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G.R. No.

131679

February 1, 2000

CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST COMPANY, petitioners, vs. SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT OF APPEALS, respondents. MENDOZA, J.: This is a petition for review on certiorari of the decision1 of the Court of Appeals in C.A. GR CV No. 42315 and the order dated December 9, 1997 denying petitioners' motion for reconsideration. The following facts are not in dispute. Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust Company (FEBTC) are banking institutions duly organized and existing under Philippine laws. On or about June 15, 1983, a certain Rodolfo Guansing obtained a loan in the amount of P90,000.00 from CDB, to secure which he mortgaged a parcel of land situated at No. 63 Calavite Street, La Loma, Quezon City and covered by TCT No. 300809 registered in his name. As Guansing defaulted in the payment of his loan, CDB foreclosed the mortgage. At the foreclosure sale held on March 15, 1984, the mortgaged property was sold to CDB as the highest bidder. Guansing failed to redeem, and on March 2, 1987, CDB consolidated title to the property in its name. TCT No. 300809 in the name of Guansing was cancelled and, in lieu thereof, TCT No. 355588 was issued in the name of CDB.
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On June 16, 1988, private respondent Lolita Chan Lim, assisted by a broker named Remedios Gatpandan, offered to purchase the property from CDB. The written Offer to Purchase, signed by Lim and Gatpandan, states in part: We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma, Quezon City for P300,000.00 under the following terms and conditions: (1) 10% Option Money; (2) Balance payable in cash; (3) Provided that the property shall be cleared of illegal occupants or tenants. Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB P30,000.00 as Option Money, for which she was issued Official Receipt No. 3160, dated June 17, 1988, by CDB. However, after some time following up the sale, Lim discovered that the subject property was originally registered in the name of Perfecto Guansing, father of mortgagor Rodolfo Guansing, under TCT No. 91148. Rodolfo succeeded in having the property registered in his name under TCT No. 300809, the same title he mortgaged to CDB and from which the latter's title (TCT No. 355588) was derived. It appears, however, that the father, Perfecto, instituted Civil Case No. Q-39732 in the Regional Trial Court, Branch 83, Quezon City, for the cancellation of his son's title. On March 23, 1984, the trial court rendered a decision 2 restoring Perfecto's previous title (TCT No. 91148) and cancelling TCT No. 300809 on the ground that the latter was fraudulently secured by Rodolfo. This decision has since become final and executory. Aggrieved by what she considered a serious misrepresentation by CDB and its mother-company, FEBTC, on their ability to sell the subject property, Lim, joined by her husband, filed on August 29, 1989 an action for specific performance and damages against petitioners in the Regional Trial Court, Branch 96, Quezon City, where it was docketed as Civil Case No. Q-89-2863. On April 20, 1990, the complaint was amended by impleading the Register of Deeds of Quezon City as an additional defendant. On March 10, 1993, the trial court rendered a decision in favor of the Lim spouses. It ruled that: (1) there was a perfected contract of sale between Lim and CDB, contrary to the latter's contention that the written offer to purchase and the payment of P30,000.00 were merely pre-conditions to the sale and still subject to the approval of FEBTC; (2) performance by CDB of its obligation under the perfected contract of sale had become impossible on account of the 1984 decision in Civil Case No. Q-39732 cancelling the title in the name of mortgagor Rodolfo Guansing; (3) CDB and FEBTC were not exempt from liability despite the impossibility of performance, because they could not credibly disclaim knowledge of the cancellation of Rodolfo Guansing's title without the admitting their failure to discharge their duties to the public as reputable banking institutions; and (4) CDB and FEBTC are liable for damages for the prejudice caused

against the Lims.3 Based on the foregoing findings, the trial court ordered CDB and FEBTC to pay private respondents, jointly and severally, the amount of P30,000.00 plus interest at the legal rate computed from June 17, 1988 until full payment. It also ordered petitioners to pay private respondents, jointly and severally, the amounts of P250,000.00 as moral damages, P50,000.00 as exemplary damages, P30,000.00 as attorney's fees, and the costs of the suit.4 Petitioners brought the matter to the Court of Appeals, which, on October 14, 1997, affirmed in toto the decision of the Regional Trial Court. Petitioners moved for reconsideration, but their motion was denied by the appellate court on December 9, 1997. Hence, this petition. Petitioners contend that 1. The Honorable Court of Appeals erred when it held that petitioners CDB and FEBTC were aware of the decision dated March 23, 1984 of the Regional Trial Court of Quezon City in Civil Case No. Q-39732. 2. The Honorable Court of Appeals erred in ordering petitioners to pay interest on the deposit of THIRTY THOUSAND PESOS (P30,000.00) by applying Article 2209 of the New Civil Code. 3. The Honorable Court of Appeals erred in ordering petitioners to pay moral damages, exemplary damages, attorney's fees and costs of suit. I. At the outset, it is necessary to determine the legal relation, if any, of the parties. Petitioners deny that a contract of sale was ever perfected between them and private respondent Lolita Chan Lim. They contend that Lim's letter-offer clearly states that the sum of P30,000,00 was given as option money, not as earnest money.5 They thus conclude that the contract between CDB and Lim was merely an option contract, not a contract of sale. The contention has no merit. Contracts are not defined by the parries thereto but by principles of law. 6 In determining the nature of a contract, the courts are not bound by the name or title given to it by the contracting parties.7 In the case at bar, the sum of P30,000.00, although denominated in the offer to purchase as "option money," is actually in the nature of earnest money or down payment when considered with the other terms of the offer. In Carceler v. Court of Appeals,8 we explained the nature of an option contract, viz. An option contract is a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions, the power to decide, whether or not to enter into a principal contract, it binds the party who has given the option not to enter into the principal contract with any other person during the period; designated, and within that period, to enter into such contract with the one to whom the option was granted, if the latter should decide to use the option. It is a separate agreement distinct from the contract to which the parties may enter upon the consummation of the option. An option contract is therefore a contract separate from and preparatory to a contract of sale which, if perfected, does not result in the perfection or consummation of the sale. Only when the option is exercised may a sale be perfected. In this case, however, after the payment of the 10% option money, the Offer to Purchase provides for the payment only of the balance of the purchase price, implying that the "option money" forms part of the purchase price. This is precisely the result of paying earnest money under Art. 1482 of the Civil Code. It is clear then that the parties in this case actually entered into a contract of sale, partially consummated as to the payment of the price. Moreover, the following findings of the trial court based on the testimony of the witnesses establish that CDB accepted Lim's offer to purchase: It is further to be noted that CDB and FEBTC already considered plaintiffs' offer as good and no longer subject to a final approval. In his testimony for the defendants on February 13, 1992, FEBTC's Leomar Guzman stated that he was then in the Acquired Assets Department of FEBTC wherein plaintiffs' offer to purchase was endorsed thereto by Myoresco Abadilla, CDB's senior vicepresident, with a recommendation that the necessary petition for writ of possession be filed in the proper court; that the recommendation was in accord with one of the conditions of the offer, i.e., the clearing of the property of illegal occupants or tenants (tsn, p. 12); that, in compliance with the

request, a petition for writ of possession was thereafter filed on July 22, 1988 (Exhs. 1 and 1-A); that the offer met the requirements of the banks; and that no rejection of the offer was thereafter relayed to the plaintiffs (p. 17); which was not a normal procedure, and neither did the banks return the amount of P30,000.00 to the plaintiffs.9 Given CDB's acceptance of Lim's offer to purchase, it appears that a contract of sale was perfected and, indeed, partially executed because of the partial payment of the purchase price. There is, however, a serious legal obstacle to such sale, rendering it impossible for CDB to perform its obligation as seller to deliver and transfer ownership of the property. Nemo dat quod non habet, as an ancient Latin maxim says. One cannot give what one does not have. In applying this precept to a contract of sale, a distinction must be kept in mind between the "perfection" and "consummation" stages of the contract. A contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.10 It is, therefore, not required that, at the perfection stage, the seller be the owner of the thing sold or even that such subject matter of the sale exists at that point in time. 11 Thus, under Art. 1434 of the Civil Code, when a person sells or alienates a thing which, at that time, was not his, but later acquires title thereto, such title passes by operation of law to the buyer or grantee. This is the same principle behind the sale of "future goods" under Art. 1462 of the Civil Code. However, under Art. 1459, at the time of delivery or consummation stage of the sale, it is required that the seller be the owner of the thing sold. Otherwise, he will not be able to comply with his obligation to transfer ownership to the buyer. It is at the consummation stage where the principle of nemo dat quod non habet applies. In Dignos v. Court of Appeals,12 the subject contract of sale was held void as the sellers of the subject land were no longer the owners of the same because of a prior sale.13 Again, in Nool v. Court of Appeals,14 we ruled that a contract of repurchase, in which the seller does not have any title to the property sold, is invalid: We cannot sustain petitioners' view. Article 1370 of the Civil Code is applicable only to valid and enforceable contracts. The Regional Trial Court and the Court of Appeals rules that the principal contract of sale contained in Exhibit C and the auxiliary contract of repurchase in Exhibit D are both void. This conclusion of the two lower courts appears to find support in Dignos v. Court of Appeals, where the Court held: Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they were no longer owners of the same and the sale is null and void. In the present case, it is clear that the sellers no longer had any title to the parcels of land at the time of sale. Since Exhibit D, the alleged contract of repurchase, was dependent on the validity of Exhibit C, it is itself void. A void contract cannot give rise to a valid one. Verily, Article 1422 of the Civil Code provides that (a) contract which is the direct result of a previous illegal contract, is also void and inexistent. We should however add that Dignos did not cite its basis for ruling that a "sale is null and void" where the sellers "were no longer the owners" of the property. Such a situation (where the sellers were no longer owners) does not appear to be one of the void contracts enumerated in Article 1409 of the Civil Code. Moreover, the Civil Code itself recognizes a sale where the goods are to be acquired . . . by the seller after the perfection of the contract of sale, clearly implying that a sale is possible even if the seller was not the owner at the time of sale, provided he acquires title to the property later on. In the present case, however, it is likewise clear that the sellers can no longer deliver the object of the sale to the buyers, as the buyers themselves have already acquired title and delivery thereof from the rightful owner, the DBP. Thus, such contract may be deemed to be inoperative and may thus fall, by analogy, under item No. 5 of Article 1409 of the Civil Code: Those which contemplate an impossible service. Article 1459 of the Civil Code provides that "the vendor must have a right to transfer the ownership thereof [subject of the sale] at the time it is delivered." Here, delivery of ownership is no longer possible. It has become impossible.15

