incurred a centavo of liability, it
is indisputable that Associated in turn would necessarily release Banzon as indemnitor
and the basic 1957 judgment would be inoperable and unenforceable against Banzon.

When Associated nevertheless prematurely and contary to the intent and condition of
the basic 1957 judgment levied in execution on the two Caloocan City lots of Banzon
the interest it acquired was clearly impressed with a trust character. Such acquisition
of Banzon's properties by Associated was effected, if not through fraud 23a on
Associated's part, certainly through mistake 23b and there Associated was "by force of
law, considered a trustee of implied trust for the benefit of the person from whom the
property comes" by virtue of Article 1456 of the Code 23c since Associated not
having paid nor having been compelled to pay the bank had no right in law or equity
to so execute the judgment against Banzon as indemnitor. Had there been no
fraudulent concealment or suppression of the fact of such non-payment by Associated
or a mistaken notion just assumed without factual basis that Associted had paid the
bank and was thus entitled to enforce its judgement against Banzon as indemnitor, the
writ for execution of the judgment against Banzon's properties would not been issued.
23d

Furthermore, Associated's conduct, upon being sued by the Philippine National Bank
directly with the principal debtor Sta. Maria for collection of the debt 23e and
sentenced by the Pampanga court of first instance in 1963 (which it did not appeal) to
pay the debt in the much lesser amount of only P15,446.44, excluding interests, in not
so discharging its liability notwithstanding that it had already executed its 1957
judgment against Banzon as indemnitor and taken in execution Banzon's two
properties, was indeed rank fraud. Associated therefore stands legally bound by force
of law to now discharge its implied trust and return Banzon's properties to him as their
true and rightful owner.

The obligation imposed upon Associated as implied trustee to so restore Banzon's

properties becomes even more compelling when it is considered that in the premature
execution sale by virtue of the basic 1957 judgment, Associated ostensibly was the
highest bidder therefor applying its purported judgment credit of P41,000.00 when in
law such judgment was not subject to execution since the condition of Associated as

surety being made to pay the bank to make the judgment operable and enforceable
had not materialized and in fact Associated not having paid anything to the bank did
not possess such purported judgment credit of P41,000.00, nor did it put out a single
centavo for which it could hold Banzon answerable and therefore take Banzon's
properties in execution and satisfaction thereof. Actually, as already indicated above,
the principal debt of the bank's debtor, when directly collected by the bank six (6)
years later, amounted merely to 1/2 the amount or P15,446.44 as of August, 1963,
excluding interests. 23f As already stated above, Associated did not pay even this
much lesser amount, notwithstanding the Pampanga court's judgment against it in the
suit directly filed by the bank.

Finally, it would be an outrage on simple justice and iniquitous unjust enrichment if a

surety such as Associated, after taking title in execution to the indemnitor's properties
in order to protect or reimburse itself from liability to the creditor for the debt
guaranteed by it, were to be allowed to retain ownership of the properties even though
it did not incur or discharge its liability at all, since it succeeded in evading payment to
the creditor who thereafter collect the debt directly from the debtor. Thus, the law
(Article 1456, Civil Code) impresses properties thus acquired with trust character and
constitutes the erring surety as "trustee of an implied trust for the benefit of the
person from who the property comes," in this case, Banzon as the true and rightful
owner of the properties.

2.
As Cardenas in levying in turn for satisfaction of his P5,100.00 judgment
against Associated on one of Banzon's lots acquired only whatever interest Associated
had in the lot, and with the knowledge that Associated's basic 1957 judgment against
Banzon was "for the benefit of the Philippine National Bank" and hence Associated's
interest in the Banzon properties was impressed with a trust character, subject to the
obligation of Associated as implied trustee to return the properties to Banzon, the trust
character of the lot titled by Cardenas necessarily passed to him. Cardenas could not
claim actual or absolute ownership of the lot so titled but could only hold the same as
trustee, like Associated as his causante or predecessor.

The respondents Cardenases' pleadings of record should clearly that they were fully
aware of these vital antecedents and premises of the suits between Associated and
the Banzons. In their memorandum, they cite the Manila court of first instance's basic
decision in Civil Case No. 31237 "condemning defendants to pay jointly and severally
upon (sic) plaintiff (Associated) but for the benefit of the Philippine National Bank" 24
the several amounts sought by Associated, as surety, totalling P30,257.86. As far as
their own claim against Associated is concerned, they likewise recite in their
memorandum that:

On April 29, 1959, then Judge (now Justice) Jesus Perez of the Court of First Instance of
Manila rendered a decision in Civil Case No. 36194, entitled "Pedro Cardenas vs.
Victoria Vda. de Tengco, et al." ordering the defendants, including Associated

Insurance & Surety Co., Inc., as surety, to pay certain sums of money to Pedro
Cardenas. The liability of the Associated Insurance & Surety Co., Inc., was affirmed by
the Court of Appeals in a Decision promulgated on October 30, 1963, in CA-G.R. No.
25227-R. Consequently, pursuant to a Writ of Execution issued on February 8, 1964,
the City Sheriff of Caloocan sold on March 23, 1964 at a public auction to Pedro
Cardenas, the highest and only bidder, all the "rights, interests, claims and title" of the
judgment-debtor Associated Insurance & Surety Co. Inc., over the property plus the
improvements thereon covered by Transfer Certificate of Title No. 39685 (one on the
properties acquired from Antonio Banzon). The property not having been redeemed
within the one year period, a Deed of Absolute Sale was issued in favor of Pedro
Cardenas on April 2, 1965. On April 23, 1965, Pedro Cardenas filed a petition with the
Court of First Instance of Rizal, Branch XII, Caloocan City, in Registration Case No. C211 (LRC Rec. No. 11267), entitled "Pedro Cardenas, Petitioner," for the issuance of a
new transfer certificate of title over the property in question and to declare null and
void the one previously issued. On May 5, 1965, a Transfer Certificate of Title was
issued by the Register of Deeds of Caloocan City in the name of Pedro Cardenas
pursuant to the order of the court in aforecited Registration Case No. C-211, dated May
3, 1965, as amended. 25

It is obvious that since what Cardenas acquired in his execution for his P5,100.00
judgment against Associated was only "all the rights, interests, claims and title of the
judgment-debtor (Associated) over the property ... (one of the properties acquired
from Antonio Banzon)" and Associated's rights, if they could be so denominated, over
Banzon's properties were merely those of a trustee, supra, and Cardenas thereby
acquired no absolute "rights, interests, claim and title" at all but Associated's
obligation as trustee to restore Banzon's lawful properties to him.

3.
As a point of law, even though under Associated's suretyship agreement
guaranteeing Sta. Maria's crop loans with the bank, it was permitted, supposedly for
its protection, to proceed judicially against the principal debtor and indemnitors even
prior to the surety's making payment to the creditor bank, Article 2071 of the Civil
Code regulates such relations and provides that in such cases, the surety's right is
against the principal debtor and that "in all these cases, the action of the guarantor is
to obtain release from the guaranty, or to demand a security that shall protect him
from any proceedings by the creditor and from the danger of insolvency of the debtor."

Associated thus did not even have any valid cause of action against Banzon as its
indemnitor, but could proceed only against Sta. Maria as the principal debtor. And
even as against such principal debtor, it could not prematurely demand payment even
before it had paid the creditor, its action being limited only for the purpose of
obtaining release from the guaranty or a security against an eventual insolvency of
the debtor. As was emphasized by Mr. Justice Reyes for the Court in General Indemnity
Co., Inc. vs. Alvarez, 26 while a guarantor may under Article 2071 of the Civil Code
proceed against the principal debtor, even before having paid, when the debt has
become demandable, "(T)he last paragraph of this same article, however, provides

that in such instance, the only action the guarantor can file against the debtor is 'to
obtain release from the guaranty, or to demand a security that shall protect him from
any proceeding by the creditor and from the danger of insolvency of the debtor.' An
action by the guarantor against the principal debtor for payment, before the former
has paid the creditor, is premature."

4.
The realization of the Banzon's rightful objectives in law and equity as thus
restated has somewhat been hampered and beclouded by the ineptitude and sorry
neglect with which they and/or their counsel have pursued their remedies in the
various suits brought by them. To cite the latest instance, the pending suit filed by
them in the Manila court of first instance, Civil Case No. 79244, is from the record the
first real case that they have properly filed for reconveyance of their two Caloocan City
lots based on their new cause of action that with the debtor's direct payment to the
bank, Associated had been released as surety and Banzon consequently likewise
released as Associated's indemnitor, and therefore Associated in discharge of the
implied trust under which it executed the basic 1957 judgment " for the benefit of the
Philippine National Bank" against Banzon was now called upon to discharge such trust
and reconvey and restore Banzon's properties to him.

Yet Banzon filed no appeal from the Manila Court's dismissal of his complaint against
the Cardenas spouses for reconveyance of the lot wrongfully titled by the latter on the
lower court's mistaken concept that this Court's decision of November 29, 1968 in
Associated vs. Banzon, supra, constituted res judicata and apparently allowed such
dismissal to become final. In reality, since Associated never had to pay the bank,
Banzon's two lots, which had been levied upon prematurely under Associated's
judgment against Banzon and were therefore held by it in implied trust for Banzon by
force of law, "deserve to be reconveyed to them" in the very words of the insurance
commissioner, who alone and officially represents and acts for Associated as
liquidator.

As manifested by Associated's former counsel even when Associated was acting on its
own unauthorizedly and in violation of law, since an order for its liquidation and
dissolution had already been issued by the Manila court since December 31, 1965, he,
as Associated's counsel, never attempted to transfer Banzon's titles to Associated
since the question was sub-judice before this Court and resolved only per its decision
in Associated vs. Banzon of November 29, 1968, as of which time, this Court had
already previously affirmed on June 20,1968 in G.R. No. L-28934, the Manila court's
dissolution and liquidation order against Associated thus removing all doubt that only
the Insurance Commissioner as liquidator could act in any and all matters for
Associated. 27

5.
Under Sec. 175-C, paragraph 3 of the Insurance Act as amended, 28 the
Insurance Commissioner as liquidator of Associated was vested by authority of law
with the title to all of the property, contracts and rights of action of Associated as of

the date of the judicial order of liquidation, and any sale or disposition of Associated's
properties or rights without the knowledge and consent of the insurance commissioner
as liquidator and without the approval by the liquidation court is contrary to law and
null and void.

Accordingly, petitioners Banzons are, as against their and their counsel's neglect and
inattention, nevertheless saved from the otherwise fatal consequences of the invoked
final dismissal of their complaint against the Cardenases in Civil Case No. 79244 of the
Manila court for recovery of the lot wrongfully titled in the Cardenases' name per T.C.T.
No. 8567. Since in all the litigations subsequent to Associated's prematurely obtaining
in the Manila court of first instance in Civil Case 31237 the basic 1957 judgment as
surety against Banzon as a mere indemnitor to cover the principal debtor Sta. Maria's
demandable loans to the bank and thereafter levying in execution on Banzon's two
Caloocan City lots, notwithstanding that such judgment was expressly held to be in
trust and for the benefit of the bank, the insurance commissioner, as liquidator of
Associated and therefore an indispensable party was never impleaded and therefore
there could be no final determination of said actions. Under Rule 3, section 7,
indispensable parties must always be joined either as plaintiffs or defendants, for the
court cannot proceed without them, and hence all judgments and proceedings held
after the liquidation and dissolution order against Associated became void for lack of
an indispensable party in the person of the insurance commissioner-liquidator. The
insurance commissioner as liquidator of Associated by authority of law was
indisputably an indispensable party with such an interest in the controversies affecting
the judgment for Associated (against Banzon) and against Associated (in favor of
Cardenas) that a final decree would necessarily affect its rights (administered by the
Commissioner in the public interest and for the public's protection) so that the courts
could not proceed therein without the commissioner-liquidator's official presence.

6.
The wrongful dismissal by the Manila court of the Banzons' reconveyance
suit, Civil Case No. 79244, as against the Cardenases thus does not produce what
would otherwise have been fatal consequences due to the Banzons' failure to appeal
from such dismissal.

Their reconveyance case as against Associated as principal defendant remains

pending in court. And the insurance commissioner as liquidator of Associated, now
that she is fully aware of the status of these antecedent cases after she finally
received on March 11, 1971 the voluminous records thereof which had hitherto not
been surrendered to her office despite demands therefor, is called upon to appear for
Associated in the said case, if she has not as yet been duly impleaded as such
liquidator. With the insurance commissioner, as liquidator of Associated and an
indispensable party now in the case, the said reconveyance suit may now proceed
anew and the Cardenas spouses caused by the liquidator to be duly impleaded anew
for they are also indispensable parties insofar as the insurance commissionerliquidator's claim on behalf of Associated to the lot covered by T.C.T. No. 8567 issued
in their name is concerned. Herein petitioners seek principally in the said case the

reconveyance to them by Associated of their two parcels of land covered by T.C.T. No.
8567 and T.C.T. No. 53759, as acquired in execution by Associated, and thereafter,
with respect to the lot covered by T.C.T. No. 8567, by the Cardenases, by virtue of the
trust character impressed upon them and Associated's duty as implied trustee to
restore said properties to the Banzons.

Considering that the insurance commissioner herself , who now legally can alone
represent Associated as liquidator, has herein recognized such trust character and has
expressed the belief that the said lot, no less than the other lot covered by T.C.T. No.
8567, should, in justice to petitioners, be reconveyed to them on account, among
others, of petitioner Banzon's release from his obligation as indemnitor by virtue of the
principal debtor's subsequent payment of his obligation with the Philippine National
Bank which likewise released Associated from any liability as surety, the present
petition should therefore be granted in the interest of justice and equity so as to
enable the insurance commissioner-liquidator in due course to discharge the trust of
reconveying Banzons' properties to them.

7.
The circumstances that respondents Cardenases, insofar as the lot
wrongfully claimed by them, caused the Caloocan City special deputy sheriff to
enforce on March 23, 1970 respondent court's challenged order of demolition and writ
of possession on the very day that this Court ordered the issuance of a restraining
order against the enforcement of said challenged order and writ, and notwithstanding
that said sheriff was duly advised by Banzon of the petition at bar having been filed on
March 20, 1970, does not make the restraining order in any manner moot. The Court
does not look with favor upon parties "racing to beat an injunction or restraining order"
which they have reason to believe might be forthcoming from the Court by virtue of
the filing and pendency of the appropriate petition therefor. Where the restraining
order or preliminary injunction are found to have been properly issued, as in the case
at bar, mandatory writs shall be issued by the Court to restore matters to the status
quo ante. 29

In the case at bar, with the insurance commissioner as liquidator of Associated,

recognizing through the Solicitor General that the Banzons' two lots wrongfully taken
from them by Associated's premature actions should be reconveyed to them, there is
established a clear and indubitable showing on the record that the petitioners are
entitled to a writ restoring the status quo ante. A mandatory writ shall therefore issue
commanding respondent court to forthwith restore petitioners to their possession of
Lot 6, Block 176, covered by T.C.T. 8567 from which they have been removed by
enforcement of said respondent court's enjoined order of demolition and writ of
possession dated March 13, 1970, Annex "F" of the petition. As to petitioners' building
thereon claimed to be worth P10,000.00 (but countered by Cardenas to be a "mere
barong-barong" 30), respondent court shall at Banzon's petition cause respondents
Cardenases to restore the demolished building or pay Banzon the determined value
thereof. As to the fruits of possession of the land, with Cardenas acknowledging that
he has been leasing the same to a third person at P200.00 a month, 31 respondents

Cardenases shall forthwith pay to petitioners Banzons the whole amount of rentals so
received by them to the time that possession of the lot is effectively restored to
petitioners. By the very nature of this mandatory writ, the same shall be immediately
executory upon promulgation of this decision.

WHEREFORE, the petition for a permanent injunction, during the pendency of Civil
Case No. 79244 of the Court of First Instance of Manila against the disposition in any
manner of the two parcels of land subject of said case other than their reconveyance
to petitioners as the true and rightful owners thereof as expressly recognized by the
insurance commissioner as liquidator of Associated is hereby granted. In lieu of the
permanent injunction against enforcement of respondent court's order dated March
13, 1970 in Case No. C-211 thereof ordering the delivery of possession of the property
covered by T.C.T. No. 8567 to respondents Cardenases and demolition of petitioners
Banzons' improvements thereon, (which were prematurely carried out by respondent
court's sheriff on March 23, 1970) a writ of mandatory injunction commanding
respondent court to forthwith restore the status ante quo and to restore petitioners
Banzons to full possession of the property and enjoyment of the fruits and rentals
thereof under the terms and conditions stated in the next preceding paragraph is
hereby issued, which shall be immediately executory upon promulgation of this
decision. With costs against respondents Pedro Cardenas and Leonila Baluyot.

This decision is without prejudice to such civil and criminal liability as the officers of
the defunct Associated Insurance & Surety Co., Inc. may have incurred by virtue of
their acts of commission and omission which have resuited in grave prejudice and
damage to petitioners as well as to the public interest, as in the suppression from and
non-surrender to the Insurance Commissioner as liquidator of the records of the
relevant antecedent cases, and in the possible misrepresentation to the courts therein
that Associated had duly discharged to the bank its liability as surety and could
therefore lawfully levy on the properties of Banzon as indemnitor, which would have
resulted in the respondents' unjust enrichment at Banzon's expense. The insurance
commissioner is directed to conduct the corresponding investigation for the purpose of
filing such criminal and other appropriate actions as may be warranted agains the
responsible parties. So ordered.

G.R. No. L-16550

January 31, 1962

ALLEN McCONN, plaintiff-appellant,

vs.
PAUL HARAGAN, ET AL., defendants,
ASSOCIATE INSURANCE and SURETY CO., INC., defendant-appellee.

Jose Desiderio, Jr., Andres E. Matias and Juan C. Nabong, Jr. for plaintiff-appellant.
M. Perez Cardenas for defendant-appellee.

CONCEPCION, J.:

On June 30, 1955 pending hearing of Civil Case No. 24790 of the Court of First
Instance of Manila, entitled "Morris McConn v. Paul Haragan", which was scheduled to
take place on September 16, 1955 the Bureau of Immigration advised said court
that defendant Paul Haragan had applied for an immigration clearance and a re-entry
permit to enable him to leave the Philippines for 15 days only and requested
information whether the court had any objection thereto. By an order dated July 11,
1955, the court required Haragan to file a bond of P4,000 "to answer for his return to
the Philippines and the prosecution of his case against him, with the understanding,
that upon his failure to return, said bond will answer pro tanto for any judgment that
may be rendered against him". Thereupon, or on July 12, 1955, Haragan submitted a
bond, subcribed by him and the Associated Insurance & Surety Co., as principal and
surety, respectively, reading: .

WHEREAS, the above-bounden PRINCIPAL, is intending to leave the Philippines on a

business trip to Hongkong and Tokyo, Japan, for a period of thirty (30) days from date
of his departure, in connection with his business;

WHEREAS, the above-bounden PRINCIPAL, has a pending case before the Court of First
Instance of Manila, Branch III, entitled: "Allen McConn, Plaintiff, vs. Paul Haragan,
Defendant", Civil Case No. 24790, which is scheduled for hearing on September 16,
1955;

WHEREAS, before the above-bounden PRINCIPAL could leave the Philippines for
Hongkong and Tokyo, Japan, the above-mentioned Court has required him to post a
Surety Bond, in the amount of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine
Currency, the guarantee that he will return to the Philippines on or before September
16, 1955;

NOW, THEREFORE, for and in consideration of the above premises, the PRINCIPAL and
the SURETY, hereby bind themselves, jointly and severally, in favor of the Republic of
the Philippines, or its authorized representatives, in the sum of PESOS FOUR
THOUSAND ONLY (P4,000.00) Philippine Currency, that the herein PRINCIPAL will return
to the Philippines on or before September 16, 1955 and that should he fail to do so,
said bond will answer pro tanto for any judgment that may be rendered against him.

