G.R. No.

L-46240
November 3, 1939
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,
vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.Felipe Buencamino, Jr. for appellee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture which she
lent him for his use. She appealed from the judgment of the Court of First Instance of Manila
which ordered that the defendant return to her the three has heaters and the four electric lamps
found in the possession of the Sheriff of said city, that she call for the other furniture from the
said sheriff of Manila at her own expense, and that the fees which the Sheriff may charge for the
deposit of the furniture be paid pro rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del
Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between
the plaintiff and the defendant, the former gratuitously granted to the latter the use of the
furniture described in the third paragraph of the stipulation of facts, subject to the condition that
the defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the
property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified
the defendant of the conveyance, giving him sixty days to vacate the premises under one of the
clauses of the contract of lease. There after the plaintiff required the defendant to return all the
furniture transferred to him for them in the house where they were found. On
November
5, 1936, the defendant, through another person, wrote to the plaintiff reiterating that she may
call for the furniture in the ground floor of the house. On the 7th of the same month, the
defendant wrote another letter to the plaintiff informing her that he could not give up the three
gas heaters and the four electric lamps because he would use them until the 15th of the same
month when the lease in due to expire. The plaintiff refused to get the furniture in view of the
fact that the defendant had declined to make delivery of all of them. On
November 15th,
before vacating the house, the defendant deposited with the Sheriff all the furniture belonging to
the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in
the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the
law: in holding that they violated the contract by not calling for all the furniture on November 5,
1936, when the defendant placed them at their disposal; in not ordering the defendant to pay
them the value of the furniture in case they are not delivered; in holding that they should get all
the furniture from the Sheriff at their expenses; in ordering them to pay-half of the expenses
claimed by the Sheriff for the deposit of the furniture; in ruling that both parties should pay their
respective legal expenses or the costs; and in denying pay their respective legal expenses or
the costs; and in denying the motions for reconsideration and new trial. To dispose of the case,
it is only necessary to decide whether the defendant complied with his obligation to return the
furniture upon the plaintiff's demand; whether the latter is bound to bear the deposit fees
thereof, and whether she is entitled to the costs of litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract the defendant bound himself to return the furniture to the
plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1,
and 1741 of the Civil Code). The obligation voluntarily assumed by the defendant to return the
furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at
the latter's residence or house. The defendant did not comply with this obligation when he
merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters
and the four eletric lamps. The provisions of article 1169 of the Civil Code cited by counsel for

the parties are not squarely applicable. The trial court, therefore, erred when it came to the legal
conclusion that the plaintiff failed to comply with her obligation to get the furniture when they
were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the
latter's demand, the Court could not legally compel her to bear the expenses occasioned by the
deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place
the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the
furniture, because the defendant wanted to retain the three gas heaters and the four electric
lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment
thereof by the defendant in case of his inability to return some of the furniture because under
paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted the
correctness of the said value. Should the defendant fail to deliver some of the furniture, the
value thereof should be latter determined by the trial Court through evidence which the parties
may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the
prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who
breached the contract of commodatum, and without any reason he refused to return and deliver
all the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that
he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise
defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the
latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and deposit of the furniture with the
Sheriff shall be for the account of the defendant. the defendant shall pay the costs in both
instances. So ordered.
Avancea, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.
G.R. No. L-17474
October 25, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.Office of the Solicitor General for
plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the
Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari,
of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May
1949 for breeding purposes subject to a government charge of breeding fee of 10% of the book
value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a
renewal for another period of one year. However, the Secretary of Agriculture and Natural
Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to 7
May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to
the Director of Animal Industry that he would pay the value of the three bulls. On 17 October
1950 he reiterated his desire to buy them at a value with a deduction of yearly depreciation to
be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry
advised him that the book value of the three bulls could not be reduced and that they either be

returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay
the book value of the three bulls or to return them. So, on 20 December 1950 in the Court of
First Instance of Manila the Republic of the Philippines commenced an action against him
praying that he be ordered to return the three bulls loaned to him or to pay their book value in
the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with
interests, and costs; and that other just and equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that
because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of
Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural
Resources and the President of the Philippines from the refusal by the Director of Animal
Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8%
from the date of acquisition, to which depreciation the Auditor General did not object, he could
not return the animals nor pay their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three
bulls plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal
rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted
on 18 October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte
motion filed by the plaintiff on November 1958 for the appointment of a special sheriff to serve
the writ outside Manila. Of this order appointing a special sheriff, on 6 December 1958,
Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas who died on 23
October 1951 and as administratrix of his estate, was notified. On 7 January 1959 she file a
motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the
Bureau Animal of Industry and that sometime in November 1958 the third bull, the Sahiniwal,
died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad Intal, and praying
that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31
January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto.
On the same day, 6 February, the Court denied her motion. Hence, this appeal certified by the
Court of Appeals to this Court as stated at the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant,
returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station,
Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum
receipt signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the
appellant's motion to quash the writ of execution the appellee prays "that another writ of
execution in the sum of P859.53 be issued against the estate of defendant deceased Jose V.
Bagtas." She cannot be held liable for the two bulls which already had been returned to and
received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in
November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan,
where the animal was kept, and that as such death was due to force majeure she is relieved
from the duty of returning the bull or paying its value to the appellee. The contention is without
merit. The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for
breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed
for another year as regards one bull, was subject to the payment by the borrower of breeding
fee of 10% of the book value of the bulls. The appellant contends that the contract was
commodatum and that, for that reason, as the appellee retained ownership or title to the bull it
should suffer its loss due to force majeure. A contract of commodatum is essentially gratuitous.1
If the breeding fee be considered a compensation, then the contract would be a lease of the
bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a
possessor in bad faith, because she had continued possession of the bull after the expiry of the

contract. And even if the contract be commodatum, still the appellant is liable, because article
1942 of the Civil Code provides that a bailee in a contract of commodatum
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8 May 1950. But the appellant kept and used
the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore,
when lent and delivered to the deceased husband of the appellant the bulls had each an
appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the
Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event
the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the bull or
the payment of its value being a money claim should be presented or filed in the intestate
proceedings of the defendant who died on 23 October 1951, is not altogether without merit.
However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction
over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court
provides that
After a party dies and the claim is not thereby extinguished, the court shall order, upon proper
notice, the legal representative of the deceased to appear and to be substituted for the
deceased, within a period of thirty (30) days, or within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16
of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the
court promptly of such death . . . and to give the name and residence of the executory
administrator, guardian, or other legal representative of the deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas
had been issue letters of administration of the estate of the late Jose Bagtas and that "all
persons having claims for monopoly against the deceased Jose V. Bagtas, arising from contract
express or implied, whether the same be due, not due, or contingent, for funeral expenses and
expenses of the last sickness of the said decedent, and judgment for monopoly against him, to
file said claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City,
within six (6) months from the date of the first publication of this order, serving a copy thereof
upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the
said deceased," is not a notice to the court and the appellee who were to be notified of the
defendant's death in accordance with the above-quoted rule, and there was no reason for such
failure to notify, because the attorney who appeared for the defendant was the same who
represented the administratrix in the special proceedings instituted for the administration and
settlement of his estate. The appellee or its attorney or representative could not be expected to
know of the death of the defendant or of the administration proceedings of his estate instituted
in another court that if the attorney for the deceased defendant did not notify the plaintiff or its
attorney of such death as required by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late
defendant is only liable for the sum of P859.63, the value of the bull which has not been
returned to the appellee, because it was killed while in the custody of the administratrix of his
estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the
motion filed on 7 January 1959 by the appellant for the quashing of the writ of execution.
Special proceedings for the administration and settlement of the estate of the deceased Jose V.
Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money
judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution

but must be presented to the probate court for payment by the appellant, the administratrix
appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to
costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala
and Makalintal, JJ., concur.
Barrera, J., concurs in the result.
G.R. No. L-24968 April 27, 1972
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.
MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on
June 28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual
and consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of
P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's
fees in the amount of P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation
Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of
P500,000.00, to be used as follows: P250,000.00 for the construction of a factory building (for
the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute
mill machinery and equipment; and P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by
Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and
arrived in Davao City in July 1953; and that to secure its release without first paying the draft,
Saura, Inc. executed a trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for
P500,000.00, to be secured by a first mortgage on the factory building to be constructed, the
land site thereof, and the machinery and equipment to be installed. Among the other terms
spelled out in the resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo
and China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation,
subject to availability of funds, and as the construction of the factory buildings progresses, to be
certified to by an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however,
evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC,
requesting a modification of the terms laid down by it, namely: that in lieu of having China
Engineers, Ltd. (which was willing to assume liability only to the extent of its stock subscription
with Saura, Inc.) sign as co-maker on the corresponding promissory notes, Saura, Inc. would
put up a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S.
Roca would be substituted for Inocencia Arellano as one of the other co-makers, having

acquired the latter's shares in Saura, Inc.

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of
the members of its Board of Governors, for certain reasons stated in the resolution, "to
reexamine all the aspects of this approved loan ... with special reference as to the advisability of
financing this particular project based on present conditions obtaining in the operations of jute
mills, and to submit his findings thereon at the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act
as co-signer for the loan, and asked that the necessary documents be prepared in accordance
with the terms and conditions specified in Resolution No. 145. In connection with the
reexamination of the project to be financed with the loan applied for, as stated in Resolution No.
736, the parties named their respective committees of engineers and technical men to meet
with each other and undertake the necessary studies, although in appointing its own committee
Saura, Inc. made the observation that the same "should not be taken as an acquiescence on
(its) part to novate, or accept new conditions to, the agreement already) entered into," referring
to its acceptance of the terms and conditions mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of
mortgage, which was duly registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the reexamination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on
June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to
reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as
follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under
Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736,
c.s., authorizing the re-examination of all the various aspects of the loan granted the Saura
Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the
manufacture of jute sacks in Davao, with special reference as to the advisability of financing this
particular project based on present conditions obtaining in the operation of jute mills, and after
having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon
recommendation of the Chairman, RESOLVED that the loan granted the Saura Import & Export
Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be
authorized as may be necessary from time to time to place the factory in actual operation:
PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith,
shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note
for China Engineers Ltd. jointly and severally with the other RFC that his company no longer to
of the loan and therefore considered the same as cancelled as far as it was concerned. A followup letter dated July 2 requested RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be
granted. The request was denied by RFC, which added in its letter-reply that it was "constrained
to consider as cancelled the loan of P300,000.00 ... in view of a notification ... from the China
Engineers Ltd., expressing their desire to consider the loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC
that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if
RFC releases to us the P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original
amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the
promissory notes jointly with the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw materials, the
Department of Agriculture and Natural Resources shall certify to the following:

1. That the raw materials needed by the borrower-corporation to carry out its operation are
available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the
requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22,
1954, wherein it was explained that the certification by the Department of Agriculture and
Natural Resources was required "as the intention of the original approval (of the loan) is to
develop the manufacture of sacks on the basis of locally available raw materials." This point is
important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not
deny that the factory he was building in Davao was for the manufacture of bags from local raw
materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by
and between the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to
finance, manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners,
floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The
explanatory note on page 1 of the same brochure states that, the venture "is the first serious
attempt in this country to use 100% locally grown raw materials notably kenaf which is presently
grown commercially in theIsland of Mindanao where the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan application in
the first place, and to require, in its Resolution No. 9083, a certification from the Department of
Agriculture and Natural Resources as to the availability of local raw materials to provide
adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand
impliedly in its letter of January 21, 1955: (1) stating that according to a special study made by
the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably
even next year;" (2) requesting "assurances (from RFC) that my company and associates will
be able to bring in sufficient jute materials as may be necessary for the full operation of the jute
mill;" and (3) asking that releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equipment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the release of your loan
under consideration of P500,000. As stated in our letter of December 22, 1954, the releases of
the loan, if revived, are proposed to be made from time to time, subject to availability of funds
towards the end that the sack factory shall be placed in actual operating status. We shall be
able to act on your request for revised purpose and manner of releases upon re-appraisal of the
securities offered for the loan.
With respect to our requirement that the Department of Agriculture and Natural Resources
certify that the raw materials needed are available in the immediate vicinity and that there is

prospect of increased production thereof to provide adequately the requirements of the factory,
we wish to reiterate that the basis of the original approval is to develop the manufacture of
sacks on the basis of the locally available raw materials. Your statement that you will have to
rely on the importation of jute and your request that we give you assurance that your company
will be able to bring in sufficient jute materials as may be necessary for the operation of your
factory, would not be in line with our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the
matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955
RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura
himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a mortgage
contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank
and Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within
which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for
failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15,
1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the
request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of
RFC (as predecessor of the defendant DBP) to comply with its obligation to release the
proceeds of the loan applied for and approved, thereby preventing the plaintiff from completing
or paying contractual commitments it had entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract
between the parties and that the defendant was guilty of breach thereof. The defendant pleaded
below, and reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that
its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that
assuming there was, the plaintiff itself did not comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of
the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is
binding upon the parties, but the commodatum or simple loan itself shall not be perferted until
the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a
loan of P500,000.00 was approved by resolution of the defendant, and the corresponding
mortgage was executed and registered. But this fact alone falls short of resolving the basic
claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to
recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption
that the factory to be constructed would utilize locally grown raw materials, principally kenaf.
There is no serious dispute about this. It was in line with such assumption that when RFC, by
Resolution No. 9083 approved on December 17, 1954, restored the loan to the original amount
of P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials needed by the
borrower-corporation to carry out its operation are available in the immediate vicinity; and (2)
that there is prospect of increased production thereof to provide adequately for the requirements
of the factory." The imposition of those conditions was by no means a deviation from the terms
of the agreement, but rather a step in its implementation. There was nothing in said conditions
that contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954,
namely "that the proceeds of the loan shall be utilized exclusively for the following purposes:
for construction of factory building P250,000.00; for payment of the balance of purchase
price of machinery and equipment P240,900.00; for working capital P9,100.00." Evidently
Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter
of January 21, 1955, stating that local jute "will not be able in sufficient quantity this year or

probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be
released "for raw materials and labor." This was a deviation from the terms laid down in
Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part
of the proceeds of the loan to purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had
been going on for the implementation of the agreement reached an impasse. Saura, Inc.
obviously was in no position to comply with RFC's conditions. So instead of doing so and
insisting that the loan be released as agreed upon, Saura, Inc. asked that the mortgage be
cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the
nature cf mutual desistance what Manresa terms "mutuo disenso" 1 which is a mode of
extinguishing obligations. It is a concept that derives from the principle that since mutual
agreement can create a contract, mutual disagreement by the parties can cause its
extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any
alleged breach of contract by RFC, or even point out that the latter's stand was legally
unjustified. Its request for cancellation of the mortgage carried no reservation of whatever rights
it believed it might have against RFC for the latter's non-compliance. In 1962 it even applied
with DBP for another loan to finance a rice and corn project, which application was disapproved.
It was only in 1964, nine years after the loan agreement had been cancelled at its own request,
that Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond
doubt that the said agreement had been extinguished by mutual desistance and that on the
initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the other
issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs
against the plaintiff-appellee.
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ.,
concur.
Makasiar, J., took no part.
G.R. No. L-66653 June 19, 1986
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BURROUGHS LIMITED AND THE COURT OF TAX APPEALS, respondents.
Sycip, Salazar, Feliciano & Hernandez Law Office for private respondent.
PARAS, J.:
Petition for certiorari to review and set aside the Decision dated June 27, 1983 of respondent
Court of Tax Appeals in its C.T.A. Case No. 3204, entitled "Burroughs Limited vs. Commissioner
of Internal Revenue" which ordered petitioner Commissioner of Internal Revenue to grant in
favor of private respondent Burroughs Limited, tax credit in the sum of P172,058.90,
representing erroneously overpaid branch profit remittance tax.
Burroughs Limited is a foreign corporation authorized to engage in trade or business in the
Philippines through a branch office located at De la Rosa corner Esteban Streets, Legaspi
Village, Makati, Metro Manila.
Sometime in March 1979, said branch office applied with the Central Bank for authority to remit
to its parent company abroad, branch profit amounting to P7,647,058.00. Thus, on March 14,
1979, it paid the 15% branch profit remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to
its head office the amount of P6,499,999.30 computed as follows:
Amount applied for remittance................................ P7,647,058.00
Deduct: 15% branch profit

remittance tax ..............................................1,147,058.70

Net amount actually remitted.................................. P6,499,999.30
Claiming that the 15% profit remittance tax should have been computed on the basis of the
amount actually remitted (P6,499,999.30) and not on the amount before profit remittance tax
(P7,647,058.00), private respondent filed on December 24, 1980, a written claim for the refund
or tax credit of the amount of P172,058.90 representing alleged overpaid branch profit
remittance tax, computed as follows:
Profits actually remitted .........................................P6,499,999.30
Remittance tax rate .......................................................15%
Branch profit remittance taxdue thereon ......................................................P 974,999.89
Branch profit remittance
tax paid .............................................................Pl,147,058.70
Less: Branch profit remittance
tax as above computed................................................. 974,999.89
Total amount refundable........................................... P172,058.81
On February 24, 1981, private respondent filed with respondent court, a petition for review,
docketed as C.T.A. Case No. 3204 for the recovery of the above-mentioned amount of
P172,058.81.
On June 27, 1983, respondent court rendered its Decision, the dispositive portion of which
reads
ACCORDINGLY, respondent Commission of Internal Revenue is hereby ordered to grant a tax
credit in favor of petitioner Burroughs Limited the amount of P 172,058.90. Without
pronouncement as to costs.
SO ORDERED.
Unable to obtain a reconsideration from the aforesaid decision, petitioner filed the instant
petition before this Court with the prayers as herein earlier stated upon the sole issue of
whether the tax base upon which the 15% branch profit remittance tax shall be imposed under
the provisions of section 24(b) of the Tax Code, as amended, is the amount applied for
remittance on the profit actually remitted after deducting the 15% profit remittance tax. Stated
differently is private respondent Burroughs Limited legally entitled to a refund of the
aforementioned amount of P172,058.90.
We rule in the affirmative. The pertinent provision of the National Revenue Code is Sec. 24 (b)
(2) (ii) which states:
Sec. 24. Rates of tax on corporations....
(b) Tax on foreign corporations. ...
(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a branch to its head
office shall be subject to a tax of fifteen per cent (15 %) ...
In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting Commissioner of
Internal Revenue Hon. Efren I. Plana the aforequoted provision had been interpreted to mean
that "the tax base upon which the 15% branch profit remittance tax ... shall be imposed...(is) the
profit actually remitted abroad and not on the total branch profits out of which the remittance is
to be made. " The said ruling is hereinbelow quoted as follows:
In reply to your letter of November 3, 1978, relative to your query as to the tax base upon which
the 15% branch profits remittance tax provided for under Section 24 (b) (2) of the 1977 Tax
Code shall be imposed, please be advised that the 15% branch profit tax shall be imposed on
the branch profits actually remitted abroad and not on the total branch profits out of which the
remittance is to be made.
Please be guided accordingly.
Applying, therefore, the aforequoted ruling, the claim of private respondent that it made an
overpayment in the amount of P172,058.90 which is the difference between the remittance tax

actually paid of Pl,147,058.70 and the remittance tax that should have been paid of
P974,999,89, computed as follows
Profits actually remitted......................................... P6,499,999.30
Remittance tax rate.............................................................. 15%
Remittance tax due................................................... P974,999.89
is well-taken. As correctly held by respondent Court in its assailed decisionRespondent concedes at least that in his ruling dated January 21, 1980 he held that under
Section 24 (b) (2) of the Tax Code the 15% branch profit remittance tax shall be imposed on the
profit actually remitted abroad and not on the total branch profit out of which the remittance is to
be made. Based on such ruling petitioner should have paid only the amount of P974,999.89 in
remittance tax computed by taking the 15% of the profits of P6,499,999.89 in remittance tax
actually remitted to its head office in the United States, instead of Pl,147,058.70, on its net
profits of P7,647,058.00. Undoubtedly, petitioner has overpaid its branch profit remittance tax in
the amount of P172,058.90.
Petitioner contends that respondent is no longer entitled to a refund because Memorandum
Circular No. 8-82 dated March 17, 1982 had revoked and/or repealed the BIR ruling of January
21, 1980. The said memorandum circular states
Considering that the 15% branch profit remittance tax is imposed and collected at source,
necessarily the tax base should be the amount actually applied for by the branch with the
Central Bank of the Philippines as profit to be remitted abroad.
Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still the
Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited paid the
branch profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-82
dated March 17, 1982 cannot be given retroactive effect in the light of Section 327 of the
National Internal Revenue Code which providesSec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of any of the
rules and regulations promulgated in accordance with the preceding section or any of the
rulings or circulars promulgated by the Commissioner shag not be given retroactive application
if the revocation, modification, or reversal will be prejudicial to the taxpayer except in the
following cases (a) where the taxpayer deliberately misstates or omits material facts from his
return or in any document required of him by the Bureau of Internal Revenue; (b) where the
facts subsequently gathered by the Bureau of Internal Revenue are materially different from the
facts on which the ruling is based, or (c) where the taxpayer acted in bad faith. (ABS-CBN
Broadcasting Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs Limited by a retroactive
application of Memorandum Circular No. 8-82 is beyond question for it would be deprived of the
substantial amount of P172,058.90. And, insofar as the enumerated exceptions are concerned,
admittedly, Burroughs Limited does not fall under any of them.
WHEREFORE, the assailed decision of respondent Court of Tax Appeals is hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Feria, Fernan, Alampay and Gutierrez, Jr., JJ., concur.
G.R. No. 133632
February 15, 2002
BPI INVESTMENT CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT CORPORATION,
respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals

and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed
the judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831,
for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against
private respondents ALS Management and Development Corporation and Antonio K. Litonjua, 1
consolidated with (b) Civil Case No. 52093, for damages with prayer for the issuance of a writ of
preliminary injunction by the private respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of their
monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature
and made in bad faith. It awarded private respondents the amount of P300,000 for moral
damages, P50,000 for exemplary damages, and P50,000 for attorneys fees and expenses for
litigation. It likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a
house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to
AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents
ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the
P500,000 balance of Roas indebtedness with AIDC. The latter, however, was not willing to
extend the old interest rate to private respondents and proposed to grant them a new loan of
P500,000 to be applied to Roas debt and secured by the same property, at an interest rate of
20% per annum and service fee of 1% per annum on the outstanding principal balance payable
within ten years in equal monthly amortization of P9,996.58 and penalty interest at the rate of
21% per annum per day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the
above stipulations with the provision that payment of the monthly amortization shall commence
on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum of
P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn, was
liquidated when BPIIC applied thereto the proceeds of private respondents loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be
what was left of their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the
ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30,
1984, amounted to Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100
Pesos (P475,585.31). A notice of sheriffs sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They
alleged, among others, that they were not in arrears in their payment, but in fact made an
overpayment as of June 30, 1984. They maintained that they should not be made to pay
amortization before the actual release of the P500,000 loan in August and September 1982.
Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to private
respondents. Hence, applying the effects of legal compensation, the balance of P35,648.23
should be applied to the initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093,
thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development
Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that the
amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of
P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal
monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred twenty
(120) months. The amortization schedule attached as Annex "A" to the "Deed of Mortgage" is
correspondingly reformed as aforestated.

The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused
their publication in a newspaper of general circulation as defaulting debtors, and therefore
orders BPI to pay ALS and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.2
Both parties appealed to the Court of Appeals. However, private respondents appeal was
dismissed for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion
reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.
SO ORDERED.3
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the
delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua
was perfected only on September 13, 1982, the date when BPIIC released the purported
balance of the P500,000 loan after deducting therefrom the value of Roas indebtedness. Thus,
payment of the monthly amortization should commence only a month after the said date, as can
be inferred from the stipulations in the contract. This, despite the express agreement of the
parties that payment shall commence on May 1, 1981. From October 1982 to June 1984, the
total amortization due was only P194,960.43. Evidence showed that private respondents had an
overpayment, because as of June 1984, they already paid a total amount of P201,791.96.
Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage and cause the
publication in newspapers concerning private respondents delinquency in the payment of their
loan. This fact constituted sufficient ground for moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition,
where BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE
LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY
DAMAGES AND ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY
ALS AND OPPOSED TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS.
COURT OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a
simple loan is perfected upon the delivery of the object of the contract, the loan contract in this
case was perfected only on September 13, 1982. Petitioner claims that a contract of loan is a
consensual contract, and a loan contract is perfected at the time the contract of mortgage is
executed conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the
present case, the loan contract was perfected on March 31, 1981, the date when the mortgage
deed was executed, hence, the amortization and interests on the loan should be computed from
said date.
Petitioner also argues that while the documents showed that the loan was released only on
August 1982, the loan was actually released on March 31, 1981, when BPIIC issued a
cancellation of mortgage of Frank Roas loan. This finds support in the registration on March 31,
1981 of the Deed of Absolute Sale executed by Roa in favor of ALS, transferring the title of the
property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner
claims, the delay in the release of the loan should be attributed to private respondents. As BPIIC
only agreed to extend a P500,000 loan, private respondents were required to reduce Frank
Roas loan below said amount. According to petitioner, private respondents were only able to do

so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code, 4 a
simple loan is perfected upon the delivery of the object of the contract, hence a real contract. In
this case, even though the loan contract was signed on March 31, 1981, it was perfected only
on September 13, 1982, when the full loan was released to private respondents. They submit
that petitioner misread Bonnevie. To give meaning to Article 1934, according to private
respondents, Bonnevie must be construed to mean that the contract to extend the loan was
perfected on March 31, 1981 but the contract of loan itself was only perfected upon the delivery
of the full loan to private respondents on September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was
perfected on March 31, 1981, and their payment did not start a month thereafter, still no default
took place. According to private respondents, a perfected loan agreement imposes reciprocal
obligations, where the obligation or promise of each party is the consideration of the other party.
In this case, the consideration for BPIIC in entering into the loan contract is the promise of
private respondents to pay the monthly amortization. For the latter, it is the promise of BPIIC to
deliver the money. In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon him.
Therefore, private respondents conclude, they did not incur in delay when they did not
commence paying the monthly amortization on May 1, 1981, as it was only on September 13,
1982 when petitioner fully complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real
contract. It is perfected only upon the delivery of the object of the contract. 5 Petitioner
misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected
consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted
promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445,
petitioner applied for a loan of P500,000 with respondent bank. The latter approved the
application through a board resolution. Thereafter, the corresponding mortgage was executed
and registered. However, because of acts attributable to petitioner, the loan was not released.
Later, petitioner instituted an action for damages. We recognized in this case, a perfected
consensual contract which under normal circumstances could have made the bank liable for not
releasing the loan. However, since the fault was attributable to petitioner therein, the court did
not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for damages.
However, said contract does not constitute the real contract of loan which requires the delivery
of the object of the contract for its perfection and which gives rise to obligations only on the part
of the borrower.6
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on
the other, was perfected only on September 13, 1982, the date of the second release of the
loan. Following the intentions of the parties on the commencement of the monthly amortization,
as found by the Court of Appeals, private respondents obligation to pay commenced only on
October 13, 1982, a month after the perfection of the contract. 7
We also agree with private respondents that a contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each party is the consideration for that of the other. 8 As
averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the
consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1,
1981, one month after the supposed release of the loan. It is a basic principle in reciprocal
obligations that neither party incurs in delay, if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. 9 Only when a party has performed
his part of the contract can he demand that the other party also fulfills his own obligation and if
the latter fails, default sets in. Consequently, petitioner could only demand for the payment of

the monthly amortization after September 13, 1982 for it was only then when it complied with its
obligation under the loan contract. Therefore, in computing the amount due as of the date when
BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13,
1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as the date of actual
release of the loan and whether private respondents were the cause of the delay in the release
of the loan, are factual. Since petitioner has not shown that the instant case is one of the
exceptions to the basic rule that only questions of law can be raised in a petition for review
under Rule 45 of the Rules of Court, 10 factual matters need not tarry us now. On these points we
are bound by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral and exemplary
damages for it did not act maliciously when it initiated the foreclosure proceedings. It merely
exercised its right under the mortgage contract because private respondents were irregular in
their monthly amortization.1wphi1 It invoked our ruling in Social Security System vs. Court of
Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of
Appeals "the negligence of the appellant is not so gross as to warrant moral and temperate
damages," except that, said Court reduced those damages by only P5,000.00 instead of
eliminating them. Neither can we agree with the findings of both the Trial Court and respondent
Court that the SSS had acted maliciously or in bad faith. The SSS was of the belief that it was
acting in the legitimate exercise of its right under the mortgage contract in the face of irregular
payments made by private respondents and placed reliance on the automatic acceleration
clause in the contract. The filing alone of the foreclosure application should not be a ground for
an award of moral damages in the same way that a clearly unfounded civil action is not among
the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said
damages because it insisted on the payment of amortization on the loan even before it was
released. Further, it did not make the corresponding deduction in the monthly amortization to
conform to the actual amount of loan released, and it immediately initiated foreclosure
proceedings when private respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment of
monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in
bad faith. Consequently, we should rule out the award of moral and exemplary damages. 11
However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its records on the amount actually
released to private respondents and the date when it was released. Such negligence resulted in
damage to private respondents, for which an award of nominal damages should be given in
recognition of their rights which were violated by BPIIC. 12 For this purpose, the amount of
P25,000 is sufficient.
Lastly, as in SSS where we awarded attorneys fees because private respondents were
compelled to litigate, we sustain the award of P50,000 in favor of private respondents as
attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution
dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The
award of moral and exemplary damages in favor of private respondents is DELETED, but the
award to them of attorneys fees in the amount of P50,000 is UPHELD. Additionally, petitioner is
ORDERED to pay private respondents P25,000 as nominal damages. Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
G.R. No. 115324

February 19, 2003

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner,

vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated June 25,
1991 in CA-G.R. CV No. 11791 and of its Resolution 2 dated May 5, 1994, denying the motion for
reconsideration of said decision filed by petitioner Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend
Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his
business, the Sterela Marketing and Services ("Sterela" for brevity). Specifically, Sanchez asked
private respondent to deposit in a bank a certain amount of money in the bank account of
Sterela for purposes of its incorporation. She assured private respondent that he could withdraw
his money from said account within a months time. Private respondent asked Sanchez to bring
Doronilla to their house so that they could discuss Sanchezs request. 3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi,
Doronillas private secretary, met and discussed the matter. Thereafter, relying on the
assurances and representations of Sanchez and Doronilla, private respondent issued a check in
the amount of Two Hundred Thousand Pesos (P200,000.00) in favor of Sterela. Private
respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in
opening a savings account in the name of Sterela in the Buendia, Makati branch of Producers
Bank of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to
deposit the check. They had with them an authorization letter from Doronilla authorizing
Sanchez and her companions, "in coordination with Mr. Rufo Atienza," to open an account for
Sterela Marketing Services in the amount of P200,000.00. In opening the account, the
authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for Savings
Account No. 10-1567 was thereafter issued to Mrs. Vives. 4
Subsequently, private respondent learned that Sterela was no longer holding office in the
address previously given to him. Alarmed, he and his wife went to the Bank to verify if their
money was still intact. The bank manager referred them to Mr. Rufo Atienza, the assistant
manager, who informed them that part of the money in Savings Account No. 10-1567 had been
withdrawn by Doronilla, and that only P90,000.00 remained therein. He likewise told them that
Mrs. Vives could not withdraw said remaining amount because it had to answer for some
postdated checks issued by Doronilla. According to Atienza, after Mrs. Vives and Sanchez
opened Savings Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for
Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts
necessary to cover overdrawings in Current Account No. 10-0320. In opening said current
account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To cover
payment thereof, Doronilla issued three postdated checks, all of which were dishonored.
Atienza also said that Doronilla could assign or withdraw the money in Savings Account No. 101567 because he was the sole proprietor of Sterela. 5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he
received a letter from Doronilla, assuring him that his money was intact and would be returned
to him. On August 13, 1979, Doronilla issued a postdated check for Two Hundred Twelve
Thousand Pesos (P212,000.00) in favor of private respondent. However, upon presentment
thereof by private respondent to the drawee bank, the check was dishonored. Doronilla
requested private respondent to present the same check on September 15, 1979 but when the
latter presented the check, it was again dishonored. 6
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla
for the return of his clients money. Doronilla issued another check for P212,000.00 in private
respondents favor but the check was again dishonored for insufficiency of funds. 7

Private respondent instituted an action for recovery of sum of money in the Regional Trial Court
(RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case
was docketed as Civil Case No. 44485. He also filed criminal actions against Doronilla,
Sanchez and Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985 while
the case was pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157,
promulgated its Decision in Civil Case No. 44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J.
Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives
jointly and severally
(a) the amount of P200,000.00, representing the money deposited, with interest at the legal rate
from the filing of the complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary damages;
(c) the amount of P40,000.00 for attorneys fees; and
(d) the costs of the suit.
SO ORDERED.8
Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision dated June
25, 1991, the appellate court affirmed in toto the decision of the RTC. 9 It likewise denied with
finality petitioners motion for reconsideration in its Resolution dated May 5, 1994. 10
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE
TRANSACTION BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS
ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONERS
BANK MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN
DEFRAUDING PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A
CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER THE PRINCIPLE
OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF
THE REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS
THE FINDINGS OF THE REGIONAL TRIAL COURT WERE BASED ON A
MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED
DECISION IN SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF
AN EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE
LOWER COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE
WITH THE OTHER DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING
THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR
EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEYS FEES AND THE COSTS OF SUIT.11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto
on September 25, 1995. The Court then required private respondent to submit a rejoinder to the
reply. However, said rejoinder was filed only on April 21, 1997, due to petitioners delay in
furnishing private respondent with copy of the reply12 and several substitutions of counsel on the
part of private respondent.13 On January 17, 2001, the Court resolved to give due course to the
petition and required the parties to submit their respective memoranda. 14 Petitioner filed its
memorandum on April 16, 2001 while private respondent submitted his memorandum on March

22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla is a simple
loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by
private respondent to Doronilla was money, a consumable thing; and second, the transaction
was onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by
Doronilla in the amount of P212,000.00, or P12,000 more than what private respondent
deposited in Sterelas bank account. 15 Moreover, the fact that private respondent sued his good
friend Sanchez for his failure to recover his money from Doronilla shows that the transaction
was not merely gratuitous but "had a business angle" to it. Hence, petitioner argues that it
cannot be held liable for the return of private respondents P200,000.00 because it is not privy to
the transaction between the latter and Doronilla. 16
It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not be faulted for
allowing Doronilla to withdraw from the savings account of Sterela since the latter was the sole
proprietor of said company. Petitioner asserts that Doronillas May 8, 1979 letter addressed to
the bank, authorizing Mrs. Vives and Sanchez to open a savings account for Sterela, did not
contain any authorization for these two to withdraw from said account. Hence, the authority to
withdraw therefrom remained exclusively with Doronilla, who was the sole proprietor of Sterela,
and who alone had legal title to the savings account. 17 Petitioner points out that no evidence
other than the testimonies of private respondent and Mrs. Vives was presented during trial to
prove that private respondent deposited his P200,000.00 in Sterelas account for purposes of its
incorporation.18 Hence, petitioner should not be held liable for allowing Doronilla to withdraw
from Sterelas savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in affirming the trial courts decision since
the findings of fact therein were not accord with the evidence presented by petitioner during trial
to prove that the transaction between private respondent and Doronilla was a mutuum, and that
it committed no wrong in allowing Doronilla to withdraw from Sterelas savings account. 19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable
for the actual damages suffered by private respondent, and neither may it be held liable for
moral and exemplary damages as well as attorneys fees. 20
Private respondent, on the other hand, argues that the transaction between him and Doronilla is
not a mutuum but an accommodation, 21 since he did not actually part with the ownership of his
P200,000.00 and in fact asked his wife to deposit said amount in the account of Sterela so that
a certification can be issued to the effect that Sterela had sufficient funds for purposes of its
incorporation but at the same time, he retained some degree of control over his money through
his wife who was made a signatory to the savings account and in whose possession the savings
account passbook was given.22
He likewise asserts that the trial court did not err in finding that petitioner, Atienzas employer, is
liable for the return of his money. He insists that Atienza, petitioners assistant manager,
connived with Doronilla in defrauding private respondent since it was Atienza who facilitated the
opening of Sterelas current account three days after Mrs. Vives and Sanchez opened a savings
account with petitioner for said company, as well as the approval of the authority to debit
Sterelas savings account to cover any overdrawings in its current account. 23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a petition for
review filed with this Court. The Court has repeatedly held that it is not its function to analyze
and weigh all over again the evidence presented by the parties during trial. 24 The Courts
jurisdiction is in principle limited to reviewing errors of law that might have been committed by
the Court of Appeals.25 Moreover, factual findings of courts, when adopted and confirmed by the
Court of Appeals, are final and conclusive on this Court unless these findings are not supported
by the evidence on record.26 There is no showing of any misapprehension of facts on the part of
the Court of Appeals in the case at bar that would require this Court to review and overturn the

factual findings of that court, especially since the conclusions of fact of the Court of Appeals and
the trial court are not only consistent but are also amply supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between
private respondent and Doronilla was a commodatum and not a mutuum. A circumspect
examination of the records reveals that the transaction between them was a commodatum.
Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable
so that the latter may use the same for a certain time and return it, in which case the contract is
called a commodatum; or money or other consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid, in which case the contract is simply called a
loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing,
such as money, the contract would be a mutuum. However, there are some instances where a
commodatum may have for its object a consumable thing. Article 1936 of the Civil Code
provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of
the parties is to lend consumable goods and to have the very same goods returned at the end
of the period agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. 27 In case of doubt, the contemporaneous and
subsequent acts of the parties shall be considered in such determination. 28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows
that private respondent agreed to deposit his money in the savings account of Sterela
specifically for the purpose of making it appear "that said firm had sufficient capitalization for
incorporation, with the promise that the amount shall be returned within thirty (30) days." 29
Private respondent merely "accommodated" Doronilla by lending his money without
consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from Sterelas savings account and would be
returned to private respondent after thirty (30) days.
Doronillas attempts to return to private respondent the amount of P200,000.00 which the latter
deposited in Sterelas account together with an additional P12,000.00, allegedly representing
interest on the mutuum, did not convert the transaction from a commodatum into a mutuum
because such was not the intent of the parties and because the additional P12,000.00
corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the Civil Code
expressly states that "[t]he bailee in commodatum acquires the use of the thing loaned but not
its fruits." Hence, it was only proper for Doronilla to remit to private respondent the interest
accruing to the latters money deposited with petitioner.
Neither does the Court agree with petitioners contention that it is not solidarily liable for the
return of private respondents money because it was not privy to the transaction between
Doronilla and private respondent. The nature of said transaction, that is, whether it is a mutuum
or a commodatum, has no bearing on the question of petitioners liability for the return of private
respondents money because the factual circumstances of the case clearly show that petitioner,
through its employee Mr. Atienza, was partly responsible for the loss of private respondents
money and is liable for its restitution.
Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of

Sterela for Savings Account No. 10-1567 expressly states that

"2. Deposits and withdrawals must be made by the depositor personally or upon his written
authority duly authenticated, and neither a deposit nor a withdrawal will be permitted except
upon the production of the depositor savings bank book in which will be entered by the Bank the
amount deposited or withdrawn." 30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant
Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even without
presenting the passbook (which Atienza very well knew was in the possession of Mrs. Vives),
not just once, but several times. Both the Court of Appeals and the trial court found that Atienza
allowed said withdrawals because he was party to Doronillas "scheme" of defrauding private
respondent:
XXX
But the scheme could not have been executed successfully without the knowledge, help and
cooperation of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of
the defendant bank. Indeed, the evidence indicates that Atienza had not only facilitated the
commission of the fraud but he likewise helped in devising the means by which it can be done in
such manner as to make it appear that the transaction was in accordance with banking
procedure.
To begin with, the deposit was made in defendants Buendia branch precisely because Atienza
was a key officer therein. The records show that plaintiff had suggested that the P200,000.00 be
deposited in his bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted that
it must be in defendants branch in Makati for "it will be easier for them to get a certification". In
fact before he was introduced to plaintiff, Doronilla had already prepared a letter addressed to
the Buendia branch manager authorizing Angeles B. Sanchez and company to open a savings
account for Sterela in the amount of P200,000.00, as "per coordination with Mr. Rufo Atienza,
Assistant Manager of the Bank x x x" (Exh. 1). This is a clear manifestation that the other
defendants had been in consultation with Atienza from the inception of the scheme.
Significantly, there were testimonies and admission that Atienza is the brother-in-law of a certain
Romeo Mirasol, a friend and business associate of Doronilla.1awphi1.nt
Then there is the matter of the ownership of the fund. Because of the "coordination" between
Doronilla and Atienza, the latter knew before hand that the money deposited did not belong to
Doronilla nor to Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia
Vives that the money belonged to her and her husband and the deposit was merely to
accommodate Doronilla. Atienza even declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose that the
only ones empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In
the signature card pertaining to this account (Exh. J), the authorized signatories were Inocencia
Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual banking procedure that
withdrawals of savings deposits could only be made by persons whose authorized signatures
are in the signature cards on file with the bank. He, however, said that this procedure was not
followed here because Sterela was owned by Doronilla. He explained that Doronilla had the full
authority to withdraw by virtue of such ownership. The Court is not inclined to agree with
Atienza. In the first place, he was all the time aware that the money came from Vives and did
not belong to Sterela. He was also told by Mrs. Vives that they were only accommodating
Doronilla so that a certification can be issued to the effect that Sterela had a deposit of so much
amount to be sued in the incorporation of the firm. In the second place, the signature of
Doronilla was not authorized in so far as that account is concerned inasmuch as he had not
signed the signature card provided by the bank whenever a deposit is opened. In the third
place, neither Mrs. Vives nor Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been presented. It is an
accepted practice that whenever a withdrawal is made in a savings deposit, the bank requires

the presentation of the passbook. In this case, such recognized practice was dispensed with.
The transfer from the savings account to the current account was without the submission of the
passbook which Atienza had given to Mrs. Vives. Instead, it was made to appear in a
certification signed by Estrella Dumagpi that a duplicate passbook was issued to Sterela
because the original passbook had been surrendered to the Makati branch in view of a loan
accommodation assigning the savings account (Exh. C). Atienza, who undoubtedly had a hand
in the execution of this certification, was aware that the contents of the same are not true. He
knew that the passbook was in the hands of Mrs. Vives for he was the one who gave it to her.
Besides, as assistant manager of the branch and the bank official servicing the savings and
current accounts in question, he also was aware that the original passbook was never
surrendered. He was also cognizant that Estrella Dumagpi was not among those authorized to
withdraw so her certification had no effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that
Atienzas active participation in the perpetration of the fraud and deception that caused the loss.
The records indicate that this account was opened three days later after the P200,000.00 was
deposited. In spite of his disclaimer, the Court believes that Atienza was mindful and posted
regarding the opening of the current account considering that Doronilla was all the while in
"coordination" with him. That it was he who facilitated the approval of the authority to debit the
savings account to cover any overdrawings in the current account (Exh. 2) is not hard to
comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x
x x.31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for
damages caused by their employees acting within the scope of their assigned tasks. To hold the
employer liable under this provision, it must be shown that an employer-employee relationship
exists, and that the employee was acting within the scope of his assigned task when the act
complained of was committed.32 Case law in the United States of America has it that a
corporation that entrusts a general duty to its employee is responsible to the injured party for
damages flowing from the employees wrongful act done in the course of his general authority,
even though in doing such act, the employee may have failed in its duty to the employer and
disobeyed the latters instructions.33
There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not
deny that Atienza was acting within the scope of his authority as Assistant Branch Manager
when he assisted Doronilla in withdrawing funds from Sterelas Savings Account No. 10-1567, in
which account private respondents money was deposited, and in transferring the money
withdrawn to Sterelas Current Account with petitioner. Atienzas acts of helping Doronilla, a
customer of the petitioner, were obviously done in furtherance of petitioners interests 34 even
though in the process, Atienza violated some of petitioners rules such as those stipulated in its
savings account passbook.35 It was established that the transfer of funds from Sterelas savings
account to its current account could not have been accomplished by Doronilla without the
invaluable assistance of Atienza, and that it was their connivance which was the cause of
private respondents loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil
Code, petitioner is liable for private respondents loss and is solidarily liable with Doronilla and
Dumagpi for the return of the P200,000.00 since it is clear that petitioner failed to prove that it
exercised due diligence to prevent the unauthorized withdrawals from Sterelas savings
account, and that it was not negligent in the selection and supervision of Atienza. Accordingly,
no error was committed by the appellate court in the award of actual, moral and exemplary
damages, attorneys fees and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the
Court of Appeals are AFFIRMED.

SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing and Austria-Martinez, JJ., concur.
G.R. No. 146364
June 3, 2004
COLITO T. PAJUYO, petitioner,
vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review1 of the 21 June 2000 Decision 2 and 14 December 2000
Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside
the 11 November 1996 decision3 of the Regional Trial Court of Quezon City, Branch 81, 4
affirming the 15 December 1995 decision 5 of the Metropolitan Trial Court of Quezon City,
Branch 31.6
The Antecedents
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid P400 to a certain Pedro Perez for the
rights over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a
house made of light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7
December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed a
Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house
for free provided Guevarra would maintain the cleanliness and orderliness of the house.
Guevarra promised that he would voluntarily vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon
City, Branch 31 ("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot
where the house stands because the lot is within the 150 hectares set aside by Proclamation
No. 137 for socialized housing. Guevarra pointed out that from December 1985 to September
1994, Pajuyo did not show up or communicate with him. Guevarra insisted that neither he nor
Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive
portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against
defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or persons claiming
any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as reasonable
compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.7
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC
decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision
appealed from, being in accord with the law and evidence presented, and the same is hereby
affirmed en toto.
SO ORDERED.8

Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14
December 1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the
Court of Appeals, Guevarra filed with the Supreme Court a "Motion for Extension of Time to File
Appeal by Certiorari Based on Rule 42" ("motion for extension"). Guevarra theorized that his
appeal raised pure questions of law. The Receiving Clerk of the Supreme Court received the
motion for extension on 13 December 1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution 9 referring the
motion for extension to the Court of Appeals which has concurrent jurisdiction over the case.
The case presented no special and important matter for the Supreme Court to take cognizance
of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution 10
granting the motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras petition
for review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No.
Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case
filed against defendant-appellant is without factual and legal basis.
SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of
Appeals should have dismissed outright Guevarras petition for review because it was filed out
of time. Moreover, it was Guevarras counsel and not Guevarra who signed the certification
against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.12
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house
and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house
only by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made
Guevarras continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship
between Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return
possession of the house on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarras rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical
possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra
illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no
right or title over the lot because it is public land. The assignment of rights between Perez and
Pajuyo, and the Kasunduan between Pajuyo and Guevarra, did not have any legal effect.
Pajuyo and Guevarra are in pari delicto or in equal fault. The court will leave them where they
are.

The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan
between Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant
relationship. The Court of Appeals ruled that the Kasunduan is not a lease contract but a
commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court
held that Guevarra has a better right over the property under Proclamation No. 137. President
Corazon C. Aquino ("President Aquino") issued Proclamation No. 137 on 7 September 1987. At
that time, Guevarra was in physical possession of the property. Under Article VI of the Code of
Policies Beneficiary Selection and Disposition of Homelots and Structures in the National
Housing Project ("the Code"), the actual occupant or caretaker of the lot shall have first priority
as beneficiary of the project. The Court of Appeals concluded that Guevarra is first in the
hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim
that Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the Supreme
Court was stamped "13 December 1996 at 4:09 PM" by the Supreme Courts Receiving Clerk.
The Court of Appeals concluded that the motion for extension bore a date, contrary to Pajuyos
claim that the motion for extension was undated. Guevarra filed the motion for extension on
time on 13 December 1996 since he filed the motion one day before the expiration of the
reglementary period on 14 December 1996. Thus, the motion for extension properly complied
with the condition imposed by the Court of Appeals in its 28 January 1997 Resolution. The Court
of Appeals explained that the thirty-day extension to file the petition for review was deemed
granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have
dismissed the petition for review because it was Guevarras counsel and not Guevarra who
signed the certification against forum-shopping. The Court of Appeals pointed out that Pajuyo
did not raise this issue in his Comment. The Court of Appeals held that Pajuyo could not now
seek the dismissal of the case after he had extensively argued on the merits of the case. This
technicality, the appellate court opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND
DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents Motion for an Extension of thirty
days to file petition for review at the time when there was no more period to extend as the
decision of the Regional Trial Court had already become final and executory.
2) in giving due course, instead of dismissing, private respondents Petition for Review even
though the certification against forum-shopping was signed only by counsel instead of by
petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a
commodatum, instead of a Contract of Lease as found by the Metropolitan Trial Court and in
holding that "the ejectment case filed against defendant-appellant is without legal and factual
basis".
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q-9626943 and in holding that the parties are in pari delicto being both squatters, therefore, illegal
occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of the National
Government Center Housing Project instead of deciding the same under the Kasunduan
voluntarily executed by the parties, the terms and conditions of which are the laws between
themselves.13
The Ruling of the Court

The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive
issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition for
review because the RTC decision had already become final and executory when the appellate
court acted on Guevarras motion for extension to file the petition. Pajuyo points out that
Guevarra had only one day before the expiry of his period to appeal the RTC decision. Instead
of filing the petition for review with the Court of Appeals, Guevarra filed with this Court an
undated motion for extension of 30 days to file a petition for review. This Court merely referred
the motion to the Court of Appeals. Pajuyo believes that the filing of the motion for extension
with this Court did not toll the running of the period to perfect the appeal. Hence, when the Court
of Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable
to the Court of Appeals by petition for review in cases involving questions of fact or mixed
questions of fact and law.14 Decisions of the regional trial courts involving pure questions of law
are appealable directly to this Court by petition for review. 15 These modes of appeal are now
embodied in Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra
thus filed his motion for extension to file petition for review before this Court on 14 December
1996. On 3 January 1997, Guevarra then filed his petition for review with this Court. A perusal of
Guevarras petition for review gives the impression that the issues he raised were pure
questions of law. There is a question of law when the doubt or difference is on what the law is
on a certain state of facts.16 There is a question of fact when the doubt or difference is on the
truth or falsity of the facts alleged.17
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras
petition for review raised these questions: (1) Do ejectment cases pertain only to possession of
a structure, and not the lot on which the structure stands? (2) Does a suit by a squatter against
a fellow squatter constitute a valid case for ejectment? (3) Should a Presidential Proclamation
governing the lot on which a squatters structure stands be considered in an ejectment suit filed
by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment
and the Presidential Proclamation. At first glance, the questions Guevarra raised appeared
purely legal. However, some factual questions still have to be resolved because they have a
bearing on the legal questions raised in the petition for review. These factual matters refer to the
metes and bounds of the disputed property and the application of Guevarra as beneficiary of
Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for review. In
Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,18 we
declared that the Court of Appeals could grant extension of time in appeals by petition for
review. In Liboro v. Court of Appeals,19 we clarified that the prohibition against granting an
extension of time applies only in a case where ordinary appeal is perfected by a mere notice of
appeal. The prohibition does not apply in a petition for review where the pleading needs
verification. A petition for review, unlike an ordinary appeal, requires preparation and research to
present a persuasive position. 20 The drafting of the petition for review entails more time and
effort than filing a notice of appeal. 21 Hence, the Court of Appeals may allow an extension of
time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,22 we held
that Liboros clarification of Lacsamana is consistent with the Revised Internal Rules of the
Court of Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for
filing petitions for review with the Court of Appeals. The extension, however, should be limited to

only fifteen days save in exceptionally meritorious cases where the Court of Appeals may grant
a longer period.
A judgment becomes "final and executory" by operation of law. Finality of judgment becomes a
fact on the lapse of the reglementary period to appeal if no appeal is perfected. 23 The RTC
decision could not have gained finality because the Court of Appeals granted the 30-day
extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras
motion for extension. The Court of Appeals gave due course to the motion for extension
because it complied with the condition set by the appellate court in its resolution dated 28
January 1997. The resolution stated that the Court of Appeals would only give due course to the
motion for extension if filed on time. The motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for
extension are (1) the date of receipt of the judgment or final order or resolution subject of the
petition, and (2) the date of filing of the motion for extension. 24 It is the date of the filing of the
motion or pleading, and not the date of execution, that determines the timeliness of the filing of
that motion or pleading. Thus, even if the motion for extension bears no date, the date of filing
stamped on it is the reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed
his motion for extension before this Court on 13 December 1996, the date stamped by this
Courts Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for
extension exactly one day before the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical
grounds, Pajuyo did not ask the appellate court to deny the motion for extension and dismiss
the petition for review at the earliest opportunity. Instead, Pajuyo vigorously discussed the
merits of the case. It was only when the Court of Appeals ruled in Guevarras favor that Pajuyo
raised the procedural issues against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision
on the merits, is estopped from attacking the jurisdiction of the court. 25 Estoppel sets in not
because the judgment of the court is a valid and conclusive adjudication, but because the
practice of attacking the courts jurisdiction after voluntarily submitting to it is against public
policy.26
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure to
sign the certification against forum shopping. Instead, Pajuyo harped on Guevarras counsel
signing the verification, claiming that the counsels verification is insufficient since it is based
only on "mere information."
A partys failure to sign the certification against forum shopping is different from the partys
failure to sign personally the verification. The certificate of non-forum shopping must be signed
by the party, and not by counsel.27 The certification of counsel renders the petition defective. 28
On the other hand, the requirement on verification of a pleading is a formal and not a
jurisdictional requisite.29 It is intended simply to secure an assurance that what are alleged in the
pleading are true and correct and not the product of the imagination or a matter of speculation,
and that the pleading is filed in good faith. 30 The party need not sign the verification. A partys
representative, lawyer or any person who personally knows the truth of the facts alleged in the
pleading may sign the verification.31
We agree with the Court of Appeals that the issue on the certificate against forum shopping was
merely an afterthought. Pajuyo did not call the Court of Appeals attention to this defect at the
early stage of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to
Resolve the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will not divest
the inferior court of its jurisdiction over the ejectment case. 32 Even if the pleadings raise the

issue of ownership, the court may pass on such issue to determine only the question of
possession, especially if the ownership is inseparably linked with the possession. 33 The
adjudication on the issue of ownership is only provisional and will not bar an action between the
same parties involving title to the land. 34 This doctrine is a necessary consequence of the nature
of the two summary actions of ejectment, forcible entry and unlawful detainer, where the only
issue for adjudication is the physical or material possession over the real property.35
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners
of the contested property and that they are mere squatters. Will the defense that the parties to
the ejectment case are not the owners of the disputed lot allow the courts to renounce their
jurisdiction over the case? The Court of Appeals believed so and held that it would just leave the
parties where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for
recovery of possession. The parties cannot present evidence to prove ownership or right to
legal possession except to prove the nature of the possession when necessary to resolve the
issue of physical possession.36 The same is true when the defendant asserts the absence of title
over the property. The absence of title over the contested lot is not a ground for the courts to
withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to
the physical possession of the premises, that is, to the possession de facto and not to the
possession de jure.37 It does not even matter if a partys title to the property is questionable, 38 or
when both parties intruded into public land and their applications to own the land have yet to be
approved by the proper government agency.39 Regardless of the actual condition of the title to
the property, the party in peaceable quiet possession shall not be thrown out by a strong hand,
violence or terror.40 Neither is the unlawful withholding of property allowed. Courts will always
uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the
owner himself.41 Whatever may be the character of his possession, if he has in his favor prior
possession in time, he has the security that entitles him to remain on the property until a person
with a better right lawfully ejects him. 42 To repeat, the only issue that the court has to settle in an
ejectment suit is the right to physical possession.
In Pitargue v. Sorilla,43 the government owned the land in dispute. The government did not
authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the
land. The plaintiff had prior possession and had already introduced improvements on the public
land. The plaintiff had a pending application for the land with the Bureau of Lands when the
defendant ousted him from possession. The plaintiff filed the action of forcible entry against the
defendant. The government was not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession
because while the application of the plaintiff was still pending, title remained with the
government, and the Bureau of Public Lands had jurisdiction over the case. We disagreed with
the defendant. We ruled that courts have jurisdiction to entertain ejectment suits even before the
resolution of the application. The plaintiff, by priority of his application and of his entry, acquired
prior physical possession over the public land applied for as against other private claimants.
That prior physical possession enjoys legal protection against other private claimants because
only a court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue44 as squatters, strictly
speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered
the public land without the owners permission. Title to the land remained with the government
because it had not awarded to anyone ownership of the contested public land. Both the plaintiff
and the defendant were in effect squatting on government property. Yet, we upheld the courts
jurisdiction to resolve the issue of possession even if the plaintiff and the defendant in the

ejectment case did not have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because
of the public need to preserve the basic policy behind the summary actions of forcible entry and
unlawful detainer. The underlying philosophy behind ejectment suits is to prevent breach of the
peace and criminal disorder and to compel the party out of possession to respect and resort to
the law alone to obtain what he claims is his. 45 The party deprived of possession must not take
the law into his own hands.46 Ejectment proceedings are summary in nature so the authorities
can settle speedily actions to recover possession because of the overriding need to quell social
disturbances.47
We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of
possessory actions involving these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting claimants? It is one of utmost
importance, as there are public lands everywhere and there are thousands of settlers,
especially in newly opened regions. It also involves a matter of policy, as it requires the
determination of the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was in
force in this country before the American occupation, or in the new, we have a possessory
action, the aim and purpose of which is the recovery of the physical possession of real property,
irrespective of the question as to who has the title thereto. Under the Spanish Civil Code we had
the accion interdictal, a summary proceeding which could be brought within one year from
dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early
as October 1, 1901, upon the enactment of the Code of Civil Procedure (Act No. 190 of the
Philippine Commission) we implanted the common law action of forcible entry (section 80 of Act
No. 190), the object of which has been stated by this Court to be "to prevent breaches of the
peace and criminal disorder which would ensue from the withdrawal of the remedy, and
the reasonable hope such withdrawal would create that some advantage must accrue to
those persons who, believing themselves entitled to the possession of property, resort
to force to gain possession rather than to some appropriate action in the court to assert
their claims." (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the
enactment of the first Public Land Act (Act No. 926) the action of forcible entry was already
available in the courts of the country. So the question to be resolved is, Did the Legislature
intend, when it vested the power and authority to alienate and dispose of the public lands in the
Lands Department, to exclude the courts from entertaining the possessory action of forcible
entry between rival claimants or occupants of any land before award thereof to any of the
parties? Did Congress intend that the lands applied for, or all public lands for that matter, be
removed from the jurisdiction of the judicial Branch of the Government, so that any troubles
arising therefrom, or any breaches of the peace or disorders caused by rival claimants, could be
inquired into only by the Lands Department to the exclusion of the courts? The answer to this
question seems to us evident. The Lands Department does not have the means to police public
lands; neither does it have the means to prevent disorders arising therefrom, or contain
breaches of the peace among settlers; or to pass promptly upon conflicts of possession. Then
its power is clearly limited to disposition and alienation, and while it may decide conflicts
of possession in order to make proper award, the settlement of conflicts of possession
which is recognized in the court herein has another ultimate purpose, i.e., the protection
of actual possessors and occupants with a view to the prevention of breaches of the
peace. The power to dispose and alienate could not have been intended to include the
power to prevent or settle disorders or breaches of the peace among rival settlers or
claimants prior to the final award. As to this, therefore, the corresponding branches of the

Government must continue to exercise power and jurisdiction within the limits of their respective
functions. The vesting of the Lands Department with authority to administer, dispose, and
alienate public lands, therefore, must not be understood as depriving the other branches
of the Government of the exercise of the respective functions or powers thereon, such
as the authority to stop disorders and quell breaches of the peace by the police, the
authority on the part of the courts to take jurisdiction over possessory actions arising
therefrom not involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that
courts have no jurisdiction to determine the rights of claimants to public lands, and that until the
disposition of the land has passed from the control of the Federal Government, the courts will
not interfere with the administration of matters concerning the same. (50 C. J. 1093-1094.) We
have no quarrel with this principle. The determination of the respective rights of rival claimants
to public lands is different from the determination of who has the actual physical possession or
occupation with a view to protecting the same and preventing disorder and breaches of the
peace. A judgment of the court ordering restitution of the possession of a parcel of land to the
actual occupant, who has been deprived thereof by another through the use of force or in any
other illegal manner, can never be "prejudicial interference" with the disposition or alienation of
public lands. On the other hand, if courts were deprived of jurisdiction of cases involving
conflicts of possession, that threat of judicial action against breaches of the peace
committed on public lands would be eliminated, and a state of lawlessness would
probably be produced between applicants, occupants or squatters, where force or might,
not right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession
between rivals or conflicting applicants or claimants would be no other than that of forcible entry.
This action, both in England and the United States and in our jurisdiction, is a summary and
expeditious remedy whereby one in peaceful and quiet possession may recover the possession
of which he has been deprived by a stronger hand, by violence or terror; its ultimate object
being to prevent breach of the peace and criminal disorder. (Supia and Batioco vs. Quintero and
Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere possession as a fact, of physical
possession, not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or right to
possession is never in issue in an action of forcible entry; as a matter of fact, evidence thereof is
expressly banned, except to prove the nature of the possession. (Second 4, Rule 72, Rules of
Court.) With this nature of the action in mind, by no stretch of the imagination can conclusion be
arrived at that the use of the remedy in the courts of justice would constitute an interference with
the alienation, disposition, and control of public lands. To limit ourselves to the case at bar can it
be pretended at all that its result would in any way interfere with the manner of the alienation or
disposition of the land contested? On the contrary, it would facilitate adjudication, for the
question of priority of possession having been decided in a final manner by the courts, said
question need no longer waste the time of the land officers making the adjudication or award.
(Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code 48 embody the principle of pari delicto. We explained the
principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari
delicto potior est conditio defedentis. The law will not aid either party to an illegal agreement. It
leaves the parties where it finds them.49
The application of the pari delicto principle is not absolute, as there are exceptions to its
application. One of these exceptions is where the application of the pari delicto rule would
violate well-established public policy.50
In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary actions of forcible

entry and unlawful detainer. We held that:

It must be stated that the purpose of an action of forcible entry and detainer is that, regardless
of the actual condition of the title to the property, the party in peaceable quiet possession shall
not be turned out by strong hand, violence or terror. In affording this remedy of restitution the
object of the statute is to prevent breaches of the peace and criminal disorder which would
ensue from the withdrawal of the remedy, and the reasonable hope such withdrawal would
create that some advantage must accrue to those persons who, believing themselves entitled to
the possession of property, resort to force to gain possession rather than to some appropriate
action in the courts to assert their claims. This is the philosophy at the foundation of all these
actions of forcible entry and detainer which are designed to compel the party out of possession
to respect and resort to the law alone to obtain what he claims is his. 52
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters
is fraught with danger. To shut out relief to squatters on the ground of pari delicto would openly
invite mayhem and lawlessness. A squatter would oust another squatter from possession of the
lot that the latter had illegally occupied, emboldened by the knowledge that the courts would
leave them where they are. Nothing would then stand in the way of the ousted squatter from reclaiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for
recovery of possession seek to prevent. 53 Even the owner who has title over the disputed
property cannot take the law into his own hands to regain possession of his property. The owner
must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are
squatters. The determination of priority and superiority of possession is a serious and urgent
matter that cannot be left to the squatters to decide. To do so would make squatters receive
better treatment under the law. The law restrains property owners from taking the law into their
own hands. However, the principle of pari delicto as applied by the Court of Appeals would give
squatters free rein to dispossess fellow squatters or violently retake possession of properties
usurped from them. Courts should not leave squatters to their own devices in cases involving
recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court
held that the pivotal issue in this case is who between Pajuyo and Guevarra has the "priority
right as beneficiary of the contested land under Proclamation No. 137." 54 According to the Court
of Appeals, Guevarra enjoys preferential right under Proclamation No. 137 because Article VI of
the Code declares that the actual occupant or caretaker is the one qualified to apply for
socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation
site under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the
land that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No.
137. Guevarra had the burden to prove that the disputed lot is within the coverage of
Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras unsubstantiated
claim that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the
survey the project administrator conducted, he and not Pajuyo appeared as the actual occupant
of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo
allowed Guevarra to occupy the disputed property in 1985. President Aquino signed
Proclamation No. 137 into law on 11 March 1986. Pajuyo made his earliest demand for

Guevarra to vacate the property in September 1994.

During the time that Guevarra temporarily held the property up to the time that Proclamation No.
137 allegedly segregated the disputed lot, Guevarra never applied as beneficiary of
Proclamation No. 137. Even when Guevarra already knew that Pajuyo was reclaiming
possession of the property, Guevarra did not take any step to comply with the requirements of
Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and
resolve the issue of possession. However, the jurisdiction of the courts would be limited to the
issue of physical possession only.
In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving public
land to determine the issue of physical possession. The determination of the respective rights of
rival claimants to public land is, however, distinct from the determination of who has the actual
physical possession or who has a better right of physical possession. 56 The administrative
disposition and alienation of public lands should be threshed out in the proper government
agency.57
The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No.
137 was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the
law. Courts should not preempt the decision of the administrative agency mandated by law to
determine the qualifications of applicants for the acquisition of public lands. Instead, courts
should expeditiously resolve the issue of physical possession in ejectment cases to prevent
disorder and breaches of peace.58
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the house built
on it. Guevarra expressly admitted the existence and due execution of the Kasunduan. The
Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay
nagbibigay pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing
bahay at lote ng "walang bayad." Kaugnay nito, kailangang panatilihin nila ang kalinisan at
kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent,
but Guevarra was under obligation to maintain the premises in good condition. Guevarra
promised to vacate the premises on Pajuyos demand but Guevarra broke his promise and
refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by
a person from another of the possession of real property to which the latter is entitled after the
expiration or termination of the formers right to hold possession under a contract, express or
implied.59
Where the plaintiff allows the defendant to use his property by tolerance without any contract,
the defendant is necessarily bound by an implied promise that he will vacate on demand, failing
which, an action for unlawful detainer will lie. 60 The defendants refusal to comply with the
demand makes his continued possession of the property unlawful. 61 The status of the defendant
in such a case is similar to that of a lessee or tenant whose term of lease has expired but whose
occupancy continues by tolerance of the owner.62
This principle should apply with greater force in cases where a contract embodies the
permission or tolerance to use the property. The Kasunduan expressly articulated Pajuyos
forbearance. Pajuyo did not require Guevarra to pay any rent but only to maintain the house
and lot in good condition. Guevarra expressly vowed in the Kasunduan that he would vacate the
property on demand. Guevarras refusal to comply with Pajuyos demand to vacate made
Guevarras continued possession of the property unlawful.

We do not subscribe to the Court of Appeals theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable
so that the latter may use the same for a certain time and return it. 63 An essential feature of
commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
belonging to another is for a certain period. 64 Thus, the bailor cannot demand the return of the
thing loaned until after expiration of the period stipulated, or after accomplishment of the use for
which the commodatum is constituted.65 If the bailor should have urgent need of the thing, he
may demand its return for temporary use. 66 If the use of the thing is merely tolerated by the
bailor, he can demand the return of the thing at will, in which case the contractual relation is
called a precarium.67 Under the Civil Code, precarium is a kind of commodatum.68
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated
him to maintain the property in good condition. The imposition of this obligation makes the
Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on ejectment has treated relationship based on
tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of
permission would result in the termination of the lease. 69 The tenants withholding of the
property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo,
the bailor. The obligation to deliver or to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration and commodatum. 70 These contracts
certainly involve the obligation to deliver or return the thing received. 71
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they
illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely
entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had
benefited from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has
a right to physical possession of the contested property. The Kasunduan is the undeniable
evidence of Guevarras recognition of Pajuyos better right of physical possession. Guevarra is
clearly a possessor in bad faith. The absence of a contract would not yield a different result, as
there would still be an implied promise to vacate.
Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is
allowing an absentee squatter who (sic) makes (sic) a profit out of his illegal act." 72 Guevarra
bases his argument on the preferential right given to the actual occupant or caretaker under
Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the
property without paying any rent. There is also no proof that Pajuyo is a professional squatter
who rents out usurped properties to other squatters. Moreover, it is for the proper government
agency to decide who between Pajuyo and Guevarra qualifies for socialized housing. The only
issue that we are addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment.73 This is one of the
distinctions between forcible entry and unlawful detainer.74 In forcible entry, the plaintiff is
deprived of physical possession of his land or building by means of force, intimidation, threat,
strategy or stealth. Thus, he must allege and prove prior possession. 75 But in unlawful detainer,
the defendant unlawfully withholds possession after the expiration or termination of his right to
possess under any contract, express or implied. In such a case, prior physical possession is not
required.76

Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras

transient right to possess the property ended as well. Moreover, it was Pajuyo who was in actual
possession of the property because Guevarra had to seek Pajuyos permission to temporarily
hold the property and Guevarra had to follow the conditions set by Pajuyo in the Kasunduan.
Control over the property still rested with Pajuyo and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the disputed property. Possession in
the eyes of the law does not mean that a man has to have his feet on every square meter of the
ground before he is deemed in possession. 77 One may acquire possession not only by physical
occupation, but also by the fact that a thing is subject to the action of ones will. 78 Actual or
physical occupation is not always necessary.79
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that "squatters and intruders
who clandestinely enter into titled government property cannot, by such act, acquire any legal
right to said property."80 We made this declaration because the person who had title or who had
the right to legal possession over the disputed property was a party in the ejectment suit and
that party instituted the case against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment
case. This case is between squatters. Had the government participated in this case, the courts
could have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case, we
cannot evict on our own the parties. Such a ruling would discourage squatters from seeking the
aid of the courts in settling the issue of physical possession. Stripping both the plaintiff and the
defendant of possession just because they are squatters would have the same dangerous
implications as the application of the principle of pari delicto. Squatters would then rather settle
the issue of physical possession among themselves than seek relief from the courts if the
plaintiff and defendant in the ejectment case would both stand to lose possession of the
disputed property. This would subvert the policy underlying actions for recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on
the property until a person who has title or a better right lawfully ejects him. Guevarra is
certainly not that person. The ruling in this case, however, does not preclude Pajuyo and
Guevarra from introducing evidence and presenting arguments before the proper administrative
agency to establish any right to which they may be entitled under the law.81
In no way should our ruling in this case be interpreted to condone squatting. The ruling on the
issue of physical possession does not affect title to the property nor constitute a binding and
conclusive adjudication on the merits on the issue of ownership. 82 The owner can still go to court
to recover lawfully the property from the person who holds the property without legal title. Our
ruling here does not diminish the power of government agencies, including local governments,
to condemn, abate, remove or demolish illegal or unauthorized structures in accordance with
existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys
fees as part of damages are awarded only in the instances enumerated in Article 2208 of the
Civil Code.83 Thus, the award of attorneys fees is the exception rather than the rule. 84 Attorneys
fees are not awarded every time a party prevails in a suit because of the policy that no premium
should be placed on the right to litigate. 85 We therefore delete the attorneys fees awarded to
Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra
did not dispute this factual finding of the two courts. We find the amount reasonable
compensation to Pajuyo. The P300 monthly rental is counted from the last demand to vacate,
which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution

dated 14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE.
The Decision dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in
Civil Case No. Q-96-26943, affirming the Decision dated 15 December 1995 of the Metropolitan
Trial Court of Quezon City, Branch 31 in Civil Case No. 12432, is REINSTATED with
MODIFICATION. The award of attorneys fees is deleted. No costs.
SO ORDERED.
Davide, Jr., Panganiban, Ynares-Santiago, and Azcuna, JJ., concur.
G.R. No. 154878
March 16, 2007
CAROLYN M. GARCIA, Petitioner,
vs.
RICA MARIE S. THIO, Respondent.
DECISION
CORONA, J.:
Assailed in this petition for review on certiorari 1 are the June 19, 2002 decision 2 and August 20,
2002 resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the
February 28, 1997 decision of the Regional Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M.
Garcia a crossed check4 dated February 24, 1995 in the amount of US$100,000 payable to the
order of a certain Marilou Santiago.5 Thereafter, petitioner received from respondent every
month (specifically, on March 24, April 26, June 26 and July 26, all in 1995) the amount of
US$3,0006 and P76,5007 on July 26,8 August 26, September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another crossed check 9 dated June 29, 1995
in the amount of P500,000, also payable to the order of Marilou Santiago. 10 Consequently,
petitioner received from respondent the amount of P20,000 every month on August 5,
September 5, October 5 and November 5, 1995.11
According to petitioner, respondent failed to pay the principal amounts of the loans
(US$100,000 and P500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a
complaint for sum of money and damages in the RTC of Makati City, Branch 58 against
respondent, seeking to collect the sums of US$100,000, with interest thereon at 3% a month
from October 26, 1995 and P500,000, with interest thereon at 4% a month from November 5,
1995, plus attorneys fees and actual damages.12
Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of
US$100,000 with interest thereon at the rate of 3% per month, which loan would mature on
October 26, 1995.13 The amount of this loan was covered by the first check. On June 29, 1995,
respondent again borrowed the amount of P500,000 at an agreed monthly interest of 4%, the
maturity date of which was on November 5, 1995. 14 The amount of this loan was covered by the
second check. For both loans, no promissory note was executed since petitioner and
respondent were close friends at the time. 15 Respondent paid the stipulated monthly interest for
both loans but on their maturity dates, she failed to pay the principal amounts despite repeated
demands.161awphi1.nt
Respondent denied that she contracted the two loans with petitioner and countered that it was
Marilou Santiago to whom petitioner lent the money. She claimed she was merely asked by
petitioner to give the crossed checks to Santiago. 17 She issued the checks for P76,000 and
P20,000 not as payment of interest but to accommodate petitioners request that respondent
use her own checks instead of Santiagos.18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner. 19 It found that
respondent borrowed from petitioner the amounts of US$100,000 with monthly interest of 3%
and P500,000 at a monthly interest of 4%:20
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is
hereby rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount

of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October
26, 1995 until fully paid;
2. P500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.
3. P100,000.00 as and for attorneys fees; and
4. P50,000.00 as and for actual damages.
For lack of merit, [respondents] counterclaim is perforce dismissed.
With costs against [respondent].
IT IS SO ORDERED.21
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of
loan between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There is nothing in the record that shows
that [respondent] received money from [petitioner]. What is evident is the fact that
[respondent] received a MetroBank [crossed] check dated February 24, 1995 in the sum of
US$100,000.00, payable to the order of Marilou Santiago and a CityTrust [crossed] check dated
June 29, 1995 in the amount of P500,000.00, again payable to the order of Marilou Santiago,
both of which were issued by [petitioner]. The checks received by [respondent], being
crossed, may not be encashed but only deposited in the bank by the payee thereof, that
is, by Marilou Santiago herself.
It must be noted that crossing a check has the following effects: (a) the check may not be
encashed but only deposited in the bank; (b) the check may be negotiated only onceto one
who has an account with the bank; (c) and the act of crossing the check serves as warning to
the holder that the check has been issued for a definite purpose so that he must inquire if he
has received the check pursuant to that purpose, otherwise, he is not a holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and
delivery to the payee in contemplation of law since the latter is not the person who could take
the checks as a holder, i.e., as a payee or indorsee thereof, with intent to transfer title thereto.
Neither could she be deemed as an agent of Marilou Santiago with respect to the checks
because she was merely facilitating the transactions between the former and [petitioner].
With the foregoing circumstances, it may be fairly inferred that there were really no contracts of
loan that existed between the parties. x x x (emphasis supplied) 22
Hence this petition.23
As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45
of the Rules of Court. However, this case falls under one of the exceptions, i.e., when the
factual findings of the CA (which held that there were no contracts of loan between petitioner
and respondent) and the RTC (which held that there were contracts of loan) are contradictory.24
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the
object of the contract.25 This is evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract. (Emphasis supplied)
Upon delivery of the object of the contract of loan (in this case the money received by the debtor
when the checks were encashed) the debtor acquires ownership of such money or loan
proceeds and is bound to pay the creditor an equal amount. 26
It is undisputed that the checks were delivered to respondent. However, these checks were
crossed and payable not to the order of respondent but to the order of a certain Marilou
Santiago. Thus the main question to be answered is: who borrowed money from petitioner
respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks were made payable

to Santiago.27 She maintains that it was also upon respondents instruction that both checks
were delivered to her (respondent) so that she could, in turn, deliver the same to Santiago. 28
Furthermore, she argues that once respondent received the checks, the latter had possession
and control of them such that she had the choice to either forward them to Santiago (who was
already her debtor), to retain them or to return them to petitioner.29
We agree with petitioner. Delivery is the act by which the res or substance thereof is placed
within the actual or constructive possession or control of another. 30 Although respondent did not
physically receive the proceeds of the checks, these instruments were placed in her control and
possession under an arrangement whereby she actually re-lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago. 31 It was highly
improbable that petitioner would grant two loans to a complete stranger without requiring as
much as promissory notes or any written acknowledgment of the debt considering that the
amounts involved were quite big. Respondent, on the other hand, already had transactions with
Santiago at that time.32
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in
both parties list of witnesses) testified that respondents plan was for petitioner to lend her
money at a monthly interest rate of 3%, after which respondent would lend the same amount to
Santiago at a higher rate of 5% and realize a profit of 2%. 33 This explained why respondent
instructed petitioner to make the checks payable to Santiago. Respondent has not shown any
reason why Ruiz testimony should not be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of
P76,000 each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For
the P500,000 loan, she also issued her own checks in the amount of P20,000 each for four
months.34 According to respondent, she merely accommodated petitioners request for her to
issue her own checks to cover the interest payments since petitioner was not personally
acquainted with Santiago.35 She claimed, however, that Santiago would replace the checks with
cash.36 Her explanation is simply incredible. It is difficult to believe that respondent would put
herself in a position where she would be compelled to pay interest, from her own funds, for
loans she allegedly did not contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the rule that for
evidence to be believed, it must not only proceed from the mouth of a credible witness, but must
be credible in itself such as the common experience of mankind can approve as probable under
the circumstances. We have no test of the truth of human testimony except its conformity to our
knowledge, observation, and experience. Whatever is repugnant to these belongs to the
miraculous, and is outside of juridical cognizance. 37
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not
petitioner, who was listed as one of her (Santiagos) creditors. 38
Last, respondent inexplicably never presented Santiago as a witness to corroborate her story. 39
The presumption is that "evidence willfully suppressed would be adverse if produced." 40
Respondent was not able to overturn this presumption.
We hold that the CA committed reversible error when it ruled that respondent did not borrow the
amounts of US$100,000 and P500,000 from petitioner. We instead agree with the ruling of the
RTC making respondent liable for the principal amounts of the loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 and P500,000 loans respectively. There was no written proof of the interest
payable except for the verbal agreement that the loans would earn 3% and 4% interest per
month. Article 1956 of the Civil Code provides that "[n]o interest shall be due unless it has been
expressly stipulated in writing."
Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant
to Article 2209 of the Civil Code. It is well-settled that:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.41
Hence, respondent is liable for the payment of legal interest per annum to be computed from
November 21, 1995, the date when she received petitioners demand letter.42 From the finality of
the decision until it is fully paid, the amount due shall earn interest at 12% per annum, the
interim period being deemed equivalent to a forbearance of credit. 43
The award of actual damages in the amount of P50,000 and P100,000 attorneys fees is deleted
since the RTC decision did not explain the factual bases for these damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August
20, 2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET
ASIDE. The February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is
AFFIRMED with the MODIFICATION that respondent is directed to pay petitioner the amounts
of US$100,000 and P500,000 at 12% per annum interest from November 21, 1995 until the
finality of the decision. The total amount due as of the date of finality will earn interest of 12%
per annum until fully paid. The award of actual damages and attorneys fees is deleted.
SO ORDERED.
RENATO C. CORONA
Associate Justice
G.R. Nos. 173654-765
August 28, 2008
PEOPLE OF THE PHILIPPINES, petitioner,
vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner People
of the Philippines, represented by the Office of the Solicitor General, praying for the reversal of
the Orders dated 30 January 2006 and 9 June 2006 of the Regional Trial Court (RTC) of the 6 th
Judicial Region, Branch 68, Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft filed
against respondents Teresita Puig and Romeo Porras, and denying petitioners Motion for
Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before Branch 68 of the RTC
in Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig (Puig) and
Romeo Porras (Porras) who were the Cashier and Bookkeeper, respectively, of private
complainant Rural Bank of Pototan, Inc. The cases were docketed as Criminal Cases No. 053054 to 05-3165.
The allegations in the Informations 1 filed before the RTC were uniform and pro-forma, except for
the amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1 st day of August, 2002, in the Municipality of Pototan, Province of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court, above-named [respondents],
conspiring, confederating, and helping one another, with grave abuse of confidence, being
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank and with intent of gain, did then and
there willfully, unlawfully and feloniously take, steal and carry away the sum of FIFTEEN
THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage and prejudice of the

said bank in the aforesaid amount.

After perusing the Informations in these cases, the trial court did not find the existence of
probable cause that would have necessitated the issuance of a warrant of arrest based on the
following grounds:
(1) the element of taking without the consent of the owners was missing on the ground that
it is the depositors-clients, and not the Bank, which filed the complaint in these cases, who are
the owners of the money allegedly taken by respondents and hence, are the real parties-ininterest; and
(2) the Informations are bereft of the phrase alleging "dependence, guardianship or vigilance
between the respondents and the offended party that would have created a high degree
of confidence between them which the respondents could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the respondents to push
through would be violative of the right of the respondents under Section 14(2), Article III of the
1987 Constitution which states that in all criminal prosecutions, the accused shall enjoy the right
to be informed of the nature and cause of the accusation against him. Following Section 6, Rule
112 of the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30 January
2006 and refused to issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order 3 denying petitioners Motion for Reconsideration was issued by the
RTC, finding as follows:
Accordingly, the prosecutions Motion for Reconsideration should be, as it hereby, DENIED. The
Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising
the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY
ALLEGE THE ELEMENT OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE
QUALIFYING CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30
January 2006 and 9 June 2006 issued by the trial court, and that it be directed to proceed with
Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current
deposits of money in banks and similar institutions shall be governed by the provisions
concerning simple loans." Corollary thereto, Article 1953 of the same Code provides that "a
person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality."
Thus, it posits that the depositors who place their money with the bank are considered creditors
of the bank. The bank acquires ownership of the money deposited by its clients, making the
money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of
qualified theft, citing that a perusal of the Informations will show that they specifically allege that
the respondents were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
respectively, and that they took various amounts of money with grave abuse of confidence, and
without the knowledge and consent of the bank, to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the ground
that a Petition for Review on Certiorari via Rule 45 is the wrong mode of appeal because a
finding of probable cause for the issuance of a warrant of arrest presupposes evaluation of facts
and circumstances, which is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of
Justice, is the principal party to file a Petition for Review on Certiorari, considering that the
incident was indorsed by the DOJ.
We find merit in the petition.

The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the
Informations and, therefore, because of this defect, there is no basis for the existence of
probable cause which will justify the issuance of the warrant of arrest. Petitioner assails the
dismissal contending that the Informations for Qualified Theft sufficiently state facts which
constitute (a) the qualifying circumstance of grave abuse of confidence; and (b) the element of
taking, with intent to gain and without the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC judge
found the allegations in the Information inadequate. He ruled that the Information failed to state
facts constituting the qualifying circumstance of grave abuse of confidence and the element of
taking without the consent of the owner, since the owner of the money is not the Bank, but the
depositors therein. He also cites People v. Koc Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of dependence,
guardianship or vigilance, between the respondents and the offended party that has created a
high degree of confidence between them, which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no
probable cause simply on the insufficiency of the allegations in the Informations concerning the
facts constitutive of the elements of the offense charged. This, therefore, makes the issue of
sufficiency of the allegations in the Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is
committed as follows, viz:
ART. 310. Qualified Theft. The crime of theft shall be punished by the penalties next higher by
two degrees than those respectively specified in the next preceding article, if committed by a
domestic servant, or with grave abuse of confidence, or if the property stolen is motor vehicle,
mail matter or large cattle or consists of coconuts taken from the premises of a plantation, fish
taken from a fishpond or fishery or if property is taken on the occasion of fire, earthquake,
typhoon, volcanic eruption, or any other calamity, vehicular accident or civil disturbance.
(Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of
anothers property without violence or intimidation against persons or force upon things. The
elements of the crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owners consent;
5. That it be accomplished without the use of violence or intimidation against persons, nor of
force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter
alia, that the information must state the acts or omissions complained of as constitutive of the
offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of
Court, is enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as constituting the
offense and the qualifying and aggravating circumstances must be stated in ordinary and
concise language and not necessarily in the language used in the statute but in terms sufficient
to enable a person of common understanding to know what offense is being charged as well as

its qualifying and aggravating circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging the
acts or omissions complained of as constituting the offense. The test is whether it enables a
person of common understanding to know the charge against him, and the court to render
judgment properly.5
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who
come into possession of the monies deposited therein enjoy the confidence reposed in them by
their employer. Banks, on the other hand, where monies are deposited, are considered the
owners thereof. This is very clear not only from the express provisions of the law, but from
established jurisprudence. The relationship between banks and depositors has been held to be
that of creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as appropriately
pointed out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and
quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of
possession by the Bank of the money deposits therein, and the duties being performed by its
employees who have custody of the money or have come into possession of it. The Court has
consistently considered the allegations in the Information that such employees acted with grave
abuse of confidence, to the damage and prejudice of the Bank, without particularly referring to it
as owner of the money deposits, as sufficient to make out a case of Qualified Theft. For a
graphic illustration, we cite Roque v. People,6 where the accused teller was convicted for
Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the municipality of Floridablanca, province
of Pampanga, Philippines and within the jurisdiction of his Honorable Court, the above-named
accused ASUNCION GALANG ROQUE, being then employed as teller of the Basa Air Base
Savings and Loan Association Inc. (BABSLA) with office address at Basa Air Base,
Floridablanca, Pampanga, and as such was authorized and reposed with the responsibility to
receive and collect capital contributions from its member/contributors of said corporation, and
having collected and received in her capacity as teller of the BABSLA the sum of TEN
THOUSAND PESOS (P10,000.00), said accused, with intent of gain, with grave abuse of
confidence and without the knowledge and consent of said corporation, did then and there
willfully, unlawfully and feloniously take, steal and carry away the amount of P10,000.00,
Philippine currency, by making it appear that a certain depositor by the name of Antonio Salazar
withdrew from his Savings Account No. 1359, when in truth and in fact said Antonio Salazar did
not withdr[a]w the said amount of P10,000.00 to the damage and prejudice of BABSLA in the
total amount of P10,000.00, Philippine currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places money in the tellers
possession due to the confidence reposed on the teller, the felony of qualified theft would be
committed.7
Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of Qualified
Theft based on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992 and February 13,
1992, both dates inclusive, in the City of Manila, Philippines, the said accused did then and
there wilfully, unlawfully and feloniously, with intent of gain and without the knowledge and

consent of the owner thereof, take, steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to the
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch,
Manila represented by its Branch Manager, HELEN U. FARGAS, to the damage and prejudice
of the said owner in the aforesaid amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of
confidence and unfaithfulness, he being the Branch Operation Officer of the said complainant
and as such he had free access to the place where the said amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine Commercial and
Industrial Bank (PCIB), is Qualified Theft. Appellant could not have committed the crime had he
not been holding the position of Luneta Branch Operation Officer which gave him not only sole
access to the bank vault xxx. The management of the PCIB reposed its trust and confidence in
the appellant as its Luneta Branch Operation Officer, and it was this trust and confidence which
he exploited to enrich himself to the damage and prejudice of PCIB x x x. 9
From another end, People v. Locson,10 in addition to People v. Sison, described the nature of
possession by the Bank. The money in this case was in the possession of the defendant as
receiving teller of the bank, and the possession of the defendant was the possession of the
Bank. The Court held therein that when the defendant, with grave abuse of confidence,
removed the money and appropriated it to his own use without the consent of the Bank, there
was taking as contemplated in the crime of Qualified Theft. 11
Conspicuously, in all of the foregoing cases, where the Informations merely alleged the
positions of the respondents; that the crime was committed with grave abuse of confidence, with
intent to gain and without the knowledge and consent of the Bank, without necessarily stating
the phrase being assiduously insisted upon by respondents, "of a relation by reason of
dependence, guardianship or vigilance, between the respondents and the offended party
that has created a high degree of confidence between them, which respondents
abused,"12 and without employing the word "owner" in lieu of the "Bank" were considered to
have satisfied the test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in this
case, there is even no reason to quibble on the allegation in the Informations that they acted
with grave abuse of confidence. In fact, the Information which alleged grave abuse of
confidence by accused herein is even more precise, as this is exactly the requirement of the law
in qualifying the crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the possession of money of the Bank due to the
confidence reposed in them, occupy positions of confidence. The Informations, therefore,
sufficiently allege all the essential elements constituting the crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the instant petition,
the ruling in Mobilia Products, Inc. v. Hajime Umezawa 13 is instructive. The Court thus
enunciated:
In a criminal case in which the offended party is the State, the interest of the private complainant
or the offended party is limited to the civil liability arising therefrom. Hence, if a criminal case is
dismissed by the trial court or if there is an acquittal, a reconsideration of the order of dismissal
or acquittal may be undertaken, whenever legally feasible, insofar as the criminal aspect thereof
is concerned and may be made only by the public prosecutor; or in the case of an appeal, by
the State only, through the OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled
that in appeals by certiorari under Rule 45 of the Rules of Court, only errors of law may be
raised,14 and herein petitioner certainly raised a question of law.
As an aside, even if we go beyond the allegations of the Informations in these cases, a closer

look at the records of the preliminary investigation conducted will show that, indeed, probable
cause exists for the indictment of herein respondents. Pursuant to Section 6, Rule 112 of the
Rules of Court, the judge shall issue a warrant of arrest only upon a finding of probable cause
after personally evaluating the resolution of the prosecutor and its supporting evidence. Soliven
v. Makasiar,15 as reiterated in Allado v. Driokno,16 explained that probable cause for the
issuance of a warrant of arrest is the existence of such facts and circumstances that would lead
a reasonably discreet and prudent person to believe that an offense has been committed by the
person sought to be arrested. 17 The records reasonably indicate that the respondents may have,
indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the
case may be, to relieve the respondents from the pain of going through a trial once it is
ascertained that no probable cause exists to form a sufficient belief as to the guilt of the
respondents, conversely, it is also equally imperative upon the judge to proceed with the case
upon a showing that there is a prima facie case against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED.
The Orders dated 30 January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No.
05-3054 to 05-3165 are REVERSED and SET ASIDE. Let the corresponding Warrants of Arrest
issue against herein respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of
Branch 68, in Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No. 053054 to 05-3165, inclusive, with reasonable dispatch. No pronouncement as to costs.
SO ORDERED.
Ynares-Santiago, Chairperson, Austria-Martinez, Reyes, Leonardo-de Castro *, JJ., concur.
G.R. No. 174269
May 8, 2009
POLO S. PANTALEON, Petitioner,
vs.
AMERICAN EXPRESS INTERNATIONAL, INC., Respondent.
DECISION
TINGA, J.:
The petitioner, lawyer Polo Pantaleon, his wife Julialinda, daughter Anna Regina and son Adrian
Roberto, joined an escorted tour of Western Europe organized by Trafalgar Tours of Europe,
Ltd., in October of 1991. The tour group arrived in Amsterdam in the afternoon of 25 October
1991, the second to the last day of the tour. As the group had arrived late in the city, they failed
to engage in any sight-seeing. Instead, it was agreed upon that they would start early the next
day to see the entire city before ending the tour.
The following day, the last day of the tour, the group arrived at the Coster Diamond House in
Amsterdam around 10 minutes before 9:00 a.m. The group had agreed that the visit to Coster
should end by 9:30 a.m. to allow enough time to take in a guided city tour of Amsterdam. The
group was ushered into Coster shortly before 9:00 a.m., and listened to a lecture on the art of
diamond polishing that lasted for around ten minutes. 1 Afterwards, the group was led to the
stores showroom to allow them to select items for purchase. Mrs. Pantaleon had already
planned to purchase even before the tour began a 2.5 karat diamond brilliant cut, and she found
a diamond close enough in approximation that she decided to buy.2 Mrs. Pantaleon also
selected for purchase a pendant and a chain, 3 all of which totaled U.S. $13,826.00.
To pay for these purchases, Pantaleon presented his American Express credit card together
with his passport to the Coster sales clerk. This occurred at around 9:15 a.m., or 15 minutes
before the tour group was slated to depart from the store. The sales clerk took the cards
imprint, and asked Pantaleon to sign the charge slip. The charge purchase was then referred
electronically to respondents Amsterdam office at 9:20 a.m.
Ten minutes later, the store clerk informed Pantaleon that his AmexCard had not yet been
approved. His son, who had already boarded the tour bus, soon returned to Coster and

informed the other members of the Pantaleon family that the entire tour group was waiting for
them. As it was already 9:40 a.m., and he was already worried about further inconveniencing
the tour group, Pantaleon asked the store clerk to cancel the sale. The store manager though
asked plaintiff to wait a few more minutes. After 15 minutes, the store manager informed
Pantaleon that respondent had demanded bank references. Pantaleon supplied the names of
his depositary banks, then instructed his daughter to return to the bus and apologize to the tour
group for the delay.
At around 10:00 a.m, or around 45 minutes after Pantaleon had presented his AmexCard, and
30 minutes after the tour group was supposed to have left the store, Coster decided to release
the items even without respondents approval of the purchase. The spouses Pantaleon returned
to the bus. It is alleged that their offers of apology were met by their tourmates with stony
silence.4 The tour groups visible irritation was aggravated when the tour guide announced that
the city tour of Amsterdam was to be canceled due to lack of remaining time, as they had to
catch a 3:00 p.m. ferry at Calais, Belgium to London. 5 Mrs. Pantaleon ended up weeping, while
her husband had to take a tranquilizer to calm his nerves.
It later emerged that Pantaleons purchase was first transmitted for approval to respondents
Amsterdam office at 9:20 a.m., Amsterdam time, then referred to respondents Manila office at
9:33 a.m, then finally approved at 10:19 a.m., Amsterdam time. 6 The Approval Code was
transmitted to respondents Amsterdam office at 10:38 a.m., several minutes after petitioner had
already left Coster, and 78 minutes from the time the purchases were electronically transmitted
by the jewelry store to respondents Amsterdam office.
After the star-crossed tour had ended, the Pantaleon family proceeded to the United States
before returning to Manila on 12 November 1992. While in the United States, Pantaleon
continued to use his AmEx card, several times without hassle or delay, but with two other
incidents similar to the Amsterdam brouhaha. On 30 October 1991, Pantaleon purchased golf
equipment amounting to US $1,475.00 using his AmEx card, but he cancelled his credit card
purchase and borrowed money instead from a friend, after more than 30 minutes had transpired
without the purchase having been approved. On 3 November 1991, Pantaleon used the card to
purchase childrens shoes worth $87.00 at a store in Boston, and it took 20 minutes before this
transaction was approved by respondent.
On 4 March 1992, after coming back to Manila, Pantaleon sent a letter 7 through counsel to the
respondent, demanding an apology for the "inconvenience, humiliation and embarrassment he
and his family thereby suffered" for respondents refusal to provide credit authorization for the
aforementioned purchases.8 In response, respondent sent a letter dated 24 March 1992, 9
stating among others that the delay in authorizing the purchase from Coster was attributable to
the circumstance that the charged purchase of US $13,826.00 "was out of the usual charge
purchase pattern established."10 Since respondent refused to accede to Pantaleons demand for
an apology, the aggrieved cardholder instituted an action for damages with the Regional Trial
Court (RTC) of Makati City, Branch 145.11 Pantaleon prayed that he be awarded P2,000,000.00,
as moral damages; P500,000.00, as exemplary damages; P100,000.00, as attorneys fees; and
P50,000.00 as litigation expenses.12
On 5 August 1996, the Makati City RTC rendered a decision 13 in favor of Pantaleon, awarding
him P500,000.00 as moral damages, P300,000.00 as exemplary damages, P100,000.00 as
attorneys fees, and P85,233.01 as expenses of litigation. Respondent filed a Notice of Appeal,
while Pantaleon moved for partial reconsideration, praying that the trial court award the
increased amount of moral and exemplary damages he had prayed for.14 The RTC denied
Pantaleons motion for partial reconsideration, and thereafter gave due course to respondents
Notice of Appeal.15
On 18 August 2006, the Court of Appeals rendered a decision 16 reversing the award of damages
in favor of Pantaleon, holding that respondent had not breached its obligations to petitioner.
Hence, this petition.

The key question is whether respondent, in connection with the aforementioned transactions,
had committed a breach of its obligations to Pantaleon. In addition, Pantaleon submits that even
assuming that respondent had not been in breach of its obligations, it still remained liable for
damages under Article 21 of the Civil Code.
The RTC had concluded, based on the testimonial representations of Pantaleon and
respondents credit authorizer, Edgardo Jaurigue, that the normal approval time for purchases
was "a matter of seconds." Based on that standard, respondent had been in clear delay with
respect to the three subject transactions. As it appears, the Court of Appeals conceded that
there had been delay on the part of respondent in approving the purchases. However, it made
two critical conclusions in favor of respondent. First, the appellate court ruled that the delay was
not attended by bad faith, malice, or gross negligence. Second, it ruled that respondent "had
exercised diligent efforts to effect the approval" of the purchases, which were "not in accordance
with the charge pattern" petitioner had established for himself, as exemplified by the fact that at
Coster, he was "making his very first single charge purchase of US$13,826," and "the record of
[petitioner]s past spending with [respondent] at the time does not favorably support his ability to
pay for such purchase."17
On the premise that there was an obligation on the part of respondent "to approve or disapprove
with dispatch the charge purchase," petitioner argues that the failure to timely approve or
disapprove the purchase constituted mora solvendi on the part of respondent in the
performance of its obligation. For its part, respondent characterizes the depiction by petitioner of
its obligation to him as "to approve purchases instantaneously or in a matter of seconds."
Petitioner correctly cites that under mora solvendi, the three requisites for a finding of default
are that the obligation is demandable and liquidated; the debtor delays performance; and the
creditor judicially or extrajudicially requires the debtors performance. 18 Petitioner asserts that
the Court of Appeals had wrongly applied the principle of mora accipiendi, which relates to delay
on the part of the obligee in accepting the performance of the obligation by the obligor. The
requisites of mora accipiendi are: an offer of performance by the debtor who has the required
capacity; the offer must be to comply with the prestation as it should be performed; and the
creditor refuses the performance without just cause. 19 The error of the appellate court, argues
petitioner, is in relying on the invocation by respondent of "just cause" for the delay, since while
just cause is determinative of mora accipiendi, it is not so with the case of mora solvendi.
We can see the possible source of confusion as to which type of mora to appreciate. Generally,
the relationship between a credit card provider and its card holders is that of creditor-debtor, 20
with the card company as the creditor extending loans and credit to the card holder, who as
debtor is obliged to repay the creditor. This relationship already takes exception to the general
rule that as between a bank and its depositors, the bank is deemed as the debtor while the
depositor is considered as the creditor.21 Petitioner is asking us, not baselessly, to again shift
perspectives and again see the credit card company as the debtor/obligor, insofar as it has the
obligation to the customer as creditor/obligee to act promptly on its purchases on credit.
Ultimately, petitioners perspective appears more sensible than if we were to still regard
respondent as the creditor in the context of this cause of action. If there was delay on the part of
respondent in its normal role as creditor to the cardholder, such delay would not have been in
the acceptance of the performance of the debtors obligation (i.e., the repayment of the debt),
but it would be delay in the extension of the credit in the first place. Such delay would not fall
under mora accipiendi, which contemplates that the obligation of the debtor, such as the actual
purchases on credit, has already been constituted. Herein, the establishment of the debt itself
(purchases on credit of the jewelry) had not yet been perfected, as it remained pending the
approval or consent of the respondent credit card company.
Still, in order for us to appreciate that respondent was in mora solvendi, we will have to first
recognize that there was indeed an obligation on the part of respondent to act on petitioners
purchases with "timely dispatch," or for the purposes of this case, within a period significantly

less than the one hour it apparently took before the purchase at Coster was finally approved.
The findings of the trial court, to our mind, amply established that the tardiness on the part of
respondent in acting on petitioners purchase at Coster did constitute culpable delay on its part
in complying with its obligation to act promptly on its customers purchase request, whether
such action be favorable or unfavorable. We quote the trial court, thus:
As to the first issue, both parties have testified that normal approval time for purchases was a
matter of seconds.
Plaintiff testified that his personal experience with the use of the card was that except for the
three charge purchases subject of this case, approvals of his charge purchases were always
obtained in a matter of seconds.
Defendants credit authorizer Edgardo Jaurique likewise testified:
Q. You also testified that on normal occasions, the normal approval time for charges would be
3 to 4 seconds?
A. Yes, Maam.
Both parties likewise presented evidence that the processing and approval of plaintiffs charge
purchase at the Coster Diamond House was way beyond the normal approval time of a "matter
of seconds".
Plaintiff testified that he presented his AmexCard to the sales clerk at Coster, at 9:15 a.m. and
by the time he had to leave the store at 10:05 a.m., no approval had yet been received. In fact,
the Credit Authorization System (CAS) record of defendant at Phoenix Amex shows that
defendants Amsterdam office received the request to approve plaintiffs charge purchase at
9:20 a.m., Amsterdam time or 01:20, Phoenix time, and that the defendant relayed its approval
to Coster at 10:38 a.m., Amsterdam time, or 2:38, Phoenix time, or a total time lapse of one
hour and [18] minutes. And even then, the approval was conditional as it directed in
computerese [sic] "Positive Identification of Card holder necessary further charges require bank
information due to high exposure. By Jack Manila."
The delay in the processing is apparent to be undue as shown from the frantic successive
queries of Amexco Amsterdam which reads: "US$13,826. Cardmember buying jewels. ID seen.
Advise how long will this take?" They were sent at 01:33, 01:37, 01:40, 01:45, 01:52 and 02:08,
all times Phoenix. Manila Amexco could be unaware of the need for speed in resolving the
charge purchase referred to it, yet it sat on its hand, unconcerned.
xxx
To repeat, the Credit Authorization System (CAS) record on the Amsterdam transaction shows
how Amexco Netherlands viewed the delay as unusually frustrating. In sequence expressed in
Phoenix time from 01:20 when the charge purchased was referred for authorization, defendants
own record shows:
01:22 the authorization is referred to Manila Amexco
01:32 Netherlands gives information that the identification of the cardmember has been
presented and he is buying jewelries worth US $13,826.
01:33 Netherlands asks "How long will this take?"
02:08 Netherlands is still asking "How long will this take?"
The Court is convinced that defendants delay constitute[s] breach of its contractual obligation to
act on his use of the card abroad "with special handling." 22 (Citations omitted)
xxx
Notwithstanding the popular notion that credit card purchases are approved "within seconds,"
there really is no strict, legally determinative point of demarcation on how long must it take for a
credit card company to approve or disapprove a customers purchase, much less one
specifically contracted upon by the parties. Yet this is one of those instances when "youd know
it when youd see it," and one hour appears to be an awfully long, patently unreasonable length
of time to approve or disapprove a credit card purchase. It is long enough time for the customer
to walk to a bank a kilometer away, withdraw money over the counter, and return to the store.

Notably, petitioner frames the obligation of respondent as "to approve or disapprove" the
purchase "in timely dispatch," and not "to approve the purchase instantaneously or within
seconds." Certainly, had respondent disapproved petitioners purchase "within seconds" or
within a timely manner, this particular action would have never seen the light of day. Petitioner
and his family would have returned to the bus without delay internally humiliated perhaps over
the rejection of his card yet spared the shame of being held accountable by newly-made
friends for making them miss the chance to tour the city of Amsterdam.
We do not wish do dispute that respondent has the right, if not the obligation, to verify whether
the credit it is extending upon on a particular purchase was indeed contracted by the
cardholder, and that the cardholder is within his means to make such transaction. The culpable
failure of respondent herein is not the failure to timely approve petitioners purchase, but the
more elemental failure to timely act on the same, whether favorably or unfavorably. Even
assuming that respondents credit authorizers did not have sufficient basis on hand to make a
judgment, we see no reason why respondent could not have promptly informed petitioner the
reason for the delay, and duly advised him that resolving the same could take some time. In that
way, petitioner would have had informed basis on whether or not to pursue the transaction at
Coster, given the attending circumstances. Instead, petitioner was left uncomfortably dangling in
the chilly autumn winds in a foreign land and soon forced to confront the wrath of foreign folk.
Moral damages avail in cases of breach of contract where the defendant acted fraudulently or in
bad faith, and the court should find that under the circumstances, such damages are due. The
findings of the trial court are ample in establishing the bad faith and unjustified neglect of
respondent, attributable in particular to the "dilly-dallying" of respondents Manila credit
authorizer, Edgardo Jaurique.23 Wrote the trial court:
While it is true that the Cardmembership Agreement, which defendant prepared, is silent as to
the amount of time it should take defendant to grant authorization for a charge purchase,
defendant acknowledged that the normal time for approval should only be three to four seconds.
Specially so with cards used abroad which requires "special handling", meaning with priority.
Otherwise, the object of credit or charge cards would be lost; it would be so inconvenient to use
that buyers and consumers would be better off carrying bundles of currency or travellers
checks, which can be delivered and accepted quickly. Such right was not accorded to plaintiff in
the instances complained off for reasons known only to defendant at that time. This, to the
Courts mind, amounts to a wanton and deliberate refusal to comply with its contractual
obligations, or at least abuse of its rights, under the contract. 24
xxx
The delay committed by defendant was clearly attended by unjustified neglect and bad faith,
since it alleges to have consumed more than one hour to simply go over plaintiffs past credit
history with defendant, his payment record and his credit and bank references, when all such
data are already stored and readily available from its computer. This Court also takes note of
the fact that there is nothing in plaintiffs billing history that would warrant the imprudent
suspension of action by defendant in processing the purchase. Defendants witness Jaurique
admits:
Q. But did you discover that he did not have any outstanding account?
A. Nothing in arrears at that time.
Q. You were well aware of this fact on this very date?
A. Yes, sir.
Mr. Jaurique further testified that there were no "delinquencies" in plaintiffs account. 25
It should be emphasized that the reason why petitioner is entitled to damages is not simply
because respondent incurred delay, but because the delay, for which culpability lies under
Article 1170, led to the particular injuries under Article 2217 of the Civil Code for which moral
damages are remunerative.26 Moral damages do not avail to soothe the plaints of the simply
impatient, so this decision should not be cause for relief for those who time the length of their

credit card transactions with a stopwatch. The somewhat unusual attending circumstances to
the purchase at Coster that there was a deadline for the completion of that purchase by
petitioner before any delay would redound to the injury of his several traveling companions
gave rise to the moral shock, mental anguish, serious anxiety, wounded feelings and social
humiliation sustained by the petitioner, as concluded by the RTC. 27 Those circumstances are
fairly unusual, and should not give rise to a general entitlement for damages under a more
mundane set of facts.
We sustain the amount of moral damages awarded to petitioner by the RTC. There is no hardand-fast rule in determining what would be a fair and reasonable amount of moral damages,
since each case must be governed by its own peculiar facts, however, it must be commensurate
to the loss or injury suffered. 28 Petitioners original prayer for P5,000,000.00 for moral damages
is excessive under the circumstances, and the amount awarded by the trial court of
P500,000.00 in moral damages more seemly. Likewise, we deem exemplary damages available
under the circumstances, and the amount of P300,000.00 appropriate. There is similarly no
cause though to disturb the determined award of P100,000.00 as attorneys fees, and
P85,233.01 as expenses of litigation.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is
REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Makati, Branch 145 in
Civil Case No. 92-1665 is hereby REINSTATED. Costs against respondent.
SO ORDERED.
DANTE O. TINGA
Associate Justice
G.R. No. L-32644
October 4, 1930
CU UNJIENG E HIJOS, plaintiff-appelle,
vs.
THE MABALACAT SUGAR CO., ET AL., defendants.
THE MABALACAT SUGAR CO., appellant.
Romeo Mercado for appellant. Araneta and Zaragoza for plaintiff-appellee. Duran and Lim for
defendant-appellee Siuliong and Co.
STREET, J.:
This action was instituted in the Court of First Instance of Pampanga by Cu Unjieng e Hijos, for
the purpose of recovering from the Mabalacat Sugar Company an indebtedness amounting to
more than P163,00, with interest, and to foreclose a mortgage given by the debtor to secure the
same, as well as to recover stipulated attorney's fee and the sum of P1,206, paid by the plaintiff
for insurance upon the mortgaged property, with incidental relief. In the complaint Siuliong &
Co., Inc., was joined as defendant, as a surety of the Mabalacat Sugar Company, and as having
a third mortgage on the mortgaged property. The Philippine National Bank was also joined by
reason of its interest as second mortgagee of the land covered by the mortgage to the plaintiff.
After the cause had been brought to issue by the answers of the several defendants, the cause
was heard and judgment rendered, the dispositive portion of the decision being as follows:
Por las consideraciones expuestas, el Juzgado condena a The Mabalacat Sugar Company a
pagar a la demandante la suma de P163,534.73, con sus intereses de 12 por ciento al ano,
compuestos mensualmente desde el 1. de mayo de 1929. Tambien se le condena a pagar a
dicha demandante la suma de P2,412 por las primas de seguros abonadas por esta, con sus
intereses de 12 por ciento al ano, compuestos tambien mensualmente desde el 15 de mayo de
1928, mas la de P7,500 por honorarios de abogados y las costas del juicio. Y si esta deuda no
se pagare dentro del plazo de tres meses, se ejecutaran los bienes hipotecados de acuerdo
con la ley.

