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EN BANC

[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 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 vendor’s right of redemption. (See e.g., Guerrero v. Yñigo, 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:cha nro bles.c om.ph

"DEED OF SALE WITH RIGHT TO REPURCHASE

"KNOW ALL MEN BY THESE PRESENTS: jgc:chanroble s.com.p h

"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

1
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:cha nrob les.co m.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 vi rt ual 1aw li bra ry

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. Lanuza’s wife, who did not sign the deed, this time signed her name below the annotation.

It appears that after the execution of this instrument, Lanuza and his wife mortgaged the same house in favor of Martin de
Leon to secure the payment of P2,720 within one year. This mortgage was executed on October 4, 1961 and recorded in the
Office of the Register of Deeds of Manila on November 8, 1961 under the provisions of Act No. 3344.

As the Lanuzas failed to pay their obligation, De Leon filed in the sheriff’s office on October 5, 1962 a petition for the extra-
judicial foreclosure of the mortgage. On the other hand, Reyes and Navarro followed suit by filing in the Court of First
Instance of Manila a petition for the consolidation of ownership of the house on the ground that the period of redemption
expired on July 12, 1961 without the vendees exercising their right of repurchase. The petition for consolidation of ownership
was filed on October 19. On October 23, the house was sold to De Leon as the only bidder at the sheriff’s 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:chan roble s.com.p h

"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: chan rob1es v irt ual 1aw l ibra ry

‘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.

2
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 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 court’s ruling that a conveyance of real property of the conjugal partnership made by the
husband without the consent of his wife is merely voidable. This is clear from article 173 of the Civil Code which gives the
wife ten years within which to bring an action for annulment. As such it can be ratified as Lanuza’s wife in effect did in this
case when she gave her conformity to the extension of the period of redemption by signing the annotation on the margin of
the deed. We may add that actions for the annulment of voidable contracts can be brought only by those who are bound
under it, either principally or subsidiarily (Art. 1397), so that if there was anyone who could have questioned the sale on this
ground it was Lanuza’s wife alone.

We also agree with the lower court that between an unrecorded sale of a prior date and a recorded mortgage of a later date
the former is preferred to the latter for the reason that if the original owner had parted with his ownership of the thing sold
then he no longer had the ownership and free disposal of that thing so as to be able to mortgage it again. Registration of the
mortgage under Act No. 3344 would, in such case, be of no moment since it is understood to be without prejudice to the
better right of third parties. 2 Nor would it avail the mortgagee any to assert that he is in actual possession of the property
for the execution of the conveyance in a public instrument earlier was equivalent to the delivery of the thing sold to the
vendee. 3

But there is one aspect of this case which leads us to a different conclusion. It is a point which neither the parties nor the
trial court appear to have sufficiently considered. We refer to the nature of the so-called "Deed of Sale with Right to
Repurchase" and the claim that it is in reality an equitable mortgage. While De Leon raised the question below and again in
this Court in his second assignment of error, he has not demonstrated his point; neither has he pursued the logical
implication of his argument beyond stating that a petition for consolidation of ownership is an inappropriate remedy to
enforce a mortgage.

De Leon based his claim that the pacto de retro sale is actually an equitable mortgage on the fact that, first, the supposed
vendors (the Lanuzas) remained in possession of the thing sold and, second, when the three-month period of redemption
expired the parties extended it. These are circumstances which indeed indicate an equitable mortgage. 4 But their relevance
emerges only when they are seen in the perspective of other circumstances which indubitably show that what was intended
was a mortgage and not a sale. These circumstances are: chan rob1e s virtual 1aw lib rary

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 li bra ry

3
This stipulation is contrary to the nature of a true pacto de retro sale under which a vendee acquires ownership of the thing
sold immediately upon execution of the sale, subject only to the vendor’s right of redemption. 5 Indeed, what the parties
established by this stipulation is an odious pactum commissorium which enables the 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 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.

Concepcion, C.J., Dizon, Bengzon, J .P., Sanchez, and Castro, JJ., concur.

Reyes, J .B.L. and Zaldivar, JJ., reserve their votes.

Makalintal, J., concurs in the result.

Endnotes:

1. In all the proceedings the Lanuzas do not appear to have intervened.

2. Rivera v. Moran, 48 Phil. 836 (1926).

3. Civ. Code art. 1948. See also Lichauco v. Berenguer, 39 Phil. 643 (1919); Bautista v. Sioson, 39 Phil. 615 (1919).

4. Art. 1602 (2) (3).

5. See, e.g., Guerrero v. Yñigo, 96 Phil. 37 (1954); Floro v. Granada, 83 Phil. 487 (1949).

6. Reyes v. Nebrija, 98 Phil. 639 (1956); Tan Chun Tic v. West Coast Life Ins. Co., 54 Phil. 361 (1930).

7. Alcantara v. Alinea, 8 Phil. 111 (1907).

8. Civ. Code art. 2242 (5).

9. See Gomez v. Jugo, 48 Phil., 118 (1925).

4
FIRST DIVISION

[G.R. No. L-49940. September 25, 1986.]

GEMMA R. HECHANOVA, accompanied by her husband NICANOR HECHANOVA, JR., and PRESCILLA R. MASA
accompanied by her husband, FRANCISCO MASA, Petitioners, v. HON. MIDPANTAO L. ADIL, Presiding
Judge, Branch II, Court of First Instance of Iloilo, THE PROVINCIAL SHERIFF OF ILOILO, and PIO
SERVANDO, Respondents.

SYLLABUS

1. CIVIL LAW; CONTRACTS; MORTGAGE; NOT VALIDLY CONSTITUTED IN THE CASE AT BAR. — It is clear from the
records of this case that the plaintiff has no cause of action. Plaintiff has no standing to question the validity of the
deed of sale executed by the deceased defendant Jose Servando in favor of his co-defendants Hechanova and Masa.
No valid mortgage has been constituted in plaintiff’s favor, the alleged deed of mortgage being a mere private
document and not registered; moreover, it contains a stipulation (pacto comisorio) which is null and void under Article
2088 of Civil Code. Even assuming that the property was validly mortgaged to the plaintiff, his recourse was to
foreclose the mortgage, not to seek annulment of the sale.

DECISION

YAP, J.:

Petitioners seek the annulment of various orders issued by the respondent Presiding Judge of Branch II, Court of First
Instance of Iloilo, in Civil Case No. 12312 entitled "Pio Servando versus Jose Y. Servando Et. Al." A temporary
restraining order was issued by this Court on May 9, 1979, staying until further orders the execution of the decision
rendered by the respondent Judge in said case.

The case under review is for the annulment of a deed of sale dated March 11, 1978, executed by defendant Jose Y.
Servando in favor of his co-defendants, the petitioners herein, covering three parcels of land situated in Iloilo City.
Claiming that the said parcels of land were mortgaged to him in 1970 by the vendor, who is his cousin, to secure a
loan of P20,000.00, the plaintiff Pio Servando impugned the validity of the sale as being fraudulent, and prayed that it
be declared null and void and the transfer certificates of title issued to the vendees be cancelled, or alternatively, if the
sale is not annulled, to order the defendant Jose Servando to pay the amount of P20,000.00, plus interests, and to
order defendants to pay damages. Attached to the complaint was a copy of the private document evidencing the
alleged mortgage (Annex A), which is quoted hereunder: chan robles lawlib rary : rednad

"August 20, 1970

"This is to certify that I, Jose Yusay Servando, the sole owner of three parcel of land under Tax Declaration No. 28905,
44123 and 31591 at Lot No. 1, 1863-Portion of 1863 & 1860 situated at Sto. Niño St., Arevalo, Compania St. &
Compania St., Interior Molo, respectively, have this date mortgaged the said property to my cousin Pio Servando, in
the amount of TWENTY THOUSAND PESOS (P20,000.00), redeemable for a period not exceeding ten (10) years, the
mortgage amount bearing an interest of 10% per annum.

I further certify that in case I fail to redeem the said properties within the period stated above, my cousin Pio
Servando, shall become the sole owner thereof.

(SGD.) JOSE YUSAY SERVANDO

WITNESSES: chanrob 1es vi rtual 1aw lib rary

(Sgd) Ernesto G. Jeruta.

(Sgd) Francisco B. Villanueva"

The defendants moved to dismiss the complaint on the grounds that it did not state a cause of action, the alleged
mortgage being invalid and unenforceable since it was a mere private document and was not recorded in the Registry
of Deeds; and that the plaintiff was not the real party in interest and, as a mere mortgagee, had no standing to
question the validity of the sale. The motion was denied by the respondent Judge, in its order dated June 20, 1978,
"on the ground that this action is actually one for collection." cralaw virtua 1aw lib rary

On June 23, 1978, defendant Jose Y. Servando died. The defendants filed a Manifestation and Motion, informing the
trial court accordingly, and moving for the dismissal of the complaint pursuant to Section 21 of Rule 3 of the Rules of
Court, pointing out that the action was for recovery of money based on an actionable document to which only the
deceased defendant was a party. The motion to dismiss was denied on July 25, 1978, "it appearing from the face of
the complaint that the instant action is not purely a money claim, it being only incidental, the main action being one
for annulment and damages." cralaw virt ua1aw lib ra ry

5
On August 1, 1978, plaintiff filed a motion to declare defendants in default, and on the very next day, August 2, the
respondent Judge granted the motion and set the hearing for presentation of plaintiff’s evidence ex-parte on August
24, 1978.

On August 2, 1978, or the same day that the default order was issued, defendants Hechanova and Masa filed their
Answers, denying the allegations of the complaint and repeating, by way of special and affirmative defenses, the
grounds stated in their motions to dismiss.

On August 25, 1978, a judgment by default was rendered against the defendants, annulling the deed of sale in
question and ordering the Register of Deeds of Iloilo to cancel the titles issued to Priscilla Masa and Gemma
Hechanova, and to revive the title issued in the name of Jose Y. Servando and to deliver the same to the plaintiff.
chanrobles. com:cha nrob les.com. ph
chanrob les vi rtua lawlib rary

The defendants took timely steps to appeal the decision to the Court of Appeals by filing a notice of appeal, an appeal
bond, and a record on appeal. However, the trial court disapproved the record on appeal due to the failure of
defendants to comply with its order to eliminate therefrom the answer filed on August 2, 1978 and accordingly,
dismissed the appeal, and on February 2, 1978, issued an order granting the writ of execution prayed for by plaintiff.

We find the petition meritorious, and the same is hereby given due course.

It is clear from the records of this case that the plaintiff has no cause of action. Plaintiff has no standing to question
the validity of the deed of sale executed by the deceased defendant Jose Servando in favor of his co-defendants
Hechanova and Masa. No valid mortgage has been constituted in plaintiff’s favor, the alleged deed of mortgage being
a mere private document and not registered; moreover, it contains a stipulation (pacto comisorio) which is null and
void under Article 2088 of the Civil Code. Even assuming that the property was validly mortgaged to the plaintiff, his
recourse was to foreclose the mortgage, not to seek annulment of the sale.

WHEREFORE, the decision of the respondent court dated August 25, 1973 and its Order of February 2, 1979 are set
aside, and the complaint filed by plaintiff dated February 4, 1978 is hereby dismissed.

SO ORDERED.

Narvasa, Melencio-Herrera Paras and Feliciano, JJ., concur.

Cruz, J., is on leave.

6
THIRD DIVISION

[G.R. No. 115548. March 5, 1996.]

STATE INVESTMENT HOUSE INC., Petitioner, v. COURT OF APPEALS, ET AL., Respondents.

Padilla Law Office for Petitioner.

Graciano J. Tobias and Cesar Brillantes for Solid Homes, Inc. & Victorio V. Soliven.

Felix O. Lodero, Jr. for Private Respondents.

SYLLABUS

1. CIVIL LAW; LAND TITLES AND DEEDS; TORRENS SYSTEM OF LAND REGISTRATION; PURCHASER IS NOT REQUIRED TO
EXPLORE FURTHER THAN WHAT THE TITLE INDICATES; EXCEPTION. — As a general rule, where there is nothing in the
certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser
is not required to explore further than what the Torrens Title upon its face indicates in quest for any hidden defect or
inchoate right that may subsequently defeat his right thereto. This rule, however, admits of an exception as where the
purchaser or mortgagee, has knowledge of a defect or lack of title in his vendor, or that he was aware of sufficient facts to
induce a reasonably prudent man to inquire into the status of the title of the property in litigation.

2. ID.; ID.; ID.; ID.; EXCEPTION PARTICULARLY APPLIES TO FINANCING INSTITUTIONS ACCEPTING PROPERTIES
MORTGAGED BY ENTITIES ENGAGED IN SELLING SUBDIVISION LOTS. — In this case, petitioner was well aware that it was
dealing with SOLID, a business entity engaged in the business of selling subdivision lots. In fact, the OAALA found that "at
the time the lot was mortgaged, respondent State Investment House, Inc., [now petitioner] had been aware of the lot’s
location and that said lot formed part of Capital Park/Homes Subdivision." In Sunshine Finance and Investment Corp. v.
Intermediate Appellate Court, the Court, noting petitioner therein to be a financing corporation, deviated from the general
rule that a purchaser or mortgagee of a land is not required to look further than what appears on the face of the Torrens
Title. The above-enunciated rule should apply in this case as petitioner admits of being a financing institution. We take
judicial notice of the uniform practice of financing institutions to investigate, examine and assess the real property offered as
security for any loan application especially where, as in this case, the subject property is a subdivision lot located at Quezon
City, M.M. It is a settled rule that a purchaser or mortgagee cannot close its eyes to facts which should put a reasonable man
upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor
or mortgagor. Petitioner’s constructive knowledge of the defect in the title of the subject property, or lack of such knowledge
due to its negligence, takes the place of registration of the rights of respondents-spouses. Respondent court thus correctly
ruled that petitioner was not a purchaser or mortgagee in good faith; hence petitioner can not solely rely on what merely
appears on the face of the Torrens Title.

DECISION

FRANCISCO, J.:

The factual background of the case, aptly summarized in the decision of the Office of the President and cited by respondent
Court of Appeals 1 in its assailed decision, and which we have verified to be supported by the record is herein reproduced as
follows:
jgc:c hanrobles. com.ph

"The uncontroverted facts of the case as recited in the decision of the Office of the President are as follows: cha nro b1es vi rtua l 1aw lib ra ry

‘Records show that! on October 15, 1969, Contract to Sell No. 36 was executed by the Spouses Canuto and Ma. Aranzazu
Oreta, and the Solid Homes, Inc. (SOLID), involving a parcel of land identified as Block No. 8, Lot No. 1, Phase I of the
Capitol Park Homes Subdivision, Quezon City, containing 511 square meters for a consideration of 1239,347.00. Upon
signing of the contract, the spouses Oreta made payment amounting to P7,869.40, with the agreement that the balance shall
be payable in monthly installments of P451.70, at 12% interest per annum.

‘On November 4, 1976, SOLID executed several real estate mortgage contracts in favor of State Investment Homes, (sic)
Inc. (STATE) over its subdivided parcels of land, one of which is the subject lot covered by Transfer Certificate of Title No.
209642.

‘For Failure of SOLID to comply with its mortgage obligations contract, STATE extrajudicially foreclosed the mortgaged
properties including the subject lot on April 6, 1983, with the corresponding certificate of sale issued therefor to STATE
annotated at the back of the titles covering the said properties on October 13, 1983.

‘On June 23, 1984, SOLID thru a Memorandum of Agreement negotiated for the deferment of consolidation of ownership
over the foreclosed properties by committing to redeem the properties from STATE.

‘On August 15, 1988, the spouses filed a complaint before the Housing and Land Use Regulatory Board, HLRB, against the
7
developer SOLID and STATE for failure on the part of SOLID "to execute the necessary absolute deed of sale as well as to
deliver title to said property . . . in violation of the contract to sell . . .," despite full payment of the purchase price as of
January 7, 1981. In its Answer, SOLID, by way of alternative defense, alleged that the obligations under the Contract to Sell
has become so difficult . . . the herein respondents be partially released from said obligation by substituting subject lot with
another suitable residential lot from another subdivision which respondents own/operates." Upon the other hand, STATE, to
which the subject lot was mortgaged, averred that unless SOLID pays the redemption price of P125,1955.00, (sic) it has "a
right to hold on and not release the foreclosed properties." cralaw virtua 1aw lib rary

‘On May 23, 1989, the Office of Appeals, Adjudication and Legal Affairs (OAALA) rendered a decision the decretal portion of
which reads: chan rob1es v irt ual 1aw li bra ry

‘1. Ordering respondent, State Investment House, Inc. to execute a Deed of Conveyance of Lot 1, Block 8, in Capital Park
Homes Subdivision in favor of complainants and to deliver to the latter the corresponding certificate of title;

‘2. Ordering respondent, Solid Homes, Inc. to pay State Investment House, inc. that portion of its loan which corresponds to
the value of the lot as collateral;

‘3. Ordering respondent, Solid Homes, Inc. to pay to this Board the amount of Six Thousand Pesos (P6,000.00) as
administrative fine in accordance with Section 25 in relation to Section 38 of P.D. 957.

"Both the STATE and SOLID appealed to the Board of Commissioners, HLRB, which affirmed on June 5, 1990 the OAALA’s
decision (Annex "C" of the Petition; ibid, p. 34). Again, both STATE and SOLID appealed the decision of the Board of
Commissioners, HLRB, to the Office of the President which dismissed the twin appeals on February 26. 1993.

"Petitioner filed with the Supreme Court this petition for review of decision of the Office of the President where it was
docketed as G.R. No. 109364. However, in a resolution dated May 13, 1993, the Supreme Court referred this case to this
Court for proper disposition. On the other hand, SOLID does not appear to have joined herein petitioner in this petition for
review." 2

[Emphasis added.]

In a decision dated May 19, 1994, respondent court sustained the judgment of the Office of the President. Hence, this
petition substantially anchored on these two alleged errors, namely: (1) error in ruling that that private respondent spouses
Oreta’s unregistered rights over the subject property are superior to the registered mortgage rights of petitioner State
Investment House, Inc. (STATE); and (2) error in not applying the settled rule that persons dealing with property covered by
torrens certificate of title are not required to go beyond what appears on the face of the title.

At the outset, we note that herein petitioner argues more extensively on the second assigned issue, than on the first. In fact,
petitioner admits the superior rights of respondents-spouses Oreta over the subject property as it did not pray for the
nullification of the contract between respondents-spouses and SOLID, but instead asked for the payment of the release value
of the property in question, plus interest, attorney’s fees and costs of suit against SOLID or, in case of the latter’s inability to
pay, against respondents-spouses before it can be required to release the title of the subject property in favor of the
respondent spouses. 3 And even if we were to pass upon the first assigned error, we find respondent court’s ruling on the
matter to be well-founded. STATE’s registered mortgage right over the property is inferior to that of respondents-spouses’
unregistered right. The unrecorded sale between respondents- spouses and SOLID is preferred for the reason that if the
original owner (SOLID, in this case) had parted with his ownership of the thing sold then he no longer had ownership and
free disposal of that thing so as to be able to mortgage it again. 4 Registration of the mortgage is of no moment since it is
understood to be without prejudice to the better right of third parties. 5

Anent the second issue, petitioner asserts that a purchaser or mortgagee of land/s covered under the Torrens System "is not
required to do more than rely upon the certificate of title [for] it is enough that the purchaser or mortgagee] examines the
pertinent certificate of title [without] need [of] look[ing] beyond such title." 6

As a general rule, where there is nothing in the certificate of title to indicate any cloud or vice in the ownership of the
property or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title upon its
face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. This rule
however, admits of an exception as where the purchaser or mortgagee, has knowledge of a defect or lack of title in his
vendor, or that he was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the title of
the property in litigation. 7 In this case, petitioner was well aware that it was dealing with SOLID, a business entity engaged
in the business of selling subdivision lots. In fact, the OAALA found that "at the time the lot was mortgaged, respondent
State Investment House, Inc., [now petitioner] had been aware of the lot’s location and that said lot formed part of Capital
Park/Homes Subdivision." 8 In Sunshine Finance and Investment Corp. v. Intermediate Appellate Court, 9 the Court, noting
petitioner therein to be a financing corporation, deviated from the general rule that a purchaser or mortgagee of a land is not
required to look further than what appears on the face of the Torrens Title. Thus: jgc:chanrob les.com. ph

"Nevertheless, we nave to deviate from the general rule because of the failure of the petitioner in this case to take the
necessary precautions to ascertain if there was any flaw in the title of the Nolascos and to examine the condition of the
property they sought to mortgage. The petitioner is an investment and financing corporation. We presume it is experienced
in its business. Ascertainment of the status and condition of properties offered to it as security for the loans it extends must
be a standard and indispensable part of its operations. Surely, it cannot simply rely on an examination of a Torrens certificate
to determine what the subject property looks like as its condition is not apparent in the document. The land might be in a
depressed area. There might be squatters on it. It might be easily inundated. It might be an interior lot, without convenient
access. These and other similar factors determine the value of the property and so should be of practical concern to the
petitioner.

x x x

"Our conclusion might have been different if the mortgagee were an ordinary individual or company without the expertise of
the petitioner in the mortgage and sale of registered land or if the land mortgaged were some distance from the mortgagee

8
and could not be conveniently inspected. But there were no such impediments in this case. The facilities of the petitioner
were not so limited as to prevent it from making a more careful examination of the land to assure itself that there were no
unauthorized persons in possession." 10

[Emphasis supplied.]

The above-enunciated rule should apply in this case as petitioner admits of being a financing institution. 11 We take judicial
notice of the uniform practice of financing institutions to investigate, examine and assess the real property offered as
security for any loan application especially where, as in this case, the subject property is a subdivision lot located at Quezon
City, M.M. It is a settled rule that a purchaser or mortgagee cannot close its eyes to facts which should put a reasonable man
upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor
or mortgagor. 12 Petitioner’s constructive knowledge of the defect in the title of the subject property, or lack of such
knowledge due to its negligence, takes the place of registration of the rights of respondents-spouses. Respondent court thus
correctly ruled that petitioner was not a purchaser or mortgagee in good faith; hence petitioner can not solely rely on what
merely appears on the face of the Torrens Title.

ACCORDINGLY, finding no reversible error in the assailed judgment, the same is hereby AFFIRMED

SO ORDERED.

Narvasa, C.J., Davide, Jr., Melo and Panganiban, JJ., concur.

Endnotes:

1. Fifth Division: Buena, J., Chairman; Rasul, Mabutas. JJ Members.

2. Decision of the Court of Appeals, pp. 1-4; Rollo, pp. 24-27.

3. Petition, pp. 18-19; Rollo, pp. 19-20.

4. Reyes, Et. Al. v. De Leon, 126 Phil 710.

5. Id., citing Rivera v. Moran, 48 Phil. 836.

6. Petition, p. 9; Rollo, p. 10, citing Reynes v. Barrera, 68 Phil. 656; 658; WH Anderson & Co. v. Garcia, 64 Phil. 506, 515;
Cangas and Basco v. Tan Chuan Leong, 110 Phil. 188. 171; Roxas v. Dinglasan, 28 SCRA 430 434.

7. Capitol Subdivision v Province of Negros Occidental, 7 SCRA 60, 70; Mañacop, Jr. v. Cangino, 1 SCRA 572; Leung Yee v.
F.L. Strong Machinery Co and Williamson, 37 Phil. 644; Philippine National Bank v Court of Appeals, 153 SCRA 453, 442;
Gomales v. Intermediate Appellate Court, 157 SCRA 587, 595.

8. OAALA Decision, p. 3; Rollo, p. 34.

9. 203 SCRA 210.

10. Id. at pp. 216-217.

11. Petition, p. 15; Rollo, p 16.

12. Crisostomo v. Court of Appeals, 197 SCRA 833. 840.

9
FIRST DIVISION

[G.R. No. 140398. September 11, 2001]

COL. FRANCISCO DELA MERCED, substituted by his heirs, namely, BLANQUITA E.


DELA MERCED, LUIS CESAR DELA MERCED, BLANQUITA E. DELA
MERCED (nee MACATANGAY) and MARIA OLIVIA M. PAREDES, petitioners,
vs. GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS) and SPOUSES
VICTOR and MILAGROS MANLONGAT, respondents.

DECISION
YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the Rules of Court, seeking to set aside the decision of the
Court of Appeals dated May 21, 1999 in CA-G.R. CV No. 55034,[1] which reversed the decision of the Regional
Trial Court of Pasig, Metro Manila, Branch 160, in Civil Cases Nos. 51410 and 51470.[2]
The antecedent facts, as culled from the records, are as follows:
Governor Jose C. Zulueta and his wife Soledad Ramos were the owners of parcels of land consisting of
100,986 square meters, known as the Antonio Village Subdivision, Orambo, Pasig City. The parcels of land were
registered in their names under Transfer Certificates of Title Nos. 26105,[3] 37177[4] and 50256[5] of the Registry of
Deeds of the Province of Rizal.
On September 25, 1956, the Zuluetas obtained a loan of P520,000.00 from the Government Service Insurance
System, as security for which they mortgaged the lands covered by TCT No. 26105. It was expressly stipulated
in the mortgage deed that certain lots within TCT No. 26105 shall be excluded from the mortgage because they
have been either previously sold to third parties or donated to the government.
The Zulueta spouses obtained an additional loan from the GSIS on March 6, 1957 in the amount of
P190,000.00, as security for which they mortgaged the land covered by TCT No. 50256. On April 4, 1957, the
Zuluetas obtained another loan from GSIS this time in the amount of P1,000,000.00, which they secured by
mortgaging parcels of land included in TCT Nos. 26105 and 37177.
On September 3, 1957, the Zulueta spouses executed a contract to sell whereby they undertook to sell to
Francisco dela Merced and Evarista Mendoza lots identified as Lots 6, 7, 8 and 10, Block 2 (formerly Block 4),
Antonio Subdivision covered by TCT No. 26105.[6] On October 26, 1972, after full payment by Col. dela Merced
of the purchase price, a Deed of Absolute Sale was executed by the Zuluetas in his favor.
On October 15, 1957, another loan was extended by GSIS to the Zulueta spouses in the amount of
P1,398,000.00, secured by a mortgage on the properties included in TCT Nos. 26105 and 50256.
The Zuluetas defaulted in the payment of their loans. Thus, GSIS extrajudicially foreclosed the mortgages
and, at the foreclosure sale held on August 16, 1974, GSIS was awarded the mortgaged properties as the highest
bidder. Since the Zuluetas did not redeem the properties within the reglementary period, title to the properties was
consolidated to GSIS.
Later, on March 25, 1982, GSIS held a sale at public auction of its acquired assets. Elizabeth D. Manlongat
and Ma. Therese D. Manlongat, the children of Victor and Milagros Manlongat, purchased Lot 6, Block 2 of
Antonio Village.[7]
On August 22, 1984, a complaint for declaratory relief, injunction and damages, docketed as Civil Case No.
51410, was filed with the Regional Trial Court of Pasig, Branch 160, by Victor Lemonsito and several
others,[8] against Benjamin Cabusao, in his capacity as In-Charge of the Municipal Task Force on Squatters of the
Municipal Engineers Office of Pasig, spouses Domini and Olivia Suarez and spouses Victor and Milagros
Manlongat.[9] Plaintiffs therein averred that they were owners of houses in various lots in Antonio Village, having
constructed the same with the permission of the late Jose C. Zulueta before the same was foreclosed by GSIS;
that defendants Suarez and Manlongat claimed to be vendees of lots in Antonio Village; and that defendant
Cabusao was threatening to demolish plaintiffs houses on the alleged ground that they were squatters on the lots.

10
On September 7, 1984, Col. dela Merced also instituted Civil Case No. 51470 with the Regional Trial Court
of Pasig, Branch 154, against GSIS and the spouses Zulueta, praying, among others, that the foreclosure sale,
insofar as his lots were concerned, be declared null and void.[10]
Meanwhile, Col. dela Merced filed a complaint-in-intervention in Civil Case No. 51410,[11] wherein he prayed
that plaintiffs complaint be dismissed and defendants titles to lots 6, 7 and 8, Block 2 be declared null and void.
The complaint in Civil Case No. 51410 was dismissed for failure of plaintiffs to prosecute, but the complaint-
in-intervention of Col. dela Merced was allowed to proceed against defendants Suarez and Manlongat.[12]
On September 5, 1986, upon motion of plaintiff Col. dela Merced, the trial court ordered the consolidation
of Civil Case No. 51470 with Civil Case No. 51410.[13]
On October 23, 1987, the Regional Trial Court of Pasig, Branch 160, rendered its decision, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in Civil Case No. 51410:

1. Declaring Lots 6, 7, 8 and 10 of Block 2, and Lot 8 of Block 8 which are the subject of the
action, as the exclusive property of the intervenor. Consequently, the certificates of Title of the
defendants covering said property lots are declared null and void;

and in Civil Case No. 51470:

1. Declaring the foreclosure proceedings conducted by defendant GSIS, insofar as they affected the
lots in question, as null and void, including the consolidation of ownership thereof by the GSIS,
and the sale of the lots to defendant Manlongat spouses;

2. Declaring the certificates of title issued to GSIS covering the aforesaid lots, as well as those
issued to defendant Manlongat spouses by virtue of the sale executed by the former in favor of the
latter, as null and void; and directing the Office of the Register of Deeds of Pasig, Metro Manila, to
issue a new one in the name of the plaintiff Francisco Mendoza dela Merced;

3. Ordering the defendants, jointly and severally, to pay the plaintiff the sums of P100,000.00 as
moral damages; P50,000.00 as exemplary damages; and P50,000.00 by way of attorneys fees; plus
costs.

SO ORDERED. [14]

The GSIS and Manlongat spouses filed separate appeals. The Court of Appeals held that the trial court erred
in declaring defendants as having waived their right to present evidence. Thus, on April 19, 1994, the Court of
Appeals set aside the decision of the trial court and remanded the case to the lower court for the reception of
evidence of defendants Manlongat and GSIS.[15]
In the meantime, on March 19, 1988, Col. dela Merced passed away and was substituted by his heirs.
On December 27, 1996, the Regional Trial Court of Pasig, Branch 160, rendered a decision, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered:

1. Declaring the foreclosure sale of Lot Nos. 6, 7, 8 and 10 of Block 2, and Lot 8 of Block 8 and
certificate of Titles issued to GSIS covering the aforesaid lots as well as those issued to defendant
Manlongat spouses as null and void;

2. Declaring plaintiff-intervenor as the true and lawful owner of the aforesaid lots;

3. Ordering the Register of Deeds of Pasig, Metro Manila to issue new titles in the name of
plaintiff-intervenor or his substituted heirs namely Blanquita dela Merced-Macatangay, Blanquita
Errea dela Merced, Luis dela Merced and Maria Olivia dela Merced Paredes;
11
4. Ordering defendants GSIS and spouses Manlongat jointly and severally to pay attorneys fees of
P20,000.00 and to pay the costs.

SO ORDERED. [16]

The trial court made the following findings:

The mortgage contract signed by the Zulueta spouses of the property covered by TCT No. 26105 in
favor of GSIS (Exh. C-C-1 Merced) contained the following provisions:

Note:

The following lots which form part of TCT No. 26105 are not covered by this mortgage contract
due to sale to third parties and donation to government.

1. Lots No. 1 to 13, Block No. 1 - 6,138 sq.m.

2. Lots Nos. 1 to 11, Block No. 2 - 4,660 sq.m.

3. Lot No. 15, Block No. 3 ------ 487 sq.m.

4. Lot No. 17, Block No. 4 ------ 263 sq.m.

5. Lot No. 1, Block No. 7 -------- 402 sq.m.

6. Road Lots Nos. 1, 2, 3 & 4 -- 22,747 sq.m.

Evidently, lot numbers 1 to 11, Block 2 to include plaintiff-intervenors lots were excluded from the
mortgage. In fact, in a letter dated October 1, 1956, defendant GSIS confirmed that portions of the
subdivision such as lots Nos. 1 to 11, Block 2 x x x have already been sold x x x. (Exh. B-1
Merced) The intent of the parties was clear to exclude from the mortgage the properties claimed by
plaintiff-intervenor, among others, where he introduced improvements since 1955. On October 26,
1972, the spouses Zulueta executed the corresponding deed of sale in favor of plaintiff-intervenor
(Exh. C).

The contention of defendant GSIS and defendants Victor and Milagros Manlongat that Lot Nos. 6,
7, 8 & 10 are not the lots excluded from the mortgage by the spouses Zulueta to the GSIS cannot be
given credence. Evidence reveal that lots 6, 7, 8 and 10, Block 2, with a total area of 1,405 square
meters of the Antonio Village Subdivision were excluded from the September 25, 1956 mortgage
contract executed by defendants in favor of GSIS. (Exh. C, C-1 Merced, 9-1-95) Defendant GSIS
in fact had admitted in its answer, the letter to plaintiff acknowledging that there has been no
problem with respect to Lot 8, Block 8 of the said property. Obviously, defendant recognized the
ownership of intervenor of the mentioned lots. It is further to be noted that plan Pcs-5889 was not
yet in existence when the mortgage was executed in 1956. Besides defendant GSIS had knowledge
of the possession of intervenor. While the deed of sale between the Zuluetas and plaintiff-
intervenor was never registered nor annotated in the title and executed only after one (1) year,
defendant GSIS had knowledge of the possession of intervenor of the lots; that defendant GSIS was
not acting in good faith when it accepted the mortgage of the questioned lots. Plaintiff-intervenor in
1957 built a house and introduced improvement and built a house of strong structure on lots 6 & 7
and with the other lots serving as backyard and for 28 years had paid dues on the lots. [17]

Respondents appealed the decision to the Court of Appeals, where the same was docketed as CA-G.R. CV
No. 55034. On May 21, 1999, the Court of Appeals reversed the decision of the trial court.Petitioners filed a
Motion for Reconsideration which was denied on October 4, 1999.
Hence, the instant petition for review, raising the following assignments of error:
12
FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ACTED CONTRARY TO LAW AND JURISPRUDENCE IN


TOTALLY DISREGARDING THE ADMISSION OF DEFENDANT GSIS THAT THE
LOTS IN QUESTION WERE EXCLUDED FROM THE MORTGAGE

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ACTED CONTRARY TO LAW AND JURISPRUDENCE IN NOT


RULING THAT (A) PLAINTIFF HAS BEEN IN POSSESSION OF THE SUBJECT LOTS
SINCE 1955 CONTINUOUSLY UNTIL THE PRESENT AND (B) GSIS HAD
KNOWLEDGE OF PLAINTIFFS POSSESSION

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ACTED CONTRARY TO LAW AND JURISPRUDENCE IN ITS


FAILURE TO APPRECIATE THE SIGNIFICANCE OF PLAINTIFFS CONTINUOUS
OPEN AND ADVERSE POSSESSION IN THE CONCEPT OF OWNER FOR 28 YEARS
AND THE ACTUAL KNOWLEDGE OF GSIS OF SUCH POSSESSION

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ACTED CONTRARY TO LAW AND JURISPRUDENCE IN RULING


THAT NO JUDGMENT CAN BE RENDERED AGAINST THE SPOUSES MANLONGAT
WITHOUT VIOLATING THEIR RIGHT TO DUE PROCESS OF LAW [18]

In essence, petitioners allege that the foreclosure sale was null and void because the mortgage executed by
the parties, insofar as the properties previously sold to petitioners were concerned, was also void from the
beginning. Petitioners had been in continuous and open possession thereof before and during the time of the
mortgage, more specifically, since 1955 continuously up to the present, and GSIS had knowledge
thereof. Furthermore, respondent GSIS admitted that the lots in questions were excluded from the
mortgage. Finally, under Presidential Decree No. 957, also known as The Subdivision and Condominium Buyers
Protective Decree, petitioners are entitled to the issuance of their corresponding title over the lots after having
completed their payments to the subdivision owner.[19]
Petitioners aver that when the Zuluetas mortgaged their properties to GSIS on October 15, 1957, they were
no longer the owners of the lots subject of this litigation, the same having been sold to Francisco dela Merced by
virtue of the contract to sell executed on September 3, 1957. Hence, the mortgage was void from its inception and
GSIS, as mortgagee, acquired no better right notwithstanding the registration of the mortgage. Petitioners also
argued that GSIS was a mortgagee in bad faith as it had been negligent in ascertaining and investigating the
condition of the subject lots mortgaged to it as well as the rights of petitioners who were already in possession
thereof at the time of mortgage. Furthermore, petitioners cite the judicial admission of respondent GSIS in its
answer before the trial court, wherein it recognized the rights of ownership of Francisco dela Merced over Lot 8,
Block 8 and of Eva Mendoza dela Merced over Lot 10, Block 2 of TCT 26105.
Respondent GSIS countered that it cannot be legally presumed to have acknowledged petitioners rights over
Lot 8, Block 8 of TCT 26105. With regard to the possession of petitioners, respondent GSIS invoked the ruling
of the Court of Appeals that the mere possession of petitioner cannot stand against the registered titles of GSIS
and its buyers, Elizabeth and Ma. Therese Manlongat. Moreover, Lot 6, Block 2 (formerly Block 4) of the Antonio
Village Subdivision was acquired by Elizabeth Manlongat in a public bidding, as a consequence of which TCT
No. PT-94007 was issued to her. Respondent GSIS also maintained that the lots being claimed by petitioners were
included in the real estate mortgage executed by the Zuluetas in favor of GSIS; and that the inclusion of the
subject lots in the mortgage was confirmed by Manuel Ibabao, an employee of the Acquired Assets Department
of GSIS.
For their part, respondent spouses Manlongat alleged that since Francisco dela Merced never registered the
contract to sell and deed of absolute sale with the Register of Deeds, the same cannot affect the rights of third
persons such as their daughter, Elizabeth Manlongat, who dealt in good faith with GSIS as the prior registered
owner.

13
The petition is impressed with merit.
Petitioners rights of ownership over the properties in dispute, albeit unregistered, are superior to the registered
mortgage rights of GSIS over the same. The execution and validity of the contract to sell dated September 3, 1957
executed by the Zulueta spouses, as the former subdivision owner, in favor of Francisco dela Merced, are beyond
cavil. There is also no dispute that the contract to sell was entered into by the parties before the third mortgage
was constituted on October 15, 1957 by the Zuluetas in favor of GSIS on the property covered by TCT No. 26105,
which included the subject lots. Francisco dela Merced was able to fully pay the purchase price to the vendor,
who later executed a deed of absolute sale in his favor. However, the Zuluetas defaulted on their loans; hence, the
mortgage was foreclosed and the properties were sold at public auction to GSIS as the highest bidder.
In the case of State Investment House, Inc. v. Court of Appeals,[20] it was held that:

STATEs registered mortgage right over the property is inferior to that of respondents-spouses
unregistered right. The unrecorded sale between respondents-spouses and SOLID is preferred for
the reason that if the original owner (SOLID, in this case) had parted with his ownership of the
thing sold then he no longer had ownership and free disposal of that thing so as to be able to
mortgage it again. Registration of the mortgage is of no moment since it is understood to be without
prejudice to the better right of third parties.

In the same vein, therefore, the registered right of GSIS as mortgagee of the property is inferior to the
unregistered right of Francisco dela Merced. The unrecorded sale between Francisco dela Merced as the vendee
of the property and the Zuluetas, the original owners, is preferred for the same reason stated above.
Respondents cannot even assert that as mortgagee of land registered under the Torrens system, GSIS was not
required to do more than rely upon the certificate of title. As a general rule, where there is nothing on the certificate
of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser
is not required to explore further than what the Torrens Title upon its face indicates in quest for any hidden defect
or inchoate right that may subsequently defeat his right thereto. This rule, however, admits of an exception as
where the purchaser or mortgagee has knowledge of a defect or lack of title in the vendor, or that he was aware
of sufficient facts to induce a reasonably prudent man to inquire into the status of the property in litigation.[21]
In the case at bar, GSIS is admittedly a financing institution. In its answer to the complaint filed with the trial
court, GSIS admitted knowledge that the spouses Jose C. Zulueta and Soledad B. Ramos owned the Antonio
Subdivision when they mortgaged the same with GSIS. In Sunshine Finance and Investment Corp. v.
Intermediate Appellate Court,[22] we held that when the purchaser or mortgagee is a financing institution, the
general rule that a purchaser or mortgagee of land is not required to look further than what appears on the face of
the title does not apply. Further:

Nevertheless, we have to deviate from the general rule because of the failure of petitioner in this
case to take the necessary precautions to ascertain if there was any flaw in the title of the Nolascos
and to examine the condition of the property they sought to mortgage. The petitioner is an
investment and financing corporation. We presume it is experienced in its business. Ascertainment
of the status and condition of properties offered to it as security for the loans it extends must be a
standard and indispensable part of its operations. Surely it cannot simply rely on an examination of
a Torrens certificate to determine what the subject property looks like as its condition is not
apparent in the document. The land might be in a depressed area. There might be squatters on it. It
might be easily inundated. It might be an interior lot without convenient access. These and other
similar factors determine the value of the property and so should be of practical concern to the
petitioner. [23]

There is nothing in the records of this case to indicate that an ocular inspection report was conducted by
GSIS, or whether it investigated, examined and assessed the subdivision lots when they were offered as security
for the loans by the original owners. The only inventory made by GSIS based on its documentary evidence was
prepared by its officers employed with the Acquired Assets Department, but that was after the foreclosure sale
was already conducted and not before the mortgage was constituted over the property. The constructive
knowledge of GSIS of the defect in the title of the subject property, or lack of such knowledge due to its
negligence, takes the place of registration of the rights of petitioners.
Likewise, in Philippine National Bank v. Office of the President,[24]24 we held that ---

14
As between these small lot buyers and the gigantic financial institutions which the developers deal
with, it is obvious that the law --- as an instrument of social justice --- must favor the weak. Indeed,
the petitioner Bank had at its disposal vast resources with which it could adequately protect its loan
activities, and therefore is presumed to have conducted the usual due diligence checking and
ascertained (whether thru ocular inspection or other modes of investigation) the actual status,
condition, utilization and occupancy of the property offered as collateral. It could not have been
unaware that the property had been built on by small lot buyers. On the other hand, private
respondents obviously were powerless to discover the attempt of the land developer to hypothecate
the property being sold to them. It was precisely in order to deal with this kind of situation that P.D.
957 was enacted, its very essence and intendment being to provide a protective mantle over
helpless citizens who may fall prey to the razzmatazz of what P.D. 957 termed unscrupulous
subdivision and condominium sellers. [25]

In the case at bar, GSIS admitted in its answer that it received a letter from Francisco dela Merced on August
27, 1981, stating that he had acquired the subject lots by virtue of a deed of absolute sale executed in his favor by
the Zulueta spouses.[26] GSIS also admitted the fact that on October 17, 1980, its Deputy General Counsel wrote
Francisco dela Merced stating that his claim of ownership over Block 8, Lot 8, of TCT No. 26105 had no problem;
but his claim to Lots 6, 7, 10 and 11 of Block 2, of the same title, was not very clear. [27] Clearly, therefore, GSIS
had full knowledge of the claim of ownership of dela Merced over the aforementioned lots even before their sale
at public auction to Elizabeth Manlongat.
Coming now to the last issue --- whether Elizabeth Manlongat, as purchaser of Lot 6, Block 2 at an auction
sale conducted by GSIS, had a better right than petitioners --- we must rule in the negative. It should be borne in
mind that the title of Manlongat was derived through sale or transfer from GSIS, whose acquisition over the
property proceeded from a foreclosure sale that was null and void. Nemo potest plus juris ad alium transferre
quam ipse habet. No one can transfer a greater right to another than he himself has.[28] In other words, the
subsequent certificates of title of GSIS and of Manlongat over the property are both void, because of the legal
truism that the spring cannot rise higher than the source.
Further, Manlongat cannot claim that she was a purchaser in good faith. The records categorically reflect that
neither Manlongat nor her predecessor-in-interest, GSIS, possessed the property prior to or after the former bought
the same at an auction sale. In fact, at the time the lots were sold to Manlongat, petitioners were not only in actual
possession thereof, but their father, Francisco dela Merced, had already built a house thereon. Again, a cautious
and prudent purchaser would usually make an ocular inspection of the premises, this being standard practice in
the real estate industry. Should such prospective buyer find out that the land she intends to buy is being occupied
by anybody other than the seller, who, in this case, was not in actual possession, it would then be incumbent upon
her to verify the extent of the occupants possessory rights. The failure of a prospective buyer to take such
precautionary steps would mean negligence on her part and would thereby preclude her from claiming or invoking
the rights of a purchaser in good faith.
WHEREFORE, in view of the foregoing, the petition is GRANTED. The decision of the Court of Appeals
is REVERSED AND SET ASIDE. The decision of the Regional Trial Court of Pasig City, Branch 160, in Civil
Cases Nos. 51410 and 51470, is REINSTATED. The foreclosure sale of Lot Nos. 6, 7, 8 and 10 of Block 2 and
Lot 8 of Block 8 of the property originally covered by TCT 26105, and the subsequent certificates of titles issued
to GSIS as well as TCT No. PT-94007 in the name of Elizabeth Manlongat, are declared NULL AND VOID. The
Register of Deeds of Pasig City is ordered to CANCEL all present certificates of title in the name of GSIS and
Elizabeth Manlongat covering the above-mentioned properties, and to ISSUE new certificates of title over the
same in the name of petitioners as co-owners thereof. Respondents GSIS and spouses Victor and Milagros
Manlongat are ORDERED to pay, jointly and severally, attorneys fees in the increased amount of P50,000.00,
and to pay the costs.
SO ORDERED.
Kapunan and Pardo, JJ., concur.
Davide, Jr., C.J., (Chairman), except as to attorneys fees. There should be no increase.
Puno, J., on official leave.

Rollo, pp. 36-45; penned by Associate Justices Hector L. Hofilea, concurred in by Associate Justices Omar U. Amin and Presbitero J.
[1]

Velasco, Jr.
15
[2]
Record, Civil Case No. 51410, pp. 646-660; penned by Judge Mariano M. Umali.
[3]
Exh. 1.
[4]
Exh. 2.
[5]
Exh. 3.
[6]
Exh. F.
[7]
Record, Civil Case No. 51410, p. 24-25
Juanito Pomperada, Avelino Villasanta, Neptale Cababahay, Lamberto Demos, Eduardo Infante, Gloria Lemonsito, Alfonso Billones,
[8]

Jean Marie Gatungay, Alfredo Garcia, Anacleto Barcenas, Antonio Ayuben, Romeo Sesmundo, Marivic Ceniza, Oscar Calumpeta,
Osmundo Ramos, Samuel Maiwat, Primo Calderon, Joselito Braga, Raymundo Menor, Mario Fernandez, Alicia Enaje, Aida Leque,
Cristina Milo, Salvador Florencio, Ordel Tobola, Edna Gallo, Natividad Sebastian, Alejandro Laudencio and Alberto Bellera.
[9]
Record, Civil Case No. 51410, pp. 1-5.
[10]
Record, Civil Case No. 51470, pp. 1-6.
[11]
Record, Civil Case No. 51410, pp. 99-102.
[12]
Ibid., p. 130.
[13]
Record, Civil Case No. 51470, p. 145.
[14]
Record, Civil Case No. 51410, p. 361.
Ibid., pp. 472-76; penned by Associate Justice Bernardo P. Pardo (now member of this Court), concurred in by Presiding Justice
[15]

Vicente V. Mendoza (now member of this Court) and Associate Justice Justo P. Torres, Jr. (retired Justice of this Court).
[16]
Ibid., p. 660.
[17]
Ibid., pp. 657-658.
[18]
Rollo, pp. 24-30.
[19]
Ibid., pp. 178-79.
[20]
254 SCRA 368, 373 (1996).
[21]
Ibid., at 373-74.
[22]
203 SCRA 210 [1991].
[23]
Ibid., at 216.
[24]
252 SCRA 5 [1996].
[25]
Ibid., at 10-11.
[26]
Record, Civil Case No. 51470, p. 50.
[27]
Ibid., pp. 2, 50.
[28]
Mathay v. Court of Appeals, 295 SCRA 556, 577 [1998].

16
FIRST DIVISION

[G.R. No. 122425. September 28, 2001.]

FLORDELIZA H. CABUHAT, Petitioner, v. THE HONORABLE COURT OF APPEALS SPECIAL FIFTH DIVISION, and
MERCEDES H. AREDE, Respondents.

DECISION

YNARES-SANTIAGO, J.:

Before this Court is a petition for review on certiorari of the Decision of the Court of Appeals in CA-G.R. CV No. 32910 dated
January 9, 1995, disposing as follows: chan rob1es v irt ual 1aw l ibra ry

WHEREFORE, in view of the foregoing, the instant appeal is hereby GRANTED. The portion of the lower court’s decision
upholding appellee’s mortgage lien is hereby REVERSED and SET ASIDE.

SO ORDERED. 1

The undisputed facts as found by the respondent Court of Appeals: chanrob 1es vi rtua l 1aw lib rary

Mary Ann Arede was barely three days old when appellant Mercedes Arede informally adopted her as the latter’s own
daughter. In December, 1972, appellant purchased a parcel of land situated in Bagbag, Ligtong, Rosario, Cavite comprising
an area of 1,313 square meters. The said land was registered by appellant in Mary Ann Arede’s name and the corresponding
title was issued by the Register of Deeds of Cavite on December 9, 1972 as Transfer Certificate of Title No. T-56225.
According to appellant, the said title was always in her possession which she kept in a locked drawer in her residence.

