MANILA BANKING CORPORATION V.
TEODORO The three Promissory Notes stipulated that any interest due if not
G.R. No. 53955, January 13, 1989
THE MANILA BANKING CORPORATION, PLAINTIFF-APPELLEE,
VS.
ANASTACIO TEODORO, JR., AND GRACE ANNA TEODORO,
DEFENDANTS-APPELLANTS.
DECISION
BIDIN, J.:
This is an appeal from the decision * of the Court of First Instance of Manila,
Branch XVII in Civil Case No. 78178 for collection of sum of money based
on promissory notes executed by the defendants-appellants in favor of
plaintiff-appellee bank. The dispositive portion of the appealed decision
(Record on Appeal, p. 33) reads as follows:
"WHEREFORE judgment is hereby rendered (a) sentencing
defendants, Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly
and severally, to pay plaintiff the sum of P15,037.11 plus 12%
interest per annum from September 30, 1969 until fully paid, in
payment of Promissory Notes No. 11487, plus the sum of P1,000.00
as attorney's fees; and (b) sentencing defendant Anastacio
Teodoro, Jr. to pay plaintiff the sum of P8,934.74, plus interest at
12% per annum from September 30, 1969 until fully paid, in
payment of Promissory Notes Nos. 11515 and 11699, plus the sum
of P500.00 as attorney's fees.
With costs against defendants."
The facts of the case as found by the trial court are as follows:
"On April 25, 1966, defendants, together with Anastacio Teodoro,
Sr., jointly and severally, executed in favor of plaintiff a Promissory
Note (No. 11487) for the sum of P10,420.00 payable in 120 days,
or on August 25, 1966, at 12% interest per annum. Defendants
failed to pay the said amount in spite of repeated demands and the
obligation as of September 30, 1969 stood at P15,137.11 including
accrued interest and service charge.
On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro,
Sr. (Father) and Anastacio Teodoro, Jr. (Son) executed in favor of
plaintiff two Promissory Notes (Nos. 11515 and 11699) for
P8,000.00 and P1,000.00 respectively, payable in 120 days at 12%
interest per annum. Father and Son made a partial payment on
the May 3, 1966 Promissory Note but none on the June 20, 1966
Promissory Note, leaving still an unpaid balance of P8,934.74 as of
September 30, 1969 including accrued interest and service charge.
paid at the end of every month shall be added to the total amount
then due, the whole amount to bear interest at the rate of 12% per
annum until fully paid; and in case of collection through an
attorney-at-law, the makers shall, jointly and severally, pay 10% of
the amount over-due as attorney's fees, which in no case shall be
less than P200.00.
It appears that on January 24, 1964, the Son executed in favor of
plaintiff a Deed of Assignment of Receivables from the Emergency
Employment Administration in the sum of P44,635.00. The Deed of
Assignment provided that it was for and in consideration of certain
credits, loans, overdrafts and other credit accommodations
extended to defendants as security for the payment of said sum
and the interest thereon, and that defendants `do hereby remise,
release and quitclaim all its rights, title, and interest in and to the
accounts receivables. Further:
'(1) the title and right of possession to said accounts receivable is
to remain in the assignee, and it shall have the right to collect the
same from the debtor, and whatsoever the Assignor does in
connection with the collection of said accounts, it agrees to do as
agent and representative of the Assignee and in trust for said
Assignee x x x;
(6) The Assignor guarantees the existence and legality of said
accounts receivable, and the due and punctual payment thereof
unto the assignee, x x x on demand, x x x and further, that
Assignor warrants the solvency and credit worthiness of each and
every account.
(7) The Assignor does hereby guarantee the payment when due of
all sums payable under the contracts giving rise to the accounts
receivable x x x including reasonable attorney's fees in enforcing
any rights against the debtors of the assigned accounts receivable
and will pay upon demand, the entire unpaid balance of said
contract in the event of non-payment by the said debtors of any
monthly sum at its due date or of any other default by said debtors
x x x.
(9) x x x This Assignment shall also stand as a continuing
guarantee for any and all whatsoever there is or in the future there
will be justly owing from the Assignor to the Assignee x x x.'
In their stipulations of Fact, it is admitted by the parties that
plaintiff extended loans to defendants on the basis and by reason
of certain contracts entered into by the defunct Emergency
Employment Administration (EEA) with defendants for the fabri-
cation of fishing boats, and that the Philippine Fisheries
Commission succeeded the EEA after its abolition; that non-
payment of the notes was due to the failure of the Commission to
pay defendants after the latter had complied with their contractual
 obligations; and that the President of plaintiff Bank took steps to
collect from the Commission, but no collection was effected.
For failure of defendants to pay the sums due on the Promissory
Notes, this action was instituted on November 13, 1969, originally
against the Father, Son, and the latter's wife. Because the Father
died, however, during the pendency of the suit, the case as against
him was dismissed under the provisions of Section 21, Rule 3 of the
Rules of Court. The action, then is against defendants Son and his
wife for the collection of the sum of P15,037.11 on Promissory Note
No. 14487; and against defendant Son for the recovery of
P8,394.74 on Promissory Notes Nos. 11515 and 11699, plus
interest on both amounts at 12% per annum from September 30,
1969 until fully paid, and 10% of the amounts due as attorney's
fees.
Neither of the parties presented any testimonial evidence and
submitted the case for decision based on their Stipulations of Fact
and on their documentary evidence.
The issues, as defined by the parties are: (1) whether or not
plaintiff's claim is already considered paid by the Deed of
Assignment of Receivables by the Son; and (2) whether or not it is
plaintiff who should directly sue the Philippine Fisheries
Commission for collection." (Record on Appeal, p. 29-32).
On April 17, 1972, the trial court rendered its judgment adverse to
defendants. On June 8, 1972, defendants filed a motion for reconsideration
(Record on Appeal, p. 33) which was denied by the trial court in its order of
June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972, defendants
filed with the lower court their notice of appeal together with the appeal
bond (Record on Appeal, p. 38). The record of appeal was forwarded to the
Court of Appeals on August 22, 1972 (Record on Appeal, p 42).
In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a
single assignment of error, that is -
"THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL
REMAKING OF THE CONTRACT BETWEEN THE PARTIES, IN
VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION."
As the appeal involves a pure question of law, the Court of Appeals, in its
resolution promulgated on March 6, 1980, certified the case to this Court
(Rollo, p. 24). The Record on Appeal was forwarded to this Court on March
31, 1980 (Rollo, p. 1).
In the resolution of May 30, 1980, the First Division of this Court ordered
that the case be docketed and declared submitted for decision (Rollo, p.
33).
On March 7, 1988, considering the length of time that the case has been
pending with the Court and to determine whether supervening events may
have rendered the case moot and academic, the Court resolved (1) to
require the parties to MOVE IN THE PREMISES within thirty days from
notice, and in case they fail to make the proper manifestation within the
required period, (2) to consider the case terminated and closed with the
entry of judgment accordingly made thereon (Rollo, p. 40).
On April 27, 1988, appellee moved for a resolution of the appeal/review
interposed by defendants-appellants (Rollo, p. 41).
The major issues raised in this case are as follows: (1) whether or not the
assignment of receivables has the effect of payment of all the loans
contracted by appellants from appellee bank; and (2) whether or not
appellee bank must first exhaust all legal remedies against the Philippine
Fisheries Commission before it can proceed against appellants for
collections of loan under the promissory notes which are plaintiff's bases in
the action for collection in Civil Case No. 78178.
"Assignment of credit is an agreement by virtue of which the owner
of a credit, known as the assignor, by a legal cause, such as sale,
dation in payment, exchange or donation, and without the need of
the consent of the debtor, transfers his credit and its accessory
rights to another, known as the assignee, who acquires the power
to enforce it to the same extent as the assignor could have
enforced it against the debtor. x x x It may be in the form of a sale,
but at times it may constitute a dation in payment, such as when a
debtor, in order to obtain a release from his debt, assigns to his
creditor a credit he has against a third person, or it may constitute
a donation as when it is by gratuitous title; or it may even be
merely by way of guaranty, as when the creditor gives as a
collateral, to secure his own debt in favor of the assignee, without
transmitting ownership. The character that it may assume
determines its requisites and effects, its regulation, and the
capacity of the parties to execute it; and in every case, the
obligations between assignor and assignee will depend upon the
judicial relation which is the basis of the assignment" (Tolentino,
Commentaries and Jurisprudence on the Civil Code of the
Philippines, Vol. 5, pp. 165-166).
There is no question as to the validity of the assignment of receivables
executed by appellants in favor of appellee bank. The issue is with regard
to its legal effects.
I
It is evident that the assignment of receivables executed by appellants on
January 24, 1964 did not transfer the ownership of the receivables to
appellee bank and release appellants from their loans with the bank
incurred under promissory notes Nos. 11487, 11515 and 11699.
The Deed of Assignment provided that it was for and in consideration of
certain credits, loans, overdrafts, and their credit accommodations in the
sum of P10,000.00 extended to appellants by appellee bank, and as
security for the payment of said sum and the interest thereon; that
appellants as assignors, remise, release, and quitclaim to assignee bank all
their rights, title and interest in and to the accounts receivable assigned
(1st paragraph). It was further stipulated that the assignment will also
stand as a continuing guaranty for future loans of appellants to appellee
bank and correspondingly the assignment shall also extend to all the
accounts receivable; appellants shall also obtain in the future, until the
consideration on the loans secured by appellants from appellee bank shall
have been fully paid by them (No. 9).
The position of appellants, however, is that the deed of assignment is a
quitclaim in consideration of their indebtedness to appellee bank, not mere
guaranty, in view of the following provisions of the deed of assignment:
"x x x the Assignor do hereby remise, release and quit-claim unto
said assignee all its rights, title and interest in the accounts
receivable described hereunder." (Underscoring supplied by
appellants, first par., Deed of Assignment)."
"x x x that the title and right of possession to said account
receivable is to remain in said assignee and it shall have the right
to collect directly from the debtor, and whatsoever the Assignor
does in connection with the collection of said accounts, it agrees to
do so as agent and representative of the Assignee and in trust for
said Assignee x x x" (Ibid, par. 2 of Deed of Assignment)." (Record
on Appeal, p. 27)
The character of the transactions between the parties is not, however,
determined by the language used in the document but by their intention.
Thus, the Court, quoting from the American Jurisprudence (68 2d, Secured
Transaction, Section 50) said:
"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.
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 a 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 existence 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 ambiguous language or other circumstances
excluding an intent to pledge." (Lopez v. Court of Appeals, 114
SCRA 671 [1982]).
Definitely, the assignment of the receivables did not result from a sale
transaction. It cannot be said to have been constituted by virtue of a
dation in payment for appellants loans with the bank evidenced by
promissory note Nos. 11487, 11515 and 11699 which are the subject of the
suit for collection in Civil Case No. 78178. At the time the deed of
assignment was executed, said loans were non-existent yet. The deed of
assignment was executed on January 24, 1964 (Exh. "G"), while promissory
note No. 11487 is dated April 25, 1966 (Exh. "A"), promissory note 11515,
dated May 3, 1966 (Exh. ''B"), and promissory note 11699, on June 20,
1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00 the
amount of credit from appellee bank indicated in the deed of assignment.
At the time the assignment was executed, there was no obligation to be
extinguished except the amount of P10,000.00. Moreover, in order that an
obligation may be extinguished by another which substitutes 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
(Article 1292, New Civil Code).
Obviously, the deed of assignment was intended as collateral security for
the bank loans of appellants, as a continuing guaranty for whatever sums
would be owing by defendants to plaintiff, as stated in stipulation No. 9 of
the deed.
In case of doubt as to whether a transaction is a pledge or a dation in
payment, the presumption is in favor of pledge, the latter being the lesser
transmission of rights and interests (Lopez v. Court of Appeals, supra).
In one case, the assignments of rights, title and interest of the defendant in
the contracts of lease of two buildings as well as her rights, title and
interest in the land on which the buildings were constructed to secure an
overdraft from a bank amounting to P110,000.00 which was increased to
P150,000.00, then to P165,000.00 was considered by the Court to be
documents of mortgage contracts inasmuch as they were executed to
guarantee the principal obligations of the defendant consisting of the
overdrafts or the indebtedness resulting therefrom. The Court ruled that
an assignment to guarantee an obligation is in effect a mortgage and not
an absolute conveyance of title which confers ownership on the assignee
(Peoples Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).
II
As to whether or not appellee bank must have to exhaust all legal
remedies against the Philippine Fisheries Commission before it can proceed
against appellants for collection of loans under their promissory notes,
must also be answered in the negative.
The obligation of appellants under the promissory notes not having been
released by the assignment of receivables, appellants remain as the
principal debtors of appellee bank rather than mere guarantors. The deed
of assignment merely guarantees said obligations. That the guarantor
cannot be compelled to pay the creditor unless the latter has exhausted all
the property of the debtor, and has resorted to all the legal remedies
against the debtor, under Article 2058 of the New Civil Code does not
therefore apply to them. It is of course of the essence of a contract of
pledge or mortgage that when the principal obligation becomes due, the
things in which the pledge or mortgage consists may be alienated for the
payment to the creditor (Article 2087, New Civil Code). In the instant case,
appellants are both the principal debtors and the pledgors or mortgagors.
Resort to one is, therefore, resort to the other.

Appellee bank did try to collect on the pledged receivables. As the

Emergency Employment Agency (EEA) which issued the receivables had
been abolished, the collection had to be coursed through the Office of the
President which disapproved the same. (Record on Appeal, p. 16). The
receivable became virtually worthless leaving appellants' loans from
appellee bank unsecured. It is but proper that after their repeated
demands made on appellants for the settlement of their obligations,
appellee bank should proceed against appellants. It would be an exercise
in futility to proceed against a defunct office for the collection of the
receivables pledged.

WHEREFORE, the appeal is Dismissed for lack of merit and the appealed
decision of the trial court is affirmed in toto.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., and Cortes, JJ., concur.

Feliciano, J., see concurring opinion.

 ARENAS V. RAYMUNDO
ESTANISLAUA ARENAS ET AL., PLAINTIFFS AND APPELLEES,
VS.
FAUSTO 0. RAYMUNDO, DEFENDANT AND APPELLANT.
DECISION
TORRES, J.:
This is an appear filed by the defendant from a judgment of conviction
rendered by the Hon. Judge Araullo.
On the date of August 31, 1908, the attorneys for the plaintiffs,
Estanislaua Arenas and Julian La 0, brought suit against Fausto 0.
Raymundo, alleging, as a cause of action, that Estanislaua Arenas was the
owner and proprietor of the jewelry described below with the respective
value thereof:
Two gold tamborin rosaries, without bow or reliquary at P40
each.............................................
One lady's comb for fastening the hair, made of gold and silver,
adorned with pearls of ordinary size and many small pearls, one of 80
which is
missing....................................................................................
One gold ring set with a diamond of ordinary
size.....................................................................................
One gold bracelet with five small diamonds and eight brillantitos
de almendras.........................................
One pair of gold picaporte earrings with two diamonds of
ordinary size and two small
ones..........................................................................................
The plaintiffs alleged that the said jewelry, during the last part of April or
the beginning of May, 1908, was delivered to Elena de Vega to sell on
commission, and that the latter, in turn, delivered it to Concepcion Perello,
likewise to sell on commission, but that Perello, instead of fulfilling her
trust, pledged the jewelry in the defendant's pawnshop, situated at No. 33
Calle de Ilaya, Tondo, and appropriated to her own use the money thereby
obtained; that on July 30, 1908, Goncepcion Per.elio was prosecuted for
estafa, convicted, and the judgment became final; that the said jewelry
was then under the control and in the possession of the defendant, as a
result of the pledge by Perello, and that the former refused to deliver it to
the plaintiffs, the owners thereof, wherefore counsel for the plaintiffs
asked that judgment be rendered sentencing the defendant to make
restitution of the said jewelry and to pay the costs.
In the affidavit presented by the attorney for the plaintiffs, dated
September 2, 1908, after a statement and description of the jewelry
mentioned, it is set forth that the defendant was retaining it for the reason
given in the complaint, and that it was not sequestrated for the purpose of
satisfying any tax or fine or by reason of any attachment issued in
compliance with any judgment rendered against the plaintiffs' property.
In discharge of the writ of seizure issued for the said jewelry on the 2d of
September, 1908, aforementioned, the sheriff of this city made the return
that he had, on the same date, delivered one copy of the bond and
another of the said writ to the defendant personally and, on the petition
and designation of the attorney for the plaintiffs, proceeded to seize the
jewelry described in the writ, taking it out of the defendant's control, and
held it in his possession during the five days prescribed by law.
On the 15th of the same month and year, five days having elapsed
without the defendant's having given bond before the court, the sheriff
made delivery of all the jewelry described in the said order to the
attorney for the plaintiff, to the latter's entire satisfaction, who with the
sheriff signed the return of the writ.
After the demurrer to the complaint had been overruled, the defendant
P80 answered, setting forth that he denied each and all of the allegations
thereof which were not specifically admitted, explained, or qualified, and
as a special defense alleged that the jewelry, the subject ^matter of the
complaint, was pledged in his pawnshop by Concepcion Perello, the
widow of Pazos, as security for a loan of P1,524, with the knowledge,
consent, and mediation of Gabriel La O, a son of the plaintiffs, as their
agent, and that, in consequence thereof, the said plaintiffs were estopped
1,000
from disavowing the action of the said Perello; the defendant therefore
prayed that the complaint be dismissed and that the jewelry seized at the
700 instance of the plaintiffs, or the amount of the loan made thereon, together
with the interest due, be returned to the defendant, with the costs of the
suit against the plaintiffs.
1,100
The case came up for hearing on March 17, 1909, and, after the
presentation of oral testimony by both parties, the court, on June 23 of the
same year, rendered judgment sentencing the defendant to restore to the
plaintiff spouses the jewelry described in the complaint, the right being
reserved to the defendant to institute his action against the proper party.
The counsel for the defendant excepted to this judgment, asked that the
same be set aside, and a new trial granted. This motion was denied,
exception was taken by the appellant, and the proper bill of exceptions was
duly approved, certified to, and forwarded to the clerk of this court.
This is an action for the replevin of certain jewelry delivered by its owner
for sale on commission, and pledged without his knowledge by
Concepcion Perello in the pawnshop of the defendant, Fausto 0.
Raymundo, who refuses to deliver the said jewelry unless first redeemed.
The said Coneepcion Perello, who appropriated to herself the money
derived from the pledging of the jewels before mentioned, together with
others, to the prejudice of their owner Estanislaua Arenas, was prosecuted
in, the Court of First Instance of this city in cause No. 3955 and sentenced
on July 30, 1908, to the penalty of one year eight months and twienty-
one days of prision correccional, to restore to the offended party the
jewelry specified in the complaint, or to pay the value thereof, amounting
to P8,660, or, in case of insolvency, to suffer the corresponding subsidiary
imprisonment, and to pay the costs. This judgment is attested by the
certified copy attached under letter D to folio 26 of the record of the
proceedings in the case of the same plaintiff against Antonio Matute - the
pledgee of the other jewelry also appropriated by the said Concepcion
Perello - which record forms a part of the evidence in this cause.
Perello having pledged the jewelry in question to the defendant
Raymundo, and not having redeemed it by paying him the amount
received, it follows that the convicted woman, now serving the sentence
imposed upon her, could not restore the jewelry as ordered in that
judgment, which has become final by the defendant's acquiescence.
Article 120 of the Penal Code prescribes:
"The restitution of the thing itself must be made, if possible, with
payment for deterioration or diminution of value, to be appraised
by the court.
"Restitution shall be made, even though the thing may be in the
possession of a third person, who had acquired it in a legal
manner, reserving, however, his action against the proper person.
"This provision is not applicable to a case in which the third person
has acquired the thing in the manner and with the requisites
established by law to make it unrecoverable."
The provisions contained in the first two paragraphs of the preinserted
article are based on the uncontrovertible principle of justice that the party
injured through a crime has, as against all others, a preferential right to be
indemnified, or to have restored to him the thing of which he was unduly
deprived by criminal means.
In view of the harmonious relation between the different qodes in force in
these Islands, it is natural and logical that the aforementioned provision of
the Penal Code, based on the rule established in article 17 of the same, to
wit, that every person criminally liable for a crime or misdemeanor is also
civilly liable, should be in agreement and accordance with the provisions
of article 464 of the Civil Code which prescribes:
"The possession of personal property, acquired in good faith, is
equivalent to a title thereto. However, the person who has lost
personal property or has been illegally deprived thereof may
recover it from whoever possesses it.
"If the possessor of personal property, lost or stolen, has
acquired it in good faith at a public sale, the owner can not recover
it without reimbursing the price paid therefor.
"Neither can the owner of things pledged in pawnshops,
established with the authorization of the Government, recover
them, whosoever may be the person who pledged them, without
previously refunding to the institution the amount of the pledge
and the interest due.
"With regard to things acquired on exchange, or at fairs or markets
or from a merchant legally established and usually employed in
similar dealings, the provisions of the Code of Commerce shall be
observed."
On January 2, 1908, this court had occasion to decide, among other
cases, two which were entirely analogous to the present one. They were
No. 3889, Varela vs. Matute, and No. 3890, Varela vs. Finnick (9 Phil. Rep.,
479, 482).
In the decisions in both cases it appears that Nicolasa Pascual received
various jewels from Josef a Varela to sell on commission and that, instead
of fulfilling the trust or returning the jewels to their owner, she pledged
some of them in the pawnshop of Antonio Matute and others in that of H. J.
Finnick and appropriated to herself the amounts that she received, to
the detriment of the owner of the jewelry.
Tried for estafa in cause No. 2429, the said Pascual was convicted and
sentenced to the penalty of one year and eleven months of prisidn
correctional, to restore to Varela. tjie jewelry appropriated, or to pay the
value thereof, and, in case of insolvency, to subsidiary imprisonment; this
judgment became final, whereupon the defendant began to serve her
sentence. The case just cited is identical to that of Concepcion Perello.
Josef a Varela, in separate incidental proceedings, demanded the
restitution or delivery of possession of the said jewelry; the pledgees, the
pawnbrokers, refused to comply with her demand, alleging, among other
reasons, that they were entitled to possession. The two cases were duly
tried, and the Court of First Instance pronounced judgment, supporting
the plaintiff's claims in each. Both cases were appealed by the
defendants, Matute and Finnick, and this court affirmed the judgments on
the same grounds, with costs, and the decisions on appeal established the
following legal doctrines:
"1. Crimes against property; criminal and civil liability. - Where, in a
proceeding instituted by reason of a crime committed against
property, the criminal liability of the accused has been declared, it
follows that he shall also be held civilly liable therefor, because
every person who is criminally responsible on account of a crime
or misdemeanor is also civilly liable.
"2. Id.; Recovery of property unlawfully in possession. - Whoever
may have been deprived of his property in consequence of a
crime is entitled to the recovery thereof, even if such property is in
 the possession of a third party who acquired it by legal means
other than those expressly stated in article 464 of the Civil Code.
"3. Personal property; title by possession. - In order that the
possession of personal property may be considered as a title
thereto it is indispensable that the same shall have been acquired
in good faith.
"4. Id.; Ownership; prescription. - The ownership of personal
property prescribes in the manner and within the time fixed by
articles 1955 and 1962, in connection with article 464, of the Civil
Code."
In the cause prosecuted against Perello, as also in the present suit, it
was not proven that Estanislaua Arenas authorized the former to pawn
the jewelry given to her by Arenas to sell on commission. Because of the
mere fact of Perello's having been convicted and sentenced for estafa, and
for the very reason that she is now serving her sentence, the rest of the
dispositive part of the said sentence must be complied with, that is, the
jewelry misappropriated must be restored to its owner, inasmuch as it
exists and has not disappeared this restitution must be made, although the
jewelry is found in the pawnshop of Fausto 0, Raymundo and the latter had
acquired it by legal means. Raymundo however retains his right to collect
the amounts delivered upon the pledge, by bringing action against the
proper party. This finding is in accord with the provisions of the above
article 120 of the Penal Code and the first paragraph of article 464 of the
Civil Code.
The aforementioned decision, No. 3890, Varela vs. Finnick, recites, among
other considerations, the following:
"The exception contained in paragraph 3 of said article is not
applicable to the present case because a pawnshop does not enjoy
the privilege established by article 464 of the Civil Code. The
owner of the loan office of Finnick Brothers, notwithstanding the
fact that he acted in good faith, did not acquire the jewels at a
public sale; it is not a question of public property, securities, or
other such effects, the transfer, sale, or disposal of which is
subject to.the provisions of the Code of Commerce. Neither does a
pawnshop enjoy the privilege granted to a monte de piedad;
therefore, Josefa Varela, who lost said jewels and was deprived of
the same in consequence of a crime, is entitled to the recovery
thereof from the pawnshop of Finnick Brothers, where they were
pledged; the latter can not lawfully refuge to comply with the
provisions of article 120 of the Penal Code, as it is a question of
jewels which have been misappropriated by the commission of the
crime of estafa, and the execution of the sentence which orders
the restitution of the jewels can not be avoided because of the
good faith with which the owner of the pawnshop acquired them,
inasmuch as they were delivered to the accused, who was not the
owner nor authorized to dispose of the same."
Even supposing that the defendant Raymundo had acted in good faith in
accepting the pledge of the jewelry in litigation, even then he would not
be entitled to retain it until the owner thereof reimburse him for the
amount loaned to the embezzler, since the said owner of the jewelry, the
plaintiff, did not make any contract with the pledgee, that would obligate
him to pay the amount loaned to Perello, and the trial record does not
disclose any evidence, even circumstantial, that the plaintiff Arenas
consented to or had knowledge of the pledging of her jewelry in the
pawnshop of the defendant.
For this reason, and because Concepcion Perello was not the legitimate
owner of the jewelry which she pledged to the defendant Raymundo, for a
certain sum that she received from the latter as a loan, the contract of
pledge entered into by both is, of course, null and void, and, consequently
the jewelry so pawned can not serve as security for the payment of the
sum loaned, nor can the latter be collected out of the value of the said
jewelry.
Article 1857 of the Civil Code prescribes as one of the essential requisites
of the contracts of pledge and of mortgage, that the thing pledged or
mortgaged must belong to the person who pledges or mortgages it. This
essential requisite for the contract of pledge between Perello and the
defendant being absent as the former was not the owner of the jewelry
given in pledge, the contract is as devoid of value and force as if it had not
been made, and as it was executed with marked violation of an express
provision of the law, it can not confer upon the defendant any rights in
the pledged jewelry, nor impose any obligation toward him on the part of
the owner thereof, since the latter was deprived of her possession by
means of the illegal pledging of the said jewelry, a criminal act.
Between the supposed good faith of the defendant Raymundo and the
undisputed good faith of the plaintiff Arenas, the owner of the jewelry,
neither law nor justice permit that the latter, after being the victim of
embezzlement, should have to choose one of the two extremes of a
dilemma, both of which, without legal ground or reason, are injurious and
prejudicial to her interests and rights, that is, she must either lose her
jewelry or pay a large sum received by the embezzler as a loan from the
defendant, when the plaintiff Arenas is not related to the latter by any
legal or contractual bond out of which legal obligations arise.
Is it true that the plaintiffs' son, attorney Gabriel La 0, intervened and gave
his consent when Concepcion Perello pawned the jewelry in litigation with
Fausto Raymundo for P1,524? In view of the evidence offered by the trial
record, the answer is, of course, in the negative.
The parents of the attorney Gabriel La 0 being surprised by the
disagreeable news of the disappearance of various jewels, amounting in
value to more than P8,600, delivered to Elena Vega for sale on commission
and misappropriated by Concepcion Perello, who received them from
Vega for the same purpose, it is natural that the said attorney, acting in
representation of his parents and as an interested party, should have
(proceeded to ascertain the whereabouts of the embezzled jewelry and
to enter into negotiations with the pawnshop of Fausto 0. Raymundo, in
whose possession he had finally learned were to be found a part of the
embezzled jewels, as he had been informed by the said Perello herself;
and although, at first, at the commencement of his investigations, he met
with opposition on the part of the pledgee Raymundo, who objected to
showing him the jewels that he desired to see in order to ascertain whether
they were those embezzled and belonging to his mother, the plaintiff
Arenas, thanks to the intervention of attorney Chicote and to the fact
that they succeeded in obtaining from the embezzler, among other
papers, the pawn ticket issued by Raymundo's pawnshop, Exhibit E, of the
date of May 4, 1908, folio 19 of the record in the case against Matute,
Gabriel La 0 succeeded in getting the defendant to show him the jewelry
described in the said ticket together with other jewels that did not belong
to La O's mother, that had been given the defendant by Ambrosia
Capistrano, Perello's agent, in pledge or security for a loan of P170.
Gabriel La 0, continuing the search for the other missing jewelry
belonging to his mother, found that Pausto O. Raymundo was in
possession of it and had received it from the same embezzler as security
for a debt, although the defendant Raymundo would not exhibit it until he
issued the pawn tickets corresponding to such jewels; therefore, at
Raymundo's request, Perello, by means of the document Exhibit C, signed
by herself and bearing date of June 10, 1908, folio 28 of the record,
authorized her son Ramon to get from the defendant, in her name, the
pawn tickets of the said other jewelry, for which such tickets had not yet
been issued; Raymundo then wrote out the tickets - Exhibits L, LL, and M,
all dated June 22, 1908, and found on folios 20, 21, and 22 of the record
of the aforesaid proceedings against Matute - in the presence of the
attorney Gabriel La 0, who kept the said three pawn tickets, after he had
made sure that the jewels described therein and which Raymundo, taking
them out of his cabinet, exhibited to him at the time, were among those
embezzled from his mother.
The business of pawnshops, in exchange for the high and onerous interest
which constitutes its enormous profits, is always exposed to the
contingency of receiving in pledge or security for the loans, jewels and
other articles that have been robbed, stolen, or embezzled from their
legitimate owners; and as the owner of the pawnshop accepts the
pledging of jewelry from the first bearer who offers the same and asks for
money on it, without assuring himself whether such bearer is or is not the
owner thereof, he can not, by such procedure, expect from the law better
and more preferential protection than the owner of the jewels or other
articles who was deprived thereof by means of a crime and is entitled to be
excused by the courts.
Antonio Matute, the owner of another pawnshop, being convinced that he
was wrong, refrained from appealing from the judgment wherein he was
sentenced to return, without redemption, to the plaintiffs, another jewel of
great value which had been pledged to him by the same Perello. He
undoubtedly had in mind some of the previous decisions of this court, one
of which was against himself.
For the foregoing reasons, whereby the errors attributed to the judgment of
the Court of First Instance have been discussed and decided upon, and the
said judgment being in harmony with the law, the evidence and the merits
Qf the case, it is proper, in our opinion, to affirm the same, as we hereby
do, with the costs against the appellant. So ordered.
Arellano, C. J., and Mapa, J., concur.
Carson, Moreland, and Trent, JJ., concur in the result.