Si del producto de la venta hubiese algun remanente, este se destinara al pago del credito del
Banco Nacional, o sea de P32,704.69, con sus intereses de 9 por ciento al ano desde el 7 de
junio de 1929, sin perjuicio de la orden de ejecucion que pudiera expedirse en el asundo No.
26435 del Juzgado de Primera Instancia de Manila.
Se condena ademas a The Mabalacat Sugar Company al pago de la suma de P3,205.78
reclamada por Siuliong & Co., con sus intereses de 9 por ciento al ano desde el 29 de julio de
1926 hasta su completo pago, ordenandola que rinda cuentas del azucar por ella producido y
pague la comision correspondiente bajo la base de 5 por ciento de su valor, descontandose,
desde luego, las cantidades ya pagadas.
Se absuelve de la demanda de Cu Unjieng e Hijos a Siuliong & Co., Inc.1awph!l.net
From this judgment the defendant, the Mabalacat Sugar Company, appealed.
The first point assigned as error has relation to the question whether the action was prematurely
stated. In this connection we note that the mortgage executed by the Mabalacat Sugar
Company contains, in paragraph 5, a provision to the effect that non-compliance on the part of
the mortgage debtor with any of the obligations assumed in virtue of this contract will cause the
entire debt to become due and give occasion for the foreclosure of the mortgage. The debtor
party failed to comply with the obligation, imposed upon it in the mortgage, to pay the mortgage
debt in the stipulated installments at the time specified in the contract. It results that the creditor
was justified in treating the entire mortgage debt as having been accelerated by such failure of
the debtor in paying the installments.
It appears, however, that on or about October 20, 1928, the mortgage creditor, Cu Unjieng e
Hijos, agreed to extend the time for payment of the mortgage indebtedness until June 30, 1929,
with certain interim payments to be made upon specified dates prior to the contemplated final
liquidation of the whole indebtedness. But the debtor party failed to make the interim payments
due on February 25, 1929, March 25, 1929, and April 25, 1929, and failed altogether to pay the
balance due, according to the terms of this extension, on June 30, 1929. Notwithstanding the
failure of the debtor to comply with the terms of this extension, it is insisted for the appellant that
this agreement for the extension of the time of payment had the effect of abrogating the
stipulation of the original contract with respect to the acceleration of the maturity of the debt by
non-compliance with the terms of the mortgage. As the trial court pointed out, this contention is
untenable. The agreement to extend the time of payment was voluntary and without
consideration so far as the creditor is concerned; and the failure of the debtor to comply with the
terms of the extension justified the creditor in treating it as of no effect. The first error is
therefore without merit.
The second error is directed to the propriety of the interest charges made by the plaintiff in
estimating the amount of the indebtedness. In this connection we note that, under the second
clause of the mortgage, interest should be calculated upon the indebtedness at the rate of 12
per cent per annum. In the same clause, but in a separate paragraph, there is another provision
with respect to the payment of interest expressed in Spanish in the following words:
Los intereses seran pagados mensualmente a fin de cada mes, computados teniendo en
cuenta el capital del prestamo aun no pagado.
Translated into English this provision reads substantially as follows: "Interest, to be computed
upon the still unpaid capital of the loan, shall be paid monthly, at the end of each month."
It is well settled that, under article 1109 of the Civil Code, as well as under section 5 of the
Usury Law (Act No. 2655), the parties may stipulate that interest shall be compounded; and
rests for the computation of compound interest can certainly be made monthly, as well as
quarterly, semiannually, or annually. But in the absence of express stipulation for the
accumulation of compound interest, no interest can be collected upon interest until the debt is
judicially claimed, and then the rate at which interest upon accrued interest must be computed
is fixed at 6 per cent per annum.
In the present case, however, the language which we have quoted above does not justify the

charging of interest upon interest, so far as interest on the capital is concerned. The provision
quoted merely requires the debtor to pay interest monthly at the end of each month, such
interest to be computed upon the capital of the loan not already paid. Clearly this provision does
not justify the charging of compound interest upon the interest accruing upon the capital
monthly. It is true that in subsections (a), (b) and (c) of article IV of the mortgage, it is stipulated
that the interest can be thus computed upon sums which the creditor would have to pay out (a)
to maintain insurance upon the mortgaged property, (b) to pay the land tax upon the same
property, and (c) upon disbursements that might be made by the mortgagee to maintain the
property in good condition. But the chief thing is that interest cannot be thus accumulated on
unpaid interest accruing upon the capital of the debt.
The trial court was of the opinion that interest could be so charged, because of the Exhibit 1 of
the Mabalacat Sugar Company, which the court considered as an interpretation by the parties to
the contract and a recognition by the debtor of the propriety of compounding the interest earned
by the capital. But the exhibit referred to is merely a receipt showing that the sum of P256.28
was, on March 19, 1928, paid by the debtor to the plaintiff as interest upon interest. But where
interest is improperly charged, at an unlawful rate, the mere voluntary payment of it to the
creditor by the debtor is not binding. Such payment, in the case before us, was usurious, being
in excess of 12 per cent which is allowed to be charged, under section 2 of the Usury Law,
when a debt is secured by mortgage upon real property. The Exhibit 1 therefore adds no
support to the contention of the plaintiff that interest upon interest can be accumulated in the
manner adopter by the creditor in this case. The point here ruled is in exact conformity with the
decision of this court in Bachrach Garage and Taxicab Co. vs. Golingco (39 Phil., 192), where
this court held that interest cannot be allowed in the absence of stipulation, or in default thereof,
except when the debt is judicially claimed; and when the debt is judicially claimed, the interest
upon the interest can only be computed at the rate of 6 per cent per annum.
It results that the appellant's second assignment of error is well taken, and the compound
interest must be eliminated from the judgment. With respect to the amount improperly charged,
we accept the estimate submitted by the president and manager of the Mabalacat Sugar
Company, who says that the amount improperly included in the computation made by the
plaintiff's bookkeeper is P879.84, in addition to the amount of P256.28 covered by Exhibit 1 of
the Mabalacat Sugar Company. But the plaintiff creditor had the right to charge interest, in the
manner adopted by it, upon insurance premiums which it had paid out; and if any discrepancy of
importance is discoverable by the plaintiff in the result here reached, it will be at liberty to submit
a revised computation in this court, upon motion for reconsideration, wherein interest shall be
computed in accordance with this opinion, that is to say, that no accumulation of interest will be
permitted at monthly intervals, as regards the capital of the debt, but such unpaid interest shall
draw interest at the rate of 6 per cent from the date of the institution of the action.
In the third assignment of error the appellant complains, as excessive, of the attorney's fees
allowed by the court in accordance with stipulation in the mortgage. The allowance made on the
principal debt was around 4 per cent, and about the same upon the fee allowed to the bank.
Under the circumstances we think the debtor has no just cause for complaint upon this score.
The fourth assignment of error complains of the failure of the trial court to permit an amendment
to be filed by the debtor to its answer, the application therefore having been made on the day
when the cause had been set for trial, with notice that the period was non-extendible. The point
was a matter in the discretion of the court, and no abuse of discretion is shown.
From what has been stated, it follows that the appealed judgment must be modified by
deducting the sum of P1,136.12 from the principal debt, so that the amount of said
indebtedness shall be P162,398.61, with interest at 12 per cent per annum, from May 1, 1929.
In other respects the judgment will be affirmed, and it is so ordered, with cost against the
appellant.
Avancea, C.J., Malcolm, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

G.R. No. L-47878

July 24, 1942
GIL JARDENIL, plaintiff-appellant,
vs.
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee.
Eleuterio J. Gustilo for appellant.Jose C. Robles for appellee.
MORAN, J.:
This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is
defendant-appellee bound to pay the stipulated interest only up to the date of maturity as fixed
in the promissory note, or up to the date payment is effected? This question is, in our opinion
controlled by the express stipulation of the parties.
Paragraph 4 of the mortgage deed recites:
Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS PESOS
(P2,4000.00), moneda filipina, que el Sr. Hepti Solas se compromete a pagar al Sr. Jardenil en
o antes del dia treintaiuno (31) de marzo de mil novecientos treintaicuarto (1934), con los
intereses de dicha suma al tipo de doce por ciento (12%) anual a partir desde fecha hasta el dia
de su vencimiento o sea treintaiuno (31) de marzo de mil novecientos treintaicuatro (1934), por
la presente, el Sr. Hepti Solas cede y traspasa, por via de primera hipoteca, a favor del Sr.
Jardenil, sus herederos y causahabientes, la parcela de terreno descrita en el parrafo primero
(1.) de esta escritura.
Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity,
or until March 31, 1934. As the contract is silent as to whether after that date, in the event of
non-payment, the debtor would continue to pay interest, we cannot in law, indulge in any
presumption as to such interest; otherwise, we would be imposing upon the debtor an obligation
that the parties have not chosen to agree upon. Article 1755 of the Civil Code provides that
"interest shall be due only when it has been expressly stipulated." (Emphasis supplied.)
A writing must be interpreted according to the legal meaning of its language (section 286, Act
No. 190, now section 58, Rule 123), and only when the wording of the written instrument
appears to be contrary to the evident intention of the parties that such intention must prevail.
(Article 1281, Civil Code.) There is nothing in the mortgage deed to show that the terms
employed by the parties thereto are at war with their evident intent. On the contrary the act of
the mortgage of granting to the mortgagor on the same date of execution of the deed of
mortgage, an extension of one year from the date of maturity within which to make payment,
without making any mention of any interest which the mortgagor should pay during the
additional period (see Exhibit B attached to the complaint), indicates that the true intention of
the parties was that no interest should be paid during the period of grace. What reason the
parties may have therefor, we need not here seek to explore.
Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to
express their agreement, for if such mistake existed, plaintiff would have undoubtedly adduced
evidence to establish it and asked that the deed be reformed accordingly, under the parcelevidence rule.
We hold therefore, that as the contract is clear and unmistakable and the terms employed
therein have not been shown to belie or otherwise fail to express the true intention of the parties
and that the deed has not been assailed on the ground of mutual mistake which would require
its reformation, same should be given its full force and effect. When a party sues on a written
contract and no attempt is made to show any vice therein, he cannot be allowed to lay any claim
more than what its clear stipulations accord. His omission, to which the law attaches a definite
warning as an in the instant case, cannot by the courts be arbitrarily supplied by what their own
notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400
from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands have

been made which we may assume to have been so made on the expiration of the year of grace,
he shall be entitled to legal interest upon the principal and the accrued interest from April 1,
1935, until full payment.
Thus modified judgment is affirmed, with costs against appellant.
Yulo, C.J., Ozaeta and Bocobo, JJ., concur.
G.R. No. 160533
January 12, 2005
FIRST FIL-SIN LENDING CORPORATION, petitioner,
vs.
GLORIA D. PADILLO, respondent.
DECISION
YNARES-SANTIAGO, J.:
Before us is a petition for review under Rule 45 of the Rules of Court, seeking a reversal of the
Court of Appeals decision in CA-G.R. CV No. 75183 1 dated October 16, 2003, which reversed
and set aside the decision of the Regional Trial Court of Manila, Branch 21 in Civil Case No. 0096235.
On July 22, 1997, respondent Gloria D. Padillo obtained a P500,000.00 loan from petitioner
First Fil-Sin Lending Corp. On September 7, 1997, respondent obtained another P500,000.00
loan from petitioner. In both instances, respondent executed a promissory note and disclosure
statement.2
For the first loan, respondent made 13 monthly interest payments of P22,500.00 each before
she settled the P500,000.00 outstanding principal obligation on February 2, 1999. As regards
the second loan, respondent made 11 monthly interest payments of P25,000.00 each before
paying the principal loan of P500,000.00 on February 2, 1999. 3 In sum, respondent paid a total
of P792,500.00 for the first loan and P775,000.00 for the second loan.
On January 27, 2000, respondent filed an action for sum of money against herein petitioner
before the Regional Trial Court of Manila. Alleging that she only agreed to pay interest at the
rates of 4.5% and 5% per annum, respectively, for the two loans, and not 4.5% and 5% per
month, respondent sought to recover the amounts she allegedly paid in excess of her actual
obligations.
On October 12, 2001,4 the trial court dismissed respondents complaint, and on the
counterclaim, ordered her to pay petitioner P311,125.00 with legal interest from February 3,
1999 until fully paid plus 10% of the amount due as attorneys fees and costs of the suit. 5 The
trial court ruled that by issuing checks representing interest payments at 4.5% and 5% monthly
interest rates, respondent is now estopped from questioning the provisions of the promissory
notes.
On appeal, the Court of Appeals (CA) reversed and set aside the decision of the court a quo,
the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, the appealed decision is REVERSED and SET ASIDE and
a new one entered: (1) ordering First Fil-Sin Lending Corporation to return the amount of
P114,000.00 to Gloria D. Padillo, and (2) deleting the award of attorneys fees in favor of
appellee. Other claims and counterclaims are dismissed for lack of sufficient causes. No
pronouncement as to cost.
SO ORDERED.6
The appellate court ruled that, based on the disclosure statements executed by respondent, the
interest rates should be imposed on a monthly basis but only for the 3-month term of the
loan.l^vvphi1.net Thereafter, the legal interest rate will apply. The CA also found the penalty
charges pegged at 1% per day of delay highly unconscionable as it would translate to 365% per
annum. Thus, it was reduced to 1% per month or 12% per annum.
Hence, the instant petition on the following assignment of errors:
I

THE COURT OF APPEALS ERRED IN FINDING THAT THE APPLICABLE INTEREST

SHOULD BE THE LEGAL INTEREST OF TWELVE PER CENT (12%) PER ANNUM DESPITE
THE CLEAR AGREEMENT OF THE PARTIES ON ANOTHER APPLICABLE RATE.
II
THE COURT OF APPEALS ERRED IN IMPOSING A PENALTY COMPUTED AT THE RATE OF
TWELVE PER CENT (12%) PER ANNUM DESPITE THE CLEAR AGREEMENT OF THE
PARTIES ON ANOTHER APPLICABLE RATE.
III
THE COURT OF APPEALS ERRED IN DELETING THE ATTORNEYS FEES AWARDED BY
THE REGIONAL TRIAL COURT.7
Petitioner maintains that the trial court and the CA are correct in ruling that the interest rates are
to be imposed on a monthly and not on a per annum basis. However, it insists that the 4.5% and
5% monthly interest shall be imposed until the outstanding obligations have been fully paid.
As to the penalty charges, petitioner argues that the 12% per annum penalty imposed by the CA
in lieu of the 1% per day as agreed upon by the parties violates their freedom to stipulate terms
and conditions as they may deem proper.
Petitioner finally contends that the CA erred in deleting the trial courts award of attorneys fees
arguing that the same is anchored on sound and legal ground.
Respondent, on the other hand, avers that the interest on the loans is per annum as expressly
stated in the promissory notes and disclosure statements. The provision as to annual interest
rate is clear and requires no room for interpretation. Respondent asserts that any ambiguity in
the promissory notes and disclosure statements should not favor petitioner since the loan
documents were prepared by the latter.1awphi1.nt
We agree with respondent.
Perusal of the promissory notes and the disclosure statements pertinent to the July 22, 1997
and September 7, 1997 loan obligations of respondent clearly and unambiguously provide for
interest rates of 4.5% per annum and 5% per annum, respectively. Nowhere was it stated that
the interest rates shall be applied on a monthly basis.
Thus, when the terms of the agreement are clear and explicit that they do not justify an attempt
to read into it any alleged intention of the parties, the terms are to be understood literally just as
they appear on the face of the contract. 8 It is only in instances when the language of a contract
is ambiguous or obscure that courts ought to apply certain established rules of construction in
order to ascertain the supposed intent of the parties.l^vvphi1.net However, these rules will not
be used to make a new contract for the parties or to rewrite the old one, even if the contract is
inequitable or harsh. They are applied by the court merely to resolve doubts and ambiguities
within the framework of the agreement.9
The lower court and the CA mistook the Loan Transactions Summary for the Disclosure
Statement. The former was prepared exclusively by petitioner and merely summarizes the
payments made by respondent and the income earned by petitioner. There was no mention of
any interest rates and having been prepared exclusively by petitioner, the same is self serving.
On the contrary, the Disclosure Statements were signed by both parties and categorically stated
that interest rates were to be imposed annually, not monthly.
As such, since the terms and conditions contained in the promissory notes and disclosure
statements are clear and unambiguous, the same must be given full force and effect. The
expressed intention of the parties as laid down on the loan documents controls.1a\^/phi1.net
Also, reformation cannot be resorted to as the documents have not been assailed on the ground
of mutual mistake. When a party sues on a written contract and no attempt is made to show any
vice therein, he cannot be allowed to lay claim for more than what its clear stipulations accord.
His omission cannot be arbitrarily supplied by the courts by what their own notions of justice or
equity may dictate.10
Notably, petitioner even admitted that it was solely responsible for the preparation of the loan

documents, and that it failed to correct the pro forma note "p.a." to "per month".11 Since the
mistake is exclusively attributed to petitioner, the same should be charged against it. This
unilateral mistake cannot be taken against respondent who merely affixed her signature on the
pro forma loan agreements. As between two parties to a written agreement, the party who gave
rise to the mistake or error in the provisions of the same is estopped from asserting a contrary
intention to that contained therein. The checks issued by respondent do not clearly and
convincingly prove that the real intent of the parties is to apply the interest rates on a monthly
basis. Absent any proof of vice of consent, the promissory notes and disclosure statements
remain the best evidence to ascertain the real intent of the parties.1a\^/phi1.net
The same promissory note provides that "x x x any and all remaining amount due on the
principal upon maturity hereof shall earn interest at the rate of _____ from date of maturity until
fully paid." The CA thus properly imposed the legal interest of 12% per annum from the time the
loans matured until the same has been fully paid on February 2, 1999. As decreed in Eastern
Shipping Lines, Inc. v. Court of Appeals,12 "in the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default."
As regards the penalty charges, we agree with the CA in ruling that the 1% penalty per day of
delay is highly unconscionable. Applying Article 1229 of the Civil Code, courts shall equitably
reduce the penalty when the principal obligation has been partly or irregularly complied with, or
if it is iniquitous or unconscionable.
With regard to the attorneys fees, the CA correctly deleted the award in favor of petitioner since
the trial courts decision does not reveal any explicit basis for such an award. Attorneys fees are
not automatically awarded to every winning litigant.l^vvphi1.net It must be shown that any of the
instances enumerated under Art. 2208 13 of the Civil Code exists to justify the award thereof. 14
Not one of such instances exists here. Besides, by filing the complaint, respondent was merely
asserting her rights which, after due deliberations, proved to be lawful, proper and valid.
WHEREFORE, in view of the foregoing, the October 16, 2003 decision of the Court of Appeals
in CA-G.R. CV No. 75183 is AFFIRMED with the MODIFICATION that the interest rates on the
July 22, 1997 and September 7, 1997 loan obligations of respondent Gloria D. Padillo from
petitioner First Fil-Sin Lending Corporation be imposed and computed on a per annum basis,
and upon their respective maturities, the interest rate of 12% per annum shall be imposed until
full payment. In addition, the penalty at the rate of 12% per annum shall be imposed on the
outstanding obligations from date of default until full payment.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Carpio, and Azcuna, JJ., concur.
G.R. No. 155223
April 4, 2007
BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F. FUJITA, Petitioner,
vs.
FLORA SAN DIEGO-SISON, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias represented by her
Attorney-in-fact, Marie Regine F. Fujita (petitioner) seeking to annul the Decision 1 dated June
18, 2002 and the Resolution2 dated September 11, 2002 of the Court of Appeals (CA) in CAG.R. CV No. 52839.
Petitioner is the owner of a house and lot located at No. 589 Batangas East, Ayala Alabang,
Muntinlupa, Metro Manila, which she acquired from Island Masters Realty and Development
Corporation (IMRDC) by virtue of a Deed of Sale dated Nov. 16, 1990. 3 The property is covered
by TCT No. 168173 of the Register of Deeds of Makati in the name of IMRDC. 4
On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San Diego-Sison
(respondent), as the SECOND PARTY, entered into a Memorandum of Agreement 5 over the

property with the following terms:

NOW, THEREFORE, for and in consideration of the sum of THREE MILLION PESOS
(P3,000,000.00) receipt of which is hereby acknowledged by the FIRST PARTY from the
SECOND PARTY, the parties have agreed as follows:
1. That the SECOND PARTY has a period of Six (6) months from the date of the execution of
this contract within which to notify the FIRST PARTY of her intention to purchase the
aforementioned parcel of land together within (sic) the improvements thereon at the price of SIX
MILLION FOUR HUNDRED THOUSAND PESOS (P6,400,000.00). Upon notice to the FIRST
PARTY of the SECOND PARTYs intention to purchase the same, the latter has a period of
another six months within which to pay the remaining balance of P3.4 million.
2. That prior to the six months period given to the SECOND PARTY within which to decide
whether or not to purchase the above-mentioned property, the FIRST PARTY may still offer the
said property to other persons who may be interested to buy the same provided that the amount
of P3,000,000.00 given to the FIRST PARTY BY THE SECOND PARTY shall be paid to the
latter including interest based on prevailing compounded bank interest plus the amount of the
sale in excess of P7,000,000.00 should the property be sold at a price more than P7 million.
3. That in case the FIRST PARTY has no other buyer within the first six months from the
execution of this contract, no interest shall be charged by the SECOND PARTY on the P3
million however, in the event that on the sixth month the SECOND PARTY would decide not to
purchase the aforementioned property, the FIRST PARTY has a period of another six months
within which to pay the sum of P3 million pesos provided that the said amount shall earn
compounded bank interest for the last six months only. Under this circumstance, the amount of
P3 million given by the SECOND PARTY shall be treated as [a] loan and the property shall be
considered as the security for the mortgage which can be enforced in accordance with law.
x x x x.6
Petitioner received from respondent two million pesos in cash and one million pesos in a postdated check dated February 28, 1990, instead of 1991, which rendered said check stale. 7
Petitioner then gave respondent TCT No. 168173 in the name of IMRDC and the Deed of
Absolute Sale over the property between petitioner and IMRDC.
Respondent decided not to purchase the property and notified petitioner through a letter 8 dated
March 20, 1991, which petitioner received only on June 11, 1991, 9 reminding petitioner of their
agreement that the amount of two million pesos which petitioner received from respondent
should be considered as a loan payable within six months. Petitioner subsequently failed to pay
respondent the amount of two million pesos.
On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila, a complaint 10
for sum of money with preliminary attachment against petitioner. The case was docketed as
Civil Case No. 93-65367 and raffled to Branch 30. Respondent alleged the foregoing facts and
in addition thereto averred that petitioner tried to deprive her of the security for the loan by
making a false report11 of the loss of her owners copy of TCT No. 168173 to the Tagig Police
Station on June 3, 1991, executing an affidavit of loss and by filing a petition 12 for the issuance
of a new owners duplicate copy of said title with the RTC of Makati, Branch 142; that the
petition was granted in an Order 13 dated August 31, 1991; that said Order was subsequently set
aside in an Order dated April 10, 1992 14 where the RTC Makati granted respondents petition for
relief from judgment due to the fact that respondent is in possession of the owners duplicate
copy of TCT No. 168173, and ordered the provincial public prosecutor to conduct an
investigation of petitioner for perjury and false testimony. Respondent prayed for the ex-parte
issuance of a writ of preliminary attachment and payment of two million pesos with interest at
36% per annum from December 7, 1991, P100,000.00 moral, corrective and exemplary
damages and P200,000.00 for attorneys fees.
In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued a writ of
preliminary attachment upon the filing of a bond in the amount of two million pesos. 15

Petitioner filed an Amended Answer 16 alleging that the Memorandum of Agreement was
conceived and arranged by her lawyer, Atty. Carmelita Lozada, who is also respondents lawyer;
that she was asked to sign the agreement without being given the chance to read the same;
that the title to the property and the Deed of Sale between her and the IMRDC were entrusted
to Atty. Lozada for safekeeping and were never turned over to respondent as there was no
consummated sale yet; that out of the two million pesos cash paid, Atty. Lozada took the one
million pesos which has not been returned, thus petitioner had filed a civil case against her; that
she was never informed of respondents decision not to purchase the property within the six
month period fixed in the agreement; that when she demanded the return of TCT No. 168173
and the Deed of Sale between her and the IMRDC from Atty. Lozada, the latter gave her these
documents in a brown envelope on May 5, 1991 which her secretary placed in her attache case;
that the envelope together with her other personal things were lost when her car was forcibly
opened the following day; that she sought the help of Atty. Lozada who advised her to secure a
police report, to execute an affidavit of loss and to get the services of another lawyer to file a
petition for the issuance of an owners duplicate copy; that the petition for the issuance of a new
owners duplicate copy was filed on her behalf without her knowledge and neither did she sign
the petition nor testify in court as falsely claimed for she was abroad; that she was a victim of
the manipulations of Atty. Lozada and respondent as shown by the filing of criminal charges for
perjury and false testimony against her; that no interest could be due as there was no valid
mortgage over the property as the principal obligation is vitiated with fraud and deception. She
prayed for the dismissal of the complaint, counter-claim for damages and attorneys fees.
Trial on the merits ensued. On January 31, 1996, the RTC issued a decision, 17 the dispositive
portion of which reads:
WHEREFORE, judgment is hereby RENDERED:
1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest thereon at the rate of
thirty two (32%) per cent per annum beginning December 7, 1991 until fully paid.
2) Ordering defendant to pay plaintiff the sum of P70,000.00 representing premiums paid by
plaintiff on the attachment bond with legal interest thereon counted from the date of this decision
until fully paid.
3) Ordering defendant to pay plaintiff the sum of P100,000.00 by way of moral, corrective and
exemplary damages.
4) Ordering defendant to pay plaintiff attorneys fees of P100,000.00 plus cost of litigation.18
The RTC found that petitioner was under obligation to pay respondent the amount of two million
pesos with compounded interest pursuant to their Memorandum of Agreement; that the
fraudulent scheme employed by petitioner to deprive respondent of her only security to her
loaned money when petitioner executed an affidavit of loss and instituted a petition for the
issuance of an owners duplicate title knowing the same was in respondents possession,
entitled respondent to moral damages; and that petitioners bare denial cannot be accorded
credence because her testimony and that of her witness did not appear to be credible.
The RTC further found that petitioner admitted that she received from respondent the two million
pesos in cash but the fact that petitioner gave the one million pesos to Atty. Lozada was without
respondents knowledge thus it is not binding on respondent; that respondent had also proven
that in 1993, she initially paid the sum of P30,000.00 as premium for the issuance of the
attachment bond, P20,000.00 for its renewal in 1994, and P20,000.00 for the renewal in 1995,
thus plaintiff should be reimbursed considering that she was compelled to go to court and ask
for a writ of preliminary attachment to protect her rights under the agreement.
Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, the CA affirmed the
RTC decision with modification, the dispositive portion of which reads:
WHEREFORE, premises considered, the decision appealed from is MODIFIED in the sense
that the rate of interest is reduced from 32% to 25% per annum, effective June 7, 1991 until fully
paid.19

The CA found that: petitioner gave the one million pesos to Atty. Lozada partly as her
commission and partly as a loan; respondent did not replace the mistakenly dated check of one
million pesos because she had decided not to buy the property and petitioner knew of her
decision as early as April 1991; the award of moral damages was warranted since even granting
petitioner had no hand in the filing of the petition for the issuance of an owners copy, she
executed an affidavit of loss of TCT No. 168173 when she knew all along that said title was in
respondents possession; petitioners claim that she thought the title was lost when the brown
envelope given to her by Atty. Lozada was stolen from her car was hollow; that such deceitful
conduct caused respondent serious anxiety and emotional distress.
The CA concluded that there was no basis for petitioner to say that the interest should be
charged for six months only and no more; that a loan always bears interest otherwise it is not a
loan; that interest should commence on June 7, 1991 20 with compounded bank interest
prevailing at the time the two million was considered as a loan which was in June 1991; that the
bank interest rate for loans secured by a real estate mortgage in 1991 ranged from 25% to 32%
per annum as certified to by Prudential Bank, 21 that in fairness to petitioner, the rate to be
charged should be 25% only.
Petitioners motion for reconsideration was denied by the CA in a Resolution dated September
11, 2002.
Hence the instant Petition for Review on Certiorari filed by petitioner raising the following issues:
(A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD BE LIMITED TO
SIX (6) MONTHS AS CONTAINED IN THE MEMORANDUM OF AGREEMENT.
(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL DAMAGES.
(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES IS PROPER EVEN IF NOT MENTIONED IN THE TEXT OF THE
DECISION.22
Petitioner contends that the interest, whether at 32% per annum awarded by the trial court or at
25% per annum as modified by the CA which should run from June 7, 1991 until fully paid, is
contrary to the parties Memorandum of Agreement; that the agreement provides that if
respondent would decide not to purchase the property, petitioner has the period of another six
months to pay the loan with compounded bank interest for the last six months only; that the
CAs ruling that a loan always bears interest otherwise it is not a loan is contrary to Art. 1956 of
the New Civil Code which provides that no interest shall be due unless it has been expressly
stipulated in writing.
We are not persuaded.
While the CAs conclusion, that a loan always bears interest otherwise it is not a loan, is flawed
since a simple loan may be gratuitous or with a stipulation to pay interest, 23 we find no error
committed by the CA in awarding a 25% interest per annum on the two-million peso loan even
beyond the second six months stipulated period.
The Memorandum of Agreement executed between the petitioner and respondent on December
7, 1990 is the law between the parties. In resolving an issue based upon a contract, we must
first examine the contract itself, especially the provisions thereof which are relevant to the
controversy.24 The general rule is that if the terms of an agreement are clear and leave no doubt
as to the intention of the contracting parties, the literal meaning of its stipulations shall prevail. 25
It is further required that the various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken jointly.26
In this case, the phrase "for the last six months only" should be taken in the context of the entire
agreement. We agree with and adopt the CAs interpretation of the phrase in this wise:
Their agreement speaks of two (2) periods of six months each. The first six-month period was
given to plaintiff-appellee (respondent) to make up her mind whether or not to purchase
defendant-appellants (petitioner's) property. The second six-month period was given to
defendant-appellant to pay the P2 million loan in the event that plaintiff-appellee decided not to

buy the subject property in which case interest will be charged "for the last six months only",
referring to the second six-month period. This means that no interest will be charged for the first
six-month period while appellee was making up her mind whether to buy the property, but only
for the second period of six months after appellee had decided not to buy the property. This is
the meaning of the phrase "for the last six months only". Certainly, there is nothing in their
agreement that suggests that interest will be charged for six months only even if it takes
defendant-appellant an eternity to pay the loan. 27
The agreement that the amount given shall bear compounded bank interest for the last six
months only, i.e., referring to the second six-month period, does not mean that interest will no
longer be charged after the second six-month period since such stipulation was made on the
logical and reasonable expectation that such amount would be paid within the date stipulated.
Considering that petitioner failed to pay the amount given which under the Memorandum of
Agreement shall be considered as a loan, the monetary interest for the last six months
continued to accrue until actual payment of the loaned amount.
The payment of regular interest constitutes the price or cost of the use of money and thus, until
the principal sum due is returned to the creditor, regular interest continues to accrue since the
debtor continues to use such principal amount. 28 It has been held that for a debtor to continue in
possession of the principal of the loan and to continue to use the same after maturity of the loan
without payment of the monetary interest, would constitute unjust enrichment on the part of the
debtor at the expense of the creditor.29
Petitioner and respondent stipulated that the loaned amount shall earn compounded bank
interests, and per the certification issued by Prudential Bank, the interest rate for loans in 1991
ranged from 25% to 32% per annum. The CA reduced the interest rate to 25% instead of the
32% awarded by the trial court which petitioner no longer assailed.1awphi1.nt
In Bautista v. Pilar Development Corp.,30 we upheld the validity of a 21% per annum interest on
a P142,326.43 loan. In Garcia v. Court of Appeals,31 we sustained the agreement of the parties
to a 24% per annum interest on an P8,649,250.00 loan. Thus, the interest rate of 25% per
annum awarded by the CA to a P2 million loan is fair and reasonable.
Petitioner next claims that moral damages were awarded on the erroneous finding that she
used a fraudulent scheme to deprive respondent of her security for the loan; that such finding is
baseless since petitioner was acquitted in the case for perjury and false testimony filed by
respondent against her.
We are not persuaded.
Article 31 of the Civil Code provides that when the civil action is based on an obligation not
arising from the act or omission complained of as a felony, such civil action may proceed
independently of the criminal proceedings and regardless of the result of the latter.32
While petitioner was acquitted in the false testimony and perjury cases filed by respondent
against her, those actions are entirely distinct from the collection of sum of money with damages
filed by respondent against petitioner.
We agree with the findings of the trial court and the CA that petitioners act of trying to deprive
respondent of the security of her loan by executing an affidavit of loss of the title and instituting
a petition for the issuance of a new owners duplicate copy of TCT No. 168173 entitles
respondent to moral damages.1a\^/phi1.net Moral damages may be awarded in culpa
contractual or breach of contract cases when the defendant acted fraudulently or in bad faith.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose
or some moral obliquity and conscious doing of wrong. It partakes of the nature of fraud. 33
The Memorandum of Agreement provides that in the event that respondent opts not to buy the
property, the money given by respondent to petitioner shall be treated as a loan and the
property shall be considered as the security for the mortgage. It was testified to by respondent
that after they executed the agreement on December 7, 1990, petitioner gave her the owners
copy of the title to the property, the Deed of Sale between petitioner and IMRDC, the certificate

of occupancy, and the certificate of the Secretary of the IMRDC who signed the Deed of Sale. 34
However, notwithstanding that all those documents were in respondents possession, petitioner
executed an affidavit of loss that the owners copy of the title and the Deed of Sale were lost.
Although petitioner testified that her execution of the affidavit of loss was due to the fact that she
was of the belief that since she had demanded from Atty. Lozada the return of the title, she
thought that the brown envelope with markings which Atty. Lozada gave her on May 5, 1991
already contained the title and the Deed of Sale as those documents were in the same brown
envelope which she gave to Atty. Lozada prior to the transaction with respondent. 35 Such
statement remained a bare statement. It was not proven at all since Atty. Lozada had not taken
the stand to corroborate her claim. In fact, even petitioners own witness, Benilda Ynfante
(Ynfante), was not able to establish petitioner's claim that the title was returned by Atty. Lozada
in view of Ynfante's testimony that after the brown envelope was given to petitioner, the latter
passed it on to her and she placed it in petitioners attach case 36 and did not bother to look at
the envelope.37
It is clear therefrom that petitioners execution of the affidavit of loss became the basis of the
filing of the petition with the RTC for the issuance of new owners duplicate copy of TCT No.
168173. Petitioners actuation would have deprived respondent of the security for her loan were
it not for respondents timely filing of a petition for relief whereby the RTC set aside its previous
order granting the issuance of new title. Thus, the award of moral damages is in order.
The entitlement to moral damages having been established, the award of exemplary damages
is proper.38 Exemplary damages may be imposed upon petitioner by way of example or
correction for the public good.39 The RTC awarded the amount of P100,000.00 as moral and
exemplary damages. While the award of moral and exemplary damages in an aggregate
amount may not be the usual way of awarding said damages, 40 no error has been committed by
CA. There is no question that respondent is entitled to moral and exemplary damages.
Petitioner argues that the CA erred in awarding attorneys fees because the trial courts decision
did not explain the findings of facts and law to justify the award of attorneys fees as the same
was mentioned only in the dispositive portion of the RTC decision.
We agree.
Article 220841 of the New Civil Code enumerates the instances where such may be awarded
and, in all cases, it must be reasonable, just and equitable if the same were to be granted. 42
Attorney's fees as part of damages are not meant to enrich the winning party at the expense of
the losing litigant. They are not awarded every time a party prevails in a suit because of the
policy that no premium should be placed on the right to litigate. 43 The award of attorney's fees is
the exception rather than the general rule. As such, it is necessary for the trial court to make
findings of facts and law that would bring the case within the exception and justify the grant of
such award. The matter of attorney's fees cannot be mentioned only in the dispositive portion of
the decision.44 They must be clearly explained and justified by the trial court in the body of its
decision. On appeal, the CA is precluded from supplementing the bases for awarding attorneys
fees when the trial court failed to discuss in its Decision the reasons for awarding the same.
Consequently, the award of attorney's fees should be deleted.
WHEREFORE, in view of all the foregoing, the Decision dated June 18, 2002 and the
Resolution dated September 11, 2002 of the Court of Appeals in CA-G.R. CV No. 52839 are
AFFIRMED with MODIFICATION that the award of attorneys fees is DELETED.
No pronouncement as to costs.
SO ORDERED.
MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice
G.R. No. 173227
January 20, 2009
SEBASTIAN SIGA-AN, Petitioner,

vs.
ALICIA VILLANUEVA, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court seeking to
set aside the Decision,2 dated 16 December 2005, and Resolution, 3 dated 19 June 2006 of the
Court of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the Decision,4 dated 26
January 2001, of the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-980068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint 5 for sum of money against
petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255,
docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a businesswoman
engaged in supplying office materials and equipments to the Philippine Navy Office (PNO)
located at Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller of
the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and
offered to loan her the amount of P540,000.00. Since she needed capital for her business
transactions with the PNO, she accepted petitioners proposal. The loan agreement was not
reduced in writing. Also, there was no stipulation as to the payment of interest for the loan. 6
On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial
payment of the loan. On 31 October 1993, she issued another check in the amount of
P200,000.00 to petitioner as payment of the remaining balance of the loan. Petitioner told her
that since she paid a total amount of P700,000.00 for the P540,000.00 worth of loan, the excess
amount of P160,000.00 would be applied as interest for the loan. Not satisfied with the amount
applied as interest, petitioner pestered her to pay additional interest. Petitioner threatened to
block or disapprove her transactions with the PNO if she would not comply with his demand. As
all her transactions with the PNO were subject to the approval of petitioner as comptroller of the
PNO, and fearing that petitioner might block or unduly influence the payment of her vouchers in
the PNO, she conceded. Thus, she paid additional amounts in cash and checks as interests for
the loan. She asked petitioner for receipt for the payments but petitioner told her that it was not
necessary as there was mutual trust and confidence between them. According to her
computation, the total amount she paid to petitioner for the loan and interest accumulated to
P1,200,000.00.7
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan
despite absence of agreement to that effect. Her lawyer told her that petitioner could not validly
collect interest on the loan because there was no agreement between her and petitioner
regarding payment of interest. Since she paid petitioner a total amount of P1,200,000.00 for the
P540,000.00 worth of loan, and upon being advised by her lawyer that she made overpayment
to petitioner, she sent a demand letter to petitioner asking for the return of the excess amount of
P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for
reimbursement.8
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1)
P660,000.00 plus legal interest from the time of demand; (2) P300,000.00 as moral damages;
(3) P50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of P660,000.00
as attorneys fees.9
In his answer10 to the complaint, petitioner denied that he offered a loan to respondent. He
averred that in 1992, respondent approached and asked him if he could grant her a loan, as she
needed money to finance her business venture with the PNO. At first, he was reluctant to deal
with respondent, because the latter had a spotty record as a supplier of the PNO. However,
since respondent was an acquaintance of his officemate, he agreed to grant her a loan.

Respondent paid the loan in full.11

Subsequently, respondent again asked him to give her a loan. As respondent had been able to
pay the previous loan in full, he agreed to grant her another loan. Later, respondent requested
him to restructure the payment of the loan because she could not give full payment on the due
date. He acceded to her request. Thereafter, respondent pleaded for another restructuring of the
payment of the loan. This time he rejected her plea. Thus, respondent proposed to execute a
promissory note wherein she would acknowledge her obligation to him, inclusive of interest, and
that she would issue several postdated checks to guarantee the payment of her obligation.
Upon his approval of respondents request for restructuring of the loan, respondent executed a
promissory note dated 12 September 1994 wherein she admitted having borrowed an amount
of P1,240,000.00, inclusive of interest, from petitioner and that she would pay said amount in
March 1995. Respondent also issued to him six postdated checks amounting to P1,240,000.00
as guarantee of compliance with her obligation. Subsequently, he presented the six checks for
encashment but only one check was honored. He demanded that respondent settle her
obligation, but the latter failed to do so. Hence, he filed criminal cases for Violation of the
Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were assigned
to the Metropolitan Trial Court of Makati City, Branch 65 (MeTC). 12
Petitioner insisted that there was no overpayment because respondent admitted in the latters
promissory note that her monetary obligation as of 12 September 1994 amounted to
P1,240,000.00 inclusive of interests. He argued that respondent was already estopped from
complaining that she should not have paid any interest, because she was given several times to
settle her obligation but failed to do so. He maintained that to rule in favor of respondent is
tantamount to concluding that the loan was given interest-free. Based on the foregoing
averments, he asked the RTC to dismiss respondents complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an
overpayment of her loan obligation to petitioner and that the latter should refund the excess
amount to the former. It ratiocinated that respondents obligation was only to pay the loaned
amount of P540,000.00, and that the alleged interests due should not be included in the
computation of respondents total monetary debt because there was no agreement between
them regarding payment of interest. It concluded that since respondent made an excess
payment to petitioner in the amount of P660,000.00 through mistake, petitioner should return
the said amount to respondent pursuant to the principle of solutio indebiti.13
The RTC also ruled that petitioner should pay moral damages for the sleepless nights and
wounded feelings experienced by respondent. Further, petitioner should pay exemplary
damages by way of example or correction for the public good, plus attorneys fees and costs of
suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the
defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of 12% per
annum computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as
attorneys fees; and
(5) Ordering defendant to pay the costs of suit. 14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court
promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed
decision [is] AFFIRMED in toto.15

Petitioner filed a motion for reconsideration of the appellate courts decision but this was
denied.16 Hence, petitioner lodged the instant petition before us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS
DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF
SOLUTIO INDEBITI.17
Interest is a compensation fixed by the parties for the use or forbearance of money. This is
referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory interest. 18 The right to interest arises only
by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on
which interest is demanded.19
Article 1956 of the Civil Code, which refers to monetary interest, 20 specifically mandates that no
interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from
the foregoing provision, payment of monetary interest is allowed only if: (1) there was an
express stipulation for the payment of interest; and (2) the agreement for the payment of
interest was reduced in writing. The concurrence of the two conditions is required for the
payment of monetary interest. Thus, we have held that collection of interest without any
stipulation therefor in writing is prohibited by law.21
It appears that petitioner and respondent did not agree on the payment of interest for the loan.
Neither was there convincing proof of written agreement between the two regarding the
payment of interest. Respondent testified that although she accepted petitioners offer of loan
amounting to P540,000.00, there was, nonetheless, no verbal or written agreement for her to
pay interest on the loan.22
Petitioner presented a handwritten promissory note dated 12 September 1994 23 wherein
respondent purportedly admitted owing petitioner "capital and interest." Respondent, however,
explained that it was petitioner who made a promissory note and she was told to copy it in her
own handwriting; that all her transactions with the PNO were subject to the approval of
petitioner as comptroller of the PNO; that petitioner threatened to disapprove her transactions
with the PNO if she would not pay interest; that being unaware of the law on interest and fearing
that petitioner would make good of his threats if she would not obey his instruction to copy the
promissory note, she copied the promissory note in her own handwriting; and that such was the
same promissory note presented by petitioner as alleged proof of their written agreement on
interest.24 Petitioner did not rebut the foregoing testimony. It is evident that respondent did not
really consent to the payment of interest for the loan and that she was merely tricked and
coerced by petitioner to pay interest. Hence, it cannot be gainfully said that such promissory
note pertains to an express stipulation of interest or written agreement of interest on the loan
between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and
respondent agreed on the payment of 7% rate of interest on the loan; that the agreed 7% rate of
interest was duly admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases
he filed against respondent; that despite such judicial admission by respondent, the RTC and
the Court of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him
since the agreement on interest was not reduced in writing; that the application of Article 1956
of the Civil Code should not be absolute, and an exception to the application of such provision
should be made when the borrower admits that a specific rate of interest was agreed upon as in
the present case; and that it would be unfair to allow respondent to pay only the loan when the
latter very well knew and even admitted in the Batas Pambansa Blg. 22 cases that there was an
agreed 7% rate of interest on the loan.25
We have carefully examined the RTC Decision and found that the RTC did not make a ruling

therein that petitioner and respondent agreed on the payment of interest at the rate of 7% for
the loan. The RTC clearly stated that although petitioner and respondent entered into a valid
oral contract of loan amounting to P540,000.00, they, nonetheless, never intended the payment
of interest thereon.26 While the Court of Appeals mentioned in its Decision that it concurred in
the RTCs ruling that petitioner and respondent agreed on a certain rate of interest as regards
the loan, we consider this as merely an inadvertence because, as earlier elucidated, both the
RTC and the Court of Appeals ruled that petitioner is not entitled to the payment of interest on
the loan. The rule is that factual findings of the trial court deserve great weight and respect
especially when affirmed by the appellate court. 27 We found no compelling reason to disturb the
ruling of both courts.
Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases
that they had agreed on the payment of interest at the rate of 7% deserves scant consideration.
In the said case, respondent merely testified that after paying the total amount of loan, petitioner
ordered her to pay interest. 28 Respondent did not categorically declare in the same case that
she and respondent made an express stipulation in writing as regards payment of interest at the
rate of 7%. As earlier discussed, monetary interest is due only if there was an express
stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states
that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a
legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on
the payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that
interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as a penalty or
damages for breach of contractual obligations. It cannot be charged as a compensation for the
use or forbearance of money. In other words, the two instances apply only to compensatory
interest and not to monetary interest. 29 The case at bar involves petitioners claim for monetary
interest.
Further, said compensatory interest is not chargeable in the instant case because it was not
duly proven that respondent defaulted in paying the loan. Also, as earlier found, no interest was
due on the loan because there was no written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does
not apply to the instant case. Thus, he cannot be compelled to return the alleged excess
amount paid by respondent as interest.30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been
no stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be
applied. Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision
provides that if something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor
relationship is created under a quasi-contract whereby the payor becomes the creditor who then
has the right to demand the return of payment made by mistake, and the person who has no
right to receive such payment becomes obligated to return the same. The quasi-contract of
solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the
expense of another.31 The principle of solutio indebiti applies where (1) a payment is made when
there exists no binding relation between the payor, who has no duty to pay, and the person who
received the payment; and (2) the payment is made through mistake, and not through liberality
or some other cause.32 We have held that the principle of solutio indebiti applies in case of
erroneous payment of undue interest. 33
It was duly established that respondent paid interest to petitioner. Respondent was under no
duty to make such payment because there was no express stipulation in writing to that effect.

There was no binding relation between petitioner and respondent as regards the payment of
interest. The payment was clearly a mistake. Since petitioner received something when there
was no right to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed by the RTC
and the Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00 from petitioner.34
Respondent issued two checks with a total worth of P700,000.00 in favor of petitioner as
payment of the loan.35 These checks were subsequently encashed by petitioner.36 Obviously,
there was an excess of P160,000.00 in the payment for the loan. Petitioner claims that the
excess of P160,000.00 serves as interest on the loan to which he was entitled. Aside from
issuing the said two checks, respondent also paid cash in the total amount of P175,000.00 to
petitioner as interest.37 Although no receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his ReplyAffidavit38 in the Batas Pambansa Blg. 22 cases that respondent paid him a total amount of
P175,000.00 cash in addition to the two checks. Section 26 Rule 130 of the Rules of Evidence
provides that the declaration of a party as to a relevant fact may be given in evidence against
him. Aside from the amounts of P160,000.00 and P175,000.00 paid as interest, no other proof
of additional payment as interest was presented by respondent. Since we have previously found
that petitioner is not entitled to payment of interest and that the principle of solutio indebiti
applies to the instant case, petitioner should return to respondent the excess amount of
P160,000.00 and P175,000.00 or the total amount of P335,000.00. Accordingly, the
reimbursable amount to respondent fixed by the RTC and the Court of Appeals should be
reduced from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22
against respondent. In the said cases, the MeTC found respondent guilty of violating Batas
Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless, respondents
conviction therein does not affect our ruling in the instant case. The two checks, subject matter
of this case, totaling P700,000.00 which respondent claimed as payment of the P540,000.00
worth of loan, were not among the five checks found to be dishonored or bounced in the five
criminal cases. Further, the MeTC found that respondent made an overpayment of the loan by
reason of the interest which the latter paid to petitioner.39
Article 2217 of the Civil Code provides that moral damages may be recovered if the party
underwent physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation and similar injury. Respondent testified that
she experienced sleepless nights and wounded feelings when petitioner refused to return the
amount paid as interest despite her repeated demands. Hence, the award of moral damages is
justified. However, its corresponding amount of P300,000.00, as fixed by the RTC and the Court
of Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil Code
instructs that assessment of damages is left to the discretion of the court according to the
circumstances of each case. This discretion is limited by the principle that the amount awarded
should not be palpably excessive as to indicate that it was the result of prejudice or corruption
on the part of the trial court. 40 To our mind, the amount of P150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary
damages may be imposed if the defendant acted in an oppressive manner. Petitioner acted
oppressively when he pestered respondent to pay interest and threatened to block her
transactions with the PNO if she would not pay interest. This forced respondent to pay interest
despite lack of agreement thereto. Thus, the award of exemplary damages is appropriate. The
amount of P50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so as
to deter petitioner and other lenders from committing similar and other serious wrongdoings. 41
Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual,

legal or equitable justification for awarding the same. 42 In the case under consideration, the RTC
stated in its Decision that the award of attorneys fees equivalent to 25% of the amount paid as
interest by respondent to petitioner is reasonable and moderate considering the extent of work
rendered by respondents lawyer in the instant case and the fact that it dragged on for several
years.43 Further, respondent testified that she agreed to compensate her lawyer handling the
instant case such amount.44 The award, therefore, of attorneys fees and its amount equivalent
to 25% of the amount paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount
refundable to respondent computed from 3 March 1998 until its full payment. This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, 45 that when an obligation, not
constituting a loan or forbearance of money is breached, an interest on the amount of damages
awarded may be imposed at the rate of 6% per annum. We further declared that when the
judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether it is a loan/forbearance of money or not, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed equivalent to a forbearance of
credit.
In the present case, petitioners obligation arose from a quasi-contract of solutio indebiti and not
from a loan or forbearance of money. Thus, an interest of 6% per annum should be imposed on
the amount to be refunded as well as on the damages awarded and on the attorneys fees, to be
computed from the time of the extra-judicial demand on 3 March 1998, 46 up to the finality of this
Decision. In addition, the interest shall become 12% per annum from the finality of this Decision
up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16
December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of
P660,000.00 as refundable amount of interest is reduced to THREE HUNDRED THIRTY FIVE
THOUSAND PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral
damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an
interest of 6% per annum is imposed on the P335,000.00, on the damages awarded and on the
attorneys fees to be computed from the time of the extra-judicial demand on 3 March 1998 up
to the finality of this Decision; and (4) an interest of 12% per annum is also imposed from the
finality of this Decision up to its satisfaction. Costs against petitioner.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice
G.R. No. L-6913
November 21, 1913
THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,
vs.
GREGORIO DE LA PEA, administrator of the estate of Father Agustin de la Pea, defendantappellant.
J. Lopez Vito, for appellant.Arroyo and Horrilleno, for appellee.
MORELAND, J.:
This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo,
awarding to the plaintiff the sum of P6,641, with interest at the legal rate from the beginning of
the action.
It is established in this case that the plaintiff is the trustee of a charitable bequest made for the
construction of a leper hospital and that father Agustin de la Pea was the duly authorized
representative of the plaintiff to receive the legacy. The defendant is the administrator of the
estate of Father De la Pea.
In the year 1898 the books Father De la Pea, as trustee, showed that he had on hand as such

trustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the same
year he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank at
Iloilo. Shortly thereafter and during the war of the revolution, Father De la Pea was arrested by
the military authorities as a political prisoner, and while thus detained made an order on said
bank in favor of the United States Army officer under whose charge he then was for the sum
thus deposited in said bank. The arrest of Father De la Pea and the confiscation of the funds in
the bank were the result of the claim of the military authorities that he was an insurgent and that
the funds thus deposited had been collected by him for revolutionary purposes. The money was
taken from the bank by the military authorities by virtue of such order, was confiscated and
turned over to the Government.
While there is considerable dispute in the case over the question whether the P6,641 of trust
funds was included in the P19,000 deposited as aforesaid, nevertheless, a careful examination
of the case leads us to the conclusion that said trust funds were a part of the funds deposited
and which were removed and confiscated by the military authorities of the United States.
That branch of the law known in England and America as the law of trusts had no exact
counterpart in the Roman law and has none under the Spanish law. In this jurisdiction,
therefore, Father De la Pea's liability is determined by those portions of the Civil Code which
relate to obligations. (Book 4, Title 1.)
Although the Civil Code states that "a person obliged to give something is also bound to
preserve it with the diligence pertaining to a good father of a family" (art. 1094), it also provides,
following the principle of the Roman law, major casus est, cui humana infirmitas resistere non
potest, that "no one shall be liable for events which could not be foreseen, or which having been
foreseen were inevitable, with the exception of the cases expressly mentioned in the law or
those in which the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Pea did not
thereby assume an obligation different from that under which he would have lain if such deposit
had not been made, nor did he thereby make himself liable to repay the money at all hazards. If
the had been forcibly taken from his pocket or from his house by the military forces of one of the
combatants during a state of war, it is clear that under the provisions of the Civil Code he would
have been exempt from responsibility. The fact that he placed the trust fund in the bank in his
personal account does not add to his responsibility. Such deposit did not make him a debtor
who must respond at all hazards.
We do not enter into a discussion for the purpose of determining whether he acted more or less
negligently by depositing the money in the bank than he would if he had left it in his home; or
whether he was more or less negligent by depositing the money in his personal account than he
would have been if he had deposited it in a separate account as trustee. We regard such
discussion as substantially fruitless, inasmuch as the precise question is not one of negligence.
There was no law prohibiting him from depositing it as he did and there was no law which
changed his responsibility be reason of the deposit. While it may be true that one who is under
obligation to do or give a thing is in duty bound, when he sees events approaching the results of
which will be dangerous to his trust, to take all reasonable means and measures to escape or, if
unavoidable, to temper the effects of those events, we do not feel constrained to hold that, in
choosing between two means equally legal, he is culpably negligent in selecting one whereas
he would not have been if he had selected the other.
The court, therefore, finds and declares that the money which is the subject matter of this action
was deposited by Father De la Pea in the Hongkong and Shanghai Banking Corporation of
Iloilo; that said money was forcibly taken from the bank by the armed forces of the United States
during the war of the insurrection; and that said Father De la Pea was not responsible for its
loss.
The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his
complaint.

Arellano, C.J., Torres and Carson, JJ., concur.

G.R. No. L-66826 August 19, 1988
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.
Pacis & Reyes Law Office for petitioner.
Ernesto T. Zshornack, Jr. for private respondent.
CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust
Company of the Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the
Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a corporate
merger, and was substituted as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance
of Rizal Caloocan City a complaint against COMTRUST alleging four causes of action.
Except for the third cause of action, the CFI ruled in favor of Zshornack. The bank appealed to
the Intermediate Appellate Court which modified the CFI decision absolving the bank from
liability on the fourth cause of action. The pertinent portions of the judgment, as modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No.
25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with the
remaining balance of the said account at the rate fixed by the bank for dollar deposits under
Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00
immediately upon the finality of this decision, without interest for the reason that the said
amount was merely held in custody for safekeeping, but was not actually deposited with the
defendant COMTRUST because being cash currency, it cannot by law be deposited with
plaintiffs dollar account and defendant's only obligation is to return the same to plaintiff upon
demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in
the concept of litigation expenses and attorney's fees suffered by plaintiff as a result of the
failure of the defendant bank to restore to his (plaintiffs) account the amount of U.S. $1,000.00
and to return to him (plaintiff) the U.S. $3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to
Zshornack. The latter not having appealed the Court of Appeals decision, the issues facing this
Court are limited to the bank's liability with regard to the first and second causes of action and
its liability for damages.
1. We first consider the first cause of action, On the dates material to this case, Rizaldy
Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a
dollar savings account and a peso current account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia,
Assistant Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D.
Dizon in the amount of $1,000.00. In the application, Garcia indicated that the amount was to be
charged to Dollar Savings Acct. No. 25-4109, the savings account of the Zshornacks; the
charges for commission, documentary stamp tax and others totalling P17.46 were to be
charged to Current Acct. No. 210465-29, again, the current account of the Zshornacks. There
was no indication of the name of the purchaser of the dollar draft.

On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia,
issued a check payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on
the Chase Manhattan Bank, New York, with an indication that it was to be charged to Dollar
Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an
explanation from the bank. In answer, COMTRUST claimed that the peso value of the
withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on October 27, 1975
when he (Ernesto) encashed with COMTRUST a cashier's check for P8,450.00 issued by the
Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both
the trial court and the Appellate Court on the first cause of action. Petitioner must be held liable
for the unauthorized withdrawal of US$1,000.00 from private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the
bank has adopted inconsistent theories. First, it still maintains that the peso value of the amount
withdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank
Cashier's Check. At the same time, the bank claims that the withdrawal was made pursuant to
an agreement where Zshornack allegedly authorized the bank to withdraw from his dollar
savings account such amount which, when converted to pesos, would be needed to fund his
peso current account. If indeed the peso equivalent of the amount withdrawn from the dollar
account was credited to the peso current account, why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation, petitioner
bank has not shown how the transaction involving the cashier's check is related to the
transaction involving the dollar draft in favor of Dizon financed by the withdrawal from Rizaldy's
dollar account. The two transactions appear entirely independent of each other. Moreover,
Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy Zshornack.
Payment made to Ernesto cannot be considered payment to Rizaldy.
As to the second explanation, even if we assume that there was such an agreement, the
evidence do not show that the withdrawal was made pursuant to it. Instead, the record reveals
that the amount withdrawn was used to finance a dollar draft in favor of Leovigilda D. Dizon, and
not to fund the current account of the Zshornacks. There is no proof whatsoever that peso
Current Account No. 210-465-29 was ever credited with the peso equivalent of the US$1,000.00
withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court alleged that on
December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash
(popularly known as greenbacks) for safekeeping, and that the agreement was embodied in a
document, a copy of which was attached to and made part of the complaint. The document
reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US DOLLARS: THREE
THOUSAND ONLY (US$3,000.00) for safekeeping.
Received by:
(Sgd.) VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return the money.

In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current
account at prevailing conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the authenticity
and due execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the
bank US $3,000 for safekeeping. When he requested the return of the money on May 10, 1976,
COMTRUST explained that the sum was disposed of in this manner: US$2,000.00 was sold on
December 29, 1975 and the peso proceeds amounting to P14,920.00 were deposited to
Zshornack's current account per deposit slip accomplished by Garcia; the remaining
US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00
were deposited to his current account per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current
account at prevailing conversion rates, BPI now posits another ground to defeat private
respondent's claim. It now argues that the contract embodied in the document is the contract of
depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The bank
alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is
claimed, the bank cannot be liable under the contract, and the obligation is purely personal to
Garcia.
Before we go into the nature of the contract entered into, an important point which arises on the
pleadings, must be considered.
The second cause of action is based on a document purporting to be signed by COMTRUST, a
copy of which document was attached to the complaint. In short, the second cause of action
was based on an actionable document. It was therefore incumbent upon the bank to specifically
deny under oath the due execution of the document, as prescribed under Rule 8, Section 8, if it
desired: (1) to question the authority of Garcia to bind the corporation; and (2) to deny its
capacity to enter into such contract. [See, E.B. Merchant v. International Banking Corporation, 6
Phil. 314 (1906).] No sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to enter into
the contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's
authority, but also the bank's power, to enter into the contract in question.
In the past, this Court had occasion to explain the reason behind this procedural requirement.
The reason for the rule enunciated in the foregoing authorities will, we think, be readily
appreciated. In dealing with corporations the public at large is bound to rely to a large extent
upon outward appearances. If a man is found acting for a corporation with the external indicia of
authority, any person, not having notice of want of authority, may usually rely upon those
appearances; and if it be found that the directors had permitted the agent to exercise that
authority and thereby held him out as a person competent to bind the corporation, or had
acquiesced in a contract and retained the benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the actual authority may never have been granted
... Whether a particular officer actually possesses the authority which he assumes to exercise is
frequently known to very few, and the proof of it usually is not readily accessible to the stranger
who deals with the corporation on the faith of the ostensible authority exercised by some of the
corporate officers. It is therefore reasonable, in a case where an officer of a corporation has
made a contract in its name, that the corporation should be required, if it denies his authority, to
state such defense in its answer. By this means the plaintiff is apprised of the fact that the
agent's authority is contested; and he is given an opportunity to adduce evidence showing either
that the authority existed or that the contract was ratified and approved. [Ramirez v. Orientalist
Co. and Fernandez, 38 Phil. 634, 645- 646 (1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of absolving
a corporation from liability every time an officer enters into a contract which is beyond corporate
powers, even without the proper allegation or proof that the corporation has not authorized nor

ratified the officer's act, is to cast corporations in so perfect a mold that transgressions and
wrongs by such artificial beings become impossible [Bissell v. Michigan Southern and N.I.R.
Cos 22 N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized acts is only
to put forth a very plain truism but to say that such bodies have no power or capacity to err is to
impute to them an excellence which does not belong to any created existence with which we
are acquainted. The distinction between power and right is no more to be lost sight of in respect
to artificial than in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the corporation, we now
determine the correct nature of the contract, and its legal consequences, including its
enforceability.
The document which embodies the contract states that the US$3,000.00 was received by the
bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties
was really for the bank to safely keep the dollars and to return it to Zshornack at a later time,
Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which
reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and of returning the same. If the safekeeping of
the thing delivered is not the principal purpose of the contract, there is no deposit but some
other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign exchange.
Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and
Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the
time the parties entered into the transaction involved in this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in them of whatever nature,
including, where applicable their exportation and importation, shall NOT be effected, except with
respect to deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, when
such deposit accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or with banks or banking institutions
located in the Philippines, including money, checks, drafts, bullions bank drafts, deposit
accounts (demand, time and savings), all debts, indebtedness or obligations, financial brokers
and investment houses, notes, debentures, stocks, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of security, expressed in foreign
currencies, or if payable abroad, irrespective of the currency in which they are expressed, and
belonging to any person, firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation residing or located within the Philippines;
(b) Any and all assets of the kinds included and/or described in subparagraph (a) above,
whether or not held through, in, or with banks or banking institutions, and existent within the
Philippines, which belong to any person, firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation not residing or located within the
Philippines;
(c) Any and all assets existent within the Philippines including money, checks, drafts, bullions,
bank drafts, all debts, indebtedness or obligations, financial securities commonly dealt in by
bankers, brokers and investment houses, notes, debentures, stock, bonds, coupons, bank
acceptances, mortgages, pledges, liens or other rights in the nature of security expressed in
foreign currencies, or if payable abroad, irrespective of the currency in which they are
expressed, and belonging to any person, firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation residing or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those

authorized to deal in foreign exchange. All receipts of foreign exchange by any person, firm,
partnership, association, branch office, agency, company or other unincorporated body or
corporation shall be sold to the authorized agents of the Central Bank by the recipients within
one business day following the receipt of such foreign exchange. Any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or corporation,
residing or located within the Philippines, who acquires on and after the date of this Circular
foreign exchange shall not, unless licensed by the Central Bank, dispose of such foreign
exchange in whole or in part, nor receive less than its full value, nor delay taking ownership
thereof except as such delay is customary; Provided, further, That within one day upon taking
ownership, or receiving payment, of foreign exchange the aforementioned persons and entities
shall sell such foreign exchange to designated agents of the Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or
corporation, foreign or domestic, who being bound to the observance thereof, or of such other
rules, regulations or directives as may hereafter be issued in implementation of this Circular,
shall fail or refuse to comply with, or abide by, or shall violate the same, shall be subject to the
penal sanctions provided in the Central Bank Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations
on Foreign Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine
residents only. Section 6 provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation
shall be sold to authorized agents of the Central Bank by the recipients within one business day
following the receipt of such foreign exchange. Any resident person, firm, company or
corporation residing or located within the Philippines, who acquires foreign exchange shall not,
unless authorized by the Central Bank, dispose of such foreign exchange in whole or in part,
nor receive less than its full value, nor delay taking ownership thereof except as such delay is
customary; Provided, That, within one business day upon taking ownership or receiving
payment of foreign exchange the aforementioned persons and entities shall sell such foreign
exchange to the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they intended
the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his
complaint that he is a Philippine resident. The parties did not intended to sell the US dollars to
the Central Bank within one business day from receipt. Otherwise, the contract of depositum
would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within
one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it
must be considered as one which falls under the general class of prohibited transactions.
Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the
provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a
cause of action against the other. "When the nullity proceeds from the illegality of the cause or
object of the contract, and the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no cause of action against each other. . ." [Art. 1411, New Civil Code.]
The only remedy is one on behalf of the State to prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of
litigation expenses and attorney's fees to be reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to
restore to the dollar savings account of private respondent the amount of US$1,000.00 as of
October 27, 1975 to earn interest at the rate fixed by the bank for dollar savings deposits.
Petitioner is further ordered to pay private respondent the amount of P8,000.00 as damages.

The other causes of action of private respondent are ordered dismissed.

SO ORDERED.
G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY,
respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.
DAVIDE, JR., J.:
Is the contractual relation between a commercial bank and another party in a contract of rent of
a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or
one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and
Paula Pugao entered into an agreement whereby the former purchased from the latter two (2)
parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as
downpayment while the balance was covered by three (3) postdated checks. Among the terms
and conditions of the agreement embodied in a Memorandum of True and Actual Agreement of
Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full
payment of the purchase price and that the owner's copies of the certificates of titles thereto,
Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety
deposit box of any bank. The same could be withdrawn only upon the joint signatures of a
representative of the petitioner and the Pugaos upon full payment of the purchase price.
Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of
private respondent Security Bank and Trust Company, a domestic banking corporation
hereinafter referred to as the respondent Bank. For this purpose, both signed a contract of lease
(Exhibit "2") which contains, inter alia, the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession
nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection therewith. 1
After the execution of the contract, two (2) renter's keys were given to the renters one to
Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the possession
of the respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and
the other for the renter's key, and can be opened only with the use of both keys. Petitioner
claims that the certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at
a price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to a
profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos
demanded the execution of a deed of sale which necessarily entailed the production of the
certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the
respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of
title. However, when opened in the presence of the Bank's representative, the box yielded no
such certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her
earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly failed to
realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a
complaint 2 for damages against the respondent Bank with the Court of First Instance (now
Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.

In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of
action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of
any of the items or articles contained in the box could not give rise to an action against it. It then
interposed a counterclaim for exemplary damages as well as attorney's fees in the amount of
P20,000.00. Petitioner subsequently filed an answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC)
of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's
complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant
the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff. 6
The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14
of the contract of lease, the Bank has no liability for the loss of the certificates of title. The court
declared that the said provisions are binding on the parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse
decision to the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No.
15150. Petitioner urged the respondent Court to reverse the challenged decision because the
trial court erred in (a) absolving the respondent Bank from liability from the loss, (b) not
declaring as null and void, for being contrary to law, public order and public policy, the
provisions in the contract for lease of the safety deposit box absolving the Bank from any liability
for loss, (c) not concluding that in this jurisdiction, as well as under American jurisprudence, the
liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying the
petitioner's prayer for nominal and exemplary damages and attorney's fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision
principally on the theory that the contract (Exhibit "2") executed by the petitioner and respondent
Bank is in the nature of a contract of lease by virtue of which the petitioner and its co-renter
were given control over the safety deposit box and its contents while the Bank retained no right
to open the said box because it had neither the possession nor control over it and its contents.
As such, the contract is governed by Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the
enjoyment or use of a thing for a price certain, and for a period which may be definite or
indefinite. However, no lease for more than ninety-nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his
control over the property leased during the period of the contract and Article 1975 of the Civil
Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn
interest shall be bound to collect the latter when it becomes due, and to take such steps as may
be necessary in order that the securities may preserve their value and the rights corresponding
to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the
contents of the box. The stipulation absolving the defendant-appellee from liability is in
accordance with the nature of the contract of lease and cannot be regarded as contrary to law,
public order and public policy." 12 The appellate court was quick to add, however, that under the
contract of lease of the safety deposit box, respondent Bank is not completely free from liability
as it may still be made answerable in case unauthorized persons enter into the vault area or
when the rented box is forced open. Thus, as expressly provided for in stipulation number 8 of
the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented

safe and beyond this, the Bank will not be responsible for the contents of any safe rented from
it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28
August 1989, 15 petitioner took this recourse under Rule 45 of the Rules of Court and urges Us
to review and set aside the respondent Court's ruling. Petitioner avers that both the respondent
Court and the trial court (a) did not properly and legally apply the correct law in this case, (b)
acted with grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and
(c) set a precedent that is contrary to, or is a departure from precedents adhered to and affirmed
by decisions of this Court and precepts in American jurisprudence adopted in the Philippines. It
reiterates the arguments it had raised in its motion to reconsider the trial court's decision, the
brief submitted to the respondent Court and the motion to reconsider the latter's decision. In a
nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent of the
safety deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of
the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the
certificates of title pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to
the depositor, or to his heirs and successors, or to the person who may have been designated
in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall
be governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care
that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound
on the prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box
or safe and the lessee takes possession of the box or safe and places therein his securities or
other valuables, the relation of bailee and bail or is created between the parties to the
transaction as to such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall know, the character
or description of the property which is deposited in such safe-deposit box or safe does not
change that relation. That access to the contents of the safe-deposit box can be had only by the
use of a key retained by the lessee ( whether it is the sole key or one to be used in connection
with one retained by the lessor) does not operate to alter the foregoing rule. The argument that
there is not, in such a case, a delivery of exclusive possession and control to the deposit
company, and that therefore the situation is entirely different from that of ordinary bailment, has
been generally rejected by the courts, usually on the ground that as possession must be either
in the depositor or in the company, it should reasonably be considered as in the latter rather
than in the former, since the company is, by the nature of the contract, given absolute control of
access to the property, and the depositor cannot gain access thereto without the consent and
active participation of the company. . . . (citations omitted).
and a segment from Words and Phrases 18 which states that a contract for the rental of a bank
safety deposit box in consideration of a fixed amount at stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law
and public policy and should be declared null and void. In support thereof, it cites Article 1306 of
the Civil Code which provides that parties to a contract may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order or public policy.
After the respondent Bank filed its comment, this Court gave due course to the petition and
required the parties to simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety deposit box

is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do
not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed
by the provisions in the Civil Code on deposit; 19 the contract in the case at bar is a special kind
of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643
because the full and absolute possession and control of the safety deposit box was not given to
the joint renters the petitioner and the Pugaos. The guard key of the box remained with the
respondent Bank; without this key, neither of the renters could open the box. On the other hand,
the respondent Bank could not likewise open the box without the renter's key. In this case, the
said key had a duplicate which was made so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could
Article 1975, also relied upon by the respondent Court, be invoked as an argument against the
deposit theory. Obviously, the first paragraph of such provision cannot apply to a depositary of
certificates, bonds, securities or instruments which earn interest if such documents are kept in a
rented safety deposit box. It is clear that the depositary cannot open the box without the renter
being present.
We observe, however, that the deposit theory itself does not altogether find unanimous support
even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing
rule is that the relation between a bank renting out safe-deposit boxes and its customer with
respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and
mutual benefit. 21 This is just the prevailing view because:
There is, however, some support for the view that the relationship in question might be more
properly characterized as that of landlord and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of licensor and licensee. The relation between
a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box
therein, is often described as contractual, express or implied, oral or written, in whole or in part.
But there is apparently no jurisdiction in which any rule other than that applicable to bailments
governs questions of the liability and rights of the parties in respect of loss of the contents of
safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it
is clear that in this jurisdiction, the prevailing rule in the United States has been adopted.
Section 72 of the General Banking Act 23 pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes
for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this section
as depositories or as agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of deposit, i.e.,
the receiving in custody of funds, documents and other valuable objects for safekeeping. The
renting out of the safety deposit boxes is not independent from, but related to or in conjunction
with, this principal function. A contract of deposit may be entered into orally or in writing 25 and,
pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy. The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the
Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the
absence of any stipulation prescribing the degree of diligence required, that of a good father of
a family is to be observed. 27 Hence, any stipulation exempting the depositary from any liability
arising from the loss of the thing deposited on account of fraud, negligence or delay would be

void for being contrary to law and public policy. In the instant case, petitioner maintains that
conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the possession
nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility
as a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from
any liability except as contemplated in condition 8 thereof which limits its duty to exercise
reasonable diligence only with respect to who shall be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible for the contents of any safe rented from
it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of
the Bank. It is not correct to assert that the Bank has neither the possession nor control of the
contents of the box since in fact, the safety deposit box itself is located in its premises and is
under its absolute control; moreover, the respondent Bank keeps the guard key to the said box.
As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by
presenting and using this guard key. Clearly then, to the extent above stated, the foregoing
conditions in the contract in question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit
company, the parties, since the relation is a contractual one, may by special contract define their
respective duties or provide for increasing or limiting the liability of the deposit company,
provided such contract is not in violation of law or public policy. It must clearly appear that there
actually was such a special contract, however, in order to vary the ordinary obligations implied
by law from the relationship of the parties; liability of the deposit company will not be enlarged or
restricted by words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or
negligence or that of its agents or servants, and if a provision of the contract may be construed
as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that
the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its
own negligence, the view has been taken that such a lessor may limits its liability to some
extent by agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the
petition should be dismissed, but on grounds quite different from those relied upon by the Court
of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the
holding of the Court of Appeals, be based on or proceed from a characterization of the
impugned contract as a contract of lease, but rather on the fact that no competent proof was
presented to show that respondent Bank was aware of the agreement between the petitioner
and the Pugaos to the effect that the certificates of title were withdrawable from the safety
deposit box only upon both parties' joint signatures, and that no evidence was submitted to
reveal that the loss of the certificates of title was due to the fraud or negligence of the
respondent Bank. This in turn flows from this Court's determination that the contract involved
was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one
(1) renter's key, it was obvious that either of them could ask the Bank for access to the safety
deposit box and, with the use of such key and the Bank's own guard key, could open the said
box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith
on its part had been established, the trial court erred in condemning the petitioner to pay the
respondent Bank attorney's fees. To this extent, the Decision (dispositive portion) of public

respondent Court of Appeals must be modified.

WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for
attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV
No. 15150. As modified, and subject to the pronouncement We made above on the nature of the
relationship between the parties in a contract of lease of safety deposit boxes, the dispositive
portion of the said Decision is hereby AFFIRMED and the instant Petition for Review is
otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 126780
February 17, 2005
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners,
vs.
THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents.
DECISION
TINGA, J.:
The primary question of interest before this Court is the only legal issue in the case: It is
whether a hotel may evade liability for the loss of items left with it for safekeeping by its guests,
by having these guests execute written waivers holding the establishment or its employees free
from blame for such loss in light of Article 2003 of the Civil Code which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision1 dated 19 October 1995 of the
Court of Appeals which affirmed the Decision2 dated 16 December 1991 of the Regional Trial
Court (RTC), Branch 13, of Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan),
Erlinda Lainez (Lainez) and Anicia Payam (Payam) jointly and solidarily liable for damages in an
action filed by Maurice McLoughlin (McLoughlin) for the loss of his American and Australian
dollars deposited in the safety deposit box of Tropicana Copacabana Apartment Hotel, owned
and operated by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at
Sheraton Hotel during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended
McLoughlin by showing him around, introducing him to important people, accompanying him in
visiting impoverished street children and assisting him in buying gifts for the children and in
distributing the same to charitable institutions for poor children. Tan convinced McLoughlin to
transfer from Sheraton Hotel to Tropicana where Lainez, Payam and Danilo Lopez were
employed. Lopez served as manager of the hotel while Lainez and Payam had custody of the
keys for the safety deposit boxes of Tropicana. Tan took care of McLoughlin's booking at the
Tropicana where he started staying during his trips to the Philippines from December 1984 to
September 1987.3
On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He
rented a safety deposit box as it was his practice to rent a safety deposit box every time he
registered at Tropicana in previous trips. As a tourist, McLoughlin was aware of the procedure
observed by Tropicana relative to its safety deposit boxes. The safety deposit box could only be
opened through the use of two keys, one of which is given to the registered guest, and the other
remaining in the possession of the management of the hotel. When a registered guest wished to
open his safety deposit box, he alone could personally request the management who then
would assign one of its employees to accompany the guest and assist him in opening the safety
deposit box with the two keys.4
McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US
Dollars (US$15,000.00) which he placed in two envelopes, one envelope containing Ten
Thousand US Dollars (US$10,000.00) and the other envelope Five Thousand US Dollars
(US$5,000.00); Ten Thousand Australian Dollars (AUS$10,000.00) which he also placed in

another envelope; two (2) other envelopes containing letters and credit cards; two (2)
bankbooks; and a checkbook, arranged side by side inside the safety deposit box. 5
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his
safety deposit box with his key and with the key of the management and took therefrom the
envelope containing Five Thousand US Dollars (US$5,000.00), the envelope containing Ten
Thousand Australian Dollars (AUS$10,000.00), his passports and his credit cards. 6 McLoughlin
left the other items in the box as he did not check out of his room at the Tropicana during his
short visit to Hongkong. When he arrived in Hongkong, he opened the envelope which
contained Five Thousand US Dollars (US$5,000.00) and discovered upon counting that only
Three Thousand US Dollars (US$3,000.00) were enclosed therein. 7 Since he had no idea
whether somebody else had tampered with his safety deposit box, he thought that it was just a
result of bad accounting since he did not spend anything from that envelope. 8
After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for
Australia. When he arrived in Australia, he discovered that the envelope with Ten Thousand US
Dollars (US$10,000.00) was short of Five Thousand US Dollars (US$5,000). He also noticed
that the jewelry which he bought in Hongkong and stored in the safety deposit box upon his
return to Tropicana was likewise missing, except for a diamond bracelet. 9
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some
money and/or jewelry which he had lost were found and returned to her or to the management.
However, Lainez told him that no one in the hotel found such things and none were turned over
to the management. He again registered at Tropicana and rented a safety deposit box. He
placed therein one (1) envelope containing Fifteen Thousand US Dollars (US$15,000.00),
another envelope containing Ten Thousand Australian Dollars (AUS$10,000.00) and other
envelopes containing his traveling papers/documents. On 16 April 1988, McLoughlin requested
Lainez and Payam to open his safety deposit box. He noticed that in the envelope containing
Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US Dollars (US$2,000.00) were
missing and in the envelope previously containing Ten Thousand Australian Dollars
(AUS$10,000.00), Four Thousand Five Hundred Australian Dollars (AUS$4,500.00) were
missing.10
When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who
admitted that Tan opened the safety deposit box with the key assigned to him. 11 McLoughlin
went up to his room where Tan was staying and confronted her. Tan admitted that she had
stolen McLoughlin's key and was able to open the safety deposit box with the assistance of
Lopez, Payam and Lainez.12 Lopez also told McLoughlin that Tan stole the key assigned to
McLoughlin while the latter was asleep. 13
McLoughlin requested the management for an investigation of the incident. Lopez got in touch
with Tan and arranged for a meeting with the police and McLoughlin. When the police did not
arrive, Lopez and Tan went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on
a piece of paper a promissory note dated 21 April 1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its
equivalent in Philippine currency on or before May 5, 1988. 14
Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as
a witness. Despite the execution of promissory note by Tan, McLoughlin insisted that it must be
the hotel who must assume responsibility for the loss he suffered. However, Lopez refused to
accept the responsibility relying on the conditions for renting the safety deposit box entitled
"Undertaking For the Use Of Safety Deposit Box,"15 specifically paragraphs (2) and (4) thereof,
to wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability
arising from any loss in the contents and/or use of the said deposit box for any cause
whatsoever, including but not limited to the presentation or use thereof by any other person
should the key be lost;

...
4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL
upon giving up the use of the box.16
On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the
validity of the abovementioned stipulations. They opined that the stipulations are void for being
violative of universal hotel practices and customs. His lawyers prepared a letter dated 30 May
1988 which was signed by McLoughlin and sent to President Corazon Aquino. 17 The Office of
the President referred the letter to the Department of Justice (DOJ) which forwarded the same
to the Western Police District (WPD).18
After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and
registered again as a hotel guest of Tropicana. McLoughlin went to Malacaang to follow up on
his letter but he was instructed to go to the DOJ. The DOJ directed him to proceed to the WPD
for documentation. But McLoughlin went back to Australia as he had an urgent business matter
to attend to.
For several times, McLoughlin left for Australia to attend to his business and came back to the
Philippines to follow up on his letter to the President but he failed to obtain any concrete
assistance.19
McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to
pursue his claims against petitioners, the WPD conducted an investigation which resulted in the
preparation of an affidavit which was forwarded to the Manila City Fiscal's Office. Said affidavit
became the basis of preliminary investigation. However, McLoughlin left again for Australia
without receiving the notice of the hearing on 24 November 1989. Thus, the case at the Fiscal's
Office was dismissed for failure to prosecute. Mcloughlin requested the reinstatement of the
criminal charge for theft. In the meantime, McLoughlin and his lawyers wrote letters of demand
to those having responsibility to pay the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate, Manila.
Meetings were held between McLoughlin and his lawyer which resulted to the filing of a
complaint for damages on 3 December 1990 against YHT Realty Corporation, Lopez, Lainez,
Payam and Tan (defendants) for the loss of McLoughlin's money which was discovered on 16
April 1988. After filing the complaint, McLoughlin left again for Australia to attend to an urgent
business matter. Tan and Lopez, however, were not served with summons, and trial proceeded
with only Lainez, Payam and YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had previously allowed and
assisted Tan to open the safety deposit box, McLoughlin filed an Amended/Supplemental
Complaint20 dated 10 June 1991 which included another incident of loss of money and jewelry in
the safety deposit box rented by McLoughlin in the same hotel which took place prior to 16 April
1988.21 The trial court admitted the Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out of the country to attend to urgent
business in Australia, and while staying in the Philippines to attend the hearing, he incurred
expenses for hotel bills, airfare and other transportation expenses, long distance calls to
Australia, Meralco power expenses, and expenses for food and maintenance, among others. 22
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive portion
of which reads:
WHEREFORE, above premises considered, judgment is hereby rendered by this Court in favor
of plaintiff and against the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00 or its
equivalent in Philippine Currency of P342,000.00, more or less, and the sum of AUS$4,500.00
or its equivalent in Philippine Currency of P99,000.00, or a total of P441,000.00, more or less,
with 12% interest from April 16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit
CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of P3,674,238.00 as actual

and consequential damages arising from the loss of his Australian and American dollars and
jewelries complained against and in prosecuting his claim and rights administratively and
judicially (Items II, III, IV, V, VI, VII, VIII, and IX, Exh. "CC");
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of P500,000.00 as moral
damages (Item X, Exh. "CC");
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of P350,000.00 as
exemplary damages (Item XI, Exh. "CC");
5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of
P200,000.00 (Item XII, Exh. "CC");
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of P200,000.00 as
attorney's fees, and a fee of P3,000.00 for every appearance; and
7. Plus costs of suit.
SO ORDERED.23
The trial court found that McLoughlin's allegations as to the fact of loss and as to the amount of
money he lost were sufficiently shown by his direct and straightforward manner of testifying in
court and found him to be credible and worthy of belief as it was established that McLoughlin's
money, kept in Tropicana's safety deposit box, was taken by Tan without McLoughlin's consent.
The taking was effected through the use of the master key which was in the possession of the
management. Payam and Lainez allowed Tan to use the master key without authority from
McLoughlin. The trial court added that if McLoughlin had not lost his dollars, he would not have
gone through the trouble and personal inconvenience of seeking aid and assistance from the
Office of the President, DOJ, police authorities and the City Fiscal's Office in his desire to
recover his losses from the hotel management and Tan.24
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth
approximately One Thousand Two Hundred US Dollars (US$1,200.00) which allegedly occurred
during his stay at Tropicana previous to 4 April 1988, no claim was made by McLoughlin for
such losses in his complaint dated 21 November 1990 because he was not sure how they were
lost and who the responsible persons were. But considering the admission of the defendants in
their pre-trial brief that on three previous occasions they allowed Tan to open the box, the trial
court opined that it was logical and reasonable to presume that his personal assets consisting of
Seven Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan from the safety
deposit box without McLoughlin's consent through the cooperation of Payam and Lainez. 25
The trial court also found that defendants acted with gross negligence in the performance and
exercise of their duties and obligations as innkeepers and were therefore liable to answer for
the losses incurred by McLoughlin.26
Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For The Use Of
Safety Deposit Box" are not valid for being contrary to the express mandate of Article 2003 of
the New Civil Code and against public policy. 27 Thus, there being fraud or wanton conduct on
the part of defendants, they should be responsible for all damages which may be attributed to
the non-performance of their contractual obligations. 28
The Court of Appeals affirmed the disquisitions made by the lower court except as to the
amount of damages awarded. The decretal text of the appellate court's decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but modified as
follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee the following
amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila and
back for a total of eleven (11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Apartment
Hotel;

4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;

5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from the residence to
Sidney [sic] Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorney's fees.
With costs.
SO ORDERED.29
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this appeal by
certiorari.
Petitioners submit for resolution by this Court the following issues: (a) whether the appellate
court's conclusion on the alleged prior existence and subsequent loss of the subject money and
jewelry is supported by the evidence on record; (b) whether the finding of gross negligence on
the part of petitioners in the performance of their duties as innkeepers is supported by the
evidence on record; (c) whether the "Undertaking For The Use of Safety Deposit Box"
admittedly executed by private respondent is null and void; and (d) whether the damages
awarded to private respondent, as well as the amounts thereof, are proper under the
circumstances.30
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law and any
peripheral factual question addressed to this Court is beyond the bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of prior
existence of the dollars and the jewelry which had been lost while deposited in the safety
deposit boxes of Tropicana, the basis of the trial court and the appellate court being the sole
testimony of McLoughlin as to the contents thereof. Likewise, petitioners dispute the finding of
gross negligence on their part as not supported by the evidence on record.
We are not persuaded.l^vvphi1.net We adhere to the findings of the trial court as affirmed by the
appellate court that the fact of loss was established by the credible testimony in open court by
McLoughlin. Such findings are factual and therefore beyond the ambit of the present
petition.1awphi1.nt
The trial court had the occasion to observe the demeanor of McLoughlin while testifying which
reflected the veracity of the facts testified to by him. On this score, we give full credence to the
appreciation of testimonial evidence by the trial court especially if what is at issue is the
credibility of the witness. The oft-repeated principle is that where the credibility of a witness is an
issue, the established rule is that great respect is accorded to the evaluation of the credibility of
witnesses by the trial court.31 The trial court is in the best position to assess the credibility of
witnesses and their testimonies because of its unique opportunity to observe the witnesses
firsthand and note their demeanor, conduct and attitude under grilling examination. 32
We are also not impressed by petitioners' argument that the finding of gross negligence by the
lower court as affirmed by the appellate court is not supported by evidence. The evidence
reveals that two keys are required to open the safety deposit boxes of Tropicana. One key is
assigned to the guest while the other remains in the possession of the management. If the
guest desires to open his safety deposit box, he must request the management for the other key
to open the same. In other words, the guest alone cannot open the safety deposit box without
the assistance of the management or its employees. With more reason that access to the safety
deposit box should be denied if the one requesting for the opening of the safety deposit box is a
stranger. Thus, in case of loss of any item deposited in the safety deposit box, it is inevitable to
conclude that the management had at least a hand in the consummation of the taking, unless
the reason for the loss is force majeure.

Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody
of the master key of the management when the loss took place. In fact, they even admitted that
they assisted Tan on three separate occasions in opening McLoughlin's safety deposit box. 33
This only proves that Tropicana had prior knowledge that a person aside from the registered
guest had access to the safety deposit box. Yet the management failed to notify McLoughlin of
the incident and waited for him to discover the taking before it disclosed the matter to him.
Therefore, Tropicana should be held responsible for the damage suffered by McLoughlin by
reason of the negligence of its employees.
The management should have guarded against the occurrence of this incident considering that
Payam admitted in open court that she assisted Tan three times in opening the safety deposit
box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while the latter was still asleep. 34 In light of
the circumstances surrounding this case, it is undeniable that without the acquiescence of the
employees of Tropicana to the opening of the safety deposit box, the loss of McLoughlin's
money could and should have been avoided.
The management contends, however, that McLoughlin, by his act, made its employees believe
that Tan was his spouse for she was always with him most of the time. The evidence on record,
however, is bereft of any showing that McLoughlin introduced Tan to the management as his
wife. Such an inference from the act of McLoughlin will not exculpate the petitioners from liability
in the absence of any showing that he made the management believe that Tan was his wife or
was duly authorized to have access to the safety deposit box. Mere close companionship and
intimacy are not enough to warrant such conclusion considering that what is involved in the
instant case is the very safety of McLoughlin's deposit. If only petitioners exercised due
diligence in taking care of McLoughlin's safety deposit box, they should have confronted him as
to his relationship with Tan considering that the latter had been observed opening McLoughlin's
safety deposit box a number of times at the early hours of the morning. Tan's acts should have
prompted the management to investigate her relationship with McLoughlin. Then, petitioners
would have exercised due diligence required of them. Failure to do so warrants the conclusion
that the management had been remiss in complying with the obligations imposed upon hotelkeepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are
guilty of negligence, are liable for damages. As to who shall bear the burden of paying
damages, Article 2180, paragraph (4) of the same Code provides that the owners and
managers of an establishment or enterprise are likewise responsible for damages caused by
their employees in the service of the branches in which the latter are employed or on the
occasion of their functions. Also, this Court has ruled that if an employee is found negligent, it is
presumed that the employer was negligent in selecting and/or supervising him for it is hard for
the victim to prove the negligence of such employer.35 Thus, given the fact that the loss of
McLoughlin's money was consummated through the negligence of Tropicana's employees in
allowing Tan to open the safety deposit box without the guest's consent, both the assisting
employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be
held solidarily liable pursuant to Article 2193.36
The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed by
McLoughlin is tainted with nullity presents a legal question appropriate for resolution in this
petition. Notably, both the trial court and the appellate court found the same to be null and void.
We find no reason to reverse their common conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the
effect that he is not liable for the articles brought by the guest. Any stipulation between the hotelkeeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to
200137 is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely
to apply to situations such as that presented in this case. The hotel business like the common

carrier's business is imbued with public interest. Catering to the public, hotelkeepers are bound
to provide not only lodging for hotel guests and security to their persons and belongings. The
twin duty constitutes the essence of the business. The law in turn does not allow such duty to
the public to be negated or diluted by any contrary stipulation in so-called "undertakings" that
ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.
In an early case,38 the Court of Appeals through its then Presiding Justice (later Associate
Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the
effects of their guests, it is not necessary that they be actually delivered to the innkeepers or
their employees. It is enough that such effects are within the hotel or inn. 39 With greater reason
should the liability of the hotelkeeper be enforced when the missing items are taken without the
guest's knowledge and consent from a safety deposit box provided by the hotel itself, as in this
case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the New Civil
Code for they allow Tropicana to be released from liability arising from any loss in the contents
and/or use of the safety deposit box for any cause whatsoever.40 Evidently, the undertaking was
intended to bar any claim against Tropicana for any loss of the contents of the safety deposit
box whether or not negligence was incurred by Tropicana or its employees. The New Civil Code
is explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the
personal property of the guests even if caused by servants or employees of the keepers of
hotels or inns as well as by strangers, except as it may proceed from any force majeure.41 It is
the loss through force majeure that may spare the hotel-keeper from liability. In the case at bar,
there is no showing that the act of the thief or robber was done with the use of arms or through
an irresistible force to qualify the same as force majeure.42
Petitioners likewise anchor their defense on Article 2002 43 which exempts the hotel-keeper from
liability if the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of
the provision would lead us to reject petitioners' contention. The justification they raise would
render nugatory the public interest sought to be protected by the provision. What if the
negligence of the employer or its employees facilitated the consummation of a crime committed
by the registered guest's relatives or visitor? Should the law exculpate the hotel from liability
since the loss was due to the act of the visitor of the registered guest of the hotel? Hence, this
provision presupposes that the hotel-keeper is not guilty of concurrent negligence or has not
contributed in any degree to the occurrence of the loss. A depositary is not responsible for the
loss of goods by theft, unless his actionable negligence contributes to the loss. 44
In the case at bar, the responsibility of securing the safety deposit box was shared not only by
the guest himself but also by the management since two keys are necessary to open the safety
deposit box. Without the assistance of hotel employees, the loss would not have occurred.
Thus, Tropicana was guilty of concurrent negligence in allowing Tan, who was not the registered
guest, to open the safety deposit box of McLoughlin, even assuming that the latter was also
guilty of negligence in allowing another person to use his key. To rule otherwise would result in
undermining the safety of the safety deposit boxes in hotels for the management will be given
imprimatur to allow any person, under the pretense of being a family member or a visitor of the
guest, to have access to the safety deposit box without fear of any liability that will attach
thereafter in case such person turns out to be a complete stranger. This will allow the hotel to
evade responsibility for any liability incurred by its employees in conspiracy with the guest's
relatives and visitors.
Petitioners contend that McLoughlin's case was mounted on the theory of contract, but the trial
court and the appellate court upheld the grant of the claims of the latter on the basis of tort. 45
There is nothing anomalous in how the lower courts decided the controversy for this Court has
pronounced a jurisprudential rule that tort liability can exist even if there are already contractual
relations. The act that breaks the contract may also be tort. 46
As to damages awarded to McLoughlin, we see no reason to modify the amounts awarded by

the appellate court for the same were based on facts and law. It is within the province of lower
courts to settle factual issues such as the proper amount of damages awarded and such finding
is binding upon this Court especially if sufficiently proven by evidence and not unconscionable
or excessive. Thus, the appellate court correctly awarded McLoughlin Two Thousand US Dollars
(US$2,000.00) and Four Thousand Five Hundred Australian dollars (AUS$4,500.00) or their
peso equivalent at the time of payment, 47 being the amounts duly proven by evidence. 48 The
alleged loss that took place prior to 16 April 1988 was not considered since the amounts alleged
to have been taken were not sufficiently established by evidence. The appellate court also
correctly awarded the sum of P308,880.80, representing the peso value for the air fares from
Sydney to Manila and back for a total of eleven (11) trips; 49 one-half of P336,207.05 or
P168,103.52 representing payment to Tropicana; 50 one-half of P152,683.57 or P76,341.785
representing payment to Echelon Tower; 51 one-half of P179,863.20 or P89,931.60 for the taxi or
transportation expenses from McLoughlin's residence to Sydney Airport and from MIA to the
hotel here in Manila, for the eleven (11) trips; 52 one-half of P7,801.94 or P3,900.97 representing
Meralco power expenses;53 one-half of P356,400.00 or P178,000.00 representing expenses for
food and maintenance.54
The amount of P50,000.00 for moral damages is reasonable. Although trial courts are given
discretion to determine the amount of moral damages, the appellate court may modify or
change the amount awarded when it is palpably and scandalously excessive.l^vvphi1.net Moral
damages are not intended to enrich a complainant at the expense of a defendant.l^vvphi1.net
They are awarded only to enable the injured party to obtain means, diversion or amusements
that will serve to alleviate the moral suffering he has undergone, by reason of defendants'
culpable action.55
The awards of P10,000.00 as exemplary damages and P200,000.00 representing attorney's
fees are likewise sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals dated 19
October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and severally, to pay private
respondent the following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment;
(2) P308,880.80, representing the peso value for the air fares from Sydney to Manila and back
for a total of eleven (11) trips;
(3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana
Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense from
McLoughlin's residence to Sydney Airport and from MIA to the hotel here in Manila, for the
eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food and maintenance;
(8) P50,000.00 for moral damages;
(9) P10,000.00 as exemplary damages; and
(10) P200,000 representing attorney's fees.
With costs.
SO ORDERED.
[G.R. No. 160544. February 21, 2005]
TRIPLE-V vs. FILIPINO MERCHANTS
THIRD DIVISION
Gentlemen:
Quoted hereunder, for your information, is a resolution of this Court dated FEB 21 2005.
G.R. No. 160544 (Triple-V Food Services, Inc. vs. Filipino Merchants Insurance Company, Inc.)

Assailed in this petition for review on certiorari is the decision [1]cralaw dated October 21, 2003 of
the Court of Appeals in CA-G.R. CV No. 71223, affirming an earlier decision of the Regional
Trial Court at Makati City, Branch 148, in its Civil Case No. 98-838, an action for damages
thereat filed by respondent Filipino Merchants Insurance, Company, Inc., against the herein
petitioner, Triple-V Food Services, Inc.
On March 2, 1997, at around 2:15 o'clock in the afternoon, a certain Mary Jo-Anne De Asis (De
Asis) dined at petitioner's Kamayan Restaurant at 15 West Avenue, Quezon City. De Asis was
using a Mitsubishi Galant Super Saloon Model 1995 with plate number UBU 955, assigned to
her by her employer Crispa Textile Inc. (Crispa). On said date, De Asis availed of the valet
parking service of petitioner and entrusted her car key to petitioner's valet counter. A
corresponding parking ticket was issued as receipt for the car. The car was then parked by
petitioner's valet attendant, a certain Madridano, at the designated parking area. Few minutes
later, Madridano noticed that the car was not in its parking slot and its key no longer in the box
where valet attendants usually keep the keys of cars entrusted to them. The car was never
recovered. Thereafter, Crispa filed a claim against its insurer, herein respondent Filipino
Merchants Insurance Company, Inc. (FMICI). Having indemnified Crispa in the amount of
P669.500 for the loss of the subject vehicle, FMICI, as subrogee to Crispa's rights, filed with the
RTC at Makati City an action for damages against petitioner Triple-V Food Services, Inc.,
thereat docketed as Civil Case No. 98-838 which was raffled to Branch 148.
In its answer, petitioner argued that the complaint failed to aver facts to support the allegations
of recklessness and negligence committed in the safekeeping and custody of the subject
vehicle, claiming that it and its employees wasted no time in ascertaining the loss of the car and
in informing De Asis of the discovery of the loss. Petitioner further argued that in accepting the
complimentary valet parking service, De Asis received a parking ticket whereunder it is so
provided that "[Management and staff will not be responsible for any loss of or damage incurred
on the vehicle nor of valuables contained therein", a provision which, to petitioner's mind, is an
explicit waiver of any right to claim indemnity for the loss of the car; and that De Asis knowingly
assumed the risk of loss when she allowed petitioner to park her vehicle, adding that its valet
parking service did not include extending a contract of insurance or warranty for the loss of the
vehicle.
During trial, petitioner challenged FMICI's subrogation to Crispa's right to file a claim for the loss
of the car, arguing that theft is not a risk insured against under FMICI's Insurance Policy No.
PC-5975 for the subject vehicle.
In a decision dated June 22, 2001, the trial court rendered judgment for respondent FMICI, thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff
(FMICI) and against the defendant Triple V (herein petitioner) and the latter is hereby ordered to
pay plaintiff the following:
1. The amount of P669,500.00, representing actual damages plus compounded (sic);
2. The amount of P30,000.00 as acceptance fee plus the amount equal to 25% of the total
amount due as attorney's fees;
3. The amount of P50,000.00 as exemplary damages;
4. Plus, cost of suit.
Defendant Triple V is not therefore precluded from taking appropriate action against defendant
Armando Madridano.
SO ORDERED.
Obviously displeased, petitioner appealed to the Court of Appeals reiterating its argument that it
was not a depositary of the subject car and that it exercised due diligence and prudence in the
safe keeping of the vehicle, in handling the car-napping incident and in the supervision of its
employees. It further argued that there was no valid subrogation of rights between Crispa and
respondent FMICI.
In a decision dated October 21, 2003, [2]cralaw the Court of Appeals dismissed petitioner's

appeal and affirmed the appealed decision of the trial court, thus:
WHEREFORE, based on the foregoing premises, the instant appeal is hereby DISMISSED.
Accordingly, the assailed June 22, 2001 Decision of the RTC of Makati City - Branch 148 in Civil
Case No. 98-838 is AFFIRMED.
SO ORDERED.
In so dismissing the appeal and affirming the appealed decision, the appellate court agreed with
the findings and conclusions of the trial court that: (a) petitioner was a depositary of the subject
vehicle; (b) petitioner was negligent in its duties as a depositary thereof and as an employer of
the valet attendant; and (c) there was a valid subrogation of rights between Crispa and
respondent FMICI.
Hence, petitioner's present recourse.
We agree with the two (2) courts below.
When De Asis entrusted the car in question to petitioners valet attendant while eating at
petitioner's Kamayan Restaurant, the former expected the car's safe return at the end of her
meal. Thus, petitioner was constituted as a depositary of the same car. Petitioner cannot evade
liability by arguing that neither a contract of deposit nor that of insurance, guaranty or surety for
the loss of the car was constituted when De Asis availed of its free valet parking service.
In a contract of deposit, a person receives an object belonging to another with the obligation of
safely keeping it and returning the same.[3]cralaw A deposit may be constituted even without any
consideration. It is not necessary that the depositary receives a fee before it becomes obligated
to keep the item entrusted for safekeeping and to return it later to the depositor.
Specious is petitioner's insistence that the valet parking claim stub it issued to De Asis contains
a clear exclusion of its liability and operates as an explicit waiver by the customer of any right to
claim indemnity for any loss of or damage to the vehicle.
The parking claim stub embodying the terms and conditions of the parking, including that of
relieving petitioner from any loss or damage to the car, is essentially a contract of adhesion,
drafted and prepared as it is by the petitioner alone with no participation whatsoever on the part
of the customers, like De Asis, who merely adheres to the printed stipulations therein appearing.
While contracts of adhesion are not void in themselves, yet this Court will not hesitate to rule out
blind adherence thereto if they prove to be one-sided under the attendant facts and
circumstances.[4]cralaw
Hence, and as aptly pointed out by the Court of Appeals, petitioner must not be allowed to use
its parking claim stub's exclusionary stipulation as a shield from any responsibility for any loss or
damage to vehicles or to the valuables contained therein. Here, it is evident that De Asis
deposited the car in question with the petitioner as part of the latter's enticement for customers
by providing them a safe parking space within the vicinity of its restaurant. In a very real sense,
a safe parking space is an added attraction to petitioner's restaurant business because
customers are thereby somehow assured that their vehicle are safely kept, rather than parking
them elsewhere at their own risk. Having entrusted the subject car to petitioner's valet
attendant, customer De Asis, like all of petitioner's customers, fully expects the security of her
car while at petitioner's premises/designated parking areas and its safe return at the end of her
visit at petitioner's restaurant.
Petitioner's argument that there was no valid subrogation of rights between Crispa and FMICI
because theft was not a risk insured against under FMICI's Insurance Policy No. PC-5975 holds
no water.
Insurance Policy No. PC-5975 which respondent FMICI issued to Crispa contains, among
others things, the following item: "Insured's Estimate of Value of Scheduled Vehicle- P800.000".
[5]
cralaw On the basis of such item, the trial court concluded that the coverage includes a full
comprehensive insurance of the vehicle in case of damage or loss. Besides, Crispa paid a
premium of P10,304 to cover theft. This is clearly shown in the breakdown of premiums in the
same policy.[6]cralaw Thus, having indemnified CRISPA for the stolen car, FMICI, as correctly

ruled by the trial court and the Court of Appeals, was properly subrogated to Crispa's rights
against petitioner, pursuant to Article 2207 of the New Civil Code[7].
Anent the trial court's findings of negligence on the part of the petitioner, which findings were
affirmed by the appellate court, we have consistently ruled that findings of facts of trial courts,
more so when affirmed, as here, by the Court of Appeals, are conclusive on this Court unless
the trial court itself ignored, overlooked or misconstrued facts and circumstances which, if
considered, warrant a reversal of the outcome of the case. [8]cralaw This is not so in the case at
bar. For, we have ourselves reviewed the records and find no justification to deviate from the
trial court's findings.
WHEREFORE, petition is hereby DENIED DUE COURSE.
SO ORDERED.
G.R. No. 159912
August 17, 2007
UNITED COCONUT PLANTERS BANK, Petitioner,
vs.
SPOUSES SAMUEL and ODETTE BELUSO, Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to
annul the Court of Appeals Decision 1 dated 21 January 2003 and its Resolution 2 dated 9
September 2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals Decision and
Resolution affirmed in turn the Decision3 dated 23 March 2000 and Order4 dated 8 May 2000 of
the Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314, declaring
void the interest rate provided in the promissory notes executed by the respondents Spouses
Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters
Bank (UCPB).
The procedural and factual antecedents of this case are as follows:
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit
Agreement whereby the latter could avail from the former credit of up to a maximum amount of
P1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other
than their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered
by Transfer Certificates of Title No. T-31539 and T-27828, as additional security for the
obligation. The Credit Agreement was subsequently amended to increase the amount of the
Promissory Notes Line to a maximum of P2.35 Million pesos and to extend the term thereof to
28 February 1998.
The spouses Beluso availed themselves of the credit line under the following Promissory Notes:
PN #

Date of PN

Maturity Date

Amount Secured

8314-96-00083-3

29 April 1996

27 August 1996

P 700,000

8314-96-00085-0

2 May 1996

30 August 1996

P 500,000

8314-96-000292-2

20 November 1996

20 March 1997

P 800,000

The three promissory notes were renewed several times. On 30 April 1997, the payment of the
principal and interest of the latter two promissory notes were debited from the spouses Belusos
account with UCPB; yet, a consolidated loan for P1.3 Million was again released to the spouses
Beluso under one promissory note with a due date of 28 February 1998.
To completely avail themselves of the P2.35 Million credit line extended to them by UCPB, the
spouses Beluso executed two more promissory notes for a total of P350,000.00:
PN #

Date of PN

Maturity Date

Amount Secured

97-00363-1

11 December 1997

28 February 1998

P 200,000

98-00002-4

2 January 1998

28 February 1998

P 150,000

However, the spouses Beluso alleged that the amounts covered by these last two promissory
notes were never released or credited to their account and, thus, claimed that the principal
indebtedness was only P2 Million.
In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to
34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum of
P763,692.03.
From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the
obligations of the spouses Beluso, as follows:
PN #

Amount Secured

Interest

Penalty

Total

97-00363-1

P 200,000

31%

36%

P 225,313.24

97-00366-6

P 700,000

30.17%
(7 days)

32.786%
(102 days)

P 795,294.72

97-00368-2

P 1,300,000

28%
(2 days)

30.41%
(102 days)

P 1,462,124.54

98-00002-4

P 150,000

33%
(102 days)

36%

P 170,034.71

The spouses Beluso, however, failed to make any payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of
P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to comply therewith. On
28 December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to
secure their credit line, which, by that time, already ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and
Damages against UCPB with the RTC of Makati City.
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as
follows:
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by
[UCPB] void and the foreclosure and Sheriffs Certificate of Sale void. [UCPB] is hereby ordered
to return to [the spouses Beluso] the properties subject of the foreclosure; to pay [the spouses
Beluso] the amount of P50,000.00 by way of attorneys fees; and to pay the costs of suit. [The
spouses Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.5
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration, 6 prompting UCPB to
appeal the RTC Decision with the Court of Appeals. The Court of Appeals affirmed the RTC
Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial
Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to the
modification that defendant-appellant UCPB is not liable for attorneys fees or the costs of suit. 7
On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack
of merit. UCPB thus filed the present petition, submitting the following issues for our resolution:
I
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH
DECLARED VOID THE PROVISION ON INTEREST RATE AGREED UPON BETWEEN
PETITIONER AND RESPONDENTS

II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF
RESPONDENTS INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY PETITIONER
THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY THOUSAND THREE
HUNDRED EIGHT PESOS (P1,560,308.00)
III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH
ANNULLED THE FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUE
TO AN ALLEGED "INCORRECT COMPUTATION" OF RESPONDENTS INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH
FOUND PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT
V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE
BECAUSE THE RESPONDENTS ARE GUILTY OF FORUM SHOPPING 8
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision found in the
promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor
were determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE
BELUSO (BORROWER), jointly and severally promise to pay to UNITED COCONUT
PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines,
the sum of ______________ PESOS, (P_____), Philippine Currency, with interest thereon at
the rate indicative of DBD retail rate or as determined by the Branch Head. 9
UCPB asserts that this is a reversible error, and claims that while the interest rate was not
numerically quantified in the face of the promissory notes, it was nonetheless categorically
fixed, at the time of execution thereof, at the "rate indicative of the DBD retail rate." UCPB
contends that said provision must be read with another stipulation in the promissory notes
subjecting to review the interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of
interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or the resulting profitability to the LENDER after due consideration
of all dealings with the BORROWER.10
In this regard, UCPB avers that these are valid reference rates akin to a "prevailing rate" or
"prime rate" allowed by this Court in Polotan v. Court of Appeals. 11 Furthermore, UCPB argues
that even if the proviso "as determined by the branch head" is considered void, such a
declaration would not ipso facto render the connecting clause "indicative of DBD retail rate" void
in view of the separability clause of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained in this
AGREEMENT, or documents executed in connection herewith shall be declared invalid, illegal
or unenforceable in any respect, the validity, legality and enforceability of the remaining
provisions hereof shall not in any way be affected or impaired. 12
According to UCPB, the imposition of the questioned interest rates did not infringe on the
principle of mutuality of contracts, because the spouses Beluso had the liberty to choose
whether or not to renew their credit line at the new interest rates pegged by petitioner. 13 UCPB
also claims that assuming there was any defect in the mutuality of the contract at the time of its

inception, such defect was cured by the subsequent conduct of the spouses Beluso in availing
themselves of the credit line from April 1996 to February 1998 without airing any protest with
respect to the interest rates imposed by UCPB. According to UCPB, therefore, the spouses
Beluso are in estoppel.14
We agree with the Court of Appeals, and find no merit in the contentions of UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of Appeals, 15 where we held:
In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest
rate at will during the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not bargain on
equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to
take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.
The provision stating that the interest shall be at the "rate indicative of DBD retail rate or as
determined by the Branch Head" is indeed dependent solely on the will of petitioner UCPB.
Under such provision, petitioner UCPB has two choices on what the interest rate shall be: (1) a
rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB
is given this choice, the rate should be categorically determinable in both choices. If either of
these two choices presents an opportunity for UCPB to fix the rate at will, the bank can easily
choose such an option, thus making the entire interest rate provision violative of the principle of
mutuality of contracts.
Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly,
a rate "as determined by the Branch Head" gives the latter unfettered discretion on what the
rate may be. The Branch Head may choose any rate he or she desires. As regards the rate
"indicative of the DBD retail rate," the same cannot be considered as valid for being akin to a
"prevailing rate" or "prime rate" allowed by this Court in Polotan. The interest rate in Polotan
reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank
and Trust Company. x x x.16
In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties
can easily determine the interest rate by applying simple arithmetic. On the other hand, the
provision in the case at bar does not specify any margin above or below the DBD retail rate.
UCPB can peg the interest at any percentage above or below the DBD retail rate, again giving it
unfettered discretion in determining the interest rate.
The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According
to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of
interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or the resulting profitability to the LENDER after due consideration
of all dealings with the BORROWER.17

It should be pointed out that the authority to review the interest rate was given UCPB alone as
the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it
wishes. As worded in the above provision, UCPB may give as much weight as it desires to each
of the following considerations: (1) the prevailing financial and monetary condition; (2) the rate
of interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case
of the interest rate provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB
as to the interest to be imposed, as both options violate the principle of mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppel if it is prohibited by law or is against public policy.18
The interest rate provisions in the case at bar are illegal not only because of the provisions of
the Civil Code on mutuality of contracts, but also, as shall be discussed later, because they
violate the Truth in Lending Act. Not disclosing the true finance charges in connection with the
extensions of credit is, furthermore, a form of deception which we cannot countenance. It is
against the policy of the State as stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its
citizens from a lack of awareness of the true cost of credit to the user by assuring a full
disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of
the national economy.19
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending
provisions are found in the promissory notes themselves, not in the credit line. In fixing the
interest rates in the promissory notes to cover the renewed credit line, UCPB still reserved to
itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a rate as
determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates
imposed by UCPB, both failed to include in their computation of the outstanding obligation of the
spouses Beluso the legal rate of interest of 12% per annum. Furthermore, the penalty charges
were also deleted in the decisions of the RTC and the Court of Appeals. Section 2.04, Article II
on "Interest and other Bank Charges" of the subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this
ARTICLE, any principal obligation of the CLIENT hereunder which is not paid when due shall be
subject to a penalty charge of one percent (1%) of the amount of such obligation per month
computed from due date until the obligation is paid in full. If the bank accelerates teh (sic)
payment of availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be
used on the total principal amount outstanding and unpaid computed from the date of
acceleration until the obligation is paid in full. 20
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally,
agree to pay an additional sum equivalent to twenty-five percent (25%) of the total due on the
Note as attorneys fee, aside from the expenses and costs of collection whether actually
incurred or not, and a penalty charge of one percent (1%) per month on the total amount due
and unpaid from date of default until fully paid. 21
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section 9.06 of
the Credit Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its rights under this
AGREEMENT, the Note(s), the collaterals and other related documents, the BANK shall be
entitled to recover attorneys fees equivalent to not less than twenty-five percent (25%) of the

total amounts due and outstanding exclusive of costs and other expenses. 22
Another alleged computational error pointed out by UCPB is the negation of the Compounding
Interest agreed upon by the parties under Section 2.02 of the Credit Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal
and shall be subject to the same interest rate as herein stipulated. 23 and paragraph 3 of the
subject promissory notes:
Interest not paid when due shall be added to, and become part of the principal and shall
likewise bear interest at the same rate.24
UCPB lastly avers that the application of the spouses Belusos payments in the disputed
computation does not reflect the parties agreement.1avvphi1 The RTC deducted the payment
made by the spouses Beluso amounting to P763,693.00 from the principal of P2,350,000.00.
This was allegedly inconsistent with the Credit Agreement, as well as with the agreement of the
parties as to the facts of the case. In paragraph 7 of the spouses Belusos Manifestation and
Motion on Proposed Stipulation of Facts and Issues vis--vis UCPBs Manifestation, the parties
agreed that the amount of P763,693.00 was applied to the interest and not to the principal, in
accord with Section 3.03, Article II of the Credit Agreement on "Order of the Application of
Payments," which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in
accordance with the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any.25
Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had been
erroneously excluded by the RTC and the Court of Appeals from the computation of the total
amount due and demandable from spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a
considerably bigger amount and, therefore, the demand should be considered void. There being
no valid demand, according to the spouses Beluso, there would be no default, and therefore the
interests and penalties would not commence to run. As it was likewise improper to foreclose the
mortgaged properties or file a case against the spouses Beluso, attorneys fees were not
warranted.
We agree with UCPB on this score. Default commences upon judicial or extrajudicial demand. 26
The excess amount in such a demand does not nullify the demand itself, which is valid with
respect to the proper amount. A contrary ruling would put commercial transactions in disarray,
as validity of demands would be dependent on the exactness of the computations thereof,
which are too often contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are
considered in default with respect to the proper amount and, therefore, the interests and the
penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized
that said legal interest should be imposed, thus: "There being no valid stipulation as to interest,
the legal rate of interest shall be charged." 27 It seems that the RTC inadvertently overlooked its
non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest
in both the body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the respondent

Bank is null and void, only the legal rate of interest which is 12% per annum can be legally
charged and imposed by the bank, which would amount to only about P599,000.00 since 1996
up to August 31, 1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:
xxxx
2. By way of example for the public good against the Banks taking unfair advantage of the
weaker party to their contract, declaring the legal rate of 12% per annum, as the imposable rate
of interest up to February 28, 1999 on the loan of 2.350 million. 28
All these show that the spouses Beluso had acknowledged before the RTC their obligation to
pay a 12% legal interest on their loans. When the RTC failed to include the 12% legal interest in
its computation, however, the spouses Beluso merely defended in the appellate courts this noninclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a
12% legal interest in favor of petitioner in the case at bar, as what we have voided is merely the
stipulated rate of interest and not the stipulation that the loan shall earn interest.
We must likewise uphold the contract stipulation providing the compounding of interest. The
provisions in the Credit Agreement and in the promissory notes providing for the compounding
of interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the
spouses Beluso in their petition with the RTC. The compounding of interests has furthermore
been declared by this Court to be legal. We have held in Tan v. Court of Appeals, 29 that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by stipulation capitalize the interest due and
unpaid, which as added principal, shall earn new interest.
As regards the imposition of penalties, however, although we are likewise upholding the
imposition thereof in the contract, we find the rate iniquitous. Like in the case of grossly
excessive interests, the penalty stipulated in the contract may also be reduced by the courts if it
is iniquitous or unconscionable.30
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous
considering the fact that this penalty is already over and above the compounded interest
likewise imposed in the contract. If a 36% interest in itself has been declared unconscionable by
this Court,31 what more a 30.41% to 36% penalty, over and above the payment of compounded
interest? UCPB itself must have realized this, as it gave us a sample computation of the
spouses Belusos obligation if both the interest and the penalty charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if there
had been no demand. Filing a case in court is the judicial demand referred to in Article 1169 32 of
the Civil Code, which would put the obligor in delay.
The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses
Beluso were forced to litigate the issue on the illegality of the interest rate provision of the
promissory notes. The award of attorneys fees, it must be recalled, falls under the sound
discretion of the court.33 Since both parties were forced to litigate to protect their respective
rights, and both are entitled to the award of attorneys fees from the other, practical reasons
dictate that we set off or compensate both parties liabilities for attorneys fees. Therefore,
instead of awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of
the award of attorneys fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest
of 12% per annum and a penalty charge of 12% per annum. We also hold that, instead of
awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award of
attorneys fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already been
consolidated on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spouses

Beluso failed to exercise their right of redemption which expired on 25 March 2000. The RTC,
however, annulled the foreclosure of mortgage based on an alleged incorrect computation of the
spouses Belusos indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in
the case at bar. Furthermore, the annulment of the foreclosure proceedings and the certificates
of sale were mooted by the subsequent issuance of new certificates of title in the name of said
bank. UCPB claims that the spouses Belusos action for annulment of foreclosure constitutes a
collateral attack on its certificates of title, an act proscribed by Section 48 of Presidential Decree
No. 1529, otherwise known as the Property Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subject
to collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in
accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an excessive
demand on their account, they cannot be said to be in default for refusing to pay the same.
Consequently, according to the spouses Beluso, the "enforcement of such illegal and
overcharged demand through foreclosure of mortgage" should be voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already
found that a valid demand was made by UCPB upon the spouses Beluso, despite being
excessive, the spouses Beluso are considered in default with respect to the proper amount of
their obligation to UCPB and, thus, the property they mortgaged to secure such amounts may
be foreclosed. Consequently, proceeds of the foreclosure sale should be applied to the extent of
the amounts to which UCPB is rightfully entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in
this case. The grounds for the proper annulment of the foreclosure sale are the following: (1)
that there was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the
purchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the price was
inadequate and the inadequacy was so great as to shock the conscience of the court. 34
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs alleged
violation of Republic Act No. 3765, otherwise known as the Truth in Lending Act.
UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act
which mandates the filing of an action to recover such penalty must be made under the
following circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be liable
to such person in the amount of P100 or in an amount equal to twice the finance charge
required by such creditor in connection with such transaction, whichever is greater, except that
such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty
may be brought by such person within one year from the date of the occurrence of the violation,
in any court of competent jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that "[a]dmittedly the original complaint
did not explicitly allege a violation of the Truth in Lending Act and no action to formally admit
the amended petition [which expressly alleges violation of the Truth in Lending Act] was made
either by [respondents] spouses Beluso and the lower court. x x x." 35
UCPB further claims that the action to recover the penalty for the violation of the Truth in
Lending Act had been barred by the one-year prescriptive period provided for in the Act. UCPB
asserts that per the records of the case, the latest of the subject promissory notes had been
executed on 2 January 1998, but the original petition of the spouses Beluso was filed before the
RTC on 9 February 1999, which was after the expiration of the period to file the same on 2
January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals

ruled:
Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act
and no action to formally admit the amended petition was made either by [respondents]
spouses Beluso and the lower court. In such transactions, the debtor and the lending institutions
do not deal on an equal footing and this law was intended to protect the public from hidden or
undisclosed charges on their loan obligations, requiring a full disclosure thereof by the lender.
We find that its infringement may be inferred or implied from allegations that when [respondents]
spouses Beluso executed the promissory notes, the interest rate chargeable thereon were left
blank. Thus, [petitioner] UCPB failed to discharge its duty to disclose in full to [respondents]
Spouses Beluso the charges applicable on their loans. 36
We agree with the Court of Appeals. The allegations in the complaint, much more than the title
thereof, are controlling. Other than that stated by the Court of Appeals, we find that the
allegation of violation of the Truth in Lending Act can also be inferred from the same allegation
in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the
provision of their promissory note granting respondent bank the power to unilaterally fix the
interest rates, which rate was not determined in the promissory note but was left solely to the
will of the Branch Head of the respondent Bank, x x x. 37
The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest
rates certainly also means that the promissory notes do not contain a "clear statement in
writing" of "(6) the finance charge expressed in terms of pesos and centavos; and (7) the
percentage that the finance charge bears to the amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation." 38 Furthermore, the spouses
Belusos prayer "for such other reliefs just and equitable in the premises" should be deemed to
include the civil penalty provided for in Section 6(a) of the Truth in Lending Act.
UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending
Act has already prescribed is likewise without merit. The penalty for the violation of the act is
P100 or an amount equal to twice the finance charge required by such creditor in connection
with such transaction, whichever is greater, except that such liability shall not exceed P2,000.00
on any credit transaction.39 As this penalty depends on the finance charge required of the
borrower, the borrowers cause of action would only accrue when such finance charge is
required. In the case at bar, the date of the demand for payment of the finance charge is 2
September 1998, while the foreclosure was made on 28 December 1998. The filing of the case
on 9 February 1999 is therefore within the one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be
inferred nor implied from the allegations made in the complaint. 40 Pertinent provisions of the Act
read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be liable
to such person in the amount of P100 or in an amount equal to twice the finance charge
required by such creditor in connection with such transaction, whichever is the greater, except
that such liability shall not exceed P2,000 on any credit transaction. Action to recover such
penalty may be brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. In any action under this subsection in which any
person is entitled to a recovery, the creditor shall be liable for reasonable attorneys fees and
court costs as determined by the court.
xxxx
(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder
shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not less than 6
months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said

Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the
willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section
6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of the Act. The penalty therefor
is an amount of P100 or in an amount equal to twice the finance charge required by the creditor
in connection with such transaction, whichever is greater, except that the liability shall not
exceed P2,000.00 on any credit transaction. The action to recover such penalty may be
instituted by the aggrieved private person separately and independently from the criminal case
for the same offense.
In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the
Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the foreclosure void. This joinder is allowed
under Rule 2, Section 5 of the Rules of Court, which provides:
SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the alternative or
otherwise, as many causes of action as he may have against an opposing party, subject to the
following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties;
(b) The joinder shall not include special civil actions or actions governed by special rules;
(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes
of action falls within the jurisdiction of said court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of money, the
aggregate amount claimed shall be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act since the same
was not alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed,
due process mandates that a defendant should be sufficiently apprised of the matters he or she
would be defending himself or herself against. However, in the 1 July 1999 pre-trial brief filed by
the spouses Beluso before the RTC, the claim for civil sanctions for violation of the Truth in
Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending Act in not
informing the borrower in writing before the execution of the Promissory Notes of the interest
rate expressed as a percentage of the total loan, the respondent bank instead is liable to pay
petitioners double the amount the bank is charging petitioners by way of sanction for its
violation.41
In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act
provision to express the interest rate as a simple annual percentage of the loan? 42
These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of
the assertion of this issue in this case as to prevent it from putting up a defense thereto is
plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and
adjudicate the alleged violation of the Truth in Lending Act, considering that the present action
allegedly involved a single credit transaction as there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of
the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in
the promissory notes void, and (2) the action to declare the foreclosure void. There had been no
question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the
above-quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes
of action falls within the jurisdiction of said court and the venue lies therein.

Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since
the former is merely a preparatory contract to the contract of loan or mutuum. Under such credit
line, the bank is merely obliged, for the considerations specified therefor, to lend to the other
party amounts not exceeding the limit provided. The credit transaction thus occurred not when
the credit line was opened, but rather when the credit line was availed of. In the case at bar, the
violation of the Truth in Lending Act allegedly occurred not when the parties executed the Credit
Agreement, where no interest rate was mentioned, but when the parties executed the
promissory notes, where the allegedly offending interest rate was stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the following
information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)
(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the true
cost thereof, proceeding from the experience that banks are able to conceal such true cost by
hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount,
and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the
true cost of their loan, to enable them to give full consent to the contract, and to properly
evaluate their options in arriving at business decisions. Upholding UCPBs claim of substantial
compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of
the true cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso
after execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate
provision therein does not sufficiently indicate with particularity the interest rate to be applied to
the loan covered by said promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati
City) on the ground that the spouses Beluso instituted another case (Civil Case No. V-7227)
before the RTC of Roxas City, involving the same parties and issues. UCPB claims that while
Civil Case No. V-7227 initially appears to be a different action, as it prayed for the issuance of a
temporary restraining order and/or injunction to stop foreclosure of spouses Belusos properties,
it poses issues which are similar to those of the present case. 43 To prove its point, UCPB cited
the spouses Belusos Amended Petition in Civil Case No. V-7227, which contains similar
allegations as those in the present case. The RTC of Makati denied UCPBs Motion to Dismiss
Case No. 99-314 for lack of merit. Petitioner UCPB raised the same issue with the Court of
Appeals, and is raising the same issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas

City, a Petition for Injunction Against Foreclosure, is the propriety of the foreclosure before the
true account of spouses Beluso is determined. On the other hand, the issue in Case No. 99-314
before the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso
claim that Civil Case No. V-7227 has become moot because, before the RTC of Roxas City
could act on the restraining order, UCPB proceeded with the foreclosure and auction sale. As
the act sought to be restrained by Civil Case No. V-7227 has already been accomplished, the
spouses Beluso had to file a different action, that of Annulment of the Foreclosure Sale, Case
No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of action is involved
in the two civil actions, namely, the violation of the right of the spouses Beluso not to have their
property foreclosed for an amount they do not owe, the Rules of Court nevertheless allows the
filing of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City
before the filing of Case No. 99-314 with the RTC of Makati City, since the venue of litigation as
provided for in the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following
instances:
SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion to
dismiss based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same
action or claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1,
not in paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss may be made on any of the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same cause;
(f) That the cause of action is barred by a prior judgment or by the statute of limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiffs pleading has been paid, waived,
abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the provisions of the
statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied with. 44 (Emphases
supplied.)
When an action is dismissed on the motion of the other party, it is only when the ground for the
dismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. As
regards all the other grounds, the complainant is allowed to file same action, but should take
care that, this time, it is filed with the proper court or after the accomplishment of the erstwhile
absent condition precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the
spouses Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yet been
ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati.
Hence, there were allegedly two pending actions between the same parties on the same issue
at the time of the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati.
This will still not change our findings. It is indeed the general rule that in cases where there are
two pending actions between the same parties on the same issue, it should be the later case
that should be dismissed. However, this rule is not absolute. According to this Court in Allied
Banking Corporation v. Court of Appeals45 :
In these cases, it is evident that the first action was filed in anticipation of the filing of the later

action and the purpose is to preempt the later suit or provide a basis for seeking the dismissal of
the second action.
Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed if
the later action is the more appropriate vehicle for the ventilation of the issues between the
parties. Thus, in Ramos v. Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case should yield to the earlier case.
What is required merely is that there be another pending action, not a prior pending action.
Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of the
property involved, no error was committed by the lower court in deferring to the Bataan court's
jurisdiction.
Given, therefore, the pendency of two actions, the following are the relevant considerations in
determining which action should be dismissed: (1) the date of filing, with preference generally
given to the first action filed to be retained; (2) whether the action sought to be dismissed was
filed merely to preempt the later action or to anticipate its filing and lay the basis for its
dismissal; and (3) whether the action is the appropriate vehicle for litigating the issues between
the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for
injunction against a foreclosure sale that has already been held, while Civil Case No. 99-314
before the RTC of Makati City includes an action for the annulment of said foreclosure, an
action certainly more proper in view of the execution of the foreclosure sale. The former case
was improperly filed in Roxas City, while the latter was filed in Makati City, the proper venue of
the action as mandated by the Credit Agreement. It is evident, therefore, that Civil Case No. 99314 is the more appropriate vehicle for litigating the issues between the parties, as compared to
Civil Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in not
dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following
MODIFICATIONS:
1. In addition to the sum of P2,350,000.00 as determined by the courts a quo, respondent
spouses Samuel and Odette Beluso are also liable for the following amounts:
a. Penalty of 12% per annum on the amount due 46 from the date of demand; and
b. Compounded legal interest of 12% per annum on the amount due 47 from date of demand;
2. The following amounts shall be deducted from the liability of the spouses Samuel and Odette
Beluso:
a. Payments made by the spouses in the amount of P763,692.00. These payments shall be
applied to the date of actual payment of the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of the time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall be
deducted from the liability of the spouses Samuel and Odette Beluso on 9 February 1999 to the
following in the order that they are listed, to wit:
i. penalty charges due and demandable as of time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which the
Regional Trial Court and the Court of Appeals ordered respondents to pay, as modified in this
Decision, shall be deducted from the proceeds of the foreclosure sale.
SO ORDERED.

G.R. No. L-16666

April 10, 1922
ROMULO MACHETTI, plaintiff-appelle,
vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.Gabriel La O for appellee Hospicio
de San Jose.No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written
agreement undertook to construct a building on Calle Rosario in the city of Manila for the
Hospicio de San Jose, the contract price being P64,000. One of the conditions of the agreement
was that the contractor should obtain the "guarantee" of the Fidelity and Surety Company of the
Philippine Islands to the amount of P128,800 and the following endorsement in the English
language appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with the terms and conditions as outlined
in the above contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of architects representing the Hospicio
de San Jose and, as the work progressed, payments were made to him from time to time upon
the recommendation of the architects, until the entire contract price, with the exception of the
sum of the P4,978.08, was paid. Subsequently it was found that the work had not been carried
out in accordance with the specifications which formed part of the contract and that the
workmanship was not of the standard required, and the Hospicio de San Jose therefore
answered the complaint and presented a counterclaim for damages for the partial
noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350.
After issue was thus joined, Machetti, on petition of his creditors, was, on February 27, 1918,
declared insolvent and on March 4, 1918, an order was entered suspending the proceeding in
the present case in accordance with section 60 of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and
Surety Company be made cross-defendant to the exclusion of Machetti and that the
proceedings be continued as to said company, but still remain suspended as to Machetti. This
motion was granted and on February 7, 1920, the Hospicio filed a complaint against the Fidelity
and Surety Company asking for a judgement for P12,800 against the company upon its
guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity and
Surety Company for P12,800 in accordance with the complaint. The case is now before this
court upon appeal by the Fidelity and Surety Company form said judgment.
As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San
Jose defendant, has been converted into an action in which the Hospicio de San Jose is plaintiff
and the Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant, Machetti
having been practically eliminated from the case.
But in this instance the guarantor's case is even stronger than that of an ordinary surety. The
contract of guaranty is written in the English language and the terms employed must of course
be given the signification which ordinarily attaches to them in that language. In English the term
"guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true
that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be
shown which convert the contract into one of suretyship but such circumstances do not exist in
the present case; on the contrary it appear affirmatively that the contract is the guarantor's

separate undertaking in which the principal does not join, that its rests on a separate
consideration moving from the principal and that although it is written in continuation of the
contract for the construction of the building, it is a collateral undertaking separate and distinct
from the latter. All of these circumstances are distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds
himself to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer
of the solvency of the debtor. (Saint vs. Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs.
Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs.
Varadero de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and Surety Company
assumed in the present case. The undertaking is perhaps not exactly that of a fianza under the
Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily carries.
The Fidelity and Surety Company having bound itself to pay only the event its principal,
Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti
is unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by
other means, but is not sufficiently established by the mere fact that he has been declared
insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's
inability to pay is not determined until the final liquidation of his estate.
The judgment appealed from is therefore reversed without costs and without prejudice to such
right of action as the cross-complainant, the Hospicio de San Jose, may have after exhausting
its remedy against the plaintiff Machetti. So ordered.
G.R. No. L-32542 November 26, 1970
THE COMMISSIONER OF CUSTOMS and THE COLLECTOR OF CUSTOMS for the Port of
Manila, petitioners,
vs.
HON. FEDERICO C. ALIKPALA, in his capacity as Judge of the Court of First Instance of
Manila, Branch XXII, GONZALO SY and TOMAS Y. DE LEON, respondents.
Office of the Solicitor General Felix Q. Antonio, Acting Assistant Solicitor General Crispin V.
Bautista and Solicitor Pedro A. Ramirez for petitioners.
Jesus G. Barrera and De Santos, Delfino and Balgos for respondents.
MAKALINTAL, J.:
The Commissioner of Customs and the Collector of Customs for the port of Manila have come
to this Court on a petition for certiorari and prohibition with preliminary injunction, to declare null
and void and set aside certain orders of respondent Court of First Instance of Manila, Judge
Federico C. Alikpala presiding, in Civil Case No. 80655 entitled "Gonzalo Sy, doing business
under the name and style of Gonzalo Sy Trading, and Tomas Y. de Leon, doing business under
the name and style of T. Y. de Leon Enterprises, petitioners, vs. The Commissioner of Customs
and the Collector of Customs, respondents." That case was a petition for injunction with a
prayer for a writ of preliminary injunction.
The basic order complained of is that issued on August 26, 1970, which recites the essential
pertinent facts of the case and is reproduced as follows:
On August 11, 1970, the petitioners filed an action wherein it was prayed that the Commissioner
of Customs and the Collector of Customs be restrained from carrying out the seizure and
scheduled auction sale of the fruits they imported from abroad and that the said cargo be
released to them under the surety bonds which they have already submitted to respondent
Collector of Customs.
On August 13, 1970, the Court issued an order setting the hearing of the petition for the
issuance of a writ of preliminary injunction on August 19, 1970, and restraining the respondents,
their agents, representatives and attorneys in the meantime from carrying out the scheduled
auction sale of the fruits imported by the petitioners, until further orders from the Court.

