January 2016

[JANUARY 2016 CASES] 1
January 11, 2016
FIRST DIVISION
G.R. No. 160408
SPOUSES ROBERTO and ADELAIDA PEN, Petitioners,

vs.
SPOUSES SANTOS and LINDA JULIAN, Respondents.
D E C I S I O N
BERSAMIN, J.:
The petitioners who were the buyers of the mortgaged property of the respondents seek the
reversal of the decision promulgated on October 20, 2003,1 whereby the Court of Appeals
(CA) affirmed with modification the adverse judgment rendered on August 30, 1999 by the
Regional Trial Court (RTC), Branch 77, in Quezon City.2 In their respective rulings, the CA
and the RTC both declared the deed of sale respecting the respondents' property as void
and inexistent, albeit premised upon different reasons.
Antecedents
The CA summarized the antecedent facts and procedural matters in its assailed decision as
follows:
On April 9, 1986, the appellees (the Julians) obtained a P60,000.00 loan from appellant
Adelaida Pen. On May 23, 1986 and on the (sic) May 27, 1986, they were again extended
loans in the amounts of P50,000.00 and P10,000.00, respectively by appellant Adelaida. The
initial interests were deducted by appellant Adelaida, (1) P3,600.00 from the P60,000.00
loan; (2) P2,400.00 from the P50,000.00 loan; and (3) P600.00 from the P10,000.00 loan.
Two (2) promissory notes were executed by the appellees in favor of appellant Adelaida to
evidence the foregoing loans, one dated April 9, 1986 and payable on June 15, 1986 for the
P60,000.00 loan and another dated May 22, 1986 payable on July 22, 1986 for the
P50,000.00 loan. Both Joans were charged interest at 6% per month. As security, on May 23,
1986, the appellees executed a Real Estate Mortgage over their property covered by TCT No.
327733 registered under the name of appellee Santos Julian, Jr. The owner's duplicate of
TCT No. 327733 was delivered to the appellants.
Appellant's version of the subsequent events run as follows: When the loans became due
and demandable, appellees failed to pay despite several demands. As such, appellant
Adelaida decided to institute foreclosure proceedings. However, she was prevailed upon by
appellee Linda not to foreclose the property because of the cost of litigation and since it
would cause her embarrassment as the proceedings will be announced in public places at
the City Hall, where she has many friends. Instead, appellee Linda offered their mortgaged
property as payment in kind. After the ocular inspection, the parties agreed to have the
property valued at P70,000.00. Thereafter, on October 22, 1986 appellee executed a two (2)
CIVIL LAW REVIEW 2

page Deed of Sale duly signed by her on the left margin and over her printed name. After the
execution of the Deed of Sale, appellant Pen paid the capital gains tax and the required real
property tax. Title to the property was transferred to the appellants by the issuance of TCT
No. 364880 on July 17, 1987. A reconstituted title was also issued to the appellants on July
09, 1994 when the Quezon City Register of Deeds was burned (sic).
On July 1989, appellants allege that appellee Linda offered to repurchase the property to
which the former agreed at the repurchase price of P436,l 15.00 payable in cash on July 31,
1989. The appellees failed to repurchase on the agreed date. On February 1990, appellees
again offered to repurchase the property for the same amount, but they still failed to
repurchase. On June 28, 1990, another offer was made to repurchase the property for the
same amount. Appellee Linda offered to pay P100,000.00 in cash as sign of good faith. The
offer was rejected by appellant Adelaida. The latter held the money only for safekeeping
upon the pleading of appellee Linda. Upon the agreement of the parties, the amount of
P100,000.00 was deducted from the balance of the appellees' indebtedness, so that as of
October 15, 1997, their unpaid balance amounted to P319,065.00. Appellants allege that
instead of paying lthe] said balance, the appellees instituted on September 8, 1994 the civil
complaint and filed an adverse claim and lis pendens which were annotated at the back of
the title to the property.
On the other hand, the appellees aver the following: At the time the mortgage was executed,
they were likewise required by the appellant Adelaida to sign a one (1) page document
purportedly an "Absolute Deed of Sale". Said document did not contain any consideration,
and was "undated, unfilled and unnotarized". They allege that their total payments
amounted to P115,400.00 and that their last payment was on June 28, 1990 in the amount
of P100,000.00.
In December 1992, appellee Linda Julian offered to pay appellant Adelaida the amount of
P150,000.00. The latter refused to accept the offer and demanded that she be paid the
amount of P250,000.00. Unable to meet the demand, appellee Linda desisted from the offer
and requested that she be shown the land title which she conveyed to the appellee Adelaida,
but the latter refused. Upon verification with the Registry of Deeds of Quezon City, she was
informed that the title to the mortgaged property had already been registered in the name
of appellee Adelaida under TCT No. 364880, and that the transfer was entered on July 17,
1987. A reconstituted title, TCT No. RT-45272 (364880), also appeared on file in the
Registry of Deeds replacing TCT No. 364880.
By reason of the foregoing discoveries, appellee filed an Affidavit of Adverse Claim on

January 1993.1avvphi1 Counsel for the appellees, on August 12, 1994, formally demanded
the reconveyance of the title and/or the property to them, but the appellants refused. In the
process of obtaining other documents; the appellees also discovered that the appellants
have obtained several Declarations of Real Property, and a Deed of Sale consisting of two
(2) pages which was notarized by one Atty. Cesar Ching. Said document indicates a
consideration of P70,000.00 for the lot, and was made to appear as having been executed on
October 22, 1986. On September 8, 1994, appellees filed a suit for the Cancellation of Sale,
Cancellation of Title issued to the appellants; Recovery of Possession; Damages with Prayer
for Preliminary Injunction. The complaint alleged that appellant Adelaida, through obvious
bad faith, maliciously typed, unilaterally filled up, and caused to be notarized the Deed of
CIVIL LAW REVIEW 2

Sale earlier signed by appellee Julian, and used this spurious deed of sale as the vehicle for
her fraudulent transfer unto herself the parcel of land covered by TCT No. 327733.3
Judgment of the RTC
In its judgment rendered on August 30, 1999,4 the RTC ruled in favor of the respondents.
According greater credence to the version of the respondents on the true nature of their
transaction, the trial court concluded that they had not agreed on the consideration for the
sale at the time they signed the deed of sale; that in the absence of the consideration, the
sale lacked one of the essential requisites of a valid contract; that the defense of
prescription was rejected because the action to impugn the void contract was
imprescriptible; and that the promissory notes and the real estate mortgage in favor of the
petitioners were nonetheless valid, rendering the respondents liable to still pay their
outstanding obligation with interest.
The RTC disposed thusly:
WHEREFORE, judgment is hereby rendered:
1. Declaring the Deed of Sale, dated October 22, 1986, void or inexistent;
2. Cancelling TCT No. RT-45272 (364480) and declaring it to be of no further legal

force and effect;
3. Ordering the defendants to reconvey the subject property to the plaintiffs and to
deliver to them the possession thereof; and
4. Ordering the plaintiffs to pay to the defendants the unpaid balance of their
indebtedness plus accrued interest totaling P,319,065.00 as of October 15, 1997,
plus interests at the legal rate counted from the date of filing of the complaint and
until the full payment thereof, without prejudice to the right of the defendants to
foreclose the mortgage in the event that plaintiffs will fail to pay their obligation.
No pronouncement as to cost.
SO ORDERED.5
Decision of the CA
On appeal by the petitioners, the CA affirmed the RTC with modification under its assailed
decision of October 20, 2003,6 decreeing:
WHEREFORE, premises considered, the Decision of the Regional Trial Court of Quezon City
is AFFIRMED WITH modification. Judgement is hereby rendered:
1. Declaring the Deed of Sale, dated October 22, 1986, void or inexistent;
CIVIL LAW REVIEW 2

2. Cancelling TCT No. RT-45272 (364880) and declaring it to be of no further legal

force and effect;
3. Ordering the appellants-defendants to reconvey the subject property to the

plaintiffs-appellees and to deliver to them the possession thereof; and
4. Ordering the plaintiffs-appellces to pay to the defendants the unpaid balance of

their indebtedness, P43,492.15 as of June 28, 1990, plus interests at the legal rate of
12% per annum from said date and until the full payment thereof, without prejudice
to the right of the defendants to foreclose the mortgage in the event that plaintiffs-
appellees will fail to pay their obligation.
SO ORDERED.7
The CA pronounced the deed of sale as void but not because of the supposed lack of
consideration as the R TC had indicated, but because of the deed of sale having been
executed at the same time as the real estate mortgage, which rendered the sale as a
prohibited pactum commissorium in light of the fact that the deed of sale was blank as to the
consideration and the date, which details would be filled out upon the default by the
respondents; that the promissory notes contained no stipulation on the payment of interest
on the obligation, for which reason no monetary interest could be imposed for the use of
money; and that compensatory interest should instead be imposed as a form of damages
arising from Linda's failure to pay the outstanding obligation.
Issues
In this appeal, the petitioners posit the following issues, namely: (1) whether or not the CA
erred in ruling against the validity of the deed of sale; and (2) whether or not the CA erred
in ruling that no monetary interest was due for Linda's use of Adelaida's money.
Ruling of the Court
The appeal is partly meritorious.
That the petitioners are raising factual issues about the true nature of their transaction with
the respondent is already of itself, sufficient reason to forthwith deny due course to the
petition for review on certiorari. They cannot ignore that any appeal to the Court is limited
to questions of law because the Court is not a trier of facts. As such, the factual findings of
the CA should be respected and accorded great weight, and even finality when supported by
the substantial evidence on record.8 Moreover, in view of the unanimity between the RTC
and the CA on the deed of sale being void, varying only in their justifications, the Court
affirms the CA, and adopts its conclusions on the invalidity of the deed of sale.
Nonetheless, We will take the occasion to explain why we concur with the CA's justification
in discrediting the deed of sale between the parties as pactum commissorium.
Article 2088 of the Civil Code prohibits the creditor from appropriating the things given by
way of pledge or mortgage, or from disposing of them; any stipulation to the contrary is null
and void. The elements for pactum commissorium to exist are as follows, to wit: (a) that
CIVIL LAW REVIEW 2

there should be a pledge or mortgage wherein property is pledged or mortgaged by way of

security for the payment of the principal obligation; and (b) that there should be a
stipulation for an automatic appropriation by the creditor of the thing pledged or
mortgaged in the event of non-payment of the principal obligation within the stipulated
period.9 The first element was present considering that the property of the respondents was
mortgaged by Linda in favor of Adelaida as security for the farmer's indebtedness. As to the
second, the authorization for Adelaida to appropriate the property subject of the mortgage
upon Linda's default was implied from Linda's having signed the blank deed of sale
simultaneously with her signing of the real estate mortgage. The haste with which the
transfer of property was made upon the default by Linda on her obligation, and the eventual
transfer of the property in a manner not in the form of a valid dacion en pago ultimately
confirmed the nature of the transaction as a pactum commissorium.
It is notable that in reaching its conclusion that Linda's deed of sale had been executed
simultaneously with the real estate mortgage, the CA first compared the unfilled deed of
sale presented by Linda with the notarized deed of sale adduced by Adelaida. The CA justly
deduced that the completion and execution of the deed of sale had been conditioned on the
non-payment of the debt by Linda, and reasonably pronounced that such circumstances
rendered the transaction pactum commissorium. The Court should not disturb or undo the
CA's conclusion in the absence of the clear showing of abuse, arbitrariness or capriciousness
on the part of the CA.10
The petitioners have theorized that their transaction with the respondents was a
valid dacion en pago by highlighting that it was Linda who had offered to sell her property
upon her default. Their theory cannot stand scrutiny. Dacion en pago is in the nature of a
sale because property is alienated in favor of the creditor in satisfaction of a debt in
money.11 For a valid dacion en pago to transpire, however, the attendance of the following
elements must be established, namely: (a) the existence of a money obligation; (b) the
alienation to the creditor of a property by the debtor with the consent of the former; and (c)
the satisfaction of the money obligation of the debtor.12 To have a valid dacion en
pago, therefore, the alienation of the property must fully extinguish the debt. Yet, the debt of
the respondents subsisted despite the transfer of the property in favor of Adelaida.
The petitioners insist that the parties agreed that the deed of sale would not yet contain the
date and the consideration because they had still to agree on the price.13 Their insistence is
not supported by the established circumstances. It appears that two days after the loan fell
due on October 15, 1986,14 Linda offered to sell the mortgaged property;15 hence, the
parties made the ocular inspection of the premises on October 18, 1986. By that time,
Adelaida had already become aware that the appraiser had valued the property at
P70,000.00. If that was so, there was no plausible reason for still leaving the consideration
on the deed of sale blank if the deed was drafted by Adelaida on October 20, 1986,
especially considering that they could have conveniently communicated with each other in
the meanwhile on this significant aspect of their transaction. It was also improbable for
Adelaida to still hand the unfilled deed of sale to Linda as her copy if, after all, the deed of
sale would be eventually notarized on October 22, 1986.
According to Article 1318 of the Civil Code, the requisites for any contract to be valid are,
namely: (a) the consent of the contracting parties; (b) the object; and (c) the consideration.
There is a perfection of a contract when there is a meeting of the minds of the parties on
CIVIL LAW REVIEW 2

each of these requisites.16 The following passage has fittingly discussed the process of
perfection in Moreno, Jr. v. Private Management Office:17
To reach that moment of perfection, the parties must agree on the same thing in the same
sense, so that their minds meet as to all the terms. They must have a distinct intention
common to both and without doubt or difference; until all understand alike, there can be no
assent, and therefore no contract. The minds of parties must meet at every point; nothing
can be left open for further arrangement. So long as there is any uncertainty or
indefiniteness, or future negotiations or considerations to be had between the parties, there
is not a completed contract, and in fact, there is no contract at all.18
In a sale, the contract is perfected at the moment when the seller obligates herself to deliver
and to transfer ownership of a thing or right to the buyer for a price certain, as to which the
latter agrees.19 The absence of the consideration from Linda's copy of the deed of sale was
credible proof of the lack of an essential requisite for the sale. In other words, the meeting of
the minds of the parties so vital in the perfection of the contract of sale did not transpire.
And, even assuming that Linda's leaving the consideration blank implied the authority of
Adelaida to fill in that essential detail in the deed of sale upon Linda's default on the loan,
the conclusion of the CA that the deed of sale was a pactum commisorium still holds, for, as
earlier mentioned, all the elements of pactum commisorium were present.
Anent interest, the CA deleted the imposition of monetary interest but decreed
compensatory interest of 12% per annum.
Interest that is the compensation fixed by the parties for the use or forbearance of money is
referred to as monetary interest.1âwphi1 On the other hand, interest that may be imposed
by law or by the courts as penalty or indemnity for damages is called compensatory
interest. In other words, the right to recover interest arises only either by vi11ue of a
contract or as damages for delay or failure to pay the principal loan on which the interest is
demanded.20
The CA correctly deleted the monetary interest from the judgment. Pursuant to Article 1956
of the Civil Code, no interest shall be due unless it has been expressly stipulated in writing.
In order for monetary interest to be imposed, therefore, two requirements must be present,
specifically: (a) that there has been an express stipulation for the payment of interest; and
(b) that the agreement for the payment of interest has been reduced in
writing.21Considering that the promissory notes contained no stipulation on the payment of
monetary interest, monetary interest cannot be validly imposed.
The CA properly imposed compensatory interest to offset the delay in the respondents'
performance of their obligation. Nonetheless, the imposition of the legal rate of interest
should be modified to conform to the prevailing jurisprudence. The rate of 12% per
annum imposed by the CA was the rate set in accordance with Eastern Shipping Lines, Inc., v.
Court of Appeals.22 In the meanwhile, Bangko Sentral ng Pilipinas Monetary Board
Resolution No. 796 dated May 16, 2013, amending Section 2 of Circular No. 905, Series of
1982, and Circular No. 799, Series of 2013, has lowered to 6% per annum the legal rate of
interest for a loan or forbearance of money, goods or credit starting July 1, 2013. This
revision is expressly recognized in Nacar v. Gallery Frames.23 It should be noted, however,
that imposition of the legal rate of interest at 6% per annum is prospective in application.
CIVIL LAW REVIEW 2

Accordingly, the legal rate of interest on the outstanding obligation of P43,492.15 as of June
28, 1990, as the CA found, should be as follows: (a) from the time of demand on October 13,
1994 until June 30, 2013, the legal rate of interest was 12% per annum conformably
with Eastern Shipping lines; and (b) following Nacar, from July 1, 2013 until full payment,
the legal interest is 6% per annum.
WHEREFORE, the Court AFFIRMS the decision promulgated on October 20, 2003 subject to
the MODIFICATION that the amount of P43,492.l5 due from the respondents shall earn
legal interest of 12% per annum reckoned from October 13, 1994 until June 30, 2013, and
6% per annum from July 1, 2013 until full payment.
Without pronouncement on costs of suit. SO ORDERED.
CIVIL LAW REVIEW 2

2.
SECOND DIVISION
January 11, 2016
G.R. No. 194964-65
UNIVERSITY OF MINDANAO, INC., Petitioner,

vs.
BANGKO SENTRAL NG PILIPINAS, ET AL., Respondents.
D E C I S I O N
LEONEN, J.:
Acts of an officer that are not authorized by the board of directors/trustees do not bind the
corporation unless the corporation ratifies the acts or holds the officer out as a person with
authority to transact on its behalf.
This is a Petition for Review on Certiorari1 of the Court of Appeals' December 17, 2009
Decision2 and December 20, 2010 Resolution.3 The Court of Appeals reversed the Cagayan
De Oro City trial court’s and the Iligan City trial court’s Decisions to nullify mortgage
contracts involving University of Mindanao’s properties.4
University of Mindanao is an educational institution. For the year 1982, its Board of
Trustees was chaired by Guillermo B. Torres. His wife, Dolores P. Torres, sat as University of
Mindanao’s Assistant Treasurer.5
Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and operated two (2)
thrift banks: (1) First Iligan Savings & Loan Association, Inc. (FISLAI); and (2) Davao Savings
and Loan Association, Inc. (DSLAI). Guillermo B. Torres chaired both thrift banks. He acted
as FISLAI’s President, while his wife, Dolores P. Torres, acted as DSLAI’s President and
FISLAI’s Treasurer.6
Upon Guillermo B. Torres’ request, Bangko Sentral ng Pilipinas issued a P1.9 million
standby emergency credit to FISLAI. The release of standby emergency credit was
evidenced by three (3) promissory notes dated February 8, 1982, April 7, 1982, and May 4,
1982 in the amounts of P500,000.00, P600,000.00, and P800,000.00, respectively. All these
promissory notes were signed by Guillermo B. Torres, and were co-signed by either his
wife, Dolores P. Torres, or FISLAI’s Special Assistant to the President, Edmundo G. Ramos,
Jr.7
On May 25, 1982, University of Mindanao’s Vice President for Finance, Saturnino Petalcorin,
executed a deed of real estate mortgage over University of Mindanao’s property in Cagayan
de Oro City (covered by Transfer Certificate of Title No. T-14345) in favor of Bangko Sentral
CIVIL LAW REVIEW 2

ng Pilipinas.8 "The mortgage served as security for FISLAI’s P1.9 Million loan[.]"9 It was
allegedly executed on University of Mindanao’s behalf.10
As proof of his authority to execute a real estate mortgage for University of Mindanao,
Saturnino Petalcorin showed a Secretary’s Certificate signed on April 13, 1982 by University
of Mindanao’s Corporate Secretary, Aurora de Leon.11 The Secretary’s Certificate stated:
That at the regular meeting of the Board of Trustees of the aforesaid corporation
[University of Mindanao] duly convened on March 30, 1982, at which a quorum was
present, the following resolution was unanimously adopted:
"Resolved that the University of Mindanao, Inc. be and is hereby authorized, to mortgage
real estate properties with the Central Bank of the Philippines to serve as security for the
credit facility of First Iligan Savings and Loan Association, hereby authorizing the President
and/or Vice-president for Finance, Saturnino R. Petalcorin of the University of Mindanao,
Inc. to sign, execute and deliver the covering mortgage document or any other documents
which may be proper[l]y required."12
The Secretary’s Certificate was supported by an excerpt from the minutes of the January 19,
1982 alleged meeting of University of Mindanao’s Board of Trustees. The excerpt was
certified by Aurora de Leon on March 13, 1982 to be a true copy of University of Mindanao’s
records on file.13 The excerpt reads:
3 – Other Matters:
(a) Cagayan de Oro and Iligan properties: Resolution No. 82-1-8
Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-President for Finance, to

represent the University of Mindanao to transact, transfer, convey, lease, mortgage, or
otherwise hypothecate any or all of the following properties situated at Cagayan de Oro and
Iligan City and authorizing further Mr. Petalcorin to sign any or all documents relative
thereto:
1. A parcel of land situated at Cagayan de Oro City, covered and technically described in
TRANSFER CERTIFICATE OF TITLE No. T-14345 of the Registry of Deeds of Cagayan de Oro
City;
2. A parcel of land situated at Iligan City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15696 (a.t.) of the Registry of Deeds of Iligan City; and
3. A parcel of land situated at Iligan City, covered and technically described in TRANSFER
CERTIFICATE OF TITLE NO. T-15697 (a.f.) of the Registry of Deeds of Iligan City.14
The mortgage deed executed by Saturnino Petalcorin in favor of Bangko Sentral ng Pilipinas
was annotated on the certificate of title of the Cagayan de Oro City property (Transfer
Certificate of Title No. 14345) on June 25, 1982. Aurora de Leon’s certification was also
annotated on the Cagayan de Oro City property’s certificate of title (Transfer Certificate of
Title No. 14345).15
CIVIL LAW REVIEW 2

On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an additional loan of
P620,700.00. Guillermo B. Torres and Edmundo Ramos executed a promissory note on
October 21, 1982 to cover that amount.16
On November 5, 1982, Saturnino Petalcorin executed another deed of real estate mortgage,
allegedly on behalf of University of Mindanao, over its two properties in Iligan
City.1âwphi1 This mortgage served as additional security for FISLAI’s loans. The two Iligan
City properties were covered by Transfer Certificates of Title Nos. T-15696 and T-15697.17
On January 17, 1983, Bangko Sentral ng Pilipinas’ mortgage lien over the Iligan City
properties and Aurora de Leon’s certification were annotated on Transfer Certificates of
Title Nos. T-15696 and T-15697.18 On January 18, 1983, Bangko Sentral ng Pilipinas’
mortgage lien over the Iligan City properties was also annotated on the tax declarations
covering the Iligan City properties.19
Bangko Sentral ng Pilipinas also granted emergency advances to DSLAI on May 27, 1983
and on August 20, 1984 in the amounts of P1,633,900.00 and P6,489,000.00, respectively.20
On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines entered into a
Memorandum of Agreement intended to rehabilitate the thrift banks, which had been
suffering from their depositors’ heavy withdrawals. Among the terms of the agreement was
the merger of FISLAI and DSLAI, with DSLAI as the surviving corporation. DSLAI later
became known as Mindanao Savings and Loan Association, Inc. (MSLAI).21
Guillermo B. Torres died on March 2, 1989.22
MSLAI failed to recover from its losses and was liquidated on May 24, 1991.23
On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to University of Mindanao,
informing it that the bank would foreclose its properties if MSLAI’s total outstanding
obligation of P12,534,907.73 remained unpaid.24
In its reply to Bangko Sentral ng Pilipinas’ June 18, 1999 letter, University of Mindanao,
through its Vice President for Accounting, Gloria E. Detoya, denied that University of
Mindanao’s properties were mortgaged. It also denied having received any loan proceeds
from Bangko Sentral ng Pilipinas.25
On July 16, 1999, University of Mindanao filed two Complaints for nullification and
cancellation of mortgage. One Complaint was filed before the Regional Trial Court of
Cagayan de Oro City, and the other Complaint was filed before the Regional Trial Court of
Iligan City.26
University of Mindanao alleged in its Complaints that it did not obtain any loan from Bangko
Sentral ng Pilipinas. It also did not receive any loan proceeds from the bank.27
University of Mindanao also alleged that Aurora de Leon’s certification was anomalous. It
never authorized Saturnino Petalcorin to execute real estate mortgage contracts involving
its properties to secure FISLAI’s debts. It never ratified the execution of the mortgage
CIVIL LAW REVIEW 2

contracts. Moreover, as an educational institution, it cannot mortgage its properties to

secure another person’s debts.28
On November 23, 2001, the Regional Trial Court of Cagayan de Oro City rendered a Decision
in favor of University of Mindanao,29 thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff and

against defendants:
1. DECLARING the real estate mortgage Saturnino R. Petalcorin executed in favor of

BANGKO SENTRAL NG PILIPINAS involving Lot 421-A located in Cagayan de Oro City with
an area of 482 square meters covered by TCT No. T-14345 as annuled [sic];
2. ORDERING the Register of Deeds of Cagayan de Oro City to cancel Entry No. 9951 and
Entry No. 9952 annotated at the back of said TCT No. T-14345, Registry of Deeds of Cagayan
de Oro City;
Prayer for attorney’s fee [sic] is hereby denied there being no proof that in demanding
payment of the emergency loan, defendant BANGKO SENTRAL NG PILIPINAS was motivated
by evident bad faith,
SO ORDERED.30 (Citation omitted)
The Regional Trial Court of Cagayan de Oro City found that there was no board resolution
giving Saturnino Petalcorin authority to execute mortgage contracts on behalf of University
of Mindanao. The Cagayan de Oro City trial court gave weight to Aurora de Leon’s testimony
that University of Mindanao’s Board of Trustees did not issue a board resolution that would
support the Secretary’s Certificate she issued. She testified that she signed the Secretary’s
Certificate only upon Guillermo B. Torres’ orders.31
Saturnino Petalcorin testified that he had no authority to execute a mortgage contract on

University of Mindanao’s behalf. He merely executed the contract because of Guillermo B.
Torres’ request.32
Bangko Sentral ng Pilipinas’ witness Daciano Pagui, Jr. also admitted that there was no
board resolution giving Saturnino Petalcorin authority to execute mortgage contracts on
behalf of University of Mindanao.33
The Regional Trial Court of Cagayan de Oro City ruled that Saturnino Petalcorin was not
authorized to execute mortgage contracts for University of Mindanao. Hence, the mortgage
of University of Mindanao’s Cagayan de Oro City property was unenforceable. Saturnino
Petalcorin’s unauthorized acts should be annulled.34
Similarly, the Regional Trial Court of Iligan City rendered a Decision on December 7, 2001 in
favor of University of Mindanao.35 The dispositive portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff

and against the defendants, as follows:
CIVIL LAW REVIEW 2

1. Nullifying and canceling [sic] the subject Deed of Real Estate Mortgage dated November 5,
1982 for being unenforceable or void contract;
2. Ordering the Office of the Register of Deeds of Iligan City to cancel the entries on TCT No.
T-15696 and TCT No. T-15697 with respect to the aforesaid Deed of Real Estate Mortgage
dated November 5, 1982 and all other entries related thereto;
3. Ordering the defendant Bangko Sentral ng Pilipinas to return the owner’s duplicate
copies of TCT No. T-15696 and TCT No. 15697 to the plaintiff;
4. Nullifying the subject [f]oreclosure [p]roceedings and the [a]uction [s]ale conducted by
defendant Atty. Gerardo Paguio, Jr. on October 8, 1999 including all the acts subsequent
thereto and ordering the Register of Deeds of Iligan City not to register any Certificate of
Sale pursuant to the said auction sale nor make any transfer of the corresponding titles, and
if already registered and transferred, to cancel all the said entries in TCT No. T-15696 and
TCT No. T-15697 and/or cancel the corresponding new TCTs in the name of defendant
Bangko Sentral ng Pilipinas;
5. Making the Preliminary Injunction per Order of this Court dated October 13, 2000
permanent.
No pronouncement as to costs.36 (Citation omitted)
The Iligan City trial court found that the Secretary’s Certificate issued by Aurora de Leon
was fictitious37 and irregular for being unnumbered.38 It also did not specify the identity,
description, or location of the mortgaged properties.39
The Iligan City trial court gave credence to Aurora de Leon’s testimony that the University
of Mindanao’s Board of Trustees did not take up the documents in its meetings. Saturnino
Petalcorin corroborated her testimony.40
The Iligan City trial court ruled that the lack of a board resolution authorizing Saturnino
Petalcorin to execute documents of mortgage on behalf of University of Mindanao made the
real estate mortgage contract unenforceable under Article 140341 of the Civil Code.42 The
mortgage contract and the subsequent acts of foreclosure and auction sale were void
because the mortgage contract was executed without University of Mindanao’s authority.43
The Iligan City trial court also ruled that the annotations on the titles of University of
Mindanao’s properties do not operate as notice to the University because annotations only
bind third parties and not owners.44 Further, Bangko Sentral ng Pilipinas’ right to foreclose
the University of Mindanao’s properties had already prescribed.45
Bangko Sentral ng Pilipinas separately appealed the Decisions of both the Cagayan de Oro
City and the Iligan City trial courts.46
After consolidating both cases, the Court of Appeals issued a Decision on December 17,
2009 in favor of Bangko Sentral ng Pilipinas, thus:
CIVIL LAW REVIEW 2

FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial
Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7
December 2001 of the Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790
are REVERSED and SET ASIDE. The Complaints in both cases before the trial courts
are DISMISSED. The Writ of Preliminary Injunction issued by the Regional Trial Court of
Iligan City, Branch 1 in Civil Case No. 4790 is LIFTED and SET ASIDE.
SO ORDERED.47
The Court of Appeals ruled that "[a]lthough BSP failed to prove that the UM Board of
Trustees actually passed a Board Resolution authorizing Petalcorin to mortgage the subject
real properties,"48 Aurora de Leon’s Secretary’s Certificate "clothed Petalcorin with
apparent and ostensible authority to execute the mortgage deed on its behalf[.]"49Bangko
Sentral ng Pilipinas merely relied in good faith on the Secretary’s Certificate.50 University of
Mindanao is estopped from denying Saturnino Petalcorin’s authority.51
Moreover, the Secretary’s Certificate was notarized. This meant that it enjoyed the
presumption of regularity as to the truth of its statements and authenticity of the
signatures.52 Thus, "BSP cannot be faulted for relying on the [Secretary’s Certificate.]"53
The Court of Appeals also ruled that since University of Mindanao’s officers, Guillermo B.
Torres and his wife, Dolores P. Torres, signed the promissory notes, University of Mindanao
was presumed to have knowledge of the transaction.54 Knowledge of an officer in relation to
matters within the scope of his or her authority is notice to the corporation.55
The annotations on University of Mindanao’s certificates of title also operate as constructive

notice to it that its properties were mortgaged.56 Its failure to disown the mortgages for
more than a decade was implied ratification.57
The Court of Appeals also ruled that Bangko Sentral ng Pilipinas’ action for foreclosure had
not yet prescribed because the due date extensions that Bangko Sentral ng Pilipinas granted
to FISLAI extended the due date of payment to five (5) years from February 8, 1985.58 The
bank’s demand letter to Dolores P. Torres on June 18, 1999 also interrupted the
prescriptive period.59
University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion for

Reconsideration60 and Motion for Partial Reconsideration respectively of the Court of
Appeals’ Decision. On December 20, 2010, the Court of Appeals issued a Resolution, thus:
Acting on the foregoing incidents, the Court RESOLVES to:
1. GRANT the appellant’s twin motions for extension of time to file comment/opposition
and NOTE the Comment on the appellee’s Motion for Reconsideration it subsequently filed
on June 23, 2010;
2. GRANT the appellee’s three (3) motions for extension of time to file comment/opposition
and NOTE the Comment on the appellant’s Motion for Partial Reconsideration it filed on
July 26, 2010;
CIVIL LAW REVIEW 2

3. NOTE the appellant’s "Motion for Leave to File Attached Reply Dated August 11, 2010"
filed on August 13, 2010 and DENY the attached "Reply to Comment Dated July 26, 2010";
4. DENY the appellee’s Motion for Reconsideration as it does not offer any arguments
sufficiently meritorious to warrant modification or reversal of the Court’s 17 December
2009 Decision. The Court finds that there is no compelling reason to reconsider its ruling;
and
5. GRANT the appellant’s Motion for Partial Reconsideration, as the Court finds it
meritorious, considering that it ruled in its Decision that "BSP can still foreclose on the UM’s
real property in Cagayan de Oro City covered by TCT No. T-14345." It then follows that the
injunctive writ issued by the RTC of Cagayan de Oro City, Branch 24 must be lifted. The
Court’s 17 December 2009 Decision is accordingly MODIFIED and AMENDED to read as
follows:
"FOR THE REASONS STATED, the Decision dated 23 November 2001 of the Regional Trial
Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414 and the Decision dated 7
December 2001 of the Regional Trial Court of Iligan City, Branch 1 in Civil Case No. 4790
are REVERSED and SET ASIDE. The Complaints in both cases before the trial courts
are DISMISSED. The Writs of Preliminary Injunction issued by the Regional Trial Court of
Iligan City, Branch 1 in Civil Case No. 4790 and in the Regional Trial Court of Cagayan de Oro
City, Branch 24 in Civil Case No. 99-414 are LIFTED and SET ASIDE."
SO ORDERED.61 (Citation omitted)
Hence, University of Mindanao filed this Petition for Review.
The issues for resolution are:
First, whether respondent Bangko Sentral ng Pilipinas’ action to foreclose the mortgaged
properties had already prescribed; and
Second, whether petitioner University of Mindanao is bound by the real estate mortgage
contracts executed by Saturnino Petalcorin.
We grant the Petition.
Petitioner argues that respondent’s action to foreclose its mortgaged properties had already
prescribed.
Petitioner is mistaken.
Prescription is the mode of acquiring or losing rights through the lapse of time.62 Its
purpose is "to protect the diligent and vigilant, not those who sleep on their rights."63
CIVIL LAW REVIEW 2

The prescriptive period for actions on mortgages is ten (10) years from the day they may be
brought.64 Actions on mortgages may be brought not upon the execution of the mortgage
contract but upon default in payment of the obligation secured by the mortgage.65
A debtor is considered in default when he or she fails to pay the obligation on due date and,
subject to exceptions, after demands for payment were made by the creditor. Article 1169
of the Civil Code provides:
ART. 1169. 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 declare; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power
to perform.
Article 1193 of the Civil Code provides that an obligation is demandable only upon due date.
It provides:
ART. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of the
day certain.
A day certain is understood to be that which must necessarily come, although it may not be
known when.
If the uncertainty consists in whether the day will come or not, the obligation is conditional,
and it shall be regulated by the rules of the preceding Section.
In other words, as a general rule, a person defaults and prescriptive period for action runs
when (1) the obligation becomes due and demandable; and (2) demand for payment has
been made.
The prescriptive period neither runs from the date of the execution of a contract nor does
the prescriptive period necessarily run on the date when the loan becomes due and
demandable.66 Prescriptive period runs from the date of demand,67 subject to certain
exceptions.
In other words, ten (10) years may lapse from the date of the execution of contract, without
barring a cause of action on the mortgage when there is a gap between the period of
CIVIL LAW REVIEW 2

execution of the contract and the due date or between the due date and the demand date in
cases when demand is necessary.68
The mortgage contracts in this case were executed by Saturnino Petalcorin in 1982. The
maturity dates of FISLAI’s loans were repeatedly extended until the loans became due and
demandable only in 1990.69 Respondent informed petitioner of its decision to foreclose its
properties and demanded payment in 1999.
The running of the prescriptive period of respondent’s action on the mortgages did not start
when it executed the mortgage contracts with Saturnino Petalcorin in 1982.
The prescriptive period for filing an action may run either (1) from 1990 when the loan
became due, if the obligation was covered by the exceptions under Article 1169 of the Civil
Code; (2) or from 1999 when respondent demanded payment, if the obligation was not
covered by the exceptions under Article 1169 of the Civil Code.
In either case, respondent’s Complaint with cause of action based on the mortgage contract
was filed well within the prescriptive period.
Given the termination of all traces of FISLAI’s existence,70 demand may have been rendered
unnecessary under Article 1169(3)71 of the Civil Code. Granting that this is the case,
respondent would have had ten (10) years from due date in 1990 or until 2000 to institute
an action on the mortgage contract.
However, under Article 115572 of the Civil Code, prescription of actions may be interrupted
by (1) the filing of a court action; (2) a written extrajudicial demand; and (3) the written
acknowledgment of the debt by the debtor.
Therefore, the running of the prescriptive period was interrupted when respondent sent its
demand letter to petitioner on June 18, 1999. This eventually led to petitioner’s filing of its
annulment of mortgage complaints before the Regional Trial Courts of Iligan City and
Cagayan De Oro City on July 16, 1999.
Assuming that demand was necessary, respondent’s action was within the ten (10)-year
prescriptive period. Respondent demanded payment of the loans in 1999 and filed an action
in the same year.
II
Petitioner argues that the execution of the mortgage contract was ultra vires. As an
educational institution, it may not secure the loans of third persons.73 Securing loans of
third persons is not among the purposes for which petitioner was established.74
Petitioner is correct.
Corporations are artificial entities granted legal personalities upon their creation by their
incorporators in accordance with law. Unlike natural persons, they have no inherent
powers. Third persons dealing with corporations cannot assume that corporations have
CIVIL LAW REVIEW 2

powers. It is up to those persons dealing with corporations to determine their competence

as expressly defined by the law and their articles of incorporation.75
A corporation may exercise its powers only within those definitions. Corporate acts that are
outside those express definitions under the law or articles of incorporation or those
"committed outside the object for which a corporation is created"76 are ultra vires.
The only exception to this rule is when acts are necessary and incidental to carry out a
corporation’s purposes, and to the exercise of powers conferred by the Corporation Code
and under a corporation’s articles of incorporation.77This exception is specifically included
in the general powers of a corporation under Section 36 of the Corporation Code:
SEC. 36. Corporate powers and capacity.—Every corporation incorporated under this Code
has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal
the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation. (Emphasis supplied)
CIVIL LAW REVIEW 2

Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.78 stated the test to determine if a
corporate act is in accordance with its purposes:
It is a question, therefore, in each case, of the logical relation of the act to the corporate
purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise
prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to
the promotion of those ends, in a substantial, and not in a remote and fanciful, sense, it may
fairly be considered within charter powers. The test to be applied is whether the act in
question is in direct and immediate furtherance of the corporation’s business, fairly incident
to the express powers and reasonably necessary to their exercise. If so, the corporation has the
power to do it; otherwise, not.79 (Emphasis supplied)
As an educational institution, petitioner serves:
a. To establish, conduct and operate a college or colleges, and/or university;
b. To acquire properties, real and/or personal, in connection with the establishment and
operation of such college or colleges;
c. To do and perform the various and sundry acts and things permitted by the laws of the
Philippines unto corporations like classes and kinds;
d. To engage in agricultural, industrial, and/or commercial pursuits in line with educational

program of the corporation and to acquire all properties, real and personal[,] necessary for
the purposes[;]
e. To establish, operate, and/or acquire broadcasting and television stations also in line with
the educational program of the corporation and for such other purposes as the Board of
Trustees may determine from time to time;
f. To undertake housing projects of faculty members and employees, and to acquire real
estates for this purpose;
g. To establish, conduct and operate and/or invest in educational foundations; [As amended
on December 15, 1965][;]
h. To establish, conduct and operate housing and dental schools, medical facilities and other
related undertakings;
i. To invest in other corporations. [As amended on December 9, 1998]. [Amended Articles of

Incorporation of the University of Mindanao, Inc. – the Petitioner].80
Petitioner does not have the power to mortgage its properties in order to secure loans of
other persons. As an educational institution, it is limited to developing human capital
through formal instruction. It is not a corporation engaged in the business of securing loans
of others.
Hiring professors, instructors, and personnel; acquiring equipment and real estate;
establishing housing facilities for personnel and students; hiring a concessionaire; and other
CIVIL LAW REVIEW 2

activities that can be directly connected to the operations and conduct of the education
business may constitute the necessary and incidental acts of an educational institution.
Securing FISLAI’s loans by mortgaging petitioner’s properties does not appear to have even
the remotest connection to the operations of petitioner as an educational institution.
Securing loans is not an adjunct of the educational institution’s conduct of business.81 It
does not appear that securing third-party loans was necessary to maintain petitioner’s
business of providing instruction to individuals.
This court upheld the validity of corporate acts when those acts were shown to be clearly
within the corporation’s powers or were connected to the corporation’s purposes.
In Pirovano, et al. v. De la Rama Steamship Co.,82 this court declared valid the donation given
to the children of a deceased person who contributed to the growth of the
corporation.83 This court found that this donation was within the broad scope of powers
and purposes of the corporation to "aid in any other manner any person . . . in which any
interest is held by this corporation or in the affairs or prosperity of which this corporation
has a lawful interest."84
In Twin Towers Condominium Corporation v. Court of Appeals, et al.,85 this court declared
valid a rule by Twin Towers Condominium denying delinquent members the right to use
condominium facilities.86 This court ruled that the condominium’s power to promulgate
rules on the use of facilities and to enforce provisions of the Master Deed was clear in the
Condominium Act, Master Deed, and By-laws of the condominium.87 Moreover, the
promulgation of such rule was "reasonably necessary" to attain the purposes of the
condominium project.88
This court has, in effect, created a presumption that corporate acts are valid if, on their face,
the acts were within the corporation’s powers or purposes. This presumption was
explained as early as in 1915 in Coleman v. Hotel De France89 where this court ruled that
contracts entered into by corporations in the exercise of their incidental powers are not
ultra vires.90
Coleman involved a hotel’s cancellation of an employment contract it executed with a

gymnast. One of the hotel’s contentions was the supposed ultra vires nature of the contract.
It was executed outside its express and implied powers under the articles of
incorporation.91
In ruling in favor of the contract’s validity, this court considered the incidental powers of
the hotel to include the execution of employment contracts with entertainers for the
purpose of providing its guests entertainment and increasing patronage.92
This court ruled that a contract executed by a corporation shall be presumed valid if on its
face its execution was not beyond the powers of the corporation to do.93 Thus:
When a contract is not on its face necessarily beyond the scope of the power of the
corporation by which it was made, it will, in the absence of proof to the contrary, be
presumed to be valid. Corporations are presumed to contract within their powers. The
CIVIL LAW REVIEW 2

doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to
prevail where it would defeat the ends of justice or work a legal wrong.94
However, this should not be interpreted to mean that such presumption applies to all cases,
even when the act in question is on its face beyond the corporation’s power to do or when
the evidence contradicts the presumption.
Presumptions are "inference[s] as to the existence of a fact not actually known, arising from
its usual connection with another which is known, or a conjecture based on past experience
as to what course human affairs ordinarily take."95 Presumptions embody values and
revealed behavioral expectations under a given set of circumstances.
Presumptions may be conclusive96 or disputable.97
Conclusive presumptions are presumptions that may not be overturned by evidence,

however strong the evidence is.98 They are made conclusive not because there is an
established uniformity in behavior whenever identified circumstances arise. They are
conclusive because they are declared as such under the law or the rules. Rule 131, Section 2
of the Rules of Court identifies two (2) conclusive presumptions:
SEC. 2. Conclusive presumptions.— The following are instances of conclusive presumptions:
(a) Whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act or omission, be permitted to
falsify it;
(b) The tenant is not permitted to deny the title of his landlord at the time of the
commencement of the relation of landlord and tenant between them.
On the other hand, disputable presumptions are presumptions that may be overcome by
contrary evidence.99 They are disputable in recognition of the variability of human behavior.
Presumptions are not always true. They may be wrong under certain circumstances, and
courts are expected to apply them, keeping in mind the nuances of every experience that
may render the expectations wrong.
Thus, the application of disputable presumptions on a given circumstance must be based on

the existence of certain facts on which they are meant to operate. "[P]resumptions are not
allegations, nor do they supply their absence[.]"100Presumptions are conclusions. They do
not apply when there are no facts or allegations to support them.
If the facts exist to set in motion the operation of a disputable presumption, courts may
accept the presumption. However, contrary evidence may be presented to rebut the
presumption.
Courts cannot disregard contrary evidence offered to rebut disputable presumptions.

Disputable presumptions apply only in the absence of contrary evidence or explanations.
This court explained in Philippine Agila Satellite Inc. v. Usec. Trinidad-Lichauco:101
CIVIL LAW REVIEW 2

We do not doubt the existence of the presumptions of "good faith" or "regular performance
of official duty," yet these presumptions are disputable and may be contradicted and
overcome by other evidence. Many civil actions are oriented towards overcoming any
number of these presumptions, and a cause of action can certainly be geared towards such
effect. The very purpose of trial is to allow a party to present evidence to overcome the
disputable presumptions involved. Otherwise, if trial is deemed irrelevant or unnecessary,
owing to the perceived indisputability of the presumptions, the judicial exercise would be
relegated to a mere ascertainment of what presumptions apply in a given case, nothing more.
Consequently, the entire Rules of Court is rendered as excess verbiage, save perhaps for the
provisions laying down the legal presumptions.
If this reasoning of the Court of Appeals were ever adopted as a jurisprudential rule, no
public officer could ever be sued for acts executed beyond their official functions or
authority, or for tortious conduct or behavior, since such acts would "enjoy the presumption
of good faith and in the regular performance of official duty." Indeed, few civil actions of any
nature would ever reach the trial stage, if a case can be adjudicated by a mere
determination from the complaint or answer as to which legal presumptions are applicable.
For example, the presumption that a person is innocent of a wrong is a disputable
presumption on the same level as that of the regular performance of official duty. A civil
complaint for damages necessarily alleges that the defendant committed a wrongful act or
omission that would serve as basis for the award of damages. With the rationale of the
Court of Appeals, such complaint can be dismissed upon a motion to dismiss solely on the
ground that the presumption is that a person is innocent of a wrong.102 (Emphasis supplied,
citations omitted)
In this case, the presumption that the execution of mortgage contracts was within
petitioner’s corporate powers does not apply. Securing third-party loans is not connected to
petitioner’s purposes as an educational institution.
III
Respondent argues that petitioner’s act of mortgaging its properties to guarantee FISLAI’s
loans was consistent with petitioner’s business interests, since petitioner was presumably a
FISLAI shareholder whose officers and shareholders interlock with FISLAI. Respondent
points out that petitioner and its key officers held substantial shares in MSLAI when DSLAI
and FISLAI merged. Therefore, it was safe to assume that when the mortgages were
executed in 1982, petitioner held substantial shares in FISLAI.103
Parties dealing with corporations cannot simply assume that their transaction is within the
corporate powers. The acts of a corporation are still limited by its powers and purposes as
provided in the law and its articles of incorporation.
Acquiring shares in another corporation is not a means to create new powers for the
acquiring corporation. Being a shareholder of another corporation does not automatically
change the nature and purpose of a corporation’s business. Appropriate amendments must
be made either to the law or the articles of incorporation before a corporation can validly
exercise powers outside those provided in law or the articles of incorporation. In other
words, without an amendment, what is ultra vires before a corporation acquires shares in
other corporations is still ultra vires after such acquisition.
CIVIL LAW REVIEW 2

Thus, regardless of the number of shares that petitioner had with FISLAI, DSLAI, or MSLAI,
securing loans of third persons is still beyond petitioner’s power to do. It is still inconsistent
with its purposes under the law104 and its articles of incorporation.105
In attempting to show petitioner’s interest in securing FISLAI’s loans by adverting to their

interlocking directors and shareholders, respondent disregards petitioner’s separate
personality from its officers, shareholders, and other juridical persons.
The separate personality of corporations means that they are "vest[ed] [with] rights,
powers, and attributes [of their own] as if they were natural persons[.]"106 Their assets and
liabilities are their own and not their officers’, shareholders’, or another corporation’s. In
the same vein, the assets and liabilities of their officers and shareholders are not the
corporations’. Obligations incurred by corporations are not obligations of their officers and
shareholders. Obligations of officers and shareholders are not obligations of
corporations.107 In other words, corporate interests are separate from the personal
interests of the natural persons that comprise corporations.
Corporations are given separate personalities to allow natural persons to balance the risks
of business as they accumulate capital. They are, however, given limited competence as a
means to protect the public from fraudulent acts that may be committed using the separate
juridical personality given to corporations.
Petitioner’s key officers, as shareholders of FISLAI, may have an interest in ensuring the
viability of FISLAI by obtaining a loan from respondent and securing it by whatever means.
However, having interlocking officers and stockholders with FISLAI does not mean that
petitioner, as an educational institution, is or must necessarily be interested in the affairs of
FISLAI.
Since petitioner is an entity distinct and separate not only from its own officers and
shareholders but also from FISLAI, its interests as an educational institution may not be
consistent with FISLAI’s.
Petitioner and FISLAI have different constituencies. Petitioner’s constituents comprise

persons who have committed to developing skills and acquiring knowledge in their chosen
fields by availing the formal instruction provided by petitioner. On the other hand, FISLAI is
a thrift bank, which constituencies comprise investors.
While petitioner and FISLAI exist ultimately to benefit their stockholders, their
constituencies affect the means by which they can maintain their existence. Their interests
are congruent with sustaining their constituents’ needs because their existence depends on
that. Petitioner can exist only if it continues to provide for the kind and quality of
instruction that is needed by its constituents. Its operations and existence are placed at risk
when resources are used on activities that are not geared toward the attainment of its
purpose. Petitioner has no business in securing FISLAI, DSLAI, or MSLAI’s loans. This
activity is not compatible with its business of providing quality instruction to its
constituents.
CIVIL LAW REVIEW 2

Indeed, there are instances when we disregard the separate corporate personalities of the
corporation and its stockholders, directors, or officers. This is called piercing of the
corporate veil.
Corporate veil is pierced when the separate personality of the corporation is being used to
perpetrate fraud, illegalities, and injustices.108 In Lanuza, Jr. v. BF Corporation:109
Piercing the corporate veil is warranted when "[the separate personality of a corporation] is
used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues." It is also
warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation."110
These instances have not been shown in this case. There is no evidence pointing to the
possibility that petitioner used its separate personality to defraud third persons or commit
illegal acts. Neither is there evidence to show that petitioner was merely a farce of a
corporation. What has been shown instead was that petitioner, too, had been victimized by
fraudulent and unauthorized acts of its own officers and directors.
In this case, instead of guarding against fraud, we perpetuate fraud if we accept

respondent’s contentions.
IV
Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage its properties
on its behalf. There was no board resolution to that effect. Thus, the mortgages executed by
Saturnino Petalcorin were unenforceable.111
The mortgage contracts executed in favor of respondent do not bind petitioner. They were
executed without authority from petitioner.
Petitioner must exercise its powers and conduct its business through its Board of Trustees.
Section 23 of the Corporation Code provides:
SEC. 23. The board of directors or trustees.—Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall hold office for one (1) year
and until their successors are elected and qualified.
Being a juridical person, petitioner cannot conduct its business, make decisions, or act in
any manner without action from its Board of Trustees. The Board of Trustees must act as a
body in order to exercise corporate powers. Individual trustees are not clothed with
corporate powers just by being a trustee. Hence, the individual trustee cannot bind the
corporation by himself or herself.
CIVIL LAW REVIEW 2

The corporation may, however, delegate through a board resolution its corporate powers or
functions to a representative, subject to limitations under the law and the corporation’s
articles of incorporation.112
The relationship between a corporation and its representatives is governed by the general
principles of agency.113Article 1317 of the Civil Code provides that there must be authority
from the principal before anyone can act in his or her name:
ART. 1317. No one may contract in the name of another without being authorized by the
latter, or unless he has by law a right to represent him.
Hence, without delegation by the board of directors or trustees, acts of a person—including

those of the corporation’s directors, trustees, shareholders, or officers—executed on behalf
of the corporation are generally not binding on the corporation.114
Contracts entered into in another’s name without authority or valid legal representation are
generally unenforceable. The Civil Code provides:
ART. 1317. . . .
A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before
it is revoked by the other contracting party.
. . . .
ART. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers[.]
The unenforceable status of contracts entered into by an unauthorized person on behalf of

another is based on the basic principle that contracts must be consented to by both
parties.115 There is no contract without meeting of the minds as to the subject matter and
cause of the obligations created under the contract.116
Consent of a person cannot be presumed from representations of another, especially if

obligations will be incurred as a result. Thus, authority is required to make actions made on
his or her behalf binding on a person. Contracts entered into by persons without authority
from the corporation shall generally be considered ultra vires and unenforceable117 against
the corporation.
Two trial courts118 found that the Secretary’s Certificate and the board resolution were
either non-existent or fictitious. The trial courts based their findings on the testimony of the
Corporate Secretary, Aurora de Leon herself. She signed the Secretary’s Certificate and the
excerpt of the minutes of the alleged board meeting purporting to authorize Saturnino
Petalcorin to mortgage petitioner’s properties. There was no board meeting to that effect.
CIVIL LAW REVIEW 2

Guillermo B. Torres ordered the issuance of the Secretary’s Certificate. Aurora de Leon’s
testimony was corroborated by Saturnino Petalcorin.
Even the Court of Appeals, which reversed the trial courts’ decisions, recognized that "BSP
failed to prove that the UM Board of Trustees actually passed a Board Resolution
authorizing Petalcorin to mortgage the subject real properties[.]"119
Well-entrenched is the rule that this court, not being a trier of facts, is bound by the findings
of fact of the trial courts and the Court of Appeals when such findings are supported by
evidence on record.120 Hence, not having the proper board resolution to authorize Saturnino
Petalcorin to execute the mortgage contracts for petitioner, the contracts he executed are
unenforceable against petitioner. They cannot bind petitioner.
However, personal liabilities may be incurred by directors who assented to such

unauthorized act121 and by the person who contracted in excess of the limits of his or her
authority without the corporation’s knowledge.122
Unauthorized acts that are merely beyond the powers of the corporation under its articles
of incorporation are not void ab initio.
In Pirovano, et al., this court explained that corporate acts may be ultra vires but not
void.123 Corporate acts may be capable of ratification:124
[A] distinction should be made between corporate acts or contracts which are illegal and
those which are merely ultra vires. The former contemplates the doing of an act which is
contrary to law, morals, or public order, or contravene some rules of public policy or public
duty, and are, like similar transactions between individuals, void. They cannot serve as basis
of a court action, nor acquire validity by performance, ratification, or estoppel. Mere ultra
vires acts, on the other hand, or those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.125
Thus, even though a person did not give another person authority to act on his or her behalf,
the action may be enforced against him or her if it is shown that he or she ratified it or
allowed the other person to act as if he or she had full authority to do so. The Civil Code
provides:
ART. 1910. The principal must comply with all the obligations which the agent may have
contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly.
ART. 1911. Even when the agent has exceeded his authority, the principal is solidarily liable
with the agent if the former allowed the latter to act as though he had full powers. (Emphasis
supplied)
CIVIL LAW REVIEW 2