So that, when the three aforementioned pawn tickets, Exhibits L, LL, and
M, from the pawnshop of the defendant, were made out, the latter
already, and for some time previous, had had in his possession as a
pledge the jewelry described in them, and the plaintiffs' son, naturally
desiring to recover his parents' jewelry, was satisfied for the time being
with keeping the three pawn tickets certifying that such jewelry was
pawned to the defendant.

Moreover, the record discloses no proof that the attorney Gabriel La O

consented to or took any part in the delivery of the jewelry in question to
the defendant as a pledge, and both the said defendant, Raymundo, and
the embezzler Perello, averred in their respective testimony that the said
attorney La O had no knowledge of and took no part in the pledging of
the jewelry, and Perello further stated that she had received all the money
loaned to her by the defendant Raymundo. (Folios 13 to 14, and 76 to 80
of the record in the case against Matute.)
 RURAL BANK OF CALOOCAN V. CA
G.R. No. L-32116, April 21, 1981
RURAL BANK OF CALOOCAN, INC. AND JOSE O. DESIDERIO, JR.,
PETITIONERS,
VS.
THE COURT OF APPEALS AND MAXIMA CASTRO, RESPONDENTS.
DECISION
DE CASTRO,* J.:
This is a petition for review by way of certiorari of the decision[1] of the
Court of Appeals in CA-G.R. No. 39760-R entitled "Maxima Castro, plaintiff-
appellee, versus Severino Valencia, et al., defendants; Rural Bank of
Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes, defendants-
appellants," which affirmed in toto the decision of the Court of First
Instance of Manila in favor of plaintiff-appellee, the herein private
respondent Maxima Castro.
On December 7, 1959, respondent Maxima Castro, accompanied by
Severino Valencia, went to the Rural Bank of Caloocan to apply for an
industrial loan. It was Severino Valencia who arranged everything about
the loan with the bank and who supplied to the latter the personal data
required for Castro's loan application. On December 11, 1959, after the
bank approved the loan for the amount of P3,000.00, Castro, accompanied
by the Valencia spouses, signed a promissory note corresponding to her
loan in favor of the bank.
On the same day, December 11, 1959, the Valencia spouses obtained from
the bank an equal amount of loan for P3,000.00. They signed a promissory
note (Exhibit "2") corresponding to their loan in favor of the bank and had
Castro affixed thereon her signature as co-maker.
The two loans were secured by a real-estate mortgage (Exhibit "6") on
Castro's house and lot of 150 square meters, covered by Transfer
Certificate of Title No. 7419 of the Office of the Register of Deeds of Manila.
On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy
Sheriff Basilio Magsambol, sent a notice of sheriff's sale addressed to
Castro, announcing that her property covered by T.C.T. No. 7419 would be
sold at public auction on March 10, 1961 to satisfy the obligation covering
the two promissory notes plus interest and attorney's fees.
Upon request by Castro and the Valencias and with conformity of the bank,
the auction sale that was scheduled for March 10, 1961 was postponed for
April 10, 1961. But when April 10, 1961 was subsequently declared a
special holiday, the sheriff of Manila sold the property covered by T.C.T. No.
7419 at a public auction sale that was held on April 11, 1961, which was
the next succeeding business day following the special holiday.
Castro alleged that it was only when she received the letter from the Acting
Deputy Sheriff on February 13, 1961, when she learned for the first time
that the mortgage contract (Exhibit "6") which was an encumbrance on her
property was for P6,000.00 and not for P3,000.00 and that she was made
to sign as co-maker of the promissory note (Exhibit "2") without her being
informed of this.
On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money,"
against petitioners Bank and Desiderio, the Spouses Valencia, Basilio
Magsambol and Arsenio Reyes as defendants in Civil Case No. 46698
before the Court of First Instance of Manila upon the charge, amongst
others, that thru mistake on her part or fraud on the part of Valencias she
was induced to sign as co-maker of a promissory note (Exhibit "2") and to
constitute a mortgage on her house and lot to secure the questioned note.
At the time of filing her complaint, respondent Castro deposited the
amount of P3,383.00 with the court a quo in full payment of her personal
loan plus interest.
In her amended complaint, Castro prayed, amongst other, for the
annulment as far as she is concerned of the promissory note (Exhibit "2")
and mortgage contract (Exhibit "6") insofar as it exceeds P3,000.00; for the
discharge of her personal obligation with the bank by reason of a deposit of
P3,383.00 with the court a quo upon the filing of her complaint; for the
annulment of the foreclosure sale of her property covered by T.C.T. No.
7419 in favor of Arsenio Reyes; and for the award in her favor of attorney's
fees, damages and cost.
In their answers, petitioners interposed counterclaims and prayed for the
dismissal of said complaint, with damages, attorney's fees and costs. [2]
The pertinent facts arrived from the stipulation of facts entered into by the
parties as stated by respondent Court of Appeals are as follows:
"Spawning the present litigation are the facts contained in the
following stipulation of facts submitted by the parties themselves:
"1. That the capacity and addresses of all the parties in this case
are admitted;
"2. That the plaintiff was the registered owner of a residential
house and lot located at Nos. 1268-1270 Carola Street, Sampaloc,
Manila, containing an area of one hundred fifty (150) square
meters, more or less, covered by T.C.T. No. 7419 of the Office of
the Register of Deeds of Manila;
"3. That the signatures of the plaintiff appearing on the following
documents are genuine:
'a) Application for Industrial Loan with the Rural Bank of
Caloocan, dated December 7, 1959 in the amount of P3,000.00
attached as Annex A of this partial stipulation of facts;
'b) Promissory Note dated December 11, 1959 signed by the
plaintiff in favor of the Rural Bank of Caloocan for the amount of
P3,000.00 as per Annex B of this partial stipulation of facts;
'c) Application for Industrial Loan with the Rural Bank of
Caloocan, dated December 11, 1959, signed only by the
defendants, Severino Valencia and Catalina Valencia, attached as
Annex C, of this partial stipulation of facts;
d) Promissory note in favor of the Rural Bank of Caloocan, dated
December 11, 1959 for the amount of P3,000.00, signed by the
spouses Severino Valencia and Catalina Valencia as borrowers, and
plaintiff Maxima Castro, as a co-maker, attached as Annex D of this
partial stipulation of facts;
'e) Real estate mortgage dated December 11, 1959 executed by
plaintiff Maxima Castro, in favor of the Rural Bank of Caloocan, to
secure the obligation of P6,000.00 attached herein as Annex E of
this partial stipulation of facts;
"All the parties herein expressly reserved their right to present any
evidence they may desire on the circumstances regarding the
execution of the above-mentioned documents.
"4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff,
Basilio Magsambol, sent a notice of sheriff's sale, addressed to the
plaintiff, dated February 13, 1961, announcing that plaintiff's
property covered by T.C.T. No. 7419 of the Register of Deeds of the
City of Manila, would be sold at public auction on March 10, 1961
to satisfy the total obligation of P5,728.50, plus interest, attorney's
fees, etc., as evidenced by the Notice of Sheriff's Sale and Notice of
Extrajudicial Auction Sale of the Mortgaged property, attached
herewith as Annexes F and F-1, respectively, of this stipulation of
facts;
"5. That upon the request of the plaintiff and defendants-spouses
Severino Valencia and Catalina Valencia, and with the conformity of
the Rural Bank of Caloocan, the Sheriff of Manila postponed the
auction sale scheduled for March 10, 1961 for thirty (30) days and
the sheriff re-set the auction sale for April 10, 1961;
"6. That April 10, 1961 was declared a special public holiday;
"(Note: No. 7 is omitted upon agreement of the parties.)
"8. That on April 11, 1961, the Sheriff of Manila, sold at public
auction plaintiff's property covered by T.C.T. No. 7419 and
defendant, Arsenio Reyes, was the highest bidder and the
corresponding certificate of sale was issued to him as per Annex G
of this partial stipulation of facts;
"9. That on April 16, 1962, the defendant Arsenio Reyes,
executed an Affidavit of Consolidation of Ownership, a copy of
which is hereto attached as Annex H of this partial stipulation of
facts;
"10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated
executed the final deed of sale in favor of the defendant, Arsenio
Reyes, in the amount of P7,000.00, a copy of which is attached as
Annex I of this partial stipulation of facts;
"11. That the Register of Deeds of the City of Manila issued the
Transfer Certificate of Title No. 67297 in favor of the defendant,
Arsenio Reyes, in lieu of Transfer Certificate of Title No. 7419 which
was in the name of plaintiff, Maxima Castro, which was cancelled;
"12. That after defendant, Arsenio Reyes, had consolidated his title
to the property as per T.C.T. No. 67299, plaintiff filed a notice of lis
pendens with the Register of Deeds of Manila and the same was
annotated in the back of T.C.T. No. 67299 as per Annex J of this
partial stipulation of facts; and
"13. That the parties hereby reserved their rights to present
additional evidence on matters not covered by this partial
stipulation of facts.
"WHEREFORE, it is respectfully prayed that the foregoing partial
stipulation of facts be approved and admitted by this Honorable
Court."
As for the evidence presented during the trial, We quote from the decision
of the Court of Appeals the statement thereof, as follows:
"In addition to the foregoing stipulation of facts, plaintiff claims she
is a 70-year old widow who cannot read and write the English
language; that she can speak the Pampango dialect only; that she
has only finished second grade (t.s.n., p. 4, December 11, 1964);
that in December 1959, she needed money in the amount of
P3,000.00 to invest in the business of the defendant spouses
Valencia, who accompanied her to the defendant bank for the
purpose of securing a loan of P3,000.00; that while at the
defendant bank, an employee handed to her several forms already
prepared which she was asked to sign on the places indicated, with
no one explaining to her the nature and contents of the
documents; that she did not even receive a copy thereof; that she
was given a check in the amount of P2,882.85 which she delivered
to defendant spouses; that sometime in February 1961, she
received a letter from the Acting Deputy Sheriff of Manila,
regarding the extrajudicial foreclosure sale of her property; that it
was then when she learned for the first time that the mortgage
indebtedness secured by the mortgage on her property was
P6,000.00 and not P3,000.00; that upon investigation of her
lawyer, it was found that the papers she was made to sign were:
 '(a) Application for a loan of P3,000.00 dated December
7, 1959 (Exh. B-1 and Exh. I);
'(b) Promissory note dated December 11, 1959 for the
said loan of P3,000.00 (Exh. B-2);
'(c) Promissory note dated December 11, 1959 for
P3,000.00 with the defendants Valencia spouses as
borrowers and appellee as co-maker (Exh. B-4 or Exh. 2).
"The auction sale set for March 10, 1961 was postponed to April
10, 1961 upon the request of defendant spouses Valencia who
needed more time within which to pay their loan of P3,000.00 to
the defendant bank; plaintiff claims that when she filed the
complaint she deposited with the Clerk of Court the sum of
P3,383.00 in full payment of her loan of P3,000.00 with the
defendant bank, plus interest at the rate of 12% per annum up to
April 3, 1961 (Exh. D).
"As additional evidence for the defendant bank, its manager
declared that sometime in December, 1959, plaintiff was brought
to the Office of the Bank by an employee (t.s.n., p. 4, January 27,
1966). She went there to inquire if she could get a loan from the
bank. He claims he asked the amount and the purpose of the loan
and the security to be given and plaintiff said she would need
P3,000.00 to be invested in a drugstore in which she was a partner
(t.s.n., p. 8). She offered as security for the loan her lot and house
at Carola St., Sampaloc, Manila, which was promptly investigated
by the defendant bank's inspector. Then a few days later, plaintiff
came back to the bank with the wife of defendant Valencia. A date
was allegedly set for plaintiff and the defendant spouses for the
processing of their application, but on the day fixed, plaintiff came
without the defendant spouses. She signed the application and the
other papers pertinent to the loan after she was interviewed by the
manager of the defendant. After the application of plaintiff was
made, defendant spouses had their application for a loan also
prepared and signed (see Exh. 13). In his interview of plaintiff and
defendant spouses, the manager of the bank was able to gather
that plaintiff was in joint venture with the defendant spouses
wherein she agreed to invest P3,000.00 as additional capital in the
laboratory owned by said spouses (t.s.n., pp. 16-17)."[3]
Petitioners Bank and Jose Desiderio moved for the reconsideration [5] of
The Court of Appeals, upon evaluation of the evidence, affirmed in toto the
respondent court's decision. The motion having been denied,[6] they now
decision of the Court of First Instance of Manila, the dispositive portion of
come before this Court in the instant petition, with the following
which reads:
Assignment of Errors, to wit:
"FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders
judgment and:
"(1) Declares that the promissory note, Exhibit '2', is invalid as
against plaintiff herein;
"(2) Declares that the contract of mortgage, Exhibit '6', is null
and void, in so far as the amount thereof exceeds the sum of
P3,000.00 representing the principal obligation of plaintiff, plus the
interest thereon at 12% per annum;
"(3) Annuls the extrajudicial foreclosure sale at public auction of
the mortgaged property held on April 11, 1961, as well as all the
process and actuations made in pursuance of or in implementation
thereto;
"(4) Holds that the total unpaid obligation of plaintiff to
defendant Rural Bank of Caloocan, Inc., is only the amount of
P3,000.00, plus the interest thereon at 12% per annum, as of April
3, 1961, and orders that plaintiff's deposit of P3,383.00 in the
Office of the Clerk of Court be applied to the payment thereof;
"(5) Orders defendant Rural Bank of Caloocan, Inc. to return to
defendant Arsenio Reyes the purchase price the latter paid for the
mortgaged property at the public auction, as well as reimburse him
of all the expenses he has incurred relative to the sale thereof;
"(6) Orders defendants spouses Severino D. Valencia and
Catalina Valencia to pay defendant Rural Bank of Caloocan, Inc. the
amount of P3,000.00 plus the corresponding 12% interest thereon
per annum from December 11, 1960 until fully paid; and
"Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr.
and spouses Severino D. Valencia and Catalina Valencia to pay
plaintiff, jointly and severally, the sum of P600.00 by way of
attorney's fees, as well as costs.
"In view of the conclusion that the court has thus reached, the
counterclaims of defendant Rural Bank of Caloocan, Inc., Jose
Desiderio, Jr. and Arsenio Reyes are hereby dismissed, as a
corollary.
"The Court further denies the motion of defendant Arsenio Reyes
for an Order requiring Maxima Castro to deposit rentals filed on
November 16, 1963, resolution of which was held in abeyance
pending final determination of the case on the merits, also as a
consequence of the conclusion aforesaid."[4]
I
"THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL
ANNULMENT OF THE PROMISSORY NOTE, EXHIBIT 2, AND THE
MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT RESPONDENT
 MAXIMA CASTRO VIS-A-VIS PETITIONER BANK DESPITE THE TOTAL
ABSENCE OF EITHER ALLEGATION IN THE COMPLAINT OR
COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR OTHER
UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN BY
PETITIONERS IN PROCURING THE EXECUTION OF SAID CONTRACTS
FROM RESPONDENT CASTRO.
II
"THE COURT OF APPEALS ERRED IN IMPUTING UPON AND
CONSIDERING PREJUDICIALLY AGAINST PETITIONERS, AS BASIS FOR
THE PARTIAL ANNULMENT OF THE CONTRACTS AFORESAID ITS
FINDING OF FRAUD PERPETRATED BY THE VALENCIA SPOUSES
UPON RESPONDENT CASTRO IN UTTER VIOLATION OF THE RES
INTER ALIOS ACTA RULE.
III
"THE COURT OF APPEALS ERRED IN NOT HOLDING THAT, UNDER
THE FACTS FOUND BY IT, RESPONDENT CASTRO IS UNDER
ESTOPPEL TO IMPUGN THE REGULARITY AND VALIDITY OF HER
QUESTIONED TRANSACTION WITH PETITIONER BANK.
IV
"THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN
PETITIONERS AND RESPONDENT CASTRO, THE LATTER SHOULD
SUFFER THE CONSEQUENCES OF THE FRAUD PERPETRATED BY THE
VALENCIA SPOUSES, INASMUCH AS IT WAS THRU RESPONDENT
CASTRO'S NEGLIGENCE OR ACQUIESCENSE, IF NOT ACTUAL
CONNIVANCE, THAT THE PERPETRATION OF SAID FRAUD WAS MADE
POSSIBLE.
V
"THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF
THE DEPOSIT BY RESPONDENT CASTRO OF P3,383.00 WITH THE
COURT BELOW AS A TENDER AND CONSIGNATION OF PAYMENT
SUFFICIENT TO DISCHARGE SAID RESPONDENT FROM HER
OBLIGATION WITH PETITIONER BANK.
VI
"THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND
BINDING UPON RESPONDENT CASTRO THE HOLDING OF THE SALE
ON FORECLOSURE ON THE BUSINESS DAY NEXT FOLLOWING THE
ORIGINALLY SCHEDULED DATE THEREFOR WHICH WAS DECLARED
A HOLIDAY WITHOUT NECESSITY OF FURTHER NOTICE THEREOF."
The issue raised in the first three (3) assignment of errors is whether or not
respondent court correctly affirmed the lower court in declaring the
promissory note (Exhibit 2) invalid insofar as they affect respondent Castro
vis-a-vis petitioner bank, and the mortgage contract (Exhibit 6) valid up to
the amount of P3,000.00 only.
Respondent court declared that the consent of Castro to the promissory
note (Exhibit 2) where she signed as co-maker with the Valencias as
principal borrowers and her acquiescence to the mortgage contract
(Exhibit 6) where she encumbered her property to secure the amount of
P6,000.00 was obtained by fraud perpetrated on her by the Valencias who
had abused her confidence, taking advantage of her old age and ignorance
of her financial need. Respondent court added that "the mandate of fair
play decrees that she should be relieved of her obligation under the
contract" pursuant to Articles 24[7] and 1332[8] of the Civil Code.
The decision in effect relieved Castro of any liability to the promissory note
(Exhibit 2) and the mortgage contract (Exhibit 6) was deemed valid up to
the amount of P3,000.00 only which was equivalent to her personal loan to
the bank.
Petitioners argued that since the Valencias were solely declared in the
decision to be responsible for the fraud against Castro, in the light of the
res inter alios acta rule, a finding of fraud perpetrated by the spouses
against Castro cannot be taken to operate prejudicially against the bank.
Petitioners concluded that respondent court erred in not giving effect to the
promissory note (Exhibit 2) insofar as they affect Castro and the bank and
in declaring that the mortgage contract (Exhibit 6) was valid only to the
extent of Castro's personal loan of P3,000.00.
The records of the case reveal that respondent court's findings of fraud
against the Valencias is well supported by evidence. Moreover, the
findings of fact by respondent court in the matter is deemed final. [9] The
decision declared the Valencias solely responsible for the defraudation of
Castro. Petitioners' contention that the decision was silent regarding the
participation of the bank in the fraud is, therefore, correct.
We cannot agree with the contention of petitioners that the bank was
defrauded by the Valencias. For one, no claim was made on this in the
lower court. For another, petitioners did not submit proof to support its
contention.
At any rate, We observe that while the Valencias defrauded Castro by
making her sign the promissory note (Exhibit 2) and the mortgage contract
(Exhibit 6), they also misrepresented to the bank Castro's personal
qualifications in order to secure its consent to the loan. This must be the
reason which prompted the bank to contend that it was defrauded by the
Valencias. But to reiterate, We cannot agree with the contention for
reasons above-mentioned. However, if the contention deserves any
consideration at all, it is in indicating the admission of petitioners that the
bank committed mistake in giving its consent to the contracts.
Thus, as a result of the fraud upon Castro and the misrepresentation to the
bank inflicted by the Valencias, both Castro and the bank committed
mistake in giving their consents to the contracts. In other words,
substantial mistake vitiated their consents given. For if Castro had been
aware of what she signed and the bank of the true qualifications of the
loan applicants, it is evident that they would not have given their consents
to the contracts.
Pursuant to Article 1342 of the Civil Code which provides:
"Art. 1342. Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created substantial
mistake and the same is mutual."
We cannot declare the promissory note (Exhibit 2) valid between the bank
and Castro and the mortgage contract (Exhibit 6) binding on Castro beyond
the amount of P3,000.00, for while the contracts may not be invalidated
insofar as they affect the bank and Castro on the ground of fraud because
the bank was not a participant thereto, such may however be invalidated
on the ground of substantial mistake mutually committed by them as a
consequence of the fraud and misrepresentation inflicted by the Valencias.
Thus, in the case of Hill vs. Veloso, [10] this Court declared that a contract
may be annulled on the ground of vitiated consent if deceit by a third
person, even without connivance or complicity with one of the contracting
parties, resulted in mutual error on the part of the parties to the contract.
Petitioners argued that the amended complaint fails to contain even a
general averment of fraud or mistake, and its mention in the prayer is
definitely not a substantial compliance with the requirement of Section 5,
Rule 8 of the Rules of Court. The records of the case, however, will show
that the amended complaint contained a particular averment of fraud
against the Valencias in full compliance with the provision of the Rules of
Court. Although, the amended complaint made no mention of mistake
being incurred in by the bank and Castro, such mention is not essential in
order that the promissory note (Exhibit 2) may be declared of no binding
effect between them and the mortgage (Exhibit 6) valid up to the amount
of P3,000.00 only. The reason is that the mistake they mutually suffered
was a mere consequence of the fraud perpetrated by the Valencias against
them. Thus, the fraud particularly averred in the complaint, having been
proven, is deemed sufficient basis for the declaration of the promissory
note (Exhibit 2) invalid insofar as it affects Castro vis-a-vis the bank, and
the mortgage contract (Exhibit 6) valid only up to the amount of P3,000.00.
The second issue raised in the fourth assignment of errors is who between
Castro and the bank should suffer the consequences of the fraud
perpetrated by the Valencias.
In attributing to Castro all consequences of the loss, petitioners argue that
it was her negligence or acquiescence if not her actual connivance that
made the fraud possible.
Petitioners' argument utterly disregards the findings of respondent Court of
Appeals wherein petitioners' negligence in the contracts has been aptly
demonstrated, to wit:
"A witness for the defendant bank, Rodolfo Desiderio claims he had
subjected the plaintiff-appellee to several interviews. If this were
true why is it that her age was placed at 61 instead of 70; why was
she described in the application (Exh. B-1-9) as drug manufacturer
when in fact she was not; why was it placed in the application that
she has an income of P20,000.00 when according to plaintiff-
appellee, she has not even given such kind of information - the
true fact being that she was being paid P1.20 per picul of the
sugarcane production in her hacienda and 500 cavans on the palay
production."[11]
From the foregoing, it is evident that the bank was as much guilty, as
Castro was, of negligence in giving its consent to the contracts. It
apparently relied on representations made by the Valencia spouses when it
should have directly obtained the needed data from Castro who was the
acknowledged owner of the property offered as collateral. Moreover,
considering Castro's personal circumstances - her lack of education,
ignorance and old age - she cannot be considered utterly neglectful for
having been defrauded. On the contrary, it is demanded of petitioners to
exercise the highest order of care and prudence in its business dealings
with the Valencias considering that it is engaged in a banking business - a
business affected with public interest. It should have ascertained Castro's
awareness of what she was signing or made her understand what
obligations she was assuming, considering that she was giving
accommodation to, without any consideration from, the Valencia spouses.
Petitioners further argue that Castro's act of holding the Valencias as her
agent led the bank to believe that they were authorized to speak and bind
her. She cannot now be permitted to deny the authority of the Valencias to
act as her agent for one who clothes another with apparent authority as
her agent is not permitted to deny such authority.
The authority of the Valencias was only to follow-up Castro's loan
application with the bank. They were not authorized to borrow for her.
This is apparent from the fact that Castro went to the Bank to sign the
promissory note for her loan of P3,000.00. If her act had been understood
by the Bank to be a grant of an authority to the Valencias to borrow in her
behalf, it should have required a special power of attorney executed by
Castro in their favor. Since the bank did not, We can rightly assume that it
did not entertain the notion, that the Valencia spouses were in any manner
acting as an agent of Castro.
When the Valencias borrowed from the Bank a personal loan of P3,000.00
evidenced by a promissory note (Exhibit 2) and mortgaged (Exhibit 6)
Castro's property to secure said loan, the Valencias acted for their own
behalf. Considering however that for the loan in which the Valencias
appeared as principal borrowers, it was the property of Castro that was
being mortgaged to secure said loan, the Bank should have exercised due
care and prudence by making proper inquiry if Castro's consent to the
mortgage was without any taint or defect. The possibility of her not
knowing that she signed the promissory note (Exhibit 2) as co-maker with
the Valencias, and that her property was mortgaged to secure the two
loans instead of her own personal loan only, in view of her personal
circumstances - ignorance, lack of education and old age - should have
placed the Bank on prudent inquiry to protect its interest and that of the
public it serves. With the recent occurrence of events that have
supposedly affected adversely our banking system, attributable to laxity in
the conduct of bank business by its officials, the need of extreme caution
and prudence by said officials and employees in the discharge of their
functions cannot be over-emphasized.
Question is, likewise, raised as to the propriety of respondent court's
decision which declared that Castro's consignation in court of the amount
of P3,383.00 was validly made. It is contended that the consignation was
made without prior offer or tender of payment to the Bank, and is
therefore, not valid. In holding that there is a substantial compliance with
the provision of Article 1256 of the Civil Code, respondent court considered
the fact that the Bank was holding Castro liable for the sum of P6,000.00
plus 12% interest per annum, while the amount consigned was only
P3,000.00 plus 12% interest; that at the time of consignation, the Bank had
long foreclosed the mortgage extrajudicially and the sale of the mortgage
property had already been scheduled for April 10, 1961 for non-payment of
the obligation, and that despite the fact that the Bank already knew of the
deposit made by Castro because the receipt of the deposit was attached to
the record of the case, said Bank had not made any claim of such deposit,
and that therefore, Castro was right in thinking that it was futile and
useless for her to make previous offer and tender of payment directly to
the Bank only in the aforesaid amount of P3,000.00 plus 12% interest.
Under the foregoing circumstances, the consignation made by Castro was
valid, if not under the strict provision of the law, under the more liberal
considerations of equity.
also be published once a week for at least three consecutive weeks
in a newspaper of general circulation in the municipality or city."
We agree with respondent court. The pretermission of a holiday applies
only "where the day, or the last day for doing any act required or permitted
by law falls on a holiday," or when the last day of a given period for doing
an act falls on a holiday. It does not apply to a day fixed by an office or
officer of the government for an act to be done, as distinguished from a
period of time within which an act should be done, which may be on any
day within that specified period. For example, if a party is required by law
to file his answer to a complaint within fifteen (15) days from receipt of the
summons and the last day falls on a holiday, the last day is deemed moved
to the next succeeding business day. But, if the court fixes the trial of a
case on a certain day but the said date is subsequently declared a public
holiday, the trial thereof is not automatically transferred to the next
succeeding business day. Since April 10, 1961 was not the day or the last
day set by law for the extrajudicial foreclosure sale, nor the last day of a
given period, but a date fixed by the deputy sheriff, the aforesaid sale
cannot legally be made on the next succeeding business day without the
notices of the sale on that day being posted as prescribed in Section 9, Act
No. 3135.
WHEREFORE, finding no reversible error in the judgment under review,
We affirm the same in toto. No pronouncement as to cost.
SO ORDERED.
Teehankee, Acting C.J., Makasiar, Fernandez, Guerrero, and Melencio-
Herrera, JJ., concur.

