Credit Transactions Full Text Cases Atty.

Adviento
CREDIT TRANSACTIONS ARTS. 1395-1940 G.R. No. L-17474 October 25, 1962 REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE V. BAGTAS, defendant, FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitioner- appellant. PADILLA, J.: The Court of Appeals certified this case to this Court because only questions of law are raised. On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry advised him that the book value of the three bulls could not be reduced and that they either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be ordered to return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other just and equitable relief be granted in (civil No. 12818). On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did not object, he could not return the animals nor pay their value and prayed for the dismissal of the complaint. After hearing, on 30 July 1956 the trial court render judgment . . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this complaint and costs. On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by the plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal of Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at the beginning of this opinion. It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt

signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ of execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already had been returned to and received by the appellee. The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was due to force majeure she is relieved from the duty of returning the bull or paying its value to the appellee. The contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure. A contract ofcommodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum . . . is liable for loss of the things, even if it should be through a fortuitous event: (2) If he keeps it longer than the period stipulated . . . (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event; The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability. The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of its value being a money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October 1951, is not altogether without merit. However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as may be granted. . . . and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which provides that Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such death . . . and to give the name and residence of the executory administrator, guardian, or other legal representative of the deceased . . . . The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied, whether the same be due, not due, or contingent, for funeral expenses and expenses of the last sickness of the said decedent, and judgment for monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death in accordance with the above-quoted rule, and there was no reason for such

Credit Transactions Full Text Cases Atty. Adviento

failure to notify, because the attorney who appeared for the defendant was the same who represented the administratrix in the special proceedings instituted for the administration and settlement of his estate. The appellee or its attorney or representative could not be expected to know of the death of the defendant or of the administration proceedings of his estate instituted in another court that if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as required by the rule. As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of execution. Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court. ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs. G.R. No. L-8321 October 14, 1913

on which it is built, with the present boundaries of the land and condition of the building, at a price of not less than P2,890 Philippine currency . . . . So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other defendant in this case, for the price mentioned. The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court decided it by holding that this land belonged to the owner of the warehouse which had been built thereon thirty years before. The plaintiffs appealed and this court reversed the judgment of the lower court and held that the appellants were the owners of the lot in question. 1 When the judgment became final and executory, a writ of execution issued and the plaintiffs were given possession of the lot; but soon thereafter the trial court annulled this possession for the reason that it affected Cu Joco, who had not been a party to the suit in which that writ was served. It was then that the plaintiffs commenced the present action for the purpose of having the sale of the said lot declared null and void and of no force and effect. An agreement was had ad to the facts, the ninth paragraph of which is as follows: 9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme Court which found for them by holding that they are the owners of the lot in question, although there existed and still exists a commodatum by virtue of which the guardianship (meaning the defendants) had and has the use, and the plaintiffs the ownership, of the property, with no finding concerning the decree of the lower court that ordered the sale. The obvious purport of the cause "although there existed and still exists a commodatum," etc., appears to be that it is a part of the decision of the Supreme Court and that, while finding the plaintiffs to be the owners of the lot, we recognized in principle the existence of a commodatum under which the defendants held the lot. Nothing could be more inexact. Possibly, also, the meaning of that clause is that, notwithstanding the finding made by the Supreme Court that the plaintiffs were the owners, these former and the defendants agree that there existed, and still exists, a commodatum, etc. But such an agreement would not affect the truth of the contents of the decision of this court, and the opinions held by the litigants in regard to this point could have no bearing whatever on the present decision. Nor did the decree of the lower court that ordered the sale have the least influence in our previous decision to require our making any finding in regard thereto, for, with or without that decree, the Supreme Court had to decide the ownership of the lot consistently with its titles and not in accordance with the judicial acts or proceedings had prior to the setting up of the issue in respect to the ownership of the property that was the subject of the judicial decree. What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the ownership, and they themselves only the use, of the said lot. On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the manner in which the sale was effected, whether judicially or extrajudicially. He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a transfer of the ownership of the thing, it is evident that he who has only the mere use of the thing cannot transfer its ownership. The sale of a thing effected by one who is not its owner is null and void. The defendants never were the owners of the lot sold. The sale of it by them is necessarily null and void. On cannot convey to another what he has never had himself. The returns of the auction contain the following statements: I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization conferred upon me on the 31st of July, 1909, by the Court of First Instance of Ilocos Norte, proceeded with the sale at public auction of the six-sevenths part of the one-half of the warehouse constructed of rubble stone, etc.

ALEJANDRA MINA, ET AL., plaintiffs-appellants, vs. RUPERTA PASCUAL, ET AL., defendants-appellees. ARELLANO, C.J.: Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his lifetime, on March 12, 1874, a lot in the center of the town of Laoag, the capital of the Province of Ilocos Norte, the property having been awarded to him through its purchase at a public auction held by the alcalde mayor of that province. The lot has a frontage of 120 meters and a depth of 15. Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the said lot, embracing 14 meters of its frontage by 11 meters of its depth. Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et al., were recognized without discussion as his heirs. Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta Pascual were recognized likes without discussion, though it is not said how, and consequently are entitled to the said building, or rather, as Ruperta Pascual herself stated, to only sixsevenths of one-half of it, the other half belonging, as it appears, to the plaintiffs themselves, and the remaining one-seventh of the first one-half to the children of one of the plaintiffs, Elena de Villanueva. The fact is that the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse; while the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well as of the remainder thereof. This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor children, the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization to sell "the six-sevenths of the one-half of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs that is Alejandra Mina, et al. opposed the petition of Ruperta Pascual for the reason that the latter had included therein the lot occupied by the warehouse, which they claimed was their exclusive property. All this action was taken in a special proceeding in re guardianship. The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to decide the question of the ownership of the lot before it pass upon the petition for the sale of the warehouse. But the court before determining the matter of the ownership of the lot occupied by the warehouse, ordered the sale of this building, saying: While the trial continues with respect to the ownership of the lot, the court orders the sale at public auction of the said warehouse and of the lot

Credit Transactions Full Text Cases Atty. Adviento

Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the land and all the rights title, interest, and ownership in the said property to Cu Joco, who was the highest bidder, etc. Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs and assigns, all the interest, ownership and inheritance rights and others that, as the guardian of the said minors, I have and may have in the said property, etc. The purchaser could not acquire anything more than the interest that might be held by a person to whom realty in possession of the vendor might be sold, for at a judicial auction nothing else is disposed of. What the minor children of Ruperta Pascual had in their possession was the ownership of the six-sevenths part of one-half of the warehouse and the use of the lot occupied by his building. This, and nothing more, could the Chinaman Cu Joco acquire at that sale: not the ownership of the lot; neither the other half, nor the remaining one-seventh of the said first half, of the warehouse. Consequently, the sale made to him of this one-seventh of one-half and the entire other half of the building was null and void, and likewise with still more reason the sale of the lot the building occupies. The purchaser could and should have known what it was that was offered for sale and what it was that he purchased. There is nothing that can justify the acquisition by the purchaser of the warehouse of the ownership of the lot that this building occupies, since the minors represented by Ruperta Pascual never were the owners of the said lot, nor were they ever considered to be such. The trial court, in the judgment rendered, held that there were no grounds for the requested annulment of the sale, and that the plaintiffs were entitled to the P600 deposited with the clerk of the court as the value of the lot in question. The defendants, Ruperta Pascual and the Chinaman Cu Joco, were absolved from the complaint, without express finding as to costs. The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to accept the price set on the lot by expert appraisers, not even though the plaintiffs be considered as coowner of the warehouse. It would be much indeed that, on the ground of coownership, they should have to abide by and tolerate the sale of the said building, which point this court does not decide as it is not a question submitted to us for decision, but, as regards the sale of the lot, it is in all respects impossible to hold that the plaintiffs must abide by it and tolerate, it, and this conclusion is based on the fact that they did not give their consent (art. 1261, Civil Code), and only the contracting parties who have given it are obliged to comply (art. 1091, idem). The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot; but subsequently the plaintiffs, through motion, asked for an amendment by their complaint in the sense that the action should be deemed to be one for the recovery of possession of a lot and for the annulment of its sale. The plaintiff's petition was opposed by the defendant's attorney, but was allowed by the court; therefore the complaint seeks, after the judicial annulment of the sale of the lot, to have the defendants sentenced immediately to deliver the same to the plaintiffs. Such a finding appears to be in harmony with the decision rendered by the Supreme Court in previous suit, wherein it was held that the ownership of the lot lay in the plaintiffs, and for this reason steps were taken to give possession thereof to the defendants; but, as the purchaser Cu Joco was not a party to that suit, the present action is strictly one for recover against Cu Joco to compel him, once the sale has been annulled, to deliver the lot to its lawful owners, the plaintiffs. As respects this action for recovery, this Supreme Court finds: 1. That it is a fact admitted by the litigating parties, both in this and in the previous suit, that Andres Fontanilla, the defendants' predecessor in interest, erected the warehouse on the lot, some thirty years ago, with the explicit consent of his brother Francisco Fontanilla, the plaintiff's predecessor in interest. 2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the coowners of the warehouse. 3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor his successors paid any consideration or price whatever for the use of the lot occupied by the said building; whence it is, perhaps, that both parties have denominated that use a commodatum. Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of the defendants to deliver the lot to the

plaintiffs does not follow as a necessary corollary of the judicial declaration of ownership made in the previous suit, nor of that of the nullity of the sale of the lot, made in the present case. The defendants do not hold lawful possession of the lot in question.1awphil.net But, although both litigating parties may have agreed in their idea of the commodatum, on account of its not being, as indeed it is not, a question of fact but of law, yet that denomination given by them to the use of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable. Contracts are not to be interpreted in conformity with the name that the parties thereto agree to give them, but must be construed, duly considering their constitutive elements, as they are defined and denominated by law. By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that the latter may use it during the certain period and return it to the former, in which case it is calledcommodatum . . . (art. 1740, Civil Code). It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another shall for a certain period. Francisco Fontanilla did not fix any definite period or time during which Andres Fontanilla could have the use of the lot whereon the latter was to erect a stone warehouse of considerable value, and so it is that for the past thirty years of the lot has been used by both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco, now in possession of the lot, should pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum sustained by them, since, according to the second paragraph of the aforecited article 1740, "commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on page 7 of their brief is to be believed, it never entered Francisco's mind to limit the period during which his brother Andres was to have the use of the lot, because he expected that the warehouse would eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of Andres, which did not come to pass for the reason that Fructuoso died before his uncle Andres. With that expectation in view, it appears more likely that Francisco intended to allow his brother Andres a surface right; but this right supposes the payment of an annual rent, and Andres had the gratuitous use of the lot. Hence, as the facts aforestated only show that a building was erected on another's ground, the question should be decided in accordance with the statutes that, thirty years ago, governed accessions to real estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly identical with the provisions of articles 361 and 362 of the Civil Code. So, then, pursuant to article 361, the owner of the land on which a building is erected in good faith has a right to appropriate such edifice to himself, after payment of the indemnity prescribed in articles 453 and 454, or to oblige the builder to pay him the value of the land. Such, and no other, is the right to which the plaintiff are entitled. For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by Ruperta Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter in the use of the lot until the plaintiffs shall choose one or the other of the two rights granted them by article 361 of the Civil Code.1awphil.net The judgment appealed from is reversed and the sale of the lot in question is held to be null and void and of no force or effect. No special finding is made as to the costs of both instances. G.R. No. 80294-95 September 21, 1988 CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner, vs. COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents. GANCAYCO, J.: The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long time ago can properly be considered res judicata by respondent Court of Appeals in the present two cases between petitioner and two private respondents. Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the

Credit Transactions Full Text Cases Atty. Adviento

Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows: WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said defendant is ordered to pay costs. (p. 36, Rollo) Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question; that the two lots were possessed by the predecessors-ininterest of private respondents under claim of ownership in good faith from 1906 to 1951; that petitioner had been in possession of the same lots as bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for registration in 1962; that petitioner had just been in possession as owner for eleven years, hence there is no possibility of acquisitive prescription which requires 10 years possession with just title and 30 years of possession without; that the principle of res judicata on these findings by the Court of Appeals will bar a reopening of these questions of facts; and that those facts may no longer be altered. Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied. The facts and background of these cases as narrated by the trail court are as follows ... The documents and records presented reveal that the whole controversy started when the defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the Court of First Instance of Baguio Benguet on September 5, 1962 an application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church building, convents, high school building, school gymnasium, school dormitories, social hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. After trial on the merits, the land registration court promulgated its Decision, dated November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2, 3, and 4. The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of the land registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of Appeals rendered its decision, dated May 9, 1977, reversing the decision of the land registration court and dismissing the VICAR's application as to Lots 2 and 3, the lots claimed by the two sets of oppositors in the land registration case (and two sets of plaintiffs in the two cases now at bar), the first lot being presently occupied by the convent and the second by the women's dormitory and the sister's convent. On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration praying that both Lots 2 and 3 be ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals denied the motion for reconsideration filed by the Heirs of Juan Valdez on the ground that there was "no sufficient merit to justify reconsideration one way or the other ...," and likewise denied that of the Heirs of Egmidio Octaviano. Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his (its) application for registration of Lots 2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals and Heirs of Egmidio Octaviano.' From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for review, docketed as G.R. No. L46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez.

On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality of both Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872, the Heirs of Octaviano filed with the then Court of First Instance of Baguio, Branch II, a Motion For Execution of Judgment praying that the Heirs of Octaviano be placed in possession of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the ground that the Court of Appeals decision in CA-G.R. No. 38870 did not grant the Heirs of Octaviano any affirmative relief. On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of Appeals dismissed the petition. It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.). In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3) by their predecessorin-interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. BB4 ) to defendant Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000.00 per month. On the other hand, defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is not covered by any title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to the witness stand, would testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75) years continuously and peacefully and has constructed permanent structures thereon. In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the case on the sole issue of whether or not the decisions of the Court of Appeals and the Supreme Court touching on the ownership of Lot 2, which in effect declared the plaintiffs the owners of the land constitute res judicata. In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the defense of ownership and/or long and continuous possession of the two lots in question since this is barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830-R under the principle of res judicata. Plaintiffs contend that the question of possession and ownership have already been determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant Vicar maintains that the principle of res judicata would not prevent them from litigating the issues of long possession and ownership because the dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely dismissed their application for registration and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the decision, and not its body, is the controlling pronouncement of the Court of Appeals. 2 The alleged errors committed by respondent Court of Appeals according to petitioner are as follows: 1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA; 2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED; 3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND OCTAVIANO; 4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER; 5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;

Credit Transactions Full Text Cases Atty. Adviento

6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS; 7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME COURT; 8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951; 9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE; 10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3 The petition is bereft of merit. Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it clearly held that it was in agreement with the findings of the trial court that the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively declare private respondents as owners of the land, neither was it declared that they were not owners of the land, but it held that the predecessors of private respondents were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the properties in its name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary acquisitive prescription requires possession for ten years, but always with just title. Extraordinary acquisitive prescription requires 30 years. 4 On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said findings are res judicata between the parties. They can no longer be altered by presentation of evidence because those issues were resolved with finality a long time ago. To ignore the principle of res judicata would be to open the door to endless litigations by continuous determination of issues without end. An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register the lands in question under its ownership, on its evaluation of evidence and conclusion of facts. The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to support the same and the alleged purchases were never mentioned in the application for registration. By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots since 1906. The predecessors of private respondents, not petitioner Vicar, were in possession of the questioned lots since 1906. There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2 and 3, because the buildings standing thereon were only constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947, the church was constructed only in 1951 and the new convent only 2 years before the trial in 1963.

When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962. Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title. The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the adverse claim and repudiation of trust came only in 1951. We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its findings of fact have become incontestible. This Court declined to review said decision, thereby in effect, affirming it. It has become final and executory a long time ago. Respondent appellate court did not commit any reversible error, much less grave abuse of discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CAG.R. No. 05149. The facts as supported by evidence established in that decision may no longer be altered. WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED, with costs against petitioner. SO ORDERED. REPUBLIC VS. CA not found ARTS. 1641- 1945 G.R. No. L-46240 November 3, 1939 ANGEL A. ANSALDO, plaintiffs-

MARGARITA QUINTOS and appellants, vs. BECK, defendant-appellee. IMPERIAL, J.:

The plaintiff brought this action to compel the defendant to return her certain furniture which she lent him for his use. She appealed from the judgment of the Court of First Instance of Manila which ordered that the defendant return to her the three has heaters and the four electric lamps found in the possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of Manila at her own expense, and that the fees which the Sheriff may charge for the deposit of the furniture be paid pro rata by both parties, without pronouncement as to the costs. The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture described in the third paragraph of the stipulation of facts, subject to the condition that the defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant of the conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of lease. There after the plaintiff required the defendant to return all the furniture transferred to him for them in the house where they were found. On November 5, 1936, the defendant, through another person, wrote to the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the same month, the defendant wrote another letter to the plaintiff informing her that he could not give up the three gas heaters and the four electric lamps because he would use them until the 15th of the same month when the lease in due to expire. The plaintiff refused to get the furniture in view of the fact that the defendant had declined to make delivery of all of them. On November 15th, before vacating the

Credit Transactions Full Text Cases Atty. Adviento

house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff. In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in holding that they violated the contract by not calling for all the furniture on November 5, 1936, when the defendant placed them at their disposal; in not ordering the defendant to pay them the value of the furniture in case they are not delivered; in holding that they should get all the furniture from the Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the deposit of the furniture; in ruling that both parties should pay their respective legal expenses or the costs; and in denying pay their respective legal expenses or the costs; and in denying the motions for reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether the latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of litigation.lawphi1.net The contract entered into between the parties is one of commadatum, because under it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when they were offered to her. As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps. As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof by the defendant in case of his inability to return some of the furniture because under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to deliver some of the furniture, the value thereof should be latter determined by the trial Court through evidence which the parties may desire to present. The costs in both instances should be borne by the defendant because the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the contract ofcommodatum, and without any reason he refused to return and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed. The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the account of the defendant. the defendant shall pay the costs in both instances. So ordered. G.R. No. L-4150 February 10, 1910

mill of his hacienda during the season of 1901-2, without recompense or remuneration whatever for the use thereof, under the sole condition that they should be returned to the owner as soon as the work at the mill was terminated; that Magdaleno Jimenea, however, did not return the carabaos, notwithstanding the fact that the plaintiff claimed their return after the work at the mill was finished; that Magdaleno Jimenea died on the 28th of October, 1904, and the defendant herein was appointed by the Court of First Instance of Occidental Negros administratrix of his estate and she took over the administration of the same and is still performing her duties as such administratrix; that the plaintiff presented his claim to the commissioners of the estate of Jimenea, within the legal term, for the return of the said ten carabaos, but the said commissioners rejected his claim as appears in their report; therefore, the plaintiff prayed that judgment be entered against the defendant as administratrix of the estate of the deceased, ordering her to return the ten first-class carabaos loaned to the late Jimenea, or their present value, and to pay the costs. The defendant was duly summoned, and on the 25th of September, 1906, she demurred in writing to the complaint on the ground that it was vague; but on the 2d of October of the same year, in answer to the complaint, she said that it was true that the late Magdaleno Jimenea asked the plaintiff to loan him ten carabaos, but that he only obtained three second-class animals, which were afterwards transferred by sale by the plaintiff to the said Jimenea; that she denied the allegations contained in paragraph 3 of the complaint; for all of which she asked the court to absolve her of the complaint with the cost against the plaintiff. By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the defendant and her counsel, Matias Hilado, that he had made an agreement with the plaintiff to the effect that the latter would not compromise the controversy without his consent, and that as fees for his professional services he was to receive one half of the amount allowed in the judgment if the same were entered in favor of the plaintiff. The case came up for trial, evidence was adduced by both parties, and either exhibits were made of record. On the 10th of January, 1907, the court below entered judgment sentencing Agustina Jarra, as administratrix of the estate of Magdaleno Jimenea, to return to the plaintiff, Felix de los Santos, the remaining six second and third class carabaos, or the value thereof at the rate of P120 each, or a total of P720 with the costs. Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated January 19, moved for anew trial on the ground that the findings of fact were openly and manifestly contrary to the weight of the evidence. The motion was overruled, the defendant duly excepted, and in due course submitted the corresponding bill of exceptions, which was approved and submitted to this court. The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten carabaos which are now claimed by the latter, as shown by two letters addressed by the said Jimenea to Felix de los Santos; but in her answer the said defendant alleged that the late Jimenea only obtained three second-class carabaos, which were subsequently sold to him by the owner, Santos; therefore, in order to decide this litigation it is indispensable that proof be forthcoming that Jimenea only received three carabaos from his son-in-law Santos, and that they were sold by the latter to him. The record discloses that it has been fully proven from the testimony of a sufficient number of witnesses that the plaintiff, Santos, sent in charge of various persons the ten carabaos requested by his father-in-law, Magdaleno Jimenea, in the two letters produced at the trial by the plaintiff, and that Jimenea received them in the presence of some of said persons, one being a brother of said Jimenea, who saw the animals arrive at the hacienda where it was proposed to employ them. Four died of rinderpest, and it is for this reason that the judgment appealed from only deals with six surviving carabaos. The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced by any trustworthy documents such as those of transfer, nor were the declarations of the witnesses presented by the defendant affirming it satisfactory; for said reason it can not be considered that Jimenea only received three carabaos on loan from his son-in-law, and that he afterwards kept them definitely by virtue of the purchase. By the laws in force the transfer of large cattle was and is still made by means of official documents issued by the local authorities; these documents constitute the title of ownership of the carabao or horse so acquired. Furthermore, not only should the purchaser be provided with a new certificate or credential, a document which has not been produced in evidence by the defendant, nor has the loss of the same been shown in

FELIX DE LOS SANTOS, plaintiff-appelle, vs. AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased, defendant-appellant. TORRES, J.: On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the administratrix of the estate of Magdaleno Jimenea, alleging that in the latter part of 1901 Jimenea borrowed and obtained from the plaintiff ten first-class carabaos, to be used at the animal-power

Credit Transactions Full Text Cases Atty. Adviento

the case, but the old documents ought to be on file in the municipality, or they should have been delivered to the new purchaser, and in the case at bar neither did the defendant present the old credential on which should be stated the name of the previous owner of each of the three carabaos said to have been sold by the plaintiff. From the foregoing it may be logically inferred that the carabaos loaned or given on commodatum to the now deceased Magdaleno Jimenea were ten in number; that they, or at any rate the six surviving ones, have not been returned to the owner thereof, Felix de los Santos, and that it is not true that the latter sold to the former three carabaos that the purchaser was already using; therefore, as the said six carabaos were not the property of the deceased nor of any of his descendants, it is the duty of the administratrix of the estate to return them or indemnify the owner for their value. The Civil Code, in dealing with loans in general, from which generic denomination the specific one of commodatum is derived, establishes prescriptions in relation to the last-mentioned contract by the following articles: ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order that the latter may use it during a certain period and return it to the former, in which case it is called commodatum, or money or any other perishable thing, under the condition to return an equal amount of the same kind and quality, in which case it is merely called a loan. Commodatum is essentially gratuitous. A simple loan may be gratuitous, or made under a stipulation to pay interest. ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee acquires the use thereof, but not its fruits; if any compensation is involved, to be paid by the person requiring the use, the agreement ceases to be a commodatum. ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of both contracting parties, unless the loan has been in consideration for the person of the bailee, in which case his heirs shall not have the right to continue using the thing loaned. The carabaos delivered to be used not being returned by the defendant upon demand, there is no doubt that she is under obligation to indemnify the owner thereof by paying him their value. Article 1101 of said code reads: Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who in any manner whatsoever act in contravention of the stipulations of the same, shall be subjected to indemnify for the losses and damages caused thereby. The obligation of the bailee or of his successors to return either the thing loaned or its value, is sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision the legal doctrine touching commodatum as follows: Although it is true that in a contract of commodatum the bailor retains the ownership of the thing loaned, and at the expiration of the period, or after the use for which it was loaned has been accomplished, it is the imperative duty of the bailee to return the thing itself to its owner, or to pay him damages if through the fault of the bailee the thing should have been lost or injured, it is clear that where public securities are involved, the trial court, in deferring to the claim of the bailor that the amount loaned be returned him by the bailee in bonds of the same class as those which constituted the contract, thereby properly applies law 9 of title 11 ofpartida 5. With regard to the third assignment of error, based on the fact that the plaintiff Santos had not appealed from the decision of the commissioners rejecting his claim for the recovery of his carabaos, it is sufficient to estate that we are not dealing with a claim for the payment of a certain sum, the collection of a debt from the estate, or payment for losses and damages (sec. 119, Code of Civil Procedure), but with the exclusion from the inventory of the property of the late Jimenea, or from his capital, of six carabaos which did not belong to him, and which formed no part of the inheritance. The demand for the exclusion of the said carabaos belonging to a third party and which did not form part of the property of the deceased, must be the subject of a direct decision of the court in an ordinary action, wherein

the right of the third party to the property which he seeks to have excluded from the inheritance and the right of the deceased has been discussed, and rendered in view of the result of the evidence adduced by the administrator of the estate and of the claimant, since it is so provided by the second part of section 699 and by section 703 of the Code of Civil Procedure; the refusal of the commissioners before whom the plaintiff unnecessarily appeared can not affect nor reduce the unquestionable right of ownership of the latter, inasmuch as there is no law nor principle of justice authorizing the successors of the late Jimenea to enrich themselves at the cost and to the prejudice of Felix de los Santos. For the reasons above set forth, by which the errors assigned to the judgment appealed from have been refuted, and considering that the same is in accordance with the law and the merits of the case, it is our opinion that it should be affirmed and we do hereby affirm it with the costs against the appellant. So ordered. ARTS. 1946-1952 ARTS. 1953-1961 G.R. No. L-50550-52 October 31, 1979 CHEE KIONG YAM, AMPANG MAH, ANITA YAM JOSE Y.C. YAM AND RICHARD YAM, petitioners, vs. HON. NABDAR J. MALIK, Municipal Judge of Jolo, Sulu (Branch I), THE PEOPLE OF THE PHILIPPINES, ROSALINDA AMIN, TAN CHU KAO and LT. COL. AGOSTO SAJOR respondents. ABAD SANTOS, J.: This is a petition for certiorari, prohibition, and mandamus with preliminary injunction. Petitioners alleged that respondent Municipal Judge Nabdar J. Malik of Jolo, Sulu, acted without jurisdiction, in excess of jurisdiction and with grave abuse of discretion when: (a) he held in the preliminary investigation of the charges of estafa filed by respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor against petitioners that there was a prima facie case against the latter; (b) he issued warrants of arrest against petitioners after making the above determination; and (c) he undertook to conduct trial on the merits of the charges which were docketed in his court as Criminal Cases No. M-111, M-183 and M-208. Respondent judge is said to have acted without jurisdiction, in excess of jurisdiction and with grave abuse of discretion because the facts recited in the complaints did not constitute the crime of estafa, and assuming they did, they were not within the jurisdiction of the respondent judge. In a resolution dated May 23, 1979, we required respondents to comment in the petition and issued a temporary restraining order against the respondent judge from further proceeding with Criminal Cases Nos. M111, M-183 and M-208 or from enforcing the warrants of arrest he had issued in connection with said cases. Comments by the respondent judge and the private respondents pray for the dismissal of the petition but the Solicitor General has manifested that the People of the Philippines have no objection to the grant of the reliefs prayed for, except the damages. We considered the comments as answers and gave due course to the petition. The position of the Solicitor General is well taken. We have to grant the petition in order to prevent manifest injustice and the exercise of palpable excess of authority. In Criminal Case No. M-111, respondent Rosalinda M. Amin charges petitioners Yam Chee Kiong and Yam Yap Kieng with estafa through misappropriation of the amount of P50,000.00. But the complaint states on its face that said petitioners received the amount from respondent Rosalinda M. Amin "as a loan." Moreover, the complaint in Civil Case No. N-5, an independent action for the collection of the same amount filed by respondent Rosalinda M. Amin with the Court of First Instance of Sulu on September 11, 1975, likewise states that the P50,000.00 was a "simple business loan" which earned interest and was originally demandable six (6) months from July 12, 1973. (Annex E of the petition.) In Criminal Case No. M-183, respondent Tan Chu Kao charges petitioners Yam Chee Kiong, Jose Y.C. Yam, Ampang Mah and Anita Yam, alias Yong Tay, with estafa through misappropriation of the amount of P30,000.00. Likewise, the complaint states on its face that the P30,000.00 was "a simple loan." So does the complaint in Civil Case No. N-8 filed by

Credit Transactions Full Text Cases Atty. Adviento

respondent Tan Chu Kao on April 6, 1976 with the Court of First Instance of Sulu for the collection of the same amount. (Annex D of the petition.). In Criminal Case No. M-208, respondent Augusto Sajor charges petitioners Jose Y.C. Yam, Anita Yam alias Yong Tai Mah, Chee Kiong Yam and Richard Yam, with estafa through misappropriation of the amount of P20,000.00. Unlike the complaints in the other two cases, the complaint in Criminal Case No. M-208 does not state that the amount was received as loan. However, in a sworn statement dated September 29, 1976, submitted to respondent judge to support the complaint, respondent Augusto Sajor states that the amount was a "loan." (Annex G of the petition.). We agree with the petitioners that the facts alleged in the three criminal complaints do not constitute estafa through misappropriation. Estafa through misappropriation is committed according to Article 315, paragraph 1, subparagraph (b), of the Revised Penal Code as follows: Art. 315. Swindling (Estafa). Any person who shall defraud another by any of the means mentioned herein below shall be punished by: xxx xxx xxx 1. With unfaithfulness or abuse of confidence namely: xxx xxx xxx b) By misappropriating or converting, to the prejudice of another, money, goods, or any other personal property received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying having received such money, goods, or other property. In order that a person can be convicted under the abovequoted provision, it must be proven that he has the obligation to deliver or return the same money, goods or personal property that he received. Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they received from private respondents. This is so because as clearly stated in criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans. The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code. Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loam ownership passes to the borrower. 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. It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum, the borrower acquires ownership of the money, goods or personal property borrowed. Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof. In U.S. vs. Ibaez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person to refuse to nay his debt or to deny its existence. We are of the opinion and so decide that when the relation is purely that of debtor and creditor, the debtor can not be held liable for the crime of estafa, under said article, by merely refusing to pay or by denying the indebtedness. It appears that respondent judge failed to appreciate the distinction between the two types of loan, mutuum and commodatum, when he performed the questioned acts, He mistook the transaction between petitioners and respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor to be commodatum wherein the borrower does not acquire

ownership over the thing borrowed and has the duty to return the same thing to the lender. Under Sec. 87 of the Judiciary Act, the municipal court of a provincial capital, which the Municipal Court of Jolo is, has jurisdiction over criminal cases where the penalty provided by law does not exceed prision correccional or imprisonment for not more than six (6) years, or fine not exceeding P6,000.00 or both, The amounts allegedly misappropriated by petitioners range from P20,000.00 to P50,000.00. The penalty for misappropriation of this magnitude exceeds prision correccional or 6 year imprisonment. (Article 315, Revised Penal Code), Assuming then that the acts recited in the complaints constitute the crime of estafa, the Municipal Court of Jolo has no jurisdiction to try them on the merits. The alleged offenses are under the jurisdiction of the Court of First Instance. Respondents People of the Philippines being the sovereign authority can not be sued for damages. They are immune from such type of suit. With respect to the other respondents, this Court is not the proper forum for the consideration of the claim for damages against them. WHEREFORE, the petition is hereby granted; the temporary restraining order previously issued is hereby made permanent; the criminal complaints against petitioners are hereby declared null and void; respondent judge is hereby ordered to dismiss said criminal cases and to recall the warrants of arrest he had issued in connection therewith. Moreover, respondent judge is hereby rebuked for manifest ignorance of elementary law. Let a copy of this decision be included in his personal life. Costs against private respondents. SO ORDERED. Tolentino vs. Gonzalez Sy Chiam 50 Phil 558 Tolentino purchased land from Luzon Rice Mills for Php25,000 payable in three installments. Tolentino defaulted on the balance so the owner sent a letter of demand to him. To pay, Tolentino applied for loan from Gonzalez on condition that he would execute a pacto de retro sale on the property in favor of Gonzalez. Upon maturation of loan, Tolentino defaulted so Gonzalez is demanding recovery of the land. Tolentino contends that the pacto de retro sale is a mortgage and not an absolute sale. The Supreme Court held that upon its terms, the deed of pacto de retro sale is an absolute sale with right of repurchase and not a mortgage. Thus, Gonzalez is the owner of the land and Tolentino is only holding it as a tenant by virtue of a contract of lease. **LOAN: A contract of loan signifies the giving of a sum of money, goods or credits to another, with a promise to repay, but not a promise to return the same thing. It has been defined as an advancement of money, goods, or credits upon a contract or stipulation to repay, not to return, the thing loaned at some future day in accordance with the terms of the contract. The moment the contract is completed, the money, goods or chattels given cease to be the property of the former owner and become the property of the obligor to be used according to his own will, unless the contract itself expressly provides for a special or specific use of the same. At all events, the money, goods or chattels, the moment the contract is executed, cease to be the property of the former owner and become the sole property of the obligor. [G.R. No. 114398. October 24, 1997] CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF APPEALS and THE PEOPLE OF THE PHILIPPINES, represented by the Solicitor General,respondents. ROMERO, J.: Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC), Branch 93, Quezon City, in an information which reads as follows: That on or between the month of May 19, 1988 and August, 1988 in Quezon City, Philippines and within the jurisdiction of this Honorable Court, the said accused, with intent of gain, with unfaithfulness, and abuse of confidence, did then and there, willfully, unlawfully and feloniously defraud one ISIDORA ROSALES, in the following manner, to wit: on the date and in the place aforementioned, said accused received in trust from the offended party cash money amounting to P536,650.00, Philippine Currency, with the express obligation involving the duty to act as

Credit Transactions Full Text Cases Atty. Adviento

complainants agent in purchasing local cigarettes (Philip Morris and Marlboro cigarettes), to resell them to several stores, to give her commission corresponding to 40% of the profits; and to return the aforesaid amount of offended party, but said accused, far from complying her aforesaid obligation, and once in possession thereof, misapplied, misappropriated and converted the same to her personal use and benefit, despite repeated demands made upon her, accused failed and refused and still fails and refuses to deliver and/or return the same to the damage and prejudice of the said ISIDORA ROSALES, in the aforementioned amount and in such other amount as may be awarded under the provision of the Civil Code. CONTRARY TO LAW. The antecedent facts are as follows: Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of complainant Isidora Rosales (Rosales) and asked her to join them in the business of buying and selling cigarettes. Convinced of the feasibility of the venture, Rosales readily agreed. Under their agreement, Rosales would give the money needed to buy the cigarettes while Liwanag and Tabligan would act as her agents, with a corresponding 40% commission to her if the goods are sold; otherwise the money would be returned to Rosales. Consequently, Rosales gave several cash advances to Liwanag and Tabligan amounting to P633,650.00. During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report on the progress of the transactions. The visits, however, suddenly stopped, and all efforts by Rosales to obtain information regarding their business proved futile. Alarmed by this development and believing that the amounts she advanced were being misappropriated, Rosales filed a case of estafa against Liwanag. After trial on the merits, the trial court rendered a decision dated January 9, 1991, finding Liwanag guilty as charged. The dispositive portion of the decision reads thus: WHEREFORE, the Court holds, that the prosecution has established the guilt of the accused, beyond reasonable doubt, and therefore, imposes upon the accused, Carmen Liwanag, an Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS AND TWENTY ONE (21) DAYS OF PRISION CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF PRISION MAYOR AS MAXIMUM, AND TO PAY THE COSTS. The accused is likewise ordered to reimburse the private complainant the sum of P526,650.00, without subsidiary imprisonment, in case of insolvency. SO ORDERED. Said decision was affirmed with modification by the Court of Appeals in a decision dated November 29, 1993, the decretal portion of which reads: WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed with the correction of the nomenclature of the penalty which should be: SIX (6) YEARS, EIGHT (8) MONTHS and TWENTY ONE (21) DAYS of prision mayor, as minimum, to FOURTEEN (14) YEARS and EIGHT (8) MONTHS of reclusion temporal, as maximum. In all other respects, the decision is AFFIRMED. SO ORDERED. Her motion for reconsideration having been denied in the resolution of March 16, 1994, Liwanag filed the instant petition, submitting the following assignment of errors: 1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN AFFIRMING THE CONVICTION OF THE ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY THE CONTRACT THAT EXIST (sic) BETWEEN THE ACCUSED-PETITIONER AND COMPLAINANT IS EITHER THAT OF A SIMPLE LOAN OR THAT OF A PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF THE MONEY OF THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT CRIMINAL.

2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING THE ACCUSED-PETITIONER ON GROUNDS OF REASONABLE DOUBT BY APPLYING THE EQUIPOISE RULE. Liwanag advances the theory that the intention of the parties was to enter into a contract of partnership, wherein Rosales would contribute the funds while she would buy and sell the cigarettes, and later divide the profits between them.[1] She also argues that the transaction can also be interpreted as a simple loan, with Rosales lending to her the amount stated on an installment basis.[2] The Court of Appeals correctly rejected these pretenses. While factual findings of the Court of Appeals are conclusive on the parties and not reviewable by the Supreme Court, and carry more weight when these affirm the factual findings of the trial court,[3] we deem it more expedient to resolve the instant petition on its merits. Estafa is a crime committed by a person who defrauds another causing him to suffer damages, by means of unfaithfulness or abuse of confidence, or of false pretenses of fraudulent acts.[4] From the foregoing, the elements of estafa are present, as follows: (1) that the accused defrauded another by abuse of confidence or deceit; and (2) that damage or prejudice capable of pecuniary estimation is caused to the offended party or third party,[5] and it is essential that there be a fiduciary relation between them either in the form of a trust, commission or administration.[6] The receipt signed by Liwanag states thus: May 19, 1988 Quezon City Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX THOUSAND AND SIX HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency, to purchase cigarrets (sic) (Philip & Marlboro) to be sold to customers. In the event the said cigarrets (sic) are not sold, the proceeds of the sale or the said products (shall) be returned to said Mrs. Isidora P. Rosales the said amount of P526,650.00 or the said items on or before August 30, 1988. (SGD & Thumbedmarked) (sic) CARMEN LIWANAG 26 H. Kaliraya St. Quezon City Signed in the presence of: (Sgd) Illegible (Sgd) Doming Z. Baligad

The language of the receipt could not be any clearer. It indicates that the money delivered to Liwanag was for a specific purpose, that is, for the purchase of cigarettes, and in the event the cigarettes cannot be sold, the money must be returned to Rosales. Thus, even assuming that a contract of partnership was indeed entered into by and between the parties, we have ruled that when money or property have been received by a partner for a specific purpose (such as that obtaining in the instant case) and he later misappropriated it, such partner is guilty of estafa.[7] Neither can the transaction be considered a loan, since in a contract of loan once the money is received by the debtor, ownership over the same is transferred.[8] Being the owner, the borrower can dispose of it for whatever purpose he may deem proper. In the instant petition, however, it is evident that Liwanag could not dispose of the money as she pleased because it was only delivered to her for a single purpose, namely, for the purchase of cigarettes, and if this was not possible then to return the money to Rosales. Since in this case there was no transfer of ownership of the money delivered, Liwanag is liable for conversion under Art. 315, par. 1(b) of the Revised Penal Code. WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals dated November 29, 1993, is AFFIRMED. Costs against petitioner. SO ORDERED. G.R. No. L-24968 April 27, 1972

Credit Transactions Full Text Cases Atty. Adviento

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee, vs. DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant. MAKALINTAL, J.:p In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00. The present appeal is from that judgment. In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and P9,100.00 as additional working capital. Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank. On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured by a first mortgage on the factory building to be constructed, the land site thereof, and the machinery and equipment to be installed. Among the other terms spelled out in the resolution were the following: 1. That the proceeds of the loan shall be utilized exclusively for the following purposes: For construction of factory building P250,000.00 For payment of the balance of purchase price of machinery and equipment 240,900.00 For working capital 9,100.00 T O T A L P500,000.00 4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation; 5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability of funds, and as the construction of the factory buildings progresses, to be certified to by an appraiser of this Corporation;" Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other co-makers, having acquired the latter's shares in Saura, Inc. In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this approved loan ... with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next meeting of the Board." On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the loan, and asked that the necessary documents be prepared in accordance with the terms and conditions specified in Resolution No. 145. In connection with the reexamination of the project to be financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective committees of engineers and technical men to meet with each other and undertake the necessary studies, although in appointing its own committee

10

Saura, Inc. made the observation that the same "should not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement already) entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No. 145. On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly registered on the following April 17. It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows: RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the reexamination of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operation of jute mills, and after having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be authorized as may be necessary from time to time to place the factory in actual operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect." On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and therefore considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC that the registration of the mortgage be withdrawn. In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd., expressing their desire to consider the loan insofar as they are concerned." On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by you.". On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-corporation," but with the following proviso: That in view of observations made of the shortage and high cost of imported raw materials, the Department of Agriculture and Natural Resources shall certify to the following: 1. That the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and 2. That there is prospect of increased production thereof to provide adequately for the requirements of the factory." The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was explained that the certification by the Department of Agriculture and Natural Resources was required "as the intention of the original approval (of the loan) is to develop the manufacture of sacks on the basis of locally available raw materials." This point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags from local raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by and between the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate a Kenafmill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The explanatory note on page 1 of the same brochure states that, the venture "is the first serious attempt in this country to use 100% locally grown raw

Credit Transactions Full Text Cases Atty. Adviento

materials notably kenaf which is presently grown commercially in theIsland of Mindanao where the proposed jutemill is located ..." This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources as to the availability of local raw materials to provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1) stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my company and associates will be able to bring in sufficient jute materials as may be necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be made as follows: a) For the payment of the machineries with the Prudential Bank & Trust Company P250,000.00 (For immediate release) b) For the purchase of materials ment per attached list to enable mill to operate 182,413.91 c) For raw materials and labor 67,586.09 1) P25,000.00 ing of the for $25,000.00. 2) P25,000.00 of raw jute. 3) P17,586.09 to mill is ready to operate. to be released letter of credit to be be released as on for the raw upon soon as openjute arrival the and the equipjute receipt for jute mill

11

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms thereof. We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which provides: ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perferted until the delivery of the object of the contract. There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages. It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and (2) that there is prospect of increased production thereof to provide adequately for the requirements of the factory." The imposition of those conditions was by no means a deviation from the terms of the agreement, but rather a step in its implementation. There was nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954, namely "that the proceeds of the loan shall be utilizedexclusively for the following purposes: for construction of factory building P250,000.00; for payment of the balance of purchase price of machinery and equipment P240,900.00; for working capital P9,100.00." Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute "will not be able in sufficient quantity this year or probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon. When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the nature cf mutual desistance what Manresa terms "mutuo disenso" 1 which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. 2 The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for cancellation of the mortgage carried no reservation of whatever rights it believed it might have against RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan to finance a rice and corn project, which application was disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at its own request, that Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond doubt that the said agreement had been extinguished by mutual desistance and that on the initiative of the plaintiff-appellee itself. With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the respective briefs of the parties. WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the plaintiff-appellee. EN BANC

released

On January 25, 1955 RFC sent to Saura, Inc. the following reply: Dear Sirs: This is with reference to your letter of January 21, 1955, regarding the release of your loan under consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if revived, are proposed to be made from time to time, subject to availability of funds towards the end that the sack factory shall be placed in actual operating status. We shall be able to act on your request for revised purpose and manner of releases upon re-appraisal of the securities offered for the loan. With respect to our requirement that the Department of Agriculture and Natural Resources certify that the raw materials needed are available in the immediate vicinity and that there is prospect of increased production thereof to provide adequately the requirements of the factory, we wish to reiterate that the basis of the original approval is to develop the manufacture of sacks on the basis of the locally available raw materials. Your statement that you will have to rely on the importation of jute and your request that we give you assurance that your company will be able to bring in sufficient jute materials as may be necessary for the operation of your factory, would not be in line with our principle in approving the loan. With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc. It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955. On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff from completing or paying contractual commitments it had entered into, in connection with its jute mill project.

Credit Transactions Full Text Cases Atty. Adviento

G.R. No. L-1927 May 31, 1949 ROO, petitioner, CRISTOBAL vs. JOSE L. GOMEZ, ET AL., respondents. Alfonso Farcon Capistrano & Azores for respondents. BENGZON, J.: This petition to review a decision of the Court of Appeals was admitted mainly because it involves one phase of the vital contemporary question: the repayment of loans given in Japanese fiat currency during the last war of the Pacific. On October 5, 1944, Cristobal Roo received as a loan four thousand pesos in Japanese fiat money from Jose L. Gomez. He informed the later that he would use the money to purchase a jitney; and he agreed to pay that debt one year after date in the currency then prevailing. He signed a promissory note of the following tenor: For value received, I promise to pay one year after date the sum of four thousand pesos (4,000) to Jose L. Gomez. It is agreed that this will not earn any interest and the payment It is agreed that this will not earn any interest and the payment prevailing by the end of the stipulated period of one year. In consideration of this generous loan, I renounce any right that may come to me by reason of any postwar arrangement, of privilege that may come to me by legislation wherein this sum may be devalued. I renounce flatly and absolutely any condition, term right or privilege which in any way will prejudice the right engendered by this agreement wherein Atty. Jose L. Gomez will receive by right his money in the amount of P4,000. I affirm the legal tender, currency or any medium of exchange, or money in this sum of P4,000 will be paid by me to Jose L. Gomez one year after this date, October 5, 1944. On October 15, 1945, i.e., after the liberation, Roo was sued for payment in the Laguna Court of First Instance. His main defense was his liability should not exceed the equivalent of 4,000 pesos "mickey mouse" money and could not be 4,000 pesos Philippine currency, because the contract would be void as contrary to law, public order and good morals. After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge, ordered the defendant Roo to pay four thousand pesos in Philippine currency with legal interest from the presentation of the complaint plus costs. On appeal the Court of Appeals in a decision written by Mr. Justice Jugo, affirmed the judgment with costs. It declared being a mechanic who knew English was not deceived into signing the promissory note, and that the contents of the same had not been misrepresented to him. It pronounced the contract valid and enforceable according to its terms and conditions. One basic principle of the law on contracts of the Civil Code is that "the contracting parties may establish any pacts, clauses and conditions they may deem advisable, provided they are not contrary to law, morals or public order." (Article 1255.) Another principle is that "obligations arising from contracts shall have the force of law between the contracting parties and must be performed in accordance with their stipulations" (Article 1091). Invoking the above proviso, Roo asserts this contract is contrary to the Usury law, because on the basis of calculations by Government experts he only received the equivalent of one hundred Philippine pesos and now he is required to disgorge four thousand pesos or interest greatly in excess of the lawful rates. for

12

petitioner.

But he is not paying interest. Precisely the contract says that the money received "will not earn any interest." Furthermore, he received four thousand pesos; and he is required to pay four thousand pesos exactly. The increased intrinsic value and purchasing power of the current money is consequence of an event (change of currency) which at the time of the contract neither party knew would certainly happen within the period of one year. They both elected to subject their rights and obligations to that contingency. If within one year another kind of currency became legal tender, Gomez would probably get more for his money. If the same Japanese currency continued, he would get less, the value of Japanese money being then on the downgrade. Our legislation has a word for these contracts: aleatory. The Civil Code recognizes their validity (see art. 1790 and Manresa's comment thereon) on a par with insurance policies and life annuities. The eventual gain of Gomez in this transaction is not interest within the meaning of Usury Laws. Interest is some additional money to be paid in any event, which is not the case herein, because Gomez might have gotten less if the Japanese occupation had extended to the end of 1945 or if the liberation forces had chosen to permit the circulation of the Japanese notes. Moreover, Roo argues, the deal was immoral because taking advantage of his superior knowledge of war developments Gomez imposed on him this onerous obligation. In the first place, the Court of Appeals found that he voluntary agreed to sign and signed the document without having been misled as to its contents and "in so far as knowledge of war events was concerned" both parties were on "equal footing". In the second place although on October 5, 1944 it was possible to surmise the impending American invasion, the date of victory or liberation was anybody's guess. In the third place there was the possibility that upon-re-occupation the Philippine Government would not invalidate the Japanese currency, which after all had been forced upon the people in exchange for valuable goods and property. The odds were about even when Roo and Gomez played their bargaining game. There was no overreaching, nor unfair advantage. Again Roo alleges it is immoral and against public order for a man to obtain four thousand pesos in return for an investment of forty pesos (his estimate of the value of the Japanese money he borrowed). According to his line of reasoning it would be immoral for the homeowner to recover ten thousand pesos (P10,000, when his house is burned, because he invested only about one hundred pesos for the insurance policy. And when the holder of a sweepstakes ticket who paid only four pesos luckily obtains the first prize of one hundred thousand pesos or over, the whole business is immoral or against public order. In this connection we should explain that this decision does not cover situations where borrowers of Japanese fiat currency promised to repay "the same amount" or promised to return the same number of pesos "in Philippines currency" or "in the currency prevailing after the war." There may be room for argument when those litigations come up for adjudication. All we say here and now is that the contract in question is legal and obligatory. A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We opine with the Court of Appeals that the matter involve a defect in procedure which does not amount to prejudicial error. Wherefore, the appealed judgment will be affirmed with costs. So ordered. Moran, C.J., Ozaeta, Tuason, Montemayor and Reyes, JJ., concur.

G.R. No. L-1328

September 9, 1949 AGUEDA G. DE

MARIANO NEPOMUCENO and NEPOMUCENO, plaintiffs-appellants,

Credit Transactions Full Text Cases Atty. Adviento

vs. EDILBERTO appellees. OZAETA, J.: On November 14, 1938, appellant Mariano Nepomuceno executed a mortgage in favor of the appellees on a parcel of land situated in the municipality of Angeles, Province of Pampanga, to secure the payment within the period of seven years from the date of the mortgage of the sum of P24,000 together with interest thereon at the rate of 8 per cent per annum. On September 30, 1943, that is to say, more than two years before the maturity of said mortgage, the parties executed a notarial document entitled "Partial Novation of Contract" whereby they modified the terms of said mortgage as follows: (1) From December 8, 1941, to January 1, 1944, the interest on the mortgage shall be at 6 per cent per annum, unpaid interest also paying interest also paying interest at the same rate. (2) From January 1, 1944, up to the end of the war, the mortgage debt shall likewise bear interest at 6 per cent. Unpaid interest during this period shall however not bear any interest. (3) At the end of the war the interest shall again become 8 per cent in accordance with the original contract of mortgage. (4) While the war goes on, the mortgagor, his administrators or assigns, cannot redeem the property mortgaged. (5) When the mortgage lapses on November 14, 1945, the mortgage may continue for another ten years if the mortgagor so chooses, but during this period he may pay only one half of the capital. On July 21, 1944, the mortgagor Mariano Nepomuceno and his wife Agueda G. de Nepomuceno filed their complaint in this case against the mortgagees, which compplaint, as amended on September 7, 1944, alleged the execution of the contract of mortgage and its principal novation as above indicated, and 7. That as per Annex B, No. 4, it is provided that the mortgagor cannot redeem the property mortgaged while the war goes on; and that notwithstanding the said provision the herein plaintiffs-mortgagors are now willing to pay the amount of the indebtedness together with the corresponding interest due thereon; 8. That on July 19, 1944, the mortgagors-plaintiffs went to the house of the mortgagees-defendants to tender payment of the balance of the mortgage debt with their corresponding interest, but said spouses defendants refuse and still refuse to accept payment; 9. That because of this refusal of the defendants to accept tender of payment on the mortgage consideration, the plaintiffs suffered and still suffer damages in the amount of P5,000; 10. That the plaintiffs are now and have deposited with the Clerk of Court of First Instance of Pampanga the amount of P22,356 for the payment of the mortgage debt and the interest due thereon; Wherefore, it is more respectfully prayed that this Honorable Court will issue an order in the following tenor: (a) Ordering the defendants to accept tender of payment from the plaintiffs; (b) Ordering defendants to execute the corresponding deed of release of mortgage; (c) Ordering defendants to pay damages in the amount of P5,000; and (d) Ordering defendants to pay the amount of P3,000 as attorney's fee and the costs of suit and any other remedy just and equitable in the premises. After the trial the court sustained the defense that the complaint had been prematurely presented and dismissed it with costs. Appellants contend that the stipulation in the contract of September 30, 1943, that "while the war goes on the mortgagor, his administrators or assigns cannot redeem the property mortgaged," is against public policy and therefore null and void. They cite and rely on article 1255 of the Civil Code, which provides: A. NARCISO and MAURA SUAREZ, defendants-

13

ART. 1255. The contracting parties may establish any pacts, clauses, and conditions they may deem advisable, provided they are not contrary to law, morals, or public order. They argue that "it would certainly be against public policy and a restraint on the freedom of commerce to compel a debtor not to release his property from a lien even if he wanted to by the payment of the indebtedness while the war goes on, which was undoubtedly of a very uncertain duration." The first two paragraphs of article 1125 of the Civil Code provide: ART. 1125. Obligation for the performance of which a day certain has been fixed shall be demandable only when the day arrives. A day certain is understood to be one which must necessarily arrive, even though its date be unknown. Article 1127 says: ART. 1127. Whenever a term for the performance of an obligation is fixed, it is presumed to have been established for the benefit of the creditor and that of the debtor, unless from its tenor or from other circumstances it should appear that the term was established for the benefit of one or the other. It will be noted that the original contract of mortgage provided for interest at 8 per cent per annum and that the principal together with the interest was payable within the period of seven years from November 14, 1938. But by mutual agreement of the parties that term was modified on September 30, 1943, by reducing the interest to 6 per cent per annum from December 8, 1941, until the end of the war and by stipulating that the mortgagor shall not pay off the mortgage while the war went on. We find nothing immoral or violative of public order in that stipulation. The mortgagees apparently did not want to have their prewar credit paid with Japanese military notes, and the mortgagor voluntarily agreed not to do so in consideration of the reduction of the rate of interest. It was a perfectly equitable and valid transaction, in conformity with the provision of the Civil Code hereinabove quoted. Appellants were bound by said contract and appellees were not obligated to receive the payment before it was due. Hence the latter had reason not to accept the tender of payment made to them by the former. The judgment is affirmed, with costs against the appellants. EQUITABLE PCI BANK,*G.R. No. 171545 AIMEE YU and BEJAN LIONEL APAS, Petitioners,Present: PUNO, C.J., Chairperson, - v e r s u s -cralawSANDOVAL-GUTIERREZ, CORONA, AZCUNA and LEONARDO-DE CASTRO, JJ. NG SHEUNG NGOR** doing business under the name and style KEN MARKETING, cralawPromulgated: KEN APPLIANCE DIVISION, INC. and BENJAMIN E. GO, Respondents.December 19, 2007 CORONA, J.: This petition for review on certiorari[1] seeks to set aside the decision[2] of the Court of Appeals (CA) in CA-G.R. SP No. 83112 and its resolution[3] denying reconsideration. On October 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance Division, Inc. and Benjamin E. Go filed an action for annulment and/or reformation of documents and contracts[5] against petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu City.[6]They claimed that Equitable induced them to avail of its peso and dollar credit facilities by offering low interest rates[7] so they accepted Equitable's proposal and signed the bank's pre-printed promissory notes on various dates beginning 1996. They, however, were unaware that the documents contained identical escalation clauses granting Equitable authority to increase interest rates without their consent.[8]chanroblesvirtuallawlibrary

Credit Transactions Full Text Cases Atty. Adviento

cralawEquitable, in its answer, asserted that respondents knowingly accepted all the terms and conditions contained in the promissory notes. [9] In fact, they continuously availed of and benefited from Equitable's credit facilities for five years.[10]chanroblesvirtuallawlibrary cralawAfter trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone, Equitable restructured respondents' loans amounting to US$228,200 and P1,000,000.[11] The trial court, however, invalidated the escalation clause contained therein because it violated the principle of mutuality of contracts.[12] Nevertheless, it took judicial notice of the steep depreciation of the peso during the intervening period[13] and declared the existence of extraordinary deflation.[14] Consequently, the RTC ordered the use of the 1996 dollar exchange rate in computing respondents' dollar-denominated loans.[15] Lastly, because the business reputation of respondents was (allegedly) severely damaged when Equitable froze their accounts,[16] the trial court awarded moral and exemplary damages to them.[17]chanroblesvirtuallawlibrary cralawThe dispositive portion of the February 5, 2004 decision[18] provided: WHEREFORE, premises considered, judgment is hereby rendered: RTC

14

cralawOn March 24, 2004, the RTC issued an omnibus orderdenying Equitable's motion for reconsideration for lack of merit[25]and ordered the issuance of a writ of execution in favor of respondents.[26]According to the RTC, because respondents did not move for the reconsideration of the previous order (denying due course to the parties notices of appeal), [27] the February 5, 2004 decision became final and executory as to both parties and a writ of execution against Equitable was in order. [28]chanroblesvirtuallawlibrary cralawA writ of execution was thereafter issued[29] and three real properties of Equitable were levied upon.[30] cralawOn March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004 order.[31] It, however, withdrew that petition on March 30, 2004[32] and instead filed a petition for certiorari with an application for an injunction in the CA to enjoin the implementation and execution of the March 24, 2004 omnibus order.[33] cralawOn June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary injunction was correspondingly issued. [34]chanroblesvirtuallawlibrary cralawNotwithstanding the writ of injunction, the properties of Equitable previously levied upon were sold in a public auction on July 1, 2004. Respondents were the highest bidders and certificates of sale were issued to them.[35] cralawOn August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the sheriffs who conducted the sale in contempt for proceeding with the auction despite the injunction order of the CA.[36] cralawOn October 28, 2005, the CA dismissed the petition for certiorari. [37] It found Equitable guilty of forum shopping because the bank filed its petition for certiorari in the CA several hours before withdrawing its petition for relief in the RTC.[38]Moreover, Equitable failed to disclose, both in the statement of material dates and certificate of non-forum shopping (attached to its petition for certiorari in the CA), that it had a pending petition for relief in the RTC.[39]chanroblesvirtuallawlibrary cralaw Equitable moved for reconsideration[40] but it was denied.[41] Thus, this petition. cralawEquitable asserts that it was not guilty of forum shopping because the petition for relief was withdrawn on the same daythe petition for certiorari was filed.[42]It likewise avers that its petition for certiorari was meritorious because the RTC committed grave abuse of discretion in issuing the March 24, 2004 omnibus order which was based on an erroneous assumption. The March 1, 2004 order denying its notice of appeal for non payment of appeal fees was erroneous because it had in fact paid the required fees.[43] Thus, the RTC, by issuing its March 24, 2004 omnibus order, effectively prevented Equitable from appealing the patently wrong February 5, 2004 decision.[44]chanroblesvirtuallawlibrary cralawThis petition is meritorious. EQUITABLE WAS NOT GUILTY OF FORUM SHOPPING

A) Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit placed on hold status; B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos as moral damages; C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos as exemplary damages; D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents], jointly and severally, the sum of [t]wo [m]illion [p]esos as moral and exemplary damages; E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally, to pay [respondents'] attorney's fees in the sum of P300,000; litigation expenses in the sum of P50,000 and the cost of suit; F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the unpaid principal obligation for the peso loan as well as the unpaid obligation for the dollar denominated loan; G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable] interest as follows: 1) 12% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment of the dollar obligation is the conversion rate of P26.50 per dollar availed of at the time of incurring of the obligation in accordance with Article 1250 of the Civil Code of the Philippines; H) Dismissing [Equitable's] counterclaim except the payment of the aforestated unpaid principal loan obligations and interest. cralawSO ORDERED.[19] Equitable and respondents filed their respective notices of appeal. [20]chanroblesvirtuallawlibrary In the March 1, 2004 order of the RTC, both notices were denied due course because Equitable and respondents failed to submit proof that they paid their respective appeal fees.[21] WHEREFORE, premises considered, the appeal interposed by defendants from the Decision in the above-entitled case is DENIED due course. As of February 27, 2004, the Decision dated February 5, 2004, is considered final and executory in so far as [Equitable, Aimee Yu and Bejan Lionel Apas] are concerned.[22] (emphasis supplied) Equitable moved for the reconsideration of the March 1, 2004 order of the RTC[23] on the ground that it did in fact pay the appeal fees. Respondents, on the other hand, prayed for the issuance of a writ of execution.[24] cralaw

Forum shopping exists when two or more actions involving the same transactions, essential facts and circumstances are filed and those actions raise identical issues, subject matter and causes of action.[45] The test is whether, in two or more pending cases, there is identity of parties, rights or causes of actions and reliefs.[46] cralawEquitable's petition for relief in the RTC and its petition for certiorari in the CA did not have identical causes of action. The petition for relief from the denial of its notice of appeal was based on the RTCs judgment or final order preventing it from taking an appeal by fraud, accident, mistake or excusable negligence.[47] On the other hand, its petition for certiorari in the CA, a special civil action, sought to correct the grave abuse of discretion amounting to lack of jurisdiction committed by the RTC. [48]chanroblesvirtuallawlibrary In a petition for relief, the judgment or final order is rendered by a court with competent jurisdiction. In a petition for certiorari, the order is rendered by a court without or in excess of its jurisdiction. cralawMoreover, Equitable substantially complied with the rule on nonforum shopping when it moved to withdraw its petition for relief in the RTC on the same day (in fact just four hours and forty minutes after) it filed the

Credit Transactions Full Text Cases Atty. Adviento

petition for certiorari in the CA. Even if Equitable failed to disclose that it had a pending petition for relief in the RTC, it rectified what was doubtlessly a careless oversight by withdrawing the petition for relief just a few hours after it filed its petition for certiorari in the CA a clear indication that it had no intention of maintaining the two actions at the same time. THE TRIAL COURT COMMITTED GRAVE ABUSE OF DISCRETION IN ISSUING ITS MARCH 1, 2004 AND MARCH24,2004 ORDERS cralaw Section 1, Rule 65 of the Rules of Court provides: Section 1. Petition for Certiorari. When any tribunal, board or officer exercising judicial or quasi-judicial function has acted without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, nor any plain, speedy or adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty and praying that judgment be rendered annulling or modifying the proceedings of such tribunal, board or officer, and granting such incidental reliefs as law and justice may require. cralawThe petition shall be accompanied by a certified true copy of the judgment, order or resolution subject thereof, copies of all pleadings and documents relevant and pertinent thereto, and a sworn certificate of nonforum shopping as provided in the third paragraph of Section 3, Rule 46. There are two substantial requirements in a petition for certiorari. These are: 1. that the tribunal, board or officer exercising judicial or quasi-judicial functions acted without or in excess of his or its jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction; and 2. that there is no appeal or any plain, speedy and adequate remedy in the ordinary course of law. cralawFor a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must show that the public respondent patently and grossly abused his discretion and that abuse amounted to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law or to act at all in contemplation of law, as where the power was exercised in an arbitrary and despotic manner by reason of passion or hostility.[49] cralawThe March 1, 2004 order denied due course to the notices of appeal of both Equitable and respondents. However, it declared that the February 5, 2004 decision was final and executory only with respect to Equitable.[50]As expected, the March 24, 2004 omnibus order denied Equitable's motion for reconsideration and granted respondents' motion for the issuance of a writ of execution.[51] The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to prevent Equitable, et al. from appealing the February 5, 2004 decision. Not only that. The execution of the decision was undertaken with indecent haste, effectively obviating or defeating Equitable's right to avail of possible legal remedies. No matter how we look at it, the RTC committed grave abuse of discretion in rendering those orders. cralawWith regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary course of law, we hold that there was none. The RTC denied due course to its notice of appeal in the March 1, 2004 order. It affirmed that denial in the March 24, 2004 omnibus order. Hence, there was no way Equitable could have possibly appealed the February 5, 2004 decision.[52] cralawAlthough Equitable filed a petition for relief from the March 24, 2004 order, that petition was not a plain, speedy and adequate remedy in the ordinary course of law.[53]A petition for relief under Rule 38 is an equitable remedy allowed only in exceptional circumstances or where there is no other available or adequate remedy.[54]chanroblesvirtuallawlibrary cralawThus, we grant Equitable's petition for certiorari and consequently give due course to its appeal. EQUITABLE RAISED PETITIONFORREVIEW PURE QUESTIONS OF LAW IN ITS

15

cralawThe jurisdiction of this Court in Rule 45 petitions is limited to questions of law.[55] There is a question of law when the doubt or controversy concerns the correct application of law or jurisprudence to a certain set of facts; or when the issue does not call for the probative value of the evidence presented, the truth or falsehood of facts being admitted. [56] cralawEquitable does not assail the factual findings of the trial court. Its arguments essentially focus on the nullity of the RTCs February 5, 2004 decision. Equitable points out that that decision was patently erroneous, specially the exorbitant award of damages, as it was inconsistent with existing law and jurisprudence.[57] THE PROMISSORY NOTES WEREVALID cralaw The RTC upheld the validity of the promissory notes despite respondents assertion that those documents were contracts of adhesion. cralawA contract of adhesion is a contract whereby almost all of its provisions are drafted by one party.[58] The participation of the other party is limited to affixing his signature or his adhesion to the contract.[59] For this reason, contracts of adhesion are strictly construed against the party who drafted it.[60]chanroblesvirtuallawlibrary cralawIt is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on the contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A contract of adhesion becomes void only when the dominant party takes advantage of the weakness of the other party, completely depriving the latter of the opportunity to bargain on equal footing.[61]chanroblesvirtuallawlibrary cralawThat was not the case here. As the trial court noted, if the terms and conditions offered by Equitable had been truly prejudicial to respondents, they would have walked out and negotiated with another bank at the first available instance. But they did not. Instead, they continuously availed of Equitable's credit facilities for five long years. cralawWhile the RTC categorically found that respondents had outstanding dollar- and peso-denominated loans with Equitable, it, however, failed to ascertain the total amount due (principal, interest and penalties, if any) as of July 9, 2001.The trial court did not explain how it arrived at the amounts of US$228,200 and P1,000,000.[62] In Metro Manila Transit Corporation v. D.M. Consunji,[63] we reiterated that this Court is not a trier of facts and it shall pass upon them only for compelling reasons which unfortunately are not present in this case.[64] Hence, we ordered the partial remand of the case for the sole purpose of determining the amount of actual damages.[65] ESCALATION CLAUSE VIOLATED MUTUALITYOFCONTRACTS THE PRINCIPLE OF

CRALAWEscalation clauses are not void per se. However, one which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement is void. Clauses of that nature violate the principle of mutuality of contracts.[66] Article 1308[67] of the Civil Code holds that a contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.[68] cralawFor this reason, we have consistently held that a valid escalation clause provides: 1. that the rate of interest will only be increased if the applicable maximum rate of interest is increased by law or by the Monetary Board; and 2. that the stipulated rate of interest will be reduced if theapplicable maximum rate of interest is reduced by law or by the Monetary Board (de-escalation clause).[69] cralawThe RTC found that Equitable's promissory notes uniformly stated: If subject promissory note is extended, the interest for subsequent extensions shall be at such rate as shall be determined by the bank.[70]

Credit Transactions Full Text Cases Atty. Adviento

Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended. Respondents had no choice but to accept them. This was a violation of Article 1308 of the Civil Code. Furthermore, the assailed escalation clause did not contain the necessary provisions for validity, that is, it neither provided that the rate of interest would be increased only if allowed by law or the Monetary Board, nor allowed deescalation. For these reasons, the escalation clause was void. cralawWith regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National Bank[71] we held that, because the escalation clause was annulled, the principal amount of the loan was subject to the original or stipulated rate of interest. Upon maturity, the amount due was subject to legal interest at the rate of 12% per annum. [72]chanroblesvirtuallawlibrary cralaw cralawConsequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their dollar-denominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001 to July 9, 2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts due. THERE WAS NO EXTRAORDINARYDEFLATION Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency (that is, beyond the common fluctuation in the value of currency) and such decrease could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the obligation. Extraordinary deflation, on the other hand, involves an inverse situation.[73] cralaw cralawArticle 1250 of the Civil Code provides: Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should intervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be proven: 1. that there was an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng Pilipinas (BSP);[74] 2. that the obligation was contractual in nature;[75] and

16

In culpa contractual or breach of contract, moral damages are recoverable only if the defendant acted fraudulently or in bad faith or in wanton disregard of his contractual obligations.[83] The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. [84]chanroblesvirtuallawlibrary cralaw cralawThe RTC found that respondents did not pay Equitable the interest due on February 9, 2001 (or any month thereafter prior to the maturity of the loan)[85] or the amount due (principal plus interest) due on July 9, 2001.[86] Consequently, Equitable applied respondents' deposits to their loans upon maturity. cralawThe relationship between a bank and its depositor is that of creditor and debtor.[87] For this reason, a bank has the right to set-off the deposits in its hands for the payment of a depositor's indebtedness. [88]chanroblesvirtuallawlibrary cralawRespondents indeed defaulted on their obligation. For this reason, Equitable had the option to exercise its legal right to set-off or compensation. However, the RTC mistakenly (or, as it now appears, deliberately) concluded that Equitable acted fraudulently or in bad faith or in wanton disregard of its contractual obligations despite the absence of proof. The undeniable fact was that, whatever damage respondents sustained was purely the consequence of their failure to pay their loans. There was therefore absolutely no basis for the award of moral damages to them. cralawNeither was there reason to award exemplary damages. Since respondents were not entitled to moral damages, neither should they be awarded exemplary damages.[89] And if respondents were not entitled to moral and exemplary damages, neither could they be awarded attorney's fees and litigation expenses.[90]chanroblesvirtuallawlibrary cralawACCORDINGLY, the petition is hereby GRANTED. cralawThe October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CA-G.R. SP No. 83112 are hereby REVERSED and SET ASIDE. cralawThe March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil Case No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion amounting to lack or excess of jurisdiction. All proceedings undertaken pursuant thereto are likewise declared null and void. cralawThe March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is therefore given due course. cralawThe February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby entered: 1. ordering respondents Ng Sheung Ngor, doing business under the name and style of Ken Marketing, Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank the principal amount of their dollar- and peso-denominated loans; 2. ordering respondents Ng Sheung Ngor, doing business under the name and style of Ken Marketing, Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI Bank interest at: a) 12.66% p.a. with respect to their dollar-denominated loans from January 10, 2001 to July 9, 2001; b) 20% p.a.with respect to their peso-denominated loans from January 10, 2001 to July 9, 2001;[91] c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,[92]the total amount due on July 9, 2001 shall earn legal interest at 12% p.a. from the time petitioner Equitable PCI Bank demanded payment, whether judicially or extra-judicially; and d) after this Decision becomes final and executory, the applicable rate shall be 12% p.a.until full satisfaction; 3. all other claims and counterclaims are dismissed. cralawAs a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact amounts due on the respective dollardenominated and peso-denominated loans, as of July 9, 2001, of

3. that the parties expressly agreed to consider the effects of the extraordinary inflation or deflation.[76] Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation.Moreover, although the obligation in this instance arose out of a contract, the parties did not agree to recognize the effects of extraordinary inflation (or deflation).[77] The RTC never mentioned that there was a such stipulation either in the promissory note or loan agreement. Therefore, respondents should pay their dollar-denominated loans at the exchange rate fixed by the BSP on the date of maturity. [78]chanroblesvirtuallawlibrary THE AWARD LACKEDBASIS OF MORAL AND EXEMPLARY DAMAGES

cralawMoral damages are in the category of an award designed to compensate the claimant for actual injury suffered, not to impose a penalty to the wrongdoer.[79] To be entitled to moral damages, a claimant must prove: 1. That he or she suffered besmirched reputation, or physical, mental or psychological suffering sustained by the claimant; 2. That the defendant committed a wrongful act or omission;

3. That the wrongful act or omission was the proximate cause of the damages the claimant sustained; 4. The case is predicated on any of the instances expressed or envisioned by Article 2219[80] and 2220[81]. [82]

Credit Transactions Full Text Cases Atty. Adviento

respondents Ng Sheung Ngor, doing business under the name and style of Ken Marketing, Ken Appliance Division and Benjamin E. Go. SO ORDERED. G.R. No. 169617 April 4, 2007 HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, Petitioners, vs. SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, Represented by ZOILO LANDRITO, as their Attorney-in-Fact, Respondents.

17

and gave them until July 1992 to pay the said amount. However, upon inquiry, they found out that on 24 June 1992, the Spouses Espiritu had already executed an Affidavit of Consolidation of Ownership and registered the mortgaged property in their name, and that the Register of Deeds of Makati had already issued Transfer Certificate of Title No. 179802 in the name of the Spouses Espiritu. On 9 October 1992, the Spouses Landrito, represented by their son Zoilo Landrito, filed an action for annulment or reconveyance of title, with damages against the Spouses Espiritu before Branch 146 of the Regional Trial Court of Makati.9 Among the allegations in their Complaint, they stated that the Spouses Espiritu, as creditors and mortgagees, "imposed interest rates that are shocking to ones moral senses."10 The trial court dismissed the complaint and upheld the validity of the foreclosure sale. The trial court ordered in its Decision, dated 13 December 1995:11 WHEREFORE, all the foregoing premises considered, the herein complaint is hereby dismissed forthwith. Without pronouncements to costs. The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41 of the 1997 Rules of Court. In its Decision dated 31 August 2005, the Court of Appeals reversed the trial courts decision, decreeing that the five percent (5%) interest imposed by the Spouses Espiritu on the first month and the varying interest rates imposed for the succeeding months contravened the provisions of the Real Estate Mortgage contract which provided that interest at the legal rate, i.e., 12% per annum, would be imposed. It also ruled that although the Usury Law had been rendered ineffective by Central Bank Circular No. 905, which, in effect, removed the ceiling rates prescribed for interests, thus, allowing parties to freely stipulate thereon, the courts may render void any stipulation of interest rates which are found iniquitous or unconscionable. As a result, the Court of Appeals set the interest rate of the loan at the legal rate, or 12% per annum.12 Furthermore, the Court of Appeals held that the action for reconveyance, filed by the Spouses Landrito, is still a proper remedy. Even if the Spouses Landrito failed to redeem the property within the one-year redemption period provided by law, the action for reconveyance remained as a remedy available to a landowner whose property was wrongfully registered in anothers name since the subject property has not yet passed to an innocent purchaser for value.13 In the decretal portion of its Decision, the Court of Appeals ruled14: WHEREFORE, the instant appeal is hereby GRANTED. The assailed Decision dated December 13, 1995 of the Regional Trial Court of Makati, Branch 146 in Civil Case No. 92-2920 is hereby REVERSED and SET ASIDE, and a new one is hereby entered as follows: (1) The legal rate of 12% per annum is hereby FIXED to be applied as the interest of the loan; and (2) Conditioned upon the payment of the loan, defendants-appellees spouses Zoilo and Primitiva Espiritu are hereby ordered to reconvey Transfer Certificate of Title No. S-48948 to appellant spouses Maximo and Paz Landrito. The case is REMANDED to the Trial Court for the above determination. Hence, the present petition. The following issues were raised:15 I THE HONORABLE COURT OF APPEALS ERRED IN REVERSING AND SETTING ASIDE THE DECISION OF THE TRIAL COURT AND ORDERING HEREIN PETITIONERS TO RECONVEY TRANSFER CERTIFICATE OF TITLE NO. 18918 TO HEREIN RESPONDENTS, WITHOUT ANY FACTUAL OR LEGAL BASIS THEREFOR. II THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT HEREIN PETITIONERS UNILATERALLY IMPOSED ON HEREIN RESPONDENTS THE ALLEGEDLY UNREASONABLE INTERESTS ON THE MORTGAGE LOANS. III THE HONORABLE COURT OF APPEALS ERRED IN NOT CONSIDERING THAT HEREIN RESPONDENTS ATTORNEY-IN-FACT IS NOT ARMED WITH AUTHORITY TO FILE AND PROSECUTE THIS CASE.

CHICO-NAZARIO, J.: This is a petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision of the Court of Appeals,1 dated 31 August 2005, reversing the Decision rendered by the trial court on 13 December 1995. The Court of Appeals, in its assailed Decision, fixed the interest rate of the loan between the parties at 12% per annum, and ordered the Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) to reconvey the subject property to the Spouses Landrito conditioned upon the payment of the loan. Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all surnamed ESPIRITU, are the only children and legal heirs of the Spouses Zoilo and Primitiva Espiritu, who both died during the pendency of the case before the Honorable Court of Appeals.2 Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein represented by their son and attorney-in-fact, Zoilo Landrito.3 On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the amount of P350,000.00 payable in three months. To secure the loan, the Spouses Landrito executed a real estate mortgage over a five hundred forty (540) square meter lot located in Alabang, Muntinlupa, covered by Transfer Certificate of Title No. S-48948, in favor of the Spouses Espiritu. From the P350,000.00 that the Landritos were supposed to receive, P17,500.00 was deducted as interest for the first month which was equivalent to five percent of the principal debt, andP7,500.00 was further deducted as service fee. Thus, they actually received a net amount of P325,000.00. The agreement, however, provided that the principal indebtedness earns "interest at the legal rate."4 After three months, when the debt became due and demandable, the Spouses Landrito were unable to pay the principal, and had not been able to make any interest payments other than the amount initially deducted from the proceeds of the loan. On 29 December 1986, the loan agreement was extended to 4 January 1987 through an Amendment of Real Estate Mortgage. The loan was restructured in such a way that the unpaid interest became part of the principal, thus increasing the principal to P385,000. The new loan agreement adopted all other terms and conditions contained in first agreement.5 Due to the continued inability of the Spouses Landritos to settle their obligations with the Spouses Espiritu, the loan agreement was renewed three more times. In all these subsequent renewals, the same terms and conditions found in the first agreement were retained. On 29 July 1987, the principal was increased to P507,000.00 inclusive of running interest. On 11 March 1988, it was increased to P647,000.00. And on 21 October 1988, the principal was increased to P874,125.00.6 At the hearing before the trial court, Zoilo Espiritu testified that the increase in the principal in each amendment of the loan agreement did not correspond to the amount delivered to the Spouses Landrito. Rather, the increase in the principal had been due to unpaid interest and other charges.7 The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the mortgaged property on 31 October 1990. During the auction sale, the property was sold to the Spouses Espiritu as the lone bidder. On 9 January 1991, the Sheriffs Certificate of Sale was annotated on the title of the mortgaged property, giving the Spouses Landrito until 8 January 1992 to redeem the property. 8 The Spouses Landrito failed to redeem the subject property although they alleged that they negotiated for the redemption of the property as early as 30 October 1991. While the negotiated price for the land started atP1,595,392.79, it was allegedly increased by the Spouses Espiritu from time to time. Spouses Landrito allegedly tendered two managers checks and some cash, totaling P1,800,000.00 to the Spouses Espiritu on 13 January 1992, but the latter refused to accept the same. They also alleged that the Spouses Espiritu increased the amount demanded to P2.5 Million

Credit Transactions Full Text Cases Atty. Adviento

The petition is without merit. The Real Estate Mortgage executed between the parties specified that "the principal indebtedness shall earn interest at the legal rate." The agreement contained no other provision on interest or any fees or charges incident to the debt. In at least three contracts, all designated as Amendment of Real Estate Mortgage, the interest rate imposed was, likewise, unspecified. During his testimony, Zoilo Espiritu admitted that the increase in the principal in each of the Amendments of the Real Estate Mortgage consists of interest and charges. The Spouses Espiritu alleged that the parties had agreed on the interest and charges imposed in connection with the loan, hereunder enumerated: 1. P17,500.00 was the interest charged for the first month and P7,500.00 was imposed as service fee. 2. P35,000.00 interest and charges, or the difference between the P350,000.00 principal in the Real Estate Mortgage dated 5 September 1986 and the P385,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 December 1986. 3. P132,000.00 interest and charges, or the difference between the P385,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 December 1986 and the P507,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 July 1987. 4. P140,000.00 interest and charges, or the difference between the P507,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 July 1987 and the P647,000.00 principal in the Amendment of the Real Estate Mortgage dated 11 March 1988. 5. P227,125.00 interest and charges, or the difference between the P647,000.00 principal in the Amendment of the Real Estate Mortgage dated 11 March 1988 and the P874,125 principal in the Amendment of the Real Estate Mortgage dated 21 October 1988. The total interest and charges amounting to P559,125.00 on the original principal of P350,000 was accumulated over only two years and one month. These charges are not found in any written agreement between the parties. The records fail to show any computation on how much interest was charged and what other fees were imposed. Not only did lack of transparency characterize the aforementioned agreements, the interest rates and the service charge imposed, at an average of 6.39% per month, are excessive. In enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State seeks to protect its citizens from a lack of awareness of the true cost of credit by assuring the full disclosure of such costs. Section 4, in connection with Section 3(3)16 of the said law, gives a detailed enumeration of the specific information required to be disclosed, among which are the interest and other charges incident to the extension of credit. Section 617 of the same law imposes on anyone who willfully violates these provisions, sanctions which include civil liability, and a fine and/or imprisonment. Although any action seeking to impose either civil or criminal liability had already prescribed, this Court frowns upon the underhanded manner in which the Spouses Espiritu imposed interest and charges, in connection with the loan. This is aggravated by the fact that one of the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to plead ignorance of the requirements of the law in connection with the transparency of credit transactions. In addition, the Civil Code clearly provides that: Article 1956. No interest shall be due unless it has been stipulated in writing. The omission of the Spouses Espiritu in specifying in the contract the interest rate which was actually imposed, in contravention of the law, manifested bad faith. In several cases, this Court has been known to declare null and void stipulations on interest and charges that were found excessive, iniquitous, and unconscionable. In the case of Medel v. Court of Appeals,18 the Court declared an interest rate of 5.5% per month on a P500,000.00 loan to be excessive, iniquitous, unconscionable and exorbitant. Even if the parties themselves agreed on the interest rate and stipulated the same in a written agreement, it nevertheless declared such stipulation as void and ordered the imposition of a 12% yearly interest rate. In Spouses Solangon v. Salazar,19 6% monthly interest on a P60,000.00 loan was likewise equitably reduced to a 1% monthly interest or 12% per annum. In Ruiz v. Court of Appeals,20 the Court found a 3% monthly interest imposed on

18

four separate loans with a total of P1,050,000.00 to be excessive and reduced the interest to a 1% monthly interest or 12% per annum. In declaring void the stipulations authorizing excessive interest and charges, the Court declared that although the Usury Law was suspended by Central Bank Circular No. 905, s. 1982, effective on 1 January 1983, and consequently parties are given a wide latitude to agree on any interest rate, nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.21 Stipulation authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived.22 The nullity of the stipulation on the usurious interest does not, however, affect the lenders right to recover the principal of the loan.23 Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed. While the terms of the Real Estate Mortgage remain effective, the foreclosure proceedings held on 31 Ocotber 1990 cannot be given effect. In the Notice of Sheriffs Sale24 dated 5 October 1990, and in the Certificate of Sale25 dated 31 October 1990, the amount designated as mortgage indebtedness amounted to P874,125.00. Likewise, in the demand letter26 dated 12 December 1989, Zoilo Espiritu demanded from the Spouses Landrito the amount of P874,125.00 for the unpaid loan. Since the debt due is limited to the principal of P350,000.00 with 12% per annum as legal interest, the previous demand for payment of the amount of P874,125.00 cannot be considered as a valid demand for payment. For an obligation to become due, there must be a valid demand.27 Nor can the foreclosure proceedings be considered valid since the total amount of the indebtedness during the foreclosure proceedings was pegged at P874,125.00 which included interest and which this Court now nullifies for being excessive, iniquitous and exorbitant. If the foreclosure proceedings were considered valid, this would result in an inequitable situation wherein the Spouses Landrito will have their land foreclosed for failure to pay an over-inflated loan only a small part of which they were obligated to pay. Moreover, it is evident from the facts of the case that despite considerable effort on their part, the Spouses Landrito failed to redeem the mortgaged property because they were unable to raise the total amount, which was grossly inflated by the excessive interest imposed. Their attempt to redeem the mortgaged property at the inflated amount of P1,595,392.79, as early as 30 October 1991, is reflected in a letter, which creditormortgagee Zoilo Landrito acknowledged to have received by affixing his signature herein.28 They also attached in their Complaint copies of two checks in the amounts of P770,000.00 and P995,087.00, both dated 13 January 1992, which were allegedly refused by the Spouses Espiritu.29 Lastly, the Spouses Espiritu even attached in their exhibits a copy of a handwritten letter, dated 27 January 1994, written by Paz Landrito, addressed to the Spouses Espiritu, wherein the former offered to pay the latter the sum of P2,000,000.00.30 In all these instances, the Spouses Landrito had tried, but failed, to pay an amount way over the indebtedness they were supposed to pay i.e., P350,000.00 and 12% interest per annum. Thus, it is only proper that the Spouses Landrito be given the opportunity to repay the real amount of their indebtedness. Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle their debt, at the correct amount and without the iniquitous interest imposed, no foreclosure proceedings may be instituted. A judgment ordering a foreclosure sale is conditioned upon a finding on the correct amount of the unpaid obligation and the failure of the debtor to pay the said amount.31 In this case, it has not yet been shown that the Spouses Landrito had already failed to pay the correct amount of the debt and, therefore, a foreclosure sale cannot be conducted in order to answer for the unpaid debt. The foreclosure sale conducted upon their failure to payP874,125 in 1990 should be nullified since the amount demanded as the outstanding loan was overstated; consequently it has not been shown that the mortgagors the Spouses Landrito, have failed to pay their outstanding obligation. Moreover, if the proceeds of the sale together with its reasonable rates of interest were applied to the obligation, only a small part of its original loans would actually remain outstanding, but because of the unconscionable interest rates, the larger part corresponded to said excessive and iniquitous interest.

Credit Transactions Full Text Cases Atty. Adviento

As a result, the subsequent registration of the foreclosure sale cannot transfer any rights over the mortgaged property to the Spouses Espiritu. The registration of the foreclosure sale, herein declared invalid, cannot vest title over the mortgaged property. The Torrens system does not create or vest title where one does not have a rightful claim over a real property. It only confirms and records title already existing and vested. It does not permit one to enrich oneself at the expense of another.32 Thus, the decree of registration, even after the lapse of one (1) year, cannot attain the status of indefeasibility. Significantly, the records show that the property mortgaged was purchased by the Spouses Espiritu and had not been transferred to an innocent purchaser for value. This means that an action for reconveyance may still be availed of in this case.33 Registration of property by one person in his or her name, whether by mistake or fraud, the real owner being another person, impresses upon the title so acquired the character of a constructive trust for the real owner, which would justify an action for reconveyance.34 This is based on Article 1465 of the Civil Code which states that: Art. 1465. If property acquired through mistakes or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for benefit of the person from whom the property comes. The action for reconveyance does not prescribe until after a period of ten years from the date of the registration of the certificate of sale since the action would be based on implied trust.35 Thus, the action for reconveyance filed on 31 October 1992, more than one year after the Sheriffs Certificate of Sale was registered on 9 January 1991, was filed within the prescription period. It should, however, be reiterated that the provisions of the Real Estate Mortgage are not annulled and the principal obligation stands. In addition, the interest is not completely removed; rather, it is set by this Court at 12% per annum. Should the Spouses Landrito fail to pay the principal, with its recomputed interest which runs from the time the loan agreement was entered into on 5 September 1986 until the present, there is nothing in this Decision which prevents the Spouses Espiritu from foreclosing the mortgaged property. The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized to file the action for reconveyance filed before the trial court or even to file the appeal from the judgment of the trial court, by virtue of the Special Power of Attorney dated 30 September 1992. They further noted that the trial court and the Court of Appeals failed to rule on this issue.36 The Special Power of Attorney37 dated 30 September 1992 was executed by Maximo Landrito, Jr., with the conformity of Paz Landrito, in connection with the mortgaged property. It authorized Zoilo Landrito: 2. To make, sign, execute and deliver corresponding pertinent contracts, documents, agreements and other writings of whatever nature or kind and to sue or file legal action in any court of the Philippines, to collect, ask demands, encash checks, and recover any and all sum of monies, proceeds, interest and other due accruing, owning, payable or belonging to me as such owner of the afore-mentioned property. (Emphasis provided.) Zoilo Landritos authority to file the case is clearly set forth in the Special Power of Attorney. Furthermore, the records of the case unequivocally show that Zoilo Landrito filed the reconveyance case with the full authority of his mother, Paz Landrito, who attended the hearings of the case, filed in her behalf, without making any protest.38She even testified in the same case on 30 August 1995. From the acts of Paz Landrito, there is no doubt that she had authorized her son to file the action for reconveyance, in her behalf, before the trial court. IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This Court AFFIRMS the assailed Decision of the Court of Appeals, promulgated on 31 August 2005, fixing the interest rate of the loan between the parties at 12% per annum, and ordering the Spouses Espiritu to reconvey the subject property to the Spouses Landrito conditioned upon the payment of the loan together with herein fixed rate of interest. Costs against the petitioners. SO ORDERED. G.R. No. L-47878 GIL vs. July 24, 1942 JARDENIL, plaintiff-appellant, HEFTI SOLAS (alias HEPTI appellee. MORAN, J.: SOLAS, JEPTI

19

SOLAS), defendant-

This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is defendant-appellee bound to pay the stipulated interest only up to the date of maturity as fixed in the promissory note, or up to the date payment is effected? This question is, in our opinion controlled by the express stipulation of the parties. Paragraph 4 of the mortgage deed recites: Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS PESOS (P2,4000.00), moneda filipina, que el Sr. Hepti Solas se compromete a pagar al Sr. Jardenil en o antes del dia treintaiuno (31) de marzo de mil novecientos treintaicuarto (1934), con los intereses de dicha suma al tipo de doce por ciento (12%) anual a partir desde fecha hasta el dia de su vencimiento o sea treintaiuno (31) de marzo de mil novecientos treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede y traspasa, por via de primera hipoteca, a favor del Sr. Jardenil, sus herederos y causahabientes, la parcela de terreno descrita en el parrafo primero (1.) de esta escritura. Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity, or until March 31, 1934. As the contract is silent as to whether after that date, in the event of non-payment, the debtor would continue to pay interest, we cannot in law, indulge in any presumption as to such interest; otherwise, we would be imposing upon the debtor an obligation that the parties have not chosen to agree upon. Article 1755 of the Civil Code provides that "interest shall be due only when it has been expressly stipulated." (Emphasis supplied.) A writing must be interpreted according to the legal meaning of its language (section 286, Act No. 190, now section 58, Rule 123), and only when the wording of the written instrument appears to be contrary to the evident intention of the parties that such intention must prevail. (Article 1281, Civil Code.) There is nothing in the mortgage deed to show that the terms employed by the parties thereto are at war with their evident intent. On the contrary the act of the mortgage of granting to the mortgagor on the same date of execution of the deed of mortgage, an extension of one year from the date of maturity within which to make payment, without making any mention of any interest which the mortgagor should pay during the additional period (see Exhibit B attached to the complaint), indicates that the true intention of the parties was that no interest should be paid during the period of grace. What reason the parties may have therefor, we need not here seek to explore. Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to express their agreement, for if such mistake existed, plaintiff would have undoubtedly adduced evidence to establish it and asked that the deed be reformed accordingly, under the parcel-evidence rule. We hold therefore, that as the contract is clear and unmistakable and the terms employed therein have not been shown to belie or otherwise fail to express the true intention of the parties and that the deed has not been assailed on the ground of mutual mistake which would require its reformation, same should be given its full force and effect. When a party sues on a written contract and no attempt is made to show any vice therein, he cannot be allowed to lay any claim more than what its clear stipulations accord. His omission, to which the law attaches a definite warning as an in the instant case, cannot by the courts be arbitrarily supplied by what their own notions of justice or equity may dictate. Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400 from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands have been made which we may assume to have been so made on the expiration of the year of grace, he shall be entitled to legal interest upon the principal and the accrued interest from April 1, 1935, until full payment. Thus modified judgment is affirmed, with costs against appellant. G.R. No. L-52482 February 23, 1990 SENTINEL INSURANCE CO., INC., petitioner, vs. THE HONORABLE COURT OF APPEALS, HON. FLORELIANA CASTRO-BARTOLOME, Presiding Judge, Court of First Instance of Rizal, Seventh Judicial District, Branch XV, THE PROVINCIAL SHERIFF OF RIZAL, and ROSE INDUSTRIES, INC., respondents.