In this case, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must, therefore, be deemed a nullity for CDB did not have a valid title to the said property. To be sure, CDB never acquired a valid title to the property because the foreclosure sale, by virtue of which, the property had been awarded to CDB as highest bidder, is likewise void since the mortgagor was not the owner of the property foreclosed. A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid price in money or its equivalent. Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale. This is the reason Art. 208516 of the Civil Code, in providing for the essential requisites of the contract of mortgage and pledge, requires, among other things, that the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a possible foreclosure sale should the mortgagor default in the payment of the loan. There is, however, a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy. This is the doctrine of "the mortgagee in good faith" based on the rule that all persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title. 17 The public interest in upholding the indefeasibility of a certificate of title, as evidence of the lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certificate of title. This principle is cited by petitioners in claiming that, as a mortgagee bank, it is not required to make a detailed investigation of the history of the title of the property given as security before accepting a mortgage. We are not convinced, however, that under the circumstances of this case, CDB can be considered a mortgagee in good faith. While petitioners are not expected to conduct an exhaustive investigation on the history of the mortgagor's title, they cannot be excused from the duty of exercising the due diligence required of banking institutions. In Tomas v. Tomas,18 we noted that it is standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are real owners thereof, noting that banks are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands, for their business is affected with public interest. We held thus: We, indeed, find more weight and vigor in a doctrine which recognizes a better right for the innocent original registered owner who obtained his certificate of title through perfectly legal and regular proceedings, than one who obtains his certificate from a totally void one, as to prevail over judicial pronouncements to the effect that one dealing with a registered land, such as a purchaser, is under no obligation to look beyond the certificate of title of the vendor, for in the latter case, good faith has yet to be established by the vendee or transferee, being the most essential condition, coupled with valuable consideration, to entitle him to respect for his newly acquired title even as against the holder of an earlier and perfectly valid title. There might be circumstances apparent on the face of the certificate of title which could excite suspicion as to prompt inquiry, such as when the transfer is not by virtue of a voluntary act of the original registered owner, as in the instant case, where it was by means of a self-executed deed of extra-judicial settlement, a fact which should be noted on the face of Eusebia Tomas certificate of title. Failing to make such inquiry would hardly be consistent with any pretense of good faith, which the appellant bank invokes to claim the right to be protected as a mortgagee, and for the reversal of the judgment rendered against it by the lower court.19 In this case, there is no evidence that CDB observed its duty of diligence in ascertaining the validity of Rodolfo Guansing's title. It appears that Rodolfo Guansing obtained his fraudulent title by executing an Extra-Judicial Settlement of the Estate With Waiver where he made it appear that he and Perfecto Guansing were the only surviving heirs entitled to the property, and that Perfecto had waived all his rights thereto. This self-executed deed should have placed CDB on guard against any possible defect in or question as to the mortgagor's title. Moreover, the alleged ocular inspection report20 by CDB's representative was never formally offered in evidence. Indeed, petitioners admit that they are aware that

the subject land was being occupied by persons other than Rodolfo Guansing and that said persons, who are the heirs of Perfecto Guansing, contest the title of Rodolfo.21 II. The sale by CDB to Lim being void, the question now arises as to who, if any, among the parties was at fault for the nullity of the contract. Both the trial court and the appellate court found petitioners guilty of fraud, because on June 16, 1988, when Lim was asked by CDB to pay the 10% option money, CDB already knew that it was no longer the owner of the said property, its title having been cancelled.22 Petitioners contend that: (1) such finding of the appellate court is founded entirely on speculation and conjecture; (2) neither CDB nor FEBTC was a party in the case where the mortgagor's title was cancelled; (3) CDB is not privy to any problem among the Guansings; and (4) the final decision cancelling the mortgagor's title was not annotated in the latter's title. As a rule, only questions of law may be raised in a petition for review, except in circumstances where questions of fact may be properly raised.23 Here, while petitioners raise these factual issues, they have not sufficiently shown that the instant case falls under any of the exceptions to the above rule. We are thus bound by the findings of fact of the appellate court. In any case, we are convinced of petitioners' negligence in approving the mortgage application of Rodolfo Guansing. III. We now come to the civil effects of the void contract of sale between the parties. Article 1412(2) of the Civil Code provides: If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: xxx xxx xxx (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise. Private respondents are thus entitled to recover the P30,000,00 option money paid by them. Moreover, since the filing of the action for damages against petitioners amounted to a demand by respondents for the return of their money, interest thereon at the legal rate should be computed from August 29, 1989, the date of filing of Civil Case No. Q-89-2863, not June 17, 1988, when petitioners accepted the payment. This is in accord with our ruling inCastillo v. Abalayan24 that in case of avoid sale, the seller has no right whatsoever to keep the money paid by virtue thereof and should refund it, with interest at the legal rate, computed from the date of filing of the complaint until fully paid. Indeed, Art. 1412(2) which provides that the non-guilty party "may demand the return of what he has given" clearly implies that without such prior demand, the obligation to return what was given does not become legally demandable. Considering CDB's negligence, we sustain the award of moral damages on the basis of Arts. 21 and 2219 of the Civil Code and our ruling in Tan v. Court of Appeals25 that moral damages may be recovered even if a bank's negligence is not attended with malice and bad faith. We find, however, that the sum of P250,000.00 awarded by the trial court is excessive. Moral damages are only intended to alleviate the moral suffering undergone by private respondent, not to enrich them at the expenses of the petitioners.26 Accordingly, the award of moral damages must be reduced to P50,000.00. Likewise, the award of P50,000.00 as exemplary damages, although justified under Art. 2232 of the Civil Code, is excessive and should be reduced to P30,000.00. The award of P30,000.00 attorney's fees based on Art. 2208, pars. 1, 2, 5 and 11 of the Civil Code should similarly be reduced to P20,000.00. WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the MODIFICATION as to the award of damages as above stated.
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SO ORDERED.

G.R. No. 129471 April 28, 2000 DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and CARLOS CAJES, respondents. MENDOZA, J.: This is a petition for certiorari seeking to reverse the decision1 and resolution2 of the Court of Appeals dated August 30, 1996 and April 23, 1997, respectively, declaring private respondent Carlos Cajes the owner of 19.4 hectares of land embraced in TCT No. 10101 and ordering the segregation and reconveyance of said portion to him. The antecedent facts are as follows: The land in dispute, consisting of 19.4 hectares located in San Miguel, Province of Bohol, was originally owned by Ulpiano Mumar, whose ownership since 1917 was evidenced by Tax Declaration No. 3840.3 In 1950,4 Mumar sold the land to private respondent who was issued Tax Declaration No. R-1475 that same year.5 The tax declaration was later superseded by Tax Declaration Nos. R-799 issued in 1961 6 and D2247 issued in 1974.7Private respondent occupied and cultivated the said land, 8 planting cassava and camote in certain portions of the land.9 In 1969, unknown to private respondent, Jose Alvarez succeeded in obtaining the registration of a parcel of land with an area of 1,512,468.00 square meters, 10 in his name for which he was issued OCT No. 546 on June 16, 1969. 11 The parcel of land included the 19.4 hectares occupied by private respondent. Alvarez never occupied nor introduced improvements on said land. 12 In 1972, Alvarez sold the land to the spouses Gaudencio and Rosario Beduya to whom TCT No. 10101 was issued. 13 That same year, the spouses Beduya obtained a loan from petitioner Development Bank of the Philippines for P526,000.00 and, as security, mortgaged the land covered by TCT No. 10101 to the bank. 14 In 1978, the SAAD Investment Corp., and the SAAD Agro-Industries, Inc., represented by Gaudencio Beduya, and the spouses Beduya personally executed another mortgage over the land in favor of petitioner to secure a loan of P1,430,000.00. 15 The spouses Beduya later failed to pay their loans, as a result of which, the mortgage on the property was foreclosed. 16 In the resulting foreclosure sale held on January 31, 1985, petitioner was the highest bidder. 17 As the spouses Beduya failed to redeem the property, petitioner consolidated its ownership. 18 It appears that private respondent had also applied for a loan from petitioner in 1978, offering his 19.4 hectare property under Tax Declaration No. D-2247 as security for the loan. As part of the processing of the application, a representative of petitioner, Patton R. Olano, inspected the land and appraised its value. Private respondent's loan application was later approved by petitioner. 19 However after releasing the amount of the loan to private respondent, petitioner found that the land mortgaged by private respondent was included in the land covered by TCT No. 10101 in the name of the spouses Beduya. Petitioner, therefore, cancelled the loan and demanded immediate payment of the amount. 20 Private respondent paid the loan to petitioner for which the former was issued a Cancellation of Mortgage, dated March 18, 1981, releasing the property in question from encumbrance. 21 Sometime in April of 1986, more than a year after the foreclosure sale, a re-appraisal of the property covered by TCT No. 10101 was conducted by petitioner's representatives. It was then discovered that private respondent was occupying a portion of said land. Private respondent was informed that petitioner had become the owner of the land he was occupying, and he was asked to vacate the property. As private respondent refused to do so, 22petitioner filed a complaint for recovery of possession with damages against him. The case was assigned to Branch 1 of the Regional Trial Court, Tagbilaran City, 23 which after trial, rendered a decision, dated August 22, 1989, declaring petitioner the lawful owner of the entire land

covered by TCT No. 10101 on the ground that the decree of registration was binding upon the land. 24 The dispositive portion of the decision reads: WHEREFORE, foregoing considered, the court renders judgment: 1 Declaring plaintiff bank Development Bank of the Philippines the true and legal owner of the land in question covered by TCT No. 10101 farm of Gaudencio Beduya; 2 Dismissing defendant's counterclaim; 3 Ordering defendant to vacate from the land in question; the portion of which he claims to belong to him for without basis in fact and law; 4 Ordering defendant, his agents or any person representing him or those who may claim substantial rights on the land to vacate therefrom, cease and desist from disturbing, molesting and interfering plaintiff's possession of the land in question, and from committing any such act as would tend to mitigate, deny or deprive plaintiff of its ownership and possession over said land. SO ORDERED. On appeal, the Court of Appeals reversed and gave judgment for private respondent, declaring him the owner of the 19.4 hectares of land erroneously included in TCT No. 10101. The dispositive portion of the appellate court's decision reads: WHEREFORE, the appealed decision is hereby REVERSED AND SET ASIDE. A new decision is hereby rendered: 1. Dismissing the complaint. 2. Declaring the disputed 19.4000 hectares of land embraced in TCT 10101 as exclusively belonging to defendant-appellant, ordering its segregation from plaintiff-appellee's title and its reconveyance to appellant. No pronouncement as to costs. SO ORDERED. 25 Petitioner moved for a reconsideration but its motion was denied in a resolution dated April 23, 1997. 26 Hence this petition. Petitioner contends that: I. THE DECISION OF THE RESPONDENT COURT IS NOT IN ACCORD WITH THE APPLICABLE PROVISIONS OF LAW (Sections 38 and 46 of ACT 496) AND THE APPLICABLE DECISIONS OF THE SUPREME COURT, PARTICULARLY IN THE CASE OF BENIN VS. TUASON, 57 SCRA 531. II. THE RESPONDENT COURT OVERLOOKED THE ISSUES ABOUT THE DBP BEING AN INNOCENT MORTGAGEE FOR VALUE OF THE LAND IN QUESTION AND OF HAVING PURCHASED LATER THE SAME DURING A PUBLIC AUCTION SALE. III. THE RESPONDENT COURT'S RULING DECLARING DBP IN ESTOPPEL IS ILLOGICAL. 27 First. Petitioner invokes the ruling of this Court in Benin v. Tuason 28 in support of its claim that its predecessor-in-interest, Jose Alvarez, became the owner of the land by virtue of the decree of registration issued in his name. In Benin, three sets of plaintiffs filed separate complaints against Mariano Severo Tuason and J.M. Tuason & Co., Inc., praying for the cancellation of OCT No. 735 covering two parcels of land called the Sta. Mesa Estate, or Parcel 1, with an area of 8,798,617.00 square meters, and the Diliman Estate, or Parcel 2, with an area of 15,961,246.00 square meters. They asked that they be declared the owners and lawful possessors of said lands.