Soon thereafter, or on July 19, 1955, the court issued an order stating that "in view of
said bond, it would have no objection" to Haragan's "departure from the Philippines for
a short stay abroad" and that "formal leave" was thereby given him. On the date set
for the hearing of the case, Haragan's counsel moved for continuance, whereupon, the
hearing was postponed to November 14, 1955. On the date last mentioned, the same
counsel informed the court that Haragan had been unable to return to the Philippines
because the Philippine Consulate in Hongkong had advised Haragan of a
communication from our Department of Foreign Affairs banning him from returning to
the Philippines. The court then postponed the hearing to January 6, 1956.
Subsequently, Herbert T. Fallis was impleaded as defendant and, later on, one
Inocencio Ortiz Luis Jr. was allowed to intervene. In due course, thereafter, or on
February 19, 1959, the court rendered judgment, which, inter alia, sentenced Haragan
to pay to plaintiff the sum of P5,500, with 6% interest thereon from December 8, 1954,
until full payment, plus P1,000 as attorney's fees and costs. After this judgment had
become final and executory, plaintiff moved for the execution of the aforementioned
bond to satisfy said judgment against Haragan. The surety company objected thereto
upon several grounds and, after due hearing, the lower court issued an order dated
October 13, 1959, releasing said company from liability under the bond
aforementioned and denying plaintiff's motion. A reconsideration of this order having
been denied, the case is now before us on record on appeal filed by the
plaintiff.1wph1.t

The issue is whether the Surety Company is liable to plaintiff under the bond quoted
above, in view of the failure of Haragan to return to the Philippines. The lower court
decided the issue in the negative upon the following ground: .

... A careful reading of the surety bond, Exhibit F, indicates that the surety's principal
commitment is 'to guarantee that he (Haragan) will return to the Philippines on or
before September 16, 1955' (See the third 'Whereas'). In the last paragraph of said
surety bond, Exhibit F, it appears that said bond was executed in favor of the Republic
of the Philippines or its duly authorized representatives to guarantee 'thatthe herein
principal (Haragan) will return to the Philippines on or before September 16, 1955 and
that should he fail to do so, said bond will answer pro tanto for any judgment that may
be rendered against him.' As the terms of the bond so state, it appears clearly that the
bond will only answer for the judgment which may be rendered against defendant,
should he (defendant Haragan) fail to return to the Philippines. In other words, if
defendant Haragan should return to the Philippines on or before September 16, 1955,
said bond will not answer for the judgment. It is now the contention of the Associated
Insurance that since it was the Republic of the Philippines (obligee under the bond)
who rendered the return of defendantHaragan to the Philippines impossible, said
surety company is thereby released from its obligation, and cites in support thereof
Articles 1266 and 2076 of the New Civil Code. Upon a consideration of this contention,
the Court finds it tenable and well grounded, for as the surety company has so well
stated 'where the principal obligation (of returning to the Philippines) has been
extinguished by the action of the obligee, Philippine Government in preventing such
return, the accessory obligation of the surety is likewise extinguished and the bond

released of its liability.' Paraphrasing the last paragraph of the bond in a negative way,
it will read thus: 'should he (not) fail to do so, said bond will (not) answer pro tanto for
any judgment that may be rendered against him.

We are fully in agreement with the foregoing view, which is in accord with the principle
that:

The debtor in obligation to do shall also be released when the prestationbecomes

legally or physically impossible without the fault of the obligor. (Article 1266, Civil
Code of the Philippines.).

Thus, in Tabora vs. Lazatin, (G.R. No. L-5245, May 29, 1953), we said:

This Court finds that despite his efforts to secure the necessary building permit for the
reconstruction, he failed because of the disapproval or unfavorable attitude of the
Urban Planning Commission toward reconstruction unless they conformed to the plan
of widening the city streets. Finding that defendant had done all he could to secure the
permit and to comply with his obligations, but because of the refusal of the
government authorities to issue said permit, he failed to fulfill his undertaking, he
should be absolved and released from said obligation.

To same effect, substantially, is the decision of this Court in House vs. De La Costa (40
Off. Gaz. [3 S] 47).

WHEREFORE, the order appealed from is hereby affirmed, with the costs of this
instance against plaintiff-appellant. It is so ordered.

[G.R. No. 138544. October 3, 2000]

SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M. CUENCA,
respondent.
DECISION
PANGANIBAN, J.:

Being an onerous undertaking, a surety agreement is strictly construed against the

creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental

rules of fair play require the creditor to obtain the consent of the surety to any
material alteration in the principal loan agreement, or at least to notify it thereof.
Hence, petitioner bank cannot hold herein respondent liable for loans obtained in
excess of the amount or beyond the period stipulated in the original agreement,
absent any clear stipulation showing that the latter waived his right to be notified
thereof, or to give consent thereto. This is especially true where, as in this case,
respondent was no longer the principal officer or major stockholder of the corporate
debtor at the time the later obligations were incurred. He was thus no longer in a
position to compel the debtor to pay the creditor and had no more reason to bind
himself anew to the subsequent obligations.

The Case

This is the main principle used in denying the present Petition for Review under Rule
45 of the Rules of Court. Petitioner assails the December 22, 1998 Decision[1] of the
Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as
follows:

WHEREFORE, the judgment appealed from is hereby amended in the sense that
defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability
to pay any amount stated in the judgment.

Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for

lack of merit.

In all other respect[s], the decision appealed from is AFFIRMED.[2]

Also challenged is the April 14, 1999 CA Resolution,[3] which denied petitioners Motion
for Reconsideration.

Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial Court (RTC)
of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:

WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale

Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank
& Trust Company the sum of P39,129,124.73 representing the balance of the loan as
of May 10, 1994 plus 12% interest per annum until fully paid, and the sum of
P100,000.00 as attorneys fees and litigation expenses and to pay the costs.

SO ORDERED.

The Facts

The facts are narrated by the Court of Appeals as follows:[5]

The antecedent material and relevant facts are that defendant-appellant Sta. Ines
Melale (Sta. Ines) is a corporation engaged in logging operations. It was a holder of a
Timber License Agreement issued by the Department of Environment and Natural
Resources (DENR).

On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta.
Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos
(P8,000,000.00) to assist the latter in meeting the additional capitalization
requirements of its logging operations.

The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility
shall be effective until 30 November 1981:

JOINT CONDITIONS:

1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued
at 200% of the lines plus JSS of Rodolfo M. Cuenca.

2. Submission of an appropriate Board Resolution authorizing the borrowings,

indicating therein the companys duly authorized signatory/ies;

3. Reasonable/compensating deposit balances in current account shall be maintained

at all times; in this connection, a Makati account shall be opened prior to availment on
lines;

4. Lines shall expire on November 30, 1981; and

5. The bank reserves the right to amend any of the aforementioned terms and
conditions upon written notice to the Borrower. (Emphasis supplied.)

To secure the payment of the amounts drawn by appellant SIMC from the abovementioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980
(Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC. As
additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca
executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of
[Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows:

xxxxxxxxx

Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client
(SIMC) in favor of the bank for the payment, upon demand and without the benefit of
excussion of whatever amount x x x the client may be indebted to the bank x x x by
virtue of aforesaid credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendments, conversions and revivals of the aforesaid credit
accommodation(s) x x x . (Emphasis supplied).

On 26 November 1981, four (4) days prior to the expiration of the period of effectivity
of the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit
line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand
[p]esos (P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note
No. TD/TLS-3599-81 for said amount (Exhibit C).

Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the

Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings
of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction
relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc.
and Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala who was the
highest bidder during the public auction.

Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6)
other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree
[h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50).
Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85,
DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts
of the abovementioned additional loans against the credit line.

Appellant SIMC, however, encountered difficulty[6] in making the amortization

payments on its loans and requested [Petitioner] SBTC for a complete restructuring of
its indebtedness. SBTC accommodated appellant SIMCs request and signified its
approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendantappellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca,
agreed to restructure the past due obligations of defendant-appellant Sta. Ines.
[Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines the
following loans:

a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant
Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of
Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33
to 34) and

b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
(P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of
the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf.
Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33
to 34).

It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations

to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of
[s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only
loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November
1981 and the only one covered by the Indemnity Agreement dated 19 December 1980
(Exhibit 3-Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was
instead lumped together with, the other loans, i.e., Promissory Notes Nos.
DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at
Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were not
secured by said Indemnity Agreement.

Pursuant to the agreement to restructure its past due obligations to [Petitioner]

Security Bank, defendant-appellant Sta. Ines thus executed the following promissory
notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:

PROMISSORY NOTE NO. AMOUNT

RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
------------------TOTAL P12,200,000.00

(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).

To formalize their agreement to restructure the loan obligations of defendant-appellant

Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan
Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to
41). Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:

1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate
amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00),
Philippines [c]urrency (the Loan). The loan shall be released in two (2) tranches of
P8,800,000.00 for the first tranche (the First Loan) and P3,400,000.00 for the second
tranche (the Second Loan) to be applied in the manner and for the purpose stipulated
hereinbelow.

1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding indebtedness to the Lender (the indebtedness)
while the Second Loan shall be applied to liquidate the past due interest and penalty
portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca,
Expediente, at Vol. I, p. 33)

From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further
payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even
[h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up
to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)

Appellant SIMC defaulted in the payment of its restructured loan obligations to

[Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA, the last of
which were made through separate letters dated 5 June 1991 (Exhibit K) and 27 June
1991 (Exhibit L), respectively.

Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus,
SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting after
trial on the merits in a decision by the court a quo, x x x from which [Respondent]
Cuenca appealed.

Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan
Agreement had novated the 1980 credit accommodation earlier granted by the bank
to Sta. Ines. Accordingly, such novation extinguished the Indemnity Agreement, by
which Cuenca, who was then the Board chairman and president of Sta. Ines, had
bound himself solidarily liable for the payment of the loans secured by that credit
accommodation. It noted that the 1989 Loan Agreement had been executed without
notice to, much less consent from, Cuenca who at the time was no longer a
stockholder of the corporation.

The appellate court also noted that the Credit Approval Memorandum had specified
that the credit accommodation was for a total amount of P8 million, and that its expiry
date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans
obtained prior to November 30, 1981, and only for an amount not exceeding P8
million.

It further held that the restructuring of Sta. Ines obligation under the 1989 Loan
Agreement was tantamount to a grant of an extension of time to the debtor without
the consent of the surety. Under Article 2079 of the Civil Code, such extension
extinguished the surety.

The CA also opined that the surety was entitled to notice, in case the bank and Sta.
Ines decided to materially alter or modify the principal obligation after the expiry date
of the credit accommodation.

Hence, this recourse to this Court.[7]

The Issues

In its Memorandum, petitioner submits the following for our consideration:[8]

A. Whether or not the Honorable Court of Appeals erred in releasing Respondent

Cuenca from liability as surety under the Indemnity Agreement for the payment of the
principal amount of twelve million two hundred thousand pesos (P12,200,000.00)
under Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No.
RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other
charges due thereon;

i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent

Cuencas liability under the Indemnity Agreement covered only availments on SIMCs
credit line to the extent of eight million pesos (P8,000,000.00) and made on or before
30 November 1981;

ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring
of SIMCs indebtedness under the P8 million credit accommodation was tantamount to
an extension granted to SIMC without Respondent Cuencas consent, thus
extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of
the Civil Code;

iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring
of SIMCs indebtedness under the P8 million credit accommodation constituted a
novation of the principal obligation, thus extinguishing Respondent Cuencas liability
under the indemnity agreement;

B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;

C. Whether or not petitioners Motion for Reconsideration was pro-forma;

D. Whether or not service of the Petition by registered mail sufficiently complied with
Section 11, Rule 13 of the 1997 Rules of Civil Procedure.

Distilling the foregoing, the Court will resolve the following issues: (a) whether the
1989 Loan Agreement novated the original credit accommodation and Cuencas
liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to
be notified of and to give consent to any substitution, renewal, extension, increase,
amendment, conversion or revival of the said credit accommodation. As preliminary
matters, the procedural questions raised by respondent will also be addressed.

The Courts Ruling

The Petition has no merit.

Preliminary Matters: Procedural Questions

Motion for Reconsideration Not Pro Forma

Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in

merely rehashing the arguments already passed upon by the appellate court, was pro
forma; that as such, it did not toll the period for filing the present Petition for Review.
[9] Consequently, the Petition was filed out of time.[10]

We disagree. A motion for reconsideration is not pro forma just because it reiterated
the arguments earlier passed upon and rejected by the appellate court. The Court has
explained that a movant may raise the same arguments, precisely to convince the
court that its ruling was erroneous.[11]

Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo,[12] the Court
explained that a pro forma motion had no other purpose than to gain time and to
delay or impede the proceedings. Hence, where the circumstances of a case do not
show an intent on the part of the movant merely to delay the proceedings, our Court
has refused to characterize the motion as simply pro forma. It held:

We note finally that because the doctrine relating to pro forma motions for
reconsideration impacts upon the reality and substance of the statutory right of
appeal, that doctrine should be applied reasonably, rather than literally. The right to
appeal, where it exists, is an important and valuable right. Public policy would be
better served by according the appellate court an effective opportunity to review the
decision of the trial court on the merits, rather than by aborting the right to appeal by
a literal application of the procedural rules relating to pro forma motions for
reconsideration.

Service by Registered Mail Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service
and filing of pleadings and other papers shall be done personally. Except with respect
to papers emanating from the court, a resort to other modes must be accompanied by
a written explanation why the service or filing was not done personally. A violation of
this Rule may be cause to consider the paper as not filed.

Respondent maintains that the present Petition for Review does not contain a
sufficient written explanation why it was served by registered mail.

We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the
aforecited rule was mandatory, and that only when personal service or filing is not
practicable may resort to other modes be had, which must then be accompanied by a
written explanation as to why personal service or filing was not practicable to begin
with.

In this case, the Petition does state that it was served on the respective counsels of
Sta. Ines and Cuenca by registered mail in lieu of personal service due to limitations in
time and distance.[14] This explanation sufficiently shows that personal service was
not practicable. In any event, we find no adequate reason to reject the contention of
petitioner and thereby deprive it of the opportunity to fully argue its cause.

First Issue: Original Obligation Extinguished by Novation

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil

Code, which reads as follows:

ART. 1292. In order that an obligation may be extinguished by another which

substitute the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other.

Novation of a contract is never presumed. It has been held that [i]n the absence of an
express agreement, novation takes place only when the old and the new obligations
are incompatible on every point.[15] Indeed, the following requisites must be
established: (1) there is a previous valid obligation; (2) the parties concerned agree to
a new contract; (3) the old contract is extinguished; and (4) there is a valid new
contract.[16]

Petitioner contends that there was no absolute incompatibility between the old and
the new obligations, and that the latter did not extinguish the earlier one. It further
argues that the 1989 Agreement did not change the original loan in respect to the
parties involved or the obligations incurred. It adds that the terms of the 1989
Contract were not more onerous.[17] Since the original credit accomodation was not
extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.

We reject these contentions. Clearly, the requisites of novation are present in this
case. The 1989 Loan Agreement extinguished the obligation[18] obtained under the
1980 credit accomodation. This is evident from its explicit provision to liquidate the
principal and the interest of the earlier indebtedness, as the following shows:

1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding Indebtedness to the Lender (the Indebtedness)
while the Second Loan shall be applied to liquidate the past due interest and penalty
portion of the Indebtedness.[19] (Italics supplied.)

The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan
Agreement were used to pay-off the original indebtedness serves to strengthen this
ruling.[21]

Furthermore, several incompatibilities between the 1989 Agreement and the 1980
original obligation demonstrate that the two cannot coexist. While the 1980 credit
accommodation had stipulated that the amount of loan was not to exceed P8 million,
[22] the 1989 Agreement provided that the loan was P12.2 million. The periods for
payment were also different.

Likewise, the later contract contained conditions, positive covenants and negative
covenants not found in the earlier obligation. As an example of a positive covenant,
Sta. Ines undertook from time to time and upon request by the Lender, [to] perform
such further acts and/or execute and deliver such additional documents and writings
as may be necessary or proper to effectively carry out the provisions and purposes of
this Loan Agreement.[23] Likewise, SIMC agreed that it would not create any mortgage
or encumbrance on any asset owned or hereafter acquired, nor would it participate in
any merger or consolidation.[24]

Since the 1989 Loan Agreement had extinguished the original credit accommodation,
the Indemnity Agreement, an accessory obligation, was necessarily extinguished also,
pursuant to Article 1296 of the Civil Code, which provides:

ART. 1296. When the principal obligation is extinguished in consequence of a novation,

accessory obligations may subsist only insofar as they may benefit third persons who
did not give their consent.

Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of
the P8 million original accommodation; it was not a novation.[25]

This argument must be rejected. To begin with, the 1989 Loan Agreement expressly
stipulated that its purpose was to liquidate, not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan
Agreement, which had allegedly extended the original P8 million credit facility. Hence,
his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of
the Civil Code, which specifically states that [a]n extension granted to the debtor by
the creditor without the consent of the guarantor extinguishes the guaranty. x x x. In
an earlier case,[26] the Court explained the rationale of this provision in this wise:

The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the suretys consent would deprive the surety of his
right to pay the creditor and to be immediately subrogated to the creditors remedies
against the principal debtor upon the maturity date. The surety is said to be entitled to
protect himself against the contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period.

Binding Nature of the Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit Approval
Memorandum in holding that the credit accommodation was only for P8 million, and
that it was for a period of one year ending on November 30, 1981. Petitioner objects to
the appellate courts reliance on that document, contending that it was not a binding
agreement because it was not signed by the parties. It adds that it was merely for its
internal use.

We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof evidencing
the accommodation.[27] Moreover, in its Petition before this Court, it alluded to the
Credit Approval Memorandum in this wise:

4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the
Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to
assist SIMC in meeting the additional capitalization requirements for its logging
operations. For this purpose, the Bank issued a Credit Approval Memorandum dated 10
November 1980.

Clearly, respondent is estopped from denying the terms and conditions of the P8

million credit accommodation as contained in the very document it presented to the

courts. Indeed, it cannot take advantage of that document by agreeing to be bound
only by those portions that are favorable to it, while denying those that are
disadvantageous.

Second Issue: Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave
his consent to any modification of the credit accommodation or otherwise waived his
right to be notified of, or to give consent to, the same.[28] Respondents consent or
waiver thereof is allegedly found in the Indemnity Agreement, in which he held himself
liable for the credit accommodation including [its] substitutions, renewals, extensions,
increases, amendments, conversions and revival. It explains that the novation of the
original credit accommodation by the 1989 Loan Agreement is merely its renewal,
which connotes cessation of an old contract and birth of another one x x x.[29]

At the outset, we should emphasize that an essential alteration in the terms of the
Loan Agreement without the consent of the surety extinguishes the latters obligation.
As the Court held in National Bank v. Veraguth,[30] [i]t is fundamental in the law of
suretyship that any agreement between the creditor and the principal debtor which
essentially varies the terms of the principal contract, without the consent of the
surety, will release the surety from liability.

In this case, petitioners assertion - that respondent consented to the alterations in the
credit accommodation -- finds no support in the text of the Indemnity Agreement,
which is reproduced hereunder:

Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest
Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in
consideration of the credit accommodation in the total amount of eight million pesos
(P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a commercial
bank duly organized and existing under and by virtue of the laws of the Philippine,
6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor
of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the
CLIENT, with the stipulated interests and charges thereon, evidenced by that/those
certain PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor
of the BANK hereby bind(s) himself/themselves jointly and severally with the CLIENT in
favor of the BANK for the payment , upon demand and without benefit of excussion of
whatever amount or amounts the CLIENT may be indebted to the BANK under and by
virtue of aforesaid credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendment, conversions and revivals of the aforesaid credit
accommodation(s), as well as of the amount or amounts of such other obligations that

the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as
appears in the accounts, books and records of the BANK, plus interest and expenses
arising from any agreement or agreements that may have heretofore been made, or
may hereafter be executed by and between the parties thereto, including the
substitutions, renewals, extensions, increases, amendments, conversions and revivals
of the aforesaid credit accommodation(s), and further bind(s) himself/themselves with
the CLIENT in favor of the BANK for the faithful compliance of all the terms and
conditions contained in the aforesaid credit accommodation(s), all of which are
incorporated herein and made part hereof by reference.

While respondent held himself liable for the credit accommodation or any modification
thereof, such clause should be understood in the context of the P8 million limit and the
November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify
the nature and scope of the original credit accommodation, without informing or
getting the consent of respondent who was solidarily liable. Taking the banks
submission to the extreme, respondent (or his successors) would be liable for loans
even amounting to, say, P100 billion obtained 100 years after the expiration of the
credit accommodation, on the ground that he consented to all alterations and
extensions thereof.

