G.R. No.

115548 March 5, 1996

STATE INVESTMENT HOUSE INC., petitioner, vs.
COURT OF APPEALS, ET AL., respondents.
FRANCISCO, J.:p
The factual background of the case, aptly summarized
in the decision of the Office of the President and cited
by respondent Court of Appeals 1 in its assailed
decision, and which we have verified to be supported
by the record is herein reproduced as follows:
The uncontroverted facts of the case as recited in
the decision of the Office of the President are as
follows:
Records show that, on October 15, 1969,
Contract to Sell No. 36 was executed by the
Spouses Canuto and Ma. Aranzazu Oreta, and the
Solid Homes, Inc. (SOLID), involving a parcel of
land identified as Block No. 8, Lot No. 1, Phase of
the Capitol Park Homes Subdivision, Quezon City,
containing 511 square meters for a consideration
of P39,347.00. Upon signing of the contract, the
spouses Oreta made payment amounting to
P7,869.40, with the agreement that the balance
shall be payable in monthly installments of
P451.70, at 12% interest per annum.
On November 4, 1976, SOLID executed several
real estate mortgage contracts in favor of State
Investment Homes, (sic) Inc. (STATE) over its
subdivided parcels of land, one of which is the
subject lot covered by Transfer Certificate of Title
No. 209642.
For Failure of SOLID to comply with its mortgage
obligations contract, STATE extrajudicially
foreclosed the mortgaged properties including
the subject lot on April 6, 1983, with the
corresponding certificate of sale issued therefor
to STATE annotated at the back of the titles
covering the said properties on October 13, 1983.
On June 23, 1984; SOLID thru a Memorandum of
Agreement negotiated for the deferment of
consolidation of ownership over the foreclosed
properties by committing to redeem the
properties from STATE.
On August 15, 1988, the spouses filed a
complaint before the Housing and Land Use
Regulatory Board, HLRB, against the developer
SOLID and STATE for failure on the part of SOLID
"to execute
the necessary absolute deed of sale as well as to
deliver title to said property . . . in violation of the

contract to sell . . .," despite full payment of the

purchase price as of January 7, 1981. In its
Answer, SOLID, by way of alternative defense,
alleged that the obligations under the Contract to
Sell has become so difficult . . . the herein
respondents be partially released from said
obligation by substituting subject lot with another
suitable residential lot from another subdivision
which respondents own/operates". Upon the
other hand, STATE, to which the subject lot was
mortgaged, averred that unless SOLID pays the
redemption price of P125,1955.00, (sic) it has "a
right to hold on and not release the foreclosed
properties.
On May 23, 1989, the Office of Appeals,
Adjudication and Legal Affairs (OAALA) rendered
a decision the decretal portion of which reads:
1. Ordering respondent, State Investment House,
Inc. to execute a Deed of Conveyance of Lot 1,
Block 8, in Capital Park Homes Subdivision in
favor of complainants and to deliver to the latter
the corresponding certificate of title;
2. Ordering respondent, Solid Homes, Inc. to pay
State Investment House, Inc. that portion of its
loan which corresponds to the value of the lot as
collateral;
3. Ordering respondent, Solid Homes, Inc. to pay
to this Board the amount of Six Thousand Pesos
(P6,000.00) as administrative fine in accordance
with Section 25 in relation to Section 38 of P.D.
957.
Both the STATE and SOLID appealed to the Board
of Commissioners, HLRB, which affirmed on June
5, 1990 the OAALA's decision (Annex "C" of the
Petition; ibid, p. 34). Again, both STATE and
SOLID appealed the decision of the Board of
Commissioners, HLRB, to the Office of the
President which dismissed the twin appeals on
February 26, 1993.
Petitioner filed with the Supreme Court this
petition for review of decision of the Office of the
President where it was docketed as G.R. No.
109364. However, in a resolution dated May 13,
1993, the Supreme Court referred this case to
this Court for proper disposition. On the other
hand, SOLID does not appear to have joined
herein petitioner in this petition for review. 2
In a decision dated May 19, 1994, respondent court
sustained the judgment of the Office of the President.
Hence, this petition substantially anchored on these
two alleged errors, namely: (1) error in ruling that

private respondent spouses Oreta's unregistered rights

over the subject property are superior to the registered
mortgage rights of petitioner State Investment House,
Inc. (STATE); and (2) error in not applying the settled
rule that persons dealing with property covered by
torrens certificate of title are not required to go beyond
what appears on the face of the title.
At the outset, we note that herein petitioner argues
more extensively on the second assigned issue, than
on the first. In fact, petitioner admits the superior
rights of respondents-spouses Oreta over the subject
property as it did not pray for the nullification of the
contract between respondents-spouses and SOLID, but
instead asked for the payment of the release value of
the property in question, plus interest, attorney's fees
and costs of suit against SOLID or, in case of the
latter's inability to pay, against respondents-spouses
before it can be required to release the title of the
subject property in favor of the respondent
spouses. 3 And even if we were to pass upon the first
assigned error, we find respondent court's ruling on the
matter to be well-founded. STATE's registered
mortgage right over the property is inferior to that of
respondents-spouses' unregistered right. The
unrecorded sale between respondents-spouses and
SOLID is preferred for the reason that if the original
owner (SOLID, in this case) had parted with his
ownership of the thing sold then he no longer had
ownership and free disposal of that thing so as to be
able to mortgage it again. 4Registration of the
mortgage is of no moment since it is understood to be
without prejudice to the better right of third parties.5
Anent the second issue, petitioner asserts that a
purchaser or mortgagee of land/s covered under the
Torrens System "is not required to do more than rely
upon the certificate of title [for] it is enough that the
(purchaser or mortgagee] examines the pertinent
certificate of title [without] need [of] look[ing] beyond
such title." 6
As a general rule, where there is nothing in the
certificate of title to indicate any cloud or vice in the
ownership of the property, or any encumbrance
thereon, the purchaser is not required to explore
further than what the Torrens Title upon its face
indicates in quest for any hidden defect or inchoate
right that may subsequently defeat his right thereto.
This rule, however, admits of an exception as where
the purchaser or mortgagee, has knowledge of a defect
or lack of title in his vendor, or that he was aware of
sufficient facts to induce a reasonably prudent man to
inquire into the status of the title of the property in
litigation. 7 In this case, petitioner was well aware that
it was dealing with SOLID, a business entity engaged in
the business of selling subdivision lots. In fact, the
OAALA found that at the time the lot was mortgaged,

respondent State Investment House Inc., [now

petitioner] had been aware of the lot's location and
that the said lot formed part of Capital Park/Homes
Subdivision." 8 In Sunshine Finance and Investment
Corp. v. Intermediate Appellate Court, 9 the Court
noting petitioner therein to be a financing corporation,
deviated from the general rule that a purchaser or
mortgagee of a land is not required to look further that
what appears on the face of the Torrens Title. Thus:
Nevertheless, we have to deviate from the general
rule because of the failure of the petitioner in this
case to take the necessary precautions to ascertain
if there was any flaw in the title of the mortgage.
The petitioner is an investment and financing
corporation. We presume it is experienced in its
business. Ascertainment of the status and condition
of properties offerred to it as security for the loans it
extends must be a standard and indispensable part
of its operations. Surely, it cannot simply rely on an
examination of a Torrens certificate to determine
what the subject property looks like as its condition
is not apparent in the document. The land might be
in a depressed area. There might be squatters on it.
It might be easily inundated. It might be an interior
lot, without convenient access. These and other
similar factors determine the value of the property
and so should be of practical concern to the
petitioner.
xxx xxx xxx
Our conclusion might have been different if the
mortgagee were an ordinary individual or company
without the expertise of the petitioner in the
mortgage and sale of registered land or if the land
mortgaged were some distance from the mortgagee
and could not be conveniently inspected. But there
were no such impediments in this case. The facilities
of the petitioner were not so limited as to prevent it
from making a more careful examination of the land
to assure itself that there were no unauthorized
persons in possession. 10
[Emphasis supplied.]
The above-enunciated rule should apply in this
case as petitioner admits of being a financing
institution. 11We take judicial notice of the uniform
practice of financing institutions to investigate,
examine and assess the real property offered as
security for any loan application especially where,
as in this case, the subject property is a
subdivision lot located at Quezon City, M.M. It is a
settled rule that a purchaser or mortgagee cannot
close its eyes to facts which should put a
reasonable man upon his guard, and then claim
that he acted in good faith under the belief that
there was no defect in the title of the vendor or
mortgagor. 12 Petitioner's constructive knowledge

of the defect in the title of the subject property, or

lack of such knowledge due to its negligence,
takes the place of registration of the rights of
respondents-spouses. Respondent Court thus
correctly ruled that petitioner was not a purchaser
or mortgagee in good faith; hence petitioner can
not solely rely on what merely appears on the face
of the Torrens Title.

ACCORDINGLY, finding no reversible error in the

assailed judgment, the same is hereby AFFIRMED.
SO ORDERED.
G.R. No. 180945
February 12, 2010
PHILIPPINE NATIONAL BANK, AS THE ATTORNEYIN-FACT OF OPAL PORTFOLIO INVESTMENTS (SPVAMC), INC., Petitioner, - versus MERCEDES CORPUZ, REPRESENTED BY HER
ATTORNEY-IN-FACT VALENTINA CORPUZ,
Respondent.
This case is about the need for a mortgagee-bank,
faced with suspicious layers of transfers involving a
property presented for mortgage, to exercise proper
diligence in ascertaining the bona fide status of those
transfers.
The Facts and the Case
On October 4, 1974 respondent Mercedes Corpuz
delivered her owners duplicate copy of Transfer
Certificate of Title (TCT) 32815 to Dagupan City Rural
Bank as security against any liability she might incur as
its cashier. She later left her job and went to the United
States.
On October 24, 1994 the rural bank where she worked
cancelled its lien on Corpuzs title, she having incurred
no liability to her employer. Without Corpuzs
knowledge and consent, however, Natividad Alano, the
rural banks manager, turned over Corpuzs title to Julita
Camacho and Amparo Callejo.
Conniving with someone from the assessors office,
Alano, Camacho, and Callejo prepared a falsified deed
of sale, making it appear that on February 23, 1995
Corpuz sold her land to one Mary Bondoc
for P50,000.00. They caused the registration of the
deed of sale, resulting in the cancellation of TCT 32815
and the issuance of TCT 63262 in Bondocs name. About
a month later or on March 27, 1995 the trio executed
another fictitious deed of sale with Mary Bondoc selling
the property to the spouses Rufo and Teresa Palaganas
for only P15,000.00. This sale resulted in the issuance
of TCT 63466 in favor of the Palaganases.
Nine days later or on April 5, 1995 the Palaganases
executed a deed of sale in favor of spouses Virgilio and
Elena Songcuan for P50,000.00, resulting in the
issuance of TCT 63528. Finally, four months later or on
August 10, 1995 the Songcuans took out a loan of P1.1
million from petitioner Philippine National Bank (PNB)
and, to secure payment, they executed a real estate
mortgage on their title. Before granting the loan, the
PNB had the title verified and the property inspected.

On November 20, 1995 respondent Corpuz

filed, through an attorney-in-fact, a complaint before
the Dagupan Regional Trial Court (RTC) against Mary
Bondoc, the Palaganases, the Songcuans, and
petitioner PNB, asking for the annulment of the layers
of deeds of sale covering the land, the cancellation of
TCTs 63262, 63466, and 63528, and the reinstatement
of TCT 32815 in her name.
On June 29, 1998 the RTC rendered a decision granting
respondent Corpuzs prayers. This prompted petitioner
PNB to appeal to the Court of Appeals (CA). On July 31,
2007 the CA affirmed the decision of the RTC and
denied the motion for its reconsideration, prompting
PNB to take recourse to this Court.
The Issue Presented
The sole issue presented in this case is whether
or not petitioner PNB is a mortgagee in good faith,
entitling it to its lien on the title to the property in
dispute.
The Ruling of the Court
Petitioner PNB points out that, since it did a credit
investigation, inspected the property, and verified the
clean status of the title before giving out the loan to
the Songcuans, it should be regarded as a mortgagee
in good faith. PNB claims that the precautions it took
constitute sufficient compliance with the due diligence
required of banks when dealing with registered lands.
As a rule, the Court would not expect a mortgagee to
conduct an exhaustive investigation of the history of
the mortgagors title before he extends a loan.[1] But
petitioner PNB is not an ordinary mortgagee; it is
a bank.[2] Banks are expected to be more cautious than
ordinary individuals in dealing with lands, even
registered ones, since the business of banks is imbued
with public interest.[3] It is of judicial notice that the
standard practice for banks before approving a loan is
to send a staff to the property offered as collateral and
verify the genuineness of the title to determine the real
owner or owners.[4]
One of the CAs findings in this case is that in
the course of its verification, petitioner PNB was
informed of the previous TCTs covering the subject
property.[5] And the PNB has not categorically contested
this finding. It is evident from the faces of those titles
that the ownership of the land changed from Corpuz to
Bondoc, from Bondoc to the Palaganases, and from the
Palaganases to the Songcuans in less than three
months and mortgaged to PNB within four months of
the last transfer.
The above information in turn should have
driven the PNB to look at the deeds of sale involved. It
would have then discovered that the property was sold
for ridiculously low prices: Corpuz supposedly sold it to
Bondoc for justP50,000.00; Bondoc to the Palaganases
for just P15,000.00; and the Palaganases to the
Songcuans also for justP50,000.00. Yet the PNB gave
the
property
an
appraised
value
of P781,760.00. Anyone who deliberately ignores a
significant fact that would create suspicion in an

otherwise reasonable person cannot be considered as

an innocent mortgagee for value.[6]
The Court finds no reason to reverse the CA decision.
WHEREFORE,
the
Court DENIES the
petition
and AFFIRMS the decision of the Court of Appeals
dated July 31, 2007 and its resolution dated December
17, 2007 in CA-G.R. CV 60616. SO ORDERED.
G.R. No. 112160

February 28, 2000

OSMUNDO S. CANLAS and ANGELINA

CANLAS, petitioner, vs.
COURT OF APPEALS, ASIAN SAVINGS BANK,
MAXIMO C. CONTRARES and VICENTE
MAOSCA,respondents.

payable within one week, and the balance of

P350,000.00 to serve as his (Osmundo's) investment in
the business. Thus, Osmundo Canlas delivered to
Vicente Maosca the transfer certificates of title of the
parcels of land involved. Vicente Maosca, as his part
of the transaction, issued two postdated checks in
favor of Osmundo Canlas in the amounts of P40,000.00
and P460,000.00, respectively, but it turned out that
the check covering the bigger amount was not
sufficiently funded.4
On September 3, 1982, Vicente Maosca was able to
mortgage the same parcels of land for P100,000.00 to
a certain Attorney Manuel Magno, with the help of
impostors who misrepresented themselves as the
spouses, Osmundo Canlas and Angelina Canlas.5

PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule
45 of the Rules of Court, seeking to review and set
aside the Decision1 of the Court of Appeals in CA-G.R.
CV No. 25242, which reversed the Decision2 of Branch
59 of the Regional Trial Court of Makati City in Civil
Case No. M-028; the dispositive portion of which reads:
WHEREFORE, the decision appealed from is
hereby REVERSED and SET ASIDE and a new
one is hereby entered DISMISSING the
complaint of the spouses Osmundo and
Angelina Canlas. On the counterclaim of
defendant Asian Savings Bank, the plaintiffs
Canlas spouses are hereby ordered to pay the
defendant Asian Savings Bank the amount of
P50,000.00 as moral and exemplary damages,
plus P15,000.00 as and for attorney's fees.
With costs against appellees.
SO ORDERED.3
The facts that matter:
Sometime in August, 1982, the petitioner, Osmundo S.
Canlas, and private respondent, Vicente Maosca,
decided to venture in business and to raise the capital
needed therefor. The former then executed a Special
Power of Attorney authorizing the latter to mortgage
two parcels of land situated in San Dionisio, (BF
Homes) Paranaque, Metro Manila, each lot with semiconcrete residential house existing thereon, and
respectively covered by Transfer Certificate of Title No.
54366 in his (Osmundo's) name and Transfer Certificate
of Title No. S-78498 in the name of his wife Angelina
Canlas.
Subsequently, Osmundo Canlas agreed to sell the said
parcels of land to Vicente Maosca, for and in
consideration of P850,000.00, P500,000.00 of which

On September 29, 1982, private respondent Vicente

Maosca was granted a loan by the respondent Asian
Savings Bank (ASB) in the amount of P500,000.00, with
the use of subject parcels of land as security, and with
the involvement of the same impostors who again
introduced themselves as the Canlas spouses.6 When
the loan it extended was not paid, respondent bank
extrajudicially foreclosed the mortgage.
On January 15, 1983, Osmundo Canlas wrote a letter
informing the respondent bank that the execution of
subject mortgage over the two parcels of land in
question was without their (Canlas spouses) authority,
and request that steps be taken to annul and/or revoke
the questioned mortgage. On January 18, 1983,
petitioner Osmundo Canlas also wrote the office of
Sheriff Maximo O. Contreras, asking that the auction
sale scheduled on February 3, 1983 be cancelled or
held in abeyance. But respondents Maximo C.
Contreras and Asian Savings Bank refused to heed
petitioner Canlas' stance and proceeded with the
scheduled auction sale.7
Consequently, on February 3, 1983 the herein
petitioners instituted the present case for annulment of
deed of real estate mortgage with prayer for the
issuance of a writ of preliminary injunction; and on May
23, 1983, the trial court issued an Order restraining the
respondent sheriff from issuing the corresponding
Certificate of Sheriff's Sale.8
For failure to file his answer, despite several motions
for extension of time for the filing thereof, Vicente
Maosca was declared in default.9
On June 1, 1989, the lower court a quo came out with a
decision annulling subject deed of mortgage and
disposing, thus:
Premises considered, judgment is hereby rendered
as follows.1wphi1.nt

1. Declaring the deed of real estate mortgage

(Exhibit "L") involving the properties of the plaintiffs
as null and void;
2. Declaring the public auction sale conducted by
the defendant Sheriff, involving the same properties
as illegal and without binding effect;

V
RESPONDENT COURT OF APPEALS ERRED IN AWARDING
RESPONDENT ASB MORAL DAMAGES.11
The Petition is impressed with merit.
Art. 1173 of the Civil Code, provides:

3. Ordering the defendants, jointly and severally, to

pay the plaintiffs the sum of P20,000.00
representing attorney's fees;
4. On defendant ASB's crossclaim: ordering the
cross-defendant Vicente Maosca to pay the
defendant ASB the sum of P350,000.00,
representing the amount which he received as
proceeds of the loan secured by the void mortgage,
plus interest at the legal rate, starting February 3,
1983, the date when the original complaint was
filed, until the amount is fully paid;
5. With costs against the defendants.
SO ORDERED.10
From such Decision below, Asian Savings Bank
appealed to the Court of Appeals, which handed down
the assailed judgment of reversal, dated September 30,
1983, in CA-G.R. CV No. 25242. Dissatisfied therewith,
the petitioners found their way to this Court via the
present Petition; theorizing that:
I
RESPONDENT COURT OF APPEALS ERRED IN HOLDING
THAT THE MORTGAGE OF THE PROPERTIES SUBJECT OF
THIS CASE WAS VALID.
II
RESPONDENT COURT OF APPEALS ERRED IN HIOLDING
THAT PETITIONERS ARE NOT ENTITLED TO RELIEF
BECAUSE THEY WERE NEGLIGENT AND THEREFORE
MUST BEAR THE LOSS.
III
RESPONDENT COURT OF APPEALS ERRED IN HOLDING
THAT RESPONDENT ASB EXERCISED DUE DILIGENCE IN
GRANTING THE LOAN APPLICATION OF RESPONDENT.
IV
RESPONDENT COURT OF APPEALS ERRED IN HOLDING
THAT RESPONDENT ASB DID NOT ACT WITH BAD FAITH
IN PROCEEDING WITH THE FORECLOSURE SALE OF THE
PROPERTIES.