Ratification is a voluntary and deliberate confirmation or adoption of a previous

unauthorized act.126 It converts the unauthorized act of an agent into an act of the
principal.127 It cures the lack of consent at the time of the execution of the contract entered
into by the representative, making the contract valid and enforceable.128 It is, in essence,
consent belatedly given through express or implied acts that are deemed a confirmation or
waiver of the right to impugn the unauthorized act.129 Ratification has the effect of placing
the principal in a position as if he or she signed the original contract. In Board of Liquidators
v. Heirs of M. Kalaw, et al.:130
Authorities, great in number, are one in the idea that "ratification by a corporation of an
unauthorized act or contract by its officers or others relates back to the time of the act or
contract ratified, and is equivalent to original authority;" and that "[t]he corporation and the
other party to the transaction are in precisely the same position as if the act or contract had
been authorized at the time." The language of one case is expressive: "The adoption or
ratification of a contract by a corporation is nothing more nor less than the making of an
original contract. The theory of corporate ratification is predicated on the right of a
corporation to contract, and any ratification or adoption is equivalent to a grant of prior
authority."131 (Citations omitted)
Implied ratification may take the form of silence, acquiescence, acts consistent with
approval of the act, or acceptance or retention of benefits.132 However, silence,
acquiescence, retention of benefits, and acts that may be interpreted as approval of the act
do not by themselves constitute implied ratification. For an act to constitute an implied
ratification, there must be no acceptable explanation for the act other than that there is an
intention to adopt the act as his or her own.133 "[It] cannot be inferred from acts that a
principal has a right to do independently of the unauthorized act of the agent."134
No act by petitioner can be interpreted as anything close to ratification. It was not shown
that it issued a resolution ratifying the execution of the mortgage contracts. It was not
shown that it received proceeds of the loans secured by the mortgage contracts. There was
also no showing that it received any consideration for the execution of the mortgage
contracts. It even appears that petitioner was unaware of the mortgage contracts until
respondent notified it of its desire to foreclose the mortgaged properties.
Ratification must be knowingly and voluntarily done.135 Petitioner’s lack of knowledge

about the mortgage executed in its name precludes an interpretation that there was any
ratification on its part.
Respondent further argues that petitioner is presumed to have knowledge of its

transactions with respondent because its officers, the Spouses Guillermo and Dolores
Torres, participated in obtaining the loan.136
Indeed, a corporation, being a person created by mere fiction of law, can act only through
natural persons such as its directors, officers, agents, and representatives. Hence, the
general rule is that knowledge of an officer is considered knowledge of the corporation.
However, even though the Spouses Guillermo and Dolores Torres were officers of both the
thrift banks and petitioner, their knowledge of the mortgage contracts cannot be considered
as knowledge of the corporation.
CIVIL LAW REVIEW 2

The rule that knowledge of an officer is considered knowledge of the corporation applies
only when the officer is acting within the authority given to him or her by the corporation.
In Francisco v. Government Service Insurance System:137
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the

course of his employment, and in relation to matters within the scope of his authority, is
notice to the corporation, whether he communicates such knowledge or not.138
The public should be able to rely on and be protected from the representations of a
corporate representative acting within the scope of his or her authority. This is why an
authorized officer’s knowledge is considered knowledge of corporation. However, just as
the public should be able to rely on and be protected from corporate representations,
corporations should also be able to expect that they will not be bound by unauthorized
actions made on their account.
Thus, knowledge should be actually communicated to the corporation through its

authorized representatives. A corporation cannot be expected to act or not act on a
knowledge that had not been communicated to it through an authorized representative.
There can be no implied ratification without actual communication. Knowledge of the
existence of contract must be brought to the corporation’s representative who has authority
to ratify it. Further, "the circumstances must be shown from which such knowledge may be
presumed."139
The Spouses Guillermo and Dolores Torres’ knowledge cannot be interpreted as knowledge
of petitioner. Their knowledge was not obtained as petitioner’s representatives. It was not
shown that they were acting for and within the authority given by petitioner when they
acquired knowledge of the loan transactions and the mortgages. The knowledge was
obtained in the interest of and as representatives of the thrift banks.
VI
Respondent argues that Saturnino Petalcorin was clothed with the authority to transact on
behalf of petitioner, based on the board resolution dated March 30, 1982 and Aurora de
Leon’s notarized Secretary’s Certificate.140 According to respondent, petitioner is bound by
the mortgage contracts executed by Saturnino Petalcorin.141
This court has recognized presumed or apparent authority or capacity to bind corporate
representatives in instances when the corporation, through its silence or other acts of
recognition, allowed others to believe that persons, through their usual exercise of
corporate powers, were conferred with authority to deal on the corporation’s behalf.142
The doctrine of apparent authority does not go into the question of the corporation’s
competence or power to do a particular act. It involves the question of whether the officer
has the power or is clothed with the appearance of having the power to act for the
corporation. A finding that there is apparent authority is not the same as a finding that the
corporate act in question is within the corporation’s limited powers.
The rule on apparent authority is based on the principle of estoppel. The Civil Code
provides:
CIVIL LAW REVIEW 2

ART. 1431. Through estoppel an admission or representation is rendered conclusive upon

the person making it, and cannot be denied or disproved as against the person relying
thereon.
. . . .
ART. 1869. Agency may be express, or implied from the acts of the principal, from his
silence or lack of action, or his failure to repudiate the agency, knowing that another person
is acting on his behalf without authority.
Agency may be oral, unless the law requires a specific form.
A corporation is estopped by its silence and acts of recognition because we recognize that
there is information asymmetry between third persons who have little to no information as
to what happens during corporate meetings, and the corporate officers, directors, and
representatives who are insiders to corporate affairs.143
In People’s Aircargo and Warehousing Co. Inc. v. Court of Appeals,144 this court held that the
contract entered into by the corporation’s officer without a board resolution was binding
upon the corporation because it previously allowed the officer to contract on its behalf
despite the lack of board resolution.145
In Francisco, this court ruled that Francisco’s proposal for redemption of property was
accepted by and binding upon the Government Service Insurance System. This court did not
appreciate the Government Service Insurance System’s defense that since it was the Board
Secretary and not the General Manager who sent Francisco the acceptance telegram, it
could not be made binding upon the Government Service Insurance System. It did not
authorize the Board Secretary to sign for the General Manager. This court appreciated the
Government Service Insurance System’s failure to disown the telegram sent by the Board
Secretary and its silence while it accepted all payments made by Francisco for the
redemption of property.146
There can be no apparent authority and the corporation cannot be estopped from denying
the binding affect of an act when there is no evidence pointing to similar acts and other
circumstances that can be interpreted as the corporation holding out a representative as
having authority to contract on its behalf. In Advance Paper Corporation v. Arma Traders
Corporation,147 this court had the occasion to say:
The doctrine of apparent authority does not apply if the principal did not commit any acts
or conduct which a third party knew and relied upon in good faith as a result of the exercise
of reasonable prudence. Moreover, the agent’s acts or conduct must have produced a
change of position to the third party’s detriment.148 (Citation omitted)
Saturnino Petalcorin’s authority to transact on behalf of petitioner cannot be presumed

based on a Secretary’s Certificate and excerpt from the minutes of the alleged board
meeting that were found to have been simulated. These documents cannot be considered as
the corporate acts that held out Saturnino Petalcorin as petitioner’s authorized
representative for mortgage transactions. They were not supported by an actual board
meeting.149
CIVIL LAW REVIEW 2

VII
Respondent argues that it may rely on the Secretary’s Certificate issued by Aurora de Leon
because it was notarized.
The Secretary’s Certificate was void whether or not it was notarized.
Notarization creates a presumption of regularity and authenticity on the document. This

presumption may be rebutted by "strong, complete and conclusive proof"150 to the contrary.
While notarial acknowledgment "attaches full faith and credit to the document
concerned[,]"151 it does not give the document its validity or binding effect. When there is
evidence showing that the document is invalid, the presumption of regularity or
authenticity is not applicable.
In Basilio v. Court of Appeals,152 this court was convinced that the purported signatory on a
deed of sale was not as represented, despite testimony from the notary public that the
signatory appeared before him and signed the instrument.153 Apart from finding that there
was forgery,154 this court noted:
The notary public, Atty. Ruben Silvestre, testified that he was the one who notarized the
document and that Dionisio Z. Basilio appeared personally before him and signed the
instrument himself. However, he admitted that he did not know Dionisio Z. Basilio
personally to ascertain if the person who signed the document was actually Dionisio Z.
Basilio himself, or another person who stood in his place. He could not even recall whether
the document had been executed in his office or not.
Thus, considering the testimonies of various witnesses and a comparison of the signature in
question with admittedly genuine signatures, the Court is convinced that Dionisio Z. Basilio
did not execute the questioned deed of sale. Although the questioned deed of sale was a
public document having in its favor the presumption of regularity, such presumption was
adequately refuted by competent witnesses showing its forgery and the Court’s own visual
analysis of the document.155 (Emphasis supplied, citations omitted)
In Suntay v. Court of Appeals,156 this court held that a notarized deed of sale was void
because it was a mere sham.157 It was not intended to have any effect between the
parties.158 This court said:
[I]t is not the intention nor the function of the notary public to validate and make binding an
instrument never, in the first place, intended to have any binding legal effect upon the
parties thereto.159
Since the notarized Secretary’s Certificate was found to have been issued without a
supporting board resolution, it produced no effect. It is not binding upon petitioner. It
should not have been relied on by respondent especially given its status as a bank.
VIII
The banking institution is "impressed with public interest"160 such that the public’s faith is
"of paramount importance."161 Thus, banks are required to exercise the highest degree of
CIVIL LAW REVIEW 2

diligence in their transactions.162 In China Banking Corporation v. Lagon,163 this court found
that the bank was not a mortgagee in good faith for its failure to question the due execution
of a Special Power of Attorney that was presented to it in relation to a mortgage
contract.164 This court said:
Though petitioner is not expected to conduct an exhaustive investigation on the history of

the mortgagor’s title, it cannot be excused from the duty of exercising the due diligence
required of a banking institution. Banks are expected to exercise more care and prudence
than private individuals in their dealings, even those that involve registered lands, for their
business is affected with public interest.165 (Citations omitted)
For its failure to exercise the degree of diligence required of banks, respondent cannot claim
good faith in the execution of the mortgage contracts with Saturnino Petalcorin.
Respondent’s witness, Daciano Paguio, Jr., testified that there was no board resolution
authorizing Saturnino Petalcorin to act on behalf of petitioner.166 Respondent did not
inquire further as to Saturnino Petalcorin’s authority.
Banks cannot rely on assumptions. This will be contrary to the high standard of diligence
required of them.
VI
According to respondent, the annotations of respondent’s mortgage interests on the

certificates of titles of petitioner’s properties operated as constructive notice to petitioner
of the existence of such interests.167 Hence, petitioners are now estopped from claiming that
they did not know about the mortgage.
Annotations of adverse claims on certificates of title to properties operate as constructive

notice only to third parties—not to the court or the registered owner.1âwphi1 In Sajonas v.
Court of Appeals:168
[A]nnotation of an adverse claim is a measure designed to protect the interest of a person

over a piece of real property where the registration of such interest or right is not otherwise
provided for by the Land Registration Act or Act 496 (now [Presidential Decree No.] 1529
or the Property Registration Decree), and serves a warning to third parties dealing with said
property that someone is claiming an interest on the same or a better right than that of the
registered owner thereof.169 (Emphasis supplied)
Annotations are merely claims of interest or claims of the legal nature and incidents of
relationship between the person whose name appears on the document and the person who
caused the annotation. It does not say anything about the validity of the claim or convert a
defective claim or document into a valid one. 170 These claims may be proved or disproved
during trial.
Thus, annotations are not conclusive upon courts or upon owners who may not have reason
to doubt the security of their claim as their properties' title holders.
CIVIL LAW REVIEW 2

WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision dated December
17, 2009 is REVERSED and SET ASIDE. The Regional Trial Courts' Decisions of November
23, 2001 and December 7, 2001 are REINSTATED.
CIVIL LAW REVIEW 2

3.
SECOND DIVISION
January 11, 2016
G.R. No. 169507
AIR CANADA, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
D E C I S I O N
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines, through a
general sales agent, is a resident foreign corporation doing business in the Philippines. As
such, it is taxable under Section 28(A)(l), and not Section 28(A)(3) of the 1997 National
Internal Revenue Code, subject to any applicable tax treaty to which the Philippines is a
signatory. Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air
Canada may only be imposed a maximum tax of 1 ½% of its gross revenues earned from the
sale of its tickets in the Philippines.
This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax
Appeals En Banc, which in turn affirmed the December 22, 2004 Decision3 and April 8, 2005
Resolution4 of the Court of Tax Appeals First Division denying Air Canada’s claim for refund.
Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"5 On
April 24, 2000, it was granted an authority to operate as an offline carrier by the Civil
Aeronautics Board, subject to certain conditions, which authority would expire on April 24,
2005.6 "As an off-line carrier, [Air Canada] does not have flights originating from or coming
to the Philippines [and does not] operate any airplane [in] the Philippines[.]"7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its
general sales agent in the Philippines.8 Aerotel "sells [Air Canada’s] passage documents in
the Philippines."9
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air
Canada, through Aerotel, filed quarterly and annual income tax returns and paid the income
tax on Gross Philippine Billings in the total amount of ₱5,185,676.77,10 detailed as follows:
CIVIL LAW REVIEW 2

Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29, 2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August 29, 2001 1,033,423.34
3rd Qtr 2001 November 29, 2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30, 2002 594,850.13
2nd Qtr 2002 August 29, 2002 1,164,664.11
TOTAL P 5,185,676.77 11
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously
paid income taxes amounting to ₱5,185,676.77 before the Bureau of Internal
Revenue,12 Revenue District Office No. 47-East Makati.13It found basis from the revised
definition14 of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997 National
Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
. . . .
(3) International Carrier. - An international carrier doing business in the Philippines shall
pay a tax of two and onehalf percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined
hereunder:
(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and mail originating
from the Philippines in a continuous and uninterrupted flight, irrespective of the place
of sale or issue and the place of payment of the ticket or passage document: Provided,
That tickets revalidated, exchanged and/or indorsed to another international airline form
part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from
CIVIL LAW REVIEW 2

the Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(Emphasis supplied)
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review
before the Court of Tax Appeals on November 29, 2002.15 The case was docketed as C.T.A.
Case No. 6572.16
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision
denying the Petition for Review and, hence, the claim for refund.17 It found that Air Canada
was engaged in business in the Philippines through a local agent that sells airline tickets on
its behalf. As such, it should be taxed as a resident foreign corporation at the regular rate of
32%.18 Further, according to the Court of Tax Appeals First Division, Air Canada was
deemed to have established a "permanent establishment"19 in the Philippines under Article
V(2)(i) of the Republic of the Philippines-Canada Tax Treaty20 by the appointment of the
local sales agent, "in which [the] petitioner uses its premises as an outlet where sales of
[airline] tickets are made[.]"21
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the
Court of Tax Appeals First Division’s Resolution dated April 8, 2005 for lack of merit.22 The
First Division held that while Air Canada was not liable for tax on its Gross Philippine
Billings under Section 28(A)(3), it was nevertheless liable to pay the 32% corporate income
tax on income derived from the sale of airline tickets within the Philippines pursuant to
Section 28(A)(1).23
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc.24 The appeal was
docketed as CTA EB No. 86.25
In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the
findings of the First Division.26 The En Banc ruled that Air Canada is subject to tax as a
resident foreign corporation doing business in the Philippines since it sold airline tickets in
the Philippines.27 The Court of Tax Appeals En Banc disposed thus:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE,
and accordingly, DISMISSED for lack of merit.28
Hence, this Petition for Review29 was filed.
The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international carrier selling passage
documents through a general sales agent in the Philippines, is a resident foreign
corporation within the meaning of Section 28(A)(1) of the 1997 National Internal Revenue
Code;
Second, whether petitioner Air Canada is subject to the 2½% tax on Gross Philippine
Billings pursuant to Section 28(A)(3). If not, whether an offline international carrier selling
passage documents through a general sales agent can be subject to the regular corporate
income tax of 32%30 on taxable income pursuant to Section 28(A)(1);
CIVIL LAW REVIEW 2

Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines falls under the
definition of "permanent establishment" under Article V(2)(i) of the Republic of the
Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77 pertaining
allegedly to erroneously paid tax on Gross Philippine Billings from the third quarter of 2000
to the second quarter of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax on
resident foreign corporations provided under Section 28(A)(1) of the 1997 National
Internal Revenue Code does not apply to "international carriers,"31 which are especially
classified and taxed under Section 28(A)(3).32 It adds that the fact that it is no longer subject
to Gross Philippine Billings tax as ruled in the assailed Court of Tax Appeals Decision "does
not render it ipso facto subject to 32% income tax on taxable income as a resident foreign
corporation."33 Petitioner argues that to impose the 32% regular corporate income tax on
its income would violate the Philippine government’s covenant under Article VIII of the
Republic of the Philippines-Canada Tax Treaty not to impose a tax higher than 1½% of the
carrier’s gross revenue derived from sources within the Philippines.34 It would also
allegedly result in "inequitable tax treatment of on-line and off-line international air
carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in the
Philippines was income from services and not income from sales of personal
property.36 Petitioner cites the deliberations of the Bicameral Conference Committee on
House Bill No. 9077 (which eventually became the 1997 National Internal Revenue Code),
particularly Senator Juan Ponce Enrile’s statement,37 to reveal the "legislative intent to treat
the revenue derived from air carriage as income from services, and that the carriage of
passenger or cargo as the activity that generates the income."38 Accordingly, applying the
principle on the situs of taxation in taxation of services, petitioner claims that its income
derived "from services rendered outside the Philippines [was] not subject to Philippine
income taxation."39
Petitioner further contends that by the appointment of Aerotel as its general sales agent,
petitioner cannot be considered to have a "permanent establishment"40 in the Philippines
pursuant to Article V(6) of the Republic of the Philippines-Canada Tax Treaty.41 It points out
that Aerotel is an "independent general sales agent that acts as such for . . . other
international airline companies in the ordinary course of its business."42 Aerotel sells
passage tickets on behalf of petitioner and receives a commission for its
services.43 Petitioner states that even the Bureau of Internal Revenue—through VAT Ruling
No. 003-04 dated February 14, 2004—has conceded that an offline international air carrier,
having no flight operations to and from the Philippines, is not deemed engaged in business
in the Philippines by merely appointing a general sales agent.44 Finally, petitioner maintains
that its "claim for refund of erroneously paid Gross Philippine Billings cannot be denied on
the ground that [it] is subject to income tax under Section 28 (A) (1)"45 since it has not been
assessed at all by the Bureau of Internal Revenue for any income tax liability.46
CIVIL LAW REVIEW 2

On the other hand, respondent maintains that petitioner is subject to the 32% corporate
income tax as a resident foreign corporation doing business in the Philippines. Petitioner’s
total payment of ₱5,185,676.77 allegedly shows that petitioner was earning a sizable
income from the sale of its plane tickets within the Philippines during the relevant
period.47 Respondent further points out that this court in Commissioner of Internal Revenue
v. American Airlines, Inc.,48 which in turn cited the cases involving the British Overseas
Airways Corporation and Air India, had already settled that "foreign airline companies
which sold tickets in the Philippines through their local agents . . . [are] considered resident
foreign corporations engaged in trade or business in the country."49 It also cites Revenue
Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing business in the
Philippines" as including "regular sale of tickets in the Philippines by offline international
airlines either by themselves or through their agents."50
Respondent further contends that petitioner is not entitled to its claim for refund because
the amount of ₱5,185,676.77 it paid as tax from the third quarter of 2000 to the second
quarter of 2001 was still short of the 32% income tax due for the period.51 Petitioner cannot
allegedly claim good faith in its failure to pay the right amount of tax since the National
Internal Revenue Code became operative on January 1, 1998 and by 2000, petitioner should
have already been aware of the implications of Section 28(A)(3) and the decided cases of
this court’s ruling on the taxability of offline international carriers selling passage tickets in
the Philippines.52
At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an offline
international carrier with no landing rights in the Philippines, is not liable to tax on Gross
Philippine Billings under Section 28(A)(3) of the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
. . . .
(3) International Carrier. - An international carrier doing business in the Philippines shall pay
a tax of two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined
hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue
and the place of payment of the ticket or passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to another international airline form part of the
Gross Philippine Billings if the passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from
the Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(Emphasis supplied)
CIVIL LAW REVIEW 2

Under the foregoing provision, the tax attaches only when the carriage of persons, excess
baggage, cargo, and mail originated from the Philippines in a continuous and uninterrupted
flight, regardless of where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross
Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes.
Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1)
of the 1997 National Internal Revenue Code, thus, it may be subject to 32%53 tax on its
taxable income:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized,

authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an income tax equivalent to thirty-
five percent (35%) of the taxable income derived in the preceding taxable year from all
sources within the Philippines: Provided, That effective January 1, 1998, the rate of income
tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-
three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-
two percent (32%54). (Emphasis supplied)
The definition of "resident foreign corporation" has not substantially changed throughout
the amendments of the National Internal Revenue Code. All versions refer to "a foreign
corporation engaged in trade or business within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on
June 15, 1939, defined "resident foreign corporation" as applying to "a foreign corporation
engaged in trade or business within the Philippines or having an office or place of business
therein."55
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No.
6110, approved on August 4, 1969, reads:
Sec. 24. Rates of tax on corporations. — . . .
(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized, authorized, or existing under the

laws of any foreign country, except a foreign life insurance company, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection (a) of this section
upon the total net income received in the preceding taxable year from all sources within the
Philippines.56 (Emphasis supplied)
CIVIL LAW REVIEW 2

Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the
1939 National Internal Revenue Code. Section 24(b)(2) on foreign resident corporations
was amended, but it still provides that "[a] corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net
income received in the preceding taxable year from all sources within the Philippines[.]"57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation58declared British Overseas Airways Corporation, an international air carrier
with no landing rights in the Philippines, as a resident foreign corporation engaged in
business in the Philippines through its local sales agent that sold and issued tickets for the
airline company.59 This court discussed that:
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting"

business. Each case must be judged in the light of its peculiar environmental circumstances.
The term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of
the functions normally incident to, and in progressive prosecution of commercial gain
or for the purpose and object of the business organization. "In order that a foreign
corporation may be regarded as doing business within a State, there must be continuity of
conduct and intention to establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character.["]
BOAC, during the periods covered by the subject-assessments, maintained a general sales
agent in the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1)
selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip
in the series corresponding to a different airline company; (3) receiving the fare from the
whole trip; and (4) consequently allocating to the various airline companies on the basis of
their participation in the services rendered through the mode of interline settlement as
prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities
were in exercise of the functions which are normally incident to, and are in progressive
pursuit of, the purpose and object of its organization as an international air carrier. In fact,
the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be no doubt then that
BOAC was "engaged in" business in the Philippines through a local agent during the period
covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax
upon its total net income received in the preceding taxable year from all sources within the
Philippines.60 (Emphasis supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with
its definition of "doing business" with regard to foreign corporations. Section 3(d) of the law
enumerates the activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts, opening
offices, whether called "liaison" offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any calendar year stay in the country for
a period or periods totalling one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that imply a continuity of commercial dealings
CIVIL LAW REVIEW 2

or arrangements, and contemplate to that extent the performance of acts or works, or

the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase "doing business" shall not be deemed to
include mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests in such corporation; nor appointing a
representative or distributor domiciled in the Philippines which transacts business in its
own name and for its own account[.]61 (Emphasis supplied)
While Section 3(d) above states that "appointing a representative or distributor domiciled
in the Philippines which transacts business in its own name and for its own account" is not
considered as "doing business," the Implementing Rules and Regulations of Republic Act No.
7042 clarifies that "doing business" includes "appointing representatives or
distributors, operating under full control of the foreign corporation, domiciled in the
Philippines or who in any calendar year stay in the country for a period or periods totaling
one hundred eighty (180) days or more[.]"62
An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board,
but who maintains office or who has designated or appointed agents or employees in the
Philippines, who sells or offers for sale any air transportation in behalf of said foreign air
carrier and/or others, or negotiate for, or holds itself out by solicitation, advertisement, or
otherwise sells, provides, furnishes, contracts, or arranges for such transportation."63
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil
Aeronautics] Board for such authority."64 Each offline carrier must file with the Civil
Aeronautics Board a monthly report containing information on the tickets sold, such as the
origin and destination of the passengers, carriers involved, and commissions received.65
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the

Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial to
the purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits
to petitioner.66 There is nothing on record to show that Aerotel solicited orders alone and
for its own account and without interference from, let alone direction of, petitioner. On the
contrary, Aerotel cannot "enter into any contract on behalf of [petitioner Air Canada]
without the express written consent of [the latter,]"67 and it must perform its functions
according to the standards required by petitioner.68 Through Aerotel, petitioner is able to
engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an
offline carrier in the Philippines for a period of five years, or from April 24, 2000 until April
24, 2005.69
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived
from sources within the Philippines. Petitioner’s income from sale of airline tickets, through
Aerotel, is income realized from the pursuit of its business activities in the Philippines.
CIVIL LAW REVIEW 2

III
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997
National Internal Revenue Code must consider the existence of an effective tax treaty
between the Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court
held that Section 28(A)(3)(a) does not categorically exempt all international air carriers
from the coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a
taxpayer, then the general rule under Section 28(A)(1) does not apply. If, however, Section
28(A)(3)(a) does not apply, an international air carrier would be liable for the tax under
Section 28(A)(1).71
This court in South African Airways declared that the correct interpretation of these
provisions is that: "international air carrier[s] maintain[ing] flights to and from the
Philippines . . . shall be taxed at the rate of 2½% of its Gross Philippine Billings[;] while
international air carriers that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country [like sale of airline tickets] will
be taxed at the rate of 32% of such [taxable] income."72
In this case, there is a tax treaty that must be taken into consideration to determine the
proper tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of
eliminating double taxation on income and capital, preventing fiscal evasion, promoting
mutual trade and investment, and according fair and equitable tax treatment to foreign
residents or nationals."73 Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc.74 explained the purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal legislations
of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions. More precisely, the tax conventions are drafted with a view towards
the elimination of international juridical double taxation, which is defined as the imposition
of comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic economies. Foreign
investments will only thrive in a fairly predictable and reasonable international investment
climate and the protection against double taxation is crucial in creating such a
climate.75 (Emphasis in the original, citations omitted)
Observance of any treaty obligation binding upon the government of the Philippines is
anchored on the constitutional provision that the Philippines "adopts the generally accepted
principles of international law as part of the law of the land[.]"76 Pacta sunt servanda is a
fundamental international law principle that requires agreeing parties to comply with their
treaty obligations in good faith.77
CIVIL LAW REVIEW 2

Hence, the application of the provisions of the National Internal Revenue Code must be
subject to the provisions of tax treaties entered into by the Philippines with foreign
countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court

stressed the binding effects of tax treaties. It dealt with the issue of "whether the failure to
strictly comply with [Revenue Memorandum Order] RMO No. 1-200079 will deprive persons
or corporations of the benefit of a tax treaty."80 Upholding the tax treaty over the
administrative issuance, this court reasoned thus:
Our Constitution provides for adherence to the general principles of international law as part
of the law of the land. The time-honored international principle of pacta sunt servanda
demands the performance in good faith of treaty obligations on the part of the states that
enter into the agreement. Every treaty in force is binding upon the parties, and obligations
under the treaty must be performed by them in good faith. More importantly, treaties have
the force and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting
parties and, in turn, help the taxpayer avoid simultaneous taxations in two different
jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax conventions are
drafted with a view towards the elimination of international juridical double taxation,
which is defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods. The apparent
rationale for doing away with double taxation is to encourage the free flow of goods and
services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments
will only thrive in a fairly predictable and reasonable international investment climate and
the protection against double taxation is crucial in creating such a climate." Simply put, tax
treaties are entered into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as double tax treaty or double
tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations
those modifications that may be necessary to ensure the fulfillment of the obligations
undertaken." Thus, laws and issuances must ensure that the reliefs granted under tax treaties
are accorded to the parties entitled thereto. The BIR must not impose additional
requirements that would negate the availment of the reliefs provided for under
international agreements. More so, when the RPGermany Tax Treaty does not provide for
any pre-requisite for the availment of the benefits under said agreement.
. . . .
Bearing in mind the rationale of tax treaties, the period of application for the availment of
tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to
the relief as it would constitute a violation of the duty required by good faith in complying
with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to
apply within the prescribed period under the administrative issuance would impair the
value of the tax treaty. At most, the application for a tax treaty relief from the BIR should
merely operate to confirm the entitlement of the taxpayer to the relief.
CIVIL LAW REVIEW 2

The obligation to comply with a tax treaty must take precedence over the objective of RMO
No. 1-2000. Logically, noncompliance with tax treaties has negative implications on
international relations, and unduly discourages foreign investors. While the consequences
sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these may
be remedied through other system management processes, e.g., the imposition of a fine or
penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for
failure to strictly comply with an administrative issuance requiring prior application for tax
treaty relief.81 (Emphasis supplied, citations omitted)
On March 11, 1976, the representatives82 for the government of the Republic of the
Philippines and for the government of Canada signed the Convention between the
Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income (Republic of the Philippines-Canada Tax Treaty).
This treaty entered into force on December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent
establishment" as a "fixed place of business in which the business of the enterprise is wholly
or partly carried on."84
Even though there is no fixed place of business, an enterprise of a Contracting State is

deemed to have a permanent establishment in the other Contracting State if under certain
conditions there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that
"[a] person acting in a Contracting State on behalf of an enterprise of the other Contracting
State (other than an agent of independent status to whom paragraph 6 applies) shall be
deemed to be a permanent establishment in the first-mentioned State if . . . he has and
habitually exercises in that State an authority to conclude contracts on behalf of the
enterprise, unless his activities are limited to the purchase of goods or merchandise for that
enterprise[.]" The provision seems to refer to one who would be considered an agent under
Article 186885 of the Civil Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall
not be deemed to have a permanent establishment in the other Contracting State merely
because it carries on business in that other State through a broker, general commission
agent or any other agent of an independent status, where such persons are acting in the
ordinary course of their business."
Considering Article XV86 of the same Treaty, which covers dependent personal services, the
term "dependent" would imply a relationship between the principal and the agent that is
akin to an employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter
exercises comprehensive control and detailed instructions over the means and results of
the activities of the agent.87
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of
the Philippines, defines a general sales agent as "a person, not a bonafide employee of an air
carrier, who pursuant to an authority from an airline, by itself or through an agent, sells or
CIVIL LAW REVIEW 2

offers for sale any air transportation, or negotiates for, or holds himself out by solicitation,
advertisement or otherwise as one who sells, provides, furnishes, contracts or arranges for,
such air transportation."88 General sales agents and their property, property rights,
equipment, facilities, and franchise are subject to the regulation and control of the Civil
Aeronautics Board.89 A permit or authorization issued by the Civil Aeronautics Board is
required before a general sales agent may engage in such an activity.90
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have
created a "permanent establishment" in the Philippines as defined under the Republic of the
Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of
transportation on petitioner and handle reservations, appointment, and supervision of
International Air Transport Associationapproved and petitioner-approved sales agents,
including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following
services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in
every matter relating to this Agreement;
. . . .
c) Promotion of passenger transportation on AC;
. . . .
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of
the GSA [Philippines], of traffic documents issued by AC outside the said territory of the GSA
[Philippines], as required by the passenger(s);
. . . .
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs
and publicity material provided by AC in accordance with the reasonable requirements of
AC;
. . . .
j) Distribution of official press releases provided by AC to media and reference of any press
or public relations inquiries to AC;
. . . .
CIVIL LAW REVIEW 2

o) Submission for AC’s approval, of an annual written sales plan on or before a date to be
determined by AC and in a form acceptable to AC;
. . . .
q) Submission of proposals for AC’s approval of passenger sales agent incentive plans at a
reasonable time in advance of proposed implementation.
r) Provision of assistance on request, in its relations with Governmental and other

authorities, offices and agencies in the Territory [Philippines].
. . . .
u) Follow AC guidelines for the handling of baggage claims and customer complaints and,
unless otherwise stated in the guidelines, refer all such claims and complaints to AC.91
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at
its own expense and acceptable to [petitioner Air Canada], adequate and suitable premises,
qualified staff, equipment, documentation, facilities and supervision and in consideration of
the remuneration and expenses payable[,] [will] defray all costs and expenses of and
incidental to the Agency."92 "[I]t is the sole employer of its employees and . . . is responsible
for [their] actions . . . or those of any subcontractor."93 In remuneration for its services,
Aerotel would be paid by petitioner a commission on sales of transportation plus override
commission on flown revenues.94 Aerotel would also be reimbursed "for all authorized
expenses supported by original supplier invoices."95
Aerotel is required to keep "separate books and records of account, including supporting
documents, regarding all transactions at, through or in any way connected with [petitioner
Air Canada] business."96
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased
way."97 Aerotel cannot "accept additional appointments as General Sales Agent of any other
carrier without the prior written consent of [petitioner Air Canada]."98
The Passenger General Sales Agency Agreement "may be terminated by either party without
cause upon [no] less than 60 days’ prior notice in writing[.]"99 In case of breach of any
provisions of the Agreement, petitioner may require Aerotel "to cure the breach in 30 days
failing which [petitioner Air Canada] may terminate [the] Agreement[.]"100
The following terms are indicative of Aerotel’s dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or
takes control of another entity or merges with or is acquired or controlled by another
person or entity[.]"101 Except with the written consent of petitioner, Aerotel must not
acquire a substantial interest in the ownership, management, or profits of a passenger sales
agent affiliated with the International Air Transport Association or a non-affiliated
passenger sales agent nor shall an affiliated passenger sales agent acquire a substantial
interest in Aerotel as to influence its commercial policy and/or management
decisions.102 Aerotel must also provide petitioner "with a report on any interests held by
CIVIL LAW REVIEW 2

[it], its owners, directors, officers, employees and their immediate families in companies
and other entities in the aviation industry or . . . industries related to it[.]"103 Petitioner may
require that any interest be divested within a set period of time.104
Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of
petitioner without the express written consent of the latter;105 it must act according to the
standards required by petitioner;106 "follow the terms and provisions of the [petitioner Air
Canada] GSA Manual [and all] written instructions of [petitioner Air Canada;]"107 and "[i]n
the absence of an applicable provision in the Manual or instructions, [Aerotel must] carry
out its functions in accordance with [its own] standard practices and procedures[.]"108
Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for
all transportation over [its] services[.]"109 All use of petitioner’s name, logo, and marks must
be with the written consent of petitioner and according to petitioner’s corporate standards
and guidelines set out in the Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the
transportation sold by Aerotel are for the account of petitioner, except in the case of
negligence of Aerotel.111
Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General
Sales Agency Agreement executed between the parties. It has the authority or power to
conclude contracts or bind petitioner to contracts entered into in the Philippines. A third-
party liability on contracts of Aerotel is to petitioner as the principal, and not to Aerotel, and
liability to such third party is enforceable against petitioner. While Aerotel maintains a
certain independence and its activities may not be devoted wholly to petitioner,
nonetheless, when representing petitioner pursuant to the Agreement, it must carry out its
functions solely for the benefit of petitioner and according to the latter’s Manual and
written instructions. Aerotel is required to submit its annual sales plan for petitioner’s
approval.
In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is

a conduit or outlet through which petitioner’s airline tickets are sold.112
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the
"business profits" of an enterprise of a Contracting State is "taxable only in that State[,]
unless the enterprise carries on business in the other Contracting State through a
permanent establishment[.]"113 Thus, income attributable to Aerotel or from business
activities effected by petitioner through Aerotel may be taxed in the Philippines. However,
pursuant to the last paragraph114 of Article VII in relation to Article VIII115 (Shipping and Air
Transport) of the same Treaty, the tax imposed on income derived from the operation of
ships or aircraft in international traffic should not exceed 1½% of gross revenues derived
from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the
1997 National Internal Revenue Code on its taxable income116 from sale of airline tickets in
the Philippines, it could only be taxed at a maximum of 1½% of gross revenues, pursuant to
CIVIL LAW REVIEW 2

Article VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as
a "foreign corporation organized and existing under the laws of Canada[.]"117
Tax treaties form part of the law of the land,118 and jurisprudence has applied the statutory
construction principle that specific laws prevail over general ones.119
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and
became valid and effective on that date. On the other hand, the applicable
provisions120 relating to the taxability of resident foreign corporations and the rate of such
tax found in the National Internal Revenue Code became effective on January 1,
1998.121 Ordinarily, the later provision governs over the earlier one.122 In this case,
however, the provisions of the Republic of the Philippines-Canada Tax Treaty are more
specific than the provisions found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not
simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective unless
concurred in by at least two-thirds of all the Members of the Senate.
This provision states the second of two ways through which international obligations
become binding. Article II, Section 2 of the Constitution deals with international obligations
that are incorporated, while Article VII, Section 21 deals with international obligations that
become binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as well as
definite prestations have effects equivalent to a statute. Thus, these specific treaty
provisions may amend statutory provisions. Statutory provisions may also amend these
types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international
obligations erga omnes. We are also not required to rule in this case on the effect of
international customary norms especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a Contracting
State derived by an enterprise of the other Contracting State from the operation of ships or
aircraft in international traffic may be taxed in the first-mentioned State but the tax so
charged shall not exceed the lesser of a) one and one-half per cent of the gross revenues
derived from sources in that State; and b) the lowest rate of Philippine tax imposed on such
profits derived by an enterprise of a third State."
The Agreement between the government of the Republic of the Philippines and the
government of Canada on Air Transport, entered into on January 14, 1997, reiterates the
effectivity of Article VIII of the Republic of the Philippines-Canada Tax Treaty:
ARTICLE XVI
(Taxation)
CIVIL LAW REVIEW 2

The Contracting Parties shall act in accordance with the provisions of Article VIII of the
Convention between the Philippines and Canada for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Manila on
March 31, 1976 and entered into force on December 21, 1977, and any amendments
thereto, in respect of the operation of aircraft in international traffic.123
Petitioner’s income from sale of ticket for international carriage of passenger is income
derived from international operation of aircraft. The sale of tickets is closely related to the
international operation of aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to
tax limited to a certain extent[.]"124 Thus, we are bound to extend to a Canadian air carrier
doing business in the Philippines through a local sales agent the benefit of a lower tax
equivalent to 1½% on business profits derived from sale of international air transportation.
Finally, we reject petitioner’s contention that the Court of Tax Appeals erred in denying its
claim for refund of erroneously paid Gross Philippine Billings tax on the ground that it is
subject to income tax under Section 28(A)(1) of the National Internal Revenue Code
because (a) it has not been assessed at all by the Bureau of Internal Revenue for any income
tax liability;125 and (b) internal revenue taxes cannot be the subject of set-off or
compensation,126citing Republic v. Mambulao Lumber Co., et al.127 and Francia v.
Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we have ruled

that "[i]n an action for the refund of taxes allegedly erroneously paid, the Court of Tax
Appeals may determine whether there are taxes that should have been paid in lieu of the
taxes paid."130 The determination of the proper category of tax that should have been paid is
incidental and necessary to resolve the issue of whether a refund should be
granted.131 Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6%
capital gains tax or other taxes at the first instance. The Court of Tax Appeals has no power
to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that
petitioner’s transactions are subject to capital gains tax, however, the Court of Tax Appeals
was not making an assessment. It was merely determining the proper category of tax that
petitioner should have paid, in view of its claim that it erroneously imposed upon itself and
paid the 5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an
incidental matter necessary for the resolution of the principal issue, which is whether
petitioner was entitled to a refund.
The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper
taxes that are due from petitioner. A claim for tax refund carries the assumption that the tax
returns filed were correct. If the tax return filed was not proper, the correctness of the
CIVIL LAW REVIEW 2

amount paid and, therefore, the claim for refund become questionable. In that case, the
court must determine if a taxpayer claiming refund of erroneously paid taxes is more
properly liable for taxes other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed
for refund of its erroneously paid 2½% taxes on its gross Philippine billings. This court did
not immediately grant South African’s claim for refund. This is because although this court
found that South African Airways was not subject to the 2½% tax on its gross Philippine
billings, this court also found that it was subject to 32% tax on its taxable income.
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that
the quarterly tax return it filed in 2000 was improper. Hence, to determine if petitioner was
entitled to the refund being claimed, the Court of Tax Appeals has the duty to determine if
petitioner was indeed not liable for the 5% final tax and, instead, liable for taxes other than
the 5% final tax. As in South African Airways, petitioner’s request for refund can neither be
granted nor denied outright without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the
amount of the taxpayer’s liability should be computed and deducted from the refundable
amount.
Any liability in excess of the refundable amount, however, may not be collected in a case
involving solely the issue of the taxpayer’s entitlement to refund. The question of tax
deficiency is distinct and unrelated to the question of petitioner’s entitlement to refund. Tax
deficiencies should be subject to assessment procedures and the rules of prescription. The
court cannot be expected to perform the BIR’s duties whenever it fails to do so either
through neglect or oversight. Neither can court processes be used as a tool to circumvent
laws protecting the rights of taxpayers.132
Hence, the Court of Tax Appeals properly denied petitioner’s claim for refund of allegedly
erroneously paid tax on its Gross Philippine Billings, on the ground that it was liable instead
for the regular 32% tax on its taxable income received from sources within the Philippines.
Its determination of petitioner’s liability for the 32% regular income tax was made merely
for the purpose of ascertaining petitioner’s entitlement to a tax refund and not for imposing
any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases
cited are based on different circumstances. In both cited cases,133 the taxpayer claimed that
his (its) tax liability was off-set by his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended that
the amounts it paid to the government as reforestation charges from 1947 to 1956, not
having been used in the reforestation of the area covered by its license, may be set off or
applied to the payment of forest charges still due and owing from it.134Rejecting Mambulao’s
claim of legal compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial court
correctly observed:
CIVIL LAW REVIEW 2

Under Article 1278, NCC, compensation should take place when two persons in their own
right are creditors and debtors of each other. With respect to the forest charges which the
defendant Mambulao Lumber Company has paid to the government, they are in the coffers of
the government as taxes collected, and the government does not owe anything to defendant
Mambulao Lumber Company. So, it is crystal clear that the Republic of the Philippines and the
Mambulao Lumber Company are not creditors and debtors of each other, because
compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest
charges in question, can not be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who
is liable to the state or municipality for taxes. Neither are they a proper subject of
recoupment since they do not arise out of the contract or transaction sued on. * * *. (80 C.J.S.
73–74.)
The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental purposes.
The reason on which the general rule is based, is that taxes are not in the nature of contracts
between the party and party but grow out of a duty to, and are the positive acts of the
government, to the making and enforcing of which, the personal consent of individual
taxpayers is not required. * * * If the taxpayer can properly refuse to pay his tax when called
upon by the Collector, because he has a claim against the governmental body which is not
included in the tax levy, it is plain that some legitimate and necessary expenditure must be
curtailed. If the taxpayer’s claim is disputed, the collection of the tax must await and abide
the result of a lawsuit, and meanwhile the financial affairs of the government will be thrown
into great confusion. (47 Am. Jur. 766–767.)135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal
compensation provided under Article 1279 were present.136 In that case, a portion of
Francia’s property in Pasay was expropriated by the national government,137 which did not
immediately pay Francia. In the meantime, he failed to pay the real property tax due on his
remaining property to the local government of Pasay, which later on would auction the
property on account of such delinquency.138 He then moved to set aside the auction sale and
argued, among others, that his real property tax delinquency was extinguished by legal
compensation on account of his unpaid claim against the national government.139 This court
ruled against Francia:
There is no legal basis for the contention. By legal compensation, obligations of persons,
who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other;
x x x x x x x x x
CIVIL LAW REVIEW 2

(3) that the two debts be due.
x x x x x x x x x
This principal contention of the petitioner has no merit. We have consistently ruled that
there can be no off-setting of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government owes
him an amount equal to or greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government.
. . . .
There are other factors which compel us to rule against the petitioner. The tax was due to
the city government while the expropriation was effected by the national
government. Moreover, the amount of ₱4,116.00 paid by the national government for the
125 square meter portion of his lot was deposited with the Philippine National Bank long
before the sale at public auction of his remaining property. Notice of the deposit dated
September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner
admitted in his testimony that he knew about the ₱4,116.00 deposited with the bank but he
did not withdraw it. It would have been an easy matter to withdraw ₱2,400.00 from the
deposit so that he could pay the tax obligation thus aborting the sale at public auction.140
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v.
Commission on Audit141 and Philex Mining Corporation v. Commissioner of Internal
Revenue.142 In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not
such a debt, demand, contract or judgment as is allowed to be set-off.143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are
due to the Government in its corporate capacity, while taxes are due to the Government in
its sovereign capacity."144 Rejecting Philex Mining’s assertion that the imposition of
surcharge and interest was unjustified because it had no obligation to pay the excise tax
liabilities within the prescribed period since, after all, it still had pending claims for VAT
input credit/refund with the Bureau of Internal Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground
that it has a pending tax claim for refund or credit against the government which has not yet
been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory
rather than a matter of bargain. Hence, a tax does not depend upon the consent of the
taxpayer. If any tax payer can defer the payment of taxes by raising the defense that it still
has a pending claim for refund or credit, this would adversely affect the government
revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply
because he has a claim against the government or that the collection of the tax is contingent
on the result of the lawsuit it filed against the government. Moreover, Philex’s theory that
would automatically apply its VAT input credit/refund against its tax liabilities can easily
CIVIL LAW REVIEW 2

give rise to confusion and abuse, depriving the government of authority over the manner by
which taxpayers credit and offset their tax liabilities.145 (Citations omitted)
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse
to pay tax on the ground that the tax liabilities were off-set against any alleged claim the
taxpayer may have against the government. Such would merely be in keeping with the basic
policy on prompt collection of taxes as the lifeblood of the government.1âwphi1
Here, what is involved is a denial of a taxpayer’s refund claim on account of the Court of Tax
Appeals’ finding of its liability for another tax in lieu of the Gross Philippine Billings tax that
was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on
the denial of claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of
a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s
supplemental motion for reconsideration alleging bringing to said court’s attention the
existence of the deficiency income and business tax assessment against Citytrust. The fact of
such deficiency assessment is intimately related to and inextricably intertwined with the
right of respondent bank to claim for a tax refund for the same year. To award such refund
despite the existence of that deficiency assessment is an absurdity and a polarity in
conceptual effects. Herein private respondent cannot be entitled to refund and at the same
time be liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts
stated therein are true and correct. The deficiency assessment, although not yet final, created
a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in
said return which, by itself and without unquestionable evidence, cannot be the basis for the
grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an assessment is
made in case of any list, statement, or return, which in the opinion of the Commissioner of
Internal Revenue was false or fraudulent or contained any understatement or
undervaluation, no tax collected under such assessment shall be recovered by any suits
unless it is proved that the said list, statement, or return was not false nor fraudulent and
did not contain any understatement or undervaluation; but this provision shall not apply to
statements or returns made or to be made in good faith regarding annual depreciation of oil
or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax
due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute anew
a proceeding for the recovery of erroneously refunded taxes which recourse must be filed
within the prescriptive period of ten years after discovery of the falsity, fraud or omission in
the false or fraudulent return involved. This would necessarily require and entail additional
CIVIL LAW REVIEW 2

efforts and expenses on the part of the Government, impose a burden on and a drain of
government funds, and impede or delay the collection of much-needed revenue for
governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both

logically necessary and legally appropriate that the issue of the deficiency tax assessment
against Citytrust be resolved jointly with its claim for tax refund, to determine once and for
all in a single proceeding the true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and
fair that the taxpayer and the Government alike be given equal opportunities to avail of
remedies under the law to defeat each other’s claim and to determine all matters of dispute
between them in one single case. It is important to note that in determining whether or not
petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine
how much the Government is entitled to collect as taxes. This would necessarily include the
determination of the correct liability of the taxpayer and, certainly, a determination of this
case would constitute res judicata on both parties as to all the matters subject thereof or
necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The
above pronouncements are, therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable under
Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(l), the correctness of the return
filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.146 (Emphasis supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, 147 this
court upheld the denial of the claim for refund based on the Court of Tax Appeals' finding
that the taxpayer had, through erroneous deductions on its gross income, underpaid its
Gross Philippine Billing tax on cargo revenues for 1999, and the amount of underpayment
was even greater than the refund sought for erroneously paid Gross Philippine Billings tax
on passenger revenues for the same taxable period.148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was
computed at the rate of 1 ½% of its gross revenues amounting to P345,711,806.08149 from
the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax
imposable under Section 28(A)(l) of the 1997 National Internal Revenue Code [32% of
t.axable income, that is, gross income less deductions] will exceed the maximum ceiling of 1
½% of gross revenues as decreed in Article VIII of the Republic of the Philippines-Canada
Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution
dated April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.
CIVIL LAW REVIEW 2

4.
SECOND DIVISION
January 11, 2016
G.R. No. 206584
MAE FLOR GALIDO, Petitioner,

vs.
NELSON P. MAGRARE, EVANGELINE M. PALCAT, RODOLFO BAYOMBONG, and
REGISTER OF DEEDS OF ANTIQUE, San Jose, Antique, Respondents.
D E C I S I O N
CARPIO, J.:
The Case
Before the Court is a petition for review1 assailing the Decision2 dated 29 February 2012
and Resolution3 dated 28 February 2013 of the Court of Appeals in CA-G.R. CEB CV No.
02306, affirming the Order4 dated 2 October 2007 of the Regional Trial Court (RTC), Branch
12, San Jose, Antique in RTC Cad. Case No. 2004-819, Cad. Record No. 936.
The Antecedent Facts
On 19 August 2004, Mae Flor Galido (petitioner) filed before the RTC of San Jose, Antique a
petition5 to cancel all entries appearing on Transfer Certificate of Title (TCT) Nos. T-22374,
T-22375 and T-22376, all in the name of Isagani Andigan (Andigan), and to annul TCT No.
T-24815 and all other TCTs issued pursuant to the Order dated 18 October 2011 of RTC
Branch 11, San Jose, Antique (Branch 11) in RTC Civil Case No. 2001-2-3230. The petition
was raffled to RTC Branch 12, San Jose, Antique (trial court) and docketed as RTC Cad. Case
No. 2004-819 Cad. Record No. 936.
The controversy revolves around three parcels of land, designated as Lot 1052-A-1, Lot
1052-A-2 and Lot 1052-A-3, all of the San Jose, Antique Cadastre. These parcels of land
were, prior to subdivision in 1999, part of Lot 1052-A which was covered by TCT No. T-
21405 in the name of Andigan.
On 28 December 1998, Andigan sold undivided portions of Lot 1052-A to Nelson P. Magrare
(Magrare), Evangeline M. Palcat (Palcat) and Rodolfo Bayombong (Bayombong). To
Magrare was sold an undivided portion with an area of 700 square meters, more or less; to
Palcat, 1,000 square meters, more or less; and to Bayombong, 500 square meters, more or
less.
Andigan caused the subdivision of Lot 1052-A into five lots, namely: Lot 1052-A-1, Lot
1052-A-2, Lot 1052-A-3, Lot 1052-A-4 and Lot 1052-A-5. On 18 October 1999, TCT No. T-
CIVIL LAW REVIEW 2

21405 was cancelled and new certificates were issued for the subdivided portions.
Pertinent to the case are TCT No. T-22374 which was issued for Lot 1052-A-1, TCT No. T-
22375 for Lot 1052-A-2 and TCT No. T-22376 for Lot 1052-A-3, all in the name of Andigan.
Andigan did not turn over the new TCTs to Magrare, Palcat and Bayombong, and the latter
were unaware of the subdivision.
On 8 May 2000, Andigan mortgaged the same three lots to petitioner and the latter came
into possession of the owner’s duplicate copies of TCT Nos. T-22374, T-22375 and T-22376.
On 6 February 2001, at 11:00 a.m., Magrare, Palcat and Bayombong registered their
respective adverse claims on TCT Nos. T-22374, T-22375 and T-22376. On the same day, at
3:00 p.m., petitioner also registered her mortgage on the same TCTs, such that the
certificates in the custody of the Register of Deeds were annotated thus:
TCT No. T-22374
Entry No. 246290 – Adverse Claim – executed by Nelson Magrare, covering the parcel of
land described herein subject to the conditions embodied in the instrument on file in this
office.
Date of Instrument: February 6, 2001.
Date of Inscription: February 6, 2001.
A:M 11:00
Entry No. 246303 – Real Estate Mortgage – executed by Isagani Andigan in favor of Mae Flor
Galido, covering the parcel of land described herein for the sum of SIXTY THOUSAND PESOS
(P60,000.00), subject to the conditions embodied in the instrument acknowledged before
Notary Public Mariano R. Pefianco of San Jose, Antique as Doc. No. 302 Page No. 61; Book
No. 61, Series of 2000.
Date of Instrument: May 8, 2000.
P:M 3:006
TCT No. T-22375
Entry No. 246300 – Adverse Claim – executed by Evangeline M. Palcat, covering the parcel
of land described herein subject to the conditions embodied in the instrument on file in this
office.
CIVIL LAW REVIEW 2

A:M 11:00
Galido, covering the parcel of land described herein for the sum of TEN THOUSAND PESOS
Notary Public Mariano R. Pefianco of San Jose, Antique as Doc. No. 226; Page No. 46; Book
No. IV, Series of 2000.
P:M 3:007
TCT No. T-22376
Entry No. 246299 – Adverse Claim – executed by Rodolfo Bayombong, covering the parcel of
land described herein subject to the conditions embodied in the instrument on file in this
office.
A:M 11:00
Galido, covering the parcel of land described herein for the sum of SIXTY THOUSAND PESOS
Notary Public Mariano R. Pefianco of San Jose, Antique as Doc. No. 219; Page No. 44; Book
No. IV, Series of 2000.
P:M 3:008
On 22 February 2001, Magrare, Palcat and Bayombong filed before the RTC of San Jose,
Antique a Petition to Compel the Surrender to the Register of Deeds of Antique the Owner’s
Duplicate Copies of TCT No. T-22374 Issued for Lot 1052-A-1; TCT No. T-22375 Issued for
Lot 1052-A-2; and TCT No. T-22376 Issued for Lot 1052-A-3, all of the San Jose Cadastre
against the Spouses Isagani and Merle Andigan.9 The case, raffled to Branch 11 and
docketed as Civil Case No. 2001-2-3230, was tried and decided on its merits.
Civil Case No. 2001-2-3230 (RTC Branch 11)
CIVIL LAW REVIEW 2