The final issue raised is the validity or invalidity of the extrajudicial

foreclosure sale at public auction of the mortgaged property that was held
on April 11, 1961.

Petitioners contended that the public auction sale that was held on April
11, 1961 which was the next business day after the scheduled date of the
sale on April 10, 1961, a special public holiday, was permissible and valid
pursuant to the provisions of Section 31 of the Revised Administrative Code
which ordains:

"Pretermission of holiday. - Where the day, or the last day, for

doing any act required or permitted by law falls on a holiday, the
act may be done on the next succeeding business day."

Respondent court ruled that the aforesaid sale is null and void, it not
having been carried out in accordance with Section 9 of Act No. 3135,
which provides:

"Section 9. - Notice shall be given by posting notices of the sale for

not less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall
 ALCANTARA V. ALINEA
G.R. No. 3227, March 22, 1907
PEDRO ALCANTARA, PLAINTIFF AND APPELLEE,
VS.
AMBROSIO ALINEA ET AL., DEFENDANTS AND APPELLANTS.
DECISION
TORRES, J.:
On the 13th day of March, 1905, the plaintiff filed a complaint in the Court
of First Instance of La Laguna, praying that judgment be rendered in his
behalf ordering the defendants to deliver to him the house and lot claimed,
and to pay him in addition thereto as rent the sum of 8 pesos per month
from February of that year, and to pay the costs of the action; and the
plaintiff alleged in effect that on the 29th day of February, 1904, the
defendants, Ambrosio Alinea and Eudosia Belarmino, borrowed from him
the sum of 480 pesos, payable in January of said year 1905 under the
agreement that if, at the expiration of the said period, said amount should
not be paid it would be understood that the house and lot, the house being
constructed of strong materials, owned by the said defendants and located
in the town of San Pablo on the street of the same name, Province of La
Laguna, be considered as absolutely sold to the plaintiff for the said sum;
that the superficial extent and boundaries of said property are described in
the complaint; and that, notwithstanding that the time for the payment of
said sum has expired and no payment has been made, the defendants
refuse to deliver to plaintiff the said property, openly violating that which
they contracted to do and depriving him to his loss of the rents which
plaintiff should receive, the same counting from February, 1905.
The defendants, after the overruling of a demurrer to the complaint herein,
answered denying generally and specifically all the allegations contained in
the complaint, except those which were expressly admitted, and alleged
that the amount claimed included the interest; and that the principal
borrowed was only 200 pesos and that the interest was 280 pesos,
although in drawing the document by mutual consent of the parties thereto
the amount of indebtedness was made to appear in the sum of 480 pesos;
and that as their special defense defendants alleged that they offered to
pay the plaintiff the sum of 480 pesos, but the plaintiff had refused to
accept the same, therefore they persisted in making said offer and tender
of payment, placing at the disposal of the plaintiff the said 480 pesos first
tendered; and defendants asked for the costs of action.
After having taken the evidence of both parties and attaching the
documents presented in evidence to the record, the judge on November
27, 1905, rendered a judgment ordering the defendants to deliver to the
plaintiff the house and lot, the object of this litigation, and to pay the costs
of the action, not making any finding upon the question of loss or damages
by reason of the absence of proof on these points. The defendants duly
took exception to this decision, and asked for a new trial of the case on the
ground that the findings of the court below in its decision were plainly
contrary to law, which motion was overruled and from which ruling
defendants also excepted.
We have in this case a contract of loan and a promise of sale of a house
and lot, the price of which should be the amount loaned, if within a fixed
period of time such amount should not be paid by the debtor-vendor of the
property to the creditor-vendee of same.
Either one of the contracts are perfectly legal and both are authorized
respectively by articles 1451, 1740, and 1753, and those following, of the
Civil Code. The fact that the parties have agreed at the same time, in such
a manner that the fulfillment of the promise of sale would depend upon the
nonpayment or return of the amount loaned, has not produced any change
in the nature and legal conditions of either contract, or any essential defect
which would tend to nullify the same.
If the promise of sale is not vitiated because, according to the agreement
between the parties thereto, the price of the same is to be the amount
loaned and not repaid, neither would the loan be null or illegal, for the
reason that the added agreement provides that in the event of failure of
payment the sale of the property as agreed will take effect, the
consideration being the amount loaned and not paid. No article of the Civil
Code, under the rules or regulations of which such double contract was
executed, prohibits expressly, or by inference from any of its provisions,
that an agreement could not be made in the form in which the same has
been executed; on the contrary, article 1278 of the aforesaid code provides
that "contracts shall be binding, whatever may be the form in which they
may have been executed, provided the essential conditions required for
their validity exist." This legal prescription appears firmly sustained by the
settled practice of the courts.
The property, the sale of which was agreed to by the debtors, does not
appear mortgaged in favor of the creditor, because in order to constitute a
valid mortgage it is indispensable that the instrument be registered in the
Register of Property, in accordance with article 1875 of the Civil Code, and
the document of contract, Exhibit A, does not constitute a mortgage, nor
could it possibly be a mortgage, for the reason that said document is not
vested with the character and conditions of a public instrument.
By the aforesaid document, Exhibit A, said property could not be pledged,
not being personal property, and notwithstanding the said double contract
the debtor continued in possession thereof and the said property has never
been occupied by the creditor.
Neither was there ever any contract of antichresis by reason of the said
contract of loan, as is provided in articles 1881 and those following of the
Civil Code, inasmuch as the creditor-plaintiff has never been in possession
thereof, nor has he enjoyed the said property, nor for one moment ever
received its rents; therefore, there are no proper terms in law, taking into
consideration the terms of the conditions contained in the aforesaid
contract, whereby this court can find that the contract was null, and under
no consideration whatever would it be just to apply to the plaintiff articles
1859 and 1884 of the same code.
The contract (pactum commissorium) referred to in Law 41, title 5, and Law
12, title 12, of the fifth Partida, and perhaps included in the prohibition and
declaration of nullity expressed in articles 1859 and 1884 of the Civil Code,
indicates the existence of the contracts of mortgage or of pledge or that of
antichresis, none of which have coincided in the loan indicated herein.
After the expiration of twenty days from the date of the notification of this
decision let judgment be entered in accordance herewith and ten days
thereafter let the case be remanded to the court from whence it came for
proper action. So ordered.
Arellano, C. J., Mapa, Johnson, and Tracey, JJ., concur.

It is a principle in law, invariably applied by the courts in the decisions of DISSENTING

actions instituted in the matter of compliance with obligations, that the will
of the contracting parties is the law of contracts and that a man obligates WILLARD, J.:
himself to that to which he promises to be bound, a principle in accordance
This contract violates the fundamental principle of the Spanish law, which
with Law 1, title 1, book 10 of the Novisima Recopilacion, and article 1091
does not permit a debtor, at the time he secures a loan of money, to make
of the Civil Code. That which is agreed to in a contract is law between the
an agreement whereby the mere failure to pay the loan at maturity shall
parties, a doctrine established, among others, in judgments of the supreme
divest him irrevocably of all his interest in the specific property mentioned
court of Spain of February 20, 1897, and February 13, 1904.
in the agreement without any right on his part to redeem or to have the
It was agreed between plaintiff and defendants herein that if defendants property sold to pay the debt. (Civil Code, arts. 1859, 1872, and 1884.) I
should not pay the loan of 480 pesos in January, 1905, the property therefore dissent.
belonging to the defendants and described in the contract should remain
sold for the aforesaid sum, and such agreement must be complied with,
inasmuch as there is no ground in law to oppose the compliance with that
which has been agreed upon, having been so acknowledged by the
obligated parties.

The supreme court of Spain, applying the aforementioned laws of Spanish

origin to a similar case, establishes in its decision of January 16, 1872, the
following legal doctrine:

"Basing the complaint upon the obligation signed by the debtor,

who judicially recognized his signature; and after confessing to
have received from the plaintiff a certain amount, binding himself
to return same to the satisfaction of the plaintiff within the term of
four years, or in case of default to transfer direct domain of the
properties described in the obligation and to execute the necessary
sale; and the term having expired and the aforesaid amount not
having been paid, said plaintiff has his right free from impediment
to claim same against the heirs of the debtor."

The document of contract has been recognized by the defendant Alinea

and by the witnesses who signed same with him, being therefore an
authentic and efficacious document, in accordance with article 1225 of the
Civil Code; and as the amount loaned has not been paid and continues in
possession of the debtor, it is only just that the promise of sale be carried
into effect, and the necessary instrument be executed by the vendees.

