G.R. No.

133179

March 27, 2008

ALLIED BANKING CORPORATION, Petitioner, vs. LIM SIO WAN, METROPOLITAN BANK AND TRUST CO., and PRODUCERS BANK, Respondents. DECISION VELASCO, JR., J.: To ingratiate themselves to their valued depositors, some banks at times bend over backwards that they unwittingly expose themselves to great risks. The Case This Petition for Review on Certiorari under Rule 45 seeks to reverse the Court of Appeals (CAs) Decision promulgated on March 18, 19981 in CA-G.R. CV No. 46290 entitled Lim Sio Wan v. Allied Banking Corporation, et al. The CA Decision modified the Decision dated November 15, 19932 of the Regional Trial Court (RTC), Branch 63 in Makati City rendered in Civil Case No. 6757. The Facts The facts as found by the RTC and affirmed by the CA are as follows: On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied Banking Corporation (Allied) at its Quintin Paredes Branch in Manila a money market placement of PhP 1,152,597.35 for a term of 31 days to mature on December 15, 1983,3 as evidenced by Provisional Receipt No. 1356 dated November 14, 1983. 4 On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied, and instructed the latter to pre-terminate Lim Sio Wans money market placement, to issue a managers check representing the proceeds of the placement, and to give the check to one Deborah Dee Santos who would pick up the check.5 Lim Sio Wan described the appearance of Santos so that So could easily identify her. 6 Later, Santos arrived at the bank and signed the application form for a managers check to be issued. 7 The bank issued Managers Check No. 035669 for PhP 1,158,648.49, representing the proceeds of Lim Sio Wans money market placement in the name of Lim Sio Wan, as payee.8 The check was cross-checked "For Payees Account Only" and given to Santos.9 Thereafter, the managers check was deposited in the account of Filipinas Cement Corporation (FCC) at respondent Metropolitan Bank and Trust Co. (Metrobank),10 with the forged signature of Lim Sio Wan as indorser.11 Earlier, on September 21, 1983, FCC had deposited a money market placement for PhP 2 million with respondent Producers Bank. Santos was the money market trader assigned to handle FCCs account.12 Such deposit is evidenced by Official Receipt No. 31756813 and a Letter dated September 21, 1983 of Santos addressed to Angie Lazo of FCC, acknowledging receipt of the placement.14 The placement matured on October 25, 1983 and was rolled-over until December 5, 1983 as evidenced by a Letter dated October 25, 1983.15 When the placement matured, FCC demanded the payment of the proceeds of the placement.16 On December 5, 1983, the same date that So received the phone call instructing her to pre-terminate Lim Sio Wans placement, the managers check in the name of Lim Sio Wan was deposited in the account of FCC, purportedly representing the proceeds of FCCs money market placement with Producers Bank.17 In other words, the Allied check was deposited with Metrobank in the account of FCC as Producers Banks payment of its obligation to FCC. To clear the check and in compliance with the requirements of the Philippine Clearing House Corporation (PCHC) Rules and Regulations, Metrobank stamped a guaranty on the check, which reads: "All prior endorsements and/or lack of endorsement guaranteed."18 The check was sent to Allied through the PCHC. Upon the presentment of the check, Allied funded the check even without checking the authenticity of Lim Sio Wans purported indorsement. Thus, the amount on the face of the check was credited to the account of FCC.19 On December 9, 1983, Lim Sio Wan deposited with Allied a second money market placement to mature on January 9, 1984.20 On December 14, 1983, upon the maturity date of the first money market placement, Lim Sio Wan went to Allied to withdraw it.21 She was then informed that the placement had been pre-terminated upon her instructions. She denied giving any instructions and receiving the proceeds thereof. She desisted from further complaints when she was assured by the banks manager that her money would be recovered.22

When Lim Sio Wans second placement matured on January 9, 1984, So called Lim Sio Wan to ask for the latters instructions on the second placement. Lim Sio Wan instructed So to roll-over the placement for another 30 days.23On January 24, 1984, Lim Sio Wan, realizing that the promise that her money would be recovered would not materialize, sent a demand letter to Allied asking for the payment of the first placement. 24 Allied refused to pay Lim Sio Wan, claiming that the latter had authorized the pre-termination of the placement and its subsequent release to Santos.25 Consequently, Lim Sio Wan filed with the RTC a Complaint dated February 13, 198426 docketed as Civil Case No. 6757 against Allied to recover the proceeds of her first money market placement. Sometime in February 1984, she withdrew her second placement from Allied. Allied filed a third party complaint27 against Metrobank and Santos. In turn, Metrobank filed a fourth party complaint28 against FCC. FCC for its part filed a fifth party complaint29 against Producers Bank. Summonses were duly served upon all the parties except for Santos, who was no longer connected with Producers Bank. 30 On May 15, 1984, or more than six (6) months after funding the check, Allied informed Metrobank that the signature on the check was forged.31 Thus, Metrobank withheld the amount represented by the check from FCC. Later on, Metrobank agreed to release the amount to FCC after the latter executed an Undertaking, promising to indemnify Metrobank in case it was made to reimburse the amount.32 Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a party-defendant, along with Allied.33 The RTC admitted the amended complaint despite the opposition of Metrobank.34 Consequently, Allieds third party complaint against Metrobank was converted into a cross-claim and the latters fourth party complaint against FCC was converted into a third party complaint.35 After trial, the RTC issued its Decision, holding as follows: WHEREFORE, judgment is hereby rendered as follows: 1. Ordering defendant Allied Banking Corporation to pay plaintiff the amount of P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid; 2. Ordering defendant Allied Bank to pay plaintiff the amount of P100,000.00 by way of moral damages; 3. Ordering defendant Allied Bank to pay plaintiff the amount of P173,792.20 by way of attorneys fees; and, 4. Ordering defendant Allied Bank to pay the costs of suit. Defendant Allied Banks cross-claim against defendant Metrobank is DISMISSED. Likewise defendant Metrobanks third-party complaint as against Filipinas Cement Corporation is DISMISSED. Filipinas Cement Corporations fourth-party complaint against Producers Bank is also DISMISSED. SO ORDERED.36 The Decision of the Court of Appeals Allied appealed to the CA, which in turn issued the assailed Decision on March 18, 1998, modifying the RTC Decision, as follows: WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is rendered ordering and sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%) percent and defendantappellee Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid. The moral damages, attorneys fees and costs of suit adjudged shall likewise be paid by defendant-appellant Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust Company in the same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED. SO ORDERED.37 Hence, Allied filed the instant petition. The Issues Allied raises the following issues for our consideration:

The Honorable Court of Appeals erred in holding that Lim Sio Wan did not authorize [Allied] to pre-terminate the initial placement and to deliver the check to Deborah Santos. The Honorable Court of Appeals erred in absolving Producers Bank of any liability for the reimbursement of amount adjudged demandable. The Honorable Court of Appeals erred in holding [Allied] liable to the extent of 60% of amount adjudged demandable in clear disregard to the ultimate liability of Metrobank as guarantor of all endorsement on the check, it being the collecting bank.38 The petition is partly meritorious. A Question of Fact Allied questions the finding of both the trial and appellate courts that Allied was not authorized to release the proceeds of Lim Sio Wans money market placement to Santos. Allied clearly raises a question of fact. When the CA affirms the findings of fact of the RTC, the factual findings of both courts are binding on this Court.39 We also agree with the CA when it said that it could not disturb the trial courts findings on the credibility of witness So inasmuch as it was the trial court that heard the witness and had the opportunity to observe closely her deportment and manner of testifying. Unless the trial court had plainly overlooked facts of substance or value, which, if considered, might affect the result of the case,40 we find it best to defer to the trial court on matters pertaining to credibility of witnesses. Additionally, this Court has held that the matter of negligence is also a factual question.41 Thus, the finding of the RTC, affirmed by the CA, that the respective parties were negligent in the exercise of their obligations is also conclusive upon this Court. The Liability of the Parties As to the liability of the parties, we find that Allied is liable to Lim Sio Wan. Fundamental and familiar is the doctrine that the relationship between a bank and a client is one of debtor-creditor. Articles 1953 and 1980 of the Civil Code provide: Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Thus, we have ruled in a line of cases that a bank deposit is in the nature of a simple loan or mutuum. 42 More succinctly, in Citibank, N.A. (Formerly First National City Bank) v. Sabeniano, this Court ruled that a money market placement is a simple loan or mutuum.43 Further, we defined a money market in Cebu International Finance Corporation v. Court of Appeals, as follows: [A] money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle man or dealer in open market. In a money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer. In the case at bar, the money market transaction between the petitioner and the private respondent is in the nature of a loan.44 Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon her request, or upon maturity of the placement, or until the bank is released from its obligation as debtor. Until any such event, the obligation of Allied to Lim Sio Wan remains unextinguished. Art. 1231 of the Civil Code enumerates the instances when obligations are considered extinguished, thus: Art. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. (Emphasis supplied.) From the factual findings of the trial and appellate courts that Lim Sio Wan did not authorize the release of her money market placement to Santos and the bank had been negligent in so doing, there is no question that the obligation of Allied to pay Lim Sio Wan had not been extinguished. Art. 1240 of the Code states that "payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it." As commented by Arturo Tolentino: Payment made by the debtor to a wrong party does not extinguish the obligation as to the creditor, if there is no fault or negligence which can be imputed to the latter. Even when the debtor acted in utmost good faith and by mistake as to the person of his creditor, or through error induced by the fraud of a third person, the payment to one who is not in fact his creditor, or authorized to receive such payment, is void, except as provided in Article 1241. Such payment does not prejudice the creditor, and accrual of interest is not suspended by it. 45 (Emphasis supplied.) Since there was no effective payment of Lim Sio Wans money market placement, the bank still has an obligation to pay her at six percent (6%) interest from March 16, 1984 until the payment thereof. We cannot, however, say outright that Allied is solely liable to Lim Sio Wan. Allied claims that Metrobank is the proximate cause of the loss of Lim Sio Wans money. It points out that Metrobank guaranteed all prior indorsements inscribed on the managers check, and without Metrobanks guarantee, the present controversy would never have occurred. According to Allied: Failure on the part of the collecting bank to ensure that the proceeds of the check is paid to the proper party is, aside from being an efficient intervening cause, also the last negligent act, x x x contributory to the injury caused in the present case, which thereby leads to the conclusion that it is the collecting bank, Metrobank that is the proximate cause of the alleged loss of the plaintiff in the instant case. 46 We are not persuaded. Proximate cause is "that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury and without which the result would not have occurred."47 Thus, there is an efficient supervening event if the event breaks the sequence leading from the cause to the ultimate result. To determine the proximate cause of a controversy, the question that needs to be asked is: If the event did not happen, would the injury have resulted? If the answer is NO, then the event is the proximate cause. In the instant case, Allied avers that even if it had not issued the check payment, the money represented by the check would still be lost because of Metrobanks negligence in indorsing the check without verifying the genuineness of the indorsement thereon. Section 66 in relation to Sec. 65 of the Negotiable Instruments Law provides: Section 66. Liability of general indorser.Every indorser who indorses without qualification, warrants to all subsequent holders in due course; a) The matters and things mentioned in subdivisions (a), (b) and (c) of the next preceding section; and b) That the instrument is at the time of his indorsement valid and subsisting; And in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. Section 65. Warranty where negotiation by delivery, so forth.Every person negotiating an instrument by delivery or by a qualified indorsement, warrants: a) That the instrument is genuine and in all respects what it purports to be; b) That he has a good title of it;

c) That all prior parties had capacity to contract; d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to persons negotiating public or corporation securities, other than bills and notes. (Emphasis supplied.) The warranty "that the instrument is genuine and in all respects what it purports to be" covers all the defects in the instrument affecting the validity thereof, including a forged indorsement. Thus, the last indorser will be liable for the amount indicated in the negotiable instrument even if a previous indorsement was forged. We held in a line of cases that "a collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement itself, and ultimately should be held liable therefor."48 However, this general rule is subject to exceptions. One such exception is when the issuance of the check itself was attended with negligence. Thus, in the cases cited above where the collecting bank is generally held liable, in two of the cases where the checks were negligently issued, this Court held the institution issuing the check just as liable as or more liable than the collecting bank. In isolated cases where the checks were deposited in an account other than that of the payees on the strength of forged indorsements, we held the collecting bank solely liable for the whole amount of the checks involved for having indorsed the same. In Republic Bank v. Ebrada,49 the check was properly issued by the Bureau of Treasury. While in Banco de Oro Savings and Mortgage Bank (Banco de Oro) v. Equitable Banking Corporation,50 Banco de Oro admittedly issued the checks in the name of the correct payees. And in Traders Royal Bank v. Radio Philippines Network, Inc.,51 the checks were issued at the request of Radio Philippines Network, Inc. from Traders Royal Bank.
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However, in Bank of the Philippine Islands v. Court of Appeals, we said that the drawee bank is liable for 60% of the amount on the face of the negotiable instrument and the collecting bank is liable for 40%. We also noted the relative negligence exhibited by two banks, to wit: Both banks were negligent in the selection and supervision of their employees resulting in the encashment of the forged checks by an impostor. Both banks were not able to overcome the presumption of negligence in the selection and supervision of their employees. It was the gross negligence of the employees of both banks which resulted in the fraud and the subsequent loss. While it is true that petitioner BPIs negligence may have been the proximate cause of the loss, respondent CBCs negligence contributed equally to the success of the impostor in encashing the proceeds of the forged checks. Under these circumstances, we apply Article 2179 of the Civil Code to the effect that while respondent CBC may recover its losses, such losses are subject to mitigation by the courts. (See Phoenix Construction Inc. v. Intermediate Appellate Courts, 148 SCRA 353 [1987]). Considering the comparative negligence of the two (2) banks, we rule that the demands of substantial justice are satisfied by allocating the loss of P2,413,215.16 and the costs of the arbitration proceeding in the amount of P7,250.00 and the cost of litigation on a 60-40 ratio.52 Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing institution and the collecting bank should equally share the liability for the loss of amount represented by the checks concerned due to the negligence of both parties: The Court finds as reasonable, the proportionate sharing of fifty percent-fifty percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a period close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the hospitals real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB. The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payees indorsement. 53 A reading of the facts of the two immediately preceding cases would reveal that the reason why the bank or institution which issued the check was held partially liable for the amount of the check was because of the negligence of these parties which resulted in the issuance of the checks.

In the instant case, the trial court correctly found Allied negligent in issuing the managers check and in transmitting it to Santos without even a written authorization.54 In fact, Allied did not even ask for the certificate evidencing the money market placement or call up Lim Sio Wan at her residence or office to confirm her instructions. Both actions could have prevented the whole fraudulent transaction from unfolding. Allieds negligence must be considered as the proximate cause of the resulting loss. To reiterate, had Allied exercised the diligence due from a financial institution, the check would not have been issued and no loss of funds would have resulted. In fact, there would have been no issuance of indorsement had there been no check in the first place. The liability of Allied, however, is concurrent with that of Metrobank as the last indorser of the check. When Metrobank indorsed the check in compliance with the PCHC Rules and Regulations 55 without verifying the authenticity of Lim Sio Wans indorsement and when it accepted the check despite the fact that it was crosschecked payable to payees account only,56 its negligent and cavalier indorsement contributed to the easier release of Lim Sio Wans money and perpetuation of the fraud. Given the relative participation of Allied and Metrobank to the instant case, both banks cannot be adjudged as equally liable. Hence, the 60:40 ratio of the liabilities of Allied and Metrobank, as ruled by the CA, must be upheld. FCC, having no participation in the negotiation of the check and in the forgery of Lim Sio Wans indorsement, can raise the real defense of forgery as against both banks.57 As to Producers Bank, Allied Banks argument that Producers Bank must be held liable as employer of Santos under Art. 2180 of the Civil Code is erroneous. Art. 2180 pertains to the vicarious liability of an employer for quasi-delicts that an employee has committed. Such provision of law does not apply to civil liability arising from delict. One also cannot apply the principle of subsidiary liability in Art. 103 of the Revised Penal Code in the instant case. Such liability on the part of the employer for the civil aspect of the criminal act of the employee is based on the conviction of the employee for a crime. Here, there has been no conviction for any crime. As to the claim that there was unjust enrichment on the part of Producers Bank, the same is correct. Allied correctly claims in its petition that Producers Bank should reimburse Allied for whatever judgment that may be rendered against it pursuant to Art. 22 of the Civil Code, which provides: "Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just cause or legal ground, shall return the same to him."
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The above provision of law was clarified in Reyes v. Lim, where we ruled that "[t]here is unjust enrichment when a person unjustly retains a benefit to the loss of another, or when a person retains money or property of another against the fundamental principles of justice, equity and good conscience."58 In Tamio v. Ticson, we further clarified the principle of unjust enrichment, thus: "Under Article 22 of the Civil Code, there is unjust enrichment when (1) a person is unjustly benefited, and (2) such benefit is derived at the expense of or with damages to another."59 In the instant case, Lim Sio Wans money market placement in Allied Bank was pre-terminated and withdrawn without her consent. Moreover, the proceeds of the placement were deposited in Producers Banks account in Metrobank without any justification. In other words, there is no reason that the proceeds of Lim Sio Wans placement should be deposited in FCCs account purportedly as payment for FCCs money market placement and interest in Producers Bank. With such payment, Producers Banks indebtedness to FCC was extinguished, thereby benefitting the former. Clearly, Producers Bank was unjustly enriched at the expense of Lim Sio Wan. Based on the facts and circumstances of the case, Producers Bank should reimburse Allied and Metrobank for the amounts the two latter banks are ordered to pay Lim Sio Wan.
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It cannot be validly claimed that FCC, and not Producers Bank, should be considered as having been unjustly enriched. It must be remembered that FCCs money market placement with Producers Bank was already due and demandable; thus, Producers Banks payment thereof was justified. FCC was entitled to such payment. As earlier stated, the fact that the indorsement on the check was forged cannot be raised against FCC which was not a part in any stage of the negotiation of the check. FCC was not unjustly enriched. From the facts of the instant case, we see that Santos could be the architect of the entire controversy. Unfortunately, since summons had not been served on Santos, the courts have not acquired jurisdiction over her.60 We, therefore, cannot ascribe to her liability in the instant case. Clearly, Producers Bank must be held liable to Allied and Metrobank for the amount of the check plus 12% interest per annum, moral damages, attorneys fees, and costs of suit which Allied and Metrobank are adjudged to pay Lim Sio Wan based on a proportion of 60:40. WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998 CA Decision in CA-G.R. CV No. 46290 and the November 15, 1993 RTC Decision in Civil Case No. 6757 are AFFIRMED with MODIFICATION.

Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced, as follows: WHEREFORE, premises considered, the decision appealed from is MODIFIED. Judgment is rendered ordering and sentencing defendant-appellant Allied Banking Corporation to pay sixty (60%) percent and defendantappellee Metropolitan Bank and Trust Company forty (40%) of the amount of P1,158,648.49 plus 12% interest per annum from March 16, 1984 until fully paid. The moral damages, attorneys fees and costs of suit adjudged shall likewise be paid by defendant-appellant Allied Banking Corporation and defendant-appellee Metropolitan Bank and Trust Company in the same proportion of 60-40. Except as thus modified, the decision appealed from is AFFIRMED. SO ORDERED. Additionally and by way of MODIFICATION, Producers Bank is hereby ordered to pay Allied and Metrobank the aforementioned amounts. The liabilities of the parties are concurrent and independent of each other. SO ORDERED.

G.R. No. L-41764 December 19, 1980 NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner, vs. HON. ALBERTO V. SENERIS, RICARDO A. TONG and EX-OFFICIO SHERIFF HAKIM S. ABDULWAHID,respondents.

CONCEPCION JR., J.: A petition for certiorari with preliminary injunction to annul and/or modify the order of the Court of First Instance of Zamboanga City (Branch ii) dated August 28, 1975 denying petitioner's Ex-Parte Motion for Issuance of Certificate Of Satisfaction Of Judgment. Herein petitioner is the defendant in a complaint for collection of a sum of money filed by the private respondent. 1On July 19, 1974, a compromise judgment was rendered by the respondent Judge in accordance with an amicable settlement entered into by the parties the terms and conditions of which, are as follows: (1) That defendant will pay to the plaintiff the amount of Fifty Four Thousand Five Hundred Pesos (P54,500.00) at 6% interest per annum to be reckoned from August 25, 1972; (2) That defendant will pay to the plaintiff the amount of Six Thousand Pesos (P6,000.00) as attorney's fees for which P5,000.00 had been acknowledged received by the plaintiff under Consolidated Bank and Trust Corporation Check No. 16-135022 amounting to P5,000.00 leaving a balance of One Thousand Pesos (P1,000.00); (3) That the entire amount of P54,500.00 plus interest, plus the balance of P1,000.00 for attorney's fees will be paid by defendant to the plaintiff within five months from today, July 19, 1974; and
(4) Failure one the part of the defendant to comply with any of the above-conditions, a writ of execution may be issued by this Court for the satisfaction of the obligation. 2

For failure of the petitioner to comply with his judgment obligation, the respondent Judge, upon motion of the private respondent, issued an order for the issuance of a writ of execution on December 21, 1974. Accordingly, writ of execution was issued for the amount of P63,130.00 pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the petitioner, to wit: (1) Unit American Lathe 24 (1) Unit American Lathe 18 Cracker Wheeler (1) Unit Rockford Shaper 24 and set the auction sale thereof on January 15, 1975. However, prior to January 15, 1975, petitioner deposited with the Clerk of Court, Court of First Instance, Zamboanga City, in his capacity as Ex-Officio Sheriff of Zamboanga City, the sum of P63,130.00 for the payment of the judgment obligation, consisting of the following: 1. P50.000.00 in Cashier's Check No. S-314361 dated January 3, 1975 of the Equitable Banking Corporation; and
2. P13,130.00 incash. 3

In a letter dated January 14, 1975, to the Ex-Officio Sheriff, 4 private respondent through counsel, refused to accept the check as well as the cash deposit. In the 'same letter, private respondent requested the scheduled auction sale on January 15, 1975 to proceed if the petitioner cannot produce the cash. However, the scheduled auction sale at 10:00 a.m. on January 15, 1975 was postponed to 3:00 o'clock p.m. of the same day due to further attempts to settle the case. Again, the scheduled auction sale that afternoon did not push through because of a last ditch attempt to convince the private respondent to accept the check. The auction sale was then postponed on the following day, January 16, 1975 at 10:00 o'clock a.m. 5 At about 9:15 a.m., on January 16, 1975, a certain Mr. Taedo representing the petitioner appeared in the office of the Ex-Officio Sheriff and the latter reminded Mr. Taedo that the auction sale would proceed at 10:00 o'clock. At 10:00 a.m., Mr. Taedo and Mr. Librado, both representing the petitioner requested the Ex-Officio Sheriff to give them fifteen minutes within which to contract their lawyer which request was granted. After Mr. Taedo and Mr. Librado failed to return, counsel for private respondent insisted that the sale must proceed and the Ex-Officio Sheriff proceeded with the auction sale. 6 In the course of the proceedings, Deputy Sheriff Castro sold the levied properties item by item to the private respondent as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00. 7 Thereafter, on January 16, 1975, the Ex-Officio Sheriff

issued a "Sheriff's Certificate of Sale" in favor of the private respondent, Ricardo Tong, married to Pascuala Tong for the total amount of P50,000.00 only.8 Subsequently, on January 17, 1975, petitioner filed an exparte motion for issuance of certificate of satisfaction of judgment. This motion was denied by the respondent Judge in his order dated August 28, 1975. In view thereof, petitioner now questions said order by way of the present petition alleging in the main that said respondent Judge capriciously and whimsically abused his discretion in not granting the motion for issuance of certificate of satisfaction of judgment for the following reasons: (1) that there was already a full satisfaction of the judgment before the auction sale was conducted with the deposit made to the Ex-Officio Sheriff in the amount of P63,000.00 consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash; and (2) that the auction sale was invalid for lack of proper notice to the petitioner and its counsel when the Ex-Officio Sheriff postponed the sale from June 15, 1975 to January 16, 1976 contrary to Section 24, Rule 39 of the Rules of Court. On November 10, 1975, the Court issued a temporary restraining order enjoining the respondent Ex-Officio Sheriff from delivering the personal properties subject of the petition to Ricardo A. Tong in view of the issuance of the "Sheriff Certificate of Sale." We find the petition to be impressed with merit. The main issue to be resolved in this instance is as to whether or not the private respondent can validly refuse acceptance of the payment of the judgment obligation made by the petitioner consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash which it deposited with the Ex-Officio Sheriff before the date of the scheduled auction sale. In upholding private respondent's claim that he has the right to refuse payment by means of a check, the respondent Judge cited the following: Section 63 of the Central Bank Act: Sec. 63. Legal Character. Checks representing deposit money do not have legal tender power and their acceptance in payment of debts, both public and private, is at the option of the creditor, Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account. Article 1249 of the New Civil Code: Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. Likewise, the respondent Judge sustained the contention of the private respondent that he has the right to refuse payment of the amount of P13,130.00 in cash because the said amount is less than the judgment obligation, citing the following Article of the New Civil Code: Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the presentations in which the obligation consists. Neither may the debtor be required to make partial payment. However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. It is to be emphasized in this connection that the check deposited by the petitioner in the amount of P50,000.00 is not an ordinary check but a Cashier's Check of the Equitable Banking Corporation, a bank of good standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been deposited, it is a certified crossed check.9 It is a well-known and accepted practice in the business sector that a Cashier's Check is deemed as cash. Moreover, since the said check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. 10Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. 11 Said certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an understanding that the check is good then, and shall continue good, and this agreement is as binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to use it as money." 12 When the holder procures the check to be certified, "the check operates as an assignment of a part of the funds to the creditors." 13 Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount

equal to the amount credited to his account" shall apply in this case. Considering that the whole amount deposited by the petitioner consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation of P63,000.00 as mentioned in the writ of execution, then, We see no valid reason for the private respondent to have refused acceptance of the payment of the obligation in his favor. The auction sale, therefore, was uncalled for. Furthermore, it appears that on January 17, 1975, the Cashier's Check was even withdrawn by the petitioner and replaced with cash in the corresponding amount of P50,000.00 on January 27, 1975 pursuant to an agreement entered into by the parties at the instance of the respondent Judge. However, the private respondent still refused to receive the same. Obviously, the private respondent is more interested in the levied properties than in the mere satisfaction of the judgment obligation. Thus, petitioner's motion for the issuance of a certificate of satisfaction of judgment is clearly meritorious and the respondent Judge gravely abused his discretion in not granting the same under the circumstances. In view of the conclusion reached in this instance, We find no more need to discuss the ground relied in the petition. It is also contended by the private respondent that Appeal and not a special civil action for certiorari is the proper remedy in this case, and that since the period to appeal from the decision of the respondent Judge has already expired, then, the present petition has been filed out of time. The contention is untenable. The decision of the respondent Judge in Civil Case No. 250 (166) has long become final and executory and so, the same is not being questioned herein. The subject of the petition at bar as having been issued in grave abuse of discretion is the order dated August 28, 1975 of the respondent Judge which was merely issued in execution of the said decision. Thus, even granting that appeal is open to the petitioner, the same is not an adequate and speedy remedy for the respondent Judge had already issued a writ of execution. 14 WHEREFORE, in view of all the foregoing, judgment is hereby rendered: 1. Declaring as null and void the order of the respondent Judge dated August 28, 1975; 2. Declaring as null and void the auction sale conducted on January 16, 1975 and the certificate of sale issued pursuant thereto; 3. Ordering the private respondent to accept the sum of P63,130.00 under deposit as payment of the judgment obligation in his favor; 4. Ordering the respondent Judge and respondent Ex-Officio Sheriff to release the levied properties to the herein petitioner. The temporary restraining order issued is hereby made permanent. Costs against the private respondent. SO ORDERED. Barredo (Chairman), Aquino, Abad Santos and De Castro, JJ., concur.

10

G.R. No. 153134

June 27, 2006

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, Petitioner, vs. ANTONIO G. DIAZ and ELSIE B. DIAZ, Respondents. DECISION CALLEJO, SR., J.: Before the Court is the Petition for Review on Certiorari filed by Banco Filipino Savings and Mortgage Bank of the Decision1 dated November 12, 2001 of the Court of Appeals (CA) in CA-G.R. SP No. 64475 allowing respondents spouses Antonio and Elsie Diaz to withdraw their deposit on consignation in the amount of P1,034,600.002 held by the Regional Trial Court (RTC) of Makati City, Branch 61. The assailed decision reversed and set aside the orders of the said lower court which had denied the respondents' motion to withdraw deposit. Likewise assailed is the Resolution of April 12, 2002 of the appellate court denying the reconsideration of the assailed decision. The present case is an offshoot of the CA Decision3 of October 31, 1990 in CA-G.R. SP No. 21089 and Decision4of November 14, 1997 in CA-G.R. CV No. 42899, both of which had already become final and executory. As culled therefrom and from the pleadings filed by the parties in the present case, the factual and procedural antecedents are as follows: On March 8, 1979, spouses Antonio and Elsie Diaz (the respondents) secured a loan from Banco Filipino Savings and Mortgage Bank (petitioner bank) in the amount of P400,000.00 bearing an interest rate of 16% per annum. In November 1982, the said loan was restructured or consolidated in the increased amount of P3,163,000.00 payable within a period of 20 years at an interest rate of 21% per annum. The obligation was to be paid in equal monthly amortization of P56,227.00, and secured by a real estate mortgage over two commercial lots situated at Bolton and Bonifacio Streets in Davao City. As additional collateral, the respondents assigned the rentals on the mortgaged properties in favor of petitioner bank. Despite repeated demands made on them, the respondents defaulted in the payment of their obligation beginning October 1986. Before petitioner bank could institute the proceedings to foreclose on the mortgaged properties, the respondents filed with the RTC of Davao City a complaint for "Declaration of Interest Rates and Penalty Charges as Unconscionable and Its Reduction, Reformation of Contract, Annulment of Assignment of Rentals, Damages and Attorney's Fees with Injunction," docketed as Civil Case No. 17840. The RTC of Davao City (Branch 12) denied the application for the issuance of a writ of preliminary injunction. It held that, by respondent Antonio Diaz' own admission, the respondents had been remiss in paying the amortization as agreed upon in the contract; hence, the conditions in the real estate mortgage contract had been violated. As such, petitioner bank could rightfully foreclose the mortgaged properties. On appeal by the respondent spouses, the CA, in its Decision of October 31, 1990 in CA-G.R. SP No. 21089, affirmed the said Order of the RTC of Davao City. Thereafter, the respondents filed another complaint with the RTC of Makati City for "Consignation and Declaration of Cancellation of Obligation, with Prayer for Issuance of a Preliminary Injunction and Temporary Restraining Order." The case was docketed as Civil Case No. 91-3090, and raffled to Branch 61 of the said RTC. For failure to file its answer, petitioner bank was declared in default. In addition to the facts established in the previous case, the RTC of Makati City, based on the ex parte evidence of the respondents, made the finding that during the period of January 3, 1983 and January 25, 1985, when petitioner bank was ordered closed by the Central Bank, the respondents paid a total amount of P1,311,308.48. Further, as of January 25, 1985, the respondents' total obligation amounted to P3,391,501.99. The respondents made additional payments from February 11, 1985 until September 1991 amounting to P2,356,910.00. If these additional payments were to be applied to the principal, the remaining balance would only be P1,034,600.00 as of September 16, 1991. The respondents tried to settle their account by tendering the sum of P1,034,600.00 as full payment of their loan obligation. However, petitioner bank, through its then Liquidator Ricardo P. Lirio, refused to accept the said amount. According to petitioner bank, the respondents' obligation at that time amounted to P10,160,649.13. The respondents then deposited by way of consignation with the RTC of Makati City, a manager's check dated December 5, 1991, in the amount of P1,034,600.00 as full payment of their loan obligation. Petitioner bank was duly informed of such consignation. In its Decision dated March 6, 1992, the RTC of Makati City ruled that the respondents' total obligation to petitioner bank amounted only to P1,034,600.00 exclusive of interests, and the latter could not charge and/or collect any interest during the time that it was closed by the Central Bank as, in fact, banks that were ordered closed by the Central Bank ceased to be liable for the payment of interests on deposits. It also considered the deposited check as consignation of the respondents' entire debt and that there was a valid consignation. Accordingly, the respondents' obligation to petitioner bank was declared as fully paid and/or cancelled. On appeal by petitioner bank, the CA, in its Decision dated November 14, 1997 in CA-G.R. CV No. 42899, reversed and set aside the decision of the RTC of Makati City. On the procedural aspect, the CA found that the

11

lower court erred in denying petitioner bank's motion to lift order of default. Regarding the substantive issue, the CA held that the lower court likewise erroneously declared that petitioner bank, during the time that it was ordered closed by the Central Bank, could not charge or collect interests on the respondents' loan obligation. Citing the principle of unjust enrichment, the CA posited that it was with more reason that distressed banks, like petitioner bank, should be allowed to collect interests on the loans that they had extended to their borrowers. According to the CA, the fact that distressed banks were freed from the obligation to pay any interest due on deposits when they were closed and ordered to stop operations did not mean that their borrowers were similarly freed from their contractual obligation to pay interests. It distinguished the contracts between the banks and their depositors from those between the banks and their borrowers. The CA declared that the deposited amount of P1,034,600.00 failed to effect a valid consignation in law because it did not include all interests due. It ratiocinated that for a valid consignation to exist, the tender of the principal must be accompanied with the tender of interests which had accrued; otherwise, the said tender would not be effective. The CA then reversed and set aside the decision of the RTC of Makati City and entered a new one dismissing Civil Case No. 91-3090. The subsequent facts pertain to the case now before the Court: Upon finality of the decision of the CA in CA-G.R. CV No. 42899, declaring that there was no valid consignation and dismissing Civil Case No. 91-3090, the respondents filed with the RTC of Makati City a motion to withdraw deposit. They averred therein that with the finality of the CA decision dismissing their complaint, they are now withdrawing the amount of P1,034,600.00 which they had deposited by way of consignation with the said lower court. In addition, they alleged that their loan obligation was eventually settled with the payment of the amount ofP25,000,000.00 through negotiations made with petitioner bank by the brothers James and Francisco Gaisano as attorneys-in-fact of the respondents. Upon such payment, Corazon L. Costan, petitioner bank's 2nd Assistant Vice-President and Davao Main Branch Manager, issued on February 10, 1999 the Cancellation of the Real Estate Mortgage over the respondents' commercial lots. According to the respondents, there was no longer any obstacle to the immediate release of their deposit. They prayed that they be allowed to withdraw the money which they deposited on consignation with the said court (RTC of Makati City). Petitioner bank opposed the respondents' motion. It alleged that as of December 31, 1998, the respondents' loan obligation stood at P28,810,330.51. Petitioner bank asserted that the deposit in question should be released to it as part of the full payment of the respondents' obligation. It maintained that it accepted the said consignation; hence, the respondents could no longer withdraw the said amount. Petitioner bank refuted the respondents' claim that there was already full payment of their obligation with the payment by the Gaisanos of P25,000,000.00. Petitioner bank stated that it negotiated with the Gaisanos on January 7, 1999 and the sum agreed thereon was allegedly for the payment of the respondents' obligation as of December 31, 1998 which amounted to P28,810,330.51. Petitioner bank added that during this negotiation, it took into account and deducted from the said total obligation the amounts of P1,462,901.00, representing the payments made by the respondents in 1990 and 1991, and P1,034,600.00, representing the deposit made by the respondents with the RTC of Makati City. The net obligation of the respondents after deducting these amounts stood at P26,312,828.52 and it was this amount that petitioner bank agreed to be settled with the payment by the Gaisanos of P25,100,000.00, not P25,000,000.00 as alleged by the respondents. Petitioner bank accused the respondents of being in bad faith in that while its negotiation with the Gaisanos had not yet been finalized, the respondents sought to withdraw the deposit in question - which was part of the consideration that induced petitioner bank to agree to settle the respondents' obligation with the payment by the Gaisanos of P25,100,000.00 Petitioner bank prayed that the deposit in question be released to it in order that it could be applied to the respondents' total loan obligation. After consideration of the parties' respective arguments, the RTC of Makati City issued the Order dated July 31, 2000 stating as follows: Acting on the Motion to Withdraw Deposit mailed by plaintiff[s], [the respondents herein] on 26 January 1999 in Davao City with Opposition thereto filed by defendant Banco Filipino Savings and Mortgage Bank on 08 February 1999. It appears on record that the Complaint for Consignation filed by the plaintiff[s] before this Court, dated 13 December 1991 and was dismissed by the Court of Appeals on 14 November 1997 which found that the deposited amount of P1,034,600.00 did not include the interest due and was not in full satisfaction of the defendant's claim and there was no valid tender of payment and consignation. The dismissal of the complaint for Consignation by the Appellate Court did not absolve the obligation of plaintiff to apply the consignation to the outstanding obligation to the defendant and thus, the deposited amount may still be applied for payment of the obligation after due hearing on the deficiency claim of the defendant against the plaintiff. WHEREFORE, in view of the foregoing, the MOTION TO WITHDRAW DEPOSIT is hereby DENIED for lack of merit.