Indeed, it has been held that a contract of surety cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved
against enlarging the liability of the surety.[31] Likewise, the Court has ruled that it is a
well-settled legal principle that if there is any doubt on the terms and conditions of the
surety agreement, the doubt should be resolved in favor of the surety x x x.
Ambiguous contracts are construed against the party who caused the ambiguity.[32]
In the absence of an unequivocal provision that respondent waived his right to be
notified of or to give consent to any alteration of the credit accommodation, we cannot
sustain petitioners view that there was such a waiver.

It should also be observed that the Credit Approval Memorandum clearly shows that
the bank did not have absolute authority to unilaterally change the terms of the loan
accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to
this condition:

5. The Bank reserves the right to amend any of the aforementioned terms and
conditions upon written notice to the Borrower.[33]

We reject petitioners submission that only Sta. Ines as the borrower, not respondent,
was entitled to be notified of any modification in the original loan accommodation.[34]
Following the banks reasoning, such modification would not be valid as to Sta. Ines if
no notice were given; but would still be valid as to respondent to whom no notice need

be given. The latters liability would thus be more burdensome than that of the former.
Such untenable theory is contrary to the principle that a surety cannot assume an
obligation more onerous than that of the principal.[35]

The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which

the Court sustained a stipulation whereby the surety consented to be bound not only
for the specified period, but to any extension thereafter made, an extension x x x that
could be had without his having to be notified.

In that case, the surety agreement contained this unequivocal stipulation: It is hereby
further agreed that in case of any extension of renewal of the bond, we equally bind
ourselves to the Company under the same terms and conditions as herein provided
without the necessity of executing another indemnity agreement for the purpose and
that we hereby equally waive our right to be notified of any renewal or extension of
the bond which may be granted under this indemnity agreement.

In the present case, there is no such express stipulation. At most, the alleged basis of
respondents waiver is vague and uncertain. It confers no clear authorization on the
bank or Sta. Ines to modify or extend the original obligation without the consent of the
surety or notice thereto.

Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety,
petitioner maintains that there was no need for respondent to execute another surety
contract to secure the 1989 Loan Agreement.

This argument is incorrect. That the Indemnity Agreement is a continuing surety does
not authorize the bank to extend the scope of the principal obligation inordinately.[37]
In Dino v. CA,[38] the Court held that a continuing guaranty is one which covers all
transactions, including those arising in the future, which are within the description or
contemplation of the contract of guaranty, until the expiration or termination thereof.

To repeat, in the present case, the Indemnity Agreement was subject to the two
limitations of the credit accommodation: (1) that the obligation should not exceed P8
million, and (2) that the accommodation should expire not later than November 30,
1981. Hence, it was a continuing surety only in regard to loans obtained on or before
the aforementioned expiry date and not exceeding the total of P8 million.

Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained
on November 26, 1991. It did not secure the subsequent loans, purportedly under the
1980 credit accommodation, that were obtained in 1986. Certainly, he could not have
guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981
and which exceeded the stipulated P8 million ceiling.

Petitioner, however, cites the Dino ruling in which the Court found the surety liable for
the loan obtained after the payment of the original one, which was covered by a
continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the
surety Agreement specifically provided that each suretyship is a continuing one which
shall remain in full force and effect until this bank is notified of its revocation. Since
the bank had not been notified of such revocation, the surety was held liable even for
the subsequent obligations of the principal borrower.

No similar provision is found in the present case. On the contrary, respondents liability
was confined to the 1980 credit accommodation, the amount and the expiry date of
which were set down in the Credit Approval Memorandum.

Special Nature of the JSS

It is a common banking practice to require the JSS (joint and solidary signature) of a
major stockholder or corporate officer, as an additional security for loans granted to
corporations. There are at least two reasons for this. First, in case of default, the
creditors recourse, which is normally limited to the corporate properties under the veil
of separate corporate personality, would extend to the personal assets of the surety.
Second, such surety would be compelled to ensure that the loan would be used for the
purpose agreed upon, and that it would be paid by the corporation.

Following this practice, it was therefore logical and reasonable for the bank to have
required the JSS of respondent, who was the chairman and president of Sta. Ines in
1980 when the credit accommodation was granted. There was no reason or logic,
however, for the bank or Sta. Ines to assume that he would still agree to act as surety
in the 1989 Loan Agreement, because at that time, he was no longer an officer or a
stockholder of the debtor-corporation. Verily, he was not in a position then to ensure
the payment of the obligation. Neither did he have any reason to bind himself further
to a bigger and more onerous obligation.

Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of
respondent, without even informing him, smacks of negligence on the part of the bank
and bad faith on that of the principal debtor. Since that Loan Agreement constituted a
new indebtedness, the old loan having been already liquidated, the spirit of fair play

should have impelled Sta. Ines to ask somebody else to act as a surety for the new
loan.

In the same vein, a little prudence should have impelled the bank to insist on the JSS
of one who was in a position to ensure the payment of the loan. Even a perfunctory
attempt at credit investigation would have revealed that respondent was no longer
connected with the corporation at the time. As it is, the bank is now relying on an
unclear Indemnity Agreement in order to collect an obligation that could have been
secured by a fairly obtained surety. For its defeat in this litigation, the bank has only
itself to blame.

In sum, we hold that the 1989 Loan Agreement extinguished by novation the
obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity
Agreement, which had been an accessory to the 1980 credit accommodation, was also
extinguished. Furthermore, we reject petitioners submission that respondent waived
his right to be notified of, or to give consent to, any modification or extension of the
1980 credit accommodation.

In this light, we find no more need to resolve the issue of whether the loan obtained
before the expiry date of the credit accommodation has been paid.

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

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19519

November 28, 1964

IN RE: Petition for Cancellation of Adverse Claim. ANANIAS ABUSTAN, petitionerappellee,

vs.
RUPERTO FERRER and CONSUELO V. GOLEZ (spouses), oppositors-appellants.

Pio L. Pestrao for oppositors-appellants.

Marquez, Quirino & Associates and V. de Villar for petitioner-appellee.

CONCEPCION, J.:

The spouses Ruperto Ferrer and Consuelo V. Golez, hereinafter referred to as the
Ferrers, seek the review of an order of the Court of First Instance of Rizal directing the
cancellation of an annotation of their adverse claim to a parcel of land situated in the
Municipality of Makati, Province of Rizal, and covered by Transfer Certificate of Title No.
76141 of the Office of the Register of Deeds of said province, issued in the name of
appellee Ananias Abustan on May 4, 1960, upon cancellation of Transfer Certificate of
Title No. 30520 in the name of Vicente C. Gomez, married to Cirila Sulingco Manuel, of
the same province.

The record shows that on April 6, 1955, Gomez had executed the document Exhibit E,
constituting a mortgage on said land in favor of the Ferrers, to guarantee the payment
of P2,500.00, within one (1) year from said date; that Exhibit E provided that, if Gomez
failed to redeem the property within the aforementioned period, the Ferrers could, "at
their election," assume an obligation of Gomez in favor of the Meralco Loan and
Savings Association hereinafter referred to as the Meralco Association which had
a first mortgage on said property, and Gomez would execute the corresponding deed
of sale thereof in favor of the Ferrers; and that Exhibit E was neither registered nor
annotated on Transfer Certificate of Title No. 30520, because the former stated
erroneously that said proper was covered by Transfer Certificate of Title No. 16488 of
the City of Manila.

Subsequently, or on May 9, 1956, the mortgage in favor of the Meralco Association

was cancelled in pursuance of a deed to this effect. On the same date, a deed of real
estate mortgage, executed by Gomez in favor of the spouses Brigido Campita and
Fausta Domingo, for the sum of P3,000, was duly registered, but the annotation
thereof was duly cancelled on June 8, 1957, on which date another deed of mortgage
on the same property, for the sum of P6,000, in favor of the Manila Building and Loan
Association hereinafter referred to as the Manila Association was duly registered.
On March 4, 1959, the Ferrers instituted, against Gomez, Civil Case No. 4820 of the
Court of First Instance of Rizal, for the recovery of the sum of money referred to in
Exhibit E but this case was later dismissed for non-appearance of the parties on the
date set for the hearing thereof. Instead of seeking a revocation of the order of
dismissal, the Ferrers commenced, on August 14, 1959, Civil Case No. 5726 of the

same court, against Gomez and the Manila Association. In the complaint therein, the
Ferrers alleged, inter alia, the execution by Gomez of said deed Exhibit E, the failure of
Gomez to pay the debt guaranteed thereby, the reason why Exhibit E was not
registered, and the execution of the deed of first mortgage in favor of the Manila
Association. The Ferrers alleged further that the Manila Association had been guilty of
laches in failing to require Gomez, before lending him P6,000, to submit an affidavit
stating that the property aforementioned was unencumbered and prayed that
judgment be rendered sentencing Gomez to convey said property to them (the
Ferrers), as well as to pay damages, and the Manila Association to cancel the
mortgage in their favor, upon payment by the Ferrers of the amount representing the
balance of the obligation of Gomez in favor of the Meralco Association outstanding on
April 6, 1956 (it should be 1955), when Exhibit E was executed.

Gomez and the Manila Association moved to dismiss the complaint in Case No. 5726,
upon the ground that the same is barred by the order of dismissal of Case No. 4820.
On December 10, 1959, this motion was granted and the complaint in said Case No.
5726 was, accordingly, dismissed. No appeal was taken from the order of dismissal,
which accordingly, became final and executory. Subsequently, or on March 14, 1960,
Mrs. Ferrer filed with the office of the Register of Deeds of Rizal an affidavit of adverse
claim to the property above referred to, based upon Exhibit E. Soon thereafter, or on
May 4, 1960, Transfer Certificate of Title No. 76141 was issued in the name of Ananias
D. Abustan, married to Librada Buan. This Transfer Certificate of Title No. 76141
carried thereon two (2) memoranda, of "encumbrances," namely, the annotation of the
first mortgage in favor of the Manila Association and that of the adverse claim of the
Ferrers.

On July 13, 1960, Abustan filed in Land Registration Case No. 3861, G.L.R.O. Cadastral
Record No. 2029, under which the property in question is registered, a petition for
cancellation of said annotation of adverse claim upon the ground that the same had
been "improperly registered in violation of Section 112 of Act 496, because the right or
interest sought to be enforced by the spouses, Ruperto Ferrer and Consuelo Golez, has
become unenforceable by virtue of a final decision rendered by the Court of First
Instance of Rizal on December 10, 1959, in Civil Case No. 5726," referring to the
aforementioned order of dismissal thereof. After due hearing this petition was granted
and, a reconsideration of the action thus taken by the lower court having been denied,
the, Ferrers have interposed the present appeal by writ of error.

The Ferrers maintain that the lower court erred (a) in holding that the deed of
mortgage constituted in their favor had become unenforceable owing to the dismissal
of Civil Cases Nos. 4820 and 5726 of Rizal; (b) in not holding that the registration of
the adverse claim in question operated as a registration of the deed of real estate
mortgage in their favor; (c) in not holding that Civil Case No. 5726 operated as a
reopening of Civil Case No. 4820; and (d) in giving due course to appellee's petition
instead of requiring them to file an ordinary action.

This appeal is clearly devoid of merit. Indeed, the dismissal of Case No. 4820 had the
effect of extinguishing the debt of Gomez in favor of the Ferrers. As a consequence,
the latter lost the right to demand the conveyance in their favor of the lot in dispute,
such right being predicated upon the default of Gomez in the payment of said debt.
The extinction thereof necessarily operated to wipe out the default, if any, and, as a
consequence, the relief stipulated for such event, namely, the conveyance of the
property to the Ferrers. Regardless of the foregoing, the dismissal of Case No. 5726
extinguished the light, if it still existed, to said conveyance, which was sought to be
enforced in that case.

Even if the annotation of the adverse claim amounted to the registration of a deed of
real estate mortgage and it did not have such effect the dismissal of Case No.
4820, had extinguished the debt secured by the mortgage, and, accordingly, of the
latter. Being merely an accessory contract, a mortgage cannot exist without the
principal obligation it seeks to guarantee (Article 2085, Civil Code of the Philippines).
So, too, even if Case No. 5726 had amounted to a reopening of Case No. 4820, which
is not a fact, the dismissal of Case No. 5726 wiped out the right of the Ferrers under
Exhibit E to the conveyance in their favor if the property in question regardless of its
nullity under Article 2088 of the Civil Code of the Philippines no appeal having been
taken from the order of dismissal of said case No. 5726.

As regards the theory that the lower court should have required Abustan to litigate in
an ordinary action, instead of allowing him to secure the cancellation of the annotation
of the adverse claim under Section 112 of the Land Registration Act, suffice it to say
that the case of Tangunan vs. Republic (50 Off. Gaz., 1) relied upon by the Ferrers is
not in point, for the issue therein was controversial, whereas in the case at bar, there
is no dispute about the issue in Cases Nos. 4820 and 5726, about the dismissal of both
and the grounds for dismissal, and about the fact that no appeal had been taken from
the orders of dismissal and that the same had, accordingly, become final and
executory. Neither can there be any controversy about the effect of said orders of
dismissal. That of Case No. 4820, for non-appearance of the parties, was, pursuant to
Section 3 of Rule 17 of the Rules of Court, "an adjudication upon the merits, unless
otherwise provided by the court," and the, court did not provide otherwise. Upon the
other hand, the dismissal of Case No. 5726 was based upon the ground that the cause
of action therein is barred by a prior judgment namely the dismissal of Case No.
4820.

WHEREFORE, the order appealed from is hereby affirmed, with costs against herein
appellants Ruperto Ferrer and Consuelo V. Golez. It is so ordered.

SECOND DIVISION

[G.R. No. 131679. February 1, 2000]

CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST COMPANY, petitioners,
vs. SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT OF APPEALS, respondents.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari of the decision[1] of the Court of Appeals in
C.A. GR CV No. 42315 and the order dated December 9, 1997 denying petitioners
motion for reconsideration.

The following facts are not in dispute.

Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust Company
(FEBTC) are banking institutions duly organized and existing under Philippine laws. On
or about June 15, 1983, a certain Rodolfo Guansing obtained a loan in the amount of
P90,000.00 from CDB, to secure which he mortgaged a parcel of land situated at No.
63 Calavite Street, La Loma, Quezon City and covered by TCT No. 300809 registered in
his name. As Guansing defaulted in the payment of his loan, CDB foreclosed the
mortgage. At the foreclosure sale held on March 15, 1984, the mortgaged property
was sold to CDB as the highest bidder. Guansing failed to redeem, and on March 2,
1987, CDB consolidated title to the property in its name. TCT No. 300809 in the name
of Guansing was cancelled and, in lieu thereof, TCT No. 355588 was issued in the
name of CDB.

On June 16, 1988, private respondent Lolita Chan Lim, assisted by a broker named
Remedios Gatpandan, offered to purchase the property from CDB. The written Offer to
Purchase, signed by Lim and Gatpandan, states in part:

We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma,
Quezon City for P300,000.00 under the following terms and conditions:

(1) 10% Option Money;

(2) Balance payable in cash;

(3) Provided that the property shall be cleared of illegal occupants or tenants. Scjuris

Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB P30,000.00
as Option Money, for which she was issued Official Receipt No. 3160, dated June 17,
1988, by CDB. However, after some time following up the sale, Lim discovered that the
subject property was originally registered in the name of Perfecto Guansing, father of
mortgagor Rodolfo Guansing, under TCT No. 91148. Rodolfo succeeded in having the
property registered in his name under TCT No. 300809, the same title he mortgaged to
CDB and from which the latters title (TCT No. 355588) was derived. It appears,
however, that the father, Perfecto, instituted Civil Case No. Q-39732 in the Regional
Trial Court, Branch 83, Quezon City, for the cancellation of his sons title. On March 23,
1984, the trial court rendered a decision[2] restoring Perfectos previous title (TCT No.
91148) and cancelling TCT No. 300809 on the ground that the latter was fraudulently
secured by Rodolfo. This decision has since become final and executory.

Aggrieved by what she considered a serious misrepresentation by CDB and its mothercompany, FEBTC, on their ability to sell the subject property, Lim, joined by her
husband, filed on August 29, 1989 an action for specific performance and damages
against petitioners in the Regional Trial Court, Branch 96, Quezon City, where it was
docketed as Civil Case No. Q-89-2863. On April 20, 1990, the complaint was amended
by impleading the Register of Deeds of Quezon City as an additional defendant.

On March 10, 1993, the trial court rendered a decision in favor of the Lim spouses. It
ruled that: (1) there was a perfected contract of sale between Lim and CDB, contrary
to the latters contention that the written offer to purchase and the payment of
P30,000.00 were merely pre-conditions to the sale and still subject to the approval of
FEBTC; (2) performance by CDB of its obligation under the perfected contract of sale
had become impossible on account of the 1984 decision in Civil Case No. Q-39732
cancelling the title in the name of mortgagor Rodolfo Guansing; (3) CDB and FEBTC
were not exempt from liability despite the impossibility of performance, because they
could not credibly disclaim knowledge of the cancellation of Rodolfo Guansings title
without admitting their failure to discharge their duties to the public as reputable
banking institutions; and (4) CDB and FEBTC are liable for damages for the prejudice
caused against the Lims.[3] Based on the foregoing findings, the trial court ordered
CDB and FEBTC to pay private respondents, jointly and severally, the amount of
P30,000.00 plus interest at the legal rate computed from June 17, 1988 until full
payment. It also ordered petitioners to pay private respondents, jointly and severally,
the amounts of P250,000.00 as moral damages, P50,000.00 as exemplary damages,
P30,000.00 as attorneys fees, and the costs of the suit.[4]

Petitioners brought the matter to the Court of Appeals, which, on October 14, 1997,
affirmed in toto the decision of the Regional Trial Court. Petitioners moved for
reconsideration, but their motion was denied by the appellate court on December 9,
1997. Hence, this petition. Petitioners contend that - Jjlex

1. The Honorable Court of Appeals erred when it held that petitioners CDB and FEBTC
were aware of the decision dated March 23, 1984 of the Regional Trial Court of Quezon
City in Civil Case No. Q-39732.

2. The Honorable Court of Appeals erred in ordering petitioners to pay interest on the
deposit of THIRTY THOUSAND PESOS (P30,000.00) by applying Article 2209 of the New
Civil Code.

3. The Honorable Court of Appeals erred in ordering petitioners to pay moral damages,
exemplary damages, attorneys fees and costs of suit.

I.

At the outset, it is necessary to determine the legal relation, if any, of the parties.

Petitioners deny that a contract of sale was ever perfected between them and private
respondent Lolita Chan Lim. They contend that Lims letter-offer clearly states that the
sum of P30,000.00 was given as option money, not as earnest money.[5] They thus
conclude that the contract between CDB and Lim was merely an option contract, not a
contract of sale.

The contention has no merit. Contracts are not defined by the parties thereto but by
principles of law.[6] In determining the nature of a contract, the courts are not bound
by the name or title given to it by the contracting parties.[7] In the case at bar, the
sum of P30,000.00, although denominated in the offer to purchase as "option money,"
is actually in the nature of earnest money or down payment when considered with the
other terms of the offer. In Carceler v. Court of Appeals,[8] we explained the nature of
an option contract, viz. -

An option contract is a preparatory contract in which one party grants to the other, for
a fixed period and under specified conditions, the power to decide, whether or not to
enter into a principal contract, it binds the party who has given the option not to enter

into the principal contract with any other person during the period designated, and
within that period, to enter into such contract with the one to whom the option was
granted, if the latter should decide to use the option. It is a separate agreement
distinct from the contract to which the parties may enter upon the consummation of
the option. Newmiso

An option contract is therefore a contract separate from and preparatory to a contract

of sale which, if perfected, does not result in the perfection or consummation of the
sale. Only when the option is exercised may a sale be perfected.