Credit Transactions Full Text Cases Atty. Adviento

REGALADO, J.: Before us is a petition seeking the amendment and modification of the dispositive portion of respondent court's decision in CA-G.R. No. SP09331, 1 allegedly to make it conform with the findings, arguments and observations embodied in said decision which relief was denied by respondent court in its resolution, dated January 15, 1980, 2rejecting petitioner's ex parte motion filed for that purpose. 3 While not involving the main issues in the case threshed out in the court a quo, the judgment in which had already become final and executory, the factual backdrop of the present petition is summarized by respondent court as follows: Petitioner Sentinel Insurance Co., Inc., was the surety in a contract of suretyship entered into on November 15, 1974 with Nemesio Azcueta, Sr., who is doing business under the name and style of 'Malayan Trading as reflected in SICO Bond No. G(16)00278 where both of them bound themselves, 'jointly and severally, to fully and religiously guarantee the compliance with the terms and stipulations of the credit line granted by private respondent Rose Industries, Inc., in favor of Nemesio Azcueta, Sr., in the amount of P180,00.00.' Between November 23 to December 23, 1974, Azcueta made various purchases of tires, batteries and tire tubes from the private respondent but failed to pay therefor, prompting the latter to demand payment but because Azcueta failed to settle his accounts, the case was referred to the Insurance Commissioner who invited the attention of the petitioner on the matter and the latter cancelled the Suretyship Agreement on May 13, 1975 with due notice to the private respondent. Meanwhile, private respondent filed with the respondent court of Makati a complaint for collection of sum of money against herein petitioner and Azcueta, docketed as Civil Case No. 21248 alleging the foregoing antecedents and praying that said defendants be ordered to pay jointly and severally unto the plaintiff. a) The amount of P198,602.41 as its principal obligation, including interest and damage dues as of April 29, 1975; b) To pay interest at 14% per annum and damage dues at the rate of 2% every 45 days commencing from April 30, 1975 up to the time the full amount is fully paid: xxx xxx xxx After petitioner filed its answer with counterclaim, the case, upon agreement of the parties, was submitted for summary judgment and on December 29, 1975, respondent court rendered its decision with the following dispositive portion: xxx xxx xxx a) To pay interest on the principal obligation at the rate of 14% per annum at the rate of 2% every 45 days commencing from April 30, 1975 until the amount is fully paid. The decision having become final and executory, the prevailing party moved for its execution which respondent judge granted and pursuant thereto, a notice of attachment and levy was served by respondent Provincial Sheriff upon the petitioner. On the same day, however, the latter filed a motion for 'clarification of the judgment as to its real and true import because on its face, it would appear that aside from the 14% interest imposed on the principal obligation, an additional 2% every 45 days corresponding to the additional penalty has been imposed against the petitioner which imposition would be usurious and could not have been the intention of respondent Judge.' But the move did nor prosper because oil May 22, 1971, the judge denied the motion on the theory that the judgment, having become final and executory, it can no longer be amended or corrected. 4 Contending that the order was issued with grave abuse of discretion, petitioner went to respondent court on a petition for certiorari and mandamus to compel the court below to clarify its decision, particularly Paragraph l(a) of the dispositive portion thereof. Respondent court granted tile petition in its decision dated December 3, 1979, the disquisition and dispositive portion whereof read: While it is an elementary rule of procedure that after a decision, order or ruling has become final, the court loses its jurisdiction orderover the same and can no longer be subjected to any modification or alteration, it is likewise well-settled that courts are empowered even after such finality, to correct clerical errors or mistakes in the decisions (Potenciano vs. CA, L-

20

11569, 55 O.G. 2895). A clerical error is one that is visible to the eyes or obvious to the understanding (Black vs. Republic, 104 Phil. 849). That there was a mistake in the dispositive portion of the decision cannot be denied considering that in the complaint filed against the petitioner, the prayer as specifically stated in paragraph (b) was to 'order the latter, to pay interest at 14% per annum and damage dues at the rate of 2% every 45 days commencing from April 30, 1975 up to the time the amount is fully paid.' But this notwithstanding the respondent court in its questioned decision decreed the petitioner to pay the interest on the principal obligation at the rate of 14% per annum and 2% every 45 days commencing from April 30, 1975 until the amount is fully paid,' so that, as petitioner correctly observes, it would appear that on top of the 14% per annum on the principal obligation, another 2% interest every 45 days commencing from April 30, 1975 until the amount is fully paid has been imposed against him (petitioner). In other words, 365 days in one year divided by 45 days equals 8-1/9 which, multiplied by 2% as ordered by respondent-judge would amount to a little more than 16%. Adding 16% per annum to the 14% interest imposed on the principal obligation would be 30% which is veritably usurious and this cannot be countenanced, much less sanctioned by any court of justice. We agree with this observation and what is more, it is likewise a settled rule that although a court may grant any relief allowed by law, such prerogative is delimited by the cardinal principle that it cannot grant anything more than what is prayed for, for certainly, the relief to be dispensed cannot rise above its source. (Potenciano vs. CA, supra.) WHEREFORE, the writ of certiorari is hereby granted and the respondent judge is ordered to clarify its judgment complained of in the following manner: xxx xxx xxx a) to pay interest at 14% per annum on the principal obligation and damage dues at the rate of 2% every 45 days commencing from April 30, 1975 up to the time the full amount is fully paid; 5 xxx xxx xxx As earlier stated, petitioner filed an ex parte motion seeking to amend the above-quoted decretal portion which respondent court denied, hence the petition at bar. The amendment sought, ostensibly in order that the dispositive portion of said decision would conform with the body thereof, is the sole issue for resolution by the Court. Petitioner itself cites authorities in support of its contention that it is entitled to a correct and clear expression of a judgment to avoid substantial injustice. 6 In amplification of its plaint, petitioner further asseverates that respondent court should not have made an award for "damage dues" at such late stage of the proceeding since said dues were not the subject of the award made by the trial court. 7 We disagree with petitioner. To clarify an ambiguity or correct a clerical error in the judgment, the court may resort to the pleadings filed by the parties, the findings of fact and the conclusions of law expressed in the text or body of the decision. 8 Indeed, this was what respondent court did in resolving the original petition. It examined the complaint filed against the petitioner and noted that the prayer as stated in Paragraph (b) thereof was to "order defendant to pay interest at 14 per centum and damage dues at the rate of 2% every 45 days commencing from April 30, 1975 up to the time the full amount is fully paid." 9 Insofar as the findings and the dispositive portion set forth in respondent court's decision are concerned, there is really no inconsistency as wittingly or unwittingly asserted by petitioner. The findings made by respondent court did not actually nullify the judgment of the trial court. More specifically, the statement that the imposition of 2% interest every 45 days commencing from April 30, 1975 on top of the 14% per annum (as would be the impression from a superficial reading of the dispositive portion of the trial court's decision) would be usurious is a sound observation. It should, however, be stressed that such observation was on the theoretical assumption that the rate of 2% is being imposed as interest, not as damage dues which was the intendment of the trial court. Certainly, the damage dues in this case do not include and are not included in the computation of interest as the two are of different categories and are distinct claims which may be demanded separately, in

Credit Transactions Full Text Cases Atty. Adviento

the same manner that commissions, fines and penalties are excluded in the computation of interest where the loan or forbearance is not secured in whole or in part by real estate or an interest therein. 10 While interest forms part of the consideration of the contract itself, damage dues (penalties, and so forth) are usually made payable only in case of default or non-performance of the contract. 11 Also, although interest is subject to the provisions of the Usury Law, 12 there is no policy or provision in such law preventing the enforcement of damage dues although the effect may be to increase the sum payable beyond the prescribed ceiling rates. Petitioner's assertion that respondent court acted without authority in appending the award of damage dues to the judgment of the trial court should be rejected. As correctly pointed out by private respondent, the opening sentence of Paragraph l(a) of the dispositive portion of the lower court's decision explicitly ordered petitioner to pay private respondent the amount of P198,602.41 as principal obligation including interest and damage dues, which is a clear and unequivocal indication of the lower court's intent to award both interest and damage dues. 13 Significantly, it bears mention that on several occasions before petitioner moved for a clarificatory judgment, it offered to settle its account with private respondent without assailing the imposition of the aforementioned damage dues. 14 As ramified by private respondent: 2. ... the then counsel of record for the petitioner, Atty. Porfirio Bautista, and Atty. Teodulfo L. Reyes, petitioner's Assistant Vice- President for Operations, had a conference with the undersigned attorneys as to how petitioner will settle its account to avoid execution. During the conference, both parties arrived at almost the same computation and the amount due from petitioner, which includes 2% damage dues every 45 days from 30 April 1975 until the amount is fully paid, under the judgment. No question was ever raised as regards same. xxx xxx xxx 5. The very face of Annex 'D' shows that the '2%' damage dues being questioned by the present counsel of petitioner had been mentioned no less than TEN (10) TIMES and was clearly and distinctly defined by petitioner and included in the computation of its obligation to herein petitioner as '2% penalty for every 45 days.' xxx xxx xxx Petitioner's pretense that it was not the intent of the court to award the damage dues of 2% every 45 days commencing 30 April 1975 is belied by the fact (and this is admitted by petitioner) that upon agreement of the parties, the case before the lower court was submitted for summary judgment; in other words, the case was submitted upon the facts as appear in the pleadings with no other evidence presented and a fact that appears clearly in the pleadings is that the defendants in the case before the lower court were under contract to pay private respondent, among others, the damage dues of 2% every 45 days commencing on 30 April 1975 until the obligation is fully paid; .... 15 Respondent court demonstrably did not err in ordering the clarification of the decision of the trial court by amending the questioned part of its dispositive portion to include therein the phrase damage dues to modify the stated rate of 2%, and thereby obviate any misconception that it is being imposed as interest. ACCORDINGLY, certiorari is hereby DENIED and the decision of respondent Court of Appeals is hereby AFFIRMED. SO ORDERED. G.R. Nos. L-43697 and L-442200 March 31, 1938 In re Liquidation of the Mercantile Bank of China, GOPOCO GROCERY (GOPOCO), ET AL., claimants-appellants, vs. PACIFIC COAST BISCUIT CO., ET AL., oppositors-appellees. DIAZ, J.: On petition of the Bank Commissioner who alleged to have found, after an investigation, that the Mercantile Bank of China could not continue operating as such without running the risk of suffering losses and prejudice its depositors and customers; and that with the requisite approval of the corresponding authorities, he had taken charge of all the assets thereof; the Court of First Instance of Manila declared the said bank in liquidation; approved all the acts theretofore executed by the commissioner; prohibited the officers and agents of the bank from interfering with said

21

commissioner in the possession of the assets thereof, its documents, deed, vouchers, books of account, papers, memorandum, notes, bond, bonds and accounts, obligations or securities and its real and personal properties; required its creditors and all those who had any claim against it, to present the same in writing before the commissioner within ninety days; and ordered the publication, as was in fact done, of the order containing all these provisions, for the two consecutive weeks in two news-papers of general circulation in the City of Manila, at the expenses of the aforesaid bank. After these publications, and within the period of ninety days, the following creditors, among others, presented their presented their claims: Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella Tondea. I. The claim of Tiong Chui Gion is for the sum of P10,285.27. He alleged that he deposited said sum in the bank under liquidation on current account. II. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48 plus P460. It described its claim as follows: Balance due on open account P4,927.95 subject to check Interest on c/a 4,53

4,932.48 Surety deposit 460.00

III. The claim of Tan Locko is for the sum of P7,624.20, and he describes it in turn as follows: Balance due on open account P7,610.44 subject to check L-759 Savings account No. 156 (foreign) with Mercantile Bank of China L1611 Amoy $15,000,00 Interest on said Savings Account No. 156 8.22 Interest on checking a/c 10.54

7,624.20 IV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set out in its written claim appearing in the record on appeal as follows: Balance due on open subject to P6,961.01 check L-845 Interest on checking a/c 11.37 6,972.83 V. The claim of Sy Guan Huat is for the sum of P6,232.88 and the described it as follows: Balance due on open account P6,224.34 subject to check L-718 Interest on checking a/c 8.54

6,232.88 VI. The claim of La Bella Tondea is for the sum of P1,912.79, also described as follows: Balance due on open account P1910.59 subject to check Interest on account 2.20

Credit Transactions Full Text Cases Atty. Adviento

22

1. In not first deducting from their respective deposits in the bank under liquidation, whose payment they claim, their respective obligation thereto. 1,912.79 To better resolve not only these claims but also the many others which were presented against the bank, the lower court, on July 15, 1932, appointed Fulgencio Borromeo as commissioner and referee to receive the evidence which the interested parties may desire to present; and the commissioner and referee thus named, after qualifying for the office and receiving the evidence presented to him, resolved the aforesaid six claims by recommending that the same be considered as an ordinary credit only, and not as a preferred credit as the interested parties wanted, because they were at the same time debtors of the bank. The evidence adduced and the very admissions of the said interested parties in fact show that (a) the claimant Tiong Chui Gion, while he was a creditor of the Mercantile Bank of China in the sum of P10,285.27 which he deposited on current account, was also a debtor not only in the sum of P633.76 but also in the sum of P664.77, the amount of a draft which he accepted, plus interest thereon and the protest fees paid therefor; (b) the claimant Gopoco Grocery (Gopoco) had a current account in the bank in the sum of P5,392.48, but it is indebted to it, in Turn, in the sum of $2,334.80, the amount of certain drafts which it had accepted; (c) the claimant Tan Locko had a deposit of P7,624.20, but he owed $1,378.90, the amount of a draft which he also accepted; (d) the claimant Woo & Lo & Co. had a deposit of P6,972.88, but it was indebted in the sum of $3,464.84, the amount also of certain drafts accepted by it; (e) the claimants Sy Guan Huat and Sy Kia had a deposit of P6,232.88, but they owed the sum of $3,107.37, for two drafts accepted by them and already due; and (f) the claimant La Bella Tondea had, in turn, a deposit of P1,912.79, but it was, in turn, indebted in the sum of $565.40 including interest and other expenses, the amount of two drafts drawn upon and accepted by it. The lower court approved all the recommendations of The commissioner and referee as to claims of the six appellants as follows; (1) To approve the claim of Tiong Chui Gion (P10,285.27) but only as an ordinary credit, minus the amount of the draft for P664.77; (2) to approve the claim of Gopoco Grocery (Gopoco) but also as an ordinary credit only (P5,387.95 according to the referee), minus its obligation amounting to $2,334.80 or P4,669.60; (3) to approve the claim of Tan Locko but as an ordinary credit only (P7,610.44 according to the referee), deducting therefrom his obligation amounting to $1,378.90 or P2,757.80; to approve the claim of Woo & Lo & Co. but only as an ordinary credit (P6,961.01 according to the referee). after deducting its obligation to the bank, amounting to $3,464.84 or P6,929.68; (5) to approve the claim of Sy Guan Huat but only as an ordinary credit (P6,224.34 according to the referee), after deducting his obligation amounting to $3,107.37) or P6,214.74; and, finally, (6) to approve the claim of la Bella Tondea but also as an ordinary credit only (1,917.50 according to the referee), after deducting it obligation amounting to $565.40 or P1,130.80; but he expressly refused to authorize the payment of the interest by reason of impossibility upon the ground set out in the decision. Not agreeable to the decision of the lower court, each of the interested parties appealed therefrom and thereafter filed their respective briefs. Tiong Chui Gion argues in his brief filed in case in G. R. No. 442200, that the lower court erred: 1. In holding that his deposit of P10,285.27 in the Mercantile Bank of China, constitutes an ordinary credit only and not a preferred credit. 2. In holding as preferred credits the drafts and checks issued by the bank under liquidation in payment of the drafts remitted to it for collection from merchants residing in the country, by foreign entities or banks; and in not holding that the deposits on current account in said bank should enjoy preference over said drafts and checks; and 3. In holding that the amount of P633.76 (which should be understood as P664.77), which the claimant owes to the bank under liquidation, be deducted from his current account deposit therein, amounting to P10,285.27, upon the distribution of the assets of the bank among its various creditors, instead of holding that, after deducting the aforesaid sum of P633.76 (should be P664.77) from his aforesaid deposit, there be turned over to him the balance together with the dividends or shares then corresponding to him, on the basis of said amount. The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella Tondea, in turn argue in the brief they jointly filed in case G. R. No. 43697, that the lower court erred: 2. In not holding that their claims constitute a preferred credit. 3. In holding that the drafts and checks issued by the bank under liquidation in payment of the drafts remitted to it by foreign entitles and banks for collection from the certain merchant residing in the country, are preferred credits; and in not holding that the deposits made by each of them enjoy preference over said drafts and checks, and 4. In denying their motion for a new trial base on the proposition that the appealed decision is not in accordance with law and is contrary to the evidence adduced at the trial. The questions raised by the appellant in case G. R. No. 44200 and by appellants in case G.R. 43697 being identical in nature, we believe it practical and proper to resolve said questions jointly in one decision. Before proceeding, however, it is convenient to note that the commissioner and referee, classifying the various claims presented against the bank, placed under one group those partaking of the same nature, the classification having resulted in six groups. In the first group he included all the claims for current account, savings and fixed deposits. In the second group he included the claims for checks or drafts sold by the bank under liquidation and not paid by the agents or banks in whose favor they had been issued. In the third group he included the claims checks or drafts issued by the bank under liquidation in payment or reimbursement of the drafts or goods remitted to it for collection, from resident merchants and entitles, by foreign banks and entities. In the fourth group he included the claims for drafts or securities to be collected from resident merchants and entities to be collected from resident merchants and entities which were pending collection on the date payments were suspended. In the fifth group he included the claims of certain depositors or creditors of the bank who were at the same time debtors thereof; and he considered of this class the claims of the appellants in these two cases, and In the sixth group he included the other claims different in nature from the of the aforesaid five claims. I. Now, then, should the appellants' deposits on current account in the bank now under liquidation be considered preferred credits, and not otherwise, or should they be considered ordinary credits only? The appellants contend that they are preferred credits only? The appellants contend that they are preferred credits because they are deposits in contemplation of law, and as such should be returned with the corresponding interest thereon. In support thereof they cite Manresa (11 Manresa, Civil Code, page 663), and what has been insinuated in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319), citing the said commentator who maintains that, notwithstanding the provisions of articles 1767 and 1768 and others of the aforesaid Code, from which it is inferred that the so-called irregular deposits no longer exist, the fact is that said deposits still exist. And they contend and argue that what they had in the bank should be considered as of this character. But it happens that they themselves admit that the bank owes them interest which should have been paid to them before it was declared in a state of liquidation. This fact undoubtedly destroys the character which they nullifies their contention that the same be considered as irregular deposits, because the payment of interest only takes place in the case of loans. On the other hand, as we stated with respect to the claim of Tan Tiong Tick (In re Liquidation of Mercantile Bank of China, G.R. No. 43682), the provisions of the Code of Commerce, and not those of the Civil Code, are applicable to cases of the nature of those at bar, which have to do with parties who are both merchants. (Articles 303 and 309, Code of Commerce.) We there said, and it is not amiss to repeat now, that the so-called current account and savings deposits have lost their character of deposits, properly so-called and are convertible into simple commercial loans because, in cases of such deposits, the bank has made use thereof in the ordinary course of its transactions as an institution engaged in the banking business, not because it so wishes, but precisely because of the authority deemed to have been granted to it by the appellants to enable them to collect the interest which they had been and they are now collecting, and by virtue further of the authority granted to it by section 125 of the Corporation Law (Act No. 1459), as amended by Acts Nos. 2003 and 3610 and section 9 of the Banking Law (Act No. 3154), without considering of course the

Credit Transactions Full Text Cases Atty. Adviento

provisions of article 1768 of the Civil Code. Wherefore, it is held that the deposits on current account of the appellants in the bank under liquidation, with the right on their right on their part to collect interest, have not created and could not create a juridical relation between them except that of creditors and debtor, they being the creditors and the bank the debtor. What has so far been said resolves adversely the contention of the appellants, the question raised in the first and second assigned errors Tiong Chui Gion in case G. R. No. 44200, and the appellants' second and third assigned errors in case G. R. No. 43697. II. As to the third and first errors attributed to lower court by Tiong Chui Gion in his case, and by the other appellants in theirs, respectively, it should be stated that the question of set-off raised by them cannot be resolved a like question in the said case, G. R. No. 43682, entitled "In re Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant." It is proper that set-offs be made, inasmuch as the appellants and the bank being reciprocally debtors and creditors, the same is only just and according to law (art. 1195, Civil Code), particularly as none of the appellants falls within the exceptions mentioned in section 58 of the Insolvency Law (Act No. 1956), reading: SEC. 58. In all cases of mutual debts and mutual credits between the parties, the account between them shall be stated, and one debt set off against the other, and the balance only shall be allowed and paid. But no set-off or counterclaim shall be allowed of a claim in its nature not provable against the estate: Provided, That no set-off on counterclaim shall be allowed in favor of any debtor to the insolvent of a claim purchased by or transferred to such debtor within thirty days immediately preceding the filing, or after the filing of the petition by or against the insolvent. It has been said with much basis by Morse, in his work on Bank and Banking (6th ed., vol. 1, pages 776 and 784) that: The rules of law as to the right of set-off between the bank and its depositors are not different from those applicable to other parties. (Page 776.) Where the bank itself stops payment and becomes insolvent, the customer may avail himself in set-off against his indebtedness to the bank of any indebtedness of the bank to himself, as, for example, the balance due him on his deposit account. (Page 784.) But if set-offs are proper in these cases, when and how should they be made, considering that the appellants ask for the payment of interest? Are they by any chance entitled to interest? If they are, when and until what time should they be paid the same? The question of whether they are entitled to interest should be resolved in the same way that we resolved the case of the claimant Tan Tiong Tick in the said case, G. R. No. 43682. The circumstances in these two cases are certainly the same as those in the said case with reference to the said question. The Mercantile Bank of China owes to each of the appellants the interest claimed by them, corresponding to the year ending December 4, 1931, the date it was declared in a state of liquidation, but not which the appellants claim should be earned by their deposits after said date and until the full amounts thereof are paid to them. And with respect to the question of set-off, this should be deemed made, of course, as of the date when the Mercantile Bank of China was declared in a state of liquidation, that is, on December 4, 1931, for then there was already a reciprocal concurrence of debts, with respect to said bank and the appellants. (Arts. 1195 and 1196 of the Civil Code; 8 Manresa, 4th ed., p. 361.) III. With respect to the fourth assigned error of the appellants in case G. R. No. 43697, we hold, in view of the considerations set out in resolving the other assignments of errors, that the lower court properly denied the motion for new trial of said appellants. In view of the foregoing, we modify the appealed judgments by holding that the deposits claimed by the appellants, and declared by the lower court to be ordinary credits are for the following amounts: P10,285.27 of Tiong Chui Gion; P5,387.95 of Gopoco Grocery (Gopoco); P7,610.44 of Tan Locko; P6961.01 of Woo & Lo & Co.; P6,224.34 of Sy Guan Huat; and P1,917.50 of La Bella Tondea, plus their corresponding interest up to December 4, 1931; that their obligations to the bank under liquidation which should be set off against said deposits, are respectively for the following amounts: P664.77 of Tiong Chui Gion; P4,669.60 of Gopoco Grocery (Gopoco); P2,757.80 of Tan Locko; P6,929.68 of Woo & Lo & Co.; P6,214.74 of Sy Huat; and P1,130.80 of La Bella Todea; and we order that the set-offs in question be made in the manner stated in this decision, that is, as of the date already indicated, December 4, 1931. In all other respects, we affirm the aforesaid pronouncement as to costs. So ordered. judgments, without

23

special

G.R. No. L-38427 March 12, 1975 CENTRAL BANK OF THE PHILIPPINES as Liquidator of the FIDELITY SAVINGS BANK, petitioner, vs. HONORABLE JUDGE JESUS P. MORFE, as Presiding Judge of Branch XIII, Court of First Instance of Manila, Spouses AUGUSTO and ADELAIDA PADILLA and Spouses MARCELA and JOB ELIZES,respondents. AQUINO, J.:+.wph!1 This case involves the question of whether a final judgment for the payment of a time deposit in a savings bank which judgment was obtained after the bank was declared insolvent, is a preferred claim against the bank. The question arises under the following facts: On February 18,1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The Board directed the Superintendent of Banks to take charge of its assets, forbade it to do business and instructed the Central Bank Legal Counsel to take legal actions (Resolution No. 350). On December 9, 1969 the Board involved to seek the court's assistant and supervision in the liquidation of the ban The resolution implemented only on January 25, 1972, when his Central Bank of the Philippines filed the corresponding petition for assistance and supervision in the Court of First Instance of Manila (Civil Case No. 86005 assigned to Branch XIII). Prior to the institution of the liquidation proceeding but after the declaration of insolvency, or, specifically, sometime in March, 1971, the spouses Job Elizes and Marcela P. Elizes filed a complaint in the Court of First Instance of Manila against the Fidelity Savings Bank for the recovery of the sum of P50, 584 as the balance of their time deposits (Civil Case No. 82520 assigned to Branch I). In the judgment rendered in that case on December 13, 1972 the Fidelity Savings Bank was ordered to pay the Elizes spouses the sum of P50,584 plus accumulated interest. In another case, assigned to Branch XXX of the Court of First Instance of Manila, the spouses Augusta A. Padilla and Adelaida Padilla secured on April 14, 1972 a judgment against the Fidelity Savings Bank for the sums of P80,000 as the balance of their time deposits, plus interests, P70,000 as moral and exemplary damages and P9,600 as attorney's fees (Civil Case No. 84200 where the action was filed on September 6, 1971). In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII having cognizance of the liquidation proceeding), upon motions of the Elizes and Padilla spouses and over the opposition of the Central Bank, directed the latter as liquidator, to pay their time deposits as preferred judgments, evidenced by final judgments, within the meaning of article 2244(14)(b) of the Civil Code, if there are enough funds in the liquidator's custody in excess of the credits more preferred under section 30 of the Central Bank Law in relation to articles 2244 and 2251 of the Civil Code. From the said order, the Central Bank appealed to this Court by certiorari. It contends that the final judgments secured by the Elizes and Padilla spouses do not enjoy any preference because (a) they were rendered after the Fidelity Savings Bank was declared insolvent and (b) under the charter of the Central Bank and the General Banking Law, no final judgment can be validly obtained against an insolvent bank. Republic Act No. 265 provides:t.hqw SEC. 29. Proceeding upon insolvency.Whenever upon examination by the Superintendent or his examiners or agents into the condition of any banking institution, it shall be disclosed that the condition of the same is one of insolvency, or that its continuance in business would involve probable loss to its depositors or creditors, it shall be the duty of the Superintendent forthwith, in writing to inform the Monetary Board of the facts, and the Board, upon finding the statements of the Superintendent to be true, shall forthwith forbid the institution to do business in the Philippines and shall take charge of its assets and proceeds according to law. The Monetary Board shall thereupon determine within thirty days whether the institution may be reorganized or otherwise placed in such a condition so that it may be permitted to resume business with safety to its creditors and shall prescribe the conditions under which such resumption of

Credit Transactions Full Text Cases Atty. Adviento

business shall take place. In such case the expenses and fees in the administration of the institution shall be determined by the Board and shall be paid to the Central Bank out of the assets of such banking institution. At any time within ten days after the Monetary Board has taken charge of the assets of any banking institution, such institution may apply to the Court of First Instance for an order requiring the Monetary Board to show cause why it should not be enjoined from continuing such charge of its assets, and the court may direct the Board to refrain from further proceedings and to surrender charge of its assets. If the Monetary Board shall determine that the banking institution cannot resume business with safety to its creditors, it shall, by the Office of the Solicitor General, file a petition in the Court of First Instance reciting the proceedings which have been taken and praying the assistance and supervision of the court in the liquidation of the affairs of the same. The Superintendent shall thereafter, upon order of the Monetary Board and under the supervision of the court and with all convenient speed, convert the assets of the banking institution to money. SEC. 30. Distribution of assets.In case of liquidation of a banking institution, after payment of the costs of the proceedings, including reasonable expenses and fees of the Central Bank to be allowed by the court, the Central Bank shall pay the debts of such institution, under the order of the court, in accordance with their legal priority. The General Banking Act, Republic Act No. 337, provides:t.hqw SEC. 85. Any director or officer of any banking institution who receives or permits or causes to be received in said bank any deposit, or who pays out or permits or causes to be paid out any funds of said bank, or who transfers or permits or causes to be transferred any securities or property of said bank, after said bank becomes insolvent, shall be punished by fine of not less than one thousand nor more than ten thousand pesos and by imprisonment for not less than two nor more than ten years. The Civil Code provides:t.hqw ART. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code. (n) ART. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named: xxx xxx xxx (14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively. (1924a) ART. 2251. Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the following rules: (1) In the order established in article 2244; (2) Common credits referred to in article 2245 shall be paid pro rata regardless of dates. (1929a) The trial court or, to be exact, the liquidation court noted that there is no provision in the charter of the Central Bank in the General Banking Law (Republic Acts Nos. 265 and 337, respectively) which suspends or abates civil actions against an insolvent bank pending in courts other than the liquidation court. It reasoned out that, because such actions are not suspended, judgments against insolvent banks could be considered as preferred credits under article 2244(14)(b) of the Civil Code. It further noted that, in contrast with the Central Act, section 18 of the Insolvency Law provides that upon the issuance by the court of an order declaring a person insolvent "all civil proceedings against the said insolvent shall be stayed." The liquidation court directed the Central Bank to honor the writs of execution issued by Branches I and XXX for the enforcement of the judgments obtained by the Elizes and Padilla spouses. It suggested that, after satisfaction of the judgment the Central Bank, as liquidator, should include said judgments in the list of preferred credits contained in the "Project of Distribution" "with the notation "already paid" " On the other hand, the Central Bank argues that after the Monetary Board has declared that a bank is insolvent and has ordered it to cease

24

operations, the Board becomes the trustee of its assets "for the equal benefit of all the creditors, including the depositors". The Central Bank cites the ruling that "the assets of an insolvent banking institution are held in trust for the equal benefit of all creditors, and after its insolvency, one cannot obtain an advantage or a preference over another by an attachment, execution or otherwise" (Rohr vs. Stanton Trust & Savings Bank, 76 Mont. 248, 245 Pac. 947). The stand of the Central Bank is that all depositors and creditors of the insolvent bank should file their actions with the liquidation court. In support of that view it cites the provision that the Insolvency Law does not apply to banks (last sentence, sec. 52 of Act No. 1956). It also invokes the provision penalizing a director officer of a bank who disburses, or allows disbursement, of the funds of the bank after it becomes insolvent (Sec. 85, General Banking Act, Republic Act No. 337). It cites the ruling that "a creditor of an insolvent state bank in the hands of a liquidator who recovered a judgment against it is not entitled to a preference for (by) the mere fact that he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N. Carolina 10, 175 S. E. 838, Braver Liquidation of Financial Institutions, p. 922). It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are not true deposits. They are considered simple loans and, as such, are not preferred credits (Art. 1980, Civil Code; In re Liquidation of Mercantile Bank of China: Tan Tiong Tick vs. American Apothecaries Co., 65 Phil. 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375; Fletcher American National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacific Coast Biscuit Co., 65 Phil. 443). The aforequoted section 29 of the Central Bank's charter explicitly provides that when a bank is found to be insolvent, the Monetary Board shall forbid it to do business and shall take charge of its assets. The Board in its Resolution No. 350 dated February 18,1969 banned the Fidelity Savings Bank from doing business. It took charge of the bank's assets. Evidently, one purpose in prohibiting the insolvent bank from doing business is to prevent some depositors from having an undue or fraudulent preference over other creditors and depositors. That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some depositors could be maintained and judgments would be rendered for the payment of their deposits and then such judgments would be considered preferred credits under article 2244 (14) (b) of the Civil Code. We are of the opinion that such judgments cannot be considered preferred and that article 2244(14)(b) does not apply to judgments for the payment of the deposits in an insolvent savings bank which were obtained after the declaration of insolvency. A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize such judgments as entitled to priority would mean that depositors in insolvent banks, after learning that the bank is insolvent as shown by the fact that it can no longer pay withdrawals or that it has closed its doors or has been enjoined by the Monetary Board from doing business, would rush to the courts to secure judgments for the payment of their deposits. In such an eventuality, the courts would be swamped with suits of that character. Some of the judgments would be default judgments. Depositors armed with such judgments would pester the liquidation court with claims for preference on the basis of article 2244(14)(b). Less alert depositors would be prejudiced. That inequitable situation could not have been contemplated by the framers of section 29. The Rohr case (supra) supplies some illumination on the disposition of the instant case. It appears in that case that the Stanton Trust & Savings Bank of Great Falls closed its doors to business on July 9, 1923. On November 7,1924 the bank (then already under liquidation) issued to William Rohr a certificate stating that he was entitled to claim from the bank $1,191.72 and that he was entitled to dividends thereon. Later, Rohr sued the bank for the payment of his claim. The bank demurred to the complaint. The trial court sustained the demurrer. Rohr appealed. In affirming the order sustaining the demurrer, the Supreme Court of Montana said:t.hqw The general principle of equity that the assets of an insolvent are to he distributed ratably among general creditors applies with full force to the distribution of the assets of a bank. A general depositor of a bank is merely

Credit Transactions Full Text Cases Atty. Adviento

a general creditor, and, as such, is not entitled to any preference or priority over other general creditors. The assets of a bank in process of liquidation are held in trust for the equal benefit of all creditors, and one cannot be permitted to obtain an advantage or preference over another by an attachment, execution or otherwise. A disputed claim of a creditor may be adjudicated, but those whose claims are recognized and admitted may not successfully maintain action thereon. So to permit would defeat the very purpose of the liquidation of a bank whether being voluntarily accomplished or through the intervention of a receiver. xxx xxx xxx The available assets of such a bank are held in trust, and so conserved that each depositor or other creditor shall receive payment or dividend according to the amount of his debt, and that none of equal class shall receive any advantage or preference over another. And with respect to a national bank under voluntary liquidation, the court noted in the Rohr case that the assets of such a bank "become a trust fund, to be administered for the benefit of all creditors pro rata and, while the bank retains its corporate existence, and may be sued, the effect of a judgment obtained against it by a creditor is only to fix the amount of debt. He can acquire no lien which will give him any preference or advantage over other general creditors. (245 Pac. 249). * Considering that the deposits in question, in their inception, were not preferred credits, it does not seem logical and just that they should be raised to the category of preferred credits simply because the depositors, taking advantage of the long interval between the declaration of insolvency and the filing of the petition for judicial assistance and supervision, were able to secure judgments for the payment of their time deposits. The judicial declaration that the said deposits were payable to the depositors, as indisputably they were due, could not have given the Elizes and Padilla spouses a priority over the other depositors whose deposits were likewise indisputably due and owing from the insolvent bank but who did not want to incur litigation expenses in securing a judgment for the payment of the deposits. The circumstance that the Fidelity Savings Bank, having stopped operations since February 19, 1969, was forbidden to do business (and that ban would include the payment of time deposits) implies that suits for the payment of such deposits were prohibited. What was directly prohibited should not be encompassed indirectly. (See Maurello vs. Broadway Bank & Trust Co. of Paterson 176 Atl. 391, 114 N.J.L. 167). It is noteworthy that in the trial court's order of October 3, 1972, which contains the Bank Liquidation Rules and Regulations, it indicated in step III the procedure for processing the claims against the insolvent bank. In Step IV, the court directed the Central Bank, as liquidator, to submit a Project of Distribution which should include "a list of the preferred credits to be paid in full in the order of priorities established in Articles 2241, 2242, 2243, 2246 and 2247" of the Civil Code (note that article 2244 was not mentioned). There is no cogent reason why the Elizes and Padilla spouses should not adhere to the procedure outlined in the said rules and regulations. WHEREFORE, the lower court's orders of August 20, 1973 and February 25, 1974 are reversed and set aside. No costs. SO ORDERED. G.R. No. L-30511 February 14, 1980 MANUEL M. SERRANO, petitioner, vs. CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M. RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA, HORACIO DELA RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents. CONCEPCION, JR., J.: Petition for mandamus and prohibition, with preliminary injunction, that seeks the establishment of joint and solidary liability to the amount of Three Hundred Fifty Thousand Pesos, with interest, against respondent Central Bank of the Philippines and Overseas Bank of Manila and its stockholders, on the alleged failure of the Overseas Bank of Manila to return the time deposits made by petitioner and assigned to him, on the

25

ground that respondent Central Bank failed in its duty to exercise strict supervision over respondent Overseas Bank of Manila to protect depositors and the general public. 1 Petitioner also prays that both respondent banks be ordered to execute the proper and necessary documents to constitute all properties fisted in Annex "7" of the Answer of respondent Central Bank of the Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs. Central Bank of the Philippines," into a trust fund in favor of petitioner and all other depositors of respondent Overseas Bank of Manila. It is also prayed that the respondents be prohibited permanently from honoring, implementing, or doing any act predicated upon the validity or efficacy of the deeds of mortgage, assignment. and/or conveyance or transfer of whatever nature of the properties listed in Annex "7" of the Answer of respondent Central Bank in G.R. No. 29352. 2 A sought for ex-parte preliminary injunction against both respondent banks was not given by this Court. Undisputed pertinent facts are: On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with 6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent Overseas Bank of Manila. 3 Concepcion Maneja also made a time deposit, for one year with 6-% interest, on March 6, 1967, of Two Hundred Thousand Pesos (P200,000.00) with the same respondent Overseas Bank of Manila. 4 On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent Overseas Bank of Manila. 5 Notwithstanding series of demands for encashment of the aforementioned time deposits from the respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968, not a single one of the time deposit certificates was honored by respondent Overseas Bank of Manila. 6 Respondent Central Bank admits that it is charged with the duty of administering the banking system of the Republic and it exercises supervision over all doing business in the Philippines, but denies the petitioner's allegation that the Central Bank has the duty to exercise a most rigid and stringent supervision of banks, implying that respondent Central Bank has to watch every move or activity of all banks, including respondent Overseas Bank of Manila. Respondent Central Bank claims that as of March 12, 1965, the Overseas Bank of Manila, while operating, was only on a limited degree of banking operations since the Monetary Board decided in its Resolution No. 322, dated March 12, 1965, to prohibit the Overseas Bank of Manila from making new loans and investments in view of its chronic reserve deficiencies against its deposit liabilities. This limited operation of respondent Overseas Bank of Manila continued up to 1968. 7 Respondent Central Bank also denied that it is guarantor of the permanent solvency of any banking institution as claimed by petitioner. It claims that neither the law nor sound banking supervision requires respondent Central Bank to advertise or represent to the public any remedial measures it may impose upon chronic delinquent banks as such action may inevitably result to panic or bank "runs". In the years 1966-1967, there were no findings to declare the respondent Overseas Bank of Manila as insolvent. 8 Respondent Central Bank likewise denied that a constructive trust was created in favor of petitioner and his predecessor in interest Concepcion Maneja when their time deposits were made in 1966 and 1967 with the respondent Overseas Bank of Manila as during that time the latter was not an insolvent bank and its operation as a banking institution was being salvaged by the respondent Central Bank. 9 Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by respondent Overseas Bank of Manila as additional collaterals to respondent Central Bank of the Philippines for the former's overdrafts and emergency loans were acquired through the use of depositors' money, including that of the petitioner and Concepcion Maneja. 10 In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a case was filed by the petitioner Ramos, wherein respondent Overseas Bank of Manila sought to prevent respondent Central Bank from closing, declaring the former insolvent, and liquidating its assets. Petitioner Manuel Serrano in this case, filed on September 6, 1968, a motion to intervene in G.R. No. L-29352, on the ground that

Credit Transactions Full Text Cases Atty. Adviento

Serrano had a real and legal interest as depositor of the Overseas Bank of Manila in the matter in litigation in that case. Respondent Central Bank in G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to intervene in that case, on the ground that his claim as depositor of the Overseas Bank of Manila should properly be ventilated in the Court of First Instance, and if this Court were to allow Serrano to intervene as depositor in G.R. No. L-29352, thousands of other depositors would follow and thus cause an avalanche of cases in this Court. In the resolution dated October 4, 1968, this Court denied Serrano's, motion to intervene. The contents of said motion to intervene are substantially the same as those of the present petition. 11 This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and executory on March 3, 1972, favorable to the respondent Overseas Bank of Manila, with the dispositive portion to wit: WHEREFORE, the writs prayed for in the petition are hereby granted and respondent Central Bank's resolution Nos. 1263, 1290 and 1333 (that prohibit the Overseas Bank of Manila to participate in clearing, direct the suspension of its operation, and ordering the liquidation of said bank) are hereby annulled and set aside; and said respondent Central Bank of the Philippines is directed to comply with its obligations under the Voting Trust Agreement, and to desist from taking action in violation therefor. Costs against respondent Central Bank of the Philippines. 12 Because of the above decision, petitioner in this case filed a motion for judgment in this case, praying for a decision on the merits, adjudging respondent Central Bank jointly and severally liable with respondent Overseas Bank of Manila to the petitioner for the P350,000 time deposit made with the latter bank, with all interests due therein; and declaring all assets assigned or mortgaged by the respondents Overseas Bank of Manila and the Ramos groups in favor of the Central Bank as trust funds for the benefit of petitioner and other depositors. 13 By the very nature of the claims and causes of action against respondents, they in reality are recovery of time deposits plus interest from respondent Overseas Bank of Manila, and recovery of damages against respondent Central Bank for its alleged failure to strictly supervise the acts of the other respondent Bank and protect the interests of its depositors by virtue of the constructive trust created when respondent Central Bank required the other respondent to increase its collaterals for its overdrafts said emergency loans, said collaterals allegedly acquired through the use of depositors money. These claims shoud be ventilated in the Court of First Instance of proper jurisdiction as We already pointed out when this Court denied petitioner's motion to intervene in G.R. No. L-29352. Claims of these nature are not proper in actions for mandamus and prohibition as there is no shown clear abuse of discretion by the Central Bank in its exercise of supervision over the other respondent Overseas Bank of Manila, and if there was, petitioner here is not the proper party to raise that question, but rather the Overseas Bank of Manila, as it did in G.R. No. L29352. Neither is there anything to prohibit in this case, since the questioned acts of the respondent Central Bank (the acts of dissolving and liquidating the Overseas Bank of Manila), which petitioner here intends to use as his basis for claims of damages against respondent Central Bank, had been accomplished a long time ago. Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits when the petitioner claimed that there should be created a constructive trust in his favor when the respondent Overseas Bank of Manila increased its collaterals in favor of respondent Central Bank for the former's overdrafts and emergency loans, since these collaterals were acquired by the use of depositors' money. Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans. 14 Current and savings deposit are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests with respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of he respondent Bank to honor the time deposit is failure to pay s obligation as a debtor and not a breach of trust arising from depositary's failure to return the subject matter of the deposit WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner. SO ORDERED. G.R. No. L-60033 April 4, 1984

26

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners, vs. THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and CLEMENT DAVID, respondents.

MAKASIAR, Actg. C.J.:+.wph!1 This is a petition for prohibition and injunction with a prayer for the immediate issuance of restraining order and/or writ of preliminary injunction filed by petitioners on March 26, 1982. On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a temporary restraining order was duly issued ordering the respondents, their officers, agents, representatives and/or person or persons acting upon their (respondents') orders or in their place or stead to refrain from proceeding with the preliminary investigation in Case No. 8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David filed a motion to lift restraining order which was denied in the resolution of this Court dated May 18, 1983. As can be gleaned from the above, the instant petition seeks to prohibit public respondents from proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners were charged by private respondent Clement David, with estafa and violation of Central Bank Circular No. 364 and related regulations regarding foreign exchange transactions principally, on the ground of lack of jurisdiction in that the allegations of the charged, as well as the testimony of private respondent's principal witness and the evidence through said witness, showed that petitioners' obligation is civil in nature. For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in its Comment dated June 28,1982, as follows:t. hqw On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of the City Fiscal of Manila, which case was assigned to respondent Lota for preliminary investigation (Petition, p. 8). In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall and the following directors of the Nation Savings and Loan Association, Inc., namely Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with estafa and violation of Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions, allegedly committed as follows (Petition, Annex "A"):t.hqw "From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment and US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that David was induced into making the aforestated investments by Robert Marshall an Australian national who was allegedly a close associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and petitioner Santos, then NSLA General Manager; that on March 21, 1981 N LA was placed under receivership by the Central Bank, so that David filed claims therewith for his investments and those of his sister; that on July 22, 1981 David received a report from the Central Bank that only P305,821.92 of those investments were entered in the records of NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance of the investments, at the same time violating Central Bank Circular No. 364 and related Central Bank regulations on foreign exchange transactions; that after demands, petitioner Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to P959,078.14 and US$75,000.00." Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which they stated the following.t.hqw "That Martin became President of NSLA in March 1978 (after the resignation of Guingona, Jr.) and served as such until October 30, 1980, while Santos was General Manager up to November 1980; that because NSLA was urgently in need of funds and at David's insistence, his investments were treated as special- accounts with interest above the

Credit Transactions Full Text Cases Atty. Adviento

legal rate, an recorded in separate confidential documents only a portion of which were to be reported because he did not want the Australian government to tax his total earnings (nor) to know his total investments; that all transactions with David were recorded except the sum of US$15,000.00 which was a personal loan of Santos; that David's check for US$50,000.00 was cleared through Guingona, Jr.'s dollar account because NSLA did not have one, that a draft of US$30,000.00 was placed in the name of one Paz Roces because of a pending transaction with her; that the Philippine Deposit Insurance Corporation had already reimbursed David within the legal limits; that majority of the stockholders of NSLA had filed Special Proceedings No. 82-1695 in the Court of First Instance to contest its (NSLA's) closure; that after NSLA was placed under receivership, Martin executed a promissory note in David's favor and caused the transfer to him of a nine and on behalf (9 1/2) carat diamond ring with a net value of P510,000.00; and, that the liabilities of NSLA to David were civil in nature." Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the following:t.hqw "That he had no hand whatsoever in the transactions between David and NSLA since he (Guingona Jr.) had resigned as NSLA president in March 1978, or prior to those transactions; that he assumed a portion o; the liabilities of NSLA to David because of the latter's insistence that he placed his investments with NSLA because of his faith in Guingona, Jr.; that in a Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona, Jr.) bound himself to pay David the sums of P668.307.01 and US$37,500.00 in stated installments; that he (Guingona, Jr.) secured payment of those amounts with second mortgages over two (2) parcels of land under a deed of Second Real Estate Mortgage (Petition, Annex "E") in which it was provided that the mortgage over one (1) parcel shall be cancelled upon payment of one-half of the obligation to David; that he (Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00 which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-33865 in the Court of First Instance of Rizal at Quezon City, to effect the release of the mortgage over one (1) of the two parcels of land conveyed to David under second mortgages." At the inception of the preliminary investigation before respondent Lota, petitioners moved to dismiss the charges against them for lack of jurisdiction because David's claims allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8). But, after the presentation of David's principal witness, petitioners filed the instant petition because: (a) the production of the Promisory Notes, Banker's Acceptance, Certificates of Time Deposits and Savings Account allegedly showed that the transactions between David and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were novated when Guingona, Jr. and Martin assumed them; and (b) David's principal witness allegedly testified that the duplicate originals of the aforesaid instruments of indebtedness were all on file with NSLA, contrary to David's claim that some of his investments were not record (Petition, pp. 8-9). Petitioners alleged that they did not exhaust available administrative remedies because to do so would be futile (Petition, p. 9) [pp. 153-157, rec.]. As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public respondents acted without jurisdiction when they investigated the charges (estafa and violation of CB Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter of I.S. No. 81-31938. There is merit in the contention of the petitioners that their liability is civil in nature and therefore, public respondents have no jurisdiction over the charge of estafa. A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation Savings and Loan Association, will show that from March 20, 1979 to March, 1981, private respondent David, together with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association the sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of Time Deposits and the sum of P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent David, together with his sister, made investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).

27

Moreover, the records reveal that when the aforesaid bank was placed under receivership on March 21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed the obligation of the bank to private respondent David by executing on June 17, 1981 a joint promissory note in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed appears to be bigger than the original claim because of the added interest and the inclusion of other deposits of private respondent's sister in the amount of P116,613.20. Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne with the Nation Savings and Loan Association. Furthermore, the various pleadings and documents filed by private respondent David, before this Court indisputably show that he has indeed invested his money on time and savings deposits with the Nation Savings and Loan Association. It must be pointed out that when private respondent David invested his money on nine. and savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that:t.hqw Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be governed by the provisions concerning simple loan. In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:t.hqw It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are hat true deposits. are considered simple loans and, as such, are not preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)." This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA 102 [1980]) that:t.hqw Bank deposits are in the nature of irregular deposits. They are really 'loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank because it can use the same. The petitioner here in making time deposits that earn interests will respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depositary's failure to return the subject matter of the deposit (Emphasis supplied). Hence, the relationship between the private respondent and the Nation Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public respondents have no- jurisdiction. WE have already laid down the rule that:t.hqw In order that a person can be convicted under the above-quoted provision, it must be proven that he has the obligation to deliver or return the some

Credit Transactions Full Text Cases Atty. Adviento

money, goods or personal property that he receivedPetitioners had no such obligation to return the same money, i.e., the bills or coins, which they received from private respondents. This is so because as clearly as stated in criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans. The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.t.hqw "Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time- and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall he paid in which case the contract is simply called a loan or mutuum. "Commodatum is essentially gratuitous. "Simple loan may be gratuitous or with a stipulation to pay interest. "In commodatum the bailor retains the ownership of the thing loaned while in simple loan, ownership passes to the borrower. "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." It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum the borrower acquires ownership of the money, goods or personal property borrowed Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied). But even granting that the failure of the bank to pay the time and savings deposits of private respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to private respondent David, thereby resulting in the novation of the original contractual obligation arising from deposit into a contract of loan and converting the original trust relation between the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust but would merely be a failure to pay the obligation as a debtor. Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:t.hqw As pointed out in People vs. Nery, novation prior to the filing of the criminal information as in the case at bar may convert the relation between the parties into an ordinary creditor-debtor relation, and place the complainant in estoppel to insist on the original transaction or "cast doubt on the true nature" thereof. Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:t.hqw The novation theory may perhaps apply prior to the filling of the criminal information in court by the state prosecutors because up to that time the original trust relation may be converted by the parties into an ordinary creditor-debtor situation, thereby placing the complainant in estoppel to insist on the original trust. But after the justice authorities have taken cognizance of the crime and instituted action in court, the offended party may no longer divest the prosecution of its power to exact the criminal liability, as distinguished from the civil. The crime being an offense against the state, only the latter can renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620). It may be observed in this regard that novation is not one of the means recognized by the Penal Code whereby criminal liability can be extinguished; hence, the role of novation may only be to either prevent the rise of criminal habihty or to cast doubt on the true nature of the original basic transaction, whether or not it was such that its breach would not give rise to penal responsibility, as when money loaned is made to appear as a

28

deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481). In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long before the filing of the criminal complaint with the Office of the City Fiscal. Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation. Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364 and other related regulations regarding foreign exchange transactions by accepting foreign currency deposit in the amount of US$75,000.00 without authority from the Central Bank. They contend however, that the US dollars intended by respondent David for deposit were all converted into Philippine currency before acceptance and deposit into Nation Savings and Loan Association. Petitioners' contention is worthy of behelf for the following reasons: 1. It appears from the records that when respondent David was about to make a deposit of bank draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan Association, the same had to be cleared first and converted into Philippine currency. Accordingly, the bank draft was endorsed by respondent David to petitioner Guingona, who in turn deposited it to his dollar account with the Security Bank and Trust Company. Petitioner Guingona merely accommodated the request of the Nation Savings and loan Association in order to clear the bank draft through his dollar account because the bank did not have a dollar account. Immediately after the bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association to withdraw the same in order to be utilized by the bank for its operations. 2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they were accepted and deposited in Nation Savings and Loan Association, because the bank is presumed to have followed the ordinary course of the business which is to accept deposits in Philippine currency only, and that the transaction was regular and fair, in the absence of a clear and convincing evidence to the contrary (see paragraphs p and q,Sec. 5, Rule 131, Rules of Court). 3. Respondent David has not denied the aforesaid contention of herein petitioners despite the fact that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment and in the July 27, 1982 reply to public respondents' comment and reiterated in petitioners' memorandum filed on October 30, 1982, thereby adding more support to the conclusion that the US$75,000.00 were really converted into Philippine currency before they were accepted and deposited into Nation Savings and Loan Association. Considering that this might adversely affect his case, respondent David should have promptly denied petitioners' allegation. In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is no clear showing that they engaged in foreign exchange transactions, We hold that the public respondents acted without jurisdiction when they investigated the charges against the petitioners. Consequently, public respondents should be restrained from further proceeding with the criminal case for to allow the case to continue, even if the petitioners could have appealed to the Ministry of Justice, would work great injustice to petitioners and would render meaningless the proper administration of justice. While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and injunction, this court has recognized the resort to the extraordinary writs of prohibition and injunction in extreme cases, thus:t. hqw On the issue of whether a writ of injunction can restrain the proceedings in Criminal Case No. 3140, the general rule is that "ordinarily, criminal prosecution may not be blocked by court prohibition or injunction." Exceptions, however, are allowed in the following instances:t.hqw "1. for the orderly administration of justice; "2. to prevent the use of the strong arm of the law in an oppressive and vindictive manner; "3. to avoid multiplicity of actions;

Credit Transactions Full Text Cases Atty. Adviento

"4. to afford adequate protection to constitutional rights; "5. in proper cases, because the statute relied upon is unconstitutional or was held invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]). Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held that:t.hqw The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate analysis, intended to annul void proceedings; to prevent the unlawful and oppressive exercise of legal authority and to provide for a fair and orderly administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for certiorari and prohibition although the accused in the case could have appealed in due time from the order complained of, our action in the premises being based on the public welfare policy the advancement of public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the prosecution of certain chiropractors although, if convicted, they could have appealed. We gave due course to their petition for the orderly administration of justice and to avoid possible oppression by the strong arm of the law. And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial court's action admitting an amended information was sustained despite the availability of appeal at the proper time. WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT. SO ORDERED.1wph1.t

29

Credit Transactions Full Text Cases Atty. Adviento

30

It is erroneous to assert that the certificate of deposit in question is negotiable like any other commercial instrument: First, because every commercial instrument is not negotiable; and second, because only instruments payable to order are negotiable. Hence, this instrument not being to order but to bearer, it is not negotiable. It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in the defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing lent, while in a deposit the use of the thing is not transmitted, but merely possession for its custody or safe-keeping. plaintiff-appellee, In order that the depositary may use or dispose oft he things deposited, the depositor's consent is required, and then: The rights and obligations of the depositary and of the depositor shall cease, and the rules and provisions applicable to commercial loans, commission, or contract which took the place of the deposit shall be observed. (Art. 309, Code of Commerce.) The defendant has shown no authorization whatsoever or the consent of the depositary for using or disposing of the P2,498, which the certificate acknowledges, or any contract entered into with the depositor to convert the deposit into a loan, commission, or other contract. That demand was not made for restitution of the sum deposited, which could have been claimed on the same or the next day after the certificate was signed, does not operate against the depositor, or signify anything except the intention not to press it. Failure to claim at once or delay for sometime in demanding restitution of the things deposited, which was immediately due, does not imply such permission to use the thing deposited as would convert the deposit into a loan. Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided: The depositary of an amount of money cannot use the amount, and if he makes use of it, he shall be responsible for all damages that may accrue and shall respond to the depositor for the legal interest on the amount. Whereupon the commentators say: In this case the deposit becomes in fact a loan, as a just punishment imposed upon him who abuses the sacred nature of a deposit and as a means of preventing the desire of gain from leading him into speculations that may be disastrous to the depositor, who is much better secured while the deposit exists when he only has a personal action for recovery. According to article 548, No. 5, of the Penal Code, those who to the prejudice of another appropriate or abstract for their own use money, goods, or other personal property which they may have received as a deposit, on commission, or for administration, or for any other purpose which produces the obligation of delivering it or returning it, and deny having received it, shall suffer the penalty of the preceding article," which punishes such act as the crime of estafa. The corresponding article of the Penal Code of the Philippines in 535, No. 5. In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he commits the crime of estafa under article 548 of the Penal Code of Spain who to another's detriment appropriates to himself or abstracts money or goods received on commission for delivery, the court rightly applied this article to the appellant, who, to the manifest detriment of the owner or owners of the securities, since he has not restored them, willfully and wrongfully disposed of them by appropriating them to himself or at least diverting them from the purpose to which he was charged to devote them."

EN BANC G.R. No. L-7593 March 27, 1913

THE UNITED STATES, vs. JOSE M. IGPUARA, defendant-appellant.

W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant. Office of the Solicitor-General Harvey for appellee. ARELLANO, C.J.: The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla and Eugenio Veraguth out of P2,498 Philippine currency, which he had take on deposit from the former to be at the latter's disposal. The document setting forth the obligation reads: We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-eight pesos (P2,498), the balance from Juana Montilla's sugar. Iloilo, June 26, 1911, Jose Igpuara, for Ramirez and Co. The Court of First Instance of Iloilo sentenced the defendant to two years of presidio correccional, to pay Juana Montilla P2,498 Philippine currency, and in case of insolvency to subsidiary imprisonment at P2.50 per day, not to exceed one-third of the principal penalty, and the costs. The defendant appealed, alleging as errors: (1) Holding that the document executed by him was a certificate of deposit; (2) holding the existence of a deposit, without precedent transfer or delivery of the P2,498; and (3) classifying the facts in the case as the crime of estafa. A deposit is constituted from the time a person receives a thing belonging to another with the obligation of keeping and returning it. (Art. 1758, Civil Code.) That the defendant received P2,498 is a fact proven. The defendant drew up a document declaring that they remained in his possession, which he could not have said had he not received them. They remained in his possession, surely in no other sense than to take care of them, for they remained has no other purpose. They remained in the defendant's possession at the disposal of Veraguth; but on August 23 of the same year Veraguth demanded for him through a notarial instrument restitution of them, and to date he has not restored them. The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in an instrument payable on demand, and as no attempt was made to cash it until August 23, 1911, he could indorse and negotiate it like any other commercial instrument. There is no doubt that if Veraguth accepted the receipt for P2,498 it was because at that time he agreed with the defendant to consider the operation of sale on commission closed, leaving the collection of said sum until later, which sum remained as a loan payable upon presentation of the receipt." (Brief, 3 and 4.) Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this commission was settled with a balance of P2,498 in favor of the principal, Juana Montilla; and (3) that this balance remained in the possession of the defendant, who drew up an instrument payable on demand, he has drawn two conclusions, both erroneous: One, that the instrument drawn up in the form of a deposit certificate could be indorsed or negotiated like any other commercial instrument; and the other, that the sum of P2,498 remained in defendant's possession as a loan.

Credit Transactions Full Text Cases Atty. Adviento

It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed of to the detriments of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth, belong to the defendant. Likewise erroneous is the construction apparently at tempted to be given to two decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs. Morales and Morco, 15 Phil. Rep., 236) as implying that what constitutes estafa is not the disposal of money deposited, but denial of having received same. In the first of said cases there was no evidence that the defendant had appropriated the grain deposited in his possession. On the contrary, it is entirely probable that, after the departure of the defendant from Libmanan on September 20, 1898, two days after the uprising of the civil guard in Nueva Caceres, the rice was seized by the revolutionalists and appropriated to their own uses. In this connection it was held that failure to return the thing deposited was not sufficient, but that it was necessary to prove that the depositary had appropriated it to himself or diverted the deposit to his own or another's benefit. He was accused or refusing to restore, and it was held that the code does not penalize refusal to restore but denial of having received. So much for the crime of omission; now with reference to the crime of commission, it was not held in that decision that appropriation or diversion of the thing deposited would not constitute the crime of estafa. In the second of said decisions, the accused "kept none of the proceeds of the sales. Those, such as they were, he turned over to the owner;" and there being no proof of the appropriation, the agent could not be found guilty of the crime of estafa. Being in accord and the merits of the case, the judgment appealed from is affirmed, with costs. THIRD DIVISION G.R. No. L-66826 August 19, 1988 BANK OF THE vs. THE INTERMEDIATE respondents. PHILIPPINE APPELLATE ISLANDS, COURT and petitioner, ZSHORNACK

31

1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with the remaining balance of the said account at the rate fixed by the bank for dollar deposits under Central Bank Circular 343; 2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00 immediately upon the finality of this decision, without interest for the reason that the said amount was merely held in custody for safekeeping, but was not actually deposited with the defendant COMTRUST because being cash currency, it cannot by law be deposited with plaintiffs dollar account and defendant's only obligation is to return the same to plaintiff upon demand; xxx xxx xxx 5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in the concept of litigation expenses and attorney's fees suffered by plaintiff as a result of the failure of the defendant bank to restore to his (plaintiffs) account the amount of U.S. $1,000.00 and to return to him (plaintiff) the U.S. $3,000.00 cash left for safekeeping. Costs against defendant COMTRUST. SO ORDERED. [Rollo, pp. 47-48.] Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to Zshornack. The latter not having appealed the Court of Appeals decision, the issues facing this Court are limited to the bank's liability with regard to the first and second causes of action and its liability for damages. 1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso current account. On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia indicated that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings account of the Zshornacks; the charges for commission, documentary stamp tax and others totalling P17.46 were to be charged to Current Acct. No. 210465-29, again, the current account of the Zshornacks. There was no indication of the name of the purchaser of the dollar draft. On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank, New York, with an indication that it was to be charged to Dollar Savings Acct. No. 25-4109. When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from the bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to Ernesto. Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial court and the Appellate Court on the first cause of action. Petitioner must be held liable for the unauthorized withdrawal of US$1,000.00 from private respondent's dollar account.

Pacis & Reyes Law Office for petitioner. Ernesto T. Zshornack, Jr. for private respondent.

CORTES, J.: The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a corporate merger, and was substituted as party to the case. Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal Caloocan City a complaint against COMTRUST alleging four causes of action. Except for the third cause of action, the CFI ruled in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which modified the CFI decision absolving the bank from liability on the fourth cause of action. The pertinent portions of the judgment, as modified, read: IN VIEW OF THE FOREGOING, the Court renders judgment as follows:

Credit Transactions Full Text Cases Atty. Adviento

In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has adopted inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that the withdrawal was made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw from his dollar savings account such amount which, when converted to pesos, would be needed to fund his peso current account. If indeed the peso equivalent of the amount withdrawn from the dollar account was credited to the peso current account, why did the bank still have to pay Ernesto? At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not shown how the transaction involving the cashier's check is related to the transaction involving the dollar draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy. As to the second explanation, even if we assume that there was such an agreement, the evidence do not show that the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no proof whatsoever that peso Current Account No. 210-465-29 was ever credited with the peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109. 2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as greenbacks) for safekeeping, and that the agreement was embodied in a document, a copy of which was attached to and made part of the complaint. The document reads: Makati Cable Address: Philippines "COMTRUST" COMMERCIAL BANK AND TRUST COMPANY of the Philippines Quezon City Branch December 8, 1975 MR. RIZALDY T. ZSHORNACK &/OR MRS SHIRLEY E. ZSHORNACK Sir/Madam: We acknowledged (sic) having received from you today the sum of US DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping. Received by:

32

In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at prevailing conversion rates. It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due execution of the above instrument. During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to his current account per deposit slip also accomplished by Garcia. Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia. Before we go into the nature of the contract entered into, an important point which arises on the pleadings, must be considered. The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of which document was attached to the complaint. In short, the second cause of action was based on an actionable document. It was therefore incumbent upon the bank to specifically deny under oath the due execution of the document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due execution of the document in question, or questioning the authority of Garcia to bind the bank, or denying the bank's capacity to enter into the contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's authority, but also the bank's power, to enter into the contract in question. In the past, this Court had occasion to explain the reason behind this procedural requirement. The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a corporation with the external indicia of authority, any person, not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted

... Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the stranger who deals with the (Sgd.) VIRGILIO V. GARCIA corporation on the faith of the ostensible authority exercised by some of the corporate officers. It is therefore reasonable, in a case where an officer of a It was also alleged in the complaint that despite demands, the bank corporation has made a contract in its name, that the refused to return the money. corporation should be required, if it denies his authority, to state such defense in its answer. By this means the plaintiff is apprised of the fact that the

Credit Transactions Full Text Cases Atty. Adviento

agent's authority is contested; and he is given an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646 (1918).] Petitioner's argument must also be rejected for another reason. The practical effect of absolving a corporation from liability every time an officer enters into a contract which is beyond corporate powers, even without the proper allegation or proof that the corporation has not authorized nor ratified the officer's act, is to cast corporations in so perfect a mold that transgressions and wrongs by such artificial beings become impossible [Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized acts is only to put forth a very plain truism but to say that such bodies have no power or capacity to err is to impute to them an excellence which does not belong to any created existence with which we are acquainted. The distinction between power and right is no more to be lost sight of in respect to artificial than in respect to natural persons." [Ibid.] Having determined that Garcia's act of entering into the contract binds the corporation, we now determine the correct nature of the contract, and its legal consequences, including its enforceability. The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later. The above arrangement is that contract defined under Article 1962, New Civil Code, which reads: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into the transaction involved in this case. The circular provides: xxx xxx xxx 2. Transactions in the assets described below and all dealings in them of whatever nature, including, where applicable their exportation and importation, shall NOT be effected, except with respect to deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, when such deposit accounts are owned by and in the name of, banks. (a) Any and all assets, provided they are held through, in, or with banks or banking institutions located in the Philippines, including money, checks, drafts, bullions bank drafts, deposit accounts (demand, time and savings), all debts, indebtedness or obligations, financial brokers and investment houses, notes, debentures, stocks, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of security, expressed in foreign

33

currencies, or if payable abroad, irrespective of the currency in which they are expressed, and belonging to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation residing or located within the Philippines; (b) Any and all assets of the kinds included and/or described in subparagraph (a) above, whether or not held through, in, or with banks or banking institutions, and existent within the Philippines, which belong to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation not residing or located within the Philippines; (c) Any and all assets existent within the Philippines including money, checks, drafts, bullions, bank drafts, all debts, indebtedness or obligations, financial securities commonly dealt in by bankers, brokers and investment houses, notes, debentures, stock, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of security expressed in foreign currencies, or if payable abroad, irrespective of the currency in which they are expressed, and belonging to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation residing or located within the Philippines. xxx xxx xxx 4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those authorized to deal in foreign exchange. All receipts of foreign exchange by any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation shall be sold to the authorized agents of the Central Bank by the recipients within one business day following the receipt of such foreign exchange. Any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation, residing or located within the Philippines, who acquires on and after the date of this Circular foreign exchange shall not, unless licensed by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value, nor delay taking ownership thereof except as such delay is customary; Provided, further, That within one day upon taking ownership, or receiving payment, of foreign exchange the aforementioned persons and entities shall sell such foreign exchange to designated agents of the Central Bank. xxx xxx xxx 8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or corporation, foreign

Credit Transactions Full Text Cases Atty. Adviento

or domestic, who being bound to the observance thereof, or of such other rules, regulations or directives as may hereafter be issued in implementation of this Circular, shall fail or refuse to comply with, or abide by, or shall violate the same, shall be subject to the penal sanctions provided in the Central Bank Act. xxx xxx xxx Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6 provides: SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation shall be sold to authorized agents of the Central Bank by the recipients within one business day following the receipt of such foreign exchange. Any resident person, firm, company or corporation residing or located within the Philippines, who acquires foreign exchange shall not, unless authorized by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value, nor delay taking ownership thereof except as such delay is customary; Provided, That, within one business day upon taking ownership or receiving payment of foreign exchange the aforementioned persons and entities shall sell such foreign exchange to the authorized agents of the Central Bank. As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did not intended to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the contract of depositum would never have been entered into at all. Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the other. "When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for violating the law. We thus rule that Zshornack cannot recover under the second cause of action. 3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation expenses and attorney's fees to be reasonable. The award is sustained. WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by the bank for dollar savings deposits. Petitioner is further ordered to pay private respondent the amount of P8,000.00 as damages. The other causes of action of private respondent are ordered dismissed. SO ORDERED. THIRD DIVISION G.R. No. 90027 March 3, 1993

34

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner, vs. THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents. Dolorfino & Dominguez Law Offices for petitioner. Danilo B. Banares for private respondent.

DAVIDE, JR., J.: Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee? This is the crux of the present controversy. On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the following conditions: 13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. 1 After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be opened only with the use of both keys. Petitioner claims that the certificates of title were placed inside the said box. Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a complaint 2 for damages against the respondent Bank with the Court of

Credit Transactions Full Text Cases Atty. Adviento

First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382. In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained in the box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim. 4 In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads: WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint. On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees. With costs against plaintiff. 6 The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are binding on the parties. Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the challenged decision because the trial court erred in (a) absolving the respondent Bank from liability from the loss, (b) not declaring as null and void, for being contrary to law, public order and public policy, the provisions in the contract for lease of the safety deposit box absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as well as under American jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and exemplary damages and attorney's fees. 8 In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally on the theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit box and its contents while the Bank retained no right to open the said box because it had neither the possession nor control over it and its contents. As such, the contract is governed by Article 1643 of the Civil Code 10 which provides: Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall be valid. It invoked Tolentino vs. Gonzales 11 which held that the owner of the property loses his control over the property leased during the period of the contract and Article 1975 of the Civil Code which provides: Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law.

35

The above provision shall not apply to contracts for the rent of safety deposit boxes. and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents of the box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature of the contract of lease and cannot be regarded as contrary to law, public order and public policy." 12 The appellate court was quick to add, however, that under the contract of lease of the safety deposit box, respondent Bank is not completely free from liability as it may still be made answerable in case unauthorized persons enter into the vault area or when the rented box is forced open. Thus, as expressly provided for in stipulation number 8 of the contract in question: 8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 13 Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a) did not properly and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents adhered to and affirmed by decisions of this Court and precepts in American jurisprudence adopted in the Philippines. It reiterates the arguments it had raised in its motion to reconsider the trial court's decision, the brief submitted to the respondent Court and the motion to reconsider the latter's decision. In a nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of the Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title pursuant to Article 1972 of the said Code which provides: Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book. If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound on the prevailing rule in the United States, to wit: The prevailing rule appears to be that where a safedeposit company leases a safe-deposit box or safe and the lessee takes possession of the box or safe and places therein his securities or other valuables, the relation of bailee and bail or is created between the parties to the transaction as to such securities or other valuables; the fact that the safe-deposit company does not know, and that it is not expected that it shall know, the character or description of the property which is deposited in such safe-deposit box or safe does not change that relation. That access to the contents of the safedeposit box can be had only by the use of a key retained by the lessee ( whether it is the sole key or one to be used in connection with one retained by the lessor) does not operate to alter the foregoing rule. The argument that there is not, in such a case, a delivery of exclusive possession and control to the deposit company, and that therefore the situation is

Credit Transactions Full Text Cases Atty. Adviento

entirely different from that of ordinary bailment, has been generally rejected by the courts, usually on the ground that as possession must be either in the depositor or in the company, it should reasonably be considered as in the latter rather than in the former, since the company is, by the nature of the contract, given absolute control of access to the property, and the depositor cannot gain access thereto without the consent and active participation of the company. . . . (citations omitted). and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety deposit box in consideration of a fixed amount at stated periods is a bailment for hire. Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties to simultaneously submit their respective Memoranda. The petition is partly meritorious. We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19 the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters could have access to the box. Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter being present. We observe, however, that the deposit theory itself does not altogether find unanimous support even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view because: There is, however, some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes. omitted)
22

36

(citations

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act 23 pertinently provides: Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects. xxx xxx xxx The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as depositories or as agents. . . . 24 (emphasis supplied) Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. 27 Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read: 13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. 28 are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any rented safe, to wit: 8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 29 Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself

Credit Transactions Full Text Cases Atty. Adviento

is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said: With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limits its liability to some extent by agreement or stipulation. 30 (citations omitted) Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the said box, without the other renter being present. Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had been established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision (dispositive portion) of public respondent Court of Appeals must be modified. WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made above on the nature of the relationship between the parties in a contract of lease of safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for Review is otherwise DENIED for lack of merit. No pronouncement as to costs. SO ORDERED. EN BANC G.R. No. 4015 August 24, 1908 ANGEL JAVELLANA, vs. JOSE LIM, ET AL., defendants-appellants. R. Zaldarriaga B. Montinola for appellee. TORRES, J.: plaintiff-appellee,

37

for

appellants.

The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906, with the Court of First Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino Domingo Lim, he sentenced to jointly and severally pay the sum of P2,686.58, with interest thereon at the rate of 15 per cent per annum from the 20th of January, 1898, until full payment should be made, deducting from the amount of interest due the sum of P1,102.16, and to pay the costs of the proceedings. Authority from the court having been previously obtained, the complaint was amended on the 10th of January, 1907; it was then alleged, on the 26th of May, 1897, the defendants executed and subscribed a document in favor of the plaintiff reading as follows: We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and severally, on the 20th of January, 1898. Jaro, 26th of May, 1897. Signed Jose Lim. Signed: Ceferino Domingo Lim. That, when the obligation became due, the defendants begged the plaintiff for an extension of time for the payment thereof, building themselves to pay interest at the rate of 15 per cent on the amount of their indebtedness, to which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid on account of interest due the sum of P1,000 pesos, with the exception of either capital or interest, had thereby been subjected to loss and damages. A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the defendants answered the original complaint before its amendment, setting forth that they acknowledged the facts stated in Nos. 1 and 2 of the complaint; that they admitted the statements of the plaintiff relative to the payment of 1,102.16 pesos made on the 15th of November, 1902, not, however, as payment of interest on the amount stated in the foregoing document, but on account of the principal, and denied that there had been any agreement as to an extension of the time for payment and the payment of interest at the rate of 15 per cent per annum as alleged in paragraph 3 of the complaint, and also denied all the other statements contained therein. As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which, together with the P1,102.16 acknowledged in the complaint, aggregated the total sum of P5,602.16, and that, deducting therefrom the total sum of P2,686.58 stated in the document transcribed in the complaint, the plaintiff still owed the defendants P2,915.58; therefore, they asked that judgment be entered absolving them, and sentencing the plaintiff to pay them the sum of P2,915.58 with the costs. Evidence was adduced by both parties and, upon their exhibits, together with an account book having been made of record, the court below rendered judgment on the 15th of January, 1907, in favor of the plaintiff for the recovery of the sum of P5,714.44 and costs. The defendants excepted to the above decision and moved for a new trial. This motion was overruled and was also excepted to by them; the bill of exceptions presented by the appellants having been approved, the same was in due course submitted to this court. The document of indebtedness inserted in the complaint states that the plaintiff left on deposit with the defendants a given sum of money which they were jointly and severally obliged to return on a certain date fixed in the document; but that, nevertheless, when the document appearing as Exhibits 2, written in the Visayan dialect and followed by a translation into Spanish was executed, it was acknowledged, at the date thereof, the 15th

Credit Transactions Full Text Cases Atty. Adviento

of November, 1902, that the amount deposited had not yet been returned to the creditor, whereby he was subjected to losses and damages amounting to 830 pesos since the 20th of January, 1898, when the return was again stipulated with the further agreement that the amount deposited should bear interest at the rate of 15 per cent per annum, from the aforesaid date of January 20, and that the 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt issued by him to the debtors, would be included, and that the said rate of interest would obtain until the debtors on the 20th of May, 1897, it is called a deposit consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal to the one received by them. For this reason it must be understood that the debtors were lawfully authorized to make use of the amount deposited, which they have done, as subsequent shown when asking for an extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected the letter, their creditor, to losses and damages for not complying with what had been stipulated, and being conscious that they had used, for their own profit and gain, the money that they received apparently as a deposit, they engaged to pay interest to the creditor from the date named until the time when the refund should be made. Such conduct on the part of the debtors is unquestionable evidence that the transaction entered into between the interested parties was not a deposit, but a real contract of loan. Article 1767 of the Civil Code provides that The depository can not make use of the thing deposited without the express permission of the depositor. Otherwise he shall be liable for losses and damages. Article 1768 also provides that When the depository has permission to make use of the thing deposited, the contract loses the character of a deposit and becomes a loan or bailment. The permission shall not be presumed, and its existence must be proven. When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor asking for an extension of one year, in view of the fact the money was scare, and because neither himself nor the other defendant were able to return the amount deposited, for which reason he agreed to pay interest at the rate of 15 per cent per annum, it was because, as a matter of fact, he did not have in his possession the amount deposited, he having made use of the same in his business and for his own profit; and the creditor, by granting them the extension, evidently confirmed the express permission previously given to use and dispose of the amount stated as having bee deposited, which, in accordance with the loan, to all intents and purposes gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent per annum until its full payment, deducting from the total amount of interest the sum of 1,000 pesos, in accordance with the provisions of article 1173 of the Civil Code. Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2) executed in the presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on behalf of himself and the former, nevertheless, the said document has not been contested as false, either by a criminal or by a civil proceeding, nor has any doubt been cast upon the authenticity of the signatures of the witnesses who attested the execution of the same; and from the evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly aware of and authorized his joint codebtor to liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to execute the aforesaid document No. 2. A true ratification of the original document of deposit was thus made, and not the least proof is shown in the record that Jose Lim had ever paid the whole or any part of the capital stated in the original document, Exhibit 1. If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as fully established, such is not the case with the defendant's counterclaim for P5,602.16, because the existence and certainty of said indebtedness imputed to the plaintiff has not been proven,

38

and the defendants, who call themselves creditors for the said amount have not proven in a satisfactory manner that the plaintiff had received partial payments on account of the same; the latter alleges with good reason, that they should produce the receipts which he may have issued, and which he did issue whenever they paid him any money on account. The plaintiffs allegation that the two amounts of 400 and 1,200 pesos, referred to in documents marked "C" and "D" offered in evidence by the defendants, had been received from Ceferino Domingo Lim on account of other debts of his, has not been contradicted, and the fact that in the original complaint the sum of 1,102.16 pesos, was expressed in lieu of 1,000 pesos, the only payment made on account of interest on the amount deposited according to documents No. 2 and letter "B" above referred to, was due to a mistake. Moreover, for the reason above set forth it may, as a matter of course, be inferred that there was no renewal of the contract deposited converted into a loan, because, as has already been stated, the defendants received said amount by virtue of real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown. The original joint obligation contracted by the defendant debtor still exists, and it has not been shown or proven in the proceedings that the creditor had released Joe Lim from complying with his obligation in order that he should not be sued for or sentenced to pay the amount of capital and interest together with his codebtor, Ceferino Domingo Lim, because the record offers satisfactory evidence against the pretension of Jose Lim, and it further appears that document No. 2 was executed by the other debtor, Ceferino Domingo Lim, for himself and on behalf of Jose Lim; and it has also been proven that Jose Lim, being fully aware that his debt had not yet been settled, took steps to secure an extension of the time for payment, and consented to pay interest in return for the concession requested from the creditor. In view of the foregoing, and adopting the findings in the judgment appealed from, it is our opinion that the same should be and is hereby affirmed with the costs of this instance against the appellant, provided that the interest agreed upon shall be paid until the complete liquidation of the debt. So ordered. EN BANC G.R. No. L-6913 November 21, 1913

THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee, vs. GREGORIO DE LA PEA, administrator of the estate of Father Agustin de la Pea, defendant-appellant. J. Lopez Vito, Arroyo and Horrilleno, for appellee. for appellant.

MORELAND, J.: This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo, awarding to the plaintiff the sum of P6,641, with interest at the legal rate from the beginning of the action. It is established in this case that the plaintiff is the trustee of a charitable bequest made for the construction of a leper hospital and that father Agustin de la Pea was the duly authorized representative of the plaintiff to receive the legacy. The defendant is the administrator of the estate of Father De la Pea. In the year 1898 the books Father De la Pea, as trustee, showed that he had on hand as such trustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the same year he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and during the war of the revolution, Father De la Pea was arrested by the military authorities as a political prisoner, and while

Credit Transactions Full Text Cases Atty. Adviento

thus detained made an order on said bank in favor of the United States Army officer under whose charge he then was for the sum thus deposited in said bank. The arrest of Father De la Pea and the confiscation of the funds in the bank were the result of the claim of the military authorities that he was an insurgent and that the funds thus deposited had been collected by him for revolutionary purposes. The money was taken from the bank by the military authorities by virtue of such order, was confiscated and turned over to the Government. While there is considerable dispute in the case over the question whether the P6,641 of trust funds was included in the P19,000 deposited as aforesaid, nevertheless, a careful examination of the case leads us to the conclusion that said trust funds were a part of the funds deposited and which were removed and confiscated by the military authorities of the United States. That branch of the law known in England and America as the law of trusts had no exact counterpart in the Roman law and has none under the Spanish law. In this jurisdiction, therefore, Father De la Pea's liability is determined by those portions of the Civil Code which relate to obligations. (Book 4, Title 1.) Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the diligence pertaining to a good father of a family" (art. 1094), it also provides, following the principle of the Roman law, major casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for events which could not be foreseen, or which having been foreseen were inevitable, with the exception of the cases expressly mentioned in the law or those in which the obligation so declares." (Art. 1105.) By placing the money in the bank and mixing it with his personal funds De la Pea did not thereby assume an obligation different from that under which he would have lain if such deposit had not been made, nor did he thereby make himself liable to repay the money at all hazards. If the had been forcibly taken from his pocket or from his house by the military forces of one of the combatants during a state of war, it is clear that under the provisions of the Civil Code he would have been exempt from responsibility. The fact that he placed the trust fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a debtor who must respond at all hazards. We do not enter into a discussion for the purpose of determining whether he acted more or less negligently by depositing the money in the bank than he would if he had left it in his home; or whether he was more or less negligent by depositing the money in his personal account than he would have been if he had deposited it in a separate account as trustee. We regard such discussion as substantially fruitless, inasmuch as the precise question is not one of negligence. There was no law prohibiting him from depositing it as he did and there was no law which changed his responsibility be reason of the deposit. While it may be true that one who is under obligation to do or give a thing is in duty bound, when he sees events approaching the results of which will be dangerous to his trust, to take all reasonable means and measures to escape or, if unavoidable, to temper the effects of those events, we do not feel constrained to hold that, in choosing between two means equally legal, he is culpably negligent in selecting one whereas he would not have been if he had selected the other. The court, therefore, finds and declares that the money which is the subject matter of this action was deposited by Father De la Pea in the Hongkong and Shanghai Banking Corporation of Iloilo; that said money was forcibly taken from the bank by the armed forces of the United States during the war of the insurrection; and that said Father De la Pea was not responsible for its loss. The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his complaint. Arellano, C.J., Torres and Carson, JJ., concur. G.R. No. L-43191 November 13, 1935 Separate Opinions TRENT, J., dissenting:

39

I dissent. Technically speaking, whether Father De la Pea was a trustee or an agent of the plaintiff his books showed that in 1898 he had in his possession as trustee or agent the sum of P6,641 belonging to the plaintiff as the head of the church. This money was then clothed with all the immunities and protection with which the law seeks to invest trust funds. But when De la Pea mixed this trust fund with his own and deposited the whole in the bank to his personal account or credit, he by this act stamped on the said fund his own private marks and unclothed it of all the protection it had. If this money had been deposited in the name of De la Pea as trustee or agent of the plaintiff, I think that it may be presumed that the military authorities would not have confiscated it for the reason that they were looking for insurgent funds only. Again, the plaintiff had no reason to suppose that De la Pea would attempt to strip the fund of its identity, nor had he said or done anything which tended to relieve De la Pea from the legal reponsibility which pertains to the care and custody of trust funds. The Supreme Court of the United States in the United State vs. Thomas (82 U. S., 337), at page 343, said: "Trustees are only bound to exercise the same care and solicitude with regard to the trust property which they would exercise with regard to their own. Equity will not exact more of them. They are not liable for a loss by theft without their fault. But this exemption ceases when they mix the trust-money with their own, whereby it loses its identity, and they become mere debtors." If this proposition is sound and is applicable to cases arising in this jurisdiction, and I entertain no doubt on this point, the liability of the estate of De la Pea cannot be doubted. But this court in the majority opinion says: "The fact that he (Agustin de la Pea) placed the trust fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a debtor who must respond at all hazards. . . . There was no law prohibiting him from depositing it as he did, and there was no law which changed his responsibility, by reason of the deposit." I assume that the court in using the language which appears in the latter part of the above quotation meant to say that there was no statutory law regulating the question. Questions of this character are not usually governed by statutory law. The law is to be found in the very nature of the trust itself, and, as a general rule, the courts say what facts are necessary to hold the trustee as a debtor. If De la Pea, after depositing the trust fund in his personal account, had used this money for speculative purposes, such as the buying and selling of sugar or other products of the country, thereby becoming a debtor, there would have been no doubt as to the liability of his estate. Whether he used this money for that purpose the record is silent, but it will be noted that a considerable length of time intervened from the time of the deposit until the funds were confiscated by the military authorities. In fact the record shows that De la Pea deposited on June 27, 1898, P5,259, on June 28 of that year P3,280, and on August 5 of the same year P6,000. The record also shows that these funds were withdrawn and again deposited all together on the 29th of May, 1900, this last deposit amounting to P18,970. These facts strongly indicate that De la Pea had as a matter of fact been using the money in violation of the trust imposed in him. lawph!1.net If the doctrine announced in the majority opinion be followed in cases hereafter arising in this jurisdiction trust funds will be placed in precarious condition. The position of the trustee will cease to be one of trust. EN BANC

Credit Transactions Full Text Cases Atty. Adviento

PAULINO GULLAS, plaintiff-appellant, vs. THE PHILIPPINE NATIONAL BANK, defendant-appellant. Gullas, Lopez, Tuao and Leuterio Jose Delgado for defendant-appellant. for plaintiff-appellant.

40

reciprocally creditor and debtor of each other (Civil Code, article 1195). In his connection, it has been held that the relation existing between a depositor and a bank is that of creditor and debtor. (Fulton Iron Works Co. vs. China Banking Corporation [1933], 59 Phil., 59.) The Negotiable Instruments Law contains provisions establishing the liability of a general indorser and giving the procedure for a notice of dishonor. The general indorser of negotiable instrument engages that if he be dishonored and the, necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it has been held a long line of authorities that notice of dishonor is in order to charge all indorser and that the right of action against him does not accrue until the notice is given. (Asia Banking Corporation vs. Javier [1923] 44 Phil., 777; 5 Uniform Laws Annotated.) As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a bank has no right, without an order from or special assent of the depositor to retain out of his deposit an amount sufficient to meet his indebtedness. The basis of the Louisiana doctrine is the theory of confidential contracts arising from irregular deposits, e. g., the deposit of money with a banker. With freedom of selection and after full preference to the minority rule as more in harmony with modern banking practice. (1 Morse on Banks and Banking, 5th ed., sec. 324; Garrison vs. Union Trust Company [1905], 111 A.S.R., 407; Louisiana Civil Code Annotated, arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8 Manresa, Comentarios al Codigo Civil Espaol, 4th ed., 359 et seq., 11 Manresa pp. 694 et seq.) Starting, therefore, from the premise that the Philippine National Bank had with respect to the deposit of Gullas a right of set off, we next consider if that remedy was enforced properly. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. At this point recall that Gullas was merely an indorser and had issued in good faith. As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party, it has been held that he has a right of action against the bank for its refusal to pay such a check in the absence of notice to him that the bank has applied the funds so deposited in extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) The decision cited represents the minority doctrine, for on principle it would seem that notice is not necessary to a maker because the right is based on the doctrine that the relationship is that of creditor and debtor. However this may be, as to an indorser the situation is different, and notice should actually have been given him in order that he might protect his interests. We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to follow up that statement with others proving exact damages is not so easy. For instance, for alleged libelous articles the bank would not be primarily liable. The same remark could be made relative to the loss of business which Gullas claims but which could not be traced definitely to this occurrence. Also Gullas having eventually been reimbursed lost little through the actual levy by the bank on his funds. On the other hand, it was not agreeable for one to draw checks in all good faith, then, leave for Manila, and on return find that those checks had not been cashed because of the action taken by the bank. That caused a disturbance in Gullas' finances, especially with reference to his insurance, which was injurious to him. All facts and circumstances considered, we are of the opinion that Gullas should be awarded nominal damages because of the premature action of the bank against which Gullas had no means of protection, and have finally determined that the amount should be P250. Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled, with the result that the judgment of the trial court will be modified by sentencing the defendant to pay the plaintiff the sum of P250, and the costs of both instances. THIRD DIVISION G.R. No. 156940 December 14, 2004

MALCOLM, J.: Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which sentenced the defendant to return to the account of the plaintiff the sum of P5098, with legal interest and costs, the plaintiff to secure damages in the amount of P10,000 more or less, and the defendant to be absolved totally from the amended complaint. As it is conceded that the plaintiff has already received the sum represented by the United States treasury, warrant, which is in question, the appeal will thus determine the amount, if any, which should be paid to the plaintiff by the defendant. The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a member of the Philippine Bar, resident in the City of Cebu. The second named is a banking corporation with a branch in the same city. Attorney Gullas has had a current account with the bank. It appears from the record that on August 2, 1933, the Treasurer of the United States for the United States Veterans Bureau issued a Warrant in the amount of $361, payable to the order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check. Thereupon it was cashed by the Philippine National Bank. Subsequently the treasury warrant was dishonored by the Insular Treasurer. At that time the outstanding balance of Attorney Gullas on the books of the bank was P509. Against this balance he had issued certain cheeks which could not be paid when the money was sequestered by the On August 20, 1933, Attorney Gullas left his residence for Manila. The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas which could not be delivered to him at that time because he was in Manila. In the bank's letter of August 21, 1933, addressed to Messrs. Paulino Gulla and Pedro Lopez, they were informed that the United States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for $361 or P722, the payment for which had been received has been returned by our Manila office with the notation that the payment of his check has been stopped by the Insular Treasurer. "In view of this therefore we have applied the outstanding balances of your current accounts with us to the part payment of the foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney Gullas to Cebu on August 31, 1933, notice of dishonor was received and the unpaid balance of the United States Treasury warrant was immediately paid by him. As a consequence of these happenings, two occurrences transpired which inconvenienced Attorney Gullas. In the first place, as above indicated, checks including one for his insurance were not paid because of the lack of funds standing to his credit in the bank. In the second place, periodicals in the vicinity gave prominence to the news to the great mortification of Gullas.lawphil.net A variety of incidental questions have been suggested on the record which it can be taken for granted as having been adversely disposed of in this opinion. The main issues are two, namely, (1) as to the right of Philippine National Bank, and to apply a deposit to the debt of depositor to the bank and (2) as to the amount damages, if any, which should be awarded Gullas. The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195 et seq., 1758 et seq. The portions of Philippine law provide that compensation shall take place when two persons are

Credit Transactions Full Text Cases Atty. Adviento

ASSOCIATED BANK (Now WESTMONT vs. VICENTE HENRY TAN, respondent. BANK), petitioner,

41

docketed as Civil Case No. 892-AF, against the BANK, as defendant. "In his [C]omplaint, [respondent] maintained that he ha[d] sufficient funds to pay the subject checks and alleged that his suppliers decreased in number for lack of trust. As he has been in the business community for quite a time and has established a good record of reputation and probity, plaintiff claimed that he suffered embarrassment, humiliation, besmirched reputation, mental anxieties and sleepless nights because of the said unfortunate incident. [Respondent] further averred that he continuously lost profits in the amount of P250,000.00. [Respondent] therefore prayed for exemplary damages and that [petitioner] be ordered to pay him the sum of P1,000,000.00 by way of moral damages, P250,000.00 as lost profits, P50,000.00 as attorneys fees plus 25% of the amount claimed including P1,000.00 per court appearance. "Meanwhile, [petitioner] filed a Motion to Dismiss on February 7, 1991, but the same was denied for lack of merit in an Order dated March 7, 1991. Thereafter, [petitioner] BANK on March 20, 1991 filed its Answer denying, among others, the allegations of [respondent] and alleged that no banking institution would give an assurance to any of its client/depositor that the check deposited by him had already been cleared and backed up by sufficient funds but it could only presume that the same has been honored by the drawee bank in view of the lapse of time that ordinarily takes for a check to be cleared. For its part, [petitioner] alleged that on October 2, 1990, it gave notice to the [respondent] as to the return of his UCPB check deposit in the amount of P101,000.00, hence, on even date, [respondent] deposited the amount of P50,000.00 to cover the returned check. "By way of affirmative defense, [petitioner] averred that [respondent] had no cause of action against it and argued that it has all the right to debit the account of the [respondent] by reason of the dishonor of the check deposited by the [respondent] which was withdrawn by him prior to its clearing. [Petitioner] further averred that it has no liability with respect to the clearing of deposited checks as the clearing is being undertaken by the Central Bank and in accepting [the] check deposit, it merely obligates itself as depositors collecting agent subject to actual payment by the drawee bank. [Petitioner] therefore prayed that [respondent] be ordered to pay it the amount of P1,000,000.00 by way of loss of goodwill, P7,000.00 as acceptance fee plus P500.00 per appearance and by way of attorneys fees. "Considering that Westmont Bank has taken over the management of the affairs/properties of the BANK, [respondent] on October 10, 1996, filed an Amended Complaint reiterating substantially his allegations in the original complaint, except that the name of the previous defendant ASSOCIATED BANK is now WESTMONT BANK.

DECISION

PANGANIBAN, J.: While banks are granted by law the right to debit the value of a dishonored check from a depositors account, they must do so with the highest degree of care, so as not to prejudice the depositor unduly. The Case Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the January 27, 2003 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 56292. The CA disposed as follows: "WHEREFORE, premises considered, the Decision dated December 3, 1996, of the Regional Trial Court of Cabanatuan City, Third Judicial Region, Branch 26, in Civil Case No. 892-AF is hereby AFFIRMED. Costs against the [petitioner]."3 The Facts The CA narrated the antecedents as follows: "Vicente Henry Tan (hereafter TAN) is a businessman and a regular depositor-creditor of the Associated Bank (hereinafter referred to as the BANK). Sometime in September 1990, he deposited a postdated UCPB check with the said BANK in the amount of P101,000.00 issued to him by a certain Willy Cheng from Tarlac. The check was duly entered in his bank record thereby making his balance in the amount of P297,000.00, as of October 1, 1990, from his original deposit of P196,000.00. Allegedly, upon advice and instruction of the BANK that the P101,000.00 check was already cleared and backed up by sufficient funds, TAN, on the same date, withdrew the sum of P240,000.00, leaving a balance of P57,793.45. A day after, TAN deposited the amount of P50,000.00 making his existing balance in the amount of P107,793.45, because he has issued several checks to his business partners, to wit: CHECK NUMBERS a. 138814 b. 138804 c. 138787 d. 138847 DATE Sept. 29, 1990 Oct. 8, 1990 Sept. 30, 1990 Sept. 29, 1990 AMOUNT P9,000.00 9,350.00

6,360.00 "Trial ensured and thereafter, the court rendered its Decision dated 21,850.00 December 3, 1996 in favor of the [respondent] and against the [petitioner], e. 167054 Sept. 29, 1990 4,093.40 ordering the latter to pay the [respondent] the sum of P100,000.00 by way f. 138792 ` Sept. 29, 1990 3,546.00 moral damages, P75,000.00 as exemplary damages, P25,000.00 as of attorneys fees, plus the costs of this suit. In making said ruling, it was g. 138774 Oct. 2, 1990 6,600.00 shown that [respondent] was not officially informed about the debiting of h. 167072 Oct. 10, 1990 9,908.00 the P101,000.00 [from] his existing balance and that the BANK merely i. 168802 Oct. 10, 1990 3,650.00 allowed the [respondent] to use the fund prior to clearing merely for accommodation because the BANK considered him as one of its valued "However, his suppliers and business partners went back to him clients. The trial court ruled that the bank manager was negligent in alleging that the checks he issued bounced for insufficiency of handling the particular checking account of the [respondent] stating that funds. Thereafter, TAN, thru his lawyer, informed the BANK to such lapses caused all the inconveniences to the [respondent]. The trial take positive steps regarding the matter for he has adequate court also took into consideration that [respondents] mother was originally and sufficient funds to pay the amount of the subject checks. maintaining with the x x x BANK [a] current account as well as [a] time Nonetheless, the BANK did not bother nor offer any apology deposit, but [o]n one occasion, although his mother made a deposit, the 4 regarding the incident. Consequently, TAN, as plaintiff, filed a same was not credited in her favor but in the name of another." Complaint for Damages on December 19, 1990, with the Regional Trial Court of Cabanatuan City, Third Judicial Region, Petitioner appealed to the CA on the issues of whether it was within its rights, as collecting bank, to debit the account of its client for a dishonored

Credit Transactions Full Text Cases Atty. Adviento

check; and whether it had informed respondent about the dishonor prior to debiting his account. Ruling of the Court of Appeals Affirming the trial court, the CA ruled that the bank should not have authorized the withdrawal of the value of the deposited check prior to its clearing. Having done so, contrary to its obligation to treat respondents account with meticulous care, the bank violated its own policy. It thereby took upon itself the obligation to officially inform respondent of the status of his account before unilaterally debiting the amount of P101,000. Without such notice, it is estopped from blaming him for failing to fund his account. The CA opined that, had the P101,000 not been debited, respondent would have had sufficient funds for the postdated checks he had issued. Thus, the supposed accommodation accorded by petitioner to him is the proximate cause of his business woes and shame, for which it is liable for damages. Because of the banks negligence, the CA awarded respondent moral damages of P100,000. It also granted him exemplary damages of P75,000 and attorneys fees of P25,000. Hence this Petition.5 Issue In its Memorandum, petitioner raises the sole issue of "whether or not the petitioner, which is acting as a collecting bank, has the right to debit the account of its client for a check deposit which was dishonored by the drawee bank."6 The Courts Ruling The Petition has no merit. Sole Issue: Debit of Depositors Account Petitioner-bank contends that its rights and obligations under the present set of facts were misappreciated by the CA. It insists that its right to debit the amount of the dishonored check from the account of respondent is clear and unmistakable. Even assuming that it did not give him notice that the check had been dishonored, such right remains immediately enforceable. In particular, petitioner argues that the check deposit slip accomplished by respondent on September 17, 1990, expressly stipulated that the bank was obligating itself merely as the depositors collecting agent and -- until such time as actual payment would be made to it -- it was reserving the right to charge against the depositors account any amount previously credited. Respondent was allowed to withdraw the amount of the check prior to clearing, merely as an act of accommodation, it added. At the outset, we stress that the trial courts factual findings that were affirmed by the CA are not subject to review by this Court.7 As petitioner itself takes no issue with those findings, we need only to determine the legal consequence, based on the established facts. Right of Setoff A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals on the part of a depositor.8 The right of a collecting bank to debit a clients account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan."

42

Hence, the relationship between banks and depositors has been held to be that of creditor and debtor.9 Thus, legal compensation under Article 127810 of the Civil Code may take place "when all the requisites mentioned in Article 1279 are present,"11 as follows: "(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."12 Nonetheless, the real issue here is not so much the right of petitioner to debit respondents account but, rather, the manner in which it exercised such right. The Court has held that even while the right of setoff is conceded, separate is the question of whether that remedy has properly been exercised.13 The liability of petitioner in this case ultimately revolves around the issue of whether it properly exercised its right of setoff. The determination thereof hinges, in turn, on the banks role and obligations, first, as respondents depositary bank; and second, as collecting agent for the check in question. Obligation Depositary Bank as

In BPI v. Casa Montessori,14 the Court has emphasized that the banking business is impressed with public interest. "Consequently, the highest degree of diligence is expected, and high standards of integrity and performance are even required of it. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care."15 Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of Appeals16 has held that "the degree of diligence required of banks is more than that of a good father of a family where the fiduciary nature of their relationship with their depositors is concerned."17 Indeed, the banking business is vested with the trust and confidence of the public; hence the "appropriate standard of diligence must be very high, if not the highest, degree of diligence."18 The standard applies, regardless of whether the account consists of only a few hundred pesos or of millions.19 The fiduciary nature of banking, previously imposed by case law,20 is now enshrined in Republic Act No. 8791 or the General Banking Law of 2000. Section 2 of the law specifically says that the State recognizes the "fiduciary nature of banking that requires high standards of integrity and performance." Did petitioner treat respondents account with the highest degree of care? From all indications, it did not. It is undisputed -- nay, even admitted -- that purportedly as an act of accommodation to a valued client, petitioner allowed the withdrawal of the face value of the deposited check prior to its clearing. That act certainly disregarded the clearance requirement of the banking system. Such a practice is unusual, because a check is not legal tender or money;21 and its value can properly be transferred to a depositors account only after the check has been cleared by the drawee bank.22 Under ordinary banking practice, after receiving a check deposit, a bank either immediately credit the amount to a depositors account; or infuse

Credit Transactions Full Text Cases Atty. Adviento

value to that account only after the drawee bank shall have paid such amount.23 Before the check shall have been cleared for deposit, the collecting bank can only "assume" at its own risk -- as herein petitioner did -- that the check would be cleared and paid out. Reasonable business practice and prudence, moreover, dictated that petitioner should not have authorized the withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over and above his outstanding cleared balance of P196,793.45.24 Hence, the lower courts correctly appreciated the evidence in his favor. Obligation Collecting Agent Indeed, the bank deposit slip expressed this reservation: "In receiving items on deposit, this Bank obligates itself only as the Depositors Collecting agent, assuming no responsibility beyond carefulness in selecting correspondents, and until such time as actual payments shall have come to its possession, this Bank reserves the right to charge back to the Depositors account any amounts previously credited whether or not the deposited item is returned. x x x."25 However, this reservation is not enough to insulate the bank from any liability. In the past, we have expressed doubt about the binding force of such conditions unilaterally imposed by a bank without the consent of the depositor.26 It is indeed arguable that "in signing the deposit slip, the depositor does so only to identify himself and not to agree to the conditions set forth at the back of the deposit slip."27 Further, by the express terms of the stipulation, petitioner took upon itself certain obligations as respondents agent, consonant with the well-settled rule that the relationship between the payee or holder of a commercial paper and the collecting bank is that of principal and agent.28 Under Article 190929 of the Civil Code, such bank could be held liable not only for fraud, but also for negligence. As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment.30 Due to the very nature of their business, banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.31 Jurisprudence has established that the lack of diligence of a servant is imputed to the negligence of the employer, when the negligent or wrongful act of the former proximately results in an injury to a third person;32 in this case, the depositor. The manager of the banks Cabanatuan branch, Consorcia Santiago, categorically admitted that she and the employees under her control had breached bank policies. They admittedly breached those policies when, without clearance from the drawee bank in Baguio, they allowed respondent to withdraw on October 1, 1990, the amount of the check deposited. Santiago testified that respondent "was not officially informed about the debiting of the P101,000 from his existing balance of P170,000 on October 2, 1990 x x x."33 Being the branch manager, Santiago clearly acted within the scope of her authority in authorizing the withdrawal and the subsequent debiting without notice. Accordingly, what remains to be determined is whether her actions proximately caused respondents injury. Proximate cause is that which -- in a natural and continuous sequence, unbroken by any efficient intervening cause --produces the injury, and without which the result would not have occurred.34 Let us go back to the facts as they unfolded. It is undeniable that the banks premature authorization of the withdrawal by respondent on October 1, 1990, triggered -- in rapid succession and in a natural sequence -- the debiting of his account, the fall of his account balance to insufficient levels, and the subsequent dishonor of his own checks for lack of funds. The CA correctly noted thus: as

43

"x x x [T]he depositor x x x withdrew his money upon the advice by [petitioner] that his money was already cleared. Without such advice, [respondent] would not have withdrawn the sum of P240,000.00. Therefore, it cannot be denied that it was [petitioners] fault which allowed [respondent] to withdraw a huge sum which he believed was already his. "To emphasize, it is beyond cavil that [respondent] had sufficient funds for the check. Had the P101,000.00 not [been] debited, the subject checks would not have been dishonored. Hence, we can say that [respondents] injury arose from the dishonor of his well-funded checks. x x x."35 Aggravating matters, petitioner failed to show that it had immediately and duly informed respondent of the debiting of his account. Nonetheless, it argues that the giving of notice was discernible from his act of depositing P50,000 on October 2, 1990, to augment his account and allow the debiting. This argument deserves short shrift. First, notice was proper and ought to be expected. By the bank managers account, respondent was considered a "valued client" whose checks had always been sufficiently funded from 1987 to 1990,36 until the October imbroglio. Thus, he deserved nothing less than an official notice of the precarious condition of his account. Second, under the provisions of the Negotiable Instruments Law regarding the liability of a general indorser37 and the procedure for a notice of dishonor,38 it was incumbent on the bank to give proper notice to respondent. In Gullas v. National Bank,39 the Court emphasized: "x x x [A] general indorser of a negotiable instrument engages that if the instrument the check in this case is dishonored and the necessary proceedings for its dishonor are duly taken, he will pay the amount thereof to the holder (Sec. 66) It has been held by a long line of authorities that notice of dishonor is necessary to charge an indorser and that the right of action against him does not accrue until the notice is given. "x x x. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. At this point recall that Gullas was merely an indorser and had issued checks in good faith. As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party, it has been held that he has a right of action against the bank for its refusal to pay such a check in the absence of notice to him that the bank has applied the funds so deposited in extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203.) However this may be, as to an indorser the situation is different, and notice should actually have been given him in order that he might protect his interests."40 Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we fully subscribe to the CAs observations that it was not unusual for a well-reputed businessman like him, who "ordinarily takes note of the amount of money he takes and releases," to immediately deposit money in his current account to answer for the postdated checks he had issued.41 Damages Inasmuch as petitioner does not contest the basis for the award of damages and attorneys fees, we will no longer address these matters. WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner. SO ORDERED. GUINGONA v. CITY FISCAL SUPRA

Credit Transactions Full Text Cases Atty. Adviento

FIRST DIVISION G.R. No. L-50900 April 9, 1985 COMPAIA vs. COURT OF respondents. MARITIMA, APPEALS and PAN petitioner, ORIENTAL SHIPPING CO.,

44

G.R. No. L-51438 April 9, 1985 REPUBLIC OF THE PHILIPPINES (BOARD OF LlQUIDATORS), petitioner, vs. COURT OF APPEALS and PAN ORIENTAL SHIPPING CO., respondents. G.R. No. L-51463 April 9, 1985 PAN ORIENTAL SHIPPING CO., petitioner, vs. COURT OF APPEALS, COMPAIA MARITIMA and THE REPUBLIC OF THE PHILIPPINES (BOARD OF LIQUIDATORS), respondents. Quisumbing, Caparas, Tobias, Alcantara y Mosqueda for Pan Oriental Shipping Co. Rafael Dinglasan for Compania Maritima.

On February 21, 1949, the General Manager (of the Shipping Administration) directed its officers ... to take immediate possession of the vessel and to suspend the unloading of all cargoes on the same until the owners thereof made the corresponding arrangement with the Shipping Administration. Pursuant to these instructions, the boat was, not only actually repossessed, but the title thereto was registered again in the name of the Shipping Administration, thereby re-transferring the ownership thereof to the government. On February 22, 1949, Pan Oriental Shipping Co., hereinafter referred to as Pan Oriental, offered to charter said vessel FS-197 for a monthly rent of P3,000.00. Because the government was then spending for the guarding of the boat and subsistence of the crew members since repossession, the Slopping Administration on April 1, 1949, accepted Pan Oriental's offer "in principle" subject to the condition that the latter shag cause the repair of the vessel advancing the cost of labor and drydocking thereof, and the Shipping Administration to furnish the necessary spare parts. In accordance with this charter contract, the vessel was delivered to the possession of Pan Oriental. In the meantime, or on February 22, 1949, Froilan tried to explain his failure to comply with the obligations he assumed and asked that he be given another extension up to March 15, 1949 to file the necessary bond. Then on March 8, Froilan offered to pay all his overdue accounts. However, as he failed to fulfill even these offers made by him in these two communications, the Shipping Administration denied his petition for reconsideration (of the rescission of the contract) on March 22, 1949. It should be noted that while his petition for reconsideration was denied on March 22, it does not appear when he formally formulated his appeal. In the meantime, as already stated, the boat has been repossessed by the Shipping Administration and the title thereto reregistered in the name of the government, and delivered to the Pan Oriental in virtue of the charter agreement. On June 2, 1949, Froilan protested to the President against the charter of the vessel. xxx xxx xxx On June 4, 1949, the Shipping Administration and the Pan Oriental formalized the charter agreement and signed a bareboat contract with option to purchase, containing the following pertinent provisions: III. CHARTER HIRE, TIME OF PAYMENT. The CHARTERER shall pay to the owner a monthly charter hire of THREE THOUSAND (P3,000.00) PESOS from date of delivery of the vessel, payable in advance on or before the 5th of every current month until the return of the vessel to OWNER or purchase of the vessel by CHARTERER. IV. RIGHT OF OPTION TO PURCHASE. The right of option to purchase the vessel at the price of P150,000.00 plus the amount expended for its present repairs is hereby granted to the CHARTERER within 120 days from the execution of this Contract, unless otherwise extended by the OWNER. This right shall be deemed exercised only if, before the expiration of the said period, or its extension by the OWNER, the CHARTERER completes the payment, including any amount paid as Charter hire, of a total sum of not less than twenty-five percentum (25%) of said price of the vessel.

MELENCIO-HERRERA, J.: The above-entitled three (3) cases stemmed from the Decision of this Court, dated October 31, 1964, entitled "Fernando A. Froilan vs. PanOriental Shipping Co., et al. 1 and our four (4) subsequent Resolutions of August 27, 1965, November 23, 1966, December 16, 1966, and January 5, 1967, respectively. The antecedental background is narrated in the aforestated Decision, the pertinent portions of which read:

On March 7, 1947, Fernando A. Froilan purchased from the Shipping Administration a boat described as MV/FS-197 for the sum of P200,000.00, with a down payment of P50,000.00. To secure payment of the unpaid balance of the purchase price, a mortgage was constituted on the vessel in favor of the Shipping Administration .... xxx xxx xxx Th(e) contract was duly approved by the President of the Philippines. Froilan appeared to have defaulted in spite of demands, not only in the payment of the first installment on the unpaid balance of the purchase price and the interest thereon when they fell due, but also failed in his express undertaking to pay the premiums on the insurance coverage of the vessel obliging the Shipping Administration to advance such payment to the insurance company. ... Subsequently, FROILAN appeared to have still incurred a series of defaults notwithstanding reconsiderations granted, so much so that:

Credit Transactions Full Text Cases Atty. Adviento

The period of option may be extended by the OWNER without in any way affecting the other provisions, stipulations, and terms of this contract. If, for any reason whatsoever, the CHARTERER fails to exercise its option to purchase within the period stipulated, or within the extension thereof by the OWNER, its right of option to purchase shall be deemed terminated, without prejudice to the continuance of the Charter Party provisions of this contract. The right to dispose of the vessel or terminate the Charter Party at its discretion is reserved to the OWNER. XIII. TRANSFER OF OWNERSHIP OF THE VESSEL. After the CHARTERER has exercised his right of option as provided in the preceding paragraph (XII), the vessel shall be deemed conditionally sold to the purchaser, but the ownership thereof shag not be deemed transferred unless and until all the price of the vessel, together with the interest thereon, and any other obligation due and payable to the OWNER under this contract, have been fully paid by the CHARTERER. xxx xxx xxx XXI. APPROVAL OF THE PRESIDENT. This contract shall take effect only upon approval of His Excellency, the President. On September 6, 1949, the Cabinet revoked the cancellation of Froilan's contract of sale and restored to him all his rights thereunder, on condition that he would give not less than P1,000.00 to settle partially as overdue accounts and that reimbursement of the expenses incurred for the repair and drydocking of the vessel performed by Pan Oriental was to be made in accordance with future adjustment between him and the Shipping Administration (Exh. I). Later, pursuant to this reservation, Froilan's request to the Executive Secretary that the Administration advance the payment of the expenses incurred by Pan Oriental in the drydocking and repair of the vessel, was granted on condition that Froilan assume to pay the same and file a bond to cover said undertaking (EXH. III). On September 7, 1949, the formal bareboat charter with option to purchase filed on June 4, 1949, in favor of the Pan Oriental was returned to the General Manager of the Shipping Administration without action (not disapproval), only because of the Cabinet resolution of September 6, 1949 restoring Froilan to his rights under the conditions set forth therein, namely, the payment of P10,000.00 to settle partially his overdue accounts and the filing of a bond to guarantee the reimbursement of the expenses incurred by the Pan Oriental in the drydocking and repair of the vessel But Froilan again failed to comply with these conditions. And so the Cabinet, considering Froilan's consistent failure to comply with his obligations, including those imposed in the resolution of September 6, 1949, resolved to reconsider said previous resolution restoring him to his previous rights. And, in a letter dated December 3, 1949, the Executive Secretary authorized the Administration to continue its charter contract with Pan Oriental in respect to FS-197 and enforce whatever rights it may still have under the original contract with Froilan (Exh. 188). xxx xxx xxx

45

On August 25, 1950, the Cabinet resolved once more to restore Froilan to his rights under the original contract of sale, on condition that he shall pay the sum of P10,000.00 upon delivery of the vessel to him, said amount to be credited to his outstanding accounts; that he shall continue paying the remaining installments due, and that he shall assume the expenses incurred for the repair and drydocking of the vessel (Exh. 134). Pan Oriental protested to this restoration of Froilan's rights under the contract of sale, for the reason that when the vessel was delivered to it, the Shipping Administration had authority to dispose of the said property, Froilan having already relinquished whatever rights he may have thereon. Froilan paid the required cash of P10,000.00, and as Pan Oriental refused to surrender possession of the vessel, he filed an action for replevin in the Court of First Instance of Manila (Civil Case No. 13196) to recover possession thereof and to have him declared the rightful owner of said property. Upon plaintiff's filing a bond of P400,000.00, the court ordered the seizure of the vessel from Pan Oriental and its delivery to the plaintiff. Pan Oriental tried to question the validity of this order in a petition for certiorari filed in this Court (G.R. No. L-4577), but the same was dismissed for lack of merit by resolution of February 22, 1951. Defendant accordingly filed an answer, denying the averments of the complaint. The Republic of the Philippines, having been allowed to intervene in the proceeding, also prayed for the possession of the vessel in order that the chattel mortgage constituted thereon may be foreclosed. Defendant Pari Oriental resisted said intervention, claiming to have a better right to the possession of the vessel by reason of a valid and subsisting contract in its favor, and of its right of retention, in view of the expenses it had incurred for the repair of the said vessel. As counterclaim, defendant demanded of the intervenor to comply with the latter's obligation to deliver the vessel pursuant to the provisions of the charter contract. xxx xxx xxx Subsequently, Compaia Maritima, as purchaser of the vessel from Froilan, was allowed to intervene in the proceedings (in the lower court), said intervenor taking common cause with the plaintiff Froilan. In its answer to the complaint in intervention, defendant setup a counterclaim for damages in the sum of P50,000.00, alleging that plaintiff secured the Cabinet resolutions and the writ of replevin, resulting in its deprivation of possession of the vessel, at the instigation and inducement of Compania Maritima. This counterclaim was denied by both plaintiff and intervenor Maritima. On September 28, 1956, the lower court rendered a decision upholding Froilan's (and Compaia Maritima's) right to the ownership and possession of the FS-197. xxx xxx xxx It is not disputed that appellant Pan Oriental took possession of the vessel in question after it had been repossessed by the Shipping Administration and title thereto reacquired by the government, and operated the same from June 2, 1949 after it had repaired the vessel until it was dispossessed of the property on February 3, 1951, in virtue of a bareboat charter contract entered into between said company and the

Credit Transactions Full Text Cases Atty. Adviento

Shipping Administration. In the same agreement, appellant as charterer, was given the option to purchase the vessel, which may be exercised upon payment of a certain amount within a specified period. The President and Treasurer of the appellant company, tendered the stipulated initial payment on January 16, l950. Appellant now contends that having exercised the option, the subsequent Cabinet resolutions restoring Froilan's rights on the vessel, violated its existing rights over the same property. To the contention of plaintiff Froffan that the charter contract never became effective because it never received presidential approval as required therein, Pan Oriental answers that the letter of the Executive Secretary dated December 3, 1949 (Exh. 118), authorizing the Shipping Administration to continue its charter contract with appellant, satisfies such requirement (of presidential approval). It is to be noted, however, that said letter was signed by the Executive Secretary only and not under authority of the President. The same, therefore, cannot be considered to have attached unto the charter contract the required consent of the Chief Executive for its validity. xxx xxx xxx (Emphasis supplied) This Court then held: In the circumstances of this case, therefore, the resulting situation is that neither Froilan nor the Pan Oriental holds a valid contract over the vessel. However, since the intervenor Shipping Administration, representing the government practically ratified its proposed contract with Froilan by receiving the full consideration of the sale to the latter, for which reason the complaint in intervention was dismissed as to Froilan, and since Pan Oriental has no capacity to question this actuation of the Shipping Administration because it had no valid contract in its favor, the of the lower court adjudicating the vessel to Froilan and its successor Maritima, must be sus Nevertheless, under the already adverted to, Pan Oriental cannot be considered as in bad faith until after the institution of the case. However, since it is not disputed that said made useful and necessary expenses on the vessel, appellant is entitled to the refund of such expenses with the light to retain the vessel until he has been reimbursed therefor (Art. 546, Civil Code). As it is by the concerted acts of defendants and intervenor Republic of the Philippines that appellant was deprived of the possession of the vessel over which appellant had a lien for his expenses, appellees Froilan, Compaia Maritima, and the Republic of the Philippines are declared liable for the reimbursement to appellant of its legitimate expenses, as allowed by law, with legal interest from the time of disbursement. Modified in this manner, the decision appealed from is affirmed, without costs. Case is remanded to the lower court for further proceedings in the matter of expenses. So ordered. (Emphasis supplied). On August 27, 1965, this Court, in resolving a Motion for Reconsideration filed by FROILAN and MARITIMA, ruled: In G.R. No. L-11897 (Fernando A. Froilan vs. Pan Oriental Shipping Co.); before us are (1) a motion, filed by appellant Pan Oriental to reconsider the ruling made in this case sustaining Froilan's right to ownership and possession of the vessel FS-197, and

46

holding that there was never a perfected contract between said movant and the intervenor Republic of the Philippines; and (2) a motion by plaintiff-appellee Fernando A. Froilan, and intervenor-appellee Compaia Maritima, for reconsideration of the decision insofar as it declared said movants, together with intervenor Republic of the Philippines, liable for reimbursement to appellant Pan Oriental of the latter's legitimate necessary expenses made on the vessel in question. 1. .Appellant Pan Oriental's Motion must be denied. It may be remembered that in the instant case, the alleged approval of the charter contract or permission to proceed with said contract was given by the Executive Secretary in his own name and not under the authority of the President. xxx xxx xxx 2. Anent, appellant's motion, considering that the writ of replevin, by virtue of which appellant Pan Oriental was divested of possession of the vessel FS-197, was issued by the lower court on February 8, 1951 at the instance of plaintiff Froilan and with the cooperation of intervenor Republic of the Philippines, which accepted the payment tendered by him (Froilan) notwithstanding its previous dealings with Pan Oriental; and whereas, the intervenor Compaia Maritima acquired the same property only on December 1, 1951, it is clear that only plaintiff Froilan and the intervenor Republic of the Philippines may be held responsible for the deprivation of defendant of its right to the retention of the property until fully reimbursed of the necessary expenditure made on the vessel. For this reason, Froilan and the Republic of the Philippines are declared jointly and severally liable, not only for reimbursement to Pan Oriental of the legitimate necessary expenses incurred on the vessel but also for payment of legal interest thereon, computed from the date of the defendant's dispossession of the property. However, as defendant was in actual possession of the vessel from April 1, 1949 to February 7, 1951, it must be required to pay reasonable rental for the use thereof, at the rate of P3,000.00 a month the same rate specified as rental in the imperfected charter contract which shall be deductible from whatever may be due and owing the said party by way of reimbursable necessary expenses and interest. This rental shall commence from the time defendant Pan Oriental actually operated the vessel, which date shall be determined by the lower court. Case is remanded to the court of origin for further proceedings on the matter of necessary expenses, interest and rental, as directed in our decision and this resolution. (Emphasis supplied). On November 23, 1966, acting on a second Motion for Reconsideration filed by PAN ORIENTAL, this Court resolved: In case G.R. No. L-11817, Fernando A, Froilan, et al., appellees, vs. Pan Oriental Shipping Company, appellant, the latter filed a .second motion for reconsideration, alleging that the Resolution of this Court of August 27, 1965 denying its motion for reconsideration of December 16, 1964 is not in accordance with law; and that the modification of the judgment following the ex-parte motion for reconsideration of appellee Froilan is contrary to due process.