12

SO ORDERED.5 The respondents sought the reconsideration thereof but the RTC of Makati City denied their motion in its Order dated December 14, 2000. They then filed with the CA a Petition for Certiorari alleging grave abuse of discretion on the part of the presiding judge6 of the said lower court in promulgating the orders denying their motion to withdraw deposit. Acting on the said petition, the CA rendered the Decision dated November 12, 2001 in CA-G.R. SP No. 64475 reversing and setting aside the Orders dated July 31, 2000 and December 14, 2000 of the RTC of Makati City. It declared that the respondents had the statutory unilateral right to withdraw their deposit by way of consignation because there was no acceptance of the same by petitioner bank. On this point, the CA relied on Article 1260 of the Civil Code which provides, in part, that "[b]efore the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or sum deposited, allowing the obligation to remain in force." The CA stressed that petitioner bank had not "performed any prior unmistakable and deliberate act denominating a preemptive acceptance of the deposit in partial settlement of the loan obligation." 7 The claim of "acceptance" was found to be an afterthought on the part of petitioner bank and proffered for the sole purpose of opposing the respondents' motion to withdraw deposit. Even assuming that there was acceptance by petitioner bank, the CA opined that such acceptance must retroact to December 5, 1991 when the deposit was judicially made. In such a case, petitioner bank's computation of the respondents' outstanding loan obligation would have to be modified and reduced accordingly because the interest rate of 21% would then have to be applied to the reduced loan balance as of December 5, 1991. The CA strongly condemned the fact that the respondents' original loan of P400,000.00 in 1972 ballooned toP28,810,330.51 as of December 31, 1998 based on petitioner bank's statement of account. The principal amount plus interests, surcharges, insurance premiums, sheriff's and attorney's fees, notarization fees, etc., all added up to the respondents' outstanding balance. According to the CA, the surcharges for missed monthly payments that petitioner bank charged the respondents amounted to twice as much as the 21% interest rate, resulting in an effective interest rate of more than 60% per annum. Citing Medel v. Court of Appeals,8 this rate was characterized by the CA as "excessive, iniquitous, unconscionable and exorbitant" and likened petitioner bank to Shylock, the moneylender in William Shakespeare's The Merchant of Venice, who asked for a literal pound of flesh as payment for the money he lent. The CA found as credible the respondents' claim that, on their behalf, the Gaisanos had secured a compromise agreement with petitioner bank with the payment of P25,100,000.00 and, consequently, the mortgage over the respondents' commercial lots was cancelled. Further, the auction sale of these properties which was scheduled on January 27, 1999 was cancelled by petitioner bank itself in its letter to the Sheriff. The dispositive portion of the assailed decision of the CA reads: WHEREFORE, the foregoing premises considered, the petitioners' [the respondents herein] petition for certiorari is GRANTED. The Orders dated July 31, 2000 and December 14, 2000 of the public court in Civil Case No. 91-3090 are REVERSED and SET ASIDE, and another one entered allowing the withdrawal by the petitioners of their deposit of P1,034,600.00 held in custodia legis with said court. No costs. SO ORDERED.9 Petitioner bank sought the reconsideration of the said decision but the CA, in its Resolution dated April 12, 2002, denied its motion. Hence, petitioner bank's recourse to the Court. The basic contention of petitioner bank is that the CA erred in reversing the Orders dated July 31, 2000 and December 14, 2000 of the RTC of Makati City which had denied the respondents' motion to withdraw deposit. Petitioner bank posits that the said lower court did not commit grave abuse of discretion in issuing the said orders because, as stated in the CA Decision of November 14, 1997 in CA-G.R. CV No. 42899, there was no valid consignation since the amount tendered (P1,034,600.00) by the respondents did not include the interests that accrued on the principal and, therefore, was not in full settlement of their outstanding obligation. Petitioner bank maintains that the dismissal of the respondents' complaint for consignation in Civil Case No. 91-3090 did not discharge their obligation to petitioner bank. Hence, the deposited amount may still be applied to the payment of such obligation. Petitioner bank claims that it accepted the respondents' deposit on consignation as partial payment of their obligation after the CA had declared the same to have been improperly made and ineffective to discharge the respondents of their obligation to petitioner bank. The RTC of Makati City thus did not allegedly commit grave abuse of discretion in holding that the deposited amount of P1,034,600.00 may still be applied to the payment of their outstanding obligation of P28,810,330.51 as of December 31, 1998.

13

It is likewise petitioner bank's view that respondents erroneously resorted to the remedy of certiorari in assailing the orders of the RTC of Makati City. By filing their motion to withdraw deposit with the said lower court, the respondents allegedly recognized its jurisdiction and assuming arguendo that it committed an error in the exercise thereof, the appropriate remedy to correct the same was by ordinary appeal, not certiorari. Petitioner bank emphasizes that it already accepted the deposit of P1,034,600.00 such that it could no longer be withdrawn by the respondents. It reiterated that as of December 31, 1998, the respondents' total obligation wasP28,810,330.51 and when it negotiated with the Gaisanos in January 1999, it deducted therefrom the sums ofP1,462,901.00, representing previous payments of the respondents, and P1,034,600.00, representing the deposit in question. After these deductions, the respondents' net obligation stood at P26,312,828.52, and it was this amount that petitioner bank agreed to be settled with the payment of P25,100,000.00 by the Gaisanos. This allegedly showed its acceptance of the deposit in question as it was part of the consideration for the settlement of the respondents' obligation of P28,810,330.51. Petitioner bank strongly takes exception to the portion of the assailed CA decision comparing it to Shylock and characterizing the surcharges and interests as "excessive, iniquitous, unconscionable and exorbitant." It faults the respondents for being remiss in paying their amortization. Had they been religious in paying the same, then their obligation would not have reached the amount of over P28,000,000.00. Petitioner bank denies that it delayed the foreclosure of the respondents' mortgaged properties in order to allow the loan arrearages to accumulate. Rather, the delay was allegedly the respondents' doing as they filed with the RTC of Davao City a complaint to enjoin the said foreclosure. Moreover, petitioner bank points out that in several cases,10 the Court recognized that interests and surcharges are two entirely different things that may be simultaneously collected in connection with loan agreements. Petitioner bank, thus, prays for the reversal of the Decision dated November 12, 2001 and Resolution dated April 12, 2002 of the appellate court allowing the respondents to withdraw their deposit on consignation ofP1,034,600.00 held by the RTC of Makati City. The petition is denied. The Court shall first address the procedural issue on the propriety of respondents' filing with the CA of a petition for certiorari in assailing the Orders of the RTC of Makati City denying their motion to withdraw deposit. Petitioner bank submits that such tack was erroneous, as they should have filed an appeal. Petitioner bank's submission is not correct. A special civil action for certiorari may be instituted when any tribunal, board or officer, exercising judicial or quasi-judicial functions, has acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, nor any plain, speedy and adequate remedy in the ordinary course of law.11 To recall, in the present case, the RTC of Makati City had already rendered its original judgment in Civil Case No 91-3090 and the same was appealed to the CA. Acting on the appeal, the CA reversed the judgment of the RTC of Makati City and dismissed the respondents' complaint for consignation. The CA decision became final and executory. Subsequently, the respondents filed the motion to withdraw deposit with the RTC of Makati City and which the latter denied in the Orders of July 31, 2000 and December 14, 2000. These orders, issued after the original judgment had already been rendered, were interlocutory and, therefore, not appealable. Since no appeal was available against such orders, the respondents properly availed of the remedy of certiorari before the CA. On the other hand, the only substantive issue for the Court's resolution is whether the appellate court erred in reversing the Orders dated July 31, 2000 and December 14, 2000 of the RTC of Makati City which denied the respondents' motion to withdraw deposit and, consequently, allowing them to withdraw their deposit ofP1,034,600.00 held on consignation by the said lower court. Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment. 12 In order that consignation may be effective, the debtor must show that: (1) there was a debt due; (2) the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due or because the title to the obligation has been lost; (3) previous notice of the consignation had been given to the person interested in the performance of the obligation; (4) the amount due was placed at the disposal of the court; and (5) after the consignation had been made, the person interested was notified thereof.13 As earlier mentioned, the CA, in its Decision of November 14, 1997 in CA-G.R. CV No. 42899, ruled that there was no valid consignation because the amount tendered as payment was insufficient. In other words, the element of a valid tender of payment was not satisfied. This decision became final and executory. The issue that now confronts the Court relates to the right of the respondents to withdraw the amount deposited with the RTC of Makati City. Article 1260 of the Civil Code of the Philippines pertinently provides: Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation.

14

Before the creditor has accepted the consignation, or before a judicial confirmation that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. This provision has been explained in this wise: x x x The right of the debtor to withdraw the thing or amount deposited in court, depends upon whether or not the consignation has already been accepted or judicially declared proper. Before that time, the debtor is still the owner, and he may withdraw it; in this case, the obligation will remain in full force as before the deposit. But once the consignation has been accepted by the creditor or judicially declared as properly made, the debtor loses his right over the thing or amount deposited, and he cannot withdraw the same without the consent of the creditor; if the creditor consents to the withdrawal in such case, the obligation is revived as against the debtor personally, but all rights of preference of the creditor over the thing and all his actions against co-debtors, guarantors and sureties are extinguished. xxxx x x x We believe, however, that the contrary view is more acceptable. Before the consignation has been accepted by the creditor or judicially declared as properly made, the debtor is still the owner of the thing or amount deposited, and, therefore, the other parties liable for the obligation have no right to oppose his withdrawal of such thing or amount. The debtor merely uses his right, and unless the law expressly limits that use of his right, it cannot be prevented by the objections of anyone. Our law grants to the debtor the right to withdraw, without any limitation, and we should not read a non-existing limitation into the law. Although the other parties liable for the obligation would have been benefited if the consignation had been allowed to become effective, before that moment they have not acquired such an interest as would give them a right to oppose the exercise of the right of the debtor to withdraw the consignation. Before the consignation has been judicially declared proper, the creditor may prevent the withdrawal by the debtor, by accepting the consignation, even with reservations. Thus, when the amount consigned does not cover the entire obligation, the creditor may accept it, reserving his right to the balance. x x x14 Thus, under Article 1260 of the Civil Code, the debtor may withdraw, as a matter of right, the thing or amount deposited on consignation in the following instances: (1) Before the creditor has accepted the consignation; or (2) Before a judicial declaration that the consignation has been properly made. Obviously, in this case, there was no judicial declaration that the consignation had been properly made. On the contrary, the CA declared that there was no valid consignation. What remains to be determined then is whether petitioner bank had already accepted the deposit in question so as to prevent the respondents from exercising their right to withdraw the same. Petitioner bank insists that it had already done so. In fact, petitioner bank avers, it took into account and deducted the deposit in question from the respondents' outstanding obligation of P28,810,330.51 as of December 31, 1998 when it negotiated with the Gaisanos. Deducting the deposit in question as well as the payments made by the respondents during the period of 1990 and 1991, their net obligation stood at P26,312,828.52. It was this amount that petitioner bank allegedly agreed to be settled with the payment of P25,100,000.00 by the Gaisanos on behalf of the respondents. To prove this claim, petitioner bank relies on the statement of account15 prepared by its employees purportedly showing that the deposit in question was deducted from the respondents' outstanding obligation as of December 31, 1998. This statement of account, however, is self-serving and has no probative value especially considering that the persons who prepared the same were not presented in court. Thus, other than its bare allegation, petitioner bank has failed to establish by convincing evidence that it had made such acceptance of the deposit in question prior to the respondents' filing of their motion to withdraw deposit as to effectively prevent them from withdrawing the sum of P1,034,600.00 held by the RTC of Makati City. On the other hand, in the assailed decision, the CA categorically made the finding that petitioner bank made no acceptance of the deposit in question, even if only as partial payment of the respondents' outstanding obligation: Nor could it be successfully argued with any modicum of persuasion, x x x, that the bank had performed any prior unmistakable and deliberate act denominating a preemptive acceptance of the deposit in partial settlement of the loan obligation. Otherwise, it would not have waited until the petitioners [the respondents herein] filed their motion to withdraw more than a year after this Court's aforecited decision. The claimed "acceptance" was obviously an afterthought, and proffered for the sole purpose of opposing the deposit withdrawal.16

15

This finding of fact of the CA that petitioner bank had not accepted the deposit in question, even with reservation, is accorded respect by this Court following the salutary rule that findings of facts of the appellate court are generally conclusive on the Supreme Court.17 It is significant to note that the RTC of Makati City never made any factual finding on whether or not there had been acceptance of the deposit in question by petitioner bank.18 The said lower court did not even apply Article 1260 of the Civil Code when it denied the respondents' motion to withdraw deposit. With the finding that petitioner bank had not made any prior acceptance of the deposit in question, the CA accordingly did not commit reversible error in setting aside the Orders of the RTC of Makati City which had denied the respondents' motion to withdraw deposit. Indeed, absent this prior acceptance by petitioner bank or a judicial declaration that the consignation had been properly made, the respondents remain the owners of the sum ofP1,034,600.00 deposited with the RTC of Makati City. When they filed their motion to withdraw the deposit, they did so in the exercise of their right. At this point, it bears mentioning that it is not disputed that the Gaisano brothers, as attorneys-in-fact of the respondents, eventually paid to petitioner bank some time in January 1999 the sum of P25,100,000.00 as settlement of the respondents' obligation. To the Court's mind, the payment of the said sum already constituted substantial compliance by the respondents of their obligation considering that their loan, as restructured or consolidated in November 1982, amounted to only P3,163,000.00. As noted by the CA, the surcharges imposed by petitioner bank on the respondents as of November 15, 1998 reached P16,569,534.62.19 Article 122920 of the Civil Code specifically empowers the judge to reduce the civil penalty equitably, when the principal obligation has been partly or irregularly complied with. Upon this premise, the Court holds that the said surcharges should be equitably reduced such that the payment of P25,100,000.00 constituted substantial compliance by the respondents of their obligation to petitioner bank. The Court need not delve on the other issues raised, particularly relating to the interests imposed by petitioner bank in connection with the respondents' loan, as these were already passed upon in the other cases (CA-G.R. SP No. 21089 and CA-G.R. CV No. 42899) involving the same parties. WHEREFORE, premises considered, the petition is DENIED. The Decision dated November 12, 2001 and Resolution of April 12, 2002 of the Court of Appeals in CA-G.R. SP No. 64475 are AFFIRMED. SO ORDERED.

16

G.R. No. 149756

February 11, 2005

MYRNA RAMOS, petitioner, vs. SUSANA S. SARAO and JONAS RAMOS, respondents. DECISION PANGANIBAN, J.: Although the parties in the instant case denominated their contract as a "DEED OF SALE UNDER PACTO DE RETRO," the "sellers" have continued to possess and to reside at the subject house and lot up to the present. This evident factual circumstance was plainly overlooked by the trial and the appellate courts, thereby justifying a review of this case. This overlooked fact clearly shows that the petitioner intended merely to secure a loan, not to sell the property. Thus, the contract should be deemed an equitable mortgage. The Case Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the August 31, 2001 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 50095, which disposed as follows: "WHEREFORE, the instant appeal is DISMISSED for lack of merit. The decision dated January 19, 1995 of the Regional Trial Court, Branch 145, Makati City is AFFIRMEDin toto."3 The Facts On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a contract over their conjugal house and lot in favor of Susana S. Sarao for and in consideration of P1,310,430.4 Entitled "DEED OF SALE UNDER PACTO DE RETRO," the contract, inter alia, granted the Ramos spouses the option to repurchase the property within six months from February 21, 1991, for P1,310,430 plus an interest of 4.5 percent a month.5 It was further agreed that should the spouses fail to pay the monthly interest or to exercise the right to repurchase within the stipulated period, the conveyance would be deemed an absolute sale. 6 On July 30, 1991, Myrna Ramos tendered to Sarao the amount of P1,633,034.20 in the form of two managers checks, which the latter refused to accept for being allegedly insufficient. 7 On August 8, 1991, Myrna filed a Complaint for the redemption of the property and moral damages plus attorneys fees.8 The suit was docketed as Civil Case No. 91-2188 and raffled to Branch 145 of the Regional Trial Court (RTC) of Makati City. On August 13, 1991, she deposited with the RTC two checks that Sarao refused to accept.9 On December 21, 1991, Sarao filed against the Ramos spouses a Petition "for consolidation of ownership in pacto de retro sale" docketed as Civil Case No. 91-3434 and raffled to Branch 61 of the RTC of Makati City.10 Civil Case Nos. 91-2188 and 91-3434 were later consolidated and jointly tried before Branch 145 of the said Makati RTC.11 The two lower courts narrated the trial in this manner: "x x x Myrna [Ramos] testified as follows: On February 21, 1991, she and her husband borrowed from Sarao the amount of P1,234,000.00, payable within six (6) months, with an interest thereon at 4.5% compounded monthly from said date until August 21, 1991, in order for them to pay [the] mortgage on their house. For and in consideration of the said amount, they executed a deed of sale under a [pacto de retro] in favor of Sarao over their conjugal house and lot registered under TCT No. 151784 of the Registry of Deeds of Makati (Exhibit A). She further claimed that Sarao will keep the torrens title until the lapse of the 6-month period, in which case she will redeem [the] subject property and the torrens title covering it. When asked why it was the amount of P1,310,430 instead of the aforestated amount which appeared in the deed, she explained that upon signing of the deed in question, the sum of P20,000.00 representing attorneys fees was added, and its total amount was multiplied with 4.5% interest rate, so that they could pay in advance the compounded interest. She also stated that although the market value of the subject property as of February 1991 [was] calculated to [be] more or less P10 million, it was offered [for] only P1,310,430.00 for the reason that they intended nothing but to redeem the same. In May 1991, she wrote a letter to Atty. Mario Aguinaldo requesting him to give a computation of the loan obligation, and [expressed] her intention to redeem the subject property, but she received no reply to her letter. Instead, she, through her husband, secured directly from Sarao a handwritten computation of their loan obligation, the total of which amount[ed] to P1,562,712.14. Later, she sent several letters to Sarao, [furnishing] Atty. Aguinaldo with copies, asking them for the updated computation of their loan obligation as of July 1991, but [no reply was again received]. During the hearing of February 17, 1992, she admitted receiving a letter dated July 23, 1991 from Atty. Aguinaldo which show[ed] the computation of their loan obligation [totaling] to P2,911,579.22 (Exhs. 6, 6-A). On July 30, 1991, she claimed that she offered the redemption price in the form of two (2) managers checks amounting to P1,633,034.20 (Exhs. H-1 & H-2) to Atty. Aguinaldo, but the latter refused to accept them because they [were] not enough to pay the loan obligation. Having refused acceptance of the said checks covering the redemption price, on August 13, 1991 she came to Court to consign the checks (Exhs. L-4 and L-5). Subsequently, she proceeded to the Register of