Art. 1173. The fault or negligence of the obligor

consist in the omission of that diligence which is
required by the nature of the obligation and
corresponds with the circumstances of the
persons, of the time and of the place. When
negligence shows bad faith, the provisions of
articles 1171 and 2201, paragraph 2, shall
apply.
If the law or contract does not state the
diligence which is to be observed in the
performance, that which is expected of a good
father of a family shall be required. (1104)
The degree of diligence required of banks is more than
that of a good father of a family;12 in keeping with their
responsibility to exercise the necessary care and
prudence in dealing even on a registered or titled
property. The business of a bank is affected with public
interest, holding in trust the money of the depositors,
which bank deposits the bank should guard against loss
due to negligence or bad faith, by reason of which the
bank would be denied the protective mantle of the land
registration law, accorded only to purchasers or
mortgagees for value and in good faith.13
In the case under consideration, from the evidence on
hand it can be gleaned unerringly that respondent
bank did not observe the requisite diligence in
ascertaining or verifying the real identity of the couple
who introduced themselves as the spouses Osmundo
Canlas and Angelina Canlas. It is worthy to note that
not even a single identification card was exhibited by
the said impostors to show their true identity; and yet,
the bank acted on their representations simply on the
basis of the residence certificates bearing signatures
which tended to match the signatures affixed on a
previous deed of mortgage to a certain Atty. Magno,
covering the same parcels of land in question. Felizado
Mangubat, Assistant Vice President of Asian Savings
Bank, thus testified inter alia:
xxx

xxx

xxx

Q:
According to you, the basis for your having
recommended for the approval of MANASCO's (sic) loan
particularly that one involving the property of plaintiff in this
case, the spouses OSMUNDO CANLAS and ANGELINA CANLAS,
the basis for such approval was that according to you all the
signatures and other things taken into account matches with

that of the document previously executed by the spouses

CANLAS?
Q:
That is the only basis for accepting the signature on
the mortgage, the basis for the recommendation of the
approval of the loan are the financial statement of MAOSCA?
A:
Yes; among others the signature and TAX Account
Number, Residence Certificate appearing on the previous loan
executed by the spouses CANLAS, I am referring to EXHIBIT 5,
mortgage to ATTY. MAGNO, those were made the basis.
A:
That is just the basis of accepting the signature,
because at that time the loan have been approved already on
the basis of the financial statement of the client the Bank
Statement. Wneh (sic) it was approved we have to base it on
the Financial statement of the client, the signatures were
accepted only for the purpose of signing the mortgage not for
the approval, we don't (sic) approve loans on the signature.
ATTY. CLAROS:
Would you agree that as part of ascertaining the identify of
the parties particularly the mortgage, you don't consider also
the signature, the Residence Certificate, the particular address
of the parties involved.
A:
I think the question defers (sic) from what you asked
a while ago.
Q:

Among others?

A:
We have to accept the signature on the basis of the
other signatures given to us it being a public instrument.
ATTY. CARLOS:
You mean to say the criteria of ascertaining the identity of the
mortgagor does not depend so much on the signature on the
residence certificate they have presented.
A:

We have to accept that.

xxx

xxx

xxx

A:
We accepted the signature on the basis of the
mortgage in favor of ATTY. MAGNO duly notarized which I have
been reiterrting (sic) entitled to full faith considering that it is
a public instrument.
ATTY. CARLOS:
What other requirement did you take into account in
ascertaining the identification of the parties particularly the
mortgagor in this case.
A:

Residence Certificate.

Q:

Is that all, is that the only requirement?

A:
We requested for others but they could not produce,
and because they presented to us the Residence Certificate
which matches on the signature on the Residence Certificate
in favor of Atty. Magno.14

Evidently, the efforts exerted by the bank to verify the

identity of the couple posing as Osmundo Canlas and
Angelina Canlas fell short of the responsibility of the
bank to observe more than the diligence of a good
father of a family. The negligence of respondent bank
was magnified by the fact that the previous deed of
mortgage (which was used as the basis for checking
the genuineness of the signatures of the supposed
Canlas spouses) did not bear the tax account number
of the spouses,15 as well as the Community Tax
Certificate of Angelina Canlas.16 But such fact
notwithstanding, the bank did not require the
impostors to submit additional proof of their true
identity.
Under the doctrine of last clear chance, which is
applicable here, the respondent bank must suffer the
resulting loss. In essence, the doctrine of last clear
chance is to the effect that where both parties are
negligent but the negligent act of one is appreciably
later in point of time than that of the other, or where it
is impossible to determine whose fault or negligence
brought about the occurrence of the incident, the one
who had the last clear opportunity to avoid the
impending harm but failed to do so, is chargeable with
the consequences arising therefrom. Stated differently,
the rule is that the antecedent negligence of a person
does not preclude recovery of damages caused by the
supervening negligence of the latter, who had the last
fair chance to prevent the impending harm by the
exercise of due diligence.17
Assuming that Osmundo Canlas was negligent in giving
Vicente Maosca the opportunity to perpetrate the
fraud, by entrusting to latter the owner's copy of the
transfer certificates of title of subject parcels of land, it
cannot be denied that the bank had the last clear
chance to prevent the fraud, by the simple expedient of
faithfully complying with the requirements for banks to
ascertain the identity of the persons transacting with
them.
For not observing the degree of diligence required of
banking institutions, whose business is impressed with
public interest, respondent Asian Savings Bank has to
bear the loss sued upon.
In ruling for respondent bank, the Court of Appeals
concluded that the petitioner Osmundo Canlas was a
party to the fraudulent scheme of Maosca and
therefore, estopped from impugning the validity of
subject deed of mortgage; ratiocinating thus:
xxx

xxx

xxx

Thus, armed with the titles and the special

power of attorney, Maosca went to the
defendant bank and applied for a loan. And

when Maosca came over to the bank to submit

additional documents pertinent to his loan
application, Osmundo Canlas was with him,
together with a certain Rogelio Viray. At that
time, Osmundo Canlas was introduced to the
bank personnel as "Leonardo Rey".
When he was introduced as "Leonardo Rey" for
the first time Osmundo should have corrected
Maosca right away. But he did not. Instead, he
even allowed Maosca to avail of his
(Osmundo's) membership privileges at the
Metropolitan Club when Maosca invited two
officers of the defendant bank to a luncheon
meeting which Osmundo also attended. And
during that meeting, Osmundo did not say who
he really is, but even let Maosca introduced
him again as "Leonardo Rey", which all the
more indicates that he connived with Maosca
in deceiving the defendant bank.
Finally after the loan was finally approved,
Osmundo accompanied Maosca to the bank
when the loan was released. At that time, a
manger's check for P200,000.00 was issued in
the name of Oscar Motorworks, which Osmundo
admits he owns and operates.
Collectively, the foregoing circumstances
cannot but conjure to a single conclusion that
Osmundo active participated in the loan
application of defendant Asian Savings Bank,
which culminated in his receiving a portion of
the process thereof:18
A meticulous and painstaking scrutiny of the Records
on hand, reveals, however, that the findings arrived at
by the Court of Appeals are barren of any sustainable
basis. For instance, the execution of the deeds of
mortgages constituted by Maosca on subject pieces of
property of petitioners were made possible not by the
Special Power of Attorney executed by Osmundo
Canlas in favor of Maosca but through the use of
impostors who misrepresented themselves as the
spouses Angelina Canlas and Osmundo Canlas. It
cannot be said therefore, that the petitioners
authorized Vicente Maosca to constitute the mortgage
on their parcels of land.
What is more, Osmundo Canlas was introduced as
"Leonardo Rey" by Vicente Maosca, only on the
occasion of the luncheon meeting at the Metropolitan
Club.19 Thereat, the failure of Osmundo Canlas to
rectify Maosca's misrepresentations could not be
taken as a fraudulent act. As well explained by the
former, he just did not want to embarrass Maosca, so
that he waited for the end of the meeting to correct
Maosca.20

Then, too, Osmundo Canlas recounted that during the

said luncheon meeting, they did not talk about the
security or collateral for the loan of Maosca with
ASB.21 So also, Mrs. Josefina Rojo, who was the Account
Officer of Asian Savings Bank when Maosca applied
for subject loan, corroborated the testimony of
Osmundo Canlas, she testified:
xxx

xxx

xxx

QUESTION:
Now could you please describe out the
lunch conference at the Metro Club in Makati?
ANSWER:
Mr. Mangubat, Mr. Maosca and I did not
discuss with respect to the loan application and discuss
primarily his business.
xxx

xxx

xxx

QUESTION:
So, what is the main topic of your
discussion during the meeting?
ANSWER:
The main topic war then, about his
business although, Mr. Leonardo Rey, who actually
turned out as Mr. Canlas, supplier of Mr. Maosca.
QUESTION:
I see . . . other than the business of Mr.
Maosca, were there any other topic discussed?
ANSWER:
QUESTION:
ANSWER:

YES.
And what was the topic:
General Economy then.
xxx

xxx

x x x22

Verily, Osmundo Canlas was left unaware of the illicit

plan of Maosca, explaining thus why he (Osmundo)
did not bother to correct what Maosca misrepresented
and to assert ownership over the two parcels of land in
question.
Not only that; while it is true that Osmundo Canlas was
with Vicente Maosca when the latter submitted the
documents needed for his loan application, and when
the check of P200,000.00 was released, the former did
not know that the collateral used by Maosca for the
said loan were their (Canlas spouses') properties.
Osmundo happened to be with Maosca at the time
because he wanted to make sure that Maosca would
make good his promise to pay the balance of the
purchase price of the said lots out of the proceeds of
the loan.23
The receipt by Osmundo Canlas of the P200,000.00
check from ASB could not estop him from assailing the
validity of the mortgage because the said amount was
in payment of the parcels of land he sold to Maosca.24

What is decisively clear on record is that Maosca

managed to keep Osmundo Canlas uninformed of his
(Maosca's) intention to use the parcels of land of the
Canlas spouses as security for the loan obtained from
Asian Savings Bank. Since Vicente Maosca showed
Osmundo Canlas several certificates of title of lots
which, according to Maosca were the collaterals,
Osmundo Canlas was confident that their (Canlases')
parcels of land were not involved in the loan
transactions with the Asian Savings Bank.25 Under the
attendant facts and circumstances, Osmundo Canlas
was undoubtedly negligent, which negligence made
them (petitioners) undeserving of an award of
attorney's fees.
Settled is the rule that a contract of mortgage must be
constituted only by the absolute owner on the property
mortgaged;26 a mortgage, constituted by an impostor is
void.27 Considering that it was established indubitably
that the contract of mortgage sued upon was entered
into and signed by impostors who misrepresented
themselves as the spouses Osmundo Canlas and
Angelina Canlas, the Court is of the ineluctible
conclusion and finding that subject contract of
mortgage is a complete nullity.
WHEREFORE, the Petition is GRANTED and the Decision
of the Court of Appeals, dated September 30, 1993, in
CA-G.R. CV No. 25242 SET ASIDE. The Decision of
Branch 59 of the Regional Trial Court of Makati City in
Civil Case No. M-028 is hereby REINSTATED. No
pronouncement as to costs. SO ORDERED.
G.R. No. L-13313

April 28, 1960

AGRICULTURAL CREDIT COOPERATIVE

ASSOCIATION OF HINIGARAN, movant-appellee, vs.
ESTANISLAO YULO YUSAY, ET AL., oppositorsappellants.
LABRADOR, J.:
This is an appeal from an order of the Court of First
Instance of Negros Occidental, Hon. Jose S. de la Cruz,
presiding the Register of Deeds of Negros Occidental to
register a mortgage executed by Rafael Yulo in favor of
the movant covering Lot No. 855, Pontevedra Cadastre,
covered by Original Certificate of Title No. 4979.
The records disclose that on July 20, 1952, Rafaela Yulo
executed in favor of the movant a mortgage for
P33,626.29, due from her, her mother, sisters,
brothers, and others, which amount she assumed to
pay to the movant. A motion was presented to the
court by the movant demanding the surrender of the
owner's duplicate certificate of title that he may
annotate said mortgage at the back of the certificate.
Estanislao Yusay, a part owner of the lot, opposed the

petition on the ground that he is owner of a part of the

property in question; that the granting of the motion
would operate to his prejudice, as he has not
participated in the mortgage cited in the motion; that
Rafaela Yulo is dead; that the motion is not verified and
movant's rights have lapsed by prescription. Finally it is
argued that his opposition raises a controversial matter
which the court has no jurisdiction to pass upon.
Margarita, Maria, Elena and Pilar, all surnamed Yulo,
joined the oppositor Estanislao Yusay, raising the same
objections interposed by Yusay.
The existence of the mortgage is not disputed, and
neither is the fact that the mortgagor Rafaela Yulo is
part owner of Lot No. 855 of the Cadastral Survey of
Pontevedra. The oppositors do not dispute that she is
such a part owner, and their main objection to the
petition is that as part owners of the property, the
annotation of the mortgage on the common title will
affect their rights.
The court held that even if the ownership of the
deceased Rafaela Yulo over the portion of the lot in
question and the validity of the mortgage are disputed,
such invalidity of the mortgage is no proof of the nonexistence of the mortgage nor a ground for objecting to
its registration, citing the case of Register of Deeds of
Manila vs. Maxima Tinoco Vda. de Cruz, et, al., 95 Phil.,
818; 53 Off. Gaz., 2804.
In his Brief before this Court, counsel for appellants
argue that the mortgage sought to be registered was
not recorded before the closing of the intestate
proceedings of the deceased mortgagor, but was so
recorded only four months after the termination of said
proceedings, so that the claim of movant has been
reduced to the character of a mere money claim, not a
mortgage, hence the mortgage may not be registered.
In the first place, as the judge below correctly ruled,
the proceeding to register the mortgage does not
purport to determine the supposed invalidity of the
mortgage or its effect. Registration is a mere
ministerial act by which a deed, contract or instrument
is sought to be inscribed in the records of the Office of
the Register of Deeds and annotated at the back of the
certificate of title covering the land subject of the deed,
contract or instrument.
The registration of a lease or mortgage, or the
entry of a memorial of a lease or mortgage on
the register, is not a declaration by the state
that such an instrument is a valid and
subsisting interest in land; it is merely a
declaration that the record of the title appears
to be burdened with the lease or mortgage
described, according to the priority set forth in
the certificate.

The mere fact that a lease or mortgage was

registered does not stop any party to it from
setting up that it now has no force or effect.
(Niblack, pp. 134-135, quoted in Francisco Land
Registration Act, l950 ed., p. 348.)
The court below, in ordering the registration and
annotation of the mortgage, did not pass on its
invalidity or effect. As the mortgage is admittedly an
act of the registered owner, all that the judge below did
and could do, as a registration court, is to order its
registration and annotation on the certificate of title
covering the land mortgaged. By said order the court
did not pass upon the effect or validity of the mortgage
these can only be determined in an ordinary case
before the courts, not before a court acting merely as a
registration court, which did not have the jurisdiction to
pass upon the alleged effect or validity.
Wherefore, the order appealed from is hereby affirmed,
with costs against oppositors-appellants. So ordered.

PHILIPPINE NATIONAL BANK - LAOAG BRANCH,

Respondent.
CARPIO, J.:
The Case
G.R. No. 170166 is a petition for review 1 assailing the
Decision2 promulgated on 17 October 2005 by the
Court of Appeals (appellate court) in CA-G.R. CV No.
76845. The appellate court granted the appeal filed by
the Philippine National Bank Laoag Branch (PNB). The
appellate court reversed the 29 June 2001 Decision of
Branch 15 of the Regional Trial Court of Laoag City (trial
court) in Civil Case No. 7803.
The trial court declared the Deed of Real Estate
Mortgage executed by spouses Jose A. Ros 3 (Ros)
and Estrella Aguete(Aguete) (collectively, petitioners),
as well as the subsequent foreclosure proceedings,
void. Aside from payment of attorneys fees, the trial
court also ordered PNB to vacate the subject property
to give way to petitioners possession.
The Facts
The appellate court narrated the facts as follows:
On
January
13,
1983,
spouses
Jose
A. Ros and Estrella Aguete filed a complaint for the
annulment of the Real Estate Mortgage and all legal
proceedings
taken thereunder against
PNB, Laoag Branch
before
the
Court
of
First
Instance, IlocosNorte docketed as Civil Case No. 7803.
The complaint was later amended and was raffled to
the Regional Trial Court, Branch 15, Laoag City.
The averments in the complaint disclosed that plaintiffappellee Joe
A. Ros obtained
a
loan
of P115,000.00 from PNB LaoagBranch on October 14,
1974 and as security for the loan, plaintiffappellee Ros executed a real estate mortgage involving
a parcel of land Lot No. 9161 of the Cadastral Survey
of Laoag, with all the improvements thereon described
under Transfer Certificate of Title No. T-9646.
Upon maturity, the loan remained outstanding. As a
result,
PNB
instituted
extrajudicial
foreclosure
proceedings on the mortgaged property. After the
extrajudicial sale thereof, a Certificate of Sale was
issued in favor of PNB, Laoag as the highest bidder.
After the lapse of one (1) year without the property
being redeemed, the property was consolidated and
registered in the name of PNB, Laoag Branch on August
10, 1978.
Claiming that she (plaintiff-appellee Estrella Aguete)
has no knowledge of the loan obtained by her husband
nor she consented to the mortgage instituted on the
conjugal property a complaint was filed to annul the
proceedings pertaining to the mortgage, sale and
consolidation of the property interposing the defense
that her signatures affixed on the documents were
forged and that the loan did not redound to the benefit
of the family.

