[G.R. NO.

145578 November 18, 2005] goods covered by the letter of credit and to remit the proceeds to respondent bank, if sold,
or to return the goods, if not sold, on or before 29 December 1981.
JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, Petitioners, v. THE COURT OF
APPEALS and BANK OF THE PHILIPPINE ISLANDS, Respondents. On 9 October 1981, petitioners signed, in their capacities as officers of El Oro Corporation,
a trust receipt corresponding to Letter of Credit No. 2-00914-5 (for P294,000). Petitioners
DECISION bound themselves to sell the goods covered by that letter of credit and to remit the proceeds
to respondent bank, if sold, or to return the goods, if not sold, on or before 8 December
CARPIO, J.: 1981.

The Case After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El
Oro Corporation, respondent bank paid the former P564,871.05 and P294,000,
respectively.
This is a Petition for Review 1 of the Decision2 of the Court of Appeals dated 7 September
2000 and its Resolution dated 18 October 2000. The 7 September 2000 Decision affirmed
the ruling of the Regional Trial Court, Makati, Branch 144 in a case for estafa under Petitioners did not comply with their undertaking under the trust receipts. Respondent bank
Section 13, Presidential Decree No. 115. The Court of Appeals' Resolution of 18 October made several demands for payments but El Oro Corporation made partial payments only.
2000 denied petitioners' motion for reconsideration. On 27 June 1983 and 28 June 1983, respondent bank's counsel5 and its
representative6 respectively sent final demand letters to El Oro Corporation. El Oro
Corporation replied that it could not fully pay its debt because the Armed Forces of the
The Facts
Philippines had delayed paying for the survival bolos.
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners") were Vice-President for
Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No.
Operations and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation ("El
115 ("Section 13")7 or Trust Receipts Law ("PD 115"). After preliminary investigation, the
Oro Corporation"). El Oro Corporation had a contract with the Philippine Army to supply
then Makati Fiscal's Office found probable cause to indict petitioners. The Makati Fiscal's
the latter with "survival bolos."
Office filed the corresponding Informations (docketed as Criminal Case Nos. 8848 and
8849) with the Regional Trial Court, Makati, on 17 January 1984 and the cases were raffled
To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of
to Branch 144 ("trial court") on 20 January 1984. Petitioners pleaded not guilty to the
El Oro Corporation, applied with respondent Bank of the Philippine Islands ("respondent
charges and trial ensued. During the trial, respondent bank presented evidence on the civil
bank") for two commercial letters of credit. The letters of credit were in favor of El Oro
aspect of the cases.
Corporation's suppliers, Tanchaoco Manufacturing Incorporated3 ("Tanchaoco
Incorporated") and Maresco Rubber and Retreading Corporation4 ("Maresco Corporation").
The Ruling of the Trial Court
Respondent bank granted petitioners' application and issued Letter of Credit No. 2-00896-3
for P564,871.05 to Tanchaoco Incorporated and Letter of Credit No. 2-00914-5
for P294,000 to Maresco Corporation. On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on
reasonable doubt. However, the trial court found petitioners solidarily liable with El Oro
Corporation for the balance of El Oro Corporation's principal debt under the trust receipts.
Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in
The dispositive portion of the trial court's Decision provides:
favor of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV ("petitioner
Jose Tupaz") signed, in his personal capacity, a trust receipt corresponding to Letter of
Credit No. 2-00896-3 (for P564,871.05). Petitioner Jose Tupaz bound himself to sell the WHEREFORE, judgment is hereby rendered ACQUITTING both accused Jose C. Tupaz,
IV and Petronila Tupaz based upon reasonable doubt.
1
However, El Oro Engraver Corporation, Jose C. Tupaz, IV and Petronila Tupaz, are hereby
ordered, jointly and solidarily, to pay the Bank of the Philippine Islands the outstanding
principal obligation of P624,129.19 (as of January 23, 1992) with the stipulated interest at
the rate of 18% per annum; plus 10% of the total amount due as attorney's fees; P5,000.00
as expenses of litigation; and costs of the suit.8
In holding petitioners civilly liable with El Oro Corporation, the trial court held:
[S]ince the civil action for the recovery of the civil liability is deemed impliedly instituted
with the criminal action, as in fact the prosecution thereof was actively handled by the
private prosecutor, the Court believes that the El Oro Engraver Corporation and both
accused Jose C. Tupaz and Petronila Tupaz, jointly and solidarily should be held civilly
liable to the Bank of the Philippine Islands. The mere fact that they were unable to collect
in full from the AFP and/or the Department of National Defense the proceeds of the sale of
the delivered survival bolos manufactured from the raw materials covered by the trust
receipt agreements is no valid defense to the civil claim of the said complainant and surely
could not wipe out their civil obligation. After all, they are free to institute an action to
collect the same.9
Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their acquittal
"operates to extinguish [their] civil liability" and (2) at any rate, they are not personally
liable for El Oro Corporation's debts.
The Ruling of the Court of Appeals
In its Decision of 7 September 2000, the Court of Appeals affirmed the trial court's ruling.
The appellate court held:
It is clear from [Section 13, PD 115] that civil liability arising from the violation of the
trust receipt agreement is distinct from the criminal liability imposed therein. In the case
of Vintola v. Insular Bank of Asia and America, our Supreme Court held that acquittal in
the estafa case (P.D. 115) is no bar to the institution of a civil action for collection. This is
because in such cases, the civil liability of the accused does not arise ex delicto but rather
based ex contractuand as such is distinct and independent from any criminal proceedings
and may proceed regardless of the result of the latter. Thus, an independent civil action to
enforce the civil liability may be filed against the corporation aside from the criminal
action against the responsible officers or employees.
xxx
[W]e hereby hold that the acquittal of the accused-appellants from the criminal charge of
estafa did not operate to extinguish their civil liability under the letter of credit-trust receipt
arrangement with plaintiff-appellee, with which they dealt both in their personal capacity
and as officers of El Oro Engraver Corporation, the letter of credit applicant and principal
debtor.
Appellants argued that they cannot be held solidarily liable with their corporation, El Oro
Engraver Corporation, alleging that they executed the subject documents including the trust
receipt agreements only in their capacity as such corporate officers. They said that these
instruments are mere pro-forma and that they executed these instruments on the strength of
a board resolution of said corporation authorizing them to apply for the opening of a letter
of credit in favor of their suppliers as well as to execute the other documents necessary to
accomplish the same.
Such contention, however, is contradicted by the evidence on record. The trust receipt
agreement indicated in clear and unmistakable terms that the accused signed the same
as surety for the corporation and that they bound themselves directly and immediately
liable in the event of default with respect to the obligation under the letters of credit which
were made part of the said agreement, without need of demand. Even in the application for
the letter of credit, it is likewise clear that the undertaking of the accused is that of a surety
as indicated [in] the following words: "In consideration of your establishing the
commercial letter of credit herein applied for substantially in accordance with the
foregoing, the undersigned Applicant and Surety hereby agree, jointly and severally, to
each and all stipulations, provisions and conditions on the reverse side hereof."
xxx
Having contractually agreed to hold themselves solidarily liable with El Oro Engraver
Corporation under the subject trust receipt agreements with appellee Bank of the Philippine
Islands, herein accused-appellants may not, therefore, invoke the separate legal personality
of the said corporation to evade their civil liability under the letter of credit-trust receipt
arrangement with said appellee, notwithstanding their acquittal in the criminal cases filed
against them. The trial court thus did not err in holding the appellants solidarily liable with
El Oro Engraver Corporation for the outstanding principal obligation of P624,129.19 (as of
January 23, 1992) with the stipulated interest at the rate of 18% per annum, plus 10% of the
total amount due as attorney's fees, P5,000.00 as expenses of litigation and costs of suit.10
Hence, this petition. Petitioners contend that:
2

1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE CIVIL
LIABILITY OF PETITIONERS[;]
2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED OBLIGATION
WAS INCURRED BY THE CORPORATION, THE SAME IS NOT YET DUE AND
PAYABLE;
3. GRANTING THAT THE QUESTIONED OBLIGATION WAS ALREADY DUE AND
PAYABLE, xxx PETITIONERS ARE NOT PERSONALLY LIABLE TO xxx
RESPONDENT BANK, SINCE THEY SIGNED THE LETTER[S] OF CREDIT AS
'SURETY' AS OFFICERS OF EL ORO, AND THEREFORE, AN EXCLUSIVE
LIABILITY OF EL ORO; [AND]
4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE SIMULATED
AND VOID.11
The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable for El Oro Corporation's debts
under the trust receipts;
(2) If so'
(a) whether petitioners' liability is solidary with El Oro Corporation; andcralawlibrary
(b) whether petitioners' acquittal of estafa under Section 13, PD 115 extinguished their civil
liability.
The Ruling of the Court
The petition is partly meritorious. We affirm the Court of Appeals' ruling with the
modification that petitioner Jose Tupaz is liable as guarantor of El Oro Corporation's debt
under the trust receipt dated 30 September 1981.
On Petitioners' Undertaking Under the Trust Receipts
A corporation, being a juridical entity, may act only through its directors, officers, and
employees. Debts incurred by these individuals, acting as such corporate agents, are not
theirs but the direct liability of the corporation they represent.12 As an exception, directors
or officers are personally liable for the corporation's debts only if they so contractually
agree or stipulate.13
Here, the dorsal side of the trust receipts contains the following stipulation:
To the Bank of the Philippine Islands
In consideration of your releasing to - under the terms of this Trust Receipt the goods
described herein, I/We, jointly and severally, agree and promise to pay to you, on demand,
whatever sum or sums of money which you may call upon me/us to pay to you, arising out
of, pertaining to, and/or in any way connected with, this Trust Receipt, in the event of
default and/or non-fulfillment in any respect of this undertaking on the part of the said - '.
I/we further agree that my/our liability in this guarantee shall be DIRECT AND
IMMEDIATE, without any need whatsoever on your part to take any steps or exhaust any
legal remedies that you may have against the said '. before making demand upon
me/us.14 (Capitalization in the original)
In the trust receipt dated 9 October 1981, petitioners signed below this clause as officers of
El Oro Corporation. Thus, under petitioner Petronila Tupaz's signature are the words "Vice-
Pres'Treasurer" and under petitioner Jose Tupaz's signature are the words "Vice-
Pres'Operations." By so signing that trust receipt, petitioners did not bind themselves
personally liable for El Oro Corporation's obligation. In Ong v. Court of Appeals,15 a
corporate representative signed a solidary guarantee clause in two trust receipts in his
capacity as corporate representative. There, the Court held that the corporate representative
did not undertake to guarantee personally the payment of the corporation's debts, thus:
[P]etitioner did not sign in his personal capacity the solidary guarantee clause found on the
dorsal portion of the trust receipts. Petitioner placed his signature after the typewritten
words "ARMCO INDUSTRIAL CORPORATION" found at the end of the solidary
3
guarantee clause. Evidently, petitioner did not undertake to guaranty personally the
payment of the principal and interest of ARMAGRI's debt under the two trust receipts.
Hence, for the trust receipt dated 9 October 1981, we sustain petitioners' claim that they are
not personally liable for El Oro Corporation's obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner Jose
Tupaz signed alone, we find that he did so in his personal capacity. Petitioner Jose Tupaz
did not indicate that he was signing as El Oro Corporation's Vice-President for Operations.
Hence, petitioner Jose Tupaz bound himself personally liable for El Oro Corporation's
debts. Not being a party to the trust receipt dated 30 September 1981, petitioner Petronila
Tupaz is not liable under such trust receipt.
The Nature of Petitioner Jose Tupaz's Liability Under the Trust Receipt Dated 30
September 1981
As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:
To the Bank of the Philippine Islands
In consideration of your releasing to - under the terms of this Trust Receipt the goods
described herein, I/We, jointly and severally, agree and promise to pay to you, on demand,
whatever sum or sums of money which you may call upon me/us to pay to you, arising out
of, pertaining to, and/or in any way connected with, this Trust Receipt, in the event of
default and/or non-fulfillment in any respect of this undertaking on the part of the said - '.
I/we further agree that my/our liability in this guarantee shall be DIRECT AND
IMMEDIATE, without any need whatsoever on your part to take any steps or exhaust any
legal remedies that you may have against the said '. Before making demand upon me/us.
(Underlining supplied; capitalization in the original)
The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself
solidarily liable with El Oro Corporation for the latter's debt under that trust receipt.
This is error.
In Prudential Bank v. Intermediate Appellate Court,16 the Court interpreted a substantially
identical clause17 in a trust receipt signed by a corporate officer who bound himself
personally liable for the corporation's obligation. The petitioner in that case contended that
the stipulation "we jointly and severally agree and undertake" rendered the corporate
officer solidarily liable with the corporation. We dismissed this claim and held the
corporate officer liable as guarantor only. The Court further ruled that had there been more
than one signatories to the trust receipt, the solidary liability would exist between the
guarantors. We held:
Petitioner [Prudential Bank] insists that by virtue of the clear wording of the xxx clause "x
x x we jointly and severally agree and undertake x x x," and the concluding sentence on
exhaustion, [respondent] Chi's liability therein is solidary.
xxx
Our xxx reading of the questioned solidary guaranty clause yields no other conclusion than
that the obligation of Chi is only that of a guarantor. This is further bolstered by the last
sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this
case because the space therein for the party whose property may not be exhausted was not
filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may
be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise
admits that the questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the guaranty as solidary
between the guarantors; this would have been correct if two (2) guarantors had signed
it. The clause "we jointly and severally agree and undertake" refers to the undertaking of
the two (2) parties who are to sign it or to the liability existing between themselves. It does
not refer to the undertaking between either one or both of them on the one hand and the
petitioner on the other with respect to the liability described under the trust receipt. xxx
Furthermore, any doubt as to the import or true intent of the solidary guaranty clause
should be resolved against the petitioner. The trust receipt, together with the questioned
solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's
participation therein is limited to the affixing of his signature thereon. It is, therefore, a
contract of adhesion; as such, it must be strictly construed against the party responsible for
its preparation.18 (Underlining supplied; italicization in the original)
However, respondent bank's suit against petitioner Jose Tupaz stands despite the Court's
finding that he is liable as guarantor only. First, excussion is not a pre-requisite to secure
judgment against a guarantor. The guarantor can still demand deferment of the execution of
the judgment against him until after the assets of the principal debtor shall have been
exhausted.19 Second, the benefit of excussion may be waived.20 Under the trust receipt
dated 30 September 1981, petitioner Jose Tupaz waived excussion when he agreed that his
"liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any need
4
whatsoever on xxx [the] part [of respondent bank] to take any steps or exhaust any legal
remedies xxx." The clear import of this stipulation is that petitioner Jose Tupaz waived the
benefit of excussion under his guarantee.
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporation's principal debt and
other accessory liabilities (as stipulated in the trust receipt and as provided by law) under
the trust receipt dated 30 September 1981. That trust receipt (and the trust receipt dated 9
October 1981) provided for payment of attorney's fees equivalent to 10% of the total
amount due and an "interest at the rate of 7% per annum, or at such other rate as the
bankmay fix, from the date due until paid xxx."21 In the applications for the letters of credit,
the parties stipulated that drafts drawn under the letters of credit are subject to interest at
the rate of 18% per annum.22
The lower courts correctly applied the 18% interest rate per annum considering that the
face value of each of the trust receipts is based on the drafts drawn under the letters of
credit. Based on the guidelines laid down in
Eastern Shipping Lines, Inc. v. Court of Appeals,23 the accrued stipulated interest earns
12% interest per annum from the time of the filing of the Informations in the Makati
Regional Trial Court on 17 January 1984. Further, the total amount due as of the date of the
finality of this Decision will earn interest at 18% per annum until fully paid since this was
the stipulated rate in the applications for the letters of credit.24
The accounting of El Oro Corporation's debts as of 23 January 1992, which the trial court
used, is no longer useful as it does not specify the amounts owing under each of the trust
receipts. Hence, in the execution of this Decision, the trial court shall compute El Oro
Corporation's total liability under each of the trust receipts dated 30 September 1981 and 9
October 1981 based on the following formula:25
TOTAL AMOUNT DUE = [principal + interest + interest on interest] - partial payments
made26
Interest = principal x 18 % per annum x no. of years from due date27 until finality of
judgment
Interest on interest = interest computed as of the filing of the complaint (17 January 1984)
x 12% x no. of years until finality of judgment
Attorney's fees is 10% of the total amount computed as of finality of judgment
Total amount due as of the date of finality of judgment will earn an interest of 18% per
annum until fully paid.
In so delegating this task, we reiterate what we said in Rizal Commercial Banking
Corporation v. Alfa RTW Manufacturing Corporation28 where we also ordered the trial
court to compute the amount of obligation due based on a formula substantially similar to
that indicated above:
The total amount due xxx [under] the xxx contract[] xxx may be easily determined by the
trial court through a simple mathematical computation based on the formula specified
above. Mathematics is an exact science, the application of which needs no further proof
from the parties.
Petitioner Jose Tupaz's Acquittal did not Extinguish his Civil Liability
The rule is that where the civil action is impliedly instituted with the criminal action, the
civil liability is not extinguished by acquittal -
[w]here the acquittal is based on reasonable doubt xxx as only preponderance of evidence
is required in civil cases; where the court expressly declares that the liability of the accused
is not criminal but only civil in nature xxx as, for instance, in the felonies of estafa, theft,
and malicious mischief committed by certain relatives who thereby incur only civil liability
(See Art. 332, Revised Penal Code); and, where the civil liability does not arise from or is
not based upon the criminal act of which the accused was acquitted xxx.29 (Emphasis
supplied)rllbrr
Here, respondent bank chose not to file a separate civil action30 to recover payment under
the trust receipts. Instead, respondent bank sought to recover payment in Criminal Case
Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose Tupaz, his acquittal
did not extinguish his civil liability. As the Court of Appeals correctly held, his liability
arose not from the criminal act of which he was acquitted (ex delito) but from the trust
receipt contract (ex contractu) of 30 September 1981. Petitioner Jose Tupaz signed the trust
receipt of 30 September 1981 in his personal capacity.
On the other Matters Petitioners Raise
Petitioners raise for the first time in this appeal the contention that El Oro Corporation's
debts under the trust receipts are not yet due and demandable. Alternatively, petitioners
assail the trust receipts as simulated. These assertions have no merit. Under the terms of the
5
trust receipts dated 30 September 1981 and 9 October 1981, El Oro Corporation's debts fell
due on 29 December 1981 and 8 December 1981, respectively.
Neither is there merit to petitioners' claim that the trust receipts were simulated. During the
trial, petitioners did not deny applying for the letters of credit and subsequently executing
the trust receipts to secure payment of the drafts drawn under the letters of credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court
of Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with the
following MODIFICATIONS:
1) El Oro Engraver Corporation is principally liable for the total amount due under the trust
receipts dated 30 September 1981 and 9 October 1981, as computed by the Regional Trial
Court, Makati, Branch 144, upon finality of this Decision, based on the formula provided
above;
2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporation's total debt under
the trust receipt dated 30 September 1981 as thus computed by the Regional Trial Court,
Makati, Branch 144; andcralawlibrary
3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable under the trust receipt
dated 9 October 1981.
SO ORDERED.
[G.R. No. L-26449. May 15, 1969.]
LUZON STEEL CORPORATION, represented by TOMAS AQUINO CU, plaintiff-
appellant, v. JOSE O. SIA, defendant, TIMES SURETY & INSURANCE CO., INC.,
surety-appellee.
German A. Sipin, for Plaintiff-Appellant.
Galicano S. Calapatia for surety-appellee.
SYLLABUS
1. REMEDIAL LAW; ATTACHMENT; COUNTERBOND TO DISCHARGE A LEVY ON
ATTACHMENT; RULE. Rule 57, Section 12, specifies that an attachment may be
discharged upon the making of a cash deposit or filing a counterbond "in an amount equal
to the value of the property attached as determined by the judge" ; that upon the filing of
the counterbond "the property attached - shall be delivered to the party making the deposit
or giving the counterbond, or the person appearing on his behalf, the deposit or
counterbond aforesaid standing in place of the property so released." Whether the judgment
be rendered after trial on the merits or upon compromise, such judgment may be made
effective upon the property released; and since the counterbond merely stands in the place
of such property, there is no reason why the judgment should not be made effective against
the counterbond regardless of the manner how the judgment was obtained.
2. ID.; ID.; ID.; SAID COUNTERBONDS DISTINGUISHED FROM BOND FILED BY
PLAINTIFF FOR THE ISSUANCE OF WRIT OF ATTACHMENT. Counterbonds
posted to obtain the lifting of a writ of attachment is a security for the payment of any
judgment that the attaching party may obtain; they are thus mere replacements of the
property formerly attached and may be levied upon after final judgment in the case in order
to realize the amount adjudged. This situation does not obtain in the case of injunction
counterbonds, since the sureties in the latter case merely undertake to pay all damages that
the plaintiff may suffer by reason of the continuance - of the acts complained of and not to
secure payment of the judgment recovered.
3. ID.; ID.; ID.; NATURE THEREOF. The counterbond contemplated in Section 17 of
Rule 57 of the Revised Rules of Court is ordinary guaranty where the sureties assume a
subsidiary liability.
4. CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; EXCUSSION; PREVIOUS
EXHAUSTION OF PROPERTY OF DEBTOR DOES NOT APPLY WHERE SURETY IS
BOUND IN SOLIDUM. Article 2059, paragraph 2, of the Civil Code of the Philippines
requiring excussion (previous exhaustion of the property of the debtor) does not apply if
the guarantor has bound himself solidarily with the debtor.
5. ID.; ID.; ID.; ID.; REASON. A procedural rule may not amend the substantive law
expressed in the Civil Code, and would nullify the express stipulation of the parties.
6. ID.; ID.; ID.; INSTANCE WHEN EXCUSSION DOES NOT APPLY. Even if the
suretys undertaking were not solidary with that of the principal debtor, still he may not
demand exhaustion of the property of the latter, unless he can point out sufficient leviable
property of the debtor within Philippine territory.
6
7. ID.; ID.; ID.; LIABILITY OF SURETY ATTACHES UPON RENDITION OF
JUDGMENT. Where under the rule and the bond the undertaking is to pay the
judgment, the liability of the surety or sureties attaches upon the rendition of the judgment,
and the issue of an execution and its return nulla bona is not, and should not be, a condition
to the right to resort to the bond. Payment under the bond is not made to depend upon the
redelivery or availability of the property previously attached.
8. ID.; ID.; ID.; REQUIREMENT OF NOTICE AND HEARING, SUBSTANTIAL
COMPLIANCE THEREWITH. Where the surety was allowed to move for the quashal
of the writ of execution and for the cancellation of its obligation, the requirement of notice
and summary hearing in the same action is substantially complied with.
DECISION
REYES, J.B.L., C.J.:
Direct appeal from two orders, dated 19 May and 5 June 1965, issued by the Court of First
Instance of Manila (Judge Francisco Arca presiding), in its Civil Case No. 54913, entitled
Luzon Steel Corporation, Plaintiff, v. Metal Manufacturing of the Philippines, Inc., and
Jose O. Sia, Defendants, whereby the court aforesaid quashed a writ of execution issued
against the Times Surety & Insurance Co., Inc., and cancelled the undertaking of said
surety company.
The essential and uncontroverted facts of the case may be summarized as
follows:chanrob1es virtual 1aw library
Luzon Steel Corporation has sued Metal Manufacturing of the Philippines and Jose O. Sia,
the formers manager, for breach of contract and damages. It obtained a writ of preliminary
attachment of the properties of the defendants, but the attachment was lifted upon a
P25,000.00 counter-bond executed by the defendant Sia, as principal, and the Times Surety
& Insurance., Inc. (hereinafter designated as the surety), as solidary guarantor, in the
following terms:jgc:chanrobles.com.ph
"WHEREFORE, we JOSE O. SIA, as principal, and the TIMES SURETY &
INSURANCE CO., INC., as Surety, in consideration of the dissolution of attachment,
hereby jointly and severally bind ourselves in the sum of Twenty Five Thousand Pesos
(P25,000.00), Philippine currency, to answer for the payment to the plaintiff of any
judgment it may recover in the action in accordance with Section 12, Rule 59, of the Rules
of Court. (pp. 32, 45, Rec. on Appeal.)"
Issues having been joined, plaintiff and defendant (without intervention of the surety)
entered into a compromise whereby defendant Sia agreed to settle the plaintiffs claim in
the following manner:jgc:chanrobles.com.ph
"1. That the Defendant shall settle with the Plaintiff the amount of TWENTY FIVE
THOUSAND (P25,000.00) PESOS, in the following manner: FIVE HUNDRED (P500.00)
PESOS, monthly for the first six (6) months to be paid at the end of every month and to
commence in January, 1965, and within one month after paying the last installment of
P500.00, the balance of P22,000.00 shall be paid in lump sum, without interest. It is
understood that failure of the Defendant to pay one or any installment will make the whole
obligation immediately due and demandable and that a writ of execution will be issued
immediately against Defendants bond."cralaw virtua1aw library
The compromise was submitted to the court and the latter approved it, rendered judgment
in conformity therewith, and directed the parties to comply with the same (Record on
Appeal, page 22).
Defendant having failed to comply, plaintiff moved for and obtained a writ of execution
against defendant and the joint and several counter-bond. The surety, however, moved to
quash the writ of execution against it, averring that it was not a party to the compromise,
and that the writ was issued without giving the surety notice and hearing. The court,
overruling the plaintiffs opposition, set aside the writ of execution, and later cancelled the
counter-bond, and denied the motion for reconsideration. Hence this appeal.
Main issues posed are (1) whether the judgment upon the compromise discharged the
surety from its obligation under its attachment counterbond and (2) whether the writ of
execution could be issued against the surety without previous exhaustion of the debtors
properties.
Both questions can be solved by bearing in mind that we are dealing with a counterbond
filed to discharge a levy on attachment. Rule 57, Section 12, specifies that an attachment
may be discharged upon the making of a cash deposit or filing a counterbond "in an
amount equal to the value of the property attached as determined by the judge" ; that upon
the filing of the counterbond "the property attached . . . shall be delivered to the party
making the deposit or giving the counterbond, or the person appearing on his behalf, the
deposit or counterbond of aforesaid standing in place of the property so released."
The italicized expressions constitute the key to the entire problem. Whether the judgment
be rendered after trial on the merits or upon compromise, such judgment undoubtedly may
be made effective upon the property released; and since the counterbond merely stands in
the place of such property, there is no reason why the judgment should not be made
effective against the counterbond regardless of the manner how the judgment was obtained.
7
Squarely on the point, and rebutting the appellees apprehension that the compromise could
be the result of a collusion between the parties to injure the surety, is our decision in
Anzures v. Alto Surety & Insurance Co., Inc., Et Al., 92 Phil. 742, where this Court,
through former Chief Justice Paras, ruled as follows:jgc:chanrobles.com.ph
"Under Section 12, Rule 59, of the Rules of Court, the bond filed, as in this case, for the
discharge of an attachment is to secure the payment to the plaintiff of any judgment he
may recover in the action, and stands in place of the property so released. It follows that
the order of cancellation issued by the respondent judge is erroneous. Indeed, judgment had
already been rendered by the Court of First Instance of Manila in civil case No. 11748,
sentencing Benjamin Aguilar to pay the sum of P3,500.00 to the petitioner; and it is not
pretended that said judgment is a nullity. There is no point in the contention of the
respondent Surety Company that the compromise was entered into without its knowledge
and consent, thus becoming as to it essentially fraudulent. The Surety is not a party to civil
case No. 11748 and, therefore, need not be served with notice of the petition for judgment.
As against the conjecture of said respondent that the parties may easily connive by means
of a compromise to prejudice it, there is also the likelihood that the same end may be
attained by parties acting in bad faith through a simulated trial. At any rate, it is within the
power of the Surety Company to protect itself against a risk of the kind.
Wherefore, the order of the respondent Judge cancelling the bond in question is set aside.
So ordered with costs against the respondent Alto Surety & Insurance Co., Inc."cralaw
virtua1aw library
The lower court and the appellee herein appear to have relied on doctrines of this Court
concerning the liability of sureties in bonds filed by a plaintiff for the issuance of writs of
attachment, without discriminating between such bonds and those filed by a defendant for
the lifting of writs of attachment already issued and levied. This confusion is hardly
excusable considering that this Court has already called attention to the difference between
these kinds of bonds. Thus, in Cajefe v. Judge Fernandez, Et Al., L-15709, 19 October
1960, this Court pointed out that
"The diverse rule in Section 17 of Rule 59 for counterbonds posted to obtain the lifting of a
writ of attachment is due to these bonds being security for the payment of any judgment
that the attaching party may obtain; they are thus mere replacements of the property
formerly attached, and just as the latter may be levied upon after final judgment in the case
in order to realize the amount adjudged, so is the liability of the countersureties
ascertainable after the judgment has become final. This situation does not obtain in the case
of injunction counterbonds, since the sureties in the latter case merely undertake to pay all
damages that the plaintiff may suffer by reason of the continuance . . . of the acts
complained of (Rule 60, Section 6) and not to secure payment of the judgment recovered."
1 has done so. Says Article 2060 of the Civil Code of the Philippines:jgc:chanrobles.com.ph
It was, therefore, error on the part of the court below to have ordered the surety bond
cancelled, on the theory that the parties compromise discharged the obligation of the
surety.
As declared by us in Mercado v. Macapayag, 69 Phil. 403, 405- 406, in passing upon the
liability of counter sureties in replevin who bound themselves to answer solidarily for the
obligations of the defendants to the plaintiffs in a fixed amount of P912.04, to secure
payment of the amount that said plaintiff be adjudged to recover from the defendants, 2
"the liability of the sureties was fixed and conditioned on the finality of the judgment
rendered regardless of whether the decision was based on the consent of the parties or on
the merits. A judgment entered on a stipulation is nonetheless a judgment of the court
because consented to by the parties. "But the surety in the present case insists (and the
court below so ruled) that the execution issued against it was invalid because the writ
issued against its principal, Jose O. Sia, Et Al., defendants below, had not been returned
unsatisfied; and the surety invoked in its favor Section 17 of Rule 57 of the Revised Rules
of Court (old Rule 59), couched in the following terms:jgc:chanrobles.com.ph
"SEC. 17 When execution returned unsatisfied recovery had upon bond.If the execution
be returned unsatisfied in whole or in part, the surety or sureties on any counterbond given
pursuant to the provisions of this rule to secure the payment of the judgment shall become
charged on such counterbond, and bound to pay to the judgment creditor upon demand, the
amount due under the judgment, which amount may be recovered from such surety or
sureties after notice and summary hearing in the same action."cralaw virtua1aw library
The suretys contention is untenable. The counterbond contemplated in the rule is evidently
an ordinary guaranty where the sureties assume a subsidiary liability. This is not the case
here, because the surety in the present case bound itself "jointly and severally" (in solidum)
with the defendant; and it is prescribed in Article 2059, paragraph 2, of the Civil Code of
the Philippines that excussion (previous exhaustion of the property of the debtor) shall not
take place "if he (the guarantor) has bound himself solidarily with the debtor." The rule
heretofore quoted can not be construed as requiring that an execution against the debtor be
first returned unsatisfied even if the bond were a solidary one; for a procedural rule may
not amend the substantive law expressed in the Civil Code, and further would nullify the
express stipulation of the parties that the suretys obligation should be solidary with that of
the defendant.
A second reason against the stand of the surety and of the court below is that even if the
suretys undertaking were not solidary with that of the principal debtor, still he may not
demand exhaustion of the property of the latter, unless he can point out sufficient leviable
property of the debtor within Philippine territory. There is no record that the appellee surety
8

"ART. 2060. In order that the guarantor may make use of the benefit of excussion, he must
set it up against the creditor upon the latters demand for payment from him, and point out
to the creditor available property of the debtor within Philippine territory, sufficient to
cover the amount of the debt."cralaw virtua1aw library
A third reason against the thesis of appellee is that, under the rule and its own terms, the
counter-bond is only conditioned upon the rendition of the judgment. Payment under the
bond is not made to depend upon the re-delivery or availability of the property previously
attached, as it was under Section 440 of the old Code of Civil Procedure. Where under the
rule and the bond the undertaking is to pay the judgment, the liability of the surety or
sureties attaches upon the rendition of the judgment, and the issue of an execution and its
return nulla bona is not, and should not be, a condition to the right to resort to the bond. 3
It is true that under Section 17 recovery from the surety or sureties should be "after notice
and summary hearing in the same action." But this requirement has been substantially
complied with from the time the surety was allowed to move for the quashal of the writ of
execution and for the cancellation of their obligation.
WHEREFORE, the orders appealed from are reversed, and the court of origin is ordered to
proceed with the execution against the surety appellee, Times Surety & Insurance Co., Inc.
Costs against said appellee.
[G.R. No. L-28030. January 18, 1982.]
THE IMPERIAL INSURANCE, INC., Petitioner, v. HON. WALFRIDO DE LOS
ANGELES, Judge of the Court of First Instance of Rizal, Quezon City Branch IV,
ROSA V. REYES, PEDRO V. REYES and CONSOLACION V. REYES, Respondents.
Paredes, Poblador, Nazareno & Azada for Petitioner.
Dakila T. Castro for Private Respondents.
SYNOPSIS
The plaintiffs in two separate civil actions against a common defendant were able to obtain
preliminary writs of attachment whereby properties of the defendant were attached.
However, the attachments were dissolved upon the execution by defendant of a
counterbond where the petitioner, as surety, bound itself "jointly and severally" with the
defendant to satisfy any judgment that may be rendered against the latter in the said civil
cases. Consequently, when judgment was rendered against the defendant after a joint trial
of the cases, and the writs of execution against him were returned unsatisfied, the plaintiff
filed a motion for recovery on the counterbonds. and, in a letter, demanded payment of the
accounts from the surety. The trial court granted the motion over the opposition of the
surety company, and a writ of execution was issued on ex parte motion of the plaintiffs. In
the meantime, the surety moved for reconsideration of the order granting plaintiffs motion
to recover on the counterbond, and upon denial thereof, filed a petition for certiorari with
the Court of Appeals. The petition was dismissed. Hence, this recourse. Petitioner surety
company assailed the trial courts issuance of the writ of execution against the counterbond
without prior notice of hearing and without prior exhaustion of defendants properties, and
faulted the appellate court for not holding that the order granting the motion for recovery
on the counterbond was final and therefore appealable.
The Supreme Court held that the requirements of notice and hearing to charge the
counterbond under Section 17, Rule 57 of the Rules of Court had been satisfactorily
complied with as shown by the records; that the rule that the counterbond contemplated in
the said Section 17 is an ordinary guaranty, cannot apply where the surety bound itself
"jointly and severally" with the defendant; and that under the same Section 17, the liability
of the surety on a counterbond automatically attaches and a writ of execution may
immediately be issued once the requirements set forth in the said provision of the Rules
have been met.
Decision affirmed.
SYLLABUS
1. REMEDIAL LAW; PROVISIONAL REMEDIES; PRELIMINARY ATTACHMENT;
COUNTERBOND TO LIFT ATTACHMENT; REQUISITES TO HOLD SURETY
THEREON LIABLE. Under Section 17, Rule 57 of the Rules of Court, the liability of
the surety upon a counterbond to lift an order of attachment automatically attaches after the
following requisites have been complied with: (1) the writ of execution must be returned
unsatisfied, in whole or in part; (2) the plaintiff must demand the amount due under the
judgment from the surety or sureties, and (3) notice and hearing of such demand although
in a summary manner.
2. ID.; ID.; ID.; ID.; REQUIREMENTS SATISFACTORILY COMPLIED WITH IN CASE
9
AT BAR; JUDGMENT AGAINST COUNTERBOND A SUPERFLUITY. It is clear
from the indubitable documents on record that the requirements of notice and hearing of
demand upon the surety on the counterbond had been satisfactorily complied with by the
private respondents in the case at bar when they filed the motion for recovery on the surety
bond dated September 9, 1966 and to which the surety filed their opposition dated
September 24, 1966. Therefore, all the requisites under Section 17, Rule 57 of the Rules of
Court have been complied with, and the liability of the petitioner surety automatically
attaches.
3. ID.; ID.; ID.; ID.; NATURE THEREOF. The counterbonds under Section 17, Rule 57
of the Rules of Court merely stand in place of the properties attached and released by virtue
of the filing of such counterbond. They are mere replacements of the properties formerly
attached, and just as the latter may be levied upon after final judgment in the case in order
to realize the amount adjudged, so is the liability of the counter sureties ascertainable after
the judgment has become final.
4. ID.; ID.; ID.; ID.; SURETIES SUBSIDIARILY LIABLE THEREON; CASE AT BAR,
AN EXCEPTION. Although the counterbond contemplated in Section 17, Rule 57 of
the Rules of Court is an ordinary guaranty where the sureties assume a subsidiary liability,
the rule cannot apply to a counterbond where the surety bound itself "jointly and severally"
(in solidum) with the defendant as in the present case
5. ID.; ID.; ID.; ID.; ID.; NO EXCUSSION WHERE SURETY BOUND HIMSELF
SOLIDARILY WITH PRINCIPAL DEBTOR. In accordance with Article 2059, par. 2 of
the Civil Code of the Philippines, excussion (previous exhaustion of the property of the
debtor) shall not take place "if he (the guarantor) has bound himself solidarily with the
debtor. Section 17, Rule 57 of the Rules of Court cannot be construed that an execution
against the debtor be first returned unsatisfied even if the bond were a solidary one, for a
procedural rule may not amend the substantive law expressed in the Civil Code, and further
would nullify the express stipulation of the parties that the suretys obligation should be
solidary with that of the defendant.
6. ID.; ID.; ID.; ID.; RECOVERY AND EXECUTION AGAINST SURETY IN THE
SAME CIVIL CASE. To recover against the petitioner surety on its counterbonds, it is
not necessary to file a separate action. Recovery and execution may be had in the same
civil cases as sanctioned by Section 17, Rule 57 of the Rules of Court. Where all the
requisites under the said Rule are present, as in the present case, the liability of the surety
automatically attaches. The order rendering judgment against the counterbonds in this case
was, therefore, a superfluity. The respondent Judge could have immediately issued a writ of
execution against the petitioner surety upon demand.
7. ID.; ID.; ID.; ID.; ORDER RENDERING JUDGMENT AGAINST COUNTERBOND,
FINAL AND NON-APPEALABLE; APPLICABLE RULE. The finality and non-
appealability of the order rendering judgment against the counterbond in the case at bar is
made certain and absolute with the issuance of the order of execution upon the filing of the
ex parte motion for writ of execution of which the petitioner was duly notified by the
respondent Judge and which was duly heard. The general rule is that an order of execution
is not appealable, otherwise a case would never end. The two exceptions to this rule are;
(1) where the order of execution varies the tenor of the judgment; and (2) when the terms
of the judgment are not very clear, and there is room for interpretation. The case at bar does
not fall under either exception. There is no showing that the order of execution varies the
tenor of the judgment in the two civil cases, nor of the order rendering judgment against the
surety, but is in fact in consonance therewith and the terms of the judgment are clear and
definite, therefore, the general rule of non-appealability applies.
8. ID.; ID.; ID.; ID.; UNDERTAKING UNDER COUNTERBOND CONDITIONED
UPON RENDITION OF JUDGMENT; CASE AT BAR. Under the law and under their
own terms, the counter-bonds are only conditioned upon the rendition of the judgment. As
held by this Court in the case of Luzon Steel Corporation v. Sia (28 SCRA 58, 64) "where
under the role and the bond the undertaking is to pay the judgment, the liability of the
surety or sureties attaches upon the rendition of the judgment, and the issue of an execution
and its return nulla bona is not, and should not be a condition tu the right to resort to the
bond." Thus, it matters not whether the Provincial Sheriff, in making the return of the writ
of execution served or did not serve a copy thereof with notice of attachment on the
administratrix of the intestate estate in the case at bar and filed a copy of said writ with the
Office of the Clerk of Court with notice in accordance with Section 7(f), Rule 57 of the
Revised Rules of Court. The petitioner surety as solidary obligor is liable just the same.
DECISION
FERNANDEZ, J.:
This is a petition for certiorari to review the decision of the Court of Appeals in CA-G.R.
No. 38824-R promulgated on July 19, 1967 entitled "The Imperial Insurance, Inc.,
petitioner versus Hon. Walfrido de los Angeles, Judge of the Court of First Instance of
Rizal, Branch IV, Quezon City, Et Al., Respondents," the dispositive part of which
reads:jgc:chanrobles.com.ph
"WHEREFORE, the instant petition is dismissed and the writ of preliminary injunction
issued by the Court on January 31, 1967, is hereby dissolved, with costs against petitioner.
"SO ORDERED." 1
10
As found by the Court of Appeals, the uncontroverted facts are:jgc:chanrobles.com.ph
"It appears that herein private respondent Rosa V. Reyes is the plaintiff in Civil Case No.
Q-8213 of the Court of First Instance of Rizal, Branch IV, Quezon City, entitled, Rosa V.
Reyes v. Felicisimo V. Reyes, etc., where she obtained a writ of preliminary attachment
and, accordingly, levied upon all the properties of the defendant, Felicisimo V. Reyes, in
said case. The other two herein private respondents, namely, Pedro V. Reyes and
Consolacion V. Reyes, are the plaintiffs in Civil Case No. Q-5214 of the same court
entitled, Pedro V. Reyes, etc., and likewise, obtained a writ of preliminary attachment
and, accordingly, levied upon all the properties of the defendant, Felicisimo V. Reyes, in
said case.
"For the dissolution of the attachments referred to above, the herein petitioner, The
Imperial Insurance, Inc., as surety, and Felicisimo V. Reyes, as principal, posted a
defendants bond for dissolution of attachment in the amount of P60,000.00 in Civil Case
No. Q-5213 and another bond of the same nature in the amount of P40,000.00 in Civil Case
No. Q-5214.
"Civil Cases Nos. Q-5213 and 5214 were jointly tried and the decision therein rendered
was in favor of the plaintiffs. This decision was affirmed by this Court on appeal in cases
CA-G.R. Nos. 33783-R and 33784-R. The decision of this Court, having become final, the
records of the cases were remanded to the Court of First Instance of Rizal, Quezon City
Branch, for execution of judgment.
"Accordingly, on June 24,1966, the Court below, presided by the herein respondent Judge,
Hon. Walfrido de los Angeles, issued the writs of execution of judgment in said cases.
However, on August 20, 1966, the Provincial Sheriff of Bulacan returned the writs of
execution unsatisfied in whole or in part.
"On September 9,1966, private respondents filed a motion for recovery on the surety
bonds. Thereafter, said private respondents, thru counsel, sent a letter of demand upon
petitioner asking the latter to pay them the accounts on the counter-bonds. On September
24,1966, petitioner filed its opposition to the private respondents Motion for recovery on
the surety bonds. Respondent Judge, in his order, dated November 10,1966, rendered
judgment against the counter-bonds.
"On November 15, 1966, private respondents filed an ex parte motion for writ of
execution without serving copy thereof on petitioner.
"In the meantime, on or about November 23, 1966, petitioner filed a motion for
reconsideration of the order, dated November 10, 1966. This motion was, however, denied
by the respondent Judge on January 9, 1967.
"On or about January 11, 1967, petitioner filed its notice of intention to appeal from the
final orders of the respondent Judge, dated November 10, 1966 and January 9, 1967.
"On January 19, 1967, the respondent Judge issued an order granting the issuance of the
writ of execution against the bonds filed by the petitioner" (Exhibit J, petition). 2
On January 25, 1967, the petitioner filed a petition for certiorari with prayer for
preliminary injunction with the Court of Appeals to restrain the enforcement of the writ of
execution. 3 The petition was given due course and on January 30, 1967 a writ of
preliminary injunction was issued. 4 After the parties had submitted their respective
pleadings and memoranda in lieu of oral argument, the Court of Appeals rendered the
decision now under review.
The defendant, Felicisimo V. Reyes, in the abovementioned cases died during the pendency
of the trial. He was duly substituted by his surviving spouse, Emilia T. David, an
administratrix of his intestate estate. 5
The petitioner assigns as errors allegedly committed by the Court of Appeals the
following:chanrob1es virtual 1aw library
"I
"THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE
RESPONDENT JUDGE COULD LEGALLY ISSUE THE WRIT OF EXECUTION
AGAINST THE PETITIONER AS SURETY IN A COUNTERBOND (BOND TO
DISSOLVE ATTACHMENT) ON THE BASIS OF AN EX-PARTE MOTION FOR
EXECUTION WHICH WAS NEITHER SERVED UPON THE SURETY NOR SET FOR
HEARING.
"II
"THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE PLAINTIFF
WHO OBTAINED A JUDGMENT AGAINST THE DEFENDANT MAY LEGALLY
CHOOSE TO GO DIRECTLY AFTER THE SURETY IN A COUNTERBOND
WITHOUT PRIOR EXHAUSTION OF THE DEFENDANTS PROPERTIES.
"III
"THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE
11
JUDGMENT RENDERED AGAINST THE MENTIONED COUNTERBONDS IS A
FINAL ORDER IN THE CONTEMPLATION OF SECTION 2, RULE 41 OF THE
REVISED RULES OF COURT AND, THEREFORE, APPEALABLE.
"IV
"THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT IN THE
ABSENCE OF AN EXPRESS PROVISION OF THE REVISED RULES OF COURT,
THE PROCEDURE FOLLOWED BY THE SHERIFF IN THE EXECUTION OF THE
JUDGMENT ON THE SURVIVING CLAIMS, WHEN THE DEFENDANT DIED
DURING THE PENDENCY OF THE TRIAL OF HIS CASE AND BEFORE
JUDGMENT WAS DULY SUBSTITUTED BY THE COURT APPOINTED
ADMINISTRATRIX OF HIS ESTATE, SHOULD HAVE BEEN THE SAME AS THE
PROCEDURE SET OUT IN SECTION (f), RULE 57 RESPECTING THE EXECUTION
OF A WRIT OF PRELIMINARY ATTACHMENT OF PROPERTIES IN CUSTODIA
LEGIS." 6
Anent the first error, the petitioner contends that the Court of Appeals erred in holding that
the respondent Judge could legally issue the writ of execution against the petitioner as
surety in a counterbond (bond to dissolve attachment) on the basis of an ex parte motion
for execution which was allegedly never served upon the surety nor set for hearing. This
contention is devoid of merit.
The counterbonds filed to lift the writs of attachment executed by the herein petitioner, The
Imperial Insurance, Inc., for and in behalf of the deceased defendant Felicisimo V . Reyes
in favor of the plaintiffs, private respondents herein Rosa V. Reyes and Consolacion V.
Reyes in Civil Case No. Q-5214 docketed with the Court of First Instance of Rizal, Branch
IV, Quezon City, are clearly the bonds contemplated under Sec. 17, Rule 57 of the Rules of
Court which provides:jgc:chanrobles.com.ph
"Sec. 17. When execution returned unsatisfied, recovery had upon bond. If the
execution be returned unsatisfied in whole or in part, the surety or sureties on any
counterbond given pursuant to the provisions of this rule to secure the payment of the
judgment shall become charged on such counterbond, and bound to pay to the judgment
creditor upon demand, the amount due under the judgment, which amount may be
recovered from such surety or sureties after notice and summary hearing in the same
action."cralaw virtua1aw library
This section allows the counterbond filed to lift an attachment to be charged only after
notice and summary hearing in the same action. The records show that the notice and
hearing requirement was substantially complied with in the instant case.
Prior to the filing of the ex parte motion for a writ of execution, the respondents filed a
motion for recovery on the surety bonds where the petitioner was duly notified and the said
motion was heard on September 24, 1966. 7 Moreover, on November 23, 1966 the
petitioner filed a motion for reconsideration of the order dated November 10, 1966
rendering judgment against the petitioner on its counterbonds in the amount of P60,000.00
in Civil Case No. Q-5213 and P40,000.00 in Civil Case No. Q-52l4. 8 The respondent
Judge set the hearing of the ex parte motion for writ of execution together with the motion
for reconsideration of the order dated November 10, 1966 on December 17, 1966 at 8:30
oclock in the morning. 9 The petitioner received the notice of the said hearing on
December 9, 1966 as evidenced by Registry Return No. 40122. 10 On January 9, 1967, the
respondent Judge issued an order denying the motion for reconsideration dated November
23,1966 for lack of merit. 11 In an order dated January 19, 1967, the motion for writ of
execution was granted by the respondent judge. 12
It is thus clear from indubitable documents on record that the requirements of notice and
hearing had been satisfactorily complied with by the respondents. The first error assigned
is overruled.
The petitioner asserts that the Court of Appeals gravely erred in holding that the plaintiff
who obtained judgment against the defendant may legally choose "to go directly" after the
surety in a counterbond without prior exhaustion of the defendants properties. This
contention is likewise not meritorious.
Although the counterbond contemplated in the aforequoted Sec. 17, Rule 57, of the Rules
of Court is an ordinary guaranty where the sureties assume a subsidiary liability, the rule
cannot apply to a counterbond where the surety bound itself "jointly and severally" (in
solidum) with the defendant as in the present case. The counterbond executed by the
deceased defendant Felicisimo V. Reyes, as principal, and the petitioner, The Imperial
Insurance, Inc., as solidary guarantor to lift the attachment in Civil Case No. Q-5213 is in
the following terms:jgc:chanrobles.com.ph
"WHEREFORE, We, FELICISIMO V. REYES, of legal age, Filipino, and with postal
address at San Jose, San Miguel, Bulacan and/or 1480 Batangas Street, Sta. Cruz, Manila,
as PRINCIPAL and THE IMPERIAL INSURANCE, INC., a corporation duly organized
and existing under the laws of the Philippines, as SURETY, in consideration of the
dissolution of said attachment, hereby JOINTLY AND SEVERALLY, bind ourselves in the
sum of SIXTY THOUSAND PESOS ONLY (P60,000.00), Philippine Currency, under the
condition that in case the plaintiff recovers judgment in the action, the defendant shall pay
the sum of SIXTY THOUSAND PESOS (P60,000.00), Philippine Currency, being the
amount released for attachment, to be applied to the payment of the judgment, or in default
thereof, the Surety will, on demand, pay to the plaintiff said amount of SIXTY
THOUSAND PESOS ONLY (P60,000.00), Philippine Currency. (Emphasis supplied).
12
"Manila, Philippines ,June 30, 1960." 13
The counterbond executed by the same parties in Civil Case No. Q-5214, likewise
states:jgc:chanrobles.com.ph
"WHEREFORE, We, FELICISIMO V. REYES, of legal age, Filipino, and with postal
address at San Jose, San Miguel, Bulacan, and/or 1480 Batangas Street, Sta. Cruz, Manila,
as PRINCIPAL and THE IMPERIAL INSURANCE, INC., a corporation duly organized
and existing under the laws of the Philippines, as SURETY, in consideration of the
dissolution of said attachment, hereby JOINTLY and SEVERALLY, bind ourselves in the
action the defendant shall pay the sum of FORTY THOUSAND PESOS ONLY
(40,000.00), Philippine Currency, being the amount released for attachment, to be applied
to the payment of the judgment, or in default thereof, the Surety will, on demand, pay to
the plaintiffs said amount of FORTY THOUSAND PESOS ONLY (P40,000.00), Philippine
Currency. (Capitalizations supplied).
"Manila, Philippines, June 30th, 1960." 14
Clearly, the petitioner, the Imperial Insurance, Inc., had bound itself solidarily with the
principal, the deceased defendant Felicisimo V. Reyes. In accordance with Article 2059,
par. 2 of the Civil Code of the Philippines, 15 excussion (previous exhaustion of the
property of the debtor) shall not take place "if he (the guarantor) has bound himself
solidarily with the debtor." Section 17, Rule 57 of the Rules of Court cannot be construed
that an "execution against the debtor be first returned unsatisfied even if the bond were a
solidary one, for a procedural rule may not amend the substantive law expressed in the
Civil Code, and further would nullify the express stipulation of the parties that the suretys
obligation should be solidary with that of the defendant." 16
Hence the petitioner, cannot escape liability on its counterbonds based on the second error
assigned.
As regards the third error, the petitioner submits that the Court of Appeals erred in not
holding that the order dated November 10, 1966 rendering judgment against the
counterbonds, as well as the order dated January 9, 1967, denying the motion for
reconsideration thereof, and the order of the writ of execution dated January 19, 1967 are
final and appealable in accordance with Sec. 2, Rule 41 of the Revised Rules of Court. This
submission is also without merit.
To recover against the petitioner surety on its counterbonds it is not necessary to file a
separate action. Recovery and execution may be had in the same Civil Cases Nos. Q-5213
and Q-5214, as sanctioned by Sec. 17, Rule 57, of the Revised Rules of Court.
The decision in Civil Cases Nos. Q-5213 and Q-5214, having become final, the respondent
Judge issued the writs of execution in said cases. On August 20, 1966, the Provincial
Sheriff of Bulacan returned the writs of execution "unsatisfied in whole or in part. 17"
Sec. 12, Rule 57 of the Revised Rules of Court 18 specifies that an attachment may be
discharged upon the making of a cash deposit or filing a counterbond "in an amount equal
to the value of the property attached as determined by the judge" ; and that upon filing the
counterbond "the property attached shall be delivered to the party making the deposit or
giving the counter bond or the person appearing in his behalf, the deposit or counterbond
standing in place of the property so released."cralaw virtua1aw library
The counterbonds merely stand in place of the properties so released. They are mere
replacements of the properties formerly attached, and just as the latter may be levied upon
after final judgment in the case in order to realize the amount adjudged so is the liability of
the counter sureties ascertainable after the judgment has become final. 19
The judgment having been rendered against the defendant, Felicisimo V. Reyes, the
counterbonds given by him and the surety, The Imperial Insurance, Inc., under Sec. 12,
Rule 57 are made liable after execution was returned unsatisfied. Under the said rule, a
demand shall be made upon the surety to pay the plaintiff the amount due on the judgment,
and if no payment is so made, the amount may be recovered from such surety after notice
and hearing in the same action. A separate action against the sureties is not necessary. 20
In the present case, the demand upon the petitioner surety was made with due notice and
hearing thereon when the private respondents filed the motion for recovery on the surety
bonds dated September 9, 1966 and to which the petitioner filed their opposition dated
September 24, 1966. 21
Therefore, all the requisites under Sec. 17, Rule 57, being present, namely: (1) the writ of
execution must be returned unsatisfied, in whole or in part; (2) the plaintiff must demand
the amount due under the judgment from the surety or sureties, and (3) notice and hearing
of such demand although in a summary manner, complied with, the liability of the
petitioner automatically attaches.
In effect, the order dated November 10, 1966 rendering judgment against the counterbonds
was a superfluity. The respondent Judge could have issued immediately a writ of execution
against the petitioner surety upon demand.
As correctly held by the Court of Appeals:jgc:chanrobles.com.ph
"In fact, respondent Judge could have even issued a writ of execution against petitioner on
its bond immediately after its failure to satisfy the judgment against the defendant upon
demand, since liability on the bond automatically attaches after the writ of execution
against the defendant was returned unsatisfied as held in the case of Tijan v. Sibonghanoy,
13
CA-G.R. No. 23669-R, December 11, 1927." 22