Upon reaching the age of majority and unknown to appellant, Mary Ann Arede obtained a reconstituted owner’s duplicate of
TCT No. T-56225 (Exhibit "D") thru the use of a falsified court order (Exhibit "B") supposedly issued by the Regional Trial
Court of Cavite, Branch 17, on December 16, 1988, whereby the court purportedly directed the Register of Deeds of Cavite
to issue another owner’s duplicate copy of TCT No. T-56225, which Mary Ann Arede claimed to have lost. Using this
reconstituted title, Mary Ann Arede mortgaged the land to the Rural Bank of Noveleta, Cavite on February 28, 1989. Upon
release of the mortgage, the land was again mortgaged by Mary Ann Arede on May 16, 1990, this time to appellee Flordeliza
Cabuhat for the amount of P300,000.00, which mortgage was registered by appellee on the following day at the Register of
Deeds of Cavite.

It appeared however that prior to the second mortgage on May 16, 1990, the subject lot was sold by Mary Ann Arede to
appellant Mercedes Arede in consideration of the sum of P100,000.00 as evidenced by a Deed of Sale dated January 17,
1990 (Annex E, Record, p. 17). Unfortunately, this sale was not registered by Appellant.

Hence, upon knowledge of the mortgage to appellee Cabuhat, appellant was prompted to commence the instant suit for
annulment of title.

Upon her failure to file answer within the reglementary period, defendant Mary Ann Arede was declared in default.
Thereafter, trial ensued and judgment was rendered by the lower court on April 26, 1991, ordering as follows: jgc: chan roble s.com.p h

"WHEREFORE, the Court hereby decrees that: chan rob1e s virtual 1aw l ibra ry

1) the owner’s duplicate copy of T.C.T. No. T-56225, with Serial No. 004470 of the Register of Deeds of the Province of
Cavite, is null and void and, accordingly, the Register of Deeds is directed to cancel the same from their files and the owner’s
duplicate copy thereof with Serial No. SN2033078 is hereby revived;

2) the mortgage lien in favor of defendant Flordeliza H. Cabuhat is valid and binding;

3) defendant Mary Ann Arede is ordered to pay plaintiff Mercedes Arede the following amounts: chanrob1es v irt ual 1aw l ibra ry

a) the sum of FIFTY THOUSAND (P50,000.00) PESOS as moral damages;

b) the sum of FIFTEEN THOUSAND (P15,000.00) PESOS, plus P500.00 per appearance of counsel, as attorney’s fees; and

c) TWO THOUSAND (P2,000.00) PESOS as litigation expenses.

Cost against defendant Mary Ann Arede.

SO ORDERED. 2

Mercedes appealed to the Court of Appeals, seeking a reversal of the portion of the above-quoted decision upholding the
mortgage lien in Flordeliza’s favor. Mercedes argued that mortgage lien was invalid because: (1) the registration was
procured through the presentation of a forged owner’s duplicate certificate of title, in violation of Section 53 of Presidential
Decree 1529; and (2) the mortgage constituted when Mary Ann was no longer the absolute owner of the subject property
contravened Article 2085 of the New Civil Code.
17
While the appeal was pending, Mercedes passed away, leaving no legal representative or heirs qualified to take her place.
Nevertheless, the Court of Appeals proceeded to resolve the case without substituting the appellant, it appearing that no
prejudice would be caused to the parties.

On January 9, 1995, the Court of Appeals rendered judgment granting the late Mercedes’ appeal, reversing and setting aside
the trial court’s decision upholding the mortgage lien in favor of Flordeliza.

Hence, this petition for review.

Petitioner contends that the Court of Appeals committed grave abuse of discretion when it disregarded the priority of
registered rights over real property. She also assails the appellate court’s conclusion that the real estate mortgage in her
favor is null and void.

After a careful and thorough disquisition of the established facts and issues raised in the instant controversy, we find merit in
this petition.

The Court of Appeals, in reversing the decision of the trial court, relied solely on the provisions of Article 2085 of the New
Civil Code, which states, in part, that for a mortgage to be valid, the persons constituting the pledge or mortgage should
have the free disposal of their property, and in the absence thereof, they should be legally authorized for the purpose. It also
cited the 1954 case of Parqui v. PNB, 3 wherein the mortgage was declared null and void since the registration thereof was
procured by the presentation of a forged deed.

However, it is well-settled that even if the procurement of a certificate of title was tainted with fraud and misrepresentation,
such defective title may be the source of a completely legal and valid title in the hands of an innocent purchaser for value. 4
Thus:chanrob1e s virtual 1aw lib rary

Where innocent third persons, relying on the correctness of the certificate of title thus issued, acquire rights over the
property the court cannot disregard such rights and order the total cancellation of the certificate. The effect of such an
outright cancellation would be to impair public confidence in the certificate of title, for everyone dealing with property
registered under the Torrens system would have to inquire in every instance whether the title has been regularly or
irregularly issued. 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. 5

Just as an innocent purchaser for value may rely on what appears in the certificate of title, a mortgagee has the right to rely
on what appears in the title presented to him, 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 the said certificate. 6

Furthermore, it is a well-entrenched legal principle that when an innocent mortgagee who relies upon the correctness of a
certificate of title consequently acquires rights over the mortgaged property, the courts cannot disregard such rights. 7

Article 2085 of the Civil Code, which requires that the mortgagor must have free disposal of the property, or at least have
legal authority to do so, admits of exceptions. In quite a number of instances, this Court has ruled that the said provision
does not apply where the property involved is registered under the Torrens System. 8 Only recently, this Court declared: cha nro b1es vi rtua l 1aw lib ra ry

The Torrens system was adopted in this country because it was believed to be the most effective measure to guarantee the
integrity of land titles and to protect their indefeasibility once the claim of ownership is established and recognized. If a
person purchases a piece of land on the assurance that the seller’s title thereto is valid, he should not run the risk of being
told later that his acquisition was ineffectual after all. This would not only be unfair to him. What is worse is that if this were
permitted, public confidence in the system would be eroded and land transactions would have to be attended by complicated
and not necessarily conclusive investigations and proof of ownership. The further consequence would be that land conflicts
could be even more numerous and complex than they are now and possibly also more abrasive, if not even violent. The
Government, recognizing the worthy purposes of the Torrens system, should be the first to accept the validity of titles issued
thereunder once the conditions laid down by the law are satisfied. 9

Setting aside the general rule and applying instead the exception is not without legal or statutory basis. In the case of
Medina v. Chanco, 10 we held: cha nrob 1es vi rtua l 1aw lib rary

It is very clear from Section 55 of the Land Registration Act that although an original owner of a registered land may seek
the annulment of a transfer thereof on the ground of fraud, such a remedy, however, is "without prejudice to the rights of
any innocent holder for value" of the certificate of title. (Emphasis ours)

Then in Penullar v. PNB, 11 this Court resolved a similar issue ruling that Section 38 of the Land Registration Act places an
innocent mortgagee for value under the mantle of protection accorded to innocent purchasers for value.

Furthermore, Section 39 of Act No. 496 provides that every person receiving a certificate of title in pursuance of a decree of
registration, and every subsequent purchaser (or mortgagee) of registered land who takes a certificate of title for value in
good faith, shall hold the same free of all encumbrance except those noted on said certificate. 12 In Sunshine Finance and
Investment Corp. v. IAC, 13 we held: cha nrob 1es vi rtua l 1aw lib rary

The court does not intend to disregard the long line of its decisions holding that "where innocent third persons, relying on the
correctness of the certificate of title thus issued, acquire rights over the property, the court cannot disregard such rights and
order the total cancellation of the certificate." It is true that the effect of such cancellation would be to impair public
confidence in the certificate of title, for everyone dealing with property registered under the Torrens System would have to
inquire in every instance as to whether the title has been regularly or irregularly issued. This is contrary to the evident
purpose of Act 496, Sec. 39, as "innocent purchasers for value" or any innocent lessee, mortgagee or other encumbrances
for value. A mortgagee has the right to rely on what appears in the certificate of title, and in the absence of anything to
excite suspicion, is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on
the face of the certificate. (Emphasis ours)

18
On the basis of these statutory provisions, this Court has uniformly held that when a mortgagee relies upon what appears on
the face of a Torrens title and loans money in all good faith on the basis of the title in the name of the mortgagor, only
thereafter to learn that the latter’s title was defective, being thus an innocent mortgagee for value, his or her right or lien
upon the land mortgaged must be respected and protected, even if the mortgagor obtained her title thereto through fraud.
14

In the case at bar, there is no doubt that petitioner was an innocent mortgagee for value. When Mary Ann mortgaged the
subject property, she presented to petitioner Flordeliza an owner’s duplicate certificate of title that had been issued by the
Register of Deeds. The title was neither forged nor fake. Petitioner had every right to rely on the said title which showed on
its face that Mary Ann was the registered owner. There was no reason to suspect that Mary Ann’s ownership was defective.
Besides, even if there had been a cloud of doubt, Flordeliza would have found upon verification with the Register of Deeds
that Mary Ann was the titled owner and that the original title on file with the said office was free from any lien or
encumbrance, and that no adverse claim of ownership was annotated thereon.

Petitioner’s reliance on the clean title of Mary Ann was reinforced by the fact that the latter had previously mortgaged the
same property to a bank which accepted the property as collateral on the strength of the same owner’s duplicate copy of the
title presented by Mary Ann. Certainly, petitioner Flordeliza cannot be expected or obliged to inquire whether the said
owner’s duplicate copy presented to her was regularly or irregularly issued, when by its very appearance there was no reason
to doubt its validity. Where there is nothing in the certificate of title that would indicate any cloud or vice in the ownership of
the property, or any encumbrance thereon, the mortgagee is not required to explore further than what the certificate of title
on its face indicates in search of any hidden defect or inchoate right that may thereafter defeat her right thereto. 15

In fact, respondent never questioned petitioner Flordeliza’s good faith in accepting the subject property as security for the
loan and in having the mortgage registered and annotated on the title. Neither was there an allegation that the petitioner
was a party or even privy to Mary Ann’s alleged fraudulent acts to secure another owner’s duplicate copy. There is, therefore,
no reason to doubt petitioner’s good faith in entering into the mortgage transaction with Mary Ann.

The record shows that petitioner loaned the amount of P300,000.00 to Mary Ann, proving that not only was she an innocent
mortgagee for value, but also one who in good faith relied on the clean title of Mary Ann. In accepting such a mortgage,
petitioner was not required to make further investigation of the title presented to her to bind the property being given as
security for the loan. 16

In fine, the prevailing jurisprudence is that a mortgagee has a right to rely in good faith on the certificate of title of the
mortgagor of the property given as security and in the absence of any sign that might arouse suspicion, has no obligation to
undertake further investigation. Hence, even if the mortgagor is not the rightful owner of, or does not have a valid title to,
the mortgaged property, the mortgagee in good faith is nonetheless entitled to protection. 17

We are not unmindful of the fact that both petitioner and respondent are innocent parties who have been forced to litigate
due to the duplicitous acts of Mary Ann, who has not even bothered to make an appearance or participate throughout the
litigation of this case. Nevertheless, there is an equitable maxim that between two innocent persons, the one who made it
possible for the wrong to be done should be the one to bear the resulting loss. 18 It cannot be denied that Mercedes, in her
failure or neglect to register the sale in her favor made it possible for Mary Ann to mortgage the subject property to the
petitioner. Having failed to properly safeguard her own rights, she cannot ask the courts to come to her rescue, when to do
so would be at the expense of an innocent mortgagee in good faith. The law and jurisprudence dictate that petitioner’s right
as a registered mortgagee in good faith and for value is better deserving of protection.

Clearly, then, the Court of Appeals erred in invalidating petitioner’s mortgage lien over the subject property.

WHEREFORE, in view of the foregoing, the instant petition for review on certiorari is GRANTED. The Decision of the Court of
Appeals in CA-G.R. CV No. 32910 is SET ASIDE, and the Decision of the Regional Trial Court of Cavite City, Branch 16, in
Civil Case No. N-5386 is REINSTATED in all aspects.

No pronouncement as to costs.

SO ORDERED.

Davide, Jr., C.J., Puno, Kapunan, and Pardo, JJ., concur.

Endnotes:

1. Court of Appeals Decision, p. 4 Rollo, p. 51.

2. RTC Decision, Records, pp. 103-110.

3. 96 Phil. 157, 161 (1954).

4. Republic v. Court of Appeals, 306 SCRA 81, 88 [1999].

5. Republic v. Court of Appeals, supra, pp. 88-89.

6. Duran v. IAC, 138 SCRA 489, 495 [1985].

7. Hemedes v. Court of Appeals, 316 SCRA 347. 373 (1999).

8. Duran v. IAC, supra.

9. Traders Royal Bank v. Court of Appeals, 315 SCRA 190, 202 (1999), citing Tenio-Obsequio v. Court of Appeals, 230 SCRA
550, 557 (1994).
19
10. 117 SCRA 201, 205 (1982).

11. 120 SCRA 171, 180 (1983), citing Blanco, Et. Al. v. Esquierdo, Et Al., 110 Phil. 606 (1961).

12. Director of Lands v. Abache, 73 Phil. 606 (1941-42).

13. 203 SCRA 210, 215-216 (1991).

14 Penullar v. PNB, supra, PNB v. Court of Appeals, 187 SCRA 735, 742 (1990).

15. State Investment House, Inc. v. Court of Appeals, 254 SCRA 368, 373 (1996).

16. Planters Development Bank v. Court of Appeals, 197 SCRA 698, 702 (1991).

17. Cebu International Finance Corp. v. Court of Appeals, 268 SCRA 178, 189 (1997).

18. Bacaltos Coal Mines v. Court of Appeals, 245 SCRA 460, 475 (1995); Traders Royal Bank v. Court of Appeals, supra, pp.
210-211.

20
FIRST DIVISION

[G.R. No. L-70987. September 29, 1988.]

GREGORIO Y. LIMPIN, and ROGELIO M. SARMIENTO, Petitioners, v. INTERMEDIATE APPELLATE COURT and
GUILLERMO PONCE, Respondents.

Danilo A. Basa for petitioner Gregorio Y. Limpin, Jr.

Angara, Abello, Concepcion, Regala & Cruz Law Offices for petitioner Rogelio Sarmiento.

Sycip, Salazar, Hernandez & Gatmaitan Law Offices and Eugenio C. Lindo for respondent Guillermo Ponce.

SYLLABUS

1. CIVIL LAW; CIVIL CODE; CREDIT TRANSACTIONS; MORTGAGE RIGHT OF REDEMPTION EXISTS IN EXTRAJUDICIAL
FORECLOSURE. — Under Act 3135, after an extrajudicial foreclosure, a mortgager has the right of redemption which he may
exercise within one year from the registration of the sheriff’s certificate of sale.

2. SPECIAL LAW; SPECIAL CIVIL ACTION; FORECLOSURE OF MORTGAGE; NO RIGHT OF REDEMPTION EXISTS; EXCEPTION.
— There is no right of redemption in judicial foreclosure, except where the mortgagee is the Philippine National Bank, or a
bank or banking institution (Rule 68, Sec. 3, Rules of Court; Acts Nos. 2747 and 2938; Republic Act No. 337).

3. ID.; ID.; ID.; ID.; EQUITY REDEMPTION, IN JUDICIAL FORECLOSURE; PERIOD TO REDEEM. — While there is no right of
redemption in judicial foreclosure, there is in favor of the mortgagor an equity of redemption. An equity of redemption is the
right of the mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within
the 90-day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior
to its confirmation.

4. ID.; ID.; ID.; ID.; JUNIOR ENCUMBRANCES HAVE RIGHT OF EQUITY OF REDEMPTION. — The equity of redemption
pertaining to the mortgagor is the same right that may be exercised by the mortgagor’s successor in interest or third persons
acquiring rights over the mortgaged property subordinate to the mortgagee’s lien.

5. ID.; ID.; ID.; ID.; ID.; UNFORECLOSED EQUITY OF REDEMPTION, RETAINED BY PARTIES NOT IMPLEADED. — Where a
subsequent or junior lienholder is not impleaded in the foreclosure proceedings, any judgment in favor of the mortgagee is
not binding upon him, he retains what is known as an unforeclosed equity of redemption and a separate foreclosure
proceeding should be brought to require him to redeem from the first mortgagee or the party acquiring title to the
mortgaged property at the foreclosure sale within 90 days under penalty of losing said prerogative.

6. ID.; ID.; ID.; EQUITY OF REDEMPTION; GRANT OF EXTENSION MUST BE CLEAR AND UNEQUIVOCAL. — The fact that
private respondent recognized petitioners’ equity of redemption does not prevent the redemption from lapsing where such
recognition was made when there was as yet no order confirming the sale and private respondent’s equity of redemption still
existed. Moreover, even assuming that a period to redeem may be extended by the act of the party who would have been
benefited by the expiration, the grant of such extension must be clear and unequivocal.

7. CONSTITUTIONAL LAW; BILL OF RIGHTS; DUE PROCESS; PETITIONER WHO APPEALED THE QUESTIONED DECISION
CANNOT CLAIM DENIAL OF DUE PROCESS. — Since petitioner has appealed to this court the decision of the court of appeals
ordering the trial court to confirm the judicial foreclosure, he cannot now claim that he was denied due process for alleged
lack of notice. The denial of the appeal sufficiently alerted him that confirmation could come at any time after the finality of
this Court’s decision.

DECISION

NARVASA, J.:

Once again the parties are before this Court; this time, for a determination of whether or not the equity of redemption
recognized in favor of petitioner Rogelio M. Sarmiento in this Court’s judgment promulgated on January 30, 1987, still
subsists and may be exercised, more than a year after that judgment had become final and executory. chanrobles vi rt ualawlib ra ry chan roble s.com:c han robles. com.ph

The proceedings concern two (2) lots, then covered by TCTs Nos. 92836 and 92837, which, together with two (2) others,
were originally mortgaged in 1973 to herein private respondent Ponce by their former owners, the Spouses Jose and
Marcelina Aquino. These two lots were afterwards sold in 1978 by the same Aquino Spouses to Butuan Bay Wood Export
Corporation. Against this corporation herein petitioner Limpin obtained a money judgment in 1979; and to satisfy the
judgment, the two lots were levied on and sold at public auction in 1980, Limpin being the highest bidder. Limpin later sold
the lots to his co-petitioner, Sarmiento.

Earlier however — or a day before levy was made on the two lots in execution of the judgment against Butuan Bay Wood
21
Export Corporation — Ponce had initiated judicial proceedings for the foreclosure of the mortgage over said two (2) lots
(together with the two (2) others mortgaged to him). Judgment was rendered in his favor and became final; and at the
ensuing foreclosure sale, the lots were acquired by Ponce himself as highest bidder. Ponce then moved for confirmation of
the foreclosure sale, but the Court confirmed the sale of only two lots, refusing to do so as regards the two which had been
subject of the execution sale in Limpin’s favor (i.e., those covered by TCTs Nos. 92836 and 92837). chanrob les law li bra ry

It was to resolve the resulting dispute that Ponce instituted a special civil action in the Intermediate Appellate Court,
impleading Limpin and Sarmiento as indispensable parties respondents. That Court rendered judgment on February 28, 1985
in Ponce’s favor; Limpin and Sarmiento appealed; this Court denied their appeal.

The judgment of this Court of January 30, 1987 dismissed Sarmiento’s and Limpin’s petition for review on certiorari of the
Appellate Court’s decision of February 28, 1985. It in effect affirmed the latter’s decision which inter alia ordered the Trial
Court "to confirm the sale (of the lots formerly covered by TCT Nos. 92836 and 92837) and issue a writ of possession to . . .
(Guillermo Ponce) with respect to the aforesaid lots, subject to the equity of redemption of the respondent Rogelio V.
Sarmiento," 1 Applying the doctrine laid down in Santiago v. Dionisio, a 1953 decision of this Court, 2 the Intermediate
Appellate Court’s decision declared that "the sale to Ponce, as the highest bidder in the foreclosure sale of the two lots in
question should have been confirmed, subject to Limpin’s (and now Sarmiento’s) equity of redemption." cralaw vi rtua 1aw lib rary

This Court’s aforesaid judgment also clearly and categorically sustained the exercise by the Appellate Court of jurisdiction
over the persons of Rogelio M. Sarmiento and Gregorio Limpin. 3 There can thus be no question that the petitioners herein,
said Rogelio Sarmiento and Gregorio Limpin, were affected and are bound by the decision of the Intermediate Appellate
Court, and that of this Court affirming it. chan roble s virtual lawl ibra ry

Rogelio M. Sarmiento, particularly, was aware that the Trial Court had the ministerial duty to execute the Appellate Court’s
decision, i.e., to confirm the sale and issue a writ of possession as regards the aforesaid lots, subject to the equity of
redemption explicitly recognized in his favor in the decisions mentioned. He knew that he had the prerogative to exercise his
equity of redemption, if not from the moment that the judgment of this Court became final and executory, 4 at least until the
Court a quo, presided over by Hon. Antonio Solano, subsequently confirmed the sale and issued a writ of possession in favor
of Guillermo Ponce in June, 1987. 5

He did not try to exercise that right before, at or about the time of the confirmation of the foreclosure sale by Judge Solano.
Instead, he instituted no less than two (2) actions in the same Regional Trial Court — which were assigned to another
branch, presided over by Hon. Teodoro Beltran — attempting to relitigate precisely the same issues which this Court and the
Intermediate Appellate Court had already passed upon and resolved adversely to him. For doing so — for trifling with and
abusing the processes of the courts, and thus unwarrantedly delaying execution of the final and executory judgment against
him — he and his counsel were both found guilty of contempt and correspondingly punished by this Court, by Resolution
dated May 5, 1988. The same resolution also decreed the dismissal of the complaints in both cases and the nullification and
setting aside of the restraining or injunctive orders of Judge Beltran. chanro bles. com:cra law:red

It was not until March 11, 1988 — nine months or so after entry of the judgment recognizing his equity of redemption as
successor-in-interest of the original mortgagors — that Sarmiento finally bestirred himself to attempt to exercise his
unforeclosed equity of redemption. On that day he filed a motion with the Court presided over by Hon. Judge Antonio Solano,
manifesting that he would exercise the right and asked the Court to fix the redemption price. 6 The Court opined that "this
should be the subject of the agreement between Ponce and Sarmiento." 7

Sarmiento then wrote to Ponce on March 23, 1988 offering "P2.6 million as redemption price for the two lots originally
covered by TCTs Nos. 92836 and 92837, now 307100 and 307124." 8 Ponce’s answer, dated March 25, 1988, rejected the
offer and averred "that the period within which x x (Sarmiento) could have exercised such right . . . (had) lapsed." 9
Sarmiento reacted by filing a motion with the Solano Court, dated March 29, 1988, asking it to "fix the redemption price . . .
and that the implementation of the writ of possession be provisionally deferred." 10 An opposition was promptly filed by
Ponce under date of May 4, 1988 11 in which he argued that "Sarmiento’s right to exercise his equity of redemption over
those lots had long expired," the opportunity to exercise it having presented itself but not availed of" (i) after . . . default in
the performance of the conditions of the mortgage and (ii) before the Sheriff s sale of the property and the judicial
confirmation thereof" According to Ponce, "from October 17, 1982, . . . (when) Sarmiento’s predecessors-in-interest
defaulted in their obligations over the mortgaged properties, up to June 17, 1987, when this . . . (Trial) Court confirmed the
auction sale of those properties, Sarmiento could (and should) have exercised his ‘equity of redemption.’" Judge Solano did
not share this view, and ruled accordingly. 12

The issue has been brought to this Court for resolution by Ponce’s "Motion for Clarification" dated May 27, 1988 and
"Supplemental Motion . ." dated June 13, 1988, as to which Sarmiento has submitted a Comment dated June 17, 1988. To
the comment a reply has been presented by Ponce under date of August 3, 1988.

Ponce states 13 that the term, equity of redemption, means "the right of the mortgagor to redeem the mortgaged property
after his default in the performance of the conditions of the mortgage but before the sale of the property or the (judicial)
confirmation of the (Sheriff s) sale," citing Top Rate International Services, Inc. v. I.A.C., 142 SCRA 473 [1976], or "the right
to redeem mortgaged property by paying the amount ordered by the court within a period of ninety days, or, even thereafter
but before the confirmation of the sale, invoking Sun Life Assurance Co. of Canada v. Diez, 52 Phil. 275 [1928]. 14 On this
premise, he postulates that "from October 17, 1982, the date Sarmiento’s predecessors-in-interest defaulted in their
obligations over the mortgaged properties, up to June 17, 1987, when the lower court confirmed the auction sale of those
properties, Sarmiento could have exercised his ‘equity of redemption." ‘ Not having done so within that time, his equity of
redemption had been extinguished; indeed, by opting to file "new suits against Ponce . . . seeking to annul Ponce’s titles over
those properties" instead of redeeming the same, he had "waived his equity of redemption (assuming such right existed at
the time the suits were commenced)." cralaw virtua1aw l ibra ry

It is Sarmiento’s position, on the other hand, 15 that the "17 June 1987 confirmation of the sale of the two lots could not
have cut off . . . (his) equity of redemption;" in fact, "Ponce himself, in his ‘Urgent Motion’ dated 1 June 1987, precisely
prayed for the issuance of a writ of possession ‘subject to the equity of redemption of Rogelio M. Sarmiento’ thereby
recognizing Sarmiento’s equity of redemption beyond confirmation date," 16 He also argues that he had not been informed of
the time when his right of redemption would be cut-off, 17 because he "never received a copy of any Motion for
Confirmation, much less notice of hearing thereon in violation of his right to due process;" that to hold otherwise would
"render nugatory the decision of the Court of Appeals and this . . . Court on the issue;" and that he is entitled to a
22
reasonable time, e.g., a year, for the exercise of his equity of redemption. 18

The equity of redemption is, to be sure, different from and should not be confused with the right of redemption. 19

The right of redemption in relation to a mortgage — understood in the sense of a prerogative to re-acquire mortgaged
property after registration of the foreclosure sale — exists only in the case of the extrajudicial foreclosure of the mortgage.
No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National Bank or a
bank or banking institution.

Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year
from the registration of the sheriffs certificate of foreclosure sale. 20

Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law 21 declares that a
judicial foreclosure sale, "when confirmed by an order of the court, . . . shall operate to divest the rights of all the parties to
the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law." 22 Such
rights exceptionally "allowed by law" (i.e., even after confirmation by an order of the court) are those granted by the charter
of the Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act (R.A. 337). 23 These laws confer on
the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold
on foreclosure — after confirmation by the court of the foreclosure sale — which right may be exercised within a period of
one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property. chan roble s law lib ra ry

But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the
PNB or a bank or banking institution. In such a case, the foreclosure sale, "when confirmed by an order of the court . . . shall
operate to divest the rights of all the parties to the action and to vest their rights in the purchaser." There then exists only
what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage
and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final,
in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.

Section 2, Rule 68 provides that —

". . . If upon the trial . . . the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due
to the plaintiff upon the mortgage debt or obligation, including interest and costs, and shall render judgment for the sum so
found due and order the same to be paid into court within a period of not less than ninety (90) days from the date of the
service of such order, and that in default of such payment the property be sold to realize the mortgage debt and costs." 24

This is the mortgagor’s equity (not right) of redemption which, as above stated, may be exercised by him even beyond the
90-day period "from the date of service of the order," and even after the foreclosure sale itself, provided it be before the
order of confirmation of the sale. 25 After such order of confirmation, no redemption can be effected any longer.

It is this same equity of redemption that is conferred by law on the mortgagor’s successors-in-interest, or third persons
acquiring rights over the mortgaged property subsequent, and therefore subordinate, to the mortgagee’s lien. 26 If these
subsequent or junior lien-holders be not joined in the foreclosure action, the judgment in the mortgagor’s favor is ineffective
as to them, of course. In that case, they retain what is known as the "unforeclosed equity of redemption," and a separate
foreclosure proceeding should be brought to require them to redeem from the first mortgagee, or the party acquiring title to
the mortgaged property at the foreclosure sale, within 90 days, 27 under penalty of losing that prerogative to redeem. In the
case at bar, however, there is no occasion to speak of any "unforeclosed equity of redemption" in Sarmiento’s favor since he
was properly impleaded in the judicial proceeding where his and Ponce’s rights over the mortgaged property were ventilated
and specifically adjudicated. cha nroble s.com : vi rtual law lib rary

Under the circumstances obtaining in this case, the plain intendment of the Intermediate Appellate Court was to give to
Sarmiento, not the unforeclosed equity of redemption pertaining to a stranger to the foreclosure suit, but the same equity of
redemption possessed by the mortgagor himself. The judgment cannot be construed as contemplating or requiring the
institution of a separate suit by Ponce to compel Sarmiento to exercise his unforeclosed equity of redemption, or as granting
Sarmiento the option to redeem at any time that he pleases, subject only to prescription. This would give rise to that
multiplicity of proceedings which the law eschews. The judgment plainly intended that Sarmiento exercise his option to
redeem, as successor of the mortgagor.

Upon the facts on record, Sarmiento cannot be heard to complain of denial of due process for alleged lack of notice of any
motion or hearing for confirmation of sale. The Decision of the Intermediate Appellate Court which he and his predecessor,
Limpin, had appealed to this Court specifically ordered the Trial Court to confirm 28 the judicial foreclosure sale in favor of
Ponce over the two lots, in these terms: 29

"WHEREFORE, the orders dated October 16, 1983 and December 19, 1983 of the respondent court, so far as they deny the
confirmation of the sale of the lots formerly covered by TCT Nos. 92836 and 92837, are SET ASIDE, and the respondent
court is hereby ORDERED to confirm the sale and issue a writ of possession to the petitioner with respect to the aforesaid
lots, subject to the equity of redemption of the respondent Rogelio V. Sarmiento. Without costs." cralaw virt ua1aw lib ra ry

Given the fact that said appealed orders of the Trial Court had been issued upon motion for confirmation earlier made by
Ponce — which was duly served and heard — the aforecited Decision of the Intermediate Appellate Court can be construed in
nowise than as a peremptory command to the Trial Court to confirm the sale as directed, motu proprio, and without the need
of any further motion or other action on the part of Ponce. The rejection by this Court of Sarmiento’s and Limpin’s appeal in
its own Decision of January 30, 1987, which imported nothing less than a total affirmance of the Decision of the Appellate
Court, should therefore have sufficiently alerted Sarmiento that confirmation could come at any time after this Court’s
Decision became final, with or without any action from Ponce. He cannot, in the circumstances, claim unfair surprise. He
should, upon being notified of this Court’s Decision, have taken steps to redeem the properties in question or, at the very
least, served the Trial Court and Ponce with notice of his intention to exercise his equity of redemption. There was certainly
time enough to do this — the order confirming the foreclosure sale issuing only on June 17, 1987 — had he not occupied
himself with the fruitless maneuverings to re-litigate the issues already recounted. Indeed, had he made an attempt to
redeem, even belatedly but within a reasonable period of time after learning of the order of confirmation (the record shows
he did learn of it within three [3] days after its issuance), 30 he might perhaps have given the Court some reason to consider
his bid on equitable grounds. He did not. He let nine (9) months pass, to repeat, in carrying out improper (and
23
contumacious) stratagems to negate the judgments against him, before making any such move. chanrobles law lib rary : re d

Neither can Sarmiento acceptably claim that Ponce, by moving for a writ of possession subject to his (Sarmiento’s) equity of
redemption, recognized the existence and enforceability of that prerogative beyond the prescribed cut-off date of
confirmation of the sale. Such an interpretation of the motion is totally unwarranted, given the fact that said motion was
made at a time (June 1, 1987) when there was as yet no order confirming the sale and, since Sarmiento’s equity of
redemption then still unquestionably existed, there was hardly occasion or for that matter, any reason as far as Ponce was
concerned, to provide against its lapsing. Moreover, assuming for the sake of argument that a resolutory period fixed by law
may be extended by act of the party in whose favor its expiration would operate, that act must bespeak a clear and
unequivocal intent to grant such an extension. No such clear grant can be inferred from the terms of Ponce’s motion, which
can, and in fact should be, read as a mere affirmation that there existed at the time an equity of redemption in Sarmiento’s
favor.cralawnad

WHEREFORE, the Court hereby rules that the equity of redemption claimed and invoked by Rogelio M. Sarmiento over the
properties originally covered by Transfer Certificates of Title Nos. 92836 and 92837 (now by TCTs Numbered 307100 and
307124), Registry of Deeds of Quezon City, subject of this case, lapsed and ceased to exist without having been properly
exercised, on June 17, 1987, with the issuance by the Trial Court of the Order confirming the sheriff’s sale (on judicial
foreclosure) of said, properties in favor of Guillermo Ponce.

Cruz, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

Endnotes:

1. At p. 1; Emphasis supplied.

2. 92 Phil. 495.

3. At pp. 7-8; and p. 4, Resolution, May 5, 1988.

4. The petitioners’ motion for reconsideration of the judgment was denied with finality by the Court’s Resolution dated April
27, 1987 (Rollo, p. 363), and entry of judgment was made on June 1, 1987 (Rollo, p. 364).

5. The writ of possession was issued, more precisely, on June 17, 1987 (Rollo, p. 386).

6. "Motion (Ex Abundanti Cautela)," Annex 1 of Sarmiento’s Comment dated 17 June 1988.

7. Order, March 17, 1988, Annex 2 of same Comment.

8. Annex 3 of Sarmiento Comment.

9. Annex 4, id.

10. Annex 6, id.

11. Annex 7, id.

12. In his Order of April 8, 1988, he declared that Ponce’s theory "would render nugatory and empty the decision of the
Appellate Court on this issue" (Annex 8, Comment of June 17, 1988, supra); and in his Order dated July 8, 1988, His Honor
denied Ponce’s motion for reconsideration dated May 4, 1988.

13. Reply to Comment, Aug. 3, 1988.

14. Drawing attention, too, to Quimson v. PNB, 36 SCRA 265; Villar v. Javier de Paderanga, 97 Phil. 604; Anderson v. Reyes,
54 Phil. 944.

15. Comment, June 17, 1988.

16. Emphasis supplied.

17. Citing Tiglao v. Botones, 90 Phil. 275.

18. Invoking Pascua v. Perez, 10 SCRA 198; Doronila v. Basquez, 72 Phil. 572; de Castro v. Olondriz, 50 Phil. 725; La
Urbana v. Belando, 54 Phil. 930.

19. Top Rate International Services v. IAC, Et Al., 142 SCRA 467, supra.

20. Salazar v. Meneses, 8 SCRA 495; General v. Barrameda, 69 SCRA 182; Gorospe v. Santos, 69 SCRA 191; PNB v. CA, 94
SCRA 357.

21. Sec. 3, Rule 68, Rules of Court.

22. Emphasis supplied.

23. SEE Moran, Comments on the Rules, 1970 ed., Vol. 3, p. 273, citing Gonzales v. PNB, 48 Phil. 824, 828; and Martin,
Rules of Court, etc., 3rd ed., Vol. 3, p. 289, citing Villar v. Javier de Paderanga, 97 Phil. 64; Piano v. Cayanong, 7 SCRA 397.

24. Emphasis supplied.

24
25. Anderson v. Reyes, 54 Phil. 944; Grimalt v. Velasquez, 36 Phil. 936; La Urbana v. Belando, 54 Phil. 930; Villar v.
Paderanga, 51 O.G. 5162, cited in Moran, op cit., at p. 273.

26. E.g., by second mortgage or subsequent attachment or judgment.

27. The period fixed in Section 2, Rule 68 for the mortgagor himself to redeem.

28. Something which it had earlier refused to do.

29. Rollo, p. 26.

30. Rollo, p. 382.

25
FIRST DIVISION

[G.R. No. 128118. February 15, 2002.]

GOVERNMENT SERVICE INSURANCE SYSTEM, Petitioner, v. THE HONORABLE COURT OF APPEALS and
CONRADO O. COLARINA, Respondents.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the Rules of Court assailing the October 28, 1996 Decision 1 and the
January 29, 1997 Resolution 2 of the Court of Appeals 3 in CA-G.R. SP. No. 40610, which set aside the March 13,
1996 4 and the April 24, 1996 5 Orders 6 of the Regional Trial Court of Masbate, Branch 48, in Spec. Civil Case Nos.
4242-43.

The instant controversy stemmed from a complaint 7 for "Determination and Payment of Just Compensation" filed by
private respondent against petitioner Government Service Insurance System (GSIS), the Secretary of Agrarian
Reform and the Land Bank of the Philippines (LBP). The instant case involves fifteen (15) parcels of land 8 originally
titled in the name of Associated Agricultural Activities, Inc. (AAA), with a total land area of 32,398,264 square meters,
situated in Barrio Malaran and Lamintao, Municipality of Dimasalang (now Uson), Masbate. These parcels of land were
mortgaged by AAA to petitioner GSIS as security for the payment of its loan. When AAA failed to pay the loan,
petitioner foreclosed the mortgage constituted on the lots. Petitioner was the highest bidder at the foreclosure sale.
Thereafter, the corresponding certificates of sale were issued, and subsequently registered on May 19, 1988, in the
name of petitioner.

On December 8, 1988, within the one-year redemption period, private respondent purchased subject lots from AAA. 9
On April 25, 1989, he voluntarily offered to sell the said properties to the Department of Agrarian Reform (DAR).

In a letter dated May 6, 1989, private respondent informed petitioner of his offer to sell the properties to the DAR.
Private respondent manifested that since the properties in question were already under the coverage of the
Comprehensive Agrarian Reform Program (CARP), the payment of the redemption price to the GSIS shall be assumed
by the government through the DAR and the LBP. Likewise, in a letter dated May 18, 1989, private respondent
informed petitioner of its willingness to pay 20% of the repurchase price within 30 days from receipt of the acceptance
of his offer. He added that the balance shall be paid by him within one (1) year from payment of the aforesaid
amount. Private respondent, however, received no reply from the petitioner.

After the lapse of the redemption period without a redemption of the subject lots being effected, petitioner
consolidated ownership over the subject lots in its name. Thereafter, on November 5, 1990, petitioner executed a
Deed of Transfer of said lots in favor of the DAR pursuant to Executive Order No. 407, 10 which mandates all
government owned and controlled corporations to transfer to the DAR all landholdings suitable for agriculture. By
virtue of the transfer, the Register of Deeds of Masbate issued on December 11, 1990, TCT Nos. T-7882 to T-7891, in
the name of the Republic of the Philippines, and thereafter, on April 16, 1991, Transfer Certificate of Title No. 94 to
TCT No. T-103, in the names of farmer beneficiaries to whom the lots were subsequently awarded.

Despite repeated demands of private respondent, the LBP and the DAR refused to determine and pay the just
compensation for the controverted lots. Hence, on November 3, 1993, private respondent filed the instant case.

In its Answer, 11 petitioner alleged that it is the lawful owner of the lots in question; that the failure to redeem the
said lots within the redemption period has the effect of consolidating the titles thereof in its name; that being the
lawful owner of the lots, it can validly transfer said lots to the DAR in compliance with E.O. No. 407.

On September 19, 1995, petitioner filed a motion to dismiss 12 on the ground of failure to state a cause of action.
Petitioner argued that private respondent had no right to sell the lots to the DAR because what it acquired from AAA
was only the right to redeem the lots in question. Failing to so redeem, he never became the owner of said lots and
therefore was not a real party in interest in the instant case for determination and payment of just compensation.

In his Opposition to the Motion to Dismiss, 13 private respondent did not dispute the claim of petitioner that he failed
to redeem the properties within the allotted period. He simply declared that petitioner was a necessary party in this
case being the mortgagee of the disputed lots.

On March 13, 1996, the trial court dismissed private respondent’s complaint for failure to state a cause of action. The
dispositive portion thereof reads:chanrob 1es vi rtual 1aw lib rary

WHEREFORE, in view of the foregoing, the complaints of the above-entitled cases are hereby ordered DISMISSED with
costs against the plaintiff.

26
SO ORDERED. 14

With the denial of his motion for reconsideration on April 24, 1996, private respondent appealed to the Court of
Appeals. On October 28, 1996, the respondent court set aside the assailed orders of the trial court and directed it to
proceed with the trial on the merits. The decretal portion thereof states: chanrob1e s virtual 1aw l ibra ry

Viewed from the foregoing, petition is hereby given due course and the Orders of respondent Court dated March 13,
1996 and April 24, 1996, respectively are hereby set aside. Respondent Court is hereby directed to proceed with the
hearing of Spec. Civil Case No. 4243.

SO ORDERED. 15

Hence, the instant petition on the following alleged errors: chanrob 1es vi rtua l 1aw lib rary

THE COURT OF APPEALS ERRED WHEN IT FAILED TO TAKE JUDICIAL NOTICE THAT ONLY REGISTERED LANDOWNERS
CAN AVAIL THEMSELVES OF VOLUNTARY OFFER TO SELL (VOS) UNDER THE COMPREHENSIVE AGRARIAN REFORM
PROGRAM (CARP).

II

THE COURT OF APPEALS ERRED IN RULING THAT THE DECISION OF THE TRIAL COURT WAS BASED ON CONCLUSION
DESPITE THE CLEAR ADMISSION BY RESPONDENT COLARINA IN THE COMPLAINT THAT THE SUBJECT PROPERTIES IN
QUESTION HAVE BEEN FORECLOSED BY THE PETITIONER AND THERE WAS FAILURE TO EXERCISE THE RIGHT OF
REDEMPTION DURING THE ONE (1) YEAR REGLEMENTARY PERIOD OF REDEMPTION BY THE MORTGAGOR OR HIS
SUCCESSORS-IN-INTEREST, AS SPECIFICALLY REQUIRED UNDER ACT 3135 as amended.

III

THE COURT OF APPEALS ERRED WHEN IT RULED THAT THE TRIAL COURT "DOUBTED" THE VERACITY OF THE
COMPLAINT. ON THE CONTRARY, THE TRIAL COURT BASED ON THE ALLEGATIONS IN THE COMPLAINT AND NO
OTHER, DISMISSED THE COMPLAINT FOR FAILURE TO STATE A CAUSE OF ACTION.

IV

THE COURT OF APPEALS ERRED WHEN IT CONSIDERED ANNEX "C-1" OF THE RESPONDENT’S PETITION, WHICH WAS
NOT AMONG THE EVIDENCE ALLEGED, MUCH LESS ADDUCED IN THE TRIAL COURT. 16

The decision of the Court of Appeals is premised on the ratiocination that since the motion to dismiss of petitioner is
based on failure to state a cause of action, the evaluation of the court a quo should be limited to the complaint itself.
Thus, it set aside the assailed orders of the trial court because the latter went beyond the allegations in the complaint
in determining whether private respondent’s complaint states a cause of action. Indeed, the rule is that, when the
motion to dismiss is based on lack of cause of action, only the statements in the complaint may be properly
considered, and the court cannot take cognizance of external facts or hold preliminary hearings to ascertain their
existence. 17

It must be noted, however, that the motion to dismiss in the case at bar was filed by petitioner after it has filed an
answer. The motion was allowed and favorably acted upon by the trial court. Admittedly, the court a quo considered
facts not stated in the complaint in assessing whether it states a cause of action. In effect, therefore, it treated the
motion to dismiss as a motion for summary judgment. This is tenable under the circumstances, inasmuch as the
opposition to the motion to dismiss filed by private respondent did not tender a genuine issue. 18 Private respondent
offered absolutely no denial to the averment that what he acquired from AAA was merely the right of redemption
which he never exercised within the redemption period, resulting in the consolidation of ownership in petitioner. At
any rate, it is settled that the only rights which a mortgagor can legally transfer, cede and convey after the
foreclosure of his properties are the right to redeem the land, and the possession, use and enjoyment of the same
during the period of redemption. 19 But whatever right private respondent acquired from AAA loses legal significance
in the present case in view of his failure to redeem the foreclosed properties. Thus, the lower court can validly
dispense with the trial and proceed to render a summary judgment.

While it is true that under DAR Administrative Order No. 3, series of 1989, it is not necessary that the voluntary
offeror of the lot be the registered owner thereof, 20 private respondent failed to show that the DAR accepted and
approved his offer to sell. Without said approval and acceptance, private respondent cannot safely presume that his
voluntary offer to sell was accepted by the DAR. Notably, the word "offer," is subject to acceptance. The voluntary
offer to sell is in fact reviewed and evaluated by the DAR before a corresponding notice of acceptance is sent to the
landowner. The applicable rules and procedure governing voluntary offer to sell (VOS) at the time private respondent
made his offer provides: chanrob1e s virtual 1aw libra ry

IV. Operating procedures

The following procedures shall be observed for every Voluntary Offer to Sell (VOS): chan rob1e s virtual 1aw lib rary

27
B. Municipal Agrarian Reform Officer (MARO)

x x x

2. Schedule an investigation of the land being offered for sale; after which notify the local BARC accordingly and then
invite the prospective beneficiaries to a conference at the site of the land.

3. With the assistance of the BARC, determine the suitability/productivity of the land and prepare an investigation
report with his findings and recommendations using CARP Form No. 2. If the subject landholdings is found not suited
for agricultural productions, recommend the same for rejection.

x x x

C. Provincial Agrarian Reform Officer (PARO)

1. Review and evaluate the MARO’s report and all pertinent documents relative to the landowner’s compensation as
attached to the VOCF.

x x x

D. Regional Director (RD)

1. Review and evaluate the VOCF and supporting documents.

2. Refer the VOCF to the Regional Attorney for review and to determine completeness and legal sufficiency of the
documents submitted.

3. If the VOS is in order, notify the landowner of DAR’s decision to acquire the land. The notice shall be in writing and
shall be served on the landowner by personal delivery or by registered mail, with copies thereof posted in a
conspicuous place in the municipal building and barangay hall where the property is located (CARP Form No. 8) . . .
21

Evidently, without the notice informing the landowner of the DAR’s conformity with the offer to sell, private
respondent cannot validly presume that his offer to sell has been accepted by the DAR and that the latter will now
assume the payment of the loan to the GSIS.

It is not disputed that the subject lots were not redeemed from petitioner. When the one (1) year redemption period
expired without private respondent exercising the right of redemption, ownership over the foreclosed properties was
consolidated in the name of petitioner. Hence, the latter can legally transfer ownership therein to the DAR in
compliance with Executive Order No. 407. Clearly, private respondent had no personality to sue for the determination
and payment of just compensation of said lots because he failed to show that his offer was accepted by the DAR, and
more importantly, because whatever right he may have had over said lots was defeated by the consolidation of
ownership in the name of petitioner who turned over the subject lots to the DAR. The questioned lots are presently
titled in the name of the farmer beneficiaries not by reason of the DAR’s purchase thereof from private respondent,
but by reason of petitioner’s transfer of ownership over said lots to the DAR. Private respondent may have the right to
offer for sale what he expects to be his, but he certainly has no right to sell what never became his, much more, ask
that he be compensated for that which was never bought from him.

WHEREFORE, in view of all the foregoing, the petition is GRANTED. The October 28, 1996 Decision and the January
29, 1997 Resolution of the Court of Appeals in CA-G.R. SP. No. 40610 are SET ASIDE. The March 13, 1996 and April
24, 1996 Orders of the Regional Trial Court of Masbate, Branch 48, in Spec. Civil Case Nos. 4242-43 are REINSTATED.

SO ORDERED.

Davide, Jr., C.J., Puno and Kapunan, JJ., concur.

Endnotes:

1. Rollo, p. 24.

2. Rollo, p. 36.

3. Ninth Division, Composed of Associate Justices Corona Ibay-Somera (ponente), Celia Lipana-Reyes (member) and Jorge S. Imperial
(chairman).

4. Records, p. 240.

5. Records, p. 261.

6. Issued by Judge Jacinta B. Tambago.

28
7. Records, p. 1.

8. T.C.T. No. T-1188, Lot No. 1, Plan Psu-9095, Lot No. 2, Plan Psu-90597, Lot No. 3, Plan Psu-597; T.C.T. No. T-1189, Lot No. 1, Plan Psu-
90598, Lot No. 2, Plan Psu-90598; T.C.T. No. T-1190, Lot No. 1, Plan Psu-145404; T.C.T. No. T-1191, Lot No. 2, Plan Psu-145404; T.C.T. No.
T-1192, Lot No. 7, Plan Psu-14504, Lot No. 10, Plan Psu-14504; T.C.T. No. T-1193, Lot No. 8, Plan Psu-14; T.C.T. No. T-1194, Lot No. 6,
Plan, Psu-14504; T.C.T. No. T-1195, Lot No. 9, Plan Psu-145404; T.C.T. No. T- 1196, Lot No. 5, Plan Psu-145404; T.C.T. No. T-1197, Lot No.
3, Plan Psu-145404, Lot No. 4, Plan Psu-14504 (Deed of Sale, Records, pp. 11-12).