In this case, however, after the payment of the 10% option money, the Offer to
Purchase provides for the payment only of the balance of the purchase price, implying
that the "option money" forms part of the purchase price. This is precisely the result of
paying earnest money under Art. 1482 of the Civil Code. It is clear then that the
parties in this case actually entered into a contract of sale, partially consummated as
to the payment of the price. Moreover, the following findings of the trial court based
on the testimony of the witnesses establish that CDB accepted Lims offer to purchase:

It is further to be noted that CDB and FEBTC already considered plaintiffs offer as good
and no longer subject to a final approval. In his testimony for the defendants on
February 13, 1992, FEBTCs Leomar Guzman stated that he was then in the Acquired
Assets Department of FEBTC wherein plaintiffs offer to purchase was endorsed thereto
by Myoresco Abadilla, CDBs senior vice-president, with a recommendation that the
necessary petition for writ of possession be filed in the proper court; that the
recommendation was in accord with one of the conditions of the offer, i.e., the clearing
of the property of illegal occupants or tenants (tsn, p. 12); that, in compliance with the
request, a petition for writ of possession was thereafter filed on July 22, 1988 (Exhs. 1
and 1-A); that the offer met the requirements of the banks; and that no rejection of the
offer was thereafter relayed to the plaintiffs (p. 17); which was not a normal procedure,
and neither did the banks return the amount of P30,000.00 to the plaintiffs.[9]

Given CDBs acceptance of Lims offer to purchase, it appears that a contract of sale
was perfected and, indeed, partially executed because of the partial payment of the
purchase price. There is, however, a serious legal obstacle to such sale, rendering it
impossible for CDB to perform its obligation as seller to deliver and transfer ownership
of the property. Acctmis

Nemo dat quod non habet, as an ancient Latin maxim says. One cannot give what one
does not have. In applying this precept to a contract of sale, a distinction must be kept
in mind between the "perfection" and "consummation" stages of the contract.

A contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price.[10] It is, therefore, not
required that, at the perfection stage, the seller be the owner of the thing sold or even
that such subject matter of the sale exists at that point in time.[11] Thus, under Art.
1434 of the Civil Code, when a person sells or alienates a thing which, at that time,
was not his, but later acquires title thereto, such title passes by operation of law to the
buyer or grantee. This is the same principle behind the sale of "future goods" under
Art. 1462 of the Civil Code. However, under Art. 1459, at the time of delivery or
consummation stage of the sale, it is required that the seller be the owner of the thing
sold. Otherwise, he will not be able to comply with his obligation to transfer ownership
to the buyer. It is at the consummation stage where the principle of nemo dat quod
non habet applies.

In Dignos v. Court of Appeals,[12] the subject contract of sale was held void as the
sellers of the subject land were no longer the owners of the same because of a prior
sale.[13] Again, in Nool v. Court of Appeals,[14] we ruled that a contract of repurchase,
in which the seller does not have any title to the property sold, is invalid:

We cannot sustain petitioners view. Article 1370 of the Civil Code is applicable only to
valid and enforceable contracts. The Regional Trial Court and the Court of Appeals
ruled that the principal contract of sale contained in Exhibit C and the auxiliary
contract of repurchase in Exhibit D are both void. This conclusion of the two lower
courts appears to find support in Dignos v. Court of Appeals, where the Court held:

"Be that as it may, it is evident that when petitioners sold said land to the Cabigas
spouses, they were no longer owners of the same and the sale is null and void."

In the present case, it is clear that the sellers no longer had any title to the parcels of
land at the time of sale. Since Exhibit D, the alleged contract of repurchase, was
dependent on the validity of Exhibit C, it is itself void. A void contract cannot give rise
to a valid one. Verily, Article 1422 of the Civil Code provides that (a) contract which is
the direct result of a previous illegal contract, is also void and inexistent."

We should however add that Dignos did not cite its basis for ruling that a "sale is null
and void" where the sellers "were no longer the owners" of the property. Such a
situation (where the sellers were no longer owners) does not appear to be one of the
void contracts enumerated in Article 1409 of the Civil Code. Moreover, the Civil Code
itself recognizes a sale where the goods are to be acquired x x x by the seller after the
perfection of the contract of sale, clearly implying that a sale is possible even if the
seller was not the owner at the time of sale, provided he acquires title to the property
later on. Misact

In the present case, however, it is likewise clear that the sellers can no longer deliver
the object of the sale to the buyers, as the buyers themselves have already acquired
title and delivery thereof from the rightful owner, the DBP. Thus, such contract may be
deemed to be inoperative and may thus fall, by analogy, under item No. 5 of Article
1409 of the Civil Code: Those which contemplate an impossible service. Article 1459 of
the Civil Code provides that "the vendor must have a right to transfer the ownership
thereof [subject of the sale] at the time it is delivered." Here, delivery of ownership is
no longer possible. It has become impossible.[15]

In this case, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo
Guansing must, therefore, be deemed a nullity for CDB did not have a valid title to the
said property. To be sure, CDB never acquired a valid title to the property because the
foreclosure sale, by virtue of which the property had been awarded to CDB as highest
bidder, is likewise void since the mortgagor was not the owner of the property
foreclosed.

A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with
Art. 1458 of the Civil Code, under which the mortgagor in default, the forced seller,
becomes obliged to transfer the ownership of the thing sold to the highest bidder who,
in turn, is obliged to pay therefor the bid price in money or its equivalent. Being a sale,
the rule that the seller must be the owner of the thing sold also applies in a foreclosure
sale. This is the reason Art. 2085[16] of the Civil Code, in providing for the essential
requisites of the contract of mortgage and pledge, requires, among other things, that
the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in
anticipation of a possible foreclosure sale should the mortgagor default in the payment
of the loan.

There is, however, a situation where, despite the fact that the mortgagor is not the
owner of the mortgaged property, his title being fraudulent, the mortgage contract
and any foreclosure sale arising therefrom are given effect by reason of public policy.
This is the doctrine of "the mortgagee in good faith" based on the rule that all persons
dealing with property covered by a Torrens Certificate of Title, as buyers or
mortgagees, are not required to go beyond what appears on the face of the title.[17]
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, relied upon what appears on the face of the
certificate of title. Sdjad

This principle is cited by petitioners in claiming that, as a mortgagee bank, it is not

required to make a detailed investigation of the history of the title of the property
given as security before accepting a mortgage.

We are not convinced, however, that under the circumstances of this case, CDB can be
considered a mortgagee in good faith. While petitioners are not expected to conduct
an exhaustive investigation on the history of the mortgagors title, they cannot be
excused from the duty of exercising the due diligence required of banking institutions.
In Tomas v. Tomas,[18] we noted that it is standard practice for banks, before
approving a loan, to send representatives to the premises of the land offered as
collateral and to investigate who are the real owners thereof, noting that banks are
expected to exercise more care and prudence than private individuals in their
dealings, even those involving registered lands, for their business is affected with
public interest. We held thus:

We, indeed, find more weight and vigor in a doctrine which recognizes a better right
for the innocent original registered owner who obtained his certificate of title through
perfectly legal and regular proceedings, than one who obtains his certificate from a
totally void one, as to prevail over judicial pronouncements to the effect that one
dealing with a registered land, such as a purchaser, is under no obligation to look
beyond the certificate of title of the vendor, for in the latter case, good faith has yet to
be established by the vendee or transferee, being the most essential condition,
coupled with valuable consideration, to entitle him to respect for his newly acquired
title even as against the holder of an earlier and perfectly valid title. There might be
circumstances apparent on the face of the certificate of title which could excite
suspicion as to prompt inquiry, such as when the transfer is not by virtue of a
voluntary act of the original registered owner, as in the instant case, where it was by
means of a self-executed deed of extra-judicial settlement, a fact which should be
noted on the face of Eusebia Tomas certificate of title. Failing to make such inquiry
would hardly be consistent with any pretense of good faith, which the appellant bank
invokes to claim the right to be protected as a mortgagee, and for the reversal of the
judgment rendered against it by the lower court.[19]

In this case, there is no evidence that CDB observed its duty of diligence in
ascertaining the validity of Rodolfo Guansings title. It appears that Rodolfo Guansing
obtained his fraudulent title by executing an Extra-Judicial Settlement of the Estate
With Waiver where he made it appear that he and Perfecto Guansing were the only
surviving heirs entitled to the property, and that Perfecto had waived all his rights
thereto. This self-executed deed should have placed CDB on guard against any
possible defect in or question as to the mortgagors title. Moreover, the alleged ocular
inspection report[20] by CDBs representative was never formally offered in evidence.
Indeed, petitioners admit that they are aware that the subject land was being occupied
by persons other than Rodolfo Guansing and that said persons, who are the heirs of
Perfecto Guansing, contest the title of Rodolfo.[21] Sppedsc

II.

The sale by CDB to Lim being void, the question now arises as to who, if any, among

the parties was at fault for the nullity of the contract. Both the trial court and the
appellate court found petitioners guilty of fraud, because on June 16, 1988, when Lim
was asked by CDB to pay the 10% option money, CDB already knew that it was no
longer the owner of the said property, its title having been cancelled.[22] Petitioners
contend that: (1) such finding of the appellate court is founded entirely on speculation
and conjecture; (2) neither CDB nor FEBTC was a party in the case where the
mortgagors title was cancelled; (3) CDB is not privy to any problem among the
Guansings; and (4) the final decision cancelling the mortgagors title was not
annotated in the latters title.

As a rule, only questions of law may be raised in a petition for review, except in
circumstances where questions of fact may be properly raised.[23] Here, while
petitioners raise these factual issues, they have not sufficiently shown that the instant
case falls under any of the exceptions to the above rule. We are thus bound by the
findings of fact of the appellate court. In any case, we are convinced of petitioners
negligence in approving the mortgage application of Rodolfo Guansing.

III.

We now come to the civil effects of the void contract of sale between the parties.
Article 1412(2) of the Civil Code provides:

If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:

....

(2).......When only one of the contracting parties is at fault, he cannot recover what he
has given by reason of the contract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may demand the return of what he has
given without any obligation to comply with his promise.

Private respondents are thus entitled to recover the P30,000.00 option money paid by
them. Moreover, since the filing of the action for damages against petitioners
amounted to a demand by respondents for the return of their money, interest thereon
at the legal rate should be computed from August 29, 1989, the date of filing of Civil
Case No. Q-89-2863, not June 17, 1988, when petitioners accepted the payment. This
is in accord with our ruling in Castillo v. Abalayan[24] that in case of a void sale, the
seller has no right whatsoever to keep the money paid by virtue thereof and should
refund it, with interest at the legal rate, computed from the date of filing of the

complaint until fully paid. Indeed, Art. 1412(2) which provides that the non-guilty party
"may demand the return of what he has given" clearly implies that without such prior
demand, the obligation to return what was given does not become legally
demandable. Sccalr

Considering CDBs negligence, we sustain the award of moral damages on the basis of
Arts. 21 and 2219 of the Civil Code and our ruling in Tan v. Court of Appeals[25] that
moral damages may be recovered even if a banks negligence is not attended with
malice and bad faith. We find, however, that the sum of P250,000.00 awarded by the
trial court is excessive. Moral damages are only intended to alleviate the moral
suffering undergone by private respondents, not to enrich them at the expense of the
petitioners.[26] Accordingly, the award of moral damages must be reduced to
P50,000.00.

Likewise, the award of P50,000.00 as exemplary damages, although justified under

Art. 2232 of the Civil Code, is excessive and should be reduced to P30,000.00. The
award of P30,000.00 attorneys fees based on Art. 2208, pars. 1, 2, 5 and 11 of the
Civil Code should similarly be reduced to P20,000.00.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the MODIFICATION
as to the award of damages as above stated.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17072

October 31, 1961

CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee,

vs.
BRIGIDA MARCOS, ET AL., defendants-appellants.

Aladin B. Bermudez for defendants-appellants.

Cube and Fajardo for plaintiff-appellee.

REYES, J.B.L., J.:

The main question in this appeal is whether or not a mortgagee may foreclose a
mortgage on a piece of land covered by a free patent where the mortgage was
executed before the patent was issued and is sought to be foreclosed within five years
from its issuance.

The facts of the case appear to be as follows:

On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000
from plaintiff Cristina Marcel Vda. de Bautista and to secure payment thereof
conveyed to the latter by way of mortgage a two (2)-hectare portion of an
unregistered parcel of land situated in Sta. Ignacia, Tarlac. The deed of mortgage,
Exhibit "A", provided that it was to last for three years, that possession of the land
mortgaged was to be turned over to the mortgagee by way of usufruct, but with no
obligation on her part to apply the harvests to the principal obligation; that said
mortgage would be released only upon payment of the principal loan of P2,000
without any interest; and that the mortgagor promised to defend and warrant the
mortgagee's rights over the land mortgaged.

Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the heirs of
her deceased mother Victoriana Cainglet (who are Brigida herself and her three
sisters), an application for the issuance of a free patent over the land in question, on
the strength of the cultivation and occupation of said land by them and their
predecessor since July, 1915. As a result, Free Patent No. V-64358 was issued to the
applicants on January 25, 1957, and on February 22, 1957, it was registered in their
names under Original Certificate of Title No. P-888 of the office of Register of Deeds for
the province of Tarlac.

Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid

up to 1959, the latter, on March 4, 1959, filed the present action against Brigida and
her husband (Civil Case No. 3382) in the court below for the payment thereof, or in
default of the debtors to pay, for the foreclosure of her mortgage on the land give as
security. Defendants moved to dismiss the action, pointing out that the land in
question is covered by a free patent and could not, therefore, under the Public Land
Law, be taken within five years from the issuance of the patent for the payment of any

debts of the patentees contracted prior to the expiration of said five-year period; but
the lower court denied the motion to dismiss on the ground that the law cited does not
apply because the mortgage sought to be foreclosed was executed before the patent
was issued. Defendants then filed their answer, reiterating the defense invoked in their
motion to dismiss, and alleging as well that the real contract between the parties was
an antichresis and not a mortgage. Pre-trial of the case followed, after which the lower
court rendered judgment finding the mortgage valid to the extent of the mortgagor's
pro-indiviso share of 15,333 square meters in the land in question, on the theory that
the Public Land Law does not apply in this case because the mortgage in question was
executed before a patent was issued over the land in question; that the agreement of
the parties could not be antichresis because the deed Exhibit "A" clearly shows a
mortgage with usufruct in favor of the mortgagee; and ordered the payment of the
mortgage loan of P2,000 to plaintiff or, upon defendant's failure to do so, the
foreclosure of plaintiff's mortgage on defendant Brigida Marcos' undivided share in the
land in question. From this judgment, defendants Brigida Marcos and her husband
Osmondo Apolocio appealed to this Court.

There is merit in the appeal.

The right of plaintiff-appellee to foreclose her mortgage on the land in question

depends not so much on whether she could take said land within the prohibitive period
of five years from the issuance of defendants' patent for the satisfaction of the
indebtedness in question, but on whether the deed of mortgage Exhibit "A" is at all
valid and enforceable, since the land mortgaged was apparently still part of the public
domain when the deed of mortgage was constituted. As it is an essential requisite for
the validity of a mortgage that the mortgagor be the absolute owner of the thing
mortgaged (Art. 2085), the mortgage here in question is void and ineffective because
at the time it was constituted, the mortgagor was not yet the owner of the land
mortgaged and could not, for that reason, encumber the same to the plaintiffappellee. Nor could the subsequent acquisition by the mortgagor of title over said land
through the issuance of a free patent validate and legalize the deed of mortgage
under the doctrine of estoppel (cf. Art. 1434, New Civil Code,1 since upon the issuance
of said patient, the land in question was thereby brought under the operation of the
Public Land Law that prohibits the taking of said land for the satisfaction of debts
contracted prior to the expiration of five years from the date of the issuance of the
patent (sec. 118, C.A. No. 141). This prohibition should include not only debts
contracted during the five-year period immediately preceding the issuance of the
patent but also those contracted before such issuance, if the purpose and policy of the
law, which is "to preserve and keep in the family of the homesteader that portion of
public land which the State has gratuitously given to him" (Pascua v. Talens, 45 O.G.
No. 9 [Supp.] 413; De los Santos v. Roman Catholic Church of Midsayap, G.R. L-6088,
Feb. 24, 1954), is to be upheld.

The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant
invalidity of the collate agreement in the same deed of mortgage whereby possession

of the land mortgaged was transferred to plaintiff-appellee in usufruct, without any

obligation on her part to account for its harvests or deduct them from defendants'
indebtedness of P2,000. Defendant Brigida Marcos, who, together with her sisters, was
in possession of said land by herself and through her deceased mother before her
since 1915, had possessory rights over the same even before title vested in her as coowner by the issuance of the free patent to her and her sisters, and these possessory
right she could validly transfer and convey to plaintiff-appellee, as she did in the deed
of mortgage Exhibit "A". The latter, upon the other hand, believing her mortgagor to
be the owner of the land mortgaged and not being aware of any flaw which invalidated
her mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as such
had the right to all the fruits received during the entire period of her possession in
good faith (Art. 544, N.C.C.). She is, therefore, entitled to the full payment of her credit
of P2,000 from defendants, without any obligation to account for the fruits or benefits
obtained by her from the land in question.

WHEREFORE, the judgment appealed from is reversed insofar as it orders the

foreclosure of the mortgage in question, but affirmed in all other respects. Costs again
defendants-appellants.

G.R. No. L-64159

September 10, 1985

CIRCE S. DURAN and ANTERO S. GASPAR, petitioners,

vs.
INTERMEDIATE APPELLATE COURT, ERLINDA B. MARCELO TIANGCO and RESTITUTO
TIANGCO, respondents.

RELOVA, J.:

The respondent then Court of Appeals rendered judgment, modifying the decision of
the then Court of First Instance of Rizal, which reads as follows:

(1)

the complaint of the plaintiffs (herein petitioners) is hereby DISMISSED;

(2)
the defendants-appellants spouses Erlinda B. Marcelo Tiangco and Restituto
Tiangco (herein private respondents) are hereby declared the lawful owners of the two

(2) parcels of land and all the improvements thereon including the 12-door apartment
thereon described in the complaint, in the counterclaim, in the cross-claim, and in the
Sheriff's Certificate of Sale;

(3)
the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby
ordered to deliver to (the Tiangcos) the two parcels of land and all the improvements
thereon including the 12-door apartment thereon, subject matter of the complaint,
counterclaim, and cross-claim, and in the Sheriff's Certificate of Sale;

(4)
the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby
ordered to pay solidarily to the Tiangcos the sum of Two Thousand Four Hundred Pesos
(P2,400) a month from May 16, 1972 until delivery of possession of the properties in
question to said Tiangco spouses, representing rentals collected by plaintiffsappellants and defendant- appellee Fe S. Duran;

(5)
the plaintiffs-appellants and defendant-appellee Fe S. Duran are hereby
ordered to pay solidarily to the spouses Tiangco the sum of Twenty Thousand Pesos
(P20,000) as damages for attorney's fees, and the sum of Twenty-Five Thousand Pesos
(P25,000) for moral damages, and the costs. (pp. 149-150, Rollo)

The antecedent facts showed that petitioner Circe S. Duran owned two (2) parcels of
land (Lots 5 and 6, Block A, Psd 32780) covered by Transfer Certificate of Title No.
1647 of the Register of Deeds of Caloocan City which she had purchased from the
Moja Estate. She left the Philippines in June 1954 and returned in May 1966.

On May 13, 1963, a Deed of Sale of the two lots mentioned above was made in favor
of Circe's mother, Fe S. Duran who, on December 3, 1965, mortgaged the same
property to private respondent Erlinda B. Marcelo-Tiangco. When petitioner Circe S.
Duran came to know about the mortgage made by her mother, she wrote the Register
of Deeds of Caloocan City informing the latter that she had not given her mother any
authority to sell or mortgage any of her properties in the Philippines. Failing to get an
answer from the registrar, she returned to the Philippines. Meanwhile, when her
mother, Fe S. Duran, failed to redeem the mortgage properties, foreclosure
proceedings were initiated by private respondent Erlinda B. Marcelo Tiangco and,
ultimately, the sale by the sheriff and the issuance of Certificate of Sale in favor of the
latter.

Petitioner Circe S. Duran claims that the Deed of Sale in favor of her mother Fe S.
Duran is a forgery, saying that at the time of its execution in 1963 she was in the
United States. On the other hand, the adverse party alleges that the signatures of
Circe S. Duran in the said Deed are genuine and, consequently, the mortgage made by

Fe S. Duran in favor of private respondent is valid.