G.R. No. 170166

April 6, 2011
JOE A. ROS and ESTRELLA AGUETE, Petitioners, versus -

In its answer, PNB prays for the dismissal of the

complaint for lack of cause of action, and insists that it
was plaintiffs-appellees own acts [of]
omission/connivance that bar them from recovering the
subject property on the ground of estoppel, laches,
abandonment and prescription.4

The Trial Courts Ruling

PNB filed its Notice of Appeal7 of the trial courts

decision

On

29

June

paid

the

declared that Aguete did not sign the loan documents,

opposed.9 In their comment to the opposition 10 filed on

did not appear before the Notary Public to acknowledge

10 October 2001, petitioners stated that at the hearing

the execution of the loan documents, did not receive

of

the loan proceeds from PNB, and was not aware of the

representative had no objection to the execution of

loan until PNB notified her in 14 August 1978 that she

judgment pending appeal. Petitioners claimed that the

and her family should vacate the mortgaged property

house on the subject lot is dilapidated, a danger to life

because of the expiration of the redemption period.

and limb, and should be demolished. Petitioners added

Under the Civil Code, the effective law at the time of

that they obliged themselves to make the house

the transaction, Ros could not encumber any real

habitable at a cost of not less P50,000.00. The repair

property

cost would accrue to PNBs benefit should the appellate

of

petitioners.

the

rendered

and

motion for execution pending appeal, 8 which PNB

of

court

2001

corresponding fees. Petitioners filed on the same date a

favor

trial

September

court

Decision in

the

13

its

2001,

on

The

conjugal

without Aguetes consent. Aguete may,

trial

partnership
during

their

marriage and within ten years from the transaction

the

motion

on

October

2001,

PNBs

lay

court reverse the trial court. PNB continued to oppose

petitioners motion.11

questioned, ask the courts for the annulment of the

contract her husband entered into without her consent,

In an Order12 dated 8 May 2002, the trial court found

especially in the present case where her consent is

petitioners

required. The trial court, however, ruled that its

improper because petitioners have made it clear that

decision is without prejudice to the right of action of

they were willing to wait for the appellate courts

PNB to recover the amount of the loan and its interests

decision. However, as a court of justice and equity, the

from Ros.

trial court allowed petitioners to occupy the subject

motion

for

execution

pending

appeal

property with the condition that petitioners would

The dispositive portion reads:
WHEREFORE, premises considered, judgment is hereby
rendered:
1. DECLARING the Deed of Real Estate
Mortgage (Exhibit C) and the subsequent foreclosure
proceedings conducted thereon NULL and VOID;

voluntarily vacate the premises and waive recovery of

improvements

introduced

should

PNB

prevail

on

appeal.
The Appellate Courts Ruling
On 17 October 2005, the appellate court

2. ORDERING the Register of Deeds of the City

of Laoag to cancel TCT No. T-15276 in the name of
defendant PNB and revert the same in the name of
plaintiffs spouses Joe Ros and Estrella Aguete;
3. ORDERING defendant to vacate and turnover
the possession of the premises of the property in suit to
the plaintiffs; and

rendered its Decision13 and granted PNBs appeal. The

appellate court reversed the trial courts decision, and
dismissed petitioners complaint.
The appellate court stated that the trial court
concluded forgery without adequate proof; thus it was

4. ORDERING defendant to pay plaintiffs

attorneys fee and litigation expenses in the sum of TEN
THOUSAND (P10,000.00) PESOS.

improper

for

the

trial

court

to

rely

solely

on Aguetes testimony that her signatures on the loan

documents were forged. The appellate court declared

No pronouncement as to costs. SO ORDERED.6

that Aguete affixed her signatures on the documents

knowingly and with her full consent.

Assuming arguendo that Aguete did

not

give

her consent to Ros loan, the appellate court ruled that

the conjugal partnership is still liable because the loan
proceeds redounded to the benefit of the family. The
records of the case reveal that the loan was used for
the expansion of the familys business. Therefore, the
debt obtained is chargeable against the conjugal
partnership.
Petitioners filed the present petition for review
before this Court on 9 December 2005.
The Issues
Petitioners assigned the following errors:
I. The Honorable Court of Appeals erred in not giving
weight to the findings and conclusions of the trial court,
and in reversing and setting aside such findings and
conclusions without stating specific contrary evidence;
II. The Honorable Court of Appeals erred in declaring
the real estate mortgage valid;
III. The Honorable Court of Appeals erred in declaring,
without basis, that the loan contracted by husband Joe
A. Ros with
respondent
Philippine
National
Bank Laoag redounded to the benefit of his family,
aside from the fact that such had not been raised by
respondent in its appeal.14
The Courts Ruling
The petition has no merit. We affirm the ruling of the
appellate court.
The Civil Code was the applicable law at the time of the
mortgage. The subject property is thus considered part
of the conjugal partnership of gains. The pertinent
articles of the Civil Code provide:
Art. 153. The following are conjugal partnership
property:
(1) That which is acquired by onerous title
during the marriage at the expense of the common
fund, whether the acquisition be for the partnership, or
for only one of the spouses;
(2) That which is obtained by the industry, or
work or as salary of the spouses, or of either of them;
(3) The fruits, rents or interest received or due
during the marriage, coming from the common
property or from the exclusive property of each spouse.
Art. 160. All property of the marriage is presumed to
belong to the conjugal partnership, unless it be proved
that it pertains exclusively to the husband or to the
wife.
Art. 161. The conjugal partnership shall be liable for:
(1) All debts and obligations contracted by the
husband for the benefit of the conjugal partnership,
and those contracted by the wife, also for the same

purpose, in the cases where she may legally bind the

partnership;
(2) Arrears or income due, during the marriage,
from obligations which constitute a charge upon
property of either spouse or of the partnership;
(3) Minor repairs or for mere preservation made
during the marriage upon the separate property of
either the husband or the wife; major repairs shall not
be charged to the partnership;
(4) Major or minor repairs upon the conjugal
partnership property;
(5) The maintenance of the family and the
education of the children of both husband and wife,
and of legitimate children of one of the spouses;
(6) Expenses to permit the spouses to complete
a professional, vocational or other course.
Art. 166. Unless the wife has been declared a non
compos mentis or a spendthrift, or is under civil
interdiction or is confined in a leprosarium, the
husband cannot alienate or encumber any real
property of the conjugal partnership without the wifes
consent. If she refuses unreasonably to give her
consent, the court may compel her to grant the same.
Art. 173. The wife may, during the marriage, and within
ten years from the transaction questioned, ask the
courts for the annulment of any contract of the
husband entered into without her consent, when such
consent is required, or any act or contract of the
husband which tends to defraud her or impair her
interest in the conjugal partnership property. Should
the wife fail to exercise this right, she or her heirs after
the dissolution of the marriage may demand the value
of the property fraudulently alienated by the husband.

There is no doubt that the subject property was

acquired
during Ros and Aguetes marriage. Ros and Aguete wer
e married on 16 January 1954, while the subject
property was acquired in 1968.15 There is also no doubt
that Ros encumbered the subject property when he
mortgaged

it

for

P115,000.00 on

1974.16 PNB Laoag does

evidenced

by

not

her

doubt

23

October

that Aguete,

signature,

as

consented

to Ros mortgage to PNB of the subject property. On the

other hand, Aguete denies ever having consented to
the loan and also denies affixing her signature to the
mortgage and loan documents.
The

husband

cannot

alienate

or

encumber

any

conjugal real property without the consent, express or

implied, of the wife. Should the husband do so, then
the contract is voidable.17 Article 173 of the Civil Code

allows Aguete to

question Rosencumbrance

of

the

subject property. However, the same article does not

guarantee that the courts will declare the annulment of
the contract. Annulment will be declared only upon a
finding that the wife did not give her consent. In the
present case, we follow the conclusion of the appellate
court

and

rule

that Aguete gave

her

consent

documents

disavowed

by Aguete are

acknowledged before a notary public, hence they are

public

documents.

Every

instrument

duly

acknowledged and certified as provided by law may be

presented in evidence without further proof, the
certificate

of

acknowledgment

being prima

facie evidence of the execution of the instrument or

document involved.18 The execution of a document that
has been ratified before a notary public cannot be
disproved
signer.

19

by

PNB

the
was

mere
correct

denial

of

the

alleged

when

it

stated

that

petitioners omission to present other positive evidence

to substantiate their claim of forgery was fatal to
petitioners cause.20 Petitioners did not present any
corroborating witness, such as a handwriting expert,
who

could

authoritatively

In filing the complaint, it must have been a remorse of

conscience for having wronged his family; in forging
the signature of his wife on the questioned documents;
in squandering the P115,000.00 loan from the bank for
himself, resulting in the foreclosure of the conjugal
property; eviction of his family therefrom; and,
exposure to public contempt, embarassment and
ridicule.22
The application for loan shows that the loan would be

to Ros encumbrance of the subject property.

The

of his wife that her signatures on the questioned

documents are not hers.

declare

that Aguetes signatures were really forged.

A notarized document carries the evidentiary weight
conferred upon it with respect to its due execution, and
it has in its favor the presumption of regularity which
may only be rebutted by evidence so clear, strong and
convincing as to exclude all controversy as to the
falsity of the certificate. Absent such, the presumption
must be upheld. The burden of proof to overcome the
presumption of due execution of a notarial document
lies on the one contesting the same. Furthermore, an
allegation of forgery must be proved by clear and
convincing evidence, and whoever alleges it has the
burden of proving the same.21

used exclusively for additional working [capital] of buy

&

sell

of

garlic

& virginia tobacco.23 In

her

testimony, Aguete confirmed that Ros engaged in such

business, but claimed to be unaware whether it
prospered. Aguete was also aware of loans contracted
by Ros, but did not know where he wasted the
money.24 Debts contracted by the husband for and in
the exercise of the industry or profession by which he
contributes to the support of the family cannot be
deemed to be his exclusive and private debts.25
If the husband himself is the principal obligor in the
contract, i.e., he directly received the money and
services to be used in or for his own business or his
own profession, that contract falls within the term x
x x x obligations for the benefit of the conjugal
partnership. Here, no actual benefit may be proved. It
is enough that the benefit to the family is apparent at
the signing of the contract. From the very nature of the
contract of loan or services, the family stands to
benefit from the loan facility or services to be rendered
to the business or profession of the husband. It is
immaterial, if in the end, his business or profession fails
or does not succeed. Simply stated, where the husband
contracts obligations on behalf of the family business,
the law presumes, and rightly so, that such obligation
will redound to the benefit of the conjugal
partnership.26
For this reason, we rule that Ros loan from PNB
redounded to the benefit of the conjugal partnership.
Hence,

the

debt

is

chargeable

to

the

conjugal

Ros himself cannot bring action against PNB, for no one

partnership.

can come before the courts with unclean hands. In

WHEREFORE, we DENY the petition. The Decision of

their memorandum before the trial court, petitioners

the Court of Appeals in CA-G.R. CV No. 76845

themselves

promulgated on 17 October 2005 is AFFIRMED. Costs

admitted

that Ros forged Aguetes signatures.

Joe A. Ros in legal effect admitted in the complaint that
the signatures of his wife in the questioned documents
are
forged,
incriminating
himself
to
criminal
prosecution. If he were alive today, he would be
prosecuted for forgery. This strengthens the testimony

against petitioners.
SO ORDERED.
G.R. No. 152071

May 8, 2009

PRODUCERS BANK OF THE PHILIPPINES,

Petitioner,
- versus- EXCELSA INDUSTRIES, INC.,
Respondent.
TINGA, J.:

line

in

the

amount

of P300,000.00,

of

which

about P96,000.00 in principal remained outstanding.

[7]

This is a petition for review on certiorari [1] under Rule

Respondent executed the corresponding promissory

notes evidencing the indebtedness.[8]

43 of the 1997 Rules of Civil Procedure, assailing the

decision[2] and resolution[3] of the Court of Appeals in

Prior to the application for the packing credit

Appeals

line, respondent had obtained a loan from petitioner in

decision[4]reversed the decision of the Regional Trial

the form of a bill discounted and secured credit

Court (RTC), Branch 73, Antipolo, Rizal, upholding the

accommodation in the amount of P200,000.00, of

extrajudicial

on

which P110,000.00 was outstanding at the time of the

respondents properties, while the resolution denied

approval of the packing credit line. The loan was

petitioners motion for reconsideration.[5]

secured by a real estate mortgage dated 05 December

CA-G.R.

CV

No.

59931.

foreclosure

The

of

Court

the

of

mortgage

1986 over respondents properties covered by Transfer

As borne by the records of the case, the
following factual antecedents appear:

Certificates of Titles (TCT) No. N-68661, N-68662, N68663, N-68664, N-68665 and N-68666, all issued by

Respondent Excelsa Industries, Inc. is a manufacturer

and exporter of fuel products, particularly charcoal
briquettes, as an alternative fuel source. Sometime in

the Register of Deeds of Marikina.[9]

Significantly,

the

real

estate

mortgage

contained the following clause:

January 1987, respondent applied for a packing credit

line

or

credit

export

advance

with

petitioner

Producers Bank of the Philippines, a banking institution

duly organized and existing under Philippines laws.[6]

The application was supported by Letter of

Credit No. M3411610NS2970 dated 14 October 1986.
Kwang Ju Bank, Ltd. of Seoul, Korea issued the letter of
credit through its correspondent bank, the Bank of the
Philippine Islands, in the amount of US$23,000.00 for
the account of Shin Sung Commercial Co., Ltd., also
located in Seoul, Korea. T.L. World Development
Corporation was the original beneficiary of the letter of
credit. On 05 December 1986, for value received, T.L.

For and in consideration of those

certain loans, overdraft and/or other
credit accommodations on this date
obtained from the MORTGAGEE, and to
secure the payment of the same, the
principal of all of which is hereby fixed
at FIVE HUNDRED THOUSAND PESOS
ONLY (P500,000.00) Pesos, Philippine
Currency, as well as those that the
MORTGAGEE may hereafter extend to
the MORTGAGOR, including interest and
expenses or any other obligation owing
to the MORTGAGEE, the MORTGAGOR
does hereby transfer and convey by way
of mortgage unto the MORTGAGEE, its
successors or assigns, the parcel(s) of
land which is/are described in the list
inserted on the back of this document,
and/or appended hereto, together with
all the buildings and improvements now
existing or which may hereafter be
erected or constructed thereon, of which
the MORTGAGOR declares that he/it is
the absolute owner, free from all liens
and encumbrances.[10]

World transferred to respondent all its rights and

obligations under the said letter of credit. Petitioner
approved respondents application for a packing credit

On 17 March 1987, respondent presented for

negotiation to petitioner drafts drawn under the letter

of credit and the corresponding export documents in

total due and demandable obligation of P573,225.60,

consideration

including interest, in six different accounts, namely:

for

its

drawings

in

the

amounts

of US$5,739.76 and US$4,585.79. Petitioner purchased

the drafts and export documents by paying respondent
the peso equivalent of the drawings. The purchase was
subject to the conditions laid down in two separate
undertakings by respondent dated 17 March 1987 and
10 April 1987.[11]
On 24 April 1987, Kwang Ju Bank, Ltd. notified
petitioner through cable that the Korean buyer refused
to pay respondents export documents on account of
typographical

discrepancies.

Kwang

Ju

Bank,

Ltd. returned to petitioner the export documents.[12]

1)
EBP-PHO-87-1121
(US$4,585.97
21.212) = P119,165.06
2)
EBP-PHO-87-1095
(US$
5,739.76
21.212) = 151,580.97
3) BDS-001-87 = 61,777.78
4) BDS-030/86 A = 123,555.55
5) BDS-PC-002-/87 = 55,822.91
6) BDS-005/87 = 61,323.33
P573,225.60[14]

x
x

The total approved bid price, which included the

attorneys

fees

and

sheriff

fees,

was

pegged

at P752,074.63. At the public auction held on 05

January 1988, the Sheriff of Antipolo, Rizal issued a
Certificate of Sale in favor of petitioner as the highest

Upon learning about the Korean importers nonpayment, respondent sent petitioner a letter dated 27
July 1987, informing the latter that respondent had
brought the matter before the Korea Trade Court and
that it was ready to liquidate its past due account with
petitioner. Respondent sent another letter dated 08
September 1987, reiterating the same assurance. In a

bidder.[15] The certificate of sale was registered on 24

March 1988.[16]
On 12 June 1989, petitioner executed an
affidavit of consolidation over the foreclosed properties
after respondent failed to redeem the same. As a
result, the Register of Deeds of Marikina issued new
certificates of title in the name of petitioner.[17]

letter 05 October 1987, Kwang Ju Bank, Ltd. informed

petitioner that it would be returning the export
documents on account of the non-acceptance by the
importer.

On 17 November 1989, respondent instituted

an action for the annulment of the extrajudicial

[13]

foreclosure with prayer for preliminary injunction and

the

damages against petitioner and the Register of Deeds

export

of Marikina. Docketed as Civil Case No. 1587-A, the

documents, plus interest and other charges, and also of

complaint was raffled to Branch 73 of the RTC of

the other due and unpaid loans. Due to respondents

Antipolo, Rizal. The complaint prayed, among others,

failure to heed the demand, petitioner moved for the

that the defendants be enjoined from causing the

extrajudicial foreclosure on the real estate mortgage

transfer of ownership over the foreclosed properties

over respondents properties.

from respondent to petitioner.[18]

Petitioner
payment

of

the

demanded
peso

from

equivalent

respondent
of

the

Per petitioners computation, aside from charges

On 05 April 1990, petitioner filed a petition for

for attorneys fees and sheriffs fees, respondent had a

the issuance of a writ of possession, docketed as LR

Case No. 90-787, before the same branch of the RTC of

respondent could not expect their return prior to the

Antipolo, Rizal. The RTC ordered the consolidation of

payment of the export advances because the drafts

Civil Case No, 1587-A and LR Case No. 90-787.[19]

and

export

documents

were

the

evidence

that

respondent received export advances from petitioner.