9. Records, pp. 11-15.

10. Dated June 14, 1990, and titled — Accelerating the acquisition and distribution of agricultural lands, pasture lands, fishponds, agro-
forestry lands and other lands of the public domain suitable for agriculture.

x x x

SECTION 1. All Government instrumentalities including but not limited to government agencies, government-owned and controlled
corporations or financial institutions such as the Development Bank of the Philippines, Philippine National Bank, Republic Planters Bank, Asset
Privatization Trust, Presidential Commission on Good Government, Department of Agriculture, State Colleges and Universities, Department of
National Defense, shall immediately execute Deeds of Transfer in favor of the Republic of the Philippines as represented by the Department of
Agrarian Reform and surrender to the latter department all landholdings suitable for agriculture . . .

11. Records, p. 64.

12. Records, p. 209.

13. Records, p. 237.

14. Records, p. 241.

15. Rollo, pp. 33-34.

16. Rollo, pp. 13-14.

17. Vergara v. Court of Appeals, 319 SCRA 323, 327 [1999]; citing Drilon v. Court of Appeals, 270 SCRA 211 [1997].

18. Moran, Comments on the Rules of Court, 1995 Edition, pp. 607-608; citing Aranzanso v. Martinez, 88 Phil. 536 [1951].

19. Litonjua v. L & R Corporation, 320 SCRA 405, 417 [1999].

20. IV. Operating Procedures

The following procedures shall be observed for every Voluntary Offer to Sell (VOS): chanrob1es vi rtual 1aw lib rary

A. Landowner/Offeror

x x x

For Titled Property

a) Certified photocopy of Certificate of Title of the land offered for sale.

In case Certificate of Title is not yet in the name of landowner to submit instruments of acquisition such as Deed of Sale, Deed of Donation,
etc. It shall be sufficient that, through the series of documents submitted, the landowner/offeror can establish his ownership of the land. After
the documents of ownership have been submitted, assist the landowner in securing or transferring the Certificate of Title in his name to
enable him to collect payment from LBP. . . .

21. Administrative Order No. 3, series of 1989, dated February 20, 1989.

29
THIRD DIVISION

[G.R. No. 147788. March 19, 2002.]

EDILBERTO CRUZ and SIMPLICIO CRUZ, Petitioners, v. BANCOM FINANCE CORPORATION (now UNION BANK OF
THE PHILIPPINES), Respondent.

DECISION

PANGANIBAN, J.:

An absolutely simulated contract of sale is void ab initio and transfers no ownership right. The purported buyer, not being the
owner, cannot validly mortgage the subject property. Consequently, neither does the buyer at the foreclosure sale acquire
any title thereto.

Statement of the Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the March 30, 2001 Decision 1
of the Court of Appeals (CA) in CA-G.R. No. 58346. The decretal portion of the challenged Decision reads as follows: jgc:chan roble s.com.p h

"WHEREFORE, upon the premises, the assailed Decision is REVERSED and SET ASIDE. A new one is rendered declaring
BANCOM’s right to the subject land as a purchaser in good faith and for value, and ordering the cancellation of the Notice of
Lis Pendens on TCT No. 248262-Bulacan. Without pronouncement as to costs." 2

The Facts

The factual antecedents of the case are summarized by the Court of Appeals thus: jgc:chanroble s.co m.ph

"Brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz, plaintiffs herein, were the registered owners of a 339,335 square meter
or 33.9335 hectare parcel of agricultural land together with improvements located in Barangay Pulang Yantoc, Angat,
Bulacan covered by TCT No. 19587. Sometime in May 1978, defendant Norma Sulit, after being introduced by Candelaria
Sanchez to Fr. Cruz, offered to purchase the land. Plaintiffs’ asking, price for the land was P700,000.00, but Norma only had
P25,000.00 which Fr. Cruz accepted as earnest money with the agreement that titles would be transferred to Norma upon
payment of the balance of P675,000.00. Norma failed to pay the balance and proposed [to] Fr. Cruz to transfer the property
to her but the latter refused, obviously because he had no reason to trust Norma. But capitalizing on the close relationship of
Candelaria Sanchez with the plaintiffs, Norma succeeded in having the plaintiffs execute a document of sale of the land in
favor of Candelaria who would then obtain a bank loan in her name using the plaintiffs’ land as collateral. On the same day,
Candelaria executed another Deed of Absolute Sale over the land in favor of Norma. In both documents, it appeared that the
consideration for the sale of the land was only P150,000.00. Pursuant to the sale, Norma was able to effect the transfer of
the title to the land in her name under TCT No. T-248262.

"Evidence shows that aside from the P150,000.00, Candelaria undertook to pay the plaintiffs the amount of P655,000.00
representing the balance of the actual price of the land. In a Special Agreement dated September 1, 1978, Norma assumed
Candelaria’s obligation, stipulating to pay the plaintiffs the said amount within six months on pain of fine or penalty in case of
non-fulfillment. Unknown to the plaintiffs, Norma managed to obtain a loan from Bancom in the amount of P569,000.00
secured by a mortgage over the land now titled in her name. chanrob1e s virtua1 1aw 1ib rary

"On account of Norma’s failure to pay the amount stipulated in the Special Agreement and her subsequent disappearance
from her usual address, plaintiffs were prompted to file the herein complaint for the reconveyance of the land.

"Norma filed an Answer on February 11, 1980 but failed to appear in court and was eventually declared in default. On May
20, 1980, Bancom filed a motion for leave to intervene which was granted by the trial court. In its Answer in Intervention,
Bancom claimed priority as mortgagee in good faith; and that its contract of mortgage with Norma had been executed before
the annotation of plaintiffs’ interest in the title.

"Meanwhile in the middle of 1980, Norma defaulted in her payment to the Bank and her mortgage was foreclosed. At the
subsequent auction sale, Bancom was declared the highest bidder and was issued the corresponding certificate of sale over
the land.

"On January 25, 1996, the trial court rendered the herein assailed Decision in favor of the plaintiffs. It ruled that the contract
of sale between plaintiffs and Candelaria was absolutely simulated. Consequently, the second contract of sale, that is,
between Candelaria and Norma, produced no legal effect. As for Bancom, the trial court held that the Bank was not a
mortgagee in good faith thus it can not claim priority of rights over plaintiffs’ property." 3

Ruling of the Court of Appeals

In reversing the RTC, the CA held that the Deeds of Sale were valid and binding, not simulated. Thus, the Contract of
Mortgage between Sulit and respondent was likewise valid.

30
Petitioners, the CA ruled, intended to be bound by the Contracts of Sale and Mortgage, because they "did not seek to annul
the same but instead executed a special agreement to enforce payment of the balance of the price in the amount of
P665,000.00." 4

Furthermore, it upheld respondent as a "mortgagee in good faith;" ergo, it had a preferential right to the land.

Hence, this Petition. 5

Issues

In their Memorandum, petitioners raise the following issues for this Court’s consideration: chanro b1es vi rtua l 1aw li bra ry

"Whether or not the Honorable Court of Appeals seriously erred when it held that the petitioners intended to enter into a sale
of the property in question and that the declarations of Petitioner Fr. Edilberto Cruz in Court belied the court a quo’s finding
that the Deeds of Sale in question were absolute simulations.

II

"Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank was a mortgagee in good
faith, despite the fact that respondent Bancom was in truth and in fact a mortgagee in bad faith over the subject property.

III

"Whether or not the Honorable Court of Appeals seriously erred when it ruled that the face of the title [to] the property did
not disclose any irregularity that would arouse suspicion by respondent bank as to the condition of the subject land despite
the fact that questions and circumstances abound which would render respondent bank not a mortgagee in good faith, and
that the case of Sunshine Finance Investment Corporation v. Intermediate Appellate Court applies to the instant case.

IV

"Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank possesses a preferential
right over petitioners on the subject land as a mortgagee in good faith." 6

The above issues can be summed up into two: (1) the validity of the Deeds of Sale and Mortgage and (2) the good faith of
the mortgagee.

This Court’s Ruling

The Petition is meritorious.

First Issue: chanrob1es vi rt ual 1aw li bra ry

Validity of the Sale and the Mortgage

Petitioners claim that the Deed of Sale 7 they executed with Sanchez, as well as the Deed of Sale 8 executed between
Sanchez and Sulit, was absolutely simulated; hence, null and void. On the other hand, echoing the appellate court,
respondent contends that petitioners intended to be bound by those Deeds, and that the real estate mortgage over the
subject property was valid. chan rob1e s v irtua 1 1aw 1ib ra ry

As a general rule, when the terms of a contract are clear and unambiguous about the intention of the contracting parties, the
literal meaning of its stipulations shall control. But if the words appear to contravene the evident intention of the parties; the
latter shall prevail over the former. 9 The real nature of a contract may be determined from the express terms of the
agreement, as well as from the contemporaneous and subsequent acts of the parties thereto." 10

On the other hand, simulation takes place when the parties do not really want the contract they have executed to produce
the legal effects expressed by its wordings. 11 Simulation or vices of declaration may be either absolute or relative. Article
1345 of the Civil Code distinguishes an absolute simulation from a relative one while Article 1346 discusses their effects, as
follows:jgc:c hanrobles. com.ph

"Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be
bound at all; the latter when the parties conceal their true agreement.

"Art. 1346. An absolutely simulated contract is void. A relative simulation, when it does not prejudice a third person and is
not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their
agreement." cralaw virt ua1aw li bra ry

In Rongavilla v. Court of Appeals, 12 we held that a deed of sale, in which the stated consideration had not in fact been paid,
was "a false contract" ; that is "void ab initio." Furthermore, Ocejo v. Flores, 13 ruled that "a contract of purchase and sale is
null and void and produces no effect whatsoever where it appears that [the] same is without cause or consideration which
should have been the motive thereof, or the purchase price which appears thereon as paid but which in fact has never been
paid by the purchaser to the vendor." chanrob1e s virtua1 1aw 1ib rary

31
Although the Deed of Sale 14 between petitioners and Sanchez stipulated a consideration of P150,000, there was actually no
exchange of money between them. Petitioner Edilberto Cruz narrated how the transaction came about: jgc:chanrob les.co m.ph

"ATTY. CABRERA: chanrob1es vi rtua l 1aw lib ra ry

Q Why did you execute the deed of sale in favor of Candelaria Sanchez since it was Norma Sulit with whom you are
transacting?

A Because Norma Sulit made the promise to Mrs. Candelaria Sanchez that upon acquiring the title from us, they can borrow
money from the Bank. So it is a way of acquiring the title from us, sir.

Q. This deed of sale marked Exhibit ‘D’ which you just identified, stipulates a consideration of P150,000.00. The question,
Father, is - did you receive the P150,000.00?

ATTY. AGRAVANTE

Objection, your Honor, the document is the best evidence.

ATTY. CABRERA

This is an action to annul a certain contract.

COURT

He received the consideration stated in the contract. The witness may answer.

WITNESS

A Not a single centavo we received from Candelaria Sanchez as if it is nominal, sir.

ATTY. CABRERA

Q If you did not receive this P150,000.00 stated in this deed of sale that you and your brother executed from Candelaria
Sanchez, did you receive the said amount from Norma Sulit or anybody else for that matter?

A Not a single centavo, sir." 15

His claim was corroborated by Sanchez. She likewise said that the Deed of Sale 16 she executed with Sulit, for which she did
not receive any consideration was only for the purpose of placing the title to the property in the latter’s name. She testified
as follows: jgc:chan roble s.com.p h

"Q And so you transferred the property in favor of Norma Sulit?

A Yes, sir.

Q I am showing to you this document which has already been marked when the representative of the Register of Deeds
produced the pertinent documents before the court as Exhibit "C", is this that document that you executed transferring the
property in the name of Norma Sulit?

A Yes, sir, this is it.

Q There is a consideration of P150,000.00 stated in this Exhibit "C", were you paid by Norma Sulit the amount of
P150,000.00 appearing in this Exhibit "C" ?

ATTY. BUYCO

The question is leading, Your Honor.

COURT: chanrob1es v irt ual 1aw l ibra ry

Witness may answer.

A No amount was given, sir. We prepared this document to transfer the title [to] her name only." 17

Respondent never offered any evidence to refute the foregoing testimonies. 18 On the contrary, it even admitted that the
stipulated consideration of P150,000 in the two Deeds of Sale had never been actually paid by Sanchez to petitioners; 19
neither by Sulit to the former. 20

Another telling sign of simulation was the complete absence of any attempt on the part of the buyers — Sanchez and Sulit —
to assert their alleged rights of ownership over the subject property. 21 This fact was confirmed by respondent which,
however, tried to justify the non-occupancy of the land by Sanchez and Sulit. Supposedly, because the two failed to pay the
purchase price of the land, they could not force petitioners to vacate it. 22

The records clearly show that the two Deeds of Absolute Sale were executed over the same property on the same date, June
21, 1978. Six days thereafter, on June 27, 1978, it was mortgaged by Sulit to Federal Insurance Company for P500,000. The
mortgage was cancelled when she again mortgaged the property to respondent for P569,000 on August 22, 1979. It is also
undisputed that petitioners did not receive any portion of the proceeds of the loan. chanrob 1es virtua1 1aw 1 ibra ry

Clearly, the Deeds of Sale were executed merely to facilitate the use of the property as collateral to secure a loan from a
bank. 23 Being merely a subterfuge, these agreements could not have been the source of any consideration for the supposed
sales. 24 Indeed, the execution of the two documents on the same day sustains the position of petitioners that the Contracts
32
of Sale were absolutely simulated, and that they received no consideration therefor.25 cralaw:red

The failure of Sulit to take possession of the property purportedly sold to her was a clear badge of simulation that rendered
the whole transaction void and without force and effect, pursuant to Article 1409 26 of the Civil Code. 27 The fact that she
was able to secure a Certificate of Title to the subject property in her name did not vest her with ownership over it. 28 A
simulated deed of sale has no legal effect; consequently any transfer certificate of title (TCT) issued in consequence thereof
should be cancelled. 29 A simulated contract is not a recognized mode of acquiring ownership. 30

Second Issue: chanrob1e s virtual 1aw l ibra ry

Good Faith of Mortgagee

Petitioners argue that respondent was not a mortgagee in good faith because, at the time it registered the real estate
mortgage over the subject property, their adverse claim and notice of lis pendens had already been annotated on the TCT
(on October 30, 1979 and December 10, 1979, respectively). On the other hand, respondent maintains that petitioners were
the ones in bad faith, because they already had knowledge of the existence of the mortgage over the property when they
caused the annotation of their adverse claim and notice of lis pendens. chan rob1e s virtua1 1 aw 1ib rary

As a general rule, every person dealing with registered land may safely rely on the correctness of the certificate of title and is
no longer required to look behind the certificate in order to determine the actual owner. 31 To do so would be contrary to the
evident purpose of Section 39 of Act 496 which we quote hereunder: jgc:c hanro bles. com.ph

"Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every subsequent
purchaser of registered land who takes a certificate of title for value in good faith shall hold the same free of all
encumbrances except those noted on said certificate, and any of the following encumbrances which may be subsisting,
namely: jgc:chan robles .com.p h

"First. Liens, claims, or rights arising or existing under the laws or Constitution of the United States or of the Philippine
Islands which the statutes of the Philippine Islands cannot require to appear of record in the Registry.

"Second. Taxes within two years after the same became due and payable.

"Third. Any public highway, way, private way established by law, or any Government irrigation canal or lateral thereof, where
the certificate of title does not state that the boundaries of such highway, way, or irrigation canal or lateral thereof, have
been determined.

"But if there are easements or other rights appurtenant to a parcel of registered land which for any reason have failed to be
registered, such easements or rights shall remain so appurtenant notwithstanding such failure, and shall be held to pass with
the land until cut off or extinguished by the registration of the servient estate, or in any other manner." cralaw virtua 1aw lib rary

This rule is, however, subject to the right of a person deprived of land through fraud to bring an action for reconveyance,
provided the rights of innocent purchasers for value and in good faith are not prejudiced. An innocent purchaser for value or
any equivalent phrase shall be deemed, under Section 38 of the same Act, 32 to include an innocent lessee, mortgagee or
any other encumbrancer for value. 33

Respondent claims that, being an innocent mortgagee, it should not be required to conduct an exhaustive investigation on
the history of the mortgagor’s title before it could extend a loan. 34

Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is
expected to exercise greater care and prudence in its dealings, including those involving registered lands. 35 A banking
institution is expected to exercise due diligence before entering into a mortgage contract. 36 The ascertainment of the status
or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations. 37

In Rural Bank of Compostela v. CA, 38 we held that a bank that failed to observe due diligence was not a mortgagee in good
faith. In the words of the ponencia: jgc:chan robles. com.ph

". . . [T]he rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.

"Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, for
their business is one affected with public interest, keeping in trust money belonging to their depositors, which they should
guard against loss by not committing any act of negligence which amounts to lack of good faith by which they would be
denied the protective mantle of the land registration statute, Act [No.] 496, extended only to purchasers for value and in
good faith, as well as to mortgagees of the same character and description." (Citations omitted)

Recently, in Adriano v. Pangilinan, 39 we said that the due diligence required of banks extended even to persons regularly
engaged in the business of lending money secured by real estate mortgages. chanrob1e s virt ua1 1aw 1 ibra ry

The evidence before us indicates that respondent bank was not a mortgagee in good faith. 40 First, at the time the property
was mortgaged to it, it failed to conduct an ocular inspection. 41 Judicial notice is taken of the standard practice for banks
before they approve a loan: to send representatives to the premises of the land offered as collateral and to investigate the
ownership thereof. 42 As correctly observed by the RTC, respondent, before constituting the mortgage over the subject
property, should have taken into consideration the following questions: jgc:cha nrob les.c om.ph

"1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap even in 1978?

"2) Why did Candelaria Sanchez sell the property at the same. price of P150,000.00 to Norma Sulit on the same date, June
21, 1978 when she supposedly acquired it from the plaintiffs?

"3) Being agricultural land, didn’t it occur to the intervenors that there would be tenants to be compensated or who might
pose as obstacles to the mortgagee’s exercise of acts of dominion?

33
"4) In an area as big as that property, [why] did they not verify if there were squatters?

"5) What benefits or prospects thereof could the ultimate owner expect out of the property?

"Verily, the foregoing circumstances should have been looked into, for if either or both companies did, they could have
discovered that possession of the land was neither with Candelaria nor with Norma." 43

Respondent was clearly wanting in the observance of the necessary precautions to ascertain the flaws in the title of Sulit and
to examine the condition of the property she sought to mortgage. 44 It should not have simply relied on the face of the
Certificate of Title to the property, as its ancillary function of investing funds required a greater degree of diligence. 45
Considering the substantial loan involved at the time, it should have exercised more caution. 46

Moreover, the subject property, being situated in Bulacan, could have been easily and conveniently inspected by Respondent.
A person who deliberately ignores a significant fact that would create suspicion in an otherwise reasonable person is not an
innocent purchaser for value. 47

Second, respondent was already aware that there was an adverse claim and notice of lis pendens annotated on the
Certificate of Title when it registered the mortgage on March 14, 1980. Unless duly registered, a mortgage does not affect
third parties like herein petitioners, as provided under Section 51 of PD NO. 1529, 48 which we reproduce hereunder: jgc:cha nrob les.co m.ph

"SEC. 51. Conveyance and other dealings by registered owner. — An owner of registered land may convey, mortgage, lease,
charge or otherwise deal with the same in accordance with existing laws. He may use such forms of deeds, mortgages,
leases or other voluntary instruments [as] are sufficient in law. But no deed, mortgage, lease, or other voluntary instrument
except a will, purporting to convey or affect registered land, shall take effect as a conveyance or bind the land; but shall’
operate only as a contract between the parties and as evidence of authority to the clerk or register of deeds to make
registration.

"The act of registration shall be the operative act to convey and affect the land, and in all cases under this Act the
registration shall be made in the office of the register of deeds for the province or city, where the land lies."
cralaw vi rtua1aw lib rary

True, registration is not the operative act for a mortgage to be binding between the parties. But to third persons, it is
indispensible. 49 In the present case, the adverse claim and the notice of lis pendens were annotated on the title on October
30, 1979 and December 10, 1979, respectively; the real estate mortgage over the subject property was registered by
respondent only on March 14, 1980. Settled in this jurisdiction is the doctrine that a prior registration of a lien creates a
preference. 50 Even a subsequent registration of the prior mortgage will not diminish this preference, which retroacts to the
date of the annotation of the notice of lis pendens and the adverse claim. 51 Thus, respondent’s failure to register the real
estate mortgage 52 prior to these annotations, resulted in the mortgage being binding only between it and the mortgagor,
Sulit. Petitioners, being third parties to the mortgage, were not bound by it. 53 Contrary to respondent’s claim that
petitioners were in bad faith because they already had knowledge of the existence of the mortgage in favor of respondent
when they caused the aforesaid annotations, petitioner Edilberto Cruz said that they only knew of this mortgage when
respondent intervened in the RTC proceedings. 54

On the question of who has a preferential right over the property, the long-standing rule, as provided by Article 2085 55 of
the Civil Code, 56 is that only the absolute owner of the property can constitute a valid mortgage on it. In case of
foreclosure, a sale would result in the transmission only of whatever rights the seller had over of the thing sold. 57

In the instant case, the two Deeds of Sale were absolutely simulated; hence, null and void. 58 Thus, they did not convey any
rights that could ripen into valid titles. 59 Necessarily, the subsequent real estate mortgage constituted by Sulit in favor of
respondent was also null and void, because the former was not the owner thereof. There being no valid real estate mortgage,
there could also be no valid foreclosure or valid auction sale, either. At bottom, respondent cannot be considered either as a
mortgagee or as a purchaser in good faith. This being so, petitioners would be in the same position as they were before they
executed the simulated Deed of Sale in favor of Sanchez. They are still the owners of the property. 60

WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. The Decision of the RTC of Bulacan, (Branch 21)
dated January 25, 1996 is REINSTATED. No costs. chanrob1es v irt ua1 1aw 1 ibra ry

SO ORDERED.

Melo, Sandoval-Gutierrez and Carpio, JJ., concur.

Vitug, J., Abroad on Official Business

Endnotes:

1. Rollo, pp. 105-116. Penned by Justice Portia Aliño-Hormachuelos and concurred in by JJ Fermin A. Martin Jr. (Division
chairman) and Mercedes Gozo-Dadole (member).

2. Assailed CA Decision, p. 11; rollo, p. 115.

3. Assailed Decision, pp. 3-5; rollo, pp. 107-109.

4. Assailed Decision, p. 10; rollo, p. 114.

5. The case was deemed submitted for decision on November 22, 2001 upon the Court’s receipt of respondent’s
Memorandum, which was signed by Attys. Marilyn Salamanca Guzman and Raymund Hilarion R. Genilo. Petitioners’
Memorandum, filed on November 5, 2001, was signed by Atty. Vicente H. Reyes.

6. Petitioners’ Memorandum, pp. 13-14; rollo, pp. 217-218; original in upper case.
34
7. Annex "H" ; rollo, pp. 119-120.

8. Annex "I" ; rollo, p. 121.

9. Art. 1370 of the Civil Code.

10. Art. 1371 of the Civil Code; Cruz v. CA, 293 SCRA 239 July 27, 1998; Sicad v. CA, 294 SCRA 183, August 13, 1998;
People’s Aircargo and Warehouse Co., Inc. v. CA, 297 SCRA 170, October 7, 1998.

11. Cf Villaflor v. CA, 280 SCRA 297, October 9, 1997; Tongoy v. CA, 123 SCRA 99, 118, June 28, 1983; Rodriguez v.
Rodriguez, 20 SCRA 908, 914, July 31, 1967.

12 294 SCRA 289, 304-305, August 17, 1998, per Quisumbing, J.

13 40 Phil 921, March 16, 1920, Torres, J.

14 Annex "H" ; rollo, pp. 119-120.

15. TSN, December 4, 1984, pp. 9-10.

16. Annex "I" ; rollo, p. 121.

17. TSN, September 16, 1982, pp. 4-5.

18. Sunshine Finance and Investment Corp. v IAC, 203 SCRA 210, October 28, 1991.

19. Respondent’s Memorandum, p. 6; rollo; p. 277.

20. Ibid., p. 5; ibid., p. 276.

21. Suntay v. CA, 251 SCRA 430, December 19, 1995.

22. Respondent’s memorandum, p. 12, rollo, p. 283.

23. Velasquez v, CA, 345 SCRA 468, November 22, 2000.

24. Yu Bun Guan v. Elvira Ong, supra.

25. Velasquez v. Court of Appeals; supra, p. 475.

26. This article provides: jg c:chan roble s.com.p h

"The following contracts are inexistent and void from the beginning: c hanrob1es vi rt ual 1aw li bra ry

x x x

"(2) Those which are absolutely simulated or fictitious;

x x x

27. Santiago v. CA, 278 SCRA 98, 107, August 21, 1997.

28. Reyes v. CA, 315 SCRA 626 September 30, 1999.

29. Yu Bun Guan v. Elvira Ong, supra.

30. Santiago v. CA, supra.

31. Development Bank of the Philippines v. CA, supra, p. 288; Heirs of Spouses Benito Gavino and.Juana Euste v. CA, 291
SCRA 495, June 29, 1998.

32. Sec. 38 of Act No. 496, the Land Registration Act, provides: jgc: chan robles .com.p h

"If the court after hearing finds that the applicant or adverse claimant has title as stated in his application or adverse claim
and proper for registration, a decree of confirmation and registration shall be entered. Every decree of registration shall bind
the land, and quiet title thereto, subject only to the exceptions stated in the following section. It shall be conclusive upon and
against all persons, including the Insular Government and all the branches thereof, whether mentioned by name in the
application, notice, or citation, or included in the general description "To whom it may concern." Such decree shall not be
opened by reason of the absence, infancy, or other disability of any person affected thereby, nor by any proceeding in any
court for reversing judgments or decrees; subject, however, to the right of any person deprived of land or of any estate or
interest therein by decree of registration obtained by fraud to file in the competent Court of First Instance a petition for
review within one year after entry of the decree provided no innocent purchaser for value has acquired an interest. Upon the
expiration of said term of one year, every decree or certificate of title issued in accordance with this section shall be
incontrovertible. If there is any such purchaser, the decree of registration shall not be opened, but shall remain in full force
and effect forever, subject only to the right of appeal hereinbefore provided: Provided, however, That no decree or certificate
of title issued to persons not parties to the appeal shall be cancelled or annulled. But any person aggrieved by such decree in
any case may pursue his remedy by action for damages against the applicant or any other person for fraud in procuring the

35
decree. Whenever the phrase "innocent purchaser for value" or an equivalent phrase occurs in this Act, it shall be deemed to
include an innocent lessee, mortgagee, or other encumbrancer for value." (As amended by §3, Act 3621; and §1, Act No.
3630.)

33. Sunshine Finance and Investment Corp v. IAC, supra, p. 216.

34. Development Bank of the Philippines v. CA, 331 SCRA 267, 289, April 28, 2000.

35. Cavite Development Bank v. Lim, 324 SCRA 346, February 1, 2000, citing Tomas v. Tomas, 98 SCRA 280, June 25,
1980.

36. Development Bank of the Philippines v. Court of Appeals, supra.

37. Sunshine Finance and Investment Corp v. IAC, supra, p. 216

38. 271 SCRA 76, 88, April 8, 1997, per Davide Jr., CJ.

39. G.R. No. 13747, January 16, 2002.

40. Development Bank of the Philippines v. CA, supra.

41. Government Service Insurance System v. CA, 287 SCRA 204, March 6, 1998.

42. Development Bank of the Philippines v. CA, supra.

43. RTC Decision, pp. 5-6; rollo, pp. 100-101, per Judge Cesar M. Solis.

44. Sunshine Finance and Investment Corp. v. IAC, supra.

45. Government Service Insurance System v. CA, supra, p. 211.

46. Ibid., p. 210.

47. Development Bank of the Philippines v. CA, supra, p. 290.

48. Property Registration Decree.

49. "Art. 2125. In addition to the requisites stated in article 2085, it is indispensable in order that a mortgage may be validly
constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties.

"The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the
recording of the document in which the mortgage is formalized." cralaw vi rtua 1aw lib rary

50. Lavides v. Pre, G.R. No. 127830, October 17, 2001.

51. Ibid.

52. Annex "L", rollo, pp. 130-135.

53. Ramos. v. CA, 302 SCRA 589, February 3, 1999.

54. See TSN, July 28, 1986, pp. 14-15.

55. "Art. 2085. The following requisites are essential to the contracts of pledge and mortgage: chan rob1e s virtual 1aw l ibra ry

x x x

"(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

x x x

56. Lagrosa v. CA, 312 SCRA 298, August 12, 1999.

57. Art. 1458 Civil Code; Nufable v. Nufable, 309 SCRA 692, July 2, 1999.

58. Francisco v. Francisco-Alfonso, G.R. No. 138774, March 8, 2001, per Pardo, J .

59. Velasquez v. CA, supra.

60. Government Service Insurance System v. CA, supra, p. 211.

36
Republic of the Philippines
SUPREME COURT
Baguio City

FIRST DIVISION

G.R. No. 142958 - April 24, 2002

SPS. FELINO S. SAMATRA and CHARLITA ISIDRO, Petitioners, vs. RITA S. VDA. DE PARIAS, Respondent.

PUNO, J.:

The case at bar originated from an agrarian case involving two (2) agricultural lots1 with an aggregate area of 28,375
square meters and a homelot2 with an area of 472 square meters, all situated in Sto. Domingo, Nueva Ecija. These
lots were originally owned by spouses Donato Samatra and Macaria Sana. Petitioner FELINO SAMATRA and
respondent RITA S. VDA. DE PARIÑAS are their legitimate children.

On March 20, 1972, the spouses mortgaged one of the agricultural lots and the homelot to the Rural Bank of Sto.
Domingo (N.E.) Inc. to secure their P2,500.00 loan that would mature on August 25, 1975. A year later, or on
September 21, 1973, the spouses constituted another real estate mortgage over the other lot in favor of the same
bank to secure their second loan of P1,300.00. This loan was to mature on April 3, 1975.

On January 3, 1975, while the mortgages were still subsisting, mortgagor Donato Samatra executed a "Kasunduang
Buwisan sa Sakahan"3 constituting his daughter, respondent Rita S. Vda. de Pariñas, as agricultural lessee over the
mortgaged lots, without the consent of the mortgagee bank.

When the mortgagors-spouses failed to pay their loans upon maturity, the mortgagee bank extrajudicially foreclosed
the mortgages over the subject lots. At a public auction, the lots were sold to the mortgagee bank as the sole and
highest bidder. The corresponding certificates of sale were issued in its favor and registered with the Register
of Deeds of Nueva Ecija on May 27, 1976. As the mortgagors-spouses failed to redeem the lots within a year
from its registration, the mortgagee bank consolidated its ownership over the subject lots. Nonetheless,
respondent continued in possession of the lands.

Thereafter, negotiations were conducted between the manager of the mortgagee bank Ricardo E. Gonzales and the
heirs of the mortgagor-spouses, with the bank offering the heirs priority to repurchase the lots. Respondent Rita S.
Vda. de Pariñas and her son Perfecto showed interest in the offer. Thus, it was agreed that respondent would buy
back the lots by gradually depositing small amounts for the repurchase of the properties until the full purchase price is
paid and, thereafter, the mortgagee bank would execute the corresponding deed of sale in favor of respondent.

Initially, the agreement was carried out by the respondent. Later, however, respondent and her son discontinued
depositing money in their account for the repurchase of the lots. Instead, they began to withdraw small amounts from
their account until it was depleted and their account closed in November 1982. From then on, nothing was heard from
respondent and her son about their intention to repurchase the lots. Thus, the mortgagee bank construed their silence
and inaction as a lack of further interest to continue with the agreed plan of sale.

In December 1983, petitioner Felino Samatra, one of the heirs of the mortgagor-spouses and a brother of respondent,
expressed his intention to repurchase the lots from the bank. Consequently, on July 17, 1984, the bank sold the
lots to petitioners FELINO SAMATRA and CHARLITA ISIDRO.4 The sale was duly registered and title was
issued in the name of petitioners.5

When respondent learned about the sale, she immediately went to the bank and declared that she was ready to buy
them back. The mortgagee bank informed her that they were already validly sold to petitioners. Respondent
adamantly held on to the lots and continued her possession claiming right over them as agricultural lessee. She filed a
complaint with the barangay's Lupong Tagapayapa for reconveyance of the lots as she has right of pre-emption as
agricultural lessee. As the issue could not be settled at the barangay level, the Lupon issued a certification to enable
the parties to file the necessary action in court.

On December 26, 1984, respondent filed an agrarian case6 with the Regional Trial Court against the mortgagee bank
and the petitioners: (1) to annul the sale by the mortgagee bank of said lots to petitioners, claiming right of pre-
emption or legal redemption as agricultural tenant and homelot possessor of the subject lots; (2) to order the
mortgagee bank to reconvey the lands to her after exercising her right of legal redemption; and (3) for payment of
damages.

In their Answer, petitioners argued that respondent was not an agricultural lessee over the subject lots as it was their
parents, mortgagor-spouses Donato Samatra and Macaria Sana, who personally cultivated the lots as previous
owners.

After the issues were joined, trial ensued. On October 13, 1994, the trial court rendered a decision7 in favor of
the petitioners. It found that respondent was not a bonafide lessee of the lands as she did not present
proof that she personally cultivated them. Not being a bonafide agricultural lessee, the trial court ruled that
respondent has no right of pre-emption and legal redemption over said lots. The trial court disposed, thus:

37
"WHEREFORE, judgment is hereby rendered:

1. ordering the dismissal of the complaint;

2. declaring the document entitled "KASUNDUANG BUWISAN SA SAKAHAN" as fraudulent, illegal and null and void;

3. declaring the sale of the properties in question by the defendant Rural Bank of Sto. Domingo (NE), Inc. in favor of
the defendants-spouses Felino Samatra and Charlita Isidro as legal and valid;

4. ordering the plaintiff to vacate the subject landholdings and deliver the possession thereof to the spouses Felino
Samatra and Charlita Isidro;

5. ordering the plaintiff to pay the defendants-spouses Felino Samatra and Charlita Isidro the amount of P50,000.00
as unrealized income from the disputed land from 1984 up to the present;8

6. ordering the plaintiff to pay to the defendants-spouses Felino Samatra and Charlita Isidro the amount of P3,000.00
as attorney's fees and the amount of P2,000.00 as expenses of litigation and the defendant Rural Bank of Sto.
Domingo (N.E.), Inc. the amount of P3,000.00 as attorney's fees and the amount of P2,000.00 as litigation expenses;
and

7. ordering the plaintiff to pay the costs of suit.

SO ORDERED."

On appeal, the court of Appeals held that although the appellant did not personally cultivate the subject lands, could
still be considered an agricultural lessee as the law allows the lessee to be assisted by farm laborers in working the
land. The Court of Appeals also relied on two (2) documents attesting that the respondent is the registered legitimate
agricultural lessee of the disputed lands, thus: (1) the Certification, dated May 8, 1985, issued by the Ministry of
Agrarian Reform (MAR) District Officer Eugenio B. Bernardo, in compliance with the Order of the trial court, dated
April 23, 1985; (2) an Affidavit of one Ponciano Alejo,9 President of the Malaya Samahang Nayon, dated October 4,
1984. Although the Court of Appeals ruled that respondent is a bonafide lessee, it denied her the right of pre-emption
as she was already given by the bank sufficient opportunity to exercise it but she failed to avail of it. It also held that
respondent did not possess the right of redemption as the sale by the mortgagee bank of the disputed lands to
petitioners was not unknown to her. Hence, the Court of Appeals disposed:

"WHEREFORE, with the modification declaring the legality and validity of the contract of lease or "KASUNDUAN
BUWISAN SA SAKAHAN," finding appellant Rita S. Vda. de Pariñas a bonafide agricultural lessee/tenant of
the landholdings in dispute, viz., Lots Nos. 2891, 2908 and Lot 2434 and deleting the award for damages and
attorney's fees and payment of litigation expenses and cost of suit, the Decision appealed from
is AFFIRMED in all other respects.

No Costs.

SO ORDERED."10 (emphasis supplied)

Petitioners' motion for reconsideration was denied.

Hence this petition, where the following issues were raised:

"4.1. WHETHER OR NOT THE TENANCY CONTRACT ENTERED INTO BETWEEN THE MORTGAGORS-SPOUSES DONATO
SAMATRA AND MACARIA SANA WITH RESPONDENT RITA S. PARIÑAS DURING THE EFFECTIVITY OF THE MORTGAGE
WAS LEGAL AND VALID.

4.2. WHETHER OR NOT RESPONDENT RITA S. PARIÑAS IS A BONAFIDE AGRICULTURAL LESSEE/TENANT OF THE
LANDHOLDINGS IN DISPUTE.

4.2.1. Whether or not the Court of Appeals correctly reviewed the findings of the trial court on the issue of whether or
not respondent Rita S. Pariñas is deemed to have personally cultivated the landholding, considering the rule that the
only duty of the Court of Appeals in agrarian cases is to determine whether the findings of the trial court are
supported by substantial evidence.

4.2.2. Whether or not the Court of Appeals correctly appreciated documentary evidence in support of its ruling that
respondent Rita S. Pariñas is the one personally cultivating the landholding.

4.2.3. Whether or not the resolution of (sic) this second main issue and its following two corollary issues are
tantamount to (sic) questions of law that ought to be reviewed by this Honorable Supreme Court.

4.3. WHETHER OR NOT PETITIONERS ARE ENTITLED TO UNREALIZED INCOME FROM THE TIME THEY PURCHASED
THE PROPERTIES IN DISPUTE FROM THE RURAL BANK OF STO. DOMINGO (N.E.) AND TO ATTORNEY'S FEES AND
LITIGATION EXPENSES."

38
We shall discuss the issues in seriatim.

Petitioners insist that the tenancy contract was illegal as the mortgagor-spouses cannot validly enter into an
agricultural lease agreement with respondent during the effectivity of the mortgage contract.

We disagree. The Court of Appeals correctly applied Article 2130 of the Civil Code which renders void any stipulation
forbidding the owner from alienating the immovable mortgaged (pacto de non aliendo) property. It is settled that a
real estate mortgage does not extinguish the title of the debtor. He does not lose his right to use or dispose of the
mortgaged property (jus disponendi) which is one of the principal attributes of ownership. Thus, in the case at bar,
the mortgagor-spouses were well within their rights when they constituted respondent as an agricultural lessee and
the legality of the leasehold contract cannot be validly assailed on this ground.

The second issue deals with whether or not respondent may be considered a bonafide agricultural lessee of the
subject lands as to give her the right to repurchase the foreclosed lands. The findings of the trial court and the Court
of Appeals on this matter are directly opposed to each other. Thus, a scrutiny of the evidence on record is in order to
determine if there is merit in the petition at bar.

The essential elements of agricultural leasehold relationships are: (1) the parties are the landowner and the
agricultural lessee; (2) the subject matter of the relationship is agricultural land; (3) there is consent between the
parties to the relationship; (4) the purpose of the relationship is to bring about agricultural production; (5) there is
personal cultivation on the part of the agricultural lessee; and (6) the harvest is shared between the landowner
and the agricultural lessee.11

In the case at bar, the resolution of the second issue involves proof of the fifth element, i.e., personal cultivation of
the lands by respondent as to constitute her a bonafide agricultural lessee thereof. While the trial court found that
respondent was not a bonafide tenant, the Court of Appeals declared that she is but she failed to exercise her right to
redeem the lands within the required period. As a result, both the trial court and the Court of Appeals decreed that
the sale of the lands to petitioners is valid although they disagreed on the fact of personal cultivation by respondent
as to constitute her a bonafide lessee. Thus, the petitioners now seek a declaration from this Court that the
respondent has no right to further possess the disputed lands as she is not a bonafide agricultural lessee thereof.

On this aspect, we find for the petitioners.

In support of her claim of legitimate tenancy, respondent presented the following documents: (1) the Kasunduang
Buwisan sa Sakahan, dated January 3, 1975; (2) the certificate of the Ministry of Agrarian Reform (MAR) District
Officer Eugenio B. Bernardo; and (3) the October 4, 1984 affidavit of Ponciano Alejo, President of the Malayang
Samahang Nayon. We find, however, that these documents are insufficient to support respondent's claim of tenancy.

First, the Kasunduang Buwisan sa Sakahan entered into by the original owners and the respondent does not per se
prove that respondent is a bonafide lessee. The five (5) elements of agricultural leasehold relationship are still
required to be established. In the case at bar, the element of personal cultivation by the respondent was not
adequately proved. This is fatal to respondent's cause as without the element of personal cultivation, a person
cannot be considered a tenant even if he is so designated in the written agreement of the parties. 12

Second, the Certification issued by MAR District Officer Bernardo is likewise insufficient to prove that respondent is a
bonafide lessee as it did not make a finding that respondent personally cultivated the land either by herself or through
farm laborers. The Certification simply made a general conclusion that respondent is a registered agricultural
lessee of the lands per records of their office, as the Kasunduang Buwisan sa Sakahan was registered there.

Third, the 1984 Affidavit of Alejo,13 the President of the Malayang Samahang Nayon likewise deserves scant
consideration. Its contents leave much to be desired insofar as proof that respondent is a bonafide lessee of the
subject lots. Its ambiguous and sweeping statements cannot support respondent's claim of legitimate
tenancy. Consider these statements:

"2. That on July 2, 1984, I issued a certification that one MR. DONATO SAMATRA, of Barangay Malaya, Sto.
Domingo, Nueva Ecija is the owner, and at the same time the actual tiller of two (2) parcels of agricultural
land situated thereat, with a combined area of 26,746 square meters, more or less including a residential
portion, without carefully verifying the facts.

3. That it now appears that I was misled into believing, and thus certifying, that said landholding was not
tenanted but is actually being tilled by the registered owner DONATO SAMATRA;

4. That in truth and in fact, said landholding is tenanted by virtue of a "Kasunduang Buwisan sa Sakahan,"
dated January 3, 1975, by and between its registered owner DONATO SAMATRA and RITA S. VDA. DE
PARIÑAS, with Rufino Q. Roque and Ernesto C. Castelo as instrumental witnesses, and which document is known as
Dok. Blg. 145; Pahina Blg. 50; Aklat Blg. VII, duly notarized by Hon. Judge Manuel Dela Cruz, Notary Public Ex-Oficio
and registered with the Office of the Municipal Treasurer of Sto. Domingo, Nueva Ecija, on the same date;

5. That I am executing this affidavit in order to set the record straight and to correct an error that may prejudice, or
may have prejudiced, the lawful tenant, possessor and cultivator, MRS. RITA S. VDA. DE PARIÑAS." (emphasis
supplied)

39
Thus, it appears that Alejo based the foregoing affidavit certifying that respondent is the actual cultivator and lawful
lessee of the land solely on the existence of the registered contract of agricultural lease. His certification on the fact
of personal cultivation by the respondent as to constitute her a bonafide or legitimate lessee was not based on
personal knowledge or factual information. There is no mention in his Affidavit that he investigated respondent's
status and saw for himself or knew for a fact that respondent personally cultivated the lots. His Affidavit is wanting
in particulars and its ambiguous contents were never explained in court. We likewise find it curious that Alejo
had earlier issued a conflicting Affidavit,14 dated July 2, 1984, certifying that the subject lands were
untenanted and the actual tiller was the mortgagor Donato Samatra. Three months later, he issued the
aforequoted Affidavit stating in paragraph 3 that it was respondent who personally cultivated the lands. Curiously,
Alejo did not elaborate in the same Affidavit or during the trial of the case the circumstances and reasons that
allegedly misled him to issue the first certificate.

In the light of these two (2) conflicting affidavits issued by Alejo, the issue on personal cultivation by the respondent
as to constitute her a bonafide lessee was not adequately proved. We reiterate our ruling in Bernas vs. Court of
Appeals15 that the legal question of agricultural leasehold relationship cannot be made to depend on mere
certifications issued by the president or officers of associations and organizations. This ruling applies with
greater force in the case at bar as the documents and certifications issued by the same person contradict
each other.

Aside from respondent's conflicting documentary evidence, the trial court rightly observed that respondent was of
advance age which immediately puts in doubt her ability to personally cultivate the disputed lands. It would have
been appropriate for respondent to have testified on her behalf or presented witnesses to attest that she
performed any of the various acts of caring for the plants, as to fall under the definition of "personal
cultivation."16 While the evidence shows that respondent was in possession of the lands, it is not enough to prove
that she cultivated them. As correctly pointed out by petitioners, cultivation, although not limited to plowing and
harrowing of the soil, requires some general industry on the part of the tenant in caring for the plants. In the case at
bar, we find absolutely no evidence on record to show that respondent performed any act that may be considered as
falling under the phrase "personal cultivation." Neither can we affirm the Court of Appeals' conclusion that, although
respondent may not have personally cultivated the lands, she could have been helped by farm laborers in the care of
the plants as this is allowed by law. To be sure, there is a dearth of evidence on record to show that respondent
personally cultivated the lands, much less that she was assisted by hired personnel in her farm work.

Prescinding from these premises, we affirm the conclusion of the trial court that respondent is not a bonafide
agricultural lessee of the subject lands for failure to prove the important element of personal cultivation.

Finally, we affirm the award of actual damages to petitioners in the form of unrealized income from the
lands in view of respondent's refusal to surrender the disputed lands to them. The actual amount thereof should be
recomputed by the trial court based on the total expected harvest from the date the lots were sold to petitioners in
1984 until finality of the decision. However, we affirm the deletion of the award of attorney's fees and
litigation expenses as the trial court failed to discuss in its Decision the reasons for their grant. The settled rule is
that the matter of attorney's fees cannot be mentioned only in the dispositive portion of the decision.17 The
same goes for the award of litigation expenses. They must be clearly explained and justified by the trial court in the
body of its decision for the general rule is that attorney's fees and expenses of litigation cannot be recovered in the
absence of stipulation.18

IN VIEW WHEREOF, the impugned Decision of the Court of Appeals in CA-G.R. CV No. 51831, dated March 12,
1999, is SET ASIDE. The Decision of the Regional Trial Court, Branch 37, Sto. Domingo, Nueva Ecija, dated October
17, 1994, in Agrarian Case No. 113/Civil Case No. SD-1194, is REINSTATED, with the modifications that the awards of
attorney's fees and litigation expenses to petitioners are deleted. The records of the case are remanded to the court a
quo for recomputation of the proper amount of actual damages to be paid by respondent Rita S. Vda. de Pariñas to
petitioners Felino Samatra and Charlita Isidro.

SO ORDERED.

Davide, Jr., C.J., and Austria-Martinez, JJ., concur.


Kapunan, Ynares-Santiago, On official leave.

Endnotes:

1 Lot Nos. 2891 and 2908.

2 Lot No. 2434.

3 Rollo, p. 42.

4
Counter-Affidavit of mortgagee bank manager Ricardo E. Gonzales, paragraphs 6-9, Original Records, volume 1, pp. 27-28.

5 Original Records, volume 1, p. 23.

6
Agrarian Case No. 113, Civil Case No. SD-1194, Regional Trial Court; Branch 28, Cabanatuan City, Complaint, Original Records, volume 1,
pp. 1-8.

40
7
Penned by Judge Senen R. Saguyod, Regional Trial Court, Third Judicial Region, Branch 37, Sto. Domingo, Nueva Ecija; Rollo, pp. 43-48.

8This order was based on the trial court's finding that respondent took possession of the disputed lots and appropriated for herself the palay
harvests from 1984 until the decision of the court in said case in 1994; See page 5 of the trial court's decision, Rollo, at p. 47.

9 Original Records, volume 1, p. 35.

10
Decision, dated March 12, 1999, penned by Associate Justice Bernardo P. Abesamis and concurred in by Associate Justices Jainal D. Rasul
and Conchita Carpio-Morales; Rollo, p. 38.

11 Cuaño vs. Court of Appeals, 327 SCRA 122 (1994).

12 Castillo vs. Court of Appeals, 205 SCRA 529 (1992).

13 Original Records, volume 1, p. 35.

14 Ibid., p. 22.

15 225 SCRA 119, 137 (1993).

16 This is not limited to the plowing or harrowing of land. Cultivation includes preparation of the seedbed (plowing, harrowing, watering of
seedbed), scattering of seeds and care of the seedlings; maintenance, repair and weeding of dikes, paddies and irrigation canals in his
landholdings, pulling and bundling of seedings preparatory to their transplanting, care of the growing plants, gathering and bundling of the
reaped harvest, piling of the bundles into small stacks, preparation of the place where the harvest is to be stacked, gathering of the small
stacks and transportation to the place where they are to be stacked, or piling into a big stack preparatory to threshing. See Rulings from the
SCRA in Agrarian Cases, Milagros A. German, pp. 114-115, 1989 edition.

17
Development Bank of the Philippines vs. Court of Appeals, 262 SCRA 246 (1996).

18 Article 2208, New Civil Code.

41
THIRD DIVISION

[G.R. No. 133079. August 9, 2005]

SPS. MAXIMO LANDRITO, JR. and PACITA EDGALANI, petitioners, vs. THE
HONORABLE COURT OF APPEALS; SPS. BENJAMIN SAN DIEGO and
CARMENCITA SAN DIEGO; The EX-OFFICIO SHERIFF and CLERK OF
COURT of the Regional Trial Court, Makati City; and the REGISTER OF
DEEDS, Makati City, respondents.