The respondents filed a motion to dissolve the restraining order and an opposition to the
issuance of a writ of preliminary injunction invoking several grounds in support thereof.
It appears that the Collector of Customs of the port of Manila issued several warrants of seizure
and detention against the cargo of the petitioners consisting of apples, lemons, oranges and
grapes, on the ground that they were imported in violation of Central Bank circulars in relation to
Section 2530-F of the Tariff and Customs Code. In due time, the petitioners were notified of the
seizure, but before they could be heard, respondent Collector of Customs issued a notice of
sale of the imported fruits which was scheduled for sale on August 10, 1970.
The petitioners filed with the Court of Tax Appeals a petition seeking a review of the action taken
by the Collector of Customs of Manila who ordered the seizure of the imported fresh fruits, with
a prayer that pending final determination of the case, a writ of preliminary injunction be issued
restraining the Commissioner of Customs and Collector of Customs from carrying out the
seizure. On August 12, 1970, said Court, however, denied the petition on the ground that it had
no jurisdiction over the subject matter thereof and to grant the writ of preliminary injunction.
Counsel for the respondents admitted that the petitioners have not been heard on the seizure
proceedings and the imported cargo have already been advertised for sale and the same would
have been sold had not this Court issued a restraining order. The first question submitted for
resolution is whether the Court has jurisdiction over the subject matter of the petition and to
issue the ancillary remedy prayed for.
The question involved herein is not whether the imported fruits are subject to seizure but
whether the respondent Collector of Customs of Manila acted in accordance with law in
scheduling the sale thereof without first giving the petitioners an opportunity to be heard. In
short, the question presented for resolution is whether there was observance of due process
and in the case of Nadeco vs. Collector of Customs (G.R. No. L-19180, Oct. 31, 1963) the
Supreme Court in effect held that the Court of First Instance has jurisdiction over the subject
matter of the action.
The provision of Tariff and Customs Code relied upon by the respondents in issuing the
warrants of seizure is Section 2530-F (which declares that articles of prohibited importation are
subject to forfeiture) in relation to circulars issued by the Central Bank of the Philippines
beginning March 10, 1970 prohibiting the issuance of release certificates on no-dollar imports.
Section 2301 of the Tariff and Customs Code, however, provides that upon making any seizure,
the Collector shall issue a warrant for the detention of the property, but if the owner or importer
desires to secure the release of the property for legitimate use, said official may surrender it
upon the filing of a sufficient bond, in an amount to be fixed by him, conditioned for the payment
of the appraised value of the articles and/or any fine, expenses and costs which may be
adjudged in the case.
The Tariff and Customs Code further requires the Collector to give the owner or importer of the
property written notice of the seizure and an opportunity to be heard in relation thereto (Section
2303) and that properties under seizure shall not be sold except after liability to sale shall have
been established by proper administrative or judicial proceedings in conformity with the
provisions of said Code.
Evidently, the respondent Collector of Customs should not have ordered the sale at public
auction of the imported fruits until after the petitioners have been given an opportunity to be
heard. Moreover, they availed of the remedy granted them by Section 2301, which respondent
Collector of Customs granted but required the submission of a cash instead of a surety bond.
The statute under consideration (Section 2301, Tariff and Customs Code) merely provided that
the release would be upon the filing of a sufficient "bond." The petitioners affirmed that they
presented to respondent Collector of Customs surety bonds conditioned for the payment of the
appraised value of the imported fruits and/or any fine, expenses and costs which may be
adjudged in the case. The attention of the petitioners have not been called by the respondent
Collector of Customs to the "insufficiency" of the bonds nor did he raise any question as to the

solvency of the bonding company.

On the basis of the foregoing facts, the Court finds that the petitioners are entitled to the relief
prayed for. The imported goods are perishable in nature and unless immediate relief is granted
to petitioners, irreparable damage may be caused to them and in the event petitioners'
contention would be upheld, the judgment that may be subsequently rendered would become
ineffectual.
WHEREFORE, upon filing of a bond in the sum of P500, subject to the approval of the Court, let
a writ of preliminary injunction be issued enjoining the respondents, their agents,
representatives and any other person acting in their behalf from proceeding with the seizure and
sale at public auction of the imported fruits, until further orders from this Court. The respondents
are further directed to release immediately the imported goods to the custody of the petitioners
on the strength of the surety bonds filed by them unless the respondents file with this Court their
objection to the sufficiency of said bonds, which should be done within twenty-four (24) hours
from notice of a copy of this order.
SO ORDERED.
On September 23, 1970 this Court gave, due course to the present petition and resolved to
issue a restraining order "enjoining respondent Judge from executing his order dated August 26,
1970 ... insofar as it directed the petitioners herein from releasing to the custody of the
respondents the imported goods in question." In due time the respondents filed their answer to
the petition and subsequently both parties submitted their respective memorandum in lieu of
oral argument.
Three grounds are relied upon in the petition for the issuance of the writ prayed for, namely:
1. Respondent Court has no jurisdiction over the subject matter of the case; it follows that it
does not have the authority to grant the writ of preliminary injunction ordering the release of the
imported fruits in question.
2. Assuming, ad arguendo, that it has jurisdiction over the subject matter of the case,
respondent Court acted with grave abuse of discretion amounting to lack of jurisdiction in
granting the writ of preliminary injunction despite the fact that the respondents' complaint states
no cause of action upon which the grant of injunction may be predicated.
3. Respondent Court gravely abused its discretion amounting to black of jurisdiction in insisting
on the sufficiency of the bonds filed by petitioners, undertaken by the Communications
Insurance Co., Inc. in the total amount of P513,865.46, (P513,866.06), despite the fact that its
writing capacity is P50,465.52 only.
For a proper understanding and resolution of the issues it is necessary to state the facts in
greater detail, as they appear from the pleadings and memoranda submitted by the parties as
well as from the different documents attached thereto and marked as annexes.
We first take up the case of Gonzalo Sy Trading. On Nov. 19, 1968 this firm was authorized by
the Central Bank, under Monetary Board Revolution No. 2038, to import fresh fruits from Japan
to the extent of $350,000.00, on a no-dollar basis and without letters of credit. As of November
1969 the amount of $144,306.15 had been used. On October 30 of that year Gonzalo Sy
Trading asked the Central Bank for an amendment of the terms of the aforesaid resolution so
that the importations authorized under it could be procured not only from Japan but from other
sources as well. On November 19, 1969 the Deputy Governor of the Central Bank denied the
request, and pointed out that Monetary Board Resolution No. 2038 was intended only for the
Christmas season of 1968 and did not extend through 1969. Two days thereafter, however, or
on November 21, the Director of the Foreign Exchange Department of the Central Bank wrote
the Prudential Bank and Trust Company in connection with the release certificates so far issued
by it covering the no-dollar importations of fresh fruits by its client, Gonzalo Sy Trading, and
noting that only $144,306.15 had been used out of the total amount of $350,000.00, authorized
the Prudential Bank and Trust Company to "continue to issue release certificates to cover the
No-Dollar importations of fresh fruits by your client, subject to the same terms and conditions

imposed by the Monetary Board under the above-mentioned resolution." Pursuant to such
authority Gonzalo Sy Trading continued importing fresh fruits, until by the beginning of June
1970 the total amount already used was $314,142.51, leaving a balance of $35,857.49.
On June 3, 1970, Gonzalo Sy Trading wrote a letter to the Central Bank, making reference to a
previous letter of May 27 requesting permission to utilize the said balance to pay for two
shipments of fresh fruits coming on June 4 and 6, respectively. This request was denied by the
Central Bank in its letter of June 10, 1970. On the following June 16 warrants of seizure and
detention were issued by the Collector of Customs after the customs duties, taxes and other
charges had been paid by the importer.
With respect to respondent Tomas T. de Leon, it appears that on many occasions in the past he
had always been allowed by the Central Bank to import fresh fruits on a dollar co-assignment
basis. The 1968 imports alone were valued at over half a million dollars. The corresponding
release certificates were invariably authorized by said bank after the arrival of the shipments in
the Philippines. On November 20, 1969 De Leon filed the customary application with the bank
for the issuance of a "no-dollar import permit" to cover consignments of fruits from suppliers
abroad. Pending action on said application, orders were placed and the shipments arrived
during the months of May through July 1970, and the customs duties, taxes and other charges
were also paid by the importer. As in the case of Gonzalo Sy Trading however, the said
shipments were seized by the Collector of Customs.
On July 30, 1970 the Collector of Customs issued a notice of auction sale of the goods under
seizure to be held on the following August 12 and every day thereafter until terminated. On July
31 counsel for both importers wrote a letter to the Collector requesting that they be allowed to
file sufficient bonds for the release of the goods, without prejudice to their right to contest the
validity of seizure. On the same date the Collector granted the request by means of a
handwritten marginal notation on the letter itself, provided "duty and taxes have already been
paid." This condition had been previously met, and so the corresponding surety bonds were
filed, in the aggregate amount of P513,865.46. Their approval was requested in another letter
dated August 10, 1970, but the Collector of Customs thereupon required a cash bond instead,
as indicated in a similar marginal notation on this second letter.
On the same date August 10 the two importers filed a petition with the Court of Tax
Appeals to stop the sale at public auction of the fruit shipments in question, with a prayer for
preliminary injunction until the final determination of the validity of the seizure proceedings. The
said Court, however, by resolution dated August 12, 1970, dismissed the petition on the ground
of lack of jurisdiction, stating that neither the Collector of Customs nor the Commissioner of
Customs had yet rendered any decision from which an appeal could be taken pursuant to
Section 7 of Republic Act, No. 1125. Evidently anticipating such a ruling and considering the
urgency of the matter, the importers went to the Court of First Instance on a petition for
injunction, wherein the resolution reproduced in the beginning of this decision was thereafter
promulgated after hearing.
That there must be some forum to which a party may apply for relief from an alleged violation or
denial of his rights is a legal principle from which there can be no dissent. Otherwise the rule of
law would be defeated. The choice in this case was between the Court of Tax Appeals and the
Court of First Instance. Recourse to the former was sought and denied. The Tax Court held that
it could not issue the preliminary injunction prayed for except in the exercise of its appellate
jurisdiction, and no appeal had been taken since no appealable decision had been rendered.
The ruling appears to find support in the decisions of this Court, thus:
... Nowhere does the law expressly vest in the Court of Tax Appeals original jurisdiction to issue
writs of prohibition or injunction independently of, and apart from, an appealed case. The writ of
prohibition or injunction that it may issue under the provisions of section 11, Republic Act No.
1125, to suspend the collection of taxes, is merely ancillary to and in furtherance of its appellate
jurisdiction in the cases mentioned in section 7 of the Act. The power to issue the writ exists only

in cases appealed to it. This is reflected in the explanatory note of the bill (House No. 175),
creating the Court of Tax Appeal. (Coll. of Int. Rev. v. Yuseco, G.R. No. L-12518, Oct. 28, 1961.)
Respondent Court of First Instance assumed jurisdiction over the petition before it on the
ground that "the question presented for resolution (was) whether there was absence of due
process," citing our decision in Nadeco vs. Collector of Customs, G.R. No.
L-19180, Oct. 31, 1969. The said Court found: "Counsel for the respondents admitted that the
petitioners have not been heard on the seizure proceedings and the imported cargo have
already been advertised for sale and some would have been sold had not this Court issued a
restraining order." Due notice and hearing, besides being an inherent element of due process, is
provided for in Section 2303 of the Tariff and Customs Code, which requires the Collector to
give the owner or importer of the property written notice of the seizure and an opportunity to be
heard in relation to the delinquency which was the occasion for such seizure, as well as in
Section 2601, which directs that seized property, other than contraband, shall be subject to sale
after liability to sale shall have been established by proper administrative or judicial proceedings
in conformity with the provisions of said Code.
In view of the foregoing, we hold that respondent Court of First Instance had jurisdiction to take
cognizance of the petition for injunction before it. The remedy prayed for was one in equity,
which the petitioner below tried to seek in the Court of Tax Appeals, but was denied on the
ground that no appealable decision had yet been rendered by the Collector and the
Commissioner of Customs. The jurisdiction of respondent Court was not invoked to determine
the validity of the seizure proceedings, which are pending before the Collector of Customs and
regarding which an appeal could be eventually taken only to the Tax Court, but rather to stop the
projected auction sale of the goods in question and secure the release thereof under surety
bond, without prejudice to the main issue concerning the validity of the seizure. Such relief is
interlocutory in nature, and is sanctioned by Section 2301 of the Tariff and Customs Code,
which provides that "upon making any seizure the Collector shall issue a warrant for the
detention of the property; but if the owner or importer desires to secure the release of the
property for legitimate use, the Collector may surrender it upon the filing of a sufficient bond, in
an amount to be fixed by him, conditioned for payment of the appraised value of the article
and/or any fine, expenses and costs which may be adjudged in the case."
The really basic issue before us is whether or not respondent Court gravely abused its
discretion in issuing the orders complained of, particularly that dated August 26, 1970. For the
resolution of this issue we need not pass squarely upon the question of whether the
importations in question are prohibited by law within the meaning of the proviso in Section 2301
of the Tariff and Customs Code which says that such prohibited importation may not be released
under bond. That question is involved and should properly be decided in the seizure
proceedings. For purposes of the equitable remedy of injunction granted by respondent Court,
however, as well, as of the petition for certiorari and prohibition before us, it is sufficient to note,
first, that there is no clear showing that the importations subject of seizure are prohibited by law;
and second, that the Collector of Customs has in fact agreed in the beginning to release the
importations provided surety bonds were filed, although he subsequently required a cash bond
instead.
The warrants of seizure were issued in view of Central Bank Circulars Nos. 294 and 295,
promulgated on March 10 and 20, 1970, respectively, which provide that "no-dollar imports not
covered by Circular No. 247 shall not be issued any release certificates and shall be referred to
the Central Bank for official transmittal to the Bureau of Customs for appropriate seizure
proceedings."
Evidently, in the opinion of the Collector of Customs himself, even in the light of those circulars
there exists no legal impediment to the release of the subject importations under bond,
otherwise he would not have agreed thereto, although he changed his requirement from surety
bond to cash. In any case, as pointed out by private respondents, the said importations had

been ordered before Central Bank Circulars 294 and 295 were promulgated, and since the
orders were made in accordance with previous practice there could be no bad faith or intent to
violate those circulars.
The options presented in this case are few and clearcut: (1) to sell the imported fresh fruits at
public auction, as the petitioners due insist; (2) to release them to the private respondents upon
the filing of sufficient surety bonds, as respondent Court has directed; and (3) to require the
private respondents to file a cash bond instead.
We fail to see what good it would do either the Government or the private respondents to have
the fruits sold at public auction. The Government's interest, ultimately, is in the proceeds which
may be realized from such sale, in the event the fruits are declared forfeited in the seizure
proceedings. By now a considerable portion thereof must have deteriorated, and the rest will in
all probability not command the same prices as before. Besides, as pointed out by the
respondents and this has not been denied the Commissioner of Customs has been
quoted by a newspaper on September 29, 1970, to the effect that "seized items worth hundreds
of thousands of pesos could not be disposed of because of the unrealistic bids received by the
Bureau of Customs when the goods were offered for sale at public auction. ... Some of the
offers were not even enough to pay the import taxes and customs duties due on the articles." To
sell the goods at public auction, therefore, cannot but entail great loss either to the Government
or to the importers.
On the other hand the filing of sufficient bond would serve the purpose envisaged, that is,
protect the interest of the Government in the value of the imported goods should they be finally
declared forfeited, while at the same time avoiding needless damage or prejudice to the
importers should the forfeiture fail. The release on bond, it may be repeated, is expressly
authorized by Section 2301 of the Tariff and Customs Code.
But the petitioners would have the private respondents put up cash, alleging that it may be
difficult to realize upon a surety bond if it is allowed. We do not believe this reason is justified. In
the first place, a bond, when required by law, is commonly understood to mean an undertaking
that is sufficiently secured, and not cash or currency. According to the respondents this is the
established practice in the Bureau of Customs, and this statement has not been denied. Of
course whatever surety bonds are submitted by the importers are subject to any objections by
the Collector of Customs as to their sufficiency or as to the solvency of the bondsman. In the
second place, to require the private respondents here to put up cash in the sum of P513,865.46
is prohibitive and unrealistic, and amounts to an arbitrary exercise of discretion under the
circumstances of this case, assuming that the matter is discretionary.
We note, however, that the bonds offered by the respondents are all subscribed by the same
bonding company, namely, the Communications Insurance Co., Inc., which has a net worth of
only P504,655.15 and a maximum writing capacity of P50,465.52, on the basis of its financial
statement as of December 31, 1969, according to a letter of the Acting Insurance Commissioner
dated August 28, 1970. The figure given by the petitioners in their objection to the sufficiency of
the bonds before respondent court is P596,342.51 in reference to the net worth of said
company. In any case the petitioners have expressed doubts as to whether the bondsman can
satisfy a liability of P513,865.46, which is the aggregate amount of the bonds submitted. The
objection on this ground has been brushed aside by the lower court in its order of September 8,
1970, since the private respondents "have shown that the bonding company obtained
reinsurance on part of their liability for those bonds." But it appears, as manifested by said
respondents themselves, that only two of the bonds submitted by them, in the respective
amounts of P94,647.80 and P78,981.24, are covered by reinsurance, leaving more than
P340,000.00 not reinsured. In view thereof, it is incumbent upon the respondents to either
cause of sufficient portion of the other bonds submitted by it to be covered by reinsurance or to
put up other surety bonds acceptable to the Collector of Customs, the same to be justified
before respondent Court in case of dispute.

WHEREFORE, subject to the condition stated in the preceding paragraph, the writ prayed for is
denied, the petition dismissed, and the restraining order issued by this Court hereby lifted. No
pronouncement as to costs.
G.R. No. L-26473 February 29, 1972
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
PAL-FOX LUMBER CO., INC. AND FAR EASTERN SURETY & INSURANCE COMPANY,
INC., defendants, FAR EASTERN SURETY & INSURANCE CO., INC., defendant-appellant;
FAR EASTERN SURETY & INSURANCE CO., INC., third-party plaintiff-appellant, vs.
GASPAR PALANCA & JOSEPH LEE, third-party defendants.
MAKALINTAL, J.:p
Claiming that the Pal-Fox Lumber Co., Inc. was indebted to the Bureau of Internal Revenue for
forest charges and surcharges amounting to P11,851.56, and that the Far Eastern Surety &
Insurance Co., Inc. was jointly and severally liable with the lumber company for the payment of
said forest charges up to P5,000.00 on account of a forestry bond which the surety company
executed in favor of the plaintiff on November 27, 1946, guaranteeing faithful compliance by the
principal with all the provisions of the Forest Law and National Internal Revenue Code, as well
as the "prompt and complete payment of all charges lawfully accruing on the forest products cut
or gathered by (Pal-Fox Lumber Co., Inc.), and of all fines and penalties imposed in accordance
with the provisions of law," the plaintiff commenced suit before the Court of First Instance of
Manila (Civil Case No. 32386) seeking to recover, jointly and severally, from Pal-Fox Lumber
Co., Inc. and the Far Eastern Surety & Insurance Co., Inc. the sum of P5,000.00 plus interest
from the filing of the complaint, and from the Pal-Fox Lumber Co., Inc. alone the balance of
P6,841.56 plus legal interest.
The Far Eastern Surety & Insurance Co., Inc. filed its answer with a cross-claim against its codefendant Pal-Fox Lumber Co., Inc. which, due to the latter's failure to file an answer despite
valid service of summons, was subsequently declared in default. With leave of court, the surety
company later filed a third-party complaint against certain persons based on a separate
indemnity agreement wherein said third-party defendants appear to have bound themselves to
indemnify the surety company for all damages it may suffer by reason of the execution of the
forestry bond. In time, these third-party defendants were similarly declared in default.
After trial, the court a quo rendered a decision the dispositive portion of which reads: .
WHEREFORE, judgment is hereby rendered ordering defendants to pay to plaintiff, jointly and
severally, the sum of P5,000.00, with legal interest thereon from the filing of the complaint until
fully paid, and defendant Pal-Fox Lumber Co., Inc. to pay to plaintiff the further sum of
P6,841.56, with legal interest thereon from the filing of the complaint until fully paid, plus costs;
and likewise ordering cross-defendant Pal-Fox Lumber Co., Inc. and third-party defendants
Gaspar G. Palanca and Joseph Lee to pay to defendant Far Eastern Surety & Insurance Co.,
Inc., jointly and severally, any amount which the latter may pay to plaintiff under his judgment,
plus premium in the amount of P3,750.00 and stipulated attorney's fees and interest at the rate
of 15% and 12% per annum, respectively, on the total amount due, the said interest to be
compounded quarterly from November 22, 1946, until fully paid.
Unable to secure, in a motion for reconsideration, a judgment absolving it from any and all
liability under Forestry Bond No. 7004, the surety company appealed to the Court of Appeals
(CA-G.R. No. 31338-R) which Court subsequently certified the case here on a finding that the
appeal involves only questions of law, to wit: .
The first legal point which arises in connection with said exhibits is: What is the probative value
of documents which were admitted only as part of the testimony of the witness who identified
them? Do they constitute evidence of the truth of their contents or not? In other words, are they

evidence of demands for payment considering that Mr. Zalita merely testified that said exhibits
are certified copies of records and documents now in the possession of the Record Control
Section of the Bureau of Internal Revenue?
The next issue to resolve is who has the burden of proving that the claim of the plaintiff is not
yet paid?
xxx xxx xxx
In the third assigned error, appellant raises the question of prescription of action. ..." (Court of
Appeals resolution prom. on August 15, 1966 in CA-G.R. No. 31338-R, pp. 6-7).
During the pendency of this case before this Court, certain pertinent developments have come
about which practically render the resolution of appellant's assigned errors unnecessary. Thus in
a manifestation filed on February 10, 1967 the surety company expressed its willingness to pay
the sum of P5,000.00 under its forestry bond anytime "that an order is issued (by this Court)
directing the defendant surety to so pay according to this manifestation." In a resolution dated
February 22, 1967 this Court granted appellant surety company's plea, thereby allowing it to pay
the Republic of the Philippines the sum of P5,000.00, in full payment of its liability under
Forestry Bond No. 7004, and dismissing the case insofar as said appellant was concerned.
On March 27, 1967 the plaintiff moved for reconsideration, pointing out that the surety
company's correct liability under the appealed decision was P5,000.00 plus legal interest from
the filing of the complaint. In other words, the plaintiff would want the surety company to pay the
legal interest adjudged by the trial court before the case may finally be considered dismissed
insofar as appellant surety was concerned. Despite the opposition registered by the surety
company this Court resolved on May 10, 1967 "... to MODIFY the resolution of February 22,
1967 in that the appellant Far Eastern Surety and Insurance Co., Inc. is further ordered to pay
the Republic of the Philippines interest on the P5,000.00 at the rate of 6% per annum computed
from April 24, 1957 when the complaint was filed until October 3, 1966 when the appellant
offered to pay the appellee the sum of P5,000.00 in settlement of its obligation but which offer
was ignored by the appellee; PROVIDED, that in case the appellant fails or refuses to pay the
interest herein stated the case against him would not be considered dismissed, thereby leaving
the matter on the liability of said appellant to pay interest subject to future orders by this Court
along with the other matters that may be resolved in this case." .
As things stand now, the contending parties are one in conceding that the decisive issue for
determination, in view of the surety company's willingness to pay the amount of P5,000.00
under its forestry bond, is its liability for the payment of legal interest thereon. 1 The said
company's denial of liability for such interest is based on the stipulation in the bond that it was
bound to the plaintiff "in the sum of P5,000.00." .
Judgment must go to the plaintiff. In the case of National Marketing Corporation vs. Marquez, et
al., L-25553, January 31, 1969, (26 SCRA 722, 726), this Court resolved a similar question as
follows: .
On the third and last issue (on whether the surety's liability can exceed the amount of its bond),
it is enough to remark that while the guarantee was for the original amount of the debt of Gabino
Marquez, the amount of the judgment by the trial court in no way violates the rights of the
surety. The judgment on the principal was only for P10,000.00, while the remaining P9,990.91
represent the moratory interest due on account of the failure to pay the principal obligation from
and after the same had fallen due, and default had taken place. Appellant surety was fully
aware that the obligation earned interest, since the note was annexed to its contract, Exhibit
"C". The contract of guaranty executed by the appellant Company nowhere excludes this
interest, and Article 2055, paragraph 2, of the Civil Code of the Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it shall comprise not only the principal obligation but
also all its accessories, including judicial costs, provided with respect to the latter, that the
guarantor shall only be liable for those costs incurred after he has been judicially required to
pay." (Emphasis supplied)" .

WHEREFORE, the decision appealed from is affirmed, with the modification that the appellant
should pay the interest adjudged in said decision up to the date of payment of the principal sum
of P5,000.00. No pronouncement as to costs.
G.R. No. L-31789 June 29, 1972
ANTONIO R. BANZON and ROSA BALMACEDA, petitioners,
vs.
HON. FERNANDO CRUZ, Spouses PEDRO CARDENAS and LEONILA BALUYOT and
ASSOCIATED INSURANCE & SURETY COMPANY, INC. represented by INSURANCE
COMMISSIONER in her capacity as LIQUIDATOR OF ASSOCIATED INSURANCE &
SURETY COMPANY, INC., respondents.
L. T. Castillo for petitioners.
Dakila F. Castro & Associates for respondents spouses Pedro Cardenas and Leonila Baluyot.
Feliberto V. Castillo for respondent Associated Insurance & Surety Co., Inc.
Office of the Solicitor General Felix Q. Antonio, Assistant Solicitor General Dominador L. Quiroz
and Solicitor Lolita O. Galang for respondent Insurance Commissioner, etc.
TEEHANKEE, J.:p
An original action to enjoin respondent court from forcing a writ of possession and order of
demolition over one of two Caloocan City lots originally owned by petitioners- spouses pending
the outcome of their suit for reconveyance of said lots from private respondents.
Sometime in 1952, Maximo Sta. Maria obtained crop loans from the Philippine National Bank
(hereinafter referred as the bank). Respondent Associated Insurance & Surety Co., Inc.
(hereinafter referred to as Associated) acted as surety of Sta. Maria, filing surety bonds in favor
of the bank to answer for prompt repayment of the loans. Petitioner Antonio R. Banzon and
Emilio Ma. Naval in turn acted as indemnitors of Associated and were obligated to indemnify
and hold harmless Associated from any liability thus acting as surety of the loan. Sta. Maria
failed to pay his obligations to the bank, which accordingly demanded payment from Associated
as surety.
Instead of paying the bank, Associated filed a complaint dated November 19, 1956 with the
Court of First Instance of Manila 1 against debtor Sta. Maria and indemnitors Banzon and Naval,
alleging that the outstanding obligations of Sta. Maria with the bank guaranteed by it amounted
to P6,100.00, P9,346.44 and P14,811.32, or a total of P30,257.86, excluding interest. On
December 11, 1957, the said court rendered judgment ordering Sta. Maria, Banzon and Naval
"to pay jointly and severally unto plaintiff for the benefit of the Philippine National Bank" the
amounts mentioned above, with interest thereon at 12% per annum, P593.76 for premiums and
documentary stamps due, and 15% attorney's fees, "the 15% and the interest to be paid for the
benefit only of the plaintiff."
What happened thereafter is narrated in the decision of this Court rendered on November 29,
1968 in the appeal instituted by petitioner Banzon and his spouse, co- petitioner Rosa
Balmaceda, from a subsequent action of Associated in the Court of First Instance of Rizal
wherein the Rizal court ordered Banzon to surrender for cancellation his owner's duplicates of
titles to his two Caloocan City lots which had been levied upon and purchased at the execution
sale by Associated in supposed satisfaction of the Manila court's judgment, docketed as Case
L-23971 of this Court, entitled Associated Ins. & Surety Co. Inc. plaintiff-appellee vs. Antonio
Banzon and Rosa Balmaceda, defendants-appellants, 2 as follows:
As the above decision 3 became final and executory, the corresponding writ of execution was
issued and levy was made upon the properties of the judgment debtor Antonio R. Banzon
covered by Transfer Certificates of Title Nos. 39685 and 53759 issued in his name by the
Register of Deeds of Rizal. The first covered a parcel of land containing an area of 650 square
meters situated in Barrio Calaanan, Caloocan, Rizal, and the second, another parcel of 650
square meters situated in the same barrio of the same municipality. After the proceedings

required by law in connection with execution sales, the aforesaid properties were sold, the
judgment creditor, Associated Insurance and Surety Co., Inc., having been the highest bidder,
for the total sum of P41,000.00. The Sheriff of Rizal issued in its favor the corresponding
certificate of sale dated June 27, 1957, which was duly registered on June 30, 1959. As the
period of redemption expired on June 20, 1960 without the judgment debtor or any proper party
having exercised it, the judgment creditor and purchaser obtained in due time the corresponding
final certificate of sale, which was likewise duly registered.
In view of the foregoing, herein petitioner-appellee made demands upon Antonio R. Banzon to
deliver to it the owner's duplicate of Certificate of Title Nos. 39685 and 53759 mentioned
heretofore, but the latter refused to do so. As a result it filed in the Court of First Instance of
Rizal in Case No. 3885, G.L.R.O. Record No. 11267, a petition for an order directing Antonio R.
Banzon to present his owner's duplicate of Certificae of Title Nos. 89685 and 53759 to the
Register of Deeds of Rizal for cancellation, and for another order directing the Register of
Deeds of Rizal to cancel said duplicates and to issue new transfer certificates of title covering
the properties in the name of petitioner.
Banzon filed his opposition to the petition claiming mainly that (1) the decision of the Court of
First Instance of Manila in Civil Case No. 31237 was void as far as he was concerned because
he had never been summoned in connection therewith, an that (2) the levy and sale of the
properties covered by the petition were likewise void because they were conjugal properties
belonging to him and his wife, Rosa Balmaceda.
After a hearing on the motion and opposition mentioned above, the lower court, on February 7,
1961, rendered a decision whose dispositive portion is as follows:
"In view of the foregoing, judgment is hereby rendered in favor of the petitioner granting the
relief prayed for. The oppositors are hereby ordered to surrender to the Register of Deeds of
Rizal the Certificate of Title in question for cancellation and let a new one be issued in the name
of the petitioner."
In this appeal interposed by them, the Banzons seek a reversal of the above decision upon the
same grounds relied upon in their opposition filed in the lower court. 4
This Court in its decision of November 29, 1968 affirmed the decision of the trial court, relying
upon the lower court's findings on Banzon's failure to substantiate his claims which "would
amount to a deprivation of (Banzon's) property without due process of law" had he but
discharged his burden of proof, thus:
With respect to appellant's contention that Antonio R. Banzon had not been duly served with
summons in connection with Civil Case No. 31237 of the Court of First Instance of Manila, it is
enough for us to quote here the pertinent portions of the well-considered decision of the lower
court
"With respect to the first contention of oppositors, the latter in effect contends that not having
been served by summons, Antonio Banzon never became a party defendant to the aforesaid
civil case and hence not bound by any judgment rendered therein. It is erroneous on the part of
the petitioner to contend that the objection as to lack of jurisdiction on the defendant's person
has been waived for said waiver applies only when summons has been served although
defectively, such as one not served by the proper officer. If the contention of the oppositor were
true, that is, no summons was ever served upon him and that he was completely unaware of
the proceedings in the civil case aforementioned, the properties in question could not be levied
upon for that would amount to a deprivation of oppositor's property without due process of law.
"The burden, however, rests upon the oppositors to prove that there was in fact no service of
summons and this, the court believes, the oppositors have failed to substantiate with sufficient
evidence. It is a fundamental rule that the regularity of all official actions and proceedings will be
presumed until the contrary is proved. In said civil case No. 31237, the records show,
particularly the answer and the motion to dismiss, that the proceedings were conducted by
counsel in behalf of all the defendants therein including the oppositor, Antonio Banzon. The

presumption therefore, of the regularity of the proceedings as against said defendant will be
maintained including the fact that either summons was duly served or that the defendant
Banzon voluntarily appeared in court without such summons. It is therefore incumbent upon the
oppositors to rebut this presumption with competent and proper evidence such as the return
made by the sheriff who served the summons in question. This, however, the oppositors have
not met.
"Moreover, the circumstances of the case all the more bear out the strength of this presumption
when it considered that the oppositor Antonio Banzon received a notice of execution and levy of
these properties and notice of the sale of the same at public auction. Had the oppositors have
been prejudiced by being deprived of due process, they should have filed either a third party
claim upon the property levied or an injunction proceeding to prevent its sale at public auction,
nor would they have allowed the consummation of the sale and the lapse of one year within
which the redemption would have been exercised. These facts gravely militate against the
merits of the opposition, not only insofar as it strengthens the aforesaid presumption of
regularity, but also insofar as they are indicative of the fact that the properties levied upon are
not conjugal property or even if they were that the debt involved was one which redound to the
benefit of the family for which the conjugal partnership may be held liable."
Appellants' second contention namely, that the properties now in question are their conjugal
properties, is belied by the record before us which shows that Transfer Certificate of Title Nos.
39685 and 53759 were issued in the name of Antonio R. Banzon. Moreover, there is no
sufficient evidence in the record to show that the properties were acquired during appellants'
marriage.
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby affirmed, with costs.
5

It has now been exposed that notwithstanding the judgment of December 11, 1957 obtained
from the Manila court by Associated and executed by it against petitioner Banzon as indemnitor
" for the benefit of the Philippine National Bank," and which judgment it obtained and executed
on the representation to the said court that the bank was exacting payment from it as surety of
the debtor Sta. Maria's loans, and that it was therefore enforcing Banzon's undertaking as
indemnitor in turn to indemnify it, that it never discharged its liability as surety to the bank nor
ever made any payment to the bank, whether in money or property, to discharge Sta. Maria's
outstanding obligations as guaranteed by it.
As will be shown later, this suit of Associated against Banzon as indemnitor and the execution
against him of the judgment obtained in trust "for the benefit of the PhiIippine National Bank"
were absolutely premature and uncalled for, since Article 2071 of the Civil Code permits the
surety, even before having paid, to proceed only "against the principal debtor ... (4) when the
debt has become demandable, by reason of the expiration of the period for payment" and that
"the action of the guarantor is to obtain release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor and from the danger of insolvency of the
debtor."
In fact, since the bank failed to exact payment from Associated as surety of the debtor Maximo
Sta. Maria's matured obligations, the bank itself filed on February 10, 1961, its own complaint
with the Court of First Instance of Pampanga against principal debtor Maximo Sta. Maria, his six
brothers and sisters (who had executed a special power of attorney in Sta. Maria's favor to
mortgage a 16-hectare parcel of land jointly owned by all of them as security also for the bank's
loans), and Associated itself, surety, as defendants, for the collection of the outstanding
obligations due from the principal debtor, Maximo Sta. Maria.
After trial, the court ordered all the defendants jointly and severally to pay the bank the
outstanding amounts due on the crop loans to Sta. Maria, which as of that much later date,
August 20, 1963, amounted only to P6,100.00 and P9,346.44 or a total of P15,446.44, exclusive
of interests. It should be noted therefore, that the debtor Sta. Maria had been making payments

all along to the bank on account of his crop loans so much so that by 1963, the total principal
due and amount outstanding thereon amounted only to P15,446.44. This amounts to practically
one-half of the advance judgment for the total amount of P30,257.86, excluding interests,
obtained by Associated six (6) years earlier in 1957 against Banzon " for the benefit of the
Philippine National Bank" allegedly as the amount due from Sta. Maria and which Associated as
surety would have to pay the bank, and which as it turns out, Associated never paid to the bank.
These facts and figures are of record in this Court's decision of August 29, 1969, in Philippine
National Bank vs. Sta. Maria, et al.," wherein it is further recorded that "(D)efendant Maximo
Sta. Maria and his surety, defendant Associated Insurance & Surety Co., Inc. who did not resist
the action, did not appeal the judgment (sentencing all defendants jointly and severally to pay
the bank the above referred to principal amount of P15,446.44, excluding interests)."
This Court sustained the appeal taken by the debtor Maximo Sta. Maria's brothers and sisters,
and reversed the lower court's judgment against them, as follows:
... This appeal has been taken by his six brothers and sisters, defendants-appellants who
reiterate in their brief their main contention in their Answer to the complaint that under the
special power of attorney, Exh. E, they had not given their brother, Maximo, the authority to
borrow money but only to mortgage the real estate jointly owned by them; and that if they are
liable at all, their liability should not go beyond the value of the property which they had
authorized to be given as security for the loans obtained by Maximo. In their answer,
defendants-appellants had further contended that they did not benefit whatsoever from the
loans, and that the plaintiff bank's only recourse against them is to foreclose on the property
which they had authorized Maximo to mortgage.
We find the appeal of defendants-appellants, except for defendant Valeriana Sta. Maria who
had executed another special power of attorney, Exh. E-1, expressly authorizing Maximo to
borrow money on her behalf, to be well taken.
1. Plaintiff bank has not made out a cause of action against defendants-appellants (except
Valeriana), so as to hold them liable for the unpaid balances of the loans obtained by Maximo
under the chattel mortgages executed by him in his own name alone.
xxx xxx xxx
6. Finally, as to the 10% award of attorney's fees, this Court believes that considering the
resources of plaintiff bank and the fact that the principal debtor, Maximo Sta. Maria, had not
contested the suit, an award of five (5%) per cent of the balance due on the principal, exclusive
of interests, i.e., a balance of P6,100.00 on the first cause of action and a balance of P9,846.44
on the second cause of action, per the bank's statements of August 20, 1968, (Exhs. Q-1 and
BB-1 respectively) should be sufficient.
WHEREFORE, the judgment of the trial court against defendant-appellants Emeteria, Teofilo,
Quintin, Rosario and Leonila, all surnamed Sta. Maria is hereby reversed and set aside, with
costs in both instances against plaintiff. The judgment against defendant-appellant Valeriana
Sta. Maria is modified in that her liability is held to be joint and not solidary, and the award of
attorney's fees is reduced as set forth in the preceding paragraph, without costs in this instance.
The bank thus collected directly from its debtor Sta. Maria the amounts owing to it, with
Associated never having put in one centavo. Per the bank's letter dated February 20, 1970 to
Associated, it informed Associated that the amounts of its judgment credit against judgment
defendants in the aforementioned case terminated by this Court's decision of August 29, 1969,
"had already been satisfied as of February 16, 1970 by virtue of the payment made by and thru
the Provincial Sheriff of Bataan on the proceeds of the extra-judicial sale of the mortgaged
properties of defendants Sta. Marias," in view of which "we (Philippine National Bank) have now
released the Associated Insurance & Surety Co., Inc. of its joint obligation with Maximo Sta.
Maria et al. in the aforementioned case." 7
This should have put an end to the matter and Banzon's two lots therefore restored fully to his
ownership, but for certain complications involving the intervention of the other private

respondents, the spouses Pedro Cardenas and Leonila Baluyot, and Associated's own
unjustifiable actions, as shall presently be seen.
According to the Banzons' petition at bar, sometime in 1965, even before ownership over the
two parcels of land belonging to the Banzons could be consolidated in the name of Associated
(since the judgment was " for the benefit of the Philippine National Bank" and it had not
discharged its surety's liability to the bank), Associated "in clear collusion and confederation with
(respondent) Pedro Cardenas, allowed and permitted the latter to execute and levy one of the
two parcels of land (that covered by T.C.T. No. 39685-Rizal, Lot 6, Block No. 176 of subdivision
plan Psd-2896, G.L.R.O. Rec. No. 11267) for a judgment debt of P5,100.00 (of Associated in
favor of Cardenas) 8 notwithstanding that the property in question was worth P130,000.00 more
or less, and further notwithstanding the fact that said respondent (Associated) knew the
property was merely being held in trust by it for the benefit of the Philippine National Bank and
therefore, not being the legal owner thereof, it cannot validly dispose of it in any manner." 9
Respondent Cardenas being allegedly the lone bidder in the auction sale for execution of his
P5,100.00-judgment against Associated was awarded the property in full satisfaction of his
judgment, and eventually succeeded in having Banzon's title cancelled and a new one, T.C.T.
No. 8567-Caloocan City issued thereto in his name, notwithstanding that Associated's right
thereto was still sub-judice in Associated vs. Banzon, to be resolved much later yet by this
Court's decision of November 29, 1968. Associated made no move to question or challenge this
action of Cardenas, notwithstanding an order for its liquidation and dissolution issued on
December 31, 1965 by the Court of First Instance of Manila and eventually affirmed by this
Court per resolution of June 20, 1968 in G.R. No. L-38934. Nor did Associated make any effort
to resist execution on said property of Banzon's, knowing as it did that its interest in said
property was impressed with a trust character since the clear tenor and intent of the judgment
granted against Banzon nominally in its favor but expressly " for the benefit of the Philippine
National Bank" was to make the execution and operation of the judgment contingent or
conditioned upon Associated's being made or compelled to pay the bank, which contingency
never materialized.
The Cardenas spouses thereafter filed with the Court of First Instance of Rizal, Caloocan City
Branch XII, Reg. Case No. C-211 (LRC Case No. 112167) entitled "Pedro Cardenas, et al.,
petitioners vs. Antonio Banzon, et al., respondents," to secure possession from the Banzons of
the lot covered by T.C.T. No. 8567. A writ of possession was issued in said case on May 21,
1965, but the enforcement thereof was held in abeyance in view of the filing with the same court
of Civil Case No. C-531 entitled "Antonio Banzon, et al. vs. Pedro Cardenas and Leonila
Baluyot, Associated Insurance and Surety Co., Inc. and Benito Macrohon." Banzon's complaint
in Civil Case No. C-531 was, however, dismissed on August 6, 1969, on the ground that "the
matter of the legality of the transfer of ownership of the property in question from the plaintiff to
the Associated Insurance & Surety Co., Inc., has been upheld by the Supreme Court in its
decision promulgated on November 29, 1968, and consequently the transfer to the spouses
Pedro Cardenas and Leonila Baluyot must perforce be considered also as valid and legal."
Consequently, respondent Cardenas filed a motion on October 13, 1969, in Case No. C-211 for
the issuance of an alias writ of possession; this was granted on October 23, 1969. The alias writ
was served on Banzon, who refused to vacate the premises and to remove the improvements
thereon. In view of this, an order was issued on December 9, 1969, for the issuance of a writ of
demolition, but its enforcement was held in abeyance because a temporary restraining order,
later changed to a writ of preliminary injunction, was issued by the Court of Appeals on
December 13, 1969, in view of the filing by the Banzons with the said appellate court of a
petition for injunction. 10
On February 28, 1970 the Court of Appeals rendered judgment dismissing the petition because
it found the same to be allegedly "merely a device to prevent the execution of a final judgment
by the filing of a new suit based upon the same grounds which have already been interposed

and passed upon in the case where the final judgment had already been rendered ... ."
Cardenas thereafter filed a motion for the enforcement of the order of demolition and writ of
possession previously issued in Reg. Case No. C-211. On March 13, 1970, Judge Fernando A.
Cruz of the Court of First Instance of Rizal, Caloocan City Branch XII, issued an order granting
the motion. 11
On March 13, 1970, the Banzons having learned of the bank's release of Associated as of
February 20,1970, supra, accordingly filed a complaint for reconveyance and damages with the
Court of First Instance of Manila against respondents Associated and the Cardenas spouses. 12
In their complaint, the Banzons impute bad faith, collusion and confederation between
Associated and the Cardenases with regard to the latter's prematurely obtaining T.C.T. No. 8567
covering one of Banzon's lots in their name. The Banzons therein alleged for the first time their
new cause of action based on the subsequent development that the Philippine National Bank
had collected directly on February 16, 1970 from the principal debtor Sta. Maria the loan
guaranteed by Associated (which amounted only to a principal of P15,446.44 as of August,
1963, excluding interests or just one-half of the premature judgment for P30,257.88 excluding
interests obtained by Associated six (6) years earlier in 1957 against Banzon in trust and for the
benefit of the bank allegedly as the amount owed by Sta. Maria and to be discharged by
Associated, which Associated never discharged); 12a and that the bank, per its letter of February
20, 1970 had therefore absolutely released Associated of any liability on its surety undertaking.
12
b The Banzons therefore prayed for the return and reconveyance of their two parcels of land
covered by T.C.T. No. 8567 (in Cardenas' name) and No. 53759 (still in Banzon's name), in
discharge of Associated's implied trust not to unjustly enrich itself and appropriate Banzon's
properties at absolutely no cost to itself.
On March 16, 1970, the Sheriff of Caloocan City served upon the Banzons copy of the aforesaid
order giving them until March 20, 1970, within which to deliver possession of the parcel of land
covered by T.C.T. No. 8567, and to remove the improvements thereon; otherwise, the said
sheriff would proceed to enforce the same.
Petitioners Banzons therefore came to this Court on March 20, 1970, by means of the present
petition for injunction. At petitioners' instance, the Court on March 24, 1970 restrained
respondents and their representatives from enforcing the questioned writ of execution and order
of demolition, and respondent Associated from disposing in any manner of its alleged rights and
interests over the two lots in question.
Respondents Cardenas spouses filed in due course their Answer dated April 2, 1970, admitting
in effect the antecedents of the case as recited above, citing even this Court's decision of
November 29, 1968 in Associated vs. Banzon, supra, which affirmed the money judgment in
favor of Associated " for the benefit of the Philippine National Bank" 13 but alleging that
ownership to one parcel (Lot 6, Block 176 covered by T.C.T. No. 8567) "has already absolutely
and irrevocably vested in herein respondent Pedro Cardenas." 14 Said respondents further
averred that "there is no longer anything that may be restrained," since per the sheriff's return of
March 23, 1970, he enforced on said date respondent court's writ of possession and demolition
order and demolished all the improvements erected in the premises. 15
To this petitioners countered that "the special deputy sheriff of Rizal did succeed in demolishing
the building erected on that lot in question. This he did notwithstanding the fact that he has
been duly informed by petitioner Banzon of the existence of a restraining order in this case .
However, after accomplishing his purpose, he and his men left the premises." 16
Most relevant, however, was a pleading entitled "Explanation and Manifestation" dated April 25,
1970 filed by Atty. Feliberto Castillo, as former counsel for Associated "in the interest of justice
and in the name of truth and as an officer of the Court," wherein with respect to the summons
for Associated received by his law office, he manifests:
3. That he is entertaining a serious doubt whether he could still represent the Associated
Insurance & Surety Co., Inc. in view of the fact that in Civil Case No. 56995 of the Court of First

Instance of Manila, entitled "Republic of the Philippines, represented by the Insurance

Commissioner vs. Associated Insurance Surety Co., Inc." the said Court of First Instance of
Manila ordered the liquidation and dissolution of this surety company, which was appealed to
the Court of Appeals, CA-G. R. No. 37985-R but affirmed the decision of the Court of First
Instance of Manila in a decision promulgated on January 3, 1968, which was appealed again by
the Associated Insurance & Surety Co., Inc to the Honorable Tribunal, G.R. No. L-29834, also
affirming the decision of the Court of Appeals by denying the petition for writ of certiorari in its
resolution of June 20, 1968, and therefore, since then, the decision of the Court of First Instance
of Manila ordering the liquidation and dissolution of the Associate Insurance & Surety Co., Inc.
became final and executory, an thereafter, the Insurance Commissioner demanded the
surrender of books, documents and other papers of this surety company, an as a matter of fact,
books, documents and other papers salvaged were already surrendered to the Insurance
Commissioner for liquidation of this company, so that by virtue thereof, the Insurance
Commissioner being the liquidator appointed by the court to liquidate the Associated Insurance
& Surety Co., Inc., is now the legal representative of this surety company to whom a copy of this
paper will be furnished." 17
In his "Explanation and Manifestation," Atty. Castillo further states that his law office was the
counsel for Associated in the cases involved in these proceedings, viz., Civil Case No. 31237 of
the Court of First Instance of Manila, Case No. 3885, G.L.R.O. Record No. 11267 of the Court of
First Instance of Rizal, for consolidation in Associated's favor of T.C.T. No. 29685-Rizal and
T.C.T. No. 53759-Rizal, and in G.R. No. L-23971 of the Supreme Court, Associated vs. Banzon,
supra, affirming on November 29, 1968 the Rizal court's judgment for consolidation; and
That since Associated was ordered liquidated and dissolved by the Manila court of first
instance in Civil Case No. 56995, as affirmed by the Court of Appeals in CA-G.R. No. 37985-R,
which became final upon this Court's denial of review per its resolution of June 20, 1968 in G.R.
No. L-28934, the Insurance Commissioner as the appointed liquidator of Associated is the legal
representative thereof who may duly act for Associated and upon whom summons should be
served;
That even before the promulgation of the Supreme Court decision on November 29, 1968 in
Associated vs. Banzon he, as counsel for Associated, never attempted to secure new titles for
his said client, considering that its ownership over the parcel of land covered by them was then
"still sub judice;"
That even after the promulgation of the said Supreme Court decision, he never attempted to
secure new titles for his client, because by that time Associated had already been ordered
dissolved and liquidated, hence, to be represented in all instances by the Insurance
Commissioner as liquidator;
That he wonders how respondent Pedro Cardenas was able to secure T.C.T. No. 8567
(formerly T.C.T. No. 39685-Rizal) in his name in 1965, when Associated, which really owed
Cardenas a certain sum, could only secure new titles over the parcels of land after not before
November 29, 1968, when the Supreme Court's decision in G.R. No. L-23971 was
promulgated; and that in his opinion, the issuance to respondent Cardenas of T.C.T. No. 8567
was "fraudulent and irregular for being without basis when the same was issued, so that the
register of deeds of Caloocan City committed some sort of mistakes or negligence in issuing
this title to respondent Pedro Cardenas, and as such, this T.C.T. No. 8567 is null and void and
without force and effect and calls for an investigation of the guilty parties responsible for the
issuance of this T.C.T. No. 8567 in the name of respondent Pedro Cardenas, who might have
committed some falsifications;" (for indeed how could Cardenas cause title to said lot to be
transferred to Associated for him in turn levy against it for his P5,100.00 judgment against
Associated when Associated's case against Banzon for such transfer and consolidation of title
was then still pending appeal before this Court, and Associated's judgment against Banzon was
one of trust, expressly therein declared to be "for the benefit of the Philippine National Bank?") 18

and
That "anybody who will attempt to offer the said parcel of land for sale would be committing a
crime as the position of the same belongs exclusively to the Insurance Commissioner who is the
liquidator of the Associated Instance & Security Co., Inc.; consequently, the petitioner should not
entertain any worry as said parcel of land is not being disposed of not only because the power
to sell the same exclusively belongs to the Insurance Commissioner but also because the
Associated Insurance & Surety Co., has no titles yet over these parcels of land as it did not
attempt to secure any even before and after the promulgation of the decision of the Honorable
Tribunal in G.R. No. 23971 in view of the circumstances earlier explained."
On May 11, 1970, we issued summons on the Insurance Commissioner as liquidator of
Associated to answer the petition. In her answer filed on May 29, 1970, the Acting Insurance
Commissioner through the Solicitor General disclaimed knowledge of practically all the
allegations of the petition for lack of knowledge or information sufficient to form a belief as to
their truth, manifesting that she first learned of the material facts averred in the petition when
she received copy of Atty. Castillo's "Explanation and Manifestation", because the records and
documents pertinent to this case were not among those surrendered to her, and affirming she is
the liquidator of Associated by virtue of the Manila court's order dated December 31, 1965 of
liquidation and dissolution of said corporation, as follows:
3. That the herein Acting Insurance Commissioner is liquidator of Associated Insurance & Surety
Co., Inc. by virtue of an order of liquidation and dissolution of said corporation dated December
31, 1965, by the Court of First Instance of Manila in Civil Case No. 56995, which decision was
affirmed on appeal by the Court of Appeals in its decision (CA-G.R. No. 37895) dated January
3, 1968, which decision was again affirmed on appeal by this Honorable Tribunal when it denied
the petition for a writ of certiorari in its Resolution of June 20, 1968 (G.R. No. L-38934) and
which on July 9, 1968, became final and executory;
4. That by virtue of the aforesaid decision, the Insurance Commissioner as liquidator of
Associated Insurance & Surety Co., Inc., is vested by authority of law with the title to all of the
property, contracts, and rights of action of said corporation as of the date of the order of
liquidation (Sec. 175-C, par. 3 of the Insurance Act, as amended);
5. That any subsequent sale or disposition of the property of said corporation without the
knowledge and consent of the herein Acting Insurance Commissioner and approval but the
Liquidation Court is contrary to law and null and void;
6. That after the aforesaid order of liquidation and dissolution became final and executory, the
Acting Insurance Commissioner demanded for the surrender of all the books, documents and
properties of Associated Insurance & Surety Co., Inc. However, the records and documents
pertinent to the above-entitled case were not among those surrendered to the Insurance
Commissioner and it was only upon receipt of the "Explanation and Manifestation" of Atty.
Feliberto Castillo, dated April 25, 1970, and the present "Petition" that she came to know for the
first time of the alleged facts averred in this case." 19
A "Motion to Dissolve Temporary Restraining Order and to Dismiss Petition" was filed on
February 12, 1971, by respondents spouses Cardenas and Baluyot. They contend that the
restraining order issued by this Court should be dissolved, and the petition itself, insofar as they
are concerned, be dismissed, because the petition is predicated on petitioners' complaint for
reconveyance and damages in Civil Case No. 79244 before Branch VIII of the Court of First
Instance of Manila, and the said court issued an order on October 28, 1970, dismissing the said
complaint with respect to defendants therein Cardenas and Baluyot, which dismissal was not
appealed and became final and executory on January 5, 1971, per entry of judgment attached
to the motion. Consequently, according to these respondents, the temporary restraining order
issued by this Court enjoining the enforcement of the writ of execution and the order of
demolition in Reg. Case No. C-211 of the Court of First Instance of Rizal, has become
inoperative and without any legal basis, the present petition has lost its legal basis, and

petitioners have no more cause of action against respondents Cardenas and Baluyot. The said
order of dismissal of the complaint against these respondents was issued pursuant to Section 5,
Rule 16 of the Rules of Court, after a preliminary hearing on the affirmative defenses of bar by
prior judgment and lack of cause of action set up by said respondents in their answer, with the
lower court opinion that petitioners' action was already barred by the prior judgments of this
Court of November 29, 1968 in Associated vs. Banzon and of the Court of Appeals of February
28, 1970 in Banzon vs. Hon. Fernando Cruz, supra. 20
The Solicitor General filed on March 29, 1971 on behalf of the Insurance Commissioner as
liquidator of Associated a strong opposition to the motion to dissolve the restraining order and
dismiss the petition. 21 The commissioner-liquidator after complaining that "she is still
demanding for the surrender of all the books, documents and properties of Associated" and that
"it was only upon receipt on March 11, 1971 of the voluminous records of the cases handled by
counsel Feliberto V. Castillo for (Associated) that (her) undersigned counsel have verified and
confirmed the truth of the status of the different cases," contends inter alia as follows:
18. That, however, during the pendency of the aforesaid appeal of petitioner Antonio R. Banzon
with this Honorable Tribunal and while the case was still sub-judice, particularly on February 8,
1964, the herein respondent Pedro Cardenas as winning party in a case entitled "Pedro
Cardenas vs. Victoria Vda. de Tengco and Pablo Tuazon," Civil Case No. 36174, Court of First
Instance of Manila, and where the Associated Insurance and Surety Co., Inc. was surety for the
defendants therein, executed and levied upon one of the parcels of lands involved in the
aforesaid appeal. Ultimately, Pedro Cardenas was able to acquire the land in question (Lot No.
6, Block No. 176, then covered by T.C.T. No. 39685) as highest bidder, for the judgment debt of
defendants in said action, plus incidental expenses for the sum of P5,100.00 only;
19. That subsequently thereafter, said respondents Cardenas, thru some scheme and devise,
succeeded in having the title of said parcel of land transferred in their names under T.C.T. No.
8567, Registry of Deeds of Caloocan City, on May 5, 1965, at a time when the Associated
Insurance & Surety Co., Inc. had not yet earned the authority to consolidate in its name said
property, as the case was then pending with this Honorable Tribunal. As alleged in paragraph 18
hereof, the question of consolidation was resolved by this Honorable Tribunal on February 28,
1968; 21a
20. That by the nature of the decision in Civil Case No. 31237, CFI, Manila, as alleged in
paragraph 15 hereof, the property or sums of money recovered from defendants therein shall
be reserved for the benefit of the Philippine National Bank for the purpose of paying the
principal debtor's (Maximo Sta. Maria's) obligation therein, and consequently, the Associated
Insurance & Surety Co., Inc. shall hold the property in question or the sums recovered in said
action, in trust and for the purpose of paying the aforesaid obligation of Maximo Sta. Maria. 22
21. That the Associated Insurance & Surety Co., Inc. failed to pay from its own funds under its
surety undertaking, nor from funds realized from the property levied upon by virtue of the
decision in Civil Case No. 31237, CFI, Manila, but on the other hand, the principal debtor Sta.
Maria paid his own obligation the Philippine National Bank thus, releasing it (Associated
Insurance & Surety Co., Inc.) from its obligation under the suretyship undertaking with respect
to said obligation of Maximo Sta. Maria, and similarly herein petitioner Antonio R. Banzon was
released from this obligation as co-indemnitor in said undertaking;
22. That in fairness to petitioners Antonio R. Banzon and Rosa Balmaceda, the two parcels of
land executed and levied upon by virtue of the decision in Civil Case No. 31237, Court of First
Instance of Manila, deserve to be reconveyed to them;
23. That one of the lots involved, namely, Lot No. 6, Block No. 176 covered by T.C.T. No. 8567,
Registry of Deeds of Caloocan City, in the names of the present respondents Pedro Cardenas
and Leonila Baluyot, being one of the two parcels of lands levied upon in Civil Case No. 31237
but transferred to respondents under dubious circumstances and patently unauthorized by law,
should be ordered reconveyed to the Associated Insurance Co., Inc. through the Insurance

Commissioner for the purpose stated in the next preceding paragraph, as the transaction on the
transfer of said parcel of land to them is null and void from the very beginning." 23
Petitioners likewise oppose the motion of the Cardenases. They contend that the present
petition is not solely predicated on their complaint for reconveyance and damages in Civil Case
No. 79244 for, as admitted by the Insurance Commissioner, they are entitled to the
reconveyance of the lot covered by T.C.T. No. 8567 and for contribution or indemnification for
damages which they may recover from Associated; that respondents Cardenases secured said
title fraudulently and irregularly without any legal basis, hence, said title having been
anomalously issued, is null and void and without force and effect, and, that, as stated by
Insurance Commissioner-liquidator, in fairness and justice to petitioners, the two parcels of land
levied in favor of Associated by virtue of the decision on Civil Case No. 31237 should be
reconveyed to them; and that to dissolve the temporary restraining order and to dismiss the
present petition would leave petitioners without a legal remedy.
In a minute resolution dated April 19, 1971, the Court denied the said motion of respondents
Cardenas and Baluyot "to dissolve temporary restraining order and to dismiss petition."
1. The immediate objectives of this petition are: (a) to enjoin respondent Judge Fernando Cruz
of the Court First Instance of Rizal, Caloocan City Branch, and respondents Pedro Cardenas
and Leonila Baluyot, and their representatives, from enforcing the writ of execution and of
demolition issued by said respondent Judge in Reg. Case No. C-211 in relation to the lot
covered by T.C.T. No 8567; and (b) to enjoin respondent Associated from disposing its alleged
rights and interests in the two lots covered by T.C.T. No. 8567 and T.C.T. No. 53759, the
injunction in both cases to be made effective during the pendency of the reconveyance case,
Civil Case No. 79244, filed by petitioners as plaintiffs before the Manila court of first instance.
The real and substantive objectives of the petition are to seek the rightful restoration and
reconveyance to petitioners Banzons of their two Caloocan city lots, covered by T.C.T. No.
53759 (still in Banzon's name, but on the back whereof is annotated the sheriff's final deed of
sale in favor of Associated) and by T.C.T. No. 8567 (in the name of respondents Cardenases) on
the fundamental ground that Associated's levy in execution of said lots was in trust for the
benefit of the Philippine National Bank for the purpose of paying the bank the loan obligation of
Maximo Sta. Maria which Associated had guaranteed as surety and against which liability
Banzon in turn as indemnitor had undertaken to indemnify and hold harmless Associated.
Now, the basic 1957 judgment of the Manila court sentencing Banzon to pay Associated a total
of P30,257.86 excluding interest, " for the benefit of the Philippine National Bank" expressly
made of record the said court's intent and disposition that the execution and operation of its
judgment against Banzon were contingent and conditioned upon Associated as plaintiff-surety
actually paying or being made or compelled to pay the bank-creditor an equivalent amount as
guaranteed by it. That this is so is made more evident when we consider the provisions of
Article 2071 of the Civil Code which permit the surety to file such an advance suit against the
principal debtor (not against an indemnitor such as Banzon) only to obtain release from the
guaranty or security against the danger of the debtor's insolvency. Where the debtor directly
discharged his loan obligation to the bank which in turn released Associated from its suretyship
liability without Associated having incurred a centavo of liability, it is indisputable that Associated
in turn would necessarily release Banzon as indemnitor and the basic 1957 judgment would be
inoperable and unenforceable against Banzon.
When Associated nevertheless prematurely and contary to the intent and condition of the basic
1957 judgment levied in execution on the two Caloocan City lots of Banzon the interest it
acquired was clearly impressed with a trust character. Such acquisition of Banzon's properties
by Associated was effected, if not through fraud 23a on Associated's part, certainly through
mistake 23b and there Associated was "by force of law, considered a trustee of implied trust for
the benefit of the person from whom the property comes" by virtue of Article 1456 of the Code
23
c since Associated not having paid nor having been compelled to pay the bank had no right

in law or equity to so execute the judgment against Banzon as indemnitor. Had there been no
fraudulent concealment or suppression of the fact of such non-payment by Associated or a
mistaken notion just assumed without factual basis that Associted had paid the bank and was
thus entitled to enforce its judgement against Banzon as indemnitor, the writ for execution of the
judgment against Banzon's properties would not been issued. 23d
Furthermore, Associated's conduct, upon being sued by the Philippine National Bank directly
with the principal debtor Sta. Maria for collection of the debt 23e and sentenced by the
Pampanga court of first instance in 1963 (which it did not appeal) to pay the debt in the much
lesser amount of only P15,446.44, excluding interests, in not so discharging its liability
notwithstanding that it had already executed its 1957 judgment against Banzon as indemnitor
and taken in execution Banzon's two properties, was indeed rank fraud. Associated therefore
stands legally bound by force of law to now discharge its implied trust and return Banzon's
properties to him as their true and rightful owner.
The obligation imposed upon Associated as implied trustee to so restore Banzon's properties
becomes even more compelling when it is considered that in the premature execution sale by
virtue of the basic 1957 judgment, Associated ostensibly was the highest bidder therefor
applying its purported judgment credit of P41,000.00 when in law such judgment was not
subject to execution since the condition of Associated as surety being made to pay the bank to
make the judgment operable and enforceable had not materialized and in fact Associated not
having paid anything to the bank did not possess such purported judgment credit of P41,000.00,
nor did it put out a single centavo for which it could hold Banzon answerable and therefore take
Banzon's properties in execution and satisfaction thereof. Actually, as already indicated above,
the principal debt of the bank's debtor, when directly collected by the bank six (6) years later,
amounted merely to 1/2 the amount or P15,446.44 as of August, 1963, excluding interests. 23f
As already stated above, Associated did not pay even this much lesser amount, notwithstanding
the Pampanga court's judgment against it in the suit directly filed by the bank.
Finally, it would be an outrage on simple justice and iniquitous unjust enrichment if a surety such
as Associated, after taking title in execution to the indemnitor's properties in order to protect or
reimburse itself from liability to the creditor for the debt guaranteed by it, were to be allowed to
retain ownership of the properties even though it did not incur or discharge its liability at all,
since it succeeded in evading payment to the creditor who thereafter collect the debt directly
from the debtor. Thus, the law (Article 1456, Civil Code) impresses properties thus acquired with
trust character and constitutes the erring surety as "trustee of an implied trust for the benefit of
the person from who the property comes," in this case, Banzon as the true and rightful owner of
the properties.
2. As Cardenas in levying in turn for satisfaction of his P5,100.00 judgment against Associated
on one of Banzon's lots acquired only whatever interest Associated had in the lot, and with the
knowledge that Associated's basic 1957 judgment against Banzon was "for the benefit of the
Philippine National Bank" and hence Associated's interest in the Banzon properties was
impressed with a trust character, subject to the obligation of Associated as implied trustee to
return the properties to Banzon, the trust character of the lot titled by Cardenas necessarily
passed to him. Cardenas could not claim actual or absolute ownership of the lot so titled but
could only hold the same as trustee, like Associated as his causante or predecessor.
The respondents Cardenases' pleadings of record should clearly that they were fully aware of
these vital antecedents and premises of the suits between Associated and the Banzons. In their
memorandum, they cite the Manila court of first instance's basic decision in Civil Case No.
31237 "condemning defendants to pay jointly and severally upon (sic) plaintiff (Associated) but
for the benefit of the Philippine National Bank" 24 the several amounts sought by Associated, as
surety, totalling P30,257.86. As far as their own claim against Associated is concerned, they
likewise recite in their memorandum that:
On April 29, 1959, then Judge (now Justice) Jesus Perez of the Court of First Instance of Manila

rendered a decision in Civil Case No. 36194, entitled "Pedro Cardenas vs. Victoria Vda. de
Tengco, et al." ordering the defendants, including Associated Insurance & Surety Co., Inc., as
surety, to pay certain sums of money to Pedro Cardenas. The liability of the Associated
Insurance & Surety Co., Inc., was affirmed by the Court of Appeals in a Decision promulgated
on October 30, 1963, in CA-G.R. No. 25227-R. Consequently, pursuant to a Writ of Execution
issued on February 8, 1964, the City Sheriff of Caloocan sold on March 23, 1964 at a public
auction to Pedro Cardenas, the highest and only bidder, all the "rights, interests, claims and
title" of the judgment-debtor Associated Insurance & Surety Co. Inc., over the property plus the
improvements thereon covered by Transfer Certificate of Title No. 39685 (one on the properties
acquired from Antonio Banzon). The property not having been redeemed within the one year
period, a Deed of Absolute Sale was issued in favor of Pedro Cardenas on April 2, 1965. On
April 23, 1965, Pedro Cardenas filed a petition with the Court of First Instance of Rizal, Branch
XII, Caloocan City, in Registration Case No. C-211 (LRC Rec. No. 11267), entitled "Pedro
Cardenas, Petitioner," for the issuance of a new transfer certificate of title over the property in
question and to declare null and void the one previously issued. On May 5, 1965, a Transfer
Certificate of Title was issued by the Register of Deeds of Caloocan City in the name of Pedro
Cardenas pursuant to the order of the court in aforecited Registration Case No. C-211, dated
May 3, 1965, as amended. 25
It is obvious that since what Cardenas acquired in his execution for his P5,100.00 judgment
against Associated was only "all the rights, interests, claims and title of the judgment-debtor
(Associated) over the property ... (one of the properties acquired from Antonio Banzon)" and
Associated's rights, if they could be so denominated, over Banzon's properties were merely
those of a trustee, supra, and Cardenas thereby acquired no absolute "rights, interests, claim
and title" at all but Associated's obligation as trustee to restore Banzon's lawful properties to
him.
3. As a point of law, even though under Associated's suretyship agreement guaranteeing Sta.
Maria's crop loans with the bank, it was permitted, supposedly for its protection, to proceed
judicially against the principal debtor and indemnitors even prior to the surety's making payment
to the creditor bank, Article 2071 of the Civil Code regulates such relations and provides that in
such cases, the surety's right is against the principal debtor and that "in all these cases, the
action of the guarantor is to obtain release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from the danger of insolvency of the
debtor."
Associated thus did not even have any valid cause of action against Banzon as its indemnitor,
but could proceed only against Sta. Maria as the principal debtor. And even as against such
principal debtor, it could not prematurely demand payment even before it had paid the creditor,
its action being limited only for the purpose of obtaining release from the guaranty or a security
against an eventual insolvency of the debtor. As was emphasized by Mr. Justice Reyes for the
Court in General Indemnity Co., Inc. vs. Alvarez, 26 while a guarantor may under Article 2071 of
the Civil Code proceed against the principal debtor, even before having paid, when the debt has
become demandable, "(T)he last paragraph of this same article, however, provides that in such
instance, the only action the guarantor can file against the debtor is 'to obtain release from the
guaranty, or to demand a security that shall protect him from any proceeding by the creditor and
from the danger of insolvency of the debtor.' An action by the guarantor against the principal
debtor for payment, before the former has paid the creditor, is premature."
4. The realization of the Banzon's rightful objectives in law and equity as thus restated has
somewhat been hampered and beclouded by the ineptitude and sorry neglect with which they
and/or their counsel have pursued their remedies in the various suits brought by them. To cite
the latest instance, the pending suit filed by them in the Manila court of first instance, Civil Case
No. 79244, is from the record the first real case that they have properly filed for reconveyance of
their two Caloocan City lots based on their new cause of action that with the debtor's direct

payment to the bank, Associated had been released as surety and Banzon consequently
likewise released as Associated's indemnitor, and therefore Associated in discharge of the
implied trust under which it executed the basic 1957 judgment " for the benefit of the Philippine
National Bank" against Banzon was now called upon to discharge such trust and reconvey and
restore Banzon's properties to him.
Yet Banzon filed no appeal from the Manila Court's dismissal of his complaint against the
Cardenas spouses for reconveyance of the lot wrongfully titled by the latter on the lower court's
mistaken concept that this Court's decision of November 29, 1968 in Associated vs. Banzon,
supra, constituted res judicata and apparently allowed such dismissal to become final. In reality,
since Associated never had to pay the bank, Banzon's two lots, which had been levied upon
prematurely under Associated's judgment against Banzon and were therefore held by it in
implied trust for Banzon by force of law, "deserve to be reconveyed to them" in the very
words of the insurance commissioner, who alone and officially represents and acts for
Associated as liquidator.
As manifested by Associated's former counsel even when Associated was acting on its own
unauthorizedly and in violation of law, since an order for its liquidation and dissolution had
already been issued by the Manila court since December 31, 1965, he, as Associated's counsel,
never attempted to transfer Banzon's titles to Associated since the question was sub-judice
before this Court and resolved only per its decision in Associated vs. Banzon of November 29,
1968, as of which time, this Court had already previously affirmed on June 20,1968 in G.R. No.
L-28934, the Manila court's dissolution and liquidation order against Associated thus removing
all doubt that only the Insurance Commissioner as liquidator could act in any and all matters for
Associated. 27
5. Under Sec. 175-C, paragraph 3 of the Insurance Act as amended, 28 the Insurance
Commissioner as liquidator of Associated was vested by authority of law with the title to all of
the property, contracts and rights of action of Associated as of the date of the judicial order of
liquidation, and any sale or disposition of Associated's properties or rights without the
knowledge and consent of the insurance commissioner as liquidator and without the approval
by the liquidation court is contrary to law and null and void.
Accordingly, petitioners Banzons are, as against their and their counsel's neglect and
inattention, nevertheless saved from the otherwise fatal consequences of the invoked final
dismissal of their complaint against the Cardenases in Civil Case No. 79244 of the Manila court
for recovery of the lot wrongfully titled in the Cardenases' name per T.C.T. No. 8567. Since in all
the litigations subsequent to Associated's prematurely obtaining in the Manila court of first
instance in Civil Case 31237 the basic 1957 judgment as surety against Banzon as a mere
indemnitor to cover the principal debtor Sta. Maria's demandable loans to the bank and
thereafter levying in execution on Banzon's two Caloocan City lots, notwithstanding that such
judgment was expressly held to be in trust and for the benefit of the bank, the insurance
commissioner, as liquidator of Associated and therefore an indispensable party was never
impleaded and therefore there could be no final determination of said actions. Under Rule 3,
section 7, indispensable parties must always be joined either as plaintiffs or defendants, for the
court cannot proceed without them, and hence all judgments and proceedings held after the
liquidation and dissolution order against Associated became void for lack of an indispensable
party in the person of the insurance commissioner-liquidator. The insurance commissioner as
liquidator of Associated by authority of law was indisputably an indispensable party with such an
interest in the controversies affecting the judgment for Associated (against Banzon) and against
Associated (in favor of Cardenas) that a final decree would necessarily affect its rights
(administered by the Commissioner in the public interest and for the public's protection) so that
the courts could not proceed therein without the commissioner-liquidator's official presence.
6. The wrongful dismissal by the Manila court of the Banzons' reconveyance suit, Civil Case No.
79244, as against the Cardenases thus does not produce what would otherwise have been fatal

consequences due to the Banzons' failure to appeal from such dismissal.

Their reconveyance case as against Associated as principal defendant remains pending in
court. And the insurance commissioner as liquidator of Associated, now that she is fully aware
of the status of these antecedent cases after she finally received on March 11, 1971 the
voluminous records thereof which had hitherto not been surrendered to her office despite
demands therefor, is called upon to appear for Associated in the said case, if she has not as yet
been duly impleaded as such liquidator. With the insurance commissioner, as liquidator of
Associated and an indispensable party now in the case, the said reconveyance suit may now
proceed anew and the Cardenas spouses caused by the liquidator to be duly impleaded anew
for they are also indispensable parties insofar as the insurance commissioner-liquidator's claim
on behalf of Associated to the lot covered by T.C.T. No. 8567 issued in their name is concerned.
Herein petitioners seek principally in the said case the reconveyance to them by Associated of
their two parcels of land covered by T.C.T. No. 8567 and T.C.T. No. 53759, as acquired in
execution by Associated, and thereafter, with respect to the lot covered by T.C.T. No. 8567, by
the Cardenases, by virtue of the trust character impressed upon them and Associated's duty as
implied trustee to restore said properties to the Banzons.
Considering that the insurance commissioner herself , who now legally can alone represent
Associated as liquidator, has herein recognized such trust character and has expressed the
belief that the said lot, no less than the other lot covered by T.C.T. No. 8567, should, in justice to
petitioners, be reconveyed to them on account, among others, of petitioner Banzon's release
from his obligation as indemnitor by virtue of the principal debtor's subsequent payment of his
obligation with the Philippine National Bank which likewise released Associated from any liability
as surety, the present petition should therefore be granted in the interest of justice and equity so
as to enable the insurance commissioner-liquidator in due course to discharge the trust of
reconveying Banzons' properties to them.
7. The circumstances that respondents Cardenases, insofar as the lot wrongfully claimed by
them, caused the Caloocan City special deputy sheriff to enforce on March 23, 1970 respondent
court's challenged order of demolition and writ of possession on the very day that this Court
ordered the issuance of a restraining order against the enforcement of said challenged order
and writ, and notwithstanding that said sheriff was duly advised by Banzon of the petition at bar
having been filed on March 20, 1970, does not make the restraining order in any manner moot.
The Court does not look with favor upon parties "racing to beat an injunction or restraining
order" which they have reason to believe might be forthcoming from the Court by virtue of the
filing and pendency of the appropriate petition therefor. Where the restraining order or
preliminary injunction are found to have been properly issued, as in the case at bar, mandatory
writs shall be issued by the Court to restore matters to the status quo ante. 29
In the case at bar, with the insurance commissioner as liquidator of Associated, recognizing
through the Solicitor General that the Banzons' two lots wrongfully taken from them by
Associated's premature actions should be reconveyed to them, there is established a clear and
indubitable showing on the record that the petitioners are entitled to a writ restoring the status
quo ante. A mandatory writ shall therefore issue commanding respondent court to forthwith
restore petitioners to their possession of Lot 6, Block 176, covered by T.C.T. 8567 from which
they have been removed by enforcement of said respondent court's enjoined order of demolition
and writ of possession dated March 13, 1970, Annex "F" of the petition. As to petitioners'
building thereon claimed to be worth P10,000.00 (but countered by Cardenas to be a "mere
barong-barong" 30), respondent court shall at Banzon's petition cause respondents Cardenases
to restore the demolished building or pay Banzon the determined value thereof. As to the fruits
of possession of the land, with Cardenas acknowledging that he has been leasing the same to a
third person at P200.00 a month, 31 respondents Cardenases shall forthwith pay to petitioners
Banzons the whole amount of rentals so received by them to the time that possession of the lot
is effectively restored to petitioners. By the very nature of this mandatory writ, the same shall be

immediately executory upon promulgation of this decision.

WHEREFORE, the petition for a permanent injunction, during the pendency of Civil Case No.
79244 of the Court of First Instance of Manila against the disposition in any manner of the two
parcels of land subject of said case other than their reconveyance to petitioners as the true and
rightful owners thereof as expressly recognized by the insurance commissioner as liquidator of
Associated is hereby granted. In lieu of the permanent injunction against enforcement of
respondent court's order dated March 13, 1970 in Case No. C-211 thereof ordering the delivery
of possession of the property covered by T.C.T. No. 8567 to respondents Cardenases and
demolition of petitioners Banzons' improvements thereon, (which were prematurely carried out
by respondent court's sheriff on March 23, 1970) a writ of mandatory injunction commanding
respondent court to forthwith restore the status ante quo and to restore petitioners Banzons to
full possession of the property and enjoyment of the fruits and rentals thereof under the terms
and conditions stated in the next preceding paragraph is hereby issued, which shall be
immediately executory upon promulgation of this decision. With costs against respondents
Pedro Cardenas and Leonila Baluyot.
This decision is without prejudice to such civil and criminal liability as the officers of the defunct
Associated Insurance & Surety Co., Inc. may have incurred by virtue of their acts of commission
and omission which have resuited in grave prejudice and damage to petitioners as well as to the
public interest, as in the suppression from and non-surrender to the Insurance Commissioner as
liquidator of the records of the relevant antecedent cases, and in the possible misrepresentation
to the courts therein that Associated had duly discharged to the bank its liability as surety and
could therefore lawfully levy on the properties of Banzon as indemnitor, which would have
resulted in the respondents' unjust enrichment at Banzon's expense. The insurance
commissioner is directed to conduct the corresponding investigation for the purpose of filing
such criminal and other appropriate actions as may be warranted against the responsible
parties. So ordered.
G.R. No. 103066 April 25, 1996
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents.
MENDOZA, J.:p
This is a petition for review on certiorari of the decision 1 of the Court of Appeals in C.A.-G.R. CV
No. 19094, affirming the decision of the Regional Trial Court of the National Capital Judicial
Region, Branch XLV, Manila, which ordered petitioner Willex Plastic Industries Corporation and
the Inter-Resin Industrial Corporation, jointly and severally, to pay private respondent
International Corporate Bank certain sums of money, and the appellate court's resolution of
October 17, 1989 denying petitioner's motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila
Banking Corporation. To secure payment of the credit accomodation, Inter-Resin Industrial and
the Investment and Underwriting Corporation of the Philippines (IUCP) executed two
documents, both entitled "Continuing Surety Agreement" and dated December 1, 1978, whereby
they bound themselves solidarily to pay Manilabank "obligations of every kind, on which the
[Inter-Resin Industrial] may now be indebted or hereafter become indebted to the [Manilabank]."
The two agreements (Exhs. J and K) are the same in all respects, except as to the limit of
liability of the surety, the first surety agreement being limited to US$333,830.00, while the
second one is limited to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a
"Continuing Guaranty" in favor of IUCP whereby "For and in consideration of the sum or sums

obtained and/or to be obtained by Inter-Resin Industrial Corporation" from IUCP, Inter-Resin

Industrial and Willex Plastic jointly and severally guaranteed "the prompt and punctual payment
at maturity of the NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate principal
sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests, charges
and penalties as hereafter may be specified."
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrial's outstanding obligation. (Exh. M-1) On
February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded IUCP,
demanded from Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had paid
to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court below
against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded Atrium,
the sum of P687,600.00 representing the proceeds of its fire insurance policy for the destruction
of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was intended to
secure payment to Atrium of the amount of P4,334,280.61 which the latter had paid to
Manilabank. It claimed, however, that it had already fully paid its obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the complaint and
interposed the following Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to plaintiff, the former's liability is
extinguished due to the accidental fire that destroyed its premises, which liability is covered by
sufficient insurance assigned to plaintiff;
(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account is now
very much lesser than those stated in the complaint because of some payments made by the
former;
(c) The complaint states no cause of action against WILLEX;
(d) WLLLEX is only a guarantor of the principal obliger, and thus, its liability is only secondary to
that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the principal
obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then proceeded
to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the right to
present evidence for its failure to appear at the hearing despite due notice. On the other hand,
Willex Plastic rested its case without presenting any evidence. Thereafter Interbank and Willex
Plastic submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and Willex
Plastic jointly and severally to pay to Interbank the following amounts:
(a) P3, 646,780.61, representing their indebtedness to the plaintiff, with interest of 17% per
annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the plaintiff, until
full payment of the said amount;
(b) Liquidated damages equivalent to 178 of the amount due; and
(c) Attorney's fees and expenses of litigation equivalent to 208 of the total amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic filed its
brief, while Inter-Resin Industrial presented a "Motion to Conduct Hearing and to Receive
Evidence to Resolve Factual Issues and to Defer Filing of the Appellant's Brief." After its motion
was denied, Inter-Resin Industrial did not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling of the trial
court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to present evidence to

show that Inter-Resin Industrial had already paid its obligation to Interbank, but its motion was
denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin Industrial's
motion for reception of evidence because the situation or situations in which we could exercise
the power under BP 129 did not exist. Movant here has not presented any argument which
would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991 and the
resolution of December 6, 1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing Guaranty" signed on April 2, 1979
petitioner Willex Plastic may be held jointly and severally liable with Inter-Resin Industrial for the
amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbank's predecessor-in-interest, Atrium
Capital, to Manilabank pursuant to the "Continuing Surety Agreements" made on December 1,
1978. In denying liability to Interbank for the amount, Willex Plastic argues that under the
"Continuing Guaranty," its liability is for sums obtained by Inter-Resin Industrial from Interbank,
not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial. In support
of this contention Willex Plastic cites the following portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN
INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your
principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other
evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and
severally and unconditionally guarantee unto you and/or your principal/s, successor/s and
assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S
in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such
interests, charges and penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked is the fact that evidence
aliunde was introduced in the trial court to explain that it was actually to secure payment to
Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the "Continuing
Guaranty" was executed. In its complaint below, Interbank's predecessor-in-interest, Atrium
Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation granted to defendant
IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required defendant IRIC [Inter-Resin
Industrial] to execute a chattel mortgage in its favor and a Continuing Guaranty which was
signed by the other defendant WPIC [Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it had
already paid its obligation in its entirety. On the other hand, Willex Plastic, while denying the
allegation in question, merely did so "for lack of knowledge or information of the same." But, at
the hearing of the case on September 16, 1986, when asked by the trial judge whether Willex
Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex Plastic's counsel replied
in the negative and manifested that "the plaintiff in this case [Interbank] is the guarantor and my
client [Willex Plastic] only signed as a guarantor to the guarantee." 2
For its part Interbank adduced evidence to show that the "Continuing Guaranty" had been made
to guarantee payment of amounts made by it to Manilabank and not of any sums given by it as
loan to Inter-Resin Industrial. Interbank's witness testified under cross examination by counsel
for Willex Plastic that Willex "guaranteed the exposure/of whatever exposure of ACP [Atrium
Capital] will later be made because of the guarantee to Manila Banking Corporation." 3
It has been held that explanatory evidence may be received to show the circumstances under
which a document has been made and to what debt it relates. 4 At all events, Willex Plastic
cannot now claim that its liability is limited to any amount which Interbank, as creditor, might

give directly to Inter-Resin Industrial as debtor because, by failing to object to the parol
evidence presented, Willex Plastic waived the protection of the parol evidence rule. 5
Accordingly, the trial court found that it was "to secure the guarantee made by plaintiff of the
credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that]
the plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing
Guaranty which was signed by the defendant Willex Plastic Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the guarantee
undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin
Industrial by Manilabank, plaintiff-appellee required defendant-appellants to sign a Continuing
Guaranty." These factual findings of the trial court and of the Court of Appeals are binding on us
not only because of the rule that on appeal to the Supreme Court such findings are entitled to
great weight and respect but also because our own examination of the record of the trial court
confirms these findings of the two courts. 7
Nor does the record show any other transaction under which Inter-Resin Industrial may have
obtained sums of money from Interbank. It can reasonably be assumed that Inter-Resin
Industrial and Willex Plastic intended to indemnify Interbank for amounts which it may have paid
Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was "to secure the
aforesaid guarantee, that INTERBANK required principal debtor IRIC [Inter-Resin Industrial] to
execute a chattel mortgage in its favor, and so a "Continuing Guaranty" was executed on April 2,
1979 by WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of
INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an accessory contract, cannot
legally exist because of the absence of a valid principal obligation. 8 Its contention is based on
the fact that it is not a party either to the "Continuing Surety Agreement" or to the loan
agreement between Manilabank and Interbank Industrial.
Put in another way the consideration necessary to support a surety obligation need not pass
directly to the surety, a consideration moving to the principal alone being sufficient. For a
"guarantor or surety is bound by the same consideration that makes the contract effective
between the principal parties thereto. It is never necessary that a guarantor or surety should
receive any part or benefit, if such there be, accruing to his principal." 9 In an analogous case, 10
this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of
having an additional capital for buying and selling coco-shell charcoal and importation of
activated carbon, the comprehensive surety agreement was admittedly in full force and effect.
The loan was, therefore, covered by the said agreement, and private respondent, even if he did
not sign the promissory note, is liable by virtue of the surety agreement. The only condition that
would make him liable thereunder is that the Borrower "is or may become liable as maker,
endorser, acceptor or otherwise." There is no doubt that Daicor is liable on the promissory note
evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is
an accessory obligation, it being dependent upon a principal one which, in this case is the loan
obtained by Daicor as evidenced by a promissory note.
[3] Willex Plastic contends that the "Continuing Guaranty" cannot be retroactivelt applied so as
to secure payments made by Interbank under the two "Continuing Surety Agreements." Willex
Plastic invokes the ruling in El Vencedor v. Canlas 11 and Dio v. Court of Appeals 12 in support
of its contention that a contract of suretyship or guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the present case. In El Vencedor v. Canlas
we held that a contract of suretyship "is not retrospective and no liability attaches for defaults
occurring before it is entered into unless an intent to be so liable is indicated." There we found
nothing in the contract to show that the paries intended the surety bonds to answer for the debts

contracted previous to the execution of the bonds. In contrast, in this case, the parties to the
"Continuing Guaranty" clearly provided that the guaranty would cover "sums obtained and/or to
be obtained" by Inter-Resin Industrial from Interbank.
On the other hand, in Dio v. Court of Appeals the issue was whether the sureties could be held
liable for an obligation contracted after the execution of the continuing surety agreement. It was
held that by its very nature a continuing suretyship contemplates a future course of dealing. "It is
prospective in its operation and is generally intended to provide security with respect to future
transactions." By no means, however, was it meant in that case that in all instances a contrast
of guaranty or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13 although a contract of
suretyship is ordinarily not to be construed as retrospective, in the end the intention of the
parties as revealed by the evidence is controlling. What was said there 14 applies mutatis
mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that bonds or other contracts
of suretyship are ordinarily not to be construed as retrospective, but that rule must yield to the
intention of the contracting parties as revealed by the evidence, and does not interfere with the
use of the ordinary tests and canons of interpretation which apply in regard to other contracts.
In the present case the circumstances so clearly indicate that the bond given by Echevarria was
intended to cover all of the indebtedness of the Arrocera upon its current account with the
plaintiff Bank that we cannot possibly adopt the view of the court below in regard to the effect of
the bond.
[4] Willex Plastic says that in any event it cannot be proceeded against without first exhausting
all property of Inter-Resin Industrial. Willex Plastic thus claims the benefit of excussion. The Civil
Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and Inter-Resin
Industrial in favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s
may directly proceed against Me/Us without first proceeding against and exhausting DEBTOR/s
properties in the same manner as if all such liabilities constituted My/Our direct and primary
obligations. (emphasis supplied)
This stipulation embodies an express renunciation of the right of excussion. In addition, Willex
Plastic bound itself solidarily liable with Inter-Resin Industrial under the same agreement:
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN
INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your
principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other
evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and
severally and unconditionally guarantee unto you and/or your principal/s, successor/s and
assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S
in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such
interests, charges and penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness to
Interbank and that Willex Plastic should have been allowed by the Court of Appeals to adduce
evidence to prove this. Suffice it to say that Inter-Resin Industrial had been given generous
opportunity to present its evidence but it failed to make use of the same. On the otherhand,
Willex Plastic rested its case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but because of
its failure to appear on that date, the hearing was reset on March 12, 26 and April 2, 1987.

On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of Willex Plastic,
the hearings on March 12 and 26, 1987 were cancelled and "reset for the last time" on April 2
and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court issued
the following order:
Considering that, as shown by the records, the Court had exerted every earnest effort to cause
the service of notice or subpoena on the defendant Inter-Resin Industrial but to no avail, even
with the assistance of the defendant Willex the defendant Inter-Resin Industrial is hereby
deemed to have waived the right to present its evidence.
On the other hand, Willex Plastic announced it was resting its case without presenting any
evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order and set the
hearing anew on July 23, 1987. But Inter-Resin Industrial again moved for the postponement of
the hearing be postponed to August 11, 1987. The hearing was, therefore, reset on September
8 and 22, 1987 but the hearings were reset on October 13, 1987, this time upon motion of
Interbank. To give Interbank time to comment on a motion filed by Inter-Resin Industrial, the
reception of evidence for Inter-Resin Industrial was again reset on November 17, 26 and
December 11, 1987. However, Inter-Resin Industrial again moved for the postponement of the
hearing. Accordingly the hearing was reset on November 26 and December 11, 1987, with
warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on January 22, 1988 and
February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still failed to present its
evidence, it was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however, the hearing
was postponed to March 4, 1988. Again Inter-Resin Industrial's counsel did not appear. The trial
court, therefore, finally declared Inter-Resin Industrial to have waived the right to present its
evidence. On the other hand, Willex Plastic, as before, manifested that it was not presenting
evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the opportunity of
showing that Inter-Resin Industrial has already paid its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against the
petitioner.
SO ORDERED.
G.R. No. 127405
October 4, 2000
MARJORIE TOCAO and WILLIAM T. BELO, petitioners,
vs.
COURT OF APPEALS and NENITA A. ANAY, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV No. 41616, 1
affirming the Decision of the Regional Trial Court of Makati, Branch 140, in Civil Case No. 88509.2
Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand, private respondent
Nenita A. Anay met petitioner William T. Belo, then the vice-president for operations of Ultra
Clean Water Purifier, through her former employer in Bangkok. Belo introduced Anay to
petitioner Marjorie Tocao, who conveyed her desire to enter into a joint venture with her for the
importation and local distribution of kitchen cookwares. Belo volunteered to finance the joint
venture and assigned to Anay the job of marketing the product considering her experience and
established relationship with West Bend Company, a manufacturer of kitchen wares in
Wisconsin, U.S.A. Under the joint venture, Belo acted as capitalist, Tocao as president and

general manager, and Anay as head of the marketing department and later, vice-president for
sales. Anay organized the administrative staff and sales force while Tocao hired and fired
employees, determined commissions and/or salaries of the employees, and assigned them to
different branches. The parties agreed that Belos name should not appear in any documents
relating to their transactions with West Bend Company. Instead, they agreed to use Anays
name in securing distributorship of cookware from that company. The parties agreed further that
Anay would be entitled to: (1) ten percent (10%) of the annual net profits of the business; (2)
overriding commission of six percent (6%) of the overall weekly production; (3) thirty percent
(30%) of the sales she would make; and (4) two percent (2%) for her demonstration services.
The agreement was not reduced to writing on the strength of Belos assurances that he was
sincere, dependable and honest when it came to financial commitments.
Anay having secured the distributorship of cookware products from the West Bend Company
and organized the administrative staff and the sales force, the cookware business took off
successfully. They operated under the name of Geminesse Enterprise, a sole proprietorship
registered in Marjorie Tocaos name, with office at 712 Rufino Building, Ayala Avenue, Makati
City. Belo made good his monetary commitments to Anay. Thereafter, Roger Muencheberg of
West Bend Company invited Anay to the distributor/dealer meeting in West Bend, Wisconsin,
U.S.A., from July 19 to 21, 1987 and to the southwestern regional convention in Pismo Beach,
California, U.S.A., from July 25-26, 1987. Anay accepted the invitation with the consent of
Marjorie Tocao who, as president and general manager of Geminesse Enterprise, even wrote a
letter to the Visa Section of the U.S. Embassy in Manila on July 13, 1987. A portion of the letter
reads:
"Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend Co. for twenty
(20) years now, acquired the distributorship of Royal Queen cookware for Geminesse
Enterprise, is the Vice President Sales Marketing and a business partner of our company, will
attend in response to the invitation." (Italics supplied.) 3
Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the task of saving
the business on account of the unsatisfactory sales record in the Makati and Cubao offices. On
August 31, 1987, she received a plaque of appreciation from the administrative and sales
people through Marjorie Tocao4 for her excellent job performance. On October 7, 1987, in the
presence of Anay, Belo signed a memo5 entitling her to a thirty-seven percent (37%)
commission for her personal sales "up Dec 31/87." Belo explained to her that said commission
was apart from her ten percent (10%) share in the profits. On October 9, 1987, Anay learned
that Marjorie Tocao had signed a letter 6 addressed to the Cubao sales office to the effect that
she was no longer the vice-president of Geminesse Enterprise. The following day, October 10,
she received a note from Lina T. Cruz, marketing manager, that Marjorie Tocao had barred her
from holding office and conducting demonstrations in both Makati and Cubao offices. 7 Anay
attempted to contact Belo. She wrote him twice to demand her overriding commission for the
period of January 8, 1988 to February 5, 1988 and the audit of the company to determine her
share in the net profits. When her letters were not answered, Anay consulted her lawyer, who, in
turn, wrote Belo a letter. Still, that letter was not answered.
Anay still received her five percent (5%) overriding commission up to December 1987. The
following year, 1988, she did not receive the same commission although the company netted a
gross sales of P13,300,360.00.
On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of money with
damages8 against Marjorie D. Tocao and William Belo before the Regional Trial Court of Makati,
Branch 140.
In her complaint, Anay prayed that defendants be ordered to pay her, jointly and severally, the
following: (1) P32,00.00 as unpaid overriding commission from January 8, 1988 to February 5,
1988; (2) P100,000.00 as moral damages, and (3) P100,000.00 as exemplary damages. The
plaintiff also prayed for an audit of the finances of Geminesse Enterprise from the inception of

its business operation until she was "illegally dismissed" to determine her ten percent (10%)
share in the net profits. She further prayed that she be paid the five percent (5%) "overriding
commission" on the remaining 150 West Bend cookware sets before her "dismissal."
In their answer,9 Marjorie Tocao and Belo asserted that the "alleged agreement" with Anay that
was "neither reduced in writing, nor ratified," was "either unenforceable or void or inexistent." As
far as Belo was concerned, his only role was to introduce Anay to Marjorie Tocao. There could
not have been a partnership because, as Anay herself admitted, Geminesse Enterprise was the
sole proprietorship of Marjorie Tocao. Because Anay merely acted as marketing demonstrator of
Geminesse Enterprise for an agreed remuneration, and her complaint referred to either her
compensation or dismissal, such complaint should have been lodged with the Department of
Labor and not with the regular court.
Petitioners (defendants therein) further alleged that Anay filed the complaint on account of "illwill and resentment" because Marjorie Tocao did not allow her to "lord it over in the Geminesse
Enterprise." Anay had acted like she owned the enterprise because of her experience and
expertise. Hence, petitioners were the ones who suffered actual damages "including unreturned
and unaccounted stocks of Geminesse Enterprise," and "serious anxiety, besmirched reputation
in the business world, and various damages not less than P500,000.00." They also alleged that,
to "vindicate their names," they had to hire counsel for a fee of P23,000.00.
At the pre-trial conference, the issues were limited to: (a) whether or not the plaintiff was an
employee or partner of Marjorie Tocao and Belo, and (b) whether or not the parties are entitled
to damages.10
In their defense, Belo denied that Anay was supposed to receive a share in the profit of the
business. He, however, admitted that the two had agreed that Anay would receive a three to
four percent (3-4%) share in the gross sales of the cookware. He denied contributing capital to
the business or receiving a share in its profits as he merely served as a guarantor of Marjorie
Tocao, who was new in the business. He attended and/or presided over business meetings of
the venture in his capacity as a guarantor but he never participated in decision-making. He
claimed that he wrote the memo granting the plaintiff thirty-seven percent (37%) commission
upon her dismissal from the business venture at the request of Tocao, because Anay had no
other income.
For her part, Marjorie Tocao denied having entered into an oral partnership agreement with
Anay. However, she admitted that Anay was an expert in the cookware business and hence,
they agreed to grant her the following commissions: thirty-seven percent (37%) on personal
sales; five percent (5%) on gross sales; two percent (2%) on product demonstrations, and two
percent (2%) for recruitment of personnel. Marjorie denied that they agreed on a ten percent
(10%) commission on the net profits. Marjorie claimed that she got the capital for the business
out of the sale of the sewing machines used in her garments business and from Peter Lo, a
Singaporean friend-financier who loaned her the funds with interest. Because she treated Anay
as her "co-equal," Marjorie received the same amounts of commissions as her. However, Anay
failed to account for stocks valued at P200,000.00.
On April 22, 1993, the trial court rendered a decision the dispositive part of which is as follows:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. Ordering defendants to submit to the Court a formal account as to the partnership affairs for
the years 1987 and 1988 pursuant to Art. 1809 of the Civil Code in order to determine the ten
percent (10%) share of plaintiff in the net profits of the cookware business;
2. Ordering defendants to pay five percent (5%) overriding commission for the one hundred and
fifty (150) cookware sets available for disposition when plaintiff was wrongfully excluded from
the partnership by defendants;
3. Ordering defendants to pay plaintiff overriding commission on the total production which for
the period covering January 8, 1988 to February 5, 1988 amounted to P32,000.00;
4. Ordering defendants to pay P100,000.00 as moral damages and P100,000.00 as exemplary

damages, and
5. Ordering defendants to pay P50,000.00 as attorneys fees and P20,000.00 as costs of suit.
SO ORDERED."
The trial court held that there was indeed an "oral partnership agreement between the plaintiff
and the defendants," based on the following: (a) there was an intention to create a partnership;
(b) a common fund was established through contributions consisting of money and industry, and
(c) there was a joint interest in the profits. The testimony of Elizabeth Bantilan, Anays cousin
and the administrative officer of Geminesse Enterprise from August 21, 1986 until it was
absorbed by Royal International, Inc., buttressed the fact that a partnership existed between the
parties. The letter of Roger Muencheberg of West Bend Company stating that he awarded the
distributorship to Anay and Marjorie Tocao because he was convinced that with Marjories
financial contribution and Anays experience, the combination of the two would be invaluable to
the partnership, also supported that conclusion. Belos claim that he was merely a "guarantor"
has no basis since there was no written evidence thereof as required by Article 2055 of the Civil
Code. Moreover, his acts of attending and/or presiding over meetings of Geminesse Enterprise
plus his issuance of a memo giving Anay 37% commission on personal sales belied this. On the
contrary, it demonstrated his involvement as a partner in the business.
The trial court further held that the payment of commissions did not preclude the existence of
the partnership inasmuch as such practice is often resorted to in business circles as an impetus
to bigger sales volume. It did not matter that the agreement was not in writing because Article
1771 of the Civil Code provides that a partnership may be "constituted in any form." The fact
that Geminesse Enterprise was registered in Marjorie Tocaos name is not determinative of
whether or not the business was managed and operated by a sole proprietor or a partnership.
What was registered with the Bureau of Domestic Trade was merely the business name or style
of Geminesse Enterprise.
The trial court finally held that a partner who is excluded wrongfully from a partnership is an
innocent partner. Hence, the guilty partner must give him his due upon the dissolution of the
partnership as well as damages or share in the profits "realized from the appropriation of the
partnership business and goodwill." An innocent partner thus possesses "pecuniary interest in
every existing contract that was incomplete and in the trade name of the co-partnership and
assets at the time he was wrongfully expelled."
Petitioners appeal to the Court of Appeals 11 was dismissed, but the amount of damages
awarded by the trial court were reduced to P50,000.00 for moral damages and P50,000.00 as
exemplary damages. Their Motion for Reconsideration was denied by the Court of Appeals for
lack of merit.12 Petitioners Belo and Marjorie Tocao are now before this Court on a petition for
review on certiorari, asserting that there was no business partnership between them and herein
private respondent Nenita A. Anay who is, therefore, not entitled to the damages awarded to her
by the Court of Appeals.
Petitioners Tocao and Belo contend that the Court of Appeals erroneously held that a
partnership existed between them and private respondent Anay because Geminesse Enterprise
"came into being" exactly a year before the "alleged partnership" was formed, and that it was
very unlikely that petitioner Belo would invest the sum of P2,500,000.00 with petitioner Tocao
contributing nothing, without any "memorandum whatsoever regarding the alleged
partnership."13
The issue of whether or not a partnership exists is a factual matter which are within the
exclusive domain of both the trial and appellate courts. This Court cannot set aside factual
findings of such courts absent any showing that there is no evidence to support the conclusion
drawn by the court a quo.14 In this case, both the trial court and the Court of Appeals are one in
ruling that petitioners and private respondent established a business partnership. This Court
finds no reason to rule otherwise.
To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or

more persons bind themselves to contribute money, property or industry to a common fund; and
(2) intention on the part of the partners to divide the profits among themselves. 15 It may be
constituted in any form; a public instrument is necessary only where immovable property or real
rights are contributed thereto.16 This implies that since a contract of partnership is consensual,
an oral contract of partnership is as good as a written one. Where no immovable property or
real rights are involved, what matters is that the parties have complied with the requisites of a
partnership. The fact that there appears to be no record in the Securities and Exchange
Commission of a public instrument embodying the partnership agreement pursuant to Article
1772 of the Civil Code17 did not cause the nullification of the partnership. The pertinent provision
of the Civil Code on the matter states:
Art. 1768. The partnership has a juridical personality separate and distinct from that of each of
the partners, even in case of failure to comply with the requirements of article 1772, first
paragraph.
Petitioners admit that private respondent had the expertise to engage in the business of
distributorship of cookware. Private respondent contributed such expertise to the partnership
and hence, under the law, she was the industrial or managing partner. It was through her
reputation with the West Bend Company that the partnership was able to open the business of
distributorship of that companys cookware products; it was through the same efforts that the
business was propelled to financial success. Petitioner Tocao herself admitted private
respondents indispensable role in putting up the business when, upon being asked if private
respondent held the positions of marketing manager and vice-president for sales, she testified
thus:
"A: No, sir at the start she was the marketing manager because there were no one to sell yet,
its only me there then her and then two (2) people, so about four (4). Now, after that when she
recruited already Oscar Abella and Lina Torda-Cruz these two (2) people were given the
designation of marketing managers of which definitely Nita as superior to them would be the
Vice President."18
By the set-up of the business, third persons were made to believe that a partnership had indeed
been forged between petitioners and private respondents. Thus, the communication dated June
4, 1986 of Missy Jagler of West Bend Company to Roger Muencheberg of the same company
states:
"Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the operations.
Marge does not have cookware experience. Nita Anay has started to gather former managers,
Lina Torda and Dory Vista. She has also gathered former demonstrators, Betty Bantilan, Eloisa
Lamela, Menchu Javier. They will continue to gather other key people and build up the
organization. All they need is the finance and the products to sell." 19
On the other hand, petitioner Belos denial that he financed the partnership rings hollow in the
face of the established fact that he presided over meetings regarding matters affecting the
operation of the business. Moreover, his having authorized in writing on October 7, 1987, on a
stationery of his own business firm, Wilcon Builders Supply, that private respondent should
receive thirty-seven (37%) of the proceeds of her personal sales, could not be interpreted
otherwise than that he had a proprietary interest in the business. His claim that he was merely a
guarantor is belied by that personal act of proprietorship in the business. Moreover, if he was
indeed a guarantor of future debts of petitioner Tocao under Article 2053 of the Civil Code, 20 he
should have presented documentary evidence therefor. While Article 2055 of the Civil Code
simply provides that guaranty must be "express," Article 1403, the Statute of Frauds, requires
that "a special promise to answer for the debt, default or miscarriage of another" be in writing. 21
Petitioner Tocao, a former ramp model, 22 was also a capitalist in the partnership. She claimed
that she herself financed the business. Her and petitioner Belos roles as both capitalists to the
partnership with private respondent are buttressed by petitioner Tocaos admissions that
petitioner Belo was her boyfriend and that the partnership was not their only business venture

together. They also established a firm that they called "Wiji," the combination of petitioner Belos
first name, William, and her nickname, Jiji.23 The special relationship between them dovetails
with petitioner Belos claim that he was acting in behalf of petitioner Tocao. Significantly, in the
early stage of the business operation, petitioners requested West Bend Company to allow them
to "utilize their banking and trading facilities in Singapore" in the matter of importation and
payment of the cookware products. 24 The inevitable conclusion, therefore, was that petitioners
merged their respective capital and infused the amount into the partnership of distributing
cookware with private respondent as the managing partner.
The business venture operated under Geminesse Enterprise did not result in an employeremployee relationship between petitioners and private respondent. While it is true that the
receipt of a percentage of net profits constitutes only prima facie evidence that the recipient is a
partner in the business,25 the evidence in the case at bar controverts an employer-employee
relationship between the parties. In the first place, private respondent had a voice in the
management of the affairs of the cookware distributorship, 26 including selection of people who
would constitute the administrative staff and the sales force. Secondly, petitioner Tocaos
admissions militate against an employer-employee relationship. She admitted that, like her who
owned Geminesse Enterprise,27 private respondent received only commissions and
transportation and representation allowances 28 and not a fixed salary.29 Petitioner Tocao
testified:
"Q: Of course. Now, I am showing to you certain documents already marked as Exhs. X and
Y. Please go over this. Exh. Y is denominated `Cubao overrides 8-21-87 with ending August
21, 1987, will you please go over this and tell the Honorable Court whether you ever came
across this document and know of your own knowledge the amount --A: Yes, sir this is what I am talking about earlier. Thats the one I am telling you earlier a certain
percentage for promotions, advertising, incentive.
Q: I see. Now, this promotion, advertising, incentive, there is a figure here and words which I
quote: Overrides Marjorie Ann Tocao P21,410.50 this means that you have received this
amount?
A: Oh yes, sir.
Q: I see. And, by way of amplification this is what you are saying as one representing
commission, representation, advertising and promotion?
A: Yes, sir.
Q: I see. Below your name is the words and figure and I quote Nita D. Anay P21,410.50, what
is this?
A: Thats her overriding commission.
Q: Overriding commission, I see. Of course, you are telling this Honorable Court that there
being the same P21,410.50 is merely by coincidence?
A: No, sir, I made it a point that we were equal because the way I look at her kasi, you know in a
sense because of her expertise in the business she is vital to my business. So, as part of the
incentive I offer her the same thing.
Q: So, in short you are saying that this you have shared together, I mean having gotten from the
company P21,140.50 is your way of indicating that you were treating her as an equal?
A: As an equal.
Q: As an equal, I see. You were treating her as an equal?
A: Yes, sir.
Q: I am calling again your attention to Exh. Y Overrides Makati the other one is --A: That is the same thing, sir.
Q: With ending August 21, words and figure Overrides Marjorie Ann Tocao P15,314.25 the
amount there you will acknowledge you have received that?
A: Yes, sir.
Q: Again in concept of commission, representation, promotion, etc.?

A: Yes, sir.
Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an indication that
she received the same amount?
A: Yes, sir.
Q: And, as in your previous statement it is not by coincidence that these two (2) are the same?
A: No, sir.
Q: It is again in concept of you treating Miss Anay as your equal?
A: Yes, sir." (Italics supplied.)30
If indeed petitioner Tocao was private respondents employer, it is difficult to believe that they
shall receive the same income in the business. In a partnership, each partner must share in the
profits and losses of the venture, except that the industrial partner shall not be liable for the
losses.31 As an industrial partner, private respondent had the right to demand for a formal
accounting of the business and to receive her share in the net profit. 32
The fact that the cookware distributorship was operated under the name of Geminesse
Enterprise, a sole proprietorship, is of no moment. What was registered with the Bureau of
Domestic Trade on August 19, 1987 was merely the name of that enterprise. 33 While it is true
that in her undated application for renewal of registration of that firm name, petitioner Tocao
indicated that it would be engaged in retail of "kitchenwares, cookwares, utensils, skillet," 34 she
also admitted that the enterprise was only "60% to 70% for the cookware business," while 20%
to 30% of its business activity was devoted to the sale of water sterilizer or purifier. 35 Indubitably
then, the business name Geminesse Enterprise was used only for practical reasons - it was
utilized as the common name for petitioner Tocaos various business activities, which included
the distributorship of cookware.
Petitioners underscore the fact that the Court of Appeals did not return the "unaccounted and
unremitted stocks of Geminesse Enterprise amounting to P208,250.00." 36 Obviously a ploy to
offset the damages awarded to private respondent, that claim, more than anything else, proves
the existence of a partnership between them. In Idos v. Court of Appeals, this Court said:
"The best evidence of the existence of the partnership, which was not yet terminated (though in
the winding up stage), were the unsold goods and uncollected receivables, which were
presented to the trial court. Since the partnership has not been terminated, the petitioner and
private complainant remained as co-partners. x x x." 37
It is not surprising then that, even after private respondent had been unceremoniously booted
out of the partnership in October 1987, she still received her overriding commission until
December 1987.
Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the partnership to
reap for herself and/or for petitioner Belo financial gains resulting from private respondents
efforts to make the business venture a success. Thus, as petitioner Tocao became adept in the
business operation, she started to assert herself to the extent that she would even shout at
private respondent in front of other people. 38 Her instruction to Lina Torda Cruz, marketing
manager, not to allow private respondent to hold office in both the Makati and Cubao sales
offices concretely spoke of her perception that private respondent was no longer necessary in
the business operation,39 and resulted in a falling out between the two. However, a mere falling
out or misunderstanding between partners does not convert the partnership into a sham
organization.40 The partnership exists until dissolved under the law. Since the partnership
created by petitioners and private respondent has no fixed term and is therefore a partnership at
will predicated on their mutual desire and consent, it may be dissolved by the will of a partner.
Thus:
"x x x. The right to choose with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each partners capability to give it, and the absence
of cause for dissolution provided by the law itself. Verily, any one of the partners may, at his sole

pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not
that the attendance of bad faith can prevent the dissolution of the partnership but that it can
result in a liability for damages."41
An unjustified dissolution by a partner can subject him to action for damages because by the
mutual agency that arises in a partnership, the doctrine of delectus personae allows the
partners to have the power, although not necessarily the right to dissolve the partnership.42
In this case, petitioner Tocaos unilateral exclusion of private respondent from the partnership is
shown by her memo to the Cubao office plainly stating that private respondent was, as of
October 9, 1987, no longer the vice-president for sales of Geminesse Enterprise. 43 By that
memo, petitioner Tocao effected her own withdrawal from the partnership and considered
herself as having ceased to be associated with the partnership in the carrying on of the
business. Nevertheless, the partnership was not terminated thereby; it continues until the
winding up of the business.44
The winding up of partnership affairs has not yet been undertaken by the partnership. 1wphi1
This is manifest in petitioners claim for stocks that had been entrusted to private respondent in
the pursuit of the partnership business.
The determination of the amount of damages commensurate with the factual findings upon
which it is based is primarily the task of the trial court. 45 The Court of Appeals may modify that
amount only when its factual findings are diametrically opposed to that of the lower court, 46 or
the award is palpably or scandalously and unreasonably excessive. 47 However, exemplary
damages that are awarded "by way of example or correction for the public good," 48 should be
reduced to P50,000.00, the amount correctly awarded by the Court of Appeals. Concomitantly,
the award of moral damages of P100,000.00 was excessive and should be likewise reduced to
P50,000.00. Similarly, attorneys fees that should be granted on account of the award of
exemplary damages and petitioners evident bad faith in refusing to satisfy private respondents
plainly valid, just and demandable claims, 49 appear to have been excessively granted by the trial
court and should therefore be reduced to P25,000.00.
WHEREFORE, the instant petition for review on certiorari is DENIED. The partnership among
petitioners and private respondent is ordered dissolved, and the parties are ordered to effect the
winding up and liquidation of the partnership pursuant to the pertinent provisions of the Civil
Code. This case is remanded to the Regional Trial Court for proper proceedings relative to said
dissolution. The appealed decisions of the Regional Trial Court and the Court of Appeals are
AFFIRMED with MODIFICATIONS, as follows --1. Petitioners are ordered to submit to the Regional Trial Court a formal account of the
partnership affairs for the years 1987 and 1988, pursuant to Article 1809 of the Civil Code, in
order to determine private respondents ten percent (10%) share in the net profits of the
partnership;
2. Petitioners are ordered, jointly and severally, to pay private respondent five percent (5%)
overriding commission for the one hundred and fifty (150) cookware sets available for
disposition since the time private respondent was wrongfully excluded from the partnership by
petitioners;
3. Petitioners are ordered, jointly and severally, to pay private respondent overriding
commission on the total production which, for the period covering January 8, 1988 to February
5, 1988, amounted to P32,000.00;
4. Petitioners are ordered, jointly and severally, to pay private respondent moral damages in the
amount of P50,000.00, exemplary damages in the amount of P50,000.00 and attorneys fees in
the amount of P25,000.00.
SO ORDERED.
G.R. No. 138544
October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner,

vs.
RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and
every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require
the creditor to obtain the consent of the surety to any material alteration in the principal loan
agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent
liable for loans obtained in excess of the amount or beyond the period stipulated in the original
agreement, absent any clear stipulation showing that the latter waived his right to be notified
thereof, or to give consent thereto. This is especially true where, as in this case, respondent
was no longer the principal officer or major stockholder of the corporate debtor at the time the
later obligations were incurred. He was thus no longer in a position to compel the debtor to pay
the creditor and had no more reason to bind himself anew to the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for Review under Rule 45 of the
Rules of Court. Petitioner assails the December 22, 1998 Decision 1 of the Court of Appeals (CA)
in CA-GR CV No. 56203, the dispositive portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in the sense that defendantappellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to pay any amount
stated in the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack
of merit.
"In all other respect[s], the decision appealed from is AFFIRMED."2
Also challenged is the April 14, 1999 CA Resolution, 3 which denied petitioners Motion for
Reconsideration.
Modified by the CA was the March 6, 1997 Decision 4 of the Regional Trial Court (RTC) of Makati
City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation
and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank & Trust Company the
sum of P39,129,124.73 representing the balance of the loan as of May 10, 1994 plus 12%
interest per annum until fully paid, and the sum of P100,000.00 as attorneys fees and litigation
expenses and to pay the costs.
SO ORDERED."
The Facts
The facts are narrated by the Court of Appeals as follows: 5
"The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta.
Ines) is a corporation engaged in logging operations. It was a holder of a Timber License
Agreement issued by the Department of Environment and Natural Resources (DENR).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines
Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00)
to assist the latter in meeting the additional capitalization requirements of its logging operations.
"The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be
effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200%
of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein
the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be maintained at all
times; in this connection, a Makati account shall be opened prior to availment on lines;

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

5. The bank reserves the right to amend any of the aforementioned terms and conditions upon
written notice to the Borrower. (Emphasis supplied.)
"To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned
credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some
of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for the
payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated
17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily bound
himself with SIMC as follows:
xxx
xxx
xxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC)
in favor of the bank for the payment, upon demand and without the benefit of excussion of
whatever amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases,
amendments, conversions and revivals of the aforesaid credit accommodation(s) x x x .
(Emphasis supplied).
"On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the
P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line with
[Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS3599-81 for said amount (Exhibit C).
"Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of
Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent]
Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case No.
18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca. Said
shares were bought by Adolfo Angala who was the highest bidder during the public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other
loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed
Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85
DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned additional loans
against the credit line.
"Appellant SIMC, however, encountered difficulty6 in making the amortization payments on its
loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC
accommodated appellant SIMCs request and signified its approval in a letter dated 18 February
1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice to or the
prior consent of [Respondent] Cuenca, agreed to restructure the past due obligations of
defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendantappellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta.
Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G,
Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
(P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the
indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G,
Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).
"It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to
[Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion
[o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan incurred prior to
the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered

by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca, Expediente, at Vol.
II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e.,
Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and
F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were
not secured by said Indemnity Agreement.
"Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank,
defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09
March 1988 in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO.

AMOUNT

RL/74/596/88

P8,800,000.00

RL/74/597/88

P3,400,000.00

TOTAL

P12,200,000.00

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

"To formalize their agreement to restructure the loan obligations of defendant-appellant Sta.
Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement
dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of
the said Loan Agreement dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of
TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines
[c]urrency (the Loan). The loan shall be released in two (2) tranches of P8,800,000.00 for the
first tranche (the First Loan) and P3,400,000.00 for the second tranche (the Second Loan) to
be applied in the manner and for the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while the
Second Loan shall be applied to liquidate the past due interest and penalty portion of the
Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p.
33)
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further
payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC,
Expediente, at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner]
SBTC despite demands made upon appellant SIMC and CUENCA, the last of which were made
through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L),
respectively.
"Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a
complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits in a
decision by the court a quo, x x x from which [Respondent] Cuenca appealed."
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had
novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines. Accordingly,
such novation extinguished the Indemnity Agreement, by which Cuenca, who was then the
Board chairman and president of Sta. Ines, had bound himself solidarily liable for the payment
of the loans secured by that credit accommodation. It noted that the 1989 Loan Agreement had
been executed without notice to, much less consent from, Cuenca who at the time was no
longer a stockholder of the corporation.
The appellate court also noted that the Credit Approval Memorandum had specified that the

credit accommodation was for a total amount of P8 million, and that its expiry date was
November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to
November 30, 1981, and only for an amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement was
tantamount to a grant of an extension of time to the debtor without the consent of the surety.
Under Article 2079 of the Civil Code, such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines
decided to materially alter or modify the principal obligation after the expiry date of the credit
accommodation.
Hence, this recourse to this Court.7
The Issues
In its Memorandum, petitioner submits the following for our consideration: 8
"A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from
liability as surety under the Indemnity Agreement for the payment of the principal amount of
twelve million two hundred thousand pesos (P12,200,000.00) under Promissory Note No.
RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March 1988,
plus stipulated interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas
liability under the Indemnity Agreement covered only availments on SIMCs credit line to the
extent of eight million pesos (P8,000,000.00) and made on or before 30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMCs
indebtedness under the P8 million credit accommodation was tantamount to an extension
granted to SIMC without Respondent Cuencas consent, thus extinguishing his liability under the
Indemnity Agreement pursuant to Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMCs
indebtedness under the P8 million credit accommodation constituted a novation of the principal
obligation, thus extinguishing Respondent Cuencas liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11,
Rule 13 of the 1997 Rules of Civil Procedure."
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan
Agreement novated the original credit accommodation and Cuencas liability under the
Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give
consent to any substitution, renewal, extension, increase, amendment, conversion or revival of
the said credit accommodation. As preliminary matters, the procedural questions raised by
respondent will also be addressed.
The Courts Ruling
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely
rehashing the arguments already passed upon by the appellate court, was pro forma; that as
such, it did not toll the period for filing the present Petition for Review.9 Consequently, the
Petition was filed out of time.10
We disagree. A motion for reconsideration is not pro forma just because it reiterated the
arguments earlier passed upon and rejected by the appellate court. The Court has explained
that a movant may raise the same arguments, precisely to convince the court that its ruling was
erroneous.11
Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings.

