FULL CASE

1.
G.R. No. 178407, March 18, 2015
METROPOLITAN BANK AND TRUST COMPANY, Petitioner, v. S.F. NAGUIAT
ENTERPRISES, INC.,Respondent.
DECISION
This case calls for the determination of whether the approval and consent of the insolvency court is required
under Act No. 1956, otherwise known as the Insolvency Law, before a secured creditor like petitioner
Metropolitan Bank and Trust Company can proceed with the extrajudicial foreclosure of the mortgaged
property.
This is a Petition for Review1 under Rule 45, seeking to reverse and set aside the November 15, 2006
Decision2 and June 14, 2007 Resolution3 of the Court of Appeals (Sixth Division) in CA-G.R. SP No. 94968. The
questioned Decision and Resolution dismissed Metropolitan Bank and Trust Company's Petition for Certiorari
and Mandamus4 and denied its subsequent Motion for Reconsideration and Clarification. 5
Sometime in April 1997, Spouses Rommel Naguiat and Celestina Naguiat and S.F. Naguiat Enterprises, Inc. (S.F.
Naguiat) executed a real estate mortgage6 in favor of Metropolitan Bank and Trust Company (Metrobank) to
secure certain credit accommodations obtained from the latter amounting to P17 million. The mortgage was
constituted over the following properties:
(1) TCT No. 586767 - a parcel of land in the Barrio of Pulung Bulu, Angeles, Pampanga, with an area of 489
square meters; and
(2) TCT No. 310523 - a parcel of land in Marikina, Rizal, with an area of 1,200.10 square meters. 8
On March 3, 2005, S.F. Naguiat represented by Celestina T. Naguiat, Eugene T. Naguiat, and Anna N. Africa
obtained a loan9 from Metrobank in the amount of P1,575,000.00. The loan was likewise secured by the 1997
real estate mortgage by virtue of the Agreement on Existing Mortgage(s) 10executed between the parties on
March 15, 2004.
On July 7, 2005, S.F. Naguiat filed a Petition for Voluntary Insolvency with Application for the Appointment of a
Receiver11 pursuant to Act No. 1956, as amended,12 before the Regional Trial Court of Angeles City and which
was raffled to Branch 56.13 Among the assets declared in the Petition was the property covered by TCT No.
58676 (one of the properties mortgaged to Metrobank). 14
Presiding Judge Irin Zenaida S. Buan (Judge Buan) issued the Order15 dated July 12, 2005, declaring S.F. Naguiat
insolvent; directing the Deputy Sheriff to take possession of all the properties of S.F. Naguiat until the
appointment of a receiver/assignee; and forbidding payment of any debts due, delivery of properties, and
transfer of any of its properties.
Pending the appointment of a receiver, Judge Buan directed the creditors, including Metrobank, to file their
respective Comments on the Petition.16 In lieu of a Comment, Metrobank filed a Manifestation and
Motion17 informing the court of Metrobank's decision to withdraw from the insolvency proceedings because it
intended to extrajudicially foreclose the mortgaged property to satisfy its claim against S.F. Naguiat. 18
Subsequently, S.F. Naguiat defaulted in paying its loan. 19 On November 8, 2005, Metrobank instituted an
extrajudicial foreclosure proceeding against the mortgaged property covered by TCT No. 58676 20and sold the
property at a public auction held on December 9, 2005 to Phoenix Global Energy, Inc., the highest
bidder.21 Afterwards, Sheriff Claude B. Balasbas prepared the Certificate of Sale22 and submitted it for
approval to Clerk of Court Vicente S. Fernandez, Jr. and Executive Judge Bernardita Gabitan-Erum (Executive
Judge Gabitan-Erum). However, Executive Judge Gabitan-Erum issued theOrder23dated December 15,
2005 denying her approval of the Certificate of Sale in view of the July 12, 2005 Order issued by the insolvency

court. Metrobank's subsequent Motion for Reconsideration was also denied in the Order24dated April 24,
2006.
Aggrieved by both Orders of Executive Judge Gabitan-Erum, Metrobank filed a Petition25 for certiorari and
mandamus before the Court of Appeals on June 22, 2006. S.F. Naguiat filed its Manifestation 26stating that it
was not interposing any objection to the Petition and requested that the issues raised in the Petition be
resolved without objection and argument on its part. 27
On November 15, 2006, the Court of Appeals rendered its Decision dismissing the Petition on the basis of
Metrobank's failure to "obtain the permission of the insolvency court to extrajudicially foreclose the
mortgaged property."28 The Court of Appeals declared that "a suspension of the foreclosure proceedings is in
order, until an assignee [or receiver,] is elected or appointed [by the insolvency court] so as to afford the
insolvent debtor proper representation in the foreclosure [proceedings]." 29
Metrobank filed a Motion for Reconsideration and Clarification, which was denied by the Court of Appeals in
its Resolution dated June 14, 2007.30 The Court of Appeals held that leave of court must be obtained from the
insolvency court whether the foreclosure suit was instituted judicially or extrajudicially so as to afford the
insolvent estate's proper representation (through the assignee) in such action 31 and "to avoid the dissipation
of the insolvent debtor's assets in possession of the insolvency court without the latter's knowledge." 32
Hence, the present Petition for Review was filed. Petitioner contends that the Court of Appeals decided
questions of substance in a way not in accord with law and with the applicable decisions of this court:
A.
By ruling that there must be a motion for leave of court to be filed and granted by the insolvency court, before
the petitioner, as a secured creditor of an insolvent, can extrajudicially foreclose the mortgaged property,
which is tantamount to a judicial legislation.
B.
By ruling that the Honorable Executive Judge Bernardita Gabitan-Erum did not abuse her discretion in refusing
to perform her ministerial duty of approving the subject certificate of sale, despite the fact that the petitioner
and the designated sheriff complied with all the requirements mandated by Act No. 3135, as amended,
circulars, administrative matters and memorandums issued by the Honorable Supreme Court.
C.
By ruling that the action of the Honorable Executive Judge Bernardita Gabitan-Erum is proper in denying the
approval of the Certificate of Sale on the grounds that the issuance of the Order dated 12 July 2005 declaring
respondent insolvent and the pendency of the insolvency proceeding forbid the petitioner, as a secured
creditor, to foreclose the subject mortgaged property. 33 (Emphasis supplied)
On October 20, 2007, S.F. Naguiat filed a Manifestation34 stating that it interposed no objection to the Petition
and submitted the issues raised therein without any argument.
On November 28, 2007, the court resolved "to give due course to the petition [and] to decide the case
according to the pleadings already filed[.]"35
The issues for resolution are:
First, whether the Court of Appeals erred in ruling that prior leave of the insolvency court is necessary before a
secured creditor, like petitioner Metropolitan Bank and Trust Company, can extrajudicially foreclose the
mortgaged property.
Second, whether the Court of Appeals erred in ruling that Executive Judge Gabitan-Erum did not abuse her
discretion in refusing to approve the Certificate of Sale.
Petitioner argues that nowhere in Act No. 1956 does it require that a secured creditor must first obtain leave

or permission from the insolvency court before said creditor can foreclose on the mortgaged property. 36 It
adds that this procedural requirement applies only to civil suits, and not when the secured creditor opts to
exercise the right to foreclose extrajudicially the mortgaged property under Act No. 3135, as amended,
because extrajudicial foreclosure is not a civil suit. 37Thus, the Court of Appeals allegedly imposed a new
condition that was tantamount to unauthorized judicial legislation when it required petitioner to file a Motion
for Leave of the insolvency court.38 Said condition, petitioner argues, defeated and rendered inutile its right or
prerogative under Act No. 1956 to independently initiate extrajudicial foreclosure of the mortgaged
property.39
Nonetheless, petitioner contends that the filing of its Manifestation before the insolvency court served as
sufficient notice of its intention and, in effect, asked the court's permission to foreclose the mortgaged
property.40
Petitioner further contends that "the powers and responsibilities of an Executive Judge in extrajudicial
foreclosure proceedings, in line with Administrative Order No. 6, is merely to supervise the conduct of the
extra-judicial foreclosure of the property"41 and to oversee that the procedural requirements are faithfully
complied with;42 and when "the Clerk of Court and Sheriff concerned complied with their designated duties
and responsibilities under the [administrative] directives and under Act No. 3135, as amended, and the
corresponding filing and legal fees were duly paid, it becomes a ministerial duty on the part of the executive
judge to approve the certificate of sale."43 Thus, Executive Judge Gabitan-Erum allegedly exceeded her
authority by "exercising judicial discretion in issuing her Orders dated December 15, 2006 and April 24, 2006 . .
. despite the fact that Sheriff Balasbas complied with all the notices requirements under Act No. 3135, [as]
amended, . . . and the petitioner and the highest bidder paid all the requisite filing and legal fees[.]"44
Furthermore, citing Chartered Bank v. C.A. Imperial and National Bank,45 petitioner submits that the order of
insolvency affected only unsecured creditors and not secured creditors, like petitioner, which did not
surrender its right over the mortgaged property.46 Hence, it contends that the Court of Appeals seriously erred
in holding as proper Executive Judge Gabitan-Erum's disapproval of the Certificate of Sale on account of the
Order of insolvency issued by the insolvency court. 47
Finally, petitioner points out that contrary to the Court of Appeals' ruling, "there is nothing more to suspend
because the extrajudicial foreclosure of the mortgaged property was already a fait accomplias the public
auction sale was conducted on December 9, 2005 and all the requisite legal fees were paid and a Certificate of
Sale was already prepared."48 "The only remaining thing to do [was] for the . . . Executive Judge to sign the
Certificate of Sale, which she . . . refused to do."49
The Petition has no merit.
I

A look at the historical background of the laws governing insolvency in this country will be helpful in resolving
the questions presented before us.
The first insolvency law, Act No. 1956, was enacted on May 20, 1909. It was derived from the Insolvency Act of
California (1895), with a few provisions taken from the United States Bankruptcy Act of 1898. 50 Act No. 1956
was entitled "An Act Providing for the Suspension of Payments, the Relief of Insolvent Debtors, the Protection
of Creditors, and the Punishment of Fraudulent Debtors." The remedies under the law were through a
suspension of payment51 (for a debtor who was solvent but illiquid) or a discharge from debts and liabilities
through the voluntary52 or involuntary53 insolvency proceedings (for a debtor who was insolvent).
The objective of suspension of payments is the deferment of the payment of debts until such time as the
debtor, which possesses sufficient property to cover all its debts, is able to convert such assets into cash or
otherwise acquires the cash necessary to pay its debts. On the other hand, the objective in insolvency
proceedings is "to effect an equitable distribution of the bankrupt's properties among his creditors and to
benefit the debtor by discharging54 him from his liabilities and enabling him to start afresh with the property
set apart for him as exempt."55
Act No. 1956 was meant to be a complete law on insolvency,56 and debts were to be liquidated in accordance

with the order of priority set forth under Chapter VI, Sections 48 to 50 on "Classification and Preference of
Creditors"; and Sections 29 and 59 with respect to mortgage or pledge of real or personal property, or lien
thereon. Jurisdiction over suspension of payments and insolvency was vested in the Courts of First Instance
(now the Regional Trial Courts).57
The Civil Code58 (effective August 30, 1950) established a system of concurrence and preference of credits,
which finds particular application in insolvency proceedings. 59Philippine Savings Bank v. Hon. Lantin60 explains
this scheme:
Concurrence of credits occurs when the same specific property of the debtor or all of his property is subjected
to the claims of several creditors. The concurrence of credits raises no questions of consequence where the
value of the property or the value of all assets of the debtor is sufficient to pay in full all the creditors.
However, it becomes material when said assets are insufficient for then some creditors of necessity will not be
paid or some creditors will not obtain the full satisfaction of their claims. In this situation, the question of
preference will then arise, that is to say who of the creditors will be paid ahead of the others. (Caguioa,
Comments and Cases on Civil Law, 1970 ed., Vol. VI, p. 472.)61
The credits are classified into three general categories, namely, "(a) special preferred credits listed in Articles
224162 and 2242,63 (b) ordinary preferred credits listed in Article 2244[,]64and (c) common credits under Article
2245."65
The special preferred credits enumerated in Articles 2241 (with respect to movable property) and 2242 (with
respect to immovable property) are considered as mortgages or pledges of real or personal property, or liens
within the purview of Act No. 1956.66 These credits, which enjoy preference with respect to a specific movable
or immovable property, exclude all others to the extent of the value of the property. 67 If there are two or
more liens on the same specific property, the lienholders divide the value of the property involved pro rata,
after the taxes on the same property are fully paid. 68
"Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, take precedence
over ordinary preferred credits so far as concerns the property to which the liens have attached. The specially
preferred credits must be discharged first out of the proceeds of the property to which they relate, before
ordinary preferred creditors may lay claim to any part of such proceeds." 69
"In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which follow
such property. What Article 2244 creates are simply rights in favor of certain creditors to have the cash and
other assets of the insolvent applied in a certain sequence or order of priority."70
It was held that concurrence and preference of credits can only be ascertained in the context of a general
liquidation proceeding that is in rem, such as an insolvency proceeding, where properties of the debtor are
inventoried and liquidated and the claims of all the creditors may be bindingly adjudicated. 71 The application
of this order of priorities established under the Civil Code in insolvency proceedings assures that priority of
claims are respected and credits belonging to the same class are equitably treated.
Conformably, it is the policy of Act No. 1956 to place all the assets and liabilities of the insolvent debtor
completely within the jurisdiction and control of the insolvency court without the intervention of any other
court in the insolvent debtor's concerns or in the administration of the estate. 72 It was considered to be of
prime importance that the insolvency proceedings follow their course as speedily as possible in order that a
discharge, if the insolvent debtor is entitled to it, should be decreed without unreasonable delay. "Proceedings
of [this] nature cannot proceed properly or with due dispatch unless they are controlled absolutely by the
court having charge thereof."73
In 1981, Presidential Decree No. 1758 amended Presidential Decree No. 902-A, the Securities and Exchange
Commission charter. Under its terms,74 jurisdiction regarding corporations that sought suspension of
payments process was taken away from the regular courts and given to the Securities and Exchange
Commission.75 In addition, an alternative to suspension of payments rehabilitation was introduced. It
enables a corporation whose assets are not sufficient to cover its liabilities to apply to the Securities and
Exchange Commission for the appointment of a rehabilitation receiver and/or management committee76 and
then to develop a rehabilitation plan with a view to rejuvenating a financially distressed corporation. However,
the procedure to avail of the remedy was not spelled out until 20 years later when the Securities and

Exchange Commission finally adopted the Rules of Procedure on Corporate Recovery on January 4, 2000.
Shortly thereafter, with the passage of Republic Act No. 8799 or The Securities Regulation Code on July 19,
2000, jurisdiction over corporation rehabilitation cases was reverted to the Regional Trial Courts designated as
commercial courts or rehabilitation courts.77 This legal development was implemented by the Interim Rules of
Procedure on Corporate Rehabilitation (made effective in December 2000), which was later replaced by A.M.
00-8-10-SC or the Rules of Procedure on Corporate Rehabilitation of 2008.
Act No. 1956 continued to remain in force and effect until its express repeal on July 18, 2010 when Republic
Act No. 10142,78 otherwise known as the Financial Rehabilitation and Insolvency Act of 2010, took effect.
Republic Act No. 10142 now provides for court proceedings in the rehabilitation or liquidation of debtors, both
juridical and natural persons, in a "timely, fair, transparent, effective and efficient"79 manner. The purpose of
insolvency proceedings is "to encourage debtors . . . and their creditors to collectively and realistically resolve
and adjust competing claims and property rights"80while "maintaining] certainty and predictability in
commercial affairs, preserving] and maximizing] the value of the assets of these debtors, recognizing] creditor
rights and respecting] priority of claims, and ensuring] equitable treatment of creditors who are similarly
situated."81 It has also been provided that whenever rehabilitation is no longer feasible, "it is in the interest of
the State to facilitate a speedy and orderly liquidation of [the] debtors' assets and the settlement of their
obligations."82
Unlike Act No. 1956, Republic Act No. 10142 provides a broad definition of the term, "insolvent":
SEC. 4. Definition of Terms. - As used in this Act, the term:
....
(p) Insolvent shall refer to the financial condition of a debtor that is generally unable to pay its or his liabilities
as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets.
Republic Act No. 10142 also expressly categorizes different forms of debt relief available to a corporate debtor
in financial distress. These are out-of-court restructuring agreements;83 pre-negotiated rehabilitation;84 courtsupervised rehabilitation;85 and liquidation (voluntary and involuntary).86 An insolvent individual debtor can
avail of suspension of payments,87 or liquidation.88
During liquidation proceedings, a secured creditor may waive its security or lien, prove its claim, and share in
the distribution of the assets of the debtor, in which case it will be admitted as an unsecured creditor; or
maintain its rights under the security or lien,89 in which case:
1. [T]he value of the property may be fixed in a manner agreed upon by the creditor and the liquidator.
When the value of the property is less than the claim . . . the [creditor] will be admitted ... as a creditor
for the balance. If its value exceeds the claim . . . the liquidator may convey the property to the
creditor and waive the debtor's right of redemption upon receiving the excess from the creditor;
2. [T]he liquidator may sell the property and satisfy the secured creditor's entire claim from the proceeds
of the sale; or
3. [T]he secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws. 90

A secured creditor, however, is subject to the temporary stay of foreclosure proceedings for a period of 180
days,91 upon the issuance by the court of the Liquidation Order. 92
Republic Act No. 10142 was to govern all petitions filed after it had taken effect, and all further proceedings in
pending insolvency, suspension of payments, and rehabilitation cases, except when its application "would not
be feasible or would work injustice, in which event the procedures set forth in prior laws and regulations shall
apply."93
The relevant proceedings in this case took place prior to Republic Act No. 10142; hence, the issue will be
resolved according to the provisions of Act No. 1956.

II
Act No. 1956 impliedly requires a secured creditor to ask the permission of the insolvent court before said
creditor can foreclose the mortgaged property.
When read together, the following provisions of Act No. 1956 reveal the necessity for leave of the insolvency
court:
(A)

(B)

(C)

(D)

Under Section 14, "[a]n insolvent debtor, owing debts exceeding in amount the sum of one thousand
pesos, may apply to be discharged from his debts and liabilities by petition to the Court of First Instance
of the province or city in which he has resided for six months next preceding the filing of such petition. In
his petition, he shall set forth his place of residence, the period of his residence therein immediately
prior to filing said petition, his inability to pay all his debts in full, his willingness to surrender all his
property, estate, and effects not exempt from execution for the benefit of his creditors, and an
application to be adjudged an insolvent. He shall annex to his petition a schedule and inventory in the
form hereinafter provided. The filing of such petition shall be an act of insolvency."
Under Section 16, "[the] inventory must contain, besides the creditors, an accurate description of all the
real and personal property, estate, and effects of the [insolvent], including his homestead, if any,
together with a statement of the value of each item of said property, estate, and effects and its location,
and a statement of the incumbrances thereon. All property exempt by law from execution shall be set
out in said inventory with a statement of its valuation, location, and the incumbrances thereon, if any.
The inventory shall contain an outline of the facts giving rises [sic], or which might give rise, to a right of
action in favor of the insolvent debtor."
Under Section 18, upon receipt of the petition, the court shall issue an order declaring the petitioner
insolvent, and directing the sheriff to take possession of and safely keep, until the appointment of a
receiver or assignee, all the debtor's real and personal property, except those exempt by law from
execution. The order also forbids the transfer of any property by the debtor.
Under Section 32, once an assignee is elected and qualified, the clerk of court shall assign and convey to
the assignee all the real and personal property of the debtor, not exempt from execution, and
such assignment shall relate back to the commencement of the insolvency proceedings, and by operation
n of law, shall vest the tide to all such property in the assignee.

With the declaration of insolvency of the debtor, insolvency courts "obtain full and complete jurisdiction over
all property of the insolvent and of all claims by and against [it.]"94 It follows that the insolvency court has
exclusive jurisdiction to deal with the property of the insolvent. 95Consequently, after the mortgagor-debtor
has been declared insolvent and the insolvency court has acquired control of his estate, a mortgagee may not,
without the permission of the insolvency court, institute proceedings to enforce its lien. In so doing, it would
interfere with the insolvency court's possession and orderly administration of the insolvent's properties. 96
It is true that under Section 59 of Act No. 1956, the creditor is given the option to participate in the insolvency
proceedings by proving the balance of his debt, after deducting the value of the mortgaged property as agreed
upon with the receiver or determined by the court or by a sale of the property as directed by the court; or
proving his whole debt, after releasing his claim to the receiver/sheriff before the election of an assignee, or to
the assignee. However, Section 59 of Act No. 1956 proceeds to state that when "the property is not sold or
released, and delivered up, or its value fixed, the creditor [is] not allowed to prove any part of his debt," but
the assignee shall deliver to the creditor the mortgaged property. Hence, explicitly under Section 59 and as a
necessary consequence flowing from the exclusive jurisdiction of the insolvency court over the estate of the
insolvent, the mortgaged property must first be formally delivered by the court or the assignee (if one has
already been elected) before a mortgagee-creditor can initiate proceedings for foreclosure.97
Here, the foreclosure and sale of the mortgaged property of the debtor, without leave of court, contravene
the provisions of Act No. 1956 and violate the Order dated July 12, 2005 of the insolvency court which
declared S.F. Naguiat insolvent and forbidden from making any transfer of any of its properties to any person.
Petitioner would insist that "respondent was given the opportunity to be represented in the public auction
sale conducted on December 9, 2005"98 because it received a copy of the Notice of the Sheriffs Sale on
November 11, 2005;"99 and the Notice of Auction Sale was published in a newspaper of general
circulation.100 However, respondent allegedly opted not to participate by not attending the public auction
sale.101

Such was to be expected because when the foreclosure proceeding was initiated, respondent was already
declared insolvent. Indeed, upon the adjudication of insolvency, the insolvent ceased to exist and was in effect
judicially declared dead as of the filing of the insolvency petition and by the nature of things had no further
interest in the property covered by the mortgage.102 Under Section 32 of Act No. 1956, title to the insolvent's
estate relates back to the filing of the insolvency petition upon the election of the assignee who shall
thereafter act on behalf of all the creditors. Under Section 36, the assignee has the power to redeem all valid
mortgages or sell property subject to mortgage. Thus, the extrajudicial foreclosure of the mortgaged property
initiated by petitioner without leave of insolvency court would effectively exclude the assignee's right to
participate in the public auction sale of the property and to redeem the foreclosed property 103 to the
prejudice of all the other creditors of the insolvent.
Petitioner filed its Manifestation and Motion before the insolvency court on September 7, 2005, 104praying that
it would no longer file the Comment required as it opted to exercise its right to extrajudicially foreclose the
property mortgaged and that it "be allowed to temporarily withdraw its active participation in the . . .
proceeding pending the outcome of the extra-judicial foreclosure proceeding of the mortgaged property."105
Petitioner should have waited for the insolvency court to act on its Manifestation and Motion before
foreclosing the mortgaged property and its lien (assuming valid) would not be impaired or its claim in any way
jeopardized by any reasonable delay. There are mechanisms within Act No. 1956 such as Section 59 that
ensure that the interests of the secured creditor are adequately protected. Parenthetically, mortgage liens are
retained in insolvency proceedings. What is merely suspended until court approval is obtained is the creditor's
enforcement of such preference.
On the other hand, to give the secured creditor a free hand in foreclosing its collateral upon the initiation of
insolvency proceedings may frustrate the basic objectives of Act No. 1956 of maximizing the value of the
estate of the insolvent or obtaining the highest return possible from its sale for the benefit of all the creditors
(both secured and unsecured).
III
Executive Judge Gabitan-Erum did not unlawfully neglect to perform her duty when she refused to approve
and sign the Certificate of Sale, as would warrant the issuance of a writ of mandamus against her.
An executive judge has the administrative duty in extrajudicial foreclosure proceedings to ensure that all the
conditions of Act No. 3135 have been complied with before approving the sale at public auction of any
mortgaged property.106
"Certain requisites must be established before a creditor can proceed to an extrajudicial foreclosure, namely:
first, there must have been the failure to pay the loan obtained from the mortgagee-creditor; second, the loan
obligation must be secured by a real estate mortgage; and third, the mortgagee-creditor has the right to
foreclose the real estate mortgage either judicially or extrajudicially."107
Furthermore, Act No. 3135 outlines the notice and publication requirements and the procedure for the
extrajudicial foreclosure which constitute a condition sine qua non for its validity. Specifically, Sections 2, 3,
and 4 of the law prescribe the formalities of the extrajudicial foreclosure proceeding:
SEC. 2. Said sale cannot be made legally outside of the province in which the property sold is situated; and in
case the place within said province in which the sale is to be made is the subject of stipulation, such sale shall
be made in said place or in the municipal building of the municipality in which the property or part thereof is
situated.
SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public
places of the municipality or city where the property is situated, and if such property is worth more than four
hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city.
SEC. 4. The sale shall be made at public auction, between the hours of nine in the morning and four in the
afternoon; and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the

peace of the municipality in which such sale has to be made, or a notary public of said municipality, who shall
be entitled to collect a fee of five pesos for each day of actual work performed, in addition to his expenses.
''Mandamus will not issue to enforce a right which is in substantial dispute or to which a substantial doubt
exists."108
There was a valid reason for Executive Judge Gabitan-Erum to doubt the propriety of the foreclosure sale. Her
verification with the records of the Clerk of Court showed that a Petition for Insolvency had been filed and had
already been acted upon by the insolvency court prior to the application for extrajudicial foreclosure of the
mortgaged properties. Among the inventoried unpaid debts and properties attached to the Petition for
Insolvency was the loan secured by the real estate mortgage subject of the application for extrajudicial
foreclosure sale.109 With the pendency of the insolvency case, substantial doubt exists to justify the refusal by
Executive Judge Gabitan-Erum to approve the Certificate of Sale as the extrajudicial foreclosure sale without
leave of the insolvency court may contravene the policy and purpose of Act No. 1956. 110
Act No. 3135 is silent with respect to mortgaged properties that are in custodia legis, such as the property in
this case, which was placed under the control and supervision of the insolvency court. This court has declared
that "[a] court which has control of such property, exercises exclusive jurisdiction over the same, retains all
incidents relative to the conduct of such property. No court, except one having supervisory control or superior
jurisdiction in the premises, has a right to interfere with and change that possession." 111 The extrajudicial
foreclosure and sale of the mortgaged property of the debtor would clearly constitute an interference with
the insolvency court's possession of the property.
Furthermore, Executive Judge Gabitan-Erum noticed that the President of the highest bidder in the public
auction sale may be related to the owners of S.F. Naguiat Enterprises, Inc. The President of the highest bidder,
Phoenix Global Energy, Inc., was a certain Eugene T. Naguiat.112 "Among the incorporators of S.F. Naguiat
Enterprises, Inc. [the insolvent corporation] [were] Sergio F. Naguiat, Maningning T. Naguiat, Antolin M. Tiglao,
Nero F. Naguiat and Antolin T. Naguiat. Later[,] its capital was increased and the listed subscribers [were]
Celestina T. Naguiat, Rommel T. Naguiat, Antolin T. Naguiat, Sergio T. Naguiat, Jr., Alexander T. Naguiat,
Coumelo T. Naguiat, Fely Ann Breggs and Teresita Celine Quemer."113
Under the foregoing circumstances, the refusal of Executive Judge Gabitan-Erum to approve the Certificate of
Sale was in accord with her duty to act with prudence, caution, and attention in the performance of her
functions.
WHEREFORE, the Petition is DENIED, and the Court of Appeals' Decision dated November 15, 2006 and
Resolution dated June 14, 2007 are AFFIRMED.
SO ORDERED.

2.
RIZAL COMMERCIAL BANKING
CORPORATION,
Petitioner,

- versus -

ROYAL CARGO CORPORATION,

Respondent.

G.R. No. 179756

Present:
YNARES-SANTIAGO, *
CARPIO MORALES, **
Acting Chairperson,
PERALTA, ***
DEL CASTILLO, and
ABAD, JJ.

Promulgated:
October 2, 2009
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CARPIO MORALES, J.:
Terrymanila, Inc.[1] (Terrymanila) filed a petition for voluntary insolvency with the Regional Trial Court
(RTC) of Bataan on February 13, 1991.[2] One of its creditors was Rizal Commercial Banking Corporation
(petitioner) with which it had an obligation of P3 Million that was secured by a chattel mortgage executed
on February 16, 1989.The chattel mortgage was duly recorded in the notarial register of Amado Castano, a
notary public for and in the Province of Bataan.[3]
Royal Cargo Corporation (respondent), another creditor of Terrymanila, filed an action before the RTC
of Manila for collection of sum of money and preliminarily attached some of Terrymanilas personal
properties on March 5, 1991 to secure the satisfaction of a judgment award of P296,662.16, exclusive of
interests and attorneys fees.[4]
On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.
On June 11, 1991,[5] the Manila RTC, by Decision of even date, rendered judgment in the collection case
in favor of respondent.
In the meantime, petitioner sought in the insolvency proceedings at the Bataan RTC permission to
extrajudicially foreclose the chattel mortgage which was granted by Order of February 3, 1992.[6] It appears
that respondent, together with its employees union, moved to have this Order reconsidered but the motion
was denied by Order of March 20, 1992 Order.[7]
The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the public auction sale of the
mortgaged personal properties at the Municipal Building of Mariveles, Bataan. At the auction sale, petitioner,
the sole bidder of the properties, purchased them for P1.5 Million. Eventually, petitioner sold the properties
to Domingo Bondoc and Victoriano See.[8]
Respondent later filed on July 30, 1992 a petition before the RTC of Manila, docketed as Civil Case No.
92-62106, against the Provincial Sheriff of the RTC Bataan and petitioner, for annulment of the auction

sale (annulment of sale case). Apart from questioning the inclusion in the auction sale [9] of some of the
properties which it had attached, respondent questioned the failure to duly notify it of the sale at least 10
days before the sale, citing Section 14 of Act No. 1508 or the Chattel Mortgage Law which reads:
Sec. 14. The mortgagee, his executor, administrator or assign, may, after thirty days, from the time of
condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a public
officer at a public place in the municipality where the mortgagor resides, or where the property is situated,
provided at least ten days notice of the time, place, and purpose of such sale has been posted at two or more
public places in such municipality, and the mortgagee, his executor, administrator or assignee shall notify the
mortgagor or person holding under him and the persons holding subsequent mortgages of the time and
place of sale, either by notice in writing directed to him or left at his abode, if within the municipality, or
sent by mail if he does not reside in such municipality, at least ten days previous to the date. (Emphasis and
underscoring supplied),

it claiming that its counsel received a notice only on the day of the sale. [10]
Petitioner, alleging that the annulment of sale case filed by respondent stated no cause of action, filed
on December 3, 1992 a Motion to Dismiss[11] which was, however, denied by Branch 16 of the Manila RTC.[12]
Petitioner appealed the denial of the Motion to Dismiss via certiorari to the Court of Appeals, docketed
as CA-G.R. SP No. 31125. The appellate court dismissed the petition, by Decision of February 21, 1994, it
holding that respondents petition for annulment prima facie states a sufficient cause of action and that the
[trial court] in denying [herein petitioner RCBCs] motion to dismiss, had acted advisedly and well within its
powers and authority.[13]
Petitioner thereupon filed before the Manila RTC its Answer Ex Abundante Cautelam[14] in the
annulment of sale case in which it lodged a Compulsory Counterclaim by seeking P1 Million for moral
damages, P500,000 for exemplary damages, and P250,000 for attorneys fees. It thereafter elevated the case
to this Court via petition for review oncertiorari, docketed as G.R. 115662. This Court by minute Resolution
of November 7, 1994,[15] denied the petition for failure to show that a reversible error was committed by the
appellate court.[16]
Trial on the merits of the annulment of sale case thereupon ensued. By Decision[17] of October 15,
1997, Branch 16 of the Manila RTC rendered judgment in favor of respondent, disposing as follows:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
1. ORDERING . . . RCBC to pay plaintiff [heein respondent Royal Cargo] the amount of P296,662.16 and P8,000.00 as
reasonable attorneys fees.
2. No pronouncement as to costs.
3. DISMISSING the petition as to respondents Provincial Sheriff of Balanga, Bataan RTC;
SO ORDERED.

Both parties appealed to the Court of Appeals which, by Decision [18] of April 17, 2007, denied herein
petitioners appeal and partly granted herein respondents by increasing to P50,000 the attorneys fees awarded
to it and additionally awarding it exemplary damages and imposing interest on the principal amount payable
to it. Thus it disposed:
WHEREFORE, the foregoing considered, the appeal instituted by appellant RCBC is hereby DENIED for
lack of merit while the appeal of appellant Royal Cargo is PARTLY GRANTED in that the amount of attorneys
fees awarded by the RTC is increased to P50,000.00.
In addition, RCBC is ordered to pay Royal Cargo the amount of P100,000.00 as exemplary
damages. The principal amount of P296,662.18 [sic] to be paid by RCBC to Royal Cargo shall likewise earn 12%
interest per annum from the time the petition was filed in the court a quo until fully paid. The rest of the
decision is AFFIRMED.
SO ORDERED. (Emphasis and underscoring supplied)

In partly granting respondents appeal from the Decision of Br. 16 of RTC Manila, the appellate court
ratiocinated that respondent had a right to be timely informed of the foreclosure sale.
RCBCs citations [sic] of numerous rulings on the matter more than supports the fact that as mortgagee,
it had preferential right over the chattels subject of the foreclosure sale. This however is not at issue in this
case. What is being contested is the right of Royal Cargo to be timely informed of the foreclosure sale as it too
had interests over the mortgagee Terrymanila, Inc.s assets. We note that this matter had already been
passed upon by this Court on February 21, 1994 in CA-G.R. SP No. 31125 as well as by the Supreme Court on
November 7, 1994 in G.R. No. [1]15662. RCBC, by arguing about its preferential right as mortgagee in the
instant appeal merely reiterates what had already been considered and ruled upon in earlier proceedings.
xxxx
Moreover, Section 14 of the Chattel Mortgage Law pertaining to the procedure in the foreclosure of
chattel mortgages provides, to wit:
xxxx
The above-quoted provision clearly requires that the mortgagee should notify in writing the mortgagor
or person holding under him of the time and place of the sale by personal delivery of the notice. Thus, RCBCs
failure to comply with this requirement warranted a ruling against it by the RTC. (Italics in the original;
emphasis partly in the original; underscoring supplied)
Its motion for reconsideration having been denied by the appellate court,[19] petitioner lodged the
present petition for review which raises the following issues:
I
WHETHER OR NOT RESPONDENT SHOULD HAVE BEEN GIVEN A TEN(10)-DAY PRIOR NOTICE OF THE JUNE 16,
1992 FORECLOSURE SALE
II
WHETHER OR NOT THE TRIAL COURT AND THE COURT OF APPEALS GRAVELY ERRED IN DECLARING
PETITIONER GUILTY OF CONSTRUCTIVE FRAUD IN FAILING TO PROVIDE RESPONDENT A TEN (10)-DAY PRIOR
NOTICE OF THE FORECLOSURE SALE.