Benin is distinguished from this case. In the first place, Benin involved vast tracts of lands which had already been subdivided and bought by innocent purchasers for value and in good faith at the time the claimants obtained registration. Secondly, when the claimants' ancestors occupied the lands in question and declared them for tax purposes in 1944, the lands were already covered by the tax declarations in the name of J. M. Tuason & Co., Inc. In 1914, OCT No. 735 was issued in the name of Tuason so that, from that time on, no possession could defeat the title of the registered owners of the land. Thirdly, the validity of OCT No. 735 had already been recognized by this Court in several cases 29 and, as a result thereof, the transfer certificates of title acquired by the innocent purchasers for value were also declared valid. It was held that neither could the claimants file an action to annul these titles for not only had these actions prescribed, but the fact was that the claimants were also barred from doing so by laches, having filed the complaint only in 1955, or 41 years after the issuance of OCT No. 735 to J.M. Tuason & Co., Inc. Thus, it was not solely the decree of registration which was considered in resolving the Benin case. What was considered decisive was the valid title or right of ownership of J. M. Tuason & Co., Inc. and that of the other innocent purchasers for value and in good faith compared to the failure of the claimants to show their right to own or possess the questioned properties.
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Petitioner maintains that the possession by private respondent and his predecessor-in-interest of the 19.4 hectares of land for more than 30 years cannot overcome the decree of registration issued in favor of its predecessor-in-interest Jose Alvarez. Petitioner quotes the following statement in the Benin case: It follows also that the allegation of prescriptive title in favor of plaintiffs does not suffice to establish a cause of action. If such prescription was completed before the registration of the land in favor of the Tuasons, the resulting prescriptive title was cut off and extinguished by the decree of registration. If, on the contrary, the prescription was either begun or completed after the decree of registration, it conferred no title because, by express provision of law, prescription can not operate against the registered owner (Act 496). 30 Petitioner would thus insist that, by virtue of the decree of registration, Jose Alvarez and those claiming title from him (i.e., the spouses Beduya) acquired ownership of the 19.4 hectares of land, despite the fact that they neither possessed nor occupied these lands. This view is mistaken. A consideration of the cases shows that a decree of registration cut off or extinguished a right acquired by a person when such right refers to a lien or encumbrance on the land not to the right of ownership thereof which was not annotated on the certificate of title issued thereon. Thus, Act No. 496 provides: Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold the same free of all encumbrances except those noted on said certificate, and any of the following encumbrances which may be subsisting, namely: First. Liens, claims, or rights arising or existing under the laws of Constitution of the United States or of the Philippine Islands which the statutes of the Philippine Islands cannot require to appear of record in the Registry. Second. Taxes within two years after the same became due and payable. Third. Any public highway, way, private way established by law, or any Government irrigation canal or lateral thereof, where the certificate of title does not state that the boundaries of such highway, way, or irrigation canal or lateral thereof, have been determined. But if there are easements or other rights appurtenant to a parcel of registered land which for any reason have failed to be registered, such easements or rights shall remain so appurtenant notwithstanding such failure, and shall be held to pass with the land until cut off or extinguished by the registration of the servient estate, or in any other manner. Hence, in Cid v. Javier, 31 it was held: . . . Consequently, even conceding arguendo that such an easement has been acquired, it had been cut off and extinguished by the registration of the servient estate under the

Torrens system without the easement being annotated on the corresponding certificate of title, pursuant to Section 39 of the Land Registration Act. This principle was reiterated in Purugganan v. Paredes 32 which also involved an easement of light and view that was not annotated on the certificate of title of the servient estate. But to make this principle applicable to a situation wherein title acquired by a person through acquisitive prescription would be considered cut off and extinguished by a decree of registration would run counter to established jurisprudence before and after the ruling in Benin. Indeed, registration has never been a mode of acquiring ownership over immovable property. As early as 1911, in the case of City of Manila v. Lack, 33 the Court already ruled on the purpose of registration of lands, viz.: The Court of Land Registration was created for a single purpose. The Act is entitled "An Act to provide for the adjudication and registration of titles to lands in the Philippine Islands." The sole purpose of the Legislature in its creation was to bring the land titles of the Philippine Islands under one comprehensive and harmonious system, the cardinal features of which are indefeasibility of title and the intervention of the State as a prerequisite to the creation and transfer of titles and interest, with the resultant increase in the use of land as a business asset by reason of the greater certainty and security of title. It does not create a title nor vest one. It simply confirms a title already created and already vested, rendering it forever indefeasible. . . Again, in the case of Angeles v. Samia 34 where land was erroneously registered in favor of persons who neither possessed nor occupied the same, to the prejudice of the actual occupant, the Court held: . . . The purpose of the Land Registration Act, as this court has had occasion to so state more than once, is not to create or vest title, but to confirm and register title already created and already vested, and of course, said original certificate of title No. 8995 could not have vested in the defendant more title than what was rightfully due her and her coowners. It appearing that said certificate granted her much more than she expected, naturally to the prejudice of another, it is but just that the error, which gave rise to said anomaly, be corrected (City of Manila vs. Lack, 19 Phil., 324). The defendant and her coowners knew or, at least, came to know that it was through error that the original certificate of title in question was issued by the court which heard cadastral case No. 11 of Bacolor, not only in or prior to March, 1933, but from the time said certificate was issued in their favor, that is, from December 15, 1921. This is evidenced by the fact that, ever since, they remained passive without even attempting to make the least showing of ownership over the land in question until after the lapse of more than eleven years. The Land Registration Act as well as the Cadastral Act protects only the holders of a title in good faith and does not permit its provisions to be used as a shield for the commission of fraud, or that one should enrich himself at the expense of another (Gustilo vs. Maravilla, 48 Phil., 442; Angelo vs. Director of Lands, 49 Phil., 838). The above-stated Acts do not give anybody, who resorts to the provisions thereof, a better title than he really and lawfully has. If he happened to obtain it by mistake or to secure, to the prejudice of his neighbor, more land than he really owns, with or without bad faith on his part, the certificate of title, which may have been issued to him under the circumstances, may and should be cancelled or corrected (Legarda and Prieto vs. Saleeby, 31 Phil., 590). This is permitted by section 112 of Act No. 496, which is applicable to the Cadastral Act because it is so provided expressly by the provisions of section 11 of the latter Act. It cannot be otherwise because, as stated in the case of Domingo vs. Santos, Ongsiako, Lim y Cia. (55 Phil., 361), errors in the plans of lands sought to be registered in the registry and reproduced in the certificate of title issued later, do not annul the decree of registration on the ground that it is not the plan but the land itself which is registered in the registry. In other words, if the plan of an applicant for registration or claimant in a cadastral case alleges that the land referred to in said plan is 100 or 1,000 hectares, and the land which he really owns and desires to register in the registry is only 80 ares, he cannot claim to be the owner of the existing difference if afterwards he is issued a certificate of title granting him said area of 100 or 1,000 hectares. 35

The principle laid down in this 1938 case remains the prevailing doctrine, its latest application being in the case ofReyes v. Court of Appeals 36 wherein we ruled that the fact that a party was able to secure a title in his favor did not operate to vest ownership upon her of the property. In the present case, private respondent has been in actual, open, peaceful and continuous possession of the property since 1950. This fact was corroborated by the testimony of Eleuterio Cambangay who personally knew that Ulpiano Mumar transferred the land covered by Tax Declaration No. 3840 37 in favor of private respondent in 1950. 38 Private respondent's claim based on actual occupation of the land is bolstered by Tax Declaration Nos. R-1475, R-799 and D-2247 39 which were issued in his name in 1950, 1961 and 1974, respectively. Together with his actual possession of the land, these tax declarations constitute strong evidence of ownership of the land occupied by him. As we said in the case of Republic vs. Court of Appeals: 40 Although tax declarations or realty tax payments of property are not conclusive evidence of ownership, nevertheless, they are good indicia of possession in the concept of owner for no one in his right mind would be paying taxes for a property that is not in his actual or at least constructive possession. They constitute at least proof that the holder has a claim of title over the property. The voluntary declaration of a piece of property for taxation purposes manifests not only one's sincere and honest desire to obtain title to the property and announces his adverse claim against the State and all other interested parties, but also the intention to contribute needed revenues to the Government. Such an act strengthens one's bona fide claim of acquisition of ownership. More importantly, it was established that private respondent, having been in possession of the land since 1950, was the owner of the property when it was registered by Jose Alvarez in 1969, his possession tacked to that of his predecessor-in-interest, Ulpiano Mumar, which dates back to 1917. 41 Clearly, more than 30 years had elapsed before a decree of registration was issued in favor of Jose Alvarez. This uninterrupted adverse possession of the land for more than 30 years could only ripen into ownership of the land through acquisitive prescription which is a mode of acquiring ownership and other real rights over immovable property. Prescription requires public, peaceful, uninterrupted and adverse possession of the property in the concept of an owner for ten (10) years, in case the possession is in good faith and with a just title. Such prescription is called ordinary prescription, as distinguished from extraordinary prescription which requires possession for 30 years in case possession is without just title or is not in good faith. 42 In contrast to private respondent, it has been shown that neither Jose Alvarez nor the spouses Beduya were at any time in possession of the property in question. In fact, despite knowledge by Gaudencio Beduya that private respondent occupied this 19.4 hectares included in the area covered by TCT No. 10101, 43 he never instituted any action to eject or recover possession from the latter. Hence, it can be concluded that neither Jose Alvarez nor the spouses Beduya ever exercised any right of ownership over the land. The fact of registration in their favor never vested in them the ownership of the land in dispute. "If a person obtains a title under the Torrens system, which includes by mistake or oversight land which can no longer be registered under the system, he does not, by virtue of the said certificate alone, become the owner of the lands illegally included." 44 Considering the circumstances pertaining in this case, therefore, we hold that ownership of the 19.4 hectares of land presently occupied by private respondent was already vested in him and that its inclusion in OCT No. 546 and, subsequently, in TCT No. 10101, was erroneous. Accordingly, the land in question must be reconveyed in favor of private respondent, the true and actual owner thereof, reconveyance being clearly the proper remedy in this case. The true owner may bring an action to have the ownership or title to the land judicially settled and the Court in the exercise of its equity jurisdiction, without ordering the cancellation of the Torrens title issued upon the patent, may direct the defendants, the registered owner to reconvey the parcel of land to the plaintiff who has been found to be the true owner thereof." (Vital vs. Amore, 90 Phil. 955) "The reconveyance is just and proper in order to terminate the intolerable anomaly that the patentees should have a torrens title for the land which they and their predecessors never possessed which has been possessed by Novo in the concept of owner." (Bustarga v. Novo, 129 SCRA 125). 45

Second. Generally, an action for reconveyance based on an implied or constructive trust, such as the instant case, prescribes in 10 years from the date of issuance of decree of registration. 46 However, this rule does not apply when the plaintiff is in actual possession of the land. Thus, it has been held: . . . [A]n action for reconveyance of a parcel of land based on implied or constructive trust prescribes in ten years, the point of reference being the date of registration of the deed or the date of the issuance of the certificate of title over the property, but this rule applies only when the plaintiff or the person enforcing the trust is not in possession of the property, since if a person claiming to be the owner thereof is in actual possession of the property, as the defendants are in the instant case, the right to seek reconveyance, which in effect seeks to quiet title to the property, does not prescribe. The reason for this is that one who is in actual possession of a piece of land claiming to be the owner thereof may wait until his possession is disturbed or his title is attacked before taking steps to vindicate his right, the reason for the rule being, that his undisturbed possession gives him a continuing right to seek the aid of a court of equity to ascertain and determine the nature of the adverse claim of a third party and its effect on his own title, which right can be claimed only by one who is in possession. 47 Having been the sole occupant of the land in question, private respondent may seek reconveyance of his property despite the lapse of more than 10 years. Nor is there any obstacle to the determination of the validity of TCT No. 10101. It is true that the indefeasibility of torrens titles cannot be collaterally attacked. In the instant case, the original complaint is for recovery of possession filed by petitioner against private respondent, not an original action filed by the latter to question the validity of TCT No. 10101 on which petitioner bases its right. To rule on the issue of validity in a case for recovery of possession is tantamount to a collateral attack. However, it should not be overlooked that private respondent filed a counterclaim against petitioner, claiming ownership over the land and seeking damages. Hence, we could rule on the question of the validity of TCT No. 10101 for the counterclaim can be considered a direct attack on the same. "A counterclaim is considered a complaint, only this time, it is the original defendant who becomes the plaintiff. . . . It stands on the same footing and is to be tested by the same rules as if it were an independent action." 48 In an analogous case, 49 we ruled on the validity of a certificate of title despite the fact that the original action instituted before the lower court was a case for recovery of possession. The Court reasoned that since all the facts of the case are before it, to direct the party to institute cancellation proceedings would be needlessly circuitous and would unnecessarily delay the termination of the controversy which has already dragged on for 20 years. Third. Petitioner nonetheless contends that an action for reconveyance does not lie against it, because it is an innocent purchaser for value in the foreclosure sale held in 1985. This contention has no merit. Sec. 38 of Act No. 496, the Land Registration Act, provides: If the court after hearing finds that the applicant or adverse claimant has title as stated in his application or adverse claim and proper for registration, a decree of confirmation and registration shall be entered. Every decree of registration shall bind the land, and quiet title thereto, subject only to the exceptions stated in the following section. It shall be conclusive upon and against all persons, including the Insular Government and all the branches thereof, whether mentioned by name in the application, notice, or citation, or included in the general description "To all whom it may concern." Such decree shall not be opened by reason of the absence, infancy, or other disability of any person affected thereby, nor by any proceeding in any court for reversing judgments or decrees; subject, however, to the right of any person deprived of land or of any estate or interest therein by decree of registration obtained by fraud to file in the competent Court of First Instance a petition for review within one year after entry of the decree, provided no innocent purchaser for value has acquired an interest. Upon the expiration of said term of one year, every decree or certificate of title issued in accordance with this section shall be incontrovertible. If there is any such purchaser, the decree of registration shall not be opened, but shall remain in full force and effect forever, subject only to the right of appeal hereinbefore provided: Provided, however, That no decree or certificate of title issued to persons not parties to the appeal shall be