Therefore, by virtue of the reasons given above and accepting the findings
given in the judgment appealed from, we affirm the said judgment herein,
with the costs against the appellants.
 A. FRANCISCO REALTY V. COURT OF APPEALS
G.R. No. 125055, October 30, 1998
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION,
PETITIONER,
VS.
COURT OF APPEALS AND SPOUSES ROMULO S.A. JAVILLONAR AND
ERLINDA P. JAVILLONAR, RESPONDENTS.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision rendered on
February 29, 1996 by the Court of Appeals [1] reversing, in toto, the decision
of the Regional Trial Court of Pasig City in Civil Case No. 62290, as well as
the appellate courts resolution of May 7, 1996 denying reconsideration.
Petitioner A. Francisco Realty and Development Corporation granted a loan
of P7.5 Million to private respondents, the spouses Romulo and Erlinda
Javillonar, in consideration of which the latter executed the following
documents: (a) a promissory note, dated November 27, 1991, stating an
interest charge of 4% per month for six months; (b) a deed of mortgage
over realty covered by TCT No. 58748, together with the improvements
thereon; and (c) an undated deed of sale of the mortgaged property in
favor of the mortgagee, petitioner A. Francisco Realty.[2]
The interest on the said loan was to be paid in four installments: half of the
total amount agreed upon (P900,000.00) to be paid in advance through a
deduction from the proceeds of the loan, while the balance to be paid
monthly by means of checks post-dated March 27, April 27, and May 27,
1992. The promissory note expressly provided that upon "failure of the
MORTGAGOR [private respondents] to pay the interest without prior
arrangement with the MORTGAGEE [petitioner], full possession of the
property will be transferred and the deed of sale will be registered." [3] For
this purpose, the owners duplicate of TCT No. 58748 was delivered to
petitioner A. Francisco Realty.
Petitioner claims that private respondents failed to pay the interest and, as
a consequence, it registered the sale of the land in its favor on February
21, 1992. As a result, TCT No. 58748 was cancelled and in lieu thereof TCT
No. PT-85569 was issued in the name of petitioner A. Francisco Realty. [4]
Private respondents subsequently obtained an additional loan of P2.5
Million from petitioner on March 13, 1992 for which they signed a
promissory note which reads:
PROMISSORY NOTE
For value received, I promise to pay A. FRANCISCO REALTY AND
DEVELOPMENT CORPORATION, the additional sum of Two Million
Five Hundred Thousand Pesos (P2,500,000.00) on or before April
27, 1992, with interest at the rate of four percent (4%) a month
until fully paid and if after the said date this note and/or the other
promissory note of P7.5 Million remains unpaid and/or unsettled,
without any need for prior demand or notification, I promise to
vacate voluntarily and willfully and/or allow A. FRANCISCO REALTY
AND DEVELOPMENT CORPORATION to appropriate and occupy for
their exclusive use the real property located at 56 Dragonfly, Valle
Verde VI, Pasig, Metro Manila.[5]
Petitioner demanded possession of the mortgaged realty and the payment
of 4% monthly interest from May 1992, plus surcharges. As respondent
spouses refused to vacate, petitioner filed the present action for
possession before the Regional Trial Court in Pasig City. [6]
In their answer, respondents admitted liability on the loan but alleged that
it was not their intent to sell the realty as the undated deed of sale was
executed by them merely as an additional security for the payment of their
loan. Furthermore, they claimed that they were not notified of the
registration of the sale in favor of petitioner A. Francisco Realty and that
there was no interest then unpaid as they had in fact been paying interest
even subsequent to the registration of the sale. As an alternative defense,
respondents contended that the complaint was actually for ejectment and,
therefore, the Regional Trial Court had no jurisdiction to try the case. As
counterclaim, respondents sought the cancellation of TCT No. PT-85569 as
secured by petitioner and the issuance of a new title evidencing their
ownership of the property.[7]
On December 19, 1992, the Regional Trial Court rendered a decision, the
dispositive portion of which reads as follows:
WHEREFORE, prescinding from the foregoing considerations,
judgment is hereby rendered declaring as legal and valid, the right
of ownership of A. Francisco Realty And Development Corporation,
over the property subject of this case and now registered in its
name as owner thereof, under TCT No. 85569 of the Register of
Deeds of Rizal, situated at No. 56 Dragonfly Street, Valle Verde VI,
Pasig, Metro Manila.
Consequently, defendants are hereby ordered to cease and desist
from further committing acts of dispossession or from withholding
possession from plaintiff, of the said property as herein described
and specified.
Claim for damages in all its forms, however, including attorneys
fees, are hereby denied, no competent proofs having been
adduced on record, in support thereof. [8]
Respondent spouses appealed to the Court of Appeals which reversed the
decision of the trial court and dismissed the complaint against them. The
appellate court ruled that the Regional Trial Court had no jurisdiction over
the case because it was actually an action for unlawful detainer which is
exclusively cognizable by municipal trial courts. Furthermore, it ruled that,
even presuming jurisdiction of the trial court, the deed of sale was void for
being in fact a pactum commissorium which is prohibited by Art. 2088 of
the Civil Code.
Petitioner A. Francisco Realty filed a motion for reconsideration, but the
Court of Appeals denied the motion in its resolution, dated May 7, 1996.
Hence, this petition for review on certiorari raising the following issues:
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT
THE REGIONAL TRIAL COURT HAD NO JURISDICTION OVER THE
COMPLAINT FILED BY THE PETITIONER.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT
THE CONTRACTUAL DOCUMENTS SUBJECT OF THE INSTANT CASE
ARE CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED
UNDER ARTICLE 2088 OF THE CIVIL CODE OF THE PHILIPPINES.
On the first issue, the appellate court stated:
Ostensibly, the cause of action in the complaint indicates a case for
unlawful detainer, as contra-distinguished from accion publiciana.
As contemplated by Rule 70 of the Rules of Court, an action for
unlawful detainer which falls under the exclusive jurisdiction of the
Metropolitan or Municipal Trial Courts, is defined as withholding
from by a person from another for not more than one year, the
possession of the land or building to which the latter is entitled
after the expiration or termination of the supposed rights to hold
possession by virtue of a contract, express or implied. (Tenorio vs.
Gamboa, 81 Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). If no action is
initiated for forcible entry or unlawful detainer within the expiration
of the 1 year period, the case may still be filed under the plenary
action to recover possession by accion publiciana before the Court
of First Instance (now the Regional Trial Court) (Medina vs.
Valdellon, 63 SCRA 278). In plain language, the case at bar is a
legitimate ejectment case filed within the 1 year period from the
jurisdictional demand to vacate. Thus, the Regional Trial Court has
no jurisdiction over the case. Accordingly, under Section 33 of B.P.
Blg. 129 Municipal Trial Courts are vested with the exclusive
original jurisdiction over forcible entry and unlawful detainer case.
(Sen Po Ek Marketing Corp. vs. CA, 212 SCRA 154 [1990]) [9]
We think the appellate court is in error. What really distinguishes an action
for unlawful detainer from a possessory action (accion publiciana) and from
a reivindicatory action (accion reivindicatoria) is that the first is limited to
the question of possession de facto.
An unlawful detainer suit (accion interdictal) together with forcible
entry are the two forms of an ejectment suit that may be filed to
recover possession of real property. Aside from the summary action
of ejectment, accion publiciana or the plenary action to recover the
right of possession and accion reivindicatoria or the action to
recover ownership which includes recovery of possession, make up
the three kinds of actions to judicially recover possession.
Illegal detainer consists in withholding by a person from another of
the possession of a land or building to which the latter is entitled
after the expiration or termination of the formers right to hold
possession by virtue of a contract, express or implied. An
ejectment suit is brought before the proper inferior court to recover
physical possession only or possession de facto and not possession
de jure, where dispossession has lasted for not more than one year.
Forcible entry and unlawful detainer are quieting processes and the
one-year time bar to the suit is in pursuance of the summary
nature of the action. The use of summary procedure in ejectment
cases is intended to provide an expeditious means of protecting
actual possession or right to possession of the property. They are
not processes to determine the actual title to an estate. If at all,
inferior courts are empowered to rule on the question of ownership
raised by the defendant in such suits, only to resolve the issue of
possession. Its determination on the ownership issue is, however,
not conclusive.[10]
The allegations in both the original and the amended complaints of
petitioner before the trial court clearly raise issues involving more than the
question of possession, to wit: (a) the validity of the transfer of ownership
to petitioner; (b) the alleged new liability of private respondents for
P400,000.00 a month from the time petitioner made its demand on them
to vacate; and (c) the alleged continuing liability of private respondents
under both loans to pay interest and surcharges on such. As petitioner A.
Francisco Realty alleged in its amended complaint:
5. To secure the payment of the sum of P7.5 Million together with
the monthly interest, the defendant spouses agreed to execute a
Deed of Mortgage over the property with the express condition that
if and when they fail to pay monthly interest or any infringement
thereof they agreed to convert the mortgage into a Deed of
Absolute Sale in favor of the plaintiff by executing Deed of Sale
thereto, copy of which is hereto attached and incorporated herein
as Annex "A";
6. That in order to authorize the Register of Deeds into registering
the Absolute Sale and transfer to the plaintiff, defendant delivered
unto the plaintiff the said Deed of Sale together with the original
owners copy of Transfer Certificate of Title No. 58748 of the
Registry of Rizal, copy of which is hereto attached and made an
integral part herein as Annex "B";
7. That defendant spouses later secured from the plaintiff an
additional loan of P2.5 Million with the same condition as
aforementioned with 4% monthly interest;
 8. That defendants spouses failed to pay the stipulated monthly
interest and as per agreement of the parties, plaintiff recorded and
registered the Absolute Deed of Sale in its favor on and was issued
Transfer Certificate of Title No. PT-85569, copy of which is hereto
attached and incorporated herein as Annex "C";
9. That upon registration and transfer of the Transfer Certificate of
Title in the name of the plaintiff, copy of which is hereto attached
and incorporated herein as Annex "C", plaintiff demanded the
surrender of the possession of the above-described parcel of land
together with the improvements thereon, but defendants failed and
refused to surrender the same to the plaintiff without justifiable
reasons thereto; Neither did the defendants pay the interest of 4%
a month from May, 1992 plus surcharges up to the present;
10. That it was the understanding of the parties that if and when
the defendants shall fail to pay the interest due and that the Deed
of Sale be registered in favor of plaintiff, the defendants shall pay a
monthly rental of P400,000.00 a month until they vacate the
premises, and that if they still fail to pay as they are still failing to
pay the amount of P400,000.00 a month as rentals and/or interest,
the plaintiff shall take physical possession of the said property; [11]
It is therefore clear from the foregoing that petitioner A. Francisco Realty
raised issues which involved more than a simple claim for the immediate
possession of the subject property. Such issues range across the full scope
of rights of the respective parties under their contractual arrangements. As
held in an analogous case:
The disagreement of the parties in Civil Case No. 96 of the Justice
of the Peace of Hagonoy, Bulacan extended far beyond the issues
generally involved in unlawful detainer suits. The litigants therein
did not raise merely the question of who among them was entitled
to the possession of the fishpond of Federico Suntay. For all judicial
purposes, they likewise prayed of the court to rule on their
respective rights under the various contractual documents their
respective deeds of lease, the deed of assignment and the
promissory note upon which they predicate their claims to the
possession of the said fishpond. In other words, they gave the
court no alternative but to rule on the validity or nullity of the
above documents. Clearly, the case was converted into the
determination of the nature of the proceedings from a mere
detainer suit to one that is "incapable of pecuniary estimation" and
thus beyond the legitimate authority of the Justice of the Peace
Court to rule on.[12]
Nor can it be said that the compulsory counterclaim filed by respondent
spouses challenging the title of petitioner A. Francisco Realty was merely a
collateral attack which would bar a ruling here on the validity of the said
title.
A counterclaim is considered a complaint, only this time, it is the
original defendant who becomes the plaintiff (Valisno v. Plan, 143
SCRA 502 (1986). It stands on the same footing and is to be tested
by the same rules as if it were an independent action. Hence, the
same rules on jurisdiction in an independent action apply to a
counterclaim (Vivar v. Vivar, 8 SCRA 847 (1963); Calo v. Ajax
International, Inc. v. 22 SCRA 996 (1968); Javier v. Intermediate
Appellate Court, 171 SCRA 605 (1989); Quiason, Philippine Courts
and Their Jurisdictions, 1993 ed., p. 203). [13]
On the second issue, the Court of Appeals held that, even "on the
assumption that the trial court has jurisdiction over the instant case,"
petitioners action could not succeed because the deed of sale on which it
was based was void, being in the nature of a pactum commissorium
prohibited by Art. 2088 of the Civil Code which provides:
ART. 2088. The creditor cannot appropriate the things given by way
to pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.
With respect to this question, the ruling of the appellate court should be
affirmed. Petitioner denies, however, that the promissory notes contain a
pactum commissorium. It contends that
What is envisioned by Article 2088 of the Civil Code of the
Philippines is a provision in the deed of mortgage providing for the
automatic conveyance of the mortgaged property in case of the
failure of the debtor to pay the loan (Tan v. West Coast Life
Assurance Co., 54 Phil. 361). A pactum commissorium is a
forfeiture clause in a deed of mortgage (Hechanova v. Adil,
144 SCRA 450; Montevergen v. Court of Appeals, 112 SCRA 641;
Report of the Code Commission, 156).
Thus, before Article 2088 can find application herein, the subject
deed of mortgage must be scrutinized to determine if it contains
such a provision giving the creditor the right "to appropriate the
things given by way of mortgage without following the procedure
prescribed by law for the foreclosure of the mortgage" (Ranjo v.
Salmon, 15 Phil. 436). IN SHORT, THE PROSCRIBED
STIPULATION SHOULD BE FOUND IN THE MORTGAGE DEED
ITSELF.[14]
The contention is patently without merit. To sustain the theory of petitioner
would be to allow a subversion of the prohibition in Art. 2088.
In Nakpil v. Intermediate Appellate Court, [15] which involved the violation of
a constructive trust, no deed of mortgage was expressly executed between
the parties in that case. Nevertheless, this Court ruled that an agreement
whereby property held in trust was ceded to the trustee upon failure of the
beneficiary to pay his debt to the former as secured by the said property
was void for being a pactum commissorium. It was there held:
 The arrangement entered into between the parties, whereby
Pulong Maulap was to be "considered sold to him (respondent) x x
x" in case petitioner fails to reimburse Valdes, must then be
construed as tantamount to a pactum commissorium which is
expressly prohibited by Art. 2088 of the Civil Code. For, there was
to be automatic appropriation of the property by Valdez in the
event of failure of petitioner to pay the value of the advances.
Thus, contrary to respondents manifestations, all the elements of
a pactum commissorium were present: there was a creditor-debtor
relationship between the parties; the property was used as security
for the loan; and, there was automatic appropriation by respondent
of Pulong Maulap in case of default of petitioner.[16]
Similarly, the Court has struck down such stipulations as contained in
deeds of sale purporting to be pacto de retro sales but found actually to be
equitable mortgages.
It has been consistently held that the presence of even one of the
circumstances enumerated in Art. 1602 of the New Civil Code is sufficient
to declare a contract of sale with right to repurchase an equitable
mortgage. This is so because pacto de retro sales with the stringent and
onerous effects that accompany them are not favored. In case of doubt, a
contract purporting to be a sale with right to repurchase shall be construed
as an equitable mortgage.
Petitioner, to prove her claim, cannot rely on the stipulation in the contract
providing that complete and absolute title shall be vested on the vendee
should the vendors fail to redeem the property on the specified date. Such
stipulation that the ownership of the property would automatically pass to
the vendee in case no redemption was effected within the stipulated period
is void for being a pactum commissorium which enables the mortgagee to
acquire ownership of the mortgaged property without need of foreclosure.
Its insertion in the contract is an avowal of the intention to mortgage rather
that to sell the property.[17]
Indeed, in Reyes v. Sierra[18] this Court categorically ruled that a
mortgagees mere act of registering the mortgaged property in his own
name upon the mortgagors failure to redeem the property amounted to
the exercise of the privilege of a mortgagee in a pactum commissorium.
Obviously, from the nature of the transaction, applicants predecessor-in-
interest is a mere mortgagee, and ownership of the thing mortgaged is
retained by Basilia Beltran, the mortgagor. The mortgagee, however, may
recover the loan, although the mortgage document evidencing the loan
was nonregistrable being a purely private instrument. Failure of mortgagor
to redeem the property does not automatically vest ownership of the
property to the mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This violates the provision
of Article 2088 of the New Civil Code, which reads:
The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose by them. Any stipulation to the contrary is null and
void.
The act of applicant in registering the property in his own name upon
mortgagors failure to redeem the property would amount to a pactum
commissorium which is against good morals and public policy. [19]
Thus, in the case at bar, the stipulations in the promissory notes providing
that, upon failure of respondent spouses to pay interest, ownership of the
property would be automatically transferred to petitioner A. Francisco
Realty and the deed of sale in its favor would be registered, are in
substance a pactum commissorium. They embody the two elements of
pactum commissorium as laid down in Uy Tong v. Court of Appeals, [20] to
wit:
The prohibition on pactum commissorium stipulations is provided
for by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate the things given by way
of pledge or mortgagee, or dispose of the same. Any stipulation to
the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum
commissorium to exist: (1) that there should be a pledge or
mortgage wherein a property is pledged or mortgaged by way of
security for the payment of the principal obligation; and (2) that
there should be a stipulation for an automatic appropriation by the
creditor of the thing pledged or mortgaged in the event of non-
payment of the principal obligation within the stipulated period. [21]
The subject transaction being void, the registration of the deed of sale, by
virtue of which petitioner A. Francisco Realty was able to obtain TCT No. PT-
85569 covering the subject lot, must also be declared void, as prayed for
by respondents in their counterclaim.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar
as it dismissed petitioners complaint against respondent spouses on the
ground that the stipulations in the promissory notes are void for being a
pactum commissorium, but REVERSED insofar as it ruled that the trial
court had no jurisdiction over this case. The Register of Deeds of Pasig City
is hereby ORDERED to CANCEL TCT No. PT-85569 issued to petitioner
and ISSUE a new one in the name of respondent spouses.
SO ORDERED.
Melo, (Acting Chairman), Puno and Martinez, JJ., concur.
 REYES V. SIERRA
G.R. No. L-28658, October 18, 1979
VICENTE C. REYES, APPLICANT-APPELLEE,
VS.
FRANCISCO SIERRA, EMILIO SIERRA, ALEJANDRA SIERRA, FELIMON
SIERRA, AURELIO SIERRA, CONSTANCIO SIERRA, CIRILO SIERRA
AND ANTONIA SANTOS, OPPOSITORS-APPELLANTS.
DECISION
DE CASTRO, J.:
Appeal from the decision dated December 29, 1966 of the Court of First
Instance of Rizal Branch I, Pasig, which declared applicant Vicente Reyes
the true and rightful owner of the land covered by Plan Psu-189753 and
ordered the registration of his title thereto.
On January 3, 1961, Vicente Reyes filed an application for registration of
his title to a parcel of land situated in Antipolo, Rizal and covered by Plan
Psu-189753 of the Bureau of Lands. In his application, he declared that he
acquired the land by inheritance from his father who died sometime in
1944. Applicant is one of the heirs of the deceased Vicente Reyes Sr. but
the other heirs executed a deed of quit claim in favor of the applicant.
The notice of initial hearing was published in the Official Gazette, and a
copy thereof was posted in a conspicuous place in the land in question and
in the municipal building of Antipolo, Rizal. An opposition was filed by the
Director of Lands, Francisco Sierra and Emilio Sierra. An Order of General
Default was issued on June 28, 1962. A motion to set aside an
interlocutory default order was filed by Alejandra, Felimon, Aurelio,
Apolonio, Constancio, Cirilo, all surnamed Sierra and Antonia Santos, thru
counsel, and the trial court issued an Order on February 4, 1966 amending
the general order of default so as to include the aforementioned movants
as oppositors.
The case was set for hearing, and after trial the court rendered a decision,
the dispositive portion of which reads as follows:
"IN VIEW OF THE ABOVE CONSIDERATIONS, this Court declares
Vicente Reyes the true and rightful owner of the land covered by
Plan Psu-189753 and orders the registration of his title thereto,
provided that the title to be issued shall be subject to a public
easement of right-of-way over a 2.00 meter-wide strip of the land
along Lucay Street for the latter's widening and improvement.
"As soon as this decision is final let the corresponding decree be
issued in favor of VICENTE C. REYES, widower, filipino, of legal age
and resident of 1851 P. Guevarra Street, Santa Cruz, Manila." (p.
25, Record on Appeal).
Oppositors appealed from the aforesaid decision, with the following
assignment of errors:
I
"THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT
ARTICLES 1134 AND 1137 OF THE NEW CIVIL CODE ARE
APPLICABLE TO THIS INSTANT CASE ALTHOUGH THERE WAS NO
FORECLOSURE OR SALE OF THE PROPERTY TO THE HIGHEST
BIDDER.
II
"THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT
APPLICANT-APPELLEE AND HIS PREDECESSOR-IN-INTEREST HAD
BEEN IN CONSTRUCTIVE POSSESSION OF THE LAND FROM APRIL
19, 1926 UP TO THE PRESENT AS SHOWN BY THE FACT THAT THEY
HAD PAID THE REALTY TAXES.
III
"THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT
BECAUSE OPPOSITORS-APPELLANTS AND THEIR PREDECESSORS-
IN-INTEREST HAD NOT TAKEN ANY ACTIVE INTEREST TO PAY REALTY
TAXES SINCE 1926 AND IT WAS APPLICANT-APPELLEE AND HIS
PREDECESSOR-IN-INTEREST THAT PAID THE REALTY TAXES FROM
THE SAME PERIOD, THIS CONSTITUTES STRONG CORROBORATING
EVIDENCE OF APPLICANT'S ADVERSE POSSESSION.
IV
"THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT
DOCUMENT EXH. 'D' EXECUTED BY BASILIA BELTRAN IN 1926 WAS
ALREADY A CONVEYANCE OF THE LAND IN QUESTION TO VICENTE
REYES AND THE FAILURE OF BASILIA BELTRAN AND HER CHILDREN
TO REDEEM THE SAME, COULD BE CONSIDERED AS IF THE LAND
HAD ALREADY BEEN SOLD TO HIM." (p. 21, Rollo).
The land applied for was originally owned by Basilia Beltran's parents, and
upon their death in 1894, Basilia inherited the property. On April 19, 1926,
Basilia Beltran, a widow, borrowed from applicant's father, Vicente Reyes,
Sr. the amount of P100.00 and secured the loan with the piece of land in
question, as evidenced by exhibit "D" quoted hereunder:
"SA KAALAMAN NANG LAHAT NA BUMASA AT
NAKAKITA NITONG KASULATAN:
Kaming mag-kakapatid may sapat na gulang na nakalagda sa
kasulatan ito, bilang katibayan nang pag-papahintulot sa aming Ina
na si Bacilia na ipanagutan kay G. Vicente Reyes sa inutang na
halagang isang daan piso (P100.00) na walang anopamang
pakinabang; ang isang lagay na lupa sa kallehon Sukay, Antipolo,
 Rizal, naliligiran nang mga lupang may titulo Torrents, expedientes
Nos. 770, 1831 lote 1, 645 at 1839 lote 2, may kabu-uan humigit
kumulang sa apat na raan metro; ito'y aring naiwan ng ama
naming namatay na si Melecio Sierra.
Ang katotohanan kahit isangla o ipag-bile man ng tuluyan ang
nasabing pag-aari o lupa wala kaming kinalaman, sapagkat
ipinauubaya naming lubusan sa aming Ina ang kapamahalaan.
Sa katunayan nagsilagda kaming mga anak, at apo kay Esteban, sa
harap nang saksing magpapatotoo.
Ngayon ika 19 nang Abril nang 1926. Antipolo, Rizal, K.P.
Lagda ni
Bacilia Beltran Gregorio Sierra
Saksi:
_______________
_______________"
Since the execution of this document, Vicente Reyes, Sr. began paying the
realty taxes up to the time of his death in 1944, after which, his children
continued paying the taxes. Basilia Beltran died in 1938 before Reyes
could recover from the loan.
Applicant, in seeking the registration of the land, relied on his belief that
the property belongs to his father who bought the same from Basilia
Beltran, as borne out by his testimony during the trial on direct
examination.
"Q. Mr. Reyes, do you claim to be the owner of this property
included or described in your application?
"A. Yes, sir.
"Q. How did you acquire this property?
"A. Since 1926 we were the ones paying the land taxes.
"Q. From whom did you acquire this property?
"A. Basilia Beltran.
"Q. Do you mean to say that you yourself bought this property?
"A. My father was the one who bought the property."
Q. What is the name of your father?
"A. Vicente C. Reyes.
"Q. Where is he now?
"A. He is already dead.
"Q. Can you inform this Honorable Court, if you know, how your
father acquired this property?
"A. Since 1926 my father bought that land.
"Q. Was that transaction evidenced by a document?
"A. Yes, there is a document.
"Q. From whom did your father allegedly purchase the property?
"A. Basilia Beltran."
From the above-quoted testimony of applicant, it is evident that he
considered the document marked Exhibit "D" as a contract of Sale and not
as a mortgage. Oppositors contended that the words "isinangla," "na
ipananagutan sa inutang na halagang isang daang piso," "Kahit isangla o
ipagbili," etc., manifest that the document should be treated as a
mortgage, antichresis, or pactum commissorium and not as an absolute
sale or pacto de retro sale. (p. 28, Brief, Oppositors-Appellants).
The Court is of the opinion that Exhibit "D" is a mortgage contract. The
intention of the parties at the time of the execution of the contract must
prevail, that is, the borrowing and lending of money with security. The use
of the word debt (utang) in an agreement helps to point out that the
transaction was intended to be a loan with mortgage, because the term
"utang" implies the existence of a creditor-debtor relationship. The Court
has invariably upheld the validity of an agreement or understanding
whereby the lender of money has taken a deed to the land as security for
repayment of the loan.
Thus:
"The fact that the real transaction between the parties was a
borrowing and lending, will, whenever, or however it may appear,
show that a deed, absolute on its face was intended as a security
for money; and whenever it can be ascertained to be a security for
money, it is only a mortgage, however artfully it may be
disguised." (Villa vs. Santiago, 38 Phil. 163).
"The whole case really turns on the question of whether the written
instrument in controversy was a mortgage or a conditional sale. x
x x The real intention of the parties at the time the written
instrument was made must govern in the interpretation given to it
by the courts. x x x The correct test, where it can be applied, is the
continued existence of a debt or liability between the parties. If
such exists, the conveyance may be held to be merely a security
for the debt or an indemnity against the liability." (Cuyugan vs.
Santos, 34 Phil. 112).
The Cuyugan Case quoted some provisions in Jones' Commentaries on
Evidence, vol. 3, paragraphs 446-447 which are likewise applicable to the
facts of the case at bar:
"446. To show that instruments apparently absolute are only
securities. x x x It is an established doctrine that a court of equity
will treat a deed, absolute in form, as a mortgage, when it is
executed as security for loan of money, The court looks beyond the
terms of the instrument to the real transaction; and when that is
shown to be one of security and not of sale, it will give effect to the
actual contract of the parties."
"447. Same--Real intention of the parties to be ascertained. x x x
As we have shown in the preceding section, the intention of the
parties must govern; and it matters not what peculiar form the
transaction may have taken. The inquiry always is, Was a security
for the loan of money or other property intended? x x x A debt
owing to the mortgagee, or a liability incurred for the grantor,
either pre-existing or created at the time the deed is made, is
essential to give the deed the character of a mortgage. The
relation of debtor and creditor must appear. The existence of the
debt is one of the tests. x x x In construing the deed to be a
mortgage, its character as such must have existed from its very
inception,--created at the time the conveyance was made."
The same principle was laid down in a later case, that of Macapinlac vs.
Gutierrez Rapide, 43 Phil. 781, quoting 3 Pomeroy's Equity Jurisdiction,
Section 1195, wherein it was stated:
"* * * The doctrine has been firmly established from an early day
that when the character of a mortgage has attached at the
commencement of the transaction, so that the instrument,
whatever be its form, is regarded in equity as a mortgage, that
character of mortgage must and will always continue. If the
instrument is in its essence a mortgage, the parties cannot by any
stipulations, however express and positive, render it anything but a
mortgage or deprive it of the essential attributes belonging to a
mortgage in equity."
Concerning the legal effects of such Contract, Pomeroy observes:
"* * * Whenever a deed absolute on its face is thus treated as a
mortgage, the parties are clothed with all the rights, are subject to
all liabilities, and are entitled to all the remedies of ordinary
mortgagors and mortgagees. The grantee may maintain an action
for the foreclosure of the grantor's equity of redemption; the
grantor may maintain an action to redeem and to compel a
reconveyance upon his payment of the debt secured. If the
grantee goes into possession, he is in reality a mortgagee in
possession, and as such is liable to account for the rents and
profits."
Obviously, from the nature of the transaction, applicant's predecessor-in-
interest is a mere mortgagee, and ownership of the thing mortgaged is
retained by Basilia Beltran, the mortgagor. The mortgagee, however, may
recover the loan, although the mortgage document evidencing the loan
was non-registrable being a purely private instrument. Failure of
mortgagor to redeem the property does not automatically vest ownership
of the property to the mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This violates the
provision of Article 2088 of the New Civil Code, which reads:
"The creditor cannot appropriate the things given by way of pledge
or mortgage, or dispose by them. Any stipulation to the contrary is
null and void."
The act of applicant in registering the property in his own name upon
mortgagor's failure to redeem the property would amount to a pactum
commissorium which is against good morals and public policy.
In declaring applicant as the "true and rightful owner of the land in
question," the trial court held that applicant and his predecessor-in-interest
acquired ownership over the property by means of prescription having
been in constructive possession of the land applied for since 1926,
applying Arts. 1134 and 1137 of the New Civil Code:
"Art. 1134. - Ownership and other real rights over immovable
property are acquired by ordinary prescription through possession
of ten years.
"Art. 1137. -Ownership and other real rights over immovables also
prescribe through uninterrupted adverse possession thereof for
thirty years, without need of title or good faith."
Applicant, in his testimony on cross-examination, admitted that he and his
father did not take possession of the property but only made use of the
same for the purpose of spending vacation there, which practice they
discontinued for the last 23 years. Possession of the property must be in
the concept of an owner. This is a fundamental principle of the law of
prescription in this jurisdiction. In the case at bar, the possession of
applicant was not adverse, nor continuous.
An applicant for registration of title must prove his title and should not rely
on the absence or weakness of the evidence of the oppositors. For
purposes of prescription, there is just title when adverse claimant came
into possession of the property through one of the modes recognized by
law for the acquisition of ownership (Art. 1129, New Civil Code). Just title
must be proved and is never presumed (Art. 1131, New Civil Code).
Mortgage does not constitute just title on the part of the mortgagee since
ownership is retained by the mortgagor. When possession is asserted to
convert itself into ownership, a new right is sought to be created, and the
law becomes more exacting and requires positive proof of title. Applicant
failed to present sufficient evidence to prove that he is entitled to register
the property. The trial court's findings that since applicant and his father
had been continuously paying the realty taxes, that fact "constitutes strong
corroborating evidence of applicant's adverse possession," does not carry
much weight. Mere failure of the owner to pay the taxes does not warrant
a conclusion that there was abandonment of a right to the property. The
payment of taxes on property does not alone constitute sufficient evidence
of title. (Elumbaring vs. Elumbaring, 12 Phil. 389).