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

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

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

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

SO ORDERED.

14

[G.R. No. 109941. August 17, 1999.]
PACIONARIA C. BAYLON, Petitioner, v. THE HONORABLE COURT OF
APPEALS (Former Ninth Division) and LEONILA TOMACRUZ, Respondents.
DECISION
GONZAGA-REYES, J.:
This is a petition for review by way of certiorari under Rule 45 of the Revised Rules of
Court of the decision of the Court of Appeals 1 dated November 29, 1991 in CA-G.R. CV
No. 27779 affirming the decision 2 of the Regional Trial Court of Quezon City, Branch 88,
dated June 14, 1990 in Civil Case No. Q-89-2483 and the Resolution of the Court of
Appeals dated April 27, 1993 denying petitioners Motion for Reconsideration.
The pertinent facts, as found by the trial court and affirmed by respondent court, are briefly
narrated as follows:chanroblesvirtual|awlibrary
Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent Leonila
Tomacruz, the co-manager of her husband at PLDT, to Rosita B. Luanzon. 3 Petitioner told
private respondent that Luanzon has been engaged in business as a contractor for twenty
years and she invited private respondent to lend Luanzon money at a monthly interest rate
of five percent (5%), to be used as capital for the latters business. Private respondent,
persuaded by the assurances of petitioner that Luanzons business was stable and by the
high interest rate, agreed to lend Luanzon money in the amount of P150,000. On June 22,
1987, Luanzon issued and signed a promissory note acknowledging receipt of the P150,000
from private respondent and obliging herself to pay the former the said amount on or
before August 22, 1987. 4 Petitioner signed the promissory note, affixing her signature
under the word "guarantor." Luanzon also issued a postdated Solidbank check no.
CA418437 dated August 22, 1987 payable to Leonila Tomacruz in the amount of P150,000.
5 Subsequently, Luanzon replaced this check with another postdated Solidbank check no.
432945 dated December 22, 1987, in favor of the same payee and covering the same
amount. 6 Several checks in the amount of P7,500 each were also issued by Luanzon and
made payable to private Respondent. 7
Private respondent made a written demand upon petitioner for payment, which petitioner
did not heed. Thus, on May 8, 1989, private respondent filed a case for the collection of a
sum of money with the Regional Trial Court (RTC) of Quezon City, Branch 88, against
Luanzon and petitioner herein, impleading Mariano Baylon, husband of petitioner, as an
additional defendant. However, summons was never served upon Luanzon.
In her answer, petitioner denied having guaranteed the payment of the promissory note
issued by Luanzon. She claimed that private respondent gave Luanzon the money, not as a
loan, but rather as an investment in Art Enterprises and Construction, Inc. the
construction business of Luanzon. Furthermore, petitioner avers that, granting arguendo
that there was a loan and petitioner guaranteed the same, private respondent has not
exhausted the property of the principal debtor nor has she resorted to all the legal remedies
against the principal debtor as required by law. Finally, petitioner claims that there was an
extension of the maturity date of the loan without her consent, thus releasing her from her
obligation. 8chanrobles virtual lawlibrary
After trial on the merits, the lower court ruled in favor of private Respondent. In its
Decision dated June 14, 1990, it stated that
15
The evidence and the testimonies on record clearly established a (sic) fact that the
transaction between the plaintiff and defendants was a loan with five percent (5%) monthly
interest and not an investment. In fact they all admitted in their testimonies that they are not
given any stock certificate but only promissory notes similar to Exhibit "B" wherein it was
clearly stated that defendant Luanzon would pay the amount of indebtedness on the date
due. Postdated checks were issued simultaneously with the promissory notes to enable the
plaintiff and others to withdraw their money on a certain fixed time. This shows that they
were never participants in the business transaction of defendant Luanzon but were
creditors.
The evidences presented likewise show that plaintiff and others loan their money to
defendant Luanzon because of the assurance of the monthly income of five percent (5%) of
their money and that they could withdraw it anytime after the due date add to it the fact that
their friend, Pacionaria Baylon, expresses her unequivocal guarantee to the payment of the
amount loaned.
x x x project of the latter. 13 In support of her claim, petitioner cites the use by private
WHEREFORE, premises considered, judgment is hereby rendered against the defendants
Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the sum of P150,000.00,
with interest at the legal rate from the filing of this complaint until full payment thereof, to
pay the total sum of P21,000.00 as attorneys fees and costs of suit. 9chanrobles.com.ph :
virtual law library
On appeal, the trial courts decision was affirmed by the Court of Appeals. Hence, this
present case wherein petitioner makes the following assignment of errors
I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE RESPONDENT
TOMACRUZ WAS A CREDITOR OF DEFENDANT LUANZON AND NOT AN
INVESTOR IN THE CONSTRUCTION BUSINESS OF ART ENTERPRISES &
CONSTRUCTION, INC.
II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT
BAYLON WAS A "GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A") THE
RESPONDENT COURT ERRED IN RULING THAT PETITIONER-APPELLANT
BAYLON IS LIABLE TO THE PRIVATE RESPONDENT BECAUSE THE LATTER
HAS NOT TAKEN STEPS TO EXHAUST THE PROPERTY OF THE PRINCIPAL
DEBTOR AND HAS NOT RESORTED TO ALL THE LEGAL REMEDIES PROVIDED
BY LAW AGAINST THE DEBTOR, DEFENDANT LUANZON.
III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT
BAYLON WAS A GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED JUNE
22, 1987, THE LOWER COURT ERRED IN RESOLVING THAT SHE WAS NOT
RELEASED FROM HER GUARANTY BY THE SUBSEQUENT TRANSACTIONS
BETWEEN THE RESPONDENT-APPELLANT AND DEFENDANT
LUANZON.chanroblesvirtuallawlibrary
At the outset, we note that petitioners claim that the factual findings of the lower court,
which were affirmed by the Court of Appeals, were based on a misapprehension of facts
and contradicted by the evidence on records 10 is a bare allegation and devoid of merit. As
a rule, the conclusions of fact of the trial court, especially when affirmed by the Court of
Appeals, are final and conclusive and cannot be reviewed on appeal by the Supreme Court.
11 Although this rule admits of several exceptions, 12 none of the exceptions are in point in
the present case. The factual findings of the respondent court are borne out by the record
and are based on substantial evidence.
Petitioner claims that there is no loan to begin with; that private respondent gave Luanzon
the amount of P150,000, not as a loan, but rather as an investment in the construction
respondent of the words "investment," "dividends," and "commission" in her testimony
before the lower court; the fact that private respondent received monthly checks from
Luanzon in the amount of P7,500 from July to December, 1987, representing dividends on
her investment; and the fact that other employees of the Development Bank of the
Philippines made similar investments in Luanzons construction business. 14
However, all the circumstances mentioned by petitioner cannot override the clear and
unequivocal terms of the June 22, 1987 promissory note whereby Luanzon promised to pay
private respondent the amount of P150,000 on or before August 22, 1987. The promissory
note states as follows:chanroblesvirtuallawlibrary:red
June 22, 1987
To Whom It May Concern:chanrob1es virtual 1aw library
For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount of
ONE HUNDRED FIFTY THOUSAND PESOS ONLY (P150,000.00) on or before August
22, 1987.
The above amount is covered by _____ Check No. _____ dated August 22, 1987.
(signed)
ROSITA B. LUANZON
G U R A R A N T O R :chanrob1es virtual 1aw library
16
 Under the circumstances availing in the present case, we hold that it is premature for this
(signed) Court to even determine whether or not petitioner is liable as a guarantor and whether she
is entitled to the concomitant rights as such, like the benefit of excussion, since the most
PACIONARIA O. BAYLON basic prerequisite is wanting that is, no judgment was first obtained against the principal
debtor Rosita B. Luanzon. It is useless to speak of a guarantor when no debtor has been
Tel. No. 801-28-00 held liable for the obligation which is allegedly secured by such guarantee. Although the
principal debtor Luanzon was impleaded as defendant, there is nothing in the records to
18 P. Mapa St., DBP Village show that summons was served upon her. Thus, the trial court never even acquired
jurisdiction over the principal debtor. We hold that private respondent must first obtain a
Almanza, Las Pinas, M.M. 15 judgment against the principal debtor before assuming to run after the alleged guarantor.

If the terms of a contract are clear and leave no doubt as to the intention of the contracting IN VIEW OF THE FOREGOING, the petition is granted and the questioned Decision of
parties, the literal meaning of its stipulation shall control. 16 Resort to extrinsic aids and the Court of Appeals dated November 29, 1991 and Resolution dated April 27, 1993 are
other extraneous sources are not necessary in order to ascertain the parties intent when SET ASIDE. No pronouncement as to costs.chanrobles lawlibrary : rednad
there is no ambiguity in the terms of the agreement. 17 Both petitioner and private
respondent do not deny the due execution and authenticity of the June 22, 1987 promissory SO ORDERED.
note. All of petitioners arguments are directed at uncovering the real intention of the
parties in executing the promissory note, but no amount of argumentation will change the
plain import of the terms thereof, and accordingly, no attempt to read into it any alleged
intention of the parties thereto may be justified. 18 The clear terms of the promissory note
establish a creditor-debtor relationship between Luanzon and private Respondent. The
transaction at bench is therefore a loan, not an investment.chanroblesvirtualawlibrary

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

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

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

17

[G.R. NO. 151060 : August 31, 2005]
JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA.
ANA, Petitioners, v. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION,Respondent.
[G.R. NO. 151311 : August 31, 2005]
NARCISO V. CRUZ, Petitioners, v. PHILIPPINE EXPORT and FOREIGN LOAN
GUARANTEE CORPORATION, Respondent.
DECISION
TINGA, J.:
Before us are consolidated petitions questioning the Decision1 of the Court of Appeals
(CA) in CA-G.R. CV No. 61318, entitled Philippine Export and Foreign Loan Guarantee
Corporation v. JN Development Corporation, et al., which reversed the Decision of the
Regional Trial Court (RTC) of Makati, Branch 60.
On 13 December 1979, petitioner JN Development Corporation ("JN") and Traders Royal
Bank (TRB) entered into an agreement whereby TRB would extend to JN an Export
Packing Credit Line for Two Million Pesos (P2,000,000.00). The loan was covered by
several securities, including a real estate mortgage2 and a letter of guarantee from
respondent Philippine Export and Foreign Loan Guarantee Corporation ("PhilGuarantee"),
now Trade and Investment Development Corporation of the Philippines, covering seventy
percent (70%) of the credit line.3 With PhilGuarantee issuing a guarantee in favor of
TRB,4 JN, petitioner spouses Rodrigo and Leonor Sta. Ana5 and petitioner Narciso
Cruz6 executed a Deed of Undertaking7 (Undertaking) to assure repayment to
PhilGuarantee.
It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October 1980
TRB requested PhilGuarantee to make good its guarantee.8 PhilGuarantee informed JN
about the call made by TRB, and inquired about the action of JN to settle the loan. 9 Having
received no response from JN, on 10 March 1981 PhilGuarantee paid TRB Nine Hundred
Thirty Four Thousand Eight Hundred Twenty Four Pesos and Thirty Four Centavos
(P934,824.34).10 Subsequently, PhilGuarantee made several demands on JN, but the latter
failed to pay. On 30 May 1983, JN, through Rodrigo Sta. Ana, proposed to settle the
obligation "by way of development and sale" of the mortgaged property.11 PhilGuarantee,
however, rejected the proposal.
PhilGuarantee thus filed a Complaint12 for collection of money and damages against herein
petitioners.
In its Decision dated 20 August 1998, the RTC dismissed PhilGuarantee's Complaint as
well as the counterclaim of petitioners. It ruled that petitioners are not liable to reimburse
PhilGuarantee what it had paid to TRB. Crucial to this holding was the court's finding that
TRB was able to foreclose the real estate mortgage executed by JN, thus extinguishing
petitioners' obligation.13 Moreover, there was no showing that after the said foreclosure,
TRB had demanded from JN any deficiency or the payment of the difference between the
18
proceeds of the foreclosure sale and the actual loan.14 In addition, the RTC held that since
PhilGuarantee's guarantee was good for only one year from 17 December 1979, or until 17
December 1980, and since it was not renewed after the expiry of said period,
PhilGuarantee had no more legal duty to pay TRB on 10 March 1981.15 The RTC likewise
ruled that Cruz cannot be held liable under the Undertaking since he was not the one who
signed the document, in line with its finding that his signature found in the records is
totally different from the signature on the Undertaking.16
According to the RTC, the failure of TRB to sue JN for the recovery of the loan precludes
PhilGuarantee from seeking recoupment from the spouses Sta. Ana and Cruz what it paid
to TRB. Thus, PhilGuarantee's payment to TRB amounts to a waiver of its right under Art.
2058 of the Civil Code.17
Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The appellate court
reversed the RTC and ordered petitioners to pay PhilGuarantee Nine Hundred Thirty Four
Thousand Six Hundred Twenty Four Pesos and Thirty Four Centavos (P934,624.34), plus
service charge and interest.18
In reaching its denouement, the CA held that the RTC's finding that the loan was
extinguished by virtue of the foreclosure sale of the mortgaged property had no factual
support,19 and that such finding is negated by Rodrigo Sta. Ana's testimony that JN did not
receive any notice of foreclosure from PhilGuarantee or from TRB.20 Moreover, Sta. Ana
even offered the same mortgaged property to PhilGuarantee to settle its obligations with
the latter.21
The CA also ruled that JN's obligation had become due and demandable within the one-
year period of effectivity of the guarantee; thus, PhilGuarantee's payment to TRB
conformed with its guarantee, although the payment itself was effected one year after the
maturity date of the loan.22 Contrary to the trial court's finding, the CA ruled that the
contract of guarantee was not extinguished by the alleged lack of evidence on
PhilGuarantee's consent to the extensions granted by TRB to JN.23 Interpreting Art. 2058 of
the Civil Code,24 the appellate court explained that while the provision states that the
guarantor cannot be compelled to pay unless the properties of the debtor are exhausted, the
guarantor is not precluded from waiving the benefit of excussion and paying the obligation
altogether.25
Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery of his
signature in the Undertaking, the evidence presented not being sufficient to overcome the
presumption of regularity of the Undertaking which is a notarized document.26
Petitioners sought reconsideration of the Decision and prayed for the admission of
documents evidencing the foreclosure of the real estate mortgage, but the motion for
reconsideration was denied by the CA for lack of merit. The CA ruled that the documentary
evidence presented by petitioners cannot be considered as newly discovered evidence, it
being already in existence while the case was pending before the trial court, the very forum
before which it should have been presented. Besides, a foreclosure sale per se is not proof
of petitioners' payment of the loan to PhilGuarantee, the CA added.27
So now before the Court are the separate petitions for review of the CA Decision. JN and
the spouses Sta. Ana, petitioners in G.R. No. 151060, posit that the CA erred in interpreting
Articles 2079, 2058, and 2059 of the Civil Code in its Decision.28 Meanwhile, petitioner
Narciso Cruz in G.R. No. 151311 claims that the CA erred when it held that petitioners are
liable to PhilGuarantee despite its payment after the expiration of its contract of guarantee
and the lack of PhilGuarantee's consent to the extensions granted by TRB to JN. Moreover,
Cruz questions the reversal of the ruling of the trial court anent his liability as a signatory
to the Undertaking.29
On the other hand, PhilGuarantee maintains that the date of default, not the actual date of
payment, determines the liability of the guarantor and that having paid TRB when the loan
became due, it should be indemnified by petitioners.30 It argues that, contrary to petitioners'
claim, there could be no waiver of its right to excussion more explicit than its act of
payment to TRB very directly.31 Besides, the right to excussion is for the benefit of the
guarantor and is not a defense for the debtor to raise and use to evade liability.32 Finally,
PhilGuarantee maintains that there is no sufficient evidence proving the alleged forgery of
Cruz's signature on the Undertaking, which is a notarized document and as such must be
accorded the presumption of regularity.33
The Court finds for PhilGuarantee.
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.34 The guarantor who
pays for a debtor, in turn, must be indemnified by the latter.35 However, the guarantor
cannot be compelled to pay the creditor unless the latter has exhausted all the property of
the debtor and resorted to all the legal remedies against the debtor.36 This is what is
otherwise known as the benefit of excussion.
It is clear that excussion may only be invoked after legal remedies against the principal
debtor have been expanded. Thus, it was held that the creditor must first obtain a judgment
against the principal debtor before assuming to run after the alleged guarantor, "for
19
obviously the 'exhaustion of the principal's property' cannot even begin to take place before
judgment has been obtained."37 The law imposes conditions precedent for the invocation of
the defense. Thus, in order that the guarantor may make use of the benefit of excussion, he
must set it up against the creditor upon the latter's demand for payment and point out to the
creditor available property of the debtor within the Philippines sufficient to cover the
amount of the debt.38
While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the
obligation once demand is made on him. Excussion, after all, is a right granted to him by
law and as such he may opt to make use of it or waive it. PhilGuarantee's waiver of the
right of excussion cannot prevent it from demanding reimbursement from petitioners. The
law clearly requires the debtor to indemnify the guarantor what the latter has paid. 39
Petitioners' claim that PhilGuarantee had no more obligation to pay TRB because of the
alleged expiration of the contract of guarantee is untenable. The guarantee, dated17
December 1979, states:
In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is
made to pay its obligation arising under the aforesaid guarantee PHILGUARANTEE shall
pay the BANK the amount of P1.4 million or 70% of the total obligation unpaid'
....
This guarantee shall be valid for a period of one (1) year from date hereof but may be
renewed upon payment by JNDC of the guarantee fee at the same rate of 1.5% per
annum.40
The guarantee was only up to 17 December 1980. JN's obligation with TRB fell due on 30
June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980. That
payment was actually made only on 10 March 1981 does not take it out of the terms of the
guarantee. What is controlling is that default and demand on PhilGuarantee had taken place
while the guarantee was still in force.
There is likewise no merit in petitioners' claim that PhilGuarantee's failure to give its
express consent to the alleged extensions granted by TRB to JN had extinguished the
guarantee. The requirement that the guarantor should consent to any extension granted by
the creditor to the debtor under Art. 2079 is for the benefit of the guarantor. As such, it is
likewise waivable by the guarantor. Thus, even assuming that extensions were indeed
granted by TRB to JN, PhilGuarantee could have opted to waive the need for consent to
such extensions. Indeed, a guarantor is not precluded from waiving his right to be notified
of or to give his consent to extensions obtained by the debtor. Such waiver is not contrary
to public policy as it is purely personal and does not affect public interest.41 In the instant
case, PhilGuarantee's waiver can be inferred from its actual payment to TRB after the
latter's demand, despite JN's failure to pay the renewal/guarantee fee as indicated in the
guarantee.42
For the above reasons, there is no basis for petitioner's claim that PhilGuarantee was a mere
volunteer payor and had no legal obligation to pay TRB. The law does not prohibit the
payment by a guarantor on his own volition, heedless of the benefit of excussion. In fact, it
recognizes the right of a guarantor to recover what it has paid, even if payment was made
before the debt becomes due,43 or if made without notice to the debtor,44 subject of course
to some conditions.
Petitioners' invocation of our ruling in Willex Plastic Industries, Corp. v. Court of
Appeals45 is misplaced, if not irrelevant. In the said case, the guarantor claimed that it could
not be proceeded against without first exhausting all of the properties of the debtor. The
Court, finding that there was an express renunciation of the benefit of excussion in the
contract of guarantee, ruled against the guarantor.
The cited case finds no application in the case a quo. PhilGuarantee is not invoking the
benefit of excussion. It cannot be overemphasized that excussion is a right granted to the
guarantor and, therefore, only he may invoke it at his discretion.
The benefit of excussion, as well as the requirement of consent to extensions of payment, is
a protective device pertaining to and conferred on the guarantor. These may be invoked by
the guarantor against the creditor as defenses to bar the unwarranted enforcement of the
guarantee. However, PhilGuarantee did not avail of these defenses when it paid its
obligation according to the tenor of the guarantee once demand was made on it. What is
peculiar in the instant case is that petitioners, the principal debtors themselves, are
muddling the issues and raising the same defenses against the guarantor, which only the
guarantor may invoke against the creditor, to avoid payment of their own obligation to the
guarantor. The Court cannot countenance their self-seeking desire to be exonerated from
the duty to reimburse PhilGuarantee after it had paid TRB on their behalf and to unjustly
enrich themselves at the expense of PhilGuarantee.
Petitioners assert that TRB's alleged foreclosure of the real estate mortgage over the land
executed as security for the loan agreement had extinguished PhilGuarantee's obligation;
20
thus, PhilGuarantee's recourse should be directed against TRB, as per the pari-
passu provision46 in the contract of guarantee.47 We disagree.
The foreclosure was made on 27 August 1993, "after the case was submitted for decision in
1992 and before the issuance of the decision of the court a quo in 1998".48 Thus,
foreclosure was resorted to by TRB against JN when they both had become aware that
PhilGuarantee had already paid TRB and that there was a pending case filed by
PhilGuarantee against petitioners. This matter was not raised and proved in the trial court,
nor in the appeal before the CA, but raised for the first time in petitioners' motion for
reconsideration in the CA. In their appellants' Brief, petitioners claimed that "there was no
need for the defendant-appellee JNDC to present any evidence before the lower court to
show that indeed foreclosure of the REM took place."49 As properly held by the CA,
'Firstly, the documents evidencing foreclosure of mortgage cannot be considered as newly
discovered evidence. The said documents were already subsisting and should have been
presented during the trial of the case. The alleged foreclosure sale was made on August 23,
1993 - while the decision was rendered by the trial court on August 20, 1998 about five (5)
years thereafter. These documents were likewise not submitted by the defendants-appellees
when they submitted their appellees' Brief to this Court. Thus, these cannot be considered
as newly discovered evidence but are more correctly ascribed as suppressed forgotten
evidence' Secondly, the alleged foreclosure sale is not proof of payment of the loan by
defendant-appellees to the plaintiffs-appellants.50
Besides, the complaint a quo was filed by PhilGuarantee as guarantor for JN, and its cause
of action was premised on its payment of JN's obligation after the latter's default.
PhilGuarantee was well within its rights to demand reimbursement for such payment made,
regardless of whether the creditor, TRB, was subsequently able to obtain payment from JN.
If double payment was indeed made, then it is JN which should go after TRB, and not
PhilGuarantee. Petitioners have no one to blame but themselves, having allowed the
foreclosure of the property for the full value of the loan despite knowledge of
PhilGuarantee's payment to TRB. Having been aware of such payment, they should have
opposed the foreclosure, or at the very least, filed a supplemental pleading with the trial
court informing the same of the foreclosure sale.
The Court notes the letter51 of Rodrigo Sta. Ana offering, by way of settlement of JN's
obligations to PhilGuarantee, the very same parcel of land mortgaged as security for the
loan agreement. This further weakens the position of petitioners, since it becomes obvious
that they acknowledged the payment made by PhilGuarantee on their behalf and that they
were in fact willing to negotiate with PhilGuarantee for the settlement of the said
obligation before the filing of the complaint a quo.
Anent the issue of forgery, the CA is correct in reversing the decision of the trial court.
Save for the denial of Narciso Cruz that it was not his signature in the Undertaking and the
perfunctory comparison of the signatures, nothing in the records would support the claim
of forgery. Forgery cannot be presumed and must be proved by clear, positive and
convincing evidence and the burden of proof lies on the party alleging forgery.52 Mere
denial will not suffice to overcome the positive value of the Undertaking, which is a
notarized document, has in its favor the presumption of regularity, and carries the
evidentiary weight conferred upon it with respect to its due execution.53 Even in cases
where the alleged forged signature was compared to samples of genuine signatures to show
its variance therefrom, this Court still found such evidence insufficient.54 Mere variance of
the signatures cannot be considered as conclusive proof that the same were forged. 55
WHEREFORE, the consolidated petitions are DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 61318 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

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

21
 [G.R. No. L-27703. July 31, 1970.]

MANILA SURETY & FIDELITY CO., INC., Petitioner, v. WORKMENS

COMPENSATION COMMISSION and MARIA P. MALLARI, Respondents.

De Santos & Delfino for Petitioner.

Ruben C. Ayson for respondent Maria P. Mallari.

Juan O. Ramos & Miguel E. Lanzona, Jr. for respondent Workmens Compensation
Commission.

SYLLABUS

1. LABOR AND SOCIAL LEGISLATION; WORKMENS COMPENSATION

COMMISSION; DEATH PRESUMED SERVICE CONNECTED. In the absence of
evidence that the killing was the result of a quarrel purely personal in character and
completely unrelated to the work of the deceased, the killing and the resulting death of
Mallari having taken place inside the shop where he works, must be presumed to have
arisen out of and in the course of his employment.

2. ID.; ID.; COMPULSORY INSURANCE COVERAGE OF WORKERS, PURPOSE

AND REASON. The new concept of compulsory insurance in the Workmens
Compensation System decrees that the insurance company which issued a workmens
compensation policy is liable for compensation payments regardless of conditions
incorporated in the insurance policy limiting its coverage to certain named locations, in
view of the fact that the system follows the full coverage rule. The philosophy underlying
compulsory insurance of workmens compensation liabilities is to allow the injured or sick
worker to receive prompt payment of his full compensation benefits with a minimum of
legal formality.

22
 DECISION
CASTRO, J.:
Simeon Mallari was employed as a laborer of the Pineda Furniture Store located at Abanao
St. in Baguio City, from 1947 until his death on May 3, 1965, with an average weekly wage
of P36. On the latter date, while inside the shop of the furniture store, and during working
hours, Mallari was stabbed to death by a fellow employee. The claimant Maria P. Mallari is
his widow with eight minor children, all of whom were fully dependent upon him for
support. Pursuant to section 30 of Act 3428 as amended, Adela Pineda, the owner of the
furniture store, obtained workmens compensation policy DG-WC-312 from the
intervenor-appellant Manila Surety & Fidelity Co., Inc. This policy was in force from May
1, 1965 to May 1, 1966. In virtue of this policy, the intervenor-appellant bound itself to a
maximum liability of P15,000 for any one employee. The policy covers, in the language of
the policy itself, "seven (7) shop workers," without mention of names of the employees
covered. The amount of P364.50 was duly paid as insurance premium.
Acting on the claim of the widow Maria P. Mallari, Referee Erudito E. Luna of the
Regional Office No. 1 in Dagupan City rendered a decision, declaring the death of Simeon
Mallari compensable, absolving the Pineda Furniture Store from liability, and adjudging
the intervenor company liable to pay compensation benefits to the surviving dependents of
Simeon Mallari on the basis of the workmens compensation policy already adverted to,
and ordering the respondent-intervenor company:jgc:chanrobles.com.ph
"1. To pay to the widow, Mrs. Maria P. Mallari and her minor children, thru this Office the
total amount of FOUR THOUSAND FOUR HUNDRED NINETY TWO PESOS AND
80/100 (P4,492.80), as compensation benefit, plus the amount of P200.00, for burial
expenses; and
"2. To pay to this Office the amount of P45.00 as Administrative Costs, pursuant to Section
55 of the Act, to wit:jgc:chanrobles.com.ph
"(a) 1.00 for the decision P1.00
"(b) 1.00 for every hundred pesos of the Award which in this case is 4,492.80 P44.00
_______
P45.00"
The case was elevated to the Workmens Compensation Commission, and in his decision of
May 19, 1967 Associate Commissioner Cesareo Perez affirmed the decision of the Referee,
"with the modification that the respondent Pineda Furniture Store be ordered to pay the
sum of Five Pesos (P5.00) as postponement fee, per order dated July 8, 1966 of the Acting
Referee and Chief, Workmens Compensation Unit, and the respondent Manila Surety &
Fidelity Co., Inc. is hereby further ordered to pay to this Commission the sum of Five
Pesos (P5.00) as costs for this review, pursuant to section 55 of Act 3428, as amended."
The motion for reconsideration of the intervenor surety company was denied by the banc.
In this appeal, the petitioner company poses two issues, namely: (1) Was the death of
Simeon Mallari compensable, "it having been proved by competent evidence that he met
his death because of a personal quarrel between him and another employee?" and (2) Was
the death of Simeon Mallari covered by the terms of the policy it issued to the Pineda
Furniture Store?
Resolution of these two issues presents no special difficulty.
1. Simeon Mallari was stabbed to death between one oclock and two oclock in the
afternoon of May 3, 1965 by a co-employee, Fortunato Reyes. The killing took place inside
the shop of the furniture store. The reason for the stabbing which caused his death was not
brought out by the claimant, but neither the employer nor the petitioner-company proved
that the killing was the result of a quarrel purely personal in character and completely
unrelated to the work of the deceased. In the absence of evidence to the contrary, the death
of Mallari must be presumed to have arisen out of and in the course of his employment.
2. To resolve the second issue, we need merely quote from the decision of the Workmens
Compensation Commission. Thus:jgc:chanrobles.com.ph
". . . Was Simeon Mallari among the seven (7) employees covered by Workmens
Compensation Commission Policy No. DG-WC-312 dated May 1, 1965? In contending
that the late Mallari was not covered by the policy the insurance carrier insisted that since
Mallari was an employee of the Insured assigned to the Holy Ghost Subdivision Shop and
not one of those assigned at its Abanao St. Shop, he is not among those covered by the
policy. This contention is a law [sic] attempt to exculpate the insurance carrier from its
accepted liability under the workmens compensation policy issued in favor of the Pineda
Furniture Shop where Mallari was admittedly employed. Under the provisions of Section
30 of the Workmens Compensation Act, as further amended by Rep. Act No. 4119
effective June 20, 1964, which introduced into our country the new concept of compulsory
insurance in our workmens compensation System, the insurance company which issued a
workmens compensation policy is liable for compensation payments regardless of
conditions incorporated in the insurance policy limiting its coverage to certain named
locations, classes of employees, or specified operations, in view of the fact that we follow
the full coverage rule in compulsory insurance. For instance, if the policy enumerates the
names or number of employees covered by it, the Bureau will disregard such enumeration
23
or limitation when an employee, not within the list, meets with an accident, and the bureau
will require the insurance carrier to pay compensation benefits to him as if his name were
included in the list. Similarly, defenses such as non-payment of premiums, breach of policy
conditions, or even assignment and transfer of interests which the insurer might have
against the employer, are not available against the employee. (Cf. Larson, Workmens
Compensation Law, Vol. 2, Sec. 92.00, p. 443). The philosophy underlying compulsory
insurance of workmens compensation liabilities is to allow the injured or sick worker to
receive prompt payment of his full compensation benefits with a minimum of legal G.R. No. L-31789 June 29, 1972
formality. Besides, it appears in the insurance carriers Schedule that the policy
apparently covers Any person in the Insureds immediate service . . . which necessarily ANTONIO R. BANZON and ROSA BALMACEDA, petitioners,
includes the late Mallari. Any other interpretation will tend to defeat the very purpose for vs.
which compulsory insurance system was introduced into the country."cralaw virtua1aw HON. FERNANDO CRUZ, Spouses PEDRO CARDENAS and LEONILA
library BALUYOT and ASSOCIATED INSURANCE & SURETY COMPANY, INC.
represented by INSURANCE COMMISSIONER in her capacity as LIQUIDATOR
We need only add, in refutation of the petitioner-appellants contention that the deceased OF ASSOCIATED INSURANCE & SURETY COMPANY, INC., respondents.
Mallari exceeded the number of employees (seven in all) covered by the insurance policy,
that since the policy itself nowhere specifies the names of the persons covered, it is obvious L. T. Castillo for petitioners.
that Simeon Mallari cannot by any reason or rule of logic be considered as excluded from
the coverage thereof. Dakila F. Castro & Associates for respondents spouses Pedro Cardenas and Leonila
Baluyot.
ACCORDINGLY, the judgment appealed from is affirmed, at petitioners cost.
Feliberto V. Castillo for respondent Associated Insurance & Surety Co., Inc.