cancelled or annulled. But any person aggrieved by such decree in any case may pursue his remedy by action for damages against the applicant or any other person for fraud in procuring the decree. Whenever the phrase "innocent purchaser for value" or an equivalent phrase occurs in this Act, it shall be deemed to include an innocent lessee, mortgagee, or other encumbrancer for value. (As amended by Sec. 3, Act 3621; and Sec. 1, Act No. 3630.) Succinctly put, 38 provides that a certificate of title is conclusive and binding upon the whole world. Consequently, a buyer need not look behind the certificate of title in order to determine who is the actual owner of the land. However, this is subject to the right of a person deprived of land through fraud to bring an action for reconveyance, provided that it does not prejudice the rights of an innocent purchaser for value and in good faith. "It is a condition sine qua non for an action for reconveyance to prosper that the property should not have passed to the hands of an innocent purchaser for value." 50 The same rule applies to mortgagees, like petitioner. Thus, we held: Where the certificate of title is in the name of the mortgagor when the land is mortgaged, the innocent mortgagee for value has the right to rely on what appears on the certificate of title. In the absence of anything to excite suspicion, said mortgagee is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of said certificate. Although Article 2085 of the Civil Code provides that absolute ownership of the mortgaged property by the mortgagor is essential, the subsequent declaration of a title as null and void is not a ground for nullifying the mortgage right of a mortgagee in good faith. 51 The evidence before us, however, indicates that petitioner is not a mortgagee in good faith. To be sure, an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor's title. Nonetheless, especially in the case of a banking institution, a mortgagee must exercise due diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof. Banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands. 52 In this case, petitioner's representative, Patton R. Olano, admitted that he came to know of the property for the first time in 1979 when he inspected it to determine whether the portion occupied by private respondent and mortgaged by the latter to petitioner was included in TCT No. 10101. This means that when the land was mortgaged by the spouses Beduya in 1972, no investigation had been made by petitioner. It is clear, therefore, that petitioner failed to exercise due care and diligence in establishing the condition of the land as regards its actual owners and possessors before it entered into the mortgage contract in 1972 with the Beduyas. Had it done so, it would not have failed to discover that private respondent was occupying the disputed portion of 19.4 hectares. For this reason, petitioner cannot be considered an innocent purchaser for value when it bought the land covered by TCT No. 10101 in 1985 at the foreclosure sale. Indeed, two circumstances negate petitioner's claim that it was an innocent purchaser for value when it bought the land in question, including the portion occupied by private respondent: (1) petitioner was already informed by Gaudencio Beduya that private respondent occupied a portion of the property covered by TCT No. 10101; and (2) petitioner's representative conducted an investigation of the property in 1979 to ascertain whether the land mortgaged by private respondent was included in TCT No. 10101. In other words, petitioner was already aware that a person other than the registered owner was in actual possession of the land when it bought the same at the foreclosure sale. A person who deliberately ignores a significant fact which would create suspicion in an otherwise reasonable man is not an innocent purchaser for value. "It is a well-settled rule that a purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor." 53 Petitioner deliberately disregarded both the fact that private respondent already occupied the property and that he was claiming ownership over the same. It cannot feign ignorance of private respondent's claim to the land since the latter mortgaged the same land to petitioner as security for the loan he contracted in 1978 on the strength of the tax declarations issued under his name. Instead of inquiring into private

respondent's occupation over the land, petitioner simply proceeded with the foreclosure sale, pretending that no doubts surround the ownership of the land covered by TCT No. 10101. Considering these circumstances, petitioner cannot be deemed an innocent mortgagee/purchaser for value. As we ruled: The failure of appellees to take the ordinary precautions which a prudent man would have taken under the circumstances, specially in buying a piece of land in the actual, visible and public possession of another person, other than the vendor, constitutes gross negligence amounting to bad faith. In this connection, it has been held that where, as in this case, the land sold is in the possession of a person other than the vendor, the purchaser is required to go beyond the certificates of title and ma[k]e inquiries concerning the rights of the actual possessor. (Citations omitted.) xxx xxx xxx One who purchases real property which is in the actual possession of another should, at least, make some inquiry concerning the right of those in possession. The actual possession by other than the vendor should, at least put the purchaser upon inquiry. He can scarcely, in the absence of such inquiry, be regarded as a bona fide purchaser as against such possessors. 54 Fourth. From the foregoing, we find that the resolution of the issue of estoppel will not affect the outcome of this case. Petitioner claims that the fact that it approved a loan in favor of private respondent and executed a mortgage contract covering the 19.4 hectares covered by tax declarations issued under private respondent's name does not mean that it is estopped from questioning the latter's title. Petitioner accuses private respondent of having made misrepresentations which led it to believe in his valid title and ownership. The claim has no basis. Private respondent made no misrepresentation with regard to the land occupied by him as he is actually the real owner thereof. Moreover, when private respondent entered into a mortgage contract with petitioner, his claim of ownership was supported not only by the tax declarations but also by a certification of the Clerk of Court of the Court of First Instance of Bohol that no civil, land registration or cadastral case has been filed or instituted before the court affecting the validity of Tax Declaration No. D2247 covering the land located in Bugang, San Miguel, Bohol and declared in the name of Carlos Cajes. 55 These documents were relied upon by private respondent in support of his claim of ownership. We cannot consider the submission of these documents as misrepresentations by private respondent as to the actual ownership of the land. Rather, private respondent believed in good faith and with good reason that he was the owner of the 19.4 hectares occupied by him. As to the question of estoppel, we do not find petitioner to be estopped from questioning private respondent's title. "Estoppel in pais arises when one, by his acts, representations or admission, or by his own silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts." 56 In the case at bar, upon learning that the land occupied by private respondent was also covered by TCT No. 10101, petitioner immediately demanded full payment of the loan and thereafter cancelled the mortgage contract, a fact that is admitted by private respondent himself. 57 Indeed, nothing in record indicates that petitioner impliedly acquiesced to the validity of private respondent's title when it found out that the latter was occupying a portion of the land covered by TCT No. 10101.
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However, for reasons aforestated, we uphold private respondent's ownership of 19.4 hectares occupied by him. As a necessary consequence thereof, such portion of land included in TCT No. 10101 must be segregated and reconveyed in his favor. WHEREFORE, the decision of the Court of Appeals is AFFIRMED in toto. SO ORDERED.
[G.R. No. 134330.July 18, 2001]

SPS. BELO et al vs. PNB et al. SECOND DIVISION Gentlemen: Quoted hereunder, for your information, is a resolution of this Court dated JUL 18 2001. G.R. No. 134330(Spouses Enrique M. Belo and Florencia G. Belo vs. Philippine National Bank and Spouses Marcos and Arsenia Eslabons.) Before us is a motion for reconsideration by respondent Philippine National Bank of the Decision dated March 1, 2001 rendered by this Court in G.R. No. 134330 entitled Spouses Bolo v. Philippine National Bank, et. al. In the said decision we granted the petitioners who are the assignees of the accommodation mortgagor, Eduarda Belo, the right to redeem the property mortgaged by the said accommodation mortgagor to the respondent, by paying the bid price less the value of the mortgaged properties not belonging to the petitioners spouses. We refused to apply the provisions of Section 25 of the Presidential Decree No. 694 to accommodation mortgagors. In its supplemental motion for reconsideration, respondent bank cites the case of Arrow Head Golf Club, Inc. v. Court of Appeals[1] wherein in two (2) unpublished resolutions, we basically held that the said provision applies even to accommodation mortgagors. The said unpublished resolutions were based on the purpose of the law which is to protect government investments in state-owned lending institutions.
cralaw

The motion is denied for lack of merit. First, the facts in the present case and the facts in the Arrow Head case are different. In the case at bar, there are indications that the respondent bank was disregarding the provisions of its Charter in the foreclosure proceedings that ensued. The mortgage contract explicitly provided the application of Act No. 3135 in case of foreclosure; the actual foreclosure proceeding was filed under Act No. 3135; and, the notice of redemption to the spouses stated that the respondent was requiring the petitioners spouses to redeem their properties without mention of the other properties not belonging to the spouses. These circumstances certainly do not obtain in the Arrow Head case. Thus, under the doctrine of estoppel and the basic principles on the rule on equity and fair play, Section 25 of P.D. No. 694 cannot and should not be applied in the case at bar. That is the reason why in our decision we ruled that: One wonders why respondent bank up to now invokes Act No. 3135 in its contracts without qualification and yet in the end disregards the same when it finds its provisions unfavorable to it. This is downright unfair for the other contracting party who in good faith believes that respondent would comply with the contractual agreement. What makes matters worse is that respondent uses its Charter and the General Banking Act to cover up its contractual violation and to put some vestige of legality thereto. As said earlier, a law is not crafted to perpetrate injustice. We are not downgrading the higher interest of giving protection to the banking system but said interest remains irrelevant when the banks themselves cower under favorable laws to hide a contractual breach. Hence, if the respondent and other banks for that matter would like to invoke the General Banking Act and at the same time the provisions of Act No. 3135 regarding extrajudicial foreclosure, they should clearly stipulate in their mortgage contracts the specific provision on redemption that will govern the parties so that apparent conflicts in these laws will be avoided and the parties will not be put in the same predicament. Second, at the time the offer of redemption was made sometime in 1991 by the petitioners spouses, the respondent bank was already partially privatized with 30% of the shares already owned by private entities and with a further intention to fully privatize the same in the very near future. Meanwhile, in the Arrow Head case, when the redemption was exercised on February 26, 1985, the respondent was still fully government-owned. Hence, we fail to see the reason for an overly strict application of Section 25 of the Charter, inasmuch as in the continuing operation of respondent bank the objective of increasing government investment earnings have been relegated to a more primary concern, that is, its conversion to a wholly privatized lending institution. WHEREFORE, the motion for reconsideration is DENIED and this denial is FINAL. SO ORDERED.

G.R. No. 134330

March 1, 2001

SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners, vs. PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and ARSENIA ESLABON, respondents. DE LEON, JR., J.: Before us is a petition for review on certiorari of the Decision1 and Resolution2 in CA-G.R. No. 53865 of the Court of Appeals3 dated May 21, 1998 and June 29, 1998, respectively, which modified the Decision4 dated April 30, 1996 of the Regional Trial Court of Roxas City, Branch 19 in a suit5 for Declaration of Nullity of the Contract of Mortgage.