The belief of applicant that he owns the property in question which he

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

Applicant having failed to show by sufficient evidence a registrable title to

the land in question, the application for registration should be dismissed.

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

SO ORDERED.

Teehankee, (Chairman), Makasiar, Fernandez, Guerrero, and Melencio-

Herrera, JJ., concur.
 SPS. UY TONG V. CA
G.R. No. 77465, May 21, 1988
SPOUSES UY TONG & KHO PO GIOK, PETITIONERS,
VS.
HONORABLE COURT OF APPEALS, HONORABLE BIENVENIDO C.
EJERCITO, JUDGE OF THE COURT OF FIRST INSTANCE OF MANILA,
BRANCH XXXVII AND BAYANIHAN AUTOMOTIVE CORPORATION,
RESPONDENTS.
DECISION
CORTES, J.:
In the present petition, petitioners assail the validity of a deed of
assignment over an apartment unit and the leasehold rights over the land
on which the building housing the said apartment stands for allegedly
being in the nature of a pactum commissorium.
The facts are not disputed.
Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES)
used to be the owners of Apartment No. 307 of the Ligaya Building,
together with the leasehold right for ninety-nine (99) years over the land
on which the building stands. The land is registered in the name of Ligaya
Investments, Inc. as evidenced by Transfer Certificate of Title No. 79420 of
the Registry of Deeds of the City of Manila. It appears that Ligaya
Investments, Inc. owned the building which houses the apartment units but
sold Apartment No. 307 and leased a portion of the land in which the
building stands to the SPOUSES.
In February, 1969, the SPOUSES purchased from private respondent
Bayanihan Automotive, Inc. (BAYANIHAN) seven (7) units of motor vehicles
for a total amount of P47,700.00 payable in three (3) installments. The
transaction was evidenced by a written "Agreement" wherein the terms of
payment had been specified as follows:
That immediately upon signing of this Agreement, the VENDEE
shall pay unto the VENDOR the amount of Seven Thousand Seven
Hundred (P7.700.00) Pesos. Philippine Currency, and the amount of
Fifteen Thousand (PI5.000.00) Pesos shall be paid on or before
March 30,1969 and the balance of Twenty Five Thousand
(P25.000.00) Pesos shall be paid on or before April 30. 1969, the
said amount again to be secured by another postdated check with
maturity on April 30, 1969 to be drawn by the VENDEE;
That it is fully understood that should the two (2) aforementioned
checks be not honored on their respective maturity dates, herein
VENDOR will give VENDEE another sixty (60) days from maturity
dates, within which to pay or redeem the value of the said checks'.
That if for any reason the VENDEE should fail to pay her
aforementioned obligation to the VENDOR, the latter shall become
automatically the owner of the former's apartment which is located
at No. 307, Ligava Building. Alvarado St., Binondo, Manila, with the
only obligation on its part to pay unto the VENDEE the amount of
Three Thousand Five Hundred Thirty Five (P3.536 00) Pesos,
Philippine Currency: and in such event the VENDEE shall execute
the corresponding Deed of Absolute Sale in favor of the VENDOR
and/or Assignment of Leasehold Rights. [Italics supplied]. (Quoted
in Decision in Civil Case No. 80420. Exhibit "A" of Civil Case No.
131532],
After making a downpayment of P7.700.00. the SPOUSES failed to pay the
balance of P40.000.00. Due to these unpaid balances, BAYAN1HAN filed an
action for specific performance against the SPOUSES docketed as Civil
Case No. 80420 with the Court of First Instance of Manila.
On October 28. 1978, after hearing, judgment was rendered in favor of
BAYAN1HAN in a decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered, ordering the
defendants, jointly and severally, to pay the plaintiffs, the sum of
P40.000.00. with interest at the legal rate from July 1. 1970 until
full payment. In the event of their failure to do so within thirty (30)
days from notice of this judgment, they are hereby ordered to
execute the corresponding deed of absolute sale in favor of the
plaintiff and/or the assignment of leasehold rights over the
defendants' apartment located at 307 Ligava Building. Alvarado
Street. Binondn, Manila, upon the payment by the plaintiff to the
defendants of the sum of P3.535.00. [Italics supplied].
Pursuant to said judgment, an order for execution pending appeal was
issued by the trial court and a deed of assignment dated May 27, 1972.
was executed by the SPOUSES [Exhibit "B", CFI Records, p. 127] over
Apartment No. 307 of the Ligaya Building together with the leasehold right
over the land on which the building stands. The SPOUSES acknowledged
receipt of the sum of P3.000.00 more or less, paid by BAYANIHAN pursuant
to the said judgment.
Notwithstanding the execution of the deed of assignment, the SPOUSES
remained in possession of the premises. Subsequently, they were allowed
to remain in the premises as lessees for a stipulated monthly rental until
November 30. 1972.
Despite the expiration of the said period, the SPOUSES failed to surrender
possession of the premises in favor of BAYANIHAN. This prompted
BAYANIHAN to file an ejectment case against them in the City Court of
Manila docketed as Civil Case No. 240019. This action was however
dismissed on the ground that BAYANIHAN was not the real party in interest,
not being the owner of the building.
On February 7, 1979, after demands to vacate the subject apartment made
by BAYANIHAN's counsel was again ignored by the SPOUSES, an action for
recovery of possession with damages was filed with the Court of First
Instance of Manila, docketed as Civil Case No. 121532 against the
SPOUSES and impleading Ligaya Investments, Inc. as party defendant. On
March 17, 1981, decision in said case was rendered in favor of BAYANIHAN
ordering the following:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants spouses UY TONG and KHO PC GIOK and
defendant Ligaya Investment. Inc.. dismissing defendants'
counterclaim and ordering:
1 The defendants spouses UY TONG and KHO PO GIOK and
any and or persons claiming right under them, to vacate,
surrender and deliver possession of Apartment 307, Ligaya
Building, located at 64 Alvarado Street. Binondo. Manila to
the plaintiff;
2 Ordering defendant Ligaya Investment, Inc. to recognize
the right of ownership and possession of the plaintiff over
Apartment No. 307, Ligaya Building;
3 Ordering Ligaya Investment, Inc. to acknowledge plaintiff
as assignee-lessee in lieu of defendants spouses Uy Tong
and Kho Po Giok over the lot on which the building was
constructed;
4 Ordering the defendants spouses Uy Tong and Kho Po Giok
to pay to the plaintiff the sum of P200.00 commencing
from June, 1971 to November 30, 1972, or a total amount
of P3.400,00 as rental for the apartment, and the sum of
P200.00 from December 1. 1972 until the premises are
finally vacated and surrendered to the plaintiff, as
reasonable compensation for the use of the apartment: and
5 Ordering the defendants spouses Uy Tong and Kho Po Giok
to pay P3.000.00 as and for attorney's fees to the plaintiff,
and the costs of this suit.
Not satisfied with this decision, the SPOUSES appealed to the Court of
Appeals. On October 2, 1984. the respondent Court of Appeals affirmed in
toto the decision appealed from [Petition, Annex "A", Rollo, pp. 15-20]. A
motion for reconsideration of the said decision was denied by the
respondent Court in a resolution dated February 11, 1987 [Petition. Annex
"C". Rollo, pp. 31-34].
Petitioners-SPOUSES in seeking a reversal of the decision of the Court of
Appeals rely on the following reasons:
I. The deed of assignment is null and void because it is in the nature
of a pactum commissorium and/or was borne out of the same.
II. The genuineness and due execution of the deed of assignment was
not deemed admitted by petitioner.
III. The deed of assignment is unenforceable because the condition for
its execution was not complied with.
IV. The refusal of petitioners to vacate and surrender the premises in
question to private respondent is justified and warranted by the
circumstances obtaining in the instant case.
I. In support of the first argument, petitioners bring to the fore the contract
entered into by the parties w hereby petitioner Kho Po Giok agreed that the
apartment in question will automatically become the property of private
respondent BAYANIHAN upon her mere failure to pay her obligation. This
agreement, according to the petitioners is in the nature of a pactum
commissorium which is null and void, hence, the deed of assignment
which was borne out of the same agreement suffers the same fate.
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 mortgage, 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.
A perusal of the terms of the questioned agreement evinces no basis for
the application of the pactum commissorium provision. First, there is no
indication of any contract of mortgage entered into by the parties. It is a
fact that the parties agreed on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of the property by
BAYANIHAN. When the SPOUSES defaulted in their payments of the second
and third installments of the trucks they purchased, BAYANIHAN filed an
action an court for specific performance. The trial court rendered favorable
judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of
their obligation and in case of failure to do so, to execute a deed of
assignment over the property involved in this case. The SPOUSES elected
to execute the deed of assignment pursuant to said judgment.
Clearly, there was no automatic vesting of title on BAYANIHAN because it
took the intervention of the trial court to exact fulfillment of the obligation,
which, by its very nature is "... anathema to the concept of pacto
commissorio" [Northern Motors, Inc. v. Herrera, G.R. No. L-32674,
February 22, 1973, 49 SCRA 392]. And even granting that the original
agreement between the parties had the badges of pactum
commissorium, the deed of assignment does not suffer the same fate as
this was executed pursuant to a valid judgment in Civil Case No. 80420 as
can be gleaned from its very terms and conditions:
DEED OF ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS:
This deed made and entered into by Uy Tiong also known as Henry
Uy and Kho Po Giok. both of legal age. husband and wife,
respectively, and presently residing at 307 Ligaya BIdg.. Alvarado
St., Binondo. Manila, and hereinafter to be known and called as the
ASSIGNORS, in favor of Bayanihan Automoti e Corporal ion. an entit
duly organized and existing under the laws of the Philippines, with
principal business address at 1690 Otis St.. Paco. Manila and
hereinafter to be known and called the ASSIGNEE:
witnesseth
WHEREAS, the ASSIGNEE has filed a civil complaint for Specific-
Performance with Damages" against the ASSIGNORS in the Court of
First Instance of Manila. Branch V. said case having been docketed
as Civil Case No. 80420;
WHEREAS, the ASSIGNEE was able to obtain a judgment against
the ASSIGNOR wherein the latter was ordered by the court as
follows. to wit:
WHEREFORE, judgment is hereby rendered ordering the
defendants, jointly and severally to pay the plaintiff the
sum ofP40.000.00. with interest at the legal rale from July
31. 1970 until full payment. In the event of their failure to
do so w ithin thirty (30) days from notice of this judgment,
they arc hereby ordered to execute the corresponding deed
of absolute sale in favor of the plaintiff and/or the
assignment of leasehold, rights over the defendants'
apartment located at No. 307 Ligaya Building. Alvarado
Street. Binondo, Manila, upon the payment by the plaintiff
to Ihe defendants the sum of P3.535.00.
The defendants shall pay the costs.
WHEREAS, the court, upon petition by herein ASSIGNEE and its
deposit of sufficient bond, has ordered for the immediate execution
of the said decision even pending appeal of the aforesaid decision;
WHEREAS, the ASSIGNORS have elected to just execute the
necessary deed of sale and/or assignment of leasehold
rights over the apartment mentioned in the decision in
favor of the herein ASSIGNEE:
NOW, THEREFORE, for and in consideration of the foregoing
premises, the ASSIGNORS have transferred assigned and ceded,
and by these presents do hereby transfer, assign and cede all their
rights and interests over that place known as Apartment No. 307 at
the Ligaya Building which is located at No. 864 Alvarado St.,
Binondo, Manila, together with the corresponding leasehold rights
over the lot on which the said building is constructed, in favor of
the herein ASSIGNEE, its heirs or assigns.
IN WITNESS WHEREOF, We have hereunto signed our names this
27lh day of May, 1971 at Manila, Philippines.
UY TONG/HENRY UY KHO PO GIOK
Assignor Assignor
ACR-2151166 Manila 1/13/51 ACR-C-001620 Manila
March 3, 1965.
This being the case, there is no reason to impugn the validity of the said
deed of assignment.
II. The SPOUSES take exception to the ruling of the Court of Appeals that
their failure to deny the genuineness and due execution of the deed of
assignment was deemed an admission thereof. The basis for this exception
is the SPOUSES' insistence that the deed of assignment having been borne
out of pactum commissorium is not subject to ratification and its
invalidity cannot be waived.
There is no compelling reason to reverse the abovementioned ruling of the
appellate court. Considering this Court's above conclusion that the deed of
assignment is not invalid, it follows that when an action founded on this
written instrument is filed, the rule on contesting its genuineness and due
execution must be followed.
That facts reveal that the action in Civil Case No. 121532 was founded on
the deed of assignment. However, the SPOUSES, in their answer to the
complaint, failed to deny under oath and specifically the genuineness and
due execution of the said deed. Perforce, under Section 8, Rule 8 of the
Revised Rules of Court, the SPOUSES are deemed to have admitted the
deed's genuineness and due execution. Besides, they themselves admit
that ". . . the contract was duly executed and that the same is genuine"
[Sur-Rejoinder, Rollo, p. 67]. They cannot now claim otherwise.
III. The SPOUSES also question the enforceability of the deed of
assignment. They contend that the deed is unenforceable because the
condition for its execution was not complied with. What petitioners
SPOUSES refer to is that portion of the disposition in Civil Case No. 80420
requiring BAYANIHAN to pay the former the sum of P3.535.OO. To buttress
their claim of non-compliance, they invoke the following receipt issued by
the SPOUSES to show that BAYANIHAN was P535.00 short of the complete
payment:
RECEIPT
This is to acknowledge the fact that the amount of THREE
THOUSAND (P3.000.00) PESOS, more or less as indicated in the
judgment of the Hon. Conrado Vasque/. Presiding Judge of
the Court of First Instance of Manila. Branch V. in Civil Case
entitled "Bayanihan Automotive Corp. v. Pho (sic) Po Giok. etc." and
docketed as Civil Case No. 80420 has been applied for the
payment of the previous rentals of the property which is the
subject matter of the aforesaid judgment. |Emphasis supplied.|
(Sgd.) Pho (sic) Po Giok
(Sgd.) Henry Uy
August 21. 1971
The issue presented involves a question of fact which is not within this
Court's competence to look into. Suffice it to say that this Court is of the
view that findings and conclusion of the trial court and the Court of Appeals
on the question of whether there was compliance by BAYANIHAN of its
obligation
under the decision in Civil Case No. 80420 to pay the SPOUSES the sum of
P3.535.00 is borne by the evidence on record. The Court finds merit in the
following findings of the trial court:
". . . Defendants' contention that the P3.535.00 required in the
decision in Civil Case No. 80420 as a condition for the execution of
the deed of assignment was not paid by the plaintiff to the
defendants is belied by the fact that the defendants acknowledged
payment of P3.000.00, more or less, in a receipt dated August 21,
1971. This amount was expressly mentioned in this receipt as
indicated in the judgment of the Honorable Conrado Vasquez.
presiding Judge of the CFI of Manila. Branch V. in Civil Case entitled
Bayanihan Automotive Corp. versus Kho Po Giok. docketed as Civil
Case No. 80420. and also expressly mentioned as having been
applied for the payment of the previous rentals of the property
subject matter of the said judgment. Nothing could be more
explicit. The contention that there is still a difference of P-535.00 is
hard to believe because the spouses Kho Po Giok and Uy Tong
executed the deed of assignment without first demanding from the
plaintiff the payment of P535.OO. Indeed, as contended by the
plaintiff, for it to refuse to pay this small amount and thus gave
defendants a reason not to execute the Deed of Assignment, is
hard to believe. Defendants further confirm by the joint
manifestation of plaintiff and defendants, duly assisted hv counsel,
Puerto and Associates, dated September, 1971, Exhibit "O",
wherein it was stated that plaintiff has fully complied with its
obligation to the defendants caused upon it (sic) by the
pronouncement of the judgment as a condition for the execution of
their (sic) leasehold rights of defendants, as evidenced by the
receipt duly executed by the defendants, and which was already
submitted in open court for the consideration of the sum of
P3.535.00 Italics supplied).
[Decision, Civil Case No. 121532. pp. 3-4].
This Court agrees with private respondent BAYANIHAN's reasoning that
inasmuch as the decision in Civil Case No. 80420 imposed upon the parties
correlative obligations which were simultaneously demandable so much so
that if private respondent refused to comply with its obligation under the
judgment to pay the sum of P3.535.00 then it could not compel petitioners
to comply with their own obligation to execute the deed of assignment
over the subject premises. The fact that petitioners executed the deed of
assignment with the assistance of their counsel leads to no other
conclusion that private respondent itself had paid the full amount.
IV. Petitioners attempt to justify their continued refusal to vacate the
premises subject of this litigation on the following grounds:
(a The deed of assignment is in the nature of a pactum
) commissorium and, therefore, null and void.
(b There was no full compliance by private respondent of the condition
) imposed in the deed of assignment.
(c Proof that petitioners have been allowed to stay in the premises, is
) the very admission of private respondent who declared that
petitioners were allowed to stay in the premises until November
20,1972. This admission is very significant. Private respondent
merely stated that there was a term until November 30. 1972
in order to give a semblance of validity to its attempt to dispossess
herein petitioners of the subject premises. In short, this is one way
of rendering seemingly illegal petitioners' possession of the
premises after November 30. 1972.
The first two classifications are mere reiterations of the arguments
presented by the petitioners and which had been passed upon already in
this decision. As regards the third ground, it is enough to state that the
deed of assignment has vested in the private respondent the rights and
interests of the SPOUSES over the apartment unit in question including the
leasehold rights over the land on which the building stands. BAYANIHAN is
therefore entitled to the possession thereof. These are the clear terms of
the deed of assignment which cannot be superseded by bare allegations of
fact that find no support in the record.
WHEREFORE, the petition is hereby DENIED for lack of merit and the
decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.