In Marikina Valley Development Corporation v. Flojo, 12 the Court explained that a pro forma
motion had no other purpose than to gain time and to delay or impede the proceedings. Hence,
"where the circumstances of a case do not show an intent on the part of the movant merely to
delay the proceedings, our Court has refused to characterize the motion as simply pro forma." It
held:
"We note finally that because the doctrine relating to pro forma motions for reconsideration
impacts upon the reality and substance of the statutory right of appeal, that doctrine should be
applied reasonably, rather than literally. The right to appeal, where it exists, is an important and
valuable right. Public policy would be better served by according the appellate court an effective
opportunity to review the decision of the trial court on the merits, rather than by aborting the
right to appeal by a literal application of the procedural rules relating to pro forma motions for
reconsideration."
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
"SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing
of pleadings and other papers shall be done personally. Except with respect to papers
emanating from the court, a resort to other modes must be accompanied by a written
explanation why the service or filing was not done personally. A violation of this Rule may be
cause to consider the paper as not filed."
Respondent maintains that the present Petition for Review does not contain a sufficient written
explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort13 that the aforecited rule
was mandatory, and that "only when personal service or filing is not practicable may resort to
other modes be had, which must then be accompanied by a written explanation as to why
personal service or filing was not practicable to begin with."
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines
and Cuenca "by registered mail in lieu of personal service due to limitations in time and
distance."14 This explanation sufficiently shows that personal service was not practicable. In any
event, we find no adequate reason to reject the contention of petitioner and thereby deprive it of
the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which
reads as follows:
"ART. 1292. In order that an obligation may be extinguished by another which substitute the
same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other."
Novation of a contract is never presumed. It has been held that "[i]n the absence of an express
agreement, novation takes place only when the old and the new obligations are incompatible on
every point."15 Indeed, the following requisites must be established: (1) there is a previous valid
obligation; (2) the parties concerned agree to a new contract; (3) the old contract is
extinguished; and (4) there is a valid new contract. 16
Petitioner contends that there was no absolute incompatibility between the old and the new
obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989
Agreement did not change the original loan in respect to the parties involved or the obligations
incurred. It adds that the terms of the 1989 Contract were "not more onerous." 17 Since the
original credit accomodation was not extinguished, it concludes that Cuenca is still liable under
the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this case. The
1989 Loan Agreement extinguished the obligation 18 obtained under the 1980 credit
accomodation. This is evident from its explicit provision to "liquidate" the principal and the
interest of the earlier indebtedness, as the following shows:

"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding Indebtedness to the Lender (the "Indebtedness") while the
Second Loan shall be applied to liquidate the past due interest and penalty portion of the
Indebtedness."19 (Italics supplied.)
The testimony of an officer20 of the bank that the proceeds of the 1989 Loan Agreement were
used "to pay-off" the original indebtedness serves to strengthen this ruling. 21
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original
obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had
stipulated that the amount of loan was not to exceed P8 million,22 the 1989 Agreement provided
that the loan was P12.2 million. The periods for payment were also different.
Likewise, the later contract contained conditions, "positive covenants" and "negative covenants"
not found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook
"from time to time and upon request by the Lender, [to] perform such further acts and/or execute
and deliver such additional documents and writings as may be necessary or proper to effectively
carry out the provisions and purposes of this Loan Agreement." 23 Likewise, SIMC agreed that it
would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor
would it participate in any merger or consolidation. 24
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the
Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to
Article 1296 of the Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit third persons who did not
give their consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8
million original accommodation; it was not a novation. 25
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated
that its purpose was to "liquidate," not to renew or extend, the outstanding indebtedness.
Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly
extended the original P8 million credit facility. Hence, his obligation as a surety should be
deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that
"[a]n extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. x x x." In an earlier case, 26 the Court explained the rationale of this
provision in this wise:
"The theory behind Article 2079 is that an extension of time given to the principal debtor by the
creditor without the suretys consent would deprive the surety of his right to pay the creditor and
to be immediately subrogated to the creditors remedies against the principal debtor upon the
maturity date. The surety is said to be entitled to protect himself against the contingency of the
principal debtor or the indemnitors becoming insolvent during the extended period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit Approval
Memorandum in holding that the credit accommodation was only for P8 million, and that it was
for a period of one year ending on November 30, 1981. Petitioner objects to the appellate
courts reliance on that document, contending that it was not a binding agreement because it
was not signed by the parties. It adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof "evidencing the
accommodation."27 Moreover, in its Petition before this Court, it alluded to the Credit Approval
Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was granted by the Bank a
credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in

meeting the additional capitalization requirements for its logging operations. For this purpose,
the Bank issued a Credit Approval Memorandum dated 10 November 1980."
Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit
accommodation as contained in the very document it presented to the courts. Indeed, it cannot
take advantage of that document by agreeing to be bound only by those portions that are
favorable to it, while denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca "impliedly gave his
consent to any modification of the credit accommodation or otherwise waived his right to be
notified of, or to give consent to, the same." 28 Respondents consent or waiver thereof is
allegedly found in the Indemnity Agreement, in which he held himself liable for the "credit
accommodation including [its] substitutions, renewals, extensions, increases, amendments,
conversions and revival." It explains that the novation of the original credit accommodation by
the 1989 Loan Agreement is merely its "renewal," which "connotes cessation of an old contract
and birth of another one x x x."29
At the outset, we should emphasize that an essential alteration in the terms of the Loan
Agreement without the consent of the surety extinguishes the latters obligation. As the Court
held in National Bank v. Veraguth, 30 "[i]t is fundamental in the law of suretyship that any
agreement between the creditor and the principal debtor which essentially varies the terms of
the principal contract, without the consent of the surety, will release the surety from liability."
In this case, petitioners assertion - that respondent consented to the alterations in the credit
accommodation -- finds no support in the text of the Indemnity Agreement, which is reproduced
hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products
Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the
credit accommodation in the total amount of eight million pesos (P8,000,000.00) granted by the
SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and existing
under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila
hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS
CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests and charges
thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and
delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly and
severally with the CLIENT in favor of the BANK for the payment , upon demand and without
benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK
under and by virtue of aforesaid credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendment, conversions and revivals of the aforesaid credit
accommodation(s), as well as of the amount or amounts of such other obligations that the
CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the
accounts, books and records of the BANK, plus interest and expenses arising from any
agreement or agreements that may have heretofore been made, or may hereafter be executed
by and between the parties thereto, including the substitutions, renewals, extensions, increases,
amendments, conversions and revivals of the aforesaid credit accommodation(s), and further
bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of
all the terms and conditions contained in the aforesaid credit accommodation(s), all of which are
incorporated herein and made part hereof by reference."
While respondent held himself liable for the credit accommodation or any modification thereof,
such clause should be understood in the context of the P8 million limit and the November 30,
1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of
the original credit accommodation, without informing or getting the consent of respondent who
was solidarily liable. Taking the banks submission to the extreme, respondent (or his
successors) would be liable for loans even amounting to, say, P100 billion obtained 100 years

after the expiration of the credit accommodation, on the ground that he consented to all
alterations and extensions thereof.
Indeed, it has been held that a contract of surety "cannot extend to more than what is stipulated.
It is strictly construed against the creditor, every doubt being resolved against enlarging the
liability of the surety." 31 Likewise, the Court has ruled that "it is a well-settled legal principle that if
there is any doubt on the terms and conditions of the surety agreement, the doubt should be
resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who
caused the ambiguity."32 In the absence of an unequivocal provision that respondent waived his
right to be notified of or to give consent to any alteration of the credit accommodation, we
cannot sustain petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that the bank
did not have absolute authority to unilaterally change the terms of the loan accommodation.
Indeed, it may do so only upon notice to the borrower, pursuant to this condition:
"5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon
written notice to the Borrower." 33
We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was
entitled to be notified of any modification in the original loan accommodation. 34 Following the
banks reasoning, such modification would not be valid as to Sta. Ines if no notice were given;
but would still be valid as to respondent to whom no notice need be given. The latters liability
would thus be more burdensome than that of the former. Such untenable theory is contrary to
the principle that a surety cannot assume an obligation more onerous than that of the principal. 35
The present controversy must be distinguished from Philamgen v. Mutuc,36 in which the Court
sustained a stipulation whereby the surety consented to be bound not only for the specified
period, "but to any extension thereafter made, an extension x x x that could be had without his
having to be notified."
In that case, the surety agreement contained this unequivocal stipulation: "It is hereby further
agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the
Company under the same terms and conditions as herein provided without the necessity of
executing another indemnity agreement for the purpose and that we hereby equally waive our
right to be notified of any renewal or extension of the bond which may be granted under this
indemnity agreement."
In the present case, there is no such express stipulation.1wphi1 At most, the alleged basis of
respondents waiver is vague and uncertain. It confers no clear authorization on the bank or Sta.
Ines to modify or extend the original obligation without the consent of the surety or notice
thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner
maintains that there was no need for respondent to execute another surety contract to secure
the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation inordinately.37 In Dino v. CA,38
the Court held that "a continuing guaranty is one which covers all transactions, including those
arising in the future, which are within the description or contemplation of the contract of
guaranty, until the expiration or termination thereof."
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the
credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981. Hence, it was a continuing
surety only in regard to loans obtained on or before the aforementioned expiry date and not
exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on
November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit

accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989
Loan Agreement, which was executed after November 30, 1981 and which exceeded the
stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan
obtained after the payment of the original one, which was covered by a continuing surety
agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement
specifically provided that "each suretyship is a continuing one which shall remain in full force
and effect until this bank is notified of its revocation." Since the bank had not been notified of
such revocation, the surety was held liable even for the subsequent obligations of the principal
borrower.
No similar provision is found in the present case. On the contrary, respondents liability was
confined to the 1980 credit accommodation, the amount and the expiry date of which were set
down in the Credit Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and solidary signature") of a major
stockholder or corporate officer, as an additional security for loans granted to corporations.
There are at least two reasons for this. First, in case of default, the creditors recourse, which is
normally limited to the corporate properties under the veil of separate corporate personality,
would extend to the personal assets of the surety. Second, such surety would be compelled to
ensure that the loan would be used for the purpose agreed upon, and that it would be paid by
the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have required the
JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines
to assume that he would still agree to act as surety in the 1989 Loan Agreement, because at
that time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was
not in a position then to ensure the payment of the obligation. Neither did he have any reason to
bind himself further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent,
without even informing him, smacks of negligence on the part of the bank and bad faith on that
of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan
having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask
somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one
who was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit
investigation would have revealed that respondent was no longer connected with the
corporation at the time. As it is, the bank is now relying on an unclear Indemnity Agreement in
order to collect an obligation that could have been secured by a fairly obtained surety. For its
defeat in this litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under
the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had been
an accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject
petitioners submission that respondent waived his right to be notified of, or to give consent to,
any modification or extension of the 1980 credit accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before the
expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.
G.R. No. 136603

January 18, 2002

EMILIO Y. TAEDO, petitioner,

vs.
ALLIED BANKING CORPORATION, respondent.
PARDO, J.:
Appeal via certiorari from the decision of the Court of Appeals 1 reversing the ruling of the trial
court and holding petitioner liable solidarily with defendant Cheng Ban Yek Co., Inc. for all items
of the money judgment and costs of suit.
The Facts
The facts, as found by the Court of Appeals, are as follows:
"Appeal by both the plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek &
Co., Inc. from the Order, as summary judgment, of the Regional Trial Court (Branch XLIV,
Manila), the decretal part whereof reads:
"WHEREFORE, and in view of the foregoing considerations, summary judgment is hereby
rendered in favor of the plaintiff, Allied Banking Corporation, and against defendant Cheng Ban
Yek and Co., Inc. as follows:
"1. On the first cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P2,000,000.00, plus
interest thereon at 14% per annum, 2% per annum as service charge, and penalty charge of 1%
per month from February 11, 1981 until fully paid;
"2. On the second cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P2,500,000.00, plus
interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1
% per month, from February 3, 1981 until fully paid;
"3. On the third cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus
interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1
% per month, from February 12, 1981 until fully paid;
"4. On the fourth cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus
interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1
% per month, from February 12, 1981 until fully paid;
"5. On the fifth cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus
interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1%
per month, from February 12, 1981 until fully paid;
"6. On the sixth cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,000,000.00 plus
interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1%
per month, from February 12, 1981 until fully paid;
"7. On the seventh cause of action:
" Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of P1,500,000.00 plus
interest thereon at 14% per annum, service charge of 2% per annum, and penalty charge of 1%
per month, from February 12, 1981 until fully paid;
"8. On all the causes of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum equivalent to 25% of
the amount due and demandable as and for attorneys fees;
"9. Declaring the "Continuing Guaranty" as having been extinguished after plaintiff branded it as
a "worthless security" and preferred to avail, as it did avail, of the provisional remedy of
attachment; and declaring defendants Alfredo Ching and Emilio Taedo relieved of their
obligation under the said continuing Guaranty; and
"10. Ordering the defendant Cheng Ban Yek Co., Inc. to pay the costs of suit.

"SO ORDERED."2
"The foregoing summary judgment has its roots in a complaint with preliminary attachment filed
by plaintiff bank to recover sums of money from defendant corporation on its seven past due
promissory notes with principal amounts totaling P10,000,000.00, from defendants Alfredo
Ching and Emilio Taedo under a Continuing Guaranty providing for joint and several liability
relative to the said promissory notes. The preliminary attachment sought was granted upon the
required bond and was thereafter maintained despite defendant corporations efforts to have it
discharged.
"The appeal of plaintiff bank is limited to paragraph 9 of the summary judgment (supra, p. 3)
which declared defendants Aldredo Ching and Emilio Taedo as free from any liability under the
Continuing Guaranty since their respective liabilities thereunder became extinguished when
plaintiff bank in its pleading branded the Continuing Guaranty as "worthless security".
"On the other hand, defendant corporations appeal is an attack on the summary nature of the
proceeding adopted by the lower court since, according to defendant corporation, there was a
petition for suspension of payment filed by it with the Securities and Exchange Commission
which, although dismissed, was duly appealed to the Court of Appeals.
"xxx
"Defendant corporations petition for suspension of payment was dismissed by the Securities
and Exchange Commission for lack of quorum. At the creditors meeting called and accordingly
held to approve the corporations petition for suspension of payment, out of outstanding
liabilities of P237,718,426.00, only the creditors representing P110,355,607.37 thereof attended.
This was far short of the three-fifths quorum unqualifiedly required by law which should have
been P142,631,055.60 (Act No. 1956, Sec. 8) x x x ." 3
On October 16, 1984, the trial court rendered a summary judgment, as quoted above. 4
Both plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek & Co., Inc. appealed
from the summary judgment to the Court of Appeals. 5
On March 27, 1990, the Court of Appeals promulgated a decision, the dispositive portion of
which reads:
"WHEREFORE, the Order appealed from is in part REVERSED and MODIFIED by deleting
paragraph 9 from the dispositive portion thereof, and declaring the defendants Alfredo Ching
and Emilio Taedo solidarily liable with defendant Cheng Ban Yek Co., Inc. for all items of the
money judgment set forth in paragraphs one 91) to eight (8) inclusive, and paragraph ten (10),
of said dispositive portion. The Order is AFFIRMED in its other aspects. No costs in this
instance.
"SO ORDERED."6
On April 11, 1990, petitioner Emilio Y. Taedo filed a motion for reconsideration of the decision,
contending that while the case was pending before the Court of Appeals the Allied Bank and
Cheng Ban Yek & Co., Inc. agreed to extend the time of payment of the indebtedness, without
the consent of petitioner, thereby relieving him of his obligation as guarantor or surety of such
obligation.7
On November 27, 1998, the Court of Appeals denied the motion for lack of merit. 8
Hence, this appeal.9
The Issues
The basic issues raised are (a) whether the execution by the respondent Bank of the Fourth
Amendatory Agreement extinguished petitioners obligations as surety, and (b) whether the
"continuing guarantee" executed by the petitioner is a contract of (surety) adhesion. 10
The Courts Ruling
We find the petition without merit.
Resolving the first issue, we note that the amendatory agreement between the respondent
Allied Banking Corporation and Cheng Ban Yek & Co., Inc. extended the maturity of the
promissory notes without notice or consent of the petitioner as surety of the obligations.

However, the "continuing guarantee" executed by the petitioner provided that he consents and
agrees that the bank may, at any time or from time to time extend or change the time of
payments and/or the manner, place or terms of payment of all such instruments, loans,
advances, credits or other obligations guaranteed by the surety. Hence, the extensions of the
loans did not release the surety.11
As to the second issue, even if the "continuing guarantee" were considered as one of adhesion,
we find the contract of "surety" valid because petitioner was "free to reject it entirely". 12
Petitioner was a stockholder and officer of Cheng Ban Yek and Co., Inc. and it was common
business and banking practice to require "sureties" to guarantee corporate obligations.
The Fallo
IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision of the Court of
Appeals.13
No costs in this instance.
SO ORDERED.
G.R. No. 119800
November 12, 2003
FILIPINAS TEXTILE MILLS, INC. and BERNARDINO VILLANUEVA, Petitioners,
vs.
COURT OF APPEALS and STATE INVESTMENT HOUSE, INC. Respondents.
DECISION
Tinga, J.:
Before this Court is a Petition for Review on Certiorari assailing the Decision1 and Resolution2 of
the Court of Appeals dated June 16, 1994 and April 19, 1995, respectively, affirming the
Decision3 of the Regional Trial Court dated July 23, 1990 which found the petitioners Filipinas
Textile Mills, Inc. ("Filtex") and Bernardino Villanueva ("Villanueva") jointly and severally liable to
respondent State Investment House, Inc. ("SIHI") for the amount of P7,868,881.11.
The antecedent facts are as follows:
On December 6, 1985, SIHI instituted a Complaint4 for the collection of the sum of
P3,118,949.75, with interest, penalties, exemplary damages, attorneys fees and costs of suit
against herein petitioners Filtex and Villanueva.
In its Complaint, SIHI alleged that sometime in 1983, Filtex applied for domestic letters of credit
to finance the purchase of various raw materials for its textile business. Finding the application
to be in order, SIHI issued on various dates domestic letters of credit 5 authorizing IndoPhilippine Textile Mills, Inc. ("Indo-Phil"), Texfiber Corporation ("Texfiber"), and Philippine
Polyamide Industrial Corporation ("Polyamide") "to value" on SIHI such drafts as may be drawn
by said corporations against Filtex for an aggregate amount not exceeding P3,737,988.05.
Filtex used these domestic letters of credit to cover its purchase of various textile materials from
Indo-Phil, Texfiber and Polyamide. Upon the sale and delivery of the merchandise, Indo-Phil,
Texfiber and Polyamide issued several sight drafts 6 on various dates with an aggregate value of
P3,736,276.71 payable to the order of SIHI, which were duly accepted by Filtex. Subsequently,
the sight drafts were negotiated to and acquired in due course by SIHI which paid the value
thereof to Indo-Phil, Texfiber and Polyamide for the account of Filtex.
Allegedly by way of inducement upon SIHI to issue the aforesaid domestic letters of credit and
"to value" the sight drafts issued by Indo-Phil, Texfiber and Polyamide, Villanueva executed a
comprehensive surety agreement7 on November 9, 1982, whereby he guaranteed, jointly and
severally with Filtex, the full and punctual payment at maturity to SIHI of all the indebtedness of
Filtex. The essence of the comprehensive surety agreement was that it shall be a continuing
surety until such time that the total outstanding obligation of Filtex to SIHI had been fully settled.
In order to ensure the payment of the sight drafts aforementioned, Filtex executed and issued to
SIHI several trust receipts8 of various dates, which were later extended with the issuance of
replacement trust receipts all dated June 22, 1984, covering the merchandise sold. Under the

trust receipts, Filtex agreed to hold the merchandise in trust for SIHI, with liberty to sell the same
for SIHI's account but without authority to make any other disposition of the said goods. Filtex
likewise agreed to hand the proceeds, as soon as received, to SIHI "to apply" against any
indebtedness of the former to the latter. Filtex also agreed to pay SIHI interest at the rate of
25% per annum from the time of release of the amount to Indo-Phil, Texfiber and Polyamide
until the same is fully paid, subject to SIHI's option to reduce the interest rate. Furthermore, in
case of delay in the payment at maturity of the aggregate amount of the sight drafts negotiated
to SIHI, said amount shall be subject to two percent (2%) per month penalty charge payable
from the date of default until the amount is fully paid.
Because of Filtex's failure to pay its outstanding obligation despite demand, SIHI filed a
Complaint on December 6, 1985 praying that the petitioners be ordered to pay, jointly and
severally, the principal amount of P3,118,949.75, plus interest and penalties, attorney's fees,
exemplary damages, costs of suit and other litigation expenses.
In its Answer with Counterclaim,9 Filtex interposed special and affirmative defenses, i.e., the
provisions of the trust receipts, as well as the comprehensive surety agreement, do not reflect
the true will and intention of the parties, full payment of the obligation, and lack of cause of
action. For his part, Villanueva interposed the same special and affirmative defenses and added
that the comprehensive surety agreement is null and void and damages and attorney's fees are
not legally demandable.10 The petitioners, however, failed to specifically deny under oath the
genuineness and due execution of the actionable documents upon which the Complaint was
based.
On July 23, 1990, the Regional Trial Court of Manila rendered judgment 11 holding Filtex and
Villanueva jointly and severally liable to SIHI. Dissatisfied, Filtex and Villanueva filed an
Appeal,12 primarily contending that they have fully paid their indebtedness to SIHI and asserting
that the letters of credit, sight drafts, trust receipts and comprehensive surety agreement upon
which the Complaint is based are inadmissible in evidence supposedly because of non-payment
of documentary stamp taxes as required by the Internal Revenue Code. 13
In its assailed Decision, the Court of Appeals debunked the petitioners' contention that the
letters of credit, sight drafts, trust receipts and comprehensive surety agreement are
inadmissible in evidence ruling that the petitioners had "in effect, admitted the genuineness and
due execution of said documents because of their failure to have their answers placed under
oath, the complaint being based on actionable documents in line with Section 7, Rule 8 of the
Rules of Court."14 The appellate court also ruled that there remained an unpaid balance as of
January 31, 1989 of P868,881.11 for which Filtex and Villanueva are solidarily liable. 15
The appellate court denied the petitioners' Motion for Reconsideration16 in its Resolution,17 ruling
that the petitioners failed to raise new and substantial matters that would warrant the reversal of
its Decision. However, due to certain typographical oversights, the Court of Appeals modified its
Decision and stated that the correct unpaid balance as of January 31, 1989 was actually
P7,868,881.11, excluding litigation and other miscellaneous expenses and filing fees. 18
In asking this Court to reverse and set aside the aforementioned Decision and Resolution of the
Court of Appeals, the petitioners argued that the appellate court should not have admitted in
evidence the letters of credit, sight drafts, trust receipts and comprehensive surety agreement
for lack of the requisite documentary stamps thereon. They hypothesized that their implied
admission of the genuineness and due execution of these documents for failure to specifically
deny the same under oath should not be equated with an admission in evidence of the
documents and an admission of their obligation. They also maintained that they have fully paid
the obligation and, in fact, have made an excess payment in the amount of P415,722.53. In
addition, Villanueva asserted that the comprehensive surety agreement which he executed is
null and void, inadmissible in evidence and contains material alterations. Thus, he claimed that
he should not be held solidarily liable with Filtex.
Traversing the allegations in the instant petition, SIHI stated in its Comment19 that in their

respective answers to the complaint, the petitioners expressly admitted the due execution of the
letters of credit, sight drafts and trust receipts and their obligation arising from these documents.
Having done so, they could no longer question the admissibility of these documents. Moreover,
their allegation of inadmissibility of these documents is inconsistent with their defense of full
payment. SIHI also reasoned that the documentary stamps, assuming they are required, are for
the sole account of Filtex not only because the letters of credit were issued at its instance and
application but also because it was the issuer and acceptor of the trust receipts and sight drafts,
respectively. As regards the petitioners' allegation of full payment, SIHI stressed that the
appellate court had already resolved this issue in its favor by ruling that there remained an
unpaid balance of P7,868,881.11 as of January 31, 1989 for which the petitioners were held
solidarily liable. Besides, by quoting substantial portions of their appellants' Brief in the instant
petition, the petitioners merely repeated the issues that have already been passed upon by the
appellate court. Finally, SIHI asserted the validity and admissibility of the comprehensive surety
agreement.
The threshold issue in this case is whether or not the letters of credit, sight drafts, trust receipts
and comprehensive surety agreement are admissible in evidence despite the absence of
documentary stamps thereon as required by the Internal Revenue Code. 20
We rule in the affirmative. As correctly noted by the respondent, the Answer with Counterclaim21
and Answer,22 of Filtex and Villanueva, respectively, did not contain any specific denial under
oath of the letters of credit, sight drafts, trust receipts and comprehensive surety agreement
upon which SIHI's Complaint23 was based, thus giving rise to the implied admission of the
genuineness and due execution of these documents. Under Sec. 8, Rule 8 of the Rules of
Court, when an action or defense is founded upon a written instrument, copied in or attached to
the corresponding pleading as provided in the preceding section, the genuineness and due
execution of the instrument shall be deemed admitted unless the adverse party, under oath,
specifically denies them, and sets forth what he claims to be the facts.
In Benguet Exploration, Inc. vs. Court of Appeals,24 this Court ruled that the admission of the
genuineness and due execution of a document means that the party whose signature it bears
admits that he voluntarily signed the document or it was signed by another for him and with his
authority; that at the time it was signed it was in words and figures exactly as set out in the
pleading of the party relying upon it; that the document was delivered; and that any formalities
required by law, such as a seal, an acknowledgment, or revenue stamp, which it lacks, are
waived by him.
Moreover, under Section 173 of the Internal Revenue Code the liability for payment of the stamp
taxes is imposed on "the person making, signing, issuing, accepting, or transferring" the
document. As correctly pointed out by SIHI, Filtex was the issuer and acceptor of the trust
receipts and sight drafts, respectively, while the letters of credit were issued upon its application.
On the other hand, Villanueva signed the comprehensive surety agreement. Thus, being among
the parties obliged to pay the documentary stamp taxes, the petitioners are estopped from
claiming that the documents are inadmissible in evidence for non-payment thereof.
Interestingly, the petitioners questioned the admissibility of these documents rather belatedly, at
the appeal stage even. Their respective answers 25 to SIHI's Complaint were silent on this point.
The rule is well-settled that points of law, theories, issues and arguments not adequately
brought to the attention of the trial court need not, and ordinarily will not, be considered by a
reviewing court as they cannot be raised for the first time on appeal because this would be
offensive to the basic rules of fair play, justice and due process. 26
Hence, the petitioners can no longer dispute the admissibility of the letters of credit, sight drafts,
trust receipts and comprehensive surety agreement. However, this does not preclude the
petitioners from impugning these documents by evidence of fraud, mistake, compromise,
payment, statute of limitations, estoppel and want of consideration. 27
This brings us to the petitioners' contention that they have already fully paid their obligation to

SIHI and have, in fact, overpaid by P415,722.53. This matter is purely a factual issue. In
Fortune Motors (Phils.) Corporation vs. Court of Appeals, 28 it was held that "the jurisdiction of
this Court in cases brought before it from the Court of Appeals under Rule 45 of the Rules of
Court is limited to reviewing or revising errors of law. It is not the function of this Court to
analyze or weigh evidence all over again unless there is a showing that the findings of the lower
court are totally devoid of support or are glaringly erroneous as to constitute serious abuse of
discretion. Factual findings of the Court of Appeals are conclusive on the parties and carry even
more weight when said court affirms the factual findings of the trial court." 29
It should be noted that the issue of overpayment as well as the proof presented by the
petitioners on this point merely rehash those submitted before the Court of Appeals. The
appellate court affirmed the trial court and passed upon this issue by exhaustively detailing the
amounts paid as guaranty deposit, the payments made and the balance due for every trust
receipt. This Court shall not depart from the findings of the trial court and the appellate court,
supported by the preponderance of evidence and unsatisfactorily refuted by the petitioners, as
they are.
As a final issue, Villanueva contended that the comprehensive surety agreement is null and void
for lack of consent of Filtex and SIHI. He also alleged that SIHI materially altered the terms and
conditions of the comprehensive surety agreement by granting Filtex an extension of the period
for payment thereby releasing him from his obligation as surety. We find these contentions
specious.
In the first place, the consent of Filtex to the surety may be assumed from the fact that
Villanueva was the signatory to the sight drafts and trust receipts on behalf of Filtex.30 Moreover,
in its Answer with Counterclaim,31 Filtex admitted the execution of the comprehensive surety
agreement with the only qualification that it was not a means to induce SIHI to issue the
domestic letters of credit. Clearly, had Filtex not consented to the comprehensive surety
agreement, it could have easily objected to its validity and specifically denied the same. SIHI's
consent to the surety is also understood from the fact that it demanded payment from both
Filtex and Villanueva.
As regards the purported material alteration of the terms and conditions of the comprehensive
surety agreement, we rule that the extension of time granted to Filtex to pay its obligation did
not release Villanueva from his liability. As this Court held in Palmares vs. Court of Appeals:32
"The neglect of the creditor to sue the principal at the time the debt falls due does not discharge
the surety, even if such delay continues until the principal becomes insolvent
The raison d'etre for the rule is that there is nothing to prevent the creditor from proceeding
against the principal at any time. At any rate, if the surety is dissatisfied with the degree of
activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and
become subrogated to all the rights and remedies of the creditor.
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the
creditor without change in the time when the debt might be demanded, does not constitute an
extension of the time of payment, which would release the surety. In order to constitute an
extension discharging the surety, it should appear that the extension was for a definite period,
pursuant to an enforceable agreement between the principal and the creditor, and that it was
made without the consent of the surety or with a reservation of rights with respect to him. The
contract must be one which precludes the creditor from, or at least hinders him in, enforcing the
principal contract within the period during which he could otherwise have enforced it, and
precludes the surety from paying the debt." 33
Lastly, with regard to Villanueva's assertion that the 25% annual interest to be paid by Filtex in
case it failed to pay the amount released to suppliers was inserted by SIHI without his consent,
suffice it to say that the trust receipts bearing the alleged insertion of the 25% annual fee are
countersigned by him. His pretension of lack of knowledge and consent thereto is obviously
contrived.

In view of the foregoing, we find the instant petition bereft of merit.1wphi1

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision and
Resolution of the Court of Appeals concurring with the decision of the trial court are hereby
AFFIRMED. Costs against the petitioners.
SO ORDERED.
G.R. No. 160466
January 17, 2005
SPOUSES ALFREDO and SUSANA ONG, petitioners,
vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.
DECISION
PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the
Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003, affirming
the decision of the trial court denying petitioners motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the
manufacture and export of finished wood products. Petitioners-spouses Alfredo and Susana
Ong are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now EquitablePhilippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of
money1 against petitioners-spouses. Respondent bank sought to hold petitioners-spouses liable
as sureties on the three (3) promissory notes they issued to secure some of BMCs loans,
totalling five million pesos (P5,000,000.00).
The complaint alleged that in 1991, BMC needed additional capital for its business and applied
for various loans, amounting to a total of five million pesos, with the respondent bank.
Petitioners-spouses acted as sureties for these loans and issued three (3) promissory notes for
the purpose. Under the terms of the notes, it was stipulated that respondent bank may consider
debtor BMC in default and demand payment of the remaining balance of the loan upon the levy,
attachment or garnishment of any of its properties, or upon BMCs insolvency, or if it is declared
to be in a state of suspension of payments. Respondent bank granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with
the Securities and Exchange Commission (SEC) after its properties were attached by creditors.
Respondent bank considered debtor BMC in default of its obligations and sought to collect
payment thereof from petitioners-spouses as sureties. In due time, petitioners-spouses filed
their Answer.1awphi1.nt
On October 13, 1992, a Memorandum of Agreement (MOA) 2 was executed by debtor BMC, the
petitioners-spouses as President and Treasurer of BMC, and the consortium of creditor banks of
BMC (of which respondent bank is included). The MOA took effect upon its approval by the SEC
on November 27, 1992.3
Thereafter, petitioners-spouses moved to dismiss 4 the complaint. They argued that as the
SEC declared the principal debtor BMC in a state of suspension of payments and, under the
MOA, the creditor banks, including respondent bank, agreed to temporarily suspend any
pending civil action against the debtor BMC, the benefits of the MOA should be extended to
petitioners-spouses who acted as BMCs sureties in their contracts of loan with respondent
bank. Petitioners-spouses averred that respondent bank is barred from pursuing its collection
case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court of
Appeals which affirmed the trial courts ruling that a creditor can proceed against petitionersspouses as surety independently of its right to proceed against the principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by respondent bank should

be dismissed for three (3) reasons: First, the MOA provided that during its effectivity, there shall
be a suspension of filing or pursuing of collection cases against the BMC and this provision
should benefit petitioners as sureties. Second, principal debtor BMC has been placed under
suspension of payment of debts by the SEC; petitioners contend that it would prejudice them if
the principal debtor BMC would enjoy the suspension of payment of its debts while petitioners,
who acted only as sureties for some of BMCs debts, would be compelled to make the payment;
petitioners add that compelling them to pay is contrary to Article 2063 of the Civil Code which
provides that a compromise between the creditor and principal debtor benefits the guarantor
and should not prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code
which provides that: "the guarantor may set up against the creditor all the defenses which
pertain to the principal debtor and are inherent in the debt; but not those which are purely
personal to the debtor." Petitioners aver that if the principal debtor BMC can set up the defense
of suspension of payment of debts and filing of collection suits against respondent bank,
petitioners as sureties should likewise be allowed to avail of these defenses.
We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced
as these provisions refer to contracts of guaranty. They do not apply to suretyship
contracts. Petitioners-spouses are not guarantors but sureties of BMCs debts. There is a sea
of difference in the rights and liabilities of a guarantor and a surety. A guarantor insures the
solvency of the debtor while a surety is an insurer of the debt itself. A contract of guaranty
gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor
has proceeded against the properties of the principal debtor and the debt remains unsatisfied
that a guarantor can be held liable to answer for any unpaid amount. This is the principle of
excussion. In a suretyship contract, however, the benefit of excussion is not available to the
surety as he is principally liable for the payment of the debt. As the surety insures the debt
itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of
whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go
directly against the surety although the principal debtor is solvent and is able to pay or no prior
demand is made on the principal debtor. A surety is directly, equally and absolutely bound
with the principal debtor for the payment of the debt and is deemed as an original
promissor and debtor from the beginning.5
Under the suretyship contract entered into by petitioners-spouses with respondent bank, the
former obligated themselves to be solidarily bound with the principal debtor BMC for the
payment of its debts to respondent bank amounting to five million pesos (P5,000,000.00). Under
Article 1216 of the Civil Code,6 respondent bank as creditor may proceed against petitionersspouses as sureties despite the execution of the MOA which provided for the suspension of
payment and filing of collection suits against BMC. Respondent banks right to collect payment
from the surety exists independently of its right to proceed directly against the principal debtor.
In fact, the creditor bank may go against the surety alone without prior demand for payment on
the principal debtor.7
The provisions of the MOA regarding the suspension of payments by BMC and the nonfiling of collection suits by the creditor banks pertain only to the property of the principal
debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties of BMC
were mentioned in the petition with the SEC. 8 Secondly, there is nothing in the MOA that
involves the liabilities of the sureties whose properties are separate and distinct from that of the
debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the
creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and
corporate assets. It has no jurisdiction over the properties of BMCs officers or
sureties.1awphi1.nt
Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties can
prosper. The trial courts denial of petitioners motion to dismiss was proper.

IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to

costs.
SO ORDERED.
G.R. No. L-23663
October 17, 1925
JOSEFA LAPLANA, as administratrix of the estate of Ana Maria Alcantara, plaintiffappellant,
vs.
MARIANO GARCHITORENA CHEREAU and ANDREE GARCHITORENA CHEREAU,
defendants-appellants.
Antonio V. Herrero for plaintiff-appellant. Crossfield and O'Brien and Isidro Santiago for
defendants-appellants.
STREET, J.:
This action was instituted on December 27, 1921, in the Court of First Instance of Camarines
Sur by Josefa Laplana, as administratrix of the estate of Ana Maria Alcantara, against Mariano
Garchitorena Chereau and Andree Garchitorena Chereau, for the purpose of compelling them
to execute a mortgage on certain real property and to recover the indebtedness secured by said
mortgage. In connection with this complaint the plaintiff asked for an order for the preventive
annotation of her right to be secured by said mortgage, in the registry of titles, for the purpose of
securing the benefit of lis pendens, contingent upon the outcome of the litigation. This order was
granted. Upon hearing the cause the trial judge ignored the prayer for the creation of a formal
mortgage but gave judgment for the plaintiff to recover the amount sued for, consisting of the
sum of P24,902.86, with interest from July 2, 1921, and an additional sum of P2,000 to cover
expenses of litigation and attorneys' fees. From this judgment the plaintiff appealed in respect to
the action of the court in refusing to require the defendants to execute the mortgage, and the
defendants appealed in respect to the order requiring them to pay to the plaintiff the amounts
stated.
Omitting a long series of historical antecedents not necessary to the determination of the case,
the facts are briefly these: On July 2, 1921, the defendant Mariano Garchitorena, acting under
competent power of attorney from his sister, Andree Garchitorena, executed a public document
in the City of Manila, on behalf both of himself and his said sister, admitting that the two were
indebted to the plaintiff, Josefa Laplana as administratrix of Ana Maria Alcantara in the amount
of P24,902.86 as of the date of June 30, immediately preceding. In the same document the said
Mariano Garchitorena obligated himself and sister to pay said sum within one year from July 1,
of the same year with interest at the rate of one per centum per month, payable within the first
fifteen days of each month beginning with the succeeding August.
In the same document it was declared that the obligors in this contract, Mariano and Andree
Garchitorena, were the owners of a large estate, known as the Hacienda Salvacion, located in
the barrio of Hignaroy, municipality of Tigaon, Ambos Camarines, for the registration of which
proceedings were then pending in the Court of First Instance of said province; and it was
agreed that as soon as they should obtain a Torrens title to the said hacienda a second
mortgage upon the same would be executed by Mariano Garchitorena, acting in his own behalf
and as attorney in fact of his sister, to secure said debt. Finally, it was declared that the
mortgage to be executed should respond not only for capital and interest of said debt but
furthermore for the sum of P2,000 agreed upon for costs and expenses, including the attorney's
fees of the creditor in case of litigation.
It appears that in the official survey made for the purposes of the registration proceedings the
Hacienda Salvacion was divided into three parcels, consisting, respectively, of about 452.81,
176, and 103.52 hectares all of which were subject to a first mortgage in favor of the Philippine

National Bank for the sum of P15,000. Of these three parcels the lot No. 2 was the first to be
registered, and when the certificate of title issued, the defendant, Mariano Garchitorena, instead
of constituting a second mortgage thereon in favor of the estate of Ana Maria Alcantara,
mortgaged the lot on November 28, 1921, to one Bartolome M. Martin, to secure a loan for the
sum of P11,000, received on that date by said Garchitorena. Three days thereafter the plaintiff
instituted the present action for the purpose, as already stated, of compelling the defendants to
execute a mortgage and to recover the amount claimed in the complaint. It will be noted that the
action was brought before the date of the maturity of the debt as fixed in the contract, but the
plaintiff insists that the act of Mariano Garchitorena in mortgaging lot No. 2 to a stranger
constitutes a diminution of the value of the security which he had contracted to give to the
plaintiff and, under No. 3 of article 1129 of the Civil Code, confers on the creditor the right to
treat the whole debt as due. The trial court considered this contention to be well founded, a
conclusion in which we agree. The contention of the defendants that the action was prematurely
brought is therefore not well founded.
By the terms of the contract of July 2, 1921, it was explicitly agreed that a mortgage should be
created in favor of the plaintiff upon the Hacienda Salvacion as soon as a Torrens title should be
secured, and the defendants were obligated to execute a mortgage in favor of the plaintiff
immediately upon obtaining a title to any part thereof, in preference to any creditor other than
the Philippine National Bank which had a first mortgage for P15,000 on the estate. It is
pretended by the defendants that the intention was that the mortgage should be created when a
Torrens title should be obtained to the whole hacienda, and that the obligation to execute a
mortgage did not arise when a certificate of title had been obtained to one lot only of the three
constituting the hacienda. We consider this suggestion an untenable evasion of the spirit of the
agreement, and it is obvious that the creation of a second mortgage in favor of Martin was in
violation of the stipulation to execute a second mortgage on the property to the plaintiff.
As already stated, while giving judgment for the debt, the trial court at first failed to make any
pronouncement with reference to the right of the plaintiff to have said mortgage executed. In the
motion dated September 13, 1924, the attorney for the plaintiff asked the court to make a proper
provision in the judgment for the execution by the defendants of the second mortgage in favor of
the plaintiff on the hacienda. In reply to this motion the trial judge made its order of December
24, 1924, in which said motion was denied on the ground that the two causes of action, namely,
to enforce the execution of the mortgage; and to recover judgment for the indebtedness, were
mutually inconsistent and that both species of relief could not properly be granted. We are of the
opinion that this ruling was erroneous. It is true that a promise to constitute a mortgage gives
rise only to a personal obligation between the contracting parties (art. 1862, Civ. Code) and
creates no real right in the property, but the agreement to constitute the mortgage is lawful and
such stipulation can be enforced by the creditor, being in no wise inconsistent with the right to
recover the indebtedness. But a court of equity never requires an unnecessary thing and in this
case all of the rights if the creditor will be adequately protected by declaring that the
indebtedness recognized by Mariano Garchitorena in the document of July 2, 1921, constitutes
a lien in the nature of a mortgage upon the Hacienda Salvacion, it appearing that the
registration of the whole has been effected. It is a maxim of jurisprudence that "equity regards
that as done which ought to be done," and in obedience to this precept, as between the parties
to this record, the property must be considered to be subject to the same lien as if the mortgage
which had been agreed to be made had been actually executed. (1 Pom., Eq. Jur., secs. 363377.) It is our opinion, therefore that there is merit in the plaintiff's appeal, though the remedy to
be conceded is not precisely the compelling of the defendants to execute the mortgage a
declaration of the existence of the lien being sufficient.
We note the in the brief of the defendants, as appellees, it is insisted the plaintiff's appeal was
not perfected in time, with the result that this court has no jurisdiction to entertain the appeal.
This contention is not well founded. In this connection we note that the original judgment was

rendered by the trial court on August 27, 1924, and notice of this decision was served on the
attorney for the appellant on September 5, 1924. On September 13 said attorney presented his
motion, asking the court to amplify the judgment and in particular to pass upon the rights of the
plaintiff to compel the defendants to execute a mortgage in favor of the plaintiff. The court kept
this motion under consideration until December 24, 1924, when the motion was overruled. The
submission of this petition to the court had the effect of suspending the running of the time for
the taking of the necessary steps for appeal; and if this period be deducted, it will be found that
all of the steps looking towards the perfection of the appeal were taken within due time and in
the manner necessary to give this court jurisdiction over the cause. The contention of the
defendant-appellees that the appeal of the plaintiff should not be entertained is therefore illfounded. 1awph!l.net
In the third fourth and fifth errors assigned in the brief of the defendants, as appellants, an effort
is made to demonstrates that the true amount of the defendants indebtedness to the plaintiff is
not more than P8,000, with interest at twelve per centum per annum from October 20, 1920,
and that the document of July 2, 1921 admitting indebtedness to the extent of P24,902.86 was
obtained from Mariano Garchitorena by fraud and deceit. We have examined the considerations
in support of this contention and find the same to have been so completely refuted in the able
opinion of the trial court that we find it unnecessary to comment further, adopting the conclusion
of the appealed decision upon this point.
We note that during the pendency of this litigation Carmen Garchitorena Alcantara was
declared, in the proceedings over the estate of her mother, Ana Maria Alcantara, to be the
latter's heir and entitled to succeed to the right of action in this case, for which reason the said
Carmen Garchitorena Alcantara was substituted as party plaintiff by order of the court of August
2, 1922, since which date the litigation has proceeded in her own name and right.
For the reasons states the decision which is the subject of appeal will be affirmed in so far as it
requires the defendants jointly and severally to pay to the present plaintiff, Carmen Garchitorena
Alcantara, the sum of P24,902.86, with yearly interest at twelve per centum from July 2, 1921
until paid plus the further sum of P2,000 as costs, expenses and attorney's fees, and said
decision will be modified by adding thereto a pronouncement that the aforesaid indebtedness
constitutes a lien upon the Hacienda Salvacion consisting of the three lots described in the
complaint, and a duly certified copy of the dispositive part of this decision will be certified to the
register of deeds of Camarines Sur, in order that the existence of this lien may be noted in the
proper certificates of title, to which end the defendants are enjoined to produce before said
register the owner's duplicates. No express pronouncement will be made as to costs.
G.R. No. L-17072
October 31, 1961
CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee,
vs.
BRIGIDA MARCOS, ET AL., defendants-appellants.
Aladin B. Bermudez for defendants-appellants.Cube and Fajardo for plaintiff-appellee.
REYES, J.B.L., J.:
The main question in this appeal is whether or not a mortgagee may foreclose a mortgage on a
piece of land covered by a free patent where the mortgage was executed before the patent was
issued and is sought to be foreclosed within five years from its issuance.
The facts of the case appear to be as follows:
On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000 from
plaintiff Cristina Marcel Vda. de Bautista and to secure payment thereof conveyed to the latter
by way of mortgage a two (2)-hectare portion of an unregistered parcel of land situated in Sta.
Ignacia, Tarlac. The deed of mortgage, Exhibit "A", provided that it was to last for three years,
that possession of the land mortgaged was to be turned over to the mortgagee by way of
usufruct, but with no obligation on her part to apply the harvests to the principal obligation; that

said mortgage would be released only upon payment of the principal loan of P2,000 without any
interest; and that the mortgagor promised to defend and warrant the mortgagee's rights over the
land mortgaged.
Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the heirs of her
deceased mother Victoriana Cainglet (who are Brigida herself and her three sisters), an
application for the issuance of a free patent over the land in question, on the strength of the
cultivation and occupation of said land by them and their predecessor since July, 1915. As a
result, Free Patent No. V-64358 was issued to the applicants on January 25, 1957, and on
February 22, 1957, it was registered in their names under Original Certificate of Title No. P-888
of the office of Register of Deeds for the province of Tarlac.
Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid up to
1959, the latter, on March 4, 1959, filed the present action against Brigida and her husband
(Civil Case No. 3382) in the court below for the payment thereof, or in default of the debtors to
pay, for the foreclosure of her mortgage on the land give as security. Defendants moved to
dismiss the action, pointing out that the land in question is covered by a free patent and could
not, therefore, under the Public Land Law, be taken within five years from the issuance of the
patent for the payment of any debts of the patentees contracted prior to the expiration of said
five-year period; but the lower court denied the motion to dismiss on the ground that the law
cited does not apply because the mortgage sought to be foreclosed was executed before the
patent was issued. Defendants then filed their answer, reiterating the defense invoked in their
motion to dismiss, and alleging as well that the real contract between the parties was an
antichresis and not a mortgage. Pre-trial of the case followed, after which the lower court
rendered judgment finding the mortgage valid to the extent of the mortgagor's pro-indiviso share
of 15,333 square meters in the land in question, on the theory that the Public Land Law does
not apply in this case because the mortgage in question was executed before a patent was
issued over the land in question; that the agreement of the parties could not be antichresis
because the deed Exhibit "A" clearly shows a mortgage with usufruct in favor of the mortgagee;
and ordered the payment of the mortgage loan of P2,000 to plaintiff or, upon defendant's failure
to do so, the foreclosure of plaintiff's mortgage on defendant Brigida Marcos' undivided share in
the land in question. From this judgment, defendants Brigida Marcos and her husband
Osmondo Apolocio appealed to this Court.
There is merit in the appeal.
The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so
much on whether she could take said land within the prohibitive period of five years from the
issuance of defendants' patent for the satisfaction of the indebtedness in question, but on
whether the deed of mortgage Exhibit "A" is at all valid and enforceable, since the land
mortgaged was apparently still part of the public domain when the deed of mortgage was
constituted. As it is an essential requisite for the validity of a mortgage that the mortgagor be the
absolute owner of the thing mortgaged (Art. 2085), the mortgage here in question is void and
ineffective because at the time it was constituted, the mortgagor was not yet the owner of the
land mortgaged and could not, for that reason, encumber the same to the plaintiff-appellee. Nor
could the subsequent acquisition by the mortgagor of title over said land through the issuance of
a free patent validate and legalize the deed of mortgage under the doctrine of estoppel (cf. Art.
1434, New Civil Code,1 since upon the issuance of said patient, the land in question was
thereby brought under the operation of the Public Land Law that prohibits the taking of said land
for the satisfaction of debts contracted prior to the expiration of five years from the date of the
issuance of the patent (sec. 118, C.A. No. 141). This prohibition should include not only debts
contracted during the five-year period immediately preceding the issuance of the patent but also
those contracted before such issuance, if the purpose and policy of the law, which is "to
preserve and keep in the family of the homesteader that portion of public land which the State
has gratuitously given to him" (Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v.

Roman Catholic Church of Midsayap, G.R. L-6088, Feb. 24, 1954), is to be upheld.
The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant invalidity of
the collate agreement in the same deed of mortgage whereby possession of the land
mortgaged was transferred to plaintiff-appellee in usufruct, without any obligation on her part to
account for its harvests or deduct them from defendants' indebtedness of P2,000. Defendant
Brigida Marcos, who, together with her sisters, was in possession of said land by herself and
through her deceased mother before her since 1915, had possessory rights over the same even
before title vested in her as co-owner by the issuance of the free patent to her and her sisters,
and these possessory right she could validly transfer and convey to plaintiff-appellee, as she did
in the deed of mortgage Exhibit "A". The latter, upon the other hand, believing her mortgagor to
be the owner of the land mortgaged and not being aware of any flaw which invalidated her
mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as such had the right
to all the fruits received during the entire period of her possession in good faith (Art. 544,
N.C.C.). She is, therefore, entitled to the full payment of her credit of P2,000 from defendants,
without any obligation to account for the fruits or benefits obtained by her from the land in
question.
WHEREFORE, the judgment appealed from is reversed insofar as it orders the foreclosure of
the mortgage in question, but affirmed in all other respects. Costs again defendants-appellants.
G.R. Nos. L-43673 and 43674
October 24, 1938
LICERIO LEGASPI and JULIAN SALCEDO, plaintiffs-appellants,
vs.
DAMASO CELESTIAL, defendant-appellee.
Ambrosio Santos and Calixto M. Legaspi for appellants. Juan S. Rustia for appellee.
VILLA-REAL, J.:
The plaintiffs Licerio Legaspi and Julian Salcedo appeal to this court from the judgment
rendered by the Court of First Instance of Cavite in civil cases Nos. 3025 and 3037 of said
court, the dispositive part of which reads as follows:
Wherefore, judgment is rendered by this court holding that both the so-called instrument of
mortgage Exhibit A and the instrument Exhibit C-1 are really contracts of antichresis and,
consequently, the plaintiffs should render to the defendant an account of the 65 salt beds, which
are the subject matter of the two cases, as soon this decision becomes final, taking into
consideration the sums already paid by the defendant to the plaintiffs.
The writ of preliminary attachment issued in civil case No. 3037 is set aside, without costs in
both cases. It is so ordered.
In support of their appeal, the appellants assign the following alleged errors as committed by the
court a quo in its judgment in question, to wit:
1. The court erred in holding that both the instrument of mortgage Exhibit A and the instrument
Exhibit C-1 are really contracts of antichresis.
2. The court likewise erred in ordering the plaintiffs to render to the defendant an account of the
fruits produced by the 65 salt beds, which are the subject matter of both cases.
3. Lastly, the court erred in not absolving the plaintiffs from the counterclaim and crosscomplaint filed by the defendant, with the costs to the latter.
On January 17, 1935, the plaintiffs brought an action against the defendant Damaso Celestial in
the justice of the peace court of Kawit, Cavite, praying that judgment be rendered, ordering said
defendant to pay to the abovenamed plaintiffs the sum of P556.160, plus the corresponding
legal interest thereon from the date of the filing of the complaint, until fully paid, and the costs.
The defendant, answering the complaint, admitted the essential facts alleged therein, stating
that he was disposed to pay what he should appear still to be indebted and, by way of
counterclaim and cross-complaint, claimed that, the contract entered into between him and the

plaintiffs being an antichresis, the latter were bound to render an account of the products of the
five salt beds, the total production of which was from 300 to 350 cavans of salt at P1 a cavan.
After due trial of the case, the justice of the peace court of Kawit, Cavite, on February 5, 1935,
rendered judgment in said case, the dispositive part of which reads as follows:
Premises considered, judgment hereby rendered ordering the defendant to pay the herein
plaintiffs the sum of P556.60 with interest at the legal rate from January 17, 1935, and to pay
the costs of suit. It is so ordered.
From the foregoing judgment, the defendant appealed to the Court of First Instance of Cavite.
On January 30, 1935, the same plaintiffs filed a complaint in civil case No. 3025 of said Court of
First Instance, praying that the same defendant Damaso Celestial be ordered to pay them the
sum of P7,637, with the legal interest thereon from the date of the filing of the complaint, until
fully paid, and the costs of the suit, and that, upon his failure to do so, the mortgage constituted
by said defendant in their favor to secure the payment of the loan in question be ordered
foreclosed.lwphi1.nt
The defendant, answering the complaint, admitted the material facts alleged therein as well as
the conditions set forth in the documents Exhibit "A" attached thereto, stating that he had never
refused to pay any balance of the debt resulting after a rendition of accounts by the plaintiffs
and a liquidation; and by way of counterclaim and cross-complaint, alleged that the sixty-five
salt beds administered by the plaintiffs, by virtue of the above-stated documents, yielded a net
produced of a about 6,500 cavans of salt every six months at P1 a cavan; that the plaintiffs
should render to the defendant an account of said products so that they may be applied to the
payment of his loan or debt; that the approximate total value of half of the number of cavans of
salt reaped and availed of by the plaintiffs from the sixty-five salt beds administered by them
during three years and eleven months, that is, from February 23, 1931, to February 8, 1935, the
date of the filing of the answer, was P13,000; that after deducting from said P13,000 the total
amount of the defendant's debt to the plaintiffs under the above-stated contracts, that is,
P8,193.60, there would still remain a balance in favor of the defendant in the sum of P4,806.40,
which he is entitled to collect from the plaintiffs. He prayed that judgment be rendered, ordering
the plaintiffs to render an account of their administration and to pay jointly and severally the sum
of P4,806.40, with the legal interest thereon, plus the damages that would result if the contract
of mortgage already perfected with Melchor de Lara should be frustrated and should he fail to
find another to execute said contract of mortgage in the sum of P25,000.
The plaintiffs, replying to the special defense and cross-complaint, denied each and every one
of the facts alleged therein, stating that the salt gathered from the 60 salt beds mentioned in the
complaint was for the exclusive use, benefit and enjoyment of the plaintiffs who, under the
provisions of Exhibit A and the intention of the parties, were not obliged to submit to the
defendant a liquidation of the salt produced and gathered, in order that the same may be
deducted from the principal.
On February 25, 1935, the parties to civil case No. 3025 submitted the following stipulation to
the court, to wit:
Come now the parties to this case, assisted by their respective attorney, and respectfully submit
the following stipulation:
1. That, aside from this case, the same plaintiffs had instituted against the same defendant in
the justice of the peace court of Kawit, Cavite, civil case No. 165, for the recovery of the sum of
P556.60 representing a loan made by the plaintiffs on a portion of the same parcel of land which
is the subject matter of the mortgage in this case before this Honorable Court of First Instance,
as evidenced by another notarial document dated August 13, 1932. And in this stipulation, said
case shall be understood to be consolidated with the present one.
2. That the defendants agrees and is disposed to make immediate delivery to the plaintiffs of the
total amount of P8,193.60, without prejudice to his right to prosecute the case in connection with
his contention of their administration. In must render to him an account of their administration. In

consideration hereof, the plaintiffs, in turn, agree and bind themselves now to secure the
amount in question, or the receipt thereof, for the due compliance with the judgment to be
rendered by the court on said rendition of accounts, with sufficient property of their own worth
not less than the 14th instant,; and likewise forthwith to respect, turn over and restore now, as
they hereby do so, to the defendant or his assignees, the conclusive possession, administration,
benefit and use of the mortgaged property in question, particularly the sixty-five salt beds
administered by said plaintiffs to date.
Wherefore, both parties sign this stipulation and pray this honorable court to render its decision
in accordance herewith, upon acting on the motion of the defendant, dated February 7, 1935.
Cavite, Cavite, February 9, 1935.
In view of the foregoing stipulation, the court a quo rendered contracts entered into between the
plaintiffs Licerio Legaspi and Julian Salcedo, on the one hand, and Damaso Celestial, on the
other hand, appearing in the instruments Exhibits A and C-1 are of mortgage or antichresis.
The contracts Exhibit C-1, entitled "Contract of Antichresis", contains the following stipulation:
That during the existence of this Contract, the Party of the SECOND PART (Licerio Legaspi and
Julian Salcedo) or their representative shall administer and enjoy the benefits and fruits
gathered and harvested thereon; and that the Party of the FIRST PART (Damaso Celestial)
shall give and turn over to the Party of the SECOND PART the administration and to possession
of the said 5 salt beds during the term of this contract.
In the contract Exhibit A, the parties stipulated the following:
(a) The term of this mortgage is three (3) years to be counted from February 23, 1931, and
should the party of the first part, after the expiration of this term, fail to pay to the party of the
second part the amount of this mortgage, this contract shall subsist in full force and effect and
continue the debt or amount of the mortgage is fully paid.
(b) During the term of the mortgage, the party of the second part of the mortgagees shall
administer or take charge of the work and harvest of the 60 salt beds and pay for the
maintenance of the croppers and defray the expenses for the improvement thereof; and the
party of the first part shall turn over to the party of the second part the administration of the sixty
salt beds mortgaged for the duration of the stipulation contract.
(c) The crop from the sixty salt beds shall be shared equally by the croppers and the party of the
second part, after deducting the expenses paid by the party of the second part during each
harvest period and throughout the existence of this mortgage.
It should be noted that the contract Exhibit C-1 is entitled "Contract of Artichresis" while the
contract Exhibit A is entitled "Contract of Mortgage". Both in the contract Exhibit C-1 and in the
contract Exhibit A, the defendant Damaso Calestial, as debtor, agrees to turn over to the
plaintiffs, as creditors, the possession of the salt beds so that the latter, after paying the
expenses for the production, administration and harvest of the salt with one-half of the produce,
may keep the other half of the use, benefit and enjoyment. It is not stipulated that the net
produce of the salt beds shall first be applied to the payment of the interest, if any, and
afterwards to that of the principal of their credit. Both contracts merely provide that the creditors
shall keep one-half of the products. Therefore, they are not contracts of antichresis, as defined
by article 1881 of the Civil Code. In a contract of mortgage, the mortgagor, as a general rule,
retains the possession of the property mortgaged as security for the payment of the sum of
money borrowed from the mortgagee, and pays the latter a certain per cent thereof as interest
on his principal by way of compensation for his sacrifice in depriving himself of the use of said
money and the enjoyment of its fruits, in order to give them to the mortgagor. Inasmuch as it is
not an essential requisite of the contract of mortgage that the property mortgaged remain in the
possession of the mortgagor (article 1857 of the Civil Code), the latter may deliver said property
to the mortgagee, without thereby altering the nature of the contract. It not being an essential
requisite of said contract of mortgage that the principal of the mortgage credit bear interest, or
that the interest, as compensation for the use of the principal and enjoyment of its fruits, be in

the form of a certain per cent thereof, such interest may be in the form of fruits of the property
mortgage, without the contract's longing thereby its character of a mortgage contract. It is
stipulated in the contracts under consideration that, during the term thereof and while the total
amount of the loan remains unpaid by the debtor, the salt beds constituted as security for the
payment of said loan, shall be administered by the creditors who shall destine one-half of the
products thereof for the maintenance and support of the croppers and the improvements of the
property, keeping the other half for themselves. It appears, therefore, that the debtor, instead of
paying a certain per cent of the principal of the loan as compensation for the sacrifice made by
the creditors in depriving themselves of the use of their principal and the enjoyment of its fruits,
so as to give them to the debtor, has delivered to them the property constituted as a security for
the payment of the loan, so that they may administer and use it, enjoying its fruits, by way of
compensation for their said sacrifice in lending said debtor their money. Therefore, the
contracts, which are the subject matter of this action, have all the essential requsites of a
mortgage, enumerated in article 1857 of the Civil Code and, consequently, are mortgage
contracts.
With respects to the second assignment of alleged error, this court, having arrived at the
conclusion that the contracts entered into between the plaintiffs and the defendant are contracts
of mortgage and not of antichresis, finds the same to be well founded.
This court likewise finds the third assignment of alleged error to be well founded.
From the foregoing considerations, this court is of the opinion and so holds, that when a
contracts of loan with security does not stipulate the payment of interest but provides for the
delivery to the creditor by the debtor of the real property constituted as security for the payment
thereof, in order that the creditor may administer the same and avail himself of its fruits, without
stating that said fruits are to be applied to the payment of interest, if any, and afterwards to that
of the principal of the credit, the contract shall be considered to be one of mortgage and not of
antichresis.
Wherefore, the appealed judgment is reversed, and the defendant's debt to the plaintiffs is
declared paid and the deeds of security executed by both parties cancelled, dismissing the
counterclaim and cross-complained filed by said defendant and appellee Damaso Celestial, with
costs to the latter. So ordered.
G.R. No. 125055 October 30, 1998
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P.
JAVILLONAR, respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the decision rendered on February 29, 1996 by the
Court of Appeals 1 reversing, in toto, the decision of the Regional Trial Court of Pasig City in
Civil Case No. 62290, as well as the appellate court's resolution of May 7, 1996 denying
reconsideration.
Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to
private respondents, the spouses Romulo and Erlinda Javillonar, in consideration of which the
latter executed the following documents: (a) a promissory note, dated November 27, 1991,
stating an interest charge of 4% per month for six months; (b) a deed of mortgage over realty
covered by TCT No. 58748, together with the improvements thereon; and (c) an undated deed
of sale of the mortgaged property in favor of the mortgagee, petitioner A. Francisco Realty. 2
The interest on the said loan was to be paid in four installments: half of the total amount agreed
upon (P900,000.00) to be paid in advance through a deduction from the proceeds of the loan,
while the balance to be paid monthly by means of checks post-dated March 27, April 27, and

May 27, 1992. The promissory note expressly provided that upon "failure of the MORTGAGOR
(private respondents) to pay the interest without prior arrangement with the MORTGAGEE
(petitioner), full possession of the property will be transferred and the deed of sale will be
registered. 3 For this purpose, the owner's duplicate of TCT No. 58748 was delivered to
petitioner A. Francisco Realty.
Petitioner claims that private respondents failed to pay the interest and, as a consequence, it
registered the sale of the land in its favor on February 21, 1992. As a result, TCT No. 58748 was
cancelled and in lieu thereof TCT No. PT-85569 was issued in the name of petitioner A.
Francisco Realty. 4
Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on
March 13, 1992 for which they signed a promissory note which reads:
PROMISSORY NOTE
For value received I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT
CORPORATION, the additional sum of Two Million Five Hundred Thousand Pesos
(P2,500,000.00) on or before April 27, 1992, with interest at the rate of four percent (4%) a
month until fully paid and if after the said date this note and/or the other promissory note of P7.5
Million remains unpaid and/or unsettled, without any need for prior demand or notification, I
promise to vacate voluntarily and willfully and/or allow A.FRANCISCO REALTY AND
DEVELOPMENT CORPORATION to appropriate and occupy for their exclusive use the real
property located at 56 Dragonfly, Valle Verde VI, Pasig, Metro Manila. 5
Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly
interest from May 1992, plus surcharges. As respondent spouses refused to vacate, petitioner
filed the present action for possession before the Regional Trial Court in Pasig City. 6
In their answer, respondents admitted liability on the loan but alleged that it was not their intent
to sell the realty as the undated deed of sale was executed by them merely as an additional
security for the payment of their loan. Furthermore, they claimed that they were not notified of
the registration of the sale in favor of petitioner A. Francisco Realty and that there was no
interest then unpaid as they had in fact been paying interest even subsequent to the registration
of the sale. As an alternative defense, respondents contended that the complaint was actually
for ejectment and, therefore, the Regional Trial Court had no jurisdiction to try the case. As
counterclaim, respondents sought the cancellation of TCT No. PT-85569 as secured by
petitioner and the issuance of a new title evidencing their ownership of the property. 7
On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of
which reads as follows:
WHEREFORE, prescinding from the foregoing considerations, judgment is hereby rendered
declaring as legal and valid, the right of ownership of A. Francisco Realty Find Development
Corporation, over the property subject of this case and now registered in its name as owner
thereof, under TCT No. 85569 of the Register of Deeds of Rizal, situated at No. 56 Dragonfly
Street, Valle Verde VI, Pasig, Metro Manila.
Consequently, defendants are hereby ordered to cease and desist from further committing acts
of dispossession or from withholding possession from plaintiff of the said property as herein
described and specified.
Claim for damages in all its forms, however, including attorney's fees, are hereby denied, no
competent proofs having been adduced on record, in support thereof. 8
Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial
court and dismissed the complaint against them. The appellate court ruled that the Regional
Trial Court had no jurisdiction over the case because it was actually an action for unlawful
detainer which is exclusively cognizable by municipal trial courts. Furthermore, it ruled that,
even presuming jurisdiction of the trial court, the deed of sale was void for being in fact a
pactum commissorium which is prohibited by Art. 2088 of the Civil Code.
Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied

the motion in its resolution, dated May 7, 1996. Hence, this petition for review on certiorari
raising the following issues:
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL
TRIAL COURT HAD NO JURISDICTION OVER THE COMPLAINT FILED BY THE
PETITIONER.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE
CONTRACTUAL DOCUMENTS SUBJECT OF THE INSTANT CASE ARE CONSTITUTIVE OF
PACTUM COMMISSORIUM AS DEFINED UNDER ARTICLE 2088 OF THE CIVIL CODE OF
THE PHILIPPINES.
On the first issue, the appellate court stated:
Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer, as contradistinguished from accion publiciana. As contemplated by Rule 70 of the Rules of Court, an
action for unlawful detainer which falls under the exclusive jurisdiction of the Metropolitan or
Municipal Trial Courts, is defined as withholding from by a person from another for not more
than one year, the possession of the land or building to which the latter is entitled after the
expiration or termination of the supposed rights to hold possession by virtue of a contract,
express or implied. (Tenorio vs. Gamboa, 81 Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). If no
action is initiated for forcible entry or unlawful detainer within the expiration of the 1 year period,
the case may still be filed under the plenary action to recover possession by accion publiciana
before the Court of First Instance (now the Regional Trial Court) (Medina vs. Valdellon, 63
SCRA 278). In plain language, the case at bar is a legitimate ejectment case filed within the 1
year period from the jurisdictional demand to vacate. Thus, the Regional Trial Court has no
jurisdiction over the case. Accordingly, under Section 33 of B.P. Blg. 129 Municipal Trial Courts
are vested with the exclusive original jurisdiction over forcible entry and unlawful detainer case.
(Sen Po Ek Marketing Corp. vs. CA, 212 SCRA 154 [1990]) 9
We think the appellate court is in error. What really distinguishes an action for unlawful detainer
from a possessory action (accion publiciana) and from a reivindicatory action (accion
reivindicatoria) is that the first is limited to the question of possession de facto.
An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms of an
ejectment suit that may be filed to recover possession of real property. Aside from the summary
action of ejectment, accion publiciana or the plenary action to recover the right of possession
and accion reivindicatoria or the action to recover ownership which includes recovery of
possession, make up the three kinds of actions to judicially recover possession.
Illegal detainer consists in withholding by a person from another of the possession of a land or
building to which the latter is entitled after the expiration or termination of the former's right to
hold possession by virtue of a contract, express or implied. An ejectment suit is brought before
the proper inferior court to recover physical possession only or possession de facto and not
possession de jure, where dispossession has lasted for not more than one year. Forcible entry
and unlawful detainer are quieting processes and the one-year time bar to the suit is in
pursuance of the summary nature of the action. The use of summary procedure in ejectment
cases is intended to provide an expeditious means of protecting actual possession or right to
possession of the property. They are not processes to determine the actual title to an estate. If
at all, inferior courts are empowered to rule on the question of ownership raised by the
defendant in such suits, only to resolve the issue of possession. Its determination on the
ownership issue is, however, not conclusive. 10
The allegations in both the original and the amended complaints of petitioner before the trial
court clearly raise issues involving more than the question of possession, to wit: (a) the validity
of the Transfer of ownership to petitioner; (b) the alleged new liability of private respondents for
P400,000.00 a month from the time petitioner made its demand on them to vacate; and (c) the
alleged continuing liability of private respondents under both loans to pay interest and
surcharges on such. As petitioner A. Francisco Realty alleged in its amended complaint:

5. To secure the payment of the sum of 7.5 Million together with the monthly interest, the
defendant spouses agreed to execute a Deed of Mortgage over the property with the express
condition that if and when they fail to pay monthly interest or any infringement thereof they
agreed to convert the mortgage into a Deed of Absolute Sale in favor of the plaintiff by executing
Deed of Sale thereto, copy of which is hereto attached and incorporated herein as Annex "A";
6. That in order to authorize the Register of Deeds into registering the Absolute Sale and
transfer to the plaintiff, defendant delivered unto the plaintiff the said Deed of Sale together with
the original owner's copy of Transfer Certificate of Title No. 58748 of the Registry of Rizal, copy
of which is hereto attached and made an integral part herein as Annex "B";
7. That defendant spouses later secured from the plaintiff an additional loan of P2.5 Million with
the same condition as aforementioned with 4% monthly interest;
8. That defendants spouses failed to pay the stipulated monthly interest and as per agreement
of the parties, plaintiff recorded and registered the Absolute Deed of Sale in its favor on and was
issued Transfer Certificate of Title No. PT-85569, copy of which is hereto attached and
incorporated herein as Annex "C";
9. That upon registration and transfer of the Transfer Certificate of Title in the name of the
plaintiff, copy of which is hereto attached and incorporated herein as Annex "C", plaintiff
demanded the surrender of the possession of the above-described parcel of land together with
the improvements thereon, but defendants failed and refused to surrender the same to the
plaintiff without justifiable reasons thereto; Neither did the defendants pay the interest of 4% a
month from May, 1992 plus surcharges up to the present;
10. That it was the understanding of the parties that if and when the defendants shall fail to pay
the interest due and that the Deed of Sale be registered in favor of plaintiff, the defendants shall
pay a monthly rental of P400,000.00 a month until they vacate the premises, and that if they still
fail to pay as they are still failing to pay the amount of P400,000.00 a month as rentals and/or
interest, the plaintiff shall take physical possession of the said property; 11
It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues which
involved more than a simple claim for the immediate possession of the subject property. Such
issues range across the full scope of rights of the respective parties under their contractual
arrangements. As held in an analogous case:
The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of Hagonoy,
Bulacan extended far beyond the issues generally involved in unlawful detainer suits. The
litigants therein did not raise merely the question of who among them was entitled to the
possession of the fishpond of Federico Suntay. For all judicial purposes, they likewise prayed of
the court to rule on their respective rights under the various contractual documents their
respective deeds of lease, the deed of assignment and the promissory note upon which they
predicate their claims to the possession of the said fishpond. In other words, they gave the court
no alternative but to rule on the validity or nullity of the above documents. Clearly, the case was
converted into the determination of the nature of the proceedings from a mere detainer suit to
one that is "incapable of pecuniary estimation" and thus beyond the legitimate authority of the
Justice of the Peace Court to rule on. 12
Nor can it be said that the compulsory counterclaim filed by respondent spouses challenging the
title of petitioner A. Francisco Realty was merely a collateral attack which would bar a ruling
here on the validity of the said title.
A counterclaim is considered a complaint, only this time, it is the original defendant who
becomes the plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It stands on the same footing and
is to be tested by the same rules as if it were an independent action. Hence, the same rules on
jurisdiction in an independent action apply to a counterclaim (Vivar v. Vivar, 8 SCRA 847 (1963);
Calo v. Ajar International, Inc. v. 22 SCRA 996 (1968); Javier v. Intermediate Appellate Court,
171 SCRA 605 (1989); Quiason, Philippine Courts and Their Jurisdictions, 1993 ed., p. 203). 13
On the second issue, the Court of Appeals held that, even "on the assumption that the trial court

has jurisdiction over the instant case," petitioner's action could not succeed because the deed of
sale on which it was based was void, being in the nature of a pactum commissorium prohibited
by Art. 2088 of the Civil Code which provides:
Art. 2088. The creditor cannot appropriate the things given by way to pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.
With respect to this question, the ruling of the appellate court should be affirmed. Petitioner
denies, however, that the promissory notes contain a pactum commissorium. It contends that
What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the deed
of mortgage providing for the automatic conveyance of the mortgaged property in case of the
failure of the debtor to pay the loan (Tan v. West Coast Life Assurance Co., 54 Phil. 361). A
pactum commissorium is a forfeiture clause in a deed of mortgage (Hechanova v. Adil, 144
SCRA 450; Montevergen v. Court of Appeals, 112 SCRA 641; Report of the Code Commission,
156).
Thus, before Article 2088 can find application herein, the subject deed of mortgage must be
scrutinized to determine if it contains such a provision giving the creditor the right "to
appropriate the things given by way of mortgage without following the procedure prescribed by
law for the foreclosure of the mortgage" (Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE
PROSCRIBED STIPULATION SHOULD BE FOUND IN THE MORTGAGE DEED ITSELF. 14
The contention is patently without merit. To sustain the theory of petitioner would be to allow a
subversion of the prohibition in Art. 2088.
In Nakpil v. Intermediate Appellate Court, 15 which involved the violation of a constructive trust,
no deed of mortgage was expressly executed between the parties in that case: Nevertheless,
this Court ruled that an agreement whereby property held in trust was ceded to the trustee upon
failure of the beneficiary to pay his debt to the former as secured by the said property was void
for being a pactum commissorium. Itwas there held:
The arrangement entered into between the parties, whereby Pulong Maulap was to be
"considered sold to him (respondent) . . ." in case petitioner fails to reimburse Valdes, must then
be construed as tantamount to a pactum commissorium which is expressly prohibited by Art.
2088 of the Civil Code. For, there was to be automatic appropriation of the property by Valdez in
the event of failure of petitioner to pay the value of the advances. Thus, contrary to
respondent's manifestations, all the elements of a pactum commissorium were present: there
was a creditor-debtor relationship between the parties; the property was used as security for the
loan; and, there was automatic appropriation by respondent of Pulong Maulap in case of default
of petitioner. 16
Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting
to be pacto de retro sales but found actually to be equitable mortgages.
It has been consistently held that the presence of even one of the circumstances enumerated in
Art. 1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase
an equitable mortgage. This is so because pacto de retro sales with the stringent and onerous
effects that accompany them are not favored. In case of doubt, a contract purporting to be a
sale with the right to repurchase shall be construed as an equitable mortgage.
Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that
complete and absolute title shall be vested on the vendee should the vendors fail to redeem the
property on the specified date. Such stipulation that the ownership of the property would
automatically pass to the vendee in case no redemption was effected within the stipulated
period is void for being a pactum commissorium which enables the mortgagee to acquire
ownership of the mortgaged property without need of foreclosure. Its insertion in the contract is
an avowal of the intention to mortgage rather that to sell the property. 17
Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgagee's mere act of
registering the mortgaged property in his own name upon the mortgagor's failure to redeem the
property amounted to the exercise of the privilege of a mortgagee in a pactum commissorium.

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

mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor.
The mortgagee, however, may recover the loan, although the mortgage document evidencing
the loan was nonregistrable being a purely private instrument. Failure of mortgagor to redeem
the property does not automatically vest ownership of the property to the mortgagee, which
would grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates
the provision of Article 2088 of the New Civil Code, which reads:
The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by
them. Any stipulation to the contrary is null and void.
The act of applicant in registering the property in his own name upon mortgagor's failure to
redeem the property would to a pactum commissorium which is against good morals and public
policy. 19
Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of
respondent spouses to pay interest, ownership of the property would be automatically
transferred to petitioner A. Francisco Realty and the deed of sale in its favor would be
registered, are in substance a pactum commissorium. They embody the two elements of
pactum commissorium as laid down in Uy Tong v. Court of Appeals, 20 to wit:
The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil
Code:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or
dispose of the same. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1)
that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way
of security for the payment of the principal obligation; and (2) that there should be a stipulation
for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of
non-payment of the principal obligation within the stipulated period. 21
The subject transaction being void, the registration of the deed of sale, by virtue of which
petitioner A. Francisco Realty was able to obtain TCT No. PT-85569 covering the subject lot,
must also be declared void, as prayed for by respondents in their counterclaim.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed
petitioner's complaint against respondent spouses on the ground that the stipulations in the
promissory notes are void for being a pactum commissorium, but REVERSED insofar as it ruled
that the trial court had no jurisdiction over this case. The Register of Deeds of Pasig City is
hereby ORDERED to CANCEL TCT No. PT-85569 issued to petitioner and ISSUE a new one in
the name of respondent spouses.
SO ORDERED.
G.R. No. 134330
March 1, 2001
SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners,
vs.
PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and ARSENIA ESLABON,
respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision 1 and Resolution2 in CA-G.R. No.
53865 of the Court of Appeals 3 dated May 21, 1998 and June 29, 1998, respectively, which
modified the Decision4 dated April 30, 1996 of the Regional Trial Court of Roxas City, Branch 19
in a suit5 for Declaration of Nullity of the Contract of Mortgage.
The facts are as follows:
Eduarda Belo owned an agricultural land with an area of six hundred sixty one thousand two
hundred eighty eight (661,288) square meters located in Timpas, Panitan, Capiz, covered and
described in Transfer Certificate of Title (TCT for brevity) No. T-7493. She leased a portion of

the said tract of land to respondents spouses Marcos and Arsenia Eslabon in connection with
the said spouses' sugar plantation business. The lease contract was effective for a period of
seven (7) years at the rental rate of Seven Thousand Pesos (P7,000.00) per year.
To finance their business venture, respondents spouses Eslabon obtained a loan from
respondent Philippine National Bank (PNB for brevity) secured by a real estate mortgage on
their own four (4) residential houses located in Roxas City, as well as on the agricultural land
owned by Eduarda Belo. The assent of Eduarda Belo to the mortgage was acquired through a
special power of attorney which she executed in favor of respondent Marcos Eslabon on June
15, 1982.
Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation, extrajudicial
foreclosure proceedings against the mortgaged properties were instituted by respondent PNB.
At the auction sale on June 10, 1991, respondent PNB was the highest bidder of the foreclosed
properties at Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos
(P447,632.00).
In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale at public
auction of her agricultural land on June 10, 1991 as well as the registration of the Certificate of
Sheriff's Sale in its favor on July 1, 1991, and the one-year period to redeem the land.
Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique and
Florencia Belo under a deed of absolute sale of proprietary and redemption rights.
Before the expiration of the redemption period, petitioners spouses Belo tendered payment for
the redemption of the agricultural land in the amount of Four Hundred Eighty Four Thousand
Four Hundred Eighty Two Pesos and Ninety Six Centavos (P484,482.96), which includes the
bid price of respondent PNB, plus interest and expenses as provided under Act No. 3135.
However, respondent PNB rejected the tender of payment of petitioners spouses Belo. It
contended that the redemption price should be the total claim of the bank on the date of the
auction sale and custody of property plus charges accrued and interests amounting to Two
Million Seven Hundred Seventy Nine Thousand Nine Hundred Seventy Eight and Seventy Two
Centavos (P2,779,978.72).6 Petitioners spouses disagreed and refused to pay the said total
claim of respondent PNB.
On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of Roxas City,
Civil Case No. V-6182 which is an action for declaration of nullity of mortgage, with an
alternative cause of action, in the event that the accommodation mortgage be held to be valid,
to compel respondent PNB to accept the redemption price tendered by petitioners spouses Belo
which is based on the winning bid price of respondent PNB in the extrajudicial foreclosure in the
amount of Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00)
plus interest and expenses.
In its Answer, respondent PNB raised, among others, the following defenses, to wit:
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77. In all loan contracts granted and mortgage contracts executed under the 1975 Revised
Charter (PD 694, as amended), the proper rate of interest to be charged during the redemption
period is the rate specified in the mortgage contract based on Sec. 25 7 of PD 694 and the
mortgage contract which incorporates by reference the provisions of the PNB Charters.
Additionally, under Sec. 78 of the General Banking Act (RA No. 337, as amended) made
applicable to PNB pursuant to Sec. 38 of PD No. 694, the rate of interest collectible during the
redemption period is the rate specified in the mortgage contract.
78. Since plaintiffs failed to tender and pay the required amount for redemption of the property
under the provisions of the General Banking Act, no redemption was validly effected; 8
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After trial on the merits, the trial court rendered its Decision dated April 30, 1996 granting the
alternative cause of action of spouses Belo, the decretal portion of which reads:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of plaintiffs

Spouses Enrique M. Belo and Florencia G. Belo and against defendants Philippine National
Bank and Spouses Marcos and Arsenia Eslabon:
1. Making the injunction issued by the court permanent, insofar as the property of Eduarda Belo
covered by Transfer Certificate of Title No. T-7493 is concerned;
2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo to redeem only
Eduarda Belo's property situated in Brgy. Timpas, Panitan, Capiz, and covered by Transfer
Certificate of Title No. T-7493 by paying only its bid price of P447,632.00, plus interest and other
charges provided for in Section 30, Rule 39 of the Rules of Court, less the loan value, as
originally appraised by said defendant Bank, of the foreclosed four (4) residential lots of
defendants Spouses Marcos and Arsenia Eslabon; and
3. Dismissing for lack of merit the respective counterclaims of defendants Philippine National
Bank and spouses Marcos and Arsenia Eslabon.
With costs against defendants.
SO ORDERED.9
Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to the
Court of Appeals. In its Decision rendered on May 21, 1998, the appellate court, while upholding
the decision of the trial court on the validity of the real estate mortgage on Eduarda Belo's
property, the extrajudicial foreclosure and the public auction sale, modified the trial court's
finding on the appropriate redemption price by ruling that the petitioners spouses Belo should
pay the entire amount due to PNB under the mortgage deed at the time of the foreclosure sale
plus interest, costs and expenses.10
Petitioners spouses Belo sought reconsideration 11 of the said Decision but the same was denied
by the appellate court in its Resolution promulgated on June 29, 1998, ratiocinating, thus:
Once more, the Court shies away from declaring the nullity of the mortgage contract obligating
Eduarda Belo as co-mortgagor, considering that it has not been sufficiently established that
Eduarda Belo's assent to the special power of attorney and to the mortgage contract was
tainted by any vitiating cause. Moreover, in tendering an offer to redeem the property (Exhibit
"20", p. 602 Record) after its extrajudicial foreclosure, she has thereby admitted the validity of
the mortgage, as well as the transactions leading to its inception. Eduarda Belo, and the
appellees as mere assignees of Eduarda's right to redeem the property, are therefore estopped
from questioning the efficacy of the mortgage and its subsequent foreclosure. 12
The appellate court further declared that petitioners spouses Belo are obligated to pay the total
bank's claim representing the redemption price for the foreclosed properties, as provided by
Section 25 of P.D No. 694, holding that:
On the other hand, the court's ruling that the appellees, being the assignee of the right of
repurchase of Eduarda Belo, were bound by the redemption price as provided by Section 25 of
P.D. 694, stands. The attack on the constitutionality of Section 25 of P.D. 694 cannot be
allowed, as the High Court, in previous instances, (Dulay v. Carriaga, 123 SCRA 794 [1983];
Philippine National Bank v. Remigio, 231 SCRA 362 [1994]) has regarded the said provision of
law with respect, using the same in determining the proper redemption price in foreclosure of
mortgages involving the PNB as mortgagee.
The terms of the said provision are quite clear and leave no room for qualification, as the
appellees would have us rule. The said rule, as amended, makes no specific distinction as to
assignees or transferees of the mortgagor of his redemptive right. In the absence of such
distinction by the law, the Court cannot make a distinction. As admitted assignees of Eduarda
Belo's right of redemption, the appellees succeed to the precise right of Eduarda including all
conditions attendant to such right.
Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code) will
extend to apply in the redemption stage of the mortgage.
As we have previously remarked, Section 25 of P.D. 694 is a sanctioned deviation from the rule
embodied in Rule 39, Section 30 of the Rules of Court, and is a special protection given to

government lending institutions, particularly, the Philippine National Bank. (Dulay v. Carriaga,
supra)13
Hence, the instant petition.
During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo, agreed to limit the
assignment of errors to the following:
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II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL COURT ON THE
BASIS OF THE ASSIGNMENT OF ERRORS ALLEGED BY PETITIONERS IN THEIR BRIEF:
(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA BELO IN FAVOR
OF RESPONDENT ESLABON WAS NULL AND VOID:
(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT MARCOS
ESLABON UNDER SAID INVALID SPECIAL POWER OF ATTORNEY IS ALSO NULL AND
VOID;
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB ACTED
IN BAD FAITH AND CONNIVED WITH RESPONDENTS-DEBTORS ESLABONS TO OBTAIN
THE CONSENT OF EDUARDA BELO, PETITIONERS' PREDECESSOR, THROUGH FRAUD.
IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB WAS
NEGLIGENT IN THE PERFORMANCE OF ITS DUTY AS COMMERCIAL MONEY LENDER.
V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO, PETITIONERS'
PREDECESSOR, HAD WAIVED THE RIGHT TO QUESTION THE LEGALITY OF THE
ACCOMMODATION MORTGAGE.
VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY HOLDING
THAT ON REDEMPTION, PETITIONERS SHOULD PAY THE ENTIRE CLAIM OF PNB
AGAINST RESPONDENTS-DEBTORS ESLABONS.
VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD PETITIONERS
DECIDE TO PAY THE ENTIRE CLAIM OF RESPONDENT PNB AGAINST THE
RESPONDENTS-DEBTORS ESLABONS, PETITIONERS SHALL SUCCEED TO ALL THE
RIGHTS OF RESPONDENT PNB WITH THE RIGHT TO REIMBURSEMENT BY
RESPONDENTS-DEBTORS ESLABONS.
VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD PETITIONERS
DECIDE NOT TO EXERCISE THEIR RIGHT OF REDEMPTION, PETITIONERS SHALL BE
ENTITLED TO THE VALUE OF THEIR IMPROVEMENTS MADE IN GOOD FAITH AND FOR
THE REAL ESTATE TAX DUE PRIOR TO THE FORECLOSURE SALE.14
Petitioners challenge the appreciation of the facts of the appellate court, pointing out the
following facts which the appellate court allegedly failed to fully interpret and appreciate:
1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an
accommodation mortgagor and that she has no personal liability to respondent PNB.
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2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. "D") used to bind Eduarda
Belo as accommodation mortgagor authorized the agent Eslabons to borrow and mortgage her
agricultural land for her (Eduarda Belo) use and benefit. Instead, said PNB SPA Form No. 74
was used by debtors Eslabons and PNB to bind Eduarda Belo as accommodation mortgagor for
the crop loan extended by PNB to the Eslabons.
3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without specifying
the amount of the loan to be granted by respondent PNB to the respondents-debtors Eslabons
upon assurance by the PNB manager that the SPA was merely a formality and that the bank will
not lend beyond the value of the four (4) [Roxas City] residential lots located in Roxas City
mortgaged by respondents-debtors Eslabons (see Exhibit "D"; Eduarda Belo's deposition,
Exhibit "V", pp. 7 to 24).
4. That PNB did not advise Eduarda Belo of the amount of the loan granted to the Eslabons, did
not make demands upon her for payment, did not advise her of Eslabons' default. The pre-

auction sale notice intended for Eduarda Belo was addressed and delivered to the address of
the debtors Eslabons residence at Baybay Roxas City, not to the Belo Family House which is
the residence of Eduarda Belo located in the heart of Roxas City. The trial court stated in its
Decision that the PNB witness Miss Ignacio "admitted that through oversight, no demand letters
were sent to Eduarda Belo, the accommodation mortgagor" (see p. 7, RTC Decision).
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5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the loan which was
unpaid at the time of the extrajudicial foreclosure sale was only P789,897.00.
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6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belo's
agricultural land expressly reserved the right to question the legality of the accommodation
mortgage in the event that said tender to redeem was rejected by PNB (Exh. "I").15
Petitioners present basically two (2) issues before this Court. First, whether or not the Special
Power of Attorney (SPA for brevity), the real estate mortgage contract, the foreclosure
proceedings and the subsequent auction sale involving Eduarda Belo's property are valid.
Second, assuming they are valid, whether or not the petitioners are required to pay, as
redemption price, the entire claim of respondent PNB in the amount of P2,779,978.72 as of the
date of the public auction sale on June 10, 1991.
On the first issue, the petitioners contend that the SPA is void for the reason that the amount for
which the spouses Eslabon are authorized to borrow from respondent bank was unlimited; and
that, while the SPA states that the amount loaned is for the benefit of Eduarda Belo, it was in
fact used for the benefit of the respondents spouses Eslabon. For the said reasons petitioners
contend that the mortgage contract lacks valid consent, object and consideration; that it violates
a concept in the law of agency which provides that the contract entered into by the agent must
always be for the benefit of the principal; and, that it does not express the true intent of the
parties.
The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the
subsequent auction sale of Eduarda Belo's property are valid and legal.
First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to
petitioners' failure to appeal the same after the trial court rendered its decision affirming their
validity. After the trial court rendered its decision granting petitioners their alternative cause of
action, i.e., that they can redeem the subject property on the basis of the winning bid price of
respondent PNB, petitioners did not anymore bother to appeal that decision on their first cause
of action. If they felt aggrieved by the trial court's decision upholding the validity of the said two
(2) documents, then they should have also partially appealed therefrom but they did not. It is an
abuse of legal remedies for petitioners to belatedly pursue a claim that was settled with finality
due to their own shortcoming. As held in Caliguia v. National Labor Relations Commission,16
where a party did not appeal from the Labor Arbiter's decision denying claims for actual, moral
and exemplary damages and instead moved for immediate execution, the decision then
became final as to him and by asking for its execution, he was estopped from relitigating his
claims for damages.
Second, well-entrenched is the rule that the findings of trial courts which are factual in nature,
especially when affirmed by the Court of Appeals, deserve to be respected and affirmed by the
Supreme Court, provided it is supported by substantial evidence. 17 The finding of facts of the
trial court to the effect that Eduarda Belo was not induced by the manager of respondent PNB
but instead that she freely consented to the execution of the SPA is given the highest respect as
it was affirmed by the appellate court. In the case at bar, the burden of proof was on the
petitioners to prove or show that there was alleged inducement and misrepresentation by the
manager of respondent PNB and the spouses Eslabon. Their allegation that Eduarda Belo only
agreed to sign the SPA after she was assured that the spouses Eslabon would not borrow more
than the value of their own four (4) residential lots in Roxas City was properly objected to by

respondent PNB.18 Also their contention that Eduarda Belo signed the SPA in blank was
properly objected to by respondent PNB on the ground that the best evidence was the SPA.
There is also no proof to sustain petitioners' allegation that respondent PNB acted in bad faith
and connived with the debtors, respondents spouses Eslabon, to obtain Eduarda Belo's consent
to the mortgage through fraud. Eduarda Belo very well knew that the respondents spouses
Eslabon would use her property as additional mortgage collateral for loans inasmuch as the
mortgage contract states that "the consideration of this mortgage is hereby initially fixed at
P229,000.00."19 The mortgage contract sufficiently apprises Eduarda Belo that the respondents
spouses Eslabon can apply for more loans with her property as continuing additional security. If
she found the said provision questionable, she should have complained immediately. Instead,
almost ten (10) years had passed before she and the petitioners sought the annulment of the
said contracts.
Third, after having gone through the records, this Court finds that the courts a quo did not err in
holding that the SPA executed by Eduarda Belo in favor of the respondents spouses Eslabon
and the Real Estate Mortgage executed by the respondents spouses in favor of respondent
PNB are valid. It is stipulated in paragraph three (3) of the SPA that Eduarda Belo appointed the
Eslabon spouses "to make, sign, execute and deliver any contract of mortgage or any other
documents of whatever nature or kind . . . which may be necessary or proper in connection with
the loan herein mentioned, or with any loan which my attorney-in-fact may contract personally in
his own name . . . 20 This portion of the SPA is quite relevant to the case at bar. This was the
main reason why the SPA was executed in the first place inasmuch as Eduarda Belo consented
to have her land mortgaged for the benefit of the respondents spouses Eslabon. The SPA was
not meant to make her a co-obligor to the principal contract of loan between respondent PNB,
as lender, and the spouses Eslabon, as borrowers. The accommodation real estate mortgage
over her property, which was executed in favor of respondent PNB by the respondents spouses
Eslabon, in their capacity as her attorneys-in-fact by virtue of her SPA, is merely an accessory
contract.
Eduarda Belo consented to be an accommodation mortgagor in the sense that she signed the
SPA to authorize respondents spouses Eslabons to execute a mortgage on her land. Petitioners
themselves even acknowledged that the relation created by the SPA and the mortgage contract
was merely that of mortgagor-mortgagee relationship. The SPA form of the PNB was utilized to
authorize the spouses Eslabon to mortgage Eduarda Belo's land as additional collateral of the
Eslabon spouses' loan from respondent PNB. Thus, the petitioners' contention that the SPA is
void is untenable. Besides, Eduarda Belo benefited, in signing the SPA, in the sense that she
was able to collect the rentals on her leased property from the Eslabons. 21
An accommodation mortgage is not necessarily void simply because the accommodation
mortgagor did not benefit from the same. The validity of an accommodation mortgage is allowed
under Article 2085 of the New Civil Code which provides that "(t)hird persons who are not
parties to the principal obligation may secure the latter by pledging or mortgaging their own
property." An accommodation mortgagor, ordinarily, is not himself a recipient of the loan,
otherwise that would be contrary to his designation as such. It is not always necessary that the
accommodation mortgagor be appraised beforehand of the entire amount of the loan nor should
it first be determined before the execution of the SPA for it has been held that:
"(real) mortgages given to secure future advancements are valid and legal contracts; that the
amounts named as consideration in said contract do not limit the amount for which the
mortgage may stand as security if from the four corners of the instrument the intent to secure
future and other indebtedness can be gathered. A mortgage given to secure advancements is a
continuing security and is not discharged by repayment of the amount named in the mortgage,
until the full amount of the advancements are paid." 22
Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to respondent
PNB manifesting her intent to redeem the property is a waiver of her right to question the

validity of the SPA and the mortgage contract as well as the foreclosure and the sale of her
subject property. Petitioners claim that her letter was not an offer to redeem as it was merely a
declaration of her intention to redeem. Respondent PNB's answer to her letter would have
carried certain legal effects. Had respondent PNB accepted her letter-offer, it would have surely
bound the bank into accepting the redemption price offered by Eduarda Belo. If it was her
opinion that her SPA and the mortgage contract were null and void, she would not have
manifested her intent to redeem but instead questioned their validity before a court of justice.
Her offer was a recognition on her part that the said contracts are valid and produced legal
effects. Inasmuch as Eduarda Belo is estopped from questioning the validity of the contracts,
her assignees who are the petitioners in the instant case, are likewise estopped from disputing
the validity of her SPA, the accommodation real estate mortgage contract, the foreclosure
proceedings, the auction sale and the Sheriff's Certificate of Sale.
The second issue pertains to the applicable law on redemption to the case at bar. Respondent
PNB maintains that Section 25 of Presidential Decree No. 694 should apply, thus:
SECTION 25. Right of redemption of foreclosed property Right of possession during
redemption period. Within one year from the registration of the foreclosure sale of real estate,
the mortgagor shall have the right to redeem the property by paying all claims of the Bank
against him on the date of the sale including all the costs and other expenses incurred by
reason of the foreclosure sale and custody of the property as well as charges and accrued
interests.23
Additionally, respondent bank seeks the application to the case at bar of Section 78 of the
General Banking Act, as amended by P.D. No. 1828, which states that
. . . In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real
estate which is security for any loan granted before the passage of this Act or under the
provisions of this Act, the mortgagor or debtor whose real property has been sold at public
auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank,
banking or credit institution, within the purview of this Act shall have the right, within one year
after the sale of the real estate as a result of the foreclosure of the respective mortgage, to
redeem the property by paying the amount fixed by the court in the order of execution, or the
amount due under the mortgage deed, as the case may be, with interest thereon at the rate
specified in the mortgage, and all the costs, and judicial and other expenses incurred by the
bank or institution concerned by reason of the execution and sale and as a result of the custody
of said property less the income received from the property.24
On the other hand, petitioners assert that only the amount of the winning bidder's purchase
together with the interest thereon and on all other related expenses should be paid as
redemption price in accordance with Section 6 of Act No. 3135 which provides that:
SECTION 6. In all cases in which an extrajudicial sale is made under the special power
hereinbefore referred to, the debtor, his successor in interest or any judicial creditor or judgment
creditor of said debtor, or any person having a lien on the property subsequent to the mortgage
or deed of trust under which the property is sold, may redeem the same at any time within the
term of one year from and after the date of the sale; and such redemption shall be governed by
the provisions of sections four hundred and sixty-four to four hundred and sixty six, inclusive, of
the Code of Civil Procedure 25 , in so far as these are not inconsistent with the provisions of this
Act.
Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:
SECTION 28. Time and manner of, and amounts payable on, successive redemptions; notice to
be given and filed. The judgment obligor, or redemptioner, may redeem the property from the
purchaser, at any time within one (1) year from the date of the registration of the certificate of
sale, by paying the purchaser the amount of his purchase, within one per centum per month
interest thereon in addition, up to the time of redemption, together with the amount of any
assessments or taxes which the purchaser may have paid thereon after purchase, and interest

on such last named amount at the same rate; and if the purchaser be also a creditor having a
prior lien to that of the redemptioner, other than the judgment under which such purchase was
made, the amount of such other lien, with interest. (Italic supplied)
xxx
xxx
xxx
This Court finds the petitioners' position on that issue to be meritorious.
There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation
mortgagor. The Pre-trial Order and respondent PNB's brief contain a declaration of this fact. The
dispute between the parties is whether Section 25 of P.D. No. 694 applies to an accommodation
mortgagor, or her assignees. The said legal provision does not make a distinction between a
debtor-mortgagor and an accommodation mortgagor as it uses the broad term "mortgagor". The
appellate court thus ruled that the provision applies even to an accommodation mortgagor
inasmuch as the law does not make any distinction. We disagree. Where a word used in a
statute has both a restricted and a general meaning, the general must prevail over the restricted
unless the nature of the subject matter or the context in which it is employed clearly indicates
that the limited sense is intended.26 It is presumed that the legislature intended exceptions to its
language which would avoid absurd consequences of this character. 27 In the case at bar, the
qualification to the general rule applies. The same provision of Section 25 of P.D. No. 694
provides that "the mortgagor shall have the right to redeem the property by paying all claims of
the Bank against him". From said provision can be deduced that the mortgagor referred to by
that law is one from whom the bank has a claim in the form of outstanding or unpaid loan; he is
also called a borrower or debtor-mortgagor. On the other hand, respondent PNB has no claim
against accommodation mortgagor Eduarda Belo inasmuch as she only mortgaged her property
to accommodate the Eslabon spouses who are the loan borrowers of the PNB. The principal
contract is the contract of loan between the Eslabon spouses, as borrowers/debtors, and the
PNB as lender. The accommodation real estate mortgage (which secures the loan) is only an
accessory contract. It is our view and we hold that the term "mortgagor" in Section 25 of P.D.
No. 694 pertains only to a debtor-mortgagor and not to an accommodation mortgagor.
It is well settled that courts are not to give a statute a meaning that would lead to absurdities. If
the words of a statute are susceptible of more than one meaning, the absurdity of the result of
one construction is a strong argument against its adoption, and in favor of such sensible
interpretation.28 We test a law by its result. A law should not be interpreted so as not to cause an
injustice. There are laws which are generally valid but may seem arbitrary when applied in a
particular case because of its peculiar circumstances. We are not bound to apply them in
slavish obedience to their language.29
The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair and
unjust to accommodation mortgagors and their assignees. Forcing an accommodation
mortgagor like Eduarda Belo to pay for what the principal debtors (Eslabon spouses) owe to
respondent bank is to punish her for the accommodation and generosity she accorded to the
Eslabon spouses who were then hard pressed for additional collateral needed to secure their
bank loan. Respondents PNB and spouses Eslabons very well knew that she merely consented
to be a mere accommodation mortgagor.
The circumstances of the case at bar also provide for ample reason why petitioners cannot be
made to pay the entire liability of the principal debtors, Eslabon spouses, to respondent PNB.
The trial court found that respondent PNB's application for extrajudicial foreclosure and public
auction sale of Eduarda Belo's mortgaged property 30 was filed under Act No. 3135, as amended
by P.D. No. 385. The notice of extrajudicial sale, the Certificate of Sheriff's Sale, and the letter it
sent to Eduarda Belo did not mention P. D. No. 694 as the basis for redemption. As aptly ruled
by the trial court
In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for value of
their redemption rights, PNB should have at least advised them that redemption would be
governed by its Revised Charter or PD 69, and not by Act 3135 and the Rules of Court, as

commonly practiced . . . This practice of defendant Bank is manifestly unfair and unjust to these
redemptioners who are caught by surprise and usually taken aback by the enormous claims of
the Bank not shown in the Notice of Extrajudicial Sale or the Certificate of Sheriff's Sale as in
this case.31
Moreover, the mortgage contract explicitly provides that ". . . the mortgagee may immediately
foreclose this mortgage judicially in accordance with the Rules of Court or extrajudicially in
accordance with Act No. 3135, as amended and Presidential Decree No. 385 . . . 32 Since the
mortgage contract in this case is in the nature of a contract of adhesion as it was prepared
solely by respondent, it has to be interpreted in favor of petitioners. The respondent bank
however tries to renege on this contractual commitment by seeking refuge in the 1989 case of
Sy v. Court of Appeals 33 wherein this Court ruled that the redemption price is equal to the total
amount of indebtedness to the bank's claim inasmuch as Section 78 of the General Banking Act
is an amendment to Section 6 of Act No. 3135, despite the fact that the extrajudicial foreclosure
procedure followed by the PNB was explicitly under or in accordance with Act No. 3135.
In the 1996 case of China Banking Corporation v. Court of Appeals,34 where the parties also
stipulated that Act No. 3135 is the controlling law in case of foreclosure, this Court ruled that;
By invoking the said Act, there is no doubt that it must "govern the manner in which the sale and
redemption shall be effected." Clearly, the fundamental principle that contracts are respected as
the law between the contracting parties finds application in the present case, specially where
they are not contrary to law, morals, good customs and public policy.35
More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases,36 that the
General Banking Act and P.D. No. 694 shall prevail over Act No. 3135 with respect to the
redemption price, does not apply here inasmuch as in the said cases the redemptioners were
the debtors themselves or their assignees, and not an accommodation mortgagor or the latter's
assignees such as in the case at bar. In the said cases, the debtor-mortgagors were required to
pay as redemption price their entire liability to the bank inasmuch as they were obligated to pay
their loan which is a principal obligation in the first place. On the other hand, accommodation
mortgagors as such are not in anyway liable for the payment of the loan or principal obligation
of the debtor/borrower The liability of the accommodation mortgagors extends only up to the
loan value of their mortgaged property and not to the entire loan itself. Hence, it is only just that
they be allowed to redeem their mortgaged property by paying only the winning bid price thereof
(plus interest thereon) at the public auction sale.
One wonders why respondent PNB invokes Act No. 3135 in its contracts without qualification
and yet in the end appears to disregard the same when it finds its provisions unfavorable to it.
This is unfair to the other contracting party who in good faith believes that respondent PNB
would comply with the contractual agreement.
It is therefore our view and we hold that Section 78 of the General Banking Act, as amended by
P.D. No. 1828, is inapplicable to accommodation mortgagors in the redemption of their
mortgaged properties.
While the petitioners, as assignees of Eduarda Belo, are not required to pay the entire claim of
respondent PNB against the principal debtors, spouses Eslabon, they can only exercise their
right of redemption with respect to the parcel of land belonging to Eduarda Belo, the
accommodation mortgagor. Thus, they have to pay the bid price less the corresponding loan
value of the foreclosed four (4) residential lots of the spouses Eslabon.
The respondent PNB contends that to allow petitioners to redeem only the property belonging to
their assignor, Eduarda Belo, would violate the principle of indivisibility of mortgage contracts.
We disagree.
Article 2089 of the Civil Code of the Philippines, provides that:
A pledge or mortgage is indivisible, even though the debt may be divided among the successors
in interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate

extinguishment of the pledge or mortgage as the debt is not completely satisfied.

Neither can the creditor's heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in
mortgage or pledge, each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as
the portion of the debt for which each thing is specially answerable is satisfied.
There is no dispute that the mortgage on the four (4) parcels of land by the Eslabon spouses
and the other mortgage on the property of Eduarda Belo both secure the loan obligation of
respondents spouses Eslabon to respondent PNB. However, we are not persuaded by the
contention of the respondent PNB that the indivisibility concept applies to the right of
redemption of an accommodation mortgagor and her assignees. The jurisprudence in Philippine
National Bank v. Agudelo37 is enlightening to the case at bar, to wit:
xxx
xxx
xxx
However, Paz Agudelo y Gonzaga (the principal) . . . gave her consent to the lien on lot No. 878
. . . . This acknowledgment, however, does not extend to lots Nos. 207 and 61 . . . inasmuch as,
although it is true that a mortgage is indivisible as to the contracting parties and as to their
successors in interest (Article 1860, Civil code), it is not so with respect to a third person who
did not take part in the constitution thereof either personally or through an agent x x x.
Therefore, the only liability of the defendant-appellant Paz Agudelo y Gonzaga is that which
arises from the aforesaid acknowledgment but only with respect to the lien and not to the
principal obligation secured by the mortgage acknowledged by her to have been constituted on
said lot No. 878 . . . . Such liability is not direct but a subsidiary one. 38
xxx
xxx
xxx
Wherefore, it is hereby held that the liability contracted by the aforesaid defendant-appellant
Paz Agudelo y Gonzaga is merely subsidiary to that of Mauro A. Garrucho (the agent), limited to
lot No. 87.
xxx
xxx
xxx
From the wording of the law, indivisibility arises only when there is a debt, that is, there is a
debtor-creditor relationship. But, this relationship is wanting in the case at bar in the sense that
petitioners are assignees of an accommodation mortgagor and not of a debtor-mortgagor.
Hence, it is fair and logical to allow the petitioners to redeem only the property belonging to their
assignor, Eduarda Belo.
With respect to the four (4) parcels of residential land belonging to the Eslabon spouses,
petitioners being total strangers to said lots lack legal personality to redeem the same.
Fair play and justice demand that the respondent PNB's interest of recovering its entire bank
claim should not be at the expense of petitioners, as assignees of Eduarda Belo, who is not
indebted to it. Besides, the letter 39 sent by respondent PNB to Eduarda Belo states that "your
(Belo) mortgaged property/ies with PNB covered by TCT # T-7493 was/were sold at public
auction . . . .". It further states that "You (Belo) have, therefore, one year from July 1, 1991 within
which to redeem your mortgaged property/ies, should you desire to redeem it." Respondent
PNB never mentioned that she was bound to redeem the entire mortgaged properties including
the four (4) residential properties of the spouses Eslabon. The letter was explicit in mentioning
Eduarda Belo's property only. From the said statement, there is then an admission on the part of
respondent PNB that redemption only extends to the subject property of Eduarda Belo for the
reason that the notice of the sale limited the redemption to said property.
WHEREFORE, the petition is partially granted in that the petitioners are hereby allowed to
redeem only the property, covered and described in Transfer Certificate of Title No. T-7493Capiz registered in the name of Eduarda Belo, by paying only the bid price less the
corresponding loan value of the foreclosed four (4) residential lots of the respondents spouses
Marcos and Arsenia Eslabon, consistent with the Decision of the Regional Trial Court of Roxas

City in Civil Case No. V-6182.

SO ORDERED.
G.R. No. L-19227
February 17, 1968
DIOSDADO YULIONGSIU, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.
Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant. Tomas Besa, R.
B. de los Reyes and C. E. Medina for defendant-appellee.
BENGZON, J.P., J.:
Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The
M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and
operated the FS-203, valued at P210,672.24, which was purchased by him from the Philippine
Shipping Commission, by installment or on account. As of January or February, 1943, plaintiff
had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the
purchase price was payable at P50,000 a year, due on or before the end of the current year. 2
On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine
National Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S
Don Dino and its equity in the FS-203 to the defendant bank, as evidenced by the pledge
contract, Exhibit "A" & "1-Bank", executed on the same day and duly registered with the office of
the Collector of Customs for the Port of Cebu. 3
Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The
remaining balance was renewed by the execution of two (2) promissory notes in the bank's
favor. The first note, dated December 18, 1947, for P20,000, was due on April 16, 1948 while
the second, dated February 26, 1948, for P10,000, was due on June 25, 1948. These two notes
were never paid at all by plaintiff on their respective due dates. 4
On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused
for estafa thru falsification of commercial documents, because plaintiff had, as last indorsee,
deposited with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine
Islands checks totalling P184,000. The drawer thereof one of the co-accused had no
funds in the drawee bank. However, in connivance with one employee of defendant bank,
plaintiff was able to withdraw the amount credited to him before the discovery of the
defraudation on April 2, 1948. Plaintiff and his co-accused were convicted by the trial court and
sentenced to indemnify the defendant bank in the sum of P184,000. On appeal, the conviction
was affirmed by the Court of Appeals on October 31, 1950. The corresponding writ of execution
issued to implement the order for indemnification was returned unsatisfied as plaintiff was totally
insolvent. 5
Meanwhile, together with the institution of the criminal action, defendant bank took
physical possession of three pledged vessels while they were at the Port of Cebu, and on April
29, 1948, after the first note fell due and was not paid, the Cebu Branch Manager of defendant
bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed
a document of sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS203, to defendant bank for P30,042.72. 6
The FS-203 was subsequently surrendered by the defendant bank to the Philippine
Shipping Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to
pay the remaining installments on the purchase price thereof. 7 The other two boats, the M/S
Surigao and the M/S Don Dino were sold by defendant bank to third parties on March 15, 1951.
On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to
recover the three vessels or their value and damages from defendant bank. The latter filed its
answer, with a counterclaim for P202,000 plus P5,000 damages. After issues were joined, a

pretrial was held resulting in a partial stipulation of facts dated October 2, 1958, reciting most of
the facts above-narrated. During the course of the trial, defendant amended its answer reducing
its claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to P35,000.
The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's
taking of physical possession of the vessels on April 6, 1948 was justified by the pledge
contract, Exhibit "A" & "1-Bank" and the law; (b) that the private sale of the pledged vessels by
defendant bank to itself without notice to the plaintiff-pledgor as stipulated in the pledge contract
was likewise valid; and (c) that the defendant bank should pay to plaintiff the sums of P1,153.99
and P8,000, as his remaining account balance, or set-off these sums against the indemnity
which plaintiff was ordered to pay to it in the criminal cases.
When his motion for reconsideration and new trial was denied, plaintiff brought the appeal
to Us, the amount involved being more than P200,000.00.
In support of the first assignment of error, plaintiff-appellant would have this Court hold
that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could
not take possession of the chattels object thereof until after there has been default. The
submission is without merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a
pledge contract
3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank,
and the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in order
to guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was
executed and duly registered with the Office of the Collector of Customs for the Port of Cebu on
the date appearing therein; (Emphasis supplied)1wph1.t
Necessarily, this judicial admission binds the plaintiff. Without any showing that this was
made thru palpable mistake, no amount of rationalization can offset it. 9
The defendant bank as pledgee was therefore entitled to the actual possession of the
vessels. While it is true that plaintiff continued operating the vessels after the pledge contract
was entered into, his possession was expressly made "subject to the order of the pledgee." 10
The provision of Art. 2110 of the present Civil Code 11 being new cannot apply to the pledge
contract here which was entered into on June 30, 1947. On the other hand, there is an authority
supporting the proposition that the pledgee can temporarily entrust the physical possession of
the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor
is regarded as holding the pledged property merely as trustee for the pledgee. 12
Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to
make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to
be actual delivery of the chattels pledged. But then there is also Banco Espaol-Filipino v.
Peterson, 7 Phil. 409 ruling that symbolic delivery would suffice. An examination of the peculiar
nature of the things pledged in the two cases will readily dispel the apparent contradiction
between the two rulings. In Betita v. Ganzon, the objects pledged carabaos were easily
capable of actual, manual delivery unto the pledgee. In Banco Espaol-Filipino v. Peterson, the
objects pledged goods contained in a warehouse were hardly capable of actual, manual
delivery in the sense that it was impractical as a whole for the particular transaction and would
have been an unreasonable requirement. Thus, for purposes of showing the transfer of control
to the pledgee, delivery to him of the keys to the warehouse sufficed. In other words, the type of
delivery will depend upon the nature and the peculiar circumstances of each case. The parties
here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said
property subject to the order of the pledgee." Considering the circumstances of this case and
the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is
sufficient.
Since the defendant bank was, pursuant to the terms of pledge contract, in full control of
the vessels thru the plaintiff, the former could take actual possession at any time during the life
of the pledge to make more effective its security. Its taking of the vessels therefore on April 6,

1948, was not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the
defendant bank in the huge sum of P184,000.
The stand We have taken is not without precedent. The Supreme Court of Spain, in a
similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14
Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder del
acreedor o de un tercero y no quedar en la del deudor, como ha sucedido en el caso de autos,
es lo cierto que todas las partes interesadas, o sean acreedor, deudor y Sociedad, convinieron
que continuaran los coches en poder del deudor para no suspender el trafico, y el derecho de
no uso de la prenda pertenence al deudor, y el de dejar la cosa bajo su responsabilidad al
acreedor, y ambos convinieron por creerlo util para las partes contratantes, y estas no reclaman
perjuicios no se infringio, entre otros este articulo.
In the second assignment of error imputed to the lower court plaintiff-appellant attacks the
validity of the private sale of the pledged vessels in favor of the defendant bank itself. It is
contended first, that the cases holding that the statutory requirements as to public sales with
prior notice in connection with foreclosure proceedings are waivable, are no longer authoritative
in view of the passage of Act 3135, as amended; second, that the charter of defendant bank
does not allow it to buy the property object of foreclosure in case of private sales; and third, that
the price obtained at the sale is unconscionable.
There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil.
763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of
Act 3135. This law refers only, and is limited, to foreclosure of real estate mortgages. 15 So,
whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's
authority to be the purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts
2747 and 2938 only states that if the sale is public, the bank could purchase the whole or part of
the property sold " free from any right of redemption on the part of the mortgagor or pledgor."
This even argues against plaintiff's case since the import thereof is this if the sale were private
and the bank became the purchaser, the mortgagor or pledgor could redeem the property.
Hence, plaintiff could have recovered the vessels by exercising this right of redemption. He is
the only one to blame for not doing so.
Regarding the third contention, on the assumption that the purchase price was
unconscionable, plaintiff's remedy was to have set aside the sale. He did not avail of this.
Moreover, as pointed out by the lower court, plaintiff had at the time an obligation to return the
P184,000 fraudulently taken by him from defendant bank.
The last assignment of error has to do with the damages allegedly suffered by plaintiffappellant by virtue of the taking of the vessels. But in view of the results reached above, there is
no more need to discuss the same.
On the whole, We cannot say the lower court erred in disposing of the case as it did.
Plaintiff-appellant was not all-too-innocent as he would have Us believe. He did defraud the
defendant bank first. If the latter countered with the seizure and sale of the pledged vessels
pursuant to the pledge contract, it was only to protect its interests after plaintiff had defaulted in
the payment of the first promissory note. Plaintiff-appellant did not come to court with clean
hands.
WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiffappellant. So ordered.
G.R. No. L-6342
January 26, 1954
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
LAUREANO ATENDIDO, defendants-appellant.
Nicolas Fernandez for appellee.Gaudencio L. Atendido for appellant.
BAUTISTA, ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Nueva Ecija which orders the
defendant to pay to the plaintiff the sum of P3,000, with interest thereon at the rate of 6% per
annum from June 26, 1940, and the costs of action.
On June 26, 1940, Laureano Atendido obtained from the Philippine National Bank a loan of
P3,000 payable in 120 days with interests at 6% per annum from the date of maturity. To
guarantee the payment of the obligation the borrower pledged to the bank 2,000 cavanes of
palay which were then deposited in the warehouse of Cheng Siong Lam & Co. in San Miguel,
Bulacan, and to that effect the borrower endorsed in favor of the bank the corresponding
warehouse receipt. Before the maturity of the loan, the 2,000 cavanes of palay disappeared for
unknown reasons in the warehouse. When the loan matured the borrower failed to pay either
the principal or the interest and so the present action was instituted.
Defendant set up a special defense and a counterclaim. As regards the former, defendant
claimed that the warehouse receipt covering the palay which was given as security having been
endorsed in blank in favor of the bank, and the palay having been lost or disappeared, he
thereby became relieved of liability. And, by way of counterclaim, defendant claimed that, as a
corollary to his theory, he is entitled to an indemnity which represents the difference between
the value of the palay lost and the amount of his obligation.
The case was submitted on an agreed statements of facts and thereupon the court rendered
judgment as stated in the early part of this decision.
Defendant took the case on appeal to the Court of Appeals but later it was certified to this Court
on the ground that the question involved is purely one of law.
The only issue involved in this appeal is whether the surrender of the warehouse receipt
covering the 2,000 cavanes of palay given as a security, endorsed in blank, to appellee, has the
effect of transferring their title or ownership to said appellee, or it should be considered merely
as a guarantee to secure the payment of the obligation of appellant.
In upholding the view of appellee, the lower court said: "The surrendering of warehouse receipt
No. S-1719 covering the 2,000 cavanes of palay by the defendant in favor of the plaintiff was
not that of a final transfer of that warehouse receipt but merely as a guarantee to the fulfillment
of the original obligation of P3,000.00. In other word, plaintiff corporation had no right to dispose
(of) the warehouse receipt until after the maturity of the promissory note Exhibit A. Moreover,
the 2,000 cavanes of palay were not in the first place in the actual possession of plaintiff
corporation, although symbolically speaking the delivery of the warehouse receipt was actually
done to the bank."
We hold this finding to be correct not only because it is in line with the nature of a contract of
pledge as defined by law (Articles 1857, 1858 & 1863, Old Civil Code), but is supported by the
stipulations embodied in the contract signed by appellant when he secured the loan from the
appellee. There is no question that the 2,000 cavanes of palay covered by the warehouse
receipt were given to appellee only as a guarantee to secure the fulfillment by appellant of his
obligation. This clearly appears in the contract Exhibit A wherein it is expressly stated that said
2,000 cavanes of palay were given as a collateral security. The delivery of said palay being
merely by way of security, it follows that by the very nature of the transaction its ownership
remains with the pledgor subject only to foreclose in case of non-fulfillment of the obligation. By
this we mean that if the obligation is not paid upon maturity the most that the pledgee can do is
to sell the property and apply the proceeds to the payment of the obligation and to return the
balance, if any, to the pledgor (Article 1872, Old Civil Code). This is the essence of this contract,
for, according to law, a pledgee cannot become the owner of, nor appropriate to himself, the
thing given in pledge (Article 1859, Old Civil Code). If by the contract of pledge the pledgor
continues to be the owner of the thing pledged during the pendency of the obligation, it stands
to reason that in case of loss of the property, the loss should be borne by the pledgor. The fact
that the warehouse receipt covering the palay was delivered, endorsed in blank, to the bank
does not alter the situation, the purpose of such endorsement being merely to transfer the

juridical possession of the property to the pledgee and to forestall any possible disposition
thereof on the part of the pledgor. This is true notwithstanding the provisions to the contrary of
the Warehouse Receipt Law.
In case recently decided by this Court (Martinez vs. Philippine National Bank, 93 Phil., 765)
which involves a similar transaction, this Court held:
In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to
a creditor only to secure the payment of a loan or debt, the transferee or endorsee does not
automatically become the owner of the goods covered by the warehouse receipt or quedan but
he merely retains the right to keep and with the consent of the owner to sell them so as to
satisfy the obligation from the proceeds of the sale, this for the simple reason that the
transaction involved is not a sale but only a mortgage or pledge, and that if the property covered
by the quedans or warehouse receipts is lost without the fault or negligence of the mortgagee or
pledgee or the transferee or endorsee of the warehouse receipt or quedan, then said goods are
to be regarded as lost on account of the real owner, mortgagor or pledgor.
Wherefore, the decision appealed from is affirmed, with costs against appellant.
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision
promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with
modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which
dismissed the complaint filed therein by herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a quo and adopted by
respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch
issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited
with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial
Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to
280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection
with his purchased of fuel products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's
procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in
the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date,
said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which
stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the
indicated time deposits from and after date" of the assignment and further authorizes said bank
to pre-terminate, set-off and "apply the said time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc.,
went to the defendant bank's Sucat branch and presented for verification the CTDs declared
lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 5468).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein
plaintiff formally informing it of its possession of the CTDs in question and of its decision to preterminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a
copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as
"the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the
value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and
on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of
the matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be
ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the
complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that the
subject certificates of deposit are non-negotiable despite being clearly negotiable instruments;
(2) that petitioner did not become a holder in due course of the said certificates of deposit; and
(3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments
payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines

SUCAT OFFICEP 4,000.00

CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of
this certificate, with interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing
as follows:
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is
important to note that after the word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain amount follows. The document
further provides that the amount deposited shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are
payable, not to whoever purports to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz
as the person who made the deposit and further engages itself to pay said depositor the amount
indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question
are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The
parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr.
Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court
that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred
(sic) in these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who
cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as
the bank is concerned?
witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself. 9 In the construction of
a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the
writing may be read in the light of surrounding circumstances in order to more perfectly
understand the intent and meaning of the parties, yet as they have constituted the writing to be
the only outward and visible expression of their meaning, no other words are to be added to it or
substituted in its stead. The duty of the court in such case is to ascertain, not what the parties
may have secretly intended as contradistinguished from what their words express, but what is
the meaning of the words they have used. What the parties meant must be determined by what
they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The documents
provide that the amounts deposited shall be repayable to the depositor. And who, according to
the document, is the depositor? It is the "bearer." The documents do not say that the depositor
is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather,
the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever
may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it
could have with facility so expressed that fact in clear and categorical terms in the documents,
instead of having the word "BEARER" stamped on the space provided for the name of the
depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited
are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely
declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously
other parties not privy to the transaction between them would not be in a position to know that
the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party
dealing with the CTDs to go behind the plain import of what is written thereon to unravel the
agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence
is what is sought to be avoided by the Negotiable Instruments Law and calls for the application
of the elementary rule that the interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is
in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead
in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner
without informing respondent bank thereof at any time. Unfortunately for petitioner, although the
CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement
between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement.
For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a
security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were
delivered as payment for the fuel products or as a security has been dissipated and resolved in
favor of the latter by petitioner's own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr.
Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This
admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of
estoppel, an admission or representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying thereon. 14 A party may not go back
on his own acts and representations to the prejudice of the other party who relied upon them. 15
In the law of evidence, whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular thing true, and to act upon such
belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted

to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill
of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver
with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing
that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness
to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could
have proved, if such truly was the fact, that the CTDs were delivered as payment and not as
security. Having opposed the motion, petitioner now labors under the presumption that evidence
willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined by their intention,
regardless of what language was used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge; but if there was some other
intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to
have been absolute, its object and character might still be qualified and explained by
contemporaneous writing declaring it to have been a deposit of the property as collateral
security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient
on its face to make an absolute conveyance, should be treated as a pledge if the debt continues
in inexistence and is not discharged by the transfer, and that accordingly the use of the terms
ordinarily importing conveyance of absolute ownership will not be given that effect in such a
transaction if they are also commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and
unambiguous language or other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the
Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person
to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder
may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
22
In the present case, however, there was no negotiation in the sense of a transfer of the legal
title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of
the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the
purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was
not disclosed) could at the most constitute petitioner only as a holder for value by reason of his
lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of such security,
in the event of non-payment of the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral
security, he would be a pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions
on pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged.
The instrument proving the right pledged shall be delivered to the creditor, and if negotiable,
must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of

respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de
la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any
right effective against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive law prescribing a condition
without which the execution of a pledge contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of
respondent bank was embodied in a public instrument. 27 With regard to this other mode of
transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether
as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the
extent of its lien nor the execution of any public instrument which could affect or bind private
respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has
definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not
private respondent observed the requirements of the law in the case of lost negotiable
instruments and the issuance of replacement certificates therefor, on the ground that petitioner
failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of
private respondent was not included in the stipulation of the parties and in the statement of
issues submitted by them to the trial court. 29 The issues agreed upon by them for resolution in
this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the
depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by the
CTDs and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity
date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from
each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities,
the foregoing enumeration does not include the issue of negligence on the part of respondent
bank. An issue raised for the first time on appeal and not raised timely in the proceedings in the
lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues
framed by the parties and, consequently, issues not raised in the trial court cannot be raised for
the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a
case are properly raised. Thus, to obviate the element of surprise, parties are expected to
disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial,
except such as may involve privileged or impeaching matters. The determination of issues at a
pre-trial conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be
considered encompassed by the issues on its right to preterminate and receive the proceeds of
the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We
agree with private respondent that the broad ultimate issue of petitioner's entitlement to the

proceeds of the questioned certificates can be premised on a multitude of other legal reasons
and causes of action, of which respondent bank's supposed negligence is only one. Hence,
petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless
exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below,
petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of
Commerce laying down the rules to be followed in case of lost instruments payable to bearer,
which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in
the case at bar, are merely permissive and not mandatory. The very first article cited by
petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or
court of competent jurisdiction, asking that the principal, interest or dividends due or about to
become due, be not paid a third person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on
the part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for
the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word
shows that it is not mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence,
merely established, on the one hand, a right of recourse in favor of a dispossessed owner or
holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other,
an option in favor of the party liable thereon who, for some valid ground, may elect to refuse to
issue a replacement of the instrument. Significantly, none of the provisions cited by petitioner
categorically restricts or prohibits the issuance a duplicate or replacement instrument sans
compliance with the procedure outlined therein, and none establishes a mandatory precedent
requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the
appealed decision is hereby AFFIRMED.
SO ORDERED.
G.R. No. L-18500
October 2, 1922
FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR, plaintiffs-appellants,
vs.
GLICERIO JAVELLANA, defendant-appellant.
Montinola, Montinola and Hontiveros for plaintiffs-appellants. J. M. Arroyo and Fisher and
DeWitt for defendant-appellant.
AVANCEA, J.:
On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500 with interest at the
rate of 25 per cent per annum for the term of one year. To guarantee this loan, the plaintiffs
pledged a large medal with a diamond in the center and surrounded with ten diamonds, a pair of
diamond earrings, a small comb with twenty-two diamonds, and two diamond rings, which the
contracting parties appraised at P4,000. This loan is evidenced by two documents (Exhibits A
and 1) wherein the amount appears to be P1,875, which includes the 25 per cent interest on the
sum of P1,500 for the term of one year.
The plaintiffs allege that at the maturity of this loan, August 31, 1912, the plaintiff Eusebio M.
Villaseor, being unable to pay the loan, obtained from the defendant an extension, with the
condition that the loan was to continue, drawing interest at the rate of 25 per cent per annum, so
long as the security given was sufficient to cover the capital and the accrued interest. In the

month of August, 1919, the plaintiff Eusebio M. Villaseor, in company with Carlos M. Dreyfus,
went to the house of the defendant and offered to pay the loan and redeem the jewels, taking
with him, for this purpose, the sum of P11,000, but the defendant then informed them that the
time for the redemption had already elapsed. The plaintiffs renewed their offer to redeem the
jewelry by paying the loan, but met with the same reply. These facts are proven by the
testimony of the plaintiffs, corroborated by Carlos M. Dreyfus.
The plaintiffs now bring this action to compel the defendant to return the jewels pledged, or their
value, upon the payment by them of the sum they owe the defendant, with the interest thereon.
The defendant alleges, in his defense, that upon the maturity of the loan, August 31, 1912, he
requested the plaintiff, Eusebio M. Villaseor, to secure the money, pay the loan and redeem
the jewels, as he needed money to purchase a certain piece of land; that one month thereafter,
the plaintiff, Filomena Sarmiento, went to his house and offered to sell him the jewels pledged
for P3,000; that the defendant then told her to come back on the next day, as he was to see his
brother, Catalino Javellana, and ask him if he wanted to take the jewels for that sum; that on the
next day the plaintiff, Filomena Sarmiento, went back to the house of the defendant who then
paid her the sum of P1,125, which was the balance remaining of the P3,000 after deducting the
plaintiff's loan.
It appearing that the defendant possessed these jewels originally, as a pledge to secure the
payment of a loan stated in writing, the mere testimony of the defendant to the effect that later
they were sold to him by the plaintiff, Filomena Sarmiento, against the positive testimony of the
latter that she did not make any such sale, requires a strong corroboration to be accepted. We
do not find the testimony of Jose Sison to be of sufficient value as such corroboration. This
witness testified to having been in the house of the defendant when Filomena went there to offer
to sell the defendant the jewels, as well as on the third day when she returned to receive the
price. According to this witness, he happened to be in the house of the defendant, having gone
there to solicit a loan, and also accidentally remained in the house of the defendant for three
days, and that that was how he happened to witness the offer to sell, as well as the receipt of
the price on the third day. But not only do we find that the defendant has not sufficiently
established, by his evidence, the fact of the purchase of the jewels, but also that there is a
circumstance tending to show the contrary, which is the fact that up to the trial of this cause the
defendant continued in possession of the documents, Exhibits A and 1, evidencing the loan and
the pledge. If the defendant really bought these jewels, its seems natural that Filomena would
have demanded the surrender of the documents evidencing the loan and the pledge, and the
defendant would have returned them to plaintiff.
Our conclusion is that the jewels pledged to defendant were not sold to him afterwards.
Another point on which evidence was introduced by both parties is as to the value of the jewels
in the event that they were not returned by the defendant. In view of the evidence of record, we
accept the value of P12,000 fixed by the trial court.
From the foregoing it follows that, as the jewels in question were in the possession of the
defendant to secure the payment of a loan of P1,500, with interest thereon at the rate of 25 per
cent per annum from Augusts 31, 1911, to August 31, 1912, and the defendant having
subsequently extended the term of the loan indefinitely, and so long as the value of the jewels
pledged was sufficient to secure the payment of the capital and the accrued interest, the
defendant is bound to return the jewels or their value (P12,000) to plaintiffs, and the plaintiffs
have the right to demand the same upon the payment by them of the sum of P1,5000, plus the
interest thereon at the rate of 25 per cent per annum from August 28, 1911.
The judgment appealed from being in accordance with this findings, the same is affirmed
without special pronouncement as to costs. So ordered.
Araullo, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur.
RESOLUTION
April 4, 1923

AVANCEA, J.:
The defendant contends that the plaintiffs' action for the recovery of the jewels pledged has
prescribed. Without deciding whether or not the action to recover the thing pledged may
prescribe in any case, it not being necessary for the purposes of this opinion, but supposing that
it may, still the defendant's contention is untenable. In the document evidencing the loan in
question there is stated: "I transfer by way of pledge the following jewels." That this is a valid
contract of pledge there can be no question. As a matter of fact the defendant does not question
it, but take s it for granted. However, it is contended that the obligation of the defendant to return
the jewels pledged must be considered as not stated in writing, for this obligation is not
expressly mentioned in the document. But if this contract of pledge is in writing, it must
necessarily be admitted that the action to enforce the right, which constitutes the essence of this
contract, is covered by a written contract. The duty of the creditor to return the thing pledged in
case the principal obligation is fulfilled is essential in all contracts of pledge. This constitutes,
precisely, the consideration of the debtor in this accessory contract, so that if this obligation of
the creditor to return to thing pledged, and the right of the debtor to demand the return thereof,
are eliminated, the contract would not be a contract of pledge. It would be a donation.
If the right of the plaintiffs to recover the thing pledged is covered by a written contract, the time
for the prescription of this action is ten years, according to section 43 of the Code of Civil
Procedure.
The defendant contends that the time of prescription of the action of the plaintiffs to recover the
thing pledged must be computed from August 28, 1911, the date of the making of the contract of
loan secured by this pledge. The term of this loan is one year. However, it is contended that the
action of the plaintiff to recover the thing pledged accrued on the very date of the making of the
contract, inasmuch as from that date they could have recovered the same by paying the loan
even before the expiration of the period fixed for payment. This view is contrary to law.
Whenever a term for the performance of an obligation is fixed, it is presumed to have been
established for the benefit of the creditor as well as that of the debtor, unless from its tenor or
from other circumstances it should appear that the term was established for the benefit of one
or the other only (art. 1128 of the Civil Code.) In this case it does not appear, either from any
circumstance, or from the tenor of the contract, that the term of one year allowed the plaintiffs to
pay the debt was established in their favor only. Hence it must be presumed to have been
established for the benefit of the defendant also. And it must be so, for this is a case of a loan,
with interest, wherein the term benefits the plaintiffs by the use of the money, as well as the
defendant by the interest. This being so, the plaintiffs had no right to pay the loan before the
lapse of one year, without the consent of the defendant, because such a payment in advance
would have deprived the latter of the benefit of the stipulated interest. It follows from this that
appellant is in error when he contents that the plaintiffs could have paid the loan and recovered
the thing pledged from the date of the execution of the contract and, therefore, his theory that
the action of the plaintiffs to recover the thing pledged accrued from the date of the execution of
the contract is not tenable. 1awph!l.net
It must, therefore, be admitted that the action of the plaintiffs for the recovery of the thing
pledged did not accrue until August 31, 1912, when the term fixed for the loan expired.
Computing the time from that date to that of the filing of the complaint in this cause, October 9,
1920, it appears that the ten years fixed by the law for the prescription of the action have not yet
elapsed.
On the other hand, the contract of loan with pledge is in writing and the action of the defendant
for the recovery of the loan does not prescribe until after ten years. It is unjust to hold that the
action of the plaintiffs for the recovery of the thing pledged, after the payment of the loan, has
already prescribed while the action of the defendant for the recovery of the loan has not yet
prescribed. The result of this would be that the defendant might have collected the loan and at
the same time kept the thing pledged.