DECISION
GARCIA, J.:

Herein petitioners, the spouses Maximo Landrito, Jr. and Pacita Landrito, have come to this
Court via this petition for review on certiorari under Rule 45 of the Rules of Court to seek the reversal
and setting aside of the decision dated 12 December 1997 [1] and resolution dated 10 March 1998[2] of
the Court of Appeals in CA-G.R. CV No. 48896, affirming an earlier order of the Regional Trial Court at
Makati City which granted the motion to dismiss filed by the herein private respondents, the spouses
Benjamin San Diego and Carmencita San Diego, in its Civil Case No. 94-2950, a complaint for
annulment of extrajudicial foreclosure and auction sale, thereat commenced by them against the San
Diegos, the ex-officio sheriff and the Register of Deeds of Makati City.
The facts:
In July 1990, petitioners obtained a loan of P350,000.00 from respondent Carmencita San Diego.
To secure payment thereof, petitioners executed on 02 August 1990 in favor of the same respondent
a deed of real estate mortgage over their parcel of land located at Bayanan, Muntinlupa, Rizal and
registered in their names under Transfer Certificate of Title No. (432281) S-21000.
After making substantial payments, petitioners again obtained and were granted by Carmencita
San Diego an additional loan of One Million Pesos (P1,000,000.00). To secure this additional loan, the
parties executed on 13 September 1991 an Amendment of Real Estate Mortgage, whereunder they
stipulated that the loan shall be paid within six (6) months from 16 September 1991, and if not paid
within said period, the mortgagee shall have the right to declare the mortgage due and may immediately
foreclose the same judicially or extrajudicially, in accordance with law.
It appears that petitioners defaulted in paying their loan and continuously refused to comply with
their obligation despite repeated demands therefor, prompting respondent Carmencita San Diego to
send them on 27 April 1993, a final notice of demand requiring them to settle their financial obligation
which, by then, already amounted to P1,950,000.00.
On 30 June 1993, after her efforts to collect proved futile, respondent Carmencita San Diego filed
with the Office of the Clerk of Court and Ex-Officio Sheriff of RTC-Makati, a petition for the extrajudicial
foreclosure of the mortgage.
On 06 July 1993, said office sent to the parties a Notice of Sheriffs Sale, therein announcing that
petitioners mortgaged property will be sold in a public auction to be conducted on 11 August 1993 at
10:00 oclock in the morning, copies of which notice were posted in several conspicuous places within
the sheriffs territorial jurisdiction.
As announced, on 11 August 1993, at 10:00 oclock in the morning, the public auction sale was held
and the mortgaged property sold to respondent Carmencita San Diego as the highest bidder
for P2,000,000.00, as evidenced by the Sheriffs Certificate of Sale issued in her favor on 07 October
1993.
On 29 October 1993, respondent San Diego caused the registration of the same sheriffs certificate
of sale with the Office of the Register of Deeds, Makati City, and duly inscribed on the same date at the
dorsal side of the petitioners TCT No. (432281) S-21000.

42
With the petitioners having failed to redeem their property within the 1-year redemption period from
the date of inscription of the sheriffs certificate of sale, as provided for in Act No. 3135, as amended,
the San Diegos caused the consolidation of title over the foreclosed property in their names.
Then, on 09 November 1994, before the Regional Trial Court at Makati City, petitioners filed their
complaint for annulment of the extrajudicial foreclosure and auction sale, with damages. In their
complaint, thereat docketed as Civil Case No. 94-2950, petitioners alleged that (1) said foreclosure and
auction sale were null and void for failure to comply with the requirements of notice and publication, as
mandated by Act 3135, as amended; (2) the mortgaged property was illegally foreclosed in the light of
the settled rule that an action to foreclose a mortgage must be limited to the amount mentioned in the
mortgage document, in this case, P1,000,000.00, which amount was allegedly bloated by respondent
Carmencita San Diego to P1,950,000.00; and (3) the San Diegos application for consolidation of title
was premature because the husband, Benjamin San Diego, allegedly granted them an extension of the
period of redemption up to 11 November 1994.
To the complaint, respondents interposed a Motion to Dismiss, therein alleging that said complaint
failed to state a cause of action as no primary right of the petitioners had been violated since they
actually failed to exercise their right of redemption within the one-year redemption period, adding that
petitioners never took any action which may stall the running of the same period, thereby leaving them
no further right or interest in the property in question.
In an order dated 13 January 1995, the trial court granted respondents motion to dismiss and
accordingly dismissed petitioners complaint, saying that the latters cause of action, if any, is already
barred by laches on account of their failure or neglect for an unreasonable length of time to do that
which, by exercising due diligence, could or should have been done earlier. Further, the trial court ruled
that petitioners inaction constituted a waiver on their part.
Therefrom, petitioners went on appeal to the Court of Appeals in CA-G.R. CV No. 48896.
As stated at the outset hereof, the appellate court, in its decision of 12 December 1997, dismissed
petitioners appeal and affirmed in toto the trial courts order of dismissal. With their motion for
reconsideration having been denied by the same court in its resolution of 10 March 1998, [3] petitioners
are now with us via the present recourse, faulting the Court of Appeals, as follows:

1. The Court of Appeals gravely erred in avoiding to resolve in the assailed Decision and
in the questioned Resolution the basic issue as to whether or not the extra-judicial
foreclosure and public auction sale of the subject parcel of land are valid and
lawful when the amount stated in letter-request or the petition for extra-judicial
foreclosure and in the notice of sheriff sale doubled the amount stipulated in the
Amendment of Real Estate Mortgage;

2. The Court of Appeals has similarly committed serious error in considering that the
complaint of the petitioner is a complaint for redemption when in the caption; in
the body; and in the prayer of the complaint, petitioner spouses have sought the
nullity as void ab initio the extra-judicial foreclosure and auction sale of the
subject property;

3. The respondent Appellate Court likewise incredulously erred to have resolved the
admissibility and probative value of the statement of account attached as Annex E
of the complaint when it was not yet presented in evidence; because the stage of
the case at the time the assailed dismissal order was issued, was yet in the period
of pleadings;

4. The Court of Appeals has grievously erred in affirming the assailed dismissal order by
declaring petitioner spouses to have been guilty of laches in failing to redeem
during the legal period of redemption the foreclosed parcel of land; when the cause
of the failure to redeem was the illegal increase by 100% of the original obligation,
stated in the Amendment of Real Estate Mortgage and bloating of the redemption
price from Two Million Pesos (P2,000,000.00) to Three Million Four Hundred

43
Ninety One Thousand Two Hundred Twenty Five & 98/100 Pesos
(P3,491,225.98).

We DENY.
The records indubitably show that at the time of the foreclosure sale on 11 August 1993, petitioners
were already in default in their loan obligation to respondent Carmencita San Diego.
Much earlier, or on 27 April 1993, a final notice of demand for payment had been sent to them,
despite which they still failed to pay. Hence, respondent Carmencita San Diegos resort to extrajudicial
foreclosure, provided no less in the parties Amendment of Real Estate Mortgage.
The rule has been, and still is, that in real estate mortgage, when the principal obligation is not paid
when due, the mortgagee has the right to foreclose on the mortgage and to have the mortgaged
property seized and sold with the view of applying the proceeds thereof to the payment of the
obligation.[4]
Here, the validity of the extrajudicial foreclosure on 11 August 1993 was virtually confirmed by the
trial court when it dismissed petitioners complaint, and rightly so, what with the fact that petitioners
failed to exercise their right of redemption within the 1-year period therefor counted from the registration
of the sheriffs certificate of sale.
It is petitioners main submission, however, that the very reason why they did not avail of their
redemption right is because Mrs. San Diego bloated their original loan of P1,000,000.00
to P1,950,000.00, an issue supposedly not considered and/or addressed by the appellate court in the
decision under review. In this regard, petitioners argue that the Court of Appeals, in sustaining the
extrajudicial foreclosure proceedings, thereby go against the established jurisprudence that an action
for foreclosure must be limited to the amount mentioned in the mortgage document, P1,000,000.00 in
this case.
We do not take issue with petitioners submission that a mortgage may be foreclosed only for the
amount appearing in the mortgage document, more so where, as here, the mortgage contract entered
into by the parties is evidently silent on the payment of interest.
However, contrary to petitioners claim, the appellate court did pass upon the legal issue raised by
them, albeit ruling that petitioners had been barred by laches from raising the same. We quote from the
challenged decision:

[Petitioners] next argued that the mortgaged property was illegally foreclosed since it is a well
settled rule that an action to foreclose a mortgage must be limited to the amount mentioned in the
mortgage.

The argument is without merit.

It appears from the evidence on record that despite due notice and publication of the same in a
newspaper of general circulation (Exhs. 5, 5-A and 5-B, pp. 53-55, Record), [petitioners] did not
bother to attend the foreclosure sale nor raise any question regarding the propriety of the sale. It
was only on November 9, 1994, or more than one year from the registration of the Sheriffs
Certificate of Sale, that [petitioners] filed the instant complaint. Clearly, [petitioners] had slept on
their rights and are therefore guilty of laches, which is defined as the failure or neglect for an
unreasonable or explained length of time to do that which, by exercising due diligence, could or
should have been done earlier, failure of which gives rise to the presumption that the person
possessed of the right or privilege has abandoned or has declined to assert the same. (Words in
bracket added.)

For sure, in the very petition they filed in this case, petitioners have not offered any valid excuse
why, despite notice to them of the petition for extrajudicial foreclosure filed by the respondents, they
failed to attend the proceedings and there voiced out what they are now claiming. Truly, laches has
worked against them.

44
The law on redemption of mortgaged property is clear. Republic Act No. 3135 (An Act to Regulate
the Sale of Property Under Special Powers Inserted In Or Annexed to Real Estate Mortgages), as
amended by Republic Act No. 4118, provides in Section 6 thereof, thus:

Sec. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore
referred to, the debtor, his successors 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; xxx (Emphasis supplied)

In a long line of cases[5], this Court has consistently ruled that the one-year redemption period
should be counted not from the date of foreclosure sale, but from the time the certificate of sale is
registered with the Register of Deeds. Here, it is not disputed that the sheriffs certificate of sale was
registered on 29 October 1993.
And under Article 13 of the New Civil Code[6], a year is understood to have three hundred sixty-five
(365) days each. Thus, excluding the first day and counting from 30 October 1993 (under paragraph 3
of Article 13 of the New Civil Code), and bearing in mind that 1994 was a leap year, petitioners had
only until 29 October 1994, the 365th day after registration of the sheriffs certificate of sale on 29
October 1993, within which to redeem the foreclosed property in accordance with law. And since 29
October 1994 fell on a Saturday, petitioners had until the following working day, 31 October 1994, within
which to exercise their right of redemption.
From the foregoing, it is clear as day that even the complaint filed by the petitioners with the trial
court on 09 November 1994 was instituted beyond the 1-year redemption period. In fact, petitioners no
less acknowledged that their complaint for annulment of extrajudicial foreclosure and auction sale was
filed about eleven (11) days after the redemption period had already expired on 29 October 1994 [7].
They merely harp on the alleged increase in the redemption price of the mortgaged property as the
reason for their failure to redeem the same. However, and as already pointed out herein, they chose
not, despite notice, to appear during the foreclosure proceedings.
Of course, petitioners presently insist that they requested for and were granted an extension of
time within which to redeem their property, relying on a handwritten note allegedly written by Mrs. San
Diegos husband on petitioners statement of account, indicating therein the date 11 November 1994 as
the last day to pay their outstanding account in full. Even assuming, in gratia argumenti, that they were
indeed granted such an extension, the hard reality, however, is that at no time at all did petitioners
make a valid offer to redeem coupled with a tender of the redemption price.
Even on this score, petitioners case must fall.
For, in Lazo v. Republic Surety & Insurance Co., Inc.[8], this Court has made it clear that it is only
where, by voluntary agreement of the parties, consisting of extensions of the redemption
period, followed by commitment by the debtor to pay the redemption price at a fixed date, will
the concept of legal redemption be converted into one of conventional redemption.
Here, there is no showing whatsoever that petitioners agreed to pay the redemption price on or
before 11 November 1994, as allegedly set by Mrs. San Diegos husband. On the contrary, their act of
filing their complaint on 09 November 1994 to declare the nullity of the foreclosure sale is indicative of
their refusal to pay the redemption price on the alleged deadline set by the husband. At the very least,
if they so believed that their loan obligation was only for P1,000,000.00, petitioners should have made
an offer to redeem within one (1) year from the registration of the sheriffs certificate of sale, together
with a tender of the same amount. This, they never did.
It must be remembered that the period of redemption is not a prescriptive period but a condition
precedent provided by law to restrict the right of the person exercising redemption. Correspondingly, if
a person exercising the right of redemption has offered to redeem the property within the period fixed,
he is considered to have complied with the condition precedent prescribed by law and may thereafter
bring an action to enforce redemption. If, on the other hand, the period is allowed to lapse before the
right of redemption is exercised, then the action to enforce redemption will not prosper, even if the
action is brought within the ordinary prescriptive period. Moreover, the period within which to redeem
the property sold at a sheriffs sale is not suspended by the institution of an action to annul the
foreclosure sale.[9] It is clear, then, that petitioners have lost any right or interest over the subject
property primarily because of their failure to redeem the same in the manner and within the period
45
prescribed by law. Their belated attempts to question the legality and validity of the foreclosure
proceedings and public auction must accordingly fail.
WHEREFORE, the instant petition is DENIED and the challenged decision and resolution of the
Court of Appeals AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Panganiban, (Chairman), Sandoval-Gutierrez, and Carpio-Morales, JJ., concur.
Corona, J., on official leave.

[1] Penned by then, now a member of this Court, Associate Justice Consuelo Ynares-Santiago, with then Associate Justices
Bernardo Ll. Salas and Demetrio G. Demetria, concurring.
[2] Rollo, p. 28.
[3] Ibid.
[4] State Investment House, Inc. v. Court of Appeals, 215 SCRA 734 [1992] citing Commodity Financing Co., Inc. v. Jimenez,
91 SCRA 57 [1979] and Bicol Savings and Loan Association v. Court of Appeals, 171 SCRA 630 [1989].
[5] Agbulos v. Alberto, 5 SCRA 790, [1962]; Salazar v. Meneses, 8 SCRA 495 [1963]; Reyes v. Noblejas, 21 SCRA 1027
[1970]; Quimson v. Philippine National Bank, 36 SCRA 26 [1970]; Gregorio Limpin v. Intermediate Appellate Court,
166 SCRA 87 [1988]; Eastman Chemical Industries, Inc. v. Court of Appeals, 174 SCRA 619 [1989]; Bernardez v.
Reyes, 201 SCRA 648 [1991]; and Union Bank of the Philippines v. Court of Appeals, 357 SCRA 12 [2001].
[6] Article 13. When the law speaks of years, months, days or nights, it shall be understood that years are of three hundred
sixty-five days each; months, of thirty days; days, of twenty-four hours; and nights from sunset to sunrise.
If months are designated by their name, they shall be computed by the number of days which they
respectively have.
In computing a period, the first day shall be excluded, and the last day included.
[7] Memorandum for the Petitioners dated 26 February 1999.
[8] 31 SCRA 329 [1970].
[9] Fundamentals of Redemption in Extra-Judicial Foreclosures, 140 SCRA 368 [1985], citing De Connejero, et al. v. Court
of Appeals, et al., L-21812; Castillo v. Samonte, L-13146, 30 June 1960; Daga v. Tomacruz, 58 Phil 414;
and Sumerariz v. Development Bank of the Philippines, 21 SCRA 1374.

46
FIRST DIVISION

[G.R. No. 102696*. July 12, 2001]

ALBERTO LOOYUKO, JUAN C. UY and ATTY. VICTORIA CUYOS, petitioner,


vs. COURT OF APPEALS, F.G.U. INSURANCE CORPORATION and ANTONIO
GUTANG, HEIRS and SUCCESSORS-IN-INTEREST, respondents.

[G.R No. 102716*. July 12, 2001]

FGU INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS, ANTONIO J.


GUTANG, JOSE V. GUTANG, ALBERTO LOOYUKO, JUAN C. UY, VICTORIA
ALCANTARA CUYOS and JUDGE WILLIAM H. BAYHON, respondent.

[G.R. No. 108257*. July 12, 2001]

SCHUBERT TANUNLIONG, petitioner, vs. COURT OF APEALS, ANTONIA GUTANG,


DAVID GUTANG, ELIZABETH GUTANG-LEDESMA, ATTY. RAMON A.
GONZALES, ATTY. VICTORIA S. ALCANTARA CUYOS and JUDGE RICARDO
MOLINA, respondents.

[G.R. No. 120954*. July 12, 2001]

SCHUBERT TANUNLIONG, petitioner, vs. COURT OF APPEALS, and ANTONIA J.


GUTANG, respondents.

DECISION
KAPUNAN, J.:

Disputed in these consolidated cases is a house and lot located in Mandaluyong, Rizal (now Mandaluyong
City), formerly covered by Transfer Certificate of Title (TCT) No. 1702, and previously owned by the Spouses
Tomas and Linda Mendoza. Bitterly contesting the property are the spouses various creditors as well as the
creditors alleged assignee.
One set of creditors includes Albert Looyuko and Jose Uy. Their lawyer, Atty. Victoria Cuyos, has also
annotated her attorneys lien over the property. Antonia Gutang and her children David and Elizabeth, who have
substituted their father,[1] comprise another set. Both sets of creditors rest their claim upon separate levies on
execution and their supposed purchase of the property at public auction.
A more detailed background that gave rise to Looyuko et al.s and the Gutangs claims over the property is set
forth below. Thereafter, a recital of the antecedents that gave rise to the consolidated petitions, including the
claims of another creditor, FGU Insurance Corporation, as well as Schubert Tanuliong, who purports to be
Looyuko et al.s and the Gutangs assignee, follows.
Civil Case No. 82-5792, RTC Manila
(Looyuko and Uy vs. Spouses Mendoza)[2]
47
On April 22, 1977, Albert Looyuko and Jose Uy, through their counsel, Atty. Victoria Cuyos, filed a
complaint against the Spouses Mendoza before the Regional Trial Court (RTC) of Manila. The Manila RTC
issued a writ of preliminary attachment over the property and a notice of levy on attachment bearing the date
April 22, 1977 was annotated at the back of the TCT No. 1702.
Evidently, Looyuko and Uy prevailed in that action. On February 12, 1986, the Manila RTC issued a writ of
execution and the property was sold at public auction with Looyuko and Uy as the highest bidders.
On June 30, 1995, the Register of Deeds of Mandaluyong issued a new TCT over the property, TCT No.
10107, in the name of Looyuko and Uy. The TCT bears the date February 6, 1992, the date of inscription of the
final deed of sale in favor of Looyuko and Uy.
Civil Case No. 13122, RTC Iloilo
(Antonia Gutang vs. Tomas Mendoza)
LRC Case No. R-3613, RTC Rizal
Antonia Gutang filed a complaint for a sum of money with damages against Tomas Mendoza with the RTC
of Iloilo (Civil Case No. 13122). Judgment was rendered in favor of Antonia Gutang and the decision later became
final and executory. On July 1, 1981, Antonia Gutang caused to be annotated on the same TCT No. 1702 a notice
of levy on execution. On June 8, 1984, the property was sold at public auction to Antonia Gutang. The Deputy
Sheriff executed a final deed of sale on November 5, 1985.
Antonia Gutang, by virtue of the certificate of sale, filed with the RTC of Rizal a petition for the cancellation
of TCT No. 1702 and the issuance of a new title in her name. The case was docketed as LRC Case No. R-3613. On
June 15, 1987, the Rizal RTC issued an order granting the petition. Consequently, TCT No. 1702 was cancelled
and TCT No. 242 in the name of Antonia Gutang, married to Jose Gutang, was issued on December 23, 1987. The
issuance of TCT No. 242, as will be seen later, spawned other cases.
Civil Case No. 82-9760, RTC Manila
(FGU vs. Spouses Mendoza)
CA-G.R. No. 23849, 7th Division, Court of Appeals
(FGU vs. Judge Bayhon and Spouses Gutang)
G.R. No. 102696, Supreme Court
(Looyuko et al. vs. Court of Appeals, FGU, et al.)
G.R. No. 102716, Supreme Court
(FGU vs. Court of Appeals, Spouses Gutang, et al.)
On December 2, 1976, spouses Tomas and Linda Mendoza executed a mortgage over the subject property in
favor of FGU Insurance Corporation. The mortgage was registered with the Register of Deeds of Pasig, Rizal on
December 3, 1976.
As the spouses failed to satisfy the obligation secured by the mortgage, FGU on June 1, 1982 filed an action
(Civil Case No. 82-9760) with the RTC of Manila against said spouses. The latter filed an Answer but failed to
appear during the pre-trial. Consequently, the Spouses Mendoza were declared as in default and evidence were
received ex-parte.
On January 22, 1988, the Manila RTC rendered a decision in favor of FGU, thus:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering
the latter, jointly and severally, to pay the plaintiff the following:

1. The amount of P368,785.80 with interest at 12% per annum compounded monthly from May 5,
1982 until the same is fully paid;

2. The amount of P22,501.60 with interest at 12% per annum compounded monthly from
December 7, 1977 until the same is fully paid;

3. P5,000.00 as attorneys fees;

4. The costs of suit.


48
SO ORDERED.[3]

FGU filed a motion for partial reconsideration, pointing out that the action was not for a sum of money but
for foreclosure of mortgage. It prayed that in accordance with Section 2, Rule 68 of the Rules of Court, the
decision be amended by ordering the sale of the property mortgaged in case defendant should not satisfy the
judgment in favor of plaintiff within ninety (90) days from notice of decision.
On May 19, 1988, the RTC issued an Order granting FGUs motion:

Acting on the partial motion for reconsideration of the Decision rendered by the Court on January
22, 1988 and finding the same to be meritorious, the same is hereby granted.

Accordingly, the first paragraph and the dispositive portion of said Decision are hereby ordered
amended to read as follows:

This is an action for foreclosure of real estate mortgage filed by plaintiff, FGU Insurance
Corporation against Spouses Tomas Mendoza and Linda A. Mendoza, filed way back on June 1,
1982.

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendants,
ordering the latter, jointly and severally, to pay the plaintiff the following: 1. The amount of
P368,785.80 with interest at 12% per annum compounded monthly from May 5, 1982 until the
same is fully paid; 2. The amount of P22,501.60 with interest at 12% per annum compounded
monthly from December 7, 1977 until the same is fully paid; 3. P5,000.00 as attorneys fees; 4. the
costs of suit. Should defendants fail to pay said amounts within 90 days from receipt of the
Decision dated Jan. 22, 1988, the mortgaged property described in par. 6 of the complaint shall be
sold in the manner and under the regulations governing sales of real estate under execution. The
proceeds of the sale, after deducting the cost of the sale shall be applied to the judgment and any
balance shall be turned over to the defendants or their agent.

SO ORDERED.[4]

No appeal was taken from the above Order and the same subsequently became final and executory.
On September 14, 1988, the Manila RTC issued a writ of execution. On November 24, 1988, the deputy
sheriff in a public bidding sold the parcel of land covered by TCT 1702 to FGU, the highest bidder. A certificate
of sale was thereafter issued in FGUs favor, which was confirmed by the RTC on March 2, 1989. On August 23,
1989, the RTC issued an order for the cancellation of TCT No. 242 and the issuance of a new TCT in FGUs name.
Before the new TCT could be issued, however, the Spouses Gutang filed a motion for intervention and to set
aside the judgment of the RTC, alleging that they are the new registered owners of the property. In an Order dated
February 9, 1990, the RTC allowed the motion for intervention, holding that the failure of FGU to implead the
Spouses in the action for foreclosure deprived the latter of due process. The RTC thus set aside its Decision and
all orders issued subsequent and related thereto.

WHEREFORE, the motion to intervene filed by the Spouses Gutang is granted and the decision on
May 19, 1988 is reconsidered set aside together with all orders subsequent and related thereto.[5]

On October 11, 1990, Looyuko et al. filed a motion for intervention, which the RTC granted in its Order
dated October 18, 1990.
In an Order dated November 16, 1990, the RTC denied FGUs motion for the reconsideration of the order
setting aside its decision.
FGU filed a petition for certiorari, prohibition and mandamus in the Court of Appeals, arguing that the trial
court committed grave abuse of discretion in granting the Spouses Gutangs motion for intervention since the RTC
decision, as amended, was already final and executory.
On March 13, 1991, the Court of Appeals received an Urgent Motion by Juan Uy, Alberto Looyuko and their
counsel, Atty. Cuyos, praying for leave to file a motion for intervention. They alleged that they were attachment

49
creditors of the spouses Tomas and Linda Mendoza whose property covered by TCT No. 1702 was attached as
per entry No. 11728 duly inscribed on April 22, 1977 and subsequently carried over to TCT No. 242 in the name
of the Spouses Gutang. On April 26, 1991, the court issued a resolution allowing Looyuko et al.s motion for
intervention.
In a Decision dated August 12, 1991, the Court of Appeals rendered its Decision, the dispositive portion of
which reads:

WHEREFORE, the petition for certiorari, mandamus and prohibition is hereby (1) GRANTED
insofar as that portion of the Order of February 9, 1990 is concerned reconsidering and setting aside
the money judgment is concerned, which judgment [is] final and executory, and in the process of
satisfaction, should be maintained and remains as such; and (2) DISMISSING insofar as that
portion of the same Order allowing the private respondents to intervene is concerned.

SO ORDERED.[6]

The Court of Appeals ruled that the action before the RTC was not actually an action for foreclosure but one
for collection of a sum of money. The court also affirmed the order of the RTC allowing intervention, thus:

The Court, both from the factual, procedural and substantive points, finds that respondent court had
just and valid reasons to allow the private respondents to intervene in the case. Had it denied the
intervention, the execution in satisfaction of the money judgment against the judgment debtors,
would be violative of section 15 of Rule 30, that should be on all the property, real and personal, x
x x of the judgment debtor x x x. when, in the case, the ownership of the parcel of land, covered by
TCT 45066 is claimed by private respondents as well as movants-intervenors. Finally, even if it is
considered, as petitioner claims, petitioner should have impleaded in its action all persons having or
claiming an interest in the (mortgage) premises subordinate in right to that of the holder of the
mortgage, all of whom shal be made defendants in the action (sec. 1, Rule 68, Rules of Court) and
without their inclusion there can be no final determination in the action. Petitioner did not include
private respondents as well as movants-intervenors, both of whom hold liens on the same
property. Even under this aspect, respondent court should not be faulted for allowing private
respondents to intervene, considering its reason that what (is) sought to be safeguarded (is) x x x
the provision of Rule 68 of the Rules of Court. And while the time to intervene, under section 2, of
Rule 12, is before or during a trial, x x x, in its discretion x x x, or even on the day when the case is
submitted for decision (Falcasantos vs. Falcasantos, L-4627, May 13, 1952), or at any time before
the rendition of final judgment (Lichauco vs. C.A., ET AL., L-23642, Mar. 13, 1975), in Director of
Lands vs. C.A., et al. (L-45168, Sept. 25, 1979), intervention was permitted pending appeal in order
to avoid injustice which must have impelled the respondent court to allow the intervention.

Be that as it may, insofar as the default judgment dated January 27, 1988, ordering the defendants
spouses Mendoza, jointly and severally, to pay petitioner the judgment debt, interest, attorneys fees
and costs, and which money judgment was restated in the Order dated may 19, 1988, since that
judgment had already become final and executory and in the process of execution, what cropped up
in the interim on the question of whether or not the money judgment can be enforced against the
parcel of land covered by TCT 450666, it appearing that petitioner, private respondents and herein
movants-intervenors are all having and claiming interest in that property, a question which has no
relevance and would not affect the correctness of the money judgment, the respondent court had no
reason to reconsider and set aside the judgment which had already become final and executory, can
no longer be altered, amended, reconsidered, set aside. Nothing more can be done therewith. The
court which rendered it has no more authority to modify or revoke it, except for its execution,
otherwise, there would be not end to the litigation. Hence, the money judgment should be
maintained and set at rest as and all that remains to be done in connection therewith is to have the
same properly executed against the judgment debtors.[7]

On August 16, 1991, the Court of Appeals noted a motion for leave to intervene by Schubert Tanunliong.

50
Subsequently, FGU and Looyuko et al. filed their respective motions for reconsideration. On October 31,
1991 the Court of Appeals issued a resolution denying both motions for reconsideration.
Looyuko et al. thus filed a petition for certiorari, prohibition and mandamus before this Court, contending in
the main that the failure of FGU to implead them as defendants in Civil Case No. 82-9760 deprived them of due
process. Consequently, the entire proceedings conducted before the RTC should have been declared void. The
case was docketed herein as G.R. No. 102696.
FGU, for its part, filed a petition for review on certiorari with this Court, which was docketed as G.R. No.
102716. FGU contends that the Court of Appeals erred in characterizing Civil Case No. 82-9760 as an action for
a sum of money, and not one for foreclosure of mortgage, and in allowing the intervention of the Spouses Gutang
and Looyuko et al. in the proceedings before the trial court.
LRC Case No. R-4212, RTC Rizal
(Gutang vs. Register of Deeds, et al.)
LRC Case No. R-4643, RTC Rizal
(Gutang et al. vs. Looyuko et al.)
CA-G.R. SP No. 36825, 9th Division, Court of Appeals
(Gutang vs. Judge Trampe, Tanunliong)
G.R. No. 120954, Supreme Court
(Tanunliong vs. Court of Appeals, Gutang)
On November 28, 1989, Antonia Gutang filed with the RTC of Rizal an Amended Petition under Section 108
of Presidential Decree No. 1539 for the cancellation of TCT No. 242 in the name of the Spouses Gutang and the
issuance of a new one in the name of Antonia Gutang and her children David and Elizabeth. The cancellation of
the TCT was sought on the grounds that the husband, Jose Gutang, had already died, and that the property covered
by the TCT was paraphernal. The case was entitled Antonia Gutang versus Register of Deed, Galvanizers
Marketing, Inc., Victoria Alcantara Cuyos, Alberto Looyuko and Juan Uy, LRC Case No. R-4212.
On August 29, 1991, Schubert Tanunliong, the alleged assignee of FGU and Looyuko et al., filed a motion
for leave to intervene, attaching his opposition to the amended petition.
On June 1, 1992, Antonia Gutang and her children filed another petition with the Rizal RTC against Cuyos,
Looyuko and Uy praying for the cancellation of certain entries annotated in TCT No. 242. The case was docketed
as LRC Case No. 4643.
On July 12, 1993, the RTC ordered the setting of the cases for hearing and for compliance with jurisdictional
requirements. On October 11, 1993, the court issued an order allowing the intervention of Tanunliong. The
Gutangs moved for a reconsideration of both orders. On July 19, 1994, the court issued an Omnibus Order in
LRC Case Nos. 4214 and 4643, the dispositive portion of which reads:

WHEREFORE, in view of all the foregoing, the Petitioners two (2) Motions for reconsideration
dated August 30, 1993 and October 27, 1993; and Respondents Motion for Reconsideration dated
November 3, 1993 and the Opposition and Motion to Dismiss dated June 23, 1991, are all DENIED
for lack of merit.

On the other hand, movant Intervenors Motion for Leave to Intervene with Opposition dated
August 29, 1991 is Granted.

In the meantime, let a notice of hearing be issued setting these cases for hearing in accordance with
the provisions of P.D. 1529.

Let copies of the same be furnished the parties in this case, thru their counsels, the Register of
Deeds of Mandaluyong, Metro Manila; the Office of the Solicitor General; and Intervenor Schubert
Tanunliong, thru his counsel Atty. Nelson Ng.[8]

On March 6, 1995, the court issued another order in both LRC cases, thus:

Accordingly, let the questioned Omnibus Order dated July 19, 1994 stand, and the Branch Clerk of
Court is directed to issue the notice of initial hearing in [this] case with notice to the Office of
51
Solicitor General, the Registry of Deed of the City of Mandaluyong, herein respondents and
intervenor Ng, pursuant to Section 108 of the Presidential Decree No. 1529.[9]

Yet another order was subsequently issued by the RTC in LRC Case No. 4212, the dispositive portion of
which reads:

FURTHERMORE, let a copy of this order and the petition be furnished the Solicitor General,
Makati, Metro Manila.[10]

Antonia Gutang went to the Court of Appeals and questioned, among others, the allowance of the intervention
by Tanunliong (CA-G.R. SP No. 36825). In a Decision dated June 30, 1995, the Court of Appeals, through the
Special Ninth Division, set aside and declared void the Orders of the Land Registration Court insofar as they
allowed the intervention of Tanunliong.
Tanunliong now challenges the decision of the Court of Appeals in G. R. No. 120954. He submits that the
decision in LRC Case No. R-3613, which issued TCT No. 242 in the name of the Spouses Gutang is void, citing
specific grounds therefor. Accordingly, intervention should have been allowed on the principle that a void
judgment can be attacked either directly or collaterally.
Civil Case No. 61209, Pasig RTC
(Tanunliong vs. Gutang et al.)
CA-G.R. SP NO. 27972, 4th Division, Court of Appeals
(Gutang et al. vs. Judge Molina and Tanunliong)
G.R. No. 108257, Supreme Court
(Tanunliong vs. Court of Appeals, Gutang et al.)
Schubert Tanunliong claims that on December 19, 1985, the Spouses Mendoza sold the subject house and
lot to him. Subsequently, on January 9, 1986, Alberto Looyuko and John Uy, the plaintiffs in Civil Case No. 82-
5792, allegedly assigned to Tanunliong their rights and interests over the property. The validity of the assignment,
however, is refuted by Looyuko, et al.[11]
On January 29, 1987, FGU, the plaintiff in Civil Case No. 82-9760 likewise assigned all its rights and interest
over said property to Tanunliong. The assignment is not denied by FGU. On August 23, 1991, Tanunliong filed
before the RTC of Pasig a complaint for the cancellation of title, accounting and issuance of a writ of preliminary
injunction against Antonia Gutang, David Gutang, Elizabeth Gutang Ledesma, Atty. Ramon Gonzales (the
counsel for the Gutangs), and Atty. Victoria Cuyos. The case was docketed as Civil Case No. 61209. Tanunliong
alleged, among others, that Antonia Gutang obtained the Order in LRC Case No. R-3613, canceling TCT No.
1702 and ordering the issuance of TCT No. 242 in favor of the Gutangs, through fraud and misrepresentation and
without notice to FGU. Consequently, said Order was void.
The defendants filed a motion to dismiss Tanunliongs complaint on the ground that the RTC had no
jurisdiction over the case, the complaint in reality being an action for the annulment of the Order of the Pasig
RTC in LRC Case No. R-3613. The RTC denied said motion but the Court of Appeals, upon a petition for
certiorari and prohibition by the Gutangs and Gonzales, ruled otherwise. The appellate court held that
Tanunliongs action, though denominated as one for cancellation of title, accounting and for issuance of
preliminary injunction is, in truth, a case for annulment of judgment. The dispositive portion of the Decision,
dated December 16, 1992, reads:

WHEREFORE, the Petition for Certiorari and Prohibition, with Temporary Restraining Order, is
hereby GRANTED. The Order of the RTC-Pasig, Branch 152, dated May 14, 1992, in Civi9l Case
No. 61209, is SET ASIDE, for being null and void. The RTC-Pasig, Branch 152,
is ENJOINED from proceeding with Civil Case No. 61209 and is ORDERED to dismiss said case,
for lack of jurisidiction.

IT IS SO ORDERED.[12]

Tanunliong thus assails the ruling of the Court of Appeals in G.R. No. 108257, maintaining, in essence, that
the action for cancellation of title, accounting and issuance of a writ of preliminary injunction is proper.

52
The Court finds the principal issue raised in G.R. Nos. 102696 and 102716 dispositive of the consolidated
petitions. Was the motion for intervention filed by the Spouses Gutang and Looyuko et al. in Civil Case No. 82-
9760 proper considering that the case was already final and executory?
We do not deem it necessary to address the issue of whether the complaint filed by FGU against the Spouses
Mendoza was an action for foreclosure of mortgage or one for a sum of money. Clearly, if it were the latter, the
Gutangs and Looyuko et al. would have no right to intervene therein since the action for sum of money, i.e.,
damages, would have arisen from the contract secured by mortgage, to which they are not parties. Then Section
2, Rule 12 of the Rules of Court, the law prevailing at the time, read as follows:

Intervention. A person may, before or during a trial be permitted by the court, in its discretion, to
intervene in an action, if he has legal interest in the matter in litigation, or in the success of either of
the parties, or an interest against both, or when he is so situated as to be adversely affected by a
distribution or other disposition of property in the custody of the court or of an officer
thereof. [Underscoring supplied.]

None of the grounds underscored above are present to warrant their intervention. Accordingly, we assume for
purposes of discussion that the action was indeed for the foreclosure of the mortgage over the subject property.
The rule stated above also requires that a motion for intervention should be made before or during a
trial. Because of varying interpretations of the phrase, the present Rules have clarified that the motion should be
filed any time before rendition of judgment.[13]

1. The former rule as to when intervention may be allowed was expressed in Sec. 2, Rule 12 as
before or during a trial, and this ambiguity also gave rise to indecisive doctrines. Thus, inceptively
it was held that a motion for leave to intervene may be filed before or during a trial even on the day
when the case is submitted for decision (Falcasantos vs. Falcasantos, L-4627, May 13, 1952) as
long as it will not unduly delay the disposition of the case. The term trial was used in its restricted
sense, i.e., the period for the introduction for intervention was filed after the case had already been
submitted for decision, the denial threof is proper (Vigan Electric Light Co., Inc. vs. Arciaga, L-
29207 and L-29222, July 31, 1974). However, it has also been held that intervention may be
allowed at any time before the rendition of final judgment (Lichauco vs. CA, et al., L-23842, Mar.
13, 1975). Further, in the exceptional case of Director of Lands vs. CA, et al. (L-45168, Sept. 25,
1979), the Supreme Court permitted intervention in a case pending before it on appeal in order to
avoid injustice and in consideration of the number of parties who may be affected by the dispute
involving overlapping of numerous land titles.

2. The uncertainty in these ruling has been eliminated by the present Sec. 2 of this amended Rule
which permits the filing of the motion to intervene at any time before the rendition of the judgment
in the case, in line with the doctrine in Lichauco above cited. The justification advanced for this is
that before judgment is rendered, the court, for god cause shown, may still allow the introduction of
additional evidence and that is still within a liberal interpretation of the period for trial. Also, since
no judgment has yet been rendered, the matter subject of the intervention may still be readily
resolved and integrated in the judgment disposing of all claims in the case, and would not require
an overall reassessment of said claims as would be the case if the judgment had already been
rendered.[14]

In the present case, the motions for intervention were filed after judgment had already been rendered, indeed
when the case was already final and executory. Certainly, intervention can no longer be allowed in a case already
terminated by final judgment.[15]
Intervention is merely collateral or accessory or ancillary to the principal action, and not an independent
proceeding; it is an interlocutory proceeding dependent on or subsidiary to the case between the original
parties.[16] Where the main action ceases to exist, there is no pending proceeding wherein the intervention may be
based.[17] Here, there is no more pending principal action wherein the Spouses Gutang and Looyuko et al. may
intervene.
A decision was already rendered therein and no appeal having been taken therefrom, the judgment in that
main case is now final and executory. Intervention is legally possible only before or during a trial, hence a motion
53
for intervention filed after trialand, a fortiori, when the case has already been submitted, when judgment has been
rendered, or worse, when judgment is already final and executoryshould be denied.[18]
In exceptional cases, the Court has allowed intervention notwithstanding the rendition of judgment by the
trial court. In Director of Lands vs. Court of Appeals,[19] intervention was allowed even when the petition for
review of the assailed judgment was already submitted for decision in the Supreme Court. Recently in Mago vs.
Court of Appeals,[20] the Court granted intervention despite the case having become final and executory.

Admittedly, petitioners motion for intervention was filed on 2 August 1988 after the amended order
of 30 March 1988 had already become final.

xxx

It must be noted however that petitioners were unaware of the proceedings in Civil Case No. Q-
52319. Aside from the obvious fact that they were never impleaded, they were also lulled into
believing that all was well. After all, there was a previous agreement or Kasunduan ng Paghahati
ng Lote which private respondent Asis executed in ther favor on 23 May 1980 or before the
disputed lot was awarded to Asis by the NHA. In that agreement private respondent voluntarily
agreed to divide the awarded lot into two (2)-on-half (1/2) to be retained by him, and the other one-
half (1/2) to belong to petitioners. It can be seen from this that private respondent acted in bad faith
when he accepted the award erroneously made to him by NHA knowing fully well that a perfected
agreement had been forged earlier between him and petitioners. As a matter of record, the NHA
even acknowledged its mistake.

xxx

These matters should have been taken into account by the courts a quo for being of utmost
importance in ruling on petitioners motion for intervention. The permissive tenor of the provision
on intervention shows the intention of the Rules to give to the court the full measure of discretion in
permitting or disallowing the same. But needless to say, this discretion should be exercised
judiciously and only after consideration of all the circumstances obtaining in the case.

But it is apparent that the courts a quo only considered the technicalities of the rules on the
intervention and of the petition for relief from judgment. The denial of their motion to intervene
arising from the strict application of the rule was an injustice to petitioners whose substantial
interest in the subject property cannot be disputed. It must be stressed that the trial court granted
private respondents petition for prohibition with injunction without petitioners being impleaded, in
total disregard of their right to be heard, when on the face of the resolution of the Community
Relations and Information Office (CRIO) sought to be enjoined, petitioners were the ones directly
to be affected. We need not belabor the point that petitioners are indeed indispensable parties with
such an interest in the controversy or subject matter that a final adjudication cannot be made in
their absence without affecting, nay injuring, such interest.

In Director of Lands v. Court of Appeals where the motions for intervention were filed when the
case had already reached this Court, it was declared:

It is quite clear and patent that the motions for intervention filed by the movants at this stage of the
proceedings where trial had already been concluded x x x and on appeal x x x the same was
affirmed by the Court of Appeals and the instant petition for certiorari to review said judgment is
already submitted for decision by the Supreme Court, are obviously and manifestly late, beyond the
period prescribed under x x x Section 2, Rule 12 of the Rules of Court.

But Rule 12 of the Rules of Court, like all other Rules therein promulgated, is simply a rule of
procedure, the whole purpose and object of which is to make the powers of the Court fully and
completely available for justice. The purpose of procedure is not to thwart justice. Its proper aim is
to facilitate the application of justice to the rival claims of contending parties. It was created not to
54
hinder and delay but to facilitate and promote the administration of justice. It does not constitute
the thing itself which courts are always striving to secure to litigants. It is designed as the means
best adopted to obtain that thing. In other words, it is a means to an end.

In Tahanan Development Corp. v. Court of Appeals this Court allowed intervention almost at the
end of the proceedings. Accordingly, there should be no quibbling, much less hesitation or
circumvention, on the part of subordinate and inferior courts to abide and conform to the rule
enunciated by the Supreme Court.

It must be noted, however, that in both these cases, the intervenors were indispensable parties.[21] This is not so
in the case at bar.
Section 1, Rule 68 of the Rules of Court requires all persons having or claiming an interest in the premises
subordinate in right to that of the holder of the mortgage be made defendants in the action for foreclosure. The
requirement for joinder of the person claiming an interest subordinate to the mortgage sought to be foreclosed,
however, is not mandatory in character but merely directory, in the sense that failure to comply therewith will not
invalidate the foreclosure proceedings.[22]
A subordinate lien holder is a proper, even a necessary, but not an indispensable, party to a foreclosure
proceeding. Appropriate relief could be granted by the court to the mortgagee in the foreclosure proceeding,
without affecting the rights of the subordinate lien holders. The effect of the failure on the part of the mortgagee
to make the subordinate lien holder a defendant is that the decree entered in the foreclosure proceeding would not
deprive the subordinate lien holder of his right of redemption. A decree of foreclosure in a suit to which the
holders of a second lien are not parties leaves the equity of redemption in favor of such lien holders unforeclosed
and unaffected.[23]
The Spouses Gutang make a lot of needless hair-splitting by arguing that cases applying the above principles
are not on all fours with the one at bar. They persistently cling to the notion that as purchasers in the execution
sale, they stepped into the shoes of the Spouses Gutang and have become, in legal contemplation, the mortgagors
of the property. Consequently, their intervention should be allowed.
This contention is utterly devoid of merit. Subordinate lien holders like the Spouses Gutang and Looyuko et
al. acquire only a lien upon the equity of redemption vested in the mortgagor, and their rights are strictly
subordinate to the superior lien of the mortgagee.[24] This principle is reiterated in Top Rate International Services,
Inc. vs. Intermediate Appellate Court,[25] where the Court cited a host of precedents in support of its decision:

As we have ruled in Northern Motors, Inc. v. Coquia, (66 SCRA 415, 420):

To levy upon the mortgagors incorporeal right or equity of redemption, it was not necessary for the
sheriff to have taken physical possession of the mortgaged taxicabs. x x x Levying upon the
property itself is distinguishable from levying on the judgment debtors interest in it (McCullough &
Co. v. Taylor, 25 Phil. 110, 115).

Likewise, in the case of Blouse Potenciano v. Mariano, (96 SCRA 463, 469), we ruled:

Quirinos interest in the mortgaged lots is merely an equity of redemption, an intangible or


incorporeal right (Sun Life Assurance Co. of Canada v. Gonzales Diez, 52 Phil. 271; Santiago v.
Dionisio, 92 Phil. 495; Northern Motors Inc. v. Coquia, 66 SCRA 415).

That interest could be levied upon by means of writ of execution issued by the Manila Court as had
been done in the case of property encumbered by a chattel mortgage (Levy Hermanos, Inc. v.
Ramirez and Casimiro, 60 Phil. 978, 982; McCullough & Co. v. Taylor, 25 Phil. 110).[]

It is, therefore, error on the part of the petitioner to say that since private respondents lien is only a
total of P343,227.40. they cannot be entitled to the equity of redemption because the exercise of
such right would require the payment of an amount which cannot be less than P40,000,000.00.

When herein private respondents prayed for the attachment of the properties to secure their
respective claims against Consolidated Mines, Inc., the properties had already been mortgaged to
55
the consortium of twelve banks to secure an obligation of US$62,062,720.66. Thus, like subsequent
mortgagees, the respondents liens on such properties became inferior to that of the banks, which
claims in the event of foreclosure proceedings, must first be satisfied. The appellate court,
therefore, was correct in holding that in reality, what was attached by the respondents was merely
Consolidated Mines right or equity of redemption. Thus, in the case of Alpha Insurance and Surety
Co., Inc. v. Reyes (106 SCRA 274, 278), we ruled:

Deciding the legal question before Us, even if the DBP were just an ordinary first mortgagee
without any preferential liens under Republic Act No. 85 or Commonwealth Act 459, the statutes
mentioned in the Associated Insurance case relied upon by the trial court, it would be
unquestionable that nothing may be done to favor plaintiff-appellant, a mere second mortgage, until
after the obligations of the debtors-appellees with the first mortgagee have been fulfilled, satisfied
and settled. In law, strictly speaking, what was mortgaged by the Reyeses to Alpha was no more
than their equity of redemption.

We, therefore, hold that the appellate court did not commit any error in ruling that there was no
over-levy on the disputed properties. What was actually attached by respondents was Consolidated
Mines right or equity of redemption, an incorporeal or intangible right, the value of which can
neither be quantified nor equated with the actual value of the properties upon which it may be
exercised. [Underscoring supplied.]

Accordingly, an execution creditor who levies his execution upon property that the judgment debtor has
mortgaged to another can sell at most only the equity of redemption belonging to the mortgagor. [26] As it is the
equity of redemption that the subordinate lien holders had acquired by the levy on execution and that was sold in
the public auction, this equity, not the property itself, was what the purchasers, who incidentally are the
subordinate lien holders themselves, bought at the execution sale.
The failure of the mortgagee to join the subordinate lien holders as defendants in the foreclosure suit,
therefore, did not have the effect of nullifying the foreclosure proceeding, but kept alive the equity of redemption
acquired by the purchasers in their respective execution sales.[27] If there be any more quibbling on the rights of
Looyuko et al. and the Gutangs over the property and their right to intervene in the proceedings, Limpin vs.
Intermediate Appellate Court sums up all the principles enunciated above and should lay the matter to rest:
Section 2, Rule 68 provides that

x x If upon the trial x x the court shall find the facts set forth in the complaint to be true, it shall
ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest
and costs, and shall render judgment to be paid into court within a period of not less than ninety
(90) days from the date of the service of such order, and that in default of such payment the
property be sold to realize the mortgage debt and costs.

This is the mortgagors equity (not right) of redemption which, as above stated, may be exercised by
him even beyond the 90-day period from the date of service of the order, and even after the
foreclosure sale itself, provided it be before the order of confirmation of the sale. After such order
of confirmation, no redemption can be effected any longer.