The facts are as follows: Eduarda Belo owned an agricultural land with an area of six hundred sixty one thousand two hundred eighty eight (661,288) square meters located in Timpas, Panitan, Capiz, covered and described in Transfer Certificate of Title (TCT for brevity) No. T-7493. She leased a portion of the said tract of land to respondents spouses Marcos and Arsenia Eslabon in connection with the said spouses' sugar plantation business. The lease contract was effective for a period of seven (7) years at the rental rate of Seven Thousand Pesos (P7,000.00) per year. To finance their business venture, respondents spouses Eslabon obtained a loan from respondent Philippine National Bank (PNB for brevity) secured by a real estate mortgage on their own four (4) residential houses located in Roxas City, as well as on the agricultural land owned by Eduarda Belo. The assent of Eduarda Belo to the mortgage was acquired through a special power of attorney which she executed in favor of respondent Marcos Eslabon on June 15, 1982. Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation, extrajudicial foreclosure proceedings against the mortgaged properties were instituted by respondent PNB. At the auction sale on June 10, 1991, respondent PNB was the highest bidder of the foreclosed properties at Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00). In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale at public auction of her agricultural land on June 10, 1991 as well as the registration of the Certificate of Sheriff's Sale in its favor on July 1, 1991, and the one-year period to redeem the land. Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique and Florencia Belo under a deed of absolute sale of proprietary and redemption rights. Before the expiration of the redemption period, petitioners spouses Belo tendered payment for the redemption of the agricultural land in the amount of Four Hundred Eighty Four Thousand Four Hundred Eighty Two Pesos and Ninety Six Centavos (P484,482.96), which includes the bid price of respondent PNB, plus interest and expenses as provided under Act No. 3135. However, respondent PNB rejected the tender of payment of petitioners spouses Belo. It contended that the redemption price should be the total claim of the bank on the date of the auction sale and custody of property plus charges accrued and interests amounting to Two Million Seven Hundred Seventy Nine Thousand Nine Hundred Seventy Eight and Seventy Two Centavos (P2,779,978.72).6 Petitioners spouses disagreed and refused to pay the said total claim of respondent PNB. On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of Roxas City, Civil Case No. V-6182 which is an action for declaration of nullity of mortgage, with an alternative cause of action, in the event that the accommodation mortgage be held to be valid, to compel respondent PNB to accept the redemption price tendered by petitioners spouses Belo which is based on the winning bid price of respondent PNB in the extrajudicial foreclosure in the amount of Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00) plus interest and expenses. In its Answer, respondent PNB raised, among others, the following defenses, to wit: xxx xxx xxx 77. In all loan contracts granted and mortgage contracts executed under the 1975 Revised Charter (PD 694, as amended), the proper rate of interest to be charged during the redemption period is the rate specified in the mortgage contract based on Sec. 25 7 of PD 694 and the mortgage contract which incorporates by reference the provisions of the PNB Charters. Additionally, under Sec. 78 of the General Banking Act (RA No. 337, as amended) made applicable to PNB pursuant to Sec. 38 of PD No. 694, the rate of interest collectible during the redemption period is the rate specified in the mortgage contract. 78. Since plaintiffs failed to tender and pay the required amount for redemption of the property under the provisions of the General Banking Act, no redemption was validly effected;8 xxx xxx xxx

After trial on the merits, the trial court rendered its Decision dated April 30, 1996 granting the alternative cause of action of spouses Belo, the decretal portion of which reads: WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of plaintiffs Spouses Enrique M. Belo and Florencia G. Belo and against defendants Philippine National Bank and Spouses Marcos and Arsenia Eslabon: 1. Making the injunction issued by the court permanent, insofar as the property of Eduarda Belo covered by Transfer Certificate of Title No. T-7493 is concerned; 2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo to redeem only Eduarda Belo's property situated in Brgy. Timpas, Panitan, Capiz, and covered by Transfer Certificate of Title No. T-7493 by paying only its bid price of P447,632.00, plus interest and other charges provided for in Section 30, Rule 39 of the Rules of Court, less the loan value, as originally appraised by said defendant Bank, of the foreclosed four (4) residential lots of defendants Spouses Marcos and Arsenia Eslabon; and 3. Dismissing for lack of merit the respective counterclaims of defendants Philippine National Bank and spouses Marcos and Arsenia Eslabon. With costs against defendants. SO ORDERED.9 Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to the Court of Appeals. In its Decision rendered on May 21, 1998, the appellate court, while upholding the decision of the trial court on the validity of the real estate mortgage on Eduarda Belo's property, the extrajudicial foreclosure and the public auction sale, modified the trial court's finding on the appropriate redemption price by ruling that the petitioners spouses Belo should pay the entire amount due to PNB under the mortgage deed at the time of the foreclosure sale plus interest, costs and expenses.10 Petitioners spouses Belo sought reconsideration11 of the said Decision but the same was denied by the appellate court in its Resolution promulgated on June 29, 1998, ratiocinating, thus: Once more, the Court shies away from declaring the nullity of the mortgage contract obligating Eduarda Belo as co-mortgagor, considering that it has not been sufficiently established that Eduarda Belo's assent to the special power of attorney and to the mortgage contract was tainted by any vitiating cause. Moreover, in tendering an offer to redeem the property (Exhibit "20", p. 602 Record) after its extrajudicial foreclosure, she has thereby admitted the validity of the mortgage, as well as the transactions leading to its inception. Eduarda Belo, and the appellees as mere assignees of Eduarda's right to redeem the property, are therefore estopped from questioning the efficacy of the mortgage and its subsequent foreclosure.12 The appellate court further declared that petitioners spouses Belo are obligated to pay the total bank's claim representing the redemption price for the foreclosed properties, as provided by Section 25 of P.D No. 694, holding that: On the other hand, the court's ruling that the appellees, being the assignee of the right of repurchase of Eduarda Belo, were bound by the redemption price as provided by Section 25 of P.D. 694, stands. The attack on the constitutionality of Section 25 of P.D. 694 cannot be allowed, as the High Court, in previous instances, (Dulay v. Carriaga, 123 SCRA 794 [1983]; Philippine National Bank v. Remigio, 231 SCRA 362 [1994]) has regarded the said provision of law with respect, using the same in determining the proper redemption price in foreclosure of mortgages involving the PNB as mortgagee. The terms of the said provision are quite clear and leave no room for qualification, as the appellees would have us rule. The said rule, as amended, makes no specific distinction as to assignees or transferees of the mortgagor of his redemptive right. In the absence of such distinction by the law, the Court cannot make a distinction. As admitted assignees of Eduarda Belo's right of redemption, the appellees succeed to the precise right of Eduarda including all conditions attendant to such right.

Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code) will extend to apply in the redemption stage of the mortgage. As we have previously remarked, Section 25 of P.D. 694 is a sanctioned deviation from the rule embodied in Rule 39, Section 30 of the Rules of Court, and is a special protection given to government lending institutions, particularly, the Philippine National Bank. (Dulay v. Carriaga, supra)13 Hence, the instant petition. During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo, agreed to limit the assignment of errors to the following: xxx xxx xxx II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL COURT ON THE BASIS OF THE ASSIGNMENT OF ERRORS ALLEGED BY PETITIONERS IN THEIR BRIEF: (1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA BELO IN FAVOR OF RESPONDENT ESLABON WAS NULL AND VOID: (2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT MARCOS ESLABON UNDER SAID INVALID SPECIAL POWER OF ATTORNEY IS ALSO NULL AND VOID; III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB ACTED IN BAD FAITH AND CONNIVED WITH RESPONDENTS-DEBTORS ESLABONS TO OBTAIN THE CONSENT OF EDUARDA BELO, PETITIONERS' PREDECESSOR, THROUGH FRAUD. IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB WAS NEGLIGENT IN THE PERFORMANCE OF ITS DUTY AS COMMERCIAL MONEY LENDER. V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO, PETITIONERS' PREDECESSOR, HAD WAIVED THE RIGHT TO QUESTION THE LEGALITY OF THE ACCOMMODATION MORTGAGE. VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY HOLDING THAT ON REDEMPTION, PETITIONERS SHOULD PAY THE ENTIRE CLAIM OF PNB AGAINST RESPONDENTS-DEBTORS ESLABONS. VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD PETITIONERS DECIDE TO PAY THE ENTIRE CLAIM OF RESPONDENT PNB AGAINST THE RESPONDENTSDEBTORS ESLABONS, PETITIONERS SHALL SUCCEED TO ALL THE RIGHTS OF RESPONDENT PNB WITH THE RIGHT TO REIMBURSEMENT BY RESPONDENTS-DEBTORS ESLABONS. VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD PETITIONERS DECIDE NOT TO EXERCISE THEIR RIGHT OF REDEMPTION, PETITIONERS SHALL BE ENTITLED TO THE VALUE OF THEIR IMPROVEMENTS MADE IN GOOD FAITH AND FOR THE REAL ESTATE TAX DUE PRIOR TO THE FORECLOSURE SALE.14 Petitioners challenge the appreciation of the facts of the appellate court, pointing out the following facts which the appellate court allegedly failed to fully interpret and appreciate: 1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an accommodation mortgagor and that she has no personal liability to respondent PNB. xxx xxx xxx 2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. "D") used to bind Eduarda Belo as accommodation mortgagor authorized the agent Eslabons to borrow and mortgage her agricultural land for her (Eduarda Belo) use and benefit. Instead, said PNB SPA Form No. 74 was used by debtors Eslabons and PNB to bind Eduarda Belo as accommodation mortgagor for the crop loan extended by PNB to the Eslabons.

3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without specifying the amount of the loan to be granted by respondent PNB to the respondents-debtors Eslabons upon assurance by the PNB manager that the SPA was merely a formality and that the bank will not lend beyond the value of the four (4) [Roxas City] residential lots located in Roxas City mortgaged by respondents-debtors Eslabons (see Exhibit "D"; Eduarda Belo's deposition, Exhibit "V", pp. 7 to 24). 4. That PNB did not advise Eduarda Belo of the amount of the loan granted to the Eslabons, did not make demands upon her for payment, did not advise her of Eslabons' default. The pre-auction sale notice intended for Eduarda Belo was addressed and delivered to the address of the debtors Eslabons residence at Baybay Roxas City, not to the Belo Family House which is the residence of Eduarda Belo located in the heart of Roxas City. The trial court stated in its Decision that the PNB witness Miss Ignacio "admitted that through oversight, no demand letters were sent to Eduarda Belo, the accommodation mortgagor" (see p. 7, RTC Decision). xxx xxx xxx 5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the loan which was unpaid at the time of the extrajudicial foreclosure sale was only P789,897.00. xxx xxx xxx 6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belo's agricultural landexpressly reserved the right to question the legality of the accommodation mortgage in the event that said tender to redeem was rejected by PNB (Exh. "I").15 Petitioners present basically two (2) issues before this Court. First, whether or not the Special Power of Attorney (SPA for brevity), the real estate mortgage contract, the foreclosure proceedings and the subsequent auction sale involving Eduarda Belo's property are valid. Second, assuming they are valid, whether or not the petitioners are required to pay, as redemption price, the entire claim of respondent PNB in the amount of P2,779,978.72 as of the date of the public auction sale on June 10, 1991. On the first issue, the petitioners contend that the SPA is void for the reason that the amount for which the spouses Eslabon are authorized to borrow from respondent bank was unlimited; and that, while the SPA states that the amount loaned is for the benefit of Eduarda Belo, it was in fact used for the benefit of the respondents spouses Eslabon. For the said reasons petitioners contend that the mortgage contract lacks valid consent, object and consideration; that it violates a concept in the law of agency which provides that the contract entered into by the agent must always be for the benefit of the principal; and, that it does not express the true intent of the parties. The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the subsequent auction sale of Eduarda Belo's property are valid and legal. First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to petitioners' failure to appeal the same after the trial court rendered its decision affirming their validity. After the trial court rendered its decision granting petitioners their alternative cause of action, i.e., that they can redeem the subject property on the basis of the winning bid price of respondent PNB, petitioners did not anymore bother to appeal that decision on their first cause of action. If they felt aggrieved by the trial court's decision upholding the validity of the said two (2) documents, then they should have also partially appealed therefrom but they did not. It is an abuse of legal remedies for petitioners to belatedly pursue a claim that was settled with finality due to their own shortcoming. As held in Caliguia v. National Labor Relations Commission,16 where a party did not appeal from the Labor Arbiter's decision denying claims for actual, moral and exemplary damages and instead moved for immediate execution, the decision then became final as to him and by asking for its execution, he was estopped from relitigating his claims for damages. Second, well-entrenched is the rule that the findings of trial courts which are factual in nature, especially when affirmed by the Court of Appeals, deserve to be respected and affirmed by the Supreme Court, provided it is supported by substantial evidence. 17 The finding of facts of the trial court to the effect that Eduarda Belo was not induced by the manager of respondent PNB but instead that she freely consented to the execution of the SPA is given the highest respect as it was affirmed by the appellate court. In the case at bar, the burden of proof was on the petitioners to prove or show that there was alleged inducement and misrepresentation by the manager of respondent PNB and the spouses Eslabon. Their allegation that