Fernan (Chairman), Guitierrez, Jr., and Feliciano, JJ., concur.

Bidin, J., no part. Appurtenanted in the appealed decision of respondent
Court of Appeals.
 OLEA V. CA
G.R. No. 109696, August 14, 1995
THELMA P. OLEA, PETITIONER,
VS.
COURT OF APPEALS, ELENA VDA. DE PACARDO, JESUS PALENCIA,
ELIZABETH PALENCIA AND MONSERRAT PACIENTE, RESPONDENTS.
DECISION
BELLOSILLO, J.:
This is a petition for review of the decision of the Court of Appeals affirming
that of the court a quo which dismissed the complaint of petitioner for
recovery of possession on the ground that the action had already
prescribed and that the deed of sale with right to repurchase on which
petitioner based her claim was an equitable mortgage.
On 27 January 1947 spouses Filoteo Pacardo and Severa de Pacardo
executed a deed of Sale Con Pacto de Retro over Lot No. 767 of the Passi
Cadastre covered by Transfer Certificate of Title No. 26424 in their name
for a consideration of P950.00 in favor of Maura Palabrica, predecessor in
interest of petitioner, subject to the condition that -
x x x if we, the said spouses, Filoteo Pacardo and Severa de
Pacardo, our heirs, assigns, successors-in-interest, executors and
administrators shall and will truly repurchase the above-described
parcel of land from the said Maura Palabrica, her heirs, assigns,
successors-in-interest after THREE YEARS counting from the date of
the execution of this instrument, to wit, on January 27, 1950 in
cash payment in the sum of Five Hundred Pesos, Philippine
currency, plus Four Hundred and Fifty Pesos (P450), also lawful
currency, in cash or eighteen (18) cavans of palay (Provincial
Measurement) at our option, then this sale shall become null and
void and of no force and effect whatsoever. On the contrary, the
same will become irrevocable, definite and final and will vest
complete and absolute title on the vendee upon the premises. [1]
The contract of sale with right to repurchase was acknowledged by the
vendors before Notary Public Victorio Tagamolila on the same day the
contract was executed in the Municipality of Passi, Province of Iloilo. The
vendors also delivered to the vendee their owner's copy of the title.
After the execution of the sale, the Pacardo spouses as vendors remained
in possession of the land and continued the cultivation thereof. Since the
sale on 27 January 1947 up to August 1987, or for a period of about 40
years, the spouses delivered annually one-third (1/3) of the produce of the
land to Maura Palabrica and kept for themselves the remaining two-thirds
(2/3).
On 27 January 1950, despite the lapse of three (3) years, the Pacardo
spouses did not repurchase the land but faithfully continued to give 1/3 of
the produce to Maura Palabrica. When the spouses died, their son Filoteo
Jr., took over the possession and assumed the cultivation of the land and,
like his parents, gave 1/3 of the produce to Maura Palabrica and later to her
daughter, petitioner herein, who would eventually buy from her the lot
subject of the litigation.
On 22 September 1966 Maura Palabrica caused the registration of the Sale
Con Pacto de Retro with the Register of Deeds of Iloilo and its annotation
on Transfer Certificate of Title No. 26424 covering the subject lot.
On 10 May 1978 Maura Palabrica sold Lot No. 767 for P40,000.00 to one of
her daughters, petitioner Thelma Olea. From then on it was petitioner who
received the one-third (1/3) share of the annual produce of the land from
Filoteo Pacardo, Jr., until he died in August 1987. His widow Elena Vda. de
Pacardo however refused to give to petitioner the one-third (1/3) share of
the produce. After Elena transferred residence to another barangay the
spouses Jesus and Elizabeth Palencia took over the possession and
cultivation of the property. Elizabeth Palencia is a sister of Filoteo Jr., and is
one of the children of spouses Filoteo and Severina Pacardo. The Palencias
delivered the share of the produce not to petitioner but to respondent
Elena Pacardo.
Hence, on 25 January 1989, petitioner filed a complaint against Elena
Pacardo and the spouses Jesus and Elizabeth Palencia for recovery of
possession with damages. She alleged that she was the owner of Lot No.
767 having acquired the same from her mother Maura Palabrica through a
deed of sale, who in turn acquired the lot from the spouses Filoteo and
Severa Pacardo through a pacto de retro sale, and that due to the failure of
the spouses to redeem the property three (3) years thereafter ownership
thereof passed on to Maura Palabrica who later caused the registration of
the Sale Con Pacto de Retro with the Registry of Deeds of Iloilo and its
annotation on TCT No. 26424.
Private respondents Elena Vda. de Pacardo and Jesus and Elizabeth
Palencia filed their answer alleging that their parents intended the disputed
transaction to be an equitable mortgage and not a sale with right to
repurchase. Respondent Monserrat Paciente, another daughter of the
vendor-spouses Filoteo and Severa Pacardo, filed an answer in intervention
raising likewise as defense that the Sale Con Pacto de Retro was indeed an
equitable mortgage.
On 19 February 1991 the trial court rendered judgment dismissing the
complaint. Petitioner appealed to the Court of Appeals which on 16
December 1992 affirmed the judgment of the trial court.
In the instant recourse, petitioner assails the Court of Appeals for its
conclusions and findings allegedly grounded entirely on speculations,
surmises, conjectures and misapprehension of facts. [2] Petitioner submits
that the terms and conditions of the Sale Con Pacto de Retro between her
mother Maura Palabrica and the Pacardos on 27 January 1947 are clear and
leave no room for interpretation; that the parties to the transaction have
specified that the consideration of the sale was P950.00 and the
repurchase price was P500.00 in cash plus P450.00 cash or eighteen (18)
cavans of palay at the option of the vendor-spouses in case they
repurchased the property three (3) years afterwards; and that the Court of
Appeals erred in holding that the repurchase price was only P450.00 or
eighteen cavans of palay.
Petitioner also asserts that the failure of her mother, the vendee Maura
Palabrica, to consolidate ownership under Art. 1607 of the New Civil Code
should not be a ground for considering the sale to be an equitable
mortgage because both parties have stipulated in the contract that when
the spouses should fail to repurchase Lot No. 767 on 27 January 1950
complete and absolute title would forthwith be vested in Maura Palabrica;
and that even granting that Art. 1607 of the New Civil Code, which took
effect 30 August 1950, be granted retroactive effect Maura Palabrica had
already acquired a vested right of ownership over the land as of 27 January
1950 which Art. 1607 can no longer invalidate under Art. 2252 of the New
Civil Code. Moreover, petitioner submits that the Pacardo spouses
remained in possession of the land they sold to Palabrica because of their
good relations with each other and the latter consented that the spouses
would be the ones to till the land.
We cannot sustain petitioner. Art. 1602 of the New Civil Code provides that
the contract of sale with right to repurchase shall be presumed to be an
equitable mortgage in any of the following cases: (a) when the price of the
sale is unusually inadequate; (b) when the vendor remains in possession as
lessee or otherwise; (c) when upon or after the expiration of the right to
repurchase another instrument extending the period of redemption or
granting a new period is executed; (d) when the purchaser retains for
himself a part of the purchase price; (e) when the vendor binds himself to
pay the taxes on the thing sold; and, (f) in any other case where it may be
fairly inferred that the real intention of the parties is that the transaction
shall secure the payment of a debt or the performance of any other
obligation. Being remedial in nature, Art. 1602 may be applied
retroactively to cases prior to the effectivity of the New Civil Code. [3] Hence
it may apply to the instant case where the deed of sale with right to
repurchase was executed on 27 January 1947.
It has been held that a contract should be construed as a mortgage or a
loan instead of a pacto de retro sale when its terms are ambiguous or the
circumstances surrounding its execution or its performance are
incompatible or inconsistent with the theory that it is a sale. [4] Even when a
document appears on its face to be a sale with pacto de retro the owner of
the property may prove that the contract is really a loan with mortgage by
raising as an issue the fact that the document does not express the true
intent and agreement of the parties. In this case, parol evidence then
becomes competent and admissible to prove that the instrument was in
truth and in fact given merely as a security for the repayment of a loan.
And upon proof of the truth of such allegations, the court will enforce the
agreement or understanding in consonance with the true intent of the
parties at the time of execution of the contract. [5] This principle is
applicable even if the purported Sale Con Pacto de Retro was registered in
the name of the transferee and a new certificate of title was issued in the
name of the latter.[6]
There is no dispute that when Maura Palabrica "bought" the land on 27
January 1947 the vendors, the Pacardo spouses, remained in possession of
the property and cultivated the same. Their son continued the cultivation
when the spouses died, which cultivation was continued later by his widow
Elena Vda. de Pacardo and then by his sister Elizabeth Palencia. During the
direct examination, petitioner admitted -
Q. And who later on cultivated this lot 767 if you know?
A. When the Pacardos sold to my mother, it was the spouses who
cultivated the land. When Filoteo Pacardo Sr. could no longer till, it
was Filoteo Pacardo Jr. who took over.[7]
Defendant-intervenor Monserrat Paciente also testified -
Q. Do you know whether any transaction was had between your
mother Severa Pacardo and Maura Palabrica involving this Lot No.
767?
A. There was a transaction. Every year, dues was (sic) paid to this land
when the land was mortgaged. It was a 1/3 transaction, 1/3 was
given to them and 2/3 were taken by us.
Q. When did you come to know that alleged transaction between your
parents and the late Maura Palabrica?
A. When I came to the age of reason, it was told to me by my parents.
[8]
The rule is settled that where in a contract of sale with pacto de retro the
vendor remains in physical possession of the land sold as lessee or
otherwise, the contract should be considered an equitable mortgage. [9] The
same presumption applies when the vendee was given the right to
appropriate the fruits thereof in lieu of receiving interest on the loan. [10]
Moreover, the terms of the document itself can aid in arriving at the true
nature of the transaction. Where the contract contains a stipulation, as in
this case, that upon payment by the vendor of the purchase price within a
certain period the document shall become null and void and have no legal
force or effect, the purported sale should be considered a mortgage
contract. In pacto de retro sale the payment of the repurchase price does
not merely render the document null and void but there is the obligation on
the part of the vendee to sell back the property.[11]
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.[12] This is so because pacto de retro sales with the stringent and SO ORDERED.
onerous effects that accompany them are not favored. In case of doubt, a
contract purporting to be a sale with right to repurchase shall be construed Padilla, (Chairman), Davide, Jr., Kapunan, and Hermosisima, Jr., JJ., concur.
as an equitable mortgage.[13]

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
than to sell the property.[14]

Consequently, there was no valid sale to Maura Palabrica. Ownership over

the property was not transferred to her for she was merely a mortgagee.
There being no title to the land that Palabrica acquired from the spouses
Filoteo and Severa Pacardo, it follows that Palabrica had no title to the
same land which could be conveyed to petitioner. [15] Hence there is no legal
basis for petitioner to recover possession of the property.

It is clear from the contract that the amount loaned to the Pacardo spouses
was P950.00 and Lot No. 767 was mortgaged as security. The spouses
were allowed under the contract to pay the amount of the loan on 27
January 1950 by tendering the amount of P500.00 in cash and P450.00
cash or 18 cavans of palay at their option. The trial court made its factual
finding that from 1947 when the purported sale was executed to 1972
alone, the spouses and their successors in interest delivered a total of
1,166 cavans of palay to Maura Palabrica. The delivery of 1/3 of the annual
produce to Palabrica and later to petitioner continued until 1987. Under
the last paragraph of Art. 1602, this produce received by the alleged
vendee as rent or otherwise should be considered as interest.

There is no dispute that the Pacardo spouses or their successors in interest

failed to pay the amount of the loan on 27 January 1950 as stipulated in
the contract although they continued to deliver the produce to Palabrica
and petitioner until 1987 by way of interest on the loan. Even if we treat
petitioner's action to recover possession of Lot No. 767 as one for the
enforcement of her right as mortgagee, the same has already prescribed.
Art. 1142 of the New Civil Code provides that a mortgage action prescribes
after ten (10) years. Since 27 January 1950 when the Pacardo spouses
failed to pay the loan up to 1989 when the action for recovery of
possession was filed, thirty-nine (39) years had already elapsed. As a
result, petitioner is not only barred by prescription from instituting her
action; she is also guilty of estoppel by laches.