According to Magrare, Palcat and Bayombong, even prior to the subdivision, they had made
oral demands on Andigan to secure TCT No. T-21405 in order that they may take the
appropriate steps to register the affected lots in their names.10 That Andigan had proceeded
with the subdivision and registration of the subdivided lots was unknown to them. They
registered their adverse claims upon discovery of the subdivision. Neither were they aware
that Andigan had mortgaged the lots he sold to them. They only discovered the mortgage
when they requested certified true copies of TCT Nos. T-22374, T-22375 and T-22376, in
preparation for filing a petition to compel delivery.
On the other hand, Andigan insisted that he made demands on Magrare, Palcat and
Bayombong to pay for the costs of subdividing Lot 1052-A and registering the subdivided
lots. Their failure to pay the costs was his motivation in withholding the TCTs from them. In
other words, Andigan did not dispute that the undivided portions of Lot 1052-A he sold
them were indeed Lot 1052-A-1 covered by TCT No. T-22374, Lot 1052-A-2 covered by TCT
No. T-22375 and Lot 1052-A-3 covered by TCT No. T-22376.11
On 18 October 2001, RTC Branch 11 issued an Order granting the petition, to wit:
WHEREFORE, premises considered, the PETITION dated February 16, 2001 is hereby
granted and, in consequence, the respondent spouses ISAGANI ANDIGAN and MERL[E]
ANDIGAN are hereby directed to surrender or deliver to the Register of Deeds for Antique
the owner’s duplicate copies of Transfer Certificates of Title Nos. T-22374, T-22375 and T-
22376.
If for any reason the outstanding owner’s duplicate copies of the subject certificates of title
cannot be so surrendered or delivered, the Register of Deeds for Antique is hereby ordered
to annul the same, issue new certificates of title in lieu thereof which shall contain a
memorandum of the annulment of the outstanding owner’s duplicate copies.
SO ORDERED.12
Spouses Andigan through counsel filed a Notice of Appeal. The appeal was docketed as CA
G.R. CV 73363. However, they failed to timely file their appellants’ brief, and the appeal was
dismissed in a Resolution dated 15 October 2002.13 The 15 October 2002 Resolution
became final and executory on 22 December 2002 and was recorded in the Book of Entries
of Judgments.14
Upon Motion for Execution, RTC Branch 11 issued the Writ of Execution directing the
Provincial Sheriff of Antique to cause the satisfaction of the Order dated 18 October
2001.15 For failure to gain satisfaction of the order from the Spouses Andigan, the Register
of Deeds was notified and commanded to annul the duplicate copies of TCT Nos. T-22374,
T-22375 and T-22376 and new ones were issued in lieu thereof.16
The records bare that petitioner filed a Third Party Claimant’s Affidavit dated 3 March
200417 before the RTC Branch 11 after learning of the Notification and Writ of Execution.
The following were also inscribed on TCT Nos. T-22374, T-22375, and T-22376:
(1) Notice of Lis Pendens of CA G.R. CV-No. 73363, on 16 July 2002;
CIVIL LAW REVIEW 2

(2) Order issued by RTC Branch 11 directing the Register of Deeds for Antique to annul the
subject certificates and issue new ones in lieu thereof, on 21 April 2004;
(3) Resolution by the Court of Appeals dismissing the appeal from the RTC Branch 11
decision in Civil Case No. 2001-2-3230, on 21 April 2004;
(4) Writ of Execution issued by RTC Branch 11, on 21 April 2004; and
(5) Notification issued by the Sheriff to cancel the owner’s duplicate copies, on 21 April
2004.18
Civil Case No. 3345 (RTC Branch 10)
Meanwhile, petitioner also filed with the RTC a case for foreclosure of mortgage against the
heirs of Isagani Andigan, entitled Mae Flor Galido v. Heirs of Isagani Andigan.19 The case was
raffled to Branch 10 and docketed as Civil Case No. 3345.
It appears that petitioner prevailed in Civil Case No. 3345. As a result, the Sheriff issued a
Certificate of Sale20 in favor of petitioner of the properties covered by TCT Nos. T-22374, T-
22375 and T-22376.
RTC Cad. Case No. 2004-819, Cad. Record No. 936 (RTC Branch 12)
Hence, petitioner filed a petition seeking to cancel all entries appearing on TCT No. T-22374
for Lot 1052-A-1, TCT No. T-22375 for Lot 1052-A-2, and TCT No. T-22376 for Lot 1052-A-
3, and to annul TCT No. T-2481521 and all other titles issued pursuant to RTC Civil Case No.
2001-2-3230.
Petitioner alleged that she had been a holder in good faith of the following owner’s
duplicate certificates of title, all of the San Jose Cadastre, in the name of one Andigan:
TCT No. T-22374 for Lot 1052-A-1;
TCT No. T-22375 for Lot 1052-A-2; and
TCT No. T-22376 for Lot 1052-A-3.
And that she had prevailed in Civil Case No. 3345 (RTC Branch 10) and was issued a
Certificate of Sale by the Sheriff. She also averred that the titles contained adverse claims
filed by Magrare, Palcat and Bayombong, and annotations in connection with Civil Case No.
2001-2-3230.
Finding that the case was contentious in nature, the trial court ordered petitioner to amend
her petition to implead the following: (1) Magrare, in whose name TCT No. T-24815 was
registered and who had earlier registered an adverse claim on TCT No. T-22374; (2) Palcat,
who had registered an adverse claim on TCT No. T-22375; and (3) Bayombong, who had
registered an adverse claim on TCT No. T-22376.22
CIVIL LAW REVIEW 2

After petitioner amended her petition, the trial court issued summons to Magrare, Palcat
and Bayombong.23 The summons were duly served on Magrare and Palcat. However, the
sheriff reported that Bayombong was not served because he was already dead.24 Petitioner
moved to substitute the heirs of Bayombong, but the trial court ruled that the substitution
was without legal basis because Bayombong was not properly impleaded. He died on 13
December 2001 and could not have been made a party to the petition filed on 19 August
2004. Hence, the trial court dismissed the case against Bayombong in an Order dated 22
April 2005.25
Petitioner moved to amend her petition for the second time to include the heirs of
Bayombong and the Rural Bank of Sibalom (Antique), Inc., whose mortgage was registered
on TCT No. T-24815. The trial court ruled that the names and addresses of all the heirs of
Bayombong were not identified, and that there was no showing that the widow of
Bayombong represented all the heirs.26 The trial court also found no legal or factual basis to
implead the bank. Hence, the trial court denied petitioner’s motion to further amend the
petition.27
Meanwhile, respondents Magrare and Palcat filed their answer on 4 March 2005,28 setting
forth the following affirmative defenses: (1) petitioner has no cause of action against them;
and (2) the present case is barred by the prior ruling in Civil Case No. 2001-2-3230.
Upon motion, the trial court held a summary hearing on the affirmative defenses. Despite
due notice, neither petitioner nor her counsel appeared. The trial court allowed
respondents’ counsel to proceed with the presentation of evidence.29
After receiving respondents’ evidence in support of their affirmative defenses, the trial
court set another hearing to give petitioner a chance to refute the same.30 However, despite
due notice and even a postponement requested by petitioner,31 she and her counsel failed to
appear.32 The judge took petitioner’s absences during the settings for the preliminary
hearing as a waiver to present documentary evidence or arguments to refute respondents’
evidence.
The Ruling of the Trial Court
On 2 October 2007, the trial court ruled in favor of respondents, dismissing the case, thus:
On the basis of the foregoing findings and observations, this court finds meritorious the
affirmative defenses put up by the respondents/adverse claimants, that, the petitioner Mae
Flor Galido has no cause of action against them and, that, this case is already barred by prior
judgment rendered in Civil Case No. 2001-2-3230. In Nicasio I. Alacantara, et al. vs. Vicente
C. Ponce, et al., G.R. No. 131547, Dec. 15, 2005, it was ruled that, "Litigation must end and
terminate sometime and somewhere, and it is essential to an effective and efficient
administration of justice that once a judgment has become final, the winning party be not,
through a mere subterfuge, deprived of the fruits of the verdict. Court[s] must therefore
guard against any scheme calculated to bring about the result. Constituted as they are to put
an end to the controversies, courts should frown upon any attempt to prolong them."
PREMISES CONSIDERED, the petition in this case is hereby DENIED and, this case dismissed
for the reasons aforestated.33
CIVIL LAW REVIEW 2

The trial court found petitioner’s prayer for cancellation of entries concerning the adverse
claims of respondents moot and academic because the same were already
cancelled.34 Further, the decision in Civil Case No. 2001-2-3230 had already become final
and in fact was executed.35 The trial court also ruled that since Andigan had already sold
Lots 1052-A-1 and 1052-A-2 to respondents when he mortgaged the same to her, it was as
if nothing was mortgaged at all.36
Petitioner filed an appeal before the Court of Appeals with the following assignment of
errors:
1. THE LOWER COURT ERRED IN FAILING TO GIVE NOTICES TO ALL PARTIES IN

INTEREST;
2. THE LOWER COURT ERRED IN REQUIRING THE APPELLANT TO AMEND HER PETITION
TO IMPLEAD THE ADVERSE CLAIMANTS-APPELLEES;
3. THE LOWER COURT ERRED IN REFUSING TO ADMIT AMENDED PETITION THAT

COMPLIED WITH HIS LIKINGS;
4. THE LOWER COURT ERRED IN REFUSING TO CONDUCT PRE-TRIAL CONFERENCE IN

THE INSTANT CASE;
5. THE TRIAL COURT ERRED IN ALLOWING THE HEARING OF ADVERSE CLAIMANTS-

APPELLEES’ AFFIRMATIVE DEFENSES;
6. THE TRIAL COURT ERRED IN REFUSING TO CONSIDER THE EVIDENCE OF THE

APPELLANT IN ITS DECISION; [AND]
7. THE LOWER COURT ERRED IN DISMISSING THE PETITION FILED IN THE INSTANT
CASE.37
The Ruling of the Court of Appeals
The Court of Appeals denied petitioner’s appeal in a Decision38 dated 29 February 2012, the
dispositive portion of which reads:
WHEREFORE, premises considered, and finding no reversible error in the order appealed
from, the appeal is DENIED and the Order dated October 2, 2007 of the Regional Trial Court,
Branch 12 in San Jose, Antique denying and dismissing the petition, is AFFIRMED.39
For lack of merit, the Court of Appeals denied petitioner’s motion for reconsideration in a
Resolution40 dated 28 February 2013.
Hence, the instant petition.
The Issues
Petitioner raises the following issues:
CIVIL LAW REVIEW 2

1. WHETHER OR NOT NOTICES TO ALL PARTIES IN INTEREST ARE REQUIRED IN THIS

CASE;
2. WHETHER OR NOT THE LOWER COURT COULD ORDER PETITIONER TO AMEND HER
PETITION TO IMPLEAD THE ADVERSE CLAIMANTS-APPELLEES;
3. WHETHER OR NOT THE LOWER COURT COULD REFUSE ADMISSION OF AMENDED

PETITION THAT INCLUDED HEIRS OF THE DECEASED RODOLFO BAYOMBONG;
4. WHETHER OR NOT THE LOWER COURT COULD REFUSE HOLDING PRE-TRIAL

CONFERENCE IN THE INSTANT CASE;
5. WHETHER OR NOT THE TRIAL COURT WAS CORRECT IN ALLOWING THE HEARING OF
ADVERSE CLAIMANTS-APPELLEES’ AFFIRMATIVE DEFENSES;
6. WHETHER OR NOT THE TRIAL COURT WAS CORRECT IN REFUSING TO CONSIDER THE
EVIDENCE OF THE PETITIONER IN ITS DECISION; [AND]
7. WHETHER OR NOT THE LOWER COURT WAS CORRECT IN DISMISSING THE PETITION
FILED IN THE INSTANT CASE.41
The Court’s Ruling
We grant the petition in part.
At the crux is the question of who has a better right to the properties concerned: petitioner
on the one hand, and Magrare, Palcat and Bayombong on the other?
No Valid Mortgage in Favor of Petitioner
Petitioner derives her title from Andigan, as mortgagor. However, at the time Andigan
mortgaged the lots to petitioner he had already sold the same to Magrare, Palcat and
Bayombong. Indeed, petitioner’s case is negated by Civil Case No. 2001-2-3230. There,
Andigan admitted that Lot Nos. 1052-A-1, 1052-A-2 and 1052-A-3 were the parcels of land
he sold to Magrare, Palcat and Bayombong, respectively, on 28 December 1998.42 Hence,
when Andigan mortgaged the lots to petitioner on 8 May 2000, he no longer had any right to
do so. We quote with approval the discussion of the trial court:
Finally, when the spouses Andigan mortgaged to the herein petitioner Galido Lot Nos. 1052-
A-1 and 1052-A-2, the said lots were already sold to the respondents Palcat and Magrare. It
is therefore as if nothing was mortgaged to her because Isagani Andigan was no longer the
owner of the mortgaged real property. Under Art. 2085 of the Civil Code, two of the
prescribed requisites for a valid mortgage are, that, the mortgagor be the absolute owner of
the thing mortgaged and, that, he has the free disposal thereof. These requisites are absent
when Isagani Andigan and his wife mortgaged the lots alluded to above to the herein
petitioner.43
CIVIL LAW REVIEW 2

A spring cannot rise higher than its source. Since Andigan no longer had any interest in the
subject properties at the time he mortgaged them to her, petitioner had nothing to
foreclose.
Prior Registered Adverse Claims Prevail
The parcels of land involved in this case are registered under the Torrens system. One who
deals with property registered under the Torrens system need not go beyond the certificate
of title, but only has to rely on the certificate of title.44 Every subsequent purchaser of
registered land taking a certificate of title for value and in good faith shall hold the same
free from all encumbrances except those noted on said certificate and any of the
encumbrances provided by law.45
The Property Registration Decree46 provides:
Section 51. Conveyance and other dealings by registered owner. An owner of registered land
may convey, mortgage, lease, charge or otherwise deal with the same in accordance with
existing laws. He may use such forms of deeds, mortgages, leases or other voluntary
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 Register of Deeds to make registration.
The act of registration shall be the operative act to convey or affect the land insofar as third
persons are concerned, and in all cases under this Decree, the registration shall be made in
the office of the Register of Deeds for the province or city where the land lies.1âwphi1
Section 52. Constructive notice upon registration. Every conveyance, mortgage, lease, lien,
attachment, order, judgment, instrument or entry affecting registered land shall, if
registered, filed or entered in the office of the Register of Deeds for the province or city
where the land to which it relates lies, be constructive notice to all persons from the time of
such registering, filing or entering.
The adverse claims were registered on the respective titles on 6 February 2001, at 11:00 in
the morning. They were already in existence when petitioner filed her case for foreclosure
of mortgage. In fact, when petitioner registered the mortgages on 6 February 2011 at 3:00
in the afternoon, she was charged with the knowledge that the properties subject of the
mortgage were encumbered by interests the same as or better than that of the registered
owner.
Petitioner does not hide the fact that she was aware of the adverse claim and the
proceedings in Civil Case No. 2001-2-3230. In her petition before the Court, she stated that
"on March 03, 2004, petitioner had filed a third party claim with the Regional Trial Court,
Branch 11 in said Civil Case No. 2001-2-3230."47
Instead, petitioner insists that it was illegal for Magrare, Palcat and Bayombong to file a case
compelling the surrender of the owner’s duplicates of TCT Nos. T-22374, T-22375 and T-
22376. On the contrary, the law itself provides the recourse they took – registering an
CIVIL LAW REVIEW 2

adverse claim and filing a petition in court to compel surrender of the owner’s duplicate
certificate of title:
Sec. 70. Adverse claim. Whoever claims any part or interest in registered land adverse to the
registered owner, arising subsequent to the date of the original registration, may if no other
provision is made in this Decree for registering the same, make a statement in writing
setting forth fully his alleged right or interest, and how or under whom acquired, a
reference to the number of the certificate of title of the registered owner, the name of the
registered owner, and a description of the land which the right or interest is claimed.
x x x x
Sec. 107. Surrender of withheld duplicate certificates. Where it is necessary to issue a new
certificate of title pursuant to any involuntary instrument which divests the title of the
registered owner against his consent or where a voluntary instrument cannot be registered
by reason of the refusal or failure of the holder to surrender the owner’s duplicate
certificate of title, the party in interest may file a petition in court to compel surrender of
the same to the Register of Deeds. The court, after hearing, may order the registered owner
or any person withholding the duplicate certificate to surrender the same, and direct the
entry of a new certificate or memorandum upon such surrender. If the person withholding
the duplicate certificate is not amenable to the process of the court, or if for any reason the
outstanding owner’s duplicate certificate cannot be delivered, the court may order the
annulment of the same as well as the issuance of a new certificate of title in lieu thereof.
Such new certificate and all duplicates thereof shall contain a memorandum of the
annulment of the outstanding duplicate.
Further, RTC Branch 11, after trial on the merits of Civil Case No. 2001-2-3230, found for
Magrare, Palcat and Bayombong. That decision has attained finality and was entered in the
Book of Judgments. The trial court was correct in not touching upon the final and executory
decision in that case.
Petitioner is not a Buyer in Good Faith
But even assuming that the mortgage was valid, petitioner can hardly be considered a buyer
in good faith. 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 such purchase, or before he has
notice of the claims or interest of some other person in the property.48
As discussed above, petitioner had notice as early as 2001 of the adverse claims of Magrare,
Palcat and Bayombong. The decision in Civil Case No. 2001-2-3230 became final and
executory before the Certificate of Sale was issued by the Provincial Sheriff on 14 July 2004
in Civil Case No. 3345.
Without speculating as to petitioner’s motivations in foreclosing on the mortgage, the law

on the matter is clear. Preference is given to the prior registered adverse claim because
registration is the operative act that binds or affects the land insofar as third persons are
concerned.49 Thus, upon registration of respondents’ adverse claims, notice was given the
whole world, including petitioner.
CIVIL LAW REVIEW 2

Hence, the trial court’s dismissal of the case against Magrare and Palcat is in order. There is
no need for us to discuss petitioner’s other assignments of error. Besides, the same issues
were sufficiently addressed by the Court of Appeals.
Heirs of Bayombong are Indispensable Parties
However, we find reversible error on the part of the trial court in not impleading the heirs
of Bayombong. Indispensable parties are parties in interest without whom no final
determination can be had of an action.50Petitioner’s action was for the cancellation of titles,
including TCT No. T-22376. In its Order dated 17 January 2005,51 the trial court itself
recognized that the controversy was contentious in nature, and required the participation
of Bayombong, among others. Bayombong, like respondents Magrare and Palcat stood to be
benefited or prejudiced by the outcome of the case. Since he was already dead at the time
the case was filed by petitioner, the heirs of Bayombong stand in his stead not only as
parties in interest, but indispensable parties. Without the heirs of Bayombong to represent
the interest of Bayombong, there can be no complete determination of all the issues
presented by petitioner, particularly, in regard to TCT No. T-22376.
Failure to implead an indispensable party is not a ground for the dismissal of an action, as
the remedy in such case is to implead the party claimed to be indispensable, considering
that parties may be added by order of the court, on motion of the party or on its own
initiative at any stage of the action.52
By denying petitioner’s motion to implead the heirs of Bayombong due to technicalities, the
trial court in effect deprived petitioner a full adjudication of the action, and the heirs of
Bayombong any beneficial effects of the decision. Indeed, the dismissal of the petition as to
Magrare and Palcat greatly benefits them as the controversy regarding TCT Nos. T-22374
and T-22375 is finally laid to rest. Not so with the heirs of Bayombong. We note that the
trial court’s decision discusses TCT Nos. T-22374 and T-22375. The records do not contain
any direct refutation of the claim of petitioner as to TCT No. T-22376, as could be expected
since there were no parties impleaded to defend such interest. Hence, we cannot, without
depriving petitioner due process, extend the trial court’s decision to TCT No. T-22376.
Given the Court’s authority to order the inclusion of an indispensable party at any stage of
the proceedings,53 the heirs of Bayombong are hereby ordered impleaded as parties-
defendants. Since the action has been disposed of as regards Magrare and Palcat, the action
is to proceed solely against the heirs of Bayombong, once they are properly impleaded.54
We note that the counsel representing Magrare and Palcat is the same counsel that
represented Magrare, Palcat and Bayombong in Civil Case No. 2001-2-3230. There is no
information on record, apart from petitioner’s allegation, whether or not counsel informed
the court of the death of Bayombong, in accordance with Section 16, Rule 3 of the Rules of
Court. Nevertheless, for expediency, Atty. Alexis C. Salvani is directed to provide the trial
court and petitioner the full names and addresses of the heirs of Bayombong to enable the
trial court to properly implead them.
WHEREFORE, we GRANT the petition IN PART. The Decision dated 29 February 2012 and
Resolution dated 28 February 2013 of the Court of Appeals in CA-G.R. CEB CV No. 02306,
affirming the Order dated 2 October 2007 of the Regional Trial Court, Branch 12, San Jose,
CIVIL LAW REVIEW 2

Antique in RTC Cad. Case No. 2004-819, Cad. Record No. 936, is: (1) AFFIRMED insofar as
the dismissal of the case with respect to Nelson P. Magrare and Evangeline M. Palcat; and
(2) REVERSED insofar as the dismissal of the case pertaining to TCT No. T-22376. The heirs
of Rodolfo Bayombong are ORDERED IMPLEADED as parties-defendants and the trial
court is directed to proceed with the case pertaining to TCT No. T-22376. Atty. Alexis C.
Salvani is further directed to provide the full names and addresses of the heirs of
Bayombong.
CIVIL LAW REVIEW 2

5.
THIRD DIVISION
January 11, 2016
G.R. No. 191033
THE ORCHARD GOLF & COUNTRY CLUB, INC., EXEQUIEL D. ROBLES, CARLO R.H.
MAGNO, CONRADO L. BENITEZ II, VICENTE R. SANTOS, HENRY CUA LOPING, MARIZA
SANTOS-TAN, TOMAS B. CLEMENTE III, and FRANCIS C. MONTALLANA, Petitioners,
vs.
ERNESTO V. YU and MANUEL C. YUHICO, Respondents.
D E C I S I O N
PERALTA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court (Rules) seeks to
reverse the Resolutions dated September 16, 20091 and January 21, 20102 of the Court of
Appeals (CA) in CA-G.R. SP No. 106918, which reconsidered and set aside its Resolution
dated January 15, 20093 granting petitioners a 15-day period within which to file a petition
for review under Rule 43 of the Rules.
The present case is a continuation of Yu v. The Orchard Gold & Country Club, Inc.4 decided by
this Court on March 1, 2007. For brevity, the relevant facts narrated therein are quoted as
follows:
On May 28, 2000, a Sunday, [respondents] Ernesto Yu and Manuel Yuhico went to the
Orchard Golf & Country Club to play a round of golf with another member of the club. At the
last minute, however, that other member informed them that he could not play with them.
Due to the "no twosome" policy of the Orchard contained in the membership handbook
prohibiting groups of less than three players from teeing off on weekends and public
holidays before 1:00 p.m., [respondents] requested management to look for another player
to join them.
Because [Orchard] were unable to find their third player, [respondent] Yu tried to convince
Francis Montallana, Orchard’s assistant golf director, to allow them to play twosome, even if
they had to tee off from hole no. 10 of the Palmer golf course. Montallana refused, stating
that the flights which started from the first nine holes might be disrupted. [Respondent] Yu
then shouted invectives at Montallana, at which point he told [respondent] Yuhico that they
should just tee off anyway, regardless of what management's reaction would be.
[Respondents] then teed off, without permission from Montallana. They were thus able to
play, although they did so without securing a tee time control slip before teeing off, again in
CIVIL LAW REVIEW 2

disregard of a rule in the handbook. As a result of [respondents’] actions, Montallana filed a

report on the same day with the board of directors (the board).
In separate letters dated May 31, 2000, the board, through [petitioner] Clemente, requested
[respondents] to submit their written comments on Montallana’s incident report dated May
28, 2000. The reportwas submitted for the consideration of the board.
Subsequently, on June 29, 2000, the board resolved to suspend [respondents] from July 16
to October 15, 2000, and served notice thereof on them.
On July 11, 2000, [respondents] filed separate petitions for injunction with application for
temporary restraining order (TRO) and/or preliminary injunction with the Securities
Investigation and Clearing Department (SICD) of the Securities and Exchange Commission
(SEC), at that time the tribunal vested by law with jurisdiction to hear and decide intra-
corporate controversies. The cases, in which [respondents] assailed the validity of their
suspension, were docketed as SEC Case Nos. 07-00-6680 and 07-00-6681. They were
eventually consolidated.
After a joint summary hearing on the aforesaid petitions, the SEC-SICD, on July 14, 2000,
issued a TRO effective for 20 days from issuance, restraining and enjoining [petitioners],
their agents or representatives from implementing or executing the suspension of
[respondents].
On August 1, 2000, the SEC en banc issued its "Guidelines on Intra-Corporate Cases Pending
Before the SICD and the Commission En Banc of the Securities and Exchange Commission"
(guidelines). Sections 1 and 2 of these guidelines provided:
Section 1. Intra-corporate and suspension of payments or rehabilitation cases may still be

filed with the Securities and Exchange Commission on or before August 8, 2000. However,
the parties-litigants or their counsels or representatives shall be advised that the
jurisdiction of the Commission over these cases shall be eventually transferred to the
Regional Trial Courts upon effectivity of The Securities Regulation Code by August 9, 2000.
Section 2. Prayers for temporary restraining order or injunction or suspension of payment

order contained in cases filed under the preceding section may be acted upon favorably
provided that the effectivity of the corresponding order shall only be up to August 8,
2000. Prayers for other provisional remedies shall no longer be acted upon by the
Commission. In all these cases, the parties-litigants or their counsels or representatives
shall be advised that the said cases will eventually be transferred to the regular courts by
August 9, 2000. (Emphasis ours)
After hearing [respondents’] applications for preliminary injunction, the SEC-SICD issued an
order dated August 2, 2000 directing the issuance of a writ of preliminary injunction
enjoining the individual [petitioners], their agents and representatives from suspending
[respondents], upon the latter's posting of separate bonds of P40,000. This [respondents]
did on August 4, 2000.
On August 7, 2000, the SEC-SICD issued a writ of preliminary injunction against

[petitioners] directing them to strictly observe the order dated August 2, 2000.1âwphi1
CIVIL LAW REVIEW 2

On October 31, 2000, the board held a special meeting in which it resolved to implement the
June 29, 2000 order for the suspension of [respondents] in view of the fact that the writs of
injunction issued by the SICD in their respective cases had already [elapsed] on August 8,
2000 under the SEC guidelines.
In separate letters dated December 4, 2000 addressed to each [respondent], [petitioner]

Clemente informed them that the board was implementing their suspensions.
On December 12, 2000, [respondents] filed a petition for indirect contempt against
[petitioners] in the Regional Trial Court (RTC) of Dasmariñas, Cavite, docketed as Civil Case
No. 2228-00.
In an order dated December 13, 2000, the Dasmariñas, Cavite RTC, Branch 90, through
Judge Dolores [L.] Español, directed the parties to maintain the "last, actual, peaceable and
uncontested state of things," effectively restoring the writ of preliminary injunction, and
also ordered [petitioners] to file their answer to the petition. [Petitioners] did not file a
motion for reconsideration but filed a petition for certiorari and prohibition with the CA,
docketed as CA-G.R. SP No. 62309, contesting the propriety of the December 13, 2000 order
of Judge Español. They also prayed for the issuance of a TRO and writ of preliminary
injunction.
The CA reversed the Dasmariñas, Cavite RTC in the x x x decision dated August 27, 2001.
In view of the CA's decision in CA-G.R. SP No. 62309, [petitioners] finally implemented
[respondents’] suspension.
In the meantime, [respondents] filed a motion ad cautelam dated August 30, 2001 in the
RTC of Imus, Cavite, Branch 21, praying for the issuance of a TRO and/or writ of injunction
to enjoin [petitioners] from implementing the suspension orders. They alleged that neither
the CA nor this Court could afford them speedy and adequate relief, hence[,] the case in the
RTC of Imus, Cavite. The case was docketed as SEC Case Nos. 001-01 and 002-01.
On September 7, 2001, the Imus, Cavite RTC issued a TRO. [Petitioners] filed a motion for
reconsideration on September [11,] 2001.
It was after the issuance of this TRO that [respondents] filed, on September 12, 2001, a
motion for reconsideration of the CA’s decision in CA-G.R. SP No. 62309. In a resolution
dated October 10, 2001, the CA denied [respondents’] motion, prompting them to elevate
the matter to this Court via petition for review on certiorari, docketed as G.R. No. 150335.
In an order dated September 21, 2001, the Imus, Cavite RTC denied [petitioners’] motion for
reconsideration and directed the issuance of a writ of preliminary injunction. This
prompted [petitioners] to file another petition for certiorari in the Court of Appeals
[docketed as CA-G.R. SP No. 67664] which x x x issued [on March 26, 2002] a TRO against
the Imus, Cavite RTC, enjoining it from implementing the writ of preliminary injunction.
At this point, [respondents] filed their second petition in this Court, this time a special civil
action for certiorari, docketed as G.R. No. 152687, which included a prayer for the issuance
CIVIL LAW REVIEW 2

of a TRO and/or the issuance of a writ of preliminary injunction to restrain the enforcement
of the CA-issued TRO.
On May 6, 2002, the Court issued a resolution consolidating G.R. No. 152687 and G.R. No.
150335.
In G.R. No. 150335, the issue for consideration [was] whether Sections 1 and 2 of the SEC
guidelines dated August 1, 2000 shortened the life span of the writs of preliminary
injunction issued on August 7, 2000 by the SEC-SICD in SEC Case Nos. 07-00-6680 and 07-
00-6681, thereby making them effective only until August 8, 2000.
At issue in G.R. No. 152687, on the other hand, [was] whether or not the CA committed
grave abuse of discretion amounting to lack of jurisdiction by issuing a TRO against the
Imus, Cavite RTC and enjoining the implementation of its writ of preliminary injunction
against [petitioners].5
On March 1, 2007, the Court denied the petitions in G.R. Nos. 150335 and 152687. In G.R.
No. 150335, it was held that the parties were allowed to file their cases before August 8,
2000 but any provisional remedies the SEC granted them were to be effective only until that
date. Given that the SEC Order and Writ of Injunction were issued on August 2 and 7, 2000,
respectively, both were covered by the guidelines and the stated cut-off date. As to G.R. No.
152687, We ruled that the petition became moot and academic because the TRO issued by
the CA on March 26, 2002 already expired, its lifetime under Rule 58 of the Rules being only
60 days, and petitioners themselves admitted that the CA allowed its TRO to elapse.
Meanwhile, per Order dated September 24, 2002 of the Imus RTC, SEC Case Nos. 001-01
and 002-01 were set for pre-trial conference.6 Trial on the merits thereafter ensued.
On December 4, 2008, the Imus RTC ruled in favor of respondents. The dispositive portion
of the Decision7 ordered:
WHEREFORE, premises considered, the decision of the Club’s Board of Directors

suspending [respondents] Ernesto V. Yu and Manuel C. Yuhico is hereby declared void and
of no effect, and its’ (sic) enforcement permanently enjoined. The writ of preliminary
injunction is hereby declared permanent.
[Petitioners] are hereby directed to jointly and severally pay each of the [respondents] the
following amounts:
(a) P2,000,000.00 as moral damages;
(b) P2,000,000.00 as exemplary damages;
(c) P500,000.00 as attorney’s fees[;] and
(d) P100,000.00 as costs of litigation.
SO ORDERED.8
CIVIL LAW REVIEW 2

Upon receiving a copy of the Imus RTC Decision on December 22, 2008, petitioners filed a
Notice of Appeal accompanied by the payment of docket fees on January 5,
2009.9 Respondents then filed an Opposition to Notice of Appeal with Motion for Issuance of
Writ of Execution,10 arguing that the December 4, 2008 Decision already became final and
executory since no petition for review under Rule 43 of the Rules was filed before the CA
pursuant to Administrative Matter No. 04-9-07-SC.
Realizing the mistake, petitioners filed on January 13, 2009 an Urgent Motion for Extension
of Time to File a Petition.11 Before the Imus RTC, they also filed a Motion to Withdraw the
Notice of Appeal.12
On January 15, 2009, the CA resolved to give petitioners a 15-day period within which to file
the petition, but "[s]ubject to the timeliness of the filing of petitioners’ Urgent Motion for
Extension of Time to File ‘Petition for Review’ Under Rule 43 of the Rules of Court dated
January 13, 2009."13 Afterwards, on January 21, 2009, petitioners filed a Petition for
Review.14
In the meantime, respondents filed an Opposition to Petitioners’ Urgent

Motion.15 Subsequently, they also filed a motion for reconsideration of the CA’s Resolution
dated January 15, 2009.16
Before the Imus RTC, respondents’ motion for execution was granted on February 17, 2009.
The trial court opined that the proper appellate mode of review was not filed within the
period prescribed by the Rules and that the CA issued no restraining order.17 On March 2,
2009, the Writ of Execution was issued.18 Eventually, on March 30, 2009, the Sheriff
received the total amount of P9,200,000.00, as evidenced by two manager’s check payable
to respondents in the amount of P4,600,000.00 each, which were turned over to
respondents’ counsel.19
On September 16, 2009, the CA granted respondents’ motion for reconsideration, setting
aside its January 15, 2009 Resolution. It relied on Atty. Abrenica v. Law Firm of Abrenica,
Tungol & Tibayan (Atty. Abrenica)20 and Land Bank of the Philippines v. Ascot Holdings and
Equities, Inc., (LBP),21 which respondents cited in their Opposition to the Urgent Motion and
Motion for Reconsideration. Petitioners moved to reconsider,22 but it was denied on January
21, 2010; hence, this petition.
The Court initially denied the petition, but reinstated the same on October 6, 2010.23
We grant the petition.
The cases of LBP and Atty. Abrenica are inapplicable. In LBP, the Court affirmed the CA’s
denial of the bank’s motion for extension of time to file a petition for review. Examination of
said case revealed that the bank filed a motion for reconsideration of the trial court’s
adverse judgment dated March 15, 2006, in violation of Section 8(3), Rule 1 of the Interim
Rules of Procedure Governing Intra-Corporate Controversies under Republic Act No. 8799.
It was held that the filing of such prohibited pleading did not toll the reglementary period to
appeal the judgment via a petition for review under Rule 43 of the Rules. Thus, the CA
already lacked jurisdiction to entertain the petition which the bank intended to file, much
less to grant the motion for extension of time that was belatedly filed on July 25, 2006.
CIVIL LAW REVIEW 2

Also, in Atty. Abrenica, We found no compelling reasons to relax the stringent application of
the rules on the grounds as follows:
First, when petitioner received the trial court’s consolidated decision on December 16,
2004, A.M. No. 04-9-07-SC was already in effect for more than two months.
Second, petitioner had known about the new rules on the second week of January, 2005
when he received a copy of respondents’ Opposition (To Defendant’s Notice of Appeal)
dated January 6, 2005. In their opposition, respondents specifically pointed to the
applicability of A.M. No. 04-9-07-SC to the instant case.
Third, petitioner originally insisted in his Reply with Manifestation (To the Opposition to
Defendant’s Notice of Appeal) that the correct mode of appeal was a "notice of appeal."
Petitioner reiterated in his Opposition to respondents’ motion for execution dated January
14, 2005 that a notice of appeal was the correct remedy.
Finally, petitioner filed his Motion to Admit Attached Petition for Review only on June 10,
2005, or almost eight months from the effectivity of A.M. No. 04-9-07-SC on October 15,
2004, after he received the trial court’s Order of May 11, 2005.24
Unlike LBP and Atty. Abrenica, petitioners in this case committed an excusable delay of
merely seven (7) days. When they received a copy of the Imus RTC Decision on December
22, 2008, they filed before the CA an Urgent Motion for Extension of Time to File a Petition
on January 13, 2009. Meantime, they exhibited their desire to appeal the case by filing a
Notice of Appeal before the Imus RTC. Upon realizing their procedural faux pax, petitioners
exerted honest and earnest effort to file the proper pleading despite the expiration of the
reglementary period. In their urgent motion, they candidly admitted that a petition for
review under Rule 43 and not a notice of appeal under Rule 41 ought to have been filed. The
material dates were also indicated. Hence, the CA was fully aware that the 15-day
reglementary period already elapsed when it granted the time to file the petition.
In general, procedural rules setting the period for perfecting an appeal or filing a petition
for review are inviolable considering that appeal is not a constitutional right but merely a
statutory privilege and that perfection of an appeal in the manner and within the period
permitted by law is not only mandatory but jurisdictional.25 However, procedural rules may
be waived or dispensed with in order to serve and achieve substantial justice.26 Relaxation
of the rules may be had when the appeal, on its face, appears to be absolutely meritorious or
when there are persuasive or compelling reasons to relieve a litigant of an injustice not
commensurate with the degree of thoughtlessness in not complying with the prescribed
procedure.27
Notably, under A.M. No. 04-9-07-SC (Re: Mode of Appeal in Cases Formerly Cognizable by
the Securities and Exchange Commission),28 while the petition for review under Rule 43 of
the Rules should be filed within fifteen (15) days from notice of the decision or final order of
the RTC, the CA may actually grant an additional period of fifteen (15) days within which to
file the petition and a further extension of time not exceeding fifteen (15) days for the most
compelling reasons. This implies that the reglementary period is neither an impregnable
nor an unyielding rule.
CIVIL LAW REVIEW 2

Here, there is also no material prejudice to respondents had the CA allowed the filing of a
petition for review. When the Imus RTC declared as permanent the writ of preliminary
injunction, the injunction became immediately executory. Respondents’ suspension as Club
members was effectively lifted; in effect, it restored their rights and privileges unless
curtailed by a temporary restraining order or preliminary injunction.
More importantly, the substantive merits of the case deserve Our utmost consideration.
In the present case, Yu acknowledged that there was an offense committed.29 Similarly,
Yuhico admitted that he was aware or had prior knowledge of the Club’s "no twosome"
policy as contained in the Club’s Membership Handbook and that they teed off without the
required tee time slip.30 Also, while Yu recognized telling Montallana "kamote ka," Yuhico
heard him also say that he (Montallana) is "gago."31
Respondents assert that the "no twosome" policy was relaxed by the management when a
member or player would not be prejudiced or, in the words of Yu, allowed
when "maluwag."32 Yet a thorough reading of the transcript of stenographic records (TSN)
disclosed that such claim is based not on concrete examples. No specific instance as to when
and under what circumstance the supposed relaxation took place was cited. Yuhico roughly
recollected two incidents but, assuming them to be true, these happened only after May 28,
2000.33 Further, the tee pass or control slip and the Club’s Palmer Course Card,34 which was
identified by respondents’ witness, Pepito Dimabuyo, to prove that he and another member
were allowed to play twosome on June 13, 2004, a Sunday, indicated that they were allowed
to tee off only at 1:45 p.m.35 Lastly, granting, for the sake of argument, that the "no
twosome" policy had been relaxed in the past, Montallana cannot be faulted in exercising
his prerogative to disallow respondents from playing since they made no prior reservation
and that there were standing flights waiting for tee time. Per Cipriano Santos’ Report, May
28, 2000 was a relatively busy day as it had 200 registered players to accommodate as of
8:00 a.m.
It was averred that respondents teed off without the required tee time slip based on the
thinking that it was no longer necessary since Santos, the Club’s Manager, allowed them by
waving his hands when Yuhico’s caddie tried to pick up the slip in the registration office.
Such excuse is flimsy because it ignored the reality that Santos, a mere subordinate of
Montallana who already earned the ire of Yu, was practically more helpless to contain the
stubborn insistence of respondents.
Definitely, the contentions that respondents were not stopped by the management when
they teed off and that they did not cause harm to other members playing golf at the time for
absence of any complaints are completely immaterial to the fact that transgressions to
existing Club rules and regulations were committed. It is highly probable that they were
tolerated so as to restore the peace and avoid further confrontation and inconvenience to
the parties involved as well as to the Club members in general.
With regard to the purported damages they incurred, respondents testified during the trial
to support their respective allegations.1âwphi1 Yuhico stated that he distanced himself
from his usual group (the "Alabang Boys") and that he became the butt of jokes of fellow
golfers.36 On the other hand, Yu represented that some of his friends in the business like
Freddy Lim, a certain Atty. Benjie, and Jun Ramos started to evade or refuse to have dealings
CIVIL LAW REVIEW 2

with him after his suspension.37 Apart from these self-serving declarations, respondents
presented neither testimonial nor documentary evidence to bolster their claims. Worse, Yu
even admitted that Freddy Lim and Atty. Benjie did not tell him that his suspension was the
reason why they did not want to transact with him.38
Records reveal that respondents were given due notice and opportunity to be heard before
the Board of Directors imposed the penalty of suspension as Club members. Respondent Yu
was served with the May 31, 2000 letter39signed by then Acting General Manager Tomas B.
Clemente III informing that he violated the "no twosome" policy, teed off without the
required tee time slip, and uttered derogatory remarks to Montallana in front of another
member and the caddies. In response, Yu’s counsel asked for a copy of Montallana’s report
and a formal hearing to confront the complainant and all the witnesses.40 Subsequently, on
June 13, 2000, Yu, through counsel, submitted his explanation that included an admission of
the "no twosome" policy.41 Finally, on September 15, 2000, Yu was advised of the Board
resolution to give him another opportunity to present his side in a meeting supposed to be
held on September 20, 2000.42 It appears, however, that Yu refused to attend.43
Likewise, respondent Yuhico was given by Clemente a letter dated May 31, 2000 informing
him of violating the "no twosome" policy and teeing off without the required tee time
slip.44 After receiving the same, Yuhico called up Clemente to hear his side.45 Like Yu,
however, Yuhico later refused to attend a meeting with the Board.46
Respondents were suspended in accordance with the procedure set forth in the Club’s By-
laws. There is no merit on their insistence that their suspension is invalid on the ground
that the affirmative vote of eight (8) members is required to support a decision suspending
or expelling a Club member. Both the provisions of Articles of Incorporation47 and By-
Laws48 of the Club expressly limit the number of directors to seven (7); hence, the provision
on suspension and expulsion of a member which requires the affirmative vote of eight (8)
members is obviously a result of an oversight. Former Senator Helena Z. Benitez, the
Honorary Chairperson named in the Membership Handbook, could not be included as a
regular Board member since there was no evidence adduced by respondents that she was
elected as such pursuant to the Corporation Code and the By-laws of the Club or that she
had the right and authority to attend and vote in Board meetings. In addition, at the time the
Board resolved to suspend respondents, the affirmative votes of only six (6) Board
members already sufficed. The testimony of Jesus A. Liganor, who served as Assistant
Corporate Secretary, that Rodrigo Francisco had not attended a single Board meeting since
1997 remains uncontroverted.49 The Court agrees with petitioners that the Club should not
be powerless to discipline its members and be helpless against acts inimical to its interest
just because one director had been suspended and refused to take part in the management
affairs.
Lastly, contrary to respondents’ position, the recommendation of the House Committee50 to

suspend a Club member is not a pre-requisite. Section 1, Article XIV,51 not Section 2 (b),
Article XI,52 of the By-Laws governs as it outlines the procedure for the suspension of a
member. Even assuming that the recommendation of the House Committee is mandatory,
respondents failed to prove, as a matter of fact, that petitioners acted in bad faith in relying
on the subject provision, which employs the permissive word "may" in reference to the
power of the House Committee to recommend anytime the suspension of a Club member.
CIVIL LAW REVIEW 2

Way different from the trial court’s findings, there is, therefore, no factual and legal basis to
grant moral and exemplary damages, attorney’s fees and costs of suit in favor of
respondents. The damages suffered, if there are any, partake of the nature of a damnum
absque injuria. As elaborated in Spouses Custodio v. CA:53
x x x [T]he mere fact that the plaintiff suffered losses does not give rise to a right to recover
damages. To warrant the recovery of damages, there must be both a right of action for a
legal wrong inflicted by the defendant, and damage resulting to the plaintiff therefrom.
Wrong without damage, or damage without wrong, does not constitute a cause of action,
since damages are merely part of the remedy allowed for the injury caused by a breach or
wrong.
There is a material distinction between damages and injury. Injury is the illegal invasion of a
legal right; damage is the loss, hurt, or harm which results from the injury; and damages are
the recompense or compensation awarded for the damage suffered. Thus, there can be
damage without injury in those instances in which the loss or harm was not the result of a
violation of a legal duty. These situations are often called damnum absque injuria.
In order that a plaintiff may maintain an action for the injuries of which he complains, he
must establish that such injuries resulted from a breach of duty which the defendant owed
to the plaintiff – a concurrence of injury to the plaintiff and legal responsibility by the
person causing it. The underlying basis for the award of tort damages is the premise that an
individual was injured in contemplation of law. Thus, there must first be the breach of some
duty and the imposition of liability for that breach before damages may be awarded; it is not
sufficient to state that there should be tort liability merely because the plaintiff suffered
some pain and suffering.
Many accidents occur and many injuries are inflicted by acts or omissions which cause
damage or loss to another but which violate no legal duty to such other person, and
consequently create no cause of action in his favor. In such cases, the consequences must be
borne by the injured person alone. The law affords no remedy for damages resulting from
an act which does not amount to a legal injury or wrong.
In other words, in order that the law will give redress for an act causing damage, that act
must be not only hurtful, but wrongful. There must be damnum et injuria. If, as may happen
in many cases, a person sustains actual damage, that is, harm or loss to his person or
property, without sustaining any legal injury, that is, an act or omission which the law does
not deem an injury, the damage is regarded as damnum absque injuria.
x x x x
The proper exercise of a lawful right cannot constitute a legal wrong for which an action
will lie, although the act may result in damage to another, for no legal right has been
invaded. One may use any lawful means to accomplish a lawful purpose and though the
means adopted may cause damage to another, no cause of action arises in the latter’s favor.
Any injury or damage occasioned thereby is damnum absque injuria. The courts can give no
redress for hardship to an individual resulting from action reasonably calculated to achieve
a lawful end by lawful means.54
CIVIL LAW REVIEW 2

"One who makes use of his own legal right does no injury. Qui jure suo utitur nullum
damnum facit. If damage results from a person's exercising his legal rights, it is damnum
absque injuria."55 In this case, respondents failed to prove by preponderance of evidence
that there is fault or negligence on the part of petitioners in order to oblige them to pay for
the alleged damage sustained as a result of their suspension as Club members. Certainly,
membership in the Club is a privilege.56 Regular members are entitled to use all the facilities
and privileges of the Club, subject to its rules and regulations.57 As correctly pointed out by
petitioners, the mental anguish respondents experienced, assuming to be true, was brought
upon them by themselves for deliberately and consciously violating the rules and
regulations of the Club. Considering that respondents were validly suspended, there is no
reason for the Club to compensate them. Indeed, the penalty of suspension provided for in
Section 1, Article XIV of the By-Laws is a means to protect and preserve the interest and
purposes of the Club. This being so, the suspension of respondents does not fall under any
of the provisions of the Civil Code pertaining to the grant of moral and exemplary damages,
attorney’s fees, and litigation costs.
WHEREFORE, premises considered, the petition is GRANTED. The Resolutions dated

September 16, 2009 and January 21, 2010 of the Court of Appeals in CA-G.R. SP No. 106918,
which reconsidered and set aside its Resolution dated January 15, 2009, granting
petitioners a fifteen-day period within which to file a petition for review under Rule 43 of
the Rules, is ANNULLED AND SET ASIDE. SEC Case Nos. 001-0l and 002-0l filed and raffled
before the Regional Trial Court, Branch 21 of Imus, Cavite are hereby DISMISSED for lack of
merit. Respondents are ORDERED TO RETURN to petitioners the total amount of
P9,200,000.00 or P4,600,000.00 each, within THIRTY (30) DAYS from the time this
decision becomes final and executory. Thereafter, said amount shall earn legal interest of six
percent (6%) per annum until fully paid.
CIVIL LAW REVIEW 2

6.
SECOND DIVISION
January 11, 2016
G.R. No. 167615
SPOUSES ALEXANDER AND JULIE LAM, Doing Business Under the Name and Style
"COLORKWIK LABORATORIES" AND "COLORKWIK PHOTO SUPPLY", Petitioners,
vs.
KODAK PHILIPPINES, LTD., Respondent.
D E C I S I O N
LEONEN, J.:
This is a Petition for Review on Certiorari filed on April 20, 2005 assailing the March 30,
2005 Decision1 and September 9, 2005 Amended Decision2 of the Court of Appeals, which
modified the February 26, 1999 Decision3 of the Regional Trial Court by reducing the
amount of damages awarded to petitioners Spouses Alexander and Julie Lam (Lam
Spouses).4 The Lam Spouses argue that respondent Kodak Philippines, Ltd.’s breach of their
contract of sale entitles them to damages more than the amount awarded by the Court of
Appeals.5
On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd. entered into an agreement
(Letter Agreement) for the sale of three (3) units of the Kodak Minilab System
22XL6 (Minilab Equipment) in the amount of ₱1,796,000.00 per unit,7 with the following
terms:
This confirms our verbal agreement for Kodak Phils., Ltd. To provide Colorkwik
Laboratories, Inc. with three (3) units Kodak Minilab System 22XL . . . for your proposed
outlets in Rizal Avenue (Manila), Tagum (Davao del Norte), and your existing Multicolor
photo counter in Cotabato City under the following terms and conditions:
1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based
on prevailing equipment price provided said equipment packages will be purchased not
later than June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered
in advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
CIVIL LAW REVIEW 2

3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE

THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12 months; the
balance shall be re-amortized for the remaining 36 months and the prevailing interest shall
be applied.
5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION
SEVEN HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.]8
On January 15, 1992, Kodak Philippines, Ltd. delivered one (1) unit of the Minilab
Equipment in Tagum, Davao Province.9 The delivered unit was installed by Noritsu
representatives on March 9, 1992.10 The Lam Spouses issued postdated checks amounting
to ₱35,000.00 each for 12 months as payment for the first delivered unit, with the first
check due on March 31, 1992.11
The Lam Spouses requested that Kodak Philippines, Ltd. not negotiate the check dated
March 31, 1992 allegedly due to insufficiency of funds.12 The same request was made for the
check due on April 30, 1992. However, both checks were negotiated by Kodak Philippines,
Ltd. and were honored by the depository bank.13 The 10 other checks were subsequently
dishonored after the Lam Spouses ordered the depository bank to stop payment.14
Kodak Philippines, Ltd. canceled the sale and demanded that the Lam Spouses return the
unit it delivered together with its accessories.15 The Lam Spouses ignored the demand but
also rescinded the contract through the letter dated November 18, 1992 on account of
Kodak Philippines, Ltd.’s failure to deliver the two (2) remaining Minilab Equipment units.16
On November 25, 1992, Kodak Philippines, Ltd. filed a Complaint for replevin and/or
recovery of sum of money. The case was raffled to Branch 61 of the Regional Trial Court,
Makati City.17 The Summons and a copy of Kodak Philippines, Ltd.’s Complaint was
personally served on the Lam Spouses.18
The Lam Spouses failed to appear during the pre-trial conference and submit their pre-trial
brief despite being given extensions.19 Thus, on July 30, 1993, they were declared in
default.20 Kodak Philippines, Ltd. presented evidence ex-parte.21 The trial court issued the
Decision in favor of Kodak Philippines, Ltd. ordering the seizure of the Minilab Equipment,
which included the lone delivered unit, its standard accessories, and a separate generator
set.22 Based on this Decision, Kodak Philippines, Ltd. was able to obtain a writ of seizure on
December 16, 1992 for the Minilab Equipment installed at the Lam Spouses’ outlet in
Tagum, Davao Province.23 The writ was enforced on December 21, 1992, and Kodak
Philippines, Ltd. gained possession of the Minilab Equipment unit, accessories, and the
generator set.24
The Lam Spouses then filed before the Court of Appeals a Petition to Set Aside the Orders
issued by the trial court dated July 30, 1993 and August 13, 1993. These Orders were
CIVIL LAW REVIEW 2

subsequently set aside by the Court of Appeals Ninth Division, and the case was remanded
to the trial court for pre-trial.25
On September 12, 1995, an Urgent Motion for Inhibition was filed against Judge Fernando V.
Gorospe, Jr.,26 who had issued the writ of seizure.27 The ground for the motion for inhibition
was not provided. Nevertheless, Judge Fernando V. Gorospe Jr. inhibited himself, and the
case was reassigned to Branch 65 of the Regional Trial Court, Makati City on October 3,
1995.28
In the Decision dated February 26, 1999, the Regional Trial Court found that Kodak
Philippines, Ltd. defaulted in the performance of its obligation under its Letter Agreement
with the Lam Spouses.29 It held that Kodak Philippines, Ltd.’s failure to deliver two (2) out of
the three (3) units of the Minilab Equipment caused the Lam Spouses to stop paying for the
rest of the installments.30 The trial court noted that while the Letter Agreement did not
specify a period within which the delivery of all units was to be made, the Civil Code
provides "reasonable time" as the standard period for compliance:
The second paragraph of Article 1521 of the Civil Code provides:
Where by a contract of sale the seller is bound to send the goods to the buyer, but no time
for sending them is fixed, the seller is bound to send them within a reasonable time.
What constitutes reasonable time is dependent on the circumstances availing both on the
part of the seller and the buyer. In this case, delivery of the first unit was made five (5) days
after the date of the agreement. Delivery of the other two (2) units, however, was never
made despite the lapse of at least three (3) months.31
Kodak Philippines, Ltd. failed to give a sufficient explanation for its failure to deliver all
three (3) purchased units within a reasonable time.32
The trial court found:
Kodak would have the court believe that it did not deliver the other two (2) units due to the
failure of defendants to make good the installments subsequent to the second. The court is
not convinced. First of all, there should have been simultaneous delivery on account of the
circumstances surrounding the transaction. . . . Even after the first delivery . . . no delivery
was made despite repeated demands from the defendants and despite the fact no
installments were due. Then in March and in April (three and four months respectively from
the date of the agreement and the first delivery) when the installments due were both
honored, still no delivery was made.
Second, although it might be said that Kodak was testing the waters with just one delivery -
determining first defendants’ capacity to pay - it was not at liberty to do so. It is implicit in
the letter agreement that delivery within a reasonable time was of the essence and failure to
so deliver within a reasonable time and despite demand would render the vendor in default.
. . . .
CIVIL LAW REVIEW 2