III
WHETHER OR NOT THE PETITIONER WAS CORRECTLY HELD LIABLE TO PAY RESPONDENT P296,662.[16] PLUS
INTEREST THEREON, EXEMPLARY DAMAGES ANDATTORNEYS FEES.
IV
WHETHER OR NOT PETITIONER IS ENTITLED TO AN AWARD OF ATTORNEYS FEES.[20] (Underscoring supplied)

Petitioner faults the appellate court in applying res judicata by holding that respondents entitlement to
notice of the auction sale had already been settled in its Decision inCA G.R. SP No. 31125 and in this
Courts Decision in G.R. No. 115662. For, so it contends, the decisions in these cases dealt
on interlocutory issues, viz: the issue of whether respondents petition for annulment of the sale stated a cause
of action, and the issue of whether petitioners motion to dismiss was properly denied.[21]
Arguing against respondents position that it was entitled to notice of the auction sale, petitioner cites
the Chattel Mortgage Law which enumerates who are entitled to be notified under Section 14 thereof. It
posits that [h]ad the law intended to include in said Section an attaching creditor or a judgment creditor [like
herein respondent], it could have so specifically stated therein, since in the preceding section, Section 13, it
already mentioned that a subsequent attaching creditor may redeem. [22]
Petitioner goes on to fault the appellate court in echoing its ruling in CA-G.R. SP No. 31125 that
Sections 13[23] and 14 of the Chattel Mortgage Law should be read in tandem since the right given to the
attaching creditor under Section 13 would not serve its purpose if we were to exclude the subsequent
attaching creditor from those who under Section 14 need to be notified of the foreclosure sale ten days before
it is held.[24]
Petitioner likewise posits that Section 13 permits a subsequent attaching creditor to redeem the
mortgage only before the holding of the auction sale, drawing attention toParay v. Rodriguez[25] which
instructs that no right of redemption exists over personal property as the Chattel Mortgage Law is silent
thereon.[26]
Even assuming arguendo, petitioner contends, that there exists an obligation to furnish respondent a
notice of the auction sale 10 days prior thereto, respondents judgment award of P296,662.16 with interest
thereon at the legal rate from the date of filing of the [c]omplaint and P10,000.00 as reasonable attorneys fees
is very much less than the P1.5 [m]illion bid of petitioner[27]
As for the issue of constructive fraud-basis of the award of damages to respondent, petitioner
maintains that both the trial and appellate courts erred in concluding that it (petitioner) was the one which
sent the notice of sheriffs sale to, which was received on the day of the sale by, the counsel for respondent
for, so it contends, it had absolutely no participation in the preparation and sending of such notice. [28]
In its Comment,[29] respondent reiterates that the respective decisions of the appellate court and this
Court in CA G.R. SP No. 31125 and G.R. No. 115662 are conclusivebetween the parties, hence, the right of

[respondent] to a [ten-day] notice has a binding effect and must be adopted in any other controversy between
the same parties in which the very same question is raised. [30]
And respondent maintains that the obligation to notify the mortgagor or person holding under him and
the persons holding subsequent mortgages falls upon petitioner as the mortgagee.
The petition is MERITORIOUS.
The respective decisions of the appellate court in CA G.R. SP No. 31125 and this Court in G.R. No.
115662 did not conclusively settle the issue on the need to give a 10-day notice to respondent of the holding
of the public auction sale of the chattels.
The elements of res judicata are: (1) the judgment sought to bar the new action must be final; (2) the
decision must have been rendered by a court having jurisdiction over the subject matter and the parties; (3)
the disposition of the case must be a judgment on the merits; and (4) there must be as between the first and
second action, identity of parties, subject matter, and causes of action. [31]
Res judicata has two concepts: (1) bar by prior judgment as enunciated in Rule 39, Section 47 (b) of the
Rules of Civil Procedure; and (2) conclusiveness of judgment in Rule 39, Section 47 (c).[32]
There is bar by prior judgment when, as between the first case where the judgment was rendered, and
the second case that is sought to be barred, there is identity of parties, subject matter, and causes of action.
Where there is identity of parties and subject matter in the first and second cases, but no identity of causes of
action, there isconclusiveness of judgment.[33] The first judgment is conclusive only as to those
matters actually and directly controverted and determined, not as to matters merely involvedtherein.
The Court of Appeals, in CA G.R. SP No. 31125, resolved only the interlocutory issue of whether the trial
courts Order of April 12, 1993 denying petitioners motion to dismiss respondents petition for annulment was
attended by grave abuse of discretion. The appellate court did not rule on the merits of the petition as to
establish a controlling legal rule which has to be subsequently followed by the parties in the same case. It
merely held that respondents petition in the trial court stated a sufficient cause of action. Its determination of
respondents entitlement to notice of the public auction sale was at best prima facie. Thus, the appellate court
held:
In view of the above, We are of the considered view that the private respondents petition in the
court a quo prima facie states a sufficient cause of action and that the public respondent in denying the
petitioners motion to dismiss, had acted advisedly and well within its powers and authority. We, therefore,
find no cause to annul the challenged order issued by the respondent court in Civil Case No. 9262106. (Underscoring in the original; emphasis and italics supplied)[34]

An order denying a motion to dismiss is merely interlocutory and cannot give rise to res judicata,
hence, it is subject to amendments until the rendition of the final judgment.[35]

On respondents contention that petitioner, as mortgagee, had the duty to notify it of the public
auction sale, the Court finds the same immaterial to the case.
Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to redeem the
mortgaged property only before its sale. Consider the following pronouncement in Paray: [36]
[T]here is no law in our statute books which vests the right of redemption over personal property. Act
No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to
bestow a right of redemption over personal property, since that law governs the extrajudicial sale of
mortgaged personal property, but the statute is definitely silent on the point. And Section 39 of the 1997
Rules of Civil Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of
redemption applies to realproperties, not personal properties, sold on execution. (Emphasis, italics and
underscoring supplied)

Unmistakably, the redemption cited in Section 13 partakes of an equity of redemption, which is the
right of the mortgagor to redeem the mortgaged property after his default in the performance of the
conditions of the mortgage but before the sale of the property[37] to clear it from the encumbrance of the
mortgage.[38] It is not the same asright of redemption which is the right of the mortgagor to redeem the
mortgaged property after registration of the foreclosure sale,[39] and even after confirmation of the sale.[40]
While respondent had attached some of Terrymanilas assets to secure the satisfaction of
a P296,662.16 judgment rendered in another case, what it effectively attached wasTerrymanilas equity of
redemption. That respondents claim is much lower than the P1.5 million actual bid of petitioner at the auction
sale does not defeat respondents equity of redemption. Top Rate International Services, Inc. v.
IAC[41] enlightens:
It is, therefore, error on the part of the petitioner to say that since private respondents lien is only a
total of P343,227.40, they cannot be entitled to the equity of redemption because the exercise of such right
would require the payment of an amount which cannot be less than P40,000,000.00.
When herein private respondents prayed for the attachment of the properties to secure their
respective claims against Consolidated Mines, Inc., the properties had already been mortgaged to the
consortium of twelve banks to secure an obligation of US$62,062,720.66. Thus, like subsequent mortgagees,
the respondents liens on such properties became inferior to that of banks, which claims in the event of
foreclosure proceedings, must first be satisfied. The appellate court, therefore, was correct in holding that in
reality, what was attached by the respondents was merely Consolidated Mines . . . equity of redemption. x x
xx
xxxx
We, therefore, hold that the appellate court did not commit any error in ruling that there was no overlevy on the disputed properties. What was actually attached by respondents was Consolidated Mines right or
equity of redemption, an incorporeal and intangible right, the value of which can neither be quantified nor
equated with the actual value of the properties upon which it may be exercised.[42] (Emphasis, italics and
underscoring supplied)

Having thus attached Terrymanilas equity of redemption, respondent had to be informed of the date of
sale of the mortgaged assets for it to exercise such equity of redemption over some of those foreclosed
properties, as provided for in Section 13.
Recall, however, that respondent filed a motion to reconsider the February 3, 1992 Order of the RTC
Bataan-insolvency court which granted leave to petitioner to foreclose the chattel mortgage, which motion
was denied. Notably, respondent failed to allege this incident in his annulment of sale case before the RTC of
Manila.
Thus, even prior to receiving, through counsel, a mailed notice of the auction sale on the date of the
auction sale itself on June 16, 1992, respondent was already put on notice of the impending foreclosure sale of
the mortgaged chattels. It could thus have expediently exercised its equity of redemption, at the earliest when
it received the insolvency courts Order of March 20, 1992 denying its Motion for Reconsideration of the
February 3, 1992 Order.
Despite its window of opportunity to exercise its equity of redemption, however, respondent chose to
be technically shrewd about its chances, preferring instead to seek annulment of the auction sale, which was
the result of the foreclosure of the mortgage, permission to conduct which it had early on opposed before the
insolvency court. Its negligence or omission to exercise its equity of redemption within a reasonable time, or
even on the day of the auction sale, warrants a presumption that it had either abandoned it or opted not to
assert it.[43] Equitable considerations thus sway against it.
It is also not lost on the Court that as early as April 12, 1991, Terrymanila had been judicially declared
insolvent. Respondents recourse was thus to demand the satisfaction of its judgment award before the
insolvency court as its judgment award is a preferred credit under Article 2244 [44] of the Civil Code. To now
allow respondent have its way in annulling the auction sale and at the same time let it proceed with its claims
before the insolvency court would neither rhyme with reason nor with justice.
Parenthetically, respondent has not shown that it was prejudiced by the auction sale since the
insolvency court already determined that even if the mortgaged properties were foreclosed, there were still
sufficient, unencumbered assets of Terrymanila to cover the obligations owing to other creditors, including
that of respondents.[45]
In any event, even if respondent would have participated in the auction sale and matched petitioners
bid, the superiority of petitioners lien over the mortgaged assets would preclude respondent from recovering
the chattels.
It has long been settled by this Court that the right of those who acquire said properties should not
and can not be superior to that of the creditor who has in his favor an instrument of mortgage executed
with the formalities of the law, in good faith, and without the least indication of fraud. x x x. In purchasing it,
with full knowledge that such circumstances existed, it should be presumed that he did so, very much willing
to respect the lien existing thereon, since he should not have expected that with the purchase, he would
acquire a better right than that which the vendor then had. (Emphasis and underscoring supplied) [46]

It bears noting that the chattel mortgage in favor of petitioner was registered more than two
years before the issuance of a writ of attachment over some of Terrymanilas chattels in favor of respondent.
This is significant in determining who between petitioner and respondent should be given preference over the
subject properties. Since the registration of a chattel mortgage is an effective and binding notice to other
creditors of its existence and creates a real right or lien that follows the property wherever it may be,[47] the
right of respondent, as an attaching creditor or as purchaser, had it purchased the mortgaged chattel at the
auction sale, is subordinate to the lien of the mortgagee who has in his favor a valid chattel mortgage. [48]
Contrary then to the appellate courts ruling, petitioner is not liable for constructive fraud for
proceeding with the auction sale. Nor for subsequently selling the chattel. For foreclosure suits may be
initiated even during insolvency proceedings, as long as leave must first be obtained from the insolvency
court[49] as what petitioner did.
The appellate courts award of exemplary damages and attorneys fees for respondent, given petitioners
good faith, is thus not warranted.
As for petitioners prayer for attorneys fees in its Compulsory Counterclaim, the same is in order, the
dismissal

of

respondents

Complaint

nowithstanding. [50] Perkin

Elmer

Singapore

v.

Dakila

Trading,[51] citing Pinga v. Heirs of German Santiago,[52] enlightens:

It bears to emphasize that petitioners counterclaim against respondent is for damages and attorneys fees
arising from the unfounded suit. While respondents Complaint against petitioner is already dismissed,
petitioner may have very well incurred damages and litigation expenses such as attorneys fees since it
was forced to engage legal representation in the Philippines to protect its rights and to assert lack of
jurisdiction of the courts over its person by virtue of the improper service of summons upon it. Hence, the
cause of action of petitioners counterclaim is not eliminated by the mere dismissal of respondents
complaint.[53] (Underscoring supplied)

To the Court, the amount of P250,000 prayed for by petitioner in its Counterclaim is just and equitable, given
the nature and extent of legal services employed in controverting respondents unfounded claim.
WHEREFORE, the petition for review is GRANTED. The challenged Decision and Resolution of the Court
of Appeals are REVERSED and SET ASIDE. Civil Case No. 92-62106 lodged before the Regional Trial Court of
Manila, Branch 16, is DISMISSED for lack of merit.
Respondent, Royal Cargo Corporation, is ORDERED to pay petitioner, Rizal Commercial Banking
Corporation, P250,000 as and for attorneys fees.
No costs.
SO ORDERED.

3.
G.R. No. L-56568 May 20, 1987
REPUBLIC OF THE PHILIPPINES, represented by the Bureau of Customs and the Bureau of
Internal Revenue,petitioner,
vs.
HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE OF
MANILA, BRANCH XVII, QUALITY TABACCO CORPORATION, FRANCISCO, FEDERACION
OBRERO DE LA INDUSTRIA TABAQUERA Y OTROS TRABAJADORES DE FILIPINAS (FOITAF)
USTC EMPLOYEES ASSOCIATION WORKERS UNION-PTGWO, respondents.
The Republic of the Philippines seeks the review on certiorari of the Order dated 17 November 1980
of the Court of First Instance of Manila in its Civil Case No. 108395 entitled "In the Matter of Voluntary
Insolvency of Quality Tobacco Corporation, Quality Tobacco Corporation, Petitioner," and of the
Order dated 19 January 1981 of the same court denying the motion for reconsideration of the earlier
Order filed by the Bureau of Internal Revenue and the Bureau of Customs for the Republic.
In the voluntary insolvency proceedings commenced in May 1977 by private respondent Quality
Tobacco Corporation (the "Insolvent"), the following claims of creditors were filed:
(i) P2,806,729.92, by the USTC Association of Employees and workers Union-PTGWO USTC as
separation pay for their members. This amount plus an additional sum of P280,672.99 as attorney's
fees had been awarded by the National Labor Relations Commission in NLRC Case No. RB-IV-977577. 1
(ii) P53,805.05 by the Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas
("FOITAF), as separation pay for their members, an amount similarly awarded by the NLRC in the
same NLRC Case.
(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection fees covering the period
1 October 1967 to 28 February 1973;
(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes payable on various
importations by the Insolvent. These obligations appear to be secured by surety bonds. 2 Some of these
imported items are apparently still in customs custody so far as the record before this Court goes.

In its questioned Order of 17 November 1980, the trial court held that the above-enumerated claims
of USTC and FOITAF (hereafter collectively referred to as the "Unions") for separation pay of their
respective members embodied in final awards of the National Labor Relations Commission were to
be preferred over the claims of the Bureau of Customs and the Bureau of Internal Revenue. The trial
court, in so ruling, relied primarily upon Article 110 of the Labor Code which reads thus:
Article 110. Worker preference in case of bankruptcy In the event of bankruptcy or
liquidation of an employer's business, his workers shall enjoy first preference as regards
wages due them for services rendered during the period prior to the bankruptcy or
liquidation, any provision of law to the contrary notwithstanding. Union paid wages shall
be paid in full before other creditors may establish any claim to a share in the assets of
the employer.
The Solicitor General, in seeking the reversal of the questioned Orders, argues that Article 110 of the
Labor Code is not applicable as it speaks of "wages," a term which he asserts does not include
the separation pay claimed by the Unions. "Separation pay," the Solicitor General contends,
is given to a laborer for a separation from employment computed on the basis of the number of years
the laborer was employed by the employer; it is a form of penalty or damage against the employer in
favor of the employee for the latter's dismissal or separation from service. 3
Article 97 (f) of the Labor Code defines "wages" in the following terms:

Wage' paid to any employee shall mean the remuneration or earnings, however
designated, capable of being expressed in terms of money, whether fixed or
ascertained on a time, task, piece, or commission basis, or other method of calculating
the same, which is payable by an employer to an employee under a written or unwritten
contract of employment for work done or to be done, or for services rendered or to be
rendered, and includes the fair and reasonable value, as determined by the Secretary of
Labor, of board, lodging, or other facilities customarily furnished by the employer to the
employee. 'Fair and reasonable value' shall not include any profit to the employer or to
any person affiliated with the employer.(emphasis supplied)
We are unable to subscribe to the view urged by the Solicitor General. We note, in this connection,
that inPhilippine Commercial and Industrial Bank (PCIB) us. National Mines and Allied Workers
Union, 4 the Solicitor General took a different view and there urged that the term "wages" under Article 110 of the Labor
Code may be regarded as embracing within its scope severance pay or termination or separation pay. In PCIB, this Court
5
agreed with the position advanced by the Solicitor General. We see no reason for overturning this particular position. We
continue to believe that, for the specific purposes of Article 110 and in the context of insolvency termination or separation
pay is reasonably regarded as forming part of the remuneration or other money benefits accruing to employees or workers
by reason of their having previously rendered services to their employer; as such, they fall within the scope of
"remuneration or earnings for services rendered or to be rendered ." Liability for separation pay might indeed have
the effect of a penalty, so far as the employer is concerned. So far as concerns the employees, however, separation pay
is additional remuneration to which they become entitled because, having previously rendered services, they are
separated from the employer's service. The relationship between separation pay and services rendered is underscored by
the fact that separation pay is measured by the amount (i.e., length) of the services rendered. This construction is
sustained both by the specific terms of Article 110 and by the major purposes and basic policy embodied in the Labor
Code. 6 It is also the construction that is suggested by Article 4 of the Labor Code which directs that doubts assuming
that any substantial rather than merely frivolous doubts remain-in the interpretation of the provisions of the labor Code and
its implementing rules and regulations shall be "resolved in favor of labor."

The resolution of the issue of priority among the several claims filed in the insolvency proceedings
instituted by the Insolvent cannot, however, rest on a reading of Article 110 of the labor Code alone.
Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation.
Rather, Article 110 must be read in relation to the provisions of the Civil Code concerning the
classification, concurrence and preference of credits, which provisions find particular application in
insolvency proceedings where the claims of all creditors, preferred or non-preferred, may be
adjudicated in a binding manner. 7 It is thus important to begin by outlining the scheme constituted by the
provisions of the Civil Code on this subject.

Those provisions may be seen to classify credits against a particular insolvent into three general
categories, namely:
(a) special preferred credits listed in Articles 2241 and 2242,
(b) ordinary preferred credits listed in Article 2244; and
(c) common credits under Article 2245.
Turning first to special preferred credits under Articles 2241 and 2242, it should be noted at once that
these credits constitute liens or encumbrances on the specific movable or immovable property to
which they relate. Article 2243 makes clear that these credits "shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal provisions governing
insolvency." It should be emphasized in this connection that "duties, taxes and fees due [on specific
movable property of the insolvent] to the State or any subdivision thereof" (Article 2241 [1]) and
"taxes due upon the [insolvent's] land or building (2242 [1])"stand first in preference in respect of the
particular movable or immovable property to which the tax liens have attached. Article 2243 is quite
explicit: "[T]axes mentioned in number 1, Article 2241 and number 1, Article 2242 shall first be
satisfied. " The claims listed in numbers 2 to 13 in Article 2241 and in numbers 2 to 10 in Articles
2242, all come after taxes in order of precedence; such claims enjoy their privileged character as
liens and may be paid only to the extent that taxes have been paid from the proceeds of the specific
property involved (or from any other sources) and only in respect of the remaining balance of such
proceeds. What is more, these other (non-tax) credits, although constituting liens attaching to
particular property, are not preferred one over another inter se. Provided tax liens shall have been
satisfied, non-tax liens or special preferred credits which subsist in respect of specific movable or
immovable property are to be treated on an equal basis and to be satisfied concurrently and

proportionately. 8 Put succintly, Articles 2241 and 2242 jointly with Articles 2246 to 2249 establish a two-tier order of
preference. The first tierincludes only taxes, duties and fees due on specific movable or immovable property. All other
special preferred credits stand on the same second tier to be satisfied, pari passu and pro rata, out of any residual value
of the specific property to which such other credits relate.

Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, take
precedence over ordinary preferred credits so far as concerns the property to which the liens have
attached. The specially preferred credits must be discharged first out of the proceeds of the property
to which they relate, before ordinary preferred creditors may lay claim to any part of such proceeds. 9
If the value of the specific property involved is greater than the sum total of the tax liens and other
specially preferred credits, the residual value will form part of the "free property" of the insolvent
i.e., property not impressed with liens by operation of Articles 2241 and 2242. If, on the other hand,
the value of the specific movable or immovable is less than the aggregate of the tax liens and other
specially preferred credits, the unsatisfied balance of the tax liens and other such credits are to the
treated as ordinary credits under Article 2244 and to be paid in the order of preference there set up.

10

In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which
follow such property. What Article 2244 creates are simply rights in favor of certain creditors to have
the cash and other assets of the insolvent applied in a certain sequence or order of priority. 11
Only in respect of the insolvent's "free property" is an order of priority established by Article 2244. In
this sequence, certain taxes and assessments also figure but these do not have the same kind of
overriding preference that Articles 2241 No. 1 and 2242 No. I create for taxes which constituted liens
on the taxpayer's property. Under Article 2244,
(a) taxes and assessments due to the national government, excluding those which
result in tax liens under Articles 2241 No. 1 and 2242 No. 1 but including the balance
thereof not satisfied out of the movable or immovable property to which such liens
attached, are ninth in priority;
(b) taxes and assessments due any province, excluding those impressed as tax liens
under Articles 2241 No. 1 and 2242 No. 1, but including the balance thereof not
satisfied out of the movable or immovable property to which such liens attached,
are tenth in priority; and
(c) taxes and assessments due any city or municipality, excluding those impressed as
tax liens under Articles 2241 No. I and 2242 No. 2 but including the balance thereof not
satisfied out of the movable or immovable property to which such liens attached, are
eleventh in priority.
It is within the framework of the foregoing rules of the Civil Code that the question of the relative
priority of the claims of the Bureau of Customs and the Bureau of Internal Revenue, on the one hand,
and of the claims of the Unions for separation pay of their members, on the other hand, is to be
resolved. A related vital issue is what impact Article 110 of the labor Code has had on those
provisions of the Civil Code.
A. Claim of the Bureau of Customs for Unpaid Customs Duties and TaxesUnder Section 1204 of the Tariff and Customs Code, 12 the liability of an importer
for duties, taxes and fees and other charges attaching on importation constitute a personal debt due
from the importer to the government which can be discharged only by payment in full of all duties,
taxes, fees and other charges legally accruing It also constitutes a lien upon the articles imported
which may be enforced while such articles are in the custody or subject to the control of the
government. (emphasis supplied)
Clearly, the claim of the Bureau of Customs for unpaid customs duties and taxes enjoys the status of
a specially preferred credit under Article 2241, No. 1, of the Civil Code. only in respect of the articles
importation of which by the Insolvent resulted in the assessment of the unpaid taxes and duties, and
which are still in the custody or subject to the control of the Bureau of Customs. The goods imported
on one occasion are not subject to a lien for customs duties and taxes assessed upon other

importations though also effected by the Insolvent. Customs duties and taxes which remain
unsatisfied after levy upon the imported articles on which such duties and taxes are due, would have
to be paid out of the Insolvent's "free property" in accordance with the order of preference embodied
in Article 2244 of the Civil Code. Such unsatisfied customs duties and taxes would fall within Article
2244, No. 9, of the Civil Code and hence would be ninth in priority.
B. Claims of the Bureau of Internal Revenue for Tabacco Inspection Fees
Under Section 315 of the National Internal Revenue Code ("old Tax Code"),

13 later reenacted in Identical terms as

Section 301 of the Tax Code of 1977, 14 an unpaid "internal revenue tax," together with related interest, penalties and costs, constitutes a lien in favor of the
Government from the time an assessment therefor is made and until paid, "upon all property and rights to property belonging to the taxpayer."

Tobacco inspection fees are specifically mentioned as one of the miscellaneous taxes imposed under
the National Internal Revenue Code, specifically Title VIII, Chapter IX of the old Tax Code and little
VIII, Chapter VII of the Tax Code of 1977. 15 Tobacco inspection fees are collected both for purposes of regulation and control and for
purposes of revenue generation: half of the said fees accrues to the Tobacco Inspection Fund created by Section 1 2 of Act No. 2613, as amended by Act No.
3179, while the other half accrues to the Cultural Center of the Philippines. Tobacco inspection fees, in other words, are im posed both as a regulatory measure
and as a revenue-raising measure. In Commissioner of Internal Revenue us. Guerrero, et al 16 this Court held, through Mr. Chief Justice Concepcion, that the
term "tax" is used in Section 315 of the old Tax Code:

not in the limited sense [of burdens imposed upon persons and/or properties, by way of
contributions to the support of the Government, in consideration of general benefits
derived from its operation], but, in a broad sense, encompassing all government
revenues collectible by the Commissioner of Internal Revenue under said Code,
whether involving taxes, in the strict technical sense thereof, or not. x x x As used in
Title IX of said Code, the term 'tax' includes 'any national internal revenue tax, fee or
charge imposed by the Code. 17
It follows that the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees
constitutes a claim for unpaid internal revenue taxes 18 which gives rise to a tax lien upon all the properties and assets, movable
and immovable, of the Insolvent as taxpayer. Clearly, under Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given
preference over any other claim of any other creditor, in respect of any and all properties of the Insolvent. 19

C. Claims of the Unions for Separation Pay of Their Members

Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for
unpaid wages either upon all of the properties or upon any particular property owned by their
employer. Claims for unpaid wages do not therefore fall at all within the category of specially
preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent that
such claims for unpaid wages are already covered by Article 2241, number 6. "claims for laborers'
wages, on the goods manufactured or the work done;" or by Article 2242, number 3: "claims of
laborers and other workers engaged in the construction, reconstruction or repair of buildings, canals
and other works, upon said buildings, canals or other works." To the extent that claims for unpaid
wages fall outside the scope of Article 2241, number 6 and 2242, number 3, they would come within
the ambit of the category of ordinary preferred credits under Article 2244.
Applying Article 2241, number 6 to the instant case, the claims of the Unions for separation pay of
their members constitute liens attaching to the processed leaf tobacco, cigars and cigarettes and
other products produced or manufactured by the Insolvent, but not to other assets owned by the
Insolvent. And even in respect of such tobacco and tobacco products produced by the Insolvent, the
claims of the Unions may be given effect only after the Bureau of Internal Revenue's claim for unpaid
tobacco inspection fees shall have been satisfied out of the products so manufactured by the
Insolvent.
Article 2242, number 3, also creates a lien or encumbrance upon a building or other real property of
the Insolvent in favor of workmen who constructed or repaired such building or other real property.
Article 2242, number 3, does not however appear relevant in the instant case, since the members of
the Unions to whom separation pay is due rendered services to the Insolvent not (so far as the record
of this case would show) in the construction or repair of buildings or other real property, but rather, in
the regular course of the manufacturing operations of the Insolvent. The Unions' claims do not
therefore constitute a lien or encumbrance upon any immovable property owned by the Insolvent, but
rather, as already indicated, upon the Insolvent's existing inventory (if any of processed tobacco and
tobacco products.

We come to the question of what impact Article 110 of the Labor Code has had upon the complete
scheme of classification, concurrence and preference of credits in insolvency set out in the Civil
Code. We believe and so hold that Article 110 of the Labor Code did not sweep away the overriding
preference accorded under the scheme of the Civil Code to tax claims of the government or any
subdivision thereof which constitute a lien upon properties of the Insolvent. It is frequently said that
taxes are the very lifeblood of government. The effective collection of taxes is a task of highest
importance for the sovereign. It is critical indeed for its own survival. It follows that language of a
much higher degree of specificity than that exhibited in Article 110 of the Labor Code is necessary to
set aside the intent and purpose of the legislator that shines through the precisely crafted provisions
of the Civil Code. It cannot be assumed simpliciter that the legislative authority, by using in Article 110
the words "first preference" and "any provision of law to the contrary notwithstanding" intended to
disrupt the elaborate and symmetrical structure set up in the Civil Code. Neither can it be assumed
casually that Article 110 intended to subsume the sovereign itself within the term "other creditors" in
stating that "unpaid wages shall be paid in full before other creditors may establish any claim to a
share in the assets of employer." Insistent considerations of public policy prevent us from giving to
"other creditors" a linguistically unlimited scope that would embrace the universe of creditors save
only unpaid employees.
We, however, do not believe that Article 110 has had no impact at all upon the provisions of the Civil
Code. Bearing in mind the overriding precedence given to taxes, duties and fees by the Civil Code
and the fact that the Labor Code does not impress any lien on the property of an employer, the use of
the phrase "first preference" in Article 110 indicates that what Article 110 intended to modify is the
order of preference found in Article 2244, which order relates, as we have seen, to property of the
Insolvent that is not burdened with the liens or encumbrances created or recognized by Articles 2241
and 2242. We have noted that Article 2244, number 2, establishes second priority for claims for
wages for services rendered by employees or laborers of the Insolvent "for one year preceding the
commencement of the proceedings in insolvency." Article 110 of the Labor Code establishes "first
preference" for services rendered "during the period prior to the bankruptcy or liquidation, " a period
not limited to the year immediately prior to the bankruptcy or liquidation. Thus, very substantial effect
may be given to the provisions of Article 110 without grievously distorting the framework established
in the Civil Code by holding, as we so hold, that Article 110 of the Labor Code has modified Article
2244 of the Civil Code in two respects: (a) firstly, byremoving the one year limitation found in Article
2244, number 2; and (b) secondly, by moving up claims for unpaid wages of laborers or workers of
the Insolvent from second priority to first priority in the order of preference established I by Article
2244.
Accordingly, and by way of recapitulating the application of Civil Code and Labor Code provisions to
the facts herein, the trial court should inventory the properties of the Insolvent so as to determine
specifically: (a) whether the assets of the Insolvent before the trial court includes stocks of processed
or manufactured tobacco products; and (b) whether the Bureau of Customs still has in its custody or
control articles imported by the Insolvent and subject to the lien of the government for unpaid customs
duties and taxes.
In respect of (a), if the Insolvent has inventories of processed or manufactured tobacco products,
such inventories must be subjected firstly to the claim of the Bureau of Internal Revenue for unpaid
tobacco inspection fees. The remaining value of such inventories after satisfaction of such fees (or
should such inspection fees be satisfied out of other properties of the Insolvent) will be subject to a
lien in favor of the Unions by virtue of Article 2241, number 6. In case, upon the other hand, the
Insolvent no longer has any inventory of processed or manufactured product, then the claim of the
Unions for separation pay would have to be satisfied out of the "free property" of the Insolvent under
Article 2244 of the Civil Code. as modified by Article 110 of the Labor Code.
Turning to (b), should the Bureau of Customs no longer have any importations by the Insolvent still
within customs custody or control, or should the importations still held by the Bureau of Customs be
or have become insufficient in value for the purpose, customs duties and taxes remaining unpaid
would have only ninth priority by virtue of Article 2244, number 9. In respect therefore of the
Insolvent's "free property, " the claims of the Unions will enjoy first priority under Article 2244 as
modified and will be paid ahead of the claims of the Bureau of Customs for any customs duties and
taxes still remaining unsatisfied.

It is understood that the claims of the Unions referred to above do not include the 10% claim for
attorney's fees. Attorney's fees incurred by the Unions do not stand on the same footing as the
Unions' claims for separation pay of their members.
WHEREFORE, the petition for review is granted and the Orders dated 17 November 1980 and 19
January 1981 of the trial court are modified accordingly. This case is hereby remanded to the trial
court for further proceedings in insolvency compatible with the rulings set forth above. No
pronouncement as to costs.
SO ORDERED.
Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras, Gancayco, Padilla,
Bidin, Sarmiento and Cortes, JJ., concur,

Separate Opinions

CRUZ, J., dissenting:

I regret I cannot give my concurrence to the majority opinion because it reads into the law an
exception that is not there. In so doing, it arrogates for the Court a power rightfully belonging to the
legislature.
It seems to me that the erudite ponencia "doth protest too much. "
The language of the provision in question is clear and categorical. Article 110 of P.D. No. 442 states
quite plainly:
D. Art. 110. Worker preference in case of bankruptcy. In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first preference as regards wages due them for services
rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary
notwithstanding. Unpaid wages shall be paid in full before other creditors may establish any claim to a
share in the assets of the employer. (Emphasis mine).
I take the phrase "any provision of law to the contrary notwithstanding" to mean exactly what it says, I
submit that if the law had intended an exception, it would have - and could easily have-provided for it.
The labor Code was promulgated by President Marcos who, we may assume, was aware of the usual
preference of tax claims. So informed, he would have reserved that primacy in the above article if that
was what he really wanted.
That fact that he did not is to me a certain indication of his true intention, viz., that under the said
article the claims of laborers for unpaid wages shall have priority above all else.
It is axiomatic that the words of a statute are to be given their normal and ordinary connotation. We
cannot read into the law meanings that are not intended and - worse - that are precisely excluded as
in this case.
Moreover, the Labor Code was promulgated later than the Civil Code, the Insolvency Law and the
Internal Revenue Code where the tax claims are preferred. The Labor Code prevails over these
earlier statutes as it represents the later expression of the legislative will.
While I recognize the need for the usual preference of taxes over other claims, I suggest that general
rule must be read in the light of the basic policy embodied in the Labor Code for the protection of the
working class.

The power of taxation, while indispensable, is not absolute and may be subordinated to the demands
of social justice. I for one am not alarmed by the dire prognostication that this would prejudice the
very existence of the state. The amount involved is relatively insubstantial and is not significant
enough as to drain the coffers of the government.
By contrast, that same amount could, without exaggeration, spell the difference between subsistence
and starvation for the laborer and affect the very survival of the faith we hope he still retains in the
concern of the state for his welfare.
Social justice is not a mere catchphrase to be mouthed with sham fervor in Labor Day celebrations for
the delectation and seduction of the working class. It is a mandate we should pursue with energy and
sincerity if we are to truly insure the dignity and well-being of the laborer.
By the decision reached today, I feel the Court has reneged on its hitherto consistent commitment for
the protection of labor under the policy of social justice. It is for me a cause for deep disappointment.
Separate Opinions
CRUZ, J., dissenting:
I regret I cannot give my concurrence to the majority opinion because it reads into the law an
exception that is not there. In so doing, it arrogates for the Court a power rightfully belonging to the
legislature.
It seems to me that the erudite ponencia "doth protest too much. "
The language of the provision in question is clear and categorical. Article 110 of P.D. No. 442 states
quite plainly:
D. Art. 110. Worker preference in case of bankruptcy. In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first preference as regards wages due them for services
rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary
notwithstanding. Unpaid wages shall be paid in full before other creditors may establish any claim to a
share in the assets of the employer. (Emphasis mine).
I take the phrase "any provision of law to the contrary notwithstanding" to mean exactly what it says, I
submit that if the law had intended an exception, it would have - and could easily have-provided for it.
The labor Code was promulgated by President Marcos who, we may assume, was aware of the usual
preference of tax claims. So informed, he would have reserved that primacy in the above article if that
was what he really wanted.
That fact that he did not is to me a certain indication of his true intention, viz., that under the said
article the claims of laborers for unpaid wages shall have priority above all else.
It is axiomatic that the words of a statute are to be given their normal and ordinary connotation. We
cannot read into the law meanings that are not intended and - worse - that are precisely excluded as
in this case.
Moreover, the Labor Code was promulgated later than the Civil Code, the Insolvency Law and the
Internal Revenue Code where the tax claims are preferred. The Labor Code prevails over these
earlier statutes as it represents the later expression of the legislative will.
While I recognize the need for the usual preference of taxes over other claims, I suggest that general
rule must be read in the light of the basic policy embodied in the Labor Code for the protection of the
working class.
The power of taxation, while indispensable, is not absolute and may be subordinated to the demands
of social justice. I for one am not alarmed by the dire prognostication that this would prejudice the
very existence of the state. The amount involved is relatively insubstantial and is not significant
enough as to drain the coffers of the government.

By contrast, that same amount could, without exaggeration, spell the difference between subsistence
and starvation for the laborer and affect the very survival of the faith we hope he still retains in the
concern of the state for his welfare.
Social justice is not a mere catchphrase to be mouthed with sham fervor in Labor Day celebrations for
the delectation and seduction of the working class. It is a mandate we should pursue with energy and
sincerity if we are to truly insure the dignity and well-being of the laborer.
By the decision reached today, I feel the Court has reneged on its hitherto consistent commitment for
the protection of labor under the policy of social justice. It is for me a cause for deep disappointment.

4.
[G.R. No. L-33929. September 2, 1983.]
PHILIPPINE SAVINGS BANK, Petitioner, v. HON. GREGORIO T. LANTIN, Presiding Judge, Court of First
Instance of Manila, Branch VII, and CANDIDO RAMOS, Respondents.
Jose Diokno for Petitioner.
Romeo C . Carlos for Private Respondent.

SYLLABUS

1. CIVIL LAW; CREDIT TRANSACTION; CONCURRENCE AND PREFERENCE OF CREDITS; INSUFFICIENT ASSETS OF
DEBTOR RAISES QUESTION OF PREFERENCE AS WELL AS QUESTION OF CONSEQUENCE IN CONCURRENCE OF
CREDITS. Concurrence of credits occurs when the same specific property of the debtor or all of his property
is subjected to the claims of several creditors. The concurrence of credits raises no questions of consequence
were the value of the property or the value of all assets of the debtor is sufficient to pay in fall all the
creditors. However, it becomes material when said assets are insufficient for then some creditors of necessity
will not be paid or some creditors will not obtain the full satisfaction of their claims. In this situation, the
question of preference will then arise, that is to say who of the creditors will be paid the all of the others
(Caguioa, Comments and Cases on Civil Law, 1970 ed., Vol. VI, p. 472).
2. ID.; ID.; PREFERENCE OF CREDITS; ARTICLES 2249 AND 2242 OF THE NEW CIVIL CODE OF THE PHILIPPINES;
CONSTRUED. Under the system established by Article 2249 of the civil Code of the Philippines, only taxes
and assessments upon immovable property enjoy absolute preference. All the remaining specified classes of
preferred creditors under Article 2242 enjoy no priority among themselves. Their credits shall be satisfied prorata, i.e., in proportion to the amount of the respective credits.
3. ID.; ID.; ARTICLE 2249 AND 2242 OF THE NEW CIVIL CODE; PAIL REQUISITE TO THEIR FULL APPLICATION
UNDER THE DE BARRETO CASE. Under the De Barreto decision, the full application of Articles 2242 and
2249 demands that there must first be some proceeding where the class of all the preferred creditors may be
bindingly adjudicated, such as insolvency, the settlement of a decedents estate under Rule 87 of the Rules of
Court, or other liquidation proceedings of similar import.
4. REMEDIAL LAW; INSOLVENCY PROCEEDINGS AND SETTLEMENT OF A DECEDENTS ESTATE; BOTH
PROCEEDINGS IN REM, OTHER EQUIVALENT GENERAL LIQUIDATION OF SIMILAR NATURE. Insolvency
proceedings end settlement of a decedents estate are both proceedings in rem which are binding the whole
world. All persons having interest in the subject matter involved, whether they were notified or not, are
equally bound. Consequently, a liquidation of similar import or other equivalent general liquidation must also
necessarily be a proceeding in rem so that all interested persons whether known to the parties or not may be
bound by such proceeding.
3. ID.; ACTION FOR COLLECTION OF UNPAID CONTRACTORS FEE; NOT AN ACTION IN REM. The proceedings
in the court below do not partake of the insure of insolvency proceedings or settlement of a decedents
estate. The action filed by Ramos was only to collect the unpaid cost of the construction of the duplex
apartment. It is far from being a general liquidation of the estate of the Tabligan spouses.
6. CIVIL LAW; CREDIT TRANSACTION; ANNOTATION OF CLAIMS AND CREDITS AS STATUTORY LIENS;
RELEVANCE TO THE STABILITY OF THE TORRENS SYSTEM. In the case at bar, although the lower court found
that "there were no known creditors other than the plaintiff and the defendant herein," this cannot be
conclusive. It will not bar other creditors in the event they show up and present their claims State petitioner
bank, claiming that they also have preferred liens against the property involved. Consequently, Transfer
Certificate of Title No. 101864 issued in favor of the bank which is supposed to be indefeasible would remain
constantly unstable and questionable. Such could not have been the intention of Article 2243 of the Civil Code
although it considers claims and credits under Article 2242 as statutory liens. Neither does the De Barreto case

sanction such instability. In fact, an annotation, as suggested above, would insure to the benefit of the public,
particularly those who may subsequently wish to buy the property in question or who have a business
transaction in connection therewith. It would facilitate the enforcement of a legal statutory right which cannot
be barred by laches (See Manila Railroad Co. v. Luzon Stevedoring Co., 100 Phil. 135).
7. ID.; SALE; BUYER IN GOOD FAITH OF REALTY; TAKES IT FEE FROM LIENS AND ENCUMBRANCES OTHER THAN
STATUTORY LIENS AND THOSE ANNOTATED IN THE TITLE; CASE AT BAR. Since the action filed by the private
respondent is not one which can be considered as "equivalent general liquidation" having the same import as
an insolvency or settlement of the decedents estate proceeding, the well established principle must be
applied that a purchaser in good faith and for value takes register land free from liens and encumbrances
other than statutory liens and those recorded in the Certificate of Title. It Is an limited fact that at the time the
deeds of real estate mortgage in favor of the petitioner bank were constituted, the transfer certificate of title
of the spouses Tabligan was free from any recorded lien and encumbrances, so that the only registered liens in
the title were deeds in favor of the petitioner.

DECISION

GUTIERREZ, JR., J.:

This is a petition for review of the decision of the Court of First Instance of Manila, Branch VII, presided over
by respondent Judge Gregorio T. Lantin, in Civil Case No. 79914 entitled Candido Ramos v. Philippine Savings
Bank and of the order denying a motion for its reconsideration. The dispositive portion of the decision
reads:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering the
defendant to pay the plaintiff the sum of P15,000.00 as his pro-rata share in the value of the duplexapartment house which was built by the plaintiff for the spouses likewise Filomeno Tabligan and Socorro
Espiritu, which is now registered in the name of the defendant under Transfer Certificate of Title No. 101864
issued by the Register of Deeds of the City of Manila, on August 6, 1970, with legal interest from the date of
the filing of the complaint until fully paid; to pay the sum of P500.00 as attorneys fees; and to pay the costs.
"The counterclaim interposed by the defendant is hereby dismissed."cralaw virtua1aw library
Involved in this case is a duplex-apartment house on a lot covered by TCT No. 86195 situated at San Diego
Street, Sampaloc, Manila, and owned by the spouses Filomeno and Socorro Tabligan.
The duplex-apartment house was built for the spouses by private respondent Candido Ramos, a duly licensed
architect and building contractor, at a total cost of P32,927.00. The spouses paid private respondent the sum
of P7,139.00 only. Hence, the latter used his own money, P25,788.50 in all, to finish the construction of the
duplex-apartment.chanrobles.com:cralaw:red
Meanwhile, on December 16, 1966, February 1, 1967, and February 28, 1967, the spouses Tabligan obtained
from petitioner Philippine Savings Bank three (3) loans in the total amount of P35,000.00, the purpose of
which was to complete the construction of the duplex-apartment. To secure payment of the l2oans, the
spouses executed in favor of the petitioner three (3) promissory notes and three (3) deeds of real estate
mortgages over the property subject matter of this litigation.
On December 19, 1966, the petitioner registered the December 16, 1966 deed of real estate mortgage with
the Register of Deeds of Manila. The subsequent mortgages of February 1, 1967, and February 28, 1967, were
registered with the Register of Deeds of Manila on February 2, 1967 and March 1, 1967, respectively. At the
time of the registration of these mortgages, Transfer Certificate of Title No. 86195 was free from all liens and
encumbrances.
The spouses failed to pay their monthly amortizations. As a result thereof, the petitioner bank foreclosed the
mortgages, and at the public auction held on July 23, 1969, was the highest bidder.