The motion for reconsideration is denied.

G.R. No. L-21069
October 26, 1967
MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,
vs.
RODOLFO R. VELAYO, defendant-appellant.
Villaluz Law Office for plaintiff-appellee. Rodolfo R. Velayo for and in his own behalf as
defendant-appellant.
REYES, J.B.L., J.:
Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435)
sentencing appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum
of P2,565.00 with interest at 12-% per annum from July 13, 1954; P120.93 as premiums with
interest at the same rate from June 13, 1954: attorneys' fees in an amount equivalent to 15% of
the total award, and the costs.
Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code
of the Philippines (1950).
The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo
Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by
one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila.
Velayo undertook to pay the surety company an annual premium of P112.00; to indemnify the
Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as
well as reimburse the same for all money it should pay or become liable to pay under the bond
including costs and attorneys' fees.
As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the
Surety Company "for the latter's further protection", with power to sell the same in case the
surety paid or become obligated to pay any amount of money in connection with said bond,
applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning
the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs
(Rec. App. pp. 12-15).
Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and
execution having been returned unsatisfied, the surety company was forced to pay P2,800.00
that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety
caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only.
Thereafter and upon Velayo's failure to pay the balance, the surety company brought suit in the
Municipal Court. Velayo countered with a claim that the sale of the pledged jewelry extinguished
any further liability on his part under Article 2115 of the 1950 Civil Code, which recites:
Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not
the proceeds of the sale are equal to the amount of the principal obligation, interest and
expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not
be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither
shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the
contrary.
The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed
to the Court of First Instance, the defense was once more overruled, and the case decided in
the terms set down at the start of this opinion.
Thereupon, Velayo resorted to this Court on appeal.
The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):
It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement
and if the pieces of jewelry mentioned by the defendant were delivered to the plaintiff, it was
merely as an added protection to the latter. There was no understanding that, should the same
be sold at public auction and the value thereof should be short of the undertaking, the defendant

would have no further liability to the plaintiff. On the contrary, the last portion of the said
agreement specifies that in case the said collateral should diminish in value, the plaintiff may
demand additional securities. This stipulation is incompatible with the idea of pledge as a
principal agreement. In this case, the status of the pledge is nothing more nor less than that of a
mortgage given as a collateral for the principal obligation in which the creditor is entitled to a
deficiency judgment for the balance should the collateral not command the price equal to the
undertaking.
It appearing that the collateral given by the defendant in favor of the plaintiff to secure this
obligation has already been sold for only the amount of P235.00, the liability of the defendant
should be limited to the difference between the amounts of P2,800.00 and P235.00 or
P2,565.00.
We agree with the appellant that the above quoted reasoning of the appealed decision is
unsound. The accessory character is of the essence of pledge and mortgage. As stated in
Article 2085 of the 1950 Civil Code, an essential requisite of these contracts is that they be
constituted to secure the fulfillment of a principal obligation, which in the present case is
Velayo's undertaking to indemnify the surety company for any disbursements made on account
of its attachment counterbond. Hence, the fact that the pledge is not the principal agreement is
of no significance nor is it an obstacle to the application of Article 2115 of the Civil Code.
The reviewed decision further assumes that the extinctive effect of the sale of the pledged
chattels must be derived from stipulation. This is incorrect, because Article 2115, in its last
portion, clearly establishes that the extinction of the principal obligation supervenes by operation
of imperative law that the parties cannot override:
If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency
notwithstanding any stipulation to the contrary.
The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the
articles pledged, instead of suing on the principal obligation, the creditor has waived any other
remedy, and must abide by the results of the sale. No deficiency is recoverable.
It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the
legal prescription contained in Article 1484(3) of the same Code, concerning the effect of a
foreclosure of a chattel mortgage constituted to secure the price of the personal property sold in
installments, and which originated in Act 4110 promulgated by the Philippine Legislature in
1933.
WHEREFORE, the decision under appeal is modified and the defendant absolved from the
complaint, except as to his liability for the 1954 premium in the sum of P120.93, and interest at
12-1/2% per annum from June 13, 1954. In this respect the decision of the Court below is
affirmed. No costs. So ordered.
G.R. No. L-22001
November 4, 1924
CHINA BANKING CORPORATION, in substitution of Filipinas Compania de Seguros,
plaintiffs-appellee,
vs.
FAUSTINO LICHAUCO, ET AL., defendants-appellants.
Jose A. Espiritu for appellants. Feria and La O and P. J. Sevilla for appellee.
AVANCEA, J.:
The dispositive part of the judgment appealed from is literally as follows:
For all of the foregoing it is adjudged and decreed that the defendant Faustino Lichauco be, as
is hereby, sentenced to pay the plaintiff the sum of P21,500, with interest at 12 per cent per year
from September 13, 1922 until full payment thereof, and in addition, interest at 6 per cent per
annum from the filing of the complaint upon P1,935, interest of the sum claimed for 9 months

prior to the filing of the complaint, and of such sums as subsequently have become or may
become due, from their respective dates of maturity until the payment of said interest; he is
further sentenced to pay the sum of P14,200 as fees of plaintiff's attorney, expenses and
troubles caused by the litigation for the collection of said sum of P21,500, with interest thereon;
and all the defendants are sentenced to pay the sum of P50,000 with interest at the rate of 12
per cent per annum from September 5, 1921, capitalized monthly to earn the same interest as
the principal, until full payments thereof, and in addition 5 per cent of P50,000 and the interest
due at the time of the filing of the complaint, as costs of suit and other expenses of whatever
kind, including attorney's fees, incurred by the plaintiff for the recovery of said sum, and it is
ordered that the payment of all these amounts be made within three months from the date of the
judgment and that in case of nonpayment of all these amounts within the aforesaid period, the
mortgaged property be sold for the payment of the amount or amounts not paid.
The judgment appealed from contains a complete and exact statement of all the facts from
which the liability of the defendants arose.
There is no question in this appeal but that the defendant Faustino Lichauco owes the plaintiff
the sum of P21,500, with interest thereon at the rate of 12 per cent per year from September 13,
1922. Nor is there about the fact that, at the filing of the herein complaint, Faustino Lichauco
owed the sum of P1,935, as interest for the preceding nine months. But it is alleged that the
lower court erred in allowing legal interest at the rate of 6 per cent from the filing of the
complaint upon this sum of P1,935, the amount of interest due on that date. This is no error.
Article 1109 of the Civil Code expressly provides that interest due shall earn legal interest from
the date payment thereof is judicially demanded, although the obligation may be silent on the
matter.
As to the part of the judgment sentencing all the defendants to pay the plaintiff the sum of
P50,000, it is necessary to take into account the previous transactions that gave rise to this
liability of the defendants. Lichauco & Company, Inc., owed the plaintiff a large sum by way of
loan. On September 5, 1921, Faustino Lichauco and his wife Luisa F. de Lichauco executed a
document (Exhibit C) in favor of the plaintiff whereby they secured with a mortgage upon the
property described in the document the payment of a part of this loan in the amount of P50,000
with interest at 9 per cent per year. It was agreed that in case of non-fulfillment of the contract,
this mortgage would stand as security also for the payment of all the costs of the suit and
expenses of any kind, including attorney's fees, which by way of liquidated damages are fixed at
5 per cent of the principal. It is stated lastly in this document that if Faustino Lichauco and Luisa
F. de Lichauco should fail to pay this amount of P50,000, the mortgage shall be in full force and
effect.
On the 20th of December, 1922, Lichauco & Co., Inc., Faustino Lichauco, and Luisa F. de
Lichauco executed another document (Exhibit D) in which, among the other things, they ratified
the former mortgage and stated that the payment of the P50,000 shall continue to be secured in
the same manner and with the same property, and shall earn interest at 12 per cent per year
from October 20, 1920. 1awphil.net
The appellants argue in this court that the obligation of Faustino Lichauco and Luisa F. de
Lichauco lacked consideration, because what they guaranteed with this mortgage was a debt of
Lichauco & Co., Inc. This contention does not find support in law. As a mortgage is an
accessory contract, its consideration is the very consideration of the principal contract, from
which it receives its life, and without which it cannot exist as an independent contract, although,
as in the instant case, it may secure an obligation incurred by another (art. 1857 of the Civil
Code). That this amount of P50,000 is to earn interest, and that 5 per cent must be paid in
addition for judicial expenses and attorney's fees, was expressly stipulated in the contract. The
trial court, however, fixed this interest at 12 per cent from September 5, 1921, which we believe
is an error. In the contract of December 20, 1922, it was stipulated that from October 20, 1920,
the interest must be 12 per cent. Undoubtedly a clerical error was committed in the writing of

this date, inasmuch as then Faustino Lichauco and Luisa F. de Lichauco had not executed the
mortgage yet. The lower court held that this date must be September 5, 1921, but this view is
groundless, since in the contract of September 5, 1921, this interest was fixed at 9 per cent.
This date must, therefore, be construed to be the date of the second contract, December 20,
1922, as it cannot be presumed that the parties ever intended to make it effective from a former
date.
For the foregoing, it being understood that the defendants must pay interest at 9 per cent from
September 5, 1921, and 12 per cent from December 20, 1922, the judgment appealed from is
affirmed in all other respects, without special pronouncement as to costs. So ordered.
G.R. No. L-21953
March 28, 1969
ENCARNACION GATIOAN, plaintiff-appellee,
vs.
SIXTO GAFFUD ET AL., defendants,
PHILIPPINE NATIONAL BANK, defendant-appellant.
Felix Fernandez for plaintiff-appellee. Tomas Besa and Jose B. Galang for defendant-appellant.
BARREDO, J.:
Appeal from the Court of First Instance of Isabela.
The facts as found by the said court are as follows:
The land in question was originally registered in the name of Rufina Permison under Original
Certificate of Title No. L-3432, dated December 18, 1935 on the basis of a free patent. In the
year 1948, Permison sold it to Sibreno Novesteras, who in turn, conveyed it to appellee
Encarnacion Gatioan on April 1, 1949. Through the initiative of appellee, the said Original
Certificate of Title No. L-3432 in the name of Rufina Permison was cancelled on June 3, 1949
and in lieu thereof Transfer Certificate of Title No. T-1212 was issued in favor of appellee.
On June 12, 1950, appellee obtained a loan in the amount of P900.00 from the appellant,
Philippine National, Bank, and as security therefor, mortgaged the land described in TCT No. T1212. Said mortgage was duly inscribed at the back of the title but was cancelled when it was
fully paid on June 3, 1953. Using the same land and title as collateral, appellee acquired
another loan in the sum of P1,100.00 from the same bank on May 3, 1954. The annotated
incumbrance covering this second loan was upon its being paid released on June 28, 1956. On
July 18, 1957, appellee secured, a third loan from the same bank, this time for a bigger amount
P2,800,00. Again, she remortgaged the same land and title. This third loan appears as Entry
No. 8511 at the back of TCT No. T-1212. The third loan not yet paid, she secured an additional
loan of P3,170.00 from the same bank on July 30, 1957, for which she, however, gave as
collateral, another parcel of land covered by TCT No. T-4807. The deed of mortgage covering
the last amount was jointly and severally execution by appellee and the other registered coowners appearing in the last mentioned title.
On August 12, 1960, appellee paid P2,800.00, plus interest, in full payment of the last loan
secured by mortgage on the land covered by TCT No. T-1212, as per receipt No. 402272-B.
Partial payment was also given for the other joint obligation secured with the joint deed of
mortgage on the other land. Despite these payments, appellant executed no instrument
releasing or discharging the incumbrance on TCT No. T-1212.
In the meantime, on January 23, 1956, the defendant spouses Sixto Gaffud and Villamora
Logan procured a free patent covering the identical parcel of land described in TCT No. T-1212
of appellee, on the basis of which Original Certificate of Title No. P-6038 was issued in their
favor. On May 15, 1956 and January 8, 1957, they also obtained two loans from appellant Bank
in the sum of P1,400.00 and P300.00, respectively, and as collateral for both, they mortgaged
the said land covered by OCT No. P-6038. Without paying these two obligations, a consolidated
mortgage in the sum of P2,300.00 was executed by them on June 17, 1957, for which they gave
as security in addition to the land described in OCT No. P-6038, another parcel of land

described in Original Certificate of Title No. 3137, also in their names.

Subsequently, the Secretary of Agriculture and Natural Resources compared the technical
descriptions, areas, lot numbers and cadastral numbers of the land described in TCT No. T1212 with that covered by OCT No. P-6088, and convinced that both titles covered the same
identical land, he recommended the cancellation of the latter.lwphi1.et
On May 16, 1962, because of the existence of OCT No. P-6038 in the name of the defendant
spouses Gaffud and Logan, containing an annotation of the aforementioned consolidated
mortgage in favor of the appellant Bank, and the annotation on TCT No. T-1212 of the mortgage
incumbrance covering the already paid loan of P2,800.00 to the appellee, which appellant Bank
refused to have cancelled, appellee filed the complaint for quieting of title in this case.
The above facts were found by the lower court from the stipulations submitted by the parties,
except defendant spouses Gaffud and Logan who were declared in default. No oral evidence
was presented by any of the parties.
From a judgment favorable to the plaintiff thus:
WHEREFORE, the Court renders judgment:
(a) Declaring null and void ab initio the patent and certificate of title No. P-6038 issued in the
name of the defendant spouses Sixto Gaffud and Villamora Logan;
(b) Ordering the Register of Deeds of Isabela to cancel, upon payment of the fees, original
certificate of title No. P-6038 in the name of said spouses and ordering the Philippine National
Bank to surrender to the Register of Deeds of Isabela the owner's duplicate certificate of said
title for its cancellation;
(c) Declaring the real estate mortgage executed by the defendant spouses Sixto Gaffud and
Villamora Logan in favor of the Bank, recorded on OCT P-6038 null and void and unenforceable
as against the herein plaintiff, and ordering its cancellation, without prejudice of the Bank's right
to collect from the said spouses;
(d) Dismissing the complaint and its prayer, to order the defendant bank to immediately cancel
or release the mortgage recorded on Transfer Certificate of Title No. T-1212 in the name of the
plaintiff, unless the other joint obligation secured with the joint deed of mortgage executed by
the herein plaintiff together with her co-debtors has been full paid; and
(e) The court hereby sentences the defendant spouses Sixto Gaffud and Villamora Logan to pay
to the plaintiff as actual or compensatory and exemplary or corrective damages, and attorney's
fees, the total amount of ONE THOUSAND FIVE HUNDRED PESOS (P1,500.00), and to pay
the costs.
only the appellant Bank has come to Us on appeal on a sole question of law related to
paragraphs (a), (b) and (c) thereof. (See Notice of Appeal, p. 90, Record on Appeal.)
Appellant does not, however, impugn the lower court's ruling in declaring null and void and
cancelling OCT No. P-6038 in favor of the defendant spouses Gaffud and Logan; it only insists
that the lower court should have declared it an innocent mortgagee in good faith and for value
as regards the mortgages executed in its favor by said defendant spouses and duly annotated
on their abovementioned OCT P-6038 and that consequently, the said mortgage annotations
should be carried over to and considered as incumbrances on the land covered by TCT No. T1212 of appellee which, as already stated, is the identical land covered by OCT P-6038 of the
Gaffuds. We find no merit, whatsoever, in this contention, because the point raised was already
passed upon by this Court in no uncertain terms in Legarda v. Saleeby, 31 Phil. 590, way back
on October 2, 1915 and in subsequent cases of similar nature. 1 We unhesitatingly affirm the
judgment of the lower court.
Indeed, upon the facts found by the trial court as above stated, there can be no question that
the decision of this Court in Legarda v. Saleeby, supra, is controlling herein. Therein this Court
held:
We find statutory provisions which, upon first reading, seem to cast some doubt upon the rule
that the vendee acquires the interest of the vendor only. Sections 38, 56, and 112 of Act No. 496

indicate that the vendee may acquire rights and be protected against the defenses which the
vendor would not. Said sections speak of available rights in favor of third parties which are cut
off by virtue of the sale of the land to an "innocent purchaser". That is to say, persons who had
had a right or interest in land wrongfully included in an original certificate would be unable to
enforce such rights against an "innocent purchaser", by virtue of the provisions of said sections.
In the present case Teus had his land, including the wall, registered in his name. He
subsequently sold the same to appellee an "innocent purchaser", as the phrase is used in said
sections? May those who have been deprived of their land by reason of a mistake in the original
certificate in favor of Teus be deprived of their right to the same, by virtue of the sale by him to
the appellee? Suppose the appellants had sold their lot, including the wall, to an "innocent
purchaser", would such purchaser be included in the phrase "innocent purchaser", as the same
is used in said sections? Under these examples there would be two innocent purchasers of the
same land, if said sections are to be applied. Which of the two innocent purchasers, if they are
both to be regarded as innocent purchasers, should be protected under the provisions of said
sections? These questions indicate to difficulty with which we are met in giving meaning and
effect to the phrase "innocent purchaser", in said sections.
May the purchaser of the land which has been included in a "second original certificate" ever
be regarded as an "innocent purchaser", as against the rights or interest of the owner of the first
original certificate, his heirs, assigns or vendee? The first original certificate is recorded in the
public registry. It is never issued until it is recorded. The record is notice to all the world. All
persons are charged with the knowledge of what it contains. All persons dealing with the land so
recorded or any portion of it, must be charged with notice of whatever it contains. The purchaser
is charged with notice of every fact shown by the record and is presumed to know every fact
which the record discloses. This rule is so well established that it is scarcely necessary to cite
authorities in its support (Northwestern National Bank v. Freeman, 171 U.S. 620, 629; Delvin on
Real Estate, sections 710, 710-[a]).
When a conveyance has been properly recorded such record is constructive notice of its
contents and all interests, legal and equitable, included therein. (Grandin v. Anderson, 15 Ohio
State, 286, 289; Orvis v. Newell 17 Conn. 97; Buchanan v. International Bank, 78 111. 500;
Youngs v. Wilson, 27 N.Y. 351; McCabe v. Grey, 20 Cal. 509; Montefiore v. Browne, 7 House of
Lords Cases, 341.)
Under the rule of notice, it is presumed that the purchaser has examined every instrument of
record affecting the title. Such presumption is irrebutable. He is charged with notice of every fact
shown by the record and is presumed to know every fact which an examination of the record
would have disclosed. This presumption cannot be overcome by proof of innocence or good
faith. Otherwise the very purpose and object of the law requiring a record would be destroyed.
Such presumption cannot be defeated by proof of want of knowledge of what the record
contains any more than one may be permitted to show that he was ignorant of the provisions of
the law. The rule that all persons must take notice of the facts which the public record contains
is a rule of law. The rule must be absolute. Any variation would lead to endless confusion and
useless litigation.
While there is no statutory provision in force here requiring that original deeds of conveyance
of real property, be recorded, yet there is a rule requiring mortgages to be recorded. (Arts. 1875
and 606 of the Civil Code.) The record of a mortgage is indispensable to its validity. (Art. 1875.)
In the face of that statute, would the courts allow a mortgage to be valid which had not been
recorded, upon the plea of ignorance of the statutory provision, when third parties were
interested? May a purchaser of land, subsequent to the recorded mortgage, plead ignorance of
its existence, and by reason of such ignorance have the land released from such lien? Could a
purchaser of land, after the recorded mortgage, be relieved from the mortgage lien by the plea
that he was a bona fide purchaser? May there be a bona fide purchaser of said land, bona fide
in the sense that he had no knowledge of the existence of the mortgage? We believe the rule

that all persons must take notice of what the public record contains is just as obligatory upon all
persons as the rule that all men must know the law: that no one can plead ignorance of the law.
The fact that all men know the law is contrary to the presumption. The conduct of men, at times,
shows clearly that they do not know the law. The rule, however, is mandatory and obligatory,
notwithstanding. It would be just as logical to allow the plea of ignorance of the law of affecting a
contract as to allow the defense of ignorance of the existence and contents of a public record.
In view, therefore, of the foregoing rules of law, may the purchaser of land from the owner of
the second original certificate be an "innocent purchaser" when a part or all of such land had
theretofore been registered in the name of another, not the vendor? We are of the opinion that
said sections 38, 55, and 112 should not be applied to such purchasers. We do not believe that
the phrase "innocent purchaser" should be applied to such a purchaser. He cannot be regarded
as an "innocent purchaser" because of the facts contained in the record of the first original
certificate. The rule should not be applied to the purchaser of a parcel of land the vendor of
which is not the owner of the original certificate, or his successors. He, in no sense, can be an
"innocent purchaser" of the portion of the land included in another earlier original certificate. The
rule of notice of what the record contains precludes the idea of innocence. By reason of the
prior registry there cannot be an innocent purchaser of land included in a prior original certificate
and in a name other than that of the vendor, or his successors. In order to minimize the
difficulties we think this is the safer rule to establish. We believe the phrase "innocent
purchaser", used in said sections, should be limited only to cases where unregistered land has
been wrongfully included in a certificate under the torrens system. When land is once brought
under the torrens system, the record of the original certificate and all subsequent transfers
thereof is notice to all the world. That being the rule, could Teus even be regarded as the holder
in good faith of that part of the land included in his certificate which had theretofore been
included in the original certificate of the appellants? We think not. Suppose, for example, that
Teus had never had his lot registered under the torrens system. Suppose he had sold his lot to
the appellee and included in his deed of transfer the very strip of land now in question. Could
his vendee be regarded as an "innocent purchaser" of said strip? Certainly not. The record of
the original certificate of the appellants precludes the possibility. Has the appellee gained any
right by reason of the registration of the strip of land in the name of his vendor? Applying the
rule of notice resulting from the record of the title of the appellants, the question must be
answered in the negative. We are of the opinion that the rules are more in harmony with the
purpose of Act No. 496 than the rule contended for by the appellee. We believe that the
purchaser from the owner of the later certificate, and his successors, should be required to
resort to his vendor for damages, in case of a mistake like the present, rather than to molest the
holder of the first certificate who has been guilty of no negligence. The holder of the first original
certificate and his successors should be permitted to secure in their title against one who had
acquired rights in conflict therewith and who had full and complete knowledge of their rights.
The purchaser of land included in the second original certificate, by reason of the facts
contained in the public record and the knowledge with which he is charged and by reason of his
negligence should suffer the loss, if any, resulting from such purchaser case rather than he who
has obtained the first certificate and who was innocent of any act of negligence. (31 Phil. 590,
599-603)
Moreover, it is a matter of judicial notice that before a bank grants a loan on the security of
land, it first undertakes a careful examination of the title of the applicant as well as a physical
and on-the-spot investigation of the land itself offered as security. Undoubtedly, had herein
appellant Bank taken such a step which is demanded by the most ordinary prudence, it would
have easily discovered the flaw in the title of the defendant spouses; and if it did not conduct
such examination and investigation, it must be held to be guilty of gross negligence in granting
them the loans in question. In either case, appellant Bank cannot be considered as a mortgagee
in good faith within the contemplation of the law. 2

A more factual approach would lead to the same result. From the stipulated facts, it can be
seen that prior to the execution of the mortgage between appellant and the defendant spouses,
the appellee had been mortgaging the land described in TCT No. T-1212 to it. She did this first
in the year 1950 for a loan of P900.00, and again in 1954 for a loan of P1,100.00. In both
instances, the appellant Bank had possession of, or at least, must have examined appellee's
title, TCT No. T-1212, wherein appear clearly the technical description, exact area, lot number
and cadastral number of the land covered by said title. In other words, by the time the defendant
spouses offered OCT P-6038, in their names, for scrutiny in connection with their own
application for loan with appellant, the latter was charged with the notice of the identity of the
technical descriptions, areas, lot numbers and cadastral numbers of the lands purportedly
covered by the two titles and was in a position to know, if it did not have such knowledge
actually, that they referred to one and the same lot. Under the circumstances, appellant had
absolutely no excuse for approving the application of the defendant spouses and giving the
loans in question. To appellant, therefore, fittingly applies the following pronouncement of this
Court:
One who purchases real estate with knowledge of a defect or lack of, title in his vendor cannot
claim that he has acquired title thereto in good faith as against the true owner of the land or of
an interest therein; and the same rule must be applied to one who has knowledge of facts which
should have put him upon such inquiry and investigation as might be necessary to acquaint him
with the defects in the title of his vendor. A purchaser cannot close his 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. His mere refusal to believe that such
defect exists or his willful closing of his eyes to the possibility of the existence of a defect in his
vendor's title will not make him an innocent purchaser for value, if it afterwards develops that the
title was in fact defective, and it appears that he had such notice of the defect as would have led
to its discovery had be acted with that measure of precaution which may reasonably be required
of a prudent man in a like situation..... (Dayao v. Diez, supra; citing the case of Leung Yee v.
Strong Machinery. Co., 37 Phil; 644.)
Anyway, appellant Bank is not without any remedy. It appears that, defendant spouses have
another land covered by OCT 3137 which is also mortgaged to it and which perhaps may yet be
sufficient to cover the loans in question. In any event, again, the following ruling of this Court in
the recent case of De Villa v. Trinidad, G.R. No. L-24918, March 20, 1968, applies to appellant:
We have laid the rule that where two certificates of title around issued to different persons
covering the same land in whole or in part, the earlier in date must prevail as between original
parties and in case of successive registrations where more than one certificate is issued over
the land, the person holding under the prior certificate is entitled to the land as against the
person who rely on the second certificate. The purchaser from the owner of the later certificate
and his successors, should resort to his vendor for redress, rather than molest the holder of the
first certificate and his successors, who should be permitted to resort secure in their title. (Citing
Legarda v. Saleeby, 31 Phil. 590) [Emphasis supplied]
The recourse to the cases of Blanco, et al. v. Esquierdo, G.R. No. L-15182, December 28,
1960 and Director of Lands v. Abache, 73 Phil. 606, made by appellant in its brief is obviously
unavailing. The factual settings of those cases are entirely different from the one before Us now.
In the case of Abache, what happened was that the land which one Santiago Imperial and his
mother claimed during the cadastral proceedings was adjudicated by the cadastral court in its
decision to other parties, the Adornados, who had never made any claim thereto, and when the
Imperials asked later on, after the decree and title had been issued, for the annulment of such
title in the name of said non-claimants, it appeared that the latter had already mortgaged the
land to one Luis Meneses. This Court decreed that although the title of the Adornados was void
and the Imperials were entitled to the issuance of the title in their favor, the mortgage in favor of
Meneses constituted a valid lien over the land; the remedy of the Imperials was to go against

the Assurance Fund. Thus, in that case, there was nothing in the title itself which could indicate
to Meneses that there was a flaw in the title of the Adornados, because the error was committed
by the court in the proceedings and not in the issuance of the title, hence it contained on its face
no circumstances of suspicion at all, from any point of view, unlike in the present case wherein
an examination of the title of the defendant spouses was sufficient to put appellant on notice
that the land described therein was identical with the land it had previously dealt with under
another title in the name of somebody else.
The same is true with the other cited case of Blanco, et al. v. Esquierdo, supra. The pertinent
portions of said decision are as follows:
That the certificate of title issued in the name of Fructuosa Esquierdo is a nullity, the same
having been secured thru fraud, is not here in question. The only question for determine nation
is whether the defendant bank is entitled to the protection accorded to "innocent purchasers for
value", which phrase, according to sec. 38 of the Land Registration Law, includes an innocent
mortgagee for value. The question, in our opinion, must be answered in the affirmative.
The trial court, in the decision complained of, made no finding that the defendant mortgagee
bank was a party to the fraudulent transfer of the land to Fructuosa Esquierdo. Indeed, there is
nothing alleged in the complaint which may implicate said defendant mortgagee in the fraud, or
justify a finding that it acted in bad faith. On the other hand, the certificate of title was in the
name of the mortgagor Fructuosa Esquierdo when the land was mortgaged by her to the
defendant bank. Such being the case, the said defendant bank, as mortgagee, had the right to
rely on what appeared in the certificate and, in the absence of anything to excite suspicion, was
under no obligation to look beyond the certificate and investigate the title of the mortgagor
appearing on the face of said certificate. (De Lara, et al., vs. Ayroso, 50 Off. Gaz. 4838; Joaquin
vs. Madrid, et al., G.R. No. L-13551, January 30, 1960.) Being thus an innocent mortgagee for
value, its right or lien upon the land mortgaged must be respected and protected, even if the
mortgagor obtained her title thereto thru fraud. The remedy of the persons prejudiced is to bring
an action for damages against those causing the fraud, and if the latter are insolvent, an action
against the Treasurer of the Philippines may be filed for the recovery of damages against the
Assurance Fund. (De la Cruz vs. Fabie, 35 Phil. 144; Blondeau vs. Nena, 61 Phil. 625; Sumira,
et al. vs. Vistan, et al., 74 Phil. 138; Raymundo et al., vs. Mayon Realty Corp., et al., 54 Off.
Gaz. 4954; Avecilla vs. Yatco, et al., 54 Off. Gaz. 6415.)
In this connection, it will be noted that the deceased Maximiano Blanco died way back in 1930
and the certificate of title pursuant to his homestead application was issued in the name of his
heirs sometime in 1934. Plaintiffs, however, took no steps for the settlement of their late
brother's estate and instead merely took possession of the land in question jointly with
Fructuosa Esquierdo. They also appear to have entrusted the owner's certificate to said
Fructuosa Esquierdo thus making it possible for her to fraudulently secure a transfer certificate
of title in her name. This should be emphasized, for in several cases it is what impelled this
Court to apply the principle of equity that "as between two innocent persons, one of whom must
suffer the consequences of a breach of trust, the one who. made it possible by his act of
confidence must bear the loss". (De Lara, et al. vs. Ayroso supra.)
Again, it is clear that in that case, the title examined by the bank had no indication, whatsoever,
of any, defect in it, unlike, as already stated, in this case.
By no means of reasoning, therefore, can anyone ever say that the case cited and relied upon
by appellant could have modified the doctrine in Legarda v. Saleeby, supra, and the other cases
wherein it was reiterated. In fact, no mention at all is made by appellant of the Legarda v.
Saleeby case in its brief by way of explaining way said appellant had to bring this case on
appeal to Us in the face of the said decision which explained clearly and in detail the law on the
point appellant now urges before Us. We are thus persuaded that appellant paid little heed to
the merit or lack of merit of this appeal which We find to be frivolous.

WHEREFORE, as appellant has not appealed from the judgment of the lower court insofar as
paragraphs (d) and (e) thereof are concerned, said paragraphs stand, and the rest of said
judgment is hereby affirmed. Double costs against appellant in this instance.
G.R. No. 138053 May 31, 2000
CORNELIO M. ISAGUIRRE, petitioner,
vs.
FELICITAS DE LARA, respondent.
GONZAGA-REYES, J.:
In this petition for review on certiorari under Rule 45 of the 1997 Revised Rules of Civil
Procedure, petitioner Cornelio M. Isaguirre assails the October 5, 1998 decision 1 of the Court of
Appeals2 and its Resolution promulgated on March 5, 1999.
The antecedent facts of the present case are as follows:
Alejandro de Lara was the original applicant-claimant for a Miscellaneous Sales Application over
a parcel of land identified as portion of Lot 502, Guianga Cadastre, filed with the Bureau of
Lands on January 17, 1942 and with an area of 2,324 square meters. Upon his death, Alejandro
de Lara was succeeded by his wife respondent Felicitas de Lara, as claimant. On November
19, 1954, the Undersecretary of Agriculture and Natural Resources amended the sales
application to cover only 1,600 square meters. Then, on November 3, 1961, by virtue of a
decision rendered by the Secretary of Agriculture and Natural Resources dated November 19,
1954, a subdivision survey was made and the area was further reduced to 1,000 square meters.
On this lot stands a two-story residential-commercial apartment declared for taxation purposes
under TD 43927 in the name of respondent's sons Apolonio and Rodolfo, both surnamed de
Lara.
Sometime in 1953, respondent obtained several loans from the Philippine National Bank. When
she encountered financial difficulties, respondent approached petitioner Cornelio M. Isaguirre,
who was married to her niece, for assistance. On February 10, 1960, a document denominated
as "Deed of Sale and Special Cession of Rights and Interests" was executed by respondent and
petitioner, whereby the former sold a 250 square meter portion of Lot No. 502, together with the
two-story commercial and residential structure standing thereon, in favor of petitioner, for and in
consideration of the sum of P5,000.
Sometime in May, 1968, Apolonio and Rodolfo de Lara filed a complaint against petitioner for
recovery of ownership and possession of the two-story building. 3 However, the case was
dismissed for lack of jurisdiction.
On August 21, 1969, petitioner filed a sales application over the subject property on the basis of
the deed of sale. His application was approved on January 17, 1984, resulting in the issuance of
Original Certificate of Title No. P-11566 on February 13, 1984, in the name of petitioner.
Meanwhile, the sales application of respondent over the entire 1,000 square meters of subject
property (including the 250 square meter portion claimed by petitioner) was also given due
course, resulting in the issuance of Original Certificate of Title No. P-13038 on June 19, 1989, in
the name of respondent.4
Due to the overlapping of titles, petitioner filed an action for quieting of title and damages with
the Regional Trial Court of Davao City against respondent on May 17, 1990. The case was
docketed as Civil Case No. 20124-90. After trial on the merits, the trial court rendered judgment
on October 19, 1992, in favor of petitioner, declaring him to be the lawful owner of the disputed
property. However, the Court of Appeals reversed the trial court's decision, holding that the
transaction entered into by the parties, as evidenced by their contract, was an equitable
mortgage, not a sale.5 The appellate court's decision was based on the inadequacy of the
consideration agreed upon by the parties, on its finding that the payment of a large portion of
the "purchase price" was made after the execution of the deed of sale in several installments of

minimal amounts; and finally, on the fact that petitioner did not take steps to confirm his rights or
to obtain title over the property for several years after the execution of the deed of sale. As a
consequence of its decision, the appellate court also declared Original Certificate of Title No. P11566 issued in favor of petitioner to be null and void. On July 8, 1996, in a case docketed as
G.R. No. 120832, this Court affirmed the decision of the Court of Appeals and on September 11,
1996, we denied petitioner's motion for reconsideration.
On May 5, 1997, respondent filed a motion for execution with the trial court, praying for the
immediate delivery of possession of the subject property, which motion was granted on August
18, 1997. On February 3, 1998, respondent moved for a writ of possession, invoking our ruling
in G.R. No. 120832. Petitioner opposed the motion, asserting that he had the right of retention
over the property until payment of the loan and the value of the improvements he had
introduced on the property. On March 12, 1998, the trial court granted respondent's motion for
writ of possession. Petitioner's motion for reconsideration was denied by the trial court on May
21, 1998. Consequently, a writ of possession dated June 16, 1998, together with the Sheriff's
Notice to Vacate dated July 7, 1998, were served upon petitioner.
Petitioner filed with the Court of Appeals a special civil action for certiorari and prohibition with
prayer for a temporary restraining order or preliminary injunction to annul and set aside the
March 12, 1998 and May 21, 1998 orders of the trial court, including the writ of possession
dated June 16, 1998 and the sheriff's notice to vacate dated July 7, 1998. 6
The appellate court summarized the issues involved in the case as follows: (1) whether or not
the mortgagee in an equitable mortgage has the right to retain possession of the property
pending actual payment to him of the amount of indebtedness by the mortgagor; and (b)
whether or not petitioner can be considered a builder in good faith with respect to the
improvements he made on the property before the transaction was declared to be an equitable
mortgage.
The Court of Appeals held that petitioner was not entitled to retain possession of the subject
property. It said that
. . . the mortgagee merely has to annotate his claim at the back of the certificate of title in order
to protect his rights against third persons and thereby secure the debt. There is therefore no
necessity for him to actually possess the property. Neither should a mortgagee in an equitable
mortgage fear that the contract relied upon is not registered and hence, may not operate as a
mortgage to justify its foreclosure. In Feliza Zubiri v. Lucio Quijano, 74 Phil 47, it was ruled "that
when a contract . . . is held as an equitable mortgage, the same shall be given effect as if it had
complied with the formal requisites of mortgage. . . . by its very nature the lien thereby created
ought not to be defeated by requiring compliance with the formalities necessary to the validity of
a voluntary real estate mortgage, as long as the land remains in the hands of the petitioner
(mortgagor) and the rights of innocent parties are not affected.
Proceeding from the foregoing, petitioner's imagined fears that his lien would be lost by
surrendering possession are unfounded.
In the same vein, there is nothing to stop the mortgagor de Lara from acquiring possession of
the property pending actual payment of the indebtedness to petitioner. This does not in anyway
endanger the petitioner's right to security since, as pointed out by private respondents, the
petitioner can always have the equitable mortgage annotated in the Certificate of Title of private
respondent and pursue the legal remedies for the collection of the alleged debt secured by the
mortgage. In this case, the remedy would be to foreclose the mortgage upon failure to pay the
debt within the required period.
It is unfortunate however, that the Court of Appeals, in declaring the transaction to be an
equitable mortgage failed to specify in its Decision the period of time within which the private
respondent could settle her account, since such period serves as the reckoning point by which
foreclosure could ensue. As it is, petitioner is now in a dilemma as to how he could enforce his
rights as a mortgagee. . . .

Hence, this Court, once and for all resolves the matter by requiring the trial court to determine
the amount of total indebtedness and the period within which payment shall be made.
Petitioner's claims that he was a builder in good faith and entitled to reimbursement for the
improvements he introduced upon the property were rejected by the Court of Appeals. It held
that petitioner knew, or at least had an inkling, that there was a defect or flaw in his mode of
acquisition. Nevertheless, the appellate court declared petitioner to have the following rights:
. . . He is entitled to reimbursement for the necessary expenses which he may have incurred
over the property, in accordance with Art. 526 and Art. 452 of the Civil Code. Moreover,
considering that the transaction was merely an equitable mortgage, then he is entitled to
payment of the amount of indebtedness plus interest, and in the event of non-payment to
foreclose the mortgage. Meanwhile, pending receipt of the total amount of debt, private
respondent is entitled to possession over the disputed property.
The case was finally disposed of by the appellate court in the following manner:
WHERFORE, the Petition is hereby DISMISSED, and this case is ordered remanded to the
Regional Trial Court of Davao City for further proceedings, as follows:
1) The trial court shall determine
a) The period within which the mortgagor must pay his total amount of indebtedness.
b) The total amount of indebtedness owing the petitioner-mortgagee plus interest computed
from the time when the judgment declaring the contract to be an equitable mortgage became
final.
c) The necessary expenses incurred by petitioner over the property.7
On March 5, 1999, petitioner's motion for reconsideration was denied by the appellate court. 8
Hence, the present appeal wherein petitioner makes the following assignment of errors:
A. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT THE RTC ACTED
WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ISSUING A WRIT
OF POSSESSION IN FAVOR OF RESPONDENT.
A.1 The RTC patently exceeded the scope of its authority and acted with grave abuse of
discretion in ordering the immediate delivery of possession of the Property to respondent as
said order exceeded the parameters of the final and executory decision and constituted a
variance thereof.
B. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER IS
NOT ENTITLED TO THE POSSESSION OF THE PROPERTY PRIOR TO THE PAYMENT OF
RESPONDENT'S MORTGAGE LOAN.
C. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER WAS
NOT A BUILDER IN GOOD FAITH.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER IS
ENTITLED TO INTEREST COMPUTED ONLY FROM THE TIME WHEN THE JUDGMENT
DECLARING THE CONTRACT TO BE AN EQUITABLE MORTGAGE BECAME FINAL.9
Basically, petitioner claims that he is entitled to retain possession of the subject property until
payment of the loan and the value of the necessary and useful improvements he made upon
such property. 10 According to petitioner, neither the Court of Appeals' decision in G.R. CV No.
42065 nor this Court's decision in G.R. No. 120832 ordered immediate delivery of possession of
the subject property to respondent.
The dispositive portion of the March 31, 1995 decision of the Court of Appeals in G.R. CV No.
42065, which was affirmed by this Court, provides that
IN VIEW OF ALL THE FOREGOING, the judgment appealed from is REVERSED and SET
ASIDE and a new one entered: (1) dismissing the complaint; (2) declaring the "Document of
Sale and Special Cession of Rights and Interests" (Exhibit B) dated February 10, 1960, to be an
equitable mortgage not a sale; (3) upholding the validity of OCT No. P-13038 in the name of
Felicitas de Lara; and (3) declaring null and void OCT No. P-11566 in the name of plaintiff

Cornelio Isaguirre. All other counterclaims for damages are likewise dismissed. Costs against
the appellee. 11
Petitioner argues that the abovementioned decision merely settled the following matters: (1) that
the transaction between petitioner and respondent was not a sale but an equitable mortgage;
(2) that OCT No. P-13038 in the name of respondent is valid; and (3) that OCT No. P-11566 in
the name of petitioner is null and void. Since the aforementioned decision did not direct the
immediate ouster of petitioner from the subject property and the delivery thereof to respondent,
the issuance of the writ of possession by the trial court on June 16, 1998 constituted an
unwarranted modification or addition to the final and executory decision of this Court in G.R. No.
120832. 12
We do not agree with petitioner's contentions. On the contrary, the March 31, 1995 decision of
the appellate court, which was affirmed by this Court on July 8, 1996, served as more than
adequate basis for the issuance of the writ of possession in favor of respondent since these
decisions affirmed respondent's title over the subject property. As the sole owner, respondent
has the right to enjoy her property, without any other limitations than those established by
law. 1 Corollary to such right, respondent also has the right to exclude from the possession of
her property any other person to whom she has not transmitted such property. 14
It is true that, in some instances, the actual possessor has some valid rights over the property
enforceable even against the owner thereof, such as in the case of a tenant or lessee. 15
Petitioner anchors his own claim to possession upon his declared status as a mortgagee. In his
Memorandum, he argues that
4.8 It was respondent who asserted that her transfer of the Property to petitioner was by way of
an equitable mortgage and not by sale. After her assertion was sustained by the Courts,
respondent cannot now ignore or disregard the legal effects of such judicial declaration
regarding the nature of the transaction.
xxx xxx xxx
4.13 Having delivered possession of the Property to petitioner as part of the constitution of the
equitable mortgage thereon, respondent is not entitled to the return of the Property unless and
until the mortgage loan is discharged by full payment thereof. Petitioner's right as mortgagee to
retain possession of the Property so long as the mortgage loan remains unpaid is further
supported by the rule that a mortgage may not be extinguished even though then mortgagordebtor may have made partial payments on the mortgage loan:
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who has received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of the other heirs who have not been paid. (Emphasis
supplied.)
xxx xxx xxx
4.14 To require petitioner to deliver possession of the Property to respondent prior to the full
payment of the latter's mortgage loan would be equivalent to the cancellation of the mortgage.
Such effective cancellation would render petitioner's rights ineffectual and nugatory and would
constitute unwarranted judicial interference.
xxx xxx xxx
4.16 The fact of the present case show that respondent delivered possession of the Property to
petitioner upon the execution of the Deed of Absolute Sale and Special Cession of Rights and
Interest dated 10 February 1960. Hence, transfer of possession of the Property to petitioner was
an essential part of whatever agreement the parties entered into, which, in this case, the
Supreme Court affirmed to be an equitable mortgage.
xxx xxx xxx

4.19 Petitioner does not have the mistaken notion that the mortgagee must be in actual
possession of the mortgaged property in order to secure the debt. However, in this particular
case, the delivery of possession of the Property was an integral part of the contract between
petitioner and respondent. After all, it was supposed to be a contract of sale. If delivery was not
part of the agreement entered into by the parties in 1960, why did respondent surrender
possession thereof to petitioner in the first place?
4.20 Now that the Courts have ruled that the transaction was not a sale but a mortgage,
petitioner's entitlement to the possession of the Property should be deemed as one of the
provisions of the mortgage, considering that at the time the contract was entered into,
possession of the Property was likewise delivered to petitioner. Thus, until respondent has fully
paid her mortgage loan, petitioner should be allowed to retain possession of the subject
property. 16
Petitioner's position lacks sufficient legal and factual moorings.
A mortgage is a contract entered into in order to secure the fulfillment of a principal obligation. 17
It is constituted by recording the document in which it appears with the proper Registry of
Property, although, even if it is not recorded, the mortgage is nevertheless binding between the
parties. 18 Thus, the only right granted by law in favor of the mortgagee is to demand the
execution and the recording of the document in which the mortgage is formalized. 19 As a
general rule, the mortgagor retains possession of the mortgaged property since a mortgage is
merely a lien and title to the property does not pass to the mortgagee. 20 However, even though
a mortgagee does not have possession of the property, there is no impairment of his security
since the mortgage directly and immediately subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment of the obligation for whose security it was
constituted. 21 If the debtor is unable to pay his debt, the mortgage creditor may institute an
action to foreclose the mortgage, whether judicially or extrajudicially, whereby the mortgaged
property will then be sold at a public auction and the proceeds therefrom given to the creditor to
the extent necessary to discharge the mortgage loan. Apparently, petitioner's contention that
"[t]o require [him] . . . to deliver possession of the Property to respondent prior to the full
payment of the latter's mortgage loan would be equivalent to the cancellation of the mortgage"
is without basis. Regardless of its possessor, the mortgaged property may still be sold, with the
prescribed formalities, in the event of the debtor's default in the payment of his loan obligation.
Moreover, this Court cannot find any justification in the records to uphold petitioner's contention
that respondent delivered possession of the subject property upon the execution of the "Deed of
Sale and Special Cession of Rights and Interests" on February 10, 1960 and that the transfer of
possession to petitioner must therefore be considered an essential part of the agreement
between the parties. This self-serving assertion of petitioner was directly contradicted by
respondent in her pleadings. 22 Furthermore, nowhere in the Court of Appeals' decisions
promulgated on March 31, 1995 (G.R. CV No. 42065) and on October 5, 1998 (G.R. SP No.
48310), or in our own decision promulgated on July 8, 1996 (G.R. No. 120832) was it ever
established that the mortgaged properties were delivered by respondent to petitioner.
In Alvano v. Batoon, 2 this Court held that "[a] simple mortgage does not give the mortgagee a
right to the possession of the property unless the mortgage should contain some special
provision to that effect." Regrettably for petitioner, he has not presented any evidence, other
than his own gratuitous statements, to prove that the real intention of the parties was to allow
him to enjoy possession of the mortgaged property until full payment of the loan.
Therefore, we hold that the trial court correctly issued the writ of possession in favor of
respondent. Such writ was but a necessary consequence of this Court's ruling in G.R. No.
120832 affirming the validity of the original certificate of title (OCT No. P-13038) in the name of
respondent Felicitas de Lara, while at the same time nullifying the original certificate of title
(OCT No. P-11566) in the name of petitioner Cornelio Isaguirre. Possession is an essential
attribute of ownership; thus, it would be redundant for respondent to go back to court simply to

establish her right to possess subject property. Contrary to petitioner's claims, the issuance of
the writ of possession by the trial court did not constitute an unwarranted modification of our
decision in G.R. No. 120832, but rather, was a necessary complement thereto. 24 It bears
stressing that a judgment is not confined to what appears upon the face of the decision, but also
those necessarily included therein or necessary thereto. 25
With regard to the improvements made on the mortgaged property, we confirm the Court of
Appeals' characterization of petitioner as a possessor in bad faith. Based on the factual findings
of the appellate court, it is evident that petitioner knew from the very beginning that there was
really no sale and that he held respondent's property as mere security for the payment of the
loan obligation. Therefore, petitioner may claim reimbursement only for necessary expenses;
however, he is not entitled to reimbursement for any useful
expenses 26 which he may have incurred. 27
Finally, as correctly pointed out by the Court of Appeals, this case should be remanded to the
Regional Trial Court of Davao City for a determination of the total amount of the loan, the
necessary expenses incurred by petitioner, and the period within which respondent must pay
such amount. 28 However, no interest is due on the loan since there has been no express
stipulation in writing. 29
WHEREFORE, the assailed Decision of the Court of Appeals dated October 5, 1998 and its
Resolution dated March 5, 1999 are hereby AFFIRMED. Respondent is entitled to delivery of
possession of the subject property. This case is hereby REMANDED to the trial court for
determination of the amount of the loan, the necessary expenses incurred by petitioner and the
period within which the respondent must pay the same.
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.
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 semi-concrete
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 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
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;
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.
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:
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:
YES.
QUESTION:
And what was the topic:
ANSWER:
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.1wphi1.nt

G.R. No. L-13683

March 28, 1960
PAZ SAMANILLA, petitioner-appellee,
vs.
CENEN A. CAJUCOM, ET AL., respondents-appellants.
R. M. Ordiz de Guzman, L. P. de Guzman, Jr. and Lorenzo de Guzman, Sr. for appellee.Agustin
C. Bagasao for appellants.
REYES, J.B.L., J.:
Appeal interposed by respondents Cenen A. Cajucom and Jose A. Cajucom from the order of
the Court of First Instance of Nueva Ecija in Land Registration Case No. 210, G.L.R.O. Rec. No.
N-6010, requiring them to surrender Original Certificate of Title No. O-966 within ten days either
to the Register of Deeds or to the Court for the annotation of a mortgage executed by them in
favor of petitioner Paz Samanilla.
The case arose out of a petition presented by appellee Samanilla in said registration case
alleging that respondents Cajucom had executed in her favor, on December 20, 1955, a real
estate mortgage over their rights and participation on the parcel of land covered by Original
Certificate of Title No. O-966 to secure a loan of P10,000.00; that sometime in February, 1956,
respondents borrowed the title from her on the excuse that they needed it to segregate from the

land the portion claimed by other persons; and that thereafter, petitioner asked for the return of
the title so that she could register her mortgage, but respondents refused. Attached to the
petition were the deed of mortgage and the affidavits of petitioner and a certain Antonio G.
Javier, who allegedly was the one who borrowed the title from petitioner in behalf of
respondents.
Respondents opposed the petition, claiming that the mortgage in question was void ab initio for
want of consideration, and that the issues should be litigated in an ordinary civil action. The
opposition notwithstanding, the lower court entered an order on June 12, 1956 finding the
petition well-taken and ordering respondents to surrender their title either to the Register of
Deeds or to the Court. From this order, respondents appealed to the Court of Appeals, which
forwarded the case to us for raising purely question of law.
The appeal has no merit. Appellants' sole objection to the registration of the deed of mortgage is
that the same was executed without any consideration. But there is a legal presumption of
sufficient cause or consideration supporting a contract, even if such cause is not stated therein
(Art. 1354, New Civil Code; Rule 123, sec. 69 [r], Rules of Court). This presumption appellants
cannot overcome by a simple assertion of lack of consideration. Especially may not the
presumption be so lightly set aside when the contract itself states that consideration was given,
and the same has been reduced into a public instrument with all due formalities and solemnities
as in this case. As held by this Court.
Once a mortgage has been signed in due form, the mortgagee is entitled to its registration as a
matter of right. By executing the mortgage the mortgagor is understood to have given his
consent to its registration, and he cannot be permitted to revoke it unilaterally. The validity and
fulfillment of contracts cannot be left to the will of one of the contracting parties (Article 1254 of
the Civil Code)." (Gonzales vs. Basa, Jr., et al., 73 Phil., 704)
To overcome the presumption of consideration, appellants must show the alleged lack of
consideration of the mortgage by preponderance of evidence in a proper action.
Appellants assert that they cannot be compelled to surrender their title for registration of the
mortgage in question until they are given an opportunity to show its invalidity in an ordinary civil
action, because registration is an essential element of a real estate mortgage and the surrender
of their title would complete this requirement of registration. The argument is fallacious, for a
mortgage, whether registered or not, is binding between the parties, registration being
necessary only to make the same valid against third persons (Art. 2125, New Civil Code). In
other words, registration only operates as a notice of the mortgage to others, but neither adds to
its validity nor convert an invalid mortgage into a valid one between the parties. Appellants still
have the right to show that the mortgage in question is invalid for lack of consideration in an
ordinary action and there ask for the avoidance of the deed and the cancellation of its
registration. But until such action is filed and decided, it would be too dangerous to the rights of
the mortgagee to deny registration of her mortgage, because her rights can so easily be
defeated by a transfer or conveyance of the mortgaged property to an innocent third person. In
Gurbax Singh Pabla & Co., et al. vs. Reyes, et al., 92 Phil., 177; 48 Off. Gaz., 4365, this Court
had the occasion to rule that "if the purpose of registration is merely to give notice, the
questions regarding the effect or invalidity of instruments are expected to be decided after, not
before, registration. It must follow as a necessary consequence that registration must first be
allowed and validity or effect litigated afterwards".
Appellants cite the case of Government of the Philippine Islands vs. Payva, 44 Phil., 629.
However, the appellee correctly points out that the same is inapplicable to this case because
the only question raised and decide therein was whether an order of the registration court
requiring the holder of a duplicate certificate of title for the purpose of annotating an attachment,
lien, or adverse claim under sec. 72 of Act 496 is appealable or not, and we held that it was,
because it resolves important questions as to the respective rights of the parties. It should be
remembered that the Land Registration Court may summarily pass upon the validity of adverse

claims sought to be registered under sections 72 and 110 of the Land Registration Act, if all the
parties agree to submit the precise question to the court (see Gurbax Singh Pabla Co. vs.
Reyes, supra); and when it is thus submitted, the losing party may appeal the court's ruling, as
held in the Payva case. But appellants herein, by opposing appellee's petition on the ground
that their defense of invalidity o the mortgage sought to be registered is contentious and should
be litigated in a separate action, precisely refused to submit said question to the Land
Registration Court. The court, then, acted correctly in ordering the recording without passing
upon the validity of the mortgage in question.
The order appealed from is affirmed, without prejudice to appellants' right to bring a separate
action to question the validity of the mortgage in question and ask for the cancellation of its
registration. Costs against appellants.
G.R. No. L-26371
September 30, 1969
MOBIL OIL PHILIPPINES, INC., plaintiff-appellant,
vs.
RUTH R. DIOCARES, ET AL., defendants-appellees.
Faylona, Berroya, Norte and Associates for plaintiff-appellant.Vivencio G. Ibrado Jr. for
defendants-appellees.
FERNANDO, J.:
It may very well be, as noted by jurists of repute, that to stress the element of a promise as the
basis of contracts is to acknowledge the influence of natural law. 1 Nonetheless, it does not admit
of doubt that whether under the civil law or the common law, the existence of a contract is
unthinkable without one's word being plighted. So the New Civil Code provides: "A contract is a
meeting of minds between two persons whereby one binds himself, with respect to the other, to
give something or to render some service." 2 So it is likewise under American law. Thus: "A
contract is a promise or a set of promises for the breach of which the law gives a remedy, or the
performance of which the law in some way recognizes as a duty." 3
The law may go further and require that certain formalities be executed. Thus, for a mortgage to
be validly constituted, "it is indispensable, ..., that the document in which it appears be recorded
in the Registry of Property." The same codal provision goes on: "If the instrument is not
recorded, the mortgage is nevertheless binding between the parties." 4
The question before us in this appeal from a lower court decision, one we have to pass upon for
the first time, is the effect, if any, to be given to a mortgage contract admittedly not registered,
only the parties being involved in the suit. The lower court was of the opinion that while it
"created a personal obligation [it] did not establish a real estate mortgage." 5 It did not decree
foreclosure therefor. Plaintiff-appellant appealed. We view the matter differently and reverse the
lower court.
The case for the plaintiff, Mobil Oil Philippines, Inc., now appellant, was summarized in the
lower court order of February 25, 1966, subject of this appeal. Thus: "In its complaint plaintiff
alleged that on Feb. 9, 1965 defendants Ruth R. Diocares and Lope T. Diocares entered into a
contract of loan and real estate mortgage wherein the plaintiff extended to the said defendants a
loan of P45,000.00; that said defendants also agreed to buy from the plaintiff on cash basis their
petroleum requirements in an amount of not less than 50,000 liters per month; that the said
defendants will pay to the plaintiff 9-1/2% per annum on the diminishing balance of the amount
of their loan; that the defendants will repay the said loan in monthly installments of P950.88 for
a period of five (5) years from February 9, 1965; that to secure the performance of the foregoing
obligation they executed a first mortgage on two parcels of land covered by Transfer Certificates
of Title Nos. T-27136 and T-27946, both issued by the Register of Deeds of Bacolod City. The
agreement further provided that in case of failure of the defendants to pay any of the
installments due and purchase their petroleum requirements in the minimum amount of 50,000

liters per month from the plaintiff, the latter has the right to foreclose the mortgage or recover
the payment of the entire obligation or its remaining unpaid balance; that in case of foreclosure
the plaintiff shall be entitled to 12% of the indebtedness as damages and attorney's fees. A copy
of the loan and real estate mortgage contract executed between the plaintiff and the defendants
is attached to the complaint and made a part thereof. The complaint further alleges that the
defendant paid only the amount of P1,901.76 to the plaintiff, thus leaving a balance of
P43,098.24, excluding interest, on their indebtedness. The said defendants also failed to buy on
cash basis the minimum amount of petroleum which they agreed to purchase from the plaintiff.
The plaintiff, therefore, prayed that the defendants be ordered to pay the amount of P43,098.24,
with interest at 9-1/2% per annum from the date it fell due, and in default of such payment that
the mortgaged properties be sold and the proceeds applied to the payment of defendants'
obligation." 6
Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees, admitted their
indebtedness as set forth above, denying merely the alleged refusal to pay, the truth, according
to them, being that they sought for an extension of time to do so, inasmuch as they were not in
a position to comply with their obligation. They further set forth that they did request plaintiff to
furnish them with the statement of accounts with the view of paying the same on installment
basis, which request was, however, turned down by the plaintiff.
Then came a motion from the plaintiff for a judgment on the pleadings, which motion was
favorably acted on by the lower court. As was stated in the order appealed from: "The answer of
the defendants dated October 21, 1965 did not raise any issue. On the contrary, said answer
admitted the material allegations of the complaint. The plaintiff is entitled to a judgment on the
pleadings." 7
As to why the foreclosure sought by plaintiff was denied, the lower court order on appeal reads
thus: "The Court cannot, however, order the foreclosure of the mortgage of properties, as
prayed for, because there is no allegation in the complaint nor does it appear from the copy of
the loan and real estate mortgage contract attached to the complaint that the mortgage had
been registered. The said loan agreement although binding among the parties merely created a
personal obligation but did not establish a real estate mortgage. The document should have
been registered. (Art. 2125, Civil Code of the Phil.)" 8 The dispositive portion is thus limited to
ordering defendants "to pay the plaintiff the account of P43,098.24, with interest at the rate of 91/2% per annum from the date of the filing of the complaint until fully paid, plus the amount of
P2,000.00 as attorneys' fees, and the costs of the suit." 9
Hence this appeal, plaintiff-appellant assigning as errors the holding of the lower court that no
real estate mortgage was established and its consequent refusal to order the foreclosure of the
mortgaged properties. As set forth at the outset, we find the appeal meritorious. The lower court
should not have held that no real estate mortgage was established and should have ordered its
foreclosure.
The lower court predicated its inability to order the foreclosure in view of the categorical nature
of the opening sentence of the governing article 10 that 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." Note that it ignored the succeeding sentence: "If the instrument is not
recorded, the mortgage is nevertheless binding between the parties." Its conclusion, however, is
that what was thus created was merely "a personal obligation but did not establish a real estate
mortgage."
Such a conclusion does not commend itself for approval. The codal provision is clear and
explicit. Even if the instrument were not recorded, "the mortgage is nevertheless binding
between the parties." The law cannot be any clearer. Effect must be given to it as written. The
mortgage subsists; the parties are bound. As between them, the mere fact that there is as yet
no compliance with the requirement that it be recorded cannot be a bar to
foreclosure.1awphl.nt

A contrary conclusion would manifest less than full respect to what the codal provision ordains.
The liability of the mortgagor is therein explicitly recognized. To hold, as the lower court did, that
no foreclosure would lie under the circumstances would be to render the provision in question
nugatory. That we are not allowed to do. What the law requires in unambiguous language must
be lived up to. No interpretation is needed, only its application, the undisputed facts calling for it.
11

Moreover to rule as the lower court did would be to show less than fealty to the purpose that
animated the legislators in giving expression to their will that the failure of the instrument to be
recorded does not result in the mortgage being any the less "binding between the parties." In
the language of the Report of the Code Commission: "In article [2125] an additional provision is
made that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding
between the parties." 12 We are not free to adopt then an interpretation, even assuming that the
codal provision lacks the forthrightness and clarity that this particular norm does and, therefore,
requires construction, that would frustrate or nullify such legislative objective.
Nor is the reason difficult to discern why such an exception should be made to the rule that is
indispensable for a mortgage to be validly constituted that it be recorded. Equity so demands,
and justice is served. There is thus full acknowledgment of the binding effect of a promise,
which must be lived up to, otherwise the freedom a contracting party is supposed to possess
becomes meaningless. It could be said of course that to allow foreclosure in the absence of
such a formality is to offend against the demands of jural symmetry. What is "indispensable"
may be dispense with. Such an objection is far from fatal. This would not be the first time when
logic yields to what is fair and what is just. To such an overmastering requirement, law is not
immune.
WHEREFORE, the lower court order of February 25, 1966 is affirmed with the modification that
in default of the payment of the above amount of P43,028.94 with interests at the rate of 9-1/2%
per annum from the date of the filing of the complaint, that the mortgage be foreclosed with the
properties subject thereof being sold and the proceeds of the sale applied to the payment of the
amounts due the plaintiff in accordance with law. With costs against defendants-appellees.
G.R. No. 147788
March 19, 2002
EDILBERTO CRUZ and SIMPLICIO CRUZ, petitioners,
vs.
BANCOM FINANCE CORPORATION (NOW UNION BANK OF THE PHILIPPINES),
respondent.
DECISION
PANGANIBAN, J.:
An absolutely simulated contract of sale is void ab initio and transfers no ownership right. The
purported buyer, not being the owner, cannot validly mortgage the subject property.
Consequently, neither does the buyer at the foreclosure sale acquire any title thereto.
Statement of the Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing
the March 30, 2001 Decision1 of the Court of Appeals (CA) in CA-GR No. 58346. The decretal
portion of the challenged Decision reads as follows:
"WHEREFORE, upon the premises, the assailed Decision is REVERSED and SET ASIDE. A
new one is rendered declaring BANCOMs right to the subject land as a purchaser in good faith
and for value, and ordering the cancellation of the Notice of Lis Pendens on TCT No. 248262Bulacan. Without pronouncement as to costs."2
The Facts
The factual antecedents of the case are summarized by the Court of Appeals thus:
"Brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz, plaintiffs herein, were the registered
owners of a 339,335 square meter or 33.9335 hectare parcel of agricultural land together with

improvements located in Barangay Pulang Yantoc, Angat, Bulacan covered by TCT No. 19587.
Sometime in May 1978, defendant Norma Sulit, after being introduced by Candelaria Sanchez
to Fr. Cruz, offered to purchase the land. Plaintiffs asking price for the land was P700,000.00,
but Norma only had P25,000.00 which Fr. Cruz accepted as earnest money with the agreement
that titles would be transferred to Norma upon payment of the balance of P675,000.00. Norma
failed to pay the balance and proposed [to] Fr. Cruz to transfer the property to her but the latter
refused, obviously because he had no reason to trust Norma. But capitalizing on the close
relationship of Candelaria Sanchez with the plaintiffs, Norma succeeded in having the plaintiffs
execute a document of sale of the land in favor of Candelaria who would then obtain a bank
loan in her name using the plaintiffs land as collateral. On the same day, Candelaria executed
another Deed of Absolute Sale over the land in favor of Norma. In both documents, it appeared
that the consideration for the sale of the land was only P150,000.00. Pursuant to the sale,
Norma was able to effect the transfer of the title to the land in her name under TCT No. T248262.
"Evidence shows that aside from the P150,000.00, Candelaria undertook to pay the plaintiffs the
amount of P655,000.00 representing the balance of the actual price of the land. In a Special
Agreement dated September 1, 1978, Norma assumed Candelarias obligation, stipulating to
pay the plaintiffs the said amount within six months on pain of fine or penalty in case of nonfulfillment. Unknown to the plaintiffs, Norma managed to obtain a loan from Bancom in the
amount of P569,000.00 secured by a mortgage over the land now titled in her name.
"On account of Normas failure to pay the amount stipulated in the Special Agreement and her
subsequent disappearance from her usual address, plaintiffs were prompted to file the herein
complaint for the reconveyance of the land.
"Norma filed an Answer on February 11, 1980 but failed to appear in court and was eventually
declared in default. On May 20, 1980, Bancom filed a motion for leave to intervene which was
granted by the trial court. In its Answer in Intervention, Bancom claimed priority as mortgagee in
good faith; and that its contract of mortgage with Norma had been executed before the
annotation of plaintiffs interest in the title.
"Meanwhile in the middle of 1980, Norma defaulted in her payment to the Bank and her
mortgage was foreclosed. At the subsequent auction sale, Bancom was declared the highest
bidder and was issued the corresponding certificate of sale over the land.
"On January 25, 1996, the trial court rendered the herein assailed Decision in favor of the
plaintiffs. It ruled that the contract of sale between plaintiffs and Candelaria was absolutely
simulated. Consequently, the second contract of sale, that is, between Candelaria and Norma,
produced no legal effect. As for Bancom, the trial court held that the Bank was not a mortgagee
in good faith thus it can not claim priority of rights over plaintiffs property." 3
Ruling of the Court of Appeals
In reversing the RTC, the CA held that the Deeds of Sale were valid and binding, not simulated.
Thus, the Contract of Mortgage between Sulit and respondent was likewise valid.
Petitioners, the CA ruled, intended to be bound by the Contracts of Sale and Mortgage, because
they "did not seek to annul the same but instead executed a special agreement to enforce
payment of the balance of the price in the amount of P665,000.00."4
Furthermore, it upheld respondent as a "mortgagee in good faith;" ergo, it had a preferential
right to the land.
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following issues for this Courts consideration:
I
"Whether or not the Honorable Court of Appeals seriously erred when it held that the petitioners
intended to enter into a sale of the property in question and that the declarations of Petitioner Fr.
Edilberto Cruz in Court belied the court a quos finding that the Deeds of Sale in question were

absolute simulations.
II
"Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent
bank was a mortgagee in good faith, despite the fact that respondent Bancom was in truth and
in fact a mortgagee in bad faith over the subject property.
III
"Whether or not the Honorable Court of Appeals seriously erred when it ruled that the face of
the title [to] the property did not disclose any irregularity that would arouse suspicion by
respondent bank as to the condition of the subject land despite the fact that questions and
circumstances abound which would render respondent bank not a mortgagee in good faith, and
that the case of Sunshine Finance Investment Corporation vs. Intermediate Appellate Court
applies to the instant case.
IV
"Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent
bank possesses a preferential right over petitioners on the subject land as a mortgagee in good
faith."6
The above issues can be summed up into two: (1) the validity of the Deeds of Sale and
Mortgage and (2) the good faith of the mortgagee.
This Courts Ruling
The Petition is meritorious.
First Issue:
Validity of the Sale and the Mortgage
Petitioners claim that the Deed of Sale7 they executed with Sanchez, as well as the Deed of
Sale8 executed between Sanchez and Sulit, was absolutely simulated; hence, null and void. On
the other hand, echoing the appellate court, respondent contends that petitioners intended to be
bound by those Deeds, and that the real estate mortgage over the subject property was valid.
As a general rule, when the terms of a contract are clear and unambiguous about the intention
of the contracting parties, the literal meaning of its stipulations shall control. But if the words
appear to contravene the evident intention of the parties, the latter shall prevail over the former. 9
The real nature of a contract may be determined from the express terms of the agreement, as
well as from the contemporaneous and subsequent acts of the parties thereto. 10
On the other hand, simulation takes place when the parties do not really want the contract they
have executed to produce the legal effects expressed by its wordings. 11 Simulation or vices of
declaration may be either absolute or relative. Article 1345 of the Civil Code distinguishes an
absolute simulation from a relative one while Article 1346 discusses their effects, as follows:
"Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when
the parties do not intend to be bound at all; the latter when the parties conceal their true
agreement.
"Art. 1346. An absolutely simulated contract is void. A relative simulation, when it does not
prejudice a third person and is not intended for any purpose contrary to law, morals, good
customs, public order or public policy binds the parties to their agreement."
In Rongavilla v. Court of Appeals,12 we held that a deed of sale, in which the stated
consideration had not in fact been paid, was "a false contract"; that is "void ab initio."
Furthermore, Ocejo v. Flores,13 ruled that "a contract of purchase and sale is null and void and
produces no effect whatsoever where it appears that [the] same is without cause or
consideration which should have been the motive thereof, or the purchase price which appears
thereon as paid but which in fact has never been paid by the purchaser to the vendor."
Although the Deed of Sale14 between petitioners and Sanchez stipulated a consideration of
P150,000, there was actually no exchange of money between them. Petitioner Edilberto Cruz
narrated how the transaction came about:
"ATTY. CABRERA:

Q Why did you execute the deed of sale in favor of Candelaria Sanchez since it was Norma
Sulit with whom you are transacting?
A Because Norma Sulit made the promise to Mrs. Candelaria Sanchez that upon acquiring the
title from us, they can borrow money from the Bank. So it is a way of acquiring the title from us,
sir.
Q. This deed of sale marked Exhibit D which you just identified, stipulates a consideration of
P150,000.00. The question, Father, is - did you receive the P150,000.00?
ATTY. AGRAVANTE
Objection, your Honor, the document is the best evidence.
ATTY. CABRERA
This is an action to annul a certain contract.
COURT
He received the consideration stated in the contract. The witness may answer.
WITNESS
A Not a single centavo we received from Candelaria Sanchez as if it is nominal, sir.
ATTY. CABRERA
Q If you did not receive this P150,000.00 stated in this deed of sale that you and your brother
executed from Candelaria Sanchez, did you receive the said amount from Norma Sulit or
anybody else for that matter?
A Not a single centavo, sir."15
His claim was corroborated by Sanchez. She likewise said that the Deed of Sale 16 she executed
with Sulit, for which she did not receive any consideration was only for the purpose of placing
the title to the property in the latters name. She testified as follows:
"Q And so you transferred the property in favor of Norma Sulit?
A Yes, sir.
Q I am showing to you this document which has already been marked when the representative
of the Register of Deeds produced the pertinent documents before the court as Exhibit "C", is
this that document that you executed transferring the property in the name of Norma Sulit?
A Yes, sir, this is it.
Q There is a consideration of P150,000.00 stated in this Exhibit "C", were you paid by Norma
Sulit the amount of P150,000.00 appearing in this Exhibit "C"?
ATTY BUYCO:
The question is leading, Your Honor.
COURT:
Witness may answer.
A No amount was given, sir. We prepared this document to transfer the title [to] her name
only."17
Respondent never offered any evidence to refute the foregoing testimonies. 18 On the contrary, it
even admitted that the stipulated consideration of P150,000 in the two Deeds of Sale had never
been actually paid by Sanchez to petitioners; 19 neither by Sulit to the former.20
Another telling sign of simulation was the complete absence of any attempt on the part of the
buyers -- Sanchez and Sulit -- to assert their alleged rights of ownership over the subject
property.21 This fact was confirmed by respondent which, however, tried to justify the nonoccupancy of the land by Sanchez and Sulit. Supposedly, because the two failed to pay the
purchase price of the land, they could not force petitioners to vacate it. 22
The records clearly show that the two Deeds of Absolute Sale were executed over the same
property on the same date, June 21, 1978. Six days thereafter, on June 27, 1978, it was
mortgaged by Sulit to Federal Insurance Company for P500,000. The mortgage was cancelled
when she again mortgaged the property to respondent for P569,000 on August 22, 1979. It is
also undisputed that petitioners did not receive any portion of the proceeds of the loan.
Clearly, the Deeds of Sale were executed merely to facilitate the use of the property as

collateral to secure a loan from a bank. 23 Being merely a subterfuge, these agreements could
not have been the source of any consideration for the supposed sales. 24 Indeed, the execution
of the two documents on the same day sustains the position of petitioners that the Contracts of
Sale were absolutely simulated, and that they received no consideration therefor.25
The failure of Sulit to take possession of the property purportedly sold to her was a clear badge
of simulation that rendered the whole transaction void and without force and effect, pursuant to
Article 140926 of the Civil Code.27 The fact that she was able to secure a Certificate of Title to the
subject property in her name did not vest her with ownership over it. 28 A simulated deed of sale
has no legal effect; consequently any transfer certificate of title (TCT) issued in consequence
thereof should be cancelled. 29 A simulated contract is not a recognized mode of acquiring
ownership.30
Second Issue:
Good Faith of Mortgagee
Petitioners argue that respondent was not a mortgagee in good faith because, at the time it
registered the real estate mortgage over the subject property, their adverse claim and notice of
lis pendens had already been annotated on the TCT (on October 30, 1979 and December 10,
1979, respectively). On the other hand, respondent maintains that petitioners were the ones in
bad faith, because they already had knowledge of the existence of the mortgage over the
property when they caused the annotation of their adverse claim and notice of lis pendens.
As a general rule, every person dealing with registered land may safely rely on the correctness
of the certificate of title and is no longer required to look behind the certificate in order to
determine the actual owner.31 To do so would be contrary to the evident purpose of Section 39
of Act 496 which we quote hereunder:
"Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration,
and every subsequent purchaser of registered land who takes a certificate of title for value in
good faith shall hold the same free of all encumbrances except those noted on said certificate,
and any of the following encumbrances which may be subsisting, namely:
"First. Liens, claims, or rights arising or existing under the laws or Constitution of the United
States or of the Philippine Islands which the statutes of the Philippine Islands cannot require to
appear of record in the Registry.
"Second. Taxes within two years after the same became due and payable.
"Third. Any public highway, way, private way established by law, or any Government irrigation
canal or lateral thereof, where the certificate of title does not state that the boundaries of such
highway, way, or irrigation canal or lateral thereof, have been determined.
"But if there are easements or other rights appurtenant to a parcel of registered land which for
any reason have failed to be registered, such easements or rights shall remain so appurtenant
notwithstanding such failure, and shall be held to pass with the land until cut off or extinguished
by the registration of the servient estate, or in any other manner."
This rule is, however, subject to the right of a person deprived of land through fraud to bring an
action for reconveyance, provided the rights of innocent purchasers for value and in good faith
are not prejudiced. An innocent purchaser for value or any equivalent phrase shall be deemed,
under Section 38 of the same Act, 32 to include an innocent lessee, mortgagee or any other
encumbrancer for value.33
Respondent claims that, being an innocent mortgagee, it should not be required to conduct an
exhaustive investigation on the history of the mortgagors title before it could extend a loan. 34
Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike
private individuals, it is expected to exercise greater care and prudence in its dealings, including
those involving registered lands.35 A banking institution is expected to exercise due diligence
before entering into a mortgage contract. 36 The ascertainment of the status or condition of a
property offered to it as security for a loan must be a standard and indispensable part of its
operations.37

In Rural Bank of Compostela v. CA,38 we held that a bank that failed to observe due diligence
was not a mortgagee in good faith. In the words of the ponencia:
"x x x [T]he rule that persons dealing with registered lands can rely solely on the certificate of
title does not apply to banks.
"Banks, indeed, should exercise more care and prudence in dealing even with registered lands,
than private individuals, for their business is one affected with public interest, keeping in trust
money belonging to their depositors, which they should guard against loss by not committing
any act of negligence which amounts to lack of good faith by which they would be denied the
protective mantle of the land registration statute, Act [No.] 496, extended only to purchasers for
value and in good faith, as well as to mortgagees of the same character and description."
(Citations omitted)
Recently, in Adriano v. Pangilinan,39 we said that the due diligence required of banks extended
even to persons regularly engaged in the business of lending money secured by real estate
mortgages.
The evidence before us indicates that respondent bank was not a mortgagee in good faith. 40
First, at the time the property was mortgaged to it, it failed to conduct an ocular inspection. 41
Judicial notice is taken of the standard practice for banks before they approve a loan: to send
representatives to the premises of the land offered as collateral and to investigate the ownership
thereof.42 As correctly observed by the RTC, respondent, before constituting the mortgage over
the subject property, should have taken into consideration the following questions:
"1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap
even in 1978?
"2) Why did Candelaria Sanchez sell the property at the same price of P150,000.00 to Norma
Sulit on the same date, June 21, 1978 when she supposedly acquired it from the plaintiffs?
"3) Being agricultural land, didnt it occur to the intervenors that there would be tenants to be
compensated or who might pose as obstacles to the mortgagees exercise of acts of dominion?
"4) In an area as big as that property, [why] did they not verify if there were squatters?
"5) What benefits or prospects thereof could the ultimate owner expect out of the property?
"Verily, the foregoing circumstances should have been looked into, for if either or both
companies did, they could have discovered that possession of the land was neither with
Candelaria nor with Norma."43
Respondent was clearly wanting in the observance of the necessary precautions to ascertain
the flaws in the title of Sulit and to examine the condition of the property she sought to
mortgage.44 It should not have simply relied on the face of the Certificate of Title to the property,
as its ancillary function of investing funds required a greater degree of diligence. 45 Considering
the substantial loan involved at the time, it should have exercised more caution. 46
Moreover, the subject property, being situated in Bulacan, could have been easily and
conveniently inspected by respondent. A person who deliberately ignores a significant fact that
would create suspicion in an otherwise reasonable person is not an innocent purchaser for
value.47
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, 48 which we reproduce hereunder:
"SEC. 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
instruments [as] are sufficient in law. But no deed, mortgage, lease, or other voluntary
instrument except a will, purporting to convey or affect registered land, shall take effect as a
conveyance or bind the land, but shall operate only as a contract between the parties and as
evidence of authority to the clerk or register of deeds to make registration.

"The act of registration shall be the operative act to convey and affect the land, and in all cases
under this Act the registration shall be made in the office of the register of deeds for the province
or city, where the land lies."
True, registration is not the operative act for a mortgage to be binding between the
parties.1wphi1 But to third persons, it is indispensible. 49 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. 50 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.51 Thus, respondents failure to register the real
estate mortgage52 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.53 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. 54
On the question of who has a preferential right over the property, the long-standing rule, as
provided by Article 208555 of the Civil Code,56 is that only the absolute owner of the property can
constitute a valid mortgage on it. In case of foreclosure, a sale would result in the transmission
only of whatever rights the seller had over of the thing sold. 57
In the instant case, the two Deeds of Sale were absolutely simulated; hence, null and void. 58
Thus, they did not convey any rights that could ripen into valid titles. 59 Necessarily, the
subsequent real estate mortgage constituted by Sulit in favor of respondent was also null and
void, because the former was not the owner thereof. There being no valid real estate mortgage,
there could also be no valid foreclosure or valid auction sale, either. At bottom, respondent
cannot be considered either as a mortgagee or as a purchaser in good faith. This being so,
petitioners would be in the same position as they were before they executed the simulated
Deed of Sale in favor of Sanchez. They are still the owners of the property.60
WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. The Decision
of the RTC of Bulacan, (Branch 21) dated January 25, 1996 is REINSTATED. No costs.
SO ORDERED.
G.R. No. 98334 May 8, 1992
MANUEL D. MEDIDA, Deputy Sheriff of the Province of Cebu, CITY SAVINGS BANK
(formerly Cebu City Savings and Loan Association, Inc.) and TEOTIMO ABELLANA,
petitioners,
vs.
COURT OF APPEALS and SPS. ANDRES DOLINO and PASCUALA DOLINO, respondents.
Gines N. Abellana for petitioners.
Dionisio U. Flores for private respondents.
REGALADO, J.:
The core issue in this case is whether or not a mortgagor, whose property has been
extrajudicially foreclosed and sold at the corresponding foreclosure sale, may validly execute a
mortgage contract over the same property in favor of a third party during the period of
redemption.
The present appeal by certiorari assails the decision 1 of respondent Court of Appeals in CAG.R. CV No. 12678 where it answered the question posed by the foregoing issue in the
negative and modified the decision 2 of the then Court of First Instance of Cebu in Civil Case
No. R-18616 wherein the validity of said subsequent mortgage was assumed and the case was

otherwise disposed of on other grounds.

The facts which gave rise to the institution of the aforesaid civil case in the trial court, as found
by respondent Court of Appeals, are as follows:
On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption over lot 4731
of the Cebu City Cadastre and embraced under TCT No. 14272 from Mr. Juan Gandioncho,
purchaser of the aforesaid lot at the foreclosure sale of the previous mortgage in favor of Cebu
City Development Bank, went to Teotimo Abellana, president of defendant Association, to obtain
a loan of P30,000.00. Prior thereto or on October 3, 1974, their son Teofredo Dolino filed a
similar loan application for Twenty-Five Thousand (P25,000.00) Pesos with lot No. 4731 offered
as security for the Thirty Thousand (P30,000.00) Pesos loan from defendant association.
Subsequently, they executed a promissory note in favor of defendant association. Both
documents indicated that the principal obligation is for Thirty Thousand (P30,000.00) Pesos
payable in one year with interest at twelve (12%) percent per annum.
When the loan became due and demandable without plaintiff paying the same, defendant
association caused the extrajudicial foreclosure of the mortgage on March 16, 1976. After the
posting and publication requirements were complied with, the land was sold at public auction on
April 19, 1976 to defendant association being the highest bidder. The certificate of sale was
issued on April 20, 1976 and registered on May 10, 1976 with the Register of Deeds of Cebu.
On May 24, 1971 (sic, 1977), no redemption having been effected by plaintiff, TCT No. 14272
was cancelled and in lieu thereof TCT No. 68041 was issued in the name of defendant
association. 3
xxx xxx xxx
On October 18, 1979, private respondents filed the aforestated Civil Case No. R-18616 in the
court a quo for the annulment of the sale at public auction conducted on April 19, 1976, as well
as the corresponding certificate of sale issued pursuant thereto.
In their complaint, private respondents, as plaintiffs therein, assailed the validity of the
extrajudicial foreclosure sale of their property, claiming that the same was held in violation of Act
No. 3135, as amended, and prayed, inter alia, for the cancellation of Transfer Certificate of Title
No. 68041 issued in favor of therein defendant City Savings and Loan Association, Inc., now
known as City Savings Bank and one of the petitioners herein.
In its answer, the defendant association therein denied the material allegations of the complaint
and averred, among others, that the present private respondent spouses may still avail of their
right of redemption over the land in question.
On January 12, 1983, after trial on the merits, the court below rendered judgment upholding the
validity of the loan and the real estate mortgage, but annulling the extrajudicial foreclosure sale
inasmuch as the same failed to comply with the notice requirements in Act No. 3135, as
amended, under the following dispositive part:
WHEREFORE, the foregoing premises considered and upon the view taken by the Court of this
case, judgment is hereby rendered, as follows:
1. Declaring ineffective the extrajudicial foreclosure of the mortgage over Lot No. 4731 of the
Cadastral Survey of Cebu;
2. Ordering the cancellation of Transfer Certificate of Title No. 68041 of the Registry of Deeds of
the City of Cebu in the name of defendant Cebu City Savings and Loan Association, Inc. the
corresponding issuance of a new transfer certificate to contain all the annotations made in TCT
No. 14272 of the plaintiffs Pascuala Sabellano, married to Andres Dolino;
3. Ordering the plaintiffs aforenamed to pay the defendant Cebu City Savings and Loan
Association, Inc. the unpaid balance of the loan, plus interest; and reimbursing said defendant
the value of any necessary and useful expenditures on the property after deducting any income
derived by said defendant from the property.
For this purpose, defendant Association is given 15 days from receipt hereof within which to
submit its statement of the amount due it from the plaintiffs Dolino, with notice to them. The

payment to be made by the plaintiffs shall be within ninety (90) days from their receipt of the
order approving the amount due the defendant Cebu City Savings and Loan Association, Inc.
No award of damages or costs to either party.
SO ORDERED. 4
Not satisfied therewith, herein private respondents interposed a partial appeal to respondent
court with respect to the second and third paragraphs of the aforequoted decretal portion,
contending that the lower court erred in (1) declaring that the mortgage executed by the therein
plaintiff spouses Dolino is valid; (2) permitting therein Cebu City Savings and Loan Association,
Inc. to collect interest after the same foreclosure proceedings and auction sale which are null
and void from the beginning; (3) not ordering the forfeiture of the capital or balance of the loan
with usurious interest; and (4) not sentencing therein defendant to pay damages and attorney's
fees to plaintiffs. 5
On September 28, 1990, respondent Court of Appeals promulgated its decision modifying the
decision of the lower court, with this adjudication:
WHEREFORE, PREMISES CONSIDERED, the decision appealed from is hereby MODIFIED
declaring as void and ineffective the real estate mortgage executed by plaintiffs in favor of
defendant association. With this modification, the decision is AFFIRMED in other respects. 6
Herein petitioners then filed a motion for reconsideration which was denied by respondent court
in its resolution dated March 5, 1991, hence the present petition which, in synthesis, postulates
that respondent court erred in declaring the real estate mortgage void, and also impugns the
judgment of the trial court declaring ineffective the extrajudicial foreclosure of said mortgage and
ordering the cancellation of Transfer Certificate of Title No. 68041 issued in favor of the
predecessor of petitioner bank. 7
The first submission assailing the judgment of respondent Court of Appeals is meritorious.
Said respondent court declared the real estate mortgage in question null and void for the reason
that the mortgagor spouses, at the time when the said mortgage was executed, were no longer
the owners of the lot, having supposedly lost the same when the lot was sold to a purchaser in
the foreclosure sale under the prior mortgage. This holding cannot be sustained.
Preliminarily, the issue of ownership of the mortgaged property was never alleged in the
complaint nor was the same raised during the trial, hence that issue should not have been taken
cognizance of by the Court of Appeals. An issue which was neither averred in the complaint nor
ventilated during the trial in the court below cannot be raised for the first time on appeal as it
would be offensive to the basic rule of fair play, justice and due process. 8
Nonetheless, since respondent Court took cognizance thereof and, in fact, anchored its
modificatory judgment on its ratiocination of that issue, we are inclined to liberalize the rule so
that we can in turn pass upon the correctness of its conclusion. We may consider such
procedure as analogous to the rule that an unassigned error closely related to an error properly
assigned, or upon which the determination of the question properly assigned is dependent, may
be considered by an appellate court. 9 We adopt this approach since, after all, both lower courts
agreed upon the invalidity of the extrajudicial foreclosure but differed only on the matter of the
validity of the real estate mortgage upon which the extrajudicial foreclosure was based.
In arriving at its conclusion, respondent court placed full reliance on what obviously is an obiter
dictum laid down in the course of the disquisition in Dizon vs. Gaborro, et al. which we shall
analyze. 10 For, as explicitly stated therein by the Court, "(t)he basic issue to be resolved in this
case is whether the 'Deed of Sale with Assumption of Mortgage' and the 'Option to Purchase
Real Estate,' two instruments executed by and between petitioner Jose P. Dizon and Alfredo G.
Gaborro (defendant below) on the same day, October 6, 1959, constitute in truth and in fact an
absolute sale of the three parcels of land therein described or merely an equitable mortgage or
conveyance thereof by way of security for reimbursement or repayment by petitioner Jose P.
Dizon of any and all sums which may have been paid to the Development Bank of the
Philippines and the Philippine National Bank by Alfredo G. Gaborro . . . ." Said documents were

executed by the parties and the payments were made by Gaborro for the debt of Dizon to said
banks after the Development Bank of the Philippines had foreclosed the mortgage executed by
Dizon and during the period of redemption after the foreclosure sale of the mortgaged property
to said creditor bank.
The trial court held that the true agreement between the parties therein was that Gaborro would
assume and pay the indebtedness of Dizon to the banks and, in consideration thereof, Gaborro
was given the possession and enjoyment of the properties in question until Dizon shall have
reimbursed him for the amount paid to the creditor banks. Accordingly, the trial court ordered the
reformation of the documents to the extent indicated and such particular relief was affirmed by
the Court of Appeals. This Court held that the agreement between the parties is one of those
innominate contracts under Article 1307 of the Civil Code whereby the parties agreed "to give
and to do" certain rights and obligations, but partaking of the nature of antichresis.
Hence, on appeal to this Court, the judgment of the Court of Appeals in that case was affirmed
but with the following pronouncements:
The two instruments sought to be reformed in this case appear to stipulate rights and
obligations between the parties thereto pertaining to and involving parcels of land that had
already been foreclosed and sold extrajudicially, and purchased by the mortgage creditor, a third
party. It becomes, therefore, necessary, to determine the legality of said rights and obligations
arising from the foreclosure and sale proceedings not only between the two contracting parties
to the instruments executed between them but also in so far as the agreement affects the rights
of the third party, the purchaser Bank.
xxx xxx xxx
Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor remains in
possession of the property foreclosed and sold, during the period of redemption. If the judgment
debtor is in possession of the property sold, he is entitled to retain it, and receive the fruits, the
purchaser not being entitled to such possession. (Riosa vs. Verzosa, 26 Phil. 86; Velasco vs.
Rosenberg's, Inc., 32 Phil. 72; Pabico vs. Pauco, 43 Phil. 572; Power vs. PNB, 54 Phil. 54;
Gorospe vs. Gochangco, L-12735, Oct. 30, 1959).
xxx xxx xxx
Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed by the
sheriff. (Section 27, Revised Rules of Court). After the termination of the period of redemption
and no redemption having been made, the purchaser is entitled to a deed of conveyance and to
the possession of the properties. (Section 35, Revised Rules of Court). The weight of authority
is to the effect that the purchaser of land sold at public auction under a writ of execution has
only an inchoate right to the property, subject to be defeated and terminated within the period of
12 months from the date of sale, by a redemption on the part of the owner. Therefore, the
judgment debtor in possession of the property is entitled to remain therein during the period for
redemption. (Riosa vs. Verzosa, 26 Phil. 86, 89; Gonzales vs. Calimbas, 51 Phil. 355).
In the case before Us, after the extrajudicial foreclosure and sale of his properties, petitioner
Dizon retained the right to redeem the lands, the possession, use and enjoyment of the same
during the period of redemption. And these are the only rights that Dizon could legally transfer,
cede and convey unto respondent Gaborro under the instrument captioned Deed of Sale with
Assumption of Mortgage (Exh. A-Stipulation), likewise the same rights that said respondent
could acquire in consideration of the latter's promise to pay and assume the loan of petitioner
Dizon with DBP and PNB.
Such an instrument cannot be legally considered a real and unconditional sale of the parcels of
land, firstly, because there was absolutely no money consideration therefor, as admittedly
stipulated, the sum of P131,831.91 mentioned in the document as the consideration "receipt of
which was acknowledged" was not actually paid; and, secondly, because the properties had
already been previously sold by the sheriff at the foreclosure sale, thereby divesting the
petitioner of his full right as owner thereof to dispose and sell the lands. (Emphasis ours.)

It was apparently the second reason stated by the Court in said case which was relied upon by
respondent court in the present case on which to premise its conclusion. Yet, as demonstrated
by the relevant excerpts above quoted, not only was that obiter therein unnecessary since
evidently no sale was concluded, but even inaccurate, if not inconsistent, when considered in
the context of the discussion in its entirety. If, as admitted, the purchaser at the foreclosure sale
merely acquired an inchoate right to the property which could ripen into ownership only upon
the lapse of the redemption period without his credit having been discharged, it is illogical to
hold that during that same period of twelve months the mortgagor was "divested" of his
ownership, since the absurd result would be that the land will consequently be without an owner
although it remains registered in the name of the mortgagor.
That is why the discussion in said case carefully and felicitously states that what is divested
from the mortgagor is only his "full right as owner thereof to dispose (of) and sell the lands," in
effect, merely clarifying that the mortgagor does not have the unconditional power to absolutely
sell the land since the same is encumbered by a lien of a third person which, if unsatisfied,
could result in a consolidation of ownership in the lienholder but only after the lapse of the
period of redemption. Even on that score, it may plausibly be argued that what is delimited is
not the mortgagor's jus dispodendi, as an attribute of ownership, but merely the rights conferred
by such act of disposal which may correspondingly be restricted.
At any rate, even the foregoing considerations and arguments would have no application in the
case at bar and need not here be resolved since what is presently involved is a mortgage, not a
sale, to petitioner bank. Such mortgage does not involve a transfer, cession or conveyance of
the property but only constitutes a lien thereon. There is no obstacle to the legal creation of
such a lien even after the auction sale of the property but during the redemption period, since
no distinction is made between a mortgage constituted over the property before or after the
auction sale thereof.
Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment or
mortgage on the property sold, or on some part thereof, subsequent to the judgment under
which the property was sold. 11 Of course, while in extrajudicial foreclosure the sale
contemplated is not under a judgment but the proceeding pursuant to which the mortgaged
property was sold, a subsequent mortgage could nevertheless be legally constituted thereafter
with the subsequent mortgagee becoming and acquiring the rights of a redemptioner, aside
from his right against the mortgagor.
In either case, what bears attention is that since the mortgagor remains as the absolute owner
of the property during the redemption period and has the free disposal of his property, there
would be compliance with the requisites of Article 2085 of the Civil Code for the constitution of
another mortgage on the property. To hold otherwise would create the inequitable situation
wherein the mortgagor would be deprived of the opportunity, which may be his last recourse, to
raise funds wherewith to timely redeem his property through another mortgage thereon.
Coming back to the present controversy, it is undisputed that the real estate mortgage in favor
of petitioner bank was executed by respondent spouses during the period of redemption. We
reiterate that during said period it cannot be said that the mortgagor is no longer the owner of
the foreclosed property since the rule up to now is that the right of a purchaser at a foreclosure
sale is merely inchoate until after the period of redemption has expired without the right being
exercised. 12 The title to land sold under mortgage foreclosure remains in the mortgagor or his
grantee until the expiration of the redemption period and conveyance by the master's deed. 13 To
repeat, the rule has always been that it is only upon the expiration of the redemption period,
without the judgment debtor having made use of his right of redemption, that the ownership of
the land sold becomes consolidated in the purchaser. 14
Parenthetically, therefore, what actually is effected where redemption is seasonably exercised
by the judgment or mortgage debtor is not the recovery of ownership of his land, which
ownership he never lost, but the elimination from his title thereto of the lien created by the levy

on attachment or judgment or the registration of a mortgage thereon. The American rule is

similarly to the effect that the redemption of property sold under a foreclosure sale defeats the
inchoate right of the purchaser and restores the property to the same condition as if no sale had
been attempted. Further, it does not give to the mortgagor a new title, but merely restores to him
the title freed of the encumbrance of the lien foreclosed. 15
We cannot rule on the plaint of petitioners that the trial court erred in declaring ineffective the
extrajudicial foreclosure and the sale of the property to petitioner bank. The court below spelled
out at length in its decision the facts which it considered as violative of the provisions of Act No.
3135, as amended, by reason of which it nullified the extrajudicial foreclosure proceeding and
its effects. Such findings and ruling of the trial court are already final and binding on petitioners
and can no longer be modified, petitioners having failed to appeal therefrom.
An appellee who has not himself appealed cannot obtain from the appellate court any
affirmative relief other than the ones granted in the decision of the court below. 16 He cannot
impugn the correctness of a judgment not appealed from by him. He cannot assign such errors
as are designed to have the judgment modified. All that said appellee can do is to make a
counter-assignment of errors or to argue on issues raised at the trial only for the purpose of
sustaining the judgment in his favor, even on grounds not included in the decision of the court a
quo nor raised in the appellant's assignment of errors or arguments. 17
WHEREFORE, the decision of respondent Court of Appeals, insofar as it modifies the judgment
of the trial court, is REVERSED and SET ASIDE. The judgment of said trial court in Civil Case
No. R-18616, dated January 12, 1983, is hereby REINSTATED.
SO ORDERED.
G.R. No. 118342 January 5, 1998
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and LYDIA CUBA, respondents.
G.R. No. 118367 January 5, 1998
LYDIA P. CUBA, petitioner,
vs.
COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and AGRIPINA P.
CAPERAL, respondents.
DAVIDE, JR., J.:
These two consolidated cases stemmed from a complaint 1 filed against the Development Bank
of the Philippines (hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter CUBA)
on 21 May 1985 with the Regional Trial Court of Pangasinan, Branch 54. The said complaint
sought (1) the declaration of nullity of DBP's appropriation of CUBA's rights, title, and interests
over a 44-hectares fishpond located in Bolinao, Pangasinan, for being violative of Article 2088 of
the Civil Code; (2) the annulment of the Deed of Conditional Sale executed in her favor by DBP;
(3) the annulment of DBP's sale of the subject fishpond to Caperal; (4) the restoration of her
rights, title, and interests over the fishpond; and (5) the recovery of damages, attorney's fees,
and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective pleadings, the trial
court conducted a pre-trial where CUBA and DBP agreed on the following facts, which were
embodied in the pre-trial order: 2
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated
May 13, 1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines in the
amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms stated in the
Promissory Notes dated September 6, 1974; August 11, 1975; and April 4, 1977;

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

Trial was thereafter had on other matters.

The principal issue presented was whether the act of DBP in appropriating to itself CUBA's
leasehold rights over the fishpond in question without foreclosure proceedings was contrary to
Article 2088 of the Civil Code and, therefore, invalid. CUBA insisted on an affirmative resolution.
DBP stressed that it merely exercised its contractual right under the Assignments of Leasehold
Rights, which was not a contract of mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBP's taking possession
and ownership of the property without foreclosure was plainly violative of Article 2088 of the Civil
Code which provides as follows:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.
It disagreed with DBP's stand that the Assignments of Leasehold Rights were not contracts of
mortgage because (1) they were given as security for loans, (2) although the "fishpond land" in
question is still a public land, CUBA's leasehold rights and interest thereon are alienable rights
which can be the proper subject of a mortgage; and (3) the intention of the contracting parties to
treat the Assignment of Leasehold Rights as a mortgage was obvious and unmistakable; hence,
upon CUBA's default, DBP's only right was to foreclose the Assignment in accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for

being a clear case of pactum commissorium expressly prohibited and declared null and void by
Article 2088 of the Civil Code. It then concluded that since DBP never acquired lawful ownership
of CUBA's leasehold rights, all acts of ownership and possession by the said bank were void.
Accordingly, the Deed of Conditional Sale in favor of CUBA, the notarial rescission of such sale,
and the Deed of Conditional Sale in favor of defendant Caperal, as well as the Assignment of
Leasehold Rights executed by Caperal in favor of DBP, were also void and ineffective.
As to damages, the trial court found "ample evidence on record" that in 1984 the
representatives of DBP ejected CUBA and her caretakers not only from the fishpond area but
also from the adjoining big house; and that when CUBA's son and caretaker went there on 15
September 1985, they found the said house unoccupied and destroyed and CUBA's personal
belongings, machineries, equipment, tools, and other articles used in fishpond operation which
were kept in the house were missing. The missing items were valued at about P550,000. It
further found that when CUBA and her men were ejected by DBP for the first time in 1979,
CUBA had stocked the fishpond with 250,000 pieces of bangus fish (milkfish), all of which died
because the DBP representatives prevented CUBA's men from feeding the fish. At the
conservative price of P3.00 per fish, the gross value would have been P690,000, and after
deducting 25% of said value as reasonable allowance for the cost of feeds, CUBA suffered a
loss of P517,500. It then set the aggregate of the actual damages sustained by CUBA at
P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely representing to the
Bureau of Fisheries that it had foreclosed its mortgage on CUBA's leasehold rights. Such
representation induced the said Bureau to terminate CUBA's leasehold rights and to approve
the Deed of Conditional Sale in favor of CUBA. And considering that by reason of her unlawful
ejectment by DBP, CUBA "suffered moral shock, degradation, social humiliation, and serious
anxieties for which she became sick and had to be hospitalized" the trial court found her entitled
to moral and exemplary damages. The trial court also held that CUBA was entitled to P100,000
attorney's fees in view of the considerable expenses she incurred for lawyers' fees and in view
of the finding that she was entitled to exemplary damages.
In its decision of 31 January 1990, 4 the trial court disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of defendant Development
Bank of the Philippines in appropriating for its own interest, without any judicial or extra-judicial
foreclosure, plaintiff's leasehold rights and interest over the fishpond land in question under her
Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the
defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the acts of
notarial rescission of the Development Bank of the Philippines relative to said sale (Exhs. 16
and 26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the
Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and Exh. 21), the
Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of defendant Agripina
Caperal (Exh. 23) and the Assignment of Leasehold Rights dated February 12, 1985 executed
by defendant Agripina Caperal in favor of the defendant Development Bank of the Philippines
(Exh. 24) as void ab initio;
4. ORDERING defendant Development Bank of the Philippines and defendant Agripina Caperal,
jointly and severally, to restore to plaintiff the latter's leasehold rights and interests and right of
possession over the fishpond land in question, without prejudice to the right of defendant
Development Bank of the Philippines to foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following
amounts:
a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS

(P1,067,500.00), as and for actual damages;

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

jointly and severally, to pay the deficiency, if any." 7

Simultaneous with the execution of the notes was the execution of "Assignments of Leasehold
Rights" 8 where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond,
together with the improvements thereon. As pointed out by CUBA, the deeds of assignment
constantly referred to the assignor (CUBA) as "borrower"; the assigned rights, as mortgaged
properties; and the instrument itself, as mortgage contract. Moreover, under condition no. 22 of
the deed, it was provided that "failure to comply with the terms and condition of any of the loans
shall cause all other loans to become due and demandable and all mortgages shall be
foreclosed." And, condition no. 33 provided that if "foreclosure is actually accomplished, the
usual 10% attorney's fees and 10% liquidated damages of the total obligation shall be imposed."
There is, therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by way of
security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights.
In People's Bank & Trust Co. vs. Odom, 9 this Court had the occasion to rule that an assignment
to guarantee an obligation is in effect a mortgage.
We find no merit in DBP's contention that the assignment novated the promissory notes in that
the obligation to pay a sum of money the loans (under the promissory notes) was substituted by
the assignment of the rights over the fishpond (under the deed of assignment). As correctly
pointed out by CUBA, the said assignment merely complemented or supplemented the notes;
both could stand together. The former was only an accessory to the latter. Contrary to DBP's
submission, the obligation to pay a sum of money remained, and the assignment merely served
as security for the loans covered by the promissory notes. Significantly, both the deeds of
assignment and the promissory notes were executed on the same dates the loans were
granted. Also, the last paragraph of the assignment stated: "The assignor further reiterates and
states all terms, covenants, and conditions stipulated in the promissory note or notes covering
the proceeds of this loan, making said promissory note or notes, to all intent and purposes, an
integral part hereof."
Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code
for the plain and simple reason that there was only one creditor, the DBP. Article 1255
contemplates the existence of two or more creditors and involves the assignment of all the
debtor's property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which
reads: "Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt
in money, shall be governed by the law on sales." It bears stressing that the assignment, being
in its essence a mortgage, was but a security and not a satisfaction of indebtedness. 10
We do not, however, buy CUBA's argument that condition no. 12 of the deed of assignment
constituted pactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the Assignor hereby
appoints the Assignee his Attorney-in-fact with full power and authority to take actual
possession of the property above-described, together with all improvements thereon, subject to
the approval of the Secretary of Agriculture and Natural Resources, to lease the same or any
portion thereof and collect rentals, to make repairs or improvements thereon and pay the same,
to sell or otherwise dispose of whatever rights the Assignor has or might have over said
property and/or its improvements and perform any other act which the Assignee may deem
convenient to protect its interest. All expenses advanced by the Assignee in connection with
purpose above indicated which shall bear the same rate of interest aforementioned are also
guaranteed by this Assignment. Any amount received from rents, administration, sale or
disposal of said property may be supplied by the Assignee to the payment of repairs,
improvements, taxes, assessments and other incidental expenses and obligations and the

balance, if any, to the payment of interest and then on the capital of the indebtedness secured
hereby. If after disposal or sale of said property and upon application of total amounts received
there shall remain a deficiency, said Assignor hereby binds himself to pay the same to the
Assignee upon demand, together with all interest thereon until fully paid. The power herein
granted shall not be revoked as long as the Assignor is indebted to the Assignee and all acts
that may be executed by the Assignee by virtue of said power are hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and (2) there should be
a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of nonpayment of the principal obligation within the stipulated period. 11
Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBA's failure to pay the loan on time. It merely provided for
the appointment of DBP as attorney-in-fact with authority, among other things, to sell or
otherwise dispose of the said real rights, in case of default by CUBA, and to apply the proceeds
to the payment of the loan. This provision is a standard condition in mortgage contracts and is in
conformity with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the
mortgage and alienate the mortgaged property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As
admitted by it during the pre-trial, it had "[w]ithout foreclosure proceedings, whether judicial or
extrajudicial, . . . appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in
question." Its contention that it limited itself to mere administration by posting caretakers is
further belied by the deed of conditional sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the
herein vendees [Cuba spouses] the former acquired all the right and interest of the latter over
the above-described property;
xxx xxx xxx
The title to the real estate property [sic] and all improvements thereon shall remain in the name
of the Vendor until after the purchase price, advances and interest shall have been fully paid.
(Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and taken
ownership of CUBA's leasehold rights merely on the strength of the deed of assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of
appropriating the leasehold rights. As stated earlier, condition no. 12 did not provide that
CUBA's default would operate to vest in DBP ownership of the said rights. Besides, an
assignment to guarantee an obligation, as in the present case, is virtually a mortgage and not
an absolute conveyance of title which confers ownership on the assignee. 12
At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of Article 2088 of
the Civil Code, which forbids a credit or from appropriating, or disposing of, the thing given as
security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not
estop her from questioning DBP's act of appropriation. Estoppel is unavailing in this case. As
held by this Court in some cases, 13 estoppel cannot give validity to an act that is prohibited by
law or against public policy. Hence, the appropriation of the leasehold rights, being contrary to
Article 2088 of the Civil Code and to public policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should
have foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of
assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26
October 1979, addressed to the Minister of Agriculture and Natural Resources and coursed
through the Director of the Bureau of Fisheries and Aquatic Resources, DBP declared that it
"had foreclosed the mortgage and enforced the assignment of leasehold rights on March 21,
1979 for failure of said spouses [Cuba spouces] to pay their loan amortizations." 14 This only

goes to show that DBP was aware of the necessity of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the mortgage, the
Bureau of Fisheries cancelled CUBA's original lease permit, approved the deed of conditional
sale, and issued a new permit in favor of CUBA. Said acts which were predicated on such false
representation, as well as the subsequent acts emanating from DBP's appropriation of the
leasehold rights, should therefore be set aside. To validate these acts would open the
floodgates to circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify
the consequent auction sale for failure to comply with the requirements laid down by law, such
as Act No. 3135, as amended. 15 With more reason that the sale of property given as security for
the payment of a debt be set aside if there was no prior fore closure proceeding.
Hence, DBP should render an accounting of the income derived from the operation of the
fishpond in question and apply the said income in accordance with condition no. 12 of the deed
of assignment which provided: "Any amount received from rents, administration, . . . may be
applied to the payment of repairs, improvements, taxes, assessment, and other incidental
expenses and obligations and the balance, if any, to the payment of interest and then on the
capital of the indebtedness. . ."
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate compensation only
for such pecuniary loss suffered by him as he has duly proved. Such compensation is referred
to as actual or compensatory damages.
Actual or compensatory damages cannot be presumed, but must be proved with reasonable
degree of certainty. 16 A court cannot rely on speculations, conjectures, or guesswork as to the
fact and amount of damages, but must depend upon competent proof that they have been
suffered by the injured party and on the best obtainable evidence of the actual amount thereof.
17
It must point out specific facts which could afford a basis for measuring whatever
compensatory or actual damages are borne. 18
In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages
consisting of P550,000 which represented the value of the alleged lost articles of CUBA and
P517,500 which represented the value of the 230,000 pieces of bangus allegedly stocked in
1979 when DBP first ejected CUBA from the fishpond and the adjoining house. This award was
affirmed by the Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not proved by clear
evidence. Other than the testimony of CUBA and her caretaker, there was no proof as to the
existence of those items before DBP took over the fishpond in question. As pointed out by DBP,
there was not "inventory of the alleged lost items before the loss which is normal in a project
which sometimes, if not most often, is left to the care of other persons." Neither was a single
receipt or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985, CUBA included "losses of property" as among
the damages resulting from DBP's take-over of the fishpond. Yet, it was only in September 1985
when her son and a caretaker went to the fishpond and the adjoining house that she came to
know of the alleged loss of several articles. Such claim for "losses of property," having been
made before knowledge of the alleged actual loss, was therefore speculative. The alleged loss
could have been a mere afterthought or subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of
bangus which died when DBP took possession of the fishpond in March 1979, the same was
not called for. Such loss was not duly proved; besides, the claim therefor was delayed
unreasonably. From 1979 until after the filing of her complaint in court in May 1985, CUBA did
not bring to the attention of DBP the alleged loss. In fact, in her letter dated 24 October 1979, 19
she declared:

1. That from February to May 1978, I was then seriously ill in Manila and within the same period
I neglected the management and supervision of the cultivation and harvest of the produce of the
aforesaid fishpond thereby resulting to the irreparable loss in the produce of the same in the
amount of about P500,000.00 to my great damage and prejudice due to fraudulent acts of some
of my fishpond workers.
Nowhere in the said letter, which was written seven months after DBP took possession of the
fishpond, did CUBA intimate that upon DBP's take-over there was a total of 230,000 pieces of
bangus, but all of which died because of DBP's representatives prevented her men from feeding
the fish.
The award of actual damages should, therefore, be struck down for lack of sufficient basis.
In view, however, of DBP's act of appropriating CUBA's leasehold rights which was contrary to
law and public policy, as well as its false representation to the then Ministry of Agriculture and
Natural Resources that it had "foreclosed the mortgage," an award of moral damages in the
amount of P50,000 is in order conformably with Article 2219(10), in relation to Article 21, of the
Civil Code. Exemplary or corrective damages in the amount of P25,000 should likewise be
awarded by way of example or correction for the public good. 20 There being an award of
exemplary damages, attorney's fees are also recoverable. 21
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is
hereby REVERSED, except as to the award of P50,000 as moral damages, which is hereby
sustained. The 31 January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54,
in Civil Case No. A-1574 is MODIFIED setting aside the finding that condition no. 12 of the deed
of assignment constituted pactum commissorium and the award of actual damages; and by
reducing the amounts of moral damages from P100,000 to P50,000; the exemplary damages,
from P50,000 to P25,000; and the attorney's fees, from P100,000 to P20,000. The Development
Bank of the Philippines is hereby ordered to render an accounting of the income derived from
the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income statement of DBP,
as well as the statement of the account of Lydia P. Cuba, and for the determination of each
party's financial obligation to one another.
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 covering P545,000.000. 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 of P545,000.00, 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 an Order setting aside its earlier decision and awarded
attorneys fees to respondents.15 It found that only the P250,000.00 loan is secured by the
mortgage on the land covered by TCT No. 438157. On the other hand, the P382,680.83 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/C-252 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 for P20,000.00.16
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/C345 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/C-345, 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. 34 Respondents 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/C430 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, well-established
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/C-345. 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. 50 This 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.
SO ORDERED.
G.R. No. 34385
September 21, 1931
ALEJANDRA TORRES, ET AL., plaintiff-appellees,
vs.
FRANCISCO LIMJAP, Special Administrator of the estate of the deceased Jose B.
Henson, defendant-appellant.
x---------------------------------------------------------x
G.R. No. 34386
September 21, 1931
SABINA VERGARA VDA. DE TORRES, ET AL., plaintiffs-appellees,
vs.
FRANCISCO LIMJAP, Special Administration of the estate of the deceased Jose B.
Henson, defendant-appellant.
Duran, Lim and Tuason for appellant.Guevara, Francisco and Recto for appellees.
JOHNSON, J.:
These two actions were commenced in the Court of First Instance of Manila on April 16, 1930,
for the purpose of securing from the defendant the possession of two drug stores located in the
City of Manila, covered by two chattel mortgages executed by the deceased Jose B. Henson in
favor of the plaintiffs.
In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime, executed in their favor
a chattel mortgage (Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, known as
Farmacia Henson, to secure a loan of P7,000, although it was made to appear in the instrument
that the loan was for P20,000.
In the second case the plaintiffs alleged that they were the heirs of the late Don Florentino
Torres; and that Jose B. Henson, in his lifetime, executed in favor of Don Florentino Torres a
chattel mortgage (also Exhibit A) on his three drug stores known as Henson's Pharmacy,
Farmacia Henson and Botica Hensonina, to secure a loan of P50,000, which was later reduced
to P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only
security by agreement of the parties.
In both cases the plaintiffs alleged that the defendant violated the terms of the mortgage and
that, in consequence thereof they became entitled to the possession of the chattels and to
foreclose their mortgages thereon. Upon the petition of the plaintiffs and after the filing of the

necessary bonds, the court issued in each case an order directing the sheriff of the City of
Manila to take immediate possession of said drug stores.
The defendant filed practically the same answer to both complaints. He denied generally and
specifically the plaintiffs' allegations, and set up the following special defenses:
(1) That the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No. 34286)
are null and void for lack of sufficient particularity in the description of the property mortgaged;
and
(2) That the chattels which the plaintiffs sought to recover were not the same property described
in the mortgage.
The defendant also filed a counterclaim for damages in the sum of P20,000 in the first case and
P100,000 in the second case.
Upon the issue thus raised by the pleadings, the two causes were tried together by agreement
of the parties. After hearing the evidence adduced during the trial and on July 17, 1930, the
Honorable Mariano Albert, judge, in a very carefully prepared opinion, arrived at the conclusion
(a) that the defendant defaulted in the payment of interest on the loans secured by the
mortgages, in violation of the terms thereof; (b) that by reason of said failure said mortgages
became due, and (c) that the plaintiffs, as mortgagees, were entitled to the possession of the
drug stores Farmacia Henson at Nos. 101-103 Calle Rosario and Henson's Pharmacy at Nos.
71-73 Escolta. Accordingly, a judgment was rendered in favor of the plaintiffs and against the
defendant, confirming the attachment of said drug stores by the sheriff of the City of Manila and
the delivery thereof to the plaintiffs. The dispositive part of the decision reads as follows:
En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado en todas sus partes los
ordenes de fechas 16 y 17 de abril de presente ano, dictadas en las causas Nos. 37096 y
37097, respectivamente, y declara definitiva la entrega hecha a los demandantes por el Sheriff
de Manila de las boticas en cuestion. Se condena en costas al demandado en ambas causas.
From the judgment the defendant appealed, and now makes the following assignments of error:
I. The lower court erred in failing to make a finding on the question of the sufficiency of the
description of the chattels mortgaged and in failing to hold that the chattel mortgages were null
and void for lack of particularity in the description of the chattels mortgaged.
II. The lower court erred in refusing to allow the defendant to introduce evidence tending to
show that the stock of merchandise found in the two drug stores was not in existence or owned
by the mortgagor at the time of the execution of the mortgages in question.
III. The lower court erred in holding that the administrator of the deceased is now estopped from
contesting the validity of the mortgages in question.
IV. The lower court erred in failing to make a finding on the counterclaims of the defendant.
With reference to the first assignment of error, we deem it unnecessary to discuss the question
therein raised, inasmuch as according to our view on the question of estoppel, as we shall
hereinafter set forth in our discussion of the third assignment of error, the defendant is estopped
from questioning the validity of these chattel mortgages.
In his second assignment of error the appellant attacks the validity of the stipulation in said
mortgages authorizing the mortgagor to sell the goods covered thereby and to replace them
with other goods thereafter acquired. He insists that a stipulation authorizing the disposal and
substitution of the chattels mortgaged does not operate to extend the mortgage to afteracquired property, and that such stipulation is in contravention of the express provision of the
last paragraph of section 7 Act No. 1508, which reads as follows:
A chattel mortgage shall be deemed to cover only the property described therein and not like or
substituted property thereafter acquired by the mortgagor and placed in the same depository as
the property originally mortgaged, anything in the mortgage to the contrary notwithstanding.
In order to give a correct construction to the above-quoted provision of our Chattel Mortgage
Law (Act No. 1508), the spirit and intent of the law must first be ascertained. When said Act was
placed on our statute books by the United States Philippine Commission on July 2, 1906, the

primary aim of that law-making body was undoubtedly to promote business and trade in these
Islands and to give impetus to the economic development of the country. Bearing this in mind, it
could not have been the intention of the Philippine Commission to apply the provision of section
7 above quoted to stores open to the public for retail business, where the goods are constantly
sold and substituted with new stock, such as drug stores, grocery stores, dry-goods stores, etc.
If said provision were intended to apply to this class of business, it would be practically
impossible to constitute a mortgage on such stores without closing them, contrary to the very
spirit about a handicap to trade and business, would restrain the circulation of capital, and
would defeat the purpose for which the law was enacted, to wit, the promotion of business and
the economic development of the country.
In the interpretation and construction of a statute the intent of the law-maker should always be
ascertained and given effect, and courts will not follow the letter of a statute when it leads away
from the true intent and purpose of the Legislature and to conclusions inconsistent with the spirit
of the Act. On this subject, Sutherland, the foremost authority on statutory construction, says:
The Intent of Statute is the Law. If a statute is valid it is to have effect according to the
purpose and intent of the lawmaker. The intent is the vital part, the essence of the law, and the
primary rule of construction is to ascertain and give effect to that intent. The intention of the
legislature in enacting a law is the law itself, and must be enforced when ascertained, although
it may not be consistent with the strict letter of the statute. Courts will not follow the letter of a
statute when it leads away from the true intent and purpose of the legislature and to conclusions
inconsistent with the general purpose of the act. Intent is the spirit which gives life to a
legislative enactment. In construing statutes the proper course is to start out and follow the true
intent of the legislature and to adopt that sense which harmonizes best with the content and
promotes in the fullest manner the apparent policy and objects of the legislature. (Vol. II
Sutherland, Statutory Construction, pp. 693-695.)
A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid
and binding
. . . where the after-acquired property is in renewal of, or in substitution for, goods on hand when
the mortgage was executed, or is purchased with the proceeds of the sale of such goods, etc.
(11 C.J., p. 436.)
Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations
relating to after-acquired and substituted chattels. His views are based on the decisions of the
supreme courts of several states of the Union. He says: "A mortgage may, by express
stipulations, be drawn to cover goods put in stock in place of others sold out from time to time. A
mortgage may be made to include future acquisitions of goods to be added to the original stock
mortgaged, but the mortgage must expressly provide that such future acquisitions shall be held
as included in the mortgage. ... Where a mortgage covering the stock in trade, furniture, and
fixtures in the mortgagor's store provides that "all goods, stock in trade, furniture, and fixtures
hereafter purchased by the mortgagor shall be included in and covered by the mortgage," the
mortgage covers all after-acquired property of the classes mentioned, and, upon foreclosure,
such property may be taken and sold by the mortgagee the same as the property in possession
of the mortgagor at the time the mortgage was executed." (Vol. I, Cobbey on Chattel Mortgages,
sec. 361, pp. 474, 475.)
In harmony with the foregoing, we are of the opinion (a) that the provision of the last paragraph
of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the
nature of a revolving and floating business; (b) that the stipulation in the chattel mortgages in
question, extending their effect to after-acquired property, is valid and binding; and (c) that the
lower court committed no error in not permitting the defendant-appellant to introduce evidence
tending to show that the goods seized by the sheriff were in the nature of after-acquired
property.
With reference to the third assignment of error, we agree with the lower court that, from the facts

of record, the defendant-appellant is estopped from contenting the validity of the mortgages in
question. This feature of the case has been very ably and fully discussed by the lower court in
its decision, and said discussion is made, by reference, a part of this opinion.
As to the fourth assignment of error regarding the counterclaims of the defendant-appellant, it
may be said that in view of the conclusions reached by the lower court, which are sustained by
this court, the lower court committed no error in not making any express finding as to said
counterclaims. As a matter of form, however, the counter-claims should have been dismissed,
but as the trial court decided both cases in favor of the plaintiffs and confirmed and ratified the
orders directing the sheriff to take possession of the chattels on behalf of the plaintiffs, there
was, in effect, a dismissal of the defendant's counterclaims.
For all of the foregoing, we are of the opinion and so hold that the judgment appealed from is in
accordance with the facts and the law, and the same should be and is hereby affirmed, with
costs. So ordered.
G.R. No. L-30173 September 30, 1971
GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees,
vs.
ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.
Castillo & Suck for plaintiffs-appellees.
Jose Q. Calingo for defendants-appellants.
REYES, J.B.L., J.:
Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for the reason that
only questions of law are involved.
This case was originally commenced by defendants-appellants in the municipal court of Manila
in Civil Case No. 43073, for ejectment. Having lost therein, defendants-appellants appealed to
the court a quo (Civil Case No. 30993) which also rendered a decision against them, the
dispositive portion of which follows:
WHEREFORE, the court hereby renders judgment in favor of the plaintiffs and against the
defendants, ordering the latter to pay jointly and severally the former a monthly rent of P200.00
on the house, subject-matter of this action, from March 27, 1956, to January 14, 1967, with
interest at the legal rate from April 18, 1956, the filing of the complaint, until fully paid, plus
attorney's fees in the sum of P300.00 and to pay the costs.
It appears on the records that on 1 September 1955 defendants-appellants executed a chattel
mortgage in favor of plaintiffs-appellees over their house of strong materials located at No. 550
Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B, Block No. 2554, which
were being rented from Madrigal & Company, Inc. The mortgage was registered in the Registry
of Deeds of Manila on 2 September 1955. The herein mortgage was executed to guarantee a
loan of P4,800.00 received from plaintiffs-appellees, payable within one year at 12% per annum.
The mode of payment was P150.00 monthly, starting September, 1955, up to July 1956, and the
lump sum of P3,150 was payable on or before August, 1956. It was also agreed that default in
the payment of any of the amortizations, would cause the remaining unpaid balance to
becomeimmediately due and Payable and
the Chattel Mortgage will be enforceable in accordance with the provisions of Special Act No.
3135, and for this purpose, the Sheriff of the City of Manila or any of his deputies is hereby
empowered and authorized to sell all the Mortgagor's property after the necessary publication in
order to settle the financial debts of P4,800.00, plus 12% yearly interest, and attorney's fees... 2
When defendants-appellants defaulted in paying, the mortgage was extrajudicially foreclosed,
and on 27 March 1956, the house was sold at public auction pursuant to the said contract. As
highest bidder, plaintiffs-appellees were issued the corresponding certificate of sale. 3
Thereafter, on 18 April 1956, plaintiffs-appellant commenced Civil Case No. 43073 in the

municipal court of Manila, praying, among other things, that the house be vacated and its
possession surrendered to them, and for defendants-appellants to pay rent of P200.00 monthly
from 27 March 1956 up to the time the possession is surrendered. 4 On 21 September 1956, the
municipal court rendered its decision
... ordering the defendants to vacate the premises described in the complaint; ordering further to
pay monthly the amount of P200.00 from March 27, 1956, until such (time that) the premises is
(sic) completely vacated; plus attorney's fees of P100.00 and the costs of the suit. 5
Defendants-appellants, in their answers in both the municipal court and court a quo impugned
the legality of the chattel mortgage, claiming that they are still the owners of the house; but they
waived the right to introduce evidence, oral or documentary. Instead, they relied on their
memoranda in support of their motion to dismiss, predicated mainly on the grounds that: (a) the
municipal court did not have jurisdiction to try and decide the case because (1) the issue
involved, is ownership, and (2) there was no allegation of prior possession; and (b) failure to
prove prior demand pursuant to Section 2, Rule 72, of the Rules of Court. 6
During the pendency of the appeal to the Court of First Instance, defendants-appellants failed to
deposit the rent for November, 1956 within the first 10 days of December, 1956 as ordered in
the decision of the municipal court. As a result, the court granted plaintiffs-appellees' motion for
execution, and it was actually issued on 24 January 1957. However, the judgment regarding the
surrender of possession to plaintiffs-appellees could not be executed because the subject
house had been already demolished on 14 January 1957 pursuant to the order of the court in a
separate civil case (No. 25816) for ejectment against the present defendants for non-payment
of rentals on the land on which the house was constructed.
The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond and
withdrawal of deposited rentals was denied for the reason that the liability therefor was
disclaimed and was still being litigated, and under Section 8, Rule 72, rentals deposited had to
be held until final disposition of the appeal. 7
On 7 October 1957, the appellate court of First Instance rendered its decision, the dispositive
portion of which is quoted earlier. The said decision was appealed by defendants to the Court of
Appeals which, in turn, certified the appeal to this Court. Plaintiffs-appellees failed to file a brief
and this appeal was submitted for decision without it.
Defendants-appellants submitted numerous assignments of error which can be condensed into
two questions, namely: .
(a) Whether the municipal court from which the case originated had jurisdiction to adjudicate the
same;
(b) Whether the defendants are, under the law, legally bound to pay rentals to the plaintiffs
during the period of one (1) year provided by law for the redemption of the extrajudicially
foreclosed house.
We will consider these questions seriatim.
(a) Defendants-appellants mortgagors question the jurisdiction of the municipal court from which
the case originated, and consequently, the appellate jurisdiction of the Court of First Instance a
quo, on the theory that the chattel mortgage is void ab initio; whence it would follow that the
extrajudicial foreclosure, and necessarily the consequent auction sale, are also void. Thus, the
ownership of the house still remained with defendants-appellants who are entitled to possession
and not plaintiffs-appellees. Therefore, it is argued by defendants-appellants, the issue of
ownership will have to be adjudicated first in order to determine possession. lt is contended
further that ownership being in issue, it is the Court of First Instance which has jurisdiction and
not the municipal court.
Defendants-appellants predicate their theory of nullity of the chattel mortgage on two grounds,
which are: (a) that, their signatures on the chattel mortgage were obtained through fraud, deceit,
or trickery; and (b) that the subject matter of the mortgage is a house of strong materials, and,
being an immovable, it can only be the subject of a real estate mortgage and not a chattel

mortgage.
On the charge of fraud, deceit or trickery, the Court of First Instance found defendantsappellants' contentions as not supported by evidence and accordingly dismissed the charge, 8
confirming the earlier finding of the municipal court that "the defense of ownership as well as the
allegations of fraud and deceit ... are mere allegations." 9
It has been held in Supia and Batiaco vs. Quintero and Ayala 10 that "the answer is a mere
statement of the facts which the party filing it expects to prove, but it is not evidence; 11 and
further, that when the question to be determined is one of title, the Court is given the authority to
proceed with the hearing of the cause until this fact is clearly established. In the case of Sy vs.
Dalman, 12 wherein the defendant was also a successful bidder in an auction sale, it was
likewise held by this Court that in detainer cases the aim of ownership "is a matter of defense
and raises an issue of fact which should be determined from the evidence at the trial." What
determines jurisdiction are the allegations or averments in the complaint and the relief asked for.
13

Moreover, even granting that the charge is true, fraud or deceit does not render a contract void
ab initio, and can only be a ground for rendering the contract voidable or annullable pursuant to
Article 1390 of the New Civil Code, by a proper action in court. 14 There is nothing on record to
show that the mortgage has been annulled. Neither is it disclosed that steps were taken to
nullify the same. Hence, defendants-appellants' claim of ownership on the basis of a voidable
contract which has not been voided fails.
It is claimed in the alternative by defendants-appellants that even if there was no fraud, deceit or
trickery, the chattel mortgage was still null and void ab initio because only personal properties
can be subject of a chattel mortgage. The rule about the status of buildings as immovable
property is stated in Lopez vs. Orosa, Jr. and Plaza Theatre Inc., 15 cited in Associated
Insurance Surety Co., Inc. vs. Iya, et al. 16 to the effect that
... it is obvious that the inclusion of the building, separate and distinct from the land, in the
enumeration of what may constitute real properties (art. 415, New Civil Code) could only mean
one thing that a building is by itself an immovable property irrespective of whether or not said
structure and the land on which it is adhered to belong to the same owner.
Certain deviations, however, have been allowed for various reasons. In the case of Manarang
and Manarang vs. Ofilada, 17 this Court stated that "it is undeniable that the parties to a contract
may by agreement treat as personal property that which by nature would be real property",
citing Standard Oil Company of New York vs. Jaramillo. 18 In the latter case, the mortgagor
conveyed and transferred to the mortgagee by way of mortgage "the following described
personal property." 19 The "personal property" consisted of leasehold rights and a building.
Again, in the case of Luna vs. Encarnacion, 20 the subject of the contract designated as Chattel
Mortgage was a house of mixed materials, and this Court hold therein that it was a valid Chattel
mortgage because it was so expressly designated and specifically that the property given as
security "is a house of mixed materials, which by its very nature is considered personal
property." In the later case of Navarro vs. Pineda, 21 this Court stated that
The view that parties to a deed of chattel mortgage may agree to consider a house as personal
property for the purposes of said contract, "is good only insofar as the contracting parties are
concerned. It is based, partly, upon the principle of estoppel" (Evangelista vs. Alto Surety, No. L11139, 23 April 1958). In a case, a mortgaged house built on a rented land was held to be a
personal property, not only because the deed of mortgage considered it as such, but also
because it did not form part of the land (Evangelists vs. Abad, [CA]; 36 O.G. 2913), for it is now
settled that an object placed on land by one who had only a temporary right to the same, such
as the lessee or usufructuary, does not become immobilized by attachment (Valdez vs. Central
Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. vs. Castillo, et al., 61 Phil. 709).
Hence, if a house belonging to a person stands on a rented land belonging to another person, it
may be mortgaged as a personal property as so stipulated in the document of mortgage.