Credit Transactions Full Text Cases Atty. Adviento

Considering that foregoing motion as well as the opposition thereto by plaintiff-appellee and intervenorappellee Compaia Maritima, the Court RESOLVED to amend the ruling in this case by holding intervenorappellee Compaia Maritima, because of its actual knowledge of the circumstances surrounding the purchase by Froilan of the vessel in question from the Shipping Administrator, jointly and severally liable with the other appellees, for reimbursement to appellant of the necessary expenses incurred and expended by the latter on the said vessel, minus the amount of rentals due from the appellant for the use thereof for the period it was actually operated by Pan Oriental. The period of actual operation shall not include the time when the vessel was drydocked. On December 16,1966, acting on PAN ORIENTAL's Motion for Reconsideration or Application for Damages on account of the wrongful issuance of the Writ of Replevin, this Court issued a Resolution as follows: Before us again in Case G.R. No. 11897 (Fernando A. Froilan vs. Pan Oriental Shipping Co. et al) is a motion for reconsideration or Application for damages filed by respondent Pan Oriental Shipping Co., allegedly on account of the wrongful issuance of the writ of replevin, pursuant to Rule 60, Section 10, in relation to Rule 57, Section 20 of the Revised Rules of Court. Considering that by virtue of our resolution dated August 27, 1965, this case has been ordered to be remanded to the Court of origin for further proceedings on the matter of necessary expenses, interest and rentals, and since evidence would have to be presented if the application for damages is allowed, the Court resolved, first, to deny the present motion for reconsideration and, second, to refer the application to the trial court, there to be heard and decided as prescribed by law and the Rules. (See last sentence, Section 20, Rule 57). Pursuant thereto, the case was remanded to the Court of First Instance of Manila, Branch VI (Civil Case No. 13196). After the evidence of the parties was received and assessed by a Commissioner, said Court issued an Order, dated June 4, 1975, the dispositive portion of which reads: WHEREFORE, in view of the foregoing consideration, the Court orders the intervenor Compaia (plaintiff Fernando A. Froilan's successor-in-interest) and intervenor Republic of the Philippines (Board of Liquidators) jointly and severally to pay defendant Pan Oriental Shipping Company the sum of P6,937.72 a month from the time 'it was dispossessed on February 3, 1951' until it is paid its useful and necessary expenses; the sum of P40,797.54 actual amount expended for the repairs and improvements prior to the operation of the vessel on June 1, 1949 with legal interest from the time of disbursement of said legitimate expenses. The Court also orders the intervenor Republic of the Philippines to return the sum of P15,000.00 tendered by defendant Pan Oriental Shipping Company as provided in the option with legal interest from January 16, 1950, the date it was paid by the latter. SO ORDERED. 2 The amount of P6,937.72 ordered to be paid monthly represented the lower Court's computation of damages of PAN ORIENTAL for deprivation of the right to retain the vessel. 3 On appeal by REPUBLIC and MARITIMA to the then Court of Appeals, judgment was promulgated decreeing.

47

WHEREFORE, in the light of the foregoing pronouncements, the judgment appealed from is hereby MODIFIED as follows: Ordering intervenors-appellants Republic and Compaia Maritima, jointly and severally, to pay appellee Pan Oriental Shipping Company the sum of P40,797.54 with legal interest from February 3, 1951 until fully paid but there shah be deducted therefrom the amount of P59,500.00 representing the unpaid rentals due the Republic of the Philippines; and AFFIRMED in all other respects. In other words, (a) the date from which interest is to be paid on the amount of P40,797.54 is from February 3, 1951, the date of dispossession, and not from the time of disbursement and (b) the unpaid rentals due the Republic are deductible from the amount of expenses payable to PANORIENTAL. It should be recalled that the deduction of rentals from the amount payable to PAN-ORIENTAL by REPUBLIC was pursuant to this Court's Resolutions of August 27, 1965 and November 23, 1966, supra, From the foregoing Decision, the parties filed their respective Petitions for Review now before us. For clarity, the sums ordered to be paid by MARITIMA and the REPUBLIC, jointly and severally, to PAN-ORIENTAL are: (a) the sum of P6,937.72 a month from February 3, 1951, the date of PAN-ORIENTAL's dispossession, in the concept of damages for the deprivation of its right to retain the vessel, it until it is paid its useful and necessary expenses"; 4 (b) the sum of P15,000.00, representing PAN-ORIENTAL's deposit with REPUBLIC for the purchase of the vessel, "with legal interest from January 16, 1950," the date PAN-ORIENTAL had paid the same; 5 and (c) the sum of P40,797.54 representing the expenses for repairs incurred by PAN-ORIENTAL, "with legal interest from February 3, 1951 until fully paid," minus the amount of P59,500.00 representing the unpaid rentals due the REPUBLIC 6 The legal rate of interest is made payable only on the last two amounts (b) and (c). REPUBLIC attributes the following errors to the Appellate Court: (1) in not holding that compensation by operation of law took place as between REPUBLIC and PAN-ORIENTAL as of the date of dispossession; (2) in not holding that the obligation of the REPUBLIC to pay legal interest on the amount of useful and necessary expenses from February 3, 1951 had become stale and ineffective; (3) in affirming the Order of the Trial Court that MARITIMA and REPUBLIC, jointly and severally, pay to PANORIENTAL the sum of P6,937.72 a month from the time it was dispossessed of the vessel on February 3, 1951 until it is paid its useful and necessary expenses; and (4) in not holding that the Trial Court had no jurisdiction to order the return of P15,000.00 to PAN-ORIENTAL. MARITIMA, for its part, aside from assailing the sums it was ordered to pay PAN-ORIENTAL, jointly and severally, with REPUBLIC, echoed the theory of compensation and added that the question of damages on account of alleged wrongful replevin was not a proper subject of inquiry by the Trial Court when it determined the matter of necessary expenses, interest and rentals. REPUBLIC's Submissions 1) REPUBLIC maintains that compensation or set-off took place between it and PAN-ORIENTAL as of February 3, 1951, the date the latter was dispossessed of the vessel For compensation to take place, one of the elements necessary is that the debts be liquidated. 7 In this case, all the elements for Compensation to take place were not present on the date of dispossession, or on February 3, 1951. The amount expended for repairs and improvements had yet to be determined by the Trial Court pursuant to the Decision of this Court promulgated on October 31, 1964. At the time of dispossession also, PAN-ORIENTAL was still insisting on its right to purchase the vessel. The obligation of REPUBLIC to reimburse PANORIENTAL for expenses arose only after this Court had so ruled. Rentals for the use of the vessel by PAN- ORIENTAL were neither due and demandable at the time of dispossession but only after this Court had issued its Resolution of August 27, 1965.

Credit Transactions Full Text Cases Atty. Adviento

More, the legal interest payable from February 3, 1951 on the sum of P40,797.54, representing useful expenses incurred by PAN-ORIENTAL, is also still unliquidated 8 since interest does not stop accruing "until the expenses are fully paid." 9 Thus, we find without basis REPUBLIC's allegation that PAN- ORIENTAL's claim in the amount of P40,797.54 was extinguished by compensation since the rentals payable by PANORIENTAL amount to P59,500.00 while the expenses reach only P40,797.54. Deducting the latter amount from the former, REPUBLIC claims that P18,702.46 would still be owing by PAN-ORIENTAL to REPUBLIC. That argument loses sight of the fact that to the sum of P40,797.54 will still have to be added the legal rate of interest "from February 3, 1951 until fully paid." But although compensation by operation of law cannot take place as between REPUBLIC and PAN-ORIENTAL, by specific pronouncement of this Court in its Resolution of November 23, 1966, supra, the rentals payable by PAN-ORIENTAL in the amount of P59,500.00 should be deducted from the sum of useful expenses plus legal interest due, assuming that the latter amount would still be greater. Otherwise, the corresponding adjustments can be made depending on the totality of the respective amounts. 2) Since we are holding that the obligation of REPUBLIC to pay P40,797.54 to PAN-ORIENTAL was not extinguished by compensation, the obligation of REPUBLIC to pay legal interest on said amount has neither become stale as REPUBLIC contends. Of special note is the fact that payment of that interest was the specific ruling of this Court in its Resolution of August 27, 1965, thus: ... For this reason, Froilan and the REPUBLIC of the Philippines are declared jointly and severally liable, not only for reimbursement to Pan Oriental, of the legitimate necessary expenses incurred on the vessel, but also for payment of legal interest thereon, computed from the date of the defendant's dispossession of the property ... . 3) The amount of P6,937.72 a month ordered to be paid by REPUBLIC and MARITIMA to PAN-ORIENTAL until the latter is paid its useful and necessary expenses is likewise in order. That amount represents the damages for the wrongful issuance of the Writ of Replevin and was computed as follows: P4,132.77 for loss of income by PAN-ORIENTAL plus P2,804.95 as monthly depreciation of the vessel in lieu of the charter hire. It should further be recalled that this Court, in acting on PAN- ORIENTAL's application for damages in its Resolution of December 16, 1966, supra, did not deny the same but referred it instead to the Trial Court "there to be heard and decided" since evidence would have to be presented. Moreover, this Court found that PAN-ORIENTAL was "deprived of the possession of the vessel over which (it) had a lien for these expenses" 10 and that FROILAN and REPUBLIC "may be held responsible for the deprivation of defendant (PANORIENTAL) of its right to retention of the property until fully reimbursed on the necessary expenditures made on the vessel. " 11 4) There return of Pl5,000.00 ordered by the Trial Court and affirmed by the Appellate Court was but just and proper. As this Court found, that sum was tendered to REPUBLIC "which together with its (PAN-ORIENTAL's) alleged expenses already made on the vessel, cover 25% of the cost of the vessel, as provided in the option granted in the bareboat contract (Exhibit "C"). This amount was accepted by the Administration as deposit ...." Since the purchase did not eventually materialize for reasons attributable to REPUBLIC, it is but just that the deposit be returned. 12 It is futile to allege that PAN-ORIENTAL did not plead for the return of that amount since its prayer included other reliefs as may be just under the premises. Courts may issue such orders of restitution as justice and equity may warrant. MARITIMA's Position We find no merit in MARITIMA's contention that the alleged damages on account of wrongful replevin was barred by res judicata, and that the application for damages before the lower Court was but a mere adoption

48

of a different method of presenting claims already litigated. For the records show that an application for damages for wrongful replevin was filed both before this Court and thereafter before the Trial Court after this Tribunal specifically remanded the issue of those damages to the Trial Court there to be heard and decided pursuant to Rule 60, Section 10 in relation to Rule 57, Section 20. 13 The matter of legal compensation which MARITIMA has also raised has been previously discussed. Parenthetically, PAN-ORIENTAL can no longer raise the alleged error of the Trial Court in computing the necessary and useful expenses at only P40,797.54 when they should be P87,267.30, since it did not appeal from that Court's Decision. In a nutshell, we find that the appealed Decision of the Trial Court and of the then Court of Appeals is in consonance with the Decision and Resolutions of this Court. ACCORDINGLY, the judgment appealed from is hereby affirmed. No costs. SO ORDERED. SECOND DIVISION G.R. No. 126780 February 17, 2005

YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners, vs. THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents. DECISION TINGA, J.: The primary question of interest before this Court is the only legal issue in the case: It is whether a hotel may evade liability for the loss of items left with it for safekeeping by its guests, by having these guests execute written waivers holding the establishment or its employees free from blame for such loss in light of Article 2003 of the Civil Code which voids such waivers. Before this Court is a Rule 45 petition for review of the Decision1 dated 19 October 1995 of the Court of Appeals which affirmed the Decision2 dated 16 December 1991 of the Regional Trial Court (RTC), Branch 13, of Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia Payam (Payam) jointly and solidarily liable for damages in an action filed by Maurice McLoughlin (McLoughlin) for the loss of his American and Australian dollars deposited in the safety deposit box of Tropicana Copacabana Apartment Hotel, owned and operated by YHT Realty Corporation. The factual backdrop of the case follow. Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at Sheraton Hotel during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended McLoughlin by showing him around, introducing him to important people, accompanying him in visiting impoverished street children and assisting him in buying gifts for the children and in distributing the same to charitable institutions for poor children. Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana where Lainez, Payam and Danilo Lopez were employed. Lopez served as manager of the hotel while Lainez and Payam had custody of the keys for the safety deposit boxes of Tropicana. Tan took care of McLoughlin's booking at the Tropicana where he started staying during his trips to the Philippines from December 1984 to September 1987.3

Credit Transactions Full Text Cases Atty. Adviento

On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented a safety deposit box as it was his practice to rent a safety deposit box every time he registered at Tropicana in previous trips. As a tourist, McLoughlin was aware of the procedure observed by Tropicana relative to its safety deposit boxes. The safety deposit box could only be opened through the use of two keys, one of which is given to the registered guest, and the other remaining in the possession of the management of the hotel. When a registered guest wished to open his safety deposit box, he alone could personally request the management who then would assign one of its employees to accompany the guest and assist him in opening the safety deposit box with the two keys.4 McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US Dollars (US$15,000.00) which he placed in two envelopes, one envelope containing Ten Thousand US Dollars (US$10,000.00) and the other envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand Australian Dollars (AUS$10,000.00) which he also placed in another envelope; two (2) other envelopes containing letters and credit cards; two (2) bankbooks; and a checkbook, arranged side by side inside the safety deposit box.5 On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his safety deposit box with his key and with the key of the management and took therefrom the envelope containing Five Thousand US Dollars (US$5,000.00), the envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his passports and his credit cards.6 McLoughlin left the other items in the box as he did not check out of his room at the Tropicana during his short visit to Hongkong. When he arrived in Hongkong, he opened the envelope which contained Five Thousand US Dollars (US$5,000.00) and discovered upon counting that only Three Thousand US Dollars (US$3,000.00) were enclosed therein.7 Since he had no idea whether somebody else had tampered with his safety deposit box, he thought that it was just a result of bad accounting since he did not spend anything from that envelope.8 After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for Australia. When he arrived in Australia, he discovered that the envelope with Ten Thousand US Dollars (US$10,000.00) was short of Five Thousand US Dollars (US$5,000). He also noticed that the jewelry which he bought in Hongkong and stored in the safety deposit box upon his return to Tropicana was likewise missing, except for a diamond bracelet.9 When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some money and/or jewelry which he had lost were found and returned to her or to the management. However, Lainez told him that no one in the hotel found such things and none were turned over to the management. He again registered at Tropicana and rented a safety deposit box. He placed therein one (1) envelope containing Fifteen Thousand US Dollars (US$15,000.00), another envelope containing Ten Thousand Australian Dollars (AUS$10,000.00) and other envelopes containing his traveling papers/documents. On 16 April 1988, McLoughlin requested Lainez and Payam to open his safety deposit box. He noticed that in the envelope containing Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US Dollars (US$2,000.00) were missing and in the envelope previously containing Ten Thousand Australian Dollars (AUS$10,000.00), Four Thousand Five Hundred Australian Dollars (AUS$4,500.00) were missing.10 When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who admitted that Tan opened the safety deposit box with the key assigned to him.11 McLoughlin went up to his room where Tan was staying and confronted her. Tan admitted that she had stolen McLoughlin's key and was able to open the safety deposit box with the assistance of Lopez, Payam and Lainez.12 Lopez also told McLoughlin that Tan stole the key assigned to McLoughlin while the latter was asleep.13 McLoughlin requested the management for an investigation of the incident. Lopez got in touch with Tan and arranged for a meeting with the police and McLoughlin. When the police did not arrive, Lopez and Tan went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a promissory note dated 21 April 1988. The promissory note reads as follows:

49

I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its equivalent in Philippine currency on or before May 5, 1988.14 Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as a witness. Despite the execution of promissory note by Tan, McLoughlin insisted that it must be the hotel who must assume responsibility for the loss he suffered. However, Lopez refused to accept the responsibility relying on the conditions for renting the safety deposit box entitled "Undertaking For the Use Of Safety Deposit Box,"15 specifically paragraphs (2) and (4) thereof, to wit: 2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability arising from any loss in the contents and/or use of the said deposit box for any cause whatsoever, including but not limited to the presentation or use thereof by any other person should the key be lost; ... 4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL upon giving up the use of the box.16 On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the validity of the abovementioned stipulations. They opined that the stipulations are void for being violative of universal hotel practices and customs. His lawyers prepared a letter dated 30 May 1988 which was signed by McLoughlin and sent to President Corazon Aquino.17 The Office of the President referred the letter to the Department of Justice (DOJ) which forwarded the same to the Western Police District (WPD).18 After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and registered again as a hotel guest of Tropicana. McLoughlin went to Malacaang to follow up on his letter but he was instructed to go to the DOJ. The DOJ directed him to proceed to the WPD for documentation. But McLoughlin went back to Australia as he had an urgent business matter to attend to. For several times, McLoughlin left for Australia to attend to his business and came back to the Philippines to follow up on his letter to the President but he failed to obtain any concrete assistance.19 McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to pursue his claims against petitioners, the WPD conducted an investigation which resulted in the preparation of an affidavit which was forwarded to the Manila City Fiscal's Office. Said affidavit became the basis of preliminary investigation. However, McLoughlin left again for Australia without receiving the notice of the hearing on 24 November 1989. Thus, the case at the Fiscal's Office was dismissed for failure to prosecute. Mcloughlin requested the reinstatement of the criminal charge for theft. In the meantime, McLoughlin and his lawyers wrote letters of demand to those having responsibility to pay the damage. Then he left again for Australia. Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate, Manila. Meetings were held between McLoughlin and his lawyer which resulted to the filing of a complaint for damages on 3 December 1990 against YHT Realty Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss of McLoughlin's money which was discovered on 16 April 1988. After filing the complaint, McLoughlin left again for Australia to attend to an urgent business matter. Tan and Lopez, however, were not served with summons, and trial proceeded with only Lainez, Payam and YHT Realty Corporation as defendants. After defendants had filed their Pre-Trial Brief admitting that they had previously allowed and assisted Tan to open the safety deposit box, McLoughlin filed an Amended/Supplemental Complaint20 dated 10 June 1991 which included another incident of loss of money and jewelry in the safety deposit box rented by McLoughlin in the same hotel which took place prior to 16 April 1988.21 The trial court admitted the Amended/Supplemental Complaint.

Credit Transactions Full Text Cases Atty. Adviento

During the trial of the case, McLoughlin had been in and out of the country to attend to urgent business in Australia, and while staying in the Philippines to attend the hearing, he incurred expenses for hotel bills, airfare and other transportation expenses, long distance calls to Australia, Meralco power expenses, and expenses for food and maintenance, among others.22 After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive portion of which reads: WHEREFORE, above premises considered, judgment is hereby rendered by this Court in favor of plaintiff and against the defendants, to wit: 1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00 or its equivalent in Philippine Currency of P342,000.00, more or less, and the sum of AUS$4,500.00 or its equivalent in Philippine Currency of P99,000.00, or a total of P441,000.00, more or less, with 12% interest from April 16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit CC); 2. Ordering defendants, jointly and severally to pay plaintiff the sum of P3,674,238.00 as actual and consequential damages arising from the loss of his Australian and American dollars and jewelries complained against and in prosecuting his claim and rights administratively and judicially (Items II, III, IV, V, VI, VII, VIII, and IX, Exh. "CC"); 3. Ordering defendants, jointly and severally, to pay plaintiff the sum of P500,000.00 as moral damages (Item X, Exh. "CC"); 4. Ordering defendants, jointly and severally, to pay plaintiff the sum of P350,000.00 as exemplary damages (Item XI, Exh. "CC"); 5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of P200,000.00 (Item XII, Exh. "CC"); 6. Ordering defendants, jointly and severally, to pay plaintiff the sum of P200,000.00 as attorney's fees, and a fee of P3,000.00 for every appearance; and 7. Plus costs of suit. SO ORDERED.23 The trial court found that McLoughlin's allegations as to the fact of loss and as to the amount of money he lost were sufficiently shown by his direct and straightforward manner of testifying in court and found him to be credible and worthy of belief as it was established that McLoughlin's money, kept in Tropicana's safety deposit box, was taken by Tan without McLoughlin's consent. The taking was effected through the use of the master key which was in the possession of the management. Payam and Lainez allowed Tan to use the master key without authority from McLoughlin. The trial court added that if McLoughlin had not lost his dollars, he would not have gone through the trouble and personal inconvenience of seeking aid and assistance from the Office of the President, DOJ, police authorities and the City Fiscal's Office in his desire to recover his losses from the hotel management and Tan.24 As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth approximately One Thousand Two Hundred US Dollars (US$1,200.00) which allegedly occurred during his stay at Tropicana previous to 4 April 1988, no claim was made by McLoughlin for such losses in his complaint dated 21 November 1990 because he was not sure how they were lost and who the responsible persons were. But considering the admission of the defendants in their pre-trial brief that on three previous occasions they allowed Tan to open the box, the trial court opined that it was logical and reasonable to presume that his personal assets consisting of Seven Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan from the safety deposit box without McLoughlin's consent through the cooperation of Payam and Lainez.25

50

The trial court also found that defendants acted with gross negligence in the performance and exercise of their duties and obligations as innkeepers and were therefore liable to answer for the losses incurred by McLoughlin.26 Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For The Use Of Safety Deposit Box" are not valid for being contrary to the express mandate of Article 2003 of the New Civil Code and against public policy.27 Thus, there being fraud or wanton conduct on the part of defendants, they should be responsible for all damages which may be attributed to the non-performance of their contractual obligations.28 The Court of Appeals affirmed the disquisitions made by the lower court except as to the amount of damages awarded. The decretal text of the appellate court's decision reads: THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but modified as follows: The appellants are directed jointly plaintiff/appellee the following amounts: and severally to pay the

1) P153,200.00 representing US$2,000.00 and AUS$4,500.00;

the

peso

equivalent

of

2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila and back for a total of eleven (11) trips; 3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Apartment Hotel; 4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower; 5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from the residence to Sidney [sic] Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; 6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses; 7) One-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance; 8) P50,000.00 for moral damages; 9) P10,000.00 as exemplary damages; and 10) P200,000 representing attorney's fees. With costs. SO ORDERED.29 Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this appeal by certiorari. Petitioners submit for resolution by this Court the following issues: (a) whether the appellate court's conclusion on the alleged prior existence and subsequent loss of the subject money and jewelry is supported by the evidence on record; (b) whether the finding of gross negligence on the part of petitioners in the performance of their duties as innkeepers is supported by the evidence on record; (c) whether the "Undertaking For The Use of Safety Deposit Box" admittedly executed by private respondent is null and void; and (d) whether the damages awarded to private respondent, as well as the amounts thereof, are proper under the circumstances.30

Credit Transactions Full Text Cases Atty. Adviento

The petition is devoid of merit. It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law and any peripheral factual question addressed to this Court is beyond the bounds of this mode of review. Petitioners point out that the evidence on record is insufficient to prove the fact of prior existence of the dollars and the jewelry which had been lost while deposited in the safety deposit boxes of Tropicana, the basis of the trial court and the appellate court being the sole testimony of McLoughlin as to the contents thereof. Likewise, petitioners dispute the finding of gross negligence on their part as not supported by the evidence on record. We are not persuaded.l^vvphi1.net We adhere to the findings of the trial court as affirmed by the appellate court that the fact of loss was established by the credible testimony in open court by McLoughlin. Such findings are factual and therefore beyond the ambit of the present petition.1awphi1.nt The trial court had the occasion to observe the demeanor of McLoughlin while testifying which reflected the veracity of the facts testified to by him. On this score, we give full credence to the appreciation of testimonial evidence by the trial court especially if what is at issue is the credibility of the witness. The oft-repeated principle is that where the credibility of a witness is an issue, the established rule is that great respect is accorded to the evaluation of the credibility of witnesses by the trial court. 31 The trial court is in the best position to assess the credibility of witnesses and their testimonies because of its unique opportunity to observe the witnesses firsthand and note their demeanor, conduct and attitude under grilling examination.32 We are also not impressed by petitioners' argument that the finding of gross negligence by the lower court as affirmed by the appellate court is not supported by evidence. The evidence reveals that two keys are required to open the safety deposit boxes of Tropicana. One key is assigned to the guest while the other remains in the possession of the management. If the guest desires to open his safety deposit box, he must request the management for the other key to open the same. In other words, the guest alone cannot open the safety deposit box without the assistance of the management or its employees. With more reason that access to the safety deposit box should be denied if the one requesting for the opening of the safety deposit box is a stranger. Thus, in case of loss of any item deposited in the safety deposit box, it is inevitable to conclude that the management had at least a hand in the consummation of the taking, unless the reason for the loss is force majeure. Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of the master key of the management when the loss took place. In fact, they even admitted that they assisted Tan on three separate occasions in opening McLoughlin's safety deposit box.33 This only proves that Tropicana had prior knowledge that a person aside from the registered guest had access to the safety deposit box. Yet the management failed to notify McLoughlin of the incident and waited for him to discover the taking before it disclosed the matter to him. Therefore, Tropicana should be held responsible for the damage suffered by McLoughlin by reason of the negligence of its employees. The management should have guarded against the occurrence of this incident considering that Payam admitted in open court that she assisted Tan three times in opening the safety deposit box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while the latter was still asleep.34 In light of the circumstances surrounding this case, it is undeniable that without the acquiescence of the employees of Tropicana to the opening of the safety deposit box, the loss of McLoughlin's money could and should have been avoided. The management contends, however, that McLoughlin, by his act, made its employees believe that Tan was his spouse for she was always with him most of the time. The evidence on record, however, is bereft of any showing that McLoughlin introduced Tan to the management as his wife. Such an inference from the act of McLoughlin will not exculpate the petitioners from liability in the absence of any showing that he made the management believe that Tan was his wife or was duly authorized to have access to the safety deposit box. Mere close companionship and intimacy

51

are not enough to warrant such conclusion considering that what is involved in the instant case is the very safety of McLoughlin's deposit. If only petitioners exercised due diligence in taking care of McLoughlin's safety deposit box, they should have confronted him as to his relationship with Tan considering that the latter had been observed opening McLoughlin's safety deposit box a number of times at the early hours of the morning. Tan's acts should have prompted the management to investigate her relationship with McLoughlin. Then, petitioners would have exercised due diligence required of them. Failure to do so warrants the conclusion that the management had been remiss in complying with the obligations imposed upon hotel-keepers under the law. Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are guilty of negligence, are liable for damages. As to who shall bear the burden of paying damages, Article 2180, paragraph (4) of the same Code provides that the owners and managers of an establishment or enterprise are likewise responsible for damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of their functions. Also, this Court has ruled that if an employee is found negligent, it is presumed that the employer was negligent in selecting and/or supervising him for it is hard for the victim to prove the negligence of such employer.35 Thus, given the fact that the loss of McLoughlin's money was consummated through the negligence of Tropicana's employees in allowing Tan to open the safety deposit box without the guest's consent, both the assisting employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be held solidarily liable pursuant to Article 2193.36 The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed by McLoughlin is tainted with nullity presents a legal question appropriate for resolution in this petition. Notably, both the trial court and the appellate court found the same to be null and void. We find no reason to reverse their common conclusion. Article 2003 is controlling, thus: Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 200137 is suppressed or diminished shall be void. Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to situations such as that presented in this case. The hotel business like the common carrier's business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called "undertakings" that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature. In an early case,38 the Court of Appeals through its then Presiding Justice (later Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests, it is not necessary that they be actually delivered to the innkeepers or their employees. It is enough that such effects are within the hotel or inn. 39 With greater reason should the liability of the hotelkeeper be enforced when the missing items are taken without the guest's knowledge and consent from a safety deposit box provided by the hotel itself, as in this case. Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the New Civil Code for they allow Tropicana to be released from liability arising from any loss in the contents and/or use of the safety deposit box for any cause whatsoever.40 Evidently, the undertaking was intended to bar any claim against Tropicana for any loss of the contents of the safety deposit box whether or not negligence was incurred by Tropicana or its employees. The New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the personal property of the guests even if caused by servants or employees of the keepers of hotels or inns as well as by strangers, except as it may proceed from any force majeure.41 It is the loss through force majeure that may spare the hotel-keeper from liability. In the case at bar, there is no showing that the act of the thief or robber was done with the use of arms or through an irresistible force to qualify the same as force majeure.42

Credit Transactions Full Text Cases Atty. Adviento

Petitioners likewise anchor their defense on Article 200243 which exempts the hotel-keeper from liability if the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of the provision would lead us to reject petitioners' contention. The justification they raise would render nugatory the public interest sought to be protected by the provision. What if the negligence of the employer or its employees facilitated the consummation of a crime committed by the registered guest's relatives or visitor? Should the law exculpate the hotel from liability since the loss was due to the act of the visitor of the registered guest of the hotel? Hence, this provision presupposes that the hotel-keeper is not guilty of concurrent negligence or has not contributed in any degree to the occurrence of the loss. A depositary is not responsible for the loss of goods by theft, unless his actionable negligence contributes to the loss.44 In the case at bar, the responsibility of securing the safety deposit box was shared not only by the guest himself but also by the management since two keys are necessary to open the safety deposit box. Without the assistance of hotel employees, the loss would not have occurred. Thus, Tropicana was guilty of concurrent negligence in allowing Tan, who was not the registered guest, to open the safety deposit box of McLoughlin, even assuming that the latter was also guilty of negligence in allowing another person to use his key. To rule otherwise would result in undermining the safety of the safety deposit boxes in hotels for the management will be given imprimatur to allow any person, under the pretense of being a family member or a visitor of the guest, to have access to the safety deposit box without fear of any liability that will attach thereafter in case such person turns out to be a complete stranger. This will allow the hotel to evade responsibility for any liability incurred by its employees in conspiracy with the guest's relatives and visitors. Petitioners contend that McLoughlin's case was mounted on the theory of contract, but the trial court and the appellate court upheld the grant of the claims of the latter on the basis of tort.45 There is nothing anomalous in how the lower courts decided the controversy for this Court has pronounced a jurisprudential rule that tort liability can exist even if there are already contractual relations. The act that breaks the contract may also be tort.46 As to damages awarded to McLoughlin, we see no reason to modify the amounts awarded by the appellate court for the same were based on facts and law. It is within the province of lower courts to settle factual issues such as the proper amount of damages awarded and such finding is binding upon this Court especially if sufficiently proven by evidence and not unconscionable or excessive. Thus, the appellate court correctly awarded McLoughlin Two Thousand US Dollars (US$2,000.00) and Four Thousand Five Hundred Australian dollars (AUS$4,500.00) or their peso equivalent at the time of payment,47 being the amounts duly proven by evidence.48 The alleged loss that took place prior to 16 April 1988 was not considered since the amounts alleged to have been taken were not sufficiently established by evidence. The appellate court also correctly awarded the sum of P308,880.80, representing the peso value for the air fares from Sydney to Manila and back for a total of eleven (11) trips; 49 onehalf of P336,207.05 or P168,103.52 representing payment to Tropicana;50 one-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;51 one-half of P179,863.20 or P89,931.60 for the taxi or transportation expenses from McLoughlin's residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; 52 onehalf of P7,801.94 or P3,900.97 representing Meralco power expenses;53 one-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance.54 The amount of P50,000.00 for moral damages is reasonable. Although trial courts are given discretion to determine the amount of moral damages, the appellate court may modify or change the amount awarded when it is palpably and scandalously excessive.l^vvphi1.net Moral damages are not intended to enrich a complainant at the expense of a defendant.l^vvphi1.net They are awarded only to enable the injured party to obtain means, diversion or amusements that will serve to alleviate the moral suffering he has undergone, by reason of defendants' culpable action.55 The awards of P10,000.00 as exemplary damages and P200,000.00 representing attorney's fees are likewise sustained.

52

WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals dated 19 October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and severally, to pay private respondent the following amounts: (1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment; (2) P308,880.80, representing the peso value for the air fares from Sydney to Manila and back for a total of eleven (11) trips; (3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana Apartment Hotel; (4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower; (5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense from McLoughlin's residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; (6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses; (7) One-half of P356,400.00 or P178,200.00 representing expenses for food and maintenance; (8) P50,000.00 for moral damages; (9) P10,000.00 as exemplary damages; and (10) P200,000 representing attorney's fees. With costs. SO ORDERED.

FIRST DIVISION

G.R. No. 72275 November 13, 1991 PACIFIC BANKING CORPORATION, petitioner, vs. HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA, JR., respondents. Ocampo, Dizon & Domingo for petitioner. Angara, Concepcion, Regala & Cruz for private respondent.

MEDIALDEA, J.:p This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of the Intermediate Appellate Court (now Court of Appeals) in AC-G.R. C.V. No. 02753, 1 which modified the decision of the trial court against herein private respondent Roberto Regala, Jr., one of the defendants in the case for sum of money filed by Pacific Banking Corporation.

Credit Transactions Full Text Cases Atty. Adviento

The facts of the case as adopted by the respondent appellant court from herein petitioner's brief before said court are as follows: On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred to as Celia Regala for brevity), applied for and obtained from the plaintiff the issuance and use of Pacificard credit card (Exhs. "A", "A-l",), under the Terms and Conditions Governing the Issuance and Use of Pacificard (Exh. "B" and hereinafter referred to as Terms and Conditions), a copy of which was issued to and received by the said defendant on the date of the application and expressly agreed that the use of the Pacificard is governed by said Terms and Conditions. On the same date, the defendant-appelant Robert Regala, Jr., spouse of defendant Celia Regala, executed a "Guarantor's Undertaking" (Exh. "A-1-a") in favor of the appellee Bank, whereby the latter agreed "jointly and severally of Celia Aurora Syjuco Regala, to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Aurora Syjuco Regala with the use of the Pacificard, or renewals thereof, issued in her favor by the Pacific Banking Corporation". It was also agreed that "any changes of or novation in the terms and conditions in connection with the issuance or use of the Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from responsibility hereunder, it being understood that I fully agree to such charges, novation or extension, and that this understanding is a continuing one and shall subsist and bind me until the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid. Plaintiff-appellee Pacific Banking Corporation has contracted with accredited business establishments to honor purchases of goods and/or services by Pacificard holders and the cost thereof to be advanced by the plaintiff-appellee for the account of the defendant cardholder, and the latter undertook to pay any statements of account rendered by the plaintiff-appellee for the advances thus made within thirty (30) days from the date of the statement, provided that any overdue account shall earn interest at the rate of 14% per annum from date of default. The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or services on credit (Exh. "C", "C-l" to "C-112") under her Pacificard, for which the plaintiff advanced the cost amounting to P92,803.98 at the time of the filing of the complaint. In view of defendant Celia Regala's failure to settle her account for the purchases made thru the use of the Pacificard, a written demand (Exh. "D") was sent to the latter and also to the defendant Roberto Regala, Jr. (Exh. " ") under his "Guarantor's Undertaking." A complaint was subsequently filed in Court for defendant's (sic) repeated failure to settle their obligation. Defendant Celia Regala was declared in default for her failure to file her answer within the reglementary period. Defendant-appellant Roberto Regala, Jr., on the other hand, filed his Answer with Counterclaim admitting his execution of the "Guarantor's Understanding", "but with the understanding that his liability would be limited to P2,000.00 per month." In view of the solidary nature of the liability of the parties, the presentation of evidence ex-parte as against the defendant Celia Regala was jointly held

53

with the trial of the case as against defendant Roberto Regala. After the presentation of plaintiff's testimonial and documentary evidence, fire struck the City Hall of Manila, including the court where the instant case was pending, as well as all its records. Upon plaintiff-appellee's petition for reconstitution, the records of the instant case were duly reconstituted. Thereafter, the case was set for pre-trial conference with respect to the defendant-appellant Roberto Regala on plaintiff-appellee's motion, after furnishing the latter a copy of the same. No opposition thereto having been interposed by defendant-appellant, the trial court set the case for pre-trial conference. Neither did said defendant-appellant nor his counsel appear on the date scheduled by the trial court for said conference despite due notice. Consequently, plaintiffappellee moved that the defendant-appellant Roberto Regala he declared as in default and that it be allowed to present its evidence ex-parte, which motion was granted. On July 21, 1983, plaintiff-appellee presented its evidence ex-parte. (pp. 23-26, Rollo) After trial, the court a quo rendered judgment on December 5, 1983, the dispositive portion of which reads: WHEREFORE, the Court renders judgment for the plaintiff and against the defendants condemning the latter, jointly and severally, to pay said plaintiff the amount of P92,803.98, with interest thereon at 14% per annum, compounded annually, from the time of demand on November 17, 1978 until said principal amount is fully paid; plus 15% of the principal obligation as and for attorney's fees and expense of suit; and the costs. The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of merit. SO ORDERED. (pp. 22-23, Rollo) The defendants appealed from the decision of the court a quo to the Intermediate Appellate Court. On August 12, 1985, respondent appellate court rendered judgment modifying the decision of the trial court. Private respondent Roberto Regala, Jr. was made liable only to the extent of the monthly credit limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the advances made during the one year period of the card's effectivity counted from October 29, 1975 up to October 29, 1976. The dispositive portion of the decision states: WHEREFORE, the judgment of the trial court dated December 5, 1983 is modified only as to appellant Roberto Regala, Jr., so as to make him liable only for the purchases made by defendant Celia Aurora Syjuco Regala with the use of the Pacificard from October 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month only, with interest from the filing of the complaint up to the payment at the rate of 14% per annum without pronouncement as to costs. (p. 32, Rollo) A motion for reconsideration was filed by Pacific Banking Corporation which the respondent appellate court denied for lack of merit on September 19, 1985 (p. 33, Rollo). On November 8, 1985, Pacificard filed this petition. The petitioner contends that while the appellate court correctly recognized Celia Regala's obligation to Pacific Banking Corp. for the purchases of goods and

Credit Transactions Full Text Cases Atty. Adviento

services with the use of a Pacificard credit card in the total amount of P92,803.98 with 14% interest per annum, it erred in limiting private respondent Roberto Regala, Jr.'s liability only for purchases made by Celia Regala with the use of the card from October 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month with 14% interest from the filing of the complaint. There is merit in this petition. The pertinent portion of the "Guarantor's Undertaking" which private respondent Roberto Regala, Jr. signed in favor of Pacific Banking Corporation provides: I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco Regala to pay the Pacific Banking Corporation upon demand any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of the Pacificard or renewals thereof issued in his favor by the Pacific Banking Corporation. Any changes of or Novation in the terms and conditions in connection with the issuance or use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid. (p. 12, Rollo) The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking," was in substance a contract of surety. As distinguished from a contract of guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the Philippines). We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s undertaking. As a surety he bound himself jointly and severally with the debtor Celia Regala "to pay the Pacific Banking Corporation upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation." This undertaking was also provided as a condition in the issuance of the Pacificard to Celia Regala, thus: 5. A Pacificard is issued to a Pacificard-holder against the joint and several signature of a third party and as such, the Pacificard holder and the guarantor assume joint and several liabilities for any and all amount arising out of the use of the Pacificard. (p. 14, Rollo) The respondent appellate court held that "all the other rights of the guarantor are not thereby lost by the guarantor becoming liable solidarily and therefore a surety." It further ruled that although the surety's liability is like that of a joint and several debtor, it does not make him the debtor but still the guarantor (or the surety), relying on the case of Government of the Philippines v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA 1182. Consequently, Article 2054 of the Civil Code providing for a limited liability on the part of the guarantor or debtor still applies. It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. 2 It is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original period of its effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of any change or novation of the terms and conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his commitment as a surety

54

a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the "Guarantor's Undertaking" Roberto signed, thus: . . . Any changes of or novation in the terms and conditions in connection with the issuance or use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully satisfied or paid. (p. 12, supra; emphasis supplied) Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of future changes in the terms and conditions governing the issuance of the credit card to his wife and that, notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional and future debts of the principal debtor the amount of which is not yet known (see Article 2053, supra). The application by respondent court of the ruling in Government v. Tizon, supra is misplaced. It was held in that case that: . . . although the defendants bound themselves in solidum, the liability of the Surety under its bond would arise only if its co-defendants, the principal obligor, should fail to comply with the contract. To paraphrase the ruling in the case of Municipality of Orion vs. Concha, the liability of the Surety is "consequent upon the liability" of Tizon, or "so dependent on that of the principal debtor" that the Surety "is considered in law as being the same party as the debtor in relation to whatever is adjudged, touching the obligation of the latter"; or the liabilities of the two defendants herein "are so interwoven and dependent as to be inseparable." Changing the expression, if the defendants are held liable, their liability to pay the plaintiff would be solidary, but the nature of the Surety's undertaking is such that it does not incur liability unless and until the principal debtor is held liable. A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense that a surety, although solidarily liable with the principal debtor, is different from the debtor. It does not mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship(see PCIB v. CA, L34959, March 18, 1988, 159 SCRA 24). ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent appellate court is SET ASIDE and the decision of the trial court is REINSTATED. SO ORDERED. SECOND DIVISION

G.R. No. 113931 May 6, 1998 E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST CORPORATION, and SPOUSES RAUL and ELEA R. CLAVERIA, respondents.

Credit Transactions Full Text Cases Atty. Adviento

MARTINEZ, J.: This petition for review on certiorari seeks the reversal of the decision 1 of the Court of Appeals dated July 13, 1993 which affirmed the Order of the Regional Trial Court of Manila, Branch 51, denying petitioner's Motion to Dismiss the complaint, as well as the Resolution 2 dated February 15, 1994 denying the motion for reconsideration thereto. The facts are as follows: Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos (P2,875,000.00) to finance the purchase of two (2) maritime barges and one tugboat 3 which would be used in their molasses business. The loan was granted subject to the condition that respondent spouses execute a chattel mortgage over the three (3) vessels to be acquired and that a continuing guarantee be executed by Ayala International Philippines, Inc., now herein petitioner E. Zobel, Inc., in favor of SOLIDBANK. The respondent spouses agreed to the arrangement. Consequently, a chattel mortgage and a Continuing Guaranty 4 were executed. Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January 31, 1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary attachment, against respondents spouses and petitioner. The case was docketed as Civil Case No. 91-55909 in the Regional Trial Court of Manila. Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel mortgage with the appropriate government agency. SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not a guarantor but a surety. On February 18, 1993, the trial court issued an Order, portions of which reads: After a careful consideration of the matter on hand, the Court finds the ground of the motion to dismiss without merit. The document referred to as "Continuing Guaranty" dated August 21, 1985 (Exh. 7) states as follows: For and in consideration of any existing indebtedness to you of Agro Brokers, a single proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is now obligated to you as surety and in order to induce you, in your discretion, at any other manner, to, or at the request or for the account of the borrower, . . . The provisions of the document are clear, plain and explicit. Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the document is "Continuing Guaranty", the Court's interpretation is not limited to the title alone but to the contents and intention of the parties more specifically if the language is clear and positive. The obligation of the defendant Zobel being that of a surety, Art. 2080 New Civil Code will not apply as it is only for those acting as guarantor. In fact, in the letter of January 31, 1986 of the defendants (spouses and Zobel) to the plaintiff

55

it is requesting that the chattel mortgage on the vessels and tugboat be waived and/or rescinded by the bank inasmuch as the said loan is covered by the Continuing Guaranty by Zobel in favor of the plaintiff thus thwarting the claim of the defendant now that the chattel mortgage is an essential condition of the guaranty. In its letter, it said that because of the Continuing Guaranty in favor of the plaintiff the chattel mortgage is rendered unnecessary and redundant. With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the proper government agency, i.e. with the Office of the Collector of Customs or with the Register of Deeds makes the obligation a guaranty, the same merits a scant consideration and could not be taken by this Court as the basis of the extinguishment of the obligation of the defendant corporation to the plaintiff as surety. The chattel mortgage is an additional security and should not be considered as payment of the debt in case of failure of payment. The same is true with the failure to register, extinction of the liability would not lie. WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered to file its answer to the complaint within ten (10) days from receipt of a copy of this Order. 5 Petitioner moved for reconsideration but was denied on April 26, 1993. 6 Thereafter, petitioner questioned said Orders before the respondent Court of Appeals, through a petition for certiorari, alleging that the trial court committed grave abuse of discretion in denying the motion to dismiss. On July 13, 1993, the Court of Appeals rendered the assailed decision the dispositive portion of which reads: WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion in issuing the herein assailed orders, We hereby DISMISS the petition. A motion for reconsideration filed by petitioner was denied for lack of merit on February 15, 1994. Petitioner now comes to us via this petition arguing that the respondent Court of Appeals erred in its finding: (1) that Article 2080 of the New Civil Code which provides: "The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter," is not applicable to petitioner; (2) that petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is that of a surety; and (3) that the failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish petitioner's liability to respondent SOLIDBANK. We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty" obligated itself to SOLIDBANK as a guarantor or a surety. A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not. 7 A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the debt. 8 Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. However, under our civil law, they may be distinguished thus: A surety is usually bound with his principal by the same instrument, executed at the same time, and on the same consideration. He is an original promissor and debtor from the beginning, and is held,

Credit Transactions Full Text Cases Atty. Adviento

ordinarily, to know every default of his principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of the default of the principal, no matter how much he may be injured thereby. On the other hand, the contract of guaranty is the guarantor's own separate undertaking, in which the principal does not join. It is usually entered into before or after that of the principal, and is often supported on a separate consideration from that supporting the contract of the principal. The original contract of his principal is not his contract, and he is not bound to take notice of its non-performance. He is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the principal. 9 Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay. 10 Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to respondent spouses. This can be seen in the following stipulations. For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business address . . . (hereinafter called the Borrower), for the payment of which the undersigned is now obligated to you as surety and in order to induce you, in your discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at the request or for the account of the Borrower, either with or without purchase or discount, or to make any loans or advances evidenced or secured by any notes, bills receivable, drafts, acceptances, checks or other instruments or evidences of indebtedness . . . upon which the Borrower is or may become liable as maker, endorser, acceptor, or otherwise, the undersigned agrees to guarantee, and does hereby guarantee, the punctual payment, at maturity or upon demand, to you of any and all such instruments, loans, advances, credits and/or other obligations herein before referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to you by the Borrower, together with any and all expenses which may be incurred by you in collecting all or any such instruments or other indebtedness or obligations hereinbefore referred to, and or in enforcing any rights hereunder, and also to make or cause any and all such payments to be made strictly in accordance with the terms and provisions of any agreement (g), express or implied, which has (have) been or may hereafter be made or entered into by the Borrower in reference thereto, regardless of any law, regulation or decree, now or hereafter in effect which might in any manner affect any of the terms or provisions of any such agreements(s) or your right with respect thereto as against the Borrower, or cause or permit to be invoked any alteration in the time, amount or manner of payment by the Borrower of any such instruments, obligations or indebtedness; . . . (Emphasis Ours) One need not look too deeply at the contract to determine the nature of the undertaking and the intention of the parties. The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party to the undertaking and obligated itself as an original promissor. It bound itself jointly and severally to the obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses' properties before it can hold petitioner liable for the obligation. This can be gleaned from a reading of the stipulations in the contract, to wit:

56

. . . If default be made in the payment of any of the instruments, indebtedness or other obligation hereby guaranteed by the undersigned, or if the Borrower, or the undersigned should die, dissolve, fail in business, or become insolvent, . . ., or if any funds or other property of the Borrower, or of the undersigned which may be or come into your possession or control or that of any third party acting in your behalf as aforesaid should be attached of distrained, or should be or become subject to any mandatory order of court or other legal process, then, or any time after the happening of any such event any or all of the instruments of indebtedness or other obligations hereby guaranteed shall, at your option become (for the purpose of this guaranty) due and payable by the undersigned forthwith without demand of notice, and full power and authority are hereby given you, in your discretion, to sell, assign and deliver all or any part of the property upon which you may then have a lien hereunder at any broker's board, or at public or private sale at your option, either for cash or for credit or for future delivery without assumption by you of credit risk, and without either the demand, advertisement or notice of any kind, all of which are hereby expressly waived. At any sale hereunder, you may, at your option, purchase the whole or any part of the property so sold, free from any right of redemption on the part of the undersigned, all such rights being also hereby waived and released. In case of any sale and other disposition of any of the property aforesaid, after deducting all costs and expenses of every kind for care, safekeeping, collection, sale, delivery or otherwise, you may apply the residue of the proceeds of the sale and other disposition thereof, to the payment or reduction, either in whole or in part, of any one or more of the obligations or liabilities hereunder of the undersigned whether or not except for disagreement such liabilities or obligations would then be due, making proper allowance or interest on the obligations and liabilities not otherwise then due, and returning the overplus, if any, to the undersigned; all without prejudice to your rights as against the undersigned with respect to any and all amounts which may be or remain unpaid on any of the obligations or liabilities aforesaid at any time (s). xxx xxx xxx Should the Borrower at this or at any future time furnish, or should be heretofore have furnished, another surety or sureties to guarantee the payment of his obligations to you, the undersigned hereby expressly waives all benefits to which the undersigned might be entitled under the provisions of Article 1837 of the Civil Code (beneficio division), the liability of the undersigned under any and all circumstances being joint and several; (Emphasis Ours) The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities recognize that the word "guarantee" is frequently employed in business transactions to describe not the security of the debt but an intention to be bound by a primary or independent obligation. 11 As aptly observed by the trial court, the interpretation of a contract is not limited to the title alone but to the contents and intention of the parties. Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, finds no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa, 12 we have ruled that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a guarantor. But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage did not release petitioner from the obligation.

Credit Transactions Full Text Cases Atty. Adviento

In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral. It even released SOLIDBANK from any fault or negligence that may impair the contract. The pertinent portions of the contract so provides: . . . the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty, irrespective of the existence, value or condition of any collateral, and notwithstanding any such change, exchange, settlement, compromise, surrender, release, sale, application, renewal or extension, and notwithstanding also that all obligations of the Borrower to you outstanding and unpaid at any time(s) may exceed the aggregate principal sum herein above prescribed. This is a Continuing Guaranty and shall remain in full force and effect until written notice shall have been received by you that it has been revoked by the undersigned, but any such notice shall not be released the undersigned from any liability as to any instruments, loans, advances or other obligations hereby guaranteed, which may be held by you, or in which you may have any interest, at the time of the receipt of such notice. No act or omission of any kind on your part in the premises shall in any event affect or impair this guaranty, nor shall same be affected by any change which may arise by reason of the death of the undersigned, of any partner (s) of the undersigned, or of the Borrower, or of the accession to any such partnership of any one or more new partners. (Emphasis supplied) In fine, we find the petition to be without merit as no reversible error was committed by respondent Court of Appeals in rendering the assailed decision. WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs against the petitioner. SO ORDERED. EN BANC G.R. No. L-16666 April 10, 1922

57

FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS. (Sgd) Vice-President. OTTO VORSTER,

Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as the work progressed, payments were made to him from time to time upon the recommendation of the architects, until the entire contract price, with the exception of the sum of the P4,978.08, was paid. Subsequently it was found that the work had not been carried out in accordance with the specifications which formed part of the contract and that the workmanship was not of the standard required, and the Hospicio de San Jose therefore answered the complaint and presented a counterclaim for damages for the partial noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was, on February 27, 1918, declared insolvent and on March 4, 1918, an order was entered suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law, Act No. 1956. The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety Company be made cross-defendant to the exclusion of Machetti and that the proceedings be continued as to said company, but still remain suspended as to Machetti. This motion was granted and on February 7, 1920, the Hospicio filed a complaint against the Fidelity and Surety Company asking for a judgement for P12,800 against the company upon its guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity and Surety Company for P12,800 in accordance with the complaint. The case is now before this court upon appeal by the Fidelity and Surety Company form said judgment. As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has been converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant, Machetti having been practically eliminated from the case. But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is written in the English language and the terms employed must of course be given the signification which ordinarily attaches to them in that language. In English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist in the present case; on the contrary it appear affirmatively that the contract is the guarantor's separate undertaking in which the principal does not join, that its rests on a separate consideration moving from the principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty. Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. (Saint vs. Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and Surety Company assumed in the present case. The undertaking is perhaps not exactly that of a fianza under the Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily carries. The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final liquidation of his estate.

ROMULO MACHETTI, plaintiff-appelle, vs. HOSPICIO DE SAN JOSE, defendant-appellee, and FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant Ross and Laurence and Wolfson Gabriel La O for appellee No appearance for the other appellee. OSTRAND, J.: It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement undertook to construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the contract price being P64,000. One of the conditions of the agreement was that the contractor should obtain the "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the amount of P128,800 and the following endorsement in the English language appears upon the contract: MANILA, July 15, 1916. For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract. & Scwarzkopf Hospicio de for appellant. San Jose.

Credit Transactions Full Text Cases Atty. Adviento

The judgment appealed from is therefore reversed without costs and without prejudice to such right of action as the cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff Machetti. So ordered. EN BANC G.R. No. L-158025 November 5, 1920

58

guarantor are unlike in that the surety assumes liability as a regular party to the undertaking, while the liability as a regular party to upon an independent agreement to pay the obligation if the primary pay or fails to do so. A surety is charged as an original promissory; the engagement of the guarantor is a collateral undertaking. The obligation of the surety is primary; the obligation of the guarantor is secondary. (See U.S. vs. Varadero de la Quinta [1919], 40 Phil., 48; Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley [1913], 173 Mich., 492; Brandt, on Suretyship and Guaranty, sec. 1, cited approvingly by many authorities.) Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or suretyship) one person binds himself to pay or perform for a third person in case the latter should fail to do so." But "If the surety binds himself in solidum with the principal debtor, the provisions of Section fourth, Chapter third, Title first, shall be applicable." What the first portion of the cited article provides is, consequently, seen to be somewhat akin to the contract of guaranty, while what is last provided is practically equivalent to the contract of suretyship. When in subsequent articles found in section 1 of Chapter II of the title concerning fianza, the Code speaks of the effects of suretyship between surety and creditor, it has, in comparison with the common law, the effect of guaranty between guarantor and creditor. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between codebtors liable in solidum is similar to the common law suretyship. It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be more precise, of the fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that if the promissory note is not paid at maturity, then, within fifteen days after notice of such default and upon surrender to him of the three thousand shares of Keystone Mining Company stock, he will assume responsibility. Sellner is not bound with the principals by the same instrument executed at the same time and on the same consideration, but his responsibility is a secondary one found in an independent collateral agreement, Neither is Sellner jointly and severally liable with the principal debtors. With particular reference, therefore, to appellants assignments of error, we hold that defendant Sellner is a guarantor within the meaning of the provisions of the Civil Code. There is also an equitable aspect to the case which reenforces this conclusion. The note executed by the Keystone Mining Company matured on November 29, 1915. Interest on the note was not accepted by the makers until September 30, 1916. When the note became due, it is admitted that the shares of stock used as collateral security were selling at par; that is, they were worth pesos 30,000. Notice that the note had not been paid was not given to and when the Keyston Mining Company stock was worthless. Defendant, consequently, through the laches of plaintiff, has lost possible chance to recoup, through the sale of the stock, any amount which he might be compelled to pay as a surety or guarantor. The "indulgence," as this word is used in the law of guaranty, of the creditors of the principal, as evidenced by the acceptance of interest, and by failure promptly to notify the guarantor, may thus have served to discharge the guarantor. For quite different reasons, which, nevertheless, arrive at the same result, judgment is affirmed, with costs of this instance against the appellants. So ordered. SECOND DIVISION

CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffs-appellants, vs. GEORGE C. SELLNER, defendant-appellee. Wolfson, Wolfson and William and Ferrier for appellee. Schwarzkopf for appellants.

MALCOLM, J.: This is an action brought by plaintiffs to recover from defendant the sum of P10,000. The brief decision of the trial court held that the suit was premature, and absolved the defendant from the complaint, with the costs against the plaintiffs. The basis of plaintiff's action is a letter written by defendant George C. Sellner to John T. Macleod, agent for Mrs. Horace L. Higgins, on May 31, 1915, of the following tenor:lawph!l.net DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns that if the promissory note executed the 29th day of May, 1915 by the Keystone Mining Co., W.H. Clarke, and John Maye, jointly and severally, in your favor and due six months after date for Pesos 10,000 is not fully paid at maturity with interest, I will, within fifteen days after notice of such default, pay you in cash the sum of P10,000 and interest upon your surrendering to me the three thousand shares of stock of the Keystone Mining Co. held by you as security for the payment of said note. Respectfully, (Sgd.) GEO. C. SELLNER. Counsel for both parties agree that the only point at issue is the determination of defendant's status in the transaction referred to. Plaintiffs contend that he is a surety; defendant contends that he is a guarantor. Plaintiffs also admit that if defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil Code govern. In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is entitled "De la Fianza." The Spanish word "fianza" is translated in the Washington and Walton editions of the Civil Code as "security." "Fianza" appears in the Fisher translation as "suretyship." The Spanish world "fiador" is found in all of the English translations of the Civil Code as "surety." The law of guaranty is not related of by that name in the Civil Code, although indirect reference to the same is made in the Code of Commerce. In terminology at least, no distinction is made in the Civil Code between the obligation of a surety and that of a guarantor. As has been done in the State of Louisiana, where, like in the Philippines, the substantive law has a civil law origin, we feel free to supplement the statutory law by a reference to the precepts of the law merchant. The points of difference between a surety and a guarantor are familiar to American authorities. A surety and a guarantor are alike in that each promises to answer for the debt or default of another. A surety and a

G.R. No. L-29139 November 15, 1974 CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA, plaintiffs-appellants, vs. ESTEBAN PICZON and SOSING-LOBOS & CO., INC., defendantsappellees. Vicente C. Santos for plaintiffs-appellants.

Credit Transactions Full Text Cases Atty. Adviento

Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co., Inc. Vicente M. Macabidang for defendant-appellee Esteban Piczon.

59

BARREDO, J.:p Appeal from the decision of the Court of First Instance of Samar in its Civil Case No. 5156, entitled Consuelo P. Piczon, et al. vs. Esteban Piczon, et al., sentencing defendants-appellees, Sosing Lobos and Co., Inc., as principal, and Esteban Piczon, as guarantor, to pay plaintiffs-appellants "the sum of P12,500.00 with 12% interest from August 6, 1964 until said principal amount of P12,500.00 shall have been duly paid, and the costs." After issues were joined and at the end of the pre-trial held on August 22, 1967, the trial court issued the following order: "When this case was called for pre-trial, plaintiffs and defendants through their lawyers, appeared and entered into the following agreement: 1. That defendants admit the due execution of Annexes "A" and "B" of the complaint; 2. That consequently defendant Sosing-Lobos and Co., Inc. binds itself to the plaintiffs for P12,500.00, the same to be paid on or before October 31, 1967 together with the interest that this court may determine. That the issues in this case are legal ones namely: (a) Will the payment of twelve per cent interest of P12,500.00 commence to run from August 6, 1964 when plaintiffs made the first demand or from August 29, 1956 when the obligation becomes due and demandable? (b) Is defendant Esteban Piczon liable as a guarantor or a surety? That the parties are hereby required to file their respective memorandum if they so desire on or before September 15, 1967 to discuss the legal issues and therewith the case will be considered submitted for decision. WHEREFORE, the instant case is hereby considered submitted based on the aforesaid facts agreed upon and upon submission of the parties of their respective memorandum on or before September 15, 1967. SO ORDERED. 1 (Record on Appeal pp. 28-30.) Annex "A", the actionable document of appellants reads thus: AGREEMENT OF LOAN KNOW YE ALL MEN BY THESE PRESENTS: That I, ESTEBAN PICZON, of legal age, married, Filipino, and resident of and with postal address in the municipality of Catbalogan, Province of Samar, Philippines, in my capacity as the President of the corporation known as the "SOSING-LOBOS and CO., INC.," as controlling stockholder, and at the same time as guarantor for the same, do by these presents II

contract a loan of Twelve Thousand Five Hundred Pesos (P12,500.00), Philippine Currency, the receipt of which is hereby acknowledged, from the "Piczon and Co., Inc." another corporation, the main offices of the two corporations being in Catbalogan, Samar, for which I undertake, bind and agree to use the loan as surety cash deposit for registration with the Securities and Exchange Commission of the incorporation papers relative to the "Sosing-Lobos and Co., Inc.," and to return or pay the same amount with Twelve Per Cent (12%) interest per annum, commencing from the date of execution hereof, to the "Piczon and Co., Inc., as soon as the said incorporation papers are duly registered and the Certificate of Incorporation issued by the aforesaid Commission. IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan, Samar, Philippines, this 28th day of September, 1956.

(Sgd.) EST (Record on Appeal, pp. 6-7.) The trial court having rendered judgment in the tenor aforequoted, appellants assign the following alleged errors: I THE TRIAL COURT ERRED IN ORDERING THE PAYMENT OF 12% INTEREST ON THE PRINCIPAL OF P12,500.00 FROM AUGUST 6, 1964, ONLY, INSTEAD OF FROM SEPTEMBER 28, 1956, WHEN ANNEX "A" WAS DULY EXECUTED.

THE TRIAL COURT ERRED IN CONSIDERING DEFENDANT ESTEBAN PICZON AS GUARANTOR ONLY AND NOT AS SURETY. III THE TRIAL COURT ERRED IN NOT ADJUDICATING DAMAGES IN FAVOR OF THE PLAINTIFFSAPPELLANTS. (Appellants' Brief, pp. a to b.) Appellants' first assignment of error is well taken. Instead of requiring appellees to pay interest at 12% only from August 6, 1964, the trial court should have adhered to the terms of the agreement which plainly provides that Esteban Piczon had obligated Sosing-Lobos and Co., Inc. and himself to "return or pay (to Piczon and Co., Inc.) the same amount (P12,500.00) with Twelve Per Cent (12%) interest per annum commencing from the date of the execution hereof", Annex A, which was on September 28, 1956. Under Article 2209 of the Civil Code "(i)f the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum." In the case at bar, the "interest agreed upon" by the parties in Annex A was to commence from the execution of said document. Appellees' contention that the reference in Article 2209 to delay incurred by the debtor which can serve as the basis for liability for interest is to that defined in Article 1169 of the Civil Code reading thus: Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

Credit Transactions Full Text Cases Atty. Adviento

However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declares; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held that the article cited by appellees (which was Article 1100 of the Old Civil Code read in relation to Art. 1101) is applicable only when the obligation is to do something other than the payment of money. And in Firestone Tire & Rubber Co. (P.I.) vs. Delgado, 104 Phil. 920, the Court squarely ruled that if the contract stipulates from what time interest will be counted, said stipulated time controls, and, therefore interest is payable from such time, and not from the date of the filing of the complaint (at p. 925). Were that not the law, there would be no basis for the provision of Article 2212 of the Civil Code providing that "(I)nterest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point." Incidentally, appellants would have been entitled to the benefit of this article, had they not failed to plead the same in their complaint. Their prayer for it in their brief is much too late. Appellees had no opportunity to meet the issue squarely at the pre-trial. As regards the other two assignments of error, appellants' pose cannot be sustained. Under the terms of the contract, Annex A, Esteban Piczon expressly bound himself only as guarantor, and there are no circumstances in the record from which it can be deduced that his liability could be that of a surety. A guaranty must be express, (Article 2055, Civil Code) and it would be violative of the law to consider a party to be bound as a surety when the very word used in the agreement is "guarantor." Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order, appellants accepted the express assumption of liability by Sosing-Lobos & Co., Inc. for the payment of the obligation in question, thereby modifying their original posture that inasmuch as that corporation did not exist yet at the time of the agreement, Piczon necessarily must have bound himself as insurer. As already explained earlier, appellants' prayer for payment of legal interest upon interest due from the filing of the complaint can no longer be entertained, the same not having been made an issue in the pleadings in the court below. We do not believe that such a substantial matter can be deemed included in a general prayer for "any other relief just and equitable in the premises", especially when, as in this case, the pre-trial order does not mention it in the enumeration of the issues to be resolved by the court. PREMISES CONSIDERED, the judgment of the trial court is modified so as to make appellees liable for the stipulated interest of 12% per annum from September 28, 1956, instead of August 6, 1964. In all other respects, said judgment is affirmed. Costs against appellees. SECOND DIVISION ESTRELLA vs. COURT OF respondents. PALMARES, APPEALS and M.B. petitioner, LENDING

60

CORPORATION,

REGALADO, J.: Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor? Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof. 1 On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on September 26, 1991. 2 Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a complaint 3 against petitioner Palmares as the lone party-defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter. In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in August 1990, immediately after the loan matured, she offered to settle the obligation with respondent corporation but the latter informed her that they would try to collect from the spouses Azarraga and that she need not worry about it; that there has already been a partial payment in the amount of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as the penalty charges of 3% per month, are usurious and unconscionable; and that while she agrees to be liable on the note but only upon default of the principal debtor, respondent corporation acted in bad faith in suing her alone without including the Azarragas when they were the only ones who benefited from the proceeds of the loan. During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court: (1) what the rate of interest, penalty and damages should be; (2) whether the liability of the defendant (herein petitioner) is primary or subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with primary liability. 5 Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23, rendered judgment dismissing the complaint without prejudice to the filing of a separate action for a sum of money against the spouses Osmea and Merlyn Azarraga who are primarily liable on the instrument. 6 This was based on the findings of the court a quo that the filing of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a prior party; that the offer made by petitioner to pay the obligation is considered a valid tender of payment sufficient to discharge a person's secondary liability on the instrument; as co-maker, is only secondarily liable on the instrument; and that the promissory note is a contract of adhesion. Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring herein petitioner Palmares liable to pay respondent corporation: 1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six percent (6%) per month computed from the date the loan was contracted until fully paid;

G.R. No. 126490 March 31, 1998

Credit Transactions Full Text Cases Atty. Adviento

2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance; 3. Attorney's fees at 25% of the total amount due per stipulations; 4. Plus costs of suit. 7 Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety since she bound herself to be jointly and severally or solidarily liable with the principal debtors, the Azarraga spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note and hence may be sued by the creditor corporation for the entire obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although she claims that the Azarraga spouses should have been impleaded. Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if the promissory note were to be considered as a contract of adhesion, the same is not entirely prohibited because the one who adheres to the contract is free to reject it entirely; if he adheres, he gives his consent. Hence this petition for review on certiorari wherein it is asserted that: A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the promissory note. 1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares' solidary liability. 2. The promissory note contains provisions which establish the co-maker's liability as that of a guarantor. 3. There is no sufficient basis for concluding that Palmares' liability is solidary. 4. The promissory note is a contract of adhesion and should be construed against M. B. Lending Corporation. 5. Palmares cannot be compelled to pay the loan at this point. B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty charges on the outstanding balance of the promissory note. The foregoing contentions of petitioner are denied and contradicted in their material points by respondent corporation. They are further refuted by accepted doctrines in the American jurisdiction after which we patterned our statutory law on surety and guaranty. This case then affords us the opportunity to make an extended exposition on the ramifications of these two specialized contracts, for such guidance as may be taken therefrom in similar local controversies in the future. The basis of petitioner Palmares' liability under the promissory note is expressed in this wise: ATTENTION TO CO-MAKERS: PLEASE READ WELL I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this Promissory Note for Short-Term Loan: That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this note;

61

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same conditions abovecontained. 8 Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second paragraph seems to define her liability as that of a surety which is joint and solidary with the principal maker, on the other hand, under the third paragraph her liability is actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply stated, although the second paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as that of a guarantor. According to petitioner, these are two conflicting provisions in the promissory note and the rule is that clauses in the contract should be interpreted in relation to one another and not by parts. In other words, the second paragraph should not be taken in isolation, but should be read in relation to the third paragraph. In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held liable only as a guarantor for several reasons. First, the words "jointly and severally or solidarily liable" used in the second paragraph are technical and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is likely to enter into such transactions without fully realizing the nature and extent of her liability. On the contrary, the wordings used in the third paragraph are easier to comprehend. Second, the law looks upon the contract of suretyship with a jealous eye and the rule is that the obligation of the surety cannot be extended by implication beyond specified limits, taking into consideration the peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct consideration received from either the principal obligor or the creditor. Third, the promissory note is a contract of adhesion since it was prepared by respondent M.B. Lending Corporation. The note was brought to petitioner partially filled up, the contents thereof were never explained to her, and her only participation was to sign thereon. Thus, any apparent ambiguity in the contract should be strictly construed against private respondent pursuant to Art. 1377 of the Civil Code. 9 Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the promissory note to be that of a guarantor. Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors cannot be considered in default in the absence of a judicial or extrajudicial demand. It is true that the complaint alleges the fact of demand, but the purported demand letters were never attached to the pleadings filed by private respondent before the trial court. And, while petitioner may have admitted in her Amended Answer that she received a demand letter from respondent corporation sometime in 1990, the same did not effectively put her or the principal debtors in default for the simple reason that the latter subsequently made a partial payment on the loan in September, 1991, a fact which was never controverted by herein private respondent. Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding balance of the loan is only P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or unconscionable, and the obligation has been partially complied with, the court may equitably reduce the penalty 10 on grounds of substantial justice. More importantly, respondent corporation never refuted petitioner's allegation that immediately after the loan matured, she informed said respondent of her desire to settle the obligation. The court should, therefore, mitigate the damages to be paid since petitioner has shown a sincere desire for a compromise. 11 After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of merit, but to except therefrom the issue anent the propriety of the monetary award adjudged to herein respondent corporation.

Credit Transactions Full Text Cases Atty. Adviento

At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between the parties is a contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not invalid per se and that on numerous occasions the binding effects thereof have been upheld. The peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which the provisions are intended to apply. Hence, just as consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the operative facts and surrounding circumstances. 12 The factual scenario obtaining in the case before us warrants a liberal application of the rule in favor of respondent corporation. The Civil Code pertinently provides: Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. 13 In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioner's liability is that of a surety. Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph of her contract are technical and legal terms which could not be easily understood by an ordinary layman like her is diametrically opposed to her manifestation in the contract that she "fully understood the contents" of the promissory note and that she is "fully aware" of her solidary liability with the principal maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be established by clear and convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving allegations. 14 Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking. 15 The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability. 16 Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable with the principal maker, her liability is deemed restricted by the provisions of the third paragraph of her contract wherein she agreed "that M.B. Lending Corporation may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note," which makes her contract one of guaranty and not suretyship. The purported discordance is more apparent than real. A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. 17 A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. 18 Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. 19 A surety binds himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so. 20 In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default, while a guarantor

62

contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor. 21 Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do not contain any other condition for the enforcement of respondent corporation's right against petitioner. It has not been shown, either in the contract or the pleadings, that respondent corporation agreed to proceed against herein petitioner only if and when the defaulting principal has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtor's obligation, so as to render himself directly and primarily responsible with him, and without reference to the solvency of the principal. 22 In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of reasonable construction applicable to all written contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is not to be extended beyond its strict meaning. 23 The rule, however, will apply only after it has been definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining whether a party's undertaking is that of a surety or a guarantor. Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third paragraph of the controverted suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted to above. It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall also be principally considered. 24 Several attendant factors in that genre lend support to our finding that petitioner is a surety. For one, when petitioner was informed about the failure of the principal debtor to pay the loan, she immediately offered to settle the account with respondent corporation. Obviously, in her mind, she knew that she was directly and primarily liable upon default of her principal. For another, and this is most revealing, petitioner presented the receipts of the payments already made, from the time of initial payment up to the last, which were all issued in her name and of the Azarraga spouses. 25 This can only be construed to mean that the payments made by the principal debtors were considered by respondent corporation as creditable directly upon the account and inuring to the benefit of petitioner. The concomitant and simultaneous compliance of petitioner's obligation with that of her principals only goes to show that, from the very start, petitioner considered herself equally bound by the contract of the principal makers. In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal, 26 and as such is deemed an original promisor and debtor from the beginning. 27 This is because in suretyship there is but one contract, and the surety is bound by the same agreement which binds the principal. 28 In essence, the contract of a surety starts with the agreement, 29 which is precisely the situation obtaining in this case before the Court. It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions stipulated between respondent corporation, as creditor, and the principal obligors. A surety is usually bound with his principal by the same instrument, executed at the same time and upon the same consideration; he is an original debtor, and his liability is immediate and direct. 30 Thus, it has been held that where a written agreement on the same sheet of paper with and immediately following the principal contract between the buyer and seller is executed simultaneously therewith, providing that the signers of the agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable with the buyer. 31 A surety usually enters into the same obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and the same consideration usually supports the obligation for both the principal and the surety. 32

Credit Transactions Full Text Cases Atty. Adviento

There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent corporation may demand payment of the loan from her in case the principal maker defaults, subject to the same conditions expressed in the promissory note. Significantly, paragraph (G) of the note states that "should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares. 33 As a surety, petitioner is equally bound by such waiver. Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand. 34 On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship. 35 The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account. 36 The underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default. 37 As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his principal. 38 Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors who allegedly were the only ones who benefited from the proceeds of the loan. What petitioner is trying to imply is that the creditor, herein respondent corporation, should have proceeded first against the principal before suing on her obligation as surety. We disagree. A creditor's right to proceed against the surety exists independently of his right to proceed against the principal. 39 Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone. 40 Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. 41 Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound. 42 We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal's request or without it, and whether it is

63

yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. 43 And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety, 44 or that he need not trouble himself. 45 The consequences of the delay, such as the subsequent insolvency of the principal, 46 or the fact that the remedies against the principal may be lost by lapse of time, are immaterial. 47 The raison d'tre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. 48 At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor. 49 It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. 50 In order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety from paying the debt. 51 None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal debtors an extended period of time within which to comply with their obligation did not effectively absolve here in petitioner from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by some act of the creditor, 52 herein respondent corporation, failing in which we cannot grant the relief prayed for. As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the outstanding balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would accumulate. The statement, likewise traversed by said respondent, is misleading. In an affidavit 53 executed by petitioner, which was attached to her petition, she stated, among others, that: 8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released and that she has not paid the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and of my liability arising from the promissory note which I signed. 9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At the same time, I offered to pay MB Lending the outstanding balance of the principal obligation should he fail to collect from Merlyn and Osmea Azarraga. Mr. Banusing advised me not to worry because he will try to collect first from Merlyn and Osmea Azarraga. 10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of Merlyn and Osmea Azarraga, together with interest and penalties thereon, has not been paid. Since I had no available funds at that time, I offered to pay MB Lending by delivering to them a parcel of land which I own. Mr. Banusing's secretary, however, refused my offer for the reason that they are not interested in real estate.

Credit Transactions Full Text Cases Atty. Adviento

11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in the amount of P30,000.00. 12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending. 13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmea Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing. The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively discharge her from liability. There are a number of circumstances which conjointly inveigh against her aforesaid theory. 1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who initially requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to collect. The delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of petitioner. At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if the principal does not pay. 2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned. Respondent corporation was acting well within its rights when it refused to accept the offer. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value, or more valuable than that which is due. 54 The obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A change of the object of the obligation would constitute novation requiring the express consent of the parties. 55 3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the obligation in the amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot be blamed for refusing the amount being offered because it fell way below the amount it had computed, based on the stipulated interests and penalty charges, as owing and due from herein petitioner. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. 56 In other words, the prestation must be fulfilled completely. A person entering into a contract has a right to insist on its performance in all particulars. 57 Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, then the obligation shall be deemed fully complied with. 58 Precisely, this is what respondent corporation wanted to avoid when it continually refused to settle with petitioner at less than what was actually due under their contract. This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees equivalent to 25% of the total amount due are highly inequitable and unreasonable. It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even before the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. And, even if there has been no performance, the penalty may also be reduced if it is iniquitous or leonine. In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty

64

interest for being excessive and unwarranted under the following rationalization: Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3 %) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is intended that is, to punish the obligor will have been sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties' promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest altogether. 59 Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated. Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon between the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the amount thereof appears to be unconscionable or unreasonable. 60 To that end, it is not even necessary to show, as in other contracts, that it is contrary to morals or public policy. 61 The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this simple action for collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this case. 62 WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00. SO ORDERED. EN BANC G.R. No. 34642 September 24, 1931

FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-appellees, vs. GUILLERMO SEVERINO, ET AL., defendants. ENRIQUE ECHAUS, appellant. R. Nepomuceno Jacinto E. Evidente for appellees. STREET, J.: This action was instituted in the Court of First Instance of the Province of Iloilo by Fabiola Severino, with whom is joined her husband Ricardo Vergara, for the purpose of recovering the sum of P20,000 from Guillermo Severino and Enrique Echaus, the latter in the character of guarantor for the former. Upon hearing he cause the trial court gave judgment in favor of the plaintiffs to recover the sum of P20,000 with lawful from November 15, 1929, the date of the filing of the complaint, with costs. But it was declared that execution of this judgment should issue first against the property of Guillermo Severino, and if no property should be found belonging to said defendant sufficient to satisfy the judgment in whole or in part, execution for the remainder should be issued against the property of Enrique Echaus as guarantor. From this judgment the defendant Echaus appealed, but his principal, Guillermo Severino, did not. The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino, deceased, former resident of Occidental Negros. Upon the death of Melecio Severino a number of years ago, he left considerable property and litigation ensued between his widow, Felicitas Villanueva, and Fabiola Severino, on the one part, and other heirs of the deceased on the for appellant.

Credit Transactions Full Text Cases Atty. Adviento

other part. In order to make an end of this litigation a compromise was effected by which Guillermo Severino, a son of Melecio Severino, took over the property pertaining to the estate of his father at the same time agreeing to pay P100,000 to Felicitas Villanueva and Fabiola Severino. This sum of money was made payable, first, P40,000 in cash upon the execution of the document of compromise, and the balance in three several payments of P20,000 at the end of one year; two years, and three years respectively. To this contract the appellant Enrique Echaus affixed his name as guarantor. The first payment of P40,000 was made on July 11, 1924, the date when the contract of compromise was executed; and of this amount the plaintiff Fabiola Severino received the sum of P10,000. Of the remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to the sum of P20,000. It appears that at the time of the compromise agreement above-mentioned was executed Fabiola Severino had not yet been judicially recognized as the natural daughter of Melecio Severino, and it was stipulated that the last P20,000 corresponding to Fabiola and the last P5,000 corresponding to Felicitas Villanueva should retained on deposit until the definite status of Fabiola Severino as natural daughter of Melecio Severino should be established. The judicial decree to this effect was entered in the Court of First Instance of Occidental Negros on June 16, 1925, and as the money which was contemplated to be held in suspense has never in fact been paid to the parties entitled thereto, it results that the point respecting the deposit referred to has ceased to be of moment. The proof shows that the money claimed in this action has never been paid and is still owing to the plaintiff; and the only defense worth noting in this decision is the assertion on the part of Enrique Echaus that he received nothing for affixing his signature as guarantor to the contract which is the subject of suit and that in effect the contract was lacking in consideration as to him. The point is not well taken. A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action which Felicitas Villanueva and Fabiola Severino had instituted against Guillermo Severino was an adequate consideration to support the promise on the part of Guillermo Severino to pay the sum of money stipulated in the contract which is the subject of this action. The promise of the appellant Echaus as guarantor therefore binding. It is never necessary that the guarantor or surety should receive any part of the benefit, if such there be, accruing to his principal. But the true consideration of this contract was the detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it is immaterial that no benefit may have accrued either to the principal or his guarantor. The judgment appealed from is in all respects correct, and the same will be affirmed, with costs against the appellant. So ordered. EN BANC G.R. No. L-45571 June 30, 1939

65

style Philippine-American Construction Company, with a capital of P14,000, P10,000 of which were taken by way of loan from Paulino Candelaria. The partnership and the co-partners undertook and bound themselves to pay, jointly and severally, the said indebtedness in or before June, 1925. Having violated the conditions of the contract executed for the purpose, Paulino Candelaria brought civil case No. 3838 of the Court of First Instance of Nueva Ecija on May 15, 1925, against the PhilippineAmerican Construction Company and its co-partners, for the recovery of the loan, plus interest thereon and stipulated attorney's fees. On January 25, 1926, the said court rendered judgment therein sentencing all the defendants to pay the plaintiff, jointly and severally, the sum of P9,317, with legal interest thereon from the filing of the complaint, plus P500 as liquidated damages and P1,000 as attorney's fees. On appeal this judgment was affirmed by this court on December 17, 1926 (G.R. No. 26131). A writ of execution of the affirmed judgment having been issued, the herein plaintiff, in her capacity as judicial administratrix of the deceased Santiago Lucero, on February 10, 1932, paid to be creditor Paulino Candelaria the sum of P5,665.55 on account of the judgment. Upon filing of the complaint in civil case No. 3838, Paulino Candeleria obtained a writ of attachment against the then defendants by virtue of which the sheriff attached properties of Jerry O. Toole valued at P50; of Antonio K. Abad valued at P12,150; and of Anastacio R. Santos valued at P2,733. No property of the partnership Philippine-American Construction Company was attached. In view of these attachments, the PhilippineAmerican Construction Company moved for the discharge of the attached properties and offered to post a bond for P10,000. The court granted the motion and fixed the bond at the amount offered. On May 29, 1925, the Philippine-American Construction Company, as principal, then represented by the partner Antonio K. Abad, and Santiago Lucero and Meliton Carlos, as guarantors, executed a bond for P10,000 in favor of Paulino Candelaria for the lifting of the attachment under section 440 of the Code of Civil Procedure. In the bond thus executed, the defendant Anastacio R. Santos neither intervened nor signed individually, but Abad testified that the former was the one who induced him to get the signature of Lucero by taking advantage of his good relations with him. Upon the approval of the bond, the attachment was discharged and the attached properties were returned to their owners. After the issuance of the writ for the execution of the judgment rendered in civil case No. 3838, the sheriff returned the same with the statement that the writ could not be executed as he found no property of the judgment debtors. In view of this, Paulino Candelaria moved for the issuance of a writ of execution against the guarantors of the defendants. The court granted the motion and issued a writ of execution against the plaintiff, as judicial administratrix of the deceased Santiago Lucero, and the other guarantor Meliton Carlos. The plaintiff tenaciously refused to pay the judgment obtained by Paulino Candelaria, but after all her efforts had failed, she was eventually compelled to pay to said creditor the sum of P5,565.55, the co-guarantor Meliton Carlos also paid upon the bond signed by him the sum of P5,135. The plaintiff and Carlos later recovered from Antonio K. Abad, one of the defendants in the said civil case, the sum of P3,800 which they divided equally. It thus appears that the payment made by the plaintiff to Candelaria was reduced to the sum of P3,665.55. The plaintiff, in her said capacity, demanded of the defendant Anastacio R. Santos the return of the aforesaid sum and, upon the latter's refusal, she brought the action which culminated in the appealed judgment. The four errors assigned by the appellant raise only one legal question, namely, whether under the proven facts admitted by the parties, he is bound to pay to the plaintiff what the latter had advanced to Paulino Candelaria upon the bond which the deceased Santiago Lucero had executed. The appellant vigorously insists that he is not so bound under the law, because he neither applied for nor intervened in the bond in any capacity. It is beyond question that the appellant neither intervened nor signed the bond which was filed to discharge the attachment of the properties of the judgment debtors, but it is clear, and this is admitted, that the bond was filed to release the attached properties, it was approved by the court and it resulted in the discharge of the attachment and the return of the attached properties to their respective owners. When the sheriff attempted to execute judgment and looked for the discharged properties, he found that they had disappeared, for which reason the court subsequently issued a writ of execution against the guarantors. As a result of this last execution, the plaintiff was forced to pay and in fact paid the said sum to the creditor Candelaria. Now, then, under article 1822 of the Civil Code, by guaranty one person binds himself to pay or perform for a

FLORENTINA DE GUZMAN, as administratrix of the intestate estate of the deceased Santiago Lucero, plaintiff-appellee, vs. ANASTACIO R. SANTOS, defendant-appellant. E.V. Filamor Antonio G. Lucero for appellee. IMPERIAL, J.: This is an appeal taken by the defendant from the decision of the Court of First Instance of Nueva Ecija which sentenced him to pay the plaintiff the sum of P3,665.55, plus legal interest thereon from February 10, 1932, until fully paid, and the costs. On October 28, 1924, Jerry O. Toole, Antonio K. Abad and Anastacio R. Santos, the defendant, formed a general mercantile partnership under the appellant.

Credit Transactions Full Text Cases Atty. Adviento

third person in case the latter should fail to do so; and the article 1838 provides that any guarantor who pays for the debtor shall be indemnified by the latter even should the guaranty have been undertaken without the knowledge of the debtor. In the present case, the guarantor was the deceased Santiago Lucero, now represented by the plaintiff in her capacity as judicial administratrix, and the debtor is the defendant-appellant. Applying the provision of the last cited article, it is obvious that the appellant is legally bound to pay what the plaintiff had advanced to the creditor upon the judgment, notwithstanding the fact that the bond had given without his knowledge. The obligation of the appellant to pay the plaintiff what the latter had advanced is further sanctioned by the general provisions of the Civil Code regarding obligations. Article 1158 provides that "payment may be made by any person, whether he has an interest in the performance of the obligation or not, and whether the payment is known and approved by the debtor or whether he is unaware of it. Any person who makes a payment for the account of another may recover from the debtor the amount of the payment, unless it was made against the express will of the latter. In the latter case he can only recover from the debtor in so far as the payment has been beneficial to the latter." According to this legal provision, it is evident that the plaintiff-appellant is bound to pay to the plaintiff what the latter had advanced to the creditor upon the judgment, and this is the more so because it appears that although Lucero executed the bond without his knowledge, nevertheless he did not object thereto or repudiate the same at any time. From the proven facts it cannot logically be deduced that the appellant did not have knowledge of the bond, first, because his properties were attached and the attachment could not have been levied without his knowledge, and, secondly, because the said properties were returned to him and in receiving them he was necessarily apprized of the fact that a bond had been filed to discharge the attachment. The appellant questions the application by the court of article 127 of the Code of Commerce, overlooking article 128. This assignment of error is of no consequence and does not affect the result of the case. As already stated, the rights of the parties must be governed by the aforesaid articles of the Civil Code. Assuming the inapplicability of article 127 of the Code of Commerce, in view of the fact that the action is not addressed to the appellant as general partner of the Philippine-American Construction Company, it nevertheless appears that his liability to the plaintiff, as debtor in solidum of Paulino Candelaria, is recognized and countenanced by articles 1158 and 1838 of the Civil Code. In view of the foregoing, the appealed judgment is affirmed, with costs of this instance to the defendant appellant. So ordered. G.R. No. L-29587 November 28, 1975 PHILIPPINE NATIONAL BANK, Petitioner, vs. LUZON SURETY CO., INC. and THE HONORABLE COURT OF APPEALS, Respondent. ESGUERRA, J.: Petitioner Philippine National Bank seeks a review and reversal of the decision dated June 26, 1968, of the Court of Appeals in its case CA-G.R. No. 30282-R, absolving Luzon Surety Co., Inc. of its liability to said petitioner and thus reversing the decision of the Court of First Instance of Negros Occidental, the dispositive portion of which reads as follows: IN VIEW THEREOF, judgment is hereby rendered ordering defendant Augusto R. Villarosa to pay plaintiff PHILIPPINE NATIONAL BANK the sum of P81,200.00 plus accrued interest of 5% per annum on P63,222.78 from August 31, 1959; to pay 10% of said amount as attorney's fees and to pay the costs. Defendant Luzon Surety Co., Inc. is hereby ordered to pay jointly and severally with defendant Villarosa to the plaintiff the sum of P10,000.00; defendant Central Surety and Insurance Company jointly and severally with defendant Villarosa the sum of P20,000 to the plaintiff, and Associated Surety And Insurance Co. jointly and severally with defendant Villarosa the sum of P15,000.00 to the plaintiff, with the understanding that should said bonding companies pay the

66

aforementioned amounts of their respective bonds to the plaintiff, said amounts should be deducted from the total outstanding obligation of defendant Villarosa in favor of the plaintiff. Above-quoted decision was modified in an order of the Court of First Instance dated June 5, 1961, granting petitioner Philippine National Bank (PNB) the right to recover accrued interest at the rate of 5% per annum from December 24, 1953, from the defendants bonding companies.chanroblesvirtualawlibrary chanrobles virtual law library The facts as found by the Court of Appeals are as follows: ... sometime prior to 27 November 1951, defendant Augusto R. Villarosa, a sugar planter adhered to the Lopez Sugar Central Milling Company, Inc. applied for a crop loan with the plaintiff, Philippine National Bank, Exhibit A; this application was approved on 6 March, 1952 in the amount of P32,400, according to the complaint; but the document of approval has not been exhibited; at any rate, the planter Villarosa executed a Chattel Mortgage on standing crops to guarantee the crop loan, Exhibit B and as shown in Exhibits C to C30 on various dates from 28 January, 1952 to 9 January, 1953, in consideration of periodical sums of money by him received from PNB, planter Villarosa executed these promissory notes from which will be seen that the credit line was that the original amount of P32,400 and was thus maintained up to the promissory note Exhibit C-9 dated 30 May, 1952 but afterwards it was increased and promissory notes Exhibits C-10 to C-30 were based on the increased credit line; and as of 27 September, 1953 as shown in the accounts, Exhibits D and D-1, there was a balance of P63,222.78 but as of the date when the complaint was filed on 8 June, 1960, because of the interest accrued, it had reached a much higher sum; that was why due to its non-payment, plaintiff filed this complaint, as has been said, on 8 June, 1960; now the complaint sought relief not only against the planter but also against the three (3) bondsmen, Luzon Surety, Central Surety and Associated Surety because Luzon Surety had filed the bond Exhibit E dated 18 February, 1952 in the sum of P10,000; Central Surety Exhibit F dated 24 February, 1952 in the sum of P20,000 and Associated Surety the bond Exhibit G dated 11 September, 1952 in the sum of P15,000; in gist, the obligation of each of the bondsmen being to guarantee the faithful performance of the obligation of the planter with PNB; now each of the defendants in their answers raised various defenses but as far as principal defendant Augusto R. Villarosa and other defendants Central Surety and Associated Surety are concerned, their liability is no longer material because they have not appealed; and in the trial of the case, plaintiff submitted Exhibits A to J-1 and witness Romanito Brillantes; but the defense of Luzon Surety thru its witness Jose Arroyo and Exhibits 1 to 3 being 1st that the evidence of the plaintiff did not establish a cause of action to make Luzon Surety liable and 2ndly, in any case that there had been material alteration in the principal obligation, if any, guaranteed by it; ... . Unable to obtain reconsideration of the decision of the Appellate Court, PNB came to this Court and alleged the following errors. 1. The Court of Appeals erred in the application of the law involved by invoking Article 2055 of the New Civil Code, which properly should have been the law on suretyship which are covered by Section 4, Chapter 3, Title 1, Book IV of the New Civil Code; chanrobles virtual law library

Credit Transactions Full Text Cases Atty. Adviento

2. Consequently, when the Court of Appeals released the surety from liability, it committed a grave or gross misappreciation of facts amounting to an error of law; chanrobles virtual law library 3. The Court of Appeals erred when it held that there must have been a principal crop loan contract, guaranteed by the surety bonds; chanrobles virtual law library 4. The Court of Appeals erred when it released the surety from liability. The above assigned errors boil down to the single question of whether or not the Court of Appeals was justified in absolving Luzon Surety Co., Inc., from liability to petitioner Philippine National Bank. We have examined the record thoroughly and found the appealed decision to be erroneous. Excerpt of the Chattel Mortgage executed to guarantee the crop loan clearly provided as follows: xxx xxx xxx chanrobles virtual law library 1. That the Mortgagor does by these presents grant, cede and convey unto the Mortgagee by way of First Mortgage free from any encumbrances, all the crops of the absolute property of the Mortgagor, corresponding to the 1952-53 and subsequent yearly sugar crops agricultural season at present growing in the Hda. known as San Antonio, Washington (P) Audit 24-124 and 24-16 la and Hda. Aliwanay (non-quota land); milling with LSMC and CAD Municipality of Sagay, and Escalante, Province of Negros Occidental covered by cadastral lots no. Various of the Cadastral Survey at the Municipality of Sagay, Escalante particularly bounded and described in Transfer Certificate of Title No. Various issued by the Register of Deeds of said province. The said mortgage crops consist of all the Mortgagor's first available entire net share of the 1952-53 and subsequent yearly sugar crops thereafter conservatively estimated at but not less than Three Thousand Four Hundred Twenty and 14/00 (3,420.14) piculs of export and domestic sugar, including whatever addition thereto, and such aids, subsidies, indemnity payments and other benefits as maybe awarded to the Mortgagor, coming from any source, governmental or otherwise.chanroblesvirtualawlibrary chanrobles virtual law library xxx xxx xxx chanrobles virtual law library 4. This Mortgage is executed to secure payment by the Mortgagor to the Mortgagee at the latter's office of a loan herein granted to the Mortgagor in the sum of Thirty Two Thousand Four Hundred (P32,400.00) Pesos, Philippine Currency, with interest at the rate of five per cent per annum, which loan shall be given to the Mortgagor either in lump sum or in installments as the mortgagee may determine. The Mortgagee may increase or decrease the amount of the loan as well as the installments as it may deem convenient and the Mortgagor shall submit such periodical reports on the crops mortgaged as the Mortgagee may require. In the event that the loan is increased such increase shall likewise be secured by Mortgage. This Mortgage shall also secure any other loans or advances that the Mortgagee may extend to the Mortgagor, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the account books and records of the Mortgagee.chanroblesvirtualawlibrary chanrobles virtual law library xxx xxx xxx

67

Likewise an extract from the Surety Bond executed by and between the PNB on one hand and Augusto Villarosa and respondent Luzon Surety Company, Inc. on the other, is hereby reproduced, viz: That we Augusto Villarosa of Bacolod City, as principal and Luzon Surety Company, Inc. a corporation duly organized and existing under and by virtue of the laws of the Philippines, as surety, are held firmly bound unto Philippine National Bank, Bacolod City, Philippines, in the sum of Ten Thousand Pesos (P10,000.00) Philippine Currency, for the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors, and assigns jointly and severally, firmly by these presents: The condition of the obligation are as follows: WHEREAS, the above bounden principal, on the - day of February, 1952, entered into a crop loan contract with obligee Philippine National Bank, Bacolod Branch of Bacolod City, Philippines to fully and faithfully Comply with all the terms and condition stipulated in said crop loan contract which are hereby incorporated as essential parts hereof, and principally to meet and pay from the proceeds of the sugar produced from his Hda. Antonio and Hda. Aliwanay, Escalante, Occidental Negros credit advances made by the Philippine National Bank Bacolod Branch not to exceed P32,800 as stated in said contract. Provided further that the liability under this bond shall not exceed the amount of P10,000.00 chanrobles virtual law library WHEREAS, said Philippine National Bank Bacolod Branch requires said principal to give a good and sufficient bond in the above stated sum to secure the full and faithful performance on his part of said crop loan contract.chanroblesvirtualawlibrary chanrobles virtual law library NOW, THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms and conditions and agreement stipulated in said crop loan contract then, this obligation shall be null and void, otherwise it shall remain in full force and effect.chanroblesvirtualawlibrary chanrobles virtual law library xxx xxx xxx The foregoing evidences clearly the liability of Luzon Surety to petitioner Philippine National Bank not merely as a guarantor but as surety-liable as a regular party to the undertaking (Castelvi de Higgins vs. Sellner 41 Phil. 142). The Court of Appeals, however, in absolving the bonding company ratiocinates that the Surety Bond executed on February 18, 1952, made specific references to a crop loan contract executed by Augusto Villarosa sometime in February 1952. And, therefore, the Chattel Mortgage, Exhibit B dated March 6, 1952, could not have been the obligations guaranteed by the surety bond. Thus the Court of Appeals stated: ... one is really at a loss to impose any liability upon Luzon Surety in the absence of the principal obligation which was a crop loan contract executed in February, 1952, and to which there was made an express reference in the surety bond, Exhibit E; let it not be overlooked further that one can secure a crop loan without executing a Chattel Mortgage on his crops because the crop loan is the principal obligation while

Credit Transactions Full Text Cases Atty. Adviento

the Chattel Mortgage is only an ancillary and secondary contract to guarantee fulfillment of a crop loan; stated otherwise and as Luzon Surety never intervened in the execution of the Chattel Mortgage, Exhibit B, there is no way under the evidence from which it can be made to answer for liability to Augusto Villarosa under Exhibit E; ... " The Court of Appeals, to Our mind did not give credence to an otherwise significant and unrebutted testimony of petitioner's witness, Romanito Brillantes, that Exhibit B was the only chattel mortgage executed by Augusto Villarosa evidencing the crop loan contract and upon which Luzon Surety agreed to assume liability up to the amount of P10,000 by posting the said surety bond. Moreover Article 1354 of our New Civil Code which provides: Art. 1354.- Although the cause is not stated in the contract., it is presumed that it exist and is lawful, unless the debtor proves the contrary. bolster petitioner's stand. Considering too that Luzon Surety company is engaged in the business of furnishing guarantees, for a consideration, there is no reason that it should be entitled to a rule of strictissimi juris or a strained and over-strict interpretation of its undertaking. The presumption indulged in by the law in favor of guarantors was premised on the fact that guarantees were originally gratuitous obligations, which is not true at present, at least in the great majority of cases. (Aurelio Montinola vs. Alejo Gatila, et al, G.R. No L-7558, October 31, 1955).chanroblesvirtualawlibrary chanrobles virtual law library We have likewise gone over the answer of Luzon Surety Company dated June 17, 1960 (p. 73 Record on Appeal) and noted the following: xxx xxx xxx chanrobles virtual law library 3. Defendant LUZON admits the portion of paragraph 3 referring to the grant of P32,400 secured by a Chattel Mortgage dated March 6, 1952, copy of which is attached as Annex "A" of the complaint.chanroblesvirtualawlibrary chanrobles virtual law library xxx xxx xxx As special defenses: 8. The terms and conditions of the surety bond as well as the contract it guaranteed was materially altered and or novated without the knowledge and consent of the surety thereby releasing the latter from liability.chanroblesvirtualawlibrary chanrobles virtual law library 11. The maximum liability, if any, of defendant LUZON is P10.000.00. The principal obligation, therefore, has never been put in issue by then defendant now respondent Luzon Surety Co., Inc. On the other hand it raised as its defense the alleged material alteration of the terms and conditions of the contract as the basis of its prayer for release. Even this defense of respondent Luzon Surety Co., Inc. is untenable under the facts obtaining. As a surety, said bonding company is charged as an original promissory and is an insurer of the debt. While it is an accepted rule in our jurisdiction that an alteration of the contract is a ground for release, this alteration, We stress must be material. A cursory examination of the record shows that the alterations in the form of increases were made with the full consent of Luzon Surety Co., Inc. Paragraph 4 of the Chattel Mortgage explicitly provided for this increase(s), viz: ... the Mortgagee may increase or decrease the amount of the loan as well as the installment as it may deem convenient ...