On 18 December 1997, the RTC rendered a

[22]

decision upholding the validity of the extrajudicial

foreclosure and ordering the issuance of a writ of
possession in favor of petitioner, to wit:

The RTC also found that by its admission,

respondent had other loan obligations obtained from
petitioner which were due and demandable; hence,

WHEREFORE, in Case No. 1587A, the court hereby rules that the
foreclosure of mortgage for the old and
new obligations of the plaintiff Excelsa
Industries Corp., which has remained
unpaid up to the time of foreclosure by
defendant Producers Bank of the
Philippines was valid, legal and in order;
In Case No. 787-A, the court hereby
orders for the issuance of a writ of
possession in favor of Producers Bank of
the Philippines after the properties of
Excelsa Industries Corp., which were
foreclosed and consolidated in the name
of Producers Bank of the Philippines
under TCT No. 169031, 169032, 169033,
169034 and 169035 of the Register of
Deeds of Marikina.

petitioner correctly exercised its right to foreclose the

real estate mortgage, which provided that the same
secured the payment of not only the loans already
obtained but also the export advances.[23]
Lastly, the RTC found respondent guilty of
laches in questioning the foreclosure sale considering
that petitioner made several demands for payment of
respondents outstanding loans as early as July 1987
and that respondent acknowledged the failure to pay

SO ORDERED.[20]

its loans and advances.[24]

The

The RTC held that petitioner, whose obligation

consisted only of receiving, and not of collecting, the
export proceeds for the purpose of converting into
Philippine

currency

and

remitting

the

same

to

RTC

denied

reconsideration.[25] Thus,

respondents
respondent

motion

elevated

for
the

matter to the Court of Appeals, reiterating its claim

that petitioner was not only a collection agent but was
considered a purchaser of the export

respondent, cannot be considered as respondents

On 30 May 2001, the Court of Appeals rendered

agent. The RTC also held that petitioner cannot be

the assailed decision, reversing the RTCs decision, thus:

presumed to have received the export proceeds,

considering that respondent executed undertakings
warranting

that

the

drafts

and

accompanying

documents were genuine and accurately represented

the facts stated therein and would be accepted and
paid in accordance with their tenor.[21]
Furthermore, the RTC concluded that petitioner
had no obligation to return the export documents and

WHEREFORE, the appeal is

hereby GRANTED. The decision of the
trial court dated December 18, 1997 is
REVERSED and SET ASIDE. Accordingly,
the foreclosure of mortgage on the
properties of appellant is declared as
INVALID. The issuance of the writ of
possession in favor of appellee is
ANNULLED. The following damages are
hereby awarded in favor of appellant:
(a) Moral damages
amount of P100,000.00;

in

the

(b) Exemplary damages in the

amount of P100,000.00; and

the following: first, petitioner had a hand in preparing

(c) Costs.

and scrutinizing the export documents wherein the

SO ORDERED.[26]

discrepancies were found; and, second, petitioner

failed to advise respondent about the warning from
Kwang Ju Bank, Ltd. that the export documents would

The Court of Appeals held that respondent

should not be faulted for the dishonor of the drafts and

be

returned

if

no

explanation

regarding

the

invalidated

the

discrepancies would be made.

export documents because the obligation to collect the

The

export proceeds from Kwang Ju Bank, Ltd. devolved

Court

of

Appeals

upon petitioner. It cited the testimony of petitioners

extrajudicial foreclosure of the real estate mortgage on

manager for the foreign currency department to the

the ground that the posting and publication of the

effect that petitioner was respondents agent, being the

notice of extrajudicial foreclosure proceedings did not

only entity authorized under Central Bank Circular No.

comply with the personal notice requirement under

491 to collect directly from the importer the export

paragraph 12[27] of the real estate mortgage executed

proceeds on respondents behalf and converting the

between petitioner and respondent. The Court of

same

Appeals

to

Philippine

currency

for

remittance

to

also

overturned
guilty

of

the

RTCs

finding

respondent. The appellate court found that respondent

respondent was

was not authorized and even powerless to collect from

questioning the extrajudicial foreclosure sale.

that

estoppel by laches

in

the importer and it appeared that respondent was left

at the mercy of petitioner, which kept the export

Petitioners motion for reconsideration[28] was

documents during the time that respondent attempted

denied in a Resolution dated 29 January 2002. Hence,

to collect payment from the Korean importer.

the instant petition, arguing that the Court of Appeals

erred in finding petitioner as respondents agent, which

The Court of Appeals disregarded the RTCs

was

liable

for

the

discrepancies

in

the

export

finding that the export documents were the only

documents, in invalidating the foreclosure sale and in

evidence of respondents export advances and that

declaring that respondent was not estopped from

petitioner was justified in refusing to return them. It

questioning the foreclosure sale.[29]

opined that granting petitioner had no obligation to

The validity of the extrajudicial foreclosure of

return the export documents, the former should have

the mortgage is dependent on the following issues

helped respondent in the collection efforts instead of

posed by petitioner: (1) the coverage of the blanket

augmenting respondents dilemma.

mortgage clause; (2) petitioners failure to furnish

personal notice of the foreclosure to respondent; and

Furthermore,

the

Court

of

Appeals

found

petitioners negligence as the cause of the refusal by

the Korean buyer to pay the export proceeds based on

(3) petitioners obligation as negotiating bank under the

letter of credit.

the RTC and the Court of Appeals, there is a need to

prevailing today from the date of

negotiation, plus all charges and
expenses
whatsoever
incurred
in
connection therewith. You shall neither
be obliged to contest or dispute any
refusal to accept or to pay the whole or
any part of the above draft(s), nor
proceed in any way against the drawee,
the issuing bank or any endorser
thereof, before making a demand on us
for the payment of the whole or any
unpaid balance of the draft(s).(Emphasis
supplied)[31]

review the factual issues as an exception to the general

In Velasquez v. Solidbank Corporation,[32] where

Notably, the errors cited by petitioners are

factual in nature. Although the instant case is a petition
for review under Rule 45 which, as a general rule, is
limited to reviewing errors of law, findings of fact being
conclusive as a matter of general principle, however,
considering the conflict between the factual findings of

the drawer therein also executed a separate letter of

rule.[30]

undertaking in consideration for the banks negotiation

Much of the discussion has revolved around

of its sight drafts, the Court held that the drawer can

who should be liable for the dishonor of the draft and

still be made liable under the letter of undertaking

export documents. In the two undertakings executed

even if he is discharged due to the banks failure to

by respondent as a condition for the negotiation of the

protest the non-acceptance of the drafts. The Court

drafts, respondent held itself liable if the drafts were

explained, thus:

not

accepted.

respondent

are

The

two

undertakings

similarly-worded

and

signed

by

Petitioner, however, can still be

made liable under the letter of
undertaking. It bears stressing that it is
a separate contract from the sight draft.
The liability of petitioner under the letter
of undertaking is direct and primary. It is
independent from his liability under the
sight draft. Liability subsists on it even if
the sight draft was dishonored for nonacceptance or non-payment.

contained

respondents express warranties, to wit:

In
consideration
of
your
negotiating
the
above
described
draft(s), we hereby warrant that the
said draft(s) and accompanying
documents
thereon
are
valid,
genuine and accurately represent
the facts stated therein, and that
such draft(s) will be accepted and
paid in accordance with its/their
tenor. We further undertake and agree,
jointly and severally, to defend and hold
you free and harmless from any and all
actions,
claims
and
demands
whatsoever, and to pay on demand all
damages
actual
or
compensatory
including attorneys fees, costs and other
awards or be adjudged to pay, in case of
suit, which you may suffer arising from,
by reason, or on account of your
negotiating the above draft(s) because
of the following discrepancies or reasons
or any other discrepancy or reason
whatever.
We hereby undertake to pay
on demand the full amount of the
above draft(s) or any unpaid
balance thereof, the Philippine perso
equivalent converted at the prevailing
selling rate (or selling rate prevailing at
the date you negotiate our draft,
whichever is higher) allowed by the
Central Bank with interest at the rate

Respondent agreed to purchase

the draft and credit petitioner its value
upon the undertaking that he will
reimburse the amount in case the sight
draft is dishonored. The bank would
certainly not have agreed to grant
petitioner an advance export payment
were it not for the letter of undertaking.
The consideration for the letter of
undertaking was petitioners promise to
pay respondent the value of the sight
draft if it was dishonored for any reason
by the Bank of Seoul.[33]

Thus,

notwithstanding

petitioners

alleged

failure to comply with the requirements of notice of

dishonor and protest under Sections 89[34] and 152,
[35]

respectively, of the Negotiable Instruments Law,

respondent may not escape its liability under the

separate undertakings, where respondent promised to

pay on demand the full amount of the drafts.

Petitioner, therefore, was not precluded from

seeking the foreclosure of the real estate mortgage
based on the unpaid drafts drawn by respondent. In

The next question, therefore, is whether the

any case, respondent had admitted that aside from the

real estate mortgage also served as security for

unpaid

drafts,

respondent

also

had

due

and

respondents drafts that were not accepted and paid by

demandable loans secured from another account as

the Kwang Ju Bank, Ltd.

evidenced by Promissory Notes (PN Nos.) BDS-001-87,

BDS-030/86 A, BDS-PC-002-/87 and BDS-005/87.

Respondent executed a real estate mortgage

However, the Court of Appeals invalidated the

containing a blanket mortgage clause, also known as a

extrajudicial foreclosure of the mortgage on the ground

dragnet clause. It has been settled in a long line of

that

decisions that mortgages given to secure future

personal notice of the sale contrary to the stipulation in

advancements are valid and legal contracts, and the

the real estate mortgage.

petitioner

had

failed

to

furnish

respondent

amounts named as consideration in said contracts do

Petitioner, on the other hand, claims that under

not limit the amount for which the mortgage may stand

paragraph 12[39] of the real estate mortgage, personal

as security if from the four corners of the instrument

notice of the foreclosure sale is not a requirement to

the intent to secure future and other indebtedness can

the validity of the foreclosure sale.

be gathered.[36]

A perusal of the records of the case shows that

a notice of sheriffs sale[40] was sent by registered mail

In Union Bank of the Philippines v. Court of

Appeals,[37] the

nature

of

dragnet

clause

explained, thus:

was

to respondent and received in due course. [41] Yet,

respondent claims that it did not receive the notice but
only learned about it from petitioner. In any event,

Is one which is specifically

phrased to subsume all debts of past
and future origins. Such clauses are
carefully
scrutinized
and
strictly
construed. Mortgages of this character
enable the parties to provide continuous
dealings, the nature or extent of which
may not be known or anticipated at the
time, and they avoid the expense and
inconvenience of executing a new
security on each new transaction. A
dragnet
clause
operates
as
a
convenience and accommodation to
theborrowers as it makes available addit
ional funds without their
having to execute additional security
documents, thereby saving time, travel,
loan closing costs, costs of extra legal
services, recording fees, et cetera.[38]
xx

paragraph 12 of the real estate mortgage requires

petitioner merely to furnish respondent with the notice
and

does

not

oblige

petitioner

to

ensure

that

respondent actually receives the notice. On this score,

the Court holds that petitioner has performed its
obligation under paragraph 12 of the real estate
mortgage.

As regards the issue of whether respondent

may still question the foreclosure sale, the RTC held
that the sale was conducted according to the legal
procedure, to wit:

Plaintiff
is
estopped
from
questioning the foreclosure. The plaintiff
is guilty of laches and cannot at this
point in time question the foreclosure of
the subject properties. Defendant bank
made demands against the plaintiff for
the payment of plaintiffs outstanding
loans and advances with the defendant
as early as July 1997. Plaintiff
acknowledged such outstanding loans
and advances to the defendant bank
and committed to liquidate the same.
For failure of the plaintiff to pay its
obligations on maturity, defendant bank
foreclosed the mortgage on subject
properties on January 5, 1988 the
certificate of sale was annotated on
March 24, 1988 and there being no
redemption made by the plaintiff, title to
said properties were consolidated in the
name of defendant in July 1989.
Undeniably, subject foreclosure was
done in accordance with the prescribed
rules as may be borne out by the
exhibits submitted to this Court which
are Exhibit 33, a notice of extrajudicial
sale executed by the Sheriff of Antipolo,
Exhibit
34
certificate
posting
of
extrajudicial sale, Exhibit 35 return card
evidencing receipt by plaintiff of the
notice of extrajudicial sale and Exhibit
21 affidavit of publication.
The Court adopts and approves the aforequoted
findings by the RTC, the same being fully supported by
the evidence on record.
WHEREFORE the instant petition for review on
certiorari is GRANTED and the decision and resolution
of the Court of Appeals in CA-G.R. CV No. 59931 are
REVERSED and SET ASIDE. The decision of the Regional
Trial Court Branch 73, Antipolo, Rizal in Civil Case No.
1587-A and LR Case No. 90-787 is REINSTATED.
SO ORDERED.

G.R. No. 150197 July 28, 2005

PRUDENTIAL BANK, Petitioner,
vs.
DON A. ALVIAR and GEORGIA B.
ALVIAR, Respondents.
DECISION
Tinga, J.:
Before us is a petition for review on certiorari under
Rule 45 of the Rules of Court. Petitioner Prudential Bank
seeks the reversal of the Decision1 of the Court of
Appeals dated 27 September 2001 in CA-G.R. CV No.
59543 affirming the Decision of the Regional Trial Court
(RTC) of Pasig City, Branch 160, in favor of
respondents.
Respondents, spouses Don A. Alviar and Georgia B.
Alviar, are the registered owners of a parcel of land in
San Juan, Metro Manila, covered by Transfer Certificate
of Title (TCT) No. 438157 of the Register of Deeds of
Rizal. On 10 July 1975, they executed a deed of real
estate mortgage in favor of petitioner Prudential Bank
to secure the payment of a loan
worth P250,000.00.2 This mortgage was annotated at
the back of TCT No. 438157. On 4 August 1975,
respondents executed the corresponding promissory
note, PN BD#75/C-252, covering the said loan, which
provides that the loan matured on 4 August 1976 at an
interest rate of 12% per annum with a 2% service
charge, and that the note is secured by a real estate
mortgage as aforementioned.3 Significantly, the real
estate mortgage contained the following clause:
That for and in consideration of certain loans, overdraft
and other credit accommodations obtained from the
Mortgagee by the Mortgagor and/or ________________
hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and
those that may hereafter be obtained, the principal or
all of which is hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine Currency, as
well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and
expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and
records of the Mortgagee, the Mortgagor does hereby
transfer and convey by way of mortgage unto the
Mortgagee, its successors or assigns, the parcels of
land which are described in the list inserted on the
back of this document, and/or appended hereto,
together with all the buildings and improvements now
existing or which may hereafter be erected or
constructed thereon, of which the Mortgagor declares

that he/it is the absolute owner free from all liens and
incumbrances. . . .4
On 22 October 1976, Don Alviar executed another
promissory note, PN BD#76/C-345 for P2,640,000.00,
secured by D/A SFDX #129, signifying that the loan
was secured by a "hold-out" on the mortgagors foreign
currency savings account with the bank under Account
No. 129, and that the mortgagors passbook is to be
surrendered to the bank until the amount secured by
the "hold-out" is settled.5
On 27 December 1976, respondent spouses executed
for Donalco Trading, Inc., of which the husband and
wife were President and Chairman of the Board and
Vice President,6 respectively, PN BD#76/C-430
coveringP545,000.000. As provided in the note, the
loan is secured by "Clean-Phase out TOD CA 3923,"
which means that the temporary overdraft incurred by
Donalco Trading, Inc. with petitioner is to be converted
into an ordinary loan in compliance with a Central Bank
circular directing the discontinuance of overdrafts.7
On 16 March 1977, petitioner wrote Donalco Trading,
Inc., informing the latter of its approval of a straight
loan ofP545,000.00, the proceeds of which shall be
used to liquidate the outstanding loan of P545,000.00
TOD. The letter likewise mentioned that the securities
for the loan were the deed of assignment on two
promissory notes executed by Bancom Realty
Corporation with Deed of Guarantee in favor of A.U.
Valencia and Co. and the chattel mortgage on various
heavy and transportation equipment.8
On 06 March 1979, respondents paid
petitioner P2,000,000.00, to be applied to the
obligations of G.B. Alviar Realty and Development, Inc.
and for the release of the real estate mortgage for
the P450,000.00 loan covering the two (2) lots located
at Vam Buren and Madison Streets, North Greenhills,
San Juan, Metro Manila. The payment was
acknowledged by petitioner who accordingly released
the mortgage over the two properties.9
On 15 January 1980, petitioner moved for the
extrajudicial foreclosure of the mortgage on the
property covered by TCT No. 438157. Per petitioners
computation, respondents had the total obligation
of P1,608,256.68, covering the three (3) promissory
notes, to wit: PN BD#75/C-252 for P250,000.00, PN
BD#76/C-345 for P382,680.83, and PN BD#76/C-340
for P545,000.00, plus assessed past due interests and
penalty charges. The public auction sale of the
mortgaged property was set on 15 January 1980.10
Respondents filed a complaint for damages with a
prayer for the issuance of a writ of preliminary
injunction with the RTC of Pasig,11 claiming that they