(Evangelista vs. Abad, Supra.) It should be noted, however that the principle is predicated on
statements by the owner declaring his house to be a chattel, a conduct that may conceivably
estop him from subsequently claiming otherwise. (Ladera vs. C.N. Hodges, [CA] 48 O.G. 5374):
22

In the contract now before Us, the house on rented land is not only expressly designated as
Chattel Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLS and
TRANSFERS by way of Chattel Mortgage 23 the property together with its leasehold rights over
the lot on which it is constructed and participation ..." 24 Although there is no specific statement
referring to the subject house as personal property, yet by ceding, selling or transferring a
property by way of chattel mortgage defendants-appellants could only have meant to convey
the house as chattel, or at least, intended to treat the same as such, so that they should not
now be allowed to make an inconsistent stand by claiming otherwise. Moreover, the subject
house stood on a rented lot to which defendats-appellants merely had a temporary right as
lessee, and although this can not in itself alone determine the status of the property, it does so
when combined with other factors to sustain the interpretation that the parties, particularly the
mortgagors, intended to treat the house as personalty. Finally unlike in the Iya cases, Lopez vs.
Orosa, Jr. and Plaza Theatre, Inc. 25 and Leung Yee vs. F. L. Strong Machinery and Williamson,
26
wherein third persons assailed the validity of the chattel mortgage, 27 it is the defendantsappellants themselves, as debtors-mortgagors, who are attacking the validity of the chattel
mortgage in this case. The doctrine of estoppel therefore applies to the herein defendantsappellants, having treated the subject house as personalty.
(b) Turning to the question of possession and rentals of the premises in question. The Court of
First Instance noted in its decision that nearly a year after the foreclosure sale the mortgaged
house had been demolished on 14 and 15 January 1957 by virtue of a decision obtained by the
lessor of the land on which the house stood. For this reason, the said court limited itself to
sentencing the erstwhile mortgagors to pay plaintiffs a monthly rent of P200.00 from 27 March
1956 (when the chattel mortgage was foreclosed and the house sold) until 14 January 1957
(when it was torn down by the Sheriff), plus P300.00 attorney's fees.
Appellants mortgagors question this award, claiming that they were entitled to remain in
possession without any obligation to pay rent during the one year redemption period after the
foreclosure sale, i.e., until 27 March 1957. On this issue, We must rule for the appellants.
Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No. 1508. 28
Section 14 of this Act allows the mortgagee to have the property mortgaged sold at public
auction through a public officer in almost the same manner as that allowed by Act No. 3135, as
amended by Act No. 4118, provided that the requirements of the law relative to notice and
registration are complied with. 29 In the instant case, the parties specifically stipulated that "the
chattel mortgage will be enforceable in accordance with the provisions of Special Act No. 3135
... ." 30 (Emphasis supplied).
Section 6 of the Act referred to 31 provides that the debtor-mortgagor (defendants-appellants
herein) may, at any time within one year from and after the date of the auction sale, redeem the
property sold at the extra judicial foreclosure sale. Section 7 of the same Act 32 allows the
purchaser of the property to obtain from the court the possession during the period of
redemption: but the same provision expressly requires the filing of a petition with the proper
Court of First Instance and the furnishing of a bond. It is only upon filing of the proper motion
and the approval of the corresponding bond that the order for a writ of possession issues as a
matter of course. No discretion is left to the court. 33 In the absence of such a compliance, as in
the instant case, the purchaser can not claim possession during the period of redemption as a
matter of right. In such a case, the governing provision is Section 34, Rule 39, of the Revised
Rules of Court 34 which also applies to properties purchased in extrajudicial foreclosure
proceedings. 35 Construing the said section, this Court stated in the aforestated case of Reyes
vs. Hamada.

In other words, before the expiration of the 1-year period within which the judgment-debtor or
mortgagor may redeem the property, the purchaser thereof is not entitled, as a matter of right, to
possession of the same. Thus, while it is true that the Rules of Court allow the purchaser to
receive the rentals if the purchased property is occupied by tenants, he is, nevertheless,
accountable to the judgment-debtor or mortgagor as the case may be, for the amount so
received and the same will be duly credited against the redemption price when the said debtor
or mortgagor effects the redemption. Differently stated, the rentals receivable from tenants,
although they may be collected by the purchaser during the redemption period, do not belong to
the latter but still pertain to the debtor of mortgagor. The rationale for the Rule, it seems, is to
secure for the benefit of the debtor or mortgagor, the payment of the redemption amount and
the consequent return to him of his properties sold at public auction. (Emphasis supplied)
The Hamada case reiterates the previous ruling in Chan vs. Espe. 36
Since the defendants-appellants were occupying the house at the time of the auction sale, they
are entitled to remain in possession during the period of redemption or within one year from and
after 27 March 1956, the date of the auction sale, and to collect the rents or profits during the
said period.
It will be noted further that in the case at bar the period of redemption had not yet expired when
action was instituted in the court of origin, and that plaintiffs-appellees did not choose to take
possession under Section 7, Act No. 3135, as amended, which is the law selected by the parties
to govern the extrajudicial foreclosure of the chattel mortgage. Neither was there an allegation
to that effect. Since plaintiffs-appellees' right to possess was not yet born at the filing of the
complaint, there could be no violation or breach thereof. Wherefore, the original complaint
stated no cause of action and was prematurely filed. For this reason, the same should be
ordered dismissed, even if there was no assignment of error to that effect. The Supreme Court
is clothed with ample authority to review palpable errors not assigned as such if it finds that their
consideration is necessary in arriving at a just decision of the cases. 37
It follows that the court below erred in requiring the mortgagors to pay rents for the year
following the foreclosure sale, as well as attorney's fees.
FOR THE FOREGOING REASONS, the decision appealed from is reversed and another one
entered, dismissing the complaint. With costs against plaintiffs-appellees.
G.R. No. 97130
June 19, 1991
FRANCISCO N. DY, JR., Substituted by his Estate Rep. by ROSARIO PEREZ-DY,
Administratrix, petitioner,
vs.
COURT OF APPEALS and FERTILIZER MARKETING COMPANY OF THE PHILIPPINES,
respondents.
Loreta F. Sablaya for petitioner.Rayala & Associates for private respondent.
GRIO-AQUINO, J.:
This is a petition for review of the Court of Appeals' decision dated December 11, 1990, which
affirmed in toto the decision of the Regional Trial Court of Makati dated July 18, 1988, which
ordered the petitioner to pay the private respondent the sum of P337,120.00 plus interest of
12% per annum, attorney's fees and costs.
Private respondent Fertilizer Marketing Company of the Philippines filed an action to collect
from Francisco Dy, Jr. (now deceased) and the Francisco Dy, Jr. Trading Corporation the sum of
P337,120.00 as unpaid balance on their purchase of fertilizers on credit from the private
respondent.
The defendants were declared in default on August 15, 1983 for failure to answer the complaint
within the reglementary period. Private respondent was thereafter allowed to present its
evidence ex parte before the Branch Clerk of Court.

Subsequently, the defendants filed a motion to admit their answer, but it was denied by the
court. They filed a motion for reconsideration; it was granted; the order of default was set aside;
their answer was admitted; and they were allowed to present their evidence without retaking the
plaintiff s evidence.
On the date set for the reception of their evidence, the defendants failed to appear despite due
notice, so, judgment was rendered by the trial court against them on January 4, 1984.
On appeal to the Court of Appeals, the judgment by default was set aside and the case was
remanded to the lower court for pre-trial and trial on the merits (AC-G.R. CV No. 03747, p. 46,
Rollo).
At the pre-trial conference on November 12, 1987, the plaintiff and defendant Francisco Dy, Jr.
appeared, but there was no appearance for the defendant trading corporation, so it was
declared in default again and the plaintiff was allowed to present its evidence ex parte before
the Branch Clerk of Court. However, in that same pre-trial conference the parties agreed that
the evidence previously presented by the plaintiff shall remain on record for purposes of the
continuation of the trial, subject to cross-examination in open court, and, that the presentation of
the affidavits in question and answer form will constitute the direct testimony of the defendant's
witnesses likewise subject to cross-examination of the adverse counsel.
On motion for reconsideration, the order of default against the corporation was lifted. A second
motion for reconsideration was filed by the defendants on January 22, 1988 to set aside the
agreement for trial by affidavits but it was denied by the court.
On the date of the hearing set on April 25, 1988, the defendants failed to appear to present their
evidence despite due notice, hence, they were deemed to have waived the presentation of their
evidence. The case was submitted for decision upon the plaintiffs evidence.
On July 18, 1988, the trial court rendered a decision (mentioned earlier) for the plaintiff and
against the defendants. The latter appealed to the Court of Appeals (CA-G.R. CV No. 23540)
alleging that the court a quo erred (1) in reinstating the nullified proceedings on August 19, 1983
before the Branch Clerk of Court; (2) in denying her procedural due process; and (3) in
awarding damages against her.
During the pendency of the appeal, Francisco Dy, Jr. passed away on June 20, 1989. His wife,
Rosario Perez-Dy, as judicial administratrix of his estate, prosecuted the appeal (Azarraga vs.
Cortes, 9 Phil. 698).
On December 11, 1990, the Court of Appeals dismissed the appeal (CA-G.R. CV No. 23540) for
lack of merit.
In this petition for review of that decision, the petitioner reiterates the same issues that she
raised in the Court of Appeals.
With regard to the validity of the proceedings before the Branch Clerk of Court, we agree with
the observations of the Court of Appeals that:
Appellant is now estopped from questioning the retention of the proceedings held on August 19,
1983 before the Branch Clerk of Court since her husband agreed to the same during the pretrial conference held on November 12, 1987. Agreements reached at the pre-trial conference
and embodied in the pre-trial order shall control the subsequent course of the trial and should
not be disturbed unless there could be manifest injustice.
The agreement is not unjust to appellant. Aside from appellant having the right to adduce
evidence on her behalf, the parties agreed that the evidence presented by appellee before the
Branch Clerk of Court would be retained, with appellant having the right to cross-examine
appellee's witnesses.
xxx
xxx
xxx
The agreement of the parties as contained in the pre-trial order is not invalid. The parties are
authorized by the Rules of Court to consider "[s]uch other matters as may aid in the prompt
disposition of the action." An authority believes this includes "agreement on certain matters so
that witnesses need not and will not be called." Undoubtedly, the procedure agreed upon by the

parties in this case would have greatly accelerated the trial and the decision therein, which, at
the, time of the pre-trial conference, had been pending for three years and had already gone up
on appeal to this Court. (pp. 27-28, Rollo.)
The presentation of the plaintiff's evidence before the Branch Clerk of Court was not void. The
Supreme Court, in the case of Continental Bank vs. Tiangco, et al. (94 SCRA 715) departing
from its contrary statement in the Lim Tan Hu case (66 SCRA 425), declared that a decision
based on evidence heard by a deputy clerk of court as commissioner is valid and enforceable
because it was rendered by a court of competent jurisdiction, was not impaired by extrinsic
fraud, nor by lack of due process, and there was no showing that the private respondents were
prejudiced by such a procedure, or that the commissioner committed any mistake or abuse of
discretion, or that the proceedings were vitiated by collusion and collateral fraud. That ruling
applies four square to this case.
The practice of designating the clerk of court as a commissioner to receive evidence in the
event of the non-appearance of the defendant and its counsel, is not irregular and is sanctioned
by Rule 33 of the Rules of Court on trial by commissioner (J.M. Tuazon, Inc. vs. Dela Rosa, 18
SCRA 591; Wassmer vs. Velez, 12 SCRA 648).
The petitioner was not denied due process. As pointed out by the appellate court:
. . . Appellant retained her right to present evidence on her behalf and the opportunity to crossexamine the witnesses already presented by appellee. At any rate, if appellant believes that her
right to procedural due process had been curtailed, the same was due to a voluntary waiver by
her husband. (p. 28, Rollo)
WHEREFORE, the petition for review is denied for lack of merit. Costs against the petitioners.
SO ORDERED.
G.R. No. 110048 November 19, 1999
SERVICEWIDE SPECIALISTS, INC., petitioner,
vs.
COURT OF APPEALS, HILDA TEE, & ALBERTO M. VILLAFRANCA, respondents.
PURISIMA, J.:
This is a petition for review on certiorari under Rule 45 of Decision of the Court of Appeals 1 in
CA-G.R. CV No. 19571, affirming the judgment of the Regional Trial Court of Manila, Branch
XX, dismissing Civil Case No. 84-25763 for replevin and damages.
The litigation involves a motor vehicle, a Colt Galant, 4-door Sedan automobile, with Motor No.
2E-08927, Serial No. A112A-5297, Model No. 1976.
The appellate court culled the facts that matter as follows: 2
On May 14, 1976, Leticia L. Laus of Quezon City purchased on credit a Colt Galant . . . from
Fortune Motors (Phils.) Corporation. On the same date, she executed a promissory note for the
amount of P56,028.00, inclusive of interest at 12% per annum, payable within a period of 48
months starting August, 1976 at a monthly installment of P1,167.25 due and demandable on the
17th day of each month (Exhibit "A", pp. 144, Orig. Records,). It was agreed upon, among
others, that in case of default in the payment of any installment the total principal sum, together
with the interest, shall become immediately due and payable (Exhibit "A"; p. 144, Orig.
Records). As a security for the promissory note, a chattel mortgage was constituted over the
said motor vehicle (Exhibit "B", ibid.), with a deed of assignment incorporated therein such that
the credit and mortgage rights were assigned by Fortune Motors Corp. in favor of Filinvest
Credit Corporation with the consent of the mortgagor-debtor Leticia Laus (Exhibits "B-1" and "B2", p. 147, ibid.). The vehicle was then registered in the name of Leticia L. Laus with the chattel
mortgage annotated on said certificate. (Exhibit "H"; p. 154, ibid.)
On September 25, 1978, Filinvest Credit Corporation in turn assigned the credit in favor of
Servicewide Specialists, Inc. (Servicewide, for brevity) transferring unto the latter all its rights

under the promissory note and the chattel mortgage (Exhibit "B-3", p. 149, ibid.) with the
corresponding notice of assignment sent to the registered car owner (Exhibit "C"; p. 150, ibid.).
On April 18, 1977, Leticia Laus failed to pay the monthly installments for that month. The
installments for the succeeding 17 months were not likewise fully paid, hence on September 25,
1978, pursuant to the provisions of the promissory note, Servicewide demanded payment of the
entire outstanding balance of P46,775.24 inclusive of interests (Exhibits "D" and "E"; pp. 151152, ibid.). Despite said formal demand, Leticia Laus failed to pay all the monthly installments
due until July 18, 1980.
On July 25, 1984, Servicewide sent a statement of account to Leticia Laus and demanded
payment of the amount of P86,613.32 representing the outstanding balance plus interests up to
July 25, 1985, attorney's fees, liquidated damages, estimated repossession expense, and
bonding fee (Exhibit "F"; p. 153, ibid.)
As a result of the failure of Leticia Laus to settle her obligation, or at least to surrender
possession of the motor vehicle for the purpose of foreclosure, Servicewide instituted a
complaint for replevin, impleading Hilda Tee and John Dee in whose custody the vehicle was
believed to be at the time of the filing of the suit.
In its complaint, plaintiff alleged that it had superior lien over the mortgaged vehicle; that it is
lawfully entitled to the possession of the same together with all its accessories and equipments;
(sic) that Hilda Tee was wrongfully detaining the motor vehicle for the purpose of defeating its
mortgage lien; and that a sufficient bond had been filed in court. (Complaint with Annexes, pp.
1-13, ibid.). On July 30, 1984, the court approved the replevin bond (p. 20, ibid.)
On August 1, 1984, Alberto Villafranca filed a third party claim contending that he is the absolute
owner of the subject motor vehicle duly evidenced by the Bureau of Land Transportation's
Certificate of Registration issued in his name on June 22, 1984; that he acquired the said
mother vehicle from a certain Remedios D. Yang under a Deed of Sale dated May 16, 1984;
that he acquired the same free from all lien and emcumbrances; and that on July 30, 1984, the
said automobile was taken from his residence by Deputy Sheriff Bernardo Bernabe pursuant to
the seizure order issued by the court a quo.
Upon motion of the plaintiff below, Alberto Villafranca was substituted as defendant. Summons
was served upon him. (pp. 55-56, ibid).
On March 20, 1985, Alberto Villafranca moved for the dismissal of the complaint on the ground
that there is another action pending between the same parties before the Regional Trial Court of
Makati, Branch 140, docketed as Civil Case No. 8310, involving the seizure of subject motor
vehicle and the indemnity bond posted by Servicewide (Motion to Dismiss with Annexes; pp. 57110, ibid.) On March 28, 1985, the court granted the aforesaid motion (p. 122, ibid.), but
subsequently the order of dismissal was reconsidered and set aside (pp. 135-136, ibid.). For
failure to file his Answer as required by the court a quo, Alberto Villafranca was declared in
default and plaintiff's evidence was received ex parte.
On December 27, 1985, the lower court rendered a decision dismissing the complaint for
insufficiency of evidence. Its motion for reconsideration of said decision having been denied, . . .
.
In its appeal to the Court of Appeals, petitioner theorized that a suit for replevin aimed at the
foreclosure of a chattel is an action quasi in rem, and does not require the inclusion of the
principal obligor in the Complaint. However, the appellate court affirmed the decision of the
lower Court; ratiocinating, thus:
A cursory reading, however, of the Promissory Note dated May 14, 1976 in favor of Fortune
Motors (Phils.) Corp. in the sum of P56,028.00 (Annex "A" of Complaint, p. 7, Original Records)
and the Chattel Mortgage of the same date (Annex "B" of Complaint; pp. 8-9, ibid.) will disclose
that the maker and mortgagor respectively are one and the same person: Leticia Laus. In fact,
plaintiff-appellant admits in paragraphs (sic) nos. 2 and 3 of its Complaint that the aforesaid
public documents (Annexes "A" and "B" thereof) were executed by Leticia Laus, who, for

reasons not explained, was never impleaded. In the case under consideration, plaintiffappellant's main case is for judicial foreclosure of the chattel mortgage against Hilda Tee and
John Doe who was later substituted by appellee Alberto Villafranca. But as there is no privity of
contract, not even a causal link, between plaintiff-appellant Servicewide Specialists, Inc. and
defendant-appellee Alberto Villafranca, the court a quo committed no reversible error when it
dismissed the case for insufficiency of evidence against Hilda Tee and Alberto Villafranca since
the evidence adduced pointed to Leticia Laus as the party liable for the obligation sued upon (p.
2, RTC Decision). 3
Petitioner presented a Motion for Reconsideration but in its Resolution 4 of May 10, 1993, the
Court of Appeals denied the same, taking notice of another case "pending between the same
parties . . . relating to the very chattel mortgage of the motor vehicle in litigation."
Hence, the present petition for review on certiorari under Rule 45. Essentially, the sole issue
here is: Whether or not a case for replevin may be pursued against the defendant, Alberto
Villafranca, without impleading the absconding debtor-mortgagor?
Rule 60 of the Revised Rules of Court requires that an applicant for replevin must show that he
"is the owner of the property claimed, particularly describing it, or is entitled to the possession
thereof." 5 Where the right of the plaintiff to the possession of the specified property is so
conceded or evident, the action need only be maintained against him who so possesses the
property. In rem action est per quam rem nostram quae ab alio possidetur petimus, et semper
adversus eum est qui rem possidet. 6
Citing Northern Motors, Inc. vs. Herrera, 7 the Court said in the case of BA Finance (which is of
similar import with the present case):
There can be no question that persons having a special right of property in the goods the
recovery of which is sought, such as a chattel mortgagee, may maintain an action for replevin
therefor. Where the mortgage authorizes the mortgagee to take possession of the property on
default, he may maintain an action to recover possession of the mortgaged chattels from the
mortgagor or from any person in whose hands he may find them. 8
Thus, in default of the mortgagor, the mortgagee is thereby constituted as attorney-in-fact of the
mortgagor, enabling such mortgagee to act for and in behalf of the owner. That the defendant is
not privy to the chattel mortgage should be inconsequential. By the fact that the object of
replevin is traced to his possession, one properly can be a defendant in an action for replevin. It
is here assumed that the plaintiff's right to possess the thing is not or cannot be disputed . 9
(Emphasis supplied)
However, in case the right of possession on the part of the plaintiff, or his authority to claim such
possession or that of his principal, is put to great doubt (a contending party may contest the
legal bases for plaintiffs cause of action or an adverse and independent claim of ownership or
right of possession may be raised by that party), it could become essential to have other
persons involved and impleaded for a complete determination and resolution of the controversy.
10
In the case under scrutiny, it is not disputed that there is an adverse and independent claim of
ownership by the respondent as evinced by the existence of a pending case before the Court of
Appeals involving subject motor vehicle between the same parties herein. 11 Its resolution is a
factual matter, the province of which properly lies in the lower Court and not in the Supreme
Court, in the guise of a petition for review on certiorari. For it is basic that under Rule 45, this
Court only entertains questions of law, and rare are the exceptions and the present case does
not appear to be one of them.
In a suit for replevin, a clear right of possession must be established. (Emphasis supplied) A
foreclosure under a chattel mortgage may properly be commenced only once there is default on
the part of the mortgagor of his obligation secured by the mortgage. The replevin in this case
has been resorted to in order to pave the way for the foreclosure of what is covered by the
chattel mortgage. The conditions essential for such foreclosure would be to show, firstly, the
existence of the chattel mortgage and, secondly, the default of the mortgagor. These

requirements must be shown because the validity of the plaintiffs exercise of the right of
foreclosure is inevitably dependent thereon. 12
Since the mortgagee's right of possession is conditioned upon the actual fact of default which
itself may be controverted, the inclusion of other parties, like the debtor or the mortgagor
himself, may be required in order to allow a full and conclusive determination of the case. When
the mortgagee seeks a replevin in order to effect the eventual foreclosure of the mortgage, it is
not only the existence of, but also the mortgagor's default on, the chattel mortgage that, among
other things, can properly uphold the right to replevy the property. The burden to establish a
valid justification for such action lies with the plaintiff. An adverse possessor, who is not the
mortgagor, cannot just be deprived of his possession, let alone be bound by the terms of the
chattel mortgage contract, simply because the mortgagee brings up an action for replevin. 13
Leticia Laus, being an indispensable party, should have been impleaded in the complaint for
replevin and damages. An indispensable party is one whose interest will be affected by the
court's action in the litigation, and without whom no final determination of the case can be had.
The party's interest in the subject matter of the suit and in the relief sought are so inextricably
intertwined with the other parties that his legal presence as a party to the proceeding is an
absolute necessity. In his absence, there cannot be a resolution of the dispute of the parties
before the Court which is effective, complete, or equitable.
Conversely, a party is not indispensable to the suit if his interest in the controversy or subject
matter is distinct and divisible from the interest of the other parties and will not necessarily be
prejudiced by a judgment which does complete justice to the parties in Court. He is not
indispensable if his presence would merely complete relief between him and those already
parties to the action or will simply avoid multiple litigation. 14 Without the presence of
indispensable parties to a suit or proceeding, a judgment of a Court cannot attain real finality. 15
That petitioner could not locate the mortgagor, Leticia Laus, is no excuse for resorting to a
procedural short-cut. It could have properly availed of substituted service of summons under the
Revised Rules of Court. 16 If it deemed such a mode to be unavailing, it could have proceeded in
accordance with Section 14 of the same Rule. 17 Indeed, petitioner had other proper remedies, it
could have resorted to but failed to avail of. For instance, it could have properly impleaded the
mortgagor. Such failure is fatal to petitioner's cause.
With the foregoing disquisition and conclusion, the other issues raised by petitioner need not be
passed upon.
WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals in CA-G.R. CV
No. 19571 AFFIRMED. No pronouncement as to costs.
SO ORDERED.
G.R. No. 150673
February 28, 2003
SUPERLINES TRANSPORTATION COMPANY, INC., and MANOLET LAVIDES, petitioners,
vs.
ICC LEASING & FINANCING CORPORATION, respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, of the Decision1 of the Court of Appeals in CA-G.R. No. 65126 reversing on appeal
the Decision2 of Branch 142 of the Regional Trial Court of Makati City in Civil Case No. 97-816.
The Antecedents
In 1995, Superlines Transportation Co., Inc. (Superlines, for brevity) decided to acquire five new
buses from the Diamond Motors Corporation for the price of P10,873,582.00. However,
Superlines lacked financial resources for the purpose. By virtue of a board resolution,
Superlines authorized its President and General Manager, Manolet Lavides, a graduate of the
Ateneo de Manila School of Law and a businessman for twenty years, to look for and negotiate

with a financing corporation for a loan for the purchase of said buses.
Lavides negotiated with ICC Leasing & Financing Corporation (ICC, for brevity) through the
latters Assistant Vice-President for Operations Aida F. Albano, for a financial scheme for the
planned purchase. ICC agreed to finance the purchase of the new buses via a loan and
proposed a three-year term for the payment thereof at a fixed interest rate of 22% per annum.
The new buses to be purchased were to be used by Superlines as security for the loan. ICC
required Superlines to submit certificates of registration of the said buses under the name of
Superlines before the appropriate document was executed by the parties and their transactions
consummated. On October 19, 1995, Diamond Motors Corporation sold to Superlines five new
buses under Vehicle Invoice Nos. 9225 to 9229. 3 Superlines, through Lavides, acknowledged
receipt of the buses.
On November 22, 1995, the vehicle invoices were filed with the Land Transportation Office
which then issued certificates of registration covering the five buses under the name of
Superlines.4 With the buses now registered under its name, Superlines, through Lavides,
executed two documents, namely: a deed of chattel mortgage over the said buses as security
for the purchase price of the buses in the amount of P13,114,287.005 loaned by ICC to
Superlines, which deed was annotated on the face of said certificates of registration, and a
promissory note in favor of ICC binding and obliging itself to pay to the latter the amount of
P10,873,582.00 in monthly installments of P415,290.00, the first installment to start on
December 23, 1995, with interest thereon at the rate of 22% per annum until full payment of
said amount6 in favor of Superlines and ICC covenanted in said deed that:
Effective upon the breach of any condition of this mortgage, and in case of loss or damage of
the mortgaged property/ies and in addition to the remedies herein stipulated, the MORTGAGEE
is hereby appointed attorney-in-fact of the MORTGAGOR with full power and authority, by the
use of force if necessary, to take actual possession of the mortgaged property/ies without the
necessity of any judicial order or any other permission or power, to remove, sell or dispose of
the mortgaged property/ies, and collect rents therefor, to execute bill of sale, lease or
agreements that may be deemed convenient; to make repairs or improvements in the
mortgaged property/ies and pay the same and perform any other act which the MORTGAGEE
may deem convenient for the proper administration of the mortgaged property/ies; and to file,
prove, justify, prosecute, compromise or settle insurance claims with the insurance company,
without the participation of the MORTGAGOR, under such terms and conditions as the
Mortgagee as attorney-in-fact may consider fair and reasonable. The payment of any expenses
advanced by the MORTGAGEE or its assigns in connection with the purpose indicated herein is
also guaranteed by this mortgage. Any amount received from the sale, disposal or
administration abovementioned may be executed by the MORTGAGEE by virtue of this power
and applied to the satisfaction of the obligations hereby secured, which act is hereby ratified.
The MORTGAGEE shall have the option of selling the property/ies either at public or private
sale at the municipality or at the capital of the province where it may be situated at the time; or
at any municipality where the MORTGAGEE may have a branch, office, or at Metro Manila, the
MORTGAGOR hereby waiving all rights to any notice of such sale.
The MORTGAGOR hereby expressly waives the term of thirty (30) days or any other term
granted or which may hereafter be granted him/it by law as the period which must elapse before
the MORTGAGEE or its assigns shall be entitled to foreclose this mortgage, it being expressly
understood and agreed that the MORTGAGEE may foreclose this mortgage at any time after
the breach of any condition hereof.
It is further agreed that in case of the sale at public auction under foreclosure proceedings of the
property/ies herein mortgaged, or of any part thereof, the MORTGAGEE shall be entitled to bid
for the properties so sold, or for any part thereof, to buy the same, or any part thereof, and to
have the amount of his/its bid applied to the payment of the obligations secured by this
mortgage without requiring payment in cash of the amount of such bid.

The remedies of the MORTGAGEE under the powers hereby conferred upon him/it shall be and
are in addition to and cumulative with such right of action as the said MORTGAGEE or the
assigns may have in accordance with the present or any future laws of the Philippines. 7
Superlines and Lavides executed a Continuing Guaranty to pay jointly and severally in favor of
ICC the amount of P13,114,285.00.8 ICC drew and delivered to Superlines Metrobank Check
No. 0661909113, dated November 23, 1995, payable to the account of Superlines in the amount
of P10,873,582.00,9 representing the net proceeds of the loan. The latter acknowledged receipt
of the check in Cash Voucher No. 0.0769. 10 Superlines remitted the said check to Diamond
Motors Corporation in full payment of the purchase price of the new buses.
After paying only seven monthly amortizations for the period of December 1995 to June 1996,
Superlines defaulted in the payment of its obligation to ICC. 11 On April 2, 1997, ICC wrote
Superlines demanding full payment of its outstanding obligation, which as of March 31, 1997
amounted to P12,606,020.55.12 However, Superlines failed to heed said demand.
ICC filed a complaint13 for collection of sum of money with prayer for a writ of replevin on April
21, 1997 with Branch 142 of the Regional Trial Court of Makati City against Superlines and
Lavides. The case was entitled "ICC Leasing & Finance Corporation vs. Superlines
Transportation Co., Inc., et al." and docketed as Civil Case No. 97-816. ICC alleged, by way of
alternative cause of action, that:
xxx xxx xxx
13. In the event that the Plaintiff fails to locate and/or seize the above-described mortgaged
vehicles from Defendant, its agents and/or assigns, or any such person other than said
Defendant or its representatives, Defendant is obligated to pay Plaintiff the sum of
P12,072,895.59, and an amount equivalent to 5% of the total amount due from Defendant as
and for attorneys fees, plus expenses of collection, the costs of suit and cost of Replevin Bond.
ICC prayed that after due proceedings, judgment be rendered in its favor, thus:
WHEREFORE, it is respectfully prayed that:
1. A Writ of Replevin be issued, ordering the Court Sheriff and/or any of his deputies, to seize
from Defendant, its agents and/or assigns, or any such person other than said Defendant or its
representatives in possession thereof at present, the above-described vehicles wherever they
may be found, to take and keep the same in custody and, to dispose of them in accordance with
Section 6, Rule 60 of the Revised Rules of Court.
2. Judgment be rendered in favor of the Plaintiff and against the Defendant, as follows:
a) Declaring that Plaintiff is entitled to the possession of the subject properties in accordance
with the terms and conditions of the Chattel Mortgage;
b) Ordering Defendant, in case the amount realized from the sale of the mortgaged properties
shall be insufficient to cover its total indebtedness, to pay the Plaintiff the deficiency;
c) Ordering Defendant to pay Plaintiff the expenses of litigation and costs of suit, including the
costs of the Replevin Bond, plus the stipulated attorneys fees.
As to the
ALTERNATIVE CAUSE OF ACTION
Ordering Defendants to pay the outstanding principal balance of P12,072,895.59, to pay the
costs of suit, expenses of litigation and the costs of the Replevin Bond, plus an amount
equivalent to 5% of the total amount due as and for attorneys fees.
In the meantime, the trial court issued a writ of seizure for the five mortgaged buses. 14 On May
29, 1997, the sheriff took possession of the five buses in compliance with the writ of seizure
issued by the trial court.15 Thereafter, ICC instituted extra-judicial foreclosure proceedings over
the subject buses. An auction sale was held on July 2, 1997. ICC offered a bid of P7,200,000.00
for the motor vehicles and was declared the winning bidder, resulting in a deficiency of
P5,406,029.55. In addition, ICC incurred necessary expenses in the amount of P920,524.62.
Superlines thus still owed ICC the amount of P6,326,556.17.
In their Answer with Counterclaim, Superlines and Lavides asserted that the real agreement of

the parties was one of financing a sale of personal property, the prices for which shall be
payable on installments. Relying on Article 1484(3) of the Civil Code, Superlines and Lavides
claimed that since the chattel mortgage on subject buses was already foreclosed by ICC, the
latter had no further action against Superlines and Lavides for the unpaid balance of the price.
They interposed compulsory damages in the total amount of P750,000.00 excluding costs of
suit.
Leonardo Serrano, Jr., the Executive Vice-President and Chief Operations Officer of ICC,
testified that the transaction forged by ICC and Superlines was an amortized commercial loan
and not a consumer loan, because under the latter transaction, ICC should have paid the price
of the purchase of its customers (Superlines) directly to the suppliers. However, ICC did not do
business directly with Diamond Motors Corporation; it transacted directly with Superlines. ICC
remitted the purchase price of the buses directly to Superlines and not to Diamond Motors
Corporation. ICC had no contract with Diamond Motors Corporation.
On the other hand, Lavides testified that he and ICCs Assistant Vice-President for Operations
Aida Albano agreed on a consumer loan for the financing of the purchase of the buses, with ICC
as the vendor, and Superlines as the vendee, of said buses; and that ICC had a special
arrangement with Diamond Motors Corporation on the purchase by Superlines of the buses.
On June 1, 1999, the trial court rendered a decision ordering the dismissal of the case and for
ICC to pay damages and litigation expenses to Superlines and Lavides, the decretal portion of
which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered DISMISSING the instant
complaint and ORDERING plaintiff to pay defendants the following:
1. The sum of P150,000.00 as and for attorneys fees;
2. The sum of P300,000.00 as moderate damages;
3. The sum of P50,000.00 as litigation expenses and
4. The costs of suit.
SO ORDERED.16
The trial court found that, as testified to by Lavides, ICC and Superlines forged a consumer loan
agreement and not an amortized commercial loan. It further declared that, as testified to by
Lavides, there was a special arrangement for the purchase by ICC of said buses. The trial court
finally stated that Superlines purchased the buses from ICC, the purchase price therefor
payable in monthly installments. ICC appealed the trial courts decision to the Court of Appeals.
On July 30, 2001, the appellate court rendered a decision reversing the decision of the RTC and
ordering Superlines and Lavides to pay the deficiency claim of ICC. The decretal portion thereof
reads:
In view of the foregoing, it is Our conclusion that plaintiff-appellant is entitled to the deficiency
claim of P5,376,543.96 (Exh. "F-1", p. 155 Record), plus costs of P71,807.22 for the Replevin
Bond (Exh. "H", p. 156, Record) and attorneys fees of P508,000.00 (Exh. "G", p. 156, Record).
WHEREFORE, the appealed Decision is REVERSED and SET ASIDE and a new one is
rendered ordering defendants to pay jointly and severally the sum of P5,956,351.18 to the
plaintiff.
SO ORDERED.17
The Court of Appeals stated that ICC and Superlines entered into an amortized commercial loan
agreement with ICC as creditor-mortgagee and Superlines as debtor-mortgagor, and ordered
Superlines and Lavides to pay to ICC jointly and severally the sum of P5,956,351.18 as
deficiency.18
It further declared that it was Diamond Motors Corporation and not ICC which sold the subject
buses to Superlines. It held that no evidence had been presented by Superlines to show that
ICC bought the said buses from Diamond Motors Corporation under a special arrangement and
that ICC sold the buses to Superlines. The appellate court also ruled that Article 1484(3) is
applicable only where there is vendor-vendee relationship between the parties and since ICC

did not sell the buses to Superlines, the latter cannot invoke said law.
Hence, this petition.
Petitioners contend that the appellate court committed serious errors of law and/or grave abuse
of discretion amounting to excess or lack of jurisdiction:
1. In concluding that Article 1484 (3) of the Civil Code is inapplicable to the instant transaction
between the parties, and in holding that said transaction was an "amortized commercial loan",
the same being patently contrary to the unrebutted evidence as well as the admissions of the
respondents sole witness that the parties may "verbally" agree as regards the financial scheme
applied for and that the chattel mortgage, promissory note and other documents executed in the
case of a "commercial loan" are no different from those documents executed in the case of a
"consumer loan".
2. In concluding that the respondent is in any event entitled to deficiency judgment as it is
deemed to have chosen the remedy of exacting fulfillment of the obligation under paragraph (1)
of Article 1484 of the Civil Code, the same being patently contrary to incontestable fact that
what respondent availed of in the instant case is foreclosure of the chattel mortgage and not the
alternative prayer contained in the relief portion of its complaint. 19
Anent the first assignment of error, petitioners aver that the findings of the Court of Appeals that
the transaction forged by petitioners and private respondent was an amortized commercial loan
and not a consumer loan are belied by the evidence on record, more specifically the testimony
of Lavides and that of respondents witness Leonardo Serrano, Jr. The Promissory Note and
Chattel Mortgage executed by petitioner Superlines and the Continuing Guaranty executed by
both petitioners are not conclusive of the nature of the transaction concluded by them, private
respondent and Diamond Motors Corporation. Petitioners further claim that the appellate court
also ignored the unrebutted testimony of Lavides that respondent and Diamond Motors
Corporation forged a special arrangement under which the latter will expedite the issuance of
the certificates of registration over the buses under the name of Superlines. Petitioners also
argue that the word "vendee" in Article 1484(3) of the New Civil Code is used in its generic term,
and hence, it may mean an assignee or a mortgagee such as respondent.
For its part, respondent contends that the findings and conclusions of the Court of Appeals were
buttressed by the documentary and testimonial evidence on record which should prevail over
those of the trial court:
We do not agree with the lower court that Art. 1484 (3) of the New Civil Code is applicable to the
instant case. DIAMOND is the seller of the five units of buses and not the plaintiff. No
convincing evidence, except the self-serving testimony of defendant Manolet Lavides, was
presented to prove that there was an internal arrangement between the plaintiff, as financing
agent, and Diamond, as seller of the buses. In fact, defendant Lavides admitted under oath that
DIAMOND and plaintiff did not enter into transaction over the sale of the buses (TSN, February
26, 1999, p. 12). The conclusion of the lower court that the parties entered into a financing
scheme covered by Article 1484 (3) of the New Civil Code is therefore unsubstantiated.
The evidence shows that the transaction between the parties was an "amortized commercial
loan" to be paid in installments. Defendants failed to prove that a "special arrangement"
regarding the nature of the transaction was agreed upon between the plaintiff and the
defendants. Aida Albano, plaintiffs employee who allegedly agreed with the request of
defendant Manolet Lavides for a special arrangement, was not presented. It bears emphasizing
that whoever alleges fraud or mistake affecting a transaction must substantiate his allegation,
since it is presumed that a person takes ordinary care of his concerns and private transactions
have been fair and regular (Mangahas vs. CA, 304 SCRA 375). If indeed defendant Manolet
Lavides, a law graduate from a prestigious law school (TSN, February 26, 1999, p. 3) and a
successful businessman for twenty (20) years ...., who admits to having meticulously examined
the subject documents ... intended a financing scheme covered by Art. 1484 of the New Civil
Code, he should have objected to the contents of the documents and incorporated therein his

true intent.20
At the core of petitioners case is their claim that the findings of facts of the Court of Appeals and
its conclusions anchored thereon are belied by the evidence on record in contrast to those of
the trial court. It bears stressing, however, that in a petition for review on certiorari, only
questions of law may be raised in said petition. The jurisdiction of this Court in cases brought to
it from the Court of Appeals is confined to reviewing and reversing the errors of law ascribed to
it, findings of facts being conclusive on this Court. The Court is not tasked to calibrate and
assess the probative weight of evidence adduced by the parties during trial all over again. 21 In
those instances where the findings of facts of the trial court and its conclusions anchored on
said findings are inconsistent with those of the Court of Appeals, this Court does not
automatically delve into the record to determine which of the discordant findings and
conclusions should prevail and to resolve the disputed facts for itself. This Court is tasked to
merely determine which of the findings of the two tribunals are conformable to the facts at
hand.22 So long as the findings of facts of the Court of Appeals are consistent with or are not
palpably contrary to the evidence on record, this Court shall decline to embark on a review on
the probative weight of the evidence of the parties. Indeed, in Tan vs. Lim,23 this Court, citing its
ruling in Hermo vs. Court of Appeals,24 held that it is the findings of the Court of Appeals and not
those of the trial court which are final and conclusive on this Court. The rule is not without
exception. This Court may review the findings of facts of the Court of Appeals and its
conclusions based thereon if the inference made by the appellate court from its findings of facts
is manifestly erroneous, absurd or impossible, or when the judgment of the said court is
premised on a misappreciation of facts. 25
In this case, the findings of facts of the Court of Appeals and its conclusions anchored thereon
are in terra firma, buttressed as they are by the evidence on record. The Court of Appeals
correctly ruled that the findings of facts, deductions, and conclusions of the trial court are not
warranted by the evidence on record.
Petitioners failed to adduce a preponderance of evidence to prove that respondents and
Diamond Motors Corporation entered into a special arrangement relative to the issuance of
certificates of registration over the buses under the name of petitioner Superlines. Petitioners
were also unable to prove that respondent purchased from Diamond Motors Corporation the
new buses. In contrast, the vehicle invoices of Diamond Motors Corporation 26 irrefragably show
that it sold the said buses to petitioner Superlines. The net proceeds of the loan were remitted
by respondent to petitioner Superlines and the latter remitted the same to Diamond Motors
Corporation in payment of the purchase price of the buses. In fine, respondent and Diamond
Motors Corporation had no direct business transactions relative to the purchase of the buses
and the payment of the purchase price thereof.
As aptly observed by the Court of Appeals, petitioner Lavides is a graduate of the Ateneo de
Manila University School of Law. He had been in business for twenty years or so. It is incredible
that petitioner Superlines through petitioner Lavides never required respondent and Diamond
Motors Corporation to execute a deed evidencing their special agreement or arrangement if
indeed they had one.
The trial court indulged in a non sequitur when it quoted part of the testimony of Leonardo
Serrano, Jr. out of context and used it as anchor for its finding that respondent and Diamond
Motors Corporation forged a special arrangement. The testimony of Leonardo Serrano, Jr. is as
follows:
ATTY. FABIE
Q Now, on page 12 of the transcript of stenographic notes of October 9, 1998, to the question of
Atty. Agcaoili, the question is this and I quote:
Q - Now, after that visit to the office of Superlines Inc. in Atimonan, Quezon what other
circumstances or events transpired in connection with the evaluation or approval of the loan of
the defendants Superlines?"

And your answer was this:

A - The regular paper requirements, meaning the way the loan proposal and the approval report
inclusive of credit showing credit checking was presented for approval by our Executive
Committee."
ATTY. FABIE
What is this regular papers requirement you are referring to, Mr. Witness?
WITNESS
A Those papers that are presented to the Executive Committee, Sir.
ATTY. FABIE
Q Papers that are presented to the Executive Committee?
WITNESS
A This will include evaluation report of the corporations financial statement credit checking from
his creditors and this will include evidence of the collaterals being presented for the loan, Sir.
ATTY. FABIE
Q In this particular case of Superlines Transportation Company, those requirements were
complied with, Mr. Witness?
WITNESS
A Yes, Sir.
ATTY. FABIE
Q By way, in consumer loan, these papers are practically the same, am I correct, Mr. Witness?
WITNESS
A In consumer loan, sometimes we have additional requirements, Sir.
ATTY. FABIE
Q What is that, Mr. Witness?
WITNESS
A Because they are individual applicants, we require them to submit their certificate of
employment with the corresponding amount of their salary, Sir.
ATTY. FABIE
Q You mean to say that consumer loan are specifically for individual and entities are not
supposed to apply in consumer loans, is that what you mean, Mr. Witness?
WITNESS
A As a matter of practice, we classify them as consumer loan, loans for individuals, Sir.
ATTY. FABIE
Q For individuals only?
WITNESS
A Yes, sir.
ATTY. FABIE
Q So, you did not extend consumer loans to corporations other than individuals, Mr. Witness?
WITNESS
A For companies or corporations, we classified them as commercial loan already, Sir.
ATTY. FABIE
Q Although the scheme adopted on both loans are the same or would be the same, Mr.
Witness?
WITNESS
A In consumer loan, Sir, usually it is for purposes of buying a car or a motor vehicle, Sir.
ATTY. FABIE
Q That is the normal practice, Mr. Witness?
WITNESS
A Yes, Sir. That is the normal practice.
ATTY. FABIE
Q But arrangement can be made by your company regarding the nature of the transaction, am I

correct? Specific arrangement?

WITNESS
A What do you mean?
ATTY. FABIE
Q That you may depart from certain requirements between your company and the applicant?
Mr. Witness?
WITNESS
A When the company ......
ATTY. FABIE
Q In special cases?
WITNESS
A When the company is presented with a loan proposal, we require them to submit documents
depending on the loan proposal, Sir.
ATTY. FABIE
Q Now, did Superlines Transportation Company or Mr. Lavides present to you a loan proposal
and where is that now, Mr. Witness?
WITNESS
A The loan proposal of Mr. Lavides, Mr. Witness?
ATTY. FABIE
Q Yes, in writing?
WITNESS
A No, not in writing?
ATTY. FABIE
Q No written loan proposal, Mr. Witness?
WITNESS
A It was verbally told to us the purpose of his loan, Sir.
ATTY. FABIE
Q Now, is that normal in your corporation, Mr. Witness?
WITNESS
A In the practice?
ATTY. FABIE
Q I am asking you whether that is normal in your corporation that you do not require any written
loan proposal from the applicants, Mr. Witness?
WITNESS
A We do not, Sir.
ATTY. FABIE
Q Even in consumer loan, Mr. Witness?
WITNESS
A We only require when the consumer or individual is applying. Then we require him to submit
the application form.
ATTY. FABIE
Q So, there is an application form, Mr. Witness?
WITNESS
A For consumer loan, yes.
ATTY. FABIE
Q And in commercial loan, you dont require the applicant to submit a written loan proposal, Mr.
Witness?
WITNESS
A As a matter of (loan) marketing consideration, anybody who wants ....
ATTY. FABIE
Q I am asking you whether that is normal in your operation like Superlines?

WITNESS
A This .....
ATTY. AGCAOILI
Already answered, Your Honor.
ATTY. FABIE
I am asking him now to specific, Your Honor.
COURT
Witness may answer.
WITNESS
A That is not normal. Sorry. That is normal. We do not require them. That is the regular practice.
ATTY. FABIE
Q And why not?
ATTY. AGCAOILI
Objection, misleading. It was already answered that that was the normal practice, Your Honor.
ATTY. FABIE
Q Why do you not require the applicants to submit papers or written loan proposal, Mr.
Witness?
WITNESS
A Because in our business marketing consideration, we finance companies after evaluation of a
particular account and if this account is credit worthy, we sometimes do away with it, Sir.
ATTY. FABIE
Q So, what is normal is that you ask for written loan proposal and what is sometimes not normal
is that you do not require them to submit any loan proposal, Mr. Witness?
WITNESS
A We....
ATTY. AGCAOILI
I think counsel is already (arguing) with the witness, Your Honor. The question has been asked
several times and the witness consistently answered in the same fashion.
ATTY. FABIE
The Court will know ....
COURT
The answer he gave was that with marketing considerations, we do not require papers in
consumer loan because the client is credit worthy risk. Sometimes we do not require
submission of papers anymore. That is the answer. Alright, proceed.
ATTY. FABIE
I think that is all for the witness, Your Honor.27
Leonardo Serrano, Jr. never testified that respondent and Diamond Motors Corporation had a
special arrangement relative to the registration of the new buses. The mere admission of the
witness that respondent in the course of its business transactions allowed special arrangements
does not constitute proof that it in fact had a special arrangement with Diamond Motors
Corporation relative to the registration of the new buses.
The evidence on record shows that under the Promissory Note, Chattel Mortgage and
Continuing Guaranty, respondent was the creditor-mortgagee of petitioner Superlines and not
the vendor of the new buses. Hence, petitioners cannot find refuge in Article 1484(3) of the New
Civil Code. As correctly held by the Court of Appeals, what should apply was the Chattel
Mortgage executed by petitioner Superlines and respondent in relation to the Chattel Mortgage
Law.28 This Court had consistently ruled that if in an extra-judicial foreclosure of a chattel
mortgage a deficiency exists, an independent civil action may be instituted for the recovery of
said deficiency. To deny the mortgagee the right to maintain an action to recover the deficiency
after foreclosure of the chattel mortgage would be to overlook the fact that the chattel mortgage
is only given as security and not as payment for the debt in case of failure of payment. 29 Both

the Chattel Mortgage Law and Act 3135 governing extra-judicial foreclosure of real estate
mortgage, do not contain any provision, expressly or impliedly, precluding the mortgagee from
recovering deficiency of the principal obligation.
In a case of recent vintage, this Court held that if the proceeds of the sale are insufficient to
cover the debt in an extra-judicial foreclosure of the mortgage, the mortgagee is still entitled to
claim the deficiency from the debtor:
To begin with, it is settled that if the proceeds of the sale are insufficient to cover the debt in an
extrajudicial foreclosure of the mortgage, the mortgagee is entitled to claim the deficiency from
the debtor. For when the legislature intends to deny the right of a creditor to sue for any
deficiency resulting from foreclosure of security given to guarantee an obligation it expressly
provides as in the case of pledges [Civil Code, Art. 2115] and in chattel mortgages, while silent
as to the mortgagees right to recover, does not, on the other hand, prohibit recovery of
deficiency. Accordingly, it has been held that a deficiency claim arising from the extrajudicial
foreclosure is allowed.30
In the case of PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals,31 this Court declared
that under Section 14 of the Chattel Mortgage Law, the mortgagor is entitled to recover the
balance of the proceeds, upon satisfaction of the principal obligation and costs, thus there is a
corollary obligation on the part of the debtor-mortgagor to pay the deficiency in case of a
reduction in the price at public auction.
In fine then, the Court of Appeals correctly ruled that respondent is entitled to a deficiency
judgment against the petitioners.
IN LIGHT OF THE FOREGOING, the petition is DENIED. The Decision of the Court of Appeals
dated July 30, 2001 appealed from is AFFIRMED in toto. With costs against petitioners.
SO ORDERED.
G.R. No. 147950
December 11, 2003
CALIFORNIA BUS LINES, INC., petitioner,
vs.
STATE INVESTMENT HOUSE, INC., respondent.
DECISION
QUISUMBING, J.:
In this petition for review, California Bus Lines, Inc., assails the decision, 1 dated April 17, 2001,
of the Court of Appeals in CA-G.R. CV No. 52667, reversing the judgment 2, dated June 3, 1993,
of the Regional Trial Court of Manila, Branch 13, in Civil Case No. 84-28505 entitled State
Investment House, Inc. v. California Bus Lines, Inc., for collection of a sum of money. The Court
of Appeals held petitioner California Bus Lines, Inc., liable for the value of five promissory notes
assigned to respondent State Investment House, Inc.
The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for financial
assistance from respondent State Investment House, Inc. (hereafter SIHI), a domestic
corporation engaged in the business of quasi-banking. SIHI agreed to extend a credit line to
Delta for P25,000,000.00 in three separate credit agreements dated May 11, June 19, and
August 22, 1979.3 On several occasions, Delta availed of the credit line by discounting with SIHI
some of its receivables, which evidence actual sales of Deltas vehicles. Delta eventually
became indebted to SIHI to the tune of P24,010,269.32.4
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI),
purchased on installment basis 35 units of M.A.N. Diesel Buses and two (2) units of M.A.N.
Diesel Conversion Engines from Delta. To secure the payment of the purchase price of the 35
buses, CBLI and its president, Mr. Dionisio O. Llamas, executed sixteen (16) promissory notes
in favor of Delta on January 23 and April 25, 1980. 5 In each promissory note, CBLI promised to
pay Delta or order, P2,314,000 payable in 60 monthly installments starting August 31, 1980,

with interest at 14% per annum. CBLI further promised to pay the holder of the said notes 25%
of the amount due on the same as attorneys fees and expenses of collection, whether actually
incurred or not, in case of judicial proceedings to enforce collection. In addition to the notes,
CBLI executed chattel mortgages over the 35 buses in Deltas favor.
When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta
on October 7, 1981, to cover its overdue obligations under the promissory notes. 6 The
restructuring agreement provided for a new schedule of payments of CBLIs past due
installments, extending the period to pay, and stipulating daily remittance instead of the
previously agreed monthly remittance of payments. In case of default, Delta would have the
authority to take over the management and operations of CBLI until CBLI and/or its president,
Mr. Dionisio Llamas, remitted and/or updated CBLIs past due account. CBLI and Delta also
increased the interest rate to 16% p.a. and added a documentation fee of 2% p.a. and a 4% p.a.
restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of Receivables 7 in
favor of SIHI as security for the payment of its obligations to SIHI per the credit agreements. In
view of Deltas failure to pay, the loan agreements were restructured under a Memorandum of
Agreement dated March 31, 1982. 8 Delta obligated itself to pay a fixed monthly amortization of
P400,000 to SIHI and to discount with SIHI P8,000,000 worth of receivables with the
understanding that SIHI shall apply the proceeds against Deltas overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten
CBLI with the enforcement of the management takeover clause. To pre-empt the take-over,
CBLI filed on May 3, 1982, a complaint for injunction 9, docketed as Civil Case No. 0023-P, with
the Court of First Instance of Rizal, Pasay City, (now Regional Trial Court of Pasay City). In due
time, Delta filed its amended answer with applications for the issuance of a writ of preliminary
mandatory injunction to enforce the management takeover clause and a writ of preliminary
attachment over the buses it sold to CBLI. 10 On December 27, 1982,11 the trial court granted
Deltas prayer for issuance of a writ of preliminary mandatory injunction and preliminary
attachment on account of the fraudulent disposition by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of
Sale12 assigning to SIHI five (5) of the sixteen (16) promissory notes 13 from California Bus Lines,
Inc. At the time of assignment, these five promissory notes, identified and numbered as 80-53,
80-54, 80-55, 80-56, and 80-57, had a total value of P16,152,819.80 inclusive of interest at 14%
per annum.
SIHI subsequently sent a demand letter dated December 13, 1983, 14 to CBLI requiring CBLI to
remit the payments due on the five promissory notes directly to it. CBLI replied informing SIHI of
Civil Case No. 0023-P and of the fact that Delta had taken over its management and
operations.15
As regards Deltas remaining obligation to SIHI, Delta offered its available bus units, valued at
P27,067,162.22, as payment in kind.16 On December 29, 1983, SIHI accepted Deltas offer, and
Delta transferred the ownership of its available buses to SIHI, which in turn acknowledged full
payment of Deltas remaining obligation. 17 When SIHI was unable to take possession of the
buses, SIHI filed a petition for recovery of possession with prayer for issuance of a writ of
replevin before the RTC of Manila, Branch 6, docketed as Civil Case No. 84-23019. The Manila
RTC issued a writ of replevin and SIHI was able to take possession of 17 bus units belonging to
Delta. SIHI applied the proceeds from the sale of the said 17 buses amounting to
P12,870,526.98 to Deltas outstanding obligation. Deltas obligation to SIHI was thus reduced to
P20,061,898.97. On December 5, 1984, Branch 6 of the RTC of Manila rendered judgment in
Civil Case No. 84-23019 ordering Delta to pay SIHI this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July 24, 1984, 18 in Civil
Case No. 0023-P, the injunction case before the RTC of Pasay. CBLI agreed that Delta would
exercise its right to extrajudicially foreclose on the chattel mortgages over the 35 bus units. The

RTC of Pasay approved this compromise agreement the following day, July 25, 1984. 19
Following this, CBLI vehemently refused to pay SIHI the value of the five promissory notes,
contending that the compromise agreement was in full settlement of all its obligations to Delta
including its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505, against
CBLI in the Regional Trial Court of Manila, Branch 34, to collect on the five (5) promissory notes
with interest at 14% p.a. SIHI also prayed for the issuance of a writ of preliminary attachment
against the properties of CBLI.20
On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages
pursuant to its compromise agreement with CBLI. On January 2, 1985, Delta filed in the RTC of
Pasay a motion for execution of the judgment based on the compromise agreement. 21 The RTC
of Pasay granted this motion the following day.22
In view of Deltas petition and motion for execution per the judgment of compromise, the RTC of
Manila granted in Civil Case No. 84-28505 SIHIs application for preliminary attachment on
January 4, 1985.23 Consequently, SIHI was able to attach and physically take possession of
thirty-two (32) buses belonging to CBLI.24 However, acting on CBLIs motion to quash the writ of
preliminary attachment, the same court resolved on January 15, 1986, 25 to discharge the writ of
preliminary attachment. SIHI assailed the discharge of the writ before the Intermediate Appellate
Court (now Court of Appeals) in a petition for certiorari and prohibition, docketed as CA-G.R. SP
No. 08378. On July 31, 1987, the Court of Appeals granted SIHIs petition in CA-GR SP No.
08378 and ruled that the writ of preliminary attachment issued by Branch 34 of the RTC Manila
in Civil Case No. 84-28505 should stay.26 The decision of the Court of Appeals attained finality
on August 22, 1987.27
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff of Pasay
City conducted a public auction and issued a certificate of sheriffs sale to Delta on April 2, 1987,
attesting to the fact that Delta bought 14 of the 35 buses for P3,920,000.28 On April 7, 1987, the
sheriff of Manila, by virtue of the writ of execution dated March 27, 1987, issued by Branch 6 of
the RTC of Manila in Civil Case No. 84-23019, sold the same 14 buses at public auction in
partial satisfaction of the judgment SIHI obtained against Delta in Civil Case No. 84-23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC of Manila
in view of the retirement of the presiding judge of Branch 34. Subsequently, SIHI moved to sell
the sixteen (16) buses of CBLI which had previously been attached by the sheriff in Civil Case
No. 84-28505 pursuant to the January 4, 1985, Order of the RTC of Manila. 29 SIHIs motion was
granted on December 16, 1987. 30 On November 29, 1988, however, SIHI filed an urgent exparte motion to amend this order claiming that through inadvertence and excusable negligence
of its new counsel, it made a mistake in the list of buses in the Motion to Sell Attached
Properties it had earlier filed. 31 SIHI explained that 14 of the buses listed had already been sold
to Delta on April 2, 1987, by virtue of the January 3, 1985 Order of the RTC of Pasay, and that
two of the buses listed had been released to third party, claimant Pilipinas Bank, by Order dated
September 16, 198732 of Branch 13 of the RTC of Manila.
CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3, 1989, 33 Branch 13 of
the RTC of Manila denied SIHIs urgent motion to allow the sale of the 16 buses listed in its
motion to amend. The trial court ruled that the best interest of the parties might be better served
by denying further sales of the buses and to go direct to the trial of the case on the merits. 34
After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993, discharging
CBLI from liability on the five promissory notes. The trial court likewise favorably ruled on CBLIs
compulsory counterclaim. The trial court directed SIHI to return the 16 buses or to pay CBLI
P4,000,000 representing the value of the seized buses, with interest at 12% p.a. to begin from
January 11, 1985, the date SIHI seized the buses, until payment is made. In ruling against SIHI,
the trial court held that the restructuring agreement dated October 7, 1981, between Delta and
CBLI novated the five promissory notes; hence, at the time Delta assigned the five promissory

notes to SIHI, the notes were already merged in the restructuring agreement and cannot be
enforced against CBLI.
SIHI appealed the decision to the Court of Appeals. The case was docketed as CA-G.R. CV No.
52667. On April 17, 2001, the Court of Appeals decided CA-G.R. CV No. 52667 in this manner:
WHEREFORE, based on the foregoing premises and finding the appeal to be meritorious, We
find defendant-appellee CBLI liable for the value of the five (5) promissory notes subject of the
complaint a quo less the proceeds from the attached sixteen (16) buses. The award of
attorneys fees and costs is eliminated. The appealed decision is hereby REVERSED. No costs.
SO ORDERED.35
Hence, this appeal where CBLI contends that
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE RESTRUCTURING
AGREEMENT BETWEEN DELTA AND THE PETITIONER DID NOT SUBSTANTIALLY NOVATE
THE TERMS OF THE FIVE PROMISSORY NOTES.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE AGREEMENT
BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY CASE DID NOT SUPERSEDE
AND DISCHARGE THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING VALIDITY OF THE
PRELIMINARY
ATTACHMENT
AND
EXONERATING
THE
RESPONDENT
OF
MALEFACTIONS IN PRESERVING AND ASSERTING ITS RIGHTS THEREUNDER. 36
Essentially, the issues are (1) whether the Restructuring Agreement dated October 7, 1981,
between petitioner CBLI and Delta Motors, Corp. novated the five promissory notes Delta
Motors, Corp. assigned to respondent SIHI, and (2) whether the compromise agreement in Civil
Case No. 0023-P superseded and/or discharged the subject five promissory notes. The issues
being interrelated, they shall be jointly discussed.
CBLI first contends that the Restructuring Agreement did not merely change the incidental
elements of the obligation under all sixteen (16) promissory notes, but it also increased the
obligations of CBLI with the addition of new obligations that were incompatible with the old
obligations in the said notes.37 CBLI adds that even if the restructuring agreement did not totally
extinguish the obligations under the sixteen (16) promissory notes, the July 24, 1984,
compromise agreement executed in Civil Case No. 0023-P did. 38 CBLI cites paragraph 5 of the
compromise agreement which states that the agreement between it and CBLI was in "full and
final settlement, adjudication and termination of all their rights and obligations as of the date of
(the) agreement, and of the issues in (the) case." According to CBLI, inasmuch as the five
promissory notes were subject matters of the Civil Case No. 0023-P, the decision approving the
compromise agreement operated as res judicata in the present case. 39
Novation has been defined as the extinguishment of an obligation by the substitution or change
of the obligation by a subsequent one which terminates the first, either by changing the object or
principal conditions, or by substituting the person of the debtor, or subrogating a third person in
the rights of the creditor.40
Novation, in its broad concept, may either be extinctive or modificatory.41 It is extinctive when an
old obligation is terminated by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement.42 An extinctive novation results either by changing
the object or principal conditions (objective or real), or by substituting the person of the debtor or
subrogating a third person in the rights of the creditor (subjective or personal). 43 Novation has
two functions: one to extinguish an existing obligation, the other to substitute a new one in its
place.44 For novation to take place, four essential requisites have to be met, namely, (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation. 45
Novation is never presumed,46 and the animus novandi, whether totally or partially, must appear
by express agreement of the parties, or by their acts that are too clear and unequivocal to be

mistaken.47
The extinguishment of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly.48 The term "expressly" means that the
contracting parties incontrovertibly disclose that their object in executing the new contract is to
extinguish the old one. 49 Upon the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an incompatibility between the two
contracts.50 While there is really no hard and fast rule to determine what might constitute to be a
sufficient change that can bring about novation, the touchstone for contrariety, however, would
be an irreconcilable incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and thereby produce
the effect of extinguishing an obligation by another which substitutes the same. The first is when
novation has been explicitly stated and declared in unequivocal terms. The second is when the
old and the new obligations are incompatible on every point. The test of incompatibility is
whether the two obligations can stand together, each one having its independent existence. 51 If
they cannot, they are incompatible and the latter obligation novates the first. 52 Corollarily,
changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation, such as its
object, cause or principal conditions thereof; otherwise, the change would be merely
modificatory in nature and insufficient to extinguish the original obligation. 53
The necessity to prove the foregoing by clear and convincing evidence is accentuated where
the obligation of the debtor invoking the defense of novation has already matured. 54
With respect to obligations to pay a sum of money, this Court has consistently applied the wellsettled rule that the obligation is not novated by an instrument that expressly recognizes the old,
changes only the terms of payment, and adds other obligations not incompatible with the old
ones, or where the new contract merely supplements the old one. 55
In Inchausti & Co. v. Yulo56 this Court held that an obligation to pay a sum of money is not
novated in a new instrument wherein the old is ratified, by changing only the term of payment
and adding other obligations not incompatible with the old one. In Tible v. Aquino 57 and Pascual
v. Lacsamana58 this Court declared that it is well settled that a mere extension of payment and
the addition of another obligation not incompatible with the old one is not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The restructuring
agreement between Delta and CBLI executed on October 7, 1981, shows that the parties did
not expressly stipulate that the restructuring agreement novated the promissory notes. Absent
an unequivocal declaration of extinguishment of the pre-existing obligation, only a showing of
complete incompatibility between the old and the new obligation would sustain a finding of
novation by implication.59 However, our review of its terms yields no incompatibility between the
promissory notes and the restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on September 13, 1983, contained the
following common stipulations:
1. They were payable in 60 monthly installments up to July 31, 1985;
2. Interest: 14% per annum;
3. Failure to pay any of the installments would render the entire remaining balance due and
payable at the option of the holder of the notes;
4. In case of judicial collection on the notes, the maker (CBLI) and co-maker (its president, Mr.
Dionisio O. Llamas, Jr) were solidarily liable of attorneys fees and expenses of 25% of the
amount due in addition to the costs of suit.
The restructuring agreement, for its part, had the following provisions:
WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory
notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 P1,411,434.00

b. PN Nos. 52 to 57 (24 units)

Past Due as of September 30, 1981 P1,105,353.00
WHEREAS, the parties agreed to restructure the above-mentioned past due installments under
the following terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months
PN Nos. 52 to 57 (24 units) 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereby
agree and covenant as follows:
1. That the past due installment referred to above plus the current and/or falling due
amortization as of October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57 shall be
paid by CBL and/or LLAMAS in accordance with the following schedule of payments:
Daily payments of P11,000.00 from<>October 1 to December 31, 1981
Daily payments of P12,000.00 from<>January 1, 1982 to March 31, 1982
Daily payments of P13,000.00 from<>April 1, 1982 to June 30, 1982
Daily payments of P14,000.00 from<>July 1, 1982 to September 30, 1982
Daily payments of P15,000.00 from<>October 1, 1982 to December 31, 1982
Daily payments of P16,000.00 from<>January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from<>July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash
payments due to DMC in accordance with the schedule in paragraph 1. DMC may send a
collector to receive the amount due at CBLs premises. All delayed remittances shall be charged
additional 2% penalty interest per month.
3. All payments shall be applied to amortizations and penalties due in accordance with
paragraph of the restructured past due installments above mentioned and PN Nos. 16 to 26 and
52 to 57.
4. DMC may at anytime assign and/or send its representatives to monitor the operations of CBL
pertaining to the financial and field operations and service and maintenance matters of M.A.N.
units. Records needed by the DMC representatives in monitoring said operations shall be made
available by CBL and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to 57, CBL or
LLAMAS shall remit in lump sum whatever balance is left after deducting all payments made
from what is due and payable to DMC in accordance with paragraph 1 of this agreement and
PN Nos. 16 to 26 and 52 to 57.
6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon and the total
accumulated unremitted amount has reached and (sic) equivalent of Sixty (60) days, DMC and
Silverio shall exercise any or all of the following options:
(a) The whole sum remaining then unpaid plus 2% penalty per month and 16% interest per
annum on total past due installments will immediately become due and payable. In the event of
judicial proceedings to enforce collection, CBL and LLAMAS will pay to DMC an additional sum
equivalent to 25% of the amount due for attorneys fees and expenses of collection, whether
actually incurred or not, in addition to the cost of suit;
(b) To enforce in accordance with law, their rights under the Chattel Mortgage over various
M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and 80-15, and/or
(c) To take over management and operations of CBL until such time that CBL and/or LLAMAS
have remitted and/or updated their past due account with DMC.
7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the M.A.N.
Diesel Buses and shall make available to CBL at the price prevailing at the time of purchase, an

inventory of spare parts consisting of at least ninety (90%) percent of the needs of CBL based
on a moving 6-month requirement to be prepared and submitted by CBL, and acceptable to
DMC, within the first week of each month.
8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN
Nos. 16 to 26 and 52 to 57 shall continue to govern the relationship between the parties and
that the Chattel Mortgage over various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 8041, 80-42, 80-43, 80-44 and CM No. 80-15 as well as the Deed of Pledge executed by Mr.
Llamas shall continue to secure the obligation until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public
Alberto G. Doller and to instruct him not to proceed with the public auction sale of the shares of
stock of CBL subject-matter of the Deed of Pledge of Shares. LLAMAS, on the other hand,
undertakes to move for the immediate dismissal of Civil Case No. 9460-P entitled "Dionisio O.
Llamas vs. Alberto G. Doller, et al.", Court of First Instance of Pasay, Branch XXIX. 60
It is clear from the foregoing that the restructuring agreement, instead of containing provisions
"absolutely incompatible" with the obligations of the judgment, expressly ratifies such obligations
in paragraph 8 and contains provisions for satisfying them. There was no change in the object of
the prior obligations. The restructuring agreement merely provided for a new schedule of
payments and additional security in paragraph 6 (c) giving Delta authority to take over the
management and operations of CBLI in case CBLI fails to pay installments equivalent to 60
days. Where the parties to the new obligation expressly recognize the continuing existence and
validity of the old one, there can be no novation. 61 Moreover, this Court has ruled that an
agreement subsequently executed between a seller and a buyer that provided for a different
schedule and manner of payment, to restructure the mode of payments by the buyer so that it
could settle its outstanding obligation in spite of its delinquency in payment, is not tantamount to
novation. 62
The addition of other obligations likewise did not extinguish the promissory notes. In Young v.
CA63, this Court ruled that a change in the incidental elements of, or an addition of such element
to, an obligation, unless otherwise expressed by the parties will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory notes.
Neither is there merit in CBLIs argument that the compromise agreement dated July 24, 1984,
in Civil Case No. 0023-P superseded and/or discharged the five promissory notes. Both Delta
and CBLI cannot deny that the five promissory notes were no longer subject of Civil Case No.
0023-P when they entered into the compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no more right to
compromise the same. Deltas limited authority to collect for SIHI stipulated in the September
13, 1985, Deed of Sale cannot be construed to include the power to compromise CBLIs
obligations in the said promissory notes. An authority to compromise, by express provision of
Article 187864 of the Civil Code, requires a special power of attorney, which is not present in this
case. Incidentally, Deltas authority to collect in behalf of SIHI was, by express provision of the
Continuing Deed of Assignment,65 automatically revoked when SIHI opted to collect directly from
CBLI.
As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring CBLI to remit the
payments directly to SIHI effectively revoked Deltas limited right to collect in behalf of SIHI. This
should have dispelled CBLIs erroneous notion that Delta was acting in behalf of SIHI, with
authority to compromise the five promissory notes.
But more importantly, the compromise agreement itself provided that it covered the rights and
obligations only of Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as the
new creditor of CBLI in the subject promissory notes. CBLI and Delta stipulated in paragraph 5
of the agreement that:
5. This COMPROMISE AGREEMENT constitutes the entire understanding by and between the
plaintiffs and the defendants as well as their lawyers, and operates as full and final settlement,

adjudication and termination of all their rights and obligations as of the date of this agreement,
and of the issues in this case.66
Even in the absence of such a provision, the compromise agreement still cannot bind SIHI
under the settled rule that a compromise agreement determines the rights and obligations of
only the parties to it.67 Therefore, we hold that the compromise agreement covered the rights
and obligations only of Delta and CBLI and only with respect to the eleven (11) other promissory
notes that remained with Delta.
CBLI next maintains that SIHI is estopped from questioning the compromise agreement
because SIHI failed to intervene in Civil Case No. 0023-P after CBLI informed it of the takeover
by Delta of CBLIs management and operations and the resultant impossibility for CBLI to
comply with its obligations in the subject promissory notes. CBLI also adds that SIHIs failure to
intervene in Civil Case No. 0023-P is proof that Delta continued to act in SIHIs behalf in
effecting collection under the notes.
The contention is untenable. As a result of the assignment, Delta relinquished all its rights to the
subject promissory notes in favor of SIHI. This had the effect of separating the five promissory
notes from the 16 promissory notes subject of Civil Case No. 0023-P. From that time, CBLIs
obligations to SIHI embodied in the five promissory notes became separate and distinct from
CBLIs obligations in eleven (11) other promissory notes that remained with Delta. Thus, any
breach of these independent obligations gives rise to a separate cause of action in favor of SIHI
against CBLI. Considering that Deltas assignment to SIHI of these five promissory notes had
the effect of removing the said notes from Civil Case No. 0023-P, there was no reason for SIHI
to intervene in the said case. SIHI did not have any interest to protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and permissive. 68 Notably, Section 2,69
Rule 12 of the then 1988 Revised Rules of Procedure uses the word may in defining the right
to intervene. The present rules maintain the permissive nature of intervention in Section 1, Rule
19 of the 1997 Rules of Civil Procedure, which provides as follows:
SEC. 1. Who may intervene.A person who has a legal interest in the matter in litigation, or in
the success of either of the parties, or an interest against both, or is so situated as to be
adversely affected by a distribution or other disposition of property in the custody of the court or
of an officer thereof may, with leave of court, be allowed to intervene in the action. The court
shall consider whether or not the intervention will unduly delay or prejudice the adjudication of
the rights of the original parties, and whether or not the intervenor's rights may be fully protected
in a separate proceeding.70
Also, recall that Delta transferred the five promissory notes to SIHI on September 13, 1983
while Civil Case No. 0023-P was pending. Then as now, the rule in case of transfer of interest
pendente lite is that the action may be continued by or against the original party unless the
court, upon motion, directs the person to whom the interest is transferred to be substituted in
the action or joined with the original party.71 The non-inclusion of a necessary party does not
prevent the court from proceeding in the action, and the judgment rendered therein shall be
without prejudice to the rights of such necessary party.72
In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P in another court
does not amount to an estoppel that may prevent SIHI from instituting a separate and
independent action of its own. 73 This is especially so since it does not appear that a separate
proceeding would be inadequate to protect fully SIHIs rights. 74 Indeed, SIHIs refusal to
intervene is precisely because it considered that its rights would be better protected in a
separate and independent suit.
The judgment on compromise in Civil Case No. 0023-P did not operate as res judicata to
prevent SIHI from prosecuting its claims in the present case. As previously discussed, the
compromise agreement and the judgment on compromise in Civil Case No. 0023-P covered
only Delta and CBLI and their respective rights under the 11 promissory notes not assigned to
SIHI. In contrast, the instant case involves SIHI and CBLI and the five promissory notes. There

being no identity of parties and subject matter, there is no res judicata.

CBLI maintains, however, that in any event, recovery under the subject promissory notes is no
longer allowed by Article 1484(3)75 of the Civil Code, which prohibits a creditor from suing for the
deficiency after it has foreclosed on the chattel mortgages. SIHI, being the successor-in-interest
of Delta, is no longer allowed to recover on the promissory notes given as security for the
purchase price of the 35 buses because Delta had already extrajudicially foreclosed on the
chattel mortgages over the said buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial foreclosure of the
chattel mortgages Delta effected cannot prejudice SIHIs rights. As stated earlier, the
assignment of the five notes operated to create a separate and independent obligation on the
part of CBLI to SIHI, distinct and separate from CBLIs obligations to Delta. And since there was
a previous revocation of Deltas authority to collect for SIHI, Delta was no longer SIHIs
collecting agent. CBLI, in turn, knew of the assignment and Deltas lack of authority to
compromise the subject notes, yet it readily agreed to the foreclosure. To sanction CBLIs
argument and to apply Article 1484 (3) to this case would work injustice to SIHI by depriving it of
its right to collect against CBLI who has not paid its obligations.
That SIHI later on levied on execution and acquired in the ensuing public sale in Civil Case No.
84-23019 the buses Delta earlier extrajudicially foreclosed on April 2, 1987, in Civil Case No.
0023-P, did not operate to render the compromise agreement and the foreclosure binding on
SIHI. At the time SIHI effected the levy on execution to satisfy its judgment credit against Delta
in Civil Case No. 84-23019, the said buses already pertained to Delta by virtue of the April 2,
1987 auction sale. CBLI no longer had any interest in the said buses. 1wphi1 Under the
circumstances, we cannot see how SIHIs belated acquisition of the foreclosed buses operates
to hold the compromise agreementand consequently Article 1484(3)applicable to SIHI as
CBLI contends. CBLIs last contention must, therefore, fail. We hold that the writ of execution to
enforce the judgment of compromise in Civil Case No. 0023-P and the foreclosure sale of April
2, 1987, done pursuant to the said writ of execution affected only the eleven (11) other
promissory notes covered by the compromise agreement and the judgment on compromise in
Civil Case No. 0023-P.
In support of its third assignment of error, CBLI maintains that there was no basis for SIHIs
application for a writ of preliminary attachment. 76 According to CBLI, it committed no fraud in
contracting its obligation under the five promissory notes because it was financially sound when
it issued the said notes on April 25, 1980. 77 CBLI also asserts that at no time did it falsely
represent to SIHI that it would be able to pay its obligations under the five promissory notes. 78
According to CBLI, it was not guilty of fraudulent concealment, removal, or disposal, or of
fraudulent intent to conceal, remove, or dispose of its properties to defraud its creditors; 79 and
that SIHIs bare allegations on this matter were insufficient for the preliminary attachment of
CBLIs properties.80
The question whether the attachment of the sixteen (16) buses was valid and in accordance
with law, however, has already been resolved with finality by the Court of Appeals in CA-G.R.
SP No. 08376. In its July 31, 1987, decision, the Court of Appeals upheld the legality of the writ
of preliminary attachment SIHI obtained and ruled that the trial court judge acted with grave
abuse of discretion in discharging the writ of attachment despite the clear presence of a
determined scheme on the part of CBLI to dispose of its property. Considering that the said
Court of Appeals decision has already attained finality on August 22, 1987, there exists no
reason to resolve this question anew. Reasons of public policy, judicial orderliness, economy
and judicial time and the interests of litigants as well as the peace and order of society, all
require that stability be accorded the solemn and final judgments of courts or tribunals of
competent jurisdiction.81
Finally, in the light of the justness of SIHIs claim against CBLI, we cannot sustain CBLIs

contention that the Court of Appeals erred in dismissing its counterclaim for lost income and the
value of the 16 buses over which SIHI obtained a writ of preliminary attachment. Where the
party who requested the attachment acted in good faith and without malice, the claim for
damages resulting from the attachment of property cannot be sustained. 82
WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No.
52667 is AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to pay respondent
State Investment House, Inc., the value of the five (5) promissory notes subject of the complaint
in Civil Case No. 84-28505 less the proceeds from the sale of the attached sixteen (16) buses.
No pronouncement as to costs.
SO ORDERED.
G.R. No. L-31816
February 15, 1930
RECAREDO F. PANDO, plaintiff-appellee,
vs.
ANTONIO GIMENEZ, ET AL., defendants.
ANTONIO GIMENEZ, appellant.
Harvey and O'Brien and Eugenio Angeles for appellant.Antonio Sanz for appellee.
ROMUALDEZ, J.:
This action was instituted for the purpose of foreclosing a mortgage executed by defendant
Antonio Gimenez. Massy Teague was also impleaded for having purchased at public auction
one of the mortgaged properties.
The answer of the defendant Teague set up a general denial and a special defense, which are
not involved in this appeal.
Defendant Antonio Gimenez also filed a general denial, and raised four special defenses in his
answer, to wit:
As a first special defense said defendant alleges:
1. That on the 27th day of October, 1924, said defendant Gimenez was indebted to the plaintiff
in the sum of P8,000, and to secure the payment of the said amount duly made, executed and
delivered a real estate mortgage in favor of the said plaintiff over the properties and leasehold
rights mentioned in paragraph VIII of the plaintiff's complaint, and which contract of mortgage is
evidenced by the document, Exhibit A attached to the complaint.
2. That owing to the fact that said defendant was leaving the City of Manila in order to attend to
his business in the Province of Cagayan, and at the special instance and request of the herein
plaintiff, said defendant gave to the plaintiff the full control, and complete and absolute
administration of the building and the parcel of land on which said building was erected, situated
in Santa Mesa, District of Santa Mesa, mortgaged to the plaintiff, under the condition that said
plaintiff would attend to the administration, care and preservation of the said building and the
property leased from the Hacienda Tuason on which said building was erected, the payment of
the premium on the insurance of this building, the payment of the taxes might become due on
the said building, the payment to the lessor Hacienda Tuason of the rents of the leased
property, and to collect the rents from the tenants of the said building.
3. That the rents that would be collected from the said building, the plaintiff would apply the
same to the payment of all the expenses necessary for the preservation and maintenance of the
said building, the rents of the leased property, and the balance to be applied in payment on
account of the interest that may become due in favor of the plaintiff under the mortgage.
4. That in accordance with this agreement, the defendant gave, and the plaintiff took absolute
control and possession and entered in the full administration of the said building and land since
October 27, 1924, and up to the present time.
5. That in the course of the administration by the plaintiff of the said building and land leased
from the Hacienda Tuason, said plaintiff failed and neglected to pay to the government of the

City of Manila taxes due for several years on the said building and has also failed and neglected
to pay to the lessor Hacienda Tuason the rents due for several years on the land leased and on
which said building was erected.
6. That by reason of this failure, neglect and abandonment by the plaintiff to pay the taxes due
on the said building, the City of Manila, on November 23, 1926, sold at public auction the said
building was sold for the sum of P244.50, and was bought by the other defendant Massy
Teague, and since that time the said building was lost to the defendant Gimenez.
7. That by reason of the failure, neglect and abandonment of the plaintiff to pay the Hacienda
Tuason the rents due for several years on the leased property on which the building in question
is erected, the said lessor cancelled the contract of lease of the defendant Gimenez, and has
brought a suit against the said defendant Gimenez for desahucio in the municipal court of the
City of Manila.
As a second special defense, alleges that the building which was sold to the defendant Massy
Teague is worth P11,000, and the leasehold right of the defendant which was cancelled by the
Hacienda Tuason as above stated is worth P3,000.
As a third special defense, alleges that by reason of the negligence, failure and abandonment of
the plaintiff to properly administer the building and land in question and to pay the taxes due to
the government and the rents due the lessor Hacienda Tuason, and as a result of which the
defendant Gimenez has been deprived of the building, and his leasehold right was cancelled,
said defendant has suffered irreparable damages in the sum of P14,000.
And as a fourth special defense and by way of counter-claim and set-off against the claim of the
said plaintiff, the defendant Gimenez alleges that he reproduces herein the first three special
defenses heretofore mentioned, and that by reason of the negligent acts committed by the
plaintiff in the administration of the said building and land which caused irreparable damage and
prejudice to the defendant Gimenez, said defendant has suffered damages in the sum of
P14,000.
Wherefore, the defendant Gimenez by the undersigned attorneys, respectfully prays the court to
render judgment in his favor and against the plaintiff, condemning the latter to pay the former
the sum of fourteen thousand pesos (P14,000), as damages suffered by the defendant
Gimenez; and that should this court find that the said defendant Gimenez is liable to pay to
plaintiff any sum of money under the mortgage, that this amount of P14,000 be set-off against
the amount that might rightfully be found by the court to be due and owing by the defendant
Gimenez to plaintiff, and that should there be a difference in favor of the defendant Gimenez
that the plaintiff be condemned to pay to the said defendant Gimenez the amount of such
difference and for the costs of this action; and also asks for such other and further relief as may
be proper and equitable under the premises. (Pages 23, 24, 25, 26 and 27, Bill of Exceptions.)
After trial, the Court of First Instance of Manila rendered a decision, dismissing the counterclaim
presented by the defendant Antonio Gimenez, the dispositive part of which reads as follows:
For the foregoing considerations, the court renders judgment, ordering Antonio Gimenez to pay
Recaredo Pando eight thousand pesos (P8,000), Philippine currency, with annual interest at
twelve per centum from June 1, 1928, until fully paid; two thousand three hundred and forty-four
pesos and sixty centavos (P2,344.60) as accrued interest with legal interest thereon from the
date of the complaint, May 19, 1928, until fully paid; and eight hundred pesos (P800) as the
stipulated attorney's fees, and the costs; all of said sums to be paid within three months from
the date hereof.
Defendant Massy Teague is hereby authorized to pay to the plaintiff the amounts set forth in the
preceding paragraph, if he so desires, in order to obtain the cancellation of the plaintiff's
mortgage, and to acquire the properties of defendant Gimenez free of all liens and
encumbrances, within the same three-month period from the date hereof.
In case neither of the defendants pay to the plaintiff the foregoing amounts within the period
named, the mortgaged properties shall be sold at public auction in accordance with the law, and

from the proceeds of the sale, the aggregate sum of the aforementioned amounts shall be paid
to the plaintiff, and the balance, if any, delivered to defendant Massy Teague, the present owner
of the mortgaged property. (Pages 40 and 41, Bill of Exceptions.)
Antonio Gimenez, defendant, appealed from this decision and now makes the following
assignments of error:
I. The lower court erred in not finding that, after the execution of the contract of mortgage,
Exhibit A, and just before the time said mortgage matured, the appellee and the appellant
entered into an agreement by virtue of which:
(a) The appellee assumed and took over the general administration (administracion directa) of
the house No. 655 Santa Mesa, Manila, with the right to collect the rents of the said house;
(b) But with the duty and obligation, that said appellee should pay the taxes owing or accruing
on the said house to the City of Manila;
(c) Should pay the rentals owing or accruing on the land occupied by said house to the owners
of said land the "Hacienda de Santa Mesa y Diliman", in accordance with the terms of the
contract of lease; and
(d) Should pay all other expenses necessary for the proper preservation and maintenance of
said house, such as repairs and so forth, including the premium of the policy of insurance
thereon and that the balance of said rents should be applied by him toward the liquidation of
interest accruing under the mortgage.
II. The lower court erred in not finding that the appellee violated his duty by neglecting and
failing to pay the taxes on the house No. 655 Santa Mesa, to the Government of the City of
Manila, which became due during the years 1925 and 1926, while said house was under his
general administration, and that by reason of that failure to pay said taxes, said house was sold
by public auction by the City of Manila to satisfy said taxes, and finally adjudicated to the
defendant Massy Teague, the immediate consequence thereof being the loss to the appellant of
all his rights, legal and equitable in the said house.
III. The lower court erred in not finding that the appellant had suffered damages for the loss of
his said house No. 655 Santa Mesa, and that the appellee should be responsible to the
appellant for all damages suffered by him.
IV. The lower court erred in not finding that the appellee violated his duty by neglecting and
failing to pay the rentals for the land occupied by said house No. 655 Santa Mesa, to the
owners thereof, which rentals became due during the years 1925, 1926, 1927 and 1928, while
the said land and house were under his general administration, and that by reason of that failure
to pay said rentals, the owners of the land cancelled the contract of lease of the appellant, the
immediate consequence thereof being that the appellant lost all his rights, use and enjoyment of
said land for the remaining unexpired period of 26 years.
V. The lower court erred in not finding that the appellant had suffered damages for the loss of
his leasehold right, the improvements on the land and the use and enjoyment of said land for
the remaining unexpired period of 26 years, and that the appellee should be responsible to the
appellant for all damages suffered by him.
VI. The lower court erred in not rendering judgment in favor of the appellant and against the
appellee on the counterclaim for the damages suffered by the appellant for the total amount
proven.
VII. The lower court erred in not granting the motion for new trial.
In order to secure the payment of P8,000 which the defendant Gimenez owed the plaintiff, he
mortgaged the house at No. 655 Santa Mesa, Manila, and the leasehold right on the lot upon
which it stands (Exhibit A). It was agreed between them that the plaintiff would collect the rents
of said house, in order to apply them to the payment of interest on the amount of the
indebtedness. This was payable on October 27, 1925, but, in spite of nonpayment, the creditor,
who is the plaintiff herein, did not foreclose the mortgage.
For default in the payment of taxes for the years 1925 and 1926, the house was on November

23, 1926 sold at public auction, and, for failure to exercise the right of legal redemption, the City
of Manila, the attachment creditor and vendor of the property, executed a final deed of sale in
favor of the purchaser, the other defendant Massy Teague. Furthermore, for default in the
payment of the rents due on the lot of said house for the years 1925 to 1928, the Santa Mesa
estate, the lessor of said land, cancelled the lease on July 13, 1928, pursuant to the terms of
the contract.
The appellant Gimenez contends that the plaintiff was responsible for the delinquency in the
payment of both the tax on the house and the rent of the lot, which caused him the loss of the
said house and the leasehold right on the lot, because the plaintiff was at that time in charge of
the administration of the premises with the obligation to attend to the payment of the tax and the
rents. The plaintiff denied that he had such obligation, alleging that his duties were confined to
the collection of the rents of the house in order to apply them to the payment of the interest on
the mortgage.
Such was in fact the original agreement; but the appellant asserts that it was modified by the
letter Exhibit 1, quoted below:
MANILA, October 29, 1925
Mr. ANTONIO GIMENEZ
A. Luna, San Juan del Monte
ESTEEMED DON ANTONIO: Yesterday Mrs. Xaudaro came to pay me the rents for the months
of July and August, and forty pesos on account of September, saying that she did not pay the
balance of the rent for that month and the rent for the whole of October, because your wife had
demanded the delivery of the difference, or P90. I am surprised at such a procedure, since you
yourself authorized me one year ago to collect the rent from Mr. Xaudaro, and I have done so
up to date.
Mrs. Xaudaro has also informed me that, upon your demand, they would leave the chalet next
month and it appears that this, too, was done using me as a shield, which is another surprise to
me.
I believe, Mr. Gimenez, that the best thing would be for you to turn over the chalet to me, since
the period has expired, so that I may take direct charge of the administration of the premises.
Yours very truly,
(Sgd.) R. PANDO
(Page 63, record.)
The appellant testified further, that when he turned over the administration of the property to the
plaintiff, it was agreed that the plaintiff "would keep the property in good condition of repair, pay
the insurance and other expenses inherent in the preservation of the building, such as land
taxes," and "would pay the rents of the land upon which the property is situated" (transcript of
the stenographic notes, page 6). These points have not been contradicted by the plaintiff.
Taking into account the language of the letter Exhibit 1 and the appellant's unimpeached
testimony, we are constrained to hold that it has been proved by a preponderance of evidence,
that even though at first the plaintiff had only undertaken to collect the rents of the house, later
on, towards the end of October, 1925, he assumed the obligation to pay both the tax on the
house, and the rent of the lot.
As to the consideration contained in the judgment appealed from to the effect that, in view of the
reduction of the rent of the house in May, 1926, the plaintiff would not have accepted the
administration under the conditions alleged by the defendant-appellant, it must be remembered
that the plaintiff took over such complete administration months before such reduction of rents,
and it does not appear that the reduction was foreseen.
From all these circumstances it follows that the administration of the property in question
assumed by the plaintiff toward the end of October, 1925 is antichretic in character, and
therefore justice and equity demand that application be here made of the Civil Code provisions

touching the obligations of the antichretic creditor, to wit:

The creditor is obliged to pay the taxes and charges which burden the estate, in the absence of
an agreement to the contrary.
He shall also be obliged to pay any expenses necessary for its preservation and repair.
Any sums he may expend for such purposes shall be chargeable against the fruits. (Art. 1882,
Civil Code.)
These obligations arise from the very nature of the covenant, and are correlated with the
plaintiff's acquired right to take charge of the property and collect the fruits for himself. Hence,
the illustrious Manresa, explains the basis of this article 1882 in the following terms:
The right which the creditor acquires by virtue of antichresis to enjoy the fruits of the property
delivered to him, carries two obligations which are a necessary consequence of the contract,
because they arise from its very nature.
And the plaintiff having failed in his obligation to pay the tax on the house and the rent of the lot,
he is by law required to pay indemnity for damages (article 1101, Civil Code).
Considering the evidence of record as to the value and condition of the house and the
improvements made by the appellant upon said lot, as well as the other circumstances of the
case the total amount of the damages sustained by said appellant must be fixed at P5,000.
Wherefore, the judgment appealed from is modified, and it is held that the appellant, Antonio
Gimenez, is entitled to recover from the plaintiff the sum of P5,000 and it is so ordered; and the
judgment appealed from is hereby affirmed in all respects consistent with the present decision,
without express pronouncement of costs.
G.R. No. L-45963
October 12, 1939
CARLOS PARDO DE TAVERA and CARMEN PARDO DE TAVERA MANZANO, plaintiffsappellants,
vs.
EL HOGAR FILIPINO, INC., defendant-appellee.
TAVERA-LUNA, INC., defendant-appellant;
VICENTE MADRIGAL, defendant-appellee.
Carlos P. de Tavera and E. Voltaire Garcia for plaintiffs and appellants.Pedro Sabido and Jose
Avancea for defendant and appellant.Camus and Zavalla for appellee El Hogar Filipino.
Vicente Madrigal in his own behalf.
MORAN, J.:
On January 17, 1931, defendant corporation, Tavera-Luna Inc., for the purpose of constructing
the Crystal Arcade building on its premises at Escolta, Manila. To secure this loan, the
corporation executed a first mortgage on said premises and on the building proposed to be
erected thereon. On February 11, 1932, Tavera-Luna, Inc., secured from El Hogar Filipino an
additional loan of P300,000 with the same security executed for the original loan. The TaveraLuna, Inc., thereafter, defaulted in the payment of the monthly amortizations on the loan:
whereupon, El Hogar Filipino foreclosed the mortgage proceeded with the extra-judicial sale of
the Crystal Arcade building, at which it was the highest bidder for P1,363,555.36. One day
before the expiration of the period of redemption, Carlos Pardo de Tavera and Carmen Pardo de
Tavera Manzano, in their capacity as stockholders of the Tavera-Luna, Inc., and El Hogar
Filipino, Inc., to annul the two secured loans as well as extra-judicial sale made in favor of the
latter. Vicente Madrigal was included as party defendant because of his having signed the
second contract of loans aforementioned. From the judgment dismissing the complaint and
cross-complaint, plaintiffs and cross-complainant took the present appeal.
The most important question raised by appellant is whether or not the two secured loans are
null and void. It is contended that they are, on the ground that the Crystal Arcade building, given
as security form the loans, is a public building. This contention is predicated upon section 171 of

the Corporation Law which reads as follows:

It shall be unlawful for any building and loan association to make any loan after the date when
this Act, as amended, shall become effective upon property that is able for use only as a
manufacturing plant, theater, public hall, church, convent, school, club, hotel, garage, or other
public building. To facilitate the investment of the idle funds of a building and loan association,
however, the Bank Commissioner, with the approval of the Secretary of Finance, may, in special
instances. waive the provisions of this paragraph.
We find it unnecessary to determine, in the instant case, whether the Crystal Arcade is or is not
a public building, for, even if it is, the loan are valid. It may be said, in passing the evidence is
sufficient to show that the Secretary of Finance and the Bank Commissioner had knowledge of
the loans and of the security given therefor, and that they have impliedly approved the same.
On the other hand, under the legal provision above quoted, a loan given on a property which
may be considered as a public building, is not, in itself, null and void. It is unlawful to make
loans on that kind of security, but the law does not declare the loan, once made, to be null and
void. The unlawful taking of the security may constitute a misuser of the powers conferred upon
the corporation by its charter, for which it may be made to answer in an action for ouster or
dissolution; but certainly the stockholders and depositors of the corporation should not be
punished with a loss of the money loaned nor the borrower be rewarded with it. As held by the
Supreme Court of the United States, in a similar case:
The statute does not declare such a security void. If congress so meant, it would have been
easy to say so; and it is hardly to be believed that this would not have been done, instead of
leaving the question to be settled by the uncertain result of litigation and judicial decision . . ..
We cannot believe it was meant that stockholders, and perhaps depositors and other creditors,
should be punished and the borrower rewarded, by giving success to this defense whenever the
offensive fact shall occur. The impending danger of a judgment of ouster and dissolution was,
we think, the check, and none other contemplated by congress.
That has been always the punishment prescribed for the wanton violation of a charter, and it
may be made to follow whenever the proper public authority shall see fit to invoke its
application. . . . (Union Nat. Bank of St. Louis vs. Matthews, 98 U.S., 621; 25 L. ed., 188.) In the
same case it has been likewise held that:
Where it is a simple question of authority to contract, arising either on a question of regularity of
organization or of power conferred by the charter, a party who has had the benefit of the
agreement cannot he permitted, in an action founded upon it, to question its validity.
Fletcher on this matter says:
There is a direct conflict in the decisions as to the effect of a charter or statutory prohibition
against discounting or lending money on certain securities. If the statute expressly declares that
securities taken in violation of the prohibition shall be void, such securities cannot be enforced.
Some courts have gone further and have held that the mere fact of prohibition renders them
unenforceable; but this construction is not supported by the weight of authority. The better
opinion is that where the charter of a corporation or some other statute prohibits it from lending
money on certain kinds of security, but does not declare that prohibited securities taken by it
shall be void, they are not void, and may be enforced by it. The taking of such security is a
misuser of the powers conferred upon the corporation by its charter, for which the state may
enforce a forfeiture, but the misuser cannot be set up by the borrower to prevent the corporation
from enforcing the security. In case of a state statute prohibiting savings banks from lending
their funds on the security of names alone, it has been held that a savings bank may enforce
payment of a promissory note taken for money loaned in violation of the statute. (Vol. 7,
Fletcher Cyc. Corp., sec. 3616, pp. 744, 745.)
It is contended that the contracts in question are not of mortgage, but of antichresis. The
distinction, however, is immaterial, for even if the contracts are of antichresis, the extra-judicial
foreclosure of the security is valid. Stipulations in a contract of antichresis for the extra-judicial

foreclosure of the security may be allowed in the same manner as they are allowed in contracts
of mortgage and of pledge. (El Hogar Filipino vs. Paredes, 45 Phil., 178; Peterson vs. Azada, 8
Phil., 432, 437.)lwphi1.nt
Appellants contend that El Hogar Filipino has been given the possession and administration of
the Crystal Arcade building, so that it may apply the rentals thereof to the payment of interest
and the capital owed by Tavera-Luna, Inc., and that due to the negligence of El Hogar Filipino,
no rental sufficient to cover the monthly amortizations on the debt had been realized therefrom.
The alleged negligence is made to consist in the failure of El Hogar Filipino to advertise the
rooms of the Crystal Arcade building for rent and to employ agents to solicit and attract tenants.
But the evidence presented to this effect has been sufficiently contradicted by the evidence
adduced by the defendant-appellant. Besides, it appears that El Hogar Filipino appointed Jose
V. Ramirez as its representative in the management and administration of the Crystal Arcade
building, and the appointment was made in agreement with Tavera-Luna, Inc. The ability of
Ramirez to do the work entrusted to him is not disputed. As a matter of fact, Ramirez, during his
management of the building, was a stockholder and director of the Tavera-Luna, Inc., and was
serving that corporation as its secretary and treasurer. Under all these circumstances, we see
no reason to disturb the findings of the lower court.
Judgment is affirmed, with costs against appellants.
G.R. No. L-14938
January 28, 1961
MAGDALENA C. DE BARRETO, ET AL., plaintiffs-appellants,
vs.
JOSE G. VILLANUEVA, ET AL., defendants-appellees.
Bausa, Ampil & Suarez for plaintiffs-appellants.Esteban Ocampo for defendants-appellees.
GUTIERREZ DAVID, J.:
On May 10, 1948, Rosario Cruzado, for herself and as administratix of the intestate estate of
her deceased husband Pedro Cruzado in Special Proceedings No. 4959 of the Court of First
Instance of Manila, obtained from the defunct Rehabilitation Finance Corporation (hereinafter
referred to as the RFC a loan in the amount of P11,000.00. To secure payment thereof, she
mortgaged the land then covered by Transfer Certificate of Title No. 61358 issued in her name
and that of her deceased. husband. As she failed to pay certain installments on the loan, the
mortgage was foreclosed and the RFC acquired the property for P11,000.00, subject to her
rights as mortgagor to re-purchase the same. On July 26, 1951, upon her application, the land
was sold back to her conditionally for the amount of P14,269.03, payable in seven years.
About two years thereafter, or on February 13, 1953 Rosario Cruzado, as guardian of her minor
children in Special Proceedings No. 14198 of the Court of First Instance of Manila, was
authorized by the court, to sell with the previous consent of the RFC the land in question
together with the improvements thereon for a sum not less than P19,000. Pursuant to such
authority and with the consent of the RFC, she sold to Pura L. Villanueva for P19,000.00 "all
their rights, interest,' title and dominion and over the herein described parcel of land together
with the existing improvements thereon, including one use and an annex thereon; free from all
charges and encumbrances, , with the exception of the sum of P11,009.52, is stipulated interest
thereon, which the vendor, is still presently obligated to the RFC and which the vendee herein
now assumes to pay to the RFC under the same terms and conditions specified in that deed of
sale dated July 26, 1951." Having paid in advance the sum of P500.00, Pura L. Villanueva, the
vendee, in consideration of the aforesaid sale, executed in favor of the vendor Rosario Cruzado
a promissory note dated March 9, 1953, undertaking to pay the balance of P17,500.00 in
monthly installments. On April 22, 1953, she made an additional payment of P5,500.00 on the
promissory note. She was, subsequently, able to secure in her name Transfer Certificate of Title
No. 32526 covering the house and lot above referred to, and on July 10, 1953, she mortgaged
the said property to Magdalena C. Barretto as security for a loan the amount of P30,000.00.

As said Pura L. Villanueva had failed to pay the remaining installments on the unpaid balance of
P12,000.00 her promissory note for the sale of the property in question, a complaint for the
recovery of the same from her and her husband was filed on September 21, 1963 by Rosario
Cruzado in her own right and in her capacity as judicial guardian of her minor children. Pending
trial of the case, a lien was constituted upon the property in the nature of a levy in attachment in
favor of the Cruzados said lien being annotated at the back of Transfer Certificate of Title No.
32526. After trial, decision was rendered ordering Pura Villanueva and her husband, jointly and
severally, to pay Rosario Cruzado the sum of P12,000.00, with legal interest thereon from the
date of the filing of the complaint until fully paid plus the sum of P1,500.00 as attorney's fees.
Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to Magdalena C.
Barretto, the latter, jointly with her husband, instituted against the Villanueva spouses an action
for foreclosure of mortgage, impleading Rosario Cruzado and her children as parties
defendants. On November 11, 1956, decision was rendered in the case absolving the Cruzados
from the complaint and sentencing the Villanuevas to pay the Barrettos, jointly and severally, the
sum of P30,000.00, with interest thereon at the rate of 12% per annum from January 11, 1954
plus the sum of P4,000.00 as attorney's fees. Upon the finality of this decision, the Barrettos
filed a motion for the issuance of a writ of execution which was granted by the lower court on
July 31, 1958. On August 14, 1958, the Cruzados filed their "Vendor's Lien" in the amount of
P12,000.00, plus legal interest, over the real property subject of the foreclosure suit, the said
amount representing the unpaid balance of the purchase price of the said property. Giving due
course to the line, the court on August 18, 1958 ordered the same annotated in Transfer
Certificate of Title No. 32526 of the Registry of Deeds of Manila, decreeing that should the realty
in question be sold at public auction in the foreclosure proceedings, the Cruzados shall be
credited with their pro-rata share in the proceeds thereof, "pursuant to the provision of articles
2248 and 2249 of the new Civil Code in relation to Article 2242, paragraph 2 of the same Code."
The Barrettos filed a motion for reconsideration on September 12, 1958, but on that same date,
the sheriff of Manila, acting in pursuance of the order of the court granting the writ of execution,
sold at public auction the property in question. As highest bidder, the Barrettos themselves
acquired the properties for the sum of P49,000.00.
On October 4, 1958, 'the Court of First Instance issued an order confirming the aforesaid sale
and directing the Register of Deeds of the City of Manila to issue to the Barrettos the
corresponding certificate of title, subject, however, to the order of August 18, 1958 concerning,.
the vendor's lien. On the same date, the motion of the Barettos seeking reconsideration of the
order of the court giving due course to the said vendor's lien was denied. From this last order,
the Barretto spouses interposed the present appeal.
The appeal is devoid of merit.
In claiming that the decision of the Court, of First Instance of Manila in Civil Case No. 20075 .
awarding the amount of P12,000.00 in favor of Rosario Cruzado and her minor children . cannot
constitute a basis for the vendor's lien filed by the appellee Rosario Cruzado, appellants allege
that the action in said civil case was merely to recover the balance of a promissory note. But
while, apparently, the action was to recover the remaining obligation of promissor Pura
Villanueva on the note, the fact remains that Rosario P. Cruzado as guardian of her minor
children, was an unpaid vendor., of the realty in question, and the promissory note, was,
precisely, for the unpaid balance of the price of the property bought by, said Pura Villanueva.
Article 2242 of the new Civil, Code enumerates the claims, mortgage and liens that constitute
an encumbrance on specific immovable property, and among them are: .
(2) For the unpaid price of real property sold, upon the immovable sold; and
(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with respect to the
same specific real property or real rights, they shall be satisfied pro-rata after the payment of
the taxes and assessment upon the immovable property or real rights.