On August 5, 1969, the petitioner bank registered the certificate of sale issued in its favor. On August 9, 1970,
the bank consolidated its ownership over the property in question, and Transfer Certificate of Title No. 101864
was issued by the Register of Deeds of Manila in the name of the petitioner bank.
Upon the other hand, the private respondent filed an action against the spouses to collect the unpaid cost of
the construction of the duplex-apartment before the Court of First Instance of Manila, Branch I, which case
was docketed therein as Civil Case No. 69228. During its pendency, the private respondent succeeded in
obtaining the issuance of a writ of preliminary attachment, and pursuant thereto, had the property in question
attached. Consequently, a notice of adverse claim was annotated at the back of Transfer Certificate of Title
No. 86195.
On August 26, 1968, a decision was rendered in Civil Case No. 69228 in favor of the private respondent and
against the spouses. A writ of execution was accordingly issued but was returned unsatisfied.
As the spouses did not have any properties to satisfy the judgment in Civil Case No. 69228, the private
respondent addressed a letter to the petitioner for the delivery to him (private respondent) of his pro-rata
share in the value of the duplex-apartment in accordance with Article 2242 of the Civil Code. The petitioner
refused to pay the pro-rata value prompting the private respondent to file the instant action. As earlier stated,
a decision was rendered in favor of the private Respondent.chanrobles virtual lawlibrary
The parties are agreed that the only issue is whether or not the private respondent is entitled to claim a prorata share in the value of the property in question. The applicable provision, Article 2242 of the Civil Code,
reads as follows:jgc:chanrobles.com.ph
"ART. 2242. With reference to specific immovable property and real rights of the debtor, the following claims,
mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or real
right:jgc:chanrobles.com.ph
"(1) Taxes due upon the land or building;
"(2) For the unpaid price of real property sold, upon the immovable sold;
"(3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and
contractors, engaged in the construction, reconstruction or repair of buildings, canals or other works, upon
said buildings, canals or other works;
"(4) Claims of furnishers of materials used in the construction reconstruction, or repair of buildings, canals or
other works upon said buildings, canals or other works;
"(5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;
"(6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement,
upon the immovable preserved or improved;
"(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or executions,
upon the property affected, and only as to later credits;
"(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus
divided;
"(9) Claims of donors of real property for pecuniary charges or other conditions imposed upon the donee,
upon the immovable donated;
"(10) Credits of insurers upon the property insured, for the insurance premium for two years."cralaw
virtua1aw library
Both the petitioner bank and private respondent Ramos rely on the case of De Barreto v. Villanueva (6 SCRA

928).
The petitioner bank would impress upon this Court that the proceedings had before the court below is not one
of the proceedings contemplated in the De Barreto case that will sustain the authority of the respondent court
to adjudicate the claims of all preferred creditors under Article 2242 of the Civil Code. Petitioner argues that
for Article 2242 of the Civil Code to apply, there must have been an insolvency proceeding or other liquidation
proceedings of similar import. And under the facts then obtaining, there could have been no insolvency
proceeding as there were only two known creditors. ** Consequently, it is argued that private respondents
unpaid contractors claim did not acquire the character of a statutory lien equal to the petitioners registered
mortgage.
Upon the other hand, private respondent Ramos maintains that the proceedings had before the court below
can qualify as a general liquidation of the estate of the spouses Tabligan because the only existing property of
said spouses is the property subject matter of this litigation.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph
Concurrence of credits occurs when the same specific property of the debtor or all of his property is subjected
to the claims of several creditors. The concurrence of credits raises no questions of consequence where the
value of the property or the value of all assets of the debtor is sufficient to pay in full all the creditors.
However, it becomes material when said assets are insufficient for then some creditors of necessity will not be
paid or some creditors will not obtain the full satisfaction of their claims. In this situation, the question of
preference will then arise, that is to say who of the creditors will be paid ahead of the others. (Caguioa,
Comments and Cases on Civil Law, 1970 ed., Vol. VI, p. 472.)
Under the system established by Article 2249 of the Civil Code of the Philippines, only taxes and assessments
upon immovable property enjoy absolute preference. All the remaining specified classes of preferred creditors
under Article 2242 enjoy no priority among themselves. Their credits shall be satisfied pro-rata, i.e., in
proportion to the amount of the respective credits.
Under the De Barreto decision, the full application of Articles 2242 and 2249 demands that there must first be
some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as
insolvency, the settlement of a decedents estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import.
The pertinent ruling reads:jgc:chanrobles.com.ph
"Thus, it becomes evident that one preferred creditors third-party claim to the proceeds of a foreclosure sale
(as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences
under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none
of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro rata
dividend corresponding to each because the rights of the other creditors likewise enjoying preference under
Article 2242 can not be ascertained. Wherefore, the order of the Court of First Instance of Manila now
appealed from, decreeing that the proceeds of the foreclosure sale be apportioned only between appellant
and appellee, is incorrect and must be reversed.
"In the absence of insolvency proceedings (or other equivalent general liquidation of the debtors estate), the
conflict between the parties now before us must be decided pursuant to the well established principle
concerning registered lands; that a purchaser in good faith and for value (as the appellant concededly is) takes
registered property free from liens and encumbrances other then statutory liens and those recorded in the
certificate of title. There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did
not acquire the character and rank of a statutory lien co-equal to the mortgagees recorded encumbrance, and
must remain subordinate to the latter."cralaw virtua1aw library
The resolution of this petition, therefore, hinges on the determination of whether an insolvency proceeding or
other liquidation proceeding of similar import may be considered to have been conducted in the court below.
The respondent court ruled in the affirmative holding that:jgc:chanrobles.com.ph

"There were no known creditors, other than the plaintiff and defendant herein, and the proceedings in the
present case may ascertain and bindingly adjudicate the respective claims of the plaintiff and the defendant,
serving as a substantial compliance with what the Supreme Court stated:jgc:chanrobles.com.ph
". . . it is thus apparent that the full application of Articles 2242 and 2249 demands that there must be first
some proceeding where the claims of all the preferred creditors may be bindingly adjudicated, such as
insolvency, the settlement of a decedents estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import. (de Barretto v. Villanueva, Et Al., G.R. No. L-14938, December 29, 1962)."
A careful considering of this petition leads us to agree with the petitioner. The conclusions of the lower court
are not supported by the law and the facts.
The proceedings in the court below do not partake of the nature of the insolvency proceedings or settlement
of a decedents estate. The action filed by Ramos was only to collect the unpaid cost of the construction of the
duplex apartment. It is far from being a general liquidation of the estate of the Tabligan spouses.
Insolvency proceedings and settlement of a decedents estate are both proceedings in rem which are binding
against the whole world. All persons having interest in the subject matter involved, whether they were
notified or not, are equally bound. Consequently, a liquidation of similar import or "other equivalent general
liquidation must also necessarily be a proceeding in rem so that all interested persons whether known to the
parties or not may be bound by such proceeding.
In the case at bar, although the lower court found that "there were no known creditors other than the plaintiff
and the defendant herein", this can not be conclusive. It will not bar other creditors in the event they show up
and present their claims against the petitioner bank, claiming that they also have preferred liens against the
property involved. Consequently, Transfer Certificate of Title No. 101864 issued in favor of the bank which is
supposed to be indefeasible would remain constantly unstable and questionable. Such could not have been
the intention of Article 2243 of the Civil Code although it considers claims and credits under Article 2242 as
statutory liens. Neither does the De Barretto case sanction such instability. It emphasized the
following:jgc:chanrobles.com.ph
"We are understandably loath (absent a clear precept of law so commanding) to adopt a rule that would
undermine the faith and credit to be accorded to registered Torrens titles and nullify the beneficient
objectives sought to be obtained by the Land Registration Act. No argument is needed to stress that if a
person dealing with registered land were to be held to take it in every instance subject to all the fourteen
preferred claims enumerated in Article 2242 of the new Civil Code, even if the existence and import thereof
can not be ascertained from the records, all confidence in Torrens titles would be destroyed, and credit
transactions on the faith of such titles would be hampered, if not prevented, with incalculable results. Loans
on real estate security would become aleatory and risky transactions, for no prospective lender could
accurately estimate the hidden liens on the property offered as security, unless he indulged in complicated,
tedious investigations. The logical result might well be a contraction of credit to unforeseable proportions that
could lead to economic disaster.
"Upon the other hand, it does not appear excessively burdensome to require the privileged creditors to cause
their claims to be recorded in the books of the Register of Deeds should they desire to protect their rights
even outside of insolvency or liquidation proceedings.
In fact, an annotation, as suggested above, would inure to the benefit of the public, particularly those who
may subsequently wish to buy the property in question or who have a business transaction in connection
therewith. It would facilitate the enforcement of a legal statutory right which cannot be barred by laches. (See
Manila Railroad Co. v. Luzon Stevedoring Co., 100 Phil. 135).chanrobles law library
Respondent Ramos admitted in the partial stipulation of facts submitted by both parties that at the time of
the loans to the spouses, the petitioners bank had no actual or constructive knowledge of any lien against the
property in question. The duplex apartment house was built for P32,927.00. The spouses Tabligan borrowed
P35,000.00 for the construction of the apartment house. The bank could not have known of any contractors
lien because, as far as it was concerned, it financed the entire construction even if the stated purpose of the
loans was only to "complete" the construction.

Since the action filed by the private respondent is not one which can be considered as "equivalent general
liquidation" having the same import as an insolvency or settlement of the decedents estate proceeding, the
well established principle must be applied that a purchaser in good faith and for value takes registered land
free from liens and encumbrances other than statutory liens and those recorded in the Certificate of Title. It is
an admitted fact that at the time the deeds of real estate mortgage in favor of the petitioner bank were
constituted, the transfer certificate of title of the spouses Tabligan was free from any recorded lien and
encumbrances, so that the only registered liens in the title were deeds in favor of the petitioner.
Prescinding from the foregoing, the private respondents claim must remain subordinate to the petitioner
banks title over the property evidenced by TCT No. 101864.
WHEREFORE, the petition is granted. The decision of the Court of First Instance of Manila, Branch VII is,
hereby, reversed and set aside. The complaint and the counterclaim are dismissed.
SO ORDERED.

5.
G.R. No. L-14938

January 28, 1961

MAGDALENA C. DE BARRETO, ET AL., plaintiffs-appellants,

vs.
JOSE G. VILLANUEVA, ET AL., defendants-appellees.
Bausa, Ampil & Suarez for plaintiffs-appellants.
Esteban Ocampo for defendants-appellees.
GUTIERREZ DAVID, J.:
On May 10, 1948, Rosario Cruzado, for herself and as administratix of the intestate estate of her deceased husband
Pedro Cruzado in Special Proceedings No. 4959 of the Court of First Instance of Manila, obtained from the defunct
Rehabilitation Finance Corporation (hereinafter referred to as the RFC a loan in the amount of P11,000.00. To
secure payment thereof, she mortgaged the land then covered by Transfer Certificate of Title No. 61358 issued in
her name and that of her deceased. husband. As she failed to pay certain installments on the loan, the mortgage
was foreclosed and the RFC acquired the property for P11,000.00, subject to her rights as mortgagor to re-purchase
the same. On July 26, 1951, upon her application, the land was sold back to her conditionally for the amount of
P14,269.03, payable in seven years.
About two years thereafter, or on February 13, 1953 Rosario Cruzado, as guardian of her minor children in Special
Proceedings No. 14198 of the Court of First Instance of Manila, was authorized by the court, to sell with the previous
consent of the RFC the land in question together with the improvements thereon for a sum not less than P19,000.
Pursuant to such authority and with the consent of the RFC, she sold to Pura L. Villanueva for P19,000.00 "all their
rights, interest,' title and dominion and over the herein described parcel of land together with the existing
improvements thereon, including one use and an annex thereon; free from all charges and encumbrances, , with the
exception of the sum of P11,009.52, is stipulated interest thereon, which the vendor, is still presently obligated to the
RFC and which the vendee herein now assumes to pay to the RFC under the same terms and conditions specified
in that deed of sale dated July 26, 1951." Having paid in advance the sum of P500.00, Pura L. Villanueva, the
vendee, in consideration of the aforesaid sale, executed in favor of the vendor Rosario Cruzado a promissory note
dated March 9, 1953, undertaking to pay the balance of P17,500.00 in monthly installments. On April 22, 1953, she
made an additional payment of P5,500.00 on the promissory note. She was, subsequently, able to secure in her
name Transfer Certificate of Title No. 32526 covering the house and lot above referred to, and on July 10, 1953, she
mortgaged the said property to Magdalena C. Barretto as security for a loan the amount of P30,000.00.
As said Pura L. Villanueva had failed to pay the remaining installments on the unpaid balance of P12,000.00 her
promissory note for the sale of the property in question, a complaint for the recovery of the same from her and her
husband was filed on September 21, 1963 by Rosario Cruzado in her own right and in her capacity as judicial
guardian of her minor children. Pending trial of the case, a lien was constituted upon the property in the nature of a
levy in attachment in favor of the Cruzados said lien being annotated at the back of Transfer Certificate of Title No.
32526. After trial, decision was rendered ordering Pura Villanueva and her husband, jointly and severally, to pay
Rosario Cruzado the sum of P12,000.00, with legal interest thereon from the date of the filing of the complaint until
fully paid plus the sum of P1,500.00 as attorney's fees.
Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to Magdalena C. Barretto, the latter,
jointly with her husband, instituted against the Villanueva spouses an action for foreclosure of mortgage, impleading
Rosario Cruzado and her children as parties defendants. On November 11, 1956, decision was rendered in the case
absolving the Cruzados from the complaint and sentencing the Villanuevas to pay the Barrettos, jointly and
severally, the sum of P30,000.00, with interest thereon at the rate of 12% per annum from January 11, 1954 plus the
sum of P4,000.00 as attorney's fees. Upon the finality of this decision, the Barrettos filed a motion for the issuance
of a writ of execution which was granted by the lower court on July 31, 1958. On August 14, 1958, the Cruzados
filed their "Vendor's Lien" in the amount of P12,000.00, plus legal interest, over the real property subject of the
foreclosure suit, the said amount representing the unpaid balance of the purchase price of the said property. Giving
due course to the line, the court on August 18, 1958 ordered the same annotated in Transfer Certificate of Title No.
32526 of the Registry of Deeds of Manila, decreeing that should the realty in question be sold at public auction in
the foreclosure proceedings, the Cruzados shall be credited with their pro-rata share in the proceeds thereof,
"pursuant to the provision of articles 2248 and 2249 of the new Civil Code in relation to Article 2242, paragraph 2 of
the same Code." The Barrettos filed a motion for reconsideration on September 12, 1958, but on that same date,
the sheriff of Manila, acting in pursuance of the order of the court granting the writ of execution, sold at public
auction the property in question. As highest bidder, the Barrettos themselves acquired the properties for the sum of
P49,000.00.
On October 4, 1958, 'the Court of First Instance issued an order confirming the aforesaid sale and directing the
Register of Deeds of the City of Manila to issue to the Barrettos the corresponding certificate of title, subject,
however, to the order of August 18, 1958 concerning,. the vendor's lien. On the same date, the motion of the
Barettos seeking reconsideration of the order of the court giving due course to the said vendor's lien was denied.
From this last order, the Barretto spouses interposed the present appeal.

The appeal is devoid of merit.

In claiming that the decision of the Court, of First Instance of Manila in Civil Case No. 20075 . awarding the amount
of P12,000.00 in favor of Rosario Cruzado and her minor children . cannot constitute a basis for the vendor's lien
filed by the appellee Rosario Cruzado, appellants allege that the action in said civil case was merely to recover the
balance of a promissory note. But while, apparently, the action was to recover the remaining obligation of promissor
Pura Villanueva on the note, the fact remains that Rosario P. Cruzado as guardian of her minor children, was an
unpaid vendor., of the realty in question, and the promissory note, was, precisely, for the unpaid balance of the price
of the property bought by, said Pura Villanueva.
Article 2242 of the new Civil, Code enumerates the claims, mortgage and liens that constitute an encumbrance on
specific immovable property, and among them are: .
(2) For the unpaid price of real property sold, upon the immovable sold; and
(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro-rata after the payment of the taxes and assessment upon the
immovable property or real rights.
Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario Cruzado
as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the proceeds of
the foreclosure sale.
The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case was not registered, it should
not prejudice the said appellants' registered rights over the property. There is nothing to this argument. Note must
be taken of the fact that article 2242 of the new Civil Code enumerating the preferred claims, mortgages and liens
on immovables, specifically requires that . unlike the unpaid price of real property sold . mortgage credits, in order to
be given preference, should be recorded in the Registry of Property. If the legislative intent was to impose the same
requirement in the case of the vendor's lien, or the unpaid price of real property sold, the lawmakers could have
easily inserted the same qualification which now modifies the mortgage credits. The law, however, does not make
any distinction between registered and unregistered vendor's lien, which only goes to show that any lien of that kind
enjoys the preferred credit status.
Appellants also argue that to give the unrecorded vendor's lien the same standing as the registered mortgage credit
would be to nullify the principle in land registration system that prior unrecorded interests cannot prejudice persons
who subsequently acquire interests over the same property. The Land Registration Act itself, however, respects
without reserve or qualification the paramount rights of lien holders on real property. Thus, section 70 of that Act
provides that .
Registered land, and ownership therein shall in all respects be subject to the same burdens and incidents
attached by law to unregistered land. Nothing contained in this Act shall in any way be construed to relieve
registered land or the owners thereof from any rights incident to the relation of husband and wife, or from
liability to attachment on mesne process or levy, on execution, or from liability to any lien of any description
established by law on land and the buildings thereon, or the interest of the owners of such land or buildings,
or to change the laws of descent, or the rights of partition between co-owners, joint tenants and other cotenants or the right to take the same by eminent domain, or to relieve such land from liability to be
appropriated in any lawful manner for the payment of debts, or to change or affect in any other way any
other rights or liabilities created by law and applicable to unregistered land, except as otherwise expressly
provided in this Act or in the amendments thereof, (Emphasis supplied)
As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only
to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this
portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships where there are
concurrence of credits would be left without any rules to govern them, and it would render purposeless the special
laws an insolvency.
Premises considered, the order appealed from is hereby affirmed. Costs against the appellants.
Bengzon, Padilla, Bautista Angelo, Labrador, Paredes and Dizon, JJ., concur.
Concepcion, Reyes, J.B.L. and Barrera, JJ., concur in the result.

RESOLUTION ON MOTION TO RECONSIDER

December 29, 1962

REYES, J.B.L., J.:
Appellants, spouses Barretto, have filed a motion vigorously urging, for reason to be discussed in the course of this
resolution, that our decision of 28 January 1961 be reconsidered and set aside, and a new one entered declaring
that their right as mortgagees remain superior to the unrecorded claim of herein appellee for the balance of the
purchase price of her rights, title, and interests in the mortgaged property.
It will be recalled that, with Court authority, Rosario Cruzado sold all her right, title, and interest and that of her
children in the house and lot herein involved to Pura I. Villanueva for P19,000.00. The purchaser paid Pl,500 in
advance, and executed a promissory note for the balance of P17,506.00. However, the buyer could only pay P5,500
On account of the note, for which reason the vendor obtained judgment for the unpaid balance. In the meantime, the
buyer Villanueva was able to secure a clean certificate of title (No. 32626), and mortgaged the property to appellant
Magdalena C. Barretto, married to Jose C. Barretto, to secure a loan of P30,000.03, said mortgage having been
duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her favor,
obtained judgment, and upon its becoming final asked for execution on 31 July 1958. On 14 August 1958, Cruzado
filed a motion for recognition for her "vendor's lien" in the amount of Pl2,000.00, plus legal interest, invoking Articles
2242, 2243, and 2249 of the new Civil Code. After hearing, the court below ordered the "lien" annotated on the back
of Certificate of Title No. 32526, with the proviso that in case of sale under the foreclosure decree the vendor's lien
and the mortgage credit of appellant Barretto should be paid pro rata from the proceeds. Our original decision
affirmed this order of the Court of First Instance of Manila.
Appellants insist that:
(1) The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the Philippines, can only become
effective in the event of insolvency of the vendee, which has not been proved to exist in the instant case; and .
(2) That the appellee Cruzado is not a true vendor of the foreclosed property. W e have given protracted and mature
consideration to the facts and law of this case, and have reached the conclusion that our original decision must be
reconsidered and set aside, for the following reasons:
A. The previous decision failed to take fully into account the radical changes introduced by the Civil Code of the
Philippines into the system of priorities among creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real property under
Article 1923 were to be resolved according to an order of priorities established by Article 1927, whereby one class of
creditors could exclude the creditors of lower order until the claims of the former were fully satisfied out of the
proceeds of the sale of the real property subject of the preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines however, only taxes enjoy a similar absolute preference. All
the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but
must be paid pro-rata i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides:
If there are two or more credits with respect to the same specific real property or real rights, they, shall be
satisfied pro-rata after the payment of the taxes and assessments upon the immovable property or real
rights."
But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of Article 2242
(or such of their, as have credits outstanding) must necessarily be convened, and the import of their claims
ascertained. It is thus apparent that the full, application (of Articles 2249 and 2242 demands that there must be first
some proceedings where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency,
the settlement of decedents estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar
import.
This explains the rule of Article 2243 of the new Civil Code that
The claims or credits enumerated in the two preceding articles" shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal provisions governing insolvency . . .
(Emphasis supplied),
And the rule is further clarified in he Report of the Code Commission, as follows:
The question as to whether the Civil Code and the insolvency Law can be harmonized is settled by this
Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in
accordance with the Insolvency Law." (Emphasis supplied) .

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in
the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article
2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for
taxes, a dispute between two creditors will not enable the Court to ascertain the pro-rata dividend corresponding to
each, because the rights of the other creditors likewise" enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed from, decreeing that the
proceeds of the foreclosure sale be apportioned only between appellant and appellee, is incorrect, and must be
reversed.
In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's estate), the conflict
between the parties now before us must be decided pursuant to the well established principle concerning registered
lands; that a purchaser in good faith and for value (as the appellant concededly is) takes registered property free
from liens and encumbrances other than statutory liens and those recorded in the certificate of title. There being no
insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not require the character and rank of a
statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain subordinate to the latter.
We are understandably loathed (absent a clear precept of law so commanding) to adopt a rule that would
undermine the faith and credit to be accorded to registered Torrens titles and nullify the beneficient objectives
sought to be obtained by the Land Registration Act. No argument is needed to stress that if a person dealing with
registered land were to be held to take it in every instance subject to all the fourteen preferred claims enumerate in
Article 2242 of the new Civil Code, even if the existence and import thereof can not be ascertained from the records,
all confidence in Torrens titles would be destroyed, and credit transactions on the faith of such titles would be
hampered, if not prevented, with incalculable results. Loans on real estate security would become aleatory and risky
transactions, for no, prospective lender could accurately estimate the hidden liens on the property offered as
security, unless he indulged in complicated, tedious investigations, . The logical result might well be a contraction of
credit unforeseeable proportions that could lead to economic disaster.
Upon the other hand, it does not appear excessively burdensome to require the privileged creditors to cause their
claims to be recorded in the books of the Register of deeds should they desire to protect their rights even outside of
insolvency or liquidation proceedings.
B. The close study of the facts disclosed by the records lasts strong doubt on the proposition that appellees
Cruzados should be regarded as unpaid vendors of the property( land, buildings, and improvements ) involved in the
case at bar so as to be entitled to preference under Article 2242. The record on appeal, specially the final decision
of the Court of First Instance of Manila in the suit of the ,Cruzados against Villanueva, clearly establishes that after
her husband's death, and with due court authority, Rosario Cruzado, for herself and as administratrix of her
husband's state, mortgaged the property to the Rehabilitation Finance Corporation (RFC) to secure payment of a
loan of P11,000, installments, but that the debtor failed to pay some of the installments; wherefore the RFC, on 24
August 1949, foreclosed the mortgage, and acquired the property, subject to the debtor's right to redeem or
repurchase the said property; and that on 25 September 1950, the RFC consolidated its ownership, and the
certificate of title of the Cruzados was cancelled and a new certificate issued in the name of the RFC.
While on 26 July 1951 the RFC did execute a deed selling back the property to the erstwhile mortgagors and former
owners Cruzados in installments, subject to the condition (among others) that the title to the property and its
improvements "shall remain in the name of Corporation (RFC) until after said purchase price, advances and
interests shall have been fully paid", as of 27 September 1952, Cruzado had only paid a total of P1,360, and had
defaulted on six monthly amortizations; for which reason the RFC rescinded the sale, and forfeited the payments
made, in accordance with the terms of the contract of 26 July 1951.
It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all "their rights, title, interest and
dominion on and over" the property, lot, house, and improvements for P19,000.00, the buyer undertaking to assume
payment of the obligation to the RFC, and by resolution of 30 April 1953, the RFC approved "the transfer of the
rights and interest of Rosario P. Cruzado and her children in their property herein above-described in favor of Pura
L. Villanueva"; and on 7 May 1953 the RFC executed a deed of absolute sale of the property to said party, who had
fully paid the price of P14,269.03. Thereupon, the spouses Villanueva obtained a new Transfer Certificate of Title
No. 32526 in their name.
On 10 July 1953, the Villanuevas mortgaged the property to the spouses Barretto, appellants herein.
It is clear from the facts above-stated that ownership of the property had passed to the Rehabilitation Finance
Corporation since 1950, when it consolidated its purchase at the foreclosure sale and obtained a certificate of title in
its corporate name. The subsequent contract of resale in favor of the Cruzados did not revest ownership in them,
since they failed to comply with its terms and conditions, and the contract itself provided that the title should remain
in the name of the RFC until the price was fully paid.
Therefore, when after defaulting in their payments due under the resale contract with the RFC the appellants
Cruzados sold to Villanueva "their rights, title, interest and dominion" to the property, they merely assigned whatever
rights or claims they might still have thereto; the ownership of the property rested with the RFC. The sale from
Cruzado to Villanueva, therefore, was not so much a sale of the land and its improvements as it was a quit-claim
deed in favor of Villanueva. In law, the operative sale was that from the RFC to the latter, and it was the RFC that

should be regarded as the true vendor of the property. At the most, the Cruzados transferred to Villanueva an option
to acquire the property, but not the property itself, and their credit, therefore, can not legally constitute a vendor's
lien on the corpus of that property that should stand on an equal footing with the mortgaged credit held by appellant
Barretto.
In view of the foregoing, the previous decision of this Court, promulgated on 28 January 1961, is hereby
reconsidered and set aside, and a new one entered reversing the judgment appealed from and declaring the
appellants Barretto entitled to full satisfaction of their mortgaged credit out of the proceeds of the foreclosure sale in
the hands of the Sheriff of the City of Manila. No costs.

6.
G.R. No. L-24137

March 29, 1926

EULOGIO BETITA, plaintiff-appellee,

vs.
SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA, defendants-appellants.
Padilla, Trenas and Magalona for appellants.
Varela and Ybiernas for appellee.
OSTRAND, J.:
This action is brought to recover the possession of four carabaos with damages in the sum of P200.
Briefly stated, the facts are as follows: On May 15, 1924, the defendant Alejo de la Flor recovered a
judgment against Tiburcia Buhayan for the sum of P140 with costs. Under this judgment the
defendant Ganzon, as sheriff levied execution on the carabaos in question which were found in the
possession of one Simon Jacinto but registered in the name of Tiburcia Buhayan. The plaintiff herein,
Eulogio Betita, presented a third party claim (terceria) alleging that the carabaos had been mortgaged
to him and as evidence thereof presented a document dated May 6, 1924, but the sheriff proceeded
with the sale of the animals at public auction where they were purchased by the defendant Clemente
Perdena for the sum of P200, and this action was thereupon brought.
The document upon which the plaintiff bases his cause of action is in the Visayan dialect and in
translation reads as follows:
I, Tiburcia Buhatan, of age, widow and resident of the sitio of Jimamanay, municipality of Balasan,
Province of Iloilo, Philippine Islands, do hereby execute this document extrajudicially and state that I
am indebted to Mr. Eulogio Betita, resident of the municipality of Estancia, Province of Iloilo,
Philippine Islands, in the sum of P470, Philippine currency, and was so indebted since the year 1922,
and as a security to my creditor I hereby offer four head of carabaos belonging to me exclusively
(three females and one male), the certificates of registration of said animals being Nos. 2832851,
4670520, 4670521 and 4670522, which I delivered to said Mr. Eulogio Betita.
I hereby promise to pay said debt in the coming month of February, 1925, in case I will not be able to
pay, Mr. Eulogio Betita may dispose of the carabaos given as security for said debt.
This document is a new one or a renewal of our former document because the first carabaos
mortgaged died and were substituted for by the newly branded ones."
In testimony whereof and not knowing how to sign my name, I caused my name to be written and
marked same with my right thumb.
Estancia, May 6, 1924.
(Marked). TIBURCIA BUHAYAN
Signed in the presence of:
MIGUEL MERCURIO
TIRZO ZEPEDA
The court below held that inasmuch as this document was prior in date to the judgment under which
the execution was levied, it was a preferred credit and judgment was rendered in favor of the plaintiff
for the possession of the carabaos, without damages and without costs. From this judgment the
defendants appeal.
The judgment must be reversed unless the document above quoted can be considered either a
chattel mortgage or else a pledge. That it is not a sufficient chattel mortgage is evident; it does not
meet the requirements of section 5 of the Chattel Mortgage Law (Act No. 1508), has not been
recorded and, considered as a chattel mortgage, is consequently of no effect as against third parties

(Williams vs. McMicking, 17 Phil., 408; Giberson vs. A. N. Jureidini Bros., 44 Phi., 216; Benedicto de
Tarrosa vs. F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros, 46 Phil., 753).
Neither did the document constitute a sufficient pledge of the property valid against third parties.
Article 1865 of the Civil Code provides that "no pledge shall be effective as against third parties
unless evidence of its date appears in a public instrument." The document in question is not public,
but it is suggested that its filing with the sheriff in connection with the terceria gave in the effect of a
public instrument and served to fix the date of the pledge, and that it therefore fulfills the requirements
of article 1865. Assuming, without conceding, that the filing of the document with the sheriff had that
effect, it seems nevertheless obvious that the pledge only became effective as against the plaintiff in
execution from the date of the filing and did not rise superior to the execution attachment previously
levied (see Civil Code, article 1227).
Manresa, in commenting on article 1865, says:
ART. 1865. A pledge will not be valid against a third party if the certainty of the date is not
expressed in a public instrument.
This article, the precept of which did not exist in our old law, answers the necessity for not
disturbing the relationship or the status of the ownership of things with hidden or simulated
contracts of pledge, in the same way and for the identical reasons that were taken into account
by the mortgage law in order to suppress the implied and legal mortgages which produce so
much instability in real property.
Considering the effects of a contract of pledge, it is easily understood that, without this
warranty demanded by law, the case may happen wherein a debtor in bad faith from the
moment that he sees his movable property in danger of execution may attempt to withdraw the
same from the action of justice and the reach of his creditors by simulating, through criminal
confabulations, anterior and fraudulent alterations in his possession by means of feigned
contracts of this nature; and, with the object of avoiding or preventing such abuses, almost all
the foreign writers advise that, for the effectiveness of the pledge, it be demanded as a precise
condition that in every case the contract be executed in a public writing, for, otherwise, the
determination of its date will be rendered difficult and its proof more so, even in cases in which
it is executed before witnesses, due to the difficulty to be encountered in seeking those before
whom it was executed.
Our code has not gone so far, for it does not demand in express terms that in all cases the
pledge be constituted or formalized in a public writing, nor even in private document, but only
that the certainty of the date be expressed in the first of the said class of instruments in order
that it may be valid against a third party; and, in default of any express provision of law, in the
cases where no agreement requiring the execution in a public writing exists, it should be
subjected to the general rule, and especially to that established in the last paragraph of article
1280, according to which all contracts not included in the foregoing cases of the said article
should be made in writing even though it be private, whenever the amount of the presentation
of one or of the two contracting parties exceeds 1,500 pesetas. (Vol. 12, ed., p. 421.)
If the mere filing of a private document with the sheriff after the levy of execution can create a lien of
pledge superior to the attachment, the purpose of the provisions of article 1865 as explained by
Manresa clearly be defeated. Such could not have been the intention of the authors of the Code. (See
also Ocejo, Perez & Co. vs.International Banking Corporation, 37 Phil., 631 and Tec Bi & Co.
Chartered Bank of India, Australia & China, 41 Phil., 596.)
The alleged pledge is also ineffective for another reason, namely, that the plaintiff pledgee never had
actual possession of the property within the meaning of article 1863 of the Civil Code. But it is argued
that at the time of the levy the animals in question were in the possession of one Simon Jacinto; that
Jacinto was the plaintiff's tenant; and that the tenant's possession was the possession of his landlord.
It appears, however, from the evidence that though not legally married, Simon Jacinto and Tiburcia
Buhayan were living together as husband and wife and had been so living for many years. Testifying
as a witness for the plaintiff, Jacinto on cross-examination made the following statements:

Q. But the caraballas in question had never been in possession of Eulogio Betita? A. The
three young ones did not get into his hands.
Q. And the others? A. Sometimes they were in the hands of Betita and at other times in the
hands of Buhayan.
Q. Those are the caraballas which formerly were mortgaged by Buhayan to Betita, isn't that
so? A. Yes, sir.
Q. And the four carabaos now in question had never been in possession of Betita, but were in
your possession? A. When I worked they were in my hands.
Q. And before you worked, these caraballas were in possession of your mistress, Tiburcia
Buhayan? A. Yes, sir.
Q. Do you mean to say that from the possession of Tiburcia Buhayan the animals passed
immediately into your possession? A. Yes sir.
This testimony is substantially in accord with that of the defendant sheriff to the effect that he found
the animals at the place where Tiburcia Buhayan was living. Article 1863 of the Civil Code reads as
follows:
In addition to the requisites mentioned in article 1857, it shall be necessary, in order to
constitute the contract of pledge, that the pledge be placed in the possession of the creditor or
of a third person appointed by common consent.
In his commentary on this article Manresa says:
This requisite is most essential and is characteristic of a pledge without which the contract
cannot be regarded as entered into or completed, because, precisely, in this delivery lies the
security of the pledge. Therefore, in order that the contract of pledge may be complete, it is
indispensable that the aforesaid delivery take place . . . . (P. 411, supra.)
It is, of course, evident that the delivery of possession referred to in article 1863 implies a change in
the actual possession of the property pledged and that a mere symbolic delivery is not sufficient. In
the present case the animals in question were in the possession of Tiburcia Buhayan and Simon
Jacinto before the alleged pledge was entered into and apparently remained with them until the
execution was levied, and there was no actual delivery of possession to the plaintiff himself. There
was therefore in reality no change in possession.
It may further be noted that the alleged relation of landlord and tenant between the plaintiff and Simon
Jacinto is somewhat obscure and it is, perhaps, doubtful if any tenancy, properly speaking, existed.
The land cultivated by Jacinto was not the property of the plaintiff, but it appears that a part of the
products was to be applied towards the payment of Tiburcia Buhayan's debt to the plaintiff. Jacinto
states that he was not a tenant until after the pledge was made.
From what has been said it follows that the judgment appealed from must be reversed and it is
ordered and adjudged that the plaintiff take nothing by his action. Without costs. So ordered.

7.
G.R. No. L-31018

November 6, 1929

CORNELIO CRUZ and CIRIACA SERRANO, plaintiffs-appellants,

vs.
CHUA A. H. LEE, defendant-appellant.
Gibbs and McDonough for plaintiff-appellants.
Antonio Gonzalez for defendant-appellant.

STREET, J.:
This action was instituted in the Court of First Instance of the City of Manila by Cornelio Cruz and
wife, for the purpose of recovering a sum of money from the defendant Chua A.H. Lee, representing
the damages alleged to have been sustained by them from the lapsing of certain pawn tickets which
they had pledged to the defendant under the circumstances hereinafter stated. Upon hearing the
cause the trial court gave judgment in favor of the plaintiffs to recover of the defendant the sum of
P1,141, with legal interest from December 16, 1927, and with costs. From this judgment both plaintiffs
and defendant appealed.
It appears that prior to June 10, 1926, the plaintiff Cornelio Cruz had pledged valuable jewelry to two
different pawnshops in the city of Manila, namely, the Monte de Piedad and Ildefonso Tambunting,
receiving therefor twelve pawn tickets showing the terms upon which the articles pledged were held
by the pledges. On the date stated the plaintiff, being desirous of obtaining a further loan upon the
same and other jewels, presented himself to the defendant Chua A.H Lee and pledged to him six
pawn tickets of the Monte de Piedad and a bracelet and the six tickets Lee delivered to the plaintiff a
sum of money, for which the plaintiff executed a receipt containing words to the effect that the amount
of P3,020, therein stated, represented the value of the bracelet and pawn tickets and that it was
understood that Lee would become the absolute owner of the articles pledge if Cruz should not return
said sum of money within the period of sixty days. One week thereafter Cruz again presented himself
at the place of business of Lee and received the further sum of P3,500, at the same time delivering
two pawn tickets of the house of Ildefonso Tambunting and four pawn tickets of the Monte de Piedad.
At the same time Cruz signed a further receipt containing a stipulation that the sale of the articles
pledge would become absolute unless the amount stated in the receipt should be return within sixty
days.
The tickets which form the principal feature in these two pledges represented a pair of diamond
earrings previously pledged to Ildefonso Tambunting for P7,000, and several other pieces of jewelry
priviously pledged to the Monte de Piedad for the aggregate amount of P2,020. All of these tickets
were renewable, according to the custom of pawnbrokers, upon payment from time to time of the
sums of money representing the interest accruing upon the debts for which the jewelry was pawned.
The right of repurchasing the jewelry, which was conceded to Cruz in the two receipt above
mentioned, was never exercised by him; and on September 25, 1926, Lee filed a complaint against
Cruz in the Court of First Instance of Manila (case No. 30569), in which it was allege that the receipts
above mentioned had been drawn in the form of a sale with stipulation for repurchase in sixty days
but it was understood between the parties that the transaction was a loan and that the jewelry and
pawn tickets held by Lee constituted a mere security for the money advanced by him to Cruz. As a
consequence Lee asked for judgment against Cruz in the amount of P6,520. On March 31, 1927,
judgment in said action was rendered in the Court of First Instance favorably to the plaintiff and,
although an attempt was made to get the decision reviewed in the Supreme Court, the judgment was
affirmed for failure of the appellants to cause a transcript of the oral testimony to be brought to said
court. 1 After affirmance of the judgment in the Supreme Court the cause was returned to the Court of
First Instance for execution, but as a result of certain proceedings not necessary to be here
recounted, execution in that case was suspended to wait the result of the judgment to be given in this
case.