Third, at least two (2) checks were honored. If indeed Kodak refused delivery on account of
defendants’ inability to pay, non-delivery during the two (2) months that payments were
honored is unjustified.33
Nevertheless, the trial court also ruled that when the Lam Spouses accepted delivery of the
first unit, they became liable for the fair value of the goods received:
On the other hand, defendants accepted delivery of one (1) unit. Under Article 1522 of the
Civil Code, in the event the buyer accepts incomplete delivery and uses the goods so
delivered, not then knowing that there would not be any further delivery by the seller, the
buyer shall be liable only for the fair value to him of the goods received. In other words, the
buyer is still liable for the value of the property received. Defendants were under obligation
to pay the amount of the unit. Failure of delivery of the other units did not thereby give unto
them the right to suspend payment on the unit delivered. Indeed, in incomplete deliveries,
the buyer has the remedy of refusing payment unless delivery is first made. In this case
though, payment for the two undelivered units have not even commenced; the installments
made were for only one (1) unit.
Hence, Kodak is right to retrieve the unit delivered.34
The Lam Spouses were under obligation to pay for the amount of one unit, and the failure to
deliver the remaining units did not give them the right to suspend payment for the unit
already delivered.35 However, the trial court held that since Kodak Philippines, Ltd. had
elected to cancel the sale and retrieve the delivered unit, it could no longer seek payment
for any deterioration that the unit may have suffered while under the custody of the Lam
Spouses.36
As to the generator set, the trial court ruled that Kodak Philippines, Ltd. attempted to
mislead the court by claiming that it had delivered the generator set with its accessories to
the Lam Spouses, when the evidence showed that the Lam Spouses had purchased it from
Davao Ken Trading, not from Kodak Philippines, Ltd.37 Thus, the generator set that Kodak
Philippines, Ltd. wrongfully took from the Lam Spouses should be replaced.38
The dispositive portion of the Regional Trial Court Decision reads:
PREMISES CONSIDERED, the case is hereby dismissed. Plaintiff is ordered to pay the
following:
1) PHP 130,000.00 representing the amount of the generator set, plus legal interest at 12%
per annum from December 1992 until fully paid; and
2) PHP 1,300,000.00 as actual expenses in the renovation of the Tagum, Davao and Rizal
Ave., Manila outlets.
SO ORDERED.39
On March 31, 1999, the Lam Spouses filed their Notice of Partial Appeal, raising as an issue
the Regional Trial Court’s failure to order Kodak Philippines, Ltd. to pay: (1) ₱2,040,000 in
actual damages; (2) ₱50,000,000 in moral damages; (3) ₱20,000,000 in exemplary damages;
CIVIL LAW REVIEW 2

(4) ₱353,000 in attorney’s fees; and (5) ₱300,000 as litigation expenses.40 The Lam Spouses
did not appeal the Regional Trial Court’s award for the generator set and the renovation
expenses.41
Kodak Philippines, Ltd. also filed an appeal. However, the Court of Appeals42 dismissed it on
December 16, 2002 for Kodak Philippines, Ltd.’s failure to file its appellant’s brief, without
prejudice to the continuation of the Lam Spouses’ appeal.43 The Court of Appeals’ December
16, 2002 Resolution denying Kodak Philippines, Ltd.’s appeal became final and executory on
January 4, 2003.44
In the Decision45 dated March 30, 2005, the Court of Appeals Special Fourteenth Division
modified the February 26, 1999 Decision of the Regional Trial Court:
WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of

the Regional Trial Court, Branch 65 in Civil Case No. 92-3442 is hereby MODIFIED. Plaintiff-
appellant is ordered to pay the following:
1. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per
annum from December 1992 until fully paid; and
2. P440,000.00 as actual damages;
3. P25,000.00 as moral damages; and
4. P50,000.00 as exemplary damages.
SO ORDERED.46 (Emphasis supplied)
The Court of Appeals agreed with the trial court’s Decision, but extensively discussed the
basis for the modification of the dispositive portion.
The Court of Appeals ruled that the Letter Agreement executed by the parties showed that
their obligations were susceptible of partial performance. Under Article 1225 of the New
Civil Code, their obligations are divisible:
In determining the divisibility of an obligation, the following factors may be considered, to

wit: (1) the will or intention of the parties, which may be expressed or presumed; (2) the
objective or purpose of the stipulated prestation; (3) the nature of the thing; and (4)
provisions of law affecting the prestation.
Applying the foregoing factors to this case, We found that the intention of the parties is to be
bound separately for each Minilab Equipment to be delivered as shown by the separate
purchase price for each of the item, by the acceptance of Sps. Lam of separate deliveries for the
first Minilab Equipment and for those of the remaining two and the separate payment
arrangements for each of the equipment. Under this premise, Sps. Lam shall be liable for the
entire amount of the purchase price of the Minilab
Equipment delivered considering that Kodak had already completely fulfilled its obligation
to deliver the same. . . .
CIVIL LAW REVIEW 2

Third, it is also evident that the contract is one that is severable in character as demonstrated
by the separate purchase price for each of the minilab equipment. "If the part to be performed
by one party consists in several distinct and separate items and the price is apportioned to
each of them, the contract will generally be held to be severable. In such case, each distinct
stipulation relating to a separate subject matter will be treated as a separate
contract." Considering this, Kodak's breach of its obligation to deliver the other two (2)
equipment cannot bar its recovery for the full payment of the equipment already delivered. As
far as Kodak is concerned, it had already fully complied with its separable obligation to deliver
the first unit of Minilab Equipment.47 (Emphasis supplied)
The Court of Appeals held that the issuance of a writ of replevin is proper insofar as the
delivered Minilab Equipment unit and its standard accessories are concerned, since Kodak
Philippines, Ltd. had the right to possess it:48
The purchase price of said equipment is P1,796,000.00 which, under the agreement is
payable with forty eight (48) monthly amortization. It is undisputed that Sps. Lam made
payments which amounted to Two Hundred Seventy Thousand Pesos (P270,000.00)
through the following checks: Metrobank Check Nos. 00892620 and 00892621 dated 31
March 1992 and 30 April 1992 respectively in the amount of Thirty Five Thousand Pesos
(P35,000.00) each, and BPI Family Check dated 31 July 1992 amounting to Two Hundred
Thousand Pesos (P200,000.00). This being the case, Sps. Lam are still liable to Kodak in the
amount of One Million Five Hundred Twenty Six Thousand Pesos (P1,526,000.00), which is
payable in several monthly amortization, pursuant to the Letter Agreement. However, Sps.
Lam admitted that sometime in May 1992, they had already ordered their drawee bank to stop
the payment on all the other checks they had issued to Kodak as payment for the Minilab
Equipment delivered to them. Clearly then, Kodak ha[d] the right to repossess the said
equipment, through this replevin suit. Sps. Lam cannot excuse themselves from paying in full
the purchase price of the equipment delivered to them on account of Kodak’s breach of the
contract to deliver the other two (2) Minilab Equipment, as contemplated in the Letter
Agreement.49(Emphasis supplied)
Echoing the ruling of the trial court, the Court of Appeals held that the liability of the Lam
Spouses to pay the remaining balance for the first delivered unit is based on the second
sentence of Article 1592 of the New Civil Code.50 The Lam Spouses’ receipt and use of the
Minilab Equipment before they knew that Kodak Philippines, Ltd. would not deliver the two
(2) remaining units has made them liable for the unpaid portion of the purchase price.51
The Court of Appeals noted that Kodak Philippines, Ltd. sought the rescission of its contract
with the Lam Spouses in the letter dated October 14, 1992.52 The rescission was based on
Article 1191 of the New Civil Code, which provides: "The power to rescind obligations is
implied in reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him."53 In its letter, Kodak Philippines, Ltd. demanded that the Lam
Spouses surrender the lone delivered unit of Minilab Equipment along with its standard
accessories.54
The Court of Appeals likewise noted that the Lam Spouses rescinded the contract through
its letter dated November 18, 1992 on account of Kodak Philippines, Inc.’s breach of the
parties’ agreement to deliver the two (2) remaining units.55
CIVIL LAW REVIEW 2

As a result of this rescission under Article 1191, the Court of Appeals ruled that "both
parties must be restored to their original situation, as far as practicable, as if the contract
was never entered into."56 The Court of Appeals ratiocinated that Article 1191 had the effect
of extinguishing the obligatory relation as if one was never created:57
To rescind is to declare a contract void in its inception and to put an end to it as though it
never were. It is not merely to terminate it and to release parties from further obligations to
each other but abrogate it from the beginning and restore parties to relative positions
which they would have occupied had no contract been made.58
The Lam Spouses were ordered to relinquish possession of the Minilab Equipment unit and
its standard accessories, while Kodak Philippines, Ltd. was ordered to return the amount of
₱270,000.00, tendered by the Lam Spouses as partial payment.59
As to the actual damages sought by the parties, the Court of Appeals found that the Lam
Spouses were able to substantiate the following:
Incentive fee paid to Mr. Ruales in the amount of P100,000.00; the rider to the contract of
lease which made the Sps. Lam liable, by way of advance payment, in the amount of
P40,000.00, the same being intended for the repair of the flooring of the leased premises;
and lastly, the payment of P300,000.00, as compromise agreement for the pre-termination
of the contract of lease with Ruales.60
The total amount is ₱440,000.00. The Court of Appeals found that all other claims made by
the Lam Spouses were not supported by evidence, either through official receipts or check
payments.61
As regards the generator set improperly seized from Kodak Philippines, Ltd. on the basis of
the writ of replevin, the Court of Appeals found that there was no basis for the Lam Spouses’
claim for reasonable rental of ₱5,000.00. It held that the trial court’s award of 12% interest,
in addition to the cost of the generator set in the amount of ₱130,000.00, is sufficient
compensation for whatever damage the Lam Spouses suffered on account of its improper
seizure.62
The Court of Appeals also ruled on the Lam Spouses’ entitlement to moral and exemplary
damages, as well as attorney’s fees and litigation expenses:
In seeking recovery of the Minilab Equipment, Kodak cannot be considered to have

manifested bad faith and malevolence because as earlier ruled upon, it was well within its
right to do the same. However, with respect to the seizure of the generator set, where Kodak
misrepresented to the court a quo its alleged right over the said item, Kodak’s bad faith and
abuse of judicial processes become self-evident. Considering the off-setting circumstances
attendant, the amount of P25,000.00 by way of moral damages is considered sufficient.
In addition, so as to serve as an example to the public that an application for replevin should
not be accompanied by any false claims and misrepresentation, the amount of P50,000.00
by way of exemplary damages should be pegged against Kodak.
CIVIL LAW REVIEW 2

With respect to the attorney’s fees and litigation expenses, We find that there is no basis to
award Sps. Lam the amount sought for.63
Kodak Philippines, Ltd. moved for reconsideration of the Court of Appeals Decision, but it
was denied for lack of merit.64 However, the Court of Appeals noted that the Lam Spouses’
Opposition correctly pointed out that the additional award of ₱270,000.00 made by the trial
court was not mentioned in the decretal portion of the March 30, 2005 Decision:
Going over the Decision, specifically page 12 thereof, the Court noted that, in addition to the
amount of Two Hundred Seventy Thousand (P270,000.00) which plaintiff-appellant should
return to the defendantsappellants, the Court also ruled that defendants-appellants should,
in turn, relinquish possession of the Minilab Equipment and the standard accessories to
plaintiff-appellant. Inadvertently, these material items were not mentioned in the decretal
portion of the Decision. Hence, the proper correction should herein be made.65
The Lam Spouses filed this Petition for Review on April 14, 2005. On the other hand, Kodak
Philippines, Ltd. filed its Motion for Reconsideration66 before the Court of Appeals on April
22, 2005.
While the Petition for Review on Certiorari filed by the Lam Spouses was pending before
this court, the Court of Appeals Special Fourteenth Division, acting on Kodak Philippines,
Ltd.’s Motion for Reconsideration, issued the Amended Decision67 dated September 9, 2005.
The dispositive portion of the Decision reads:
WHEREFORE, premises considered, this Court resolved that:
A. Plaintiff-appellant’s Motion for Reconsideration is hereby DENIED for lack of merit.
B. The decretal portion of the 30 March 2005 Decision should now read as follows:
"WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26 February 1999 of

the Regional Trial Court, Branch 65 in Civil Cases No. 92-3442 is
hereby MODIFIED. Plaintiff-appellant is ordered to pay the following:
a. P270,000.00 representing the partial payment made on the Minilab equipment.
b. P130,000.00 representing the amount of the generator set, plus legal interest at 12% per
annum from December 1992 until fully paid;
c. P440,000.00 as actual damages;
d. P25,000.00 as moral damages; and
e. P50,000.00 as exemplary damages.
Upon the other hand, defendants-appellants are hereby ordered to return to plaintiff-
appellant the Minilab equipment and the standard accessories delivered by plaintiff-
appellant.
CIVIL LAW REVIEW 2

SO ORDERED."
SO ORDERED.68 (Emphasis in the original)
Upon receiving the Amended Decision of the Court of Appeals, Kodak Philippines, Ltd. filed
a Motion for Extension of Time to File an Appeal by Certiorari under Rule 45 of the 1997
Rules of Civil Procedure before this court.69
This was docketed as G.R. No. 169639. In the Motion for Consolidation dated November 2,
2005, the Lam Spouses moved that G.R. No. 167615 and G.R. No. 169639 be consolidated
since both involved the same parties, issues, transactions, and essential facts and
circumstances.70
In the Resolution dated November 16, 2005, this court noted the Lam Spouses’ September
23 and September 30, 2005 Manifestations praying that the Court of Appeals’ September 9,
2005 Amended Decision be considered in the resolution of the Petition for Review on
Certiorari.71 It also granted the Lam Spouses’ Motion for Consolidation.72
In the Resolution73 dated September 20, 2006, this court deconsolidated G.R No. 167615
from G.R. No. 169639 and declared G.R. No. 169639 closed and terminated since Kodak
Philippines, Ltd. failed to file its Petition for Review.
II
We resolve the following issues:
First, whether the contract between petitioners Spouses Alexander and Julie Lam and
respondent Kodak Philippines, Ltd. pertained to obligations that are severable, divisible,
and susceptible of partial performance under Article 1225 of the New Civil Code; and
Second, upon rescission of the contract, what the parties are entitled to under Article 1190
and Article 1522 of the New Civil Code.
Petitioners argue that the Letter Agreement it executed with respondent for three (3)
Minilab Equipment units was not severable, divisible, and susceptible of partial
performance. Respondent’s recovery of the delivered unit was unjustified.74
Petitioners assert that the obligations of the parties were not susceptible of partial
performance since the Letter Agreement was for a package deal consisting of three (3)
units.75 For the delivery of these units, petitioners were obliged to pay 48 monthly
payments, the total of which constituted one debt.76 Having relied on respondent’s
assurance that the three units would be delivered at the same time, petitioners
simultaneously rented and renovated three stores in anticipation of simultaneous
operations.77 Petitioners argue that the divisibility of the object does not necessarily
determine the divisibility of the obligation since the latter is tested against its susceptibility
to a partial performance.78 They argue that even if the object is susceptible of separate
deliveries, the transaction is indivisible if the parties intended the realization of all parts of
the agreed obligation.79
CIVIL LAW REVIEW 2

Petitioners support the claim that it was the parties’ intention to have an indivisible
agreement by asserting that the payments they made to respondent were intended to be
applied to the whole package of three units.80 The postdated checks were also intended as
initial payment for the whole package.81 The separate purchase price for each item was
merely intended to particularize the unit prices, not to negate the indivisible nature of their
transaction.82 As to the issue of delivery, petitioners claim that their acceptance of separate
deliveries of the units was solely due to the constraints faced by respondent, who had sole
control over delivery matters.83
With the obligation being indivisible, petitioners argue that respondent’s failure to comply
with its obligation to deliver the two (2) remaining Minilab Equipment units amounted to a
breach. Petitioners claim that the breach entitled them to the remedy of rescission and
damages under Article 1191 of the New Civil Code.84
Petitioners also argue that they are entitled to moral damages more than the ₱50,000.00
awarded by the Court of Appeals since respondent’s wrongful act of accusing them of non-
payment of their obligations caused them sleepless nights, mental anguish, and wounded
feelings.85 They further claim that, to serve as an example for the public good, they are
entitled to exemplary damages as respondent, in making false allegations, acted in evident
bad faith and in a wanton, oppressive, capricious, and malevolent manner.86
Petitioners also assert that they are entitled to attorney’s fees and litigation expenses under
Article 2208 of the New Civil Code since respondent’s act of bringing a suit against them
was baseless and malicious. This prompted them to engage the services of a lawyer.87
Respondent argues that the parties’ Letter Agreement contained divisible obligations
susceptible of partial performance as defined by Article 1225 of the New Civil Code.88 In
respondent’s view, it was the intention of the parties to be bound separately for each
individually priced Minilab Equipment unit to be delivered to different outlets:89
The three (3) Minilab Equipment are intended by petitioners LAM for install[a]tion at their
Tagum, Davao del Norte, Sta. Cruz, Manila and Cotabato City outlets. Each of these units [is]
independent from one another, as many of them may perform its own job without the other.
Clearly the objective or purpose of the prestation, the obligation is divisible.
The nature of each unit of the three (3) Minilab Equipment is such that one can perform its
own functions, without awaiting for the other units to perform and complete its job. So
much so, the nature of the object of the Letter Agreement is susceptible of partial
performance, thus the obligation is divisible.90
With the contract being severable in character, respondent argues that it performed its
obligation when it delivered one unit of the Minilab Equipment.91 Since each unit could
perform on its own, there was no need to await the delivery of the other units to complete
its job.92 Respondent then is of the view that when petitioners ordered the depository bank
to stop payment of the issued checks covering the first delivered unit, they violated their
obligations under the Letter Agreement since respondent was already entitled to full
payment.93
CIVIL LAW REVIEW 2

Respondent also argues that petitioners benefited from the use of the Minilab Equipment
for 10 months—from March to December 1992— despite having paid only two (2) monthly
installments.94 Respondent avers that the two monthly installments amounting to
₱70,000.00 should be the subject of an offset against the amount the Court of Appeals
awarded to petitioners.95
Respondent further avers that petitioners have no basis for claiming damages since the
seizure and recovery of the Minilab Equipment was not in bad faith and respondent was
well within its right.96
III
The Letter Agreement contained an indivisible obligation.
Both parties rely on the Letter Agreement97 as basis of their respective obligations. Written
by respondent’s Jeffrey T. Go and Antonio V. Mines and addressed to petitioner Alexander
Lam, the Letter Agreement contemplated a "package deal" involving three (3) units of the
Kodak Minilab System 22XL, with the following terms and conditions:
This confirms our verbal agreement for Kodak Phils., Ltd. to provide Colorkwik
Laboratories, Inc. with three (3) units Kodak Minilab System 22XL . . . for your proposed
outlets in Rizal Avenue (Manila), Tagum (Davao del Norte), and your existing Multicolor
photo counter in Cotabato City under the following terms and conditions:
1. Said Minilab Equipment packages will avail a total of 19% multiple order discount based
on prevailing equipment price provided said equipment packages will be purchased not
later than June 30, 1992.
2. 19% Multiple Order Discount shall be applied in the form of merchandise and delivered
in advance immediately after signing of the contract.
* Also includes start-up packages worth P61,000.00.
3. NO DOWNPAYMENT.
4. Minilab Equipment Package shall be payable in 48 monthly installments at THIRTY FIVE

THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for the first 12 months; the
balance shall be re-amortized for the remaining 36 months and the prevailing interest shall
be applied.
5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at ONE MILLION
SEVEN HUNDRED NINETY SIX THOUSAND PESOS.
6. Price is subject to change without prior notice.
*Secured with PDCs; 1st monthly amortization due 45 days after installation[.]98
Based on the foregoing, the intention of the parties is for there to be a single transaction
covering all three (3) units of the Minilab Equipment. Respondent’s obligation was to
CIVIL LAW REVIEW 2

deliver all products purchased under a "package," and, in turn, petitioners’ obligation was to
pay for the total purchase price, payable in installments.
The intention of the parties to bind themselves to an indivisible obligation can be further
discerned through their direct acts in relation to the package deal. There was only one
agreement covering all three (3) units of the Minilab Equipment and their accessories. The
Letter Agreement specified only one purpose for the buyer, which was to obtain these units
for three different outlets. If the intention of the parties were to have a divisible contract,
then separate agreements could have been made for each Minilab Equipment unit instead of
covering all three in one package deal. Furthermore, the 19% multiple order discount as
contained in the Letter Agreement was applied to all three acquired units.99 The "no
downpayment" term contained in the Letter Agreement was also applicable to all the
Minilab Equipment units. Lastly, the fourth clause of the Letter Agreement clearly referred
to the object of the contract as "Minilab Equipment Package."
In ruling that the contract between the parties intended to cover divisible obligations, the
Court of Appeals highlighted: (a) the separate purchase price of each item; (b) petitioners’
acceptance of separate deliveries of the units; and (c) the separate payment arrangements
for each unit.100 However, through the specified terms and conditions, the tenor of the
Letter Agreement indicated an intention for a single transaction. This intent must prevail
even though the articles involved are physically separable and capable of being paid for and
delivered individually, consistent with the New Civil Code:
Article 1225. For the purposes of the preceding articles, obligations to give definite things
and those which are not susceptible of partial performance shall be deemed to be
indivisible.
When the obligation has for its object the execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous things which by their nature are
susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an obligation is
indivisible if so provided by law or intended by the parties. (Emphasis supplied)
In Nazareno v. Court of Appeals,101 the indivisibility of an obligation is tested against

whether it can be the subject of partial performance:
An obligation is indivisible when it cannot be validly performed in parts, whatever may be the
nature of the thing which is the object thereof. The indivisibility refers to the prestation and
not to the object thereof. In the present case, the Deed of Sale of January 29, 1970
supposedly conveyed the six lots to Natividad. The obligation is clearly indivisible because
the performance of the contract cannot be done in parts, otherwise the value of what is
transferred is diminished. Petitioners are therefore mistaken in basing the indivisibility of a
contract on the number of obligors.102 (Emphasis supplied, citation omitted)
There is no indication in the Letter Agreement that the units petitioners ordered were
covered by three (3) separate transactions. The factors considered by the Court of Appeals
are mere incidents of the execution of the obligation, which is to deliver three units of the
Minilab Equipment on the part of respondent and payment for all three on the part of
CIVIL LAW REVIEW 2

petitioners. The intention to create an indivisible contract is apparent from the benefits that
the Letter Agreement afforded to both parties. Petitioners were given the 19% discount on
account of a multiple order, with the discount being equally applicable to all units that they
sought to acquire. The provision on "no downpayment" was also applicable to all units.
Respondent, in turn, was entitled to payment of all three Minilab Equipment units, payable
by installments.
IV
With both parties opting for rescission of the contract under Article 1191, the Court of
Appeals correctly ordered for restitution.
The contract between the parties is one of sale, where one party obligates himself or herself
to transfer the ownership and deliver a determinate thing, while the other pays a certain
price in money or its equivalent.103 A contract of sale is perfected upon the meeting of minds
as to the object and the price, and the parties may reciprocally demand the performance of
their respective obligations from that point on.104
The Court of Appeals correctly noted that respondent had rescinded the parties’ Letter
Agreement through the letter dated October 14, 1992.105 It likewise noted petitioners’
rescission through the letter dated November 18, 1992.106This rescission from both parties
is founded on Article 1191 of the New Civil Code:
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfilment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he has
chosen fulfilment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
Rescission under Article 1191 has the effect of mutual restitution.107 In Velarde v. Court of
Appeals:108
Rescission abrogates the contract from its inception and requires a mutual restitution of
benefits received.
. . . .
Rescission creates the obligation to return the object of the contract. It can be carried out only
when the one who demands rescission can return whatever he may be obliged to restore. To
rescind is to declare a contract void at its inception and to put an end to it as though it never
was. It is not merely to terminate it and release the parties from further obligations to each
other, but to abrogate it from the beginning and restore the parties to their relative positions
as if no contract has been made.109 (Emphasis supplied, citations omitted)
CIVIL LAW REVIEW 2

The Court of Appeals correctly ruled that both parties must be restored to their original
situation as far as practicable, as if the contract was never entered into. Petitioners must
relinquish possession of the delivered Minilab Equipment unit and accessories, while
respondent must return the amount tendered by petitioners as partial payment for the unit
received. Further, respondent cannot claim that the two (2) monthly installments should be
offset against the amount awarded by the Court of Appeals to petitioners because the effect
of rescission under Article 1191 is to bring the parties back to their original positions before
the contract was entered into. Also in Velarde:
As discussed earlier, the breach committed by petitioners was the nonperformance of a

reciprocal obligation, not a violation of the terms and conditions of the mortgage contract.
Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the
contract does not apply. Instead, Civil Code provisions shall govern and regulate the
resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code,
mutual restitution is required to bring back the parties to their original situation prior to the
inception of the contract. Accordingly, the initial payment of ₱800,000 and the corresponding
mortgage payments in the amounts of ₱27,225, ₱23,000 and ₱23,925 (totaling ₱874,150.00)
advanced by petitioners should be returned by private respondents, lest the latter unjustly
enrich themselves at the expense of the former.110 (Emphasis supplied)
When rescission is sought under Article 1191 of the Civil Code, it need not be judicially
invoked because the power to resolve is implied in reciprocal obligations.111 The right to
resolve allows an injured party to minimize the damages he or she may suffer on account of
the other party’s failure to perform what is incumbent upon him or her.112 When a party
fails to comply with his or her obligation, the other party’s right to resolve the contract is
triggered.113 The resolution immediately produces legal effects if the non-performing party
does not question the resolution.114 Court intervention only becomes necessary when the
party who allegedly failed to comply with his or her obligation disputes the resolution of the
contract.115 Since both parties in this case have exercised their right to resolve under Article
1191, there is no need for a judicial decree before the resolution produces effects.
The issue of damages is a factual one. A petition for review on certiorari under Rule 45 shall
only pertain to questions of law.116 It is not the duty of this court to re-evaluate the evidence
adduced before the lower courts.117Furthermore, unless the petition clearly shows that
there is grave abuse of discretion, the findings of fact of the trial court as affirmed by the
Court of Appeals are conclusive upon this court.118 In Lorzano v. Tabayag, Jr.:119
For a question to be one of law, the same must not involve an examination of the probative
value of the evidence presented by the litigants or any of them. The resolution of the issue
must rest solely on what the law provides on the given set of circumstances. Once it is clear
that the issue invites a review of the evidence presented, the question posed is one of fact.
. . . .
CIVIL LAW REVIEW 2

For the same reason, we would ordinarily disregard the petitioner’s allegation as to the
propriety of the award of moral damages and attorney’s fees in favor of the respondent as it is
a question of fact. Thus, questions on whether or not there was a preponderance of evidence to
justify the award of damages or whether or not there was a causal connection between the
given set of facts and the damage suffered by the private complainant or whether or not the
act from which civil liability might arise exists are questions of fact.
Essentially, the petitioner is questioning the award of moral damages and attorney’s fees in
favor of the respondent as the same is supposedly not fully supported by evidence. However, in
the final analysis, the question of whether the said award is fully supported by evidence is a
factual question as it would necessitate whether the evidence adduced in support of the same
has any probative value. For a question to be one of law, it must involve no examination of the
probative value of the evidence presented by the litigants or any of them.120 (Emphasis
supplied, citations omitted)
The damages awarded by the Court of Appeals were supported by documentary

evidence.121 Petitioners failed to show any reason why the factual determination of the
Court of Appeals must be reviewed, especially in light of their failure to produce receipts or
check payments to support their other claim for actual damages.122
Furthermore, the actual damages amounting to ₱2,040,000.00 being sought by

petitioners123 must be tempered on account of their own failure to pay the rest of the
installments for the delivered unit. This failure on their part is a breach of their obligation,
for which the liability of respondent, for its failure to deliver the remaining units, shall be
equitably tempered on account of Article 1192 of the New Civil Code.124 In Central Bank of
the Philippines v. Court of Appeals:125
Since both parties were in default in the performance of their respective reciprocal obligations,
that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and
Sulpicio M. Tolentino failed to comply with his obligation to pay his ₱17,000.00 debt within
3 years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of
their reciprocal obligations, the liability of the first infractor shall be equitably tempered by
the courts. WE rule that the liability of Island Savings Bank for damages in not furnishing the
entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of
penalties and surcharges, for not paying his overdue ₱17,000.00 debt. The liability of
Sulpicio M. Tolentino for interest on his ₱17,000.00 debt shall not be included in offsetting
the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of
the ₱17,000.00, it is just that he should account for the interest thereon.126 (Emphasis
supplied)
The award for moral and exemplary damages also appears to be sufficient. Moral damages
are granted to alleviate the moral suffering suffered by a party due to an act of another, but
it is not intended to enrich the victim at the defendant’s expense.127 It is not meant to punish
the culpable party and, therefore, must always be reasonable vis-a-vis the injury
caused.128 Exemplary damages, on the other hand, are awarded when the injurious act is
attended by bad faith.129 In this case, respondent was found to have misrepresented its right
CIVIL LAW REVIEW 2

over the generator set that was seized. As such, it is properly liable for exemplary damages
as an example to the public.130
However, the dispositive portion of the Court of Appeals Amended Decision dated
September 9, 2005 must be modified to include the recovery of attorney’s fees and costs of
suit in favor of petitioners. In Sunbanun v. Go:131
Furthermore, we affirm the award of exemplary damages and attorney’s fees. Exemplary
damages may be awarded when a wrongful act is accompanied by bad faith or when the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner which
would justify an award of exemplary damages under Article 2232 of the Civil Code. Since the
award of exemplary damages is proper in this case, attorney’s fees and cost of the suit may
also be recovered as provided under Article 2208 of the Civil Code.132 (Emphasis supplied,
citation omitted)
Based on the amount awarded for moral and exemplary damages, it is reasonable to award
petitioners ₱20,000.00 as attorney’s fees.
WHEREFORE, the Petition is DENIED. The Amended Decision dated September 9, 2005
is AFFIRMED with MODIFICATION. Respondent Kodak Philippines, Ltd. is ordered to pay
petitioners Alexander and Julie Lam:
(a) P270,000.00, representing the partial payment made on the Minilab Equipment;
(b) P130,000.00, representing the amount of the generator set, plus legal interest at 12%
.per annum from December 1992 until fully paid;
(c) P440,000.00 as actual damages;
(d) P25,000.00 as moral damages;
(e) P50,000.00 as exemplary damages; and
(f) P20,000.00 as attorney's fees.
Petitioners are ordered to return the Kodak Minilab System 22XL unit and its standard
accessories to respondent.
CIVIL LAW REVIEW 2

7.
THIRD DIVISION
G.R. No. 178110 June 15, 2011
AYALA LAND, INC. and CAPITOL CITIFARMS, INC., Petitioners,

vs.
SIMEONA CASTILLO, LORENZO PERLAS, JESSIELYN CASTILLO, LUIS MAESA, ROLANDO
BATIQUIN, and BUKLURAN MAGSASAKA NG TIBIG, as represented by their attorney-
in-fact, SIMEONA CASTILLO, Respondents.
D E C I S I O N
SERENO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure questioning the Decision1 dated 31 January 2007 of the Court of Appeals (CA) in
CA-G.R. SP No. 86321, which reversed the Decision2 of the Office of the President (OP) dated
28 January 2004. The OP Decision upheld Conversion Order No. 4-97-1029-051 issued by
then Secretary of the Department of Agrarian Reform (DAR) Ernesto Garilao, as well as the
Orders issued by Secretary Hernani Braganza and Secretary Roberto Pagdanganan both
affirming the conversion.
The CA found merit in the OP’s rationale for maintaining the Conversion Order, yet
invalidated the same on the basis that a Notice of Coverage and a Notice of Acquisition had
already been issued over the lands – hence, they could no longer be subject to conversion.
Thus, landowner Capitol Citifarms, Inc. (CCFI) and its successor-in-interest Ayala Land, Inc.
(ALI) filed the present petition imputing error on the appellate court for the following
reasons: 1) the CA resolved an issue – that the alleged Notice of Acquisition prevents the
land from being converted – raised for the first time on appeal, 2) the CA’s finding has no
factual basis, 3) the DAR itself found that the subject property has long been converted to
non-agricultural uses, and 4) a Certificate of Finality of the Braganza Order has already been
issued.
We grant certiorari on the following procedural and substantial grounds:
I. For the first time on appeal, respondents raised a new issue that had never been passed
upon by the DAR or by the Office of the President; hence, the CA is barred from entertaining
the claim.
II. The rule that a prior Notice of Acquisition bars the issuance of a Conversion Order is only
a guiding principle; upon applicant’s compliance with the application requirements, the
DAR is rightly authorized to determine the propriety of conversion.
CIVIL LAW REVIEW 2

III. Respondents are barred from appealing the Conversion Order long after it has attained
finality.
IV. The conversion and/ or reclassification of the said lands has become an operative fact.
V. The OP has long resolved that the lands that are the subject of this case are exempted
from the Comprehensive Agrarian Reform Law (CARL) partly to maintain the stability of the
country’s banking system.
The uncontroverted factual antecedents, as culled from the records, are as follows:
CCFI owned two parcels of land with a total area of 221.3048 hectares located at Barangay
Tibig in Silang, Cavite – hereon referred to as the subject land. The subject land was
mortgaged in favor of one of CCFI’s creditors, MBC. Pursuant to Resolution No. 505 of the
Monetary Board of the Bangko Sentral ng Pilipinas (BSP), MBC was placed under
receivership on 22 May 1987, in accordance with Section 29 of the Central Bank Act
(Republic Act 265). Pursuant to this law, the assets of MBC were placed in the hands of its
receiver under custodia legis.3 On 29 September 1989, the DAR issued a Notice of Coverage
placing the property under compulsory acquisition under the Comprehensive Agrarian
Reform Law of 1988.4
In the meantime, CCFI was unable to comply with its mortgage obligations to MBC. The
latter foreclosed on the lien, and the land was awarded to it in an auction sale held on 4
January 1991. The sale was duly annotated on the titles as Entry No. 5324-44. Subsequently,
the Supreme Court in G.R. No. 85960 ordered MBC’s partial liquidation and allowed the
receiver-designate of the BSP to sell the bank’s assets, including the subject landholding, "at
their fair market value, under the best terms and condition and for the highest price under
current real estate appraisals..."5In a Deed of Partial Redemption,6 CCFI was authorized to
partially redeem the two parcels of land and sell them to a third party, pending full payment
of the redemption price. Under the Deed, the downpayment, which was 30% of the
purchase price, would be payable to the bank only upon approval of the exemption of the
two parcels of land from the coverage of CARL or upon their conversion to non-agricultural
use.
On the same date as the execution of the Deed of Partial Redemption, 29 December 1995,
the property was sold to petitioner ALI in a Deed of Sale over the properties covered by TCT
Nos. 128672 and 144245. The sale was not absolute but conditional, i.e. subject to terms
and conditions other than the payment of the price and the delivery of the titles. The Deed
stated that MBC was to continue to have custody of the corresponding titles for as long as
any obligation remained due it.
Prompted by the numerous proceedings for compulsory acquisition initiated by the DAR
against MBC, Governor Reyes requested then DAR Secretary Ernesto Garilao to issue an
order exempting the landholdings of MBC from CARL and to declare a moratorium on the
compulsory acquisition of MBC’s landholdings. On 14 February 1995, Secretary Garilao
denied the request. On 1 August 1995, MBC and Governor Reyes filed with the OP a Petition
for Review of Secretary Garilao’s Decision. The OP issued a Stay Order of the appealed
Decision. Thereafter, MBC filed with the OP a motion for the issuance of an order granting
CIVIL LAW REVIEW 2

the former a period of five years within which to seek the conversion of its landholdings to
non-agricultural use.
Instead of ruling on the motion alone, however, the OP, through Executive Secretary Ruben
D. Torres, decided to rule on the merits of the petition, as "what is involved in this case is
the susceptibility of a bank to undergo rehabilitation which will be jeopardized by the
distribution of its assets…"7 Secretary Torres remanded the case to the DAR and ordered
the agency to determine which parcels of land were exempt from the coverage of the CARL.
He stated that the ends of justice would be better served if BSP were given the fullest
opportunity to monetize the bank’s assets that were outside the coverage of CARL or could
be converted into non-agricultural uses. He then ordered the DAR to respect the BSP’s
temporary custody of the landholdings, as well as to cease and desist from subjecting MBC’s
properties to the CARL or from otherwise distributing to farmer-beneficiaries those parcels
of land already covered.8
Secretary Torres denied the Motion for Reconsideration filed by the DAR. He reiterated the
need to balance the goal of the agrarian reform program vis-à-vis the interest of the bank
(under receivership by the BSP), and the bank’s creditors (85% of whose credit, or a total of
P8,771,893,000, was payable to BSP).9
Secretary Garilao issued a Resolution dated 3 October 1997, granting MBC’s "Request for
Clearance to Sell," with the sale to be undertaken by CCFI. He applied Section 73-A of
Republic Act No. (R.A.) 6657, as amended by R.A. 7881, that allows the sale of agricultural
land where such sale or transfer is necessitated by a bank’s foreclosure of a mortgage. DAR
Memorandum Circular No. 05, Series of 1996 further clarified the above provision, stating
that foreclosed assets are subject to existing laws on their compulsory transfer under
Section 16 of the General Banking Act. CCFI thereafter filed an application for conversion
and/or exemption pursuant to its prerogative as a landowner under Part IV of DAR A.O. 12-
94 and the procedure outlined therein.
On 31 October 1997, Secretary Garilao issued Conversion Order No. 4-97-1029-051,

approving the conversion and/or exemption of the 221-hectare property in Silang, based on
the findings of the DAR’s Center for Land Use Policy, Planning and Implementation
(CLUPPI) and of the Municipal Agrarian Reform Officer (MARO). These agencies found that
the property was exempt from agrarian reform coverage, as it was beyond eighteen (18)
degrees in slope. They recommended conversion, subject to the submission of several
documentary requirements. On 1 December 1997, CCFI complied by submitting the
following groups of documents:
1. A Certification and a copy of Resolution No. 295-S-96 by the Sangguniang Panlalawigan of

Cavite, adopted in its 4th Special Session, approving the conversion/ reclassification of the
said parcels of land from agricultural to residential, commercial, and industrial uses;
2. A copy of Resolution No. ML-08-S-96 adopted by the Sangguniang Bayan of Silang,

recommending conversion based on the favorable findings by the Committee on Housing
and Land Use;10
CIVIL LAW REVIEW 2

3. Statement of Justification of economic/social benefits of the proposed subdivision

project; development plan, work and financial plan and proof of financial and organizational
capability;
4. Proof of settlement of claims: a table of the list of tenant-petitioners, the area tilled and
the amount of compensation received by each tenant, the Kasunduan,11 and a compilation of
the agreements signed by the one hundred and eighteen (118) tenants waiving all claims
over the property.12
The Morales Order Revoking the Grant of Conversion
On 19 May 2000, almost three years after the Conversion Order had been in force and effect,
the farmers tilling the subject land (hereinafter known as farmers) filed a Petition for
Revocation of Conversion Order No. 4-97-1029-051. They alleged (1) that the sale in 1995
by CCFI to ALI was invalid; and (2) that CCFI and ALI were guilty of misrepresentation in
claiming that the property had been reclassified through a mere Resolution, when the law
required an ordinance of the Sanggunian.13 The issue of the alleged Notice of Acquisition
was never raised. Neither was there any mention of the issuance of a Notice of Coverage.
CCFI and ALI, on the other hand, argued that the claim of the farmers had prescribed, as
mandated by Section 34 of Administrative Order No. (A.O.) 1, Series of 1999, which laid
down a one-year prescriptive period for the filing of a petition to cancel or withdraw
conversion. They stated further that the farmers had already received their disturbance
compensation as evidenced in a Kasunduan, in compliance with the Conversion Order.
On 18 December 2000, DAR Secretary Horacio Morales, Jr. issued an Order declaring that
the action to revoke the conversion had not yet prescribed. According to him, Section 34 of
A.O. 1-99 imposing the one-year prescription period did not apply, because administrative
rules should be applied prospectively. Thus, the rule to be followed was that prevailing at
the time of the issuance of the Conversion Order – DAR A.O. 12-94 – not A.O. 1-99, which
was the rule prevailing when the Petition for Revocation was filed.
As for the two issues raised by the farmer-beneficiaries, these were resolved by Secretary
Morales in favor of CCFI and ALI. First, he found that CCFI did not violate the order of
conversion when it sold the land to ALI, because the prohibition to sell is not a condition for
the conversion. In fact, the sale preceded the issuance of the Conversion Order. Second, he
ruled that there was no misrepresentation by CCFI and ALI regarding the lands’
reclassification. However, he found a new issue for withdrawing the grant of conversion,
that was not previously raised by petitioner-farmers. Apparently unaware of the earlier
history of the land as property in custodia legis, he ruled that the delayed registration of the
sale was evidence of respondents’ intention to evade coverage of the landholding under
agrarian reform. Because the sale was concealed from the Register of Deeds, and the land
was still agricultural at that time, Secretary Morales opined that ALI and CCFI violated the
CARL. It must be remembered however, that contrary to Morales’ findings, it was the
Supreme Court itself that ordered the sale of the lands through its Resolution in G.R. No
85960. Thus there could be no finding by any government body that the sale was illegal.
CIVIL LAW REVIEW 2

Secretary Morales never passed upon or even mentioned any matter related to the Notice of
Acquisition. The gist of both the Petition for Revocation and the Morales Decision revolved
exclusively around the illicit intent behind the sale of the land to ALI:
The gravamen of respondents’ acts lies not upon the sale by respondent Capitol of the land
to ALI, and upon ALI having bought the land from Capitol. It lies somewhere deeper: that
the sale was done as early as 1995 prior to the land’s conversion, and was concealed in the
application until it was registered in 1999.
… … … …
At the time of the registration of the deed on 29 September 1999, the subject land had
ceased to be an agricultural land since it has already been converted to other uses by virtue
of an approved conversion application. As such, the requirement of reporting by the
Register of Deeds of any transaction involving agricultural lands beyond five (5) hectares,
was not made as it is no longer necessary.14
It is important to note, however, that Secretary Morales declared that CCFI and ALI had
completed the payment of disturbance compensation to the farmers, as shown by the
Kasunduan, which was a waiver of all the farmers’ rights over the landholding, and by the
Katunayan ng Pagbabayad, which expressly acknowledged the amounts paid as the full and
final settlement of their claims against CCFI and ALI.
The Braganza Order Reversing the Revocation
On 26 September 2002, acting on the Motion for Reconsideration filed by ALI, DAR
Secretary Hernani Braganza reversed15 the Revocation of Conversion Order 4-97-1029-051.
He resolved three issues to arrive at his Decision, namely: 1) whether the Petition for
Revocation had prescribed; 2) whether ALI was the owner of the subject landholding at the
time of the application; and 3) whether there was complete payment of the disturbance
compensation. Again, Secretary Braganza was not afforded an opportunity to discuss any
evidence related to the existence or effect of any Notice of Acquisition, as the joinder of
issues was limited to those already summarized above.
Secretary Braganza found that the Deed of Partial Redemption was conditional, and that
there was no transfer of ownership to CCFI or its successor-in-interest, ALI. Hence, there
could be no violation of the CARL arising from an unauthorized transfer of the land to ALI.
In fact, the obligation of ALI to pay the purchase price did not arise until the DAR’s issuance
of an order of exemption or conversion. In Secretary Braganza’s words:
Was ownership included in the bundle of rights that was transferred from CCFI to ALI? This
Office answers in the negative.
For CCFI to convey ownership to ALI, MBC must have first transferred this right to CCFI
under the DEED OF PARTIAL REDEMPTION for the reason that CCFI can only convey its
present rights and obligations to ALI.
… … … …
CIVIL LAW REVIEW 2

The fact that MBC is holding on to the Transfer Certificates of Title pending full payment of
the purchase price is indicative of the reservation of ownership in MBC.
… … … …
Thus, it is only upon the full payment of consideration shall the title to the subject
landholding be issued to CCFI or its successor-in-interest, ALI.16
On 14 January 2003, Secretary Braganza granted ALI’s Motion for Extension to develop the
land for another five (5) years.
The Pagdanganan Order Declaring FINALITY
In response to Secretary Braganza’s grant of the Motion for Reconsideration filed by ALI, the
farmers, through their counsel, Atty. Henry So, filed their own Motion for Reconsideration of
the Braganza Order. The farmers questioned the jurisdiction of the DAR to determine the
ownership of the lands and to determine whether or not the sale was conditional, as these
issues are within the ambit of the civil courts. Atty. So found fault with Secretary Braganza’s
attention to "the intricate history of the property,"17 when substantial evidence was all that
was required in agrarian cases. He also claimed that the farmers’ previous counsel, Atty.
Dolor, was misleading the farmers into accepting payment in exchange for their tenancy
rights.18
Secretary Roberto Pagdanganan issued an Order on 13 August 2003, denying the farmers’
Motion for Reconsideration and affirming the finality of the Braganza Order. He stated
therein that the revocation of the conversion, which came almost three years after the
conversion, had not passed through the CLUPPI-1 Deliberation Committee. In addition, he
found that Atty. So had no locus standi to represent the farmers. Secretary Pagdanganan
upheld the Kasunduan the farmers signed as waiver of their claims and deemed the
Braganza Order "final and executory":
WHEREFORE, premises considered, Order is hereby issued DENYING both the Motion for
Reconsideration dated 4 November 2002 and the Urgent Motion for Issuance of Cease and
Desist Order dated 7 May 2003, filed by Atty. Henry So.
FURTHERMORE, the Bureau of Agrarian Legal Assistance is hereby DIRECTED to issue a

Certificate of Finality of the 26 September 2002 order. ACCORDINGLY, this case is deemed
close as far as this office is concern (sic).19
Petitioners’ Appeal before the Office of the President
The farmers then went to the OP and raised only two issues:
The Secretary of Agrarian Reform erred in declaring herein counsel to have no more locus
standi to represent the farmer-petitioners.
The Secretary of Agrarian Reform erred in affirming the Order of 26 September 2002 issued
by then Secretary Hernani Braganza.20
CIVIL LAW REVIEW 2

The Appeal Memorandum pointed out that DAR’s grant of conversion was issued under
"suspicious circumstances." They attached to the Appeal Memorandum an uncertified
photocopy of a Notice of Coverage as "Annex B."21 The photocopy of the Notice of Coverage
was mentioned in passing when the farmers cited paragraph VI-E of Administrative Order
No. 12, Series of 1994. Additionally, farmer-beneficiaries alleged that a Notice of Acquisition
was also in existence. No such document, however, could be found in the memorandum or
in any prior or subsequent pleadings filed by farmer-beneficiaries. They never stated that
the issue of the Notice of Acquisition prevents the conversion of the land.
On 23 January 2004, the Office of the President dismissed the appeal22 and affirmed the
Pagdanganan Order. The OP found the subject property to have been legally converted into
non-agricultural land, citing the findings of the local agencies of Silang that the property was
beyond eighteen (18) degrees in slope, remained undeveloped, was not irrigated, and was
without any other source of irrigation in the area. The OP stated: "Upon our examination of
the voluminous motions, memoranda, evidence submitted by appellants, but not a single
document sufficiently controverts the factual finding of the DAR that the subject property
had long been converted to non-agricultural uses."23 Farmer-beneficiaries then elevated the
case to the CA. The CA reversed the findings of the OP and the DAR, prompting ALI and CCFI
to file the instant Petition.
I. Respondents raised a new issue for the first time on appeal.
The CA found the Conversion Order valid on all points, with the sole exception of the effect
of the alleged issuance of a Notice of Acquisition. In its eight-page Decision, the CA merely
asserted in two lines: "no less than the cited DAR Administrative Order No. 12 enjoins the
conversion of lands directly under a notice of acquisition."24
After perusing the records of the DAR and the OP, however, we find no admissible proof
presented to support this claim. What was attached to the Petition for Review25 to the CA
was not a Notice of Acquisition, but a mere photocopy of the Notice of Coverage. A Notice of
Acquisition was never offered in evidence before the DAR and never became part of the
records even at the trial court level. Thus, its existence is not a fully established fact for the
purpose of serving as the sole basis the entire history of the policy decisions made by the
DAR and the OP were to be overturned. The CA committed reversible error when it gave
credence to a mere assertion by the tenant-farmers, rather than to the policy evaluation
made by the OP.
Assuming arguendo however, that the farmers had submitted the proper document to the
appellate court, the latter could not have reversed the OP Decision on nothing more than
this submission, as the issue of the Notice of Acquisition had never been raised before the
administrative agency concerned. In fact, the records show that this issue was not raised in
the original Petition for Revocation in the second Motion for Reconsideration filed by the
farmers before the DAR, and that no Notice of Acquisition was attached to their Appeal
Memorandum to the OP. As a consequence, the OP, Secretary Pagdanganan, Secretary
Braganza, and Secretary Morales did not have any opportunity to dwell on this issue in their
Orders and Decision. Instead, what respondents persistently allege is the concealment of
the sale by CCFI and ALI. The three DAR Secretaries, including Secretary Garilao who issued
the Conversion Order, correctly found this allegation bereft of merit.
CIVIL LAW REVIEW 2

We cannot uphold respondents’ proposition for us to disregard basic rules, particularly the
rule that new issues cannot be raised for the first time on appeal. Aside from their failure to
raise the non-issuance of a notice of acquisition before the OP and DAR, they also failed to
question the lack of approved town plan at the DAR level, prompting the OP to correctly
rule on the latter, thus:
…Appellants’ lapses in not raising the issues before the DAR which has the expertise to
resolve the same and in a position to conduct due hearings and reception of evidence from
contending parties pertaining to the issue, puts the appellants in estoppel to question the
same for the first time on appeal. Jurisprudence dictates the following:
…The petitioner for the first time, to allow him to assume a different posture when he
comes before the court and challenge the position he had accepted at the administrative
level, would be to sanction a procedure whereby the court – which is supposed to review
administrative determinations – would not review, but determine and decide for the first
time, a question not raised at the administrative forum. This cannot be permitted, for the
same reason that underlies the requirement of prior exhaustion of administrative remedies
to give administrative authorities the prior authority to decide controversies within its
competence, and in much the same way that, on the judicial level, issues not raised in the
lower court cannot be raised for the first time on appeal. (Aguinaldo Industries Corporation
vs. Commissioner of Internal Revenue & Court of Tax Appeals, 112 SCRA 136)26
It is well established that issues raised for the first time on appeal and not raised in the
proceedings in the lower court are barred by estoppel. Points of law, theories, issues, and
arguments not brought to the attention of the trial court ought not to be considered by a
reviewing court, as these cannot be raised for the first time on appeal. To consider the
alleged facts and arguments belatedly raised would amount to trampling on the basic
principles of fair play, justice, and due process.27 More important, if these matters had been
raised earlier, they could have been seriously examined by the administrative agency
concerned.28
Courts will not interfere in matters which are addressed to the sound discretion of the
government agency entrusted with the regulation of activities coming under its special and
technical training and knowledgeand the latter are given wide latitude in the evaluation of
evidence and in the exercise of their adjudicative functions.29 This Court has always given
primary importance to the DAR Secretary’s ruling and will not disturb such ruling without
substantial reason:
Considering that these issues involve an evaluation of the DAR’s findings of facts, this Court
is constrained to accord respect to such findings. It is settled that factual findings of
administrative agencies are generally accorded respect and even finality by this Court, if
such findings are supported by substantial evidence. The factual findings of the Secretary of
DAR who, by reason of his official position, has acquired expertise in specific matters within
his jurisdiction, deserve full respect and, without justifiable reason, ought not to be altered,
modified or reversed.30
The CA erred in passing upon and ruling on an issue not raised by the farmers themselves.
This Court must not countenance the violation of petitioner’s right to due process by the CA
upholding its conclusion founded on a legal theory only newly discovered by the CA itself.
CIVIL LAW REVIEW 2

This is especially insupportable considering the long history of government affirmation of

the conversion of the subject land.
II. Provision in DAR A.O. 12-94 is only a guiding principle.
Assuming for a moment that the notice of acquisition exists, it is not an absolute, perpetual
ban on conversion. The provision invoked in AO 12-94, paragraph E, disallows applications
for conversion of lands for which the DAR has issued a notice of acquisition. But paragraph
E falls under heading VI, "Policies and Guiding Principles." By no stretch of the imagination
can a mere "principle" be interpreted as an absolute proscription on conversion. Secretary
Garilao thus acted within his authority in issuing the Conversion Order, precisely because
the law grants him the sole power to make this policy judgment, despite the "guiding
principle" regarding the notice of acquisition. The CA committed grave error by favoring a
principle over the DAR’s own factual determination of the propriety of conversion. The CA
agreed with the OP that land use conversion may be allowed when it is by reason of changes
in the predominant use brought about by urban development, but the appellate court
invalidated the OP Decision anyway for the following reason:
The argument is valid if the agricultural land is still not subjected to compulsory acquisition
under CARP. But as we saw, there has already been a notice of coverage and notice of
acquisition issued for the property...Verily, no less than the cited DAR Administrative Order
No. 12 enjoins conversions of lands already under a notice of acquisition. The objectives and
ends of economic progress must always be sought after within the framework of the law,
not against it, or in spite of it.31
However, under the same heading VI, on Guiding Principles, is paragraph B (3), which
reads:
If at the time of the application, the land still falls within the agricultural zone, conversion
shall be allowed only on the following instances:
a) When the land has ceased to be economically feasible and sound for agricultural
purposes, as certified by the Regional Director of the Department of Agriculture (DA) or
b) When the locality has become highly urbanized and the land will have a greater economic
value for residential, commercial and industrial purposes, as certified by the local
government unit.
The thrust of this provision, which DAR Secretary Garilao rightly took into account in
issuing the Conversion Order, is that even if the land has not yet been reclassified, if its use
has changed towards the modernization of the community, conversion is still allowed.
As DAR Secretary, Garilao had full authority to balance the guiding principle in paragraph E
against that in paragraph B (3) and to find for conversion. Note that the same guiding
principle which includes the general proscription against conversion was scrapped from the
new rules on conversion, DAR A.O. 1, Series of 2002, or the "Comprehensive Rules on Land
Use Conversion." It must be emphasized that the policy allowing conversion, on the other
hand, was retained. This is a complex case in which there can be no simplistic or mechanical
solution. The Comprehensive Agrarian Reform Law is not intractable, nor does it condemn a
CIVIL LAW REVIEW 2