With respect to the issue as to whether the signature of petitioner Circe S. Duran in
the Deed of Sale is a forgery or not, respondent appellate court held the same to be
genuine because there is the presumption of regularity in the case of a public
document and "the fact that Circe has not been able to satisfactorily prove that she
was in the United States at the time the deed was executed in 1963. Her return in
1966 does not prove she was not here also in 1963, and that she did not leave shortly
after 1963. She should have presented her old passport, not her new one. But even if
the signatures were a forgery, and the sale would be regarded as void, still it is Our
opinion that the Deed of Mortgage is VALID, with respect to the mortgagees, the
defendants-appellants. While it is true that under Art. 2085 of the Civil Code, it is
essential that the mortgagor be the absolute owner of the property mortgaged, and
while as between the daughter and the mother, it was the daughter who still owned
the lots, STILL insofar as innocent third persons are concerned the owner was already
the mother (Fe S. Duran) inasmuch as she had already become the registered owner
(Transfer Certificates of Title Nos. 2418 and 2419). The mortgagee had the right to rely
upon what appeared in the certificate of title, and did not have to inquire further. If the
rule were otherwise, the efficacy and conclusiveness of Torrens Certificate of Titles
would be futile and nugatory. Thus the rule is simple: the fraudulent and forged
document of sale may become the root of a valid title if the certificate has already
been transferred from the name of the true owner to the name indicated by the forger
(See De la Cruz v. Fable, 35 Phil. 144; Blondeau et al. v. Nano et al., 61 Phil. 625; Fule
et al. v. Legare et al., 7 SCRA 351; see also Sec. 55 of Act No. 496, the Land
Registration Act). The fact that at the time of the foreclosure sale proceedings (197072) the mortgagees may have already known of the plaintiffs' claim is immaterial.
What is important is that at the time the mortgage was executed, the mortgagees in
good faith actually believed Fe S. Duran to be the owner, as evidenced by the
registration of the property in the name of said Fe S. Duran (pp. 146-147, Rollo)."

In elevating the judgment of the respondent appellate court to Us for review,

petitioners discussed questions of law which, in effect and substance, raised only one
issue and that is whether private respondent Erlinda B. Marcelo-Tiangco was a buyer in
good faith and for value.

Guided by previous decisions of this Court, good faith consists in the possessor's belief
that the person from whom he received the thing was the owner of the same and
could convey his title (Arriola vs. Gomez dela Serna, 14 Phil. 627). Good faith, while it
is always to be presumed in the absence of proof to the contrary, requires a wellfounded belief that the person from whom title was received was himself the owner of
the land, with the right to convey it (Santiago vs. Cruz, 19 Phil. 148). There is good
faith where there is an honest intention to abstain from taking any unconscientious
advantage from another (Fule vs. Legare, 7 SCRA 351). Otherwise stated, good faith is
the opposite of fraud and it refers to the state of mind which is manifested by the acts
of the individual concerned. In the case at bar, private respondents, in good faith

relied on the certificate of title in the name of Fe S. Duran and as aptly stated by
respondent appellate court "[e]ven on the supposition that the sale was void, the
general rule that the direct result of a previous illegal contract cannot be valid (on the
theory that the spring cannot rise higher than its source) cannot apply here for We are
confronted with the functionings of the Torrens System of Registration. The doctrine to
follow is simple enough: a fraudulent or forged document of sale may become the
ROOT of a valid title if the certificate of title has already been transferred from the
name of the true owner to the name of the forger or the name indicated by the forger."
(p. 147, Rollo)

Thus, where innocent third persons relying on the correctness of the certificate of title
issued, acquire rights over the property, the court cannot disregard such rights and
order the total cancellation of the certificate for that would impair public confidence in
the certificate of title; otherwise everyone dealing with property registered under the
torrens system would have to inquire in every instance as to whether the title had
been regularly or irregularly issued by the court. Indeed, this is contrary to the evident
purpose of the law. Every person dealing with registered land may safely rely on the
correctness of the certificate of title issued therefor and the law will in no way oblige
him to go behind the certificate to determine the condition of the property. Stated
differently, an innocent purchaser for value relying on a torrens title issued is
protected. A mortgagee has the right to rely on what appears in the certificate of title
and, in the absence of anything to excite suspicion, he is under no obligation to look
beyond the certificate and investigate the title of the mortgagor appearing on the face
of said certificate.

Likewise, We take note of the finding and observation of respondent appellate court in
that petitioners were guilty of estoppel by laches "in not bringing the case to court
within a reasonable period. Antero Gaspar, husband of Circe, was in the Philippines in
1964 to construct the apartment on the disputed lots. This was testified to by Circe
herself (tsn., p. 41, Nov. 27, 1973). In the process of construction, specifically in the
matter of obtaining a building permit, he could have discovered that the deed of sale
sought to be set aside had been executed on May 13, 1963 (the building permit
needed an application by the apparent owner of the land, namely, Circe's mother, Fe
S. Duran). And then again both plaintiffs could have intervened in the foreclosure suit
but they did not. They kept silent until almost the last moment when they finally
decided, shortly before the sheriff's sale, to file a third-party claim. Clearly, the
plaintiffs can be faulted for their estoppel by laches." (p. 148, Rollo)

IN VIEW OF THE FOREGOING, We find the petition without merit and hereby AFFIRMED
in toto the decision of respondent appellate court promulgated on August 12, 1981.

SO ORDERED.

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

SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners, vs. PHILIPPINE

NATIONAL BANK and SPOUSES MARCOS and ARSENIA ESLABON, respondents.
DECISION
DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision[1] and Resolution[2] in

CA-G.R. No. 53865 of the Court of Appeals[3] dated May 21, 1998 and June 29, 1998,
respectively, which modified the Decision[4] dated April 30, 1996 of the Regional Trial
Court of Roxas City, Branch 19 in a suit[5] for Declaration of Nullity of the Contract of
Mortgage.

The facts are as follows:

Eduarda Belo owned an agricultural land with an area of six hundred sixty one
thousand two hundred eighty eight (661,288) square meters located in Timpas,
Panitan, Capiz, covered and described in Transfer Certificate of Title (TCT for brevity)
No. T-7493. She leased a portion of the said tract of land to respondents spouses
Marcos and Arsenia Eslabon in connection with the said spouses sugar plantation
business. The lease contract was effective for a period of seven (7) years at the rental
rate of Seven Thousand Pesos (P7,000.00) per year.

To finance their business venture, respondents spouses Eslabon obtained a loan from
respondent Philippine National Bank (PNB for brevity) secured by a real estate
mortgage on their own four (4) residential houses located in Roxas City, as well as on
the agricultural land owned by Eduarda Belo. The assent of Eduarda Belo to the
mortgage was acquired through a special power of attorney which she executed in
favor of respondent Marcos Eslabon on June 15, 1982.

Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation,
extrajudicial foreclosure proceedings against the mortgaged properties were instituted
by respondent PNB. At the auction sale on June 10, 1991, respondent PNB was the
highest bidder of the foreclosed properties at Four Hundred Forty Seven Thousand Six
Hundred Thirty Two Pesos (P447,632.00).

In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale
at public auction of her agricultural land on June 10, 1991 as well as the registration of

the Certificate of Sheriffs Sale in its favor on July 1, 1991, and the one-year period to
redeem the land.

Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique
and Florencia Belo under a deed of absolute sale of proprietary and redemption rights.

Before the expiration of the redemption period, petitioners spouses Belo tendered
payment for the redemption of the agricultural land in the amount of Four Hundred
Eighty Four Thousand Four Hundred Eighty Two Pesos and Ninety Six Centavos
(P484,482.96), which includes the bid price of respondent PNB, plus interest and
expenses as provided under Act No. 3135.

However, respondent PNB rejected the tender of payment of petitioners spouses Belo.
It contended that the redemption price should be the total claim of the bank on the
date of the auction sale and custody of property plus charges accrued and interests
amounting to Two Million Seven Hundred Seventy Nine Thousand Nine Hundred
Seventy Eight and Seventy Two Centavos (P2,779,978.72).[6] Petitioners spouses
disagreed and refused to pay the said total claim of respondent PNB.

On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of
Roxas City, Civil Case No. V-6182 which is an action for declaration of nullity of
mortgage, with an alternative cause of action, in the event that the accommodation
mortgage be held to be valid, to compel respondent PNB to accept the redemption
price tendered by petitioners spouses Belo which is based on the winning bid price of
respondent PNB in the extrajudicial foreclosure in the amount of Four Hundred Forty
Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00) plus interest and
expenses.

In its Answer, respondent PNB raised, among others, the following defenses, to wit:

xxx

77. In all loan contracts granted and mortgage contracts executed under the 1975
Revised Charter (PD 694, as amended), the proper rate of interest to be charged
during the redemption period is the rate specified in the mortgage contract based on
Sec. 25[7] of PD 694 and the mortgage contract which incorporates by reference the
provisions of the PNB Charters. Additionally, under Sec. 78 of the General Banking Act
(RA No. 337, as amended) made applicable to PNB pursuant to Sec. 38 of PD No. 694,
the rate of interest collectible during the redemption period is the rate specified in the
mortgage contract.

78. Since plaintiffs failed to tender and pay the required amount for redemption of the
property under the provisions of the General Banking Act, no redemption was validly
effected;[8]

xxx

After trial on the merits, the trial court rendered its Decision dated April 30, 1996
granting the alternative cause of action of spouses Belo, the decretal portion of which
reads:

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

plaintiffs Spouses Enrique M. Belo and Florencia G. Belo and against defendants
Philippine National Bank and Spouses Marcos and Arsenia Eslabon:

1. Making the injunction issued by the court permanent, insofar as the property of
Eduarda Belo covered by Transfer Certificate of Title No. T-7493 is concerned;

2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo to

redeem only Eduarda Belos property situated in Brgy. Timpas, Panitan, Capiz, and
covered by Transfer Certificate of Title No. T-7493 by paying only its bid price of
P447,632.00, plus interest and other charges provided for in Section 30, Rule 39 of the
Rules of Court, less the loan value, as originally appraised by said defendant Bank, of
the foreclosed four (4) residential lots of defendants Spouses Marcos and Arsenia
Eslabon; and

3. Dismissing for lack of merit the respective counterclaims of defendants Philippine

National Bank and spouses Marcos and Arsenia Eslabon.

With costs against defendants.

SO ORDERED.[9]

Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to
the Court of Appeals. In its Decision rendered on May 21, 1998, the appellate court,
while upholding the decision of the trial court on the validity of the real estate

mortgage on Eduarda Belos property, the extrajudicial foreclosure and the public
auction sale, modified the trial courts finding on the appropriate redemption price by
ruling that the petitioners spouses Belo should pay the entire amount due to PNB
under the mortgage deed at the time of the foreclosure sale plus interest, costs and
expenses.[10]

Petitioners spouses Belo sought reconsideration[11] of the said Decision but the same
was denied by the appellate court in its Resolution promulgated on June 29, 1998,
ratiocinating, thus:

Once more, the Court shies away from declaring the nullity of the mortgage contract
obligating Eduarda Belo as co-mortgagor, considering that it has not been sufficiently
established that Eduarda Belos assent to the special power of attorney and to the
mortgage contract was tainted by any vitiating cause. Moreover, in tendering an offer
to redeem the property (Exhibit 20, p. 602 Record) after its extrajudicial foreclosure,
she has thereby admitted the validity of the mortgage, as well as the transactions
leading to its inception. Eduarda Belo, and the appellees as mere assignees of
Eduardas right to redeem the property, are therefore estopped from questioning the
efficacy of the mortgage and its subsequent foreclosure.[12]

The appellate court further declared that petitioners spouses Belo are obligated to pay
the total banks claim representing the redemption price for the foreclosed properties,
as provided by Section 25 of P.D. No. 694, holding that:

On the other hand, the courts ruling that the appellees, being the assignee of the right
of repurchase of Eduarda Belo, were bound by the redemption price as provided by
Section 25 of P.D. 694, stands. The attack on the constitutionality of Section 25 of P.D.
694 cannot be allowed, as the High Court, in previous instances, (Dulay v. Carriaga,
123 SCRA 794 [1983]; Philippine National Bank v. Remigio, 231 SCRA 362 [1994]) has
regarded the said provision of law with respect, using the same in determining the
proper redemption price in foreclosure of mortgages involving the PNB as mortgagee.

The terms of the said provision are quite clear and leave no room for qualification, as
the appellees would have us rule. The said rule, as amended, makes no specific
distinction as to assignees or transferees of the mortgagor of his redemptive right. In
the absence of such distinction by the law, the Court cannot make a distinction. As
admitted assignees of Eduarda Belos right of redemption, the appellees succeed to the
precise right of Eduarda including all conditions attendant to such right.

Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code)
will extend to apply in the redemption stage of the mortgage.

As we have previously remarked, Section 25 of P.D. 694 is a sanctioned deviation from

the rule embodied in Rule 39, Section 30 of the Rules of Court, and is a special
protection given to government lending institutions, particularly, the Philippine
National Bank. (Dulay v. Carriaga, supra)[13]

Hence, the instant petition.

During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo, agreed
to limit the assignment of errors to the following:

xxxxxxxxx

II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL COURT ON THE BASIS
OF THE ASSIGNMENT OF ERRORS ALLEGED BY PETITIONERS IN THEIR BRIEF:

(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA BELO IN FAVOR
OF RESPONDENT ESLABON WAS NULL AND VOID;

(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT MARCOS ESLABON
UNDER SAID INVALID SPECIAL POWER OF ATTORNEY IS ALSO NULL AND VOID;

III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB ACTED IN
BAD FAITH AND CONNIVED WITH RESPONDENTS-DEBTORS ESLABONS TO OBTAIN THE
CONSENT OF EDUARDA BELO, PETITIONERS PREDECESSOR, THROUGH FRAUD.

IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB WAS
NEGLIGENT IN THE PERFORMANCE OF ITS DUTY AS COMMERCIAL MONEY LENDER.

V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO, PETITIONERS

PREDECESSOR, HAD WAIVED THE RIGHT TO QUESTION THE LEGALITY OF THE
ACCOMMODATION MORTGAGE.

VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY HOLDING THAT
ON REDEMPTION, PETITIONERS SHOULD PAY THE ENTIRE CLAIM OF PNB AGAINST

RESPONDENTS-DEBTORS ESLABONS.

VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD PETITIONERS
DECIDE TO PAY THE ENTIRE CLAIM OF RESPONDENT PNB AGAINST THE RESPONDENTSDEBTORS ESLABONS, PETITIONERS SHALL SUCCEED TO ALL THE RIGHTS OF
RESPONDENT PNB WITH THE RIGHT TO REIMBURSEMENT BY RESPONDENTS-DEBTORS,
ESLABONS.

VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD PETITIONERS
DECIDE NOT TO EXERCISE THEIR RIGHT OF REDEMPTION, PETITIONERS SHALL BE
ENTITLED TO THE VALUE OF THEIR IMPROVEMENTS MADE IN GOOD FAITH AND FOR
THE REAL ESTATE TAX DUE PRIOR TO THE FORECLOSURE SALE.[14]

Petitioners challenge the appreciation of the facts of the appellate court, pointing out
the following facts which the appellate court allegedly failed to fully interpret and
appreciate:

1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an
accommodation mortgagor and that she has no personal liability to respondent PNB.

xxx

2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. D) used to bind
Eduarda Belo as accommodation mortgagor authorized the agent Eslabons to borrow
and mortgage her agricultural land for her (Eduarda Belo) use and benefit. Instead,
said PNB SPA Form No. 74 was used by debtors Eslabons and PNB to bind Eduarda Belo
as accommodation mortgagor for the crop loan extended by PNB to the Eslabons.

3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without
specifying the amount of the loan to be granted by respondent PNB to the
respondents-debtors Eslabons upon assurance by the PNB manager that the SPA was
merely a formality and that the bank will not lend beyond the value of the four (4)
[Roxas City] residential lots located in Roxas City mortgaged by respondents-debtors
Eslabons (see Exhibit D; Eduarda Belos deposition, Exhibit V, pp. 7 to 24).

4. That PNB did not advise Eduarda Belo of the amount of the loan granted to the
Eslabons, did not make demands upon her for payment, did not advise her of Eslabons
default. The pre-auction sale notice intended for Eduarda Belo was addressed and

delivered to the address of the debtors Eslabons residence at Baybay, Roxas City, not
to the Belo Family House which is the residence of Eduarda Belo located in the heart of
Roxas City. The trial court stated in its Decision that the PNB witness Miss Ignacio
admitted that through oversight, no demand letters were sent to Eduarda Belo, the
accommodation mortgagor (see p. 7, RTC Decision).

xxx

5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the loan
which was unpaid at the time of the extrajudicial foreclosure sale was only
P789,897.00.

xxx

6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belos
agricultural land expressly reserved the right to question the legality of the
accommodation mortgage in the event that said tender to redeem was rejected by
PNB (Exh. I).[15]

Petitioners present basically two (2) issues before this Court. First, whether or not the
Special Power of Attorney (SPA for brevity), the real estate mortgage contract, the
foreclosure proceedings and the subsequent auction sale involving Eduarda Belos
property are valid. Second, assuming they are valid, whether or not the petitioners are
required to pay, as redemption price, the entire claim of respondent PNB in the
amount of P2,779,978.72 as of the date of the public auction sale on June 10, 1991.

On the first issue, the petitioners contend that the SPA is void for the reason that the
amount for which the spouses Eslabon are authorized to borrow from respondent bank
was unlimited; and that, while the SPA states that the amount loaned is for the benefit
of Eduarda Belo, it was in fact used for the benefit of the respondents spouses
Eslabon. For the said reasons petitioners contend that the mortgage contract lacks
valid consent, object and consideration; that it violates a concept in the law of agency
which provides that the contract entered into by the agent must always be for the
benefit of the principal; and, that it does not express the true intent of the parties.

The subject SPA, the real estate mortgage contract, the foreclosure proceedings and
the subsequent auction sale of Eduarda Belos property are valid and legal.

First, the validity of the SPA and the mortgage contract cannot anymore be assailed
due to petitioners failure to appeal the same after the trial court rendered its decision
affirming their validity. After the trial court rendered its decision granting petitioners
their alternative cause of action, i.e., that they can redeem the subject property on the
basis of the winning bid price of respondent PNB, petitioners did not anymore bother
to appeal that decision on their first cause of action. If they felt aggrieved by the trial
courts decision upholding the validity of the said two (2) documents, then they should
have also partially appealed therefrom but they did not. It is an abuse of legal
remedies for petitioners to belatedly pursue a claim that was settled with finality due
to their own shortcoming. As held in Caliguia v. National Labor Relations Commission,
[16] where a party did not appeal from the Labor Arbiters decision denying claims for
actual, moral and exemplary damages and instead moved for immediate execution,
the decision then became final as to him and by asking for its execution, he was
estopped from relitigating his claims for damages.

Second, well-entrenched is the rule that the findings of trial courts which are factual in
nature, especially when affirmed by the Court of Appeals, deserve to be respected and
affirmed by the Supreme Court, provided it is supported by substantial evidence.[17]
The finding of facts of the trial court to the effect that Eduarda Belo was not induced
by the manager of respondent PNB but instead that she freely consented to the
execution of the SPA is given the highest respect as it was affirmed by the appellate
court. In the case at bar, the burden of proof was on the petitioners to prove or show
that there was alleged inducement and misrepresentation by the manager of
respondent PNB and the spouses Eslabon. Their allegation that Eduarda Belo only
agreed to sign the SPA after she was assured that the spouses Eslabon would not
borrow more than the value of their own four (4) residential lots in Roxas City was
properly objected to by respondent PNB.[18] Also their contention that Eduarda Belo
signed the SPA in blank was properly objected to by respondent PNB on the ground
that the best evidence was the SPA. There is also no proof to sustain petitioners
allegation that respondent PNB acted in bad faith and connived with the debtors,
respondents spouses Eslabon, to obtain Eduarda Belos consent to the mortgage
through fraud. Eduarda Belo very well knew that the respondents spouses Eslabon
would use her property as additional mortgage collateral for loans inasmuch as the
mortgage contract states that the consideration of this mortgage is hereby initially
fixed at P229,000.00.[19] The mortgage contract sufficiently apprises Eduarda Belo
that the respondents spouses Eslabon can apply for more loans with her property as
continuing additional security. If she found the said provision questionable, she should
have complained immediately. Instead, almost ten (10) years had passed before she
and the petitioners sought the annulment of the said contracts.