Eduarda Belo only agreed to sign the SPA after she was assured that the spouses Eslabon would not borrow more than the value of their own four (4) residential lots in Roxas City was properly objected to by respondent PNB.18 Also their contention that Eduarda Belo signed the SPA in blank was properly objected to by respondent PNB on the ground that the best evidence was the SPA. There is also no proof to sustain petitioners' allegation that respondent PNB acted in bad faith and connived with the debtors, respondents spouses Eslabon, to obtain Eduarda Belo's consent to the mortgage through fraud. Eduarda Belo very well knew that the respondents spouses Eslabon would use her property as additional mortgage collateral for loans inasmuch as the mortgage contract states that "the consideration of this mortgage is hereby initially fixed at P229,000.00."19 The mortgage contract sufficiently apprises Eduarda Belo that the respondents spouses Eslabon can apply for more loans with her property as continuing additional security. If she found the said provision questionable, she should have complained immediately. Instead, almost ten (10) years had passed before she and the petitioners sought the annulment of the said contracts. Third, after having gone through the records, this Court finds that the courts a quo did not err in holding that the SPA executed by Eduarda Belo in favor of the respondents spouses Eslabon and the Real Estate Mortgage executed by the respondents spouses in favor of respondent PNB are valid. It is stipulated in paragraph three (3) of the SPA that Eduarda Belo appointed the Eslabon spouses "to make, sign, execute and deliver any contract of mortgage or any other documents of whatever nature or kind . . . which may be necessary or proper in connection with the loan herein mentioned, or with any loan which my attorney-infact may contract personally in his own name . . .20 This portion of the SPA is quite relevant to the case at bar. This was the main reason why the SPA was executed in the first place inasmuch as Eduarda Belo consented to have her land mortgaged for the benefit of the respondents spouses Eslabon. The SPA was not meant to make her a co-obligor to the principal contract of loan between respondent PNB, as lender, and the spouses Eslabon, as borrowers. The accommodation real estate mortgage over her property, which was executed in favor of respondent PNB by the respondents spouses Eslabon, in their capacity as her attorneys-in-fact by virtue of her SPA, is merely an accessory contract. Eduarda Belo consented to be an accommodation mortgagor in the sense that she signed the SPA to authorize respondents spouses Eslabons to execute a mortgage on her land. Petitioners themselves even acknowledged that the relation created by the SPA and the mortgage contract was merely that of mortgagor-mortgagee relationship. The SPA form of the PNB was utilized to authorize the spouses Eslabon to mortgage Eduarda Belo's land as additional collateral of the Eslabon spouses' loan from respondent PNB. Thus, the petitioners' contention that the SPA is void is untenable. Besides, Eduarda Belo benefited, in signing the SPA, in the sense that she was able to collect the rentals on her leased property from the Eslabons.21 An accommodation mortgage is not necessarily void simply because the accommodation mortgagor did not benefit from the same. The validity of an accommodation mortgage is allowed under Article 2085 of the New Civil Code which provides that "(t)hird persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property." An accommodation mortgagor, ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his designation as such. It is not always necessary that the accommodation mortgagor be appraised beforehand of the entire amount of the loan nor should it first be determined before the execution of the SPA for it has been held that: "(real) mortgages given to secure future advancements are valid and legal contracts; that the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid."22 Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to respondent PNB manifesting her intent to redeem the property is a waiver of her right to question the validity of the SPA and the mortgage contract as well as the foreclosure and the sale of her subject property. Petitioners claim that her letter was not an offer to redeem as it was merely a declaration of her intention to redeem. Respondent PNB's answer to her letter would have carried certain legal effects. Had respondent PNB accepted her letter-offer, it would have surely bound the bank into accepting the redemption price offered by Eduarda Belo. If it was her opinion that her SPA and the mortgage contract were null and void, she would not have

manifested her intent to redeem but instead questioned their validity before a court of justice. Her offer was a recognition on her part that the said contracts are valid and produced legal effects. Inasmuch as Eduarda Belo is estopped from questioning the validity of the contracts, her assignees who are the petitioners in the instant case, are likewise estopped from disputing the validity of her SPA, the accommodation real estate mortgage contract, the foreclosure proceedings, the auction sale and the Sheriff's Certificate of Sale. The second issue pertains to the applicable law on redemption to the case at bar. Respondent PNB maintains that Section 25 of Presidential Decree No. 694 should apply, thus: SECTION 25. Right of redemption of foreclosed property Right of possession during redemption period. Within one year from the registration of the foreclosure sale of real estate, the mortgagor shall have the right to redeem the property by paying all claims of the Bank against him on the date of the sale including all the costs and other expenses incurred by reason of the foreclosure sale and custody of the property as well as charges and accrued interests.23 Additionally, respondent bank seeks the application to the case at bar of Section 78 of the General Banking Act, as amended by P.D. No. 1828, which states that . . . In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property.24 On the other hand, petitioners assert that only the amount of the winning bidder's purchase together with the interest thereon and on all other related expenses should be paid as redemption price in accordance with Section 6 of Act No. 3135 which provides that: SECTION 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successor in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty six, inclusive, of the Code of Civil Procedure25 , in so far as these are not inconsistent with the provisions of this Act. Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that: SECTION 28. Time and manner of, and amounts payable on, successive redemptions; notice to be given and filed. The judgment obligor, or redemptioner, may redeem the property from the purchaser, at any time within one (1) year from the date of the registration of the certificate of sale, by paying the purchaser the amount of his purchase, within one per centum per month interest thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last named amount at the same rate; and if the purchaser be also a creditor having a prior lien to that of the redemptioner, other than the judgment under which such purchase was made, the amount of such other lien, with interest. (Italic supplied) xxx xxx xxx This Court finds the petitioners' position on that issue to be meritorious. There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation mortgagor. The Pretrial Order and respondent PNB's brief contain a declaration of this fact. The dispute between the parties is whether Section 25 of P.D. No. 694 applies to an accommodation mortgagor, or her assignees. The said

legal provision does not make a distinction between a debtor-mortgagor and an accommodation mortgagor as it uses the broad term "mortgagor". The appellate court thus ruled that the provision applies even to an accommodation mortgagor inasmuch as the law does not make any distinction. We disagree. Where a word used in a statute has both a restricted and a general meaning, the general must prevail over the restricted unless the nature of the subject matter or the context in which it is employed clearly indicates that the limited sense is intended.26 It is presumed that the legislature intended exceptions to its language which would avoid absurd consequences of this character.27 In the case at bar, the qualification to the general rule applies. The same provision of Section 25 of P.D. No. 694 provides that "the mortgagor shall have the right to redeem the property by paying all claims of the Bank against him". From said provision can be deduced that the mortgagor referred to by that law is one from whom the bank has a claim in the form of outstanding or unpaid loan; he is also called a borrower or debtor-mortgagor. On the other hand, respondent PNB has no claim against accommodation mortgagor Eduarda Belo inasmuch as she only mortgaged her property to accommodate the Eslabon spouses who are the loan borrowers of the PNB. The principal contract is the contract of loan between the Eslabon spouses, as borrowers/debtors, and the PNB as lender. The accommodation real estate mortgage (which secures the loan) is only an accessory contract. It is our view and we hold that the term "mortgagor" in Section 25 of P.D. No. 694 pertains only to a debtor-mortgagor and not to an accommodation mortgagor. It is well settled that courts are not to give a statute a meaning that would lead to absurdities. If the words of a statute are susceptible of more than one meaning, the absurdity of the result of one construction is a strong argument against its adoption, and in favor of such sensible interpretation.28 We test a law by its result. A law should not be interpreted so as not to cause an injustice. There are laws which are generally valid but may seem arbitrary when applied in a particular case because of its peculiar circumstances. We are not bound to apply them in slavish obedience to their language.29 The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair and unjust to accommodation mortgagors and their assignees. Forcing an accommodation mortgagor like Eduarda Belo to pay for what the principal debtors (Eslabon spouses) owe to respondent bank is to punish her for the accommodation and generosity she accorded to the Eslabon spouses who were then hard pressed for additional collateral needed to secure their bank loan. Respondents PNB and spouses Eslabons very well knew that she merely consented to be a mere accommodation mortgagor. The circumstances of the case at bar also provide for ample reason why petitioners cannot be made to pay the entire liability of the principal debtors, Eslabon spouses, to respondent PNB. The trial court found that respondent PNB's application for extrajudicial foreclosure and public auction sale of Eduarda Belo's mortgaged property30 was filed under Act No. 3135, as amended by P.D. No. 385. The notice of extrajudicial sale, the Certificate of Sheriff's Sale, and the letter it sent to Eduarda Belo did not mention P. D. No. 694 as the basis for redemption. As aptly ruled by the trial court In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for value of their redemption rights, PNB should have at least advised them that redemption would be governed by its Revised Charter or PD 69, and not by Act 3135 and the Rules of Court, as commonly practiced . . . This practice of defendant Bank is manifestly unfair and unjust to these redemptioners who are caught by surprise and usually taken aback by the enormous claims of the Bank not shown in the Notice of Extrajudicial Sale or the Certificate of Sheriff's Sale as in this case.31 Moreover, the mortgage contract explicitly provides that ". . . the mortgagee may immediately foreclose this mortgage judicially in accordance with the Rules of Court or extrajudicially in accordance with Act No. 3135, as amended and Presidential Decree No. 385 . . .32 Since the mortgage contract in this case is in the nature of a contract of adhesion as it was prepared solely by respondent, it has to be interpreted in favor of petitioners. The respondent bank however tries to renege on this contractual commitment by seeking refuge in the 1989 case ofSy v. Court of Appeals33 wherein this Court ruled that the redemption price is equal to the total amount of indebtedness to the bank's claim inasmuch as Section 78 of the General Banking Act is an amendment to Section 6 of Act No. 3135, despite the fact that the extrajudicial foreclosure procedure followed by the PNB was explicitly under or in accordance with Act No. 3135. In the 1996 case of China Banking Corporation v. Court of Appeals,34 where the parties also stipulated that Act No. 3135 is the controlling law in case of foreclosure, this Court ruled that;