Application of the above-quoted provisions to the case at bar would mean that the herein
appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share
pro-rata with the appellants the proceeds of the foreclosure sale.
The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case was not
registered, it should not prejudice the said appellants' registered rights over the property. There
is nothing to this argument. Note must be taken of the fact that article 2242 of the new Civil
Code enumerating the preferred claims, mortgages and liens on immovables, specifically
requires that . unlike the unpaid price of real property sold . mortgage credits, in order to be
given preference, should be recorded in the Registry of Property. If the legislative intent was to
impose the same requirement in the case of the vendor's lien, or the unpaid price of real
property sold, the lawmakers could have easily inserted the same qualification which now
modifies the mortgage credits. The law, however, does not make any distinction between
registered and unregistered vendor's lien, which only goes to show that any lien of that kind
enjoys the preferred credit status.
Appellants also argue that to give the unrecorded vendor's lien the same standing as the
registered mortgage credit would be to nullify the principle in land registration system that prior
unrecorded interests cannot prejudice persons who subsequently acquire interests over the
same property. The Land Registration Act itself, however, respects without reserve or
qualification the paramount rights of lien holders on real property. Thus, section 70 of that Act
provides that .
Registered land, and ownership therein shall in all respects be subject to the same burdens and
incidents attached by law to unregistered land. Nothing contained in this Act shall in any way be
construed to relieve registered land or the owners thereof from any rights incident to the relation
of husband and wife, or from liability to attachment on mesne process or levy, on execution, or
from liability to any lien of any description established by law on land and the buildings thereon,
or the interest of the owners of such land or buildings, or to change the laws of descent, or the
rights of partition between co-owners, joint tenants and other co-tenants or the right to take the
same by eminent domain, or to relieve such land from liability to be appropriated in any lawful
manner for the payment of debts, or to change or affect in any other way any other rights or
liabilities created by law and applicable to unregistered land, except as otherwise expressly
provided in this Act or in the amendments thereof, (Emphasis supplied)
As to the point made that the articles of the Civil Code on concurrence and preference of credits
are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any
such limitation. If we are to interpret this portion of the Code as intended only for insolvency
cases, then other creditor-debtor relationships where there are concurrence of credits would be
left without any rules to govern them, and it would render purposeless the special laws an
insolvency.
Premises considered, the order appealed from is hereby affirmed. Costs against the appellants.
Bengzon, Padilla, Bautista Angelo, Labrador, Paredes and Dizon, JJ., concur.
Concepcion, Reyes, J.B.L. and Barrera, JJ., concur in the result.
RESOLUTION ON MOTION TO RECONSIDER
December 29, 1962
REYES, J.B.L., J.:
Appellants, spouses Barretto, have filed a motion vigorously urging, for reason to be discussed
in the course of this resolution, that our decision of 28 January 1961 be reconsidered and set
aside, and a new one entered declaring that their right as mortgagees remain superior to the
unrecorded claim of herein appellee for the balance of the purchase price of her rights, title, and
interests in the mortgaged property.
It will be recalled that, with Court authority, Rosario Cruzado sold all her right, title, and interest

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

by this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242)
are to be enforced in accordance with the Insolvency Law." (Emphasis supplied) .
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a
foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for
the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit
for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two
creditors will not enable the Court to ascertain the pro-rata dividend corresponding to each,
because the rights of the other creditors likewise" enjoying preference under Article 2242 can
not be ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed
from, decreeing that the proceeds of the foreclosure sale be apportioned only between
appellant and appellee, is incorrect, and must be reversed.
In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's
estate), the conflict between the parties now before us must be decided pursuant to the well
established principle concerning registered lands; that a purchaser in good faith and for value
(as the appellant concededly is) takes registered property free from liens and encumbrances
other than statutory liens and those recorded in the certificate of title. There being no insolvency
or liquidation, the claim of the appellee, as unpaid vendor, did not require the character and rank
of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain
subordinate to the latter.
We are understandably loathed (absent a clear precept of law so commanding) to adopt a rule
that would undermine the faith and credit to be accorded to registered Torrens titles and nullify
the beneficient objectives sought to be obtained by the Land Registration Act. No argument is
needed to stress that if a person dealing with registered land were to be held to take it in every
instance subject to all the fourteen preferred claims enumerate in Article 2242 of the new Civil
Code, even if the existence and import thereof can not be ascertained from the records, all
confidence in Torrens titles would be destroyed, and credit transactions on the faith of such titles
would be hampered, if not prevented, with incalculable results. Loans on real estate security
would become aleatory and risky transactions, for no, prospective lender could accurately
estimate the hidden liens on the property offered as security, unless he indulged in complicated,
tedious investigations, . The logical result might well be a contraction of credit unforeseeable
proportions that could lead to economic disaster.
Upon the other hand, it does not appear excessively burdensome to require the privileged
creditors to cause their claims to be recorded in the books of the Register of deeds should they
desire to protect their rights even outside of insolvency or liquidation proceedings.
B. The close study of the facts disclosed by the records lasts strong doubt on the proposition
that appellees Cruzados should be regarded as unpaid vendors of the property( land, buildings,
and improvements ) involved in the case at bar so as to be entitled to preference under Article
2242. The record on appeal, specially the final decision of the Court of First Instance of Manila
in the suit of the ,Cruzados against Villanueva, clearly establishes that after her husband's
death, and with due court authority, Rosario Cruzado, for herself and as administratrix of her
husband's state, mortgaged the property to the Rehabilitation Finance Corporation (RFC) to
secure payment of a loan of P11,000, installments, but that the debtor failed to pay some of the
installments; wherefore the RFC, on 24 August 1949, foreclosed the mortgage, and acquired
the property, subject to the debtor's right to redeem or repurchase the said property; and that on
25 September 1950, the RFC consolidated its ownership, and the certificate of title of the
Cruzados was cancelled and a new certificate issued in the name of the RFC.
While on 26 July 1951 the RFC did execute a deed selling back the property to the erstwhile
mortgagors and former owners Cruzados in installments, subject to the condition (among
others) that the title to the property and its improvements "shall remain in the name of
Corporation (RFC) until after said purchase price, advances and interests shall have been fully
paid", as of 27 September 1952, Cruzado had only paid a total of P1,360, and had defaulted on

six monthly amortizations; for which reason the RFC rescinded the sale, and forfeited the
payments made, in accordance with the terms of the contract of 26 July 1951.
It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all "their rights, title,
interest and dominion on and over" the property, lot, house, and improvements for P19,000.00,
the buyer undertaking to assume payment of the obligation to the RFC, and by resolution of 30
April 1953, the RFC approved "the transfer of the rights and interest of Rosario P. Cruzado and
her children in their property herein above-described in favor of Pura L. Villanueva"; and on 7
May 1953 the RFC executed a deed of absolute sale of the property to said party, who had fully
paid the price of P14,269.03. Thereupon, the spouses Villanueva obtained a new Transfer
Certificate of Title No. 32526 in their name.
On 10 July 1953, the Villanuevas mortgaged the property to the spouses Barretto, appellants
herein.
It is clear from the facts above-stated that ownership of the property had passed to the
Rehabilitation Finance Corporation since 1950, when it consolidated its purchase at the
foreclosure sale and obtained a certificate of title in its corporate name. The subsequent
contract of resale in favor of the Cruzados did not revest ownership in them, since they failed to
comply with its terms and conditions, and the contract itself provided that the title should remain
in the name of the RFC until the price was fully paid.
Therefore, when after defaulting in their payments due under the resale contract with the RFC
the appellants Cruzados sold to Villanueva "their rights, title, interest and dominion" to the
property, they merely assigned whatever rights or claims they might still have thereto; the
ownership of the property rested with the RFC. The sale from Cruzado to Villanueva, therefore,
was not so much a sale of the land and its improvements as it was a quit-claim deed in favor of
Villanueva. In law, the operative sale was that from the RFC to the latter, and it was the RFC
that should be regarded as the true vendor of the property. At the most, the Cruzados
transferred to Villanueva an option to acquire the property, but not the property itself, and their
credit, therefore, can not legally constitute a vendor's lien on the corpus of that property that
should stand on an equal footing with the mortgaged credit held by appellant Barretto.
In view of the foregoing, the previous decision of this Court, promulgated on 28 January 1961, is
hereby reconsidered and set aside, and a new one entered reversing the judgment appealed
from and declaring the appellants Barretto entitled to full satisfaction of their mortgaged credit
out of the proceeds of the foreclosure sale in the hands of the Sheriff of the City of Manila. No
costs.
G.R. No. 105827
January 31, 2000
J.L. BERNARDO CONSTRUCTION, represented by attorneys-in-fact Santiago R. Sugay,
Edwin A. Sugay and Fernando S.A. Erana, SANTIAGO R. SUGAY, EDWIN A. SUGAY and
FERNANDO S. A. ERANA, petitioners,
vs.
COURT OF APPEALS and MAYOR JOSE L. SALONGA, respondents.
GONZAGA-REYES, J.:
This petition for certiorari under Rule 65 seeks to annul and set aside the following:
1. Decision dated February 6, 1992 issued by the Eleventh Division of the Court of Appeals in
CA-G.R. No. 26336 which nullified the order of the Regional Trial Court of Cabanatuan City in
Civil Case No. 1016-AF granting plaintiffs (petitioners herein) a writ of attachment and a
contractor's lien upon the San Antonio Public Market; and
2. Resolution dated June 10, 1992 issued by the former Eleventh Division of the Court of
Appeals in CA-G.R. No. 26336 denying the motions for reconsideration filed by both parties.
The factual antecedents of this case, as culled from the pleadings, are as follows:
Sometime in 1990, the municipal government of San Antonio, Nueva Ecija approved the
construction of the San Antonio Public Market. The construction of the market was to be funded

by the Economic Support Fund Secretariat (ESFS), a government agency working with the
USAID. Under ESFS' "grant-loan-equity" financing program, the funding for the market would be
composed of a (a) grant from ESFS, (b) loan extended by ESFS to the Municipality of San
Antonio, and (c) equity or counterpart funds from the Municpality.
It is claimed by petitioners Santiago R. Sugay, Edwin A. Sugay, Fernando S.A. Erana and J.L.
Bernardo Construction, a single proprietorship owned by Juanito L. Bernardo, that they entered
into a business venture for the purpose of participating in the bidding for the public market. It
was agreed by petitioners that Santiago Sugay would take the lead role and be responsible for
the preparation and submission of the bid documents, financing the entire project, providing and
utilizing his own equipment, providing the necessary labor, supplies and materials and making
the necessary representations and doing the liaison work with the concerned government
agencies.
On April 20, 1990, J.L. Bernardo Construction, thru petitioner Santiago Sugay, submitted its bid
together with other qualified bidders. After evaluating the bids, the municipal pre-qualification
bids and awards committee, headed by respondent Jose L. Salonga (then incumbent municipal
mayor of San Antonio) as Chairman, awarded the contract to petitioners. On June 8, 1990, a
Construction Agreement was entered into by the Municipality of San Antonio thru respondent
Salonga and petitioner J.L. Bernardo Construction.
It is claimed by petitioners that under this Construction Agreement, the Municipality agreed to
assume the expenses for the demolition, clearing and site filling of the construction site in the
amount of P1,150,000 and, in addition, to provide cash equity of P767,305.99 to be remitted
directly to petitioners.
Petitioners allege that, although the whole amount of the cash equity became due, the
Municipality refused to pay the same, despite repeated demands and notwithstanding that the
public market was more than ninety-eight percent (98%) complete as of July 20, 1991.
Furthermore, petitioners maintain that Salonga induced them to advance the expenses for the
demolition, clearing and site filling work by making representations that the Municipality had the
financial capability to reimburse them later on. However, petitioners claim that they have not
been reimbursed for their expenses.1
On July 31, 1991, J.L. Bernardo Construction, Santiago Sugay, Edwin Sugay and Fernando
Erana, with the latter three bringing the case in their own personal capacities and also in
representation of J.L. Bernardo Construction, filed a complaint for breach of contract, specific
performance, and collection of a sum of money, with prayer for preliminary attachment and
enforcement of contractor's lien against the Municipality of San Antonio, Nueva Ecija and
Salonga, in his personal and official capacity as municipal mayor. After defendants filed their
answer, the Regional Trial Court held hearings on the ancillary remedies prayed for by
plaintiffs.2
On September 5, 1991, the Regional Trial Court issued the writ of preliminary attachment
prayed for by plaintiffs. It also granted J.L. Bernardo Construction the right to maintain
possession of the public market and to operate the same. The dispositive portion of the decision
provides:
IN VIEW OF THE FOREGOING DISQUISITION, the Court finds the auxiliary reliefs of
attachment prayed for by the plaintiffs to be well-taken and the same is hereby GRANTED.
Conformably thereto, let a writ of preliminary attachment be issued upon the filing by the
plaintiffs of a bond in the amount of P2,653,576.84 to answer for costs and damages which the
defendants may suffer should the Court finally adjudged (sic) that the plaintiffs are not entitled to
the said attachment, and thereafter, the Deputy Sheriff of this court is hereby ordered to attach
the properties of the defendants JOSE LAPUZ SALONGA and the MUNICIPALITY OF SAN
ANTONIO, NUEVA ECIJA which are not exempt from execution.
CORROLARILY, the Court grants the plaintiffs J.L. BERNARDO CONSTRUCTION, represented
by SANTIAGO R. SUGAY, EDWIN A. SUGAY and FERNANDO S.A. ERANA, the authority to

hold on to the possession of the public market in question and to open and operate the same
based on fair and reasonable guidelines and other mechanics of operation to be submitted by
plaintiffs within fifteen (15) days from their receipt of this Order which shall be subject to Court's
approval and to deposit the income they may derive therefrom to the Provincial Treasurer of
Nueva Ecija after deducting the necessary expenses for the operation and management of said
market, subject to further orders from this Court.
SO ORDERED.
The trial court gave credence to plaintiffs' claims that defendants were guilty of fraud in incurring
their contractual obligations as evidenced by the complaint and the affidavits of plaintiffs
Santiago Sugay and Erana. The court ruled that defendants' acts of ". . . obtaining property,
credit or services by false representations as to material facts made by the defendant to the
plaintiff with intent to deceive constitutes fraud warranting attachment" and that ". . . a debt is
considered fradulently contracted if at the time of contracting it, the debtor entertained an
intention not to pay."
With regards to the contractor's lien, the trial court held that since plaintiffs have not been
reimbursed for the cash equity and for the demolition, clearing and site filling expenses, they
stand in the position of an unpaid contractor and as such are entitled, pursuant to articles 2242
and 2243 of the Civil Code, to a lien in the amount of P2,653,576.84 (as of August 1, 1991),
excluding the other claimed damages, attorney's fees and litigation expenses, upon the public
market which they constructed. It was explained that, although the usual way of enforcing a lien
is by a decree for the sale of the property and the application of the proceeds to the payment of
the debt secured by it, it is more practical and reasonable to permit plaintiffs to operate the
public market and to apply to their claims the income derived therefrom, in the form of rentals
and goodwill from the prospective stallholders of the market, as prayed for by plaintiffs.
The trial court made short shrift of defendants' argument that the case was not instituted in the
name of the real parties-in-interest. It explained that the plaintiff in the cause of action for money
claims for unpaid cash equity and demolition and site filling expenses is J.L. Bernardo
Construction, while the plaintiffs in the claim for damages for violation of their rights under the
Civil Code provisions on human relations are plaintiffs Santiago Sugay, Edwin Sugay and
Erana.3
The defendants moved for reconsideration of the trial court's order, to which the plaintiffs filed
an opposition. On October 10, 1991 the motion was denied. The following day, the trial court
approved the guidelines for the operation of the San Antonio Public Market filed by plaintiffs.
Respondent Salonga filed a motion for the approval of his counterbond which was treated by
the trial court in its October 29, 1991 order as a motion to fix counterbond and for which it
scheduled a hearing on November 19, 1991.
On October 21, 1991, during the pendency of his motion, respondent Salonga filed with the
Court of Appeals a petition for certiorari under Rule 65 with prayer for a writ of preliminary
injunction and temporary restraining order which case was docketed as CA-G.R. SP No.
26336.4 Petitioners opposed the petition, claming that respondent had in fact a plain, speedy
and adequate remedy as evidenced by the filing of a motion to approve counter-bond with the
trial court.5
On February 6, 1992, the Court of Appeals reversed the trial court's decision and ruled in favor
of Salonga. The dispositive portion of its decision states
FOR ALL THE FOREGOING, the petition is hereby granted as follows:
1. The respondent judge's ORDER dated September 5, 1991 for the issuance of a writ of
attachment and for the enforcement of a contractor's lien, is hereby NULLIFIED and SET
ASIDE; the writ of attachment issued pursuant thereto and the proceedings conducted by the
Sheriffs assigned to implement the same are, as a consequence, also hereby NULLIFIED and
SET ASIDE;
2. The respondent judge's ORDER dated October 11, 1991 further enforcing the contractor's

lien and approving the guidelines for the operation of the San Antonio Public Market is also
NULLIFIED and SET ASIDE.
Petitioner's prayers for the dismissal of Civil Case No. 1016 (now pending before respondent
judge) and for his deletion from said case as defendant in his private capacity are, however,
DENIED.
The respondent judge may now proceed to hearing of Civil Case No. 1016 on the merits.
SO ORDERED.
The appellate court reasoned that since the Construction Agreement was only between Juanito
Bernardo and the Municipality of San Antonio, and since there is no sworn statement by Juanito
Bernardo alleging that he had been deceived or misled by Mayor Salonga or the Municipality of
San Antonio, it is apparent that the applicant has not proven that the defendants are guilty of
inceptive fraud in contracting the debt or incurring the obligation, pursuant to Rule 57 of the
Rules of Court, and therefore, the writ of attachment should be struck down for having been
improvidently and irregularly issued.
The filing of a motion for the approval of counter-bond by defendants did not, according to the
Court of Appeals, render the petition for certiorari premature. The appellate court held that such
motion could not cure the defect in the issuance of the writ of attachment and that, moreover,
the defendants' motion was filed by them "without prejudice to the petition for certiorari."
As to the contractor's lien, the appellate court ruled that Articles 2242 of the Civil Code finds
application only in the context of insolvency proceedings, as expressly stated in Article 2243.
Even if it is conceded that plaintiffs are entitled to retain possession of the market under its
contractor's lien, the appellate court held that the same right cannot be expanded to include the
right to use the building. Therefore, the trial court's grant of authority to plaintiffs to operate the
San Antonio Public Market amounts to a grave abuse of discretion.
With regard to the allegations of defendants that plaintiffs are not the proper parties, the Court of
Appeals ruled that such issue should be assigned as an error by defendants later on should the
outcome of the case be adverse to the latter.6
Petitioners are now before this Court assailing the appellate court's decision. In their petition,
they make the following assignment of errors:
1. THE DECISION IS CONTRARY TO LAW IN THAT THE COURT OF APPEALS
OVERLOOKED AND/OR DISREGARDED THE FUNDAMENTAL REQUIREMENT AND
ESTABLISHED SUPREME COURT DECISIONS IN ACTIONS FOR CERTIORARI
CONSIDERING THAT THE FILING OF THE PETITION BY RESPONDENT SALONGA WITH
THE COURT OF APPEALS IS OBVIOUSLY PREMATURE AND IMPROPER SINCE THERE
ADMITTEDLY EXISTS A PLAIN, SPEEDY AND ADEQUATE REMEDY AVAILABLE TO
RESPONDENT SALONGA WHICH IS HIS UNRESOLVED "MOTION TO APPROVE
COUNTERBOND" PENDING WITH THE TRIAL COURT.
2. IN COMPLETE DISREGARD OF ESTABLISHED JURISPRUDENCE, THE COURT OF
APPEALS HAS SKIRTED AND/OR FAILED TO CONSIDER/DISREGARDED THE EQUALLY
CRUCIAL ISSUE THAT THE QUESTIONED ORDERS ARE CLEARLY AND ADMITTEDLY
INTERLOCUTORY IN NATURE AND THEREFORE THEY CANNOT BE THE PROPER
SUBJECT OF AN ACTION FOR CERTIORARI; PROOF THAT THE ORDERS ASSAILED BY
RESPONDENT SALONGA ARE INTERLOCUTORY IN CHARACTER IS THE DISPOSITIVE
PORTION OF THE DECISION WHEN THE COURT OF APPEALS SAID "THE RESPONDENT
JUDGE MAY NOW PROCEED TO HEARING OF SAID CIVIL CASE NO. 1016 ON THE
MERITS"; PETITION FILED BY RESPONDENT SALONGA WITH THE COURT OF APPEALS
SHOULD HAVE BEEN DISMISSED OUTRIGHTLY AS SOUGHT BY HEREIN PETITIONERS IN
THEIR VARIOUS UNACTED PLEADINGS.
3. THE DECISION IS BASED ON FINDINGS OF FACTS AND CONCLUSIONS WHICH ARE
NOT ONLY GROSSLY ERRONEOUS BUT ARE SQUARELY CONTRADICTED BY THE
EVIDENCE ON RECORD.

4. THE COURT OF APPEALS HAS CLEARLY MAISAPPRECIATED, MISREAD AND

DISREGARDED HEREIN PETITIONERS' CAUSES OF ACTION AGAINST RESPONDENT
SALONGA AND HIS CO-RESPONDENT MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA.
5. THE COURT OF APPEALS HAS MADE ERRONEOUS AND CONTRADICTORY
CONCLUSIONS AND FINDINGS ON THE ISSUE OF "REAL PARTY IN INTEREST" IN
COMPLETE DISREGARD OF THE POWERS AND AUTHORITY GRANTED BY JUANITO L.
BERNARDO CONSTRUCTION TO HEREIN PETITIONERS.
6. THE COURT OF APPEALS HAS SKIRTED THE IMPORTANT ISSUE OF "AGENCY
COUPLED WITH AN INTEREST."
7. THE COURT OF APPEALS WENT BEYOND THE ISSUES OF THE CERTIORARI CASE
AND ITS FINDINGS AND CONCLUSIONS ON ISSUES NOT RELATED TO THE CASE FOR
CERTIORARI ARE CONTRARY TO THE PLEADINGS AND DO NOT CONFORM TO THE
EVIDENCE ON RECORD.
8. THE COURT OF APPEALS HAS LIKEWISE DISREGARDED THE PRECEPT THAT
CONCLUSIONS AND FINDINGS OF FACT OF THE TRIAL COURT ARE ENTITLED TO
GREAT WEIGHT ON APPEAL AND SHOULD NOT BE DISTURBED SINCE THERE IS NO
STRONG AND COGENT REASON WHATSOVER TO OVERCOME THE WELL-WRITTEN AND
DETAILED AND ESTABLISHED FACTUAL FINDINGS OF THE TRIAL COURT.
9. PETITIONERS HAVE STRONG REASONS TO BELIEVE THAT THE DECISION OF THE
COURT OF APPEALS WAS ISSUED WITH SERIOUS INJUSTICE AND AGAINST THE
TENETS OF FAIR PLAY SINCE THE DECISION HAD BEEN KNOWN TO AS IT WAS OPENLY
AND PUBLICLY ANNOUNCED BY RESPONDENT SALONGA LONG BEFORE IT WAS
"PROMULGATED" BY THE COURT OF APPEALS.
The various issues raised by petitioners may be restated in a more summary manner as
1. Whether or not the Court of Appeals correctly assumed jurisdiction over the petition for
certiorari filed by respondents herein assailing the trial court's interlocutory orders granting the
writ of attachment and the contractor's lien?
2. Whether or not the Court of Appeals committed reversible errors of law in its decision?
A petition for certiorari may be filed in case a tribunal, board or officer exercising judicial or
quasi-judicial functions has acted without or in excess of jurisdiction, or with grave abuse of
discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain,
speedy, and adequate remedy in the ordinary course of law.7
The office of a writ of certiorari is restricted to truly extraordinary cases wherein the act of the
lower court or quasi-judicial body is wholly void. 8 We held in a recent case that certiorari may be
issued "only where it is clearly shown that there is a patent and gross abuse of discretion as to
amount to an evasion of positive duty or to virtual refusal to perform a duty enjoined by law, or
to act at all in contemplation of law, as where the power is exercised in an arbitrary and despotic
manner by reason of passion or personal hostility." 9
As a general rule, an interlocutory order is not appealable until after the rendition of the
judgment on the merits for a contrary rule would delay the administration of justice and unduly
burden the courts.10 However, we have held that certiorari is an appropriate remedy to assail an
interlocutory order (1) when the tribunal issued such order without or in excess of jurisdiction or
with grave abuse of discretion and (2) when the assailed interlocutory order is patently
erroneous and the remedy of appeal would not afford adequate and expeditious relief. 11
We hold that the petition for certiorari filed by Salonga and the Municipality with the Court of
Appeals questioning the writ of attachment issued by the trial court should not have been given
due course for they still had recourse to a plain, speedy and adequate remedy the filing of a
motion to fix the counter-bond, which they in fact filed with the trial court, the grant of which
would effectively prevent the issuance of the writ of attachment. Moreover, they could also have
filed a motion to discharge the attachment for having been improperly or irregularly issued or
enforced, or that the bond is insufficient, or that the attachment is excessive. 12 With such

remedies still available to the Municipality and Salonga, the filing of a petition for certiorari with
the Court of Appeals insofar as it questions the order of attachment was clearly premature.
However, with regards to the contractor's lien, we uphold the appellate court's ruling reversing
the trial court's grant of a contractor's lien in favor of petitioners.
Art.'s 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with
respect to specific personal or real property of the debtor. Specifically, the contractor's lien
claimed by petitioners is granted under the third paragraph of Article 2242 which provides that
the claims of contractors engaged in the construction, reconstruction or repair of buildings or
other works shall be preferred with respect to the specific building or other immovable property
constructed.13
However, Article 2242 only finds application when there is a concurrence of credits, i.e. when
the same specific property of the debtor is subjected to the claims of several creditors and the
value of such property of the debtor is insufficient to pay in full all the creditors. In such a
situation, the question of preference will arise, that is, there will be a need to determine which of
the creditors will be paid ahead of the others. 14 Fundamental tenets of due process will dictate
that this statutory lien should then only be enforced in the context of some kind of a proceeding
where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency
proceedings.15
This is made explicit by Article 2243 which states that the claims and liens enumerated in
articles 2241 and 2242 shall be considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions governing insolvency.16
The action filed by petitioners in the trial court does not partake of the nature of an insolvency
proceeding. It is basically for specific performance and damages. 17 Thus, even if it is finally
adjudicated that petitioners herein actually stand in the position of unpaid contractors and are
entitled to invoke the contractor's lien granted under Article 2242, such lien cannot be enforced
in the present action for there is no way of determining whether or not there exist other
preferred creditors with claims over the San Antonio Public Market. The records do not contain
any allegation that petitioners are the only creditors with respect to such property. The fact that
no third party claims have been filed in the trial court will not bar other creditors from
subsequently bringing actions and claiming that they also have preferred liens against the
property involved.18
Our decision herein is consistent with our ruling in Philippine Savings Bank v. Lantin,19 wherein
we also disallowed the contractor from enforcing his lien pursuant to Article 2242 of the Civil
Code in an action filed by him for the collection of unpaid construction costs.
It not having been alleged in their pleadings that they have any rights as a mortgagee under the
contracts, petitioners may only obtain possession and use of the public market by means of a
preliminary attachment upon such property, in the event that they obtain a favorable judgment in
the trial court. Under our rules of procedure, a writ of attachment over registered real property is
enforced by the sheriff by filing with the registry of deeds a copy of the order of attachment,
together with a description of the property attached, and a notice that it is attached, and by
leaving a copy of such order, description, and notice with the occupant of the property, if any. 20 If
judgment be recovered by the attaching party and execution issue thereon, the sheriff may
cause the judgment to be satisfied by selling so much of the property as may be necessary to
satisfy the judgment.21 Only in the event that petitioners are able to purchase the property will
they then acquire possession and use of the same.
Clearly, the trial court's order of September 5, 1991 granting possession and use of the public
market to petitioners does not adhere to the procedure for attachment laid out in the Rules of
Court. In issuing such an order, the trial court gravely abused its discretion and the appellate
court's nullification of the same should be sustained.1awp++i1
At this stage of the case, there is no need to pass upon the question of whether or not
petitioners herein are the real parties-in-interest. In the event that judgment is rendered against

Salonga and the Municipality, this issue may be assigned as an error in their appeal from such
judgment.
WHEREFORE, we UPHOLD the Court of Appeal's Decision dated February 6, 1992 in CA-G.R.
SP No. 26336 insofar as it nullifies the contractor's lien granted by the trial court in favor of
petitioners in its September 5, 1991 Order. Consequently, we also UPHOLD the appellate
court's nullification of the trial court's October 11, 1991 Order approving the guidelines for the
operation of the San Antonio Public Market. However, we REVERSE the appellate court's order
nullifying the writ of attachment granted by the trial court.1wphi1.nt
No pronouncement as to costs.
SO ORDERED.
G.R. No. 126200
August 16, 2001
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
HONORABLE COURT OF APPEALS and REMINGTON INDUSTRIAL SALES
CORPORATION, respondents.
KAPUNAN, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
seeking a review of the Decision of the Court of Appeals dated October 6, 1995 and the
Resolution of the same court dated August 29, 1996.
The facts are as follows:
Marinduque Mining-Industrial Corporation (Marinduque Mining), a corporation engaged in the
manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides; copper
ore/concentrates, cement and pyrite conc., obtained from the Philippine National Bank (PNB)
various loan accommodations. To secure the loans, Marinduque Mining executed on October 9,
1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage
covered all of Marinduque Mining's real properties, located at Surigao del Norte, Sipalay,
Negros Occidental, and at Antipolo, Rizal, including the improvements thereon. As of November
20, 1980, the loans extended by PNB amounted to P4 Billion, exclusive of interest and
charges.1
On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of
the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque
Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay,
Negros Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also
covered all of Marinduque Mining's chattels, as well as assets of whatever kind, nature and
description which Marinduque Mining may subsequently acquire in substitution or replenishment
or in addition to the properties covered by the previous Deed of Real and Chattel Mortgage
dated October 7, 1978. Apparently, Marinduque Mining had also obtained loans totaling P2
Billion from DBP, exclusive of interest and charges. 2
On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to
Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB
and DBP all other real and personal properties and other real rights subsequently acquired by
Marinduque Mining.3
For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime
on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged properties.
The events following the foreclosure are narrated by DBP in its petition, as follows:
In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged and
were declared the highest bidders over the foreclosed real properties, buildings, mining claims,
leasehold rights together with the improvements thereon as well as machineries [sic] and
equipments [sic] of MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid
price of P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at Nonoc

Refinery Plant at Surigao del Norte, PNB and DBP as highest bidders, bidded for
P170,577,610.00 (Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP). For the foreclosed real
properties together with all the buildings, major machineries & equipment and other
improvements of MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were sold
to PNB and DBP as highest bidders in the sum of P1,107,167,950.00 (Exhs. "10" to "10-X"PNB/ DBP).
At the auction sale conducted on September 7, 1984[,] over the foreclosed real properties,
buildings, & machineries/equipment of MMIC located at Sipalay, Negros Occidental were sold to
PNB and DBP, as highest bidders, in the amount of P2,383,534,000.00 and P543,040.000.00
respectively (Exhs. "8" to "8-BB", "9" to "90-GGGGGG"-PNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed personal
properties of MMIC, the same were sold to PNB and DBP as the highest bidder in the sum of
P678,772,000.00 (Exhs. "11" and "12-QQQQQ"-PNB).
PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order to
ensure the continued operation of the Nickel refinery plant and to prevent the deterioration of
the assets foreclosed, assigned and transferred to Nonoc Mining and Industrial Corporation all
their rights, interest and participation over the foreclosed properties of MMIC located at Nonoc
Island, Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. "13"-PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and
transferred in favor of Maricalum Mining Corp. all its rights, interest and participation over the
foreclosed properties of MMIC at Sipalay, Negros Occidental for an initial consideration of
P325,800,000.00 (Exh. "14"-PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again
assigned, transferred and conveyed to the National Government thru [sic] the Asset
Privatization Trust (APT) all its existing rights and interest over the assets of MMIC, earlier
assigned to Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and Island
Cement Corporation (Exh. "15" & "15-A" PNB/DBP). 4
In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and
caused to be delivered construction materials and other merchandise from Remington Industrial
Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid as of
August 1, 1984 when Remington filed a complaint for a sum of money and damages against
Marinduque Mining for the value of the unpaid construction materials and other merchandise
purchased by Marinduque Mining, as well as interest, attorney's fees and the costs of suit.
On September 7, 1984, Remington's original complaint was amended to include PNB and DBP
as co-defendants in view of the foreclosure by the latter of the real and chattel mortgages on the
real and personal properties, chattels, mining claims, machinery, equipment and other assets of
Marinduque Mining.5
On September 13, 1984, Remington filed a second amended complaint to include as additional
defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc Mining is the
assignee of all real and personal properties, chattels, machinery, equipment and all other assets
of Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte. 6
On March 26, 1986, Remington filed a third amended complaint including the Maricalum Mining
Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as codefendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum
Mining and Island Cement must be treated in law as one and the same entity by disregarding
the veil of corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are
practically owned wholly by defendants PNB and DBP, and managed by their officers, aside
from the fact that the aforesaid co-defendants NMIC, Maricalum and Island Cement were
organized in such a hurry and in such suspicious circumstances by co-defendants PNB and
DBP after the supposed extrajudicial foreclosure of MMIC's assets as to make their supposed

projects assets, machineries and equipment which were originally owned by co-defendant
MMIC beyond the reach of creditors of the latter.
2. The personnel, key officers and rank-and-file workers and employees of co-defendants
NMIC, Maricalum and Island Cement creations of co-defendants PNB and DBP were the
personnel of co-defendant MMIC such that . . . practically there has only been a change of
name for all legal purpose and intents
3. The places of business not to mention the mining claims and project premises of codefendants NMIC, Maricalum and Island Cement likewise used to be the places of business,
mining claims and project premises of co-defendant MMIC as to make the aforesaid codefendants NMIC, Maricalum and Island Cement mere adjuncts and subsidiaries of codefendants PNB and DBP, and subject to their control and management.
On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being all
corporations created by the government in the pursuit of business ventures should not be
allowed to ignore, x x x or obliterate with impunity nay illegally, the financial obligations of x x x
MMIC whose operations co-defendants PNB and DBP had highly financed before the alleged
extrajudicial foreclosure of defendant MMIC's assets, machineries and equipment to the extent
that major policies of co-defendant MMIC were being decided upon by co-defendants PNB and
DBP as major financiers who were represented in its board of directors forming part of the
majority thereof which through the alleged extrajudicial foreclosure culminated in a complete
take-over by co-defendants PNB and DBP bringing about the organization of their codefendants NMIC, Maricalum and Island Cement to which were transferred all the assets,
machineries and pieces of equipment of co-defendant MMIC used in its nickel mining project in
Surigao del Norte, copper mining operation in Sipalay, Negros Occidental and cement factory in
Antipolo, Rizal to the prejudice of creditors of co-defendant MMIC such as plaintiff Remington
Industrial Sales Corporation whose stockholders, officers and rank-and-file workers in the
legitimate pursuit of its business activities, invested considerable time, sweat and private money
to supply, among others, co-defendant MMIC with some of its vital needs for its operation, which
co-defendant MMIC during the time of the transactions material to this case became x x x codefendants PNB and DBP's instrumentality, business conduit, alter ego, agency (sic), subsidiary
or auxiliary corporation, by virtue of which it becomes doubly necessary to disregard the
corporation fiction that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and Island Cement,
six (6) distinct and separate entities, when in fact and in law, they should be treated as one and
the same at least as far as plaintiff's transactions with co-defendant MMIC are concerned, so as
not to defeat public convenience, justify wrong, subvert justice, protect fraud or confuse
legitimate issues involving creditors such as plaintiff, a fact which all defendants were as (sic)
still are aware of during all the time material to the transactions subject of this case. 7
On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint
impleading the Asset Privatization Trust (APT) as co-defendant. Said fourth amended complaint
was admitted by the lower court in its Order dated April 29, 1989.
On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington,
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants
Marinduque Mining & Industrial Corporation, Philippine National Bank, Development Bank of the
Philippines, Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation, Island
Cement Corporation and Asset Privatization Trust to pay, jointly and severally, the sum of
P920,755.95, representing the principal obligation, including the stipulated interest as of June
22, 1984, plus ten percent (10%) surcharge per annum by way of penalty, until the amount is
fully paid; the sum equivalent to 10% of the amount due as and for attorney's fees; and to pay
the costs.8
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the
Court of Appeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC.

Petitioner filed a Motion for Reconsideration, which was denied in the Resolution dated August
29, 1996.
Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB,
nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT.
On the other hand, private respondent Remington submits that the transfer of the properties
was made in fraud of creditors. The presence of fraud, according to Remington, warrants the
piercing of the corporate veil such that Marinduque Mining and its transferees could be
considered as one and the same corporation. The transferees, therefore, are also liable for the
value of Marinduque Mining's purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,9 cited by the Court of Appeals in its
decision,10 this Court declared:
It is an elementary and fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to which it may be
connected. However, when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association of
persons or in case of two corporations, merge them into one". (Koppel [Phils.], Inc., vs. Yatco,
71 Phil. 496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S.
vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.). x x x.
In accordance with the foregoing rule, this Court has disregarded the separate personality of the
corporation where the corporate entity was used to escape liability to third parties. 11 In this case,
however, we do not find any fraud on the part of Marinduque Mining and its transferees to
warrant the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past
due account had incurred arrearages of more than 20% of the total outstanding obligation.
Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides:
It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from
the issuance of this decree, to foreclose the collateral and/or securities for any loan, credit
accommodation, and/or guarantees granted by them whenever the arrearages on such account,
including accrued interest and other charges, amount to at least twenty percent (20%) of the
total outstanding obligations, including interest and other charges, as appearing in the books of
account and/or related records of the financial institution concerned. This shall be without
prejudice to the exercise by the government financial institution of such rights and/or remedies
available to them under their respective contracts with their debtors, including the right to
foreclose on loans, credits, accommodations and/or guarantees on which the arrearages are
less than twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the
subject properties. The banks had no choice but to obey the statutory command.
The import of this mandate was lost on the Court of Appeals, which reasoned that under Article
19 of the Civil Code, "Every person must, in the exercise of his rights and in the performance of
his duties, act with justice, give everyone his due, and observe honesty and good faith." The
appellate court, however, did not point to any fact evidencing bad faith on the part of the
Marinduque Mining and its transferees. Indeed, it skirted the issue entirely by holding that the
question of actual fraudulent intent on the part of the interlocking directors of DBP and
Marinduque Mining was irrelevant because:
As aptly stated by the appellee in its brief, "x x x where the corporations have directors and
officers in common, there may be circumstances under which their interest as officers in one
company may disqualify them in equity from representing both corporations in transactions
between the two. Thus, where one corporation was 'insolvent and indebted to another, it has
been held that the directors of the creditor corporation were disqualified, by reason of selfinterest, from acting as directors of the debtor corporation in the authorization of a mortgage or
deed of trust to the former to secure such indebtedness x x x" (page 105 of the Appellee's Brief).

In the same manner that "x x x when the corporation is insolvent, its directors who are its
creditors can not secure to themselves any advantage or preference over other creditors. They
can not thus take advantage of their fiduciary relation and deal directly with themselves, to the
injury of others in equal right. If they do, equity will set aside the transaction at the suit of
creditors of the corporation or their representatives, without reference to the question of any
actual fraudulent intent on the part of the directors, for the right of the creditors does not depend
upon fraud in fact, but upon the violation of the fiduciary relation to the directors." x x x (page
106 of the Appellee's Brief)
We also concede that "x x x directors of insolvent corporation, who are creditors of the
company, can not secure to themselves any preference or advantage over other creditors in the
payment of their claims. It is not good morals or good law. The governing body of officers
thereof are charged with the duty of conducting its affairs strictly in the interest of its existing
creditors, and it would be a breach of such trust for them to undertake to give any one of its
members any advantage over any other creditors in securing the payment of his debts in
preference to all others. When validity of these mortgages, to secure debts upon which the
directors were indorsers, was questioned by other creditors of the corporation, they should have
been classed as instruments rendered void by the legal principle which prevents directors of an
insolvent corporation from giving themselves a preference over outside creditors. x x x" (page
106-107 of the Appellee's Brief.) 12
The Court of Appeals made reference to two principles in corporation law. The first pertains to
transactions between corporations with interlocking directors resulting in the prejudice to one of
the corporations. This rule does not apply in this case, however, since the corporation allegedly
prejudiced (Remington) is a third party, not one of the corporations with interlocking directors
(Marinduque Mining and DBP).
The second principle invoked by respondent court involves "directors x x x who are creditors"
which is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the
directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining,
Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its
charter to engage in the mining business. 13 The creation of the three corporations was
necessary to manage and operate the assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value. In the absence of any entity willing to purchase
these assets from the bank, what else would it do with these properties in the meantime? Sound
business practice required that they be utilized for the purposes for which they were intended.
Remington also asserted in its third amended complaint that the use of Nonoc Mining,
Maricalum and Island Cement of the premises of Marinduque Mining and the hiring of the
latter's officers and personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among those acquired by DBP in
the foreclosure sale, convenience and practicality dictated that the corporations so created
occupy the premises where these assets were found instead of relocating them. No doubt,
many of these assets are heavy equipment and it may have been impossible to move them. The
same reasons of convenience and practicality, not to mention efficiency, justified the hiring by
Nonoc Mining, Maricalum and Island Cement of Marinduque Mining's personnel to manage and
operate the properties and to maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend
crime.14 To disregard the separate juridical personality of a corporation, the wrongdoing must be
clearly and convincingly established. It cannot be presumed. 15 In this case, the Court finds that
Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining
and its transferees in the mortgage and foreclosure of the subject properties to justify the
piercing of the corporate veil.

The Court of Appeals also held that there exists in Remington's favor a "lien" on the unpaid
purchases of Marinduque Mining, and as transferee of these purchases, DBP should be held
liable for the value thereof.
In the absence of liquidation proceedings, however, the claim of Remington cannot be enforced
against DBP. Article 2241 of the Civil Code provides:
ARTICLE 2241. With reference to specific movable property of the debtor, the following claims
or liens shall be preferred:
xxx
xxx
xxx
(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the
possession of the debtor, up to the value of the same; and if the movable has been resold by
the debtor and the price is still unpaid, the lien may be enforced on the price; this right is not lost
by the immobilization of the thing by destination, provided it has not lost its form, substance and
identity, neither is the right lost by the sale of the thing together with other property for a lump
sum, when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the
creditor, or those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up
to the value thereof;
xxx
xxx
xxx
In Barretto vs. Villanueva,16 the Court had occasion to construe Article 2242, governing claims
or liens over specific immovable property. The facts that gave rise to the case were summarized
by this Court in its resolution as follows:
x x x Rosario Cruzado sold all her right, title, and interest and that of her children in the house
and lot herein involved to Pura L. Villanueva for P19,000.00. The purchaser paid P1,500 in
advance, and executed a promissory note for the balance of P17,500.00. However, the buyer
could only pay P5,500 on account of the note, for which reason the vendor obtained judgment
for the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean
certificate of title (No. 32626), and mortgaged the property to appellant Magdalena C. Barretto,
married to Jose C. Baretto, to secure a loan of P30,000.03, said mortgage having been duly
recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the
mortgage in her favor, obtained judgment, and upon its becoming final asked for execution on
31 July 1958. On 14 August 1958, Cruzado filed a motion for recognition for her "vendor's lien"
in the amount of P12,000.00, plus legal interest, invoking Articles 2242, 2243, and 2249 of the
new Civil Code. After hearing, the court below ordered the "lien" annotated on the back of
Certificate of Title No. 32526, with the proviso that in case of sale under the foreclosure decree
the vendor's lien and the mortgage credit of appellant Barretto should be paid pro rata from the
proceeds. Our original decision affirmed this order of the Court of First Instance of Manila.
In its decision upholding the order of the lower court, the Court ratiocinated thus:
Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute
an encumbrance on specific immovable property, and among them are:
"(2) For the unpaid price of real property sold, upon the immovable sold"; and
"(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with respect to the
same specific real property or real rights, they shall be satisfied pro-rata, after the payment of
the taxes and assessments upon the immovable property or real rights."
Application of the above-quoted provisions to the case at bar would mean that the herein
appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share
pro-rata with the appellants the proceeds of the foreclosure sale.
xxx
xxx
xxx
As to the point made that the articles of the Civil Code on concurrence and preference of credits
are applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any

such limitation. If we are to interpret this portion of the Code as intended only for insolvency
cases, then other creditor-debtor relationships where there are concurrence of credits would be
left without any rules to govern them, and it would render purposeless the special laws on
insolvency.17
Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes,
speaking for the Court, explained the reasons for the reversal:
A. The previous decision failed to take fully into account the radical changes introduced by the
Civil Code of the Philippines into the system of priorities among creditors ordained by the Civil
Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real
property under Article 1923 were to be resolved according to an order of priorities established
by Article 1927, whereby one class of creditors could exclude the creditors of lower order until
the claims of the former were fully satisfied out of the proceeds of the sale of the real property
subject of the preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar
absolute preference. All the remaining thirteen classes of preferred creditors under Article 2242
enjoy no priority among themselves, but must be paid pro rata, i.e., in proportion to the amount
of the respective credits. Thus, Article 2249 provides:
"If there are two or more credits with respect to the same specific real property or real rights,
they shall be satisfied pro rata, after the payment of the taxes and assessments upon the
immovable property or real rights."
But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to
14 of Article 2242 (or such of them as have credits outstanding) must necessarily be convened,
and the import of their claims ascertained. It is thus apparent that the full application of Articles
2249 and 2242 demands that there must be first some proceeding where the claims of all the
preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of
decedent's estate under Rule 87 of the Rules of Court, or other liquidation proceedings of
similar import.
This explains the rule of Article 2243 of the new Civil Code that
"The claims or credits enumerated in the two preceding articles shall be considered as
mortgages or pledges of real or personal property, or liens within the purview of legal provisions
governing insolvency x x x (Italics supplied).
And the rule is further clarified in the Report of the Code Commission, as follows
"The question as to whether the Civil Code and the Insolvency Law can be harmonized is
settled by this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and
2242) are to be enforced in accordance with the Insolvency Law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a
foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for
the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit
for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two
creditors will not enable the Court to ascertain the pro rata dividend corresponding to each,
because the rights of the other creditors likewise enjoying preference under Article 2242 can not
be ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed
from, decreeing that the proceeds of the foreclosure sale be apportioned only between
appellant and appellee, is incorrect, and must be reversed. [Emphasis supplied]
The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et al.,18 and
in two cases both entitled Development Bank of the Philippines vs. NLRC. 19
Although Barretto involved specific immovable property, the ruling therein should apply equally
in this case where specific movable property is involved. As the extrajudicial foreclosure
instituted by PNB and DBP is not the liquidation proceeding contemplated by the Civil Code,
Remington cannot claim its pro rata share from DBP.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 6,
1995 and its Resolution promulgated on August 29, 1996 is REVERSED and SET ASIDE. The
original complaint filed in the Regional Trial Court in CV Case No. 84-25858 is hereby
DISMISSED.
SO ORDERED.
G.R. No. 124185-87 January 20, 1998
RUBY INDUSTRIAL CORPORATION and BENHAR INTERNATIONAL, INC. petitioners,
vs.
COURT OF APPEALS, MIGUEL LIM, ALLIED LEASING and FINANCE CORPORATION, and
THE MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL CORPORATION, respondents.
PUNO, J.:
Petitioners seek the reversal of the Court of Appeals Decision, 1 setting aside the Orders of the
Securities and Exchange Commission (SEC), dated July 30, 1993 and October 15, 1993, which
approved the Revised Rehabilitation Plan of Ruby Industrial Corporation (RUBY) and appointed
Benhar International, Inc. (BENHAR) as member of RUBY's Management Committee.
The facts: Petitioner Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in
glass manufacturing, while petitioner Benhar International, Inc. (BENHAR) is a domestic
corporation engaged in importation and sale of vehicle spare parts. BENHAR is wholly-owned
by the Yu family and headed by Henry Yu who is also a director and majority stockholder of
RUBY.
In 1983, RUBY suffered severe liquidity problems. Thus, on December 13, 1983, it filed a
Petition for Suspension of Payments with the Securities and Exchange Commission (SEC). 2
On December 20, 1983, the SEC issued an Order 3 declaring RUBY under suspension of
payments. Pending hearing of its petition, the SEC enjoined RUBY from disposing its property,
except insofar as necessary in its ordinary operations. It also enjoined RUBY from making
payments outside of the necessary or legitimate expenses of its business.
On August 10, 1984, the SEC Hearing Panel 4 created a management committee 5 for RUBY to:
(1) undertake the management of RUBY; (2) take custody of and control over all existing assets
and liabilities of RUBY; (3) evaluate RUBY's existing assets and liabilities, earnings and
operations; (4) determine the best way to salvage and protect the interest of its investors and
creditors; and (5) study, review and evaluate the proposed rehabilitation plan for RUBY. 6
Subsequently, at RUBY's special stockholders meeting, its majority stockholders led by Yu Kim
Giang presented the BENHAR/RUBY Rehabilitation Plan to be submitted to SEC. Under the
plan, BENHAR shall lend its P60 million credit line in China Bank to RUBY, payable within ten
(10) years. Moreover, BENHAR shall purchase the credits of RUBY's creditors and mortgage
RUBY's properties to obtain credit facilities for RUBY. 7 Upon approval of the rehabilitation plan,
BENHAR shall control and manage RUBY'S operations. For its service, BENHAR shall receive
a management fee equivalent to 7.5% of RUBY's net sales. 8
Some 40% of the stockholders opposed the BENHAR/RUBY Plan, including private respondent
MIGUEL LIM, a minority shareholder of RUBY. Private respondent Allied Leasing and Finance
Corporation, the biggest unsecured creditor of RUBY and chairman of the management
committee, also objected to the plan as it would transfer RUBY's assets beyond the reach and
to the prejudice of its unsecured creditors. Despite the oppositions, the majority stockholders
still submitted the BENHAR/RUBY Plan to the SEC for approval.
Upon the other hand, RUBY's minority stockholders, represented by private respondent Lim,
submitted their own rehabilitation plan (the ALTERNATIVE PLAN) to the SEC where they
proposed to: (1) pay all RUBY'S creditors without securing any bank loan; (2) run and operate
RUBY without charging management fees; (3) buy-out the majority shares or sell their shares to
the majority stockholders; (4) rehabilitate RUBY's two plants; and (5) secure a loan at 25%

interest, as against the 28% interest charged in the loan under the BENHAR/RUBY Plan. 9
Both plans were endorsed by the SEC to RUBY's management committee for evaluation.
On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan. 10 The
minority stockholders, thru private respondent Lim, appealed the approval to the SEC en banc.
On November 15, 1988, the SEC en banc temporarily enjoined the implementation of the
BENHAR/RUBY Plan. On December 20, 1988, after the expiration of the TRO, the SEC en
banc granted the writ of preliminary injunction against the enforcement of the BENHAR/RUBY
Plan. 11
Thereafter, BENHAR and Henry Yu, later joined by RUBY and Yu Kim Clang, appealed to the
Court of Appeals (CA-G.R. SP No. 16798) questioning the issuance of the writ. Their appeal
was denied. 12
BENHAR and company elevated the matter to this Court. In a minute Resolution, 13 dated
February 28, 1990, we denied the petition and upheld the injunction against the implementation
of the BENHAR/RUBY Plan.
However, it appears that before the SEC Hearing Panel approved the BENHAR/RUBY Plan on
October 28, 1988, BENHAR had already implemented part of the plan by paying off Far East
Bank & Trust Company (FEBTC), one of RUBY's secured creditors. Thus, by May 30, 1988,
FEBTC had already executed a deed of assignment of credit and mortgage rights in favor of
BENHAR. Moreover, despite the SEC en banc's TRO and injunction, BENHAR still paid RUBY's
other secured creditors who, in turn, assigned their credits in favor of BENHAR.
Hence, RUBY's biggest unsecured creditor, Allied Leasing and Finance Corporation, and private
respondent Lim moved to nullify the deeds of assignment executed in favor of BENHAR and
cite the parties thereto in contempt for willful violation of the December 20, 1983 SEC Order
enjoining RUBY from disposing its properties and making payments pending the hearing of its
petition for suspension of payments. Private respondents Lim and Allied Leasing charged that in
paying off FEBTC's credits, FEBTC was given undue preference over the other creditors of
RUBY.
Acting on private respondents' motions, the SEC Hearing Panel nullified the deeds of
assignment executed by RUBY's creditors in favor of BENHAR and declared the parties thereto
guilty of indirect contempt. 14
Petitioners appealed to the SEC en banc. Their appeal was denied. 15 It was ruled that, pending
approval of the BENHAR/RUBY plan, BENHAR had no authority to pay off FEBTC, one of
RUBY's creditors. In prematurely implementing the BENHAR/RUBY plan, BENHAR defied the
SEC Order declaring RUBY under suspension of payments and directing the management
committee to preserve its assets.
Petitioners RUBY and BENHAR, joined by Henry Yu and Yu Kim Giang, appealed to the Court
of Appeals (CA-G.R. SP No. 18310). On August 29,1990, the Court of Appeals affirmed the SEC
ruling nullifying the deeds of assignment. 16 It also declared that its decision is final and
executory as to RUBY and Yu Kim Giang for their failure to file their pleadings within the
reglementary period. This Court affirmed the Court of Appeals' decision in G.R. No. 96675. 17
Earlier, on May 29, 1990, after the SEC en banc enjoined the implementation of
BENHAR/RUBY Plan, RUBY filed with the SEC en banc an ex-parte petition to create a new
management committee and to approve its revised rehabilitation plan (Revised BENHAR/RUBY
Plan). Under the revised plan, BENHAR shall receive P34.068 Million of the P60.437 Million
credit facility to be extended to RUBY, as reimbursement for BENHAR's payment to some of
RUBY's creditors.
The SEC en banc directed RUBY to submit the Revised BENHAR/RUBY Plan to its creditors for
comment and approval. The petition for the creation of a new management committee was
remanded for further proceedings to the SEC Hearing Panel. The Alternative Plan of RUBY's
minority stockholders was also forwarded to the hearing panel for evaluation.
On April 26, 1991, over ninety (90%) percent of RUBY's creditors objected to the Revised

BENHAR/RUBY Plan and the creation of a new management committee. Instead, they
endorsed the minority stockholders' Alternative Plan.
At the hearing of the petition for the creation of a new management committee, three (3)
members of the original management committee 18 opposed the Revised BENHAR/RUBY Plan
on the following grounds:
(1) the Revised BENHAR/RUBY Plan would legitimize the entry of BENHAR, a total stranger, to
RUBY as BENHAR would become the biggest creditor of RUBY;
(2) the revised plan would put RUBY's assets beyond the reach of the unsecured creditors and
the minority stockholders; and,
(3) the revised plan was not approved by RUBY's stockholders in a meeting called for the
purpose.
However, on September 18, 1991, despite the objections of over 90% of RUBY's creditors and
three (3) members of the management committee, the SEC Hearing Panel approved the
revised plan and dissolved the existing management committee. It also created a new
management committee and appointed BENHAR as one of its members. 19 In addition to the
powers originally conferred to the management committee under P.D. No. 902-A, the new
management committee was tasked to oversee the implementation by the Board of Directors of
the revised rehabilitation plan for RUBY.
Consequently, the original management committee, Lim, and the Allied Leasing Corporation
appealed to the SEC en banc. On July 30, 1993, the SEC En Banc affirmed the approval of the
Revised BENHAR/RUBY Plan and the creation of a new management committee. 20 To avoid
any group from controlling the management of RUBY, the SEC appointed SEC lawyers Ruben
C. Ladia and Teresita R. Siao as additional members of the new management committee.
Further, it declared that BENHAR's membership in the new management committee is subject
to the condition that BENHAR will extend its credit facilities to RUBY without using the latter's
assets as security or collateral.
Private respondents Lim, Allied Leasing Corporation and the original management committee
moved for reconsideration. Petitioners, on the other hand, asked the SEC to reconsider the
portion of its Order prohibiting BENHAR from utilizing RUBY's assets as collateral.
On October 15, 1993, the SEC denied private respondents' motions for reconsideration.
However, it granted petitioners' motion and allowed BENHAR to use RUBY's assets as
collateral for loans, subject to the approval of the majority of all the members of the new
management committee. 21
On appeal by private respondents, the Court of Appeals set aside 22 SEC's approval of the
Revised BENHAR/RUBY plan and remanded the case to the SEC for further proceedings. It
ruled that the revised plan circumvented its earlier decision (CA-G.R. SP No. 18310) nullifying
the deeds of assignment executed by RUBY's creditors in favor of BENHAR. Under the revised
plan, BENHAR was to receive P34.068 Million of the P60.437 Million credit facility to be
extended to RUBY, as settlement for its advance payment to RUBY's seven (7) secured
creditors. In effect, the payments made by BENHAR under the void Deeds of Assignment were
recognized as payable to BENHAR under the revised plan. Petitioners' motion for
reconsideration was denied. 23
Hence, this petition where petitioners aver that:
I. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR, GRAVELY ABUSED ITS
DISCRETION AND EXCEEDED ITS JURISDICTION WHEN IT WENT AGAINST THE FACTS
AS FOUND BY THE SEC AND, THEREAFTER, SUBSTITUTED ITS JUDGMENT FOR THAT
OF THE SEC.
II. THE COURT OF APPEALS COMMITTED AN ERROR REVIEWABLE ON APPEAL AND
ALSO A PROPER SUBJECT OF CERTIORARI WHEN IT ALLOWED PRIVATE
RESPONDENTS TO FILE SEPARATE PETITIONS PREPARED BY LAWYERS
REPRESENTING THEMSELVES AS BELONGING TO DIFFERENT LAW FIRMS.

We find no merit in the petition.

Petitioners first contend that, in reversing the SEC's approval of the Revised BENHAR/RUBY
Plan, the Court of Appeals exceeded its jurisdiction and disregarded the SEC's expertise in
resolving corporate controversies.
The settled doctrine is that factual findings of an administrative agency are accorded respect
and, at times, finality for they have acquired the expertise inasmuch as their jurisdiction is
confined to specific matters. 24 Nonetheless, these doctrines do not apply when the board or
official has gone beyond his statutory authority, exercised unconstitutional powers or clearly
acted arbitrarily and without regard to his duty or with grave abuse of discretion. 25 In Leongson
vs. Court of Appeals, 26 we held: "once the actuation of the administrative official or
administrative board or agency is tainted by a failure to abide by the command of the law, then it
is incumbent on the courts of justice to set matters right, with this Tribunal having the last say on
the matter."
We hold that the SEC acted arbitrarily when it approved the Revised BENHAR/RUBY Plan. As
found by the Court of Appeals, the plan contained provisions which circumvented its final
decision 27 in CA-G.R. SP No. 18310, nullifying the deeds of assignment of credits and
mortgages executed by RUBY's creditors in favor of BENHAR, as well as this Court's resolution
in G.R. No. 96675, affirming said Court of Appeals' decision. Specifically, the Revised
BENHAR/RUBY Plan considered as valid the advance payments made by BENHAR in favor of
some of RUBY'S creditors. The nullity of BENHAR's unauthorized dealings with RUBY's
creditors is settled. The deeds of assignment between BENHAR and RUBY's creditors had
been categorically declared void by the SEC Hearing Panel in two (2) orders issued on January
12, 1989 and March 15, 1989. 28 The dispositive portion of the Order, dated January 12, 1989,
held:
WHEREFORE, the motion for reconsideration of the Order dated October 7, 1988, insofar as it
relates to the motion of Allied Leasing and Finance Corporation to cite for contempt and to annul
deed of assignment is hereby GRANTED. . . . The Deed of Assignment of Receivables and
Mortgages, Rights, Credits and Interest Without Recourse having been executed in violation of
the Order dated December 20, 1988 is hereby declared NULL and VOID.
SO ORDERED.
The dispositive portion of the Order dated March 15, 1989, similarly provided:
WHEREFORE, Mr. Yu Kim Giang and others are hereby found guilty of indirect contempt and a
penalty of P500.00 each is hereby imposed on them. The Deed of Assignment of Receivables
and Mortgages, Rights, Credits and Interest Without Recourse, in favor of Benhar International,
Inc., by Florence Danon, Philippine Bank of Communication, Philippine Commercial
International Bank, Philippine Trust Company and PCI Leasing and Finance Incorporated,
having been executed in violation of the Order dated December 20, 1988 are hereby declared
NULL and VOID.
These orders were upheld by the SEC en banc 29 and the Court of Appeals. 30 In CA-GR SP No.
18310, the Court of Appeals ruled as follows:
xxx xxx xxx
1) . . . when the Deed of Assignment was executed on May 30, 1988 by and between Ruby
Industrial Corp., Benhar International Inc., and FEBTC, the Rehabilitation Plan proposed by
petitioner Ruby Industrial Corp. for Benhar International Inc. to assume all petitioner's obligation
has not been approved by the SEC. The Rehabilitation Plan was not approved until October 28,
1988. There was a willful and blatant violation of the SEC order dated December 1983 on the
part of petitioner Ruby Industrial Corp., represented by Yu Kim Giang, by Benhar International
Inc., represented by Henry Yu and by FEBTC . . . .
2) The magnitude and coverage of the transactions involved were such that Yu Kim Giang and
the other signatories cannot feign ignorance or pretend lack of knowledge thereto in view of the
fact that they were all signatories to the transaction and privy to all the negotiations leading to

the questioned transactions. In executing the Deeds of Assignments, the petitioners totally
disregarded the mandate contained in the SEC order not to dispose the properties of Ruby
Industrial Corp. in any manner whatsoever pending the approval of the Rehabilitation Plan and
rendered illusory the SEC efforts to rehabilitate the petitioner corporation to the best interests of
all the creditors.
3) The assignments were made without prior approval of the Management Committee created
by the SEC in an Order dated August 10, 1984. Under Section 6, par. d, sub. par. (2) of P.D.
902-A as amended by P.D. 1799, the Management Committee, rehabilitation receiver, board or
body shall have the power to take custody and control over all existing assets of such entities
under management notwithstanding any provision of law, articles of incorporation or by-law to
the contrary. The SEC therefore has the power and authority, through a Management
Committee composed of petitioner's creditors or through itself directly, to declare all assignment
of assets of the petitioner Corporation declared under suspension of payments, null and void,
and to conserve the same in order to effect a fair, equitable and meaningful rehabilitation of the
insolvent corporation.
4) . . . . The acts for which petitioners were held in indirect contempt by the SEC arose from the
failure or willful refusal by petitioners to obey the lawful order of the SEC not to dispose of any
of its properties in any manner whatsoever without authority or approval of the SEC. The
execution of the Deeds of Assignment tend to defeat or obstruct the administration of justice.
Such acts are offenses against the SEC because they are calculated to embarrass, hinder and
obstruct the tribunal in the administration of justice or lessen its authority.
In view of the foregoing conclusion which has now been reached, it is not necessary to discuss
at length or to determine other questions which are presented on record. It is sufficient to say
that the facts as established by the evidence on records warrant a finding that petitioners are
guilty of indirect contempt. The Order of the SEC is hereby AFFIRMED. This petition is
DISMISSED with costs against the petitioners.
SO ORDERED. (emphasis ours)
Petitioners insist that the Court of Appeals did not make a categorical statement in the
dispositive portion of its decision in CA-G.R. SP No. 18310 that it was nullifying the deeds of
assignment in favor of BENHAR. Allegedly, it merely stated that it is affirming the decision of the
SEC. Petitioners cite Olac vs. Court of Appeals 31 where we held that the dispositive portion or
the fallo constitutes the court's resolution in a given case, while the discussion in the body of the
decision merely expresses the court's opinion.
The contention has no merit. The principle laid down in Olac applies only when there is a
conflict between the dispositive part (fallo) and the opinion of the court contained in the
decision. Hence, in the execution of the court's judgment, the fallo should be considered as the
final disposition of the case before it. Such conflict does not exist in the Court of Appeals'
decision in CA-G.R. SP No. 18310. It is crystal clear that what the Court of Appeals affirmed in
CA-GR SP No. 18310 was the nullity of the deeds of assignment in favor of BENHAR. In a
minute resolution in G.R. No. 96675, we even sustained the Court of Appeals' decision in CAGR SP No. 18310. 32
In any event, petitioners actively participated in the proceedings before the SEC and the Court
of Appeals when private respondents sought the nullification of the subject deeds. Petitioners
are, therefore, estopped from questioning anew the validity of the deeds of assignment
executed by RUBY 's creditors in favor of BENHAR. Petitioners should know that it is not for a
party to participate in the proceedings, submit his case for decision, accept the judgment if it is
favorable to him but attack it for any reason when it is adverse. 33
Even the SEC en banc, in its July 30, 1993 Order affirming the approval of the Revised
BENHAR/RUBY Plan, has acknowledged the invalidity of the subject deeds of assignment.
However, to justify its approval of the plan and the appointment of BENHAR to the new
management committee, it gave the lame excuse that BENHAR became RUBY's creditor for

having paid RUBY's debts. We quote the relevant portion of the SEC's ruling, thus:
Anent the contention that BENHAR should not take an active participation in the management
of petitioner corporation, the same deserves scant consideration.
While the Deeds of Assignment executed by creditors of Ruby in favor of Benhar were all
declared null and void, the Revised Rehabilitation plan, as herein approved by the Commission,
shows that Benhar will assign its credit lines/loan proceeds or will act as financier whereby it relends the contracted loan to Ruby thereby converting Benhar as a creditor of the petitioner
corporation once the Rehabilitation Plan is implemented. In fact, as of March 31, 1990, it
appears that Benhar had made some advance payments to some creditors of Ruby further
strengthening its status as a creditor. We cannot, therefore, see any reason why Benhar should
not sit in the management team to oversee the implementation of the Plan.
For its part, the Court of Appeals noted that the approved Revised BENHAR/RUBY Plan gave
undue preference to BENHAR. The records, indeed, show that BENHAR's offer to lend its credit
facility in favor of RUBY is conditioned upon the payment of the amount it advanced to RUBY's
creditors, thus:
FUND SOURCING
xxx xxx xxx
1.1. Deed of Assignment of Credit Facility (or Loan Proceeds) to be executed by Benhar in favor
of Ruby, under pre-arrangement with China Banking Corporation or by any other creditor-banks,
and upon payment by Ruby of such amount already advanced by Benhar.
In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit facility to be
extended to RUBY for the latter's rehabilitation.
Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore
and reinstate the corporation to its former position of successful operation and solvency. 34
When a distressed company is placed under rehabilitation, the appointment of a management
committee follows to avoid collusion between the previous management and creditors it might
favor, to the prejudice of the other creditors. All assets of a corporation under rehabilitation
receivership are held in trust for the equal benefit of all creditors to preclude one from obtaining
an advantage or preference over another by the expediency of attachment, execution or
otherwise. As between the creditors, the key phrase is equality in equity. Once the corporation
threatened by bankruptcy is taken over by a receiver, all the creditors ought to stand on equal
footing. Not any one of them should be paid ahead of the others. This is precisely the reason for
suspending all pending claims against the corporation under receivership. 35
Parenthetically, BENHAR is a domestic corporation engaged in importing and selling vehicle
spare parts with an authorized capital stock of thirty million pesos. Yet, it offered to lend its credit
facility in the amount of sixty to eighty millions pesos to RUBY. It is to be noted that BENHAR is
not a lending or financing corporation and lending its credit facilities, worth more than double its
authorized capitalization, is not one of the powers granted to it under its Articles of
Incorporation. Significantly, Henry Yu, a director and a majority stockholder of RUBY is, at the
same time, a stockholder of BENHAR, a corporation owned and controlled by his family. These
circumstances render the deals between BENHAR and RUBY highly irregular.
To justify its appointment in the new management committee and to dispute that it will become a
creditor of RUBY only on account of the proposed assignment of its credit facility to RUBY,
BENHAR avers that as early as December 27, 1988, it already lent one million pesos
(P1,000,000.00) to RUBY for the latter's working capital.
The submission deserves scant consideration. To start with, this argument was raised by
BENHAR for the first time in its motion for reconsideration before the Court of Appeals. The
settled rule is that issues not raised in the court a quo cannot be raised for the first time on
appeal in this case, in a motion for reconsideration for being offensive to the basic rules of
fair play, justice and due process. 36
Moreover, when RUBY initiated its petition for suspension of payments with the SEC, BENHAR

was not listed as one of RUBY's creditors. BENHAR is a total stranger to RUBY. If at all,
BENHAR only served as a conduit of RUBY. As aptly stated in the challenged Court of Appeals
decision: 37
Benhar's role in the Revised Benhar/Ruby Plan, as envisioned by the majority stockholders, is
to contract the loan for Ruby and, serving the role of a financier, relend the same to Ruby.
Benhar is merely extending its credit line facility with China Bank, under which the bank agrees
to advance funds to the company should the need arise. This is unlikely a loan in which the
entire amount is made available to the borrower so that it can be used and programmed for the
benefit of the company's financial and operational needs. Thus, it is actually China Bank which
will be the source of the funds to be relent to Ruby. Benhar will not shell out a single centavo of
its own funds. It is the assets of Ruby which will be mortgaged in favor of Benhar. Benhar's
participation will only make the rehabilitation plan more costly and, because of the mortgage of
its (Ruby's) assets to a new creditor, will create a situation which is worse than the present. . . . .
We need not say more.
On the second issue, petitioners charge that private respondents are guilty of forum-shopping. It
appears that the three (3) private respondents filed separate petitions before the Court of
Appeals upon receipt of the adverse ruling of the SEC en banc. Private respondent Miguel Lim
commenced CA-G. R. SP No. 32404, thru its counsel Romulo Mabanta Beunaventura Sayoc
and De los Angeles. For their part, private respondent Allied Leasing and the original
management committee of RUBY, represented by Attorney Waiter T. Young, commenced CAG.R. SP No. 32483 and CA-G.R. SP No. 32469, respectively. In CA-G. R. SP No. 32483, Atty.
Young signed for and in behalf of the law firm Ocampo Quiroz Pesayco and Associates, while in
CA-G.R. SP No. 32469, Atty. Young signed for the law firm Quiroz and Young. In both petitions,
he used the same business address Allied Bank Center, 6754 Ayala Avenue, Makati City.
We hold that private respondents are not guilty of forum-shopping. In Ramos, Sr. vs. Court of
Appeals, 38 we ruled:
The private respondents can be considered to have engaged in forum shopping if all of them,
acting as one group, filed identical special civil actions in the Court of Appeals and in this Court.
There must be identity of parties or interests represented, rights asserted and relief sought in
different tribunals. In the case at bar, two groups of private respondents appear to have acted
independently of each other when they sought relief from the appellate court. Both group sought
relief from the same tribunal.
It would not matter even if there are several divisions in the Court of Appeals. The adverse party
can always ask for the consolidation of the two cases. . . .
In the case at bar, private respondents represent different groups with different interests the
minority stockholders' group, represented by private respondent Lim; the unsecured creditors
group, Allied Leasing & Finance Corporation; and the old management group. Each group has
distinct rights to protect. In line with our ruling in Ramos , the cases filed by private respondents
should be consolidated. In fact, BENHAR and RUBY did just that in their urgent motions filed
on December 1, 1993 and December 6, 1993, respectively, they prayed for the consolidation of
the cases before the Court of Appeals.
IN VIEW OF THE FOREGOING, the instant petition is DISMISSED for lack of merit. The Court
of Appeals' Decision, dated March 31, 1995, and its Resolution, dated March 12, 1996, in CAG.R. SP Nos. 32404, 42469 and 32483 are AFFIRMED. The case is remanded to the Securities
and Exchange Commission for further proceedings. Costs against petitioners.
SO ORDERED.
G.R. No. 165675 September 30, 2005
SPOUSES EDUARDO SOBREJUANITE and FIDELA SOBREJUANITE, Petitioners,
vs.
ASB DEVELOPMENT CORPORATION, Respondent.

DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the June 29, 2004 Decision of the Court of Appeals
in CA-G.R. SP No. 79420 which reversed and set aside the Decision of the Office of the
President; and its October 18, 2004 Resolution denying reconsideration thereof.
The antecedent facts show that on March 7, 2001, spouses Eduardo and Fidela Sobrejuanite
(Sobrejuanite) filed a Complaint 1 for rescission of contract, refund of payments and damages,
against ASB Development Corporation (ASBDC) before the Housing and Land Use Regulatory
Board (HLURB).
Sobrejuanite alleged that they entered into a Contract to Sell with ASBDC over a condominium
unit and a parking space in the BSA Twin Tower-B Condominum located at Bank Drive, Ortigas
Center, Mandaluyong City. They averred that despite full payment and demands, ASBDC failed
to deliver the property on or before December 1999 as agreed. They prayed for the rescission of
the contract; refund of payments amounting to P2,674,637.10; payment of moral and exemplary
damages, attorneys fees, litigation expenses, appearance fee and costs of the suit.
ASBDC filed a motion to dismiss or suspend proceedings in view of the approval by the
Securities and Exchange Commission (SEC) on April 26, 2001 of the rehabilitation plan of ASB
Group of Companies, which includes ASBDC, and the appointment of a rehabilitation receiver.
The HLURB arbiter however denied the motion and ordered the continuation of the
proceedings.
The arbiter found that under the Contract to Sell, ASBDC should have delivered the property to
Sobrejuanite in December 1999; that the latter had fully paid their obligations except the
P50,000.00 which should be paid upon completion of the construction; and that rescission of the
contract with damages is proper.
The dispositive portion of the Decision reads:
WHEREFORE, in view of the foregoing judgment is rendered ordering the rescission of the
contracts to sell between the parties, and further ordering the respondent [ASBDC] to pay the
complainants [Sobrejuanite] the following:
a) all amortization payments by the complainants amounting to P2,674,637.10 plus 12% interest
from the date of actual payment of each amortization;
b) moral damages amounting to P200,000.00;
c) exemplary damages amounting to P100,000.00;
d) attorneys fees amounting to P100,000.00;
e) litigation expenses amounting to P50,000.00.
All other claims and all counter-claims are hereby dismissed.
IT IS SO ORDERED.2
The HLURB Board of Commissioners 3 affirmed the ruling of the arbiter that the approval of the
rehabilitation plan and the appointment of a rehabilitation receiver by the SEC did not have the
effect of suspending the proceedings before the HLURB. The board held that the HLURB could
properly take cognizance of the case since whatever monetary award that may be granted by it
will be ultimately filed as a claim before the rehabilitation receiver. The board also found that
ASBDC failed to deliver the property to Sobrejuanite within the prescribed period. The
dispositive portion of the Decision reads:
Wherefore the petition for review is denied and the decision of the office below is affirmed. It
shall be understood that all monetary awards shall still be filed as claims before the
rehabilitation receiver.4
ASBDC filed an appeal5 before the Office of the President which was dismissed 6 for lack of
merit. Hence, ASBDC filed a petition 7 under Section 1, Rule 43 of the Rules of Court before the
Court of Appeals, docketed as CA-G.R. SP No. 79420.
On June 29, 2004, the Court of Appeals rendered its assailed Decision, 8 the dispositive portion
of which reads:

WHEREFORE, premises considered, the instant petition is GRANTED. The impugned decision
dated June 27, 2003 of the Office of the President is hereby REVERSED AND SET ASIDE. No
pronouncement as to costs.
SO ORDERED.9
The Court of Appeals held that the approval by the SEC of the rehabilitation plan and the
appointment of the receiver caused the suspension of the HLURB proceedings. The appellate
court noted that Sobrejuanites complaint for rescission and damages is a claim under the
contemplation of Presidential Decree (PD) No. 902-A or the SEC Reorganization Act and A.M.
No. 00-8-10-SC or the Interim Rules of Procedure on Corporate Rehabilitation, because it
sought to enforce a pecuniary demand. Therefore, jurisdiction lies with the SEC and not
HLURB. It also ruled that ASBDC was obliged to deliver the property in December 1999 but its
financial reverses warranted the extension of the period.
Sobrejuanites motion for reconsideration was denied 10 hence the instant petition which raises
the following issues:
1. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND GRAVELY ABUSED
ITS DISCRETION IN RULING THAT THE SEC, NOT THE HLURB, HAS JURISDICTION OVER
PETITIONERS COMPLAINT, IN CONTRAVENTION TO LAW AND THE RULING OF THIS
HONORABLE COURT IN THE ARRANZA CASE.
2. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND GRAVELY ABUSED
ITS DISCRETION WHEN IT RULED THAT THE APPROVAL OF THE CORPORATE
REHABILITATION PLAN AND THE APPOINTMENT OF A RECEIVER HAD THE EFFECT OF
SUSPENDING THE PROCEEDING IN THE HLURB, AND THAT THE MONETARY AWARD
GIVEN BY THE HLURB COULD NOT [BE] FILED IN THE SEC FOR PROPER DISPOSITION,
NOT BEING IN ACCORDANCE WITH LAW AND JURISPRUDENCE.
3. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND GRAVELY ABUSED
ITS DISCRETION IN RULING THAT RESPONDENT "IS JUSTIFIED IN EXTENDING THE
AGREED DATE OF DELIVERY BY INVOKING AS GROUND THE FINANCIAL CONSTRAINTS
IT EXPERIENCED," BEING CONTRARY TO LAW AND IN EEFECT AN UNLAWFUL
NOVATION OF THE AGREEMENT OF THE DATE OF DELIVERY ENTERED INTO BY
PETITIONERS AND RESPONDENT.11
The petition lacks merit.
Section 6(c) of PD No. 902-A empowers the SEC:
c) To appoint one or more receivers of the property, real and personal, which is the subject of
the action pending before the Commission whenever necessary in order to preserve the
rights of the parties-litigants and/or protect the interest of the investing public and creditors:
Provided, finally, That upon appointment of a management committee, rehabilitation receiver,
board or body, pursuant to this Decree, all actions for claims against corporations,
partnerships or associations under management or receivership pending before any
court, tribunal, board or body shall be suspended accordingly. [Emphasis added]
The purpose for the suspension of the proceedings is to prevent a creditor from obtaining an
advantage or preference over another and to protect and preserve the rights of party litigants as
well as the interest of the investing public or creditors. 12 Such suspension is intended to give
enough breathing space for the management committee or rehabilitation receiver to make the
business viable again, without having to divert attention and resources to litigations in various
fora.13 The suspension would enable the management committee or rehabilitation receiver to
effectively exercise its/his powers free from any judicial or extra-judicial interference that might
unduly hinder or prevent the "rescue" of the debtor company. To allow such other action to
continue would only add to the burden of the management committee or rehabilitation receiver,
whose time, effort and resources would be wasted in defending claims against the corporation
instead of being directed toward its restructuring and rehabilitation. 14
Thus, in order to resolve whether the proceedings before the HLURB should be suspended, it is

necessary to determine whether the complaint for rescission of contract with damages is a
claim within the contemplation of PD No. 902-A.
In Finasia Investments and Finance Corp. v. Court of Appeals,15 we construed claim to refer only
to debts or demands pecuniary in nature. Thus:
[T]he word claim as used in Sec. 6(c) of P.D. 902-A refers to debts or demands of a pecuniary
nature. It means "the assertion of a right to have money paid. It is used in special proceedings
like those before administrative court, on insolvency."
The word "claim" is also defined as:
Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured; or right to an equitable remedy for breach of performance if such breach gives rise
to a right to payment, whether or not such right to an equitable remedy is reduced to judgment,
fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured.
In conflicts of law, a receiver may be appointed in any state which has jurisdiction over the
defendant who owes a claim.
As used in statutes requiring the presentation of claims against a decedents estate, "claim" is
generally construed to mean debts or demands of a pecuniary nature which could have been
enforced against the deceased in his lifetime and could have been reduced to simple money
judgments; and among these are those founded upon contract.
In Arranza v. B.F. Homes, Inc.,16 claim is defined as referring to actions involving monetary
considerations.
Finasia Investments and Finance Corp. v. Court of Appeals and Arranza v. B.F. Homes, Inc.
were promulgated prior to the effectivity of the Interim Rules of Procedure on Corporate
Rehabilitation on December 15, 2000. The interim rules define a claim as referring to all claims
or demands, of whatever nature or character against a debtor or its property, whether for money
or otherwise. The definition is all-encompassing as it refers to all actions whether for money or
otherwise. There are no distinctions or exemptions.
Incidentally, although the petition for rehabilitation with prayer for suspension of actions and
proceedings was filed before the SEC on May 2, 2000, 17 or prior to the effectivity of the interim
rules, the same would still apply pursuant to Section 1, Rule 1 thereof which provides:
Section 1. Scope These Rules shall apply to petitions for rehabilitation filed by corporations,
partnerships, and associations pursuant to Presidential Decree No. 902-A, as amended.
Clearly then, the complaint filed by Sobrejuanite is a claim as defined under the Interim Rules of
Procedure on Corporate Rehabilitation. Even under our rulings in Finasia Investments and
Finance Corp. v. Court of Appeals and Arranza v. B.F. Homes, Inc., the complaint for rescission
with damages would fall under the category of claim considering that it is for pecuniary
considerations.
In their complaint, Sobrejuanite pray for the rescission of the contract and the refund of
P2,674,637.10 representing their total payments to ASBDC; P200,000.00 as moral damages;
P100,000.00 as exemplary damages; P100,000.00 as attorneys fees; P50,000.00 as litigation
expenses; P1,500.00 per hearing as appearance fees; and costs of the suit.
In the decision of the HLURB arbiter, ASBDC was ordered to pay P2,674,637.10 plus 12%
interest from the date of actual payment of each amortization, representing the refund of all the
amortization payments made by Sobrejuanite; P200,000.00 as moral damages; P100,000.00 as
exemplary damages; P100,000.00 as attorneys fees; and P50,000.00 as litigation expenses.
As such, the HLURB arbiter should have suspended the proceedings upon the approval by the
SEC of the ASB Group of Companies rehabilitation plan and the appointment of its
rehabilitation receiver. By the suspension of the proceedings, the receiver is allowed to fully
devote his time and efforts to the rehabilitation and restructuring of the distressed corporation.
It is well to note that even the execution of final judgments may be held in abeyance when a
corporation is under rehabilitation.18 Hence, there is more reason in the instant case for the

HLURB arbiter to order the suspension of the proceedings as the motion to suspend was filed
soon after the institution of the complaint. By allowing the proceedings to proceed, the HLURB
arbiter unwittingly gave undue preference to Sobrejuanite over the other creditors and claimants
of ASBDC, which is precisely the vice sought to be prevented by Section 6(c) of PD 902-A.
Thus:
As between creditors, the key phrase is "equality is equity." When a corporation threatened by
bankruptcy is taken over by a receiver, all the creditors should stand on equal footing. Not
anyone of them should be given any preference by paying one or some of them ahead of the
others. This is precisely the reason for the suspension of all pending claims against the
corporation under receivership. Instead of creditors vexing the courts with suits against the
distressed firm, they are directed to file their claims with the receiver who is a duly appointed
officer of the SEC.19
Petitioners reliance on Arranza v. B.F. Homes, Inc.20 is misplaced. In that case, we held that the
HLURB retained its jurisdiction despite the rehabilitation proceedings since the claim filed by the
homeowners did not involve pecuniary considerations. The claim therein was for specific
performance to enforce the homeowners rights as regards right of way, open spaces, road and
perimeter wall repairs, and security. However, it can also be deduced therefrom that if the claim
was for monetary awards, the proceedings before the HLURB should be suspended during the
rehabilitation. Thus:
No violation of the SEC order suspending payments to creditors would result as far as
petitioners complaint before the HLURB is concerned. To reiterate, what petitioners seek to
enforce are respondents obligations as a subdivision developer. Such claims are basically not
pecuniary in nature although it could incidentally involve monetary considerations. All that
petitioners claims entail is the exercise of proper subdivision management on the part of the
SEC-appointed Board of Receivers towards the end that homeowners shall enjoy the ideal
community living that respondent portrayed they would have when they bought real estate from
it.
Neither may petitioners be considered as having "claims" against respondent within the context
of the following proviso of Section 6 (c) of P.D. No. 902-A, to warrant suspension of the
HLURB proceedings.
.
In this case, under the complaint for specific performance before the HLURB, petitioners do not
aim to enforce a pecuniary demand. Their claim for reimbursement should be viewed in the light
of respondents alleged failure to observe its statutory and contractual obligations to provide
petitioners a "decent human settlement" and "ample opportunities for improving their quality of
life." The HLURB, not the SEC, is equipped with the expertise to deal with that matter. 21
Finally, we agree with the Court of Appeals that under the Contract to Sell, ASBDC was obliged
to deliver the property to Sobrejuanite on or before December 1999. Nonetheless, the same
was deemed extended due to the financial reverses experienced by the company. Section 7 of
the Contract to Sell allows the developer to extend the period of delivery on account of causes
beyond its control, such as financial reverses.
WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Appeals dated
June 29, 2004 in CA-G.R. SP No. 79420 and its Resolution dated October 18, 2004, are
AFFIRMED.
SO ORDERED.
G.R. Nos. 175181-82
September 14, 2007
METROPOLITAN BANK and TRUST COMPANY, INC., petitioner,
vs.
SLGT HOLDINGS, INC., DANILO A. DYLANCO and ASB DEVELOPMENT CORPORATION,
respondents.

x - - - - - - - - - - - - - - - - - - - - - - - -x
G.R. Nos. 175354 & 175387-88
September 14, 2007
UNITED COCONUT PLANTERS BANK, petitioner,
vs.
SLGT HOLDINGS, INC. and ASB DEVELOPMENT CORPORATION, respondents.
DECISION
GARCIA, J.:
It happened before; it will likely happen again. A developer embarks on an aggressive marketing
campaign and succeeds in selling units in a yet to-be completed condominium project. Short of
funds, the developer borrows money from a bank and, without apprising the latter of the preselling transactions, mortgages the condominium complex, but also without informing the
buyers of the mortgage constitution. Saddled with debts, the developer fails to meet its part of
the bargain. The defaulting developer is soon sued by the fully-paid unit buyers for specific
performance or refund and is threatened at the same time with a foreclosure of mortgage.
Having his hands full parrying legal blows from different directions, the developer seeks a
declaration of suspension of payment, followed by a petition for rehabilitation with suspension of
action.
With a slight variation, the scenario thus depicted describes the instant case which features
respondent ASB Development Corporation (ASB, for short), as the defaulting developer of the
BSA Twin Towers Condominium Project (BSA Towers or Project, for short) situated at Ortigas
Center, Mandaluyong City, and respondents Danilo A. Dylanco and SLGT Holdings, Inc.
(Dylanco and SLGT, respectively, hereinafter) as the unit buyers. Petitioners Metropolitan Bank
and Trust Company, Inc. (Metrobank) and United Coconut Planters Bank (UCPB) are the
lending-mortgagee banks.
And now to the case:
Before the Court are these separate petitions for review under Rule 45 of the Rules of Court
separately interposed by Metrobank and UCPB to nullify and set aside the consolidated
Decision1 and Resolution2 dated June 29, 2006, and October 31, 2006, respectively, of the
Court of Appeals (CA) in CA-G.R. SP No. 92807, CA-G.R. SP No. 92808 and CA-G.R. SP No.
92882.
The first assailed issuance affirmed the earlier Decision 3 dated October 10, 2005 of the Office of
the President (OP, hereinafter), as modified in its Order 4 of December 22, 2005, in consolidated
OP Case No. 05-F-212 and OP Case No. 05-G-215. The second assailed issuance, on the
other hand, denied reconsideration of the first.
Per its Resolution5 of March 26, 2007, the Court ordered the consolidation of these petitions.
From the petitions and the comments thereon, with their respective annexes, and other
pleadings, the Court gathers the following facts:
On October 25, 1995, Dylanco and SLGT each entered into a contract to sell with ASB for the
purchase of a unit (Unit 1106 for Dylanco and Unit 1211 for SLGT) at BSA Towers then being
developed by the latter. As stipulated, ASB will deliver the units thus sold upon completion of the
construction or before December 1999. Relying on this and other undertakings, Dylanco and
SLGT each paid in full the contract price of their respective units. The promised completion date
came and went, but ASB failed to deliver, as the Project remained unfinished at that time. To
make matters worse, they learned that the lots on which the BSA Towers were to be erected
had been mortgaged6 to Metrobank, as the lead bank, and UCPB 7 without the prior written
approval of the Housing and Land Use Regulatory Board (HLURB).
Alarmed by this foregoing turn of events, Dylanco, on August 10, 2004, filed with the HLURB a
complaint8 for delivery of property and title and for the declaration of nullity of mortgage. A
similar complaint9 filed by SLGT followed three (3) days later. At this time, it appears that the
ASB Group of Companies, which included ASB, had already filed with the Securities and
Exchange Commission a petition for rehabilitation and a rehabilitation receiver had in fact been

appointed.
What happened next are laid out in the OP decision adverted to above, thus:
In response to the above complaints, ASB alleged that it encountered liquidity problems
sometime in 2000 after its creditors [UCPB and Metrobank] simultaneously demanded
payments of their loans; that on May 4, 2000, the Commission (SEC) granted its petition
for rehabilitation; that it negotiated with UCPB and Metrobank but nothing came out positive
from their negotiation .
On the other hand, Metrobank claims that complainants [Dylanco and SLGT] have no
personality to ask for the nullification of the mortgage because they are not parties to the
mortgage transaction ; that the complaints must be dismissed because of the ongoing
rehabilitation of ASB; xxx that its claim against ASB, including the mortgage to the [Project] have
already been transferred to Asia Recovery Corporation; xxx.
UCPB, for its part, denies its liability to SLGT [for lack of privity of contract] [and] questioned
the personality of SLGT to challenge the validity of the mortgage reasoning that the latter is not
party to the mortgage contract [and] maintains that the mortgage transaction was done in
good faith. Finally, it prays for the suspension of the proceedings because of the on-going
rehabilitation of ASB.
In resolving the complaint in favor of Dylanco and SLGT, the Housing Arbiter ruled that the
mortgage constituted over the lots is invalid for lack of mortgage clearance from the HLURB. He
also rebuffed the banks request to suspend the proceedings under Section 5 of Presidential
Decree (PD) No. 902-A as the banks are parties under receivership. xxx
The HLURB Board of Commissioners, [per its separate Decision both dated April 21, 2005]
affirmed the above rulings with the modification that ASB should cause the subdivision of the
mother titles into condominium certificates of title of Dylanco and SLGT free from all liens and
encumbrances. [On June 28, 2005 the HLURB denied the separate motions of Metrobank and
UCPB for reconsideration. (Words in brackets and emphasis added).
For perspective, the decretal portion of the HLURBs underlying decision 10 with respect to the
Dylanco case, docketed thereat as REM-A-050208-0021, reads as follows:
WHEREFORE, the appeals are dismissed for lack of merit and the decision of the office below
is modified as follows:
1. Declaring the mortgage over the subject condominium unit in favor of respondent [Metrobank]
as null and void for violation of Section 18 of [PD] No. 957;
2. Directing respondent bank to cancel/release the mortgage on the subject condominium unit
[Unit 1106]; and accordingly, surrender/release the title thereof to the complainant;
3. Directing respondent Bank to release to respondent ASB the transfer certificate of title of the
lots covering the BSA Twin Towers Project; directing ASB to cause the subdivision of the mother
titles into condominium certificates of tile within 90 days and to thereafter deliver title to
complainant [Dylanco] free from all liens and encumbrances; [and]
4. Ordering respondent ASB to complete the subject condominium project as per SEC Order
dated 03 November 2004. (Words in brackets added)
On the other hand, the HLURB decision11 on the SLGT case, docketed as REM-A-050208-0020,
was, on all material points, of the same tenor as in the Dylanco case, albeit the unit involved is
different and the banks referred to in SLGT are UCPB and Metrobank.
From the HLURB resolutions in REM-A-050208-0020 and REM-A-050208-0021, Metrobank
appealed to the OP, followed by UCPBs own appeal from the resolution in REM-A-0502080020. Owing to the obvious similarities in both cases, the OP had them consolidated, the
Dylanco case docketed as O.P. Case No. 05-F-212 and the SLGT case as O.P. Case No. 05-F215.
On October 10, 2005, the OP rendered a decision 12 against Metrobank and UCPB, disposing as
follows:
WHEREFORE, premises considered, the appeals filed by Metropolitan Bank and Trust

Company and the United Coconut Planters Bank are hereby DISMISSED for lack of merit.
SO ORDERED.
From the October 10, 2005 OP Decision, petitioner banks and SLGT interposed their respective
motions for reconsideration, SLGT excepting to that portion of the decision declaring the
mortgage contract as void only insofar as it and Dylanco are concerned. To SLGT, the
indivisibility of a mortgage contract requires that a declaration of nullity or a validity for that
matter - should cover the entire mortgage.
On December 22, 2005, the OP issued an Order 13 acting favorably on SLGTs motion, but
denying those of Metrobank and UCPB. The fallo of the OPs Order reads:
"WHEREFORE, the Motions for Reconsideration of [Metrobank] and [UCPB] are hereby
DENIED. With respect to the partial motion for reconsideration of SLGT , the same is hereby
GRANTED. Accordingly, the mortgage contract executed between ASB Development
Corporation and respondent banks (Metrobank and UCPB) is hereby declared null and
void in its entirety. Respondents-appellants are hereby ordered to release to ASBDC [TCT]
Nos. 9834 and 9835, and for ASBDC to cause the subdivision of the mother titles into
condominium certificates of title, and thereafter deliver to complainants [SLGT and Dylanco]
their respective condominium certificates of title free of lien and encumbrances.
The records of the instant cases are hereby remanded to [HLURB] for its appropriate
disposition.
SO ORDERED. (Emphasis and words in brackets added)
In time, petitioner banks went to the CA on a petition for review under Rule 43 of the Rules of
Court whereat the appellate recourses were likewise consolidated and docketed as CA-G.R. SP
No. 92807, CA-G.R. SP No. 92808 and CA-G.R. SP No. 92882.
As stated at the threshold hereof, the appellate court, in its assailed Decision 14 of June 29,
2006, affirmed the OPs October 10, 2005 Decision as modified in its December 22, 2005 Order,
the affirmance being predicated, in gist, on the following main premises:
1. A mortgage constituted on a condominium project without the approval of the HLURB in
violation of the prescription of Presidential Decree (PD) 957, like the ASB-Metrobank-Trust
Division mortgage contract, is void; a mortgage is indivisible and cannot be divided into a valid
and invalid parts.
2. The complaints of Dylanco and SLGT are not covered by the order issued by the SEC
suspending all actions and proceedings against ASB.
Petitioner banks separate motions for reconsideration were later denied in the CAs equally
assailed resolution15 dated October 31, 2006.
Hence, these separate petitions.
Although formulated a bit differently, the grounds and arguments advanced in support of the
petitions converge and focus on two issues, to wit:
1. The declaration of nullity of the entire mortgage constituted on the project land site and the
improvements thereon; and
2. The applicability to this case of the suspension order granted by SEC to ASB.
We DENY.
As to the first issue, it is the petitioners posture that the CA, and, before it, the OP, erred when it
declared the subject mortgage contract void in its entirety and then directed both petitioner
banks to release the mortgage on the Project.
We are not persuaded.
Both petitioners do not dispute executing the mortgage in question without the HLURBs prior
written approval and notice to both individual respondents. Section 18 of Presidential Decree
No. (PD) 957 The Subdivision and Condominium Buyers Protective Decree provides:
SEC. 18. Mortgages. - No mortgage of any unit or lot shall be made by the owner or
developer without prior written approval of the [HLURB]. Such approval shall not be
granted unless it is shown that the proceeds of the mortgage loan shall be used for the

development of the condominium or subdivision project . The loan value of each lot or unit
covered by the mortgage shall be determined and the buyer thereof, if any, shall be notified
before the release of the loan. The buyer may, at his option, pay his installment for the lot or
unit directly to the mortgagee who shall apply the payments to the corresponding mortgage
indebtedness secured by the particular lot or unit being paid for . (Emphasis and word in
bracket added)
There can thus be no quibbling that the project lot/s and the improvements introduced or be
introduced thereon were mortgaged in clear violation of the aforequoted provision of PD 957.
And to be sure, Dylanco and SLGT, as Project unit buyers, were not notified of the mortgage
before the release of the loan proceeds by petitioner banks.
As it were, PD 957 aims to protect innocent subdivision lot and condominium unit buyers
against fraudulent real estate practices. Its preambulatory clauses say so and the Court need
not belabor the matter presently. Section 18, supra, of the decree directly addresses the
problem of fraud and other manipulative practices perpetrated against buyers when the lot or
unit they have contracted to acquire, and which they religiously paid for, is mortgaged without
their knowledge, let alone their consent. The avowed purpose of PD 957 compels, as the OP
correctly stated, the reading of Section 18 as prohibitory and acts committed contrary to it are
void.16 Any less stringent construal would only accord unscrupulous developers and their
financiers unbridled discretion to follow or not to follow PD 957 and thus defeat the very lofty
purpose of that decree. It thus stands to reason that a mortgage contract executed in breach of
Section 18 of the decree is null and void.
In Philippine National Bank v. Office of the President, 17 involving a defaulting mortgagorsubdivision developer, a mortgagee-bank and a lot buyer, the Court expounded on the rationale
behind PD 957, as a tool to protect subdivision lot and/or condominium unit buyers against
developers and mortgaging banks, in the following wise:
xxx [T]he unmistakable intent of the law [is] to protect innocent lot buyers from scheming
subdivision developers. As between these small lot buyers and the gigantic financial institutions
which the developers deal with, it is obvious that the law as an instrument of social justice
must favor the weak. Indeed, the petitioner bank had at its disposal vast resources with which it
could adequately protect its loan activities, and therefore is presumed to have conducted the
usual "due diligence" checking and ascertaining the actual status, condition, utilization and
occupancy of the property offered as collateral. xxx On the other hand, private respondents
obviously were powerless to discover the attempt of the land developer to hypothecate the
property being sold to them. It was precisely in order to deal with this kind of situation that P.D.
957 was enacted, its very essence and intendment being to provide a protective mantle over
helpless citizens who may fall prey to the razzmatazz of what P.D. 957 termed "unscrupulous
subdivision and condominium sellers."
The Court then quoted with approval the following instructive comments of the Solicitor General:
Verily, if P.D. 957 were to exclude from its coverage the aforecited mortgage contract, the
vigorous regulation which P.D. 957 seeks to impose on unconscientious subdivision sellers will
be translated into a feeble exercise of police power just because the iron hand of the state
cannot particularly touch mortgage contracts badged with the unfortunate accident of having
been constituted prior to the enactment of P.D. 957. Indeed, it would be illogical in the extreme if
P.D. 957 is to be given full force and effect and yet, the fraudulent practices and manipulations it
seeks to curb. xxx
Given the foregoing perspective, the next question to be addressed turns on whether or not the
nullity extends to the entire mortgage contract.
The poser should be resolved, as the CA and OP did resolve it, in the affirmative. This
disposition stems from the basic postulate that a mortgage contract is, by nature, indivisible. 18
Consequent to this feature, a debtor cannot ask for the release of any portion of the mortgaged
property or of one or some of the several properties mortgaged unless and until the loan thus

secured has been fully paid, notwithstanding the fact that there has been partial fulfillment of the
obligation. Hence, it is provided that the debtor who has paid a part of the debt cannot ask for
the proportionate extinguishments of the mortgage as long as the debt is not completely
satisfied.
The situation obtaining in the case at bench is within the purview of the aforesaid rule on the
indivisibility of mortgage. It may be that Section 18 of PD 957 allows partial redemption of the
mortgage in the sense that the buyer is entitled to pay his installment for the lot or unit directly to
the mortgagee so as to enable him - the said buyer - to obtain title over the lot or unit after full
payment thereof. Such accommodation statutorily given to a unit/lot buyer does not, however,
render the mortgage contract also divisible. Generally, the divisibility of the principal obligation is
not affected by the indivisibility of the mortgage. The real estate mortgage voluntarily constituted
by the debtor (ASB) on the lots or units is one and indivisible. In this case, the mortgage
contract executed between ASB and the petitioner banks is considered indivisible, that is, it
cannot be divided among the different buildings or units of the Project. Necessarily, partial
extinguishment of the mortgage cannot be allowed. In the same token, the annulment of the
mortgage is an all or nothing proposition. It cannot be divided into valid or invalid parts. The
mortgage is either valid in its entirety or not valid at all. In the present case, there is doubtless
only one mortgage to speak of. Ergo, a declaration of nullity for violation of Section 18 of PD
957 should result to the mortgage being nullified wholly.
It will not avail the petitioners any to feign ignorance of PD 957 requiring prior written approval
of the HLURB, they being charged with knowledge of such requirement since granting loans
secured by a real estate mortgage is an ordinary part of their business.
Neither could they rightly claim to be mortgagees in good faith. We shall explain.
The unyielding rule is that persons dealing with property brought under the Torrens system of
land registration have the right to rely on what appears on the certificate of title without inquiring
further;19 that in the absence of anything to excite or arouse suspicion that should impel a
reasonably cautious person to make such further inquiry, a would-be mortgagee is without
obligation to look beyond the certificate and investigate the title of the mortgagor. Such rule,
however, does not apply to mortgagee-banks, 20 their business being one affected with public
interest, holding as they do and keeping, in trust, money pertaining to the depositing public
which they should guard with earnest. Unlike private individuals, it behooves banks to exercise
greater care and prudence in their dealings, including those involving registered lands. 21 As we
wrote in Cruz v. Bancom Finance Corporation,22 "a banking institution is expected to exercise
due diligence before entering into a mortgage contract. The ascertainment of the status or
condition of a property offered to it as a security must be standard and indispensable part of its
operations." A bank that failed to observe due diligence cannot be accorded the status of a
bona fide mortgagee.23
Surely, petitioner banks cannot plausibly assert compliance with the due diligence requirement
exacted contextually by the situation. For, have they done so, they could have easily discovered
that there is an on-going condominium project on the lots offered as mortgage collateral and, as
such, could have aroused their suspicion that the developer may have engaged in pre-selling,
or, with like effect, that there may be unit buyers therein, as was the case here. Having been
short in care and prudence, petitioners cannot be deemed to be mortgagees in good faith
entitled to the benefits arising from such status.
This thus brings us to the next issue of whether or not the HLURB, OP and, necessarily, the CA
reversibly erred in continuing with the resolution of this case notwithstanding the rehabilitation
proceedings before, and the appointment by, the SEC of a receiver for ASB which, under
Section 6 (c)24 of PD 902-A, as amended,25 necessarily suspended "all actions for claims"
against distressed corporations.
Petitioners maintain that individual respondents demands initially filed with the HLURB partake
of the nature of "claim" within the contemplation of the aforesaid suspensive section of PD 902-

A. They cite Sobrejuanite v. ASB Development Corporation 26 to drive home the idea of the
encompassing reach of the word "claim" which they deem to include any and all claims or
demands of whatever nature and character.
The Court is unable to accommodate the petitioners.
As we articulated in Arranza v. B.F. Homes, Inc.,27 the fact that respondent B.F. Homes is under
receivership does not preclude the continuance before the HLURB of the case for specific
performance of a real estate developers obligation under PD 957. For, "[E]"ven if respondent is
under receivership, its obligations as a real estate developer under P.D. 957 are not suspended.
Section 6 (C) of P.D. No. 902-A, as amended , on suspension of all actions for claims against
corporations refers solely to monetary claims."28 Says the Court further:
xxx The appointment of a receiver does not dissolve the corporation, nor does it interfere with
the exercise of corporate rights. In this case where there appears to be no restraints imposed
upon respondent as it undergoes rehabilitation receivership, respondent continues or should
continue to perform its contractual and statutory responsibilities to petitioners as homeowners.
xxx xxx xxx
No violation of the SEC order suspending payments to creditors would result as far as
petitioners complaint before the HLURB is concerned. To reiterate, what petitioners seek to
enforce are respondents obligation as subdivision developer [for which the HLURB, not the
SEC, is equipped with the expertise to deal with the matter]. Such claims are basically not
pecuniary in nature.29
Arranza actually complemented the earlier case of Finasia Investments and Finance
Corporation v. CA30 where the Court defined and explained the term "claim" in the following
wise:
We agree that the word "claim" as used in Sec. 6 (c) of P.D. 902-A, as amended, refers to
debts or demands of a pecuniary nature. It means "the assertion of a right to have money paid.
It is used in special proceedings like those before administrative court, on insolvency.
Consequently, the word "claim"
Petitioners citation and undue reliance on Sobrejuanite is quite misplaced in view of differing
set of facts. In that case, the Court held that the HLURB is bereft of jurisdiction to proceed with
the case during the pendency of the rehabilitation proceedings since the spouses Sobrejuanites
claim involves pecuniary consideration, or a claim for refund of the purchase price paid, with
interest, to be precise. Unlike the spouses Sobrejuanite in Sobrejuanite, SLGTs and Dylancos
complaints in the instant case did not seek monetary recovery or to touch the corporate coffers
of ASB ahead of others. They did not even consider themselves as money claimants. All they
ask was for the enforcement of ASBs statutory and contractual obligations as a condominium
developer. In the concrete, they pressed for the delivery of their units free from all liens and
encumbrances and the declaration of nullity of the mortgage in question arising from the breach
of Section 18 of PD 957.
Significantly, in Sobrejuanite, the Court stated the observation, in reference to the Arranza case,
that "the proceedings before the HLURB [may] be suspended during the rehabilitation [of the
ailing corporation]" "if the claim was for monetary awards." 31
The Court is very much aware of A.M. No. 00-8-10-SC or the Interim Rules on Corporate
Rehabilitation32 which defines the term "claim" as including all claims or demands of whatever
character against a debtor or its property, whether for money or otherwise. But as aptly
explained by the CA, Section 24 33 of the interim rules limits the coverage of the Rules on
rehabilitation and consequently the rule of suspension of action to those who stand in the
category or debtors and creditors. The relationship between the petitioner banks, as mortgagor
of the ASB property, on one hand, and respondents SLGT and Dylanco, as unit buyers, on the
other, cannot be that of a debtor-creditor as to bring the case within the purview of the rules on
corporate recovery, let alone the Sobrejuanite case. Then, too, the vinculum that binds
SLGT/Dylanco, as unit buyers and as suitors before the HLURB, and ASB is far from being akin

to that of debtor-creditor. As it were, SLGT/Dylanco sued ASB for having constituted, in breach
of PD 957, a mortgage on the condominium project without prior HLURB approval and so much
as notifying them of the loan release for which reason they prayed for the delivery of their units
free from all liens and encumbrances. With the view we take of the case, the complaint of
individual respondents is not in the nature of "claims" that should be covered by the suspensive
effect of a rehabilitation proceeding.
Looking beyond the strictly legal issues involved in this case, however, the pendency of the
rehabilitation proceedings ought not, as stressed in the Order 34 of the OP, be invoked to defeat
or deny the claim of individual respondents. Suspending the proceedings would only perpetuate
and compound the injustice committed by ASB on SLGT and Dylanco. It would reduce to pure
jargon the beneficent provisions and render illusory the purpose of PD 957 which, to repeat, is
to protect innocent unit and lot buyers from scheming subdivision/condominium
owners/developers. As a matter of good conscience, the Court cannot allow it under the factual
and legal premises surrounding this case.
WHEREFORE, the instant petitions are DENIED and the assailed CA Decision and Resolution
are AFFIRMED.
Cost against the petitioners.
SO ORDERED.
PHILIPPINE AIRLINES, INCORPORATED, Petitioner, v. COURT OF APPEALS AND
SPOUSES MANUEL S. BUNCIO AND AURORA R. BUNCIO, MINORS DEANNA R. BUNCIO
AND NIKOLAI R. BUNCIO, ASSISTED BY THEIR FATHER, MANUEL S. BUNCIO, AND
JOSEFA REGALADO, REPRESENTED BY HER ATTORNEY-IN-FACT, MANUEL S. BUNCIO,
Respondents.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review1 on Certiorari under Rule 45 of the Rules of Court seeking to
set aside the Decision,2 dated 20 December 1995, of the Court of Appeals in CA-G.R. CV No.
26921 which affirmed in toto the Decision,3 dated 2 April 1990, of the Quezon City Regional Trial
Court (RTC), Branch 90, in Civil Case No. Q-33893.
The undisputed facts are as follows:
Sometime before 2 May 1980, private respondents spouses Manuel S. Buncio and Aurora R.
Buncio purchased from petitioner Philippine Airlines, Incorporated, two plane tickets 4 for their
two minor children, Deanna R. Buncio (Deanna), then 9 years of age, and Nikolai R. Buncio
(Nikolai), then 8 years old. Since Deanna and Nikolai will travel as unaccompanied minors,
petitioner required private respondents to accomplish, sign and submit to it an indemnity bond. 5
Private respondents complied with this requirement. For the purchase of the said two plane
tickets, petitioner agreed to transport Deanna and Nikolai on 2 May 1980 from Manila to San
Francisco, California, United States of America (USA), through one of its planes, Flight 106.
Petitioner also agreed that upon the arrival of Deanna and Nikolai in San Francisco Airport on 3
May 1980, it would again transport the two on that same day through a connecting flight from
San Francisco, California, USA, to Los Angeles, California, USA, via another airline, United
Airways 996. Deanna and Nikolai then will be met by their grandmother, Mrs. Josefa Regalado
(Mrs. Regalado), at the Los Angeles Airport on their scheduled arrival on 3 May 1980.
On 2 May 1980, Deanna and Nikolai boarded Flight 106 in Manila.
On 3 May 1980, Deanna and Nikolai arrived at the San Francisco Airport. However, the staff of

United Airways 996 refused to take aboard Deanna and Nikolai for their connecting flight to Los
Angeles because petitioner's personnel in San Francisco could not produce the indemnity bond
accomplished and submitted by private respondents. The said indemnity bond was lost by
petitioner's personnel during the previous stop-over of Flight 106 in Honolulu, Hawaii. Deanna
and Nikolai were then left stranded at the San Francisco Airport. Subsequently, Mr. Edwin Strigl
(Strigl), then the Lead Traffic Agent of petitioner in San Francisco, California, USA, took Deanna
and Nikolai to his residence in San Francisco where they stayed overnight.
Meanwhile, Mrs. Regalado and several relatives waited for the arrival of Deanna and Nikolai at
the Los Angeles Airport. When United Airways 996 landed at the Los Angeles Airport and its
passengers disembarked, Mrs. Regalado sought Deanna and Nikolai but she failed to find
them. Mrs. Regalado asked a stewardess of the United Airways 996 if Deanna and Nikolai were
on board but the stewardess told her that they had no minor passengers. Mrs. Regalado called
private respondents and informed them that Deanna and Nikolai did not arrive at the Los
Angeles Airport. Private respondents inquired about the location of Deanna and Nikolai from
petitioner's personnel, but the latter replied that they were still verifying their whereabouts.
On the morning of 4 May 1980, Strigl took Deanna and Nikolai to San Francisco Airport where
the two boarded a Western Airlines plane bound for Los Angeles. Later that day, Deanna and
Nikolai arrived at the Los Angeles Airport where they were met by Mrs. Regalado. Petitioner's
personnel had previously informed Mrs. Regalado of the late arrival of Deanna and Nikolai on 4
May 1980.
On 17 July 1980, private respondents, through their lawyer, sent a letter 6 to petitioner
demanding payment of 1 million pesos as damages for the gross negligence and inefficiency of
its employees in transporting Deanna and Nikolai. Petitioner did not heed the demand.
On 20 November 1981, private respondents filed a complaint 7 for damages against petitioner
before the RTC. Private respondents impleaded Deanna, Nikolai and Mrs. Regalado as their coplaintiffs. Private respondents alleged that Deanna and Nikolai were not able to take their
connecting flight from San Francisco to Los Angeles as scheduled because the required
indemnity bond was lost on account of the gross negligence and malevolent conduct of
petitioner's personnel. As a consequence thereof, Deanna and Nikolai were stranded in San
Francisco overnight, thereby exposing them to grave danger. This dilemma caused Deanna,
Nikolai, Mrs. Regalado and private respondents to suffer serious anxiety, mental anguish,
wounded feelings, and sleepless nights. Private respondents prayed the RTC to render
judgment ordering petitioner: (1) to pay Deanna and Nikolai P100,000.00 each, or a total of
P200,000.00, as moral damages; (2) to pay private respondents P500,000.00 each, or a total of
P1,000,000,00, as moral damages; (3) to pay Mrs. Regalado P100,000.00 as moral damages;
(4) to pay Deanna, Nikolai, Mrs. Regalado and private respondents P50,000.00 each, or a total
of P250,000.00 as exemplary damages; and (5) to pay attorney's fees equivalent to 25% of the
total amount of damages mentioned plus costs of suit.
In its answer8 to the complaint, petitioner admitted that Deanna and Nikolai were not allowed to
take their connecting flight to Los Angeles and that they were stranded in San Francisco.
Petitioner, however, denied that the loss of the indemnity bond was caused by the gross
negligence and malevolent conduct of its personnel. Petitioner averred that it always exercised
the diligence of a good father of the family in the selection, supervision and control of its
employees. In addition, Deanna and Nikolai were personally escorted by Strigl, and the latter
exerted efforts to make the connecting flight of Deanna and Nikolai to Los Angeles possible.
Further, Deanna and Nikolai were not left unattended from the time they were stranded in San

Francisco until they boarded Western Airlines for a connecting flight to Los Angeles. Petitioner
asked the RTC to dismiss the complaint based on the foregoing averments.

1
2
3
4
5

After trial, the RTC rendered a Decision on 2 April 1990 holding petitioner liable for damages for
breach of contract of carriage. It ruled that petitioner should pay moral damages for its
inattention and lack of care for the welfare of Deanna and Nikolai which, in effect, amounted to
bad faith, and for the agony brought by the incident to private respondents and Mrs. Regalado.
It also held that petitioner should pay exemplary damages by way of example or correction for
the public good under Article 2229 and 2232 of the Civil Code, plus attorney's fees and costs of
suit. In sum, the RTC ordered petitioner: (1) to pay Deanna and Nikolai P50,000.00 each as
moral damages and P25,000.00 each as exemplary damages; (2) to pay private respondent
Aurora R. Buncio, as mother of Deanna and Nikolai, P75,000.00 as moral damages; (3) to pay
Mrs. Regalado, as grandmother of Deanna and Nikolai, P30,000.00 as moral damages; and (4)
to pay an amount of P38,250.00 as attorney's fees and the costs of suit. Private respondent
Manuel S. Buncio was not awarded damages because his court testimony was disregarded, as
he failed to appear during his scheduled cross-examination. The dispositive portion of the RTC
Decision reads:
ACCORDINGLY, judgment is hereby rendered:
Ordering defendant Philippines Airlines, Inc. to pay Deanna R. Buncio and Nikolai R. Buncio the
amount of P50,000.00 each as moral damages; and the amount of P25,000.00 each as
exemplary damages;
Ordering said defendant to pay the amount of P75,000.00 to Aurora R. Buncio, mother of
Deanna and Nikolai, as moral damages; and the amount of P30,000.00 to Josefa Regalado,
grandmother of Deanna and Nikolai, as moral damages; and
Ordering said defendant to pay P38,250.00 as attorney's fees and also the costs of the suit. 9
Petitioner appealed to the Court of Appeals. On 20 December 1995, the appellate court
promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the decision appealed is hereby AFFIRMED in toto and the instant appeal
DISMISSED.10
Petitioner filed the instant petition before us assigning the following errors 11:
I.
THE COURT OF APPEALS ERRED IN SUSTAINING THE RTC AWARD OF MORAL
DAMAGES.
II.
THE COURT OF APPEALS ERRED IN SUSTAINING THE RTC AWARD OF EXEMPLARY
DAMAGES.
III.
THE COURT OF APPEALS ERRED IN SUSTAINING THE RTC AWARD OF ATTORNEY'S
FEES AND ORDER FOR PAYMENT OF COSTS.
Anent the first assigned error, petitioner maintains that moral damages may be awarded in a
breach of contract of air carriage only if the mishap results in death of a passenger or if the
carrier acted fraudulently or in bad faith, that is, by breach of a known duty through some motive
of interest or ill will, some dishonest purpose or conscious doing of wrong; if there was no
finding of fraud or bad faith on its part; if, although it lost the indemnity bond, there was no

finding that such loss was attended by ill will, or some motive of interest, or any dishonest
purpose; and if there was no finding that the loss was deliberate, intentional or consciously
done.12
Petitioner also claims that it cannot be entirely blamed for the loss of the indemnity bond; that
during the stop-over of Flight 106 in Honolulu, Hawaii, USA, it gave the indemnity bond to the
immigration office therein as a matter of procedure; that the indemnity bond was in the custody
of the said immigration office when Flight 106 left Honolulu, Hawaii, USA; that the said
immigration office failed to return the indemnity bond to petitioner's personnel before Flight 106
left Honolulu, Hawaii, USA; and that even though it was negligent in overlooking the indemnity
bond, there was still no liability on its part because mere carelessness of the carrier does not
per se constitute or justify an inference of malice or bad faith. 13
When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain date,
a contract of carriage arises. The passenger has every right to expect that he be transported on
that flight and on that date, and it becomes the airline's obligation to carry him and his luggage
safely to the agreed destination without delay. If the passenger is not so transported or if in the
process of transporting, he dies or is injured, the carrier may be held liable for a breach of
contract of carriage.14
Private respondents and petitioner entered into a contract of air carriage when the former
purchased two plane tickets from the latter. Under this contract, petitioner obliged itself (1) to
transport Deanna and Nikolai, as unaccompanied minors, on 2 May 1980 from Manila to San
Francisco through one of its planes, Flight 106; and (2) upon the arrival of Deanna and Nikolai
in San Francisco Airport on 3 May 1980, to transport them on that same day from San
Francisco to Los Angeles via a connecting flight on United Airways 996. As it was, petitioner
failed to transport Deanna and Nikolai from San Francisco to Los Angeles on the day of their
arrival at San Francisco. The staff of United Airways 996 refused to take aboard Deanna and
Nikolai for their connecting flight to Los Angeles because petitioner's personnel in San
Francisco could not produce the indemnity bond accomplished and submitted by private
respondents. Thus, Deanna and Nikolai were stranded in San Francisco and were forced to
stay there overnight. It was only on the following day that Deanna and Nikolai were able to
leave San Francisco and arrive at Los Angeles via another airline, Western Airlines. Clearly
then, petitioner breached its contract of carriage with private respondents.
In breach of contract of air carriage, moral damages may be recovered where (1) the mishap
results in the death of a passenger; or (2) where the carrier is guilty of fraud or bad faith; or (3)
where the negligence of the carrier is so gross and reckless as to virtually amount to bad
faith.15
Gross negligence implies a want or absence of or failure to exercise even slight care or
diligence, or the entire absence of care. It evinces a thoughtless disregard of consequences
without exerting any effort to avoid them.16
In Singson v. Court of Appeals,17 we ruled that a carrier's utter lack of care for and sensitivity to
the needs of its passengers constitutes gross negligence and is no different from fraud, malice
or bad faith. Likewise, in Philippine Airlines, Inc. v. Court of Appeals,18 we held that a carrier's
inattention to, and lack of care for, the interest of its passengers who are entitled to its utmost
consideration, particularly as to their convenience, amount to bad faith and entitles the
passenger to an award of moral damages.