Third, after having gone through the records, this Court finds that the courts a quo did
not err in holding that the SPA executed by Eduarda Belo in favor of the respondents
spouses Eslabon and the Real Estate Mortgage executed by the respondents spouses
in favor of respondent PNB are valid. It is stipulated in paragraph three (3) of the SPA
that Eduarda Belo appointed the Eslabon spouses to make, sign, execute and deliver
any contract of mortgage or any other documents of whatever nature or kind .... which

may be necessary or proper in connection with the loan herein mentioned, or with any
loan which my attorney-in-fact may contract personally in his own name ...[20] This
portion of the SPA is quite relevant to the case at bar. This was the main reason why
the SPA was executed in the first place inasmuch as Eduarda Belo consented to have
her land mortgaged for the benefit of the respondents spouses Eslabon. The SPA was
not meant to make her a co-obligor to the principal contract of loan between
respondent PNB, as lender, and the spouses Eslabon, as borrowers. The
accommodation real estate mortgage over her property, which was executed in favor
of respondent PNB by the respondents spouses Eslabon, in their capacity as her
attorneys-in-fact by virtue of her SPA, is merely an accessory contract.

Eduarda Belo consented to be an accommodation mortgagor in the sense that she

signed the SPA to authorize respondents spouses Eslabons to execute a mortgage on
her land. Petitioners themselves even acknowledged that the relation created by the
SPA and the mortgage contract was merely that of mortgagor-mortgagee relationship.
The SPA form of the PNB was utilized to authorize the spouses Eslabon to mortgage
Eduarda Belos land as additional collateral of the Eslabon spouses loan from
respondent PNB. Thus, the petitioners contention that the SPA is void is untenable.
Besides, Eduarda Belo benefited, in signing the SPA, in the sense that she was able to
collect the rentals on her leased property from the Eslabons.[21]

An accommodation mortgage is not necessarily void simply because the

accommodation mortgagor did not benefit from the same. The validity of an
accommodation mortgage is allowed under Article 2085 of the New Civil Code which
provides that (t)hird persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property. An accommodation
mortgagor, ordinarily, is not himself a recipient of the loan, otherwise that would be
contrary to his designation as such. It is not always necessary that the accommodation
mortgagor be appraised beforehand of the entire amount of the loan nor should it first
be determined before the execution of the SPA for it has been held that:

(real) mortgages given to secure future advancements are valid and legal contracts;
that the amounts named as consideration in said contract do not limit the amount for
which the mortgage may stand as security if from the four corners of the instrument
the intent to secure future and other indebtedness can be gathered. A mortgage given
to secure advancements is a continuing security and is not discharged by repayment
of the amount named in the mortgage, until the full amount of the advancements are
paid.[22]

Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to
respondent PNB manifesting her intent to redeem the property is a waiver of her right
to question the validity of the SPA and the mortgage contract as well as the
foreclosure and the sale of her subject property. Petitioners claim that her letter was
not an offer to redeem as it was merely a declaration of her intention to redeem.

Respondent PNBs answer to her letter would have carried certain legal effects. Had
respondent PNB accepted her letter-offer, it would have surely bound the bank into
accepting the redemption price offered by Eduarda Belo. If it was her opinion that her
SPA and the mortgage contract were null and void, she would not have manifested her
intent to redeem but instead questioned their validity before a court of justice. Her
offer was a recognition on her part that the said contracts are valid and produced legal
effects. Inasmuch as Eduarda Belo is estopped from questioning the validity of the
contracts, her assignees who are the petitioners in the instant case, are likewise
estopped from disputing the validity of her SPA, the accommodation real estate
mortgage contract, the foreclosure proceedings, the auction sale and the Sheriffs
Certificate of Sale.

The second issue pertains to the applicable law on redemption to the case at bar.
Respondent PNB maintains that Section 25 of Presidential Decree No. 694 should
apply, thus:

SEC. 25. Right of redemption of foreclosed property Right of possession during

redemption period. - Within one year from the registration of the foreclosure sale of
real estate, the mortgagor shall have the right to redeem the property by paying all
claims of the Bank against him on the date of the sale including all the costs and other
expenses incurred by reason of the foreclosure sale and custody of the property, as
well as charges and accrued interests.[23]

Additionally, respondent bank seeks the application to the case at bar of Section 78 of
the General Banking Act, as amended by P.D. No. 1828, which states that -

In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on

real estate which is security for any loan granted before the passage of this Act or
under the provisions of this Act, the mortgagor or debtor whose real property has been
sold at public auction, judicially or extrajudicially, for the full or partial payment of an
obligation to any bank, banking or credit institution, within the purview of this Act shall
have the right, within one year after the sale of the real estate as a result of the
foreclosure of the respective mortgage, to redeem the property by paying the amount
fixed by the court in the order of execution, or the amount due under the mortgage
deed, as the case may be, with interest thereon at the rate specified in the mortgage,
and all the costs, and judicial and other expenses incurred by the bank or institution
concerned by reason of the execution and sale and as a result of the custody of said
property less the income received from the property.[24]

On the other hand, petitioners assert that only the amount of the winning bidders
purchase together with the interest thereon and on all other related expenses should
be paid as redemption price in accordance with Section 6 of Act No. 3135 which

provides that:

Sec. 6. In all cases in which an extrajudicial sale is made under the special power
hereinbefore referred to, the debtor, his successor in interest or any judicial creditor or
judgment creditor of said debtor, or any person having a lien on the property
subsequent to the mortgage or deed of trust under which the property is sold, may
redeem the same at any time within the term of one year from and after the date of
the sale; and such redemption shall be governed by the provisions of sections four
hundred and sixty-four to four hundred and sixty six, inclusive, of the Code of Civil
Procedure[25], in so far as these are not inconsistent with the provisions of this Act.

Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:

SEC. 28. Time and manner of, and amounts payable on, successive redemptions;
notice to be given and filed. - The judgment obligor, or redemptioner, may redeem the
property from the purchaser, at any time within one (1) year from the date of the
registration of the certificate of sale, by paying the purchaser the amount of his
purchase, within one per centum per month interest thereon in addition, up to the
time of redemption, together with the amount of any assessments or taxes which the
purchaser may have paid thereon after purchase, and interest on such last named
amount at the same rate; and if the purchaser be also a creditor having a prior lien to
that of the redemptioner, other than the judgment under which such purchase was
made, the amount of such other lien, with interest. (Italics supplied)

xxx xxx xxx

This Court finds the petitioners position on that issue to be meritorious.

There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation

mortgagor. The Pre-trial Order and respondent PNBs brief contain a declaration of this
fact. The dispute between the parties is whether Section 25 of P.D. No. 694 applies to
an accommodation mortgagor, or her assignees. The said legal provision does not
make a distinction between a debtor-mortgagor and an accommodation mortgagor as
it uses the broad term mortgagor. The appellate court thus ruled that the provision
applies even to an accommodation mortgagor inasmuch as the law does not make any
distinction. We disagree. Where a word used in a statute has both a restricted and a
general meaning, the general must prevail over the restricted unless the nature of the
subject matter or the context in which it is employed clearly indicates that the limited
sense is intended.[26] It is presumed that the legislature intended exceptions to its
language which would avoid absurd consequences of this character.[27] In the case at
bar, the qualification to the general rule applies. The same provision of Section 25 of

P.D. No. 694 provides that the mortgagor shall have the right to redeem the property
by paying all claims of the Bank against him. From said provision can be deduced that
the mortgagor referred to by that law is one from whom the bank has a claim in the
form of outstanding or unpaid loan; he is also called a borrower or debtor-mortgagor.
On the other hand, respondent PNB has no claim against accommodation mortgagor
Eduarda Belo inasmuch as she only mortgaged her property to accommodate the
Eslabon spouses who are the loan borrowers of the PNB. The principal contract is the
contract of loan between the Eslabon spouses, as borrowers/debtors, and the PNB as
lender. The accommodation real estate mortgage (which secures the loan) is only an
accessory contract. It is our view and we hold that the term mortgagor in Section 25 of
P.D. No. 694 pertains only to a debtor-mortgagor and not to an accommodation
mortgagor.

It is well settled that courts are not to give a statute a meaning that would lead to
absurdities. If the words of a statute are susceptible of more than one meaning, the
absurdity of the result of one construction is a strong argument against its adoption,
and in favor of such sensible interpretation.[28] We test a law by its result. A law
should not be interpreted so as not to cause an injustice. There are laws which are
generally valid but may seem arbitrary when applied in a particular case because of
its peculiar circumstances. We are not bound to apply them in slavish obedience to
their language.[29]

The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair
and unjust to accommodation mortgagors and their assignees. Forcing an
accommodation mortgagor like Eduarda Belo to pay for what the principal debtors
(Eslabon spouses) owe to respondent bank is to punish her for the accommodation
and generosity she accorded to the Eslabon spouses who were then hard pressed for
additional collaterals needed to secure their bank loan. Respondents PNB and spouses
Eslabons very well knew that she merely consented to be a mere accommodation
mortgagor.

The circumstances of the case at bar also provide for ample reason why petitioners
cannot be made to pay the entire liability of the principal debtors, Eslabon spouses, to
respondent PNB.

The trial court found that respondent PNBs application for extrajudicial foreclosure and
public auction sale of Eduarda Belos mortgaged property[30] was filed under Act No.
3135, as amended by P.D. No. 385. The notice of extrajudicial sale, the Certificate of
Sheriffs Sale, and the letter it sent to Eduarda Belo did not mention P. D. No. 694 as
the basis for redemption. As aptly ruled by the trial court -

In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for

value of their redemption rights, PNB should have at least advised them that
redemption would be governed by its Revised Charter or PD 69, and not by Act 3135
and the Rules of Court, as commonly practiced This practice of defendant Bank is
manifestly unfair and unjust to these redemptioners who are caught by surprise and
usually taken aback by the enormous claims of the Bank not shown in the Notice of
Extrajudicial Sale or the Certificate of Sheriffs Sale, as in this case.[31]

Moreover, the mortgage contract explicitly provides that . the mortgagee may
immediately foreclose this mortgage judicially in accordance with the Rules of Court or
extrajudicially in accordance with Act No. 3135, as amended and Presidential Decree
No. 385...[32] Since the mortgage contract in this case is in the nature of a contract of
adhesion as it was prepared solely by respondent, it has to be interpreted in favor of
petitioners. The respondent bank however tries to renege on this contractual
commitment by seeking refuge in the 1989 case of Sy v. Court of Appeals[33] wherein
this Court ruled that the redemption price is equal to the total amount of indebtedness
to the banks claim inasmuch as Section 78 of the General Banking Act is an
amendment to Section 6 of Act No. 3135, despite the fact that the extrajudicial
foreclosure procedure followed by the PNB was explicitly under or in accordance with
Act No. 3135.

In the 1996 case of China Banking Corporation v. Court of Appeals,[34] where the
parties also stipulated that Act No. 3135 is the controlling law in case of foreclosure,
this Court ruled that;

By invoking the said Act, there is no doubt that it must govern the manner in which
the sale and redemption shall be effected. Clearly, the fundamental principle that
contracts are respected as the law between the contracting parties finds application in
the present case, specially where they are not contrary to law, morals, good customs
and public policy.[35]

More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases,[36]
that the General Banking Act and P.D. No. 694 shall prevail over Act No. 3135 with
respect to the redemption price, does not apply here inasmuch as in the said cases the
redemptioners were the debtors themselves or their assignees, and not an
accommodation mortgagor or the latters assignees such as in the case at bar. In the
said cases, the debtor-mortgagors were required to pay as redemption price their
entire liability to the bank inasmuch as they were obligated to pay their loan which is a
principal obligation in the first place. On the other hand, accommodation mortgagors
as such are not in anyway liable for the payment of the loan or principal obligation of
the debtor/borrower. The liability of the accommodation mortgagors extends only up
to the loan value of their mortgaged property and not to the entire loan itself. Hence, it
is only just that they be allowed to redeem their mortgaged property by paying only
the winning bid price thereof (plus interest thereon) at the public auction sale.

One wonders why respondent PNB invokes Act No. 3135 in its contracts without
qualification and yet in the end appears to disregard the same when it finds its
provisions unfavorable to it. This is unfair to the other contracting party who in good
faith believes that respondent PNB would comply with the contractual agreement.

It is therefore our view and we hold that Section 78 of the General Banking Act, as
amended by P.D. No. 1828, is inapplicable to accommodation mortgagors in the
redemption of their mortgaged properties.

While the petitioners, as assignees of Eduarda Belo, are not required to pay the entire
claim of respondent PNB against the principal debtors, spouses Eslabon, they can only
exercise their right of redemption with respect to the parcel of land belonging to
Eduarda Belo, the accommodation mortgagor. Thus, they have to pay the bid price
less the corresponding loan value of the foreclosed four (4) residential lots of the
spouses Eslabon.

The respondent PNB contends that to allow petitioners to redeem only the property
belonging to their assignor, Eduarda Belo, would violate the principle of indivisibility of
mortgage contracts. We disagree.

Article 2089 of the Civil Code of the Philippines, provides that:

A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.

Therefore, the debtors heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as the debt is not completely
satisfied.

Neither can the creditors heir who received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given
in mortgage or pledge, each one of them guarantees only a determinate portion of the
credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable is
satisfied.

There is no dispute that the mortgage on the four (4) parcels of land by the Eslabon
spouses and the other mortgage on the property of Eduarda Belo both secure the loan
obligation of respondents spouses Eslabon to respondent PNB. However, we are not
persuaded by the contention of the respondent PNB that the indivisibility concept
applies to the right of redemption of an accommodation mortgagor and her assignees.
The jurisprudence in Philippine National Bank v. Agudelo[37] is enlightening to the
case at bar, to wit:

xxxxxxxxx

However, Paz Agudelo y Gonzaga (the principal) x x x gave her consent to the lien on
lot No. 878 x x x. This acknowledgment, however, does not extend to lots Nos. 207
and 61 inasmuch as, although it is true that a mortgage is indivisible as to the
contracting parties and as to their successors in interest (Article 1860, Civil code), it is
not so with respect to a third person who did not take part in the constitution thereof
either personally or through an agent x x x. Therefore, the only liability of the
defendant-appellant Paz Agudelo y Gonzaga is that which arises from the aforesaid
acknowledgment but only with respect to the lien and not to the principal obligation
secured by the mortgage acknowledged by her to have been constituted on said lot
No. 878 x x x. Such liability is not direct but a subsidiary one.[38]

xxxxxxxxx

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

xxxxxxxxx

From the wordings of the law, indivisibility arises only when there is a debt, that is,
there is a debtor-creditor relationship. But, this relationship is wanting in the case at
bar in the sense that petitioners are assignees of an accommodation mortgagor and
not of a debtor-mortgagor. Hence, it is fair and logical to allow the petitioners to
redeem only the property belonging to their assignor, Eduarda Belo.

With respect to the four (4) parcels of residential land belonging to the Eslabon
spouses, petitioners - being total strangers to said lots - lack legal personality to
redeem the same. Fair play and justice demand that the respondent PNBs interest of
recovering its entire bank claim should not be at the expense of petitioners, as
assignees of Eduarda Belo, who is not indebted to it. Besides, the letter[39] sent by
respondent PNB to Eduarda Belo states that your (Belo) mortgaged property/ies with
PNB covered by TCT # T-7493 was/were sold at public auction ..... It further states that
You (Belo) have, therefore, one year from July 1, 1991 within which to redeem your
mortgaged property/ies, should you desire to redeem it. Respondent PNB never
mentioned that she was bound to redeem the entire mortgaged properties including
the four (4) residential properties of the spouses Eslabon. The letter was explicit in
mentioning Eduarda Belos property only. From the said statement, there is then an
admission on the part of respondent PNB that redemption only extends to the subject
property of Eduarda Belo for the reason that the notice of the sale limited the
redemption to said property.

WHEREFORE, the petition is partially granted in that the petitioners are hereby allowed
to redeem only the property, covered and described in Transfer Certificate of Title No.
T-7493-Capiz registered in the name of Eduarda Belo, by paying only the bid price less
the corresponding loan value of the foreclosed four (4) residential lots of the
respondents spouses Marcos and Arsenia Eslabon, consistent with the Decision of the
Regional Trial Court of Roxas City in Civil Case No. V-6182.

SO ORDERED.

G.R. No. L-28658

October 18, 1979

VICENTE C. REYES, applicant-appellee,

vs.
FRANCISCO SIERRA, EMILIO SIERRA, ALEJANDRA SIERRA, FELIMON SIERRA, AURELIO
SIERRA, CONSTANCIO SIERRA, CIRILO SIERRA and ANTONIA SANTOS, oppositorsappellants.

DE CASTRO, J.:

Appeal from the decision dated December 29, 1966 of the Court of First Instance of

Rizal Branch 1, Pasig, which declared applicant Vicente Reyes the true and rightful
owner of the land covered by Plan Psu-189753 and ordered the registration of his title
thereto.

On January 3, 1961, Vicente Reyes filed an application for registration of his title to a
parcel of land situated in Antipolo, Rizal and covered by Plan Psu-189753 of the
Bureau of Lands. In his application, he declared that he acquired the land by
inheritance from his father who died sometime in 1944. Applicant is one of the heirs of
the deceased Vicente Reyes Sr. but the other heirs executed a deed of quit claim in
favor of the applicant.

The notice of initial hearing was published in the Official Gazette, and a copy thereof
was posted in a conspicuous place in the land in question and in the municipal building
of Antipolo, Rizal. An opposition was filed by the Director of Lands, Francisco Sierra
and Emilio Sierra. An Order of General Default was issued on June 28, 1962. A motion
to set aside an interlocutory default order was filed by Alejandra, Felimon, Aurelio,
Apolonio, Constancio, Cirilo, all surnamed Sierra and Antonia Santos, thru counsel, and
the trial court issued an Order on February 4, 1966 amending the general order of
default so as to include the aforementioned movants as oppositors.

The case was set for hearing, and after trial the court rendered a decision, the
dispositive portion of which reads as follows:

IN VIEW OF THE ABOVE CONSIDERATIONS this Court declares Vicente Reyes the true
and rightful owner of the land covered by Plan, Psu-189753 and orders the registration
of his title thereto, provided that the title to be issued shall be subject to a public
easement of right of-way over a 2.00 meter-wide strip of the land along Lucay Street
for the latter's widening and improvement.

As soon as this decision is final let, the corresponding degree be issued in favor of
VICENTE REYES, widower, Pilipino, of legal age and resident of 1851 P. Guevarra
Street, Santa Cruz, Manila. (P. 25, Record on Appeal).

Oppositors appealed from the aforesaid decision, with the following assignment of
errors:

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT ARTICLES 1134 AND
1137 OF THE NEW CIVIL CODE ARE APPLICABLE TO THIS INSTANT CASE ALTHOUGH
THERE WAS NO FORECLOSURE OR SALE OF THE PROPERTY TO THE HIGHEST BIDDER.

II

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT APPLICANT-APPELLEE

AND HIS PREDECESSOR-IN-INTEREST HAD BEEN IN CONSTRUCTIVE POSSESSION OF
THE LAND FROM APRIL 19, 1926 UP TO THE PRESENT AS SHOWING BY THE FACT THAT
THEY HAD PAID THE REALTY TAXES.

III

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT BECAUSE OPPOSITORSAPPELLANTS AND THEIR PREDECESSORS-IN-INTEREST HAD NOT TAKEN ANY ACTIVE
INTEREST TO PAY REALTY TAXES SINCE 1926 AND IT WAS APPLICANT- APPELLEE AND
HIS PREDECESSOR-IN-INTEREST THAT PAID THE REALTY 'TAXES FROM THE SAME
PERIOD, THIS CONSTITUTES STRONG CORROBORATING EVIDENCE OF APPLICANT'S
ADVERSE POSSESSION.

IV

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT DOCUMENT EXH. "D"
EXECUTED BY BASILIA BELTRAN IN 1926 WAS ALREADY A CONVEYANCE OF THE LAND I
N QUESTION TO VICENTE REYES AND THE FAILURE OF BASILIA BELTRAN AND HER
CHILDREN TO REDEEM THE SAME, COULD BE CONSIDERED AS IF THE LAND HAD
ALREADY BEEN SOLD TO HIM. (p. 2 1, Rollo.)