It appears that the defendant Lee on August 18, 1926, renewed the ten pawn tickets issued by the
Monte de Piedad by paying the interest necessary to effect the renewal, but these tickets all expired
on October 18, 1926, and were never renewed. The pawn tickets issued by the Tambunting's
pawnshop on the diamond earrings were dated May 12, 1926, and remained good for one year,
having expired on May 12, 1927. Although the pawn tickets issued by the Monte de Piedad expired
on October 18, 1926, it is admitted that they could have been renewed or the jewelry redeemed at
any time prior to actual sale at public auction, and these jewels were not sold by the Monte de Piedad
until in the year 1927, when they were, at different dates, brought in by the appraiser of the Monte de
Piedad for the amount then due upon the respective jewels. But the jewelry represented by one of
these pawn tickets was that thus not sold until August 10, 1928. From this it will be seen that all of the
pawned jewelry was still subject to redemption when civil case No. 30569 was first called for trial on
January 3, 1927, and apparently the right of redemption on only one piece of jewelry had been
foreclosed by sale when the decision was rendered in the same case at the end of March. The record
does not show whether or not the earrings pawned to Ildefonso Tambunting were in fact sold after the
tickets lapsed on May 12, 1927, but it is proved that the jewelry was not forthcoming when a inquiry
was made therefor by the present plaintiff with a view to redemption after judgment had been
rendered in the instituted by Lee against him.
The first two errors assigned in the brief of the defendant as appellant raise a question of a
preliminary nature, which is, whether the present action can be maintained in view of the fact that the
cause of action set out in the present complaint might have been so the defendant supposes
used as a ground of defense or counterclaim in action No. 30569 of the Court of First Instance of
Manila instituted by the present defendant against the present plaintiff. Upon this it is insisted that the
trial court should sustained the plea of res judicatainterposed in this case by the defendant. This
contention is untenable for the reason that the facts which serve as the basis of the present action
were not existence at the time of commencement of action No. 30569. Under section 97 of the Code
of Civil Procedure the defendant is required to set up his counterclaim as a defense only in those
cases where the right out of which the counterclaim arises existed at the time of the commencement
of the action.
The principal question requiring decision in the case before us is one of law, namely, whether a
person who takes a pawn tickets in pledge is bound to renew the ticket from time to time, by the
payment of interest, or premium, as required by the pawnbroker, until the rights of the pledgor are
finally foreclosed. In this connection reliance is placed by the attorney for the plaintiff upon article
1867 of the Civil Code, which reads as follows:
The creditor must take care of the thing given in pledge with the diligence of a good father of a
family; he shall be entitled to recover any expenses incurred for its preservation and shall be
liable for its loss or deterioration, in accordance with the provisions of this code.
In applying this provision to the situation before us it must be borne in mind that the ordinary pawn
ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by
mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results
that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder
who must renew the pledge, if it is to be kept alive. Article 1867 contemplates that the pledgee may
have to undergo expenses in order to prevent the pledge from being lost; and this expenses the
pledgee is entitled to recover from the pledgor. From this it follows that were, in a case like this, the
pledge is lost by the failure of the pledgee to renew the loan, he is liable for the resulting damage.
Nor, in this case, was the duty of the pledgee destroyed by the fact that the pledgee had obtained a
judgment for the debt of the pledgor which was secured by the pledge. The duty to use the deligence
of a good father of the family in caring for the pledge subsists as long as the pledge article remains in
the power of the pledgee.
In this connection we quote as follows from a monographic note appended to Griggs vs. Day (32 Am.
St. Rep., 718), in which it is said:
As the holder of collateral security is entitled to its possession and to the extent of his interest
is substantially the owner thereof, he must, to a certain extent at least, assume the duties of
the ownership, and furthermore must protect the interest of his pledgor as well as his own,
because the latter, by giving the collateral security, has parted with the power to protect
himself. The contract carries with it the implication that the security shall be made available to
discharge the obligation': Wheeler vs. Newbould, 16 N.Y., 396. We apprehend that it carries

with it the further implication that the property, no matter what its character, shall be lost
through the negligence or inattention of the pledgee.
In commenting upon article 1867 of the Civil Code, the commentator Manresa points out that the
predecessor article in the Civil Code of 1851 limited itself to declaring that the creditor should take
such care of the pledge thing as the good father of the family, and this led to a lively controversy
among the civilians concerning the consequences of the duty of conservation or safekeeping imposed
upon the creditor. But this controversy, says the learned author, has largely lost its interest because
the authors of the Code put an end to such discussions by defining the responsibility of the creditor in
a form so clear and explicit as to leave no room for doubt (Manresa,Codigo Civil. 4426, 427). In the
treatise of Colin and Capitant on the Civil Law, it is stated that the creditor who receives an article in
pledge must bear all the expenses necessary to secure the conservation of the pledge and that the
debtor is bound to reimburse him for such expenses. As an illustration of the duty of the pledgee to
exercise diligence in preserving the pledge, he states that a pledgee who fails to renew at the proper
time the inscription of a mortgage guaranteeing a credit will be liable for the damage resulting from its
loss (opus citat, p. 77). To the same effect is a passage found in the pages of the French
commentator Troplong, Droit Civil Explique, Du Gage, sec. 428.
The question of the extent of the duty of the pledgee in caring for the property pledged has often been
discussed in connection with pledges of collatteral security. In this case we find the following
observation made by the author of the title "Pledge" in 21 Ruling Case Law, to wit:
The rights and duties of parties to a pledge of securities for the payment of the debt may of
course be fixed by agreement as to the manner in which they are to be collected, but as a
general rule not only is it the right of the holder of collateral security to collect the money
thereon and apply it to the principal debt but his duties in this respect are active and he is
bound to ordinary diligence to preserve the legal validity and pecuniary value of the pledge,
and if by negligence, wrongful act or omission on his part loss is sustained, it must be borne by
him. (Pledge, sec. 30.)
1awphil.net

The application of the doctrine above expounded to the case in hand leads the conclusion that the
defendant Chua A. H. Lee in the case before us in liable for the value of the securities lost by his
failure to keep the pledges alive in the extent of their actual value over the amounts for which the
same were pledged; and the trial court, in our opinion, committed no error is so holding.
There remains to be considered the question of the proper valuation of the jewelry sacrificed in the
manner above stated. Upon this point we are of the opinion that the trial court was too conservative in
its estimate; and we find, upon the testimony of Manuel Javier, appraiser of the La Insular Pawnshop,
and Francisco Ferrer, a jewelry merchant of Manila supplemented by that of the plaintiff, Cornelio
Cruz, that the two diamond earrings represented by the tickets issued by Tambunting's pawnshop
were fairly worth P14,000. It is true that Cornelio Cruz testified that these jewels cost him P11,000,
but he at the same time stated that they were at the time of the trial in the court below worth at least
P15,000. Again, we are of the opinion that the jewels represented by the ten pawn tickets of Monte de
Piedad were worth, at a conservation estimate, the sum of P4,040. In fixing these values it must be
remembered that it is not the practice of pawnshops to advance more than from thirty-five to fifty per
cent of the true value upon pledges of jewels.
From the values of the jewelry, as estimated above, there is of course to be deducted the amounts
which had been advanced upon the pledges with interest thereon at the situated rate of 18 per cent
per annum until the date when the offer was made by the plaintiff Cornelio Cruz in writing to redeem
the jewelry. But it should be noted that the sum of P3,500 which the defendant advanced to Cruz
upon the pledge of the pawn tickets covering the earings must not be deducted, because the
defendant, in the prior action, has already recovered judgment for that amount.
Upon liquidation of the account between plaintiffs and defendant in conformity with the suggestion
above made, it results that the plaintiffs herein were damaged by the sacrifice of the jewelry in
question in the total amount of P6,687.56. Also, in order to clarify the appealed decision, it is declared
that the plaintiff is entitled to recover the bracelet composed of seventeen diamonds, forming the
additional pledge made by the plaintiff to the defendant, upon satisfaction of the judgment in civil case
No. 30569.

The judgment appealed from is therefore modified to the extent above indicated, namely, that the
plaintiffs shall recover of the defendant the sum of P6,687.56, with legal interest from December 16,
1927, until the same shall be paid, as well as the bracelet of seventeen diamonds upon satisfaction of
the judgment above mentioned. So ordered, without costs.

8.
G.R. No. L-11933

December 1, 1917

ALBERTO BARRETTO, plaintiff-appellee,

vs.
LEONARDO F. BARRETTO, ET AL., objector-appellant.
Modesto Reyes and Eliseo Ymzon for appellants.
Williams, Ferrier and Sycip for interveners.
Delgado and Delgado for appellee.

TORRES, J.:
This case was begun in the Court of First Instance of Zambales by Alberto Barretto, who claimed
delivery to him of a piece of land which was a part of the hacienda named "Balintagac" together with
its fruits or their value, and also of a lot situated in the same hacienda together with the rents thereof,
and was brought to this court on appeal, by the bill of exceptions, presented by the counsel for the
defendants and the defendant interveners from the judgment entered on July 2, 1915, in the office of
the clerk of the said Court of First Instance, by which, after declaring that the said Alberto Barretto y
Blanco is the owner of the hacienda of Balintagac described in the complaint, it was ordered that the
defendant Leonardo F. Barretto deliver to the plaintiff the possession of the piece of land and the lot
withheld, and pay, together with the other defendants, the costs of the action.
In his complaint of November 11, 1913, filed in the Court of First Instance of Zambales, Alberto
Barretto alleges as his first cause of action that he is the owner of the whole hacienda called
Balintagac, situated in the barrio of the same name, in the municipality of San Felipe of said province,
having an area of about 200 qui__ones antiguos, and bounded on the north by the Anonang River;
on the south by the Carmen Mountain; on the east by the corner of the Balintagac; and on the west
by the Tectec Mountain. That he was in possession of the said hacienda quietly, peacefully, and
continuously, as were his predecessors since the year 1884 until May, 1912; that on a certain day of
the latter month and year, the defendant Leonardo F. Barretto alleging himself to be the owner of a
certain part of said hacienda illegally and unduly usurped a portion of land of the said hacienda on the
eastern part situated in Ilum-Ilog, Santa Maria and Inubo-grande y pequeo, Santa Maria and
Carupisan, bounded on the north by the Anonang River, on the east by the Golongoro River and the
corner of Balintagac, on the south by the Balintagac and Inbo mountains, and on the west by the rest
of the hacienda which the plaintiff at present holds; that since that time the defendant had been
receiving two-thirds of the fruits which the usurped portion annually produced, which amounted to 33
uyones and 145 and 33 per cent cavanes of rice at P8 per upon and P2 a cavan, and whose value
amounts to the sum P554; that the defendant refused to return that portion of land usurped together
with the fruits received, or their value, in spite of the fact that he has been required to do so in writing
by the plaintiff.
That, as a second cause of action, the defendant, on the said month of May, 1912, illegally took
possession of a lot situated in the same hacienda and barrio of Balintagac, bounded on the front by
the provincial road, on its right, left, and rear sides by lands of the hacienda belonging to the plaintiff,
measuring 18 meters in front by 48 meters deep, that is, an area of 864 square meters, which lot
should reasonably produce for its use a monthly rent of P1, and that in spite of the fact that the
plaintiff had requested the defendant to vacate and to deliver the said lot to him with its rents, he

(defendant) refused to return the said lot or pay the rents therefor, for which reason the plaintiff
prayed judgment in his favor ordering the delivery or restitution of the said portion of land and lot,
claimed in his first and second causes of action, together with the products of rice said to have been
received, and those which in the future may be obtained, or their value, and the sum of P18 for the
reasonable use of the lot since May, 1912, to October, 1913, and the rent that it should produce at
the rate of P1 a month until the actual delivery of the lot shall have been made, with the costs of the
action.
The demurrer to the said complaint having been overruled, the counsel for the defendant in an
answer dated May 23, 1914, denied each and every one of the allegations contained in the complaint
and alleged that the defendant is in possession of the land and lot claimed in the first and second
causes of action of the complaint, as well as of the rest of the hacienda, that is, that he is in
possession of all the hacienda of Balintagac as the true owner thereof since 1881.
Upon the permission of the Court, the attorney for Angelica Barretto, Beatriz Barretto West and her
husband, J. C. West, Maria Teresa Barretto York and her husband Archibald C. York, Carlos
Alejandro Barretto, Bernardo O. Barretto, and Ernesto E. Barretto, filed a complaint of intervention in
this case, alleging among other things that the hacienda of Balintagac in controversy was owned and
possessed by Juan Antonio Barretto, Sr.; that on his death in Zambales on November 21, 1881, he
left seven children called Juan Antonio Barretto, domiciled in Macao, Angelica Maria Barretto, a
resident of Manila, Leonardo F. Barretto, a resident of San Felipe, Zambales, Francisca Barretto also
domiciled in Macao, Bartolome Barretto, a resident of Kow Loon, China, and now deceased Jose A.
Barretto and Leopoldo Barretto, and these seven children of the deceased Juan Antonio Barretto, Sr.,
were his only heirs who succeeded him in all his rights and actions and for this reason they became
owners with the right of possession of the said hacienda of Balintagac, as in fact they are at present
in possession of the same through their agents and representatives; that one of his children, Jose A.
Barretto on his death in 1893 left three children, Beatriz Barretto, Amalia Barretto, and Jose Conde
Barretto, who succeeded in all rights of their father Jose A. Barretto and in the possession of the said
hacienda, as well as the four children of Leopoldo F. Barretto, who died in 1894, named Maria Teresa
Barretto, Carlos Alejandro Barretto, Ernesto E. Barretto, and Bernardo O. Barretto, coowners and
copossessors of the said hacienda; that the interveners deny that the plaintiff Alberto Barretto is the
owner of any part of the said hacienda and the lot mentioned in the complaint, or that the said plaintiff
was in possession of them, or any portion of the same, and that the defendant Leonardo F. Barretto is
in possession of the said hacienda Balintagac and the lot described in the complaint as the
representative of the interveners and the other coheirs, of the estate of the deceased Juan Antonio
Barretto Sr., since the said Leonardo F. Barretto being one of the coheirs, is not the only owner of the
said hacienda, nor of any part of the same except that portion which belongs to him as one of the
heirs of the original owner, but without any right to withhold the possession of the hacienda as against
the interveners, and concluded by asking that they be declared owners as the heirs of their deceased
ascendant Juan Antonio Barretto, Sr., of their respective undivided shares in the hacienda and lot
mentioned in the complaint, adjudging to them the possession of the same, with the costs.
lawphi1.net

The counsel for Amalia Barretto Moore and her husband, J. B. Moore, residents of San Francisco,
California, with the permission of the court filed a complaint of intervention proclaiming their intention
to unite, take part and reproduced the application for intervention formerly asked by Angelica Maria
Barretto and others, adopting all the allegations contained in the former complaint of intervention with
the prayers therein made.
The demurrer interposed by the plaintiff having been overruled and the court having ordered Juan
Antonio Barretto, Jr., Amalia Barretto, Jose Conde Barretto, Francisco Barretto, and Bartolome
Barretto to appear and become parties to this action, with the exception of the plaintiff, the latter in
answer to the complaint of intervention alleged: that he admits the first three paragraphs of said
complaint and denies generally and specifically those following, up to paragraph 13, except the last of
these in which it is alleged that Leonardo F. Barretto was the representative of the interveners and of
the other heirs of Juan Antonio Barretto, Sr., which part is admitted. As a special defense he alleged
that by a notarial document executed May 16, 1882, Juan Antonio Barretto Grandpre, Jr., then
executor of his deceased father Juan Antonio Barretto, Sr., declaring himself to be the absolute
owner of all the hacienda of Balintagac the boundary of which is expressed and its area is 200
quiones borrowed money in the sum of P11,000 from Antonio Vicente Barretto for the expenses
of the said hacienda with the obligation to pay P1,000 for delinquency and other causes and interests
at 8 per cent per annum, payable quarterly in advance, and as guaranty for said loan he mortgaged
specifically the cultivated half of the hacienda and other properties mentioned in the instrument and to

this effect the brothers of said Juan Antonio Barretto Grandpre intervened and procured the granting
of the loan for the indicated purpose, inducing the creditor to grant said loan on the security of the
mortgage above mentioned; that for the failure of the debtor to pay his debt, the creditor Antonio
Vicente Barretto, on April, 1885, brought an action to foreclose the mortgage in order to recover the
money loaned, against Juan Antonio Barretto Grandpre in his own behalf and as executor of his
father. The trial was at first conducted against himself and then against Leonardo F. Barretto as
attorney in fact of said Juan Antonio Barretto Grandpre. Half of the mortgaged hacienda was levied
upon and a judgment to sell the property was rendered, but said half of the attached hacienda could
not be sold in spite of the fact that it was placed at auction three times, its price in the last two having
been reduced; then the creditor, about May, 1888, prayed for the adjudication of all the property
attached to the payment of his credit of P7,648 to which adjudication and conveyance in part payment
the defendant Leonardo F. Barretto voluntarily agreed and consented as attorney in fact of Juan
Antonio Barretto Grandpre. The Juan Antonio Barretto, Jr., and his brothers, not being able to pay the
debt, interests, and costs delivered and conveyed all the hacienda of Balintagac to the creditor about
the year 1889 or 1890. That from these years the brothers of Juan Antonio Barretto Grandpre named
Leonardo F. Barretto, Jose Barretto, Leopoldo Barretto, and Bartolome Barretto administered, by the
appointment and exclusive account of Antonio Vicente Barretto, the entire hacienda, acknowledging
him as the owner of all of it and delivering to him all its products till April, 1896. That in this month of
that year Antonio Vicente Barretto leased the whole hacienda for P900 annually to Luis Bonifacio
Barretto who administered it till his death in 1902 with the knowledge and without the objection of
Leonardo F. Barretto, the attorney in fact and representative of his brothers and coheirs. That on the
death of Antonio Vicente Barretto and his children Antonio Maria Barretto y Rocha, Ricardo Esteban
Barretto y Rocha and Guadalupe Barretto y Rocha succeeded him, about the year 1902 they
appointed Antonio T. Barretto y Blanco as administrator of the entire hacienda with its annual rent of
P225 and he administered it continuously without any interruption whatsoever till May or June, 1912,
when Leonardo F. Barretto illegally took possession of two portions of the said hacienda the area and
boundaries of which are described in the complaint. That on March 31, 1913, Antonio and Ricardo
Barretto y Rocha by means of a notarial document, sold to the plaintiff Alberto Barretto y Blanco the
two-thirds part which belonged to them as heirs of the creditor Antonio Vicente Barretto. That about
June, 1902, Guadalupe Barretto y Rocha with the consent of her husband donated all her rights and
interests as heir of Antonio Vicente Barretto, on condition that the donee should deliver to every one
of his brothers or the latter's children one eight part of what the donation consisted, and Alberto
Barretto, having acquired the rights which Ricardo, Antonio Barretto having acquired the rights which
Ricardo, Antonio Maria, and Guadalupe Barretto y Rocha had as successors of Antonio Vicente
Barretto over the whole of the said hacienda, the plaintiff has possessed the same quietly, publicly,
and peacefully as its owner until May or June, 1912, when Leonardo F. Barretto usurped and retained
certain portions of the property and its land tax (with the sworn declaration of ownership since it was
introduced up to the present) as been paid by him in the name and on the account of the heirs of
Antonio Vicente Barretto.
As a special defense and as an estoppel he (plaintiff) alleged that Juan Antonio Barretto, Jr., and his
brothers Leonardo F. Barretto, Bartolome Barretto, Jose Barretto, and Leopoldo Barretto by their own
acts induced Antonio Vicente Barretto intentionally and deliberately to believe that Juan Antonio
Barretto, Jr., had full and absolute power to dispose of all the hacienda of Balintagac, by reason of
which the creditor executed the loan on the security of the said property and then his brothers by their
own acts acknowledged Antonio Vicente Barretto as the owner of the whole hacienda, and Leonardo
F. Barretto, on his part, as attorney in fact of Juan Antonio Grandpre, Jr., and as representative of his
coheirs agreed to the adjudication of the attached and cultivated half of the hacienda in favor of
Antonio Vicente Barretto in payment of the sum of P7,648. Lastly and likewise as a special defense
he (plaintiff) alleged prescription for the reason that Antonio Vicente Barretto in his own behalf and in
that of his successors and through his representatives, administrators, lessees and grantees, since
1889 and 1890 had been in possession of the hacienda publicly, quietly and peacefully till May or
June, 1912, without any interruption and as owner of the whole of said hacienda by means of which
possession they had acquired the dominion and ownership of all the said hacienda by acquisitive
prescription, and at the same time all rights and actions which Leonardo F. Barretto and the
interveners could have or might allege as to all part of it, have prescribed; and, therefore, Alberto
Barretto asked the court to dismiss the complaint of intervention, declaring him the owner of all the
hacienda of Balintagac, with costs to the defendants and interveners.
The counsel for the interveners in answer to the special defenses alleged in the preceding pleading,
said that he denies generally and specifically all that was alleged in it by the plaintiff, defendant in the
intervention.

After the trial and the introduction of evidence on both sides, the exhibits being attached to the record,
the court by judgment recorded in the office of the clerk of the Court of First Instance of Zambales
July 2, 1915, rendered the decision above mentioned, against which the defendants and the
interveners excepted and asked for a new trial, which was denied and exception was taken to the
ruling by them. The corresponding bill of exceptions having been presented, the same was approved
and forwarded to this court together with the document and transcript of the stenographic notes and
other proceedings which constitute the evidence adduced by the parties in the action.
The fact is uncontroverted and fully proved in the record that Antonio Vicente Barretto as creditor
not being able to collect his credit of P11,000 and interest at 8 per cent, nor obtain the adjudication in
his favor of half of hacienda of Balintagac which was mortgaged for the security of the debt, and there
having been no bidders on the three occasions in which it was offered for public auction took
possession, in 1888 or 1889, of all the hacienda and from that time on received through his
administrators the products of the same for the purpose of collecting his credit interests, and on the
lack of proof to contrary it may be established that he took possession of said hacienda by virtue of
voluntary assignment with the express consent of heirs of the deceased Juan Antonio Barretto, Sr.,
owner of one-half of the hacienda and of Juan Antonio Barretto Grandpre, Jr., owner of the other half.
It does not fully appear which contract has been entered into between the creditor and the said heirs
of the deceased Juan Antonio Barretto, Sr., and his son Juan Antonio Barretto Grandpre; but from the
facts that have been fully established it is inferred that since the years 1888-1889, once the
foreclosure proceedings brought by the creditor Antonio Vicente Barretto, against Juan Antonio
Barretto Jr., were suspended, because the creditor had not been able to obtain the adjudication of the
hacienda in his favor, the creditor took possession of the hacienda of Balintagac, and held it in
usufruct with the knowledge and express consent of its legitimate owners; thenceforth there has not
been any opposition or protest against the possession which by usufruct the creditor and his
successors enjoyed, aside from the usurpation of two small portions of that property effected by the
defendant Leonardo F. Barretto in 1912.
Considering that from the facts proved, which refer to the possession and usufruct enjoyed by
Antonio Vicente Barretto while living, and then by his successors among whom was the plaintiff,
Alberto Barretto y Blanco, it is logically deduced that such facts were accomplished by virtue of a
verbal contract, and not by written one, entered into between the owners of the hacienda and the
creditor Antonio Vicente Barretto. Since from the documentary and oral evidence on record it is not
shown that the debtors have delivered the whole hacienda to the creditor by assignment of the
property, in payment of the debt that weighed down, as it were, the half which secures the payment of
the debt it is to be presumed with founded and just reason that the debtors delivered not only one
half, but the whole hacienda with a view that the creditor might collect by usufruct his credit with the
accrued interests.
Even when it cannot possibly be doubted that the assignment of the hacienda to Antonio Vicente
Barretto was not made in payment of his credit, as shown by the evidence adduced at the trial,
nevertheless, in spite of the fact that the agreement between the creditor and the debtors was not set
down in any document, due to the relationship which exists between them, it may safely be asserted,
assuming the facts that took place, that the debtors have limited themselves to give to the creditor the
right to collect his credit from the fruits of the hacienda of Balintagac, conferring upon him the
possession of the property, but not transferring to him the dominion of the same, since such transfer
does not in any way appear to be proved in the present action.
The agreement or verbal stipulation which lead to the facts proved deserves in law the name of
antichresis as defined by the Civil Code in its article 1881, which says:
By the antichresis a creditor acquires a right to receive the fruits of real property of his debtor,
with the obligation to apply them to the payment of the interest, if due, and afterwards to the
principal of his credit.
The perusal of the following articles, 1882 to 1886, of the Code, shows in a convincing way that the
possession of the hacienda enjoyed by the creditor Antonio Vicente Barretto while living and later on
by his successors up to the present time was conferred to them by virtue of the stated contract or
agreement in antichresis; thus, one of the administrators of the hacienda, Luis Barretto, was the one
who presented the sworn declaration of ownership of the same for the purposes of the assessment

tax and paid the land tax in the name of the creditor who possessed and held the hacienda in
usufruct, as it is duly established in the record.
Although article 1884 of the same Code states that the creditor does not acquire through possession
the ownership of the real property delivered by virtue of an antichresis, for failure to pay the debt
within the stipulated time any agreement to the contrary being void nevertheless, the debtor
according to the preceding article 1883 cannot recover the use of the real property given in
antichresis to the creditor, without previously fully paying the creditor, who in case of insolvency may
ask for the sale of the real property which he possesses by virtue of the covenant in antichresis,
unless the pending debt be paid.
It appears to be duly proved in the record that in 1912 the defendant Leonardo F. Barretto, by himself
and for himself and without the consent of the present possessor now the plaintiff, took over and
usurped a portion of land of the hacienda and a lot included in it, withholding and refusing to deliver
them to the creditor in antichresis on the pretext that he is the owner of the whole hacienda; and as it
does appear in any way that the debt, for the payment of which the whole hacienda of Balintagac was
delivered in antichresis, has been paid, it is doubtless that the defendant Leonardo F. Barretto, when
he effected the usurpation, acted without just reason and in contravention of the provisions of the said
article 1883 of the Civil Code. It is known that the action to recover a thing, where a legitimate
possessor has been deprived of his possession, takes place in accordance with the law, even against
the owner himself, who wrested the possession, since the despoiler can never be protected by the
law even on his right of ownership, without first restoring what he acquired through his authority by an
illegal act of dispossession.
It is to be inferred from the facts and the foregoing statements that though the plaintiff Alberto Barretto
has no title of ownership over the hacienda of Balintagac, and therefore, he can not be declared
owner of the same, nevertheless, his claim that a judgment be rendered ordering the return to him of
the portion usurped by the defendant Leonardo F. Barretto which refers to the first cause of action of
his complaint, as well as the lot described in the second cause of the action of the same, which is
withheld by said defendant, is in conformity with the law and is in accordance with the merits of the
present action. The plaintiff being in the legitimate possession and use of all the hacienda of
Balintagac which was voluntarily delivered to him by Juan Antonio Barretto Grandpre, Jr., and his
coheirs as the successors of the deceased Juan Antonio Barretto, Sr., with the object that the creditor
Antonio Vicente Barretto might collect the capital and interests which they owed and still owe him a
lawful contractual act called by law a covenant or agreement in antichresis the debtors, or any of
them, can under no circumstances while the debt exists and is not fully paid, recover or reacquire, as
the mentioned article 1883 provides, the possession and use of the real property delivered to the
creditor, without the latter giving his consent; consequently, the defendant Leonardo F. Barretto
without the knowledge or consent of the plaintiff Alberto Barretto who succeeded by singular title in
the possession and use of the hacienda in question, could not have recovered by usurpation the
possession and use of a portion of the same.
Although the plaintiff affirms in his complaint that he is the sole owner of the said hacienda and as
such he claims in his complaint the delivery of the portion of the land and the lot withheld by the
defendant, his complaint is not, even then, explicit enough to affirm that the action brought thereby is
a technical one and precisely that of recovery of possession (reivindicatoria). In a complaint whereby
the "accion publiciana" is brought, also called in law a plenary action of possession, the restitution
and delivery of the thing or real property of the possession of which the plaintiff has been illegally
deprived is equally asked for. Therefore, it should not be understood that, because the plaintiff
Barretto asks for the delivery of the portion of land and lot claimed in his complaint, the action brought
is that of recovery of ownership and possession (reivindicatoria): it should be understood, instead,
that he seeks to recover the portion of land, of the legal possession of which he has been improperly
deprived by the usurper, Leonardo F. Barretto; since the facts should be established in the suit as
grounds for decision in accordance with the results of the evidence adduced at the trial. When the
defendants denied the ownership which the plaintiff pretends to have over the said hacienda, they
have not denied nor could they deny the existence and the certainty of the debt guaranteed by the
mortgage of one-half of the hacienda of Balintagac in favor of the creditor, now deceased, Antonio
Vicente Barretto; nor could they allege and prove that the debt has been entirely paid, so that they
may reacquire and recover the possession and use of the hacienda which was delivered to the
original creditor, the predecessor of the plaintiff.

The preceding facts in this case are beyond discussion, since it appears duly proved in the record
that the original owner of the hacienda of Balintagac, according to the composition title issued by the
State, Exhibit A, on July 9, 1858, was Antonio Lorenzo Barretto, now deceased, from whom Juan
Antonio Barretto, Sr., acquired one-half of said hacienda, on March, 1881 (Exhibit C), and Juan
Antonio Barretto Jr., had acquired the other half from the said original owner Antonio Lorenzo
Barretto, on November, 1881.
After the death of Juan Antonio Barretto, Sr., his son Juan Antonio Grandpre, in his own behalf and
as the executor of his father, mortgaged, on May 16,1882, the cultivated half of said hacienda in favor
of Antonio Vicente Barretto as security for the amount of P11,000 which the latter loaned to him,
according to the document, Exhibit F, recorded in the registry.
In order to show how and in what manner the plaintiff Alberto Barretto succeeded to the rights
acquired by the creditor Antonio Vicente Barretto to whom the hacienda was delivered in 1888 or
1889, that he might collect his credit from the products of the property, it is stated that on the death of
the said creditor his three children and heirs Antonio Ma Barretto, Ricardo Esteban Barretto, and
Guadalupe Barretto came to succeed him. The last one by means of a document, Exhibit 1, executed
July 5, 1902, made a donation inter vivos in favor of the plaintiff Alberto Barretto of the undivided onethird part of the hypothecary credit and of the rights belonging to her deceased father Antonio Vicente
Barretto, assigning to the donee all the rights and actions which she might have in the foreclosure
proceedings exhibited at the trial of the present action, on the condition that as soon as the donee
Alberto Barretto could collect the said one-third part of the credit or should obtain the assignment of
the property of the debtor, he would divide what was donated, into nine equal parts among the donee
himself and six living brothers and the heirs of their two brothers now dead, each receiving one-ninth
part.
In the public documents, Exhibits J, J-1, J-2, J-3, J-4, J-5, and J-6, it appears to be established that
the plaintiff Alberto Barretto, complying with the condition imposed in said document of the donation
executed by the donor Guadalupe Barretto, paid to each of his brothers and nephews, the latter by
right of the representation, the sum of P875 as the price of one-eight part of one third of the said
hacienda and in exchange for the sums received as such price his co-donees assigned and conveyed
to him one-eight part of the third of the said hacienda and whatever rights and interests the grantors
might have by virtue of the said donation in favor of the plaintiff Barretto. It is to be noted that the
plaintiff bought one-eight undivided part of the third of the whole hacienda of Balintagac and paid to
every claimant P875 as the price of the eight part sold to him, and, without these statements
appearing in the said seven documents Exhibit 1, it may be understood that the third part of the
ownership of the hacienda was transferred to the plaintiff by the donor Guadalupe Barretto.
In fact, with the mutual purpose on the part of the brothers Antonio M.a Barretto and Ricardo Esteban
Barretto and of that of Alberto Barretto of transferring to the latter the rest of the two-thirds part of the
hypothecary credit and of the right to collect its value from the fruits of the hacienda of Balintagac, the
notarial document, Exhibit K, was executed and after reciting in it that one undivided half of said
hacienda was in May, 1882, mortgaged to secure the sum of P11,000, at 8 per cent per annum,
which Juan Vicente Barretto Grandpre received from his uncle Antonio Vicente Barretto, and for
neither having paid the debt nor having sold the said half of the mortgaged hacienda on the three
occasions in which it was offered for public auction, the whole hacienda was delivered to the creditor
in order that he might collect his credit and interests. From that time on the said Antonio Vicente
Barretto and later on his successors have been in possession of the hacienda, receiving the fruits of
the property, paying the expenses and the corresponding taxes, the outcome being that the debt,
capital and interests, up to March 31, 1813, according to the liquidation, amounted to about one
hundred thousand pesos. It is further stated that by virtue of the same, the grantors, the brothers
Antonio M.a Barretto and Ricardo Esteban Barretto, sold and conveyed all their rights and actions
included and derived from the said hypothecary credit for the price of P14,000 which would be paid
by the grantee and vendee by installments and in the manner prescribed in the said deed, assigning
to him, besides, all the rights which the said brothers had over the two-third parts of the said
hacienda.
The contents of this documents, which is public in nature, as well as those of another deed, Exhibit 1,
conclusively prove that the plaintiff did not obtain by assignment, sale, or transfer, as expressed in
said deeds, the ownership of the said hacienda of Balintagac, but only the hypothecary credit which
the heirs of the deceased creditor Antonio Vicente Barretto had inherited from the latter, after the
plaintiff had obtained from his other brothers the conveyance of their respective rights to the donation.

The rights acquired by the creditor were transmitted by hereditary title through operation of law to the
heirs of the same Antonio M.a, Ricardo Esteban, and Guadalupe, Barretto y Rocha and these in turn
assigned, sold and transferred the credit with all their rights as hypothecary creditors, as well as the
right to the usufruct of all the hacienda of Balintagac to the plaintiff Alberto Barretto, without it being
ever understood that the right of ownership over the same was transferred for the reason that neither
the original creditor Antonio Vicente Barretto nor his three heirs had acquired such right of ownership
but merely the right to receive the products of the hacienda in order to cover the credit which the
owners of the hacienda owed.
If the fact were not certain that the hacienda was delivered by its owners to the creditor Antonio
Vicente Barretto, it cannot be understood why it is that in the long course of this action the defendant
and the interveners could not explain how and in what manner Antonio Vicente Barretto took
possession of the hacienda in 1888 or 1889 after the termination of the said foreclosure proceedings,
nor could they explain how and why several of the coowners of the said hacienda had acted as
administrators of the same in the name and representation of the creditor Antonio Vicente Barretto.
It appears from the record without any contradiction whatsoever that the first who administered the
said hacienda in the name and by direction of Antonio Vicente Barretto was the defendant Leonardo
F. Barretto himself till the year 1890 in which year the latter voluntarily left by the direction of the
creditor and was succeeded by his brother Jose Barretto till 1893, when Leopoldo Barretto entered as
administrator relieving Jose Barretto by order of Antonio Vicente Barretto himself, till 1894. In this
year the defendant Leonardo F. Barretto himself returned to act as administrator by direction and in
the name of the creditor Antonio Vicente Barretto, till the year 1895, when according to the letter of
Leonardo, Exhibit L, and the letter, Exhibit M, of Antonio Vicente Barretto by direction of the latter the
defendant Leonardo F. Barretto delivered the hacienda to his brother Bartolome Barretto. It is to be
noted that in the said letter, Exhibit M, Antonio Vicente Barretto advised the defendant Leonardo to
tell the tenants of the hacienda to transact their business with Bartolome as the administrator. In
1896, because of the death of Bartolome Antonio Barretto, Luis Bonifacio Barretto succeeded him as
administrator, who managed the hacienda in the name of the same creditor. After the death of the
latter, he (Luis) dealt with Antonio M.a Barretto, one of the heirs of the deceased creditor. On August,
1902 because of the death of the above-mentioned Luis Bonifacio Barretto, his brother Antonio T.
Barretto succeeded him in the administration of the hacienda in the name and account of the heirs of
the deceased Antonio Vicente Barretto and the said Antonio T. Barretto continued to act as
administrator of the hacienda in the name of the plaintiff Barretto, who acquired the rights of the heirs
of the deceased creditor Antonio Vicente Barretto, until the beginning of the present action.
These facts which have been fully established show that the whole hacienda was delivered to Antonio
Vicente Barretto so that he might collect his credit, and this is corroborated by the letters which have
been exchanged between Juan Antonio Barretto Grandpre, Jr., residing abroad and Antonio Vicente
Barretto, as well as by the account, Exhibit 3, rendered to Juan Antonio Barretto, Jr., by Antonio
Vicente Barretto up to December 31, 1888, in which the hypothecary credit of P11,000 with its
interests amounting to P16,255.70 still appear existing and complete. Such facts cannot in any way
prove that Antonio Vicente Barretto took possession of the hacienda in the character of the owner
although he had been appointing administrators until his death in 1897 and the administrators had
dealt with him while living for the determination of the rent of the hacienda and other particulars, as
well as the fact that the declaration of ownership of the assessment of the property was made in his
name and the payment of the land tax due was made on his account, for the reason that he acted as
creditor in antichresis, and not as a owner and proprietor of the hacienda, which fact does not appear
to be proved by the oral evidence, whole the contrary has been fully established by the documentary
evidence attached in the record.
That the said verbal contract of antichresis was not set out in some document is not contrary to what
has been said, since the same, being a consensual contract, has the elements enumerated in article
1261 of the Civil Code and was complied with and carried into effect without any difficulty whatsoever
from the year 1888 until 1912, that is, during more than 24 years, without any protest or objection on
the part of any of those who could and probably had the right to impugn it; but, on the contrary,
several of the coowners of the hacienda usufructed by the creditor submitted themselves to the
discretional orders of the latter in the exercise of his right as creditor in antichresis, the former acting
successively as administrators of the very hacienda of which they were coowners; and they only
dared to oppose and to overlook the facts whose realization many of them have helped, from the time
the defendant Leonardo F. Barretto, who on two occasions administered the hacienda in the name
and on the account of the creditor Antonio Vicente Barretto, dared to usurp a portion of the hacienda

and to deny the unquestioned rights of the plaintiff which were directly derived from the said creditor,
now dead, taking possession of two portions of the hacienda in usufruct, in his own behalf, while the
whole debt, or part of it, still exists for the payment of which the right of usufruct is at present
exercised.
In other respects, the proceedings in the present action do not offer any legal cause or reason by
virtue of which it can be established that the plaintiff has acquired the ownership of the said hacienda
by prescription, since the original possessor entered into possession of the same with the consent of
the owners and not as owner, but as a creditor with the right only to collect his credit on the fruits of
the said hacienda, and the plaintiff could not acquire better rights than those which had been
conferred upon him by his predecessors in possession. Thus, article 1884 of the Civil Code declares
that the creditor cannot acquire the ownership of the real property for failure to pay the debt within the
time agreed upon. Any stipulation to the to the contrary shall be void.
It is, therefore, clear and beyond all discussion that the possession enjoyed by the predecessors of
the plaintiff has not been conferred by the owners of the hacienda to the creditor that the latter might
acquire the ownership of the property, but merely that from its products he might collect the existing
debt. Consequently, the possession exercised by the creditor Antonio Vicente Barretto, not being
under title of ownership because no right of ownership could have taken place, the present
possession of the hacienda can not possibly turn into title of acquisitive prescription of the property.
Furthermore, it does not appear that the donation made by Guadalupe Barretto and the sales or
assignment made by Antonio M.a Barretto and Ricardo Esteban Barretto were that of the ownership
or dominion of the hacienda, but the hypothecary credit and whatever right the donor and the
assignor and vendors had against the owners of the hacienda, as it is clearly expressed in the
documents Exhibit 1, and K above referred to. The rights acquired by the plaintiff Alberto Barretto
consist, without any doubt whatsoever, of what the said three brothers of the creditor Antonio Vicente
Barretto had transferred to him and under no circumstance could it be understood that they
transferred the dominion and the ownership of the said hacienda.
As the extinguishment of the right of the creditor and the termination of the use and possession of the
real property depend upon the entire payment of the debt and its interest, it is proper the
liquidation of accounts having been made to fix definitely the sums of the amount which the
debtors had paid on account of the capital and interests and which had been really received by the
creditor.
For these considerations, whereby some of the errors, assigned against the sentence appealed from
as notoriously opposed to the foundation of right and justice laid down in this decision, are deemed to
have been refuted, holding the plaintiff to be in legitimate possession of the said hacienda, the
defendant Leonardo F. Barretto should be sentenced and we sentence him to vacate and release
immediately otherwise subject to an order of ejectment the portion of land and lot included
within the boundary of the hacienda Balintagac, and place same at the disposal of the plaintiff Alberto
Barretto, or of his representatives; it being understood that before liquidation, the actual amount of the
debt be fixed, which debt, in the form of capital and interest, is collectible from the products of the
hacienda, by the adjustment of the amounts paid and received on their account to cover the debt.
There is no special finding as to costs in both instances; thus, that part of the judgment appealed
from, which is in conformity with this decision is affirmed and that contrary to it is reversed. So
ordered.