By invoking the said Act, there is no doubt that it must "govern the manner in which the sale andredemption shall be effected." Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application in the present case, specially where they are not contrary to law, morals, good customs and public policy.35 More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases,36 that the General Banking Act and P.D. No. 694 shall prevail over Act No. 3135 with respect to the redemption price, does not apply here inasmuch as in the said cases the redemptioners were the debtors themselves or their assignees, and not an accommodation mortgagor or the latter's assignees such as in the case at bar. In the said cases, the debtor-mortgagors were required to pay as redemption price their entire liability to the bank inasmuch as they were obligated to pay their loan which is a principal obligation in the first place. On the other hand, accommodation mortgagors as such are not in anyway liable for the payment of the loan or principal obligation of the debtor/borrower The liability of the accommodation mortgagors extends only up to the loan value of their mortgaged property and not to the entire loan itself. Hence, it is only just that they be allowed to redeem their mortgaged property by paying only the winning bid price thereof (plus interest thereon) at the public auction sale. One wonders why respondent PNB invokes Act No. 3135 in its contracts without qualification and yet in the end appears to disregard the same when it finds its provisions unfavorable to it. This is unfair to the other contracting party who in good faith believes that respondent PNB would comply with the contractual agreement. It is therefore our view and we hold that Section 78 of the General Banking Act, as amended by P.D. No. 1828, is inapplicable to accommodation mortgagors in the redemption of their mortgaged properties. While the petitioners, as assignees of Eduarda Belo, are not required to pay the entire claim of respondent PNB against the principal debtors, spouses Eslabon, they can only exercise their right of redemption with respect to the parcel of land belonging to Eduarda Belo, the accommodation mortgagor. Thus, they have to pay the bid price less the corresponding loan value of the foreclosed four (4) residential lots of the spouses Eslabon. The respondent PNB contends that to allow petitioners to redeem only the property belonging to their assignor, Eduarda Belo, would violate the principle of indivisibility of mortgage contracts. We disagree. Article 2089 of the Civil Code of the Philippines, provides that: A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as the debt is not completely satisfied. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. There is no dispute that the mortgage on the four (4) parcels of land by the Eslabon spouses and the other mortgage on the property of Eduarda Belo both secure the loan obligation of respondents spouses Eslabon to respondent PNB. However, we are not persuaded by the contention of the respondent PNB that the indivisibility concept applies to the right of redemption of an accommodation mortgagor and her assignees. The jurisprudence in Philippine National Bank v. Agudelo37 is enlightening to the case at bar, to wit: xxx xxx xxx However, Paz Agudelo y Gonzaga (the principal) . . . gave her consent to the lien on lot No. 878 . . . . This acknowledgment, however, does not extend to lots Nos. 207 and 61 . . . inasmuch as, although it is true that a mortgage is indivisible as to the contracting parties and as to their successors in interest (Article 1860, Civil code), it is not so with respect to a third person who did

not take part in the constitution thereof either personally or through an agent x x x. Therefore, the only liability of the defendant-appellant Paz Agudelo y Gonzaga is that which arises from the aforesaid acknowledgment but only with respect to the lien and not to the principal obligation secured by the mortgage acknowledged by her to have been constituted on said lot No. 878 . . . . Such liability is not direct but a subsidiary one.38 xxx xxx xxx Wherefore, it is hereby held that the liability contracted by the aforesaid defendant-appellant Paz Agudelo y Gonzaga is merely subsidiary to that of Mauro A. Garrucho (the agent), limited to lot No. 87. xxx xxx xxx From the wording of the law, indivisibility arises only when there is a debt, that is, there is a debtor-creditor relationship. But, this relationship is wanting in the case at bar in the sense that petitioners are assignees of an accommodation mortgagor and not of a debtor-mortgagor. Hence, it is fair and logical to allow the petitioners to redeem only the property belonging to their assignor, Eduarda Belo. With respect to the four (4) parcels of residential land belonging to the Eslabon spouses, petitioners being total strangers to said lots lack legal personality to redeem the same. Fair play and justice demand that the respondent PNB's interest of recovering its entire bank claim should not be at the expense of petitioners, as assignees of Eduarda Belo, who is not indebted to it. Besides, the letter39 sent by respondent PNB to Eduarda Belo states that "your (Belo) mortgaged property/ies with PNB covered by TCT # T-7493 was/were sold at public auction . . . .". It further states that "You (Belo) have, therefore, one year from July 1, 1991 within which to redeem your mortgaged property/ies, should you desire to redeem it." Respondent PNB never mentioned that she was bound to redeem the entire mortgaged properties including the four (4) residential properties of the spouses Eslabon. The letter was explicit in mentioning Eduarda Belo's property only. From the said statement, there is then an admission on the part of respondent PNB that redemption only extends to the subject property of Eduarda Belo for the reason that the notice of the sale limited the redemption to said property. WHEREFORE, the petition is partially granted in that the petitioners are hereby allowed to redeem only the property, covered and described in Transfer Certificate of Title No. T-7493-Capiz registered in the name of Eduarda Belo, by paying only the bid price less the corresponding loan value of the foreclosed four (4) residential lots of the respondents spouses Marcos and Arsenia Eslabon, consistent with the Decision of the Regional Trial Court of Roxas City in Civil Case No. V-6182. SO ORDERED. G.R. No. 121158 December 5, 1996 CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and RENATO C. TAGUIAM,petitioners, vs. COURT OF APPEALS, HON. PEDRO T. SANTIAGO, SPS. SO CHING and CRISTINA SO, and NATIVE WEST INTERNATIONAL TRADING CORP., respondents. FRANCISCO, J.:p China Banking Corporation (China Bank) extended several loans to Native West International Trading Corporation (Native West) and to So Ching, Native West's president. Native West in turn executed promissory notes 1 in favor of China Bank. So Ching, with the marital consent of his wife, Cristina So, additionally executed two mortgages over their properties, viz., a real estate mortgage executed on July 27, 1989 covering a parcel of land situated in Cubao, Quezon City, under TCT No. 277797 2, and another executed on August 10, 1989 covering a parcel of land located in Mandaluyong, under TCT No. 5363. 3 The promissory notes matured and despite due demands by China Bank neither private respondents Native West nor So Ching paid. Pursuant to a provision embodied in the two mortgage

contracts, China Bank filed petitions for the extra-judicial foreclosure of the mortgaged properties before Notary Public Atty. Renato E. Taguiam for TCT No. 277797, 4 and Notary Public Atty. Reynaldo M. Cabusora for TCT No. 5363, 5 copies of which were given to the spouses So Ching and Cristina So. After due notice and publication, the notaries public scheduled the foreclosure sale of the spouses' real estate properties on April 13, 1993. Eight days before the foreclosure sale, however, private respondents filed a complaint 6 with the Regional Trial Court 7 for accounting with damages and with temporary restraining order against petitioners alleging the following causes of action: A. Defendants failed to comply with the mandates of Administrative Order No. 3 of the Supreme Court dated October 19, 1984. B. Defendants failed to comply with the mandates of Section 2 Presidential Decree No. 1079 dated January 28, 1977. C. MORTGAGORS liability limited to P6,500,000.00 and P3,500,000.00 respectively in the Mortgages Annexes A and B respectively, but the same are not included in the notice of foreclosure. D. Violation of Truth in Lending Act (RP Act No. 3765). E. In all the loans granted by DEFENDANT-BANK to plaintiffs and Borrowers, the Bank charged interests in excess of the rate allowed by the Central Bank.
F. Violation of Article 1308 of the Civil Code. 8

On April 7, 1993, the trial court issued a temporary restraining order to enjoin the foreclosure sale. Thereafter counsels for the respective parties agreed to file their pleadings and to submit the case, without further hearing, for resolution. On April 28, 1993, the trial court, without passing upon the material averments of the complaint, issued an Order granting the private respondents' prayer for the issuance of preliminary injunction with the following proffered justification: From the foregoing, it is quite apparent that a question of accounting poses a thorny issue as between the litigants. Variance in the amounts involved relating to the loan agreements must be judiciously passed upon by the Court and this is only possible if a trial on the merits could be had as the matters appurtenant thereto are evidentiary in nature. Under the premises, the accounting issue being evidentiary in character calls for an issuance of a writ of preliminary injunction pending the adjudication of the case. The issuance thereof at this particular stage of the case is merely a preventive remedy designed to protect from irreparable injury to property or other rights plaintiff may suffer, which a court of equity may take cognizance of by commanding acts to be done or prohibiting their commission, as in the instant suit, to restrain notaries public Cabusora and Taguiam as well as defendant China Banking Corporation from continuing with the auction sale of the subject properties, until further orders from this Court.
Wherefore, premises considered, finding that the circumstances warrant the issuance of a preliminary injunction, plaintiff's prayer is hereby GRANTED. Consequent thereto, plaintiffs are hereby ordered to post a bond amounting to P1 (ONE) Million to answer for whatever damages defendant may suffer as a consequence of the writ. 9

Petitioners moved for reconsideration, but it was denied in an Order dated September 23, 1993. To annul the trial court's Orders of April 28, 1993 and September 23, 1993, petitioners elevated the case through certiorari and prohibition 10 before public respondent Court of Appeals. 11 In a decision dated January 17, 1995, respondent Court of Appeals held that Administrative Circular No. 3 is the governing rule in extra-judicial foreclosure of mortgage, which circular petitioners however failed to follow, and with respect to the publication of the notice of the auction sale, the provisions of P.D. No. 1079 is the applicable statute, 12 which decree petitioners similarly failed to obey. Respondent Court of Appeals did not pass upon the other issues and confined its additional lengthy discussion on the validity of the trial court's issuance of the preliminary injunction, finding the same neither capricious nor whimsical exercise of judgment that could amount to grave abuse of discretion. 13 The Court of Appeals accordingly dismissed the petition, as

well as petitioners' subsequent motion for reconsideration. 14Hence, the instant petition under Rule 45 of the Rules of Court reiterating the grounds raised before respondent court, to wit: I. PETITIONER CBC'S PETITIONS TO EXTRAJUDICIALLY FORECLOSE THE REAL ESTATE MORTGAGES OF JULY 27, 1989 AND AUGUST 10, 1989 THRU PETITIONERSNOTARIES PUBLIC, AND THE SCHEDULED FORECLOSURE SALE ARE VALID AND LAWFUL; II. PRIVATE RESPONDENTS AND PETITIONER CBC HAD EXPRESSLY AGREED TO CONSIDER THE SAME MORTGAGES AS VALID SECURITIES FOR PROMPT AND FULL PAYMENT OF ALL AND ANY OBLIGATIONS OF THE FORMER FROM THE LATTER; III. THE SUPPOSED VARIANCE IN THE TOTAL AMOUNT OF UNPAID LOANS IS NOT A VALID BASIS TO ENJOIN THE FORECLOSURE OF THE QUESTIONED MORTGAGES. THE MERE FAILURE TO PAY THE LOAN SECURED BY SAID MORTGAGES IS THE ONLY, SINGLE REASON FOR THEIR LAWFUL FORECLOSURE;. IV. PETITIONER BANK HAD FURNISHED PRIVATE RESPONDENTS WITH COPIES OF DISCLOSURE STATEMENTS IN COMPLIANCE WITH THE TRUTH IN LENDING ACT, AND CHARGED THEM INTERESTS IN ACCORDANCE WITH LAW AND PURSUANT TO ITS EXPRESS AGREEMENT WITH THE LATTER;
V. THE P1.0 MILLION INJUNCTION BOND REQUIRED BY THE HONORABLE COURT A QUO ON PRIVATE RESPONDENTS IS GROSSLY AND PATENTLY INADEQUATE. 15