It is this same equity of redemption that is conferred by law on the mortgagors successors-in-
interest, or third persons acquiring right over the mortgaged property subsequent, and therefore
subordinate to the mortgagees lien [e.g., by second mortgage or subsequent attachment or
judgment]. If these subsequent or junior lien-holders be not joined in the foreclosure action, the
judgment in the mortgagors favor is ineffective as to them, of course. In that case, they retain what
is known as the unforeclosed equity of redemption, and a separate foreclosure proceeding should be
brought to require them to redeem from the first mortgagee, or the party acquiring title to the
mortgaged property at the foreclosure sale, within 90 days, [the period fixed in Section 2, Rule 68
for the mortgagor himself to redeem], under penalty of losing that prerogative to redeem. x x
x. [Underscoring supplied.]
56
Such equity of redemption does not constitute a bar to the registration of the property in the name of the
mortgagee. Registration may be granted in the name of the mortgagee but subject to the subordinate lien holders
equity of redemption, which should be exercised within ninety (90) days from the date the decision becomes
final.[28] This registration is merely a necessary consequence of the execution of the final deed of sale in the
foreclosure proceedings. Consequently, there is no merit in Looyuko et al.s contention that the Manila RTC,
which was not acting as a land jurisdiction court, had no authority to order the cancellation of TCT No. 242. For
the same reason, neither does the submission of the Gutangs that the foreclosure proceedings was a collateral
attack on their TCT deserve any credence.
Accordingly, the petition for review (G.R. No. 102716) of the mortgagee FGU, who was the first to register
its encumbrance, must be granted. Conversely, the petition for certiorari, prohibition and mandamus (G.R. No.
102696) filed by Looyuko et al. must be dismissed.
In view of the foregoing ruling, the resolution of G.R. Nos. 108257 and 120954 is no longer necessary. G.R.
No. 108257 stems from a complaint by Tanunliong for, among others, the cancellation of TCT No. 242 in the
name of the Spouses Gutang. G.R. No. 120954 involves the propriety of Tanunliongs intervention in the land
registration cases instituted by Antonia Gutang for the cancellation of TCT No. 242 and certain annotations in
said TCT. The above ruling has rendered moot the proceedings from which these cases (G.R. Nos. 108257 and
120954) arose.
WHEREFORE:
(1) The petition in G.R. No. 102696 is DISMISSED.
(2) The petition in G.R. No. 102716 is GRANTED.
(3) The petition in G.R. No. 108257 is DENIED.
(4) The petition in G.R. No. 120954 is DENIED.
The Register of Deeds is ordered to cancel TCT No. 10107 in the names of Jose Looyuko and John Uy and
to issue a new one in the name of FGU Insurance Corporation, subject to the equity of redemption of Jose Looyuko
and John Uy, and Antonia Gutang, respectively. The equity of redemption of Jose Looyuko and John Uy should
be exercised within ninety (90) days from the date this decision becomes final.
SO ORDERED.
Davide, Jr., C.J., Puno, Pardo, and Ynares-Santiago, JJ., concur.

*
This case was transferred to the ponente pursuant to the resolution in AM No. 00-9-03-SC.- Re: Creaation of Special Committee on
Case Backlog dated February 27, 2001.
*
This case was transferred to the ponente pursuant to the resolution in AM No. 00-9-03-SC.- Re: Creaation of Special Committee on
Case Backlog dated February 27, 2001.
*
This case was transferred to the ponente pursuant to the resolution in AM No. 00-9-03-SC.- Re: Creaation of Special Committee on
Case Backlog dated February 27, 2001.
*
This case was transferred to the ponente pursuant to the resolution in AM No. 00-9-03-SC.- Re: Creaation of Special Committee on
Case Backlog dated February 27, 2001.
[1]
Jose Gutang died on April 17,1987.
[2]
The titles of the cases are not their formal designations but are merely stated for easy reference.
[3]
Rollo, G.R. No. 102696, pp. 41-42.
[4]
Rollo, G.R. No. 102696, p. 44. Underscoring in the original.
[5]
Rollo, G.R. No. 102696, p. 52.
[6]
Rollo, G.R. No. 102696, p. 53. Underscoring in the original.
[7]
Rollo, G.R. No. 102696, pp. 52-53. Underscoring in the original.
[8]
Rollo, G. R. No. 120954, pp. 55-56.
[9]
Id., at 56.
[10]
Ibid.
[11]
Rollo, G.R. No. 102696, pp. 73, 89-90, 131, 137-138; Rollo, G.R. No. 102716, pp.305-306.
[12]
Rollo, G.R. No. 108257, p. 41.
[13]
Rules of Court, Rule 19, Section 2.
57
[14]
II Regalado, Remedial Law Compendium 292-293 6th ed. (1997).
[15]
Seveses vs. Court of Appeals, 316 SCRA 605 (1999), citing Chavez vs. Presidential Commission on Good Government, 307 SCRA
394 (1999); Rabino vs. Cruz, 222 SCRA 493 (1993); People of Paombong, Bulacan vs. Court of Appeals, 218 SCRA 423 (1993);
Felismino vs. Gloria, 47 Phil. 967 (1924). See also Oliva vs. Court of Appeals, 166SCRA 632 (1988) and cases cited in Note 15 therein.
[16]
Big Country Ranch Corp. vs. Court of Appeals, 227 SCRA 161 (1993); Barangay Matictic vs. Elbinias, 148 SCRA 83 (1987).
[17]
Ibid.
[18]
Ibid; Oliva vs. Court of Appeals, supra.
[19]
93 SCRA 238 (1979).
[20]
303 SCRA 600 (1999).
[21]
See Oliva vs. Court of Appeals, supra.
[22]
Somes vs. Government of the Philippines, 62 Phil. 432.
[23]
Sun Life Assurance Co. of Canada vs. Gonzales Diez, 52 Phil. 271 (1928); Government of the Philippines vs. Cajigas, 55 Phil. 667
(1931); Gregorio de la Paz, and Guadalupe Santiesteban vs. Macondray & Co., Inc., 66 Phil. 402 (1938), applying the rule to a purchaser
of the mortgaged real estate.
[24]
Sun Life Assurance Co. of Canada vs. Gonzales Diez, 52 Phil. 271 (1928). See also Ramirez vs. Court of Appeals, 219 SCRA 598
(1993).
[25]
142 SCRA 467 (1986).
[26]
Tan de Jua vs. Po Paoco, 54 Phil. 354 (1930).
[27]
Gregorio de la Paz, and Guadalupe Santiesteban vs. Macondray & Co., Inc., supra.
[28]
Santiago vs. Dionisio, 92 Phil. 495 (1953).

58
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-58469 May 16, 1983

MAKATI LEASING and FINANCE CORPORATION, petitioner,


vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS, respondents.

Loreto C. Baduan for petitioner.

Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.

Jose V. Mancella for respondent.

DE CASTRO, J.:

Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate Appellate Court)
promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting aside certain Orders later specified herein, of
Judge Ricardo J. Francisco, as Presiding Judge of the Court of First instance of Rizal Branch VI, issued in Civil
Case No. 36040, as wen as the resolution dated September 22, 1981 of the said appellate court, denying
petitioner's motion for reconsideration.

It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing and Finance
Corporation, the private respondent Wearever Textile Mills, Inc., discounted and assigned several receivables with
the former under a Receivable Purchase Agreement. To secure the collection of the receivables assigned, private
respondent executed a Chattel Mortgage over certain raw materials inventory as well as a machinery described as
an Artos Aero Dryer Stentering Range.

Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the properties mortgage to
it. However, the Deputy Sheriff assigned to implement the foreclosure failed to gain entry into private respondent's
premises and was not able to effect the seizure of the aforedescribed machinery. Petitioner thereafter filed a
complaint for judicial foreclosure with the Court of First Instance of Rizal, Branch VI, docketed as Civil Case No.
36040, the case before the lower court.

Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the enforcement of which was
however subsequently restrained upon private respondent's filing of a motion for reconsideration. After several
incidents, the lower court finally issued on February 11, 1981, an order lifting the restraining order for the
enforcement of the writ of seizure and an order to break open the premises of private respondent to enforce said
writ. The lower court reaffirmed its stand upon private respondent's filing of a further motion for reconsideration.

On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private respondent and
removed the main drive motor of the subject machinery.

The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein private respondent, set
aside the Orders of the lower court and ordered the return of the drive motor seized by the sheriff pursuant to said
Orders, after ruling that the machinery in suit cannot be the subject of replevin, much less of a chattel mortgage,
because it is a real property pursuant to Article 415 of the new Civil Code, the same being attached to the ground by
means of bolts and the only way to remove it from respondent's plant would be to drill out or destroy the concrete
floor, the reason why all that the sheriff could do to enfore the writ was to take the main drive motor of said
machinery. The appellate court rejected petitioner's argument that private respondent is estopped from claiming that
the machine is real property by constituting a chattel mortgage thereon.

A motion for reconsideration of this decision of the Court of Appeals having been denied, petitioner has brought the
case to this Court for review by writ of certiorari. It is contended by private respondent, however, that the instant
petition was rendered moot and academic by petitioner's act of returning the subject motor drive of respondent's
machinery after the Court of Appeals' decision was promulgated.

The contention of private respondent is without merit. When petitioner returned the subject motor drive, it made itself
unequivocably clear that said action was without prejudice to a motion for reconsideration of the Court of Appeals
decision, as shown by the receipt duly signed by respondent's representative. 1 Considering that petitioner has

59
reserved its right to question the propriety of the Court of Appeals' decision, the contention of private respondent
that this petition has been mooted by such return may not be sustained.

The next and the more crucial question to be resolved in this Petition is whether the machinery in suit is real or
personal property from the point of view of the parties, with petitioner arguing that it is a personality, while the
respondent claiming the contrary, and was sustained by the appellate court, which accordingly held that the chattel
mortgage constituted thereon is null and void, as contended by said respondent.

A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court, speaking through
Justice J.B.L. Reyes, ruled:

Although there is no specific statement referring to the subject house as personal property, yet by
ceding, selling or transferring a property by way of chattel mortgage defendants-appellants could
only have meant to convey the house as chattel, or at least, intended to treat the same as such, so
that they should not now be allowed to make an inconsistent stand by claiming otherwise. Moreover,
the subject house stood on a rented lot to which defendants-appellants merely had a temporary right
as lessee, and although this can not in itself alone determine the status of the property, it does so
when combined with other factors to sustain the interpretation that the parties, particularly the
mortgagors, intended to treat the house as personality. Finally, unlike in the Iya cases, Lopez vs.
Orosa, Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery & Williamson, wherein third
persons assailed the validity of the chattel mortgage, it is the defendants-appellants themselves, as
debtors-mortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine
of estoppel therefore applies to the herein defendants-appellants, having treated the subject house
as personality.

Examining the records of the instant case, We find no logical justification to exclude the rule out, as the appellate
court did, the present case from the application of the abovequoted pronouncement. If a house of strong materials,
like what was involved in the above Tumalad case, may be considered as personal property for purposes of
executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will
be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes
immobilized only by destination or purpose, may not be likewise treated as such. This is really because one who has
so agreed is estopped from denying the existence of the chattel mortgage.

In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals lays stress on the
fact that the house involved therein was built on a land that did not belong to the owner of such house. But the law
makes no distinction with respect to the ownership of the land on which the house is built and We should not lay
down distinctions not contemplated by law.

It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is
indicative of intention and impresses upon the property the character determined by the parties. As stated
in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by
agreement treat as personal property that which by nature would be real property, as long as no interest of third
parties would be prejudiced thereby.

Private respondent contends that estoppel cannot apply against it because it had never represented nor agreed that
the machinery in suit be considered as personal property but was merely required and dictated on by herein
petitioner to sign a printed form of chattel mortgage which was in a blank form at the time of signing. This contention
lacks persuasiveness. As aptly pointed out by petitioner and not denied by the respondent, the status of the subject
machinery as movable or immovable was never placed in issue before the lower court and the Court of Appeals
except in a supplemental memorandum in support of the petition filed in the appellate court. Moreover, even
granting that the charge is true, such fact alone does not render a contract void ab initio, but can only be a ground
for rendering said contract voidable, or annullable pursuant to Article 1390 of the new Civil Code, by a proper action
in court. There is nothing on record to show that the mortgage has been annulled. Neither is it disclosed that steps
were taken to nullify the same. On the other hand, as pointed out by petitioner and again not refuted by respondent,
the latter has indubitably benefited from said contract. Equity dictates that one should not benefit at the expense of
another. Private respondent could not now therefore, be allowed to impugn the efficacy of the chattel mortgage after
it has benefited therefrom,

From what has been said above, the error of the appellate court in ruling that the questioned machinery is real, not
personal property, becomes very apparent. Moreover, the case of Machinery and Engineering Supplies, Inc. v. CA,
96 Phil. 70, heavily relied upon by said court is not applicable to the case at bar, the nature of the machinery and
equipment involved therein as real properties never having been disputed nor in issue, and they were not the
subject of a Chattel Mortgage. Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant
case to be the more controlling jurisprudential authority.

WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby reversed and set aside,
and the Orders of the lower court are hereby reinstated, with costs against the private respondent.

60
SO ORDERED.

Makasiar (Chairman), Aquino, Concepcion Jr., Guerrero and Escolin JJ., concur.

Abad Santos, J., concurs in the result.

Footnotes

1 p. 52, Rollo.

61
SECOND DIVISION

[G.R. No. L-68010. May 30, 1986.]

FILIPINAS MARBLE CORPORATION, Petitioner, v. THE HONORABLE INTERMEDIATE APPELLATE COURT, THE
HONORABLE CANDIDO VILLANUEVA, Presiding Judge of Br. 144, RTC, Makati, DEVELOPMENT BANK OF THE
PHILIPPINES (DBP), BANCOM SYSTEMS CONTROL, INC. (Bancom), DON FERRY, CASIMERO TANEDO, EUGENIO
PALILEO, ALVARO TORIO, JOSE T. PARDO, ROLANDO ATIENZA, SIMON A. MENDOZA, Sheriff NORVELL R.
LIM, Respondents.

Vicente Millora for Petitioner.

Jesus A. Avencena and Bonifacio M. Abad for Respondents.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; MORTGAGE; REAL ESTATE MORTGAGE; AUTOMATIC FORECLOSURE OF
MORTGAGE PURSUANT TO P.D. 385 INAPPLICABLE PENDING OUTCOME OF TRIAL ON THE MERITS OF THE MAIN ACTION. —
In the case at bar, the respondent try to impress upon this Court that the $5,000,000.00 loan was actually granted and
released to the petitioner corporation and whatever the composition of the management which received the loan is of no
moment because this management was acting in behalf of the corporation. The respondent also argue that since the loan
was extended to the corporation, the releases had to be made to the then officers of that borrower corporation. We cannot,
at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5
million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were
committed by the Respondent. This matter should rightfully be litigated below in the main action. Pending the outcome of
such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of the petitioner’s properties under the provisions of
P.D. 385 to satisfy the whole amount of the loan would be gross mistake. It would unduly prejudice the petitioner, its
employees and their families. Only after trial on the merits of the main case can the true amount of the loan which was
applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was
no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await
the presentation of evidence in a trial on the merits.

2. ID.; ID.; ID.; AN ACCESSORY CONTRACT; VALIDITY THEREOF DEPENDS ON THE VALIDITY OF THE LOAN SECURED; NON-
REGISTRATION OF CHATTEL MORTGAGE DOES NOT AFFECT THE IMMEDIATE PARTIES. — As regards the second assignment
of error, we agree with the petitioner that a mortgage is a mere accessory contract and, thus, its validity would depend on
the validity of the loan secured by it. We, however, reject the petitioner’s argument that since the chattel mortgage involved
was not registered, the same is null and void. Article 2125 of the Civil Code clearly provides that the non-registration of the
mortgage does not affect the immediate parties. It states: "Art. 2125. In addition to the requisites stated in Article 2085, it is
indispensable, in order that a mortgage may be validly constituted that the document in which it appears be recorded in the
Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties. The
petitioner cannot invoke the above provision to nullify the chattel mortgage it executed in favor of respondent DBP.

3. CONSTITUTIONAL LAW; SUPREME COURT; DOES NOT DECIDE ISSUES OF CONSTITUTIONAL NATURE UNLESS
ABSOLUTELY NECESSARY. — We find no need to pass upon the constitutional issue raised in the third assignment of error.
We follow the rule stated in Alger Electric, Inc. v. Court of Appeals, (135 SCRA 37, 45): "We see no necessity of passing upon
the constitutional issues raised by respondent Northern. This Court does not decide questions of a constitutional nature
unless absolutely necessary to a decision of a case. If there exists some other grounds of construction, we decide the case on
a non-constitutional determination. (See Burton v. United States, 196 U.S. 283; Siler v. Louisville & Nashville R. Co., 123
U.S. 175; Berea College v. Kentucky, 211 U.S. 45)."

DECISION

GUTIERREZ, JR., J.:

This petition for review seeks to annul the decision and resolution of the appellate court which upheld the trial court’s
decision denying the petitioner’s prayer to enjoin the respondent from foreclosing on its properties.

On January 19, 1983, petitioner Filipinas Marble Corporation filed an action for nullification of deeds and damages with
prayer for a restraining order and a writ of preliminary injunction against the private respondents. In its complaint, the
petitioner alleged in substance that it applied for a loam in the amount of $5,000,000.00 with respondent Development Bank
of the Philippines (DBP) in its desire to develop the full potentials of its mining claims and deposits; that DBP granted the
loan subject, however, to sixty onerous conditions, among which are: (a) petitioner shall have to enter into a management
contract with respondent Bancom Systems Control, Inc. [Bancom]; (b) DBP shall be represented by no less than six (6)
regular directors, three (3) to be nominated by Bancom and three (3) by DBP, in Filipinas Marble’s board, one of whom shall
continue to be the chairman of the board; (c) the key officers/executives [the President and the officers for finance,
marketing and purchasing] to be chosen by Bancom for the corporation shall be appointed only with DBP’s prior approval and
62
all these officers are to be made directly responsible to DBP; DBP shall immediately designate Mr. Alvaro Torio, Assistant
Manager of DBP’s Accounting Department as DBP’s Comptroller in the firm whose compensation shall be borne by Filipinas
Marble; and (d) the $5 million loan shall be secured by: 1) a final mortgage on the following assets with a total approved
value of P48,630,756.00 . . .; 2) the joint and several signatures with Filipinas Marble of Mr. Pelagio M. Villegas, Sr., Trinidad
Villegas, and Jose E. Montelibano and 3) assignment to DBP of the borrower firm’s right over its mining claims; that pursuant
to these above-mentioned and other "take it or leave it" conditions, the petitioner entered into a management contract with
Bancom whereby the latter agreed to manage the plaintiff company for a period of three years; that under the management
agreement, the affairs of the petitioner were placed under the complete control of DBP and Bancom, including the disposition
and disbursement of the $5,000,000 or P37,500,000 loan; that the respondents and their directors/officers mismanaged and
misspent the loan, after which Bancom resigned with the approval of DBP even before the expiration date of the
management contract, leaving petitioner desolate and devastated; that among the acts and omissions of the respondents are
the following: (a) failure to purchase all the necessary machinery and equipment needed by the petitioner’s project for which
the approved loan was intended; (b) failure to construct a processing plant; (c) abandonment of imported machinery and
equipment at the pier; (d) purchase of unsuitable lot for the processing plant at Biñan; (e) failure to develop even a square
meter of the quarries in Romblon or Cebu; and (f) nearly causing the loss of petitioner’s rights over its Cebu claims; and that
instead of helping petitioner get back on its feet, DBP completely abandoned the petitioner’s project and proceeded to
foreclose the properties mortgaged to it by petitioner without previous demand or notice.

In essence, the petitioner in its complaint seeks the annulment of the deeds of mortgage and deed of assignment which it
executed in favor of DBP in order to secure the $5,000,000.00 loan because it is petitioner’s contention that there was no
loan at all to secure since what DBP "lent" to petitioner with its right hand, it also got back with its left hand; and that, there
was failure of consideration with regard to the execution of said deeds as the loan was never delivered to the petitioner. The
petitioner further prayed that pending the trial on the merits of the case, the trial court immediately issue a restraining order
and then a writ of preliminary injunction against the sheriffs to enjoin the latter from proceeding with the foreclosure and
sale of the petitioner’s properties in Metro Manila and in Romblon. chan roble s law lib rary : red

Respondent DBP opposed the issuance of a writ of preliminary injunction stating that under Presidential Decree No. 385,
DBP’s right to foreclose is mandatory as the arrearages of petitioner had already amounted to P123,801,265.82 as against its
total obligation of P151,957,641.72; that under the same decree, no court can issue any restraining order or injunction
against it to stop the foreclosure since Filipinas Marble’s arrearages had already reached at least twenty percent of its total
obligations; that the alleged non-receipt of the loan proceeds by the petitioner could, at best, be accepted only in a technical
sense because the money was received by the officers of the petitioner acting in such capacity and, therefore. irrespective of
whoever is responsible for placing them in their positions, their receipt of the money was receipt by the petitioner corporation
and that the complaint does not raise any substantial controversy as to the amount due under the mortgage as the issues
raised therein refer to the propriety of the manner by which the proceeds of the loan were expended by the petitioner’s
management, the allegedly precipitate manner with which DBP proceeded with the foreclosure, and the capacity of the DBP
to be an assignee of the mining lease rights.

After a hearing on the preliminary injunction, the trial court issued an order stating: jgc:chan robles .com.p h

"The Court has carefully gone over the evidence presented by both parties, and while it sympathizes with the plight of the
plaintiff and of the pitiful condition it now has found itself, it cannot but adhere to the mandatory provisions of P.D. 385.
While the evidence so far presented by the plaintiff corporation appears to be persuasive, the same may be considered
material and relevant to the case. Hence, despite the impressive testimony of the plaintiff’s witnesses, the Court believes
that it cannot enjoin the defendant Development Bank of the Philippines from complying with the mandatory provisions of
the said Presidential Decree. It having been shown that plaintiff’s outstanding obligation as of December 31, 1982 amounted
to P151,957,641.72 and with arrearages reaching up to 81% against said total obligation, the Court finds the provisions of
P.D. 385 applicable to the instant case. It is a settled rule that when the statute is clear and unambiguous, there is no room
for interpretation, and all that it has to do is to apply the same." cralaw virtua 1aw lib rary

On appeal, the Intermediate Appellate Court upheld the trial court’s decision and held: jgc:chan roble s.com. ph

"While petitioner concedes ‘that Presidential Decree No. 385 applies only where it is clear that there was a loan or where the
loan is not denied’ (p. 14 — petition), it disclaims receipt of the $5 million loan nor benefits derived therefrom, and bewails
the onerous conditions imposed by DBP Resolution No. 385 dated December 7, 1977, which allegedly placed the petitioner
under the complete control of the private respondents DBP and Bancom Systems Control Inc. (Bancom, for short). The
plausibility of petitioner’s statement that it did not receive the $5 million loan is more apparent than real. At the hearing for
injunction before the counsel for DBP stressed that $2,625,316.83 of the $5 million loan was earmarked to finance the
acquisition of machinery, equipment and spare parts for petitioner’s Diamond gangsaw, which machineries were actually
imported by petitioner Filipinas Marble Corporation and arrived in the Philippines. Indeed, a summary of releases to
petitioner covering the period June 1978 to October 1979 (Exh. 2, Injunction) showed disbursements amounting to millions
of pesos for working capital and opening of letter of credits for the acquisition of its machineries and equipment. Petitioner
does not dispute that releases were made for the purchase of machineries and equipment but claims that such imported
machineries were left to the mercy of the elements as they were never delivered to it.

x x x

"Apart from the foregoing, petitioner is patently not entitled to a writ of preliminary injunction for it has not demonstrated
that at least 20% of its outstanding arrearages has been paid after the foreclosure proceedings were initiated. Nowhere in
the record is it shown or alleged that petitioner has paid in order that it may fall within the exception prescribed on Section 2,
Presidential Decree No. 385." cralaw virtua1aw li bra ry

Dissatisfied with the appellate court’s decision the petitioner filed this instant petition with the following assignments of
errors:jgc:c han robles. com.ph

"1. There being ‘persuasive’ evidence that the $5 million proceeds of the loan were not received and did not benefit the
petitioner per finding of the lower court which should not be disturbed unless there is grave abuse of discretion, it must
follow that PD 385 does not and cannot apply;

63
"2. If there was no valid loam contract for failure of consideration, the mortgage cannot exist or stand by itself being a mere
accessory contract. Additionally, the chattel mortgage has not been registered. Therefore, the same is null and void under
Article 2125 of the New Civil Code; and

"3. PD 385 is unconstitutional as a ‘class legislation’, and violative of the due process clause." cralaw virtua 1aw lib rary

With regard to the first assignment of error, the petitioner maintains that since the trial court found "persuasive evidence"
that there might have been a failure of consideration on the contract of loan due to the manner in which the amount of $5
million was spent, said court committed grave abuse of discretion in holding that it had no recourse but to apply P.D. 385
because the application of this decree requires the existence of a valid loan which, however, is not present in petitioner’s
case. It likewise faults the appellate court for upholding the applicability of the said decree.

Sections 1 and 2 of P.D. No. 385 respectively provide: j gc:cha nrob les.com .p h

"Section 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the issuance of
this Decree, to foreclose the collaterals and/or securities for any loan, credit accommodation, and/or guarantees granted by
them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty
(20%) of the total outstanding obligations, including interest and other charges, as appearing in the book of accounts and/or
related records of the financial institution concerned. This shall be without prejudice to the exercise by the government
financial institution of such rights and/or remedies available to them under their respective contracts with their debtors,
including the right to foreclose on loans, credits, accommodations, and or guarantees on which the arrearages are less than
twenty percent (20%).

"Section 2. No restraining order, temporary or permanent injunction shall be issued by the court against any government
financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section
1 hereof, whether such restraining order, temporary or permanent injunction is sought by the borrower(s) or any third party
or parties, except after due hearing in which it is established by the borrower, and admitted by the government financial
institution concerned that twenty percent (20%) of the outstanding arrearages has been paid after the filing of foreclosure
proceedings." cra law virt ua1aw lib ra ry

Presidential Decree No. 385 was issued primarily to see to it that government financial institutions are not denied substantial
cash inflows, which are necessary to finance development projects all over the country, by large borrowers who, when they
become delinquent, resort to court actions in order to prevent or delay the government’s collection of their debts and loans.

The government, however, is bound by basic principles of fairness and decency under the due process clause of the Bill of
Rights. P.D. 385 was never meant to protect officials of government lending institutions who take over the management of a
borrower corporation, lead that corporation to bankruptcy through mismanagement or misappropriation of its funds, and
who, after ruining it, use the mandatory provisions of the decree to avoid the consequences of their misdeeds. c han roblesv irt ualawli bra ry

The designated officers of the government financing institution cannot simply walk away and then state that since the loans
were obtained in the corporation’s name, then P.D. 385 must be peremptorily applied and that there is no way the borrower
corporation can prevent the automatic foreclosure of the mortgage on its properties once the arrearages reach twenty
percent (20%) of the total obligation no matter who was responsible.

In the case at bar, the respondents try to impress upon this Court that the $5,000,000.00 loan was actually granted and
released to the petitioner corporation and whatever the composition of the management which received the loan is of no
moment because this management was acting in behalf of the corporation. The respondents also argue that since the loan
was extended to the corporation, the releases had to be made to the then officers of that borrower corporation.

Precisely, what the petitioner is trying to point out is that the DBP and Bancom people who managed Filipinas Marble
misspent the proceeds of the loan by taking advantage of the positions that they were occupying in the corporation which
resulted in the latter’s devastation instead of its rehabilitation. The petitioner does not question the authority under which the
loan was delivered but stresses that it is precisely this authority which enabled the DBP and Bancom people to misspend and
misappropriate the proceeds of the loan thereby defeating its very purpose, that is, to develop the projects of the
corporation. Therefore, it is as if the loan was never delivered to it and thus, there was failure on the part of the respondent
DBP to deliver the consideration for which the mortgage and the assignment of deed were executed.

We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and
misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such
acts were committed by the Respondent. This matter should rightfully be litigated below in the main action. Pending the
outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is
responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner’s properties under
the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would unduly prejudice the
petitioner, its employees and their families.

Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for the
benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of consideration and
which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in
a trial on the merits. As we have ruled in the case of Central Bank of the Philippines v. Court of Appeals, (139 SCRA 46, 52-
53; 56):jgc:cha nrob les.co m.ph

"When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they
undertook reciprocal obligations, the obligation or promise of each party is the consideration for that of the other. (Penacio v.
Ruaya, 110 SCRA 46 [1981]; . . . ." cralaw virt ua1aw lib ra ry

x x x

"The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no consideration was then in existence, as there
was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate

64
mortgage void for lack of consideration. It is not necessary that any consideration should pass at the time of the execution of
the contract of real mortgage (Bonnevie v. Court of Appeals, 125 SCRA 122 [1983]). It may either be a prior or subsequent
matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured
by it is created as a binding contract to pay (Parks v. Sherman, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the extent of such failure (Dow, Et. Al. v. Poore, Vol. 172 N.E. p. 82,
cited in Vol. 59, 1974 ed. C.J.S. p. 138). . . ." cralaw virt ua1aw li bra ry

Under the admitted circumstances of this petition, we, therefore, hold that until the trial on the merits of the main case, P.D.
385 cannot be applied and thus, this Court can restrain the respondents from foreclosing on petitioner’s properties pending
such litigation. chan roble s virtual lawl ibra ry

The respondents, in addition, assert that even if the $5 million loan were not existing, the mortgage on the properties sought
to be foreclosed was made to secure previous loans of the petitioner with respondent and therefore, the foreclosure is still
justified.

This contention is untenable. Two of the conditions imposed by respondent DBP for the release of the $5 million loan
embodied in its letter to petitioner dated December 21, 1977 state: jgc:chanro bles. com.ph

"A. The interim loan of $289,917.32 plus interest due thereon which was used for the importation of one Savage Diamond
Gangsaw shall be liquidated out of the proceeds of this $5 million loan. In addition, FMC shall also pay DBP, out of the
proceeds of above foreign currency loan, the past due amounts on obligation with DBP.

x x x

"B. Conversion into preferred shares of P2 million of FMC’s total obligations with DBP as of the date the legal documents for
this refinancing shall have been executed or not later than 90 days from date of advice of approval of this accommodation."
virtua 1aw lib rary
cralaw

The above conditions lend credence to the petitioner’s contention that the "original loan had been converted into ‘equity
shares’, or preferred shares; therefore, to all intents and purposes, the only ‘loan’ which is the subject of the foreclosure
proceedings is the $5 million ‘loan’ in 1978." cralaw virtua 1aw lib rary

As regards the second assignment of error, we agree with the petitioner that a mortgage is a mere accessory contract and,
thus, its validity would depend on the validity of the loan secured by it. We, however, reject the petitioner’s argument that
since the chattel mortgage involved was not registered, the same is null and void. Article 2125 of the Civil Code clearly
provides that the non-registration of the mortgage does not affect the immediate parties. It states: jgc:chanrob les.co m.ph

"Art. 2125. In addition to the requisites stated in article 2085, it is indispensable, in order that a mortgage may be validly
constituted that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties.

x x x

The petitioner cannot invoke the above provision to nullify the chattel mortgage it executed in favor of respondent DBP.

We find no need to pass upon the constitutional issue raised in the third assignment of error. We follow the rule started in
Alger Electric, Inc. v. Court of Appeals, (135 SCRA 37, 45).

"We see no necessity of passing upon the constitutional issues raised by respondent Northern. This Court does not decide
questions of a constitutional nature unless absolutely necessary to a decision of a case. If there exists some other grounds of
construction, we decide the case on a non-constitutional determination. (See Burton v. United States, 196 U.S. 283; Siler v.
Luisville & Nashville R. Co., 123 U.S. 175; Berta College v. Kentucky, 211 U.S. 45)." cralaw virtua 1aw lib rary

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is GRANTED. The orders of the Intermediate Appellate Court dated
April 17, 1984 and July 3, 1984 are hereby ANNULLED and SET ASIDE. The trial court is ordered to proceed with the trial on
the merits of the main case. In the meantime, the temporary restraining order issued by this Court on July 23, 1984 shall
remain in force until the merits of the main case are resolved. chan roble s lawli bra ry : rednad

SO ORDERED.

Feria, Fernan, Alampay and Paras, JJ., concur.

65
THIRD DIVISION

[G.R. No. L-49081. December 13, 1988.]

ALLIED BANKING CORPORATION, Petitioner, v. HON. EMILIO V. SALAS, in his capacity as Presiding Judge of the
CFI of Rizal, Branch I, Pasig, Metro Manila and METROPOLITAN BANK AND TRUST CO., Respondents.

Soller, Carreon, Ramirez & Associates for Petitioner.

Arturo A. Alafriz & Associates for respondent Metropolitan Bank and Trust Co.

SYLLABUS

1. CIVIL LAW; SPECIAL CONTRACTS; CHATTEL MORTGAGE; REGISTRATION THEREOF; A DETERMINING FACTOR AS TO WHO
IS THE PREFERRED CREDITOR. — Finding the chattel mortgage to be valid, the Court takes special note of the fact that said
chattel mortgage was registered and duly recorded in the Chattel Mortgage Registry of Quezon City on February 7, 1974,
prior to April 22, 1977, the date the writ of attachment of the properties in question was issued. This is a significant factor in
determining who of two contending claimants should be given preference over the same properties in question.

2. ID.; ID.; ID.; REGISTRATION CREATES A LIEN OR REAL RIGHT AND BINDS OTHER CREDITORS OF THE EXISTENCE OF
THE MORTGAGE. — The registration of the chattel mortgage more than three years prior to the writ of attachment issued by
respondent judge is an effective and binding notice to other creditors of its existence and creates a real right or a lien, which
being recorded, follows the chattel wherever it goes. The chattel mortgage lien attaches to the property wherever it may be.
Thus, private respondent as attaching creditor acquired the properties in question subject to petitioner’s mortgage lien as it
existed thereon at the time of the attachment. In this regard, it must be stressed that the right of those who so acquire said
properties should not and cannot be superior to that of the creditor who has in his favor an instrument of mortgage executed
with the formalities of law, in good faith, and without the least indication of fraud.

DECISION

FERNAN, J.:

Petition for certiorari, prohibition and mandamus directed against the Order dated July 27, 1978 of the Hon. Emilio V. Salas,
Presiding Judge of the Court of First Instance (now Regional Trial Court) of Rizal, Branch I in Civil Case No. 25988 entitled
"Metropolitan Bank and Trust Company, Plaintiff, versus Clarencio S. Yujuico and Jesus Z. Yujuico, Defendants" restraining
the Sheriff of Quezon City, who apparently was not a party in the aforesaid case, from selling at public auction on July 28,
1978 certain printing machineries and equipment claimed to have been previously levied upon pursuant to a writ of
attachment dated April 22, 1977 issued by said respondent Judge Emilio V. Salas in Civil Case No. 25988. chanroble s lawlib rary : rednad

The aforesaid order of July 27, 1978 is assailed on jurisdictional grounds centering on the propriety of its issuance.

Briefly, the antecedent-facts are: chanrob1es v irt ual 1aw li bra ry

Petitioner’s predecessor, General Bank and Trust Company granted Gencor Marketing, Inc., a time loan in the principal
amount of P400,000.00 evidenced by a Promissory Note executed by the latter through its President, Dr. Clarencio S.
Yujuico. 1 As security for the time loan and pursuant to a resolution of the Board of Directors of Gencor Marketing, 2 a Deed
of Chattel Mortgage 3 was executed by Gencor Marketing in favor of General Bank and Trust Company involving the following
personal properties:cha nrob 1es vi rtua l 1aw lib rary

1. Linotype Machine-Model 32

2. Aurelia 46-Offset Machine

3. Solna 125-Offset Machine

4. Dainippon Camera D.S.C. 24-D

5. Heidelberg-Letterpress 19" x 127"

6. Titan Automatic Cylinder Press 15-1/2" x 21-1/2"

7. Minerva Conventional Letterpress 12" x 18"

8. Hdner-Conventional Letterpress 12" x 15-1/2"

9. Printex Guilotene Cutter Model 107 31" x 42"

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10. Saeg-Paper Stitching Machine

11. Von Yong Die Cutting Machine

12. Punching Machine

13. Embossing Machine

14. Graining Machine

15. Horizontal Plate Making

16. Stamping Machine.

The Deed of Chattel Mortgage was duly recorded in the Chattel Mortgage Registry of Quezon City on February 7, 1974 under
Page No. 365, Volume No. 104, File No. 5884.

On maturity date of Gencor’s Time Loan and allegedly after several subsequent extensions of time for Gencor to settle its
account, Gencor failed to pay its obligations either to General Bank and Trust Company or to herein petitioner which took
over the affairs and/or acquired all the assets and assumed the liabilities of General Bank and Trust Company. chanrobles. com:c rala w:red

Consequently, on June 15, 1978, petitioner extrajudicially foreclosed the aforesaid Chattel Mortgage and requested the City
Sheriff of Quezon City to effect the said foreclosure. The City Sheriff of Quezon City, through Deputy Sheriff A. Tabbada
levied upon the aforedescribed mortgaged personal properties in question and issued the corresponding Notice of Sheriff’s
Sale dated July 13, 1978. 4

It appears, however, that prior to the extrajudicial foreclosure effected by petitioner involving the personal properties in
question, private respondent Metropolitan Bank and Trust Company filed Civil Case No. 25988, an action for a sum of money
in the amount of P5,402,740.17 with preliminary attachment against Clarencio Yujuico and Jesus Yujuico. On April 29, 1977,
a writ of preliminary attachment was issued in said case and the Sheriff of the Court of First Instance of Rizal levied upon the
personal properties in question.

Thus, upon learning of the Notice sent by City Sheriff Tabbada for the sale of the foreclosed personal properties in question,
private respondent filed in Civil Case No. 25988 an Urgent Motion to Enjoin the Sheriff of Quezon City from foreclosing and
selling at public auction the said properties, alleging that the printing machineries and equipment previously levied and
attached by the Sheriff of Rizal belonged exclusively to defendant Clarencio S. Yujuico, doing business under the firm name
of Gencor Printing and as such, may not legally be foreclosed and sold at auction by the Sheriff of Quezon City. The hearing
of said Motion was set on July 27, 1978.

Meanwhile, on July 29, 1978, private respondent Metropolitan Bank and Trust Company filed a Third Party Claim with the
Quezon City Sheriff’s Office over the personal properties in question levied upon and sought to be sold at public auction by
City Sheriff A. Tabbada, alleging that these same personal properties had been previously levied upon by the Deputy sheriff
of Branch I of the Court of First Instance of Rizal, pursuant to a Writ of Attachment issued by herein respondent Judge Emilio
V. Salas in Civil Case No. 25988.

Allegedly to protect petitioner’s rights over the personal properties in question, petitioner’s counsel entered a special
appearance during the scheduled hearing on July 27, 1978 for the exclusive purpose of opposing private respondent’s motion
on jurisdictional grounds and gross irregularity of procedure amounting to lack of jurisdiction. However, over petitioner’s
opposition, respondent Judge rendered the assailed Order dated July 27, 1978, which reads: chanro b1es vi rtua l 1aw li bra ry

ORDER

"Before this Court is plaintiffs ‘Urgent Motion to Enjoin the Sheriff of Quezon City from Foreclosing and Selling at Public
Auction Properties Previously Levied Under Writ of Attachment Issued Herein by This Court.’ When the motion was called for
hearing today, Atty. Arturo A. Alafriz, counsel for the plaintiff and Atty. Joselito Generoso, counsel for Allied Banking Corp.
appeared. Atty. Alafriz claims that the properties sought to be sold at public auction by the Sheriff of Quezon City which were
allegedly mortgaged by Gencor Marketing, Inc., to General Bank and Trust predecessor-in-interest of Allied Banking Corp.
belong exclusively to the Gencor Printing, a sole proprietorship of defendant Clarencio Yujuico, and not to the mortgagor,
Gencor Marketing, Inc. This fact is admitted by Atty. Generoso. Such being the case, Gencor Marketing Inc. had no authority
to mortgage the properties in question and, consequently, the same cannot be sold at public auction in an extra-judicial
foreclosure of the mortgage to the General Bank and Trust Co.

PREMISES CONSIDERED, the Sheriff of Quezon City is restrained from selling at public auction on July 28, 1978 the printing
machineries and equipment previously levied pursuant to the writ of attachment of April 22, 1977 issued in this case.

SO ORDERED." 5

On the same day, petitioner’s counsel received a copy of a "Notice of Issuance of Restraining Order" from private respondent
addressed to the Sheriff of Quezon City stating, among others, that: Pending official service upon you of the restraining order
of the Court, this advance notice is being served upon you to subserve all legal effects." 6

Finding that to seek reconsideration of the assailed Order of July 27, 1978 would be an exercise in futility, petitioner filed the
instant petition for certiorari, prohibition and mandamus with preliminary injunction, asserting that respondent judge lacks
jurisdiction over the person of petitioner and the city sheriff of Quezon City, and that the respondent judge acted without
and/or in excess of jurisdiction and/or with grave abuse of discretion amounting to lack of jurisdiction in acting upon the
motion of respondent Metropolitan Bank and Trust Company dated July 24, 1978 and consequently erred as well in issuing
the disputed Order of July 27, 1978 enjoining the sale at public auction on July 28, 1978 of the printing machineries and
equipment previously mortgaged to herein petitioner. Further, petitioner maintains that respondent court could not pass
upon the validity and authenticity of the Deed of Chattel Mortgage as these were not in issue in Civil Case No. 25988, the
same being merely an action for a sum of money. Moreover, petitioner argues that granting arguendo that the mortgaged
properties were owned by Clarencio Yujuico, the same did not make the chattel mortgage void since Clarencio Yujuico, as the
67
owner thereof, in effect ratified the mortgage because he signed the Board Resolution authorizing the execution of the
mortgage and he himself signed the promissory note which was the principal obligation secured by the chattel mortgage.

To support its contention that no jurisdiction was acquired over the persons of petitioner and City Sheriff Tabbada, petitioner
asserts that its counsel appeared before respondent judge on the scheduled hearing of herein private respondent’s urgent
motion to enjoin the public sale of other personal properties in question by way of special appearance precisely for the sole
purpose of questioning the jurisdiction of the court a quo. On the other hand, private respondent argues that counsel for
petitioner voluntarily appeared before respondent judge during said hearing thereby also voluntarily submitting the person of
petitioner to the authority of the court in said case. The court considers these arguments immaterial. Regardless of the
nature of counsel for petitioner’s appearance before respondent judge, the central thrust of the problem and what we
consider the pivotal issue in this case is whether respondent judge may validly enjoin the public sale of the extrajudicially
foreclosed properties, granting that proper legal procedures were observed by private respondent in order that respondent
court may validly acquire jurisdiction over the person of petitioner.
c hanro bles. com:cra law:red

While counsel for petitioner admitted during the hearing on July 27, 1978 that the personal properties in question belonged
to Clarencio Yujuico and not to Gencor Marketing, Inc., the Court nevertheless finds that the chattel mortgage over the
printing machineries and equipment was ratified and approved by Clarencio Yujuico. As earlier stated and as pointed out by
petitioner, it was Clarencio Yujuico as president of Gencor Marketing, Inc., who signed the promissory note evidencing the
time loan granted by petitioner’s predecessor General Bank and Trust Company in favor of Gencor Marketing, Inc.

Finding the chattel mortgage to be valid, the Court takes special note of the fact that said chattel mortgage was registered
and duly recorded in the Chattel Mortgage Registry of Quezon City on February 7, 1974, prior to April 22, 1977, the date the
writ of attachment of the properties in question was issued. This is a significant factor in determining who of two contending
claimants should be given preference over the same properties in question.

The registration of the chattel mortgage more than three years prior to the writ of attachment issued by respondent judge is
an effective and binding notice to other creditors of its existence and creates a real right or a lien, which being recorded,
follows the chattel wherever it goes. 7 The chattel mortgage lien attaches to the property wherever it may be. Thus, private
respondent as attaching creditor acquired the properties in question subject to petitioner’s mortgage lien as it existed
thereon at the time of the attachment.

In this regard, it must be stressed that the right of those who so acquire said properties should not and cannot be superior to
that of the creditor who has in his favor an instrument of mortgage executed with the formalities of law, in good faith, and
without the least indication of fraud. 8

Applying the foregoing principle to the case at bar, the Court finds the lien of petitioner’s chattel mortgage over the
mortgaged properties in question superior to the levy on attachment made on the same by private respondent as creditor of
chattel mortgagor Clarencio Yujuico. What may be attached by private respondent as creditor of said chattel mortgagor is
only the equity or right of redemption of the mortgagor. 9

WHEREFORE, in view of the foregoing, the instant petition is GRANTED. The order dated July 27, 1978 of the respondent
judge restraining the Sheriff of Quezon City from selling at public auction the printing machineries and equipment in question
is hereby annulled and set aside. Respondent judge is ordered to desist and refrain from further interfering with petitioner’s
property rights in the aforesaid Deed of Chattel Mortgage and to allow the Sheriff of Quezon City and his deputies to proceed
with the auction sale of the foreclosed personal properties. Costs against private Respondent.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.

Endnotes:

1. Petition, Annex "B," Rollo, p. 29.

2. Petition, Annex "C," Rollo, p. 30.

3. Petition, Annex "D," Rollo, p. 31.

4. Petition, Annex "G," Rollo, p. 37.

5. Petition, Annex "N," Rollo, p. 63.

6. Petition, Annex "O," Rollo, p. 64.

7. Northern Motors, Inc. v. Coquia, 68 SCRA 374.

8. Ong Liong Tiak v. Luneta Motor Co., 66 Phil. 459.

9. Northern Motors, Inc. v. Coquia, Supra at 377.

68
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 74553 June 8, 1989

SERVICEWIDE SPECIALISTS, INCORPORATED, petitioner,


vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT, GALICANO SITON AND JUDGE JUSTINIANO DE
DUMO respondents.

Labaguis, Loyola, Angara & Associates for petitioner.

Godofredo de Guzman for respondents.

MEDIALDEA, J.:

This is a petition for review on certiorari of a decision of the Intermediate Appellate Court (now Court of Appeals) in
ACG.R. CV No. 03876 affirming in toto the decision of the Regional Trial Court of Manila in Civil Case No. 82-4364
entitled, "Servicewide Specialists, Inc. vs. Galicano Siton and John Doe."

The antecedent facts in this case as found by the lower court are as follows:

The private respondent Galicano Siton purchased from Car Traders Philippines, Inc. a vehicle described as
Mitsubishi Celeste two-door with air-conditioning, Engine 2M-62799, Serial No. A73-2652 and paid P 25,000.00 as
downpayment of the price. The remaining balance of P 68,400.00, includes not only the remaining principal
obligation but also advance interests and premiums for motor vehicle insurance policies.

On August 14, 1979, Siton executed a promissory note in favor of Car Traders Philippines, Inc. expressly stipulating
that the face value of the note which is P 68,400. 00, shall "be payable, without need of notice of demand, in
installments of the amounts following and at the dates hereinafter set forth, to wit: P 1,900.00 monthly for 36 months
due and payable on the 14th day of each month starting September 14, 1979, thru and inclusive of August 14,
1982" (p. 84, Rollo). There are additional stipulations in the Promissory Note consisting of, among others:

1 Interest at the rate of 14% per annum to be added on each unpaid installment from maturity;

2 If default is made in the payment of any of the installments or interest thereon, the total principal
sum then remaining unpaid, together with accrued interest thereon shall at once become due and
demandable;

3 In case of default, and attorney's services are availed of, there shall be added a sum equal to 25%
of the total sum due thereon to cover attorney's fees, aside from expenses of collection and legal
costs (p. 84, Rollo).

As further security, Siton executed a Chattel Mortgage over the subject motor vehicle in favor of Car Traders
Philippines, Inc. (pp. 85-88, Rollo). The Chattel Mortgage Contract provides additional stipulations, such as: a) the
waiver by the mortgagor of his rights under Art. 1252 of the Civil Code to designate the application of his payments
and authorize the mortgagee or its assigns to apply such payments to either his promissory note or to any of his
existing obligations to the mortgagee or its assigns at the latter's discretion; and b) concerning the insurance of the
subject motor vehicle, the mortgagor is under obligation to secure the necessary policy in an amount not less than
the outstanding balance of the mortgage obligation and that loss thereof shall be made payable to the mortgagee or
its assigns as its interest may appear, with the further obligation of the mortgagor to deliver the policy to the
mortgagee. The mortgagor further agrees that in default of his effecting or renewing the insurance and delivering the
policy as endorsed to the mortgagee within five (5) days after the execution of the mortgage or the expiry date of the
insurance, the mortgagee may, at his option but without any obligation to do so, effect such insurance or obtain such
renewal for the account of the mortgagor.

The credit covered by the promissory note and chattel mortgage executed by respondent Galicano Siton was first
assigned by Car Traders Philippines, Inc. in favor of Filinvest Credit Corporation. Subsequently, Filinvest Credit
Corporation likewise reassigned said credit in favor of petitioner Servicewide Specialists, Inc. and respondent Siton
was advised of this second assignment.