17

Deeds to cause the annotation of lis pendens on TCT No. 151784 (Exh. B-1-A). Hence, she filed the x x x civil case against Sarao. "On the other hand, Sarao testified as follows: On February 21, 1991, spouses Ramos together with a certain Linda Tolentino and her husband, Nestor Tolentino approached her and offered transaction involv[ing a] sale of property[. S]he consulted her lawyer, Atty. Aguinaldo, and on the same date a corresponding deed of sale underpacto de retro was executed and signed (Exh. 1 ). Later on, she sent, through her lawyer, a demand letter dated June 10, 1991 (Exh. 6) in view of Myrnas failure to pay the monthly interest of 4.5% as agreed upon under the deed[. O]n June 14, 1991 Jonas replied to said demand letter (Exh. 8); in the reply Jonas admitted that he no longer ha[d] the capacity to redeem the property and to pay the interest. In view of the said reply of Jonas, [Sarao] filed the corresponding consolidation proceedings. She [further claimed] that before filing said action she incurred expenses including payment of real estate taxes in arrears, x x x transfer tax and capital [gains] tax, and [expenses] for [the] consolidated proceedings, for which these expenses were accordingly receipted (Exhs. 6, 6-1 to 6-0). She also presented a modified computation of the expenses she had incurred in connection with the execution of the subject deed (Exh. 9). She also testified that Myrna did not tender payment of the correct and sufficient price for said real property within the 6-month period as stipulated in the contract, despite her having been shown the computation of the loan obligation, inclusive of capital gains tax, real estate tax, transfer tax and other expenses. She admitted though that Myrna has tendered payment amounting to P1,633,034.20 in the form of two managers checks, but these were refused acceptance for being insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were sent to Myrna and her lawyer, informing them of the computation of the loan obligation inclusive of said expenses. Finally, she denied the allegations made in the complaint that she allied herself with Jonas, and claimed that she ha[d] no knowledge about said allegation."12 After trial, the RTC dismissed the Complaint and granted the prayer of Sarao to consolidate the title of the property in her favor.13 Aggrieved, Myrna elevated the case to the CA. Ruling of the Court of Appeals The appellate court sustained the RTCs finding that the disputed contract was a bonafide pacto de retro sale, not a mortgage to secure a loan.14 It ruled that Myrna Ramos had failed to exercise the right of repurchase, as the consignation of the two managers checks was deemed invalid. She allegedly failed (1) to deposit the correct repurchase price and (2) to comply with the required notice of consignation. 15 Hence, this Petition.16 The Issues Petitioner raises the following issues for our consideration: "1. Whether or not the honorable appellate court erred in ruling the subject Deed of Sale under Pacto de Retro was, and is in reality and under the law an equitable mortgage; "2. Whether or not the honorable appellate court erred in affirming the ruling of the court a quo that there was no valid tender of payment of the redemption price neither [sic] a valid consignation in the instant case; and "3. Whether or not [the] honorable appellate court erred in affirming the ruling of the court a quo denying the claim of petitioner for damages and attorneys fees."17 The Courts Ruling The Petition is meritorious in regard to Issues 1 and 2. First Issue: A Pacto de Retro Sale or an Equitable Mortgage? Respondent Sarao avers that the herein Petition should have been dismissed outright, because petitioner (1) failed to show proof that she had served a copy of it to the Court of Appeals and (2) raised questions of fact that were not proper issues in a petition under Rule 45 of the Rules of Court.18 This Court, however, disregarded the first ground; otherwise, substantial injustice would have been inflicted on petitioner. Since the Court of Appeals is not a party here, failure to serve it a copy of the Petition would not violate any right of respondent. Service to the CA is indeed mentioned in the Rules, but only to inform it of the pendency of the appeal before this Court.

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As regards Item 2, there are exceptions to the general rule barring a review of questions of fact. 19 The Court reviewed the factual findings in the present case, because the CA had manifestly overlooked certain relevant and undisputed facts which, after being considered, justified a different conclusion. 20 Pacto de Retro Sale Distinguished from Equitable Mortgage The pivotal issue in the instant case is whether the parties intended the contract to be a bona fide pacto de retrosale or an equitable mortgage. In a pacto de retro, ownership of the property sold is immediately transferred to the vendee a retro, subject only to the repurchase by the vendor a retro within the stipulated period.21 The vendor a retros failure to exercise the right of repurchase within the agreed time vests upon the vendee a retro, by operation of law, absolute title to the property.22 Such title is not impaired even if the vendee a retro fails to consolidate title under Article 1607 of the Civil Code.23 On the other hand, an equitable mortgage is a contract that -- although lacking the formality, the form or words, or other requisites demanded by a statute -- nevertheless reveals the intention of the parties to burden a piece or pieces of real property as security for a debt.24 The essential requisites of such a contract are as follows: (1) the parties enter into what appears to be a contract of sale, but (2) their intention is to secure an existing debt by way of a mortgage.25 The nonpayment of the debt when due gives the mortgagee the right to foreclose the mortgage, sell the property, and apply the proceeds of the sale to the satisfaction of the loan obligation.26 This Court has consistently decreed that the nomenclature used by the contracting parties to describe a contract does not determine its nature.27 The decisive factor is their intention -- as shown by their conduct, words, actions and deeds -- prior to, during, and after executing the agreement.28 This juristic principle is supported by the following provision of law: Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.29 Even if a contract is denominated as a pacto de retro, the owner of the property may still disprove it by means of parol evidence,30 provided that the nature of the agreement is placed in issue by the pleadings filed with the trial court.31 There is no single conclusive test to determine whether a deed absolute on its face is really a simple loan accommodation secured by a mortgage.32 However, the law enumerates several instances that show when a contract is presumed to be an equitable mortgage, as follows: Article 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases: (1) When the price of a sale with right to repurchase is unusually inadequate; (2) When the vendor remains in possession as lessee or otherwise; (3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4) When the purchaser retains for himself a part of the purchase price; (5) When the vendor binds himself to pay the taxes on the thing sold; (6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. 33 Furthermore, a contract purporting to be a pacto de retro is construed as an equitable mortgage when the terms of the document and the surrounding circumstances so require.34 The law discourages the use of a pacto de retro, because this scheme is frequently used to circumvent a contract known as a pactum commissorium. The Court has frequently noted that a pacto de retro is used to conceal a contract of loan secured by a mortgage.35Such construction is consistent with the doctrine that the law favors the least transmission of rights.36 Equitable Mortgage Presumed

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to be Favored by Law Jurisprudence has consistently declared that the presence of even just one of the circumstances set forth in the forgoing Civil Code provision suffices to convert a contract to an equitable mortgage.37 Article 1602 specifically states that the equitable presumption applies to any of the cases therein enumerated. In the present factual milieu, the vendor retained possession of the property allegedly sold. 38 Petitioner and her children continued to use it as their residence, even after Jonas Ramos had abandoned them. 39 In fact, it remained as her address for the service of court orders and copies of Respondent Saraos pleadings.40 The presumption of equitable mortgage imposes a burden on Sarao to present clear evidence to rebut it. Corollary to this principle, the favored party need not introduce proof to establish such presumption; the party challenging it must overthrow it, lest it persist.41 To overturn that prima facie fact that operated against her, Sarao needed to adduce substantial and credible evidence to prove that the contract was a bona fide pacto de retro. This evidentiary burden she miserably failed to discharge. Contrary to Saraos bare assertions, a meticulous review of the evidence reveals that the alleged contract was executed merely as security for a loan. The July 23, 1991 letter of Respondent Saraos lawyer had required petitioner to pay a computed amount -under the heading "House and Lot Loan"42 -- to enable the latter to repurchase the property. In effect, respondent would resell the property to petitioner, once the latters loan obligation would have been paid. This explicit requirement was a clear indication that the property was to be used as security for a loan. The loan obligation was clear from Saraos evidence as found by the trial court, which we quote: "x x x [Sarao] also testified that Myrna did not tender payment of the correct and sufficient price for said real property within the 6-month period as stipulated in the contract, despite her having been shown the computation of the loan obligation, inclusive of capital gains tax, real estate tax, transfer tax and other expenses. She admitted though that Myrna has tendered payment amounting to P1,633,034.20 in the form of two managers checks, but these were refused acceptance for being insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were sent to Myrna and her lawyer, informing them of the computation of the loan obligation inclusive of said expenses. x x x."43 Respondent herself stressed that the pacto de retro had been entered into on the very same day that the property was to be foreclosed by a commercial bank.44 Such circumstance proves that the spouses direly needed funds to avert a foreclosure sale. Had they intended to sell the property just to realize some profit, as Sarao suggests,45they would not have retained possession of the house and continued to live there. Clearly, the spouses had entered into the alleged pacto de retro sale to secure a loan obligation, not to transfer ownership of the property. Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to her lawyer that the contract was a pacto de retro.46 That letter, however, cannot override the finding that the pacto de retro was executed merely as security for a loan obligation. Moreover, on May 17, 1991, prior to the transmittal of the letter, petitioner had already sent a letter to Saraos lawyer expressing the formers desire to settle the mortgage on the property.47Considering that she had already denominated the transaction with Sarao as a mortgage, petitioner cannot be prejudiced by her husbands alleged admission, especially at a time when they were already estranged.48 Inasmuch as the contract between the parties was an equitable mortgage, Respondent Saraos remedy was to recover the loan amount from petitioner by filing an action for the amount due or by foreclosing the property. 49 Second Issue: Propriety of Tender of Payment and Consignation Tender of payment is the manifestation by debtors of their desire to comply with or to pay their obligation. 50 If the creditor refuses the tender of payment without just cause, the debtors are discharged from the obligation by the consignation of the sum due.51 Consignation is made by depositing the proper amount to the judicial authority, before whom the tender of payment and the announcement of the consignation shall be proved. 52 All interested parties are to be notified of the consignation.53 Compliance with these requisites is mandatory.54 The trial and the appellate courts held that there was no valid consignation, because petitioner had failed to offer the correct amount and to provide ample consignation notice to Sarao.55 This conclusion is incorrect. Note that the principal loan was P1,310,430 plus 4.5 per cent monthly interest compounded for six months. Expressing her desire to pay in the fifth month, petitioner averred that the total amount due was P1,633,034.19, based on the computation of Sarao herself.56 The amount of P2,911,579.22 that the latter demanded from her

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to settle the loan obligation was plainly exorbitant, since this sum included other items not covered by the agreement. The property had been used solely as secure ty for the P1,310,430 loan; it was therefore improper to include in that amount payments for gasoline and miscellaneous expenses, taxes, attorneys fees, and other alleged loans. When Sarao unjustly refused the tender of payment in the amount of P1,633,034.20, petitioner correctly filed suit and consigned the amount in order to be released from the latters obligation. The two lower courts cited Article 1257 of the Civil Code to justify their ruling that petitioner had failed to notify Respondent Sarao of the consignation. This provision of law states that the obligor may be released, provided the consignation is first announced to the parties interested in the fulfillment of the obligation. The facts show that the notice requirement was complied with. In her August 1, 1991 letter, petitioner said that should the respondent fail to accept payment, the former would consign the amount.57 This statement was an unequivocal announcement of consignation. Concededly, sending to the creditor a tender of payment and notice of consignation -- which was precisely what petitioner did -- may be done in the same act.58 Because petitioners consignation of the amount of P1,633,034.20 was valid, it produced the effect of payment.59"The consignation, however, has a retroactive effect, and the payment is deemed to have been made at the time of the deposit of the thing in court or when it was placed at the disposal of the judicial authority."60 "The rationale for consignation is to avoid making the performance of an obligation more onerous to the debtor by reason of causes not imputable to him."61 Third Issue: Moral Damages and Attorneys Fees Petitioner seeks moral damages in the amount of P500,000 for alleged sleepless nights and anxiety over being homeless.62 Her bare assertions are insufficient to prove the legal basis for granting any award under Article 2219 of the Civil Code.63 Verily, an award of moral damages is uncalled for, considering that it was Respondent Saraos accommodation that settled the earlier obligation of the spouses with the commercial bank and allowed them to retain ownership of the property. Neither have attorneys fees been shown to be proper.64 As a general rule, in the absence of a contractual or statutory liability therefor, sound public policy frowns on penalizing the right to litigate. 65 This policy applies especially to the present case, because there is a need to determine whether the disputed contract was a pacto de retro sale or an equitable mortgage. Other Matters In a belated Manifestation filed on October 19, 2004, Sarao declared that she was the "owner of the one-half share of Jonas Ramos in the conjugal property," because of his alleged failure to file a timely appeal with the CA.66 Such declaration of ownership has no basis in law, considering that the present suit being pursued by petitioner pertains to a mortgage covering the whole property. Besides, it is basic that defenses and issues not raised below cannot be considered on appeal.67 The Court, however, observes that Respondent Sarao paid real property taxes amounting to P67,567.10 to halt the auction sale scheduled for October 8, 2004, by the City of Muntinlupa.68 Her payment was made in good faith and benefited petitioner. Accordingly, Sarao should be reimbursed; otherwise, petitioner would be unjustly enriched,69 under Article 2175 of the Civil Code which provides: Art. 2175. Any person who is constrained to pay the taxes of another shall be entitled to reimbursement from the latter. WHEREFORE, the Petition is partly GRANTED and the assailed Decision SET ASIDE. Judgment is hereby rendered: (1) DECLARING (a) the disputed contract as an equitable mortgage, (b) petitioners loan to Respondent Sarao to be in the amount of P1,633,034.19 as of July 30, 1991; and (c) the mortgage on the property -- covered by TCT No. 151784 in the name of the Ramos spouses and issued by the Register of Deeds of Makati City --as discharged (2) ORDERING the RTC to release to Sarao the consigned amount of P1,633,034.19 (3) COMMANDING Respondent Sarao to return to petitioner the owners copy of TCT No. 151784 in the name of the Ramos spouses and issued by the Register of Deeds of Makati City (4) DIRECTING the Register of Deeds of Makati City to cancel Entry No. 24057, the annotation appearing on TCT No. 151784

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(5) ORDERING petitioner to pay Sarao in the amount of P67,567.10 as reimbursement for real property taxes No pronouncement as to costs. SO ORDERED. Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.

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G.R. No. 142731

June 8, 2006

BANK OF THE PHILIPPINE ISLANDS (formerly FAR EAST BANK AND TRUST COMPANY), Petitioner, vs. COURT OF APPEALS and JIMMY T. GO, Respondents. DECISION AZCUNA, J.: This is a petition for review on certiorari filed by Bank of the Philippine Islands of the decision and resolution of the Court of Appeals, which in turn partially denied a petition for certiorari questioning the temporary restraining order (TRO) and preliminary injunction issued by Judge Urbano C. Victorio, Sr. 1 The facts as narrated in the Court of Appeals decision are as follows: Petitioner, Far East Bank and Trust Company, granted a total of eight (8) loans to Noahs Arc Merchandising (Noahs Ark, for brevity). Per Certificate of Registration issued by the Department of Trade and Industry (Rollo, p. 40), Noahs Ark is a single proprietorship owned by Mr. Albert T. Looyuko. The said loans were evidenced by identical Promissory Notes all signed by Albert T. Looyuko, private respondent Jimmy T. Go and one Wilson Go. Likewise, all loans were secured by real estate mortgage constituted over a parcel of land covered by Transfer Certificate of Title [No.] 160277 registered in the names of Mr. Looyuko and herein private respondent. Petitioner, claiming that Noahs Ark defaulted in its obligations, extrajudicially foreclosed the mortgage. The auction sale was set on 14 April 1998 but on 8 April 1998 private respondent filed a complaint for damages with prayer [for] issuance of TRO and/or writ of preliminary injunction seeking [to] enjoin the auction sale. [I]n the Order dated 14 April 1998 a temporary restraining order was issued and in the same order the application for Preliminary Injunction was set for hearing [i]n the afternoon of the same day (Rollo, p. 142).2 In an order3 dated April 15, 1998, Judge Victorio extended the TRO for another 15 days, for a total of 20 days. The Court of Appeals decision continues thus: After hearing, the 7 May 1998 Order granted the application for preliminary injunction which shall take effect upon posting of a bond in the amount of Two Hundred Thousand Pesos (P200,000.00). The dispositive portion read: "WHEREFORE, it appearing that the acts complained of would be in violation of plaintiffs right and would work injustice to the plaintiff and so as not to render ineffectual whatever judgment may be issued in this case, the application [for] preliminary injunction is hereby granted and the defendants and all persons acting in their behalf are hereby ordered to cease, desist, and refrain from proceeding with the scheduled foreclosure and public auction sale of the mortgaged property covered by TCT No. 160277 until further orders from this Court. This Order shall be effective upon petitioners filing of a bond in the amount of Two Hundred Thousand Pesos (P200,000.00) to answer for any and all damages that defendants may suffer by reason of the issuance of the writ of preliminary injunction. As prayed for, defendants are hereby directed to file their answer on or before May 14, 1998. Copy furnished plaintiff. SO ORDERED." (Rollo p. 175) Private-respondent then filed a bond as required by the order. Petitioner moved for a reconsideration of the aforementioned order which motion was denied in the Order dated 30 July 1998 on the ground that the extrajudicial foreclosure was premature as to four (4) promissory notes. The dispositive portion read: "WHEREFORE, premises considered, the motion for reconsideration is hereby denied and the other pending incident pertaining thereto are noted and this case be set for pre-trial. LET THEREFORE, a notice of pre-trial be sent to the parties. SO ORDERED." (Rollo, p. 219)4 After petitioners motion for reconsideration was denied in an order dated July 30, 1998, petitioner filed a petition for certiorari with the Court of Appeals, praying that the orders dated May 7, 1998 and July 30, 1998, granting the writ of preliminary injunction and denying the motion for reconsideration, respectively, be annulled and set aside and the writ of preliminary injunction be dissolved. Furthermore, petitioner asked to be allowed to proceed with the auction sale of the property. The Court of Appeals promulgated its decision dated August 26, 1999 which partially denied the petition for certiorari, stating as follows:

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The issue in this case is: "Whether the trial court erred in the issuance of the Writ of Preliminary Injunction or not." Petitioner averred that private respondent had not shown any right which should be protected by an injunction. Private respondent naturally claimed otherwise and asserted that since four (4) of the promissory notes have not yet matured there was no basis to foreclose the mortgage (Comment, p 15). He also claimed that his right to due process entitles him to legal demand prior to the filing of the foreclosure proceedings against the subject property (Comment, p. 16). It has been held that an injunction may be issued in order to preserve the status quo. Thus, in Cagayan de Oro City Landless Residents Association, Inc., v. Court of Appeals (254 SCRA 220 [1996]) it was held: As an extraordinary remedy, injunction is calculated to preserve the status quo of things and is generally availed of to prevent actual or threatened acts, until the merits of the case can be heard. x x x. (254 SCRA 228). In the case at bar, there is a need to first settle the question of whether the demand made by petitioner was sufficient to render private respondent in default or not. In Rose Packing Co., Inc. v. Court of Appeals (167 SCRA 309 [1988]) it was held that the question of whether the debtor is in default should first be settled to determine if the foreclosure was proper. In the same case it was also held that said question should be resolved by the trial court, to wit: While petitioner corporation does not deny, in fact, it admits its indebtedness to respondent bank (Brief for Petitioner, pp. 7-11), there were matters that needed the preservation of the status quo between the parties. The foreclosure sale was premature. First was the question of whether or not petitioner corporation was already in default. xxx Petitioner corporation alleges that there had been no demand on the part of respondent bank previous to its filing a complaint against petitioner and Rene Knecht personally for collection on petitioners indebtedness (Brief for Petitioner, p.13). For an obligation to become due there must generally be a demand. Default generally begins from the moment the creditor demands the performance of the obligation. Without such demand, judicial or extrajudicial, the effects of default will not arise. (Namarco v. Federation of United Namarco Distributors, Inc. 49 SCRA 238 [1973]; Borje v. CFI of Misamis Occidental, 88 SCRA 576 [1979]. Whether petitioner corporation is already in default or not and whether demand had been properly made or not had to be determined in the lower court. (167 SCRA 317-318). We now come to the matter of sufficiency of the bond filed by private respondent. Petitioner claims that theP200,000.00 bond is grossly insufficient. It argued, thus: By enjoining petitioner from conducting the auction sale of the mortgaged property, petitioner has already suffered damages in the amount of P715,077.78 representing filing and publication fees. Yet damages to be incurred by petitioner by reason of the injunction are not limited to filing and publication fees, granting that the case will drag on for more tha[n] a year, which is usually the case. The injunction would deprive petitioner FEBTC of its own income from the foreclosed property or from the proceeds of the foreclosure sale. Obviously it is easily more thanP200,000.00 (Rollo, p. 31). The Court agrees with petitioner that the amount of the bond is insufficient. In Valencia v. Court of Appeals, (263 SCRA 275 [1996]) the Supreme Court explained that the bond is for the protection against loss or damage by reason of the injunction, to wit: The said bond was supposed to answer only for damages which may be sustained by private respondents, against whom the mandatory injunction was issued, by reason of the issuance thereof, and not to answer for damages caused by the actuations of petitioner, which may or may not be related at all to the implementation of the mandatory injunction. The purpose of the injunction bond is to protect the defendant against loss or damage by reason of the injunction in case the court finally decides that the plaintiff was not entitled to it, and the bond is usually conditioned accordingly. Thus, the bondsmen are obligated to account to the defendant in the injunction suit for all damages, or costs and reasonable counsels fees incurred or sustained by the latter in case it is determined that the injunction was wrongfully issued. (263 SCRA 288-289) Private respondents contention that considering the market value of the property, the bond is reasonable and proper (Rollo, p. 240) cannot be upheld considering that no proof of the value of the property was even presented to buttress this assertion. However, the insufficiency of the amount of the bond prescribed by the trial court does not warrant the lifting of the writ of injunction. The Court notes that under Section 7, Rule 58 of the 1997 Rules of Civil Procedure the applicant, in case the bond is insufficient, may still file one sufficient in amount, to wit:

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Sec. 7. Service of copies of bond; effect of disapproval of same. - - x x x. If the applicants bond is found to be insufficient in amount, or if the surety or sureties thereon fail to justify, and a bond sufficient in amount with sufficient sureties approved after justification is not filed forthwith, the injunction shall be dissolved. x x x. The Court considers a bond of Five Million Pesos (P5,000,000.00) to be more appropriate in the present case. WHEREFORE, considering the foregoing premises the petition for certiorari is DENIED; however, private respondent is ordered to file an injunctive bond in the amount of P5,000,000.00. SO ORDERED.5 Petitioner filed a motion for reconsideration which was denied in a resolution dated April 3, 2000 by the Court of Appeals on the ground that all the matters raised in the motion for reconsideration had already been passed upon in the decision.6 Petitioner filed the instant petition for review on certiorari questioning the August 26, 1999 decision and the April 3, 2000 resolution. The following issues were raised by petitioner: 3.1 Whether the Honorable Court of Appeals can resolve the issue of the sufficiency of demand. 3.2 Whether private respondent Go is entitled to a temporary restraining order and a writ of preliminary injunction. 3.3 Whether the Complaint of private respondent Go has been rendered moot and academic. For the purpose of clarity, the issues are restated thus: 1. Whether or not the private respondent was entitled to the TRO and writ of preliminary injunction. 2. Whether or not the TRO and writ of preliminary injunction were properly issued by Judge Victorio. On the first issue, this Court finds that private respondent was not entitled to the TRO and the writ of preliminary injunction. Section 3 of Rule 58 of the Rules of Court provides the grounds for the issuance of a preliminary injunction, to wit: A preliminary injunction may be granted when it is established: (a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts, either for a limited period or perpetually; (b) That the commission, continuance or non-performance of the act or acts complained of during the litigation would probably work injustice to the applicant; or (c) That a party, court, agency or person is doing, threatening, or is attempting to do, or is procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the judgment ineffectual. As will be discussed below, private respondent is not entitled to the relief of injunction against the extrajudicial foreclosure and auction sale. Neither are the extrajudicial foreclosure and auction sale violative of private respondents rights. Private respondent claimed that demand was not made upon him, in spite of the fact that he co-signed the promissory notes. He also argues that only four of the eight promissory notes secured by the mortgage had become due. A reading of the promissory notes discloses that as co-signor, private respondent waived demand. Furthermore, the promissory notes contain an acceleration clause, to wit: Upon the happening of any of the following events, FAR EAST BANK AND TRUST COMPANY or the holder, may at its option, forthwith accelerate maturity and the unpaid balance of the principal, as well as interest and other charges which have accrued, shall become due and payable without demand or notice[:](1) default in payment or performance of any obligation of any of the undersigned to FAR EAST BANK AND TRUST COMPANY or its affiliated companies; xxx I/We hereby waive any diligence, presentment, demand, protest or notice of non-payment o[r] dishonor with respect to this note or any extension thereof.7 (Emphasis added)

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The Civil Code in Article 11698 provides that one incurs in delay or is in default from the time the obligor demands the fulfillment of the obligation from the obligee. However, the law expressly provides that demand is not necessary under certain circumstances, and one of these circumstances is when the parties expressly waive demand. Hence, since the co-signors expressly waived demand in the promissory notes, demand was unnecessary for them to be in default. Private respondent further argues that by withholding the lease payments Far East Bank and Trust Company (FEBTC) owed Noahs Ark for the space FEBTC was leasing from Noahs Ark and applying said amounts to the outstanding obligation of Noahs Ark, as expressed in a letter from FEBTC dated May 19, 1998, 9 FEBTC has waived default, novated the contract of loan as embodied in the promissory notes and is therefore estopped from foreclosing on the mortgaged property. This Court disagrees. FEBTCs act of withholding the lease payments and applying them to the outstanding obligation of Noahs Ark is merely an acknowledgement of the legal compensation that occurred by operation of law between the parties. The Court has expounded on compensation and more specifically on legal compensation as follows: x x x compensation is a mode of extinguishing to the concurrent amount the obligations of persons who in their own right and as principals are reciprocally debtors and creditors of each other. Legal compensation takes place by operation of law when all the requisites are present, as opposed to conventional compensation which takes place when the parties agree to compensate their mutual obligations even in the absence of some requisites.10 The Civil Code enumerates the requisites of legal compensation, thus: Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. It is clear from the facts that FEBTC and Noahs Ark are both principal obligors and creditors of each other. Their debts to each other both consist in a sum of money. As discussed above, the eight promissory notes of Noahs Ark are all due; and the lease payments owed by FEBTC become due each month. Noahs Arks debt is liquidated and demandable; and FEBTCs lease payments are liquidated and are demandable every month as they fall due. Lastly, there is no retention or controversy commenced by third persons over either of the debts. Novation did not occur as private respondent argued. The Court has declared that a contract cannot be novated in the absence of a new contract executed between the parties.11 The legal compensation, which was acknowledged by FEBTC in its May 19, 1998 letter, occurred by operation of law, as discussed above. As a consequence, it cannot be considered a new contract between the parties. Hence, the loan agreement, as embodied in the promissory notes and the real estate mortgage, subsists. Since the compensation between the parties occurred by operation of law, FEBTC did not waive Noahs Arks default. As a result of the absence of novation or waiver of default, FEBTC is therefore not estopped from proceeding with the foreclosure. Private respondent further argues in his memorandum that FEBTC was in bad faith when it initiated the foreclosure proceedings because Noahs Ark had been requesting for accounting and reconciliation of its account and the application of interest payment, and that there were on-going negotiations with FEBTC for the settlement and restructuring of the loan obligation. From the evidence on hand, it is clear that FEBTC was acting within its rights. Private respondent did not present any other agreement signed by the parties subsequent to the promissory notes and mortgage contract which can be considered as replacing, altering, or novating the contractual rights between the parties. Even if Noahs Ark was trying to seek an accounting and reconciliation of its account and even if it was trying to negotiate a restructuring of its loan obligation, it cannot deny the fact that it had already defaulted on the entire loan obligation. This gave FEBTC the right to exercise

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its contractual rights to foreclose on the security of the debt, which in this case was the real estate mortgage subject of this case. FEBTC was therefore just exercising its contractual rights when it initiated foreclosure proceedings and cannot be considered to have acted in bad faith. With regard to the second issue, this Court finds that the TRO and the writ of preliminary injunction were improperly issued by Judge Victorio. First of all, on substantive grounds, as discussed above, private respondent was not entitled to the TRO and the writ of preliminary injunction. Second, the issuance of the TRO was, on procedural grounds, irregular. Section 5, Rule 58 of the Rules of Civil Procedure provides: Preliminary injunction not granted without notice; exception. No preliminary injunction shall be granted without hearing and prior notice to the party or person sought to be enjoined. If it shall appear from facts shown by affidavits or by the verified application that great or irreparable injury would result to the applicant before the matter can be heard on notice, the court to which the application for preliminary injunction was made, may issue a temporary restraining order to be effective only for a period of twenty (20) days from notice to the party or person sought to be enjoined. Within the said twenty-day period, the court must order said party or person to show cause, at a specified time and place, why the injunction should not be granted, determine within the same period whether or not the preliminary injunction shall be granted, and accordingly issue the corresponding order. Judge Victorio, in an order dated April 14, 1998, issued a TRO for five days, then, in an order dated April 15, 1998, extended it for fifteen more days, totaling twenty days. However, in the first order, Judge Victorio excluded Saturdays and Sundays; and in the latter order he added legal holidays to the exclusions. As quoted above, a TRO is effective only for a period of twenty days from notice to the party sought to be enjoined. The rule does not specify that the counting of the twenty-day period is only limited to working days or that Saturdays, Sundays and legal holidays are excluded from the twenty-day period. The law simply states twenty days from notice. Section 1, Rule 22 of the Rules of Court is pertinent, to wit: How to compute time. In computing any period of time prescribed or allowed by these Rules, or by order of the court, or by any applicable statute, the day of the act or event from which the designated period of time begins to run is to be excluded and the date of performance included. If the last day of the period, as thus computed, falls on a Saturday, a Sunday, or a legal holiday in the place where the court sits, the time shall not run until the next working day. It is clear from the last sentence of this section that non-working days (Saturdays, Sundays and legal holidays) are excluded from the counting of the period only when the last day of the period falls on such days. The Rule does not provide for any other circumstance in which non-working days would affect the counting of a prescribed period. Hence, Judge Victorio exceeded the authority granted to lower courts, in Section 5, Rule 58 of the Rules of Court, when he excluded non-working days from the counting of the twenty-day period. In sum, private respondent was not entitled to the TRO nor to the preliminary injunction, and the period granted in the TRO issued by Judge Victorio exceeded that prescribed in the Rules of Court. WHEREFORE, the petition is GRANTED and the decision12 and resolution13 of the Court of Appeals dated August 26, 1999 and April 3, 2000, respectively, are PARTIALLY REVERSED and SET ASIDE, retaining only the portion which increases the amount of the injunctive bond to Five Million Pesos (P5,000,000). The writ of preliminary injunction issued by Judge Urbano C. Victorio, Sr., in an order14 dated May 7, 1998 in Civil Case No. 98-88266, is hereby DISSOLVED. No costs. SO ORDERED.

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G.R. No. 115158 September 5, 1997 EMILLA M. URACA, CONCORDIA D. CHING and ONG SENG, represented by ENEDINO H. FERRER,petitioners, vs. COURT OF APPEALS, JACINTO VELEZ, JR., CARMEN VELEZ TING, AVENUE MERCHANDISING, INC., FELIX TING AND ALFREDO GO, respondents.

PANGANIBAN, J.: Novation is never presumed; it must be sufficiently established that a valid new agreement or obligation has extinguished or changed an existing one. The registration of a later sale must be done in good faith to entitle the registrant to priority in ownership over the vendee in an earlier sale. Statement of the Case These doctrines are stressed by this Court as it resolves the instant petition challenging the December 28, 1993 Decision 1 of Respondent Court of Appeals 2 in CA-G.R. SP No. 33307, which reversed and set aside the judgment of the Regional Trial Court of Cebu City, Branch 19, and entered a new one dismissing the petitioners' complaint. The dispositive portion of the RTC decision reads: 3 WHEREFORE, judgment is hereby rendered: 1) declaring as null and void the three (3) deeds of sale executed by the Velezes to Felix C. Ting, Manuel Ting and Alfredo Go; 2) ordering Carmen Velez Ting and Jacinto M. Velez, Jr. to execute a deed of absolute sale in favor of Concordia D. Ching and Emilia M. Uraca for the properties in question for P1,400,000.00, which sum must be delivered by the plaintiffs to the Velezes immediately after the execution of said contract; 3) ordering Carmen Velez Ting and Jacinto M. Velez, Jr. to reimburse Felix C. Ting, Manuel C. Ting and Alfredo Go whatever amount the latter had paid to the former; 4) ordering Felix C. Ting, Manuel C. Ting and Alfredo Go to deliver the properties in question to the plaintiffs within fifteen (15) days from receipt of a copy of this decision; 5) ordering all the defendants to pay, jointly and severally, the plaintiffs the sum of P20,000.00 as attorney's fees. SO ORDERED. The Antecedent Facts The facts narrated by the Court of Appeals are as follows: 4 The Velezes (herein private respondents) were the owners of the lot and commercial building in question located at Progreso and M.C. Briones Streets in Cebu City.
Herein (petitioners) were the lessees of said commercial building. 5

On July 8, 1985, the Velezes through Carmen Velez Ting wrote a letter to herein (petitioners) offering to sell the subject property for P1,050,000.00 and at the same time requesting (herein petitioners) to reply in three days. On July 10, 1985, (herein petitioners) through Atty. Escolastico Daitol sent a reply-letter to the Velezes accepting the aforesaid offer to sell. On July 11, 1985, (herein petitioner) Emilia Uraca went to see Carmen Ting about the offer to sell but she was told by the latter that the price was P1,400,000.00 in cash or manager's check and not P1,050,000.00 as erroneously stated in their letter-offer after some haggling. Emilia Uraca agreed to the price of P1,400,000.00 but counter-proposed that payment be paid in installments with a down payment of P1,000,000.00 and the balance of P400,000 to be paid in 30 days. Carmen Velez Ting did not accept the said counter-offer of Emilia Uraca although this fact is disputed by Uraca.

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No payment was made by (herein petitioners) to the Velezes on July 12, 1985 and July 13, 1985. On July 13, 1985, the Velezes sold the subject lot and commercial building to the Avenue Group (Private Respondent Avenue Merchandising Inc.) for P1,050,000.00 net of taxes, registration fees, and expenses of the sale. At the time the Avenue Group purchased subject property on July 13, 1985 from the Velezes, the certificate of title of the said property was clean and free of any annotation of adverse claims or lis pendens. On July 31, 1985 as aforestated, herein (petitioners) filed the instant complaint against the Velezes.
On August 1, 1985, (herein petitioners) registered a notice of lis pendens over the property in question with the Office of the Register of Deeds. 6

On October 30, 1985, the Avenue Group filed an ejectment case against (herein petitioners) ordering the latter to vacate the commercial building standing on the lot in question. Thereafter, herein (petitioners) filed an amended complaint impleading the Avenue Group as new defendants (after about 4 years after the filing of the original complaint). The trial court found two perfected contracts of sale between the Velezes and the petitioners involving the real property in question. The first sale was for P1,050,000.00 and the second was for P1,400,000.00. In respect to the first sale, the trial court held that "[d]ue to the unqualified acceptance by the plaintiffs within the period set by the Velezes, there consequently came about a meeting of the minds of the parties not only as to the object certain but also as to the definite consideration or cause of the contract." 7 And even assuming arguendo that the second sale was not perfected, the trial court ruled that the same still constituted a mere modificatory novation which did not extinguish the first sale. Hence, the trial court held that "the Velezes were not free to sell the properties to the Avenue Group." 8 It also found that the Avenue Group purchased the property in bad faith. 9 Private respondents appealed to the Court of Appeals. As noted earlier, the CA found the appeal meritorious. Like the trial court, the public respondent held that there was a perfected contract of sale of the property for P1,050,000.00 between the Velezes and herein petitioners. It added, however, that such perfected contract of sale was subsequently novated. Thus, it ruled: "Evidence shows that that was the original contract. However, the same was mutually withdrawn, cancelled and rescinded by novation, and was therefore abandoned by the parties when Carmen Velez Ting raised the consideration of the contract [by] P350,000.00, thus making the price P1,400,000.00 instead of the original price of P1,050,000.00. Since there was no agreement as to the 'second' price offered, there was likewise no meeting of minds between the parties, hence, no contract of sale was perfected." 10 The Court of Appeals added that, assuming there was agreement as to the price and a second contract was perfected, the later contract would be unenforceable under the Statute of Frauds. It further held that such second agreement, if there was one, constituted a mere promise to sell which was not binding for lack of acceptance or a separate consideration. 11 The Issues Petitioners allege the following "errors" in the Decision of Respondent Court: I Since it ruled in its decision that there was no meeting of the minds on the "second" price offered (P1,400,000.00), hence no contract of sale was perfected, the Court of Appeals erred in not holding that the original written contract to buy and sell for P1,050,000.00 the Velezes property continued to be valid and enforceable pursuant to Art. 1279 in relation with Art. 1479, first paragraph, and Art. 1403, subparagraph 2 (e) of the Civil Code. II
The Court of Appeals erred in not ruling that petitioners have better rights to buy and own the Velezes' property for registering their notice of lis pendens ahead of the Avenue Group's registration of their deeds of sale taking into account Art. 1544, 2nd paragraph, of the Civil Code.