WHEREFORE, the petition is DENIED and the assailed decision of the

Court of Appeals dated 16 December 1992 sustaining that of the Regional
Trial Court of Iloilo City is AFFIRMED. Costs against petitioner.
 DAYRIT V. CA
G.R. No. L-29388, December 28, 1970
VINCENT P. DAYRIT, PETITIONER,
VS.
THE COURT OF APPEALS, HON. FRANCISCO ARCA, JUDGE OF THE
COURT OF FIRST INSTANCE OF MANILA, BRANCH I, MOBIL OIL
PHILIPPINES, INC., AND ELADIO YLAGAN, SPECIAL SHERIFF,
RESPONDENTS.
DECISION
CASTRO, J.:
Petition for certiorari by way of appeal from the Court of Appeals minute
resolution of June 14, 1968 dismissing the petition for certiorari in CA-G.R.
No. 41359-R, as well as its resolutions of July 9, 1968 and August 5, 1968
denying the first and second motions for reconsideration, respectively, in
the same case.
On July 21, 1965, the defendants Vincent Dayrit, Leonila T. Sumbillo
and, Reynaldo Angeles entered into a contract with the Mobil Oil
Philippines, Inc., entitled "LOAN & MORTGAGE AGREEMENT,"
providing, among others, that:
(a) For and in consideration of Sales Agreement dated July 21,
1965, among the parties herein, Mobil grants a loan of P150,000 to
borrowers.
(b) Defendants-Borrowers shall repay Mobil the whole amount of
P150,000 plus 10% interest per annum on the diminishing balance
for 48 months.
"(c) To secure the prompt repayment of such loan by defendants-
borrowers to Mobil and the faithful performance by Borrowers of
that Sales Agreement, Defendants-Borrowers hereby transfer in
favor of Mobil by way of first mortgage lands covered by TCT No.
45169 and TCT No. 45170, together with the improvements
existing in said two (2) parcels of land.
(d) In case of default of Defendants-Borrowers in payment of any
of the installments and/or their failure to purchase the quantity of
products stated therein Mobil shall have the right to foreclose this
mortgage.
(e) Mobil, in case of default and foreclosure shall be entitled to
attorney's fees and cost of collection equivalent to not less than
25% of total indebtedness remaining unpaid.
(f) All expenses in connection with the preparation and
registration of this mortgage as well as cancellation of same shall
be for the account of Defendants-Borrowers.
(g) If Defendants-Borrowers shall perform the full obligation above
stated according to the terms thereof, then this obligation shall be
null and void, otherwise, it shall remain in full force and effect."
The defendants violated the Loan & Mortgage Agreement, they having paid
but one installment in the amount of P 3,816, of which P1,250 was applied
to interest, and the remaining P2,566 to the principal obligation. The
defendants likewise failed to buy the quantities of products as required in
the Sales Agreement (exh. D). The plaintiff made due demand (exh. I),
which the defendant Dayrit answered, acknowledging his liability in his
letter exh. I-1.
On November 17, 1967, after trial and after the parties had submitted their
memoranda,[1] the trial court rendered its decision, the dispositive portion
of which reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff
and against the defendants Vincent Dayrit, Leonila T. Sunbillo and
Reynaldo Angeles, ordering them to pay to the plaintiff one-third
each of the sum of P147,434.00 with interest of 10% per annum
from the time it fell due according to agreement, and in default of
such payment, the properties put up in collateral shall be sold in
foreclosure sale in accordance with law, the proceeds to be applied
in payment of the amount due to the plaintiff from the defendants
as claimed in the complaint, provided that, as to Dayrit, his
liability shall in no case exceed 1/3 of the total obligation.
"The defendants are likewise ordered to pay to the plaintiff, in the
same proportion of 1/3 each, 25% of the obligation as attorney's
fees as provided in the contract; and P300.60 for the registration of
the contract.
* * *
"Each of the three said defendants shall also pay 1/3 of the costs."
No appeal having been interposed by the defendants, the above decision
became final and executory.
An undated Mobil's motion for execution of the decision and for the
appointment of Eladio Ylagan as special sheriff (annex D) was received by
the herein petitioner Dayrit on February 8, 1968. Whereupon, he filed his
opposition and motion to stay execution, alleging that before the finality of
the aforesaid judgment, he and the plaintiff had agreed not to appeal
and/or file any motion for reconsideration, the petitioner offering to pay his
one-third share with a reasonable discount, if possible, in so far as the
interests and the award for attorney's fees were concerned, with the
corresponding release of the mortgage on all his properties, and praying, in
view thereof, for a 30-day grace period within which to pay the plaintiff.
The 30-day grace period was granted by the court in its order of February
24, 1968.
On March 25, 1968 the petitioner filed another motion for 20 days'
extension within which to pay his one-third share of the judgment
obligation and to submit the corresponding compromise agreement for the
satisfaction of the judgment. The said motion was granted on April 1,
1968.
Thereafter, the respondent Mobil filed an "Urgent Reply to Opposition and
Motion to Stay Execution dated Feb. 21, 1968 and Motion dated March 25,
1968," alleging therein that the respondent agreed to release the
mortgage or collateral for the entire judgment obligation only if "the whole
principal mortgaged debt plus the whole accrued interest" were fully paid.
Mobil further prayed for a writ of execution to be issued against the peti -
tioner after the lapse of 20 days from March 25, 1968, if by then the
parties shall not have submitted a compromise agreement for the
satisfaction of the judgment; Mobil also reiterated its prayer for the
appointment of respondent Eladio Ylagan as special sheriff.
On April 3, 1968 the petitioner filed a manifestation and motion, praying
that he be allowed to deposit with the Clerk of Court the amount
corresponding to his one-third share of the obligation under the decision of
November 17, 1967, and that thereupon the collateral or mortgage over
petitioner's properties or lands be ordered released or cancelled.
On April 10, 1968 the court a quo ordered all pending incidents set for
hearing on. April 19, 1968, "so that the Court may have the opportunity to
confer with the parties to thresh out the settlement of this case." At this
hearing Mobil did not appear; the court reset the hearing for May 23, 1968.
Under date of May 8, 1968, Mobil filed an addendum to its reply dated April
1, 1968 and opposition to petitioner's motion dated April 3, 1968, praying
that the motion of petitioner Dayrit that the entire mortgaged collateral be
released upon his payment of mere 1/3 of the loan obligation, be denied
and instead a writ of execution against him in accordance with the
dispositive portion of the decision and sections 2 and 3 of Rule 68 of the
Revised Rules of Court be issued.
On May 18, 1968 the petitioner filed his rejoinder to respondent Mobil's
aforesaid addendum and opposition.
On May 23, 1968; after hearing oral argument, the court denied the
manifestation and motion of Dayrit filed thru counsel and dated April 3,
1968; the court further ruled that "There is no further need to issue an
order for the issuance of a writ of execution and appointment of special
sheriff ... considering that the Court, in its order of February 24, 1968, has
already ordered the issuance of a writ of execution for the satisfaction of
the judgment."
The petitioner then filed his petition for certiorari with the Court of Appeals,
dated May 30, 1968, alleging that "respondent Judge Arca acted without or
in excess of his jurisdiction and/or with grave abuse of discretion, in
denying petitioner's motion to allow him to pay or deposit his one-third
share of the judgment obligation" as well as the consequent release or can -
cellation of the mortgage on his properties.
The Court of Appeals, however, in its minute resolution of June 14, 1968,
dismissed the petition for certiorari, in the following words:
"Upon consideration of the petition for certiorari filed in this case,
the Court RESOLVED TO DISMISS the petition, there being no abuse
of discretion in ordering the execution of a final judgment. Details
of execution for satisfaction of Vincent Dayrit's liability will be
worked out in connection with the sale of the collateral for
mortgaged debt, and the judgment in Civil Case No. 64138 of the
CFI-Manila will control the disposition and application of the
collateral."
The petitioner filed a motion for reconsideration dated June 9, 1968 which
the Court of Appeals denied in its resolution of July 9, 1968, as follows:
"Both the petition and the motion for reconsideration are based on
a misapprehension of the terms of the judgment. The Mortgage
obligation is one and indivisible. It was executed to assure
payment of the total indebtedness of the three defendants in Civil
Case No. 64138, and not merely one-third (1/3) thereof
corresponding to petitioner Vincent P. Dayrit's liability."
The petitioner's second motion for reconsideration of July 25, 1968 was
summarily dismissed on August 5, 1968, for lack of merit.
The petitioner, in his present petition, tenders the following issues for
resolution:
"1) Whether or not respondent Judge [CFI-Manila] acted without or
in excess of his jurisdiction, and/ or with grave abuse of discretion
in denying petitioner's motion to allow him to exercise his clearly
legal right to pay or deposit his one-third share of the judgment;
2) The next issue was that brought about by the Court of Appeals
resolution dismissing the petition for certiorari, and which was
raised in petitioner's motion dated June 19, 1968 for
reconsideration of said resolution, contending that the ground for
dismissal did not jibe with the issue raised in the petition for
certiorari;
3) And lastly, the Court of Appeals' resolution of July 9, 1968
denying said motion for reconsideration apprehension on the part
of petitioner of the terms of the respondent judge.
1. The question raised by the respondent Mobil that the present petition for
certiorari was filed way beyond the reglementary period of 15 days from
appellant's receipt of notice of judgment or of the denial of his motion for
reconsideration pursuant to section 1, Rule 45 of the Revised Rules of
Court,[2] needs to be resolved before consideration of this case on the
merits. Admittedly, the ex parte first motion for reconsideration filed by
the herein petitioner was denied, and copy of such denial was received by
the petitioner on July 15, 1968. Still not satisfied, petitioner filed another
ex parte motion for reconsideration on July 26, 1968, notice of the denial of
which, under CA resolution dated August 5, 1968, was received by said
petitioner on August 9, 1968.
Respondent Mobil contends that the second motion for reconsideration
filed by the petitioner was a mere scrap of paper and pro forma since it
was filed ex parte and without express leave of court, contrary to the
mandate of section 1, Rule 52 of the Rules of Court. [3]
The rule appears to be inflexible in the sense that no more than one
motion for reconsideration shall be filed without express leave of court.
The requirement that the second motion for reconsideration must be
presented, with leave of court, within fifteen days from notice of the order
or judgment, deducting the time during which the first motion was
pending, is to afford the court sufficient time to evaluate whether there is
prima facie merit therein, so that, "if the court finds merit prima facie in
the motion for rehearing or reconsideration, the adverse party shall be
given time to answer, after which the court, in its discretion, may set the
case for oral argument."[4] And only upon compliance with the above stated
requirements may the second motion for reconsideration stay the final
order or judgment sought to be re-examined.[5]
The Court of Appeals gave due course to the second motion for
reconsideration of the herein petitioner, but nevertheless, dismissed the
same summarily for lack of merit.
However, even assuming, that the ex parte second motion for
reconsideration was properly filed so as to toll the reglementary period
within which to appeal, it appears that the petition for certiorari filed with
this Court on August 20, 1968 was time barred. From the date of denial of
the petitioner's ex parte first motion for reconsideration received by him on
July 15, 1968 assuming that the period was interrupted by the ex parte
second motion for reconsideration from July 26, 1968 to August 9, 1968 (15
days) - to the elevation of the said case to this Court on August 20, 1968,
36 days had elapsed. Deducting the 15 days during which the ex parte
second motion for reconsideration was pending from the total period of 36
days leaves 21 days. This means that the present petition was filed with
this Court six days late, contrary to and in violation of section 1, Rule 45,
which specifically provides that a petition for certiorari under such Rule
should be filed within 15 days from notice of judgment or denial of motion
for reconsideration. Hence, the present petition may be dismissed on the
aforestated ground.
But we opt, nevertheless, to consider the merits of this case, if only to
demonstrate to the petitioner his error.
2. The decision of the lower court, let it not be forgotten, has admittedly
become final and executory. The controverted judgment ordered the
defendants (Dayrit, Sumbillo and Angeles) "to pay the plaintiff one-third
each of the sum of P147,434.00 with interest of 10% per annum from the
time it fell due according to agreement, and in default of such payment,
the properties put up in collateral shall be sold in foreclosure sale in
accordance with law, the proceeds to be applied due to the plaintiff from
the defendants as claimed in the complaint, provided that, as to Dayrit, his
liability shall in no case exceed 1/3 of the total obligation."
In sum, the issue that must be resolved in the instant case is, whether or
not the Court of First Instance of Manila erred in ordering the sale at public
auction of the mortgaged properties to answer for the entire P147,434
principal obligation after the defendants (Dayrit Sumbillo and Angeles) had
failed to pay their respective one-third shares of the obligation to the
respondent Mobil; otherwise stated, whether or not the respondents Court
of First Instance and the Court of Appeals erred in refusing to allow the
alleged proposed deposit of a sum equivalent to 1/3 of the loan agreed
upon and in refusing to release forever the collaterals owned by Dayrit,
although the other 2/3 portion of the loan obli gation had not been satisfied
due to insolvency of the other two co-defendants.
To begin with, the prayer of the complaint filed with the respondent Court
of First Instance recites as follows:
"WHEREFORE, it is respectfully prayed that judgment be rendered
"a) Ordering the defendants to pay the sum of P147,484 with 10%
interest per annum from the time, it fell due as agreed upon and
that in default of such payment, the above described properties be
sold and the proceeds of sale be applied to the payment of the
amount due to the plaintiff from the defendants under this
complaint."
The complaint, in effect, is acollection suit with damages and foreclosure of
mortgage against the three defendants, Leonila Sumbillo, Reynaldo
Angeles and Vincent Dayrit. Although the Loan and Mortgage Agreement
was signed by the three defendants as mortgagors, the properties being
foreclosed belong solely to, and are registered solely in the name of, the
petitioner Vincent Dayrit.
The pertinent dispositive portion of the decision rendered by the lower
court reads:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff
and against the defendants"' Vincent Dayrit; Leonila T. Sumbillo
and Reynaldo Angeles, ordering them to pay to the plaintiff one?
third each of the sum of P147,434 with interest of 10% per annum
from the time it fell due according to agreement, and in default of
such payment, the properties put in collateral shall, be sold in fore-
closure sale in accordance with law, the proceeds to be applied in
payment of the amount due to the plaintiff from the defendants as
claimed in the complaint, provided that, as to Dayrit, his liability
shall in no case exceed 1/3 of the total obligation."
The petitioner contends that the said judgment is a simple money
judgment and not a foreclosure judgment, and that because the
respondent Mobil resorted to the remedy of enforcing his right by a
complaint against the defendant-petitioner for collection of a sum of
money, with the consequent simple money judgment, the satisfaction of
his 1/3 share of the joint obligation would release all the mortgaged
properties put up as collateral to secure the payment of the whole
obligation. The reason advanced by the petitioner is that the decision
rendered being a simple money judgment and not a mortgage-foreclosure
judgment, the distinction in its execution is decisive, that is, whereas in
mortgage foreclosure the judgment should conform to the requirement,
embodied in section 2, Rule 68 of the Rules of Court, that the order of
payment be made into the court "within a period not less than ninety (90)
days x x x and in default of such payment, the property mortgaged be sold
to realize" the indebtedness, in a simple money judgment, upon
satisfaction of part (in the instant case his 1/3 share) of the joint obligation,
the mortgaged properties should be released from such mortgage contract.
This contention of the petitioner is clearly devoid of merit.
The decision which the petitioner describes as a simple money judgment
orders the defendants Vincent Dayrit, Leonila T. Sumbillo and Reynaldo
Angeles to pay the plaintiff the sum of P147,434, and in default of such
payment, the properties put up in collateral shall be sold in foreclosure sale
in accordance with law, the proceeds to be applied in payment of the
amount due to the plaintiff from the defendants as claimed in the
complaint. While it is true that the obligation is merely joint and each of
the defendants is obliged to pay only his/her 1/3 share of the joint
obligation, the undisputed fact remains that the intent and purpose of the
Loan and Mortgage Agreement was to secure, inter alia, the entire loan of
P150,000 that the respondent Mobil extended to the defendants. The court
below found that the defendants had violated the Loan and Mortgage
Agreement, they having paid but one installment. The undisputed fact also
remains that the petitioner alone benefited from the proceeds of the loan
of P150,000, the said amount having been paid directly to the Bank of the
Philippines to bail out the same properties from a mortgage that was about
to be foreclosed. In effect, Mobil merely stepped into the shares of the
Bank of the Philippines.
The petitioner insists that the dispositive portion of the judgment declaring
the obligation merely joint with the proviso that "as to Dayrit, his liability
shall in no case exceed 1/3 of the total obligation, should be construed in
the light of the opinion of the lower court that "said collateral must answer
in full but only to the extent of Dayrits liability which as above deter mined,
is 1/3 of the obligation, thereby entitling him to pay or deposit in court his
corresponding share of the joint obligation in satisfaction thereof, with the
automatic release of all the mortgaged properties.
A judgment must be distinguished from an opinion. The latter is the
informal expression of the views of the court and cannot prevail against its
final order or decision. "While the two may be combined in one instrument,
the opinion forms no part of the judgment. There is a distinction between
the findings and conclusion of a court and its judgment. While they may
constitute its decision and amount to a rendition of a judgment they are
not the judgment itself. They amount to nothing more than an order for
judgment which must be distinguished from the judgment. Only the
dispositive portion may be executed."[6]
Besides, well-entrenched in law is the rule that a mortgage directly and
immediately subjects the property upon which it is imposed, [7] the same
being indivisible even though the debt may be divided, [8] and such
indivisibility likewise being unaffected by the fact that the debtors are not
solidarily liable.[9] As Tolentino, in his Commentaries and Jurisprudence on
the Civil Code of the Philippines,[10] puts it -
"When several things are pledged or mortgaged, each thing for a
determinate portion of the debt, the pledges or mortgages are
considered separate from each other. But when the several things
are given to secure the same debt in its entirety, all of them are
liable for the debt, and the creditor does not have to divide his
action by distributing the debt among the various things pledged
or mortgaged. Even when only a part of the debt remains unpaid,
all the things are still liable for such balance. Hence, a mortgage
voluntarily constituted by the debtor on two or more parcels of
land is one and indivisible, and the mortgagee has the right to
have either or both parcels, jointly or singly, sold to satisfy his
claim. In case the mortgaged properties are a house and lot, it can
not be claimed that the lot and the house should be sold separately
and not together."
But then there is this other seeming posture of the petitioner: that the
judgment which has become final and executory either modified or
superseded the Loan and Mortgage Agreement between the parties, and
since the obligation is merely joint, upon payment thereof, as in
attachment, the properties mortgaged are released from liability. The
decision under consideration, however, did nothing of the sort. The
petitioner conveniently refused to recognize the true import of the dispo-
sitive portion of the judgment. The said portion unequivocally states that
"in default of such payment, the properties put up in collateral shall be sold
in foreclosure sale in accordance with law, the proceeds to be applied in
payment of the amount due to the plaintiff as claims d in the complaint."
And the claim in the complaint was the full satisfaction of the total
indebtedness of P147,434; therefore, the release of all the mortgaged
properties may be authorized only upon the full payment of the above-
stated amount secured by the said mortgage.
With respect to the provisions of section 2 of Rule 68 of the Rules of Court
giving the petitioner a period of 90 days within which he might voluntarily
pay the debt before the sale of the collateral at public auction was ordered,
we agree that the trial court failed to provide such period. However, this
failure can be regarded as having resulted in mere damnum absque
injuria. From November 17, 1967 when the decision was rendered to May
23, 1968 when the final order to sell the mortgaged properties was issued,
a period of more than six months had passed, which is considerably much
more than the 90-day period of grace allowed the petitioner to validly
tender the proper payment.

ACCORDINGLY, the petition is denied, at petitioner's cost.

Concepcion, C.J., Reyes, Dizon, Makalintal, Zaldivar, Teehankee, Barredo,

Villamor, and Makasiar, JJ., concur.

Fernando, J., no part.

 CENTRAL BANK V. CA
G.R. No. L-45710, October 03, 1985
CENTRAL BANK OF THE PHILIPPINES AND ACTING DIRECTOR
ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL
AND SAVINGS BANK, IN HIS CAPACITY AS STATUTORY RECEIVER OF
ISLAND SAVINGS BANK, PETITIONERS,
VS.
THE HONORABLE COURT OF APPEALS AND SULPICIO M.
TOLENTINO, RESPONDENTS.
DECISION
MAKASIAR, C.J.:
This is a petition for review on certiorari to set aside as null and void the
decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated February
11, 1977, modifying the decision dated February 15, 1972 of the Court of
First Instance of Agusan, which dismissed the petition of respondent
Sulpicio M. Tolentino for injunction, specific performance or rescission, and
damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of
its legal department, approved the loan application for P80,000.00 of
Sulpicio M. Tolentino, who, as a security for the loan, executed on the same
day a real estate mortgage over his 100-hectare land located in Cubo, Las
Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was
annotated on the said title the next day. The approved loan application
called for a lump sum P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual interest. It was
required that Sulpicio M. Tolentino shall use the loan proceeds solely as an
additional capital to develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan
was made by the Bank; and Sulpicio M. Tolentino and his wife Edita
Tolentino signed a promissory note for P17,000.00 at 12% annual interest,
payable within 3 years from the date of execution of the contract at semi-
annual installments of P3,459.00 (p. 64, rec.). An advance interest for the
P80,000.00 loan covering a 6-month period amounting to P4,800.00 was
deducted from the partial release of P17,000.00. But this pre-deducted
interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being
informed by the Bank that there was no fund yet available for the release
of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president
and treasurer, promised repeatedly the release of the P63,000.00 balance
(p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding
Island Savings Bank was suffering liquidity problems, issued Resolution No.
1049, which provides:
"In view of the chronic reserve deficiencies of the Island Savings
Bank against its deposit liabilities, the Board, by unanimous vote,
decided as follows:
"1) To prohibit the bank from making new loans and investments
[except investments in government securities] excluding
extensions or renewals of already approved loans, provided that
such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may
be necessary to insure correction of the bank's deficiency as soon
as possible;
xxx xxx xx
x" (p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding that Island Savings
Bank failed to put up the required capital to restore its solvency, issued
Resolution No. 967 which prohibited Island Savings Bank from doing
business in the Philippines and instructed the Acting Superintendent of
Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec.).
On August 1, 1968, Island Savings Bank, in view of nonpayment of the
P17,000.00 covered by the promissory note, filed an application for the
extra-judicial foreclosure of the real estate mortgage covering the 100-
hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction
for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of
First Instance of Agusan for injunction, specific performance or rescission
and damages with preliminary injunction, alleging that since Island Savings
Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver
the P63,000.00 with interest of 12% per annum from April 28, 1965, and if
said balance cannot be delivered, to rescind the real estate mortgage (pp.
32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety
bond, issued a temporary restraining order enjoining the Island Savings
Bank from continuing with the foreclosure of the mortgage (pp. 86-87,
rec.).
On January 29, 1969, the trial court admitted the answer in intervention
praying for the dismissal of the petition of Sulpicio M. Tolentino and the
setting aside of the restraining order, filed by the Central Bank and by the
Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits, rendered its
decision, finding unmeritorious the petition of Sulpicio M. Tolentino,
ordering him to pay Island Savings Bank the amount of P17,000.00 plus
legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136,
rec.).

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M.
Tolentino, modified the Court of First Instance decision by affirming the
dismissal of Sulpicio M. Tolentino's petition for specific performance, but it
ruled that Island Savings Bank can neither foreclose the real estate
mortgage nor collect the P17,000.00 loan (pp. 30-31, rec.).
Hence, this instant petition by the Central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance
prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt
covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00
subsists, can his real estate mortgage be foreclosed to satisfy said
amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an
P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal
obligations. In reciprocal obligations, the obligation or promise of each
party is the consideration for that of the other (Penaco vs. Ruaya, 110
SCRA 46 [1981]; Vda. de Quirino vs. Pelarca, 29 SCRA 1 [1969]); and when
one party has performed or is ready and willing to perform his part of the
contract, the other party who has not performed or is not ready and willing
to perform incurs in delay (Art. 1169 of the Civil Code). The promise of
Sulpicio M. Tolentino to pay was the consideration for the obligation of
Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M.
Tolentino executed a real estate mortgage on April 28, 1965, he signified
his willingness to pay the P80,000.00 loan. From such date, the obligation
of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the
Bank's delay in furnishing the entire loan started on April 28, 1965, and
lasted for a period of 3 years or when the Monetary Board of the Central
Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island
Savings Bank from doing further business. Such prohibition made it legally
impossible for Island Savings Bank to furnish the P63,000.00 balance of the
P80,000.00 loan. The power of the Monetary Board to take over insolvent
banks for the protection of the public is recognized by Section 29 of R.A.
No. 265, which took effect on June 15, 1948, the validity of which is not in
question.
The Monetary Board Resolution No. 1049 issued on August 13, 1965 cannot
interrupt the default of Island Savings Bank in complying with its obligation
of releasing the P63,000.00 balance because said resolution merely
prohibited the Bank from making new loans and investments, and nowhere
did it prohibit Island Savings Bank from releasing the balance of loan
agreements previously contracted. Besides, the mere pecuniary inability
to fulfill an engagement does not discharge the obligation of the contract,
nor does it constitute any defense to a decree of specific performance
(Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 Phil. 190 [1918]).
And, the mere fact of insolvency of a debtor is never an excuse for the non-
fulfillment of an obligation but instead it is taken as a breach of the
contract by him (Vol. 17A, 1974 ed., CJS p. 650).
The fact that Sulpicio M. Tolentino demanded and accepted the refund of
the pre-deducted interest amounting to P4,800.00 for the supposed
P80,000.00 loan covering a 6-month period cannot be taken as a waiver of
his right to collect the P63,000.00 balance. The act of Island Savings Bank,
in asking the advance interest for 6 months on the supposed P80,000.00
loan, was improper considering that only P17,000.00 out of the P80,000.00
loan was released. A person cannot be legally charged interest for a non-
existing debt. Thus, the receipt by Sulpicio M. Tolentino of the pre-
deducted interest was an exercise of his right to it, which right exist
independently of his right to demand the completion of the P80,000.00
loan. The exercise of one right does not affect, much less neutralize, the
exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the
loan collateral cannot exempt it from complying with its reciprocal
obligation to furnish the entire P80,000.00 loan. This Court previously
ruled that bank officials and employees are expected to exercise caution
and prudence in the discharge of their functions (Rural Bank of Caloocan,
Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's
officials and employees that before they approve the loan application of
their customers, they must investigate the existence and valuation of the
properties being offered as a loan security. The recent rush of events
where collaterals for bank loans turn out to be non-existent or grossly over-
valued underscore the importance of this responsibility. The mere reliance
by bank officials and employees on their customer's representation
regarding the loan collateral being offered as loan security is a patent non-
performance of this responsibility. If ever, bank officials and employees
totally rely on the representation of their customers as to the valuation of
the loan collateral, the bank shall bear the risk in case the collateral turn
out to be over-valued. The representation made by the customer is
immaterial to the bank's responsibility to conduct its own investigation.
Furthermore, the lower court, on objections of Sulpicio M. Tolentino, had
enjoined petitioners from presenting proof on the alleged over-valuation
because of their failure to raise the same in their pleadings (pp. 198-199,
t.s.n., Sept. 15, 1971). The lower court's action is sanctioned by the Rules
of Court, Section 2, Rule 9, which states that "defenses and objections not
pleaded either in a motion to dismiss or in the answer are deemed
waived." Petitioners, thus, cannot raise the same issue before the Supreme
Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation
under their loan agreement, Sulpicio M. Tolentino, under Article 1191 of the
Civil Code, may choose between specific performance or rescission with
damages in either case. But since Island Savings Bank is now prohibited
from doing further business by Monetary Board Resolution No. 967, WE
cannot grant specific performance in favor of Sulpicio M. Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that
rescission is only for the P63,000.00 balance of the P80,000.00 loan,
because the bank is in default only insofar as such amount is concerned, as
there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and
executed a promissory note to cover it, the bank was deemed to have
complied with its reciprocal obligation to furnish a P17,000.00 loan. The
promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue
amortizations under the promissory note made him a party in default,
hence not entitled to rescission (Article 1191 of the Civil Code). If there is
a right to rescind the promissory note, it shall belong to the aggrieved
party, that is, Island Savings Bank. If Tolentino had not signed a
promissory note setting the date for payment of P17,000.00 within 3 years,
he would be entitled to ask for rescission of the entire loan because he
cannot possibly be in default as there was no date for him to perform his
reciprocal obligation to pay.
Since both parties were in default in the performance of their respective
reciprocal obligations, that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M. Tolentino failed to
comply with his obligation to pay his P17,000.00 debt within 3 years as
stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have
committed a breach of their reciprocal obligations, the liability of the first
infractor shall be equitably tempered by the courts. WE rule that the
liability of Island Savings Bank for damages in not furnishing the entire loan
is offset by the liability of Sulpicio M. Tolentino for damages, in the form of
penalties and surcharges, for not paying his overdue P17,000.00 debt. The
liability of Sulpicio M. Tolentino for interest on his P17,000.00 debt shall not
be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that
he should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino
cannot be entirely foreclosed to satisfy his P17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the
same as that of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA
443 [1979]). For the debtor, the consideration of his obligation to pay is
the existence of a debt. Thus, in the accessory contract of real estate
mortgage, the consideration of the debtor in furnishing the mortgage is the
existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation
to Art. 2052 of the Civil Code).
The fact that when Sulpicio M. Tolentino executed his real estate mortgage,
no consideration was then in existence, as there was no debt yet because
Island Savings Bank had not made any release on the loan, does not make
the real estate mortgage void for lack of consideration. It is not necessary
that any consideration should pass at the time of the execution of the
contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). It
may either be a prior or subsequent matter. But when the consideration is
subsequent to the mortgage, the mortgage can take effect only when the
debt secured by it is created as a binding contract to pay (Parks vs.
Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol.
2, pp. 5-6). And, when there is partial failure of consideration, the
mortgage becomes unenforceable to the extent of such failure (Dow, et al.
vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where
the indebtedness actually owing to the holder of the mortgage is less than
the sum named in the mortgage, the mortgage cannot be enforced for
more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol.
19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, p. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the
P80,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence
the real estate mortgage covering 100 hectares is unenforceable to the
extent of 78.75 hectares. The mortgage covering the remainder of 21.25
hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is
more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article
2089 of the Civil Code is inapplicable to the facts of this case.
Article 2089 provides:
"A pledge or mortgage is indivisible even though the debt may be
divided among the successors in interest of the debtor or creditor.
"Therefore, the debtor's heirs who has paid a part of the debt can
not 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 have received his share of the
debt return the pledge or cancel the mortgage, to the prejudice of
other heirs who have not been paid."
The rule of indivisibility of the mortgage as outlined by Article 2089 above-
quoted presupposes several heirs of the debtor or creditor which does not
obtain in this case. Hence, the rule of indivisibility of a mortgage cannot
apply.
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED
FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF
HEREIN PETITIONERS THE SUM OF P17,000.00, PLUS P41,210.00
REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM
MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL
AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE
MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO
SATISFY HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY

DECLARED UNENFORCEABLE AND IS HEREBY ORDERED RELEASED IN
FAVOR OF SULPICIO M. TOLENTINO.