The land applied for was originally owned by Basilia Beltran's parents, and upon their
death in 1894, Basilia inherited the property. On April 19, 1926, Basilia Beltran, a
widow, borrowed from applicant's father, Vicente Reyes, Sr. the amount of P100.00
and secured the loan with the piece of land in question, AS evidenced by exhibit "D"
quoted hereunder:

SA KAALAMAN NANG LAHAT NA BUMASA AT

NAKAKITA NITONG KASULATAN:

Kaming mag-kakapatid may sapat na gulang na nakalagda Sa kasulatan ito, bilang

katibayan nang pag papahintulot sa aming Ina na si Bacilia Beltran na ipananagutan
kay G. Vicente Reyes sa inutang ha halagang isang daan piso (P100.00) na walang
anopamang pakinabang; ang isang lagay na lupa sa kallehon Sukay, Antipolo, Rizal,
naliligiran nang mga lupang may titulo Torrents, expendientes Nos. 770, 1831, lote 1,
645 at 1839 lote 2, may kabu-uan humigit kumulang sa apat na raan metro; ito'y aring
naiwan ng ama naming namatay na si Melecio Sierra.

Ang katotohanan kahit isangla o ipag-bile man ng tuluyan ang nasabing pag-aaral' o
lupa wala kaming kinalaman, sapagkat ipinauubaya nang lubusan sa arming Ina ang
kapamahalaan.

Sa katunayan nagsilagda kaming mga anak, at apo kay Esteban, sa harap nang
saksing magpapatotoo.

Ngayon ika 19 nang Abril nang 1926. Antipolo, Rizal. K.P.

Lagda ni

Bacilia Beltran

Gregorio Sierra

Saksi:

-------------------------

-------------------------

Since the execution of this document, Vicente Reyes, Sr. began paying the realty taxes
up to the time of his death in 1944, after which, his children continued paying the
taxes. Basilia Beltran died in 1938 before Reyes could recover from the loan.

Applicant, in seeking the registration of the land, relied on his belief that the property
belongs to his father who bought the same from Basilia Beltran, as borne out by his
testimony during the trial on direct examination.

Q.
Mr. Reyes, do you claim to be the owner of this property included or
described in your application?

A Yes, sir.

How did you acquire this property'?

A.

Since 1926 we were the ones paying the land taxes.

Q.

From whom did you acquire this property?

A.

Basilia Beltran.

Q.

Do you mean to say that you yourself bought this property.

A.

My father was the one who bought the property.

Q.

What is the name of your father?

A.

Vicente C. Reyes.

Q.

Where is he now?

A.

He is already dead.

Q.
Can you inform this Honorable Court, if you know, how your father acquired
this property?

A.

Since 1926 my father bought that land.

Q.

Was that transaction evidenced by a document?

A.

Yes, there is a document.

Q.

From whom did your father allegedly purchase the property?

A.

Basilia Beltran.

From the above-quoted testimony of applicant, it is evident that he considered the

document marked Exhibit "D as contract of Sale and not as a mortgage. Oppositors
contended that the words "isinangla," "na ipananagutan sa inutang na halagang isang
daang piso," "Kahit isangla o ipagbili," etc., manifest that the document should be
treated as a mortgage, antichresis, or pactum commission and not as an absolute sale
or pacto de retro sale. (p. 28, Brief, Oppositors-Appellants).

The Court is of the opinion that Exhibit "D" is a mortgage contract. The intention of the
parties at the time of the execution of the contract must prevail, that is, the borrowing
and lending of money with security. The use of the word Debt (utang) in an agreement
helps to point out that the transaction was intended to be a loan with mortgage,
because the term "utang" implies the existence of a creditor-debtor relationship. The '
Court has invariably upheld the validity of an agreement or understanding whereby
the lender of money has taken a deed to the land as security for repayment of the
loan. Thus:

The fact that the real transaction between the parties was a borrowing and lending,
will, whenever, or however, it may appear, show that a deed, absolute on its face was
intended as a security for money; and whenever it can be ascertained to be a security
for money, it is only a mortgage, however artfully it may be disguised. (Villa vs.
Santiago, 38 Phil. 163).

The whole case really turns on the question of whether the written instrument in
controversy was a mortgage or a conditional sale. ... The real intention of the parties
at the time the written instrument was made must concern in the interpretation given
to it by the courts. ... The correct test, where it can be applied, is the continued
existence of a debt or liability between the parties. If such exists, the conveyance may

be held to be merely a security for the debt or an indemnity against the liability.
(Cuyugan vs. Santos, 34 Phil. 112).

The Cuyugan Case quoted some provisions in Jones' Commentaries on Evidence, vol.
3, paragraphs 446-447 which are likewise applicable to the facts of the case at bar:

446.
To show that instruments apparently absolute are only securities. ... It is an
established doctrine that a court of equity will treat a deed, absolute in form, as a
mortgage, when it is executed as security for loan of money, The court looks beyond
the terms of the instrument to the real transaction; and when that is shown to be one
of security and not of sale, it will give effect to the actual contract of the parties.

447.
Same-Real intention of the parties to be ascertained ... As we have shown in
the preceding section, the intention of the parties must govern and it matters not what
peculiar form the transaction may have taken. The inquiry always is, Was a security for
the loan of money or other property intended? ... A debt owing to the mortgagee, or a
liability incurred for the grantor, either pre-existing or created at the time the deed is
made, is essential to give the deed the character of a mortgage. The relation of debtor
and creditor must appear. The existence of the debt is one on the tests. ... In
construing the deed to be a mortgage, its character as such must have existed from
its very inception, - created at the time the conveyance was made.

The same principle was laid down in a later case, that of Macapinlac vs. Gutierrez
Rapide, 43 Phil. 781, quoting 3 Pomeroy's Equity Jurisdiction, Section .1195, wherein it
was stated:

... The doctrine has been firmly established from an early day that when the character
of a mortgage has attached at the commencement of the transaction, so that the
instrument, whatever be its form, is regarded in equity as a mortgage, that character
of mortgage must and will always continue. If the instrument is in its essence a
mortgage, the parties cannot by any stipulations, however express and positive,
render it anything but a mortgage or deprive it of the essential attributes belonging to
a mortgage in equity.

Concerning the legal effects of such contract, Pomeroy observes:

... Whenever a deed absolute on its face is thus treated as a mortgage, the parties are
clothed with all the rights, are subject to all liabilities, and are entitled to all the
remedies of ordinary mortgagors and mortgagees. The grantee may maintain an
action for the foreclosure of the grantor equity of redemption; the grantor may

maintain an action to redeem and to compel a reconvayance upon his payment of the
debt secured. If the grantee goes into possession, and as such is liable to account for
the rents and profits.

Obviously, from the nature of the transaction, applicant's predecessor-in-interest is a

mere mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran,
the mortgagor. The mortgagee, however, may recover the loan, although the
mortgage document evidencing the loan was non-registrable being a purely private
instrument. Failure of mortgagor to redeem the property does not automatically vest
ownership of the property to the mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This violates the provision of Article
2088 of the New Civil Code, which reads:

The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose by them. Any stipulation to the contrary is null and void.

The act of applicant in registering the property in his own name upon mortgagor's
failure to redeem the property would amount to a pactum commissorium which is
against good morals and public policy.

In declaring applicant as the "true and rightful owner of the land in question," the trial
court held that applicant and his predecessor-in- interest acquired ownership over the
property by means of prescription having been in constructive possession of the land
applied for since 1926, applying Arts, 1134 and 1137 of the New Civil Code:

Art. 1134. Ownership and other real rights over immovable property are
acquired by ordinary prescription through possession of ten years.

Art. 1137. Ownership and other real rights over immovables also prescribe
through uninterrupted adverse possession thereof for thirty years, without need of title
or good faith.

Applicant in his testimony on cross-examination, admitted that he and his father did
not take possession of the property but only made use of the same for the purpose of
spending vacation there, which practice they discontinued for the last 23 years.
Possession of the property must. be in the concept of an owner. This is a fundamental
principle of the law of prescription in this jurisdiction. In the case at bar, the
possession of applicant was not adverse, nor continuous.

An applicant for registration of title must prove his title and should not rely on the
absence or weakness of the evidence of the oppositors. For purposes of prescription,
there is just title when adverse claimant came into possession of the property through
one of the modes recognized by law for the acquisition of ownership (Art. 1129, New
Civil Code). Just title must be proved and is never presumed (Art. 1131, New Civil
Code). Mortgage does not constitute just title on the part of the mortgagee. since
ownership is retained by the mortgagor. When possession is asserted to convert itself
into ownership, a new right is sought to be created, and the law becomes more
exacting and requires positive proof of title. Applicant failed to present sufficient
evidence to prove that he is entitled to register the property. The trial court's finding
that since applicant and his father had been continuously paying the realty taxes, that
fact "constitutes strong corroborating evidence of applicant's adverse possession,"
does not carry much weight. Mere failure of the owner to pay the taxes does not
warrant a conclusion that there was abandonment of a right to the property. The
payment of taxes on property does not alone constitute sufficient evidence of title.
(Elumbaring vs. Elumbaring, 12 Phil. 389)

The belief of applicant that he owns the property in question which he inherited from
his father cannot overthrow the fact that the transaction is a mortgage. The doctrine
"once a mortgage always a mortgage" has been firmly established whatever be its
form. (Macapinlac vs. Gutierrez Rapide, supra) The parties cannot by any stipulation,
however express and positive, render it anything but a mortgage. No right passes to
applicant except that of a mortgage since one cannot acquire a right from another
who was not in possession thereof A derivative right cannot rise higher than its source.

Applicant having failed to show by sufficient evidence a registrable title to the land in
question, the application for registration should be dismissed.

WHEREFORE, the decision appealed from is hereby set aside, and let another one be
entered ordering the registration of the title of the land in question in the name of the
oppositors- appellants. The said oppositors-appellants are hereby directed to pay the
applicant- appellee within ninety (90) days from the finality of this decision, the debt in
the amount of P100.00 plus interest at the rate of six per cent (6%) per annum from
April 19, 1926 until paid. No pronouncement as to costs.

SO ORDERED.

[G.R. No. 125055. October 30, 1998]

A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner, vs. COURT OF

APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P. JAVILLONAR,

respondents.
DECISION
MENDOZA, J.:

This is a petition for review on certiorari of the decision rendered on February 29, 1996
by the Court of Appeals[1] reversing, in toto, the decision of the Regional Trial Court of
Pasig City in Civil Case No. 62290, as well as the appellate courts resolution of May 7,
1996 denying reconsideration.

Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5

Million to private respondents, the spouses Romulo and Erlinda Javillonar, in
consideration of which the latter executed the following documents: (a) a promissory
note, dated November 27, 1991, stating an interest charge of 4% per month for six
months; (b) a deed of mortgage over realty covered by TCT No. 58748, together with
the improvements thereon; and (c) an undated deed of sale of the mortgaged property
in favor of the mortgagee, petitioner A. Francisco Realty.[2]

The interest on the said loan was to be paid in four installments: half of the total
amount agreed upon (P900,000.00) to be paid in advance through a deduction from
the proceeds of the loan, while the balance to be paid monthly by means of checks
post-dated March 27, April 27, and May 27, 1992. The promissory note expressly
provided that upon failure of the MORTGAGOR [private respondents] to pay the
interest without prior arrangement with the MORTGAGEE [petitioner], full possession of
the property will be transferred and the deed of sale will be registered.[3] For this
purpose, the owners duplicate of TCT No. 58748 was delivered to petitioner A.
Francisco Realty.

Petitioner claims that private respondents failed to pay the interest and, as a
consequence, it registered the sale of the land in its favor on February 21, 1992. As a
result, TCT No. 58748 was cancelled and in lieu thereof TCT No. PT-85569 was issued in
the name of petitioner A. Francisco Realty.[4]

Private respondents subsequently obtained an additional loan of P2.5 Million from

petitioner on March 13, 1992 for which they signed a promissory note which reads:

PROMISSORY NOTE

For value received, I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT

CORPORATION, the additional sum of Two Million Five Hundred Thousand Pesos
(P2,500,000.00) on or before April 27, 1992, with interest at the rate of four percent
(4%) a month until fully paid and if after the said date this note and/or the other
promissory note of P7.5 Million remains unpaid and/or unsettled, without any need for
prior demand or notification, I promise to vacate voluntarily and willfully and/or allow
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION to appropriate and occupy
for their exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig,
Metro Manila.[5]

Petitioner demanded possession of the mortgaged realty and the payment of 4%

monthly interest from May 1992, plus surcharges. As respondent spouses refused to
vacate, petitioner filed the present action for possession before the Regional Trial
Court in Pasig City.[6]

In their answer, respondents admitted liability on the loan but alleged that it was not
their intent to sell the realty as the undated deed of sale was executed by them
merely as an additional security for the payment of their loan. Furthermore, they
claimed that they were not notified of the registration of the sale in favor of petitioner
A. Francisco Realty and that there was no interest then unpaid as they had in fact been
paying interest even subsequent to the registration of the sale. As an alternative
defense, respondents contended that the complaint was actually for ejectment and,
therefore, the Regional Trial Court had no jurisdiction to try the case. As counterclaim,
respondents sought the cancellation of TCT No. PT-85569 as secured by petitioner and
the issuance of a new title evidencing their ownership of the property.[7]

On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive
portion of which reads as follows:

WHEREFORE, prescinding from the foregoing considerations, judgment is hereby

rendered declaring as legal and valid, the right of ownership of A. Francisco Realty And
Development Corporation, over the property subject of this case and now registered in
its name as owner thereof, under TCT No. 85569 of the Register of Deeds of Rizal,
situated at No. 56 Dragonfly Street, Valle Verde VI, Pasig, Metro Manila.

Consequently, defendants are hereby ordered to cease and desist from further
committing acts of dispossession or from withholding possession from plaintiff, of the
said property as herein described and specified.

Claim for damages in all its forms, however, including attorneys fees, are hereby
denied, no competent proofs having been adduced on record, in support thereof.[8]

Respondent spouses appealed to the Court of Appeals which reversed the decision of
the trial court and dismissed the complaint against them. The appellate court ruled
that the Regional Trial Court had no jurisdiction over the case because it was actually
an action for unlawful detainer which is exclusively cognizable by municipal trial
courts. Furthermore, it ruled that, even presuming jurisdiction of the trial court, the
deed of sale was void for being in fact a pactum commissorium which is prohibited by
Art. 2088 of the Civil Code.

Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of
Appeals denied the motion in its resolution, dated May 7, 1996. Hence, this petition for
review on certiorari raising the following issues:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL
TRIAL COURT HAD NO JURISDICTION OVER THE COMPLAINT FILED BY THE PETITIONER.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE

CONTRACTUAL DOCUMENTS SUBJECT OF THE INSTANT CASE ARE CONSTITUTIVE OF
PACTUM COMMISSORIUM AS DEFINED UNDER ARTICLE 2088 OF THE CIVIL CODE OF
THE PHILIPPINES.

On the first issue, the appellate court stated:

Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer,
as contra-distinguished from accion publiciana. As contemplated by Rule 70 of the
Rules of Court, an action for unlawful detainer which falls under the exclusive
jurisdiction of the Metropolitan or Municipal Trial Courts, is defined as withholding from
by a person from another for not more than one year, the possession of the land or
building to which the latter is entitled after the expiration or termination of the
supposed rights to hold possession by virtue of a contract, express or implied. (Tenorio
vs. Gamboa, 81 Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). If no action is initiated for
forcible entry or unlawful detainer within the expiration of the 1 year period, the case
may still be filed under the plenary action to recover possession by accion publiciana
before the Court of First Instance (now the Regional Trial Court) (Medina vs. Valdellon,
63 SCRA 278). In plain language, the case at bar is a legitimate ejectment case filed
within the 1 year period from the jurisdictional demand to vacate. Thus, the Regional
Trial Court has no jurisdiction over the case. Accordingly, under Section 33 of B.P. Blg.
129 Municipal Trial Courts are vested with the exclusive original jurisdiction over
forcible entry and unlawful detainer case. (Sen Po Ek Marketing Corp. vs. CA, 212 SCRA
154 [1990])[9]

We think the appellate court is in error. What really distinguishes an action for unlawful
detainer from a possessory action (accion publiciana) and from a reivindicatory action
(accion reivindicatoria) is that the first is limited to the question of possession de facto.

An unlawful detainer suit (accion interdictal) together with forcible entry are the two
forms of an ejectment suit that may be filed to recover possession of real property.
Aside from the summary action of ejectment, accion publiciana or the plenary action
to recover the right of possession and accion reivindicatoria or the action to recover
ownership which includes recovery of possession, make up the three kinds of actions
to judicially recover possession.

Illegal detainer consists in withholding by a person from another of the possession of a

land or building to which the latter is entitled after the expiration or termination of the
formers right to hold possession by virtue of a contract, express or implied. An
ejectment suit is brought before the proper inferior court to recover physical
possession only or possession de facto and not possession de jure, where
dispossession has lasted for not more than one year. Forcible entry and unlawful
detainer are quieting processes and the one-year time bar to the suit is in pursuance
of the summary nature of the action. The use of summary procedure in ejectment
cases is intended to provide an expeditious means of protecting actual possession or
right to possession of the property. They are not processes to determine the actual
title to an estate. If at all, inferior courts are empowered to rule on the question of
ownership raised by the defendant in such suits, only to resolve the issue of
possession. Its determination on the ownership issue is, however, not conclusive.[10]

The allegations in both the original and the amended complaints of petitioner before
the trial court clearly raise issues involving more than the question of possession, to
wit: (a) the validity of the transfer of ownership to petitioner; (b) the alleged new
liability of private respondents for P400,000.00 a month from the time petitioner made
its demand on them to vacate; and (c) the alleged continuing liability of private
respondents under both loans to pay interest and surcharges on such. As petitioner A.
Francisco Realty alleged in its amended complaint:

5. To secure the payment of the sum of P7.5 Million together with the monthly interest,
the defendant spouses agreed to execute a Deed of Mortgage over the property with
the express condition that if and when they fail to pay monthly interest or any
infringement thereof they agreed to convert the mortgage into a Deed of Absolute
Sale in favor of the plaintiff by executing Deed of Sale thereto, copy of which is hereto
attached and incorporated herein as Annex A;

6. That in order to authorize the Register of Deeds into registering the Absolute Sale
and transfer to the plaintiff, defendant delivered unto the plaintiff the said Deed of

Sale together with the original owners copy of Transfer Certificate of Title No. 58748 of
the Registry of Rizal, copy of which is hereto attached and made an integral part
herein as Annex B;

7. That defendant spouses later secured from the plaintiff an additional loan of P2.5
Million with the same condition as aforementioned with 4% monthly interest;

8. That defendants spouses failed to pay the stipulated monthly interest and as per
agreement of the parties, plaintiff recorded and registered the Absolute Deed of Sale
in its favor on and was issued Transfer Certificate of Title No. PT-85569, copy of which
is hereto attached and incorporated herein as Annex C;

9. That upon registration and transfer of the Transfer Certificate of Title in the name of
the plaintiff, copy of which is hereto attached and incorporated herein as Annex C,
plaintiff demanded the surrender of the possession of the above-described parcel of
land together with the improvements thereon, but defendants failed and refused to
surrender the same to the plaintiff without justifiable reasons thereto; Neither did the
defendants pay the interest of 4% a month from May, 1992 plus surcharges up to the
present;

10. That it was the understanding of the parties that if and when the defendants shall
fail to pay the interest due and that the Deed of Sale be registered in favor of plaintiff,
the defendants shall pay a monthly rental of P400,000.00 a month until they vacate
the premises, and that if they still fail to pay as they are still failing to pay the amount
of P400,000.00 a month as rentals and/or interest, the plaintiff shall take physical
possession of the said property;[11]

It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues
which involved more than a simple claim for the immediate possession of the subject
property. Such issues range across the full scope of rights of the respective parties
under their contractual arrangements. As held in an analogous case:

The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of
Hagonoy, Bulacan extended far beyond the issues generally involved in unlawful
detainer suits. The litigants therein did not raise merely the question of who among
them was entitled to the possession of the fishpond of Federico Suntay. For all judicial
purposes, they likewise prayed of the court to rule on their respective rights under the
various contractual documents their respective deeds of lease, the deed of
assignment and the promissory note upon which they predicate their claims to the
possession of the said fishpond. In other words, they gave the court no alternative but
to rule on the validity or nullity of the above documents. Clearly, the case was

converted into the determination of the nature of the proceedings from a mere
detainer suit to one that is incapable of pecuniary estimation and thus beyond the
legitimate authority of the Justice of the Peace Court to rule on.[12]

Nor can it be said that the compulsory counterclaim filed by respondent spouses
challenging the title of petitioner A. Francisco Realty was merely a collateral attack
which would bar a ruling here on the validity of the said title.