have paid their principal loan secured by the

mortgaged property, and thus the mortgage should not
be foreclosed. For its part, petitioner averred that the
payment of P2,000,000.00 made on 6 March 1979 was
not a payment made by respondents, but by G.B. Alviar
Realty and Development Inc., which has a separate
loan with the bank secured by a separate mortgage.12
On 15 March 1994, the trial court dismissed the
complaint and ordered the Sheriff to proceed with the
extra-judicial foreclosure.13 Respondents sought
reconsideration of the decision.14 On 24 August 1994,
the trial court issued anOrder setting aside its earlier
decision and awarded attorneys fees to
respondents.15 It found that only theP250,000.00 loan
is secured by the mortgage on the land covered by TCT
No. 438157. On the other hand, theP382,680.83 loan is
secured by the foreign currency deposit account of Don
A. Alviar, while the P545,000.00 obligation was an
unsecured loan, being a mere conversion of the
temporary overdraft of Donalco Trading, Inc. in
compliance with a Central Bank circular. According to
the trial court, the "blanket mortgage clause" relied
upon by petitioner applies only to future loans obtained
by the mortgagors, and not by parties other than the
said mortgagors, such as Donalco Trading, Inc., for
which respondents merely signed as officers thereof.
On appeal to the Court of Appeals, petitioner made the
following assignment of errors:
I. The trial court erred in holding that the real estate
mortgage covers only the promissory note BD#75/C252 for the sum of P250,000.00.
II. The trial court erred in holding that the promissory
note BD#76/C-345 for P2,640,000.00 (P382,680.83
outstanding principal balance) is not covered by the
real estate mortgage by expressed agreement.
III. The trial court erred in holding that Promissory Note
BD#76/C-430 for P545,000.00 is not covered by the
real estate mortgage.
IV. The trial court erred in holding that the real estate
mortgage is a contract of adhesion.
V. The trial court erred in holding defendant-appellant
liable to pay plaintiffs-appellees attorneys fees
forP20,000.00.16
The Court of Appeals affirmed the Order of the trial
court but deleted the award of attorneys fees.17 It
ruled that while a continuing loan or credit
accommodation based on only one security or
mortgage is a common practice in financial and
commercial institutions, such agreement must be clear
and unequivocal. In the instant case, the parties

executed different promissory notes agreeing to a

particular security for each loan. Thus, the appellate
court ruled that the extrajudicial foreclosure sale of the
property for the three loans is improper.18
The Court of Appeals, however, found that respondents
have not yet paid the P250,000.00 covered by PN
BD#75/C-252 since the payment of P2,000,000.00
adverted to by respondents was issued for the
obligations of G.B. Alviar Realty and Development,
Inc.19
Aggrieved, petitioner filed the instant petition,
reiterating the assignment of errors raised in the Court
of Appeals as grounds herein.
Petitioner maintains that the "blanket mortgage clause"
or the "dragnet clause" in the real estate mortgage
expressly covers not only the P250,000.00 under PN
BD#75/C-252, but also the two other promissory notes
included in the application for extrajudicial foreclosure
of real estate mortgage.20 Thus, it claims that it acted
within the terms of the mortgage contract when it filed
its petition for extrajudicial foreclosure of real estate
mortgage. Petitioner relies on the cases of Lim Julian v.
Lutero,21 Tad-Y v. Philippine National Bank,22 Quimson v.
Philippine National Bank,23 C & C Commercial v.
Philippine National Bank,24 Mojica v. Court of
Appeals,25 and China Banking Corporation v. Court of
Appeals,26 all of which upheld the validity of mortgage
contracts securing future advancements.
Anent the Court of Appeals conclusion that the parties
did not intend to include PN BD#76/C-345 in the real
estate mortgage because the same was specifically
secured by a foreign currency deposit account,
petitioner states that there is no law or rule which
prohibits an obligation from being covered by more
than one security.27 Besides, respondents even
continued to withdraw from the same foreign currency
account even while the promissory note was still
outstanding, strengthening the belief that it was the
real estate mortgage that principally secured all of
respondents promissory notes.28 As for PN BD#76/C345, which the Court of Appeals found to be exclusively
secured by the Clean-Phase out TOD 3923, petitioner
posits that such security is not exclusive, as the
"dragnet clause" of the real estate mortgage covers all
the obligations of the respondents.29
Moreover, petitioner insists that respondents attempt
to evade foreclosure by the expediency of stating that
the promissory notes were executed by them not in
their personal capacity but as corporate officers. It
claims that PN BD#76/C-430 was in fact for home
construction and personal consumption of respondents.
Thus, it states that there is a need to pierce the veil of
corporate fiction.30

Finally, petitioner alleges that the mortgage contract

was executed by respondents with knowledge and
understanding of the "dragnet clause," being highly
educated individuals, seasoned businesspersons, and
political personalities.31 There was no oppressive use of
superior bargaining power in the execution of the
promissory notes and the real estate mortgage.32
For their part, respondents claim that the "dragnet
clause" cannot be applied to the subsequent loans
extended to Don Alviar and Donalco Trading, Inc. since
these loans are covered by separate promissory notes
that expressly provide for a different form of
security.33 They reiterate the holding of the trial court
that the "blanket mortgage clause" would apply only to
loans obtained jointly by respondents, and not to loans
obtained by other parties.34Respondents also place a
premium on the finding of the lower courts that the real
estate mortgage clause is a contract of adhesion and
must be strictly construed against petitioner bank.35
The instant case thus poses the following issues
pertaining to: (i) the validity of the "blanket mortgage
clause" or the "dragnet clause"; (ii) the coverage of the
"blanket mortgage clause"; and consequently, (iii) the
propriety of seeking foreclosure of the mortgaged
property for the non-payment of the three loans.
At this point, it is important to note that one of the
loans sought to be included in the "blanket mortgage
clause" was obtained by respondents for Donalco
Trading, Inc. Indeed, PN BD#76/C-430 was executed by
respondents on behalf of Donalco Trading, Inc. and not
in their personal capacity. Petitioner asks the Court to
pierce the veil of corporate fiction and hold
respondents liable even for obligations they incurred
for the corporation. The mortgage contract states that
the mortgage covers "as well as those that the
Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary." Well-settled is the rule
that a corporation has a personality separate and
distinct from that of its officers and stockholders.
Officers of a corporation are not personally liable for
their acts as such officers unless it is shown that they
have exceeded their authority.36 However, the legal
fiction that a corporation has a personality separate
and distinct from stockholders and members may be
disregarded if it is used as a means to perpetuate fraud
or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to
confuse legitimate issues.37 PN BD#76/C-430, being an
obligation of Donalco Trading, Inc., and not of the
respondents, is not within the contemplation of the
"blanket mortgage clause." Moreover, petitioner is
unable to show that respondents are hiding behind the
corporate structure to evade payment of their

obligations. Save for the notation in the promissory

note that the loan was for house construction and
personal consumption, there is no proof showing that
the loan was indeed for respondents personal
consumption. Besides, petitioner agreed to the terms of
the promissory note. If respondents were indeed the
real parties to the loan, petitioner, a big, wellestablished institution of long standing that it is, should
have insisted that the note be made in the name of
respondents themselves, and not to Donalco Trading
Inc., and that they sign the note in their personal
capacity and not as officers of the corporation.
Now on the main issues.
A "blanket mortgage clause," also known as a "dragnet
clause" in American jurisprudence, is one which is
specifically phrased to subsume all debts of past or
future origins. Such clauses are "carefully scrutinized
and strictly construed."38 Mortgages of this character
enable the parties to provide continuous dealings, the
nature or extent of which may not be known or
anticipated at the time, and they avoid the expense
and inconvenience of executing a new security on each
new transaction.39 A "dragnet clause" operates as a
convenience and accommodation to the borrowers as it
makes available additional funds without their having
to execute additional security documents, thereby
saving time, travel, loan closing costs, costs of extra
legal services, recording fees, et cetera.40 Indeed, it has
been settled in a long line of decisions that mortgages
given to secure future advancements are valid and
legal contracts,41 and 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.42
The "blanket mortgage clause" in the instant case
states:
That for and in consideration of certain loans, overdraft
and other credit accommodations obtained from the
Mortgagee by the Mortgagor and/or ________________
hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same
and those that may hereafter be obtained, the
principal or all of which is hereby fixed at Two Hundred
Fifty Thousand (P250,000.00) Pesos, Philippine
Currency, as well as those that the Mortgagee
may extend to the Mortgagor and/or DEBTOR,
including interest and expenses or any other
obligation owing to the Mortgagee, whether
direct or indirect, principal or secondary as
appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and
convey by way of mortgage unto the Mortgagee, its
successors or assigns, the parcels of land which are

described in the list inserted on the back of this

document, and/or appended hereto, together with all
the buildings and improvements now existing or which
may hereafter be erected or constructed thereon, of
which the Mortgagor declares that he/it is the absolute
owner free from all liens and incumbrances. . . .
43
(Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals,
petitioner and respondents intended the real estate
mortgage to secure not only the P250,000.00 loan from
the petitioner, but also future credit facilities and
advancements that may be obtained by the
respondents. The terms of the above provision being
clear and unambiguous, there is neither need nor
excuse to construe it otherwise.
The cases cited by petitioner, while affirming the
validity of "dragnet clauses" or "blanket mortgage
clauses," are of a different factual milieu from the
instant case. There, the subsequent loans were not
covered by any security other than that for the
mortgage deeds which uniformly contained the
"dragnet clause."
In the case at bar, the subsequent loans obtained by
respondents were secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was secured by
a "hold-out" on his foreign currency savings account,
while PN BD#76/C-430, executed by respondents for
Donalco Trading, Inc., was secured by "Clean-Phase out
TOD CA 3923" and eventually by a deed of assignment
on two promissory notes executed by Bancom Realty
Corporation with Deed of Guarantee in favor of A.U.
Valencia and Co., and by a chattel mortgage on various
heavy and transportation equipment. The matter of PN
BD#76/C-430 has already been discussed. Thus, the
critical issue is whether the "blanket mortgage" clause
applies even to subsequent advancements for which
other securities were intended, or particularly, to PN
BD#76/C-345.
Under American jurisprudence, two schools of thought
have emerged on this question. One school advocates
that a "dragnet clause" so worded as to be broad
enough to cover all other debts in addition to the one
specifically secured will be construed to cover a
different debt, although such other debt is secured by
another mortgage.44 The contrary thinking maintains
that a mortgage with such a clause will not secure a
note that expresses on its face that it is otherwise
secured as to its entirety, at least to anything other
than a deficiency after exhausting the security
specified therein,45 such deficiency being an
indebtedness within the meaning of the mortgage, in
the absence of a special contract excluding it from the
arrangement.46

The latter school represents the better position. The

parties having conformed to the "blanket mortgage
clause" or "dragnet clause," it is reasonable to
conclude that they also agreed to an implied
understanding that subsequent loans need not be
secured by other securities, as the subsequent loans
will be secured by the first mortgage. In other words,
the sufficiency of the first security is a corollary
component of the "dragnet clause." But of course,
there is no prohibition, as in the mortgage contract in
issue, against contractually requiring other securities
for the subsequent loans. Thus, when the mortgagor
takes another loan for which another security was
given it could not be inferred that such loan was made
in reliance solely on the original security with the
"dragnet clause," but rather, on the new security given.
This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the
California court in the cited case made an inquiry
whether the second loan was made in reliance on the
original security containing a "dragnet clause."
Accordingly, finding a different security was taken for
the second loan no intent that the parties relied on the
security of the first loan could be inferred, so it was
held. The rationale involved, the court said, was that
the "dragnet clause" in the first security instrument
constituted a continuing offer by the borrower to
secure further loans under the security of the first
security instrument, and that when the lender accepted
a different security he did not accept the offer.47
In another case, it was held that a mortgage with a
"dragnet clause" is an "offer" by the mortgagor to the
bank to provide the security of the mortgage for
advances of and when they were made. Thus, it was
concluded that the "offer" was not accepted by the
bank when a subsequent advance was made because
(1) the second note was secured by a chattel mortgage
on certain vehicles, and the clause therein stated that
the note was secured by such chattel mortgage; (2)
there was no reference in the second note or chattel
mortgage indicating a connection between the real
estate mortgage and the advance; (3) the mortgagor
signed the real estate mortgage by her name alone,
whereas the second note and chattel mortgage were
signed by the mortgagor doing business under an
assumed name; and (4) there was no allegation by the
bank, and apparently no proof, that it relied on the
security of the real estate mortgage in making the
advance.48
Indeed, in some instances, it has been held that in the
absence of clear, supportive evidence of a contrary
intention, a mortgage containing a "dragnet clause"
will not be extended to cover future advances unless
the document evidencing the subsequent advance
refers to the mortgage as providing security therefor.49

It was therefore improper for petitioner in this case to

seek foreclosure of the mortgaged property because of
non-payment of all the three promissory notes. While
the existence and validity of the "dragnet clause"
cannot be denied, there is a need to respect the
existence of the other security given for PN BD#76/C345. The foreclosure of the mortgaged property should
only be for the P250,000.00 loan covered by PN
BD#75/C-252, and for any amount not covered by the
security for the second promissory note. As held in one
case, where deeds absolute in form were executed to
secure any and all kinds of indebtedness that might
subsequently become due, a balance due on a note,
after exhausting the special security given for the
payment of such note, was in the absence of a special
agreement to the contrary, within the protection of the
mortgage, notwithstanding the giving of the special
security.50This is recognition that while the "dragnet
clause" subsists, the security specifically executed for
subsequent loans must first be exhausted before the
mortgaged property can be resorted to.
One other crucial point. The mortgage contract, as well
as the promissory notes subject of this case, is a
contract of adhesion, to which respondents only
participation was the affixing of their signatures or
"adhesion" thereto.51 A contract of adhesion is one in
which a party imposes a ready-made form of contract
which the other party may accept or reject, but which
the latter cannot modify.52
The real estate mortgage in issue appears in a
standard form, drafted and prepared solely by
petitioner, and which, according to jurisprudence must
be strictly construed against the party responsible for
its preparation.53 If the parties intended that the
"blanket mortgage clause" shall cover subsequent
advancement secured by separate securities, then the
same should have been indicated in the mortgage
contract. Consequently, any ambiguity is to be
taken contra proferentum, that is, construed against
the party who caused the ambiguity which could have
avoided it by the exercise of a little more care.54 To be
more emphatic, any ambiguity in a contract whose
terms are susceptible of different interpretations must
be read against the party who drafted it,55 which is the
petitioner in this case.
Even the promissory notes in issue were made on
standard forms prepared by petitioner, and as such are
likewise contracts of adhesion. Being of such nature,
the same should be interpreted strictly against
petitioner and with even more reason since having
been accomplished by respondents in the presence of
petitioners personnel and approved by its manager,
they could not have been unaware of the import and
extent of such contracts.

Petitioner, however, is not without recourse. Both the

Court of Appeals and the trial court found that
respondents have not yet paid the P250,000.00, and
gave no credence to their claim that they paid the said
amount when they paid petitioner P2,000,000.00. Thus,
the mortgaged property could still be properly
subjected to foreclosure proceedings for the
unpaid P250,000.00 loan, and as mentioned earlier, for
any deficiency after D/A SFDX#129, security for PN
BD#76/C-345, has been exhausted, subject of course
to defenses which are available to respondents.
WHEREFORE, the petition is DENIED. The Decision of
the Court of Appeals in CA-G.R. CV No. 59543 is
AFFIRMED.
Costs against petitioner.

G.R. No. 173171

July 11, 2012

PHILIPPINE CHARITY SWEEPSTAKES OFFICE

(PCSO), Petitioner,
vs.
NEW DAGUPAN METRO GAS CORPORATION,
PURITA E. PERALTA and PATRICIA P.
GALANG,Respondents.
DECISION

SO ORDERED.
REYES, J.:

This is a petition for review under Rule 45 of the Rules

of Court, assailing the Decision1 dated September 29,
2005 and Resolution2 dated June 9, 2006 of the Court of
Appeals (CA) in CA-G.R. CV No. 59590.
In the assailed Decision, the CA Affirmed the
Decision3 dated January 28, 1998 of the Regional Trial
Court (RTC), Branch 42 of Dagupan City in Civil Case
No. 94-00200-D, ordering petitioner Philippine Charity
Sweepstakes Office (PCSO) to surrender the owners
duplicate of Transfer
Certificate of Title (TCT) No. 52135 to the Register of
Deeds of Dagupan City for cancellation and issuance of
a new certificate of title in the name of respondent New
Dagupan Metro Gas Corporation (New Dagupan).
In its Resolution4 dated June 9, 2006, the CA denied
PCSOs motion for reconsideration.
The Factual Antecedents
Respondent Purita E. Peralta (Peralta) is the registered
owner of a parcel of land located at Bonuan Blue Beach
Subdivision, Dagupan City under TCT No. 52135. On
March 8, 1989, a real estate mortgage was constituted
over such property in favor of PCSO to secure the
payment of the sweepstakes tickets purchased by one
of its provincial distributors, Patricia P. Galang (Galang).
The salient provisions of the Deed of Undertaking with
First Real Estate Mortgage,5 where Galang, PCSO and
Peralta were respectively designated as "principal",
"mortgagee" and "mortgagor", are as follows:
WHEREAS, the PRINCIPAL acknowledges that he/she
has an outstanding and unpaid account with the