0
piece of land to a single use forever. With the same conviction that the state promotes rural
development,32 it also "recognizes the indispensable role of the private sector, encourages
private enterprise, and provides incentives to needed investments."33
Respondents herein muddle the issue in contending that a Sangguniang Bayan Resolution
was not a sufficient compliance with the requirement of the Local Government Code that an
ordinance must be enacted for a valid reclassification. Yet there was already a Conversion
Order. To correct a situation in which lands redeemed from the MBC would remain idle,
petitioners took the route of applying for conversion. Conversion and reclassification are
separate procedures.34 CCFI and ALI submitted the two Resolutions to the DAR (one issued
by the Sangguniang Bayan of Silang, the other by the Sangguniang Panlalawigan of Cavite)
only as supporting documents in their application.
Again, paragraph B (3), Part VI of DAR AO 12-94, cited above, allows conversion when the
land will have greater economic value for residential, commercial or industrial purposes "as
certified by the Local Government Unit." It is clear that the thrust of the community and the
local government is the conversion of the lands. To this end, the two Resolutions, one issued
by the Sangguniang Bayan of Silang, the other by the Sangguniang Panlalawigan of Cavite,
while not strictly for purposes of reclassification, are sufficient compliance with the
requirement of the Conversion Order.
Paragraph E and paragraph B (3) were thus set merely as guidelines in issues of conversion.
CARL is to be solely implemented by the DAR, taking into account current land use as
governed by the needs and political will of the local government and its people. The
palpable intent of the Administrative Order is to make the DAR the principal agency in
deciding questions on conversion. A.O. 12-94 clearly states:
A. The Department of Agrarian Reform is mandated to "approve or disapprove applications

for conversion, restructuring, or readjustment of agricultural lands into non-agricultural
uses," pursuant to Section 4 (j) of Executive Order No. 129-A, Series of 1987."
B. Section 5 (1) of E.O. No. 129-A, Series of 1987, vests in the DAR, exclusive authority to
approve or disapprove applications for conversion of agricultural lands for residential,
commercial, industrial, and other land uses.35
III. The Conversion Order has long attained finality and may no longer be questioned.
Respondents came forward as claimants under CARL almost three years after the
Conversion Order was issued. In arguing that the claim of respondents had already
prescribed, petitioner ALI applied DAR A.O. 1, Series of 1999, which lays down a one-year
prescriptive period for petitions for cancellation or withdrawal. Section 34 thereof states:
Filing of Petition – A petition for cancellation or withdrawal of the conversion order may be
filed at the instance of DAR or any aggrieved party before the approving authority within
ninety (90) days from discovery of facts which would warrant such cancellation but not
more than one (1) year from issuance of the order: Provided, that where the ground refers
to any of those enumerated in Sec. 35 (b), (e), and (f), the petition may be filed within ninety
(90) days from discovery of such facts but not beyond the period for development
stipulated in the order of conversion; Provided further, That where the ground is lack of
CIVIL LAW REVIEW 2

1
jurisdiction, the petition shall be filed with the Secretary and the period prescribed herein
shall not apply.
The Conversion Order was issued by Secretary Garilao on 31 October 1997. Respondents
questioned the Order only on 19 May 2000, almost two years and seven months later. Since
the action was filed during the effectivity of A.O. 01-99, its provision on prescription should
apply.
Respondents, on the other hand, state that the applicable rule is A.O. 12 (promulgated in
1994), which was the rule subsisting at the time the Conversion Order was issued. A.O. 12-
94 imposes a prescriptive period of five (5) years; thus, according to the farmers, the
petition was filed well within the period.
Petitioner ALI’s argument is well-taken. A.O. 01-99 entitled "REVISED RULES AND
REGULATIONS ON THE CONVERSION OF AGRICULTURAL LANDS TO NON-AGRICULTURAL
USES," provides for its own effectivity as follows:
SEC. 56. Effectivity – This Order shall take effect ten (10) days after its publication in two
(2) national newspapers of general circulation.
A.O. 01-99 was promulgated on 30 March 1999 and published in Malaya and Manila
Standard on the following day, 31 March 1999. Thus, A.O. 01-99 was the rule governing the
filing of a "petition for cancellation or withdrawal of the conversion order" at the time the
farmers filed their petition.
Respondent farmers argue that, according to A.O. No. 01-99, the one-year prescriptive
period should be reckoned from the issuance of the Conversion Order. They point out that it
was impossible for them to receive notice of this rule when Secretary Garilao issued the
Conversion Order, since the rule was published only one year and seven months after the
issuance of the Order. Thus, it should be A.O. 12-94, or the five-year prescription period,
that should be applied to them, and not the one-year period in A.O. 01-99.
Respondents assume that the rule to be applied is that prevailing at the time of the issuance
of the Conversion Order. This is incorrect. The rule applicable in determining the timeliness
of a petition for cancellation or withdrawal of a conversion order is the rule prevailing at
the time of the filing of that petition, and not at the time of the issuance of the Conversion
Order. It is axiomatic that laws have prospective effect, as the Administrative Code
provides.36While A.O. 01-99 was not yet promulgated at the time of the issuance of the
Conversion Order, it was already published and in effect when the Petition for Revocation
was filed on 19 May 2000.
Regarding the question on when the one-year prescription period should be reckoned, it
must be still be resolved in conformity with the prospective character of laws and rules. In
this case, the one-year period should be reckoned from the date of effectivity of A.O. 1-99,
which is 31 March 1999. Therefore, no petition for cancellation or withdrawal of conversion
of lands already converted as of 30 March 1999 may be filed after 1 March 2000.
The Conversion Order is final and executory. The Court ruled in Villorente v. Aplaya Laiya
Corporation:
CIVIL LAW REVIEW 2

2
Indubitably, the Conversion Order of the DAR was a final order, because it resolved the
issue of whether the subject property may be converted to non-agricultural use. The finality
of such Conversion Order is not dependent upon the subsequent determination, either by
agreement of the parties or by the DAR, of the compensation due to the tenants/occupants
of the property caused by its conversion to non-agricultural use. Once final and executory,
the Conversion Order can no longer be questioned.37
A conversion order is a final judgment and cannot be repeatedly assailed by respondents in

perpetuity, after they have received compensation and exhausted other means. In
Villorente, the Court had occasion to rebuke the would-be beneficiaries who, after accepting
the compensation stipulated in the conversion Order – thereby impliedly acknowledging
the validity of the order – turned around and suddenly assailed it. The Court held:
We are convinced that the petition for review filed by the petitioners with the CA was
merely an afterthought…
… … … …
It must be stressed that the petitioners agreed to negotiate with the respondent for the
disturbance compensation which they claimed was due them, conformably with the said
Conversion Order. Hence, they cannot now assail the said order without running afoul to
(sic) the doctrine of estoppel. The petitioners cannot approbate and disapprobate at the
same time.38
It must be borne in mind that there can be no vested right to judicial relief, as ruled by the
Court in United Paracale Mining v. Dela Rosa:
There can be no vested right in a judicial relief for this is a mere statutory privilege and not
a property right…the right to judicial relief is not a right which may constitute vested right
because to be vested, a right must have become a title, legal or equitable, to the present or
future enjoyment of property, or to the present or future enforcement of a demand or legal
exemption from a demand made by another.39
IV. The conversion and/or reclassification of the said lands has become an operative fact.
Respondent farmers do not deny that at the time of filing of the Petition for Revocation, the
lands in question were no longer agricultural. Secretary Morales affirmed this fact in his
Decision, even as he revoked Secretary Garilao’s Order of conversion:
When respondent Capitol applied for conversion of the subject land on 7 May 1996, the land
is already reclassified from agricultural to other uses. Respondent Capitol applied for
conversion as the registered owner of the land, although in truth it was no longer the owner
of the same by virtue of its sale to ALI. This fact of transfer of ownership is not known since
the absolute sale of the land was not yet public, the deed of sale not having been registered
before the Register of Deeds at that time.
… … …
CIVIL LAW REVIEW 2

3
At the time of the registration of the deed on 29 September 1999, the subject land had
ceased to be an agricultural land since it has already been converted to other uses by virtue
of an approved conversion application. As such, the requirement of reporting by the
Register of Deeds of any transaction involving agricultural lands beyond five (5) hectares,
was not made as it is no longer necessary.
Clearly, the findings of the CLUPPI, the Sangguniang Bayan of Silang, and Secretary Morales
himself confirm as an operative fact the reclassification and/or conversion of the lands.
Both the DAR and the Sangguniang Bayan anchored their findings on the Certifications from
the CLUPPI (obtained by the CLUPPI’s executive committee as required by the DAR
procedure), the National Irrigation Administration, the Philippine Coconut Authority, and
the Department of Environment and Natural Resources.40 The CLUPPI and the MARO
(Municipal Agrarian Reform Office) conducted their own ocular inspection. The
Sangguniang Bayan of Silang conducted plebiscites before issuing the Resolution for
reclassification.41
In sum, the findings of the different government agencies are as follows:
1. The property is about ten (10) kilometers from the provincial road.
2. The land sits on a mountainside overlooking Santa Rosa Technopark.
3. The property is beyond eighteen (18) degrees in slope and undeveloped.
4. Based on a DAR Soil Investigation Report, the property is only marginally suitable for
agriculture use due to its undulating topography.42
5. The land is outside the irrigable area of the Cavite Friar Lands Irrigation Systems.
6. DENR Administrative Order No. 08 granted the application for an Environmental

Clearance while presenting these additional findings:
• · The area is unirrigated, and the main source of water supply is rainfall.
• · The occupants have been paid disturbance compensation.
• · The area in question had been granted a Certificate of Eligibility for Conversion by
the DAR on 16 January 1996.
The reclassification/conversion of the land has long been a foregone fact. While
respondents insist that the process by which the land was reclassified was invalid, their
claim is immaterial, because, as stated, the two procedures are distinct. Independently of
the Sangguniang Bayan’s own initiative, the DAR issued a Certificate of Eligibility. These
issuances only bolster the fact that, at the time it was converted, the land was no longer
agricultural, and that it would generate more revenue if reclassified as a residential area.
Resolution No. ML-08-S-96, adopted by the Sangguniang Bayan of Silang, recommended
conversion based on the favorable findings of the Committee on Housing and Land Use. The
Resolution states:43
CIVIL LAW REVIEW 2

4
...Whereas based on the favorable findings by the Committee on Housing and Land Use after
careful study and after conducting several public hearings has favorably recommended the
approval of the request of Capitol Citifarms, Inc.;
Whereas, the land use reclassification of the said parcels of land will benefit the people of
Silang by way of increased municipal revenue, generate employment, increased commercial
activities and general (sic) uplift the socio-economic condition of the people particularly
those in the vicinity of said parcels of land.
It is no longer necessary to delve into the allegations of the lack of a valid ordinance or the
lack of a land use plan. Aside from the OP finding that this issue was raised belatedly, the
submission of "new or revised town plans approved by the HLURB" is a requirement only in
the process of reclassification embodied in the Local Government Code. This is not a
requirement in the process of conversion, wherein the DAR is given the sole prerogative to
make technical determinations on changes in land use and to decide whether a particular
parcel of agricultural land, due to modernization and the needs of the community, has
indeed been converted to non-agricultural use.
V. It has long been resolved by the Office of the President that the lands in this case are
exempted from CARL coverage, partly in order to maintain the stability of the country’s
banking system.
In the first OP Decision dated 11 October 1996, Executive Secretary Ruben D. Torres
expressly declared that the preservation of the assets of the BSP warranted higher
consideration, so certain lands of the MBC were exempt from coverage of the CARL. In
remanding the case to the DAR for it to identify which lands should be exempted, Secretary
Torres held:
Upon review of the entire records of the case, this Office is persuaded that a stringent
appreciation of the issues raised by the parties may not do justice to their respective causes,
and the public in general. What is involved is the susceptibility of a bank to undergo
rehabilitation which will be jeopardized by the distribution of its assets…a careful balance
between the interest of the petitioner bank, its creditors (which includes the Bangko Sentral
ng Pilipinas) and the general public on the one hand, and adherence to the implementation
of the agrarian reform program on the other, must be established.
… … … …
…the ends of justice will be better subserved if the Statutory Receiver is given the fullest
opportunity to monetize the assets of the bank which are supposed to be outside of the
coverage of the CARL or may be converted into non-agricultural uses.44
Secretary Torres denied the Motion for Reconsideration filed by the DAR. The denial was
based precisely on the need to balance the agrarian reform law with another policy
consideration, the stability of the banking system. He explained as follows:
The guiding principle on land use conversion is to preserve prime agricultural lands. On the
other hand, when coinciding with the objectives of the Comprehensive Agrarian Reform
CIVIL LAW REVIEW 2

5
Law to promote social justice, industrialization and the optimum use of lands as a national
resource for public welfare, shall be pursued in a speedy and judicious manner.
… … …
Finally, we wish to reiterate the need to balance the interest between the petitioner bank
(under receivership by the BSP), its creditors (85% of which or a total of P8, 771, 893, 000
is payable to BSP) and the general public on one hand, and the faithful implementation of
agrarian reform program on the other hand, with the view to harmonizing them and
ensuring that the objectives of the CAR are met and satisfied.45
The Conversion Order was a product of policy determinations made by the DAR, the Office
of the President, and even the Supreme Court. Secretary Torres had ordered the DAR to
"respect the temporary custody of those properties by the Statutory Receiver (BSP Deputy
Governor Alberto Reyes) by deferring their coverage under the CARL…" This order
stemmed in turn from the BSP Resolution of 22 May 1987 placing MBC’s assets under
custodia legis. Bolstered by the need to save MBC, which was one of BSP’s crucial debtors,
the Supreme Court allowed the BSP receiver to sell MBC’s assets to a third party "under the
best terms and conditions," to give it ample opportunity to rehabilitate MBC. The
disposition of MBC’s properties was a judgment call made by the BSP, which, as the sole
agency mandated to assist banks and financial institutions in distress, exercises asset
management on a macro level. The Supreme Court Resolution called the arrangement the
"best solution for Manila Banking and CCFI."
In light of the foregoing, it would be absurd to impute bad faith to ALI solely because it
chose to purchase the redeemed land. Similarly, ALI cannot be held accountable for all the
years that the land remained idle pending conversion. To deny relief to ALI would be
tantamount to placing the private sector in the unjust situation of investing, upon invitation
from the government, in a bank’s distressed assets – among which are lands the
government itself has ordered converted – then subsequently confiscating the same from
it.1avvphi1
Petitioners did not renege on their duty to pay disturbance compensation to the tenant-
farmers. They expended substantial amounts in addition to the purchase price of the
foreclosed lands – for litigation and administrative processing costs, the farmers’
compensation, and improvements on the land. The development projects were grounded on
a reliance on national government actions that support the thrust of Cavite towards
urbanization.
It was the OP’s first Decision, together with the Supreme Court Resolution, that ultimately
paved the way for ALI to acquire title to the subject lands as a third party buyer. When the
dispute over the subject land reached the OP for the second time – when the validity of the
conversion order was in dispute – the OP of course found no merit in the allegation of
concealment. There is therefore absolutely no basis for the imputation of bad faith upon ALI
simply on account of the alleged delay in the registration of the sale from CCFI to it.
It must be emphasized that the OP’s ground for supporting conversion finds its moorings in
DAR Memorandum Circular 11-79 governing the conversion of private agricultural lands
into other uses. The Circular states that conversion may be allowed when it is by reason of
CIVIL LAW REVIEW 2

6
the changes in the predominant land use, brought about by urban development. The OP
Decision pointed to the fact that the close proximity of Cavite to Manila opened Cavite to the
effects of modernization and urbanization. While the CA characterized this ground as
"novel," it still agreed that land use conversion may be allowed, if caused by changes in
predominant land use due to urban development.
The DAR found merit in the thrust of the local government to "disperse urban growth
towards neighboring regions of Metro Manila"; to encourage the movement of residential
development in the area; and to support the housing needs not just of the neighboring Santa
Rosa Technopark, but also of other commercial centers. It is helpful to remember that it is
the local government, in this case, that of Silang, Cavite, that occupies the primary policy
role of allowing the development of real estate to generate real property taxes and other
local revenues.
The CA Decision effectively enfeebles the Orders of no less than three Secretaries of the DAR
and the policy pronouncements of the OP. The actions of respondents – accepting
disturbance compensation for the land, seeking petitioners’ compliance with the terms of
the Conversion Order, then reversing themselves by assailing the Order itself long after the
proper period had prescribed – contradict this Court’s rule that conversion orders, once
final and executory, may no longer be questioned.
The only justification for the CA ruling – that the lands had already been subjected to a
Notice of Acquisition, hence no conversion thereof can take place – cannot stand in the light
of two points: 1) the record before this Court (including the CA and the DAR records) is
bereft of any copy, certified or otherwise, of the alleged Notice of Acquisition; and 2) even if
the land is subject to a Notice of Acquisition, this issue was never raised before the DAR or
the OP, nor was it argued before the CA. It existed as a single-line statement in petitioners’
Appeal Memorandum.46 Since the DAR and the OP had ruled for petitioners CCFI and ALI,
and the CA itself admitted that petitioners’ stand would have been valid if not for the alleged
Notice, the CA should have been more circumspect in verifying whether the evidence on
record supported respondents’ self-serving claim.
Before the CA’s unilateral action, this unsupported allegation was never raised as a live legal
issue. Hence, CCFI and ALI were deprived of any opportunity to controvert the fact of the
Notice of Acquisition and its legal effect, because they were never alerted that the existence
of such Notice would in any way endanger their legal position. They had the right to expect
that only issues properly raised before the administrative tribunals needed to be addressed.
Even assuming that the Notice of Acquisition did exist, considering that CCFI and ALI had no
chance to controvert the CA finding of its legal bar to conversion, this Court is unable to
ascertain the details of the Notice of Acquisition at this belated stage, or rule on its legal
effect on the Conversion Order duly issued by the DAR, without undermining the technical
expertise of the DAR itself. To do so would run counter to another basic rule that courts will
not resolve a controversy involving a question that is within the jurisdiction of the
administrative tribunal prior to its resolution of that question.47
CARL cannot be used to stultify modernization. It is not the role of the Supreme Court to
apply the missing notice of acquisition in perpetuity. This is not a case wherein a feudal
landowner is unjustly enriched by the plantings of a long-suffering tenant. ALI is in the
precarious position of having been that third-party buyer who offered the terms and
CIVIL LAW REVIEW 2

7
conditions most helpful to CCFI, MBC, and effectively, the BSP, considering the 85% portion
of the total debt of MBC that BSP owns. What this Court can do positively is to contribute to
policy stability by binding the government to its clear policy decisions borne over a long
period of time.
WHEREFORE, premises considered, the Court of Appeals committed reversible error in

nullifying the policy pronouncement of the Office of the President and the Department of
Agrarian Reform. The instant petition for certiorari is hereby GRANTED, and the Order of
the Office of the President dated 26 January 2004 is AFFIRMED.
SO ORDERED.
CIVIL LAW REVIEW 2

8

8.
EN BANC
January 12, 2016
A.C. No. 10910

[Formerly CBD Case No. 12-3594)
ANTERO M. SISON, JR., Complainant,

vs.
ATTY. MANUEL N. CAMACHO, Respondent.
D E C I S I O N
PERCURIAM:
In his verified affidavit-complaint,1 dated September 17, 2012, filed before the Integrated
Bar of the Philippines Commission on Bar Discipline (JBP-CBD), complainant Atty. Antero M.
Sison, Jr. (Atty. Sison), president of Marsman-Drysdale Agribusiness Holdings
Inc. (MDAHI), charged respondent Atty. Manuel Camacho (Atty. Camacho) with violation of
the Code of Professional Responsibility (CPR). He accused Atty. Camacho of violating Rule
1.01, for dishonestly entering into a compromise agreement without authorization, and
Rule 16.01, for failure to render an accounting of funds which were supposed to be paid as
additional docket fees.
Complaint's Position
Atty. Sison alleged that Atty. Camacho was the counsel of MDAHI in an insurance claim
action against Paramount Life & General Insurance Corp. (Paramount Insurance), docketed
as Civil Case No. 05-655, before the Regional Trial Court, Makati City, Branch 139 (RTC). The
initial insurance claim of MDAHI against Paramount Insurance was P14,863,777.00.
On March 4, 2011, Atty. Camacho met with Atty. Enrique Dimaano (Atty.
Dimaano), corporate secretary of MDAHI, and proposed to increase their claim to
P64,412,534. l 8 by taking into account the interests imposed. Atty. Camacho, however,
clarified that the increase in the claim would require additional docket fees in the amount of
Pl,288,260.00, as shown in his hand-written computation.2 MDAHI agreed and granted the
said amount to Atty. Dimaano which was evidenced by a Payment Request/Order
Form.3 On May 27, 2011, Atty. Dimaano gave the money for docket fees to Atty. Camacho
who promised to issue a receipt for the said amount, but never did.4
Atty. Sison later discovered that on May 26, 2011, the RTC had already rendered a
decision5 in favor of MDAHI granting its insurance claim plus interests in the amount of
approximately P65,000,000.00.
CIVIL LAW REVIEW 2

9
On August 11, 2011, Atty. Camacho sent a letter6 to MDAHI recommending a settlement
with Paramount Insurance in Civil Case No. 05-655 in the amount of Pl5,000,000.00
allegedly to prevent a protracted appeal with the appellate court. MDAHI refused the offer
of compromise and did not indicate its conforme on the letter of Atty. Camacho.
Surprisingly, even without the written conformity of MDAHI, Atty. Camacho filed the
Satisfaction of Judgment,7 dated August 15, 2011, before the R TC stating that the parties
had entered into a compromise agreement.
On August 18, 2011, Atty. Sison met with Atty. Camacho to clarify the events that
transpired.8 He asked Atty. Camacho whether he paid the amount of Pl,288,260.00 as
additional dockets fees, and the latter replied that he simply gave it to the clerk of court as
the payment period had lapsed.
Disappointed with the actions of Atty. Camacho, Atty. Sison sent a letter,9 dated August 24,
2011, stating that he was alarmed that the former would accept a disadvantageous
compromise; that it was against company policy to bribe any government official with
respect to the Pl,288,260.00 given to the clerk of court; and that MDAHI would only pay
P200,000.00 to Atty. Camacho as attorney's fees.
Respondent's Position
In his verified answer,10 dated October 30, 2012, Atty. Camacho denied all the allegations
against him. He stressed that he had the authority to enter into the compromise agreement.
Moreover, the alleged docket fees given to him by MDAHI formed part of his attorney's fees.
He further stated in his position paper11 that the judgment debt was paid and accepted by
MDAHI without any objection, as duly evidenced by an acknowledgment receipt.12 Thus,
there was no irregularity in the compromise agreement.
With respect to the amount handed to him, Atty. Camacho averred that he filed a Motion to
Compel Plaintiff to Pay Attorney's Fee on September 13, 2011 before the RTC. The Court
granted the said motion in its April 12, 2012 Order13 stating that the amount of
Pl,288,260.00 was considered as part of his attorney's fees.
On July 6, 2012, the R TC issued an Order14 resolving the motion for reconsideration filed by
both parties in favor of Atty. Camacho. In the said order, the RTC opined that only
P300,000.00 was previously paid to Atty. Camacho15 as attorney's fees. Based on the
foregoing, Atty. Camacho asserted that the amount of Pl,288,260.00 which he received, truly
formed part of his unpaid attorney's fees. He stressed that the said RTC order had attained
finality and constituted res judicata on the present administrative case. He added that
MDAHI disregarded the RTC order as it filed an estafa case against him concerning the
amount ofl:ll,288,260.00.
Report and Recommendation
After the mandatory conference on January 24, 2013 and upon a thorough evaluation of the
evidence presented by the parties in their respective position papers, the IBP-CBD
submitted its Report and Recommendation,16 dated April 1, 2013 finding Atty. Camacho to
have violated the provisions of Rule 1.01 and Rule 16.01 of the CPR and recommending the
CIVIL LAW REVIEW 2

0
imposition of the penalty of one (1) year suspension from the practice of law against him. In
its Resolution No. XX-2013-474,17 dated April 16, 2013, the Board of Governors of the
Integrated Bar of the Philippines (Board) adopted the said report and recommendation of
Investigating Commissioner Eldrid C. Antiquiera.
Aggrieved, Atty. Camacho filed a motion for reconsideration18 before the Board reiterating
that the compromise agreement was valid because MDAHI did not reject the same and that
the amount of Pl,288,260.00 formed part of his attorney's fees.
In his Comment/Opposition,19 Atty. Sison countered that Atty. Camacho never denied that
he filed the satisfaction of judgment without the written authority of MDAHI and that there
was ca pending estafa case against him before the Regional Trial Court, Makati City, Branch
146, docketed as Criminal Case No. 13-1688, regarding the Pl,288,260.00 handed to him.
In its Resolution No. XXI-2014-532,20 dated August 10, 2014, the Board adopted the report
and recommendation21of National Director Dominic C.M. Solis. The Board partially granted
the motion for reconsideration and dismissed, without prejudice, the charge regarding the
failure to account for the money, because it was premature to act on such issue due to the
pending criminal case against the Atty. Camacho. Accordingly, the penalty of one (1) year
suspension imposed was lowered to six (6) months suspension from the practice of law.
Hence, the case was elevated to the Court.
The Court's Ruling
The Court finds that Atty. Camacho violated Rules 1.01 and 16.01 of the CPR.
Entering into a compromise

agreement without written
authority of the client
Those in the legal profession must always conduct themselves with honesty and integrity in
all their dealings. Members of the Bar took their oath to conduct themselves according to
the best of their knowledge and discretion with all good fidelity as well to the courts as to
their clients and to delay no man for money or malice. These mandates apply especially to
dealings of lawyers with their clients considering the highly fiduciary nature of their
relationship.22
In the practice of law, lawyers constantly formulate compromise agreements for the benefit
of their clients. Article 1878 of the Civil Code provides that " [ s ]pecial powers of attorney
are necessary in the following cases: xxx (3) To compromise, to submit questions to
arbitration, to renounce the right to appeal from a judgment, to waive objections to the
venue of an action or to abandon a prescription already acquired xxx."
In line with the fiduciary duty of the Members of the Bar, Section 23, Rule 138 of the Rules
of Court specifies a stringent requirement with respect to compromise agreements, to wit:
Sec. 23. Authority of attorneys to bind clients. - Attorneys have authority to bind their
clients in any case by any agreement in relation thereto made in writing, and in taking
CIVIL LAW REVIEW 2

1
appeals, and in all matters of ordinary judicial procedure. But they cannot, without
special authority, compromise their client's litigation, or receive anything in
discharge of a client's claim but the full amount in cash.
[Emphasis and Underscoring Supplied]
In the case at bench, the R TC decision, dated May 26, 2011, awarded MDAHI approximately
P65,000,000.00. When Paramount Insurance offered a compromise settlement in the
amount of Pl5,000,000.00, it was clear as daylight that MDAHI never consented to the said
offer. As can be gleaned from Atty. Camacho's letter, MDAHI did not sign the conforme
regarding the compromise agreement.23
Glaringly, despite the lack of a written special authority, Atty. Camacho agreed to a lower
judgment award on behalf of his client and filed a satisfaction of judgment before the R TC.
The said pleading also failed to bear the conformity of his client.24 Although MDAHI
subsequently received the payment of P15M from Paramount Insurance, it does not erase
Atty. Camacho's transgression in reaching the compromise agreement without the prior
consent of his client.
For entering into a compromise agreement without the written authority of his client, Atty.
Camacho violated Rule 1.01 of the CPR, which states that " [a] lawyer shall not engage in
unlawful, dishonest, immoral or deceitful conduct." Members of the Bar must always
conduct themselves in a way that promotes public confidence in the integrity of the legal
profession.25
Failing to account for

the money of the client
Atty. Camacho was also charged with violation of Rule 16.01 of the CPR, which provides for
a lawyer's duty to "account for all money or property collected or received for or from the
client."
Here, Atty. Sison alleged that MDAHI gave Atty. Camacho the amount of P 1,288,260.00 as
payment of additional docket fees but the latter failed to apply the same for its intended
purpose. In contrast, Atty. Camacho invoked the July 6, 2012 Order of the RTC which
declared the MDAHI allegation as unsubstantiated, and claimed that the said amount
formed part of his attorney's fees. The Board, on the other hand, opined that it was still
premature to decide such issue because there was a pending estafa case, docketed as
Criminal Case No. 13-1688, filed by MDAHI against Atty. Camacho involving the same
amount of P 1,288,260.00.
The Court is of the view that it is not premature to rule on the charge against Atty. Camacho
for his failure to account for the money of his client. The pending case against him is
criminal in nature. The issue therein is whether he is guilty beyond reasonable doubt of
misappropriating the amount of Pl,288,260.00 entrusted to him by his client. The present
case, however, is administrative in character, requiring only substantial evidence. It only
entails a determination of whether Atty. Camacho violated his solemn oath by failing to
account for the money of his client. Evidently, the adjudication of such issue in this
administrative case shall not, in any way, affect the separate criminal proceeding.
CIVIL LAW REVIEW 2

2
In disciplinary proceedings against lawyers, the only issue is whether the officer of the court
is still fit to be allowed to continue as a member of the Bar.1âwphi1 The only concern of the
Court is the determination of the respondent's administrative liability. The findings in this
case will have no material bearing on other judicial action which the parties may choose to
file against each other. While a lawyer's wrongful actuations may give rise at the same time
to criminal, civil, and administrative liabilities, each must be determined in the appropriate
case; and every case must be resolved in accordance with the facts and the law applicable
and the quantum of proof required in each.26
Delving into the substance of the allegation, the Court rules that Atty. Camacho indeed
violated Rule 16.01 of the CPR. When Atty. Camacho personally requested MDAHI for
additional docket fees, the latter obediently granted the amount of Pl ,288,260.00 to the
former. Certainly, it was understood that such amount was necessary for the payment of
supposed additional docket fees in Civil Case No. 05-655. Yet, when Atty. Sison confronted
Atty. Camacho regarding the said amount, the latter replied that he simply gave it to the
clerk of court as the payment period had lapsed. Whether the said amount was pocketed by
him or improperly given to the clerk of court as a form of bribery, it was unmistakably clear
that Atty. Camacho did not apply the amount given to him by his client for its intended legal
purpose.
Atty. Camacho did not even deny making that request to MDAHI for additional docket fees
and receiving such amount from his client. Rather, he set up a defense that the said amount
formed part of his attorney's fees. Such defense, however, is grossly contradictory to the
established purpose of the Pl,288,260.00. In its Payment Request/Order Form,27 it is plainly
indicated therein that MDAHI released the said amount only to be applied as payment for
additional docket fees, and not for any other purposes. Consequently, the lame excuse of
Atty. Camacho is bereft of merit because it constitutes a mere afterthought and a manifest
disrespect to the legal profession. Atty. Camacho is treading on a perilous path where the
payment of his attorney's fees is more important than his fiduciary and faithful duty of
accounting the money of his client. Well-settled is the rule that lawyers are not entitled to
unilaterally appropriate their clients' money for themselves by the mere fact that the clients
owe them attorney's fees.28
Moreover, Atty. Camacho failed to issue a receipt to MDAHI from the moment he received
the said amount. In Tarog v. Ricafort,29 the Court held that ethical and practical
considerations made it both natural and imperative for a lawyer to issue receipts, even if
not demanded, and to keep copies of the receipts for his own records. Pursuant to Rule
16.01 of the CPR, a lawyer must be aware that he is accountable for the money entrusted to
him by the clients, and that his only means of ensuring accountability is by issuing and
keeping receipts.
Worse, on May 26, 2011, the RTC already rendered its decision in Civil Case No. 05-655,
adjudging MDAHI entitled to an insurance claim in the amount of approximately
P.65,000,000.00. From that date on, there was no more need for additional docket fees.
Apparently, still unaware of the judgment, MDAHI subsequently released the money for
additional docket fees to Atty. Dimaano, who handed it to Atty. Camacho on May 27,
2011. Despite a decision having been rendered, Atty. Camacho did not reject the said
amount or return it to his client upon receipt. Instead, he unilaterally withheld the said
amount by capriciously invoking the payment of his attorney's fees.
CIVIL LAW REVIEW 2

3
The fiduciary nature of the relationship between the counsel and his client imposes on the
lawyer the duty to account for the money or property collected or received for or from his
client. Money entrusted to a lawyer for a specific purpose but not used for the purpose
should be immediately returned. A lawyer's failure, to return upon demand, the funds held
by him on behalf of his client gives rise to the presumption that he has appropriated the
same for his own use in violation of the trust reposed in him by his client. Such act is a gross
violation of general morality as well as of professional ethics. It impairs public confidence in
the legal profession and deserves punishment.30
Administrative penalty
A member of the Bar may be penalized, even disbarred or suspended from his office as an
attorney, for violation of the lawyer's oath and/or for breach of the ethics of the legal
profession as embodied in the CPR. The practice of law is a profession, a form of public
trust, the performance of which is entrusted to those who are qualified and who possess
good moral character. The appropriate penalty for an errant lawyer depends on the exercise
of sound judicial discretion based on the surrounding facts.31
In Luna v. Galarrita,32 the Court suspended the respondent lawyer for two (2)
years because he accepted a compromise agreement without valid authority and he failed
to tum over the payment to his client. In the case of Melendrez v. Decena,33 the lawyer
therein was disbarred because he entered into a compromise agreement without the
special authority of his client and he drafted deceptive and dishonest contracts. Similarly,
in Navarro v. Meneses III,34 another lawyer, who misappropriated the money entrusted to
him by his client which he failed and/or refused to account for despite repeated demands,
was disbarred because his lack of personal honesty and good moral character rendered
him unworthy of public confidence.
In this case, Atty. Camacho entered into a compromise agreement without the conformity of
his client which is evidently against the provisions of the CPR and the law. Moreover, he
deliberately failed to account for the money he received from his client, which was
supposed to be paid as additional docket fees. He even had the gall to impute that the
money was illicitly given to an officer of the court. The palpable indiscretions of Atty.
Camacho shall not be countenanced by the Court for these constitute as a blatant and
deliberate desecration of the fiduciary duty that a lawyer owes to his client.
The Court finds that Atty. Camacho's acts are so reprehensible, and his violations of the CPR
are so flagrant, exhibiting his moral unfitness and inability to discharge his duties as a
member of the Bar. His actions erode rather than enhance the public perception of the legal
profession. Therefore, in view of the totality of his violations, as well as the damage and
prejudice they caused to his client, Atty. Camacho deserves the ultimate penalty of
disbarment.
Further, he must be ordered to return the amount of Pl,288,260.00 to MDAHI, which he

received in his professional capacity for payment of the purported additional docket fees.
Disciplinary proceedings revolve around the determination of the respondent-lawyer's
administrative liability, which must include those intrinsically linked to his professional
engagement.35
CIVIL LAW REVIEW 2

4
WHEREFORE, Atty. Manuel N. Camacho is found guilty of violating Rule 1.01 and Rule 16.01
of the Code of Professional Responsibility. For reasons above-stated, he
is DISBARRED from the practice of law and his name stricken off the Roll of Attorneys,
effective immediately.
Furthermore, Atty. Manuel N. Camacho is ORDERED to return to Marsman-Drysdale

Agribusiness Holdings Inc. the money intended to pay for additional docket fees which he
received from the latter in the amount of P 1,288,260.00 within ninety (90) days from the
finality of this decision.
Let a copy of this decision be furnished the Office of the Bar Confidant to be entered into the
records of respondent Atty. Manuel N. Camacho. Copies shall likewise be furnished the
Integrated Bar of the Philippines and the Office of the Court Administrator for circulation to
all courts concerned.
CIVIL LAW REVIEW 2

5

9.
FIRST DIVISION
January 13, 2016
G.R. No. 168078
FABIO CAHAYAG and CONRADO RIVERA, Petitioners,

vs.
COMMERCIAL CREDIT CORPORATION, represented by its President, LEONARDO B.
ALEJANDRO; TERESITA T. QUA, assisted by her husband ALFONSO MA. QUA; and the
REGISTER OF DEEDS OF LAS PINAS, METRO MANILA, DISTRICT IV, Respondents.
x - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 168357
DULOS REALTY & DEVELOPMENT CORPORATION, represented by its President,

JUANITO C. DULOS; and MILAGROS E. ESCALONA, and ILUMINADA D.
BALDOZA, Petitioners,
vs.
COMMERCIAL CREDIT CORPORATION, represented by its President, LEONARDO B.
ALEJANDRO; TERESITA T. QUA, assisted by her husband ALFONSO MA. QUA; and the
REGISTER OF DEEDS OF LAS PINAS, METRO MANILA, DISTRICT IV, Respondents.
D E C I S I O N
SERENO, J.:
Before us are consolidated Rule 45 Petitions1 seeking to nullify the Court of Appeals (CA)
Decision dated 2 November 20042 and Resolution dated 10 May 20053 in CA-G.R. CV No.
47421. The CA Decision reversed and set aside the Decision dated 6 July 1992 issued by the
Regional Trial Court (RTC), Branch 65 of Makati.4
FACTUAL ANTECEDENTS
Petitioner Dulos Realty was the registered owner of certain residential lots covered by
Transfer Certificate of Title (TCT) Nos. S-39767, S-39775, S-28335, S-39778 and S-29776,
located at Airmen's Village Subdivision, Pulang Lupa II, Las Pinas, Metro Manila.
On 20 December 1980, Dulos Realty obtained a loan from respondent CCC in the amount of
P300,000. To secure the loan, the realty executed a Real Estate Mortgage over the subject
properties in favor of respondent. The mortgage was duly annotated on the certificates of
title on 3 February 1981.5
CIVIL LAW REVIEW 2

6
On 29 March 1981, Dulos Realty entered into a Contract to Sell with petitioner Cahayag over
the lot covered by TCT No. S-39775.6
On 12 August 1981, Dulos Realty entered into another Contract to Sell, this time with
petitioner Rivera over the lot covered by TCT No. S-28335.7
Dulos Realty defaulted in the payment of the mortgage loan, prompting respondent CCC to
initiate extrajudicial foreclosure proceedings. On 17 November 1981, the auction sale was
held, with respondent CCC emerging as the highest bidder.8
On 23 November 1981, a Certificate of Sale covering the properties, together with all the
buildings and improvements existing thereon, was issued in favor of CCC.9 The Certificate of
Sale was annotated on the corresponding titles to the properties on 8 March 1982.10
Thereafter, or on 13 January 1983, Dulos Realty entered into a Contract to Sell with
petitioner Escalona over the house and lot covered by TCT No. S-29776.11
On 10 November 1983, an Affidavit of Consolidation in favor of respondent CCC dated 26

August 1983 was annotated on the corresponding titles to the properties.12 By virtue of the
affidavit, TCT Nos. S-39775, S-28335, S-39778 and S-29776 - all in the name of Dulos Realty
- were cancelled and TCT Nos. 74531, 74532, 74533 and 74534 were issued in the name of
respondent CCC on the same day.13
On 10 December 1983, Dulos Realty entered into a Deed of Absolute Sale with petitioner
Baldoza over the property covered by TCT No. S-39778, together with the improvements
existing thereon.14
On 21 December 1983, respondent CCC, through a Deed of Absolute Sale, sold to respondent
Qua the same subject properties, now covered by TCT Nos. 74531, 74532, 74533 and
74534, which were in the name of respondent CCC. The sale was duly annotated on the
corresponding titles to the properties on 5 January 1984.15
Accordingly, TCT Nos. 74531, 74532, 74533 and 74534 were cancelled; and TCT Nos.
77012, 77013, 77014 and 770015 were issued to respondent Qua on 5 January 1984.16
Subsequently, respondent Qua filed ejectment suits individually against petitioners Du1os
Realty,17 Cahayag,18Esca1ona,19 and Rivera20 before the Metropolitan Trial Court (MTC) of
Las Piñas, Metro Manila.
The MTC rendered Decisions in favor of respondent Qua. It ordered Dulos Realty, Escalona,
Cahayag, and Rivera to vacate the properties.
On 8 March 1988, the MTC issued a Writ of Execution to enforce its Decision dated 20
October 1986 in Civil Case No. 2257 against Dulos Realty "and all persons claiming right
under defendant."21 The subject of the writ of execution was Lot 11 Block II,22 which was the
lot sold by Dulos Realty to petitioner Baldoza.
COMPLAINT FOR ANNULMENT

OF SHERIFF'S SALE AND OTHER DOCUMENTS
CIVIL LAW REVIEW 2

7
On 5 December 1988, petitioners filed a Complaint against respondents for the "Annulment
of Sherifffs] Sale and Other Documents with Preliminary Injunction and/or Temporary
Restraining Order" before the RTC of Makati City, where it was docketed as Civil Case No.
88-2599.23
The Complaint24 alleged that petitioners Cahayag, Rivera, Escalona and Baldoza were
owners of the properties in question by virtue of Contracts of Sale individually executed in
their favor, and that the Real Estate Mortgage between Dulos Realty and defendant-
appellant CCC did not include the houses, but merely referred to the lands
themselves.25 Thus, the inclusion of the housing units in the Deed of Sale executed by
respondent CCC in favor of respondent Qua was allegedly illegal.26
Respondents failed to file an answer within the reglementary period. Subsequently, they
were declared in default. They appealed the order of default but their appeal was dismissed
on 8 February 1990.27
On 6 July 1992, the RTC rendered a Decision,28 which ruled that the houses were not
included in the Real Estate Mortgage; and that the foreclosure of the mortgage over the
subject lots, as well as the housing units, was not valid.29 The trial court held that this
conclusion was established by the plaintiffs' evidence, which went unrefuted when
defendants were declared in default.30
THE CA DECISION
Respondents proceeded to the CA, where they secured a favorable ruling. In its Decision
rendered on 2 November 2004,31 the appellate court held that the extrajudicial foreclosure
was valid, since the Real Estate Mortgage clearly included the buildings and improvements
on the lands, subject of the mortgage.
After establishing the inclusion of the housing units in the Real Estate Mortgage, the CA
determined the rights of the buyers in the Contracts to Sell/Contract of Sale vis-a-vis those
of the mortgagee and its successor-in-interest.
In the cases of petitioners Cahayag, Rivera and Escalona, the CA pointed to lack of evidence
establishing full payment of the price. As supporting reason, it stated that even if there were
full payment of the purchase price, the mortgagee and the latter's successor-in-interest had
a better right over the properties. The CA anchored this conclusion on the fact that the Real
Estate Mortgage was annotated at the back of the titles to the subject properties before the
execution of the Contracts to Sell. It said that the annotation constituted sufficient notice to
third parties that the property was subject to an encumbrance. With the notice, Cahayag,
Rivera and Escalona should have redeemed the properties within the one-year redemption
period, but they failed to do so. Consequently, the right of respondent CCC over the
properties became absolute, and the transfer to respondent Qua was valid.
As regards Baldoza, though the case involved a Contract of Sale, and not a mere Contract to
Sell, the CA declared the transaction null and void on the purported ground that Dulos was
no longer the owner at the time of the sale.
CIVIL LAW REVIEW 2

8
The CA accordingly reversed and set aside the RTC Decision, dismissed the case for lack of
merit, and ordered petitioners to surrender possession of the properties to respondent Qua.
THE RULE 45 PETITIONS
On 30 May 2005, petitioners Cahayag and Rivera filed their Rule 45 Petition with this
Court.32 For their part, petitioners Dulos Realty, Baldoza and Escalona filed their Rule 45
Petition on 19 July 2005.33
In the Petition under G.R. No. 168357, it is argued, among others, that the Deed of Absolute
Sale in favor of petitioner Baldoza was the culmination of a Contract to Sell between her and
Dulos Realty. She claims that the Contract to Sell, marked as Exhibit "L" during the trial, was
executed on 10 January 1979, which preceded the execution of the Deed of Real Estate
Mortgage and the registration of the mortgage on 3 February 1981.34 After full payment of
the price under the Contract to Sell, Dulos Realty executed the Deed of Absolute Sale. In
other words, Baldoza is arguing that she has a better title to the property than respondent
Qua since the unregistered contract to sell in her favor was executed before the registration
of the mortgage. But the CA ignored Exhibit "L" and merely stated that there was only a
Deed of Absolute Sale in favor of Baldoza.
THE ARGUMENTS
The arguments of petitioners, as stated in their respective Memoranda, are summarized as

follows:
Coverage of the Mortgage
Initially, petitioners attempt to stave off the effects of the extra judicial foreclosure by
attacking the coverage of the Real Estate Mortgage with respect to its subject-matter.35 They
draw attention to the fact that the List of Properties attached to the Deed of Real Estate
Mortgage refers merely to the lands themselves and does not include the housing units
found thereon.36 Petitioners also contend that doubts should be resolved against the drafter
inasmuch as the agreement is a contract of adhesion, having been prepared by the
mortgagee.37
As backup argument for the theory that the houses are outside the coverage of the mortgage
agreement, petitioners argue that the improvements were not owned by Dulos Realty, the
mortgagor, but by its buyers under the Contracts to Sell and Contracts of Sale; hence, those
improvements are excluded from the coverage of the real estate mortgage.
Validity of the Mortgage
Petitioners next challenge the validity of the foreclosure sale on the ground that the
mortgage executed by the mortgagor (petitioner Dulos Realty) and the mortgagee
(respondent CCC) was null and void.38 Petitioners claim that Dulos Realty was no longer the
owner of the properties it had mortgaged at the time of the execution of the mortgage
contract, as they were sold under existing Contracts to Sell and Deed of Absolute Sale.39
CIVIL LAW REVIEW 2

9
Petitioners Cahayag, Rivera and Escalona lean on the unregistered Contracts to Sell they had
individually executed with Dulos Realty as vendor. For his part, petitioner Baldoza points to
the Deed of Absolute Sale executed by Dulos Realty in his favor.
Better Right over the Properties
Petitioners claim that respondent CCC cannot claim to be a mortgagee in good faith, since it
is a financial institution.40 As such, respondent CCC knew that it was dealing with a
subdivision developer, which was in the business of selling subdivision lots.41 Dela Merced v.
GSIS42 which states that the general rule that a mortgagee need not look beyond the title
cannot benefit banks and other financial institutions, as a higher due diligence requirement
is imposed on them.
They also raise the contention that lack of full payment of the purchase price under the
Contracts to Sell on the part of Cahayag, Rivera and Escalona was due to respondent Qua's
"harassment and unlawful actuations.43
Petitioners further state that respondent Qua is a mere transferee of respondent CCC and
that, like a stream, she cannot rise higher than her source. They also argue that Qua is not an
innocent purchaser for value, since she is a former investor of respondent CCC and one of its
principal stockholders.44
No Prior Written HLURB Approval of

the Mortgage
Finally, petitioners allege that the mortgage contract in this case was not approved by the
BLURB, which violates Section 18 of P.D. 95745 and results in the nullity of the mortgage.46
Exhibit "L" as Evidence of a Prior

Contract to Sell
The matter of CA ignoring Exhibit "L" as evidence of a prior unregistered Contract to Sell
was not included in the Memoranda of petitioners.
THE ISSUES
Based on the foregoing facts and arguments raised by petitioners, the threshold issues to be
resolved are the following:
1. Whether the real mortgage covers the lands only, as enumerated in the Deed of Real
Estate Mortgage or the housing units as well;
2. Whether Dulos Realty was the owner of the properties it had mortgaged at the time of its
execution in view of the various Contracts to Sell and Deed of Absolute Sale respectively
executed in favor of petitioners Cahayag, Rivera, Escalona and Cahayag;
3. Who, as between petitioners-buyers and respondent Qua, has a better right over the
properties?
CIVIL LAW REVIEW 2

0
4. Whether the Deed of Absolute Sale in favor of Baldoza was not preceded by a Contract to
Sell and full payment of the purchase price; and
5. Whether the mortgage is void on the ground that it lacked the prior written approval of
the HLURB.
OUR RULING
We deny the Petition for reasons as follows.
1. Attack on the Subject-matter of

the Real Estate Mortgage
It is true that the List of Properties attached to the Deed of Real Estate Mortgage refers
merely to the lands themselves and does not include the housing units found thereon. A
plain reading of the Real Estate Mortgage, however, reveals that it covers the housing
units as well. We quote the pertinent provision of the agreement:
[T]he MORTGAGOR has transferred and conveyed and, by these presents, do hereby
transfer and convey by way of FIRST MORTGAGE unto the MORTGAGEE, its successors and
assigns the real properties described in the list appearing at the back of this document
and/or in a supplemental document attached hereto as Annex "A" and made and integral
part hereof, together with all the buildings and/or other improvements now existing
or which may hereafter be place[d] or constructed thereon, all of which the
MORTGAGOR hereby warrants that he is the absolute owner and exclusive possessor
thereof, free from all liens and encumbrances of whatever kind and nature. xxx.47 (Emphasis
Ours)
Thus, the housing units would fall under the catch-all phrase "together with all the
buildings and/or other improvements now existing or which may hereafter be placed
or constructed thereon."
The contra proferentem rule finds no application to this case. The doctrine provides that in
the interpretation of documents, ambiguities are to be construed against the drafter.48 By its
very nature, the precept assumes the existence of an ambiguity in the contract, which is
why contra proferentem is also called the ambiguity doctrine.49 In this case, the Deed of Real
Estate Mortgage clearly establishes that the improvements found on the real properties
listed therein are included as subject-matter of the contract. It covers not only the real
properties, but the buildings and improvements thereon as well.
2. Challenge to the Foreclosure

Sale with Regard to the
Ownership of the Mortgaged
Properties
To begin with, the Contracts to Sell and Deed of Absolute Sale could not have posed an
impediment at all to the mortgage, given that these contracts had yet to materialize when
the mortgage was constituted. They were all executed after the constitution of the Real
Estate Mortgage on 20 December 1980.
CIVIL LAW REVIEW 2

1
As regards Cahayag, the Contract to Sell in his favor was executed on 29 March 1981, more
than three months after the execution of the mortgage contract.50 This is taken from the
Contract to Sell itself, which forms part of the records of this case.51
At this juncture, we note that the CA, for reasons unknown, specified 29 September
1980,52 and not 29 March 1981, as the date of the execution of the Contract to Sell in its
Decision. Respondent Qua has raised this point in her Memorandum filed with us. This
Court cannot be bound by the factual finding of the CA with regard to the date of the
Contract to Sell in favor of Cahayag. The general rule that the Court is bound by the factual
findings of the CA must yield in this case, as it falls under one of the exceptions: when the
findings of the CA are contradicted by the evidence on record.53 In this case, there is nothing
in the records to support the CA's conclusion that the Contract to Sell was executed on 29
September 1980. The evidence on record, however, reveals that the correct date is 29
March 1981.
In the case of petitioner Rivera, the corresponding Contract to Sell in his favor was executed
only on 12 August 1981, or almost eight months after the perfection of the mortgage
contract on 20 December 1980.
Lastly, Dulos Realty executed the Deed of Absolute Sale in favor of petitioner Baldoza on 10
December 1983, which was almost three years from the time the mortgage contract was
executed on 20 December 1980.
There was neither a contract to sell nor a deed of absolute sale to speak of when the
mortgage was executed.
Petitioners equate a contract to sell to a contract of sale, in which the vendor loses
ownership over the property upon its delivery.54 But a contract to sell, standing alone, does
not transfer ownership.55 At the point of perfection, the seller under a contract to sell does
not even have the obligation to transfer ownership to the buyer.56 The obligation arises only
when the buyer fulfills the condition: full payment of the purchase price.57 In other words,
the seller retains ownership at the time of the execution of the contract to sell.58
There is no evidence to show that any of petitioners Cahayag, Rivera and Escalona were
able to effect full payment of the purchase price, which could have at least given rise to the
obligation to transfer ownership. Petitioners Cahayag and Rivera even admit that they
defaulted on their obligations under their respective Contracts to Sell, although they
attribute the default to respondent Qua's "harassment and unlawful actuations."59 The
statement, though, was a mere allegation that was left unsubstantiated and, as such, could
not qualify as proof of anything.60
3. Who Has a Better Right over the Properties
Registration of the mortgage hound the buyers under the Contracts to Sell
Registration of the mortgage establishes a real right or lien in favor of the mortgagee, as
provided by Articles 131261and 212662 of the Civil Code.63 Corollary to the rule, the lien has
been treated as "inseparable from the property inasmuch as it is a right in rem."64 In other
words, it binds third persons to the mortgage.
CIVIL LAW REVIEW 2