12

The Court's Ruling The petition is meritorious. First Issue: No Extinctive Novation

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The lynchpin of the assailed Decision is the public respondent's conclusion that the sale of the real property in controversy, by the Velezes to petitioners for P1,050,000.00, was extinguished by novation after the said parties negotiated to increase the price to P1,400,000.00. Since there was no agreement on the sale at the increased price, then there was no perfected contract to enforce. We disagree. The Court notes that the petitioners accepted in writing and without qualification the Velezes' written offer to sell at P1,050,000.00 within the three-day period stipulated therein. Hence, from the moment of acceptance on July 10, 1985, a contract of sale was perfected since undisputedly the contractual elements of consent, object certain and cause concurred. 13 Thus, this question is posed for our resolution: Was there a novation of this perfected contract? Article 1600 of the Civil Code provides that "(s)ales are extinguished by the same causes as all other obligations, . . . ." Article 1231 of the same Code states that novation is one of the ways to wipe out an obligation. Extinctive novation requires: (1) the existence of a previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the extinguishment of the old obligation or contract; and (4) the validity of the new one. 14 The foregoing clearly show that novation is effected only when a new contract has extinguished an earlier contract between the same parties. In this light, novation is never presumed; it must be proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable incompatibility between old and new obligations or contracts. 15 After a thorough review of the records, we find this element lacking in the case at bar. As aptly found by the Court of Appeals, the petitioners and the Velezes did not reach an agreement on the new price of P1,400,000.00 demanded by the latter. In this case, the petitioners and the Velezes clearly did not perfect a new contract because the essential requisite of consent was absent, the parties having failed to agree on the terms of the payment. True, petitioners made a qualified acceptance of this offer by proposing that the payment of this higher sale price be made by installment, with P1,000,000.00 as down payment and the balance of P400,000.00 payable thirty days thereafter. Under Article 1319 of the Civil Code, 16 such qualified acceptance constitutes a counter-offer and has the ineludible effect of rejecting the Velezes' offer. 17 Indeed, petitioners' counter-offer was not accepted by the Velezes. It is well-settled that "(a)n offer must be clear and definite, while an acceptance must be unconditional and unbounded, in order that their concurrence can give rise to a perfected contract." 18 In line with this basic postulate of contract law, "a definite agreement on the manner of payment of the price is an essential element in the formation of a binding and enforceable contract of sale." 19 Since the parties failed to enter into a new contract that could have extinguished their previously perfected contract of sale, there can be no novation of the latter. Consequently, the first sale of the property in controversy, by the Velezes to petitioners for P1,050,000.00, remained valid and existing. In view of the validity and subsistence of their original contract of sale as previously discussed, it is unnecessary to discuss public respondent's theses that the second agreement is unenforceable under the Statute of Frauds and that the agreement constitutes a mere promise to sell. Second Issue: Double Sale of an Immovable The foregoing holding would have been simple and straightforward. But Respondent Velezes complicated the matter by selling the same property to the other private respondents who were referred to in the assailed Decision as the Avenue Group. Before us therefore is a classic case of a double sale first, to the petitioner; second, to the Avenue Group. Thus, the Court is now called upon to determine which of the two groups of buyers has a better right to said property. Article 1544 of the Civil Code provides the statutory solution: xxx xxx xxx Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property. Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. Under the foregoing, the prior registration of the disputed property by the second buyer does not by itself confer ownership or a better right over the property. Article 1544 requires that such registration must be coupled with good faith. Jurisprudence teaches us that "(t)he governing principle is primus tempore, potior jure (first in time, stronger in right). Knowledge gained by the first buyer of the second sale cannot defeat the first buyer's rights except where the second buyer registers in good faith the second sale ahead of the first, as provided by the Civil Code. Such knowledge of the first buyer does not bar her from availing of her rights under the law, among them, to register first her purchase as against the second buyer. But in converso, knowledge gained by the second buyer of the first sale defeats his rights even if he is first to register the second sale, since such knowledge taints his prior registration with bad faith. This is the price exacted by Article 1544 of the Civil Code for the second buyer being able to displace the first buyer; that before the second buyer can obtain priority over

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the first, he must show that he acted in good faith throughout (i.e, in ignorance of the first sale and of the first buyer's rights) from the time of acquisition until the title is transferred to him by registration or failing registration, by delivery of possession." 20 (Emphasis supplied) After a thorough scrutiny of the records of the instant case, the Court finds that bad faith tainted the Avenue Group's purchase on July 13, 1985 of the Velezes' real property subject of this case, and the subsequent registration thereof on August 1, 1995. The Avenue Group had actual knowledge of the Velezes' prior sale of the same property to the petitioners, a fact antithetical to good faith. For a second buyer like the Avenue Group to successfully invoke the second paragraph, Article 1544 of the Civil Code, it must possess good faith from the time of the sale in its favor until the registration of the same. This requirement of good faith the Avenue Group sorely failed to meet. That it had knowledge of the prior sale, a fact undisputed by the Court of Appeals, is explained by the trial court thus: The Avenue Group, whose store is close to the properties in question, had known the plaintiffs to be the lessee-occupants thereof for quite a time. Felix Ting admitted to have a talk with Ong Seng in 1983 or 1984 about the properties. In the cross-examination, Manuel Ting also admitted that about a month after Ester Borromeo allegedly offered the sale of the properties Felix Ting went to see Ong Seng again. If these were so, it can be safely assumed that Ong Seng had consequently told Felix about plaintiffs' offer on January 11, 1985 to buy the properties for P1,000,000.00 and of their timely acceptance on July 10, 1985 to buy the same at P1,050,000.00.
The two aforesaid admissions by the Tings, considered together with Uraca's positive assertion that Felix Ting met with her on July 11th and who was told by her that the plaintiffs had transmitted already to the Velezes their decision to buy the properties at P1,050,000.00, clinches the proof that the Avenue Group had prior knowledge of plaintiffs' interest. Hence, the Avenue Group defendants, earlier forewarned of the plaintiffs' prior contract with the Velezes, were guilty of bad faith when they proceeded to buy the properties to the prejudice of the plaintiffs. 21

The testimony of Petitioner Emilia Uraca supports this finding of the trial court. The salient portions of her testimony follow: BY ATTY. BORROMEO: (To witness) Q According to Manuel Ting in his testimony, even if they know, referring to the Avenue Group, that you were tenants of the property in question and they were neighbors to you, he did not inquire from you whether you were interested in buying the property, what can you say about that? A It was Felix Ting who approached me and asked whether I will buy the property, both the house and the land and that was on July 10, 1985. ATTY BORROMEO: (To witness) Q What was your reply, if any? A Yes, sir, I said we are going to buy this property because we have stayed for a long time there already and we have a letter from Carmen Ting asking us whether we are going to buy the property and we have already given our answer that we are willing to buy. COURT: (To witness) Q What do you mean by that, you mean you told Felix Ting and you showed him that letter of Carmen Ting? WITNESS:
A We have a letter of Carmen Ting where she offered to us for sale the house and lot and I told him that I have already agreed with Concordia Ching, Ong Seng and my self that we buy the land. We want to buy the land and the building. 22

We see no reason to disturb the factual finding of the trial court that the Avenue Group, prior to the registration of the property in the Registry of Property, already knew of the first sale to petitioners. It is hornbook doctrine that "findings of facts of the trial court, particularly when affirmed by the Court of Appeals, are binding upon this Court"23 save for exceptional circumstances 24 which we do not find in the factual milieu of the present case. True, this doctrine does not apply where there is a variance in the factual findings of the trial court and the Court of Appeals. In the present case, the Court of Appeals did not explicitly sustain this particular holding of the trial court, but neither did it

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controvert the same. Therefore, because the registration by the Avenue Group was in bad faith, it amounted to no "inscription" at all. Hence, the third and not the second paragraph of Article 1544 should be applied to this case. Under this provision, petitioners are entitled to the ownership of the property because they were first in actual possession, having been the property's lessees and possessors for decades prior to the sale. Having already ruled that petitioners' actual knowledge of the first sale tainted their registration, we find no more reason to pass upon the issue of whether the annotation of lis pendens automatically negated good faith in such registration. WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is hereby SET ASIDE and the dispositive portion of the trial court's decision dated October 19, 1990 is REVIVED with the following MODIFICATION the consideration to be paid under par. 2 of the disposition is P1,050,000.00 and not P1,400,000.00. No Costs. SO ORDERED. Narvasa, C.J., Melo and Francisco, JJ., concur. Davide, Jr., J., concurs in the results.

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G.R. No. 152346 November 25, 2005 ISAIAS F. FABRIGAS and MARCELINA R. FABRIGAS, Petitioners, vs. SAN FRANCISCO DEL MONTE, INC., Respondent. DECISION Tinga, J.: Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, which assails the Decision of the Court of Appeals in CA-G.R. CV No. 45203 and its Resolution therein denying petitioners motion for reconsideration. Said Decision affirmed the Decision dated January 3, 1994 of the Regional Trial Court (RTC), Branch 63, Makati City in Civil Case No. 90-2711 entitled San Francisco Del Monte, Inc. v. Isaias F. Fabrigas and Marcelina R. Fabrigas. The dispositive portion of the trial courts Decision reads: In the light of the foregoing, the Court is convinced that plaintiff has proven by preponderance of evidence, the allegation appearing in its complaint and is therefore, entitled to the reliefs prayed for. Considering, however, that defendants had already paid P78,152.00, the Court exercising its discretion, hereby renders judgment as follows: 1. Ordering defendant to make complete payment under the conditions of Contract to Sell No. 2491-V dated January 21, 1985, within twenty days from receipt of this Decision, and in the event that defendant fail or refuse to observe the latter, defendants and all persons claiming right of possession or occupation from defendants are ordered to vacate and leave the premises, described as Lot No. 9 Block No. 3 of Subdivision Plan (LRC) Psd-50064 covered by Transfer Certificate of Title No. 4980 (161653) T-1083 of the Registry of Deeds of Rizal, and to surrender possession thereof to plaintiff or any of its authorized representatives; 2. That in the event that defendants chose to surrender possession of the property, they are further ordered to pay plaintiff P206,223.80 as unpaid installments on the land inclusive of interests; 3. Ordering defendants to jointly and severally pay plaintiff the amount of P10,000.00 as and for attorneys fees; and 4. Ordering defendants to pay the costs of suit. SO ORDERED.1 The following factual antecedents are matters of record. On April 23, 1983, herein petitioner spouses Isaias and Marcelina Fabrigas ("Spouses Fabrigas" or "petitioners") and respondent San Francisco Del Monte, Inc. ("Del Monte") entered into an agreement, denominated as Contract to Sell No. 2482-V, whereby the latter agreed to sell to Spouses Fabrigas a parcel of residential land situated in Barrio Almanza, Las Pias, Manila for and in consideration of the amount of P109,200.00. Said property, which is known as Lot No. 9, Block No. 3 of Subdivision Plan (LRC) Psd-50064, is covered by Transfer Certificate of Title No. 4980 (161653) T-1083 registered in the name of respondent Del Monte. The agreement stipulated that Spouses Fabrigas shall pay P30,000.00 as downpayment and the balance within ten (10) years in monthly successive installments of P1,285.69.2 Among the clauses in the contract is an automatic cancellation clause in case of default, which states as follows: 7. Should the PURCHASER fail to make any of the payments including interest as herein provided, within 30 days after the due date, this contract will be deemed and considered as forfeited and annulled without necessity of notice to the PURCHASER, and said SELLER shall be at liberty to dispose of the said parcel of land to any other person in the same manner as if this contract had never been executed. In the event of such forfeiture, all sums of money paid under this contract will be considered and treated as rentals for the use of said parcel of land, and the PURCHASER hereby waives all right to ask or demand the return thereof and agrees to peaceably vacate the said premises.3 After paying P30,000.00, Spouses Fabrigas took possession of the property but failed to make any installment payments on the balance of the purchase price. Del Monte sent demand letters on four occasions to remind Spouses Fabrigas to satisfy their contractual obligation.4 In particular, Del Montes third letter dated November 9, 1983 demanded the payment of arrears in the amount of P8,999.00. Said notice granted Spouses Fabrigas a fifteen-day grace period within which to settle their accounts. Petitioners failure to heed Del Montes demands prompted the latter to send a final demand letter dated December 7, 1983, granting Spouses Fabrigas another grace period of fifteen days within which to pay the overdue amount and warned them that their failure to satisfy their obligation would cause the rescission of the contract and the forfeiture of the sums of money already paid. Petitioners received Del Montes final demand letter on December 23, 1983. Del Monte

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considered Contract to Sell No. 2482-V cancelled fifteen days thereafter, but did not furnish petitioners any notice regarding its cancellation.5 On November 6, 1984, petitioner Marcelina Fabrigas ("petitioner Marcelina") remitted the amount of P13,000.00 to Del Monte.6 On January 12, 1985, petitioner Marcelina again remitted the amount of P12,000.00.7 A few days thereafter, or on January 21, 1985, petitioner Marcelina and Del Monte entered into another agreement denominated as Contract to Sell No. 2491-V, covering the same property but under restructured terms of payment. Under the second contract, the parties agreed on a new purchase price of P131,642.58, the amount ofP26,328.52 as downpayment and the balance to be paid in monthly installments of P2,984.60 each.8 Between March 1985 and January 1986, Spouses Fabrigas made irregular payments under Contract to Sell No. 2491-V, to wit: March 19, 1985 P1, 328.52 July 2, 1985 P2, 600.00 September 30, 1985 P2, 600.00 November 27, 1985 P2, 600.00 January 20, 1986 P2, 000.009 Del Monte sent a demand letter dated February 3, 1986, informing petitioners of their overdue account equivalent to nine (9) installments or a total amount of P26,861.40. Del Monte required petitioners to satisfy said amount immediately in two subsequent letters dated March 5 and April 2, 1986. 10 This prompted petitioners to pay the following amounts: February 3, 1986 P2, 000.00 March 10, 1986 P2, 000.00 April 9, 1986 P2, 000.00 May 13, 1986 P2, 000.00 June 6, 1986 P2, 000.00 July 14, 1986 P2, 000.0011 No other payments were made by petitioners except the amount of P10,000.00 which petitioners tendered sometime in October 1987 but which Del Monte refused to accept, the latter claiming that the payment was intended for the satisfaction of Contract to Sell No. 2482-V which had already been previously cancelled. On March 24, 1988, Del Monte sent a letter demanding the payment of accrued installments under Contract to Sell No. 2491-V in the amount of P165,759.60 less P48,128.52, representing the payments made under the restructured contract, or the net amount of P117,631.08. Del Monte allowed petitioners a grace period of thirty (30) days within which to pay the amount asked to avoid rescission of the contract. For failure to pay, Del Monte notified petitioners on March 30, 1989 that Contract to Sell No. 2482-V had been cancelled and demanded that petitioners vacate the property.12 On September 28, 1990, Del Monte instituted an action for Recovery of Possession with Damages against Spouses Fabrigas before the RTC, Branch 63 of Makati City. The complaint alleged that Spouses Fabrigas owed Del Monte the principal amount of P206,223.80 plus interest of 24% per annum. In their answer, Spouses Fabrigas claimed, among others, that Del Monte unilaterally cancelled the first contract and forced petitioner Marcelina to execute the second contract, which materially and unjustly altered the terms and conditions of the original contract.13 After trial on the merits, the trial court rendered a Decision on January 3, 1994, upholding the validity of Contract to Sell No. 2491-V and ordering Spouses Fabrigas either to complete payments thereunder or to vacate the property. Aggrieved, Spouses Fabrigas elevated the matter to the Court of Appeals, arguing that the trial court should have upheld the validity and existence of Contract to Sell No. 2482-V instead and nullified Contract to Sell No. 2491-V. The Court of Appeals rejected this argument on the ground that Contract to Sell No. 2482-V had been rescinded pursuant to the automatic rescission clause therein. While the Court of Appeals declared Contract to Sell No. 2491-V as merely unenforceable for having been executed without petitioner Marcelinas signature, it upheld its validity upon finding that the contract was subsequently ratified.