MORTGAGEE in the amount of FOUR HUNDRED FIFTY

THOUSAND (P450,000.00), representing the balance of
his/her accountabilities for all draws;
WHEREAS, the PRINCIPAL agrees to liquidate or pay
said account ten (10) days after each draw with
interest at the rate of 14% per annum.
xxxx
The PRINCIPAL shall settle or pay his/her account of
FOUR HUNDRED FIFTY THOUSAND PESOS
(P450,000.00) PESOS with the MORTGAGEE, provided
that the said balance shall bear interest thereon at the
rate of 14% per annum;
To secure the faithful compliance and as security to the
obligation of the PRINCIPAL stated in the next
preceding paragraph hereof, the MORTGAGOR hereby
convey unto and in favor of the MORTGAGEE, its
successor and assigns by way of its first real estate
mortgage, a parcel/s of land together with all the
improvements now or hereafter existing thereon
located at BOQUIG, DAGUPAN CITY, covered by TCT No.
52135, of the Register of Deeds of DAGUPAN CITY, and
more particularly described as follows:
xxxx
4. During the lifetime of this mortgage, the
MORTGAGOR shall not alienate, sell, or in any manner
dispose of or encumber the above-mentioned property,
without the prior written consent of the MORTGAGEE;
xxxx
15. Upon payment of the principal amount together
with interest and other expenses legally incurred by the
MORTGAGEE, the above undertaking is considered
terminated.6
On July 31, 1990, Peralta sold, under a conditional sale,
the subject property to New Dagupan, the conveyance
to be absolute upon the latters full payment of the
price of P800,000.00. New Dagupan obliged to pay
Peralta P200,000.00 upon the execution of the
corresponding deed and the balance of P600,000.00 by
monthly instalments of P70,000.00, the first instalment
falling due on August 31, 1990. Peralta showed to New
Dagupan a photocopy of TCT No. 52135, which bore no
liens and encumbrances, and undertook to deliver the
owners duplicate within three (3) months from the
execution of the contract.7
New Dagupan withheld payment of the last instalment,
which was intended to cover the payment of the capital
gains tax, in view of Peraltas failure to deliver the
owners duplicate of TCT No. 52135 and to execute a

deed of absolute sale in its favor. Further, New

Dagupan, through its President, Julian Ong Cua
(Cua), executed an affidavit of adverse claim, which
was annotated on TCT No. 52135 on October 1, 1991
as Entry No. 14826.8
In view of Peraltas continued failure to deliver a deed
of absolute sale and the owners duplicate of the title,
New Dagupan filed a complaint for specific
performance against her with the RTC on February 28,
1992. New Dagupans complaint was raffled to Branch
43 and docketed as Civil Case No. D-10160.
On May 20, 1992, during the pendency of New
Dagupans complaint against Peralta, PCSO caused the
registration of the mortgage.9
On February 10, 1993, PCSO filed an application for the
extrajudicial foreclosure sale of the subject property in
view of Galangs failure to fully pay the sweepstakes
she purchased in 1992.10 A public auction took place on
June 15, 1993 where PCSO was the highest bidder. A
certificate of sale was correspondingly issued to
PCSO.11
The certified true copy of TCT No. 52135 that New
Dagupan obtained from the Register of Deeds of
Dagupan City for its use in Civil Case No. D-10160
reflected PCSOs mortgage lien. New Dagupan,
claiming that it is only then that it was informed of the
subject mortgage, sent a letter to PCSO on October 28,
1993, notifying the latter of its complaint against
Peralta and its claim over the subject property and
suggesting that PCSO intervene and participate in the
case.
On January 21, 1994, the RTC Branch 43 rendered a
Decision, approving the compromise agreement
between Peralta and New Dagupan. Some of the
stipulations made are as follows:
3. For her failure to execute, sign and deliver a
Deed of Absolute Sale to plaintiff by way of
transferring TCT No. 52135 in the name of the
latter, defendant hereby waives and quitclaims
the remaining balance of the purchase price in
the amount of P60,000.00 in favor of the
plaintiff, it being understood that the said
amount shall be treated as a penalty for such
failure;
xxxx
6. Upon the signing of this compromise
agreement, possession and ownership of the
above described property, together with all the
improvements existing thereon, are hereby
vested absolutely upon, and transferred to the

plaintiff whom the defendant hereby declares

and acknowledges to be the absolute owner
thereof, now and hereafter;
7. This compromise agreement shall be without
prejudice to whatever rights and remedies, if
any, that the Philippine Charity Sweepstakes
Office has against the herein defendant and
Patricia P. Galang under the Deed of
Undertaking adverted to under par. 2(f)
hereof.12
As the RTC Branch 43 Decision dated January 21, 1994
became final and executory, New Dagupan once again
demanded Peraltas delivery of the owners duplicate of
TCT No. 52135. Also, in a letter dated March 29, 1994,
New Dagupan made a similar demand from PCSO, who
in response, stated that it had already foreclosed the
mortgage on the subject property and it has in its
name a certificate of sale for being the highest bidder
in the public auction that took place on June 15, 1993.
Thus, on June 1, 1994, New Dagupan filed with the RTC
a petition against PCSO for the annulment of TCT No.
52135 or surrender of the owners duplicate
thereof.13 The petition was docketed as Civil Case No.
94-00200-D and raffled to Branch 43.
In an Answer14 dated March 7, 1995, PCSO alleged that:
(a) New Dagupan was a buyer in bad faith; (b) New
Dagupan and Peralta colluded to deprive PCSO of its
rights under the subject mortgage; (c) New Dagupan is
estopped from questioning the superior right of PCSO
to the subject property when it entered into the
compromise agreement subject of the RTC Branch 43
Decision dated January 21, 1994; and (d) New Dagupan
is bound by the foreclosure proceedings where PCSO
obtained title to the subject property.
In a Motion for Leave to File Third-Party
Complaint15 dated April 17, 1995, PCSO sought the
inclusion of Peralta and Galang who are allegedly
indispensable parties. In its Third-Party
Complaint,16 PCSO reiterated its allegations in its
Answer dated March 7, 1995 and made the further
claim that the sale of the subject property to New
Dagupan is void for being expressly prohibited under
the Deed of Undertaking with First Real Estate
Mortgage.
In their Answer to Third-Party Complaint with
Counterclaims17 dated January 2, 1996, Peralta and
Galang claimed that: (a) the provision in the Deed of
Undertaking with First Real Estate Mortgage prohibiting
the sale of the subject property is void under Article
2130 of the Civil Code; (b) PCSOs failure to intervene
in Civil Case No. D-10160 despite notice barred it from
questioning the sale of the subject property to New

Dagupan and the compromise agreement approved by

the RTC Branch 43; (c) it was due to PCSOs very own
neglect in registering its mortgage lien that preference
is accorded to New Dagupans rights as a buyer of the
subject property; and (d) PCSO no longer has any
cause of action against them following its decision to
foreclose the subject mortgage.
On March 6, 1996, Civil Case No. 94-00200-D was
transferred to Branch 42, after the presiding judge of
Branch 43 inhibited himself.
On January 28, 1998, the RTC Branch 42 rendered a
Decision18 in New Dagupans favor, the dispositive
portion of which states:
WHEREFORE, judgment is hereby rendered in favor of
the petitioner and against the defendant, ordering
PCSO to deliver the owners duplicate copy of TCT No.
52135 in its possession to the Registry of Deeds of
Dagupan City for the purpose of having the decision in
favor of the petitioner annotated at the back thereof.
Should said defendant fail to deliver the said title
within 30 days from the date this decision becomes
final and executory, the said owners duplicate
certificate of title is hereby cancelled and the Register
of Deeds can issue a new one carrying all the
encumbrances of the original owners duplicate subject
of this case. Further, the defendant is ordered to pay to
petitioner the sum of Ten Thousand Pesos (P10,000.00)
as attorneys fees. It is also ordered to pay costs.
SO ORDERED.19
The RTC Branch 42 ruled that New Dagupan is a buyer
in good faith, ratiocinating that:
In other words, the evidence of the petitioner would
show that although the Deed of Undertaking with First
Real Estate Mortgage was executed on March 8, 1989
its annotation was made long after the conditional sale
in favor of the petitioner was executed and annotated
at the back of the title in question. Because of the said
exhibits, petitioner contended that it was a buyer in
good faith and for value.
Defendant, to controvert the aforementioned evidence
of the plaintiff, alleged that Exhibits C, C-1 to C-1-C was
contrary to the testimony of Mr. Julian Ong Cua to the
effect that when defendants sold the property to
petitioner only the xerox copy of the title was shown
and petitioner should have verified the original as it
was a buyer in bad faith. Defendant also alleged that
the decision in Civil Case D-10160 dated January 21,
1994 would show that there was a collusion between
the petitioner and the third-party defendants.

The Court cannot go along with the reasoning of the

defendant because what was shown to Mr. Cua by the
third-party defendants was Exhibit "C" which did not
carry any encumbrance at the back of the subject title
and the annotation made on May 20, 1992 in favor of
the PCSO. Mr. Cua verified the title x x x but the
encumbrance on the title was not still there at [that]
time. One thing more, there was nothing indicated in
the decision in Civil Case No. D-10160 that petitioner
already knew that there was already a mortgage in
favor of the PCSO. Worst, defendant did not even
introduce any oral evidence to show that petitioner was
in bad faith except the manifestations of counsel.
Unfortunately, manifestations could not be considered
evidence.
xxxx
Defendant should not be allowed to profit from its
negligence of not registering the Deed of Undertaking
with First Real Estate Mortgage in its favor.20
Also, the RTC Branch 42 ruled that the prohibition on
the sale of the subject property is void. Specifically:
Suffice it to say that there is no law prohibiting a
mortgagor from encumbering or alienating the property
mortgaged. On the contrary, there is a law prohibiting
an agreement forbidding the owner from alienating a
mortgaged property. We are referring to Article 2130 of
the New Civil Code which provides as follows:
"A stipulation forbidding the owner from alienating the
immovable mortgage shall be void."21
Moreover, the RTC Branch 42 ruled that PCSO had no
right to foreclose the subject mortgage as the land in
question had already been disencumbered after
Galangs full payment of all the sweepstakes tickets
she purchased in 1989 and 1990.
It should be recalled that Amparo Abrigo, OIC Chief of
the Credit Accounts Division of the PCSO, admitted not
only once but twice that Patricia Galang has no more
liability with the PCSO for the years 1989 and 1990 x x
x. Another witness, Carlos Castillo who is the OIC of the
Sales Department of the PCSO, joined Amparo Abrigo in
saying that Patricia Galang has already paid her liability
with the PCSO for the years 1989 and 1990 x x x. Thus,
the undertaking was already discharged. Both of the
said witnesses of the PCSO alleged that the
undertaking has been re-used by Patricia Galang for
the years 1991 to 1992 yet there is no proof
whatsoever showing that Purita Peralta consented to
the use of the undertaking by Patricia Galang for 1991
to 1992. Incidentally, it is not far-fetched to say that
Purita Peralta might have thought that the undertaking
was already discharged which was the reason she

executed the Deed of Conditional Sale x x x in favor of

petitioner in 1990. That being the case, the foreclosure
sale in favor of the PCSO has no legal leg to stand as
the Deed of Undertaking with First Real Estate
Mortgage has already been discharged before the
foreclosure sale was conducted.22
According to the RTC Branch 42, the intent to use the
subject property as security for Galangs purchases for
the years after 1989, as PCSO claimed, is not clear
from the Deed of Undertaking with First Real Estate
Mortgage:
Was it not provided in the deed that the undertaking
would be for "all draws". That might be true but the
terms of the Contract should be understood to mean
only to cover the draws relative to the current liabilities
of Patricia Galang at the time of the execution of the
undertaking in 1989. It could have not been agreed
upon that it should also cover her liability for 1991 up
to 1992 because if that was the intention of the parties,
the undertaking should have so provided expressly. The
term of the undertaking with respect to the period was
ambiguous but any ambiguity in the Contract should be
resolved against PCSO because the form used was a
standard form of the defendant and it appeared that it
was its lawyers who prepared it, therefore, it was the
latter which caused the ambiguity.23
PCSOs appeal from the foregoing adverse decision was
dismissed. By way of its assailed decision, the CA did
not agree with PCSOs claim that the subject mortgage
is in the nature of a continuing guaranty, holding that
Peraltas undertaking to secure Galangs liability to
PCSO is only for a period of one year and was
extinguished when Peralta completed payment on the
sweepstakes tickets she purchased in 1989.
The instant appeal must fail. There is nothing in the
Deed of Undertaking with First Real Estate Mortgage,
expressly or impliedly, that would indicate that Peralta
agreed to let her property be burdened as long as the
contract of undertaking with real estate mortgage was
not cancelled or revoked. x x x
xxxx
A perusal of the deed of undertaking between the PCSO
and Peralta would reveal nothing but the undertaking
of Peralta to guarantee the payment of the pre-existing
obligation of Galang, constituting the unpaid
sweepstakes tickets issued to the latter before the
deed of undertaking was executed, with the PCSO in
the amount of P450,000.00. No words were added
therein to show the intention of the parties to regard it
as a contract of continuing guaranty. In other
jurisdictions, it has been held that the use of the
particular words and expressions such as payment of

"any debt", "any indebtedness", "any deficiency", or

"any sum", or the guaranty of "any transaction" or
money to be furnished the principal debtor "at any
time", or "on such time" that the principal debtor may
require, have been construed to indicate a continuing
guaranty. Similar phrases or words of the same import
or tenor are not extant in the deed of undertaking. The
deed of undertaking states:
"WHEREAS, the PRINCIPAL acknowledges that he/she
has an outstanding and unpaid account with the
MORTGAGEE in the amount of FOUR HUNDRED FIFTY
THOUSAND (P450,000.00), representing the balance of
his/her ticket accountabilities for all draws."
xxxx
Upon full payment of the principal obligation, which
from the testimonies of the officers of the PCSO had
been paid as early as 1990, the subsidiary contract of
guaranty was automatically terminated. The parties
have not executed another contract of guaranty to
secure the subsequent obligations of Galang for the
tickets issued thereafter. It must be noted that a
contract of guaranty is not presumed; it must be
express and cannot extend to more than what is
stipulated therein.
xxxx
The arguments of PCSO fail to persuade us. The phrase
"for all draws" is limited to the draws covered by the
original transaction. In its pleadings, the PCSO asserted
that the contract of undertaking was renewed and the
collateral was re-used by Galang to obtain again tickets
from the PCSO after she had settled her account under
the original contract. From such admission, it is thus
clear that the contract is not in the nature of a
continuing guaranty. For a contract of continuing
guaranty is not renewed as it is understood to be of a
continuing nature without the necessity of renewing
the same every time a new transaction contemplated
under the original contract is entered into. x x
x 24 (Citations omitted)
In this petition, PCSO claims that the CA erred in
holding that the subject mortgage had been
extinguished by Galangs payment of P450,000.00,
representing the amount of the sweepstakes tickets
she purchased in 1989. According to PCSO, the said
amount is actually the credit line granted to Galang
and the phrase "all draws" refers to her ticket
purchases for subsequent years drawn against such
credit line. Consequently, PCSO posits, the subject
mortgage had not been extinguished by Peraltas
payment of her ticket purchases in 1989 and its
coverage extends to her purchases after 1989, which
she made against the credit line that was granted to

her. That when Galang failed to pay her ticket

purchases in 1992, PCSOs right to foreclose the
subject mortgage arose.
PCSO also maintains that its rights over the subject
property are superior to those of New Dagupan.
Considering that the contract between New Dagupan is
a conditional sale, there was no conveyance of
ownership at the time of the execution thereof on July
31, 1989. It was only on January 21, 1994, or when the
RTC Branch 43 approved the compromise agreement,
that a supposed transfer of title between Peralta and
New Dagupan took place. However, since PCSO had
earlier foreclosed the subject mortgage and obtained
title to the subject property as evidenced by the
certificate of sale dated June 15, 1993, Peralta had
nothing to cede or assign to New Dagupan.
PCSO likewise attributes bad faith to New Dagupan,
claiming that Peraltas presentation of a mere
photocopy of TCT No. 52135, albeit without any
annotation of a lien or encumbrance, sufficed to raise
reasonable suspicions against Peraltas claim of a clean
title and should have prompted it to conduct an
investigation that went beyond the face of TCT No.
52135.
PCSO even assails the validity of the subject sale for
being against the prohibition contained in the Deed of
Undertaking with First Real Estate Mortgage.
New Dagupan, in its Comment,25 avers that it was a
purchaser in good faith and it has a superior right to
the subject property, considering that PCSOs mortgage
lien was annotated only on May 20, 1992 or long after
the execution of the conditional sale on July 31, 1990
and the annotation of New Dagupans adverse claim on
October 1, 1991. While the subject mortgage
antedated the subject sale, PCSO was already aware of
the latter at the time of its belated registration of its
mortgage lien. PCSOs registration was therefore in bad
faith, rendering its claim over the subject property
defeasible by New Dagupans adverse claim.
New Dagupan also claims that the subject property had
already been discharged from the mortgage, hence,
PCSO had nothing to foreclose when it filed its
application for extra-judicial foreclosure on February
10, 1993. The subject mortgage was intended to
secure Galangs ticket purchases that were outstanding
at the time of the execution of the same, the amount of
which has been specified to be P450,000.00 and does
not extend to Galangs future purchases. Thus, upon
Galangs full payment of P450,000.00, which PCSO
admits, the subject mortgage had been automatically
terminated as expressly provided under Section 15 of
the Deed of Undertaking with First Real Estate
Mortgage quoted above.

Issue
The rise and fall of this recourse is dependent on the
resolution of the issue who between New Dagupan and
PCSO has a better right to the property in question.
Our Ruling
PCSO is undeterred by the denial of its appeal to the CA
and now seeks to convince this Court that it has a
superior right over the subject property. However,
PCSOs resolve fails to move this Court and the
ineluctability of the denial of this petition is owing to
the following:
a. At the time of PCSOs registration of its
mortgage lien on May 20, 1992, the subject
mortgage had already been discharged by
Galangs full payment of P450,000.00, the
amount specified in the Deed of Undertaking
with First Real Estate Mortgage;
b. There is nothing in the Deed of Undertaking
with First Real Estate Mortgage that would
indicate that it is a continuing security or that
there is an intent to secure Galangs future
debts;
c. Assuming the contrary, New Dagupan is not
bound by PCSOs mortgage lien and was a
purchaser in good faith and for value; and
d. While the subject mortgage predated the
sale of the subject property to New Dagupan,
the absence of any evidence that the latter had
knowledge of PCSOs mortgage lien at the time
of the sale and its prior registration of an
adverse claim created a preference in its favor.
I
As a general rule, a mortgage liability is usually limited
to the amount mentioned in the contract. However, the
amounts named as consideration in a contract of
mortgage 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.26
Alternatively, while a real estate mortgage may
exceptionally secure future loans or advancements,
these future debts must be specifically described in the
mortgage contract. An obligation is not secured by a
mortgage unless it comes fairly within the terms of the
mortgage contract.27