2
The purpose of registration is to notify persons other than the parties to the contract that a
transaction concerning the property was entered into.65 Ultimately, registration, because it
provides constructive notice to the whole world, makes the certificate of title reliable, such
that third persons dealing with registered land need only look at the certificate to
determine the status of the property.66
In this case, the Real Estate Mortgage over the property was registered on 3 February 1981.
On the other hand, the Contracts to Sell were all executed after the registration of the
mortgage. The Contract to Sell in favor of petitioner Cahayag was executed on 29 March
1981, or almost two months after the registration of the mortgage. The corresponding
Contract to Sell in favor of Rivera was executed only on 12 August 1981, roughly six months
after the registration of the mortgage contract. Lastly, the Contract to Sell in favor of
Escalona was executed on 13 January 1983, or nearly two years after the registration of the
mortgage on 3 February 1981.
Consequently, petitioners Cahayag, Rivera and Escalona, were bound to the mortgage
executed between mortgagor Dulos Realty and mortgagee CCC, by virtue of its registration.
Definitely, the buyers each had constructive knowledge of the existence of the mortgage
contract when they individually executed the Contracts to Sell.
Dela Merced v. GSIS not applicable
Petitioner invokes the above case. Dela Merced involved a clash between an unrecorded
contract to sell and a registered mortgage contract. The contract to sell between the
mortgagors (Spouses Zulueta) and the buyer (Francisco Dela Merced) was
executed before the former's constitution of the mortgage in favor of GSIS. Because the
Zuluetas defaulted on their loans, the mortgage was foreclosed; the properties were sold at
public auction to GSIS as the highest bidder; and the titles were consolidated after the
spouses' failure to redeem the properties within the one-year redemption period. GSIS later
sold the contested lot to Elizabeth D. Manlongat and Ma. Therese D. Manlongat. However,
Dela Merced was able to fully pay the purchase price to Spouses Zulueta, who executed a
Deed of Absolute Sale in his favor prior to the foreclosure sale.
This Court stated therein the general rule that the purchaser is not required to go beyond
the Torrens title if there is nothing therein to indicate any cloud or vice in the ownership of
the property or any encumbrance thereon. The case nonetheless provided an exception to
the general rule. The exception arises when the purchaser or mortgagee has knowledge of a
defect in the vendor's title or lack thereof, or is aware of sufficient facts to induce a
reasonably prudent person to inquire into the status of the property under litigation. The
Court applied the exception, taking into consideration the fact that GSIS, the mortgagee, was
a financing institution.
But Dela Merced is not relevant here. Dela Merced involved a Contract to Sell that was
executed prior to the mortgage, while the Contracts to Sell in this case were all
executed after the constitution and registration of the mortgage.
In Dela Merced, since GSIS had knowledge of the contract to sell, this knowledge was
equivalent to the registration of the Contract to Sell. Effectively, this constitutes registration
canceled out the subsequent registration of the mortgage. In other words, the buyer under
CIVIL LAW REVIEW 2

3
the Contract to Sell became the- first to register. Following the priority in time rule in civil
law, the lot buyer was accorded preference or priority in right in Dela Merced.
In this case, the registration of the mortgage, which predated the Contracts to Sell, already
bound the buyers to the mortgage. Consequently, the determination of good faith does not
come into play.
Dela Merced materially differs from this case on another point. The Contract to Sell in favor
of Dela Merced was followed by full payment of the price and execution of the Deed of
Absolute Sale. In this case, the Contract to Sell in favor of each of petitioners Cahayag,
Rivera and Escalona, is not coupled with full payment and execution of a deed of absolute
sale.
This case also needs to be distinguished from Luzon Development Bank v. Enriquez.67 In that
case, the unregistered Contract to Sell was executed after the execution of the mortgage.
Instead of resorting to foreclosure, the owner/developer and the bank entered into a dacion
en pago. The Court declared that the bank was bound by the Contract to Sell despite the
non-registration of the contract. It reasoned that the bank impliedly assumed the risk that
some of the units might have been covered by contracts to sell. On the other hand, the Court
pronounced the mortgage to be void, as it was without the approval of the Housing and
Land Use Regulatory Board (HLURB). The Court consequently ordered the unit buyer in
that case to pay the balance to the bank, after which the buyer was obliged to deliver a clean
title to the property.
There are points of distinction between the case at bar and Luzon Development Bank.
First, there is a definite finding in Luzon Development Bank that the mortgage was without
prior HLURB approval, rendering the mortgage void. In the present case, as will be
discussed later, there is no proof from the records on whether the HLURB did or did not
approve the mortgage. Second, Luzon Development Bank did not even reach the foreclosure
stage of the mortgage. This case, however, not only reached the foreclosure stage; it even
went past the redemption period, consolidation of the title in the owner, and sale of the
property by the highest bidder to a third person.
The first distinction deserves elaboration. The absence of prior written approval of the
mortgage by the HLURB rendered it void. This effectively wiped out any discussion on
whether registration bound the installment buyer. In fact, Luzon Development Bank did not
even bother to state whether the mortgage was registered or not. More important, the
tables were turned when Luzon Development Bank held that the bank was bound to the
Contract to Sell in view of the latter's constructive notice of the Contract to Sell. Stated
differently, the actually unregistered Contract to Sell became fictionally registered, making
it binding on the bank.
In this case, on account of its registration, and the fact that the contracts were entered into
after it, the mortgage is valid even as to petitioners.
No Redemption within One Year from the Foreclosure Sale
When it comes to extrajudicial foreclosures, the law68 grants mortgagors or their

successors-in-interest an opportunity to redeem the property within one year from the date
CIVIL LAW REVIEW 2

4
of the sale. The one-year period has been jurisprudentially held to be counted from the
registration of the foreclosure sale with the Register of Deeds.69 An exception to this rule
has been carved out by Congress for juridical mortgagors. Section 47 of the General Banking
Law of 2000 shortens the redemption period to within three months after the foreclosure
sale or until the registration of the certificate of sale, whichever comes first.70 The General
Banking Law of 2000 came into law on 13 June 2000.
If the redemption period expires and the mortgagors or their successors-in-interest fail to
redeem the foreclosed property, the title thereto is consolidated in the purchaser.71 The
consolidation confirms the purchaser as the owner of the property; concurrently, the
mortgagor-for failure to exercise the right of redemption within the period-loses all interest
in the property.72
We now apply the rules to this case.
As the foreclosure sale took place prior to the advent of the General Banking Law of 2000,
the applicable redemption period is one year. In this case, because the Certificate of Sale in
favor of respondent CCC was registered on 8 March 1982, the redemption period was until
8 March 1983. It lapsed without any right of redemption having been exercised by Dulos
Realty. Consequently, the right of respondent CCC, as purchaser of the subject lots, became
absolute. As a matter of right, it was entitled to the consolidation of the titles in its name and
to the possession of those lots. Further, the right of respondent CCC over the lots was
transferred to respondent Qua by virtue of the Deed of Sale executed between them.
Given the foregoing considerations, respondent Qua, who now has title to the properties
subject of the various Contracts to Sell, is the lawful owner thereof.
Foreclosure Sale vs. Contract of Sale
When Dulos Realty executed a Deed of Absolute Sale covering the real property registered
under TCT No. S-39778 in favor of petitioner Baldoza on 10 December 1983, it was no
longer the owner of the property. Titles to the subject properties, including the one sold to
Baldoza, had already been consolidated in favor of respondent CCC as early as 10 November
1983. In fact, on the same date, the titles to the subject lots in the name of Dulos Realty had
already been cancelled and new ones issued to respondent CCC.
The fact that Dulos Realty was no longer the owner of the real property at the time of the
sale led the CA to declare that the Contract of Sale was null and void. On this premise, the
appellate court concluded that respondent Qua had a better title to the property over
petitioner Baldoza.
We find no error in the conclusion of the CA that respondent Qua has a better right to the
property. The problem lies with its reasoning. We therefore take a different route to reach
the same conclusion.
Proper place of nemo dat quod non habet in the Law on Sales
Undeniably, there is an established rule under the law on sales that one cannot give what
one does not have (Nemo dat quad non ha bet).73 The CA, however, confuses the application
CIVIL LAW REVIEW 2

5
of this rule with respect to time. It makes the nemo dat quad non habet rule a requirement
for the perfection of a contract of sale, such that a violation thereof goes into the validity of
the sale. But the Latin precept has been jurisprudentially held to apply to a contract of sale
at its consummation stage, and not at the perfection stage.74
Cavite Development Bank v. Spouses Syrus Lim75 puts nemo dat quad non habet in its proper
place.1âwphi1 Initially, the Court rules out ownership as a requirement for the perfection of
a contract of sale. For all that is required is a meeting of the minds upon the object of the
contract and the price. The case then proceeds to give examples of the rule. It cites Article
1434 of the Civil Code, which provides that in case the seller does not own the subject
matter of the contract at the time of the sale, but later acquires title to the thing sold,
ownership shall pass to the buyer. The Court also refers to the rule as the rationale behind
Article 1462, which deals with sale of "future goods."
Cavite Development Bank thereafter turns to Article 1459, which requires ownership by the
seller of the thing sold at the time of delivery or consummation stage of the sale. The
Court explains that if the rule were otherwise, the seller would not be able to comply with
the latter's obligation to transfer ownership to the buyer under a perfected contract of sale.
The Court ends the discourse with the conclusion that "[i]t is at the consummation stage
where the principle of nemo dat quad non habet applies.76
Case law also provides that the fact th,at the seller is not the owner of the subject matter of
the sale at the time of perfection does not make the sale void.77
Hence, the lesson: for title to pass to the buyer, the seller must be the owner of the thing
sold at the consummation stage or at the time of delivery of the item sold. The seller need not
be the owner at the perfection stage of the contract, whether it is of a contract to sell or a
contract of sale. Ownership is not a requirement for a valid contract of sale; it is a
requirement for a valid transfer of ownership'.
Consequently, it was not correct for the CA to consider the contract of sale void. The CA
erroneously considered lack of ownership on the part of the seller as having an effect on the
validity of the sale. The sale was very much valid when the Deed of Absolute Sale between
the parties was executed on 10 December 1983, even though title to the property had
earlier been consolidated in favor of respondent CCC as early as 10 November 1983. The
fact that Dulos Realty was no longer the owner of the property in question at the time of the
sale did not affect the validity of the contract.
On the contrary, lack of title goes into the performance of a contract of sale. It is therefore
crucial to determine in this case if the seller was the owner at the time of delivery of the
object of the sale. For this purpose, it should be noted that execution of a public instrument
evidencing a sale translates to delivery.78 It transfers ownership of the item sold to the
buyer.79
In this case, the delivery coincided with the perfection of the contract -The Deed of Absolute
Sale covering the real property in favor of petitioner Baldoza was executed on 10 December
1983. As already mentioned, Dulos Realty was no longer the owner of the property on that
date. Accordingly, it could not have validly transferred ownership of the real property it had
sold to petitioner.
CIVIL LAW REVIEW 2

6
Thus, the correct conclusion that should be made is that while there was a valid sale, there
was no valid transfer of title to Baldoza, since Dulos Realty was no longer the owner at the
time of the execution of the Deed of Absolute Sale.
No Bad Faith on Qua
The contention that Qua is a stockholder and former member of the Board of Directors of
respondent CCC and therefore she is not exactly a stranger to the affairs of CCC is not even
relevant.
An innocent purchaser for value is one who "buys the property of another without notice
that some other person has a right to or interest in it, and who pays a full and fair price at
the time of the purchase or before receiving any notice of another person's claim."80 The
concept thus presupposes that there must be an adverse claim or defect in the title to the
property to be purchased by the innocent purchaser for value.
Respondent Qua traces her title to respondent CCC, whose acquisition over the property
proceeded from a foreclosure sale that was valid. As there is no defect in the title of
respondent CCC to speak of in this case, there is no need to go into a discussion of whether
Qua is an innocent purchaser for value.
4. Dispute as to the Factual Finding of the CA that the Deed of Absolute Sale in Favor of
Baldoza was not Preceded by a Contract to Sell and Full Payment of the Purchase Price
We absolutely discard the argument. We can think of at least four reasons why. First, Exhibit
"L" was not formally offered in evidence. Second, it was not even incorporated into the
records. Third, the argument is irrelevant. Fourth, it was even abandoned in the Memoranda
filed by petitioners with us. Last, we are not a trier of facts and thus we yield to the finding
of the CA.
Exhibit "L" not formally offered
A perusal of the records shows that the Contract to Sell that Baldoza referred to had in fact
been marked as Exhibit "L" during her direct examination in court.81 Even so, Exhibit "L"
was never formally offered as evidence. For this reason, we reject her contention. Courts do
not consider evidence that has not been formally offered.82 This explains why the CA never
mentioned the alleged Contract to Sell in favor of Baldoza.
The rationale behind the rule rests on the need for judges to confine their factual findings
and ultimately their judgment solely and strictly to the evidence offered by the parties to a
suit.83 The rule has a threefold purpose. It allows the trial judge to know the purpose of the
evidence presented; affords opposing parties the opportunity to examine the evidence and
object to its admissibility when necessary; and facilitates review, given that an appellate
court does not have to review documents that have not been subjected to scrutiny by the
trial court.84
Exhibit "L" not incorporated into the records
CIVIL LAW REVIEW 2

7
The rule, of course, admits an exception. Evidence not formally offered may be admitted and
considered by the trial court so long as the following requirements obtain: (1) the evidence
is duly identified by testimony duly recorded; and (2) the evidence is incorporated into the
records of the case.
The exception does not apply to the case of Baldoza. While she duly identified the Contract
to Sell during her direct examination, which was duly recorded, Exhibit "L" was not
incorporated into the records.
Exhibit "L" not relevant
Be that as it may, the contention that a Contract to Sell in favor of Baldoza preceded the sale
in her favor is irrelevant. It must be stressed that the sale to Baldoza made by Dulos Realty
took place after the lapse of the redemption period and after consolidation of title in
the name of respondent CCC on 10 November 1983, one month prior to the sale to Baldoza
on 10 December 1983. Dulos Realty still would have lost all interest over the property
mortgaged.
The fact that Dulos Realty ceased to be the owner of the property and therefore it could no
longer effect delivery of the property at the time the Deed of Absolute Sale in favor of
Baldoza was executed is the very reason why the case of Baldoza cannot be compared
with Dela Merced. In the case, the buyer in the Contract to Sell was able to effect full
payment of the purchase price and to execute a Deed of Absolute Sale in his favor before
the foreclosure sale. In this case, the full payment of the purchase price and the execution
of a Deed of Absolute Sale in favor of Baldoza was done after the foreclosure sale.
Issue over Exhibit "L" not included in the Memorandum
Equally important is the fact that petitioners failed to include the issue over Exhibit "L" in
any of the Memoranda they filed with us. The omission is fatal. Issues raised in previous
pleadings but not included in the memorandum are deemed waived or
abandoned (A.M. No. 99-2-04-SC). As they are "a summation of the parties' previous
pleadings, the memoranda alone may be considered by the Court in deciding or resolving
the petition."85 Thus, even as the issue was raised in the Petition, the Court may not consider
it in resolving the case on the ground of failure of petitioners to include the issue in the
Memorandum. They have either waived or abandoned it.
5. Issue of HLURB's Non-Approval of the Mortgage
Petitioners allege before the Court that the mortgage contract in this case was not approved
by the HLURB. They claim that this violates Section 18 of P.D. 95786 and results in the nullity
of the mortgage. Respondents have disputed the claim and counter-argue that the allegation
of the petitioners is not supported by evidence. Respondents likewise aver that the
argument was raised for the first time on appeal.87
It is rather too late in the day for petitioners to raise this argument. Parties are not
permitted to change their theory of a case at the appellate stage.88 Thus, theories and issues
not raised at the trial level will not be considered by a reviewing court on the ground that
they cannot be raised for the first time on appeal.89 Overriding considerations of fair play,
CIVIL LAW REVIEW 2

8
justice and due process dictate this recognized rule.90 This Court cannot even receive
evidence on this matter.
Petitioners' original theory of the case is the nullity of the mortgage on the grounds
previously discussed. If petitioners are allowed to introduce their new theory, respondents
would have no more opportunity to rebut the new claim with contrary evidence, as the trial
stage has already been terminated. In the interest of fair play and justice, the introduction of
the new argument must be barred.91
Exceptions Not Applicable
The Court is aware that the foregoing is merely a general rule. Exceptions are written in
case law: first, an issue of jurisdiction may be raised at any time, even on appeal, for as long
as the exercise thereof will not result in a mockery of the demands of fair play;92 second, in
the interest of justice and at the sound discretion of the appellate court, a party may be
allowed to change its legal theory on appeal, but only when the factual bases thereof would
not require further presentation of evidence by the adverse party for the purpose of
addressing the issue raised in the new theory;93 and last, which is actually a bogus
exception, is when the question falls within the issues raised at the trial court.94
The exceptions do not apply to the instant case. The new argument offered in this case
concerns a factual matter - prior approval by the HLURB. This prerequisite is not in any way
related to jurisdiction, and so the first exception is not applicable. There is nothing in the
record to allow us to make any conclusion with respect to this new allegation.
Neither will the case fall under the second exception. Evidence would be required of the
respondents to disprove the new allegation that the mortgage did not have the requisite
prior HLURB approval. Besides, to the mind of this court, to allow petitioners to change
their theory at this stage of the proceedings will be exceedingly inappropriate.
Petitioners raised the issue only after obtaining an unfavorable judgment from the CA.
Undoubtedly, if we allow a change of theory late in the game, so to speak, we will
unjustifiably close our eyes to the fundamental right of petitioners to procedural due
process. They will lose the opportunity to meet the challenge, because trial has already
ended. Ultimately, we will be throwing the Constitutional rulebook out the window.
WHEREFORE, premises considered, the Petitions are DENIED, and the Court of Appeals
Decision dated 2 November 2004 and Resolution dated 10 May 2005 in CA-G.R. CV No.
47421 are hereby AFFIRMED.
CIVIL LAW REVIEW 2

9

10.
THIRD DIVISION
January 13, 2016
G.R. No. 172919
TIMOTEO BACALSO and DIOSDADA BACALSO, Petitioners,

vs.
GREGORIA B. ACA-AC, EUTIQUIA B. AGUILA, JULIAN BACUS and EVELYN
SYCHANGCO, Respondents.
D E C I S I O N
REYES, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court
seeking to annul and set aside the Decision2 dated December 14, 2005 and the
Resolution3 dated May 30, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 67516. The
CA affirmed the Decision dated April 19, 2000 of the Regional Trial Court (RTC) of Cebu
City, Branch 11, in Civil Case No. CEB-17994. The RTC ruled that the Deed of Absolute Sale
elated October 15, 1987 between herein respondents Gregoria B. Aca-Ac, Eutiguia B. Aguila
and Julian Bacus (Julian) (Bacus siblings) and herein petitioner Timoteo Bacalso (Timoteo)
was void for want of consideration.
The Facts
The Bacus siblings were tbe registered owners of a parcel of land described as Lot No. 1809-
G-2 located in San Roque, Talisay, Cebu with an area of 1,200 square meters and covered by
Transfer Certificate of Title (TCT) No. 59260. The Bacus siblings inherited the said property
from their mother Matea Bacalso (Matea).4
On October 15, 1987, the Bacus siblings executed a Deed of Absolute Sale conveying a
portion of Lot No. 1809-G-2 with an area of 271 sq m, described as Lot No. 1809-G-2-C, in
favor of their cousin, Timoteo for and in consideration of the amount of P8,000.00.5
On March 4, 1988, however, Timoteo, together with his sisters Lucena and Victoria and
some of his cousins filed a complaint for declaration of nullity of documents, certificates of
title, reconveyance of real property and damages against the Bacus siblings and four other
persons before the RTC of Cebu City, Branch 12, and was docketed as Civil Case No. CEB-
6693. They claimed that they are co-owners of the three-fourths portion of Lot No. 1809-G
(which Lot No. 1809-G-2-C was originally part of) as Matea had paid for the said property
for and in behalf of her brother Alejandro (father of petitioner Timoteo) and sisters
Perpetua and Liberata, all surnamed Bacalso.6
CIVIL LAW REVIEW 2

0
On November 29, 1989, the RTC found that Matea was the sole owner of Lot No. 1809-G and
affirmed the validity of the conveyances of portions of Lot No. 1809-G made by her children.
The same was aflirmed by the CA in a Decision dated March 23, 1992 and became final and
executory on April 15, 1992.7
Undaunted, Timoteo and Diosdada Bacalso (petitioners) filed on October 26, 1995, a
complaint for declaration of nullity of contract and certificates of title, reconveyance and
damages against the Bacus siblings, this time claiming ownership over Lot No. 1809-G-2-C
by virtue of the Deed of Absolute Sale dated October 15, 1987. They claimed, however, that
the Bacus siblings reneged on their promise to cause the issuance of a new TCT in the name
of the petitioners.8
Moreover, the petitioners alleged that the Bacus siblings have caused the subdivision of Lot
No. 1809-G-2 into four lots and one of which is Lot No. 1809-G-2-C which is now covered by
TCT No. 70783. After subdividing the property, the Bacus siblings, on February 11, 1992,
without knowledge of the petitioners, sold Lot No. 1809-G-2-C again to respondent Evelyn
Sychangco (Sychangco) and that TCT No. 74687 covering the same property was issued in
her name.9
In their answer, the Bacus siblings denied the allegations of the petitioners and claimed that
the alleged sale of Lot No. 1809-G-2-C in favor of the petitioners did not push through
because the petitioners failed to pay the purchase price thereof.10
For her part, Sychangco averred that she is a buyer in good faith and for value as she relied
on what appeared in the certificate of title of the property which appeared to be a clean title
as no lien or encumbrance was annotated therein.11
On April 19, 2000, the RTC issued a Decision declaring the Deed of Absolute Sale dated
October 15, 1987 void for want of consideration after finding that the petitioners failed to
pay the price of the subject property. Moreover, the RTC held that even granting that the
sale between the Bacus siblings and the petitioners was valid, the petitioners still cannot
ask for the rescission of the sale of the disputed portion to Sychangco as the latter was a
buyer in good faith, thus has a better right to the property. 12
Aggrieved by the foregoing disquisition of the RTC, the petitioners interposed an appeal
with the CA. On December 14, 2005, however, the CA affirmed the ruling of the RTC. The
petitioners sought a reconsideration13 of the CA decision but it was denied in a Resolution
dated May 30, 2006.
The Issues
The petitioners assign the following errors of the CA:
I.
THE [CA] SERIOUSLY ERRED WHEN IT RELIED TOO MUCH ON THE RESPECTIVE ORAL
TESTIMONIES OF RESPONDENTS JULIAN BACUS AND EVELYN SYCHANGCO UTTERLY
DISREGARDING THE ORAL TESTIMONIES OF PETITIONER TIMOTEO BACALSO AND THE
LATTER'S WITNESS ROBERTO YBAS AND THE DOCUMENTARY EVIDENCE OF THE
CIVIL LAW REVIEW 2

1
PETITIONERS, THE DULY EXECUTED AND NOTARIZED DEED OF ABSOLUTE SALE
COVERING THE SUBJECT LOT NO. 1809-G-2-C.
II
THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THE DEED OF ABSOLUTE SALE
DATED 15 OCTOBER 1987 IS NULL AND VOID AB INITIO FOR FAILURE OR WANT OF
CONSIDERATION.
III
THE [CA] SERIOUSLY ERRED WHEN IT DID NOT CONSIDER TI-IE FACT THAT THE DEED OF
ABSOLUTE SALE DATED 15 OCTOBER 1987 WAS NOTARIZED, HENCE, A PUBLIC
DOCUMENT WHICH ENJOYS THE PRESUMPTION OF REGULARITY.
IV
THE [CA] SERIOUSLY ERRED WHEN IT DID NOT RULE THAT ON 15 OCTOBER 1987, THE
[BACUS SIBLINGS] WERE NO LONGER OWNERS AND POSSESSORS OF Tl-IE SUBJECT LOT
AS THE SAME WAS ALREADY TRANSFERRED TO TI-IE PETITIONERS BY REASON OF THE
MERE EXECUTION OF A DEED OF SALE IN A PUBLIC DOCUMENT, AS IN THIS CASE.14
Essentially, the issues presented to the Court for resolution could be reduced into whether
the CA erred in holding that the Deed of Absolute Sale dated October 15, 1987 is void for
want of consideration.
Ruling of the Court
The petition is bereft of merit.
The central issue to be resolved in the present controversy is the validity of the Deed of
Absolute Sale between the petitioners and the Bacus siblings. "Such issue involves a
question of fact and settled jurisprudence dictates that, subject to a few exceptions, only
questions of law may be brought before the Court via a petition for review on certiorari."15
The Court has repeatedly held that it is not necessitated to examine, evaluate or weigh the
evidence considered in the lower courts all over again. "This is especially true where the
trial court's factual findings are adopted and affirmed by the CA as in the present case.
Factual findings of the trial court, afiirmed by the CA, are final and conclusive and may not
be reviewed on appeal."16
Although the Court recognized several exceptions to the limitation of an appeal

by certiorari to only questions of law, including: (1) when the findings are grounded entirely
on speculation, surmises, or conjectures; (2) when the interference made is manifestly
mistaken, absurd, or impossible; (3) when there is grave abuse of discretion; (4) when the
judgment is based on a misapprehension of facts; (5) when the findings of fact are
conflicting; (6) when in making its findings, the CA went beyond the issues of the case, or its
findings are contrary to the admissions of both the appellant and the appellee; (7) when the
findings are contrary to those of the trial court; (8) when the findings are conclusions
CIVIL LAW REVIEW 2

2
without citation of specific evidence on which they are based; (9) when the facts set forth in
the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondent; and (10) when the findings of fact are premised on the supposed absence of
evidence and contradicted by the evidence on record,17 the present appeal does not come
under any of the exceptions.
In any event, the Court has carefully reviewed the records of the instant case and found no
reason to disturb the findings of the RTC as affirmed by the CA.
Under the Civil Code, a contract is a meeting of minds, with respect to the other, to give
something or to render some service. Article 1318 provides:
Art. 1318. There is no contract unless the following requisites concur:
(l) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
In the case at bar, the petitioners argue that the Deed of Absolute Sale has all the requisites
of a valid contract. The petitioners contend that there is no lack of consideration that would
prevent the existence of a valid contract. They assert that the testimonies of Timoteo and
witness Roberto Ybas sufficiently established that the purchase price of P5,000.00 for Lot
No. 1809-G-2-C was paid to Julian at Sto. Nifio Church in Cebu City before the execution of
the Deed of Absolute Sale. They also claim that even assuming that they failed to pay the
purchase price, such failure does not render the sale void for being fictitious or simulated,
rather, there is only non-payment of the consideration within the period agreed upon for
payment.18
The Court does not agree.
Contrary to the petitioners' claim, this is not merely a case of failure to pay the purchase
price which can only amount to a breach of obligation with rescission as the proper remedy.
As correctly observed by the RTC, the disputed sale produces no effect and is considered
void ab initio for failure to or want of consideration since the petitioner failed to pay the
consideration stipulated in the Deed of Absolute Sale. The trial court's discussion on the
said issue, as affirmed by the CA, is hereby quoted:
To begin with, the Court hereby states that, from the totality of the evidence adduced in this
case which it scrutinized and evaluated, it has come up with a finding that there was failure
or want of consideration of the Deed of Sale of Lot 1809-G-2-C executed in favor of the
[petitioners] on October 15, 1987. The Court is morally and sufficiently convinced that
[Timoteo] had not paid to the [Bacus siblings] the price for the said land. This fact has been
competently and preponderantly established by the testimony in court of [Julian]. [Julian]
made the following narration in his testimony:
Sometime in October 1987, he and his two sisters agreed to sell to the [petitioners] Lot No.
1809-G-2-C because they needed money for the issuance of the titles to the four lots into
CIVIL LAW REVIEW 2

3
which Lot 1809-G-2 was subdivided. [Timoteo] lured him and his sisters into selling the
said land by his promise and representation that money was coming from his sister, Lucena
Bacalso, from Jolo, Sulu. Timoteo Bacalso asked for two weeks within which to produce the
said money. However, no such money came. To the shock and surprise of him and his
sisters, a complaint was filed in Court against them in Civil Case No. CEB-6693 by [Timoteo],
together with nine others, when Lucena Bacalso arrived from Jolo, Sulu, wherein they
claimed as theirs Lot 1809-G. Instead of being paid, he and his sisters were sued in Court.
From then on, [Timoteo] never cared anymore to pay for Lot 1809-G-2-C. He and his sisters
just went through the titling of Lots 1809-G-A, 1809-G-2-B, Lot 1809-G-2-C and 1809-G-2-D
on their own.
On his part, [Timoteo] himself acted in such a manner as to confirm that he did not anymore
give significance or importance to the Deed of Sale of Lot 1809-G-2-C which, in turn, creates
an impression or conclusion that he did not pay Jor the consideration or price thereof. Upon
being cross-examined in Court on his testimony, he made the following significant
admissions and statements:
1. That he did not let [Julian] sign a receipt for the sum of P8,000.00 purportedly given by
him to the latter as payment for the land in question;
2. That the alleged payment of the said sum of P8,000.00 was made not in the presence of
the notary public who notarized the document but in a place near Sto. Nino Church in Cebu
City;
3. That it was only [Julian] who appeared before the notary public, but he had no special
power of attorney from his two sisters;
4. That the Deed of Sale of Lot 1809-G-2-C was already in his possession before Civil Case
No. CEB-6693 was filed in court;
5. That he did not however show the said Deed of Sale to his lawyer who filed for the
plaintiffs the complaint in Civil Case No. CEB 6693, as in fact he suppressed the said
document from others;
6. That he did not bother to cause the segregation of Lot 1809-G-2-C from the rest of the lots
even after he had already bought it already;
7. That it was only after he lost in Civil Case No. CEB-6693 that he decided to file the present
case;
8. That he did not apply for building permits for the three houses that he purportedly
caused to be built on the land in question;
9. That he did not also declare for taxation purposes the said alleged houses;
10. That he did not declare either for taxation purposes the land in question in his name or
he had not paid taxes therefore; and
CIVIL LAW REVIEW 2

4
11. That he did not bother to register with the Registry of Deeds for the Province of Cebu
the Deed of Sale of the lot.1a\^/phi1
To the mind of the Court, [Timoteo] desisted from paying to [the Bacus siblings] the price
for Lot 1809-G-2-C when he, together with nine others, filed in Court the complaint in Civil
Case No. CEB-6693. He found it convenient to just acquire the said land as supposed co-
owners of Lot 1809-G of which the land in question is merely a part of xx x:
x x x x
Thus, it is evident from all the foregoing circumstances that there was a failure to or want of
consideration of the supposed sale of the land in question to the [petitioners] on October
15, 1987. So, the said sale could not be given effect. Article 1352 of the New Civil Code of the
Philippines is explicit in providing that 'contracts without cause produce no effect
whatsoever'. If there is no cause, the contract is void. x x x There being no price paid, there
is no cause or consideration; hence, the contract is void as a sale. x x x Consequently, in the
case at bench, the plaintiffs have not become absolute owners of Lot 1809-G-2-C of Psd-07-
022093 by virtue of the Deed of Sale thereof which was executed on October 15, 1987 by
the [Bacus siblings] in their favor.19 (Citations omitted)
It is clear from the factual findings of the RTC that the Deed of Absolute Sale entirely lacked
consideration and, consequently, void and without effect. No portion of the P8,000.00
consideration indicated in the Deed of Absolute Sale was ever paid by the
petitioners.1âwphi1
The Court also finds no compelling reason to depart from the court a quo's finding that the
Deed of Absolute Sale executed on October 15, 1987 is null and void ab initio for lack of
consideration, thus:
It must be stressed that the present case is not merely a case of failure to pay the purchase
price, as [the petitioners] claim, which can only amount to a breach of obligation with
rescission as the proper remedy. What we have here is a purported contract that lacks a
cause - one of the three essential requisites of a valid contract. Failure to pay the
consideration is different from lack of consideration. The former results in a right to
demand the fulfillment or cancellation of the obligation under an existing valid contract
while the latter prevents the existence of a valid contract. Consequently, we rule that the
October 15, 1987 Deed of Sale is null and void ab initio for lack of consideration.20 (Citation
omitted)
Well-settled is the rule that where there is no consideration, the sale is null and void ab
initio. In Sps. Lequin v. Sps. Vizconde,21 the Court ruled that:
There can be no doubt that the contract of sale or Kasulatan lacked the essential element of
consideration.1âwphi1 It is a well-entrenched rule that where the deed of sale states that
the purchase price has been paid but in fact has never been paid, the clcecl of sale is null and
void ab initio for lack of consideration.22 (Citation omitted)
WHEREFORE, petition is DENIED and the Decision dated December 14, 2005 of the Court
of Appeals in CA-G.R. CV No. 67516 is AFFIRMED.
CIVIL LAW REVIEW 2

5

11.
FIRST DIVISION
January 13, 2016
G.R. No. 174113
PAZ CHENG y CHU, Petitioner,

vs.
PEOPLE OF THE PHILIPPINES, Respondent.
D E C I S I O N
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated March 28, 2006
and the Resolution3 dated June 26, 2006 of the Court of Appeals (CA) in CA-G.R. CR No.
24871, which affirmed the conviction of petitioner Paz Cheng y Chu (Cheng) for three (3)
counts of the crime of Estafa defined and penalized under Article 315 (1) (b) of the Revised
Penal Code (RPC).
The Facts
The instant case arose from the filing of three (3) separate Informations4 charging Cheng of
the crime of Estafa defined and penalized under Article 315 (1) (b) of the RPC before the
Regional Trial Court of Quezon City, Branch 226 (RTC), docketed as Criminal Case Nos. Q-
98-75440, Q-98-75441 and Q-98-75442. According to the prosecution, private complaint
"Rowena Rodriguez (Rodriguez) and Cheng entered into an agreement whereby Rodriguez
shall deliver pieces of jewelry to Cheng for the latter to sell on commission basis. After one
month, Cheng is obliged to either: (a) remit the proceeds of the sold jewelry; or (b) return
the unsold jewelry to the former. On different dates (i.e., July 12, 1997, July 16, 1997, and
August 12, 1997), Rodriguez delivered various sets of jewelry to Cheng in the respective
amounts of P18,000.00, P36,000.00, and P257,950.00. Upon delivery of the last batch of
jewelry, Cheng issued a check worth P120,000.00 as full security for the first two (2)
deliveries and as partial security for the last. When Cheng failed to remit the proceeds or to
return the unsold jewelry on due date, Rodriguez presented the check to the bank for
encashment, but was dishonored due to insufficient funds. Upon assurance of Cheng,
Rodriguez re-deposited the check, but again, the same was dishonored because the drawee
account had been closed. Rodriguez then decided to confront Cheng, who then
uttered "Akala mo, babayaran pa kita?" Thus, Rodriguez was constrained to file the instant
charges.5
In defense, Cheng denied receiving any jewelry from Rodriguez or signing any document
purporting to be contracts of sale of jewelry, asserting that Rodriguez is a usurious
moneylender. She then admitted having an unpaid loan with Rodriguez and that she issued
CIVIL LAW REVIEW 2

6
a check to serve as security for the same, but was nevertheless surprised of her arrest due
to the latter's filing of Estafa charges against her.6
The RTC Ruling
In a Decision7 dated December 7, 2000, the RTC found Cheng guilty beyond reasonable
doubt of three (3) counts of Estafa and, accordingly, sentenced her as follows: (a) for the
first count, Cheng is sentenced to an indeterminate penalty ranging from four (4) years, two
(2) months, and one (1) day to six (6) years, eight (8) months, and twenty-one (21) days to
eight (8) years of prision correccional in its maximum period to prision mayor in its
minimum period (maximum); (b) for the second count, Cheng is sentenced to an
indeterminate penalty ranging from six (6) months and one (1) day to one (1) year, eight
(8) months, and twenty (20) days of prision correccional in its minimum and medium
periods to six (6) years, eight (8) months, and twenty-one (21) days to eight (8) years
of prision correccional in its maximum period to prision mayor in its minimum period
(maximum); and (c) for the third count, Cheng is sentenced to an indeterminate penalty
ranging from six (6) months and one (1) day to one (1) year, eight (8) months, and twenty
(20) days of prision correccional in its minimum and medium periods to four (4) years, two
(2) months, and one (1) day to five (5) years, five (5) months, and ten (10) days of prision
correccional in its maximum period to prision mayor in its minimum period (minimum).8
The RTC found that the prosecution has sufficiently proven through documentary and
testimonial evidence that: (a) Rodriguez indeed gave Cheng several pieces of jewelry for the
latter- to either sell and remit the proceeds or to return said jewelry if unsold to the former;
and (b) Cheng neither returned the jewelry nor remitted their proceeds to Rodriguez within
the specified period despite the latter's demands. In contrast, Cheng failed to substantiate
her claims through the documentary evidence she presented while her testimony was
deemed to be incredible and not worthy of belief.9
Aggrieved, Cheng appealed10 to the CA.
The CA Ruling
In a Decision11 dated March 28, 2006, the CA affirmed Cheng's conviction for three (3)
counts of Estafa, with modification as to the penalties, as follows: (a) for the first count
of Estafa where the amount misappropriated is P257,950.00, Cheng is sentenced to suffer
the penalty of imprisonment for an indeterminate period of four (4) years and two (2)
months of prision correccional, as minimum, to twenty (20) years of reclusion temporal, as
maximum; (b) for the second count of Estafa where the amount misappropriated is
P36,000.00, Cheng is sentenced to suffer the penalty of imprisonment for an indeterminate
period of four (4) years and two (2) months of prision correccional, as minimum, to nine (9)
years of prision mayor, as maximum; and (c) for the third count of Estafa where the amount
misappropriated is Pl8,000.00, Cheng is sentenced to suffer the penalty of imprisonment for
an indeterminate period of four (4) years and two (2) months of prision correccional, as
minimum, to six (6) years, eight (8) months, and twenty (20) days of prision mayor, as
maximum.12
The CA agreed with the RTC's findings that the prosecution had sufficiently established
Cheng's guilt beyond reasonable doubt, pointing out that Rodriguez's testimony was "'more
CIVIL LAW REVIEW 2

7
candid, credible and straightforward and that 'her demeanor in the witness stand is worthy
of belief" as opposed to that of Cheng which is highly self-serving and
uncorroborated.13 Further, the CA found that a modification of Cheng's penalties is in order
to conform with prevailing law and jurisprudence on the matter.14
Undaunted, Cheng moved for reconsideration15 but was denied in a Resolution16 dated June
26, 2006; hence, this petition.
The Issue Before the Court
The core issue for the Court's resolution is whether or not the CA correctly affirmed Cheng's
conviction for three counts of Estafa defined and penalized under Article 315 (1) (b) of the
RPC.
The Court's Ruling
The petition is without merit.
Article 315 (1) (b) of the RPC states:
Art. 315. Swindling (estafa). - Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision mayor in its
minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed
22,000 pesos; and if such amount exceeds the latter sum, the penalty provided in this
paragraph shall be imposed in its maximum period, adding one year for each additional
10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years. In
such cases, and in connection with the accessory penalties which may be imposed and for
the purpose of the other provisions of this Code, the penalty shall be termed prision
mayor or reclusion temporal, as the case may be[.]
x x x x
1. With unfaithfulness or abuse of confidence, namely:
x x x x
(b) By misappropriating or converting, to the prejudice of another, money, goods or any

other personal property received by the offender in trust, or on commission, or for
administration, or under any other obligation involving the duty to make delivery of, or to
return the same, even though such obligation be totally or partially guaranteed by a bond;
or by denying having received such money, goods, or other property;
x x x x
The elements of Estafa under this provision are as follows: (1) the offender's receipt of
money, goods, or other personal property in trust, or on commission, or for administration,
or under any other obligation involving the duty to deliver, or to return, the same; (2)
CIVIL LAW REVIEW 2

8
misappropriation or conversion by the offender of the money or property received, or
denial of receipt of the money or property; (3) the misappropriation, conversion or denial is
to the prejudice of another; and (4) demand by the offended party that the offender return
the money or property received.17 In the case of Pamintuan v. People,18 the Court had the
opportunity to elucidate further on the essence of the aforesaid crime, as well as the proof
needed to sustain a conviction for the same, to wit:
The essence of this kind of [E]stafa is the appropriation or conversion of money or

property received to the prejudice of the entity to whom a return should be made.
The words "convert" and "misappropriate" connote the act of using or disposing of
another's property as if it were one's own, or of devoting it to a purpose or use different
from that agreed upon. To misappropriate for one's own use includes not only conversion to
one's personal advantage, but also every attempt to dispose of the property of another
without right. In proving the element of conversion or misappropriation, a legal
presumption of misappropriation arises when the accused fails to deliver the
proceeds of the sale or to return the items to be sold and fails to give an account of
their whereabouts. 19 (Emphases and underscoring supplied)
In this case, a judicious review of the case records reveals that the elements of Estafa, as
defined and penalized by the afore-cited provision, are present, considering that: (a)
Rodriguez delivered the jewelry to Cheng for the purpose of selling them on commission
basis; (b) Cheng was required to either remit the proceeds of the sale or to return the
jewelry after one month from delivery; (c) Cheng failed to do what was required of her
despite the lapse of the aforesaid period; (d) Rodriguez attempted to encash the check given
by Cheng as security, but such check was dishonored twice for being drawn against
insufficient funds and against a closed account; (e) Rodriguez demanded that Cheng comply
with her undertaking, but the latter disregarded such demand; (j) Cheng's acts clearly
prejudiced Rodriguez who lost the jewelry and/or its value.
In a desperate attempt to absolve herself from liability, Cheng insists that Rodriguez
admitted in her own testimony that the transaction between them is not an agency on
commission basis, but a plain sale of jewelry with Rodriguez as the seller and Cheng as the
buyer.1âwphi1 As such, Cheng's non-payment of the purchase price of the jewelry would
only give rise to civil liability and not criminal liability.20 The pertinent portion of
Rodriguez's testimony is as follows:
Q. After the delivery of these several items totaling P257,950.00, what happened next?
A. She issued a check worth P120,000.00.
Q. What check is that?
A. PDCP Bank, sir.
Q. What is this check for, Ms. Witness?
A. As payment for the first and second transactions, sir, for Pl8,000.00 and
P36,000.00 and the excess amount is applied for the third transaction.
CIVIL LAW REVIEW 2

9
x x x x
Q. So, all in all, you have sixty (60) days period with respect to this item, and the first
delivery expired I am referring to July 12, 1997 worth P18,000.00 which will mature on
September 11, so, from September 11, what happened?
A. These were considered paid because she issued me a check for the period of August
13, so I was expecting that.21 (Emphases and underscoring supplied)
Essentially, Cheng posits that since Rodriguez "admitted" in her testimony that the check
issued by the former in the amount of Pl20,000.00 constituted full payment for the first and
second batch of jewelry and partial payment for the last batch, the transactions entered into
by the parties should be deemed in the nature of a sale.
Cheng is sadly mistaken.
The foregoing "admission" on the part of Rodriguez did not change the fact that her
transactions with Cheng should be properly deemed as an agency on a commission basis
whereby Rodriguez, as the owner of the jewelry, is the principal, while Cheng is the agent
who is tasked to sell the same on commission. In the eyes of the Court, Rodriguez merely
accepted the check as full security for the first and second batches of jewelry and as partial
security for the last batch. It was only when Cheng defaulted in her undertaking pursuant to
their agreement that Rodriguez was constrained to treat the check as the former's
remittance of the proceeds of the sale of jewelry - albeit deficient - by presenting it for
encashment on October 20, 1997, or more than two (2) months after the delivery of the last
batch of jewelry.22 However, the check was dishonored for being drawn against insufficient
funds.23 This notwithstanding and with the assurance from Cheng that the check will be
cleared, Rodriguez presented such check for the second time on November 4, 1997; but it
.was again dishonored - this time for being drawn against a closed account.24 As such, the
fact that Rodriguez loosely used the words "payment" and "paid" should not be taken
against her and should not in any way change the nature of her transactions with Rodriguez
from an agency on a commission basis to a full-fledged sale. Moreover, even Cheng does not
consider such check as payment for the jewelry, but rather, as security for the loan she
allegedly obtained from Rodriguez.
Indisputably, there is no reason to deviate from the findings of the RTC and the CA as they
have fully considered the evidence presented by the prosecution and the defense, and they
have adequately explained the legal and evidentiary reasons in concluding that Cheng is
indeed guilty beyond reasonable doubt of three (3) counts of Estafa by misappropriation
defined and penalized under Article 315 (1) (b) of the RPC. It is settled that factual findings
of the RTC, when affirmed by the CA, are entitled to great weight and respect by this Court
and are deemed final and conclusive when supported by the evidence on record,25 as in this
case.
WHEREFORE, the petition is DENIED. The Decision dated March 28, 2006 and the
Resolution dated June 26, 2006 of the Court of Appeals in CA-G.R. CR No. 24871 are
hereby AFFIRMED.
CIVIL LAW REVIEW 2

0
Accordingly, petitioner Paz Cheng y Chu is found GUILTY beyond reasonable doubt
of Estafa defined and penalized under Article 315 (1) (b) of the Revised Penal Code, and
is SENTENCED as follows: (a) for the first count of Estafa where the amount
misappropriated is P257,950.00, Cheng is sentenced to suffer the penalty of imprisonment
for an indeterminate period of four (4) years and two (2) months of prision correccional, as
minimum, to twenty (20) years of reclusion temporal, as maximum; (b) for the second count
of Estafa where the amount misappropriated is P36,000.00, Cheng is sentenced to suffer the
penalty of imprisonment for an indeterminate period of four (4) years and two (2) months
of prision correccional, as minimum, to nine (9) years of prision mayor, as maximum; and (c)
for the third count of Estafa where the amount misappropriated is Pl 8,000.00, Cheng is
sentenced to suffer the penalty of imprisonment for an indeterminate period of four (4)
years and two (2) months of prision correccional, as minimum, to six (6) years, eight (8)
months, and twenty (20) days of prision mayor, as maximum.
SO ORDERED.
CIVIL LAW REVIEW 2

1

12.
THIRD DIVISION
January 13, 2016
G.R. No. 198745
BANCO DE ORO UNIBANK, INC. (Formerly Banco De Oro-EPCI, Inc.), Petitioner,

vs.
SUNNYSIDE HEIGHTS HOMEOWNERS ASSOCIATION, INC., Respondent.
D E C I S I O N
REYES, J.:
Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court
seeking to annul the Decision2 dated March 11, 2011 of the Court of Appeals (CA) in CA-G.R.
SP No. 101740, which affirmed, with modification, the Decision3 dated November 22, 2007
of the Office of the President (OP) in O.P. Case No. 97-E-8033, entitled Mover Enterprises,
Inc. and Philippine Commercial & International Bank (PCIB) v. The Housing and Land Use
Regulatory Board (HLURB) and Sunnyside Heights J-Jomeowners Association, Inc.
The Facts
Mover Enterprises, Inc. (Mover) is the owner and developer of the Sunnyside Heights
Subdivision located in Batasan Hills, Quezon City. In March 1988, Mover mortgaged Lot 5,
Block 10 of Phase I of the said subdivision containing 5,764 square meters to the Philippine
Commercial International Bank (PCIB) to secure a loan of Pl ,700,000.00. Mover failed to
pay its loan and PCIB foreclosed on the mortgage. After title was consolidated in PCIB, the
Registry of Deeds of Quezon City issued Transfer Certificate of Title (TCT) No. 86389 to the
said bank on May 17, 1993.4
Sometime in mid-1994, PCIB advertised the aforesaid lot for sale in the newspapers. This
prompted the Sunnyside Heights Homeowners Association (SI-IHA) to file before the
Housing and Land Use Regulatory Board (I-ILURB) a letter-complaint,5 docketed as HLURB
Case No. REM-091594-6077, to declare the mortgage between Mover and PCIB void on the
ground that the subject property, originally covered by TCT No. 366219, has been allocated
as SHJ-IA's open space pursuant to law. SHI-IA thus sought reconveyance of the property.6
In its Answer,7 PCIB maintained that the mortgaged lot is different from the lot referred to
in SHI-IA's complaint, and moreover, the title to the said mortgaged lot bears no annotation
that it has been reserved as open space. Claiming to be an innocent mortgagee in good faith
and for value, PCIB insisted that under Batas Pambansa Bilang 1298 and Presidential Decree
(P.D.) No. 1344,9 the complaint should have been filed with the regular courts.
CIVIL LAW REVIEW 2

2
On August 28, 1995, the BLURB Arbiter dismissed SHHA's complaint for lack of cause of
action.10 He found that, per the records of the BLURB, the property claimed by SHI-IA to be
an open space is covered by TCT No. 223475, which is not the same as the property
originally covered by TCT No. 366219 in the name of Mover, and now titled to PClB, viz:
There is no explanation or allegation, much less proof, that TCT [N]o. 366219 registered in
the name of respondent Mover and subsequently registered as TCT [N]o. 8638[9] in the
name of respondent PCIB, and TCT [N]o. 223475 as identified in the letter of the Technical
Services Section of this Office, refer to one and the same property.
From the foregoing, it has therefore not been established that the property of respondent
Mover covered by TCT [N]o. 366219 which had been mortgaged and been foreclosed by
respondent PCIB, is the very same property identified as Lot 5, Block 10 and covered by TCT
No. 223475, that was allocated as open space for Sum1yside Heights Subdivision. The
complaint therefore must necessarily fail as it failed to state a cause of action x x x.11
Petition for Review to the HLURB Board of Commissioners
On petition for review to the HLURB Board of Commissioners,12 SHHA presented a

certification from the HLURB Expanded National Capital Region Field Office showing that on
May 18, 1987 the HLURB had approved an alteration in the subdivision plan whereby the
former Block 10, the subdivision's open space, had been renamed as Block 7, now covered
by TCT No. 366219:
Upon review of our records on file, lot 5, block 10 was [an] open space covered by TCT No.
223475; however, in view of the HL[U]RB's grant of Alteration of Plan elated 18 May 1987,
on which subject property was involved, the boundaries of above[-]mentioned open space
are [sic] modified resulting to be identified as Block 7 of consolidation subdivision plan Pcs-
000990 covered by TCT No. 366219. xx x.13
In its Decision14 dated September 6, 1996, the HLURB Board of Commissioners held that Lot
5, Block 10 (TCT No. 223475), the designated open space in the original subdivision plan,
became Block 7 (TCT No. 366219) in the altered plan; that the said new Block 7 was
mortgaged to PCIB; that by reason of foreclosure, PCIB became the owner of Block 7 (now
covered by TCT No. 86389 in PCIB's name); that TCT Nos. 223475, 366219 and 86389 all
refer to one and the same property. Concluding that the subject matter of the mortgage and
foreclosure in question was the designated open space of Sunnyside Heights
Subdivision,15 it ruled that the said open space, originally covered by TCT No. 366219, and
now registered in the name of PCIB, can neither be mortgaged nor foreclosed, being
inalienable, non-buildable and beyond the commerce of man. The HLURB Board of
Commissioners thus ordered, as follows:
WHEREFORE, the decision of the Office below dated August 28, 1995 is hereby SET ASIDE
and a new decision entered as follows:
1. Declaring subject mortgage and for[e]closure as null and void;
2. Declaring Block 7 of Phase I, Sunnyside Heights, Batasan Hills, Quezon City as the
designated open space of the aforesaid project;
CIVIL LAW REVIEW 2

3
3. Ordering the Register of Deeds of Quezon City to cancel TCT No. 8638[9] in the name of
respondent PCIB and to issue a new title in the name of respondent Mover;
4. Ordering respondent Mover to comply with Section 31 of P.D. 957 as amended by Section
2 of P.D. 1216; and
5. Ordering respondent Mover to pay back the amount of Pl,700,000.00 to respondent PCIB.
Let a copy of this decision be furnished the Register of Deeds of Quezon City for his/her
guidance and appropriate action.
SO ORDERED.16
Appeal to the Office of the President
After its motion for reconsideration was denied, PCIB appealed to the OP. Mover did not
appeal.17 In the Decision18dated November 22, 2007, the OP found no merit in the appeal,
ruling that the HLURB has jurisdiction over matters related to or connected with the
complaint for annulment of mortgage, as in this case.
Meanwhile, in 2000 PCIB merged with Equitable Banking Corporation to become the
Equitable PCIBank. In May 2001, it merged with Banco de Oro Universal Bank and became
the Banco de Oro-EPCI, Inc.; now it is known as Banco de Oro Unibank, Inc. (BDO).
Petition for Review to the CA
In the petition for review filed with the CA,19 Banco de Oro-EPCI, Inc. alleged that:
THE [OP] SERIOUSLY ERRED IN DISMISSING THE APPEAL ON THE POLLOWING GROUNDS:
I. THE [HLURB] HAS NO JURISDICTION OVER ACTIONS FOR ANNULMENT OF TITLE;
II. PCIB IS A MORTGAGEE IN GOOD FAITH, THEREFORE, ITS TITLE OVER THE SAID
PROPERTY CANNOT BE ANNULLED;
III. NEW EVIDENCE CANNOT BE ADMITTED ON APPEAL, OTHERWISE IT VIOLATES THE

RULE ON DUE PROCESS OF LAW; and
IV. OBLIGATION OF [MOVER] THAT IS SECURED BY THE REAL ESTATE MORTGAGE IS

MORE THAN THE PRINCIPAL AMOUNT OF Phpl,700,000.00.20
Banco de Oro-EPCI, Inc. alleged in the main that the HLURB has no jurisdiction over SHHA's
letter-complaint to annul the mortgage between Mover and PCIB. In the event that the
nullification of the mortgage is affirmed, it conceded that it was but fair that the mortgagor
be also adjudged to pay interest on the principal loan plus costs incurred.21
On March 11, 2011, the CA rendered the assailed judgment ruling that "[t]he jurisdiction of
the HLURB to regulate the real estate trade is broad enough to include jurisdiction over
CIVIL LAW REVIEW 2