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Hence, the instant petition attributing the following errors to the Court of Appeals: A. THE COURT OF APPEALS GRAVELY ERRED WHEN IT IGNORED THE PROVISIONS OF R.A. NO. 6552 (THE MACEDA LAW) AND RULED THAT CONTRACT TO SELL NO. 2482-V WAS VALIDLY CANCELLED BY SENDING A MERE NOTICE TO THE PETITIONERS. B. THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THERE WAS AN IMPLIED RATIFICATION OF CONTRACT TO SELL NO. 2491-V. C. THE COURT OF APPEALS ERRED IN ITS APPLICATION OF THE RULES OF NOVATION TO THE INSTANT CASE.14 As reframed for better understanding, the questions are the following: Was Contract to Sell No. 2482Vextinguished through rescission or was it novated by the subsequent Contract to Sell No. 2491-V? If Contract to Sell No. 2482-V was rescinded, should the manner of rescission comply with the requirements of Republic Act No. (R.A.) 6552? If Contract to Sell No. 2482-V was subsequently novated by Contract to Sell No. 2491-V, are petitioners liable for breach under the subsequent agreement? Petitioners theorize that Contract to Sell No. 2482-V should remain valid and subsisting because the notice of cancellation sent by Del Monte did not observe the requisites under Section 3 of R.A. 6552.15 According to petitioners, since respondent did not send a notarial notice informing them of the cancellation or rescission ofContract to Sell No. 2482-V and also did not pay them the cash surrender value of the payments on the property, the Court of Appeals erred in concluding that respondent correctly applied the automatic rescission clause ofContract to Sell No. 2482-V. Petitioners also cite Section 716 of said law to bolster their theory that the automatic rescission clause in Contract to Sell No. 2482-V is invalid for being contrary to law and public policy. The Court of Appeals erred in ruling that Del Monte was "well within its right to cancel the contract by express grant of paragraph 7 without the need of notifying [petitioners],17" instead of applying the pertinent provisions of R.A. 6552. Petitioners contention that none of Del Montes demand letters constituted a valid rescission ofContract to Sell No. 2482-V is correct. Petitioners defaulted in all monthly installments. They may be credited only with the amount of P30,000.00 paid upon the execution of Contract to Sell No. 2482-V, which should be deemed equivalent to less than two (2) years installments. Given the nature of the contract between petitioners and Del Monte, the applicable legal provision on the mode of cancellation of Contract to Sell No. 2482-V is Section 4 and not Section 3 of R.A. 6552. Section 4 is applicable to instances where less than two years installments were paid. It reads: SECTION 4. In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act. Thus, the cancellation of the contract under Section 4 is a two-step process. First, the seller should extend the buyer a grace period of at least sixty (60) days from the due date of the installment. Second, at the end of the grace period, the seller shall furnish the buyer with a notice of cancellation or demand for rescission through a notarial act, effective thirty (30) days from the buyers receipt thereof. It is worth mentioning, of course, that a mere notice or letter, short of a notarial act, would not suffice. While the Court concedes that Del Monte had allowed petitioners a grace period longer than the minimum sixty (60)-day requirement under Section 4, it did not comply, however, with the requirement of notice of cancellation or a demand for rescission. Instead, Del Monte applied the automatic rescission clause of the contract. Contrary, however, to Del Montes position which the appellate court sustained, the automatic cancellation clause is void under Section 718 in relation to Section 4 of R.A. 6552.19 Rescission, of course, is not the only mode of extinguishing obligations. Ordinarily, obligations are also extinguished by payment or performance, by the loss of the thing due, by the condonation or remission of the debt, by the confusion or merger of the rights of the creditor and debtor, by compensation, or by novation.20 Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would have dual functionsone to extinguish an existing obligation, the other to substitute a new one in its placerequiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.21

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Notwithstanding the improper rescission, the facts of the case show that Contract to Sell No. 2482-V was subsequently novated by Contract to Sell No. 2491-V. The execution of Contract to Sell No. 2491V accompanied an upward change in the contract price, which constitutes a change in the object or principal conditions of the contract. In entering into Contract to Sell No. 2491-V, the parties were impelled by causes different from those obtaining under Contract to Sell No. 2482-V. On the part of petitioners, they agreed to the terms and conditions ofContract to Sell No. 2491-V not only to acquire ownership over the subject property but also to avoid the consequences of their default under Contract No. 2482-V. On Del Montes end, the upward change in price was the consideration for entering into Contract to Sell No. 2491-V. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.22 The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first.23 The execution of Contract to Sell No. 2491-V created new obligations in lieu of those under Contract to Sell No. 2482-V, which are already considered extinguished upon the execution of the second contract. The two contracts do not have independent existence for to hold otherwise would present an absurd situation where the parties would be liable under each contract having only one subject matter. To dispel the novation of Contract to Sell No. 2482-V by Contract to Sell No. 2491-V, petitioners contend that the subsequent contract is void for two reasons: first, petitioner Isaias Fabrigas did not give his consent thereto, and second, the subsequent contract is a contract of adhesion. Petitioner rely on Article 172 of the Civil Code governing their property relations as spouses. Said article states that the wife cannot bind the conjugal partnership without the husbands consent except in cases provided by law. Since only petitioner Marcelina executed Contract to Sell No. 2491-V, the same is allegedly void, petitioners conclude. Under the Civil Code, the husband is the administrator of the conjugal partnership.24 Unless the wife has been declared a non compos mentis or a spendthrift, or is under civil interdiction or is confined in a leprosarium, the husband cannot alienate or encumber any real property of the conjugal partnership without the wife's consent.25Conversely, the wife cannot bind the conjugal partnership without the husbands consent except in cases provided by law.26 Thus, if a contract entered into by one spouse involving a conjugal property lacks the consent of the other spouse, as in the case at bar, is it automatically void for that reason alone? Article 17327 of the Civil Code expressly classifies a contract executed by the husband without the consent of the wife as merely annullable at the instance of the wife. However, there is no comparable provision covering an instance where the wife alone has consented to a contract involving conjugal property. Article 172 of the Civil Code, though, does not expressly declare as void a contract entered by the wife without the husbands consent. It is also not one of the contracts considered as void under Article 1409 28 of the Civil Code. In Felipe v. Heirs of Maximo Aldon,29 the Court had the occasion to rule on the validity of a sale of lands belonging to the conjugal partnership made by the wife without the consent of the husband. Speaking through Mr. Justice Abad Santos, the Court declared such a contract as voidable because one of the parties is incapable of giving consent to the contract. The capacity to give consent belonged not even to the husband alone but to both spouses.30 In that case, the Court anchored its ruling on Article 173 of the Civil Code which states that contracts entered by the husband without the consent of the wife when such consent is required, are annullable at her instance during the marriage and within ten years from the transaction mentioned. 31 The factual milieu of the instant case, however, differs from that in Felipe. The defect which Contract to Sell No. 2491-V suffers from is lack of consent of the husband, who was out of the country at the time of the execution of the contract. There is no express provision in the Civil Code governing a situation where the husband is absent and his absence incapacitates him from administering the conjugal partnership property. The following Civil Code provisions, however, are illuminating: ARTICLE 167. In case of abuse of powers of administration of the conjugal partnership property by the husband, the courts, on petition of the wife, may provide for receivership, or administration by the wife, or separation of property. ARTICLE 168. The wife may, by express authority of the husband embodied in a public instrument, administer the conjugal partnership property. ARTICLE 169. The wife may also, by express authority of the husband appearing in a public instrument, administer the latter's estate. While the husband is the recognized administrator of the conjugal property under the Civil Code, there are instances when the wife may assume administrative powers or ask for the separation of property. In the

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abovementioned instances, the wife must be authorized either by the court or by the husband. Where the husband is absent and incapable of administering the conjugal property, the wife must be expressly authorized by the husband or seek judicial authority to assume powers of administration. Thus, any transaction entered by the wife without the court or the husbands authority is unenforceable in accordance with Article 1317 32 of the Civil Code. That is the status to be accorded Contract to Sell No. 2491-V, it having been executed by petitioner Marcelina without her husbands conformity. Being an unenforceable contract, Contract to Sell No. 2491-V is susceptible to ratification. As found by the courts below, after being informed of the execution of the contract, the husband, petitioner Isaias Fabrigas, continued remitting payments for the satisfaction of the obligation under Contract to Sell No. 2491-V. These acts constitute ratification of the contract. Such ratification cleanses the contract from all its defects from the moment it was constituted. The factual findings of the courts below are beyond review at this stage. Anent Del Montes claim that Contract to Sell No. 2491-V is a contract of adhesion, suffice it to say that assuming for the nonce that the contract is such the characterization does not automatically render it void. A contract of adhesion is so-called because its terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. Such contracts are not void in themselves. They are as binding as ordinary contracts. Parties who enter into such contracts are free to reject the stipulations entirely. 33 The Court quotes with approval the following factual observations of the trial court, which cannot be disturbed in this case, to wit: The Court notes that defendant, Marcelina Fabrigas, although she had to sign contract No. 2491-V, to avoid forfeiture of her downpayment, and her other monthly amortizations, was entirely free to refuse to accept the new contract. There was no clear case of intimidation or threat on the part of plaintiff in offering the new contract to her. At most, since she was of sufficient intelligence to discern the agreement she is entering into, her signing of Contract No. 2491-V is taken to be valid and binding. The fact that she has paid monthly amortizations subsequent to the execution of Contract to Sell No. 2491-V, is an indication that she had recognized the validity of such contract. . . .34 In sum, Contract to Sell No. 2491-V is valid and binding. There is nothing to prevent respondent Del Monte from enforcing its contractual stipulations and pursuing the proper court action to hold petitioners liable for their breach thereof. WHEREFORE, the instant Petition for Review is DENIED and the September 28, 2001 Decision of the Court of Appeals in CA-G.R. CV No. 45203 is AFFIRMED. Costs against petitioners. SO ORDERED.

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G.R. No. 149040

July 4, 2007

EDGAR LEDONIO, petitioner, vs. CAPITOL DEVELOPMENT CORPORATION, respondent. DECISION CHICO-NAZARIO, J.: Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Revised Rules of Court praying that (1) the Decision,2 dated 20 March 2001, of the Court of Appeals in CA-G.R. CV No. 43604, affirming in toto the Decision,3 dated 6 August 1993, of the Quezon City Regional Trial Court (RTC), Branch 91, in Civil Case No. Q-90-5247, be set aside; and (2) the Complaint4 in Civil Case No. Q-90-5247 be dismissed. Herein respondent Capitol Development Corporation instituted Civil Case No. Q-90-5247 by filing a Complaint for the collection of a sum of money against herein petitioner Edgar Ledonio. In its Complaint, respondent alleged that petitioner obtained from a Ms. Patrocinio S. Picache two loans, with the aggregate principal amount of P60,000.00, and covered by promissory notes duly signed by petitioner. In the first promissory note,5 dated 9 November 1988, petitioner promised to pay to the order of Ms. Picache the principal amount of P30,000.00, in monthly installments of P3,000.00, with the first monthly installment due on 9 January 1989. In the second promissory note,6 dated 10 November 1988, petitioner again promised to pay to the order of Ms. Picache the principal amount of P30,000.00, with 36% interest per annum, on 1 December 1988. In case of default in payment, both promissory notes provide that (a) petitioner shall be liable for a penalty equivalent to 20% of the total outstanding balance; (b) unpaid interest shall be compounded or added to the balance of the principal amount and shall bear the same rate of interest as the latter; and (c) in case the creditor, Ms. Picache, shall engage the services of counsel to enforce her rights and powers under the promissory notes, petitioner shall pay as attorney's fees and liquidated damages the sum equivalent to 20% of the total amount sought to be recovered, but in no case shall the said sum be less that P10,000.00, exclusive of costs of suit. On 1 April 1989, Ms. Picache executed an Assignment of Credit7 in favor of respondent, which reads KNOW ALL MEN BY THESE PRESENTS: That I, PAT S. PICACHE of legal age and with postal address at 373 Quezon Avenue, Quezon City for and in consideration of SIXTY THOUSAND PESOS (P60,000.00) Philippine Currency, to me paid by [herein respondent] CAPITOL DEVELOPMENT CORPORATION, a corporation organized and existing under the laws of the Republic of the Philippines with principal office at 373 Quezon Avenue, Quezon City receipt whereof is hereby acknowledged have sold, transferred, assigned and conveyed and (sic) by me these presents do hereby sell, assign, transfer and convey unto the said [respondent] CAPITOL DEVELOPMENT CORPORATION, a certain debt due me from [herein petitioner] EDGAR A. LEDONIO in the principal sum of SIXTY THOUSAND PESOS (P60,000.00) Philippine Currency, under two (2) Promissory Notes dated November 9, 1988 and November 10, 1988, respectively, photocopies of which are attached to as annexes A & B to form integral parts hereof with full power to sue for, collect and discharge, or sell and assign the same. That I hereby declare that the principal sum of SIXTY THOUSAND PESOS (P60,000.00) with interest thereon at THIRTY SIX (36%) PER CENT per annum is justly due and owing to me as aforesaid. IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of April, 1989 at Quezon City. (SGD)PAT S. PICACHE The foregoing document was signed by two witnesses and duly acknowledged by Ms. Picache before a Notary Public also on 1 April 1989. Since petitioner did not pay any of the loans covered by the promissory notes when they became due, respondent -- through its Vice President Nina P. King and its counsel King, Capuchino, Banico & Associates -sent petitioner several demand letters.8 Despite receiving the said demand letters, petitioner still failed and refused to settle his indebtedness, thus, prompting respondent to file the Complaint with the RTC, docketed as Civil Case No. Q-90-5247. In his Answer filed with the RTC, petitioner sought the dismissal of the Complaint averring that respondent had no cause of action against him. He denied obtaining any loan from Ms. Picache and questioned the genuineness and due execution of the promissory notes, for they were the result of intimidation and fraud; hence, void. He asserted that there had been no transaction or privity of contract between him, on one hand, and Ms. Picache and respondent, on the other. The assignment by Ms. Picache of the promissory notes to

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respondent was a mere ploy and simulation to effect the unjust enforcement of the invalid promissory notes and to insulate Ms. Picache from any direct counterclaims, and he never consented or agreed to the said assignment. Petitioner then presented his own narration of events leading to the filing of Civil Case No. Q-90-5247. According to him, on 24 February 1988, he entered into a Contract of Lease9 of real property located in Quezon City with Mission Realty & Management Corporation (MRMC), of which Ms. Picache is an incorporator and member of the Board of Directors.10 Petitioner relocated the plant and machines used in his garments business to the leased property. After a month or two, a foreign investor was interested in doing business with him and sent a representative to conduct an ocular inspection of petitioner's plant at the leased property. During the inspection, a group of Meralco employees entered the leased property to cut off the electric power connections of the plant. The event gave an unfavorable impression to the foreign investor who desisted from further transacting with petitioner. Upon verification with Meralco, petitioner discovered that there were unpaid electric bills on the leased property amounting to hundreds of thousands of pesos. These electric bills were supposedly due to the surreptitious electrical connections to the leased property. Petitioner claimed that he was never informed or advised by MRMC of the existence of said unpaid electric bills. It took Meralco considerable time to restore electric power to the leased property and only after petitioner pleaded that he was not responsible for the illegal electrical connections and/or the unpaid electric bills, for he was only a recent lessee of the leased property. Because of the work stoppage and loss of business opportunities resulting from the foregoing incident, petitioner purportedly suffered damages amounting to United States $60,000.00, for which petitioner verbally attempted to recover compensation from MRMC. Having failed to obtain compensation from MRMC, petitioner decided to vacate and pull out his machines from the leased property but he can only do so, unhampered and uninterrupted by MRMC security personnel, if he signed, as he did, blank promissory note forms. Petitioner alleged that when he signed the promissory note forms, the allotted spaces for the principal amount of the loans, interest rates, and names of the promisee/s were in blank; and that Ms. Picache took advantage of petitioner's signatures on the blank promissory note forms by filling up the blanks. To raise even more suspicions of fraud and spuriousness of the promissory notes and their subsequent assignment to respondent, petitioner called attention to the fact that Ms. Picache is an incorporator and member of the Board of Directors of both MRMC and respondent.11 After the pre-trial conference and the trial proper, the RTC rendered a Decision12 on 6 August 1993, ruling in favor of respondent. The RTC gave more credence to respondent's version of the facts, finding that [Herein petitioner]'s disclaimer of the promissory note[s] does not inspire belief. He is a holder of a degree in Bachelor of Science in Chemical Engineering and has been a manufacturer of garments since 1979. As a matter of fact, [petitioner]'s testimony that he was made to sign blank sheets of paper is contrary to his admission in paragraphs 12 and 13 of his Answer that as a condition to his removal of his machines [from] the leased premises, he was made to sign blank promissory note forms with respect to the amount, interest and promisee. It thus appears incredulous that a businessman like [petitioner] would simply sign blank sheets of paper or blank promissory notes just [to] be able to vacate the leased premises. Moreover, the credibility of [petitioner]'s testimony leaves much to be desired. He contradicted his earlier testimony that he only met Patrocinio Picache once, which took place in the office of Mission Realty and Management Corporation, by stating that he saw Patrocinio Picache a second time when she went to his house. Likewise, his claim that the electric power in the leased premises was cut off only two months after he occupied the same is belied by his own evidence. The contract of lease submitted by [petitioner] is dated February 24, 1988 and took effect on March 1, 1988. His letter to Mission Realty and Management Corporation dated September 21, 1988, complained of the electric power disconnection that took place on September 6, 1988, that is, six (6) months after he had occupied the leased premises, and did not even give a hint of his intention to vacate the premises because of said incident. It appears that [petitioner] was already advised to pay his rental arrearages in a letter dated August 9, 1988 (Exh. "2") and was notified of the termination of the lease contract in a letter dated September 19, 1988 (Exh. "4"). However, in a letter dated September 26, 1988, [petitioner] requested for time to look for a place to transfer. The RTC also sustained the validity and enforceability of the Assignment of Credit executed by Ms. Picache in favor of respondent, even in the absence of petitioner's consent to the said assignment, based on the following reasoning The promissory notes (Exhs. "A" and "B") were assigned by Ms. Patrocinio Picache to [herein respondent] by virtue of a notarized Assignment of Credit dated April 1, 1989 for a consideration of P60,000.00 (Exh. "C"). The fact that the assignment of credit does not bear the conformity of [herein petitioner] is of no moment. In C & C Commercial Corporation vs. Philippine National Bank, 175 SCRA 1, 11, the Supreme Court held thus: "x x x Article 1624 of the Civil Code provides that 'an assignment of credits and other incorporeal rights shall be perfected in accordance with the provisions of Article 1475' which in turn states that 'the contract of sale is perfected at the moment there is a meeting of the minds