68

and this contract, Exhibit "B", was precisely referred to and mentioned in the Surety Bond itself. In the case of Lim Julian vs. Tiburcio Lutero, et al No. 25235, 49 Phil. 703, 717, 718, this Court held: It has been decided in many cases that the consideration named in a mortgage for future advancements does not limit the amount for which such contract may stand as security, if from the four corners of the document, the intent to secure future indebtedness is apparent. Where, by the plain terms of the contract, such an intent is evident, it will control. ... The next question to take up is the liability of Luzon Surety Co. for interest which, it contends, would increase its liability to more than P10,000 which is the maximum of its bond. We cannot agree to this reasoning. In the cases of Tagawa vs. Aldanese, 43 Phil. 852, 859; Plaridel Surety Insurance Co. vs. P. L. Galang Machinery Co., 100 Phil. 679, 682, cited in Paras Civil Code of the Philippines, Vol. V, 7th Ed. 1972, p. 772, it was held: If a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, the liability becomes more than that in the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection. It should be noted, however, that the interest runs from the time the complaint is filed, not from the time the debt becomes due and demandable. PREMISES CONSIDERED, the judgment appealed from is reversed and set aside. In lieu thereof another is rendered reinstating the judgment of the Court of First Instance of Negros Occidental, 12th Judicial District, dated March 29, 1961, holding Luzon Surety liable for the amount of P10,000.00 with the modification that interest thereon shall be computed at the legal rate from June 8, 1960 when the complaint was filed.chanroblesvirtualawlibrary chanrobles virtual law library SO ORDERED. SECOND DIVISION G.R. No. 160466 January 17, 2005

SPOUSES ALFREDO and SUSANA ONG, petitioners, vs. PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent. DECISION PUNO, J.: This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003, affirming the decision of the trial court denying petitioners motion to dismiss. The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and export of finished wood products. Petitioners-spouses Alfredo and Susana Ong are its President and Treasurer, respectively. On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-Philippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of money 1 against petitioners-spouses. Respondent bank sought to hold petitioners-spouses liable as sureties on the three (3) promissory notes they issued to secure some of BMCs loans, totalling five million pesos (P5,000,000.00).

Credit Transactions Full Text Cases Atty. Adviento

The complaint alleged that in 1991, BMC needed additional capital for its business and applied for various loans, amounting to a total of five million pesos, with the respondent bank. Petitioners-spouses acted as sureties for these loans and issued three (3) promissory notes for the purpose. Under the terms of the notes, it was stipulated that respondent bank may consider debtor BMC in default and demand payment of the remaining balance of the loan upon the levy, attachment or garnishment of any of its properties, or upon BMCs insolvency, or if it is declared to be in a state of suspension of payments. Respondent bank granted BMCs loan applications. On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with the Securities and Exchange Commission (SEC) after its properties were attached by creditors. Respondent bank considered debtor BMC in default of its obligations and sought to collect payment thereof from petitioners-spouses as sureties. In due time, petitioners-spouses filed their Answer.1awphi1.nt On October 13, 1992, a Memorandum of Agreement (MOA)2 was executed by debtor BMC, the petitioners-spouses as President and Treasurer of BMC, and the consortium of creditor banks of BMC (of which respondent bank is included). The MOA took effect upon its approval by the SEC on November 27, 1992.3 Thereafter, petitioners-spouses moved to dismiss4 the complaint. They argued that as the SEC declared the principal debtor BMC in a state of suspension of payments and, under the MOA, the creditor banks, including respondent bank, agreed to temporarily suspend any pending civil action against the debtor BMC, the benefits of the MOA should be extended to petitioners-spouses who acted as BMCs sureties in their contracts of loan with respondent bank. Petitioners-spouses averred that respondent bank is barred from pursuing its collection case filed against them. The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court of Appeals which affirmed the trial courts ruling that a creditor can proceed against petitioners-spouses as surety independently of its right to proceed against the principal debtor BMC. Hence this appeal. Petitioners-spouses claim that the collection case filed against them by respondent bank should be dismissed for three (3) reasons: First, the MOA provided that during its effectivity, there shall be a suspension of filing or pursuing of collection cases against the BMC and this provision should benefit petitioners as sureties. Second, principal debtor BMC has been placed under suspension of payment of debts by the SEC; petitioners contend that it would prejudice them if the principal debtor BMC would enjoy the suspension of payment of its debts while petitioners, who acted only as sureties for some of BMCs debts, would be compelled to make the payment; petitioners add that compelling them to pay is contrary to Article 2063 of the Civil Code which provides that a compromise between the creditor and principal debtor benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code which provides that: "the guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those which are purely personal to the debtor." Petitioners aver that if the principal debtor BMC can set up the defense of suspension of payment of debts and filing of collection suits against respondent bank, petitioners as sureties should likewise be allowed to avail of these defenses. We find no merit in petitioners contentions. Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these provisions refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMCs debts. There is a sea of difference in the rights and liabilities of a guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the

69

principle of excussion. In a suretyship contract, however, the benefit of excussion is not available to the surety as he is principally liable for the payment of the debt. As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as an original promissor and debtor from the beginning.5 Under the suretyship contract entered into by petitioners-spouses with respondent bank, the former obligated themselves to be solidarily bound with the principal debtor BMC for the payment of its debts to respondent bank amounting to five million pesos (P5,000,000.00). Under Article 1216 of the Civil Code,6 respondent bank as creditor may proceed against petitioners-spouses as sureties despite the execution of the MOA which provided for the suspension of payment and filing of collection suits against BMC. Respondent banks right to collect payment from the surety exists independently of its right to proceed directly against the principal debtor. In fact, the creditor bank may go against the surety alone without prior demand for payment on the principal debtor.7 The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of collection suits by the creditor banks pertain only to the property of the principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties of BMC were mentioned in the petition with the SEC.8 Secondly, there is nothing in the MOA that involves the liabilities of the sureties whose properties are separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate assets. It has no jurisdiction over the properties of BMCs officers or sureties.1awphi1.nt Clearly, the collection suit filed by respondent bank against petitionersspouses as sureties can prosper. The trial courts denial of petitioners motion to dismiss was proper. IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to costs. SO ORDERED. THIRD DIVISION

INTERNATIONAL FINANCE G.R. No. 160324 CORPORATION, Petitioner, Present: Panganiban, J., Chairman, - versus - Sandoval-Gutierrez,* Corona, Carpio Morales, and Garcia, JJ IMPERIAL TEXTILE MILLS, Promulgated: INC.,** Respondent. ' November 15, 2005 x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

Credit Transactions Full Text Cases Atty. Adviento

DECISION

70

December 1, 1979 were rescheduled as requested by PPIC. Despite the rescheduling of the installment payments, however, PPIC defaulted. Hence, on April 1, 1985, IFC served a written notice of default to PPIC demanding the latter to pay the outstanding principal loan and all its accrued interests. Despite such notice, PPIC failed to pay the loan and its interests. By virtue of PPIC's failure to pay, IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all improvements owned by PPIC, located at Calamba, Laguna, with the regional sheriff of Calamba, Laguna. On July 30, 1985, the deputy sheriff of Calamba, Laguna issued a notice of extrajudicial sale. IFC and DBP were the only bidders during the auction sale. IFC's bid was for P99,269,100.00 which was equivalent to US$5,250,000.00 (at the prevailing exchange rate of P18.9084 = US$1.00). The outstanding loan, however, amounted to US$8,083,967.00 thus leaving a balance of US$2,833,967.00. PPIC failed to pay the remaining balance.

PANGANIBAN, J.: The terms of a contract govern the rights and obligations of the contracting parties. When the obligor undertakes to be 'jointly and severally liable, it means that the obligation is solidary. If solidary liability was instituted to 'guarantee a principal obligation, the law deems the contract to be one of suretyship. The creditor in the present Petition was able to show convincingly that, although denominated as a 'Guarantee Agreement, the Contract was actually a surety. Notwithstanding the use of the words 'guarantee and 'guarantor, the subject Contract was indeed a surety, because its terms were clear and left no doubt as to the intention of the parties. The Case Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the February 28, 2002 Decision[2] and September 30, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 58471. The challenged Decision disposed as follows: WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of the trial court is MODIFIED to read as follows: 1. Philippine Polyamide Industrial Corporation is ORDERED to pay [Petitioner] International Finance Corporation, the following amounts: (a) US$2,833,967.00 with accrued interests as provided in the Loan Agreement; (b) Interest of 12% per annum on accrued interest, which shall be counted from the date of filing of the instant action up to the actual payment; (c) P73,340.00 as attorney's fees; (d) Costs of suit. 2. The guarantor Imperial Textile Mills, Inc. together with Grandtex is HELD secondarily liable to pay the amount herein adjudged to [Petitioner] International Finance Corporation.[4] The assailed Resolution denied both parties' respective Motions for Reconsideration. The Facts Petitioner states the issues in this wise: The facts are narrated by the appellate court as follows: On December 17, 1974, [Petitioner] International Finance Corporation (IFC) and [Respondent] Philippine Polyamide Industrial Corporation (PPIC) entered into a loan agreement wherein IFC extended to PPIC a loan of US$7,000,000.00, payable in sixteen (16) semi-annual installments of US$437,500.00 each, beginning June 1, 1977 to December 1, 1984, with interest at the rate of 10% per annum on the principal amount of the loan advanced and outstanding from time to time. The interest shall be paid in US dollars semi-annually on June 1 and December 1 in each year and interest for any period less than a year shall accrue and be pro-rated on the basis of a 360-day year of twelve 30-day months. On December 17, 1974, a 'Guarantee Agreement was executed with x x x Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties thereto. ITM and Grandtex agreed to guarantee PPIC's obligations under the loan agreement. PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The payments due on December 1, 1978, June 1, 1979 and I. Whether or not ITM and Grandtex[11] are sureties and therefore, jointly and severally liable with PPIC, for the payment of the loan. II. Whether or not the Petition raises a question of law. III. Whether or not the Petition raises a theory not raised in the lower court.[12] The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan. The Court's Ruling The Petition is meritorious. Main Issue: Liability of Respondent Under the Guarantee Agreement

Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance. However, despite the demand made by IFC, the outstanding balance remained unpaid. Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of Manila against PPIC and ITM for the payment of the outstanding balance plus interests and attorney's fees. The trial court held PPIC liable for the payment of the outstanding loan plus interests. It also ordered PPIC to pay IFC its claimed attorney's fees. However, the trial court relieved ITM of its obligation as guarantor. Hence, the trial court dismissed IFC's complaint against ITM. xxxxxxxxx Thus, apropos the decision dismissing the complaint against ITM, IFC appealed [to the CA].[5] Ruling of the Court of Appeals The CA reversed the Decision of the trial court, insofar as the latter exonerated ITM from any obligation to IFC. According to the appellate court, ITM bound itself under the 'Guarantee Agreement to pay PPIC's obligation upon default.[6] ITM was not discharged from its obligation as guarantor when PPIC mortgaged the latter's properties to IFC.[7] The CA, however, held that ITM's liability as a guarantor would arise only if and when PPIC could not pay. Since PPIC's inability to comply with its obligation was not sufficiently established, ITM could not immediately be made to assume the liability.[8] The September 30, 2003 Resolution of the CA denied reconsideration.[9] Hence, this Petition.[10] The Issues

Credit Transactions Full Text Cases Atty. Adviento

The present controversy arose from the following Contracts: (1) the Loan Agreement dated December 17, 1974, between IFC and PPIC;[13] and (2) the Guarantee Agreement dated December 17, 1974, between ITM and Grandtex, on the one hand, and IFC on the other.[14] IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPIC's obligations proceeding from the Loan Agreement.[15] For its part, ITM asserts that, by the terms of the Guarantee Agreement, it was merely a guarantor[16] and not a surety. Moreover, any ambiguity in the Agreement should be construed against IFC -- the party that drafted it.[17] Language of the No Ambiguity in the Contract Undertaking The premise of the Guarantee Agreement is found in its preambular clause, which reads: Whereas,

71

The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on 'Joint and Solidary Obligations. Relevant to this case is Article 1216, which states: The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against respondent.

(A) By an Agreement of even date herewith between IFC and PHILIPPINE POLYAMIDE INDUSTRIAL CORPORATION (herein called the Company), which agreement is herein called the Loan Agreement, IFC agrees to extend to the Company a loan (herein called the Loan) of seven million dollars ($7,000,000) on the terms therein set forth, including a provision that all or part of the Loan may be disbursed in a currency other than dollars, but only on condition that the Guarantors agree to guarantee the obligations of the Company in respect of the Loan as hereinafter provided. (B) The Guarantors, in order to induce IFC to enter into the Loan Agreement, and in consideration of IFC entering into said Agreement, have agreed so to guarantee such obligations of the Company.[18] The obligations of the guarantors are meticulously expressed in the following provision: Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and unconditionally guarantee, as primary obligors and not as sureties merely, the due and punctual payment of the principal of, and interest and commitment charge on, the Loan, and the principal of, and interest on, the Notes, whether at stated maturity or upon prematuring, all as set forth in the Loan Agreement and in the Notes.[19] The Agreement uses 'guarantee and guarantors, prompting ITM to base its argument on those words.[20] This Court is not convinced that the use of the two words limits the Contract to a mere guaranty. The specific stipulations in the Contract show otherwise. Solidary Liability Agreed to by ITM While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was 'jointly and severally liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety. Indubitably therefore, ITM bound itself to be solidarily[21] liable with PPIC for the latter's obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed merely secondarily liable. Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITM's liability commenced only when it guaranteed PPIC's obligation. It became a surety when it bound itself solidarily with the principal obligor. Thus, the applicable law is as follows: Article 2047. By guaranty, a person, called the guarantor binds himself to the creditor to fulfill the obligation of the principal in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract shall be called suretyship.[22]

The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified by the term jointly and severally, the use of the word 'guarantor to refer to a 'surety does not violate the law.[23] As Article 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the principal obligor. Likewise, the phrase in the Agreement -- 'as primary obligor and not merely as surety -- stresses that ITM is being placed on the same level as PPIC. Those words emphasize the nature of their liability, which the law characterizes as a suretyship. The use of the word guarantee does not ipso facto make the contract one of guaranty.[24] This Court has recognized that the word is frequently employed in business transactions to describe the intention to be bound by a primary or an independent obligation.[25] The very terms of a contract govern the obligations of the parties or the extent of the obligor's liability. Thus, this Court has ruled in favor of suretyship, even though contracts were denominated as a 'Guarantor's Undertaking [26] or a 'Continuing Guaranty.[27] Contracts have the force of law between the parties,[28] who are free to stipulate any matter not contrary to law, morals, good customs, public order or public policy.[29] None of these circumstances are present, much less alleged by respondent. Hence, this Court cannot give a different meaning to the plain language of the Guarantee Agreement. Indeed, the finding of solidary liability is in line with the premise provided in the 'Whereas' clause of the Guarantee Agreement. The execution of the Agreement was a condition precedent for the approval of PPIC's loan from IFC. Consistent with the position of IFC as creditor was its requirement of a higher degree of liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation in Section 2.01 and is now estopped from feigning ignorance of its solidary liability. The literal meaning of the stipulations control when the terms of the contract are clear and there is no doubt as to the intention of the parties.[30] We note that the CA denied solidary liability, on the theory that the parties would not have executed a Guarantee Agreement if they had intended to name ITM as a primary obligor.[31] The appellate court opined that ITM's undertaking was collateral to and distinct from the Loan Agreement. On this point, the Court stresses that a suretyship is merely an accessory or a collateral to a principal obligation.[32] Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party to the undertaking.[33] A surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter.[34] ITM's Liability as Surety With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former secondarily liable.[35] A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter.[36] Evidently, the dispositive portion of the assailed Decision should be modified to require ITM to pay the amount adjudged in favor of IFC. Peripheral Issues In addition to the main issue, ITM raised procedural infirmities allegedly justifying the denial of the present Petition. Before the trial court and the CA, IFC had allegedly instituted different arguments that effectively changed the corporation's theory on appeal, in violation of this Court's previous pronouncements.[37] ITM further

Credit Transactions Full Text Cases Atty. Adviento

claims that the main issue in the present case is a question of fact that is not cognizable by this Court.[38] These contentions deserve little consideration. Alleged Change of Theory on Appeal Petitioner's arguments before the trial court (that ITM was a 'primary obligor') and before the CA (that ITM was a 'surety') were related and intertwined in the action to enforce the solidary liability of ITM under the Guarantee Agreement. We emphasize that the terms primary obligor and 'surety were premised on the same stipulations in Section 2.01 of the Agreement. Besides, both terms had the same legal consequences. There was therefore effectively no change of theory on appeal. At any rate, ITM failed to show to this Court a disparity between IFC's allegations in the trial court and those in the CA. Bare allegations without proof deserve no credence. Review of Factual Findings Necessary As to the issue that only questions of law may be raised in a Petition for Review,[39] the Court has recognized exceptions,[40] one of which applies to the present case. The assailed Decision was based on a misapprehension of facts,[41] which particularly related to certain stipulations in the Guarantee Agreement -- stipulations that had not been disputed by the parties. This circumstance compelled the Court to review the Contract firsthand and to make its own findings and conclusions accordingly. WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is declared a surety to Philippine Polyamide Industrial Corporation. ITM is ORDERED to pay International Finance Corporation the same amounts adjudged against PPIC in the assailed Decision. No costs.

72

Leonor S. Bantug was declared in default as a result of her failure to appear or answer, but Tomas Alonso filed an answer setting up a general denial and the special defenses that Leonor S. Bantug made him believe that he was merely a co-security of one Vicente Palanca and he was never notified of the acceptance of his bond by the Texas Company. After trial, the Court of First Instance of Cebu rendered judgment on July 10, 1973, which was amended on February 1, 1938, sentencing Leonor S. Bantug and Tomas Alonso to pay jointly and severally to the Texas Company the sum of P629, with interest at the rate of six per cent (6%) from the date of filing of the complaint, and with proportional costs. Upon appeal by Tomas Alonso, the Court of Appeals modified the judgment of the Court of First Instance of Cebu in the sense that Leonor S. Bantug was held solely liable for the payment of the aforesaid sum of P629 to the Texas Company, with the consequent absolution of Tomas Alonso. This case is now before us on petition for review by certiorari of the decision of the Court of Appeals. It is contended by the petitioner that the Court of Appeals erred in holding that there was merely an offer of guaranty on the part of the respondent, Tomas Alonso, and that the latter cannot be held liable thereunder because he was never notified by the Texas Company of its acceptance. The Court of Appeals has placed reliance upon our decision in National Bank vs. Garcia (47 Phil., 662), while the petitioner invokes the case of National Bank vs. Escueta, (50 Phil., 991). In the first case, it was held that there was merely an offer to give bond and, as there was no acceptance of the offer, this court refused to give effect to the bond. In the second case, the sureties were held liable under their surety agreement which was found to have been accepted by the creditor, and it was therein ruled that an acceptance need not always be express or in writing. For the purpose of this decision, it is not indispensable for us to invoke one or the other case above cited. The Court of Appeals found as a fact, and this is conclusive in this instance, that the bond in question was executed at the request of the petitioner by virtue of the following clause of the agency contract: Additional Security. The Agent shall whenever requested by the Company in addition to the guaranty herewith provided, furnish further guaranty or bond, conditioned upon the Agent's faithful performance of this contract, in such individuals of firms as joint and several sureties as shall be satisfactory to the Company. In view of the foregoing clause which should be the law between the parties, it is obvious that, before a bond is accepted by the petitioner, it has to be in such form and amount and with such sureties as shall be satisfactory hereto; in other words, the bond is subject to petitioner's approval. The logical implication arising from this requirement is that, if the petitioner is satisfied with any such bond, notice of its acceptance or approval should necessarily be given to the property party in interest, namely, the surety or guarantor. In this connection, we are likewise bound by the finding of the Court of Appeals that there is no evidence in this case tending to show that the respondent, Tomas Alonso, ever had knowledge of any act on the part of petitioner amounting to an implied acceptance, so as to justify the application of our decision in National Bank vs. Escueta (50 Phil., 991). While unnecessary to this decision, we choose to add a few words explanatory of the rule regarding the necessity of acceptance in case of bonds. Where there is merely an offer of, or proposition for, a guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor before the obligation becomes fixed, it does not become a binding obligation until it is accepted and, unless there is a waiver of notice of such acceptance is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the conditions and intends to act upon the guaranty. (National Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p. 901; 24 Am. Jur., sec. 37, p. 899.) The acceptance need not necessarily be express or in writing, but may be indicated by acts amounting to acceptance. (National Bank vs. Escueta, 50 Phil., 991.) Where, upon the other hand, the transaction is not merely an offer of guaranty but amounts to direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of the guaranty, all that is necessary to make the promise binding is that the promise should act upon it, and notice of acceptance is not necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec 37, p. 899), the reason being that the contract of guaranty is unilateral (Visayan Surety and Insurance Corporation vs. Laperal, G.R. No. 46515, promulgated June 14, 1940).

SO ORDERED.

G.R. No. L-47495

August 14, 1941 (PHIL.), INC., petitioner,

THE TEXAS COMPANY vs. TOMAS ALONSO, respondent. C. D. Johnston & A. Tomas Alonso in his own behalf. LAUREL, J.:

P.

Deen

for

petitioner.

On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the Texas Company (P.I.), Inc. in the Court of First Instance of Cebu for the recovery of the sum of P629, unpaid balance of the account of Leonora S. Bantug in connection with the agency contract with the Texas Company for the faithful performance of which Tomas Alonso signed the following: For value received, we jointly and severally do hereby bind ourselves and each of us, in solidum, with Leonor S. Bantug the agent named in the within and foregoing agreement, for full and complete performance of same hereby waiving notice of nonperformance by or demand upon said agent, and the consent to any and all extensions of time for performance. Liability under this undertaking, however, shall not exceed the sum of P2,000, Philippine currency. Witness the hand and seal of the undersigned affixed in the presence of two witness, this 12th day of August, 1929.

Credit Transactions Full Text Cases Atty. Adviento

The decision appealed from will be, as the same is hereby, affirmed, with costs of this instance against the petitioner. So ordered. SECOND DIVISION

73

G.R. No. 107062 February 21, 1994 PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner, vs. THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO, INC., respondents. Ocampo, Dizon & Domingo and Rey Nathaniel C. Ifurung for petitioner. A.M. Sison, Jr. & Associates for private respondent.

On scheduled conference in December, petitioner and its counsel did not appear notwithstanding their notice in open court. 5 The pre-trial was nevertheless re-set to February 1, 1989. However, when the case was called for pre-trial conference on February 1, 1989, petitioner was again nor presented by its officer or its counsel, despite being duly notified. Hence, upon motion of respondent, petitioner was considered as in default and respondent was allowed to present evidence ex-parte, which was calendared on February 24, 1989. 6 Petitioner received a copy of the Order of Default and a copy of the Order setting the reception of respondent's evidence ex-parte, both dated February 1, 1989, on February 16, 1989. 7 On March 6, 1989, a decision was rendered by the trial court, the dispositive portion reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant Interworld Assurance Corporation to pay the amount of P1,500,000.00 representing the principal of the amount due, plus legal interest thereon from April 7, 1988, until date of payment; and P20,000.00 as and for attorney's fees. 8 Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989, having been denied it elevated its case to the Court of Appeals which however, affirmed the decision of the trial court as well as the latter's order denying petitioner's motion for reconsideration. Before us, petitioner assigns as errors the following: I. The respondent Court of Appeals gravely erred in declaring that the case was already ripe for pre-trial conference when the trial court set it for the holding thereof. II. The respondent Court of Appeals gravely erred in affirming the decision of the trial court by relying on the ruling laid down by this Honorable Court in the case of Manchester Development Corporation v. Court of Appeals, 149 SCRA 562, and disregarding the doctrine laid down in the case of Sun Insurance Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274. III. The respondent Court of Appeals gravely erred in declaring that it would be useless and a waste of time to remand the case for further proceedings as defendant-appellant has no meritorious defense. We do not find any reversible error in the conclusion reached by the court a quo. Relying on Section 1, Rule 20 of the Rules of court, petitioner argues that since the last pleading, which was supposed to be the third-party defendant's answer has not been filed, the case is not yet ripe for pre-trial. This argument must fail on three points. First, the trial court asserted, and we agree, that no answer to the third party complaint is forthcoming as petitioner never initiated the service of summons on the third party defendant. The court further said: . . . Defendant's claim that it was not aware of the Order admitting the third-party complaint is preposterous. Sec. 8, Rule 13 of the Rules, provides: Completeness of service . . . Service by registered mail is complete upon actual receipt by the addressee, but if he fails to claim his mail from the post office within five (5) days from the date of first notice of the postmaster, service shall take effect at the expiration of such time. 9

NOCON, J.: Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid to get a favorable decision from the Regional Trial Court and then again in the Court of Appeals. 1 These are non-appearance during the pre-trial despite due notice, and non-payment of docket fees upon filing of its third-party complaint. Just how strict should these rules be applied is a crucial issue in this present dispute. Petitioner, Interworld Assurance Corporation (the company now carries the corporate name Philippine Pryce Assurance Corporation), was the butt of the complaint for collection of sum of money, filed on May 13, 1988 by respondent, Gegroco, Inc. before the Makati Regional Trial Court, Branch 138. The complaint alleged that petitioner issued two surety bonds (No. 0029, dated July 24, 1987 and No. 0037, dated October 7, 1987) in behalf of its principal Sagum General Merchandise for FIVE HUNDRED THOUSAND (P500,000.00) PESOS and ONE MILLION (1,000,000.00) PESOS, respectively. On June 16, 1988, summons, together with the copy of the complaint, was served on petitioner. Within the reglementary period, two successive motions were filed by petitioner praying for a total of thirty (30) days extention within which to file a responsible pleading. In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner admitted having executed the said bonds, but denied liability because allegedly 1) the checks which were to pay for the premiums bounced and were dishonored hence there is no contract to speak of between petitioner and its supposed principal; and 2) that the bonds were merely to guarantee payment of its principal's obligation, thus, excussion is necessary. After the issues had been joined, the case was set for pretrial conference on September 29, 1988. the petitioner received its notice on September 9, 1988, while the notice addressed to its counsel was returned to the trial court with the notation "Return to Sender, Unclaimed."
2

On the scheduled date for pre-trial conference, only the counsel for petitioner appeared while both the representative of respondent and its counsel were present. The counsel for petitioner manifested that he was unable to contract the Vice-President for operations of petitioner, although his client intended to file a third party complaint against its principal. Hence, the pre-trial was re-set to October 14, 1988. 3 On October 14, 1988, petitioner filed a "Motion with Leave to Admit ThirdParty Complaint" with the Third-Party Complaint attached. On this same day, in the presence of the representative for both petitioner and respondent and their counsel, the pre-trial conference was re-set to December 1, 1988. Meanwhile on November 29, 1988, the court admitted the Third Party Complaint and ordered service of summons on third party defendants. 4

Credit Transactions Full Text Cases Atty. Adviento

Moreover, we observed that all copies of notices and orders issued by the court for petitioner's counsel were returned with the notation "Return to Sender, Unclaimed." Yet when he chose to, he would appear in court despite supposed lack of notice. Second, in the regular course of events, the third-party defendant's answer would have been regarded as the last pleading referred to in Sec. 1, Rule 20. However, petitioner cannot just disregard the court's order to be present during the pre-trial and give a flimsy excuse, such as that the answer has yet to be filed. The pre-trial is mandatory in any action, the main objective being to simplify, abbreviate and expedite trial, if not to fully dispense with it. Hence, consistent with its mandatory character the Rules oblige not only the lawyers but the parties as well to appear for this purpose before the Court 10 and when a party fails to appear at a pre-trial conference he may be non-suited or considered as in default. 11 Records show that even at the very start, petitioner could have been declared as in default since it was not properly presented during the first scheduled pre-trial on September 29, 1988. Nothing in the record is attached which would show that petitioner's counsel had a special authority to act in behalf of his client other than as its lawyer. We have said that in those instances where a party may not himself be present at the pre-trial, and another person substitutes for him, or his lawyer undertakes to appear not only as an attorney but in substitution of the client's person, it is imperative for that representative or the lawyer to have "special authority" to enter into agreements which otherwise only the client has the capacity to make. 12 Third, the court of Appeals properly considered the third-party complaint as a mere scrap of paper due to petitioner's failure to pay the requisite docket fees. Said the court a quo: A third-party complaint is one of the pleadings for which Clerks of court of Regional Trial Courts are mandated to collect docket fees pursuant to Section 5, Rule 141 of the Rules of Court. The record is bereft of any showing tha(t) the appellant paid the corresponding docket fees on its third-party complaint. Unless and until the corresponding docket fees are paid, the trial court would not acquire jurisdiction over the third-party complaint (Manchester Development Corporation vs. Court of Appeals, 149 SCRA 562). The third-party complaint was thus reduced to a mere scrap of paper not worthy of the trial court's attention. Hence, the trial court can and correctly set the case for pre-trial on the basis of the complaint, the answer and the answer to the counterclaim. 13 It is really irrelevant in the instant case whether the ruling in Sun Insurance Office, Ltd. (SIOL) v. Asuncion 14 or that in Manchester Development Corp. v. C.A. 15 was applied. Sun Insurance and Manchester are mere reiteration of old jurisprudential pronouncements on the effect of non-payment of docket fees. 16 In previous cases, we have consistently ruled that the court cannot acquire jurisdiction over the subject matter of a case, unless the docket fees are paid. Moreover, the principle laid down in Manchester could have very well been applied in Sun Insurance. We then said: The principle in Manchester [Manchester Development Corp. v. C.A., 149 SCRA 562 (1987)] could very well be applied in the present case. The pattern and the intent to defraud the government of the docket fee due it is obvious not only in the filing of the original complaint but also in the filing of the second amended complaint. xxx xxx xxx

74

In the present case, a more liberal interpretation of the rules is called for considering that, unlike Manchester, private respondent demonstrated his willingness to abide by the rules by paying the additional docket fees as required. The promulgation of the decision in Manchester must have had that sobering influence on private respondent who thus paid the additional docket fee as ordered by the respondent court. It triggered his change of stance by manifesting his willingness to pay such additional docket fees as may be ordered. 17 Thus, we laid down the rules as follows: 1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the payment of the prescribed docket fee, that vests a trial court with jurisdiction over the subject-matter or nature of the action. Where the filing of the initiatory pleading is not accompanied by payment of the docket fee, the court may allow payment of the fee within a reasonable time, but in no case beyond the applicable prescriptive or reglamentary period. 2. The same rule applies to permissive counterclaims, third-party claims and similar pleadings, which shall not be considered filed until and unless the filing fee prescribed therefor is paid. The court may also allow payment of said fee within a prescriptive or reglementary period. 3. Where the trial court acquires jurisdiction over a claim by the filing of the appropriate pleading and payment of the prescribed filing fee, but subsequently, the judgment awards a claim nor specified in the pleading, or if specified the same has not been left for determination by the court, the additional filing fee therefor shall constitute a lien on the judgment. It shall be the responsibility of the clerk of court or his duly authorized deputy to enforce said lien and assess and collect the additional fee. 18 It should be remembered that both in Manchester and Sun Insurance plaintiffs therein paid docket fees upon filing of their respective pleadings, although the amount tendered were found to be insufficient considering the amounts of the reliefs sought in their complaints. In the present case, petitioner did not and never attempted to pay the requisite docket fee. Neither is there any showing that petitioner even manifested to be given time to pay the requisite docket fee, as in fact it was not present during the scheduled pre-trial on December 1, 1988 and then again on February 1, 1989. Perforce, it is as if the third-party complaint was never filed. Finally, there is reason to believe that partitioner does not really have a good defense. Petitioner hinges its defense on two arguments, namely: a) that the checks issued by its principal which were supposed to pay for the premiums, bounced, hence there is no contract of surety to speak of; and 2) that as early as 1986 and covering the time of the Surety Bond, Interworld Assurance Company (now Phil. Pryce) was not yet authorized by the insurance Commission to issue such bonds. The Insurance Code states that: Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid, except where the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety. . . . (emphasis added)

Credit Transactions Full Text Cases Atty. Adviento

The above provision outrightly negates petitioner's first defense. In a desperate attempt to escape liability, petitioner further asserts that the above provision is not applicable because the respondent allegedly had not accepted the surety bond, hence could not have delivered the goods to Sagum Enterprises. This statement clearly intends to muddle the facts as found by the trial court and which are on record. In the first place, petitioner, in its answer, admitted to have issued the bonds subject matter of the original action. 19 Secondly, the testimony of Mr. Leonardo T. Guzman, witness for the respondent, reveals the following: Q. What are the conditions and terms of sales you extended to Sagum General Merchandise? A. First, we required him to submit to us Surety Bond to guaranty payment of the spare parts to be purchased. Then we sell to them on 90 days credit. Also, we required them to issue post-dated checks. Q. Did Sagum General merchandise comply with your surety bond requirement? A. Yes. They submitted to us and which we have accepted two surety bonds. Q Will you please present to us the aforesaid surety bonds? A. Interworld Assurance Corp. Surety Bond No. 0029 for P500,000 dated July 24, 1987 and Interworld Assurance Corp. Surety Bond No. 0037 for P1,000.000 dated October 7, 1987. 20 Likewise attached to the record are exhibits C to C-18 consisting of delivery invoices addressed to Sagum General Merchandise proving that parts were purchased, delivered and received. On the other hand, petitioner's defense that it did not have authority to issue a Surety Bond when it did is an admission of fraud committed against respondent. No person can claim benefit from the wrong he himself committed. A representation made is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. 22 WHEREFORE, in view of the foregoing, the decision of the Court of Appeals dismissing the petition before them and affirming the decision of the trial court and its order denying petitioner's Motion for Reconsideration are hereby AFFIRMED. The present petition is DISMISSED for lack of merit. SO ORDERED. EN BANC G.R. No. 43486 September 30, 1936
21

75

Luis Atienza Bijis for Provincial Fiscal Noel of Marinduque for appellee. DIAZ, J.:

appellants.

This is an action brought by the municipality of Gasan of the Province of Marinduque, against Miguel Marasigan, Angel R. Sevilla and Gonzalo L. Luna, to recover from them the sum of P3,780, alleging that it forms a part of the license fees which Miguel Marasigan failed to pay for the privilege granted him of gathering whitefish spawn (semillas de bagus) in the jurisdictional waters of the plaintiff municipality during the period from January 1, 1931, to December 31 of said year. The Court of First Instance of Marinduque, which tried the case, rendered a decision adverse to the defendants, sentencing them to pay jointly to the plaintiff said sum of P3,780 with legal interest thereon from August 19, 1932, until fully paid, plus the costs of the suit. From said judgment, the defendants appealed to this court, attributing to the lower court the five alleged errors relied upon in their brief, as follows: I. The court a quo erred in holding and maintaining that, notwithstanding the fact that resolution No. 161 of the municipal council of Gasan which gave rise to the contract and bond, Exhibits A and B, respectively, of the complaint, has been declared null and void by the provincial board and by the Executive Bureau, the contract and bond in question are valid and, consequently, enforceable on the ground that said resolution No. 161 is within or had been adopted within the powers of the council. II. The court a quo erred in holding that even granting that the contract Exhibit A is not valid de jure, it is a de facto contract as to the defendants, particularly the defendant-grantee Miguel Marasigan. III. The court a quo erred in not absolving the defendants Angel R. Sevilla and Gonzalo L. Luna, sureties of the defendant Miguel Marasigan, notwithstanding the fact that resolution No. 161, by virtue of which said defendant subscribed the bond Exhibit B of the complaint, had been declared null and void by the provincial board and by the Executive Bureau. IV. The court a quo erred in holding that the herein defendant Miguel Marasigan had taken advantage of the privilege to catch or gather whitefish spawn in the jurisdictional waters of the municipality of Gasan, during the period from January 1, to December 31, 1931, notwithstanding the fact that counsel for the plaintiff municipality failed to present evidence, either documentary or oral, to justify said fact. V. The court a quo erred in not absolving each and every one of the herein defendants from the complaint, and in not ordering the plaintiff municipality to return to the defendant Miguel Marasigan the sums of four hundred twenty pesos (P420) and eight hundred forty pesos (P840) deposited with said plaintiff, with interest thereon from the respective dates of their deposit, until their return. The case was tried by the lower court with no other evidence than the admissions made by the parties in the stipulation of facts mentioned in the body of the decision, the pertinent parts of which will be discussed later. Said stipulation and the attached papers forming a part thereof enables this court to narrate the material facts of the case, as follows: The plaintiff-appellee municipality, on December 9, 1930, put up at auction the privilege of gathering whitefish spawn in its jurisdictional waters for the period of one year from January 1, 1931. Two bidders, Graciano Napa and Miguel Marasigan, appeared at the auction. Both attached to their respective bids the certificate of not being behind in the payment of any tax, issued by the municipal treasurer of Gasan, Marinduque, as required by the provisions of resolution No. 42, series of 1930, of the council of said municipality. Graciano Napa proposed to accept the privilege by paying

THE MUNICIPALITY OF GASAN, plaintiff-appellee, vs. MIGUEL MARASIGAN, ANGEL R. SEVILLA and GONZALO L. LUNA, defendants-appellants.

Credit Transactions Full Text Cases Atty. Adviento

P5,000 therefor, Miguel Marasigan proposed to do likewise, but by paying only P4,200. The council of the plaintiff-appellee municipality, in its resolution No. 161 (Exhibit 1) of December 11, 1930 rejected Graciano Napa's bid and accepted that of the appellant Miguel Marasigan, granting and selling to the latter the privilege put up at auction for the sum of P4,200, payable quarterly in advance at the rate of P1,050 a quarter (Exhibit A). To secure his compliance with the terms of the contract which was immediately formalized by him and the plaintiff, and pursuant to the provisions of section 8 of resolution No. 128, series of 1925, of the council of said plaintiff, Miguel Marasigan filed the bond, Exhibit B, subscribed on December 15, 1930, by the defendants-appellants Angel R. Sevilla and Gonzalo L. Luna, who bound themselves in said document to pay to the plaintiff the sum of P8,400, if Miguel Marasigan failed to deposit one-fourth of P4,200 quarterly in advance in the municipal treasury of Gasan, in violation of the terms of the contract executed and entered into by him and the plaintiff on December 11, 1930 (Exhibit A), for the compliance with which they became sureties. Before the plaintiff municipality and Miguel Marasigan entered into their contract, and also before the latter's sureties executed the above-stated bond, Graciano Napa, whose bid was rejected for the reason that he had not attached thereto the certificate that he is not behind in the payment of any tax which he should have obtained from the municipal treasurer of Lemery, his native town, forwarded a protest (Exhibit 4) to the provincial board, which protest was later indorsed by said provincial board to the Chief of the Executive Bureau, alleging that the plaintiff municipality violated the provisions of section 2323 of the Administrative Code in rejecting his bid. The provincial board, passing upon Graciano Napa's protest and acting under the authority which, in its opinion, was granted to it by section 2233 of the Administrative Code, held that resolution No. 161, series of 1930, by virtue of which the municipal council of Gasan rejected Graciano Napa's bid and accepted that of Miguel Marasigan, notwithstanding the fact that the latter offered to pay less, was invalid, and suggested that the privilege should be, awarded to Graciano Napa who, in its opinion, appeared to be the highest bidder in accordance with the provisions of sections 2323 and 2319 of the Administrative Code (Exhibit 9). The Executive Bureau, concurring with the provincial board's points of view, declared, in turn, that the concession made to Marasigan was illegal in view of the fact that Graciano Napa was the highest bidder (Exhibit 13). The plaintiff municipality, through its municipal council, exerted efforts to obtain the reconsideration of the decisions of the provincial board of Marinduque and of the Executive Bureau but, as these two entities maintained their decisions (Exhibits 14, 15, 16, 17 and 18), it decided, in its resolution No. 11, series of 1931 (Exhibit 19), to award the privilege of gathering whitefish spawn within its waters to Graciano Napa, giving him a period of six days, which was later extended to seven days, from January 8, 1931 (Exhibit 19-A), to deposit the sum of P500, equivalent to 10 per cent of his bid of P5,000, with the municipal treasurer of Gasan, so as to comply with the provisions of section 8 of the conditions of the public auction at which he was a bidder, warning him that if he failed to do so, the contract entered into by the plaintiff, through its president, and the appellant Miguel Marasigan (Exhibit A), would automatically take effect. Graciano Napa not only failed to make the deposit required by the plaintiff in its two above-stated resolutions Nos. 11 and 12, series of 1931 (Exhibits 19 and 19-A), but he formally declared, through his duly authorized representative, that he yielded the privilege granted him to Miguel Marasigan or to any other person selected by the municipal authorities (Exhibit 20). One day later, or on January 15, 1931, the president of the plaintiffappellee municipality sent the letter Exhibit 21 to Miguel Marasigan, which reads: SIR: By virtue of Res. No. 11, c. s., as amended by Res. No. 12, same series, and communication of Mr. J. Zaguirre dated January 14, 1931 copy of which is hereto attached, you are hereby advised that the contract entered into between you and

76

the municipality of Gasan for the lease of the bagus fishery privilege for the year 1931 becomes effective on January 14, 1931, to run until December 31, 1931. You are hereby requested to appear before the session of the Municipal Council to be held at the office of the undersigned tomorrow, January 16, 1931, bringing with yourself the contract and bond executed in your favor for ratification. You are further informed that you are given 10 days from the date hereof, within which time you are to pay the amount of P1,050, as per tax corresponding to the first quarter, 1931. Prior to this, but after the adoption by the municipal council of Gazan of its resolution No. 163 (Exhibit 7) on December 16, 1930, and two days before the provincial board declared said council's resolutions Nos. 161 and 163 invalid, the president of the plaintiff-appellee municipality notified the appellant Miguel Marasigan that the contract whereby he was granted the privilege of gathering whitefish spawn during the year 1931, upon his offer to pay P4,200 a year therefor, was suspended and that he should consider it ineffective in the meantime in view of the fact that the question whether he (Miguel Marasigan) or Graciano Napa was the highest bidder still remained undecided by the provincial board of Marinduque and by the Executive Bureau. The English translation of the letter sent by the municipal president to Miguel Marasigan, which was written in Tagalog (Exhibit 8), reads: SIR: In view of the fact that the whitefish (bagus) case has not been decided or determined by the provincial board and is still pending action to date, and in view of the instructions given me by the representative of the Executive Bureau, Mr. Jose Zaguirre, I beg to inform you, with due respect, that you should refrain from carrying out and giving efficacy to the contract signed by me in the name of the municipality, relative to the privilege of gathering whitefish in your favor, from this date until further notice, because this case is still pending action. Knowing the above-stated facts, let us now turn to the consideration of the alleged errors attributed to the lower court by the appellants. The first and third errors should be considered jointly on account of the close relation existing between them. The determination of one depends upon that of the other. This court believes that there is no necessity of even discussing the first error because the plaintiff itself accepted the conclusions and decision of the provincial board and of the Executive Bureau, so much so that in its resolution No. 11, series of 1931, it thereafter considered Graciano Napa as the highest bidder, going to the extent of requiring him, as it in fact required him, to make the deposit of P500 prescribed by the conditions of the auction sale in which he had intervened, and granting him a period of seven days to comply with said requirement (Exhibits 19 and 19-A). Furthermore, when the plaintiff received Graciano Napa's notice informing it that he ceded the privilege just granted him to appellant Miguel Marasigan or to any other person that it might choose, said plaintiff, through its municipal president, required Miguel Marasigan to appear before its municipal council to present his formerly prepared contract as well as his bond in order that both documents might be ratified (Exhibit 21). It should be added to the foregoing that on December 18, 1930, the plaintiff, also through its municipal president notified appellant Marasigan that his contract should, in the meantime, be considered ineffectual and that he should do nothing to put it in execution because the case was still undecided by the provincial board and by the Executive Bureau (Exhibit 8). It is clear that it may be logically inferred from these facts that the contract regarding fishing privilege entered into between the plaintiff and appellant Marasigan on December 11, 1930 (Exhibit A), not only was not consummated but was cancelled. Consequently, it now appears useless and futile to discuss whether or not resolution No. 161 (Exhibit 1) is valid and legal. In either case, it is a fact that, said contract ceased to have life or force to bind each of the contracting parties. It ceased to be valid from the time it was cancelled and this being so, neither the appellant Marasigan nor his sureties or the appellants were bound to comply with

Credit Transactions Full Text Cases Atty. Adviento

the terms of their respective contracts of fishing privilege and suretyship. This is so, particularly with respect to the sureties-appellants, because suretyship cannot exist without a valid obligation (art. 1824 of the Civil Code). The obligation whose compliance by the appellant Marasigan was guaranteed by the sureties-appellants, was exclusively that appearing in Exhibit A, which should begin on January 1, 1931, not on the 14th of said month and year, and end on December 31st next. They intervened in no other subsequent contract which the plaintiff and Miguel Marasigan might have entered into on or after January 14, 1931. Guaranty is not, presume; it must be expressed and cannot be extended beyond its specified limits (art. 1827 of the Civil Code). Therefore, after eliminating the obligation for which said sureties-appellants desired to answer with their bond, the bond necessarily ceased and it ceases to have effects. Consequently, said errors I and III are true and well founded. As to the second error it must be known that among the stipulations contained in the stipulation of facts submitted to the court are the following: 21. That on July 20, 1931, Miguel Marasigan paid the sum of P16.20 to the municipal treasurer of Gasan, as internal revenue tax on sales of whitefish (bagus) spawn amounting to P1,080 during the months of April, May and June, 1931; and that on August 22, 1931, said Miguel Marasigan presented his sales book to the municipal treasurer of Gasan, Mr. Gregorio D. Chavez, it appearing therein that said Miguel Marasigan, in the month of July, 1931, sold whitefish spawn amounting to P85; in the month of August, 1931, none, and in the month of September, 1931, none. 22. That Miguel Marasigan is he concessionaire of the privilege to gather whitefish spawn in the jurisdictional waters of the municipality of Boac, Marinduque, during the period from January 1, 1931, to December 31 of said year, and that during said period of time he had paid the sales tax on the whitefish spawn in question only in the municipality of Gasan, without having made any payment in the municipality of Boac. 23. That defendant Miguel Marasigan, as bidder at the auction of December 9, 1930, deposited in the municipal treasury of Gasan the sum of P420, equivalent to 10 per cent of his bid at said auction, and that said sum has not yet been returned to him to date. 24. That on June 29, 1931, said Miguel Marasigan delivered another sum of P840 to the municipal treasurer of Gasan, making the total amount delivered by him to said municipal treasurer P1,260, the corresponding receipt having been issued to Miguel Marasigan to that effect. The facts resulting from the stipulations in question warrant and justify the inference that the appellant Miguel Marasigan practically enjoyed the privilege of gathering whitefish spawn in the jurisdictional waters of the municipality of Gasan, under the terms of the contract executed by him on December 11, 1930, but which was cancelled later by virtue of Graciano Napa's protest, at least from the month of April to the month of July, 1931, inclusive. If this were not true, he would not have paid, as he spontaneously paid to the municipal treasurer of Gasan, the following sums: P840 on June 29, 1931, and P16.20 on July 20 of said year, nor presented, as he in fact presented to said official for inspection, his sales book wherein it appears that his sales of whitefish spawn during the month of July of said year amounted to P85. The stipulation of facts, however, is silent as to whether or not he enjoyed the privilege in question during the rest of the year. On the contrary, it states he sold no whitefish spawn in August or September. The excuse now offered by appellant Marasigan in his brief that the abovestated amounts were on account of license fees or taxes on the privilege of gathering whitefish spawn in the jurisdictional waters of Boac, obtained by him from said municipality, is not supported by the evidence. If the payments made by him as he claims them to be, he would have so stated in the stipulations of facts. Not having done so and, furthermore, the practice generally observed being to pay an obligation in the municipality where the payment is due, the only conclusion possible is that said

77

appellant made all such payments on account of the-tacit contract entered into by him and the plaintiff after he had received the letter of January 15, 1931 (Exhibit 21), sent to him by said plaintiff through its municipal president. This conclusion is all the more logical because appellant Marasigan insisted in his answer, and still continues to insist in his brief, that the plaintiff is obliged to refund to him the amount of P1,260 which he claims to have paid to it, and which is no other than the amount of the two sums of P420 and P840 stated in the last two paragraphs of the abovestated stipulation of facts. If it were really true, as said appellant contends, that the sum of P840 was paid by him on account of his contract for privilege of gathering whitefish spawn, executed in his favor by the municipality of Boac, he would not have insisted in his answer, nor would he now insist in his brief, that said sum be refunded to him, because in the absence of evidence to the contrary, it must be presumed that it was transmitted by the municipal treasurer of Gasan to that of Boac, inasmuch as accepting his contention, he was obliged to pay something to the latter municipality by virtue of his alleged contract with it. For the foregoing reasons, the conclusion of this court with respect to the second error attributed to the lower court by appellant Marasigan is that said error is without merit. The truth is that between him and the plaintiff, there was a tacit contract for the privilege of gathering whitefish spawn in he jurisdictional waters of the municipality of Gasan, based upon Exhibit A but without the intervention of the sureties-appellants, for the above-stated period, or from April to July, 1931, inclusive, which is equivalent to one and one-third quarter. Said contract was one which, by its nature, need not be in writing (sec. 335 of Act No. 190); but it is binding because it has all the essential requisites of a valid contract (art. 1278 of the Civil Code). The fourth error is practically disposed of by the same reasons stated in passing upon the second error. As to the fifth error, it must be stated that appellant Marasigan really deposited in the municipal treasury of Gasan, as stated in paragraph 23 of the stipulation of facts, the sum of P420 on account of his cancelled original contract (Exhibit A), and that said deposit has not yet been returned to him. Therefore, he is entitled to be credited with said sum. Summarizing all that has been stated heretofore, this court holds that appellant Miguel Marasigan owes and is bound to pay to the plaintiff municipality the proceeds of one and one-third quarter, for the privilege of gathering whitefish spawn enjoyed by him in 1931, at the rate of P4,200 a year or P1,400 (P1,050 for one quarter and P350 for one-third of a quarter); but he is, in turn, entitled to be credited with the sum of P420 deposited by him on December 9, 1930, and P840 paid by him on June 29, 1931, or the total amount of P1,260. In other words, appellant Marasigan is bound to pay the sum of P140 to the plaintiff. In view of the foregoing considerations, this court absolves the defendants-appellants Angel R. Sevilla and Gonzalo L. Luna from the complaint and orders the defendant-appellant Miguel Marasigan to pay the sum of P140 to the plaintiff municipality. It is considered unnecessary to expressly mention appellant Miguel Marasigan's counterclaim because, as may be seen, he is credited in this judgment with the sum of P1,260 which is all that he claims therein, without special pronouncement as to costs. So ordered. FIRST DIVISION G.R. No. 165662 May 3, 2006

SELEGNA MANAGEMENT AND DEVELOPMENT CORPORATION; and Spouses EDGARDO and ZENAIDA ANGELES, Petitioners, vs. UNITED COCONUT PLANTERS BANK,* Respondent. DECISION PANGANIBAN, CJ:

Credit Transactions Full Text Cases Atty. Adviento

A writ of preliminary injunction is issued to prevent an extrajudicial foreclosure, only upon a clear showing of a violation of the mortgagors unmistakable right. Unsubstantiated allegations of denial of due process and prematurity of a loan are not sufficient to defeat the mortgagees unmistakable right to an extrajudicial foreclosure. The Case Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the May 4, 2004 Amended Decision2 and the October 12, 2004 Resolution3 of the Court of Appeals (CA) in CA-GR SP No. 70966. The challenged Amended Decision disposed thus: "WHEREFORE, the Motion for Reconsideration is GRANTED. The July 18, 2003 Decision is hereby REVERSED and SET ASIDE and another one entered GRANTING the petition and REVERSING and SETTING ASIDE the March 15, 2002 Order of the Regional Trial Court, Branch 58, Makati City in Civil Case No. 99-1061."4 The assailed Resolution denied reconsideration. The Facts On September 19, 1995, Petitioners Selegna Management and Development Corporation and Spouses Edgardo and Zenaida Angeles were granted a credit facility in the amount of P70 million by Respondent United Coconut Planters Bank (UCPB). As security for this credit facility, petitioners executed real estate mortgages over several parcels of land located in the cities of Muntinlupa, Las Pias, Antipolo and Quezon; and over several condominium units in Makati. Petitioners were likewise required to execute a promissory note in favor of respondent every time they availed of the credit facility. As required in these notes, they paid the interest in monthly amortizations. The parties stipulated in their Credit Agreement dated September 19, 1995,5 that failure to pay "any availment of the accommodation or interest, or any sum due" shall constitute an event of default, 6 which shall consequently allow respondent bank to "declare [as immediately due and payable] all outstanding availments of the accommodation together with accrued interest and any other sum payable." 7 In need of further business capital, petitioners obtained from UCPB an increase in their credit facility.8 For this purpose, they executed a Promissory Note for P103,909,710.82, which was to mature on March 26, 1999.9 In the same note, they agreed to an interest rate of 21.75 percent per annum, payable by monthly amortizations. On December 21, 1998, respondent sent petitioners a demand letter, worded as follows: "Gentlemen: "With reference to your loan with principal outstanding balance of [P103,909,710.82], it appears from the records of United Coconut Planters Bank that you failed to pay interest amortizations amounting to [P14,959,525.10] on the Promissory Note on its due date, 30 May 1998. "x x x xxx xxx "Gentlemen: "x x x xxx xxx

78

"It appears from the record of [UCPB] that you failed to pay the monthly interest due on said obligation since May 30, 1998 as well as the penalty charges due thereon. Despite repeated demands, you refused and continue to refuse to pay the same. Under the Credit Agreements/Letter Agreements you executed, failure to pay when due any installments of the loan or interest or any sum due thereunder, is an event of default. "Consequently, we hereby inform you that our client has declared your principal obligation in the amount of [P103,909,710.82], interest and sums payable under the Credit Agreement/Letter Agreement/Promissory Note to be immediately due and payable. "Accordingly, formal demand is hereby made upon you to please pay within five (5) days from date hereof or up to January 29, 1999 the principal amount of [P103,909,710.82], with the interest, penalty and other charges due thereon, which as of January 25, 1999 amounts to [P17,351,478.55]."11 Respondent sent another letter of demand on March 4, 1999. It contained a final demand on petitioners "to settle in full [petitioners] said past due obligation to [UCPB] within five (5) days from [petitioners] receipt of [the] letter."12 In response, petitioners paid respondent the amount of P10,199,473.96 as partial payment of the accrued interests.13 Apparently unsatisfied, UCPB applied for extrajudicial foreclosure of petitioners mortgaged properties. When petitioners received the Notice of Extra Judicial Foreclosure Sale on May 18, 1999, they requested UCPB to give them a period of sixty (60) days to update their accrued interest charges; and to restructure or, in the alternative, to negotiate for a takeout of their account.14 On May 25, 1999, the Bank denied petitioners request in these words: "This is to reply to your letter dated May 20, 1999, which confirms the request you made the previous day when you paid us a visit. "As earlier advised, your account has been referred to external counsel for appropriate legal action. Demand has also been made for the full settlement of your account. "We regret that the Bank is unable to grant your request unless a definite offer is made for settlement."15 In order to forestall the extrajudicial foreclosure scheduled for May 31, 1999, petitioners filed a Complaint16 (docketed as Civil Case No. 99-1061) for "Damages, Annulment of Interest, Penalty Increase and Accounting with Prayer for Temporary Restraining Order/Preliminary Injunction." All subsequent proceedings in the trial court and in the CA involved only the propriety of issuing a TRO and a writ of preliminary injunction. Judge Josefina G. Salonga,17 then executive judge of the Regional Trial Court (RTC) of Makati City, denied the Urgent Ex-parte Motion for Immediate Issuance of a Temporary Restraining Order (TRO), filed by petitioners. Judge Salonga denied their motion on the ground that no great or irreparable injury would be inflicted on them if the parties would first be heard.18 Unsatisfied, petitioners filed an Ex-Parte Motion for Reconsideration, by reason of which the case was eventually raffled to Branch 148, presided by Judge Oscar B. Pimentel.19 After due hearing, Judge Pimentel issued an Order dated May 31, 1999, granting a 20-day TRO on the scheduled foreclosure of the Antipolo properties, on the ground that the Notice of Foreclosure had indicated an inexistent auction venue.20 To resolve that issue, respondent filed a Manifestation21 that it would withdraw all its notices relative to the foreclosure of the mortgaged properties, and that it would re-post or re-

"Accordingly, formal demand is hereby made upon you to pay your outstanding obligations in the total amount of P14,959,525.10, which includes unpaid interest and penalties as of 21 December 1998 due on the promissory note, eight (8) days from date hereof."10 Respondent decided to invoke the acceleration provision in their Credit Agreement. Accordingly, through counsel, it relayed its move to petitioners on January 25, 1999 in a letter, which we quote:

Credit Transactions Full Text Cases Atty. Adviento

publish a new set of notices. Accordingly, in an Order dated September 6, 1999,22 Judge Pimentel denied petitioners application for a TRO for having been rendered moot by respondents Manifestation.23 Subsequently, respondent filed new applications for foreclosure in the cities where the mortgaged properties were located. Undaunted, petitioners filed another Motion for the Issuance of a TRO/Injunction and a Supplementary Motion for the Issuance of TRO/Injunction with Motion to Clarify Order of September 6, 1999.24 On October 27, 1999, Judge Pimentel issued an Order 25 granting a 20-day TRO in favor of petitioners. After several hearings, he issued his November 26, 1999 Order,26 granting their prayer for a writ of preliminary injunction on the foreclosures, but only for a period of twenty (20) days. The Order states: "Admitted by defendant witness is the fact that in all the notices of foreclosure sale of the properties of the plaintiffs x x x it is stated in each notice that the property will be sold at public auction to satisfy the mortgage indebtedness of plaintiffs which as of August 31, 1999 amounts to P131,854,773.98. "x x x xxx xxx

79

"WHEREFORE, premises considered and after finding merit on the arguments raised by herein defendants to be impressed with merit, and having stated in the Order dated 26 November 1999 that no other alternative recourse is available than to allow the defendants to proceed with their intended action, the Court hereby rules: "1.] To give due course to defendant[]s motion for reconsideration, as the same is hereby GRANTED, however, with reservation that this Order shall take effect upon after its[] finality[.]"31 Consequently, respondent proceeded with the foreclosure sale of some of the mortgaged properties. On the other hand, petitioners filed an "[O]mnibus [M]otion [for Reconsideration] and to [S]pecify the [A]pplication of the P92 [M]illion [R]ealized from the [F]oreclosure [S]ale x x x."32 Before this Omnibus Motion could be resolved, Judge Pimentel inhibited himself from hearing the case.33 The case was then re-raffled to Branch 58 of the RTC of Makati City, presided by Judge Escolastico U. Cruz.34 The proceedings before him were, however, all nullified by the Supreme Court in its En Banc Resolution dated September 18, 2001.35 He was eventually dismissed from service.36 The case was re-raffled to the pairing judge of Branch 58, Winlove M. Dumayas. On March 15, 2002, Judge Dumayas granted petitioners Omnibus Motion for Reconsideration and Specification of the Foreclosure Proceeds, as follows: "WHEREFORE, premises considered, the Motion to Reconsider the Order dated December 29, 2000 is hereby granted and the Order of November 26, 1999 granting the preliminary injunction is reinstated subject however to the condition that all properties of plaintiffs which were extrajudicially foreclosed though public bidding are subject to an accounting. [A]nd for this purpose defendant bank is hereby given fifteen (15) days from notice hereof to render an accounting on the proceeds realized from the foreclosure of plaintiffs mortgaged properties located in Antipolo, Makati, Muntinlupa and Las Pias."37 The aggrieved respondent filed before the Court of Appeals a Petition for Certiorari, seeking the nullification of the RTC Order dated March 15, 2002, on the ground that it was issued with grave abuse of discretion.38 The Special Fifteenth Division, speaking through Justice Rebecca de Guia-Salvador, affirmed the ruling of Judge Dumayas. It held that petitioners had a clear right to an injunction, based on the fact that respondent had kept them in the dark as to how and why their principal obligation had ballooned to almost P132 million. The CA held that respondents refusal to give them a detailed accounting had prevented the determination of the maturity of the obligation and precluded the possibility of a foreclosure of the mortgaged properties. Moreover, their payment of P10 million had the effect of updating, and thereby averting the maturity of, the outstanding obligation.39 Respondent filed a Motion for Reconsideration, which was granted by a Special Division of Five of the Former Special Fifteenth Division. Ruling of the Court of Appeals Citing China Banking Corporation v. Court of Appeals,40 the appellate court held in its Amended Decision41 that the foreclosure proceedings should not be enjoined in the light of the clear failure of petitioners to meet their obligations upon maturity.42 Also citing Zulueta v. Reyes,43 the CA, through Justice Jose Catral Mendoza, went on to say that a pending question on accounting did not warrant an injunction on the foreclosure. Parenthetically, the CA added that petitioners were not without recourse or protection. Further, it noted their pending action for annulment of interest, damages and accounting. It likewise said that they could protect themselves by causing the annotation of lis pendens on the titles of the mortgaged or foreclosed properties.

"As the court sees it, this is the problem that should be addressed by the defendant in this case and in the meantime, the notice of foreclosure sale should be held in abeyance until such time as these matters are clarified and cleared by the defendants x x x Should the defendant be able to remedy the situation this court will have no more alternative but to allow the defendant to proceed to its intended action. "x x x xxx xxx

"WHEREFORE, premises considered, and finding compelling reason at this point in time to grant the application for preliminary injunction, the same is hereby granted upon posting of a preliminary injunction bond in the amount of P3,500,000.00 duly approved by the court, let a writ of preliminary injunction be issued."27 The corresponding Writ of Preliminary Injunction28 was issued on November 29, 1999. Respondent moved for reconsideration. On the other hand, petitioners filed a Motion to Clarify Order of November 26, 1999. Conceding that the November 26 Order had granted an injunction during the pendency of the case, respondent contended that the injunctive writ merely restrained it for a period of 20 (twenty) days. On December 29, 2000, Judge Pimentel issued an Order29 granting respondents Motion for Reconsideration and clarifying his November 26, 1999 Order in this manner: "There may have been an error in the Writ of Preliminary Injunction issued dated November 29, 1999 as the same [appeared to be actually] an extension of the TRO issued by this Court dated 27 October 1999 for another 20 days period. Plaintiffs seeks to enjoin defendants for an indefinite period pending trial of the case. "Be that as it may, the Court actually did not have any intention of restraining the defendants from foreclosing plaintiff[s] property for an indefinite period and during the entire proceeding of the case x x x. "x x x xxx xxx

"What the [c]ourt wanted the defendants to do was to merely modify the notice of [the] auction sale in order that the amount of P131,854,773.98 x x x would not appear to be the value of each property being sold on auction. x x x.30

Credit Transactions Full Text Cases Atty. Adviento

In his Separate Concurring Opinion,44 Justice Magdangal M. de Leon added that a prior accounting was not essential to extrajudicial foreclosure. He cited Abaca Corporation v. Garcia,45 which had ruled that Act No. 3135 did not require mortgaged properties to be sold by lot or by only as much as would cover just the obligation. Thus, he concluded that a request for accounting -- for the purpose of determining whether the proceeds of the auction would suffice to cover the indebtedness -- would not justify an injunction on the foreclosure. Petitioners filed a Motion for Reconsideration dated May 31, 2004, which the appellate court denied.46 Hence, this Petition.47 Issues Petitioners raise the following issues for our consideration: p align="center">"I "Whether or not the Honorable Court of Appeals denied the petitioners of due process. "II "Whether or not the Honorable Court of Appeals supported its Amended Decision by invoking jurisprudence not applicable and completely identical with the instant case. "III "Whether or not the Honorable Court of Appeals failed to establish its finding that RTC Judge Winlove Dumayas has acted with grave abuse of discretion."48 The resolution of this case hinges on two issues: 1) whether petitioners are in default; and 2) whether there is basis for preliminarily enjoining the extrajudicial foreclosure. The other issues raised will be dealt with in the resolution of these two main questions. The Courts Ruling The Petition has no merit. First Issue: Default The resolution of the present controversy necessarily begins with a determination of respondents right to foreclose the mortgaged properties extrajudicially. It is a settled rule of law that foreclosure is proper when the debtors are in default of the payment of their obligation. In fact, the parties stipulated in their credit agreements, mortgage contracts and promissory notes that respondent was authorized to foreclose on the mortgages, in case of a default by petitioners. That this authority was granted is not disputed. Mora solvendi, or debtors default, is defined as a delay49 in the fulfillment of an obligation, by reason of a cause imputable to the debtor. 50 There are three requisites necessary for a finding of default. First, the obligation is demandable and liquidated; second, the debtor delays performance; third, the creditor judicially or extrajudicially requires the debtors performance.51 Mortgagors Default of Monthly Interest Amortizations

80

In the present case, the Promissory Note executed on March 29, 1998, expressly states that petitioners had an obligation to pay monthly interest on the principal obligation. From respondents demand letter,52 it is clear and undisputed by petitioners that they failed to meet those monthly payments since May 30, 1998. Their nonpayment is defined as an "event of default" in the parties Credit Agreement, which we quote: "Section 8.01. Events of Default. Each of the following events and occurrences shall constitute an Event of Default of this AGREEMENT: "1. The CLIENT shall fail to pay, when due, any availment of the Accommodation or interest, or any other sum due thereunder in accordance with the terms thereof;1avvphil.net "x x x xxx x x x"

"Section 8.02. Consequences of Default. (a) If an Event of Default shall occur and be continuing, the Bank may: "1. By written notice to the CLIENT, declare all outstanding availments of the Accommodation together with accrued interest and any other sum payable hereunder to be immediately due and payable without presentment, demand or notice of any kind, other than the notice specifically required by this Section, all of which are expressly waived by the CLIENT[.]"53 Considering that the contract is the law between the parties,54 respondent is justified in invoking the acceleration clause declaring the entire obligation immediately due and payable.55 That clause obliged petitioners to pay the entire loan on January 29, 1999, the date fixed by respondent.56 Petitioners failure to pay on that date set into effect Article IX of the Real Estate Mortgage,57 worded thus: "If, at any time, an event of default as defined in the credit agreements, promissory notes and other related loan documents referred to in paragraph 5 of ARTICLE I hereof (sic), or the MORTGAGOR and/or DEBTOR shall fail or refuse to pay the SECURED OBLIGATIONS, or any of the amortization of such indebtedness when due, or to comply any (sic) of the conditions and stipulations herein agreed, x x x then all the obligations of the MORTGAGOR secured by this MORTGAGE and all the amortizations thereof shall immediately become due, payable and defaulted and the MORTGAGEE may immediately foreclose this MORTGAGE judicially in accordance with the Rules of Court, or extrajudicially in accordance with Act No. 3135, as amended, and Presidential Decree No. 385. For the purpose of extrajudicial foreclosure, the MORTGAGOR hereby appoints the MORTGAGEE his/her/its attorneyin-fact to sell the property mortgaged under Act No. 3135, as amended, to sign all documents and perform any act requisite and necessary to accomplish said purpose and to appoint its substitutes as such attorney-infact with the same powers as above specified. x x x[.]"58 The foregoing discussion satisfactorily shows that UCPB had every right to apply for extrajudicial foreclosure on the basis of petitioners undisputed and continuing default. Petitioners Debt Considered Liquidated Despite the Alleged Lack of Accounting Petitioners do not even attempt to deny the aforementioned matters. They assert, though, that they have a right to a detailed accounting before they can be declared in default. As regards the three requisites of default, they say that the first requisite -- liquidated debt -- is absent. Continuing with foreclosure on the basis of an unliquidated obligation allegedly violates their right to due process. They also maintain that their partial payment of P10 million averted the maturity of their obligation.59 On the other hand, respondent asserts that questions regarding the running balance of the obligation of petitioners are not valid reasons for

Credit Transactions Full Text Cases Atty. Adviento

restraining the foreclosure. Nevertheless, it maintains that it has furnished them a detailed monthly statement of account. A debt is liquidated when the amount is known or is determinable by inspection of the terms and conditions of the relevant promissory notes and related documentation.60 Failure to furnish a debtor a detailed statement of account does not ipso facto result in an unliquidated obligation. Petitioners executed a Promissory Note, in which they stated that their principal obligation was in the amount of P103,909,710.82, subject to an interest rate of 21.75 percent per annum.61 Pursuant to the parties Credit Agreement, petitioners likewise know that any delay in the payment of the principal obligation will subject them to a penalty charge of one percent per month, computed from the due date until the obligation is paid in full.62 It is in fact clear from the agreement of the parties that when the payment is accelerated due to an event of default, the penalty charge shall be based on the total principal amount outstanding, to be computed from the date of acceleration until the obligation is paid in full.63 Their Credit Agreement even provides for the application of payments.64 It appears from the agreements that the amount of total obligation is known or, at the very least, determinable. Moreover, when they made their partial payment, petitioners did not question the principal, interest or penalties demanded from them. They only sought additional time to update their interest payments or to negotiate a possible restructuring of their account.65 Hence, there is no basis for their allegation that a statement of account was necessary for them to know their obligation. We cannot impair respondents right to foreclose the properties on the basis of their unsubstantiated allegation of a violation of due process. In Spouses Estares v. CA,66 we did not find any justification to grant a preliminary injunction, even when the mortgagors were disputing the amount being sought from them. We held in that case that "[u]pon the nonpayment of the loan, which was secured by the mortgage, the mortgaged property is properly subject to a foreclosure sale."67 Compared with Estares, the denial of injunctive relief in this case is even more imperative, because the present petitioners do not even assail the amounts due from them. Neither do they contend that a detailed accounting would show that they are not in default. A pending question regarding the due amount was not a sufficient reason to enjoin the foreclosure in Estares. Hence, with more reason should injunction be denied in the instant case, in which there is no dispute as to the outstanding obligation of petitioners. At any rate, whether respondent furnished them a detailed statement of account is a question of fact that this Court need not and will not resolve in this instance. As held in Zulueta v. Reyes,68 in which there was no genuine controversy as to the amounts due and demandable, the foreclosure should not be restrained by the unnecessary question of accounting. Maturity of the Loan Not Averted by Partial Compliance with Respondents Demand Petitioners allege that their partial payment of P10 million on March 25, 1999, had the effect of forestalling the maturity of the loan;69 hence the foreclosure proceedings are premature. 70 We disagree. To be sure, their partial payment did not extinguish the obligation. The Civil Code states that a debt is not paid "unless the thing x x x in which the obligation consists has been completely delivered x x x."71 Besides, a late partial payment could not have possibly forestalled a long-expired maturity date. The only possible legal relevance of the partial payment was to evidence the mortgagees amenability to granting the mortgagor a grace period. Because the partial payment would constitute a waiver of the mortgagees vested right to foreclose, the grant of a grace period cannot be casually assumed;72 the banks agreement must be clearly shown. Without a doubt,

81

no express agreement was entered into by the parties. Petitioners only assumed that their partial payment had satisfied respondents demand and obtained for them more time to update their account.73 Petitioners are mistaken. When creditors receive partial payment, they are not ipso facto deemed to have abandoned their prior demand for full payment. Article 1235 of the Civil Code provides: "When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with." Thus, to imply that creditors accept partial payment as complete performance of their obligation, their acceptance must be made under circumstances that indicate their intention to consider the performance complete and to renounce their claim arising from the defect.74 There are no circumstances that would indicate a renunciation of the right of respondent to foreclose the mortgaged properties extrajudicially, on the basis of petitioners continuing default. On the contrary, it asserted its right by filing an application for extrajudicial foreclosure after receiving the partial payment. Clearly, it did not intend to give petitioners more time to meet their obligation. Parenthetically, respondent cannot be reproved for accepting their partial payment. While Article 1248 of the Civil Code states that creditors cannot be compelled to accept partial payments, it does not prohibit them from accepting such payments. Second Issue: Enjoining the Extrajudicial Foreclosure A writ of preliminary injunction is a provisional remedy that may be resorted to by litigants, only to protect or preserve their rights or interests during the pendency of the principal action. To authorize a temporary injunction, the plaintiff must show, at least prima facie, a right to the final relief.75 Moreover, it must show that the invasion of the right sought to be protected is material and substantial, and that there is an urgent and paramount necessity for the writ to prevent serious damage.76 In the absence of a clear legal right, the issuance of the injunctive writ constitutes grave abuse of discretion. Injunction is not designed to protect contingent or future rights. It is not proper when the complainants right is doubtful or disputed.77 As a general rule, courts should avoid issuing this writ, which in effect disposes of the main case without trial.78 In Manila International Airport Authority v. CA,79 we urged courts to exercise caution in issuing the writ, as follows: "x x x. We remind trial courts that while generally the grant of a writ of preliminary injunction rests on the sound discretion of the court taking cognizance of the case, extreme caution must be observed in the exercise of such discretion. The discretion of the court a quo to grant an injunctive writ must be exercised based on the grounds and in the manner provided by law. Thus, the Court declared in Garcia v. Burgos: It has been consistently held that there is no power the exercise of which is more delicate, which requires greater caution, deliberation and sound discretion, or more dangerous in a doubtful case, than the issuance of an injunction. It is the strong arm of equity that should never be extended unless to cases of great injury, where courts of law cannot afford an adequate or commensurate remedy in damages. Every court should remember that an injunction is a limitation upon the freedom of action of the defendant and should not be granted lightly or precipitately. It should be granted only when the court is fully satisfied that the law permits it and the emergency demands it."80 (Citations omitted)

Credit Transactions Full Text Cases Atty. Adviento

Petitioners do not have any clear right to be protected. As shown in our earlier findings, they failed to substantiate their allegations that their right to due process had been violated and the maturity of their obligation forestalled. Since they indisputably failed to meet their obligations in spite of repeated demands, we hold that there is no legal justification to enjoin respondent from enforcing its undeniable right to foreclose the mortgaged properties. In any case, petitioners will not be deprived outrightly of their property. Pursuant to Section 47 of the General Banking Law of 2000, 81 mortgagors who have judicially or extrajudicially sold their real property for the full or partial payment of their obligation have the right to redeem the property within one year after the sale. They can redeem their real estate by paying the amount due, with interest rate specified, under the mortgage deed; as well as all the costs and expenses incurred by the bank.82 Moreover, in extrajudicial foreclosures, petitioners have the right to receive any surplus in the selling price. This right was recognized in Sulit v. CA, 83 in which the Court held that "if the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this fact alone will not affect the validity of the sale but simply gives the mortgagor a cause of action to recover such surplus."84 Petitioners failed to demonstrate the prejudice they would probably suffer by reason of the foreclosure. Also, it is clear that they would be adequately protected by law. Hence, we find no legal basis to reverse the assailed Amended Decision of the CA dated May 4, 2004. WHEREFORE, the Petition is DENIED and the assailed Amended Decision and Resolution AFFIRMED. Costs against petitioners. SO ORDERED. SECOND DIVISION G.R. No. L-49401 July 30, 1982 RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO CHUA, respondents. Laurente C. Ilagan for petitioner. Victor A. Clapano for respondents.

82

secured by any notes, bills, receivables, drafts, acceptances, checks or other evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable, provided that the liability shall not exceed at any one time the aggregate principal sum of P100,000.00. On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor of petitioner payable on June 13, 1977. Said note was signed by Enrique Go, Sr. in his personal capacity and in behalf of Daicor. The promissory note was not fully paid despite repeated demands; hence, on June 30, 1978, petitioner filed a complaint for a sum of money against Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated September 23, 1978 was filed by respondent Residoro Chua on the ground that the complaint states no cause of action as against him. 5 It was alleged in the motion that he can not be held liable under the promissory note because it was only Enrique Go, Sr. who signed the same in behalf of Daicor and in his own personal capacity. In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the execution of the comprehensive surety agreement, private respondent is liable because said agreement covers not merely the promissory note subject of the complaint, but is continuing; and it encompasses every other indebtedness the Borrower may, from time to time incur with petitioner bank. On October 6, 1978 respondent court rendered a decision granting private respondent's motion to dismiss the complaint. 7 Petitioner filed a motion for reconsideration dated October 12, 1978 and on November 7, 1978 respondent court issued an order denying the said motion. 8 The sole issue resolved by respondent court was the interpretation of the comprehensive surety agreement, particularly in reference to the indebtedness evidenced by the promissory note involved in the instant case, said comprehensive surety agreement having been signed by Enrique Go, Sr. and private respondent, binding themselves as solidary debtors of said corporation not only to existing obligations but to future ones. Respondent court said that corollary to that agreement must be another instrument evidencing the obligation in a form of a promissory note or any other evidence of indebtedness without which the said agreement serves no purpose; that since the promissory notes, which is primarily the basis of the cause of action of petitioner, is not signed by private respondent, the latter can not be liable thereon. Contesting the aforecited decision and order of respondent judge, the present petition was filed before this Court assigning the following as errors committed by respondent court: 1. That the respondent court erred in dismissing the complaint against Chua simply on the reasons that 'Chua is not a signatory to the promissory note" of April 29, 1977, or that Chua could not be held liable on the note under the provisions of the comprehensive surety agreement of October 29, 1976; and/or 2. That the respondent court erred in interpreting the provisions of the Comprehensive Surety Agreement towards the conclusion that respondent Chua is not liable on the promissory note because said note is not conformable to the Comprehensive Surety Agreement; and/or 3. That the respondent court erred in ordering that there is no cause of action against respondent Chua in the petitioner's complaint. The main issue involved in this case is whether private respondent is liable to pay the obligation evidence by the promissory note dated April 29,1977 which he did not sign, in the light of the provisions of the comprehensive surety agreement which petitioner and private respondent had earlier executed on October 19, 1976. We find for the petitioner. The comprehensive surety agreement was jointly executed by Residoro Chua and Enrique Go, Sr., President and

DE CASTRO, J.: Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and November 7, 1978 in Civil Case No. 11-154 of the Court of First Instance of Davao, which granted the motion filed by private respondent to dismiss the complaint of petitioner for a sum of money, on the ground that the complaint states no cause of action as against private respondent. After the petition had been filed, petitioner, on December 14, 1978 mailed a manifestation and motion requesting the special civil action for certiorari be treated as a petition for review. 1 Said manifestation and motion was noted in the resolution of January 10, 1979. 2 It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a comprehensive surety agreements 3 to guaranty among others, any existing indebtedness of Davao Agricultural Industries Corporation (referred to therein as Borrower, and as Daicor in this decision), and/or induce the bank at any time or from time to time thereafter, to make loans or advances or to extend credit in other manner to, or at the request, or for the account of the Borrower, either with or without security, and/or to purchase on discount, or to make any loans or advances evidenced or

Credit Transactions Full Text Cases Atty. Adviento

General Manager, respectively of Daicor, on October 19, 1976 to cover existing as well as future obligations which Daicor may incur with the petitioner bank, subject only to the proviso that their liability shall not exceed at any one time the aggregate principal sum of P100,000.00. Thus, paragraph I of the agreement provides: For and in consideration of any existing indebtedness to you of Davao Agricultural Industries Corporation with principal place of business and postal address at 530 J. P. Cabaguio Ave., Davao City (hereinafter called the "Borrower), and/or in order to induce, you in your discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at he request or for the account of the Borrower, either with or without security, and/or to purchase or discount or to make any loans or advances evidenced or secured by any notes, bills, receivables, drafts, acceptances, checks or other instruments or evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable as maker, endorser, acceptor, or otherwise) the undersigned agrees to guarantee, and does hereby guarantee in joint and several capacity, the punctual payment at maturity to you of any and all such instruments, loans, advances, credits and/or other obligations herein before referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to you by the Borrower, together with any and all expenses which may be incurred by you in collecting an such instruments or other indebtedness or obligations hereinbefore referred to ..., provided, however, that the liability of the undersigned shag not exceed at any one time the aggregate principal sum of P100,000.00 ... The agreement was executed obviously to induce petitioner to grant any application for a loan Daicor may desire to obtain from petitioner bank. The guaranty is a continuing one which shall remain in full force and effect until the bank is notified of its termination. This is a continuing guaranty and shall remain in fun force and effect until written notice shall have been received by you that it has been revoked by the undersigned, ... 9 At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an additional capital for buying and selling coco-shell charcoal and importation of activated carbon, 10 the comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered by the said agreement, and private respondent, even if he did not sign the promisory note, is liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is no doubt that Daicor is liable on the promissory note evidencing the indebtedness. The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. Thus Article 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured.

83

In view of the foregoing, the decision (which should have been a mere "order"), dismissing the complaint is reversed and set side. The case is remanded to the court of origin with instructions to set aside the motion to dismiss, and to require defendant Residoro Chua to answer the complaint after which the case shall proceed as provided by the Rules of Court. No costs. SO ORDERED. THIRD DIVISION

G.R. No. 89775 November 26, 1992 JACINTO UY DIO and NORBERTO UY, petitioners, vs. HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.

DAVIDE, JR., J.: Continuing Suretyship Agreements signed by the petitioners set off this present controversy. Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed the 2 December 1987 Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit entitled "Metropolitan Bank and Trust Company vs. Uy Tiam, doing business under the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Dio and Norberto Uy" and docketed as Civil Case No. 829303. They likewise challenge public respondent's Resolution of 21 August 1989 2 denying their motion for the reconsideration of the former. The impugned Decision of the Court summarizes the antecedent facts as follows: It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as UTEFS), thru its representative Uy Tiam, applied for and obtained credit accommodations (letter of credit and trust receipt accommodations) from the Metropolitan Bank and Trust Company (hereinafter referred to as METROBANK) in the sum of P700,000.00 (Original Records, p. 333). To secure the aforementioned credit accommodations Norberto Uy and Jacinto Uy Dio executed separate Continuing Suretyships (Exhibits "E" and "F" respectively), dated 25 February 1977, in favor of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy Dio agreed to be bound up to the aggregate sum of P800,000.00. Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam, obtained another credit accommodation from METROBANK in 1978, which credit accommodation was fully settled before an irrevocable letter of credit was applied for and obtained by the abovementioned business entity in 1979 (September 8, 1987, tsn, pp. 14-15). The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy Dio as they did not sign the document denominated as "Commercial Letter of

Credit Transactions Full Text Cases Atty. Adviento

Credit and Application." Also, they were not asked to execute any suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has been opened and the Continuing Suretyships separately executed in February, 1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28). The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products the amount of P815,600.00 which payment was covered by a Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original Records, p. 331). Pursuant to the above commercial transaction, UTEFS executed and delivered to METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the former acknowledged receipt in trust from the latter of the aforementioned goods from Planters Products which amounted to P815, 600.00. Being the entrusted, the former agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if sold, the proceeds of the sale thereof, on or before September 2, 1979. However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a consequence, METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy Dio, demanding payment of the amount due. Informed of the amount due, UTEFS made partial payments to the Bank which were accepted by the latter. Answering one of the demand letters, Dio, thru counsel, denied his liability for the amount demanded and requested METROBANK to send him copies of documents showing the source of his liability. In its reply, the bank informed him that the source of his liability is the Continuing Suretyship which he executed on February 25, 1977. As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit accommodation because it is a new obligation contracted without his participation. Besides, the 1977 credit accommodation which he guaranteed has been fully paid. Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to extrajudicial remedies to be futile, METROBANK filed a complaint for collection of a sum of money (P613,339.32, as of January 31, 1982, inclusive of interest, commission penalty and bank charges) with a prayer for the issuance of a writ of preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded Dio and Uy as parties-defendants. The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was returned unserved and unsatisfied as defendant Uy Tiam was nowhere to be found at his given address and his commercial enterprise was already non-operational (Original Records, p. 37). On April 11, 1984, Norberto Uy and Jacinto Uy Dio (sureties-defendant herein) filed a motion to dismiss the complaint on the ground of lack of cause of action. They maintained that the obligation which they guaranteed in 1977 has been extinguished since it has already been paid in the same year. Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It was further argued that

84

they can not be held liable for the obligation contracted in 1979 because they are not privies thereto as it was contracted without their participation (Records, pp. 42-46). On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the terms and conditions embodied in the comprehensive suretyships separately executed by suretiesdefendants, the bank argued that sureties-movants bound themselves as solidary obligors of defendant Uy Tiam to both existing obligations and future ones. It relied on Article 2053 of the new Civil Code which provides: "A guaranty may also be given as security for future debts, the amount of which is not yet known; . . . ." It was further asserted that the agreement was in full force and effect at the time the letter of credit was obtained in 1979 as sureties-defendants did not exercise their right to revoke it by giving notice to the bank. (Ibid., pp. 51-54). Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending the introduction of evidence by the parties as per order dated February 21, 1986 (Ibid., p. 71). Having been granted a period of fifteen (15) days from receipt of the order dated March 7, 1986 within which to file the answer, sureties-defendants filed their responsive pleading which merely rehashed the arguments in their motion to dismiss and maintained that they are entitled to the benefit of excussion (Original Records, pp. 88-93). On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy Tiam on the ground that it has no information as to the heirs or legal representatives of the latter who died sometime in December, 1986, which motion was granted on the following day (Ibid., pp. 180-182). After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads: The evidence and the pleadings, thus, pose the querry (sic): Are the defendants Jacinto Uy Dioand Norberto Uy liable for the obligation contracted by Uy Tiam under the Letter of Credit (Exh. B) issued on March 30, 1987 by virtue of the Continuing Suretyships they executed on February 25, 1977? Under the admitted proven facts, the Court finds that they are not. a) When Uy and Dio executed the continuing suretyships, exhibits E and F, on February 25, 1977, Uy Tiam was obligated to the plaintiff in the amount of P700,000.00 and this was the obligation which both obligation which both defendants guaranteed to pay. Uy Tiam paid this 1977 obligation and such payment extinguished the obligation they assumed as guarantors/sureties.

Credit Transactions Full Text Cases Atty. Adviento

b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which covered the 1977 account of Uy Tiam. Thus, the obligation under either is apart and distinct from the obligation created in the other as evidenced by the fact that Uy Tiam had to apply anew for the 1979 transaction (Exh. A). And Dio and Uy, being strangers thereto, cannot be answerable thereunder. c) The plaintiff did not serve notice to the defendants Dio and Uy when it extended to Credit at least to inform them that the continuing suretyships they executed on February 25, 1977 will be considered by the plaintiff to secure the 1979 transaction of Uy Tiam. d) There is no sufficient and credible showing that Dio and Uy were fully informed of the import of the Continuing Suretyships when they affixed their signatures thereon that they are thereby securing all future obligations which Uy Tiam may contract the plaintiff. On the contrary, Dio and Uy categorically testified that they signed the blank forms in the office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the instruction of Uy Tiam, their former employer. They denied having gone to the office of the plaintiff to subscribe to the documents (October 1, 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3 xxx xxx xxx In its Decision, the trial court decreed as follows: PREMISES rendered: CONSIDERED, judgment is hereby

85

APPELLEES JACINTO UY DIO AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFFAPPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY 25, 1977. II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 5 On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which reads: WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED AND SET, ASIDE. In lieu thereof, another one is rendered: 1) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, to appellant METROBANK the amount of P2,397,883.68 which represents the amount due as of July 17, 1987 inclusive of principal, interest and charges; 2) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, appellant METROBANK the accruing interest, fees and charges thereon from July 18, 1987 until the whole monetary obligation is paid; and 3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, to plaintiff P20,000.00 as attorney's fees. With costs against appellees. SO ORDERED. 6 In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the Continuing Suretyship Agreements separately executed by the petitioners in 1977 were intended to guarantee payment of Uy Tiam's outstanding as well as future obligations; each suretyship arrangement was intended to remain in full force and effect until METROBANK would have been notified of its revocation. Since no such notice was given by the petitioners, the suretyships are deemed outstanding and hence, cover even the 1979 letter of credit issued by METROBANK in favor of Uy Tiam. Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's construction of the suretyship agreements and its ruling with respect to the extent of their liability thereunder. They argued the even if the agreements were in full force and effect when METROBANK granted Uy Tiam's application for a letter of credit in 1979, the public respondent nonetheless seriously erred in holding them liable for an amount over and above their respective face values. In its Resolution of 21 August 1989, public respondent denied the motion: . . . considering that the issues raised were substantially the same grounds utilized by the lower

a) dismissing the COMPLAINT against JACINTO UY DIO and NORBERTO UY; b) ordering the plaintiff to pay to Dio and Uy the amount of P6,000.00 as attorney's fees and expenses of litigation; and c) denying all other claims of the parties for want of legal and/or factual basis. SO ORDERED. (Records, p. 336) 4 From the said Decision, the private respondent appealed to the Court of Appeals. The case was docketed as CA-G.R. CV No. 17724. In support thereof, it made the following assignment of errors in its Brief: I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT DEFENDANTS-

Credit Transactions Full Text Cases Atty. Adviento

court in rendering judgment for defendants-appellees which We upon appeal found and resolved to be untenable, thereby reversing and setting aside said judgment and rendering another in favor of plaintiff, and no new or fresh issues have been posited to justify reversal of Our decision herein, . . . . 7 Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable as sureties for the obligation contracted by Uy Tiam with METROBANK on 30 May 1979 under and by virtue of the Continuing Suretyship Agreements signed on 25 February 1977. Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements were automatically extinguished upon payment of the principal obligation secured thereby, i.e., the letter of credit obtained by Uy Tiam in 1977. They further claim that they were not advised by either METROBANK or Uy Tiam that the Continuing Suretyship Agreements would stand as security for the 1979 obligation. Moreover, it is posited that to extend the application of such agreements to the 1979 obligation would amount to a violation of Article 2052 of the Civil Code which expressly provides that a guaranty cannot exist without a valid obligation. Petitioners further argue that even granting, for the sake of argument, that the Continuing Suretyship Agreements still subsisted and thereby also secured the 1979 obligations incurred by Uy Tiam, they cannot be held liable for more than what they guaranteed to pay because it s axiomatic that the obligations of a surety cannot extend beyond what is stipulated in the agreement. On 12 February 1990, this Court resolved to give due course to the petition after considering the allegations, issues and arguments adduced therein, the Comment thereon by the private respondent and the Reply thereto by the petitioners; the parties were required to submit their respective Memoranda. The issues presented for determination are quite simple: 1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by virtue of the Continuing Suretyship Agreements they separately signed in 1977; and 2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations. Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at the time the guaranty is executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. 9 Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof. 10 A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one. 11 In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty. 12 In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by petitioner Uy provides thus:

86

I. For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter called the "Borrower"), for the payment of which the SURETY is now obligated to the BANK, either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at the request, or for the account of the Borrower, either with or without security, and/or to purchase or discount, or to make any loans or advances evidence or secured by any notes, bills, receivables, drafts, acceptances, checks, or other instruments or evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable as maker, endorser, acceptor, or otherwise, the SURETY agrees to guarantee, and does hereby guarantee, the punctual payment at maturity to the loans, advances credits and/or other obligations hereinbefore referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to the BANK by the Borrower, together with any and all expenses which may be incurred by the BANK in collecting all or any such instruments or other indebtedness or obligations herein before referred to, and/or in enforcing any rights hereunder, and the SURETY also agrees that the BANK may make or cause any and all such payments to be made strictly in accordance with the terms and provisions of any agreement(s) express or implied, which has (have) been or may hereafter be made or entered into by the Borrow in reference thereto, regardless of any law, regulation or decree, unless the same is mandatory and non-waivable in character, nor or hereafter in effect, which might in any manner affect any of the terms or provisions of any such agreement(s) or the Bank's rights with respect thereto as against the Borrower, or cause or permit to be invoked any alteration in the time, amount or manner of payment by the Borrower of any such instruments, obligations or indebtedness; provided, however, that the liability of the SURETY hereunder shall not exceed at any one time the aggregate principal sum of PESOS: THREE HUNDRED THOUSAND ONLY (P300,000.00) (irrespective of the currenc(ies) in which the obligations hereby guaranteed are payable), and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may be incurred by the BANK as referred to above. 13 Paragraph I of the Continuing Suretyship Agreement executed by petitioner Dio contains identical provisions except with respect to the guaranteed aggregate principal amount which is EIGHT THOUSAND PESOS (P800,000.00). 14 Paragraph IV of both agreements stipulate that: VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall have been received by the BANK that it has been revoked by the SURETY, but any such notice shall not release the SURETY, from any liability as to any instruments, loans, advances or other obligations hereby guaranteed, which may be held by the BANK, or in which the BANK may have any interest at the time of the receipt (sic) of such notice. No act or omission of any kind on the BANK'S part in the premises shall in any event affect or impair this guaranty, nor shall same (sic) be affected by any change which may arise by reason of the death of the SURETY, or of any partner(s) of the SURETY, or of the Borrower, or of the accession to any such partnership of any one or more new partners. 15 The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are continuing in nature. Petitioners do not

Credit Transactions Full Text Cases Atty. Adviento

deny this; in fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the suretyship agreements. Accordingly, as correctly held by the public respondent: Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce appellant to grant any application for credit accommodation (letter of credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its terms, each suretyship is a continuing one which shall remain in full force and effect until the bank is notified of its revocation. xxx xxx xxx When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank, for the purpose of obtaining goods (covered by a trust receipt) from Planters Products, the continuing suretyships were in full force and effect. Hence, even if sureties-appellees did not sign the "Commercial Letter of Credit and Application, they are still liable as the credit accommodation (letter of credit/trust receipt) was covered by the said suretyships. What makes them liable thereunder is the condition which provides that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise." And since UTEFS which (sic) was liable as principal obligor for having failed to fulfill the obligatory stipulations in the trust receipt, they as insurers of its obligation, are liable thereunder. 16 Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979 obligation because the latter was not yet in existence when the agreements were executed in 1977; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the succeeding article provides that "[a] guaranty may also be given as security for future debts, the amount of which is not yet known." Secondly, Article 2052 speaks about a valid obligation, as distinguished from a void obligation, and not an existing or current obligation. This distinction is made clearer in the second paragraph of Article 2052 which reads: Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that the public respondent gravely erred in finding them liable for more than the amount specified in their respective agreements, to wit: (a) P800,000.00 for petitioner Dio and (b) P300,000.00 for petitioner Uy. The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond its specified limits. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther. 17 Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and petitioner Uy fix the aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. 18 In the case at bar, both agreements provide for liability for interest and expenses, to wit: . . . and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may be incurred by the BANK referred to above. 19 They further provide that:

87

In the event of judicial proceedings being instituted by the BANK against the SURETY to enforce any of the terms and conditions of this undertaking, the SURETY further agrees to pay the BANK a reasonable compensation for and as attorney's fees and costs of collection, which shall not in any event be less than ten per cent (10%) of the amount due (the same to be due and payable irrespective of whether the case is settled judicially or extrajudicially). 20 Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners separately bound themselves to pay interest, expenses, attorney's fees and costs. The last two items are pegged at not less than ten percent (10%) of the amount due. Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs. Article 2055 of the Civil Code provides: 21 Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein. If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. Interest and damages are included in the term accessories. However, such interest should run only from the date when the complaint was filed in court. Even attorney's fees may be imposed whenever appropriate, pursuant to Article 2208 of the Civil Code. Thus, in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court held: Petitioner objects to the payment of interest and attorney's fees because: (1) they were not mentioned in the bond; and (2) the surety would become liable for more than the amount stated in the contract of suretyship. xxx xxx xxx The objection has to be overruled, because as far back as the year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond may recover from the surety as part of their damages, interest at the legal rate even if the surety would thereby become liable to pay more than the total amount stipulated in the bond. The theory is that interest is allowed only by way of damages for delay upon the part of the sureties in making payment after they should have done so. In some states, the interest has been charged from the date of the interest has been charged from the date of the judgment of the appellate court. In this jurisdiction, we rather prefer to follow the general practice, which is to order that interest begin to run from the date when the complaint was filed in court, . . . Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently recognized in the Rules of Court (Rule 53, section 6) and with Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code).

Credit Transactions Full Text Cases Atty. Adviento

In other words the surety is made to pay interest, not by reason of the contract, but by reason of its failure to pay when demanded and for having compelled the plaintiff to resort to the courts to obtain payment. It should be observed that interest does not run from the time the obligation became due, but from the filing of the complaint. As to attorney's fees. Before the enactment of the New Civil Code, successful litigants could not recover attorney's fees as part of the damages they suffered by reason of the litigation. Even if the party paid thousands of pesos to his lawyers, he could not charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566). However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated in Article 2208, among them, "where the court deems it just and equitable that attorney's (sic) fees and expenses of litigation should be recovered" or "when the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim." This gives the courts discretion in apportioning attorney's fees. The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 829303, the public respondent mentions the amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission penalty and bank charges." 23 This is the same amount stated by METROBANK in its Memorandum. 24 However, in summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public respondent states: Hence, they are jointly and severally liable to appellant METROBANK of UTEFS' outstanding obligation in the sum of P2,397,883.68 (as of July 17, 1987) P651,092.82 representing the principal amount, P825,133.54, for past due interest (5-31-82 to 7-17-87) and P921,657.32, for penalty charges at 12% per annum (5-31-82 to 7-17-87) as shown in the Statement of Account (Exhibit I). 25 Since the complaint was filed on 18 May 1982, it is obvious that on that date, the outstanding principal obligation of Uy Tiam, secured by the petitioners' Continuing Suretyship Agreements, was less than P613,339.32. Such amount may be fully covered by the Continuing Suretyship Agreement executed by petitioner Dio which stipulates an aggregate principal sum of not exceeding P800,000.00, and partly covered by that of petitioner Uy which pegs his maximum liability at P300,000.00. Consequently, the judgment of the public respondent shall have to be modified to conform to the foregoing exposition, to which extent the instant petition is impressed with partial merit. WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be modified with respect to the extend of petitioners' liability. As modified, petitioners JACINTO UY DIO and NORBERTO UY are hereby declared liable for and are ordered to pay, up to the maximum limit only of their respective Continuing Suretyship Agreement, the remaining unpaid balance of the principal obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with the interest due thereon at the legal rate commencing from the date of the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as well as the adjudged attorney's fees and costs. All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above are affirmed. SO ORDERED. SECOND DIVISION

88

G.R. No. 103066 April 25, 1996 WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs. HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents.

MENDOZA, J.:p This is a petition for review on certiorari of the decision 1 of the Court of Appeals in C.A.-G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the National Capital Judicial Region, Branch XLV, Manila, which ordered petitioner Willex Plastic Industries Corporation and the Inter-Resin Industrial Corporation, jointly and severally, to pay private respondent International Corporate Bank certain sums of money, and the appellate court's resolution of October 17, 1989 denying petitioner's motion for reconsideration. The facts are as follows: Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking Corporation. To secure payment of the credit accomodation, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines (IUCP) executed two documents, both entitled "Continuing Surety Agreement" and dated December 1, 1978, whereby they bound themselves solidarily to pay Manilabank "obligations of every kind, on which the [Inter-Resin Industrial] may now be indebted or hereafter become indebted to the [Manilabank]." The two agreements (Exhs. J and K) are the same in all respects, except as to the limit of liability of the surety, the first surety agreement being limited to US$333,830.00, while the second one is limited to US$334,087.00. On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a "Continuing Guaranty" in favor of IUCP whereby "For and in consideration of the sum or sums obtained and/or to be obtained by Inter-Resin Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally guaranteed "the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests, charges and penalties as hereafter may be specified." On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61 representing Inter-Resin Industrial's outstanding obligation. (Exh. M-1) On February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties paid, Atrium filed this case in the court below against Inter-Resin Industrial and Willex Plastic. On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded Atrium, the sum of P687,600.00 representing the proceeds of its fire insurance policy for the destruction of its properties. In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was intended to secure payment to Atrium of the amount of P4,334,280.61 which the latter had paid to Manilabank. It claimed, however, that it had already fully paid its obligation to Atrium Capital. On the other hand, Willex Plastic denied the material allegations of the complaint and interposed the following Special Affirmative Defenses:

Credit Transactions Full Text Cases Atty. Adviento

(a) Assuming arguendo that main defendant is indebted to plaintiff, the former's liability is extinguished due to the accidental fire that destroyed its premises, which liability is covered by sufficient insurance assigned to plaintiff; (b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account is now very much lesser than those stated in the complaint because of some payments made by the former; (c) The complaint states no cause of action against WILLEX; (d) WLLLEX is only a guarantor of the principal obliger, and thus, its liability is only secondary to that of the principal; (e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the principal obliger; (f) Plaintiff has no personality to sue. On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then proceeded to trial. On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the right to present evidence for its failure to appear at the hearing despite due notice. On the other hand, Willex Plastic rested its case without presenting any evidence. Thereafter Interbank and Willex Plastic submitted their respective memoranda. On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and Willex Plastic jointly and severally to pay to Interbank the following amounts: (a) P3, 646,780.61, representing their indebtedness to the plaintiff, with interest of 17% per annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the plaintiff, until full payment of the said amount; (b) Liquidated damages equivalent to 178 of the amount due; and (c) Attorney's fees and expenses of equivalent to 208 of the total amount due. litigation

89

Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991 and the resolution of December 6, 1991 of the Court of Appeals. Petitioner raises a number of issues. [1] The main issue raised is whether under the "Continuing Guaranty" signed on April 2, 1979 petitioner Willex Plastic may be held jointly and severally liable with Inter-Resin Industrial for the amount paid by Interbank to Manilabank. As already stated, the amount had been paid by Interbank's predecessorin-interest, Atrium Capital, to Manilabank pursuant to the "Continuing Surety Agreements" made on December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic argues that under the "Continuing Guaranty," its liability is for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the account of Inter-Resin Industrial. In support of this contention Willex Plastic cites the following portion of the "Continuing Guaranty": For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you and/or your principal/s, successor/s and assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and penalties as may hereinafter be specified. The contention is untenable. What Willex Plastic has overlooked is the fact that evidence aliunde was introduced in the trial court to explain that it was actually to secure payment to Interbank (formerly IUCP) of amounts paid by the latter to Manilabank that the "Continuing Guaranty" was executed. In its complaint below, Interbank's predecessor-in-interest, Atrium Capital, alleged: 5. to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required defendant IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the other defendant WPIC [Willex Plastic]. In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it had already paid its obligation in its entirety. On the other hand, Willex Plastic, while denying the allegation in question, merely did so "for lack of knowledge or information of the same." But, at the hearing of the case on September 16, 1986, when asked by the trial judge whether Willex Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex Plastic's counsel replied in the negative and manifested that "the plaintiff in this case [Interbank] is the guarantor and my client [Willex Plastic] only signed as a guarantor to the guarantee." 2 For its part Interbank adduced evidence to show that the "Continuing Guaranty" had been made to guarantee payment of amounts made by it to Manilabank and not of any sums given by it as loan to Inter-Resin Industrial. Interbank's witness testified under cross examination by counsel for Willex Plastic that Willex "guaranteed the exposure/of whatever exposure of ACP [Atrium Capital] will later be made because of the guarantee to Manila Banking Corporation." 3 It has been held that explanatory evidence may be received to show the circumstances under which a document has been made and to what debt it relates. 4 At all events, Willex Plastic cannot now claim that its liability is

Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic filed its brief, while Inter-Resin Industrial presented a "Motion to Conduct Hearing and to Receive Evidence to Resolve Factual Issues and to Defer Filing of the Appellant's Brief." After its motion was denied, Inter-Resin Industrial did not file its brief anymore. On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling of the trial court. Willex Plastic filed a motion for reconsideration praying that it be allowed to present evidence to show that Inter-Resin Industrial had already paid its obligation to Interbank, but its motion was denied on December 6, 1991: The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin Industrial's motion for reception of evidence because the situation or situations in which we could exercise the power under BP 129 did not exist. Movant here has not presented any argument which would show otherwise.