It was established in the instant case that since Deanna and Nikolai would travel as
unaccompanied minors, petitioner required private respondents to accomplish, sign and submit
to it an indemnity bond. Private respondents complied with this requirement. Petitioner gave a
copy of the indemnity bond to one of its personnel on Flight 106, since it was required for the
San Francisco-Los Angeles connecting flight of Deanna and Nikolai. Petitioner's personnel lost
the indemnity bond during the stop-over of Flight 106 in Honolulu, Hawaii. Thus, Deanna and
Nikolai were not allowed to take their connecting flight.
Evidently, petitioner was fully aware that Deanna and Nikolai would travel as unaccompanied
minors and, therefore, should be specially taken care of considering their tender age and
delicate situation. Petitioner also knew well that the indemnity bond was required for Deanna
and Nikolai to make a connecting flight from San Francisco to Los Angeles, and that it was its
duty to produce the indemnity bond to the staff of United Airways 996 so that Deanna and
Nikolai could board the connecting flight. Yet, despite knowledge of the foregoing, it did not
exercise utmost care in handling the indemnity bond resulting in its loss in Honolulu, Hawaii.
This was the proximate cause why Deanna and Nikolai were not allowed to take the connecting
flight and were thus stranded overnight in San Francisco. Further, petitioner discovered that the
indemnity bond was lost only when Flight 106 had already landed in San Francisco Airport and
when the staff of United Airways 996 demanded the indemnity bond. This only manifests that
petitioner did not check or verify if the indemnity bond was in its custody before leaving
Honolulu, Hawaii for San Francisco.
The foregoing circumstances reflect petitioner's utter lack of care for and inattention to the
welfare of Deanna and Nikolai as unaccompanied minor passengers. They also indicate
petitioner's failure to exercise even slight care and diligence in handling the indemnity bond.
Clearly, the negligence of petitioner was so gross and reckless that it amounted to bad faith.
It is worth emphasizing that petitioner, as a common carrier, is bound by law to exercise
extraordinary diligence and utmost care in ensuring for the safety and welfare of its passengers
with due regard for all the circumstances. 19 The negligent acts of petitioner signified more than
inadvertence or inattention and thus constituted a radical departure from the extraordinary
standard of care required of common carriers.
Petitioner's claim that it cannot be entirely blamed for the loss of the indemnity bond because it
gave the indemnity bond to the immigration office of Honolulu, Hawaii, as a matter of procedure
during the stop-over, and the said immigration office failed to return the indemnity bond to
petitioner's personnel before Flight 106 left Honolulu, Hawaii, deserves scant consideration. It
was petitioner's obligation to ensure that it had the indemnity bond in its custody before leaving
Honolulu, Hawaii for San Francisco. Petitioner should have asked for the indemnity bond from
the immigration office during the stop-over instead of partly blaming the said office later on for
the loss of the indemnity bond. Petitioner's insensitivity on this matter indicates that it fell short
of the extraordinary care that the law requires of common carriers.
Petitioner, nonetheless, insists that the following circumstances negate gross negligence on its
part: (1) Strigl requested the staff of United Airways 996 to allow Deanna and Nikolai to board
the plane even without the indemnity bond; (2) Strigl took care of the two and brought them to
his house upon refusal of the staff of the United Airways 996 to board Deanna and Nikolai; (3)
private respondent Aurora R. Buncio and Mrs. Regalado were duly informed of Deanna and
Nikolai's predicament; and (4) Deanna and Nikolai were able to make a connecting flight via an
alternative airline, Western Airlines. 20 We do not agree. It was petitioner's duty to provide
assistance to Deanna and Nikolai for the inconveniences of delay in their transportation. These

actions are deemed part of their obligation as a common carrier, and are hardly anything to rave
about.21
Apropos the second and third assigned error, petitioner argues that it was not liable for
exemplary damages because there was no wanton, fraudulent, reckless, oppressive, or
malevolent manner on its part. Further, exemplary damages may be awarded only if it is proven
that the plaintiff is entitled to moral damages. Petitioner contends that since there was no proof
that private respondents were entitled to moral damages, then they are also not entitled to
exemplary damages.22
Petitioner also contends that no premium should be placed on the right to litigate; that an award
of attorney's fees and order of payment of costs must be justified in the text of the decision; that
such award cannot be imposed by mere conclusion without supporting explanation; and that the
RTC decision does not provide any justification for the award of attorney's fees and order of
payment of costs.23
Article 2232 of the Civil Code provides that exemplary damages may be awarded in a breach of
contract if the defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner. In addition, Article 2234 thereof states that the plaintiff must show that he is entitled to
moral damages before he can be awarded exemplary damages.
As we have earlier found, petitioner breached its contract of carriage with private respondents,
and it acted recklessly and malevolently in transporting Deanna and Nikolai as unaccompanied
minors and in handling their indemnity bond. We have also ascertained that private respondents
are entitled to moral damages because they have sufficiently established petitioner's gross
negligence which amounted to bad faith. This being the case, the award of exemplary damages
is warranted.
Current jurisprudence24 instructs that in awarding attorney's fees, the trial court must state the
factual, legal, or equitable justification for awarding the same, bearing in mind that the award of
attorney's fees is the exception, not the general rule, and it is not sound public policy to place a
penalty on the right to litigate; nor should attorney's fees be awarded every time a party wins a
lawsuit. The matter of attorney's fees cannot be dealt with only in the dispositive portion of the
decision. The text of the decision must state the reason behind the award of attorney's fees.
Otherwise, its award is totally unjustified. 25
In the instant case, the award of attorney's fees was merely cited in the dispositive portion of the
RTC decision without the RTC stating any legal or factual basis for said award. Hence, the
Court of Appeals erred in sustaining the RTC's award of attorney's fees.
Since we have already resolved that the RTC and Court of Appeals were correct in awarding
moral and exemplary damages, we shall now determine whether their corresponding amounts
were proper.
The purpose of awarding moral damages is to enable the injured party to obtain means,
diversion or amusement that will serve to alleviate the moral suffering he has undergone by
reason of defendant's culpable action. 26 On the other hand, the aim of awarding exemplary
damages is to deter serious wrongdoings.27
Article 2216 of the Civil Code provides that assessment of damages is left to the discretion of
the court according to the circumstances of each case. This discretion is limited by the principle

that the amount awarded should not be palpably excessive as to indicate that it was the result of
prejudice or corruption on the part of the trial court. 28 Simply put, the amount of damages must
be fair, reasonable and proportionate to the injury suffered.
The RTC and the Court of Appeals ordered petitioner to pay Deanna and Nikolai P50,000.00
each as moral damages. This amount is reasonable considering the harrowing experience they
underwent at their tender age and the danger they were exposed to when they were stranded in
San Francisco. Both of them testified that they were afraid and were not able to eat and sleep
during the time they were stranded in San Francisco. 29 Likewise, the award of P25,000.00 each
to Deanna and Nikolai as exemplary damages is fair so as to deter petitioner and other common
carriers from committing similar or other serious wrongdoings.
Both courts also directed petitioner to pay private respondent Aurora R. Buncio P75,000.00 as
moral damages. This is equitable and proportionate considering the serious anxiety and mental
anguish she experienced as a mother when Deanna and Nikolai were not allowed to take the
connecting flight as scheduled and the fact that they were stranded in a foreign country and in
the company of strangers. Private respondent Aurora R. Buncio testified that she was very
fearful for the lives of Deanna and Nikolai when they were stranded in San Francisco, and that
by reason thereof she suffered emotional stress and experienced upset stomach. 30 Also, the
award of P30,000.00 as moral damages to Mrs. Regalado is appropriate because of the serious
anxiety and wounded feelings she felt as a grandmother when Deanna and Nikolai, whom she
was to meet for the first time, did not arrive at the Los Angeles Airport. Mrs. Regalado testified
that she was seriously worried when Deanna and Nikolai did not arrive in Los Angeles on 3 May
1980, and she was hurt when she saw the two crying upon arriving in Los Angeles on 4 May
1980.31 The omission of award of damages to private respondent Manuel S. Buncio was proper
for lack of basis. His court testimony was rightly disregarded by the RTC because he failed to
appear in his scheduled cross-examination.32
On another point, we held in Eastern Shipping Lines, Inc. v. Court of Appeals,33 that when an
obligation, not constituting a loan or forbearance of money is breached, an interest on the
amount of damages awarded may be imposed at the rate of 6% per annum. We further
declared that when the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether it is a loan/forbearance of money or not, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
then equivalent to a forbearance of credit.
In the instant case, petitioner's obligation arose from a contract of carriage and not from a loan
or forbearance of money. Thus, an interest of 6% per annum should be imposed on the
damages awarded, to be computed from the time of the extra-judicial demand on 17 July 1980
up to the finality of this Decision. In addition, the interest shall become 12% per annum from the
finality of this Decision up to its satisfaction.
Finally, the records34 show that Mrs. Regalado died on 1 March 1995 at the age of 74, while
Deanna passed away on 8 December 2003 at the age of 32. This being the case, the foregoing
award of damages plus interests in their favor should be given to their respective heirs.
WHEREFORE, the Petition is PARTLY GRANTED. The Decision of the Court of Appeals, dated
20 December 1995, in CA-G.R. CV No. 26921, is hereby AFFIRMED with the following
MODIFICATIONS: (1) the award of attorney's fees is deleted; (2) an interest of 6% per annum is
imposed on the damages awarded, to be computed from 17 July 1980 up to the finality of this
Decision; and (3) an interest of 12% per annum is also imposed from the finality of this Decision

up to its satisfaction. The damages and interests granted in favor of deceased Mrs. Regalado
and deceased Deanna are hereby awarded to their respective heirs. Costs against petitioner.
SO ORDERED.
G.R. No. 164958
January 27, 2006
SY CHIM and FELICIDAD CHAN SY, Petitioners,
vs.
SY SIY HO & SONS, INC., doing business under the name and style GUAN YIAC
HARDWARE, Respondents.
DECISION
CALLEJO, SR., J.:
The Sy Siy Ho & Sons, Inc. (hereinafter referred to as the corporation) is a domestic corporation
which was organized in the 1940s, 1 engaged primarily in importing, buying and selling
hardware, machineries, spare parts, supplies and other allied products and merchandise to be
sold exclusively on wholesale basis. It was doing business under the name and style Guan Yiac
Hardware2 with office at No. 453-455 T. Pinpin Street, Binondo, Manila.
The corporation was owned and controlled by Sy Chim and his children. Sometime in 1990, a
controversy ensued between Sy Chims two sons, Sy Tiong Shiou and Sy Tiong Bio who was
then the Vice President for Finance. Sy Chim sided with Sy Tiong Shiou. The intra-corporate
dispute reached the Securities and Exchange Commission (SEC), docketed as SEC Case No.
04443.
On May 31, 1993, the stockholders of record, Sy Chim and Sy Tiong Shiou (Sy Chim Group), on
the one hand, and Sy Tiong Bio, Sy Tiong Gue, Sy Tiong Sim, Sy Tiong Han and Sy Tiong Yan
(Sy Tiong Bio Group), on the other, executed a Compromise Agreement, 3 where the latter group
relinquished their shares to Sy Chim. The parties also agreed to divide and distribute the assets
and liabilities of the corporation as follows:
(a) Mr. SY CHIM GROUP Four (4) parts, or three (3) parts Sy Chim, one (1) part Sy Tiong
Shiou.
(b) Mr. SY TIONG BIO GROUP Five (5) parts at the rate of one (1) each. 4
Some of the shares of stocks were assigned to Felicidad Chan Sy, wife of Sy Chim. The
spouses Sy Chim and Felicidad Chan Sy, and spouses Sy Tiong Shiou and Juanita Tan Sy, and
their children, Charlie, Romer and Jesse James Tan, then became stockholders and members
of the Board of Directors of the corporation. The officers of the corporation were as follows: Sy
Chim, President; Felicidad Chan Sy, Assistant Treasurer; Sy Tiong Shiou, Vice President and
General Manager; Juanita Tan Sy (wife of Sy Tiong Shiou), Corporate Treasurer; and Charlie
Tan (son of spouses Sy Tiong Shiou), Assistant General Manager.
As of the year 2000, the corporation had a gross profit of P45,084,908.11 and P42,954,252.32
in 2001.5 As of April 19, 2002, it had a capital stock of P150,000,000.00, divided into 150,000
shares, with a par value of P1,000.00 per share. The treasury stocks amounted to
P70,720,000.00. It had a subscribed and paid-up capital of 103,733 shares and
P103,733,000.00 respectively. The stockholders and the respective shareholdings were as
follows:
Stockholder

No. of Shares
Subscribed

Amount Subscribed
and Paid (PHP)

SY CHIM

35,013

35,013,000

FELICIDAD CHAN SY

17,509

17,509,000

CHARLIE TAN

20,338

20,338,000

ROMER TAN

19,636

19,636,000

JESSE JAMES TAN

11,233

11,233,000

SY TIONG SHIOU

2,000

JUANITA TAN SY

2,000

103,733

PHP103,733,0006

TOTAL

After almost a decade later, another intra-corporate dispute ensued, this time between Sy Chim
and his wife, on the one hand, and their son Sy Tiong Shiou, on the other. In a letter addressed
to the corporation dated February 3, 2003, Corporate Treasurer Juanita Tan Sy requested that
she immediately be "removed from all responsibilities and obligations pertaining to all corporate
funds" of the corporation, considering that Felicidad Chan Sy was the one who handled and
managed all deposits and funds while Sy Chim supervised all expenditures. She further
reported that Felicidad Chan Sy did not make any cash deposit to any bank from November 1,
2002 to January 31, 2003, and that the total amount of cash as reflected in the bank statements
is far less than that reported in the corporations financial statements and other records. She
then proposed that the Board call a special meeting to discuss these matters. 7 Thus, on March
24, 2003, a special meeting of the board of directors was held with the spouses Sy Tiong Shiou
and Juanita Tan Sy and their sons Charlie, Romer and Jesse James Tan in attendance. In two
separate resolutions, Juanita Tan Sy was removed as corporate treasurer and relieved of all
responsibilities; the spouses Sy Chim were held accountable for the undeposited money; and a
new external auditor was hired to make a complete audit of all books and records. 8 Banaria
Banaria and Company then submitted Financial Reports covering 2001 and 2002. 9
In a Letter10 dated April 15, 2003, Sy Tiong Shiou informed his parents of the corporations cash
balance shortage as of March 31, 2003 (as reflected in the auditors report) and that there was
also an undeposited amount of P2,000,000.00 for the current salary and emergency funds, and
they had several postdated checks in their possession. Sy Tiong Shiou requested that the
shortage be accounted for, and that the undeposited funds be remitted. He also requested that
the postdated checks and original receipts for all disbursements of corporate funds be turned
over to Corporate Treasurer Juanita Tan Sy. The spouses Sy Chim did not respond.
Spouses Sy Tiong Shiou and Juanita Tan Sy, their three sons held another meeting on April 21,
2003, again without written notice to the spouses Sy Chim, and approved a resolution 11
authorizing Romer Tan to file a complaint for and in behalf of the corporation against the said
spouses in the Regional Trial Court (RTC) of Manila. Sy Tiong Shiou was elected President of
the corporation.
The complaint12 for accounting and damages against the spouses Sy Chim was filed on May 6,
2003. The complaint alleged that Felicidad Chan Sy, as custodian of all cash collections, had
been depositing amounts less than those appearing in the financial statements which are in the
defendants custody and that no deposits were made in the corporations account from
November 1, 2002 to January 31, 2003. Based on the accountants report, Felicidad Chan Sy
failed to account for P67,117,230.30. Plaintiff further alleged that, based on the corporations
General Information Sheet for 2003, the subscribed shares of the corporation were as follows:
Name of Subscriber

No. of Shares
Subscribed

Amount Paid-Up

Sy Tiong Shiou

27,987

P 27,987,000.00

Juanita Tan

32,017

32,017,000.00

Charlie Tan

12,512

12,512,000.00

Romer Tan

12,079

12,079,000.00

Jesse James Tan

6,910

6,910,000.00

Sy Chim

21,539

21,539,000.00

Felicidad Chan Sy

10,771

10,771,000.00

Total

123,815

P123,815,000.0013

Plaintiff prayed that, after due proceedings, judgment be rendered in its favor, as follows:
a. Ordering defendants to render a full, complete and true accounting of all the amounts,
proceeds and funds paid to, received and earned by the plaintiff since 1993 and to restitute to
the plaintiff, jointly and severally, all such amounts, proceeds and funds that they have
misappropriated;
b. Ordering defendants to pay, jointly and severally, the plaintiff the amount of One Million
(P1,000,000.00) Pesos by way of exemplary damages, and One Million (P1,000,000.00) Pesos
by way of attorneys fees plus Five Thousand (P5,000.00) Pesos per court appearance and
litigation expenses in the amount of not less than One Hundred Thousand (P100,000.00)
Pesos;
c. Cost of suit.
Plaintiff further prays for such other reliefs [it] deems just and equitable in the premises. 14
In their answer15 to the complaint, defendants averred, inter alia, that any unaccounted cash
account and irregularities in the management of the corporation, if any, were the full
responsibility of Sy Tiong Shiou, Romer Tans own father, since he has direct and actual
management of the corporation under the by-laws. Sy Chim, as corporate president, was a
mere figurehead, who only had general supervision over the corporations officers. Juanita Tan
Sy, as corporate treasurer, had custody of the corporations funds and should have kept a
complete and accurate record of receipts, disbursements, and other commercial transactions of
the corporation. Felicidad Chan Sy merely performed clerical work and acted as Corporate
Treasurer only in the absence of Juanita Tan Sy and under the latters close supervision. They
averred that any and all meetings of the stockholders and members of the corporations Board
of Directors were null and void as they violated the corporate by-laws as well as the Corporation
Code. Defendants further denied executing any deed or document authorizing the transfer of
their shares, or that treasury shares had been issued by the corporation. Assuming that treasury
shares were validly issued in 2002 as claimed in the complaint, defendants should have been
allowed to exercise their pre-emptive rights over such shares.
Defendants prayed that they be granted the following reliefs:
(1) Dismissing the instant Complaint for utter lack of merit;
(2) Ordering Plaintiff Mr. Romer S. Tan to pay the following:
(a) Three Million Pesos (PHP3,000,000.00), by way of moral damages;
(b) Three Million Pesos (PHP3,000,000.00), by way of exemplary damages;
(c) Two Million Pesos (PHP2,000,000.00), by way of attorneys fees;
(d) Costs of suit.
Other reliefs just and equitable under the premises are, likewise prayed for.16
Feeling aggrieved, the spouses Sy Chim and Felicidad Chan Sy filed a criminal complaint in the
Office of the City Prosecutor of Makati against the spouses Sy Tiong Shiou and their children for
violation of Section 74 of the Corporation Code.
In the meantime, Sy Chim, as corporate president, called for a stockholders meeting on June
11, 2003. An amended complaint was filed on July 1, 2003, praying for the issuance of a

temporary restraining order and/or writ of preliminary prohibitory injunction. It was alleged,
among others, that on April 15, 2003, defendant Sy Chim and his other children and the siblings
of Sy Tiong Shiou, namely, Sy Yu Hui-Pabilona, Sy Tiong Gue, Sy Tiong Yan, Sy Yu San, Sy Yu
Siong, Sy Yu Bun and her son, Bryan Lim, with two armed unidentified men, forcibly entered the
office and took P6,500,000.00 in cash and postdated checks and other important documents,
including five boxes of Hennesy X.O. wine. Since defendant Sy Chim abandoned his duties and
responsibilities as president, the board of directors elected Sy Tiong Shiou as president during a
special meeting on May 6, 2003. Sy Chim issued a Notice of Stockholders Meeting on June 11,
2003 although he was no longer the president of the corporation. The amended complaint
further alleged that a criminal complaint for robbery was filed against the culprits in the Office of
the City Prosecutor of Manila.
The plaintiff corporation prayed for that the court grant injunctive relief, as follows:
a. An order be issued making the preliminary injunction permanent;
b. Ordering defendants to render a full, complete and true accounting of all the amounts,
proceeds and funds paid to, received and earned by the plaintiff since 1993 and to restitute to
the plaintiff, jointly and severally, all such amounts, proceeds and funds that they have
misappropriated;
c. Ordering defendants to pay, jointly and severally, the plaintiff the amount of One Million
(P1,000,000.00) Pesos by way of exemplary damages, and One Million (P1,000,000.00) Pesos
by way of attorneys fees plus Five Thousand (P5,000.00) Pesos per court appearance and
litigation expenses in the amount of not less than One Hundred Thousand (P100,000.00)
Pesos;
d. Cost of suit.
Plaintiff further prays for such other reliefs [it] deems just and equitable in the premises. 17
During the hearing of plaintiffs petition for injunctive relief, defendants submitted the following to
the court: a Joint Affidavit,18 the Joint Supporting Affidavit 19 of See Cha and See Su Pe, and the
Complaint-Affidavit20 of Felicidad Chan Sy for violation of Section 74 of the Corporation Code
against the spouses Sy Tiong Shiou and Juanita Tan Sy, Jolie Ross Tan, Charlie Tan, Romer
Tan and Jesse James Tan filed in the Office of the City Prosecutor.
On August 6, 2003, the RTC issued an Order 21 granting the plea for a writ of preliminary
injunction on a bond of P500,000.00, and enjoined defendant Sy Chim or any person acting for
and in his behalf from "calling or holding a stockholders and/or Board of Directors meetings" of
the corporation. This was followed by a writ of preliminary injunction. 22
On July 18, 2003, defendants filed a "Motion for Production and Inspection of Documents" 23 (all
the corporate books, accounting records, financial statements and other documents mentioned
in, and pertinent to, the allegations of the complaint), praying that they be permitted to inspect,
examine and photocopy such documents. Plaintiff opposed the motion, contending that it was
premature because defendants had not yet filed their answer to the complaint. 24 On August 5,
2003, defendants also filed a "Motion for the Appointment of an Independent Auditor," to
conduct an audit of the funds and assets of the plaintiff corporation. 25
Plaintiff did not object to the motion. 26 The RTC granted the motion on August 8, 2003 and
appointed the accounting firm of Punongbayan & Araullo to conduct the audit of the
corporations books and records covering the period from 1993 to the present. The Motion for
Production and Inspection of Documents filed by the defendants was, however, denied. Instead,
the parties have been directed to provide the accounting firm of all the books of accounts,
vouchers, receipts, purchase orders and similar other documents necessary, and warned that
failure to comply with the order will be dealt with as for contempt. The RTC also directed plaintiff
to make its records available to the accounting firm, and after completion of the firms task, to
make such records available for defendants inspection. 27
In their answer to the amended complaint, defendants averred that the meetings of the
stockholders and board of directors were null and void for having been conducted without prior

notice to them.28
Meanwhile, plaintiff moved that the court set aside its Order appointing an independent auditor.
On August 26, 2003, defendants filed a "Motion for the Appointment of a Management
Committee,"29 thus:
3. Defendants alleged that under Article IV of the By-Laws of Sy Siy Ho & Sons, Inc., the funds
of the corporation are under the supervision, control and administration of Sy Tiong Shiou, as
the General Manager, and Sy Tiong Shious wife, Juanita Tan, as Treasurer; and that the
direction and control of the business and operations of Guan Yiac Hardware were in the hands
of the General Manager Sy Tiong Shiou, who had the power to direct and actively manage
Guan Yiac Hardware.
4. Thus, defendants alleged that for any unaccounted difference of the corporations account,
including the PHP67,117,230.30 alleged in the Amended Complaint, it is Sy Tiong Shiou and
Juanita Tan who are at fault in view of their powers as General Manager and Treasurer under
the By-Laws of the Corporation and in actual practice since they have active control of the dayto-day operations of the Corporation.
5. However, while this Honorable Court will still determine, in the course of these proceedings,
whether it is defendants Sy Chim and Felicidad Chan Sy or whether it is Sy Tiong Shiou and
Juanita Tan who are the parties responsible for the dissipation and loss of the corporate funds
and assets of Sy Siy Ho & Sons, Inc., the active day-to-day control and management of Sy Siy
Ho & Sons, Inc. is still under the control and supervision of Sy Tiong Shiou and Juanita Tan,
especially so since defendants had been physically ousted from their residence by Sy Tiong
Shiou and his family since 15 April 2003, and defendants have been denied access to the
corporate premises and its books and records.
6. The plaintiff itself has alleged that there has been a massive dissipation and loss of its
corporate assets and funds, and this Court is still in the process of determining whether the
General Manager, Sy Tiong Shiou, and Treasurer, Juanita Tan, are the parties responsible for
such dissipation and loss. In view of the foregoing, until this Honorable Court resolves with
finality that Sy Tiong Shiou and his wife, Juanita Tan, are not responsible for the dissipation and
loss, the control and management of the Corporation must be transferred to an independent
party to ensure the preservation of the corporate assets.
7. While Sy Tiong Shiou and Juanita Tan remain in control of the management of the
corporation, there is imminent danger of further dissipation, loss, wastage or destruction of the
corporate funds and assets.
8. Nor can control and management of the corporation be transferred to the other stockholders
Romer Sy Tan, Jesse James Tan and Charlie Tan, or the Corporate Secretary Jolie Ross S. Tan,
who are all children of Sy Tiong Shiou and Juanita Tan.
9. Annexes "E" and "J" of the Amended Complaint, show that Romer Sy Tan, Jesse James Tan
and Charlie Tan, and Jolie Ross S. Tan, allegedly acting as the members of the Board of
Directors and the corporate secretary of Sy Siy Ho & Sons, Inc., took part in the actuations
against defendants.
9.1 Plaintiffs annex "E" shows that Romer Sy Tan, Jesse James Tan and Charlie Tan all signed
the minutes of the purported special meeting of the board of directors wherein, in a highly selfserving manner, Juanita Tan was declared to have no knowledge of the deposits, disbursements
and expenditures of the plaintiff since 1993, and that all of these as well as the deposits were in
the control of the defendants. Jolie Ross Tan, on the other hand, signed the Secretarys
Certificate wherein Juanita Tan was removed of all responsibilities pertaining to the funds of the
corporation since 1993.
9.2 On the other hand, annex "J" of plaintiffs Amended Complaint shows that Romer Sy Tan,
Jesse James Tan and Charlie Tan, and Jolie Ross S. Tan all signed the minutes of the purported
special joint meeting of the board of directors and stockholders wherein they supposedly
declared defendant Sy Chim as having abandoned his position, made Sy Tiong Shiou the

President and Chairman of the Board of Directors of the corporation, made Juanita Tan the Vice
President of the corporation, and cancelled defendant Sy Chims authority as a signatory on the
corporations bank accounts.
9.3 Romer Sy Tan is also acting as the representative of Sy Siy Ho & Sons, Inc. in this and in
another case against the defendants.
10. Hence, all of the children of Sy Tiong Shiou and Juanita Tan have taken action against their
grandparents, defendants Sy Chim and Felicidad Chan Sy. Obviously, the entire family of Sy
Tiong Shiou and Juanita Tan is acting against the defendants. In view of the foregoing, the
management and control of Sy Siy Ho & Sons, Inc. cannot be transferred to any or all of the
children of Sy Tiong Shiou and Juanita Tan since they obviously would not protect the interests
of defendants Sy Chim and Felicidad Chan Sy as stockholders of Sy Siy Ho & Sons, Inc.
11. Thus, there exists an urgent need for the immediate appointment of a management
committee to administer, manage and preserve the assets, funds, properties and records of Sy
Siy Ho & Sons, Inc. in order to prevent any further dissipation, wastage and loss. 30
The control and management of the corporation must be transferred pendente lite to an
independent party to ensure the preservation of the corporate assets. 31
Plaintiff opposed the motion, contending that defendants failed to allege and establish the two
requisites for the creation of a management committee under Section 1, Rule 9 of the Interim
Rules of Procedure for Intra-Corporate Controversies (Interim Rules for brevity) under Republic
Act No. 8799. It averred that, compared to previous years under the management of Sy Tiong
Shiou, the volume of sales and importation of the corporation had considerably increased, and
that its obligation of P29,404,664.00 to Metrobank was paid, and was thus in "current status."
Plaintiff also alleged that:
8. The kind of plaintiffs business requires a special talent or managerial sagacity that only a
person who has been exposed to it for a long and continuous period of time possesses. Sy
Tiong Shiou is that kind of individual because he has been in this kind of business for more than
forty (40) years, starting as an ordinary employee and now as President and General Manager
of the plaintiff. As such, he knows its intimate details and nuances.
9. The appointment of a management committee to manage the business affairs of the plaintiff
would not only be unwise and ill-advised. It might lead to a disastrous consequence for all its
stockholders and instead of saving the enterprise, as defendants would claim, it will only result
to its untimely demise. If this will happen, the interest of all the stockholders as well as the
welfare of its more than seventy (70) employees, including that of their families, will be greatly
affected and jeopardized. xxx32
On September 9, 2003, defendants filed a Motion for Leave to File and Third-Party Complaint
against Sy Tiong Shiou and Juanita Tan Sy, with the following prayer:
1. Declaring third-party defendants Sy Tiong Shiou and Juanita Tan directly and solely liable in
respect of plaintiffs claim for accounting and damages and, in the same judgment, in the remote
event that third-party plaintiffs Sy Chim and/or Felicidad Chan Sy are adjudged liable to plaintiff,
ordering Sy Tiong Shiou and Juanita Tan to pay all amounts necessary to discharge Sy Chims
and Felicidad Chan Sys liability to plaintiff by way of indemnity or reimbursement;
2. Ordering third-party defendants to pay third-party plaintiffs the amount of P300,000.00 as
litigation expenses and attorneys fees.
Third-party plaintiffs further pray for such other reliefs as the Honorable Court may deem just
and equitable under the premises.33
For their part, Sy Tiong Shiou and Juanita Tan Sy alleged
31. As shown, since 1993, third-party defendants Sy Tiong Shiou and Juanita Tan have had full
and complete control of the day-to-day operations and complete custody and control of the
corporate funds of Sy Siy Ho & Sons, Inc., hence, they are the real parties-in-interest in this
case.
32. As shown, third-party defendants Sy Tiong Shiou and Juanita Tan are liable for any shortfall

or unaccounted difference of cash account of Sy Siy Ho & Sons, Inc. for the period 1993 to
2003, including the PHP67,117,230.30 alleged in paragraph 12 of the Amended Complaint
dated 30 June 2003, especially so since third-party plaintiffs have been physically ousted from
their residence by Sy Tiong Shiou and his family since 15 April 2003, and denied access to the
corporate premises by Sy Tiong Shiou and his family as well as its books and records.
33. Hence, third-party defendants Sy Tiong Shiou and Juanita Tan should render a full,
complete and true accounting of all the amounts, proceeds and funds paid to, received and
earned by Sy Siy Ho & Sons, Inc. since 1993, and should be declared solely liable to Sy Siy Ho
& Sons, Inc. for any shortfall or unaccounted difference of cash account of Sy Siy Ho & Sons,
Inc. for the period 1993-2003, including the PHP67,117,230.30 alleged in paragraph 12 of the
Amended Complaint dated 30 June 2003, and in the remote event that this Honorable Court
holds Sy Chim and Felicidad Chan Sy liable to plaintiff, Sy Chim and Felicidad Chan Sy are
entitled to full indemnity and reimbursement from Sy Tiong Shiou and Juanita Tan in respect of
plaintiffs claim.34
On September 12, 2003, the RTC issued an Order 35 granting the motion for the creation of a
management committee pendente lite to be composed of three members, one to be designated
by the court as chairman, and two others to be nominated by the parties within 10 days, failing
which the court would appoint the same. Such management committee would have the power
and functions enumerated under Section 5, Rule 9 of the Interim Rules. 36 The RTC justified the
issuance of its order on its finding that the parties were pointing accusing fingers at each other
for the unaccounted funds. According to the trial court, the question of who should be held
responsible for the unaccounted funds would only be determined after an extensive audit of the
companys books. Moreover, while the main case is yet to be heard, the fact remains that
corporate assets, funds, properties and records were in imminent danger of further dissipation
or total loss. Thus, it would serve the best interest of the company, as well as its stockholders
and creditors, to have the corporation managed by an independent committee exclusively
accountable to the court. According to the RTC, the corporations assets, income and properties
would be protected and preserved until the final determination of the main controversy.
The court further stated that the appointment of a receiver was justified where pleadings
requesting appointment were without qualification as to information and belief and were not
controverted by defendants.37 It noted that sufficient allegations of misappropriation of corporate
assets were made, and that the appointment of a receiver is justified upon a showing that one
who is president, director, managing officer and controlling stockholder has allowed himself
unauthorized salary increases, used corporate funds for his private purposes, entrusted his
duties to others, conducted a competing business and made a secret profit by transactions
between the two concerns, used employees and equipment of the company for his own
business, failed to keep complete corporate accounts, incurred penalties for delinquent
corporate taxes, and otherwise caused waste and loss. 38
On October 8, 2003, the RTC granted defendants Motion to File a Third-Party Complaint and
ordered that such complaint be admitted. 39 Third-party defendants failed to file their answer
thereon and were declared in default upon motion of the third-party plaintiffs.
Plaintiff corporation filed a motion for reconsideration of the September 12, 2003 Order of the
trial court creating a management committee. Plaintiff reiterating its claim that defendants failed
to adduce evidence to prove the twin requisites for the creation of a management committee
under Section 1, Rule 9 of the Interim Rules.
On October 15, 2003, the trial court issued a Supplemental Order 40 directing the president, vice
president, secretary, treasurer, accountant, bookkeeper of the corporation or any person acting
on their behalf or under their instruction to allow the parties or their duly-authorized
representatives to be present during the audit. The said officers were likewise enjoined to
secure court approval before disbursing funds in excess of P10,000.00. Finally, the officers were
directed to submit the names of the banks the corporation did business with and to indicate the

balance of its accounts. The trial court gave the said officers ten (10) days to comply with this
order and that, upon their failure to do so, would be dealt with as for contempt and meted the
appropriate penalty as warranted by the evidence.
However, Punongbayan & Araullo withdrew as independent auditor.41 Plaintiff filed a motion for
the reconsideration of the Supplemental Order, and, thereafter, a Manifestation and Motion, 42
praying that the order of the court appointing an independent auditor be executed. On
December 11, 2003, defendants filed a Comment/Opposition to Plaintiff Manifestation and
Motion.43 Plaintiff made a reply thereto.
In an Order44 dated December 19, 2003, the RTC denied plaintiffs motion for reconsideration of
the Supplemental Order. The trial court designated Wencita C. Salvador as comptroller tasked
to oversee the maintenance of corporate books of accounts, budget administration, internal
control on disbursements, reporting and interpretation of financial statements, tax
administration, protection of assets, financial evaluation and government reporting. She was
also designated as a co-signatory to all checks or withdrawals of funds, to receive a monthly fee
of P50,000.00. The RTC reserved the authority to expand her authority. However, it modified its
Order dated October 15, 2003, in that its prior approval was no longer required in the
disbursement of funds, except those in excess of P500,000.00. It further ordered plaintiff not to
obtain any loan or other credit accommodations without its prior approval, and directed plaintiffs
depository banks to be advised of its order.
The hearing for the formation of the management committee was set on January 9, 2004. 45
Plaintiff filed a motion for reconsideration of the trial courts Order dated December 19,
2003.1awphi1.net
The spouses Sy Tiong Shiou and Juanita Tan Sy filed a petition for certiorari in the Court of
Appeals (CA) assailing the October 8, 2003 and December 19, 2003 Orders of the RTC. The
petition, docketed as CA-G.R. SP No. 81897 and raffled to the appellate courts 7th Division,
contained the following prayer:
1. Upon the filing of this petition, a temporary restraining order and/or writ of preliminary
injunction be issued restraining/enjoining the Honorable Respondent JUDGE from undertaking
further proceedings in Civil Case No. 03-106456 until further orders from this Honorable
Court;1avvphi1.net
2. After due proceedings, this petition be given due course and, thereafter, judgment be
rendered annulling and setting aside the assailed Orders dated October 8, 2003 (Annex "H,"
supra) and the Order dated December 19, 2003 (Annex "R," supra) and striking out and
quashing the Third-Party Complaint or ordering the Honorable Respondent JUDGE to strike out
and quash the Third-Party Complaint.
Petitioners also pray for costs and for such other reliefs as just and equitable under the
premises.46
Meantime, in an Order47 dated January 27, 2004, the RTC declared that its December 19, 2003
Order designating Wencita Salvador as comptroller was immediately executory. She was,
likewise, directed to immediately assume her functions and ordered all the corporation officers
to immediately turn over all corporate books and records as may be required by her, and to
cooperate fully. The court designated the accounting firm of R.S. Bernaldo & Associates to
conduct the audit. The court also directed the parties to provide the firm with all the financial
books of the corporation.
In a Letter dated January 30, 2004, Salvador informed the corporation that she was assuming
the position of comptroller effective February 2, 2004.
The corporation filed an Urgent Motion48 to lift the January 27, 2004 Order of the RTC, but
before the RTC could resolve the motion, the corporation filed a petition for certiorari with
injunctive relief in the CA, docketed as CA-G.R. SP No. 82171. The following allegations were
made:
A. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND ACTED WITHOUT

OR IN EXCESS OF JURISDICTION AND VIOLATED PETITIONERS RIGHT TO DUE

PROCESS IN ISSUING THE ORDER OF 12 SEPTEMBER 2003 (Annex "F") GRANTING THE
MOTION OF THE DEFENDANTS (Private Respondents herein) FOR THE CREATION OF A
MANAGEMENT COMMITTEE PENDENTE LITE, AND IN NOT RESOLVING BUT INSTEAD
MOOTING PETITIONERS MOTION FOR RECONSIDERATION (Annex "G") AND
SUPPLEMENTAL MOTION FOR RECONSIDERATION OF SAID ORDER (Annex "H").
B. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND ACTED WITHOUT
OR IN EXCESS OF JURISDICTION AND VIOLATED PETITIONERS RIGHT TO DUE
PROCESS IN ISSUING THE SUPPLEMENTARY ORDER DATED OCTOBER 15, 2003 (Annex
"I"), AND IN NOT RESOLVING BUT INSTEAD MOOTING PETITIONERS MOTION FOR
RECONSIDERATION OF SAID ORDER (Annex "J").
C. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND ACTED
WITHOUT OR IN EXCESS OF JURISDICTION AND VIOLATED PETITIONERS RIGHT TO
DUE PROCESS IN ISSUING THE ORDER DATED DECEMBER 19, 2003 (Annex "P"), AND IN
NOT RESOLVING
BUT INSTEAD
MOOTING
PETITIONERS
MOTION
FOR
RECONSIDERATION OF SAID ORDER (Annex "Q").
D. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND ACTED
WITHOUT OR IN EXCESS OF JURISDICTION AND VIOLATED PETITIONERS RIGHT TO
DUE PROCESS IN ISSUING THE ORDER DATED JANUARY 27, 2004 (Annex "S") AND IN
NOT RESOLVING BUT INSTEAD MOOTING PETITIONERS URGENT MOTION TO LIFT
ORDER DATED JANUARY 27, 2004 (Annex "T").49
The appellate court set the hearing on the plea for injunctive relief. 50
On June 29, 2005, the CA rendered judgment granting the petition and nullifying the orders
issued by the RTC. The fallo of the decision reads:
WHEREFORE, in view of the foregoing, the petition is GRANTED. The Orders of September 12,
2003, October 15, 2003, December 19, 2003 and January 27, 2004, are hereby ANNULLED
and SET ASIDE. The instant case is remanded to the Regional Trial Court of
Manila, Branch 46, for further proceedings with special instructions to resolve the same with
deliberate dispatch in accordance with the rules on summary procedure as defined by the
Interim Rules of Procedure for Intra-Corporate Controversies. No pronouncement as to cost.
SO ORDERED.51
The CA ruled that respondents failed to prove a requirement for the creation of a management
committee under Section 1, Rule 9 of the Interim Rules: that there was imminent danger of
massive dissipation, loss, wastage or destruction of assets and other properties of the
corporation. The appellate court declared that other than the bare allegations of Sy Chim and
Felicidad Chan Sy that they could not protect their interests because of dissention among
themselves on the one hand, and members of the board of directors on the other, they failed to
show that the business operations of the corporation were paralyzed. The CA emphasized that
the creation of a management committee is for the benefit of all the interested parties, not
exclusively for the benefit of the party at whose instance it is to be created. The appellate court
stated that a simple turn over of pertinent receipts would facilitate the accounting sought for,
without resorting to the creation of a management committee; the accuracy of the validity of the
accounting report made as basis of the complaint for accounting and damages should then be
validated during trial on the merits. Citing Jacinto v. First Womens Credit Corporation, 52 the CA
ruled that the trial court abused its discretion amounting to excess of jurisdiction in ordering the
creation of a management committee pendente lite.
The CA also ruled that the trial court abused its discretion in designating a comptroller and an
accounting firm to assess the corporations financial books and records. The CA stated that the
appointment of a comptroller was not authorized by the Interim Rules. Thus, while Section 2,
Rule 9 of the Interim Rules allows the appointment of a receiver, there was no point in
discussing the same since the trial court committed abuse of its discretion in creating a

management committee. The CA concluded that, when the trial court created a management
committee and designated an auditing firm and a comptroller, it thereby imposed additional
burden on the corporation.
The CA likewise declared that "the order imposing a limitation of Five Hundred Thousand Pesos
(P500,000.00) disbursement without prior court approval was likewise unnecessary and has no
direct bearing to the issue involved in the case pending before the court a quo.
Spouses Sy Chim and Felicidad Chan Sy filed a motion for the partial reconsideration of the
decision, which the appellate court denied.53
Said spouses, now petitioners, filed the instant petition for review on certiorari, alleging that:
I
RESPONDENT COURT OF APPEALS ERRED IN INTERPRETING SECTION 1, RULE 9 OF
THE
INTERIM
RULES
OF
PROCEDURE
GOVERNING
INTRA-CORPORATE
CONTROVERSIES BECAUSE IT FAILS TO GIVE FULL FORCE AND EFFECT TO THE
PROTECTIVE POWERS OF THE COURT.
II
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE AUDIT AND
ASSESSMENT OF THE CORPORATE BOOKS AND RECORDS OF THE CORPORATION IS
UNNECESSARY AND IS MORE THAN WHAT THE CASE DEMANDS.
III
RESPONDENT COURT OF APPEALS ERRED IN RULING ON THE 8 AUGUST 2003 ORDER
OF THE TRIAL COURT DIRECTING THE CONDUCT OF AN AUDIT OF THE BOOKS AND
RECORDS OF SY SIY HO & SONS, INC. (SSHI) BECAUSE SUCH ORDER WAS NOT
COVERED BY THE PETITION BEFORE THE COURT OF APPEALS.
IV
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE TRIAL COURT HAS NO
POWER AND AUTHORITY TO DESIGNATE A COMPTROLLER AND TO MONITOR THE
DISBURSEMENTS OF THE CORPORATION.
V
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE APPOINTMENT OF AN
AUDITING FIRM IS PREMATURE.
VI
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE TRIAL COURT
GRAVELY ABUSED ITS DISCRETION IN ISSUING THE ASSAILED ORDERS.54
The threshold issue is whether or not the RTC committed grave abuse of its discretion
amounting to excess or lack of jurisdiction in (a) creating a management committee; (b)
designating an independent auditor and ordering an audit of the corporate books and records of
the corporation; and (c) appointing a comptroller; and whether the issues raised in this Court are
factual in nature and proscribed by Rule 45 of the Rules of Civil Procedure.
On the first issue, petitioners aver that the CA erred in strictly applying the requisites under
Section 1, Rule 9 of the Interim Rules regarding the creation of a management committee. The
petitioners posit that the word "and" in Section 1(1), Rule 9 should be interpreted as "or," since a
literal interpretation of the provision would frustrate the plain intention of the Rule. They point out
that the appellate courts strict interpretation of the rule is contrary to the spirit of Presidential
Decree No. 902-A. They further assert that the RTC is empowered to act and put a stop to
misappropriation of a corporations funds and thus prevent business operations from being
paralyzed. According to the petitioners, for the Court to idly wait and watch as assets of the
corporation are plundered until the business is paralyzed, would render inutile Section 1, Rule 9
of the Interim Rules.
Petitioners assert that at the time the complaint was filed in the trial court, respondents abused
their positions and mismanaged corporate affairs, thus necessitating the immediate creation of a
management committee.

Petitioners maintain that corporate funds have massively dissipated and would continue as long
as the management and control of the corporation remained with respondents. In fact,
respondents admitted in their complaint that there had been massive dissipation of the funds
and assets of the corporation since 1993 when they (respondents) were still corporate officers.
Contrary to the ruling of the CA, the creation of the management committee would ensure the
continuity of the corporations business operations and remove the management of the business
from the hands of those responsible for the dissipation of its assets. Thus, petitioners insist, the
interest of the corporation and its stockholders would be preserved and protected through the
creation of a management committee.
Petitioners further assert that the appointment of an independent auditing firm would satisfy the
corporations claim for a full accounting and ensure that all books, records and documents of the
corporation would be submitted to the auditor to ensure a fair, impartial and full accounting.
Such accounting would determine the full extent of misappropriation of corporate funds, as well
as the shareholdings of its stockholders. Petitioners insist that there was a necessity for the
court to do so in order to determine the true status of corporate funds, and to determine who
should be held responsible for the alleged misappropriation. Petitioners assert that the auditors
report is of doubtful credibility as it is inconsistent with the external auditors report (which has
no indication of any missing fund). Moreover, the appointment of an external auditor is
necessitated by time constraints and the volume of financial records to be examined. Petitioners
point out that, as gleaned from the amended complaint, the corporation prayed for the
accounting of the missing funds; the appointment of an impartial and competent auditor to
conduct the audit achieves this purpose.
Petitioners maintain that respondent corporations failure to question the trial courts
appointment of an independent auditor and accounting firm through a motion for reconsideration
effectively estopped them from assailing such orders; instead of filing a petition for certiorari in
the CA, respondent should have moved that such orders be reconsidered.
On the issue of whether or not the trial court may designate a comptroller, petitioners point out
that although Section 1, Rule 9 of the Interim Rules does not specifically authorize the RTC to
appoint a comptroller, the same rule authorizes such court to appoint a receiver; this latter
power necessarily implies the authority to designate a comptroller. According to petitioners, a
comptroller would exercise more limited functions and ensure that no illegitimate corporate
expenditures would be made and that all government requirements will be complied with before
the formation of a management committee.
By way of comment, respondent avers that the issues raised by petitioners are factual, which is
proscribed by Rule 45 of the Rules of Civil Procedure; whether or not there is factual basis for
the creation of a management committee under Section 1, Rule 9 of the Interim Rules is a
question of fact. The CA correctly ruled that petitioners failed to allege and substantiate the
need for the appointment of an auditing firm, as well as the requisites for the creation of a
management committee. The Order of the trial court dated August 8, 2003 had already been
overtaken and rendered moot by the January 27, 2004 Order of the RTC which the CA affirmed.
Also, whether or not there is a need for the appointment of comptroller and the limits of her
power are questions of fact which should not be raised in this Court.
The petition is partially granted.
Section 1, Rule 9 of the Interim Rules provides:
SECTION 1. Creation of a management committee. As an incident to any of the cases filed
under these Rules or the Interim Rules on Corporate Rehabilitation, a party may apply for the
appointment of a management committee for the corporation, partnership or association, when
there is imminent danger of:
(1) Dissipation, loss, wastage or destruction of assets or other properties; and
(2) Paralyzation of its business operations which may be prejudicial to the interest of the
minority stockholders, parties-litigants or the general public. 55

The said Rules, which took effect on April 1, 2001, was promulgated by the Court pursuant to its
power to promulgate rules concerning "pleading, practice and procedure in all courts xxx
providing for simplified and inexpensive procedure for the speedy disposition of cases" under
Section 5(5), Article VIII of the Constitution.
We do not agree with petitioners contention that the word "and" in Section 1, Rule 9 of the
Interim Rules should be interpreted to mean "or." While it is true that in Section 6(d) of
Presidential Decree No. 902-A,56 an applicant for the appointment of a management committee
is mandated to prove only one of the two requisites provided therein, the Court, in Jacinto v.
First Womens Credit Corporation,57 ruled that the two requisites should be present before a
management committee may be created and a receiver appointed by the RTC:
A reading of the aforecited legal provision reveals that for a minority stockholder to obtain the
appointment of an interim management committee, he must do more than merely make a prima
facie showing of a denial of his right to share in the concerns of the corporation; he must show
that the corporate property is in danger of being wasted and destroyed; that the business of the
corporation is being diverted from the purpose for which it has been organized; and that there is
serious paralyzation of operations all to his detriment.
The rationale for the need to establish the confluence of the two (2) requisites under Section 1,
Rule 9 by an applicant for the appointment of a management committee is primarily based upon
the fact that such committee and receiver appointed by the court will immediately take over the
management of the corporation, partnership or association, including such power as it may
deem appropriate, and any of the powers specified in Section 5 of the Rule. 58
Indeed, upon the appointment of a receiver, the duly elected/appointed officers of the
corporation are divested of the management of such corporation in favor of the management
committee/receiver. Such transference of the corporations management will certainly have a
negative, if not crippling effect, on the operations/affairs of the corporation not only with banks
and other business institutions including those abroad which it deals business with. A wall of
uncertainty is erected; the short and long-term plans of the management of the corporation are
disrupted, if not derailed.59
Thus, the creation and appointment of a management committee and a receiver is an
extraordinary and drastic remedy to be exercised with care and caution; and only when the
requirements under the Interim Rules are shown. It is a drastic course for the benefit of the
minority stockholders, the parties-litigants or the general public are allowed only under pressing
circumstances and, when there is inadequacy, ineffectual or exhaustion of legal or other
remedies. The power to intervene before the legal remedy is exhausted and misused when it is
exercised in aid of such a purpose.60 The power of the court to continue a business of a
corporation, partnership or association must be exercised with the greatest care and caution.
There should be a full consideration of all the attendant facts, including the interest of all the
parties concerned.
Neither Presidential Decree No. 902-A and Republic Act No. 8799 nor the Interim Rules of
Procedure define "imminent danger." "Danger" is a general term, including peril, jeopardy,
hazard and risk; as used in the Rule, it refers to exposure or liability to injury. "Imminent" refers
to something which is threatening to happen at once, something close at hand, something to
happen upon the instant, close although not yet happening, and on the verge of happening. 61
In the present case, petitioners failed to make a strong showing that there was an imminent
danger of dissipation, loss, wastage or destruction of assets or other properties of respondent
corporation and paralysis of its business operations which may be prejudicial to the interest of
the parties-litigants, petitioners, or the general public. The RTC thus committed grave abuse of
its discretion amounting to excess of jurisdiction in creating a management committee and the
subsequent appointment of a comptroller.
The bone of contention between the parties is whether there was a shortage or unaccounted
funds of the corporation, including P67,117,230.30 allegedly incurred from 1993 (when

petitioner Sy Chim assumed office as President, Felicidad Chan Sy as Assistant Treasurer, Sy

Tiong Shiou as General Manager, and Juanita Tan Sy as Corporate Treasurer); and who should
be held accountable therefor. Petitioners blame Sy Tiong Shiou and Juanita Tan Sy, while the
latter pin liability on petitioners based on the financial report of the Banaria Banaria and
Company and the claim of Juanita Tan Sy. However, these issues of fact have yet to be
determined by the trial court after due proceedings. Indeed, petitioners admitted the following in
their motion for the appointment of a management committee:
4. Thus, defendants allege that for any unaccounted difference of the corporations account,
including the PHP67,117,230.30 alleged in the Amended Complaint, it is Sy Tiong Shiou and
Juanita Tan who are at fault in view of their powers as General Manager and Treasurer under
the By-laws of the Corporation and in actual practice since they have active control of the dayto-day operations of the Corporation.
5. However, while this Honorable Court will still determine, in the course of these proceedings,
whether it is defendants Sy Chim and Felicidad Chan Sy or whether it is Sy Tiong Shiou and
Juanita Tan who are the parties responsible for the dissipation and loss of the corporate funds
and assets of Sy Siy Ho & Sons, Inc., the active day-to-day control and management of Sy Siy
Ho and Sons, Inc. is still under the control and supervision of Sy Tiong Shiou and Juanita Tan,
especially so since defendants have been physically ousted from their residence by Sy Tiong
Shiou and his family since 15 April 2003, and defendants have been denied access to the
corporate premises and its books and records.62
Petitioners failed to adduce a shred of evidence during the hearing of their motion to prove their
claim that there was imminent danger of dissipation, loss, wastage or destruction of the assets
or other properties of respondent ever since Sy Tiong Shiou became president and Juanita Tan
Sy continued discharging her duties as corporate treasurer; nor is there proof that there was
imminent danger of paralyzing the business operations of the corporation.1avvphi1.net
We have reviewed the records and find that, contrary to the findings of the RTC, there is no
imminent danger of dissipation or total loss of the assets, funds, properties and records of
respondent corporation, or paralysis of business operations. In fact, records show that there has
been no slack in the business operations of respondent corporation.
Petitioners were divested of their corporate positions, and thus stockholdings in the corporation
were reduced. Petitioners claim that Sy Tiong Shiou and Juanita Tan Sy (third-party defendants
below) and their children unlawfully ousted them from their positions and reduced their
shareholdings in the corporation. They posit that the formers claim that they (petitioners)
misappropriated the funds and assets of respondent was designed to justify the unlawful ouster
of petitioners from the management of respondent corporation. Such claims, however, have yet
to be proven.
While the allegation that Sy Tiong Shiou and Juanita Tan Sy abused their positions and
mismanaged the affairs of respondent corporation is a distinct possibility, petitioners failed to
adduce proof thereon. Mere possibility without proof of abusing corporate positions and
dissipation of assets and properties of the corporation is not a valid ground for the appointment
of a management committee/receiver. Petitioners even failed to adduce evidence to controvert
the following allegations of respondent:
b. A comparative breakdown of the volume of sales and importation of the plaintiff for the years
2002 and 2003, during the watch of defendant Sy Chim as President and during the time that
Sy Tiong Shiou took over as President would clearly show that it has tremendously increased. A
copy of the comparative chart is attached hereto as Annex "B";
c. In a certification dated August 29, 2003 issued by Amelin S. Yap, SVP, Center Head of
Metrobank, it is demonstrated that plaintiff, through the able and competent management and
leadership of Sy Tiong Shiou, has been able to service and pay its financial obligations when it
paid Fourteen Million Nine Hundred Eleven Thousand Six Hundred Sixty-Four ( P14,911,664.00)
Pesos under trust receipt obligation from the period of April 2003 up to August 2003. Likewise, it

has also paid Fourteen Million Four Hundred Ninety-Three Thousand (P14,493,000.00) Pesos
under loan obligation from the period April 2003 to August 2003. Further, the bank certified that
plaintiffs obligations are in current status. Photocopy of the said certification is attached hereto
as Annex "C";
d. On September 1, 2003, CHINABANK, through its Senior Assistant Vice President,
International Banking Group, Elaine Marissa L. Ong issued a certification that, as per records as
of August 28, 2003, plaintiffs outstanding trust receipts amounted only to P9,462,835.90 and
that these trust receipts are not beyond 180 days. Photocopy of the said certification is attached
hereto as Annex "D";
e. Likewise, on September 1, 2003, Allied Banking Corporation, through its Senior Assistant
Vice President Florentina Garrovillo, issued a certification that, as per records as of August 29,
2003, plaintiffs outstanding trust receipts amounted to Seven Million Two Hundred Ninety-Four
Thousand Three Hundred Six Pesos & 77/100 (Php7,294,306.77) and that, as of that date,
these trust receipts are not beyond 180 days. Photocopy of the said certification is attached
hereto as Annex "E."

7. In contrast, during defendant Sy Chims incumbency as President, the plaintiff could hardly
pay its financial obligations with its creditor banks. In fact, it has to ask and request for
extensions. When Trust Receipt with Reference No. 014/TR/000631/02 fell due on February 7,
2003 after 180 days, defendant Sy Chim as President of the plaintiff could not pay the same and
instead asked for an extension of 90 days or up to May 8, 2003. Photocopy of the document
showing this transaction is attached hereto as Annex "F." 63
We agree that past conduct and condition of the corporation may be considered in determining
the present situation and what the future will be. However, a management committee or receiver
will not be appointed merely because of things done or attempted at a past time when the
present situation and the prospects for the future are not such as to warrant taking the control of
the property out of the hands of its owners. 64 The circumstances to justify the appointment of a
management committee/ receiver must be extraordinary and something more must be shown
than past misconduct and a mere apprehension based thereon of future wrongdoing. 65 To
repeat, in the absence of a strong showing of an imminent danger of dissipation, loss, wastage
or destruction of assets or other properties of a corporation and paralysis of its business
operations, the mere apprehension of future misconduct based upon prior mismanagement will
not authorize the appointment of a management committee/receiver.66
We also agree with the CA ruling that the RTC committed grave abuse of its discretion in excess
of its jurisdiction in appointing a comptroller and ordering her to immediately assume office
before the creation of a management committee. However, the CA ruled that the RTC
committed a grave abuse of its discretion amounting to excess of its jurisdiction, thus:
As defined in Blacks Law Dictionary, a "comptroller" is an officer of a business, charged with
certain duties in relation to the fiscal affairs of the same, principally to examine and audit the
accounts, to keep records, and report the financial situation from time to time. We have perused
the Interim Rules of Procedure for Intra-Corporate Controversies and nowhere in the said rules
does it authorize the designation of a comptroller. Rule 9, Section 2 of the Procedure, however,
mandates that, in the event the court finds the application for the creation of a management
committee sufficient in form and substance, the court shall issue an order appointing a receiver
of known probity, integrity and competence and without any conflict of interest as therein defined
to immediately take over the corporation, partnership or association, specifying such powers as
it may deem appropriate under the circumstances, including any of the powers specified in
Section 5 of said Rule. We see no need to discuss whether it would have been appropriate for
the court-a-quo to appoint a receiver in view of the finding of this Court that the creation of a
management committee was done in grave abuse of discretion. 67
Indeed, the RTC committed grave abuse of its discretion in ordering the appointment of Wencita

Salvador as comptroller. We do not foreclose the power of a management committee to appoint

a comptroller under Section 5, Rule 9 of the Interim Rules. However, with the Courts ruling that
the creation of such committee and the appointment of a receiver is without factual basis, it
follows that the appointment of a comptroller is, likewise, unnecessary.1avvphi1.net
We agree with petitioners contention that the RTC acted in the exercise of its discretion in
appointing an independent auditor. Such appointment is appropriate and even necessary if only
to limit the issues for trial and thus abbreviate the proceedings. The ouster of petitioners as
president and treasurer of respondent and the takeover by third-party defendants and their
children of the management and control of the corporation is based on the claim of Juanita Tan
Sy that petitioner Felicidad Chan Sy had a shortage of P67,117,230.30 for 2001 and 2002 per
the report of the auditing firm, Banaria Banaria & Company. Petitioners, for their part, claim that
such report is inconsistent with that of respondents external auditor Anita Uy from 1994 to 2002
which were submitted to the Bureau of Internal Revenue and the SEC showing that no amount
was due to stockholders. In the report of the Banaria Banaria & Company, the corporation had
retained earnings of P56,170,114.89 for the period ending December 31, 2001, whereas per
report of Uy, respondent had net earnings of only P16,252,114.89, hence, the need for an
independent auditor. Moreover, such audit would forestall any misappropriation of corporate
funds and assets of respondent corporation in the interim.
We note that petitioners prayed for the appointment of an independent auditor, and that
respondent did not even object to the motion. Consequently, the RTC appointed the
Punongbayan & Araullo firm to conduct the audit. However, respondent made a volte face and
filed its Manifestation and Motion dated November 26, 2003 and posited that an independent
auditor was not necessary since in its complaint, it merely prayed for an accounting of the funds
which were missing based on the report of the Banaria Banaria & Company auditing firm.
We hold that an independent audit is imperative in this case so that, based on such report, the
RTC would be able to determine the veracity not only of respondents claim that petitioners
misappropriated corporate funds and assets, but also that of petitioners who claim otherwise.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The Decision of
the Court of Appeals is AFFIRMED WITH THE MODIFICATION that the Orders of the Regional
Trial Court dated August 8, 2003, October 15, 2003 and January 27, 2004, relative to the
appointment of R.S. Bernabe and Associates as independent auditor, are AFFIRMED.
No costs.
SO ORDERED.
G.R. No. 156207
September 15, 2006
EQUITABLE PCI BANK (the Banking Entity into which Philippine Commercial
International Bank was merged), petitioner,
vs.
ROWENA ONG, respondent.
DECISION
CHICO-NAZARIO, J.:
On 29 November 1991, Warliza Sarande deposited in her account at Philippine Commercial
International (PCI) Bank Magsaysay Avenue, Santa Ana District, Davao City Branch, under
Account No. 8502-00347-6, a PCI Bank General Santos City Branch, TCBT 1 Check No.
0249188 in the amount of P225,000.00. Upon inquiry by Serande at PCI Bank on 5 December
1991 on whether TCBT Check No. 0249188 had been cleared, she received an affirmative
answer. Relying on this assurance, she issued two checks drawn against the proceeds of TCBT
Check No. 0249188. One of these was PCI Bank Check No. 073661 dated 5 December 1991
for P132,000.00 which Sarande issued to respondent Rowena Ong Owing to a business
transaction. On the same day, Ong presented to PCI Bank Magsaysay Avenue Branch said
Check No. 073661, and instead of encashing it, requested PCI Bank to convert the proceeds

thereof into a manager's check, which the PCI Bank obliged. Whereupon, Ong was issued PCI
Bank Manager's Check No. 10983 dated 5 December 1991 for the sum of P132,000.00, the
value of Check No. 073661.
The next day, 6 December 1991, Ong deposited PCI Bank Manager's Check No. 10983 in her
account with Equitable Banking Corporation Davao City Branch. On 9 December 1991, she
received a check return-slip informing her that PCI Bank had stopped the payment of the said
check on the ground of irregular issuance. Despite several demands made by her to PCI Bank
for the payment of the amount in PCI Bank Manager's Check No. 10983, the same was met
with refusal; thus, Ong was constrained to file a Complaint for sum of money, damages and
attorney's fees against PCI Bank.2
From PCI Bank's version, TCBT-General Santos City Check No. 0249188 was returned on 5
December 1991 at 5:00 pm on the ground that the account against which it was drawn was
already closed. According to PCI Bank, it immediately gave notice to Sarande and Ong about
the return of Check No. 0249188 and requested Ong to return PCI Bank Manager's Check No.
10983 inasmuch as the return of Check No. 0249188 on the ground that the account from which
it was drawn had already been closed resulted in a failure or want of consideration for the
issuance of PCI Bank Manager's Check No. 10983.3
After the pre-trial conference, Ong filed a motion for summary judgment. 4 Though they were
duly furnished with a copy of the motion for summary judgment, PCI Bank and its counsel failed
to appear at the scheduled hearing. 5 Neither did they file any written comment or opposition
thereto. The trial court thereafter ordered Ong to formally offer her exhibits in writing, furnishing
copies of the same to PCI Bank which was directed to file its comment or objection. 6
Ong complied with the Order of the trial court, but PCI Bank failed to file any comment or
objection within the period given to it despite receipt of the same order. 7 The trial court then
granted the motion for summary judgment and in its Order dated 2 March 1995, it held:
IN THE LIGHT OF THE FOREGOING, the motion for summary judgment is GRANTED,
ordering defendant Philippine Commercial International Bank to pay the plaintiff the amount of
ONE HUNDRED THIRTY-TWO THOUSAND PESOS (P132,000.00) equivalent to the amount of
PCIB Manager's Check No. 10983.
Set the reception of the plaintiff's evidence with respect to the damages claimed in the
complaint.8
PCI Bank filed a Motion for Reconsideration which the trial court denied in its Order dated 11
April 1996.9 After the reception of Ong's evidence in support of her claim for damages, the trial
court rendered its Decision10 dated 3 May 1999 wherein it ruled:
IN LIGHT OF THE FOREGOIN CONSIDERATION, and as plaintiff has preponderantly
established by competent evidence her claims in the Complaint, judgment in hereby rendered
for the plaintiff against the defendant-bank ordering the latter:
1. To pay the plaintiff the sum of FIFTY THOUSAND PESOS (P50,000.00) in the concept of
moral damages;
2. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as exemplary
damages;
3. To pay the plaintiff the sum of THREE THOUSAND FIVE HUNDRED PESOS (P3,500.00)
representing actual expenses;
4. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as and for
attorney's fee's; and
5. To pay the costs.11
From this decision, PCI Bank sought recourse before the Court of Appeals. In a Decision 12
dated 29 October 2002, the appellate court denied the appeal of PCI Bank and affirmed the
orders and decision of the trial court.
Unperturbed, PCI Bank then filed the present petition for review before this Court and raised the
following issues:

1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A GRAVE AND

REVERSIBLE ERROR WHEN IT SUSTAINED THE LOWER COURT'S ORDER DATED 2
MARCH 1999 GRANTING RESPONDENT'S MOTION FOR SUMMARY JUDGMENT
NOTWITHSTANDING THE GLARING FACT THAT THERE ARE GENUINE, MATERIAL AND
FACTUAL ISSUES WHICH REQUIRE THE PRESENTATION OF EVIDENCE.
2. WHETHER OR NOT THE COURT OF APPEALS WAS IN ERROR WHEN IT SUSTAINED
THE LOWER COURT'S DECISION DATED 3 MAY 1999 GRANTING THE RELIEFS PRAYED
FOR IN RESPONDENT ONG'S COMPLAINT INSPITE OF THE FACT THAT RESPONDENT
ONG WOULD BE "UNJUSTLY ENRICHED" AT THE EXPENSE OF PETITIONER BANK, IF
PETITIONER BANK WOULD BE REQUIRED TO PAY AN UNFUNDED CHECK.
3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERRORS
WHEN IT AFFIRMED THE COURT A QUO'S DECISIION DATED 3 MAY 1999 AWARDING
DAMAGES TO RESPONDENT ONG AND HOLDING THAT RESPONDENT ONG HAD
PREPONDERANTLY ESTABLISHED BY COMPETENT EVIDENCE HER CLAIMS IN THE
COMPLAINT INSPITE OF THE FACT THAT THE EVIDENCE ON RECORD DOES NOT
JUSTIFY THE AWARD OF DAMAGES.
4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR
WHEN IT AFFIRMED THE LOWER COURT'S FACTUAL FINDING IN ITS DECISION DATED 3
MAY 1999 HOLDING RESPONDENT ONG A "HOLDER IN DUE COURSE" INSPITE OF THE
FACT THAT THE REQUISITE OF "GOOD FAITH" AND FOR VALUE IS LACKING AND
DESPITE THE ABSENCE OF A PROPER TRIAL TO DETERMINE SUCH FACTUAL ISSUE.
5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR
WHEN IT UPHELD THE LOWER COURT'S DECISION DATED 3 MAY 1999 DENYING
PETITIONER EPCI BANK'S COUNTERCLAIM INSPITE OF THE FACT THAT IT WAS SHOWN
THAT RESPONDENT ONG'S COMPLAINT LACKS MERIT.13
We affirm the Decision of the trial court and the Court of Appeals.
The provision on summary judgment is found in Section 1, Rule 35 of the 1997 Rules of Court:
SECTION 1. Summary judgment for claimant. A party seeking to recover upon a claim,
counterclaim, or cross-claim or to obtain a declaratory relief may, at any time after the pleading
in answer thereto has been served, move with supporting affidavits, depositions or admissions
for a summary judgment in his favor upon all or any part thereof.
Thus, it has been held that a summary judgment is proper where, upon a motion filed after the
issues had been joined and on the basis of the pleadings and papers filed, the court finds that
there is no genuine issue as to any material fact to except as to the amount of damages. A
genuine issue has been defined as an issue of fact which calls for the presentation of evidence,
as distinguished from an issue which is sham, fictitious, contrived and patently unsubstantial so
as not to constitute a genuine issue for trial. 14
A court may grant summary judgment to settle expeditiously a case if, on motion of either party,
there appears from the pleadings, depositions, admissions, and affidavits that no important
issues of fact are involved, except the amount of damages. 15 Rule 35, Section 3, of the Rules of
Court provides two requisites for summary judgment to be proper: (1) there must be no genuine
issue as to any material fact, except for the amount of damages; and (2) the party presenting
the motion for summary judgment must be entitled to a judgment as a matter of law.16
Certainly, when the facts as pleaded appear uncontested or undisputed, then there's no real or
genuine issue or question as to the facts, and summary judgment is called for.17
By admitting it committed an error, clearing the check of Sarande and issuing in favor of Ong
not just any check but a manager's check for that matter, PCI Bank's liability is fixed. Under the
circumstances, we find that summary judgment was proper and a hearing would serve no
purpose. That summary judgment is appropriate was incisively expounded by the trial court
when it made the following observation:
[D]efendant-bank had certified plaintiff's PCIB Check No. 073661 and since certification is

equivalent to acceptance, defendant-bank as drawee bank is bound on the instrument upon

certification and it is immaterial to such liability in favor of the plaintiff who is a holder in due
course whether the drawer (Warliza Sarande) had funds or not with the defendant-bank
(Security vs. State Bank, 154 N.W. 282) or the drawer was indebted to the bank for more than
the amount of the check (Nat. Bank vs. Schmelz, Nat. Bank, 116 S.E. 880) as the certifying
bank as all the liabilities under Sec. 62 of the Negotiable Instruments Law which refers to
liability of acceptor (Title Guarantee vs. Emadee Realty Corp., 240 N.Y. 36).
It may be true that plaintiff's PCIB Check No. 073661 for P132,000.00 which was paid to her by
Warliza Sarande was actually not funded but since plaintiff became a holder in due course,
defendant-bank cannot interpose a defense of want or lack of consideration because that
defense is equitable or personal and cannot prosper against a holder in due course pursuant to
Section 28 of the Negotiable Instruments Law. Therefore, when the aforementioned check was
endorsed and presented by the plaintiff and certified to and accepted by defendant-bank in the
purchase of PCIB Manager's Check No. 1983 in the amount of P132,000.00, there was a valid
consideration.18
The property of summary judgment was further explained by this Court when it pronounced that:
The theory of summary judgment is that although an answer may on its face appear to tender
issues requiring trial yet if it is demonstrated by affidavits, depositions, or admissions that
those issues are not genuine, but sham or fictitious, the Court is unjustified in dispensing with
the trial and rendering summary judgment for plaintiff. The court is expected to act chiefly on the
basis of the affidavits, depositions, admissions submitted by the movant, and those of the other
party in opposition thereto. The hearing contemplated (with 10-day notice) is for the purpose of
determining whether the issues are genuine or not, not to receive evidence on the issues set up
in the pleadings. A hearing is not thus de riguer. The matter may be resolved, and usually is, on
the basis of affidavits, depositions, admissions. This is not to say that a hearing may be
regarded as a superfluity. It is not, and the Court has plenary discretion to determine the
necessity therefore.19
The second and fourth issues are inter-related and so they shall be resolved together. The
second issue has reference to PCI Bank's claim of unjust enrichment on the part of Ong if it
would be compelled to make good the manager's check it had issued. As asserted by PCI Bank
under the fourth issue, Ong is not a holder in due course because the manager's check was
drawn against a closed account; therefore, the same was issued without consideration.
On the matter of unjust enrichment, the fundamental doctrine of unjust enrichment is the
transfer of value without just cause or consideration. The elements of this doctrine are:
enrichment on the part of the defendant; impoverishment on the part of the plaintiff; and lack of
cause. The main objective is to prevent one to enrich himself at the expense of another. 20 It is
based on the equitable postulate that it is unjust for a person to retain benefit without paying for
it.21 It is well to stress that the check of Sarande had been cleared by the PCI Bank for which
reason the former issued the check to Ong. A check which has been cleared and credited to the
account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount
equal to the amount credited to his account.22
Having cleared the check earlier, PCI Bank, therefore, became liable to Ong and it cannot
allege want or failure of consideration between it and Sarande. Under settled jurisprudence,
Ong is a stranger as regards the transaction between PCI Bank and Sarande. 23
PCI Bank next insists that since there was no consideration for the issuance of the manager's
check, ergo, Ong is not a holder in due course. This claim is equally without basis. Pertinent
provisions of the Negotiable Instruments Law are hereunder quoted:
SECTION 52. What constitutes a holder in due course. A holder in due course is a holder who
has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice it had been

previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it.
The same law provides further:
Sec. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to
have been issued for a valuable consideration; and every person whose signature appears
thereon to have become a party thereto for value.
Sec. 26. What constitutes holder for value. Where value has at any time been given for the
instrument, the holder is deemed a holder for value in respect to all parties who become such
prior to that time.
Sec. 28. Effect of want of consideration. Absence or failure of consideration is a matter of
defense as against any person not a holder in due course; and partial failure of consideration is
a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.
Easily discernible is that what Ong obtained from PCI Bank was not just any ordinary check but
a manager's check. A manager's check is an order of the bank to pay, drawn upon itself,
committing in effect its total resources, integrity and honor behind its issuance. By its peculiar
character and general use in commerce, a manager's check is regarded substantially to be as
good as the money it represents.24
A manager's check stands on the same footing as a certified check. 25 The effect of certification
is found in Section 187, Negotiable Instruments Law.
Sec. 187. Certification of check; effect of. Where a check is certified by the bank on which it is
drawn, the certification is equivalent to an acceptance. 26
The effect of issuing a manager's check was incontrovertibly elucidated when we declared that:
A manager's check is one drawn by the bank's manager upon the bank itself. It is similar to a
cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier on
his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon
the bank itself, and accepted in advance by the act of its issuance. It is really the bank's own
check and may be treated as a promissory note with the bank as a maker. The check becomes
the primary obligation of the bank which issues it and constitutes its written promise to pay upon
demand. The mere issuance of it is considered an acceptance thereof. x x x. 27
In the case of New Pacific Timber & Supply Co., Inc. v. Seneris28:
[S]ince the said check had been certified by the drawee bank, by the certification, the funds
represented by the check are transferred from the credit of the maker to that of the payee or
holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank,
with rights and duties of one in such situation. Where a check is certified by the bank on which it
is drawn, the certification is equivalent to acceptance. Said certification "implies that the check is
drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its
satisfaction, and that they shall be so applied whenever the check is presented for payment. It is
an understanding that the check is good then, and shall continue good, and this agreement is
as binding on the bank as its notes circulation, a certificate of deposit payable to the order of
depositor, or any other obligation it can assume. The object of certifying a check, as regards
both parties, is to enable the holder to use it as money." When the holder procures the check to
be certified, "the check operates as an assignment of a part of the funds to the creditors."
Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the
effect "that a check which has been cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his
account" shall apply in this case x x x.
By accepting PCI Bank Check No. 073661 issued by Sarande to Ong and issuing in turn a
manager's check in exchange thereof, PCI Bank assumed the liabilities of an acceptor under
Section 62 of the Negotiable Instruments Law which states:

Sec. 62. Liability of acceptor. The acceptor by accepting the instruments engages that he will
pay it according to the tenor of his acceptance; and admits
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority
to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
With the above jurisprudential basis, the issues on Ong being not a holder in due course and
failure or want of consideration for PCI Bank's issuance of the manager's check is out of sync.
Section 2, of Republic Act No. 8791, The General Banking Law of 2000 decrees:
SEC. 2. Declaration of Policy. The State recognizes the vital role of banks in providing an
environment conducive to the sustained development of the national economy and the fiduciary
nature of banking that requires high standards of integrity and performance. In furtherance
thereof, the State shall promote and maintain a stable and efficient banking and financial system
that is globally competitive, dynamic and responsive to the demands of a developing economy.
In Associated Bank v. Tan,29 it was reiterated:
"x x x the degree of diligence required of banks is more than that of a good father of a family
where the fiduciary nature of their relationship with their depositors is concerned." Indeed, the
banking business is vested with the trust and confidence of the public; hence the "appropriate
standard of diligence must be very high, if not the highest degree of diligence."
Measured against these standards, the next question that needs to be addressed is: Did PCI
Bank exercise the requisite degree of diligence required of it? From all indications, it did not.
PCI Bank distinctly made the following uncontested admission:
1. On 29 November 1991, one Warliza Sarande deposited to her savings account with PCI
Bank's Magsaysay Avenue Branch, TCBT-General Santos Branch Check No. 0249188 for
P225,000.00. Said check, however, was inadvertently sent by PCI Bank through local
clearing when it should have been sent through inter-regional clearing since the check
was drawn at TCBT-General Santos City.
2. On 5 December 1991, Warliza Sarande inquired whether TCBT Check No. 0249188 had
been cleared. Not having received any advice from the drawee bank within the regular clearing
period for the return of locally cleared checks, and unaware then of the error of not having
sent the check through inter-regional clearing, PCI Bank advised her that Check No.
024188 is treated as cleared. x x x.30 (Emphasis supplied.)
From the foregoing, it is palpable and readily apparent that PCI Bank failed to exercise the
highest degree of care31 required of it under the law.
In the case of Philippine National Bank v. Court of Appeals,32 we declared:
The banking system has become an indispensable institution in the modern world and plays a
vital role in the economic life of every civilized society. Whether as mere passive entities for the
safe-keeping and saving of money or as active instruments of business and commerce, banks
have attained an ubiquitous presence among the people, who have come to regard them with
respect and even gratitude and, most of all, confidence.
Having settled the other issues, we now resolve the question on the award of moral and
exemplary damages by the trial court to the respondent.
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though
incapable of pecuniary computation, moral damages may be recovered if they are the proximate
result of the defendant's wrongful act or omission. 33 The requisites for an award of moral
damages are well-defined, thus, firstly, evidence of besmirched reputation or physical, mental or
psychological suffering sustained by the claimant; secondly, a culpable act or omission factually
established; thirdly, proof that the wrongful act or omission of the defendant is the proximate
cause of the damages sustained by the claimant; and fourthly, that the case is predicated on
any of the instances expressed or envisioned by Article 2219 34 and Article 222035 of the Civil
Code. All these elements are present in the instant case. 36

In the first place, by refusing to make good the manager's check it has issued, Ong suffered
embarrassment and humiliation arising from the dishonor of the said check. 37 Secondly, the
culpable act of PCI Bank in having cleared the check of Serande and issuing the manager's
check to Ong is undeniable. Thirdly, the proximate cause of the loss is attributable to PCI Bank.
Proximate cause is defined as that cause which, in natural and continuous sequence, unbroken
by any efficient intervening cause, produces the injury, and without which the result would not
have occurred.38 In this case, the proximate cause of the loss is the act of PCI Bank in having
cleared the check of Sarande and its failure to exercise that degree of diligence required of it
under the law which resulted in the loss to Ong.
On exemplary damages, Article 2229 of the Civil Code states:
Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for
the public good, in addition to the moral, temperate, liquidated or compensatory damages.
The law allows the grant of exemplary damages to set an example for the public good. The
banking system has become an indispensable institution in the modern world and plays a vital
role in the economic life of every civilized society. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have
attained an ubiquitous presence among the people, who have come to regard them with respect
and even gratitude and most of all, confidence. For this reason, banks should guard against
injury attributable to negligence or bad faith on its part. 39 Without a doubt, it has been repeatedly
emphasized that since the banking business is impressed with public interest, of paramount
importance thereto is the trust and confidence of the public in general. Consequently, the
highest degree of diligence is expected, and high standards of integrity and performance are
even required of it.40 Having failed in this respect, the award of exemplary damages is
warranted.
Article 2216 of the Civil Code provides:
ART. 2216. No proof of pecuniary loss is necessary in order that moral, nominal, temperate,
liquidated or exemplary damages may be adjudicated. The assessment of such damages,
except liquidated ones, is left to the discretion of the court, according to the circumstances of
each case.
Based on the above provision, the determination of the amount to be awarded (except
liquidated damages) is left to the sound discretion of the court according to the circumstances of
each case.41 In the case before us, we find that the award of moral damages in the amount of
P50,000.00 and exemplary damages in the amount of P20,000.00 is reasonable and justified.
With the above disquisition, there is no necessity of further discussing the last issue on the PCI
Bank's counterclaim based on the supposed lack of merit of Ong's complaint.
WHEREFORE, premises considered, the Petition is DENIED and the Decision of the Court of
Appeals dated 29 October 2002 in CA-G.R. CV No. 65000 affirming the Decision dated 3 may
1999, of the Regional Trial Court of Davao City, Branch 14, in Civil Case No. 21458-92, are
AFFIRMED.
SO ORDERED.
FIRST DIVISION
G.R. No. 166197
February 27, 2007
METROPOLITAN BANK & TRUST COMPANY, Petitioner
vs.
ASB HOLDINGS, INC., ASB REALTY CORPORATION, ASB DEVELOPMENT
CORPORATION, ASB LAND, INC., ASB FINANCE, INC., MAKATI HOPE CHRISTIAN
SCHOOL, INC., BEL-AIR HOLDINGS CORPORATION, WINCHESTER TRADING, INC., VYL
DEVELOPMENT CORPORATION, GERICK HOLDINGS CORPORATION, NEIGHBORHOOD
HOLDINGS, INC., and ROSARIO S. BERNALDO, Respondents. CAMERON GRANVILLE 3
ASSET MANAGEMENT, INC., Intervenor.

DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari 1 assailing the Decision dated
August 16, 20042 of the Court of Appeals in CA-G.R. SP No. 77260 and its Resolution dated
December 1, 2004.
The facts borne by the records are:
The Metropolitan Bank and Trust Company, petitioner, is a creditor bank of respondent
corporations, collectively known as the ASB Group of Companies, owner and developer of
condominium and real estate projects. Specifically, the loans extended by petitioner bank to
respondents ASB Realty Corporation and ASB Development Corporation amounted to P523.5
million and P1.073 billion, respectively. These loans were secured by real estate mortgages.
On May 2, 2000, the ASB Group of Companies filed with the Securities and Exchange
Commission (SEC) a Petition For Rehabilitation With Prayer For Suspension Of Actions And
Proceedings Against Petitioners,3 pursuant to Presidential Decree (P.D.) No. 902-A, as
amended, docketed as SEC Case No. 05-00-6609. The pertinent portions of the petition allege:
6. The total assets of petitioner ASB Group of Companies, together with petitioner ASB Allied
Companies, amount to Nineteen Billion Four Hundred Ten Million Pesos (P19,410,000,000.00).
7. The Projects were financed with loans or borrowings from bank and individual creditors which
resulted in petitioner Group of Companies having a total liability in the amount of Twelve Billion
Seven Hundred Million Pesos (P12,700,000,000.00).
8. On account of the sudden non-renewal and/or the massive withdrawal by creditors of their
loans to petitioner ASB Holdings, Inc., coupled with the recent developments in the country, like,
among others, (i) the glut in the real estate market; (ii) the severe drop in the sale of real
properties; (iii) the depreciation of the peso vis-a-vis the dollar; and (iv) the decreased investor
confidence in the economy, petitioner Group of Companies was unable to complete and sell
some of its projects on schedule and, hence, was unable to service its obligations as they fell
due.
9. Petitioner Group of Companies possesses sufficient property to cover its obligations.
However, petitioner Group of Companies foresees its inability to pay its obligations within a
period of one (1) year.
10. Because of the inability of the Group of Companies to pay its obligations as they
respectively fall due, its secured and non-secured creditors pressed for payments of due and
maturing obligations and threatened to initiate separate actions against it, which will adversely
affect its operations and shatter its hope in rehabilitating itself for the benefit of its investors and
creditors and the general public.
11. There is a clear, present and imminent danger that the creditors of petitioner Group of
Companies will institute extrajudicial and judicial foreclosure proceedings and file court actions
unless restrained by this Honorable Commission.
12. The institution of extrajudicial and judicial foreclosure proceedings and the filing of court
actions against petitioner Group of Companies will necessarily result in the paralization of its
business operation and its assets being lost, dissipated or wasted.
13. There is, therefore, a need for the suspension of payment of all claims against petitioner
Group of Companies, in the separate and combined capacities of its member companies, while
it is working for its rehabilitation.
14. Petitioner Group of Companies has at least seven hundred twelve (712) creditors, three
hundred seventeen (317) contractors/suppliers and four hundred ninety-two (492) condominium
unit buyers, who will certainly be prejudiced by the disruption of the operations of petitioner ASB
Group of Companies which seeks to protect the interest of the parties from any precipitate
action of any person who may only have his individual interest in mind.
15. The business of petitioner ASB Group of Companies is feasible and profitable. Petitioner
Group of Companies will eventually be able to pay all its obligations given some changes in its

management, organization, policies, strategies, operations, or finances.

16. With the support of this Honorable Commission, petitioner Group of Companies is confident
that it will be able to embark on a sound and viable rehabilitation plan, with a built-in debt
repayment schedule through the optimal use of their present facilities, assets and resources.
Although a proposed rehabilitation plan is attached to this petition, a detailed and
comprehensive rehabilitation proposal will be presented for the approval of this Honorable
Commission, with the foregoing salient features:
a. Servicing and eventual full repayment of all debts and liabilities, focusing on debt restructure
and possible liquidation through dacion en pago, transfer and assignment, or outright sale of
assets, in order to lighten the debt burden of petitioner Group of Companies;
b. Forming of strategic alliances with third party investors, including joint ventures and similar
arrangements;
c. Contributing specified properties from petitioner ASB Allied Companies;
d. Streamlining the operations of petitioner ASB Group of Companies, and the effective
management of its revenues and funds towards the strengthening of its financial and business
positions; and
e. Stabilizing the operations of petitioner Group of Companies, and preparing it to take
advantage of future opportunities for growth and development.
On May 4, 2000, the Hearing Panel of the SEC Securities Investigation and Clearing
Department, finding the petition for rehabilitation sufficient in form and substance, issued a sixtyday Suspension Order (a) suspending all actions for claims against the ASB Group of
Companies pending or still to be filed with any court, office, board, body, or tribunal; (b)
enjoining the ASB Group of Companies from disposing of their properties in any manner, except
in the ordinary course of business, and from paying their liabilities outstanding as of the date of
the filing of the petition; and (c) appointing Atty. Monico V. Jacob as interim receiver of the ASB
Group of Companies.
On May 22, 2000, the SEC Hearing Panel issued an Order appointing Mr. Fortunato Cruz as
interim receiver of the ASB Group of Companies, replacing Atty. Monico Jacob.
On August 18, 2000, the ASB Group of Companies submitted to the SEC for its approval a
Rehabilitation Plan,4 thus:
Metropolitan Bank and Trust Co.
Principal Amount Principal (amount) plus any interest due and unpaid as of April 30, 2000,
less any prepaid interest, without any penalties and charges.
Form of Agreement Dacion en Pago Agreement
Purpose To retire existing loans.
Tenor Immediate Dacion en Pago of related properties, subject to the approval of the
Securities and Exchange Commission (SEC).
Effective Date September 1, 2000, subject to the approval of the SEC.
Dacion En Pago
Arrangement ASB will dacion the banks equity in St. Francis Square and apply the excess
dacion value on its BSA Twin Tower loan. Further, Makati Hope, Buendia cor. Malugay, 21
Annapolis (which is expected to be released by PNB) and # 28 & 23 Eisenhower St., will be
dacioned to Metrobank, the excess of which will also be applied to Metrobanks exposure on
BSA Twin Towers. In return, State Condominium will be freed up and placed in the ASB
creditors asset pool. Further, Metrobank shall also undertake the completion of BSA Twin
Towers.
Outstanding Loan Balance
After Dacion En Pago None51awphi1.net
Petitioner bank, in its Comment/Opposition to the Rehabilitation Plan, 6 objected to the above
Plan, specifically the arrangement concerning the mode of payment by respondents ASB Realty
Corporation and ASB Development Corporation of their loan obligations.

Petitioner bank claimed that the above arrangement "is not acceptable" because: (1) it does not
agree with the valuation of the properties offered for dacion; (2) the waiver of interests, penalties
and charges after April 30, 2000 is not feasible considering that the bank continues to incur
costs on the funds owed by ASB Realty Corporation and ASB Development Corporation; and
(3) since the proposed dacion is not acceptable to the bank, there is no basis to release the
properties which serve as collateral for the loans. Petitioner thus prayed that the Rehabilitation
Plan be disapproved.
On April 26, 2001, the SEC Hearing Panel, finding petitioner banks objections unreasonable,
issued an Order7 approving the Rehabilitation Plan and appointing Mr. Fortunato Cruz as
rehabilitation receiver, thus:
PREMISES CONSIDERED, the objections to the rehabilitation plan raised by the creditors are
hereby considered unreasonable.
Accordingly, the Rehabilitation Plan submitted by petitioners is hereby APPROVED, except
those pertaining to Mr. Roxas advances, and the ASB-Malayan Towers. Finally, Interim
Receiver Mr. Fortunato Cruz is appointed as Rehabilitation Receiver.
SO ORDERED.
On July 10, 2001, petitioner bank filed with the SEC En Banc a Petition for Certiorari,8
docketed as EB-725, alleging that the SEC Hearing Panel, in approving the Rehabilitation
Plan, committed grave abuse of discretion amounting to lack or excess of jurisdiction;
and praying for the issuance of a temporary restraining order and/or a writ of preliminary
injunction to enjoin its implementation. Subsequently, the ASB Group of Companies filed
their Opposition9 to the petition, to which petitioner bank filed its Reply.10
In a Resolution11 dated April 15, 2003, the SEC En Banc denied petitioner banks Petition
for Certiorari and affirmed the SEC Hearing Panels Order of April 26, 2001.
Petitioner bank then filed with the Court of Appeals a Petition for Review. 12 On August 16,
2004, the appellate court rendered its Decision 13 denying due course to the petition, thus:
WHEREFORE, finding the instant petition not impressed with merit, the same is DENIED
DUE COURSE. No pronouncement as to costs.
SO ORDERED.
Petitioner banks Motion for Reconsideration was likewise denied in a Resolution dated
December 1, 2004.14
Hence, this petition for review on certiorari.
In the meantime, or on June 1, 2006, Cameron Granville 3 Asset Management, Inc.
(Cameron Granville) filed a Motion For Intervention 15 alleging that in September of 2003,
petitioner bank assigned the loans and mortgages of ASB Realty Corporation and ASB
Development Corporation to Asset Recovery Corporation (ARC). However, pursuant to
its Service Agreement with ARC, petitioner continued to pursue its action before the
Court of Appeals in CA-G.R. SP No. 77260 and before this Court in the instant case. On
March 31, 2006, ARC in turn assigned the loans and mortgages of the said two
respondent corporations to herein intervenor, Cameron Granville. In a Resolution dated
June 5, 2006,16 the Court granted the motion for intervention. Accordingly, on August 28,
2006, the intervenor filed its Petition For Intervention 17 and manifested therein that it
adopts as its own petitioner banks petition and all its other pleadings. Thereafter,
respondent ASB Group of Companies filed their Comment.18
Now to the resolution of the instant petition.
Petitioner bank contends that the Court of Appeals erred:
1. In not nullifying the SEC Resolution dated April 15, 2003 approving the Rehabilitation
Plan. Such approval illegally compels petitioner bank to accept, through a dacion en
pago arrangement, the mortgaged properties based on ASB Group of Companies
transfer values and to release part of the collateral. This forced transfer of properties and
diminution of the banks right to enforce its lien on the mortgaged properties violate its

constitutional right against impairment of contracts and right to due process.

2. In not finding that the Rehabilitation Plan compels petitioner bank to waive the
interests, penalties and other charges that accrued after the SEC issued its Stay Order.
Again, this is in violation of the constitutional mandate on non-impairment of contracts
and due process.
3. In not finding that only respondent ASB Holdings, Inc. suffered financial distress as
stated in the Rehabilitation Plan and, as such, the coercive reach of the SECs Stay Order
under P.D. 902-A can extend only to the enforcement of claims against this distressed
corporation. It cannot suspend the claims and actions against its affiliate corporations.
In their Comment, respondent corporations comprising the ASB Group of Companies
prayed for the dismissal of the instant petition for being unmeritorious.
The first two (2) assigned errors lack merit. We shall discuss them jointly as they are
closely interrelated.
We are not convinced that the approval of the Rehabilitation Plan impairs petitioner
banks lien over the mortgaged properties. Section 6 [c] of P.D. No. 902-A provides that
"upon appointment of a management committee, rehabilitation receiver, board or body,
pursuant to this Decree, all actions for claims against corporations, partnerships or
associations under management or receivership pending before any court, tribunal,
board or body shall be suspended."
By that statutory provision, it is clear that the approval of the Rehabilitation Plan and the
appointment of a rehabilitation receiver merely suspend the actions for claims against
respondent corporations. Petitioner banks preferred status over the unsecured creditors
relative to the mortgage liens is retained, but the enforcement of such preference is
suspended. The loan agreements between the parties have not been set aside and
petitioner bank may still enforce its preference when the assets of ASB Group of
Companies will be liquidated. Considering that the provisions of the loan agreements are
merely suspended, there is no impairment of contracts, specifically its lien in the
mortgaged properties.
As we stressed in Rizal Commercial Banking Corporation v. Intermediate Appellate
Court,19 such suspension "shall not prejudice or render ineffective the status of a
secured creditor as compared to a totally unsecured creditor," for what P.D. No. 902-A
merely provides is that all actions for claims against the distressed corporation,
partnership or association shall be suspended. This arrangement provided by law is
intended to give the receiver a chance to rehabilitate the corporation if there should still
be a possibility for doing so, without being unnecessarily disturbed by the creditors
actions against the distressed corporation. However, in the event that rehabilitation is no
longer feasible and the claims against the distressed corporation would eventually have
to be settled, the secured creditors, like petitioner bank, shall enjoy preference over the
unsecured creditors.
Likewise, there is no compulsion on the part of petitioner bank to accept a dacion en
pago arrangement of the mortgaged properties based on ASB Group of Companies
transfer values and to condone interests and penalties. The Rehabilitation Plan itself,
under item IV-A, explains the dacion en pago proposal, thus:
IV. THE REVISED REHABILITATION PLAN
A. The Total Approach
It is apparent that ASBs corporate indebtedness needs to be reduced as quickly as
possible in order to prevent rapid deterioration in equity. x x x. In order to reduce debt
quickly, we must do the following:
1. Complete or sell on-going projects;
2. Invite secured creditors to complete dacion en pago transactions, waiving all
penalties; and

3. Invite unsecured creditors to purchase real estate parcels and other assets and set-off
the amount of their outstanding claim against the purchase price.
The assets included in the above program include all real estate assets.
In order to determine the feasibility of the above, representatives of our financial
advisors met with or had discussions with most of the secured creditors. Preliminary
discussions indicate support from the secured creditors towards the concepts of the
program associated with them. The majority of these secured creditors appear to want to
complete dacion en pago transactions based on MUTUALLY AGREED UPON TERMS. x x
x. We continue to pursue discussions with secured creditors. Based on the program,
secured creditors claims amounting to PhP5.192 billion will be paid in full including
interest up to April 30, 2000. Secured creditors have been asked to waive all penalties
and other charges. This dacion en pago program is essential to eventually pay all
creditors and rehabilitate the ASB Group of Companies. If the dacion en pago herein
contemplated does not materialize for failure of the secured creditors to agree thereto,
this rehabilitation plan contemplates to settle the obligations (without interest, penalties,
and other related charges accruing after the date of the initial suspension order) to
secured creditors with mortgaged properties at ASB selling prices for the general
interest on the employees, creditors, unit buyers, government, general public and the
economy.
x x x.20 (Underscoring supplied)
Indeed, based on the above explanation in the Rehabilitation Plan, the dacion en pago
program and the intent of respondent ASB Group of Companies to ask creditors to waive
the interests, penalties and related charges are not compulsory in nature. They are
merely proposals for the creditors to accept. In fact, as explained, there was already an
initial discussion on these proposals and the majority of the secured creditors showed
their desire to complete dacion en pago transactions, but they must be "based on
MUTUALLY AGREED UPON TERMS." The SEC En Banc in its Resolution dated April 15,
2003, affirming the SEC Hearing Panels Order of April 26, 2001 approving the
Rehabilitation Plan, aptly declared:
x x x, petitioner asserts that the Rehabilitation Plan is not legally feasible because
respondents cannot dictate the terms of dacion.
We do not agree. A cursory reading of the Rehabilitation Plan debunks this assertion.
The Plan provides that dacion en pago transaction will be effected only if the secured
creditors, like petitioner, agree thereto and under terms and conditions mutually
agreeable to private respondents and the secured creditor concerned. The dacion en
pago program is essential to eventually pay all creditors and rehabilitate private
respondents. If the dacion en pago does not materialize in case secured creditors refuse
to agree thereto, the Rehabilitation Plan contemplates to settle the obligations to secured
creditors with mortgaged properties at selling prices. This is for the general interest of
the employees, creditors, unit buyers, government, general public, and the economy. 21
(Underscoring supplied)
With respect to the third assigned error, we note that the same was not raised by
petitioner bank in its Comment/Opposition to the Rehabilitation Plan filed with the SEC
Hearing Panel. Such belated issue cannot be considered, especially because it involves a
question of fact, the resolution of which is normally beyond the authority of this Court as
it is not a trier of facts.22
At any rate, the SEC En Banc found that the SEC Hearing Panel "acted within its legal
authority in resolving this case. Neither it overstepped its lawful authority nor acted
whimsically in approving the Rehabilitation Plan. Hence, it cannot be faulted of grave
abuse of discretion."23 We find no reason to disturb such finding, it being a fundamental
rule that factual findings of quasi-judicial agencies, like the SEC, which have acquired

expertise as their jurisdiction is confined to special matters such as the subject of this
case, are generally accorded great respect and even finality, absent any showing that
they arbitrarily disregarded evidence or misapprehended evidence to such an extent as
to compel a contrary conclusion if such evidence had been properly appreciated. 24
Petitioner bank also argues that "ASB Group of Companies" is merely a generic name
used to describe collectively various companies and as such, it is not a legal entity with
juridical personality and cannot be a party to a suit. True, "ASB Group of Companies" is
merely used in this case as a generic name, for brevity, to collectively describe the
various companies/corporations that filed a Petition For Rehabilitation with the SEC.
However, in their petition, all the respondent corporations are individually named as
petitioners, not "ASB Group of Companies."
One last word. The purpose of rehabilitation proceedings is to enable the company to
gain new lease on life and thereby allows creditors to be paid their claims from its
earnings.25 Rehabilitation contemplates a continuance of corporate life and activities in
an effort to restore and reinstate the financially distressed corporation to its former
position of successful operation and solvency.26 This is in consonance with the States
objective to promote a wider and more meaningful equitable distribution of wealth to
protect investments and the public. 27 The approval of the Rehabilitation Plan by the SEC
Hearing Panel, affirmed by both the SEC En Banc and the Court of Appeals, is precisely
in furtherance of the rationale behind P.D. No. 902-A, as amended, which is "to effect a
feasible and viable rehabilitation"28 of ailing corporations which affect the public welfare.
WHEREFORE, we DENY the instant petition for review on certiorari. The assailed
Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 77260 are AFFIRMED.
Costs against intervenor Cameron Granville.
SO ORDERED.
G.R. No. 148568
March 20, 2003
ATLANTIC ERECTORS, INC., petitioner,
vs.
HERBAL COVE REALTY CORPORATION, respondent.
PANGANIBAN, J.:
The pendency of a simple collection suit arising from the alleged nonpayment of construction
services, materials, unrealized income and damages does not justify the annotation of a notice
of lis pendens on the title to a property where construction has been done.
Statement of the Case
Before the Court is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court,
challenging the May 30, 2000 Decision 2 of the Court of Appeals (CA) in CA-GR SP No. 56432.
The dispositive portion of the Decision is reproduced as follows:
"WHEREFORE, the petition is granted and the assailed November 4, 1998 and October 22,
1999 orders annulled and set aside. The July 30, 1998 order of respondent judge is reinstated
granting the cancellation of the notices of lis pendens subject of this petition." 3
In its July 21, 2001 Resolution,4 the CA denied petitioner's Motion for Reconsideration.
The Facts
The factual antecedents of the case are summarized by the CA in this wise:
"On June 20, 1996, [respondent] and [petitioner] entered into a Construction Contract whereby
the former agreed to construct four (4) units of [townhouses] designated as 16-A, 16-B, 17-A
and 17-B and one (1) single detached unit for an original contract price of P15,726,745.19
which was late[r] adjusted to P16,726,745.19 as a result of additional works. The contract period
is 180 days commencing [on] July 7, 1996 and to terminate on January 7, 1997. [Petitioner]
claimed that the said period was not followed due to reasons attributable to [respondent],
namely: suspension orders, additional works, force majeure, and unjustifiable acts of omission

or delay on the part of said [respondent]. [Respondent], however, denied such claim and instead
pointed to [petitioner] as having exceeded the 180 day contract period aggravated by defective
workmanship and utilization of materials which are not in compliance with specifications.
xxx
xxx
xxx
"On November 21, 1997, [petitioner] filed a complaint for sum of money with damages (Civil
Case No. 97-2707) with the Regional Trial Court of Makati entitled 'Atlantic Erectors,
Incorporated vs. Herbal Cove Realty Corp. and Ernest C. Escal[e]r'. This case was raffled to
Branch 137, x x x Judge Santiago J. Ranada presiding. In said initiatory pleading, [petitioner]
AEI asked for the following reliefs:
'AFTER DUE NOTICE AND HEARING, to order x x x defendant to:
1. Pay plaintiff the sum of P4,854,229.94 for the unpaid construction services already rendered;
2. To x x x pay plaintiff the sum of P1,595,551.00 for the construction materials, equipment and
tools of plaintiff held by defendant;
3. To x x x pay plaintiff the sum of P2,250,000.00 for the [loss] x x x of expected income from the
construction project;
4. [T]o x x x pay plaintiff the sum of P800,000.00 for the cost of income by way of rental from the
equipment of plaintiff held by defendants;
5. To x x x pay plaintiff the sum of P5,000,000.00 for moral damages;
6. To x x x pay plaintiff the sum of P5,000,000.00 for exemplary damages;
7. To x x x pay plaintiff the sum equivalent of 25% of the total money claim plus P200,000.00
acceptance fee and P2,500.00 per court appearance;
8. To x x x pay the cost of suit.'
"On the same day of November 21, 1997, [petitioner] filed a notice of lis pendens for annotation
of the pendency of Civil Case No. 97-707 on titles TCTs nos. T-30228, 30229, 30230, 30231
and 30232. When the lots covered by said titles were subsequently subdivided into 50 lots, the
notices of lis pendens were carried over to the titles of the subdivided lots, i.e., Transfer
Certificate of Title Nos. T-36179 to T-36226 and T-36245 to T-36246 of the Register of Deeds of
Tagaytay City.
"On January 30, 1998, [respondent] and x x x Ernest L. Escaler, filed a Motion to Dismiss
[petitioner's] Complaint for lack of jurisdiction and for failure to state a cause of action. They
claimed [that] the Makati RTC has no jurisdiction over the subject matter of the case because
the parties' Construction Contract contained a clause requiring them to submit their dispute to
arbitration.
xxx
xxx
xxx
"On March 17, 1998, [RTC Judge Ranada] dismissed the Complaint as against [respondent] for
[petitioner's] failure to comply with a condition precedent to the filing of a court action which is
the prior resort to arbitration and as against x x x Escaler for failure of the Complaint to state a
cause of action x x x.
"[Petitioner] filed a Motion for Reconsideration of the March 17, 1998 dismissal order.
[Respondent] filed its Opposition thereto.
"On April 24, 1998, [respondent] filed a Motion to Cancel Notice of Lis Pendens. It argued that
the notices of lis pendens are without basis because [petitioner's] action is a purely personal
action to collect a sum of money and recover damages and x x x does not directly affect title to,
use or possession of real property.
"In his July 30, 1998 Order, [Judge Ranada] granted [respondent's] Motion to Cancel Notice of
Lis Pendens x x x:
"[Petitioner] filed a Motion for Reconsideration of the aforesaid July 30, 1998 Order to which
[respondent] filed an Opposition.
"In a November 4, 1998 Order, [Judge Ranada,] while finding no merit in the grounds raised by
[petitioner] in its Motion for Reconsideration, reversed his July 30, 1998 Order and reinstated
the notices of lis pendens, as follows:

'1. The Court finds no merit in plaintiff's contention that in dismissing the above-entitled case for
lack of jurisdiction, and at the same time granting defendant Herbal Cove's motion to cancel
notice of lis pendens, the Court [took] an inconsistent posture. The Rules provide that prior to
the transmittal of the original record on appeal, the court may issue orders for the protection and
preservation of the rights of the parties which do not involve any matter litigated by the appeal
(3rd par., Sec. 10, Rule 41). Even as it declared itself without jurisdiction, this Court still has
power to act on incidents in this case, such as acting on motions for reconsideration, for
correction, for lifting of lis pendens, or approving appeals, etc.
'As correctly argued by defendant Herbal Cove, a notice of lis pendens serves only as a
precautionary measure or warning to prospective buyers of a property that there is a pending
litigation involving the same.
'The Court notes that when it issued the Order of 30 July 1998 lifting the notice of lis pendens,
there was as yet no appeal filed by plaintiff. Subsequently, on 10 September 1998, after a notice
of appeal was filed by plaintiff on 4 September 1998, the Branch Clerk of Court was ordered by
the Court to elevate the entire records of the above-entitled case to the Court of Appeals. It
therefore results that the above-entitled case is still pending. After a careful consideration of all
matters relevant to the lis pendens, the Court believes that justice will be better served by
setting aside the Order of 30 July 1998.'
"On November 27, 1998, [respondent] filed a Motion for Reconsideration of the November 4,
1998 Order arguing that allowing the notice of lis pendens to remain annotated on the titles
would defeat, not serve, the ends of justice and that equitable considerations cannot be
resorted to when there is an applicable provision of law.
xxx
xxx
xxx
"On October 22, 1999, [Judge Ranada] issued an order denying [respondent's] Motion for
Reconsideration of the November 4, 1998 Order for lack of sufficient merit." 5
Thereafter, Respondent Herbal Cove filed with the CA a Petition for Certiorari.
Ruling of the Court of Appeals
Setting aside the Orders of the RTC dated November 4, 1998 and October 22, 1999, the CA
reinstated the former's July 30, 1998 Order 6 granting Herbal Cove's Motion to Cancel the Notice
of Lis Pendens. According to the appellate court, the re-annotation of those notices was
improper for want of any legal basis. It specifically cited Section 76 of Presidential Decree No.
1529 (the Property Registration Decree). The decree provides that the registration of such
notices is allowed only when court proceedings directly affect the title to, or the use or the
occupation of, the land or any building thereon.
The CA opined that the Complaint filed by petitioner in Civil Case No. 97-2707 was intended
purely to collect a sum of money and to recover damages. The appellate court ruled that the
Complaint did not aver any ownership claim to the subject land or any right of possession over
the buildings constructed thereon. It further declared that absent any claim on the title to the
buildings or on the possession thereof, the notices of lis pendens had no leg to stand on.
Likewise, the CA held that Judge Ranada should have maintained the notice cancellations,
which he had directed in his July 30, 1998 Order. Those notices were no longer necessary to
protect the rights of petitioner, inasmuch as it could have procured protective relief from the
Construction Industry Arbitral Commission (CIAC), where provisional remedies were available.
The CA also mentioned petitioner's admission that there was already a pending case before the
CIAC, which in fact rendered a decision on March 11, 1999.
The appellate court further explained that the re-annotation of the Notice of Lis Pendens was no
longer warranted after the court a quo had ruled that the latter had no jurisdiction over the case.
The former held that the rationale behind the principle of lis pendens -- to keep the subject
matter of the litigation within the power of the court until the entry of final judgment -- was no
longer applicable. The reason for such inapplicability was that the Makati RTC already declared
that it had no jurisdiction or power over the subject matter of the case.

Finally, the CA opined that petitioner's Complaint had not alleged or claimed, as basis for the
continued annotation of the Notice of Lis Pendens, the lien of contractors and laborers under
Article 2242 of the New Civil Code. Moreover, petitioner had not even referred to any lien of
whatever nature. Verily, the CA ruled that the failure to allege and claim the contractor's lien did
not warrant the continued annotation on the property titles of Respondent Herbal Cove.
Hence, this Petition.7
The Issues
Petitioner raises the following issues for our consideration:
"I. Whether or not money claims representing cost of materials [for] and labor [on] the houses
constructed on a property [are] a proper lien for annotation of lis pendens on the property title[.]
"II. Whether or not the trial court[,] after having declared itself without jurisdiction to try the
case[,] may still decide on [the] substantial issue of the case." 8
This Court's Ruling
The Petition has no merit.
First Issue:
Proper Basis for a Notice of Lis Pendens
Petitioner avers that its money claim on the cost of labor and materials for the townhouses it
constructed on the respondent's land is a proper lien that justifies the annotation of a notice of
lis pendens on the land titles. According to petitioner, the money claim constitutes a lien that can
be enforced to secure payment for the said obligations. It argues that, to preserve the alleged
improvement it had made on the subject land, such annotation on the property titles of
respondent is necessary.
On the other hand, Respondent Herbal Cove argues that the annotation is bereft of any factual
or legal basis, because petitioner's Complaint 9 does not directly affect the title to the property, or
the use or the possession thereof. It also claims that petitioner's Complaint did not assert
ownership of the property or any right to possess it. Moreover, respondent attacks as baseless
the annotation of the Notice of Lis Pendens through the enforcement of a contractor's lien under
Article 2242 of the Civil Code. It points out that the said provision applies only to cases in which
there are several creditors carrying on a legal action against an insolvent debtor.
As a general rule, the only instances in which a notice of lis pendens may be availed of are as
follows: (a) an action to recover possession of real estate; (b) an action for partition; and (c) any
other court proceedings that directly affect the title to the land or the building thereon or the use
or the occupation thereof.10 Additionally, this Court has held that resorting to lis pendens is not
necessarily confined to cases that involve title to or possession of real property. This annotation
also applies to suits seeking to establish a right to, or an equitable estate or interest in, a
specific real property; or to enforce a lien, a charge or an encumbrance against it.11
Apparently, petitioner proceeds on the premise that its money claim involves the enforcement of
a lien. Since the money claim is for the nonpayment of materials and labor used in the
construction of townhouses, the lien referred to would have to be that provided under Article
2242 of the Civil Code. This provision describes a contractor's lien over an immovable property
as follows:
"Art. 2242. With reference to specific immovable property and real rights of the debtor, the
following claims, mortgages and liens shall be preferred, and shall constitute an encumbrance
on the immovable or real right:
xxx
xxx
xxx
"(3) Claims of laborers, masons, mechanics and other workmen, as well as of architects,
engineers and contractors, engaged in the construction, reconstruction or repair of buildings,
canals or other works, upon said buildings, canals or other works;
"(4) Claims of furnishers of materials used in the construction, reconstruction, or repair of
buildings, canals or other works, upon said buildings, canals or other works[.]" (Emphasis
supplied)

However, a careful examination of petitioner's Complaint, as well as the reliefs it seeks, reveals
that no such lien or interest over the property was ever alleged. The Complaint merely asked for
the payment of construction services and materials plus damages, without mentioning -- much
less asserting -- a lien or an encumbrance over the property. Verily, it was a purely personal
action and a simple collection case. It did not contain any material averment of any enforceable
right, interest or lien in connection with the subject property.
As it is, petitioner's money claim cannot be characterized as an action that involves the
enforcement of a lien or an encumbrance, one that would thus warrant the annotation of the
Notice of Lis Pendens. Indeed, the nature of an action is determined by the allegations of the
complaint.12
Even assuming that petitioner had sufficiently alleged such lien or encumbrance in its
Complaint, the annotation of the Notice of Lis Pendens would still be unjustified, because a
complaint for collection and damages is not the proper mode for the enforcement of a
contractor's lien.
In J.L. Bernardo Construction v. Court of Appeals,13 the Court explained the concept of a
contractor's lien under Article 2242 of the Civil Code and the proper mode for its enforcement as
follows:
"Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference
with respect to specific personal or real property of the debtor. Specifically, the contractor's lien
claimed by the petitioners is granted under the third paragraph of Article 2242 which provides
that the claims of contractors engaged in the construction, reconstruction or repair of buildings
or other works shall be preferred with respect to the specific building or other immovable
property constructed.
"However, Article 2242 finds application when there is a concurrence of credits, i.e., when the
same specific property of the debtor is subjected to the claims of several creditors and the value
of such property of the debtor is insufficient to pay in full all the creditors . In such a situation, the
question of preference will arise, that is, there will be a need to determine which of the creditors
will be paid ahead of the others. Fundamental tenets of due process will dictate that this
statutory lien should then only be enforced in the context of some kind of a proceeding where
the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency
proceedings."14 (Emphasis supplied)
Clearly then, neither Article 2242 of the Civil Code nor the enforcement of the lien thereunder is
applicable here, because petitioner's Complaint failed to satisfy the foregoing requirements.
Nowhere does it show that respondent's property was subject to the claims of other creditors or
was insufficient to pay for all concurring debts. Moreover, the Complaint did not pertain to
insolvency proceedings or to any other action in which the adjudication of claims of preferred
creditors could be ascertained.
Another factor negates the argument of petitioner that its money claim involves the enforcement
of a lien or the assertion of title to or possession of the subject property: the fact that it filed its
action with the RTC of Makati, which is undisputedly bereft of any jurisdiction over respondent's
property in Tagaytay City. Certainly, actions affecting title to or possession of real property or the
assertion of any interest therein should be commenced and tried in the proper court that has
jurisdiction over the area, where the real property involved or a portion thereof is situated.15 If
petitioner really intended to assert its claim or enforce its supposed lien, interest or right over
respondent's subject properties, it would have instituted the proper proceedings or filed a real
action with the RTC of Tagaytay City, which clearly had jurisdiction over those properties. 16
Narciso Pea, a leading authority on the subject of land titles and registration, gives an explicit
exposition on the inapplicability of the doctrine of lis pendens to certain actions and proceedings
that specifically include money claims. He explains in this wise:
"By express provision of law, the doctrine of lis pendens does not apply to attachments, levies of
execution, or to proceedings for the probate of wills, or for administration of the estate of

deceased persons in the Court of First Instance. Also, it is held generally that the doctrine of lis
pendens has no application to a proceeding in which the only object sought is the recovery of a
money judgment, though the title or right of possession to property be incidentally affected . It is
essential that the property be directly affected, as where the relief sought in the action or suit
includes the recovery of possession, or the enforcement of a lien, or an adjudication between
conflicting claims of title, possession, or the right of possession to specific property, or requiring
its transfer or sale"17 (Emphasis supplied)
Pea adds that even if a party initially avails itself of a notice of lis pendens upon the filing of a
case in court, such notice is rendered nugatory if the case turns out to be a purely personal
action. We quote him as follows:
"It may be possible also that the case when commenced may justify a resort to lis pendens, but
during the progress thereof, it develops to be purely a personal action for damages or
otherwise. In such event, the notice of lis pendens has become functus officio."18 (Emphasis
supplied)
Thus, when a complaint or an action is determined by the courts to be in personam, the
rationale for or purpose of the notice of lis pendens ceases to exist. To be sure, this Court has
expressly and categorically declared that the annotation of a notice of lis pendens on titles to
properties is not proper in cases wherein the proceedings instituted are actions in personam.19
Second Issue:
Jurisdiction of the Trial Court
Petitioner argues that the RTC had no jurisdiction to issue the Order canceling the Notice of Lis
Pendens as well as the Order reinstating it. Supposedly, since both Orders were issued by the
trial court without jurisdiction, the annotation made by the Register of Deeds of Tagaytay City
must remain in force.
Petitioner avers that the trial court finally declared that the latter had no jurisdiction over the
case on July 27, 1998, in an Order denying the former's Motion for Reconsideration of the
March 17, 1998 Order dismissing the Complaint. Petitioner insists that the subsequent July 30,
1998 Order cancelling the subject Notice of Lis Pendens is void, because it was issued by a
court that had no more jurisdiction over the case.
Rule 41 of the 1997 Rules on Civil Procedure, which governs appeals from regional trial courts,
expressly provides that RTCs lose jurisdiction over a case when an appeal is filed. The rule
reads thus:
"SEC. 9. Perfection of appeal; effect thereof. -- A party's appeal by notice of appeal is deemed
perfected as to him upon the filing of the notice of appeal in due time.
xxx
xxx
xxx
"In appeals by notice of appeal, the court loses jurisdiction over the case upon the perfection of
the appeals filed in due time and the expiration of the time to appeal of the other parties ."
(Emphasis supplied)
On the basis of the foregoing rule, the trial court lost jurisdiction over the case only on August
31, 1998, when petitioner filed its Notice of Appeal. 20 Thus, any order issued by the RTC prior to
that date should be considered valid, because the court still had jurisdiction over the case.
Accordingly, it still had the authority or jurisdiction to issue the July 30, 1998 Order canceling the
Notice of Lis Pendens. On the other hand, the November 4, 1998 Order that set aside the July
30, 1998 Order and reinstated that Notice should be considered without force and effect,
because it was issued by the trial court after it had already lost jurisdiction.
In any case, even if we were to adopt petitioner's theory that both the July 30, 1998 and the
November 4, 1998 Orders were void for having been issued without jurisdiction, the annotation
is still improper for lack of factual and legal bases.
As discussed previously, erroneously misplaced is the reliance of petitioner on the premise that
its money claim is an action for the enforcement of a contractor's lien. Verily, the annotation of
the Notice of Lis Pendens on the subject property titles should not have been made in the first

place. The Complaint filed before the Makati RTC -- for the collection of a sum of money and for
damages -- did not provide sufficient legal basis for such annotation.
Finally, petitioner vehemently insists that the trial court had no jurisdiction to cancel the Notice.
Yet, the former filed before the CA an appeal, docketed as CA-GR CV No. 65647, 21 questioning
the RTC's dismissal of the Complaint for lack of jurisdiction. Moreover, it must be remembered
that it was petitioner which had initially invoked the jurisdiction of the trial court when the former
sought a judgment for the recovery of money and damages against respondent. Yet again, it
was also petitioner which assailed that same jurisdiction for issuing an order unfavorable to the
former's cause. Indeed, parties cannot invoke the jurisdiction of a court to secure affirmative
relief, then repudiate or question that same jurisdiction after obtaining or failing to obtain such
relief.22
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
G.R. No. 152580
June 26, 2008
CONSUELO METAL CORPORATION, petitioner,
vs.
PLANTERS DEVELOPMENT BANK and ATTY. JESUSA PRADO-MANINGAS, in her
capacity as Ex-officio Sheriff of Manila, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review 1 seeking to reverse the 14 December 2001 Decision 2 and the 6
March 2002 Resolution3 of the Court of Appeals in CA-G.R. SP No. 65069. In its 14 December
2001 Decision, the Court of Appeals dismissed petitioner Consuelo Metal Corporations (CMC)
petition for certiorari and affirmed the 25 April 2001 Order 4 of the Regional Trial Court, Branch
46, Manila (trial court). In its 6 March 2002 Resolution, the Court of Appeals partially granted
CMCs motion for reconsideration and remanded the case to the Securities and Exchange
Commission (SEC) for further proceedings.
The Facts
On 1 April 1996, CMC filed before the SEC a petition to be declared in a state of suspension of
payment, for rehabilitation, and for the appointment of a rehabilitation receiver or management
committee under Section 5(d) of Presidential Decree No. 902-A. 5 On 2 April 1996, the SEC,
finding the petition sufficient in form and substance, declared that "all actions for claims against
CMC pending before any court, tribunal, office, board, body and/or commission are deemed
suspended immediately until further order" from the SEC. 6
In an Order dated 13 September 1999, the SEC directed the creation of a management
committee to undertake CMCs rehabilitation and reiterated the suspension of all actions for
claims against CMC.7
On 29 November 2000, upon the management committees recommendation, 8 the SEC issued
an Omnibus Order directing the dissolution and liquidation of CMC. 9 The SEC also directed that
"the proceedings on and implementation of the order of liquidation be commenced at the
Regional Trial Court to which this case shall be transferred." 10
Thereafter, respondent Planters Development Bank (Planters Bank), one of CMCs creditors,
commenced the extra-judicial foreclosure of CMCs real estate mortgage. Public auctions were
scheduled on 30 January 2001 and 6 February 2001.
CMC filed a motion for the issuance of a temporary restraining order and a writ of preliminary
injunction with the SEC to enjoin the foreclosure of the real estate mortgage. On 29 January
2001, the SEC issued a temporary restraining order to maintain the status quo and ordered the
immediate transfer of the case records to the trial court. 11

The case was then transferred to the trial court. In its 25 April 2001 Order, the trial court denied
CMCs motion for issuance of a temporary restraining order. The trial court ruled that since the
SEC had already terminated and decided on the merits CMCs petition for suspension of
payment, the trial court no longer had legal basis to act on CMCs motion.
On 28 May 2001, the trial court denied CMCs motion for reconsideration. 12 The trial court ruled
that CMCs petition for suspension of payment could not be converted into a petition for
dissolution and liquidation because they covered different subject matters and were governed
by different rules. The trial court stated that CMCs remedy was to file a new petition for
dissolution and liquidation either with the SEC or the trial court.
CMC filed a petition for certiorari with the Court of Appeals. CMC alleged that the trial court
acted with grave abuse of discretion amounting to lack of jurisdiction when it required CMC to
file a new petition for dissolution and liquidation with either the SEC or the trial court when the
SEC clearly retained jurisdiction over the case.
On 13 June 2001, Planters Bank extra-judicially foreclosed the real estate mortgage. 13
The Ruling of the Court of Appeals
On 14 December 2001, the Court of Appeals dismissed the petition and upheld the 25 April
2001 Order of the trial court. The Court of Appeals held that the trial court correctly denied
CMCs motion for the issuance of a temporary restraining order because it was only an ancillary
remedy to the petition for suspension of payment which was already terminated. The Court of
Appeals added that, under Section 121 of the Corporation Code, 14 the SEC has jurisdiction to
hear CMCs petition for dissolution and liquidation.
CMC filed a motion for reconsideration. CMC argued that it does not have to file a new petition
for dissolution and liquidation with the SEC but that the case should just be remanded to the
SEC as a continuation of its jurisdiction over the petition for suspension of payment. CMC also
asked that Planters Banks foreclosure of the real estate mortgage be declared void.
In its 6 March 2002 Resolution, the Court of Appeals partially granted CMCs motion for
reconsideration and ordered that the case be remanded to the SEC under Section 121 of the
Corporation Code. The Court of Appeals also ruled that since the SEC already ordered CMCs
dissolution and liquidation, Planters Banks foreclosure of the real estate mortgage was in order.
Planters Bank filed a motion for reconsideration questioning the remand of the case to the SEC.
In a resolution dated 19 July 2002, the Court of Appeals denied the motion for reconsideration.
Not satisfied with the 6 March 2002 Resolution, CMC filed this petition for review on certiorari.
The Issues
CMC raises the following issues:
1. Whether the present case falls under Section 121 of the Corporation Code, which refers to
the SECs jurisdiction over CMCs dissolution and liquidation, or is only a continuation of the
SECs jurisdiction over CMCs petition for suspension of payment; and
2. Whether Planters Banks foreclosure of the real estate mortgage is valid.
The Courts Ruling
The petition has no merit.
The SEC has jurisdiction to order CMCs dissolution
but the trial court has jurisdiction over CMCs liquidation.
While CMC agrees with the ruling of the Court of Appeals that the SEC has jurisdiction over
CMCs dissolution and liquidation, CMC argues that the Court of Appeals remanded the case to
the SEC on the wrong premise that the applicable law is Section 121 of the Corporation Code.
CMC maintains that the SEC retained jurisdiction over its dissolution and liquidation because it
is only a continuation of the SECs jurisdiction over CMCs original petition for suspension of
payment which had not been "finally disposed of as of 30 June 2000."
On the other hand, Planters Bank insists that the trial court has jurisdiction over CMCs
dissolution and liquidation. Planters Bank argues that dissolution and liquidation are entirely
new proceedings for the termination of the existence of the corporation which are incompatible

with a petition for suspension of payment which seeks to preserve corporate existence.
Republic Act No. 8799 (RA 8799) 15 transferred to the appropriate regional trial courts the SECs
jurisdiction defined under Section 5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799
provides:
The Commissions jurisdiction over all cases enumerated under Sec. 5 of Presidential Decree
No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional
Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the
Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission
shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final
resolution which should be resolved within one (1) year from the enactment of this Code. The
Commission shall retain jurisdiction over pending suspension of payments/rehabilitation
cases filed as of 30 June 2000 until finally disposed. (Emphasis supplied)
The SEC assumed jurisdiction over CMCs petition for suspension of payment and issued a
suspension order on 2 April 1996 after it found CMCs petition to be sufficient in form and
substance. While CMCs petition was still pending with the SEC as of 30 June 2000, it was
finally disposed of on 29 November 2000 when the SEC issued its Omnibus Order directing the
dissolution of CMC and the transfer of the liquidation proceedings before the appropriate trial
court. The SEC finally disposed of CMCs petition for suspension of payment when it
determined that CMC could no longer be successfully rehabilitated.
However, the SECs jurisdiction does not extend to the liquidation of a corporation. While the
SEC has jurisdiction to order the dissolution of a corporation, 16 jurisdiction over the liquidation of
the corporation now pertains to the appropriate regional trial courts. This is the reason why the
SEC, in its 29 November 2000 Omnibus Order, directed that "the proceedings on and
implementation of the order of liquidation be commenced at the Regional Trial Court to which
this case shall be transferred." This is the correct procedure because the liquidation of a
corporation requires the settlement of claims for and against the corporation, which clearly falls
under the jurisdiction of the regular courts. The trial court is in the best position to convene all
the creditors of the corporation, ascertain their claims, and determine their preferences.
Foreclosure of real estate mortgage is valid.
CMC maintains that the foreclosure is void because it was undertaken without the knowledge
and previous consent of the liquidator and other lien holders. CMC adds that the rules on
concurrence and preference of credits should apply in foreclosure proceedings. Assuming that
Planters Bank can foreclose the mortgage, CMC argues that the foreclosure is still void
because it was conducted in violation of Section 15, Rule 39 of the Rules of Court which states
that the sale "should not be earlier than nine oclock in the morning and not later than two
oclock in the afternoon."
On the other hand, Planters Bank argues that it has the right to foreclose the real estate
mortgage because of non-payment of the loan obligation. Planters Bank adds that the rules on
concurrence and preference of credits and the rules on insolvency are not applicable in this
case because CMC has been not been declared insolvent and there are no insolvency
proceedings against CMC.
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court,17 we held that if
rehabilitation is no longer feasible and the assets of the corporation are finally liquidated,
secured creditors shall enjoy preference over unsecured creditors, subject only to the provisions
of the Civil Code on concurrence and preference of credits. Creditors of secured obligations
may pursue their security interest or lien, or they may choose to abandon the preference and
prove their credits as ordinary claims.18
Moreover, Section 2248 of the Civil Code provides:
Those credits which enjoy preference in relation to specific real property or real rights, exclude
all others to the extent of the value of the immovable or real right to which the preference refers.
In this case, Planters Bank, as a secured creditor, enjoys preference over a specific mortgaged

property and has a right to foreclose the mortgage under Section 2248 of the Civil Code. The
creditor-mortgagee has the right to foreclose the mortgage over a specific real property whether
or not the debtor-mortgagor is under insolvency or liquidation proceedings. The right to
foreclose such mortgage is merely suspended upon the appointment of a management
committee or rehabilitation receiver19 or upon the issuance of a stay order by the trial court. 20
However, the creditor-mortgagee may exercise his right to foreclose the mortgage upon the
termination of the rehabilitation proceedings or upon the lifting of the stay order. 21
Foreclosure proceedings have in their favor the presumption of regularity and the burden of
evidence to rebut the same is on the party that seeks to challenge the proceedings. 22 CMCs
challenge to the foreclosure proceedings has no merit. The notice of sale clearly specified that
the auction sale will be held "at 10:00 oclock in the morning or soon thereafter, but not later
than 2:00 oclock in the afternoon."23 The Sheriffs Minutes of the Sale stated that "the
foreclosure sale was actually opened at 10:00 A.M. and commenced at 2:30 P.M." 24 There was
nothing irregular about the foreclosure proceedings.
WHEREFORE, we DENY the petition. We REINSTATE the 29 November 2000 Omnibus Order
of the Securities and Exchange Commission directing the Regional Trial Court, Branch 46,
Manila to immediately undertake the liquidation of Consuelo Metal Corporation. We AFFIRM the
ruling of the Court of Appeals that Planters Development Banks extra-judicial foreclosure of the
real estate mortgage is valid.
SO ORDERED.