69
Alleging that Siton failed to pay the part of the installment which fell due on November 2, 1981 as well as the
subsequent installments which fell due on December 2, 1981 and January 2, 1982, respectively, the petitioner filed
this action against Galicano Siton and "John Doe."

The relief sought by the plaintiff is a Writ of Replevin over subject motor vehicle or, in the alternative, for a sum of
money of P 20,319.42 plus interest thereon at the rate of 14% per annum from January 11, 1982 until fully paid; and
in either case, for defendants to pay certain sum of money for attorney's fees, liquidated damages, bonding fees and
other expenses incurred in the seizure of the motor vehicle plus costs of suit.

After the service of summons, Justiniano de Dumo, identifying himself as the "John Doe" in the Complaint,
inasmuch as he is in possession of the subject vehicle, filed his Answer with Counterclaim and with Opposition to
the prayer for a Writ of Replevin. Said defendant, alleged the fact that he has bought the motor vehicle from
Galicano Siton on November 24, 1979; that as such successor, he stepped into the rights and obligations of the
seller; that he has religiously paid the installments as stipulated upon in the promissory note. He also manifested
that the Answer he has filed in his behalf should likewise serve as a responsive pleading for his co-defendant
Galicano Siton.

On January 12, 1984, the Regional Trial Court rendered a decision, the dispositive portion of which states:

WHEREFORE, judgment is hereby rendered as follows:

1. Denying the issuance of a Writ of Replevin in this case;

2. Ordering defendants to pay jointly and severally, the plaintiff, the remaining balance on the motor
vehicle reckoned as of January 25, 1982, without additional interest and charges, and the same to
be paid by installments, per the terms of the Promissory Note, payable on the 14th day of each
month starting the month after this Decision shall have become final, until the full payment of the
remaining obligation;

3. The Chattel Mortgage contract is deemed to cover the obligation petition stated in par. 2, supra,
without prejudice to the parties, including defendant de Dumo, to now execute a new promissory
note and/or chattel mortgage contract;

4. Ordering defendants to pay, jointly and severally, the sum of another P 3,859.90 to the plaintiff by
way of refunding the premium payments in the past on insurance policies over subject car;

5. Each party shall bear his own expenses and attorney's fees; and

6. The claim of one party against the other(s) for damages, and vice-versa are hereby denied and
dismissed. There is no pronouncement as to costs.

SO ORDERED. (pp. 95-96, Rollo)

Not satisfied with the decision of the trial court, the petitioner appealed to the Intermediate Appellate Court.

On April 25, 1986, the respondent Appellate Court rendered judgment affirming in toto the decision of the trial court.
The dispositive portion of the judgment states:

WHEREFORE, the appealed judgment is in full accord with the evidence and the law is hereby
therefore affirmed in all its parts. Costs against plaintiff-appellant.

SO ORDERED. (p. 42, Rollo).

Hence, the instant petition was filed, praying for a reversal of the above-mentioned decision in favor of private
respondents, with the petitioner assigning the following errors:

2.1 The Honorable Respondent, the Intermediate Appellate Court erred and gravely abused its
discretion in concluding that there was a valid sale of the mortgaged vehicle between Siton and De
Dumo;

2.2 The Honorable Respondent, the Intermediate Appellate Court erred and gravely abused its
discretion in holding that the petitioner (plaintiff) and its predecessors-in-interest are bound by the
questionable and invalid unnotarized Deed of Sale between Siton and De Dumo, even as neither
petitioner (plaintiff) nor its predecessors-in-interest had knowledge nor had they given their written or
verbal consent thereto;

70
2.3 The Honorable Respondent, the Intermediate Appellate Court erred and gravely abused its
discretion in ruling that the mortgagee (petitioner) has the obligation to make demands to De Dumo
for payment on the Promissory Note when De Dumo is not privy thereto;

2.4 The Honorable Respondent, the Intermediate Appellate Court erred and acted with grave abuse
of discretion in refusing to issue the Writ of Replevin despite due compliance by petitioner of the
requirements of Rule 60, Sections 1 and 2 of REVISED RULES OF COURT;

2.5 The Honorable Respondent, the Intermediate Appellate Court acted with grave abuse of
discretion in ruling that petitioner (creditor-mortgagee) is obliged to inform respondent De Dumo (not
privy to the mortgage) to submit the insurance policy over the mortgaged "res" and to demand the
payor-third-party (De Dumo) to redeem his rubber check; (pp. 4-5, Rollo).

In its first assigned error, petitioner alleges that the sale of the mortgaged vehicle between the mortgagor Siton and
De Dumo was void, as the sale is prohibited under the provisions of the Deed of Chattel Mortgage, the Chattel
Mortgage Act (Act 1508) and the Revised Penal Code. The Deed of Chattel Mortgage executed by the petitioner
and Siton stipulates:

The Mortgagor shall not sell, mortgage or in any other way, encumber or dispose of the property
herein mortgaged without the previous written consent of the Mortgagee. (p. 85, Rollo).

The rule is settled that the chattel mortgagor continues to be the owner of the property, and therefore, has the power
to alienate the same; however, he is obliged under pain of penal liability, to secure the written consent of the
mortgagee. (Francisco, Vicente, Jr., Revised Rules of Court in the Philippines, (1972), Volume IV-B Part I, p. 525).
Thus, the instruments of mortgage are binding, while they subsist, not only upon the parties executing them but also
upon those who later, by purchase or otherwise, acquire the properties referred to therein.

The absence of the written consent of the mortgagee to the sale of the mortgaged property in favor of a third person,
therefore, affects not the validity of the sale but only the penal liability of the mortgagor under the Revised Penal
Code and the binding effect of such sale on the mortgagee under the Deed of Chattel Mortgage.

Anent its second, third and fifth assigned errors, petitioner submits that it is not bound by the deed of sale made by
Siton in favor of De Dumo, as neither petitioner nor its predecessor has given their written or verbal consent thereto
pursuant to the Deed of Chattel Mortgage.

On this matter, the appellate court upheld the findings of the trial court, as follows, to wit:

The first issue is whether or not the sale and transfer of the motor vehicle, subject matter of the
chattel mortgage, made by Siton in favor of Atty. de Dumo is illegal and violative of the Chattel
Mortgage Law. The supposition is that if it were illegal, then plaintiff has all the right to file this action
and to foreclose on the chattel mortgage. Both defendants testified that, before the projected sale,
they went to a certain. Atty. Villa of Filinvest Credit Corporation advising the latter of the intended
sale and transfer. Defendants were accordingly advised that the verbal information given to the
corporation would suffice, and that it would be tedious and impractical to effect a change of transfer
of ownership as that would require a new credit investigation as to the capacity and worthiness of
Atty. De Dumo, being the new debtor. The further suggestion given by Atty. Villa is that the account
should be maintained in the name of Galicano Siton. Plaintiff claims that it and its predecessor had
never been notified of the sale much less were they notified in writing as required by the contract. On
this particular issue, it would really appear that, since the transfer, it was Atty. de Dumo who had
been paying said account, almost invariably with his personal checks. In fact, one of the checks that
supposedly bounced, marked Exhibit J and the relative receipt as Exhibit 16, was Atty. de Dumo's
personal check. Note that plaintiff has been accepting such payments by defendant de Dumo. It
would appear, therefore, that there was an implied acceptance by the plaintiff and its predecessor of
the transfer. Another reasonable conclusion is that, while there was failure on the part of defendants
to comply strictly and literaly with their contract, there was substantial compliance therewith. (pp. 92-
93, Rollo)

We agree with the aforequoted findings and conclusions of the lower court which were affirmed on appeal by the
Court of Appeals. The conclusions and findings of facts by the trial court are entitled to great weight and will not be
disturbed on appeal unless for strong and cogent reasons because the trial court is in a better position to examine
real evidence as well as to observe the demeanor of witnesses while testifying on the case. (Macua vs. Intermediate
Appellate Court, No. L-70810, October 26, 1987,155 SCRA 29)

There is no dispute that the Deed of Chattel Mortgage executed between Siton and the petitioner requires the
written consent of the latter as mortgagee in the sale or transfer of the mortgaged vehicle. We cannot ignore the
findings, however, that before the sale, prompt inquiries were made by private respondents with Filinvest Credit
Corporation regarding any possible future sale of the mortgaged property; and that it was upon the advice of the
71
company's credit lawyer that such a verbal notice is sufficient and that it would be convenient if the account would
remain in the name of the mortgagor Siton.

Even the personal checks of de Dumo were accepted by petitioner as payment of some of the installments under
the promissory note (p. 92, Rollo). If it is true that petitioner has not acquiesced in the sale, then, it should have
inquired as to why de Dumo's checks were being used to pay Siton's obligations.

Based on the foregoing circumstances, the petitioner is bound by its predecessor company's representations. This
is based on the doctrine of estoppel, through which, "an admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved as against the person relying thereon" (Art. 1431, Civil
Code). Like the related principles of volenti non lit injuria (consent to injury), waiver and acquiescence, estoppel
finds its origin generally in the equitable notion that one may not change his position, and profit from his own
wrongdoing when he has caused another to rely on his former representations (Sy vs. Central Bank, No. L-41480,
April 30, 1976, 70 SCRA 570).

Further, it is worthy to note that despite the arguments of petitioner that it is not bound by the sale of the vehicle to
de Dumo, and that the latter is a stranger to the transaction between Filinvest and Siton, nevertheless, it admitted de
Dumo's obligation as purchaser of the property when it named the latter as one of the defendants in the lower court.
Petitioner even manifested in its prayer in the appellant's brief and in the petition before Us, that de Dumo be
ordered to pay petitioner, jointly and severally with Siton the unpaid balance on the promissory note (pp. 32 and 72,
Rollo).

In the fourth assigned error by petitioner, the latter claims that the appellate court gravely erred in upholding the trial
court's refusal to issue that Writ of Replevin despite compliance with the requirements of the Rules. This contention
is devoid of merit.

Article 1484 of the New Civil Code prescribes three remedies which a vendor may pursue in a contract of sale of
personal property the price of which is payable in installments, to wit: 1) to exact fulfillment of the obligation; 2)
cancel the sale; and 3) foreclose the mortgage on the thing sold. These remedies are alternative and the vendor
cannot avail of them at the same time.

It is clear from the prayer of petitioner in its brief on appeal to the appellate court that it had chosen the remedy of
fulfillment when it asked the appellate court to order private respondents to pay the remaining unpaid sums under
the promissory note (p. 31, Rollo). By having done so, it has deemed waived the third remedy of foreclosure, and it
cannot therefore ask at the same time for a Writ of Replevin as preparatory remedy to foreclosure of mortgage. In a
similar case, where the vendor filed an action containing three remedies: to collect the purchase price; to seize the
property purchased by suing for replevin and to foreclose the mortgage executed thereon, We held that such a
scheme is not only irregular but is a flagrant circumvention of the prohibition of the law (Luneta Motor Company vs.
Dimagiba No. L-17061, December 30, 1961, 3 SCRA 884).

Finally, the petitioner argues that the judgment of the appellate court was not in accordance with its own findings
and those of the trial court showing private respondents' default in the payment of three monthly installments as a
result of the dishonor of three checks issued as payments; and that as a consequence thereof, the full amount of the
unpaid balance under the promissory note became due and demandable pursuant to the terms of the promissory
note.

This contention is impressed with merit. The findings of the trial court on this issue, which were affirmed by the
appellate court, state, as follows:

The second point of issue is whether or not defendants were in arrears when the complaint was filed
on January 25, 1982. Plaintiff claims that there were three payments by checks made by defendants,
which are ineffective (Art. 1249, Civil Code) as said checks bounced for insufficient finding. .... The
debtor/obligor is allegedly obliged, as per the Chattel Mortgage Contract, to have the motor vehicle
insured and, failing which, the creditor may insure the same for the account of the debtor. Such
payments, therefore, together with the value of the three checks that had been dishonored, are the
reasons for defendants' delinquency. On defendant's part, more particularly Atty. de Dumo's, they
submit that there was no delinquency as, in fact, defendants have receipts to evidence payment for
the months of November 1981 (Exhibit 18 dated November 3, 1981), December 1981 (Exhibit 17
dated December 2, 1981), and January, 1982 (Exhibit 30, dated January 5, 1982).

On cross-examination, Atty. de Dumo admitted that really one of his checks (Exhibit J) was
dishonored. There is no evidence on way [or] the other whether said check was replaced
subsequently with a good one. Likewise, there is no clarification in the record as to whether the two
other dishonored checks had been replaced. As to the insurance policies, defendants claimed on the
witness stand that they were the ones who had the vehicle insured, for, otherwise, defendant de
Dumo could not have registered the motor vehicle for the years 1980 up to 1982. Defendants further
contend that they complied with their undertaking by notifying verbally the creditor of that fact. There

72
is no denying the fact however, that the insurance policies obtained were not endorsed, much less
surrendered, to the plaintiff; in fact such policies were not shown in court to evidence the proper
indorsement of the policies in favor of the creditor. (pp. 93-94, Rollo). (Emphasis supplied)

It is evident from the foregoing findings that the checks issued by the defendants as payment for the installments for
November and December, 1981 and January, 1982 were dishonored and were not shown to have been replaced.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce
the effect of payment only when they have been cashed. (Art. 1249, Civil Code). When the existence of the debt is
fully established by the evidence contained in the record, the burden of proving that it has been extinguished by
payment devolves upon the debtor who offers such a defense to the claim of the creditor. (Chua Chienco vs.
Vargas, 11 Phil. 219). In the absence of any showing that the aforestated checks were replaced and subsequently
cashed, We can only infer that the monthly installments for November, 1981, December, 1981 and January, 1982
have not been paid. In view of the above, it is not correct for the appellate court to ignore the evidence on record
showing the default of private respondents in their obligations. The fact that Siton and de Dumo were not advised or
notified of their failure to comply with their obligations under the note and under the Deed of Chattel Mortgage is of
no importance. Article 1169 of the Civil Code provides:

Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

1. When the obligation or the law expressly so declares;

xxx xxx xxx

The promissory note executed by Siton in favor of Car Traders Philippines, Inc. expressly stipulates that the unpaid
balance shall be payable, without need of notice or demand, in fixed monthly installments; and that if default be
made in the payment of any of the installments or interest thereon as and when the same becomes due and payable
as specified above, the total principal sum then remaining unpaid, together with accrued interest thereon, shall at
once become due and payable (p. 84, Rollo). The parties are bound by this agreement.

In view of the foregoing, We find it correct to hold both the respondents Galicano Siton and Justiniano de Dumo
liable for their obligations to petitioner herein. In the case at bar, the purchase of the car by respondent de Dumo
from respondent Siton does not necessarily imply the extinguishment of the liability of the latter. Since it was neither
established nor shown that Siton was released from responsibility under the promissory note, the same does not
constitute novation by substitution of debtors under Article 1293 of the Civil Code. Likewise, the fact that petitioner
company accepts payments from a third person like respondent de Dumo, who has assumed the obligation, will
result merely to the addition of debtors and not novation. Hence, the creditor may therefore enforce the obligation
against both debtors. (Straight vs. Hashell, 49 Phil. 614; Mata vs. Serra, 47 Phil. 464; McCullough vs. Veloso, 46
Phil. 1; Pacific Commercial vs. Sotto, 34 Phil. 237). If there is no agreement as to solidarity, the first and new
debtors are considered obligated jointly. (Lopez vs. Court of Appeals, et al., No. L-33157, June 29, 1982, 114 SCRA
671; Dungo vs. Lopena, et al., L-18377, December 29, 1962, 6 SCRA 1007).

ACCORDINGLY, the petition is GRANTED and the assailed decision of the Court of Appeals dated April 25, 1986 is
hereby REVERSED and SET ASIDE, and a new one entered, ordering the private respondents Galicano Siton and
Justiniano de Dumo, jointly to pay to petitioner Servicewide Specialists, Incorporated, the total sum of the remaining
unpaid balance on the promissory note with interest thereon at fourteen percent per annum from January 25, 1982
until fully paid, as well as stipulated attorney's fees and liquidated damages; and to reimburse to petitioner the sum
of P 3,859.90 for the premium payments on the insurance policies over the subject vehicle. Costs against private
respondents.

SO ORDERED.

Narvasa, Cruz, Gancayco and Griño-Aquino, JJ., concur.

73
SECOND DIVISION

[G.R. No. 62415. August 20, 1990.]

BICOL SAVINGS & LOAN ASSOCIATION, Petitioner, v. JAIME GUINHAWA and THE HON. PRESIDING JUDGE OF
THE COURT OF FIRST INSTANCE OF CAMARINES SUR (10th JUDICIAL DISTRICT), BRANCH III, Respondents.

Contreras & Associates for Petitioner.

Tirso P. Mariano for Private Respondent.

DECISION

PARAS, J.:

Sometime on June 19, 1980, Victorio Depositario together with private respondent Jaime Guinhawa, acting as solidary co-
maker, took a loan from petitioner Bicol Savings and Loan Association (BISLA, for brevity) in the sum of P10,622.00, payable
at P535.45 every 19th day of each month beginning July 1980 until maturity on June 19, 1982.

To secure the payment of the foregoing loan obligation, the principal borrower Victorio Depositario put up as security a
chattel mortgage which was a Yamaha Motorcycle. Said motorcycle was eventually foreclosed by reason of the failure of
Depositario and private respondent Guinhawa to pay the loan. As a result of the foreclosure, there was a deficiency in the
amount of P5,158.06 as of July 31, 1981, where BISLA made a demand to pay the same.

Thus, on August 6, 1981, petitioner BISLA (plaintiff therein) filed in the City Court of Naga, Branch II, a complaint for the
recovery of a sum of money constituting the deficiency after foreclosure of the chattel mortgage put up by the principal
borrower Depositario against the latter and his solidary co-maker Guinhawa (herein private respondent) as defendants.

Eventually, a stipulation of facts was entered into between BISLA and Guinhawa. They agreed to drop Depositario, as "his
whereabouts being unknown now and he could not be served with summons" (p. 8, Rollo). Said stipulation of facts reads: cralawnad

"1) That defendant admits that after the foreclosure of the chattel mortgage executed by defendant Victorio Depositario, the
principal debtor, as security for the payment of the loan, there is left a deficiency in the sum of P5,158.06 as of July 31,
1981, aside from the agreed interest thereon at 17% per annum compounded monthly;

"2) That defendant is only a co-maker in the aforementioned loan but that, however, under the promissory note he jointly
and severally promised with Victorio Depositario to pay plaintiff the said loan; that he is not a party to the chattel mortgage;
and that the same was foreclosed without notice to him;

"3) That both parties agree that the only issue to be resolved is whether defendant herein is liable to pay plaintiff the sums
mentioned in paragraph 1 hereof;

"4) That in view thereof, both parties agree to submit this case for decision based on the foregoing stipulation of facts;

"5) That should decision be in favor of the plaintiff the defendant agrees to pay plaintiff not only the sums mentioned in
paragraph I hereof but an additional amount equivalent to 10% of the aggregate amount due the plaintiff as attorney’s fees
and to pay the costs. Should the decision, however, be in favor of the defendant, plaintiff will pay the defendant the same
amount of attorney’s fees that defendant would have paid if decision is in favor of the plaintiff, and for the latter also to pay
the costs." (pp. 3-4, Petition; pp. 8-9, Rollo)

On December 4, 1981, the City Court rendered a decision 1 in favor of the petitioner, ruling in part: jgc:c han robles. com.ph

"It is undisputed that the obligation of both defendants under the promissory note they executed in favor of the plaintiff is
joint and several. That after the plaintiff foreclosed the chattel mortgage executed by defendant Victorio Depositario there
remains a deficiency which is now the subject of this case. The right of the plaintiff to claim for the deficiency resulting
between the price obtained in the sale of the property and the outstanding obligation at the time of the foreclosure is clear.
(Philippine Bank of Commerce v. De Vera, 6 SCRA 1026). Under Art. 1216 of the Civil Code, as quoted by the plaintiff in its
memorandum, plaintiff has the right to proceed against any of the herein defendants who are solidary debtors or to both of
them simultaneously. Said article further provides that a demand made against anyone of the solidary debtors shall not be
an obstacle to those which may later on be directed against the others, so long as the debt has not been fully paid or
collected. In the present case, the plaintiff first foreclosed the mortgage put up by defendant Depositario but since the debt
was not fully paid out of the proceeds of the sale it is now proceeding against any or both of the defendants herein. Article
1216 of the Civil Code gives the plaintiff in this case the option who among the defendants as solidary debtors, should be
sued, the debt not being fully paid (PNB v. Concepcion Mining Co., Inc., 5 SCRA 745)." (pp. 35-36, Rollo)

On appeal to the respondent Court of First Instance of Camarines Sur, Branch III, it rendered a decision reversing the said
lower court’s decision, ruling in part:
jgc:chan roble s.com.p h

"It is true that the assumed obligation by a co-maker is solidary in nature with respect to the principal debtor but when the
creditor chose to foreclose the mortgage, it simply means that the creditor chose to collect from Depositario, one of the
74
solidary debtors and not the appellant. If there is any deficiency in payment, how can the herein appellant be made to
assume the deficiency since the appellee-creditor choose to foreclose and collect through the mortgage of which the
appellant in the first place was not a party to the said mortgage?

"It is not disputed that a creditor can exact or collect payment of the indebtedness from any of the solidary debtors in a
promissory note of which a co-maker assumes a character of one, the appellant herein can not evade or ignore the collection
if the creditor sued upon the promissory note. But what did the creditor do? Instead of proceeding upon the promissory note
of which the appealing co-maker stands as solidary debtor, the appellee chose the chattel mortgage and collect therefrom of
which mortgage the appellant was never a party and having a deficiency therein, the creditor, the herein appellee, would like
to collect from the promissory note. In a case of identical setting, it was held that foreclosure of mortgage precludes any
further action against the debtor and his guarantor (Pascual v. Universal Motors, 61 SCRA 121)." (p. 71, Rollo)

Hence, this petition.

The petition is impressed with merit.

In a number of cases, We already held that if in an extrajudicial foreclosure of a chattel mortgage a deficiency exists, an
independent civil action may be instituted for the recovery of said deficiency. If the mortgagee has foreclosed the mortgage
judicially, he may ask for the execution of the judgment against any other property of the mortgagor for the payment of the
balance. To deny to the mortgagee the right to maintain an action to recover the deficiency after foreclosure of the chattel
mortgage would be to overlook the fact that the chattel mortgage is only given a security and not as payment for the debt in
case of failure of payment. (Bank of the Philippine Islands v. Olutanga Lumber Co., 47 Phil. 20; Manila Trading & Supply Co.
v. Tamaraw Plantation Co., 47 Phil. 513.)

The case of Pascual, as cited by the respondent court, is not applicable in this instant case because it was a case of sale on
installment, where after foreclosure of the units the plaintiffs-guarantors who had likewise executed a real estate mortgage
of up to P50,000, cannot be held answerable anymore for the deficiency. The conclusion therefore reached by the lower court
was erroneous because in the case at bar, the obligation contracted by the principal debtor (Depositario) with a solidary co-
maker (private respondent herein), was one of loan secured by a chattel mortgage, executed by the principal debtor, and not
a sale where the price is payable on installments and where a chattel mortgage on the thing sold was constituted by the
buyer and, further, the obligation to pay the installments having been guaranteed by another.

Private respondent Guinhawa contends that he was not a party to the chattel mortgage executed by Depositario but merely a
co-maker on the promissory note executed by the latter and therefore cannot be held liable for the deficiency. cha nrob les.co m : virtua l law lib rary

Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed
against the others, so long as the debt has not been fully collected. And therefore, where the private respondent binds
himself solidarily with the principal debtor to pay the latter’s debt, he may be proceeded against by the principal debtor.
Private respondent as solidary co-maker is also a surety (Art. 2047) and that under the law, the bringing of an action against
the principal debtor to enforce the payment of the obligation is not inconsistent with, and does not preclude, the bringing of
another action to compel the surety to fulfill his obligation under the agreement.

Article 2080 2 of the Civil Code which is relied on by private respondent has no application to the case at bar since his
liability here is as a surety not as a guarantor.

WHEREFORE, the appealed decision dated October 12, 1982 is hereby REVERSED and SET ASIDE and the decision of the City
Court dated December 4, 1981 is hereby REINSTATED. Costs against the private Respondent.

SO ORDERED.

Melencio-Herrera (Chairman), Padilla and Regalado, JJ., concur.

Sarmiento, J., is on leave.

Endnotes:

1. Penned by Judge Antonio N. Gerona.

2. Article 2080 provides:jg c:chan rob les.com. ph

"The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they
cannot be subrogated to the rights, mortgages, and preferences of the latter.

75
THIRD DIVISION

[G.R. No. 106435. July 14, 1999]

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V.


TEVES and HIRAM DIDAY R. PULIDO, petitioners, vs. HON. COURT OF
APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES, respondents.

DECISION
SYNOPSIS
This is a review on certiorari of a judgment of the Court of Appeals affirming in toto the decision of the
Regional Trial Court of Makati to award respondent banks deficiency claim, arising from a loan secured by a
chattel mortgage.
The Court denied the petition. It held that since the Chattel Mortgage Law bars the creditor-mortgagee from
retaining the excess of the sale proceeds, there is a corollary obligation on the part of the debtor-mortgagee to pay
the deficiency in case of a reduction in the price at public auction.
As to petitioners contention that the public auction sale is void on ground of fraud and inadequacy of price,
the Court ruled that parties may not bring on appeal issues that were not raised on trial. Petitioners never assailed
the validity of the sale in the RTC and only in the Court of Appeals did they attempt to prove inadequacy of
price. Moreover, fraud is a serious allegation that requires full and convincing evidence and may not be inferred
from the lone circumstance that it was only respondent bank that bid in the sale of the foreclosed properties.
SYLLABUS
1. CIVIL LAW; CHATTEL MORTGAGE LAW (ACT NO. 1508, AS AMENDED); DEBTOR-MORTGAGOR BARRED
FROM RETAINING EXCESS OF SALE PROCEEDS AND OBLIGED TO PAY DEFICIENCY IN CASE OF
REDUCTION IN PRICE AT PUBLIC AUCTION. -- It is clear from Section 14 of Act No. 1508, as amended that the effects
of foreclosure under the Chattel Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in pledge, the
sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the
sale in excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor
to the balance of the proceeds, upon satisfaction of the principal obligation and costs. Since the Chattel Mortgage Law bars the
creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee
to pay the deficiency in case of a reduction in the price at public auction. (Manila Trading and Supply Co. vs. Tamaraw Plantation
Co., cited in Ablaza vs. Ignacio, G.R. No. L-11466, May 23, 1958 [unpublished]). We find no reason to disturb the ruling in Ablaza
vs. Ignacio, and the cases reiterating it.
2. ID.; CIVIL CODE; ARTICLE 1484 CLEARLY APPLIES TO SALE OF PERSONAL PROPERTY IN INSTALLMENT
BASIS. -- Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As correctly
pointed out by the trial court, the said article applies clearly and solely to the sale of personal property the price of which is payable
in installments. Although Article 1484, paragraph (3) expressly bars any further action against the purchaser to recover an unpaid
balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing sold, should the vendee's failure to pay
cover two or more installments, this provision is specifically applicable to a sale on installments.
3. ID.; EQUITY; APPLIED ONLY IN ABSENCE OF STATUTORY LAW OR JUDICIAL RULES OF PROCEDURE. -- To
accommodate petitioners' prayer even on the basis of equity would be to expand the application of the provisions of Article 1484
to situations beyond its specific purview, and ignore the language and intent of the Chattel Mortgage Law. Equity, which has been
aptly described as justice outside legality, is applied only in the absence of, and never against, statutory law or judicial rules of
procedure.
4. REMEDIAL LAW; APPEAL; PARTIES MAY NOT BRING ON APPEAL ISSUES NOT RAISED ON TRIAL. -- We are
also unable to find merit in petitioners' submission that the public auction sale is void on grounds of fraud and inadequacy of
price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of Appeals did they attempt to prove
inadequacy of price through the documents, i.e., the Open-End Mortgage on Inventory and inventory dated March 31, 1980,
likewise attached to their Petition before this Court. Basic is the rule that parties may not bring on appeal issues that were not
raised on trial.
5. ID.; EVIDENCE; PRESUMPTION OF REGULARITY IN CONDUCT OF PUBLIC SALE; CASE AT BAR. -- Furthermore,
the mere fact that respondent bank was the sole bidder for the mortgaged properties in the public sale does not warrant the
conclusion that the transaction was attended with fraud. Fraud is a serious allegation that requires full and convincing evidence,
and may not be inferred from the lone circumstance that it was only respondent bank that bid in the sale of the foreclosed

76
properties. The sparseness of petitioners' evidence in this regard leaves Us no discretion but to uphold the presumption of regularity
in the conduct of the public sale.
6. ID.; ID.; FINDINGS OF FACT OF TRIAL COURT ON JOINT AND SOLIDARY LIABILITY OF PETITIONER
CORPORATION IN LOAN AFFIRMED ON APPEAL; CASE AT BAR. -- We likewise affirm private petitioners' joint and
several liability with petitioner corporation in the loan. As found by the trial court and the Court of Appeals, the terms of the
promissory note unmistakably set forth the solidary nature of private petitioners' commitment. From the foregoing, it is clear that
private petitioners intended to bind themselves solidarily with petitioner PAMECA in the loan. As correctly submitted by
respondent bank, private petitioners are not made to answer for the corporate act of petitioner PAMECA, but are made liable
because they made themselves co-makers with PAMECA under the promissory note.

APPEARANCES OF COUNSEL
Americo H. Acosta for petitioners.
Bonifacio M. Abad and Vicente Cuison for private respondent.

GONZAGA-REYES, J.:

Before Us for review on certiorari is the decision of the respondent Court of Appeals in CA G.R. CV No.
27861, promulgated on April 23, 1992,[1] affirming in toto the decision of the Regional Trial Court of Makati[2] to
award respondent banks deficiency claim, arising from a loan secured by chattel mortgage.
The antecedents of the case are as follows:
On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of
US$267,881.67, or the equivalent of P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner
PAMECA, through its President, petitioner Herminio C. Teves, executed a promissory note for the said amount,
promising to pay the loan by installment. As security for the said loan, a chattel mortgage was also executed over
PAMECAs properties in Dumaguete City, consisting of inventories, furniture and equipment, to cover the whole
value of the loan.
On January 18, 1984, and upon petitioner PAMECAs failure to pay, respondent bank extrajudicially
foreclosed the chattel mortgage, and, as sole bidder in the public auction, purchased the foreclosed properties for
a sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint for the collection of the balance of
P4,366,332.46[3] with Branch 132 of the Regional Trial Court of Makati City against petitioner PAMECA and
private petitioners herein, as solidary debtors with PAMECA under the promissory note.
On February 8, 1990, the RTC of Makati rendered a decision on the case, the dispositive portion of which
we reproduce as follows:

WHEREFORE, judgment is hereby rendered ordering the defendants to pay jointly and severally
plaintiff the (1) sum of P4,366,332.46 representing the deficiency claim of the latter as of March
31, 1984, plus 21% interest per annum and other charges from April 1, 1984 until the whole
amount is fully paid and (2) the costs of the suit. SO ORDERED.[4]

The Court of Appeals affirmed the RTC decision. Hence, this Petition.
The petition raises the following grounds:

1. Respondent appellate court gravely erred in not reversing the decision of the trial court, and in
not holding that the public auction sale of petitioner PAMECAs chattels were tainted with fraud, as
the chattels of the said petitioner were bought by private respondent as sole bidder in only 1/6 of
the market value of the property, hence unconscionable and inequitable, and therefore null and
void.

2. Respondent appellate court gravely erred in not applying by analogy Article 1484 and Article
2115 of the Civil Code by reading the spirit of the law, and taking into consideration the fact that
the contract of loan was a contract of adhesion.

3. The appellate court gravely erred in holding the petitioners Herminio Teves, Victoria Teves and
Hiram Diday R. Pulido solidarily liable with PAMECA Wood Treatment Plant, Inc. when the
intention of the parties was that the loan is only for the corporations benefit.
77
Relative to the first ground, petitioners contend that the amount of P322,350.00 at which respondent bank
bid for and purchased the mortgaged properties was unconscionable and inequitable considering that, at the time
of the public sale, the mortgaged properties had a total value of more than P2,000,000.00. According to
petitioners, this is evident from an inventory dated March 31, 1980[5], which valued the properties at
P2,518,621.00, in accordance with the terms of the chattel mortgage contract[6] between the parties that required
that the inventories be maintained at a level no less than P2 million. Petitioners argue that respondent banks act
of bidding and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their actual value in a
public sale in which it was the sole bidder was fraudulent, unconscionable and inequitable, and constitutes
sufficient ground for the annulment of the auction sale.
To this, respondent bank contends that the above-cited inventory and chattel mortgage contract were not in
fact submitted as evidence before the RTC of Makati, and that these documents were first produced by petitioners
only when the case was brought to the Court of Appeals.[7] The Court of Appeals, in turn, disregarded these
documents for petitioners failure to present them in evidence, or to even allude to them in their testimonies before
the lower court.[8] Instead, respondent court declared that it is not at all unlikely for the chattels to have sufficiently
deteriorated as to have fetched such a low price at the time of the auction sale.[9] Neither did respondent court find
anything irregular or fraudulent in the circumstance that respondent bank was the sole bidder in the sale, as all
the legal procedures for the conduct of a foreclosure sale have been complied with, thus giving rise to the
presumption of regularity in the performance of public duties.[10]
Petitioners also question the ruling of respondent court, affirming the RTC, to hold private petitioners,
officers and stockholders of petitioner PAMECA, liable with PAMECA for the obligation under the loan obtained
from respondent bank, contrary to the doctrine of separate and distinct corporate personality.[11] Private petitioners
contend that they became signatories to the promissory note only as a matter of practice by the respondent bank,
that the promissory note was in the nature of a contract of adhesion, and that the loan was for the benefit of the
corporation, PAMECA, alone.[12]
Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that Articles 1484 [13] and
2115[14] of the Civil Code be applied in analogy to the instant case to preclude the recovery of a deficiency claim.[15]
Petitioners are not the first to posit the theory of the applicability of Article 2115 to foreclosures of chattel
mortgage. In the leading case of Ablaza vs. Ignacio[16], the lower court dismissed the complaint for collection of
deficiency judgment in view of Article 2141 of the Civil Code, which provides that the provisions of the Civil
Code on pledge shall also apply to chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage
Law. It was the lower courts opinion that, by virtue of Article 2141, the provisions of Article 2115 which deny
the creditor-pledgee the right to recover deficiency in case the proceeds of the foreclosure sale are less than the
amount of the principal obligation, will apply.
This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law
regarding the effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article
2115 in relation to Article 2141, may not be applied to the case.
Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:

xxx

The officer making the sale shall, within thirty days thereafter, make in writing a return of his
doings and file the same in the office of the Registry of Deeds where the mortgage is recorded, and
the Register of Deeds shall record the same. The fees of the officer for selling the property shall be
the same as the case of sale on execution as provided in Act Numbered One Hundred and Ninety,
and the amendments thereto, and the fees of the Register of Deeds for registering the officers return
shall be taxed as a part of the costs of sale, which the officer shall pay to the Register of Deeds. The
return shall particularly describe the articles sold, and state the amount received for each article,
and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such
sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then
to the payment of the demand or obligation secured by such mortgage, and the residue shall be
paid to persons holding subsequent mortgages in their order, and the balance, after paying the
mortgage, shall be paid to the mortgagor or persons holding under him on demand. (Emphasis
supplied)

78
It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run
inconsistent with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in
excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds
there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in
the price at public auction. As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co.[17], cited
in Ablaza vs. Ignacio, supra:

While it is true that section 3 of Act No. 1508 provides that a chattel mortgage is a conditional sale,
it further provides that it is a conditional sale of personal property as security for the payment of a
debt, or for the performance of some other obligation specified therein. The lower court overlooked
the fact that the chattels included in the chattel mortgage are only given as security and not as a
payment of the debt, in case of a failure of payment.

The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in
the mortgage, given as security, should sell for more than the amount of the indebtedness secured,
that the creditor would be entitled to the full amount for which it might be sold, even though that
amount was greatly in excess of the indebtedness. Such a result certainly was not contemplated by
the legislature when it adopted Act No. 1508. There seems to be no reason supporting that theory
under the provision of the law. The value of the chattels changes greatly from time to time, and
sometimes very rapidly. If, for example, the chattels should greatly increase in value and a sale
under that condition should result in largely overpaying the indebtedness, and if the creditor is not
permitted to retain the excess, then the same token would require the debtor to pay the deficiency in
case of a reduction in the price of the chattels between the date of the contract and a breach of the
condition.

Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on the question
of chattel mortgages, have said, that in case of a sale under a foreclosure of a chattel mortgage,
there is no question that the mortgagee or creditor may maintain an action for the deficiency, if any
should occur. And the fact that Act No. 1508 permits a private sale, such sale is not, in fact, a
satisfaction of the debt, to any greater extent than the value of the property at the time of the
sale. The amount received at the time of the sale, of course, always requiring good faith and
honesty in the sale, is only a payment, pro tanto, and an action may be maintained for a deficiency
in the debt.

We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating it[18]
Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As
correctly pointed out by the trial court, the said article applies clearly and solely to the sale of personal property
the price of which is payable in installments. Although Article 1484, paragraph (3) expressly bars any further
action against the purchaser to recover an unpaid balance of the price, where the vendor opts to foreclose the
chattel mortgage on the thing sold, should the vendees failure to pay cover two or more installments, this provision
is specifically applicable to a sale on installments.
To accommodate petitioners prayer even on the basis of equity would be to expand the application of the
provisions of Article 1484 to situations beyond its specific purview, and ignore the language and intent of the
Chattel Mortgage Law. Equity, which has been aptly described as justice outside legality, is applied only in the
absence of, and never against, statutory law or judicial rules of procedure.[19]
We are also unable to find merit in petitioners submission that the public auction sale is void on grounds of
fraud and inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court
of Appeals did they attempt to prove inadequacy of price through the documents, i.e., the Open-End Mortgage on
Inventory and inventory dated March 31, 1980, likewise attached to their Petition before this Court. Basic is the
rule that parties may not bring on appeal issues that were not raised on trial.
Having nonetheless examined the inventory and chattel mortgage document as part of the records, We are
not convinced that they effectively prove that the mortgaged properties had a market value of at
79
least P2,000,000.00 on January 18, 1984, the date of the foreclosure sale. At best, the chattel mortgage contract
only indicates the obligation of the mortgagor to maintain the inventory at a value of at least P2,000,000.00, but
does not evidence compliance therewith. The inventory, in turn, was as of March 31, 1980, or even prior to April
17, 1980, the date when the parties entered into the contracts of loan and chattel mortgage, and is far from being
an accurate estimate of the market value of the properties at the time of the foreclosure sale four years
thereafter. Thus, even assuming that the inventory and chattel mortgage contract were duly submitted as evidence
before the trial court, it is clear that they cannot suffice to substantiate petitioners allegation of inadequacy of
price.
Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged properties in the public
sale does not warrant the conclusion that the transaction was attended with fraud. Fraud is a serious allegation
that requires full and convincing evidence,[20] and may not be inferred from the lone circumstance that it was only
respondent bank that bid in the sale of the foreclosed properties. The sparseness of petitioners evidence in this
regard leaves Us no discretion but to uphold the presumption of regularity in the conduct of the public sale.
We likewise affirm private petitioners joint and several liability with petitioner corporation in the loan. As
found by the trial court and the Court of Appeals, the terms of the promissory note unmistakably set forth the
solidary nature of private petitioners commitment. Thus:

On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT PLANT, INC., a
corporation organized and existing under the laws of the Philippines, with principal office at 304 El
Hogar Filipina Building, San Juan, Manila, promise to pay to the order of DEVELOPMENT
BANK OF THE PHILIPPINES at its office located at corner Buendia and Makati Avenues,
Makati, Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN THOUSAND
EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$ 267,881.67) with interest
at the rate of three per cent (3%) per annum over DBPs borrowing rate for these funds. Before the
date of maturity, we hereby bind ourselves, jointly and severally, to make partial payments as
follows:

xxx

In case of default in the payment of any installment above, we bind ourselves to pay DBP for
advances xxx

xxx

We further bind ourselves to pay additional interest and penalty charges on loan amortizations or
portion thereof in arrears as follows:

xxx

"In addition to the above, we also bind ourselves to pay for bank advances for insurance premiums,
taxes xxx

xxx

"We further bind ourselves to reimburse DBP on a pro-rata basis for all costs incurred by DBP on
the foreign currency borrowings from where the loan shall be drawn xxx

xxx

In case of non-payment of the amount of this note or any portion of it on demand, when due, or any
other amount or amounts due on account of this note, the entire obligation shall become due and
demandable, and if, for the enforcement of the payment thereof, the DEVELOPMENT BANK OF
THE PHILIPPINES is constrained to entrust the case to its attorneys, we jointly and severally bind
ourselves to pay for attorneys fees as provided for in the mortgage contract, in addition to the legal
fees and other incidental expenses. In the event of foreclosure of the mortgage securing this note,
we further bind ourselves jointly and severally to pay the deficiency, if any. (Emphasis supplied)[21]
80
The promissory note was signed by private petitioners in the following manner:

PAMECA WOOD TREATMENT PLANT, INC.

By:

(Sgd) HERMINIO G. TEVES

(For himself & as President of above-named corporation)

(Sgd) HIRAM DIDAY PULIDO

(Sgd) VICTORIA V. TEVES[22]

From the foregoing, it is clear that private petitioners intended to bind themselves solidarily with petitioner
PAMECA in the loan. As correctly submitted by respondent bank, private petitioners are not made to answer for
the corporate act of petitioner PAMECA, but are made liable because they made themselves co-makers with
PAMECA under the promissory note.
IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of Appeals dated
April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Romero (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.

[1]
Penned by Justice Lorna S. Lombos-dela Fuente, with the concurrence of Justices Salome A. Montoya and Quirino D. Abad-Santos,
Jr.
[2]
Civil Case No. 7734, Branch 132, presided over by Judge Herminio I. Benito.
[3]
Representing the deficiency claim of respondent bank, inclusive of interest charges, as of March 31, 1984.
[4]
Rollo, 47; Decision of the RTC, 4.
[5]
Rollo, 11; Annex F of the Petition.
[6]
Ibid., Open-End Mortgage on Inventory, Annex G of the Petition, 1.
[7]
Ibid., 69; Comment of Private Respondents, 2.
[8]
Ibid., 28; Decision of the Court of Appeals, 3.
[9]
Ibid.
[10]
Ibid., 28-29; Decision of the Court of Appeals, 3-4.
[11]
Ibid., 18-21; Petition, 13-16.
[12]
Ibid.
[13]
Art. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise the
following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendees failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendees failure to pay cover two or more
installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement
to the contrary shall be void. (Emphasis supplied)
[14]
Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to
the amount of the obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall
not be entitled to the excess, unless otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the
deficiency notwithstanding any stipulation to the contrary. (Emphasis supplied)
[15]
Rollo, 14-18; Petition, 9-13.
[16]
G.R. No. L-11466, May 23, 1958 (unpublished).

81
[17]
47 Phil. 513.
[18]
See Garrido vs. Tuason, 133 Phil. 717; Philippine National Bank vs. Manila Investment and Construction, Inc., 38 SCRA 462.
[19]
Conte vs. Commission on Audit, 264 SCRA 19; Mendiola vs. Court of Appeals, 258 SCRA 492; Causapin vs. Court of Appeals, 233
SCRA 615.
[20]
P.T. Cerna Corporation vs. Court of Appeals, 221 SCRA 19; Benitez vs. Intermediate Appellate Court, 154 SCRA 41; Filinvest
Corporation vs. Relova, 117 SCRA 420.
[21]
Rollo, 29-30, 34-35; Annex C of the Petition; Decision of the CA, 4-5.
[22]
Rollo, 35; Annex C of the Petition; Decision of the CA, 5.22

82
SECOND DIVISION

[G.R. No. 82040. August 27, 1991.]

BA FINANCE CORPORATION, Petitioner, v. HON. COURT OF APPEALS, Hon. Presiding Judge of Regional Trial
Court of Manila, Branch 43, MANUEL CUADY and LILIA CUADY, Respondents.

Valera, Urmeneta & Associates for Petitioner.

Pompeyo L. Bautista for Private Respondents.

SYLLABUS

1. CIVIL LAW; SPECIAL CONTRACTS; CHATTEL MORTGAGE; RULE WHEN MORTGAGE ASSIGNS HIS MORTGAGE LIEN; CASE
AT BAR. — B.A. Finance Corporation was deemed subrogated to the rights and obligations of Supercars, Inc. when the latter
assigned the promissory note, together with the chattel mortgage constituted on the motor vehicle in question, in favor of
the former. Consequently, B.A. Finance Corporation is bound by the terms and conditions of the chattel mortgage executed
between the Cuadys and Supercars, Inc.

2. ID.; ID.; ID.; ID.; OBLIGATIONS OF AN ASSIGNEE. — Under the deed of chattel mortgage, B.A. Finance Corporation was
constituted attorney-in-fact with full power and authority to file, follow-up, prosecute, compromise or settle insurance
claims; to sign, execute and deliver the corresponding papers, receipts and documents to the Insurance Company as may
be necessary to prove the claim, and to collect from the latter the proceeds of insurance to the extent of its interests, in the
event that the mortgaged car suffers any loss or damage (Rollo, p. 89). In granting B.A. Finance Corporation the
aforementioned powers and prerogatives, the Cuady spouses created in the former’s favor an agency. Under Article 1884 of
the Civil Code of the Philippines, B.A. Finance Corporation is bound by its acceptance to carry out the agency, and is liable
for damages which, through its non-performance, the Cuadys, the principal in the case at bar, may suffer.

3. ID.; ID.; ID.; MORTGAGOR, NOT BOUND TO SUFFER FROM THE ACTS OF MORTGAGEE; CASE AT BAR. — Unquestionably,
the Cuadys suffered pecuniary loss in the form of salvage value of the motor vehicle in question, not to mention the amount
equivalent to the unpaid balance on the promissory note, when B.A. Finance Corporation steadfastly refused and refrained
from proceeding against the insurer for the payment of a clearly valid insurance claim, and continued to ignore the yearning
of the Cuadys to enforce the total loss provision in the insurance policy, despite the undeniable fact that Rea Auto Center,
the auto repair shop chosen by the insurer itself to repair the aforementioned motor vehicle, misrepaired and rendered it
completely useless and unserviceable. Accordingly, there is no reason to depart from the ruling set down by the respondent
appellate court. In this connection, the Court of Appeals said: ". . . Under the established facts and circumstances, it is
unjust, unfair inequitable to require the chattel mortgagors, appellees herein, to still pay the unpaid balance of their
mortgage debt on the said car, the non-payment of which account was due to the stubborn refusal and failure of appellant
mortgagee to avail of the insurance money which became due and demandable after the insured motor vehicle was badly
damaged in a vehicular accident covered by the insurance risk. . . .." cralaw virtua1aw li bra ry

4. REMEDIAL LAW; EVIDENCE; CONCLUSION OF FACTS BY COURT OF APPEALS. — B.A. Finance Corporation would have
this Court review and reverse the factual findings of the respondent appellate court. This, of course, the Court cannot and
will not generally do. It is axiomatic that the judgment of the Court of Appeals is conclusive as to the facts and may not
ordinarily be reviewed by the Supreme Court. The doctrine is, to be sure, subject to certain specific exceptions none of
which, however, obtains in the instant case (Luzon Brokerage Corporation v. Court of Appeals, 176 SCRA 483 [1989]).

5. ID.; CIVIL PROCEDURE; APPEAL; ISSUES NOT RAISED IN THE TRIAL COURT; CANNOT BE RAISED FOR THE FIRST TIME
ON APPEAL. — As ruled by this Court in a long line of cases, issues not raised and/or ventilated in the trial court, let alone in
the Court of Appeals, cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play,
justice and due process (Galicia v. Polo, 179 SCRA 375 [1989]; Ramos v. IAC, 175 SCRA 70 (1989) and other cases.

DECISION

PARAS, J.:

This is a petition for review on certiorari which seeks to reverse and set aside (1) the decision of the Court of Appeals dated
July 21, 1987 in CA-G.R. No. CV-06522 entitled "B.A. Finance Corporation, Plaintiff-Appellant, v. Manuel Cuady and Lilia
Cuady, Defendants-Appellees," affirming the decision of the Regional Trial Court of Manila, Branch 43, which dismissed the
complaint in Civil Case No. 82-10478, and (2) the resolution dated February 9, 1988 denying petitioner’s motion for
reconsideration.chan rob les vi rtual lawlib rary

As gathered from the records, the facts are as follows: chanrob 1es vi rtual 1aw libra ry

On July 15, 1977, private respondents Manuel Cuady and Lilia Cuady obtained from Supercars, Inc. a credit of P39,574.80,
which amount covered the cost of one unit of Ford Escort 1300, four-door sedan. Said obligation was evidenced by a
promissory note executed by private respondents in favor of Supercars, Inc., obligating themselves to pay the latter or
order the sum of P39,574.80, inclusive of interest at 14% per annum, payable on monthly installments of P1,098.00
83
starting August 16, 1977, and on the 16th day of the next 35 months from September 16, 1977 until full payment thereof.
There was also stipulated a penalty of P10.00 for every month of late installment payment. To secure the faithful and
prompt compliance of the obligation under the said promissory note, the Cuady spouses constituted a chattel mortgage on
the aforementioned motor vehicle. On July 25, 1977, Supercars, Inc. assigned the promissory note, together with the
chattel mortgage, to B.A. Finance Corporation. The Cuadys paid a total of P36,730.15 to the B.A. Finance Corporation, thus
leaving an unpaid balance of P2,344.65 as of July 18, 1980. In addition thereto, the Cuadys’ owe B.A. Finance Corporation
P460.00 representing penalties or surcharges for tardy monthly installments (Rollo, pp. 27-29).