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

TEEHANKEE, J.:p

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

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

24
surety of the loan. Sta. Maria failed to pay his obligations to the bank, which accordingly
demanded payment from Associated as surety.
Instead of paying the bank, Associated filed a complaint dated November 19, 1956 with the
Court of First Instance of Manila 1 against debtor Sta. Maria and indemnitors Banzon and
Naval, alleging that the outstanding obligations of Sta. Maria with the bank guaranteed by
it amounted to P6,100.00, P9,346.44 and P14,811.32, or a total of P30,257.86, excluding
interest. On December 11, 1957, the said court rendered judgment ordering Sta. Maria,
Banzon and Naval "to pay jointly and severally unto plaintiff for the benefit of the
Philippine National Bank" the amounts mentioned above, with interest thereon at 12% per
annum, P593.76 for premiums and documentary stamps due, and 15% attorney's fees, "the
15% and the interest to be paid for the benefit only of the plaintiff."
What happened thereafter is narrated in the decision of this Court rendered on November
29, 1968 in the appeal instituted by petitioner Banzon and his spouse, co- petitioner Rosa
Balmaceda, from a subsequent action of Associated in the Court of First Instance of Rizal
wherein the Rizal court ordered Banzon to surrender for cancellation his owner's duplicates
of titles to his two Caloocan City lots which had been levied upon and purchased at the
execution sale by Associated in supposed satisfaction of the Manila court's judgment,
docketed as Case L-23971 of this Court, entitled Associated Ins. & Surety Co. Inc.
plaintiff-appellee vs. Antonio Banzon and Rosa Balmaceda, defendants-appellants, 2 as
follows:
As the above decision 3 became final and executory, the corresponding
writ of execution was issued and levy was made upon the properties of
the judgment debtor Antonio R. Banzon covered by Transfer Certificates
of Title Nos. 39685 and 53759 issued in his name by the Register of
Deeds of Rizal. The first covered a parcel of land containing an area of
650 square meters situated in Barrio Calaanan, Caloocan, Rizal, and the
second, another parcel of 650 square meters situated in the same barrio of
the same municipality. After the proceedings required by law in
connection with execution sales, the aforesaid properties were sold, the
judgment creditor, Associated Insurance and Surety Co., Inc., having
been the highest bidder, for the total sum of P41,000.00. The Sheriff of
Rizal issued in its favor the corresponding certificate of sale dated June
27, 1957, which was duly registered on June 30, 1959. As the period of
redemption expired on June 20, 1960 without the judgment debtor or any
proper party having exercised it, the judgment creditor and purchaser
obtained in due time the corresponding final certificate of sale, which
was likewise duly registered.
In view of the foregoing, herein petitioner-appellee made demands upon
Antonio R. Banzon to deliver to it the owner's duplicate of Certificate of
Title Nos. 39685 and 53759 mentioned heretofore, but the latter refused
to do so. As a result it filed in the Court of First Instance of Rizal in Case
No. 3885, G.L.R.O. Record No. 11267, a petition for an order directing
Antonio R. Banzon to present his owner's duplicate of Certificae of Title
Nos. 89685 and 53759 to the Register of Deeds of Rizal for cancellation,
and for another order directing the Register of Deeds of Rizal to cancel
said duplicates and to issue new transfer certificates of title covering the
properties in the name of petitioner.
Banzon filed his opposition to the petition claiming mainly that (1) the
decision of the Court of First Instance of Manila in Civil Case No. 31237
was void as far as he was concerned because he had never been
summoned in connection therewith, an that (2) the levy and sale of the
properties covered by the petition were likewise void because they were
conjugal properties belonging to him and his wife, Rosa Balmaceda.
After a hearing on the motion and opposition mentioned above, the lower
court, on February 7, 1961, rendered a decision whose dispositive
portion is as follows:
"In view of the foregoing, judgment is hereby rendered
in favor of the petitioner granting the relief prayed for.
The oppositors are hereby ordered to surrender to the
Register of Deeds of Rizal the Certificate of Title in
question for cancellation and let a new one be issued in
the name of the petitioner."
In this appeal interposed by them, the Banzons seek a reversal of the
above decision upon the same grounds relied upon in their opposition
filed in the lower court. 4
This Court in its decision of November 29, 1968 affirmed the decision of the trial court,
relying upon the lower court's findings on Banzon's failure to substantiate his claims which
"would amount to a deprivation of (Banzon's) property without due process of law" had he
but discharged his burden of proof, thus:
With respect to appellant's contention that Antonio R. Banzon had not
been duly served with summons in connection with Civil Case No.
31237 of the Court of First Instance of Manila, it is enough for us to
25
quote here the pertinent portions of the well-considered decision of the
lower court
"With respect to the first contention of oppositors, the
latter in effect contends that not having been served by
summons, Antonio Banzon never became a party
defendant to the aforesaid civil case and hence not
bound by any judgment rendered therein. It is
erroneous on the part of the petitioner to contend that
the objection as to lack of jurisdiction on the
defendant's person has been waived for said waiver
applies only when summons has been served although
defectively, such as one not served by the proper
officer. If the contention of the oppositor were true,
that is, no summons was ever served upon him and that
he was completely unaware of the proceedings in the
civil case aforementioned, the properties in question
could not be levied upon for that would amount to a
deprivation of oppositor's property without due process
of law.
"The burden, however, rests upon the oppositors to
prove that there was in fact no service of summons and
this, the court believes, the oppositors have failed to
substantiate with sufficient evidence. It is a
fundamental rule that the regularity of all official
actions and proceedings will be presumed until the
contrary is proved. In said civil case No. 31237, the
records show, particularly the answer and the motion to
dismiss, that the proceedings were conducted by
counsel in behalf of all the defendants therein including
the oppositor, Antonio Banzon. The presumption
therefore, of the regularity of the proceedings as
against said defendant will be maintained including the
fact that either summons was duly served or that the
defendant Banzon voluntarily appeared in court
without such summons. It is therefore incumbent upon
the oppositors to rebut this presumption with
competent and proper evidence such as the return made
by the sheriff who served the summons in question.
This, however, the oppositors have not met.
"Moreover, the circumstances of the case all the more
bear out the strength of this presumption when it
considered that the oppositor Antonio Banzon received
a notice of execution and levy of these properties and
notice of the sale of the same at public auction. Had the
oppositors have been prejudiced by being deprived of
due process, they should have filed either a third party
claim upon the property levied or an injunction
proceeding to prevent its sale at public auction, nor
would they have allowed the consummation of the sale
and the lapse of one year within which the redemption
would have been exercised. These facts gravely
militate against the merits of the opposition, not only
insofar as it strengthens the aforesaid presumption of
regularity, but also insofar as they are indicative of the
fact that the properties levied upon are not conjugal
property or even if they were that the debt involved
was one which redound to the benefit of the family for
which the conjugal partnership may be held liable."
Appellants' second contention namely, that the properties now in
question are their conjugal properties, is belied by the record before us
which shows that Transfer Certificate of Title Nos. 39685 and 53759
were issued in the name of Antonio R. Banzon. Moreover, there is no
sufficient evidence in the record to show that the properties were
acquired during appellants' marriage.
IN VIEW OF ALL THE FOREGOING, the decision appealed from is
hereby affirmed, with costs. 5
It has now been exposed that notwithstanding the judgment of December 11, 1957 obtained
from the Manila court by Associated and executed by it against petitioner Banzon as
indemnitor " for the benefit of the Philippine National Bank," and which judgment it
obtained and executed on the representation to the said court that the bank was exacting
payment from it as surety of the debtor Sta. Maria's loans, and that it was therefore
enforcing Banzon's undertaking as indemnitor in turn to indemnify it, that it never
discharged its liability as surety to the bank nor ever made any payment to the bank,
whether in money or property, to discharge Sta. Maria's outstanding obligations as
guaranteed by it.
As will be shown later, this suit of Associated against Banzon as indemnitor and the
execution against him of the judgment obtained in trust "for the benefit of the PhiIippine
26
National Bank" were absolutely premature and uncalled for, since Article 2071 of the Civil
Code permits the surety, even before having paid, to proceed only "against the principal
debtor ... (4) when the debt has become demandable, by reason of the expiration of the
period for payment" and that "the action of the guarantor is to obtain release from the
guaranty, or to demand a security that shall protect him from any proceedings by the
creditor and from the danger of insolvency of the debtor."
In fact, since the bank failed to exact payment from Associated as surety of the debtor
Maximo Sta. Maria's matured obligations, the bank itself filed on February 10, 1961, its
own complaint with the Court of First Instance of Pampanga against principal
debtor Maximo Sta. Maria, his six brothers and sisters (who had executed a special power
of attorney in Sta. Maria's favor to mortgage a 16-hectare parcel of land jointly owned by
all of them as security also for the bank's loans), and Associated itself, surety, as
defendants, for the collection of the outstanding obligations due from the principal debtor,
Maximo Sta. Maria.
After trial, the court ordered all the defendants jointly and severally to pay the bank the
outstanding amounts due on the crop loans to Sta. Maria, which as of that much later
date, August 20, 1963, amounted only to P6,100.00 and P9,346.44 or a total of P15,446.44,
exclusive of interests. It should be noted therefore, that the debtor Sta. Maria had been
making payments all along to the bank on account of his crop loans so much so that by
1963, the total principal due and amount outstanding thereon amounted only to P15,446.44.
This amounts to practically one-half of the advance judgment for the total amount
of P30,257.86, excluding interests, obtained by Associated six (6) years earlier in 1957
against Banzon " for the benefit of the Philippine National Bank" allegedly as the amount
due from Sta. Maria and which Associated as surety would have to pay the bank, and
which as it turns out, Associated never paid to the bank.
These facts and figures are of record in this Court's decision of August 29, 1969,
in Philippine National Bank vs. Sta. Maria, et al.," wherein it is further recorded that
"(D)efendant Maximo Sta. Maria and his surety, defendant Associated Insurance & Surety
Co., Inc. who did not resist the action, did not appeal the judgment (sentencing all
defendants jointly and severally to pay the bank the above referred to principal amount of
P15,446.44, excluding interests)."
This Court sustained the appeal taken by the debtor Maximo Sta. Maria's brothers and
sisters, and reversed the lower court's judgment against them, as follows:
... This appeal has been taken by his six brothers and sisters, defendants-
appellants who reiterate in their brief their main contention in their
Answer to the complaint that under the special power of attorney, Exh. E,
they had not given their brother, Maximo, the authority to borrow money
but only to mortgage the real estate jointly owned by them; and that if
they are liable at all, their liability should not go beyond the value of the
property which they had authorized to be given as security for the loans
obtained by Maximo. In their answer, defendants-appellants had further
contended that they did not benefit whatsoever from the loans, and that
the plaintiff bank's only recourse against them is to foreclose on the
property which they had authorized Maximo to mortgage.
We find the appeal of defendants-appellants, except for defendant
Valeriana Sta. Maria who had executed another special power of attorney,
Exh. E-1, expressly authorizing Maximo to borrow money on her behalf,
to be well taken.
1. Plaintiff bank has not made out a cause of action against defendants-
appellants (except Valeriana), so as to hold them liable for the unpaid
balances of the loans obtained by Maximo under the chattel mortgages
executed by him in his own name alone.
xxx xxx xxx
6. Finally, as to the 10% award of attorney's fees, this Court believes that
considering the resources of plaintiff bank and the fact that the principal
debtor, Maximo Sta. Maria, had not contested the suit, an award of five
(5%) per cent of the balance due on the principal, exclusive of interests,
i.e., a balance of P6,100.00 on the first cause of action and a balance
of P9,846.44 on the second cause of action, per the bank's statements of
August 20, 1968, (Exhs. Q-1 and BB-1 respectively) should be sufficient.
WHEREFORE, the judgment of the trial court against defendant-
appellants Emeteria, Teofilo, Quintin, Rosario and Leonila, all surnamed
Sta. Maria is hereby reversed and set aside, with costs in both instances
against plaintiff. The judgment against defendant-appellant Valeriana Sta.
Maria is modified in that her liability is held to be joint and not solidary,
and the award of attorney's fees is reduced as set forth in the preceding
paragraph, without costs in this instance.
The bank thus collected directly from its debtor Sta. Maria the amounts owing to it, with
Associated never having put in one centavo. Per the bank's letter dated February 20,
1970 to Associated, it informed Associated that the amounts of its judgment credit against
judgment defendants in the aforementioned case terminated by this Court's decision of
August 29, 1969, "had already been satisfied as of February 16, 1970 by virtue of
27
the payment made by and thru the Provincial Sheriff of Bataan on the proceeds of the
extra-judicial sale of the mortgaged properties of defendants Sta. Marias," in view of
which "we (Philippine National Bank) have now released the Associated Insurance &
Surety Co., Inc. of its joint obligation with Maximo Sta. Maria et al. in the aforementioned
case." 7
This should have put an end to the matter and Banzon's two lots therefore restored fully to
his ownership, but for certain complications involving the intervention of the other private
respondents, the spouses Pedro Cardenas and Leonila Baluyot, and Associated's own
unjustifiable actions, as shall presently be seen.
According to the Banzons' petition at bar, sometime in 1965, even before ownership over
the two parcels of land belonging to the Banzons could be consolidated in the name of
Associated (since the judgment was " for the benefit of the Philippine National Bank" and
it had not discharged its surety's liability to the bank), Associated "in clear collusion and
confederation with (respondent) Pedro Cardenas, allowed and permitted the latter to
execute and levy one of the two parcels of land (that covered by T.C.T. No. 39685-Rizal,
Lot 6, Block No. 176 of subdivision plan Psd-2896, G.L.R.O. Rec. No. 11267) for a
judgment debt of P5,100.00 (of Associated in favor of Cardenas) 8 notwithstanding that the
property in question was worth P130,000.00 more or less, and further notwithstanding the
fact that said respondent (Associated) knew the property was merely being held in trust by
it for the benefit of the Philippine National Bank and therefore, not being the legal owner
thereof, it cannot validly dispose of it in any manner." 9Respondent Cardenas being
allegedly the lone bidder in the auction sale for execution of his P5,100.00-judgment
against Associated was awarded the property in full satisfaction of his judgment, and
eventually succeeded in having Banzon's title cancelled and a new one, T.C.T. No. 8567-
Caloocan City issued thereto in his name, notwithstanding that Associated's right thereto
was still sub-judice in Associated vs. Banzon, to be resolved much later yet by this Court's
decision of November 29, 1968. Associated made no move to question or challenge this
action of Cardenas, notwithstanding an order for its liquidation and dissolution issued on
December 31, 1965 by the Court of First Instance of Manila and eventually affirmed by
this Court per resolution of June 20, 1968 in G.R. No. L-38934. Nor did Associated make
any effort to resist execution on said property of Banzon's, knowing as it did that its interest
in said property was impressed with a trust character since the clear tenor and intent of the
judgment granted against Banzon nominally in its favor but expressly " for the benefit of
the Philippine National Bank" was to make the execution and operation of the
judgment contingent or conditioned upon Associated's being made or compelled to pay the
bank, which contingency never materialized.
The Cardenas spouses thereafter filed with the Court of First Instance of Rizal, Caloocan
City Branch XII, Reg. Case No. C-211 (LRC Case No. 112167) entitled "Pedro Cardenas,
et al., petitioners vs. Antonio Banzon, et al., respondents," to secure possession from the
Banzons of the lot covered by T.C.T. No. 8567. A writ of possession was issued in said case
on May 21, 1965, but the enforcement thereof was held in abeyance in view of the filing
with the same court of Civil Case No. C-531 entitled "Antonio Banzon, et al. vs. Pedro
Cardenas and Leonila Baluyot, Associated Insurance and Surety Co., Inc. and Benito
Macrohon." Banzon's complaint in Civil Case No. C-531 was, however, dismissed
on August 6, 1969, on the ground that "the matter of the legality of the transfer of
ownership of the property in question from the plaintiff to the Associated Insurance &
Surety Co., Inc., has been upheld by the Supreme Court in its decision promulgated on
November 29, 1968, and consequently the transfer to the spouses Pedro Cardenas and
Leonila Baluyot must perforce be considered also as valid and legal."
Consequently, respondent Cardenas filed a motion on October 13, 1969, in Case No. C-211
for the issuance of an alias writ of possession; this was granted on October 23, 1969.
The alias writ was served on Banzon, who refused to vacate the premises and to remove
the improvements thereon. In view of this, an order was issued on December 9, 1969, for
the issuance of a writ of demolition, but its enforcement was held in abeyance because a
temporary restraining order, later changed to a writ of preliminary injunction, was issued
by the Court of Appeals on December 13, 1969, in view of the filing by the Banzons with
the said appellate court of a petition for injunction. 10
On February 28, 1970 the Court of Appeals rendered judgment dismissing the petition
because it found the same to be allegedly "merely a device to prevent the execution of a
final judgment by the filing of a new suit based upon the same grounds which have already
been interposed and passed upon in the case where the final judgment had already been
rendered ... ." Cardenas thereafter filed a motion for the enforcement of the order of
demolition and writ of possession previously issued in Reg. Case No. C-211. On March 13,
1970, Judge Fernando A. Cruz of the Court of First Instance of Rizal, Caloocan City
Branch XII, issued an order granting the motion. 11
On March 13, 1970, the Banzons having learned of the bank's release of Associated as
of February 20,1970, supra, accordingly filed a complaint for reconveyance and damages
with the Court of First Instance of Manila against respondents Associated and the Cardenas
spouses. 12 In their complaint, the Banzons impute bad faith, collusion and confederation
between Associated and the Cardenases with regard to the latter's prematurely obtaining
T.C.T. No. 8567 covering one of Banzon's lots in their name. The Banzons therein
alleged for the first time their new cause of action based on the subsequent development
that the Philippine National Bank had collected directly on February 16, 1970 from the
principal debtor Sta. Maria the loan guaranteed by Associated (which amounted only to a
principal of P15,446.44 as of August, 1963, excluding interests or just one-half of
the premature judgment for P30,257.88 excluding interests obtained by Associated six (6)
years earlier in 1957 against Banzon in trust and for the benefit of the bank allegedly as the
amount owed by Sta. Maria and to be discharged by Associated, which Associated never
28
discharged); 12a and that the bank, per its letter of February 20, 1970 had therefore
absolutely released Associated of any liability on its surety undertaking. 12b The Banzons
therefore prayed for the return and reconveyance of their two parcels of land covered by
T.C.T. No. 8567 (in Cardenas' name) and No. 53759 (still in Banzon's name), in discharge
of Associated's implied trust not to unjustly enrich itself and appropriate Banzon's
properties at absolutely no cost to itself.
On March 16, 1970, the Sheriff of Caloocan City served upon the Banzons copy of the
aforesaid order giving them until March 20, 1970, within which to deliver possession of the
parcel of land covered by T.C.T. No. 8567, and to remove the improvements thereon;
otherwise, the said sheriff would proceed to enforce the same.
Petitioners Banzons therefore came to this Court on March 20, 1970, by means of the
present petition for injunction. At petitioners' instance, the Court on March 24,
1970 restrained respondents and their representatives from enforcing the questioned writ of
execution and order of demolition, and respondent Associated from disposing in any
manner of its alleged rights and interests over the two lots in question.
Respondents Cardenas spouses filed in due course their Answer dated April 2, 1970,
admitting in effect the antecedents of the case as recited above, citing even this Court's
decision of November 29, 1968 in Associated vs. Banzon, supra, which affirmed the money
judgment in favor of Associated " for the benefit of the Philippine National Bank" 13 but
alleging that ownership to one parcel (Lot 6, Block 176 covered by T.C.T. No. 8567) "has
already absolutely and irrevocably vested in herein respondent Pedro Cardenas." 14 Said
respondents further averred that "there is no longer anything that may be restrained," since
per the sheriff's return of March 23, 1970, he enforced on said date respondent court's writ
of possession and demolition order and demolished all the improvements erected in the
premises. 15
To this petitioners countered that "the special deputy sheriff of Rizal did succeed in
demolishing the building erected on that lot in question. This he did notwithstanding the
fact that he has been duly informed by petitioner Banzon of the existence of a restraining
order in this case. However, after accomplishing his purpose, he and his men left the
premises." 16
Most relevant, however, was a pleading entitled "Explanation and Manifestation" dated
April 25, 1970 filed by Atty. Feliberto Castillo, as former counsel for Associated "in the
interest of justice and in the name of truth and as an officer of the Court," wherein with
respect to the summons for Associated received by his law office, he manifests:
3. That he is entertaining a serious doubt whether he could still represent
the Associated Insurance & Surety Co., Inc. in view of the fact that
in Civil Case No. 56995 of the Court of First Instance of Manila, entitled
"Republic of the Philippines, represented by the Insurance Commissioner
vs. Associated Insurance Surety Co., Inc." the said Court of First Instance
of Manila ordered the liquidation and dissolution of this surety company,
which was appealed to the Court of Appeals, CA-G. R. No. 37985-R but
affirmed the decision of the Court of First Instance of Manila in a
decision promulgated on January 3, 1968, which was appealed again by
the Associated Insurance & Surety Co., Inc to the Honorable
Tribunal, G.R. No. L-29834, also affirming the decision of the Court of
Appeals by denying the petition for writ of certiorari in its resolution of
June 20, 1968, and therefore, since then, the decision of the Court of
First Instance of Manila ordering the liquidation and dissolution of the
Associate Insurance & Surety Co., Inc. became final and executory, an
thereafter, the Insurance Commissioner demanded the surrender of
books, documents and other papers of this surety company, an as a matter
of fact, books, documents and other papers salvaged were already
surrendered to the Insurance Commissioner for liquidation of this
company, so that by virtue thereof, the Insurance Commissioner being
the liquidator appointed by the court to liquidate the Associated
Insurance & Surety Co., Inc., is now the legal representative of this
surety company to whom a copy of this paper will be furnished." 17
In his "Explanation and Manifestation," Atty. Castillo further states that his law office was
the counsel for Associated in the cases involved in these proceedings, viz., Civil Case No.
31237 of the Court of First Instance of Manila, Case No. 3885, G.L.R.O. Record No.
11267 of the Court of First Instance of Rizal, for consolidation in Associated's favor of
T.C.T. No. 29685-Rizal and T.C.T. No. 53759-Rizal, and in G.R. No. L-23971 of the
Supreme Court, Associated vs. Banzon, supra, affirming on November 29, 1968 the Rizal
court's judgment for consolidation; and
That since Associated was ordered liquidated and dissolved by the Manila court of first
instance in Civil Case No. 56995, as affirmed by the Court of Appeals in CA-G.R. No.
37985-R, which became final upon this Court's denial of review per its resolution of June
20, 1968 in G.R. No. L-28934, the Insurance Commissioner as the appointed liquidator of
Associated is the legal representative thereof who may duly act for Associated and upon
whom summons should be served;
That even before the promulgation of the Supreme Court decision on November 29,
1968 in Associated vs. Banzon he, as counsel for Associated, never attempted to secure new
29
titles for his said client, considering that its ownership over the parcel of land covered by
them was then "still sub judice;"
That even after the promulgation of the said Supreme Court decision, he never
attempted to secure new titles for his client, because by that time Associated had already
been ordered dissolved and liquidated, hence, to be represented in all instances by the
Insurance Commissioner as liquidator;
That he wonders how respondent Pedro Cardenas was able to secure T.C.T. No. 8567
(formerly T.C.T. No. 39685-Rizal) in his name in 1965, when Associated, which really
owed Cardenas a certain sum, could only secure new titles over the parcels of
land after not before November 29, 1968, when the Supreme Court's decision in G.R.
No. L-23971 was promulgated; and that in his opinion, the issuance to respondent
Cardenas of T.C.T. No. 8567 was "fraudulent and irregular for being without basis when
the same was issued, so that the register of deeds of Caloocan City committed some sort of
mistakes or negligence in issuing this title to respondent Pedro Cardenas, and as such, this
T.C.T. No. 8567 is null and void and without force and effect and calls for an investigation
of the guilty parties responsible for the issuance of this T.C.T. No. 8567 in the name of
respondent Pedro Cardenas, who might have committed some falsifications;" (for indeed
how could Cardenas cause title to said lot to be transferred to Associated for him in turn
levy against it for his P5,100.00 judgment against Associated when Associated's case
against Banzon for such transfer and consolidation of title was then still pending appeal
before this Court, and Associated's judgment against Banzon was one of trust, expressly
therein declared to be "for the benefit of the Philippine National Bank?") 18 and
That "anybody who will attempt to offer the said parcel of land for sale would
be committing a crime as the position of the same belongs exclusively to the Insurance
Commissioner who is the liquidator of the Associated Instance & Security Co., Inc.;
consequently, the petitioner should not entertain any worry as said parcel of land is not
being disposed of not only because the power to sell the same exclusively belongs to the
Insurance Commissioner but also because the Associated Insurance & Surety Co., has no
titles yet over these parcels of land as it did not attempt to secure any even before and
after the promulgation of the decision of the Honorable Tribunal in G.R. No. 23971 in view
of the circumstances earlier explained."
On May 11, 1970, we issued summons on the Insurance Commissioner as liquidator of
Associated to answer the petition. In her answer filed on May 29, 1970, the Acting
Insurance Commissioner through the Solicitor General disclaimed knowledge of practically
all the allegations of the petition for lack of knowledge or information sufficient to form a
belief as to their truth, manifesting that she first learned of the material facts averred in the
petition when she received copy of Atty. Castillo's "Explanation and Manifestation",
because the records and documents pertinent to this case were not among those surrendered
to her, and affirming she is the liquidator of Associated by virtue of the Manila court's
order dated December 31, 1965 of liquidation and dissolution of said corporation, as
follows:
3. That the herein Acting Insurance Commissioner is liquidator of
Associated Insurance & Surety Co., Inc. by virtue of an order of
liquidation and dissolution of said corporation dated December 31,
1965, by the Court of First Instance of Manila in Civil Case No. 56995,
which decision was affirmed on appeal by the Court of Appeals in its
decision (CA-G.R. No. 37895) dated January 3, 1968, which decision
was again affirmed on appeal by this Honorable Tribunal when it denied
the petition for a writ of certiorari in its Resolution of June 20, 1968
(G.R. No. L-38934) and which on July 9, 1968, became final and
executory;
4. That by virtue of the aforesaid decision, the Insurance Commissioner
as liquidator of Associated Insurance & Surety Co., Inc., is vested by
authority of law with the title to all of the property, contracts, and rights
of action of said corporation as of the date of the order of liquidation
(Sec. 175-C, par. 3 of the Insurance Act, as amended);
5. That any subsequent sale or disposition of the property of said
corporation without the knowledge and consent of the herein Acting
Insurance Commissioner and approval but the Liquidation Court is
contrary to law and null and void;
6. That after the aforesaid order of liquidation and dissolution became
final and executory, the Acting Insurance Commissioner demanded for
the surrender of all the books, documents and properties of Associated
Insurance & Surety Co., Inc. However, the records and documents
pertinent to the above-entitled case were not among those surrendered to
the Insurance Commissioner and it was only upon receipt of the
"Explanation and Manifestation" of Atty. Feliberto Castillo, dated April
25, 1970, and the present "Petition" that she came to know for the first
time of the alleged facts averred in this case." 19
A "Motion to Dissolve Temporary Restraining Order and to Dismiss Petition" was filed on
February 12, 1971, by respondents spouses Cardenas and Baluyot. They contend that the
restraining order issued by this Court should be dissolved, and the petition itself, insofar as
they are concerned, be dismissed, because the petition is predicated on petitioners'
complaint for reconveyance and damages in Civil Case No. 79244 before Branch VIII of
the Court of First Instance of Manila, and the said court issued an order on October 28,
30
1970, dismissing the said complaint with respect to defendants therein Cardenas and
Baluyot, which dismissal was not appealed and became final and executory on January 5,
1971, per entry of judgment attached to the motion. Consequently, according to these
respondents, the temporary restraining order issued by this Court enjoining the
enforcement of the writ of execution and the order of demolition in Reg. Case No. C-211 of
the Court of First Instance of Rizal, has become inoperative and without any legal basis,
the present petition has lost its legal basis, and petitioners have no more cause of action
against respondents Cardenas and Baluyot. The said order of dismissal of the complaint
against these respondents was issued pursuant to Section 5, Rule 16 of the Rules of Court,
after a preliminary hearing on the affirmative defenses of bar by prior judgment and lack of
cause of action set up by said respondents in their answer, with the lower court opinion that
petitioners' action was already barred by the prior judgments of this Court of November 29,
1968 in Associated vs. Banzon and of the Court of Appeals of February 28,
1970 in Banzon vs. Hon. Fernando Cruz, supra. 20
The Solicitor General filed on March 29, 1971 on behalf of the Insurance Commissioner as
liquidator of Associated a strong opposition to the motion to dissolve the restraining order
and dismiss the petition. 21 The commissioner-liquidator after complaining that "she is still
demanding for the surrender of all the books, documents and properties of Associated" and
that "it was only upon receipt on March 11, 1971 of the voluminous records of the cases
handled by counsel Feliberto V. Castillo for (Associated) that (her) undersigned counsel
have verified and confirmed the truth of the status of the different cases," contends inter
alia as follows:
18. That, however, during the pendency of the aforesaid appeal of
petitioner Antonio R. Banzon with this Honorable Tribunal and while the
case was still sub-judice, particularly on February 8, 1964, the herein
respondent Pedro Cardenas as winning party in a case entitled "Pedro
Cardenas vs. Victoria Vda. de Tengco and Pablo Tuazon," Civil Case No.
36174, Court of First Instance of Manila, and where the Associated
Insurance and Surety Co., Inc. was surety for the defendants therein,
executed and levied upon one of the parcels of lands involved in the
aforesaid appeal. Ultimately, Pedro Cardenas was able to acquire the land
in question (Lot No. 6, Block No. 176, then covered by T.C.T. No.
39685) as highest bidder, for the judgment debt of defendants in said
action, plus incidental expenses for the sum of P5,100.00 only;
19. That subsequently thereafter, said respondents Cardenas, thru some
scheme and devise, succeeded in having the title of said parcel of land
transferred in their names under T.C.T. No. 8567, Registry of Deeds of
Caloocan City, on May 5, 1965, at a time when the Associated Insurance
& Surety Co., Inc. had not yet earned the authority to consolidate in its
name said property, as the case was then pending with this Honorable
Tribunal. As alleged in paragraph 18 hereof, the question of
consolidation was resolved by this Honorable Tribunal on February 28,
1968; 21a
20. That by the nature of the decision in Civil Case No. 31237, CFI,
Manila, as alleged in paragraph 15 hereof, the property or sums of money
recovered from defendants therein shall be reserved for the benefit of the
Philippine National Bank for the purpose of paying the principal debtor's
(Maximo Sta. Maria's) obligation therein, and consequently, the
Associated Insurance & Surety Co., Inc. shall hold the property in
question or the sums recovered in said action, in trust and for the purpose
of paying the aforesaid obligation of Maximo Sta. Maria. 22
21. That the Associated Insurance & Surety Co., Inc. failed to pay from
its own funds under its surety undertaking, nor from funds realized from
the property levied upon by virtue of the decision in Civil Case No.
31237, CFI, Manila, but on the other hand, the principal debtor Sta.
Maria paid his own obligation the Philippine National
Bank thus, releasing it (Associated Insurance & Surety Co., Inc.) from its
obligation under the suretyship undertaking with respect to said
obligation of Maximo Sta. Maria, and similarly herein petitioner Antonio
R. Banzon was released from this obligation as co-indemnitor in said
undertaking;
22. That in fairness to petitioners Antonio R. Banzon and Rosa
Balmaceda, the two parcels of land executed and levied upon by virtue of
the decision in Civil Case No. 31237, Court of First Instance of
Manila, deserve to be reconveyed to them;
23. That one of the lots involved, namely, Lot No. 6, Block No. 176
covered by T.C.T. No. 8567, Registry of Deeds of Caloocan City, in the
names of the present respondents Pedro Cardenas and Leonila Baluyot,
being one of the two parcels of lands levied upon in Civil Case No.
31237 but transferred to respondents under dubious circumstances and
patently unauthorized by law, should be ordered reconveyed to the
Associated Insurance Co., Inc. through the Insurance Commissioner for
the purpose stated in the next preceding paragraph, as the transaction on
the transfer of said parcel of land to them is null and void from the very
beginning." 23
31
Petitioners likewise oppose the motion of the Cardenases. They contend that the present
petition is not solely predicated on their complaint for reconveyance and damages in Civil
Case No. 79244 for, as admitted by the Insurance Commissioner, they are entitled to the
reconveyance of the lot covered by T.C.T. No. 8567 and for contribution or indemnification
for damages which they may recover from Associated; that respondents Cardenases
secured said title fraudulently and irregularly without any legal basis, hence, said title
having been anomalously issued, is null and void and without force and effect, and, that, as
stated by Insurance Commissioner-liquidator, in fairness and justice to petitioners, the two
parcels of land levied in favor of Associated by virtue of the decision on Civil Case No.
31237 should be reconveyed to them; and that to dissolve the temporary restraining order
and to dismiss the present petition would leave petitioners without a legal remedy.
In a minute resolution dated April 19, 1971, the Court denied the said motion of
respondents Cardenas and Baluyot "to dissolve temporary restraining order and to dismiss
petition."
1. The immediate objectives of this petition are: (a) to enjoin respondent Judge Fernando
Cruz of the Court First Instance of Rizal, Caloocan City Branch, and respondents Pedro
Cardenas and Leonila Baluyot, and their representatives, from enforcing the writ of
execution and of demolition issued by said respondent Judge in Reg. Case No. C-211 in
relation to the lot covered by T.C.T. No 8567; and (b) to enjoin respondent Associated from
disposing its alleged rights and interests in the two lots covered by T.C.T. No. 8567 and
T.C.T. No. 53759, the injunction in both cases to be made effective during the pendency of
the reconveyance case, Civil Case No. 79244, filed by petitioners as plaintiffs before the
Manila court of first instance.
The real and substantive objectives of the petition are to seek the rightful restoration and
reconveyance to petitioners Banzons of their two Caloocan city lots, covered by T.C.T. No.
53759 (still in Banzon's name, but on the back whereof is annotated the sheriff's final deed
of sale in favor of Associated) and by T.C.T. No. 8567 (in the name of respondents
Cardenases) on the fundamental ground that Associated's levy in execution of said lots
was in trust for the benefit of the Philippine National Bank for the purpose of paying the
bank the loan obligation of Maximo Sta. Maria which Associated had guaranteed as surety
and against which liability Banzon in turn as indemnitor had undertaken to indemnify and
hold harmless Associated.
Now, the basic 1957 judgment of the Manila court sentencing Banzon to pay Associated a
total of P30,257.86 excluding interest, " for the benefit of the Philippine National Bank"
expressly made of record the said court's intent and disposition that the execution and
operation of its judgment against Banzon were contingent and conditioned upon
Associated as plaintiff-surety actually paying or being made or compelled to pay the bank-
creditor an equivalent amount as guaranteed by it. That this is so is made more evident
when we consider the provisions of Article 2071 of the Civil Code which permit the surety
to file such an advance suit against the principal debtor (not against an indemnitor such as
Banzon) only to obtain release from the guaranty or security against the danger of the
debtor's insolvency. Where the debtor directly discharged his loan obligation to the bank
which in turn released Associated from its suretyship liability without Associated having
incurred a centavo of liability, it is indisputable that Associated in turn would necessarily
release Banzon as indemnitor and the basic 1957 judgment would be inoperable and
unenforceable against Banzon.
When Associated nevertheless prematurely and contary to the intent and condition of the
basic 1957 judgment levied in execution on the two Caloocan City lots of Banzon the
interest it acquired was clearly impressed with a trust character. Such acquisition of
Banzon's properties by Associated was effected, if not through fraud 23a on Associated's
part, certainly through mistake 23b and there Associated was "by force of law, considered a
trustee of implied trust for the benefit of the person from whom the property comes" by
virtue of Article 1456 of the Code 23c since Associated not having paid nor having been
compelled to pay the bank had no right in law or equity to so execute the judgment against
Banzon as indemnitor. Had there been no fraudulent concealment or suppression of the fact
of such non-payment by Associated or a mistaken notion just assumed without factual basis
that Associted had paid the bank and was thus entitled to enforce its judgement against
Banzon as indemnitor, the writ for execution of the judgment against Banzon's properties
would not been issued. 23d
Furthermore, Associated's conduct, upon being sued by the Philippine National Bank
directly with the principal debtor Sta. Maria for collection of the debt 23e and sentenced by
the Pampanga court of first instance in 1963 (which it did not appeal) to pay the debt in the
much lesser amount of only P15,446.44, excluding interests, in not so discharging its
liability notwithstanding that it had already executed its 1957 judgment against Banzon as
indemnitor and taken in execution Banzon's two properties, was indeed rank fraud.
Associated therefore stands legally bound by force of law to now discharge its implied trust
and return Banzon's properties to him as their true and rightful owner.
The obligation imposed upon Associated as implied trustee to so restore Banzon's
properties becomes even more compelling when it is considered that in the premature
execution sale by virtue of the basic 1957 judgment, Associated ostensibly was the highest
bidder therefor applying its purported judgment credit of P41,000.00 when in law such
judgment was not subject to execution since the condition of Associated as surety being
made to pay the bank to make the judgment operable and enforceable had not materialized
and in fact Associated not having paid anything to the bank did not possess such purported
judgment credit of P41,000.00, nor did it put out a single centavo for which it could hold
Banzon answerable and therefore take Banzon's properties in execution and satisfaction
thereof. Actually, as already indicated above, the principal debt of the bank's debtor, when
32
directly collected by the bank six (6) years later, amounted merely to 1/2 the amount or
P15,446.44 as of August, 1963, excluding interests. 23f As already stated above, Associated
did not pay even this much lesser amount, notwithstanding the Pampanga court's judgment
against it in the suit directly filed by the bank.
Finally, it would be an outrage on simple justice and iniquitous unjust enrichment if a
surety such as Associated, after taking title in execution to the indemnitor's properties in
order to protect or reimburse itself from liability to the creditor for the debt guaranteed by
it, were to be allowed to retain ownership of the properties even though it did not incur or
discharge its liability at all, since it succeeded in evading payment to the creditor who
thereafter collect the debt directly from the debtor. Thus, the law (Article 1456, Civil Code)
impresses properties thus acquired with trust character and constitutes the erring surety as
"trustee of an implied trust for the benefit of the person from who the property comes," in
this case, Banzon as the true and rightful owner of the properties.
2. As Cardenas in levying in turn for satisfaction of his P5,100.00 judgment against
Associated on one of Banzon's lots acquired only whatever interest Associated had in the
lot, and with the knowledge that Associated's basic 1957 judgment against Banzon was
"for the benefit of the Philippine National Bank" and hence Associated's interest in the
Banzon properties was impressed with a trust character, subject to the obligation of
Associated as implied trustee to return the properties to Banzon, the trust character of the
lot titled by Cardenas necessarily passed to him. Cardenas could not claim actual or
absolute ownership of the lot so titled but could only hold the same as trustee, like
Associated as his causante or predecessor.
The respondents Cardenases' pleadings of record should clearly that they were fully
aware of these vital antecedents and premises of the suits between Associated and the
Banzons. In their memorandum, they cite the Manila court of first instance's basic decision
in Civil Case No. 31237 "condemning defendants to pay jointly and severally upon (sic)
plaintiff (Associated) but for the benefit of the Philippine National Bank" 24 the several
amounts sought by Associated, as surety, totalling P30,257.86. As far as their own claim
against Associated is concerned, they likewise recite in their memorandum that:
On April 29, 1959, then Judge (now Justice) Jesus Perez of the Court of
First Instance of Manila rendered a decision in Civil Case No. 36194,
entitled "Pedro Cardenas vs. Victoria Vda. de Tengco, et al." ordering the
defendants, including Associated Insurance & Surety Co., Inc., as surety,
to pay certain sums of money to Pedro Cardenas. The liability of the
Associated Insurance & Surety Co., Inc., was affirmed by the Court of
Appeals in a Decision promulgated on October 30, 1963, in CA-G.R. No.
25227-R. Consequently, pursuant to a Writ of Execution issued on
February 8, 1964, the City Sheriff of Caloocan sold on March 23, 1964 at
a public auction to Pedro Cardenas, the highest and only bidder, all the
"rights, interests, claims and title" of the judgment-debtor Associated
Insurance & Surety Co. Inc., over the property plus the improvements
thereon covered by Transfer Certificate of Title No. 39685 (one on the
properties acquired from Antonio Banzon). The property not having been
redeemed within the one year period, a Deed of Absolute Sale was issued
in favor of Pedro Cardenas on April 2, 1965. On April 23, 1965, Pedro
Cardenas filed a petition with the Court of First Instance of Rizal, Branch
XII, Caloocan City, in Registration Case No. C-211 (LRC Rec. No.
11267), entitled "Pedro Cardenas, Petitioner," for the issuance of a new
transfer certificate of title over the property in question and to declare
null and void the one previously issued. On May 5, 1965, a Transfer
Certificate of Title was issued by the Register of Deeds of Caloocan City
in the name of Pedro Cardenas pursuant to the order of the court in
aforecited Registration Case No. C-211, dated May 3, 1965, as
amended. 25
It is obvious that since what Cardenas acquired in his execution for his P5,100.00 judgment
against Associated was only "all the rights, interests, claims and title of the judgment-
debtor (Associated) over the property ... (one of the properties acquired from Antonio
Banzon)" and Associated's rights, if they could be so denominated, over Banzon's
properties were merely those of a trustee, supra, and Cardenas thereby acquired no
absolute "rights, interests, claim and title" at all but Associated's obligation as trustee to
restore Banzon's lawful properties to him.
3. As a point of law, even though under Associated's suretyship agreement guaranteeing
Sta. Maria's crop loans with the bank, it was permitted, supposedly for its protection, to
proceed judicially against the principal debtor and indemnitors even prior to the surety's
making payment to the creditor bank, Article 2071 of the Civil Code regulates such
relations and provides that in such cases, the surety's right is against the principal debtor
and that "in all these cases, the action of the guarantor is to obtain release from the
guaranty, or to demand a security that shall protect him from any proceedings by the
creditor and from the danger of insolvency of the debtor."
Associated thus did not even have any valid cause of action against Banzon as its
indemnitor, but could proceed only against Sta. Maria as the principal debtor. And even as
against such principal debtor, it could not prematurely demand payment even before it had
paid the creditor, its action being limited only for the purpose of obtaining release from the
guaranty or a security against an eventual insolvency of the debtor. As was emphasized by
Mr. Justice Reyes for the Court in General Indemnity Co., Inc. vs. Alvarez, 26 while a
guarantor may under Article 2071 of the Civil Code proceed against the principal debtor,
even before having paid, when the debt has become demandable, "(T)he last paragraph of
33
this same article, however, provides that in such instance, the only action the guarantor can
file against the debtor is 'to obtain release from the guaranty, or to demand a security that
shall protect him from any proceeding by the creditor and from the danger of insolvency of
the debtor.' An action by the guarantor against the principal debtor for payment, before the
former has paid the creditor, is premature."
4. The realization of the Banzon's rightful objectives in law and equity as thus restated has
somewhat been hampered and beclouded by the ineptitude and sorry neglect with which
they and/or their counsel have pursued their remedies in the various suits brought by them.
To cite the latest instance, the pending suit filed by them in the Manila court of first
instance, Civil Case No. 79244, is from the record the first real case that they have
properly filed for reconveyance of their two Caloocan City lots based on their new cause of
action that with the debtor's direct payment to the bank, Associated had been released as
surety and Banzon consequently likewise released as Associated's indemnitor, and
therefore Associated in discharge of the implied trust under which it executed the basic
1957 judgment " for the benefit of the Philippine National Bank" against Banzon was now
called upon to discharge such trust and reconvey and restore Banzon's properties to him.
Yet Banzon filed no appeal from the Manila Court's dismissal of his complaint against the
Cardenas spouses for reconveyance of the lot wrongfully titled by the latter on the lower
court's mistaken concept that this Court's decision of November 29, 1968 in Associated vs.
Banzon, supra, constituted res judicata and apparently allowed such dismissal to become
final. In reality, since Associated never had to pay the bank, Banzon's two lots, which had
been levied upon prematurely under Associated's judgment against Banzon and were
therefore held by it in implied trust for Banzon by force of law, "deserve to be reconveyed
to them" in the very words of the insurance commissioner, who alone and officially
represents and acts for Associated as liquidator.
As manifested by Associated's former counsel even when Associated was acting on its own
unauthorizedly and in violation of law, since an order for its liquidation and dissolution had
already been issued by the Manila court since December 31, 1965, he, as Associated's
counsel, never attempted to transfer Banzon's titles to Associated since the question
was sub-judice before this Court and resolved only per its decision in Associated vs.
Banzon of November 29, 1968, as of which time, this Court had already previously
affirmed on June 20,1968 in G.R. No. L-28934, the Manila court's dissolution and
liquidation order against Associated thus removing all doubt that only the Insurance
Commissioner as liquidator could act in any and all matters for Associated. 27
5. Under Sec. 175-C, paragraph 3 of the Insurance Act as amended, 28 the Insurance
Commissioner as liquidator of Associated was vested by authority of law with the title to
all of the property, contracts and rights of action of Associated as of the date of the judicial
order of liquidation, and any sale or disposition of Associated's properties or rights without
the knowledge and consent of the insurance commissioner as liquidator and without the
approval by the liquidation court is contrary to law and null and void.
Accordingly, petitioners Banzons are, as against their and their counsel's neglect and
inattention, nevertheless saved from the otherwise fatal consequences of the invoked final
dismissal of their complaint against the Cardenases in Civil Case No. 79244 of the Manila
court for recovery of the lot wrongfully titled in the Cardenases' name per T.C.T. No. 8567.
Since in all the litigations subsequent to Associated's prematurely obtaining in the Manila
court of first instance in Civil Case 31237 the basic 1957 judgment as surety against
Banzon as a mere indemnitor to cover the principal debtor Sta. Maria's demandable loans
to the bank and thereafter levying in execution on Banzon's two Caloocan City lots,
notwithstanding that such judgment was expressly held to be in trust and for the benefit of
the bank, the insurance commissioner, as liquidator of Associated and therefore
an indispensable party was never impleaded and therefore there could be no final
determination of said actions. Under Rule 3, section 7, indispensable parties must always
be joined either as plaintiffs or defendants, for the court cannot proceed without them, and
hence all judgments and proceedings held after the liquidation and dissolution order against
Associated became void for lack of an indispensable party in the person of the insurance
commissioner-liquidator. The insurance commissioner as liquidator of Associated by
authority of law was indisputably an indispensable party with such an interest in the
controversies affecting the judgment for Associated (against Banzon)
and against Associated (in favor of Cardenas) that a final decree would necessarily affect
its rights (administered by the Commissioner in the public interest and for the public's
protection) so that the courts could not proceed therein without the commissioner-
liquidator's official presence.
6. The wrongful dismissal by the Manila court of the Banzons' reconveyance suit, Civil
Case No. 79244, as against the Cardenases thus does not produce what would otherwise
have been fatal consequences due to the Banzons' failure to appeal from such dismissal.
Their reconveyance case as against Associated as principal defendant remains pending in
court. And the insurance commissioner as liquidator of Associated, now that she is fully
aware of the status of these antecedent cases after she finally received on March 11, 1971
the voluminous records thereof which had hitherto not been surrendered to her office
despite demands therefor, is called upon to appear for Associated in the said case, if she has
not as yet been duly impleaded as such liquidator. With the insurance commissioner, as
liquidator of Associated and an indispensable party now in the case, the said reconveyance
suit may now proceed anew and the Cardenas spouses caused by the liquidator to be duly
impleaded anew for they are also indispensable parties insofar as the insurance
commissioner-liquidator's claim on behalf of Associated to the lot covered by T.C.T. No.
8567 issued in their name is concerned. Herein petitioners seek principally in the said case
the reconveyance to them by Associated of their two parcels of land covered by T.C.T. No.
34
8567 and T.C.T. No. 53759, as acquired in execution by Associated, and thereafter, with
respect to the lot covered by T.C.T. No. 8567, by the Cardenases, by virtue of the trust
character impressed upon them and Associated's duty as implied trustee to restore said
properties to the Banzons.
Considering that the insurance commissioner herself , who now legally can alone represent
Associated as liquidator, has herein recognized such trust character and has expressed the
belief that the said lot, no less than the other lot covered by T.C.T. No. 8567, should, in
justice to petitioners, be reconveyed to them on account, among others, of petitioner
Banzon's release from his obligation as indemnitor by virtue of the principal debtor's
subsequent payment of his obligation with the Philippine National Bank which likewise
released Associated from any liability as surety, the present petition should therefore be
granted in the interest of justice and equity so as to enable the insurance commissioner-
liquidator in due course to discharge the trust of reconveying Banzons' properties to them.
7. The circumstances that respondents Cardenases, insofar as the lot wrongfully claimed by
them, caused the Caloocan City special deputy sheriff to enforce on March 23, 1970
respondent court's challenged order of demolition and writ of possession on the very
day that this Court ordered the issuance of a restraining order against the enforcement of
said challenged order and writ, and notwithstanding that said sheriff was duly advised by
Banzon of the petition at bar having been filed on March 20, 1970, does not make the
restraining order in any manner moot. The Court does not look with favor upon parties
"racing to beat an injunction or restraining order" which they have reason to believe might
be forthcoming from the Court by virtue of the filing and pendency of the appropriate
petition therefor. Where the restraining order or preliminary injunction are found to have
been properly issued, as in the case at bar, mandatory writs shall be issued by the Court to
restore matters to the status quo ante. 29
In the case at bar, with the insurance commissioner as liquidator of
Associated, recognizing through the Solicitor General that the Banzons' two lots
wrongfully taken from them by Associated's premature actions should be reconveyed to
them, there is established a clear and indubitable showing on the record that the petitioners
are entitled to a writ restoring the status quo ante. A mandatory writ shall therefore issue
commanding respondent court to forthwith restore petitioners to their possession of Lot 6,
Block 176, covered by T.C.T. 8567 from which they have been removed by enforcement of
said respondent court's enjoined order of demolition and writ of possession dated March
13, 1970, Annex "F" of the petition. As to petitioners' building thereon claimed to be worth
P10,000.00 (but countered by Cardenas to be a "mere barong-barong" 30), respondent court
shall at Banzon's petition cause respondents Cardenases to restore the demolished building
or pay Banzon the determined value thereof. As to the fruits of possession of the land, with
Cardenas acknowledging that he has been leasing the same to a third person at P200.00 a
month, 31 respondents Cardenases shall forthwith pay to petitioners Banzons the whole
amount of rentals so received by them to the time that possession of the lot is effectively
restored to petitioners. By the very nature of this mandatory writ, the same shall be
immediately executory upon promulgation of this decision.
WHEREFORE, the petition for a permanent injunction, during the pendency of Civil Case
No. 79244 of the Court of First Instance of Manila against the disposition in any manner of
the two parcels of land subject of said case other than their reconveyance to petitioners as
the true and rightful owners thereof as expressly recognized by the insurance commissioner
as liquidator of Associated is hereby granted. In lieu of the permanent injunction against
enforcement of respondent court's order dated March 13, 1970 in Case No. C-211 thereof
ordering the delivery of possession of the property covered by T.C.T. No. 8567 to
respondents Cardenases and demolition of petitioners Banzons' improvements thereon,
(which were prematurely carried out by respondent court's sheriff on March 23, 1970) a
writ of mandatory injunction commanding respondent court to forthwith restore the status
ante quo and to restore petitioners Banzons to full possession of the property and
enjoyment of the fruits and rentals thereof under the terms and conditions stated in the next
preceding paragraph is hereby issued, which shall be immediately executory upon
promulgation of this decision. With costs against respondents Pedro Cardenas and Leonila
Baluyot.
This decision is without prejudice to such civil and criminal liability as the officers of the
defunct Associated Insurance & Surety Co., Inc. may have incurred by virtue of their acts
of commission and omission which have resuited in grave prejudice and damage to
petitioners as well as to the public interest, as in the suppression from and non-surrender to
the Insurance Commissioner as liquidator of the records of the relevant antecedent cases,
and in the possible misrepresentation to the courts therein that Associated had duly
discharged to the bank its liability as surety and could therefore lawfully levy on the
properties of Banzon as indemnitor, which would have resulted in the respondents' unjust
enrichment at Banzon's expense. The insurance commissioner is directed to conduct the
corresponding investigation for the purpose of filing such criminal and other appropriate
actions as may be warranted agains the responsible parties. So ordered.
Concepcion, C.J., Reyes, J.B.L., Zaldivar, Castro and Fernando, JJ., concur.
Makalintal, Makasiar and Antonio, JJ., took no part.
Separate Opinions
35