NO COSTS.

SO ORDERED.

Concepcion, Jr., Escolin, Cuevas, and Alampay, JJ., concur.

Aquino, (Chairman) and Abad Santos, JJ., no part.

 SPS. BELO V. CA
G.R. No. 134330, March 01, 2001
SPOUSES ENRIQUE M. BELO AND FLORENCIA G. BELO,
PETITIONERS,
VS.
PHILIPPINE NATIONAL BANK AND SPOUSES MARCOS AND ARSENIA
ESLABON, RESPONDENTS.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision [1] and
Resolution[2] in CA-G.R. No. 53865 of the Court of Appeals [3] dated May 21,
1998 and June 29, 1998, respectively, which modified the Decision [4] dated
April 30, 1996 of the Regional Trial Court of Roxas City, Branch 19 in a
suit[5] for Declaration of Nullity of the Contract of Mortgage.
The facts are as follows:
Eduarda Belo owned an agricultural land with an area of six hundred sixty
one thousand two hundred eighty eight (661,288) square meters located in
Timpas, Panitan, Capiz, covered and described in Transfer Certificate of
Title (TCT for brevity) No. T-7493. She leased a portion of the said tract of
land to respondents spouses Marcos and Arsenia Eslabon in connection
with the said spouses' sugar plantation business. The lease contract was
effective for a period of seven (7) years at the rental rate of Seven
Thousand Pesos (P7,000.00) per year.
To finance their business venture, respondents spouses Eslabon obtained a
loan from respondent Philippine National Bank (PNB for brevity) secured by
a real estate mortgage on their own four (4) residential houses located in
Roxas City, as well as on the agricultural land owned by Eduarda Belo. The
assent of Eduarda Belo to the mortgage was acquired through a special
power of attorney which she executed in favor of respondent Marcos
Eslabon on June 15, 1982.
Inasmuch as the respondents spouses Eslabon failed to pay their loan
obligation, extrajudicial foreclosure proceedings against the mortgaged
properties were instituted by respondent PNB. At the auction sale on June
10, 1991, respondent PNB was the highest bidder of the foreclosed
properties at Four Hundred Forty Seven Thousand Six Hundred Thirty Two
Pesos (P447,632.00).
In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo
of the sale at public auction of her agricultural land on June 10, 1991 as
well as the registration of the Certificate of 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:
xxx
77. In all loan contracts granted and mortgage contracts executed
under the 1975 Revised Charter (PD 694, as amended), the proper
rate of interest to be charged during the redemption period is the
rate specified in the mortgage contract based on Sec. 25[7] of PD
694 and the mortgage contract which incorporates by reference
the provisions of the PNB Charters. Additionally, under Sec. 78 of
the General Banking Act (RA No. 337, as amended) made
applicable to PNB pursuant to Sec. 38 of PD No. 694, the rate of
interest collectible during the redemption period is the rate
specified in the mortgage contract.
78. Since plaintiffs failed to tender and pay the required amount for
redemption of the property under the provisions of the General
Banking Act, no redemption was validly effected; [8]
xxx
After trial on the merits, the trial court rendered its Decision dated April 30,
1996 granting the alternative cause of action of spouses Belo, the decretal
portion of which reads:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered
in favor of plaintiffs Spouses Enrique M. Belo and Florencia G. Belo and
against defendants Philippine National Bank and Spouses Marcos and
Arsenia Eslabon:
1. Making the injunction issued by the court permanent, insofar
as the property of Eduarda Belo covered by Transfer Certificate
of Title No. T-7493 is concerned;
2. Ordering defendant Philippine National Bank to allow plaintiff
Enrique M. Belo to redeem only Eduarda 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:
xxxxxxxxx
II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL
COURT ON THE BASIS OF THE ASSIGNMENT OF ERRORS ALLEGED
BY PETITIONERS IN THEIR BRIEF:

(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY
EDUARDA BELO IN FAVOR OF RESPONDENT ESLABON WAS
NULL AND VOID;
(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY
RESPONDENT MARCOS ESLABON UNDER SAID INVALID
SPECIAL POWER OF ATTORNEY IS ALSO NULL AND VOID;
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT PNB ACTED IN BAD FAITH AND CONNIVED WITH
RESPONDENTS-DEBTORS ESLABONS TO OBTAIN THE CONSENT OF
EDUARDA BELO, PETITIONERS' PREDECESSOR, THROUGH FRAUD.
IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT PNB WAS NEGLIGENT IN THE PERFORMANCE OF ITS
DUTY AS COMMERCIAL MONEY LENDER.
V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO,
PETITIONERS' PREDECESSOR, HAD WAIVED THE RIGHT TO
QUESTION THE LEGALITY OF THE ACCOMMODATION MORTGAGE.
VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT
BY HOLDING THAT ON REDEMPTION, PETITIONERS SHOULD PAY
THE ENTIRE CLAIM OF PNB AGAINST RESPONDENTS-DEBTORS
ESLABONS.
VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD
PETITIONERS DECIDE TO PAY THE ENTIRE CLAIM OF RESPONDENT
PNB AGAINST THE 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.
xxx
2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh.
"D") used to bind Eduarda Belo as accommodation mortgagor
authorized the agent Eslabons to borrow and mortgage her
agricultural land for her (Eduarda Belo) use and benefit.
Instead, said PNB SPA Form No. 74 was used by debtors
Eslabons and PNB to bind Eduarda Belo as accommodation
mortgagor for the crop loan extended by PNB to the Eslabons.
3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo
in blank, without specifying the amount of the loan to be
granted by respondent PNB to the respondents-debtors
Eslabons upon assurance by the PNB manager that the SPA
was merely a formality and that the bank will not lend beyond
the value of the four (4) [Roxas City] residential lots located in
Roxas City mortgaged by respondents-debtors Eslabons (see
Exhibit "D"; Eduarda 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).
xxx
5. As an agreed fact stated in the Pre-Trial Order of the Regional
Trial Court, the loan which was unpaid at the time of the
extrajudicial foreclosure sale was only P789,897.00.
xxx
6. That herein petitioners Spouses Belo in making the tender to
redeem Eduarda 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:
SEC. 25. Right of redemption of foreclosed property - Right of
possession during redemption period. - Within one year from the
registration of the foreclosure sale of real estate, the mortgagor
shall have the right to redeem the property by paying all claims of
the Bank against him on the date of the sale including all the costs
and other expenses incurred by reason of the foreclosure sale and
custody of the property, as well as charges and accrued interests.
[23]
Additionally, respondent bank seeks the application to the case at bar of
Section 78 of the General Banking Act, as amended by P.D. No. 1828, which
states that -
......In the event of foreclosure, whether judicially or extrajudicially,
of any mortgage on real estate which is security for any loan
granted before the passage of this Act or under the provisions of
this Act, the mortgagor or debtor whose real property has been
sold at public auction, judicially or extrajudicially, for the full or
partial payment of an obligation to any bank, banking or credit
institution, within the purview of this Act shall have the right, within
one year after the sale of the real estate as a result of the
foreclosure of the respective mortgage, to redeem the property by
paying the amount fixed by the court in the order of execution, or
the amount due under the mortgage deed, as the case may be,
with interest thereon at the rate specified in the mortgage, and all
the costs, and judicial and other expenses incurred by the bank or
institution concerned by reason of the execution and sale and as a
result of the custody of said property less the income received
from the property.[24]
On the other hand, petitioners assert that only the amount of the winning
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:
Sec. 6. In all cases in which an extrajudicial sale is made under the
special power hereinbefore referred to, the debtor, his successor in
interest or any judicial creditor or judgment creditor of said debtor,
or any person having a lien on the property subsequent to the
mortgage or deed of trust under which the property is sold, may
redeem the same at any time within the term of one year from and
after the date of the sale; and such redemption shall be governed
by the provisions of sections four hundred and sixty-four to four
hundred and sixty six, inclusive, of the Code of Civil Procedure [25], in
so far as these are not inconsistent with the provisions of this Act.
Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states
that:
SEC. 28. Time and manner of, and amounts payable on, successive
redemptions; notice to be given and filed. - The judgment obligor,
or redemptioner, may redeem the property from the purchaser, at
any time within one (1) year from the date of the registration of the
certificate of sale, by paying the purchaser the amount of his
purchase, within one per centum per month interest thereon in
addition, up to the time of redemption, together with the amount of
any assessments or taxes which the purchaser may have paid
thereon after purchase, and interest on such last named amount at
the same rate; and if the purchaser be also a creditor having a
prior lien to that of the redemptioner, other than the judgment
under which such purchase was made, the amount of such other
lien, with interest. (Italics supplied)
xxx xxx xxx
This Court finds the petitioners' position on that issue to be meritorious.
There is no doubt that Eduarda Belo, assignor of the petitioners, is an
accommodation mortgagor. The Pre-trial Order and respondent 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 collaterals
needed to secure their bank loan. Respondents PNB and spouses Eslabons
very well knew that she merely consented to be a mere accommodation
mortgagor.
The circumstances of the case at bar also provide for ample reason why
petitioners cannot be made to pay the entire liability of the principal
debtors, Eslabon spouses, to respondent PNB.
The trial court found that respondent 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. Agudelo [37] is enlightening to
the case at bar, to wit:
xxxxxxxxx
However, Paz Agudelo y Gonzaga (the principal) x x x gave her
consent to the lien on lot No. 878 x x x. This acknowledgment,
however, does not extend to lots Nos. 207 and 61... inasmuch as,
although it is true that a mortgage is indivisible as to the
contracting parties and as to their successors in interest (Article
1860, Civil code), it is not so with respect to a third person who did
not take part in the constitution thereof either personally or
through an agent x x x. Therefore, the only liability of the
defendant-appellant Paz Agudelo y Gonzaga is that which arises
from the aforesaid acknowledgment but only with respect to the
lien and not to the principal obligation secured by the mortgage
acknowledged by her to have been constituted on said lot No. 878
x x x. Such liability is not direct but a subsidiary one. [38]
xxxxxxxxx
Wherefore, it is hereby held that the liability contracted by the
aforesaid defendant-appellant Paz Agudelo y Gonzaga is merely
subsidiary to that of Mauro A. Garrucho (the agent), limited to lot
No. 87.
xxxxxxxxx
From the wordings of the law, indivisibility arises only when there is a debt,
that is, there is a debtor-creditor relationship. But, this relationship is
wanting in the case at bar in the sense that petitioners are assignees of an
accommodation mortgagor and not of a debtor-mortgagor. Hence, it is fair
and logical to allow the petitioners to redeem only the property belonging
to their assignor, Eduarda Belo.
With respect to the four (4) parcels of residential land belonging to the
Eslabon spouses, petitioners - being total strangers to said lots - lack legal
personality to redeem the same. Fair play and justice demand that the
respondent 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-7493-Capiz registered in the name of
Eduarda Belo, by paying only the bid price less the corresponding loan
value of the foreclosed four (4) residential lots of the respondents spouses
Marcos and Arsenia Eslabon, consistent with the Decision of the Regional
Trial Court of Roxas City in Civil Case No. V-6182.

SO ORDERED.

Bellosillo (Chairman), Mendoza, Quisumbing, and Buena, JJ., concur.

 AJAX V. CA
G.R. No. 118585, September 14, 1995
AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO TAN,
ELISA TAN, TAN YEE, AND SPS. MARCIAL SEE AND LILIAN TAN,
PETITIONERS,
VS.
HON. COURT OF APPEALS, METROPOLITAN BANK AND TRUST
COMPANY, AND THE SHERIFF OF MANILA, RESPONDENTS.
DECISION
FRANCISCO, J.:
In its March 30, 1994 decision, public respondent Court of Appeals affirmed
the trial court's judgment upholding the validity of the extra-judicial
foreclosure of the real estate property of petitioners--spouses Marcial See
and Lilian Tan, located at Paco District, Manila covered by TCT 105233, by
private respondent Metropolitan Bank and Trust Company (Metrobank). [1]
Petitioners' motion for reconsideration was denied; hence, this petition for
review on certiorari raising the following assignments of errors:
"FIRST: The Honorable Court of Appeals erred in holding that the
consolidation of the three ( 3 ) loans granted separately to three
entities into a single loan of P1.0 Million was a mere restructuring
and did not effect a novation of the loan as to extinguish the
accessory mortgage contracts.
SECOND: The Honorable Court of Appeals erred in not holding that
the consolidated loan of P1.0 Million was not accompanied by the
execution of a new REM, as was done by the Bank in the earlier
three (3) loans, and hence, was, to all legal intents/purposes,
unsecured.
THIRD: The Honorable Court of Appeals erred in holding that the
inclusion in the extra-judicial foreclosure of the admittedly
unsecured loan of P970,000.00 is a mere error that does not
invalidated said foreclosure, contrary to the pronouncement in C &
C Commercial Corp. vs. PNB, 175 SCRA 1.
FOURTH: The Honorable Court of Appeals erred in not declaring as
null and void the extra-judicial foreclosure undertaken by
Metrobank on the property of Sps. Marcial See and Lilian Tan."[2]
The facts as found by public respondent Court of Appeals are as follows:
"It is not disputed that Ylang-Ylang Merchandising Company, a
partnership between Angelita Rodriguez and Antonio Tan, obtained
a loan in the amount of P250,000.00 from the Metropolitan Bank
and Trust Company, and to secure payment of the same, spouses
Marcial See and Lilian Tan constituted a real estate mortgage in
favor of said bank over their property in the District of Paco,
Manila, covered by TCT No. 105233 of the Registry of Deeds of
Manila. The mortgage was annotated at the back of the title.
"Subsequently, after the partnership had changed its name to Ajax
Marketing Company albeit without changing its composition, it
obtained a loan in the sum of P150,000.00 from Metropolitan Bank
and Trust Company. Again to secure the loan, spouses Marcial See
and Lilian Tan executed in favor of said bank a second real estate
mortgage over the same property. As in the first instance, the
mortgage was duly annotated at the back of TCT No. 105233.
"On February 19, 1979, the partnership (Ajax Marketing Company)
was converted into a corporation denominated as Ajax Marketing
and Development Corporation, with the original partners (Angelita
Rodriguez and Antonio Tan) as incorporators and three (3)
additional incorporators, namely, Elisa Tan, the wife of Antonio Tan,
and Jose San Diego and Tessie San Diego. Ajax Marketing and
Development Corporation obtained from Metropolitan Bank and
Trust Company a loan of P600,000.00, the payment of which was
secured by another real estate mortgage executed by spouses
Marcial See and Lilian Tan in favor of said bank over the same
realty located in the District of Paco, Manila. Again, the third real
estate mortgage was annotated at the back of TCT No. 105233.
"In December 1980, the three (3) loans with an aggregate amount
of P1,000,000.00 were re-structured and consolidated into one (1)
loan and Ajax Marketing and Development Corporation,
represented by Antonio Tan as Board Chairman/President and in his
personal capacity as solidary co-obligor, and Elisa Tan as Vice-
President/Treasurer and in her personal capacity as solidary co-
obligor, executed a Promissory Note (PN) No. BDS-3605." [3]
In their interrelated first and second assignment of errors, petitioners argue
that a novation occurred when their three (3) loans which are all secured
by the same real estate property covered by TCT No. 105233 were
consolidated into a single loan of P1 million under Promissory Note No.
BDS-3605, thereby extinguishing their monetary obligations and releasing
the mortgaged property from liability.
Basic principles on novation need to be stressed at the outset. Novation is
the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first,
either by changing the object or principal conditions, or by substituting
another in place of the debtor, or by subrogating a third person in the
rights of the creditor.[4] Novation, unlike other modes of extinction of
obligations, is a juridical act with a dual function, namely, it extinguishes
an obligation and creates a new one in lieu of the old. It can be objective,
subjective, or mixed. Objective novation occurs when there is a change of
the object or principal conditions of an existing obligation while subjective
novation occurs when there is a change of either the person of the debtor,
or of the creditor in an existing obligation. [5] When the change of the object
or principal conditions of an obligation occurs at the same time with the
change of either in the person of the debtor or creditor a mixed novation
occurs.[6]
The well settled rule is that novation is never presumed. [7] Novation will not
be allowed unless it is clearly shown by express agreement, or by acts of
equal import. Thus, to effect an objective novation it is imperative that the
new obligation expressly declare that the old obligation is thereby
extinguished, or that the new obligation be on every point incompatible
with the new one.[8] In the same vein, to effect a subjective novation by a
change in the person of the debtor it is necessary that the old debtor be
released expressly from the obligation, and the third person or new debtor
assumes his place in the relation. [9] There is no novation without such
release as the third person who has assumed the debtor's obligation
becomes merely a co-debtor or surety.[10]
The attendant facts herein do not make a case of novation. There is
nothing in the records to show the unequivocal intent of the parties to
novate the three loan agreements through the execution of PN No. BDS-
3065. The provisions of PN No. BDS-3065 yield no indication of the
extinguishment of, or an incompatibility with, the three loan agreements
secured by the real estate mortgages over TCT No. 105233. On its face, PN
No. BDS-3065 has these words typewritten: "secured by REM" and "9.
COLLATERAL. This is wholly/partly secured by: (x) real estate" [11],
which strongly negate petitioners' asseveration that the consolidation of
the three loans effected the discharge of the mortgaged real estate
property. Otherwise, there would be no sense placing these material
provisions. Moreover, the real estate mortgages contained this common
provision, to wit:
"That for and in consideration of credit accommodations obtained
from the MORTGAGEE (Metropolitan Bank and Trust Company), by
the MORTGAGOR and/or AJAX MKTG. & DEV. CORP./AJAX
MARKETING COMPANY/YLANG-YLANG MERCHANDISING COMPANY
detailed as follows:
Nature Date Granted Due Date Amount or Line
Loans and/or P600,000.00
Advances in 150,000.00
current account 250,000.00
and to secure the payment of the same and those that may
hereafter be obtained including the renewals or extension
thereof.
xxx xxx xx
x
"the principal of all of which is hereby fixed at
(P600,000.00/P150,000.00/P250,000.00)...as well as those that
the MORTGAGEE may have previously extended or may
later extend to the MORTGAGOR, 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
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 page three of this document
and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or
constructed thereon, of which the MORTGAGOR declares that he/it
is the absolute owner free from all liens and encumbrances.
However, if the MORTGAGOR shall pay to the MORTGAGEE, its
successors or assigns, the obligation secured by this mortgage
when due, together with interest, and shall keep and perform all
and singular the covenants and agreements herein contained for
the MORTGAGOR to keep and perform, then the mortgage shall be
void; otherwise, it shall remain in full force and effect." [12]
The foregoing shows that petitioners agreed to apply the real estate
property to secure obligations that they may thereafter obtain including
their renewals or extensions with the principals fixed at P600,000.00,
P150,000.00, and P250,000.00 which when added have an aggregate sum
of P1.0 million. PN No. BDS-3605 merely restructured and renewed the
three previous loans to expediently make the loans current. There was no
change in the object of the prior obligations. The consolidation of the three
loans, contrary to petitioners' contention, did not release the mortgaged
real estate property from any liability because the mortgage annotations at
the back of TCT No. 105233, in fact, all remained uncancelled, thus
indicating the continuing subsistence of the real estate mortgages.
Neither can it be validly contended that there was a change or substitution
in the persons of either the creditor (Metrobank) or more specifically the
debtors (petitioners) upon the consolidation of the loans in PN No. BDS
3605. The bare fact of petitioners' conversion from a partnership to a
corporation, without sufficient evidence, either testimonial or
documentary, that they were expressly released from their obligations, did
not make petitioner AJAX, with its new corporate personality, a third person
or new debtor within the context of a subjective novation. If at all,
petitioner AJAX only became a co-debtor or surety. Without express release
of the debtor from the obligation, any third party who may thereafter
assume the obligation shall be considered merely as co-debtor or surety.
Novation arising from a purported change in the person of the debtor must
be clear and express because, to repeat, it is never presumed. Clearly
then, from the aforediscussed points, neither objective nor subjective
novation occurred here.
Anent the third assigned error, petitioners posit that the extra-judicial
foreclosure is invalid as it included two unsecured loans: one, the
consolidated loan of P1.0 million under PN BDS No. 3605, and two, the
P970,000.00 loan under PN BDS No. 3583 subsequently extended by
Metrobank.
An action to foreclose a mortgage is usually limited to the amount
mentioned in the mortgage, but where on the four corners of the mortgage
contracts, as in this case, the intent of the contracting parties is manifest
that the mortgaged property shall also answer for future loans or
advancements then the same is not improper as it is valid and binding
between the parties.[13] For merely consolidating and expediently making
current the three previous loans, the loan of P1.0 million under PN BDS No.
3605, secured by the real estate property, was correctly included in the
foreclosure's bid price. The inclusion of the unsecured loan of P970,000.00
under PN BDS NO. 3583, however, was found to be improper by public
respondent which ruling we shall not disturb for Metrobank's failure to
appeal therefrom. Nonetheless, the inclusion of PN BDS No. 3583 in the
bid price did not invalidate the foreclosure proceedings. As correctly
pointed out by the Court of Appeals, the proceeds of the auction sale
should be applied to the obligation pertaining to PN BDS No. 3605 only,
plus interests, expenses and other charges accruing thereto. It is
Metrobank's duty as mortgagee to return the surplus in the selling price to
the mortgagors.[14]
Lastly, petitioners cite as supporting authority C & C Commercial Corp. v.
Philippine National Bank[15] where this Court enjoined the foreclosure
proceedings for including unsecured obligations. Petitioners' reliance on
the C & C Commercial Corp. v. Phil. National Bank case is misplaced. In
that case, the foreclosure sale included previously incurred unsecured
obligations in favor of PNB which were not in the contemplation of the
mortgage contract, whereas in the instant case, the mortgages were one in
providing that the mortgaged real estate property shall also secure future
advancements or loans, as well as renewals or extensions of the same.
Prescinding from the above discussions, the fourth assignment of error
obviously needs no further discussion.
WHEREFORE, the decision appealed from is hereby AFFIRMED in toto.
Narvasa, C.J., (Chairman), Regalado, Puno, and Mendoza, JJ., concur.