At the outset, the Court's attention is drawn to the fact that since the filing of this suit before the trial court, none of the substantial issues have been resolved. To avoid and gloss over the issues raised by the parties, as what the trial court and respondent Court of Appeals did, would unduly prolong this litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to assist the parties in obtaining just, speedy and inexpensive determination of every action or proceeding. 16 The Court, therefore, feels that the central issues of the case, albeit unresolved by the courts below, should now be settled specially as they involved pure questions of law. Furthermore, the pleadings of the respective parties on file have amply ventilated their various positions and arguments on the matter necessitating prompt adjudication. Now to the core issues. As the Court sees it, the crucial issues are: (1) whether or not the loans in excess of the amounts expressly stated in the mortgage contracts can be included as part of the loans secured by the real estate mortgages, (2) whether or not petitioners can extra-judicially foreclose the properties subject of the mortgages, (3) whether or not Administrative Order No. 3 should govern the extra-judicial foreclosure of the properties, and (4) whether or not the writ of preliminary injunction issued by the trial court is valid. Petitioners aver that the additional loans extended in favor of private respondents in excess of P6,500,000.00 and P3,500,000.00 amounts respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage contracts are also secured by the same collaterals or real estate properties, citing as bases the introductory paragraph ("whereas clause") of the mortgage contracts, as well as the stipulations stated therein under the first and second paragraphs. Private respondents for their part argue that the additional loans are clean loans, relying on some isolated parts of the same introductory paragraph and first paragraph of the contracts, and also of the third paragraph. As both parties offered a conflicting interpretation of the contract, then judicial determination of the parties' intention is thus, inevitable. 17 Hereunder are the pertinent identical introductory paragraphs and paragraphs 1 to 3 of the July 27, 1989 and August 10, 1989 mortgage contracts: WHEREAS, the MORTGAGEE has granted, and may from time to time hereafter grant to the MORTGAGOR(S)/either of them/and/or NATIVE WEST INTERNATIONAL TRADING CORP. hereinafter called the DEBTOR(S) credit facilities not exceeding SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY (P6,500,000.00)* Philippine currency, and the MORTGAGEE had required the MORTGAGOR(S) to give collateral security for the payment of any and all obligations heretofore contracted/incurred and which may thereafter

be contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S), or any one of them, in favor of the MORTGAGEE; NOW, THEREFORE, as collateral security for the payment of the principal and interest of the indebtedness/obligations herein referred to and the faithful performance by the MORTGAGOR(S) of his (her, its) obligations hereunder, the MORTGAGOR(S) hereby execute(s) a FIRST MORTGAGE, in favor of the MORTGAGEE, free from all liens and encumbrances of any kind, that (those) certain parcel(s) of land, together with all the buildings/machineries/equipment improvements now existing thereon, and which may hereafter be placed thereon, described in the Schedule of mortgaged properties described hereunder and/or which is hereto attached, marked Exhibit "A" and made a part thereof. 1. It is agreed that this mortgage shall respond for all the obligations contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) or any one of them, in favor of the MORTGAGEE up to the said sum of SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY (P6,500,000.00)* regardless of the manner in which the said obligations may have been contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) whether by advances or loans made to him (her, it) by the MORTGAGEE, by the negotiation of mercantile documents, including trust receipts, by the execution by the MORTGAGOR(S) and/or DEBTOR(S) of money market instruments/commercial papers, undertakings of guaranty of suretyship, or by endorsement of negotiable instruments, or otherwise, the idea being to make this deed a comprehensive and all embracing security that it is. 2. Payments on account of the principal and interest of the credit granted by the MORTGAGEE to the MORTGAGOR(S) and/or DEBTOR(S) may be made from time to time, and as often as the MORTGAGOR(S) may elect; provided, however, that in the event of such payments being so made that the indebtedness to the MORTGAGEE may from time to time be reduced the MORTGAGEE may make further advances and all sums whatsoever advanced by the MORTGAGEE shall be secured by this mortgage, and partial payments of said indebtedness from time to time shall not thereby be taken to reduce by the amount of such payments the credit hereby secured. The said credit shall extend to any account which shall, within the said limit of P6,500,000.00* exclusive of interest, be fluctuating and subject to increase or decrease from time to time as the MORTGAGEE may approve, and this mortgage shall stand as security for all indebtedness of the MORTGAGOR(S) and/or DEBTOR(S), or any one of them, at any and all times outstanding, regardless of partial or full payments at any time or times made by the MORTGAGOR(S) and/or DEBTOR(S).
3. It is hereby agreed that the MORTGAGEE may from time to time grant the MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the amount secured by this mortgage, without affecting the liability of the MORTGAGOR(S) under this mortgage up to the amount stipulated. 18

An important task in contract interpretation is the ascertainment of the intention of the contracting parties which is accomplished by looking at the words they used to project that intention in their contract, i.e., all the words, not just a particular word or two, and words in context, not words standing alone. 19 Indeed, Article 1374 of the Civil Code, states that "the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly." Applying the rule, we find that the parties intent is to constitute the real estate properties as continuing securities liable for future obligations beyond the amounts of P6.5 million and P3.5 million respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage contracts. Thus, while the "whereas" clause initially provides that "the mortgagee has granted, and may from time to time hereafter grant to the mortgagors . . . credit facilities not exceeding six million five hundred thousand pesos only (P6,500,000.00)**" yet in the same clause it provides that "the mortgagee had required the mortgagor(s) to give collateral security for the payment of any and all obligations heretofore contracted/incurred and which may thereafter be contracted/incurred by the mortgagor(s) and/or debtor(s), or any one of them, in favor of the mortgagee" which qualifies the initial part and shows that the collaterals or real estate properties serve as securities for future obligations. The first paragraph which ends with the clause, "the idea being to make this deed a comprehensive and all embracing security that it is" supports this qualification.

Similarly, the second paragraph provides that "the mortgagee may take further advances and all sums whatsoever advanced by the mortgagee shall be secured by this mortgagee . . ." And although it was stated that "[t]he said credit shall extend to any account which shall, within the said limit of P6,500,000.00 exclusive of interest", this part of the second sentence is again qualified by its succeeding portion which provides that "this mortgage shall stand as security for all indebtedness of the mortgagor(s) and/or debtor(s), or any one of them, at any and all times outstanding . . ." Again, under the third paragraph, it is provided that "the mortgagee may from time to time grant the mortgagor(s)/debtor(s) credit facilities exceeding the amount secured by this mortgage . . ." The fourth paragraph, 20 in addition, states that ". . . all such withdrawals, and payments, whether evidenced by promissory notes or otherwise, shall be secured by this mortgage" which manifestly shows that the parties principally intended to constitute the real estate properties as continuing securities for additional advancements which the mortgagee may, upon application, extend. It is well settled that mortgages given to secure future advancements or loans are valid and legal contracts, and that the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. 21 Anent the second issue, we find that petitioners are entitled to foreclose the mortgages. In their complaint for accounting with damages pending with the trial court, private respondents averred that: 8. Up to and until February, 1993, PLAINTIFF-CORPORATION had paid to the DEFENDANT-BANK, the amount of THREE HUNDRED FIFTY THOUSAND (P350,000.00) Pesos, Philippine Currency, and was willing to pay the balance in installments of FOUR HUNDRED THOUSAND (P400,000.00) Pesos, Philippine Currency, every month, in the meantime, but the DEFENDANT-BANK refused to accept, demanding instead SEVEN HUNDRED MILLION (P700,000,000.00) Pesos, Philippine Currency, a month. 9. Inspite of the expressed willingness and commitment of plaintiffs to pay their obligation in a manner which they could afford, on March 11, 1993, MORTGAGORS and DEFENDANTCORPORATION, each received a Letter of Demand from DEFENDANT-BANK, for the payment of P28,775,615.14 exclusive of interest and penalty evidenced by 11 promissory notes enclosed therein . . . .
10. Upon receipt of the letter, PLAINTIFF-CORPORATION through its President pleaded with the Chairman of the Board of the DEFENDANT-BANK, through whom Defendant-Corporation was transacting business with, to accept its offer of payment of FOUR HUNDRED THOUSAND (P400,000.00) Pesos, Philippine Currency, a month, in the meantime, which was again refused by the said Chairman. 22

which allegations are a clear admission that they were unable to settle to the fullest their obligation. Foreclosure is valid where the debtors, as in this case, are in default in the payment of their obligation. 23The essence of a contract of mortgage indebtedness is that a property has been identified or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of payment. 24 It is a settled rule that in a real estate mortgage when the obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold in view of applying the proceeds to the payment of the obligation. 25 In fact, aside from the mortgage contracts, the promissory notes executed to evidence the loans also authorize the mortgagee to foreclose on the mortgages. Thus:
. . . CHINA BANKING CORPORATION is hereby authorized to sell at public or private sales such securities or things of value for the purpose of applying their proceeds to such payments. 26

And while private respondents aver that they have already paid ten million pesos, an allegation which has still to be settled before the trial court, the same cannot be utilized as a shield to enjoin the foreclosure sale. A mortgage given to secure advancements, we repeat, is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid. 27

With respect to the third issue, we find private respondents' contention that Administrative Order No. 3 is the governing rule in foreclosure of mortgages misplaced. The parties, we note, have stipulated that the provisions of Act No. 3135 is the controlling law in case of foreclosure. Thus:
17. The MORTGAGOR(S) hereby grant(s) unto the MORTGAGEE full and irrevocable power of attorney coupled with interest, in the event of breach of any of the conditions of this mortgage, to sell, in its discretion, the mortgaged properties at public auction, for cash and to the highest bidder, in the Province or City where the mortgaged properties are located, before the Sheriff, or a Notary Public, without court proceedings, after posting notices of sale for a period of twenty days in three public places in said place; and after publication of such notice in a newspaper of general circulation in the said place once a week, for three consecutive weeks, and the MORTGAGEE is hereby authorized to execute the deed of sale and all such other documents as may be necessary in the premises all in accordance with the provisions of Act No. 3135 of the Philippine Legislature, as amended, and Section 78 of Republic Act No. 337: . . . 28 (Emphasis supplied.)

By invoking the said Act, there is no doubt that it must "govern the manner in which the sale and redemption shall be effected." 29 Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application in the present case, 30 specially where they are not contrary to law, morals, good customs and public policy. Moreover, Administrative Order No. 3 is a directive for executive judges and clerks of courts which, under its preliminary paragraph, is "[i]n line with the responsibility of an Executive Judge, under Administrative Order No. 6, dated June 30, 1975, for the management of courts within his administrative area, included in which is the task of supervising directly the work of the Clerk of Court, who is also the Ex-Oficio Sheriff, and his staff, . . . ." Surely, a petition for foreclosure with the notary public is not within the contemplation of the aforesaid directive as the same is not filed with the court. At any rate, Administrative Order No. 3 cannot prevail over Act No. 3135, as amended. It is an elementary principle in statutory construction that a statute is superior to an administrative directive and the former cannot be repealed or amended by the latter. On the last issue, we find that the issuance of the writ of injunction by the trial court unjustified. A writ of preliminary injunction, as an ancillary or preventive remedy, may only be resorted to by a litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal action. 31 But before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right. 32 In the case at bench, we fail to see any reason why the foreclosure of the mortgages should be enjoined. On the face of the clear admission by private respondents that they were unable to settle their obligations which were secured by the mortgages, petitioners have a clear right to foreclose the mortgages which is a remedy provided by law. Thus, in Caltex Philippines, Inc. v. Intermediate Appellate Court, 33 we reiterated the rule that: . . . where a debt is secured by a mortgage and there is a default in payment on the part of the mortgagor, the mortgagee has a choice of one (1) or two (2) remedies, but he cannot have both. The mortgagee may: 1) foreclosure the mortgage; or 2) file an ordinary action to collect the debt. When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings (Soriano v. Enriquez, 24 Phil 584; Banco de Islas Filipinas v. Concepcion Hijos, 53 Phil 86; Banco Nacional v. Barreto, 53 Phil 101).
On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action to collect is favorable to him, and it becomes final and executory, he can enforce said

judgment by execution. He can even levy execution on the same mortgaged property, but he will not have priority over the latter and there may be other creditors who have better lien on the properties of the mortgagor. 34

WHEREFORE, the instant petition is hereby GRANTED. The assailed Decision, as well as the Resolution, of the Court of Appeals dated January 17, 1995 and July 7, 1995, respectively, are hereby REVERSED and SET ASIDE. The preliminary writ of injunction issued by the trial court is hereby NULLIFIED. This case is REMANDED to the court of origin for further proceedings in conformity with this decision. SO ORDERED.