BARREDO, J., dissenting:
To be in the unenviable position of fully agreeing that herein petitioners, the Banzon
spouses, are entitled to the reconveyance of their two lots herein involved but at the same
time being unable to see my way clear to giving my comformity to the reliefs granted to
them in the dispositive portion of the decision penned for the majority by Mr. Justice
Teehankee, in his usual meticulous and forceful, almost passionate, style, for which reason
I am constrained to submit this dissent, is something that pains me as a man. My feeling as
a Member of the Court, however, is one of grave concern that in their eagerness to render
substantial justice, my brethren have deemed it necessary to indulge in the luxury of
premising their conclusions on purported legal propositions which in my humble view are,
at least, controversial, going as they do beyond the necessities of the case. The majority
apparently considers it excusable to do so on the theory that the "peculiar" circumstances
of this case justify ad hoc considerations and disposition. For my part, I feel very strongly
that there is no need at all to go that far, because I am fully convinced that actually, the
seeming peculiarity of the said circumstances do not demand the radical unusual treatment
given to them by my colleagues, and rather than lend my hand in possibly creating
erroneous impressions as to the correct rules of procedure and practice which should be
observed in situations more or less similar to those herein obtaining and thereby place in
doubt the validity and efficacy of the existing normal rules to adequately meet the
problems in this case, I prefer to be alone, if alone I have to be, in the views hereunder
expressed, believing firmly as I do that no case can be worth risking doing violence to any
rule for so long as substantial justice can anyway be adequately extended to and achieved
by the parties concerned within the same time as they would otherwise by simply adhering
to the orthodox approach already understood and practiced by the bench and bar. I consider
it but proper, if there must be evidence of judiciousness and absolute impartiality in the
decisions of the Court, that We avoid as much as possible hueing Our judgment with
perceptible tinge of over-excitedness that can be suspected as having blurred Our vision of
the true justice in any case We decide.
As I will explain later in this opinion, there are passages and observations in the majority
opinion which I cannot share because they extend to areas beyond my limited knowledge
of remedial law which naturally I should fear to tread. Withal, they do not square with my
sense of justice and propriety. Worse, I believe that the dispositive portion of the decision
of the majority is beyond what is warranted in the premises.
For a more accurate and appropriate orientation, and so that the whole case may be
reviewed in proper perspective, I believe it is best to restate first the fundamental and
relevant facts appearing in the records.
1. The Philippine National Bank (PNB for short) extended credit by way of crop-loans to
one Maximo R. Sta. Maria (Sta. Maria for short) sometime in 1952, for which Associated
Insurance & Surety Co., Inc. (Associated for short) executed in favor of PNB a number of
surety bonds, on the basis in turn of an indemnity agreement in its favor executed by three
parties, one of whom was petitioner Antonio R. Banzon, (Petitioners, whether meant to be
referred to individually or together, will hereafter be referred to merely as Banzon, since
petitioner Rosa Balmaceda does not appear to have had any active role in all the transaction
herein involved.) in which agreement there was an express stipulation expressly
authorizing the surety to proceed against the indemnitors as soon as demand is made by
PNB. (Pars. 1-3, Annex E of Petition.)
2. Because of demands made by the PNB upon Associated, this in turn made demands upon
the principal debtor Sta. Maria, and when the latter failed to pay PNB, a suit, Civil Case
No. 31237 of the Court of First Instance of Manila, was instituted by Associated against
Sta. Maria and the indemnitors, including petitioner Banzon, which, after trial, allegedly
held against Sta. Maria and the other indemnitors only, since Banzon, according to him,
was not served with summons, ended nevertheless in a judgment against all the defendants,
including Banzon, sentencing all of them to pay Associated jointly and severally the
amount therein stated. (Pars. 4-7, Id.)
3. Exactly, this judgment read as follows:
IN VIEW WHEREOF, the Court renders judgment condemning
defendants to pay jointly and severally unto plaintiff but for the benefit of
the Philippine National Bank the amounts of P6,100.00, P9,346.44 and
P14,811.42, all with interest at the rate of 12% per annum from date of
the filing of the complaint until fully paid, (b) to pay the amount of
P593.76 representing premiums and documentary stamps due on the
renewal of the bonds Annexes "E" and "C-1"; (c) plus 15% as attorney's
fees, and collateral. This 15% and the interest to be paid for the benefit of
the plaintiff, and no pronouncement as to costs.
4. Upon the said judgment becoming final and executotry, Associated caused to be levied
upon and sold at public auction the two subject parcels of land covered respectively by
T.C.T. Nos. 39685 and 53759 of the Office of the Register of Deeds of Rizal. The
purchaser was Associated and no redemption was ever exercised by Banzon. (See Annex
"2", Id.)
5. Subsequently, without the said titles having been transferred actually in the name of
Associated, since what was done was merely to annotate in the meantime at the back of
Banzon's title the execution sale in favor of Associated pursuant to the judgment, and in
fact, Associated's petition for the consolidation of the titles in question in its name was still
36
pending in the Supreme Court in G.R. No. L-23971 which was decided only later on
December 29, 1968, the Sheriff of Caloocan City levied upon TCT 39685 by virtue of a
writ of execution issued against Associated in another case, Civil Case No. 36194 of the
Court of First Instance of Manila pursuant to a judgment therein, (affirmed by the Court of
Appeals in CA-G.R. No. 25227-R, Pedro Cardenas vs. Victoria Vda. de Tangco, et al.) and
on March 23, 1964, said Sheriff sold to herein respondent Pedro Cardenas and Leonila
Baluyot, (hereinafter to be referred to merely as Cardenas, irrespective of whether what is
meant to be referred to is only the husband, the wife or both of them, since Leonila Baluyot
does not appear to have had any active role in any of the transactions herein involved) as
the highest and only bidder at the public auction, "all the rights, interest, claims and title"
of Associated over the land in question and, after one year without any redemption being
made by Associated, issued to said Cardenas, a Deed of Absolute Sale on April 2, 1965.
(See p. 6 Memorandum of Cardenas, Annex 6 of their Answer; and p. 5, Opposition of
Insurance Commissioner dated March 24, 1971.)
6. On April 23, 1963, Cardenas filed a petition with the Court of First Instance of Rizal,
Caloocan Branch XII, in Reg. Case No. C-211 (LRC Rec. No. 11267) for the issuance of a
new certificate of title in his name. On May 3, 1965 an order was issued granting the
petition, and on May 5, 1965, TCT 39685 was cancelled and TCT 8567 was issued in the
name of the respondents Pedro Cardenas and his wife. (Par. 9, p. 5, Reply of Cardenas to
Explanation and Manifestation of Atty. Feliberto Castillo.)
7. It also appears that subsequently, on May 21, 1965, a writ of possession was issued in
said case, C-211, but enforcement thereof was held in abeyance in view of the filing before
Branch XII, Court of First Instance of Rizal, Caloocan City, of Civil Case No. 531 1 by
Banzon against Cardenas as well as Associated and the Sheriff questioning the validity not
only of the judgment in aforementioned Civil Case No. 31237 on the ground that Banzon
had not been summoned therein but also of the levy and sale because allegedly the
properties sold were conjugal properties of the Banzons. In addition, it was also alleged in
the complaint that Associated was not the owner of TCT 39685 but only the holder thereof
as trustee of PNB. This case was, however, dismissed on August 6, 1969 and no appeal was
taken by Banzon on time, although, later, on October 17, 1969, he filed a petition for relief,
but this was denied on October 21, 1969 on the ground that it was several days late, and it
does not appear that any appeal was taken from this denial. (pp. 7-8, Memorandum of
Cardenas.)
8. Strangely, however, as already indicated earlier, the record also bears out that after June
20, 1960, the date when the period of Banzon to redeem the two titles, TCT 39685 and
53759, which were sold at auction as stated in paragraph 4 above expired, Associated
"obtained in due time the corresponding final certificate of sale, which was likewise duly
registered" in view of which, Associated "made demands upon (Banzon) to deliver to it the
owner's duplicate of Certificates of Title Nos. 39685 and 53759 ... but the latter refused. As
a result, it filed in the Court of First Instance of Rizal in Case No. 3885, GLRO Record No.
11267, a petition for an order directing (Banzon) to present his owner's duplicate(s) ... for
cancellation, and for another order directing the Register of Deeds to cancel said
duplicate(s) and to issue new transfer certificates of title covering the properties in the
name of (Associated) ... Banzon filed his opposition claiming mainly that (1) the
decision ... in Civil Case No. 31237 was void as far as he was concerned because he had
never been summoned in connection therewith. and that in the levy and sale of the
properties ... were likewise void because they were conjugal properties ..." (Decision of the
Supreme Court, Annex 2, Id.) The trial court overruled these objections and issued the
order prayed for, and on appeal to the Supreme Court, this order was affirmed in toto. This
was on November 29, 1968. (Id.) In other words, it appears that the proceedings referred to
in paragraphs 5 and 6 above leading to the transfer, by order of the court, of Banzon's title
to Cardenas took place even before the said title had been placed in the name of
Associated.
9. On the basis of the same decision of the Supreme Court of November 29, 1968, a motion
to dismiss Civil Case No. 531, referred to in paragraph 7 above was filed and the same was
granted on August 6, 1969. Accordingly, on October 13, 1969, Cardenas applied for
an alias writ of possession (the original one was held in abeyance as stated in paragraph 7
above), and this alias writ was issued on October 23, 1969. Due to the refusal of Banzon to
vacate, an order of demolition was sought and granted on December 9, 1969, but again the
enforcement thereof was enjoined by a writ of preliminary injunction issued by the Court
of Appeals in CA-G.R. No. 44391-R, entitled "Antonio Banzon, et al. vs. Hon. Fernando
Cruz, et al." This writ of preliminary injunction was, however, dissolved in a final
judgment of February 28, 1970, the Court of Appeals holding that:
Hence, the petition for injunction prayed for being merely a devise to
prevent the execution of a final judgment by the filing of a new suit
based upon the same grounds which have already been interposed and
passed upon in the case where the final judgment had already been
rendered, this petition should be as it is hereby denied, with cost against
petitioners.
10. Accordingly, on March 11, 1970, Cardenas sought enforcement of the suspended writ
of possession, and on March 13, 1970, the corresponding order was issued. This is the
order, inter alia, that this Court has enjoined temporarily in this action, by resolution of
March 23, 1970.
11. In the meantime, while all the above proceedings were going on, it appears undisputed
that Associated was ordered liquidated and dissolved by the courts. The decision to this
effect was rendered by the Court of First Instance of Manila in Civil Case No. 56995,
Republic vs. Associated etc., affirmed by the Court of Appeals in C.A. G.R. No. 37985-R
37
on January 3, 1968, certiorari was denied by the Supreme Court on June 20, 1968, and this
denial became final on July 9, 1968. Neither the trial courts nor this Court were ever
informed of this liquidation in any of the proceedings already mentioned.
12. In the meantime also and importantly, because of the failure of the principal, Sta.
Maria, as well as the surety, Associated, to pay PNB, notwithstanding that Associated had,
in fact, already executed upon the properties of Banzon, evidently without advising PNB
thereof, PNB filed suit in the Court of First Instance of Pampanga, Civil Case No. 1907,
against said parties, which ended in the Supreme Court as G.R. No. L-24765 on August 29,
1969 with a judgment favorable to PNB. (29 SCRA) This judgment was satisfied out of
Sta. Maria's properties sold on execution on February 16, 1970 and a corresponding release
of Associated was issued by PNB on February 20, 1970 (See allegations on p. 6 of
Complaint, Annex E, Petition and also Annex E).
13. Having in view these developments, on March 13, 1970, Civil Case No. 72944 was
filed by Banzon in the Court of First Instance of Manila basing the same mainly on the
trust theory, that is, that Associated and later Cardenas, the latter as the former's virtual
successor-in-interest in TCT 39685, acquired the lots in question only as trustees for the
PNB, but this case was dismissed as against Cardenas on October 28, 1970 after a
preliminary hearing upon the ground of res adjudicata, and this dismissal is now final, no
appeal having been taken therefrom by Banzon. In this connection, it is to be noted that in
Civil Case No. 531, which, as already noted above, had been dismissed earlier, Banzon
already raised the same issue that Associated never became owner of said lots but was only
the trustee thereof for PNB. (See p. 7, Memo of Cardenas.)
14. While evidently still in daze because of all these developments, under date of February
27, 1971, Banzon filed with the Court of First Instance of Rizal, Caloocan Branch XXII,
Civil Case No. 2052, another action against Maximo R. Sta. Maria and Valeriano R. Sta.
Maria alleging, among other things, in his verified complaint that:
4. That defendant failed to pay his aforementioned obligation with the
Philippine National Bank, and accordingly upon demand being made by
the latter on the Associated Insurance & Surety Co., Inc., to pay said
defendant's outstanding obligation, said surety company filed an action
for damages against herein plaintiff and his co-indemnitors. True copy of
said complaint dated November 19, 1956 is hereto attached and made an
integral part hereof as Annex "A";
5. That as a result of the case alleged in the proceeding paragraph 4, a
decision was rendered in said case against the defendants therein, among
them the present plaintiff. A true copy of said decision dated Dec. 11,
1957 is hereto attached and made integral part of this complaint as Annex
"B";
6. That said decision (Annex "B") having become final ,and executory,
execution was made on the properties of the herein plaintiff particularly,
on his two residential lots situated at Caloocan City and embraced by
TCT Nos. 39685 and 53759, of the Registry of Deeds of Rizal Province
(now Registry of Deeds of Caloocan City), the total worth of said lots
based on the present market value being P300,000.00; that eventually
said lots were sold at public auction with the Associated Insurance &
Surety Co., Inc., as the highest bidder. True copies of the Sheriff's
Certificate of sale dated June 27, 1960 and the Officer's deed of absolute
sale dated July 8, 1960 in favor of said Isurety are hereto attached as
Annexes "C" and "D", respectively.
7. That subsequently thereafter, one of said lots, particularly that covered
and described under TCT No. 39685, was executed upon by a third party
to satisfy the said surety's obligation to the latter, leaving only one lot in
the name of the Associated Insurance & Surety Co., Inc., thereby
damaging plaintiff in the amount of P 150,000.00 which is the worth of
the lot at its present market value. A true copy of the corresponding
Sheriff's Final Deed of Sale date April 2, 1965 in favor of said third party
is hereto attached and made an integral part of this complaint as Annex
"E";
8. That through a recent negotiation with the aforementioned insurance
company, the latter has agreed to reconvey the remaining lot covered by
TCT No. 53759 to the herein plaintiff under the condition that the latter
will pay unto said surety company damages in attorney's fees equivalent
to 15% of what the present defendant owes the Philippine National Bank
or the sum of P6,750.00 and likewise relieving said surety company of its
undertaking and liability as surety for said defendant Maximo R. Sta.
Maria, with the Philippine National Bank; that plaintiff has agreed to do
so but up to the present time of filing this case no reconveyance has yet
been made;
9. That plaintiff in pursuant of the arrangement made with the
aforementioned surety company has in fact assumed all of defendant's
obligation with the Philippine National Bank, in the amount of
P45,000.00, thereby actually releasing said surety from any further
obligation as such in relation to its undertakings with said bank, and
38
 likewise, releasing said defendant from his accountability on the crop
loans he secure thereat as mentioned in paragraph 2 hereof;
10. That due to defendants' deliberate failure and refusal to pay their
plainly, valid and just obligation with the Philippine National Bank,
resulting in the unfortunate happening above enumerated, all of which
are prejudicial and damaging plaintiff's interest as the latter has suffered
the following damages:
"(a) P150,000.00, as value of his one residential lot
embraced by TCT No. 39685, Registry of Deeds of
Caloocan City, and which has been irretrievably lost to
a third party and P1O,000.00 fair value of the
demolished house of strogn materials on the lot having
a monthly rental of P200 beginning April, 1970 and
months thereafter.
"(b) P6,750.00, reimbursement to be made by plaintiff
as attorney's fees suffered by the Associated Insurance
& Surety Co., Inc., by reason of the suit occasioned by
decision defendants' failure to pay the Philippine
National Bank his crop loans;
"(c) P10,000.00 representing damages suffered by the
plaintiff by way of attorney's fees in all litigations
previous to the present one incident to defendants'
obligation with the PNB."
and praying, therefore, specifically that:
2. That after due hearing on the merits on the principal cause of this
action, judgment be rendered against the defendants jointly and severally
as follows:
"(a) Ordering the defendants to pay the sum of
P150,000.00 as value of plaintiff's one residential lot
embraced by TCT No. 39685, Registry of Deeds of
Caloocan City, which has been irretrievably lost to a
third party directly caused by defendants' failure and
refusal to pay their just and lawful obligation with the
PNB, beside ordering defendant Maximo R. Sta. Maria
to pay P10,000.00 the fair value of the house of strong
materials built on the lot, which was ordered
demolished having a monthly rental of P200.00
beginning April 1970 and monthly thereafter."
Upon these facts, and in the light of the opposing contentions of the parties as to whether or
not Banzon is entitled to the reconveyance of the two lots in question, there is no doubt in
my mind that he is entitled to the recovery thereof. My fundamental disagreement with the
majority refers only to the manner or procedure as to how this can be accomplished in the
context of the facts and judicial proceedings related above, and, of course, with the legal
reasoning to be pursued in arriving at Our respective conclusions. Withal, I do not see
sufficient basis for the dispositive portion of their decision.
As I have stated at the outset of this opinion, I am afraid that the majority approach
unnecessarily cuts corners which remedial law considers as essential, if the administration
of justice is to be carried out, as, in my view, it must be, along basic standard procedures
contemplated to keep judicial proceedings from being a riotous confusion of impromptu
and improvised steps readily to be taken to suit the judge's concept of substantial justice in
any given case. I reiterate that I am for giving Banzon what is due him, but I cannot
subscribe to many legal propositions in the majority opinion which in my considered
opinion deviate from the established and accepted concepts regarding the points touched
and referred to therein. To deal with first things first, however, I will discuss these
differences later. In the meanwhile, my solutions of the legal problems before the Court are
as follows:
I
DESPITE ALL THE PREVIOUS RELATED PROCEEDINGS AMONG
THE SAME PARTIES HEREIN APPARENTLY FURNISHING LEGAL
BASIS FOR THE ISSUANCE OF TRANSFER CERTIFICATE OF
TITLE NO. 8567 IN THE NAMES OF RESPONDENTS CARDENAS
AND BALUYOT, THERE SEEM TO BE ENOUGH REASONS TO
HOLD THAT THE SAID TITLE IS ABSOLUTELY VOID AND
NEITHER SAID TITLE NOR THE JUDICIAL PROCEEDINGS
REFERRED TO MAY SERVE AS BASIS FOR THE WRIT OF
DEMOLITION HEREIN COMPLAINED OF, ALTHOUGH, IN THE
CASE AT BAR, WE CANNOT RULE ON THE VALIDITY OF SAID
TITLE, THE ONLY PURPOSE OF THIS PETITION BEING TO HAVE
THE SAID ORDER OF DEMOLITION SUSPENDED PENDING
FINAL DECISION OF CIVIL CASE NO. 79244 WHEREIN SUCH
ISSUE OF VALIDITY IS TO BE FULLY THRESHED OUT.
39
At the outset, it may be stated incidentally, that it is not due to any fault of Banzon but
evidently to the inexperience and inadequate preparation of counsel, that this case has
turned out to be more complicated than it should have been, but that cannot deter this Court
from straightening out matters and rendering justice accordingly. Indeed, as also observed
in the majority opinion, generally, the incompetence of counsel should be overlooked
when, anyway, full opportunity has been given to every interested party as regards all the
matters upon which the Court is to act. I am satisfied that, considering how extensively and
ably counsel for Cardenas has discussed every conceivable aspect of his case, no
substantial prejudice can be caused to him, if the Court should now render judgment as the
circumstances revealed in the record demand and not exactly in accordance with the theory
formulated in the petition. As I see it, the main relief being sought by Banzon is merely the
suspension of the order of demolition or dispossession issued by respondent Judge Cruz
during the pendency of Civil Case No. 79244, on the ground that it was a grave abuse of
discretion on the part of said judge not to order such suspension, considering the nature of
said case, hence the ultimate inquiry in this case should be whether or not Banzon's
complaint on said case presents a sufficient prima facie basis for such suspension.
Accordingly, the first question that may be asked in connection with the basic problem
before Us is, what was acquired by Cardenas at the auction sale in connection with the
execution of the judgment in his favor in Civil Case No. 36194 of the Court of First
Instance of Manila? The plain answer is, only "the rights, interests, claims and title" of
Associated in TCT No. 39685, 2 which, according to the said respondent himself on p. 7 of
his memorandum, were what were sold to him in that public auction of March 23, 1964.
Indeed, it cannot be disputed that on that date of said auction and even on the date of the
execution of the deed of absolute sale after the period of redemption expired, on April 2,
1965, Associated was not in law and in fact the absolute owner of the land covered by TCT
39685. To be precise, all that Associated had in said title was the right to hold the same in
trust for the PNB. By no means and under no concept could Associated have had any right
more than that. Indeed, no other conclusion can be drawn from the facts just narrated.
In the aforequoted judgment against Banzon which served as basis of the writ of execution
by virtue of which his two titles were sold at auction, it is necessarily implied that the
same, although nominally in favor of Associated, was actually for the benefit of PNB.
Anything Associated could get from it was not intended to enrich it, but only to save it, if
fully, from the effects of the eventual enforcement of the rights of the PNB in the premises.
Conversely, it is also the inescapably implied sense of said judgment that in the event
Associated is relieved or released by PNB without its having to resort to said judgment or
making use of the proceeds thereof, then Banzon would be entitled not only to be
correspondingly relieved or released from the effects of the judgment but also to the
reconveyance of whatever may have been acquired by Associated under the same. Again,
the situation lends to no other view. Stated otherwise, the judgment in favor of Associated
was not for it to be paid with money or property by Banzon for its own benefit or for the
satisfaction of any claim of its own, much less for its own enrichment the judgment was
for Banzon to pay Associated so that Associated may pay PNB. Consequently, there can be
no doubt that under said judgment, the rights of Associated derived therefrom are not for it
to dispose of for its own exclusive benefit, and, accordingly, they could not be subject to
the claim of any third party in any manner, either prejudicial to the interests of PNB or dis-
advantageous to Banzon, beyond what had to be paid to PNB. Briefly, Associated was
made trustee of the judgment against Banzon with the PNB as beneficiary. So, when the
Sheriff sold to Cardenas "the rights, interests, claims and title" of Associated in TCT
39685, these carried impressed upon them the trust in favor of PNB (and alternatively, of
Banzon) and consequently, Cardenas was under notice that Associated had no dominical
title in the property covered thereby, in the sense that what it had was nothing more than
the title of a trustee holding the same, for the benefit of PNB with the inseparable
obligation to return the same to Banzon should PNB release Associated without the latter
paying anything and without the former using the proceeds of the judgment. Factually,
Cardenas cannot claim ignorance of these facts because the record is clear that when he
caused the transfer of TCT 39685 to his name, this title was still in the name of Banzon, for
the simple reason that the petition of Associated to have it consolidated in its name was still
pending in the Supreme Court and a cursory examination of the expediente of the case in
said Court would have revealed to him the true nature and extent of Associated's interest in
said title.
It is of no moment, in this regard, that in the indemnity agreement signed by Banzon,
Associated had the right to sue Banzon even before it has been made to pay and has
actually paid PNB. That stipulation, if it could justify the filing of the action against
Banzon as indemnitor, could not be construed to enable Associated to take advantage, for
its own benefit, of the judgment it secured against Banzon without its actually and priorly
paying PNB, for such a construction would certainly be unconscionable, and being patently
iniquitous could not pass the fundamental and all important test that contractual terms and
conditions must not be contrary to morals or public policy. Incidentally, under the present
Civil Code, Article 2071, the only anticipatory remedy of a surety is either "to obtain
release from the guarantee or to demand a security that shall protect him against any
proceedings by the creditor and from danger of insolvency," hence, according to our Acting
Chief Justice, Mr. Justice J.B.L. Reyes, speaking for the Court in General Indemnity Co.,
Inc. vs. Alvarez, 100 Phil. 1059, 1062, "an action by the guarantor against the principal
debtor for payment, before the former has paid the creditor, is premature." It is quite true
that these observations about the right of Associated to sue Banzon ahead of PNB suing it
do not necessarily render, by their own force, null and void, the title of Cardenas, but they
certainly clarify the true nature and character of his rights in the lot in question. And it is
very clear that under the circumstances, even if it were to be held that the transfer of TCT
39685 in their names was validly done, still he would be no more than a mere trustee like
Associated into whose shoes he has stepped trustee for the benefit of the Bank and, in
the other contemplated contingency, of Banzon for which reason, even if procedurally
speaking it can be assumed that the said title could be considered as properly transferred to
40
him, still he cannot escape the obligation to reconvey the same to Banzon, in the fashion of
a trustee who secures the registration of land in his name in breach of the trust, albeit it is
not for this Court to render judgment of that tenor in this case, since such reconveyance is
precisely the object of the Manila suit, Civil Case No. 79244 and not of the case at bar by
election of the petitioners themselves who have not prayed for such a relief here.
Looking at the matter from another point of view, however, it is obvious that the procedure
leading to such transfer, of TCT 39685 to the name of Cardenas cannot stand legal scrutiny.
How he secured TCT 8567 has no satisfactory explanation in the record. What is more, I do
not believe any such explanation can be found elsewhere. it is indisputable that Associated
was still in the process of trying to secure delivery to it of the duplicate certificates of the
two titles in question when this Court rendered its judgment in G.R. No. L-23971 on
November 29,1968. While it may be true that even before that, or on May 3, 1965, an order
was issued by the Court of First Instance of Rizal, Caloocan Branch in C-211 (LRC Rec.
11267), upon motion of Cardenas, for the issuance of a new certificate of title to him,
absent any showing that PNB and Banzon were properly notified thereof, because of their
interest as beneficiaries of the trust imposed upon Associated as above explained, of which
he had actual knowledge or ought to have known, the said order must be held to be void ab
initio due to the absence of the indispensable parties PNB and Banzon. The in
rem character of land registration proceedings does not extend to incidents of which no
notice by publication is required. In such instances, actual notice to the interested parties is
what confers jurisdiction upon the court and gives validity to what is done under its orders;
hence, in issuing the order for the issuance of TCT 8657, by transfer from TCT 39685, the
Court of First Instance of Rizal acted without jurisdiction, and such want of jurisdiction
being patent even on the face of the record, such order is null and void ab initio.
It would not avail Cardenas to invoke the subsequent dismissal of Civil Case No. 72944 in
Manila insofar as he and his wife are concerned, even if it were granted that such dismissal
is already final. It should be borne in mind that in said action, the Banzons have alleged
causes of action jointly against Associated and Cardenas, but when the same was filed on
March 13, 1970, Associated had already been ordered liquidated and dissolved. Under
Section 1751(c) of the Insurance Act:
Sec. 175(C). Order of rehabilitation or liquidation. 1. An order to
rehabilitate or liquidate a domestic insurer shall direct the Commissioner
and his successors in office forthwith to take possession of the property
of such insurer and to conduct the business thereof, and to take such
steps toward the removal of the causes and conditions which have made
such proceedings necessary as the court shall direct.
2. The Commissioner may submit any plan he may deem advisable to
protect the public interest for the rehabilitation or liquidation of such
insurer to the court for approval and if approved such plan shall be
binding upon the insurer, stockholders, and creditors.
3. The Commissioner and his successors shall be vested by operation of
law with the title to all of the property, contracts, and rights of action of
such insurer as of the date of the order so directing them to rehabilitate or
liquidate. The filing or recording of such order in any record office of the
Philippines shall impart the same notice that a deed, bill of sale or other
evidence of title duly filed or recorded by such insurer would have
imparted. The rights and liabilities of any such insurer and of its
creditors, policy-holders, stockholders, members and all other persons
interested in its estate shall, unless otherwise directed by the court, be
fixed as of the date of the entry of the order directing the rehabilitation or
liquidation of such insurer in the office of the clerk or court where such
insurer had its principal office for the transaction of business upon the
date of the institution of proceedings under this Act: Provided, however,
That the right of claimants holding contingent claims on said date to
share in an insolvent estate shall be determined by section one hundred
and seventy-five (a) of this Act.
Consequently, Associated, as such, could no longer be sued on March 13, 1970 and in its
place the party that should have been joined was the Insurance Commissioner. What is
more, this joinder is indispensable, considering that the Insurance Commissioner is the
liquidator of the Corporation. Absent such an indispensable party, naturally, all the
proceedings in said case are likewise void and together with them the order of dismissal
relied upon by Cardenas.
Anent the claim of Cardenas that because of the allegations aforequoted in the complaint
filed by Banzon against Sta. Maria in Civil Case No. 2052 of the Court of First Instance of
Rizal, petitioners are in estoppel to claim that TCT 8567 is invalid, Cardenas is apparently
forgetting the fact that said complaint was filed only on February 27, 1971 and, certainly,
none of the allegations contained therein could have been the inducement for his claim to
said title which was made by him as early as 1965. Estoppel presupposes that the party
invoking it must have been misled by the other party. (Tolentino, Civil Code of the
Philippines, Vol. IV, p. 600, 1956 ed.) Then also, the allegations alluded to as basis for
estoppel involve legal conclusions which as discussed above are erroneous. Errors of law
of a party do not create estoppel, for the simple reason that estoppel cannot be founded on
ignorance, and since the other party is conclusively presumed to know the law, it cannot be
misled thereby. (Eugenio v. Perdido, 97 Phil. 41, 64)
It thus appears that these are actually more than prima facie reasons why the pendency of
Civil Case No. 79244 should have induced respondent Judge to suspend the enforcement of
41
his order of demolition or dispossession of March 13, 1970. While, as I have already stated,
it is not for the Court to go into the actual merits of Banzon's pose in claiming the right to
the reconveyance of the lots in controversy, the above discussion is necessary because
they,constitute at least the legal possibilities that have to be considered in determining
whether or not the failure of respondent Judge to suspend the enforcement of his
questioned order constitutes a grave abuse of discretion. Incidentally, if not strictly binding
upon the court taking cognizance of Civil Case No. 79244, they should give him enough
light in resolving the issues before him.
II
IT BEING CLEAR FROM THE ABOVE DISCUSSION THAT
ASSOCIATED WAS ONLY A TRUSTEE FOR THE BENEFIT OF THE
PNB OF THE TWO LOTS OF BANZON ACQUIRED BY IT AT THE
AUCTION SALE AND AS A MATTER OF FACT PNB HAS
ALREADY RELEASED ASSOCIATED, ALL THAT REMAINS NOW
TO BE DONE TO RESTORE BANZON'S FULL OWNERSHIP
THEREOF IS FOR THE INSURANCE COMMISSIONER WHO HAS
STEPPED INTO THE SHOES OF ASSOCIATED AND WHO HERE
ADMITS THE CORRECTNESS OF THE CLAIM OF BANZON
THERETO TO EITHER CONFESS JUDGMENT IN CIVIL CASE NO.
79244 OR TAKE ANY OTHER APPROPRIATE STEP IN SAID CASE
LEADING TO THE CANCELLATION OF THE ANNOTATION IN
TCT 53759 OF THE AUCTION SALE IN FAVOR OF ASSOCIATED:
Considering that no rights of third parties are involved in the matter of the retention by or
reconveyance to Banzon of the other lot covered by T.C.T. 53759, as desired by him, the
same presents one difficulty. Another treatment may be given this aspect of the case
inasmuch as what I am about to state should be done as regards TCT 53759 cannot
constitute a preemption of the jurisdiction of the court in Civil Case No. 79244, for the
simple reason that, in respect to this title, there are admissions of the Insurance
Commissioner which make it unnecessary for the said court to go into a trial on the merits.
As earlier noted, notwithstanding the decision of the Supreme Court in G.R. No. L- 23971
of December 29, 1968, purportedly affirming the order of the Court of First Instance of
Rizal in Case No. 3885, GLRO Record No. 11267 requiring Banzon to surrender the said
title (together with TCT 39685) to the Register of Deeds of Rizal for cancellation and
authorizing the issuance of a new one in the name of Associated, actually, the latter has not
taken any steps to that end. Evidently, this must be due to the fact that it was well aware
that the order for its liquidation and dissolution by the Court of First Instance of Manila,
affirmed by the Supreme Court, had in the meanwhile become final on June 9, 1968, and,
therefore, since then, it had already lost personality as a corporation, to pursue the desired
transfer. Consequently, TCT 53759 in the name of Banzon remains uncancelled and the
only apparent encumbrance thereon, material herein, is the annotation of the purchase
thereof by Associated by virtue of the sale at public auction consequent to the execution of
the judgment in its favor and against Banzon in Civil Case No. 31237.
As already discussed above, in the first place, all that Associated acquired of Banzon's two
lots herein involved by virtue of the said execution was nothing more than the right to be
trustee thereof for PNB, with the obligation to return the same to Banzon should it
ultimately become unnecessary for it to use the same in settling the obligation of Sta. Maria
to the PNB, for which it stood as surety and in regard to which Banzon was bound to it as
its indemnitor in accordance with the very terms of the final judgment itself that it
(Associated) had secured against Banzon in said case. Inasmuch at it is also indisputable
that PNB has as a matter of fact already released Associated from its obligations under the
surety agreement, according to the said bank's letter to Associated of February 20, 1970,
there can be no question that pursuant to the real sense and intent of the trust created by the
aforementioned judgment, Associated has no alternative but to have the annotation on TCT
53759 of the auction sale in its favor cancelled by an appropriate instrument. In this
connection, however, whereas it is now the Insurance Commissioner that has sole authority
to act for Associated and in the pleadings filed by her in this case, she admits the
correctness of the foregoing observations and, on the other hand, there is that pending case
of Banzon against Associated for the reconveyance to him of the title in question, Civil
Case No. 79244, all that has to be done by the Commissioner is to make the proper
appearance in said case and thereafter either file a corresponding confession of judgment
therein or take any other appropriate step in the same case to the end that Banzon's title
may be freed of the annotation thereon in favor of Associated.
It cannot be an obstacle to his arrangement that there is that judgment of this Court in G.R.
No. L-23971 purportedly upholding Associated's claim over TCT 53759 (and TCT 39685).
I have already explained in my discussion of the case against Cardenas that because there
was no substitution of the Insurance Commissioner in the place of Associated after the
latter was ordered dissolved and liquidated by this Court's decision which became final on
June 9, 1968, the said judgment must be considered as null and void. After the order for the
liquidation and dissolution of a surety corporation has become final, the Insurance
Commissioner must indispensably be substituted for said corporation in any pending action
wherein it is a party, such that if no such substitution is made, any judgment in said action
cannot have any force and effect as to any of the parties. This is a logical rule which no
insurance or surety company can ignore. In any event, with the admissions made in the
pleadings of the Commissioner in the present case that Banzon is entitled to be relieved
from the claim of Associated, it is almost of secondary importance to elucidate on the
effects of the judgment of the Court in G.R. No. L-23971.
III
42
 THE BASES FOR MY DISSENT
A. Coming now to my dissent, I find it difficult to agree with the dispositive portion of the
majority decision.
(1) I regard the permanent injunction, obviously directed against Associated, enjoining the
disposition of the two lots in question except to reconvey them to Banzon as virtually
pointless, both from the legal and practical standpoint. Insofar as the lot covered by TCT
53759, there is nothing in the record indicating that after June 9, 1968, the date the order
for Associated's liquidation and dissolution became final, Associated has ever taken any
move to transfer said title to its name, much less to perform any dominical act regarding
the same. Now that the Insurance Commssioner has already stepped into the shoes of
Associated and is apparently in full control of its assets and records, at least, for the
purposes of the matters herein involved, much less could Associated be expected to move
towards these ends. On the other hand, inasmuch as the Insurance Commissioner has
practically committed herself to reconvey the disputed lots to Banzon, of what use is there
to issue an injunction against either Associated or the Commissioner? Is it not elementary
that injunction issue only when it is indispensable to do so?
(2) With particular reference to the lot covered by TCT 39685 now in the name of Cardenas
as TCT 8657, the only prayer in the present petition is for this Court to enjoin respondent
Judge Cruz from enforcing his order of demolition of March 13, 1970 during the pendency
of Civil Case No. 79244. This is plain not only from the remedy stated in the title of the
said petition, "Petition for Injunction" but also from the following allegations in paragraph
XVI thereof: "That petitioners are entitled to the relief demanded in their complaint in Civil
Case No. 79244, Court of First Instance of Manila, which part of such relief consist in
restraining respondents from taking possession of the land object of said case and
demolishing the buildings found thereon;" All these are odd, for they give the impression
that the only purpose of this case now before Us is to secure the issuance of a preliminary
injunction ancilliary to the remedies prayed for in Civil Case No. 79244. Now, without
actually declaring in this judgment that TCT 8657 and all proceedings leading to its
issuance are null and void and that the only right of Cardenas therein in the lot covered
thereby is that of a trustee of the PNB which he acquired when he purchased the rights of
Associated therein, the majority grants such ancilliary remedy. I have very grave doubts if
We can do so legally.
(3) I can understand Banzon's dilemma. As already observed above, he submitted the
matter of the legal validity of his claim for the reconveyance to him of the lots in dispute,
including, of course, the nullity of all the proceedings related to such claim, to the Manila
court, that is, in Civil Case No. 79244, but he is not sure whether or not, as a coordinate
court, the Court of First Instance of Manila is in a position to enjoin respondent Judge Cruz
from enforcing his order of March 13, 1970. Without necessarily committing myself as to
whether or not such an injunction can issue, it is my considered view that Banzon's less
controversial remedy should be to insist that Judge Cruz suspend his order of demolition
because of the pendency of Civil Case No. 79244 and then charge his refusal to do so as a
grave abuse of discretion in the appropriate certiorari proceedings, seeking at the same
time, as an added remedy, the corresponding injunction.
I am not losing sight, in this connection, of the fate that befell Banzon's attempt of a similar
nature in CA-G.R. No. 44391-R in which the Court of Appeals upheld the writ of
possession issued by Judge Cruz notwithstanding Banzon's submittal that the same should
have been suspended in view of the pendency of Civil Case No. 531. It is to be observed,
however, that no appeal was taken to this Court from that decision of the appellate court
and it is an open question whether or not We would have affirmed it. In any event, the
thrust of Civil Case No. 79244 appears to be on the more plausible theory of trusteeship
above referred to which varies somehow from the main posture of Banzon in his previous
cases.
It is, therefore, from this point of view that I consider it proper to look at the petition at bar
as an action of certiorari based on the grave abuse of discretion committed by the
respondent Judge in refusing to withhold, as evidently submitted by Banzon in opposing
Cardenas' motion, the enforcement of his impugned order of demolition during the
pendency of Civil Case No. 79244, and correspondingly, injunction should issue against
such enforcement. In this manner, it is not really necessary for Us to preempt the
jurisdiction of the Manila court to resolve the issues therein and grant Banzon's prayer for
reconveyance in said action, but nonetheless, We are able to prevent further acts of
dispossession on the part of Cardenas.
(4) In this connection, I fail to see the necessity for the mandatory injunction, being ordered
immediately executory by the majority, which to me only betrays considerable over-
excitedness, if for no other reason than that Banzon himself insists that he has never lost
complete possession of the lots in question despite the demolition by the Sheriff of his
residential building found on the lot now in the name of Cardenas. Indeed, not even in this
memorandum dated May 19, 1970 wherein Banzon first informed this Court of the
demolition of the said building does he make any specific prayer for a mandatory
injunction. It is to my mind obvious that, anyway, the restoration of said building need not
be the subject of a mandatory injunction inasmuch as the same can be taken care of in Civil
Case No. 79244 together with all the other damages claimed by Banzon.
B. I find it difficult as I have indicated earlier, to share some of the views contained in the
majority opinion.
(1) I am afraid the majority has given undue importance to the "Explanation and
Manifestation" dated April 25, 1970 filed by Atty. Feliberto Castillo not only by calling it a
43
pleading but by even relying on it for many of its findings of fact, more or less adverse to
Associated. My position in this respect is that such reliance is uncalled for and possibly
unfair to Associated. I would even consider Atty. Castillo's posture as something very
close, to put it mildly, to a breach of professional ethics.
It should be recalled that Atty. Castillo has been counsel of Associated and, in fact, was the
one that secured in its favor the judgment in Civil Case No. 31237 as well as the decision
of this Court in G.R. No. L-23971 also favorable to said corporation and, consequently,
under the rules of ethics, he is bound to hold in confidence any information related thereto
or the ultimate developments thereof that might adversely affect his client and which have
come to him by reason of their attorney-client relationship. Implicit also is his obligation
never to give aid and comfort to any party adverse to his client, except in instances allowed
by law, which, I believe, do not include the situation on hand.
For reasons which do not appear in the record, or perhaps due to what I consider an
erroneous practice on the part of the personnel in the office of our clerk of court, instead of
serving summons on the present petition upon Associated itself at its address clearly given
in Paragraph I thereof as "Room C, Astoria Building, No. 1170 A. Mabini, Ermita, Manila,
c/o Mr. Leopoldo C. Sta. Maria," the said service was apparently made upon the law office
of Atty. Castillo just because he has appeared in the related cases as counsel for Associated.
At least, Atty. Castillo does not state in his "Explanation and Manifestation" it happened
that his "law office was in receipt," to use own expression, thereof on April 16, 1970, and
his statement in Paragraph 3 of said "Explanation and Manifestation" that "he is
entertaining a serious doubt whether he could still represent the Associated Insurance &
Surety Co., Inc. in view of its liquidation and dissolution by order of the court," as above
related, is to me a revelation that he is aware that his authority to speak for Associated is
not as it ought to be. And yet, he makes denials and admissions therein affecting
Associated, and its successor-interest, Cardenas, after suggesting that summons should be
made upon the Insurance Commissioner. As far as I am concerned, I can give my vote of
appreciation for Atty. Castillo's having informed Us that as of June 9, 1968 Associated was
already without legal personality, as the insurance and surety corporation that it used to be,
to become a party or continue as a party in any action or proceeding and should have been
indispensably substituted by the Insurance Commissioner, but to consider his "Explanation
and Manifestation" as a pleading and to take into account his admissions and denials
therein affecting Associated as the majority do, are to me without basis or justification in
any part of our rules of procedure, and to give credit to such admissions and denials as
being made "in the interest of justice and in the name of truth and as an officer of the
Court" does not square with my concept of the fidelity that a lawyer owes his client. I
doubt very much if the Insurance Commissioner or any court, for that matter, can compel
the lawyer of a corporation, without the consent of such client, to give out information
adverse to it, just because the corporation is under liquidation. If a lawyer cannot be so
compelled, much less would I consider it proper for him to furnish such information
voluntarily without the client's permission. In any event, insofar as the need for the facts
stated by him in this case is concerned, I would rather rely on the statements regarding the
same matters appearing in the respective pleadings of the Insurance Commissioner, Banzon
and Cardenas, which I consider sufficient for the purposes of this decision. In brief, what
Atty. Castillo should have done in fairness to Associated and in strict adherence to the
applicable rules of ethics was to simply inform the court of the liquidation of Associated
and return the summons to the sheriff or the court for proper service, as suggested by him,
to the Insurance Commissioner.
(2) The majority attempt to distinguish what they have characterized as "immediate
objectives" from the "real and substantive objectives" of the petition at bar, to justify their
direct resolution in this case of the question of validity of TCT 8567, as if such a distinction
can ever exist in any pleading, as, in fact, nowhere in the petition do I find any intention on
the part of Banzon to forego or disregard that it is in Civil Case No. 79244 that he is
seeking the "real and substantive objectives" referred to by the majority. For the rest, I refer
to my discussion above of the dispositive portion of the majority decision.
(3) It is not very clear to me that when Associated filed Civil Case No. 31237 it had no
cause of action against Banzon, as indemnitor. I am aware of Article 2071 of the Civil
Code, as, in fact, I have referred to it above, but I am not prepared to hold in this case,
particularly because I do not recall that this particular point was discussed in the
deliberations, that such a cause of action cannot exist on the basis of the express stipulation
in the indemnity agreement giving Associated the right to file an action upon PNB's
making a demand upon it and even before it has complied with such demands although I
am in full agreement with the view that should an action be prosecuted to judgment, as it
happened in this case, Associated or the surety and all its successors-in-interest become no
more than trustees of the creditor.
(4) Among their considerations, the majority state:
Considering that the Insurance Commissioner herself , now legally can
alone represent Associated as liquidator, has herein recognized such trust
character and has expressed the belief that the said lot, no less than the
other lot covered by TC No. 8567, should, in justice to petitioners, be
reconveyed to them on account, among others, of petitioner Banzon's
release from obligation as indemnitor by virtue of the principal debtor's
subsequent payment of his obligation with the Philippine National Bank
which likewise released Associated from any liability as surety, the
present petition should therefore be granted in the interests of justice and
equity so as to enable the Insurance Commissioner-liquidator in due
course to discharge the trust in reconveying Banzon's properties to him.
44
My observation in this regard is that the invocation the "interests of justice and equity"
does not warrant granting of a relief not prayed for by the party concerned. When the
majority say "the present petition should be granted ... so as to enable the Insurance
Commissioner-liquidator in due course to discharge the trust of reconveying Banzon's
properties to him," they have in mind the called "real and substantive objectives", per their
irterpretation of the petition and not what exactly petitioners expressly asking for, which is
no more than what the majority call "the immediate objectives."
There are other loose statements of legal principles in the majority opinion, but they are
minor ones and any further discussion of all of them will unduly extend this opinion.
Incidentally, as I close, I am attempted to ask this question. With the way the majority has
disposed of this case in their opinion, is it not rather ambiguous now what has become of
Civil Case No. 79244 in the Manila court and how specifically We expect the said court to
dispose of the same?
IV
MY VOTE
IN VIEW OF ALL THE FOREGOING, and differently from the majority, I vote to set
aside the order of Judge Cruz of March 13, 1970 for having been issued with grave abuse
of discretion and to permanently enjoin said respondent from enforcing the same, until it
happens, which appears to be very remote that Civil Case No. 79244 is decided in favor of
Cardenas, after the case against them therein is revised by a corresponding supplemental
pleading of Banzon based on the patent nullity on the face of the record of the order of
dismissal of October 28, 1970 because the Insurance Commissioner was not substituted for
Associated therein.
As regards the prayer for another injunction against any disposition of the lot covered by
TCT 53759, my vote is to deny the same, without prejudice to the Insurance Commissioner
following the course of action I have indicated earlier above.
Anent the civil and criminal cases which the majority reserve to be instituted against the
officers of Associated, I feel that it should be in Civil Case No. 79244 that such reservation
should be done inasmuch as it is there where the more appropriate judgment regarding all