Credit Transactions Full Text Cases Atty. Adviento

limited to any amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as debtor because, by failing to object to the parol evidence presented, Willex Plastic waived the protection of the parol evidence rule. 5 Accordingly, the trial court found that it was "to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [InterResin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant Willex Plastic Industries Corporation." 6 Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-appellants to sign a Continuing Guaranty." These factual findings of the trial court and of the Court of Appeals are binding on us not only because of the rule that on appeal to the Supreme Court such findings are entitled to great weight and respect but also because our own examination of the record of the trial court confirms these findings of the two courts. 7 Nor does the record show any other transaction under which Inter-Resin Industrial may have obtained sums of money from Interbank. It can reasonably be assumed that Inter-Resin Industrial and Willex Plastic intended to indemnify Interbank for amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial. Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was "to secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a "Continuing Guaranty" was executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin Industrial]." [2] Willex Plastic argues that the "Continuing Guaranty," being an accessory contract, cannot legally exist because of the absence of a valid principal obligation. 8 Its contention is based on the fact that it is not a party either to the "Continuing Surety Agreement" or to the loan agreement between Manilabank and Interbank Industrial. Put in another way the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a "guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal." 9 In an analogous case, 10 this Court held: At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an additional capital for buying and selling coco-shell charcoal and importation of activated carbon, the comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered by the said agreement, and private respondent, even if he did not sign the promissory note, is liable by virtue of the surety agreement. The only condition that would make him liable thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise." There is no doubt that Daicor is liable on the promissory note evidencing the indebtedness. The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as evidenced by a promissory note. [3] Willex Plastic contends that the "Continuing Guaranty" cannot be retroactivelt applied so as to secure payments made by Interbank under the two "Continuing Surety Agreements." Willex Plastic invokes the ruling in El Vencedor v. Canlas 11 and Dio v. Court of Appeals 12 in support of its

90

contention that a contract of suretyship or guaranty should be applied prospectively. The cases cited are, however, distinguishable from the present case. In El Vencedor v. Canlas we held that a contract of suretyship "is not retrospective and no liability attaches for defaults occurring before it is entered into unless an intent to be so liable is indicated." There we found nothing in the contract to show that the paries intended the surety bonds to answer for the debts contracted previous to the execution of the bonds. In contrast, in this case, the parties to the "Continuing Guaranty" clearly provided that the guaranty would cover "sums obtained and/or to be obtained" by Inter-Resin Industrial from Interbank. On the other hand, in Dio v. Court of Appeals the issue was whether the sureties could be held liable for an obligation contracted after the execution of the continuing surety agreement. It was held that by its very nature a continuing suretyship contemplates a future course of dealing. "It is prospective in its operation and is generally intended to provide security with respect to future transactions." By no means, however, was it meant in that case that in all instances a contrast of guaranty or suretyship should be prospective in application. Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13 although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling. What was said there 14 applies mutatis mutandis to the case at bar: In our opinion, the appealed judgment is erroneous. It is very true that bonds or other contracts of suretyship are ordinarily not to be construed as retrospective, but that rule must yield to the intention of the contracting parties as revealed by the evidence, and does not interfere with the use of the ordinary tests and canons of interpretation which apply in regard to other contracts. In the present case the circumstances so clearly indicate that the bond given by Echevarria was intended to cover all of the indebtedness of the Arrocera upon its current account with the plaintiff Bank that we cannot possibly adopt the view of the court below in regard to the effect of the bond. [4] Willex Plastic says that in any event it cannot be proceeded against without first exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the benefit of excussion. The Civil Code provides, however: Art. 2059. This excussion shall not take place: (1) If the guarantor has expressly renounced it; (2) If he has bound himself solidarily with the debtor; The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and Inter-Resin Industrial in favor of IUCP (now Interbank) reads: If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s may directly proceed against Me/Us without first proceeding against and exhausting DEBTOR/s properties in the same manner as if all such liabilities constituted My/Our direct and primary obligations. (emphasis supplied) This stipulation embodies an express renunciation of the right of excussion. In addition, Willex Plastic bound itself solidarily liable with InterResin Industrial under the same agreement: For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL

Credit Transactions Full Text Cases Atty. Adviento

CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may be evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you and/or your principal/s, successor/s and assigns the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and penalties as may hereinafter he specified. [5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness to Interbank and that Willex Plastic should have been allowed by the Court of Appeals to adduce evidence to prove this. Suffice it to say that Inter-Resin Industrial had been given generous opportunity to present its evidence but it failed to make use of the same. On the otherhand, Willex Plastic rested its case without presenting evidence. The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but because of its failure to appear on that date, the hearing was reset on March 12, 26 and April 2, 1987. On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and "reset for the last time" on April 2 and 30, 1987. On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court issued the following order: Considering that, as shown by the records, the Court had exerted every earnest effort to cause the service of notice or subpoena on the defendant Inter-Resin Industrial but to no avail, even with the assistance of the defendant Willex the defendant Inter-Resin Industrial is hereby deemed to have waived the right to present its evidence. On the other hand, Willex Plastic announced it was resting its case without presenting any evidence. Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved for the postponement of the hearing be postponed to August 11, 1987. The hearing was, therefore, reset on September 8 and 22, 1987 but the hearings were reset on October 13, 1987, this time upon motion of Interbank. To give Interbank time to comment on a motion filed by Inter-Resin Industrial, the reception of evidence for Inter-Resin Industrial was again reset on November 17, 26 and December 11, 1987. However, Inter-Resin Industrial again moved for the postponement of the hearing. Accordingly the hearing was reset on November 26 and December 11, 1987, with warning that the hearings were intransferrable. Again, the reception of evidence for Inter-Resin Industrial was reset on January 22, 1988 and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still failed to present its evidence, it was declared to have waived its evidence. To give Inter-Resin Industrial a last opportunity to present its evidence, however, the hearing was postponed to March 4, 1988. Again Inter-Resin Industrial's counsel did not appear. The trial court, therefore, finally declared Inter-Resin Industrial to have waived the right to present its evidence. On the other hand, Willex Plastic, as before, manifested that it was not presenting evidence and requested instead for time to file a memorandum. There is therefore no basis for the plea made by Willex Plastic that it be given the opportunity of showing that Inter-Resin Industrial has already paid its obligation to Interbank.

91

WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against the petitioner. SO ORDERED. EN BANC G.R. No. L-13817 August 31, 1961

MACONDRAY AND COMPANY, INC., plaintiff-appellee, vs. PERFECTO PION, ET AL., defendants. RUPERTO K. KANGLEON, deceased, substituted by VALENTINA TAGLE-KANGLEON, ET AL., defendants-appellants. Jose Agbulos for plaintiff-appellee. San Juan, Africa and Benedicto for defendants-appellants. PADILLA, J.: On 11 May 1955 the plaintiff filed a complaint1 against the defendants in the Court of First Instance of Manila alleging that upon representation and undertaking made by Ruperto K. Kangleon, then a member of the Senate, in a letter addressed to the plaintiff dated 30 January 1954, that he would guarantee payment of his co-defendants' obligation, should they fail to pay on the due date (Exhibit F), on 2 and 9 February 1954, the plaintiff sold on credit and delivered to the defendants Perfecto Pion and Conrado Piring, known in the theater and entertainment business as "Tugak" and "Pugak", respectively and transacting business under a common name known as "All Stars Productions," 127 rolls of cinematographic films, F.G. release positive type 825B, 35 mm. x 1,000 ft., for the total sum of P6,985, payable on or before 9 May 1954, 12% interest thereon from date of maturity and 20% thereof for attorney's fee in case of suit for collection (Exhibits A, B, C, D, E; that the principal debtors have failed to pay the amount owed by them on the due date; that upon extensive investigations made by the plaintiff as to whether the principal debtors have any property, real or personal, which may be levied upon for the satisfaction of their obligation, it has found that they have none; that the defendant Kangleon could not point to the plaintiff any property of the principal debtors leviable for execution sufficient to satisfy the obligation; and that the sum of P6,985, the amount owed or part thereof, has not been paid by the defendants. It prayed that after hearing judgment be rendered ordering the defendants, jointly and severally, to pay it the sum of P6,985, 12% interest thereon from 10 May 1954 until fully paid, 20% of the amount due or P1,387 as attorney's fee, and costs, and that it be granted other just and equitable relief (civil No. 23947). On 10 November 1955 the defendant Kangleon answered the plaintiff's complaint setting up the defense that the letter he had written to the plaintiff dated 30 January 1954 (Exhibit F) was only to introduce his codefendants; that assuming that there was an intent on his part to guarantee payment of his co-defendants' obligation, the said letter (Exhibit F) was but an offer to act as guarantor of his co-defendants; that as the acceptance of his offer to act as guarantor for his co-defendants has not been actually made known to him by the plaintiff, the contract of guaranty between them has not been perfected; and that assuming that there has been a perfected contract of guaranty between the plaintiff and the answering defendant, the latter's obligation was extinguished by the extension for payment up to 3 May 1954 granted by the plaintiff to his codefendants. By way of counterclaim, he sought from the plaintiff the sum of P20,000 as damages suffered by his good name and reputation caused by the plaintiff's clearly unfounded civil action, P2,000 as attorney's fee and P1000 for expenses incurred in the litigation. As cross-claim, should he be finally adjudged liable to pay the plaintiff, he prayed that his co-defendants be ordered to reimburse him whatever amount he would pay to the plaintiff, and to pay him P3,000 as attorney's fee and expenses of litigation. He further prayed that he be absolved from the plaintiff's complaint and that he be granted other just and equitable relief. The defendants Pion and Piring did not answer the plaintiff's complaint or their co-defendants' cross-claim.

Credit Transactions Full Text Cases Atty. Adviento

On 10 November 1955 the plaintiff answered the defendants defendant's counterclaim. On 25 August 1956 the plaintiff and the answering de defendant entered into a stipulation of facts and submitted the case for judgment based upon the said stipulation. Not having answered the complaint against them despite notice, the Court declared the defendants Pion and Piring in default (p. 5, rec. on app.). At the trial of the case on 30 August 1956, the plaintiff and the answering defendant further stipulated that the former had looked for properties of his co-defendants Pion and Piring but found none (p. 23, rec. on app.). The plaintiff presented its evidence against the defendants in default. On 30 September 1957 the Court rendered judgment, the dispositive part of which is: WHEREFORE, judgment is hereby rendered sentencing the defendants Perfecto Pion and Conrado Piring to pay the plaintiff jointly and severally the sum of P6,985.00 plus interest at the rate of 12% per annum from May 9, 1954 until fully paid and an amount equivalent to 20% as attorney's fees and co of suit. If this judgment becomes unsatisfied by the defendants Perfecto Pion and Conrado Piring, the defendant Ruperto Kangleon is hereby sentenced to pay the plaintiff all the amounts to which his co-defendants were sentenced to pay. (p. 29, rec. on app.). The answering defendant has appealed. From the stipulation of facts entered into by and between the appellant and the appellee and the documentary evidence submitted by the appellee against the defendants in default, the following appear: On 30 January 1954 the defendants Piring and Pion requested the appellant, then a member of the Senate, to help them buy on credit from the appellee some cinematographic films. To accommodate them, the appellant wrote a letter to the appellee, as follows: REPUBLIC SENATE MANILA OF THE PHILIPPINES

92

time ending April, 1954 and for which by their guaranty I pledge payment. In view of the foregoing, I shall appreciate any help you can give to facilitate said purchases subject to usual business procedures. Sincerely, (Sgd.) RUPERTO Senator K. KANGLEON

(Exhibit F) which letter the defendants in default presented to the appellee. On the strength of the appellant's letter above quoted, on 2 and 9 February 1954, the appellee sold on credit and delivered to the defendants in default 127 rolls of cinematographic films, F.G. release positive type 825B, 35 mm. x 1,000 ft., for the total sum of P6,985, excluding sales tax, which is for the buyers' account, payable on or before 9 May 1954. The parties, among others, further stipulated that the buyers would pay interest at the rate of 1% per month on all amounts not paid when due; that should a litigation arise from non-payment, the venue of action would be the courts of Manila and that the buyers would pay 20% of the amount due for attorney's fee and costs of the suit (Exhibits A, B, C, D, E). The defendants in default failed to pay their obligation on the due date. On 27 May 1954 the appellee wrote to the appellant a letter of the following tenor: May 27 , 1954 Honorable Philippine Manila Dear Sir: On January 30th, last you requested us to give Messrs. Conrado Piring and Perfecto Pion of "All-Stars Productions", certain rolls of negative and positive films, the cost of which was payable in three months time and payment of which you guaranteed. These films were delivered and billed at P6,985.00 on Feb. 9th last. The amount has not been paid (and) we have difficulty locating the above gentlemen as they cannot be found in their offices. Ruperto K. Senate Kangleon

January 30, 1954 The Macondray China Manila Sir: This will introduce to you the bearers, Messrs. Conrado Piring and Perfecto Pion both well known theater characters under the names of "Pugak" and "Tugak", respectively. I have been made to understand by them in their representations to me that they wish to place an order for the following items: 10 rolls negative at P157.00 each, and 100 rolls positive at P55.00 each . of Dupont Release Positives Safety Basis for use of their firm called "All Stars Productions" under the management and control of Pugak and Tugak payable within three (3) months Manager Company Building

& Bank

In view of this we hereby request you to send us a check for the amount as it was due on May 3rd. Yours very truly, MACONDRAY & CO., s/ILLEGIBLE Collection Department INC.

On 31 May 1954, the appellant answered the appellee as follows: May 31, 1954 Macondray 3rd Floor, Manila Gentlemen: & China Co., Bank Inc. Bldg.

Credit Transactions Full Text Cases Atty. Adviento

This will acknowledge receipt of your letter of May 27th. Messrs. Conrado Piring and Perfecto Pion are being contacted to invite their attention to your letter. Notwithstanding the foregoing, I have been made to understand by Messrs. Piring and Pion that in arrangements with that Company an extension of time has been granted them; within which to settle their obligations. Cordially yours, (Sgd.) RUPERTO K. KANGLEON On 2 June 1954 the appellee replied to the appellant's answer to its letter thus: June 2, 1954 Hon. Philippine Manila Dear Sir: We have your letter of May 31st in reply to ours of the 7th and note that you are getting in touch with Messrs. Conrado Piring and Perfecto Pion with regard to their account. We know of no extension of time for payment being granted these people and certainly no one in authority has made such n arrangement. For this reason, if payment is not received from them by the 15th inst. We expect to receive a remittance from you to cover the full amount. Yours very truly, MACONDRAY & CO., s/ILLEGIBLE Collection Department INC. Ruperto K. Senate Kangleon (Sgd.) JOSE AGBULOS Attorney for Macondray & Co., Inc.

93

which was sent to them by registered mail (Exhibits G, G-1 & G-2). Neither the defendants in default nor the appellant has paid the amount owed to the appellee. During the time this appeal was pending in this Court the appellant died. His heirs or their legal representatives were directed to appear in substitution for the deceased appellant. Attorneys San Juan, Africa & Benedicto entered their appearance for said heirs, namely: Mrs. Valentina Tagle Kangleon, Benjamin T. Kangleon, Juanita T. Kangleon, Mrs. Flora San Gabriel, Miss Corazon Kangleon, Miss Lourdes Kangleon, Mrs. Teresita Limcolioc, Mrs. Aida Rosca, Jesus Kangleon, Jose Kangleon and Miss Cecilia Kangleon. The appellant contends that although in the stipulation of facts entered into by and between him and the appellee, he had admitted the liability of his co-defendants, who were declared in default, under the principle of res inter alios acta, that an admission by a third person can not bind another, his admission cannot bind the defendants in default and no judgment against them may be rendered on the basis of the stipulation of facts referred to. Since the appellee had not established a case against the defendants a default, the principal debtors, it cannot directly held able the appellant, the guarantor, whose obligation is only subsidiary to that of the former. The appellant proceeds from the wrong premise that the case was submitted to the Court solely on the stipulation of facts entered into by and between him and the appellee. The records show that when the case was called for trial on 30 August 1956, after the appellant's co-defendants had been declared in default, the appellee presented its evidence testimonial and documentary, against them (pp. 5-18, t.s.n.; Exhibits A, B, C, D, E, F, G, G-1 & G-2), and thereby established their primary liability. The appellant claims that the letter (Exhibit F) is mere a letter of introduction and does not constitute an offer of guaranty. A cursory reading of the letter (Exhibit F) belies his assertion. While in his opening sentence he says at that "This will introduce to you the bearers, Messrs. Conrado Piring and Perfecto Pion, . . ." who "wish to place an order for" cinematographic films, yet in the later part he says that "for which by their guaranty I pledge payment." This can only mean that he undertakes to guarantee payment of the principal debtors' obligation should they fail to pay. The appellant is a responsible man and may be presumed to mean what he says. At that time, he was occupying the exalted position of member of the Senate and his plighted word given to another would immediately be accepted. It is not, therefore, odd that upon receipt of the appellant's letter (Exhibit F), the appellee readily sold on credit to the principal debtors, the defendants in default, the cinematographic films in question. That the appellant really meant to guarantee payment of the principal debtors' obligation should they default, is patent in his answer to the appellee's letter dated 27 May 1954, reminding him that on 30 January he requested it "to give Messrs. Conrado Piring and Perfecto Pion of 'AllStars Productions', certain rolls of negative and positive films, the cost of which was payable in three months time and payment of which you guaranteed"; that the "films were delivered and billed at P6,985.00 on Feb. 9th last"; and that "the amount has not been paid (and) we have difficulty locating the above gentlemen as they cannot be found in their offices," and requesting the appellant to send a check for the amount. In his answer to the foregoing letter, dated 31 May 1954, he acknowledged receipt of the appellee's letter of the 27th of the same month and informed it that the principal debtors were "being contacted to invite their attention to your letter." Had the appellant meant otherwise, he would have immediately denied that he ever guaranteed payment of the principal debtors obligation. This he did not do. The appellant's very letter (Exhibit F) constitutes his undertaking of guaranty. "Contracts shall be obligatory in whatever form they may have

On 19 July 1954 the appellee wrote the following letter to the defendants in default: July 19, 1954 Mr. Pureza Sta Mesa, Manila Conrado Piring Extension

Mr. Perfecto Pureza Sta. Mesa, Manila Gentlemen:

Pion Extension

Please be advised that Macondray & Co., Inc. has turned over to me for corresponding judicial action your account for films in the amount of P6,985.00. As this obligation is now long past due, payment thereof is earnestly requested. Unless payment thereof is received from you immediately, I shall be compelled, much to my regret, to take this matter to the court. Very truly yours,

Credit Transactions Full Text Cases Atty. Adviento

been entered into, provided all the essential requisites for their validity are present."2 A contract of guaranty is not a formal contract and shall be valid in whatever form it may be, provided that it complies with the statute of frauds. The appellant insists that he should have been notified by the appellee of the acceptance of his offer of guaranty. In the first place, his letter (Exhibit F) already constitutes his undertaking of guaranty. In the second place, the contract entered into by and between the appellee and the defendants in default is the principal contract and the appellee is subsidiary to the principal contract. Since the principal contract had already been perfected, the subsidiary contract of guaranty became binding upon effectivity of the principal contract. Hence no notice of acceptance by the appellee to the appellant is necessary for its validity. The appellant states that assuming that the letter Exhibit F constitutes a contract of guaranty, the films actually sold to the principal debtors were 127 rolls of F.G. release positive type 825 B 35 mm. x 1,000 ft. at P55 a roll, payable 9 May 1954, while what he undertook to guarantee payment was 10 rolls negative at 157 each and 100 rolls positive at 55 each, payable within three months ending April, 1954. Citing article 2055 of the Civil Code that a guaranty cannot extend to more than what is stipulated therein, the appellant contends that he cannot be held liable for the contract in view of the variation in his undertaking. The total cost of what was actually sold to and bought by the principal debtors is P6,985, which is less than the total cost of what was originally intended to be bought by them amounting to P7,070. The variation was merely in kind and not in subject matter cinematographic films which did not render the appellant's obligation more burdensome. Instead his obligation was rendered less onerous by the reduction in the original price of P7,070 to P6,985. The fact that in the letter Exhibit F, the appellant mentioned that the principal debtors' obligation would be "payable within three months time ending April, 1954," while in the contract entered into by and between the appellee and the principal debtors they have stipulated that their obligation would be payable on or before 9 May 1954, is of no moment. The letter Exhibit F was dated 30 January 1954. Counted from that date, the three months period would expire on April 1954. However, actually the principal contract was consummated on 9 February 1954 (Exhibit A). It is but fair that the three month period be counted from that date ending 9 May 1954. Again, the appellants obligation has not become more onerous than what he actually bound himself. The judgment appealed from is affirmed against the heirs of the deceased appellant herein above named, with costs against them. Bengzon, C.J., Labrador, Reyes, J.B.L., Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur. Conception, J., took no part. EN BANC G.R. No. L-42518 August 29, 1936 plaintiff-appellee,

94

To sign for me as guarantor for himself in his indebtedness to Wise & Company of Manila, which indebtedness appears in civil case No. 41129, of the Court of First Instance of Manila, and to mortgage my lot (No. 517-F of the subdivision plan Psd-20, being a portion of lot No. 517 of the cadastral survey of Angeles, G. L. R. O. Cad. Rec. No. 124), to guarantee the said obligations to the Wise & Company, Inc., of Manila. On the 18th of said month David subscribed and on the 23d thereof, filed in court, the following document (Exhibit B): COMPROMISE Come now the parties, plaintiff by the undersigned attorneys and defendants in his own behalf and respectfully state: I. That the defendant confesses judgment for the sum of six hundred forty pesos (P640), payable at the rate of eighty pesos (P80) per month, the first payment to be made on February 15, 1932 and successively thereafter until the full amount is paid; the plaintiff accepts this stipulation. II. That as security for the payment of said sum of P640, defendant binds in favor of, and pledges to the plaintiff, the following real properties: 1. House of light materials described under tax declaration No. 9650 of the municipality of Angeles, Province of Pampanga, assessed at P320. 2. Accesoria apartments with a ground floor of 180 sq. m. with the first story of cement and galvanized of iron roofing located on the lot belonging to Mariano Tablante Geronimo, said accesoria is described under tax declaration No. 11164 of the municipality of Angeles, Province of Pampanga, assessed at P800. 3. Parcel of land described under Transfer Certificate of Title No. 2307 of the Province of Pampanga recorded in the name of Dionisio Tanglao of which defendant herein holds a special power of attorney to pledge the same in favor of Wise & Co., Inc., as a guarantee for the payment of the claim against him in the above entitled cause. The said parcel of land is bounded as follows: NE. lot No. 517 "Part" de Narciso Garcia; SE. Calle Rizal; SW. lot No. 517 "Part" de Bernardino Tiongco; NW. lot No. 508 de Clemente Dayrit; containing 431 sq. m. and described in tax declaration No. 11977 of the municipality of Angeles, Pampanga, assessed at P423. That this guaranty is attached to the properties above mentioned as first lien and for this reason the parties agree to register this compromise with the Register of Deeds of Pampanga, said lien to be cancelled only on the payment of the full amount of the judgment in this case. Wherefore, the parties pray that the above compromise be admitted and that an order issue requiring the register of Deeds of Pampanga to register this compromise previous to the filing of the legal fees. David paid the sum of P343.47 to Wise & Co., on account of the P640 which he bound himself to pay under Exhibit B, leaving an unpaid balance of P296.53.

WISE & CO., INC., vs. DIONISIO P. TANGLAO, defendant-appellant. The appellant in Franco and Reinoso for appellee. AVANCEA, C. J.: his

own

behalf.

In the Court of First Instance of Manila, Wise & Co. instituted civil case No. 41129 against Cornelio C. David for the recovery of a certain sum of money David was an agent of Wise & Co. and the amount claimed from him was the result of a liquidation of accounts showing that he was indebted in said amount. In said case Wise & Co. asked and obtained a preliminary attachment of David's property. To avoid the execution of said attachment, David succeeded in having his Attorney Tanglao execute on January 16, 1932, a power of attorney (Exhibit A) in his favor, with the following clause:

Credit Transactions Full Text Cases Atty. Adviento

Wise & Co. now institutes this case against Tanglao for the recovery of said balance of P296.53. There is no doubt that under Exhibit, A, Tanglao empowered David, in his name, to enter into a contract of suretyship and a contract of mortgage of the property described in the document, with Wise & Co. However, David used said power of attorney only to mortgage the property and did not enter into contract of suretyship. Nothing is stated in Exhibit B to the effect that Tanglao became David's surety for the payment of the sum in question. Neither is this inferable from any of the clauses thereof, and even if this inference might be made, it would be insufficient to create an obligation of suretyship which, under the law, must be express and cannot be presumed. It appears from the foregoing that defendant, Tanglao could not have contracted any personal responsibility for the payment of the sum of P640. The only obligation which Exhibit B, in connection with Exhibit A, has created on the part of Tanglao, is that resulting from the mortgage of a property belonging to him to secure the payment of said P640. However, a foreclosure suit is not instituted in this case against Tanglao, but a purely personal action for the recovery of the amount still owed by David. At any rate, even granting that defendant Tanglao may be considered as a surety under Exhibit B, the action does not yet lie against him on the ground that all the legal remedies against the debtor have not previously been exhausted (art. 1830 of the Civil Code, and decision of the Supreme Court of Spain of March 2, 1891). The plaintiff has in its favor a judgment against debtor David for the payment of debt. It does not appear that the execution of this judgment has been asked for and Exhibit B, on the other hand, shows that David has two pieces of property the value of which is in excess of the balance of the debt the payment of which is sought of Tanglao in his alleged capacity as surety. For the foregoing considerations, the appealed judgment is reversed and the defendant is absolved from the complaint, with the costs to the plaintiff. So ordered. Villa-Real, Abad Santos, Imperial, Diaz, Recto, and Laurel, JJ., concur. EN BANC G.R. No. 42490 September 9, 1937

95

date of the execution of the deed the amount of P21, and the balance of P105 at one time only a month thereafter. The year following, or on July 10, 1926, Eugenio Solon died, leaving no will, and two years, eight months and eight days later, or on March 18, 1929, the register of deeds of Cebu, upon compliance with the formalities of law, issued transfer certificate of title No. 8379 in the name of Apolonia Solon. The latter took charge of the property occupying it as her own through tenants from the time she bought the same, according to the evidence for the defendants, and from the death of Eugenio Solon, according to the evidence for the defendants, and from the death of Eugenio Solon, according to that for the plaintiffs. Plaintiffs surnamed Solon, all of whom are children of the deceased Eugenio, Solon in his marriage with his widow Manuela Ibaez, joining with the latter in maintaining that Exhibit B is false and simulated and that if the same had been executed by Eugenio Solon, it was without just consideration, commenced this suit praying (1) that said document be declared null and void because false and simulated, (2) that they be adjudged the absolute owners pro indiviso of the land in question together with the other heir of Eugenio Solon, (3) that defendants Apolonia Solon, Zoilo Solon, Roberta Solon and the latter's husband Andres Montalban, be sentenced to pay jointly and severally, to the plaintiffs the value of the fruits of the land in question from the death of Eugenio Solon, and (4) that said defendants be sentenced to pay, also jointly and severally to the plaintiffs the sum of P30,000 as damages, besides the costs of the suit. Defendants, by way of defense, filed an answer containing a general denial and the special defense of prescription based on the exercising their right of action. After trial the lower court rendered judgment dismissing plaintiffs' complaint, without any pronouncement as to costs, and declaring valid in effect the transfer made by Eugenio Solon in favor of Apolonia Solon appealed to this court after their motion for new trial on the ground that the judgment was contrary to law and not sufficiently supported by the evidence was denied. In support of their appeal appellants assigned eight errors as committed by the lower court which may be summed up as follows: (1) In giving no credit to the witnesses for the plaintiffs and in making no mention of the falsehoods committed by the witnesses for the appellees in their testimony; (2) in failing to consider the real value of the land in question by reason of its location and value in 1925 when the alleged transfer took place; (3) in failing to take into account the conclusion at which it had arrived during trial, that the land in question, being located near the Osmea bridge, was worth P0.25 per square meter in 1925, and declaring afterwards in its decision that it is worthless than P0.01 per square meter; (4) in not declaring that Eugenio Solon, like other owners of lands adjacent to his, knew of the plan to construct the provincial capitol on lot No. 850 adjoining lot No. 903 in question; (5) in holding that appellants weakened their side of the case when, after contending that the document Exhibit B is false and simulated they conceded that although the same may have been executed, it must, at all events, be declared void by reason of the disproportion between the price paid for the land and its true value at the time; (6) in failing to take into account the various facts and circumstances showing that the transaction which took place according to Exhibit B, is fraudulent and false, in view of the fact that the supposed grantor under said deed was an illiterate, 88 years of age and was furthermore the father of Apolonia Solon, and also of the fact that the whole transaction was carried out without the knowledge of his wife and other children; (7) in not holding that Exhibit B is fraudulent and false and that Eugenio Solon, who was 88 years old, ignorant and illiterate was induced to sign it; and finally (8) in not holding null and void the deed in question and in not finding that the land to which the same refers belongs to all the heirs of the deceased Eugenio Solon. 1. It is fact clearly shown by the evidence for the defendants, which appears to us to have more weight than that for the plaintiffs notwithstanding the latter's efforts to show the contrary, that the transfer of the land in question made by Eugenio Solon to Apolonia Solon, according to Exhibit B, had taken place long before the commencement of the suit of MaCleod and Co., against Andres Montalban, husband of Roberta Solon, as principal, and Eugenio Solon, as surely of said Montalban. It cannot, therefore, be believed, and the lower court did well in refusing to believe, that Andres Montalban had been making statements to the effect that Apolonia Solon had paid nothing for the reason that the same was not real

VALERIANO SOLON, NATIVIDAD SOLON and MANUEL IBAEZ, plaintiff-appellants, vs. APOLONIA SOLON, ZOILO SOLON, ROBERTA SOLON, FELISA SUICO (minor), and THE DIRECTOR OF LANDS, defendants-appellees. Jose Delgado and Vickers, Ohnick, Opisso and Velilla for appellants. Cuenco and Cuenco for appellees. DIAZ, J.: In his lifetime Eugenio Solon, father of the parties surnamed Solon, grandfather of defendant Felisa Suico, and husband of the plaintiff Manuela Ibaez in second marriage contract on May 23, 1899, bought, on installments, from the Bureau of Lands the parcel of land described as "Lot No. 903 of the Banilad Friar Lands Estate" in transfer certificate of title No. 8379 of the registry of Cebu, situated in the barrio of Cogon, municipality of Cebu, Cebu Province having an area of 6 hectares, 46 ares and 13 centares, and assessed by said bureau at P403. The sale took place on December 12, 1919, and the time stipulated for the complete payment of its price was thirteen years, the first annual installment being P31, and the subsequent twelve installments to be paid every year being P21 each. On July 30, 1925, with the amount of P126 as part of the agreed purchase price still unpaid Eugenio Solon, after securing the consent and approval of the Bureau of Lands, sold and conveyed for the sum of P1,00 all his rights, title and interest in the land acquired by him executing for that purpose in favor of Apolonia Solon who agreed to pay the installments still owing to the Bureau of Lands, the deed of transfer appearing in the record as Exhibit B. Apolonia Solon paid to the Bureau of Lands on the same

Credit Transactions Full Text Cases Atty. Adviento

but only simulated and that it was made solely for the sole purpose of placing the land in question beyond the reach of any action that might be brought by Macleod and Company against said Eugenio Solon; and Apolonia Solon had been telling her tenant named Eugenio Labra that there had been an understanding among her brothers of the whole blood that they would cede the said land to her as part of her inheritance from their father, because, in the first place there was an action against Eugenio Solon for the collection of an amount himself to pay; and, in the second place, Apolonia Solon could not have made the above statement attributed to her for the simple reason that she was then already the owner of the land aforesaid by virtue of the purchase appearing in Exhibit B. When Eugenio Solon bound himself as surely for Andres Montalban for the payment to Macleod and Company of the amount of P5,000 which Montalban owed to the latter, he limited himself to giving as security, by way of mortgage, the land, and no other, belonging to him and described as lot No. 892 of the Banilad Friar Lands Estate in case No. 5988 of the Court of Land Registration and in transfer certificate of title No. 2499 of the registry of property of the Province of Cebu. It is not possible that Macleod and Company could have ever contemplated bringing an action against Eugenio Solon to obtain possession not only of the land expressly mortgaged to it, which, as has been said, is lot No. 892 described in the certificate of title above-mentioned, which is distinct from lot No. 903, but also of any other land belonging to him or of lot No. 903 itself, for the purpose of collecting its credit against Andres Montalban, because it would not have failed to know, better than any one else, that the contract of suretyship in its favor does not admit of the interpretation that it could make Eugenio Solon liable for an amount greater than P5,000 and that it could require him to pay Montalban's indebtedness, should the latter fail to do so, with lands other than that he had mortgaged. This is so because the clauses of a contract of suretyship determine the extent of the liability of the surely (Government of the Philippine Islands vs. Herrero, 38 Phil., 410); because said liability should not be extended farther than the clear terms of the contract of guarantee by mere implication; and because the surety should be liable only in the manner and to the extent, and under the circumstances pointed out in the contract of suretyship or which may be clearly deduced therefrom (La Insular vs. Machuca Go-Tauco and Nubla Co-Siong 39 Phil., 567). 2. Plaintiffs believe having proved that the value of the land in question in 1925 was P0.25 per square meter. The evidence upon which they rely was the testimony of the engineer, surveyor and real estate broker Thomas F. Breslin, who affirmed that a parcel adjacent to the one under discussion had been sold to a lady named Consolacion Albade Rodriguez in that year at P0.25 per square meter. it should be noted that, upon crossexamination said witness had to admit that all he knew concerning the transaction had been obtained from said lady. Although the lower spite of a timely motion by defendants to that effect, inasmuch as it limited itself to saying: "It will be taken into consideration," the truth is that when it decided the case dismissing plaintiffs' complaint, it completely disregarded said evidence which is tantamount to having ordered its exclusion on account of its incompentency. The sales made in 1926 and 1927 of lots Nos. 900 and 1009-A by Jose Vao to Soledad, Salud and Mercedes Espina, and by Maria Solon to Zenon Diaz, respectively, at the rate of P0.20 and P0.24 per square meter, according to Exhibits BB and X, and the sale made by Viscal S. Duterte to the spouses Severino Rodriguez and Consolacion Alba, of lot No. 1009-B, in October, 1925, at P0.25 per square meter, according to Exhibit Y, do not necessarily prove that the land in question was worth that mush on the date of its sale. It must be remembered that this had taken place three months before the sale of the land referred to in Exhibit Y, and one and two years before those set forth in Exhibits BB and Y, respectively. Those who acquired said lands, according to their own testimony, desired to speculate because they had heard that the capitol of Cebu would be erected nearby. It is, nevertheless, a fact that since then until the date of the decision appealed from in the words of the lower court the capitol had not been erected, nor had any road been opened through said parcels, nor had the rumors that the capitol would be construed sooner or later in the vicinity had any appearance of truth. However, although there may have been a proposal to erect the capitol thereon, the evidence does not show that Eugenio Solon had never had acknowledge of that fact. Furthermore, knowing that he had paid for the land only P270.70, it is only reasonable to suppose that he was more than satisfied when he received an offer of P1,000 therefor and was paid that amount which is, no doubt, almost three times that which he had invested, not at one time, of course,

96

but in six years. On the other hand, the person to whom he transferred the land was no other than his own daugther. For these reasons, we believe and so hold that the second error is without merit. 3. There is nothing in the record which proves that the court found that the value of the land in dispute in 1925 was P0.25 per square meter. All that the lower court said during the trial, and it appears only incidentally, in ruling on the objection to a question made for the purpose of finding out the amount at which the land would quote per square meter in case the capitol were construed on parcel No. 850 which is a adjacent to the parcel in question, was the following: That is extremely remote. I believe that the best proof is that of P0.25 per square meter, in 1925. I believe that that is the real value, and it depends upon whether or not a street will be opened and on whether or not a capitol will be constructed, and if it be depression time, as it is now, it can not possibly sell at P2, so that it is all too problematical. And it should be added that the lower court said this before hearing the other evidence of plaintiffs and before having any idea of what the evidence of defendants would be. It surely corrected the same thereafter in the manner set forth in the decision appealed from. We hold that the third error is likewise not well taken. 4. The fourth error is imaginary. As has been said, there is no evidence of record to show that Eugenio Solon had any knowledge of the plan to construct the capitol of Cebu near the land in dispute upon selling the same to Apolonia Solon. The argument of plaintiffs that it must be presumed that every land owner has knowledge of all the improvements which are to be made in properties near his own, does not prove anything because it does nowhere appears as a fact that the capitol of Cebu was to be constructed sooner or later in the immediate vicinity of the land in question. But even supposing that Eugenio Solon had guessed that there would be such a plan, this does not imply that the transfer he made to Apolonia Solon was void because the owner has the right to sell what belongs to him to whomever he chooses and for whatever price satisfactory to him. 5. And it is no error for the lower court to have considered that the cause of the plaintiffs was weakened on account of the fact that they maintain two propositions which are, in reality, incompatible with each other. That the documentary of transfer Exhibit B was false and simulated, and that it must simply be declared void for the reason that the price paid therefor is disproportionate to its value in 1925 are two irreconcilable things. If the latter were true, then it would be useless to insist that the said document is false or simulated. But the truth is that there is no disproportion between the price paid for it and its real value in 1925. The Bureau of Lands itself sold, on July 28, 1924, lot No. 887 of the same Banilad Friar Lands Estate, located near the land in question and having an area of 3 hectares, 43 ares, 62 centares for the small sum of P190 of less than 6/10 centavo per square meter. (Exhibit II-A.) There is no occasion to repeat here the same reasons for the statement that there is no evidence of record in support of the conclusion that there was a proposal on the part of the Province of Cebu to construct its capitol on lot No. 850. If there was any disproportion between the price paid and real value of the land, it was not to the prejudice of Eugenio Solon because he was paid much more than he really paid therefor to the Bureau of Lands nor withstanding that he had not made any improvements thereon or completed the payment he had agreed to make to said office. 6. The sixth error attributed by appellants to the lower court has been practically shown not to exist for the reasons given in discussing the first five error. In addition thereto, it may be said transfer did not take place. On the other hand, defendants proved that it did take place by means of Exhibit B which, it may be truthfully said, was executed was all the formalities law before a notary public and in the presence of an official of the Bureau of Lands in the very office of the latter in Talisay, Cebu, and in that of another witness, and by means of the approval of said transfer by the Directors of Lands. They further proved through one of the instrumental witness to said document and through Apolonia Solon herself that the price appearing in said document Exhibit B was paid to Eugenio Solon; and that the latter had tried to sell the land before that date to other P750. All the foregoing, together with the fact that the last annual payments which Eugenio Solon should made to the Bureau of Lands were

Credit Transactions Full Text Cases Atty. Adviento

effected by Apolonia Solon and that said defendant took possession of the land immediately after the execution of Exhibit B conclusively show that said document was neither fraudulent nor false. And it is not true that Eugenio Solon was then 8 years old and, therefore, could be easily imposed upon by reason of his mental and physical weakness because the best evidence appearing of record with respect to his age, Exhibit F, shows that he was only 66 years, 2 months and 7 days at the time of the transfer. 7 and 8. The seventh and eight errors need no further discussion. The reasons above given clearly show that they do not exist. The inescapable conclusion, therefore, is that the appeal taken by plaintiffs is unfounded and without merit for the reason that the judgment appealed from is in accordance with law and supported by the evidence. In view of the foregoing, the judgment appealed from is affirmed with the costs of the appeal against the plaintiffs and appellanEN BANC G.R. No. L-15808 April 23, 1963

97

Appellants' eighteen assignments of error may be reduced to a single proposition: Whether or not upon denial of a defendants' motion to dismiss the reglementary period within which to file an answer resumes running even though the motion for a bill of particulars of the same defendants is still pending and unresolved. Both a motion to dismiss and a motion for a bill of particulars interrupt the time to file a responsive pleading. In the case of a motion to dismiss, the period starts running against as soon as the movant receives a copy of the order of denial.1 In the case of a motion for a bill of particulars, the suspended period shall continue to run upon service on the movant of the bill of particulars, if the motion is granted, or of the notice of its denial, but in any event he shall have not less than five days within which to file his responsive pleading.2 When appellants filed a motion to dismiss they requested that resolution of their previous motion for a bill of particulars be held in abeyance. This was but practical because if the court had granted the motion to dismiss, there would have been no need for a bill of particulars. Resolution of the motion for the purpose was necessary only in the event that court should deny, as it did, the motion to dismiss, in which case the period to file an answer remained suspended until the motion for a bill of particulars is denied or, if it is granted, until the bill is served on the moving party. Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1wph1.t The lower court deemed appellants to have "tacitly waived their right to push through the hearing of the motion for bill of particulars," because of their failure to set it for hearing or to ask the clerk of court to calendar it after denial of the motion to dismiss. Appellants did set the motion for hearing on December 8, 1956, although it was not heard on that day because it arrived in court only on December 12. Thereafter they did not have to reset it, as the clerk of court scheduled it for hearing on December 22, 1956. And on that day the court issued an order that "the consideration of the motion to dismiss, as well as the bill of particulars, is hereby postponed to December 29, 1956." As to whether or not both motions were actually heard on December 29, does not appear of record. But heard or not, the motions should be considered submitted, and it was the clear duty of the court to resolve the motion for a bill of particulars, as it did the motion to dismiss. No action having been taken thereon until the present, the period to answer has not yet expired. The lower court, therefore, erred in declaring appellants in defaults and in taking all the subsequent actions it did in the case. The order of default issued and the decision rendered by the trial court are set aside and the case is remanded for further proceedings, pursuant to the Rules. Costs against plaintiffs-appellees. Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and Regala, JJ., concur. ts. So ordered. SECOND DIVISION G.R. No. 130886 : January 29, 2004 COMMONWEALTH INSURANCE CORPORATION,, Petitioner, v. COURT OF APPEALS and RIZAL COMMERCIAL BANKING CORPORATION, Respondents. DECISION AUSTRIA-MARTINEZ, J.: Before us is a petition for review on certiorari assailing the Decision[1] of the Court of Appeals (CA), promulgated on May 16, 1997 in CA-G.R. CV No. 44473[2], which modified the decision dated March 5, 1993 of the

FAUSTA AGCANAS, JUAN MIGUEL, JUANITA MIGUEL, assisted by her husband ULPIANO PASION, assisted by her husband JUAN PASCUAL, plaintiffs-appellees, vs. BRUNO MERCADO and ANTONIO DASALLA, defendants-appellants. Melanio T. Singson for plaintiffs-appellees. Adriano D. Dasalla and Antonio F. Dasalla for defendants-appellants. MAKALINTAL, J.: Appeal by defendants from the Court of First Instance of Isabela on a question of law. On November 25, 1956 plaintiffs filed this action to recover portions of a parcel of land in Isabela, and damages. Under date of December 4, 1956 defendants filed a motion for a bill of particulars, with notice of hearing on December 8, but since the motion was actually received in court only on December 12 the court set it for hearing on December 22. On December 17, however, defendants filed a motion to dismiss the complaint, with a prayer that consideration of their motion for a bill of particulars be held in abeyance pending resolution of their motion to dismiss. On December 22, 1956, the date set by the court for the hearing of the motion for a bill of particulars and by defendants for the hearing of their motion to dismiss, the court issued an order postponing "consideration" of both motions to December 29. On March 7, 1957 the court denied the motion to dismiss and ordered defendants "to answer the complaint within the reglementary period provided for by the Rules of Court." Hearing of the case on the merits was set for October 29, 1957, notice of which was duly received by defendants. Defendants not having filed their answer, plaintiffs, on October 17, 1957, moved to have them declared in default. On the same day the court issued the order of default together with another order commissioning the clerk of court to receive plaintiff's evidence. On October 21, 1957 defendants moved to cancel the hearing scheduled for October 29, on two grounds one of which was that their motion for a bill of particulars had not yet been resolved. The motion to cancel was set for hearing on October 26, 1957. When defendants arrived in court on that day they learned that an order of default had been issued, so they immediately filed a motion asking that the same be set aside that their pending motion for a bill of particulars be resolved and that they be given a reasonable period thereafter within which to file their answer to the complaint. On December 13, 1957 the court denied the motion and rendered its decision in favor of plaintiffs and against defendants. On January 4, 1958 it denied defendants' motion for reconsideration of the order of denial. On January 24, defendants filed their record on appeal (to this Court from the order of December 13, 1957), but as they subsequently filed a petition for relief from the judgment by default, they asked that consideration and approval of their record on appeal be held in abeyance until said petition had been resolved. The request was granted. Defendant's petition for relief, which was filed on January 28, 1958, was denied on March 21, as was also, on September 20, 1958 their motion for reconsideration of the order of denial. On October 4, 1958 the court denied likewise their motion for a writ of preliminary injunction to restrain execution of the judgment by default. Hence, this appeal.

Credit Transactions Full Text Cases Atty. Adviento

Regional Trial Court of Makati (Branch 64); and the Resolution[3] dated September 25, 1997, denying petitioners motion for reconsideration. The facts of the case as summarized by the Court of Appeals are as follows: In 1984, plaintiff-appellant Rizal Commercial Banking Corporation (RCBC) granted two export loan lines, one, for P2,500,000.00 to Jigs Manufacturing Corporation (JIGS) and, the other, for P1,000,000.00 to Elba Industries, Inc. (ELBA). JIGS and ELBA which are sister corporations both drew from their respective credit lines, the former in the amount of P2,499,992.00 and the latter for P998,033.37 plus P478,985.05 from the case-to-case basis and trust receipts. These loans were evidenced by promissory notes (Exhibits A to L, inclusive JIGS; Exhibits V to BB, inclusive ELBA) and secured by surety bonds (Exhibits M to Q inclusive JIGS; Exhibits CC to FF, inclusive ELBA) executed by defendant-appellee Commonwealth Insurance Company (CIC). Specifically, the surety bonds issued by appellee CIC in favor of appellant RCBC to secure the obligations of JIGS totaled P2,894,128.00 while that securing ELBAs obligation was P1,570,000.00. Hence, the total face value of the surety bonds issued by appellee CIC was P4,464,128.00. JIGS and ELBA defaulted in the payment of their respective loans. On October 30, 1984, appellant RCBC made a written demand (Exhibit N) on appellee CIC to pay JIGs account to the full extend (sic) of the suretyship. A similar demand (Exhibit O) was made on December 17, 1984 for appellee CIC to pay ELBAs account to the full extend (sic) of the suretyship. In response to those demands, appellee CIC made several payments from February 25, 1985 to February 10, 1988 in the total amount of P2,000,000.00. There having been a substantial balance unpaid, appellant RCBC made a final demand for payment (Exhibit P) on July 7, 1988 upon appellee CIC but the latter ignored it. Thus, appellant RCBC filed the Complaint for a Sum of Money on September 19, 1988 against appellee CIC.[4] The trial court rendered a decision dated March 5, 1993, the dispositive portion of which reads as follows: WHEREFORE, premises considered, in the light of the above facts, arguments, discussion, and more important, the law and jurisprudence, the Court finds the defendants Commonwealth Insurance Co. and defaulted third party defendants Jigs Manufacturing Corporation, Elba Industries and Iluminada de Guzman solidarily liable to pay herein plaintiff Rizal Commercial Banking Corporation the sum of Two Million Four Hundred Sixty-Four Thousand One Hundred Twenty-Eight Pesos (P2,464,128.00), to pay the plaintiff attorneys fees of P10,000.00 and to pay the costs of suit. IT IS SO ORDERED.[5] Not satisfied with the trial courts decision, RCBC filed a motion for reconsideration praying that in addition to the principal sum of P2,464,128.00, defendant CIC be held liable to pay interests thereon from date of demand at the rate of 12% per annum until the same is fully paid. However, the trial court denied the motion. RCBC then appealed to the Court of Appeals. On May 16, 1997, the CA rendered the herein assailed decision, ruling thus: ... Being solidarily bound, a suretys obligation is primary so that according to Art. 1216 of the Civil Code, he can be sued alone for the entire obligation. However, one very important characteristic of this contract is the fact that a suretys liability shall be limited to the amount of the bond (Sec. 176, Insurance Code). This does not mean however that even if he defaults in the performance of his obligation, the extend (sic) of his liability remains to be the amount of the bond. If he pays his obligation at maturity upon demand, then, he cannot be made to pay more than the amount of the

98

bond. But if he fails or refuses without justifiable cause to pay his obligation upon a valid demand so that he is in mora solvendi (Art. 1169, CC), then he must pay damages or interest in consequence thereof according to Art. 1170. Even if this interest is in excess of the amount of the bond, the defaulting surety is liable according to settled jurisprudence. ... Appellant RCBC contends that when appellee CIC failed to pay the obligation upon extrajudicial demand, it incurred in delay in consequence of which it became liable to pay legal interest. The obligation to pay such interest does not arise from the contract of suretyship but from law as a result of delay or mora. Such an interest is not, therefore, covered by the limitation of appellees liability expressed in the contract. Appellee CIC refutes this argument stating that since the surety bonds expressly state that its liability shall in no case exceed the amount stated therein, then that stipulation controls. Therefore, it cannot be made to assume an obligation more than what it secured to pay. The contention of appellant RCBC is correct because it is supported by Arts. 1169 and 1170 of the Civil Code and the case of Asia Surety & Insurance Co., Inc. and Manila Surety & Fidelity Co. supra. On the other hand, the position of appellee CIC which upholds the appealed decision is untenable. The best way to show the untenability of this argument is to give this hypothetical case situation: Surety issued a bond for P1 million to secure a Debtors obligation of P1 million to Creditor. Debtor defaults and Creditor demands payment from Surety. If the theory of appellee and the lower court is correct, then the Surety may just as well not pay and use the P1 million in the meantime. It can choose to pay only after several years after all, his liability can never exceed P1 million. That would be absurd and the law could not have intended it.[6] (Emphasis supplied) and disposed of the case as follows: WHEREFORE, the appealed Decision is MODIFIED in the manner following: The appellee Commonwealth Insurance Company shall pay the appellant Rizal Commercial Banking Corporation: 1. On the account of JIGS, P2,894,128.00 ONLY with 12% legal interest per annum from October 30, 1984 minus payments made by the latter to the former after that date; and on the account of ELBA, P1,570,000.00 ONLY with 12% legal interest per annum from December 17, 1984 minus payments made by the latter to the former after that day; respecting in both accounts the applications of payment made by appellant RCBC on appellee CICs payments; 2. Defendant-appellee Commonwealth Insurance Company shall pay plaintiff-appellant RIZAL COMMERCIAL BANKING CORP. and (sic) attorneys fee of P10,000.00 and cost of this suit; 3. The third-party defendants JIGS MANUFACTURING CORPORATION, ELBA INDUSTRIES and ILUMINADA N. DE GUZMAN shall respectively indemnify COMMONWEALTH INSURANCE CORPORATION for whatever it had paid and shall pay to RIZAL COMMERCIAL BANKING CORPORATION of their respective individual obligations pursuant to this decision. SO ORDERED.[7] CIC filed a motion for reconsideration but the CA denied the same. Hence, herein petition by CIC raising a single assignment of error, to wit: Respondent Court of Appeals grievously erred in ordering petitioner to pay respondent RCBC the amount of the surety bonds plus legal interest of 12% per annum minus payments made by the petitioner.[8]

Credit Transactions Full Text Cases Atty. Adviento

The sole issue is whether or not petitioner should be held liable to pay legal interest over and above its principal obligation under the surety bonds issued by it. Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was made on the condition that its liability shall in no case exceed the amount of the said bonds. We are not persuaded. Petitioners argument is misplaced. Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co.[9] and reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc.[10], and more recently, in Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc.[11], we have sustained the principle that if a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection.[12] Petitioners liability under the suretyship contract is different from its liability under the law. There is no question that as a surety, petitioner should not be made to pay more than its assumed obligation under the surety bonds. [13] However, it is clear from the above-cited jurisprudence that petitioners liability for the payment of interest is not by reason of the suretyship agreement itself but because of the delay in the payment of its obligation under the said agreement. Petitioner admits having incurred in delay. Nonetheless, it insists that mere delay does not warrant the payment of interest. Citing Section 244 of the Insurance Code,[14] petitioner submits that under the said provision of law, interest shall accrue only when the delay or refusal to pay is unreasonable; that the delay in the payment of its obligation is not unreasonable because such delay was brought about by negotiations being made with RCBC for the amicable settlement of the case. We are not convinced. It is not disputed that out of the principal sum of P4,464,128.00 petitioner was only able to pay P2,000,000.00. Letters demanding the payment of the respective obligations of JIGS and ELBA were initially sent by RCBC to petitioner on October 30, 1984[15] and December 17, 1984.[16] Petitioner made payments on an installment basis spanning a period of almost three years, i.e., from February 25, 1985 until February 10, 1988. On July 7, 1988, or after a period of almost five months from its last payment, RCBC, thru its legal counsel, sent a final letter of demand asking petitioner to pay the remaining balance of its obligation including interest. [17] Petitioner failed to pay. As of the date of the filing of the complaint on September 19, 1988, petitioner was even unable to pay the remaining balance of P2,464,128.00 out of the principal amount it owes RCBC. Petitioners contention that what prevented it from paying its obligation to RCBC is the fact that the latter insisted on imposing interest and penalties over and above the principal sum it seeks to recover is not plausible. Considering that petitioner admits its obligation to pay the principal amount, then it should have paid the remaining balance of P2,464,128.00, notwithstanding any disagreements with RCBC regarding the payment of interest. The fact that the negotiations for the settlement of petitioners obligation did not push through does not excuse it from paying the principal sum due to RCBC. The issue of petitioners payment of interest is a matter that is totally different from its obligation to pay the principal amount covered by the surety bonds it issued. Petitioner offered no valid excuse for not paying the balance of its principal obligation when demanded by RCBC. Its failure to pay is, therefore, unreasonable. Thus, we find no error in the appellate courts ruling that petitioner is liable to pay interest. As to the rate of interest, we do not agree with petitioners contention that the rate should be 6% per annum. The appellate court is correct in imposing 12% interest. It is in accordance with our ruling in Eastern Shipping Lines, Inc. vs. Court of Appeals,[18] wherein we have established

99

certain guidelines in awarding interest in the concept of actual and compensatory damages, to wit: I.When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the Civil Code govern in determining the measure of recoverable damages. II.With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows 1.When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e. from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2.When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3.When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.[19] (Emphasis supplied) In the present case, there is no dispute that petitioners obligation consists of a loan or forbearance of money. No interest has been agreed upon in writing between petitioner and respondent. Applying the above-quoted rule to the present case, the Court of Appeals correctly imposed the rate of interest at 12% per annum to be computed from the time the extra-judicial demand was made. This is in accordance with the provisions of Article 1169[20] of the Civil Code and of the settled rule that where there has been an extra-judicial demand before action for performance was filed, interest on the amount due begins to run not from the date of the filing of the complaint but from the date of such extra-judicial demand.[21] RCBCs extra-judicial demand for the payment of JIGS obligation was made on October 30, 1984; while the extra-judicial demand for the payment of ELBAs obligation was made on December 17, 1984. On the other hand, the complaint for a sum of money was filed by RCBC with the trial court only on September 19, 1988. WHEREFORE, the instant petition is DENIED and the assailed Decision and Resolution of the Court of Appeals are AFFIRMED in toto. SO ORDERED. SECOND DIVISION G.R. No. L-45848 November 9,1977 TOWERS ASSURANCE CORPORATION, petitioner, vs. ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE BENJAMIN K. GOROSPE, Presiding Judge, Court of First Instance of Misamis Oriental, Branch I, respondents.

Credit Transactions Full Text Cases Atty. Adviento

Benjamin Tabique & Zosimo T. Vasalla for petitioner. Rodrigo F. Lim, Jr. for private respondent.

100

The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation assumed a solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion of the properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63). But certainly, the surety is entitled to be heard before an execution can be issued against him since he is not a party in the case involving his principal. Notice and hearing constitute the essence of procedural due process. (Martinez vs. Villacete 116 Phil. 326; Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon Surety Co., Inc. vs. Beson, L26865-66, January 30. 1970. 31 SCRA 313). WHEREFORE, the order and writ of execution, insofar as they concern Towers Corporation, are set aside. The lower court is directed to conduct a summary hearing on the surety's liability on its counterbound. No costs. SO ORDERED. SECOND DIVISION G.R. No. 84084 August 20, 1990 FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs. ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA GANDHI PUA, DAVID MALANAO, THE ADMINISTRATOR, PHILIPPINE OVERSEAS AND EMPLOYMENT ADMINISTRATION, THE SECRETARY OF LABOR AND EMPLOYMENT, respondents. David I. Unay, Jr. for petitioner. Kamid D. Abdul for private respondents.

AQUINO, J.: This case is about the liability of a surety in a counterbond for the lifting of a writ of preliminary attachment. On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses Ernesto Ong and Conching Ong in the Court of First Instance of Misamis Oriental for the collection of the sum of P 58,400 plus litigation expenses and attorney's fees (Civil Case No. 4930). See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower court issued an order of attachment. The deputy sheriff attached the properties of the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City. To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the amount of P 58,400 with Towers Assurance Corporation as surety. In that undertaking, the Ong spouses and Towers Assurance Corporation bound themselves to pay solidarity to See Hong the sum of P 58,400. On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For non-appearance at the pre- trial, the Ong spouses were declared in default. On October 25, 1976, the lower court rendered a decision, ordering not only the Ong spouses but also their surety, Towers Assurance Corporation, to pay solidarily to See Hong the sum of P 58,400. The court also ordered the Ong spouses to pay P 10,000 as litigation expenses and attorney's fees. Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama Supermart filed a motion for execution. The lower court granted that motion. The writ of execution was issued on March 14 against the judgment debtors and their surety. On March 29, 1977, Towers Assurance Corporation filed the instant petition for certiorari where it assails the decision and writ of execution. We hold that the lower court acted with grave abuse of discretion in issuing a writ of execution against the surety without first giving it an opportunity to be heard as required in Rule 57 of tie Rules of Court which provides: SEC. 17. When execution returned unsatisfied, recovery had upon bound. If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counterbound given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counterbound, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action. Under section 17, in order that the judgment creditor might recover from the surety on the counterbond, it is necessary (1) that execution be first issued against the principal debtor and that such execution was returned unsatisfied in whole or in part; (2) that the creditor made a demand upon the surety for the satisfaction of the judgment, and (3) that the surety be given notice and a summary hearing in the same action as to his liability for the judgment under his counterbond.

PARAS, J.: This is a petition for certiorari seeking to annul 1) the Order dated March 28, 1988 of the Honorable Secretary of Labor and Employment in POEA, LRO/RRD Case No. 87-09-1022-DP entitled Abdulgani Salik, et al, v. Pan Pacific Overseas and Recruiting Services and Finman General Assurance Corporation, which directed herein petitioner to pay jointly and severally with Pan Pacific the claims of herein private respondents amounting to P25,000.00 and 2) the Order dated June 7, 1988, which denied petitioner's motion for reconsideration (Rollo, p. 2). The facts of the case are as follows: Abdulgani Salik et al., private respondents, allegedly applied with Pan Pacific Overseas Recruiting Services, Inc. (hereinafter referred to as Pan Pacific) on April 22, 1987 and were assured employment abroad by a certain Mrs. Normita Egil. In consideration thereof, they allegedly paid fees totalling P30,000.00. But despite numerous assurances of employment abroad given by Celia Arandia and Mrs. Egil, they were not employed (Ibid., p. 15). Accordingly, they filed a joint complaint with the Philippine Overseas Employment Administration (herein referred to as POEA) against Pan Pacific for Violation of Articles 32 and 34(a) of the Labor Code, as amended, with claims for refund of a total amount of P30,000.00 (Ibid.). The POEA motu proprio impleaded and summoned herein petitioner surety Finman General Assurance Corporation (hereinafter referred to as Finman), in the latter's capacity as Pan Pacific's bonding company.

Credit Transactions Full Text Cases Atty. Adviento

Summons were served upon both Pan Pacific and Finman, but they failed to answer. On October 9, 1987, a hearing was called, but only the private respondents appeared. Despite being deemed in default for failing to answer, both Finman and Pan Pacific were still notified of the scheduled hearing. Again they failed to appear. Thus, ex-parte proceedings ensued. During the hearing, herein private respondents reiterated the allegations in their complaint that they first paid P20,000.00 thru Hadji Usop Kabagani for which a receipt was issued signed by Engineer Arandia and countersigned by Mrs. Egil and a certain Imelda who are allegedly employed by Pan Pacific; that they paid another P10,000.00 to Engr. Arandia who did not issue any receipt therefor; that the total payment of P30,000.00 allegedly represents payments for herein private respondents in the amount of P5,000.00 each, and Abdulnasser Ali, who did not file any complaint against Pan Pacific (Ibid., pp. 15-16). Herein private respondents presented as their witness, Hadji Usop Kabagani who they Identified as the one who actually financed their application and who corroborated their testimonies on all material points including the non-issuance of a receipt for P10,000.00 by Engr. Arandia. Herein petitioner, Finman, in an answer which was not timely filed, alleged, among others, that herein private respondents do not have a valid cause of action against it; that Finman is not privy to any transaction undertaken by Pan Pacific with herein private respondents; that herein private respondents claims are barred by the statute of frauds and by the fact that they executed a waiver; that the receipts presented by herein private respondents are mere scraps of paper; that it is not liable for the acts of Mrs. Egil that Finman has a cashbond of P75,000.00 only which is less than the required amount of P100,000.00; and that herein private respondents should proceed directly against the cash bond of Pan Pacific or against Mrs. Egil (Ibid., pp. 1617). On March 18,1988, the Honorable Franklin M. Drilon, then the Secretary of Labor and Employment, upon the recommendation of the POEA hearing officer, issued an Order, the dispositive portion of which reads: WHEREFORE, premises considered, both respondents are hereby directed to pay jointly and severally the claims of complainants, as follows: 1. Abdulgani Salik P5,000.00 2. Balabagan Ampilan 5,000.00 3. Ali Kuba 5,000.00 4. Gandhi Dua 5,000.00 5. David Malanao 5,000.00 Based on the records of this Administration, respondent agency is presently serving a total period of suspension of seventeen (1 7) months imposed in three (3) separate orders issued on June 2, 1987, August 17, 1987 and September 23, 1987. Under the new schedule of penalties published on January 21, 1987 in the Philippine Inquirer, the penalty of cancellation shall be imposed when the offender has been previously penalized with suspension the total period of which is 12 months or more. Moreover, the penalty imposable in the case at bar is two (2) months suspension for each count of violation or a total period of suspension of ten (10) months as the

101

acts were committed in April 1987. Thus, whether under the old schedule of penalties which required a total period of suspension of twentyfour (24) months for cancellation to be imposed or under the new schedule which provides for a twelve (12) month total suspension period, the penalty of cancellation may be properly imposed upon the herein respondent agency. In view thereof, the license of Pan Pacific Overseas Recruiting Services is hereby cancelled, effective immediately. SO ORDERED. (Ibid., pp. 20-21). A motion for reconsideration having been denied (Ibid., p. 22), herein petitioner instituted the instant petition for certiorari, raising the following assigned errors: I THE HONORABLE ADMINISTRATOR AND THE HONORABLE, SECRETARY OF LABOR ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN MOTU PROPRIO IMPLEADING FINMAN AS CORESPONDENT OF PAN PACIFIC IN POEA LRO/RRD CASE NO. 87-09-1022 DP WHICH WAS FILED BY ABDULGANI SALIK, ET AL.; II THE HONORABLE SECRETARY OF LABOR ACTED WITHOUT OR IN EXCESS OF JURISDICTION AND WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN DIRECTING FINMAN TO PAY JOINTLY AND SEVERALLY WITH PAN PACIFIC THE CLAIMS OF PRIVATE RESPONDENTS ON THE BASIS OF THE SURETYSHIP AGREEMENT BETWEEN FINMAN AND PAN PACIFIC AND THE PHILIPPINE OVERSEAS EMPLOYMENT ADMINISTRATION (POEA FOR SHORT); AND III THE FINDINGS OF FACT MADE BY THE POEA AND UPON WHICH THE HONORABLE SECRETARY OF LABOR BASED ITS QUESTIONED ORDERS ARE NOT SUPPORTED BY SUBSTANTIAL EVIDENCE AND ARE CONTRARY TO LAW. (Ibid., p. 101) As required by this Court, herein public respondents filed their memorandum on July 28, 1989 (Ibid., p. 84); while that of petitioner and private respondents were filed on September 11, 1989 (Ibid., p. 89) and March 16, 1990 (Ibid., p. 120), respectively. The petition is devoid of merit. In its first and second assigned errors, petitioner maintains that POEA has no jurisdiction to directly enforce the suretyship undertaking of FINMAN (herein petitioner) under the surety bond (Ibid., p. 104). In the case at bar, it remains uncontroverted that herein petitioner and Pan Pacific entered into a suretyship agreement, with the former agreeing that the bond is conditioned upon the true and faithful performance and observance of the bonded principal (Pan Pacific) of its duties and obligations. It was also understood that under the suretyship agreement, herein petitioner undertook itself to be jointly

Credit Transactions Full Text Cases Atty. Adviento

and severally liable for all claims arising from recruitment violation of Pan Pacific (Ibid., p. 23), in keeping with Section 4, Rule V, Book I of the Implementing Rules of the Labor Code, which provides: Section 4. Upon approval of the application, the applicant shall pay to the Ministry (now Department) a license fee of P6,000.00, post a cash bond of P50,000.00 or negotiable bonds of equivalent amount convertible to cash issued by banking or financial institution duly endorsed to the Ministry (now Department) as well as a surety bond of P150,000.00 from an accredited bonding company to answer for valid and legal claims arising from violations of the conditions of the license or the contracts of employment and guarantee compliance with the provisions of the Code, its implementing rules and regulations and appropriate issuances of the Ministry (now Department). (Emphasis supplied) Accordingly, the nature of Finman's obligation under the suretyship agreement makes it privy to the proceedings against its principal (Pan Pacific). As such Finman is bound, in the absence of collusion, by a judgment against its principal even though it was not a party to the proceedings Leyson v. Rizal Surety and Insurance Co., 16 SCRA 551 (1966). Furthermore, in Government of the Philippines v. Tizon (20 SCRA 1182 [1967]), this Court ruled that where the surety bound itself solidarily with the principal obligor the former is so dependent on the principal debtor "that the surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter." Applying the foregoing principles to the case at bar, it can be very well said that even if herein Finman was not impleaded in the instant case, still it (petitioner) can be held jointly and severally liable for all claims arising from recruitment violation of Pan Pacific. Moreover, as correctly stated by the Solicitor General, private respondents have a legal claim against Pan Pacific and its insurer for the placement and processing fees they paid, so much so that in order to provide a complete relief to private respondents, petitioner had to be impleaded in the case (Rollo, p. 87). Furthermore, Finman contends that herein respondent Secretary of Labor cannot validly assume jurisdiction over the case at bar; otherwise, proceedings will be railroaded resulting in the deprivation of the former of any remedial measures under the law. The records of the case reveal that herein Finman filed a motion for reconsideration of the adverse decision dated March 18, 1988 of respondent Secretary of Labor. In the said motion for reconsideration, no jurisdictional challenge was made (Ibid., p. 22). It was only when it filed this petition that it assailed the jurisdiction of the respondent Secretary of Labor, and that of the POEA. But then, it was too late. Estoppel had barred herein petitioner from raising the issue, regardless of its merits (Akay Printing Press v. Minister of Labor and Employment, 140 SCRA 381 [1985]). Hence, Finman's contention that POEA's and respondent Secretary's actions in impleading and directing herein petitioner to pay jointly and severally with Pan Pacific the claims of private respondents constitute a grave abuse of discretion amounting to lack of jurisdiction has no basis. (Ibid., p. 101.) As regards the third assigned error, herein petitioner maintains that the findings of fact made by the POEA upon which respondent Secretary of Labor based his questioned Orders are not supported by substantial evidence and are contrary to law, is likewise untenable. Herein petitioner, in raising this third issue, is, in effect, asking this Court to review the respondent Secretary's findings of facts. Well-settled is the rule that findings of facts of the respondent Secretary are generally accorded great weight unless there was grave abuse of discretion or lack of jurisdiction in arriving at such

102

findings (Asiaworld Publishing House, Inc. vs. Ople, 152 SCRA 219 (1987). In the case at bar, it is undisputed that when the case was first set for hearing, only the private respondents appeared, despite summons having been served upon both herein petitioner and Pan Pacific. This, notwithstanding, both herein petitioner and Pan Pacific were again notified of the scheduled hearing, but, as aforestated they also' failed to a pear (Rollo, p. 15). Accordingly, owing to the absence of any controverting evidence, respondent Secretary of Labor admitted and considered private respondents' testimonies and evidence as substantial. Under the circumstances, no justifiable reason can be found to justify disturbance of the findings of facts of the respondent Secretary of Labor, supported as they are by substantial evidence and in the absence of grave abuse of discretion (Asiaworld Publishing House, Inc. v. Ople, supra); and in line with the well established principle that the findings of administrative agencies which have acquired expertise because their jurisdiction is confined to specific matters are generally accorded not only respect but at times even finality. (National Federation of Labor Union (NAFLU) v. Ople, 143 SCRA 124 [1986]) PREMISES CONSIDERED, the questioned Orders of respondent Secretary of Labor are hereby AFFIRMED in toto, SO ORDERED. SECOND DIVISION [G.R. No. 151060. August 31, 2005] JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA. ANA, Petitioners, vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, respondent. [G.R. No. 151311. August 31, 2005] NARCISO V. CRUZ, Petitioner, vs. PHILIPPINE EXPORT and FOREIGN LOAN GUARANTEE CORPORATION, respondent. DECISION TINGA, J.: Before us are consolidated petitions questioning the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 61318, entitled Philippine Export and Foreign Loan Guarantee Corporation v. JN Development Corporation, et al., which reversed the Decision of the Regional Trial Court (RTC) of Makati, Branch 60. On 13 December 1979, petitioner JN Development Corporation (JN') and Traders Royal Bank (TRB) entered into an agreement whereby TRB would extend to JN an Export Packing Credit Line for Two Million Pesos (P2,000,000.00). The loan was covered by several securities, including a real estate mortgage[2] and a letter of guarantee from respondent Philippine Export and Foreign Loan Guarantee Corporation (PhilGuarantee'), now Trade and Investment Development Corporation of the Philippines, covering seventy percent (70%) of the credit line.[3] With PhilGuarantee issuing a guarantee in favor of TRB,[4] JN, petitioner spouses Rodrigo and Leonor Sta. Ana[5] and petitioner Narciso Cruz[6] executed a Deed of Undertaking[7] (Undertaking) to assure repayment to PhilGuarantee. It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October 1980 TRB requested PhilGuarantee to make good its guarantee.[8] PhilGuarantee informed JN about the call made by TRB, and inquired about the action of JN to settle the loan.[9] Having received no response from JN, on 10 March 1981 PhilGuarantee paid TRB Nine Hundred Thirty Four Thousand Eight Hundred Twenty Four Pesos and Thirty Four Centavos (P934,824.34).[10] Subsequently, PhilGuarantee made several demands on JN, but the latter failed to pay. On 30 May

Credit Transactions Full Text Cases Atty. Adviento

1983, JN, through Rodrigo Sta. Ana, proposed to settle the obligation 'by way of development and sale of the mortgaged property.[11] PhilGuarantee, however, rejected the proposal. PhilGuarantee thus filed a Complaint[12] for collection of money and damages against herein petitioners. In its Decision dated 20 August 1998, the RTC dismissed PhilGuarantee's Complaint as well as the counterclaim of petitioners. It ruled that petitioners are not liable to reimburse PhilGuarantee what it had paid to TRB. Crucial to this holding was the court's finding that TRB was able to foreclose the real estate mortgage executed by JN, thus extinguishing petitioners' obligation.[13] Moreover, there was no showing that after the said foreclosure, TRB had demanded from JN any deficiency or the payment of the difference between the proceeds of the foreclosure sale and the actual loan.[14] In addition, the RTC held that since PhilGuarantee's guarantee was good for only one year from 17 December 1979, or until 17 December 1980, and since it was not renewed after the expiry of said period, PhilGuarantee had no more legal duty to pay TRB on 10 March 1981.[15] The RTC likewise ruled that Cruz cannot be held liable under the Undertaking since he was not the one who signed the document, in line with its finding that his signature found in the records is totally different from the signature on the Undertaking. [16]chanroblesvirtuallawlibrary According to the RTC, the failure of TRB to sue JN for the recovery of the loan precludes PhilGuarantee from seeking recoupment from the spouses Sta. Ana and Cruz what it paid to TRB. Thus, PhilGuarantee's payment to TRB amounts to a waiver of its right under Art. 2058 of the Civil Code. [17]chanroblesvirtuallawlibrary Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The appellate court reversed the RTC and ordered petitioners to pay PhilGuarantee Nine Hundred Thirty Four Thousand Six Hundred Twenty Four Pesos and Thirty Four Centavos (P934,624.34), plus service charge and interest.[18]chanroblesvirtuallawlibrary In reaching its denouement, the CA held that the RTC's finding that the loan was extinguished by virtue of the foreclosure sale of the mortgaged property had no factual support,[19] and that such finding is negated by Rodrigo Sta. Ana's testimony that JN did not receive any notice of foreclosure from PhilGuarantee or from TRB. [20] Moreover, Sta. Ana even offered the same mortgaged property to PhilGuarantee to settle its obligations with the latter.[21]chanroblesvirtuallawlibrary The CA also ruled that JN's obligation had become due and demandable within the one-year period of effectivity of the guarantee; thus, PhilGuarantee's payment to TRB conformed with its guarantee, although the payment itself was effected one year after the maturity date of the loan.[22] Contrary to the trial court's finding, the CA ruled that the contract of guarantee was not extinguished by the alleged lack of evidence on PhilGuarantee's consent to the extensions granted by TRB to JN.[23] Interpreting Art. 2058 of the Civil Code,[24] the appellate court explained that while the provision states that the guarantor cannot be compelled to pay unless the properties of the debtor are exhausted, the guarantor is not precluded from waiving the benefit of excussion and paying the obligation altogether.[25]chanroblesvirtuallawlibrary Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery of his signature in the Undertaking, the evidence presented not being sufficient to overcome the presumption of regularity of the Undertaking which is a notarized document. [26] Petitioners sought reconsideration of the Decision and prayed for the admission of documents evidencing the foreclosure of the real estate mortgage, but the motion for reconsideration was denied by the CA for lack of merit. The CA ruled that the documentary evidence presented by petitioners cannot be considered as newly discovered evidence, it being already in existence while the case was pending before the trial court, the very forum before which it should have been presented. Besides, a foreclosure sale per se is not proof of petitioners' payment of the loan to PhilGuarantee, the CA added.[27]chanroblesvirtuallawlibrary

103

So now before the Court are the separate petitions for review of the CA Decision. JN and the spouses Sta. Ana, petitioners in G.R. No. 151060, posit that the CA erred in interpreting Articles 2079, 2058, and 2059 of the Civil Code in its Decision.[28] Meanwhile, petitioner Narciso Cruz in G.R. No. 151311 claims that the CA erred when it held that petitioners are liable to PhilGuarantee despite its payment after the expiration of its contract of guarantee and the lack of PhilGuarantee's consent to the extensions granted by TRB to JN. Moreover, Cruz questions the reversal of the ruling of the trial court anent his liability as a signatory to the Undertaking. [29]chanroblesvirtuallawlibrary On the other hand, PhilGuarantee maintains that the date of default, not the actual date of payment, determines the liability of the guarantor and that having paid TRB when the loan became due, it should be indemnified by petitioners.[30] It argues that, contrary to petitioners' claim, there could be no waiver of its right to excussion more explicit than its act of payment to TRB very directly.[31] Besides, the right to excussion is for the benefit of the guarantor and is not a defense for the debtor to raise and use to evade liability.[32] Finally, PhilGuarantee maintains that there is no sufficient evidence proving the alleged forgery of Cruz's signature on the Undertaking, which is a notarized document and as such must be accorded the presumption of regularity.[33]chanroblesvirtuallawlibrary The Court finds for PhilGuarantee. Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.[34] The guarantor who pays for a debtor, in turn, must be indemnified by the latter.[35] However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor.[36] This is what is otherwise known as the benefit of excussion. It is clear that excussion may only be invoked after legal remedies against the principal debtor have been expanded. Thus, it was held that the creditor must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor, 'for obviously the 'exhaustion of the principal's property cannot even begin to take place before judgment has been obtained.[37] The law imposes conditions precedent for the invocation of the defense. Thus, in order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter's demand for payment and point out to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt.[38]chanroblesvirtuallawlibrary While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the obligation once demand is made on him. Excussion, after all, is a right granted to him by law and as such he may opt to make use of it or waive it. PhilGuarantee's waiver of the right of excussion cannot prevent it from demanding reimbursement from petitioners. The law clearly requires the debtor to indemnify the guarantor what the latter has paid. [39]chanroblesvirtuallawlibrary Petitioners' claim that PhilGuarantee had no more obligation to pay TRB because of the alleged expiration of the contract of guarantee is untenable. The guarantee, dated17 December 1979, states: In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is made to pay its obligation arising under the aforesaid guarantee PHILGUARANTEE shall pay the BANK the amount of P1.4 million or 70% of the total obligation unpaid .... This guarantee shall be valid for a period of one (1) year from date hereof but may be renewed upon payment by JNDC of the guarantee fee at the same rate of 1.5% per annum.[40]chanroblesvirtuallawlibrary The guarantee was only up to 17 December 1980. JN's obligation with TRB fell due on 30 June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980. That payment was actually made only on 10 March 1981 does not take it out of the terms of the guarantee. What is

Credit Transactions Full Text Cases Atty. Adviento

controlling is that default and demand on PhilGuarantee had taken place while the guarantee was still in force. There is likewise no merit in petitioners' claim that PhilGuarantee's failure to give its express consent to the alleged extensions granted by TRB to JN had extinguished the guarantee. The requirement that the guarantor should consent to any extension granted by the creditor to the debtor under Art. 2079 is for the benefit of the guarantor. As such, it is likewise waivable by the guarantor. Thus, even assuming that extensions were indeed granted by TRB to JN, PhilGuarantee could have opted to waive the need for consent to such extensions. Indeed, a guarantor is not precluded from waiving his right to be notified of or to give his consent to extensions obtained by the debtor. Such waiver is not contrary to public policy as it is purely personal and does not affect public interest.[41] In the instant case, PhilGuarantee's waiver can be inferred from its actual payment to TRB after the latter's demand, despite JN's failure to pay the renewal/guarantee fee as indicated in the guarantee. [42]chanroblesvirtuallawlibrary For the above reasons, there is no basis for petitioner's claim that PhilGuarantee was a mere volunteer payor and had no legal obligation to pay TRB. The law does not prohibit the payment by a guarantor on his own volition, heedless of the benefit of excussion. In fact, it recognizes the right of a guarantor to recover what it has paid, even if payment was made before the debt becomes due,[43] or if made without notice to the debtor, [44] subject of course to some conditions. Petitioners' invocation of our ruling in Willex Plastic Industries, Corp. v. Court of Appeals[45] is misplaced, if not irrelevant. In the said case, the guarantor claimed that it could not be proceeded against without first exhausting all of the properties of the debtor. The Court, finding that there was an express renunciation of the benefit of excussion in the contract of guarantee, ruled against the guarantor. The cited case finds no application in the case a quo. PhilGuarantee is not invoking the benefit of excussion. It cannot be overemphasized that excussion is a right granted to the guarantor and, therefore, only he may invoke it at his discretion. The benefit of excussion, as well as the requirement of consent to extensions of payment, is a protective device pertaining to and conferred on the guarantor. These may be invoked by the guarantor against the creditor as defenses to bar the unwarranted enforcement of the guarantee. However, PhilGuarantee did not avail of these defenses when it paid its obligation according to the tenor of the guarantee once demand was made on it. What is peculiar in the instant case is that petitioners, the principal debtors themselves, are muddling the issues and raising the same defenses against the guarantor, which only the guarantor may invoke against the creditor, to avoid payment of their own obligation to the guarantor. The Court cannot countenance their self-seeking desire to be exonerated from the duty to reimburse PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves at the expense of PhilGuarantee. Petitioners assert that TRB's alleged foreclosure of the real estate mortgage over the land executed as security for the loan agreement had extinguished PhilGuarantee's obligation; thus, PhilGuarantee's recourse should be directed against TRB, as per the pari-passu provision[46] in the contract of guarantee.[47] We disagree. The foreclosure was made on 27 August 1993, 'after the case was submitted for decision in 1992 and before the issuance of the decision of the court a quo in 1998.[48] Thus, foreclosure was resorted to by TRB against JN when they both had become aware that PhilGuarantee had already paid TRB and that there was a pending case filed by PhilGuarantee against petitioners. This matter was not raised and proved in the trial court, nor in the appeal before the CA, but raised for the first time in petitioners' motion for reconsideration in the CA. In their appellants' Brief, petitioners claimed that 'there was no need for the defendantappellee JNDC to present any evidence before the lower court to show that indeed foreclosure of the REM took place.[49] As properly held by the CA,

104

Firstly, the documents evidencing foreclosure of mortgage cannot be considered as newly discovered evidence. The said documents were already subsisting and should have been presented during the trial of the case. The alleged foreclosure sale was made on August 23, 1993 ' while the decision was rendered by the trial court on August 20, 1998 about five (5) years thereafter. These documents were likewise not submitted by the defendants-appellees when they submitted their appellees' Brief to this Court. Thus, these cannot be considered as newly discovered evidence but are more correctly ascribed as suppressed forgotten evidence Secondly, the alleged foreclosure sale is not proof of payment of the loan by defendant-appellees to the plaintiffs-appellants. [50]chanroblesvirtuallawlibrary Besides, the complaint a quo was filed by PhilGuarantee as guarantor for JN, and its cause of action was premised on its payment of JN's obligation after the latter's default. PhilGuarantee was well within its rights to demand reimbursement for such payment made, regardless of whether the creditor, TRB, was subsequently able to obtain payment from JN. If double payment was indeed made, then it is JN which should go after TRB, and not PhilGuarantee. Petitioners have no one to blame but themselves, having allowed the foreclosure of the property for the full value of the loan despite knowledge of PhilGuarantee's payment to TRB. Having been aware of such payment, they should have opposed the foreclosure, or at the very least, filed a supplemental pleading with the trial court informing the same of the foreclosure sale. Likewise, petitioners cannot invoke the pari-passu clause in the guarantee, not being parties to the said agreement. The clause is clearly for the benefit of the guarantor and no other. The Court notes the letter[51] of Rodrigo Sta. Ana offering, by way of settlement of JN's obligations to PhilGuarantee, the very same parcel of land mortgaged as security for the loan agreement. This further weakens the position of petitioners, since it becomes obvious that they acknowledged the payment made by PhilGuarantee on their behalf and that they were in fact willing to negotiate with PhilGuarantee for the settlement of the said obligation before the filing of the complaint a quo. Anent the issue of forgery, the CA is correct in reversing the decision of the trial court. Save for the denial of Narciso Cruz that it was not his signature in the Undertaking and the perfunctory comparison of the signatures, nothing in the records would support the claim of forgery. Forgery cannot be presumed and must be proved by clear, positive and convincing evidence and the burden of proof lies on the party alleging forgery.[52] Mere denial will not suffice to overcome the positive value of the Undertaking, which is a notarized document, has in its favor the presumption of regularity, and carries the evidentiary weight conferred upon it with respect to its due execution.[53] Even in cases where the alleged forged signature was compared to samples of genuine signatures to show its variance therefrom, this Court still found such evidence insufficient.[54] Mere variance of the signatures cannot be considered as conclusive proof that the same were forged.[55]chanroblesvirtuallawlibrary WHEREFORE, the consolidated petitions are DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 61318 is AFFIRMED. No pronouncement as to costs. SO ORDERED. EN BANC G.R. No. L-48979 September 29, 1943

MIRA HERMANOS, INC., Plaintiff-Appellee, vs. MANILA TOBACCONISTS, INC., ET AL., defendants. PROVIDENT INSURANCE CO., Defendant-Appellant. OZAETA, J.: chanrobles virtual law library

Credit Transactions Full Text Cases Atty. Adviento

This appeal has been certified to this court by the Court of Appeals because it involves only a question of law arising from the following facts: chanrobles virtual law library By virtue of a written contract (Exhibit A) entered into between Mira Hermanos, Inc., and Manila Tobacconists, Inc., the former agreed to deliver to the latter merchandise for sale on consignment under certain specified terms and the latter agreed to pay to the former on or before the 20th day of each month the invoice value of all the merchandise sold during the preceding month. Mira Hermanos, Inc., required of the Manila Tobacconists, Inc., a bond of P3,000, which was executed by the Provident Insurance Co., on September 2, 1939 (Exhibit B), to secure the fulfillment of the obligation of the Tobacconists under the contract (Exhibit A) up to the sum of P3,000.chanroblesvirtualawlibrary chanrobles virtual law library In the month of October, 1940, the volume of the business of the Tobacconists having increased so that the merchandise received by it on consignment from Mira Hermanos exceeded P3,000 in value, Mira Hermanos required of the Tobacconist an additional bond of P2,000, and in compliance with that requirement the defendant Manila Compaia de Seguros, on October 16, 1940, executed a bond of P2,000 (Exhibit C) with the same terms and conditions (except as to the amount) as the bond of the Provident Insurance Co.chanroblesvirtualawlibrary chanrobles virtual law library On June 1, 1941, a final and complete liquidation was made of the transactions between Mira Hermanos and the Tobacconists, as a result of which there was found a balance due from the latter to the former of P2,272.79, which indebtedness the Tobacconists recognized but was unable to pay. Thereupon Mira Hermanos made a demand upon the two surety companies for the payment of said sum.chanroblesvirtualawlibrary chanrobles virtual law library The Provident Insurance Co., paid only the sum of P1,363.67, which is 60% of the amount owned by the Tobacconists to Mira Hermanos, alleging that the remaining 40% should be paid by the other surety, Manila Compaia de Seguros, in accordance with article 8137 of the Civil Code. The Manila Compaia de Seguros refused to pay the balance, contending that so long as the liability of the Tobacconists did not exceed P3,000, it was not bound to pay anything because its bond referred only to the obligation of the Tobacconists in excess of P3,000 and up to P5,000. Hence Mira Hermanos, Inc., brought this action against the Manila Tobacconists, Inc., Provident Insurance Co., and Manila Compaia de Seguros to recover from them jointly and severally the sum of P909.12 with legal interest thereon from the date of the complaint.chanroblesvirtualawlibrary chanrobles virtual law library The controversy is mainly between the two surety companies. In its answer the defendant Manila Compaia de Seguros alleged as a special defense: 4. - Que la fianza otorgada por esta demandada 'Manila Compania de Seguros', el Octubre de 1940 fue exigida por la demandante solo cuando el importe de las mercancias servidas por esta y pedidas por la demandada Manila Tobacconists, Inc., excedio de la suma de P3,000 garantizada por la otra demandada Provident Insurance Co.; por lo que quedo entendido entre la demandante y las tres demandadas que la fianza de P2,000 prestada el Octubre de 1940 por esta demandada, 'Manila Compaia de Seguros', se limitaba y era para responder solamente del importe de mercancias servidad a la demandada Manila Tobacconists, Inc., en tanto en cuanto el valor de esas mercancias excediese de P3,000 asegurada por la fianza P3,000 de la Manila Tobacconists, Inc. To that the defendant Provident Insurance Co. replied: Que no es verdad el hecho alegado por la demandada 'Manila Compaia de Seguros' en el parrafo 4 de su contestacion que dice: 'que quedo entendido entre la demandante y las tres demandadas que la fianza de P2,000 prestada el Octubre de 1940 por esta demandada "Manila Compaia de Seguros" se limitaba y era para responder solamente del importe de

105

mercancias servidas a la demandada Manila Tocacconists, Inc., en tanto en cuanto el valor de esas mercancias excediese de P3,000 asegurada por la fianza de P3,000 de la "Manila Tobacconists, Inc." chanrobles virtual law library Que la demandada, aqui compareciente, nunca ha tenido conocimiento ni menos prestado su consentimiento a esa supuesta inteligencia.chanroblesvirtualawlibrary chanrobles virtual law library Que esta demandada no puede ser privada del beneficio de division a que tiene derecho como co-fiador, sin que conste expresamente, por escrito, su conformidad y consentimiento de renunciar a su derecho. Thus there was an issue of fact between the two surety companies, viz.: whether the understanding between the plaintiff and the three defendants was, that the bond of P2,000 given by the Manila Compaia de Seguros was limited to and responded for the obligation of the Tobacconists only insofar as it might exceed the amount of P3,000 secured by the bond of the Provident Insurance Co. That issue of fact was decided by the trial court in favor of the contention of the Manila Compaia de Seguros; and judgment was rendered by it against the Provident Insurance Co. alone for the amount claimed by the plaintiff.chanroblesvirtualawlibrary chanrobles virtual law library Appellant's first two assignments of error (the third being a mere consequence of the first two) read as follows: 1. El juzgado inferior incurrio en error al hacer caso omiso del beneficio de division reclamado por la demandada Provident Insurance Co. of the Philippines con arreglo a lo dispuesto en el Art. 1837 del Codigo Civil.chanroblesvirtualawlibrary chanrobles virtual law library 2. El juzgado erro al aplicar, en lugar de lo dispuesto en el Art. 1837 del Codigo Civil, una teoria suya, declarando que la fianza de P3,000.00 prestada por Provident Insurance Co. of the Philippines y la fianza de P2,000 de Manila Compaia de Seguros, cada una tiene una esfera de responsabilidad propia e independiente la una de la otra. Discussing these two assignments of error jointly, counsel says: La unica cuestion que se presenta en esta causa es puramente de derecho. Si el saldo deudor de P2,272.79 que Tobacconists ha dejado de pagar, deben pagarlo en su lugar, los dos fiadores proporcionalmente a la cuantia en que se obligaron o debe pagarlo sola y exclusivamente la fiadora Provident Insurance Co., como ordena la sentencia opelada. Thus it appears that the issue of fact raised by and between the two surety companies before the trial court and decided by the latter in favor of the appellee Manila Compaia de Seguros is no longer raised before this Court, appellant Provident Insurance Co. having limited the issue in this appeal to whether or not it is entitled to the "benefit of division" provided in article 1837 of the Civil Code, which reads as follows: Art. 1837. Should there be several sureties of only one debtor for the same debt, the liability therefor shall be divided among them all. The creditor can claim from each surety only his proportional part unless liability in solidum has been expressly stipulated.chanroblesvirtualawlibrary chanrobles virtual law library The right to the benefit of division against the co-sureties for their respective shares ceases in the same cases and for the same reason as that to an exhaustion of property against the principal debtor. With particular reference to the second assignment of error, we find that the statement of the trial court to the effect that the bond of P3,000

Credit Transactions Full Text Cases Atty. Adviento

responded for the obligation of the Tobacconists up to the sum of P3,000 and the bond of P2,000 responded for the obligation of the Tobacconists only insofar as it might exceed P3,000 and up to P5,000, is not a mere theory but a finding of fact based upon the undisputed testimony of the witnesses called by the defendant Manila Compaia de Seguros in support of its special defense hereinbefore quoted. While on its face the bond given by the Manila Compaia de Seguros contains the same terms and conditions (except as to the amount) as those of the bond given by the Provident Insurance Co., nevertheless it was pleaded by the Manila Compaia de Seguros and found proven by the trial court "que la intencion realmente que se habia perseguido, por lo menos en lo que respecta a la Manila Tobacconists, Inc., y la Manila Compaia de Seguros, era la de que esta fianza de P2,000 habria de responder solamente por todo aquello que excediera de los P3,000." chanrobles virtual law library The evidence upon which that finding is based is not only undisputed but perfectly reasonable and convincing. For, as the trial court observed, there would have been no need for the additional bond of P2,000 if its purpose were to cover the first P2,000 already covered by the P3,000 bond of the Provident Insurance Co. Indeed, we might add, if the purpose of the additional bond of P2,000 were to cover not the excess over and above P3,000 but the first P2,000 of the obligation of the principal debtor like the bond of P3,000 which covered only the first P3,000 of said obligation, then it would result that had the obligation of the Tobacconists exceeded P3,000, neither of the two bonds would have responded for the excess, and that was precisely the event against which Mira Hermanos wanted to protect itself by demanding the additional bond of P2,000. For instance, suppose that the obligation of the principal debtor, the Tobacconists, amounted to P5,000; if both bonds were co-extensive up to P2,000 - as would logically follow if appellant's contention were correct - the result would be that the first P2,000 of the obligation would have to be divided between and paid equally by the two surety companies, which should pay P1,000 each, and of the balance of P3,000 the Provident Insurance Co. would have to pay only P1,000 more because its liability is limited to the first P3,000, thus leaving the plaintiff in the lurch as to the excess of P2,000. That was manifestly not the intention of the parties. As a matter of fact, when the Provident gave its bond and fixed the premiums thereon it assumed an obligation of P3,000 in solidum with the Tobacconists without any expectation of any benefit of division with any other surety. The additional bond of P2,000 was, more than a year later, required by the creditor of the principal debtor for the protection of said creditor and certainly not for the benefit of the original surety, which was not entitled to expect any such benefit.chanroblesvirtualawlibrary chanrobles virtual law library The foregoing considerations, which fortify the trial court's conclusion as to the real intent and agreement of the parties with regard to the bond of P2,000 given by the Manila Compaia de Seguros, destroys at the same time the theory of the appellant regarding the applicability of article 1837 of the Civil Code.chanroblesvirtualawlibrary chanrobles virtual law library That article refers to several sureties of only one debtor for the same debt. In the instant case, altho the two bonds on their face appear to guarantee the same debt co-extensively up to P2,000 - that of the Provident Insurance Co. alone extending beyond that sum up to P3,000 - it was pleaded and conclusively proven that in reality said bonds, or the two sureties, do not guarantee the same debt because the Provident Insurance Co. guarantees only the first P3,000 and the Manila Compaia de Seguros, only the excess over and above said amount up to P5,000. Article 1837 does not apply to this factual situation.chanroblesvirtualawlibrary chanrobles virtual law library The judgment of the trial court is affirmed, with the only modification that it shall be entered against the defendants Manila Tobacconists, Inc., and Provident Insurance Co. jointly and severally. Appellant shall pay the costs of this instance.chanroblesvirtualawlibrary chanrobles virtual law library EN BANC G.R. No. L-9353 MANILA vs. SURETY May 21, 1957 AND FIDELITY, INC., plaintiff-appellant,

106

BATU CONSTRUCTION AND COMPANY, CARLOS N. BAQUIRAN, GONZALO P. AMBOY and ANDRES TUNAC, defendants-appellees. De Santos and Herrera for appellant. Bienvenido C. Castro and Ruiz, Ruiz, Ruiz and Ruiz for appellees. PADILLA, J.: In a complaint filed in the Court of First Instance of Manila, the plaintiff, a domestic corporation engaged in the bonding business, hereafter called the company, alleges that the Batu Construction & Company, a partnership the members of which are the other three defendants, requested it to post, as it did, a surety bond for P8,812 in favor of the Government of the Philippines to secure the faithful Performance of the construction of the Bacarra Bridge, Project PR-72 (3), in Ilocos Norte, undertaken by the partnership, as stipulated in a construction on contract entered into on 11 July 1950 by and between the partnership and the Government of the Philippines, on condition that the defendants would "indemnify the COMPANY for any damage, loss, costs, or charges, or expenses of whatever kind and nature, including counsel or attorney's fees, which the COMPANY may, at any time, sustain or incur, as a consequence of having become surety upon the above mentioned bond; said attorney's fees shall not be less than fifteen (15%) per cent of the total amount claimed in any action which the COMPANY may institute against the undersigned (the defendants except Andres Tunac) in Court," and that "Said indemnity shall be paid to the COMPANY as soon as it has become liable for the payment of any amount, under the above-mentioned bond, whether or not it shall have paid such sum or sums of money, or any part thereof," as stipulated in a contract executed on 8 July 1950 (Exhibit B); that on 30 May 1951 because of the unsatisfactory progress of the work on the bridge, the Director of Public Works, with the approval of the Secretary of Public Works and Communications, annulled, the construction contract referred to and notified the plaintiff Company that the Government would hold it (the Company) liable for any amount incurred by the Government for the completion of the bridge, in excess of the contract price (Exhibit D); that on 19 December 1951 (should be 23 November 1951), Ricardo Fernandez and 105 other persons brought an action in the Justice of the Peace Court of Laoag, Ilocos Norte, against the partnership, the individual partners and the herein plaintiff Company for the collection of unpaid wages amounting to P5,960.10, lawful interests thereon and costs (Exhibit E); that the defendants are in imminent danger of becoming insolvent, and are removing and disposing, or about to remove and dispose, of their properties with intent to defraud their creditors, particularly the plaintiff Company; and that the latter has no other sufficient security to protect its rights against the defendants. Upon these allegations, the plaintiff prays that, upon the approval of a bond and on the strength of the allegations of the verified complaint, a writ attachment be issued and levied upon the properties of the defendants; and that after hearing, judgment be rendered " ordering the defendants to deliver to the plaintiff such sufficient security as shall protect plaintiff from the any proceedings by the creditors on the Surety Bond aforementioned and from the danger of insolvency of the defendants; and to allow costs to the herein plaintiff," and " for such other measures of relief as may be proper and just in the premises." Attached to the complaint are a verification and affidavit of attachment; and copies of the surety bond marked Annex A; of the indemnity contract marked Annex B; and of the letter of the Acting Director of Public Works to the plaintiff dated 30 May 1951, marked Annex C. Andres Tunac admits in his answer the allegations in paragraphs 1, 2, 3 and 4 of the complaint, but denies the allegations in paragraphs 5, 6, 7, 8 and 9 of the complaint, because he has never promised to put up an indemnity bond in favor of the plaintiff nor has he ever entered into any indemnity agreement with it; because the partnership or the Batu Construction & Company was fulfilling its obligations in accordance with the terms of the construction contract; because the Republic of the Philippines, through the Director of Public, Works, had no authority to annul the contract at its own initiative; because the Justice of the Peace court of Laoag, Ilocos Norte had no jurisdiction to hear and decide a case for collection of P5,960.10; and because the defendants were not in imminent danger of insolvency, neither did they remove or dispose of their properties with intent to defraud their creditors. By way of affirmative defenses, he alleges that the signing by Carlos N. Baquiran of the indemnity agreement for and in behalf of the partnership Batu Construction & Company did not bind the latter to the plaintiff and as the partnership is not bound, he (Andres Tunac), as a member thereof, is also not bound; that he not being a party to the said agreement, the plaintiff has

Credit Transactions Full Text Cases Atty. Adviento

no cause of action against him; that in the event the partnership is bound by the indemnity agreement he invokes his right of exhaustion of the property of the partnership before the plaintiff may proceed against his property. And as a counterclaim he alleges that the plaintiff brought the action against him maliciously and in bad faith for the purpose of annoying him and damaging his professional reputation, he having a flourishing and successful practice as engineer in Ilocos Norte, thereby compelling him to defend himself; that to secure the issuance of a writ of attachment the plaintiff made false representations; and that the issuance of the writ upon such false representations of the plaintiff caused him damages in the sum of P10,000 including expenses of litigation and attorney's fees. Upon the foregoing he prays that the complaint be dismissed as to him and the defendant Batu Construction & Company, with costs against the plaintiff; that the latter be ordered to pay him the sum of P10,000; and that he be granted such other remedies as may be just, equitable and proper. Gonzalo P. Amboy denies in his answer the allegations of the complaint, except those that may be deemed admitted in the special defenses, and alleges that he is not in imminent danger of insolvency and is not removing and disposing or about to remove and dispose of his properties, because he has no property; that has been no liquidation of the expenses incurred in the construction of the Bacarra Bridge, Project PR-72(3) to determine whether there would be a balance of the contract price which may be applied to pay the claim for unpaid wages of Ricardo Fernandez et al. sought to be collected in civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos Norte, and not until after such liquidation shall have been made could his liability and that of his co-defendants be determined and fixed; that if after proper liquidation's there be a deficit of the contract price the defendants are willing to pay the claim for unpaid wages of Ricardo Fernandez et al. Upon these allegations he prays that the issuance of the writ of attachment prayed for by the plaintiff be held in abeyance until after civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos Norte, shall have been disposed of. Carlos N. Baquiran admits in his answer the allegations in paragraphs 1, 2, 3,4, 5, 6, and 11 of the complaint but alleges that he has no sufficient knowledge to form a belief as to the truth of the claim of Ricardo Fernandez et al. set forth in paragraph 7 of the complaint, for there has never been a liquidation between the defendants and the Bureau of Public Works. He further denies specifically paragraphs 8, 9 and 10 of the complaint. By way of special defenses he alleges that there has been no liquidation by and between the defendants and the Bureau of Public Works on Project PR-72(3) to determine whether the total amount spent for the construction of the bridge exceeded the contract price; that after the determination of the respective liabilities of the parties in civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos Norte, if any there be against the defendants herein, and such liability could not be paid out of the balance of the contract price of Project PR-72(3), the defendants are ready and willing to assume their respective responsibilities. Upon these allegations he prays that the complaint of the plaintiff be dismissed; that the issuance of the writ of attachment prayed for be denied; and that he be granted such other relief as may be just and equitable, with costs against the plaintiff. At the hearing, the plaintiff presented its evidence. After the plaintiff had rested its case, defendant Gonzalo P. Amboy moved for the dismissal of the complaint, on the ground that the remedy provided for in the last paragraph of article 2071 of the new Civil Code may be availed of by the guarantor only and not by a surety. Acting upon this motion to dismiss the trial court made the following findings: . . . That on July 8, 1950, the defendant Batu Construction & Company, as principal, and the plaintiff Manila Surety & Fidelity Co. Inc., as surety, executed a surety bond for the sum of P8,812.00 to insure faithful performance of the former's obligation as contractor for the construction of the Bacarra Bridge, Project PR-72 (No. 3) Ilocos Norte Province. On the same date, July 8,1950, the Batu Construction & Company and the defendants Carlos N. Baquiran and Gonzales P. Amboy executed an indemnity agreement to protect the Manila Surety & Fidelity Co. Inc.., against damage, loss or expenses which it may sustain as a consequence of the surety bond executed by it jointly with Batu Construction & Company.