The stipulation extending the coverage of a mortgage

to advances or loans other than those already obtained
or specified in the contract is valid and has been
commonly referred to as a "blanket mortgage" or
"dragnet" clause. In Prudential Bank v. Alviar,28 this
Court elucidated on the nature and purpose of such a
clause as follows:
A "blanket mortgage clause," also known as a "dragnet
clause" in American jurisprudence, is one which is
specifically phrased to subsume all debts of past or
future origins. Such clauses are "carefully scrutinized
and strictly construed." Mortgages of this character
enable the parties to provide continuous dealings, the
nature or extent of which may not be known or
anticipated at the time, and they avoid the expense
and inconvenience of executing a new security on each
new transaction. A "dragnet clause" operates as a
convenience and accommodation to the borrowers as it
makes available additional funds without their having
to execute additional security documents, thereby
saving time, travel, loan closing costs, costs of extra
legal services, recording fees, et cetera. x x
x.29(Citations omitted)
A mortgage that provides for a dragnet clause is in the
nature of a continuing guaranty and constitutes an
exception to the rule than an action to foreclose a
mortgage must be limited to the amount mentioned in
the mortgage contract. Its validity is anchored on
Article 2053 of the Civil Code and is not limited to a
single transaction, but contemplates a future course of
dealing, covering a series of transactions, generally for
an indefinite time or until revoked. It is prospective in
its operation and is generally intended to provide
security with respect to future transactions within
certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor
becomes liable. In other words, a continuing guaranty
is one that covers all transactions, including those
arising in the future, which are within the description or
contemplation of the contract of guaranty, until the
expiration or termination thereof.30
In this case, PCSO claims the subject mortgage is a
continuing guaranty. According to PCSO, the intent was
to secure Galangs ticket purchases other than those
outstanding at the time of the execution of the Deed of
Undertaking with First Real Estate Mortgage on March
8, 1989 such that it can foreclose the subject mortgage
for Galangs non-payment of her ticket purchases in
1992. PCSO does not deny and even admits that
Galang had already settled the amount of P450,000.00.
However, PCSO refuses to concede that the subject
mortgage had already been discharged, claiming that
Galang had unpaid ticket purchases in 1992 and these
are likewise secured as evidenced by the following

clause in the Deed of Undertaking with First Real Estate

Mortgage:
WHEREAS, the PRINCIPAL agrees to liquidate or pay
said account ten (10) days after each draw with
interest at the rate of 14% per annum;31
This Court has to disagree with PCSO in view of the
principles quoted above. A reading of the other
pertinent clauses of the subject mortgage, not only of
the provision invoked by PCSO, does not show that the
security provided in the subject mortgage is continuing
in nature. That the subject mortgage shall only secure
Galangs liability in the amount of P450,000.00 is
evident from the following:
WHEREAS, the PRINCIPAL acknowledges that he/she
has an outstanding and unpaid account with the
MORTGAGEE in the amount of FOUR HUNDRED FIFTY
THOUSAND (P450,000.00), representing the balance of
his/her ticket accountabilities for all draws;

document to be executed for the purpose. As provided

in the Deed of Undertaking with First Real Estate
Mortgage:
15. Upon payment of the principal amount together
with interest and other expenses legally incurred by the
MORTGAGEE, the above-undertaking is considered
terminated.33
Section 6234 of Presidential Decree (P.D.) No. 1529
appears to require the execution of an instrument in
order for a mortgage to be cancelled or discharged.
However, this rule presupposes that there has been a
prior registration of the mortgage lien prior to its
discharge. In this case, the subject mortgage had
already been cancelled or terminated upon Galangs
full payment before PCSO availed of registration in
1992. As the subject mortgage was not annotated on
TCT No. 52135 at the time it was terminated, there was
no need for Peralta to secure a deed of cancellation in
order for such discharge to be fully effective and duly
reflected on the face of her title.

xxxx
The PRINCIPAL shall settle or pay his/her account of
FOUR HUNDRED FIFTY THOUSAND PESOS
(P450,000.00) PESOS with the MORTGAGEE, provided
that the said balance shall bear interest thereon at the
rate of 14% per annum;
To secure the faithful compliance and as security to the
obligation of the PRINCIPAL stated in the next
preceding paragraph hereof, the MORTGAGOR hereby
convey unto and in favor of the MORTGAGEE, its
successor and assigns by way of its first real estate
mortgage, a parcel/s of land together with all the
improvements now or hereafter existing thereon,
located at BOQUIG, DAGUPAN CITY, covered by TCT No.
52135, of the Register of Deeds of DAGUPAN CITY, and
more particularly described as follows:32

Therefore, since the subject mortgage is not in the

nature of a continuing guaranty and given the
automatic termination thereof, PCSO cannot claim that
Galangs ticket purchases in 1992 are also secured.
From the time the amount of P450,000.00 was fully
settled, the subject mortgage had already been
cancelled such that Galangs subsequent ticket
purchases are unsecured. Simply put, PCSO had
nothing to register, much less, foreclose.
Consequently, PCSOs registration of its non-existent
mortgage lien and subsequent foreclosure of a
mortgage that was no longer extant cannot defeat New
Dagupans title over the subject property.
II
Sections 51 and 53 of P.D. No. 1529 provide:

As the CA correctly observed, the use of the terms

"outstanding" and "unpaid" militates against PCSOs
claim that future ticket purchases are likewise secured.
That there is a seeming ambiguity between the
provision relied upon by PCSO containing the phrase
"after each draw" and the other provisions, which
mention with particularity the amount of P450,000.00
as Galangs unpaid and outstanding account and
secured by the subject mortgage, should be construed
against PCSO. The subject mortgage is a contract of
adhesion as it was prepared solely by PCSO and the
only participation of Galang and Peralta was the act of
affixing their signatures thereto.
Considering that the debt secured had already been
fully paid, the subject mortgage had already been
discharged and there is no necessity for any act or

Section 51. Conveyance and other dealings by

registered owner. An owner of registered land may
convey, mortgage, lease, charge or otherwise deal with
the same in accordance with existing laws. He may use
such forms of deeds, mortgages, leases or other
voluntary instrument, except a will purporting to
convey or affect registered land, but shall operate only
as a contract between the parties and as evidence of
authority to the Register of Deeds to make registration.
The act of registration shall be the operative act to
convey or affect the land insofar as third persons are
concerned, and in all cases under this Decree, the
registration shall be made in the office of the Register
of Deeds for the province or city where the land lies.

Section 52. Constructive notice upon registration. Every

conveyance, mortgage, lease, lien, attachment, order,
judgment, instrument or entry affecting registered land
shall, if registered, filed or entered in the office of the
Register of Deeds for the province or city where the
land to which it relates lies, be constructive notice to all
persons from the time of such registering, filing or
entering.
On the other hand, Article 2125 of the Civil Code
states:
Article 2125. In addition to the requisites stated in
Article 2085, it is indispensable, in order that a
mortgage may be validly constituted, that the
document in which it appears be recorded in the
Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the
parties.
The persons in whose favor the law establishes a
mortgage have no other right than to demand the
execution and the recording of the document in which
the mortgage is formalized.
Construing the foregoing conjunctively, as to third
persons, a property registered under the Torrens
system is, for all legal purposes, unencumbered or
remains to be the property of the person in whose
name it is registered, notwithstanding the execution of
any conveyance, mortgage, lease, lien, order or
judgment unless the corresponding deed is registered.
The law does not require a person dealing with the
owner of registered land to go beyond the certificate of
title as he may rely on the notices of the encumbrances
on the property annotated on the certificate of title or
absence of any annotation.35 Registration affords legal
protection such that the claim of an innocent purchaser
for value is recognized as valid despite a defect in the
title of the vendor.36
In Cruz v. Bancom Finance Corporation,37 the foregoing
principle was applied as follows:
Second, respondent was already aware that there was
an adverse claim and notice of lis pendens annotated
on the Certificate of Title when it registered the
mortgage on March 14, 1980. Unless duly registered, a
mortgage does not affect third parties like herein
petitioners, as provided under Section 51 of PD NO.
1529, which we reproduce hereunder:
xxxx
True, registration is not the operative act for a
mortgage to be binding between the parties. But to
third persons, it is indispensible. In the present case,

the adverse claim and the notice of lis pendens were

annotated on the title on October 30, 1979 and
December 10, 1979, respectively; the real estate
mortgage over the subject property was registered by
respondent only on March 14, 1980. Settled in this
jurisdiction is the doctrine that a prior registration of a
lien creates a preference. Even a subsequent
registration of the prior mortgage will not diminish this
preference, which retroacts to the date of the
annotation of the notice of lis pendens and the adverse
claim. Thus, respondents failure to register the real
estate mortgage prior to these annotations, resulted in
the mortgage being binding only between it and the
mortgagor, Sulit. Petitioners, being third parties to the
mortgage, were not bound by it. Contrary to
respondents claim that petitioners were in bad faith
because they already had knowledge of the existence
of the mortgage in favor of respondent when they
caused the aforesaid annotations, petitioner Edilberto
Cruz said that they only knew of this mortgage when
respondent intervened in the RTC
proceedings.38 (Citations omitted)
It is undisputed that it was only on May 20, 1992 that
PCSO registered its mortgage lien. By that time, New
Dagupan had already purchased the subject property,
albeit under a conditional sale. In fact, PCSOs
mortgage lien was yet to be registered at the time New
Dagupan filed its adverse claim on October 1, 1991 and
its complaint against Peralta for the surrender of the
owners duplicate of TCT No. 52135 on February 28,
1992. It was only during the pendency of Civil Case No.
D-10160, or sometime in 1993, that New Dagupan was
informed of PCSOs mortgage lien. On the other hand,
PCSO was already charged with knowledge of New
Dagupans adverse claim at the time of the annotation
of the subject mortgage. PCSOs attempt to conceal
these damning facts is palpable. However, they are
patent from the records such that there is no
gainsaying that New Dagupan is a purchaser in good
faith and for value and is not bound by PCSOs
mortgage lien.
A purchaser in good faith and for value is one who buys
property of another, without notice that some other
person has a right to, or interest in, such property, and
pays a full and fair price for the same, at the time of
such purchase, or before he has notice of the claim or
interest of some other person in the property.39 Good
faith is the opposite of fraud and of bad faith, and its
non-existence must be established by competent
proof.40 Sans such proof, a buyer is deemed to be in
good faith and his interest in the subject property will
not be disturbed. A purchaser of a registered property
can rely on the guarantee afforded by pertinent laws
on registration that he can take and hold it free from
any and all prior liens and claims except those set forth
in or preserved against the certificate of title.41

This Court cannot give credence to PCSOs claim to the

contrary. PCSO did not present evidence, showing that
New Dagupan had knowledge of the mortgage despite
its being unregistered at the time the subject sale was
entered into. Peralta, in the compromise agreement,
even admitted that she did not inform New Dagupan of
the subject mortgage.42 PCSOs only basis for claiming
that New Dagupan was a buyer in bad faith was the
latters reliance on a mere photocopy of TCT No.
52135. However, apart from the fact that the facsimile
bore no annotation of a lien or encumbrance, PCSO
failed to refute the testimony of Cua that his
verification of TCT No. 52135 with the Register of
Deeds of Dagupan City confirmed Peraltas claim of a
clean title.
Since PCSO had notice of New Dagupans adverse
claim prior to the registration of its mortgage lien, it is
bound thereby and thus legally compelled to respect
the proceedings on the validity of such adverse claim.
It is therefore of no moment if PCSOs foreclosure of the
subject mortgage and purchase of the subject property
at the auction sale took place prior to New Dagupans
acquisition of title as decreed in the Decision dated
January 21, 1994 of RTC Branch 43. The effects of a
foreclosure sale retroact to the date the mortgage was
registered.43 Hence, while PCSO may be deemed to
have acquired title over the subject property on May
20, 1992, such title is rendered inferior by New
Dagupans adverse claim, the validity of which was
confirmed per the Decision dated January 21, 1994 of
RTC Branch 43.

the later buyer notwithstanding its prior registration

was discussed by this Court in this wise:
It is undisputed that the adverse claim of private
respondents was registered pursuant to Sec. 110 of Act
No. 496, the same having been accomplished by the
filing of a sworn statement with the Register of Deeds
of the province where the property was located.
However, what was registered was merely the adverse
claim and not the Deed of Sale, which supposedly
conveyed the northern half portion of the subject
property. Therefore, there is still need to resolve the
validity of the adverse claim in separate proceedings,
as there is an absence of registration of the actual
conveyance of the portion of land herein claimed by
private respondents.
From the provisions of the law, it is clear that mere
registration of an adverse claim does not make such
claim valid, nor is it permanent in character. More
importantly, such registration does not confer instant
title of ownership since judicial determination on the
issue of the ownership is still necessary.45 (Citation
omitted)

Otherwise, if PCSOs mortgage lien is allowed to prevail

by the mere expediency of registration over an adverse
claim that was registered ahead of time, the object of
an adverse claim to apprise third persons that any
transaction regarding the disputed property is subject
to the outcome of the dispute would be rendered
naught. A different conclusion would remove the
primary motivation for the public to rely on and respect
the Torrens system of registration. Such would be
inconsistent with the well-settled, even axiomatic, rule
that a person dealing with registered property need not
go beyond the title and is not required to explore
outside the four (4) corners thereof in search for any
hidden defect or inchoate right that may turn out to be
superior.

Apart from the foregoing, the more important

consideration was the improper resort to an adverse
claim.1wphi1 In L.P. Leviste & Co. v. Noblejas,46 this
Court emphasized that the availability of the special
remedy of an adverse claim is subject to the absence
of any other statutory provision for the registration of
the claimants alleged right or interest in the property.
That if the claimants interest is based on a perfected
contract of sale or any voluntary instrument executed
by the registered owner of the land, the procedure that
should be followed is that prescribed under Section 51
in relation to Section 52 of P.D. No. 1529. Specifically,
the owners duplicate certificate must be presented to
the Register of Deeds for the inscription of the
corresponding memorandum thereon and in the entry
day book. It is only when the owner refuses or fails to
surrender the duplicate certificate for annotation that a
statement setting forth an adverse claim may be filed
with the Register of Deeds. Otherwise, the adverse
claim filed will not have the effect of a conveyance of
any right or interest on the disputed property that
could prejudice the rights that have been subsequently
acquired by third persons.

Worthy of extrapolation is the fact that there is no

conflict between the disposition of this case and Garbin
v. CA44where this Court decided the controversy
between a buyer with an earlier registered adverse
claim and a subsequent buyer, who is charged with
notice of such adverse claim at the time of the
registration of her title, in favor of the latter. As to why
the adverse claim cannot prevail against the rights of

What transpired in Gabin is similar to that in Leviste. In

Gabin, the basis of the claim on the property is a deed
of absolute sale. In Leviste, what is involved is a
contract to sell. Both are voluntary instruments that
should have been registered in accordance with
Sections 51 and 52 of P.D. No. 1529 as there was no
showing of an inability to present the owners duplicate
of title.

It is patent that the contrary appears in this case.

Indeed, New Dagupans claim over the subject property
is based on a conditional sale, which is likewise a
voluntary instrument. However, New Dagupans use of
the adverse claim to protect its rights is far from being
incongruent in view of the undisputed fact that Peralta
failed to surrender the owners duplicate of TCT No.
52135 despite demands.
Moreover, while the validity of the adverse claim in
Gabin is not established as there was no separate
proceeding instituted that would determine the
existence and due execution of the deed of sale upon
which it is founded, the same does not obtain in this
case. The existence and due execution of the
conditional sale and Peraltas absolute and complete
cession of her title over the subject property to New
Dagupan are undisputed. These are matters covered by
the Decision dated January 21, 1994 of RTC Branch 43,
which had long become final and executory.
At any rate, in Sajonas v.CA,47 this Court clarified that
there is no necessity for a prior judicial determination
of the validity of an adverse claim for it to be
considered a flaw in the vendors title as that would be
repugnant to the very purpose thereof.48
WHEREFORE, premises considered, the petition is
DISMISSED and the Decision dated September 29,
2005 and Resolution dated June9, 2006 of the Court of
Appeals in CA-G.R. CV No. 59590 are hereby AFFIRMED.
SO ORDERED.

G.R. No. 183987

July 25, 2012

ASIA TRUST DEVELOPMENT BANK, Petitioner,

vs.
CARMELO H. TUBLE, Respondent.
DECISION
SERENO, J.:
Before this Court is a Petition for Review on Certiorari
under Rule 45 of the Revised Rules of Court, seeking to
review the Court of Appeals (CA) 28 March 2008
Decision and 30 July 2008 Resolution in CA-G.R. CV No.
87410. The CA affirmed the Regional Trial Court (RTC)
Decision of 15 May 2006 in Civil Case No. 67973, which
granted to respondent the refund
of P845,805.491 representing the amount he had paid
in excess of the redemption price.
The antecedent facts are as follows:

Respondent Carmelo H. Tuble, who served as the vicepresident of petitioner Asiatrust Development Bank,
availed himself of the car incentive plan and loan
privileges offered by the bank. He was also entitled to
the banks Senior Managers Deferred Incentive Plan
(DIP).
Respondent acquired a Nissan Vanette through the
companys car incentive plan. The arrangement was
made to appear as a lease agreement requiring only
the payment of monthly rentals. Accordingly, the lease
would be terminated in case of the employees
resignation or retirement prior to full payment of the
price.
As regards the loan privileges, Tuble obtained three
separate loans. The first, a real estate loan evidenced
by the 18 January 1993 Promissory Note No. 01423 with
maturity date of 1 January 1999, was secured by a
mortgage over his property covered by Transfer
Certificate of Title No. T 145794. No interest on this
loan was indicated.
The second was a consumption loan, evidenced by the
10 January 1994 Promissory Note No. 01434 with the
maturity date of 31 January 1995 and interest at 18%
per annum. Aside from the said indebtedness, Tuble
allegedly obtained a salary loan, his third loan.
On 30 March 1995, he resigned. Subsequently, he was
given the option to either return the vehicle without
any further obligation or retain the unit and pay its
remaining book value.

Respondent had the following obligations to the bank

after his retirement: (1) the purchase or return of the
Nissan Vanette; (2) P100,000 as consumption loan;
(3) P421,800 as real estate loan; and (4) P16,250 as
salary loan.5
In turn, petitioner owed Tuble (1) his pro-rata share in
the DIP, which was to be issued after the bank had
given the resigned employees clearance; and
(2) P25,797.35 representing his final salary and
corresponding 13th month pay.
Respondent claimed that since he and the bank were
debtors and creditors of each other, the offsetting of
loans could legally take place. He then asked the bank
to simply compute his DIP and apply his receivables to
his outstanding loans.6 However, instead of heeding his
request, the bank sent him a 1 June 1995 demand
letter7obliging him to pay his debts. The bank also
required him to return the Nissan Vanette. Despite this
demand, the vehicle was not surrendered.
On 14 August 1995, Tuble wrote the bank again to
follow up his request to offset the loans. This letter was
not immediately acted upon. It was only on 13 October
1995 that the bank finally allowed the offsetting of his
various claims and liabilities. As a result, his liabilities
were reduced to P970,691.46 plus the unreturned
value of the vehicle.
In order to recover the Nissan Vanette, the bank filed a
Complaint for replevin against Tuble. Petitioner
obtained a favorable judgment. Then, to collect the
liabilities of respondent, it also filed a Petition for Extrajudicial Foreclosure of real estate mortgage over his
property. The Petition was based only on his real estate
loan, which at that time amounted to P421,800. His
other liabilities to the bank were excluded. The
foreclosure proceedings terminated, with the bank
emerging as the purchaser of the secured property.
Thereafter, Tuble timely redeemed the property on 17
March 1997 for P1,318,401.91.8 Notably, the
redemption price increased to this figure, because the
bank had unilaterally imposed additional interest and
other charges.
With the payment of P1,318,401.91, Tuble was deemed
to have fully paid his accountabilities. Thus, three years
after his payment, the bank issued him a Clearance
necessary for the release of his DIP share.
Subsequently, he received a Managers Check in the
amount of P166,049.73 representing his share in the
DIP funds.
Despite his payment of the redemption price, Tuble
questioned how the foreclosure basis of P421,800
ballooned toP1,318,401.91 in a matter of one year.