the substantive aspects of the claim of Banzon will be rendered, even if quite inevitably the
tenor of said judgment might have to be along the lines hereinabove set forth.
Separate Opinions
BARREDO, J., dissenting:
To be in the unenviable position of fully agreeing that herein petitioners, the Banzon
spouses, are entitled to the reconveyance of their two lots herein involved but at the same
time being unable to see my way clear to giving my comformity to the reliefs granted to
them in the dispositive portion of the decision penned for the majority by Mr. Justice
Teehankee, in his usual meticulous and forceful, almost passionate, style, for which reason
I am constrained to submit this dissent, is something that pains me as a man. My feeling as
a Member of the Court, however, is one of grave concern that in their eagerness to render
substantial justice, my brethren have deemed it necessary to indulge in the luxury of
premising their conclusions on purported legal propositions which in my humble view are,
at least, controversial, going as they do beyond the necessities of the case. The majority
apparently considers it excusable to do so on the theory that the "peculiar" circumstances
of this case justify ad hoc considerations and disposition. For my part, I feel very strongly
that there is no need at all to go that far, because I am fully convinced that actually, the
seeming peculiarity of the said circumstances do not demand the radical unusual treatment
given to them by my colleagues, and rather than lend my hand in possibly creating
erroneous impressions as to the correct rules of procedure and practice which should be
observed in situations more or less similar to those herein obtaining and thereby place in
doubt the validity and efficacy of the existing normal rules to adequately meet the
problems in this case, I prefer to be alone, if alone I have to be, in the views hereunder
expressed, believing firmly as I do that no case can be worth risking doing violence to any
rule for so long as substantial justice can anyway be adequately extended to and achieved
by the parties concerned within the same time as they would otherwise by simply adhering
to the orthodox approach already understood and practiced by the bench and bar. I consider
it but proper, if there must be evidence of judiciousness and absolute impartiality in the
decisions of the Court, that We avoid as much as possible hueing Our judgment with
perceptible tinge of over-excitedness that can be suspected as having blurred Our vision of
the true justice in any case We decide.
As I will explain later in this opinion, there are passages and observations in the majority
opinion which I cannot share because they extend to areas beyond my limited knowledge
of remedial law which naturally I should fear to tread. Withal, they do not square with my
sense of justice and propriety. Worse, I believe that the dispositive portion of the decision
of the majority is beyond what is warranted in the premises.
45
For a more accurate and appropriate orientation, and so that the whole case may be
reviewed in proper perspective, I believe it is best to restate first the fundamental and
relevant facts appearing in the records.
1. The Philippine National Bank (PNB for short) extended credit by way of crop-loans to
one Maximo R. Sta. Maria (Sta. Maria for short) sometime in 1952, for which Associated
Insurance & Surety Co., Inc. (Associated for short) executed in favor of PNB a number of
surety bonds, on the basis in turn of an indemnity agreement in its favor executed by three
parties, one of whom was petitioner Antonio R. Banzon, (Petitioners, whether meant to be
referred to individually or together, will hereafter be referred to merely as Banzon, since
petitioner Rosa Balmaceda does not appear to have had any active role in all the transaction
herein involved.) in which agreement there was an express stipulation expressly
authorizing the surety to proceed against the indemnitors as soon as demand is made by
PNB. (Pars. 1-3, Annex E of Petition.)
2. Because of demands made by the PNB upon Associated, this in turn made demands upon
the principal debtor Sta. Maria, and when the latter failed to pay PNB, a suit, Civil Case
No. 31237 of the Court of First Instance of Manila, was instituted by Associated against
Sta. Maria and the indemnitors, including petitioner Banzon, which, after trial, allegedly
held against Sta. Maria and the other indemnitors only, since Banzon, according to him,
was not served with summons, ended nevertheless in a judgment against all the defendants,
including Banzon, sentencing all of them to pay Associated jointly and severally the
amount therein stated. (Pars. 4-7, Id.)
3. Exactly, this judgment read as follows:
IN VIEW WHEREOF, the Court renders judgment condemning
defendants to pay jointly and severally unto plaintiff but for the benefit of
the Philippine National Bank the amounts of P6,100.00, P9,346.44 and
P14,811.42, all with interest at the rate of 12% per annum from date of
the filing of the complaint until fully paid, (b) to pay the amount of
P593.76 representing premiums and documentary stamps due on the
renewal of the bonds Annexes "E" and "C-1"; (c) plus 15% as attorney's
fees, and collateral. This 15% and the interest to be paid for the benefit of
the plaintiff, and no pronouncement as to costs.
4. Upon the said judgment becoming final and executotry, Associated caused to be levied
upon and sold at public auction the two subject parcels of land covered respectively by
T.C.T. Nos. 39685 and 53759 of the Office of the Register of Deeds of Rizal. The
purchaser was Associated and no redemption was ever exercised by Banzon. (See Annex
"2", Id.)
5. Subsequently, without the said titles having been transferred actually in the name of
Associated, since what was done was merely to annotate in the meantime at the back of
Banzon's title the execution sale in favor of Associated pursuant to the judgment, and in
fact, Associated's petition for the consolidation of the titles in question in its name was still
pending in the Supreme Court in G.R. No. L-23971 which was decided only later on
December 29, 1968, the Sheriff of Caloocan City levied upon TCT 39685 by virtue of a
writ of execution issued against Associated in another case, Civil Case No. 36194 of the
Court of First Instance of Manila pursuant to a judgment therein, (affirmed by the Court of
Appeals in CA-G.R. No. 25227-R, Pedro Cardenas vs. Victoria Vda. de Tangco, et al.) and
on March 23, 1964, said Sheriff sold to herein respondent Pedro Cardenas and Leonila
Baluyot, (hereinafter to be referred to merely as Cardenas, irrespective of whether what is
meant to be referred to is only the husband, the wife or both of them, since Leonila Baluyot
does not appear to have had any active role in any of the transactions herein involved) as
the highest and only bidder at the public auction, "all the rights, interest, claims and title"
of Associated over the land in question and, after one year without any redemption being
made by Associated, issued to said Cardenas, a Deed of Absolute Sale on April 2, 1965.
(See p. 6 Memorandum of Cardenas, Annex 6 of their Answer; and p. 5, Opposition of
Insurance Commissioner dated March 24, 1971.)
6. On April 23, 1963, Cardenas filed a petition with the Court of First Instance of Rizal,
Caloocan Branch XII, in Reg. Case No. C-211 (LRC Rec. No. 11267) for the issuance of a
new certificate of title in his name. On May 3, 1965 an order was issued granting the
petition, and on May 5, 1965, TCT 39685 was cancelled and TCT 8567 was issued in the
name of the respondents Pedro Cardenas and his wife. (Par. 9, p. 5, Reply of Cardenas to
Explanation and Manifestation of Atty. Feliberto Castillo.)
7. It also appears that subsequently, on May 21, 1965, a writ of possession was issued in
said case, C-211, but enforcement thereof was held in abeyance in view of the filing before
Branch XII, Court of First Instance of Rizal, Caloocan City, of Civil Case No. 531 1 by
Banzon against Cardenas as well as Associated and the Sheriff questioning the validity not
only of the judgment in aforementioned Civil Case No. 31237 on the ground that Banzon
had not been summoned therein but also of the levy and sale because allegedly the
properties sold were conjugal properties of the Banzons. In addition, it was also alleged in
the complaint that Associated was not the owner of TCT 39685 but only the holder thereof
as trustee of PNB. This case was, however, dismissed on August 6, 1969 and no appeal was
taken by Banzon on time, although, later, on October 17, 1969, he filed a petition for relief,
but this was denied on October 21, 1969 on the ground that it was several days late, and it
does not appear that any appeal was taken from this denial. (pp. 7-8, Memorandum of
Cardenas.)
8. Strangely, however, as already indicated earlier, the record also bears out that after June
20, 1960, the date when the period of Banzon to redeem the two titles, TCT 39685 and
46
53759, which were sold at auction as stated in paragraph 4 above expired, Associated
"obtained in due time the corresponding final certificate of sale, which was likewise duly
registered" in view of which, Associated "made demands upon (Banzon) to deliver to it the
owner's duplicate of Certificates of Title Nos. 39685 and 53759 ... but the latter refused. As
a result, it filed in the Court of First Instance of Rizal in Case No. 3885, GLRO Record No.
11267, a petition for an order directing (Banzon) to present his owner's duplicate(s) ... for
cancellation, and for another order directing the Register of Deeds to cancel said
duplicate(s) and to issue new transfer certificates of title covering the properties in the
name of (Associated) ... Banzon filed his opposition claiming mainly that (1) the
decision ... in Civil Case No. 31237 was void as far as he was concerned because he had
never been summoned in connection therewith. and that in the levy and sale of the
properties ... were likewise void because they were conjugal properties ..." (Decision of the
Supreme Court, Annex 2, Id.) The trial court overruled these objections and issued the
order prayed for, and on appeal to the Supreme Court, this order was affirmed in toto. This
was on November 29, 1968. (Id.) In other words, it appears that the proceedings referred to
in paragraphs 5 and 6 above leading to the transfer, by order of the court, of Banzon's title
to Cardenas took place even before the said title had been placed in the name of
Associated.
9. On the basis of the same decision of the Supreme Court of November 29, 1968, a motion
to dismiss Civil Case No. 531, referred to in paragraph 7 above was filed and the same was
granted on August 6, 1969. Accordingly, on October 13, 1969, Cardenas applied for
an alias writ of possession (the original one was held in abeyance as stated in paragraph 7
above), and this alias writ was issued on October 23, 1969. Due to the refusal of Banzon to
vacate, an order of demolition was sought and granted on December 9, 1969, but again the
enforcement thereof was enjoined by a writ of preliminary injunction issued by the Court
of Appeals in CA-G.R. No. 44391-R, entitled "Antonio Banzon, et al. vs. Hon. Fernando
Cruz, et al." This writ of preliminary injunction was, however, dissolved in a final
judgment of February 28, 1970, the Court of Appeals holding that:
Hence, the petition for injunction prayed for being merely a devise to
prevent the execution of a final judgment by the filing of a new suit
based upon the same grounds which have already been interposed and
passed upon in the case where the final judgment had already been
rendered, this petition should be as it is hereby denied, with cost against
petitioners.
10. Accordingly, on March 11, 1970, Cardenas sought enforcement of the suspended writ
of possession, and on March 13, 1970, the corresponding order was issued. This is the
order, inter alia, that this Court has enjoined temporarily in this action, by resolution of
March 23, 1970.
11. In the meantime, while all the above proceedings were going on, it appears undisputed
that Associated was ordered liquidated and dissolved by the courts. The decision to this
effect was rendered by the Court of First Instance of Manila in Civil Case No. 56995,
Republic vs. Associated etc., affirmed by the Court of Appeals in C.A. G.R. No. 37985-R
on January 3, 1968, certiorari was denied by the Supreme Court on June 20, 1968, and this
denial became final on July 9, 1968. Neither the trial courts nor this Court were ever
informed of this liquidation in any of the proceedings already mentioned.
12. In the meantime also and importantly, because of the failure of the principal, Sta.
Maria, as well as the surety, Associated, to pay PNB, notwithstanding that Associated had,
in fact, already executed upon the properties of Banzon, evidently without advising PNB
thereof, PNB filed suit in the Court of First Instance of Pampanga, Civil Case No. 1907,
against said parties, which ended in the Supreme Court as G.R. No. L-24765 on August 29,
1969 with a judgment favorable to PNB. (29 SCRA) This judgment was satisfied out of
Sta. Maria's properties sold on execution on February 16, 1970 and a corresponding release
of Associated was issued by PNB on February 20, 1970 (See allegations on p. 6 of
Complaint, Annex E, Petition and also Annex E).
13. Having in view these developments, on March 13, 1970, Civil Case No. 72944 was
filed by Banzon in the Court of First Instance of Manila basing the same mainly on the
trust theory, that is, that Associated and later Cardenas, the latter as the former's virtual
successor-in-interest in TCT 39685, acquired the lots in question only as trustees for the
PNB, but this case was dismissed as against Cardenas on October 28, 1970 after a
preliminary hearing upon the ground of res adjudicata, and this dismissal is now final, no
appeal having been taken therefrom by Banzon. In this connection, it is to be noted that in
Civil Case No. 531, which, as already noted above, had been dismissed earlier, Banzon
already raised the same issue that Associated never became owner of said lots but was only
the trustee thereof for PNB. (See p. 7, Memo of Cardenas.)
14. While evidently still in daze because of all these developments, under date of February
27, 1971, Banzon filed with the Court of First Instance of Rizal, Caloocan Branch XXII,
Civil Case No. 2052, another action against Maximo R. Sta. Maria and Valeriano R. Sta.
Maria alleging, among other things, in his verified complaint that:
4. That defendant failed to pay his aforementioned obligation with the
Philippine National Bank, and accordingly upon demand being made by
the latter on the Associated Insurance & Surety Co., Inc., to pay said
defendant's outstanding obligation, said surety company filed an action
for damages against herein plaintiff and his co-indemnitors. True copy of
said complaint dated November 19, 1956 is hereto attached and made an
integral part hereof as Annex "A";
47
5. That as a result of the case alleged in the proceeding paragraph 4, a
decision was rendered in said case against the defendants therein, among
them the present plaintiff. A true copy of said decision dated Dec. 11,
1957 is hereto attached and made integral part of this complaint as Annex
"B";
6. That said decision (Annex "B") having become final ,and executory,
execution was made on the properties of the herein plaintiff particularly,
on his two residential lots situated at Caloocan City and embraced by
TCT Nos. 39685 and 53759, of the Registry of Deeds of Rizal Province
(now Registry of Deeds of Caloocan City), the total worth of said lots
based on the present market value being P300,000.00; that eventually
said lots were sold at public auction with the Associated Insurance &
Surety Co., Inc., as the highest bidder. True copies of the Sheriff's
Certificate of sale dated June 27, 1960 and the Officer's deed of absolute
sale dated July 8, 1960 in favor of said Isurety are hereto attached as
Annexes "C" and "D", respectively.
7. That subsequently thereafter, one of said lots, particularly that covered
and described under TCT No. 39685, was executed upon by a third party
to satisfy the said surety's obligation to the latter, leaving only one lot in
the name of the Associated Insurance & Surety Co., Inc., thereby
damaging plaintiff in the amount of P 150,000.00 which is the worth of
the lot at its present market value. A true copy of the corresponding
Sheriff's Final Deed of Sale date April 2, 1965 in favor of said third party
is hereto attached and made an integral part of this complaint as Annex
"E";
8. That through a recent negotiation with the aforementioned insurance
company, the latter has agreed to reconvey the remaining lot covered by
TCT No. 53759 to the herein plaintiff under the condition that the latter
will pay unto said surety company damages in attorney's fees equivalent
to 15% of what the present defendant owes the Philippine National Bank
or the sum of P6,750.00 and likewise relieving said surety company of its
undertaking and liability as surety for said defendant Maximo R. Sta.
Maria, with the Philippine National Bank; that plaintiff has agreed to do
so but up to the present time of filing this case no reconveyance has yet
been made;
9. That plaintiff in pursuant of the arrangement made with the
aforementioned surety company has in fact assumed all of defendant's
obligation with the Philippine National Bank, in the amount of
P45,000.00, thereby actually releasing said surety from any further
obligation as such in relation to its undertakings with said bank, and
likewise, releasing said defendant from his accountability on the crop
loans he secure thereat as mentioned in paragraph 2 hereof;
10. That due to defendants' deliberate failure and refusal to pay their
plainly, valid and just obligation with the Philippine National Bank,
resulting in the unfortunate happening above enumerated, all of which
are prejudicial and damaging plaintiff's interest as the latter has suffered
the following damages:
"(a) P150,000.00, as value of his one residential lot
embraced by TCT No. 39685, Registry of Deeds of
Caloocan City, and which has been irretrievably lost to
a third party and P1O,000.00 fair value of the
demolished house of strogn materials on the lot having
a monthly rental of P200 beginning April, 1970 and
months thereafter.
"(b) P6,750.00, reimbursement to be made by plaintiff
as attorney's fees suffered by the Associated Insurance
& Surety Co., Inc., by reason of the suit occasioned by
decision defendants' failure to pay the Philippine
National Bank his crop loans;
"(c) P10,000.00 representing damages suffered by the
plaintiff by way of attorney's fees in all litigations
previous to the present one incident to defendants'
obligation with the PNB."
and praying, therefore, specifically that:
2. That after due hearing on the merits on the principal cause of this
action, judgment be rendered against the defendants jointly and severally
as follows:
"(a) Ordering the defendants to pay the sum of
P150,000.00 as value of plaintiff's one residential lot
embraced by TCT No. 39685, Registry of Deeds of
Caloocan City, which has been irretrievably lost to a
third party directly caused by defendants' failure and
48
 refusal to pay their just and lawful obligation with the
PNB, beside ordering defendant Maximo R. Sta. Maria
to pay P10,000.00 the fair value of the house of strong
materials built on the lot, which was ordered
demolished having a monthly rental of P200.00
beginning April 1970 and monthly thereafter."
Upon these facts, and in the light of the opposing contentions of the parties as to whether or
not Banzon is entitled to the reconveyance of the two lots in question, there is no doubt in
my mind that he is entitled to the recovery thereof. My fundamental disagreement with the
majority refers only to the manner or procedure as to how this can be accomplished in the
context of the facts and judicial proceedings related above, and, of course, with the legal
reasoning to be pursued in arriving at Our respective conclusions. Withal, I do not see
sufficient basis for the dispositive portion of their decision.
As I have stated at the outset of this opinion, I am afraid that the majority approach
unnecessarily cuts corners which remedial law considers as essential, if the administration
of justice is to be carried out, as, in my view, it must be, along basic standard procedures
contemplated to keep judicial proceedings from being a riotous confusion of impromptu
and improvised steps readily to be taken to suit the judge's concept of substantial justice in
any given case. I reiterate that I am for giving Banzon what is due him, but I cannot
subscribe to many legal propositions in the majority opinion which in my considered
opinion deviate from the established and accepted concepts regarding the points touched
and referred to therein. To deal with first things first, however, I will discuss these
differences later. In the meanwhile, my solutions of the legal problems before the Court are
as follows:
I execution of the deed of absolute sale after the period of redemption expired, on April 2,
DESPITE ALL THE PREVIOUS RELATED PROCEEDINGS AMONG
THE SAME PARTIES HEREIN APPARENTLY FURNISHING LEGAL
BASIS FOR THE ISSUANCE OF TRANSFER CERTIFICATE OF
TITLE NO. 8567 IN THE NAMES OF RESPONDENTS CARDENAS
AND BALUYOT, THERE SEEM TO BE ENOUGH REASONS TO
HOLD THAT THE SAID TITLE IS ABSOLUTELY VOID AND
NEITHER SAID TITLE NOR THE JUDICIAL PROCEEDINGS
REFERRED TO MAY SERVE AS BASIS FOR THE WRIT OF
DEMOLITION HEREIN COMPLAINED OF, ALTHOUGH, IN THE
CASE AT BAR, WE CANNOT RULE ON THE VALIDITY OF SAID
TITLE, THE ONLY PURPOSE OF THIS PETITION BEING TO HAVE
THE SAID ORDER OF DEMOLITION SUSPENDED PENDING
FINAL DECISION OF CIVIL CASE NO. 79244 WHEREIN SUCH
ISSUE OF VALIDITY IS TO BE FULLY THRESHED OUT.
At the outset, it may be stated incidentally, that it is not due to any fault of Banzon but
evidently to the inexperience and inadequate preparation of counsel, that this case has
turned out to be more complicated than it should have been, but that cannot deter this Court
from straightening out matters and rendering justice accordingly. Indeed, as also observed
in the majority opinion, generally, the incompetence of counsel should be overlooked
when, anyway, full opportunity has been given to every interested party as regards all the
matters upon which the Court is to act. I am satisfied that, considering how extensively and
ably counsel for Cardenas has discussed every conceivable aspect of his case, no
substantial prejudice can be caused to him, if the Court should now render judgment as the
circumstances revealed in the record demand and not exactly in accordance with the theory
formulated in the petition. As I see it, the main relief being sought by Banzon is merely the
suspension of the order of demolition or dispossession issued by respondent Judge Cruz
during the pendency of Civil Case No. 79244, on the ground that it was a grave abuse of
discretion on the part of said judge not to order such suspension, considering the nature of
said case, hence the ultimate inquiry in this case should be whether or not Banzon's
complaint on said case presents a sufficient prima facie basis for such suspension.
Accordingly, the first question that may be asked in connection with the basic problem
before Us is, what was acquired by Cardenas at the auction sale in connection with the
execution of the judgment in his favor in Civil Case No. 36194 of the Court of First
Instance of Manila? The plain answer is, only "the rights, interests, claims and title" of
Associated in TCT No. 39685, 2 which, according to the said respondent himself on p. 7 of
his memorandum, were what were sold to him in that public auction of March 23, 1964.
Indeed, it cannot be disputed that on that date of said auction and even on the date of the
1965, Associated was not in law and in fact the absolute owner of the land covered by TCT
39685. To be precise, all that Associated had in said title was the right to hold the same in
trust for the PNB. By no means and under no concept could Associated have had any right
more than that. Indeed, no other conclusion can be drawn from the facts just narrated.
In the aforequoted judgment against Banzon which served as basis of the writ of execution
by virtue of which his two titles were sold at auction, it is necessarily implied that the
same, although nominally in favor of Associated, was actually for the benefit of PNB.
Anything Associated could get from it was not intended to enrich it, but only to save it, if
fully, from the effects of the eventual enforcement of the rights of the PNB in the premises.
Conversely, it is also the inescapably implied sense of said judgment that in the event
Associated is relieved or released by PNB without its having to resort to said judgment or
making use of the proceeds thereof, then Banzon would be entitled not only to be
correspondingly relieved or released from the effects of the judgment but also to the
49
reconveyance of whatever may have been acquired by Associated under the same. Again,
the situation lends to no other view. Stated otherwise, the judgment in favor of Associated
was not for it to be paid with money or property by Banzon for its own benefit or for the
satisfaction of any claim of its own, much less for its own enrichment the judgment was
for Banzon to pay Associated so that Associated may pay PNB. Consequently, there can be
no doubt that under said judgment, the rights of Associated derived therefrom are not for it
to dispose of for its own exclusive benefit, and, accordingly, they could not be subject to
the claim of any third party in any manner, either prejudicial to the interests of PNB or dis-
advantageous to Banzon, beyond what had to be paid to PNB. Briefly, Associated was
made trustee of the judgment against Banzon with the PNB as beneficiary. So, when the
Sheriff sold to Cardenas "the rights, interests, claims and title" of Associated in TCT
39685, these carried impressed upon them the trust in favor of PNB (and alternatively, of
Banzon) and consequently, Cardenas was under notice that Associated had no dominical
title in the property covered thereby, in the sense that what it had was nothing more than
the title of a trustee holding the same, for the benefit of PNB with the inseparable
obligation to return the same to Banzon should PNB release Associated without the latter
paying anything and without the former using the proceeds of the judgment. Factually,
Cardenas cannot claim ignorance of these facts because the record is clear that when he
caused the transfer of TCT 39685 to his name, this title was still in the name of Banzon, for
the simple reason that the petition of Associated to have it consolidated in its name was still
pending in the Supreme Court and a cursory examination of the expediente of the case in
said Court would have revealed to him the true nature and extent of Associated's interest in
said title.
It is of no moment, in this regard, that in the indemnity agreement signed by Banzon,
Associated had the right to sue Banzon even before it has been made to pay and has
actually paid PNB. That stipulation, if it could justify the filing of the action against
Banzon as indemnitor, could not be construed to enable Associated to take advantage, for
its own benefit, of the judgment it secured against Banzon without its actually and priorly
paying PNB, for such a construction would certainly be unconscionable, and being patently
iniquitous could not pass the fundamental and all important test that contractual terms and
conditions must not be contrary to morals or public policy. Incidentally, under the present
Civil Code, Article 2071, the only anticipatory remedy of a surety is either "to obtain
release from the guarantee or to demand a security that shall protect him against any
proceedings by the creditor and from danger of insolvency," hence, according to our Acting
Chief Justice, Mr. Justice J.B.L. Reyes, speaking for the Court in General Indemnity Co.,
Inc. vs. Alvarez, 100 Phil. 1059, 1062, "an action by the guarantor against the principal
debtor for payment, before the former has paid the creditor, is premature." It is quite true
that these observations about the right of Associated to sue Banzon ahead of PNB suing it
do not necessarily render, by their own force, null and void, the title of Cardenas, but they
certainly clarify the true nature and character of his rights in the lot in question. And it is
very clear that under the circumstances, even if it were to be held that the transfer of TCT
39685 in their names was validly done, still he would be no more than a mere trustee like
Associated into whose shoes he has stepped trustee for the benefit of the Bank and, in
the other contemplated contingency, of Banzon for which reason, even if procedurally
speaking it can be assumed that the said title could be considered as properly transferred to
him, still he cannot escape the obligation to reconvey the same to Banzon, in the fashion of
a trustee who secures the registration of land in his name in breach of the trust, albeit it is
not for this Court to render judgment of that tenor in this case, since such reconveyance is
precisely the object of the Manila suit, Civil Case No. 79244 and not of the case at bar by
election of the petitioners themselves who have not prayed for such a relief here.
Looking at the matter from another point of view, however, it is obvious that the procedure
leading to such transfer, of TCT 39685 to the name of Cardenas cannot stand legal scrutiny.
How he secured TCT 8567 has no satisfactory explanation in the record. What is more, I do
not believe any such explanation can be found elsewhere. it is indisputable that Associated
was still in the process of trying to secure delivery to it of the duplicate certificates of the
two titles in question when this Court rendered its judgment in G.R. No. L-23971 on
November 29,1968. While it may be true that even before that, or on May 3, 1965, an order
was issued by the Court of First Instance of Rizal, Caloocan Branch in C-211 (LRC Rec.
11267), upon motion of Cardenas, for the issuance of a new certificate of title to him,
absent any showing that PNB and Banzon were properly notified thereof, because of their
interest as beneficiaries of the trust imposed upon Associated as above explained, of which
he had actual knowledge or ought to have known, the said order must be held to be void ab
initio due to the absence of the indispensable parties PNB and Banzon. The in
rem character of land registration proceedings does not extend to incidents of which no
notice by publication is required. In such instances, actual notice to the interested parties is
what confers jurisdiction upon the court and gives validity to what is done under its orders;
hence, in issuing the order for the issuance of TCT 8657, by transfer from TCT 39685, the
Court of First Instance of Rizal acted without jurisdiction, and such want of jurisdiction
being patent even on the face of the record, such order is null and void ab initio.
It would not avail Cardenas to invoke the subsequent dismissal of Civil Case No. 72944 in
Manila insofar as he and his wife are concerned, even if it were granted that such dismissal
is already final. It should be borne in mind that in said action, the Banzons have alleged
causes of action jointly against Associated and Cardenas, but when the same was filed on
March 13, 1970, Associated had already been ordered liquidated and dissolved. Under
Section 1751(c) of the Insurance Act:
Sec. 175(C). Order of rehabilitation or liquidation. 1. An order to
rehabilitate or liquidate a domestic insurer shall direct the Commissioner
and his successors in office forthwith to take possession of the property
of such insurer and to conduct the business thereof, and to take such
steps toward the removal of the causes and conditions which have made
such proceedings necessary as the court shall direct.
50
 2. The Commissioner may submit any plan he may deem advisable to
protect the public interest for the rehabilitation or liquidation of such
insurer to the court for approval and if approved such plan shall be
binding upon the insurer, stockholders, and creditors.
3. The Commissioner and his successors shall be vested by operation of
law with the title to all of the property, contracts, and rights of action of
such insurer as of the date of the order so directing them to rehabilitate or
liquidate. The filing or recording of such order in any record office of the
Philippines shall impart the same notice that a deed, bill of sale or other
evidence of title duly filed or recorded by such insurer would have
imparted. The rights and liabilities of any such insurer and of its
creditors, policy-holders, stockholders, members and all other persons
interested in its estate shall, unless otherwise directed by the court, be
fixed as of the date of the entry of the order directing the rehabilitation or
liquidation of such insurer in the office of the clerk or court where such
insurer had its principal office for the transaction of business upon the
date of the institution of proceedings under this Act: Provided, however,
That the right of claimants holding contingent claims on said date to
share in an insolvent estate shall be determined by section one hundred
and seventy-five (a) of this Act.
Consequently, Associated, as such, could no longer be sued on March 13, 1970 and in its
place the party that should have been joined was the Insurance Commissioner. What is
more, this joinder is indispensable, considering that the Insurance Commissioner is the
liquidator of the Corporation. Absent such an indispensable party, naturally, all the
proceedings in said case are likewise void and together with them the order of dismissal
relied upon by Cardenas.
Anent the claim of Cardenas that because of the allegations aforequoted in the complaint
filed by Banzon against Sta. Maria in Civil Case No. 2052 of the Court of First Instance of
Rizal, petitioners are in estoppel to claim that TCT 8567 is invalid, Cardenas is apparently
forgetting the fact that said complaint was filed only on February 27, 1971 and, certainly,
none of the allegations contained therein could have been the inducement for his claim to
said title which was made by him as early as 1965. Estoppel presupposes that the party
invoking it must have been misled by the other party. (Tolentino, Civil Code of the
Philippines, Vol. IV, p. 600, 1956 ed.) Then also, the allegations alluded to as basis for
estoppel involve legal conclusions which as discussed above are erroneous. Errors of law
of a party do not create estoppel, for the simple reason that estoppel cannot be founded on
ignorance, and since the other party is conclusively presumed to know the law, it cannot be
misled thereby. (Eugenio v. Perdido, 97 Phil. 41, 64)
It thus appears that these are actually more than prima facie reasons why the pendency of
Civil Case No. 79244 should have induced respondent Judge to suspend the enforcement of
his order of demolition or dispossession of March 13, 1970. While, as I have already stated,
it is not for the Court to go into the actual merits of Banzon's pose in claiming the right to
the reconveyance of the lots in controversy, the above discussion is necessary because
they,constitute at least the legal possibilities that have to be considered in determining
whether or not the failure of respondent Judge to suspend the enforcement of his
questioned order constitutes a grave abuse of discretion. Incidentally, if not strictly binding
upon the court taking cognizance of Civil Case No. 79244, they should give him enough
light in resolving the issues before him.
II
IT BEING CLEAR FROM THE ABOVE DISCUSSION THAT
ASSOCIATED WAS ONLY A TRUSTEE FOR THE BENEFIT OF THE
PNB OF THE TWO LOTS OF BANZON ACQUIRED BY IT AT THE
AUCTION SALE AND AS A MATTER OF FACT PNB HAS
ALREADY RELEASED ASSOCIATED, ALL THAT REMAINS NOW
TO BE DONE TO RESTORE BANZON'S FULL OWNERSHIP
THEREOF IS FOR THE INSURANCE COMMISSIONER WHO HAS
STEPPED INTO THE SHOES OF ASSOCIATED AND WHO HERE
ADMITS THE CORRECTNESS OF THE CLAIM OF BANZON
THERETO TO EITHER CONFESS JUDGMENT IN CIVIL CASE NO.
79244 OR TAKE ANY OTHER APPROPRIATE STEP IN SAID CASE
LEADING TO THE CANCELLATION OF THE ANNOTATION IN
TCT 53759 OF THE AUCTION SALE IN FAVOR OF ASSOCIATED:
Considering that no rights of third parties are involved in the matter of the retention by or
reconveyance to Banzon of the other lot covered by T.C.T. 53759, as desired by him, the
same presents one difficulty. Another treatment may be given this aspect of the case
inasmuch as what I am about to state should be done as regards TCT 53759 cannot
constitute a preemption of the jurisdiction of the court in Civil Case No. 79244, for the
simple reason that, in respect to this title, there are admissions of the Insurance
Commissioner which make it unnecessary for the said court to go into a trial on the merits.
As earlier noted, notwithstanding the decision of the Supreme Court in G.R. No. L- 23971
of December 29, 1968, purportedly affirming the order of the Court of First Instance of
Rizal in Case No. 3885, GLRO Record No. 11267 requiring Banzon to surrender the said
title (together with TCT 39685) to the Register of Deeds of Rizal for cancellation and
authorizing the issuance of a new one in the name of Associated, actually, the latter has not
taken any steps to that end. Evidently, this must be due to the fact that it was well aware
that the order for its liquidation and dissolution by the Court of First Instance of Manila,
51
affirmed by the Supreme Court, had in the meanwhile become final on June 9, 1968, and,
therefore, since then, it had already lost personality as a corporation, to pursue the desired
transfer. Consequently, TCT 53759 in the name of Banzon remains uncancelled and the
only apparent encumbrance thereon, material herein, is the annotation of the purchase
thereof by Associated by virtue of the sale at public auction consequent to the execution of
the judgment in its favor and against Banzon in Civil Case No. 31237.
As already discussed above, in the first place, all that Associated acquired of Banzon's two
lots herein involved by virtue of the said execution was nothing more than the right to be
trustee thereof for PNB, with the obligation to return the same to Banzon should it
ultimately become unnecessary for it to use the same in settling the obligation of Sta. Maria
to the PNB, for which it stood as surety and in regard to which Banzon was bound to it as
its indemnitor in accordance with the very terms of the final judgment itself that it
(Associated) had secured against Banzon in said case. Inasmuch at it is also indisputable
that PNB has as a matter of fact already released Associated from its obligations under the
surety agreement, according to the said bank's letter to Associated of February 20, 1970,
there can be no question that pursuant to the real sense and intent of the trust created by the
aforementioned judgment, Associated has no alternative but to have the annotation on TCT
53759 of the auction sale in its favor cancelled by an appropriate instrument. In this
connection, however, whereas it is now the Insurance Commissioner that has sole authority
to act for Associated and in the pleadings filed by her in this case, she admits the
correctness of the foregoing observations and, on the other hand, there is that pending case
of Banzon against Associated for the reconveyance to him of the title in question, Civil
Case No. 79244, all that has to be done by the Commissioner is to make the proper
appearance in said case and thereafter either file a corresponding confession of judgment
therein or take any other appropriate step in the same case to the end that Banzon's title
may be freed of the annotation thereon in favor of Associated.
It cannot be an obstacle to his arrangement that there is that judgment of this Court in G.R.
No. L-23971 purportedly upholding Associated's claim over TCT 53759 (and TCT 39685).
I have already explained in my discussion of the case against Cardenas that because there
was no substitution of the Insurance Commissioner in the place of Associated after the
latter was ordered dissolved and liquidated by this Court's decision which became final on
June 9, 1968, the said judgment must be considered as null and void. After the order for the
liquidation and dissolution of a surety corporation has become final, the Insurance
Commissioner must indispensably be substituted for said corporation in any pending action
wherein it is a party, such that if no such substitution is made, any judgment in said action
cannot have any force and effect as to any of the parties. This is a logical rule which no
insurance or surety company can ignore. In any event, with the admissions made in the
pleadings of the Commissioner in the present case that Banzon is entitled to be relieved
from the claim of Associated, it is almost of secondary importance to elucidate on the
effects of the judgment of the Court in G.R. No. L-23971.
III
THE BASES FOR MY DISSENT
A. Coming now to my dissent, I find it difficult to agree with the dispositive portion of the
majority decision.
(1) I regard the permanent injunction, obviously directed against Associated, enjoining the
disposition of the two lots in question except to reconvey them to Banzon as virtually
pointless, both from the legal and practical standpoint. Insofar as the lot covered by TCT
53759, there is nothing in the record indicating that after June 9, 1968, the date the order
for Associated's liquidation and dissolution became final, Associated has ever taken any
move to transfer said title to its name, much less to perform any dominical act regarding
the same. Now that the Insurance Commssioner has already stepped into the shoes of
Associated and is apparently in full control of its assets and records, at least, for the
purposes of the matters herein involved, much less could Associated be expected to move
towards these ends. On the other hand, inasmuch as the Insurance Commissioner has
practically committed herself to reconvey the disputed lots to Banzon, of what use is there
to issue an injunction against either Associated or the Commissioner? Is it not elementary
that injunction issue only when it is indispensable to do so?
(2) With particular reference to the lot covered by TCT 39685 now in the name of Cardenas
as TCT 8657, the only prayer in the present petition is for this Court to enjoin respondent
Judge Cruz from enforcing his order of demolition of March 13, 1970 during the pendency
of Civil Case No. 79244. This is plain not only from the remedy stated in the title of the
said petition, "Petition for Injunction" but also from the following allegations in paragraph
XVI thereof: "That petitioners are entitled to the relief demanded in their complaint in Civil
Case No. 79244, Court of First Instance of Manila, which part of such relief consist in
restraining respondents from taking possession of the land object of said case and
demolishing the buildings found thereon;" All these are odd, for they give the impression
that the only purpose of this case now before Us is to secure the issuance of a preliminary
injunction ancilliary to the remedies prayed for in Civil Case No. 79244. Now, without
actually declaring in this judgment that TCT 8657 and all proceedings leading to its
issuance are null and void and that the only right of Cardenas therein in the lot covered
thereby is that of a trustee of the PNB which he acquired when he purchased the rights of
Associated therein, the majority grants such ancilliary remedy. I have very grave doubts if
We can do so legally.
(3) I can understand Banzon's dilemma. As already observed above, he submitted the
matter of the legal validity of his claim for the reconveyance to him of the lots in dispute,
including, of course, the nullity of all the proceedings related to such claim, to the Manila
court, that is, in Civil Case No. 79244, but he is not sure whether or not, as a coordinate
52
court, the Court of First Instance of Manila is in a position to enjoin respondent Judge Cruz
from enforcing his order of March 13, 1970. Without necessarily committing myself as to
whether or not such an injunction can issue, it is my considered view that Banzon's less
controversial remedy should be to insist that Judge Cruz suspend his order of demolition
because of the pendency of Civil Case No. 79244 and then charge his refusal to do so as a
grave abuse of discretion in the appropriate certiorari proceedings, seeking at the same
time, as an added remedy, the corresponding injunction.
I am not losing sight, in this connection, of the fate that befell Banzon's attempt of a similar
nature in CA-G.R. No. 44391-R in which the Court of Appeals upheld the writ of
possession issued by Judge Cruz notwithstanding Banzon's submittal that the same should
have been suspended in view of the pendency of Civil Case No. 531. It is to be observed,
however, that no appeal was taken to this Court from that decision of the appellate court
and it is an open question whether or not We would have affirmed it. In any event, the
thrust of Civil Case No. 79244 appears to be on the more plausible theory of trusteeship
above referred to which varies somehow from the main posture of Banzon in his previous
cases.
It is, therefore, from this point of view that I consider it proper to look at the petition at bar
as an action of certiorari based on the grave abuse of discretion committed by the
respondent Judge in refusing to withhold, as evidently submitted by Banzon in opposing
Cardenas' motion, the enforcement of his impugned order of demolition during the
pendency of Civil Case No. 79244, and correspondingly, injunction should issue against
such enforcement. In this manner, it is not really necessary for Us to preempt the
jurisdiction of the Manila court to resolve the issues therein and grant Banzon's prayer for
reconveyance in said action, but nonetheless, We are able to prevent further acts of
dispossession on the part of Cardenas.
(4) In this connection, I fail to see the necessity for the mandatory injunction, being ordered
immediately executory by the majority, which to me only betrays considerable over-
excitedness, if for no other reason than that Banzon himself insists that he has never lost
complete possession of the lots in question despite the demolition by the Sheriff of his
residential building found on the lot now in the name of Cardenas. Indeed, not even in this
memorandum dated May 19, 1970 wherein Banzon first informed this Court of the
demolition of the said building does he make any specific prayer for a mandatory
injunction. It is to my mind obvious that, anyway, the restoration of said building need not
be the subject of a mandatory injunction inasmuch as the same can be taken care of in Civil
Case No. 79244 together with all the other damages claimed by Banzon.
B. I find it difficult as I have indicated earlier, to share some of the views contained in the
majority opinion.
(1) I am afraid the majority has given undue importance to the "Explanation and
Manifestation" dated April 25, 1970 filed by Atty. Feliberto Castillo not only by calling it a
pleading but by even relying on it for many of its findings of fact, more or less adverse to
Associated. My position in this respect is that such reliance is uncalled for and possibly
unfair to Associated. I would even consider Atty. Castillo's posture as something very
close, to put it mildly, to a breach of professional ethics.
It should be recalled that Atty. Castillo has been counsel of Associated and, in fact, was the
one that secured in its favor the judgment in Civil Case No. 31237 as well as the decision
of this Court in G.R. No. L-23971 also favorable to said corporation and, consequently,
under the rules of ethics, he is bound to hold in confidence any information related thereto
or the ultimate developments thereof that might adversely affect his client and which have
come to him by reason of their attorney-client relationship. Implicit also is his obligation
never to give aid and comfort to any party adverse to his client, except in instances allowed
by law, which, I believe, do not include the situation on hand.
For reasons which do not appear in the record, or perhaps due to what I consider an
erroneous practice on the part of the personnel in the office of our clerk of court, instead of
serving summons on the present petition upon Associated itself at its address clearly given
in Paragraph I thereof as "Room C, Astoria Building, No. 1170 A. Mabini, Ermita, Manila,
c/o Mr. Leopoldo C. Sta. Maria," the said service was apparently made upon the law office
of Atty. Castillo just because he has appeared in the related cases as counsel for Associated.
At least, Atty. Castillo does not state in his "Explanation and Manifestation" it happened
that his "law office was in receipt," to use own expression, thereof on April 16, 1970, and
his statement in Paragraph 3 of said "Explanation and Manifestation" that "he is
entertaining a serious doubt whether he could still represent the Associated Insurance &
Surety Co., Inc. in view of its liquidation and dissolution by order of the court," as above
related, is to me a revelation that he is aware that his authority to speak for Associated is
not as it ought to be. And yet, he makes denials and admissions therein affecting
Associated, and its successor-interest, Cardenas, after suggesting that summons should be
made upon the Insurance Commissioner. As far as I am concerned, I can give my vote of
appreciation for Atty. Castillo's having informed Us that as of June 9, 1968 Associated was
already without legal personality, as the insurance and surety corporation that it used to be,
to become a party or continue as a party in any action or proceeding and should have been
indispensably substituted by the Insurance Commissioner, but to consider his "Explanation
and Manifestation" as a pleading and to take into account his admissions and denials
therein affecting Associated as the majority do, are to me without basis or justification in
any part of our rules of procedure, and to give credit to such admissions and denials as
being made "in the interest of justice and in the name of truth and as an officer of the
Court" does not square with my concept of the fidelity that a lawyer owes his client. I
doubt very much if the Insurance Commissioner or any court, for that matter, can compel
the lawyer of a corporation, without the consent of such client, to give out information
53
adverse to it, just because the corporation is under liquidation. If a lawyer cannot be so
compelled, much less would I consider it proper for him to furnish such information
voluntarily without the client's permission. In any event, insofar as the need for the facts
stated by him in this case is concerned, I would rather rely on the statements regarding the
same matters appearing in the respective pleadings of the Insurance Commissioner, Banzon
and Cardenas, which I consider sufficient for the purposes of this decision. In brief, what
Atty. Castillo should have done in fairness to Associated and in strict adherence to the
applicable rules of ethics was to simply inform the court of the liquidation of Associated
and return the summons to the sheriff or the court for proper service, as suggested by him,
to the Insurance Commissioner.
(2) The majority attempt to distinguish what they have characterized as "immediate
objectives" from the "real and substantive objectives" of the petition at bar, to justify their
direct resolution in this case of the question of validity of TCT 8567, as if such a distinction
can ever exist in any pleading, as, in fact, nowhere in the petition do I find any intention on
the part of Banzon to forego or disregard that it is in Civil Case No. 79244 that he is
seeking the "real and substantive objectives" referred to by the majority. For the rest, I refer
to my discussion above of the dispositive portion of the majority decision.
(3) It is not very clear to me that when Associated filed Civil Case No. 31237 it had no
cause of action against Banzon, as indemnitor. I am aware of Article 2071 of the Civil
Code, as, in fact, I have referred to it above, but I am not prepared to hold in this case,
particularly because I do not recall that this particular point was discussed in the
deliberations, that such a cause of action cannot exist on the basis of the express stipulation
in the indemnity agreement giving Associated the right to file an action upon PNB's
making a demand upon it and even before it has complied with such demands although I
am in full agreement with the view that should an action be prosecuted to judgment, as it
happened in this case, Associated or the surety and all its successors-in-interest become no
more than trustees of the creditor.
(4) Among their considerations, the majority state:
Considering that the Insurance Commissioner herself , now legally can
alone represent Associated as liquidator, has herein recognized such trust
character and has expressed the belief that the said lot, no less than the
other lot covered by TC No. 8567, should, in justice to petitioners, be
reconveyed to them on account, among others, of petitioner Banzon's
release from obligation as indemnitor by virtue of the principal debtor's
subsequent payment of his obligation with the Philippine National Bank
which likewise released Associated from any liability as surety, the
present petition should therefore be granted in the interests of justice and
equity so as to enable the Insurance Commissioner-liquidator in due
course to discharge the trust in reconveying Banzon's properties to him.
My observation in this regard is that the invocation the "interests of justice and equity"
does not warrant granting of a relief not prayed for by the party concerned. When the
majority say "the present petition should be granted ... so as to enable the Insurance
Commissioner-liquidator in due course to discharge the trust of reconveying Banzon's
properties to him," they have in mind the called "real and substantive objectives", per their
irterpretation of the petition and not what exactly petitioners expressly asking for, which is
no more than what the majority call "the immediate objectives."
There are other loose statements of legal principles in the majority opinion, but they are
minor ones and any further discussion of all of them will unduly extend this opinion.
Incidentally, as I close, I am attempted to ask this question. With the way the majority has
disposed of this case in their opinion, is it not rather ambiguous now what has become of
Civil Case No. 79244 in the Manila court and how specifically We expect the said court to
dispose of the same?
IV
MY VOTE
IN VIEW OF ALL THE FOREGOING, and differently from the majority, I vote to set
aside the order of Judge Cruz of March 13, 1970 for having been issued with grave abuse
of discretion and to permanently enjoin said respondent from enforcing the same, until it
happens, which appears to be very remote that Civil Case No. 79244 is decided in favor of
Cardenas, after the case against them therein is revised by a corresponding supplemental
pleading of Banzon based on the patent nullity on the face of the record of the order of
dismissal of October 28, 1970 because the Insurance Commissioner was not substituted for
Associated therein.
54
As regards the prayer for another injunction against any disposition of the lot covered by
TCT 53759, my vote is to deny the same, without prejudice to the Insurance Commissioner
following the course of action I have indicated earlier above.