107

On or about May 30, 1951, the plaintiff received a notice from the Director of Public Works (Exhibit B) annulling its contract with the Government for the construction of the Bacarra Bridge because of its failure to make satisfactory progress in the execution of the works, with the warning that ,any amount spent by the Government in the continuation of the work, in excess of the contract price, will be charged against the surety bond furnished by the plaintiff. It also appears that a complaint by the laborers in said project of the Batu Construction & Company was filed against it and the Manila Surety and Fidelity Co., Inc., for unpaid wages amounting to P5,960.10. and, being of the opinion that the provisions of article 2071 of the new Civil Code may be availed of by a guarantor only and not by a surety the complaint, with costs against the plaintiff. From this order the plaintiff Company has appealed to this Court, because it proposes to raise only a question of law. After the order dismissing the complaint had been entered, on 16 and 20 July 1953, the defendants Gonzalo P. Amboy and Andres Tunac moved for leave to prove damages they allegedly suffered as a result of the attachment levied upon their properties. On 15 August 1953 the Court heard the evidence on damages. On 23 September 1953 the Court found and held that the defendant Gonzalo P. Amboy is entitled to recover from the plaintiff damages equivalent to 6 per cent interest per annum on the sum of P35 in possession of the Provincial Treasurer of Ilocos Norte, which was garnished pursuant to the writ of attachment, from the date of garnishment until its charge; but the claims for damages of Andres Tunac and Gonzalo P. Amboy allegedly suffered by them in their business, moral damages and attorney's fees were without basis in law and in fact. Hence their recovery was denied. The Court dissolved the writ of attachment. From this last order only the plaintiff Company has appealed. The main question to determine is whether the last paragraph of article 2071 of the new Civil Code taken from article 1843 of the old Civil Code may be availed of by a surety. A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the debt. A guarantor binds himself to pay if the principal is unable to pay; a surety undertakes to pay if the principal does not pay.1 The reason which could be invoked for the non-availability to a surety of the provisions of the last paragraph of article 2071 of the new Civil Code would be the fact that guaranty like commodatum2 is gratuitous. But guaranty could also be for a price or consideration as provided for in article 2048. So, even if there should be a consideration or price paid to a guarantor for him to insure the performance of an obligation by the principal debtor, the provisions of article 2071 would still be available to the guarantor. In suretyship the surety becomes liable to the creditor without the benefit of the principal debtor's exclusion of his properties, for he (the surety) maybe sued independently. So, he is an insurer of the debt and as such he has assumed or undertaken a responsibility or obligation greater or more onerous than that of guarantor. Such being the case, the provisions of article 2071, under guaranty, are applicable and available to a surety. The reference in article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book IV of the new Civil Code, on solidary or several obligations, does not mean that suretyship which is a solidary obligation is withdrawn from the applicable provisions governing guaranty. The plaintiff's cause of action does not fall under paragraph 2 of article 2071 of the new Civil Code, because there is no proof of the defendants' insolvency. The fact that the contract was annulled because of lack of progress in the construction of the bridge is no proof of such insolvency. It does not fall under paragraph 3, because the defendants have not bound themselves to relieve the plaintiff from the guaranty within a specified period which already has expired, because the surety bond does not fix any period of time and the indemnity agreement stipulates one year extendible or renewable until the bond be completely cancelled by the person or entity in whose behalf the bond was executed or by a Court of competent jurisdiction. It does not come under paragraph 4, because the debt has not become demandable by reason of the expiration of the period for payment. It does not come under paragraph 5 because of the lapse of 10 years, when the principal obligation has no period for its maturity, etc., for 10 years have not yet elapsed. It does not fall under paragraph 6, because there is no proof that "there are reasonable grounds to fear that

Credit Transactions Full Text Cases Atty. Adviento

the principal debtor intends to abscond." It does not come under paragraph 7, because the defendants, as principal debtors, are not in imminent danger of becoming insolvent, there being no proof to that effect. But the plaintiff's cause of action comes under paragraph 1 of article 2071 of the new Civil Code, because the action brought by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages amounting to P5,960.10, is in connection with the construction of the Bacarra Bridge, Project PR-72 (3), undertaken by the Batu Construction & Company, and one of the defendants therein is the herein plaintiff, the Manila Surety and Fidelity Co., Inc., and paragraph 1 of article 2071 of the new Civil Code provides that the guarantor, even before having paid, may proceed against the principal debtor "to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor or from the danger of insolvency of the debtor, when he (the guarantor) is sued for payment. It does not provide that the guarantor be sued by the creditor for the payment of the debt. It simply provides that the guarantor of surety be sued for the payment of an amount for which the surety bond was put up to secure the fulfillment of the obligation undertaken by the principal debtor. So, the suit filed by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages earned in connection with the work done by them in the construction of the Bacarra Bridge, Project PR-72(3), is a suit for the payment of an amount for which the surety bond was put up or posted to secure the faithful performance of the obligation undertaken by the principal debtors (the defendants) in favor of the creditor, the Government of the Philippines. The order appealed from dismissing the complaint is reversed and set aside, and the case remanded to the court below for determination of the amount of security that would protect the plaintiff Company from any proceedings by the creditor or from the danger of insolvency of the defendants, the principal debtors, and direction to the defendants to put up such amount of security as may be established by competent evidence, without pronouncement as to costs. The writ of attachment having been issued improvidently because, although there is an allegation in the verified complaint that the defendants were in imminent danger of insolvency and that they were removing or disposing, or about to remove or dispose, of their properties, with intent to defraud their creditors, particularly the plaintiff Company, still such allegation was not proved, the fact that a complaint had been filed against the defendants and the plaintiff Company in the Justice of the Peace Court of Laoag, Ilocos Norte, for the collection of an amount for unpaid wages of the plaintiffs therein who claimed to have worked in the construction of the bridge, being insufficient to prove it, and because the relief prayed for in the complaint for security that shall protect it from any proceedings by the creditor and from the danger of the defendants becoming insolvent is inconsistent with the state of insolvency of the defendants or their being in imminent danger of insolvency, the order awarding 6 per cent on the sum of P35 in possession of the Provincial Treasurer owned by the defendant Gonzalo P. Amboy garnished by virtue of the writ of attachment, from the date of the garnishment until its discharge, and denying recovery of the amounts of damages claimed to have been suffered by the defendants, is affirmed, the defendants not having appealed therefrom. Bengzon, Montemayor, Reyes, A., Bautista Angelo, Concepcion, Reyes, J.B.L., Endencia and Felix, JJ., concur. EN BANC G.R. No. L-24543 July 12, 1926 Labrador, STREET, J.:

108

This action was instituted in the Court of First Instance of Manila by Rosa Villa y Monna, widow of Enrique Bota, for the purpose of recovering from the defendants, Guillermo Garcia Bosque and Jose Romar Ruiz, as principals, and from the defendants R. G. France and F. H. Goulette, as solidary sureties for said principals, the sum of P20,509.71, with interest, as a balance alleged to be due to the plaintiff upon the purchase price of a printing establishment and bookstore located at 89 Escolta, Manila, which had been sold to Bosque and Ruiz by the plaintiff, acting through her attorney in fact, one Manuel Pirretas y Monros. The defendant Ruiz put in no appearance, and after publication judgment by default was entered against him. The other defendants answered with a general denial and various special defenses. Upon hearing the cause the trial judge gave judgment in favor of the plaintiff, requiring all of the defendants, jointly and severally, to pay to the plaintiff the sum of P19,230.01, as capital, with stipulated interest at the rate of 7 per centum per annum, plus the further sum of P1,279.70 as interest already accrued and unpaid upon the date of the institution of the action, with interest upon the latter amount at the rate of 6 per centum per annum. From this judgment Guillermo Garcia Bosque, as principal, and R. G. France and F.H. Goulette, as sureties. appealed. It appears that prior to September 17, 1919, the plaintiff, Rosa Villa y Monna, viuda de E. Bota, was the owner of a printing establishment and bookstore located at 89 Escolta, Manila, and known as La Flor de Cataluna, Viuda de E. Bota, with the machinery, motors, bindery, type material furniture, and stock appurtenant thereto. Upon the date stated, the plaintiff, then and now a resident of Barcelona, Spain, acting through Manuel Pirretas, as attorney in fact, sold the establishment abovementioned to the defendants Guillermo Garcia Bosque and Jose Pomar Ruiz, residents of the City of Manila, for the stipulated sum of P55,000, payable as follows: Fifteen thousand pesos (P15,000) on November 1, next ensuing upon the execution of the contract, being the date when the purchasers were to take possession; ten thousand pesos (P10,000) at one year from the same date; fifteen thousand pesos (P15,000) at two years; and the remaining fifteen thousand pesos (P15,000) at the end of three years. By the contract of sale the deferred installments bear interest at the rate of 7 per centum per annum. In the same document the defendants France and Goulette obligated themselves as solidary sureties with the principals Bosque and Ruiz, to answer for any balance, including interest, which should remain due and unpaid after the dates stipulated for payment of said installments, expressly renouncing the benefit of exhaustion of the property of the principals. The first installment of P15,000 was paid conformably to agreement. In the year 1920, Manuel Pirretas y Monros, the attorney in fact of the plaintiff, absented himself from the Philippine Islands on a prolonged visit to Spain; and in contemplation of his departure he executed a document, dated January 22, 1920, purporting to be a partial substitution of agency, whereby he transferred to "the mercantile entity Figueras Hermanos, or the person, or persons, having legal representation of the same," the powers that had been previously conferred on Pirretas by the plaintiff "in order that," so the document runs, "they may be able to effect the collection of such sums of money as may be due to the plaintiff by reason of the sale of the bookstore and printing establishment already mentioned, issuing for such purpose the receipts, vouchers, letters of payment, and other necessary documents for whatever they shall have received and collected of the character indicated." When the time came for the payment of the second installment and accrued interest due at the time, the purchasers were unable to comply with their obligation, and after certain negotiations between said purchasers and one Alfredo Rocha, representative of Figueras Hermanos, acting as attorney in fact for the plaintiff, an agreement was reached, whereby Figueras Hermanos accepted the payment of P5,800 on November 10, 1920, and received for the balance five promissory notes payable, respectively, on December 1, 1920, January 1, 1921, February 1, 1921, March 1, 1921, and April 1, 1921. The first three of these notes were in the amount of P1,000 each, and the last two for P2,000 each, making a total of P7,000. It was furthermore agreed that the debtors should pay 9 per centum per annum on said deferred installments, instead of the 7 per centum mentioned in the contract of sale. These notes were not paid promptly at maturity but the balance due upon them was finally paid in full by Bosque on December 24, 1921.

ROSA VILLA MONNA, plaintiff-appellee, vs. GUILLERMO GARCIA BOSQUE, ET AL., defendants. GUILLERMO GARCIA BOSQUE, F. H. GOULETTE, and R. G. FRANCE, appellants. Eiguren and Razon for the appellant Garcia Bosque. Benj. S. Ohnick for the appellants France and Goulette. Fisher, DeWitt, Perkins and Brady and John R. McFie, jr., for appellee.

Credit Transactions Full Text Cases Atty. Adviento

About this time the owners of the business La Flor de Catalua, appear to have converted it into a limited partnership under the style of Guillermo Garcia Bosque, S. en C.;" and presently a corporation was formed to take over the business under the name "Bota Printing Company, Inc." By a document executed on April 21, 1922, the partnership appears to have conveyed all its assets to this corporation for the purported consideration of P15,000, Meanwhile the seven notes representing the unpaid balance of the second installment and interest were failing due without being paid. Induced by this dilatoriness on the part the debtor and supposedly animated by a desire to get the matter into better shape, M. T. Figueras entered into the agreement attached as Exhibit 1 to the answer of Bosque. In this document it is recited that Guillermo Garcia Bosque. S. en C., is indebted to Rosa Villa, viuda de E. Bota, in the amount of P32,000 for which R. G. France and F. H. Goulette are bound as joint and several sureties, and that the partnership mentioned had transferred all its assets to the Bota Printing Company, Inc., of which one George Andrews was a principal stockholder. It is then stipulated that France and Goulette shall be relieved from all liability on their contract as sureties and that in lieu thereof the creditor, Doa Rosa Villa y Monna, accepts the Bota Printing Company, Inc., as debtor to the extent of P20,000, which indebtedness was expressly assumed by it, and George Andrews as debtor to the extent of P12,000, which he undertook to pay at the rate of P200 per month thereafter. To this contract the name of the partnership Guillermo Garcia Bosque, S. en C., was affixed by Guillermo Garcia Bosque while the name of the Bota Printing Company, Inc., was signed by G. Andrews, the latter also signing in his individual capacity. The name of the plaintiff was affixed by M.T. Figueras in the following style: "p.p. Rosa Villa, viuda de E. Bota, M. T. Figueras, party of the second part." No question is made as to the authenticity of this document or as to the intention of Figueras to release the sureties; and the latter rely upon the discharge as complete defense to the action. The defendant Bosque also relies upon the same agreement as constituting a novation such as to relieve him from personal liability. All of the defendants furthermore maintain that even supposing that M. T. Figueras authority to novate the original contract and discharge the sureties therefrom, nevertheless the plaintiff has ratified the agreement by accepting part payment of the amount due thereunder with full knowledge of its terms. In her amended complaint the plaintiff asserts that Figueras had no authority to execute the contract containing the release (Exhibit 1) and that the same had never been ratified by her. The question thus raised as to whether the plaintiff is bound by Exhibit 1 constitutes the main controversy in the case, since if this point should be determined in the affirmative the plaintiff obviously has no right of action against any of the defendants. We accordingly address ourselves to this point first. The partial substitution of agency (Exhibit B to amended complaint) purports to confer on Figueras Hermanos or the person or persons exercising legal representation of the same all of the powers that had been conferred on Pirretas by the plaintiff in the original power of attorney. This original power of attorney is not before us, but assuming, as is stated in Exhibit B, that this document contained a general power to Pirretas to sell the business known as La Flor de Catalua upon conditions to be fixed by him and power to collect money due to the plaintiff upon any account, with a further power of substitution, yet it is obvious upon the face of the act of substitution (Exhibit B) that the sole purpose was to authorize Figueras Hermanos to collect the balance due to the plaintiff upon the price of La Flor de Catalua, the sale of which had already been affected by Pirretas. The words of Exhibit B on this point are quite explicit ("to the end that the said lady may be able to collect the balance of the selling price of the Printing Establishment and Bookstore above-mentioned, which has been sold to Messrs. Bosque and Pomar"). There is nothing here that can be construed to authorize Figueras Hermanos to discharge any of the debtors without payment or to novate the contract by which their obligation was created. On the contrary the terms of the substitution shows the limited extent of the power. A further noteworthy feature of the contract Exhibit 1 has reference to the personality of the purported attorney in fact and the manner in which the contract was signed. Under the Exhibit B the substituted authority should be exercised by the mercantile entity Figueras Hermanos or the person duly authorized to represent the same. In the actual execution of Exhibit 1, M. T. Figueras intervenes as purpoted attorney in fact without anything whatever to show that he is in fact the legal representative of Figueras Hermanos or that he is there acting in such capacity. The act of substitution conferred no authority whatever on

109

M. T. Figueras as an individual. In view of these defects in the granting and exercise of the substituted power, we agree with the trial judge that the Exhibit 1 is not binding on the plaintiff. Figueras had no authority to execute the contract of release and novation in the manner attempted; and apart from this it is shown that in releasing the sureties Figueras acted contrary to instructions. For instance, in a letter from Figueras in Manila, dated March 4, 1922, to Pirretas, then in Barcelona, the former stated that he was attempting to settle the affair to the best advantage and expected to put through an arrangement whereby Doa Rosa would receive P20,000 in cash, the balance to be paid in installments, "with the guaranty of France and Goulette." In his reply of April 29 to this letter, Pirretas expresses the conformity of Doa Rosa in any adjustment of the claim that Figueras should see fit to make, based upon payment of P20,000 in cash, the balance in installments, payable in the shortest practicable periods, it being understood, however, that the guaranty of Messrs. France and Goulette should remain intact. Again, on May 9, Pirretas repeats his assurance that the plaintiff would be willing to accept P20,000 down with the balance in interest-bearing installments "with the guaranty of France and Goulette." From this it is obvious that Figueras had no actual authority whatever to release the sureties or to make a novation of the contract without their additional guaranty. But it is asserted that the plaintiff ratified the contract (Exhibit 1) by accepting and retaining the sum of P14,000 which, it is asserted, was paid by the Bota Printing Co., Inc., under that contract. In this connection it should be noted that when the firm of Guillermo Garcia Bosque, S. en C., conveyed all it assets on April 21, 1922 to the newly formed corporation, Bota Printing Co., Inc., the latter obligated itself to pay al the debts of the partnership, including the sum of P32,000 due to the plaintiff. On April 23, thereafter, Bosque, acting for the Bota Printing Co., Inc., paid to Figueras the sum of P8,000 upon the third installment due to the plaintiff under the original contract of sale, and the same was credited by Figueras accordingly. On May 16 a further sum of P5,000 was similarly paid and credited; and on May 25, a further sum of P200 was likewise paid, making P14,000 in all. Now, it will be remembered that in the contract (Exhibit 1), executed on May 17, 1922, the Bota Printing Co., Inc., undertook to pay the sum of P20,00; and the parties to the agreement considered that the sum of P13,800 then already paid by the Bota Printing Co., Inc., should be treated as a partial satisfaction of the larger sum of P20,000 which the Bota Printing Co., Inc., had obligated itself to pay. In the light of these facts the proposition of the defendants to the effect that the plaintiff has ratified Exhibit 1 by retaining the sum of P14,000, paid by the Bota Printing Co., Inc., as above stated, is untenable. By the assumption of the debts of its predecessor the Bota Printing Co., Inc., had become a primary debtor to the plaintiff; and she therefore had a right to accept the payments made by the latter and to apply the same to the satisfaction of the third installment of the original indebtedness. Nearly all of this money was so paid prior to the execution of Exhibit 1 and although the sum of P200 was paid a few days later, we are of the opinion that the plaintiff was entitled to accept and retain the whole, applying it in the manner above stated. In other words the plaintiff may lawfully retain that money notwithstanding her refusal to be bound by Exhibit 1. A contention submitted exclusively in behalf of France and Goulette, the appellant sureties, is that they were discharged by the agreement between the principal debtor and Figueras Hermanos, as attorney in fact for the plaintiff, whereby the period for the payment of the second installment was extended, without the assent of the sureties, and new promissory notes for unpaid balance were executed in the manner already mentioned in this opinion. The execution of these new promissory notes undoubtedly constituted and extension of time as to the obligation included therein, such as would release a surety, even though of the solidary type, under article 1851 of the Civil Code. Nevertheless it is to be borne in mind that said extension and novation related only to the second installment of the original obligation and interest accrued up to that time. Furthermore, the total amount of these notes was afterwards paid in full, and they are not now the subject of controversy. It results that the extension thus effected could not discharge the sureties from their liability as to other installments upon which alone they have been sued in this action. The rule that an extension of time granted to the debtor by the creditor, without the consent of the sureties, extinguishes the latter's liability is common both to Spanish jurisprudence and the common law; and it is well settled in English and American jurisprudence that where a surety is liable for different payments, such as installments of rent, or upon a series of promissory notes, an extension of time as to one or more will not affect the liability of the surety for the others. (32 Cyc., 196; Hopkirk vs. McConico, 1 Brock., 220; 12 Fed. Cas., No. 6696; Coe vs. Cassidy, 72 N. Y., 133; Cohn vs.

Credit Transactions Full Text Cases Atty. Adviento

Spitzer, 129 N. Y. Supp., 104; Shephard Land Co. vs. Banigan, 36 R. I., 1; I. J. Cooper Rubber Co. vs. Johnson, 133 Tenn., 562; Bleeker vs. Johnson, 190, N. W. 1010.) The contention of the sureties on this point is therefore untenable. There is one stipulation in the contract (Exhibit A) which, at first suggests a doubt as to propriety of applying the doctrine above stated to the case before us. We refer to cause (f) which declares that the non-fulfillment on the part of the debtors of the stipulation with respect to the payment of any installment of the indebtedness, with interest, will give to the creditor the right to treat and declare all of said installments as immediately due. If the stipulation had been to the effect that the failure to pay any installment when due would ipso facto cause to other installments to fall due at once, it might be plausibly contended that after default of the payment of one installment the act of the creditor in extending the time as to such installment would interfere with the right of the surety to exercise his legal rights against the debtor, and that the surety would in such case be discharged by the extension of time, in conformity with articles 1851 and 1852 of the Civil Code. But it will be noted that in the contract now under consideration the stipulation is not that the maturity of the later installments shall be ipso facto accelerated by default in the payment of a prior installment, but only that it shall give the creditor a right to treat the subsequent installments as due, and in this case it does not appear that the creditor has exercised this election. On the contrary, this action was not instituted until after all of the installments had fallen due in conformity with the original contract. It results that the stipulation contained in paragraph (f) does not affect the application of the doctrine above enunciated to the case before us. Finally, it is contended by the appellant sureties that they were discharged by a fraud practiced upon them by the plaintiff in failing to require the debtor to execute a mortgage upon the printing establishment to secure the debt which is the subject of this suit. In this connection t is insisted that at the time France and Goulette entered into the contract of suretyship, it was represented to them that they would be protected by the execution of a mortgage upon the printing establishment by the purchasers Bosque and Pomar. No such mortgage was in fact executed and in the end another creditor appears to have obtained a mortgage upon the plant which is admitted to be superior to the claim of the plaintiff. The failure of the creditor to require a mortgage is alleged to operate as a discharge of the sureties. With this insistence we are unable to agree, for the reason that the proof does not show, in our opinion, that the creditor, on her attorney in fact, was a party to any such agreement. On the other hand it is to be collected from the evidence that the suggestion that a mortgage would be executed on the plant to secure the purchase price and that this mortgage would operate for the protection of the sureties came from the principal and not from any representative of the plaintiff. As a result of our examination of the case we find no error in the record prejudicial to any of the appellants, and the judgment appealed from will be affirmed, So ordered, with costs against the appellants. Avancea, C. J., Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur. EN BANC G.R. No. 42829 September 30, 1935

110

In view of all the foregoing, judgment is hereby rendered in favor of the plaintiff Radio Corporation of the Philippines and against the defendants Jesus R. Roa, Ramon Chavez, Andes Roa and Manuel Roa: (a) Ordering the defendant Jesus R. Roa to pay the plaintiff the sum of P22,935, plus P99.64, with legal interest thereon from the date of the filing of the complaint until fully paid: (b) that upon failure of the defendant Jesus Roa to pay the said sum indicated, the chattel described in the second cause of action shall be sold at public auction to be applied to the satisfaction of the amount of this judgment; (c) that the defendants Jesus R. Roa, Ramon Chavez, Andres Roa and Manuel Roa pay jointly and severally to the plaintiff the amount of P10,000; (d) and that Jesus R. Roa pay to the plaintiff the amount equivalent to 10 per cent of P22,935, as attorney's fees, and that all the defendants in this case pay the costs of this action. The defendants Ramon Chavez, Andres Roa and Manuel Roa have appealed from the judgment against them for P10,00 and costs. These appellants make the following assignments of error: 1. The court below erred in not finding that the balance of the total indebtedness became immediately due and demandable upon the failure of the defendant Jesus R. Roa to pay any installment on his note. 2. The court below erred in not finding that defendant Jesus R. Roa defaulted in the payment of the installment due on February 27,1932, and that plaintiff corporation gave him an extension of time for the payment of said installment. 3. The court below erred in not finding that the extension of time given to defendant Jesus R. Roa for the payment of an overdue installment served as a release of defendant sureties from liability on all the subsequent installments. 4. The court below erred in not finding that the sureties were discharged from their bond when the plaintiff authorized Jesus R. Roa to remove the photophone equipment from Cagayan, Misamis Oriental, to Silay, Occidental Negros, without the knowledge or consent of said sureties. 5. The court below erred in condemning Ramon Chavez, Andres Roa and Manuel Roa to pay jointly and severally the sum of P10,000 to the Radio Corporation of the Philippines. The defendant Jesus R. Roa became indebted to the Philippine Theatrical Enterprises, Inc., in the sum of P28,400 payable in seventy-one equal monthly installments at the rate of P400 a month commencing thirty days after December 11, 1931, with five days grace monthly until complete payment of said sum. On that same date the Philippine Theatrical Enterprises, Inc., assigned all its right and interest in that contract to the Radio Corporation of the Philippines. The paragraph of that contract in which the accelerating clause appears reads as follows: In case the vendee-mortgagor fails to make any of the payments as hereinbefore provided, the whole amount remaining unpaid under this mortgage shall immediately become due and payable and this mortgage on the property herein mentioned as well as the Luzon Surety Bond may be foreclosed by the vendormortgagee; and, in such case, the vendee-mortgager further agrees to pay the vendor- mortgagee an additional sum equivalent to 25 per cent of the principal due unpaid as costs, expenses and liquidated damages, which said sum, shall be added to the principal sum for which this mortgage is given as security, and shall become a part, thereof. On March 15, 1932, Erlanger & Galinger, Inc., acting in its capacity as attorney-in-fact of the Radio Corporation of the Philippines wrote the following letter (Exhibit 13) to the principal debtor Jesus R. Roa:

RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee, vs. JESUS R. ROA, ET AL., defendants. RAMON CHAVES, ANDRES ROA and MANUEL ROA, appellants. M.H. de Joya and Juan Barrera and Reyes for appellee. GODDARD, J.: This is an appeal from decision of the Court of First Instance of the City of Manila the dispositive part of which reads: de Borja for appellants.

Credit Transactions Full Text Cases Atty. Adviento

Mr. JESUS Cagayan, Oriental Misamis R. ROA

111

in conformity with original contract. It results that the stipulation contained in paragraph (f) does not effect the application of the doctrine above enunciated to the case before us. The stipulation in the contract under consideration, copied above, is to the effect that upon failure to pay any installment when due the other installments ipso facto become due and payable. In view of of the fact that under the express provision of the contract, quoted above, the whole unpaid balance automatically becomes due and payable upon failure to pay one installment, the act of the plaintiff in extending the payment of the installment corresponding to February, 1932, to April, 1932, without the consent of the guarantors, constituted in fact an extension of the payment of the whole amount of the indebtedness, as by that extension the plaintiff could not have filed an action for the collection of the whole amount until after April, 1932. Therefore appellants' contention that after default of the payment of one installment the act of the herein creditor in extending the time of payment discharges them as guarantors in conformity with articles 1851 and 1852 of the Civil Code is correct. It is a familiar rule that if a creditor, by positive contract with the principal debtor, and without the consent of the surety, extends the time of payment, he thereby discharges the surety. . . . The time of payment may be quite as important a consideration to the surety as the amount he has promised conditionally to pay. . . .Again, a surety has the right, on payment of the debt, to be subrogated to all the rights of the creditor, and to proceed at once to collect it from the principal; but if the creditor has tied own hands from proceeding promptly, by extending the time of collection, the hands of the surety will equally be bound; and before they are loosed, by the expiration of the extended credit, the principal debtor may have become insolvent and the right of subrogation rendered worthless. It should be observed, however, that it is really unimportant whewther the extension given has actually proved prejudicial to the surety or not. The rule stated is quite independent of the event, and the fact that the principal is insolvent or that the extension granted promised to be beneficial to the surety would give no right to the creditor to change the terms of the contract without the knowledge or consent of the surety. Nor does it matter for how short a period the time of payment may be extended. The principle is the same whether the time is long or short. The creditor must be in such a situation that when the surety comes to be substituted in his place by paying the debt, he may have an immediate right of action against the principal. The suspension of the right to sue for a month, or even a day, is as effectual to release the surety as a year or two years. (21 R.C.L., 1018-1020.) Plaintiff's contention that the enforcement of the accelerating clause is potestative on the part of the obligee, and not self-executing, is clearly untenable from a simple reading of the clause copied above. What is potestative on the part of the obligee is the foreclosure of the mortgage and not the accelerating clause. Plaintiff-appellee contends that there was no consideration for the extension granted the principal debtor. Article 1277 of the Civil Code provides that "even though the consideration should be expressed in the contract, it shall be presumed that a consideration exists and that it is licit, unless the debtor proves the contrary." It was incumbent upon the plaintiff to prove that there was no valid consideration for the extension granted. In view of the forgoing the judgment of the trial court is reversed as to the appellants Ramon Chavez, Andres Roa and Manuel Roa, without costs. SECOND DIVISION

Attention of Mrs. Amparo Chavez de Roa DEAR SIR: We acknowledge with thanks the receipt of your letter of March 9th together with your remittance of P200 for which we enclose receipt No. 7558. We are applying this amount to the balance of your January installment. We have no objection to the extension requested by you to pay the February installment by the first week of April. We would, however, urge you to make every efforts to bring the account upto date as we are given very little discretion by the RCP in giving extension of payment. Very truly yours, RADIO CORP. OF THE PHIL. By: ERLANGER & GALINGER, INC. (Sgd.) H.N. SALET Vice-President

Under the above assignments of error the principal question to be decided is whether or not the extension granted in the above copied letter by the plaintiff, without the consent of the guarantors, the herein appellants, extinguishes the latter's liability not only as to the installments due at that time, as held by the trial court, but also as to the whole amount of their obligation. Articles 1851 of the Civil Code reads as follows: ART. 1851. An extension grated to the debtor by the creditor, without the consent of the guarantor, extinguishes the latter's liability. This court has held that mere delay in suing for the collection of the does not release the sureties. (Sons of I. de la Rama vs. Estate of Benedicto, 5 Phil., 512; Banco Espaol Filipino vs. Donaldson Sim & Co., 5 Phil., 418; Manzano vs. Tan Suanco, 13 Phil., 183; Hongkong & Shanghai Baking Corporation vs. Aldecoa & Co., 30 Phil., 255.) In the case of Villa vs. Garcia Bosque (49 Phil., 126, 134, 135), this court stated: . . . The rule that an extension of time granted to the debtor by the creditor, without the consent of the sureties, extinguishes the latter's liability is common both to Spanish jurisprudence and the common law; and it is well settled in English and American jurisprudence that where a surety is liable for different payments, such as installments of rent, or upon a series of promissory notes, an extension of time as to one or more will not affect the liability of the surety for the others. . . . There is one stipulation in the contract (Exhibit A) which, at first blush, suggests a doubt as to the propriety of applying the doctrine above stated to the case before us. We refer to clause (f) which declares that the non-fulfillment on the part of the debtors of the stipulation with respect to the payment of any installment of the indebtedness, with interest, will give to the creditor the right to treat and declare all of said installments as immediately due. If the stipulation had been to the effect that the failure to pay any installment when due would ipso facto cause the other installments to fall due at once, it might be plausibly contended that after default of the payment of one installment the act of the creditor in extending the time as to such installment would interfere with the right of the surety to exercise his legal rights against the debtor, and that the surety would in such case be discharged by the extension of time, in conformity with article 1851 and 1852 of the Civil Code. But it will be noted that in the contract now under consideration the stipulation is not that the maturity of the latter installments shall be ipso facto accelerated by default in the payment of a prior installment, but only that it shall give the creditor a right treat the subsequent installments as due; and in this case it does not appear that the creditor has exercised this election. On the contrary, this action was not instituted until after all of the installments had fallen due

G.R. No. L-19632 November 13, 1974 THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., plaintiff-appellee, vs.

Credit Transactions Full Text Cases Atty. Adviento

MANUEL MUTUC DOROTEO Q. MOJICA, and FAUSTO S. ALBERTO, defendants, FAUSTO S. ALBERTO, defendant-appellant. Manuel Lim, Manuel Y Macias & Ricardo T. Bancod for plaintiff-appellee. V. A. Francisco & Associates for defendant-appellant.

112

FERNANDO, J.:p There is an obstacle, rather formidable in character, that stands in the way of the plea of appellant Fausto S. Alberto, 1 to have this Court reverse a lower court decision of February 14, 1962, holding him liable on an indemnity agreement. As pointed out therein, the language of his undertaking is clear and unmistakable and, therefore, leaves no alternative for a court except to enforce its terms. The attempt to impugn such a judgment based on the ground that the stipulation relied upon is contrary to morals and to public order and policy, while vigorously pressed, is none too successful. Accordingly, we affirm. The facts as stipulated by the parties may be gleaned from the appealed decision. Thus: "On July 16, 1957, defendant Manuel C. Mutuc as principal, and plaintiff, as surety, executed a surety bond in the amount of P1,000 in behalf of defendant Mutuc and in favor of the Maersk Line, in which the surety company guaranteed the faithful performance by said Manuel C. Mutuc of his duties in connection with his employment as crewmember of the vessel of the Maersk Line, and more particularly, that he would not desert said vessel while he was engaged as such crewmember while outside of the Philippines. To protect the plaintiff company, on July 17, 1957, in consideration of plaintiff's becoming surety of the defendant Manuel C. Mutuc, under the bond, ... the defendant Manuel C. Mutuc, Doroteo Q. Mojica, and Fausto S. Alberto, executed an indemnity agreement in favor of the plaintiff, ... . The duration of the surety bond, ... was for the period beginning July 16, 1957 to July 17, 1958, but at the instance of the defendant, Manuel C. Mutuc, it was renewed for three successive one year periods, the last period of which was from July 17, 1960 to July 17, 1961. The prior consent of the defendant Fausto S. Alberto to the aforesaid renewal extension was not obtained by the defendant Manuel C. Mutuc or by the plaintiff. According to the letter of the Immigration and Naturalization Service, United States Department of Justice, ... Manuel C. Mutuc was not aboard the vessel M/S Merit Maersk when it departed from New York at 3:00 o'clock P.M. for Charleston, South Carolina, and was presumed to be a deserter. The Compania General de Tabacos de Filipinas which represented the Maersk Lines forwarded this letter to the plaintiff and asked for the remittance of the forfeited bond of P1,000. On October 6, 1960, the plaintiff wrote a letter to the defendants Doroteo Q. Mojica and Fausto S. Alberto demanding the payment of the amount of P1,000 in accordance with the indemnity agreement. On October 25, 1960, plaintiff paid the Tabacalera the sum of P5,000 in full settlement of the latter's claim against the bond ... .This action is for the recovery of the amount of P1,000 against the defendants Mojica and Alberto based on the indemnity agreement ... . From the judgment against them by the Municipal Court, defendant Alberto appealed alleging that the renewal was made without his consent." 2 The indemnity agreement was insofar as pertinent set forth therein in this wise: "[Indemnity]: The undersigned agree at all times to jointly and severally indemnify the [Company] and keep it indemnified and hold and save it harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatsoever kind and nature which the [Company] shall or may, at any time sustain or incur in consequence of having become surety upon this bond herein above referred to or any extension, renewal, substitution or alteration thereof, made at the instance of the undersigned or any of them, or any other bond executed on behalf of the undersigned or any of them; and to pay, reimburse and make good to the [Company] its successors and assigns, all sums and amount of money which it or its representatives shall pay or cause to be paid, or become liable to pay, on account of the undersigned or any of them, of whatsoever kind and nature, including 15% of the amount involved in the litigation or other matters growing out of or connected therewith, for and as attorney's fees, but in no case less than P25.00. It is hereby further agreed that in case of any extension or renewal of the bond we equally bind ourselves to the [Company] under the

same terms and conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity agreement. [Renewals, alterations and substitutions]: The undersigned hereby empower and authorize the Company to grant or consent to the granting of any extension, continuation, increase modification, change, alteration, and/or renewal of the original bond herein referred to, and to execute or consent to the execution of any substitution for said Bond with the same or different conditions and parties, and the undersigned hereby hold themselves jointly and severally liable to the Company for the Original Bond herein abovementioned or for any extension, continuation, increase, modification, change, alteration, renewal or substitution thereof, until the full amount including principal, interests, premiums, costs and other expenses due to the Company thereunder is fully paid up." 3 The lower court after referring to the above stipulation as to "Renewals" which refers not to a single extension but to "any extension" agreed to in advance by defendant, now appellant, found for plaintiff, now appellee. As set forth in the decision: "The defendant having expressly empowered or authorized his principal to the granting of any extension, his liability under the indemnity agreement necessarily follows." 4 It is from that decision in favor of plaintiff that this appeal is taken. As set forth at the outset, there is no legal ground for a reversal. 1. Appellant was not compelled to enter into an indemnity agreement. He did so of his own free will. He agreed to hold himself liable for the amount therein specified. What is more, he did consent likewise to be so bound not only for the one year period specified but to any extension thereafter made, an extension moreover that could be had without his having to be notified. That was what the contract provided. He gave his plighted word. The terms were definite and certain. There was no ambiguity. All that was necessary was to see its enforcement. The Civil Code explicitly provides: "If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its interpretation shall control." 5 that was how it was worded under the Civil Code of Spain of 1899 formerly in force in this jurisdiction. 6 A provision like the above exemplifies according to the leading case of Perez v. Pomar 7 the principle that "the will of the contracting parties is law, ... ." 8 It is understandable then why in Alburo v. Villanueva, 9 this Court affirmed that where the terms of a contract are "clear and explicit," they "do not justify an attempt to read into it any alleged intention of the parties other than that which appears upon its face." 10 As was so categorically put forth in Hernandez v. Antonio: 11 "The literal sense of its stipulations must be observed." 12 It was so succinctly observed by Chief Justice Arellano in Velasco v. Lao Tam 13 that such is the "first rule on the matter ... ." 14 There is this excerpt from Chinchilla v. Rafel: 15 "That the terms employed in the contract Exhibit 1 are clear and leave no doubt as to the true genuine intention of the contracting parties, it is sufficient, in the opinion of this court, to demonstrate it by a simple reading of the document Exhibit 1 from the wording of which it is not possible to find any meaning contrary or opposed to the evident intention of the contracting parties, Rafel and Verdaguer. ... From the literal wording of the document in question, it is not possible under any circumstance whatsoever to infer a contract distinct from that which really and truly appears to have been specified in the said document." 16 Thus, contracts, according to Feliciano v. Limjuco, 17 which are the private laws of the contracting parties, should be fulfilled according to the literal sense of their stipulations, if their terms are clear and leave no room for doubt as to the intention of the contracting parties, for contracts are obligatory, no matter what their form may be, whenever the essential requisites for their validity are present. 18 A terse summary of the matter is that of the then Justice, later Chief Justice, Moran: "A writing must be interpreted according to the legal meaning of its language." 19 2. There was no other valid conclusion that could be reached by the lower court. Even appellant must have seen that so it ought to be. That would account for the contention in his brief that the stipulation as to "any extension" without the need for his being notified was "null and void being contrary to law, morals, good customs, public order or public policy." 20 That is a pretty tall order. There is more than just a hint of hyperbole in such a sweeping allegation. Appellant though ought to have realized that assertion is not the equivalent of proof. A little more objectivity on his part should bring the realization that no offense to law or morals could be imputed to such a contractual provision. As to good customs, that category requires something to substantiate it. A mere denunciatory

Credit Transactions Full Text Cases Atty. Adviento

characterization certainly cannot suffice. That leaves public order or public policy. It is difficult to follow appellant's train of reasoning. He would premise it on the indemnity agreement being a contract of adhesion. He was not at all compelled to agree to it. He was free to act either way. He had a choice. It may be more offensive to public policy, let alone morals or good customs, if thereafter he would be allowed to go back on his word. Besides the policy underlying such a stipulation in this litigation is clear. What was guaranteed was the faithful performance of defendant Mutuc of his employment as a member of the crew of a vessel plying overseas. What was more logical considering the difficulty of contacting him then for the party concerned, here appellant, to agree in advance to any extension without the need for notification. So the parties agreed. There could be thus nothing that did offend public policy or public order when such an arrangement was explicitly provided for. Appellant, clearly, has not made out a case for reversal. 21 WHEREFORE, the lower court decision of February 14, 1962 is affirmed. Costs against appellant. Antonio, Fernandez and Aquino, JJ., concur. SECOND DIVISION G.R. No. L-34539 July 14, 1986 EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners, vs. THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, RAMON C. CONCEPCION and MANUEL M. TAMAYO, partners of the defunct partnership Concepcion & Tamayo Construction Company, JOSE TORIBIO, Atty-in-Fact of Concepcion & Tamayo Construction Company, and THE DISTRICT ENGINEER, Puerto Princesa, Palawan, respondents. Fernando R. Mangubat, Jr. for respondent PNB.

113

After some persuasion appellants signed on December 23, 1955 the 'Amendment of Real Estate Mortgage', mortgaging their said property to the PNB to guaranty the loan of P10,000.00 extended to the Company. The terms and conditions of the original mortgage for Pl,000.00 were made integral part of the new mortgage for P10,000.00 and both documents were registered with the Register of Deeds of Manila. The promissory note covering the loan of P10,000.00 dated December 29, 1955, maturing on April 27, 1956, was signed by Jose Toribio, as attorney-in-fact of the Company, and by the appellants. Appellants also signed the portion of the promissory note indicating that they are requesting the PNB to issue the Check covering the loan to the Company. On the same date (December 23, 1955) that the 'Amendment of Real Estate' was executed, Jose Toribio, in the same capacity as attorney-in- fact of the Company, executed also the 'Deed of Assignment' assigning all payments to be made by the Bureau to the Company on account of the contract for the construction of the Puerto Princesa building in favor of the PNB. This assignment of credit to the contrary notwithstanding, the Bureau; with approval, of the PNB, conditioned, however that they should be for labor and materials, made three payments to the Company on account of the contract price totalling P11,234.40. The Bureau's last request for P5,000.00 on June 20, 1956, however, was denied by the PNB for the reason that since the loan was already overdue as of April 28, 1956, the remaining balance of the contract price should be applied to the loan. The Company abandoned the work, as a consequence of which on June 30, 1956, the Bureau rescinded the construction contract and assumed the work of completing the building. On November 14, 1958, appellants wrote the PNB contending that since the PNB authorized payments to the Company instead of on account of the loan guaranteed by the mortgage there was a change in the conditions of the contract without the knowledge of appellants, which entitled the latter to a cancellation of their mortgage contract. Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959 this action against the PNB, the Company, the latter's attorney-in-fact Jose Toribio, and the District Engineer of Puerto Princesa, Palawan, seeking the cancellation of their real estate mortgage. The complaint was amended to exclude the Company as defendant, it having been shown that its life as a partnership had already expired and, in lieu thereof, Ramon Concepcion and Manuel M. Tamayo, partners of the defunct Company, were impleaded in their private capacity as defendants. After hearing, the trial court rendered judgment, denying the prayer in the complaint that the petitioners be absolved from their obligation under the mortgage contract and that the said mortgage be released or cancelled. The petitioners were ordered to pay jointly and severally with their comakers Ramon C. Concepcion and Manuel M. Tamayo the sum of P11,900.19 with interest at the rate of 6% per annum from the date of the filing of the complaint on June 27, 1959 until fully paid and Pl,000.00 attorney's fees. The decision also provided that if the judgment was not satisfied within 90 days from its receipt, the mortgaged properties together with all the improvements thereon belonging to the petitioners would be sold at public auction and applied to the judgment debt. The Court of Appeals affirmed the trial court's decision in toto stating that, as accommodation makers, the petitioners' liability is that of solidary co-

GUTIERREZ, JR., J.: This is a petition for review seeking to annul and set aside the decision of the Court of Appeals, now the Intermediate Appellate Court, affirming the order of the trial court which dismissed the petitioners' complaint for cancellation of their real estate mortgage and held them jointly and severally liable with the principal debtors on a promissory note which they signed as accommodation makers. The factual background of this case is stated in the decision of the appellate court: Appellants are the registered owners of a parcel of land located in Sampaloc, Manila, and covered by T.C.T. 35161 of the Register of Deeds of Manila. On October 7, 1954, this property was mortgaged by the appellants to the Philippine National Bank, hereinafter called PNB, to guarantee a loan of P1,000.00 extended to one Domingo Prudencio. Sometime in 1955, the Concepcion & Tamayo Construction Company, hereinafter called Company, had a pending contract with the Bureau of Public Works, hereinafter called the Bureau, for the construction of the municipal building in Puerto Princess, Palawan, in the amount of P36,800.00 and, as said Company needed funds for said construction, Jose Toribio, appellants' relative, and attorney-in-fact of the Company, approached the appellants asking them to mortgage their property to secure the loan of P10,000.00 which the Company was negotiating with the PNB.

Credit Transactions Full Text Cases Atty. Adviento

makers and that since "the amounts released to the construction company were used therein and, therefore, were spent for the successful accomplishment of the work constructed for, the authorization made by the Philippine National Bank of partial payments to the construction company which was also one of the solidary debtors cannot constitute a valid defense on the part of the other solidary debtors. Moreover, those who rendered services and furnished materials in the construction are preferred creditors and have a lien on the price of the contract." The appellate court further held that PNB had no obligation whatsoever to notify the petitioners of its authorizing the three payments in the total amount of Pll,234.00 in favor of the Company because aside from the fact that the petitioners were not parties to the deed of assignment, there was no stipulation in said deed making it obligatory on the part of the PNB to notify the petitioners everytime it authorizes payment to the Company. It ruled that the petitioners cannot ask to be released from the real estate mortgage. In this petition, the petitioners raise the following issues which they present in the form of errors: I. First Assignment of Error. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN PETITIONERS WERE SOLIDARY CO-DEBTORS INSTEAD OF SURETIES: II. Second Assignment of Error. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS WERE NOT RELEASED FROM THEIR OBLIGATION TO THE RESPONDENT PNB, WHEN THE PNB, WITHOUT THE KNOWLEDGE AND CONSENT OF PETITIONERS, CHANGED THE TENOR AND CONDITION OF THE ASSIGNMENT OF PAYMENTS MADE BY THE PRINCIPAL DEBTOR; CONCEPCION & TAMAYO CONSTRUCTION COMPANY; AND RELEASED TO SUCH PRINCIPAL DEBTOR PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH WERE MORE THAN ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB. The petitioners contend that as accommodation makers, the nature of their liability is only that of mere sureties instead of solidary co-debtors such that "a material alteration in the principal contract, effected by the creditor without the knowledge and consent of the sureties, completely discharges the sureties from all liability on the contract of suretyship. " They state that when respondent PNB did not apply the initial and subsequent payments to the petitioners' debt as provided for in the deed of assignment, they were released from their obligation as sureties and, therefore, the real estate mortgage executed by them should have been cancelled. Section 29 of the Negotiable Instrument Law provides: Liability of accommodation party. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that "... in lending his name to the accommodated party, the accommodation party is in effect a surety. ... . " However, unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value such that even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder for value is concerned, he is a solidary co- debtor.

114

Expounding on the nature of the liability of an accommodation petition party under the aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA 713, 716): 3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his liability to the appellee, as the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. So that the appellant stands only as a surety in relation to the maker, granting this to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder for value. The liability of the appellant remains primary and unconditional. To sanction the appellant's theory is to give unwarranted legal recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a holder in due course and for value, can escape liability on his indorsement by the convenient expedient of interposing the defense that he is a mere accommodation indorser. There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally liable on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned. Consequently, the petitioners cannot claim to have been released from their obligation simply because the time of payment of such obligation was temporarily deferred by PNB without their knowledge and consent. There has to be another basis for their claim of having been freed from their obligation. The question which should be resolved in this instant petition, therefore, is whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments Law such that the petitioners must be necessarily barred from setting up the defense of want of consideration or some other personal defenses which may be set up against a party who is not a holder in due course. A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the requirements of a holder in due course under Section 52 of the same law except notice of want of consideration. (Agbayani, Commercial Laws of the Philippines, 1964, p. 208). If he does not qualify as a holder in due course then he holds the instrument subject to the same defenses as if it were non-negotiable (Section 58, Negotiable Instruments Law). In the case at bar, can PNB, the payee of the promissory note be considered a holder in due course? Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due course and stands on no better footing than a mere assignee. In those cases where a payee was considered a holder in due course, such payee either acquired the note from another holder or has not directly dealt with the maker thereof. As was held in the case of Bank of Commerce and Savings v. Randell (186 NorthWestern Reporter 71): We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for value, before maturity, and without any notice of any infirmity, from a holder, not the maker. to whom it was negotiated as a completed instrument, is a holder in due course within the purview of a Negotiable Instruments law, so as to preclude the defense of fraud and failure of consideration between the maker and the holder to whom the instrument, was delivered. Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on rehearing and quoting Daniel on Negotiable Instruments, it was held:

Credit Transactions Full Text Cases Atty. Adviento

It is a general principle of the law merchant that, as between the immediate parties to a negotiable instrument-the parties between whom there is a privity-the consideration may be inquired into; and as to them the only superiority of a bill or note over other unsealed evidence of debt is that it prima facie imports a consideration. Although as a general rule, a payee may be considered a holder in due course we think that such a rule cannot apply with respect to the respondent PNB. Not only was PNB an immediate party or in privy to the promissory note, that is, it had dealt directly with the petitioners knowing fully well that the latter only signed as accommodation makers but more important, it was the Deed of Assignment executed by the Construction Company in favor of PNB which principally moved the petitioners to sign the promissory note also in favor of PNB. Petitioners were made to believe and on that belief entered into the agreement that no other conditions would alter the terms thereof and yet, PNB altered the same. The Deed of Assignment specifically provided that Jose F. Toribio, on behalf of the Company, "have assigned, transferred and conveyed and by these presents, do assign, transfer and convey unto the said Philippine National Bank, its successors and assigns all payments to be received from the Bureau of Public Works on account of contract for the construction of the Puerto Princesa Municipal Building in Palawan, involving the total amount of P 36,000.00" and that "This assignment shall be irrevocable and subject to the terms and conditions of the promissory note and or any other kind of documents which the Philippine National Bank have required or may require the assignor to execute to evidence the above-mentioned obligation." Under the terms of the above Deed, it is clear that there are no further conditions which could possibly alter the agreement without the consent of the petitioners such as the grant of greater priority to obligations other than the payment of the loan due to the PNB and part of which loan was guaranteed by the petitioners in the amount of P10,000.00. This, notwithstanding, PNB approved the Bureau's release of three payments directly to the Company instead of paying the same to the Bank. This approval was in violation of the Deed of Assignment and without any notice to the petitioners who stood to lose their property once the promissory note falls due without the same having been paid because the PNB, in effect, waived payments of the first three releases. From the foregoing circumstances, PNB can not be regarded as having acted in good faith which is also one of the requisites of a holder in due course under Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory note which it took from the accommodation makers was signed by the latter because of full reliance on the Deed of Assignment, which, PNB had no intention to comply with strictly. Worse, the third payment to the Company in the amount of P4,293.60 was approved by PNB although the promissory note was almost a month overdue, an act which is clearly detrimental to the petitioners. We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can validly set up their personal defense of release from the real estate mortgage against PNB. The latter, in authorizing the third payment to the Company after the promissory note became due, in effect, extended the term of the payment of the note without the consent of the accommodation makers who stand as sureties to the accommodated party and to all other parties who are not holders in due course or who do not derive their right from the same, including PNB. It may be argued that the Prudencios could have mortgaged their property even without the promissory note. The records show, however, that they would not have mortgaged the lot were it not for the sake of the Company whose attorney-in-fact was their relative. The spouses did not need the money for themselves. The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in order to secure a loan in favor of the Company but the Prudencios refused. It was only when the deed of assignment was shown to the spouses that they consented to the mortgage and signed the promissory note in the Bank's favor.

115

Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract. Petitioners do not dispute the validity of the mortgage. They only want to have it cancelled because the Bank violated the deed of assignment and extended the period of time of payment of the promissory note without the petitioners' consent and to the latter's detriment. The mortgage cannot be separated from the promissory note for it is the latter which is the basis of determining whether the mortgage should be foreclosed or cancelled. Without the promissory note which determines the amount of indebtedness there would have been no basis for the mortgage. True, if the Bank had not been the assignee, then the petition petitioners would be obliged to pay the Bank as their creditor on the promissory note, irrespective of whether or not the deed of assignment had been violated. However, the assignee and the creditor in this case are one and the same the Bank itself. When the Bank violated the deed of assignment, it prejudiced itself because its very violation was the reason why it was not paid on time in its capacity as creditor in the promissory note. It would be unfair to make the petitioners now answer for the debt or to foreclose on their property. Neither can PNB justify its acts on the ground that the Bureau of Public Works approved the deed of assignment with the condition that the wages of laborers and materials needed in the construction work must take precedence over the payment of the promissory note. In the first place, PNB did not need the approval of the Bureau. But even if it did, it should have informed the petitioners about the amendment of the deed of assignment. Secondly, the wages and materials have already been paid. That issue is academic. What is in dispute is who should bear the loss in this case. As between the petitioners and the Bank, the law and the equities of the case favor the petitioners, And thirdly, the wages and materials constitute a lien only on the constructed building but do not enjoy preference over the loan unless there is a liquidation proceeding such as in insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476). There were remedies available at the time if the laborers and the creditors had not been paid. The fact is, they have been paid. Hence, when the PNB accepted the condition imposed by the Bureau without the knowledge or consent of the petitioners, it amended the deed of assignment which, as stated earlier, was the principal reason why the petitioners consented to become accommodation makers. WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the decision of the trial court is hereby REVERSED and SET ASIDE and a new one entered absolving the petitioners from liability on the promissory note and under the mortgage contract. The Philippine National Bank is ordered to release the real estate mortgage constituted on the property of the petitioners and to pay the amount of THREE THOUSAND PESOS (P3,000.00) as attorney's fees. SO ORDERED. EN BANC G.R. No. L-41795 August 30, 1935

J.W. SHANNON and MRS. J.W. SHANNON, plaintiffs-appellees, vs. THE PHILIPPINE LUMBER & TRANSPORTATION CO., INC., and E.E. ELSER, defendants. E.E. ELSER, appellant. Gibbs and McDonough DeWitt, Perkins and Ponce Enrile for appellees. IMPERIAL, J.: On March 1, 1926, the Philippine Lumber & Transportation Co., Inc., obtained a loan of P12,000 from Mrs. J.W. Shannon and executed a note promising to pay the said sum to the creditor or to her husband, J.W. Shannon, on or before March 1, 1927, with interest at 10 per cent per annum, payable monthly and in advance on the first day of each month. The obligation with its terms was secured, jointly and severally, by Walter for appellant.

Credit Transactions Full Text Cases Atty. Adviento

E. Jones and E.E. Elser who signed the note. This note was ratified before the notary public, Juan L. Diaz, in the City of Manila, on March 22, 1926. The principal was not paid on its due date or thereafter, but the stipulated interest up to October, 1929, inclusive, was paid. Walter E. Jones died on November 24, 1929, and the plaintiffs filed a claim and recovered from his estate P1,062 in part payment of occurred interest due. On August 1, 1927, while the principal obligation was pending payment, J.W. Shannon obtained a loan of P1,000 from Walter E. Jones; on April 9, 1928, he obtained another loan of P2,000, and on April 28, 1928, he made Jones pay on his account a certain bill of exchange drawn upon him in the sum of P1,656, making Shannon's total loan from Jones P4,656. Both agreed that this amount should be paid at the rate of P125 a month, with 10 per cent interest per annum, failing which, Jones was authorized to retain and apply to the monthly payments whatever amounts he might have belonging to Shannon or to his wife. Jones did not receive monthly payments from Shannon under this agreement, but instead he deducted them from the monthly interest which, on the other hand, the Philippine Lumber & Transportation Co., Inc., of which he was the president, was bound to pay. These operations were entered in the books of said corporation. As the Philippine Lumber & Transportation Co., Inc., and its sureties had not paid the principal and the stipulated interest from November 1, 1929, the Shannons brought suit against the debtor corporation and the surety, E.E. Elser, for the recovery of said amounts. The Philippine Lumber & Transportation Co., Inc., neither appeared nor answered the complaint, and it was declared in default. Neither did it intervene nor defend itself at the trial. E.E. Elser appealed from the judgment ordering the Philippine Lumber & Transportation Co., Inc., to pay to the plaintiff the sum of P12,000 with interest at 10 per cent annum from November 1, 1929, minus the sum of P1,062 which had been recovered from the estate of the deceased Walter E. Jones, plus another 10 per cent as attorney's fees, and the costs, and likewise requiring the said E.E. Elser to pay to the plaintiffs one-half of all the aforesaid sums of money, except attorney's fees, which the Philippine Lumber & Transportation Co., Inc., should fail to pay. The appellant argues that the judgment is erroneous: in not holding that after the note became due, the plaintiffs had received from the Philippine Lumber & Transportation Co., Inc., payments in advance of the stipulated interest for a relatively long period of time, and that, consequently, said plaintiffs, as creditors, extended the period fixed for the payment of the principal without his consent; in not permitting him to adduce evidence on his defense of laches whereby he attempted to show that in 1927 and 1928 the principal debtor had property and money with which to pay its entire obligation; in not holding that the plaintiffs were guilty of unreasonable delay in bringing their action, thereby causing him damages, and in not absolving him from the complaint. The first assigned error relates to the loans made by Jones to Shannon up to the amount of P4,656. The appellant contends that these loans were in truth payments in advance of the stipulated interest which the principal debtor had to pay monthly and which had the effect of extending the stated period for the payment of the indebtedness, thereby relieving him of his obligation as surety under article 1851 of the Civil Code, because his consent was not first obtained; and in support of his contention cites the decision of this court in Banco Espaol Filipino vs. Donaldson Sim & Co. (5 Phil., 418). The facts, as we find them, do not support the contention. It indisputably appears that those amounts of money were obtained by Shannon not as payments in advance of the interest which the principal debtor was bound to pay, but as independent loans which Jones granted to him. The only connection of these loans with the interest of the indebtedness of the Philippine Lumber & Transportation Co., Inc., consisted in the agreement between Jones and Shannon to the effect that in case the latter should fail to pay the monthly interest, the former was authorized to deduct it from any amount which he might have at his disposal belonging to Shannon or to his wife. As, on the other hand, Jones was the president of the principal debtor, and the latter had to pay monthly interest on its indebtedness, Jones deducted monthly from this last interest that which Shannon failed to pay. It is therefore, evident that neither the provisions of article 1851 of the Civil Code nor the doctrine on the matter enunciated in the Banco Espaol Filipino case is squarely in point.

116

The appellant attempted to prove at the trial that the plaintiffs had been guilty of laches and had brought their action against him tardily, because in 1927 and 1928 the principal debtor had sufficient property and money with which it could have fully paid its obligation, and in so acting the plaintiffs caused him damages. This kind of evidence was timely objected to, and the objection was sustained by the court. This ruling is the subject of the second and third assigned errors. We hold that the judgment is not erroneous on these grounds. True, the plaintiffs let pass some years from the maturity of the note before bringing the action for the recovery of its amount. But we hold that the delay does not constitute laches in the sense that it had the effect of releasing both the principal debtor and its sureties from their obligations, nor did it occasion loss of rights and privileges of such moment as to give rise to the discharge of the obligation contracted by the appellant. In the aforecited Banco Espaol Filipino case, in ruling upon a similar question, we said: "The decision en casacion of the Supreme Court of Spain is jurisprudence properly interpreting the Spanish Civil Code. The following doctrine is laid down in the judgment of March 22, 1901: `The court which pronounced sentence in this case has not violated article 1851 of the Civil Code, because the mere circumstance that the creditor does not demand the compliance with the obligation immediately upon the same becoming due, and that he more or less delays his action, does not mean or reveal an intention to grant an extension to the debtor, as according to article 1847 the obligation of the surety extinguishes at the same time as that of the debtor, and for the same causes as the other obligations. ...' Deferring the filing of the action does not imply a change in the efficacy of the contract or liability of any kind on the part of the debtor. It is merely, without demonstration or proof to the contrary, respite, waiting, courtesy, leniency, passivity, inaction. It does not constitute novation, because this must be express. It does not engender liability, because on the part of the creditor such can not arise except from delay, and for this class of delay interpellation on the part of the party who considers himself injured thereby is necessary. In order that this waiting or inaction, of itself beneficial to the parties obligated, can be interpreted as injurious to any of them, it is altogether necessary that this be represented by means of a protest or interpellation against the delay. Without action of this kind it continues to be what it is merely a failure of the creditor to act, which it itself does not create liability. It can not do so, as we see in the aforesaid sentencia de casacion. `.... In accordance with the provisions of number 4 of article 1843, the surety, even before payment, may proceed against the principal debtor when the debt has become demandable because the term in which it should have been paid has expired.' In view of this action, which is a protection against the risk of possible insolvency on the part of the principal debtor, it is very clearly seen that the law does not even grant the surety the right to sue the creditor for delay, as protection against the risks of possible insolvency on the part of the debtor; but in view of the efficacy of the action of the contract against the surety, beginning with the date when the obligation becomes due, his vigilance must be exercised rather against the principal debtor." (5 Phil., 422, 423.) In Clark vs. Sellner (42 Phil., 384), this court had occasion to reiterate the same doctrine as follows: "The trial judge took into account the fact that at the time of the maturity of the note, the collateral security given to guarantee the payment was worth more than what was due on the note, but is depreciated to such an extent that, at the time of the institution of this action, it was entirely valueless. And taking this circumstance, together with the fact that this case was not commenced until after the lapse of four years from the date on which the payment fell due, and with the further fact that the defendant had not received any part of the amount mentioned in the note, he was of the opinion, and so decided, that the defendant could not be held liable. The theory of the judge a quo was that the plaintiff's failure to enforce the guaranty for the payment of the debt, and his delay in instituting this action constitute laches, which had the effect of extinguishing his right of action. We see no sufficient ground for applying such a theory to the case before us. As stated, the defendant's position being, as it is, that of a joint surety, he may, at any time after the maturity of the note, make payment, thus subrogating himself in the place of the creditor with the right to enforce the guaranty against the other signers of the note for the reimbursement of what he is entitled to recover from them. The mere delay of the creditor in enforcing the guaranty has not by any means impaired his action against the defendant. It should not be lost sight of that the defendant's signature on the note is an assurance to the creditor that the collateral guaranty will remain good, and that otherwise, he, the defendant, will be personally responsible for the payment. True, that if the creditor had done any act whereby the guaranty was impaired in its value, or discharged, such an act would have wholly or partially released the surety; but it must be borne in mind that it is a recognized

Credit Transactions Full Text Cases Atty. Adviento

doctrine in the matter of suretyship that with respect to the surety, the creditor is under no obligation to display any diligence in the enforcement of his rights as a creditor. His mere inaction, indulgence, passiveness, or delay in proceeding against the principal debtor, or the fact that he did not enforce the guaranty or apply on the payment of such funds as were available, constitute no defense at all for the surety, unless the contract expressly requires diligence and promptness on the part of the creditor, which is not the case in the present action. There is in some decisions a tendency toward holding that the creditor's laches may discharge the surety, meaning by laches a negligent forbearance. This theory, however, is not generally accepted and the courts almost universally consider it essentially inconsistent with the relation of the parties to the note. (21 R.C.L., 1032-1034.)" And in Ibaez de Aldecoa vs. Hongkong & Shanghai Banking Corporation (42 Phil., 1000; 246 U.S., 627; 62 Law. ed., 907), the Supreme Court of the United States in affirming a decision of this court on the same legal question, said: "The appellant Isabel Palet assigns as error that the Supreme Court failed to hold (1) that her liability as surety of Aldecoa and Company had been extinguished in accordance with the provisions of article 1851 of the Civil Code, which provides that `the extension granted to a debtor by the creditor, without the consent of the surety, extinguishes the security.' (2) Refused to order for her benefit that the property of the company should be exhausted before resort be had to her property for satisfaction of the bank's claim. It will be observe at once that the defense have some dependence upon questions of fact upon which the two courts below concurred. From article 1851 of the Civil Code, abstractly considered, nothing can be deduced. Both the trial and supreme courts held that `the mere failure to bring an action upon a credit, as soon as the same or any part of it matures, does not constitute an extension of the term of the obligation.' And it was further held that the extension, to produce the extinction of the liability, `must be based on some new agreement by which the creditor deprives himself of the right to immediately enforce the claim.' This interpretation of the local courts of the local law we defer to. The construction, moreover, expresses the rule that obtains in other jurisdictions." The last ground of the remedy requires no extended consideration. Under the conclusions we have arrived at, it is evident that the judgment is not erroneous is not absolving the appellant. The plaintiffs suggest in their brief that we amend the appealed judgment by ordering the appellant to pay one-half of the attorney's fees which the principal debtor should fail to pay. We are of the opinion that the contention is untenable because the plaintiffs did not appeal from the judgment but accepted and abided by it. In view of the foregoing, the appealed judgment is affirmed, with the costs of this instance to the appellant. So ordered. FIRST DIVISION G.R. No. L-47369 June 30, 1987 JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners, vs. R & B SURETY AND INSURANCE COMPANY, INC., respondent.

117

in its line of credit, to secure its faithful compliance with the terms and conditions under which its line of credit was increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and severally to comply with the "terms and conditions of the advance line [of credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond. In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM but also in his personal and individual capacity; and (b) another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal capacity. Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said SURETY BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity Agreements further provided: (b) INDEMNITY: TO indemnify the SURETY COMPANY for any damage, prejudice, loss, costs, payments, advances and expenses of whatever kind and nature, including [of] attorney's fees, which the CORPORATION may, at any time, become liable for, sustain or incur as consequence of having executed the above mentioned Bond, its renewals, extensions or substitutions and said attorney's fees [shall] not be less than twenty [20%] per cent of the total amount claimed by the CORPORATION in each action, the same to be due, demandable and payable, irrespective of whether the case is settled judicially or extrajudicially and whether the amount has been actually paid or not; (c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: The said indemnities will be paid to the CORPORATION as soon as demand is received from the Creditor or upon receipt of Court order or as soon as it becomes liable to make payment of any sum under the terms of the abovementioned Bond, its renewals, extensions, modifications or substitutions, whether the said sum or sums or part thereof, have been actually paid or not. We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from any of us, payments on account of the pending obligations, and to grant extension to any of us, to liquidate said obligations, without necessity of previous knowledge of [or] consent from the other obligors. xxx xxx xxx (e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. Any payment or disbursement made by the SURETY COMPANY on account of the above-mentioned Bonds, its renewals, extensions or substitutions, either in the belief that the SURETY COMPANY was obligate[d] to make such payment or in the belief that said payment was necessary in order

FELICIANO, J.: This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one involving only questions of law and, therefore, falling within the exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296, as amended. In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000.00, representing the increment

Credit Transactions Full Text Cases Atty. Adviento

to avoid greater losses or obligations for which the SURETY COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions or substitutions, shall be final and will not be disputed by the undersigned, who jointly and severally bind themselves to indemnify the SURETY COMPANY of any and all such payments as stated in the preceding clauses. xxx xxx xxx When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts. R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the Court of First Instance of Manila, praying principally that judgment be rendered: b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20 representing the unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968, and the additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per annum; [and] c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00 representing the total amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per annum on the amount of P70,000.00 which had been paid to the Phil. National Bank already, the interest to begin from the month of September, 1966; xxx xxx xxx Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R & B Surety: (i) did not express the true intent of the parties thereto in that he had been asked by R & B Surety to execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with the requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show that it was complying with the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety had assured him that the execution of the agreement was a mere formality and that he was to be considered a stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from enforcing the Indemnity Agreement as against him. Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R & B Surety only "for accommodation purposes" and that it did not express their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv) that the filing of the complaint was premature, considering that R & B Surety filed the case against him as indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the Surety Bond. Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses. Petitioner Villanueva did not submit any evidence either on his "accommodation" defense. The trial court was

118

therefore constrained to decide the case on the basis alone of the terms of the Trust Agreement and other documents submitted in evidence. In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R & B Surety, the dispositive portion of which reads as follows; Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum of 400,000,00, representing the total amount of their liability on Surety Bond No. 4765, and interest at the rate of 6% per annum on the following amounts: On P14,000.00 from September 27, 1966; On P4,000.00 from November 28, 1966; On P4,000.00 from December 14, 1966; On P4,000.00 from January 19, 1967; On P8,000.00 from February 13, 1967; On P4,000.00 from March 6, 1967; On P8,000.00 from June 24, 1967; On P8,000. 00 from September 14, 1967; On P8,000.00 from November 28, 1967; and On P8,000. 00 from February 26, 1968 until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest thereon from the filing of plaintiff's complaint on August 1, 1968 until fully paid, and the further sum of P4,000.00 as and for attorney's fees and expenses of litigation which this Court deems just and equitable. There being no showing the summons was duly served upon the defendant Liu Tua Ben who has filed no answer in this case, plaintiff's complaint is hereby dismissed as against defendant Liu Tua Ben without prejudice. Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva. Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals which, as already noted, certified the case to us as one raising only questions of law. The issues we must confront in this appeal are: 1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity Agreements; 2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement; and

Credit Transactions Full Text Cases Atty. Adviento

3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit against R & B Surety for the forfeiture of its Surety Bond. We address these issues seriatim. 1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28 December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary. The Trust Agreement provided, in pertinent part, as follows: WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21, 1963, in favor of the BENEFICIARY in connection with the application of PAGRICO for an advance line of P400,000.00 to P800,000.00; WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the BENEFICIARY to secure certain credit facilities extended by the BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO); WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has demanded compliance by the R & B and the CONSOLACION of their respective obligations under the aforesaid bonds; WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity agreements aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY against said companies, he is willing as he hereby agrees to pay the obligations of said companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest from the net profits arising from the procurement of reparations consumer goods made thru the allocation of WARVETS; . . . l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose of paying to the BENEFICIARY Philippine National Bank in the manner stated hereunder, the obligations of the R & B under the R & B Bond No. G-4765 for P400,000.00 dated December 23, 1963, and of the CONSOLACION under The Consolacion Bond No. G5938 of June 3, 1964 for P900,000.00 or the total amount of P1,300,000.00 without interest from the net profits arising from the procurement of reparations consumer goods under the Memorandum of Settlement and Deeds of Assignment of February 2, 1959 through the allocation of WARVETS; xxx xxx xxx 6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R & B and CONSOLACION, subject of the bond mentioned above. In the meantime that this TRUST AGREEMENT is being implemented, the

119

BENEFICIARY hereby agrees to forthwith reinstate the R & B and the CONSOLACION as among the companies duly accredited to do business with the BENEFICIARY and its branches, unless said companies have been blacklisted for reasons other than those relating to the obligations subject of the herein TRUST AGREEMENT; xxx xxx xxx 9. This agreement shall not in any manner release the R & B and CONSOLACION from their respective liabilities under the bonds mentioned above. (emphasis supplied) There is no question that the Surety Bond has not been cancelled or fully discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it must still subsist. And so must the supporting Indemnity Agreements. 3 We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the Indemnity Agreements were extinguished by novation brought about by the subsequent execution of the Trust Agreement. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 4 Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved-an obligation is extinguished and a new one is created in lieu thereof. 5 If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one. 6 Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one must be clearly discernible. 7 Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8 Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety Bond. Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and nothing else) would sustain a finding of novation by implication. 9 But where, as in this case, the parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all. What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to assume the same obligation that R & B

Credit Transactions Full Text Cases Atty. Adviento

Surety was bound to perform under the Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the extinguishment of the liability of the first debtor. 10 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that: [t]he mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had been only two, there would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never intended to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust Agreement, could not have intended to release any of its own indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB. 2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any action to enforce its claims against R & B Surety . The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the R & B Surety] to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND ." This part of the Agreement suggests that the indemnitors (including the petitioners) would become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners-indemnitors ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty" could apply in the instant case. The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties. There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's Obligation had in fact already matured, for those obligations were to amture "as soon as [R & B Surety] became liable to make payment of any sum under the terms of the [Surety Bond] whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079: [t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of the referred to herein.(emphasis supplied)

120

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the principal debtor upon the orginal maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the instant case. As this Court has held, merely delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an action on the original security. 12 In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have against PAGRICO. 3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R & B Surety to recover from petitioners even before R & B Surety shall have paid the PNB. We have previously held similar indemnity clauses to be enforceable and not violative of any public policy. 13 The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against actual loss but against liability as well. 14 While in a contract of indemnity against loss as indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case, the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB. Summarizing, we hold that : (1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety. (2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B Surety did not amount to an "extension granted to the debtor" without petitioner's consent so as to release petitioner's from their undertaking as indemnitors of R & B Surety under the INdemnity Agreements; and (3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments to the PNB. The present suit is therefore not premature despite the fact that the PNB has not instituted any action against R & B Surety for the collection of its matured obligation under the Surety Bond. WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial court is AFFIRMED in toto. Costs against the petitioners. SO ORDERED. Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Gancayco and Sarmiento, JJ., concur. EN BANC

Credit Transactions Full Text Cases Atty. Adviento

G.R. No. L-18520 September 23, 1922 THE HONGKONG & SHANGHAI BANKING CORPORATION, plaintiffappellee, vs. VICENTE ALDANESE and UNION GUARANTEE CO., LTD., defendants. UNION GUARANTEE CO., LTD., appellant. William & Ferrier Attorney-General Villa-Real No appearance for the appellee. ROMUALDEZ, J.: This dispositive clause of the judgment appealed from is as follows: The defendant Vicente Aldanese, in his capacity as Collector of Customs, is sentenced to pay the Hongkong & Shanghai Banking Corporation the sum of $9,340.80, United States currency, with costs. Messrs. Vamenta & Co., Isidro Vamenta, and Union Guarantee Co., Ltd., are sentenced to pay the same sum to Mr. Vicente Aldanese, in his aforesaid capacity, with costs. In the event that the Union Guarantee Co., Ltd., be compelled to pay the whole or any part of the said sum to the defendant Mr. Aldanese by reason of the insolvency or inability to pay of Messrs. Vamenta & Co., and Isidro Vamenta, and the latter are sentenced to pay said surety company all such sum as it may have paid as aforesaid, together with the costs. Each and every payment to be made under this judgment shall be with legal interest at the rate of six per centum per annum from April 29, 1920. So ordered. The Union Guarantee Co., Ltd., appeals from this judgment, and assigns error to the action of the trial court, among others, in finding that said corporation had given a bond for P9,450 in favor of the Government of the Philippine Islands to enable Vamenta & Co. to withdraw from the customhouse at Manila the merchandise mentioned in the complaint. The document containing the bond was not presented as evidence, nor was any proof introduced about it, and what the trial court considered as evidence on this point is merely what it took as a stipulation of facts deduced from the following statements made during the trial, to wit: COURT. Counsel for Vamenta & Co. and Isidro Vamenta admits that said company and Isidro Vamenta personally are liable to the defendant Collector of Customs and the Hongkong & Shanghai Banking Corporation in the manner to be determined by the court for the value of the merchandise withdrawn from customhouse and sold by them, which merchandise is worth $9,340.80, United States currency, according to the complaint. Mr. FERRIER. But we are in a situation where the Union Guarantee Co., Ltd., is entitled to a judgment against Vamenta & Co. COURT (continuing). Same counsel, according to Attorney Ferrier, who represents the surety company, Union Guarantee Co., Ltd., states that to protect its interests, he agrees to a judgment being rendered against the debtors and in favor of the Union Guarantee Co., Ltd., in the event that the latter, after the issuance of an execution upon the judgment, shall be compelled to pay the amount aforementioned or any part thereof on account of the insolvency of said debtors. Mr. FERRIER. It is also agreed between the parties that the Union Guarantee Co., Ltd., was company organized and existing under the laws of the Philippine Islands, and Vamenta & Co. was a company not registered. We have no more objection for for appellant. Aldanese.

121

to the action of Vamenta & Co. and Isidro Vamenta. (Folios 4 and 5, transcript, stenographic notes.) It is true to that from the above statements of the trial court not contradicted by Mr. Ferrier, attorney of the Union Guarantee Co., Ltd., it may be inferred that this corporation, through its said counsel, admitted by his silence to be surety of Vamenta & Co., although such an inference is not entirely justified inasmuch as it is based rather on the silence of said attorney when said statements were made by the trial court, which undoubtedly attempted to construe the intention of the parties. The Union Guarantee Co., Ltd., now insists in this court that the so-called stimulation of facts set out in the judgment appealed from is not the one that was really entered into the parties. And, as we have seen, the record is doubtful as to whether or not there was really such a stipulation as was stated by the trial court. But even supposing that said statements are sufficient to bind the Union Guarantee Co., Ltd., the facts is that there is no evidence, not even a scintilla of evidence, as to the amount of this bond which, according to paragraph ( f ) of the answer of the defendant Collector of Customs, was given for the sum of P9,450. The existence, terms, conditions and amount of the bond given by the Union Guarantee Co., Ltd., as surety of Vamenta & Co., in favor of the Government of the Philippine Islands, are facts that must be proven or admitting by the parties before any judgment can be rendered against said corporation, as prayed for in the answer of the Collector of Customs. And there exists an intimate connection between the liability of the Collector of Customs to the Hongkong & Shanghai Banking Corporation, and the liability of Vamenta & Co. and the Union Guarantee Co., Ltd., to the Collector of Customs, which latter liability cannot be fixed without sufficient proof of the scope and conditions of the bond in question. We think that this case requires further evidence, and to do justice to all the parties interested, we have decided to remand the record to the court of origin in order that the proper party may introduce competent evidence as to the existence, conditions and amount of the alleged bond given by the Union Guarantee Co., Ltd. The judgment appealed from is reversed and this cause ordered remanded to the court below for the holding of a new trial for the purposes above indicated, without special finding as to costs. So ordered. Araullo, C.J., Johnson, Street, Malcolm, Avancea, Villamor, Ostrand and Johns, JJ., concur. FIRST DIVISION G.R. No. 147561 June 22, 2006

STRONGHOLD INSURANCE COMPANY, INC., Petitioner, vs. REPUBLIC-ASAHI GLASS CORPORATION, Respondent. DECISION PANGANIBAN, CJ: Asurety companys liability under the performance bond it issues is solidary. The death of the principal obligor does not, as a rule, extinguish the obligation and the solidary nature of that liability. The Case Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the March 13, 2001 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 41630. The assailed Decision disposed as follows: "WHEREFORE, the Order dated January 28, 1993 issued by the lower court is REVERSED and SET ASIDE. Let the records of the instant case

Credit Transactions Full Text Cases Atty. Adviento

be REMANDED to the lower court for the reception of evidence of all parties."3 The Facts The facts of the case are narrated by the CA in this wise: "On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi) entered into a contract with x x x Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of roadways and a drainage system in Republic-Asahis compound in Barrio Pinagbuhatan, Pasig City, where [respondent] was to pay x x x JDS five million three hundred thousand pesos (P5,300,000.00) inclusive of value added tax for said construction, which was supposed to be completed within a period of two hundred forty (240) days beginning May 8, 1989. In order to guarantee the faithful and satisfactory performance of its undertakings x x x JDS, shall post a performance bond of seven hundred ninety five thousand pesos (P795,000.00). x x x JDS executed, jointly and severally with [petitioner] Stronghold Insurance Co., Inc. (SICI) Performance Bond No. SICI-25849/g(13)9769. "On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety five thousand pesos (P795,000.00) by way of downpayment. "Two progress billings dated August 14, 1989 and September 15, 1989, for the total amount of two hundred seventy four thousand six hundred twenty one pesos and one centavo (P274,621.01) were submitted by x x x JDS to [respondent], which the latter paid. According to [respondent], these two progress billings accounted for only 7.301% of the work supposed to be undertaken by x x x JDS under the terms of the contract. "Several times prior to November of 1989, [respondents] engineers called the attention of x x x JDS to the alleged alarmingly slow pace of the construction, which resulted in the fear that the construction will not be finished within the stipulated 240-day period. However, said reminders went unheeded by x x x JDS. "On November 24, 1989, dissatisfied with the progress of the work undertaken by x x x JDS, [respondent] Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said contract, and wrote a letter to x x x JDS informing the latter of such rescission. Such rescission, according to Article XV of the contract shall not be construed as a waiver of [respondents] right to recover damages from x x x JDS and the latters sureties. "[Respondent] alleged that, as a result of x x x JDSs failure to comply with the provisions of the contract, which resulted in the said contracts rescission, it had to hire another contractor to finish the project, for which it incurred an additional expense of three million two hundred fifty six thousand, eight hundred seventy four pesos (P3,256,874.00). "On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its claim under the bond for not less than P795,000.00. On March 22, 1991, [respondent] again sent another letter reiterating its demand for payment under the aforementioned bond. Both letters allegedly went unheeded. "[Respondent] then filed [a] complaint against x x x JDS and SICI. It sought from x x x JDS payment of P3,256,874.00 representing the additional expenses incurred by [respondent] for the completion of the project using another contractor, and from x x x JDS and SICI, jointly and severally, payment of P750,000.00 as damages in accordance with the performance bond; exemplary damages in the amount of P100,000.00 and attorneys fees in the amount of at least P100,000.00. "According to the Sheriffs Return dated June 14, 1991, submitted to the lower court by Deputy Sheriff Rene R. Salvador, summons were duly served on defendant-appellee SICI. However, x x x Jose D. Santos, Jr. died the previous year (1990), and x x x JDS Construction was no longer at its address at 2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila, and its whereabouts were unknown.

122

"On July 10, 1991, [petitioner] SICI filed its answer, alleging that the [respondents] money claims against [petitioner and JDS] have been extinguished by the death of Jose D. Santos, Jr. Even if this were not the case, [petitioner] SICI had been released from its liability under the performance bond because there was no liquidation, with the active participation and/or involvement, pursuant to procedural due process, of herein surety and contractor Jose D. Santos, Jr., hence, there was no ascertainment of the corresponding liabilities of Santos and SICI under the performance bond. At this point in time, said liquidation was impossible because of the death of Santos, who as such can no longer participate in any liquidation. The unilateral liquidation on the party (sic) of [respondent] of the work accomplishments did not bind SICI for being violative of procedural due process. The claim of [respondent] for the forfeiture of the performance bond in the amount of P795,000.00 had no factual and legal basis, as payment of said bond was conditioned on the payment of damages which [respondent] may sustain in the event x x x JDS failed to complete the contracted works. [Respondent] can no longer prove its claim for damages in view of the death of Santos. SICI was not informed by [respondent] of the death of Santos. SICI was not informed by [respondent] of the unilateral rescission of its contract with JDS, thus SICI was deprived of its right to protect its interests as surety under the performance bond, and therefore it was released from all liability. SICI was likewise denied due process when it was not notified of plaintiff-appellants process of determining and fixing the amount to be spent in the completion of the unfinished project. The procedure contained in Article XV of the contract is against public policy in that it denies SICI the right to procedural due process. Finally, SICI alleged that [respondent] deviated from the terms and conditions of the contract without the written consent of SICI, thus the latter was released from all liability. SICI also prayed for the award of P59,750.00 as attorneys fees, and P5,000.00 as litigation expenses. "On August 16, 1991, the lower court issued an order dismissing the complaint of [respondent] against x x x JDS and SICI, on the ground that the claim against JDS did not survive the death of its sole proprietor, Jose D. Santos, Jr. The dispositive portion of the [O]rder reads as follows: ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr., doing business under trade and style, JDS Construction and Stronghold Insurance Company, Inc. is ordered DISMISSED. SO ORDERED. "On September 4, 1991, [respondent] filed a Motion for Reconsideration seeking reconsideration of the lower courts August 16, 1991 order dismissing its complaint. [Petitioner] SICI field its Comment and/or Opposition to the Motion for Reconsideration. On October 15, 1991, the lower court issued an Order, the dispositive portion of which reads as follows: WHEREFORE, premises considered, the Motion for Reconsideration is hereby given due course. The Order dated 16 August 1991 for the dismissal of the case against Stronghold Insurance Company, Inc., is reconsidered and hereby reinstated (sic). However, the case against defendant Jose D. Santos, Jr. (deceased) remains undisturbed. Motion for Preliminary hearing and Manifestation with Motion filed by [Stronghold] Insurance Company Inc., are set for hearing on November 7, 1991 at 2:00 oclock in the afternoon. SO ORDERED. "On June 4, 1992, [petitioner] SICI filed its Memorandum for Bondsman/Defendant SICI (Re: Effect of Death of defendant Jose D. Santos, Jr.) reiterating its prayer for the dismissal of [respondents] complaint. "On January 28, 1993, the lower court issued the assailed Order reconsidering its Order dated October 15, 1991, and ordered the case, insofar as SICI is concerned, dismissed. [Respondent] filed its motion for reconsideration which was opposed by [petitioner] SICI. On April 16, 1993, the lower court denied [respondents] motion for reconsideration. x x x."4 Ruling of the Court of Appeals

Credit Transactions Full Text Cases Atty. Adviento

The CA ruled that SICIs obligation under the surety agreement was not extinguished by the death of Jose D. Santos, Jr. Consequently, RepublicAsahi could still go after SICI for the bond. The appellate court also found that the lower court had erred in pronouncing that the performance of the Contract in question had become impossible by respondents act of rescission. The Contract was rescinded because of the dissatisfaction of respondent with the slow pace of work and pursuant to Article XIII of its Contract with JDS. The CA ruled that "[p]erformance of the [C]ontract was impossible, not because of [respondents] fault, but because of the fault of JDS Construction and Jose D. Santos, Jr. for failure on their part to make satisfactory progress on the project, which amounted to non-performance of the same. x x x [P]ursuant to the [S]urety [C]ontract, SICI is liable for the non-performance of said [C]ontract on the part of JDS Construction."5 Hence, this Petition.6 Issue Petitioner states the issue for the Courts consideration in the following manner: "Death is a defense of Santos heirs which Stronghold could also adopt as its defense against obligees claim."7 More precisely, the issue is whether petitioners liability under the performance bond was automatically extinguished by the death of Santos, the principal. The Courts Ruling The Petition has no merit. Sole Issue: Effect of Death on the Suretys Liability Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the surety bond. Consequently, it says, it is automatically released from any liability under the bond. As a general rule, the death of either the creditor or the debtor does not extinguish the obligation.8 Obligations are transmissible to the heirs, except when the transmission is prevented by the law, the stipulations of the parties, or the nature of the obligation.9 Only obligations that are personal10 or are identified with the persons themselves are extinguished by death.11 Section 5 of Rule 8612 of the Rules of Court expressly allows the prosecution of money claims arising from a contract against the estate of a deceased debtor. Evidently, those claims are not actually extinguished.13 What is extinguished is only the obligees action or suit filed before the court, which is not then acting as a probate court.14 In the present case, whatever monetary liabilities or obligations Santos had under his contracts with respondent were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his death did not result in the extinguishment of those obligations or liabilities, which merely passed on to his estate.15 Death is not a defense that he or his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot use his death to escape its monetary obligation under its performance bond. The liability of petitioner is contractual in nature, because it executed a performance bond worded as follows: "KNOW ALL MEN BY THESE PRESENTS:

123

"That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of Shaw Blvd., Pasig, MM Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation duly organized and existing under and by virtue of the laws of the Philippines with head office at Makati, as Surety, are held and firmly bound unto the REPUBLIC ASAHI GLASS CORPORATION and to any individual, firm, partnership, corporation or association supplying the principal with labor or materials in the penal sum of SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00), Philippine Currency, for the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. "The CONDITIONS OF THIS OBLIGATION are as follows; "WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a contract with the REPUBLIC ASAHI GLASS CORPORATION represented by _________________, to fully and faithfully. Comply with the site preparation works road and drainage system of Philippine Float Plant at Pinagbuhatan, Pasig, Metro Manila. "WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of PESOS SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00) Philippine Currency, inclusive of interest, attorneys fee, and other damages, and shall not be liable for any advances of the obligee to the principal. "WHEREAS, said contract requires the said principal to give a good and sufficient bond in the above-stated sum to secure the full and faithfull performance on its part of said contract, and the satisfaction of obligations for materials used and labor employed upon the work; "NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings, covenants, terms, conditions, and agreements of said contract during the original term of said contract and any extension thereof that may be granted by the obligee, with notice to the surety and during the life of any guaranty required under the contract, and shall also perform well and truly and fulfill all the undertakings, covenants, terms, conditions, and agreements of any and all duly authorized modifications of said contract that may hereinafter be made, without notice to the surety except when such modifications increase the contract price; and such principal contractor or his or its sub-contractors shall promptly make payment to any individual, firm, partnership, corporation or association supplying the principal of its sub-contractors with labor and materials in the prosecution of the work provided for in the said contract, then, this obligation shall be null and void; otherwise it shall remain in full force and effect. Any extension of the period of time which may be granted by the obligee to the contractor shall be considered as given, and any modifications of said contract shall be considered as authorized, with the express consent of the Surety. "The right of any individual, firm, partnership, corporation or association supplying the contractor with labor or materials for the prosecution of the work hereinbefore stated, to institute action on the penal bond, pursuant to the provision of Act No. 3688, is hereby acknowledge and confirmed."16 As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code, which provides as follows: "Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. "If a person binds himself solidarily with the principal debtor, the provisions of Section 4,17 Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship." xxxxxxxxx "Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be

Credit Transactions Full Text Cases Atty. Adviento

directed against the others, so long as the debt has not been fully collected." Elucidating on these provisions, the Court in Garcia v. Court of Appeals18 stated thus: "x x x. The suretys obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal. x x x."19 Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the petitioner herein, in view of the solidary nature of their liability. The death of the principal debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the death of the principal debtor, respondent may still sue petitioner alone, in accordance with the solidary nature of the latters liability under the performance bond. WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals AFFIRMED. Costs against petitioner. SO ORDERED. THIRD DIVISION [G.R. No. 146997. April 26, 2005] SPOUSES GODOFREDO & DOMINICA FLANCIA, Petitioners, vs. COURT OF APPEALS & WILLIAM ONG GENATO, Respondents. DECISION CORONA, J.: Before us is a petition for review under Rule 45 of the Rules of Court, seeking to set aside the October 6, 2000 decision[1] of the Court of Appeals in CA-G.R. CV No. 56035. The facts as outlined by the trial court[2] follow. This is an action to declare null and void the mortgage executed by defendant Oakland Development Resources Corp. xxx in favor of defendant William Ong Genato over the house and lot plaintiffs spouses Godofredo and Dominica Flancia purchased from defendant corporation. In the complaint, plaintiffs allege that they purchased from defendant corporation a parcel of land known as Lot 12, Blk. 3, Phase III-A containing an area of 128.75 square meters situated in Prater Village Subd. II located at Brgy. Old Balara, Quezon City; that by virtue of the contract of sale, defendant corporation authorized plaintiffs to transport all their personal belongings to their house at the aforesaid lot; that on December 24, 1992, plaintiffs received a copy of the execution foreclosing [the] mortgage issued by the RTC, Branch 98 ordering defendant Sheriff Sula to sell at public auction several lots formerly owned by defendant corporation including subject lot of plaintiffs; that the alleged mortgage of subject lot is null and void as it is not authorized by plaintiffs pursuant to Art. 2085 of the Civil Code which requires that the mortgagor must be the absolute owner of the mortgaged property; that as a consequence of the nullity of said mortgage, the execution foreclosing [the] mortgage is likewise null and void; that plaintiffs advised defendants to exclude subject lot from the auction sale but the latter refused. Plaintiffs likewise prayed for damages in the sum of P50,000.00. Defendant William Ong Genato filed a motion to dismiss the complaint which was opposed by the plaintiffs and denied by the Court in its Order dated February 16, 1993.

124

Defendant Genato, then filed his answer averring that on May 19, 1989 co-defendant Oakland Development Resources Corporation mortgaged to Genato two (2) parcels of land covered by TCT Nos. 356315 and 366380 as security and guaranty for the payment of a loan in the sum of P2,000,000.00; that it appears in the complaint that the subject parcel of land is an unsubdivided portion of the aforesaid TCT No. 366380 which covers an area of 4,334 square meters more or less; that said real estate mortgage has been duly annotated at the back of TCT No. 366380 on May 22, 1989; that for non-payment of the loan of P2,000,000.00 defendant Genato filed an action for foreclosure of real estate mortgage against codefendant corporation; that after [trial], a decision was rendered by the Regional Trial Court of Quezon City, Branch 98 against defendant corporation which decision was affirmed by the Honorable Court of Appeals; that the decision of the Court of Appeals has long become final and thus, the Regional Trial Court, Brach 98 of Quezon City issued an Order dated December 7, 1992 ordering defendant Sheriff Ernesto Sula to cause the sale at public auction of the properties covered by TCT No. 366380 for failure of defendant corporation to deposit in Court the money judgment within ninety (90) days from receipt of the decision of the Court of Appeals; that plaintiffs have no cause of action against defendant Genato; that the alleged plaintiffs' Contract to Sell does not appear to have been registered with the Register of Deeds' of Quezon City to affect defendant Genato and the latter is thus not bound by the plaintiffs' Contract to Sell; that the registered mortgage is superior to plaintiffs' alleged Contract to Sell and it is sufficient for defendant Genato as mortgagee to know that the subject TCT No. 366380 was clean at the time of the execution of the mortgage contract with defendant corporation and defendant Genato is not bound to go beyond the title to look for flaws in the mortgagor's title; that plaintiffs' alleged Contract to Sell is neither a mutual promise to buy and sell nor a Contract of Sale. Ownership is retained by the seller, regardless of delivery and is not to pass until full payment of the price; that defendant Genato has not received any advice from plaintiffs to exclude the subject lot from the auction sale, and by way of counterclaim, defendant Genato prays for P150,000.00 moral damages and P20,000.00 for attorney's fees. On the other hand, defendant Oakland Development Resources Corporation likewise filed its answer and alleged that the complaint states no cause of action; xxx Defendant corporation also prays for attorney's fees of P20,000.00 in its counterclaim.[3]chanroblesvirtuallawlibrary After trial, the assisting judge[4] of the trial court rendered a decision dated August 16, 1996, the decretal portion of which provided: Wherefore, premises considered, judgment is hereby rendered. 1) Ordering defendant Oakland Devt. Resources Corporation to pay plaintiffs: a) the amount of P10,000.00 representing payment for the 'option to purchase lot; b) the amount of P140,000.00 representing the first downpayment of the contract price; c) the amount of P20,520.80 representing five monthly amortizations for February, March, April, May and June 1990; d) the amount of P3,000.00 representing amortization for November 1990; all plus legal interest from the constitution of the mortgage up to the time the instant case was filed. 2) Ordering said defendant corporation to pay further to plaintiffs the sum of P30,000.00 for moral damages, P10,000.00 for exemplary damages and P20,000.00 for and as reasonable attorney's fees plus cost; 3) Dismissing defendant corporation's counterclaim; 4) Dismissing defendant [5]chanroblesvirtuallawlibrary Genato's counterclaim.

On motion for reconsideration, the regular presiding judge set aside the judgment of the assisting judge and rendered a new one on November 27, 1996, the decretal portion of which read:

Credit Transactions Full Text Cases Atty. Adviento

WHEREFORE, premises considered, the Motion for Reconsideration is hereby GRANTED. The decision dated August 16, 1996 is hereby set aside and a new one entered in favor of the plaintiffs, declaring the subject mortgage and the foreclosure proceedings held thereunder as null and void insofar as they affect the superior right of the plaintiffs over the subject lot, and ordering as follows: 1. Defendant Oakland Development Resources to pay to plaintiffs the amount of P20,000.00 for litigation-related expenses; 2. Ordering defendant Sheriff Ernesto L. Sula to desist from conducting further proceedings in the extra-judicial foreclosure insofar as they affect the plaintiffs, or, in the event that title has been consolidated in the name of defendant William O. Genato, ordering said defendant to reconvey to plaintiffs the title corresponding to Lot 12, Blk. 3, Phase III-A of Prater Village [Subd. II], located in Old Balara, Quezon City, containing an area of 128.75 square meters; and 3. Dismissing the counterclaims of defendants Oakland and Genato and with costs against them. [6]chanroblesvirtuallawlibrary On appeal, the Court of Appeals issued the assailed order: Wherefore, foregoing premises considered, the appeal having merit in fact and in law is hereby GRANTED and the decision of the Trial Court dated 27 November 1996 hereby SET ASIDE and REVERSED, and its judgment dated August 16, 1996 REINSTATED and AFFIRMED IN TOTO. No Costs. SO ORDERED.[7]chanroblesvirtuallawlibrary Hence, this petition. For resolution before us now are the following issues: (1) whether or not the registered mortgage constituted over the property was valid; (2) whether or not the registered mortgage was superior to the contract to sell; and (3) whether or not the mortgagee was in good faith. Under the Art. 2085 of the Civil Code, the essential requisites of a contract of mortgage are: (a) that it be constituted to secure the fulfillment of a principal obligation; (b) that the mortgagor be the absolute owner of the thing mortgaged; and (c) that the persons constituting the mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. All these requirements are present in this case. FIRST ISSUE: WAS THE REGISTERED MORTGAGE VALID? As to the first essential requisite of a mortgage, it is undisputed that the mortgage was executed on May 15, 1989 as security for a loan obtained by Oakland from Genato. As to the second and third requisites, we need to discuss the difference between a contract of sale and a contract to sell. In a contract of sale, title to the property passes to the vendee upon the delivery of the thing sold; in a contract to sell, ownership is, by agreement, reserved by the vendor and is not to pass to the vendee until full payment of the purchase price.

125

Otherwise stated, in a contract of sale, the vendor loses ownership over the property and cannot recover it unless and until the contract is resolved or rescinded; in a contract to sell, title is retained by the vendor until full payment of the price.[8]chanroblesvirtuallawlibrary In the contract between petitioners and Oakland, aside from the fact that it was denominated as a contract to sell, the intention of Oakland not to transfer ownership to petitioners until full payment of the purchase price was very clear. Acts of ownership over the property were expressly withheld by Oakland from petitioner. All that was granted to them by the 'occupancy permit was the right to possess it. Specifically, the contract between Oakland and petitioners stated: xxx xxx xxx 7. That the BUYER/S may be allowed to enter into and take possession of the property upon issuance of Occupancy Permit by the OWNER/DEVELOPER exclusively, although title has not yet passed to the BUYER/S, in which case his possession shall be that of a possessor by mere tolerance Lessee, subject to certain restrictions contained in this deed. xxx xxx xxx 13. That the BUYER/S cannot sell, mortgage, cede, transfer, assign or in any manner alienate or dispose of, in whole or in part, the rights acquired by and the obligations imposed on the BUYER/S by virtue of this contract, without the express written consent of the OWNER/DEVELOPER. xxx xxx xxx 24. That this Contract to Sell shall not in any way [authorize] the BUYER/S to occupy the assigned house and lot to them.[9] xxx xxx xxx Clearly, when the property was mortgaged to Genato in May 1989, what was in effect between Oakland and petitioners was a contract to sell, not a contract of sale. Oakland retained absolute ownership over the property. Ownership is the independent and general power of a person over a thing for purposes recognized by law and within the limits established thereby. [10] According to Art. 428 of the Civil Code, this means that: The owner has the right to enjoy and dispose of a thing, without other limitations than those established by law. xxx xxx xxx Aside from the jus utendi and the jus abutendi [11] inherent in the right to enjoy the thing, the right to dispose, or the jus disponendi, is the power of the owner to alienate, encumber, transform and even destroy the thing owned.[12]chanroblesvirtuallawlibrary Because Oakland retained all the foregoing rights as owner of the property, it was entitled absolutely to mortgage it to Genato. Hence, the mortgage was valid. SECOND ISSUE: WAS THE REGISTERED MORTGAGE SUPERIOR TO THE CONTRACT TO SELL? In their memorandum, petitioners cite our ruling in State Investment House, Inc. v. Court of Appeals [13] to the effect that an unregistered sale is preferred over a registered mortgage over the same property. The citation is misplaced.

Credit Transactions Full Text Cases Atty. Adviento

This Court in that case explained the rationale behind the rule: The unrecorded sale between respondents-spouses and SOLID is preferred for the reason that if the original owner xxx had parted with his ownership of the thing sold then he no longer had ownership and free disposal of that thing as to be able to mortgage it again. State Investment House is completely inapplicable to the case at bar. A contract of sale and a contract to sell are worlds apart. State Investment House clearly pertained to a contract of sale, not to a contract to sell which was what Oakland and petitioners had. In State Investment House, ownership had passed completely to the buyers and therefore, the former owner no longer had any legal right to mortgage the property, notwithstanding the fact that the new owner-buyers had not registered the sale. In the case before us, Oakland retained absolute ownership over the property under the contract to sell and therefore had every right to mortgage it. In sum, we rule that Genato's registered mortgage was superior to petitioner's contract to sell, subject to any liabilities Oakland may have incurred in favor of petitioners by irresponsibly mortgaging the property to Genato despite its commitments to petitioners under their contract to sell. THIRD ISSUE: WAS THE MORTGAGE IN GOOD FAITH? The third issue involves a factual matter which should not be raised in this petition. Only questions of law may be raised in a Rule 45 petition. This Court is not a trier of facts. The resolution of factual issues is the function of the lower courts. We therefore adopt the factual findings of the Court of Appeals and uphold the good faith of the mortgagee Genato. RELIANCE ON WHAT APPEARS IN THE TITLE Just as an innocent purchaser for value may rightfully rely on what appears in the certificate of title, a mortgagee has the right to rely on what appears in the title presented to him. In the absence of anything to arouse suspicion, he is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of the said certificate. [14]chanroblesvirtuallawlibrary We agree with the findings and conclusions of the trial court regarding the liabilities of Oakland in its August 16, 1996 decision, as affirmed by the Court of Appeals: Anent [plaintiffs' ] prayer for damages, the Court finds that defendant corporation is liable to return to plaintiffs all the installments/payments made by plaintiffs consisting of the amount of P10,000.00 representing payment for the 'option to purchase lot; the amount of P140,000.00 which was the first downpayment; the sum of P20,520.80 representing five monthly amortizations for February, March, April, May and June 1990 and the amount of P3,000.00 representing amortization for November 1990 plus legal interest from the time of the mortgage up to the time this instant case was filed. Further, considering that defendant corporation wantonly and fraudulently mortgaged the subject property without regard to [plaintiffs' ] rights over the same, said defendant should pay plaintiffs moral damages in the reasonable amount of P30,000.00. xxx Furthermore, since defendant [corporation's ] acts have compelled the plaintiffs to litigate and incur expenses to protect their interest, it should likewise be adjudged to pay plaintiffs' attorney's fees of P20,000.00 under Article 2208 paragraph two (2) of the Civil Code.[15]chanroblesvirtuallawlibrary WHEREFORE, the petition for review is hereby DENIED. The decision of the Court of Appeals reinstating the August 16, 1996 decision of the trial court is hereby AFFIRMED. SO ORDERED. SECOND DIVISION G.R. No. 94247 September 11, 1991

126

DIONISIO MOJICA, in behalf of Spouses LEONARDO MOJICA (now deceased) and MARINA RUFIDO, petitioner, vs. HON. COURT OF APPEALS, and RURAL BANK OF YAWIT, INC., respondents. Lorenzo F. Miravite for petitioner. Esteban C. Manuel for private respondent.

PARAS, J.:p This is a petition for review on certiorari which seeks to reverse and set aside: the decision * of the Court of Appeals dated February 15, 1990 in AC-G.R. CV No. 05987 entitled "Dionisio Mojica, in behalf of spouses Leonardo Mojica (now deceased) and Marina Rufido v. Rural Bank of Kawit, Inc.", which affirmed in toto the decision of the trial court and (2) the resolution dated June 4, 1990 denying the motion for reconsideration. The facts of the case as gathered from the records are as follows: On February 1, 1971, plaintiff Leonardo Mojica (now deceased) contracted a loan of P20,000.00 from defendant Rural Bank of Kawit, Inc. (now respondent). This loan was secured by a real estate mortgage executed on the same date by the plaintiffs spouses Leonardo Mojica and Marina Rufido (Rollo, Annex "C" p. 40). The real estate mortgage contract states among others: ... agreement for the payment of the loan of P20,000.00 and such other loans or other advances already obtained or still to be obtained by the mortgagors ... 2. ... but if the mortgagors shall well and truly fulfill the obligation above stated according to the terms thereof then this mortgage shall become null and void. (Rollo Petitioner's Memorandum, pp. 86-87) The spouses mortgaged to the Rural Bank of Kawit, a parcel of land consisting of 218,794 square meters, located in Naic, Cavite, covered by Transfer Certificate of Title No. RT-155 (Rollo, Annex "A", p. 31). The real estate mortgage was duly registered under Entry No. 74661 of the Registry of Deeds of Cavite (Rollo, Annex "C", p. 41). The loan of P20,000.00 by the plaintiffs spouses was fully and completely paid (Ibid.). On March 5, 1974, a new loan in the amount of P18,000.00 was obtained by plaintiffs spouses from the defendant Rural Bank which loan matured on March 5, 1975 (Rollo, pp. 32; 41). No formal deed of real mortgage was constituted over any property of the borrowers, although the top of the promissory note dated March 5, 1974, contained the following notation. This promissory note is secured by a Real Estate Mortgage executed before the Notary Public of the Municipality of Kawit, Mrs. Felisa Senti under Doc. No. 62, Page No. 86, Book No.__, Series of 1971. The Real Estate Mortgage mentioned above is the registered mortgage which guaranteed the already paid loan of P20,000.00 granted on February 1, 1971 (Rollo, p. 8,7). The spouses Leonardo Mojica and Marina Rufido failed to pay their obligation after its maturity on March 5, 1975. Respondent rural bank

Credit Transactions Full Text Cases Atty. Adviento

extrajudicially foreclosed the real estate mortgage on the justification that it was adopted as a mortgage for the new loan of P18,000.00 (Rollo, pp. 32; 41). The subject property was set for auction sale by the Provincial Sheriff of Cavite for June 27, 1979. In that auction sale, defendant rural bank was the highest bidder, and its bid corresponded to the total outstanding obligation of plaintiffs spouses Mojica and Rufido (Reno, p. 32). The proceeds from the sale of the piece of land of plaintiffs spouses were applied to their outstanding obligation with defendant bank (Ibid.) The corresponding certificate of sale in favor of defendant bank was executed by the Provincial Sheriff also on June 27, 1979, and the instrument was recorded in the Office of the Register of Deeds of Cavite on June 29, 1979. The one year period for redemption elapses after June 1980 without plaintiffs spouses having redeemed the foreclosure property (Ibid.) Meanwhile, on July 19, 1980, Dionisio Mojica, the son of petitionersspouses, in an apparent attempt to pay the debt of P18,000.00 made a partial payment in the amount of P24,658.00 (P19,958.00 of this amount in check bounced) which the defendant rural bank received and accepted with the issuance of the defendant's official receipt No. 101 269, ackowledging the payment as partial payment of 'past due loan', together with the "interest on past due lose (Rollo, p. 33). On August 11, 1980, another partial payment was made by Dionisio Mojica in the amount of P9,958.00 in payment also of 64 past due loan' plus "interest on past due loan 7 which payment was received by the defendant rural bank and acknowledged with the issuance of official receipt No. 101844. These payments were, however, considered by the bank as deposit for the repurchase of the foreclosed property (Ibid., p. 33). On August 14, 1981, upon inquiry by Dionisio Mojica on the unpaid balance of the loan, the respondent rural bank issued a 'Computation Slip" indicating therein, that as of August 14, 1981, the outstanding balance plus interest computed from March 5, 1975 was P21,272.50 (Ibid.). On November 10, 1981, said bank executed an affidavit of consolidation of ownership, which it subsequently filed with the Register of Deeds of Cavite. As a result, Transfer Certificate of Title No. T-123964, covering the foreclosed piece of land, was issued in its favor by the Register of Deeds on January 19, 1982. After having consolidated its ownership over the foreclosed property, defendant bank scheduled the parcel of land to be sold at public auction on February 26, 1982, pursuant to the requirement of the law regarding the disposal by a bank of its acquired assets. Dionisio Mojica and one Teodorico Rufido, brother-in-law of plaintiff Leonardo Mojica, were notified of such auction sale However, no sale was consummated during that scheduled sale and the property concerned up to now still remains in the possession of respondent bank (Ibid.). The refusal of the same bank to allow Dionisio Mojica to pay the unpaid balance of the loan as per the "Computation Slip" amounting to P21,272.50, resulted in the filing of a complaint (Rollo, p. 42). On September 3, 1984, the trial court rendered judgment dismissing the complaint. On November 5, 1984, petitioner filed a motion for reconsideration of the decision, which motion was denied in the order dated November 17, 1984. On January 2, 1985, a notice of appeal was filed in the Intermediate Appellate Court (Rollo, p. 42). On February 15, 1990, the Appellate Court, rendered its decision, aiming in toto the decision of the trial court. The dispositive portion of the decision of the appellate court reads: WHEREFORE, finding no reversible error in the decision appealed from, the game is hereby AFFIRMED in toto. With costs against plaintiffsappellants.