4
complaints for annulment of mortgage."22 The CA further noted Banco de Oro-EPCI, Inc. 's
argument that Mover's obligation was more than the principal amount of Pl,700,000.00.
While the CA could not give credence to Banco de Oro-EPCI, Inc.'s allegations of expenses it
incurred, it acknowledged that Mover was indebted to Banco de Oro-EPCI, Inc. in the
amount of Pl,700,000.00 as pointed out in the decision of the HLURB Board of
Commissioners. Inasmuch as the amount represents a loan, Mover must also be held liable
for the payment of interest at the rate stipulated in the mortgage contract. In the absence
thereof, the legal rate of 12% per annum in accordance with Eastern Shipping Lines, Inc. v.
CA23 shall be imposed.24
Accordingly, the fallo reads as follows:
WHEREFORE, the Petition is DENIED. The Decision, dated November 22, 2007, of the Oflice
of the President in O.P. Case No. 97-E-8033 is hereby AFFIRMED, with the modification that
Mover Enterprises, Inc. is held liable to pay the corresponding interest o[n] its mortgage
indebtedness to Petitioner Banco de Oro-EPCI Inc., in addition to its payment of the
principal amount of Php1, 700,000.00 to Banco de Oro-EPCI Inc.
SO ORDERED.25
Banco de Oro-EPCI, Inc. moved for reconsideration,26 but the same was denied on
September 23, 2011.27
Petition for Review to the Supreme Court
Now in this petition, BDO raises the following grounds, to wit:
I.
THE [CA] HAS SO FAR DEPARTED FROM THE USUAL COURSE OF JUDICIAL PROCEEDINGS
IN ITS QUESTIONED DECISION AND RESOLUTION WHEN IT AFFIRMED THE DECISIONS OF
THE [OP] AND HLURB BOARD DESPITE THE UNDISPUTED FACT THAT THE LATTER WAS
BASED ON NEW EVIDENCE RAISED FOR THE FIRST TIME BY [SHHA] ON APPEAL IN
VIOLATION OF THE RIGHT OF [BOO] TO DUE PROCESS OF LAW.
II.
THE [CA] COMMITTED SERIOUS AND REVERSIBLE ERROR AND DECIDED A MATTER OF
SUBSTANCE IN A WAY NOT IN ACCORD WITH THE LAW AND WITH APPLICABLE
DECISIONS OF THE HONORABLE COURT WHEN IT DID NOT HOLD THAT [BDO] IS A
MORTGAGEE IN GOOD FAITH AS IT HAD THE RIGHT TO RELY ON THE TITLE PRESENTED
TO IT; THUS, ITS TITLE OVER THE SUBJECT PROPERTY CANNOT BE ANNULLED.
III.
THE [CA] HAS SO FAR DEPARTED FROM THE USUAL COURSE OF JUDICIAL PROCEEDINGS
WHEN ITS QUESTIONED DECISION AND RESOLUTION DENIED [BDO'S] PETITION FOR
REVIEW DESPITE THE FACT THAT THE HLURB DOES NOT HAVE JURISDICTION OVER THE
INSTANT CASE.28
CIVIL LAW REVIEW 2

5
The Court finds no merit in the petition.
Importantly, BDO has interposed a continuing objection concerning the HLURB's

jurisdiction over what it claims to be the exclusive province of the regular courts.
Corollarily, BDO insists that no evidence was presented before the HLURB Arbiter to
establish that the property covered by TCT No. 223475, claimed by SHHA as a subdivision
open space, is in any way related to TCT No. 366219 registered in the name of Mover and
now covered by TCT No. 86389 in the name of BDO (then PCIB).
Section 3 of P.D. No. 95729 granted to the National Housing Authority (NBA) exclusive
jurisdiction to regulate the real estate trade and business in order to curb swindling and
fraudulent manipulations by unscrupulous subdivision and condominium sellers and
operators, such as failure to deliver titles to the buyers or titles free from liens and
encumbrances, or to pay real estate taxes, and fraudulent sales of the same subdivision lots
to different innocent purchasers for value. P.D. No. 1344 in turn expanded the jurisdiction of
the NBA to include the following:
SECTION 1. In the exercise of its functions to regulate the real estate trade and business and
in addition to its powers provided for in Presidential Decree No. 957, the National Housing
Authority sl1all have exclusive jurisdiction to hear and decide cases of the following nature:
a) Unsound real estate business practices;
b) Claims involving refund and any other claims filed by subdivision lot or condominium
unit buyer against the project owner, developer, dealer, broker or salesman; and
c) Cases involving specific performance of contractual and statutory obligations filed by

buyers of subdivision lot or condominium unit against the owner, developer, dealer, broker
or salesman.
Under Executive Order (E.O.) No. 648, which reorganized the Human Settlements
Regulatory Commission in 1981, the regulatory and quasi-judicial functions of the NHA
were transferred to the Human Settlements Regulatory Commission, later renamed as
HLURB under E.O. No. 90.30 In the cases reaching this Court, the consistent ruling has been
that the HLURB has jurisdiction over complaints arising from contracts between the
subdivision developer and the lot buyer, or those aimed at compelling the
developer to comply with its contractual and statutory obligations.31
SHHA's letter-complaint puts in issue the validity of the mortgage over Block 10, now
renamed as Block 7, of Sunnyside Heights Subdivision, and the detriment and prejudice to
the residents and the violation by Mover of its obligation to maintain its open space under
P.D. No. 121632 are all too plain, as the following "whereas" clauses of P.D. No. 1216
underscore:
WHEREAS, there is a compelling need to create and maintain a healthy environment in

human settlements by providing open spaces, roads, alleys and sidewalks as may be
deemed suitable to enhance the quality of life of the residents therein;
CIVIL LAW REVIEW 2

6
WHEREAS, such open spaces, roads, alleys and sidewalks in residential subdivision are for
public use and are, therefore, beyond the commerce of men[.]
Section 1 of P.D. No. 1216 defines "open space" as an area in the subdivision reserved
exclusively for parks, playgrounds, recreational uses, schools, roads, places of worship,
hospitals, health centers, barangay centers and other similar facilities and amenities.
Section 2 thereof further provides that these reserved areas are non-alienable and non-
buildable. The SHHA was correct to seek the annulment of the mortgage between Mover
and PCIB before the HLURB, in view of its exclusive jurisdiction over "any claims filed by
subdivision lot or condominium unit buyer against the project owner, developer, dealer, broker
or salesman; and cases involving specific performance of contractual and statutory obligations
filed by buyers of subdivision lot or condominium unit against the owner or developer. "
As for the claim that SHHA violated BDO's right to due process when on appeal it "belatedly"
presented a certification to the HLURB Board of Commissioners that in May 1987 an
approved alteration of the subdivision plan renamed Block 10 of Sunnyside Heights
Subdivision as Block 7 but retained it as open space, let it suffice that in view of BDO's
continuing objection to HLURB 's jurisdiction, it cannot now complain that additional
documentary proof has been adduced confirming its jurisdiction. As the agency tasked to
oversee the specific compliance by developers with their contractual and statutory
obligations, such as maintaining the open space as non-alienable and non-buildable, there is
no doubt that the HLURB is empowered to annul the subject mortgage. For if a party may
continually interpose the HLURB's lack of jurisdiction, even raising the same for the first
time on appeal, since jurisdictional issues cannot be waived, then BDO is estopped to
complain that on appeal SHHA is finally able to present proof of HLURB's jurisdiction over
the present action.33
The Court has long recognized and upheld the rationale behind P.D. No. 957, which is to
protect innocent lot buyers from scheming developers,34 buyers who are by law entitled to
the enjoyment of an open space within the subdivision.1âwphi1 Thus, this Court has broadly
construed HLURB's jurisdiction to include complaints to annul mortgages of condominium
or subdivision units.35 In The Manila Banking Corp. v. Spouses Rabina, et al.,36 the Court said:
The jurisdiction of the HLURB to regulate the real estate trade is broad enough to include
jurisdiction over complaints for annulment of mortgage. To disassociate the issue of nullity
of mortgage and lodge it separately with the liquidation court would only cause
inconvenience to the parties and would not serve the ends of speedy and inexpensive
administration of justice as mandated by the laws vesting quasi-judicial powers in the
agency.37(Citations omitted)
Coming now to Mover's liability, the Court agrees with the observation of the HLURB Board
of Commissioners that it would be unjust enrichment on the part of Mover not to
acknowledge its indebtedness to BDO in the amount of Pl,700,000.00 in view of the nullity
of the mortgage.38 It should have known that its mortgage security was invalid considering
the alteration in its subdivision plan in May 1987. In equity, it must therefore compensate
PCIB for the loss thereat: reckoned from the filing of SHHA's letter-complaint on September
14, 1994. Eastern Shipping Lines, Inc.39 provides, "with regard particularly to an award of
interest in the concept of actual and compensatory damages,"40 that the rate of interest, and
the accrual thereof shall be imposed as follows:
CIVIL LAW REVIEW 2

7
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.41(Citations omitted)
Sunga-Chan, et al. v. CA, et al.42 further clarified the above rules:
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and
the applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall
apply only to loans or forbearance of money, goods, or credits, as well as to judgments
involving such loan or forbearance of money, goods, or credit, while the. 6% per annum
under Art. 2209 of the Civil Code applies "when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay in the performance
of obligations in general," with the application of both rates reckoned "from the time the
complaint was filed until the [adjudged] amount is fully paid." In either instance, the
reckoning period for the commencement of the running of the legal interest shall be subject
to the condition "that the courts are vested with discretion, depending on the equities of
each case, on the award of interest."43 (Citations omitted and emphasis ours)
Lastly, in view of absence of bad faith by PCIB in the questioned mortgage loan, the Court
agrees that in addition to the loan amount of Pl,700,000.00, Mover should pay thereon to
BDO legal interest at 12% per annum from the time it is due pursuant to Eastern Shipping
Lines, except that with the effectivity of Monetary Board Circular No. 799, the rate of
interest for the loan shall be reduced to six percent (6o/o) per annum from and after July 1,
2013.44
WHEREFORE, the petition is DENIED. The Decision dated March 11, 2011 of the Court of
Appeals in CA-G.R. SP No. 101740 is AFFIRMED with CLARIFICATION, in that Mover
Enterprises, Inc. shall pay Banco de Oro-EPCI, Inc., now Banco de Oro Unibank, Inc., the
amount of'Pl,700,000.00 plus legal interest at twelve percent (12%) per annum from
September 14, 1994, the date of the letter-complaint of Sunnyside Heights Homeowners
Association, Inc., the said rate to be reduced to six percent (6o/o) per annum starting July 1,
2013 until finality hereof. Thereafter, interest as thus computed shall, along with the
principal, earn interest at six percent (6%) per annum until fully paid.
CIVIL LAW REVIEW 2

8

13.
THIRD DIVISION
January 13, 2016
G.R. No. 176986
NISSAN CAR LEASE PHILS., INC., Petitioner,

vs.
LICA MANAGEMENT, INC. and PROTON PILIPINAS, INC., Respondents.
D E C I S I O N
JARDELEZA, J.:
This is a Petition for Review on Certiorari1 filed by Nissan Car Lease Philippines, Inc.
(NCLPI) to assail the Decision2and Resolution3 dated September 27, 2006 and March 8,
2007, respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 75985. The CA affirmed
with modification the Decision4 of the Regional Trial Court dated June 7, 2002 and ruled
that there was a valid extrajudicial rescission of the lease contract between NCLPI and Lica
Management, Inc. (LMI). It also ordered NCLPI to pay its unpaid rentals and awarded
damages in favor of LMI and third-party respondent Proton Pilipinas, Inc. (Proton).
The Facts
LMI is the absolute owner of a property located at 2326 Pasong Tamo Extension, Makati
City with a total area of approximately 2,860 square meters.5 On June 24, 1994, it entered
into a contract with NCLPI for the latter to lease the property for a term of ten (10) years (or
from July 1, 1994 to June 30, 2004) with a monthly rental of ₱308,000.00 and an annual
escalation rate of ten percent (10%).6 Sometime in September 1994, NCLPI, with LMI’s
consent, allowed its subsidiary Nissan Smartfix Corporation (NSC) to use the leased
premises.7
Subsequently, NCLPI became delinquent in paying the monthly rent, such that its total
rental arrearages8 amounted to ₱1,741,520.85.9 In May 1996, Nissan and Lica verbally
agreed to convert the arrearages into a debt to be covered by a promissory note and twelve
(12) postdated checks, each amounting to ₱162,541.95 as monthly payments starting June
1996 until May 1997.10
While NCLPI was able to deliver the postdated checks per its verbal agreement with LMI, it
failed to sign the promissory note and pay the checks for June to October 1996. Thus, in a
letter dated October 16, 1996, which was sent on October 18, 1996 by registered mail, LMI
informed NCLPI that it was terminating their Contract of Lease due to arrears in the
payment of rentals. It also demanded that NCLPI (1) pay the amount of ₱2,651,570.39 for
unpaid rentals11 and (2) vacate the premises within five (5) days from receipt of the
notice.12
CIVIL LAW REVIEW 2

9
In the meantime, Proton sent NCLPI an undated request to use the premises as a temporary
display center for "Audi" brand cars for a period of ten (10) days. In the same letter, Proton
undertook "not to disturb [NCLPI and LMI’s] lease agreement and ensure that [NCLPI] will
not breach the same [by] lending the premises x x x without any consideration."13 NCLPI
acceded to this request.14
On October 11, 1996, NCLPI entered into a Memorandum of Agreement with Proton
whereby the former agreed to allow Proton "to immediately commence renovation work
even prior to the execution of the Contract of Sublease x x x."15 In consideration, Proton
agreed to transmit to NCLPI a check representing three (3) months of rental payments, to
be deposited only upon the due execution of their Contract of Sublease.16
In a letter dated October 24, 1996, NCLPI, through counsel, replied to LMI’s letter of October
16, 1996 acknowledging the arrearages incurred by it under their Contract of Lease.
Claiming, however, that it has no intention of abandoning the lease and citing efforts to
negotiate a possible sublease of the property, NCLPI requested LMI to defer taking court
action on the matter.17
LMI, on November 8, 1996, entered into a Contract of Lease with Proton over the subject
premises.18
On November 12, 1996, LMI filed a Complaint19 for sum of money with damages seeking to
recover from NCLPI the amount of ₱2,696,639.97, equivalent to the balance of its unpaid
rentals, with interest and penalties, as well as exemplary damages, attorney’s fees, and costs
of litigation.20
On November 20, 1996, NCLPI demanded Proton to vacate the leased premises.21 However,
Proton replied that it was occupying the property based on a lease contract with LMI.22 In a
letter of even date addressed to LMI, NCLPI asserted that its failure to pay rent does not
automatically result in the termination of the Contract of Lease nor does it give LMI the
right to terminate the same.23 NCLPI also informed LMI that since it was unlawfully ousted
from the leased premises and was not deriving any benefit therefrom, it decided to stop
payment of the checks issued to pay the rent.24
In its Answer25 and Third-Party Complaint26 against Proton, NCLPI alleged that LMI and
Proton "schemed" and "colluded" to unlawfully force NCLPI (and its subsidiary NSC) from
the premises. Since it has not abandoned its leasehold right, NCLPI asserts that the lease
contract between LMI and Proton is void for lack of a valid cause or consideration.27 It
likewise prayed for the award of: (1) ₱3,000,000.00, an amount it anticipates to lose on
account of LMI and Proton’s deprivation of its right to use and occupy the premises; (2)
₱1,000,000.00 as exemplary damages; and (3) ₱500,000.00 as attorney’s fees, plus
₱2,000.00 for every court appearance.28
The trial court admitted29 the third-party complaint over LMI’s opposition.30
Subsequently, or on April 17, 1998, Proton filed its Answer with Compulsory Counterclaim
against NCLPI.31According to Proton, the undated letter-request supposedly sent by Proton
to NCLPI was actually prepared by the latter so as to keep from LMI its intention to sublease
the premises to Proton until NCLPI is able to secure LMI’s consent.32 Denying NCLPI’s
CIVIL LAW REVIEW 2

0
allegation that its use of the lease premises was made without any consideration, Proton
claims that it "actually paid [NCLPI] rental of ₱200,000.00 for the use of subject property for
10 days x x x."33
Proton further asserted that NCLPI had vacated the premises as early as during the
negotiations for the sublease and, in fact, authorized the former to enter the property and
commence renovations.34 When NCLPI ultimately failed to obtain LMI’s consent to the
proposed sublease and its lease contract was terminated, Proton, having already incurred
substantial expenses renovating the premises, was constrained to enter into a Contract of
Lease with LMI. Thus, Proton prayed for the dismissal of the Third-Party Complaint, and
asked, by way of counterclaim, that NCLPI be ordered to pay exemplary damages, attorney’s
fees, and costs of litigation.35
Ruling of the Trial Court
On June 7, 2002, the trial court promulgated its Decision,36 the decretal portion of which
reads:
WHEREFORE, in view of the foregoing, judgment is rendered in plaintiff LICA

MANAGEMENT INCORPORATED’s favor. As a consequence of this, defendant NISSAN CAR
LEASE PHILIPPINES, INC. is directed to pay plaintiff the following:
1.) [₱]2,696,639.97 representing defendant’s unpaid rentals inclusive of interest and

penalties up to 12 November 1996, plus interest to be charged against said amount at the
rate of twelve percent (12%) beginning said date until the amount is fully paid.
2.) Exemplary damages and attorney’s fees amounting to Two Hundred Thousand Pesos
([₱]200,000.00) and litigation expenses amounting to Fifty Thousand Pesos ([₱]50,000.00).
The third party complaint filed by defendant is DENIED for lack of merit and in addition to
the foregoing and as prayed for, defendant NISSAN is ordered to pay third party defendant
PROTON PILIPINAS INC. the sum of Two Hundred Thousand Pesos ([₱]200,000.00)
representing exemplary damages and attorney’s fees due.
SO ORDERED.37
The trial court found that NCLPI purposely violated the terms of its contract with LMI when
it failed to pay the required rentals and contracted to sublease the premises without the
latter’s consent.38 Under Article 1191 of the Civil Code, LMI was therefore entitled to rescind
the contract between the parties and seek payment of the unpaid rentals and damages.39 In
addition, the trial court ruled that LMI’s act of notifying NCLPI of the termination of their
lease contract due to non-payment of rentals is expressly sanctioned under paragraphs
1640 and 1841 of their contract.42
Contrary to NCLPI’s claim that it was "fooled" into allowing Proton to occupy the premises
for a limited period after which the latter unilaterally usurped the premises for itself, the
trial court found that it was NCLPI "which misrepresented itself to [Proton] as being a
lessee of good standing, so that it could induce the latter to occupy and renovate the
CIVIL LAW REVIEW 2

1
premises when at that time the negotiations were underway the lease between [LMI] and
[NCLPI] had already been terminated."43
Aggrieved, NCLPI filed a Petition for Review with the CA. In its Appellant’s Brief,44 it argued
that the trial court erred in: (1) holding that there was a valid extrajudicial rescission of its
lease contract with LMI; and (2) dismissing NCLPI’s claim for damages against LMI and
Proton while at the same time holding NCLPI liable to them for exemplary damages and
attorney’s fees.45
Ruling of the Court of Appeals
The CA denied NCLPI’s appeal and affirmed the trial court’s decision with modification. The
decretal portion of the CA’s Decision46 reads:
WHEREFORE, the appealed Decision dated June 7, 2002 of the trial court is affirmed,
subject to modification that:
(1) The award of exemplary damages of ₱100,000.00 each in favor of plaintiff-appellee and
third-party defendant-appellee is reduced to ₱50,000.00 each;
(2) The award of attorney’s fees of ₱100,000.00 each in favor of plaintiff-appellee and third-
party defendantappellee is reduced to ₱50,000.00 each;
(3) The amount of unpaid rentals is reduced from ₱2,696,639.97 to ₱2,365,569.61,

exclusive of interest; and,
(4) Plaintiff-appellee is ordered to return the balance of the security deposit amounting to
₱883,253.72 to defendant-appellant.
The Decision dated June 7, 2002 is affirmed in all other respects.
SO ORDERED.47
NCLPI sought for a reconsideration48 of this decision. LMI, on the other hand, filed a motion
to clarify whether the amount of ₱2,365,569.61 representing unpaid rentals was inclusive
of interest.49 The CA resolved both motions, thus:
WHEREFORE, the motion for reconsideration filed by defendant-appellant Nissan Car Lease
is denied for lack of merit.
With respect to the motion for clarification filed by plaintiff-appellee Lica Management, Inc.,
paragraph (3) of the dispositive portion of the Decision is hereby clarified to read as
follows:
(3) The amount of unpaid rentals is reduced from ₱2,696,639.97 to ₱2,365,569.61, inclusive
of interest and penalties up to November 12, 1996, plus interest to be charged against said
amount at the rate of twelve per cent (12%) beginning said date until the amount is fully
paid.
CIVIL LAW REVIEW 2

2
SO ORDERED.50
Hence, this petition.
The Petition
NCLPI, in its Petition, raises the following questions:
1. May a contract be rescinded extrajudicially despite the absence of a special contractual

stipulation therefor?
2. Do the prevailing facts warrant the dismissal of [LMI]’s claims and the award of NCLPI’s
claims?
3. How much interest should be paid in the delay of the release of a security deposit in a
lease contract?51
We deny the Petition for lack of merit.
Before going into the substantive merits of the case, however, we shall first resolve the
technical issue raised by LMI in its Comment52 dated August 22, 2007.
According to LMI, NCLPI’s petition must be denied outright on the ground that Luis Manuel
T. Banson (Banson), who caused the preparation of the petition and signed the Verification
and Certification against Forum Shopping, was not duly authorized to do so. His apparent
authority was based, not by virtue of any NCLPI Board Resolution, but on a Special Power of
Attorney (SPA) signed only by NCLPI’s Corporate Secretary Robel C. Lomibao.53
As a rule, a corporation has a separate and distinct personality from its directors and
officers and can only exercise its corporate powers through its board of directors. Following
this rule, a verification and certification signed by an individual corporate officer is
defective if done without authority from the corporation’s board of directors.54
The requirement of verification being a condition affecting only the form of the
pleading,55 this Court has, in a number of cases, held that:
[T]he following officials or employees of the company can sign the verification and
certification without need of a board resolution: (1) the Chairperson of the Board of
Directors, (2) the President of a corporation, (3) the General Manager or Acting General
Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case.
x x x [T]he determination of the sufficiency of the authority was done on a case to case
basis. The rationale applied in the foregoing cases is to justify the authority of
corporate officers or representatives of the corporation to sign x x x, being "in a
position to verify the truthfulness and correctness of the allegations in the
CIVIL LAW REVIEW 2

3
petition."56 (Emphasis and underscoring supplied)
In this case, Banson was President of NCLPI at the time of the filing of the petition.57 Thus,
and applying the foregoing ruling, he can sign the verification and certification against
forum shopping in the petition without the need of a board resolution.58
Having settled the technical issue, we shall now proceed to discuss the substantial issues.
Validity of Extrajudicial Rescission of Lease Contract
It is clear from the records that NCLPI committed substantial breaches of its Contract of
Lease with LMI.
Under Paragraph 2, NCLPI bound itself to pay a monthly rental of ₱308,000.00 not later
than the first day of every month to which the rent corresponds. NCLPI, however, defaulted
on its contractual obligation to timely and properly pay its rent, the arrearages of which, as
of October 16, 1996, amounted to ₱2,651,570.39.59 This fact was acknowledged and
admitted by NCLPI.60
Aside from non-payment of rentals, it appears that NCLPI also breached its obligations
under Paragraphs 461 and 562 of the Contract of Lease which prohibit it from subleasing the
premises or introducing improvements or alterations thereon without LMI’s prior written
consent. The trial court found:
As revealed from the evidence presented by PROTON however, even before [NCLPI]
represented that it would try to negotiate a possible sub-lease of the premises, it
had, without any semblance of authority from [LMI,] already effectively subleased the
subject premises to PROTON and allowed the latter not only to enter the premises but
to renovate the same.
[NCLPI]’s assertion that they only allowed PROTON to utilize the premises for ten days as a
display center for Audi cars on the occasion of the historic visit of Chancellor Helmut Kohl of
Germany to the Philippines is belied by the evidence offered by PROTON that by virtue
of a Memorandum of Agreement [NCLPI] had already permitted PROTON "to
immediately commence renovation work even prior to the execution of the Contract
of Sublease" and had accepted a check from PROTON representing the rental deposit
under the yet to be executed Contract of Sublease. x x x
x x x x
Besides, the court is not inclined to show [NCLPI] any sympathy x x x because it came to
court with unclean hands when it accused [LMI] and PROTON of being guilty parties
when they supposedly connived with each other to oust [NCLPI] from the leased
premises when in truth and in fact, [NCLPI]’s lease was already terminated when it
pursued negotiations to sub-lease the premises to PROTON then giving the latter the
assurance they would be able to obtain [LMI]’s consent to the sublease when this was very
remote, in light of [NCLPI]’s failure to update its rental payments.63 (Emphasis and
underscoring supplied)
CIVIL LAW REVIEW 2

4
This factual finding was affirmed by the CA:
There is no merit in [NCLPI]’s claim for damages allegedly arising from [LMI]’s failure to
maintain it in peaceful possession of the leased premises. It was [NCLPI] who breached
the lease contract by defaulting in the payment of lease rentals, entering into a sublease
contract with [Proton] and allowing [Proton] to introduce renovations on the leased
premises without the consent of [LMI].64 x x x (Emphasis supplied)
Factual findings of the CA are binding and conclusive on the parties and upon this Court and
will not be reviewed or disturbed on appeal. While the rule admits of certain
exceptions,65 NCLPI failed to prove that any of the exceptions applies in this case.
The crux of the controversy rather revolves around the validity of LMI’s act of
extrajudicially rescinding its Contract of Lease with NCLPI.
NCLPI maintains that while a lessor has a right to eject a delinquent lessee from its
property, such right must be exercised in accordance with law:
6.15. In this case, [LMI] did not comply with the requirement laid down in Section 2 of Rule
70 of the Rules of Court, in unceremoniously ejecting [NCLPI] from the property. The said
Rule explicitly provides that the lessor shall serve a written notice of the demand to pay or
comply with the conditions of the lease and to vacate or post such notice on the premises if
no person is found thereon, giving the lessee 15 days to comply with the demand. [LMI]’s
demand letter dated 16 October 1996 provides only a period of five days for [NCLPI] to
comply with such demand and, thus, defective.66 (Emphasis and underscoring supplied)
NCLPI’s reliance on Section 2, Rule 7067 in this case is misplaced.
Rule 70 of the Rules of Court sets forth the procedure in relation to the filing of suits for
forcible entry and unlawful detainer. The action filed by LMI against NCLPI, however, is one
for the recovery of a sum of money. Clearly, Section 2 of Rule 70 is not applicable.
In fact, it does not appear that it was even necessary for LMI to eject NCLPI from the leased
premises. NCLPI had already vacated the same as early as October 11, 1996 when it
surrendered possession of the premises to Proton, by virtue of their Memorandum of
Agreement, so that the latter can commence renovations.68
NCLPI also maintains that LMI cannot unilaterally and extrajudicially rescind their Contract
of Lease in the absence of an express provision in their Contract to that effect.69 According to
NCLPI:
6.1. The power to rescind is judicial in nature x x x
6.2. Nevertheless, the Supreme Court has allowed extrajudicial rescission if such remedy is
specifically provided for in the contract. A provision granting the nondefaulting party
merely a right to rescind would be superfluous because by law, it is inherent in such
contract [see by analogy Villanueva, PHILIPPINE LAW ON SALES, P. 238 (1998)].
x x x x
CIVIL LAW REVIEW 2

5
6.4. [Paragraph 16],70 however, cannot be construed as an authority for either party to
unilaterally and extrajudicially rescind the Lease Contract in case of breach by the other
party. All that [Paragraph] 16 affords the aggrieved party is merely the right to rescind the
lease contract, which is the very same right already granted under Article 1191 of the Civil
Code.71 (Emphasis and underscoring in the original)
It is true that NCLPI and LMI’s Contract of Lease does not contain a provision expressly
authorizing extrajudicial rescission. LMI can nevertheless rescind the contract, without
prior court approval, pursuant to Art. 1191 of the Civil Code.
Art. 1191 provides that the power to rescind is implied in reciprocal obligations, in cases
where one of the obligors should fail to comply with what is incumbent upon him.
Otherwise stated, an aggrieved party is not prevented from extrajudicially rescinding a
contract to protect its interests, even in the absence of any provision expressly providing for
such right.72 The rationale for this rule was explained in the case of University of the
Philippines v. De los Angeles73 wherein this Court held:
[T]he law definitely does not require that the contracting party who believes itself injured
must first file suit and wait for a judgment before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other's breach will have to passively sit
and watch its damages accumulate during the pendency of the suit until the final
judgment of rescission is rendered when the law itself requires that he should
exercise due diligence to minimize its own damages (Civil Code, Article 2203).
(Emphasis and underscoring supplied)
We are aware of this Court’s previous rulings in Tan v. Court of Appeals,74 Iringan v. Court of
Appeals,75 and EDS Manufacturing, Inc. v. Healthcheck International, Inc.,76 for example,
wherein we held that extrajudicial rescission of a contract is not possible without an
express stipulation to that effect.77
The seeming "conflict" between this and our previous rulings, however, is more apparent
than real.
Whether a contract provides for it or not, the remedy of rescission is always available as a
remedy against a defaulting party. When done without prior judicial imprimatur, however,
it may still be subject to a possible court review. In Golden Valley Exploration, Inc. v. Pinkian
Mining Company,78 we explained:
This notwithstanding, jurisprudence still indicates that an extrajudicial rescission based

on grounds not specified in the contract would not preclude a party to treat the same
as rescinded. The rescinding party, however, by such course of action, subjects himself to
the risk of being held liable for damages when the extrajudicial rescission is questioned by
the opposing party in court. This was made clear in the case of U.P. v. De los Angeles, wherein
the Court held as follows:
Of course, it must be understood that the act of a party in treating a contract as

cancelled or resolved on account of infractions by the other contracting party must be
made known to the other and is always provisional, being ever subject to scrutiny
and review by the proper court. If the other party denies that rescission is justified, it
CIVIL LAW REVIEW 2

6
is free to resort to judicial action in its own behalf, and bring the matter to
court.Then, should the court, after due hearing, decide that the resolution of the
contract was not warranted, the responsible party will be sentenced to damages; in
the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to
the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in
law. x x x (Emphasis and underscoring in the original)
The only practical effect of a contractual stipulation allowing extrajudicial rescission is

"merely to transfer to the defaulter the initiative of instituting suit, instead of the
rescinder."79
In fact, the rule is the same even if the parties’ contract expressly allows extrajudicial
rescission. The other party denying the rescission may still seek judicial intervention to
determine whether or not the rescission was proper.80
Having established that LMI can extrajudicially rescind its contract with NCLPI even absent
an express contractual stipulation to that effect, the question now to be resolved is whether
this extrajudicial rescission was proper under the circumstances.
As earlier discussed, NCLPI’s non-payment of rentals and unauthorized sublease of the

leased premises were both clearly proven by the records.1avvphi1 We thus confirm LMI’s
rescission of its contract with NCLPI on account of the latter’s breach of its obligations.
Rental Arrearages and Interest
Having upheld LMI’s extrajudicial rescission of its Contract of Lease, we hold that NCLPI is
required to pay all rental arrearages owing to LMI, computed by the CA as follows:
In its appellant’s brief, [NCLPI] admitted that it had rental arrears of ₱1,300,335.60 as of
May 1996.1âwphi1 Additionally, the statement of account submitted by [LMI] showed
that from June 1996 to October 1996 the rental arrears of [NCLPI] amounted to
₱1,065,234.01. Hence, the total of said rental arrears not disputed by the parties is
₱2,365,569.61 x x x.81 (Emphasis and underscoring supplied)
The Contract of Lease shows that the parties did not stipulate an applicable interest rate in
case of default in the payment of rentals. Thus, and following this Court’s ruling in Nacar v.
Gallery Frames,82 the foregoing amount of rental arrearages shall earn interest at the rate of
six percent (6%) per annum computed from October 18, 1996, the date of LMI’s
extrajudicial demand,83 until the date of finality of this judgment. The total amount shall
thereafter earn interest at the rate of six percent (6%) per annum from such finality of
judgment until its satisfaction.
Security Deposit
CIVIL LAW REVIEW 2

7
NCLPI also argues that, assuming LMI could validly rescind their Contract of Lease, the
security deposit must be returned, with interest at the rate of twelve percent (12%) per
annum, the obligation to return being in the nature of a forbearance of money.84
NCLPI is partly correct.
Paragraph 385 of the Contract of Lease provides that, in case of termination of the lease, the
balance of the security deposit must be returned to NCLPI within seven (7) days. Since
"there is no question that [LMI] is retaining the security deposit" in the amount of
₱883,253.72 (after deduction of the expenses for water and telephone services),86LMI must
return the same to NCLPI, with interest.
Considering, however, that the Contract of Lease does not stipulate an applicable interest
rate, again following our ruling in Nacar, the rate shall be six percent (6%) from the time
of judicial or extrajudicial demand. The records of this case show that the first time NCLPI
raised the issue on the security deposit was in its Brief dated March 25, 2003 filed with the
CA.87 Thus, the interest should be computed starting only on said date until the finality of
this Decision, after which the total amount shall earn interest at the rate of six percent (6%)
from the finality of this Decision until satisfaction by LMI.88
Improvements
In its Petition, NCLPI also prayed for the return of "all the equipment installed and the other
improvements on the property, or their value, pursuant to the mandate of mutual
restitution."89
NCLPI errs.
Under Paragraph 5 of the Contract of Lease, NCLPI is entitled only to the return of those
improvements introduced by it which can be removed without causing damage to the
leased premises.90 Considering, however, that the issue of ownership of the improvements
within the premises appears to be subject of another case initiated by NCLPI’s subsidiary,
NSC,91 this Court will not rule on the same.
Denial of NCLPI’s claim and award of damages in favor of LMI and Proton proper
Both the trial court and CA found that NCLPI breached the Contract of Lease. In sustaining
the denial of NCLPI’s claim for damages, the CA held:
There is no merit in [NCLPI]’s claim for damages allegedly arising from [LMI]’s failure to
maintain it in peaceful possession of the leased premises. It was [NCLPI] who breached the
lease contract x x x Moreover, the lease contract between [LMI] and [Proton] was entered
into only on November 8, 1996 x x x after the lease contract between [LMI] and [NCLPI] had
been terminated. As aptly noted by the trial court:
x x x x
In other words, while in its responsive pleading [NCLPI] claims [that] it was fooled into
allowing [Proton] to occupy the subject premises for a limited period, after which the latter,
CIVIL LAW REVIEW 2

8
in alleged collusion with [LMI] unilaterally usurped the premises for itself, the evidence
shows that it was [NCLPI] which misrepresented itself to PROTON as being a lessee of
good standing, so that it could induce the latter to occupy and renovate the premises
when at that time the negotiations were underway, the lease between [LMI] and
[NCLPI] had already been terminated.92(Emphasis and underscoring supplied)
Contrary to NCLPl's claims of an unlawful "scheme" devised by LMJ and Proton to force it
out of the leased premises, we find that it was NCLPI who was in bad faith and itself
provided the bases for the cancellation of its Contract of Lease with LMI and its eventual
ejectment from the leased premises. Accordingly, we affirm (1) the award of exemplary
damages and attorney's fees in favor of LMI and Proton and (2) the denial of NCLPI's claim
for damages.93
WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated
September 27, 2006 and the Resolution dated March 8, 2007 rendered by the CA in CA-G.R.
CV No. 75985 are, however, MODIFIED as follows:
(1) NCLP I is ordered to pay LMI and Proton exemplary damages of P50,000.00 and
attorney's fees of P50,000.00, each;
(2) NCLPI is ordered to pay the amount of P2,365,569.61 unpaid rentals, with interest at the
rate of six percent ( 6%) per annum computed from October 18, 1996 until the date of
finality of this judgment. The total amount shall thereafter earn interest at the rate of six
percent (6%) per annum from the finality of judgment until its satisfaction;
(3) LMI is ordered to return to NCLPI the balance of the security deposit amounting to
P883,253.72, with interest at the rate of six percent ( 6o/o) starting March 25, 2003 until
the finality of this Decision, after which the total amount shall earn interest at the rate of six
percent (6%) from the finality of this Decision until satisfaction by LMI.94
CIVIL LAW REVIEW 2

9

14.
THIRD DIVISION
January 13, 2016
G.R. No. 198752
ARTURO C. ALBA, JR., duly represented by his attorneys-in-fact, ARNULFO B. ALBA

and ALEXANDER C. ALBA, Petitioner,
vs.
RAYMUND D. MALAPAJO, RAMIL D. MALAPAJO and the Register of Deeds for the City
of Roxas, Respondents.
D E C I S I O N
PERALTA, J.:
Assailed in this petition for review on certiorari are the Resolution1 dated February 28,
2011 and the Resolution2dated August 31, 2011 issued by the Court of Appeals (CA) Cebu
City, in CA-G.R. SP No. 05594.
The antecedents are as follows:
On October 19, 2009, petitioner Arturo C. Alba, Jr., duly represented by his attorneys-in-fact,
Arnulfo B. Alba and Alexander C. Alba, filed with the Regional Trial Court (RTC) of Roxas
City, Branch 15, a Complaint3 against respondents Raymund D. Malapajo, Ramil D. Malapajo
and the Register of Deeds of Roxas City for recovery of ownership and/or declaration of
nullity or cancellation of title and damages alleging, among others, that he was the previous
registered owner of a parcel of land consisting of 98,146 square meters situated in Bolo,
Roxas City, covered by TCT No. T-22345; that his title was subsequently canceled by virtue
of a deed of sale he allegedly executed in favor of respondents Malapajo for a consideration
of Five Hundred Thousand Pesos (P500,000.00); that new TCT No. T-56840 was issued in
the name of respondents Malapajo; that the deed of sale was a forged document which
respondents Malapajo were the co-authors of.
Respondents Malapajo filed their Answer with Counterclaim4 contending that they were
innocent purchasers for value and that the deed was a unilateral document which was
presented to them already prepared and notarized; that before the sale, petitioner had, on
separate occasions, obtained loans from them and their mother which were secured by
separate real estate mortgages covering the subject property; that the two real estate
mortgages had never been discharged. Respondents counterclaimed for damages and for
reimbursement of petitioner's loan from them plus the agreed monthly interest in the event
that the deed of sale is declared null and void on the ground of forgery.
CIVIL LAW REVIEW 2

0
Petitioner filed a Reply to Answer and Answer to (Permissive) Counterclaim5 stating, among
others, that the court had not acquired jurisdiction over the nature of respondents'
permissive counterclaim; and, that assuming without admitting that the two real estate
mortgages are valid, the rate of five percent (5%) per month uniformly stated therein is
unconscionable and must be reduced. Respondents filed their Rejoinder6 thereto.
Petitioner filed a Motion to Set the Case for Preliminary Hearing as if a Motion to Dismiss
had been Filed7 alleging that respondents’ counterclaims are in the nature of a permissive
counterclaim, thus, there must be payment of docket fees and filing of a certification against
forum shopping; and, that the supposed loan extended by respondents’ mother to
petitioner, must also be dismissed as respondents are not the real parties-in-interest.
Respondents filed their Opposition8 thereto.
On June 4, 2010, the RTC issued an Order9 denying petitioner's motion finding that
respondents’ counterclaims are compulsory. Petitioner’s motion for reconsideration was
denied in an Order10 dated September 30, 2010.
Petitioner filed a petition for certiorari with the CA which sought the annulment of the RTC
Orders dated June 4, 2010 and September 30, 2010.
In a Resolution dated February 28, 2011, the CA dismissed the petition for certiorari saying
that there was no proper proof of service of the petition to the respondents, and that only
the last page of the attached copy of the RTC Order was signed and certified as a true copy
of the original while the rest of the pages were mere machine copies.
Petitioner filed a motion for reconsideration which the CA denied in a Resolution dated
August 31, 2011 based on the following findings:
Nevertheless, while petitioner filed with the Petition his Affidavit of Service and
incorporated the registry receipts, petitioner still failed to comply with the requirement on
proper proof of service. Post office receipt is not the required proof of service by registered
mail. Section 10, Rule 13 of the 1997 Rules of Civil Procedure specifically stated that service
by registered mail is complete upon actual receipt by the addressee, or after five (5) days
from the date he received the first notice of the postmaster, whichever is earlier. Verily,
registry receipts cannot be considered sufficient proof of service; they are merely evidence
of the mail matter with the post office of the sender, not the delivery of said mail matter by
the post office to the addressee. Moreover, Section 13, Rule 13 of the 1997 Rules of Civil
Procedure specifically stated that the proof of personal service in the form of an affidavit of
the party serving shall contain a full statement of the date, place and manner of service,
which was not true in the instant petition.11
Petitioner filed the instant petition for review raising the following assignment of errors:
I. CONTRARY TO THE ERRONEOUS RULING OF THE COURT A QUO, THE COUNTERCLAIMS

INTERPOSED BY RESPONDENTS MALAPAJO IN THEIR ANSWER WITH COUNTERCLAIM
ARE, BASED ON APPLICABLE LAW AND JURISPRUDENCE, PERMISSIVE IN NATURE, NOT
COMPULSORY, AND THEREFORE, SUCH ANSWER WITH RESPECT TO SUCH
COUNTERCLAIMS IS IN REALITY AN INITIATORY PLEADING WHICH SHOULD HAVE BEEN
ACCOMPANIED BY A CERTIFICATION AGAINST FORUM SHOPPING AND CORRESPONDING
CIVIL LAW REVIEW 2

1
DOCKET FEES, THEREFORE, SHOULD HAVE BEEN PAID, FAILING IN WHICH THE
COUNTERCLAIMS SHOULD HAVE BEEN ORDERED DISMISSED. MOREOVER, AS REGARDS
THE LOAN ALLEGEDLY EXTENDED BY THEIR MOTHER TO PETITIONER, WHICH UP TO
NOW IS SUPPOSEDLY STILL UNPAID, RESPONDENTS MALAPAJO ARE NOT THE REAL
PARTIES-IN-INTEREST AND IS, THEREFORE, DISMISSIBLE ON THIS ADDITIONAL GROUND;
and
II. THE HONORABLE COURT OF APPEALS COMMITTED A VERY SERIOUS ERROR WHEN IT
DISMISSED THE PETITION FOR CERTIORARI BASED ON PURE TECHNICALITY, THEREBY
GIVING MORE PREMIUM AND MORE WEIGHT ON TECHNICALITIES RATHER THAN
SUBSTANCE AND DISREGARDING THE MERITS OF THE PETITION.12
We find that the CA erred in denying petitioner's petition for certiorari after the latter had
clearly shown compliance with the proof of service of the petition as required under Section
13 of Rule 13 of the 1997 Rules of Civil Procedure, which provides:
Sec.13. Proof of service.
Proof of personal service shall consist of a written admission of the party served, or the
official return of the server, or the affidavit of the party serving, containing a full statement
of the date, place and manner of service. If the service is by ordinary mail, proof thereof
shall consist of an affidavit of the person mailing of facts showing compliance with section 7
of this Rule. If service is made by registered mail, proof shall be made by such affidavit and
the registry receipt issued by the mailing office. The registry return card shall be filed
immediately upon its receipt by the sender, or in lieu thereof the unclaimed letter together
with the certified or sworn copy of the notice given by the postmaster to the addressee.
Clearly, service made through registered mail is proved by the registry receipt issued by the
mailing office and an affidavit of the person mailing of facts showing compliance with the
rule. In this case, Nerissa Apuyo, the secretary of petitioner’s counsel, had executed an
affidavit13 of personal service and service by registered mail which she attached to the
petition marked as original filed with the CA. She stated under oath that she personally
served a copy of the petition to the RTC of Roxas City on December 6, 2010, as evidenced by
a stamp mark of the RTC on the corresponding page of the petition; that she also served
copies of the petition by registered mail to respondents' counsels on December 6, 2010 as
evidenced by registry receipts numbers "PST 188" and "PST 189", both issued by the Roxas
City Post Office. The registry receipts issued by the
post office were attached to the petition filed with the CA. Petitioner had indeed complied
with the rule on proof of service.
Since the case was dismissed outright on technicality, the arguments raised in the petition
for certiorari were not at all considered. However, we will now resolve the issue on the
merits so as not to delay further the disposition of the case instead of remanding it to the
CA.
The issue for resolution is whether respondents’ counterclaim, i.e., reimbursement of the
loan obtained from them in case the deed of absolute sale is declared null and void on the
CIVIL LAW REVIEW 2

2
ground of forgery, is permissive in nature which requires the payment of docket fees and a
certification against forum shopping for the trial court to acquire jurisdiction over the same.
A counterclaim is any claim which a defending party may have against an opposing
party.14 A compulsory counterclaim is one which, being cognizable by the regular courts of
justice, arises out of or is connected with the transaction or occurrence constituting the
subject matter of the opposing party's claim and does not require for its adjudication the
presence of third parties of whom the court cannot acquire jurisdiction. Such a counterclaim
must be within the jurisdiction of the court both as to the amount and the nature thereof,
except that in an original action before the Regional Trial Court, necessarily connected with
the subject matter of the opposing party's claim or even where there is such a connection,
the Court has no jurisdiction to entertain the claim or it requires for adjudication the
presence of third persons over whom the court acquire jurisdiction.15 A compulsory
counterclaim is barred if not set up in the same action.
A counterclaim is permissive if it does not arise out of or is not necessarily connected with
the subject matter of the opposing party's claim.16 It is essentially an independent claim that
may be filed separately in another case.
To determine whether a counterclaim is compulsory or permissive, we have devised the

following tests: (a) Are the issues of fact and law raised by the claim and by the
counterclaim largely the same? (b) Would res judicata bar a subsequent suit on defendants’
claims, absent the compulsory counterclaim rule? (c) Will substantially the same evidence
support or refute plaintiffs’ claim as well as the defendants’ counterclaim? and (d) Is there
any logical relation between the claim and the counterclaim?17 A positive answer to all four
questions would indicate that the counterclaim is compulsory.18
Based on the above-mentioned tests, we shall determine the nature of respondents’

counterclaim. Respondents anchored their assailed counterclaim on the following
allegations in their affirmative defenses in their Answer with Counterclaim, thus:
x x x x
10. The plaintiff's cause of action is based on his allegation that his signature on the Deed of
Absolute Sale was forged.
The Deed of Absolute Sale is a unilateral instrument, i.e., it was signed only by the vendor,
who is the plaintiff in this case and his instrumental witnesses, who are his parents in this
case. It was presented to defendants already completely prepared, accomplished and
notarized. Defendants had no hand in its preparation, accomplishment and notarization.
While the plaintiff claims that his signature on the instrument is forged, he never
questioned the genuineness of the signatures of his instrumental witnesses, his parents
Arturo P. Alba, Sr. and Norma C. Alba, who signed the said instrument below the words
"SIGNED IN THE PRESENCE OF" and above the words "Father" and "Mother," respectively.
Furthermore, plaintiff acknowledged in par. 7 of his Complaint that the stated consideration
in the Deed of Absolute Sale is P500,000.00 and he never categorically denied having
received the same.
CIVIL LAW REVIEW 2

3
11. Before the plaintiff sold the property to the defendants, he secured a loan from them in
the sum of Six Hundred Thousand Pesos (P600,000.00) payable on or before November 10,
2008. The loan is evidenced by a Promissory Note and secured by a Real Estate Mortgage
dated September 11, 2008, both executed by him, covering the parcel of land subject of this
case, Lot 2332-D, Psd 06-000738. Like the Deed of Absolute Sale, the Real Estate Mortgage
is a unilateral instrument, was signed solely by the plaintiff, and furthermore, his parents
affixed their signatures thereon under the heading "WITH MY PARENTAL CONSENT", and
above the words, "Father" and "Mother," respectively.
Prior to this, or as early as July 25, 2008, the plaintiff also obtained a loan payable on or
before September 6, 2008 from defendants' mother, Alma D. David, and already mortgaged
to her Lot 2332-D, Psd 06-000738. The loan is evidenced by a Promissory Note and a Real
Estate Mortgage, both of which were executed by plaintiff. Again, the Real Estate Mortgage
is an unilateral instrument, was signed solely by the plaintiff and furthermore, his parents
also affixed their signatures thereon under the heading, "WITH MY PARENTAL CONSENT "
and above the words, "Father" and "Mother," respectively.
In both instances, the plaintiff was always represented by his parents, who always
manifested their authority to transact in behalf of their son the plaintiff.1âwphi1
As in the case with the Deed of Absolute Sale, the defendants or their mother did not have
any hand in the preparation, accomplishment or notarization of the two Promissory Notes
with accompanying Real Estate Mortgages, x x x.
Neither of the two Real Estate Mortgages have been discharged or extinguished.
12. Considering the foregoing, the plaintiff's allegation that his signature on the Deed of
Absolute Sale was forged, and that the defendants are the "co-authors" of the said forgery,
are absolutely false and baseless.
13. If the Deed of Absolute Sale is declared null and void on the ground of forgery, then the
plaintiff should reimburse the defendants the loan he obtained from them, which he did not
deny having obtained, plus the agreed monthly interest.19
Petitioner seeks to recover the subject property by assailing the validity of the deed of sale
on the subject property which he allegedly executed in favor of respondents Malapajo on
the ground of forgery. Respondents counterclaimed that, in case the deed of sale is declared
null and void, they be paid the loan petitioner obtained from them plus the agreed monthly
interest which was covered by a real estate mortgage on the subject property executed by
petitioner in favor of respondents. There is a logical relationship between the claim and the
counterclaim, as the counterclaim is connected with the transaction or occurrence
constituting the subject matter of the opposing party's claim. Notably, the same evidence to
sustain respondents' counterclaim would disprove petitioner's case. In the event that
respondents could convincingly establish that petitioner actually executed the promissory
note and the real estate mortgage over the subject property in their favor then petitioner's
complaint might fail. Petitioner's claim is so related logically to respondents' counterclaim,
such that conducting separate trials for the claim and the counterclaim would result in the
substantial duplication of the time and effort of the court and the parties.20
CIVIL LAW REVIEW 2

4
Since respondents' counterclaim is compulsory, it must be set up in the same action;
otherwise, it would be barred forever.21 If it is filed concurrently with the main action but in
a different proceeding, it would be abated on the ground of litis pendentia; if filed
subsequently, it would meet the same fate on the ground of res judicata.22 There is,
therefore, no need for respondents to pay docket fees and to file a certification against
forum shopping for the court to acquire jurisdiction over the said counterclaim.
We agree with the RTC’s disquisition in finding that respondents’ counterclaim is

compulsory, to wit:
The arguments of the plaintiffs that this transaction is a permissive counterclaim do not
convince.
By the manner in which the answer pertaining to this transaction was phrased, the real
estate mortgage was the origin of the Deed of Absolute Sale after the loan of P600,000.00
using the same property as security for the payment thereof was not settled. In short, it is
one of defendants' defenses and controverting evidence against plaintiffs' allegations of
falsification of the Deed of Absolute Sale, the property subject of the Deed of Sale being one
and the same property subject of the mortgage.23
x x x x
Can the Court adjudicate upon the issues [of whether or not the plaintiff could recover
ownership and or whether or not the title to the property in question may be canceled or
declared null and void, and damages] without the presence of the mother of defendants in
whose favor the Real Estate Mortgage of the property subject of this action was executed?
Definitely, this Court can. That there was an allegation pertaining to the mortgage of the
property in question to defendants’ mother is only some sort of a backgrounder on why a
deed of sale was executed by plaintiff in defendants’ favor, the truth or falsity of which will
have to be evidentiary on the part of the parties hereto. In short, the Court does not need
the presence of defendants’ mother before it can adjudicate on whether or not the deed of
absolute sale was genuine or falsified and whether or not the title to the property may be
cancelled.24
WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. The

Resolutions dated February 28, 2011 and August 31, 2011 issued by the Court of Appeals in
CA-G.R. SP No. 05594 dismissing the petition for certiorari and denying reconsideration
thereof, respectively, for failure to show proper proof of service of the petition to
respondents, are SET ASIDE. Acting on the petition for certiorari, we resolve to DENY the
same and AFFIRM the Order dated June 4, 2010 of the Regional Trial Court of Roxas City,
Branch 15, denying petitioner's motion to set the case for hearing as if a motion to dismiss
had been filed, and the Order dated September 30, 2010 denying reconsideration thereof.
SO ORDERED.
CIVIL LAW REVIEW 2

5

15.
SECOND DIVISION
January 13, 2016
G.R. No. 201417
ORIX METRO LEASING AND FINANCE CORPORATION, Petitioner,

vs.
CARDLINE INC., MARY C. CALUBAD, SONY N. CALUBAD, and NG BENG
SHENG, Respondents.
D E C I S I O N
BRION, J.:
We resolve the petition for review on certiorari challenging the January 6,

2012 decision1 and April 16, 2012 resolution2 of the Court of Appeals (CA) in CA-GR SP No.
118226. The CA annulled the Regional Trial Court's (RTC) order to execute the judgment
against the respondents. The CA ruled that Cardline Inc. (Cardline) had fully satisfied its
outstanding obligation by returning the leased properties to Orix Metro Leasing and
Finance Corporation (Orix).
THE ANTECEDENTS
Cardline leased four machines (machines) from Orix as evidenced by three similarly-worded
lease agreements. Cardline’s principal stockholders and officers - Mary C. Calubad, Sony N.
Calubad, and Ng Beng Sheng (individual respondents) – signed the suretyship agreements in
their personal capacities to guarantee Cardline’s obligations under each lease agreement.
Cardline defaulted in paying the rent: the unpaid obligations amounted to P9,369,657.00 as
of July 12, 2007. Orix formally demanded payment from Cardline but the latter refused to
pay.
Orix filed a complaint for replevin, sum of money, and damages with an application for a
writ of seizure against Cardline and the individual respondents (collectively, the
respondents) before the RTC. The case was docketed as Civil Case No. 07-855.
The RTC issued a writ of seizure allowing Orix to recover the machines from Cardline.
Thereafter, the RTC declared the respondents in default for failing to file an answer, and
allowed Orix to present evidence ex parte. The respondents filed a motion to set aside the
CIVIL LAW REVIEW 2

6
order of default, but the RTC denied their motion. On May 6, 2008, the RTC rendered
judgment in Orix’s favor and ordered the respondents to pay Orix, as follows:
1. The sum of P9,369,657.00 or whatever may be the balance of defendants’

outstanding obligation still owing the plaintiff after the recovery or sale of the
[machines] as and by way of actual damages (Section 9, Rule 60), in either case, with
interest and penalty charges as stipulated, from 12 July 2007 until fully paid;
2. As stipulated in the Continuing Surety, thirty (30%) percent of the total amount due as
Attorney’s fees;
3. As stipulated in the Continuing Surety, twenty-five (25%) percent of the total amount due
as liquidated damages; and
4. Expenses incurred in securing the leased properties through manual delivery. (emphasis
supplied)
On appeal, the respondents argued that the RTC erred in declaring them in default. The
CA,3 and subsequently this Court,4 denied the respondents’ appeal. Our denial in G.R. No.
189877 became final and executory.
Ng Beng Sheng filed a petition for annulment of judgment.5 He argued that the RTC had no
jurisdiction over his person since the summons was not properly served on him. The CA
denied the petition on the grounds of forum shopping and res judicata. The CA explained
that this issue had been addressed by the RTC in the order denying the motion to set aside
the order of default, and by the CA and the Supreme Court on appeal.
In the main case, Orix filed a motion for the issuance of a writ of execution which the RTC
granted in its December 1, 2010 order. Thereafter, the RTC clerk of court issued a writ of
execution commanding the sheriff to enforce the May 8, 2009 judgment. The respondents
filed a motion for a status quo ante order but the RTC denied the motion.
Thereafter, the respondents filed a petition for prohibition6 under Rule 65 of the Rules of
Court before the CA.7They assailed the issuance of the December 1, 2010 order, arguing that
their rental obligations were offset by the market value of the returned machines and by the
guaranty deposit.
THE CA RULING
The CA granted the petition, annulled the RTC’s order dated December 1, 2010, and
prohibited the sheriff from executing the judgment dated May 6, 2008.
The CA based its decision on Sections 19.2(d)8 in relation with Section 19.39 of the lease
agreements. The CA ruled that the respondents’ debt amounting to P9,369,657.00 had been
satisfied when Orix recovered the machines valued at P14,481,500.00 and received the
security deposit amounting to P1,635,638.89. Considering that the judgment had been
satisfied in full, the RTC’s issuance of a writ of execution was no longer necessary.
The CA denied Orix’s motion for reconsideration; hence, this petition.
CIVIL LAW REVIEW 2