Anent the civil and criminal cases which the majority reserve to be instituted against the
officers of Associated, I feel that it should be in Civil Case No. 79244 that such reservation
should be done inasmuch as it is there where the more appropriate judgment regarding all
the substantive aspects of the claim of Banzon will be rendered, even if quite inevitably the
tenor of said judgment might have to be along the lines hereinabove set forth.

G.R. No. L-16550 January 31, 1962

ALLEN McCONN, plaintiff-appellant,

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

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

CONCEPCION, J.:

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

WHEREAS, the above-bounden PRINCIPAL, is intending to leave the

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

55
 WHEREAS, the above-bounden PRINCIPAL, has a pending case before the Court
of First Instance of Manila, Branch III, entitled: "Allen McConn, Plaintiff, vs.
Paul Haragan, Defendant", Civil Case No. 24790, which is scheduled for hearing
on September 16, 1955;
WHEREAS, before the above-bounden PRINCIPAL could leave the Philippines
for Hongkong and Tokyo, Japan, the above-mentioned Court has required him to
post a Surety Bond, in the amount of PESOS FOUR THOUSAND ONLY
(P4,000.00) Philippine Currency, the guarantee that he will return to the
Philippines on or before September 16, 1955;
NOW, THEREFORE, for and in consideration of the above premises, the
PRINCIPAL and the SURETY, hereby bind themselves, jointly and severally, in
favor of the Republic of the Philippines, or its authorized representatives, in the
sum of PESOS FOUR THOUSAND ONLY (P4,000.00) Philippine Currency, that
the herein PRINCIPAL will return to the Philippines on or before September 16,
1955 and that should he fail to do so, said bond will answer pro tanto for any
judgment that may be rendered against him.
Soon thereafter, or on July 19, 1955, the court issued an order stating that "in view of said
bond, it would have no objection" to Haragan's "departure from the Philippines for a short
stay abroad" and that "formal leave" was thereby given him. On the date set for the hearing
of the case, Haragan's counsel moved for continuance, whereupon, the hearing was
postponed to November 14, 1955. On the date last mentioned, the same counsel informed
the court that Haragan had been unable to return to the Philippines because the Philippine
Consulate in Hongkong had advised Haragan of a communication from our Department of
Foreign Affairs banning him from returning to the Philippines. The court then postponed
the hearing to January 6, 1956. Subsequently, Herbert T. Fallis was impleaded as defendant
and, later on, one Inocencio Ortiz Luis Jr. was allowed to intervene. In due course,
thereafter, or on February 19, 1959, the court rendered judgment, which, inter alia,
sentenced Haragan to pay to plaintiff the sum of P5,500, with 6% interest thereon from
December 8, 1954, until full payment, plus P1,000 as attorney's fees and costs. After this
judgment had become final and executory, plaintiff moved for the execution of the
aforementioned bond to satisfy said judgment against Haragan. The surety company
objected thereto upon several grounds and, after due hearing, the lower court issued an
order dated October 13, 1959, releasing said company from liability under the bond
aforementioned and denying plaintiff's motion. A reconsideration of this order having been
denied, the case is now before us on record on appeal filed by the plaintiff.1wph1.t Thus, in Tabora vs. Lazatin, (G.R. No. L-5245, May 29, 1953), we said:
The issue is whether the Surety Company is liable to plaintiff under the bond quoted above,
in view of the failure of Haragan to return to the Philippines. The lower court decided the
issue in the negative upon the following ground: .
... A careful reading of the surety bond, Exhibit F, indicates that the surety's
principal commitment is 'to guarantee that he (Haragan) will return to the
Philippines on or before September 16, 1955' (See the third 'Whereas'). In the last
paragraph of said surety bond, Exhibit F, it appears that said bond was executed in
favor of the Republic of the Philippines or its duly authorized representatives to
guarantee 'thatthe herein principal (Haragan) will return to the Philippines on or
before September 16, 1955 and that should he fail to do so, said bond will
answer pro tanto for any judgment that may be rendered against him.' As the terms
of the bond so state, it appears clearly that the bond will only answer for the
judgment which may be rendered against defendant, should he (defendant
Haragan) fail to return to the Philippines. In other words, if defendant Haragan
should return to the Philippines on or before September 16, 1955, said bond will
not answer for the judgment. It is now the contention of the Associated Insurance
that since it was the Republic of the Philippines (obligee under the bond) who
rendered the return of defendantHaragan to the Philippines impossible, said surety
company is thereby released from its obligation, and cites in support thereof
Articles 1266 and 2076 of the New Civil Code. Upon a consideration of this
contention, the Court finds it tenable and well grounded, for as the surety
company has so well stated 'where the principal obligation (of returning to the
Philippines) has been extinguished by the action of the obligee, Philippine
Government in preventing such return, the accessory obligation of the surety is
likewise extinguished and the bond released of its liability.' Paraphrasing the last
paragraph of the bond in a negative way, it will read thus: 'should he (not) fail to
do so, said bond will (not) answer pro tanto for any judgment that may be
rendered against him.
We are fully in agreement with the foregoing view, which is in accord with the principle
that:
The debtor in obligation to do shall also be released when the prestationbecomes
legally or physically impossible without the fault of the obligor. (Article 1266,
Civil Code of the Philippines.).
56
 This Court finds that despite his efforts to secure the necessary building permit for
the reconstruction, he failed because of the disapproval or unfavorable attitude of
the Urban Planning Commission toward reconstruction unless they conformed to
the plan of widening the city streets. Finding that defendant had done all he could
to secure the permit and to comply with his obligations, but because of the refusal
of the government authorities to issue said permit, he failed to fulfill his
undertaking, he should be absolved and released from said obligation.

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

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

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

SECURITY BANK AND TRUST COMPANY, Inc., Petitioner, v. RODOLFO M.

CUENCA, Respondent.

DECISION

PANGANIBAN, J.:

Being an onerous undertaking, a surety agreement is strictly construed against the creditor,
and every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair
play require the creditor to obtain the consent of the surety to any material alteration in the
principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold
herein respondent liable for loans obtained in excess of the amount or beyond the period
stipulated in the original agreement, absent any clear stipulation showing that the latter
waived his right to be notified thereof, or to give consent thereto. This is especially true
where, as in this case, respondent was no longer the principal officer or major stockholder
of the corporate debtor at the time the later obligations were incurred. He was thus no
longer in a position to compel the debtor to pay the creditor and had no more reason to bind
himself anew to the subsequent obligations.chanrob1es virtua1 1aw 1ibrary

57
 The Case
This is the main principle used in denying the present Petition for Review under Rule 45 of
the Rules of Court. Petitioner assails the December 22, 1998 Decision 1 of the Court of
Appeals (CA) in CA-G.R CV No. 56203, the dispositive portion of which reads as
follows:jgc:chanrobles.com.ph
"WHEREFORE, the judgment appealed from is hereby amended in the sense that
defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability
to pay any amount stated in the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for
lack of merit.
"In all other respect[s], the decision appealed from is AFFIRMED." 2
Also challenged is the April 14, 1999 CA Resolution, 3 which denied petitioners Motion
for Reconsideration.
Modified by the CA was the March 6, 1997 Decision 4 of the Regional Trial Court (RTC)
of Makati City Branch 66) in Civil Case No. 93-1925, which disposed as
follows:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale
Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank &
Trust Company the sum of P39,129,124.73 representing the balance of the loan as of May
10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as
attorneys fees and litigation expenses and to pay the costs.
SO ORDERED."cralaw virtua1aw library
The Facts
The facts are narrated by the Court of Appeals as follows: 5
"The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale
(Sta. Ines) is a corporation engaged in logging operations. It was a holder of a Timber
License Agreement issued by the Department of Environment and Natural Resources
(DENR).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta.
Ines Melale Corporation- [SIMC] a credit line in the amount of eight million pesos
(P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of
its logging operations.
"The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility
shall be effective until 30 November 1981:chanrob1es virtual 1aw library
JOINT CONDITIONS:chanrob1es virtual 1aw library
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at
200% of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating
therein the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be maintained at all
times; in this connection, a Makati account shall be opened prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms and conditions
upon written notice to the Borrower. (Emphasis supplied.)
"To secure the payment of the amounts drawn by appellant SIMC from the above-
mentioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980
(Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC. As
additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed
an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner]
SBTC whereby he solidarily bound himself with SIMC as follows:chanrob1es virtual 1aw
library
x x x
Rodolfo M. Cuenca . . . hereby binds himself . . . jointly and severally with the client
(SIMC) in favor of the bank for the payment, upon demand and without the benefit of
excussion of whatever amount . . . the client may be indebted to the bank . . . by virtue of
aforesaid credit accommodation(s) including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the aforesaid credit
accommodation(s) . . . (Emphasis supplied).
"On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of
the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line
58
with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No.
TD/TLS-3599-81 for said amount (Exhibit C).
"Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the
Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of
[Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative
to Civil Case No. 18021 entitled Adolfo A. Angala v. Universal Holdings, Inc. and
Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala who was the highest
bidder during the public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6)
other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree
[h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (46,369,019.50).
Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85,
DLS/74178/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of
the abovementioned additional loans against the credit line.
"Appellant SIMC, however, encountered difficulty 6 in making the amortization payments
on its loans and requested [Petitioner] SBTC for a complete restructuring of its
indebtedness. SBTC accommodated appellant SIMCs request and signified its approval in
a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta.
Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure
the past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed
to extend to defendant-appellant Sta. Ines the following loans:chanrob1es virtua1 1aw
1ibrary
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta.
Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G,
Expediente, at Vol. II, p. 336; Exhibit 5- B-Cuenca, Expediente, et Vol. I, pp. 33 to 34)
and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
(P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the
indebtedness of defendant- appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit
G, Expediente, at Vol. II, p. 336; Exhibit 5- B-Cuenca, Expediente, at Vol. II, p. 33 to
34).
"It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to
[Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix
[m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan
incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and
the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-
Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped
together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86
and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335)
obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity
Agreement.chanrob1es virtua1 1aw 1ibrary
"Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security
Bank, Defendant-Appellant Sta. Ines thus executed the following promissory notes, both
dated 09 March 1988 in favor of [Petitioner] Security Bank:chanrob1es virtual 1aw library
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
_____________
TOTAL P12,200,000.00
(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
"To formalize their agreement to restructure the loan obligations of defendant-appellant
Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan
Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41).
Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:chanrob1es
virtual 1aw library
1.01 Amount The Lender agrees to grant loan to the Borrower in the aggregate amount
of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00),
Philippines [c]urrency (the Loan). The loan shall be released in two (2) tranches of
P8,800,000.00 for the first tranche (the First Loan) and P3,400,000.00 for the second
tranche (the Second Loan) to be applied in the manner and for the purpose stipulated
herein below.chanrob1es virtua1 1aw 1ibrary
1.02. Purpose The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while
the Second Loan shall be applied to liquidate the past due interest and penalty portion of
the Indebtedness. (Emphasis supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol.
I, p. 33)
"From 08 April 1988 to 02 December 1988, Defendant-Appellant Sta. Ines made further
59
payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred
[f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-
SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan obligations to
[Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA, the last of
which were made through separate letters dated 5 June 1991 (Exhibit K) and 27 June
1991 (Exhibit L), respectively.
"Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus,
SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting after
trial on the merits in a decision by the court a quo, . . . from which [Respondent] Cuenca
appealed."cralaw virtua1aw library
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement
had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines.
Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, who
was then the Board chairman and president of Sta. Ines, had bound himself solidarily liable
for the payment of the loans secured by that credit accommodation. It noted that the 1989
Loan Agreement had been executed without notice to, much less consent from, Cuenca
who at the time was no longer a stockholder of the corporation.chanrob1es virtua1 1aw
1ibrary
The appellate court also noted that the Credit Approval Memorandum had specified that the
credit accommodation was for a total amount of P8 million, and that its expiry date was
November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to
November 30, 1981, and only for an amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement
was tantamount to a grant of an extension of time to the debtor without the consent of the
surety. Under Article 2079 of the Civil Code, such extension extinguished the
surety.chanrob1es virtua1 1aw 1ibrary
The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines
decided to materially alter or modify the principal obligation after the expiry date of the
credit accommodation.
Hence, this recourse to this Court. 7
The Issues
In its Memorandum, petitioner submits the following for our consideration: 8
"A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca
from liability as surety under the Indemnity Agreement for the payment of the principal
amount of twelve million two hundred thousand pesos (P12,200,000.00) under Promissory
Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated
9 March 1988, plus stipulated interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas
liability under the Indemnity Agreement covered only availments on SIMCs credit line to
the extent of eight million pesos (P8,000,000.00) and made on or before 30 November
1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of
SIMCs indebtedness under the P8 million credit accommodation was tantamount to an
extension granted to SIMC without Respondent Cuencas consent, thus extinguishing his
liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of
SIMCs indebtedness under the P8 million credit accommodation constituted a novation of
the principal obligation, thus extinguishing Respondent Cuencas liability under the
indemnity agreement;chanrob1es virtua1 1aw 1ibrary
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied with
Section 11, Rule 13 of the 1997 Rules of Civil Procedure."cralaw virtua1aw library
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989
Loan Agreement novated the original credit accommodation and Cuencas liability under
the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to
give consent to any substitution, renewal, extension, increase, amendment, conversion or
revival of the said credit accommodation. As preliminary matters, the procedural questions
raised by respondent will also be addressed.chanrob1es virtua1 1aw 1ibrary
The Courts Ruling
60
The Petition has no merit.
Preliminary Matters:chanrob1es virtual 1aw library
Procedural Questions
Motion for Reconsideration
Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in
merely rehashing the arguments already passed upon by the appellate court, was pro forma;
that as such, it did not toll the period for filing the present Petition for Review. 9
Consequently, the Petition was filed out of time. 10
We disagree. A motion for reconsideration is not pro forma just because it reiterated the
arguments earlier passed upon and rejected by the appellate court. The Court has explained
that a movant may raise the same arguments, precisely to convince the court that its ruling
was erroneous. 11
Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo, 12 the Court explained
that a pro forma motion had no other purpose than to gain time and to delay or impede the
proceedings. Hence, "where the circumstances of a case do not show an intent on the part
of the movant merely to delay the proceedings, our Court has refused to characterize the
motion as simply pro forma." It held:jgc:chanrobles.com.ph
"We note finally that because the doctrine relating to pro forma motions for reconsideration
impacts upon the reality and substance of the statutory right of appeal, that doctrine should
be applied reasonably, rather than literally. The right to appeal, where it exists, is an
important and valuable right. Public policy would be better served by according the
appellate court an effective opportunity to review the decision of the trial court on the
merits, rather than by aborting the right to appeal by a literal application of the procedural
rules relating to pro forma motions for reconsideration." chanrob1es virtua1 1aw 1ibrary
Service by Registered Mail
Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:jgc:chanrobles.com.ph
"SECTION 11. Priorities in modes of service and filing. Whenever practicable, the
service and filing of pleadings and other papers shall be done personally. Except with
respect to papers emanating from the court, a resort to other modes must be accompanied
by a written explanation why the service or filing was not done personally. A violation of
this Rule may be cause to consider the paper as not filed."cralaw virtua1aw library
Respondent maintains that the present Petition for Review does not contain a sufficient
written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort 13 that the aforecited
rule was mandatory, and that "only when personal service or filing is not practicable may
resort to other modes be had, which must then be accompanied by a written explanation as
to why personal service or filing was not practicable to begin with."cralaw virtua1aw
library
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines
and Cuenca "by registered mail in lieu of personal service due to limitations in time and
distance." 14 This explanation sufficiently shows that personal service was not practicable.
In any event, we find no adequate reason to reject the contention of petitioner and thereby
deprive it of the opportunity to fully argue its cause.chanrob1es virtua1 1aw 1ibrary
First Issue:chanrob1es virtual 1aw library
Original Obligation Extinguished
by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code,
which reads as follows:jgc:chanrobles.com.ph
"ARTICLE 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or that the
old and the new obligations be on every point incompatible with each other."cralaw
virtua1aw library
Novation of a contract is never presumed. It has been held that" [i]n the absence of an
express agreement, novation takes place only when the old and the new obligations are
incompatible on every point." 15 Indeed, the following requisites must be established: (1)
there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3)
the old contract is extinguished; and (4) there is a valid new contract. 16
Petitioner contends that there was no absolute incompatibility between the old and the new
obligations, and that the latter did not extinguish the earlier one. It further argues that the
1989 Agreement did not change the original loan in respect to the parties involved or the
obligations incurred. It adds that the terms of the 1989 Contract were "not more onerous."
61
17 Since the original credit accommodation was not extinguished, it concludes that Cuenca
is still liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this case. The
1989 Loan Agreement extinguished the obligation 18 obtained under the 1980 credit
accommodation. This is evident from its explicit provision to "liquidate" the principal and
the interest of the earlier indebtedness, as the following shows:chanrob1es virtua1 1aw
1ibrary
"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding Indebtedness to the Lender (the "Indebtedness") while
the Second Loan shall be applied to liquidate the past due interest and penalty portion of
the Indebtedness." 19 (Emphasis supplied.)
The testimony of an officer 20 of the bank that the proceeds of the 1989 Loan Agreement
were used "to pay-off" the original indebtedness serves to strengthen this ruling. 21
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original
obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation
had stipulated that the amount of loan was not to exceed 398 million, 22 the 1989
Agreement provided that the loan was P12.2 million. The periods for payment were also
different.
Likewise, the later contract contained conditions, "positive covenants" and "negative
covenants" not found in the earlier obligation. As an example of a positive covenant, Sta.
Ines undertook "from time to time and upon request by the Lender, [to] perform such
further acts and/or execute and deliver such additional documents and writings as may be
necessary or proper to effectively carry out the provisions and purposes of this Loan
Agreement." 23 Likewise, SIMC agreed that it would not create any mortgage or
encumbrance on any asset owned or hereafter acquired, nor would it participate in any
merger or consolidation. 24
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the
Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant
to Article 1296 of the Civil Code, which provides:chanrob1es virtua1 1aw 1ibrary
"ARTICLE 1296. When the principal obligation is extinguished in consequence of a
novation, accessory obligations may subsist only insofar as they may benefit third persons
who did not give their consent."cralaw virtua1aw library
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8
million original accommodation; it was not a novation.25cralaw:red
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly
stipulated that its purpose was to "liquidate," not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement,
which had allegedly extended the original P8 million credit facility. Hence, his obligation
as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code,
which specifically states that" [a]n extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty. . . ." In an earlier case, 26 the Court
explained the rationale of this provision in this wise:jgc:chanrobles.com.ph
"The theory behind Article 2079 is that an extension of time given to the principal debtor
by the creditor without the suretys consent would deprive the surety of his right to pay the
creditor and to be immediately subrogated to the creditors remedies against the principal
debtor upon the maturity date. The surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors becoming insolvent during the
extended period."cralaw virtua1aw library
Binding Nature of the
Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit Approval
Memorandum in holding that the credit accommodation was only for P8 million, and that it
was for a period of one year ending on November 30, 1981. Petitioner objects to the
appellate courts reliance on that document, contending that it was not a binding agreement
because it was not signed by the parties. It adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof "evidencing the
accommodation." 27 Moreover, in its Petition before this Court, it alluded to the Credit
Approval Memorandum in this wise:jgc:chanrobles.com.ph
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was granted by the
Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist
SIMC in meeting the additional capitalization requirements for its logging operations. For
this purpose, the Bank issued a Credit Approval Memorandum dated 10 November
1980." chanrob1es virtua1 1aw 1ibrary
Clearly, respondent is estopped from denying the terms and conditions of the P8 million
credit accommodation as contained in the very document it presented to the courts. Indeed,
it cannot take advantage of that document by agreeing to be bound only by those portions
that are favorable to it, while denying those that are disadvantageous.
62

Second Issue:chanrob1es virtual 1aw library
Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca "impliedly gave his
consent to any modification of the credit accommodation or otherwise waived his right to
be notified of, or to give consent to, the same." 28 Respondents consent or waiver thereof
is allegedly found in the Indemnity Agreement, in which he held himself liable for the
"credit accommodation including [its] substitutions, renewals, extensions, increases,
amendments, conversions and revival." It explains that the novation of the original credit
accommodation by the 1989 Loan Agreement is merely its "renewal," which "connotes
cessation of an old contract and birth of another one . ." 29chanrob1es virtua1 1aw 1ibrary
At the outset, we should emphasize that an essential alteration in the terms of the Loan
Agreement without the consent of the surety extinguishes the latters obligation. As the
Court held in National Bank v. Veraguth, 30" [i]t is fundamental in the law of suretyship
that any agreement between the creditor and the principal debtor which essentially varies
the terms of the principal contract, without the consent of the surety, will release the surety
from liability." DTIACH
In this case, petitioners assertion that respondent consented to the alterations in the
credit accommodation finds no support in the text of the Indemnity Agreement, which is
reproduced hereunder:jgc:chanrobles.com.ph
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products
Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration
of the credit accommodation in the total amount of eight million pesos (P8,000,000.00)
granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly
organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala
Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES
MELALE FOREST PRODUCTS CORP., hereinafter referred to as the CLIENT, with
the stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY
NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK hereby
bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK
for the payment, upon demand and without benefit of excussion of whatever amount or
amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendment,
conversions and revivals of the aforesaid credit accommodation(s), as well as of the
amount or amounts of such other obligations that the CLIENT may owe the BANK,
whether direct or indirect, principal or secondary, as appears in the accounts, books and
records of the BANK, plus interest and expenses arising from any agreement or agreements
that may have heretofore been made, or may hereafter be executed by and between the
parties thereto, including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s), and further bind(s)
himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of
all the terms and conditions contained in the aforesaid credit accommodation(s), all of
which are incorporated herein and made part hereof by reference."cralaw virtua1aw library
While respondent held himself liable for the credit accommodation or any modification
thereof, such clause should be understood in the context of the P8 million limit and the
November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the
nature and scope of the original credit accommodation, without informing or getting the
consent of respondent who was solidarily liable. Taking the banks submission to the
extreme, respondent (or his successors) would be liable for loans even amounting to, say,
P100 billion obtained 100 years after the expiration of the credit accommodation, on the
ground that he consented to all alterations and extensions thereof.cralaw : red
Indeed, it has been held that a contract of surety "cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved against
enlarging the liability of the surety." 31
Likewise, the Court has ruled that "it is a well-settled legal principle that if there is any
doubt on the terms and conditions of the surety agreement, the doubt should be resolved in
favor of the surety . . . Ambiguous contracts are construed against the party who caused the
ambiguity." 32 In the absence of an unequivocal provision that respondent waived his right
to be notified of or to give consent to any alteration of the credit accommodation, we
cannot sustain petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that the
bank did not have absolute authority to unilaterally change the terms of the loan
accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this
condition:jgc:chanrobles.com.ph
"5. The Bank reserves the right to amend any of the aforementioned terms and conditions
upon written notice to the Borrower." 33
We reject petitioners submission that only Sta Ines as the borrower, not respondent, was
entitled to be notified of any modification in the original loan accommodation. 34
Following the banks reasoning, such modification would not be valid as to Sta. Ines if no
notice were given; but would still be valid as to respondent to whom no notice need be
given. The latters liability would thus be more burdensome than that of the former. Such
untenable theory is contrary to the principle that a surety cannot assume an obligation more
onerous than that of the principal. 35
The present controversy must be distinguished from Philamgen v. Mutuc, 36 in which the
63
Court sustained a stipulation whereby the surety consented to be bound not only for the
specified period, abut to any extension thereafter made, an extension . . . that could be had
without his having to be notified." chanrob1es virtua1 1aw 1ibrary
In that case, the surety agreement contained this unequivocal stipulation: "It is hereby
further agreed that in case of any extension of renewal of the bond, we equally bind
ourselves to the Company under the same terms and conditions as herein provided without
the necessity of executing another indemnity agreement for the purpose and that we hereby
equally waive our right to be notified of any renewal or extension of the bond which may
be granted under this indemnity agreement."cralaw virtua1aw library
In the present case, there is no such express stipulation. At most, the alleged basis of
respondents waiver is vague and uncertain. It confers no clear authorization on the bank or
Sta. Ines to modify or extend the original obligation without the consent of the surety or
notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing surety,
petitioner maintains that there was no need for respondent to execute another surety
contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation inordinately. 37 In Dino
v. CA, 38 the Court held that "a continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the description or contemplation of
the contract of guaranty, until the expiration or termination thereof."cralaw virtua1aw
library
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations
of the credit accommodation: (1) that the obligation should not exceed P8 million, and (2)
that the accommodation should expire not later than November 30, 1981. Hence, it was a
continuing surety only in regard to loans obtained on or before the aforementioned expiry
date and not exceeding the total of P8 million.chanrob1es virtua1 1aw 1ibrary
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on
November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980
credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed
the 1989 Loan Agreement, which was executed after November 30, 1981 and which
exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the
loan obtained after the payment of the original one, which was covered by a continuing
surety agreement. At the risk of being repetitious, we hold that in Dino, the surety
Agreement specifically provided that "each suretyship is a continuing one which shall
remain in full force and effect until this bank is notified of its revocation." Since the bank
had not been notified of such revocation, the surety was held liable even for the subsequent
obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondents liability
was confined to the 1980 credit accommodation, the amount and the expiry date of which
were set down in the Credit Approval Memorandum.chanrob1es virtua1 1aw 1ibrary
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and solidary signature") of a
major stockholder or corporate officer, as an additional security for loans granted to
corporations. There are at least two reasons for this. First, in case of default, the creditors
recourse, which is normally limited to the corporate properties under the veil of separate
corporate personality, would extend to the personal assets of the surety. Second, such
surety would be compelled to ensure that the loan would be used for the purpose agreed
upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have
required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980
when the credit accommodation was granted.
There was no reason or logic, however, for the bank or Sta. Ines to assume that he would
still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no
longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a position
then to ensure the payment of the obligation. Neither did he have any reason to bind
himself further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent,
without even informing him, smacks of negligence on the part of the bank and bad faith on
that of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the
old loan having been already liquidated, the spirit of fair play should have impelled Sta.
Ines to ask somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one
who was in a position to ensure the payment of the loan. Even a perfunctory attempt at
credit investigation would have revealed that respondent was no longer connected with the
corporation at the time. As it is, the bank is now relying on an unclear Indemnity
Agreement in order to collect an obligation that could have been secured by a fairly
obtained surety. For its defeat in this litigation, the bank has only itself to
blame.chanrob1es virtua1 1aw 1ibrary
64
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation
under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which
had been an accessory to the 1980 credit accommodation, was also extinguished.
Furthermore, we reject petitioners submission that respondent waived his right to be
notified of, or to give consent to, any modification or extension of the 1980 credit
accommodation.chanrob1es virtua1 1aw 1ibrary

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

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

SO ORDERED.

G.R. No. L-19519 November 28, 1964

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

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

Pio L. Pestrao for oppositors-appellants.

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

CONCEPCION, J.:

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

The record shows that on April 6, 1955, Gomez had executed the document Exhibit E,
constituting a mortgage on said land in favor of the Ferrers, to guarantee the payment of
65
P2,500.00, within one (1) year from said date; that Exhibit E provided that, if Gomez failed
to redeem the property within the aforementioned period, the Ferrers could, "at their
election," assume an obligation of Gomez in favor of the Meralco Loan and Savings
Association hereinafter referred to as the Meralco Association which had a first
mortgage on said property, and Gomez would execute the corresponding deed of sale
thereof in favor of the Ferrers; and that Exhibit E was neither registered nor annotated on
Transfer Certificate of Title No. 30520, because the former stated erroneously that said
proper was covered by Transfer Certificate of Title No. 16488 of the City of Manila.
Subsequently, or on May 9, 1956, the mortgage in favor of the Meralco Association was
cancelled in pursuance of a deed to this effect. On the same date, a deed of real estate
mortgage, executed by Gomez in favor of the spouses Brigido Campita and Fausta
Domingo, for the sum of P3,000, was duly registered, but the annotation thereof was duly
cancelled on June 8, 1957, on which date another deed of mortgage on the same property,
for the sum of P6,000, in favor of the Manila Building and Loan Association hereinafter
referred to as the Manila Association was duly registered. On March 4, 1959, the Ferrers
instituted, against Gomez, Civil Case No. 4820 of the Court of First Instance of Rizal, for
the recovery of the sum of money referred to in Exhibit E but this case was later dismissed
for non-appearance of the parties on the date set for the hearing thereof. Instead of seeking
a revocation of the order of dismissal, the Ferrers commenced, on August 14, 1959, Civil
Case No. 5726 of the same court, against Gomez and the Manila Association. In the
complaint therein, the Ferrers alleged, inter alia, the execution by Gomez of said deed
Exhibit E, the failure of Gomez to pay the debt guaranteed thereby, the reason why Exhibit
E was not registered, and the execution of the deed of first mortgage in favor of the Manila
Association. The Ferrers alleged further that the Manila Association had been guilty of
laches in failing to require Gomez, before lending him P6,000, to submit an affidavit
stating that the property aforementioned was unencumbered and prayed that judgment be
rendered sentencing Gomez to convey said property to them (the Ferrers), as well as to pay
damages, and the Manila Association to cancel the mortgage in their favor, upon payment
by the Ferrers of the amount representing the balance of the obligation of Gomez in favor
of the Meralco Association outstanding on April 6, 1956 (it should be 1955), when Exhibit
E was executed.
Gomez and the Manila Association moved to dismiss the complaint in Case No. 5726,
upon the ground that the same is barred by the order of dismissal of Case No. 4820. On
December 10, 1959, this motion was granted and the complaint in said Case No. 5726 was,
accordingly, dismissed. No appeal was taken from the order of dismissal, which
accordingly, became final and executory. Subsequently, or on March 14, 1960, Mrs. Ferrer
filed with the office of the Register of Deeds of Rizal an affidavit of adverse claim to the
property above referred to, based upon Exhibit E. Soon thereafter, or on May 4, 1960,
Transfer Certificate of Title No. 76141 was issued in the name of Ananias D. Abustan,
married to Librada Buan. This Transfer Certificate of Title No. 76141 carried thereon two
(2) memoranda, of "encumbrances," namely, the annotation of the first mortgage in favor
of the Manila Association and that of the adverse claim of the Ferrers.
On July 13, 1960, Abustan filed in Land Registration Case No. 3861, G.L.R.O. Cadastral
Record No. 2029, under which the property in question is registered, a petition for
cancellation of said annotation of adverse claim upon the ground that the same had been
"improperly registered in violation of Section 112 of Act 496, because the right or interest
sought to be enforced by the spouses, Ruperto Ferrer and Consuelo Golez, has become
unenforceable by virtue of a final decision rendered by the Court of First Instance of Rizal
on December 10, 1959, in Civil Case No. 5726," referring to the aforementioned order of
dismissal thereof. After due hearing this petition was granted and, a reconsideration of the
action thus taken by the lower court having been denied, the, Ferrers have interposed the
present appeal by writ of error.
The Ferrers maintain that the lower court erred (a) in holding that the deed of mortgage
constituted in their favor had become unenforceable owing to the dismissal of Civil Cases
Nos. 4820 and 5726 of Rizal; (b) in not holding that the registration of the adverse claim in
question operated as a registration of the deed of real estate mortgage in their favor; (c) in
not holding that Civil Case No. 5726 operated as a reopening of Civil Case No. 4820; and
(d) in giving due course to appellee's petition instead of requiring them to file an ordinary
action.
This appeal is clearly devoid of merit. Indeed, the dismissal of Case No. 4820 had the
effect of extinguishing the debt of Gomez in favor of the Ferrers. As a consequence, the
latter lost the right to demand the conveyance in their favor of the lot in dispute, such right
being predicated upon the default of Gomez in the payment of said debt. The extinction
thereof necessarily operated to wipe out the default, if any, and, as a consequence, the relief
stipulated for such event, namely, the conveyance of the property to the Ferrers. Regardless
of the foregoing, the dismissal of Case No. 5726 extinguished the light, if it still existed, to
said conveyance, which was sought to be enforced in that case.
Even if the annotation of the adverse claim amounted to the registration of a deed of real
estate mortgage and it did not have such effect the dismissal of Case No. 4820, had
extinguished the debt secured by the mortgage, and, accordingly, of the latter. Being merely
an accessory contract, a mortgage cannot exist without the principal obligation it seeks to
guarantee (Article 2085, Civil Code of the Philippines). So, too, even if Case No. 5726 had
amounted to a reopening of Case No. 4820, which is not a fact, the dismissal of Case No.
66
5726 wiped out the right of the Ferrers under Exhibit E to the conveyance in their favor if
the property in question regardless of its nullity under Article 2088 of the Civil Code of
the Philippines no appeal having been taken from the order of dismissal of said case No.
5726.

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

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

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

CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST

COMPANY, Petitioners, v. SPOUSES CYRUS LIM and LOLITA CHAN LIM and
COURT OF APPEALS, Respondents.

DECISION

MENDOZA, J.:

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

The following facts are not in dispute.