127

The motion for reconsideration of said decision was denied in a resolution dated June 4, 1990 (Rollo, Annex "B", p. 39). Hence, this petition. This Court in its resolution dated September 3, 1990 dismissed the petition for non-compliance with certain requisites but later in its resolution dated November 5, 1990, it reinstated the petition (Rollo, Petition pp. 9-28); Resolutions, pp. 52-53; 61). The petition is devoid of merit. The pivotal issue in this case is whether or not the foreclosure sale by the Sheriff on June 27, 1979, had for its basis, a valid and subsisting mortgage contract. Otherwise stated, there is a need to ascertain the intention of the parties as to the coverage of the mortgage in question with respect to future advancements. Contracts which are not ambiguous are to be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment (Plastic Town Center Corp. v. NLRC, 172 SCRA 580 [1989]). Thus, where the intent of the parties has been shown unmistakably with clarity by the language used, the literal meaning shall control (Paramount Surety & Ins. Co., Inc. v. Ago, 171 SCRA 481 [1989]). Correspondingly, stipulations in the mortgage document constitute the law between the parties, which must be complied with faithfully (Community and Loan Assn., Inc. v. Court of Appeals, 153 SCRA 564 [1987]). As earlier stated, the Real Estate Mortgage in the case at bar expressly stipulates that it serves as guaranty ... for the payment of the loan ... of P20,000.00 and such other loans or other advances already obtained or still to be obtained by the mortgagors as makers ... (Rollo, p. 14). It has long been settled by a long line of decisions that mortgages given to secure future advancements are valid and legal contracts; that the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid (Lim Julian v. Lutero, 49 Phil. 704-705 [1926]). In fact, it has also been held that where the annotation on the back of a certificate of title about a first mortgage states "that the mortgage secured the payment of a certain amount of money plus interest plus other obligations arising there under' there was no necessity for any notation of the later loans on the mortgagors' title. It was incumbent upon any subsequent mortgagee or encumbrances of the property in question to e e the books and records of the bank, as first mortgagee, regarding the credit standing of the debtors Tady-Y v. PNB, 12 SCRA 19-20 [1964]). The evidence on record shows that the amounts of P4,700.00 and P9,958.00 were accepted by the bank on July 19 and August 11, 1980 as deposits for conventional redemption after the property covered by real estate mortgage became the acquired asset of the bank and priced at P85,000.00 and after petitioner had lost all rights of legal redemption because more than one year had already elapsed from June 29, 1979, the date the certificate of sale was registered in the office of the Registry of Deeds of Cavite. Indeed, the conventional redemption was subject to be exercised up to March 3, 1982 and was extended up to April 19, 1982 for a fixed amount of P85,000.00. The respondent bank even favored the petitioner by giving them the first preference to repurchase the property but they failed to avail of this opportunity, although the bank "is certainly disposed to release at anytime" the deposits. Further, the evidence on record also shows that the mortgage property was auctioned on June 27, 1979. The only bidder was the respondent bank which bid for P26,387.04. As the highest bidder, the respondent bank can rightfully consolidate its title over the property. As aptly stated by respondent Court:

Credit Transactions Full Text Cases Atty. Adviento

It would then be unfair to impute that the trial court allowed defendant bank to appropriate the mortgage property, because after the plaintiff-appellants failed to repurchase the property and filed this action with 'lis pendens', the actions prevented the bank from negotiating for the sale of the property to other buyers. (p. 36, Rollo) PREMISES CONSIDERED, the petition is DISMISSED and the assailed decision and resolution of the Intermediate Appellate Court (Court of Appeals) are AFFIRMED. SO ORDERED. EN BANC G.R. No. L-17072 October 31, 1961 plaintiff-appellee,

128

extent of the mortgagor's pro-indiviso share of 15,333 square meters in the land in question, on the theory that the Public Land Law does not apply in this case because the mortgage in question was executed before a patent was issued over the land in question; that the agreement of the parties could not be antichresis because the deed Exhibit "A" clearly shows a mortgage with usufruct in favor of the mortgagee; and ordered the payment of the mortgage loan of P2,000 to plaintiff or, upon defendant's failure to do so, the foreclosure of plaintiff's mortgage on defendant Brigida Marcos' undivided share in the land in question. From this judgment, defendants Brigida Marcos and her husband Osmondo Apolocio appealed to this Court. There is merit in the appeal. The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so much on whether she could take said land within the prohibitive period of five years from the issuance of defendants' patent for the satisfaction of the indebtedness in question, but on whether the deed of mortgage Exhibit "A" is at all valid and enforceable, since the land mortgaged was apparently still part of the public domain when the deed of mortgage was constituted. As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged (Art. 2085), the mortgage here in question is void and ineffective because at the time it was constituted, the mortgagor was not yet the owner of the land mortgaged and could not, for that reason, encumber the same to the plaintiff-appellee. Nor could the subsequent acquisition by the mortgagor of title over said land through the issuance of a free patent validate and legalize the deed of mortgage under the doctrine of estoppel (cf. Art. 1434, New Civil Code,1 since upon the issuance of said patient, the land in question was thereby brought under the operation of the Public Land Law that prohibits the taking of said land for the satisfaction of debts contracted prior to the expiration of five years from the date of the issuance of the patent (sec. 118, C.A. No. 141). This prohibition should include not only debts contracted during the five-year period immediately preceding the issuance of the patent but also those contracted before such issuance, if the purpose and policy of the law, which is "to preserve and keep in the family of the homesteader that portion of public land which the State has gratuitously given to him" (Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v. Roman Catholic Church of Midsayap, G.R. L-6088, Feb. 24, 1954), is to be upheld. The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant invalidity of the collate agreement in the same deed of mortgage whereby possession of the land mortgaged was transferred to plaintiff-appellee in usufruct, without any obligation on her part to account for its harvests or deduct them from defendants' indebtedness of P2,000. Defendant Brigida Marcos, who, together with her sisters, was in possession of said land by herself and through her deceased mother before her since 1915, had possessory rights over the same even before title vested in her as co-owner by the issuance of the free patent to her and her sisters, and these possessory right she could validly transfer and convey to plaintiff-appellee, as she did in the deed of mortgage Exhibit "A". The latter, upon the other hand, believing her mortgagor to be the owner of the land mortgaged and not being aware of any flaw which invalidated her mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as such had the right to all the fruits received during the entire period of her possession in good faith (Art. 544, N.C.C.). She is, therefore, entitled to the full payment of her credit of P2,000 from defendants, without any obligation to account for the fruits or benefits obtained by her from the land in question. WHEREFORE, the judgment appealed from is reversed insofar as it orders the foreclosure of the mortgage in question, but affirmed in all other respects. Costs again defendants-appellants. Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes and De Leon, JJ., concur. Barrera, J., took no part. FIRST DIVISION G.R. No. L-34404 June 25, 1980

CRISTINA MARCELO VDA. DE BAUTISTA, vs. BRIGIDA MARCOS, ET AL., defendants-appellants. Aladin B. Bermudez Cube and Fajardo for plaintiff-appellee. REYES, J.B.L., J.: for

defendants-appellants.

The main question in this appeal is whether or not a mortgagee may foreclose a mortgage on a piece of land covered by a free patent where the mortgage was executed before the patent was issued and is sought to be foreclosed within five years from its issuance. The facts of the case appear to be as follows: On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000 from plaintiff Cristina Marcel Vda. de Bautista and to secure payment thereof conveyed to the latter by way of mortgage a two (2)-hectare portion of an unregistered parcel of land situated in Sta. Ignacia, Tarlac. The deed of mortgage, Exhibit "A", provided that it was to last for three years, that possession of the land mortgaged was to be turned over to the mortgagee by way of usufruct, but with no obligation on her part to apply the harvests to the principal obligation; that said mortgage would be released only upon payment of the principal loan of P2,000 without any interest; and that the mortgagor promised to defend and warrant the mortgagee's rights over the land mortgaged. Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the heirs of her deceased mother Victoriana Cainglet (who are Brigida herself and her three sisters), an application for the issuance of a free patent over the land in question, on the strength of the cultivation and occupation of said land by them and their predecessor since July, 1915. As a result, Free Patent No. V-64358 was issued to the applicants on January 25, 1957, and on February 22, 1957, it was registered in their names under Original Certificate of Title No. P-888 of the office of Register of Deeds for the province of Tarlac. Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid up to 1959, the latter, on March 4, 1959, filed the present action against Brigida and her husband (Civil Case No. 3382) in the court below for the payment thereof, or in default of the debtors to pay, for the foreclosure of her mortgage on the land give as security. Defendants moved to dismiss the action, pointing out that the land in question is covered by a free patent and could not, therefore, under the Public Land Law, be taken within five years from the issuance of the patent for the payment of any debts of the patentees contracted prior to the expiration of said five-year period; but the lower court denied the motion to dismiss on the ground that the law cited does not apply because the mortgage sought to be foreclosed was executed before the patent was issued. Defendants then filed their answer, reiterating the defense invoked in their motion to dismiss, and alleging as well that the real contract between the parties was an antichresis and not a mortgage. Pre-trial of the case followed, after which the lower court rendered judgment finding the mortgage valid to the

Credit Transactions Full Text Cases Atty. Adviento

PHILIPPINE NATIONAL BANK, petitioner, vs. THE HON. COURT OF APPEALS (SPECIAL FIRST DIVISION), PEDRO BITANGA, FERNANDO BITANGA, GREGORIO BITANGA, GUILLERMO BITANGA, CLARITA BITANGA together with her husband AGRIPINO L. RABAGO and MELITONA LAGPACAN, assisted by her husband JORGE MALACAS, respondents.

129

should the mortgagor fail or violate the term of the mortgage" was annotated on said Exhibit "A" some five years from October 20, 1936, i.e. on February 27, 1941, to be precise (Exhibit "A"). In the meantime, Rosa Ver had defaulted in the fulfillment of her obligation with the Manila Trading Company. So the said company levied upon her share in the lot in question on December 13, 1939, and had the attachment annotated on the title on February 14, 1940 (Exhibit "A-3"). Rosa Ver's interest in the lot in question was afterwards sold at public auction, at which the Manila Trading Company was the highest bidder; that was on March 19, 1940, and the deed of sale in favor of the Manila Trading Company was annotated on the title on May 25, 1940 (Exhibit "A-4"). On November 14, 1940, the Manila Trading Company sold its rights over the lot in question to Santiago Sambrano, who secured the annotation of the said sale on the title on March 20, 1941 (Exhibit "A-5"). Thereafter, as stated, one-half of the said property passed into the hands of the intervenors as a result of Civil Case No. 1846 (Exhibits 7, 8, 9, and 9-A). Because Rosa Ver failed to settle her obligation with the Philippine National Bank, the latter sold at public auction the whole lot that the former had mortgaged to it, and in the same auction sale, the Philippine National Bank emerged as the highest bidder (Exhibits 2, 3, 4 and 5); and, after the period of redemption had expired without the property having been redeemed, the Philippine National Bank consolidated its title over it. The document of consolidation was, however, not annotated upon the owner's duplicate certificate of title as Rosa Ver failed to surrender the same. So it was that on November 25, 1950, the Philippine National Bank presented a petition before the trial court (Exhibit 14) asking, on the one hand, that the owner's certificate of title No. 7683 (Exhibit A), be declared null and void, and praying, on the other, that a new certificate of title be issued in its name. Acting favorably on the petition, the Court, in an order dated October 2, 1951 (Exhibit 19-A), ordered the Register of Deeds of the Province of Ilocos Norte to cancel the owner's duplicate certificate of title No. 7683 (Exhibit A), and to issue a new owner's duplicate certificate of title in the name of the petitioner Philippine National Bank. As issued, the new owner's duplicate certificate of title carried the number-description T-2701 (Exhibit B or 23). Sometime later, that is, on May 24, 1954, the Philippine National Bank sold the property in question to Felizardo Reyes (Exhibit 16-A),.as a result of which a new owner's duplicate certificate of title, No. T-3944 (Exhibit 6), was issued in the latter's name. 2 It further appears from the evidence that by virtue of the judgment obtained by the Manila Trading and Supply Company against the defendants Rosa Ver and Guillermo Bitanga in Civil Case No. 121519 in the Municipal Court of the City of Manila (Exhibit "2-Lagpacan"), the property in question was sold by the Provincial Sheriff per Certificate of Sale (Exhibit 4-Lagpacan) to the Manila Trading and Supply Company as the highest and only bidder at the auction sale, the latter acquiring therefor "all the rights, title, interest and participation which the defendants Guillermo Bitanga and Rosa Ver de Bitanga have or might have in the property. " The sale was registered in the back of the Certificate of Title No. 7683 (Exhibit 4-A Lagpacan) under Entry No. 5100 dated May 25, 1940.

GUERRERO, J.: This is a petition for review of the decision of the Court of Appeals, promulgated on September 30, 1971 in CA-G.R. No. 29868-R entitled "Pedro Bitanga, et al., Plaintiffs-Appellees, versus Philippine National Bank, et al., Defendants-Appellants, Melitona Lagpacan, assisted by her husband, Jorge Malacas, Intervenors Appellees which decision 1 affirmed with certain modifications the judgment of the Court of First Instance of Ilocos Norte in favor of plaintiffs-appellants, now the herein respondents. This case was commenced on May 17, 1954 when herein respondents Pedro, Fernando, Gregorio, Guillermo and Clarita, all surnamed Bitanga, filed a complaint before the Court of First Instance of Ilocos Norte against the Philippine National Bank, the Register of Deeds of Ilocos Norte and Felizardo Reyes, for reconveyance of real property and damages, with a prayer for the issuance of an ex-parte writ of pre injunction restraining and enjoining the PNB and Felizardo Reyes from consummating the sale of the property in question and prohibiting the Register of Deeds from registering the sale in favor of Felizardo Reyes. As prayed for, the writ of preliminary injunction was issued. All three of the defendants named in the complaint filed their respective Answers. During the pendency of the case, herein respondent-spouses, Melitona Lagpacan and Jorge Maracas, filed a Motion to admit their complaint in intervention, alleging that they had a legal interest in the subject matter of the case, and the same was granted. The factual background of this case as recited in the decision of respondent court under review is as follows: It is not disputed that the property in question originally belonged to the spouses Iigo Bitanga and Rosa Ver as their conjugal property. At the cadastral proceedings during which the said property was submitted for adjudication, the Cadastral Court rendered a decision dated December 27, 1934, by virtue of which a decree of registration of the said lot bearing date of September 14, 1937 was issued. Thereafter, a corresponding title in the name of the spouses Iigo Bitanga and Rosa Ver was likewise issued and in the Registry Books of the Register of Deeds of Ilocos Norte on December 15, 1937 (Exhibit "A"). Before the issuance of the said original certificate of tale (Exhibit "A"), however, death came to Iigo Bitanga on September 25, 1935, and was survived by his wife, Rosa Ver, and his children, the plaintiffs herein. A little over a year from the death of her husband, or on October 20, 1936, to be exact Rosa Ver mortgaged the entire property covered by Exhibit "A" (also known as Exhibit 1-Lagpacan) in favor of the Philippine National Bank for the with of FIVE HUNDRED PESOS (P500.00) as shown in Exhibit 1Lagpacan. The mortgage document was registered in the day book of the Register of Deeds of Ilocos Norte on November 12, 1936; this said mortgage lien was, however, not annotated in the day book of the Register of Deeds, when the original certificate of title (Exhibit "A"), was issued. Nevertheless, the power of attorney dated October 20, 1936 in favor of the mortgagee Philippine National Bank "to take possession of, and retain the property herein mortgaged, to sell or lease the same or any part thereof, and to do such other acts as necessary in the performance of the power granted to the mortgagee

Credit Transactions Full Text Cases Atty. Adviento

On November 16, 1960, the trial court rendered a decision in favor of the plaintiffs and intervenors below, the Court finding and holding that: (a) The lot in question is a conjugal partnership property, one-half of which must go to the heirs of the late Iigo Bitanga, the plaintiffs herein; (b) The other half goes to Rosa Ver as her share. The mortgage executed by her of her one-half portion in favor of the Philippine National Bank is not an existing hen on the said portion because it did not have a "special mention in the decree of registration." It follows, therefore, that the acquisition of the said portion by the Manila Trading Company in the manner above-described was valid and legal. Consequently, the sale made by the said Company to Santiago Sambrano over the one-half portion must also be valid and legal. In connection with Civil Case No. 1846 in which the intervenors were the plaintiffs and Santiago Sambrano was the defendant, what the intervenors had attached and sold in a public auction in which they (intervenors) were the highest bidders was the very said portion sold by the Manila Trading Company to Santiago Sambrano; (c) That Felizardo Reyes is not a purchaser of a registered land for value and in good faith, and (d) Since the issuance of Transfer Certificate of Title No. 3944 in favor of the Philippine National Bank, exhibit "B", and Owner's Duplicate Certificate of Title No. 3944, Exhibit "16", in favor of Felizardo Reyes were without legal basis, they are, therefore, declared nun and void and cancelled. With costs against the defendants. 3 On appeal by PNB and Felizardo Reyes to the Court of Appeals, respondent Court affirmed the judgment appealed from in all respects except letter (d) thereof which was modified to read as follows: (d) Since the issuance of Transfer Certificate of Title No. T2701, Exhibit "B" in favor of the Philippine National Bank, and Transfer Certificate of Title No. T3944, Exhibit "16", in favor of Felizardo Reyes, was without legal basis, they are, therefore, declared null and void and cancelled. The Register of Deeds is hereby ordered to issue in lieu of the foregoing transfer certificate of titles another certificate of title in the names of the plaintiffs and intervenors as follows: Undivided one-half () share to Pedro Bitanga, married to Agripina Purisima, Fernando Bitanga, single, Gregorio Bitanga single, Guillermo Bitanga, single, Clarita Bitanga, married to Agripino L. Rabago, and of legal age, Filipino citizens, and residents of Laoag, Ilocos Norte, and the remaining undivided one-half () share to the spouses Jorge Maracas and Melitona Lagpacan, both of legal age, Filipino citizens, and residents of Burgos, Ilocos Norte, free from incumbrance regarding the claims of the Philippine National Bank and Felizardo Reyes, after payment of lawful fees. 4 Petitioner, not satisfied with the Decision of respondent Court of Appeals and its Resolution denying the motion for its reconsideration, now comes to Us and submits the following assignment of errors: I. The Court of Appeals erred in holding that the mortgage deed (Exhibit 1-Bank) is valid and existing only with respect to the one-half portion of the lot in question allegedly belonging to the mortgagor Rosa Ver as her share in the conjugal partnership with her husband Iigo Bitanga. II. The Court of Appeals erred in holding that the mortgage deed (Exhibit 1-Bank) executed by Rosa Ver was no longer subsisting simply because the same was not annotated on the face of original certificate of title No. 7683 (Exhibit A). III. The Court of Appeals erred in holding that estoppel and/or laches has not stepped in to defeat the right of respondents Bitanga's and Rabago over the lot in question, specifically to the one-half portion thereof representing their undivided share of the lot as their inheritance from their father Iigo Bitanga.

130

|li720IV. The Court of Appeals erred in holding that the acquisition of the other half portion of the lot in question by the intervenors spouses Melitona Lagpacan and Jorge Malacas bears the earmarks of validity and regularity. Upon being required to comment on this petition, respondents filed a Motion to Dismiss on the grounds that the decision of respondent court sought to be reviewed had become final and executory on account of the failure of Felizardo Reyes, the real party in interest, to join the PNB in this petition, and that the issues presented are questions of fact and not of law, hence, not proper for review by this Court. By Resolution of January 10, 1972, this Court denied the petition for lack of merit. On January 25, 1972, the PNB moved to reconsider the denial contending that at least the validity of the mortgage deed as to the share of herein respondent-heirs should be upheld because of their acquiescence thereto, and that the bank still has an interest over the case for the reason that although it had already sold its interests over the property which is the subject matter of this litigation to Felizardo Reyes, it still stands to be affected in the event that this case is finally decided in favor of respondents. In other words, it is the contention of PNB that it has the personality to bring this petition, even without Felizardo Reyes, since it still has an interest in the final outcome of this case. On March 2, 1972, this Court reconsidered the Resolution of January 10, 1972 and resolved to give due course to the petition. On the first assigned error, PNB contends that the mortgage constituted by Rosa Ver in its favor on October 20, 1936 is valid and covers the entire property known as Lot 9068 for the reasons that: (1) the valid execution, existence and registration of said real estate mortgage under Act No. 3344 are not denied; and (2) the fact that Tax Declaration No. 120225-A then covering the mortgaged property was issued in the exclusive name of mortgagor Rosa Ver was likewise not denied but in fact admitted by herein respondents and, therefore, the latter in effect admitted the genuineness and due execution of said Tax Declaration. There is no dispute that the document of mortgage executed by Rosa Ver was in accordance with the formalities required by law and that was register in the day book of the Register of Deeds of Ilocos Norte within a month after its execution. What is here contested is whether Rosa Ver could, as she did in fact, m the entire Lot 9068 to petitioner PNB. In other words, the issue refers to the intrinsic vanity of the mortgage, as distinguished from its formal sufficiency. The trial court found and so held that Lot 9068 belonged to the conjugal partnership of the spouse lingo Bitanga and Rosa Ver. Therefore, when Inigo died on September 25, 1936, his one-half share in said lot was transmitted to his heirs (Article 777, New Civil Code; Article 657, old Civil Code) 5 and a co-ownership was established between them and Iigo's surviving spouse Rosa Ver. Hence, on October 20, 1936, a little over a year after Iigo's death, Rosa Ver, by herself alone, could not have validly mortgaged the whole of Lot 9068 to PNB. Under Article 2085, New Civil Code (Art. 1857, Old Civil Code), one of the essential requisites to the contract of pledge and mortgage is that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. And under Article 493, New Civil Code (Art. 399, Old Civil Code), each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining thereto, and he may therefore alienate, assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage, with respect to the co-owners, shag be limited to the portion which may be allotted to him in the division upon the termination of the co-ownership. Hence, We fully agree with the trial court and the respondent Court and affirm the holding that "what the Philippine National Bank had acquired from Rosa Ver by virtue of the mortgage was simply one-half () of the entire property, for this was all she had in her power to convey the other half being, as it still is, the lawful share of the plaintiffs-appellees as

Credit Transactions Full Text Cases Atty. Adviento

inheritance from their father, Iigo Bitanga. Nemo date quod non habet One cannot give what is not his. 6 Applying the provisions of the Old Civil Code 7 the law in force at the time of Inigo Bitanga's death in 1935, Rosa Ver, as surviving spouse, cannot take part legally in the sharing of the estate left by her deceased husband (one-half () of Lot 9068) with respect to which she only had usufructuary rights. "The usufructuary not being an owner, cannot alienate or dispose of the objects included in the usufruct. Thus, he cannot ... mortgage or pledge the thing ... 8 It is not disputed that Tax Declaration No. 120225-A, then covering Lot 9068, was in the exclusive name of Rosa Ver. Such fact, however, even if expressly admitted by herein respondent-heirs does not and cannot alter the conjugal character of the lot in question, much less would it affect the mortgage in favor of petitioner PNB. We have already held in several cases that declarations of ownership for purposes of taxation are not sufficient evidence of title. 9 If petitioner relied upon Tax Declaration No. 120225-A in assuming that the whole property belonged exclusively to mortgagor Rosa Ver, such erroneous assumption should not prejudice the rights of the other co-owners, herein respondent-heirs As far as the latter are concerned, their respective shares were not included m the mortgage in favor of PNB. We, therefore, reject PNB's contention that the mortgage constituted by Rosa Ver in its favor on October 20, 1936 is valid and covers the entire property known as Lot 9068. In the second assignment of error, petitioner maintains that the respondent appellate court erred in holding that the mortgage deed (Exhibit 1-Bank) executed by Rosa Ver was no longer subsisting simply because the same was not annotated on the face of original certificate of title No. 7683 (Exhibit A). Petitioner argues that Rosa Ver, being the one who constituted the mortgage deed and has full knowledge of the existence of the same as well as the respondent Bitanga's and Rabago in their capacity as heirs, subscribing witnesses and as notary public, respectively, having also full knowledge of the existence of the mortgage contract, have the legal duty to apprise petitioner Philippine National Bank of the impending registration proceedings covering the lot in question as well as to the issuance of the original certificate of title No. 7683, in line with Section 19 of the Land Registration Act, paragraph 2 (b) that the mortgagor shall not make application without the consent in writing of the mortgagee, and paragraph 3 which requires that the decree of registration in case the mortgagor does not consent to the making of the application shall state that registration is made subject to such mortgage, describing it ... Petitioner further argues that no notice whatsoever, either verbal or in writing, having been made by the mortgagor Rosa Ver and/or the respondents Bitanga's and Rabago, petitioner could not have taken any action to annotate its mortgage lien on the lot in question on the face of original certificate of title No. 7683 and, therefore, should not be blamed for its failure to annotate the mortgage lien on the lot within a period of one (1) year from the issuance of the decree on September 14, 1937 since under Section 19 of Act 496, it is specifically provided that the decree of registration in such a case shall state that the registration is subject to such mortgage. Petitioner concludes that if the mortgage is not so annotated on the face of original certificate of title No. 7683 within a period of one (1) year from September 14, 1937, then it is not a fatal defect for the enforcement of the said mortgage lien. Petitioner further buttresses its stand in distinguishing the requirements of the law as embodied in Sections 19 and 21 of the Land Registration Act from the "general notice" contemplated under Section 31 in relation to Section 35 of the same Act in that the notice required in Sections 19 and 21 are specific while in the latter, the notice is merely constructive. And to cap his argument, petitioner contends that mortgagor Rosa Ver and her heirs had already benefitted from the loan and the mortgage transaction and that they should not be allowed to enrich themselves at the expense of the petitioner. Petitioner's theory is clearly untenable and cannot be sustained for otherwise it would do violence to the fundamental and basic foundation of the Torrens system which is the indefeasibility of a Torrens title under Sections 38, 39 and 47 of Act 496, which provide as follows:

131

Sec 38. If the court after hearing finds that the applicant or adverse claimant has title as stated in his application or adverse claim and proper for registration, a decree of confirmation and registration shall be entered. Every decree of registration shall bind the land, and quiet title thereto, subject only to the exceptions stated in the following section. It shall be conclusive upon and against all persons, including the Insular Government and all the branches thereof, whether mentioned by name in the application, notice, or citation, or included in the general description "To all whom it may concern." Such decree shall not be opened by reason of the absence, infancy, or other disability of any person affected thereby, nor by any proceeding in any court for reversing judgments or decrees; subject, however, to the right of any person deprived of land or any estate or interest therein by decree of registration obtained by fraud to file in the competent Court of First Instance a petition for review within one year after entry of the decree provided no innocent purchaser for value has acquired an interest. Upon the expiration of said term of one year, every decree or certificate of title issued in accordance with this section shall be incontrovertible. If there is any such purchaser, the decree of registration shall not be opened, but shall remain in full force and effect forever, subject only to the right of all hereinbefore provided: Provided, however, That no decree or certificate of title issued to persons not parties to the appeal shall be cancelled or annulled. But any person aggrieved by such decree in any case may pursue his remedy by action for damages against the applicant or any other person for fraud in procuring the decree. Whenever the phrase "innocent purchaser for value" or an equivalent phrase occurs in this Act, it shall be deemed to include an innocent lessee, mortgagee, or other encumbrances for value. (As amended by Sec. 3, Act No. 3621; and Sec. 1, Act No. 3630). Sec. 39. Every person receiving a certificate of title in purchase office of a decree of registration, and every subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold the same five of all encumberance except those noted on mid certificate and any of the following encumbrances which may be sub existing, namely: First. Liens or rights arising or existing under the laws or Constitution of the United States or of the Philippine Islands which the statues of the Philippine Islands cannot require to appear of record in the registry. Second. Taxes within two years after the same become due and payable. Third. Any public highway, way, private way established by law, or any Government irrigation canal or lateral thereof, where the certificate of title does not state that the boundaries of such highway, way, or irrigation canal or lateral thereof, have been determined. But if there are easements or other rights appurtenant to a Parcel of registered land which for any reason have failed to be registered, such easements or rights shall remain so appurtenant notwithstanding such failure, and shall be held to pass with the land until cut off or extinguished by the registration of the servient estate, or in any other manner. (As amended by Act No. 2011, and Sec. 4, Act No. 3621). Sec. 47. The original certificate in the registration book, any copy thereof duly certified under the signature of the clerk, or of the register of deeds of the

Credit Transactions Full Text Cases Atty. Adviento

province or city where the land is situated and the seal of the court, and also the owner's duplicate certificate shag be received as evidence in all the courts of the Philippine Islands and shall be conclusive as to all matters contained therein except so far as otherwise provided in this Act. Parenthetically, it may be stated that Presidential Decree No. 1529 which amends and codifies the laws relative to registration of property reiterates the provisions cited above under the Land Registration Act, Act No. 496. Thus, Section 38 of Act 496 is reiterated by Sections 29, 30, 31 and 32 of P.D. No. 1529, while Section 39 of Act 496 is repeated under Section 44 of P.D. No. 1529. Section 47 of Act 496 is substantially repeated in paragraph 2 of Sec. 31 of the Presidential Decree. It is well-settled in Our jurisprudence that a decree of registration, after the lapse of the one-year period from its entry, becomes indefeasible and conclusive. (Garcia, et al. vs. Bello, et al., L-21355, April 30, 1965, 13 SCRA 769, 770; Baldoz vs. Papa, et al., L-18150, July 30, 1965, 14 SCRA 691; Ylarde, et all vs. Lichauco, et al., L-22115, Dec. 29, 1971, 42 SCRA 641, 650). The reason for the rule is succinctly stated in Gestosani et al., vs. Insular Development Company, et al., L-21166, September 15, 1967, 21 SCRA 114 by the Supreme Court, speaking through Justice Dizon, thus: At the risk of stating what is obvious, We say that land registration proceedings under Act 496 are in rem and that such proceedings, as well as the title issued as a result thereof, are binding and conclusive upon the whole world. Upon the expiration of one year within which a petition to review the decree of registration may be filed, said decree and the title issued pursuant thereto become incontrovertible (Sec. 38, Act 496), and the same may no longer be changed, altered or modified, much less set, aside (Director of Lands vs. Gutierrez David, 50 Phil. 797). This has to be the rule, for if even after the ownership of a property has been decreed by a land registration court in favor of a particular person, the title issued may still be annulled, changed, altered or modified after the lapse of the one year period fixed by the legal provision mentioned above, the object of the Torrens system, namely, to guarantee the indefeasibility of the title to the property, would be defeated (Cabanos vs. Register of Deeds, 40 Phil. 620). We agree with the ruling of both the trial and the appellate courts in their adherence to the doctrine laid down by Us in Snyder vs. the Provincial Fiscal of Cebu and Jose Avila No. 17132, February 8, 1922, 42 Phil. 761, which presented a nearly Identical situation as that in the case at bar, where the issue decided was whether or not a lease contract entered into prior to the original registration of the land subject of the lease and existing pending the registration proceedings could be registered or recorded after such original registration. Like the mortgage executed by Rosa Ver in the instant petition, the contract of lease was entered into prior to the issuance of the decree of registration and the Supreme Court held, thus: It will be noted from the provisions of section 38, above quoted, that the decree of registration cannot be opened or altered even by reason of the absence, infancy, or other disability of any person affected thereby; and it can only be reviewed or modified upon the petition, filed within one year after the entry of the decree, of any person who has been deprived of land or of any estate or interest therein through fraud. xxxxxxxxx If, under the Land Registration Act, an owner of land, as against third parties, and after the lapse of one year, by failing to appear and claim such ownership duly the registration proceeding, thereby loses the same, with equal or greater reason does a lessee, mortgagee, or other person having an interest in said

132

land lose such interest or right, so far as the land is concerned by not claiming the same during the registration proceeding and by allowing said land to be registered free of all encumbrances ... (Emphasis supplied) Since a clean title was issued in the name of the spouse Iigo Bitanga and Rosa Ver by virtue of the decree of registration entered on September 14, 1937, and said decree not having been contested or reopened for a period of one year, the same became incontrovertible. We must reiterate here the rationale of the doctrine We laid dwn in William H. Anderson and Co. vs. Garcia, 64 Phil. 506, 514-515, after an analysis of the Apparently conflicting decisions in the cases of Worcester vs. Ocampo and Ocampo, 34 Phil. 646; Lanci vs Yangco, 52 Phil. 563; and Laxamana vs. Carlos, 57 Phil. 722 thus: Whatever might have been generally or unqualifiedly stated in the cases heretofore decided by this court, We hold that under the Torrens system registration is the operative act that gives validity to the transfer or creates a lien upon the land (Secs. 50 and 51, Land Registration Act). A person dealing with registered land is not required to go behind the register to determine the condition of the property. He is only charged with notice of the burdens on the property which are noted on the face of the register or the certificate of title. To require him to do more is to defeat one of the pry objects of the Torrens system. A bona fide purchaser for value of such property at an auction sale acquires good title as against a prior transferee of the same property if such transfer was unrecorded at the time of the auction sale. ... In the instant case, there is no showing that the Manila Trading Company (MTC) had any knowledge or notice of the prior mortgage in favor of the PNB, hence, it may be safely presumed that it (MTC) acquired the rights of Rosa Ver and Guillermo Bitanga as an innocent purchaser for value and free from all incumbrances. From the MTC, the aforesaid rights of Rosa and Guillermo passed to Santiago Sambrano, and from the latter, to herein intervenors. There is no question, therefore, as to intervenors' rights over the property, as against the PNB or its transferee, Felizardo Reyes. The intervenors merely stepped into the shoes of MTC, a prior purchaser in good faith, and thereby became entitled to an the defenses available to said Company, including those arising from the acquisition of the property in good faith and for value. (Granados vs. Monton, L-1698, April 8, 1950, 86 Phil. 42). Upon the clear and explicit provisions of the Land Registration Act and the jurisprudence on the indefeasibility of the Torrens title after the lapse of one year as reiterated and emphasized in the unbroken line of authorities, We hold that the respondent court committed no error in holding that "the lien by reason or on account of the mortgage executed by Rosa Ver over the entire parcel on October 20, 1936, which was not annotated on the original certificate of title, could not have attached to the land. Otherwise stated, the failure of the interested party to appear during the registration proceeding and claim such interest in the land barred him from thereafter having such interest annotated on the certificate of title." The third assignment of error assails the respondent court in holding that estoppel and/or laches has not stepped in to defeat the right of respondents Bitangas and Rabago over the lot in question, specifically to the one-half (1/2) portion thereof representing their undivided share of the lot as their in. inheritance from their father, Inigo Bitanga. In rejecting appellant's defense of estoppel or laches, the respondent Court of Appeals ruled: Corollary to the foregoing, appellants cannot maintain that estoppel or laches has stepped in to defeat the right of the plaintiffs-appellees to institute an action to indicate their right. And the reason is basic in its simplicity: the mortgage contract entered into by Rosa Ver respecting the other half of the lot in question having been null and void ab initio, lapse of time could

Credit Transactions Full Text Cases Atty. Adviento

not have validated or ratified it, and an action, predicated upon the indubitable nullity of the contract constituted may always be maintained by the aggrieved party to set it aside. (pp. 13-14, CA Decision). Petitioner argues that respondents Bitangas and Rabago, as heirs and/or successors-in-interest of Rosa Ver are bound by the mortgage and may not be permitted to question the validity of the same, and assuming that Rosa Ver does not have any right to constitute a mortgage on the other half of the lot in question, petitioner contends that nonetheless the validity Of the mortgage deed constituted by her over the share of her husband should be upheld as well as its acquisition by the petitioner because respondents Bitangas and Rabago are likewise estopped to question the validity of the same by reason of acquisence On their Part in that Guillermo Bitanga together with Mary Bitanga Castillo signed as witness to the mortgage deed executed by their mother on the whole portion of the lot in question on October 20, 1936 while respondent Atty. Agripino L. Rabago, the son-in-law of the mortgagor Rosa Ver, notarized the said mortgage deed. Petitioner also points to the fact that respondent Pedro Bitanga offered to repurchase the whole portion of the property from the petitioner, which offer is an admission, conclusive upon him that the PNB is the absolute and legal owner of the lot in question and have the right to dispose of the same. And citing the case of Cruz vs Ilagan 81 Phil. 554, and authority quoted from 21 Am. Jur. 756, petitioner concludes that respondents Bitangas and Rabago, as heirs of the deceased husband, by their conduct, in effect bound themselves to the real estate mortgage contract over the share of the husband, as completely and effectively as though they themselves signed the document as mortgagors over the share of the husband. Petitioner also stresses that respondents Bitangas and Rabago filed the complaint for reconveyance and annulment of mortgage on May 17,1954, after nineteen (19) solid years have already elapsed from the time the mortgage was executed on October 20, 1936 by Rosa Ver, and the lot in question had been the subject of several transactions during which time said respondents never did anything in assuming or vindicating their right to institute a suit against the petitioner though with ample opportunity to do so and, therefore, said respondents slept on or neglected in asserting their right, hence they are guilty of laches. Petitioner's contention is without merit. First, it must be clarified that not all the respondent heirs signed the mortgage deed as instrumental witnesses. An examination of the mortgage contract (Exhibit "1") that of the five (5) Bitanga respondents, namely, Pedro, Fernando, Gregorio, Guillermo and Clarita only Guillermo Bitanga signed as one of the instrumental witnesses, the first being Mary B. Castillo. Even as regards Guillermo Bitanga, who signed as witness of the deed of mortgage, PNB's reliance upon the case of Vda de la Cruz vs. Ilagan is unavailing. In the De la Cruz case, the heirs of the decedent, who were the es sought to be estopped from questioning the validity of the sale made by their co-heir and the administrator of the decedent's estate, did not merely sign as witnesses to the deed of sale. In the words of Justice Zaldivar who penned the decision, they "gave their approval and conformity to the made and to the administrator's motion by signing with appropriate expressions both papers." (Cruz vs. Ilagan, 81 Phil. 554, 556). Thus, that the heirs gave their consent to the sale could not be doubted, as in fact it was expressed in words in the deed itself and in the motion submitted to the court for judicial approval of the sale, and on the basis of this express approval and conformity, the Court held them in estoppel and bound as covendors. In the instant case, on the other hand, the party sought to be estopped signed merely as an instrumental witness. A distinction should be made, as indeed there is, between one who signs a document merely as an instrumental witness, and one who affixes his signature as proof of his consent to, approval of, and conformity with, the contents of the deed or document. The former simply attests that the party or parties to the instrument signed the same in his presence, so that he is frequently referred to as a "Witness to the signature," and he is not bound to know or be aware of the contents of the document; while the latter is not only presumed to know the subject matter of the deed, but more importantly, binds himself thereto as effectively as the party if would be bound thereby. The foregoing distinction makes clear the inapplicability of the ruling in Vda de la Cruz vs. Ilagan to the facts obtaining in the case at bar. We

133

cannot hold Guillermo Bitanga in estoppel by declaring that he bound himself to the mortgage as effectively as the mortgagor Rosa Ver when he signed the mortgage deed as a witness in the absence of clear proof that he was in fact aware of the contents of the document at the time of its execution. We can only go as far as stating that the deed was signed by the parties thereto in his presence. Moreover, there is no allegation nor evidence on record to show that petitioner-mortgagee relied upon the signature of Guillermo Bitanga on the mortgage deed, or that he made any representations with the PNB for the acceptance of the mortgage. On the contrary, PNB states that Rosa Ver mortgaged the entire lot "on the basis and strength of Tax Declaration No. 120225-A" which "was issued and declared in her exclusive name. 10 As held by this Court, speaking through Justice Zaldivar, in the case of Kalalo vs. Luz, L-27782, July 31, 1970, 34 SCRA 337, 346-347: An essential element of estoppel is that the person invoking it has been influenced and has relied on the representations or conduct of the person sought to be estopped, and this element is wanting in the instant case ... And in Republic of the Philippines vs. Garcia, et al. (91 Phil. 46, 49 ), this Court ruled that there is no estoppel where the statement or action invoked as its basis did not mislead the adverse party. Estoppel has been characterized as harsh or odious and not favored by law (Coronet, et al. vs. C.I.R., et al., 24 SCRA 990, 996) ... Estoppel cannot be sustained by mere argument or doubtful inference; it must be clearly proved in all its essential elements by clear, convincing and satisfactory evidence (Rivers vs. Metropolitan Life Ins. Co. of New York, 6 N.Y., 2d, 3, 5) ... Consequently, there is no estoppel where there is no reliance upon representations and where there is no deliberate misleading of another. Intention to mislead is an important element of estoppel, as well as the lead party's reliance upon the declaration, act or omission of the party sought to be estopped. Both elements have not been proved in the instant case, hence again, estoppel does not lie against Guillermo Bitanga. Under this same ground of estoppel, petitioner makes capital of the fact that it was Atty. Agripino L. Rabago, son-in-law of mortgagor Rosa Ver and husband of one of herein respondent-heirs, Clarita Bitanga Rabago, who notarized the mortgage deed. It is contended that since Atty. Rabago acted as the judicial administrator and lawyer of the Bitanga family estate at the time of the execution of the mortgage, he should have prevailed upon his mother-in-law Rosa Ver not to mortgage the entire lot but only half thereof to PNB when he was approached to notarize the Hipoteca de Bienes Immuebles (Exhibit 1). Furthermore, knowing that the property was already the subject of original registration proceedings under Act No. 496, he should have informed the bank thereof. Again, this contention of petitioner is untenable. Assuming that Atty. Rabago was the lawyer for the Bitanga family administrator of its estate of which the trial and appellate courts made no such finding, his acts, declarations and omissions in the performance of his duties as such, whether deliberate or not, cannot adversely affect herein respondent hers as to deprive them of their right to umpugn a contract which was prejudicial to their interests. Under the circumstances of the case at bar, that Atty. Rabago could have or should have done a particular thing which he did not do is his own responsibility. The settled rule in Philippines Jurisprudence that a client is bound by his 's actions, negligence, mistakes and/or shortcomings enunciated in a number of cases 11 presupposes the existence of a ending litigation whether in court or in an administrative body, and refers only to matters to the conduct of such case. Precisely said rule requires the existence of an attorney-client relationship, while herein, there is merely a single, independent transaction, that of a mortgage, which was in no way con. connected with any pending litigation at the time of its execution. Therefore, the above-stated rule finds no application in the instant case. We likewise disagree with the contention that Pedro Bitanga's offer to buy the lot in question, as contained in his letter to the PNB dated September 14, 1949 (Exhibit 10), is a conclusive admission on his part that the bank was the absolute and legal owner of the property so as to estop him from

Credit Transactions Full Text Cases Atty. Adviento

contesting the validity of the mortgage (Exhibit 1) and the title (TCT T2701) procured by the bank over the property. For in the aforesaid letter, Bitanga categorically wrote: "1. That I offer the amount of P800.00 to buy said lot, and please consider that the rights which the bank had purchased was the property and shares of my mother and brother, Guillermo, and that my rights as well as the rights of my other brothers and sisters were not sold to the bank;" There can be no estoppel arising from said vehement and assertive claim. If he offered to buy the entire property despite such expressed claim, his purpose may well be that he wished to avoid a long-drawn, expensive litigation and not necessarily to admit that petitioner was the absolute and legal owner of the property. As to petitioner's contention that respondents are guilty of laches for having slept on or neglected in asserting their right to the land after the lapse of more than nineteen (19) years from the time the mortgage was executed on October 20, 1936 by Rosa Ver, the ruling in Angeles, et al., vs. Court of Appeals, et al., 102 Phil. 1006, declares that "where the sale of a homestead is null and void, the action to recover the same does not prescribe because mere lapse of the time Cannot give efficacy to the contracts that are null and void and inexistent." This is a principle recognized since Tipton vs. Velasco, 6 Phil. 67, that "mere lapse of time to give efficacy to contracts that are null and void cited in Eugenie vs. Perdido et al., 97 Phil. 41. As to the fourth assignment of error faulting the respondent appellate court in holding that the acquisition of the other half portion of the lot in question by the intervenors-spouses Melitona Lagpacan and Jorge Maracas bears the earmarks of validity and registry petitioner theorizes that the mortgage executed by Rosa Ver on the lot in question in its entirety was valid and that said mortgage was very much ahead than that of the levy made by the Manila Trading & Supply Co. since the mortgage was registered on November 12, 1936 under Act 3344 as then the property mortgaged was still an unregistered land. On the other hand, the levy made by the Manila Trading & Supply Co. was noted in the first Torrens title of the land after its registration under the Torrens system, on February 14, 1940. And being first in time, herein petitioner maintains it should be first in right and the mortgage should enjoy preference over the levy. It must be noted, however, that in Our resolution of the first assignment of error, We ruled that the mortgage deed was valid and existing only with respect to the one-half portion of the lot in question belonging to the mortgagor Rosa Ver as her share in the conjugal partnership with her husband Iigo Bitanga. Hence, petitioner's assumption that the mortgage of the whole lot was valid, is erroneous. What this Court held is that the mortgagor, Rosa Ver, as surviving spouse, could convey in mortgage to the petitioner bank one-half () of the entire property being her share in the conjugal partnership with her deceased husband, the other half being the lawful share of the respondent heirs as inheritance from their deceased father, Iigo Bitanga. And resolving the secnd assignment of error, We have ruled likewise that the respondent court committed no error in holding that the mortgage lien executed by Rosa Ver over the entire parcel of land on October 20, 1936 which was not annotated on the original certificate of title could not have attached to the land. Stated otherwise, the failure of the petitioner bank to appear during the registration proceedings and claim such interest in the land, and further to do so after more than a year after the issuance of the decree of registration which rendered the title undefeasible and free from any collateral attack by any person g title to or interest in the land prior to registration proceedings, has resulted into the petitioner bank being virtually deprived of its mortgage. It follows, therefore, that the acquisition of the other half portion of the lot in question by the intervenors-spouses Melitona Lagpacan and Jorge Macalas into whose hands said one-half () passed as a result of Civil Case No. 1846 of the Court of First Instance of Ilocos Norte entitled "Jorge Maracas, et al., vs. Alfredo Formoso, et al." was valid and regular, which holding of the Court of Appeals is correct and We affirm the same. To recapitulate, the mortgage executed by Rosa Ver in favor of the PNB was valid only as regards her one-half () conjugal share in Lot 9068. On the other hand, the intervenors-spouses Melitona Lagpacan and Jorge Malacas acquired their right to the shares of Rosa Ver and Guillermo Bitanga in the same lot from the Manila Trading Co., another creditor of Rosa Ver, which acquired "all the rights, title, interests and participations which ... Guillermo Bitanga and Row Ver de Bitanga have or might have"

134

over Lot 9068 (Exh 4-Lagpacan) more than two (2) years after the decree of registration was entered in the name of the Bitanga spouses on September 14, 1937. Since Original Certificate of Title No. 7683 covering the land in question was issued on December 15, 1937 free from any mortgage lien and no such lien was recorded thereafter even until May 25, 1940 when the certificate of sale in favor of the Manila Trading Co. as highest bidder of the shares of Rosa and Guillermo was annotated on the title (Exh. A-4), it is quite clear that as between the PNB and the Manila Trading Co., the latter had the better rights. One further point that militates against the claim of the petitioner bank who now prosecutes its claim or mortgage lien in behalf of Felizardo Reyes to whom the bank sold the property on May 24, 1954, is the finding of the appellate court that said Felizardo Reyes is a purchaser in bad faith, a notice of lis pendens having been annotated on the certificate of title cover. ing the property sometime before the de thereof was made by the Philippine National Bank in favor of F o Reyes. This finding of fact is conclusive and binding upon Us and bad faith We can neither condone nor reward. The judgment of the Court of Appeals must, however, be modified. Paragraph (d) of the dispositive portion of the decision appealed from directed the Register of Deeds to issue in lieu of Transfer Certificate of Title Nos. T-2701 and T-3944 another certificate of title in the names of the plaintiffs and in. intervenors as follows: Undivided behalf () share to Pedro Bitanga married to Agripina . Fernando Bitanga single Gregorio Bitanga single, Guillermo Bitanga, single, Clarita Bitanga, married to Agripino L. Rabago, all of legal age, Filipino citizens, and residents of Laoag, Ilocos Norte, and the remaining undivided one-half (1/2) re to the spouses Jorge Malacas and Melitona Lagpacan, both of legal age, Filipino citizens, and residents of Burgos, Ilocos Norte free from incumbrance regarding the claims of the Philippine National Bank and Felizardo Reyes, after payment of lawful fees. As We have hereinbefore ruled that the Manila Trading Company acquired not only the rights, title, interests and participation of Rosa Ver to one-half () of Lot 9068 but also that pertaining to Guillermo Bitanga or one-fifth (1/5) of the other half of the lot which the latter shared with his sister and three (3) brothers, each one having one-fifth (1/5) share each, the intervenor spouses as successors-in-interest of the Manila Trading Company are entitled to six-tenths (6/10) or three-fifths (3/5) of the entire lot, and not merely one-half () thereof as held by the lower court and the appellate court. The undivided two-fifths (2/5) share only should appertain to Pedro Bitanga, Fernando Bitanga, Gregorio Bitanga and Clarita Bitanga. WHEREFORE, IN VIEW OF THE FOREGOING, the judgment of the Court of Appeals is hereby affirmed with modification in the sense that paragraph (d) is hereby amended to read as follows: (d) Since the issuance of Transfer Certificate of Title No. T2701, Exhibit "D" in favor of the Philippine National Bank, and Transfer Certificate of Title No. T-3944, Exhibit "16", in favor of Felizardo Reyes, was without legal basis, they are, therefore, declared null and void and cancelled. The Register of Deeds is hereby ordered to issue in hell of the foregoing transfer certificates of title another certificate of title in the names of the private respondents as follows: Undivided two-fifths (2/5) share to Pedro Bitanga, married to Agripina, Purisima Fernando Bitanga, single, Gregorio Bitanga, single, and Clarita Bitanga, married to Agripino L. Rabago, all of legal age, Filipino citizens, and residents of Laoag, Ilocos Norte, and the remaining undivided threefifths (3/5) share to the spouses Jorge Maracas and Melitona Lagpacan, both of legal age, Filipino citizens, and residents of Burgos, Ilocos Norte, free from incumbrance regarding the claims of the Philippine National Bank and Felizardo Reyes, after payment of lawful fees. Costs against the petitioner.

Credit Transactions Full Text Cases Atty. Adviento

SO ORDERED. FIRST DIVISION G.R. No. 109946 February 9, 1996

135

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS, MYLO O. QUINTO and JESUSA CHRISTINE S. CHUPUICO, respondents. DECISION BELLOSILLO, J.: DEVELOPMENT BANK OF THE PHILIPPINES filed this petition for review on certiorari assailing the decision of the Court of Appeals holding that the mortgages in favor of the bank were void and ineffectual because when constituted the mortgagors, who were merely applicants for free patent of the property mortgaged, were not the owners thereof in fee simple and therefore could not validly encumber the same.1 On 20 April 1978 petitioner granted a loan of P94,000.00 to the spouses Santiago Olidiana and Oliva Olidiana. To secure the loan the Olidiana spouses executed a real estate mortgage on several properties among which was Lot 2029 (Pls-61) with Tax Declaration No. 2335/1, situated in Bo. Bago Capalaran, Molave, Zamboanga del Sur, with an area of 84,108 square meters, more or less. At the time of the mortgage the property was still the subject of a Free Patent application filed by the Olidianas with the Bureau of Lands but registered under their name in the Office of the Municipal Assessor of Molave for taxation purposes.2 On 2 November 1978 the Olidiana spouses filed with the Bureau of Lands a Request for Amendment of their Free Patent applications over several parcels of land including Lot No. 2029 (Pls-61). In this request they renounced, relinquished and waived all their rights and interests over Lot No. 2029 (Pls-61) in favor of Jesusa Christine Chupuico and Mylo O. Quinto, respondents herein. On 10 January 1979 Free Patent Nos. IX-52223 (covering one-half of Lot No. 2029 [Pls-61] and IX-5-2224 (covering the other half of the same Lot No. 2029 [Pls-61]) were accordingly granted respectively to respondents Jesusa Christine Chupuico and Mylo O. Quinto by the Bureau of Lands District Land Office No. IX-5, Pagadian City. Jesusa Christine Chupuico later obtained Original Certificate of Title No. P-27,361 covering aforementioned property while Mylo O. Quinto was also issued Original Certificate of Title No. P-27,362 in view of the previous free patent.3 On 20 April 1979 an additional loan of P62,000.00 was extended by petitioner to the Olidiana spouses. Thus on 23 April 1979 the Olidianas executed an additional mortgage on the same parcels of land already covered by the first mortgage of 4 April 1978. This second mortgage also included Lot No. 2029 (Pls-61) as security for the Olidiana spouses' financial obligation with petitioner.4 Thereafter, for failure of Santiago and Oliva Olidiana to comply with the terms and conditions of their promissory notes and mortgage contracts, petitioner extrajudicially foreclosed all their mortgaged properties. Consequently, on 14 April 1983 these properties, including Lot No. 2029 (Pls-61) were sold at public auction for P88,650.00 and awarded to petitioner as the highest bidder. A Certificate of Sale was thereafter executed in favor of petitioner and an Affidavit of Consolidation of Ownership registered in its name. However, when petitioner tried to register the sale and the affidavit of consolidation and to have the tax declaration transferred in its name it was discovered that Lot No. 2029 (Pls-61) had already been divided into two (2) parcels, one-half (l/2) now known as Lot 2029-A and covered by OCT No. P-27,361 in the name of Jesusa Christine Chupuico, while the other half known as Lot 2029-B was covered by the same OCT No. P-27,361 in the name of Mylo O. Quinto.5 In view of the discovery, petitioner filed an action for Quieting of Title and Cancellation or Annulment of Certificate of Title against respondents. After trial the Regional Trial Court of Molave, Zamboanga del Sur, Branch 23,

rendered judgment against petitioner.6 The court ruled that the contracts of mortgage entered into by petitioner and the subsequent foreclosure of subject property could not have vested valid title to petitioner bank because the mortgagors were not the owners in fee simple of the property mortgaged. The court also found the mortgages over Lot No. 2029 (Pls61) of no legal consequence because they were executed in violation of Art. 2085, par. 2, of the New Civil Code which requires that the mortgagor be the absolute owner of the thing mortgaged. According to the court a quo there was no evidence to prove that the mortgagors of the land in dispute were its absolute owners at the time of the mortgage to petitioner. The factual findings of the lower court disclose that when the Olidiana spouses mortgaged Lot No. 2029 (Pls-61) to petitioner it was still the subject of a miscellaneous sales application by the spouses with the Bureau of Lands. Since there was no showing that the sales application was approved before the property was mortgaged, the trial court concluded that the Olidiana spouses were not yet its owners in fee simple when they mortgaged the property. The lower court also said that with the subsequent issuance of the Free Patent by the Bureau of Lands in the name of respondents Chupuico and Quinto, it could be gleaned that the property was indeed public land when mortgaged to petitioner. Therefore petitioner could not have acquired a valid title over the subject property by virtue of the foreclosure and subsequent sale at public auction.7 Resultantly, the trial court declared the following as null and void insofar as they related to Lot No. 2029 (Pls-61) being a public land: the real estate mortgage dated 4 April 1978, the second mortgage dated 23 April 1979, the foreclosure sale on 14 April 1983, the certificate of sale registered with the Register of Deeds of Zamboanga del Sur on 1 September 1983, and the affidavit of consolidation of ownership registered with the Register of Deeds on 2 August 1985. Petitioner then appealed to the Court of Appeals which likewise ruled in favor of respondents, hence the instant petition.8 Petitioner now seeks to overturn the decision of respondent Court of Appeals holding that Lot No. 2029 (Pls-61) could not have been the subject of a valid mortgage and foreclosure proceeding because it was public land at the time of the mortgage, and that the act of Jesusa Christine S. Chupuico and Mylo O. Quinto in securing the patents was not tainted with fraud. The crux of this appeal thus lies in the basic issue of whether the land in dispute could have been validly mortgaged while still the subject of a Free Patent Application with the government.9 We agree with the court a quo. We hold that petitioner bank did not acquire valid title over the land in dispute because it was public land when mortgaged to the bank. We cannot accept petitioner's contention that the lot in dispute was no longer public land when mortgaged to it since the Olidiana spouses had been in open, continuous, adverse and public possession thereof for more than thirty (30) years. 10 In Visayan Realty, Inc. v. Meer 11 we ruled that the approval of a sales application merely authorized the applicant to take possession of the land so that he could comply with the requirements prescribed by law before a final patent could be issued in his favor. Meanwhile the government still remained the owner thereof, as in fact the application could still be canceled and the land awarded to another applicant should it be shown that the legal requirements had not been complied with. What divests the government of title to the land is the issuance of the sales patent and its subsequent registration with the Register of Deeds. It is the registration and issuance of the certificate of title that segregate public lands from the mass of public domain and convert it into private property. 12 Since the disputed lot in the case before us was still the subject of a Free Patent Application when mortgaged to petitioner and no patent was granted to the Olidiana spouses, Lot No. 2029 (Pls-61) remained part of the public domain. With regard to the validity of the mortgage contracts entered into by the parties, Art. 2085, par. 2, of the New Civil Code specifically requires that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. Thus, since the disputed property was not owned by the Olidiana spouses when they mortgaged it to petitioner the contracts of mortgage and all their subsequent legal consequences as regards Lot No. 2029 (Pls-61) are null and void. In a much earlier case 13 we held that it was an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the property mortgaged, and it appearing that the mortgage was constituted before the issuance of the patent to the mortgagor, the mortgage in question must of necessity be void and

Credit Transactions Full Text Cases Atty. Adviento

ineffective. For, the law explicitly requires as imperative for the validity of a mortgage that the mortgagor be the absolute owner of what is mortgaged. Finally, anent the contention of petitioner that respondents fraudulently obtained the property in litigation, we also find for the latter. As correctly found by the lower courts, no evidence existed to show that respondents had prior knowledge of the real estate mortgages executed by the Olidiana spouses in favor of petitioner. The act of respondents in securing the patents cannot therefore be categorized as having been tainted with fraud. WHEREFORE, the petition is DENIED and the questioned decision of the Court of Appeals is AFFIRMED. SO ORDERED. EN BANC [G.R. No. L-9306. May 25, 1956.] SOUTHERN MOTORS, INC., Plaintiff-Appellee, vs. ELISEO BARBOSA, Defendant-Appellant.

136

Hon. Querube C. Makalintal, Judge, for action, upon said motion for reconsideration. Thereafter, Judge Makalintal rendered the aforementioned decision, from which the Defendant has appealed. He maintains, in his brief, that:chanroblesvirtuallawlibrary 1. The trial court erred in hearing Plaintiff-Appellees motion for reconsideration dated June 9, 1951, notwithstanding the fact that Defendant-Appellant was not served with a copy thereof nor served with notice of the hearing thereof. 2. The trial court erred in rendering a judgment on the pleadings in Appellees favor when no issue was at all submitted to it for resolution, to the prejudice of the substantial rights of Appellant. 3. The court a quo erred in depriving Defendant-Appellant of his property rights without due process of law. The first assignment of error is based upon an erroneous predicate, for, contrary to Defendants assertion, his counsel in the lower court, Atty. Manuel F. Zamora, through an employee of his office, by the name of Agripino Aguilar, was actually served on June 9, 1951, with copy of Plaintiffs motion for reconsideration, with notice to the effect that said motion would be submitted for the consideration and approval of the lower court, on Saturday, June 16, 1951, at 8:chanroblesvirtuallawlibrary00 a.m., or soon thereafter as counsel may be heard. The second assignment of error is, likewise, untenable. It is not true that there was no issue submitted for determination by the lower court when it rendered the decision appealed from. It will be recalled that each one of the allegations made in Plaintiffs complaint were expressly admitted in Defendants answer, in which he merely alleged, as special and affirmative defense, that Plaintiff is not entitled to foreclose the mortgage constituted in its favor by the Defendant, because the property of Alfredo Brillantes, the principal debtors, had not been exhausted as yet, and were not sought to be exhausted, for the satisfaction of Plaintiffs credit. Thus, there was no question of fact left for determination. The only issue set up by the pleadings was the sufficiency of said affirmative defense. And such was the only point discussed by the Defendant in his opposition to Plaintiffs motion for a summary judgment, referring, evidently, to a judgment on the pleadings. Plaintiffs motion for reconsideration of the order of Judge Roman Ibaez refusing to render said judgment, upon the ground that it was premature, revived said issue of sufficiency of the aforementioned affirmative defense, apart from calling for a reexamination of the question posed by said order of Judge Ibaez, namely, whether it was proper, under the circumstances, to render a judgment on the pleadings. In other words, said motion for reconsideration had the effect of placing before then Judge Makalintal, for resolution, the following issues, to wit:chanroblesvirtuallawlibrary (1) whether a summary judgment or a judgment on the pleadings was in order, considering the allegations of Plaintiffs complaint and those of Defendants answer; chan roblesvirtualawlibraryand (2) whether the mortgage in question could be foreclosed although Plaintiff had not exhausted, and did not intend to exhaust, the properties of his principal debtor, Alfredo Brillantes. The third assignment of error is predicated upon the alleged lack of notice of the hearing of Plaintiffs motion for reconsideration. As stated in our discussion of the first assignment of error, this pretense is refuted by the record. Moreover, it is obvious that Defendants affirmative defense is devoid of merit for:chanroblesvirtuallawlibrary 1. The deed of mortgage provides:chanroblesvirtuallawlibrary executed by him specifically

DECISION CONCEPCION, J.: This is an appeal from a decision of the Court of First Instance of Iloilo:chanroblesvirtuallawlibrary (a) Ordering the Defendant Eliseo Barbosa to pay to the Court, for the benefit of the Plaintiff within a period of ninety (90) days from receipt by the Defendant hereof, the sum of P2,889.53, with interest at the rate of 12% per annum computed on the basis of the amounts of the installments mentioned in the mortgage and of the dates they respectively fell due, until fully paid; chan roblesvirtualawlibrarythe sum of P200 by way of attorneys fees, plus costs; chan roblesvirtualawlibraryand (b) Upon failure of the Defendant to pay as aforesaid, ordering the land described in the complaint and subject of the mortgage to be sold at public auction in accordance with law in order to realize the amount of the judgment debt and costs. Although originally forwarded to the Court of Appeals, the same has certified the record to this Court in view of the fact that the issues raised in the appeal involve merely questions of law. Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to foreclose a real estate mortgage, constituted by the latter in favor of the former, as security for the payment of the sum of P2,889.53 due to said Plaintiff from one Alfredo Brillantes, who had failed to settle his obligation in accordance with the terms and conditions of the corresponding deed of mortgage. Defendant Eliseo Barbosa filed an answer admitting the allegations of the complaint and alleging, by way of special and affirmative defense:chanroblesvirtuallawlibrary That the Defendant herein has executed the deed of mortgage Annex A for the only purpose of guaranteeing as surety and/or guarantor the payment of the above mentioned debt of Mr. Alfredo Brillantes in favor of the Plaintiff. That the Plaintiff until now has no right action against the herein Defendant on the ground that said Plaintiff, without motive whatsoever, did not intent or intent to exhaust all recourses to collect from the true debtor Mr. Alfredo Brillantes the debt contracted by the latter in favor of said Plaintiff, and did not resort nor intends to resort all the legal remedies against the true debtor Mr. Alfredo Brillantes, notwithstanding the fact that said Mr. Alfredo Brillantes is solvent and has many properties within the Province of Iloilo. Thereupon, Plaintiff moved for summary judgment which a branch of the Court of First Instance of Iloilo, presided over by Hon. Roman Ibaez, Judge, denied upon the ground that it is premature. Plaintiff moved for a reconsideration of the order to this effect. Soon later, he filed, also, another motion praying that the case be transferred to another branch of said court, because that of Judge Ibaez would be busy trying cadastral cases, and had adopted the policy of refraining from entertaining any other civil cases and all incidents related thereto, until after said cadastral cases shall have been finally disposed of. With the express authority of Judge Ibaez, the case was referred to the branch of said court, presided over by

That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors, administrators and assigns shall well and truly perform the full obligations above-stated according to the terms thereof, then this mortgage shall be null and void, otherwise it shall remain in full force and effect, in which event herein mortgagor authorizes and empowers herein mortgagee-company to take any of the following actions to enforce said payment;. (a) Foreclose, judicially or extrajudicially, the chattel mortgage above referred to and/or also this mortgage, applying the proceeds of the purchase price at public sale of the real property herein mortgaged to any deficiency or difference between the purchase price of said chattel at public auction and the amount of P2,889.53, together with its interest hereby secured; chan roblesvirtualawlibraryor

Credit Transactions Full Text Cases Atty. Adviento

(b) Simply foreclose this mortgage judicially in accordance with the provisions of section 2, Rule 70, Rules of Court, or extra- judicially under the provisions of Act No. 3135 and Act No. 4118, to satisfy the full amount of P2,889.53, together with its interest of 12 per cent per annum. 2. The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand exhaustion of the property of the principal debtor, exists only when a pledge or a mortgage has not been given as special security for the payment of the principal obligation. Guarantees, without any such pledge or mortgage, are governed by Title XV of said Code, whereas pledges and mortgages fall under Title XVI of the same Code, in which the following provisions, among others, are found:chanroblesvirtuallawlibrary ART. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. ART. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. 3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to the exhaustion of the property of the principal debtor. 4. Although an ordinary personal guarantor not a mortgagor or pledgor may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case. Wherefore, the decision appealed from is hereby affirmed, with costs against the Defendant-Appellant. It is SO ORDERED. SECOND DIVISION

137

this purpose, the owner's duplicate of TCT No. 58748 was delivered to petitioner A. Francisco Realty. Petitioner claims that private respondents failed to pay the interest and, as a consequence, it registered the sale of the land in its favor on February 21, 1992. As a result, TCT No. 58748 was cancelled and in lieu thereof TCT No. PT-85569 was issued in the name of petitioner A. Francisco Realty. 4 Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on March 13, 1992 for which they signed a promissory note which reads: PROMISSORY NOTE For value received I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, the additional sum of Two Million Five Hundred Thousand Pesos (P2,500,000.00) on or before April 27, 1992, with interest at the rate of four percent (4%) a month until fully paid and if after the said date this note and/or the other promissory note of P7.5 Million remains unpaid and/or unsettled, without any need for prior demand or notification, I promise to vacate voluntarily and willfully and/or allow A.FRANCISCO REALTY AND DEVELOPMENT CORPORATION to appropriate and occupy for their exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig, Metro Manila. 5 Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly interest from May 1992, plus surcharges. As respondent spouses refused to vacate, petitioner filed the present action for possession before the Regional Trial Court in Pasig City. 6 In their answer, respondents admitted liability on the loan but alleged that it was not their intent to sell the realty as the undated deed of sale was executed by them merely as an additional security for the payment of their loan. Furthermore, they claimed that they were not notified of the registration of the sale in favor of petitioner A. Francisco Realty and that there was no interest then unpaid as they had in fact been paying interest even subsequent to the registration of the sale. As an alternative defense, respondents contended that the complaint was actually for ejectment and, therefore, the Regional Trial Court had no jurisdiction to try the case. As counterclaim, respondents sought the cancellation of TCT No. PT-85569 as secured by petitioner and the issuance of a new title evidencing their ownership of the property. 7 On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of which reads as follows: WHEREFORE, prescinding from the foregoing considerations, judgment is hereby rendered declaring as legal and valid, the right of ownership of A. Francisco Realty Find Development Corporation, over the property subject of this case and now registered in its name as owner thereof, under TCT No. 85569 of the Register of Deeds of Rizal, situated at No. 56 Dragonfly Street, Valle Verde VI, Pasig, Metro Manila. Consequently, defendants are hereby ordered to cease and desist from further committing acts of dispossession or from withholding possession from plaintiff of the said property as herein described and specified. Claim for damages in all its forms, however, including attorney's fees, are hereby denied, no competent proofs having been adduced on record, in support thereof. 8

G.R. No. 125055 October 30, 1998 A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P. JAVILLONAR, respondents.

MENDOZA, J.: This is a petition for review on certiorari of the decision rendered on February 29, 1996 by the Court of Appeals 1 reversing, in toto, the decision of the Regional Trial Court of Pasig City in Civil Case No. 62290, as well as the appellate court's resolution of May 7, 1996 denying reconsideration. Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private respondents, the spouses Romulo and Erlinda Javillonar, in consideration of which the latter executed the following documents: (a) a promissory note, dated November 27, 1991, stating an interest charge of 4% per month for six months; (b) a deed of mortgage over realty covered by TCT No. 58748, together with the improvements thereon; and (c) an undated deed of sale of the mortgaged property in favor of the mortgagee, petitioner A. Francisco Realty. 2 The interest on the said loan was to be paid in four installments: half of the total amount agreed upon (P900,000.00) to be paid in advance through a deduction from the proceeds of the loan, while the balance to be paid monthly by means of checks post-dated March 27, April 27, and May 27, 1992. The promissory note expressly provided that upon "failure of the MORTGAGOR (private respondents) to pay the interest without prior arrangement with the MORTGAGEE (petitioner), full possession of the property will be transferred and the deed of sale will be registered. 3 For

Credit Transactions Full Text Cases Atty. Adviento

Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial court and dismissed the complaint against them. The appellate court ruled that the Regional Trial Court had no jurisdiction over the case because it was actually an action for unlawful detainer which is exclusively cognizable by municipal trial courts. Furthermore, it ruled that, even presuming jurisdiction of the trial court, the deed of sale was void for being in fact a pactum commissorium which is prohibited by Art. 2088 of the Civil Code. Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied the motion in its resolution, dated May 7, 1996. Hence, this petition for review on certiorari raising the following issues: WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL TRIAL COURT HAD NO JURISDICTION OVER THE COMPLAINT FILED BY THE PETITIONER. WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACTUAL DOCUMENTS SUBJECT OF THE INSTANT CASE ARE CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED UNDER ARTICLE 2088 OF THE CIVIL CODE OF THE PHILIPPINES. On the first issue, the appellate court stated: Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer, as contradistinguished from accion publiciana. As contemplated by Rule 70 of the Rules of Court, an action for unlawful detainer which falls under the exclusive jurisdiction of the Metropolitan or Municipal Trial Courts, is defined as withholding from by a person from another for not more than one year, the possession of the land or building to which the latter is entitled after the expiration or termination of the supposed rights to hold possession by virtue of a contract, express or implied. (Tenorio vs. Gamboa, 81 Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). If no action is initiated for forcible entry or unlawful detainer within the expiration of the 1 year period, the case may still be filed under the plenary action to recover possession by accion publiciana before the Court of First Instance (now the Regional Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain language, the case at bar is a legitimate ejectment case filed within the 1 year period from the jurisdictional demand to vacate. Thus, the Regional Trial Court has no jurisdiction over the case. Accordingly, under Section 33 of B.P. Blg. 129 Municipal Trial Courts are vested with the exclusive original jurisdiction over forcible entry and unlawful detainer case. (Sen Po Ek Marketing Corp. vs. CA, 212 SCRA 154 [1990]) 9 We think the appellate court is in error. What really distinguishes an action for unlawful detainer from a possessory action (accion publiciana) and from a reivindicatory action (accion reivindicatoria) is that the first is limited to the question of possession de facto. An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms of an ejectment suit that may be filed to recover possession of real property. Aside from the summary action of ejectment, accion publiciana or the plenary action to recover the right of possession and accion reivindicatoria or the action to recover ownership which includes recovery of possession, make up the three kinds of actions to judicially recover possession. Illegal detainer consists in withholding by a person from another of the possession of a land or building to which the latter is entitled after the expiration or termination of the former's right to hold possession by

138

virtue of a contract, express or implied. An ejectment suit is brought before the proper inferior court to recover physical possession only or possession de facto and not possession de jure, where dispossession has lasted for not more than one year. Forcible entry and unlawful detainer are quieting processes and the one-year time bar to the suit is in pursuance of the summary nature of the action. The use of summary procedure in ejectment cases is intended to provide an expeditious means of protecting actual possession or right to possession of the property. They are not processes to determine the actual title to an estate. If at all, inferior courts are empowered to rule on the question of ownership raised by the defendant in such suits, only to resolve the issue of possession. Its determination on the ownership issue is, however, not conclusive. 10 The allegations in both the original and the amended complaints of petitioner before the trial court clearly raise issues involving more than the question of possession, to wit: (a) the validity of the Transfer of ownership to petitioner; (b) the alleged new liability of private respondents for P400,000.00 a month from the time petitioner made its demand on them to vacate; and (c) the alleged continuing liability of private respondents under both loans to pay interest and surcharges on such. As petitioner A. Francisco Realty alleged in its amended complaint: 5. To secure the payment of the sum of 7.5 Million together with the monthly interest, the defendant spouses agreed to execute a Deed of Mortgage over the property with the express condition that if and when they fail to pay monthly interest or any infringement thereof they agreed to convert the mortgage into a Deed of Absolute Sale in favor of the plaintiff by executing Deed of Sale thereto, copy of which is hereto attached and incorporated herein as Annex "A"; 6. That in order to authorize the Register of Deeds into registering the Absolute Sale and transfer to the plaintiff, defendant delivered unto the plaintiff the said Deed of Sale together with the original owner's copy of Transfer Certificate of Title No. 58748 of the Registry of Rizal, copy of which is hereto attached and made an integral part herein as Annex "B"; 7. That defendant spouses later secured from the plaintiff an additional loan of P2.5 Million with the same condition as aforementioned with 4% monthly interest; 8. That defendants spouses failed to pay the stipulated monthly interest and as per agreement of the parties, plaintiff recorded and registered the Absolute Deed of Sale in its favor on and was issued Transfer Certificate of Title No. PT-85569, copy of which is hereto attached and incorporated herein as Annex "C"; 9. That upon registration and transfer of the Transfer Certificate of Title in the name of the plaintiff, copy of which is hereto attached and incorporated herein as Annex "C", plaintiff demanded the surrender of the possession of the above-described parcel of land together with the improvements thereon, but defendants failed and refused to surrender the same to the plaintiff without justifiable reasons thereto; Neither did the defendants pay the interest of 4% a month from May, 1992 plus surcharges up to the present; 10. That it was the understanding of the parties that if and when the defendants shall fail to pay the interest due and that the Deed of Sale be registered in favor

Credit Transactions Full Text Cases Atty. Adviento

of plaintiff, the defendants shall pay a monthly rental of P400,000.00 a month until they vacate the premises, and that if they still fail to pay as they are still failing to pay the amount of P400,000.00 a month as rentals and/or interest, the plaintiff shall take physical possession of the said property; 11 It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues which involved more than a simple claim for the immediate possession of the subject property. Such issues range across the full scope of rights of the respective parties under their contractual arrangements. As held in an analogous case: The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of Hagonoy, Bulacan extended far beyond the issues generally involved in unlawful detainer suits. The litigants therein did not raise merely the question of who among them was entitled to the possession of the fishpond of Federico Suntay. For all judicial purposes, they likewise prayed of the court to rule on their respective rights under the various contractual documents their respective deeds of lease, the deed of assignment and the promissory note upon which they predicate their claims to the possession of the said fishpond. In other words, they gave the court no alternative but to rule on the validity or nullity of the above documents. Clearly, the case was converted into the determination of the nature of the proceedings from a mere detainer suit to one that is "incapable of pecuniary estimation" and thus beyond the legitimate authority of the Justice of the Peace Court to rule on. 12 Nor can it be said that the compulsory counterclaim filed by respondent spouses challenging the title of petitioner A. Francisco Realty was merely a collateral attack which would bar a ruling here on the validity of the said title. A counterclaim is considered a complaint, only this time, it is the original defendant who becomes the plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It stands on the same footing and is to be tested by the same rules as if it were an independent action. Hence, the same rules on jurisdiction in an independent action apply to a counterclaim (Vivar v. Vivar, 8 SCRA 847 (1963); Calo v. Ajar International, Inc. v. 22 SCRA 996 (1968); Javier v. Intermediate Appellate Court, 171 SCRA 605 (1989); Quiason, Philippine Courts and Their Jurisdictions, 1993 ed., p. 203). 13 On the second issue, the Court of Appeals held that, even "on the assumption that the trial court has jurisdiction over the instant case," petitioner's action could not succeed because the deed of sale on which it was based was void, being in the nature of a pactum commissorium prohibited by Art. 2088 of the Civil Code which provides: Art. 2088. The creditor cannot appropriate the things given by way to pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. With respect to this question, the ruling of the appellate court should be affirmed. Petitioner denies, however, that the promissory notes contain a pactum commissorium. It contends that What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the deed of mortgage providing for the automatic conveyance of the mortgaged property in case of the failure of the debtor to pay the loan (Tan v. West Coast Life Assurance Co., 54 Phil. 361). A pactum commissorium is a forfeiture clause in a deed of mortgage (Hechanova v. Adil, 144 SCRA 450; Montevergen v. Court of

139

Appeals, 112 SCRA 641; Report of the Code Commission, 156). Thus, before Article 2088 can find application herein, the subject deed of mortgage must be scrutinized to determine if it contains such a provision giving the creditor the right "to appropriate the things given by way of mortgage without following the procedure prescribed by law for the foreclosure of the mortgage" (Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE PROSCRIBED STIPULATION SHOULD BE FOUND IN THE MORTGAGE DEED ITSELF. 14 The contention is patently without merit. To sustain the theory of petitioner would be to allow a subversion of the prohibition in Art. 2088. In Nakpil v. Intermediate Appellate Court, 15 which involved the violation of a constructive trust, no deed of mortgage was expressly executed between the parties in that case: Nevertheless, this Court ruled that an agreement whereby property held in trust was ceded to the trustee upon failure of the beneficiary to pay his debt to the former as secured by the said property was void for being a pactum commissorium. Itwas there held: The arrangement entered into between the parties, whereby Pulong Maulap was to be "considered sold to him (respondent) . . ." in case petitioner fails to reimburse Valdes, must then be construed as tantamount to a pactum commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be automatic appropriation of the property by Valdez in the event of failure of petitioner to pay the value of the advances. Thus, contrary to respondent's manifestations, all the elements of a pactum commissorium were present: there was a creditor-debtor relationship between the parties; the property was used as security for the loan; and, there was automatic appropriation by respondent of Pulong Maulap in case of default of petitioner. 16 Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to be pacto de retro sales but found actually to be equitable mortgages. It has been consistently held that the presence of even one of the circumstances enumerated in Art. 1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable mortgage. This is so because pacto de retro sales with the stringent and onerous effects that accompany them are not favored. In case of doubt, a contract purporting to be a sale with the right to repurchase shall be construed as an equitable mortgage. Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete and absolute title shall be vested on the vendee should the vendors fail to redeem the property on the specified date. Such stipulation that the ownership of the property would automatically pass to the vendee in case no redemption was effected within the stipulated period is void for being a pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged property without need of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage rather that to sell the property. 17 Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgagee's mere act of registering the mortgaged property in his own name upon the mortgagor's failure to redeem the property amounted to the exercise of the privilege of a mortgagee in a pactum commissorium.

Credit Transactions Full Text Cases Atty. Adviento

Obviously, from the nature of the transaction, applicant's a predecessor-in-interest is a mere mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor. The mortgagee, however, may recover the loan, although the mortgage document evidencing the loan was nonregistrable being a purely private instrument. Failure of mortgagor to redeem the property does not automatically vest ownership of the property to the mortgagee, which would grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of the New Civil Code, which reads: The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by them. Any stipulation to the contrary is null and void. The act of applicant in registering the property in his own name upon mortgagor's failure to redeem the property would to a pactum commissorium which is against good morals and public policy. 19 Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of respondent spouses to pay interest, ownership of the property would be automatically transferred to petitioner A. Francisco Realty and the deed of sale in its favor would be registered, are in substance a pactum commissorium. They embody the two elements of pactum commissorium as laid down in Uy Tong v. Court of Appeals, 20 to wit: The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code: Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or dispose of the same. Any stipulation to the contrary is null and void. The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period. 21 The subject transaction being void, the registration of the deed of sale, by virtue of which petitioner A. Francisco Realty was able to obtain TCT No. PT-85569 covering the subject lot, must also be declared void, as prayed for by respondents in their counterclaim. WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed petitioner's complaint against respondent spouses on the ground that the stipulations in the promissory notes are void for being a pactum commissorium, but REVERSED insofar as it ruled that the trial court had no jurisdiction over this case. The Register of Deeds of Pasig City is hereby ORDERED to CANCEL TCT No. PT-85569 issued to petitioner and ISSUE a new one in the name of respondent spouses. SO ORDERED. DAYRIT v CA (36 scra 548) L-29388 (Not available online) Manila FIRST DIVISION SPOUSES VICENTE YU AND DEMETRIA LEE-YU, Petitioners, Present: PANGANIBAN, C.J., (Chairperson) YNARES-SANTIAGO, - versus CALLEJO, SR., and CHICO-NAZARIO, JJ. PHILIPPINE COMMERCIAL INTERNATIONAL BANK, Respondent. March 17, 2006 x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x DECISION AUSTRIA-MARTINEZ, J.: Promulgated: AUSTRIA-MARTINEZ, G.R. No. 147902

140

Before the Court is a Petition for Review on Certiorari of the Decision[1] dated November 14, 2000 of the Court of Appeals (CA) in CA-G.R. SP No. 58982 and the CA Resolution dated April 26, 2001, which denied petitioners Motion for Reconsideration. The factual background of the case is as follows: Under a Real Estate Mortgage dated August 15, 1994[2] and Amendments of Real Estate Mortgage dated April 4, 1995[3] and December 4, 1995,[4] spouses Vicente Yu and Demetria Lee-Yu (petitioners) and spouses Ramon T. Yu and Virginia A. Tiu, or Yu Tian Hock aka Victorino/Vicente Yu, mortgaged their title, interest, and participation over several parcels of land located in Dagupan City and Quezon City, in favor of the Philippine Commercial International Bank (respondent) as security for the payment of a loan in the amount of P9,000,000.00.[5] As the petitioners failed to pay the loan, the interest, and the penalties due thereon, respondent filed on July 21, 1998 with the Office of the Clerk of Court and Ex-Officio Sheriff of the Regional Trial Court of Dagupan City a Petition for Extra-Judicial Foreclosure of Real Estate Mortgage on the Dagupan City properties.[6] On August 3, 1998, the City Sheriff issued a Notice of Extra-Judicial Sale scheduling the auction sale on September 10, 1998 at 10:00 oclock in the morning or soon thereafter in front of the Justice Hall, Bonuan, Tondaligan, Dagupan City.[7] At the auction sale on September 10, 1998, respondent emerged as the highest bidder.[8] On September 14, 1998, a Certificate of Sale was issued in favor of respondent.[9] On October 1, 1998, the sale was registered with the Registry of Deeds of Dagupan City. About two months before the expiration of the redemption period, or on August 20, 1999, respondent filed an Ex-Parte Petition for Writ of

Republic of the Philippines Supreme Court

Credit Transactions Full Text Cases Atty. Adviento

Possession before the Regional Trial Court of Dagupan City, docketed as Special Proceeding No. 99-00988-D and raffled to Branch 43 (RTC Branch 43).[10] Hearing was conducted on September 14, 1999 and respondent presented its evidence ex-parte.[11] The testimony of Rodante Manuel was admitted ex-parte and thereafter the petition was deemed submitted for resolution. On September 30, 1999, petitioners filed a Motion to Dismiss and to Strike Out Testimony of Rodante Manuel stating that the Certificate of Sale dated September 14, 1998 is void because respondent violated Article 2089 of the Civil Code on the indivisibility of the mortgaged by conducting two separate foreclosure proceedings on the mortgage properties in Dagupan City and Quezon City and indicating in the two notices of extra-judicial sale that petitioners obligation is P10,437,015.20[12] as of March 31, 1998, when petitioners are not indebted for the total amount of P20,874,031.56. [13] In the meantime, petitioners filed a complaint for Annulment of Certificate of Sale before the Regional Trial Court of Dagupan City, docketed as Civil Case No. 99-03169-D and raffled to Branch 44 (RTC Branch 44). On February 14, 2000, RTC Branch 43 denied petitioners Motion to Dismiss and to Strike Out Testimony of Rodante Manuel, ruling that the filing of a motion to dismiss is not allowed in petitions for issuance of writ of possession under Section 7 of Act No. 3135.[14] On February 24, 2000, petitioners filed a Motion for Reconsideration, further arguing that the pendency of Civil Case No. 99-03169-D in RTC Branch 44 is a prejudicial issue to Spec. Proc. No. 99-00988-D in RTC Branch 43, the resolution of which is determinative on the propriety of the issuance of a writ of possession.[15] On May 8, 2000, RTC Branch 43 denied petitioners Motion for Reconsideration, holding that the principle of prejudicial question is not applicable because the case pending before RTC Branch 44 is also a civil case and not a criminal case.[16] On June 1, 2000, petitioners filed a Petition for Certiorari with the CA.[17] On November 14, 2000, the CA dismissed petitioners Petition for Certiorari on the grounds that petitioners violated Section 8 of Act No. 3135 and disregarded the rule against multiplicity of suits in filing Civil Case No. 99-03169-D in RTC Branch 44 despite full knowledge of the pendency of Spec. Proc. No. 99-00988-D in RTC Branch 43; that since the one-year period of redemption has already lapsed, the issuance of a writ of possession in favor of respondent becomes a ministerial duty of the trial court; that the issues in Civil Case No. 99-03169-D are not prejudicial questions to Spec. Proc. No. 99-00988-D because: (a) the special proceeding is already fait accompli, (b) Civil Case No. 99-03169-D is deemed not filed for being contrary to Section 8 of Act No. 3135, (c) the filing of Civil Case No. 99-03169-D is an afterthought and dilatory in nature, and (d) legally speaking what seems to exist is litis pendentia and not prejudicial question.[18] Petitioners filed a Motion for Reconsideration[19] but it was denied by the CA on April 26, 2001.[20] Hence, the present Petition for Review on Certiorari. Petitioners pose two issues for resolution, to wit: A. Whether or not a real estate mortgage over several properties located in different locality [sic] can be separately foreclosed in different places. B. Whether or not the pendency of a prejudicial issue renders the issues in Special Proceedings No. 99-00988-D as [sic] moot and academic.[21] Anent the first issue, petitioners contend that since a real estate mortgage is indivisible, the mortgaged properties in Dagupan City and Quezon City cannot be separately foreclosed. Petitioners further point out that two notices of extra-judicial sale indicated that petitioners obligation is P10,437,015.20[22] each as of March 31, 1998 or a total of

141

P20,874,030.40,[23] yet their own computation yields only P9,957,508.90 as of February 27, 1998. As to the second issue, petitioners posit that the pendency of Civil Case No. 99-03169-D is a prejudicial issue, the resolution of which will render the issues in Spec. Proc. No. 99-00988-D moot and academic. Petitioners further aver that they did not violate Section 8 of Act No. 3135 in filing a separate case to annul the certificate of sale since the use of the word may in said provision indicates that they have the option to seek relief of filing a petition to annul the certificate of sale in the proceeding involving the application for a writ of possession or in a separate proceeding. Respondent contends[24] that, with respect to the first issue, the filing of two separate foreclosure proceedings did not violate Article 2089 of the Civil Code on the indivisibility of a real estate mortgage since Section 2 of Act No. 3135 expressly provides that extra-judicial foreclosure may only be made in the province or municipality where the property is situated. Respondent further submits that the filing of separate applications for extra-judicial foreclosure of mortgage involving several properties in different locations is allowed by A.M. No. 99-10-05-0, the Procedure on Extra-Judicial Foreclosure of Mortgage, as further amended on August 7, 2001. As to the second issue, respondent maintains that there is no prejudicial question between Civil Case No. 99-03169-D and Spec. Proc. No. 9900988-D since the pendency of a civil action questioning the validity of the mortgage and the extra-judicial foreclosure thereof does not bar the issuance of a writ of possession. Respondent also insists that petitioners should have filed their Petition to Annul the Certificate of Sale in the same case where possession is being sought, that is, in Spec. Proc. No. 9900988-D, and not in a separate proceeding (Civil Case No. 99-01369-D) because the venue of the action to question the validity of the foreclosure is not discretionary since the use of the word may in Section 8 of Act No. 3135 refers to the filing of the petition or action itself and not to the venue. Respondent further argues that even if petitioners filed the Petition to Annul the Certificate of Sale in Spec. Proc. No. 99-00988-D, the writ of possession must still be issued because issuance of the writ in favor of the purchaser is a ministerial act of the trial court and the one-year period of redemption has already lapsed. Anent the first issue, the Court finds that petitioners have a mistaken notion that the indivisibility of a real estate mortgage relates to the venue of extra-judicial foreclosure proceedings. The rule on indivisibility of a real estate mortgage is provided for in Article 2089 of the Civil Code, which provides: Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as the debt is not completely satisfied. Neither can the creditors heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. This rule presupposes several heirs of the debtor or creditor[25] and therefore not applicable to the present case. Furthermore, what the law proscribes is the foreclosure of only a portion of the property or a number of the several properties mortgaged corresponding to the unpaid portion of the debt where, before foreclosure proceedings, partial payment was made by the debtor on his total outstanding loan or obligation. This also means that the debtor cannot ask for the release of any portion of the

Credit Transactions Full Text Cases Atty. Adviento

mortgaged property or of one or some of the several lots mortgaged unless and until the loan thus secured has been fully paid, notwithstanding the fact that there has been partial fulfillment of the obligation. Hence, it is provided that the debtor who has paid a part of the debt cannot ask for the proportionate extinguishment of the mortgage as long as the debt is not completely satisfied.[26] In essence, indivisibility means that the mortgage obligation cannot be divided among the different lots,[27] that is, each and every parcel under mortgage answers for the totality of the debt.[28] On the other hand, the venue of the extra-judicial foreclosure proceedings is the place where each of the mortgaged property is located, as prescribed by Section 2 of Act No. 3135,[29] to wit: SECTION 2. Said sale cannot be made legally outside of the province in which the property sold is situated; and in case the place within said province in which the sale is to be made is subject to stipulation, such sale shall be made in said place or in the municipal building of the municipality in which the property or part thereof is situated. A.M. No. 99-10-05-0,[30] the Procedure on Extra-Judicial Foreclosure of Mortgage, lays down the guidelines for extra-judicial foreclosure proceedings on mortgaged properties located in different provinces. It provides that the venue of the extra-judicial foreclosure proceedings is the place where each of the mortgaged property is located. Relevant portion thereof provides: Where the application concerns the extrajudicial foreclosure of mortgages of real estates and/or chattels in different locations covering one indebtedness, only one filing fee corresponding to such indebtedness shall be collected. The collecting Clerk of Court shall, apart from the official receipt of the fees, issue a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, which certificate shall serve the purpose of having the application docketed with the Clerks of Court of the places where the other properties are located and of allowing the extrajudicial foreclosures to proceed thereat. (Emphasis supplied) The indivisibility of the real estate mortgage is not violated by conducting two separate foreclosure proceedings on mortgaged properties located in different provinces as long as each parcel of land is answerable for the entire debt. Petitioners assumption that their total obligation is P20,874,030.40 because the two notices of extra-judicial sale indicated that petitioners obligation is P10,437,015.20[31] each, is therefore flawed. Considering the indivisibility of a real estate mortgage, the mortgaged properties in Dagupan City and Quezon City are made to answer for the entire debt of P10,437,015.29.[32] As to the second issue, that is, whether a civil case for annulment of a certificate of sale is a prejudicial question to a petition for issuance of a writ of possession, this issue is far from novel and, in fact, not without precedence. In Pahang v. Vestil,[33] the Court said: A prejudicial question is one that arises in a case the resolution of which is a logical antecedent of the issue involved therein, and the cognizance of which pertains to another tribunal. It generally comes into play in a situation where a civil action and a criminal action are both pending and there exists in the former an issue that must be preemptively resolved before the criminal action may proceed, because howsoever the issue raised in the civil action is resolved would be determinative juris et de jure of the guilt or innocence of the accused in the criminal case. The rationale behind the principle of prejudicial question is to avoid two conflicting decisions. In the present case, the complaint of the petitioners for Annulment of Extrajudicial Sale is a civil action and the respondents petition for the issuance of a writ of possession of Lot No. 3-A, Block 1, Psd-07-021410, TCT No. 44668 is but an incident in the land registration case and, therefore, no prejudicial question can arise from the existence of the two actions. A similar issue was raised in Manalo v. Court of Appeals, where we held that:

142

At any rate, it taxes our imagination why the questions raised in Case No. 98-0868 must be considered determinative of Case No. 9011. The basic issue in the former is whether the respondent, as the purchaser in the extrajudicial foreclosure proceedings, may be compelled to have the property repurchased or resold to a mortgagors successor-in-interest (petitioner); while that in the latter is merely whether the respondent, as the purchaser in the extrajudicial foreclosure proceedings, is entitled to a writ of possession after the statutory period for redemption has expired. The two cases, assuming both are pending, can proceed separately and take their own direction independent of each other.[34] In the present case, Civil Case No. 99-01369-D and Spec. Proc. No. 9900988-D are both civil in nature. The issue in Civil Case No. 99-01369-D is whether the extra-judicial foreclosure of the real estate mortgage executed by the petitioners in favor of the respondent and the sale of their properties at public auction are null and void, whereas, the issue in Spec. Proc. No. 99-00988-D is whether the respondent is entitled to a writ of possession of the foreclosed properties. Clearly, no prejudicial question can arise from the existence of the two actions. The two cases can proceed separately and take their own direction independently of each other. Nevertheless, there is a need to correct the CAs view that petitioners violated Section 8 of Act No. 3135 and disregarded the proscription on multiplicity of suits by instituting a separate civil suit for annulment of the certificate of sale while there is a pending petition for issuance of the writ of possession in a special proceeding. Section 8 of Act No. 3135 provides: Sec. 8. Setting aside of sale and writ of possession. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided for in section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession. Either of the parties may appeal from the order of the judge in accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order of possession shall continue in effect during the pendency of the appeal. (Emphasis supplied) Under the provision above cited, the mortgagor may file a petition to set aside the sale and for the cancellation of a writ of possession with the trial court which issued the writ of possession within 30 days after the purchaser mortgagee was given possession. It provides the plain, speedy, and adequate remedy in opposing the issuance of a writ of possession. [35] Thus, this provision presupposes that the trial court already issued a writ of possession. In Sps. Ong v. Court of Appeals,[36] the Court elucidated: The law is clear that the purchaser must first be placed in possession of the mortgaged property pending proceedings assailing the issuance of the writ of possession. If the trial court later finds merit in the petition to set aside the writ of possession, it shall dispose in favor of the mortgagor the bond furnished by the purchaser. Thereafter, either party may appeal from the order of the judge in accordance with Section 14 of Act 496, which provides that every order, decision, and decree of the Court of Land Registration may be reviewedin the same manner as an order, decision, decree or judgment of a Court of First Instance (RTC) might be reviewed. The rationale for the mandate is to allow the purchaser to have possession of the foreclosed property without delay, such possession being founded on his right of ownership.[37] Accordingly, Section 8 of Act No. 3135 is not applicable to the present case since at the time of the filing of the separate civil suit for annulment of the certificate of sale in RTC Branch 44, no writ of possession was yet issued by RTC Branch 43.

Credit Transactions Full Text Cases Atty. Adviento

Similarly, the Court rejects the CAs application of the principle of litis pendentia to Civil Case No. 99-03169-D in relation to Spec. Proc. No. 9900988-D. Litis pendentia refers to that situation wherein another action is pending between the same parties for the same cause of actions and that the second action becomes unnecessary and vexatious. For litis pendentia to be invoked, the concurrence of the following requisites is necessary: (a) identity of parties or at least such as represent the same interest in both actions; (b) identity of rights asserted and reliefs prayed for, the reliefs being founded on the same facts; and, (c) the identity in the two cases should be such that the judgment that may be rendered in one would, regardless of which party is successful, amount to res judicata in the other.[38] Applying the foregoing criteria in the instant case, litis pendentia does not obtain in this case because of the absence of the second and third requisites. The issuance of the writ of possession being a ministerial function, and summary in nature, it cannot be said to be a judgment on the merits, but simply an incident in the transfer of title. Hence, a separate case for annulment of mortgage and foreclosure sale cannot be barred by litis pendentia or res judicata.[39] Thus, insofar as Spec. Proc. No. 9900988-D and Civil Case No. 99-03169-D pending before different branches of RTC Dagupan City are concerned, there is no litis pendentia. To sum up, the Court holds that the rule on indivisibility of the real estate mortgage cannot be equated with the venue of foreclosure proceedings on mortgaged properties located in different provinces since these are two unrelated concepts. Also, no prejudicial question can arise from the existence of a civil case for annulment of a certificate of sale and a petition for the issuance of a writ of possession in a special proceeding since the two cases are both civil in nature which can proceed separately and take their own direction independently of each other. Furthermore, since the one-year period to redeem the foreclosed properties lapsed on October 1, 1999, title to the foreclosed properties had already been consolidated under the name of the respondent. As the owner of the properties, respondent is entitled to its possession as a matter of right.[40] The issuance of a writ of possession over the properties by the trial court is merely a ministerial function. As such, the trial court neither exercises its official discretion nor judgment.[41] Any question regarding the validity of the mortgage or its foreclosure cannot be a legal ground for refusing the issuance of a writ of possession.[42] Regardless of the pending suit for annulment of the certificate of sale, respondent is entitled to a writ of possession, without prejudice of course to the eventual outcome of said case.[43] WHEREFORE, the petition is DENIED. SO ORDERED. EN BANC G.R. No. L-24137 March 29, 1926

143

The document upon which the plaintiff bases his cause of action is in the Visayan dialect and in translation reads as follows: I, Tiburcia Buhatan, of age, widow and resident of the sitio of Jimamanay, municipality of Balasan, Province of Iloilo, Philippine Islands, do hereby execute this document extrajudicially and state that I am indebted to Mr. Eulogio Betita, resident of the municipality of Estancia, Province of Iloilo, Philippine Islands, in the sum of P470, Philippine currency, and was so indebted since the year 1922, and as a security to my creditor I hereby offer four head of carabaos belonging to me exclusively (three females and one male), the certificates of registration of said animals being Nos. 2832851, 4670520, 4670521 and 4670522, which I delivered to said Mr. Eulogio Betita.chanroblesvirtualawlibrary chanrobles virtual law library I hereby promise to pay said debt in the coming month of February, 1925, in case I will not be able to pay, Mr. Eulogio Betita may dispose of the carabaos given as security for said debt.chanroblesvirtualawlibrary chanrobles virtual law library This document is a new one or a renewal of our former document because the first carabaos mortgaged died and were substituted for by the newly branded ones." chanrobles virtual law library In testimony whereof and not knowing how to sign my name, I caused my name to be written and marked same with my right thumb.chanroblesvirtualawlibrary chanrobles virtual law library Estancia, May 6, 1924. (Marked). TIBURCIA BUHAYAN Signed in the presence of: MIGUEL MERCURIO TIRZO ZEPEDA The court below held that inasmuch as this document was prior in date to the judgment under which the execution was levied, it was a preferred credit and judgment was rendered in favor of the plaintiff for the possession of the carabaos, without damages and without costs. From this judgment the defendants appeal.chanroblesvirtualawlibrary chanrobles virtual law library The judgment must be reversed unless the document above quoted can be considered either a chattel mortgage or else a pledge. That it is not a sufficient chattel mortgage is evident; it does not meet the requirements of section 5 of the Chattel Mortgage Law (Act No. 1508), has not been recorded and, considered as a chattel mortgage, is consequently of no effect as against third parties (Williams vs. McMicking, 17 Phil., 408; Giberson vs. A. N. Jureidini Bros., 44 Phi., 216; Benedicto de Tarrosa vs. F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros, 46 Phil., 753).chanroblesvirtualawlibrary chanrobles virtual law library Neither did the document constitute a sufficient pledge of the property valid against third parties. Article 1865 of the Civil Code provides that "no pledge shall be effective as against third parties unless evidence of its date appears in a public instrument." The document in question is not public, but it is suggested that its filing with the sheriff in connection with the terceria gave in the effect of a public instrument and served to fix the date of the pledge, and that it therefore fulfills the requirements of article 1865. Assuming, without conceding, that the filing of the document with the sheriff had that effect, it seems nevertheless obvious that the pledge only became effective as against the plaintiff in execution from the date of the filing and did not rise superior to the execution attachment previously levied (see Civil Code, article 1227).chanroblesvirtualawlibrary chanrobles virtual law library Manresa, in commenting on article 1865, says:

EULOGIO BETITA, Plaintiff-Appellee , vs. SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA, Defendants-Appellants. OSTRAND, J.: chanrobles virtual law library This action is brought to recover the possession of four carabaos with damages in the sum of P200. Briefly stated, the facts are as follows: On May 15, 1924, the defendant Alejo de la Flor recovered a judgment against Tiburcia Buhayan for the sum of P140 with costs. Under this judgment the defendant Ganzon, as sheriff levied execution on the carabaos in question which were found in the possession of one Simon Jacinto but registered in the name of Tiburcia Buhayan. The plaintiff herein, Eulogio Betita, presented a third party claim (terceria) alleging that the carabaos had been mortgaged to him and as evidence thereof presented a document dated May 6, 1924, but the sheriff proceeded with the sale of the animals at public auction where they were purchased by the defendant Clemente Perdena for the sum of P200, and this action was thereupon brought.chanroblesvirtualawlibrary chanrobles virtual law library

Credit Transactions Full Text Cases Atty. Adviento

ART. 1865. A pledge will not be valid against a third party if the certainty of the date is not expressed in a public instrument.chanroblesvirtualawlibrary chanrobles virtual law library This article, the precept of which did not exist in our old law, answers the necessity for not disturbing the relationship or the status of the ownership of things with hidden or simulated contracts of pledge, in the same way and for the identical reasons that were taken into account by the mortgage law in order to suppress the implied and legal mortgages which produce so much instability in real property.chanroblesvirtualawlibrary chanrobles virtual law library Considering the effects of a contract of pledge, it is easily understood that, without this warranty demanded by law, the case may happen wherein a debtor in bad faith from the moment that he sees his movable property in danger of execution may attempt to withdraw the same from the action of justice and the reach of his creditors by simulating, through criminal confabulations, anterior and fraudulent alterations in his possession by means of feigned contracts of this nature; and, with the object of avoiding or preventing such abuses, almost all the foreign writers advise that, for the effectiveness of the pledge, it be demanded as a precise condition that in every case the contract be executed in a public writing, for, otherwise, the determination of its date will be rendered difficult and its proof more so, even in cases in which it is executed before witnesses, due to the difficulty to be encountered in seeking those before whom it was executed.chanroblesvirtualawlibrary chanrobles virtual law library Our code has not gone so far, for it does not demand in express terms that in all cases the pledge be constituted or formalized in a public writing, nor even in private document, but only that the certainty of the date be expressed in the first of the said class of instruments in order that it may be valid against a third party; and, in default of any express provision of law, in the cases where no agreement requiring the execution in a public writing exists, it should be subjected to the general rule, and especially to that established in the last paragraph of article 1280, according to which all contracts not included in the foregoing cases of the said article should be made in writing even though it be private, whenever the amount of the presentation of one or of the two contracting parties exceeds 1,500 pesetas. (Vol. 12, ed., p. 421.) If the mere filing of a private document with the sheriff after the levy of execution can create a lien of pledge superior to the attachment, the purpose of the provisions of article 1865 as explained by Manresa clearly be defeated. Such could not have been the intention of the authors of the Code. (See also Ocejo, Perez & Co. vs. International Banking Corporation, 37 Phil., 631 and Tec Bi & Co. Chartered Bank of India, Australia & China, 41 Phil., 596.) chanrobles virtual law library The alleged pledge is also ineffective for another reason, namely, that the plaintiff pledgee never had actual possession of the property within the meaning of article 1863 of the Civil Code. But it is argued that at the time of the levy the animals in question were in the possession of one Simon Jacinto; that Jacinto was the plaintiff's tenant; and that the tenant's possession was the possession of his landlord.chanroblesvirtualawlibrary chanrobles virtual law library It appears, however, from the evidence that though not legally married, Simon Jacinto and Tiburcia Buhayan were living together as husband and wife and had been so living for many years. Testifying as a witness for the plaintiff, Jacinto on cross-examination made the following statements: Q. But the caraballas in question had never been in possession of Eulogio Betita? - A. The three young ones did not get into his hands.chanroblesvirtualawlibrary chanrobles virtual law library Q. And the others? - A. Sometimes they were in the hands of Betita and at other times in the hands of Buhayan.chanroblesvirtualawlibrary library chanrobles virtual

144
law

Q. Those are the caraballas which formerly were mortgaged by Buhayan to Betita, isn't that so? A. Yes, sir.chanroblesvirtualawlibrary chanrobles virtual law library Q. And the four carabaos now in question had never been in possession of Betita, but were in your possession? - A. When I worked they were in my hands.chanroblesvirtualawlibrary chanrobles virtual law library Q. And before you worked, these caraballas were in possession of your mistress, Tiburcia Buhayan? - A. Yes, sir.chanroblesvirtualawlibrary chanrobles virtual law library Q. Do you mean to say that from the possession of Tiburcia Buhayan the animals passed immediately into your possession? - A. Yes sir. This testimony is substantially in accord with that of the defendant sheriff to the effect that he found the animals at the place where Tiburcia Buhayan was living. Article 1863 of the Civil Code reads as follows: In addition to the requisites mentioned in article 1857, it shall be necessary, in order to constitute the contract of pledge, that the pledge be placed in the possession of the creditor or of a third person appointed by common consent. In his commentary on this article Manresa says: This requisite is most essential and is characteristic of a pledge without which the contract cannot be regarded as entered into or completed, because, precisely, in this delivery lies the security of the pledge. Therefore, in order that the contract of pledge may be complete, it is indispensable that the aforesaid delivery take place . . . . (P. 411, supra.) It is, of course, evident that the delivery of possession referred to in article 1863 implies a change in the actual possession of the property pledged and that a mere symbolic delivery is not sufficient. In the present case the animals in question were in the possession of Tiburcia Buhayan and Simon Jacinto before the alleged pledge was entered into and apparently remained with them until the execution was levied, and there was no actual delivery of possession to the plaintiff himself. There was therefore in reality no change in possession.chanroblesvirtualawlibrary chanrobles virtual law library It may further be noted that the alleged relation of landlord and tenant between the plaintiff and Simon Jacinto is somewhat obscure and it is, perhaps, doubtful if any tenancy, properly speaking, existed. The land cultivated by Jacinto was not the property of the plaintiff, but it appears that a part of the products was to be applied towards the payment of Tiburcia Buhayan's debt to the plaintiff. Jacinto states that he was not a tenant until after the pledge was made.chanroblesvirtualawlibrary chanrobles virtual law library From what has been said it follows that the judgment appealed from must be reversed and it is ordered and adjudged that the plaintiff take nothing by his action. Without costs. So ordered. SECOND DIVISION G.R. No. L-33157 June 29, 1982 BENITO H. LOPEZ, petitioner, vs. THE COURT OF APPEALS and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents.