9. A.
[G.R. No. 121158. December 5, 1996]

CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and

RENATO C. TAGUIAM, petitioners, vs. COURT OF APPEALS, HON. PEDRO
T. SANTIAGO, SPS. SO CHING and CRISTINA SO, and NATIVE WEST
INTERNATIONAL TRADING CORP., respondents.
DECISION
FRANCISCO, J.:

China Banking Corporation (China Bank) extended several loans to Native West
International Trading Corporation (Native West) and to So Ching, Native Wests president.
Native West in turn executed promissory notes in favor of China Bank. So Ching, with the
marital consent of his wife, Cristina So, additionally executed two mortgages over their
properties, viz., a real estate mortgage executed on July 27, 1989 covering a parcel of
land situated in Cubao, Quezon City, under TCT No. 277797, and another executed on
August 10, 1989 covering a parcel of land located in Mandaluyong, under TCT No.
5363. The promissory notes matured and despite due demands by China Bank neither
private respondents Native West nor So Ching paid. Pursuant to a provision embodied in
the two mortgage contracts, China Bank filed petitions for the extra-judicial foreclosure of
the mortgaged properties before Notary Public Atty. Renato E. Taguiam for TCT No.
277797, and Notary Public Atty. Reynaldo M. Cabusora for TCT No. 5363, copies of
which were given to the spouses So Ching and Cristina So. After due notice and
publication, the notaries public scheduled the foreclosure sale of the spouses real estate
properties on April 13, 1993. Eight days before the foreclosure sale, however, private
respondents filed a complaint with the Regional Trial Court for accounting with damages
and with temporary restraining order against petitioners alleging the following causes of
action:
[1]

[2]

[3]

[4]

[5]

[6]

[7]

A. Defendants failed to comply with the mandates of Administrative Order No. 3 of the
Supreme Court dated October 19, 1984.
B. Defendants failed to comply with the mandates of Section 2 Presidential Decree No. 1079
dated January 28, 1977.
C. MORTGAGORS liability limited to P6,500,000.00 and P3,500,000.00 respectively in the
Mortgages Annexes A and B respectively, but the same are not included in the notice of
foreclosure.
D. Violation of Truth in Lending Act (RP Act No. 3765).
E. In all the loans granted by DEFENDANT-BANK to plaintiffs and Borrowers, the Bank
charged interests in excess of the rate allowed by the Central Bank.
F. Violation of Article 1308 of the Civil Code.

[8]

On April 7, 1993, the trial court issued a temporary restraining order to enjoin the
foreclosure sale. Thereafter counsels for the respective parties agreed to file their
pleadings and to submit the case, without further hearing, for resolution. On April 28,
1993, the trial court, without passing upon the material averments of the complaint, issued
an Order granting the private respondents prayer for the issuance of preliminary injunction
with the following proffered justification:

From the foregoing, it is quite apparent that a question of accounting poses a thorny issue as
between the litigants. Variance in the amounts involved relating to the loan agreements must be
judiciously passed upon by the Court and this is only possible if a trial on the merits could be had
as the matters appurtenant thereto are evidentiary in nature.
Under the premises, the accounting issue being evidentiary in character calls for an issuance of a
writ of preliminary injunction pending the adjudication of the case. The issuance thereof at this
particular stage of the case is merely a preventive remedy designed to protect from irreparable
injury to property or other rights plaintiff may suffer, which a court of equity may take cognizance
of by commanding acts to be done or prohibiting their commission, as in the instant suit, to restrain
notaries public Cabusora and Taguiam as well as defendant China Banking Corporation from
continuing with the auction sale of the subject properties, until further orders from this Court.
Wherefore, premises considered, finding that the circumstances warrant the issuance of a
preliminary injunction, plaintiffs prayer is hereby GRANTED. Consequent thereto, plaintiffs are
hereby ordered to post a bond amounting to P1 (ONE) Million to answer for whatever damages
defendant may suffer as a consequence of the writ.
[9]

Petitioners moved for reconsideration, but it was denied in an Order dated September
23, 1993. To annul the trial courts Orders of April 28, 1993 and September 23, 1993,
petitioners elevated the case through certiorari and prohibition before public respondent
Court of Appeals. In a decision dated January 17, 1995, respondent Court of Appeals
held that Administrative Circular No. 3 is the governing rule in extra-judicial foreclosure of
mortgage, which circular petitioners however failed to follow, and with respect to the
publication of the notice of the auction sale, the provisions of P.D. No. 1079 is the
applicable statute, which decree petitioners similarly failed to obey. Respondent Court of
Appeals did not pass upon the other issues and confined its additional lengthy discussion
on the validity of the trial courts issuance of the preliminary injunction, finding the same
neither capricious nor whimsical exercise of judgment that could amount to grave abuse of
discretion. The Court of Appeals accordingly dismissed the petition, as well as petitioners
subsequent motion for reconsideration. Hence, the instant petition under Rule 45 of the
Rules of Court reiterating the grounds raised before respondent court, to wit:
[10]

[11]

[12]

[13]

[14]

I. PETITIONER CBCS PETITIONS TO EXTRA-JUDICIALLY FORECLOSE THE REAL

ESTATE MORTGAGES OF JULY 27, 1989 AND AUGUST 10, 1989 THRU
PETITIONERS-NOTARIES PUBLIC, AND THE SCHEDULED
FORECLOSURE SALE ARE VALID AND LAWFUL;
II. PRIVATE RESPONDENTS AND PETITIONER CBC HAD EXPRESSLY AGREED TO
CONSIDER THE SAME MORTGAGES AS VALID SECURITIES FOR PROMPT
AND FULL PAYMENT OF ALL AND ANY OBLIGATIONS OF THE FORMER
FROM THE LATTER;
III. THE SUPPOSED VARIANCE IN THE TOTAL AMOUNT OF UNPAID LOANS IS NOT
A VALID BASIS TO ENJOIN THE FORECLOSURE OF THE QUESTIONED
MORTGAGES. THE MERE FAILURE TO PAY THE LOAN SECURED BY SAID
MORTGAGES IS THE ONLY, SINGLE REASON FOR THEIR LAWFUL
FORECLOSURE;
IV. PETITIONER BANK HAD FURNISHED PRIVATE RESPONDENTS WITH COPIES
OF DISCLOSURE STATEMENTS IN COMPLIANCE WITH THE TRUTH IN
LENDING ACT, AND CHARGED THEM INTERESTS IN ACCORDANCE WITH
LAW AND PURSUANT TO ITS EXPRESS AGREEMENT WITH THE LATTER;

V. THE P1.0 MILLION INJUNCTION BOND REQUIRED BY THE HONORABLE

COURT A QUO ON PRIVATE RESPONDENTS IS GROSSLY AND PATENTLY
INADEQUATE.
[15]

At the outset, the Courts attention is drawn to the fact that since the filing of this suit
before the trial court, none of the substantial issues have been resolved. To avoid and
gloss over the issues raised by the parties, as what the trial court and respondent Court of
Appeals did, would unduly prolong this litigation involving a rather simple case of
foreclosure of mortgage.Undoubtedly, this will run counter to the avowed purpose of the
rules, i.e., to assist the parties in obtaining just, speedy and inexpensive determination of
every action or proceeding. The Court, therefore, feels that the central issues of the
case, albeit unresolved by the courts below, should now be settled specially as they
involved pure questions of law. Furthermore, the pleadings of the respective parties on file
have amply ventilated their various positions and arguments on the matter necessitating
prompt adjudication.
[16]

Now to the core issues.

As the Court sees it, the crucial issues are: (1) whether or not the loans in excess of
the amounts expressly stated in the mortgage contracts can be included as part of the
loans secured by the real estate mortgages, (2) whether or not petitioners can
extrajudicially foreclose the properties subject of the mortgages, (3) whether or not
Administrative Order No. 3 should govern the extrajudicial foreclosure of the properties,
and (4) whether or not the writ of preliminary injunction issued by the trial court is valid.
Petitioners aver that the additional loans extended in favor of private respondents in
excess of P6,500,000.00 and P3,500,000.00 amounts respectively stipulated in the July
27, 1989 and August 10, 1989 mortgage contracts are also secured by the same
collaterals or real estate properties, citing as bases the introductory paragraph (whereas
clause) of the mortgage contracts, as well as the stipulations stated therein under the first
and second paragraphs. Private respondents for their part argue that the additional loans
are clean loans, relying on some isolated parts of the same introductory paragraph and
first paragraph of the contracts, and also of the third paragraph.
As both parties offered a conflicting interpretation of the contract, then judicial
determination of the parties intention is thus, inevitable. Hereunder are the pertinent
identical introductory paragraphs and paragraphs 1 to 3 of the July 27, 1989 and August
10, 1989 mortgage contracts:
[17]

WHEREAS, the MORTGAGEE has granted, and may from time to time hereafter grant to the
MORTGAGOR(S)/either of them/and/or NATIVE WEST INTERNATIONAL TRADING CORP.
hereinafter called the DEBTOR(S) credit facilities not exceeding SIX MILLION FIVE HUNDRED
THOUSAND PESOS ONLY (P6,500,000.00) Philippine currency, and the MORTGAGEE had
required the MORTGAGOR(S) to give collateral security for the payment of any and all
obligations heretofore contracted/incurred and which may thereafter be contracted/incurred by the
MORTGAGOR(S) and/or DEBTOR(S), or any one of them, in favor of the MORTGAGEE;
*

NOW, THEREFORE, as collateral security for the payment of the principal and interest of the
indebtedness/obligations herein referred to and the faithful performance by the MORTGAGOR(S)
of his (her, its) obligations hereunder, the MORTGAGOR(S) hereby execute(s) a FIRST
MORTGAGE, in favor of the MORTGAGEE, free from all liens and encumbrances of any kind,
that (those) certain parcel(s) of land, together with all the buildings/machineries/equipment/
improvements now existing thereon, and which may hereafter be placed thereon, described in the
Schedule of mortgaged properties described hereunder and/or which is hereto attached, marked
Exhibit A and made a part thereof.
1. It is agreed that this mortgage shall respond for all the obligations contracted/incurred by the
MORTGAGOR(S) and/or DEBTOR(S) or any one of them, in favor of the MORTGAGEE up to

the said sum of SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY
(P6,500,000.00) regardless of the manner in which the said obligations may have been
contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) whether by advances or loans
made to him (her, it) by the MORTGAGEE, by the negotiation of mercantile documents, including
trust receipts, by the execution by the MORTGAGOR(S) and/or DEBTOR(S) of money market
instruments/commercial papers, undertakings of guaranty of suretyship, or by endorsement of
negotiable instruments, or otherwise, the idea being to make this deed a comprehensive and all
embracing security that it is.
*

2. Payments on account of the principal and interest of the credit granted by the MORTGAGEE to
the MORTGAGOR(S) and/or DEBTOR(S) may be made from time to time, and as often as the
MORTGAGOR(S) may elect; provided, however, that in the event of such payments being so made
that the indebtedness to the MORTGAGEE may from time to time be reduced the MORTGAGEE
may make further advances and all sums whatsoever advanced by the MORTGAGEE shall be
secured by this mortgage, and partial payments of said indebtedness from time to time shall not
thereby be taken to reduce by the amount of such payments the credit hereby secured. The said
credit shall extend to and account which shall, within the said limit of P6,500,000.00* exclusive of
interest, be fluctuating and subject to increase or decrease from time to time as the MORTGAGEE
may approve, and this mortgage shall stand as security for all indebtedness of the
MORTGAGOR(S) and/or DEBTOR(S), or any one of them, at any and all times outstanding,
regardless of partial or full payments at any time or times made by the MORTGAGOR(S) and/or
DEBTOR(S).
3. It is hereby agreed that the MORTGAGEE may from time to time grant the
MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the amount secured by this mortgage,
without affecting the liability of the MORTGAGOR(S) under this mortgage up to the amount
stipulated.
[18]

An important task in contract interpretation is the ascertainment of the intention of the

contracting parties which is accomplished by looking at the words they used to project that
intention in their contract, i.e., all the words, not just a particular word or two, and words in
context, not words standing alone. Indeed, Article 1374 of the Civil Code, states that the
various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly. Applying the rule, we find
that the parties intent is to constitute the real estate properties as continuing securities
liable for future obligations beyond the amounts of P6.5 million and P3.5 million
respectively stipulated in theJuly 27, 1989 and August 10, 1989 mortgage contracts. Thus,
while the whereas clause initially provides that the mortgagee has granted, and may from
time to time hereafter grant to the mortgagors x x x credit facilities not exceeding six
million five hundred thousand pesos only (P6,500,000.00) yet in the same clause it
provides that the mortgagee had required the mortgagor(s) to give collateral security for
the payment of any and all obligations heretofore contracted/incurred and which may
thereafter be contracted/incurred by the mortgagor(s) and/or debtor(s), or any one of
them, in favor of the mortgagee which qualifies the initial part and shows that the
collaterals or real estate properties serve as securities for future obligations. The first
which ends with the clause, the idea being to make this deed a comprehensive and all
embracing security that it is supports this qualification.
[19]

**

Similarly, the second provides that the mortgagee may take further advances and all
sums whatsoever advanced by the mortgagee shall be secured by this mortgagee x x x.
And although it was stated that [t]he said credit shall extend to any account which shall,
within the said limit of P6,500,000.00 exclusive of interest, this part of the second
sentence is again qualified by its succeeding portion which provides that this mortgage
shall stand as security for all indebtedness of the mortgagor(s) and/or debtor(s), or any
one of them, at any and all times outstanding ... Again, under the third paragraph, it is
provided that the mortgagee may from time to time grant the mortgagor(s)/debtor(s) credit

facilities exceeding the amount secured by this mortgage x x x. The fourth paragraph, in
addition, states that x x x all such withdrawals, and payments, whether evidenced by
promissory notes or otherwise, shall be secured by this mortgage which manifestly shows
that the parties principally intended to constitute the real estate properties as continuing
securities for additional advancements which the mortgagee may, upon application,
extend. It is well settled that mortgages given to secure future advancements or loans are
valid and legal contracts, and that the amounts named as consideration in said contracts
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.
[20]

[21]

Anent the second issue, we find that petitioners are entitled to foreclose the
mortgages. In their complaint for accounting with damages pending with the trial court,
private respondents averred that:
8. Up to and until February, 1993, PLAINTIFF-CORPORATION had paid to the DEFENDANTBANK, the amount of THREE HUNDRED FIFTY THOUSAND (P350,000.00) Pesos, Philippine
Currency, and was willing to pay the balance in installments of FOUR HUNDRED THOUSAND
(P400,000.00) Pesos, Philippine Currency, every month, in the meantime, but the DEFENDANTBANK refused to accept, demanding instead SEVEN HUNDRED MILLION (P700,000,000.00)
Pesos, Philippine Currency, a month.
9. Inspite of the expressed willingness and commitment of plaintiffs to pay their obligation in a
manner which they could afford, on March 11, 1993, MORTGAGORS and DEFENDANTCORPORATION, each received a Letter of Demand from DEFENDANT-BANK, for the payment
of P28,775,615.14 exclusive of interest and penalty evidenced by 11 promissory notes enclosed
therein x x x.
10. Upon receipt of the letter, PLAINTIFF-CORPORATION through its President pleaded with the
Chairman of the Board of the DEFENDANT-BANK, through whom Defendant-Corporation was
transacting business with, to accept its offer of payment of FOUR HUNDRED THOUSAND
(P400,000.00) Pesos, Philippine Currency, a month, in the meantime, which was again refused by
the said Chairman.
[22]

which allegations are a clear admission that they were unable to settle to the fullest their
obligation. Foreclosure is valid where the debtors, as in this case, are in default in the
payment of their obligation. The essence of a contract of mortgage indebtedness is that
a property has been identified or set apart from the mass of the property of the debtormortgagor as security for the payment of money or the fulfillment of an obligation to
answer the amount of indebtedness, in case of default of payment. It is a settled rule that
in a real estate mortgage when the obligation is not paid when due, the mortgagee has the
right to foreclose the mortgage and to have the property seized and sold in view of
applying the proceeds to the payment of the obligation. In fact, aside from the mortgage
contracts, the promissory notes executed to evidence the loans also authorize the
mortgagee to foreclose on the mortgages. Thus:
[23]

[24]

[25]

x x x CHINA BANKING CORPORATION is hereby authorized to sell at public or private sales

such securities or things of value for the purpose of applying their proceeds to such payments.
[26]

And while private respondents aver that they have already paid ten million pesos, an
allegation which has still to be settled before the trial court, the same cannot be utilized as
a shield to enjoin the foreclosure sale. A mortgage given to secure advancements, we
repeat, 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.
[27]

With respect to the third issue, we find private respondents contention that
Administrative Order No. 3 is the governing rule in foreclosure of mortgages misplaced.

The parties, we note, have stipulated that the provisions of Act No. 3135 is the controlling
law in case of foreclosure. Thus:
17. The MORTGAGOR(S) hereby grant(s) unto the MORTGAGEE full and irrevocable power of
attorney coupled with interest, in the event of breach of any of the conditions of this mortgage, to
sell, in its discretion, the mortgaged properties at public auction, for cash and to the highest bidder,
in the Province or City where the mortgaged properties are located, before the Sheriff, or a Notary
Public, without court proceedings, after posting notices of sale for a period of twenty days in three
public places in said place; and after publication of such notice in a newspaper of general
circulation in the said place once a week, for three consecutive weeks, and the MORTGAGEE is
hereby authorized to execute the deed of sale and all such other documents as may be necessary in
the premises all in accordance with the provisions of Act No. 3135 of the Philippine Legislature,as
amended, and Section 78 of Republic Act No. 337; x x x. (Underscoring supplied. )
[28]

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.
[29]

[30]

Moreover, Administrative Order No. 3 is a directive for executive judges and clerks of
courts which, under its preliminary paragraph is [i]n line with the responsibility of an
Executive Judge, under Administrative Order No. 6, dated June 30, 1975, for the
management of courts within his administrative area, included in which is the task of
supervising directly the work of the Clerk of Court, who is also the Ex-Oficio Sheriff, and
his staff, x x x Surely, a petition for foreclosure with the notary public is not within the
contemplation of the aforesaid directive as the same is not filed with the court. At any rate,
Administrative Order No. 3 cannot prevail over Act No. 3135, as amended. It is an
elementary principle in statutory construction that a statute is superior to an administrative
directive and the former cannot be repealed or amended by the latter.
On the last issue, we find that the issuance of the writ of injunction by the trial court
unjustified. A writ of preliminary injunction, as an ancillary or preventive remedy, may only
be resorted to by a litigant to protect or preserve his rights or interests and for no other
purpose during the pendency of the principal action. But before a writ of preliminary
injunction may be issued, there must be a clear showing by the complaint that there exists
a right to be protected and that the acts against which the writ is to be directed are
violative of the said right. In the case at bench, we fail to see any reason why the
foreclosure of the mortgages should be enjoined. On the face of the clear admission by
private respondents that they were unable to settle their obligations which were secured
by the mortgages, petitioners have a clear right to foreclose the mortgages which is a
remedy provided by law. Thus, in Caltex Philippines, Inc. v. Intermediate Appellate
Court, we reiterated the rule that:
[31]

[32]

[33]

x x x where a debt is secured by a mortgage and there is a default in payment on the part of the
mortgagor, the mortgagee has a choice of one (1) or two (2) remedies, but he cannot have both. The
mortgagee may:
1) foreclosure the mortgage; or
2) file an ordinary action to collect the debt.
When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by
the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the
satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a
deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained
in the sale of the real property at public auction and the outstanding obligation at the time of the

foreclosure proceedings (Soriano v. Enriquez, 24 Phil. 584; Banco de Islas Filipinas v. Concepcion
Hijos, 53 Phil. 86; Banco Nacional v.Barreto, 53 Phil. 101).
On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his
mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the
action to collect is favorable to him, and it becomes final and executory, he can enforce said
judgment by execution. He can even levy execution on the same mortgaged property, but he will
not have priority over the latter and there may be other creditors who have better lien on the
properties of the mortgagor.
[34]

WHEREFORE, the instant petition is hereby GRANTED. The assailed Decision, as

well as the Resolution, of the Court of Appeals dated January 17, 1995 and July 7, 1995,
respectively, are hereby REVERSED and SET ASIDE. The preliminary writ of injunction
issued by the trial court is hereby NULLIFIED. This case is REMANDED to the court of
origin for further proceedings in conformity with this decision.
SO ORDERED.

B.
G.R. No. 117604 March 26, 1997
CHINA BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.

KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner China
Banking Corporation seeks the reversal of the decision of the Court of Appeals dated 15 August 1994 nullifying
the Securities and Exchange Commission's order and resolution dated 4 June 1993 and 7 December 1993,
respectively, for lack of jurisdiction. Similarly impugned is the Court of Appeals' resolution dated 4 September
1994 which denied petitioner's motion for reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private respondent Valley
Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219 to petitioner China
Banking Corporation (CBC, for brevity). 1
On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge agreement be
recorded in its books. 2
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in
petitioner's favor was duly noted in its corporate books. 3
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which was secured by
the aforestated pledge agreement still existing between Calapatia and petitioner. 4
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for extrajudicial
foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a public auction
sale of the pledged stock. 5
On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedings and requested
that the pledged stock be transferred to its (petitioner's) name and the same be recorded in the corporate
books. However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to accede to petitioner's
request in view of Calapatia's unsettled accounts with the club. 6

Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and petitioner
emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently, petitioner was issued the
corresponding certificate of sale. 7
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the
amount of P18,783.24. 8 Said notice was followed by a demand letter dated 12 December 1985 for the same
amount 9and another notice dated 22 November 1986 for P23,483.24. 10
On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction sale
of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein was
Calapatia's own share of stock (Stock Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his membership
due to the sale of his share of stock in the 10 December 1986 auction. 11
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate No. 1219 by
virtue of being the highest bidder in the 17 September 1985 auction and requested that a new certificate of
stock be issued in its name. 12
On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public
auction held on 10 December 1986 for P25,000.00. 13
On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed a
case with the Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and for the
issuance of a new stock certificate in its name. 14
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over the
subject matter on the theory that it involves an intra-corporate dispute and on 27 August 1990 denied
petitioner's motion for reconsideration.
On 20 September 1990, petitioner filed a complaint with the Securities and Exchange Commission (SEC) for
the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued
pursuant thereto; for the issuance of a new certificate in petitioner's name; and for damages, attorney's fees
and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in
the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to transfer the
share in the name of the petitioner in the books of (VGCCI) until liquidation of
delinquency." 15 Consequently, the case was dismissed. 16
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration.

17

Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the
decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior right over the pledged
share and because of pledgor's failure to pay the principal debt upon maturity, appellantpetitioner can proceed with the foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are
hereby SET ASIDE. The auction sale conducted by appellee-respondent Club on December 10,
1986 is declared NULL and VOID. Finally, appellee-respondent Club is ordered to issue another
membership certificate in the name of appellant-petitioner bank.
SO ORDERED. 18
VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its resolution
dated 7 December 1993. 19
The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the
Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and its hearing officer
on ground of lack of jurisdiction over the subject matter and, consequently, dismissed petitioner's original
complaint. The Court of Appeals declared that the controversy between CBC and VGCCI is not intra-corporate.
It ruled as follows:

In order that the respondent Commission can take cognizance of a case, the controversy must
pertain to any of the following relationships: (a) between the corporation, partnership or
association and the public; (b) between the corporation, partnership or association and its
stockholders, partners, members, or officers; (c) between the corporation, partnership or
association and the state in so far as its franchise, permit or license to operate is concerned,
and (d) among the stockholders, partners or associates themselves (Union Glass and Container
Corporation vs. SEC, November 28, 1983, 126 SCRA 31). The establishment of any of the
relationship mentioned will not necessarily always confer jurisdiction over the dispute on the
Securities and Exchange Commission to the exclusion of the regular courts. The statement
made in Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions or
distinctions is not that absolute. The better policy in determining which body has jurisdiction over
a case would be to consider not only the status or relationship of the parties but also the nature
of the question that is the subject of their controversy (Viray vs. Court of Appeals, November 9,
1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent bank which involves ownership of
the stock that used to belong to Calapatia, Jr. is not within the competence of respondent
Commission to decide. It is not any of those mentioned in the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of
respondent Securities and Exchange Commission (Annexes Y and BB, petition) and of its
hearing officer dated January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are all
nullified and set aside for lack of jurisdiction over the subject matter of the case. Accordingly, the
complaint of respondent China Banking Corporation (Annex Q, petition) is DISMISSED. No
pronouncement as to costs in this instance.
SO ORDERED. 20
Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its resolution dated 5
October 1994. 21
Hence, this petition wherein the following issues were raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division)
GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER
DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE COMMISSION EN
BANC, AND WHEN IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST
RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION OVER THE SUBJECT
MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE
COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT EVIDENCE
SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP CERTIFICATE
NO. 1219 FOR ONE SHARE OF RESPONDENT VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the controversy, the regular courts or
the SEC.
P. D. No. 902-A conferred upon the SEC the following pertinent powers:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all
corporations, partnerships or associations, who are the grantees of primary franchises and/or a
license or permit issued by the government to operate in the Philippines, and in the exercise of
its authority, it shall have the power to enlist the aid and support of and to deputize any and all
enforcement agencies of the government, civil or military as well as any private institution,
corporation, firm, association or person.
xxx xxx xxx

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it
as expressly granted under existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or of
the stockholders, partners, members of associations or organizations registered
with the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between
and among stockholders, members, or associates; between any or all of them
and the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation, partnership
or association and the State insofar as it concerns their individual franchise or
right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees, officers, or
managers of such corporations, partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared in the
state of suspension of payments in cases where the corporation, partnership or
association possesses property to cover all of its debts but foresees the
impossibility of meeting them when they respectively fall due or in cases where
the corporation, partnership or association has no sufficient assets to cover its
liabilities, but is under the Management Committee created pursuant to this
Decree.
The aforecited law was expounded upon in Viray v. CA 22 and in the recent cases of Mainland Construction
Co., Inc. v.Movilla 23 and Bernardo v. CA, 24 thus:
. . . .The better policy in determining which body has jurisdiction over a case would be to
consider not only the status or relationship of the parties but also the nature of the question that
is the subject of their controversy.
Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdiction we have to
determine therefore whether or not petitioner is a stockholder of VGCCI and whether or not the nature of the
controversy between petitioner and private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject share or membership certificate at
public auction by petitioner (and the issuance to it of the corresponding Certificate of Sale) transferred
ownership of the same to the latter and thus entitled petitioner to have the said share registered in its name as
a member of VGCCI. It is readily observed that VGCCI did not assail the transfer directly and has in fact, in its
letter of 27 September 1974, expressly recognized the pledge agreement executed by the original owner,
Calapatia, in favor of petitioner and has even noted said agreement in its corporate books. 25 In addition,
Calapatia, the original owner of the subject share, has not contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and, therefore, the
conflict that arose between petitioner and VGCCI aptly exemplies an intra-corporate controversy between a
corporation and its stockholder under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between petitioner and private
respondent corporation. VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art VIII
of its by-laws which provides that "after a member shall have been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the Club. . ." 26 It is pursuant to this provision that VGCCI also sold
the subject share at public auction, of which it was the highest bidder. VGCCI caps its argument by asserting
that its corporate by-laws should prevail. The bone of contention, thus, is the proper interpretation and
application of VGCCI's aforequoted by-laws, a subject which irrefutably calls for the special competence of the
SEC.
We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz 27:
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative
commissions and boards the power to resolve specialized disputes in the field of labor (as in
corporations, public transportation and public utilities) ruled that Congress in requiring the
Industrial Court's intervention in the resolution of labor-management controversies likely to

cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so
expressly state in the law. The Court held that under the "sense-making and expeditious
doctrine of primary jurisdiction . . . the courts cannot or will not determine a controversy
involving a question which is within the jurisdiction of an administrative tribunal, where the
question demands the exercise of sound administrative discretion requiring the special
knowledge, experience, and services of the administrative tribunal to determine technical and
intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes of the
regulatory statute administered.
In this era of clogged court dockets, the need for specialized administrative boards or
commissions with the special knowledge, experience and capability to hear and determine
promptly disputes on technical matters or essentially factual matters, subject to judicial review in
case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the Court
noted that "between the power lodged in an administrative body and a court, the unmistakable
trend has been to refer it to the former. 'Increasingly, this Court has been committed to the view
that unless the law speaks clearly and unequivocably, the choice should fall on [an
administrative agency.]'" The Court in the earlier case of Ebon v. De Guzman, noted that the
lawmaking authority, in restoring to the labor arbiters and the NLRC their jurisdiction to award all
kinds of damages in labor cases, as against the previous P.D. amendment splitting their
jurisdiction with the regular courts, "evidently, . . . had second thoughts about depriving the
Labor Arbiters and the NLRC of the jurisdiction to award damages in labor cases because that
setup would mean duplicity of suits, splitting the cause of action and possible conflicting findings
and conclusions by two tribunals on one and the same claim."
In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does the
meticulous analysis and correct interpretation of a corporation's by-laws as well as the applicable provisions of
the Corporation Code in order to determine the validity of VGCCI's claims. The SEC, therefore, took proper
cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint it filed
with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate relations between itself and
VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice Isagani A. Cruz, declared that:
It follows that as a rule the filing of a complaint with one court which has no jurisdiction over it
does not prevent the plaintiff from filing the same complaint later with the competent court. The
plaintiff is not estopped from doing so simply because it made a mistake before in the choice of
the proper forum. . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated (in its motion
to dismiss) that the case between itself and petitioner is intra-corporate and insisted that it is the SEC and not
the regular courts which has jurisdiction. This is precisely the reason why the said court dismissed petitioner's
complaint and led to petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of Appeals, this
Court likewise deems it procedurally sound to proceed and rule on its merits in the same proceedings.
It must be underscored that petitioner did not confine the instant petition for review on certiorari on the issue of
jurisdiction. In its assignment of errors, petitioner specifically raised questions on the merits of the case. In turn,
in its responsive pleadings, private respondent duly answered and countered all the issues raised by petitioner.
Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta Y. GabrielAlmoradie v.Court of Appeals, 29 citing Escudero v. Dulay 30 and The Roman Catholic Archbishop of Manila
v. Court of Appeals. 31
In the interest of the public and for the expeditious administration of justice the issue on
infringement shall be resolved by the court considering that this case has dragged on for years
and has gone from one forum to another.
It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in a
single proceeding leaving no root or branch to bear the seeds of future litigation. No useful
purpose will be served if a case or the determination of an issue in a case is remanded to the
trial court only to have its decision raised again to the Court of Appeals and from there to the
Supreme Court.

We have laid down the rule that the remand of the case or of an issue to the lower court for
further reception of evidence is not necessary where the Court is in position to resolve the
dispute based on the records before it and particularly where the ends of justice would not be
subserved by the remand thereof. Moreover, the Supreme Court is clothed with ample authority
to review matters, even those not raised on appeal if it finds that their consideration is
necessary in arriving at a just disposition of the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et al., 32 this Court, through Mr. Justice
Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that since the filing of this suit before the
trial court, none of the substantial issues have been resolved. To avoid and gloss over the
issues raised by the parties, as what the trial court and respondent Court of Appeals did, would
unduly prolong this litigation involving a rather simple case of foreclosure of mortgage.
Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to assist the parties in
obtaining just, speedy and inexpensive determination of every action or proceeding. The Court,
therefore, feels that the central issues of the case, albeit unresolved by the courts below, should
now be settled specially as they involved pure questions of law. Furthermore, the pleadings of
the respective parties on file have amply ventilated their various positions and arguments on the
matter necessitating prompt adjudication.
In the case at bar, since we already have the records of the case (from the proceedings before the SEC)
sufficient to enable us to render a sound judgment and since only questions of law were raised (the proper
jurisdiction for Supreme Court review), we can, therefore, unerringly take cognizance of and rule on the merits
of the case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It contends that
the same was null and void for lack of consideration because the pledge agreement was entered into on 21
August
1974 33 but the loan or promissory note which it secured was obtained by Calapatia much later or only on 3
August 1983. 34
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily reveal that the contracting parties explicitly stipulated
therein that the said pledge will also stand as security for any future advancements (or renewals thereof) that
Calapatia (the pledgor) may procure from petitioner:
xxx xxx xxx
This pledge is given as security for the prompt payment when due of all loans, overdrafts,
promissory notes, drafts, bills or exchange, discounts, and all other obligations of every kind
which have heretofore been contracted, or which may hereafter be contracted, by the
PLEDGOR(S) and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE, including
discounts of Chinese drafts, bills of exchange, promissory notes, etc., without any further
endorsement by the PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND
(P20,000.00) PESOS, together with the accrued interest thereon, as hereinafter provided, plus
the costs, losses, damages and expenses (including attorney's fees) which PLEDGEE may
incur in connection with the collection thereof. 35 (Emphasis ours.)
The validity of the pledge agreement between petitioner and Calapatia cannot thus be held suspect by VGCCI.
As candidly explained by petitioner, the promissory note of 3 August 1983 in the amount of P20,000.00 was
but a renewal of the first promissory note covered by the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the right to sell
the share in question in accordance with the express provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant to note that VGCCI began sending notices of
delinquency to Calapatia after it was informed by petitioner (through its letter dated 14 May 1985) of the
foreclosure proceedings initiated against Calapatia's pledged share, although Calapatia has been delinquent in
paying his monthly dues to the club since 1975. Stranger still, petitioner, whom VGCCI had officially
recognized as the pledgee of Calapatia's share, was neither informed nor furnished copies of these letters of
overdue accounts until VGCCI itself sold the pledged share at another public auction. By doing so, VGCCI
completely disregarded petitioner's rights as pledgee. It even failed to give petitioner notice of said auction
sale. Such actuations of VGCCI thus belie its claim of good faith.

In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues in this wise:
The general rule really is that third persons are not bound by the by-laws of a corporation since
they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to this is
when third persons have actual or constructive knowledge of the same. In the case at bar,
petitioner had actual knowledge of the by-laws of private respondent when petitioner foreclosed
the pledge made by Calapatia and when petitioner purchased the share foreclosed on
September 17, 1985. This is proven by the fact that prior thereto, i.e., on May 14, 1985
petitioner even quoted a portion of private respondent's by-laws which is material to the issue
herein in a letter it wrote to private respondent. Because of this actual knowledge of such bylaws then the same bound the petitioner as of the time when petitioner purchased the share.
Since the by-laws was already binding upon petitioner when the latter purchased the share of
Calapatia on September 17, 1985 then the petitioner purchased the said share subject to the
right of the private respondent to sell the said share for reasons of delinquency and the right of
private respondent to have a first lien on said shares as these rights are provided for in the bylaws very very clearly. 36
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.: 37
And moreover, the by-law now in question cannot have any effect on the appellee. He had no
knowledge of such by-law when the shares were assigned to him. He obtained them in good
faith and for a valuable consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law cannot
operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to
the corporation for a period of thirty days is not binding upon an assignee of the stock as a
personal contract, although his assignor knew of the by-law and took part in its adoption. (10
Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not
affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris Trust &
Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who has assented to an
unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor;
the assignee is not bound by such by-law by virtue of the assignment alone. (Ireland vs. Globe
Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation for the
protection of the corporation against worthless stockholders, cannot be made available to defeat
the rights of third persons. (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa,
336.) (Emphasis ours.)
In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the
transaction or agreement between said third party and the shareholder was entered into, in this case, at the
time the pledge agreement was executed. VGCCI could have easily informed petitioner of its by-laws when it
sent notice formally recognizing petitioner as pledgee of one of its shares registered in Calapatia's name.
Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice. The ruling of the SEC en
banc is particularly instructive:
By-laws signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among themselves in their relation
to it. In other words, by-laws are the relatively permanent and continuing rules of action adopted
by the corporation for its own government and that of the individuals composing it and having
the direction, management and control of its affairs, in whole or in part, in the management and
control of its affairs and activities. (9 Fletcher 4166, 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and, although adopted
pursuant to statutory authority, have no status as public law. (Ibid.)
Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except
when they have knowledge of the provisions either actually or constructively. In the case
of Fleisher v.Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the

transfer of shares cannot have any effect on the transferee of the shares in question as he "had
no knowledge of such by-law when the shares were assigned to him. He obtained them in good
faith and for a valuable consideration. He was not a privy to the contract created by the by-law
between the shareholder . . .and the Botica Nolasco, Inc. Said by-law cannot operate to defeat
his right as a purchaser. (Emphasis supplied.)
By analogy of the above-cited case, the Commission en banc is of the opinion that said case is
applicable to the present controversy. Appellant-petitioner bank as a third party can not be
bound by appellee-respondent's by-laws. It must be recalled that when appellee-respondent
communicated to appellant-petitioner bank that the pledge agreement was duly noted in the
club's books there was no mention of the shareholder-pledgor's unpaid accounts. The transcript
of stenographic notes of the June 25, 1991 Hearing reveals that the pledgor became delinquent
only in 1975. Thus, appellant-petitioner was in good faith when the pledge agreement was
contracted.
The Commission en banc also believes that for the exception to the general accepted rule that
third persons are not bound by by-laws to be applicable and binding upon the pledgee,
knowledge of the provisions of the VGCI By-laws must be acquired at the time the pledge
agreement was contracted. Knowledge of said provisions, either actual or constructive, at the
time of foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of the Civil
Code provides that it is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists maybe alienated for the
payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission issued an
opinion to the effect that:
According to the weight of authority, the pledgee's right is entitled to full
protection without surrender of the certificate, their cancellation, and the issuance
to him of new ones, and when done, the pledgee will be fully protected against a
subsequent purchaser who would be charged with constructive notice that the
certificate is covered by the pledge. (12-A Fletcher 502)
The pledgee is entitled to retain possession of the stock until the pledgor pays or
tenders to him the amount due on the debt secured. In other words, the pledgee
has the right to resort to its collateral for the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of new certificate to a
third person who purchased the same certificate covered by the pledge, will
certainly defeat the right of the pledgee to resort to its collateral for the payment
of the debt. The pledgor or his representative or registered stockholders has no
right to require a return of the pledged stock until the debt for which it was given
as security is paid and satisfied, regardless of the length of time which have
elapsed since debt was created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or liens in favor either of the
corporation or of third persons, if he has no notice thereof, but not otherwise. He also takes it
free of liens or claims that may subsequently arise in favor of the corporation if it has notice of
the pledge, although no demand for a transfer of the stock to the pledgee on the corporate
books has been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v. Eagle Fruit Co., 75
F2d739) 38
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art. 2099 of the Civil
Code which stipulates that the creditor must take care of the thing pledged with the diligence of a good father
of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H. Lee, 39 is clearly not applicable:
In applying this provision to the situation before us it must be borne in mind that the ordinary
pawn ticket is a document by virtue of which the property in the thing pledged passes from hand
to hand by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to
bearer. It results that one who takes a pawn ticket in pledge acquires domination over the
pledge; and it is the holder who must renew the pledge, if it is to be kept alive.
It is quite obvious from the aforequoted case that a membership share is quite different in character
from a pawn ticket and to reiterate, petitioner was never informed of Calapatia's unpaid accounts and
the restrictive provisions in VGCCI's by-laws.

Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which the corporation
holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The
term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness
which a subscriber or stockholder may owe the corporation arising from any other transaction." 40 In the case at
bar, the subscription for the share in question has been fully paid as evidenced by the issuance of Membership
Certificate No. 1219. 41 What Calapatia owed the corporation were merely the monthly dues. Hence, the
aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED and the
order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.
SO ORDERED.