67
Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust Company
(FEBTC) are banking institutions duly organized and existing under Philippine laws. On or
about June 15, 1983, a certain Rodolfo Guansing obtained a loan in the amount of
P90,000.00 from CDB, to secure which he mortgaged a parcel of land situated at No. 63
Calavite Street, La Loma, Quezon City and covered by TCT No. 300809 registered in his
name. As Guansing defaulted in the payment of his loan, CDB foreclosed the mortgage. At
the foreclosure sale held on March 15, 1984, the mortgaged property was sold to CDB as
the highest bidder. Guansing failed to redeem, and on March 2, 1987, CDB consolidated
title to the property in its name. TCT No. 300809 in the name of Guansing was cancelled
and, in lieu thereof, TCT No. 355588 was issued in the name of CDB.
On June 16, 1988, private respondent Lolita Chan Lim, assisted by a broker named
Remedios Gatpandan, offered to purchase the property from CDB. The written Offer to
Purchase, signed by Lim and Gatpandan, states in part:chanrob1es virtual 1aw library
We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma,
Quezon City for P300,000.00 under the following terms and conditions:chanrob1es virtual
1aw library
(1) 10% Option Money;
(2) Balance payable in cash;
(3) Provided that the property shall be cleared of illegal occupants or tenants.
Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB P30,000.00 as
Option Money, for which she was issued Official Receipt No. 3160, dated June 17, 1988,
by CDB. However, after some time following up the sale, Lim discovered that the subject
property was originally registered in the name of Perfecto Guansing, father of mortgagor
Rodolfo Guansing, under TCT No. 91148. Rodolfo succeeded in having the property
registered in his name under TCT No. 300809, the same title he mortgaged to CDB and
from which the latters title (TCT No. 355588) was derived. It appears, however, that the
father, Perfecto, instituted Civil Case No. Q-39732 in the Regional Trial Court, Branch 83,
Quezon City, for the cancellation of his sons title. On March 23, 1984, the trial court
rendered a decision 2 restoring Perfectos previous title (TCT No. 91148) and cancelling
TCT No. 300809 on the ground that the latter was fraudulently secured by Rodolfo. This
decision has since become final and executory.
Aggrieved by what she considered a serious misrepresentation by CDB and its mother-
company, FEBTC, on their ability to sell the subject property, Lim, joined by her husband,
filed on August 29, 1989 an action for specific performance and damages against
petitioners in the Regional Trial Court, Branch 96, Quezon City, where it was docketed as
Civil Case No. Q-89-2863. On April 20, 1990, the complaint was amended by impleading
the Register of Deeds of Quezon City as an additional defendant.
On March 10, 1993, the trial court rendered a decision in favor of the Lim spouses. It ruled
that: (1) there was a perfected contract of sale between Lim and CDB, contrary to the
latters contention that the written offer to purchase and the payment of P30,000.00 were
merely pre-conditions to the sale and still subject to the approval of FEBTC; (2)
performance by CDB of its obligation under the perfected contract of sale had become
impossible on account of the 1984 decision in Civil Case No. Q-39732 cancelling the title
in the name of mortgagor Rodolfo Guansing; (3) CDB and FEBTC were not exempt from
liability despite the impossibility of performance, because they could not credibly disclaim
knowledge of the cancellation of Rodolfo Guansings title without admitting their failure to
discharge their duties to the public as reputable banking institutions; and (4) CDB and
FEBTC are liable for damages for the prejudice caused against the Lims. 3 Based on the
foregoing findings, the trial court ordered CDB and FEBTC to pay private respondents,
jointly and severally, the amount of P30,000.00 plus interest at the legal rate computed
from June 17, 1988 until full payment. It also ordered petitioners to pay private
respondents, jointly and severally, the amounts of P250,000.00 as moral damages,
P50,000.00 as exemplary damages, P30,000.00 as attorneys fees, and the costs of the suit.
4
Petitioners brought the matter to the Court of Appeals, which, on October 14, 1997,
affirmed in toto the decision of the Regional Trial Court. Petitioners moved for
reconsideration, but their motion was denied by the appellate court on December 9, 1997.
Hence, this petition. Petitioners contend that
1. The Honorable Court of Appeals erred when it held that petitioners CDB and FEBTC
were aware of the decision dated March 23, 1984 of the Regional Trial Court of Quezon
City in Civil Case No. Q-39732.
2. The Honorable Court of Appeals erred in ordering petitioners to pay interest on the
deposit of THIRTY THOUSAND PESOS (P30,000.00) by applying Article 2209 of the
New Civil Code.
3. The Honorable Court of Appeals erred in ordering petitioners to pay moral damages,
exemplary damages, attorneys fees and costs of suit.
I.
At the outset, it is necessary to determine the legal relation, if any, of the
parties.chanrobles.com : law library
Petitioners deny that a contract of sale was ever perfected between them and private
respondent Lolita Chan Lim. They contend that Lims letter-offer clearly states that the
68
sum of P30,000.00 was given as option money, not as earnest money. 5 They thus conclude
that the contract between CDB and Lim was merely an option contract, not a contract of
sale.
The contention has no merit. Contracts are not defined by the parties thereto but by
principles of law. 6 In determining the nature of a contract, the courts are not bound by the
name or title given to it by the contracting parties. 7 In the case at bar, the sum of
P30,000.00, although denominated in the offer to purchase as "option money," is actually
in the nature of earnest money or down payment when considered with the other terms of
the offer. In Carceler v. Court of Appeals, 8 we explained the nature of an option contract,
viz.
An option contract is a preparatory contract in which one party grants to the other, for a
fixed period and under specified conditions, the power to decide, whether or not to enter
into a principal contract, it binds the party who has given the option not to enter into the
principal contract with any other person during the period designated, and within that
period, to enter into such contract with the one to whom the option was granted, if the latter
should decide to use the option. It is a separate agreement distinct from the contract to
which the parties may enter upon the consummation of the option.
An option contract is therefore a contract separate from and preparatory to a contract of
sale which, if perfected, does not result in the perfection or consummation of the sale. Only
when the option is exercised may a sale be perfected.
In this case, however, after the payment of the 10% option money, the Offer to Purchase
provides for the payment only of the balance of the purchase price, implying that the
"option money" forms part of the purchase price. This is precisely the result of paying
earnest money under Art. 1482 of the Civil Code. It is clear then that the parties in this case
actually entered into a contract of sale, partially consummated as to the payment of the
price. Moreover, the following findings of the trial court based on the testimony of the
witnesses establish that CDB accepted Lims offer to purchase:chanrob1es virtual 1aw
library
It is further to be noted that CDB and FEBTC already considered plaintiffs offer as good
and no longer subject to a final approval. In his testimony for the defendants on February
13, 1992, FEBTCs Leomar Guzman stated that he was then in the Acquired Assets
Department of FEBTC wherein plaintiffs offer to purchase was endorsed thereto by
Myoresco Abadilla, CDBs senior vice-president, with a recommendation that the
necessary petition for writ of possession be filed in the proper court; that the
recommendation was in accord with one of the conditions of the offer, i.e., the clearing of
the property of illegal occupants or tenants (tsn, p. 12); that, in compliance with the
request, a petition for writ of possession was thereafter filed on July 22, 1988 (Exhs. 1 and
1-A); that the offer met the requirements of the banks; and that no rejection of the offer was
thereafter relayed to the plaintiffs (p. 17); which was not a normal procedure, and neither
did the banks return the amount of P30,000.00 to the plaintiffs. 9
Given CDBs acceptance of Lims offer to purchase, it appears that a contract of sale was
perfected and, indeed, partially executed because of the partial payment of the purchase
price. There is, however, a serious legal obstacle to such sale, rendering it impossible for
CDB to perform its obligation as seller to deliver and transfer ownership of the property.
Nemo dat quod non habet, as an ancient Latin maxim says. One cannot give what one does
not have. In applying this precept to a contract of sale, a distinction must be kept in mind
between the "perfection" and "consummation" stages of the contract.
A contract of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price. 10 It is, therefore, not required that,
at the perfection stage, the seller be the owner of the thing sold or even that such subject
matter of the sale exists at that point in time. 11 Thus, under Art. 1434 of the Civil Code,
when a person sells or alienates a thing which, at that time, was not his, but later acquires
title thereto, such title passes by operation of law to the buyer or grantee. This is the same
principle behind the sale of "future goods" under Art. 1462 of the Civil Code. However,
under Art. 1459, at the time of delivery or consummation stage of the sale, it is required
that the seller be the owner of the thing sold. Otherwise, he will not be able to comply with
his obligation to transfer ownership to the buyer. It is at the consummation stage where the
principle of nemo dat quod non habet applies.chanrobles.com : law library
In Dignos v. Court of Appeals, 12 the subject contract of sale was held void as the sellers of
the subject land were no longer the owners of the same because of a prior sale. 13 Again, in
Nool v. Court of Appeals, 14 we ruled that a contract of repurchase, in which the seller
does not have any title to the property sold, is invalid:chanrob1es virtual 1aw library
We cannot sustain petitioners view. Article 1370 of the Civil Code is applicable only to
valid and enforceable contracts. The Regional Trial Court and the Court of Appeals ruled
that the principal contract of sale contained in Exhibit C and the auxiliary contract of
repurchase in Exhibit D are both void. This conclusion of the two lower courts appears to
find support in Dignos v. Court of Appeals, where the Court held:jgc:chanrobles.com.ph
"Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses,
they were no longer owners of the same and the sale is null and void."cralaw virtua1aw
library
In the present case, it is clear that the sellers no longer had any title to the parcels of land at
the time of sale. Since Exhibit D, the alleged contract of repurchase, was dependent on the
validity of Exhibit C, it is itself void. A void contract cannot give rise to a valid one. Verily,
Article 1422 of the Civil Code provides that (a) contract which is the direct result of a
69
previous illegal contract, is also void and inexistent."cralaw virtua1aw library
We should however add that Dignos did not cite its basis for ruling that a "sale is null and
void" where the sellers "were no longer the owners" of the property. Such a situation
(where the sellers were no longer owners) does not appear to be one of the void contracts
enumerated in Article 1409 of the Civil Code. Moreover, the Civil Code itself recognizes a
sale where the goods are to be acquired . . . by the seller after the perfection of the contract
of sale, clearly implying that a sale is possible even if the seller was not the owner at the
time of sale, provided he acquires title to the property later on.
In the present case, however, it is likewise clear that the sellers can no longer deliver the
object of the sale to the buyers, as the buyers themselves have already acquired title and
delivery thereof from the rightful owner, the DBP. Thus, such contract may be deemed to
be inoperative and may thus fall, by analogy, under item No. 5 of Article 1409 of the Civil
Code: Those which contemplate an impossible service. Article 1459 of the Civil Code
provides that "the vendor must have a right to transfer the ownership thereof [subject of the
sale] at the time it is delivered." Here, delivery of ownership is no longer possible. It has
become impossible. 15
In this case, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo
Guansing must, therefore, be deemed a nullity for CDB did not have a valid title to the said
property To be sure, CDB never acquired a valid title to the property because the
foreclosure sale, by virtue of which the property had been awarded to CDB as highest
bidder, is likewise void since the mortgagor was not the owner of the property foreclosed.
A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art.
1458 of the Civil Code, under which the mortgagor in default, the forced seller, becomes
obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is
obliged to pay therefor the bid price in money or its equivalent. Being a sale, the rule that
the seller must be the owner of the thing sold also applies in a foreclosure sale. This is the
reason Art. 2085 16 of the Civil Code, in providing for the essential requisites of the
contract of mortgage and pledge, requires, among other things, that the mortgagor or
pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a
possible foreclosure sale should the mortgagor default in the payment of the loan.
There is, however, a situation where, despite the fact that the mortgagor is not the owner of
the mortgaged property, his title being fraudulent, the mortgage contract and any
foreclosure sale arising therefrom are given effect by reason of public policy. This is the
doctrine of "the mortgagee in good faith" based on the rule that all persons dealing with
property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required
to go beyond what appears on the face of the title. 17 The public interest in upholding the
indefeasibility of a certificate of title, as evidence of the lawful ownership of the land or of
any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon
what appears on the face of the certificate of title.
This principle is cited by petitioners in claiming that, as a mortgagee bank, it is not
required to make a detailed investigation of the history of the title of the property given as
security before accepting a mortgage.
We are not convinced, however, that under the circumstances of this case, CDB can be
considered a mortgagee in good faith. While petitioners are not expected to conduct an
exhaustive investigation on the history of the mortgagors title, they cannot be excused
from the duty of exercising the due diligence required of banking institutions. In Tomas v.
Tomas, 18 we noted that it is standard practice for banks, before approving a loan, to send
representatives to the premises of the land offered as collateral and to investigate who are
the real owners thereof, noting that banks are expected to exercise more care and prudence
than private individuals in their dealings, even those involving registered lands, for their
business is affected with public interest. We held thus:chanrob1es virtual 1aw library
We, indeed, find more weight and vigor in a doctrine which recognizes a better right for the
innocent original registered owner who obtained his certificate of title through perfectly
legal and regular proceedings, than one who obtains his certificate from a totally void one,
as to prevail over judicial pronouncements to the effect that one dealing with a registered
land, such as a purchaser, is under no obligation to look beyond the certificate of title of the
vendor, for in the latter case, good faith has yet to be established by the vendee or
transferee, being the most essential condition, coupled with valuable consideration, to
entitle him to respect for his newly acquired title even as against the holder of an earlier
and perfectly valid title. There might be circumstances apparent on the face of the
certificate of title which could excite suspicion as to prompt inquiry, such as when the
transfer is not by virtue of a voluntary act of the original registered owner, as in the instant
case, where it was by means of a self-executed deed of extra-judicial settlement, a fact
which should be noted on the face of Eusebia Tomas certificate of title. Failing to make
such inquiry would hardly be consistent with any pretense of good faith, which the
appellant bank invokes to claim the right to be protected as a mortgagee, and for the
reversal of the judgment rendered against it by the lower court. 19
In this case, there is no evidence that CDB observed its duty of diligence in ascertaining the
validity of Rodolfo Guansings title. It appears that Rodolfo Guansing obtained his
fraudulent title by executing an Extra-Judicial Settlement of the Estate With Waiver where
he made it appear that he and Perfecto Guansing were the only surviving heirs entitled to
the property, and that Perfecto had waived all his rights thereto. This self-executed deed
should have placed CDB on guard against any possible defect in or question as to the
mortgagors title. Moreover, the alleged ocular inspection report 20 by CDBs
representative was never formally offered in evidence. Indeed, petitioners admit that they
are aware that the subject land was being occupied by persons other than Rodolfo
Guansing and that said persons, who are the heirs of Perfecto Guansing, contest the title of
70
Rodolfo. 21
II.
The sale by CDB to Lim being void, the question now arises as to who, if any, among the
parties was at fault for the nullity of the contract. Both the trial court and the appellate
court found petitioners guilty of fraud, because on June 16, 1988, when Lim was asked by
CDB to pay the 10% option money, CDB already knew that it was no longer the owner of
the said property, its title having been cancelled. 22 Petitioners contend that: (1) such
finding of the appellate court is founded entirely on speculation and conjecture; (2) neither
CDB nor FEBTC was a party in the case where the mortgagors title was cancelled; (3)
CDB is not privy to any problem among the Guansings; and (4) the final decision
cancelling the mortgagors title was not annotated in the latters title.chanrobles
virtuallawlibrary
As a rule, only questions of law may be raised in a petition for review, except in
circumstances where questions of fact may be properly raised. 23 Here, while petitioners
raise these factual issues, they have not sufficiently shown that the instant case falls under
any of the exceptions to the above rule. We are thus bound by the findings of fact of the
appellate court. In any case, we are convinced of petitioners negligence in approving the
mortgage application of Rodolfo Guansing.
III.
We now come to the civil effects of the void contract of sale between the parties. Article
1412(2) of the Civil Code provides:chanrob1es virtual 1aw library
If the act in which the unlawful or forbidden cause consists does not constitute a criminal
offense, the following rules shall be observed:chanrob1es virtual 1aw library
x x x Aladin B. Bermudez, for Defendants-Appellants.
(2) When only one of the contracting parties is at fault, he cannot recover what he has
given by reason of the contract, or ask for the fulfillment of what has been promised him.
The other, who is not at fault, may demand the return of what he has given without any
obligation to comply with his promise.
Private respondents are thus entitled to recover the P30,000.00 option money paid by them.
Moreover, since the filing of the action for damages against petitioners amounted to a
demand by respondents for the return of their money, interest thereon at the legal rate
should be computed from August 29, 1989, the date of filing of Civil Case No. Q-89-2863,
not June 17, 1988, when petitioners accepted the payment. This is in accord with our ruling
in Castillo v. Abalayan 24 that in case of a void sale, the seller has no right whatsoever to
keep the money paid by virtue thereof and should refund it, with interest at the legal rate,
computed from the date of filing of the complaint until fully paid. Indeed, Art. 1412(2)
which provides that the non-guilty party "may demand the return of what he has given"
clearly implies that without such prior demand, the obligation to return what was given
does not become legally demandable.
Considering CDBs negligence, we sustain the award of moral damages on the basis of
Arts. 21 and 2219 of the Civil Code and our ruling in Tan v. Court of Appeals 25 that moral
damages may be recovered even if a banks negligence is not attended with malice and bad
faith. We find, however, that the sum of P250,000.00 awarded by the trial court is
excessive. Moral damages are only intended to alleviate the moral suffering undergone by
private respondents, not to enrich them at the expense of the petitioners. 26 Accordingly,
the award of moral damages must be reduced to P50,000.00.
Likewise, the award of P50,000.00 as exemplary damages, although justified under Art.
2232 of the Civil Code, is excessive and should be reduced to P30,000.00. The award of
P30,000.00 attorneys fees based on Art. 2208, pars. 1, 2, 5 and 11 of the Civil Code should
similarly be reduced to P20,000.00.chanroblesvirtuallawlibrary
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the
MODIFICATION as to the award of damages as above stated.
SO ORDERED.
[G.R. No. L-17072. October 31, 1961. ]
CRISTINA MARCELO VDA. DE BAUTISTA, Plaintiff-Appellee, v. BRIGIDA
MARCOS, ET AL., Defendants-Appellants.
Cube & Fajardo for Plaintiff-Appellee.
SYLLABUS
1. HOMESTEAD; MORTGAGES; CONTRACT OF MORTGAGE EXECUTED
BEFORE ISSUANCE OF PATENT VOID AND INEFFECTIVE. As it is an essential
requisite for the validity of a mortgage that the mortgagor be the absolute owner of the
71
thing mortgaged (Art. 2085, N.C.C.) , and it appearing that the mortgage was constituted
before the issuance of the patent to the mortgagor, the mortgage in question is void and
ineffective.
2. ID.; ID.; POSSESSION TRANSFERRED TO MORTGAGEE IN USUFRUCT;
INVALIDITY OF MORTGAGE CONTRACT DOES NOT INVALIDATE TRANSFER
OF POSSESSION; MORTGAGEE IS POSSESSOR IN GOOD FAITH AND ENTITLED
TO THE FRUITS. The invalidity of the mortgage contract does not imply the
concomitant invalidity of the collateral agreement whereby possession of the land
mortgaged was transferred to the mortgagee in usufruct, and the latter, not having been
aware of any flaw in her mode of acquisition, is a possessor in good faith (Art. 526,
N.C.C.) entitled to all the fruits received during the entire period of her possession in good
faith (Art. 544, N.C.C.) .
3. OBLIGATIONS AND CONTRACTS; HOMESTEAD CANNOT BE MADE TO
ANSWER FOR DEBTS CONTRACTED WITHIN FIVE YEARS FROM ISSUANCE OF
PATENT; PROHIBITION INCLUDES DEBTS CONTRACTED BEFORE ISSUANCE
OF PATENT; PURPOSE AND POLICY OF THE LAW. A homestead cannot be taken
for the satisfaction of debts contracted prior to the expiration of five years from the
issuance of the patent (Sec. 118, C.A. No. 141). This prohibition should include debts
contracted before such issuance because the purpose and policy of the law is to preserve
and keep in the family of the homesteader that portion of public land which the State has
gratuitously given to him (Pascua v. Talens, 80 Phil., 792; 45 Off. Gaz., No. 9 (Supp.) 413;
De los Santos v. Roman Catholic Church of Midsayap, 94 Phil., 405; 50 Off. Gaz., [4]
1588.
DECISION
REYES, J.B.L., J.:
The main question in this appeal is whether or not a mortgagee may foreclose a mortgage
on a piece of land covered by a free patent where the mortgage was executed before the
patent was issued and is sought to be foreclosed within five years from its issuance.
The facts of the case appear to be as follows:chanrob1es virtual 1aw library
On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000 from
plaintiff Cristina Marcelo Vda. de Bautista and to secure payment thereof conveyed to the
latter by way of mortgage a two (2) hectare portion of an unregistered parcel of land
situated in Sta. Ignacia, Tarlac. The deed of mortgage, Exhibit "A", provided that it was to
last for three years, that possession of the land mortgaged was to be turned over to the
mortgagee by way of usufruct, but with no obligation on her part to apply the harvests to
the principal obligation; that said mortgage would be released only upon payment of the
principal loan of P2,000 without any interest and that the mortgagor promised to defend
and warrant the mortgagees rights over the land mortgaged.
Subsequently, or in July, 1956, mortgagor Brigida Marcos filed, in behalf of the heirs of her
deceased mother Victoriana Cainglet (who are Brigida herself and her three sisters), an
application for the issuance of a free patent over the land in question, on the strength of the
cultivation and occupation of said land by them and their predecessor since July, 1915. As a
result, Free Patent No. V-64358 was issued to the applicants on January 25, 1957, and on
February 22, 1957, it was registered in their names under Original Certificate of Title No.
P-888 of the office of the Register of Deeds for the province of Tarlac.
Defendant Brigida Marcos indebtedness of P2,000 to plaintiff having remained unpaid up
to 1959, the latter, on March 4, 1959, filed the present action against Brigida and her
husband (Civil Case No. 3382) in the court below for the payment thereof, or in default of
the debtors to pay, for the foreclosure of her mortgage on the land given as security.
Defendants moved to dismiss the action, pointing out that the land in question is covered
by a free patent and could not, therefore, under the Public Land Law, be taken within five
years from the issuance of the patent for the payment of any debts of the patentees
contracted prior to the expiration of said five-year period; but the lower court denied the
motion to dismiss on the ground that the law cited does not apply because the mortgage
sought to be foreclosed was executed before the patent was issued. Defendants then filed
their answer, reiterating the defense invoked in their motion to dismiss, and alleging as well
that the real contract between the parties was an antichresis and not a mortgage. Pre-trial of
the case followed, after which the lower court rendered judgment finding the mortgage
valid to the extent of the mortgagors pro-indiviso share of 15,333 square meters in the
land in question, on the theory that the Public Land Law does not apply in this case
because the mortgage in question was executed before patent was issued over the land in
question; that the agreement of the parties could not be an antichresis because the deed
Exhibit "A" clearly shows a mortgage with usufruct in favor of the mortgagee; and ordered
the payment of the mortgage loan of P2,000 to plaintiff or, upon defendants failure to do
so, the foreclosure of plaintiffs mortgage on defendant Brigida Marcos undivided share in
the land in question. From this judgment, defendants Brigida Marcos and her husband
Osmondo Apolonio appealed to this Court.
There is merit in the appeal.
The right of plaintiff-appellee to foreclose her mortgage on the land in question depends
not so much on whether she could take said land within the prohibitive period of five years
from the issuance of defendants patent for the satisfaction of the indebtedness in question,
72
but on whether the deed of mortgage Exhibit "A" is at all valid and enforceable, since the
land mortgaged was apparently still part of the public domain when the deed of mortgage
was constituted. As it is an essential requisite for the validity of a mortgage that the
mortgagor be the absolute owner of the thing mortgaged (Art. 2085), the mortgage here in
question is void and ineffective because at the time it was constituted, the mortgagor was
not yet the owner of the land mortgaged and could not, for that reason, encumber the same
to plaintiff-appellee. Nor could the subsequent acquisition by the mortgagor of title over
said land through the issuance of a free patent validate and legalize the deed of mortgage
under the doctrine of estoppel (cf. Art. 1434, New Civil Code, 1), since upon the issuance
of said patent, the land in question was thereby brought under the operation of the Public
Land Law that prohibits the taking of said land for the satisfaction of debts contracted prior
to the expiration of five years from the date of the issuance of the patent (sec. 118, C.A.
No. 141). This prohibition should include not only debts contracted during the five-year
period immediately following the issuance of the patent but also those contracted before
such issuance, if the purpose and policy of the law, which is "to preserve and keep in the
family of the homesteader that portion of public land which the State has gratuitously given
to him" (Pascua v. Talens, 45 O.G. No. 9 [Supp. ] 413; De los Santos v. Roman Catholic
Church of Midsayap, G.R. No. L-6088, Feb. 24, 1954), is to be upheld.

The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant
invalidity of the collateral agreement in the same deed of mortgage whereby possession of
the land mortgaged was transferred to plaintiff-appellee in usufruct, without any obligation
on her part to account for its harvests or deduct them from defendants indebtedness of
P2,000. Defendant Brigida Marcos, who, together with her sisters, was in possession of
said land by herself and through her deceased mother before her since 1915, had
possessory rights over the same even before title vested in her as co-owner by the issuance
of the free patent to her and her sisters, and these possessory rights, she could validly
transfer and convey to plaintiff- appellee, as she did in the deed of mortgage Exhibit "A." [G.R. No. L-64159. September 10, 1985.]
The latter, upon the other hand, believing her mortgagor to be the owner of the land
mortgaged and not being aware of any flaw which invalidated her mode of acquisition, was CIRCLE S. DURAN and ANTERO S. GASPAR, Petitioners, v. INTERMEDIATE
a possessor in good faith (Art. 526, N.C.C.) , and as such had the right to all the fruits APPELLATE COURT, ERLINDA B. MARCELO-TIANGCO and RESTITUTO
received during the entire period of her possession in good faith (Art. 544, N.C.C.) . She is, TIANGCO, Respondents.
therefore, entitled to the full payment of her credit of P2,000 from defendants, without any
obligation to account for the fruits or benefits obtained by her from the land in question.
DECISION
WHEREFORE, the judgment appealed from is reversed insofar as it orders the foreclosure
of the mortgage in question, but affirmed in all other respects. Costs against defendant-
appellants. RELOVA, J.:

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

73
"(1) the complaint of the plaintiffs (herein petitioners) is hereby DISMISSED;
(2) the defendants-appellants spouses Erlinda B. Marcelo Tiangco and Restituto Tiangco
(herein private respondents) are hereby declared the lawful owners of the two (2) parcels of
land and all the improvements thereon including the 12-door apartment thereon described
in the complaint, in the counterclaim in the cross-claim, and in the Sheriffs Certificate of
Sale;
(3) the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby ordered to
deliver to (the Tiangcos) the two parcels of land and all the improvements thereon
including the 12-door apartment thereon, subject matter of the complaint, counterclaim,
and cross-claim, and in the Sheriffs Certificate of Sale;
(4) the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby ordered to
pay solidarily to the Tiangcos the sum of Two Thousand Four Hundred Pesos (P2,400) a
month from May 16, 1972 until delivery of possession of the properties in question to said
Tiangco spouses, representing rentals collected by plaintiffs-appellants and defendant-
appellee Fe S. Duran;
(5) the plaintiffs-appellants and defendant-appellee Fe S. Duran are hereby ordered to pay
solidarily to the spouses Tiangco the sum of Twenty Thousand Pesos (P20,000) as damages
for attorneys fees, and the sum of Twenty-Five Thousand Pesos (P25,000) for moral
damages, and the costs." (pp. 149-150, Rollo).
The antecedent facts showed that petitioner Circe S. Duran owned two (2) parcels of land
(Lots 5 and 6, Block A, Psd 32780) covered by Transfer Certificate of Title No. 1647 of the
Register of Deeds of Caloocan City which she had purchased from the Moja Estate. She
left the Philippines in June 1954 and returned in May 1966.
On May 13, 1963, a Deed of Sale of the two lots mentioned above was made in favor of
Circes mother, Fe S. Duran who, on December 3, 1965, mortgaged the same property to
private respondent Erlinda B. Marcelo-Tiangco. When petitioner Circe S. Duran came to
know about the mortgage made by her mother, she wrote the Register of Deeds of
Caloocan City informing the latter that she had not given her mother any authority to sell
or mortgage any of her properties in the Philippines. Failing to get an answer from the
registrar, she returned to the Philippines. Meanwhile, when her mother, Fe S. Duran, failed
to redeem the mortgage properties, foreclosure proceedings were initiated by private
respondent Erlinda B. Marcelo-Tiangco and, ultimately, the sale by the sheriff and the
issuance of Certificate of Sale in favor of the latter.chanrobles.com:cralaw:red
Petitioner Circe S. Duran claims that the Deed of Sale in favor of her mother Fe S. Duran is
a forgery, saying that at the time of its execution in 1963 she was in the United States. On
the other hand, the adverse party alleges that the signatures of Circe S. Duran in the said
Deed are genuine and, consequently, the mortgage made by Fe S. Duran in favor of private
respondent is valid.
With respect to the issue as to whether the signature of petitioner Circe S. Duran in the
Deed of Sale is a forgery or not, respondent appellate court held the same to be genuine
because there is the presumption of regularity in the case of a public document and "the
fact that Circe has not been able to satisfactorily prove that she was in the United States at
the time the deed was executed in 1963. Her return in 1966 does not prove she was not here
also in 1963, and that she did not leave shortly after 1963. She should have presented her
old passport, not her new one. But even if the signatures were a forgery, and the sale would
be regarded as void, still it is Our opinion that the Deed of Mortgage is VALID, with
respect to the mortgagees, the defendants-appellants. While it is true that under Art. 2086
of the Civil Code, it is essential that the mortgagor be the absolute owner of the property
mortgaged, and while as between the daughter and the mother, it was the daughter who still
owned the lots, STILL insofar as innocent third persons are concerned the owner was
already the mother (Fe S. Duran) inasmuch as she had already become the registered owner
(Transfer Certificates of Title Nos. 2418 and 2419). The mortgagee had the right to rely
upon what appeared in the certificate of title, and did not have to inquire further. If the rule
were otherwise, the efficacy and conclusiveness of Torrens Certificate of Titles would be
futile and nugatory. Thus the rule is simple: the fraudulent and forged document of sale
may become the root of a valid title if the certificate has already been transferred from the
name of the true owner to the name indicated by the forger (See De la Cruz v. Fabie, 35
Phil. 144; Blondeau, Et. Al. v. Nano Et. Al., 61 Phil. 625; Fule Et. Al. v. Legare Et. Al., 7
SCRA 351; see also Sec. 55 of Act No. 496, the Land Registration Act). The fact that at the
time of the foreclosure sale proceedings (1970-72) the mortgagees may have already
known of the plaintiffs claim is immaterial. What is important is that at the time the
mortgage was executed, the mortgagees in good faith actually believed Fe S. Duran to be
the owner, as evidenced by the registration of the property in the name of said Fe S. Duran
(pp. 146-147, Rollo)." chanrobles law library : red
In elevating the judgment of the respondent appellate court to Us for review, petitioners
discussed questions of law which, in effect and substance, raised only one issue and that is
whether private respondent Erlinda B. Marcelo-Tiangco was a buyer in good faith and for
value.
Guided by previous decisions of this Court, good faith consists in the possessors belief
that the person from whom he received the thing was the owner of the same and could
convey his title (Arriola v. Gomez dela Serna, 14 Phil. 627). Good faith, while it is always
to be presumed in the absence of proof to the contrary, requires a well-founded belief that
the person from whom title was received was himself the owner of the land, with the right
to convey it (Santiago v. Cruz, 19 Phil. 148). There is good faith where there is an honest
intention to abstain from taking any unconscientious advantage from another (Fule v.
Legare, 7 SCRA 351). Otherwise stated, good faith is the opposite of fraud and it refers to
74
the state of mind which is manifested by the acts of the individual concerned. In the case at
bar, private respondents, in good faith relied on the certificate of title in the name of Fe S.
Duran and as aptly stated by respondent appellate court" [e]ven on the supposition that the
sale was void, the general rule that the direct result of a previous illegal contract cannot be
valid (on the theory that the spring cannot rise higher than its source) cannot apply here for
We are confronted with the functionings of the Torrens System of Registration. The
doctrine to follow is simple enough: a fraudulent or forged document of sale may become
the ROOT of a valid title if the certificate of title has already been transferred from the
name of the true owner to the name of the forger or the name indicated by the forger." (p.
147, Rollo)

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

Likewise, We take note of the finding and observation of respondent appellate court in that
petitioners were guilty of estoppel by laches "in not bringing the case to court within a
[G.R. No. 134330. March 1, 2001.]
reasonable period. Antero Gaspar, husband of Circe, was in the Philippines in 1964 to
construct the apartment on the disputed lots. This was testified to by Circe herself (tsn., p.
SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, Petitioners, v.
41, Nov. 27, 1973). In the process of construction, specifically in the matter of obtaining a
PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and ARSENIA
building permit, he could have discovered that the deed of sale sought to be set aside had
ESLABON, Respondents.
been executed on May 13, 1963 (the building permit needed an application by the apparent
owner of the land, namely, Circes mother, Fe S. Duran). And then again both plaintiffs
DECISION
could have intervened in the foreclosure suit but they did not. They kept silent until almost
the last moment when they finally decided, shortly before the sheriffs sale, to file a third-
party claim. Clearly, the plaintiffs can be faulted for their estoppel by laches." (p. 148,
Rollo)chanrobles law library : red DE LEON, JR., J.:

IN VIEW OF THE FOREGOING, We find the petition without merit and hereby
AFFIRMED in toto the decision of respondent appellate court promulgated on August 12, Before us is a petition for review on certiorari of the Decision 1 and Resolution 2 in CA-
1981. 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
SO ORDERED. Court of Roxas City, Branch 19 in a suit 5 for Declaration of Nullity of the Contract of
75
Mortgage.chanrob1es virtua1 1aw 1ibrary
The facts are as follows:chanrob1es virtual 1aw library
Eduarda Belo owned an agricultural land with an area of six hundred sixty one thousand
two hundred eighty eight (661,288) square meters located in Timpas, Panitan, Capiz,
covered and described in Transfer Certificate of Title (TCT for brevity) No. T-7493. She
leased a portion of the said tract of land to respondents spouses Marcos and Arsenia
Eslabon in connection with the said spouses sugar plantation business. The lease contract
was effective for a period of seven (7) years at the rental rate of Seven Thousand Pesos
(P7,000.00) per year.
To finance their business venture, respondents spouses Eslabon obtained a loan from
respondent Philippine National Bank (PNB for brevity) secured by a real estate mortgage
on their own four (4) residential houses located in Roxas City, as well as on the agricultural
land owned by Eduarda Belo. The assent of Eduarda Belo to the mortgage was acquired
through a special power of attorney which she executed in favor of respondent Marcos
Eslabon on June 15, 1982.
Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation,
extrajudicial foreclosure proceedings against the mortgaged properties were instituted by
respondent PNB. At the auction sale on June 10, 1991, respondent PNB was the highest
bidder of the foreclosed properties at Four Hundred Forty Seven Thousand Six Hundred
Thirty Two Pesos (P447,632.00).
In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale at
public auction of her agricultural land on June 10, 1991 as well as the registration of the
Certificate of Sheriffs Sale in its favor on July 1, 1991, and the one-year period to redeem
the land.
Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique and
Florencia Belo under a deed of absolute sale of proprietary and redemption rights.
Before the expiration of the redemption period, petitioners spouses Belo tendered payment
for the redemption of the agricultural land in the amount of Four Hundred Eighty Four
Thousand Four Hundred Eighty Two Pesos and Ninety Six Centavos (P484,482.96), which
includes the bid price of respondent PNB, plus interest and expenses as provided under Act
No. 3135.
However, respondent PNB rejected the tender of payment of petitioners spouses Belo. It
contended that the redemption price should be the total claim of the bank on the date of the
auction sale and custody of property plus charges accrued and interests amounting to Two
Million Seven Hundred Seventy Nine Thousand Nine Hundred Seventy Eight and Seventy
Two Centavos (P2,779,978.72). 6 Petitioners spouses disagreed and refused to pay the said
total claim of respondent PNB.
On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of Roxas
City, Civil Case No. V-6182 which is an action for declaration of nullity of mortgage, with
an alternative cause of action, in the event that the accommodation mortgage be held to be
valid, to compel respondent PNB to accept the redemption price tendered by petitioners
spouses Belo which is based on the winning bid price of respondent PNB in the
extrajudicial foreclosure in the amount of Four Hundred Forty Seven Thousand Six
Hundred Thirty Two Pesos (P447,632.00) plus interest and expenses.
In its Answer, respondent PNB raised, among others, the following defenses, to
wit:chanrob1es virtual 1aw library
x x x
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.chanrob1es virtua1 1aw 1ibrary
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
x x x
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:chanrob1es virtual 1aw library
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:chanrob1es virtual
1aw library
1. Making the injunction issued by the court permanent, insofar as the property of Eduarda
76
Belo covered by Transfer Certificate of Title No. T-7493 is concerned;
2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo to
redeem only Eduarda Belos property situated in Brgy. Timpas, Panitan, Capiz, and covered
by Transfer Certificate of Title No. T-7493 by paying only its bid price of P447,632.00,
plus interest and other charges provided for in Section 30, Rule 39 of the Rules of Court,
less the loan value, as originally appraised by said defendant Bank, of the foreclosed four
(4) residential lots of defendants Spouses Marcos and Arsenia Eslabon; and
3. Dismissing for lack of merit the respective counterclaims of defendants Philippine
National Bank and spouses Marcos and Arsenia Eslabon.
With costs against defendants.
SO ORDERED. 9
Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to the
Court of Appeals. In its Decision rendered on May 21, 1998, the appellate court, while
upholding the decision of the trial court on the validity of the real estate mortgage on
Eduarda Belos property, the extrajudicial foreclosure and the public auction sale, modified
the trial courts finding on the appropriate redemption price by ruling that the petitioners
spouses Belo should pay the entire amount due to PNB under the mortgage deed at the time
of the foreclosure sale plus interest, costs and expenses. 10
Petitioners spouses Belo sought reconsideration 11 of the said Decision but the same was
denied by the appellate court in its Resolution promulgated on June 29, 1998, ratiocinating,
thus:chanrob1es virtual 1aw library
Once more, the Court shies away from declaring the nullity of the mortgage contract
obligating Eduarda Belo as co-mortgagor, considering that it has not been sufficiently
established that Eduarda Belos assent to the special power of attorney and to the mortgage
contract was tainted by any vitiating cause. Moreover, in tendering an offer to redeem the
property (Exhibit "20", p. 602 Record) after its extrajudicial foreclosure, she has thereby
admitted the validity of the mortgage, as well as the transactions leading to its inception.
Eduarda Belo, and the appellees as mere assignees of Eduardas right to redeem the
property, are therefore estopped from questioning the efficacy of the mortgage and its
subsequent foreclosure. 12
The appellate court further declared that petitioners spouses Belo are obligated to pay the
total banks claim representing the redemption price for the foreclosed properties, as
provided by Section 25 of P.D No. 694, holding that:chanrob1es virtual 1aw library
On the other hand, the courts ruling that the appellees, being the assignee of the right of
repurchase of Eduarda Belo, were bound by the redemption price as provided by Section
25 of P.D. 694, stands. The attack on the constitutionality of Section 25 of P.D. 694 cannot
be allowed, as the High Court, in previous instances, (Dulay v. Carriaga, 123 SCRA 794
[1983]; Philippine National Bank v. Remigio, 231 SCRA 362 [1994]) has regarded the said
provision of law with respect, using the same in determining the proper redemption price in
foreclosure of mortgages involving the PNB as mortgagee.
The terms of the said provision are quite clear and leave no room for qualification, as the
appellees would have us rule. The said rule, as amended, makes no specific distinction as
to assignees or transferees of the mortgagor of his redemptive right. In the absence of such
distinction by the law, the Court cannot make a distinction. As admitted assignees of
Eduarda Belos right of redemption, the appellees succeed to the precise right of Eduarda
including all conditions attendant to such right.
Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code)
will extend to apply in the redemption stage of the mortgage.chanrob1es virtua1 1aw
1ibrary
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:chanrob1es virtual 1aw library
x x x
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:chanrob1es virtual 1aw library
(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA BELO
IN FAVOR OF RESPONDENT ESLABON WAS NULL AND VOID:chanrob1es virtual
1aw library
(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT
MARCOS ESLABON UNDER SAID INVALID SPECIAL POWER OF ATTORNEY IS
ALSO NULL AND VOID;
77
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:chanrob1es virtual 1aw library
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.
x x x P2,779,978.72 as of the date of the public auction sale on June 10, 1991.
2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. "D") used to bind
Eduarda Belo as accommodation mortgagor authorized the agent Eslabons to borrow and
mortgage her agricultural land for her (Eduarda Belo) use and benefit. Instead, said PNB
SPA Form No. 74 was used by debtors Eslabons and PNB to bind Eduarda Belo as
accommodation mortgagor for the crop loan extended by PNB to the Eslabons.
3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without
specifying the amount of the loan to be granted by respondent PNB to the respondents-
debtors Eslabons upon assurance by the PNB manager that the SPA was merely a formality
and that the bank will not lend beyond the value of the four (4) [Roxas City] residential lots
located in Roxas City mortgaged by respondents-debtors Eslabons (see Exhibit "D" ;
Eduarda Belos deposition, Exhibit "V", pp. 7 to 24).chanrob1es virtua1 1aw 1ibrary
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).
x x x
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.
x x x
6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belos
agricultural land expressly reserved the right to question the legality of the accommodation
mortgage in the event that said tender to redeem was rejected by PNB (Exh. "I"). 15
Petitioners present basically two (2) issues before this Court. First, whether or not the
Special Power of Attorney (SPA for brevity), the real estate mortgage contract, the
foreclosure proceedings and the subsequent auction sale involving Eduarda Belos property
are valid. Second, assuming they are valid, whether or not the petitioners are required to
pay, as redemption price, the entire claim of respondent PNB in the amount of
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
78
and consideration; that it violates a concept in the law of agency which provides that the
contract entered into by the agent must always be for the benefit of the principal; and, that
it does not express the true intent of the parties.
The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the
subsequent auction sale of Eduarda Belos property are valid and legal.
First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to
petitioners failure to appeal the same after the trial court rendered its decision affirming
their validity. After the trial court rendered its decision granting petitioners their alternative
cause of action, i.e., that they can redeem the subject property on the basis of the winning
bid price of respondent PNB, petitioners did not anymore bother to appeal that decision on
their first cause of action. If they felt aggrieved by the trial courts decision upholding the
validity of the said two (2) documents, then they should have also partially appealed
therefrom but they did not. It is an abuse of legal remedies for petitioners to belatedly
pursue a claim that was settled with finality due to their own shortcoming. As held in
Caliguia v. National Labor Relations Commission, 16 where a party did not appeal from
the Labor Arbiters decision denying claims for actual, moral and exemplary damages and
instead moved for immediate execution, the decision then became final as to him and by
asking for its execution, he was estopped from relitigating his claims for damages.
Second, well-entrenched is the rule that the findings of trial courts which are factual in
nature, especially when affirmed by the Court of Appeals, deserve to be respected and
affirmed by the Supreme Court, provided it is supported by substantial evidence. 17 The
finding of facts of the trial court to the effect that Eduarda Belo was not induced by the
manager of respondent PNB but instead that she freely consented to the execution of the
SPA is given the highest respect as it was affirmed by the appellate court. In the case at bar,
the burden of proof was on the petitioners to prove or show that there was alleged
inducement and misrepresentation by the manager of respondent PNB and the spouses
Eslabon. Their allegation that Eduarda Belo only agreed to sign the SPA after she was
assured that the spouses Eslabon would not borrow more than the value of their own four
(4) residential lots in Roxas City was properly objected to by respondent PNB. 18 Also
their contention that Eduarda Belo signed the SPA in blank was properly objected to by
respondent PNB on the ground that the best evidence was the SPA. There is also no proof
to sustain petitioners allegation that respondent PNB acted in bad faith and connived with
the debtors, respondents spouses Eslabon, to obtain Eduarda Belos consent to the
mortgage through fraud. Eduarda Belo very well knew that the respondents spouses
Eslabon would use her property as additional mortgage collateral for loans inasmuch as the
mortgage contract states that "the consideration of this mortgage is hereby initially fixed at
P229,000.00." 19 The mortgage contract sufficiently apprises Eduarda Belo that the
respondents spouses Eslabon can apply for more loans with her property as continuing
additional security. If she found the said provision questionable, she should have
complained immediately. Instead, almost ten (10) years had passed before she and the
petitioners sought the annulment of the said contracts.chanrob1es virtua1 1aw 1ibrary
Third, after having gone through the records, this Court finds that the courts a quo did not
err in holding that the SPA executed by Eduarda Belo in favor of the respondents spouses
Eslabon and the Real Estate Mortgage executed by the respondents spouses in favor of
respondent PNB are valid. It is stipulated in paragraph three (3) of the SPA that Eduarda
Belo appointed the Eslabon spouses "to make, sign, execute and deliver any contract of
mortgage or any other documents of whatever nature or kind . . . which may be necessary
or proper in connection with the loan herein mentioned, or with any loan which my
attorney-in-fact may contract personally in his own name . . . 20 This portion of the SPA is
quite relevant to the case at bar. This was the main reason why the SPA was executed in the
first place inasmuch as Eduarda Belo consented to have her land mortgaged for the benefit
of the respondents spouses Eslabon. The SPA was not meant to make her a co-obligor to
the principal contract of loan between respondent PNB, as lender, and the spouses Eslabon,
as borrowers. The accommodation real estate mortgage over her property, which was
executed in favor of respondent PNB by the respondents spouses Eslabon, in their capacity
as her attorneys-in-fact by virtue of her SPA, is merely an accessory contract.
Eduarda Belo consented to be an accommodation mortgagor in the sense that she signed
the SPA to authorize respondents spouses Eslabons to execute a mortgage on her land.
Petitioners themselves even acknowledged that the relation created by the SPA and the
mortgage contract was merely that of mortgagor-mortgagee relationship. The SPA form of
the PNB was utilized to authorize the spouses Eslabon to mortgage Eduarda Belos land as
additional collateral of the Eslabon spouses loan from respondent PNB. Thus, the
petitioners contention that the SPA is void is untenable. Besides, Eduarda Belo benefited,
in signing the SPA, in the sense that she was able to collect the rentals on her leased
property from the Eslabons. 21
An accommodation mortgage is not necessarily void simply because the accommodation
mortgagor did not benefit from the same. The validity of an accommodation mortgage is
allowed under Article 2085 of the New Civil Code which provides that" (t)hird persons
who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property." An accommodation mortgagor, ordinarily, is not himself a
recipient of the loan, otherwise that would be contrary to his designation as such. It is not
always necessary that the accommodation mortgagor be appraised beforehand of the entire
amount of the loan nor should it first be determined before the execution of the SPA for it
has been held that:jgc:chanrobles.com.ph
"(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
79
named in the mortgage, until the full amount of the advancements are paid." 22
Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to
respondent PNB manifesting her intent to redeem the property is a waiver of her right to
question the validity of the SPA and the mortgage contract as well as the foreclosure and
the sale of her subject property. Petitioners claim that her letter was not an offer to redeem
as it was merely a declaration of her intention to redeem. Respondent PNBs answer to her
letter would have carried certain legal effects. Had respondent PNB accepted her letter-
offer, it would have surely bound the bank into accepting the redemption price offered by
Eduarda Belo. If it was her opinion that her SPA and the mortgage contract were null and
void, she would not have manifested her intent to redeem but instead questioned their
validity before a court of justice. Her offer was a recognition on her part that the said
contracts are valid and produced legal effects. Inasmuch as Eduarda Belo is estopped from
questioning the validity of the contracts, her assignees who are the petitioners in the instant
case, are likewise estopped from disputing the validity of her SPA, the accommodation real
estate mortgage contract, the foreclosure proceedings, the auction sale and the Sheriffs
Certificate of Sale.
The second issue pertains to the applicable law on redemption to the case at bar.
Respondent PNB maintains that Section 25 of Presidential Decree No. 694 should apply,
thus:chanrob1es virtual 1aw library
SECTION 25. Right of redemption of foreclosed property Right of possession during
redemption period. Within one year from the registration of the foreclosure sale of real
estate, the mortgagor shall have the right to redeem the property by paying all claims of the
Bank against him on the date of the sale including all the costs and other expenses incurred
by reason of the foreclosure sale and custody of the property as well as charges and
accrued interests. 23
Additionally, respondent bank seeks the application to the case at bar of Section 78 of the
General Banking Act, as amended by P.D. No. 1828, which states that
. . . In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on
real estate which is security for any loan granted before the passage of this Act or under the
provisions of this Act, the mortgagor or debtor whose real property has been sold at public
auction, judicially or extrajudicially, for the full or partial payment of an obligation to any
bank, banking or credit institution, within the purview of this Act shall have the right,
within one year after the sale of the real estate as a result of the foreclosure of the
respective mortgage, to redeem the property by paying the amount fixed by the court in the
order of execution, or the amount due under the mortgage deed, as the case may be, with
interest thereon at the rate specified in the mortgage, and all the costs, and judicial and
other expenses incurred by the bank or institution concerned by reason of the execution and
sale and as a result of the custody of said property less the income received from the
property. 24
On the other hand, petitioners assert that only the amount of the winning bidders purchase
together with the interest thereon and on all other related expenses should be paid as
redemption price in accordance with Section 6 of Act No. 3135 which provides
that:chanrob1es virtual 1aw library
SECTION 6. In all cases in which an extrajudicial sale is made under the special power
hereinbefore referred to, the debtor, his successor in interest or any judicial creditor or
judgment creditor of said debtor, or any person having a lien on the property subsequent to
the mortgage or deed of trust under which the property is sold, may redeem the same at any
time within the term of one year from and after the date of the sale; and such redemption
shall be governed by the provisions of sections four hundred and sixty-four to four hundred
and sixty six, inclusive, of the Code of Civil Procedure25 , in so far as these are not
inconsistent with the provisions of this Act.cralawred
Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:chanrob1es
virtual 1aw library
SECTION 28. Time and manner of, and amounts payable on, successive redemptions;
notice to be given and filed. The judgment obligor, or redemptioner, may redeem the
property from the purchaser, at any time within one (1) year from the date of the
registration of the certificate of sale, by paying the purchaser the amount of his purchase,
within one per centum per month interest thereon in addition, up to the time of redemption,
together with the amount of any assessments or taxes which the purchaser may have paid
thereon after purchase, and interest on such last named amount at the same rate; and if the
purchaser be also a creditor having a prior lien to that of the redemptioner, other than the
judgment under which such purchase was made, the amount of such other lien, with
interest. (Emphasis supplied)
x x x
This Court finds the petitioners position on that issue to be meritorious.
There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation
mortgagor. The Pre-trial Order and respondent PNBs brief contain a declaration of this
fact. The dispute between the parties is whether Section 25 of P.D. No. 694 applies to an
accommodation mortgagor, or her assignees. The said legal provision does not make a
distinction between a debtor-mortgagor and an accommodation mortgagor as it uses the
broad term "mortgagor." The appellate court thus ruled that the provision applies even to an
accommodation mortgagor inasmuch as the law does not make any distinction. We
disagree. Where a word used in a statute has both a restricted and a general meaning, the
80
general must prevail over the restricted unless the nature of the subject matter or the
context in which it is employed clearly indicates that the limited sense is intended. 26 It is
presumed that the legislature intended exceptions to its language which would avoid absurd
consequences of this character. 27 In the case at bar, the qualification to the general rule
applies. The same provision of Section 25 of P.D. No. 694 provides that "the mortgagor
shall have the right to redeem the property by paying all claims of the Bank against him."
From said provision can be deduced that the mortgagor referred to by that law is one from
whom the bank has a claim in the form of outstanding or unpaid loan; he is also called a
borrower or debtor-mortgagor. On the other hand, respondent PNB has no claim against
accommodation mortgagor Eduarda Belo inasmuch as she only mortgaged her property to
accommodate the Eslabon spouses who are the loan borrowers of the PNB. The principal
contract is the contract of loan between the Eslabon spouses, as borrowers/debtors, and the
PNB as lender. The accommodation real estate mortgage (which secures the loan) is only
an accessory contract. It is our view and we hold that the term "mortgagor" in Section 25 of
P.D. No. 694 pertains only to a debtor-mortgagor and not to an accommodation mortgagor.
It is well settled that courts are not to give a statute a meaning that would lead to
absurdities. If the words of a statute are susceptible of more than one meaning, the
absurdity of the result of one construction is a strong argument against its adoption, and in
favor of such sensible interpretation. 28 We test a law by its result. A law should not be
interpreted so as not to cause an injustice. There are laws which are generally valid but may
seem arbitrary when applied in a particular case because of its peculiar circumstances. We
are not bound to apply them in slavish obedience to their language. 29
The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair and
unjust to accommodation mortgagors and their assignees. Forcing an accommodation
mortgagor like Eduarda Belo to pay for what the principal debtors (Eslabon spouses) owe
to respondent bank is to punish her for the accommodation and generosity she accorded to
the Eslabon spouses who were then hard pressed for additional collateral needed to secure
their bank loan. Respondents PNB and spouses Eslabons very well knew that she merely
consented to be a mere accommodation mortgagor.
The circumstances of the case at bar also provide for ample reason why petitioners cannot
be made to pay the entire liability of the principal debtors, Eslabon spouses, to respondent
PNB.chanrob1es virtua1 1aw 1ibrary
The trial court found that respondent PNBs application for extrajudicial foreclosure and
public auction sale of Eduarda Belos mortgaged property 30 was filed under Act No. 3135,
as amended by P.D. No. 385. The notice of extrajudicial sale, the Certificate of Sheriffs
Sale, and the letter it sent to Eduarda Belo did not mention P. D. No. 694 as the basis for
redemption. As aptly ruled by the trial court
In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for
value of their redemption rights, PNB should have at least advised them that redemption
would be governed by its Revised Charter or PD 69, and not by Act 3135 and the Rules of
Court, as commonly practiced . . . This practice of defendant Bank is manifestly unfair and
unjust to these redemptioners who are caught by surprise and usually taken aback by the
enormous claims of the Bank not shown in the Notice of Extrajudicial Sale or the
Certificate of Sheriffs Sale as in this case. 31
Moreover, the mortgage contract explicitly provides that." . . the mortgagee may
immediately foreclose this mortgage judicially in accordance with the Rules of Court or
extrajudicially in accordance with Act No. 3135, as amended and Presidential Decree No.
385 . . . 32 Since the mortgage contract in this case is in the nature of a contract of adhesion
as it was prepared solely by respondent, it has to be interpreted in favor of petitioners. The
respondent bank however tries to renege on this contractual commitment by seeking refuge
in the 1989 case of Sy v. Court of Appeals 33 wherein this Court ruled that the redemption
price is equal to the total amount of indebtedness to the banks claim inasmuch as Section
78 of the General Banking Act is an amendment to Section 6 of Act No. 3135, despite the
fact that the extrajudicial foreclosure procedure followed by the PNB was explicitly under
or in accordance with Act No. 3135.
In the 1996 case of China Banking Corporation v. Court of Appeals, 34 where the parties
also stipulated that Act No. 3135 is the controlling law in case of foreclosure, this Court
ruled that;
By invoking the said Act, there is no doubt that it must "govern the manner in which the
sale and redemption shall be effected." Clearly, the fundamental principle that contracts are
respected as the law between the contracting parties finds application in the present case,
specially where they are not contrary to law, morals, good customs and public policy. 35
More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases, 36 that
the General Banking Act and P.D. No. 694 shall prevail over Act No. 3135 with respect to
the redemption price, does not apply here inasmuch as in the said cases the redemptioners
were the debtors themselves or their assignees, and not an accommodation mortgagor or
the latters assignees such as in the case at bar. In the said cases, the debtor-mortgagors
were required to pay as redemption price their entire liability to the bank inasmuch as they
were obligated to pay their loan which is a principal obligation in the first place. On the
other hand, accommodation mortgagors as such are not in anyway liable for the payment of
the loan or principal obligation of the debtor/borrower The liability of the accommodation
mortgagors extends only up to the loan value of their mortgaged property and not to the
entire loan itself. Hence, it is only just that they be allowed to redeem their mortgaged
property by paying only the winning bid price thereof (plus interest thereon) at the public
auction sale.
One wonders why respondent PNB invokes Act No. 3135 in its contracts without
81
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:chanrob1es virtual 1aw
library
A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as the debt is not completely satisfied.
Neither can the creditors heir who received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in
mortgage or pledge, each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage
as the portion of the debt for which each thing is specially answerable is
satisfied.chanrob1es virtua1 1aw 1ibrary
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:chanrob1es virtual 1aw library
x x x
However, Paz Agudelo y Gonzaga (the principal) . . . gave her consent to the lien on lot
No. 878 . . . . This acknowledgment, however, does not extend to lots Nos. 207 and 61 . . .
inasmuch as, although it is true that a mortgage is indivisible as to the contracting parties
and as to their successors in interest (Article 1860, Civil code), it is not so with respect to a
third person who did not take part in the constitution thereof either personally or through an
agent . . . . Therefore, the only liability of the defendant-appellant Paz Agudelo y Gonzaga
is that which arises from the aforesaid acknowledgment but only with respect to the lien
and not to the principal obligation secured by the mortgage acknowledged by her to have
been constituted on said lot No. 878 . . . . Such liability is not direct but a subsidiary one.
38
x x x
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.
x x x
From the wording of the law, indivisibility arises only when there is a debt, that is, there is
a debtor-creditor relationship. But, this relationship is wanting in the case at bar in the
sense that petitioners are assignees of an accommodation mortgagor and not of a debtor-
mortgagor. Hence, it is fair and logical to allow the petitioners to redeem only the property
belonging to their assignor, Eduarda Belo.
With respect to the four (4) parcels of residential land belonging to the Eslabon spouses,
petitioners being total strangers to said lots lack legal personality to redeem the
same. Fair play and justice demand that the respondent PNBs interest of recovering its
entire bank claim should not be at the expense of petitioners, as assignees of Eduarda Belo,
who is not indebted to it. Besides, the letter 39 sent by respondent PNB to Eduarda Belo
states that "your (Belo) mortgaged property/ies with PNB covered by TCT # T-7493
was/were sold at public auction . . . .." It further states that "You (Belo) have, therefore, one
year from July 1, 1991 within which to redeem your mortgaged property/ies, should you
desire to redeem it." Respondent PNB never mentioned that she was bound to redeem the
entire mortgaged properties including the four (4) residential properties of the spouses
82
Eslabon. The letter was explicit in mentioning Eduarda Belos property only. From the said
statement, there is then an admission on the part of respondent PNB that redemption only
extends to the subject property of Eduarda Belo for the reason that the notice of the sale
limited the redemption to said property.chanrob1es virtua1 1aw 1ibrary

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

SO ORDERED.