Parenthetically, the B.A. Finance Corporation, as the assignee of the mortgage lien, obtained the renewal of the insurance
coverage over the aforementioned motor vehicle for the year 1980 with Zenith Insurance Corporation, when the Cuadys
failed to renew said insurance coverage themselves. Under the terms and conditions of the said insurance coverage, any
loss under the policy shall be payable to the B.A. Finance Corporation (Memorandum For Private Respondents, pp. 3-4).

On April 18, 1980, the aforementioned motor vehicle figured in an accident and was badly damaged. The unfortunate
happening was reported to the B.A. Finance Corporation and to the insurer, Zenith Insurance Corporation. The Cuadys
asked the B.A. Finance Corporation to consider the same as a total loss, and to claim from the insurer the face value of the
car insurance policy and apply the same to the payment of their remaining account and give them the surplus thereof, if
any. But instead of heeding the request of the Cuadys, B.A. Finance Corporation prevailed upon the former to just have the
car repaired. Not long thereafter, however, the car bogged down. The Cuadys wrote B.A. Finance Corporation requesting
the latter to pursue their prior instruction of enforcing the total loss provision in the insurance coverage. When B.A. Finance
Corporation did not respond favorably to their request, the Cuadys stopped paying their monthly installments on the
promissory note (Ibid., pp. 45).

On June 29, 1982, in view of the failure of the Cuadys to pay the remaining installments on the note, B.A. Finance
Corporation sued them in the Regional Trial Court of Manila, Branch 43, for the recovery of the said remaining installments
(Memorandum for the Petitioner, p. 1).

After the termination of the pre-trial conference, the case was set for trial on the merits on April 25, 1984. B.A. Finance
Corporation’s evidence was presented on even date and the presentation of Cuady’s evidence was set on August 15, 1984.
On August 7, 1984, Atty. Noel Ebarle, counsel for the petitioner, filed a motion for postponement, the reason being that the
`handling’ counsel, Atty. Ferdinand Macibay was temporarily assigned in Cebu City and would not be back until after August
15, 1984. Said motion was, however, denied by the trial court on August 10, 1984. On August 15, 1984, the date of
hearing, the trial court allowed private respondents to adduce evidence ex parte in the form of an affidavit to be sworn to
before any authorized officer. B.A. Finance Corporation filed a motion for reconsideration of the order of the trial court
denying its motion for postponement. Said motion was granted in an order dated September 26, 1984, thus: jgc:chanrobles. com.ph

"The Court grants plaintiffs motion for reconsideration dated August 22, 1984, in the sense that plaintiff is allowed to
adduce evidence in the form of counter-affidavits of its witnesses, to be sworn to before any person authorized to
administer oaths, within ten days from notice hereof." (Ibid., pp. 1-2). chan roble s.com:c ralaw:red

B.A. Finance Corporation, however, never complied with the above-mentioned order, paving the way for the trial court to
render its decision on January 18, 1985, the dispositive portion of which reads as follows: jgc:cha nrob les.co m.ph

"IN VIEW WHEREOF, the Court of DISMISSES the complaint without costs.

SO ORDERED." (Rollo, p. 143).

On appeal, the respondent appellate court * affirmed the decision of the trial court. The decretal portion of the said decision
reads as follows:jgc:chan roble s.com.p h

"WHEREFORE, after consultation among the undersigned members of this Division, in compliance with the provision of
Section 13, Article VIII of the Constitution; and finding no reversible error in the judgment appealed from, the same is
hereby AFFIRMED, without any pronouncement as to costs." (Ibid. p. 33)

B.A. Finance Corporation moved for the reconsideration of the above decision, but the motion was denied by the respondent
appellate court in a resolution dated February 9, 1988 (Ibid., p. 38).

Hence, this present recourse.

On July 11, 1990, this Court gave due course to the petition and required the parties to submit their respective memoranda.
The parties having complied with the submission of their memoranda, the case was submitted for decision.

The real issue to be resolved in the case at bar is whether or not B.A. Finance Corporation has waived its right to collect the
unpaid balance of the Cuady spouses on the promissory note for failure of the former to enforce the total loss provision in
the insurance coverage of the motor vehicle subject of the chattel mortgage.

It is the contention of B.A. Finance Corporation that even if it failed to enforce the total loss provision in the insurance policy
of the motor vehicle subject of the chattel mortgage, said failure does not operate to extinguish the unpaid balance on the
promissory note, considering that the circumstances obtaining in the case at bar do not fall under Article 1231 of the Civil
Code relative to the modes of extinguishment of obligations (Memorandum for the Petitioner, p. 11).

On the other hand, the Cuadys insist that owing to its failure to enforce the total loss provision in the insurance policy, B.A.
Finance Corporation lost not only its opportunity to collect the insurance proceeds on the mortgaged motor vehicle in its
capacity as the assignee of the said insurance proceeds pursuant to the memorandum in the insurance policy which states
that the "LOSS: IF ANY, under this policy shall be payable to BA FINANCE CORP., as their respective rights and interest may
appear." (Rollo, p. 91) but also the remaining balance on the promissory note (Memorandum for the Respondents, pp. 16-
17).

The petition is devoid of merit.

B.A. Finance Corporation was deemed su_rmer’s favor an agency. Thus, under Article 1884 of the Civil Code of the
84
Philippines, B.A. Finance Corporation is bound by its acceptance to carry out the agency, and is liable for damages which,
through its non-performance, the Cuadys, the principal in the case at bar, may suffer. chan robles v irt ualawli bra ry cha nrob les.com: chan roble s.com.p h

Unquestionably, the Cuadys suffered pecuniary loss in the form of salvage value of the motor vehicle in question, not to
mention the amount equivalent to the unpaid balance on the promissory note, when B.A. Finance Corporation steadfastly
refused and refrained from proceeding against the insurer for the payment of a clearly valid insurance claim, and continued
to ignore the yearning of the Cuadys to enforce the total loss provision in the insurance policy, despite the undeniable fact
that Rea Auto Center, the auto repair shop chosen by the insurer itself to repair the aforementioned motor vehicle,
misrepaired and rendered it completely useless and unserviceable (Ibid., p. 31).

Accordingly, there is no reason to depart from the ruling set down by the respondent appellate court. In this connection, the
Court of Appeals said:jgc:chan roble s.com.p h

". . . Under the established facts and circumstances, it is unjust, unfair inequitable to require the chattel mortgagors,
appellees herein, to still pay the unpaid balance of their mortgage debt on the said car, the non-payment of which account
was due to the stubborn refusal and failure of appellant mortgagee to avail of the insurance money which became due and
demandable after the insured motor vehicle was badly damaged in a vehicular accident covered by the insurance risk. . . ."
(Ibid.)

On the allegation that the respondent court’s findings that B.A. Finance Corporation failed to claim for the damage to the car
was not supported by evidence, the records show that instead of acting on the instruction of the Cuadys to enforce the total
loss provision in the insurance policy, the petitioner insisted on just having the motor vehicle repaired, to which private
respondents reluctantly acceded. As heretofore mentioned, the repair shop chosen was not able to restore the
aforementioned motor vehicle to its condition prior to the accident. Thus, the said vehicle bogged down shortly thereafter.
The subsequent request of the Cuadys for the B.A. Finance Corporation to file a claim for total loss with the insurer fell on
deaf ears, prompting the Cuadys to stop paying the remaining balance on the promissory note (Memorandum for the
Respondents, pp. 4-5).

Moreover, B.A. Finance Corporation would have this Court review and reverse the factual findings of the respondent
appellate court. This, of course, the Court cannot and will not generally do. It is axiomatic that the judgment of the Court of
Appeals is conclusive as to the facts and may not ordinarily be reviewed by the Supreme Court. The doctrine is, to be sure,
subject to certain specific exceptions none of which, however, obtains in the instant case (Luzon Brokerage Corporation v.
Court of Appeals, 176 SCRA 483 [1989]).

Finally, B.A. Finance Corporation contends that respondent trial court committed grave abuses of discretion in two
instances: First, when it denied the petitioner’s motion for reconsideration praying that the counsel be allowed to cross-
examine the affiant, and; second, when it seriously considered the evidence adduced ex-parte by the Cuadys, and heavily
relied thereon, when in truth and in fact, the same was not formally admitted as part of the evidence for the private
respondents (Memorandum for the Petitioner, p. 10). This Court does not have to unduly dwell on this issue which was only
raised by B.A. Finance Corporation for the first time on appeal. A review of the records of the case shows that B.A. Finance
Corporation failed to directly raise or ventilate in the trial court nor in the respondent appellate court the validity of the
evidence adduced ex-parte by private respondents. It was only when the petitioner filed the instant petition with this Court
that it later raised the aforementioned issue. As ruled by this Court in a long line of cases, issues not raised and/or
ventilated in the trial court, let alone in the Court of Appeals, cannot be raised for the first time on appeal as it would be
offensive to the basic rules of fair play, justice and due process (Galicia v. Polo, 179 SCRA 375 [1989]; Ramos v.
Intermediate Appellate Court, 175 SCRA 70 [1989]; Dulos Realty & Development Corporation v. Court of Appeals, 157
SCRA 425 [1988]; Dihiansan, Et. Al. v. Court of Appeals, Et Al., 153 SCRA 712 [1987]; De la Santa v. Court of Appeals, Et
Al., 140 SCRA 44 [1985]).

PREMISES CONSIDERED, the instant petition is DENIED, and the decision appealed from is AFFIRMED. chanrobles law lib rary

SO ORDERED.

Melencio-Herrera, Padilla and Regalado, JJ., concur.

Sarmiento, J., is on leave.

Endnotes:

* Decision penned by Justice Fidel P. Purisima and concurred in by Justices Emeterio C. Cui and Jesus M. Elbinias.

85
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-48359. March 30, 1993.

MANOLO P. CERNA, petitioner, vs. THE HONORABLE COURT OF APPEALS and CONRAD C. LEVISTE,
respondents.

Zosa & Quijano Law Offices for petitioner.

Benjamin H. Aquino for private respondent.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS & CONTRACTS; SOLIDARY LIABILITY, NOT PRESUMED. — Only Delgado signed
the promissory note and accordingly, he was the only one bound by the contract of loan. Nowhere did it appear in
the promissory note that petitioner was a co-debtor. The law is clear that "(c)ontracts take effect only between the
parties . . ." But by some stretch of the imagination, petitioner was held solidarily liable for the debt allegedly
because he was a co-mortgagor of the principal debtor, Delgado. This ignores the basic precept that "(t)here is
solidarily liability only when the obligation expressly so states, or when the law or the nature of the obligation
requires solidarity." The contract of loan, as evidenced by the promissory note, was signed by Delgado only.
Petitioner had no part in the said contract. Thus, nowhere could it be seen from the agreement that petitioner was
solidarily bound with Delgado for the payment of the loan.

2. ID.; ID.; SIGNATORY TO THE PRINCIPAL CONTRACT OF LOAN, PRIMARILY LIABLE; THIRD-PARTY
MORTGAGOR NOT SOLIDARILY BOUND WITH THE PRINCIPAL DEBTOR. — There is no legal provision nor
jurisprudence in our jurisdiction which makes a third person who secures the fulfillment of another's obligation by
mortgaging his own property to be solidarily bound with the principal obligor. A chattel mortgage may be "an
accessory contract" to a contract of loan, but that fact alone does not make a third-party mortgagor solidarily bound
with the principal debtor in fulfilling the principal obligation that is, to pay the loan. The signatory to the principal
contract — loan — remains to be primarily bound. It is only upon the default of the latter that the creditor may have
been recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the
amount of the loan. And the liability of the third-party mortgagors extends only to the property mortgaged. Should
there be any deficiency, the creditors has recourse on the principal debtor.

3. ID.; ID.; ID.; A SPECIAL POWER OF ATTORNEY AUTHORIZING THE MORTGAGE OF CERTAIN
PROPERTIES DID NOT MAKE THE ATTORNEY-IN-FACT A MORTGAGOR. — The mortgage contract was also
signed only by Delgado as mortgagor. The Special Power of Attorney did not make petitioner a mortgagor. All it did
was to authorized Delgado to mortgage certain properties belonging to petitioner. And this is in compliance with the
requirement in Article 2085 of the Civil Code which states that: "Art. 2085. The following requisites are essential to
the contracts of pledge and mortgage: (3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally authorized for the purpose." In effect,
petitioner lent his car to Delgado so that the latter may mortgage the same to secure his debt. Thus, from the
contract itself, it was clear that only Delgado was the mortgagor regardless of the fact the he used properties
belonging to a third person to secure his debt.

4. REMEDIAL LAW; CIVIL ACTIONS; FILING OF COLLECTION SUIT BARRED THE FORECLOSURE OF
MORTGAGE. — We agree with petitioner that the filing of collection suit barred the foreclosure of the mortgage.
Thus: "A mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel mortgage
constituted over the personal property as security for the debt or value of the promissory note which he seeks to
recover in the said collection suit." The reason for this rule is that: ". . . when, however, the mortgage elects to file a
suit for collection, not foreclosure, thereby abandoning the chattel as basis for relief, he clearly manifest his lack of
desire and interest to go after the mortgaged property as security for the promissory note . . ."

5. ID.; MORTGAGE DEBT DUE FROM ESTATE; OPTIONS GIVEN TO CREDITORS UNDER SEC. 7, RULE 86,
NEW RULES OF COURT. — Leviste, having chosen to file the collection suit, could not now run after petitioner for
the satisfaction of the debt. This is even more true in this case because of the death of the principal debtor,
Delgado. Leviste was pursuing a money claim against a deceased person. Section 7, Rule 86 of the Rules of Court
provides: "Sec. 7. Mortgage debt due from estate. — A creditor holding a claim against the deceased secured by
mortgaged or other collateral security, may abandon the security and prosecute his claim in the manner provided in
86
this rule, and share in the general distribution of the assets of the estate; or he may foreclose his mortgage or
realize upon his security, by action in court, making the executor or administrator a party defendant, and if there is a
judgment for a deficiency, after the sale of the mortgaged premises, or the property pledged, in the foreclosure or
the other proceeding to realize upon security, he may claim his deficiency judgment in the manner provided in the
preceding section; or he may upon his mortgage or other security alone, and foreclosure the same at any time within
the period of the statue of limitations, and in that event he shall not be admitted as a creditor, and shall receive no
share in the distribution of the other assets of the estate; . . ."

DECISION

CAMPOS, JR., J p:

Before us is a Petition for Review on Certiorari of the decision ** of the Court of Appeals in CA G.R. No. SP-07237,
dated March 31, 1978.

The facts of this case are as follows:

On or about October 16, 1972, Celerino Delgado (Delgado) and Conrad Leviste (Leviste) entered into a loan
agreement which was evidenced by a promissory note worded as follows:

"FOR VALUE RECEIVED, I, CELERINO DELGADO, with postal address at 98 K-11 St., Kamias Rd., Quezon City,
promise to pay to the order of CONRAD C. LEVISTE, NINETY (90) DAYS after date, at his office at 215 Buendia
Ave., Makati Rizal, then total sum of SEVENTEEN THOUSAND FIVE HUNDRED (P17,500.00) PESOS, Philippine
Currency without necessity of demand, with interest at the rate of TWELVE (12%) PERCENT per annum;" 1

On the same date, Delgado executed a chattel mortgage 2 over a Willy's jeep owned by him. And acting as the
attorney-in-fact of herein petitioner, Manolo P. Cerna (petitioner), he also mortgage a "Taunus' car owned by the
latter.

The period lapsed without Delgado paying the loan. This prompted Leviste to a file a collection suit docketed as Civil
Case No. 17507 3 with the Court of First Instance of Rizal, Branch XXII against Delgado and petitioner as solidary
debtors. Herein petitioner filed his first Motion to Dismiss 4 on April 4, 1973. The grounds cited in the Motion were
lank of cause of action against petitioner and the death of Delgado. Anent the latter, petitioner claimed that the claim
should be filed in the proceedings for the settlement of Delgado's estate as the action did not survive Delgado's
death. Moreover, he also stated that since Leviste already opted to collect on the note, he could no longer foreclose
the mortgage. This Motion to Dismiss was denied on August 15, 1973 by Judge Nicanor S. Sison. Thereafter,
petitioner filed with the Court of Appeals a special civil action for certiorari, mandamus, and prohibition with
preliminary injunction docketed as CA G.R. No. 03088 on the ground that the respondent judge committed grave
abuse of discretion in refusing to dismiss the complaint. On June 28, 1976, the Court of Appeals 5 denied the
petition because herein petitioner failed to prove the death of Delgado and the consequent settlement proceedings
regarding the latter's estate. Neither did petitioner adequately prove his claim that the special power of attorney in
favor of Delgado was forged.

On February 18, 1977, petitioner filed his second Motion to Dismiss on the ground that the trial court, now presided
by Judge Nelly L. Romero Valdellon, acquired no jurisdiction over deceased defendant, that the claim did not
survive, and that there was no cause of action against him. On May 13, 1977, the said judge dismissed the motion
in an order hereunder quoted, to wit:

"Considering the second motion to dismiss filed by respondent Manolo Cerna on March 4, 1977, as well as plaintiff's
opposition thereto reiteration of the same grounds raised in the first motion to dismiss dated April 4, 1973, this Court
hereby reiterates its resolution found in its order dated August 15, 1973." 6

Petitioner filed a motion to reconsider the said order but this was denied. Then, on October 17, 1977, he filed
another petition for certiorari and prohibition docketed as CA G.R. No. SP-07237 with the Court of Appeals. This
petition was dismissed by the said court in a decision which stated, thus:

"WHEREFORE, the herein petition insofar as it alleges lack of cause of action on the part of the herein petitioner is
concerned, is hereby dismissed and/or denied and the writ of preliminary injunction previously issued by this Court
is hereby lifted and/or set aside; insofar, however, as the case against the deceased Celerino Delgado is concerned,
the petition is granted, that is, the complaint in the lower court against Celerino Delgado should be dismissed. No
costs." 7

Thereafter, the instant petition for review was filed. Petitioner raised the following legal issue:

". . . NOW, INASMUCH AS THE COMPLAINT IS ONLY FOR COLLECTION OF A SUM OF MONEY BASED ON
THE PROMISSORY NOTE, SHOULD NOT THE COMPLAINANT BE DISMISSED FOR LACK OF CAUSE OF
ACTION AS AGAINST MANOLO P. CERNA WHO IS NOT A DEBTOR UNDER THE PROMISSORY NOTE —
87
CONSIDERING THAT ACCORDING TO SETTLED JURISPRUDENCE THE FILING OF A COLLECTION SUIT IS
DEEMED AN ABANDONMENT OF THE SECURITY OF THE CHATTEL MORTGAGE?" 8

In holding petitioner liable, the Court of Appeals held that petitioner and Delgado were solidary debtors. Thus, it
held:

"But the herein petitioner pleads that the complaint states no cause of actions against the defendants Manolo P.
Cerna on the following grounds: 1) that the petitioner did not sign as joint obligator in the promissory note signed by
the deceased Celerino Delgado hence, even if the allegations of the complaint are hypothetically admitted there is
no cause of action against the herein petitioner because having proceeded against the promissory note he is
deemed to have abandoned the foreclosure of the chattel mortgage contract. This contention deserves scant
consideration. The chattel mortgage contract, prima facie shows that it created the joint and solidary obligation of
petitioner and Celerino Delgado against private respondent." 9 (Emphasis Ours)

We do not agree. Only Delgado signed the promissory note and accordingly, he was the only one bound by the
contract of loan. Nowhere did it appear in the promissory note that petitioner was a co-debtor. The law is clear that
"(c)ontracts take effect only between the parties . . ." 10

But by some stretch of the imagination, petitioner was held solidarily liable for the debt allegedly because he was a
co-mortgagor of the principal debtor, Delgado. This ignores the basic precept that "(t)here is solidarily liability only
when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity." 11

We have already stated that the contract of loan, as evidenced by the promissory note, was signed by Delgado only.
Petitioner had no part in the said contract. Thus, nowhere could it be seen from the agreement that petitioner was
solidarily bound with Delgado for the payment of the loan.

There is also no legal provision nor jurisprudence in our jurisdiction which makes a third person who secures the
fulfillment of another's obligation by mortgaging his own property to be solidarily bound with the principal obligor. A
chattel mortgage may be "an accessory contract" 12 to a contract of loan, but that fact alone does not make a third-
party mortgagor solidarily bound with the principal debtor in fulfilling the principal obligation that is, to pay the loan.
The signatory to the principal contract — loan — remains to be primarily bound. It is only upon the default of the
latter that the creditor may have been recourse on the mortgagors by foreclosing the mortgaged properties in lieu of
an action for the recovery of the amount of the loan. And the liability of the third-party mortgagors extends only to
the property mortgaged. Should there be any deficiency, the creditors has recourse on the principal debtor.

In this case, however, the mortgage contract was also signed only by Delgado as mortgagor. It is true that the
contract stated the following:

"That this CHATTEL MORTGAGE, made and entered into this 16th day of October, 1972 at Makati, Rizal, by and
between:

CELERINO DELGADO, . . . as Attorney-in -Fact of Manolo P. Cerna . . . by virtue of a Special Power of Attorney
executed by said Manolo P. Cerna in my favor under the date of October 10, 1972 and acknowledged before
Orlando J. Coruna . . . herein referred to as the MORTGAGOR; - and -

CONRAD C. LEVISTE, . . . hereinafter referred to as the MORTGAGEE." 13

But this alone does not make petitioner a co-mortgagor especially so since only Delgado singed the chattel
mortgage as mortgagor. The Special Power of Attorney did not make petitioner a mortgagor. All it did was to
authorized Delgado to mortgage certain properties belonging to petitioner. And this is in compliance with the
requirement in Article 2085 of the Civil Code which states that:

"Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

xxx xxx xxx

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose." (Emphasis Ours.)

In effect, petitioner lent his car to Delgado so that the latter may mortgage the same to secure his debt. Thus, from
the contract itself, it was clear that only Delgado was the mortgagor regardless of the fact the he used properties
belonging to a third person to secure his debt.

Granting, however, that petitioner was obligated under the mortgage contract to answer for Delgado's indebtedness,
under the circumstances, petitioner could not be held liable because the complaint was for recovery of a sum of

88
money, and not for the foreclosure of the security. We agree with petitioner that the filing of collection suit barred the
foreclosure of the mortgage. Thus:

"A mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel mortgage constituted
over the personal property as security for the debt or value of the promissory note which he seeks to recover in the
said collection suit." 14

The reason for this rule is that:

". . . when, however, the mortgage elects to file a suit for collection, not foreclosure, thereby abandoning the chattel
as basis for relief, he clearly manifest his lack of desire and interest to go after the mortgaged property as security
for the promissory note . . ." 15

Hence, Leviste, having chosen to file the collection suit, could not now run after petitioner for the satisfaction of the
debt. This is even more true in this case because of the death of the principal debtor, Delgado. Leviste was pursuing
a money claim against a deceased person. Section 7, Rule 86 of the Rules of Court Provides:

"Sec. 7. Mortgage debt due from estate. — A creditor holding a claim against the deceased secured by mortgaged
or other collateral security, may abandon the security and prosecute his claim in the manner provided in this rule,
and share in the general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon
his security, by action in court, making the executor or administrator a party defendant, and if there is a judgment for
a deficiency, after the sale of the mortgaged premises, or the property pledged, in the foreclosure or the other
proceeding to realize upon security, he may claim his deficiency judgment in the manner provided in the preceding
section; or he may upon his mortgage or other security alone, and foreclosure the same at any time within the
period of the statue of limitations, and in that event he shall not be admitted as a creditor, and shall receive no share
in the distribution of the other assets of the estate; . . ."

The above-quoted provision is substantially similar to Section 708 of the Code of Civil Procedure which states:

"Sec. 708. A creditor holding against the deceased, secured by mortgage or other collateral security, may abandon
the security and prosecute his claim before the committee, and share in the mortgage or realize upon his security,
by ordinary action in court, making the executor or administrator a party defendant; . . ."

The Supreme Court, in the case of Osorio vs. San Agustin, 16 has made the following interpretation of the said
provision,, to wit:

"It is clear by the provisions quoted section that a person holding a mortgage against the estate of a deceased
person may abandon such security and prosecute his claim before the committee, and share in the distribution of
the general assets of the estate. It provides also that he may, at his own election, foreclose the mortgage and
realize upon his security. But the law does not provide that he may have both remedies. If he elects one he must
abandon the other. If he fails in one he fails utterly."

But while there is a merit in the substantial allegations of this petition, We are constrained to deny the petition on
procedural grounds. The facts of this case reveal that the decision under review in the decision in the second
certiorari and prohibition case lodged petitioner against the judge trying the civil case. It appeared that after the
denial of the first motion to dismiss, petitioner filed CA-G.R. No. 03088 wherein petitioner alleged grave abuse of
discretion on the part of Judge Sison. The first petition was denied by the Court of Appeals. The decision became
final. The second motion to dismiss, based on the same grounds, was thereafter filed. It was likewise denied and
another petition for certiorari and prohibition was again instituted. The decision in the latter case is now under
review.

We agree with the contention of private respondent, that the action has been barred by the principle of res judicata.

It appears in this case that the second motion was filed to circumvent the effects of the finality of the decision of the
Court of Appeals in Ca-G.R. No. 03088. Petitioner intended the second motion and the subsequent proceedings as
remedies for his lapsed appeal. We cannot such behavior. It delayed the proceedings in this case and unduly
burdened the courts. Petitioner should have allowed the trial of the case to go on where his defenses could still be
presented and heard.

WHEREFORE, in view of the forgoing,, the Petition is hereby DISMISSED. With costs.

SO ORDERED.

Narvasa, C . J ., Padilla, Regalado and Nocon, JJ ., concur.

Footnotes

89
** Penned by Justice Ramon G. Gaviola, Jr. with Justices B.S. de la Fuente and Hugo E. Gutierrez, concurring.

1. Annex "A" of Annex "A" of Petition; Rollo, p. 25.

2. Annex "B" of Annex "B" of Petition; Rollo, pp. 26-27.

3. Annex "A" of Petition; Rollo pp. 18-24.

4. Rollo, pp. 93-99.

5. CA G.R. No. 03088, June 28, 1976, penned by Justice Godofredo P. Ramos, and concurred in by Justices
Lourdes P. San Diego and Mama D. Busran; Annex "8", Comment; Rollo, pp. 125-130.

6. Quoted in the Petition, p. 4; Rollo, p. 6.

7. CA GR No. SP-07237, March 31, 1978, penned by Justice Ramon G. Gaviola, Jr., and concurred in by Justices
B.S. dela Fuente and Hugo E. Gutierrez, Jr.; Annex "D", Petition; Rollo, p. 53.

8. Petition, p. 2; Rollo, p. 4.

9. Supra, note, 7 at p. 51.

10. CIVIL CODE, Art. 1311.

11. Ibid., Art. 1207.

12. Banco de Oro vs. Bayuga, 93 SCRA 443 (1979).

13. Supra, note 2 at p. 26.

14. 2 AGBAYANI, COMMERCIAL LAWS OF THE PHILIPPINES 766 (1986 ed.); citing People vs. Mata, C.A.-
00440-C.R. December 25, 1961, (1 C.A. Rep., 2nd series, pp. 958-960).

15. Ibid, p. 765.

16. 25 Phil. 404, 408 (1913).

90
FIRST DIVISION

[G.R. No. 115902. September 27, 1995.]

FILINVEST CREDIT CORPORATION, Petitioner, v. HON. COURT OF APPEALS and SPOUSES EDILBERTO and
MARCIANA TADIAMAN, Respondents.

Labaguis, Loyola, Atienza, Felipe, Santos & Associates for Petitioner.

Napoleon R. Sta. Romana for Private Respondents.

SYLLABUS

1. REMEDIAL LAW; PROVISIONAL REMEDIES; REPLEVIN; RULE IN CARRYING OUT THE WRIT. — The Court of Appeals
correctly ruled that Filinvest is liable for damages not because it commenced an action for replevin to recover possession of
the truck prior to its foreclosure, but because of the manner it carried out the seizure of the vehicle. Sections 3 and 4, Rule
60 of the Rules of Court are very clear and direct as to the procedure for the seizure of property under a writ of replevin. In
the instant case, it was not the sheriff or any other proper officer of the trial court who implement the writ of replevin.
Because it was aware that no other person can implement the writ, Filinvest asked the trial court to appoint a special sheriff.
Yet, it used its own employees who misrepresented themselves as deputy sheriff to seize the truck without having been
authorized by the court to do so. Filinvest justified its seizure by citing a statement in Bachrach Motor Co. v. Summers (42
Phil. 3 [1921]), to wit, "the only restriction on the mode by which the mortgagee shall secure possession of the mortgaged
property after breach of condition is that he must act in an orderly manner and without creating a breach of the peace,
subjecting himself to an action for trespass." This justification is misplaced and misleading for Bachrach itself had ruled that
if a mortgagee cannot obtain possession of a mortgaged property for its sale on foreclosure, it must bring a civil action either
to recover such possession as a preliminary step to the sale or to obtain judicial foreclosure. chan roble svirtuallaw lib rary

2. ID.; ID.; ID.; UPON THE DEFAULT OF THE MORTGAGOR OF HIS OBLIGATION, MORTGAGEE IS ENTITLED TO INSTITUTE
THEREOF. — Replevin is, of course, the appropriate action to recover possession preliminary, to the extrajudicial foreclosure
of a chattel mortgage. Filinvest did in fact instituted such an action and obtained a writ of replevin. And, by filing it, Filinvest
admitted that it cannot acquire possession of the mortgaged vehicle in an orderly or peaceful manner. Accordingly, it should
have left the enforcement of the writ in accordance with Rule 60 of the Rules of Court which it had voluntarily invoked.
Parenthetically, it must be observed that the trial court erred in holding that the action for replevin was "not in order as
[Filinvest] is not the owner of the property (Sec. 2 par. (a) Rule 60)." It is not only the owner who can institute a replevin
suit. A person "entitled to the possession" of the property also can, as provided in the same paragraph cited by the trial
court. Upon the default by the mortgagor in his obligations, Filinvest, as a mortgagee, had the right to the possession of the
property mortgaged preparatory to its sale in a public auction.

3. CIVIL LAW; HUMAN RELATIONS; “GOOD FAITH”; DEFINED. — In common usage, good faith is ordinarily used to describe
that state of mind denoting honesty of purpose, freedom from intention to defraud, and, generally speaking, means being
faithful to one’s duty or obligation. It consists of the honest intention to abstain from taking an unconscionable and
unscrupulous advantage of another.

4. ID.; DAMAGES; MORAL DAMAGES; MAY BE RECOVERED IN CASES INVOLVING ACTS REFERRED TO IN ARTICLE 21 OF
THE CIVIL CODE. — Anent the moral damages, the trial court ruled that the acts of the petitioner were in total disregard of
Articles 19, 20, and 21 of the Civil Code. It added that the petitioner had not only caused actual damages in lost earnings,
but had also caused the private respondents to suffer indignities at the hands of the petitioner’s personnel in hiding the truck
in question, misleading them, and making them work for the release of the truck for about two weeks, thereby justifying the
award of moral damages along with the exemplary and other damages in favor of the private respondents. We agree with
this finding of the trial court. The petitioner’s acts clearly fall within the contemplation of Articles 19 and 21 of the Civil Code.
The acts of fraudulently taking the truck, hiding it from the private respondents, and removing its spare parts show nothing
but a willful intention to cause loss to the private respondents that is punctuated with bad faith and is obviously contrary to
good customs. Thus, the private respondents are entitled to the moral damages they prayed for, for under Article 2219 of
the Civil Code, moral damages may be recovered in cases involving acts referred to in Article 21 of the same Code. chanro blesvi rt ual|awlib rary

5. ID.; ID.; EXEMPLARY DAMAGES; DETERMINATION THEREOF ADDRESSED TO THE SOUND DISCRETION OF THE COURT
UPON PROOF OF PLAINTIFF’S ENTITLEMENT THERETO. — The award of exemplary damages is in order in view of the
wanton, fraudulent, and oppressive manner by which the petitioner sought to enforce its right to the possession of the
mortgaged vehicle. Article 2232 of the Civil Code provides: In contracts and quasi-contracts, the court may award exemplary
damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Of course, a plaintiff
need not prove the actual extent of exemplary damages, for its determination is addressed to the sound discretion of the
court upon proof of the plaintiff’s entitlement to moral, temperate, or actual or compensatory damages.

6. LEGAL ETHICS; ATTORNEY’S FEES; AWARD THEREOF, NOT PROPER IN THE ABSENCE OF BAD FAITH IN FILING THE
COMPLAINT. — The award for attorney’s fees must, however, be set aside. There is no question that the petitioner filed in
good faith its complaint for replevin and damages to protect its rights under the promissory note and the chattel mortgage.
That the private respondents had defaulted in its obligation under the promissory note thereby authorizing the petitioner to
seek enforcement of its claim thereunder and proceed against the mortgage of the vehicle was duly recognized by the trial
court by its judgment against the private respondents incorporated in the first part of the dispositive portion. The private
respondents did not appeal therefrom. There would then be no basis for awarding attorney’s fees in favor of the private
respondents for whatever physical suffering, mental anguish, serious anxiety, besmirched reputation, wounded feelings,
91
moral shock, social humiliation, or any other similar injury they had suffered, even if proven, were only such as are usually
caused to parties haled into court as a defendant and which are not compensable, for the law could not have meant to
impose a penalty on the right to litigate.

DECISION

DAVID, JR., J.:

This petition for review on certiorari seeks to set aside the decision of the Court of Appeals in CA-G.R. CV No. 30231 1
affirming in toto the decision of the Regional Trial Court (RTC) of San Fernando (Pampanga), Branch 46, in Civil Case No.
6599. 2chanro blesvi rtua llawli bra ry

The antecedent facts are summarized by the Court of Appeals as follows: chan rob1e s virtual 1aw lib rary

Defendants-appellees, spouses Edilberto and Marciana Tadiaman, residents of Cabanatuan City, purchased a 10-wheeler
Isuzu cargo truck from Jordan Enterprises, Inc., in Quezon City, in installments. Said spouses executed a promissory note for
P196,680.00 payable in 24 monthly installments in favor of Jordan Enterprises, Inc., and a Chattel Mortgage over the motor
vehicle purchased to secure the payment of the promissory note. Jordan Enterprises, Inc. assigned its rights and interest
over the said instruments to Filinvest Finance and Leasing Corporation, which in turn assigned them to plaintiff-appellant
Filinvest Credit Corporation.

Subsequently, the spouses Tadiaman defaulted in the payment of the installments due on the promissory note, and plaintiff-
appellant filed an action for replevin and damages against them with the court below. Upon motion of the plaintiff-appellant,
a writ of replevin was issued, and the truck was seized in the province of Isabela, by persons who represented themselves to
be special sheriffs of the court, but who turned out to be employees of the plaintiff-appellant. The truck was brought by such
persons all the way back to Metro Manila. chanroble s.com : virtual lawlib rary

Thereafter, defendant spouses filed a counterbond, and the lower court ordered the return of the truck. This was not
immediately implemented because the defendant spouses were met with delaying tactics of the plaintiff-appellant, and when
they finally recovered the truck, they found the same to be "cannibalized." This was graphically recounted in the report
(Exhibit "3") of Deputy Sheriff Anastacio Dizon, who assisted the spouses in recovering the vehicle, excerpts of which are as
follows:
jgc:c hanrobles. com.ph

"On February 14, 1983, the undersigned contacted Mr. Villanueva, Branch Manager of the FILINVEST at Bo. Dolores, San
Fernando, Pampanga and he gave the information that the said Isuzu Cargo Truck, subject of the aforesaid Court Order, was
already delivered to their main garage at Bo. Talon, Las Piñas, Metro Manila. Mr. Villanueva further told the undersigned that
in order to effectively enforce the aforementioned Court Order, the undersigned should discuss the matter with Mr. Telesforo
(Jun) Isidro, Collection in-charge, and Mr. Gaspar Antonio delos Santos, Vice President for Branch Administration of the
FILINVEST main office at Makati, Metro Manila.

On February 18, 1983, defendant Marciana Tadiaman, Atty. Benites and the undersigned contacted Messrs. Gaspar Antonio
delos Santos and Telesforo (Jun) Isidro at the main office, FILINVEST at Paseo de Roxas, Makati, Metro Manila and we
discussed the smooth retaking of possession by the defendants of the 10-wheeler Isuzu Cargo Truck with motor No. E 120-
22041, Serial No. SPM 710164864. Messrs. Delos Santos and Isidro alternatively argued that the Traveler’s Insurance
Company is one of the black listed Insurance firm, so much so, it is only the company’s lawyer who can direct the delivery of
the above-cited Cargo Truck to us. They told us to wait for the arrival of their lawyer at 5:40 p.m., and we agreed that in the
meantime that their lawyer is not around, the said vehicle would not be transferred to any other place.

Came 5:30 P.M., but the company’s Lawyer never arrived and we were told to go back February 21, 1983. Mr. delos Santos
finally told us that the company will not deliver to us the said Cargo Truck until and after their Company Lawyer would say
so.

On February 19, 1983, Mr. Felicisimo Hogaldo, Atty. Benites, defendant Marciana Tadiaman, three policemen of Las Piñas,
Metro Manila, and the undersigned went directly to the FILINVEST garage at Bo. Talon, Las Piñas, Metro Manila and there
contracted Mr. Ismael Pascual Custodian of all repossessed vehicles of the said company, and Mr. Pedro Gervacio, Security
Guard of the company assigned by the Allied Investigation Bureau at 6th Floor, Ramon Santos Bldg. They told us that the
10-wheeler Cargo Truck subject of the above-cited court order is not one of the vehicles listed in their in-coming and out-
going Ledger books and they told us to examine their books.

Defendant Marciana Tadiaman told Messrs. Pedro Gervacio and Ismael Pascual that she saw the above-mentioned Cargo-
Truck Last February 14, 1983 at the end corner of the garage. And for that purpose she requested us, including Mr. Pascual
and the Security Guard, to inspect the site where the said truck was supposed to have been placed when she for the first
time saw it on February 14, 1983. chanro blesvi rt uallawl ibra ry

Unexpectedly, she saw and pointed to us on the site oil leaks on the ground which she believed came from the vehicle we
were looking for. We also saw skid marks of tires of a truck starting from the site where the cargo truck was previously
placed as pointed to by defendant Marciana Tadiaman up to around 20 meters before reaching the gate of the compound.
The other skid marks of tires of a truck was also seen on a portion of a road leading to a compound owned by other person.

Mr. Gervacio and Pascual strongly insisted that they do not know the whereabouts of the said Cargo Truck. The undersigned
requested the Policemen of Las Piñas, Metro Manila, Atty. Benites and defendant Marciana Tadiaman to see for ourselves the
road leading to a compound owned by another firm, about 1/3 of the length of which road is completely blocked by a big and
tall building. It was at this portion where the subject Cargo Truck was placed.

Mr. Ismael Pascual called their main office, FILINVEST, by telephone about the discovery of the whereabouts of said cargo
truck by the undersigned Defendant Marciana Tadiaman to Mr. Pascual that there were missing parts and that other parts of
the truck were completely changed with worn-out spare parts. Mr. Pascual told the undersigned that he will only affix his
92
signature on the acknowledgment receipt, below the line "GIVEN BY", if the missing parts and replaced parts were not
mentioned in said receipt. chan roble svirtual|awli brary

It was because of the said actuations of the plaintiff-appellant that the defendants-appellee [sic] filed a counterclaim for
damages. . . ." 3

After trial, the trial court rendered a decision the dispositive portion of which reads as follow: cha nrob 1es vi rtua l 1aw lib rary

WHEREFORE, judgment is hereby rendered on the main action, in favor of plaintiff and against defendants, ordering the
latter, jointly and severally, to pay the plaintiff the following sums: chanro blesv irt uallawl ibra ry

(a) The sum of P88,333.32 which is the balance of the promissory note as of September 26, 1982, with interest thereon at
14% per annum from said date.

(b) The sum equivalent to 25% of the amount sued upon, as and for attorney’s fees, that is P88,333.32 plus the stipulated
interest; and

(c) The cost of suit. chanrobles. com : virtual lawl ibra ry

On the Counterclaim: chan rob1es v irt ual 1aw l ibra ry

Plaintiff not having successfully rebutted the defendants’ evidence respecting damages caused to them by virtue of the illegal
seizure of the property, and hiding the truck in some other place not their garage, feigning knowledge that the same had
been recorded in their incoming ledger books, the "cannibalizing" done while the truck was in the custody of plaintiff’s
garage, the frustrations which the defendants had to undergo for two weeks before the truck was finally placed in the hands
of Sheriff Dizon, all point to the liability of plaintiff for its failure intentionally or otherwise "to observe certain norms that
spring from the fountain of good conscience and guide human conduct to the end that law may approach its supreme ideal,
which is the sway and dominance of justice." cralaw virtua1aw lib rary

WHEREFORE, judgment is rendered in favor of counter-claimants defendants and against plaintiff, ordering the latter to pay
to the defendants the following sums: chanrob 1es vi rtual 1aw lib rary

(1) Actual damages representing lost spare parts while in the custody of plaintiff in its garage being hidden from defendants,
in the sum of P50,000.00;

(2) P50,000.00 as moral damages;

(3) P20,000.00 exemplary damages; chanroble svirtual lawlib rary

(4) P2,000.00 as attorneys fee; and

(5) Proportionate part of the costs adjudged against plaintiff." cralaw virt ua1aw lib rary

SO ORDERED. 4 chanroblesvi rtua l|awlib rary

Petitioner Filinvest Credit Corporation (hereinafter Filinvest) appealed that portion of the judgment on the counterclaim to the
Court of Appeals (CA-G.R. CV No. 30231) and assigned the following errors of the lower court: chan rob1e s virtual 1aw l ib rary

THE TRIAL COURT ERRED IN AWARDING DAMAGES; ACTUAL, MORAL, EXEMPLARY AND ATTORNEY’S FEES AND
PROPORTIONATE PART OF THE COSTS IN FAVOR OF THE DEFENDANTS IN THEIR COUNTER-CLAIMS IN THE ABSENCE OF
ANY ACTIONABLE LOSS SUSTAINED BY THEM FOR IT WAS THE DEFENDANTS WHO VIOLATED THEIR PROMISSORY NOTE
AND CHATTEL MORTGAGE WITH THE PLAINTIFF.

II

THE TRIAL COURT ERRED IN HOLDING THAT THE PLAINTIFF OR ANY OF ITS REPRESENTATIVES HAD NO RIGHT TO TAKE
THE MORTGAGED PROPERTY AFTER THE BREACH OF THE CONDITIONS IN THE PROMISSORY NOTE AND CHATTEL
MORTGAGE BY THE DEFENDANTS. 5 chanroblesv irtuallaw lib rary

In its decision of 26 May 1994, the Court of Appeals affirmed in toto the decision of the trial court. It found no merit in the
appeal. Thus: chanrob1es v irt ual 1aw li bra ry

The plaintiff-appellant argues that it had the right to seize the truck from the moment that the defendants-appellees
defaulted in the payment of the monthly installments, and to institute an action for replevin preliminary to effecting a
foreclosure of the property mortgaged extrajudicially. The plaintiff-appellant misses the point entirely. In the first place, it
has not been held liable for filing an action for replevin in order to recover possession of the truck prior to its foreclosure, but
for the manner in which it carried out the seizure of the vehicle. It is ironic that, in spite of plaintiff-appellant’s apparent
recognition of the necessity of legal means for the recovery of the truck, in the end, it utilized illegal means in the actual
seizure of the vehicle by having its employees pose as special agents of the court in effecting the same. Plaintiff-appellant
even went to the extent of asking the appointment of a special sheriff to enforce the order of seizure, but still had the truck
seized by its own people instead. It is as if the plaintiff-appellant utilized the court only to clothe its employees with apparent
authority to seize the vehicle concerned.

In the second place, plaintiff-appellant was held liable for hiding the truck and making it difficult for the defendants-appellees
to recover the same. Defendants-appell[ees] were able to have the writ of seizure quashed on the basis of a counterbond.
Plaintiff-appellant should have been the first to obey the order for the return of the seized truck, considering its avowed

93
adherence to law and order. And yet, is made it difficult for the defendants-appellees to actually recover the vehicle, as
reported by the deputy sheriff above. chanroble s.com : vi rtual lawlib rary

In the third place, there is unrebutted evidence that the truck was "cannibalized" while in the custody of the plaintiff-
appellant. The latter argues that such evidence is not credible, because, if the truck was stripped of vital parts, it could not
have been driven by the defendants-appellees all the way back to Cabanatuan City. Plaintiff-appellant conveniently overlooks
the testimony of defendant-appellee Mrs. Tadiaman that they had to buy the missing parts in order to make the truck run
(t.s.n., p. 40, October 2, 1986, Exhibits "9", "10" and "11"). 6

Filinvest now comes to us alleging that the Court of Appeals

(a) . . . DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND THE APPLICABLE DECISIONS OF
THIS HONORABLE COURT WHEN IT REVERSED THE DECISION OF THE REGIONAL TRIAL COURT OF MANILA, BRANCH 9;

(b) . . . .ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION WHEN IT SUSTAINED THE
ERRONEOUS DECISION OF THE HONORABLE REGIONAL TRIAL COURT BRANCH 46 OF SAN FERNANDO, PAMPANGA;

(c) . . . . ACTED WITH GRAVE ABUSE OF DISCRETION AND CONTRARY TO EXISTING LAW AND JURISPRUDENCE WHEN [IT]
SUSTAINED THE SPECULATIVE FINDING OF THE RTC THAT THE PETITIONER "CANNIBALIZED" THE MORTGAGED VEHICLE;

(d) . . . ERRED GRIEVOUSLY WHEN IT EXONERATED PRIVATE RESPONDENTS FROM PAYING THE PETITIONER ON THE
LATTER’S LEGITIMATE CLAIMS UNDER THE COMPLAINT PARTICULARLY ON THE UNPAID PROMISSORY NOTE MADE BY THE
PRIVATE RESPONDENTS; chanrob lesvi rtual lawlib rary

(e) . . . ACTED CONTRARY TO LAW WHEN IT IGNORED THE PLAIN ADMISSIONS IN THE ANSWER (AT PARAGRAPH 2, & 3,
PAGE 1) OF THE DEFENDANTS (PRIVATE RESPONDENTS) THAT THEY HAVE DULY EXECUTED A PROMISSORY NOTE SECURED
BY A DEED OF CHATTEL MORTGAGE AND THAT THE PRIVATE RESPONDENTS VIOLATED THE TERMS OF THE PROMISSORY
NOTE IN FAILING TO PAY THE INSTALLMENTS DUE THEREON FOR NOV. 15, 1981 AND THE SUBSEQUENT 9 INSTALLMENTS
OR UP TO AUGUST 15, 1982;

(f) . . . ERRED IN REFUSING TO APPLY THE TERMS AND CONDITIONS OF THE PROMISSORY NOTE AND THE DEED OF
CHATTEL MORTGAGE SIGNED BY THE PONCES "AS THE LAW BETWEEN THE PARTIES" TO THE CONTRACT SUBJECT OF THE
SUIT IN THE RTC. 7

Additionally, Filinvest maintains that: chanroblesv irt uallawl ibra ry

(g) THERE IS NO PROOF TO SUSTAIN THE AWARD OF MORAL DAMAGES FOR P50,000.00 ACCORDINGLY THERE IS NO BASIS
FOR THE AWARD OF EXEMPLARY DAMAGES. 8

We gave due course to the petition and required the parties to submit their respective memoranda after the filing of the
comment to the petition by the private respondents and of the reply thereto by Filinvest. The parties subsequently filed their
memoranda which merely reiterated the arguments in their respective initiatory pleadings.