Belatedly, the bank explained that this redemption

price included the Nissan Vanettes book value, the
salary loan, car insurance, 18% annual interest on the
banks redemption price ofP421,800, penalty and
interest charges on Promissory Note No. 0142, and
litigation expenses.9 By way of note, from these items,
the amounts that remained to be collected as stated in
the Petition before us, are (1) the 18% annual interest
on the redemption price and (2) the interest charge on
Promissory Note No. 0142.
Because Tuble disputed the redemption price, he filed a
Complaint for recovery of a sum of money and
damages before the RTC. He specifically sought to
collect P896,602.0210 representing the excess charges
on the redemption price. Additionally, he prayed for
moral and exemplary damages.
The RTC ruled in favor of Tuble. The trial court
characterized the redemption price as excessive and
arbitrary, because the correct redemption price should
not have included the above-mentioned charges. Moral
and exemplary damages were also awarded to him.
According to the trial court,11 the value of the car
should not have been included, considering that the
bank had already recovered the Nissan Vanette. The
obligations arising from the salary loan and car
insurance should have also been excluded, for there
was no proof that these debts existed. The interest and
penalty charges should have been deleted, too,
because Promissory Note No. 0142 did not indicate any
interest or penalty charges. Neither should litigation
expenses have been added, since there was no proof
that the bank incurred those expenses.
As for the 18% annual interest on the bid price
of P421,800, the RTC agreed with Tuble that this charge
was unlawful. Act 313512 as amended, in relation to
Section 28 of Rule 39 of the Rules of Court,13 only
allows the mortgagee to charge an interest of 1% per
month if the foreclosed property is redeemed.
Ultimately, under the principle of solutio indebiti, the
trial court required the refund of these amounts
charged in excess of the correct redemption price.
On appeal, the CA affirmed the findings of the
RTC.14 The appellate court only expounded the rule
that, at the time of redemption, the one who redeemed
is liable to pay only 1% monthly interest plus taxes.
Thus, the CA also concluded that there was practically
no basis to impose the additional charges.
Before this Court, petitioner reiterates its claims
regarding the inclusion in the redemption price of the
18% annual interest on the bid price of P421,800 and
the interest charges on Promissory Note No. 0142.
Petitioner emphasizes that an 18% interest rate

allegedly referred to in the mortgage deed is the

proper basis of the interest. Pointing to the Real Estate
Mortgage Contract, the bank highlights the blanket
security clause or "dragnet clause" that purports to
cover all obligations owed by Tuble:15
All obligations of the Borrower and/or Mortgagor, its
renewal, extension, amendment or novation
irrespective of whether such obligations as renewed,
extended, amended or novated are in the nature of
new, separate or additional obligations;
All other obligations of the Borrower and/or Mortgagor
in favor of the Mortgagee, executed before or after the
execution of this document whether presently owing or
hereinafter incurred and whether or not arising from or
connection with the aforesaid loan/Credit
accommodation; x x x.
Tubles obligations are defined in Promissory Note Nos.
0142 and 0143. By way of recap, Promissory Note No.
0142 refers to the real estate loan; it does not contain
any stipulation on interest. On the other hand,
Promissory Note No. 0143 refers to the consumption
loan; it charges an 18% annual interest rate. Petitioner
uses this latter rate to impose an interest over the bid
price of P421,800.
Further, the bank sees the inclusion in the redemption
price of an addition 12% annual interest on Tubles real
estate loan.
On top of these claims, the bank raises a new item
the cars rental fee to be included in the redemption
price. In dealing with this argument raised for the first
time on certiorari, this Court dismisses the contention
based on the well-entrenched prohibition on raising
new issues, especially factual ones, on appeal.16
Thus, the pertinent issue in the instant appeal is
whether or not the bank is entitled to include these
items in the redemption price: (1) the interest charges
on Promissory Note No. 0142; and (2) the 18% annual
interest on the bid price of P421,800.

The statute referred to requires that in the event of

judicial or extrajudicial foreclosure of any mortgage on
real estate that is used as security for an obligation to
any bank, banking institution, or credit institution, the
mortgagor can redeem the property by paying the
amount fixed by the court in the order of execution,
with interest thereon at the rate specified in the
mortgage.18
Petitioner is correct. We have already established
in Union Bank of the Philippines v. Court of
Appeals,19 citingPonce de Leon v. Rehabilitation
Finance Corporation20 and Sy v. Court of Appeals,21 that
the General Banking Act being a special and
subsequent legislation has the effect of amending
Section 6 of Act No. 3135, insofar as the redemption
price is concerned, when the mortgagee is a bank.
Thus, the amount to be paid in redeeming the property
is determined by the General Banking Act, and not by
the Rules of Court in Relation to Act 3135.
The Remedy of Foreclosure
In reviewing the banks additional charges on the
redemption price as a result of the foreclosure, this
Court will first clarify certain vital points of fact and law
that both parties and the courts a quo seem to have
missed.
Firstly, at the time respondent resigned, which was
chronologically before the foreclosure proceedings, he
had several liabilities to the bank. Secondly, when the
bank later on instituted the foreclosure proceedings, it
foreclosed only the mortgage secured by the real
estate loan of P421,800.22 It did not seek to include, in
the foreclosure, the consumption loan under
Promissory Note No. 0143 or the other alleged
obligations of respondent. Thirdly, on 28 February
1996, the bank availed itself of the remedy of
foreclosure and, in doing so, effectively gained the
property.
As a result of these established facts, one evident
conclusion surfaces: the Real Estate Mortgage Contract
on the secured property is already extinguished.

RULING OF THE COURT

The 18% Annual Interest on the Bid
Price of P421,800
The Applicable Law
The bank argues that instead of referring to the Rules
of Court to compute the redemption price, the courts a
quoshould have applied the General Banking
Law,17 considering that petitioner is a banking
institution.

In foreclosures, the mortgaged property is subjected to

the proceedings for the satisfaction of the
obligation.23 As a result, payment is effected by
abnormal means whereby the debtor is forced by a
judicial proceeding to comply with the presentation or
to pay indemnity.24
Once the proceeds from the sale of the property are
applied to the payment of the obligation, the obligation
is already extinguished.25 Thus, in Spouses Romero v.
Court of Appeals,26 we held that the mortgage
indebtedness was extinguished with the foreclosure

and sale of the mortgaged property, and that what

remained was the right of redemption granted by law.
Consequently, since the Real Estate Mortgage Contract
is already extinguished, petitioner can no longer rely on
it or invoke its provisions, including the dragnet clause
stipulated therein. It follows that the bank cannot refer
to the 18% annual interest charged in Promissory Note
No. 0143, an obligation allegedly covered by the terms
of the Contract.
Neither can the bank use the consummated contract to
collect on the rest of the obligations, which were not
included when it earlier instituted the foreclosure
proceedings. It cannot be allowed to use the same
security to collect on the other loans. To do so would be
akin to foreclosing an already foreclosed property.
Rather than relying on an expired contract, the bank
should have collected on the excluded loans by
instituting the proper actions for recovery of sums of
money. Simply put, petitioner should have run after
Tuble separately, instead of hostaging the same
property to cover all of his liabilities.
The Right of Redemption
Despite the extinguishment of the Real Estate
Mortgage Contract, Tuble had the right to redeem the
security by paying the redemption price.
The right of redemption of foreclosed properties was a
statutory privilege27 he enjoyed. Redemption is by force
of law, and the purchaser at public auction is bound to
accept it.28 Thus, it is the law that provides the terms of
the right; the mortgagee cannot dictate them. The
terms of this right, based on Section 47 of the General
Banking Law, are as follows:
1. The redemptioner shall have the right within one
year after the sale of the real estate, to redeem the
property.

Consequently, the bank cannot alter that right by

imposing additional charges and including other loans.
Verily, the freedom to stipulate the terms and
conditions of an agreement is limited by law.29
Thus, we held in Rural Bank of San Mateo, Inc. v.
Intermediate Appellate Court30 that the power to decide
whether or not to foreclose is the prerogative of the
mortgagee; however, once it has made the decision by
filing a petition with the sheriff, the acts of the latter
shall thereafter be governed by the provisions of the
mortgage laws, and not by the instructions of the
mortgagee. In direct contravention of this ruling,
though, the bank included numerous charges and loans
in the redemption price, which inexplicably ballooned
to P1,318,401.91. On this error alone, the claims of
petitioner covering all the additional charges should be
denied. Thus, considering the undue inclusions of the
additional charges, the bank cannot impose the 18%
annual interest on the redemption price.
The Dragnet Clause
In any event, assuming that the Real Estate Mortgage
Contract subsists, we rule that the dragnet clause
therein does not justify the imposition of an 18%
annual interest on the redemption price.
This Court has recognized that, through a dragnet
clause, a real estate mortgage contract may
exceptionally secure future loans or
advancements.31 But an obligation is not secured by a
mortgage, unless, that mortgage comes fairly within
the terms of the mortgage contract.32
We have also emphasized that the mortgage
agreement, being a contract of adhesion, is to be
carefully scrutinized and strictly construed against the
bank, the party that prepared the agreement.33

2. The redemptioner shall pay the amount due under

the mortgage deed, with interest thereon at rate
specified in the mortgage, and all the costs and
expenses incurred by the bank or institution from the
sale and custody of said property less the income
derived therefrom.

Here, after reviewing the entire deed, this Court finds

that there is no specific mention of interest to be added
in case of either default or redemption. The Real Estate
Mortgage Contract itself is silent on the computation of
the redemption price. Although it refers to the
Promissory Notes as constitutive of Tubles secured
obligations, the said contract does not state that the
interest to be charged in case of redemption should be
what is specified in the Promissory Notes.

3. In case of redemptioners who are considered by law

as juridical persons, they shall have the right to redeem
not after the registration of the certificate of
foreclosure sale with the applicable Register of Deeds
which in no case shall be more than three (3) months
after foreclosure, whichever is earlier.

In Philippine Banking Communications v. Court of

Appeals,34 we have construed such silence or omission
of additional charges strictly against the bank. In that
case, we affirmed the findings of the courts a quo that
penalties and charges are not due for want of
stipulation in the mortgage contract.

Worse, when petitioner invites us to look at the

Promissory Notes in determining the interest, these
loan agreements offer different interest charges:
Promissory Note No. 0142, which corresponds exactly
to the real estate loan, contains no stipulation on
interest; while Promissory Note No. 0143, which in turn
corresponds to the consumption loan, provides a
charge of 18% interest per annum.
Thus, an ambiguity results as to which interest shall be
applied, for to apply an 18% interest per annum based
on Promissory Note No. 0143 will negate the existence
of the 0% interest charged by Promissory Note No.
0142. Notably, it is this latter Promissory Note that
refers to the principal agreement to which the security
attaches.
In resolving this ambiguity, we refer to a basic principle
in the law of contracts: "Any ambiguity is to be
taken contra proferentem, that is, construed against
the party who caused the ambiguity which could have
avoided it by the exercise of a little more
care."35 Therefore, the ambiguity in the mortgage deed
whose terms are susceptible of different interpretations
must be read against the bank that drafted it.
Consequently, we cannot impute grave error on the
part of the courts a quo for not appreciating a charge of
18% interest per annum.
Furthermore, this Court refuses to be blindsided by the
dragnet clause in the Real Estate Mortgage Contract to
automatically include the consumption loan, and its
corresponding interest, in computing the redemption
price.
As we have held in Prudential Bank v. Alviar,36 in the
absence of clear and supportive evidence of a contrary
intention, a mortgage containing a dragnet clause will
not be extended to cover future advances, unless the
document evidencing the subsequent advance refers to
the mortgage as providing security therefor.
In this regard, this Court adopted the "reliance on the
security test" used in the above-mentioned cases,
Prudential Bank37 and Philippine Bank of
Communications.38 In these Decisions, we elucidated
the test as follows:
x x x A mortgage with a "dragnet clause" is an "offer"
by the mortgagor to the bank to provide the security of
the mortgage for advances of and when they were
made. Thus, it was concluded that the "offer" was not
accepted by the bank when a subsequent advance was
made because (1) the second note was secured by a
chattel mortgage on certain vehicles, and the clause
therein stated that the note was secured by such
chattel mortgage; (2) there was no reference in the
second note or chattel mortgage indicating a

connection between the real estate mortgage and the

advance; (3) the mortgagor signed the real estate
mortgage by her name alone, whereas the second note
and chattel mortgage were signed by the mortgagor
doing business under an assumed name; and (4) there
was no allegation by the bank, and apparently no
proof, that it relied on the security of the real estate
mortgage in making the advance.39 (Emphasis
supplied)
Here, the second loan agreement, or Promissory Note
No. 0143, referring to the consumption loan makes no
reference to the earlier loan with a real estate
mortgage. Neither does the bank make any allegation
that it relied on the security of the real estate
mortgage in issuing the consumption loan to Tuble.
It must be remembered that Tuble was petitioners
previous vice-president. Hence, as one of the senior
officers, the consumption loan was given to him not as
an ordinary loan, but as a form of accommodation or
privilege.40 The banks grant of the salary loan to Tuble
was apparently not motivated by the creation of a
security in favor of the bank, but by the fact the he was
a top executive of petitioner.
Thus, the bank cannot claim that it relied on the
previous security in granting the consumption loan to
Tuble. For this reason, the dragnet clause will not be
extended to cover the consumption loan. It follows,
therefore, that its corresponding interest 18% per
annum is inapplicable. Consequently, the courts a
quo did not gravely abuse their discretion in refusing to
apply an annual interest of 18% in computing the
redemption price. A finding of grave abuse of discretion
necessitates that the judgment must have been
exercised arbitrarily and without basis in fact and in
law.41
The Interest Charges on Promissory
Note No. 0142
In addition to the 18% annual interest, the bank also
claims a 12% interest per annum on the consumption
loan. Notwithstanding that Promissory Note No. 0142
contains no stipulation on interest payments, the bank
still claims that Tuble is liable to pay the legal interest.
This interest is currently at 12% per annum, pursuant
to Central Bank Circular No. 416 and Article 2209 of the
Civil Code, which provides:
If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and
in the absence of stipulation, the legal interest, which is
six per cent per annum. (Emphasis supplied)

While Article 2209 allows the recovery of interest sans

stipulation, this charge is provided not as a form of
monetary interest, but as one of compensatory
interest.42

share in the DIP in view of the full settlement of his

obligations. Thus, there being no substantial delay on
his part, the CA did not grievously err in not declaring
him to be in default.

Monetary interest refers to the compensation set by

the parties for the use or forbearance of money.43 On
the other hand, compensatory interest refers to the
penalty or indemnity for damages imposed by law or
by the courts.44Compensatory interest, as a form of
damages, is due only if the obligor is proven to have
defaulted in paying the loan.45

The Award of Moral and Exemplary

Damages

Thus, a default must exist before the bank can collect

the compensatory legal interest of 12% per annum. In
this regard, Tuble denies being in default since, by way
of legal compensation, he effectively paid his liabilities
on time.
This argument is flawed. The bank correctly explains in
its Petition that in order for legal compensation to take
effect, Article 1279 of the Civil Code requires that the
debts be liquidated and demandable. This provision
reads:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor. (Emphasis
supplied)
Liquidated debts are those whose exact amount has
already been determined.46 In this case, the receivable
of Tuble, including his DIP share, was not yet
determined; it was the petitioners policy to compute
and issue the computation only after the retired
employee had been cleared by the bank. Thus, Tuble
incorrectly invoked legal compensation in addressing
this issue of default.
Nevertheless, based on the findings of the RTC and the
CA, the obligation of Tuble as evidenced by Promissory
Note No. 0142, was set to mature on 1 January 1999.
But then, he had already settled his liabilities on 17
March 1997 by paying P1,318,401.91 as redemption
price. Then, in 1999, the bank issued his Clearance and

The courts a quo awarded Tuble P200,000 as moral

damages and P50,000 as exemplary
damages.1wphi1 As appreciated by the RTC, which
had the opportunity to examine the parties,47 the bank
treated Tuble unfairly and unreasonably by refusing to
lend even a little charity and human consideration
when it immediately foreclosed the loans of its previous
vice-president instead of heeding his request to make a
straightforward calculation of his receivables and offset
them against his liabilities.48
To the mind of the trial court, this was such a simple
request within the control of the bank to grant; and if
petitioner had only acceded, the troubles of the lawsuit
would have been avoided.1wphi1
Moreover, the RTC found that the bank caused Tuble
severe humiliation when the Nissan Vannette was
seized from his new office at Kuok Properties
Philippines. The trial court also highlighted the fact that
respondent as the previous vice-president of petitioner
was no ordinary employee he was a man of good
professional standing, and one who actively
participated in civic organizations. The RTC then
concluded that a man of his standing deserved fair
treatment from his employer, especially since they
served common goals.
This Court affirms the dispositions of the RTC and the
CA. They correctly ruled that the award of moral
damages also includes cases of besmirched reputation,
moral shock, social humiliation and similar injury. In
this regard, the social and financial standings of the
parties are additional elements that should be taken
into account in the determination of the amount of
moral damages.49 Based on their findings that Tuble
suffered undue embarrassment, given his social
standing, the courts a quo had factual Basis50 to justify
the award of moral damages and, consequently,
exemplary damages51 in his favor.
From all the foregoing, we rule that the appellate court
correctly deleted the 18% annual interest charges,
albeit for different reasons. First, the interest cannot be
imposed, because any reference to it under the Real
Estate Mortgage Contract is misplaced, as the contract
is already extinguished. Second, the said interest
cannot be collected without any basis in terms of
Tuble's redemption rights. Third, assuming that the
Real Estate Mortgage Contract subsists, the bank

cannot collect the interest because of the contract's

ambiguity. Fourth, the dragnet clause referred to in the
contract cannot be presumed to include the 18%
annual interest specified in the consumption loan. Fifth,
with respect to the compensatory interest claimed by
the bank, we hold that neither is the interest due,
because Tuble cannot be deemed to be in default of his
obligations.

IN VIEW THEREOF, the assailed 28 March 2008

Decision and 30 July 2008 Resolution of the Court of
Appeals in CA-G.R. CV No. 87410 are
hereby AFFIRMED.
SO ORDERED.