A counterclaim is considered a complaint, only this time, it is the original defendant

who becomes the plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It stands on the same
footing and is to be tested by the same rules as if it were an independent action.
Hence, the same rules on jurisdiction in an independent action apply to a counterclaim
(Vivar v. Vivar, 8 SCRA 847 (1963); Calo v. Ajax International, Inc. v. 22 SCRA 996
(1968); Javier v. Intermediate Appellate Court, 171 SCRA 605 (1989); Quiason,
Philippine Courts and Their Jurisdictions, 1993 ed., p. 203).[13]

On the second issue, the Court of Appeals held that, even on the assumption that the
trial court has jurisdiction over the instant case, petitioners action could not succeed
because the deed of sale on which it was based was void, being in the nature of a
pactum commissorium prohibited by Art. 2088 of the Civil Code which provides:

ART. 2088. The creditor cannot appropriate the things given by way to pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.

With respect to this question, the ruling of the appellate court should be affirmed.
Petitioner denies, however, that the promissory notes contain a pactum
commissorium. It contends that

What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in
the deed of mortgage providing for the automatic conveyance of the mortgaged
property in case of the failure of the debtor to pay the loan (Tan v. West Coast Life
Assurance Co., 54 Phil. 361). A pactum commissorium is a forfeiture clause in a deed
of mortgage (Hechanova v. Adil, 144 SCRA 450; Montevergen v. Court of Appeals, 112
SCRA 641; Report of the Code Commission, 156).

Thus, before Article 2088 can find application herein, the subject deed of mortgage
must be scrutinized to determine if it contains such a provision giving the creditor the
right to appropriate the things given by way of mortgage without following the
procedure prescribed by law for the foreclosure of the mortgage (Ranjo v. Salmon, 15
Phil. 436). IN SHORT, THE PROSCRIBED STIPULATION SHOULD BE FOUND IN THE

MORTGAGE DEED ITSELF.[14]

The contention is patently without merit. To sustain the theory of petitioner would be
to allow a subversion of the prohibition in Art. 2088.

In Nakpil v. Intermediate Appellate Court,[15] which involved the violation of a

constructive trust, no deed of mortgage was expressly executed between the parties
in that case. Nevertheless, this Court ruled that an agreement whereby property held
in trust was ceded to the trustee upon failure of the beneficiary to pay his debt to the
former as secured by the said property was void for being a pactum commissorium. It
was there held:

The arrangement entered into between the parties, whereby Pulong Maulap was to be
considered sold to him (respondent) x x x in case petitioner fails to reimburse Valdes,
must then be construed as tantamount to a pactum commissorium which is expressly
prohibited by Art. 2088 of the Civil Code. For, there was to be automatic appropriation
of the property by Valdez in the event of failure of petitioner to pay the value of the
advances. Thus, contrary to respondents manifestations, all the elements of a pactum
commissorium were present: there was a creditor-debtor relationship between the
parties; the property was used as security for the loan; and, there was automatic
appropriation by respondent of Pulong Maulap in case of default of petitioner.[16]

Similarly, the Court has struck down such stipulations as contained in deeds of sale
purporting to be pacto de retro sales but found actually to be equitable mortgages.

It has been consistently held that the presence of even one of the circumstances
enumerated in Art. 1602 of the New Civil Code is sufficient to declare a contract of
sale with right to repurchase an equitable mortgage. This is so because pacto de retro
sales with the stringent and onerous effects that accompany them are not favored. In
case of doubt, a contract purporting to be a sale with right to repurchase shall be
construed as an equitable mortgage.

Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing
that complete and absolute title shall be vested on the vendee should the vendors fail
to redeem the property on the specified date. Such stipulation that the ownership of
the property would automatically pass to the vendee in case no redemption was
effected within the stipulated period is void for being a pactum commissorium which
enables the mortgagee to acquire ownership of the mortgaged property without need
of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage
rather that to sell the property.[17]

Indeed, in Reyes v. Sierra[18] this Court categorically ruled that a mortgagees mere
act of registering the mortgaged property in his own name upon the mortgagors
failure to redeem the property amounted to the exercise of the privilege of a
mortgagee in a pactum commissorium.

Obviously, from the nature of the transaction, applicants predecessor-in-interest is a

mere mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran,
the mortgagor. The mortgagee, however, may recover the loan, although the
mortgage document evidencing the loan was nonregistrable being a purely private
instrument. Failure of mortgagor to redeem the property does not automatically vest
ownership of the property to the mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This violates the provision of Article
2088 of the New Civil Code, which reads:

The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose by them. Any stipulation to the contrary is null and void.

The act of applicant in registering the property in his own name upon mortgagors
failure to redeem the property would amount to a pactum commissorium which is
against good morals and public policy.[19]

Thus, in the case at bar, the stipulations in the promissory notes providing that, upon
failure of respondent spouses to pay interest, ownership of the property would be
automatically transferred to petitioner A. Francisco Realty and the deed of sale in its
favor would be registered, are in substance a pactum commissorium. They embody
the two elements of pactum commissorium as laid down in Uy Tong v. Court of
Appeals,[20] to wit:

The prohibition on pactum commissorium stipulations is provided for by Article 2088 of

the Civil Code:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgagee, or dispose of the same. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes 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.[21]

The subject transaction being void, the registration of the deed of sale, by virtue of
which petitioner A. Francisco Realty was able to obtain TCT No. PT-85569 covering the
subject lot, must also be declared void, as prayed for by respondents in their
counterclaim.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed

petitioners complaint against respondent spouses on the ground that the stipulations
in the promissory notes are void for being a pactum commissorium, but REVERSED
insofar as it ruled that the trial court had no jurisdiction over this case. The Register of
Deeds of Pasig City is hereby ORDERED to CANCEL TCT No. PT-85569 issued to
petitioner and ISSUE a new one in the name of respondent spouses.

SO ORDERED.

G.R. No. L-44943

March 17, 1982

SOCORRO MONTEVIRGEN, et. al., petitioners,

vs.
COURT OF APPEALS, SPOUSES SERAFIN ABUTIN and CARMEN SENIR, respondents.

DE CASTRO, J.:

This is a petition for review on certiorari of the decision of the Court of Appeals
promulgated on June 8, 1976 affirming in toto the Order of the Court of First Instance
of Cavite, Branch III in Civil Case No. N-1609, promulgated on September 17, 1974.

The factual background of the case is as follows:

Petitioners Montevirgen filed an action against respondent-spouses Serafin Abutin and

Carmen Senir in the Court of First Instance of Cavite, Branch III, for the annulment of a
deed of sale with pacto de retro, over a parcel of land situated in Barrio Alima, Bacoor,
Cavite, title to which was transferred to respondents upon the registration of the deed
of pacto de retro sale. On July 1, 1971, the trial court, by virtue of the agreement
reached by the parties, rendered a decision declaring the transaction an equitable
mortgage and fixing a period of ten (10) months from July 1, 1971 within which the
petitioners must pay their obligation with legal interest, otherwise execution would
follow. 1

Petitioners having failed to pay their obligation within the ten-month period,
respondents moved for execution of the decision of July 1, 1971. Petitioners opposed
the motion for execution alleging that there must be a foreclosure of mortgage upon
failure to redeem and not an outright execution sale. Said opposition was denied by
the trial court and an Order of Execution was issued on May 10, 1972. Upon
implementation of said order, the Clerk of Court issued two writs of execution, the
first, directing the Provincial Sheriff of Cavite to levy on the properties of petitioners to
satisfy the sum of P57,500.00 plus legal interest of 12% thereon commencing from
February 2, 1969 and sum of P11,104.32 plus legal interest of 12% to commence from
May 15, 1969; and second, directing the Provincial Sheriff to sell at public auction the
described properties with all the improvements existing thereon.

Petitioners moved to quash the writ of execution alleging that said writ was at
variance with the decision, firstly, because the decision merely directed the imposition
of legal interest which is 6% per annum and secondly, because it included the new
construction on the lot in question. On September 8, 1972, the lower court denied the
motion to quash writ of execution. The Provincial Sheriff accordingly executed the
writs. Upon motion filed by respondents, the sale was confirmed by the trial court in an
Order dated September 25, 1972.

On October 5, 1972, petitioners filed a Motion to Annul the Sheriff's Certificate of Sale
alleging again that the writ of execution was at variance and contrary to the decision
and at the same time calling attention to the fact that on September 21, 1972
respondents demolished the old house in the subject premises. In an order dated
October 20, 1972, the trial court granted petitioner's Motion and ordered the writ of
execution to be amended so "that the new construction may not be the object of the
occupation by the defendant and that the interest mentioned therein which is legal
interest, must be 6%."

Respondents went to the Court of Appeals on certiorari (docketed as CA-G. R. No. SP01813) alleging that the confirmation of the sale on September 25, 1972 divested the
trial court of its jurisdiction and therefor its order amending the writ of execution was
issued without jurisdiction. The Court of Appeals dismissed the petition in its
Resolution of June 11, 1972. On appeal to this Court, this Court denied the petition for
lack of merit in an Order dated November 6, 1973. Motion for reconsideration was

again denied on December 7, 1973.

On July 24, 1974, respondents filed in the Court of First Instance another motion for
execution sale on the ground that the previous auction sales conducted were declared
void either from failure to conform with the judgment, or with the requirements of the
law in the conduct of auction sales. This was opposed by petitioners on August 7, 1974
with prayer for the cancellation of T.C.T. No. 35236 then registered in the name of
respondents, and the issuance of a new title in their names subject to equitable
mortgage right of respondents. Replying to the opposition, respondents asked for the
enforcement of the judgment of July 1, 1971 by asking for an auction sale. In resolving
the issues posed, the trial court held:

Under the circumstances this Court holds that plaintiffs cannot demand reconveyance
and there is even no need for an auction sale of this property since this property was
already titled in the name of the defendants as early as February 24, 1969 even before
this action was instituted.

xxx

xxx

xxx

In the case at bar, the foreclosure sale effected by the Provincial Sheriff was a
ceremonial futility because as may be gleaned in the Decision the only right
recognized in favor of plaintiffs Socorro Montevirgen was to repurchase the property
within the 10 month period prescribed therein; if they had done so, then the
defendants would have been ordered to reconvey the property to the plaintiffs; having
failed to do so, they have lost the equity recognized in their favor by the Decision. ...

WHEREFORE, in view of the foregoing, this Court denied defendants' Motion for
Auction Sale as well as the reliefs prayed for by plaintiffs in their opposition on August
7, 1974 and hereby declares that the execution of the Decision of July 1, 1971 does
not require the holding of any auction sale; that the auction sale previously held were
all unnecessary; that upon failure of plaintiffs to pay their obligation within the ten
month period from July 1, 1971, the absolute ownership over the land with the old
construction described in the Deed of Pacto de Retro Sale, and now registered in the
name of defendants under T.C.T. No. 35236 of the Register of Deeds of the Province of
Cavite has become consolidated in the defendants, and relieved of plaintiffs equity.
Plaintiff's right to remain in possession in a concept other than owner should be
threshed out in an unlawful detainer or other appropriate possessory action including
the fixing of rentals as this suit was filed for the purpose only of determining the
nature of the Deed of Sale with Pecto de Retro. 2 (Emphasis supplied)

On appeal to the Court of Appeals, the trial court's order of September 17, 1974 was

affirmed in toto in its decision of June 8, 1976, holding as follows:

But this notwithstanding, the points sticking out like a sore thumb in appellants thesis
is, that he has not to this date paid his obligation to the appellees within the 10 month
period as required in the judgment. This in fact gave occasion for the judgment to
become executory. As said earlier, the judgment was the result of an agreement by
and between the parties and this being so, the judgment became executory at the end
of the 10 month period. When it was executed, the execution may be reasonably
considered as a foreclosure of the mortgage. The appellant did not seek to redeem the
same as he has not to this date moved in that direction. Therefore, his right to redeem
has long since expired. 3

Upon denial of these two Motions for Reconsideration dated August 9, 1976 and
October 18, 1976, petitioners filed this instant petition raising questions of law in
which, if reduced to essential the main issue would be whether or not respondent
Court of Appeals correctly affirmed the trial court's Order of September 17, 1974
interpreting, in effect, its Decision of July 1, 1971. Pursuant to Our Resolution of March
9, 1977, this Court issued a Temporary Restraining Order restraining private
respondents from entering into any transaction affecting or disposing of the land in
question.

The appeal is impressed with merit.

1.
Perusal of the Court of Appeals' decision affirming in toto the trial court's
order of September 17, 1974, shows that it has interpreted the trial court's decision of
July 1, 1971 to mean that upon failure of the petitioners to pay their obligation within
the period as fixed in the judgment, petitioners also lost the right to redeem the
property and as such, the absolute ownership over the subject premises has become
consolidated in the respondents.

We do not agree with the respondent court's interpretation. It contradicts the

agreement between the parties and the declaration in the decision that the contract
between the parties was an equitable mortgage, not a pacto de retro sale. It would
produce the same effect as a pactum commissurium, a forfeiture clause that has
traditionally been held as contrary to good morals and public policy and, therefore,
void. 4

Thus, in the analogous case of Guanzon vs. Argel 5 this Court speaking thru Justice JBL
Reyes, affirmed the lower court's decision denying petitioner Guanzon's prayer that
the Provincial Sheriff be ordered to execute the necessary conveyance of the property
in question in her favor and that she be placed in the possession thereof, for failure of

private respondents Dumaraogs to pay the loan of P1,500 within the period also as
specified in the judgment. As therein held:

In no way can the judgment at bar be construed to mean that should the Dumaraogs
fail to pay the money within the specified period then the property would be conveyed
by the Sheriff to Guanzon. Any interpretation in that sense would contradict the
declaration made in the same Judgment that the contract between the parties was in
fact a mortgage and not a pacto de retro sale. The only right of a mortgagee in case of
non-payment of a debt secured by mortgage would be to foreclose the mortgage and
have the encumbered property sold to satisfy the outstanding indebtedness. The
mortgagor's default does not operate to vest in the mortgagee the ownership of the
encumbered property, for any such effect is against public policy as enunciated by the
Civil Code. 6

The declaration, therefore, in the decision of July 1, 1971 to the effect that absolute
ownership over the subject premises has become consolidated in the respondents
upon failure of the petitioners to pay their obligation within the specified period, is a
nullity, for consolidation of ownership is an improper and inappropriate remedy to
enforce a transaction declared to be one of mortgage. 7 It is the duty of respondents,
as mortgagees, to foreclose the mortgage if he wishes to secure a perfect title to the
mortgaged property if he buys it in the foreclosure sale. 8

2.
Neither is the petitioners' right as a mortgagor in equity affected by the fact
that the subject property was already titled in the name of respondents as early as
1969 even before the action was instituted. In the first place, it must be borne in mind
that this equitable doctrine that deems a conveyance intended as security for a debt
to be, in effect an equitable mortgage, operates regardless of the form of the
agreement chosen by the contracting parties as the repository of their will. Equity
looks through the form and considers the substance, and no kind of engagement can
be snowed which will enable the parties to escape from the equitable doctrine
adverted to. In other words, a conveyance of land, accompanied by registration in the
name of the transferee and the issuance of a new certificate, is no more secured from
the operation of this equitable doctrine than the most informal conveyance that could
be devised. 9

In the second place, the circumstance that the land has been judicially registered
under the Torrens System does not change or affect civil rights and liabilities with
respect thereto except as expressly provided in the Land Registration Act (sec. 70);
and as between the immediate parties to any contract affecting such lands, their
rights will generally be determined by the same rules of law that are applicable to
unregistered land. 10

Finally, the circumstance that the original transaction was subsequently declared to be
an equitable mortgage must mean that the title to the subject land which had been
transferred to private respondents actually remained or is transferred back to
petitioners herein as owners-mortgagors, conformably to the well-established doctrine
that the mortgagee does not become the owner of the mortgaged property because
the ownership remains with the mortgagor (Art. 2088, New Civil Code). This is
precisely the reason why this Court issued in its Resolution of March 9, 1977 a
Temporary Restraining Order, restraining private respondents from entering into any
transaction affecting or disposing the land in question.

IN VIEW OF THE FOREGOING, the decision of respondent Court of Appeals dated June
8, 1976 affirming in toto the trial court's order of September 17, 1974 is hereby
reversed. The Temporary Restraining Order issued pursuant to Our resolution of March
9, 1979 is hereby made permanent.

The Register of Deeds of the Province of Cavite is hereby ordered to cancel T.C.T. No.
35236 registered in the name of private respondents and to issue a new title in the
name of herein petitioners subject to the equitable mortgage rights of private
respondents.

SO ORDERED.

G.R. No. L-22331

June 6, 1967

IN RE: PETITION FOR CONSOLIDATION OF TITLE IN THE VENDEES OF A HOUSE AND THE
RIGHTS TO A LOT.
MARIA BAUTISTA VDA. DE REYES, ET AL., vendees-petitioners-appellees.
RODOLFO LANUZA, vendor,
vs.
MARTIN DE LEON, intervenor-appellant.

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

Augusto J. Salas for vendees-petitioners-appellees.

REGALA, J.:

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

DEED OF SALE WITH RIGHT TO REPURCHASE KNOW ALL MEN BY THESE PRESENTS:

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

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

I hereby reserve for myself, my heirs, successors, administrators, and assigns the right
to repurchase the above mentioned properties for the same amount of P3,000.00,
without interest, within the stipulated period of three (3) months from the date hereof.
If I fail to pay said amount of P3,000.00, within the stipulated period of three months,
my right to repurchase the said properties shall be forfeited and the ownership thereto
shall automatically pass to Mrs. Maria Bautista Vda. de Reyes, her heirs, successors,
administrators, and assigns, without any Court intervention, and they can take
possession of the same.1wph1.t

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

s/t RODOLFO LANUZA

Vendor

s/t MARIA BAUTISTA VDA. DE REYES

Vendee
s/t AURELIA REYES
Vendee

WITH MY MARITAL CONSENT:

s/t JOSE S. NAVARRO

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

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

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

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

It is true that the original deed of sale with pacto de retro, dated January 12, 1961,
was not signed by Belen Geronimo-Lanuza, wife of the vendor a retro, Rodolfo Lanuza,
at the time of its execution. It appears, however, that on the occasion of the extension
of the period for repurchase to July 12, 1961, Belen Geronimo-Lanuza signed giving
her approval and conformity. This act, in effect, constitutes ratification or confirmation
of the contract (Annex "A" Stipulation) by Belen Geronimo-Lanuza, which ratification
validated the act of Rodolfo Lanuza from the moment of the execution of the said
contract. In short, such ratification had the effect of purging the contract (Annex "A"

Stipulation) of any defect which it might have had from the moment of its execution.
(Article 1396, New Civil Code of the Philippines; Tang Ah Chan and Kwong Koon vs.
Gonzales, 52 Phil. 180)

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

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

Article 1602 of the New Civil Code provides:

"ART. 1602. The contract shall be presumed to be in equitable mortgage, in any of the
following cases;

xxx

xxx

xxx

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

xxx

xxx

xxx

In the present case, it appears, however, that no other instrument was executed

between the parties extending the period of redemption. What was done was simply to
annotate on the deed of sale with right to repurchase (Annex "A" Stipulation) that "the
period to repurchase, extended as requested until July 12, 1961." Needless to say, the
purchasers a retro, in the exercise of their freedom to make contracts, have the power
to extend the period of repurchase. Such extension is valid and effective as it is not
contrary to any provision of law. (Umale vs. Fernandez, 28 Phil. 89, 93)

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

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

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

We are in accord with the trial court's ruling that a conveyance of real property of the

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

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

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

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

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

of the parties merely referred to the object of the sale as "the property in question."
The failure to highlight this point, that is, the gross inadequacy of the price paid,
accounts for the error in determining the true agreement of the parties to the deed.

2. The non-transmission of ownership to the vendees. The Lanuzas, the supposed

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

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

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

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

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

Lanuzas, on the other, as the immediate parties thereto, cannot prevail over the
registered mortgage of De Leon.

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