The only relevant issue in this petition is whether or not the Court of Appeals committed reversible error in dismissing
Filinvest’s appeal from the decision of the trial court on the private respondents’ counterclaim and in affirming in toto the said
decision. The first ground raised herein by Filinvest is baseless since the discussions or arguments in Filinvest’s petition and
memorandum fail to disclose what the decision of Branch 9 of the RTC of Manila is all about. So is the fourth ground, for, the
unappealed portion of the trial court’s decision did in fact order the private respondents to pay Filinvest the unpaid balance of
the promissory note, with interest and attorney’s fees. All the other grounds are deemed waived for not having been raised
in the appeal to the Court of Appeals. In any event, Filinvest’s disquisitions on such irrelevant issues are confounded. chan roble svirtual|awli bra ry

As to the sole issue defined above, the Court of Appeals correctly ruled that Filinvest is liable for damages not because it
commenced an action for replevin to recover possession of the truck prior to its foreclosure, but because of the manner it
carried out the seizure of the vehicle. Sections 3 and 4, Rule 60 of the Rules of Court are very clear and direct as to the
procedure for the seizure of property under a writ of replevin, thus: chanrob 1es vi rtua l 1aw lib rary

SECTION 3. Order. — Upon the filing of such affidavit and bond with the clerk or judge of the court in which the action is
pending, the judge of such court shall issue an order describing the personal property alleged to be wrongfully detained, and
requiring the sheriff or other proper officer of the court forthwith to take such property into his custody.

SECTION 4. Duty of the officer. — Upon receiving such order the officer must serve a copy thereof on the defendant together
with a copy of the application, affidavit and bond, and must forthwith take the property, if it be in the possession of the
defendant or his agent, and retain it in his custody . . . (Emphasis supplied) cha nrob les.c om : virt ual lawl ibra ry

In the instant case, it was not the sheriff or any other proper officer of the trial court who implemented the writ of replevin.
Because it was aware that no other person can implement the writ, Filinvest asked the trial court to appoint a special sheriff.
Yet, it used its own employees who misrepresented themselves as deputy sheriff to seize the truck without having been
authorized by the court to do so. Filinvest justified its seizure by citing a statement in Bachrach Motor Co. v. Summers, 9 to
wit, "the only restriction on the mode by which the mortgagee shall secure possession of the mortgaged property after
breach of condition is that he must act in an orderly manner and without creating a breach of the peace, subjecting himself
to an action for trespass." cralaw virtua1aw l ibra ry

This justification is misplaced and misleading for Bachrach itself had ruled that if a mortgagee cannot obtain possession of a
mortgaged property for its sale on foreclosure, it must bring a civil action either to recover such possession as a preliminary
step to the sale or to obtain judicial foreclosure. Pertinent portions of Bachrach read as follows: chan rob1es v irt ual 1aw l ibra ry

Where, however, debtor refuses to yield up the property, the creditor must institute an action, either to effect a judicial
foreclosure directly, or to secure possession as a preliminary to the sale contemplated in the provision above quoted. He
cannot lawfully take the property by force against the will of the debtor. Upon this point the American authorities are even
more harmonious than they are upon the point that the creditor is entitled to possession. As was said many years ago by the
writer of this opinion in a monographic article contributed to an encyclopedic legal treatise, "if possession cannot be
94
peaceably obtained the mortgagee must bring an action." (Trust Deeds and Power of Sale Mortgages, 28 Am. & Eng. Encyc.
of Law, 2d ed., 783.) In the Article of Chattel Mortgages, in Corpus Juris, we find the following statement of the law on the
same point: "The only restriction on the mode by which the mortgagee shall secure possession of the mortgaged property
after breach of condition is that he must act in an orderly manner and without creating a breach of the peace, subjecting
himself to an action to trespass." (11 C.J., 560; see also 5 R.C.L., 462.)

The reason why the law does not allow the creditor to possess himself of the mortgaged property with violence and against
the will of the debtor is to be found in the fact that the creditor’s right of possession is conditioned upon the fact of default,
and the existence of this fact my naturally be the subject of controversy. The debtor, for instance, may claim good faith, and
rightly or wrongly, that the debt is paid, or that for some other reason the alleged default is nonexistent. His possession in
this situation is as fully entitled to protection as that of any other person, and in the language of article 446 of the Civil Code
he must be respected therein. To allow the creditor to seize the property against the will of the debtor would make the
former to a certain extent both judge and executioner in his own cause — a thing which is inadmissible in the absence of
unequivocal agreement in the contract itself or express provision to that effect in the statute.

It will be observed that the law places the responsibility of conducting the sale upon "a public officer;" and it might be
supposed that an officer, such as the sheriff, can seize the property where the creditor could not. This suggestion is, we
think, without force, as it is manifest that the sheriff or other officer proceeding under the authority of the language already
quoted from section 14 of the Chattel Mortgage Law, becomes pro hac vice the mere agent of the creditor. There is nothing
in this provision which creates a specific duty on the part of the officer to seize the mortgaged property; and no intention on
the part of the law-making body to impose such a duty can be implied. The conclusion is clear that for the recovery of
possession, where the right is disputed, the creditor must proceed along the usual channels by action in court. Whether the
sheriff, upon being indemnified by the creditor, could safely proceed to take the property from the debtor, is a point upon
which we express no opinion. . . .

But whatever conclusion may be drawn in the premises with respect to the true nature of a chattel mortgage, the result must
in this case be the same; for whether the mortgagee becomes the real owner of the mortgaged property — as some suppose
— or acquires only certain rights therein, it is none the less clear that he has after default the right of possession; though it
cannot be admitted that he may take the law into his own hands and wrest the property violently from the possession of the
mortgagor. Neither can he do through the medium of a public officer that which he cannot directly do himself. The
consequence is that in such case the creditor must either resort to a civil action to recover possession as a preliminary to a
sale, or preferably he may bring an action to obtain a judicial foreclosure in conformity, so far as practicable, with the
provisions of the Chattel Mortgage Law. 10 chanroblesvi rtua llawli bra ry

Replevin is, of course, the appropriate action to recover possession preliminary, to the extrajudicial foreclosure of a chattel
mortgage. Filinvest did in fact instituted such an action and obtained a writ of replevin. And, by filing it, Filinvest admitted
that it cannot acquire possession of the mortgaged vehicle in an orderly or peaceful manner. Accordingly, it should have left
the enforcement of the writ in accordance with Rule 60 of the Rules of Court which it had voluntarily invoked.

Parenthetically, it must be observed that the trial court erred in holding that the action for replevin was "not in order as
[Filinvest] is not the owner of the property (Sec. 2 par. (a) Rule 60)." 11 It is not only the owner who can institute a replevin
suit. A person "entitled to the possession" of the property also can, as provided in the same paragraph cited by the trial
court, which reads: chanrob 1es vi rtual 1aw lib rary

SECTION 2. Affidavit and bond. — Upon applying for such order the plaintiff must show . . . chanroblesv irt ual|awlib rary

(a) That the plaintiff is the owner of the property claimed particularly describing it, or is entitled to the possession thereof; . .
. (Emphasis supplied)

Upon the default by the mortgagor in his obligations, Filinvest, as a mortgagee, had the right to the possession of the
property mortgaged preparatory to its sale in a public auction. 12 However, for employing subterfuge in seizing the truck by
misrepresenting its employees as deputy sheriffs and then hiding and cannibalizing it, Filinvest committed bad faith in
violation of Article 19 of the Civil Code which provides: chan rob1e s virtual 1aw libra ry

Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith. chanroble svi rtual lawlib rary

In common usage, good faith is ordinarily used to describe that state of mind denoting honesty of purpose, freedom from
intention to defraud, and, generally speaking, means being faithful to one’s duty or obligation. 13 It consists of the honest
intention to abstain from taking an unconscionable and unscrupulous advantage of another. 14

This leaves us to the issue of damages and attorney’s fees.

In their answer with counterclaim, the private respondents asked for (a) actual damages of P50,000.00 for the spare parts
found missing after their recovery of the truck and another P50,000.00 for unearned profits due to the failure to use the
truck in their ricemill business; (b) moral damages of P50,000.00 for "the mental anguish, serious anxiety, physical suffering,
wounded feelings, social humiliation, moral shock, sleepless nights and other similar injury" which they suffered as a
"proximate result of the [petitioner’s] illegal, wrongful and unlawful acts" ; (c) nominal damages of P30,000.00; (d)
exemplary damages of P20,000.00; and (e) attorney’s fees of ,P20,000.00 which they incurred "as a direct result of
[petitioner’s] illegal and unwarranted actuations and in connection with the defense of this action." 15 chanroblesvi rtua l|awlib rary

As to actual damages, the petitioner admits that per Exhibits "1," "9," and "10" of the private respondents, only the sum of
P33,22.00 — and not P50,000.00 — was "supposedly spent for the alleged lost spare parts." 16 The petitioner may thus be
held liable only for such amount for actual or compensatory damages.

Anent the moral damages, the trial court ruled that the acts of the petitioner were in total disregard of Articles 19, 20, and
21 of the Civil Code. 17 It added that the petitioner had not only caused actual damages in lost earnings, but had also
caused the private respondents to suffer indignities at the hands of the petitioner’s personnel in hiding the truck in question,
misleading them, and making them work for the release of the truck for about two weeks, thereby justifying the award of
moral damages along with the exemplary and other damages in favor of the private respondents. 18

95
We agree with this finding of the trial court. The petitioner’s acts clearly fall within the contemplation of Articles 19 and 21 of
the Civil Code. 19 The acts of fraudulently taking the truck, hiding it from the private respondents, and removing its spare
parts show nothing but a willful intention to cause loss to the private respondents that is punctuated with bad faith and is
obviously contrary to good customs. Thus, the private respondents are entitled to the moral damages they prayed for, for
under Article 2219 of the Civil Code, moral damages may be recovered in cases involving acts referred to in Article 21 of the
same Code. chanroblesv irt uallawl ibra ry

The private respondents prayed for nominal damages of P30,000.00 which the trial court did not award them. Having failed
to appeal this omission by the trial court, we cannot make anymore such award at this point.

The award of exemplary damages is in order in view of the wanton, fraudulent, and oppressive manner by which the
petitioner sought to enforce its right to the possession of the mortgaged vehicle. Article 2232 of the Civil Code provides: cha nrob 1es vi rtua l 1aw lib rary

In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner. chanrob les.co m : virt ual lawli bra ry

Of course, a plaintiff need not prove the actual extent of exemplary damages, for its determination is addressed to the sound
discretion of the court upon proof of the plaintiff’s entitlement to moral, temperate, or actual or compensatory damages.
Article 2234 of the Civil Code thus provides in part as follows: c hanro b1es vi rtua l 1aw li bra ry

While the amount of the exemplary damages need not be proved, the plaintiff must show that he is entitled to moral,
temperate or compensatory damages before the court may consider the question of whether or not exemplary damages
should be awarded. . . .

The award for attorney’s fees must, however, be set aside. There is no question that the petitioner filed in good faith its
complaint for replevin and damages to protect its rights under the promissory note and the chattel mortgage. That the
private respondents had defaulted in its obligation under the promissory note thereby authorizing the petitioner to seek
enforcement of its claim thereunder and proceed against the mortgage of the vehicle was duly recognized by the trial court
by its judgment against the private respondents incorporated in the first part of the dispositive portion. The private
respondents did not appeal therefrom. There would then be no basis for awarding attorney’s fees in favor of the private
respondents for whatever physical suffering, mental anguish, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, or any other similar injury they had suffered, even if proven, were only such as are usually
caused to parties haled into court as a defendant and which are not compensable, for the law could not have meant to
impose a penalty on the right to litigate. 20

WHEREFORE, the assailed judgment of the Court of Appeals in CA-G.R. CV No. 30231 as well as that of the Regional Trial
Court of San Fernando, Pampanga, Branch 46 in Civil Case No. 6599 on the counterclaim is AFFIRMED, subject to the
modifications abovestated. As so modified, the petitioner is hereby ordered to pay the private respondents only the
following:chan rob1e s virtual 1aw l ibra ry

(a) actual damages in the reduced amount of P33,222.00;

(b) moral damages in the amount of P50.000.00; and chanroble s.com : virtua l lawlib ra ry

(c) exemplary damages in the amount of P20,000.00.

No pronouncement as to costs.

SO ORDERED.

Padilla, Bellosillo and Kapunan, JJ., concur. chanroble svirtual lawlib rary

Hermosisima, Jr., J., is on leave.

Endnotes:

1. Rollo, 44-50. Per Hofileña, H., J., Ramirez, P., and Garcia, C., JJ., concurring.

2. Id., 51-56. Per Judge Norberto C. Ponce.

3. Rollo, 45-48. chan rob lesvi rtua llawlib ra ry

4. Rollo, 55-56.

5. Rollo, 48-49.

6. Rollo, 49-50.

7. Rollo, 13-14.

8. Id., 22. chanroblesvi rt uallawl ibra ry

9. 42 Phil. 3 [1921].

10. Supra, at pages 6-7, 9-10. See BPI Credit Corp. v. Court of Appeals, 204 601 [1991].

11. Rollo, 54.

96
12. See Bachrach Motor Co. v. Summers, supra note 9; BPI Credit Corp. v. Court of Appeals, note 10.

13. Black’s Law Dictionary 693 (6th ed. 1990). chanro blesvi rt uallawl ibra ry

14. Abando v. Lozado, 178 SCRA 509 [1989]; Farolan v. Solmac Marketing Corp., 195 SCRA 168 [1991].

15. Rollo, 76-77.

16. Petition, 24; Id., 33; Memorandum, 19; Id., 121.

17. RTC Decision, 3-4; Rollo, 53-54.

18. Id.; Id. chanroble svirtuallaw lib rary

19. Article 20 does not apply in this case for it refers to acts that are contrary to Law, but there is no allegation, proof, or
finding that the petitioner’s actions were contrary to any provision of the Law.

20. Espiritu v. Court of Appeals, 137 SCRA 50 [1985]; PNB v. Court of Appeals, 159 SCRA 433 [1988]; Ilocos Norte Electric
Co. v. Court of Appeals, 179 SCRA 5 [1989]; Castillo v. Court of Appeals, 205 SCRA 529 [1992].

97
FIRST DIVISION

[G.R. No. 103576. August 22, 1996.]

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, Petitioners, v. HON. COURT OF APPEALS,
PRODUCERS BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY, Respondents.

SYLLABUS

1. REMEDIAL LAW; ACTIONS; APPEALS; APPEAL FROM JUDGMENT OF LOWER COURTS, NOT A MATTER OF RIGHT BUT OF
SOUND JUDICIAL DISCRETION. — Except in criminal cases where the penalty of reclusion perpetua or death is imposed
which the Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of
sound judicial discretion. The circulars of the Court prescribing technical and other procedural requirements are meant to
weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of the Court.
These technical and procedural rules, however, are intended to help secure, not suppress, substantial justice. A deviation
from the rigid enforcement of the rules may thus be allowed to attain the prime objective for, after all, the dispensation of
justice is the core reason For the existence of courts.

2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS OF SECURITY, CONSTRUED. — Contracts of security are either
personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the
obligation by the principal debtor is secured by the personal commitment of another (the guarantor or surety). In contracts
of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property —
in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public
instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the
creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of
interest, if owing, and thereafter to the principal of his credit — upon the essential condition that if the principal obligation
becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, but
that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory
character of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security
becomes, ipso facto, null and void.

3. ID.; ID.; CONTRACTS OF SECURITY; CHATTEL MORTGAGE; COVERS OBLIGATION EXISTING AT TIME MORTGAGE IS
CONSTITUTED; EFFECT OF PROMISE TO INCLUDE DEBTS THAT ARE TO BE CONTRACTED. — While a pledge, real estate
mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately
described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although
a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that
can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage
agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the
old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to
execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the
borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover
the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed. In the chattel
mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which
petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated. (Belgian Catholic Missionaries, Inc., v. Magallanes Press,
Inc., Et. Al.) The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased
to exist coincidentally with the full payment of the P3,000,000.00 loan, there no longer was any chattel mortgage that could
cover the new loans that were concluded thereafter.

4. ID.; CHATTEL MORTGAGE LAW; EXECUTION OF AFFIDAVIT OF GOOD FAITH, A CLEAR MANIFESTATION THAT DEBT
REFERRED TO IS CURRENT. — A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form
prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith.
While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid
between the parties (not against third persons acting in good faith), the fact, however, that the statute has provided that the
parties to the contract must execute an oath makes it obvious that the debt referred to in the law is a current, not an
obligation that is yet merely contemplated.

5. ID.; DAMAGES; MORAL DAMAGES; NOT RECOVERABLE BY A JURIDICAL PERSON. — We find no merit in petitioner
corporation’s other prayer that the case should be remanded to the trial court for a specific finding on the amount of
damages it has sustained "as a result of the unlawful action taken by respondent bank against it." This prayer is not reflected
in its complaint which has merely asked for the amount of P3,000,000.00 by way of moral damages. In LBC Express, Inc. v.
Court of Appeals, we have said: "Moral damages are granted in recompense for physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation,
being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only be one
having a nervous system and it flows from real ills, sorrows, and griefs of life — all of which cannot be suffered by
respondent bank as an artificial person." While Chua Pac is included in the case, the complaints, however, clearly states that
he has merely been so named as a party in representation of petitioner corporation.

6. LEGAL ETHICS; ATTORNEYS; SHOULD BE CIRCUMSPECT IN DEALING WITH COURTS. — Petitioner corporation’s counsel
98
could be commended for his zeal in pursuing his client’s cause. It instead turned out to be, however, a source of
disappointment for this Court to read in petitioner’s reply to private respondent’s comment on the petition his so-called "One
Final Word;" viz: "In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals
should be required to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as
the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the event
that its explation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices.
This is one positive step in ridding our courts of law of incompetent and dishonest magistrates especially members of a
superior court of appellate jurisdiction. The statement is not called for. The Court invites counsel’s attention to the
admonition in Guerrero v. Villamor; thus:" (L)awyers . . . should bear in mind their basic duty ‘to observe and maintain the
respect due to the courts of justice and judical officers and . . . (to) insist on similar conduct by others.’ This respectful
attitude towards the court is to be observed, ‘not for the sake of the temporary incumbent of the judical office, but for the
maintenance of its supreme importance.’ And it is ‘through a scrupulous preference for respectful language that a lawyer best
demonstrates his observance of the respect due to the courts and judicial officers . . .’" The virtues of humility and of respect
and concern for others must still live on even in an age of materialism. Atty. Francisco R. Sotto, counsel for petitioners, is
admonished to be circumspect in dealing with the courts.

DECISION

VITUG, J.:

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to
obligations yet to be contracted or incurred? This question is the core issue in the instant petition for review on certiorari.

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic Corporation,"
executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers
Bank of the Philippines. The mortgage stood by way of security for petitioner’s corporate loan of three million pesos
(P3,000,000.00). A provision in the chattel mortgage agreement was to this effect —

"(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or obligations
above-stated according to the terms thereof, then this mortgage shall be null and void. . . .

"In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as
security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a
new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and any
and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have
been contracted before, during or after the constitution of this mortgage." 1

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from
respondent bank additional financial accommodations totalling P2,700,000.00. 2 These borrowings were on due date also
fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos
(P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the loan was not
settled at maturity. 3 Respondent bank thereupon applied for an extrajudicial foreclosure of the chattel mortgage,
hereinbefore cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an action for
injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City
(Civil Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage.
It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.

Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed, "in all respects," the decision
of the court a quo. The motion for reconsideration was denied on 24 January 1992.

The instant petition interposed by petitioner corporation was initially denied on 04 March 1992 by this Court for having been
insufficient in form and substance. Private respondent filed a motion to dismiss the petition while petitioner corporation filed
a compliance and an opposition to private respondent’s motion to dismiss. The Court denied petitioner’s first motion for
reconsideration but granted a second motion for reconsideration, thereby reinstating the petition and requiring private
respondent to comment thereon. 5

Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the Court so reviews as a
matter of course, an appeal from judgments of lower courts is not a matter of right but of sound judicial discretion. The
circulars of the Court prescribing technical and other procedural requirements are meant to weed out unmeritorious petitions
that can unnecessarily clog the docket and needlessly consume the time of the Court. These technical and procedural rules,
however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules
may thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for the existence
of courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and uphold the
paramount and overriding interest of justice.

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the
faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the
guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured
by an encumbrance of property — in pledge, the placing of movable property in the possession of the creditor; in chattel
mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage,
by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written
instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such
99
fruits to the payment of interest, if owing, and thereafter to the principal of his credit — upon the essential condition that if
the principal obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the
payment of the obligation, 7 but that should the obligation be duly paid, then the contract is automatically extinguished
proceeding from the accessory character 8 of the agreement. As the law so puts it, once the obligation is complied with, then
the contract of security becomes, ipso facto, null and void. 9

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these
future debts are accurately described, 10 a chattel mortgage, however, can only cover obligations existing at the time the
mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted
can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise
until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. 11 Refusal on
the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an at of default
on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of
foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to
be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel
Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if
such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not
against third persons acting in good faith 12), the fact, however, that the statute has provided that the parties to the
contract must execute an oath that —

". . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other
purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud." 13

makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the
chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan
which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the
obligation automatically rendered the chattel mortgage void or terminated. In Belgian Catholic Missionaries, Inc., v.
Magallanes Press, Inc., Et Al., 14 the Court said—

". . . A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the
same are made and not from the date of the mortgage." 15

The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist
coincidentally with the full payment of the P3,000,000.00 loan, 16 there no longer was any chattel mortgage that could cover
the new loans that were concluded thereafter.

We find no merit in petitioner corporation’s other prayer that the case should be remanded to the trial court for a specific
finding on the amount of damages it has sustained "as a result of the unlawful action taken by respondent bank against it."
17 This prayer is not reflected in its complaint which has merely asked for the amount of P3,000,000.00 by way of moral
damages. 18 In LBC Express, Inc. v. Court of Appeals, 19 we have said: jgc:chanro bles.c om.ph

"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and
having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience
physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows
from real ills, sorrows, and griefs of life — all of which cannot be suffered by respondent bank as an artificial person." 20

While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party
in representation of petitioner corporation.

Petitioner corporation’s counsel could be commended for his zeal in pursuing his client’s cause. It instead turned out to be,
however, a source of disappointment for this Court to read in petitioner’s reply to private respondent’s comment on the
petition his so-called "One Final Word;" viz:jgc:cha nrob les.com .ph

"In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be required
to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the clear provisions
of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the event that its explanation is
wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices. This is one positive
step in ridding our courts of law of incompetent and dishonest magistrates especially members of a superior court of
appellate jurisdiction." 21 (Emphasis supplied.)

The statement is not called for. The Court invites counsel’s attention to the admonition in Guerrero v. Villamor; 22 thus: jgc:chanro bles.c om.ph

"(L)awyers . . . should bear in mind their basic duty ‘to observe and maintain the respect due to the courts of justice and
judicial officers and . . . (to) insist on similar conduct by others.’ This respectful attitude towards the court is to be observed,
‘not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme importance.’ And it
is ‘through a scrupulous preference for respectful language that a lawyer best demonstrates his observance of the respect
due to the courts and judicial officers . . ..’" 23

The virtues of humility and of respect and concern for others must still live on even in an age of materialism.

WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the
appropriate legal recourse by private respondent as may still be warranted as an unsecured creditor. No costs.

Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts.

SO ORDERED.

100
Kapunan and Hermosisima, Jr., JJ., concur.

Padilla, J., took no part.

Bellosillo, J., is on leave.

Endnotes:

1. Rollo, p. 45.

2. Ibid., p. 34.

3. Ibid.

4. Associate Justice Consuelo Ynares Santiago, ponente, with Associate Justices Ricardo L. Pronove, Jr. and Nicolas P.
Lapeña, Jr., concurring.

5. In the Court’s resolution, dated 27 May 1992, Rollo, p. 91.

6. Sec. 5 (2)(d), Art. VIII, 1987 Constitution.

7. See Arts. 2085, 2087, 2093, 2125, 2126, 2132, 2139 and 2140, Civil Code.

8. See Manila Surety & Fidelity Co. v. Velayo, 21 SCRA 515.

9. See Sec. 3, Act 1508.

10. See Mojica v. Court of Appeals, 201 SCRA 517; Lim Julian v. Lutero, 49 Phil. 703.

11. Act No. 1508.

12. See Philippine Refining Co. v. Jarque, 61 Phil. 229.

13. Civil Code, Vol. 3, 1990 Edition by Ramon C. Aquino and Carolina C. Griño-Aquino, pp. 610-611.

14. 49 Phil. 647.

15. At p. 655. This ruling was reiterated in Jaca v. Davao Lumber Company, 113 SCRA 107.

16. Being merely accessory in nature, it cannot exist independently of the principal obligation.

17. Petitioner’s Memorandum, p. 5; Rollo, p. 119.

18. Complaint, p. 6; Record, p. 9.

19. 236 SCRA 602.

20. At p. 607.

21. Rollo, p. 113.

22. 179 SCRA 355, 362.

23. At p. 362.

101
FIRST DIVISION

G.R. No. 120098 October 2, 2001

RUBY L. TSAI, petitioner,


vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R VILLALUZ, respondents.

x---------------------------------------------------------x

[G.R. No. 120109. October 2, 2001.]

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,


vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS and MAMERTO R VILLALUZ, respondents.

QUISUMBING, J.:

These consolidated cases assail the decision1 of the Court of Appeals in CA-G.R. CV No. 32986, affirming the
decision2 of the Regional Trial Court of Manila, Branch 7, in Civil Case No. 89-48265. Also assailed is respondent
court's resolution denying petitioners' motion for reconsideration.

On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX) obtained a three million peso
(P3,000,000.00) loan from petitioner Philippine Bank of Communications (PBCom). As security for the loan,
EVERTEX executed in favor of PBCom, a deed of Real and Chattel Mortgage over the lot under TCT No. 372097,
where its factory stands, and the chattels located therein as enumerated in a schedule attached to the mortgage
contract. The pertinent portions of the Real and Chattel Mortgage are quoted below:

MORTGAGE

(REAL AND CHATTEL)

xxx xxx xxx

The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First Mortgage, to the MORTGAGEE, . .
. certain parcel(s) of land, together with all the buildings and improvements now existing or which may
hereafter exist thereon, situated in . . .

"Annex A"

(Real and Chattel Mortgage executed by Ever Textile Mills in favor of PBCommunications — continued)

LIST OF MACHINERIES & EQUIPMENT

A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in Hongkong:

Serial Numbers Size of Machines

xxx xxx xxx

B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan.

xxx xxx xxx

C. Two (2) Circular Knitting Machines made in West Germany.

xxx xxx xxx


102
D. Four (4) Winding Machines.

xxx xxx xxx

SCHEDULE "A"

I. TCT # 372097 - RIZAL

xxx xxx xxx

II. Any and all buildings and improvements now existing or hereafter to exist on the above-mentioned lot.

III. MACHINERIES & EQUIPMENT situated, located and/or installed on the above-mentioned lot located at .
..

(a) Forty eight sets (48) Vayrow Knitting Machines . . .

(b) Sixteen sets (16) Vayrow Knitting Machines . . .

(c) Two (2) Circular Knitting Machines . . .

(d) Two (2) Winding Machines . . .

(e) Two (2) Winding Machines . . .

IV. Any and all replacements, substitutions, additions, increases and accretions to above properties.

xxx xxx xxx3

On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX. The loan was secured by a
Chattel Mortgage over personal properties enumerated in a list attached thereto. These listed properties were
similar to those listed in Annex A of the first mortgage deed.

After April 23, 1979, the date of the execution of the second mortgage mentioned above, EVERTEX purchased
various machines and equipments.

On November 19, 1982, due to business reverses, EVERTEX filed insolvency proceedings docketed as SP Proc.
No. LP-3091-P before the defunct Court of First Instance of Pasay City, Branch XXVIII. The CFI issued an order on
November 24, 1982 declaring the corporation insolvent. All its assets were taken into the custody of the Insolvency
Court, including the collateral, real and personal, securing the two mortgages as abovementioned.

In the meantime, upon EVERTEX's failure to meet its obligation to PBCom, the latter commenced extrajudicial
foreclosure proceedings against EVERTEX under Act 3135, otherwise known as "An Act to Regulate the Sale of
Property under Special Powers Inserted in or Annexed to Real Estate Mortgages" and Act 1506 or "The Chattel
Mortgage Law". A Notice of Sheriff's Sale was issued on December 1, 1982.

On December 15, 1982, the first public auction was held where petitioner PBCom emerged as the highest bidder
and a Certificate of Sale was issued in its favor on the same date. On December 23, 1982, another public auction
was held and again, PBCom was the highest bidder. The sheriff issued a Certificate of Sale on the same day.

On March 7, 1984, PBCom consolidated its ownership over the lot and all the properties in it. In November 1986, it
leased the entire factory premises to petitioner Ruby L. Tsai for P50,000.00 a month. On May 3, 1988, PBCom sold
the factory, lock, stock and barrel to Tsai for P9,000,000.00, including the contested machineries.

On March 16, 1989, EVERTEX filed a complaint for annulment of sale, reconveyance, and damages with the
Regional Trial Court against PBCom, alleging inter alia that the extrajudicial foreclosure of subject mortgage was in
violation of the Insolvency Law. EVERTEX claimed that no rights having been transmitted to PBCom over the assets
of insolvent EVERTEX, therefore Tsai acquired no rights over such assets sold to her, and should reconvey the
assets.

Further, EVERTEX averred that PBCom, without any legal or factual basis, appropriated the contested properties,
which were not included in the Real and Chattel Mortgage of November 26, 1975 nor in the Chattel Mortgage of
April 23, 1979, and neither were those properties included in the Notice of Sheriff's Sale dated December 1, 1982
and Certificate of Sale . . . dated December 15, 1982.

103
The disputed properties, which were valued at P4,000,000.00, are: 14 Interlock Circular Knitting Machines, 1 Jet
Drying Equipment, 1 Dryer Equipment, 1 Raisin Equipment and 1 Heatset Equipment.

The RTC found that the lease and sale of said personal properties were irregular and illegal because they were not
duly foreclosed nor sold at the December 15, 1982 auction sale since these were not included in the schedules
attached to the mortgage contracts. The trial court decreed:

WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation and against the defendants:

1. Ordering the annulment of the sale executed by defendant Philippine Bank of Communications in favor of
defendant Ruby L. Tsai on May 3, 1988 insofar as it affects the personal properties listed in par. 9 of the
complaint, and their return to the plaintiff corporation through its assignee, plaintiff Mamerto R. Villaluz, for
disposition by the Insolvency Court, to be done within ten (10) days from finality of this decision;

2. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P5,200,000.00 as
compensation for the use and possession of the properties in question from November 1986 to February
1991 and P100,000.00 every month thereafter, with interest thereon at the legal rate per annum until full
payment;

3. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P50,000.00 as and
for attorney's fees and expenses of litigation;

4. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P200,000.00 by
way of exemplary damages;

5. Ordering the dismissal of the counterclaim of the defendants; and

6. Ordering the defendants to proportionately pay the costs of suit.

SO ORDERED.4

Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which issued its decision dated August 31,
1994, the dispositive portion of which reads:

WHEREFORE, except for the deletion therefrom of the award; for exemplary damages, and reduction of the actual
damages, from P100,000.00 to P20,000.00 per month, from November 1986 until subject personal properties are
restored to appellees, the judgment appealed from is hereby AFFIRMED, in all other respects. No pronouncement
as to costs.5

Motion for reconsideration of the above decision having been denied in the resolution of April 28, 1995, PBCom and
Tsai filed their separate petitions for review with this Court.

In G.R No. 120098, petitioner Tsai ascribed the following errors to the respondent court:

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN EFFECT MAKING A


CONTRACT FOR THE PARTIES BY TREATING THE 1981 ACQUIRED MACHINERIES AS CHATTELS
INSTEAD OF REAL PROPERTIES WITHIN THEIR EARLIER 1975 DEED OF REAL AND CHATTEL
MORTGAGE OR 1979 DEED OF CHATTEL MORTGAGE.

II

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING THAT THE
DISPUTED 1981 MACHINERIES ARE NOT REAL PROPERTIES DEEMED PART OF THE MORTGAGE —
DESPITE THE CLEAR IMPORT OF THE EVIDENCE AND APPLICABLE RULINGS OF THE SUPREME
COURT.

III

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN DEEMING PETITIONER A


PURCHASER IN BAD FAITH.

IV

104
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN ASSESSING PETITIONER
ACTUAL DAMAGES, ATTORNEY'S FEES AND EXPENSES OF LITIGATION — FOR WANT OF VALID
FACTUAL AND LEGAL BASIS.

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING AGAINST


PETITIONER'S ARGUMENTS ON PRESCRIPTION AND LACHES.6

In G.R. No. 120098, PBCom raised the following issues:

I.

DID THE COURT OF APPEALS VALIDLY DECREE THE MACHINERIES LISTED UNDER PARAGRAPH 9 OF
THE COMPLAINT BELOW AS PERSONAL PROPERTY OUTSIDE OF THE 1975 DEED OF REAL ESTATE
MORTGAGE AND EXCLUDED THEM FROM THE REAL PROPERTY EXTRAJUDICIALLY FORECLOSED BY
PBCOM DESPITE THE PROVISION IN THE 1975 DEED THAT ALL AFTER-ACQUIRED PROPERTIES DURING
THE LIFETIME OF THE MORTGAGE SHALL FORM PART THEREOF, AND DESPITE THE UNDISPUTED FACT
THAT SAID MACHINERIES ARE BIG AND HEAVY, BOLTED OR CEMENTED ON THE REAL PROPERTY
MORTGAGED BY EVER TEXTILE MILLS TO PBCOM, AND WERE ASSESSED FOR REAL ESTATE TAX
PURPOSES?

II

CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN QUESTION IN GOOD FAITH, EXTENDED
CREDIT FACILITIES TO EVER TEXTILE MILLS WHICH AS OF 1982 TOTALLED P9,547,095.28, WHO HAD
SPENT FOR MAINTENANCE AND SECURITY ON THE DISPUTED MACHINERIES AND HAD TO PAY ALL THE
BACK TAXES OF EVER TEXTILE MILLS BE LEGALLY COMPELLED TO RETURN TO EVER THE SAID
MACHINERIES OR IN LIEU THEREOF BE ASSESSED DAMAGES. IS THAT SITUATION TANTAMOUNT TO A
CASE OF UNJUST ENRICHMENT?7

The principal issue, in our view, is whether or not the inclusion of the questioned properties in the foreclosed
properties is proper. The secondary issue is whether or not the sale of these properties to petitioner Ruby Tsai is
valid.

For her part, Tsai avers that the Court of Appeals in effect made a contract for the parties by treating the 1981
acquired units of machinery as chattels instead of real properties within their earlier 1975 deed of Real and Chattel
Mortgage or 1979 deed of Chattel Mortgage.8 Additionally, Tsai argues that respondent court erred in holding that
the disputed 1981 machineries are not real properties.9 Finally, she contends that the Court of Appeals erred in
holding against petitioner's arguments on prescription and laches10 and in assessing petitioner actual damages,
attorney's fees and expenses of litigation, for want of valid factual and legal basis.11

Essentially, PBCom contends that respondent court erred in affirming the lower court's judgment decreeing that the
pieces of machinery in dispute were not duly foreclosed and could not be legally leased nor sold to Ruby Tsai. It
further argued that the Court of Appeals' pronouncement that the pieces of machinery in question were personal
properties have no factual and legal basis. Finally, it asserts that the Court of Appeals erred in assessing damages
and attorney's fees against PBCom.

In opposition, private respondents argue that the controverted units of machinery are not "real properties" but
chattels, and, therefore, they were not part of the foreclosed real properties, rendering the lease and the subsequent
sale thereof to Tsai a nullity.12

Considering the assigned errors and the arguments of the parties, we find the petitions devoid of merit and ought to
be denied.

Well settled is the rule that the jurisdiction of the Supreme Court in a petition for review on certiorari under Rule 45
of the Revised Rules of Court is limited to reviewing only errors of law, not of fact, unless the factual findings
complained of are devoid of support by the evidence on record or the assailed judgment is based on
misapprehension of facts.13 This rule is applied more stringently when the findings of fact of the RTC is affirmed by
the Court of Appeals.14

The following are the facts as found by the RTC and affirmed by the Court of Appeals that are decisive of the issues:
(1) the "controverted machineries" are not covered by, or included in, either of the two mortgages, the Real Estate
and Chattel Mortgage, and the pure Chattel Mortgage; (2) the said machineries were not included in the list of
properties appended to the Notice of Sale, and neither were they included in the Sheriff's Notice of Sale of the
foreclosed properties.15

105
Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy, bolted or cemented on
the real property mortgaged by EVERTEX to PBCom, make them ipso facto immovable under Article 415 (3) and (5)
of the New Civil Code. This assertion, however, does not settle the issue. Mere nuts and bolts do not foreclose the
controversy. We have to look at the parties' intent.

While it is true that the controverted properties appear to be immobile, a perusal of the contract of Real and Chattel
Mortgage executed by the parties herein gives us a contrary indication. In the case at bar, both the trial and the
appellate courts reached the same finding that the true intention of PBCOM and the owner, EVERTEX, is to treat
machinery and equipment as chattels. The pertinent portion of respondent appellate court's ruling is quoted below:

As stressed upon by appellees, appellant bank treated the machineries as chattels; never as real properties.
Indeed, the 1975 mortgage contract, which was actually real and chattel mortgage, militates against
appellants' posture. It should be noted that the printed form used by appellant bank was mainly for real
estate mortgages. But reflective of the true intention of appellant PBCOM and appellee EVERTEX was the
typing in capital letters, immediately following the printed caption of mortgage, of the phrase "real and
chattel." So also, the "machineries and equipment" in the printed form of the bank had to be inserted in the
blank space of the printed contract and connected with the word "building" by typewritten slash marks. Now,
then, if the machineries in question were contemplated to be included in the real estate mortgage, there
would have been no necessity to ink a chattel mortgage specifically mentioning as part III of Schedule A a
listing of the machineries covered thereby. It would have sufficed to list them as immovables in the Deed of
Real Estate Mortgage of the land and building involved.

As regards the 1979 contract, the intention of the parties is clear and beyond question. It refers solely
to chattels. The inventory list of the mortgaged properties is an itemization of sixty-three (63) individually
described machineries while the schedule listed only machines and 2,996,880.50 worth of finished cotton
fabrics and natural cotton fabrics.16

In the absence of any showing that this conclusion is baseless, erroneous or uncorroborated by the evidence on
record, we find no compelling reason to depart therefrom.

Too, assuming arguendo that the properties in question are immovable by nature, nothing detracts the parties from
treating it as chattels to secure an obligation under the principle of estoppel. As far back as Navarro v. Pineda, 9
SCRA 631 (1963), an immovable may be considered a personal property if there is a stipulation as when it is used
as security in the payment of an obligation where a chattel mortgage is executed over it, as in the case at bar.

In the instant case, the parties herein: (1) executed a contract styled as "Real Estate Mortgage and Chattel
Mortgage," instead of just "Real Estate Mortgage" if indeed their intention is to treat all properties included therein as
immovable, and (2) attached to the said contract a separate "LIST OF MACHINERIES & EQUIPMENT". These
facts, taken together, evince the conclusion that the parties' intention is to treat these units of machinery as chattels.
A fortiori, the contested after-acquired properties, which are of the same description as the units enumerated under
the title "LIST OF MACHINERIES & EQUIPMENT," must also be treated as chattels.

Accordingly, we find no reversible error in the respondent appellate court's ruling that inasmuch as the subject
mortgages were intended by the parties to involve chattels, insofar as equipment and machinery were concerned,
the Chattel Mortgage Law applies, which provides in Section 7 thereof that: "a chattel mortgage shall be deemed to
cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor
and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary
notwithstanding."

And, since the disputed machineries were acquired in 1981 and could not have been involved in the 1975 or 1979
chattel mortgages, it was consequently an error on the part of the Sheriff to include subject machineries with the
properties enumerated in said chattel mortgages.

As the auction sale of the subject properties to PBCom is void, no valid title passed in its favor. Consequently, the
sale thereof to Tsai is also a nullity under the elementary principle of nemo dat quod non habet, one cannot give
what one does not have.17

Petitioner Tsai also argued that assuming that PBCom's title over the contested properties is a nullity, she is
nevertheless a purchaser in good faith and for value who now has a better right than EVERTEX.

To the contrary, however, are the factual findings and conclusions of the trial court that she is not a purchaser in
good faith. Well-settled is the rule that the person who asserts the status of a purchaser in good faith and for value
has the burden of proving such assertion.18 Petitioner Tsai failed to discharge this burden persuasively.

Moreover, a purchaser in good faith and for value is one who buys the property of another without notice that some
other person has a right to or interest in such property and pays a full and fair price for the same, at the time of
purchase, or before he has notice of the claims or interest of some other person in the property.19 Records reveal,
106
however, that when Tsai purchased the controverted properties, she knew of respondent's claim thereon. As borne
out by the records, she received the letter of respondent's counsel, apprising her of respondent's claim, dated
February 27, 1987.20 She replied thereto on March 9, 1987.21 Despite her knowledge of respondent's claim, she
proceeded to buy the contested units of machinery on May 3, 1988. Thus, the RTC did not err in finding that she
was not a purchaser in good faith.

Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where the disputed properties are located is
equally unavailing. This defense refers to sale of lands and not to sale of properties situated therein. Likewise, the
mere fact that the lot where the factory and the disputed properties stand is in PBCom's name does not
automatically make PBCom the owner of everything found therein, especially in view of EVERTEX's letter to Tsai
enunciating its claim.

Finally, petitioners' defense of prescription and laches is less than convincing. We find no cogent reason to disturb
the consistent findings of both courts below that the case for the reconveyance of the disputed properties was filed
within the reglementary period. Here, in our view, the doctrine of laches does not apply. Note that upon petitioners'
adamant refusal to heed EVERTEX's claim, respondent company immediately filed an action to recover possession
and ownership of the disputed properties. There is no evidence showing any failure or neglect on its part, for an
unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should have
been done earlier. The doctrine of stale demands would apply only where by reason of the lapse of time, it would be
inequitable to allow a party to enforce his legal rights. Moreover, except for very strong reasons, this Court is not
disposed to apply the doctrine of laches to prejudice or defeat the rights of an owner.22

As to the award of damages, the contested damages are the actual compensation, representing rentals for the
contested units of machinery, the exemplary damages, and attorney's fees.

As regards said actual compensation, the RTC awarded P100,000.00 corresponding to the unpaid rentals of the
contested properties based on the testimony of John Chua, who testified that the P100,000.00 was based on the
accepted practice in banking and finance, business and investments that the rental price must take into account the
cost of money used to buy them. The Court of Appeals did not give full credence to Chua's projection and reduced
the award to P20,000.00.

Basic is the rule that to recover actual damages, the amount of loss must not only be capable of proof but must
actually be proven with reasonable degree of certainty, premised upon competent proof or best evidence obtainable
of the actual amount thereof.23 However, the allegations of respondent company as to the amount of unrealized
rentals due them as actual damages remain mere assertions unsupported by documents and other competent
evidence. In determining actual damages, the court cannot rely on mere assertions, speculations, conjectures or
guesswork but must depend on competent proof and on the best evidence obtainable regarding the actual amount
of loss.24 However, we are not prepared to disregard the following dispositions of the respondent appellate court:

. . . In the award of actual damages under scrutiny, there is nothing on record warranting the said award of
P5,200,000.00, representing monthly rental income of P100,000.00 from November 1986 to February 1991,
and the additional award of P100,000.00 per month thereafter.

As pointed out by appellants, the testimonial evidence, consisting of the testimonies of Jonh (sic) Chua and
Mamerto Villaluz, is shy of what is necessary to substantiate the actual damages allegedly sustained by
appellees, by way of unrealized rental income of subject machineries and equipments.

The testimony of John Cua (sic) is nothing but an opinion or projection based on what is claimed to be a
practice in business and industry. But such a testimony cannot serve as the sole basis for assessing the
actual damages complained of. What is more, there is no showing that had appellant Tsai not taken
possession of the machineries and equipments in question, somebody was willing and ready to rent the
same for P100,000.00 a month.

xxx xxx xxx

Then, too, even assuming arguendo that the said machineries and equipments could have generated a
rental income of P30,000.00 a month, as projected by witness Mamerto Villaluz, the same would have been
a gross income. Therefrom should be deducted or removed, expenses for maintenance and repairs . . .
Therefore, in the determination of the actual damages or unrealized rental income sued upon, there is a
good basis to calculate that at least four months in a year, the machineries in dispute would have been idle
due to absence of a lessee or while being repaired. In the light of the foregoing rationalization and
computation, We believe that a net unrealized rental income of P20,000.00 a month, since November 1986,
is more realistic and fair.25

As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX which the Court of Appeals deleted. But
according to the CA, there was no clear showing that petitioners acted malevolently, wantonly and oppressively. The
evidence, however, shows otherwise.It is a requisite to award exemplary damages that the wrongful act must be
107
accompanied by bad faith,26 and the guilty acted in a wanton, fraudulent, oppressive, reckless or malevolent
manner.27 As previously stressed, petitioner Tsai's act of purchasing the controverted properties despite her
knowledge of EVERTEX's claim was oppressive and subjected the already insolvent respondent to gross
disadvantage. Petitioner PBCom also received the same letters of Atty. Villaluz, responding thereto on March 24,
1987.28 Thus, PBCom's act of taking all the properties found in the factory of the financially handicapped
respondent, including those properties not covered by or included in the mortgages, is equally oppressive and
tainted with bad faith. Thus, we are in agreement with the RTC that an award of exemplary damages is proper.

The amount of P200,000.00 for exemplary damages is, however, excessive. Article 2216 of the Civil Code provides
that no proof of pecuniary loss is necessary for the adjudication of exemplary damages, their assessment being left
to the discretion of the court in accordance with the circumstances of each case.29 While the imposition of exemplary
damages is justified in this case, equity calls for its reduction. In Inhelder Corporation v. Court of Appeals, G.R. No.
L-52358, 122 SCRA 576, 585, (May 30, 1983), we laid down the rule that judicial discretion granted to the courts in
the assessment of damages must always be exercised with balanced restraint and measured objectivity. Thus, here
the award of exemplary damages by way of example for the public good should be reduced to P100,000.00.

By the same token, attorney's fees and other expenses of litigation may be recovered when exemplary damages are
awarded.30 In our view, RTC's award of P50,000.00 as attorney's fees and expenses of litigation is reasonable,
given the circumstances in these cases.

WHEREFORE, the petitions are DENIED. The assailed decision and resolution of the Court of Appeals in CA-G.R.
CV No. 32986 are AFFIRMED WITH MODIFICATIONS. Petitioners Philippine Bank of Communications and Ruby L.
Tsai are hereby ordered to pay jointly and severally Ever Textile Mills, Inc. the following: (1) P20,000.00 per month,
as compensation for the use and possession of the properties in question from November 198631 until subject
personal properties are restored to respondent corporation; (2) P100,000.00 by way of exemplary damages, and (3)
P50,000.00 as attorney's fees and litigation expenses. Costs against petitioners.

SO ORDERED.

Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.

Footnotes

1 Rollo, G.R. No. 120098, pp. 23-45.

2 Id. at 23-24.

3 Folder of Exhibits, pp. 5-12.

4 Rollo, G.R. No. 120098, pp. 23-24.

5 Id. at 45.

6 Rollo, G.R. No. 120098, pp. 23-25.

7 Rollo, G.R. No. 120098, pp. 9-10.

8 Rollo, G.R. No. 120098, p. 25.

9 Id., at 33.

10 Id., at 49.

11 Id., at 44.

12 Id., at 133.

13 Congregation of the Religious of the Virgin Mary v. Court of Appeals, 291 SCRA 385, 391-392 (1998).

14 Manlapaz. Court of Appeals, 147 SCRA 236, 239 (1987).

15 Rollo, G.R No. 120109, pp. 62-63.

108
16 Rollo, G.R. No. 120098, pp. 68-69.

17Segura vs. Segura, 165 SCRA 368,375 (1988); Noel vs. Court of Appeals, G.R. No. 59550, 240 SCRA
78,88 (1995).

18 Mathay v. Court of Appeals, 295 SCRA 556, 575 (1998).

19 Diaz-Duarte vs. Ong, 298 SCRA 388, 397 (1998).

20 Exhibit "U", Folder of Exhibits, p.64.

21 Exhibit "V", Id., at 66.

22 Noel vs. Court of Appeals, 240 SCRA 78,90 (1995).

23 Ace Hailers Corporation v. CA, et al., G.R No. 127934, August 23, 2000, p. 11.

24 Barzaga vs. Court of Appeals, 268 SCRA 105, 113-114 (1997).

25 Rollo G.R. No. 120109, pp. 43-44.

26 "J" Marketing Corp. vs. Sia, Jr., 285 SCRA 580, 583-584 (1998).

27 Cervantes vs. Court of Appeals, 304 SCRA 25, 33 (1997).

28 Exhibit "X", Folder of Exhibits, p. 69.

29 Art. 2216. Civil Code. — No proof of pecuniary loss is necessary in order that moral, nominal, temperate
liquidated or exemplary damages may be adjudicated. The assessment of such damages, except liquidated
ones, is left to the discretion of the court, according to the circumstances of each case.

30 Vital-Gozon v. Court of Appeals, 292 SCRA 124, 147 (1998).

31
The time when PBCom leased the disputed properties to Tsai. CA Rollo, p. 34.

109