C.
[G.R. No. 125508. July 19, 2000]

CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, COMMISSIONER OF

INTERNAL REVENUE and COURT OF TAX APPEALS,respondents.
DECISION
VITUG, J.:
The Commissioner of Internal Revenue denied the deduction from gross income of "securities
becoming worthless" claimed by China Banking Corporation (CBC). The Commissioners
disallowance was sustained by the Court of Tax Appeals ("CTA"). When the ruling was appealed to
the Court of Appeals ("CA"), the appellate court upheld the CTA. The case is now before us on a
Petition for Review on Certiorari.
Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the
First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with
"deposit-taking" function. The investment amounted to P16,227,851.80, consisting of 106,000 shares
with a par Value of P100 per share.
In the course of the regular examination of the financial books and investment portfolios of
petitioner conducted by Bangko Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd., has
become insolvent. With the approval of Bangko Sentral, petitioner wrote-off as being worthless its
investment in First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad
debt or as an ordinary loss deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and assessed petitioner
for income tax deficiency in the amount of P8,533,328.04, inclusive of surcharge, interest and
compromise penalty. The disallowance of the deduction was made on the ground that the investment
should not be classified as being "worthless" and that, although the Hongkong Banking
Commissioner had revoked the license of First CBC Capital as a "deposit-taping" company, the latter
could still exercise, however, its financing and investment activities. Assuming that the securities had
indeed become worthless, respondent Commissioner of Internal Revenue held the view that they
should then be classified as "capital loss," and not as a bad debt expense there being no
indebtedness to speak of between petitioner and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court
sustained the Commissioner, holding that the securities had not indeed become worthless and
ordered petitioner to pay its deficiency income tax for 1987 of P8,533,328.04 plus 20% interest per
annum until fully paid. When the decision was appealed to the Court of Appeals, the latter upheld the
CTA. In its instant petition for review on certiorari, petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have become worthless is based on a
Profit and Loss Account for the Year-End 31 December 1987, and the recommendation of Bangko
Sentral that the equity investment be written-off due to the insolvency of the subsidiary. While the
matter may not be indubitable (considering that certain classes of intangibles, like franchises and

goodwill, are not always given corresponding values in financial statements [1], there may really be no
need, however, to go of length into this issue since, even to assume the worthlessness of the shares,
the deductibility thereof would still be nil in this particular case. At all events, the Court is not prepared
to hold that both the tax court and the appellate court are utterly devoid of substantial basis for their
own factual findings.
Subject to certain exceptions, such as the compensation income of individuals and passive
income subject to final tax, as well as income of non-resident aliens and foreign corporations not
engaged in trade or business in the Philippines, the tax on income is imposed on the net income
allowing certain specified deductions from gross income to be claimed by the taxpayer. Among the
deductible items allowed by the National Internal Revenue Code ("NIRC") are bad
debts and losses.[2]
An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of
which results in either a capital gain or a capital loss. The gain or the loss is ordinary when the
property sold or exchanged is not a capital asset.[3] A capital asset is defined negatively in Section
33(1) of the NIRC; viz:
(1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or property used in the trade or business, of a character
which is subject to the allowance for depreciation provided in subsection (f) of section twenty-nine; or
real property used in the trade or business of the taxpayer.
Thus, shares of stock; like the other securities defined in Section 20(t) [4] of the NIRC, would
be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale
of, or an active trader (for his own account) in, securities. Section 20(u) of the NIRC defines a
dealer in securities thus:
"(u) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual,
partnership or corporation, with an established place of business, regularly engaged in the purchase
of securities and their resale to customers; that is, one who as a merchant buys securities and sells
them to customers with a view to the gains and profits that may be derived therefrom."
In the hands, however, of another who holds the shares of stock by way of an investment, the shares
to him would be capital assets. When the shares held by such investor become worthless, the
loss is deemed to be a loss from the sale or exchange of capital assets. Section 29(d)(4)(B) of
the NIRC states:
"(B) Securities becoming worthless. - If securities as defined in Section 20 become worthless during
the tax" year and are capital assets, the loss resulting therefrom shall, for the purposes of his Title, be
considered as a loss from the sale or exchange, on the last day of such taxable year, of capital
assets."
The above provision conveys that the loss sustained by the holder of the securities, which are capital
assets (to him), is to be treated as a capital loss as if incurred from a sale or exchange
transaction. A capital gain or a capital loss normally requires the concurrence of two conditions for it
to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital
asset. When securities become worthless, there is strictly no sale or exchange but the law deems the
loss anyway to be "a loss from the sale or exchange of capital assets. [5]A similar kind of treatment is
given, by the NIRC on the retirement of certificates of indebtedness with interest coupons or in
registered form, short sales and options to buy or sell property where no sale or exchange strictly
exists.[6] In these cases, the NIRC dispenses, in effect, with the standard requirement of a sale or
exchange for the application of the capital gain and loss provisions of the code.
Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains
derived from the sale or exchange of capital assets, and not from any other income of the
taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary
corporation of petitioner bank whose shares in said investee corporation are not intended for

purchase or sale but as an investment. Unquestionably then, any loss therefrom would be a capital
loss, not an ordinary loss, to the investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed only to the extent
provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid Section 29(d)(4)(A),
read:
"Section 33. Capital gains and losses. x x x x x x x x x.
"(c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall be
allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company
incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of
deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued
by any corporation (including one issued by a government or political subdivision thereof), with
interest coupons or in registered form, any loss resulting from such sale shall not be subject to the
foregoing limitation an shall not be included in determining the applicability of such limitation to other
losses.
The exclusionary clause found in the foregoing text of the law does not include all forms of
securities but specifically covers only bonds, debentures, notes, certificates or other evidence of
indebtedness, with interest coupons or in registered form, which are the instruments of credit
normally dealt with in the usual lending operations of a financial institution.Equity holdings cannot
come close to being, within the purview of "evidence of indebtedness" under the second sentence
of the aforequoted paragraph. Verily, it is for a like thesis that the loss of petitioner bank in its equity
in vestment in the Hongkong subsidiary cannot also be deductible as a bad debt. The shares of
stock in question do not constitute a loan extended by it to its subsidiary (First CBC Capital) or a debt
subject to obligatory repayment by the latter, essential elements to constitute a bad debt, but a long
term investment made by CBC.
One other item. Section 34(c)(1) of the NIRC , states that the entire amount of the gain or loss
upon the sale or exchange of property, as the case may be, shall be recognized. The complete text
reads:
SECTION 34. Determination of amount of and recognition of gain or loss."(a) Computation of gain or loss. - The gain from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or adjusted basis for determining gain and the
loss shall be the excess of the basis or adjusted basis for determining loss over the amount
realized. The amount realized from the sale or other disposition of property shall be to sum of money
received plus the fair market value of the property (other than money) received. (As amended by E.O.
No. 37)
"(b) Basis for determining gain or loss from sale or disposition of property. - The basis of property
shall be - (1) The cost thereof in cases of property acquired on or before March 1, 1913, if such
property was acquired by purchase; or
"(2) The fair market price or value as of the date of acquisition if the same was acquired by
inheritance; or
"(3) If the property was acquired by gift the basis shall be the same as if it would be in the hands of
the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is
greater than the fair market value of the property at the time of the gift, then for the purpose of
determining loss the basis shall be such fair market value; or
"(4) If the property, other than capital asset referred to in Section 21 (e), was acquired for less than an
adequate consideration in money or moneys worth, the basis of such property is (i) the amount paid

by the transferee for the property or (ii) the transferor's adjusted basis at the time of the transfer
whichever is greater.
"(5) The basis as defined in paragraph (c) (5) of this section if the property was acquired in a
transaction where gain or loss is not recognized under paragraph (c) (2) of this section. (As amended
by E.O. No. 37)
(c) Exchange of property.
"(1) General rule.- Except as herein provided, upon the sale or exchange of property, the entire
amount of the gain or loss, as the case may be, shall be recognized.
"(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or
consolidation (a) a corporation which is a party to a merger or consolidation exchanges property
solely for stock in a corporation which is, a party to the merger or consolidation, (b) a shareholder
exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock in
another corporation also a party to the merger or consolidation, or (c) a security holder of a
corporation which is a party to the merger or consolidation exchanges his securities in such
corporation solely for stock or securities in another corporation, a party to the merger or consolidation.
"No gain or loss shall also be recognized if property is transferred to a corporation by a person in
exchange for stock in such corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four persons, gains control of said corporation: Provided, That
stocks issued for services shall not be considered as issued in return of property."
The above law should be taken within context on the general subject of the determination, and
recognition of gain or loss; it is not preclusive of, let alone renders completely inconsequential, the
more specific provisions of the code. Thus, pursuant, to the same section of the law, no such
recognition shall be made if the sale or exchange is made in pursuance of a plan of corporate merger
or consolidation or, if as a result of an exchange of property for stocks, the exchanger, alone or
together with others not exceeding four, gains control of the corporation.[7] Then, too, how the
resulting gain might be taxed, or whether or not the loss would be deductible and how, are matters
properly dealt with elsewhere in various other sections of the NIRC. [8] At all events, it may not be
amiss to once again stress that the basic rule is still that any capital loss can be deducted only
from capital gains under Section 33(c) of the NIRC.
In sum (a) The equity investment in shares of stock held by CBC of approximately 53% in its Hongkong
subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an
ordinary, asset.[9]
(b) Assuming that the equity investment of CBC has indeed become "worthless," the
loss sustained is a capital, not an ordinary, loss.[10]
(c) The capital loss sustained by CBC can only be deducted from capital gains if any derived by it
during the same taxable year that the securities have become "worthless."[11]
WHEREFORE, the Petition is DENIED. The decision of the Court of Appeals disallowing the
claimed deduction of P16,227,851.80 is AFFIRMED.
SO ORDERED.

10.
G.R. No. L-17500

May 16, 1967

PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO. OF
MANILA, plaintiffs-appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION and CONNELL
BROS. CO. (PHIL.), defendants-appellants.
Angel S. Gamboa for defendants-appellants.
Laurel Law Offices for plaintiffs-appellants.
DIZON, J.:
On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation
licensed to do business in the Philippines hereinafter referred to as ATLANTIC sold and
assigned all its rights in the Dahican Lumber concession to Dahican Lumber Company hereinafter
referred to as DALCO for the total sum of $500,000.00, of which only the amount of $50,000.00
was paid. Thereafter, to develop the concession, DALCO obtained various loans from the People's
Bank & Trust Company hereinafter referred to as the BANK amounting, as of July 13, 1950, to
P200,000.00. In addition, DALCO obtained, through the BANK, a loan of $250,000.00 from the
Export-Import Bank of Washington D.C., evidenced by five promissory notes of $50,000.00 each,
maturing on different dates, executed by both DALCO and the Dahican America Lumber Corporation,
a foreign corporation and a stockholder of DALCO, hereinafter referred to as DAMCO, all payable
to the BANK or its order.
As security for the payment of the abovementioned loans, on July 13, 1950 DALCO executed in favor
of the BANK the latter acting for itself and as trustee for the Export-Import Bank of Washington
D.C. a deed of mortgage covering five parcels of land situated in the province of Camarines Norte
together with all the buildings and other improvements existing thereon and all the personal
properties of the mortgagor located in its place of business in the municipalities of Mambulao and
Capalonga, Camarines Norte (Exhibit D). On the same date, DALCO executed a second mortgage on
the same properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale price
of the lumber concession amounting to the sum of $450,000.00 (Exhibit G). Both deeds contained the
following provision extending the mortgage lien to properties to be subsequently acquired referred
to hereafter as "after acquired properties" by the mortgagor:
All property of every nature and description taken in exchange or replacement, and all
buildings, machinery, fixtures, tools equipment and other property which the Mortgagor may
hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with the
premises, shall immediately be and become subject to the lien of this mortgage in the same
manner and to the same extent as if now included therein, and the Mortgagor shall from time

to time during the existence of this mortgage furnish the Mortgagee with an accurate inventory
of such substituted and subsequently acquired property.
Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In
addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and
9,286 shares of DAMCO to secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK
paid the same to the Export-Import Bank of Washington D.C., and the latter assigned to the former its
credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to
April 1, 1953 to pay the overdue promissory note.
After July 13, 1950 the date of execution of the mortgages mentioned above DALCO purchased
various machineries, equipment, spare parts and supplies in addition to, or in replacement of some of
those already owned and used by it on the date aforesaid. Pursuant to the provision of the mortgage
deeds quoted theretofore regarding "after acquired properties," the BANK requested DALCO to
submit complete lists of said properties but the latter failed to do so. In connection with these
purchases, there appeared in the books of DALCO as due to Connell Bros. Company (Philippines)
a domestic corporation who was acting as the general purchasing agent of DALCO thereinafter
called CONNELL the sum of P452,860.55 and to DAMCO, the sum of P2,151,678.34.
On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the
purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and
supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of
sale were executed between DALCO and DAMCO, on the one hand and between DALCO and
CONNELL, on the other.
On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said
agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12,
1953; ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First Instance
of Camarines Norte against DALCO and DAMCO. On the same date they filed an exparte application for the appointment of a Receiver and/or for the issuance of a writ of preliminary
injunction to restrain DALCO from removing its properties. The court granted both remedies and
appointed George H. Evans as Receiver. Upon defendants' motion, however, the court, in its order of
February 21, 1953, discharged the Receiver.
On March 2, 1953, defendants filed their answer denying the material allegations of the complaint and
alleging several affirmative defenses and a counterclaim.
On March 4 of the same year, CONNELL, filed a motion for intervention alleging that it was the owner
and possessor of some of the equipments, spare parts and supplies which DALCO had acquired
subsequent to the execution of the mortgages sought to be foreclosed and which plaintiffs claimed
were covered by the lien. In its order of March 18,1953 the Court granted the motion, as well as
plaintiffs' motion to set aside the order discharging the Receiver. Consequently, Evans was
reinstated.
On April 1, 1953, CONNELL filed its answer denying the material averment of the complaint, and
asserting affirmative defenses and a counterclaim.
Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the venue
of the action to the Court of First Instance of Manila where it was docketed as Civil Case No. 20987.
On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries,
equipment and supplies of DALCO, and the same were subsequently sold for a total consideration of
P175,000.00 which was deposited in court pending final determination of the action. By a similar
agreement one-half (P87,500.00) of this amount was considered as representing the proceeds
obtained from the sale of the "undebated properties" (those not claimed by DAMCO and CONNELL),
and the other half as representing those obtained from the sale of the "after acquired properties".
After due trial, the Court, on July 15, 1960, rendered judgment as follows:
IN VIEW WHEREFORE, the Court:

1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000,00 with 7%
interest per annum from July 13, 1950, Plus another sum of P100,000.00 with 5% interest per
annum from July 13, 1950; plus 10% on both principal sums as attorney's fees;
2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of P900,000.00 with 4%
interest per annum from July 3, 1950, plus 10% on both principal as attorney's fees;
3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of P425,860.55, and to
pay unto Dahican American Lumber Co. the sum of P2,151,678.24 both with legal interest
from the date of the filing of the respective answers of those parties, 10% of the principals as
attorney's fees;
4. Orders that of the sum realized from the sale of the properties of P175,000.00, after
deducting the recognized expenses, one-half thereof be adjudicated unto plaintiffs, the court
no longer specifying the share of each because of that announced intention under the
stipulation of facts to "pool their resources"; as to the other one-half, the same should be
adjudicated unto both plaintiffs, and defendant Dahican American and Connell Bros. in the
proportion already set forth on page 9, lines 21, 22 and 23 of the body of this decision; but with
the understanding that whatever plaintiffs and Dahican American and Connell Bros. should
receive from the P175,000.00 deposited in the Court shall be applied to the judgments
particularly rendered in favor of each;
5. No other pronouncement as to costs; but the costs of the receivership as to the debated
properties shall be borne by People's Bank, Atlantic Gulf, Connell Bros., and Dahican
American Lumber Co., pro-rata.
On the following day, the Court issued the following supplementary decision:
IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to add
the following paragraph 6:
6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the Court
orders the sale at public auction of the lands object of the mortgages to satisfy the said
mortgages and costs of foreclosure.
From the above-quoted decision, all the parties appealed.
Main contentions of plaintiffs as appellants are the following: that the "after acquired properties" were
subject to the deeds of mortgage mentioned heretofore; that said properties were acquired from
suppliers other than DAMCO and CONNELL; that even granting that DAMCO and CONNELL were
the real suppliers, the rescission of the sales to DALCO could not prejudice the mortgage lien in favor
of plaintiffs; that considering the foregoing, the proceeds obtained from the sale of the "after acquired
properties" as well as those obtained from the sale of the "undebated properties" in the total sum of
P175,000.00 should have been awarded exclusively to plaintiffs by reason of the mortgage lien they
had thereon; that damages should have been awarded to plaintiffs against defendants, all of them
being guilty of an attempt to defraud the former when they sought to rescind the sales already
mentioned for the purpose of defeating their mortgage lien, and finally, that defendants should have
been made to bear all the expenses of the receivership, costs and attorney's fees.
On the other hand, defendants-appellants contend that the trial court erred: firstly, in not holding that
plaintiffs had no cause of action against them because the promissory note sued upon was not yet
due when the action to foreclose the mortgages was commenced; secondly, in not holding that the
mortgages aforesaid were null and void as regards the "after acquired properties" of DALCO because
they were not registered in accordance with the Chattel Mortgage Law, the court erring, as a
consequence, in holding that said properties were subject to the mortgage lien in favor of plaintiffs;
thirdly, in not holding that the provision of the fourth paragraph of each of said mortgages did not
automatically make subject to such mortgages the "after acquired properties", the only meaning
thereof being that the mortgagor was willing to constitute a lien over such properties; fourthly, in not
ruling that said stipulation was void as against DAMCO and CONNELL and in not awarding the
proceeds obtained from the sale of the "after acquired properties" to the latter exclusively; fifthly, in
appointing a Receiver and in holding that the damages suffered by DAMCO and CONNELL by
reason of the depreciation or loss in value of the "after acquired properties" placed under receivership

was damnum absque injuria and, consequently, in not awarding, to said parties the corresponding
damages claimed in their counterclaim; lastly, in sentencing DALCO and DAMCO to pay attorney's
fees and in requiring DAMCO and CONNELL to pay the costs of the Receivership, instead of
sentencing plaintiffs to pay attorney's fees.
Plaintiffs' brief as appellants submit six assignments of error, while that of defendants also as
appellants submit a total of seventeen. However, the multifarious issues thus before Us may be
resolved, directly or indirectly, by deciding the following issues:
Firstly, are the so-called "after acquired properties" covered by and subject to the deeds of mortgage
subject of foreclosure?; secondly, assuming that they are subject thereto, are the mortgages valid
and binding on the properties aforesaid inspite of the fact that they were not registered in accordance
with the provisions of the Chattel Mortgage Law?; thirdly, assuming again that the mortgages are
valid and binding upon the "after acquired properties", what is the effect thereon, if any, of the
rescission of sales entered into, on the one hand, between DAMCO and DALCO, and between
DALCO and CONNELL, on the other?; and lastly, was the action to foreclose the mortgages
premature?
A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every
nature and description taken in exchange or replacement, as well as all buildings, machineries,
fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install,
attach; or use in, to upon, or in connection with the premises that is, its lumber concession
"shall immediately be and become subject to the lien" of both mortgages in the same manner and to
the same extent as if already included therein at the time of their execution. As the language thus
used leaves no room for doubt as to the intention of the parties, We see no useful purpose in
discussing the matter extensively. Suffice it to say that the stipulation referred to is common, and We
might say logical, in all cases where the properties given as collateral are perishable or subject to
inevitable wear and tear or were intended to be sold, or to be used thus becoming subject to the
inevitable wear and tear but with the understanding express or implied that they shall be
replaced with others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful
nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the
original value of the properties given as security. Indeed, if such properties were of the nature already
referred to, it would be poor judgment on the part of the creditor who does not see to it that a similar
provision is included in the contract.
B. But defendants contend that, granting without admitting, that the deeds of mortgage in question
cover the "after acquired properties" of DALCO, the same are void and ineffectual because they were
not registered in accordance with the Chattel Mortgage Law. In support of this and of the proposition
that, even if said mortgages were valid, they should not prejudice them, the defendants argue (1) that
the deeds do not describe the mortgaged chattels specifically, nor were they registered in accordance
with the Chattel Mortgage Law; (2) that the stipulation contained in the fourth paragraph thereof
constitutes "mere executory agreements to give a lien" over the "after acquired properties" upon their
acquisition; and (3) that any mortgage stipulation concerning "after acquired properties" should not
prejudice creditors and other third persons such as DAMCO and CONNELL.
The stipulation under consideration strongly belies defendants contention. As adverted to
hereinbefore, it states that all property of every nature, building, machinery etc. taken in exchange or
replacement by the mortgagor "shall immediately be and become subject to the lien of this mortgage
in the same manner and to the same extent as if now included therein". No clearer language could
have been chosen.
Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a chattel
mortgage must be registered and must describe the mortgaged chattels or personal properties
sufficiently to enable the parties and any other person to identify them, We say that such law does not
apply to this case.
As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in force,
there can be no doubt that the provisions of said code must govern their interpretation and the
question of their validity. It happens however, that Articles 334 and 1877 of the old Civil Code are
substantially reproduced in Articles 415 and 2127, respectively, of the new Civil Code. It is, therefore,
immaterial in this case whether we take the former or the latter as guide in deciding the point under
consideration.

Article 415 does not define real property but enumerates what are considered as such, among them
being machinery, receptacles, instruments or replacements intended by owner of the tenement for an
industry or works which may be carried on in a building or on a piece of land, and shall tend directly to
meet the needs of the said industry or works.
On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the
chattels were placed in the real properties mortgaged to plaintiffs, they came within the operation of
Art. 415, paragraph 5 and Art. 2127 of the New Civil Code".
We find the above ruling in agreement with our decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of the Civil
Code (old) gives the character of real property to machinery, liquid containers, instruments or
replacements intended by the owner of any building or land for use in connection with any industry or
trade being carried on therein and which are expressly adapted to meet the requirements of such
trade or industry.
(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a mortgage constituted
on a sugar central includes not only the land on which it is built but also the buildings, machinery and
accessories installed at the time the mortgage was constituted as well as the buildings, machinery
and accessories belonging to the mortgagor, installed after the constitution thereof .
It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in
connection with, and for use in the development of its lumber concession and that they were
purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950.
In Law, therefore, they must be deemed to have been immobilized, with the result that the real estate
mortgages involved herein which were registered as such did not have to be registered a
second time as chattel mortgages in order to bind the "after acquired properties" and affect third
parties.
But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709, claim that
the "after acquired properties" did not become immobilized because DALCO did not own the whole
area of its lumber concession all over which said properties were scattered.
The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining in the
present. In the former, the Davao Sawmill Company, Inc., had repeatedly treated the machinery
therein involved as personal property by executing chattel mortgages thereon in favor of third parties,
while in the present case the parties had treated the "after acquired properties" as real properties by
expressly and unequivocally agreeing that they shall automatically become subject to the lien of the
real estate mortgages executed by them. In the Davao Sawmill decision it was, in fact, stated that
"the characterization of the property as chattels by the appellant is indicative of intention
and impresses upon the property the character determined by the parties" (61 Phil. 112, emphasis
supplied). In the present case, the characterization of the "after acquired properties" as real property
was made not only by one but by both interested parties. There is, therefore, more reason to hold that
such consensus impresses upon the properties the character determined by the parties who must
now be held in estoppel to question it.
Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia, Inc. (225 U.S.
58) where it was held that while under the general law of Puerto Rico, machinery placed on property
by a tenant does not become immobilized, yet, when the tenant places it there pursuant to contract
that it shall belong to the owner, it then becomes immobilized as to that tenant and even as against
his assignees and creditors who had sufficient notice of such stipulation. In the case at bar it is not
disputed that DALCO purchased the "after acquired properties" to be placed on, and be used in the
development of its lumber concession, and agreed further that the same shall become immediately
subject to the lien constituted by the questioned mortgages. There is also abundant evidence in the
record that DAMCO and CONNELL had full notice of such stipulation and had never thought of
disputed validity until the present case was filed. Consequently all of them must be deemed barred
from denying that the properties in question had become immobilized.
What We have said heretofore sufficiently disposes all the arguments adduced by defendants in
support their contention that the mortgages under foreclosure are void, and, that, even if valid, are
ineffectual as against DAMCO and CONNELL.

Now to the question of whether or not DAMCO CONNELL have rights over the "after acquired
properties" superior to the mortgage lien constituted thereon in favor of plaintiffs. It is defendants'
contention that in relation to said properties they are "unpaid sellers"; that as such they had not only a
superior lien on the "after acquired properties" but also the right to rescind the sales thereof to
DALCO.
This contention it is obvious would have validity only if it were true that DAMCO and CONNELL
were the suppliers or vendors of the "after acquired properties". According to the record, plaintiffs did
not know their exact identity and description prior to the filing of the case bar because DALCO, in
violation of its obligation under the mortgages, had failed and refused theretofore to submit a
complete list thereof. In the course of the proceedings, however, when defendants moved to dissolve
the order of receivership and the writ of preliminary injunction issued by the lower court, they attached
to their motion the lists marked as Exhibits 1, 2 and 3 describing the properties aforesaid. Later on,
the parties agreed to consider said lists as identifying and describing the "after acquire properties,"
and engaged the services of auditors to examine the books of DALCO so as to bring out the details
thereof. The report of the auditors and its annexes (Exhibits V, V-1 V4) show that neither DAMCO
nor CONNELL had supplied any of the goods of which they respective claimed to be the unpaid
seller; that all items were supplied by different parties, neither of whom appeared to be DAMCO or
CONNELL that, in fact, CONNELL collected a 5% service charge on the net value of all items it
claims to have sold to DALCO and which, in truth, it had purchased for DALCO as the latter's general
agent; that CONNELL had to issue its own invoices in addition to those o f the real suppliers in order
to collect and justify such service charge.
Taking into account the above circumstances together with the fact that DAMCO was a stockholder
and CONNELL was not only a stockholder but the general agent of DALCO, their claim to be the
suppliers of the "after acquired required properties" would seem to be preposterous. The most that
can be claimed on the basis of the evidence is that DAMCO and CONNELL probably financed some
of the purchases. But if DALCO still owes them any amount in this connection, it is clear that,
as financiers, they can not claim any right over the "after acquired properties" superior to the lien
constituted thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the execution of the
rescission of sales mentioned heretofore appears to be but a desperate attempt to better or improve
DAMCO and CONNELL's position by enabling them to assume the role of "unpaid suppliers" and thus
claim a vendor's lien over the "after acquired properties". The attempt, of course, is utterly ineffectual,
not only because they are not the "unpaid sellers" they claim to be but also because there is
abundant evidence in the record showing that both DAMCO and CONNELL had known and admitted
from the beginning that the "after acquired properties" of DALCO were meant to be included in the
first and second mortgages under foreclosure.
The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or otherwise,
is of no consequence and does not make the rescission valid and legally effective. It must be stated
clearly, however, in justice to Belden, that, as a member of the Board of Directors of DALCO, he
opposed the resolution of December 15, 1952 passed by said Board and the subsequent rescission
of the sales.
Finally, defendants claim that the action to foreclose the mortgages filed on February 12, 1953 was
premature because the promissory note sued upon did not fall due until April 1 of the same year,
concluding from this that, when the action was commenced, the plaintiffs had no cause of action.
Upon this question the lower court says the following in the appealed judgment;
The other is the defense of prematurity of the causes of action in that plaintiffs, as a matter of
grace, conceded an extension of time to pay up to 1 April, 1953 while the action was filed on
12 February, 1953, but, as to this, the Court taking it that there is absolutely no debate that
Dahican Lumber Co., was insolvent as of the date of the filing of the complaint, it should follow
that the debtor thereby lost the benefit to the period.
x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code);
and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the
aggregate, P1,200,000 excluding interest while the aggregate price of the "after-acquired"
chattels claimed by Connell under the rescission contracts was P1,614,675.94, Exh. 1, Exh. V,
report of auditors, and as a matter of fact, almost all the properties were sold afterwards for
only P175,000.00, page 47, Vol. IV, and the Court understanding that when the law permits the

debtor to enjoy the benefits of the period notwithstanding that he is insolvent by his giving a
guaranty for the debt, that must mean a new and efficient guaranty, must concede that the
causes of action for collection of the notes were not premature.
Very little need be added to the above. Defendants, however, contend that the lower court had no
basis for finding that, when the action was commenced, DALCO was insolvent for purposes related to
Article 1198, paragraph 1 of the Civil Code. We find, however, that the finding of the trial court is
sufficiently supported by the evidence particularly the resolution marked as Exhibit K, which shows
that on December 16, 1952 in the words of the Chairman of the Board DALCO was "without
funds, neither does it expect to have any funds in the foreseeable future." (p. 64, record on appeal).
The remaining issues, namely, whether or not the proceeds obtained from the sale of the "after
acquired properties" should have been awarded exclusively to the plaintiffs or to DAMCO and
CONNELL, and if in law they should be distributed among said parties, whether or not the distribution
should be pro-rata or otherwise; whether or not plaintiffs are entitled to damages; and, lastly, whether
or not the expenses incidental to the Receivership should be borne by all the parties on a pro-rata
basis or exclusively by one or some of them are of a secondary nature as they are already impliedly
resolved by what has been said heretofore.
As regard the proceeds obtained from the sale of the of after acquired properties" and the "undebated
properties", it is clear, in view of our opinion sustaining the validity of the mortgages in relation
thereto, that said proceeds should be awarded exclusively to the plaintiffs in payment of the money
obligations secured by the mortgages under foreclosure.
On the question of plaintiffs' right to recover damages from the defendants, the law (Articles 1313 and
1314 of the New Civil Code) provides that creditors are protected in cases of contracts intended to
defraud them; and that any third person who induces another to violate his contract shall be liable for
damages to the other contracting party. Similar liability is demandable under Arts. 20 and 21 which
may be given retroactive effect (Arts. 225253) or under Arts. 1902 and 2176 of the Old Civil Code.
The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing to
pay the fifth promissory note upon its maturity, conspired jointly with CONNELL to violate the
provisions of the fourth paragraph of the mortgages under foreclosure by attempting to defeat
plaintiffs' mortgage lien on the "after acquired properties". As a result, the plaintiffs had to go to court
to protect their rights thus jeopardized. Defendants' liability for damages is therefore clear.
However, the measure of the damages suffered by the plaintiffs is not what the latter claim, namely,
the difference between the alleged total obligation secured by the mortgages amounting to around
P1,200,000.00, plus the stipulated interest and attorney's fees, on the one hand, and the proceeds
obtained from the sale of "after acquired properties", and of those that were not claimed neither by
DAMCO nor CONNELL, on the other. Considering that the sale of the real properties subject to the
mortgages under foreclosure has not been effected, and considering further the lack of evidence
showing that the true value of all the properties already sold was not realized because their sale was
under stress, We feel that We do not have before Us the true elements or factors that should
determine the amount of damages that plaintiffs are entitled recover from defendants. It is, however,
our considered opinion that, upon the facts established, all the expenses of the Receivership, which
was deemed necessary to safeguard the rights of the plaintiffs, should be borne by the defendants,
jointly and severally, in the same manner that all of them should pay to the plaintiffs, jointly a
severally, attorney's fees awarded in the appealed judgment.
In consonance with the portion of this decision concerning the damages that the plaintiffs are entitled
to recover from the defendants, the record of this case shall be remanded below for the
corresponding proceedings.
Modified as above indicated, the appealed judgment is affirmed in all other respects. With costs.

11.
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 extrajudicial 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.

12.
G.R. No. 165853

June 22, 2006

ROSANA EREA, Petitioner,

vs.
VIDA DANA QUERRER-KAUFFMAN, Respondent.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals (CA) in CA-G.R.
CV No. 67899. The assailed decision reversed the decision of the Regional Trial Court (RTC) of Las
Pias City in Civil Case No. LP-98-0056.2
Vida Dana Querrer-Kauffman is the owner of a residential lot with a house constructed thereon
located at Block 3, Lot 13, Marcillo corner Planza Streets, BF Resort Village, Talon, Las Pias City.
The property is covered by Transfer Certificate of Title (TCT) No. T-48521. The owners duplicate
copy of the title as well as the tax declaration 3 covering the property, were kept in a safety deposit box
in the house.
Sometime in February 1997, as she was going to the United States, Kauffman entrusted her minor
daughter, Vida Rose, to her live-in partner, Eduardo Victor. She also entrusted the key to her house
to Victor. She went back to the Philippines to get her daughter on May 13, 1997, and again left for the
U.S. on the same day. Later on, Victor also left for the U.S. and entrusted the house and the key
thereto to his sister, Mira Bernal.4
On October 25, 1997, Kauffman asked her sister, Evelyn Pares, to get the house from Bernal so that
the property could be sold. Pares did as she was told. 5 Kauffman then sent the key to the safety
deposit box to Pares, but Pares did not receive it. Kauffman then asked Pares to hire a professional
locksmith who could open the safe.6When the safe was broken open, however, Pares discovered that
the owners duplicate title and the tax declarations, including pieces of jewelry were missing. 7
Kauffman learned about this on October 29, 1997 and returned to the Philippines on November 9,
1997. She and Pares went to the Register of Deeds of Las Pias City and found out that the lot had
been mortgaged to Rosana Erea on August 1, 1997. 8 It appeared that a "Vida Dana F. Querrer" had
signed the Real Estate Mortgage as owner-mortgagor,9 together with Jennifer V. Ramirez, Victors
daughter, as attorney-in-fact.10
Kauffman and Pares were able to locate Bernal who, when asked, confirmed that Ramirez had taken
the contents of the safety deposit box. When Kauffman told Bernal that she would file a case against
them, Bernal cried and asked for forgiveness. Bernal admitted that Jennifer Ramirez had been in a
tight financial fix and pleaded for time to return the title and the jewelry. 11
On March 12, 1998, Kauffman filed a complaint against Erea, Bernal and Jennifer Ramirez for
Nullification of Deed of Real Estate Mortgage and Damages with prayer for a Temporary Restraining
Order and Preliminary Mandatory Injunction 12 in the RTC of Las Pias City. The complaint contained
the following allegations:
2. The plaintiff is the owner of a property consisting of a lot with an area of One Hundred Ten
(110) square meters located at Blk. 3, Lot 13, Marcillo cor. Pianza Sts., BF Resort Village,
Talon, Las Pias City, covered by Transfer Certificate of Title No. T-48521 of the Register of
Deeds of Las Pias City, together with a residential house thereon, with a combined assessed
value of P40,500.00, and copies of said TCT, and tax declarations of the lot and house x x x;
3. Sometime in February 1997, when the plaintiff left for the United States, she entrusted the
key of her said house to one Eduardo Victor who, in turn, when he himself went to the United
States, entrusted said key to his sister, the defendant Mira V. Bernal;

4. Sometime between May and July 1997, said defendant Mira V. Bernal, in conspiracy with
her niece, the defendant Jennifer V. Ramirez, who is the daughter of Eduardo Victor, using the
key in their possession, opened the locked and the unoccupied house of the plaintiff, forced
open the vault of the plaintiff and stole the owners copy of TCT No. T-48521 and other articles
contained therein valued at more than P60,000.00, all belonging to the plaintiff;
5. Having in their possession the stolen TCT No. T-48521, defendants Mira V. Bernal and
Jennifer V. Ramirez, with the latter falsely representing herself to be the attorney-in-fact of the
plaintiff, mortgaged the property in question to the defendant Rosana L. Erea for the amount
of P250,000.00, in Pasay City, for forging the signature of the plaintiff on the corresponding
Real Estate Mortgage, which appears to have been notarized by Notary Public Alfredo M.
Mendoza and registered as Doc. No. 43, Page No. 1, Book No. VII, Series of 1997, x x x;
6. After the execution of the falsified Real Estate Mortgage, the defendants registered the
same with the Registry of Deeds of Las Pias City and had it annotated on the TCT No. T48521 as Entry No. 7185-15;
7. When the defendant Rosana L. Erea as mortgagee accepted the property in mortgage, she
knew fully well that the plaintiff-owner was in the United States at that time and the defendants
Mira V. Bernal and Jennifer V. Ramirez were not authorized to mortgage the property as they
claimed themselves to be, and this notwithstanding, the defendants who were in bad faith
conspired and confederated between and among themselves and fraudulently executed the
said document of mortgage for purposes of personal gain;
8. The plaintiff has been a victim of fraud as above narrated and the defendant Rosana L.
Erea now being in unlawful possession of her torrens title, the plaintiff is not only in constant
apprehension as to what other fraudulent transactions the defendant might enter into involving
her title, but is also prevented from pursuing her intention to sell her property, and by reason of
which the plaintiff is entitled to recover possession of said title and the cancellation of Entry No.
7185-15 thereon;
9. In view thereof, plaintiff is entitled to actual damages in the amount of P200,000.00;
10. Likewise, plaintiff suffered moral damages in the form of mental anguish, wounded
feelings, serious anxiety and similar injuries in the amount of P200,000.00;
11. The plaintiff is also entitled to exemplary damages in the amount of P100,000.00 which
plaintiff seeks to impose upon the defendants as a correction or example for the public good,
as a deterrent to people from committing fraudulent acts against their fellowmen;
12. On account of defendants unwarranted acts aforecited, the plaintiff is furthermore entitled
to attorneys fees in the amount of P50,000.00 as acceptance fee, plus P1,500.00 appearance
fee every hearing, for which the defendants should be liable;13
The complaint also contained the following prayer:
(a) That upon the filing of this complaint and compliance with the pertinent rule, a temporary
mandatory order be issued requiring the defendant Rosana L. Erea to turn over to the plaintiff
the possession of TCT No. T-48521;
(b) That after due hearing, a writ of preliminary mandatory injunction be issued making
permanent the temporary mandatory order;
(c) In case a temporary mandatory order or preliminary injunction be not issued, that the
defendant Rosana L. Erea or whoever be in possession of TCT No. T-48521, be ordered,
after due hearing, to turn the same over to the plaintiff, that the Real Estate Mortgage (Annex
"D") of this complaint be declared null and void, and Entry No. 7185-15 on said title be
cancelled;
(d) That after hearing, the defendants be ordered to pay the plaintiff, jointly and severally, the
following amounts:

1. P200,000.00 as moral damages;

2. P200,000.00 as actual damages;
3. P100,000.00 as exemplary damages;
4. P50,000.00 as acceptance fee, plus P1,500.00 appearance fee every hearing, as
attorneys fees, aside from costs.
Plaintiff further prays for such other relief that this Honorable Court may deem just and equitable in
the premises.14
Erea interposed the defense of being a mortgagee in good faith. She likewise interposed a crossclaim against Bernal and Jennifer Ramirez for the refund of the P250,000.00 she loaned to "Vida
Dana Querrer."15
Jennifer Ramirez and Bernal interposed the common defense that, on November 13, 1998, the City
Prosecutor approved a Resolution absolving them of the robbery and estafa cases through
falsification of a public document.16
During pre-trial, defendants Ramirez and Bernal failed to appear. On motion of the plaintiff, they were
thus declared in default.17
During trial, Socorro Ramos, Ereas aunt, testified that, Richmond Ramirez, Jennifers husband, and
Angel Jose, her grandson and Ereas nephew, had been classmates and were compadres. 18 The
Ramirez spouses used to go to her house. In one occasion, the Ramirez spouses arrived in her
house with one "Vida Dana Querrer" whom Richmond introduced as his half-sister.19 He also told
Ramos that Querrer wanted to mortgage her house and lot as she was going to the U.S. 20 Richmond
showed her a copy of TCT No. T-48521, Querrers identification (I.D.) card, and pictures of the house
and lot.21 Ramos then informed her niece, Rosana Erea, and asked if she would agree to mortgage
the property. Ramos later brought the spouses
Ramirez and "Vida Dana Querrer" to Erea who showed a copy of the title, tax declaration, a tax
clearance, all in the name of "Vida Dana Querrer." The spouses also showed an I.D. card of "Vida
Dana Querrer" as a worker in Japan, a police clearance, and the location plan of the
property.22 Jennifer Ramirez informed Erea that Vida Dana was applying for a passport as she was
going to Japan and the U.S.23 "Vida Dana Querrer" likewise introduced herself as Richmonds sister. 24
Erea was able to verify from the Office of the Register of Deeds that the property was in the name of
Vida Dana Querrer and that it was free of any lien or encumbrance. Erea and her husband, Ramos,
Richmond Ramirez, Angel Jose, and "Vida Dana Querrer" later inspected the house and lot two
times.25 Erea finally agreed to aP250,000.00 mortgage loan, with the house and lot as security
therefor.
On August 1, 1997, Jennifer Ramirez, Rosana Erea and a woman who identified herself as "Vida
Dana Querrer" arrived in the office Notary Public Alfredo M. Mendoza and asked him to prepare a
Special Power of Attorney to be executed by "Vida Dana Querrer," as principal, in favor of Jennifer
Ramirez, as attorney-in-fact; and a Real Estate Mortgage contract over the lot covered by TCT No.
48521 to be executed by "Vida Dana Querrer" and Jennifer Ramirez as mortgagors. Erea and "Vida
Dana Querrer" showed to him their respective residence certificates. Mendoza prepared the
documents after which the parties affixed their respective signatures above their respective
names26 and their submarkings on the deeds. The Real Estate Mortgage was filed with the Office of
the Register of Deeds and annotated at the dorsal portion of TCT No. 48521 on November 7, 1997. 27
On April 4, 2000, the RTC rendered judgment in favor of the defendants and ordered the dismissal of
the complaint. The court ruled that, although the plaintiff adduced proof that she owned the property
and that her signatures on the Special Power of Attorney and in the Real Estate Mortgage were
forged, nevertheless, defendant Erea adduced evidence that she was a mortgagee in good faith.
The court declared that the woman who pretended to be the plaintiff and lawful owner of the property
had in her possession the original copy of the owners duplicate of title. The defendant thus relied in
good faith on the title after ascertaining with the Register of Deeds the identity of Vida Dana Querrer

as the registered owner of the property, who turned out to be an impostor. In fact, the defendant still
had possession of the owners duplicate of the title when she received the complaint and summons.
The court cited the ruling of this Court in Cebu International Finance Corporation v. Court of
Appeals28 and Duran v. Intermediate Appellate Court. 29 The fallo of the decision reads:
WHEREFORE, premises considered, the complaint filed by plaintiff VIDA DANA QUERRERKAUFFMAN is hereby DISMISSED for lack of merit and the questioned Deed of Real Estate
Mortgage dated 1 August 1997 is hereby declared VALID.
No pronouncement as to costs.
SO ORDERED.30
Kauffman filed a motion for reconsideration of the decision, alleging that the Cebu International
Finance Corporation case is not applicable as the facts therein are different. She insisted that Solivel
v. Francisco31 is the case in point.
The RTC denied the motion, prompting Kauffman to file an appeal with the CA where she made the
following allegations:
I
CONSIDERING THAT THE MORTGAGE CONTRACT IN QUESTION WAS EXECUTED AND MADE
POSSIBLE THROUGH THE FRAUDULENT MANIPULATION OF AN IMPOSTOR, THE LOWER
COURT ERRED IN FINDING THAT DEFENDANT-APPELLANT ROSANA EREA WHO
ACCEPTED THE MORTGAGE OFFERED BY SAID IMPOSTOR IS A MORTGAGEE IN GOOD
FAITH;
II
THE COURT A QUO ERRED IN CONCLUDING THAT THE DEED OF MORTGAGE IN QUESTION
IS VALID DESPITE ITS OWN FINDING THAT THE SUBJECT PROPERTY IS OWNED BY THE
PLAINTIFF-APPELLANT WHOSE SIGNATURE ON THE DEED WAS FORGED;
III
THE LOWER COURT ERRED IN APPRECIATING THE JURISPRUDENCE CITED IN ITS
APPEALED DECISION AND IN APPLYING THE SAME TO THE CASE AT BAR;
IV
THE LOWER COURT ERRED IN UPHOLDING THE RIGHT OF DEFENDANT-APPELLANT
ROSANA EREA DERIVED FROM A FORGED MORTGAGE CONTRACT AS AGAINST THE
RIGHT OF THE PLAINTIFF, THE PROVEN TRUE OWNER OF THE SUBJECT PROPERTY, WHO
DID NOT IN ANY WAY CONTRIBUTE TO THE COMMISSION OF THE FRAUD.32
On June 10, 2004, the CA rendered judgment in favor of Kauffman. It held that in ruling as it did, the
RTC disregarded the clear provisions of the Civil Code, particularly Articles 2085 (2) 33 and 1409
(2)34 The appellate court relied on the Courts ruling in Insurance Services & Commercial Traders, Inc.
v. Court of Appeals35 and ratiocinated, thus:
Thus, it has been uniformly held that (I)n a real estate mortgage contract, it is essential that the
mortgagor be the absolute owner of the property to be mortgaged; otherwise, the mortgage is void.
(Robles vs. Court of Appeals, G.R. No. 12309, Mar. 14, 2000). This was simply in line with the basic
requirement in our laws that the mortgagor be the absolute owner of the property sought to be
mortgaged (Lorbes vs. Court of Appeals, G.R No. 139884, Feb. 15, 2001). This is in anticipation of a
possible foreclosure sale should the mortgagor default in the payment of the loan, and a foreclosure
sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of the Civil Code.
Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure
sale (Cavite Development Bank vs. Cyrus Lim, G.R. No. 131679, Feb. 1, 2000). 36

Erea thus filed the instant petition contending that the following legal issues should be resolved:
I
THE COURT OF APPEALS HAS SERIOUSLY ERRED IN HOLDING THAT RESPONDENT
QUERRER-KAUFFMAN IS THE OWNER OF THE PROPERTY MORTGAGED TO PETITIONER
DESPITE THE ABSENCE OF SUBSTANTIAL EVIDENCE TO SUPPORT SUCH A CONCLUSION
OF FACT.
II
THE COURT OF APPEALS HAS SERIOUSLY ERRED IN HOLDING THAT THE CONTRACT OF
REAL ESTATE MORTGAGE EXECUTED ON 01 AUGUST 1997 BETWEEN ROSANA EREA AND
VIDA DANA QUERRER IS A FORGED DEED OF MORTGAGE WITHOUT SUBSTANTIAL
EVIDENCE TO ESTABLISH SUCH FACT.
III
THE COURT OF APPEALS HAS SERIOUSLY ERRED IN HOLDING THAT THE DOCTRINE OF A
"MORTGAGE IN GOOD FAITH" DOES NOT APPLY TO PETITIONER DESPITE SUBSTANTIAL
AND UNDISPUTED EVIDENCE PROVING HER A MORTGAGEE IN GOOD FAITH.37
Petitioner avers that respondent failed to prove that she is the owner of the property, and points out
that the documentary evidence shows that the negotiator over the property is Vida Dana Querrer and
not Vida Dana Querrer-Kaufffman. There is thus no factual basis for the CAs finding that the Real
Estate Mortgage was a forged deed. Considering that respondent, as the plaintiff below, failed to
adduce clear and convincing evidence that the signature on the Real Estate Mortgage is a forgery,
the signature over the printed name in the said document must be the genuine signature of Vida
Dana Querrer, the registered owner of the property. Even assuming that respondent was the lawful
owner of the property and the signature in the Real Estate Mortgage is a forgery, petitioner insists
that she is a mortgagee in good faith as shown by the following facts and circumstances:
1. Before the offer of mortgage was accepted by petitioner Rosana Erea, she required the
production of the owners copy of TCT No. T-48521. The mortgagee took such step to enable
her to know the rights of the mortgagor over the property to be mortgaged. The presentation of
the desired certificate was complied with.
2. The identity of the mortgagor was ascertained from the personal interview of the relatives of
the mortgagor who were the spouses Jennifer and Richmond Ramirez, a known compadre of
Angel Jose, the grandson of Socorro Ramos, the aunt of the petitioner. Richmond Ramirez
with his wife introduced the mortgagor Vida Dana Querrer as his half-sister who wanted to
mortgage the property described in the certificate of title which was registered in her name.
The spouses of the mortgagor were accompanied to the house of Rosana Erena by Socorro
Ramos, her aunt who acknowledged to know Richmond and Jennifer Ramirez for a period of
five years, more or less. Aside from the confirmation of her filial relation to the Ramirez couple
by Richmond Ramirez, her personal Identification Card showed the mortgagors name and
proved her identity to be Vida Dana Querrer. The Tax Declarations, tax clearance, the owners
copy of TCT No. T-48521, police clearance, survey plan attested to the fact that the owner of
the property subject of the mortgage was the mortgagor.
3. Further examination of the certificate of title in the Office of the Register of Deeds of Las
Pias City proved the authenticity of the owners copy of the certificate.
4. The actual physical inspection of the house and lot covered by the certificate in the given
address for two (2) times, at least by the mortgagor and mortgagee together with Soccoro
Ramos, and the Ramirez couple strengthened her reasonable belief in good faith that the
mortgagor is the owner of the property covered by the certificate of title.
5. The aforesaid interviews/examination of records, and inspection of the premises showed
that earnest and diligent efforts were exerted by the petitioner to ascertain the identity of the
mortgagor and her ownership of the subject property. The aforestated steps taken by her are
visible proofs of the due diligence exercised by Rosana Erena to ascertain the identity of the

mortgagor and respondents capacity to convey the property to her in a contract of mortgage
with her.
6. Without admitting on the allegation of a forged signature, the established facts showing the
exercise of due diligence and reasonable caution observed by petitioner preparatory to the
acceptance and execution of the mortgage contract BELIE the accusation of bad faith to her.
In truth, petitioner had been reasonably diligent to meet the justification of a mortgagee in good
faith.38
For her part, respondent avers that, contrary to petitioners claim, the issues raised in the instant
petition are factual in nature. Moreover, based on the evidence on record, both the trial and appellate
courts are one in declaring that she is the lawful registered owner of the property, and that such
findings are conclusive on this Court. Besides, the petitioner is proscribed from assailing the findings
of the trial and appellate courts since under Rule 45 of the Rules of Court, only questions of law may
be raised in this Court. She insists that petitioner failed to establish special and important reasons for
the Court to exercise its discretion to review the appellate courts decision.
The petition has no merit.
Indeed, the trial and appellate courts found that respondent, as plaintiff below, adduced clear and
convincing evidence that she is the owner of the property and that the signature on the Special Power
of Attorney and Real Estate Mortgage are not her genuine signatures. She purchased the property
from Edgardo C. Espiritu on June 21, 1997 via a Deed of Absolute Sale,39 on the basis of which TCT
No. 48521 under her name was issued by the Register of Deeds on June 25, 1997. 40 Indeed, when
respondent and her sister, Evelyn Pares, confronted Mira Bernal (Jennifer Ramirezs aunt), Bernal
pleaded for mercy, on bended knees, after admitting that she and Jennifer Ramirez stole the owners
duplicate copy of the title and the tax declarations covering the property, the air-conditioning unit,
television, and the pieces of jewelry owned by respondent, and, thus, impliedly admitted that they
forged the respondents signature on the Real Estate Mortgage:
Q Were you able to see Mira in Pasay, in her house?
A Yes, Sir. We saw her in Pasay, but in Bian, she suddenly disappeared when we arrived.
Q What time did you see Mira in her house in Pasay?
A Between 11:00 to 12:00 P.M., Sir.
Q But you said you arrived there at 6:00 p.m.?
A Yes, Sir.
Q You mean you waited?
A We waited for her. Dana said, "Mabuti pang ilabas ninyo and mother niyo."
ATTY. CABARON:
The witness is narrating, Your Honor.
ATTY. MASANGKAY:
Q So, finally, you were able to talk to Mira in that house?
A Yes, Sir.
Q How about Jennifer?
A No, Sir.
Q Alright, what did you ask Mira?

A My sister asked Mira who destroyed my vault?

Q What was the answer of Mira?
A Mira answered, "Why did you not inform that you will be coming?"
ATTY. MASANGKAY:
Q And then?
A Dana said, what I am asking, you better answer.
Q What was the answer?
A According to her, it was Jennifer.
Q It was Jennifer who, what?
A She just said Jennifer.
Q What about the title?
A My sister was asking who destroyed the vault, then Mira answered, it was Jennifer. We did not ask
anymore because she continued on talking and she said Jennifer was short of funds.
She said, "Nagipit kasi ang bata, naawa ako kaya binigay ko ang titulo.
Q And, who is Jennifer? Is this Jennifer the same Jennifer Ramirez who is one of the defendants
here?
A Yes, Sir.
Q Who is she?
A According to my sister, she is the daughter of Eduardo Victor.
Q What else did she say?
WITNESS:
A When she said that Jennifer took it, Dana looked for jewelries. Then the daughter of Beth said, "Tita
Dana, sabi ni Tita Ellen, papalitan niya ang mga alahas na iyon."
ATTY. MASANGKAY:
Q And finally, what was the statement of Mira with respect to the transaction?
A When Dana learned about that, she said, we will file a case against them.
Q And so?
A Mira knelt down and began to cry and was begging.
Q What did she say?
A She said, "Parang awa mo na sa akin, Dana. Luluhod ako sa harapan niyo, patawarin mo lang
kami." She was crying and saying, "Gipit na gipit lang talaga kami. Bigyan mo kami ng konting
panahon at ibabalik naming iyon." 41
The trial courts findings of fact as affirmed by the CA are conclusive on this Court absent evidence
that the trial court ignored, misapplied or misconstrued facts and circumstances of substance which, if
considered, would alter the outcome of the case.

Indeed, under Rule 45 of the Rules of Court, only questions of law may be raised. This is so because
this Court is not a trier of facts and is not to re-examine and re-evaluate the testimonial and
documentary evidence on record. While the findings and conclusion of the trial court and the
appellate court may be reversed in exceptional circumstances, the Court cannot do so in the absence
of any such justification or exceptional circumstance, such as in this case.
The ruling of the CA, that the Real Estate Mortgage executed in petitioners favor is null and void, is
correct. The registration thereof with the Register of Deeds and its annotation at the dorsal portion of
TCT No. 48521 is also null and void, as provided in the last paragraph of Section 53, P.D. 1529 which
reads:
Sec. 53. Presentation of owners duplicate upon entry of new certificate.
xxxx
In all cases of registration procured by fraud, the owner may pursue all his legal and equitable
remedies against the parties to such fraud without prejudice, however, to the rights of any innocent
holder of the decree of registration on the original petition or application; any subsequent registration
procured by the presentation of a forged duplicate certificate of title, or a forged deed or other
instrument, shall be null and void (emphasis supplied).
One of the essential requisites of a mortgage contract is that the mortgagor must be the absolute
owner of the thing mortgaged.42 A mortgage is, thus, invalid if the mortgagor is not the property
owner.43 In this case, the trial court and the CA are one in finding that based on the evidence on
record the owner of the property is respondent who was not the one who mortgaged the same to the
petitioner.
The evidence shows that Mira Bernal and Jennifer Ramirez were able to open respondents vault and
steal the owners duplicate of TCT No. T-48521 and the tax declarations covering the property; with
the connivance of a woman who pretended to be the respondent, they were able consummate the
execution of the Real Estate Mortgage by forging the respondents signature on said deed. We, thus,
quote with approval the CA when it held:
As to the claim of Querrer-Kauffman that her purported signatures on the mortgage are forgeries, the
trial court believed her and held that there is "convincing proof to the contention of the plaintiff that the
signature of Vida Dana Querrer as appearing on the question[ed] contract was a forgery because the
real Vida Dana Querrer who is the plaintiff in this case was actually in the United States at the time of
the questioned contract on 1 August 1997" (Decision, p. 226, record). And rightly so because of the
immigration entries on her passport, her juxtaposed sample signatures which are clearly different
from those in the deed, and the comic incongruity of Querrer-Kauffman as principal and Ramirez as
her attorney-in-fact both signing the mortgage deed, all prove and declare beyond reasonable doubt
that the subject real estate mortgage is a forgery. 44
The evidence on record further shows that Jennifer Ramirez and her husband, Richmond Ramirez,
used a woman who introduced herself as Vida Dana Querrer to the petitioner and claim as owner of
the property. That woman, an impostor, signed the Real Estate Mortgage as mortgagor and the
Special Power of Attorney, as principal, and showed to petitioner the owners duplicate copy of the
title that was taken from the respondents vault, and succeeded in having the Real Estate Mortgage
annotated at the dorsal portion of the title. As correctly ruled by the appellate court:
TCT No. T-48521 (Exh. "A") over the litigated lot was issued on June 26, 1995 in the name of the
owner of the covered lot: Vida Dana Querrer, single. That the appellant now goes by the name and
status of Vida Dana Querrer-Kauffman, married, has been well explained, and quibble on this raised
by Erea about the identity and interest of the appellant in the suit has been dismissed by the trial
court as "of no moment as this discrepancy is negligible if no[t] bearing at all to the issue of nullity of
the questioned contract" and "has no legal anchorage to cling on." The decision went on to state in no
uncertain terms that the appellant Querrer-Kauffman "was able to prove preponderantly that she is
the real owner of the subject property." 45
Indeed, case law is that a Torrens title is generally conclusive evidence of ownership of the land
referred to therein.46 While it serves as evidence of an indefeasible title to the property in favor of the
person whose name appears therein47 (and TCT No. T-48521 shows, on its face, that the owner is

the respondent), when the instrument presented for registration is forged, even if accompanied by the
owners duplicate certificate of title, the registered owner does not thereby lose his title, and neither
does the assignee or the mortgagee, for that matter, acquire any right or title to the property. 48 In such
a case, the transferee or the mortgagee, based on a forged instrument, is not even a purchaser or a
mortgagee for value protected by law. Thus, in Joaquin v. Madrid, 49 the Court had the occasion to
state:
In the first assignment of error, it is argued that since par. 2 of Sec. 55 of the Land Registration Act
expressly provides that "in all cases of registration of fraud, the owner may pursue all his legal and
equitable remedies against the parties to the fraud, without prejudice to the rights of any innocent
holder for value of a certificate of title," the second proviso in the same section "that a registration
procured by the presentation of a forged deed shall be null and void" should be overlooked. There is
no merit in this argument, which would have the effect of deleting the last proviso. This last proviso is
a limitation of the first part of par. 2 in the sense that in order that the holder of a certificate for value
issued by virtue of the registration of a voluntary instrument may be considered a holder in good faith
for value, the instrument registered should not be forged. When the instrument presented is forged,
even if accompanied by the owners duplicate certificate of title, the registered owner does not
thereby lose his title, and neither does the assignee in the forged deed acquire any right or title to the
property.
In the second assignment of error, it is further argued that as the petitioner is an innocent purchaser
for value, he should be protected as against the registered owner because the latter can secure
reparation from the assurance fund. The fact is, however, that petitioner herein is not the innocent
purchaser for value protected by law. The innocent purchaser for value protected by law is one who
purchases a titled land by virtue of a deed executed by the registered owner himself, not by a forged
deed, as the law expressly states. Such is not the situation of the petitioner, who has been the victim
of impostors pretending to be the registered owners but who are not said owners.50
The Court cited this ruling in the Joaquin case in Solivel v. Francisco, 51 to wit:
Even more in point and decisive of the issue here raised, however, is the much later case of Joaquin
v. Madrid, where the spouses Abundio Madrid and Rosalinda Yu, owners of a residential lot in Makati,
seeking a building construction loan from the then Rehabilitation Finance Corporation, entrusted their
certificate of title for surrender to the RFC to Rosalindas godmother, a certain Carmencita de Jesus,
who had offered to expedite the approval of the loan. Later having obtained a loan from another
source, the spouses decided to withdraw the application they had filed with the RFC and asked
Carmencita to retrieve their title and return it to them Carmencita failed to do so, giving the excuse
that the employee, in- charge of keeping the title was on leave. It turned out, however, that through
the machinations of Carmencita, the property had been mortgaged to Constancio Joaquin in a deed
signed by two persons posing as the owners and that after said deed had been registered, the
amount for which the mortgage was constituted had been given to the person who had passed
herself off as Rosalinda Yu. Constancio Joaquin admitted that the spouses Madrid and Yu were, in
fact, not the persons who had signed the deed of mortgage. 52
This ruling was later reiterated in Insurance Services & Commercial Traders, Inc. v. Court of
Appeals,53 where the Court stressed that in order that the holder of a certificate of value issued by
virtue of the registration of a voluntary instrument may be considered a holder in good faith and for
value, the instrument registered should not be forged.
In Cavite Development Bank v. Lim,54 the Court explained the doctrine of mortgagee in good faith,
thus:
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 "mortgagee in good faith"
based on the rule that all persons dealing with the 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. The
public interest in upholding the indefeasibility of a certificate of title, as evidence of 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. 55

Indeed, a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor of the
property given as security and in the absence of any sign that might arouse suspicion, has no
obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful owner of,
or does not have a valid title to, the mortgaged property, the mortgagee in good faith is nonetheless
entitled to protection.56 This doctrine presupposes, however, that the mortgagor, who is not the
rightful owner of the property, has already succeeded in obtaining a Torrens title over the property in
his name and that, after obtaining the said title, he succeeds in mortgaging the property to another
who relies on what appears on the said title. The innocent purchaser (mortgagee in this case) for
value protected by law is one who purchases a titled land by virtue of a deed executed by the
registered owner himself, not by a forged deed, as the law expressly states. Such is not the situation
of petitioner, who has been the victim of impostors pretending to be the registered owners but who
are not said owners.57 The doctrine of mortgagee in good faith does not apply to a situation where the
title is still in the name of the rightful owner and the mortgagor is a different person pretending to be
the owner. In such a case, the mortgagee is not an innocent mortgagee for value and the registered
owner will generally not lose his title. We thus agree with the following discussion of the CA:
The trial court wrongly applied in this case the doctrine of "mortgagee in good faith" which has been
allowed in many instances but in a milieu dissimilar from this case. This doctrine is based on the rule
that persons dealing with properties covered by a Torrens certificate of title are not required to go
beyond what appears on the face of the title. But this is only in a situation where the mortgagor has a
fraudulent or otherwise defective title, but not when the mortgagor is an impostor and a forger.
In a forged mortgage, as in this case, the doctrine of "mortgagee in good faith" cannot be applied and
will not benefit a mortgagee no matter how large is his or her reservoir of good faith and diligence.
Such mortgage is void and cannot prejudice the registered owner whose signature to the deed is
falsified. When the instrument presented is forged, even if accompanied by the owners duplicate
certificate of title, the registered owner does not lose his title, and neither does the assignee in the
forged deed acquire any right or title to the property. An innocent purchaser for value is one who
purchases a titled land by virtue of a deed executed by the registered owner himself not a forged
deed.58
As aforesaid, respondents signature on the Real Estate Mortgage was forged by an impostor.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision of the Court of Appeals
dated June 10, 2004 and Resolution dated October 28, 2004 are AFFIRMED. Costs against the
petitioner.
SO ORDERED.

13.
[G.R. No. 128122. March 18, 2005]

PREMIERE DEVELOPMENT BANK, petitioner, vs. HON. COURT OF APPEALS,

LIBERATO G. YAMBAO, JESUS B. RODRIGUEZ and JESUS D.
MORALES, respondents.

[G.R. No. 128184. March 18, 2005]

LILIAN M. TOUNDJIS, petitioner, vs. HON. COURT OF APPEALS, LIBERATO

G.YAMBAO, et al., and JOSELITO GARAYGAY, ET AL., respondents.

[G.R. No. 128229. March 18, 2005]

JOSELITO P. GARAYGAY, CENTURY REALTY and DEVELOPMENT

CORPORATION, petitioners, vs. HON. COURT OF APPEALS, LIBERATO G.
YAMBAO, JESUS B. RODRIGUEZ and JESUS D. MORALES, respondents.
DECISION
GARCIA, J.:

Before the Court are these three (3) separate petitions for review on certiorari under
Rule 45 of the Rules of Court to nullify and set aside the Decision[1] dated November 29,
1995 and Resolution[2] dated February 6, 1997 of the Court of Appeals in CA-G.R. CV
42121.
The first assailed issuance affirmed an earlier decision [3] dated January 28, 1993 of the
Regional Trial Court at Quezon City, Branch 88 in its Civil Case No. Q-92-8455,
declaring,inter alia, herein private respondents, as plaintiffs therein, Liberato G. Yambao,
Jesus B. Rodriquez and Jesus D. Morales (Yambao, Rodriquez and Morales,
respectively), as rightful owners of the land subject of this case. The second assailed
issuance, on the other hand, denied reconsideration of the first.
At the core of the controversy is a 2,660-square meter parcel of land, denominated
as Lot 23 of the subdivision plan Fls-2804-D of SWO-17514, registered under TCT No.
9780 of the Manila Registry, located as it were in Matandang Balara, which used to be a
part of the then district of Caloocan, City of Manila. The creation of Quezon City which
found Lot 23 within its borders saw the transfer of the corresponding property records to
the new political unit and the generation of new certificates of title to reflect territorial
changes. As thus transferred, TCT No. 9780 was assigned title number TCT No. 9780
(693).
The evidence on record disclose the following factual antecedents:
Two (2) different persons with exactly the same name, i.e., Vicente T. Garaygay,
each claimed exclusive ownership of Lot 23 by virtue of an owners duplicate certificate
each had possession of during the period material covering said lot. One held TCT No.

9780, supra, and the other, TCT No. 9780 (693), supra. The technical description of the
land appearing in one copy corresponds exactly with that in the other. The date June 14,
1944 appears on the face of both copies as a common date of entry. One, however,
contained certain features, markings, and/or entries not found in the other and vice versa.
On April 17, 1979, one of the two Vicente T. Garaygays, a resident of Cebu City
(hereinafter referred to as Garaygay of Cebu), executed a deed of sale[4] over the lot
described in and covered by his TCT No. 9780 (693) in favor of his nephew, Joselito P.
Garaygay (Joselito, hereinafter). The sale notwithstanding, the owners duplicate
certificate remained for some time in the sellers possession.
In another transaction, the other Vicente T. Garaygay, a resident of Rizal (hereinafter
referred to as Garaygay of Rizal), sold to Liberto G. Yambao and Jesus B.
Rodriguez the same property described in TCT 9780. YCM Compound, Angono, Rizal is
set out in the February 11, 1986 conveying deed [5] as the sellers residence. Buyers
Yambao and Rodriquez would later sell a portion of their undivided interests on the land
to Jesus D. Morales.[6]
Then came the June 11, 1988 fire that gutted a portion of the Quezon City hall and
destroyed in the process the original copy of TCT No. 9780 (693) on file with the Registry
of Deeds of Quezon City. Barely a month later, a certain Engr. Hobre filed an application,
signed by Garaygay of Cebu, for the reconstitution of the burned original on the basis of
the latters owners duplicate certificate. One Engr. Felino Cortez of the Land Registration
Authority (LRA) did the follow-up on the application. After due proceedings, the LRA
issued an order of reconstitution, [7] by virtue of which Garaygay of Cebu acquired
reconstituted TCT No. RT-1764 (9780) (693).[8]
Meanwhile, or on May 26, 1989, the deed of sale executed by Garaygay of Cebu in
favor of his nephew Joselito was registered, paving the issuance in the latters name
of TCT No. 12183.[9] Thereafter, thru the efforts of same Engr. Cortez, [10] Lot 23 was
subdivided into three (3) lots, namely: Lot 23-A, Lot 23-B and Lot 23-C for which TCT
Nos. 14414, 14415 and 14416, respectively, [11] were issued. Joselito posthaste sold Lot
23-A to Lilian Toundjis who, pursuant to a Contract to Sell executed on March 23,
1990,[12] undertook to pay Joselito the P.5 Million balance of the P2.5 Million purchase
price once she is placed in possession of a fenced-off property. And, for shares of stock,
Joselito assigned on February 26, 1991, the other two (2) lots, i.e., Lot 23-B and Lot 23C to Century Realty and Development Corporation (Century Realty) which, after
securing TCT Nos. 34390 and 34391 therefor, mortgaged[13] the same to Premiere
Development Bank, Inc. (Premiere Bank) to secure a P2.5 Million loan.
Clashing claims of ownership first came to a head when, sometime in May 1990,
Liberato G. Yambao and his agents forcibly prevented Joselitos hired hands from
concrete-fencing the subject property. The police and eventually the National Bureau of
Investigation (NBI) entered into the picture.
In the meantime, Yambao, Rodriquez and Morales as pro indiviso buyers of Lot No.
23, caused the annotation on December 17, 1990, January 16, 1991 and February 15,
1991 of their respective adverse claims on Joselitos TCT Nos. 14414, 14415 and 14416.
They then filed with the Regional Trial Court at Quezon City suit against Joselito,
Century Realty andPremiere Bank for quieting of title and annulment of said defendants
fake titles with prayer for damages.
In their amended complaint,[14] docketed as Civil Case No. Q-92-8455 and raffled to
Branch 88 of the court, Yambao, Rodriguez and Morales alleged, inter alia, the following:
1. That Joselito, taking advantage of the 1988 burning of the Quezon City Hall,
and using an impostor, who pretended to be Vicente Garaygay, by means of fraud, deceit,
and unlawful manipulation succeeded in administratively reconstituting the aforesaid

property (sic) in 1990 on the basis of an alleged owners copy, which on its face is patently
fake and spurious and fake title bearing [TCT] No. 9780 (693).
2. That a reconstituted title secured by means of fraud, deceit, or other machinations is
void ab initio under Section 11 of Republic Act (R.A.) 6732;
3. That after causing the reconstitution of the title, Joselito acted fast to consummate
his scheme of depriving the plaintiffs of their ownership . . . of the [disputed] land by the
following successive acts, referring to Joselitos act of securing title in his name,
subdividing Lot No. 23 and securing titles to and disposing of the subdivided lots;
4. That they (Yambao, Rodriguez and Morales) filed their separate adverse claims and
caused the same to be annotated at the back of Joselitos TCT Nos. 14414, 14415 and
14416; that while the adverse claim of Rodriquez was still valid, Joselito executed on
February 26, 1991 a Deed of Assignment in favor of Century Realty, which thus made
the latter a transferee in bad faith; that on March 26, 1991, Century Realty executed a
mortgage contract in favor of Premiere Bank, a mortgagee in bad faith; and
5. That at the time the mortgage was executed, the houses of plaintiffs caretaker and a
chapel belonging to them were standing on the two lots in question.
Answering, principal defendants Joselito and Century Realty denied plaintiffs
material allegations and asserted, by way of affirmative defense, the validity of (a) the
reconstitution of TCT No. 9780 (693); (b) the assignment of real property in favor of
Century Realty; and (c) the mortgage made by Century Realty in favor of Premiere Bank.
In their separate answers, also with crossclaim and counterclaim, Lilian Toundjis,
who was allowed to intervene to oppose the action thus filed, and Premiere Bank virtually
adopted Joselitos position and pleaded, in addition, their right as bona fide purchaser or
mortgagee for value, as the case may be, of the subject property.
Issues having been joined, trial ensued with plaintiffs Yambao, Rodriguez and Morales
offering in evidence several documents. Foremost of these was Exhibit B[15] which is the
owners duplicate copy of TCT No. 9780 of the Registry of Manila once in the possession
of Garaygay of Rizal. On the other hand, the principal defendants presented no less than
38 pieces of marked and sub-marked documentary evidence, among which was Exhibit.
1,[16] identical to Exhibit D, which is the duplicate copy of TCT No. 9780 (693) that
pertained toGaraygay of Cebu and used in the reconstitution of the burned original
thereof.
In his testimony, Yambao stated having noticed, when Garaygay of Rizal offered to
sell Lot 23, that the corners and the portion of Exhibit B containing the owners personal
circumstances were torn and related the owners explanation as to how these oddities
came about. Yambao related that owing to the physical appearance of Exhibit B, the
recording of theGaraygay of Rizal - Yambao/Rodriguez deed of sale (Exh. A) was
refused since the more crucial document, i.e., the torn owners copy was itself not
registrable unless it is first reconstituted. He also testified that, to assure himself of the
genuineness of the sellers owners duplicate certificate, he and Garaygay of
Rizal repaired to the Quezon City Registry to compare his (Garaygay of Rizals) copy with
the original copy on file with the registry, and discovered that the only difference was that
the owners duplicate bears the title number 9780, while the original had 9780
(693) typewritten on a straight line.[17] As told by Yambao, Garaygay of Rizals explanation
for the figure difference is that 693 was not affixed on his (Garaygay of Rizals) title
because he never, in first place, presented the same to the Quezon City Registry for
correction or affixture.
Yambao also testified that Garaygay of Rizal, when asked to show proof of his
identity, presented a voters ID with his picture,[18] a Commission of Elections (COMELEC)
certification attesting to his being a registered voter in Precinct No. 21 in Angono,
Rizal[19] and a certification of residence issued by the barangay captain of the

place.[20] Yambao added that before concluding the sale, he, together with the prospective
seller, proceeded to the land site where the residents and/or caretakers thereat assured
him that his companion, Garaygay of Rizal, was actually the landowner.
For their part, defendants presented Garaygay of Cebu who alleged, among other
things, having acquired Lot 23 from one Macaria Lim vda. Arambulo sometime in 1944,
having paid taxes thereon for the period 1949-1990[21] and mortgaging in 1949 the titled
property with Meralco Employees Savings & Loan Association, with the mortgage deed
and later the discharge of mortgage being annotated on his title.[22] Joselito also took the
witness stand in defense of his ownership of Lot 23 and the transactions he entered into
involving the lot.
Eventually, the trial court rendered judgment finding for the plaintiffs and against the
defendants, declaring Joselitos TCT No. 9780 (693) and all subsequent titles traceable to
it and transactions involving its derivatives as null and void. To the trial court, plaintiffs
evidence preponderated over those of the defendants whose main witness, Garaygay of
Cebu, gave inconsistent testimony, while Joselito hedged on his answer regarding a
cousin connected with LRA. Going against the defendants cause, the trial court further
observed dubious circumstances surrounding the reconstitution of TCT 9780 (693), the
more disturbing of which is the admitted participation of LRA personnel in the
reconstitution process.
Dated January 28, 1993, the trial courts decision[23] dispositively reads:
WHEREFORE, in view of the foregoing, the Court renders the following judgment to wit:
1. Plaintiffs Liberato G.Yambao, Jesus B. Rodriguez and Jesus D. Morales are hereby declared the
rightful owners and possessors of the land described in TCT No. 9780 marked as Exh. B;
2. Defendants title, TCT No. 9780 (693), marked as Exh. 1 (p. 349, Rollo, identical to Exh. D, p.
493 Rollo); the LRA Order of Reconstitution . . .; defendants reconstituted title No. RT-1764
(9780) (693) marked as Exh. 4 . . .; the cancelled title TCT No. 12183 and its derivative titles, TCT
Nos. 14414, 14415, and 14416, all in the name of defendant Joselito P. Garaygay and intervenor
Lilian M. Toundjis involving TCT 14414; the Deed of Assignment and Transfer between Joselito
P. Garaygay and Century Realty involving TCT Nos. 14415 and 14416; [the derivative] titles of
defendant Century Realty . . . namely TCT Nos. 34390 . . . and 34391 . . .; and the Deed of Real
Estate Mortgage executed by Century Realty . . . in favor of defendant Premiere Bank, Inc. are all
declared null and void and without force and effect;
3. The Register of Deeds of Quezon City to strike out the reconstituted title [but already cancelled]
No. 1764 (9780) (693) and TCT No. 12183, . . . ; to cancel TCT 14414 . . .; to cancel the Deed of
Assignment and Transfer between Joselito P. Garaygay and Century Realty . . . covered by TCT
Nos. 14415 and 14416, and necessarily cancel TCT Nos. 34390 and 34391 . . .; to cancel the Deed
of Real Estate Mortgage over TCT Nos. 34390 and 34390 . . .; and thereafter, to enter and register
the Deeds of Sale, dated February 11, 1986 (Exh. A) and July 10, 1988 (Exh. C) and forthwith
issue corresponding new title/s in the names of the plaintiffs, free from all encumbrances, except
those entered into by them, upon payment of all taxes and fees prescribed by law;
4. Defendant Joselito P. Garaygay is sentenced to pay each of the [three] plaintiffs . . ., the sum of
P100,000. 00 as moral damages;
5. Defendants Joselito P. Garaygay, Century Realty . . . and Premiere Bank, Inc. are sentenced to
pay jointly and severally each of the two plaintiffs, namely Liberato Yambao and Jesus Morales,
the sum of P25,000.00 as exemplary damages and to plaintiff Jesus B. Rodriquez the sum of
P25,000.00 as nominal damages The defendants are also sentenced to pay jointly and severally the
sum of P20,000.00 as attorneys fees and the cost of suit;

6. Defendant Joselito P. Garaygay is further sentenced to reimburse Lilian M. Toundjis the sum of
P2,000,000.00 with interest thereon at 6% per annum from the date of judgment;
7. With the annulment of the [aforementioned] Deed of Assignment and Transfer between
defendant Joselito P. Garaygay and defendant Century Realty . . . and the Deed of Real Estate
Mortgage . . . between defendant Century Realty . . . and defendant Premiere Bank, Inc., all
aforementioned defendants who are respective parties to the named deeds are hereby ordered to
make a full return and restitution to each other of all monies, things and objects they have received
thereunder without interest within fifteen days from finality of this judgment;
8. All other claims are dismissed.
SO ORDERED. [Words in bracket added]
In time, herein petitioners appealed to the Court of Appeals whereat their recourse
was docketed as CA- G.R. CV No. 42121.
In its Decision of November 29, 1995,[24] the Court of Appeals affirmed in toto the
appealed decision of the trial court, the affirmance being predicated on the following main
justifications:
All in all, the Court agrees with the trial court in giving low rating to both Vicente Garaygay of
Cebu and appellant JOSELITO as witnesses. The court notes that Vicente T. Garaygay of Cebu has
no explanation why the deed of sale between him and Arambulo was not adduced in evidence x x x
In view of the foregoing questionable actuations of Vicente T. Garaygay of Cebu and his nephew . .
. and their cohorts, the trial court (sic) is constrained to declare that the defendants mother title TCT
No. 9780 (693) marked as Exhibit 1, which served as the basis of the reconstitution is a fake and
spurious title. x x x Thus, all titles in the name of Vicente T. Garaygay of Cebu and Joselito
Garaygay are null and void. x x x .
On the other hand, the claim of appellees that their certificate of title is a genuine title is supported
with credible and sufficient evidence. The contention of the appellants that the appellees title
should not be accepted as genuine because it is not authenticated lacks merit. The owners copy of
the title of appellees is a public document (Broce vs. Broce, 4 Phil. 611). Unlike a private document
which must be authenticated before its admission . . ., there is no need to authenticate a public
document to make it admissible in evidence (Rule 132, Sec 24). The rule that a document must be
authenticated before it is admissible in evidence does not apply to public documents which are
admissible without further proof of their due execution or genuineness x x x. Public documents are
already authenticated by the official signature and seal which they bear, of which this Court takes
judicial notice (Apostol, Essentials of Evidence, 1991, ed., p. 430) (Underscoring added).
Their motion for reconsideration having been denied by the appellate court in
its Resolution of February 6, 1997,[25] petitioners have separately come to this Court.
That of petitionerPremier Bank was docketed as G.R. No. 128122; that
of Toundjis as G.R. No. 128184; and that of Joselito Garaygay and Century
Realty as G.R. No. 128229.
Per this Courts Resolution dated June 18, 1997,[26] the three (3) separate petitions
were, upon private respondents motion, ordered consolidated.
The principal issue tendered in the separate petitions, albeit formulated a bit
differently, comes down to the following: whether or not the Court of Appeals erred in
holding Garaygay of Rizal, instead of Garaygay of Cebu, as the real owner of Lot 23.
Behind this issue is the corollary question of whether or not the same court erred in
finding Garaygay of Rizals owners copy, TCT No. 9780, instead of the Garaygay of
Cebus copy, TCT No. 9780 (693), as the authentic title covering Lot 23.