[G.R. No. L-28658. October 18, 1979.]

VICENTE C. REYES, applicant-appellee, v. 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
83
thereto.chanroblesvirtualawlibrary
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.chanrobles.com:cralaw:red
The case was set for hearing, and after trial the court rendered a decision, the dispositive
portion of which reads as follows:jgc:chanrobles.com.ph
"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 latters
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:chanrob1es virtual 1aw library
I "SA KAALAMAN NANG LAHAT NA BUMASA AT NAKAKITA NITONG
"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 APPLICANTS 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 Beltrans parents, and upon their
death in 1894, Basilia inherited the property. On April 19, 1926, Basilia Beltran, a widow,
borrowed from applicants 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:chanrobles virtual lawlibrary
KASULATAN:chanrob1es virtual 1aw library
Kaming mag-kakapatid may sapat na gulang na nakalagda sa kasulatan ito, bilang
katibayan nang pag-papahintulot sa aming Ina na si Bacilia Beltran, na ipananagutan kay
G. Vicente Reyes sa inutang ha halagang isang daan piso (P100.00) na walang ano pamang
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; itoy aring naiwan ng ama naming
namatay na si Melecio Sierra.
84
 "Q. Do you mean to say that you yourself bought this property?
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 "A. My father was the one who bought the property.
kapamahalaan.
"Q. What is the name of your father?
Sa katunayan nagsilagda kaming mga anak, at apo kay Esteban, sa harap nang saksing
magpapatotoo. "A. Vicente C. Reyes.

Ngayon ika 19 nang Abril nang 1926. Antipolo, Rizal. K.P. "Q. Where is he now?

Lagda ni "A. He is already dead.

Bacilia Beltran "Q. Can you inform this Honorable Court, if you know, how your father acquired this
property?
Gregorio Sierra
"A. Since 1926 my father bought that land.
Saksi:chanrob1es virtual 1aw library
"Q. Was that transaction evidenced by a document?
----------------
"A. Yes, there is a document.
----------------"
"Q. From whom did your father allegedly purchase the property?
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. "A. Basilia Beltran."cralaw virtua1aw library
Basilia Beltran died in 1938 before Reyes could recover from the loan.
From the above-quoted testimony of applicant, it is evident that he considered the
Applicant, in seeking the registration of the land, relied on his belief that the property document marked Exhibit "D" as contract of Sale and not as a mortgage. Oppositors
belongs to his father who bought the same from Basilia Beltran, as borne out by his contended that the words "isinangla," "na ipananagutan sa inutang na halagang isang daang
testimony during the trial on direct examination.chanrobles.com : virtual law library 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
"Q. Mr. Reyes, do you claim to be the owner of this property included or described in your retro sale. (p. 28, Brief, Oppositors-Appellants)
application?
The Court is of the opinion that Exhibit "D" is a mortgage contract. The intention of the
"A. Yes, sir. 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
"Q. How did you acquire this property? 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
"A. Since 1926 we were the ones paying the land taxes. 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:jgc:chanrobles.com.ph
"Q. From whom did you acquire this property?
"The fact that the real transaction between the parties was a borrowing and lending, will,
"A. Basilia Beltran. 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
85
only a mortgage, however artfully it may be disguised." (Villa v. Santiago, 38 Phil. 163)
"The whole case really turns on the question of whether the written instrument in
controversy was a mortgage or a conditional sale . . . The real intention of the parties at the
time the written instrument was made must govern in the interpretation given to it by the
courts . . . The correct test, where it can be applied, is the continued existence of a debt or
liability between the parties. If such exists, the conveyance may be held to be merely a
security for the debt or an indemnity against the liability." (Cuyugan v. 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:jgc:chanrobles.com.ph
"446. To show that instruments apparently absolute are only securities. . . . It is an
established doctrine that a court of equity will treat a deed, absolute in form, as a mortgage,
when it is executed as security for loan of money. The court looks beyond the terms of the
instrument to the real transaction; and when that is shown to be one of security and not of
sale, it will give effect to the actual contract of the parties."cralaw virtua1aw library
"447. Same Real intention of the parties to be ascertained. . . . As we have shown in the
preceding section, the intention of the parties must govern; and it matters not what peculiar
form the transaction may have taken. The inquiry always is, Was a security for the loan of
money or other property intended? . . . A debt owing to the mortgagee, or a liability
incurred for the grantor, either pre-existing or created at the time the deed is made, is
essential to give the deed the character of a mortgage. The relation of debtor and creditor
must appear. The existence of the debt is one on the tests. . . . In construing the deed to be a
mortgage, its character as such must have existed from its very inception, created at the
time the conveyance was made."cralaw virtua1aw library
The same principle was laid down in a later case, that of Macapinlac v. Gutierrez Rapide,
43 Phil. 781, quoting 3 Pomeroys Equity Jurisdiction, Section 1195, wherein it was
stated:jgc:chanrobles.com.ph
". . . 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."cralaw virtua1aw
library
Concerning the legal effects of such contract, Pomeroy observes:chanrobles
virtualawlibrary chanrobles.com:chanrobles.com.ph
". . . Whenever a deed absolute on its face is thus treated as a mortgage, the parties are
clothed with all the rights, are subject to all liabilities, and are entitled to all the remedies of
ordinary mortgagors and mortgagees. The grantee may maintain an action for the
foreclosure of the grantor equity of redemption; the grantor may maintain an action to
redeem and to compel a reconveyance upon his payment of the debt secured. If the grantee
goes into possession, and as such is liable to account for the rents and profits."cralaw
virtua1aw library
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 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:jgc:chanrobles.com.ph
"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."cralaw virtua1aw library
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.
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:jgc:chanrobles.com.ph
"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 immovable also prescribe through
uninterrupted adverse possession thereof for thirty years, without need of title or good
faith."cralaw virtua1aw library
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
86
adverse, nor continuous.chanrobles.com.ph : virtual law library

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 courts finding that since applicant and his father had been
continuously paying the realty taxes, that fact "constitutes strong corroborating evidence of
applicants 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 v. 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 v. 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.
[G.R. No. 125055. October 30, 1998]
Applicant having failed to show by sufficient evidence a registrable title to the land in
question, the application for registration should be dismissed.
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner, vs.
WHEREFORE, the decision appealed from is hereby set aside, and let another one be COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and
entered ordering the registration of the title of the land in question in the name of the ERLINDA P. JAVILLONAR, respondents.
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 DECISION
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.chanrobles lawlibrary : rednad MENDOZA, J.:

SO ORDERED.
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.

87
 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.
88
 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;
89
 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
90
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:
91
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee,
or dispose of the same. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist:
(1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged
by way of security for the payment of the principal obligation; and (2) that there should be
a stipulation for an automatic appropriation by the creditor of the thing pledged or
mortgaged in the event of non-payment of the principal obligation within the stipulated
period.[21]
The subject transaction being void, the registration of the deed of sale, by virtue of
which petitioner A. Francisco Realty was able to obtain TCT No. PT-85569 covering the
subject lot, must also be declared void, as prayed for by respondents in their counterclaim.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it
dismissed petitioners complaint against respondent spouses on the ground that the
stipulations in the promissory notes are void for being a pactum commissorium, but
REVERSED insofar as it ruled that the trial court had no jurisdiction over this case.
The Register of Deeds of Pasig City is hereby ORDERED to CANCEL TCT No. PT-85569
issued to petitioner and ISSUE a new one in the name of respondent spouses.
SO ORDERED.
G.R. No. L-44943 March 17, 1982
SOCORRO MONTEVIRGEN, et. al., petitioners,
vs.
COURT OF APPEALS, SPOUSES SERAFIN ABUTIN and CARMEN SENIR,
respondents.
DE CASTRO, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals
promulgated on June 8, 1976 affirming in toto the Order of the Court of First Instance of
Cavite, Branch III in Civil Case No. N-1609, promulgated on September 17, 1974.
The factual background of the case is as follows:
Petitioners Montevirgen filed an action against respondent-spouses Serafin Abutin and
Carmen Senir in the Court of First Instance of Cavite, Branch III, for the annulment of a
deed of sale with pacto de retro, over a parcel of land situated in Barrio Alima, Bacoor,
Cavite, title to which was transferred to respondents upon the registration of the deed
of pacto de retro sale. On July 1, 1971, the trial court, by virtue of the agreement reached
by the parties, rendered a decision declaring the transaction an equitable mortgage and
fixing a period of ten (10) months from July 1, 1971 within which the petitioners must pay
their obligation with legal interest, otherwise execution would follow. 1
Petitioners having failed to pay their obligation within the ten-month period, respondents
moved for execution of the decision of July 1, 1971. Petitioners opposed the motion for
execution alleging that there must be a foreclosure of mortgage upon failure to redeem and
not an outright execution sale. Said opposition was denied by the trial court and an Order
of Execution was issued on May 10, 1972. Upon implementation of said order, the Clerk of
Court issued two writs of execution, the first, directing the Provincial Sheriff of Cavite to
levy on the properties of petitioners to satisfy the sum of P57,500.00 plus legal interest of
12% thereon commencing from February 2, 1969 and sum of P11,104.32 plus legal interest
of 12% to commence from May 15, 1969; and second, directing the Provincial Sheriff to
sell at public auction the described properties with all the improvements existing thereon.
Petitioners moved to quash the writ of execution alleging that said writ was at variance
with the decision, firstly, because the decision merely directed the imposition of legal
interest which is 6% per annum and secondly, because it included the new construction on
the lot in question. On September 8, 1972, the lower court denied the motion to quash writ
of execution. The Provincial Sheriff accordingly executed the writs. Upon motion filed by
respondents, the sale was confirmed by the trial court in an Order dated September 25,
1972.
On October 5, 1972, petitioners filed a Motion to Annul the Sheriff's Certificate of Sale
alleging again that the writ of execution was at variance and contrary to the decision and at
the same time calling attention to the fact that on September 21, 1972 respondents
demolished the old house in the subject premises. In an order dated October 20, 1972, the
trial court granted petitioner's Motion and ordered the writ of execution to be amended so
92
"that the new construction may not be the object of the occupation by the defendant and
that the interest mentioned therein which is legal interest, must be 6%."
Respondents went to the Court of Appeals on certiorari (docketed as CA-G. R. No. SP-
01813) alleging that the confirmation of the sale on September 25, 1972 divested the trial
court of its jurisdiction and therefor its order amending the writ of execution was issued
without jurisdiction. The Court of Appeals dismissed the petition in its Resolution of June
11, 1972. On appeal to this Court, this Court denied the petition for lack of merit in an
Order dated November 6, 1973. Motion for reconsideration was again denied on December
7, 1973.
On July 24, 1974, respondents filed in the Court of First Instance another motion for
execution sale on the ground that the previous auction sales conducted were declared void
either from failure to conform with the judgment, or with the requirements of the law in the
conduct of auction sales. This was opposed by petitioners on August 7, 1974 with prayer
for the cancellation of T.C.T. No. 35236 then registered in the name of respondents, and the
issuance of a new title in their names subject to equitable mortgage right of respondents.
Replying to the opposition, respondents asked for the enforcement of the judgment of July
1, 1971 by asking for an auction sale. In resolving the issues posed, the trial court held:
Under the circumstances this Court holds that plaintiffs cannot demand
reconveyance and there is even no need for an auction sale of this
property since this property was already titled in the name of the
defendants as early as February 24, 1969 even before this action was
instituted.
xxx xxx xxx
In the case at bar, the foreclosure sale effected by the Provincial Sheriff
was a ceremonial futility because as may be gleaned in the Decision the
only right recognized in favor of plaintiffs Socorro Montevirgen was to
repurchase the property within the 10 month period prescribed therein; if
they had done so, then the defendants would have been ordered to
reconvey the property to the plaintiffs; having failed to do so, they have
lost the equity recognized in their favor by the Decision. ...
WHEREFORE, in view of the foregoing, this Court denied defendants'
Motion for Auction Sale as well as the reliefs prayed for by plaintiffs in
their opposition on August 7, 1974 and hereby declares that the execution
of the Decision of July 1, 1971 does not require the holding of any
auction sale; that the auction sale previously held were all
unnecessary; that upon failure of plaintiffs to pay their obligation within
the ten month period from July 1, 1971, the absolute ownership over the
land with the old construction described in the Deed of Pacto de Retro
Sale, and now registered in the name of defendants under T.C.T. No.
35236 of the Register of Deeds of the Province of Cavite has become
consolidated in the defendants, and relieved of plaintiffs equity. Plaintiff's
right to remain in possession in a concept other than owner should be
threshed out in an unlawful detainer or other appropriate possessory
action including the fixing of rentals as this suit was filed for the purpose
only of determining the nature of the Deed of Sale with Pecto de
Retro. 2 (Emphasis supplied)
On appeal to the Court of Appeals, the trial court's order of September 17, 1974 was
affirmed in toto in its decision of June 8, 1976, holding as follows:
But this notwithstanding, the points sticking out like a sore thumb in
appellants thesis is, that he has not to this date paid his obligation to the
appellees within the 10 month period as required in the judgment. This in
fact gave occasion for the judgment to become executory. As said earlier,
the judgment was the result of an agreement by and between the parties
and this being so, the judgment became executory at the end of the 10
month period. When it was executed, the execution may be reasonably
considered as a foreclosure of the mortgage. The appellant did not seek
to redeem the same as he has not to this date moved in that direction.
Therefore, his right to redeem has long since expired. 3
Upon denial of these two Motions for Reconsideration dated August 9, 1976 and October
18, 1976, petitioners filed this instant petition raising questions of law in which, if reduced
to essential the main issue would be whether or not respondent Court of Appeals correctly
affirmed the trial court's Order of September 17, 1974 interpreting, in effect, its Decision of
July 1, 1971. Pursuant to Our Resolution of March 9, 1977, this Court issued a Temporary
Restraining Order restraining private respondents from entering into any transaction
affecting or disposing of the land in question.
The appeal is impressed with merit.
93
1. Perusal of the Court of Appeals' decision affirming in toto the trial court's order of
September 17, 1974, shows that it has interpreted the trial court's decision of July 1, 1971
to mean that upon failure of the petitioners to pay their obligation within the period as fixed
in the judgment, petitioners also lost the right to redeem the property and as such, the
absolute ownership over the subject premises has become consolidated in the respondents.
We do not agree with the respondent court's interpretation. It contradicts the agreement
between the parties and the declaration in the decision that the contract between the parties
was an equitable mortgage, not a pacto de retro sale. It would produce the same effect as
a pactum commissurium, a forfeiture clause that has traditionally been held as contrary to
good morals and public policy and, therefore, void. 4
Thus, in the analogous case of Guanzon vs. Argel 5 this Court speaking thru Justice JBL
Reyes, affirmed the lower court's decision denying petitioner Guanzon's prayer that the
Provincial Sheriff be ordered to execute the necessary conveyance of the property in
question in her favor and that she be placed in the possession thereof, for failure of private
respondents Dumaraogs to pay the loan of P1,500 within the period also as specified in the
judgment. As therein held:
In no way can the judgment at bar be construed to mean that should the
Dumaraogs fail to pay the money within the specified period then the
property would be conveyed by the Sheriff to Guanzon. Any
interpretation in that sense would contradict the declaration made in the
same Judgment that the contract between the parties was in fact a
mortgage and not a pacto de retro sale. The only right of a mortgagee in
case of non-payment of a debt secured by mortgage would be to
foreclose the mortgage and have the encumbered property sold to satisfy
the outstanding indebtedness. The mortgagor's default does not operate to
vest in the mortgagee the ownership of the encumbered property, for any
such effect is against public policy as enunciated by the Civil Code. 6
The declaration, therefore, in the decision of July 1, 1971 to the effect that absolute
ownership over the subject premises has become consolidated in the respondents upon
failure of the petitioners to pay their obligation within the specified period, is a nullity, for
consolidation of ownership is an improper and inappropriate remedy to enforce a
transaction declared to be one of mortgage. 7 It is the duty of respondents, as mortgagees,
to foreclose the mortgage if he wishes to secure a perfect title to the mortgaged property if
he buys it in the foreclosure sale. 8
2. Neither is the petitioners' right as a mortgagor in equity affected by the fact that the
subject property was already titled in the name of respondents as early as 1969 even before
the action was instituted. In the first place, it must be borne in mind that this equitable
doctrine that deems a conveyance intended as security for a debt to be, in effect an
equitable mortgage, operates regardless of the form of the agreement chosen by the
contracting parties as the repository of their will. Equity looks through the form and
considers the substance, and no kind of engagement can be snowed which will enable the
parties to escape from the equitable doctrine adverted to. In other words, a conveyance of
land, accompanied by registration in the name of the transferee and the issuance of a new
certificate, is no more secured from the operation of this equitable doctrine than the most
informal conveyance that could be devised. 9
In the second place, the circumstance that the land has been judicially registered under the
Torrens System does not change or affect civil rights and liabilities with respect thereto
except as expressly provided in the Land Registration Act (sec. 70); and as between the
immediate parties to any contract affecting such lands, their rights will generally be
determined by the same rules of law that are applicable to unregistered land. 10
Finally, the circumstance that the original transaction was subsequently declared to be an
equitable mortgage must mean that the title to the subject land which had been transferred
to private respondents actually remained or is transferred back to petitioners herein as
owners-mortgagors, conformably to the well-established doctrine that the mortgagee does
not become the owner of the mortgaged property because the ownership remains with the
mortgagor (Art. 2088, New Civil Code). This is precisely the reason why this Court issued
in its Resolution of March 9, 1977 a Temporary Restraining Order, restraining private
respondents from entering into any transaction affecting or disposing the land in question.
IN VIEW OF THE FOREGOING, the decision of respondent Court of Appeals dated June
8, 1976 affirming in toto the trial court's order of September 17, 1974 is hereby reversed.
The Temporary Restraining Order issued pursuant to Our resolution of March 9, 1979 is
hereby made permanent.
The Register of Deeds of the Province of Cavite is hereby ordered to cancel T.C.T. No.
35236 registered in the name of private respondents and to issue a new title in the name of
herein petitioners subject to the equitable mortgage rights of private respondents.
SO ORDERED.
Makasiar, Fernandez, De Castro, Guerrero, Melencio-Herrera and Plana, JJ., concur.
94
 I concur. The long final and executory judgment of July 1, 1971 declaring the transaction
an equitable mortgage and fixing a period of ten months within which petitioners-
mortgagors must pay their obligation of P57,000.00 with legal interest (of six [6%] per cent
per annum) from February 2, 1969 and the further sum of Pll,104.32 with legal interest (of
Separate Opinions six [6%] per cent per annum) from May 15, 1969, failing which execution would follow,
has at this late date not been executed due to the errors committed by the trial court of
declaring that there was no need of such execution of judgment.

The ten-month grace period granted in the 1971 decision has long expired, almost eleven
TEEHANKEE, J., concurring:
years afterwards. It should be understood that if upon finality of this Court's judgment at
bar (and remand of the records, if any, to the trial court) petitioners-mortgagors shall not
I concur. The long final and executory judgment of July 1, 1971 declaring the transaction
have discharged their indebtedness to respondents, the trial court should forthwith issue a
an equitable mortgage and fixing a period of ten months within which petitioners-
writ of execution for satisfaction of said mortgage indebtedness (as adjudged in the 1971
mortgagors must pay their obligation of P57,000.00 with legal interest (of six [6%] per cent
decision) and no longer grant petitioners the 90-day grace period provided in Rule 68,
per annum) from February 2, 1969 and the further sum of Pll,104.32 with legal interest (of
section 2 with the understanding that petitioners-mortgagors may prevent the sale by
six [6%] per cent per annum) from May 15, 1969, failing which execution would follow,
paying their whole indebtedness with interests on or before the date fixed by the sheriff for
has at this late date not been executed due to the errors committed by the trial court of
the sale of the properties and that if they so fail, respondents, as stated in the Court's
declaring that there was no need of such execution of judgment.
opinion, may "secure a perfect title to the mortgaged property if (they) buy it in the
foreclosure sale" (at page 5).
The ten-month grace period granted in the 1971 decision has long expired, almost eleven
years afterwards. It should be understood that if upon finality of this Court's judgment at
bar (and remand of the records, if any, to the trial court) petitioners-mortgagors shall not
have discharged their indebtedness to respondents, the trial court should forthwith issue a
writ of execution for satisfaction of said mortgage indebtedness (as adjudged in the 1971
decision) and no longer grant petitioners the 90-day grace period provided in Rule 68,
section 2 with the understanding that petitioners-mortgagors may prevent the sale by
paying their whole indebtedness with interests on or before the date fixed by the sheriff for
the sale of the properties and that if they so fail, respondents, as stated in the Court's
opinion, may "secure a perfect title to the mortgaged property if (they) buy it in the
foreclosure sale" (at page 5).

Separate Opinions

TEEHANKEE, J., concurring:

95
 [G.R. No. L-22331. June 6, 1967.]

IN RE: PETITION FOR CONSOLIDATION OF TITLE IN THE VENDEES OF A

HOUSE AND THE RIGHTS TO A LOT. MARIA BAUTISTA VDA. DE REYES, ET
AL., vendees, petitioners-appellees, RODOLFO LANUZA, vendor, v. MARTIN DE
LEON, Intervenor-Appellant.

Erasmo R. Cruz and C .R. Pascual for Intervenor-Appellant.

Augusto J . Salas for vendees-petitioners-appellees.

SYLLABUS

1. CONJUGAL PARTNERSHIP; CONVEYANCE OF CONJUGAL PROPERTY BY

HUSBAND WITHOUT CONSENT OF THE WIFE VOIDABLE; BY WHOM ACTION
FOR ANNULMENT MAY BE BROUGHT. A conveyance of real property of the
conjugal partnership made by the husband without the consent of his wife is merely
voidable. This is clear from Article 173 of the Civil Code, which gives the wife ten years
within which to bring an action for annulment. As such the conveyance can be ratified by
the wife. Moreover, the contract conveying the property being merely voidable, an action
for its annulment can be brought only by those who are bound under it, either principally or
subsidiarily (Article 1397), so that if there is anyone who can question the sale on this
ground it is the wife.

2. MORTGAGES; PREFERENCE BETWEEN UNRECORDED SALE OF PRIOR DATE

AND RECORDED MORTGAGE OF A LATER DATE. Between an unrecorded sale of
a prior date and a recorded mortgage of a later date, the former is preferred to the latter for
the reason that if the original owner had parted with his ownership of thing sold then he no
longer had the ownership and free disposal of that thing so as to be able to mortgage it
again. Registration of the mortgage under Act No. 3344 would, in such case, be of no
moment since it is understood to be without prejudice to the better right of third parties.
(Rivera v. Moran, 48 Phil. 836 [1926]. Nor would it avail the mortgagee for the execution
of the conveyance in a public instrument earlier was equivalent to the delivery of the thing
sold to the vendee. (Civil Code, Article 1948; see also Lichauco v. Berenguer, 39 Phil., 643
[1919]; Bautista v. Sioson, 39 Phil., 615 [1919]).

3. ID.; NON-TRANSMISSION OF OWNERSHIP TO VENDEE A CIRCUMSTANCE

INDICATIVE OF EQUITABLE MORTGAGE; INSERTION OF A STIPULATION
ESTABLISHING A PACTUM COMMISSORIUM AN AVOWAL OF INTENTION TO
MORTGAGE. The stipulation in deed denominated by the parties as a "Deed of Sale
96
With Right to Repurchase" to the effect that if the vendor fails to pay the amount agreed
upon within the stipulated period, his right to repurchase the property shall be forfeited and
the ownership over the same would automatically pass to the vendee without need of court
intervention, is contrary to the nature of a true pacto de retro sale, under which a vendee
acquires ownership of the thing sold immediately upon execution of the sale, subject only
to the vendors right of redemption. (See e.g., Guerrero v. Yigo, 96 Phil., 37 [1954]; Floro
v. Granada, 83 Phil., 486 (1949). Indeed, the stipulation which enables the mortgagee to
acquire ownership of the mortgaged property without need of foreclosure proceedings
establishes a pactum commissorium, and, being contrary to the provisions of Article 2080
of the Civil Code, is a nullity. Its insertion in the contract is an avowal of an intention to
mortgage rather than to sell. (Alcantara v. Alinea, 8 Phil., 111 [1907]).
4. ID.; PREFERENCES OF MORTGAGE CREDITS; HOW DETERMINED. Between
the unrecorded deed of Reyes and Navarro which we hold to be an equitable mortgage, and
the registered mortgage of De Leon, the latter must be preferred. Preference of mortgage
credits is determined by the priority of registration of the mortgages, following the maxim
"Prior tempore potior jure."
DECISION
REGALA, J.:
Rodolfo Lanuza and his wife Belen were the owners of a two-story house built on a lot of
the Maria Guizon Subdivision in Tondo, Manila, which the spouses leased from the
Consolidated Asiatic Co. On January 12, 1961, Lanuza executed a document entitled
"Deed of Sale with Right to Repurchase" whereby he conveyed to Maria Bautista Vda. de
Reyes and Aurelia R. Navarro the house, together with the leasehold rights to the lot, a
television set and a refrigerator in consideration of the sum of P3,000. The deed
reads:jgc:chanrobles.com.ph
"DEED OF SALE WITH RIGHT TO REPURCHASE
"KNOW ALL MEN BY THESE PRESENTS:jgc:chanrobles.com.ph
"That I, RODOLFO LANUZA, Filipino, of legal age, married to Belen Geronimo, and
residing at 783-D Interior 14 Maria Guizon, Gagalangin, Tondo, Manila, hereby declare
that I am the true and absolute owner of a new two storey house of strong materials,
constructed on a rented lot Lot No. 12 of the Maria Guizon Subdivision, owned by the
Consolidated Asiatic Co. as evidenced by the attached Receipt No. 292, and the plan of
the subdivision, owned by said company.
"That for and in consideration of the sum of THREE THOUSAND PESOS (P3,000.00)
which I have received this day from Mrs. Maria Bautista Vda. de Reyes, Filipino, of legal
age, widow; and Aurelia Reyes, married to Jose S. Navarro, Filipinos, of legal ages, and
residing at 1112 Antipolo St., Tondo, Manila, I hereby SELL, CEDE, TRANSFER, AND
CONVEY unto said Maria Bautista Vda. de Reyes, her heirs, successors, administrators
and assigns said house, including my right to the lot on which it was constructed and also
my television, and frigidaire "Kelvinator" of nine cubic feet in size, under the following
conditions:jgc:chanrobles.com.ph
"I hereby reserve for myself, my heirs, successors, administrators and assigns the right to
repurchase the above mentioned properties for the same amount of P3,000.00, without
interest, within the stipulated period of three (3) months from the date hereof. If I fail to
pay said amount of P3,000.00, within the stipulated period of three months, my right to
repurchase the said properties shall be forfeited and the ownership thereto shall
automatically pass to Mrs. Maria Bautista Vda. de Reyes, her heirs successors,
administrators, and assigns without any Court intervention, and they can take possession of
the same.
"IN WITNESS WHEREOF, we have signed this contract in the City of Manila, this 12th
day of January 1961.
"s/t RODOLFO LANUZA "s/t MARIA BAUTISTA VDA.
Vendor DE REYES
Vendee
"s/t AURELIA REYES WITH MY MARITAL CONSENT:chanrob1es virtual 1aw library
Vendee "s/t JOSE S. NAVARRO
When the original period of redemption expired, the parties extended it to July 12, 1961 by
an annotation to this effect on the left margin of the instrument. Lanuzas wife, who did not
sign the deed, this time signed her name below the annotation.
It appears that after the execution of this instrument, Lanuza and his wife mortgaged the
same house in favor of Martin de Leon to secure the payment of P2,720 within one year.
This mortgage was executed on October 4, 1961 and recorded in the Office of the Register
of Deeds of Manila on November 8, 1961 under the provisions of Act No. 3344.
As the Lanuzas failed to pay their obligation, De Leon filed in the sheriffs office on
97
October 5, 1962 a petition for the extra- judicial foreclosure of the mortgage. On the other
hand, Reyes and Navarro followed suit by filing in the Court of First Instance of Manila a
petition for the consolidation of ownership of the house on the ground that the period of
redemption expired on July 12, 1961 without the vendees exercising their right of
repurchase. The petition for consolidation of ownership was filed on October 19. On
October 23, the house was sold to De Leon as the only bidder at the sheriffs sale. De Leon
immediately took possession of the house, secured a discharge of the mortgage on the
house in favor of a rural bank by paying P2,000 and, on October 29, intervened in court
and asked for the dismissal of the petition filed by Reyes and Navarro on the ground that
the unrecorded pacto de retro sale could not affect his rights as a third party.
The parties 1 thereafter entered into a stipulation of facts on which this opinion is mainly
based and submitted the case for decision. In confirming the ownership of Reyes and
Navarro in the house and the leasehold right to the lot, the court
said:jgc:chanrobles.com.ph
"It is true that the original deed of sale with pacto de retro, dated January 12, 1961, was not
signed by Belen Geronimo-Lanuza, wife of the vendor a retro, Rodolfo Lanuza, at the time
of its execution. It appears, however, that on the occasion of the extension of the period for
repurchase to July 12, 1961, Belen Geronimo-Lanuza signed giving her approval and
conformity. This act, in effect. constitutes ratification or confirmation of the contract
(Annex "A" Stipulation) by Belen Geronimo-Lanuza, which ratification validated the act of
Rodolfo Lanuza from the moment of the execution of the said contract. In short, such
ratification had the effect of purging the contract (Annex A Stipulation) of any defect
which it might have had from the moment of its execution. (Article 1396, new Civil Code
of the Philippines; Tang Ah Chan and Kwong Koon v. Gonzales, 52 Phil. 180.)
"Again, it is to be noted that while it is true that the original contract of sale with right to
repurchase in favor of the petitioners (Annex A Stipulation) was not signed by Belen
Geronimo-Lanuza, such failure to sign, to the mind of the Court, made the contract merely
voidable, if at all, and, therefore, susceptible of ratification of said contract by Belen
Geronimo-Lenuza validated the said contract even before the property in question was
mortgaged in favor of the intervenor.
"It is also contended by the intervenor that the contract of sale with right to repurchase
should be interpreted as a mere equitable mortgage. Consequently, it is argued that the
same cannot form the basic for a judicial petition for consolidation of title over the property
in litigation. This argument is based on the fact that the vendors a retro continued in
possession of the property after the execution of the deed of sale with pacto de retro. The
mere fact, however, that the vendors a retro continued in the possession of the property in
question cannot justify an outright declaration that the sale should be construed as an
equitable mortgage and not a sale with right to repurchase. The terms of the deed of sale
with right to repurchase (Annex A Stipulation) relied upon by the petitioners must be
considered as merely an equitable mortgage for the reason that after the expiration of the
period or repurchase of three months from January 12, 1961.
"Article 1602 of the new Civil Code provides:chanrob1es virtual 1aw library
ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the
following cases;
x x x
(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed.
x x x
"In the present case, it appears, however, that no other instrument was executed between
the parties extending the period of redemption. What was done was simply to annotate on
the deed of sale with right to repurchase (Annex A Stipulation) that the period to
repurchase, extended as requested until July 12, 1961. Needless to say, the purchasers a
retro, in the exercise of their freedom to make contracts, have the power to extend the
period of repurchase. Such extension is valid and effective as it is not contrary to any
provision of law. (Umale v. Fernandez, 28 Phil. 89, 93)
"The deed of sale with right to repurchase (Annex A Stipulation) is embodied in a public
document. Consequently, the same is sufficient for the purpose of transferring the rights of
the vendors a retro over the property in question in favor of the petitioners. It is to be noted
that the deed of sale with right to repurchase (Annex A Stipulation) was executed on
January 12, 1961, which was very much ahead in point of time to the execution of the real
estate mortgage on October 4, 1961, in favor of intervenor (Annex B Stipulation). It is
obvious, therefore, that when the mortgagors, Rodolfo Lanuza and Belen Geronimo-
Lanuza, executed the real estate mortgage in favor of the intervenor, they were no longer
the absolute owners of the property since the same had already been sold a retro to the
petitioners. The spouses Lanuza, therefore, could no longer constitute a valid mortgage
over the property inasmuch as they did not have any free disposition of the property
mortgaged. (Article 2085, new Civil Code.) For a valid mortgage to exist, ownership of the
property mortgaged is an essential requisite. A mortgage executed by one who is not the
owner of the property mortgaged is without legal existence and its registration cannot
validate it. (Philippine National Bank v. Rocha, 55 Phil. 497).
"The intervenor invokes the provisions of article 1544 of the new Civil Code for the reason
that while the real estate mortgage in his favor (Annex B Stipulation) has been registered
98
with the Register of Deeds of Manila under the provisions of Act No. 3344 on November 3,
1961, the deed of sale with right to repurchase (Annex A Stipulation) however, has not
been duly registered. Article 1544 of the new Civil Code, however, refers to the sale of the
same property to two or more vendees. This provision of law, therefore, is not applicable to
the present case which does not involve sale of the same property to two or more vendees.
Furthermore, the mere registration of the property mortgaged in favor of the intervenor
under Act No. 3344 does not prejudice the interests of the petitioners who have a better
right over the property in question under the old principle of first in time, better in right.
(Gallardo v. Gallardo, C.B., 46 Off. Gaz., 5568)."
De Leon appealed directly to this Court, contending (1) that the sale in question is not only
voidable but void ab initio for having been made by Lanuza without the consent of his
wife; (2) that the pacto de retro sale is in reality an equitable mortgage and therefore can
not be the basis of a petition for consolidation of ownership; and (3) that at any rate the
sale, being unrecorded, cannot affect third parties.
We are in accord with the trial courts ruling that a conveyance of real property of the
conjugal partnership made by the husband without the consent of his wife is merely
voidable. This is clear from article 173 of the Civil Code which gives the wife ten years
within which to bring an action for annulment. As such it can be ratified as Lanuzas wife
in effect did in this case when she gave her conformity to the extension of the period of
redemption by signing the annotation on the margin of the deed. We may add that actions
for the annulment of voidable contracts can be brought only by those who are bound under
it, either principally or subsidiarily (Art. 1397), so that if there was anyone who could have
questioned the sale on this ground it was Lanuzas wife alone.
We also agree with the lower court that between an unrecorded sale of a prior date and a
recorded mortgage of a later date the former is preferred to the latter for the reason that if
the original owner had parted with his ownership of the thing sold then he no longer had
the ownership and free disposal of that thing so as to be able to mortgage it again.
Registration of the mortgage under Act No. 3344 would, in such case, be of no moment
since it is understood to be without prejudice to the better right of third parties. 2 Nor
would it avail the mortgagee any to assert that he is in actual possession of the property for
the execution of the conveyance in a public instrument earlier was equivalent to the
delivery of the thing sold to the vendee. 3
But there is one aspect of this case which leads us to a different conclusion. It is a point
which neither the parties nor the trial court appear to have sufficiently considered. We refer
to the nature of the so-called "Deed of Sale with Right to Repurchase" and the claim that it
is in reality an equitable mortgage. While De Leon raised the question below and again in
this Court in his second assignment of error, he has not demonstrated his point; neither has
he pursued the logical implication of his argument beyond stating that a petition for
consolidation of ownership is an inappropriate remedy to enforce a mortgage.
De Leon based his claim that the pacto de retro sale is actually an equitable mortgage on
the fact that, first, the supposed vendors (the Lanuzas) remained in possession of the thing
sold and, second, when the three-month period of redemption expired the parties extended
it. These are circumstances which indeed indicate an equitable mortgage. 4 But their
relevance emerges only when they are seen in the perspective of other circumstances which
indubitably show that what was intended was a mortgage and not a sale. These
circumstances are:chanrob1es virtual 1aw library
1. The gross inadequacy of the price. In the discussion in the briefs of the parties as well as
in the decision of the trial court, the fact has not been mentioned that for the price of
P3,000, the supposed vendors "sold" not only their house, which they described as new and
as being made of strong materials and which alone had an assessed value of P4,000, but
also their leasehold right, television set and refrigerator, Kelvinator of nine cubic feet in
size." Indeed, the petition for consolidation of ownership is limited to the house and the
leasehold right, while the stipulation of facts of the parties merely referred to the object of
the sale as "the property in question." The failure to highlight this point, that is, the gross
inadequacy of the price paid, accounts for the error in determining the true agreement of
the parties to the deed.
2. The non-transmission of ownership to the vendees. The Lanuzas, the supposed vendors,
did not really transfer their ownership of the properties in question to Reyes and Navarro.
What was agreed was that ownership of the things supposedly sold would vest in the
vendees only if the vendors failed to pay P3,000. In fact the emphasis is on the vendors
payment of the amount rather than on the redemption of the things supposedly sold. Thus,
the deed recites that
"If I (Lanuza) fail to pay said amount of P3,000.00 within the stipulated period of three
months, my right to repurchase the said properties shall be forfeited and the ownership
thereto automatically pass to Mrs. Maria Bautista Vda. de Reyes . . . without any Court
intervention and they can take possession of the same."cralaw virtua1aw library
This stipulation is contrary to the nature of a true pacto de retro sale under which a vendee
acquires ownership of the thing sold immediately upon execution of the sale, subject only
to the vendors right of redemption. 5 Indeed, what the parties established by this
stipulation is an odious pactum commissorium which enables the mortgagees to acquire
ownership of the mortgaged properties without need of foreclosure proceedings. Needless
to say, such a stipulation is a nullity, being contrary to the provisions of Article 2088 of the
Civil Code. 6 Its insertion in the contract of the parties is an avowal of an intention to
mortgage rather than to sell. 7
3. The delay in the filing of the petition for consolidation. Still another point obviously
overlooked in the consideration of this case is the fact that the period of redemption expired
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on July 12, 1961 and yet this action was not brought until October 19, 1962 and only after
De Leon had asked on October 5, 1962 for the extra-judicial foreclosure of his mortgage.
All the while, the Lanuzas remained in possession of the properties they were supposed to
have sold and they remained in possession even long after they had lost their right of
redemption.

Under these circumstances we cannot but conclude that the deed in question is in reality a
mortgage. This conclusion is of far-reaching consequences because it means not only that
this action for consolidation of ownership is improper as De Leon claims, but, what is
more, that between the unrecorded deed of Reyes and Navarro which we hold to be an
equitable mortgage, and the registered mortgage of De Leon, the latter must be preferred.
Preference of mortgage credits is determined by the priority of registration of the
mortgages, 8 following the maxim "Prior tempore potior jure" (He who is first in time is
preferred in right.") 9 Under Article 2125 of the Civil Code the equitable mortgage, while
valid between Reyes and Navarro, on the one hand, and the Lanuzas, on the other, as the
immediate parties thereto, cannot prevail over the registered mortgage of De Leon.

Wherefore, the decision appealed from is reversed, hence, the petition for consolidation is
dismissed. Costs against Reyes and Navarro.

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