7
THE PARTIES’ ARGUMENTS
In its petition, Orix argues that: (1) the market value of the returned machines and the
guaranty deposit do not offset the outstanding obligations; (2) the individual respondents
are solidarily liable to Orix and are not entitled to the benefit of excussion; and (3) the
respondents and their counsel engaged in willful and deliberate forum shopping.
After the petition was filed, Atty. Efren C. Lizardo withdrew his appearance and Atty. David
A. Domingo entered his appearance as the respondents’ counsel.
In their comment, the respondents argue that: (1) the RTC’s judgment should be interpreted
as follows: if Orix recovers the properties, their market values should be deducted from the
respondents’ outstanding obligations; (2) the individual respondents merely acted as
guarantors, not as sureties; and (3) the respondents committed no forum shopping because
no cases were pending before the courts when they filed the petition for prohibition.
OUR RULING
We find the petition partly meritorious.
We note at the outset that the RTC’s May 6, 2008 judgment has attained finality and can no
longer be altered. Once a judgment becomes final and executory, all that remains is the
execution of the decision. Thus, the RTC issued the December 1, 2010 order of execution. An
order of execution is not appealable;10 otherwise, a case would never end.11
As a rule, parties are not allowed to object to the execution of a final judgment.12 One
exception is when the terms of the judgment are not clear enough and there remains room
for its interpretation.13 If the exception applies, the respondents may seek the stay of
execution or the quashal of the writ of execution.14 Although an order of execution is not
appealable, an aggrieved party may challenge the order of execution via an appropriate
special civil action under Rule 65 of the Rules of Court.15 The special civil action of
prohibition is an available remedy against a tribunal exercising judicial, quasi-judicial or
ministerial powers if it acted without or in excess of its jurisdiction and there is no other
plain, speedy, and adequate remedy in the ordinary course of law.16
In the present case, the respondents effectively argued that the terms of the RTC’s May 6,
2008 judgment are not clear enough such that the parties’ agreement must be examined to
arrive at the proper interpretation. The respondents, however, did not give the RTC an
opportunity to clarify its judgment. The respondents filed a special civil action for
prohibition before the CA without first filing a motion to stay or quash the writ of execution
before the RTC. Hence, the petition for prohibition obviously lacked the requirement that no
"other plain, speedy, and adequate remedy" is available. Thus, the petition should have been
dismissed.
However, the CA gave due course to the petition. In granting the petition, the CA ruled that
the judgment had been satisfied; thus, there was no more judgment to execute. To stress,
the CA erred in granting the petition despite the availability of a "plain, speedy, and
adequate remedy."
CIVIL LAW REVIEW 2

8
Orix comes before us for a review of the CA’s decision. The issues for resolution are: (1)
whether the CA correctly prohibited the RTC from enforcing the writ of execution; (2)
whether the individual respondents can invoke the benefit of excussion; and (3) whether
the respondents committed forum shopping.
I. Propriety of the CA’s decision
The core issue presented in this case is whether the CA correctly prohibited the RTC
from enforcing the writ of execution. To resolve this issue, we must determine whether
the CA correctly interpreted this portion of the RTC’s May 6, 2008 judgment:
The sum of P9,369,657.00 or whatever may be the balance of defendants’ outstanding

obligation still owing the plaintiff after the recovery or sale of the [machines] as and
by way of actual damages xxx. (emphasis supplied)
The CA cited Sections 19.2(d) and 19.3 of the lease agreements in interpreting the above-
quoted judgment. The CA ruled that the balance of Cardline’s debt was P9,369,657.00, less
the machines’ market value and the guaranty deposit. After applying this formula, the CA
concluded that Cardline no longer owed Orix any indebtedness so that no judgment needed
to be executed.
We disagree with the CA’s conclusion.
A review of these agreements shows that the CA erroneously relied on Sections 19.2(d) and
19.3 of the lease agreements. The CA also erred in deducting the guaranty deposit from the
outstanding debt, contrary to the provisions of the lease agreements.
We review the lease agreements on two points: first, on whether the market values of the
returned machines were intended to reduce Cardline’s debt; and second, on whether the
parties intended to deduct the guaranty deposit from the unpaid obligation.
On the first point, the machines’ market values were not intended to reduce, much less
offset, Cardline’s debt.
The lease agreements’ default provisions are instructive. Section 1917 of the agreements
provides that if Cardline fails to pay rent, Orix may cancel the agreements and may avail of
the following remedies under Section 19.2:
a) LESSOR may require LESSEE to surrender possession of the property x x x;
x x x
d) Subject to the provisions of Section 19.3, after repossessing the property, the
LESSOR may re-lease or sell the PROPERTY to any third person, in such manner and upon
such terms as the LESSOR may solely deem proper;
e) Recovery of all accrued and unpaid rental, including rentals up to the time the
PROPERTY is actually returned to the LESSOR xxx;" (emphasis supplied)
CIVIL LAW REVIEW 2

9
Should Orix choose to re-lease or sell the machines after repossessing them pursuant to
Section 19.2(d), Section 19.3 shall apply, to wit:
19.3 The proceeds derived from the sale or re-leasing of the PROPERTY, shall x xx be
applied first to the expenses incurred by the LESSOR in connection with the repossession,
sale, or re-leasing of the PROPERTY, a reasonable compensation for undertaking such sale
or re-lease, all legal costs and fees, OTHER AMOUNTS, and the balance, if any, to the
RENTAL due from the LESSEE. x x x. (emphasis supplied)
Applying these provisions, when Cardline defaulted in paying rent, Orix was authorized to:
(a) re-possess the machines; and (b) recover all unpaid rent. Considering that Orix neither
re-leased nor sold the machines, Sections 19.2(d) and 19.3 are not applicable. Thus, the CA
erred in applying these provisions to the present case.
Even assuming that these provisions apply, Section 19.3 states that the net "proceeds"
derived from the sale, not the machines’ market values, shall be applied to the unpaid
rent. Therefore, these contractual provisions do not support the CA’s stance that the
machines’ market values must be reduced from Cardline’s unpaid rent.
As Orix correctly argued, the CA’s decision leads to an absurd situation where Cardline pays
for its liabilities to Orix using Orix’s own properties. The Court cannot affirm this
unreasonable and inequitable interpretation.
On the second point, Sections 6.1 and 19.2(b) of the lease agreements discuss the use of
the guaranty deposit, to wit:
6.1 The LESSEE shall pay to the LESSOR simultaneously with the execution of this
Agreement, an amount by way of deposit (the "GUARANTY DEPOSIT") as specified in the
Lease Schedule, which deposit shall be held as security for the faithful and timely
performance by the LESSEE of its obligations hereunder, as well as its compliance with all
the provisions of this Agreement, or of any extension or renewals thereof. Should the
PROPERTY be returned to the LESSOR for any reason whatsoever including LESSEE’s
default under Section 19 hereof before the expiration of this Agreement, then the
GUARANTY DEPOSIT shall be forfeited automatically in favor of the LESSOR as
additional penalty over and above those stipulated in Section 3.5 [on interest and
penalty], without prejudice to the right of the LESSOR to recover any unpaid RENTAL as
well as the OTHER AMOUNTS for which the LESSEE may be liable under this agreement.
(emphasis supplied)
19.2(b) The LESSOR may retain all amounts including any advance rental paid to it
hereunder as compensation for rent, use and depreciation of the PROPERTY. Furthermore,
the LESSOR may apply the GUARANTY DEPOSIT towards the payment of liquidated
damages.18
These provisions are relevant to determine the parties’ intent with respect to the guaranty
deposit. These provisions show that the parties did not intend to deduct the guaranty
deposit from Cardline’s unpaid rent. On the contrary, the guaranty deposit was intended to
be automatically forfeited to serve as penalty for Cardline’s default. In any case, Orix
retained the right to recover the unpaid rent but it had the option to consider the guaranty
CIVIL LAW REVIEW 2

0
deposit as liquidated damages. Notably, Orix did not exercise this option. Thus, the CA erred
when it deducted the guaranty deposit from Cardline’s unpaid rent.
After examining the RTC’s judgment under the lease agreements’ lenses, we rule that the
return or recovery of the machines does not reduce Cardline’s outstanding obligation unless
the returned machines are sold. No sale transpired pursuant to the lease agreements.
Moreover, the guaranty deposit was not meant to reduce Cardline’s unpaid obligation. Thus,
Cardline’s actual damages remain at P9,369,657.00.
In sum, we rule that the CA erroneously interpreted the RTC’s May 6, 2008 judgment.
Consequently, the CA erred in preventing the RTC from enforcing the writ of execution.
II. The Benefit of Excussion
The second issue before us is whether the individual respondents are entitled to the
benefit of excussion. We note that this issue had already been raised before the CA in G.R.
189877. The CA, as affirmed by the Court, ruled that the issue cannot be raised for the first
time on appeal.
For clarity, we briefly discuss this issue and rule in favor of Orix.
The terms of a contract govern the parties’ rights and obligations. When a party undertakes
to be "jointly and severally" liable, it means that the obligation is solidary.19 Furthermore,
even assuming that a party is liable only as a guarantor, he can be held immediately liable
without the benefit of excussion if the guarantor agreed that his liability is direct and
immediate.20 In effect, the guarantor waived the benefit of excussion pursuant to Article
2059(1) of the Civil Code.
In the present case, the records show that the individual respondents bound themselves
solidarily with Cardline. Section 31.121 of the lease agreements states that the persons who
sign separate instruments to secure Cardline’s obligations to Orix shall be jointly and
severally liable with Cardline.
Even assuming arguendo that the individual respondents signed the continuing surety
agreements merely as guarantors, they still cannot invoke the benefit of excussion. The
surety agreements provide that the individual respondents’ liability is "solidary, direct,
and immediate and not contingent upon"22 Orix’s remedies against Cardline. The
continuing suretyship agreements also provide that the individual respondents
"individually and collectively waive(s) in advance the benefit of excussion xxx under
Articles 2058 and 2065 of the Civil Code."23
Without any doubt, the individual respondents can no longer avail of the benefit of
excussion.
III. Forum-Shopping
We now turn to whether the respondents committed forum shopping when they filed the
petition for prohibition before the CA.
CIVIL LAW REVIEW 2

1
Orix asserts that the respondents committed forum shopping by instituting several actions
essentially seeking to nullify the RTC’s decision.
First, the respondents appealed before the CA to reverse the RTC’s judgment which held
them liable for the unpaid rent. The CA, and subsequently this Court via a petition for
review on certiorari,24 affirmed the RTC’s judgment. The decision became final and
executory.
Second, Ng Beng Sheng filed a petition for annulment of judgment,25 dated September 4,
2010, which the CA dismissed on the grounds of forum shopping and res judicata.1âwphi1
Third, the respondents filed the petition for prohibition,26 dated February 21, 2011, to
prevent the execution of the RTC’s judgment.
We disagree with Orix’s assertions.
Section 5 Rule 7 of the Rules prohibits forum shopping. The rule against forum shopping
seeks to address the great evil of two competent tribunals rendering two separate and
contradictory decisions.27 Forum shopping exists when a party initiates two or more
actions, other than appeal or certiorari, grounded on the same cause to obtain a more
favorable decision from any tribunal.28
The elements of forum shopping are: (i) identity of parties, or at least such parties
representing the same interest; (ii) identity of rights asserted and relief prayed for, the
latter founded on the same facts; (iii) any judgment rendered in one action will amount
to res judicata in the other action.29
In Reyes v. Alsons,30 the petitioner filed a petition for annulment of judgment raising the
issue of the RTC’s lack of jurisdiction to enforce the lower court’s judgment. This Court held
that this jurisdictional issue has been resolved in the previous cases filed by the petitioner.
Thus, the petition for annulment of judgment was barred by res judicata and the policy
against forum shopping.31
In the present case, the CA correctly denied Ng Beng Sheng’s petition for annulment of
judgment. As in Reyes, the CA correctly reasoned out that the issue on jurisdiction had been
resolved with finality in the review on certiorari. Thus, the issue could no longer be re-
litigated.
After the denial of the petition for annulment of judgment, Ng Beng Shen joined the other
respondents in filing a petition for prohibition. We are now called upon to ascertain
whether the recourse to the petition for prohibition amounted to forum shopping.
We rule in the negative.
The two cases filed collectively by the respondents are similar only in that they involve the
same parties. The cases, however, involve different causes of actions. The petition for
review on certiorari was filed to review the merits of the RTC's judgment. On the other
hand, the petition for prohibition respects the finality of the RTC's judgment on the merits
CIVIL LAW REVIEW 2

2
but interprets the dispositive portion in a way that would render the execution
unnecessary. Thus, the elements of forum shopping are not present in the two cases.
Moreover, the resort to a remedy under Rule 65 is expressly allowed by the Rules of Court.
Section 1, Rule 41 of the Rules of Court provides that an aggrieved party may file the
appropriate civil action under Rule 65 to challenge an order of execution. Accordingly, the
respondents filed their petition for prohibition under Rule 65 of the Rules of Court.
With respect to Ng Beng Sheng's petition for annulment of judgment, the CA has already
ruled that the filing of the petition constituted forum shopping, specifically due to the
jurisdictional issue raised. The petition for prohibition, however, involves a different cause
of action. Thus, there is no forum shopping.
To recap, first, the CA erred in preventing the execution of the RTC's judgment. Nothing in
the lease agreements' provisions supports the CA's ruling that the market value of the
returned machines and the guaranty deposit shall be deducted from Cardline' s unpaid
rent. Second, the individual respondents are solidarily liable for Cardline's obligations and
are not entitled to the benefit of excussion. Finally, the respondents did not commit forum
shopping by filing the petition for prohibition.
With these matters clarified, Orix should no longer be denied the fruits of its victory. The
RTC is hereby ordered to execute its long-final judgment.
WHEREFORE, we hereby GRANT the petition. The January 6, 2012 decision and April 16,
2012 resolution of the Court of Appeals in CA-GR SP No. 118226 are
hereby REVERSED and SET ASIDE. Costs against the respondents.
SO ORDERED.
CIVIL LAW REVIEW 2

3

16.
SECOND DIVISION
January 13, 2016
G.R. No. 206147
MICHAEL C. GUY, Petitioner,

vs.
ATTY. GLENN C. GACOTT, Respondent.
D E C I S I O N
MENDOZA, J.:
Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court
filed by petitioner Michael C. Guy (Guy), assailing the June 25, 2012 Decision1 and the March
5, 2013 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 94816, which affirmed
the June 28, 20093 and February 19, 20104 Orders of the Regional Trial Court, Branch 52,
Puerto Princesa City, Palawan (RTC), in Civil Case No. 3108, a case for damages. The assailed
RTC orders denied Guy's Motion to Lift Attachment Upon Personalty5 on the ground that he
was not a judgment debtor.
The Facts
It appears from the records that on March 3, 1997, Atty. Glenn Gacott (Gacott) from Palawan
purchased two (2) brand new transreceivers from Quantech Systems Corporation (QSC) in
Manila through its employee Rey Medestomas (Medestomas), amounting to a total of
P18,000.00. On May 10, 1997, due to major defects, Gacott personally returned the
transreceivers to QSC and requested that they be replaced. Medestomas received the
returned transreceivers and promised to send him the replacement units within two (2)
weeks from May 10, 1997.
Time passed and Gacott did not receive the replacement units as promised. QSC informed
him that there were no available units and that it could not refund the purchased price.
Despite several demands, both oral and written, Gacott was never given a replacement or a
refund. The demands caused Gacott to incur expenses in the total amount of P40,936.44.
Thus, Gacott filed a complaint for damages. Summons was served upon QSC and
Medestomas, afterwhich they filed their Answer, verified by Medestomas himself and a
certain Elton Ong (Ong). QSC and Medestomas did not present any evidence during the
trial.6
CIVIL LAW REVIEW 2

4
In a Decision,7 dated March 16, 2007, the RTC found that the two (2) transreceivers were
defective and that QSC and Medestomas failed to replace the same or return Gacott's money.
The dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants
to jointly and severally pay plaintiff the following:
1. Purchase price plus 6% per annum from March 3, 1997 up to and P

until fully paid ------------ 18,000.00
2. Actual Damages ----------------------------------- 40,000.00
3. Moral Damages ----------------------------------- 75,000.00
4. Corrective Damages ------------------------------- 100,000.00
5. Attorney’s Fees ------------------------------------ 60,000.00
6. Costs.

SO ORDERED.
The decision became final as QSC and Medestomas did not interpose an appeal. Gacott then
secured a Writ of Execution,8 dated September 26, 2007.
During the execution stage, Gacott learned that QSC was not a corporation, but was in fact a
general partnership registered with the Securities and Exchange Commission (SEC). In the
articles of partnership,9 Guy was appointed as General Manager of QSC.
To execute the judgment, Branch Sheriff Ronnie L. Felizarte (Sheriff Felizarte) went to the
main office of the Department of Transportation and Communications, Land Transportation
Office (DOTC-LTO), Quezon City, and verified whether Medestomas, QSC and Guy had
personal properties registered therein.10 Upon learning that Guy had vehicles registered in
his name, Gacott instructed the sheriff to proceed with the attachment of one of the motor
vehicles of Guy based on the certification issued by the DOTC-LTO.11
On March 3, 2009, Sheriff Felizarte attached Guy’s vehicle by virtue of the Notice of
Attachment/Levy upon Personalty12 served upon the record custodian of the DOTC-LTO of
Mandaluyong City. A similar notice was served to Guy through his housemaid at his
residence.
Thereafter, Guy filed his Motion to Lift Attachment Upon Personalty, arguing that he was
not a judgment debtor and, therefore, his vehicle could not be attached.13 Gacott filed an
opposition to the motion.
The RTC Order
On June 28, 2009, the RTC issued an order denying Guy’s motion. It explained that
considering QSC was not a corporation, but a registered partnership, Guy should be treated
as a general partner pursuant to Section 21 of the Corporation Code, and he may be held
jointly and severally liable with QSC and Medestomas. The trial court wrote:
CIVIL LAW REVIEW 2

5
All persons who assume to act as a corporation knowing it to be without authority to do so
shall be liable as general partners for all debts, liabilities and damages incurred or arising as
a result thereof x x x. Where, by any wrongful act or omission of any partner acting in the
ordinary course of the business of the partnership x x x, loss or injury is caused to any
person, not being a partner in the partnership, or any penalty is incurred, the partnership is
liable therefore to the same extent as the partner so acting or omitting to act. All partners
are liable solidarily with the partnership for everything chargeable to the partnership under
Article 1822 and 1823.14
Accordingly, it disposed:
WHEREFORE, with the ample discussion of the matter, this Court finds and so holds that the
property of movant Michael Guy may be validly attached in satisfaction of the liabilities
adjudged by this Court against Quantech Co., the latter being an ostensible Corporation and
the movant being considered by this Court as a general partner therein in accordance with
the order of this court impressed in its decision to this case imposing joint and several
liability to the defendants. The Motion to Lift Attachment Upon Personalty submitted by the
movant is therefore DENIED for lack of merit.
SO ORDERED.15
Not satisfied, Guy moved for reconsideration of the denial of his motion. He argued that he
was neither impleaded as a defendant nor validly served with summons and, thus, the trial
court did not acquire jurisdiction over his person; that under Article 1824 of the Civil Code,
the partners were only solidarily liable for the partnership liability under exceptional
circumstances; and that in order for a partner to be liable for the debts of the partnership, it
must be shown that all partnership assets had first been exhausted.16
On February 19, 2010, the RTC issued an order17denying his motion.
The denial prompted Guy to seek relief before the CA.
The CA Ruling
On June 25, 2012, the CA rendered the assailed decision dismissing Guy’s appeal for the
same reasons given by the trial court. In addition thereto, the appellate court stated:
We hold that Michael Guy, being listed as a general partner of QSC during that time, cannot
feign ignorance of the existence of the court summons. The verified Answer filed by one of
the partners, Elton Ong, binds him as a partner because the Rules of Court does not require
that summons be served on all the partners. It is sufficient that service be made on the
"president, managing partner, general manager, corporate secretary, treasurer or in-house
counsel." To Our mind, it is immaterial whether the summons to QSC was served on the
theory that it was a corporation. What is important is that the summons was served on
QSC’s authorized officer xxx.18
The CA stressed that Guy, being a partner in QSC, was bound by the summons served upon
QSC based on Article 1821 of the Civil Code. The CA further opined that the law did not
require a partner to be actually involved in a suit in order for him to be made liable. He
CIVIL LAW REVIEW 2

6
remained “solidarily liable whether he participated or not, whether he ratified it or not, or
whether he had knowledge of the act or omission.”19
Aggrieved, Guy filed a motion for reconsideration but it was denied by the CA in its assailed
resolution, dated March 5, 2013.
Hence, the present petition raising the following
ISSUE
THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING

THAT PETITIONER GUY IS SOLIDARILY LIABLE WITH THE PARTNERSHIP FOR
DAMAGES ARISING FROM THE BREACH OF THE CONTRACT OF SALE WITH
RESPONDENT GACOTT.20
Guy argues that he is not solidarily liable with the partnership because the solidary liability
of the partners under Articles 1822, 1823 and 1824 of the Civil Code only applies when it
stemmed from the act of a partner. In this case, the alleged lapses were not attributable to
any of the partners. Guy further invokes Article 1816 of the Civil Code which states that the
liability of the partners to the partnership is merely joint and subsidiary in nature.
In his Comment,21 Gacott countered, among others, that because Guy was a general and
managing partner of QSC, he could not feign ignorance of the transactions undertaken by
QSC. Gacott insisted that notice to one partner must be considered as notice to the whole
partnership, which included the pendency of the civil suit against it.
In his Reply,22 Guy contended that jurisdiction over the person of the partnership was not
acquired because the summons was never served upon it or through any of its authorized
office. He also reiterated that a partner’s liability was joint and subsidiary, and not solidary.
The petition is meritorious.
The service of summons was flawed; voluntary appearance cured the defect
Jurisdiction over the person, or jurisdiction in personam – the power of the court to render a
personal judgment or to subject the parties in a particular action to the judgment and other
rulings rendered in the action – is an element of due process that is essential in all actions,
civil as well as criminal, except in actions in rem or quasi in rem.23Jurisdiction over the
person of the plaintiff is acquired by the mere filing of the complaint in court. As the
initiating party, the plaintiff in a civil action voluntarily submits himself to the jurisdiction of
the court. As to the defendant, the court acquires jurisdiction over his person either by the
proper service of the summons, or by his voluntary appearance in the action.24
Under Section 11, Rule 14 of the 1997 Revised Rules of Civil Procedure, when the defendant
is a corporation, partnership or association organized under the laws of the Philippines
with a juridical personality, the service of summons may be made on the president,
managing partner, general manager, corporate secretary, treasurer, or in-house counsel.
CIVIL LAW REVIEW 2

7
Jurisprudence is replete with pronouncements that such provision provides an exclusive
enumeration of the persons authorized to receive summons for juridical entities.25
The records of this case reveal that QSC was never shown to have been served with the
summons through any of the enumerated authorized persons to receive such, namely:
president, managing partner, general manager, corporate secretary, treasurer or in-house
counsel. Service of summons upon persons other than those officers enumerated in
Section 11 is invalid. Even substantial compliance is not sufficient service of
summons.26 The CA was obviously mistaken when it opined that it was immaterial whether
the summons to QSC was served on the theory that it was a corporation.27
Nevertheless, while proper service of summons is necessary to vest the court jurisdiction
over the defendant, the same is merely procedural in nature and the lack of or defect in the
service of summons may be cured by the defendant’s subsequent voluntary submission to
the court’s jurisdiction through his filing a responsive pleading such as an answer. In this
case, it is not disputed that QSC filed its Answer despite the defective summons. Thus,
jurisdiction over its person was acquired through voluntary appearance.
A partner must be separately and distinctly impleaded before he can be bound by a judgment
The next question posed is whether the trial court’s jurisdiction over QSC extended to the
person of Guy insofar as holding him solidarily liable with the partnership. After a thorough
study of the relevant laws and jurisprudence, the Court answers in the negative.
Although a partnership is based on delectus personae or mutual agency, whereby any

partner can generally represent the partnership in its business affairs, it is non sequitur that
a suit against the partnership is necessarily a suit impleading each and every partner. It
must be remembered that a partnership is a juridical entity that has a distinct and separate
personality from the persons composing it.28
In relation to the rules of civil procedure, it is elementary that a judgment of a court is

conclusive and binding only upon the parties and their successors-in-interest after the
commencement of the action in court.29 A decision rendered on a complaint in a civil action
or proceeding does not bind or prejudice a person not impleaded therein, for no person
shall be adversely affected by the outcome of a civil action or proceeding in which he is not a
party.30The principle that a person cannot be prejudiced by a ruling rendered in an action or
proceeding in which he has not been made a party conforms to the constitutional guarantee
of due process of law.31
In Muñoz v. Yabut, Jr.,32 the Court declared that a person not impleaded and given the
opportunity to take part in the proceedings was not bound by the decision declaring as null
and void the title from which his title to the property had been derived. The effect of a
judgment could not be extended to non-parties by simply issuing an alias writ of execution
against them, for no man should be prejudiced by any proceeding to which he was a
stranger.
In Aguila v. Court of Appeals,33 the complainant had a cause of action against the partnership.
Nevertheless, it was the partners themselves that were impleaded in the complaint. The
Court dismissed the complaint and held that it was the partnership, not its partners, officers
CIVIL LAW REVIEW 2

8
or agents, which should be impleaded for a cause of action against the partnership itself.
The Court added that the partners could not be held liable for the obligations of the
partnership unless it was shown that the legal fiction of a different juridical personality was
being used for fraudulent, unfair, or illegal purposes.34
Here, Guy was never made a party to the case. He did not have any participation in the
entire proceeding until his vehicle was levied upon and he suddenly became QSC’s “co-
defendant debtor” during the judgment execution stage. It is a basic principle of law that
money judgments are enforceable only against the property incontrovertibly belonging to
the judgment debtor.35 Indeed, the power of the court in executing judgments extends only
to properties unquestionably belonging to the judgment debtor alone. An execution can be
issued only against a party and not against one who did not have his day in court. The duty
of the sheriff is to levy the property of the judgment debtor not that of a third person. For, as
the saying goes, one man's goods shall not be sold for another man's debts.36
In the spirit of fair play, it is a better rule that a partner must first be impleaded before he
could be prejudiced by the judgment against the partnership. As will be discussed later, a
partner may raise several defenses during the trial to avoid or mitigate his obligation to the
partnership liability. Necessarily, before he could present evidence during the trial, he must
first be impleaded and informed of the case against him. It would be the height of injustice
to rob an innocent partner of his hard-earned personal belongings without giving him an
opportunity to be heard. Without any showing that Guy himself acted maliciously on behalf
of the company, causing damage or injury to the complainant, then he and his personal
properties cannot be made directly and solely accountable for the liability of QSC, the
judgment debtor, because he was not a party to the case.
Further, Article 1821 of the Civil Code does not state that there is no need to implead a
partner in order to be bound by the partnership liability. It provides that:
Notice to any partner of any matter relating to partnership affairs, and the knowledge
of the partner acting in the particular matter, acquired while a partner or then present
to his mind, and the knowledge of any other partner who reasonably could and should have
communicated it to the acting partner, operate as notice to or knowledge of the
partnership, except in the case of fraud on the partnership, committed by or with the
consent of that partner.
[Emphases and Underscoring Supplied]
A careful reading of the provision shows that notice to any partner, under certain
circumstances, operates as notice to or knowledge to the partnership only. Evidently, it does
not provide for the reverse situation, or that notice to the partnership is notice to the
partners. Unless there is an unequivocal law which states that a partner is automatically
charged in a complaint against the partnership, the constitutional right to due process takes
precedence and a partner must first be impleaded before he can be considered as a
judgment debtor. To rule otherwise would be a dangerous precedent, harping in favor of the
deprivation of property without ample notice and hearing, which the Court certainly cannot
countenance.
CIVIL LAW REVIEW 2

9
Partners’ liability is subsidiary and generally joint; immediate levy upon the property of a
partner cannot be made
Granting that Guy was properly impleaded in the complaint, the execution of judgment
would be improper. Article 1816 of the Civil Code governs the liability of the partners to
third persons, which states that:
Article 1816. All partners, including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership. However, any partner may
enter into a separate obligation to perform a partnership contract.
[Emphasis Supplied]
This provision clearly states that, first, the partners’ obligation with respect to the
partnership liabilities is subsidiary in nature. It provides that the partners shall only be
liable with their property after all the partnership assets have been exhausted. To say that
one’s liability is subsidiary means that it merely becomes secondary and only arises if the
one primarily liable fails to sufficiently satisfy the obligation. Resort to the properties of a
partner may be made only after efforts in exhausting partnership assets have failed or that
such partnership assets are insufficient to cover the entire obligation. The subsidiary nature
of the partners’ liability with the partnership is one of the valid defenses against a
premature execution of judgment directed to a partner.
In this case, had he been properly impleaded, Guy’s liability would only arise after the
properties of QSC would have been exhausted. The records, however, miserably failed to
show that the partnership’s properties were exhausted. The report37 of the sheriff showed
that the latter went to the main office of the DOTC-LTO in Quezon City and verified whether
Medestomas, QSC and Guy had personal properties registered therein. Gacott then
instructed the sheriff to proceed with the attachment of one of the motor vehicles of
Guy.38 The sheriff then served the Notice of Attachment/Levy upon Personalty to the record
custodian of the DOTC-LTO of Mandaluyong City. A similar notice was served to Guy
through his housemaid at his residence.
Clearly, no genuine efforts were made to locate the properties of QSC that could have been
attached to satisfy the judgment − contrary to the clear mandate of Article 1816. Being
subsidiarily liable, Guy could only be held personally liable if properly impleaded and after
all partnership assets had been exhausted.
Second, Article 1816 provides that the partners’ obligation to third persons with respect to
the partnership liability is pro rata or joint.1âwphi1 Liability is joint when a debtor is liable
only for the payment of only a proportionate part of the debt. In contrast, a solidary liability
makes a debtor liable for the payment of the entire debt. In the same vein, Article 1207 does
not presume solidary liability unless: 1) the obligation expressly so states; or 2) the law
or nature requires solidarity. With regard to partnerships, ordinarily, the liability of the
partners is not solidary.39 The joint liability of the partners is a defense that can be raised by
a partner impleaded in a complaint against the partnership.
CIVIL LAW REVIEW 2

0
In other words, only in exceptional circumstances shall the partners’ liability be solidary in
nature. Articles 1822, 1823 and 1824 of the Civil Code provide for these exceptional
conditions, to wit:
Article 1822. Where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the partnership or with the authority of his co-partners, loss or
injury is caused to any person, not being a partner in the partnership, or any penalty is
incurred, the partnership is liable therefor to the same extent as the partner so acting or
omitting to act.
Article 1823. The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property of a
third person and the money or property so received is misapplied by any partner while it is
in the custody of the partnership.
Article 1824. All partners are liable solidarily with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823.
[Emphases Supplied]
In essence, these provisions articulate that it is the act of a partner which caused loss or
injury to a third person that makes all other partners solidarily liable with the partnership
because of the words "any wrongful act or omission of any partner acting in the ordinary
course of the business," "one partner acting within the scope of his apparent
authority" and "misapplied by any partner while it is in the custody of the partnership." The
obligation is solidary because the law protects the third person, who in good faith relied
upon the authority of a partner, whether such authority is real or apparent.40
In the case at bench, it was not shown that Guy or the other partners did a wrongful act or
misapplied the money or property he or the partnership received from Gacott. A third
person who transacted with said partnership can hold the partners solidarily liable for the
whole obligation if the case of the third person falls under Articles 1822 or
1823.41 Gacott’s claim stemmed from the alleged defective transreceivers he bought from
QSC, through the latter's employee, Medestomas. It was for a breach of warranty in a
contractual obligation entered into in the name and for the account of QSC, not due to the
acts of any of the partners. For said reason, it is the general rule under Article 1816 that
governs the joint liability of such breach, and not the exceptions under Articles 1822 to
1824. Thus, it was improper to hold Guy solidarily liable for the obligation of the
partnership.
Finally, Section 21 of the Corporation Code,42 as invoked by the RTC, cannot be applied to
sustain Guy's liability. The said provision states that a general partner shall be liable for all
debts, liabilities and damages incurred by an ostensible corporation. It must be read,
however, in conjunction with Article 1816 of the Civil Code, which governs the liabilities of
partners against third persons. Accordingly, whether QSC was an alleged ostensible
CIVIL LAW REVIEW 2

1
corporation or a duly registered partnership, the liability of Guy, if any, would remain to be
joint and subsidiary because, as previously stated, all partners shall be liable pro rata with
all their property and after all the partnership assets have been exhausted for the contracts
which may be entered into in the name and for the account of the partnership.
WHEREFORE, the petition is GRANTED. The June 25, 2012 Decision and the March 5, 2013
Resolution of the Court of Appeals in CA-G.R. CV No. 94816 are hereby REVERSED and SET
ASIDE. Accordingly, the Regional Trial Court, Branch 52, Puerto Princesa City, is ORDERED
TO RELEASE Michael C. Guy's Suzuki Grand Vitara subject of the Notice of Levy/
Attachment upon Personalty.
CIVIL LAW REVIEW 2

2

17.
SECOND DIVISION
January 20, 2016
G.R. No. 205785
HELEN B. LUKBAN, Petitioner,

vs.
OPTIMUM DEVELOPMENT BANK, Respondent.
D E C I S I O N
CARPIO, J.:
The Case
Before the Court is a petition for review on certiorari assailing the 28 August 2012
Decision1 and the 7 February 2013 Resolution2 of the Court of Appeals in CA-G.R. CV No.
95150.
The Antecedent Facts
On 18 August 2005, the City Treasurer's Office of Marikina (City Treasurer) conducted an
auction sale of tax delinquent real properties, which included the real property of Melba T.
Atienza (Atienza) under Transfer Certificate of Title (TCT) No. 234408 particularly
described as follows:
A parcel of land (Lot 8 of the conso-subd., plan (LRA) Pcs-30783, approved as non subd.,
project, being a portion of the conso- of Lots 7 & 9, Blk. 87, Pcs-4259, LRC Rec. No. 7672), in
the Bo. of Concepcion, (Bayanbayanan), Mun. of Marikina, MM., Is. of Luzon. Bounded on the
NE., points 4-1 by Lot 5, Blk. 87, Pcs-4259; on the SE., points 1-2 by Lot 9; on the SW., points
2-3 by Lot 6; both of the conso-subd., plan; on the NW., points 4-5 by ST. Lot 66, Pcs-4259
(Katipunan St.). Beginning at a point marked "1" on plan, being S. 45 deg. 39' E., 1704.37 m.
from BLBM 1, Bayanbayanan, Marikina, MM., thence S. 20 deg. 06' W., 8.00 m. to point 2;
thence N. 69 deg. 54' W., 12.75 m. to point 3; thence [N]. 20 deg. 06' E., 8.00 m. to point 4;
thence S. 69 deg. 54' E., 12.75 m. to (OVER) MELBA T. ATIENZA, of legal age, Filipino,
married to Franco Mariano Atienza, the point of beginning; containing an area of ONE
HUNDRED TWO (102) SQUARE METERS, more or less. All points referred to are indicated
on the plan and are marked on the ground by as follows: point 4, by Old PLS/Ps cyl.conc.
[m]ons., 15x60 bearings true; date of the original survey, De[c]. 1910-June 1911 and that of
the conso-subd., survey, executed by D.F. Caparas, GE on June 22, 1991.3
CIVIL LAW REVIEW 2

3
Petitioner Helen B. Lukban (Lukban) was the highest and winning bidder of the property
during the public auction. She paid the amount of P47,265.604 inclusive of penalties and
publication fees. On 25 August 2005, the City Treasurer issued Lukban a Certificate of Sale
of Delinquent Real Property to Purchaser, acknowledging receipt of her payment. Lukban
then paid the realty taxes, capital gains tax, documentary stamp tax, and all other internal
revenue taxes due on the property.
On 10 June 2008, Lukban filed a petition for the cancellation of TCT No. 234408 and the
issuance by the Register of Deeds of Marikina City (Marikina Register of Deeds) of a new
TCT in her favor. The case was raffled to the Regional Trial Court of Marikina City, Branch
272 (trial court) and docketed as LRC Case No. R-08-1010-MK. In an Order5dated 22 July
2008, the trial court found that there was an entry on TCT No. 234408 annotating a prior
Notice of Levy in favor of Capitol Bank, denominated as Entry No. 285574/T-No. 234408–
Mortgage. It was annotated more than 12 years ahead of the Notice of Levy for tax
delinquency. The trial court noted that there was a possibility that the owner’s duplicate
certificate of title was not with Atienza but with Capitol Bank. The trial court further noted
that while Lukban provided it with Atienza’s address, she did not furnish the trial court with
Capitol Bank’s address. The trial court ordered Lukban to provide it with Capitol Bank’s
correct address so that it could be notified of the case as a party in interest. Lukban sought
the help of the Marikina Register of Deeds but it could not provide her with Capitol Bank’s
address.
On 23 October 2008, Atty. Aleta I. Lopez (Atty. Lopez) appeared as counsel of Rizal
Commercial Banking Corporation (RCBC) and manifested that RCBC had acquired a portion
of the shares of Capitol Bank. Atty. Lopez further manifested that RCBC did not have the TCT
of the property in its possession. Atty. Lopez informed the trial court that Capitol Bank
already changed its name to Optimum Development Bank (Optimum Bank). During the
hearing, Atty. Felix S. Caballes, Lukban’s counsel, moved for the marking of exhibits to
establish jurisdictional requirements. The exhibits included the following:
(1) Order of the trial court dated 22 July 2008;
(2) Order dated 9 September 2008 setting the initial hearing on 23 October 2008;
(3) Registry return slips showing that Lukban, Lukban’s counsel, the Marikina Register of
Deeds, and RCBC separately received copies of the 9 September 2008 Order and the
petition; and
(4) Certificate of posting.
The trial court then issued an Order setting the continuance of the proceedings on 27
November 2008 and the initial presentation of evidence on 3 December 2008.
After the termination of the lone witness’ testimony but before Lukban’s offer of evidence,
Optimum Bank filed an Urgent Manifestation and Motion to Admit as well as its Opposition
to Lukban’s petition on the ground that its rights would be affected should the petition be
granted. Optimum Bank alleged that while it was the registered mortgagee of the property,
it was not aware that it was sold by the City Treasurer in a public auction and that Lukban
was the highest bidder. Optimum Bank further alleged that the bid was too low compared to
CIVIL LAW REVIEW 2

4
the actual market value of the property and the mortgage debt amounting to P340,000.
Optimum Bank manifested that it had the original duplicate title of the property in its
possession. Optimum Bank also reserved its right to present documentary evidence of its
rights as mortgagee.
On 4 February 2009, Optimum Bank filed a motion for extension of time to submit its
supplemental opposition and to attach proof of its interest in the property. On 4 March
2009, Lukban filed her Formal Offer of Evidence. On 25 March 2009, Optimum Bank filed a
certified true copy of the Loan and Mortgage Agreement in its favor. During the hearing of
25 June 2009, Atty. Restituto Mendoza (Atty. Mendoza), Optimum Bank’s counsel, failed to
appear for the presentation of Optimum Bank’s evidence. The hearing was reset to 17 July
2009. However, on 15 July 2009, Atty. Mendoza filed an Urgent Motion to Reset date of
hearing from 17 July 2009 to 28 August 2009. The trial court denied the motion in its 17
July 2009 Order, deemed Optimum Bank to have waived its right to present evidence, and
submitted the case for decision. Optimum Bank filed a motion for reconsideration but the
trial court denied the motion in its Order of 30 October 2009.
Optimum Bank filed a petition for certiorari and prohibition before the Court of Appeals
assailing the 17 July 2009 and 30 October 2009 Orders of the trial court. The case was
docketed as CA-G.R. SP No. 111764. In a Decision6dated 30 November 2010, the Court of
Appeals dismissed the petition and upheld the trial court’s ruling that Optimum Bank had
waived its right to present evidence.
Meanwhile, the trial court granted Lukban’s petition.
The Decision of the Trial Court
In its Decision7 dated 16 February 2010, the trial court granted Lukban’s petition. The trial
court ruled that Lukban was able to satisfactorily prove that she acquired the property from
a public auction sale, that the one-year redemption period lapsed without Atienza
redeeming the property, and that a Final Deed of Sale was issued in her favor. The trial
court noted that the City of Marikina complied with the requirements of notice and
publication in accordance with Republic Act No. 71608 (R.A. No. 7160). The trial court
further noted that Lukban paid the capital gains tax and that the Bureau of Internal Revenue
issued a Tax Clearance and a Certificate Authorizing Registration in her favor.
WHEREFORE, finding merit in the herein petition, the same is hereby GRANTED. Pursuant
to Section 107 of PD 1529 also known as the Property Registration Decree, Melba T. Atienza
married to Franco Mariano Atienza, the registered owner of the property covered by TCT
No. 234408 of the Registry of Deeds of Marikina City, or any person withholding the same is
hereby ordered to surrender the said title to the Register of Deeds of Marikina City within
THIRTY (30) DAYS upon receipt hereof. In case of non-compliance, the Register of Deeds of
Marikina City is hereby ordered to cancel TCT No. 234408 and to issue, in lieu thereof, a
new title in the name of herein petitioner, HELEN B. LUKBAN of No. 6 Remuda St., Rancho I,
Marikina City, upon payment of the prescribed taxes and fees therefor. The mortgage
annotated on the subject title shall be incorporated in or carried over to the new transfer
CIVIL LAW REVIEW 2

5
certificate of title and its duplicates and shall also contain a memorandum of the annulment
of the outstanding duplicate.
SO ORDERED.9
Optimum Bank appealed from the trial court’s Decision.
The Decision of the Court of Appeals
In its assailed 28 August 2012 Decision, the Court of Appeals granted the appeal and set
aside the trial court’s 16 February 2010 Decision.
The Court of Appeals ruled that actual notice to the registered owner of the real property is
a condition sine qua non for the validity of the auction sale. The Court of Appeals ruled that
the records of the case did not show that Atienza actually received a notice of the auction
sale. According to the Court of Appeals, such failure invalidated the auction sale and as a
consequence, Lukban did not acquire any right therefrom. However, Optimum Bank, not
being the registered owner of the property, was not entitled to the notice of sale. The Court
of Appeals then ruled that it was no longer necessary to rule on Optimum Bank’s arguments
that the issuance of a new TCT to Lukban would impair its rights as a mortgagee and that
Lukban had the burden to prove that the mortgage debt had been paid.
WHEREFORE, the Appeal is hereby GRANTED. The Decision dated 16 February 2010 of the
Regional Trial Court of Marikina City, Branch 272 granting the Petition for Cancellation of
Transfer Certificate of Title (TCT) No. 234408 and Issuance of a New One and ordering the
issuance of a new TCT in favor of appellee Helen B. Lukban, in LRC Case No. 08-1010-MK, is
SET ASIDE. The public auction sale conducted on 18 August 2005 is declared VOID for lack
of notice to Melba T. Atienza, the registered owner of the subject property.
SO ORDERED.10
Lukban filed a motion for reconsideration. In its 7 February 2013 Resolution, the Court of
Appeals denied the motion for lack of merit.
Hence, the petition before this Court.
Lukban argued that:
A. The Honorable Court of Appeals committed serious error of law in setting aside the 16
February 2010 Decision of the Honorable Regional Trial Court and declaring void the public
auction sale conducted on 18 August 2005 by the City Treasurer of Marikina City because
the Decision dated 16 February 2010 (the "Decision" for short) was issued in accordance
with applicable law, jurisprudence and the rules of evidence, and the public auction sale on
18 August 2005 (the "auction sale" for short) was performed in accordance with what
Sections 254, 258 and 260 of Republic Act No. 7610, as amended, or the Local Government
Code of 1991 (RA No. 7610 for short) provides insofar as the procedure in public auction
sale of delinquent real property is concerned.
CIVIL LAW REVIEW 2

6
B. The Honorable Court of Appeals committed reversible error of law in the interpretation
and application of the law when it ruled to invalidate the public auction sale
notwithstanding the fact that the appeal of respondent was premised only on the following
so-called arguments:
a. That petitioner did not adduce evidence that the so-called loan of Melba T. Atienza had
been paid;
b. That petitioner has the burden of proving that Melba T. Atienza had paid her so-called
loan; and
c. That respondent was entitled to personal notice of the public auction sale.11
The Issues
We can sum up the issues of this case as follows:
(1) Whether the Court of Appeals committed a reversible error in setting aside the trial
court’s Decision based on an issue that was not raised by the parties; and
(2) Whether the Court of Appeals committed a reversible error in setting aside the trial
court’s Decision on the ground that the registered owner did not receive a copy of the notice
of auction sale.
The Ruling of this Court
In its petition before the Court of Appeals, Optimum Bank argued that Lukban did not
proffer any proof that the mortgage debt had been paid. It alleged that since the annotation
of the mortgage on the property had not been cancelled, the presumption was that the
mortgage amount of P340,000 in its favor was still unpaid. Optimum Bank likewise argued
that it should have been notified of the delinquency sale because as a person having legal
interest in the property, it should have been given the right to redeem the property under
Section 261 of R.A. No. 7160. It further argued that the cancellation of TCT No. 234408
would effectively extinguish its interest in the property.
In resolving the issue before it, the Court of Appeals premised its Decision on an issue that
was not raised in the petition. Instead of ruling solely on the issues raised by Optimum
Bank, the Court of Appeals ruled on the basis of the lack of notice of the auction sale on
Atienza under Section 260 of R.A. No. 7160. According to the Court of Appeals, the records
failed to disclose that Atienza actually received a notice of the auction sale from the City
Treasurer.
We must point out here that Atienza is not a party to the case before the Court of Appeals
and in the present case before this Court. On 9 September 2008, the trial court issued an
Order which states:
This is a verified Petition For The Cancellation of Transfer Certificate of Title No. 234408
and Issuance of New One filed by petitioner Helen B. Lukban on June 10, 2008.1âwphi1
CIVIL LAW REVIEW 2

7
WHEREFORE, notice is hereby given that the said petition will be heard by this Court on
October 23, 2008 at 8:30 in the morning.
Let this Order together with the petition be posted for three (3) consecutive weeks prior to
the date of hearing in three (3) conspicuous public places in this city where the said land is
situated and on the land itself at the expense of the petitioner.
Likewise, let a copy of this Order together with copy of the petition be served upon: 1) the
Office of the Registry of Deeds of Marikina City; 2) the registered owner Melba T. Atienza at
her address stated in T.C.T. 234408, i.e., Rm. A-1, 992 Halili Complex, Quezon City; and 3)
the registered mortgagee Capitol Bank, now RCBC Savings Bank at its main office Tektite
Bldg., West Tower, Exchange Road, Ortigas Center, Pasig City and at its Marikina Branch, J.P.
Rizal St., San Roque, Marikina City.12
The records showed that the copies of the Order and the Petition sent to Atienza remained
unserved despite several attempts to serve them on her. At the back of the envelope
containing the 9 September 2008 Order were written notations of the attempts made on 18
September, 22 September and 23 September 2008 while the notations at the back of the
envelope of the 23 October 2008 Order showed that attempts to serve were made on 3
November, 4 November, and 7 November 2008. The copies were returned to sender with
the notation "unclaimed."13 Thus, Atienza did not participate in the proceedings before the
trial court. The only oppositor before the trial court was Optimum Bank.
Only the registered owner of the property is deemed the taxpayer who is entitled to a notice
of delinquency and other proceedings relative to the tax sale.14 In this case, Atienza received
the Warrant of Levy15 and the Notice of Sale.16 Whether Atienza received the Notice of
Public Auction is a factual issue that was not raised by Optimum Bank because it is an issue
that only Atienza, being the registered owner, can raise.
We do not find merit in the claim of Optimum Bank that the issuance of a new TCT in favor
of Lukban will impair its rights as a mortgagee. The trial court made a clear ruling on this. It
stated:
As for the opposition interposed in the instant petition by the oppositor, Optimum
Development Bank, the Court deemed that in the issuance of a new title under petitioner’s
name, the oppositor’s rights as a mortgagee should be annotated in the new title. This is in
line with the pronouncement in Ligon v. CA that, "It (the mortgage) is inseparable from the
property mortgaged as it is a right in rem – a lien on the property whoever its owner may
be. It subsists notwithstanding a change in ownership; in short, the personality of the owner
is disregarded. Thus, all subsequent purchasers must respect the mortgage whether the
transfer to them be with or without the consent of the mortgage[e], for such mortgage until
discharged follows the property."17
In the dispositive portion of its Decision, the trial court mandated that "[t]he mortgage
annotated on the subject title shall be incorporated in or carried over to the new transfer
certificate of title and its duplicates and shall also contain a memorandum of the annulment
of the outstanding duplicate."18 In short, the rights of Optimum Bank as a mortgagee are
amply protected, both by the Decision and by Section 180 of R.A. No. 7160,19 despite the
cancellation of the old TCT and the issuance of a new TCT in favor of Lukban. Even in the
CIVIL LAW REVIEW 2

8
petition before this Court, Lukban stressed that she never alleged and prayed for the
cancellation of the encumbrances on TCT No. 234408.
We do not subscribe to Optimum Bank’s view that it is entitled to the Notice of Sale so that it
may exercise its right to redeem the property. Section 260 of R.A. No. 7160 states:
Section 260. Advertisement and Sale. - x x x.
Within thirty (30) days after the sale, the local treasurer or his deputy shall make a report of
the sale to the sanggunian concerned, and which shall form part of his records. The local
treasurer shall likewise prepare and deliver to the purchaser a certificate of sale which shall
contain the name of the purchaser, a description of the property sold, the amount of the
delinquent tax, the interest due thereon, the expenses of sale and a brief description of the
proceedings: Provided, however, That proceeds of the sale in excess of the delinquent tax,
the interest due thereon, and the expenses of sale shall be remitted to the owner of the real
property or person having legal interest therein.
x x x x
Clearly, only the registered owner is entitled to the Notice of Sale.
WHEREFORE, we GRANT the petition. We SET ASIDE the 28 August 2012 Decision and the
7 February 2013 Resolution of the Court of Appeals in CA-G.R. CV No. 95150
and REINSTATE the trial court's 16 February 2010 Decision in LRC Case No. R-08-1010-
MK.
CIVIL LAW REVIEW 2

January 2016

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

January 2016

Transféré par

Droits d'auteur :

Formats disponibles

[JANUARY 2016 CASES] 1

January 11, 2016

G.R. No. 160408

SPOUSES ROBERTO and ADELAIDA PEN, Petitioners,

CIVIL LAW REVIEW 2

By reason of the foregoing discoveries, appellee filed an Affidavit of Adverse Claim on

CIVIL LAW REVIEW 2

Judgment of the RTC

The RTC disposed thusly:

WHEREFORE, judgment is hereby rendered:

2. Cancelling TCT No. RT-45272 (364480) and declaring it to be of no further legal

CIVIL LAW REVIEW 2

2. Cancelling TCT No. RT-45272 (364880) and declaring it to be of no further legal

3. Ordering the appellants-defendants to reconvey the subject property to the

4. Ordering the plaintiffs-appellces to pay to the defendants the unpaid balance of

Ruling of the Court

The appeal is partly meritorious.

CIVIL LAW REVIEW 2

there should be a pledge or mortgage wherein property is pledged or mortgaged by way of

CIVIL LAW REVIEW 2

CIVIL LAW REVIEW 2

Without pronouncement on costs of suit. SO ORDERED.

CIVIL LAW REVIEW 2

January 11, 2016

G.R. No. 194964-65

UNIVERSITY OF MINDANAO, INC., Petitioner,

CIVIL LAW REVIEW 2

(a) Cagayan de Oro and Iligan properties: Resolution No. 82-1-8

Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-President for Finance, to

CIVIL LAW REVIEW 2

Guillermo B. Torres died on March 2, 1989.22

CIVIL LAW REVIEW 2

contracts. Moreover, as an educational institution, it cannot mortgage its properties to

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff and

1. DECLARING the real estate mortgage Saturnino R. Petalcorin executed in favor of

SO ORDERED.30 (Citation omitted)

Saturnino Petalcorin testified that he had no authority to execute a mortgage contract on

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff

CIVIL LAW REVIEW 2

No pronouncement as to costs.36 (Citation omitted)

CIVIL LAW REVIEW 2

The annotations on University of Mindanao’s certificates of title also operate as constructive

University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion for

Acting on the foregoing incidents, the Court RESOLVES to:

CIVIL LAW REVIEW 2

SO ORDERED.61 (Citation omitted)

Hence, University of Mindanao filed this Petition for Review.

The issues for resolution are:

We grant the Petition.

CIVIL LAW REVIEW 2

(1) When the obligation or the law expressly so declare; or

CIVIL LAW REVIEW 2

CIVIL LAW REVIEW 2

powers. It is up to those persons dealing with corporations to determine their competence

1. To sue and be sued in its corporate name;

3. To adopt and use a corporate seal;

CIVIL LAW REVIEW 2

As an educational institution, petitioner serves:

a. To establish, conduct and operate a college or colleges, and/or university;

d. To engage in agricultural, industrial, and/or commercial pursuits in line with educational

i. To invest in other corporations. [As amended on December 9, 1998]. [Amended Articles of

CIVIL LAW REVIEW 2

Coleman involved a hotel’s cancellation of an employment contract it executed with a