Petitioners urge reversal on the submission that, unlike Garaygay of Cebu who came
forward and took the witness stand, the identity of Garaygay of Rizal - who they stressed
at every turn had not been presented to testify - has not been established. Albeit they do
not say so, the inference of their posture is that an impostor has taken the identity of
Vicente T. Garaygay. Corollarily, they also contend that the authenticity of the impostor
Garaygays adverted owners copy of TCT No. 9780 has remained unproven.
The desired reversal cannot be granted.
Both defining documents, Exhibit 1 and Exhibit B, appear to have been issued by the
appropriate Registry of Deeds and as such would ordinarily enjoy the guarantees flowing
from the legal presumption of regularity of issuance. [27] But how and precisely when the
legal aberration occurred where two (2) owners duplicate certificates ended up in the
hands of two (2) distinct persons, complete strangers to each other, are questions which
the records do not provide clear answer. It may not be idle to speculate, though, that fraud
or other improper manipulations had been employed along the way, with likely the willing
assistance of land registry official/s, to secure what for the nonce may be tagged as the
other title. Consistent with the presumption of regularity of issuance, however, the
authenticity of one copy has to be recognized. And necessarily, one of the two (2)
outstanding owners copies has to be struck down as wrongly issued, if not plainly
spurious, under the governing Torrens system of land registration. For, a piece of land
cannot plausibly be covered at the same time, under the same concept of ownership, by
two (2) outstanding certificates of title, each having the same validity, force and effect.
One has to be spurious, or at least one has to prevail over the other. [28]Else, the ideal
sought to be achieved by the Torrens system would be illusory. As it were, the Torrens
system of land registration aims to obviate possible conflicts of title by giving the public the
right to rely upon the face of the Torrens certificate and to dispense, as a rule, with the
necessity of inquiring further;[29] on the part of the registered owner, the system gives him
complete peace of mind that he would be secured in his ownership as long as he has not
voluntarily disposed of any right over the covered property. [30]
The categorical conclusion of the Court of Appeals confirmatory of that of the trial court
is that Exhibit B is genuine and that Garaygay of Rizal is a real person. On the other
hand,Exhibit 1 was adjudged spurious. These factual determinations as a matter of long
and sound appellate practice must be accorded great weight, and, as rule, should not be
disturbed on appeal,[31] save for the most compelling and cogent reasons, [32] like when
such factual findings were drawn from a vacuum, or, in fine, reached arbitrarily. [33]
To be sure, arbitrariness cannot contextually be imputed on the appellate court. Its
finding that Garaygay of Rizal is an authentic person, once residing in and a registered
voter of Angono, Rizal has adequate evidentiary support in his voters ID, the COMELEC
and barangay certifications aforementioned and the testimony of an occupant of Lot 23.
And for whatever it is worth, Garaygay of Cebu no less testified that there are three (3)
Vicente T. Garaygay in the Philippines. [34] The reality that the private respondents failed to
put Garaygay of Rizal on the witness box to identify his copy of the title and defend his
erstwhile ownership of Lot 23 may perhaps support petitioners claim about his being
fictitious if his whereabouts during the trial, if still alive then, was known. But, as found by
the appellate court, Yambao never heard from or about Garaygay of Rizal after they have
executed the Deed of Absolute Sale (Exh. A,supra) on February 11, 1986.
Petitioners attribution of error on the part of the appellate courts declaring Garaygay
of Rizal as owner of the disputed parcel of land is untenable. It cannot be
overemphasized that the possessor-owner of the authentic copy of TCT No. 9780 was
necessary the real owner of Lot 23. That possessory distinction happened to belong
to Garaygay of Rizal.
Moreover, facts and reasonable inferences drawn therefrom point to Exhibit 1 as
being spurious, necessarily leaving Exhibit B as the authentic duplicate copy. For

starters, there is the appearance and physical condition of the owners copies in question
which, if properly evaluated in the light of attendant circumstances, would help in
determining which is genuine and which is sham. [35] For, the condition and physical
appearance of a document would, to borrow from Junquera, reveal, albeit silently, the
naked truth, hiding nothing, forgetting nothing and exaggerating nothing. As aptly
observed by the appellate court, rationalizing its conclusion adverted to above, Exhibit
B has no defect, except for its partly being torn. Respondents explanation for the defective
state of Exhibit B, as related to them by Garaygay of Rizal, i.e., it was due to exposure of
the document to the elements, like rain, following his evacuation from Manila to a small
nipa hut in Angono, Rizal during the Japanese occupation, [36] merited approval from the
trial court and the Court of Appeals. Both courts, being in a better position to pass upon
the credibility of petitioners witness and appreciate his testimony respecting the less than
usual appearance of Exhibit B, their findings command the respect of this Court.
Lest it be overlooked, what might be considered as defects in Garaygay of
Cebus copy are, at bottom, the combined effects thereon of the passage of time and the
elements. Standing alone, these defects do not, in our view, undermine the integrity of the
document.
However, unlike Exhibit B, Exhibit 1 contained entries and other uncommon markings
or features which could not have existed without human intervention. Although any one of
them may perhaps not be appreciable in isolation, these features and/or markings, taken
together, indeed put the integrity of Exhibit 1 under heavy cloud and indeed cast doubt on
its genuineness.
The irregularities listed in the appealed decision may be summed up in the following
wise:
1. Two (2) Victory stamps issued after liberation were strangely pasted on the seal
of Garaygay of Cebus title Exhibit 1 - when such stamps were not yet in existence when
such title was entered in the Registry of Deeds of Manila on June 14, 1944;
2. Exhibit 1 was prepared on Judicial Form No. 109-D Revised June 1945, which
came into circulation after June 14, 1944;
3. Exhibit 1 bears the handwritten figure 9780 in ink above the typewritten number
693. There is no initial to suggest that the handwritten number 9780 over the typewritten
title number 693 was officially authorized;
4. The first letter Y in the surname Garaygay in Exhibit 1 was inserted in ink. In
contrast, there is no such insertion in Exhibit B; and
5. Exhibit 1 carries the annotation subject to further disposition by the government with
respect to real estate transactions consummated during the Japanese regime, and subject
to the provisions of Sec. 4, Rule 74 of the New Rules of Court. [37] Such annotation is
supposed to have been contemporaneously made on the date of the issuance of the title
in 1944. Yet, in what appears to be an anomalous instance, advertence is made
to transactions consummated during the Japanese regime and to Rule 74 of the Rules of
Court, logically implying, as aptly observed by the Court of Appeals, that the annotation
was entered after liberation and also after 1964 when the New Rules of Court came into
effect.
Almost as if it were an afterthought, petitioners explained that the Victory stamps could
have been pasted, the 1945 revised judicial form utilized, and the annotations referred to
in item # (5) entered when the TCT of Garaygay of Cebu was reissued. Anent the
number 9780 appearing in ink, the proffered explanation was that the handwritten 9780
was a mere provisional marking.
The foregoing explanations are, at best speculative, thus correctly struck down by the
appellate court. And unfortunately, Garaygay of Cebu, the best person to shed light on

the foregoing unusual situations and help the limping case of the petitioners, could not
himself offer an explanation.
Petitioners insistence that the inscription on Garaygay of Cebus copy of the deed of
mortgage and the discharge of mortgage he constituted over Lot 23 in favor of Meralco
Employees Savings and Loan Association proves the authenticity of the latters owner
duplicate is valid to a point. But, to suggest that such inscription could not have been
possible were his title spurious is altogether a different matter. We need not cite cases
memorialized in books of jurisprudence where land dealings are annotated on
reconstituted certificates secured thru fraud or otherwise issued irregularly. Stated a little
differently, an annotation of what is otherwise a bona-fide land transaction is not a
peremptory argument against the spurious character, if that be the case, of the document
on which it is annotated.
In the same token, the payment by Garaygay of Cebu of land taxes on Lot 23 does
not also necessary detract from the spurious nature of his title, Exhibit 1. After all, any one
can pay real estate taxes on a given property without being quizzed by the local treasury
whether or not the payor owns the real property in question. This is not to say of course
that tax receipts are evidence of ownership, since they are not, albeit they are good indicia
of possession in the concept of owner, for no one would ordinarily be paying taxes for a
property not in his actual or at least constructive possession. [38]
Other than paying taxes from 1949 to 1990[39] (mistakenly stated by respondent court
as from 1949 to 1960), however, Garaygay of Cebu and this holds true for his
nephew Joselito- did not appear before the current stand-off to have exercised dominion
over Lot 23. For one, it has not been shown that Garaygay of Cebu was at any time in
possession of the property in question, unlike his namesake from Rizal who managed to
place the property under the care of certain individuals who built semi-permanent
structure-dwelling houses thereon without so much of a protest from Garaygay of Cebu or
his nephew Joselito after the latter purportedly bought the property. For another, neither
Garaygay of Cebu nor his nephew Joselito ever instituted any action to eject or recover
possession from the occupants of Lot 23. This passivity bespeaks strongly against their
claim of ownership. It has been said that a partys failure to raise a restraining arm or a
shout of dissent to anothers possession for an unreasonably long period is simply contrary
to his claim of ownership.[40] Not lost on this Court are circumstances noted by the trial
court which negatively reflect on Garaygay of Cebus and his nephews claim of ownership.
Some excerpts of what the trial court wrote:
On its face, Exh. 5 [the original copy of the deed of sale between Garaygay and his nephew] was
notarized by one Armando Pulgado. However, there are certifications by both the Bureau of
National Archives that no Notarial records of Armando Pulgado exist in Manila. (Exh. KK) or in
Quezon City (Exh. LL), and by the Clerk of Court that Atty. Armando Pulgado was not appointed
as notary public for and in the City of Manila for the year 1979 (Exh. MM)
Exh. 5 dated April 17, 1979 was registered only on May 26, 1989, over 10 years from the sale.
JOSELITO could not explain how thereafter his own title (TCT 12183) was issued in his name
since it was not he who registered the Deed of Sale, Exh. 5. In other words, someone else registered
it for him.
Neither JOSELITO nor his uncle . . .followed up the petition for reconstitution which was prepared,
filed and processed by interested persons in Manila, which scenario prompted plaintiffs counsel to
observe that the reconstitution was among the first of all applicants in Quezon City to be approved
(p. 32, TSN August 17, 1992). Of these interested persons, the most unthinkable was Engr. Felino
Cortez of the LRA who did the follow-ups on the application in Manila. It is remarkable why
Cortez, who is neither a friend nor relative, took special interest in not only following up the
application for reconstitution but in effecting the subdivision of TCT 12183 into [3 lots], for which
three derivative titles of TCT 12183 were issued . . . . Again JOSELITO had no knowledge of this

fact of subdivision until his uncle, . . . telephoned him with the information that the land was
already subdivided.
In short, it appears to the Court that without doing anything, Vicente T. Garaygay of Cebu has his
title (Exh. 1) reconstituted. On the other hand, without knowing anything, JOSELITO obtained
TCT 12183 in his name and had the land subdivided and sold.
These circumstances demonstrate that neither JOSELITO nor his uncle, Vicente T. Garaygay of
Cebu acted ante litem motam like the true owners they claim to be in their respective times. xxx
Several questions confound the Courts curiosity. Why were some LRA officials so interested in the
speedy reconstitution and in the subdivision of the land in excess of their bureaucratic duties?
Where did Vicente T. Garaygay of Cebu get his owners copy, Exh. 1. Did some conniving LRA
officers supply the judicial form and Victory stamps? Why was JOSELITO so evasive about his
cousin in the LRA as shown in his examination?
xxx xxx xxx
As the Court sees it, the Deed of Sale (Exh. 5 was a simulated transaction because both JOSELITO
and his uncle admit this was a joint venture to sell the property in question. However, the facts
suggest that the joint venture was not limited to the two of them. The persons who prepared and
filed the application for reconstitution, and those officers in the LRA who followed it up and who
thereafter subdivided the land into three lots for easier sale, those at the NBI who tried to persuade
Yambao and Morales to settle the dispute . . . are apparently part of the joint venture or stand to
profit from it
This brings us to the core of Toundjis and Premiere Banks petitions. The first asserts
the rights of a purchaser and the other, that of a mortgagee, in good faith and for value of
Lot 23, a status respectively denied them by the appellate court.
The rule that a subsequent declaration of a title as null and void is not a ground for
nullifying the contractual right of a purchaser, rmortgagee or other transferees in good
faith, with the exceptions thereto, is well-settled. Where the certificate of title is in the
name of the seller or mortgagor, the innocent purchaser or mortgagee for value has the
right to rely on what appears on the certificate without inquiring further.[41] In the absence
of anything to excite or arouse suspicion, or except when the party concerned had actual
knowledge of facts or circumstances that should impel a reasonably cautious person to
make such further inquiry, said purchaser or mortgagee is without obligation to look
beyond the certificate and investigate the title of the seller or mortgagor. Thus, where
innocent third persons, relying on the correctness of the certificate, acquire rights over the
property as buyer or mortgagee, the subsequent declaration of nullity of title is not a
ground for nullifying the right of such buyer or mortgagee. [42]
Tested by the above norm, may Toundjis be considered, as she has claimed, an
innocent purchaser for value, meaning one who buys or acquires, for valuable
consideration, a piece of land of another without notice that some other person has a right
to, or interest in, such property at the time of purchase, or before he has notice of the
claim or interest of some other persons in the property. [43]
The Court of Appeals rejected the claim of Toundjis, and rightly so.
A study of the record shows that TCT 14414 covering Lot. 23-A that Toundjis
contracted to buy from Joselito carried an annotation that it was administratively
reconstituted. Records also indicate that Toundjis knew at the time of the sale that
Joselito did not have possession of the lot inasmuch as she agreed to pay the balance of
the purchase price as soon as the seller can fence off the property and surrender physical
possession thereof to her.

Even for these two (2) reasons alone, which should have placed Toundjis on guard
respecting Joselitos title, her claim of being a bona fide purchaser for value must fail. The
rejection, therefore, by the Court of Appeals of such claim is correct. Likewise acceptable
is the appellate courts holding, citing Republic vs. Court of Appeals,[44] that a purchaser of
a property cannot be in good faith where the title thereof shows that it was reconstituted.
Noted with approval, too, is the appellate courts observation that the contract to sell (Exh.
44) which is unregistered and not annotated at the back of the title of the property [cannot
adversely affect appellees] for the reason that under Sec. 51 of PD 1529 (Property
Registration Act), the act of registration shall be the operative act to convey or affect the
land in so far (sic) as third parties are concerned.[45]
Premiere Bank cannot also be accorded the status of an innocent mortgagee for
value vis--vis the mortgage of the lots covered by TCT Nos. 34390 and 34391 constituted
in its favor by Century Realty. Apart from the annotations that said titles are only
administratively reconstituted,[46] the appellate court provided the ensuing compelling
reasons:
Premiere inspected the property to be mortgaged xxx on March 6, and 11, 1991 as can be seen in its
Real Estate Appraisal Report (Exhs. EE, EE-1). The adverse claim of Jesus Rodriguez was
cancelled on March 26, 1991 xxx Hence, when Premiere inspected the property xxx, it was aware
of the existence of Rodriquez adverse claim. This is admitted by Premieres witness xxx. The
adverse claim of Rodriquez annotated at the back of TCT No. 14415 and marked as Exhibit I-3 and
also at the back of TCT No. 14416 (Exh. J) marked as Exhibit J-3 declares that he is the vendee of
the land described.
There are buildings of strong material on the land in dispute xxx.
Premiere is aware of the existence of these structures as can be seen in its real estate report (Exh.
EE). Said report states that there are shanties erected in the property in dispute.
But despite the existence of alleged shanties which are in fact and in truth big structures, two of
them being concrete buildings (Exhs. 0 to O-3), Premiere Bank proceeded in the execution of the
mortgage contract. xxx.
If the land mortgaged is in the possession of a person other than the mortgagor, the mortgagee is
required to go beyond the certificate of title and make inquiries as to the rights of the actual
possessors. Failure to do so would make him a mortgagee in bad faith (Sunshine Finance vs. IAC,
203 SCRA 213; Conspecto vs. Fruto, 31 Phil 144).
It cannot be overemphasized that Premiere Bank, being in the business of extending
loans secured by real estate mortgage, is familiar with rules on land registration. As such,
it was, as here, expected to exercise more care and prudence than private individuals in
their dealing with registered lands. [47] Accordingly, given inter alia the suspicion-provoking
presence of occupants other than the owner on the land to be mortgaged, it behooved
Premiere Bank to conduct a more exhaustive investigation on the history of the
mortgagors title. That Premiere Bank accepted in mortgage the property in question
notwithstanding the existence of structures on the property and which were in actual,
visible and public possession of a person other than the mortgagor, constitutes gross
negligence amounting to bad faith.[48] Premier Bank is thus not entitled to have its lien
annotated on the genuine title.[49]
A final consideration: Petitioners maintain that the appellate court erred in annulling
the LRA order of reconstitution (Exh. 3), even if such relief was not prayed for in private
respondents amended complaint and notwithstanding the fact that the LRA was not
impleaded as an indispensable party in Civil Case No. Q-92-8455.

The contention is far from tenable. An action for quieting of title, as here, is equivalent
to an action for reconveyance of title wrongfully or erroneously registered in anothers
name. The successful outcome of such action would in most cases necessarily entail the
cancellation of existing title wrongly issued to another, which in turn requires the action of
the LRA and/or the proper Register of Deeds. As in the past, this Court, to obviate
multiplicity of suits, had ordered the LRA or the Register of Deeds, albeit not impleaded
below, to cancel such erroneously issued titles.
Before writing finis to this ponencia, two (2) peripheral matters raised need to be
addressed.
First, petitioner Toundjis has, as an alternative prayer, asked that the appealed
decision ordering Joselito to reimburse her the sum of P2,000,000.00 be modified, such
that the reimbursable amount shall bear interest of nineteen (19%) percent (down from the
25% she sought in her answer-in-intervention) instead of six (6%) per annum reckoned
from March 23, 1990, instead of from January 28, 1993, the date of judgment of the trial
court. Absent an explanation with cogent legal support why her plea for a modificatory
ruling should be favorably considered, this Court denies the same.
Second, petitioners have invited attention to and made much of this Courts per
curiam Decision dated April 7, 1993[50] in A.M. P-91-593, entitled Office of the Court
Administrator vs. Atty. Liberato Yambao et al. [51] In it, the Court dismissed herein
respondent Yambao from the service as then Clerk of Court, RTC, Quezon City, Branch
80 for, among other things, having in his possession a forged deed of sale executed by
Vicente T. Garaygay. It should be stressed in this regard, however, that this Court, in its
Resolution of May 18, 1994,[52] resolved toSUSPEND the implementation of the effects of
the decision of April 7, 1993 pending the judicious review by the Court of Appeals of the
decision of the Regional Trial Court, Branch 80, Quezon City in Civil Case No. Q-928455.
This Court need not belabor the effects on A.M. P-91-593 of the appealed decision of
the Court of Appeals, as hereby affirmed.
WHEREFORE, the instant petitions are DENIED and the impugned Decision of the
Court of Appeals AFFIRMED.
Costs against petitioners.
SO ORDERED.

[G.R. No. 159352. April 14, 2004]

PREMIERE DEVELOPMENT BANK, petitioner, vs. COURT OF APPEALS,

PANACOR MARKETING CORPORATION and ARIZONA TRANSPORT
CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the 1997 Rules on Civil Procedure
seeking the annulment of the Decision dated June 18, 2003 of the Court of
Appeals which affirmed the Decision of the Regional Trial Court in Civil Case No. 65577.
[1]

[2]

The undisputed facts show that on or about October 1994, Panacor Marketing
Corporation (Panacor for brevity), a newly formed corporation, acquired an exclusive
distributorship of products manufactured by Colgate Palmolive Philippines, Inc. (Colgate
for short). To meet the capital requirements of the exclusive distributorship, which required
an initial inventory level of P7.5 million, Panacor applied for a loan of P4.1 million with
Premiere Development Bank. After an extensive study of Panacors creditworthiness,
Premiere Bank rejected the loan application and suggested that its affiliate company,
Arizona Transport Corporation (Arizona for short), should instead apply for the loan on
condition that the proceeds thereof shall be made available to Panacor. Eventually,
Panacor was granted a P4.1 million credit line as evidenced by a Credit Line
Agreement. As suggested, Arizona, which was an existing loan client, applied for and
was granted a loan of P6.1 million, P3.4 million of which would be used to pay-off its
existing loan accounts and the remaining P2.7 million as credit line of Panacor. As
security for the P6.1 million loan, Arizona, represented by its Chief Executive Officer
Pedro Panaligan and spouses Pedro and Marietta Panaligan in their personal capacities,
executed a Real Estate Mortgage against a parcel of land covered by TCT No. T-3475 as
per Entry No. 49507 dated October 2, 1995.
[3]

[4]

[5]

Since the P2.7 million released by Premiere Bank fell short of the P4.1 million credit
line which was previously approved, Panacor negotiated for a take-out loan with Iba
Finance Corporation (hereinafter referred to as Iba-Finance) in the sum of P10 million,
P7.5 million of which will be released outright in order to take-out the loan from Premiere
Bank and the balance of P2.5 million (to complete the needed capital of P4.1 million with
Colgate) to be released after the cancellation by Premiere of the collateral mortgage on
the property covered by TCT No. T-3475. Pursuant to the said take-out agreement, IbaFinance was authorized to pay Premiere Bank the prior existing loan obligations
of Arizona in an amount not to exceed P6 million.
On October 5, 1995, Iba-Finance sent a letter to Ms. Arlene R. Martillano, officer-incharge of Premiere Banks San Juan Branch, informing her of the approved loan in favor of
Panacor and Arizona, and requesting for the release of TCT No. T-3475. Martillano, after
reading the letter, affixed her signature of conformity thereto and sent the original copy to
Premiere Banks legal office. The full text of the letter reads:
[6]

Please be informed that we have approved the loan application of ARIZONA TRANSPORT
CORP. and PANACOR MARKETING CORPORATION. Both represented by MR. PEDRO P.
PANALIGAN (hereinafter the BORROWERS) in the principal amount of PESOS: SEVEN
MILLION FIVE HUNDRED THOUSAND ONLY (P7,500,000.00) Philippine Currency. The loan
shall be secured by a Real Estate Mortgage over a parcel of land located at #777 Nueve de Pebrero
St. Bo. Mauway, Mandaluyong City, Metro Manila covered by TCT No. 3475 and registered under
the name of Arizona Haulers, Inc. which is presently mortgaged with your bank.

The borrowers have authorized IBA FINANCE CORP. to pay Premiere Bank from the proceeds of
their loan. The disbursement of the loan, however is subject to the annotation of our mortgage lien
on the said property and final verification that said title is free from any other lien or encumbrance
other than that of your company and IBA Finance Corporation.
In order to register the mortgage, please entrust to us the owners duplicate copy of TCT No. 3475,
current tax declaration, realty tax receipts for the current year and other documents necessary to
affect annotation thereof.
Upon registration of our mortgage, we undertake to remit directly to you or your authorized
representative the amount equivalent to the Borrowers outstanding indebtedness to Premiere Bank
as duly certified by your goodselves provided such an amount shall not exceed PESOS: SIX
MILLION ONLY (P6,000,000.00) and any amount in excess of the aforestated shall be for the
account of the borrowers. It is understood that upon receipt of payment, you will release to us the
corresponding cancellation of your mortgage within five (5) banking days therefrom.
If the foregoing terms and conditions are acceptable to you, please affix your signature provided
below and furnish us a copy of the Statement of Account of said borrowers.
On October 12, 1995, Premiere Bank sent a letter-reply to Iba-Finance, informing the
latter of its refusal to turn over the requested documents on the ground that Arizona had
existing unpaid loan obligations and that it was the banks policy to require full payment of
all outstanding loan obligations prior to the release of mortgage documents. Thereafter,
Premiere Bank issued to Iba-Finance a Final Statement of Account showing Arizonas
total loan indebtedness. On October 19, 1995, Panacor and Arizona executed in favor of
Iba-Finance a promissory note in the amount of 7.5 million. Thereafter, Iba-Finance paid
to Premiere Bank the amount of P6,235,754.79 representing the full outstanding loan
account of Arizona. Despite such payment, Premiere Bank still refused to release the
requested mortgage documents specifically, the owners duplicate copy of TCT No. T3475.
[7]

[8]

[9]

On November 2, 1995, Panacor requested Iba-Finance for the immediate approval

and release of the remaining P2.5 million loan to meet the required monthly purchases
from Colgate. Iba-Finance explained however, that the processing of the P2.5 million loan
application was conditioned, among others, on the submission of the owners duplicate
copy of TCT No. 3475 and the cancellation by Premiere Bank of Arizonas
mortgage. Occasioned by Premiere Banks adamant refusal to release the mortgage
cancellation document, Panacor failed to generate the required capital to meet its
distribution and sales targets. On December 7, 1995, Colgate informed Panacor of its
decision to terminate their distribution agreement.
On March 13, 1996, Panacor and Arizona filed a complaint for specific performance
and damages against Premiere Bank before the Regional Trial Court of Pasig City,
docketed as Civil Case No. 65577.
On June 11, 1996, Iba-Finance filed a complaint-in-intervention praying that judgment
be rendered ordering Premiere Bank to pay damages in its favor.
On May 26, 1998, the trial court rendered a decision in favor of Panacor and IbaFinance, the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff Panacor Marketing
Corporation and against the defendant Premiere Bank, ordering the latter to pay the former the
following sums, namely:
1) P4,520,000.00 in addition to legal interest from the time of filing of the complaint until
full payment;

2) P1,000,000.00 as and for exemplary damages;

3) P100,000.00 as and for reasonable attorneys fees; and
4) Costs of suit.
Similarly, judgment is hereby rendered in favor of plaintiff-in-intervention IBA-Finance
Corporation as against defendant Premiere bank, as follows, namely:
1) Ordering defendant Premiere Bank to release to plaintiff-intervenor IBA-Finance
Corporation the owners duplicate copy of Transfer Certificate of Title No. 3475
registered in the name of Arizona Haulers, Inc. including the deed of cancellation of
the mortgage constituted thereon;
2) Ordering the defendant Premiere Bank to pay to Intervenor IBA-Finance, the following
sums, to wit:
3) P1,000,000.00 as and by way of exemplary damages; and
4) P100,000.00 as and for reasonable attorneys fees; and
5) Costs of suit.
For lack of sufficient legal and factual basis, the counterclaim of defendant Premiere Bank is
DISMISSED.
SO ORDERED.
Premiere Bank appealed to the Court of Appeals contending that the trial court erred in
finding, inter alia, that it had maliciously downgraded the credit-line of Panacor from P4.1
million to P2.7 million.
In the meantime, a compromise agreement was entered into between Iba-Finance and
Premiere Bank whereby the latter agreed to return without interest the amount of
P6,235,754.79 which Iba-Finance earlier remitted to Premiere Bank to pay off the unpaid
loans of Arizona. On March 11, 1999, the compromise agreement was approved.
On June 18, 2003, a decision was rendered by the Court of Appeals which affirmed
with modification the decision of the trial court, the dispositive portion of which reads:
WHEREFORE, premises considered, the present appeal is hereby DISMISSED, and the decision
appealed from in Civil Case No. 65577 is hereby AFFIRMED with MODIFICATION in that the
award of exemplary damages in favor of the appellees is hereby reduced to P500,000.00. Needless
to add, in view of the Compromise Agreement plaintiff-intervenor IBA-Finance and defendantappellant PREMIERE between plaintiff-intervenor IBA-Finance and defendant-appellant
PREMIERE as approved by this Court per Resolution dated March 11, 1999, Our dispositive of the
present appeal is only with respect to the liability of appellant PREMIERE to the plaintiffappellees.
With costs against the defendant-appellant.
SO ORDERED.

[10]

Hence the present petition for review, which raises the following issues:

[11]

WHETHER OR NOT THE DECISION OF HONORABLE COURT OF APPEALS EXCEEDED

AND WENT BEYOND THE FACTS, THE ISSUES AND EVIDENCE PRESENTED IN THE

APPEAL TAKING INTO CONSIDERATION THE ARGUMENT OF PETITIONER BANK

AND ADVENT OF THE DULY APPROVED COMPROMISE AGREEMENT BETWEEN THE
PETITIONER BANK AND IBA FINANCE CORPORATION.
II

WHETHER OR NOT THE ISSUES THAT SHOULD HAVE BEEN RESOLVED BY THE
HONORABLE COURT OF APPEALS, BY REASON OF THE EXISTENCE OF THE
COMPROMISE AGREEMENT, IS LIMITED TO THE ISSUE OF ALLEGED BAD FAITH OF
PETITIONER BANK IN THE DOWNGRADING OF THE LOAN AND SHOULD NOT
INCLUDE THE RENDITION OF AN ADVERSE PRONOUNCEMENT TO AN ALREADY
FAIT ACCOMPLI- ISSUE ON THE REFUSAL OF THE BANK TO RECOGNIZE THE TAKEOUT OF THE LOAN AND THE RELEASE OF TCT NO. 3475.
III

WHETHER OR NOT PETITIONER ACTED IN BAD FAITH IN THE DOWNGRADING OF

THE LOAN OF RESPONDENTS TO SUPPORT AN AWARD OF ACTUAL AND
EXEMPLARY DAMAGES NOW REDUCED TO P500,000.00.
IV

WHETHER OR NOT THERE IS BASIS OR COMPETENT PIECE OF EVIDENCE

PRESENTED DURING THE TRIAL TO SUPPORT AN AWARD OF ACTUAL DAMAGES OF
P4,520,000.00.
Firstly, Premiere Bank argues that considering the compromise agreement it entered
with Iba-Finance, the Court of Appeals should have ruled only on the issue of its alleged
bad faith in downgrading Panacors credit line. It further contends that the Court of Appeals
should have refrained from making any adverse pronouncement on the refusal of
Premiere Bank to recognize the take-out and its subsequent failure to release the
cancellation of the mortgage because they were rendered fait accompli by the
compromise agreement.
We are not persuaded.
In a letter-agreement dated October 5, 1995, Iba-Finance informed Premiere Bank of
its approval of Panacors loan application in the amount of P10 million to be secured by a
real estate mortgage over a parcel of land covered by TCT No. T-3475. It was agreed that
Premiere Bank shall entrust to Iba-Finance the owners duplicate copy of TCT No. T-3475
in order to register its mortgage, after which Iba-Finance shall pay off Arizonas
outstanding indebtedness. Accordingly, Iba-Finance remitted P6,235,754.79 to Premiere
Bank on the understanding that said amount represented the full payment of Arizonas
loan obligations. Despite performance by Iba-Finance of its end of the bargain, Premiere
Bank refused to deliver the mortgage document. As a consequence, Iba-Finance failed to
release the remaining P2.5 million loan it earlier pledged to Panacor, which finally led to
the revocation of its distributorship agreement with Colgate.
[12]

Undeniably, the not-so-forthright conduct of Premiere Bank in its dealings with

respondent corporations caused damage to Panacor and Iba-Finance. It is error for
Premiere Bank to assume that the compromise agreement it entered with Iba-Finance
extinguished all direct and collateral incidents to the aborted take-out such that it also
cancelled its obligations to Panacor. The unjustified refusal by Premiere Bank to release
the mortgage document prompted Iba-Finance to withhold the release of the P2.5 million
earmarked for Panacor which eventually terminated the distributorship agreement. Both
Iba-Finance and Panacor, which are two separate and distinct juridical entities, suffered
damages due to the fault of Premiere Bank. Hence, it should be held liable to each of
them.

While the compromise agreement may have resulted in the satisfaction of IbaFinances legal claims, Premiere Banks liability to Panacor remains. We agree with the
Court of Appeals that the present appeal is only with respect to the liability of appellant
Premiere Bank to the plaintiffs-appellees (Panacor and Arizona) taking into account the
compromise agreement.
[13]

For the foregoing reasons, we find that the Court of Appeals did not err in discussing in
the assailed decision the abortive take-out and the refusal by Premiere Bank to release
the cancellation of the mortgage document.
Secondly, Premiere Bank asserts that it acted in good faith when it downgraded the
credit line of Panacor from P4.1 million to P2.7 million. It cites the decision of the trial court
which, albeit inconsistent with its final disposition, expressly recognized that the
downgrading of the loan was not the proximate cause of the damages suffered by
respondents.
Under the Credit Line Agreement dated September 1995, Premiere Bank agreed to
extend a loan of P4.1 million to Arizona to be used by its affiliate, Panacor, in its
operations. Eventually, Premiere approved in favor of Arizona a loan equivalent to P6.1
million, P3.4 million of which was allotted for the payment of Arizonas existing loan
obligations and P2.7 million as credit line of Panacor. Since only P2.7 million was made
available to Panacor, instead of P4.1 million as previously approved, Panacor applied for
a P2.5 loan from Iba-Finance, which, as earlier mentioned, was not released because of
Premiere Banks refusal to issue the mortgage cancellation.
[14]

It is clear that Premiere Bank deviated from the terms of the credit line agreement
when it unilaterally and arbitrarily downgraded the credit line of Panacor from P4.1 million
to P2.7 million. Having entered into a well-defined contractual relationship, it is imperative
that the parties should honor and adhere to their respective rights and obligations
thereunder. Law and jurisprudence dictate that obligations arising from contracts have the
force of law between the contracting parties and should be complied with in good
faith. The appellate court correctly observed, and we agree, that:
[15]

Appellants actuations, considering the actual knowledge of its officers of the tight financial
situation of appellee PANACOR brought about primarily by the appellant banks considerable
reduction of the credit line portion of the loan, in relation to the bail-out efforts of IBA Finance,
whose payment of the outstanding loan account of appellee ARIZONA with appellant was readily
accepted by the appellant, were truly marked by bad faith and lack of due regard to the urgency of
its compliance by immediately releasing the mortgage cancellation document and delivery of the
title to IBA Finance. That time is of the essence in the requested release of the mortgage
cancellation and delivery of the subject title was only too well-known to appellant, having only
belatedly invoked the cross-default provision in the Real Estate Mortgage executed in its favor by
appellee ARIZONA to resist the plain valid and just demand of IBA Finance for such compliance
by appellant bank.
[16]

Premiere Bank cannot justify its arbitrary act of downgrading the credit line on the
alleged finding by its project analyst that the distributorship was not financially feasible.
Notwithstanding the alleged forewarning, Premiere Bank still extended Arizona the loan of
P6.1 million, albeit in contravention of the credit line agreement. This indubitably indicates
that Premiere Bank had deliberately and voluntarily granted the said loan despite its claim
that the distributorship contract was not viable.
Neither can Premiere Bank rely on the puerile excuse that it was the banks policy not
to release the mortgage cancellation prior to the settlement of outstanding loan
obligations. Needless to say, the Final Statement of Account dated October 17,
1995 showing in no uncertain terms Arizonas outstanding indebtedness, which was
subsequently paid by Iba-Finance, was the full payment of Arizonas loan obligations.

Equity demands that a party cannot disown it previous declaration to the prejudice of the
other party who relied reasonably and justifiably on such declaration.
Thirdly, Premiere Bank avers that the appellate courts reliance on the credit line
agreement as the basis of bad faith on its part was inadmissible or self-serving for not
being duly notarized, being unsigned in all of its left margins, and undated. According to
Premiere Bank, the irregularities in the execution of the credit line agreement bolsters the
theory that the same was the product of manipulation orchestrated by respondent
corporations through undue influence and pressure exerted by its officers on Martillano.
Premiere Banks posture deserves scant consideration. As found by the lower court,
there are sufficient indicia that demonstrate that the alleged unjust pressure exerted on
Martillano was more imagined than real. In her testimony, Martillano claims that she was
persuaded and coaxed by Caday of Iba-Finance and Panaligan of Panacor to sign the
letter. It was she who provided Iba-Finance with the Final Statement of Account and
accepted its payment without objection or qualification. These acts show that she was
vested by Premiere Bank with sufficient authority to enter into the said transactions.
If a private corporation intentionally or negligently clothes its officers or agents with
apparent power to perform acts for it, the corporation will be estopped to deny that the
apparent authority is real as to innocent third persons dealing in good faith with such
officers or agents. As testified to by Martillano, after she received a copy of the credit line
agreement and affixed her signature in conformity thereto, she forwarded the same to the
legal department of the Bank at its Head Office. Despite its knowledge, Premiere Bank
failed to disaffirm the contract. When the officers or agents of a corporation exceed their
powers in entering into contracts or doing other acts, the corporation, when it has
knowledge thereof, must promptly disaffirm the contract or act and allow the other party or
third persons to act in the belief that it was authorized or has been ratified. If it acquiesces,
with knowledge of the facts, or fails to disaffirm, ratification will be implied or else it will be
estopped to deny ratification.
[17]

[18]

Finally, Premiere Bank argues that the finding by the appellate court that it was liable
for actual damages in the amount of P4,520,000.00 is without basis. It contends that the
evidence presented by Panacor in support of its claim for actual damages are not official
receipts but self-serving declarations.
To justify an award for actual damages, there must be competent proof of the actual
amount of loss. Credence can be given only to claims, which are duly supported by
receipts. The burden of proof is on the party who will be defeated if no evidence is
presented on either side. He must establish his case by a preponderance of evidence
which means that the evidence, as a whole, adduced by one side is superior to that of the
other. In other words, damages cannot be presumed and courts, in making an award,
must point out specific facts that can afford a basis for measuring whatever compensatory
or actual damages are borne.
[19]

Under Article 2199 of the Civil Code, actual or compensatory damages are those
awarded in satisfaction of, or in recompense for, loss or injury sustained. They proceed
from a sense of natural justice and are designed to repair the wrong that has been done,
to compensate for the injury inflicted and not to impose a penalty.
In the instant case, the actual damages were proven through the sole testimony of
Themistocles Ruguero, the vice president for administration of Panacor. In his testimony,
the witness affirmed that Panacor incurred losses, specifically, in terms of training and
seminars, leasehold acquisition, procurement of vehicles and office equipment without,
however, adducing receipts to substantiate the same. The documentary evidence marked
as exhibit W, which was an ordinary private writing allegedly itemizing the capital
expenditures and losses from the failed operation of Panacor, was not testified to by any
witness to ascertain the veracity of its contents. Although the lower court fixed the sum of
P4,520,000.00 as the total expenditures incurred by Panacor, it failed to show how and in

what manner the same were substantiated by the claimant with reasonable certainty.
Hence, the claim for actual damages should be admitted with extreme caution since it is
only based on bare assertion without support from independent evidence. Premieres
failure to prove actual expenditure consequently conduces to a failure of its claim. In
determining actual damages, the court cannot rely on mere assertions, speculations,
conjectures or guesswork but must depend on competent proof and on the best evidence
obtainable regarding the actual amount of loss.
[20]

Even if not recoverable as compensatory damages, Panacor may still be awarded

damages in the concept of temperate or moderate damages. When the court finds that
some pecuniary loss has been suffered but the amount cannot, from the nature of the
case, be proved with certainty, temperate damages may be recovered. Temperate
damages may be allowed in cases where from the nature of the case, definite proof of
pecuniary loss cannot be adduced, although the court is convinced that the aggrieved
party suffered some pecuniary loss.
The Code Commission, in explaining the concept of temperate damages under Article
2224, makes the following comment:
[21]

In some States of the American Union, temperate damages are allowed. There are cases where from
the nature of the case, definite proof of pecuniary loss cannot be offered, although the court is
convinced that there has been such loss. For instance, injury to ones commercial credit or to the
goodwill of a business firm is often hard to show with certainty in terms of money. Should damages
be denied for that reason? The judge should be empowered to calculate moderate damages in such
cases, rather than that the plaintiff should suffer, without redress from the defendant's wrongful act.
It is obvious that the wrongful acts of Premiere Bank adversely affected, in one way or
another, the commercial credit of Panacor, greatly contributed to, if not, decisively
caused the premature stoppage of its business operations and the consequent loss of
business opportunity. Since these losses are not susceptible to pecuniary estimation,
temperate damages may be awarded. Article 2216 of the Civil Code:
[22]

No proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or
exemplary damages may be adjudicated. The assessment of such damages, except liquidated ones,
is left to the discretion of the Court, according to the circumstances of each case.
Under the circumstances, the sum of P200,000.00 as temperate damages is
reasonable.
WHEREFORE, the petition is DENIED. The Decision dated June 18, 2003 of the Court
of Appeals in CA-G.R. CV No. 60750, ordering Premiere Bank to pay Panacor Marketing
Corporation P500,000.00 as exemplary damages, P100,000.00 as attorneys fees, and
costs, is AFFIRMED, with the MODIFICATION that the award of P4,520,000.00 as actual
damages is DELETED for lack of factual basis. In lieu thereof, Premiere Bank is ordered
to pay Panacor P200,000.00 as temperate damages.
SO ORDERED.