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upon the thing which is the object of the contract and upon the price.' The meeting of the minds contemplated here is that between the assignor of the credit and his assignee, there being no necessity for the consent of the debtor, contrary to petitioner's claim. It is sufficient that the assignment be brought to his knowledge in order to be binding upon him. This may be inferred from Article 1626 of the Civil Code which declares that 'the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation.'" [Petitioner] does not deny having been notified of the assignment of credit by Patrocinio Picache to the [respondent]. Thus, [respondent] sent several demand letters to the [petitioner] in connection with the loan[s] (Exhs. "D", "E", "F" and "G"). [Petitioner] acknowledged receipt of [respondent]'s letter of demand dated June 13, 1989 (Exh. "F") and assured [respondent] that he would settle his account, as per their telephone conversation (Exhs. "H" and "9"). Such communications between [respondent] and [petitioner] show that the latter had been duly notified of the said assignment of credit. x x x. Given its aforequoted findings, the RTC proceeded to a determination of petitioner's liabilities to respondent, taking into account the provisions of the promissory notes, thus x x x Consequently, [herein respondent] is entitled to recover from [herein petitioner] the principal amount ofP30,000.00 for the promissory note dated November 9, 1988. As said note did not provide for any interest, [respondent] may only recover interest at the legal rate of 12% per annum from April 18, 1990, the date of the filing of the complaint. With respect to the promissory note dated November 10, 1988, the same provided for interest at 36% per annum and that interest not paid when due shall be added to and shall become part of the principal and shall bear the same rate of interest as the principal. Likewise, both promissory notes provided for a penalty of 20% of the total outstanding balance thereon and attorney's fees equivalent to 20% of the sum sought to be recovered in case of litigation. In Garcia vs. Court of Appeals, 167 SCRA 815, it was held that penalty interests are in the nature of liquidated damages and may be equitably reduced by the courts if they are iniquitous or unconscionable, pursuant to Articles 1229 and 2227 of the Civil Code. Considering that the promissory note dated November 10, 1988 already provided for interest at 36% per annum on the principal obligation, as well as for the capitalization of the unpaid interest, the penalty charge of 20% of the total outstanding balance of the obligation thus appears to be excessive and unconscionable. The interest charges are enough punishment for [petitioner]'s failure to comply with his obligation under the promissory note dated November 10, 1988. With respect to the attorney's fees, the court is likewise empowered to reduce the same if they are unreasonable or unconscionable, notwithstanding the express contract therefor. (Insular Bank of Asia and America vs. Spouses Salazar, 159 SCRA 133, 139). Thus, an award of P10,000.00 as and for attorney's fees appears to be enough. Consequently, the fallo of the RTC Decision reads WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the [herein respondent] and against [herein petitioner] ordering the latter as follows: 1. To pay [respondent], on the promissory note dated November 9, 1988, the amount of P30,000.00 with interest thereon at the legal rate of 12% per annum from April 18, 1990 until fully paid and a penalty of 20% on the total amount; 2. To pay [respondent], on the promissory note dated November 10, 1988, the amount of P30,000.00 with interest thereon at 36% per annum compounded at the same rate until fully paid; 3. To pay [respondent] the amount of P10,000.00, as and for attorney's fees; and 4. To pay the costs of the suit.13 Aggrieved by the RTC Decision, dated 6 August 1993, petitioner filed an appeal with the Court of Appeals, which was docketed as CA-G.R. CV No. 43604. The appellate court, in a Decision,14 dated 20 March 2001, found no cogent reason to depart from the conclusions arrived at by the RTC in its appealed Decision, dated 6 August 1993, and affirmed the latter Decision in toto. The Court of Appeals likewise denied petitioner's Motion for Reconsideration in a Resolution,15 dated 16 July 2001, stating that the grounds relied upon by petitioner in his Motion were mere reiterations of the issues and matters already considered, weighed and passed upon; and that no new matter or substantial argument was adduced by petitioner to warrant a modification, much less a reversal, of the Court of Appeals Decision, dated 20 March 2001. Comes now petitioner to this Court, via a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, raising the sole issue16 of whether or not the Court of Appeals committed grave abuse of discretion in affirming in toto the RTC Decision, dated 6 August 1993. Petitioner's main argument is that the Court of

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Appeals erred when it ruled that there was an assignment of credit and that there was no novation/subrogation in the case at bar. Petitioner asserts the position that consent of the debtor to the assignment of credit is a basic/essential element in order for the assignee to have a cause of action against the debtor. Without the debtor's consent, the recourse of the assignee in case of non-payment of the assigned credit, is to recover from the assignor. Petitioner further argues that even if there was indeed an assignment of credit, as alleged by the respondent, then there had been a novation of the original loan contracts when the respondent was subrogated in the rights of Ms. Picache, the original creditor. In support of said argument, petitioner invokes the following provisions of the Civil Code ART. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. ART. 1301. Conventional subrogation of a third person requires the consent of the original parties and the third person. According to petitioner, the assignment of credit constitutes conventional subrogation which requires the consent of the original parties to the loan contract, namely, Ms. Picache (the creditor) and petitioner (the debtor); and the third person, the respondent (the assignee). Since petitioner never gave his consent to the assignment of credit, then the subrogation of respondent in the rights of Ms. Picache as creditor by virtue of said assignment is without force and effect. This Court finds no merit in the present Petition. Before proceeding to a discussion of the points raised by petitioner, this Court deems it appropriate to emphasize that the findings of fact of the Court of Appeals and the RTC in this case shall no longer be disturbed. It is axiomatic that this Court will not review, much less reverse, the factual findings of the Court of Appeals, especially where, as in this case, such findings coincide with those of the trial court, since this Court is not a trier of facts.17 The jurisdiction of this Court in a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court is limited to reviewing only errors of law, not of fact, unless it is shown, inter alia, that: (a) the conclusion is grounded entirely on speculations, surmises and conjectures; (b) the inference is manifestly mistaken, absurd and impossible; (c) there is grave abuse of discretion; (d) the judgment is based on a misapplication of facts; (e) the findings of fact of the trial court and the appellate court are contradicted by the evidence on record and (f) the Court of Appeals went beyond the issues of the case and its findings are contrary to the admissions of both parties.18 None of these circumstances are present in the case at bar. After a perusal of the records, this Court can only conclude that the factual findings of the Court of Appeals, affirming those of the RTC, are amply supported by evidence and are, resultantly, conclusive on this Court.19 Therefore, the following facts are already beyond cavil: (1) petitioner obtained two loans totaling P60,000.00 from Ms. Picache, for which he executed promissory notes, dated 9 November 1988 and 10 November 1988; (2) he failed to pay any of the said loans; (3) Ms. Picache executed on 1 April 1989 an Assignment of Credit covering petitioner's loans in favor of respondent for the consideration of P60,000.00; (4) petitioner had knowledge of the assignment of credit; and (5) petitioner still failed to pay his indebtedness despite repeated demands by respondent and its counsel. Petitioner's persistent assertions that he never acquired any loan from Ms. Picache, or that he signed the promissory notes in blank and under duress, deserve scant consideration. They were already found by both the Court of Appeals and the RTC to be implausible and inconsistent with petitioner's own evidence. Now this Court turns to the questions of law raised by petitioner, all of which hinges on the contention that a conventional subrogation occurred when Ms. Picache assigned the debt, due her from the petitioner, to the respondent; and without petitioner's consent as debtor, the said conventional subrogation should be deemed to be without force and effect. This Court cannot sustain petitioner's contention and hereby declares that the transaction between Ms. Picache and respondent was an assignment of credit, not conventional subrogation, and does not require petitioner's consent as debtor for its validity and enforceability. An assignment of credit has been defined as an agreement by virtue of which the owner of a credit (known as the assignor), by a legal cause - such as sale, dation in payment or exchange or donation - and without need of the debtor's consent, transfers that credit and its accessory rights to another (known as the assignee), who acquires the power to enforce it, to the same extent as the assignor could have enforced it against the debtor. 20 On the other hand, subrogation, by definition, is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts. Conventional subrogation is that which takes place by agreement of parties.21

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Although it may be said that the effect of the assignment of credit is to subrogate the assignee in the rights of the original creditor, this Court still cannot definitively rule that assignment of credit and conventional subrogation are one and the same. A noted authority on civil law provided a discourse22 on the difference between these two transactions, to wit Conventional Subrogation and Assignment of Credits. In the Argentine Civil Code, there is essentially no difference between conventional subrogation and assignment of credit. The subrogation is merely the effect of the assignment. In fact it is expressly provided (article 769) that conventional redemption shall be governed by the provisions on assignment of credit. Under our Code, however, conventional subrogation is not identical to assignment of credit. In the former, the debtor's consent is necessary; in the latter, it is not required. Subrogation extinguishes an obligation and gives rise to a new one; assignment refers to the same right which passes from one person to another. The nullity of an old obligation may be cured by subrogation, such that the new obligation will be perfectly valid; but the nullity of an obligation is not remedied by the assignment of the creditor's right to another. (Emphasis supplied.) This Court has consistently adhered to the foregoing distinction between an assignment of credit and a conventional subrogation.23 Such distinction is crucial because it would determine the necessity of the debtor's consent. In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may fully produce the legal effects. What the law requires in an assignment of credit is not the consent of the debtor, but merely notice to him as the assignment takes effect only from the time he has knowledge thereof. A creditor may, therefore, validly assign his credit and its accessories without the debtor's consent. On the other hand, conventional subrogation requires an agreement among the parties concerned the original creditor, the debtor, and the new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties.24 Article 1300 of the Civil Code provides that conventional subrogation must be clearly established in order that it may take effect. Since it is petitioner who claims that there is conventional subrogation in this case, the burden of proof rests upon him to establish the same25 by a preponderance of evidence.26 In Licaros v. Gatmaitan,27 this Court ruled that there was conventional subrogation, not just an assignment of credit; thus, consent of the debtor is required for the effectivity of the subrogation. This Court arrived at such a conclusion in said case based on its following findings We agree with the finding of the Court of Appeals that the Memorandum of Agreement dated July 29, 1988 was in the nature of a conventional subrogation which requires the consent of the debtor, AngloAsean Bank, for its validity. We note with approval the following pronouncement of the Court of Appeals: "Immediately discernible from above is the common feature of contracts involving conventional subrogation, namely, the approval of the debtor to the subrogation of a third person in place of the creditor. That Gatmaitan and Licaros had intended to treat their agreement as one of conventional subrogation is plainly borne by a stipulation in their Memorandum of Agreement, to wit: "WHEREAS, the parties herein have come to an agreement on the nature, form and extent of their mutual prestations which they now record herein with the express conformity of the third parties concerned" (emphasis supplied), which third party is admittedly Anglo-Asean Bank. Had the intention been merely to confer on appellant the status of a mere "assignee" of appellee's credit, there is simply no sense for them to have stipulated in their agreement that the same is conditioned on the "express conformity" thereto of Anglo-Asean Bank. That they did so only accentuates their intention to treat the agreement as one of conventional subrogation. And it is basic in the interpretation of contracts that the intention of the parties must be the one pursued (Rule 130, Section 12, Rules of Court). xxxx Aside for the 'whereas clause" cited by the appellate court in its decision, we likewise note that on the signature page, right under the place reserved for the signatures of petitioner and respondent, there is, typewritten, the words "WITH OUR CONFORME." Under this notation, the words "ANGLO-ASEAN BANK AND TRUST" were written by hand. To our mind, this provision which contemplates the signed conformity of Anglo-Asean Bank, taken together with the aforementioned preambulatory clause leads to the conclusion that both parties intended that Anglo-Asean Bank should signify its agreement and conformity to the contractual arrangement between petitioner and respondent. The fact that AngloAsean Bank did not give such consent rendered the agreement inoperative considering that, as

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previously discussed, the consent of the debtor is needed in the subrogation of a third person to the rights of a creditor. None of the foregoing circumstances are attendant in the present case. The Assignment of Credit, dated 1 April 1989, executed by Ms. Picache in favor of respondent, was a simple deed of assignment. There is nothing in the said Assignment of Credit which imparts to this Court, whether literally or deductively, that a conventional subrogation was intended by the parties thereto. The terms of the Assignment of Credit only convey the straightforward intention of Ms. Picache to "sell, assign, transfer, and convey" to respondent the debt due her from petitioner, as evidenced by the two promissory notes of the latter, dated 9 November 1988 and 10 November 1988, for the consideration of P60,000.00. By virtue of the same document, Ms. Picache gave respondent full power "to sue for, collect and discharge, or sell and assign" the very same debt. The Assignment of Credit was signed solely by Ms. Picache, witnessed by two other persons. No reference was made to securing the conformeof petitioner to the transaction, nor any space provided for his signature on the said document. Perhaps more in point to the case at bar is Rodriguez v. Court of Appeals, 28 in which this Court found that The basis of the complaint is not a deed of subrogation but an assignment of credit whereby the private respondent became the owner, not the subrogee of the credit since the assignment was supported by HK $1.00 and other valuable considerations. xxxx The petitioner further contends that the consent of the debtor is essential to the subrogation. Since there was no consent on his part, then he allegedly is not bound. Again, we find for the respondent. The questioned deed of assignment is neither one of subrogation nor a power of attorney as the petitioner alleges. The deed of assignment clearly states that the private respondent became an assignee and, therefore, he became the only party entitled to collect the indebtedness. As a result of the Deed of Assignment, the plaintiff acquired all rights of the assignor including the right to sue in his own name as the legal assignee. Moreover, in assignment, the debtor's consent is not essential for the validity of the assignment (Art. 1624 in relation to Art. 1475, Civil Code), his knowledge thereof affecting only the validity of the payment he might make (Article 1626, Civil Code). Since the Assignment of Credit, dated 1 April 1989, is just as its title suggests, then petitioner's consent as debtor is not necessary in order that the assignment may fully produce legal effects. The duty to pay does not depend on the consent of the debtor; otherwise, all creditors would be prevented from assigning their credits because of the possibility of the debtors' refusal to give consent.29 Moreover, this Court had already noted previously that there does not appear to be anything in Philippine statutes or jurisprudence which prohibits a creditor, without the consent of the debtor, from making an assignment of his credit and the rights accessory thereto; and, certainly, an assignment of credit and its accessory rights does not at all obliterate the obligation of the debtor to pay, but merely puts the assignee in the place of the assignor.30 Hence, the obligation of petitioner to pay his debt subsists despite the assignment thereof; only, his obligation after he came to know of the said assignment would be to pay the debt to the respondent (the assignee), instead of Ms. Picache (the original creditor). It bears to emphasize that even if the consent of petitioner as debtor is unnecessary for the validity and enforceability of the assignment of credit, nonetheless, the petitioner must have knowledge, acquired either by formal notice or some other means, of the assignment so that he may pay the debt to the proper party, which shall now be the assignee. This much can be gathered from a reading of Article 1626 of the Civil Code providing that, "The debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation." This Court, in Sison v. Yap Tico,31 presented and adopted Manresa's analysis of Article 1626 of the Civil Code (then Article 1527 of the old Civil Code) Manresa, in commenting upon the provisions of article 1527 of the Civil Code, after discussing the articles of the Mortgage Law, says: "We have said that article 1527 deals with the individual phase or aspect which presupposes the existence of a relationship with third parties, that is, with the person of the debtor. Let us see in what way. "The above-mentioned article states that a debtor who, before having knowledge of the assignment, should pay the creditor shall be released from the obligation. "In the first place, the necessity for the notice to the debtor in order that the assignment may fully produce its legal effects may be inferred from the above. It refers to a notice and not to a petition for the consent which is not necessary. We say that the notice is not necessary in order that the legal

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effects may be fully produced, because if it should be omitted, such omission will not imply that the assignment will not exist legally, but that its effects will be limited to the parties thereto; at least, they will not reach the debtor. "* * * * * * * * "Let us go to the legal effects produced by the failure to give the notice. In the beginning, we have said that the contract does not lose its efficacy with respect to the parties who made it; but article 1527 determines specifically one of the consequences arising from the failure to give notice, for it evidently takes for granted that the debtor who, before having knowledge of the assignment, should pay the creditor shall be released from the obligation. So that if the creditor assigned his credit, acting in bad faith and taking advantage of the fact that the debtor does not know anything about the assignment because the latter has not been notified, and collects its amount, the debtor shall be free from the obligation, inasmuch as it has been legally extinguished by a payment which fully redounds to his benefit. The assignee can take advantage of all civil and criminal actions against the assignor, but he can ask nothing from the debtor, because the latter did not know of the assignment, nor was he bound to know it; the assignor should blame himself for his failure to have the notice made. "* * * * * * * * "Hence, there not having been any notice to the debtor, the existence of his knowledge of the assignment should be proved by him who is interested therein; and the debtor is not bound to prove his ignorance." In a more recent case, Aquintey v. Spouses Tibong,32 this Court stated: "The law does not require any formal notice to bind the debtor to the assignee, all that the law requires is knowledge of the assignment. Even if the debtor had not been notified, but came to know of the assignment by whatever means, the debtor is bound by it." Since his consent is immaterial, the only other matter which this Court must determine is whether petitioner had knowledge of the Assignment of Credit, dated 1 April 1989, between Ms. Picache and respondent. Both the Court of Appeals and the RTC ruled in the affirmative, and so must this Court. Petitioner does not deny having knowledge of the assignment of credit by Ms. Picache to the respondent. In 1989, when petitioner's loans became overdue, it was respondent and its counsel who sent several demand letters to him. It can be reasonably presumed that petitioner received said letters for they were sent by registered mail, and the return cards were signed by petitioner's agent. Petitioner expressly acknowledged receipt of respondent's demand letter, dated 13 June 1989, to which he replied with another letter, dated 21 June 1989, stating that he would settle his account with respondent but also requesting consideration of the losses he suffered from the electric power disconnection at the property he leased from MRMC. It further appears that petitioner had never questioned why it was respondent seeking payment of the loans and not the original creditor, Ms. Picache. All these circumstances tend to establish that respondent already knew of the assignment of credit made by Ms. Picache in favor of respondent and explains his acceptance of all the demands for payment of the loans made upon him by the respondent. Finally, assuming arguendo that this Court considers petitioner a third person to the Assignment of Credit, dated 1 April 1989, the fact that the said document was duly notarized makes it legally enforceable even as to him. According to Article 1625 of the Civil Code ART. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. Notarization converted the Assignment of Credit, dated 1 April 1989, a private document, into a public document,33 thus, complying with the mandate of the afore-quoted provision and making it enforceable even as against third persons. WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED, and the Decision, dated 20 March 2001, of the Court of Appeals in CA-G.R. CV No. 43604, affirming in toto the Decision, dated 6 August 1993, of the Quezon City Regional Trial Court, Branch 91, in Civil Case No. Q-90-5247, is hereby AFFIRMED. Costs against the petitioner. SO ORDERED. Ynares-Santiago, Chairperson, Austria-Martinez, Nachura, JJ., concur.

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