Credit Transactions Full Text Cases Atty. Adviento

GUERRERO, J.: On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the amount of P20,000.00 from the Prudential Bank and Trust Company. On the same date, he executed a promissory note for the same amount, in favor of the said Bank, binding himself to repay the said sum one (1) year after the said date, with interest at the rate of 10% per annum. In addition to said promissory note, he executed Surety Bond No. 14164 in which he, as principal, and Philippine American General Insurance Co., Inc. (PHILAMGEN) as surety, bound themselves jointly and severally in favor of Prudential Bank for the payment of the sum of P20,000.00. On the same occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed "to indemnify the Company and keep it indemnified and hold the same harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatever kind and nature which the Company shall or may at any time sustain or incur in consequence of having become surety upon the bond." 1 At the same time, Lopez executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled "Stock Assignment Separate from Certificate", which reads: This deed of assignment executed by BENITO H. LOPEZ, Filipino, of legal age, married and with residence and postal address at Baguio City, Philippines, now and hereinafter called the "ASSIGNOR", in favor of the PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal offices at Wilson Building, Juan Luna, Manila, Philippines, now and hereinafter called the "ASSIGNEE-SURETY COMPANY" WITNESSETH That for and in consideration of the obligations undertaken by the ASSIGNEE-SURETY COMPANY under the terms and conditions of SURETY BOND NO. 14164, issued on behalf of said BENITO H. LOPEZ and in favor of the PRUDENTIAL BANK & TRUST COMPANY, Manila, Philippines, in the amount of TWENTY THOUSAND PESOS ONLY (P20,000.00), Philippine Currency, and for value received, the ASSIGNOR hereby sells, assigns, and transfers unto THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Four Thousand (4,000) shares of the Baguio military Institute, Inc. standing in the name of said Assignor on the books of said Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and do hereby irrevocably constitutes and appoints THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. as attorney to transfer the said stock on the books of the within named military institute with full power of substitution in the premises. 2 With the execution of this deed of assignment, Lopez endorsed the stock certificate and delivered it to Philamgen. It appears from the evidence on record that the loan of P20,000.00 was approved conditioned upon the posting of a surety bond of a bonding company acceptable to the bank. Thus, Lopez persuaded Emilio Abello, Assistant Executive Vice-President of Philamgen and member of the Bond Under writing Committee to request Atty. Timoteo J. Sumawang, Assistant Vice- President and Manager of the Bonding Department, to accommodate him in putting up the bond against the security of his shares of stock with the Baguio Military Institute, Inc. It was their understanding that if he could not pay the loan, Vice-President Abello and Pio Pedrosa of the Prudential Bank would buy the shares of stocks and out of the proceeds thereof, the loan would be paid to the Prudential Bank.

145

On June 2, 1960, Lopez' obligation matured without it being settled. Thus, the Prudential Bank made demands for payment both upon Lopez and Philamgen. In turn, Philamgen sent Lopez several written demands for the latter to pay his note (Exhibit H, H-1 & H-2), but Lopez did not comply with said demands. Hence, the Prudential Bank sometime in August, 1961 filed a case against them to enforce payment on the promissory note plus interest. Upon receipt of the copies of complaint, Atty. Sumawang confronted Emilio Abello and Pio Pedrosa regarding their commitment to buy the shares of stock of Lopez in the event that the latter failed to pay his obligations to the Prudential Bank. Vice-President Abello then instructed Atty. Sumawang to transfer the shares of stock to Philamgen and made a commitment that thereafter he (Abello) and Pio Pedrosa will buy the shares of stock from it so that the proceeds could be paid to the bank, and in the meantime Philamgen will not pay the bank because it did not want payment under the terms of the bank. 3 Due to said commitment and instruction of Vice-President Abello, Assistant Treasurer Marcial C. Cruz requested the transfer of Stock Certificate No. 44 for 4,000 shares to Philamgen in a letter dated October 31, 1961. Stock Certificate No. 44 in the name of Lopez was accordingly cancelled and in lieu thereof Stock Certificate No. 171 was issued by the Baguio Military Institute in the name of Philamgen on November 17, 1961. The complaint was thereafter dismissed. But when no payment was still made by the principal debtor or by the surety, the Prudential Bank filed on November 8, 1963 another complaint for the recovery of the P20,000.00. On November 18, 1963, after being informed of said complaint, Lopez addressed the following letter to Philamgen: Dear Mr. Sumawang: This is with reference to yours of the 13th instant advising me of a complaint filed against us by Prudential Bank & Trust Co. regarding my loan of P20,000.00. In this connection, I would like to know what happened to my shares of stocks of Baguio Military Academy which were pledged to your goodselves to secure said obligation. These shares of stock I think are more than enough to answer for said obligation. 4 On December 9, 1963, Philamgen was forced to pay the Prudential Bank the sum of P27,785.89 which included the principal loan and accumulated interest and the Prudential Bank executed a subrogation receipt on the same date. On March 18, 1965, Philamgen brought an action in the Court of First Instance of Manila (Civil Case No. 60272, "The Philippine American General Insurance Co., Inc. vs. Benito H. Lopez") for reimbursement of the said amount. After hearing, the said court rendered judgment dismissing the complaint holding: The contention of the plaintiff that the stock of the defendant were merely pledged to it by the defendant is not borne out by the evidence. On the contrary, it appears to be contradicted by the facts of the case. The shares of stock of the defendant were actually transferred to the plaintiff when it became clear after the plaintiff and the defendant had been sued by the Prudential Bank that plaintiff would be compelled to make the payment to the Prudential Bank, in view of the inability of the defendant Benito H. Lopez to pay his said obligation. The certificate bearing No. 44 was cancelled and upon request of the plaintiff to the Baguio Military Institute a new certificate of stock was issued in the name of the plaintiff bearing No. 171, by means of which plaintiff became the registered owner of the 4,000 shares originally belonging to the defendant.

Credit Transactions Full Text Cases Atty. Adviento

It is noteworthy that the transfer of the stocks of the defendant in the name of the plaintiff company was made at the instance of Messrs. Abello and Pedrosa, who promised to buy the same from the plaintiff. Now that these shares of stock of the defendant had already been transferred in the name of the plaintiff, the defendant has already divested himself of the said stocks, and it would seem that the remedy of the plaintiff is to go after Messrs. Abello and Pedrosa on their promise to pay for the said stocks. To go after the defendant after the plaintiff had already become the owner of his shares of stock and compel him to pay his obligation to the Prudential Bank would be most unfair, unjust and illogical for it would amount to double payment on his part. After the plaintiff had already appropriated the said shares of stock, it has already lost its right to recover anything from the defendant, for the reason that the transfer of the said stocks was made without qualification. This transfer takes the form of a reimbursement of what plaintiff had paid to the Prudential Bank, thereby depriving the plaintiff of its right to go after the defendant herein. 5 Philamgen appealed to the Court of Appeals raising these assignments of errors: I The lower court erred in finding that the evidence does not bear out the contention of plaintiff that the shares of stock belonging to defendant were transferred by him to plaintiff by way of pledge. II The lower court erred in finding that plaintiff company appropriated unto itself the shares of stock pledged to it by defendant Benito Lopez and in finding that, with the transfer of the stock in the name of plaintiff company, the latter has already been paid or reimbursed what it paid to Prudential Bank. III The lower court erred in not finding that the instant case is one where the pledge has abandoned the security and elected instead to enforce his claim against the pledgor by ordinary action. 6 On December 17, 1970, the Court of Appeals promulgated a decision in favor of the Philamgen, thereby upholding the foregoing assignments of errors. It declared that the stock assignment was a mere pledge that the transfer of the stocks in the name of Philamgen was not intended to make it the owner thereof; that assuming that Philamgen had appropriated the stocks, this appropriation is null and void as a stipulation authorizing it is a pactum commissorium; and that pending payment, Philamgen is merely holding the stock as a security for the payment of Lopez' obligation. The dispositive portion of the said decision states: WHEREFORE, the decision of the lower court is hereby reversed, and another one is hereby entered ordering the defendant to pay the plaintiff the sum of P27,785.89 with interest at the rate of 12% per annum from December 9, 1963, 10% of the P27,785.89 as attorney's fees and the costs of the suit. 7 The motion for reconsideration with prayer to set the same for oral argument having been denied, Lopez brought this petition for review on certiorari presenting for resolution these questions: a) Where, as in this case, a party "sells, assigns and transfers" and delivers shares of stock to another, duly endorsed in blank, in

146

consideration of a contingent obligation of the former to the latter, and, the obligations having arisen, the latter causes the shares of stock to be transferred in its name, what is the juridical nature of the transaction-a dation in payment or a pledge? b) Where, as in this case, the debtor assigns the creditor under an agreement between the latter persons that the latter would buy the shares obligations could be paid out of the proceeds, was obligation by substitution of debtor? 8 shares of stock to the and determinate third of stock so that the there a novation of the

Philamgen failed to file its comment on the petition for review on certiorari within the extended period which expired on March 19, 1971. This Court thereby resolved to require Lopez to file his brief. 9 Under the first assignment of error, Lopez argues in his brief: That the Court of Appeals erred in holding that when petitioner "sold, assigned, transferred" and delivered shares of stock, duly endorsed in blank, to private respondent in consideration of a contingent obligation of the former to the latter and the obligation having thereafter arisen, the latter caused the shares of stock to be transferred to it, taking a new certificate of stock in its name, the transaction was a pledge, and in not holding instead that it was a dation in payment. 10 Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate", hereinbefore copied verbatim, Lopez sold, assigned and transferred unto Philamgen the stocks involved "for and in consideration of the obligations undertaken" by Philamgen "under the terms and conditions of the surety bond executed by it in favor of the Prudential Bank" and "for value received". On its face, it is neither pledge nor dation in payment. The document speaks of an outright sale as there is a complete and unconditional divestiture of the incorporeal property consisting of stocks from Lopez to Philamgen. The transfer appears to have been an absolute conveyance of the stocks to Philamgen whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank. While it is a conveyance in consideration of a contingent obligation, it is not itself a conditional conveyance. It is true that if Lopez should "well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements stipulated" in his promissory note to Prudential Bank, the obligation of Philamgen under the surety bond would become null and void. Corollarily, the stock assignment, which is predicated on the obligation of Philamgen under the surety bond, would necessarily become null and void likewise, for want of cause or consideration under Article 1352 of the New Civil Code. But this is not the case here because aside from the obligations undertaken by Philamgen under the surety bond, the stock assignment had other considerations referred to therein as "value received". Hence, based on the manifest terms thereof, it is an absolute transfer. Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof. It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P20,000.00 from Prudential Bank, Lopez executed a promissory note for ?20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full and faithful performance of his obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen under the surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock assignment. The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a

Credit Transactions Full Text Cases Atty. Adviento

complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties intended said stock assignment to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it be required to pay Lopez' loan to Prudential Bank. The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. 11 We agree with the holding of the respondent Court of Appeals that the stock assignment, Exhibit C, is in truth and in fact, a pledge. Indeed, the facts and circumstances leading to the execution of the stock assignment, Exhibit C, and the admission of Lopez prove that it is in fact a pledge. The appellate court is correct in ruling that the following requirements of a contract of pledge have been satisfied: (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; and (3) that the person constituting the pledge has the free disposal of the property, and in the absence thereof, that he be legally authorized for the purpose. (Article 2085, New Civil Code). Article 2087 of the New Civil Code providing that it is also the essence of these contracts (pledge, mortgage, and antichresis) that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor, further supports the appellate court's ruling, which We also affirm. On this point further, the Court of Appeals correctly ruled: In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (Art. 2093, N.C.C.) Incorporeal rights, including shares of stock may also be pledged (Art. 2095, N.C.C.) All these requisites are found in the transaction between the parties leading to the execution of the Stock Assignment, Exhibit C. And that it is a pledge was admitted by the defendant in his letter of November 18, 1963, Exhibit G, already quoted above, where he asked what had happened to his shares of stock "which were pledged to your goodselves to secure the said obligation". The testimony of the defendant-appellee that it was their agreement or understanding that if he would be unable to pay the loan to the Prudential Bank, plaintiff could sell the shares of stock or appropriate the same in full payment of its debt is a mere after-thought, conceived after he learned of the transfer of his stock

147

to the plaintiff in the books of the Baguio Military Institute. We also do not agree with the contention of petitioner that "petitioner's 'sale assignment and transfer' unto private respondent of the shares of stock, coupled with their endorsement in blank and delivery, comes exactly under the Civil Code's definition of dation in payment, a long recognized and deeply rooted concept in Civil Law denominated by Spanish commentators as 'adjudicacion en pago'". According to Article 1245 of the New Civil Code, dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. Speaking of the concept of dation in payment, it is well to cite that: Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. (2 Castan 525; 8 Manresa, 324) The property given may consist, not only of a thing, but also of a real right (such as a usufruct) or of a credit against a third person. (Perez Gonzales & Alguer :2-I Enneccerus, Kipp & Wolff 317). Thus, it has been held that the assignment to the creditor of the interest of the debtor in an inheritance in payment of his debt, is valid and extinguishes the debt. (Ignacio vs. Martinez, 33 Phil. 576) The modern concept of dation in payment considers it as a novation by change of the object, and this is to our mind the more juridically correct view. Our Civil Code, however, provides in this article that, where the debt is in money, the law on sales shall govern; in this case, the act is deemed to be a sale, with the amount of the obligation to the extent that it is extinguished being considered as the price. Does this mean that there can be no dation in payment if the debt is not in money? We do not think so. It is precisely in obligations which are not money debts, in which the true juridical nature of dation in payment becomes manifest. There is a real novation with immediate performance of the new obligation. The fact that there must be a prior agreement of the parties on the delivery of the thing in lieu of the original prestation shows that there is a novation which, extinguishes the original obligation, and the delivery is a mere performance of the new obligation. The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. (8 Manresa 324; 3 Valverde 174 fn Assignment of property by the debtor to his creditors, provided for in article 1255, is similar to dation in payment in that both are substitute forms of performance of an obligation. Unlike the assignment for the benefit of creditors, however, dation in payment does not involve plurality of creditors, nor the whole of the property of the debtor. It does not suppose a situation of financial difficulties, for it may be made even by a person who is completely solvent. It merely involves a change of the object of the obligation by agreement of the parties and at the same time fulfilling the same voluntarily. (8 Manresa 324). 12 Considering the above jurisprudence, We find that the debt or obligation at bar has not matured on June 2, 1959 when Lopez "alienated" his 4,000 shares of stock to Philamgen. Lopez' obligation would arise only when he

Credit Transactions Full Text Cases Atty. Adviento

would default in the payment of the principal obligation (the loan) to the bank and Philamgen had to pay for it. Such fact being adverse to the nature and concept of dation in payment, the same could not have been constituted when the stock assignment was executed. Moreover, there is no express provision in the terms of the stock assignment between Philamgen and Lopez that the principal obligation (which is the loan) is immediately extinguished by reason of such assignment. In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests. Under American jurisprudence, A distinction might also be made between delivery of property in payment of debt and delivery of such property as collateral security for the debt. Generally, such a transfer was presumed to be made for collateral security, in the absence of evidence tending to show an intention on the part of the parties that the transfer was in satisfaction of the debt. This presumption of a transfer for collateral security arose particularly where the property given was commercial paper, or some other 'specialty' chose of action, that conferred rights upon transfer by delivery of a different nature from the debt, whose value was neither intrinsic nor apparent and was not agreed upon by the parties. 13 Petitioner's argument that even assuming, arguendo that the transaction was at its inception a pledge, it gave way to a dation in payment when the obligation secured came into existence and private respondent had the stocks transferred to it in the corporate books and took a stock certificate in its name, is without merit. The fact that the execution of the stock assignment is accompanied by the delivery of the shares of stock, duly endorsed in blank to Philamgen is no proof that the transaction is a dation in payment. Likewise, the fact that Philamgen had the shares of stock transferred to it in the books of the corporation and took a certificate in its name in lieu of Lopez which was cancelled does not amount to conversion of the stock to one's own use. The transfer of title to incorporeal property is generally an essential part of the delivery of the same in pledge. It merely constitutes evidence of the pledgee's right of property in the thing pledged. By the contract of pledge, the pledgor does not part with his general right of property in the collateral. The general property therein remains in him, and only a special property vests in the pledgee. The pledgee does not acquire an interest in the property, except as a security for his debt. Thus, the pledgee holds possession of the security subject to the rights of the pledgor; he cannot acquire any interest therein that is adverse to the pledgor's title. Moreover, even where the legal title to incorporeal property which may be pledged is transferred to a pledgee as collateral security, he takes only a special property therein Such transfer merely performs the office that the delivery of possession does in case of a pledge of corporeal property. xxx xxx xxx The pledgee has been considered as having a lien on the pledged property. The extent of such lien is measured by the amount of the debt or the obligation that is secured by the collateral, and the lien continues to exist as long as the pledgee retains actual or symbolic possession of the property, and the debt or obligation remains unpaid. Payment of the debt extinguishes the lien. Though a pledgee of corporation stock does not become personally liable as a stockholder of the company, he may have the shares transferred to him on the books of the corporation if he has been authorized to do so.

148

The general property in the pledge remains in the pledgor after default as well as prior thereto. The failure of the pledgor to pay his debt at maturity in no way affects the nature of the pledgee's rights concerning the property pledged, except that he then becomes entitled to proceed to make the security available in the manner prescribed by law or by the terms of the contract, ... . 14 In his second assignment of error, petitioner contends that the Court of Appeals erred in not holding that since private respondent entered into an agreement with determinate third persons whereby the latter would buy the said shares so sold, assigned and transferred to the former by the petitioner for the purpose of paying petitioner's obligation out of the proceeds, there was a novation of the obligation by substitution of debtor. We do not agree. Under Article 1291 of the New Civil Code, obligations may be modified by: (1) changing their object or principal condition; (2) substituting the person of the debtor; (3) subrogating a third person in the rights of the creditor. And in order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (Article 1292, N.C.C.) Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (Article 1293, N.C.C.) Commenting on the second concept of novation, that is, substituting the person of the debtor, Manresa opines, thus: In this kind of novation it is pot enough to extend the juridical relation to a third person; it is necessary that the old debtor be released from the obligation, and the third person or new debtor take his place in the relation. Without such release, there is no novation; the third person who has assumed the obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and the new debtor are considered obligated jointly. (8 Manresa 435, cited in Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, p. 360) In the case at bar, the undertaking of Messrs. Emilio Abello and Pio Pedrosa that they would buy the shares of stock so that Philamgen could be reimbursed from the proceeds that it paid to Prudential Bank does not necessarily imply the extinguishment of the liability of petitioner Lopez. Since it was not established nor shown that Lopez would be released from responsibility, the same does not constitute novation and hence, Philamgen may still enforce the obligation. As the Court of Appeals correctly held that "(t)he representation of Mr. Abello to Atty. Sumawang that he and Mr. Pedrosa would buy the stocks was a purely private arrangement between them, not an agreement between (Philamgen) and (Lopez)" and which We hereby affirm, petitioner's second assignment of error must be rejected. In fine, We hold and rule that the transaction entered into by and between petitioner and respondent under the Stock Assignment Separate From Certificate in relation to the Surety Bond No. 14164 and the Indemnity Agreement, all executed and dated June 2, 1959, constitutes a pledge of the 40,000 shares of stock by the petitioner-pledgor in favor of the private respondent-pledgee, and not a dacion en pago. It is also Our ruling that upon the facts established, there was no novation of the obligation by substitution of debtor. The promise of Abello and Pedrosa to buy the shares from private respondent not having materialized (which promise was given to said respondent only and not to petitioner) and no action was taken against the two by said respondent who chose instead to sue the petitioner on the Indemnity Agreement, it is quite clear that this respondent has abandoned its right and interest over the pledged properties and must, therefore,

Credit Transactions Full Text Cases Atty. Adviento

release or return the same to the petitioner-pledgor upon the latter's satisfaction of his obligation under the Indemnity Agreement. It must also be made clear that there is no double payment nor unjust enrichment in this case because We have ruled that the shares of stock were merely pledged. As the Court of Appeals said: The appellant (Philam) is not enriching himself at the expense of the appellee. True, the stock certificate of the appellee had been in the name of the appellant but the transfer was merely nominal, and was not intended to make the plaintiff the owner thereof. No offer had been made for the return of the stocks to the defendant. As the appellant had stated, the appellee could have the stocks transferred to him anytime as long as he reimburses the plaintiff the amount it had paid to the Prudential Bank. Pending payment, plaintiff is merely holding the certificates as a pledge or security for the payment of defendant's obligation. The above holding of the appellate court is correct and We affirm the same. As to the third assignment of error which is merely the consequence of the first two assignments of errors, the same is also devoid of merit. WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the Court of Appeals is hereby AFFIRMED in toto, with costs against the petitioner. SO ORDERED. THIRD DIVISION G.R. No. 132287 January 24, 2006 No. 023 & 093; Leonora R. Nolasco .. 407 shares covered by Stock Certificates No. 091 & 092; Genoveva Soronio. 699 shares covered by Stock Certificates No. 025, 059 & 099; Dolores R. Soberano. 699 shares covered by Stock Certificates No. 021, 053, 022 & 097; Julia Generoso .. 1,100 shares covered by Stock Certificates No. 085, 051, 086 & 084; Teresita Natividad.. 440 shares covered by Stock Certificates Nos. 054 & 0552

149

When the Parays attempted to foreclose the pledges on account of respondents failure to pay their loans, respondents filed complaints with the Regional Trial Court (RTC) of Cebu City. The actions, which were consolidated and tried before RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge agreements, among others. However the RTC, in its decision3 dated 14 October 1988, dismissed the complaint and gave "due course to the foreclosure and sale at public auction of the various pledges subject of these two cases."4 This decision attained finality after it was affirmed by the Court of Appeals and the Supreme Court. The Entry of Judgment was issued on 14 August 1991. Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction on 4 November 1991. However, before the scheduled date of auction, all of respondents caused the consignation with the RTC Clerk of Court of various amounts. It was claimed that respondents had attempted to tender these payments to the Parays, but had been rebuffed. The deposited amounts were as follows: Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991 Leonora R. Nolasco . 277,381.82 .. 14 Oct. 1991 Genoveva R. Soronio 425,353.50 .. 14 Oct. 1991 38,385.44 .. 14 Oct. 1991 Julia R. Generoso .. 638,385.00 .. 25 Oct. 1991 Teresita R. Natividad . 264,375.00 .. 11 Nov. 1991

SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL ESPELETA, Petitioners, vs. DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her husband ANTOLIN JARIOL, SR., LEONORA NOLASCO assisted by her husband FELICIANO NOLASCO, DOLORES SOBERANO assisted by her husband JOSE SOBERANO, JR., JULIA R. GENEROSO, TERESITA R. NATIVIDAD and GENOVEVA R. SORONIO assisted by her husband ALFONSO SORONIO, Respondents. DECISION TINGA, J.: The assailed decision of the Court of Appeals took off on the premise that pledged shares of stock auctioned off in a notarial sale could still be redeemed by their owners. This notion is wrong, and we thus reverse. The facts, as culled from the record, follow.

Dolores R. Soberano .. 12,031.61.. 25 Oct. 1991 Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation known as the Quirino-Leonor-Rodriguez Realty Inc.1 Sometime during the years 1979 to 1980, respondents secured by way of pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray ("Parays") the payment of certain loan obligations. The shares pledged are listed below: Miguel Rodriguez Jariol .1,000 shares covered by Stock Certificates No. 011, 060, 061 & 062; Abdulia C. Rodriguez . 300 shares covered by Stock Certificates Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of the pledged shares. None of respondents participated or appeared at the auction of 4 November 1991. 520,216.39 ..11 Nov. 1991 Miguela Jariol . 490,000.00.. 18 Oct. 1991 88,000.00 ..18 Oct. 19915

Credit Transactions Full Text Cases Atty. Adviento

Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of the concluded public auction. The complaint, docketed as Civil Case No. CEB-10926, was assigned to Branch 16 of the Cebu City RTC. Respondents argued that their tender of payment and subsequent consignations served to extinguish their loan obligations and discharged the pledge contracts. Petitioners countered that the auction sale was conducted pursuant to the final and executory judgment in Civil Cases Nos. R-20120 and 20131, and that the tender of payment and consignations were made long after their obligations had fallen due. The Cebu City RTC dismissed the complaint, expressing agreement with the position of the Parays.6 It held, among others that respondents had failed to tender or consign payments within a reasonable period after default and that the proper remedy of respondents was to have participated in the auction sale.7 The Court of Appeals Eighth Division however reversed the RTC on appeal, ruling that the consignations extinguished the loan obligations and the subject pledge contracts; and the auction sale of 4 November 1991 as null and void. 8 Most crucially, the appellate court chose to uphold the sufficiency of the consignations owing to an imputed policy of the law that favored redemption and mandated a liberal construction to redemption laws. The attempts at payment by respondents were characterized as made in the exercise of the right of redemption. The Court of Appeals likewise found fault with the auction sale, holding that there was a need to individually sell the various shares of stock as they had belonged to different pledgors. Thus, it was observed that the minutes of the auction sale should have specified in detail the bids submitted for each of the shares of the pledgors for the purpose of knowing the price to be paid by the different pledgors upon redemption of the auctioned sales of stock. Petitioners now argue before this Court that they were authorized to refuse as they did the tender of payment since they were undertaking the auction sale pursuant to the final and executory decision in Civil Cases Nos. R20120 and 20131, which did not authorize the payment of the principal obligation by respondents. They point out that the amounts consigned could not extinguish the principal loan obligations of respondents since they were not sufficient to cover the interests due on the debt. They likewise argue that the essential procedural requisites for the auction sale had been satisfied. We rule in favor of petitioners. The fundamental premise from which the appellate court proceeded was that the consignations made by respondents should be construed in light of the rules of redemption, as if respondents were exercising such right. In that perspective, the Court of Appeals made three crucial conclusions favorable to respondents: that their act of consigning the payments with the RTC should be deemed done in the exercise of their right of redemption; that the buyer at public auction does not ipso facto become the owner of the pledged shares pending the lapse of the one-year redemptive period; and that the collective sale of the shares of stock belonging to several individual owners without specification of the apportionment in the applications of payment deprives the individual owners of the opportunity to know of the price they would have to pay for the purpose of exercising the right of redemption. The appellate courts dwelling on the right of redemption is utterly offtangent. The right of redemption involves payments made by debtors after the foreclosure of their properties, and not those made or attempted to be made, as in this case, before the foreclosure sale. The proper focus of the Court of Appeals should have been whether the consignations made by respondents sufficiently acquitted them of their principal obligations. A pledge contract is an accessory contract, and is necessarily discharged if the principal obligation is extinguished. Nonetheless, the Court is now confronted with this rather new fangled theory, as propounded by the Court of Appeals, involving the right of redemption over pledged properties. We have no hesitation in pronouncing such theory as discreditable. Preliminarily, it must be clarified that the subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as distinguished from

150

a judicial sale as typified by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without intervention by the courts. All the creditor needs to do, if the credit has not been satisfied in due time, is to proceed before a Notary Public to the sale of the thing pledged.9 In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the sale of the pledged shares by public auction. However, extrajudicial sale was stayed with the filing of Civil Cases No. R20120 and 20131, which sought to annul the pledge contracts. The final and executory judgment in those cases affirmed the pledge contracts and disposed them in the following fashion: WHEREFORE, premises considered, judgment is hereby rendered dismissing the complaints at bar, and (1) Declaring the various pledges covered in Civil Cases Nos. R20120 and R-20131 valid and effective; and (2) Giving due course to the foreclosure and sale at public auction of the various pledges subject of these two cases. Costs against the plaintiffs. SO ORDERED.10 The phrase "giving due course to the foreclosure and sale at public auction of the various pledges subject of these two cases" may give rise to the impression that such sale is judicial in character. While the decision did authorize the sale by public auction, such declaration could not detract from the fact that the sale so authorized is actually extrajudicial in character. Note that the final judgment in said cases expressly did not direct the sale by public auction of the pledged shares, but instead upheld the right of the Parays to conduct such sale at their own volition. Indeed, as affirmed by the Civil Code,11 the decision to proceed with the sale by public auction remains in the sole discretion of the Parays, who could very well choose not to hold the sale without violating the final judgments in the aforementioned civil cases. If the sale were truly in compliance with a final judgment or order, the Parays would have no choice but to stage the sale for then the order directing the sale arises from judicial compulsion. But nothing in the dispositive portion directed the sale at public auction as a mandatory recourse, and properly so since the sale of pledged property in public auction is, by virtue of the Civil Code, extrajudicial in character. The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution sales, more precisely execution sales of real property. The Court of Appeals expressly asserted the notion that pledged property, necessarily personal in character, may be redeemed by the creditor after being sold at public auction. Yet, as a fundamental matter, does the right of redemption exist over personal property? No law or jurisprudence establishes or affirms such right. Indeed, no such right exists. The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist preternaturally. Neither is it predicated on proprietary right, which, after the sale of property on execution, leaves the judgment debtor and vests in the purchaser. Instead, it is a bare statutory privilege to be exercised only by the persons named in the statute.12 The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended. The said law does not extend the same benefit to personal property. In fact, there is no law in our statute books which vests the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a right of redemption over personal property, since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point. And Section 39 of the 1997 Rules of Civil Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of

Credit Transactions Full Text Cases Atty. Adviento

redemption applies to real properties, not personal properties, sold on execution. Tellingly, this Court, as early as 1927, rejected the proposition that personal property may be covered by the right of redemption. In Sibal 1. v. Valdez,13 the Court ruled that sugar cane crops are personal property, and thus, not subject to the right of redemption.14 No countervailing statute has been enacted since then that would accord the right of redemption over personal property, hence the Court can affirm this decades-old ruling as effective to date. Since the pledged shares in this case are not subject to redemption, the Court of Appeals had no business invoking and applying the inexistent right of redemption. We cannot thus agree that the consigned payments should be treated with liberality, or somehow construed as having been made in the exercise of the right of redemption. We also must reject the appellate courts declaration that the buyer of at the public auction is not "ipso facto" rendered the owner of the auctioned shares, since the debtor enjoys the one-year redemptive period to redeem the property. Obviously, since there is no right to redeem personal property, the rights of ownership vested unto the purchaser at the foreclosure sale are not entangled in any suspensive condition that is implicit in a redemptive period. The Court of Appeals also found fault with the apparent sale in bulk of the pledged shares, notwithstanding the fact that these shares were owned by several people, on the premise the pledgors would be denied the opportunity to know exactly how much they would need to shoulder to exercise the right to redemption. This concern is obviously rendered a non-issue by the fact that there can be no right to redemption in the first place. Rule 39 of the Rules of Court does provide for instances when properties foreclosed at the same time must be sold separately, such as in the case of lot sales for real property under Section 19. However, these instances again pertain to execution sales and not extrajudicial sales. No provision in the Rules of Court or in any law requires that pledged properties sold at auction be sold separately. On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to choose which of the items should be sold if two or more things are pledged.15 No similar option is given to pledgors under the Civil Code. Moreover, there is nothing in the Civil Code provisions governing the extrajudicial sale of pledged properties that prohibits the pledgee of several different pledge contracts from auctioning all of the pledged properties on a single occasion, or from the buyer at the auction sale in purchasing all the pledged properties with a single purchase price. The relative insignificance of ascertaining the definite apportionments of the sale price to the individual shares lies in the fact that once a pledged item is sold at auction, neither the pledgee nor the pledgor can recover whatever deficiency or excess there may be between the purchase price and the amount of the principal obligation.16 A different ruling though would obtain if at the auction, a bidder expressed the desire to bid on a determinate number or portion of the pledged shares. In such a case, there may lie the need to ascertain with particularity which of the shares are covered by the bid price, since not all of the shares may be sold at the auction and correspondingly not all of the pledge contracts extinguished. The same situation also would lie if one or some of the owners of the pledged shares participated in the auction, bidding only on their respective pledged shares. However, in this case, none of the pledgors participated in the auction, and the sole bidder cast his bid for all of the shares. There obviously is no longer any practical reason to apportion the bid price to the respective shares, since no matter how slight or significant the value of the purchase price for the individual share is, the sale is completed, with the pledgor and the pledgee not entitled to recover the excess or the deficiency, as the case may be. To invalidate the subject auction solely on this point serves no cause other than to celebrate formality for formalitys sake. Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be resurrected. The question though yet remains whether the consignations made by respondents extinguished their respective pledge contracts in favor of the Parays so as to enjoin the latter from auctioning the pledged shares.

151

There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as well. Article 2098 of the Civil Code provides that the right of the creditor to retain possession of the pledged item exists only until the debt is paid. Article 2105 of the Civil Code further clarifies that the debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest. At the same time, the right of the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not been satisfied in due time, the creditor may proceed with the sale by public auction under the procedure provided under Article 2112 of the Code. Respondents argue that their various consignations made prior to the auction sale discharged them from the loan and the pledge agreements. They are mistaken. Petitioners point out that while the amounts consigned by respondents could answer for their respective principal loan obligations, they were not sufficient to cover the interests due on these loans, which were pegged at the rate of 5% per month or 60% per annum. Before this Court, respondents, save for Dolores Soberano, do not contest this interest rate as alleged by petitioners. Soberano, on the other hand, challenges this interest rate as "usurious."17 The particular pledge contracts did not form part of the records elevated to this Court. However, the 5% monthly interest rate was noted in the statement of facts in the 14 October 1988 RTC Decision which had since become final. Moreover, the said decision pronounced that even assuming that the interest rates of the various loans were 5% per month, "it is doubtful whether the interests so charged were exorbitantly or excessively usurious. This is because for sometime now, usury has become legally inexistent."18 The finality of this 1988 Decision is a settled fact, and thus the time to challenge the validity of the 5% monthly interest rate had long passed. With that in mind, there is no reason for the Court to disagree with petitioners that in order that the consignation could have the effect of extinguishing the pledge contracts, such amounts should cover not just the principal loans, but also the 5% monthly interests thereon. It bears noting that the Court of Appeals also ruled that respondents had satisfied the requirements under Section 18, Rule 39, which provides that the judgment obligor may prevent the sale by paying the amount required by the execution and the costs that have been incurred therein.19 However, the provision applies only to execution sales, and not extra-judicial sales, as evidenced by the use of the phrases "sale of property on execution" and "judgment obligor." The reference is inapropos, and even if it were applicable, the failure of the payment to cover the interests due renders it insufficient to stay the sale. The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should also not be discounted. Petitioners right to proceed with the auction sale was affirmed not only by law, but also by a final court judgment. Any subsequent court ruling that would enjoin the petitioners from exercising such right would have the effect of superseding a final and executory judgment. Finally, we cannot help but observe that respondents may have saved themselves much trouble if they simply participated in the auction sale, as they are permitted to bid themselves on their pledged properties.20 Moreover, they would have had a better right had they matched the terms of the highest bidder.21 Under the circumstances, with the high interest payments that accrued after several years, respondents were even placed in a favorable position by the pledge agreements, since the creditor would be unable to recover any deficiency from the debtors should the sale price be insufficient to cover the principal amounts with interests. Certainly, had respondents participated in the auction, there would have been a chance for them to recover the shares at a price lower than the amount that was actually due from them to the Parays. That respondents failed to avail of this beneficial resort wholly accorded them by law is their loss. Now, all respondents can recover is the amounts they had consigned. WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is SET ASIDE and the decision of the Cebu City RTC,

Credit Transactions Full Text Cases Atty. Adviento

Branch 16, dated 18 November 1992 is REINSTATED. Costs against respondents. SO ORDERED. EN BANC

152

DECISION October 2, 1922

that that was how he happened to witness the offer to sell, as well as the receipt of the price on the third day. But not only do we find that the defendant has not sufficiently established, by his evidence, the fact of the purchase of the jewels, but also that there is a circumstance tending to show the contrary, which is the fact that up to the trial of this cause the defendant continued in possession of the documents, Exhibits A and 1, evidencing the loan and the pledge. If the defendant really bought these jewels, its seems natural that Filomena would have demanded the surrender of the documents evidencing the loan and the pledge, and the defendant would have returned them to plaintiff. Our conclusion is that the jewels pledged to defendant were not sold to him afterwards. Another point on which evidence was introduced by both parties is as to the value of the jewels in the event that they were not returned by the defendant. In view of the evidence of record, we accept the value of P12,000 fixed by the trial court 3Dru1n. From the foregoing it follows that, as the jewels in question were in the possession of the defendant to secure the payment of a loan of P1,500, with interest thereon at the rate of 25 per cent per annum from Augusts 31, 1911, to August 31, 1912, and the defendant having subsequently extended the term of the loan indefinitely, and so long as the value of the jewels pledged was sufficient to secure the payment of the capital and the accrued interest, the defendant is bound to return the jewels or their value (P12,000) to plaintiffs, and the plaintiffs have the right to demand the same upon the payment by them of the sum of P1,5000, plus the interest thereon at the rate of 25 per cent per annum from August 28, 1911. The judgment appealed from being in accordance with this findings, the same is affirmed without special pronouncement as to costs. So ordered. Araullo, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur. R April AVANCEA, E S O L 4, U T I O N 1923 J.:

G.R. No. L-18500 FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR, plaintiffs-appellants, vs. GLICERIO JAVELLANA, defendant-appellant. Montinola, Montinola and J. M. Arroyo and Fisher , Hontiveros for and DeWitt for plaintiffs-appellants. defendant-appellant. J.:

On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500 with interest at the rate of 25 per cent per annum for the term of one year. To guarantee this loan, the plaintiffs pledged a large medal with a diamond in the center and surrounded with ten diamonds, a pair of diamond earrings, a small comb with twenty-two diamonds, and two diamond rings, which the contracting parties appraised at P4,000. This loan is evidenced by two documents (Exhibits A and 1) wherein the amount appears to be P1,875, which includes the 25 per cent interest on the sum of P1,500 for the term of one year. The plaintiffs allege that at the maturity of this loan, August 31, 1912, the plaintiff Eusebio M. Villaseor, being unable to pay the loan, obtained from the defendant an extension, with the condition that the loan was to continue, drawing interest at the rate of 25 per cent per annum, so long as the security given was sufficient to cover the capital and the accrued interest. In the month of August, 1919, the plaintiff Eusebio M. Villaseor, in company with Carlos M. Dreyfus, went to the house of the defendant and offered to pay the loan and redeem the jewels, taking with him, for this purpose, the sum of P11,000, but the defendant then informed them that the time for the redemption had already elapsed. The plaintiffs renewed their offer to redeem the jewelry by paying the loan, but met with the same reply. These facts are proven by the testimony of the plaintiffs, corroborated by Carlos M. Dreyfus. The plaintiffs now bring this action to compel the defendant to return the jewels pledged, or their value, upon the payment by them of the sum they owe the defendant, with the interest thereon. The defendant alleges, in his defense, that upon the maturity of the loan, August 31, 1912, he requested the plaintiff, Eusebio M. Villaseor, to secure the money, pay the loan and redeem the jewels, as he needed money to purchase a certain piece of land; that one month thereafter, the plaintiff, Filomena Sarmiento, went to his house and offered to sell him the jewels pledged for P3,000; that the defendant then told her to come back on the next day, as he was to see his brother, Catalino Javellana, and ask him if he wanted to take the jewels for that sum; that on the next day the plaintiff, Filomena Sarmiento, went back to the house of the defendant who then paid her the sum of P1,125, which was the balance remaining of the P3,000 after deducting the plaintiff's loan. It appearing that the defendant possessed these jewels originally, as a pledge to secure the payment of a loan stated in writing, the mere testimony of the defendant to the effect that later they were sold to him by the plaintiff, Filomena Sarmiento, against the positive testimony of the latter that she did not make any such sale, requires a strong corroboration to be accepted. We do not find the testimony of Jose Sison to be of sufficient value as such corroboration. This witness testified to having been in the house of the defendant when Filomena went there to offer to sell the defendant the jewels, as well as on the third day when she returned to receive the price. According to this witness, he happened to be in the house of the defendant, having gone there to solicit a loan, and also accidentally remained in the house of the defendant for three days, and

The defendant contends that the plaintiffs' action for the recovery of the jewels pledged has prescribed. Without deciding whether or not the action to recover the thing pledged may prescribe in any case, it not being necessary for the purposes of this opinion, but supposing that it may, still the defendant's contention is untenable. In the document evidencing the loan in question there is stated: "I transfer by way of pledge the following jewels." That this is a valid contract of pledge there can be no question. As a matter of fact the defendant does not question it, but take s it for granted. However, it is contended that the obligation of the defendant to return the jewels pledged must be considered as not stated in writing, for this obligation is not expressly mentioned in the document. But if this contract of pledge is in writing, it must necessarily be admitted that the action to enforce the right, which constitutes the essence of this contract, is covered by a written contract. The duty of the creditor to return the thing pledged in case the principal obligation is fulfilled is essential in all contracts of pledge. This constitutes, precisely, the consideration of the debtor in this accessory contract, so that if this obligation of the creditor to return to thing pledged, and the right of the debtor to demand the return thereof, are eliminated, the contract would not be a contract of pledge. It would be a donation. If the right of the plaintiffs to recover the thing pledged is covered by a written contract, the time for the prescription of this action is ten years, according to section 43 of the Code of Civil Procedure. The defendant contends that the time of prescription of the action of the plaintiffs to recover the thing pledged must be computed from August 28, 1911, the date of the making of the contract of loan secured by this pledge. The term of this loan is one year. However, it is contended that the action of the plaintiff to recover the thing pledged accrued on the very date of the making of the contract, inasmuch as from that date they could have recovered the same by paying the loan even before the expiration of the period fixed for payment. This view is contrary to law. Whenever a term for the performance of an obligation is fixed, it is presumed to have been established for the benefit of the creditor as well as that of the debtor, unless from its tenor or from other circumstances it should appear that the

Credit Transactions Full Text Cases Atty. Adviento

term was established for the benefit of one or the other only (art. 1128 of the Civil Code.) In this case it does not appear, either from any circumstance, or from the tenor of the contract, that the term of one year allowed the plaintiffs to pay the debt was established in their favor only. Hence it must be presumed to have been established for the benefit of the defendant also. And it must be so, for this is a case of a loan, with interest, wherein the term benefits the plaintiffs by the use of the money, as well as the defendant by the interest. This being so, the plaintiffs had no right to pay the loan before the lapse of one year, without the consent of the defendant, because such a payment in advance would have deprived the latter of the benefit of the stipulated interest. It follows from this that appellant is in error when he contents that the plaintiffs could have paid the loan and recovered the thing pledged from the date of the execution of the contract and, therefore, his theory that the action of the plaintiffs to recover the thing pledged accrued from the date of the execution of the contract is not tenable. It must, therefore, be admitted that the action of the plaintiffs for the recovery of the thing pledged did not accrue until August 31, 1912, when the term fixed for the loan expired. Computing the time from that date to that of the filing of the complaint in this cause, October 9, 1920, it appears that the ten years fixed by the law for the prescription of the action have not yet elapsed. On the other hand, the contract of loan with pledge is in writing and the action of the defendant for the recovery of the loan does not prescribe until after ten years. It is unjust to hold that the action of the plaintiffs for the recovery of the thing pledged, after the payment of the loan, has already prescribed while the action of the defendant for the recovery of the loan has not yet prescribed. The result of this would be that the defendant might have collected the loan and at the same time kept the thing pledged. The motion for reconsideration is denied kaMaabs1.

153

to a mortgage contract admittedly not registered, only the parties being involved in the suit. The lower court was of the opinion that while it "created a personal obligation [it] did not establish a real estate mortgage." 5 It did not decree foreclosure therefor. Plaintiff-appellant appealed. We view the matter differently and reverse the lower court. The case for the plaintiff, Mobil Oil Philippines, Inc., now appellant, was summarized in the lower court order of February 25, 1966, subject of this appeal. Thus: "In its complaint plaintiff alleged that on Feb. 9, 1965 defendants Ruth R. Diocares and Lope T. Diocares entered into a contract of loan and real estate mortgage wherein the plaintiff extended to the said defendants a loan of P45,000.00; that said defendants also agreed to buy from the plaintiff on cash basis their petroleum requirements in an amount of not less than 50,000 liters per month; that the said defendants will pay to the plaintiff 9-1/2% per annum on the diminishing balance of the amount of their loan; that the defendants will repay the said loan in monthly installments of P950.88 for a period of five (5) years from February 9, 1965; that to secure the performance of the foregoing obligation they executed a first mortgage on two parcels of land covered by Transfer Certificates of Title Nos. T-27136 and T-27946, both issued by the Register of Deeds of Bacolod City. The agreement further provided that in case of failure of the defendants to pay any of the installments due and purchase their petroleum requirements in the minimum amount of 50,000 liters per month from the plaintiff, the latter has the right to foreclose the mortgage or recover the payment of the entire obligation or its remaining unpaid balance; that in case of foreclosure the plaintiff shall be entitled to 12% of the indebtedness as damages and attorney's fees. A copy of the loan and real estate mortgage contract executed between the plaintiff and the defendants is attached to the complaint and made a part thereof. The complaint further alleges that the defendant paid only the amount of P1,901.76 to the plaintiff, thus leaving a balance of P43,098.24, excluding interest, on their indebtedness. The said defendants also failed to buy on cash basis the minimum amount of petroleum which they agreed to purchase from the plaintiff. The plaintiff, therefore, prayed that the defendants be ordered to pay the amount of P43,098.24, with interest at 91/2% per annum from the date it fell due, and in default of such payment that the mortgaged properties be sold and the proceeds applied to the payment of defendants' obligation." 6 Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees, admitted their indebtedness as set forth above, denying merely the alleged refusal to pay, the truth, according to them, being that they sought for an extension of time to do so, inasmuch as they were not in a position to comply with their obligation. They further set forth that they did request plaintiff to furnish them with the statement of accounts with the view of paying the same on installment basis, which request was, however, turned down by the plaintiff. Then came a motion from the plaintiff for a judgment on the pleadings, which motion was favorably acted on by the lower court. As was stated in the order appealed from: "The answer of the defendants dated October 21, 1965 did not raise any issue. On the contrary, said answer admitted the material allegations of the complaint. The plaintiff is entitled to a judgment on the pleadings." 7 As to why the foreclosure sought by plaintiff was denied, the lower court order on appeal reads thus: "The Court cannot, however, order the foreclosure of the mortgage of properties, as prayed for, because there is no allegation in the complaint nor does it appear from the copy of the loan and real estate mortgage contract attached to the complaint that the mortgage had been registered. The said loan agreement although binding among the parties merely created a personal obligation but did not establish a real estate mortgage. The document should have been registered. (Art. 2125, Civil Code of the Phil.)" 8 The dispositive portion is thus limited to ordering defendants "to pay the plaintiff the account of P43,098.24, with interest at the rate of 9-1/2% per annum from the date of the filing of the complaint until fully paid, plus the amount of P2,000.00 as attorneys' fees, and the costs of the suit." 9 Hence this appeal, plaintiff-appellant assigning as errors the holding of the lower court that no real estate mortgage was established and its consequent refusal to order the foreclosure of the mortgaged properties. As set forth at the outset, we find the appeal meritorious. The lower court should not have held that no real estate mortgage was established and should have ordered its foreclosure.

Araullo, C.J., Malcolm, Ostrand and Romualdez, JJ., concur.

EN BANC G.R. No. L-26371 September 30, 1969

MOBIL OIL PHILIPPINES, INC., plaintiff-appellant, vs. RUTH R. DIOCARES, ET AL., defendants-appellees. Faylona, Berroya, Norte and Associates Vivencio G. Ibrado Jr. for defendants-appellees. for plaintiff-appellant.

FERNANDO, J.: It may very well be, as noted by jurists of repute, that to stress the element of a promise as the basis of contracts is to acknowledge the influence of natural law. 1 Nonetheless, it does not admit of doubt that whether under the civil law or the common law, the existence of a contract is unthinkable without one's word being plighted. So the New Civil Code provides: "A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service." 2 So it is likewise under American law. Thus: "A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty." 3 The law may go further and require that certain formalities be executed. Thus, for a mortgage to be validly constituted, "it is indispensable, ..., that the document in which it appears be recorded in the Registry of Property." The same codal provision goes on: "If the instrument is not recorded, the mortgage is nevertheless binding between the parties." 4 The question before us in this appeal from a lower court decision, one we have to pass upon for the first time, is the effect, if any, to be given

Credit Transactions Full Text Cases Atty. Adviento

The lower court predicated its inability to order the foreclosure in view of the categorical nature of the opening sentence of the governing article 10 that it is indispensable, "in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property." Note that it ignored the succeeding sentence: "If the instrument is not recorded, the mortgage is nevertheless binding between the parties." Its conclusion, however, is that what was thus created was merely "a personal obligation but did not establish a real estate mortgage." Such a conclusion does not commend itself for approval. The codal provision is clear and explicit. Even if the instrument were not recorded, "the mortgage is nevertheless binding between the parties." The law cannot be any clearer. Effect must be given to it as written. The mortgage subsists; the parties are bound. As between them, the mere fact that there is as yet no compliance with the requirement that it be recorded cannot be a bar to foreclosure.1awphl.nt A contrary conclusion would manifest less than full respect to what the codal provision ordains. The liability of the mortgagor is therein explicitly recognized. To hold, as the lower court did, that no foreclosure would lie under the circumstances would be to render the provision in question nugatory. That we are not allowed to do. What the law requires in unambiguous language must be lived up to. No interpretation is needed, only its application, the undisputed facts calling for it. 11 Moreover to rule as the lower court did would be to show less than fealty to the purpose that animated the legislators in giving expression to their will that the failure of the instrument to be recorded does not result in the mortgage being any the less "binding between the parties." In the language of the Report of the Code Commission: "In article [2125] an additional provision is made that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties." 12 We are not free to adopt then an interpretation, even assuming that the codal provision lacks the forthrightness and clarity that this particular norm does and, therefore, requires construction, that would frustrate or nullify such legislative objective. Nor is the reason difficult to discern why such an exception should be made to the rule that is indispensable for a mortgage to be validly constituted that it be recorded. Equity so demands, and justice is served. There is thus full acknowledgment of the binding effect of a promise, which must be lived up to, otherwise the freedom a contracting party is supposed to possess becomes meaningless. It could be said of course that to allow foreclosure in the absence of such a formality is to offend against the demands of jural symmetry. What is "indispensable" may be dispense with. Such an objection is far from fatal. This would not be the first time when logic yields to what is fair and what is just. To such an overmastering requirement, law is not immune. WHEREFORE, the lower court order of February 25, 1966 is affirmed with the modification that in default of the payment of the above amount of P43,028.94 with interests at the rate of 9-1/2% per annum from the date of the filing of the complaint, that the mortgage be foreclosed with the properties subject thereof being sold and the proceeds of the sale applied to the payment of the amounts due the plaintiff in accordance with law. With costs against defendants-appellees. Concepcion, C.J., Dizon, Makalintal, Zaldivar, Capistrano, Teehankee and Barredo, Reyes, J.B.L., J., is on leave. FIRST DIVISION G.R. No. L-49940 September 25, 1986 GEMMA R. HECHANOVA, accompanied by her husband, NICANOR HECHANOVA, JR., and PRESCILLA R. MASA, accompanied by her husband, FRANCISCO MASA, petitioners, vs. HON. MIDPANTAO L. ADIL, Presiding Judge, Branch II, Court of First Instance of Iloilo, THE PROVINCIAL SHERIFF OF ILOILO, and PIO SERVANDO, respondents. Sanchez, JJ., Castro, concur. YAP, J.:

154

Petitioners seek the annulment of various orders issued by the respondent Presiding Judge of Branch II, Court of First Instance of Iloilo, in Civil Case No. 12312 entitled "Pio Servando versus Jose Y. Servando et al." A temporary restraining order was issued by this Court on May 9, 1979, staying until further orders the execution of the decision rendered by the respondent Judge in said case. The case under review is for the annulment of a deed of sale dated March 11, 1978, executed by defendant Jose Y. Servando in favor of his codefendants, the petitioners herein, covering three parcels of land situated in Iloilo City. Claiming that the said parcels of land were mortgaged to him in 1970 by the vendor, who is his cousin, to secure a loan of P20,000.00, the plaintiff Pio Servando impugned the validity of the sale as being fraudulent, and prayed that it be declared null and void and the transfer certificates of title issued to the vendees be cancelled, or alternatively, if the sale is not annulled, to order the defendant Jose Servando to pay the amount of P20,000.00, plus interests, and to order defendants to pay damages. Attached to the complaint was a copy of the private document evidencing the alleged mortgage (Annex A), which is quoted hereunder: August 20, 1970 This is to certify that I, Jose Yusay Servando, the sole owner of three parcel of land under Tax Declaration No. 28905, 44123 and 31591 at Lot No. 1, 1863Portion of 1863 & 1860 situated at Sto. Nino St., Arevalo, Compania St. & Compania St., Interior Molo, respectively, have this date mortgaged the said property to my cousin Pio Servando, in the amount of TWENTY THOUSAND PESOS (P20,000.00), redeemable for a period not exceeding ten (10) years, the mortgage amount bearing an interest of 10% per annum. I further certify that in case I fail to redeem the said properties within the period stated above, my cousin Pio Servando, shall become the sole owner thereof. (SGD.) JOSE YUSAY SERVANDO WITNESSES: (Sgd) Ernesto G. Jeruta (Sgd) Francisco B. Villanueva The defendants moved to dismiss the complaint on the grounds that it did not state a cause of action, the alleged mortgage being invalid and unenforceable since it was a mere private document and was not recorded in the Registry of Deeds; and that the plaintiff was not the real party in interest and, as a mere mortgagee, had no standing to question the validity of the sale. The motion was denied by the respondent Judge, in its order dated June 20, 1978, "on the ground that this action is actually one for collection." On June 23, 1978, defendant Jose Y. Servando died. The defendants filed a Manifestation and Motion, informing the trial court accordingly, and moving for the dismissal of the complaint pursuant to Section 21 of Rule 3 of the Rules of Court, pointing out that the action was for. recovery of money based on an actionable document to which only the deceased defendant was a party. The motion to dismiss was denied on July 25, 1978, "it appearing from the face of the complaint that the instant action is not purely a money claim, it being only incidental, the main action being one for annulment and damages." On August 1, 1978, plaintiff filed a motion to declare defendants in default, and on the very next day, August 2, the respondent Judge granted the

Credit Transactions Full Text Cases Atty. Adviento

motion and set the hearing for presentation of plaintiff's evidence ex-parte on August 24, 1978. On August 2, 1978, or the same day that the default order was issued, defendants Hechanova and Masa filed their Answers, denying the allegations of the complaint and repeating, by way of special and affirmative defenses, the grounds stated in their motions to dismiss. On August 25, 1978, a judgment by default was rendered against the defendants, annulling the deed of sale in question and ordering the Register of Deeds of Iloilo to cancel the titles issued to Priscilla Masa and Gemma Hechanova, and to revive the title issued in the name of Jose Y. Servando and to deliver the same to the plaintiff. The defendants took timely steps to appeal the decision to the Court of Appeals by filing a notice of appeal, an appeal bond, and a record on appeal. However, the trial court disapproved the record on appeal due to the failure of defendants to comply with its order to eliminate therefrom the answer filed on August 2, 1978 and accordingly, dismissed the appeal, and on February 2, 1978, issued an order granting the writ of execution prayed for by plaintiff. We find the petition meritorious, and the same is hereby given due course. It is clear from the records of this case that the plaintiff has no cause of action. Plaintiff has no standing to question the validity of the deed of sale executed by the deceased defendant Jose Servando in favor of his codefendants Hechanova and Masa. No valid mortgage has been constituted plaintiff's favor, the alleged deed of mortgage being a mere private document and not registered; moreover, it contains a stipulation (pacto comisorio) which is null and void under Article 2088 of the Civil Code. Even assuming that the property was validly mortgaged to the plaintiff, his recourse was to foreclose the mortgage, not to seek annulment of the sale. WHEREFORE, the decision of the respondent court dated August 25, 1973 and its Order of February 2, 1979 are set aside, and the complaint filed by plaintiff dated February 4, 1978 is hereby dismissed. SO ORDERED. FIRST DIVISION G.R. No. L-56450 July 25, 1983 RODOLFO T. GANZON and GREGORIO L. LIRA, in his capacity as ExOficio Provincial Sheriff of Iloilo, petitioners, vs. THE HONORABLE SANCHO Y. INSERTO, Presiding Judge, Branch I of the Court of First Instance of Iloilo, RANDOLPH C. TAJANLANGIT and ESTEBAN C. TAJANLANGIT, respondents. Salvador A. Cabaluna, Jr. and Jose W. Diokno for petitioners. Hannibal de los Reyes for private respondent.

155

On August 28, 1979, petitioner Rodolfo Ganzon initiated proceedings to extra-judicially foreclose a real estate mortgage executed by the private respondents in his favor. The Deed of Real Estate Mortgage executed on March 19, 1979 (Annex "A", Petition) between Randolph Tajanlangit and Esteban Tajanlangit as mortgagors on one hand and Rodolfo Ganzon as mortgagee on the other hand was to secure the payment by the Tajanlangits of a promissory note amounting to P40,000.00 in favor of Ganzon, to wit: xxx xxx xxx That whereas, the MORTGAGORS are justly indebted to the MORTGAGEE in the amount of FORTY THOUSAND (P40,000.00) PESOS, Philippine Currency, as evidenced by their promissory note for said sum, in the words and figures as follows: P40,000.00 March 19, 1979 Iloilo City

For value received, we promise to pay RODOLFO T. GANZON, or order, at his residence in Molo, Iloilo City, the sum of FORTY THOUSAND (P40,000.00) PESOS, Philippine Currency, in two (2) installments as follows: P20,000.00 on or before 25 May 1979; and P20,000.00 on or before 25 August 1979. This note shall not draw interest. (Annex "A", Rollo, p. 15) The mortgage covered a parcel of residential land, Lot No. 1901-E-61-B-1F of the subdivision plan Psd-274802, located in the District of Molo, Iloilo City covered by Transfer Certificate of Title No. T-50324. Thereafter, petitioner Gregorio Lira, in his capacity as ex-oficio provincial sheriff of Iloilo served personal notice of the foreclosure proceedings on the private respondents. Lira also caused the publication in a newspaper of general circulation in the City and Province of Iloilo of a Notice of Extra Judicial Sale of Mortgaged Property, setting the sale at public auction of the mortgaged property at 10:00 a.m. on September 28, 1979, at his office at the Provincial Capitol, Iloilo City. On September 27, 1979, a day before the scheduled public auction, the private respondents filed a civil action for specific performance, damages, and prohibition with preliminary injunction against the petitioners with the respondent court. The action, docketed as CFI Case No. 13053, sought to declare the extrajudicial foreclosure proceedings and all proceedings taken in connection therewith null and void. The private respondents asked for the issuance of a writ of preliminary injunction to enjoin the petitioners from proceeding with the foreclosure and public auction sale. Acting on the urgent ex-parte motion of private respondents, the trial court issued an order enjoining the provincial sheriff from proceeding with the scheduled auction sale on September 28, 1979. On October 31, 1979, the private respondents filed an amended complaint. For purposes of the instant petition, the pertinent allegations in the amended complaint are the following: (1) On August 25, 1978, defendant, now petitioner Rodolfo Ganzon executed a deed of absolute sale of a parcel of land in favor of plaintiff, now respondent Esteban Tajanlangit. The parcel of land, subject of the sale is described as Lot No. 1900 of the Cadastral Survey of Iloilo located at Molo, Iloilo City covered by Transfer Certificate of Title No. T- 39579 with an area of 24,442 square meters, more or less; (2) The deed of real estate mortgage which is the subject of the extra-judicial proceedings initiated by defendant Rodolfo Ganzon executed by plaintiffs Esteban Tajanlangit and Randolph Tajanlangit in his favor was for the purpose of securing the payment of P40,000.00 which formed part of the purchase price of Lot No. 1900; (3) Incorporated in the aforesaid deed of absolute sale was a proviso to the effect that vendor-defendant Rodolfo Ganzon guaranteed to have the occupants of the lot to vacate the premises within 120 days after the execution thereof, to wit: xxx xxx xxx

GUTIERREZ, JR., J.: May the respondent court order that a mortgage on real property be substituted by a surety bond and direct the Register of Deeds to cancel the mortgage lien annotated on the Torrens Title since the surety bond already secures the obligation earlier secured by the cancelled mortgage? The petitioner comes to us stating that the lower court acted with grave abuse of discretion and in excess of its jurisdiction in so ruling.

Credit Transactions Full Text Cases Atty. Adviento

The vendor warrants to the vendee peaceful possession of the above- mentioned parcel of land and that the said vendor shall see to it that all occupants thereof at the execution of this deed shall vacate the premises within a period of one hundred twenty (120) days computed from the date of the execution of this document. (4) The aforestated guaranty was violated by defendant Ganzon since the occupants of the said lot up to the present are still within the premises of the lot; and (5) The extra-judicial foreclosure is illegal since defendant Ganzon committed a breach in his warranty and the deed of real estate mortgage does not contain any stipulation authorizing mortgagee Ganzon to extrajudicially foreclose the mortgaged property. On March 28, 1980 the petitioners filed their answer to the amended complaint. They admitted the veracity of the deed of absolute sale covering said Lot No. 1900 but denied that the real estate mortgage covering Lot No. 1901 subject of the extra-judicial foreclosure proceedings was executed by Esteban Tajanlangit and Randolph Tajanlangit in favor of Rodolfo Ganzon to secure the payment of the balance of the purchase price of Lot No. 1900. They maintained that the real estate mortgage was an entirely different transaction between the Tajanlangits and Ganzon from the sale of Lot No. 1900 embodied in the absolute deed of sale of realty. They further maintained that the extra-judicial foreclosure proceedings would be in accordance with the terms and conditions of the said mortgage. After the issues had been joined but before actual trial, the private respondents filed a "Motion For Release Of Real Estate And For The Clerk Of Court To Accept Bond Or Cash In Lieu Thereof," to which the petitioners interposed an Opposition. In an order dated November 20, 1980, the respondent court granted the respondents' motion. The order states: This is a Motion for Release of Real Estate Mortgage and for the Clerk of Court to Accept Bond or Cash in Lieu Thereof. It appears that defendant sold to Esteban Tajanlangit, Jr. Lot No. 1900 of the Cadastral Survey of Iloilo under Transfer Certificate of Title No. T- 39579. The document of sale provides that the vendee who is the defendant herein, promised to exclude from the premises the occupants. To secure the unpaid balance of P40,000.00, plaintiffs executed a real estate mortgage on their Lot No. 1901-4-61-B-1-1 of the subdivision plan Psd-274802. Because defendant failed to clear the occupants of Lot No. 1900, as provided for in the contract of sale, plaintiffs withheld payment of the P40,000.00. To clear the title of Lot No. 1901-E-61-B-1-1 plaintiffs are willing to submit a bond in the sum of P80,000.00 which is double the consideration of the mortgage. WHEREFORE, in the interest of justice, considering that plaintiffs are willing and able to pay the P40,000.00 and considering further that defendant has not yet cleared the premises he sold to plaintiffs of tenants, the Register of Deeds of Iloilo City is ordered to cancel the mortgage lien on Transfer Certificate of Title No. T-50324, upon showing by the plaintiffs that they have put up the surety bond in the sum of P80,000.00. " (Annex "F", Rollo, p. 58) On January 28, 1981, the respondents after receipt of the aforesaid order, put up a surety bond in the amount of P80,000.00 with the Summa Insurance Corporation as surety (Annex " G ") for the approval of the respondent court,

156

On February 14, 1981, the petitioners filed an Urgent Motion for Reconsideration Of The Order Dated November 20, 1980, And Opposition To The Approval of Surety Bond. The respondent court in its order dated February 24, 1981, denied the aforesaid motion. The order states: Finding the motion filed by plaintiff through counsel for approval of surety bond well taken and considering that the opposition filed by defendants does not question the validity of the surety bond itself but is anchored upon grounds that had already been passed upon by this Court in the order dated November 20, 1980, the surety bond in the amount of P80,000.00 issued by Summa Insurance Corporation is hereby approved. The defendant Rodolfo T. Ganzon, through Atty. Salvador Cabaluna, Jr., is hereby ordered to surrender to the plaintiffs, through Atty. Hannibal de los Reyes the owner's copy of TCT No. 50324, so that the mortgage annotated therein in favor of defendant Rodolfo T. Ganzon could be duly cancelled. (Annex "I", Rollo, p. 65). Hence, the instant petition. On March 18, 198 1, we issued a temporary restraining order enjoining the respondents from enforcing the orders dated November 20, 1980 and February 24, 1981 of the Court of First Instance of Iloilo, Branch I at Iloilo City. On July 8, 1981, we gave due course to the petition and required the parties to submit their respective memoranda. As stated earlier, the issue raised before us is whether or not the trial court may order the cancellation of a mortgage lien annotated in a Torrens Certificate of Title to secure the payment of a promissory note and substitute such mortgage lien with a surety bond approved by the same court to secure the payment of the promissory note. In issuing its November 20, 1980 order, the trial court before trial on the merits of the case assumed that the real estate mortgage subject of the extra- judicial foreclosure proceedings was indeed a security for the payment of a P40,000.00 promissory note which answered for the balance of the purchase price of the sale between Ganzon as vendor and Esteban Tajanlangit was vendee of Lot No. 1900. With this assumption, the trial court concluded that Rodolfo Ganzon violated his warranty that he would clear the parcel of land of its occupants within 120 days after the execution of the deed of absolute sale of realty. On this premise and upon motion of the private respondents, the court ordered the Register of Deeds to cancel the mortgage lien annotated in the Transfer Certificate of Title covering the mortgaged parcel of land and to substitute therein a surety bond approved by the trial court. It must be noted that petitioner Rodolfo Ganzon vehemently denied the allegation that the P 40,000.00, consideration of the promissory note which resulted in the execution of the real estate mortgage to secure its payment was a balance of the purchase price of Lot No. 1900. As earlier stated, Ganzon maintained in his Answer that the real estate mortgage arose from a different transaction. At the pre-trial, what the parties admitted were the existence and due execution of the documents, including the absolute deed of sale of realty and the subject real estate mortgage. In connection with the documents, the issues per the pre-trial order were "... whether or not the documents express the true intention of the parties, and whether or not they complied with the provisions of the document. (Rollo, p. 78) Hence, at that stage of the case, the trial court's order dated November 20, 1980 had no factual basis. Even on the assumption that the factual bases of the trial court's questioned orders were justified by evidence in the records the same would still not be proper.

Credit Transactions Full Text Cases Atty. Adviento

A mortgage is but an accessory contract. "The consideration of the mortgage is the same consideration of the principal contract without which it cannot exist as an independent contract." (Banco de Oro v. Bayuga, 93 SCRA 443, citing China Banking Corporation v. Lichauco, 46 Phil. 460). On the effects of a mortgage we ruled in Philippine National Bank v. Mallorca (21 SCRA 694): xxx xxx xxx ... By Article 2126 of the Civil Code, (Formerly Article 1876 of the Civil Code of Spain of 1889.) a 'mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.' Sale or transfer cannot affect or release the mortgage. A purchaser is necessarily bound to acknowledge and respect the encumbrance to which is subject the purchased thing and which is at the disposal of the creditor 'in order that he, under the terms of the contract, may recover the amount of his credit therefrom.' (Bischoff vs. Pomar, 12 Phil. 690, 700) For, a recorded real estate is a right in rem, a lien on the property whoever its owner may be. (Altavas, The Law of Mortgages in the Philippine Islands, 1924 ed., p. 2) Because the personality of the owner is disregarded; the mortgage subsists notwithstanding changes of ownership; the last transferee is just as much of a debtor as the first one; and this, independent of whether the transferee knows or not the person of the mortgagee. (Id., at p. 6) So it is, that a mortgage lien is inseparable from the property mortgaged. All subsequent purchasers thereof must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. For, the mortgage, until discharge, follows the property. (Pea, Registration of Land Titles and Deeds, 1961 ed., p. 225; emphasis supplied. See also V. Tolentino, Civil Code of the Philippines, 1962 ed., p. 477) Applying the principles underlying the nature of a mortgage, the real estate mortgage constituted on Lot No. 1901-E-61-B-lF of the subdivision plan Psd-27482, located in the District of Molo, Iloilo City covered by Transfer Certificate of Title No. T-50324 can not be substituted by a surety bond as ordered by the trial court. The mortgage lien in favor of Petitioner Rodolfo Ganzon is inseparable from the mortgaged property. It is a right in rem, a lien on the property. To substitute the mortgage with a surety bond would convert such lien from a right in rem, to a right in personam. This conversion can not be ordered for it would abridge the rights of the mortgagee under the mortgage contract. Moreover, the questioned orders violate the non-impairment of contracts clause guaranteed under the Constitution. Substitution of the mortgage with a surety bond to secure the payment of the P40,000.00 note would in effect change the terms and conditions of the mortgage contract. Even before trial on the very issues affecting the contract, the respondent court has directed a deviation from its terms, diminished its efficiency, and dispensed with a primary condition. WHEREFORE, the instant petition is hereby GRANTED. The Orders dated November 20, 1980 and February 24, 1981 of the trial court are SET ASIDE. Our March 18, 1981 Temporary Restraining Order is made PERMANENT. No costs. SO ORDERED. SECOND DIVISION G.R. No. L-49101 October 24, 1983 RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners, vs.

157

THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE, respondents. Edgardo I. De Leon for petitioners. Siguion Reyna, Montecillo & Associates for private respondent.

GUERRERO, J: Petition for review on certiorari seeking the reversal of the decision of the defunct Court of Appeals, now Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto Bonnevie vs. Philippine Bank of Commerce, et al.," promulgated August 11, 1978 1 as well as the Resolution denying the motion for reconsideration. The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First Instance of Rizal against respondent Philippine Bank of Commerce sought the annulment of the Deed of Mortgage dated December 6, 1966 executed in favor of the Philippine Bank of Commerce by the spouses Jose M. Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made on September 4, 1968. It alleged among others that (a) the Deed of Mortgage lacks consideration and (b) the mortgage was executed by one who was not the owner of the mortgaged property. It further alleged that the property in question was foreclosed pursuant to Act No. 3135 as amended, without, however, complying with the condition imposed for a valid foreclosure. Granting the validity of the mortgage and the extrajudicial foreclosure, it finally alleged that respondent Bank should have accepted petitioner's offer to redeem the property under the principle of equity said justice. On the other hand, the answer of defendant Bank, now private respondent herein, specifically denied most of the allegations in the complaint and raised the following affirmative defenses: (a) that the defendant has not given its consent, much less the requisite written consent, to the sale of the mortgaged property to plaintiff and the assumption by the latter of the loan secured thereby; (b) that the demand letters and notice of foreclosure were sent to Jose Lozano at his address; (c) that it was notified for the first time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that the law on contracts requires defendant's consent before Jose Lozano can be released from his bilateral agreement with the former and doubly so, before plaintiff may be substituted for Jose Lozano and Alfonso Lim; (e) that the loan of P75,000.00 which was secured by mortgage, after two renewals remain unpaid despite countless reminders and demands; of that the property in question remained registered in the name of Jose M. Lozano in the land records of Rizal and there was no entry, notation or indication of the alleged sale to plaintiff; (g) that it is an established banking practice that payments against accounts need not be personally made by the debtor himself; and (h) that it is not true that the mortgage, at the time of its execution and registration, was without consideration as alleged because the execution and registration of the securing mortgage, the signing and delivery of the promissory note and the disbursement of the proceeds of the loan are mere implementation of the basic consensual contract of loan. After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie filed a motion for intervention. The intervention was premised on the Deed of Assignment executed by petitioner Honesto Bonnevie in favor of petitioner Raoul SV Bonnevie covering the rights and interests of petitioner Honesto Bonnevie over the subject property. The intervention was ultimately granted in order that all issues be resolved in one proceeding to avoid multiplicity of suits. On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as follows: WHEREFORE, all the foregoing premises considered, judgment is hereby rendered dismissing the complaint with costs against the plaintiff and the intervenor.

Credit Transactions Full Text Cases Atty. Adviento

After the motion for reconsideration of the lower court's decision was denied, petitioners appealed to respondent Court of Appeals assigning the following errors: III 1. The lower court erred in not finding that the real estate mortgage executed by Jose Lozano was null and void; 2. The lower court erred in not finding that the auction sale decide on August 19, 1968 was null and void; 3. The lower court erred in not allowing the plaintiff and the intervenor to redeem the property; 4. The lower court erred in not finding that the defendant acted in bad faith; and 5. The lower court erred in dismissing the complaint. On August 11, 1978, the respondent court promulgated its decision affirming the decision of the lower court, and on October 3. 1978 denied the motion for reconsideration. Hence, the present petition for review. The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby adopt the facts found the trial court and found by the Court of Appeals to be consistent with the evidence adduced during trial, to wit: It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the owners of the property which they mortgaged on December 6, 1966, to secure the payment of the loan in the principal amount of P75,000.00 they were about to obtain from defendant-appellee Philippine Bank of Commerce; that on December 8, 1966, executed in favor of plaintiff-appellant the Deed of Sale with Mortgage ,, for and in consideration of the sum of P100,000.00, P25,000.00 of which amount being payable to the Lozano spouses upon the execution of the document, and the balance of P75,000.00 being payable to defendant- appellee; that on December 6, 1966, when the mortgage was executed by the Lozano spouses in favor of defendant-appellee, the loan of P75,000.00 was not yet received them, as it was on December 12, 1966 when they and their co-maker Alfonso Lim signed the promissory note for that amount; that from April 28, 1967 to July 12, 1968, plaintiff-appellant made payments to defendant-appellee on the mortgage in the total amount of P18,944.22; that on May 4, 1968, plaintiff-appellant assigned all his rights under the Deed of Sale with Assumption of Mortgage to his brother, intervenor Raoul Bonnevie; that on June 10, 1968, defendant-appellee applied for the foreclosure of the mortgage, and notice of sale was published in the Luzon Weekly Courier on June 30, July 7, and July 14, 1968; that auction sale was conducted on August 19, 1968, and the property was sold to defendant-appellee for P84,387.00; and that offers from plaintiff-appellant to repurchase the property failed, and on October 9, 1969, he caused an adverse claim to be annotated on the title of the property. (Decision of the Court of Appeals, p. 5). Presented for resolution in this review are the following issues: I Whether the real estate mortgage executed by the spouses Lozano in favor of respondent bank was validly and legally executed. II IV

158

Whether the extrajudicial foreclosure of the said mortgage was validly and legally effected.

Whether petitioners had a right to redeem the foreclosed property.

Granting that petitioners had such a right, whether respondent was justified in refusing their offers to repurchase the property. As clearly seen from the foregoing issues raised, petitioners' course of action is three-fold. They primarily attack the validity of the mortgage executed by the Lozano spouses in favor of respondent Bank. Next, they attack the validity of the extrajudicial foreclosure and finally, appeal to justice and equity. In attacking the validity of the deed of mortgage, they contended that when it was executed on December 6, 1966, there was yet no principal obligation to secure as the loan of P75,000.00 was not received by the Lozano spouses "So much so that in the absence of a principal obligation, there is want of consideration in the accessory contract, which consequently impairs its validity and fatally affects its very existence." (Petitioners' Brief, par. 1, p. 7). This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano spouses. The fact that the latter did not collect from the respondent Bank the consideration of the mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract, the herein contract of loan was perfected at the same time the contract of mortgage was executed. The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does not indicate lack of consideration of the mortgage at the time of its execution. Petitioners also argued that granting the validity of the mortgage, the subsequent renewals of the original loan, using as security the same property which the Lozano spouses had already sold to petitioners, rendered the mortgage null and void, This argument failed to consider the provision 2 of the contract of mortgage which prohibits the sale, disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent of the mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged property is sold, the vendee shall assume the mortgage in the terms and conditions under which it is constituted. These provisions are expressly made part and parcel of the Deed of Sale with Assumption of Mortgage. Petitioners admit that they did not secure the consent of respondent Bank to the sale with assumption of mortgage. Coupled with the fact that the sale/assignment was not registered so that the title remained in the name of the Lozano spouses, insofar as respondent Bank was concerned, the Lozano spouses could rightfully and validly mortgage the property. Respondent Bank had every right to rely on the certificate of title. It was not bound to go behind the same to look for flaws in the mortgagor's title, the doctrine of innocent purchaser for value being applicable to an innocent mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48). Another argument for the respondent Bank is that a mortgage follows the property whoever the possessor may be and subjects the fulfillment of the obligation for whose security it was constituted. Finally, it can also be said that petitioners voluntarily assumed the mortgage when they entered into the Deed of Sale with Assumption of Mortgage. They are, therefore, estopped from impugning its validity whether on the original loan or renewals thereof. Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following grounds:

Credit Transactions Full Text Cases Atty. Adviento

a) petitioners were never notified of the foreclosure sale. b) The notice of auction sale was not posted for the period required by law. c) publication of the notice of auction sale in the Luzon Weekly Courier was not in accordance with law. The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not being a party to the Deed of Sale with Assumption of Mortgage, it can validly claim that it was not aware of the same and hence, it may not be obliged to notify petitioners. Secondly, petitioner Honesto Bonnevie was not entitled to any notice because as of May 14, 1968, he had transferred and assigned all his rights and interests over the property in favor of intervenor Raoul Bonnevie and respondent Bank not likewise informed of the same. For the same reason, Raoul Bonnevie is not entitled to notice. Most importantly, Act No. 3135 does not require personal notice on the mortgagor. The requirement on notice is that: Section 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July 14, 1968 and notices of the sale were posted for not less than twenty days in at least three (3) public places in the Municipality where the property is located. Petitioners were thus placed on constructive notice. The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said case involved a judicial foreclosure and the sale to the vendee of the mortgaged property was duly registered making the mortgaged privy to the sale. As regards the claim that the period of publication of the notice of auction sale was not in accordance with law, namely: once a week for at least three consecutive weeks, the Court of Appeals ruled that the publication of notice on June 30, July 7 and July 14, 1968 satisfies the publication requirement under Act No. 3135 notwithstanding the fact that June 30 to July 14 is only 14 days. We agree. Act No. 3135 merely requires that such notice shall be published once a week for at least three consecutive weeks." Such phrase, as interpreted by this Court in Basa vs. Mercado, 61 Phil. 632, does not mean that notice should be published for three full weeks. The argument that the publication of the notice in the "Luzon Weekly Courier" was not in accordance with law as said newspaper is not of general circulation must likewise be disregarded. The affidavit of publication, executed by the Publisher, business/advertising manager of the Luzon Weekly Courier, stares that it is "a newspaper of general circulation in ... Rizal, and that the Notice of Sheriff's sale was published in said paper on June 30, July 7 and July 14, 1968. This constitutes prima facie evidence of compliance with the requisite publication. Sadang vs. GSIS, 18 SCRA 491). To be a newspaper of general circulation, it is enough that "it is published for the dissemination of local news and general information; that it has a bona fide subscription list of paying subscribers; that it is published at regular intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not have the largest circulation so long as it is of general circulation. Banta vs. Pacheco, 74 Phil. 67). The testimony of three witnesses that they do read the Luzon Weekly Courier is no proof that said newspaper is not a newspaper of general circulation in the province of Rizal. Whether or not the notice of auction sale was posted for the period required by law is a question of fact. It can no longer be entertained by this

159

Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126). Nevertheless, the records show that copies of said notice were posted in three conspicuous places in the municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig Municipal Hall. In the same manner, copies of said notice were also posted in the place where the property was located, namely: the Municipal Building of San Juan, Rizal; the Municipal Market and on Benitez Street. The following statement of Atty. Santiago Pastor, head of the legal department of respondent bank, namely: Q How many days were the notices posted in these two places, if you know? A We posted them only once in one day. (TSN, p. 45, July 25, 1973) is not a sufficient countervailing evidence to prove that there was no compliance with the posting requirement in the absence of proof or even of allegation that the notices were removed before the expiration of the twenty- day period. A single act of posting (which may even extend beyond the period required by law) satisfies the requirement of law. The burden of proving that the posting requirement was not complied with is now shifted to the one who alleges non-compliance. On the question of whether or not the petitioners had a right to redeem the property, We hold that the Court of Appeals did not err in ruling that they had no right to redeem. No consent having been secured from respondent Bank to the sale with assumption of mortgage by petitioners, the latter were not validly substituted as debtors. In fact, their rights were never recorded and hence, respondent Bank is charged with the obligation to recognize the right of redemption only of the Lozano spouses. But even granting that as purchaser or assignee of the property, as the case may be, the petitioners had acquired a right to redeem the property, petitioners failed to exercise said right within the period granted by law. Thru certificate of sale in favor of appellee was registered on September 2, 1968 and the one year redemption period expired on September 3, 1969. It was not until September 29, 1969 that petitioner Honesto Bonnevie first wrote respondent and offered to redeem the property. Moreover, on September 29, 1969, Honesto had at that time already transferred his rights to intervenor Raoul Bonnevie. On the question of whether or not respondent Court of Appeals erred in holding that respondent Bank did not act in bad faith, petitioners rely on Exhibit "B" which is the letter of lose Lozano to respondent Bank dated December 8, 1966 advising the latter that Honesto Bonnevie was authorized to make payments for the amount secured by the mortgage on the subject property, to receive acknowledgment of payments, obtain the Release of the Mortgage after full payment of the obligation and to take delivery of the title of said property. On the assumption that the letter was received by respondent Bank, a careful reading of the same shows that the plaintiff was merely authorized to do acts mentioned therein and does not mention that petitioner is the new owner of the property nor request that all correspondence and notice should be sent to him. The claim of appellants that the collection of interests on the loan up to July 12, 1968 extends the maturity of said loan up to said date and accordingly on June 10, 1968 when defendant applied for the foreclosure of the mortgage, the loan was not yet due and demandable, is totally incorrect and misleading. The undeniable fact is that the loan matured on December 26, 1967. On June 10, 1968, when respondent Bank applied for foreclosure, the loan was already six months overdue. Petitioners' payment of interest on July 12, 1968 does not thereby make the earlier act of respondent Bank inequitous nor does it ipso facto result in the renewal of the loan. In order that a renewal of a loan may be effected, not only the payment of the accrued interest is necessary but also the payment of interest for the proposed period of renewal as well. Besides, whether or not a loan may be renewed does not solely depend on the debtor but more so on the discretion of the bank. Respondent Bank may not be, therefore, charged of bad faith. WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby AFFIRMED. Costs against petitioners.

Credit Transactions Full Text Cases Atty. Adviento

SO ORDERED. FIRST DIVISION G.R. No. 88602 April 6, 1990 TOMASA VDA. DE JACOB, as Special Administratrix of the Estate of the Deceased ALFREDO E. JACOB, petitioner, vs. HONORABLE COURT OF APPEALS, BICOL SAVINGS & LOAN ASSOCIATION, JORGE CENTENERA, AND LORENZO C. ROSALES, respondents. G.R. No. 89544 April 6, 1990 THE ESTATE OF THE LATE ALFREDO JACOB, represented by its Administrator, TOMASA VDA. DE JACOB, petitioner vs. HONORABLE COURT OF APPEALS, AND UNITED BICOL SAVINGS BANK, respondents. Benito P. Fable for petitioner. Contreras & Associates for private respondents. Rosales & Associates Law Office for private respondent Rosales. Ramon Quisumbing, Jr. for private respondent Centenera.

160

5986) located at Liboton, Naga City. Bounded on the NE, by Alfredo Cleto (Lot 383); Martin Perez (Lot 385) and Benedicto Naz (Lot 394), SE. by Benedicto Naz (Lot 394); S. by Pedro San Juan (Lot 317); SW by Margarita Narciso vs. Simeon Ty Ganco (Lot 319); and NW by the Calawag Street, containing an area of 3,376 square meters covered by TCT No. 1433. A parcel of land (Lot 15, Block 4 of the subdivision plan Psd46484, being a portion of Lot 1105-now of the Cad. survey of Naga, L.R.C. Cad. Rec. N. N-78), situated in Tinago, Naga City. Bounded on the SE., along line 12 by Lot 17, Block 4; along line 23 by road lot 4; along line 3-4 by Lot 13, Block 4; and along line 41 by Lot 14, Block 4 all of the subdivision plan. Containing an area of 236 square meters, covered by TCT No. 393. A parcel of land (Lot 14, Block 4 of the subdivision plan Psd46464, being a portion of Lot 1106-now Cad. survey of Naga, L.R.C. Cad. Rec. No. N-78), situated in Tinago, Naga City, Bounded on SW., along line 1-2 by Lot 15; Block 4; along line 23 by Lot 12, Block 4; along line 3-4 by road lot 3; and along line 41 by Lot 16, Block 4, all of the subdivision plan, containing an area of 239 square meters, covered by TCT No. 397. 2. To receive cash in any amount made in payment of the mortgage of the above described properties; to sign checks, drafts, money orders, treasury warrants, to indorse the same, to cash and make deposits with any bank here or elsewhere and to withdraw such deposit; to execute, sign and deliver any or all documents of mortgage, contracts, deeds or any instrument necessary and pertinent for purposes of mortgaging and/or encumbering said properties in favor of any banking institution in the City of Naga or elsewhere and lastly, to do and perform any and all acts and deeds which to him may seem most to my own benefit and advantage. HEREBY GIVING AND GRANTING unto my said attorney-in-fact full power and authority to do and perform any and every act and thing whatever requisite or necessary or proper to be done in and about the premises, as fully to all intents and purposes as I might or could do if personally present and acting in person and I hereby ratify and confirm all that my said attorney shall do and had done lawfully or cause to be done under any by virtue of these presents. 3 Consequently, Centenera secured a loan in the amount of P18,000.00 from the Bicol Savings & Loan Association sometime in September 1972. Centenera signed and executed the real estate mortgage and promissory note as attorney-in-fact of Dr. Jacob. 4 When the loan fell due in 1975 Centenera failed to pay the same but was able to arrange a restructuring of the loan using the same special power of attorney and property as security. Another set of loan documents, namely: an amended real estate

GANCAYCO J.: The question of whether or not an extrajudicial foreclosure of a mortgage may proceed even after the death of the mortgagor and whether or not a petition for the issuance of a writ of possession may be barred by estoppel, are the issues presented in this petition. Dr. Alfredo E. Jacob was the registered owner of a parcel of land described under Transfer Certificate of Title No. 1433 of the Register of Deeds of Naga City. 1 Sometime in 1972 Jorge Centenera was appointed as administrator of Hacienda Jacob until January 1, 1978 when the Special Power of Attorney executed in his favor by Dr. Jacob was revoked by the latter. 2 The land in question is located at Liboton, Naga City and has an area of approximately 3,376 square meters. Because of the problem of paying realty taxes, internal revenue taxes and unpaid wages of farm laborers of the hacienda, Dr. Jacob asked Centenera to negotiate for a loan. For this purpose, a special power of attorney was executed and acknowledged by Dr. Jacob before notary public Lorenzo Rosales the material portions of which read as follows: That I, ALFREDO E. JACOB, Filipino, of legal age, widower, address at Tigaon, Camarines Sur, have named, constituted and appointed and by these presents do name, constitute and appoint JORGE CENTENERA, Filipino, of legal age, married to Judith E. Centenera, resident of and with postal address at Naga City, to be my true and lawful attorney-in-fact, for me and in my name, place and stead. and to do and perform all the necessary acts and deeds, to wit: 1. To mortgage and/or, hypothecate with any banking institution in the City of Naga or elsewhere in the Philippines, the following described properties of which I am the absolute owner, as follows: A parcel of land (Plan Ps-80014, Lot 818 of Naga Cad. 290 Case No. M 472 L.R.C. Rec. No. N-

Credit Transactions Full Text Cases Atty. Adviento

mortgage and promissory note dated November 27, 1975 was executed by Centenera as attorney-in-fact of Dr. Jacob. 5 Again, Centenera failed to pay the loan when it fell due and so he arranged for another restructuring of the loan with the bank on November 23, 1976. The corresponding promissory note was again executed by Centenera on behalf of Jacob under the special power of attorney. The mortgage was annotated on the title 6 and when the loan was twice restructured, the proceeds of the same were not actually given by the bank to Centenera since the transaction was actually nothing but a renewal of the first or original loan and the supposed proceeds were applied as payment for the loan. The accrued interest for sixty (60) days was, however, paid by Centenera. Centenera again failed to pay the loan upon the maturity date forcing the bank to send a demand letter. 7 A copy of the demand letter was sent to Dr. Jacob but no reply or denial was received by the bank. Thus, the bank foreclosed the real estate mortgage and the corresponding provisional sale of the mortgaged property to the respondent bank was effected. On November 5, 1982 a definite deed of sale of the property was executed in favor of the respondent bank as the sole and highest bidder. 8 Tomasa Vda. de Jacob who was subsequently named administratrix of the estate of Dr. Jacob and who claimed to be an heir of the latter, conducted her own investigation and therefore she filed a complaint in the Regional Trial Court of Camarines Sur alleging that the special power of attorney and the documents therein indicated are forged and therefore the loan and/or real estate mortgages and promissory notes are null and void. After trial on the merit a decision was rendered on July 30, 1987, the dispositive part of which reads as follows: WHEREFORE, plaintiff's complaint is ordered DISMISSED for lack of a cause of action and/or her failure to prove the cause(s) of action alleged in the complaint; and judgment is rendered against the Estate of the late Dr. Alfredo Jacob in favor of the defendants on their respective counterclaim, ordering payment from said estate of the following: (a) actual damages in the sum of P30,000.00; exemplary damages in the sum of P20,000.00; and attorney's fees of P10,000.00; to defendant Bicol Savings and Loan Association; (b) actual damages in the sum of P30,000.00; exemplary damages in the sum of P20,000.00; moral damages in the sum of P50,000.00; attorneys fees in the sum of P10,000.00 to defendant Jorge Centenera; (c) actual damages in the sum of P30,000.00; exemplary damages in the sum of P20,000.00; attorney's fees in the sum of P10,000.00 to defendant Atty. Lorenzo Rosales. with interest at the legal rate from the time of the filing of the complaint, until full payment. Costs against the plaintiff. SO ORDERED. 9 Not satisfied therewith the plaintiff appealed therefrom to the Court of Appeals wherein on May 30, 1989 a decision was rendered affirming in toto the decision of the lower court and dismissing the appeal for lack of merit. 10 Hence, the herein petition for review docketed as G.R. No. 88602 that was filed by plaintiff therein and which raises two issues, to wit: A. The Honorable Court of Appeals failed and completely neglected to exercise appellate SO ORDERED.

161

determination on material issues which, independently of what said Court determined, would cause nullification of the mortgage deed and amendment thereto, as well as extrajudicial foreclosure proceedings and sale thereof. B. The Honorable Court of Appeals likewise ignored to resolve, nay, pass upon, the issue of excessive and unfounded award of damages, which certainly calls for appellate determination as it was squarely raised on appeal. 11 However, while the action for annulment of mortgage, etc. aforestated was pending in the trial court, on November 5, 1982, a definite deed of sale was issued by the sheriff in favor of respondent bank. Without redemption having been exercised within the prescribed period, the title in the name of Dr. Jacob was cancelled and in its place, Transfer Certificate of Title No. 14661 was issued on August 9, 1983 in favor of respondent bank. Respondent bank then filed a petition for the issuance of a writ of possession in the Regional Trial Court of Naga City which was opposed by petitioner. In due course a writ of possession was issued by the trial court in a decision dated July 21, 1987 in favor of the respondent bank, the dispositive part of which reads as follows: WHEREFORE, the petitioner UNITED BICOL SAVINGS BANK being entitled to possession of the property covered by Transfer Certificate of Title No. 14661 (registry of Naga City) let a Writ of Possession issue addressed to the respondent ESTATE OF THE LATE ALFREDO JACOB, by its administratrix Tomasa Vda. de Jacob, directing the said respondent to deliver the possession of said property to the petitioner United Bicol Savings Bank within thirty (30) days from the date this judgment becomes final; and for the Provincial Sheriff to enforce said writ and to place said petitioner United Bicol Savings Bank in possession of said property, with costs against the said respondent.

Not satisfied therewith petitioner appealed to the Court of Appeals wherein in due course a decision was rendered on June 27, 1989 affirming the decision appealed from without pronouncement as to costs. 12 A motion for reconsideration of said decision which was filed by the petitioner was denied tied in a resolution dated July 28, 1989. Hence the petition for review docketed as G.R. No. 89544 wherein petitioner contends that the writ of possession may not validly issue where from the admitted facts the extrajudicial foreclosure and auction sale is patently void. The petition in G.R. No. 89544 was consolidated with the petition in G.R. No. 88602 hereinabove discussed being closely related to each other. The petition in G.R. No. 88602 is devoid of merit. Petitioner contends that the extrajudicial foreclosure proceedings and the sale of the property mortgaged under the amended real estate mortgage after the mortgagor died are null and void. It is pointed out that Dr. Jacob died on March 9, 1979 and that the extrajudicial foreclosure proceedings were effected after his death, that is, the public auction sale was made on May 11, 1979. Petitioner argues that such extrajudicial foreclosure can only be prosecuted during the lifetime of Dr. Jacob for the reason that such kind of foreclosure under Act No. 3135, as amended, is authorized only because of the special power of attorney inserted in the mortgage deed; and that said special power of attorney cannot extend beyond the lifetime of the supposed mortgagor. Section 7, Rule 86 of the Rules of Court provides as follows:

Credit Transactions Full Text Cases Atty. Adviento

Sec. 7. Mortgage debt due from estate. A creditor holding a claim against the deceased secured by mortgage or other collateral security, may abandon the security and prosecute claim in the manner provided in this rule, and share in the general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon his security, by action in court, making the executor or administrator a party defendant, and if there is a judgment for a deficiency, after the sale of the mortgaged premises, or the property pledged, in the foreclosure or other proceeding to realize upon the security, he may claim his deficiency judgment in the manner provided in the preceding section; or he may rely upon his mortgage or other security alone, and foreclose the same at any time within the period of the statute of limitations, and in that event he shall not be admitted as a creditor, and shall receive no share in the distribution of the other assets of the estate; but nothing herein contained shall prohibit the executor or administrator from redeeming the property mortgaged or pledged, by paying the debt for which it is held as security, under the direction of the court, if the court shall adjudge it to be for the best interest of the estate that such redemption shall be made From the foregoing provision of the Rules it is clearly recognized that a mortgagee has three remedies that may be alternately availed of in case the mortgagor dies, to wit: (1) to waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim; (2) to foreclose the mortgage judicially and prove the deficiency as an ordinary claim; and; (3) to rely on the mortgage exclusively, or other security and foreclose the same at anytime, before it is barred by prescription, without the right to file a claim for any deficiency. From the foregoing it is clear that the mortgagee does not lose its light to extrajudicially foreclose the mortgage even after the death of the mortgagor as a third alternative under Section 7, Rule 86 of the Rules of Court. The power to foreclose a mortgage is not an ordinary agency that contemplated exclusively the representation of the principal by the agent but is primarily an authority conferred upon the mortgagee for the latter's own protection. That power survives the death of the mortgagor. 13 The right of the mortgagee bank to extrajudicially foreclose the mortgage after the death of the mortgagor, acting through his attorney-in-fact, did not depend on the authority in the deed of mortgage executed by the latter. That right existed independently of said stipulation and is clearly recognized in Section 7, Rule 86 of the Rules of Court aforecited. 14 The other issues raised in the petition are questions of fact which cannot be considered in this proceeding. The findings of facts of the appellate court are conclusive and cannot be reviewed at this level. Likewise, the petition in G.R. No. 89544 is devoid of merit. It is premised on the assumption that the extrajudicial foreclosure and auction sale was patently void and was without basis. On the contrary the appellate court found and so does this Court, that the extrajudicial foreclosure and auction sale was regular and in accordance with law. While it is true that the question of the validity of said mortgage and consequently the extrajudicial foreclosure thereof was raised in a separate proceeding before the trial court the pendency of such separate civil suit can be no obstacle to the issuance of the writ of possession which is a

162

ministerial act of the trial court after a title on the property has been consolidated in the mortgagee. 15 WHEREFORE, petitions in G.R. Nos. 88602 and 89544 are hereby DISMISSED for lack of merit, with costs against petitioner. SO ORDERED. EN BANC G.R. No. L-4373 February 2, 1909

SAMUEL BISCHOFF, plaintiff-appellant, vs. JUAN D. POMAR and THE COMPAIA GENERAL DE TABACOS DE FILIPINAS, defendants-appellees. Espiridion Guanko, Jose M. Arroyo, for appellee. TORRES, J.: Without prejudice to the issuance of a statement of the basis upon which this court affirms the judgment of the lower court of February 28, 1907, appealed from, by virtue whereof it is held that the steam sugar mill fitted with a portable 8-horsepower boiler, with its attachments and a complete tramway with rails and other fittings and fifteen small cars, all of which were at the Hacienda San Jose, should be considered as included in the mortgage executed by Romana Ganzon in favor of Lazaro Mota, which mortgage was afterwards transferred and conveyed by the mortgagor to the Compaia General de Tabacos, we absolve the defendants without special ruling as to costs, and reserve in favor of the plaintiff, Samuel Bischoff, the right of action which he may have to recover from Romana Ganzon the sum paid for that property, and said judgment is hereby affirmed without special ruling as to the costs in this instance. Arellano, C.J., Mapa, Carson, Willard, and Tracey, JJ., concur. BASIS OF THE DECISION. FEBRUARY 6, 1909. TORRES, J.: On the 27th of December, 1905, counsel for Samuel Bischoff filed a complaint, alleging that the latter was the owner of the steam sugar mill fitted with a portable 8-horse-power boiler with its attachments, a complete tramway with rails and other fittings for a distance of not less than 3 kilometers, and fifteen small cars, all of which were at the Hacienda San Jose, of San Carlos, occidental Negros; that the defendant Compaia de Tabacos had asked and obtained from the Court of First Instance, in or about the month of October of the same year, the appointment of a receive for the property of Romana Ganzon, among which property that the described above was included at the instance of the defendant as belonging to the debtor Ganzon; that at the designation of the Compaia de Tabacos Juan Pomar was appointed receiver and upon taking charge of the property of the said Romana Ganzon he did not confine himself thereto, but unlawfully and without any right whatever took possession, as receive, of the property of the plaintiff herein before described; that notwithstanding the repeated demands made by the plaintiff, Bischoff, the latter was unable to secure from the defendants the return of the said property; that they refused to deliver the said property to him and continued to use the same to the prejudice of the plaintiff, whose loss and damages amounted to P30 a day; the plaintiff therefore prayed that judgment be entered in his favor, declaring that the property described in the first paragraph of the complaint belonged to him, and that the said defendants be ordered to pay the said losses and damages with costs. In his written answer, counsel for the Compaia General de Tabacos denied the allegations 1, 4, 6, 7, and 8 of the complaint, and as a defense for appellant.

Credit Transactions Full Text Cases Atty. Adviento

alleged, that under a public instrument executed before the notary Gregorio Yulo, on the 20th of July, 1900, Lazaro Mota y Ayo loaned to Romana Ganzon or Tanson, widow of Vega, the sum of 11,209 pesos, payable at the expiration of two years from the date of the instrument, and as a security for her debt, the said Romana Ganzon mortgaged to her creditor, Mota, the sugar plantation called San Jose, situated in the sitio of Sibungcogon, barrio of San Carlos, in the town of Calatrava, Occidental Negros; that by another instrument executed on October 8, 1900, Lazaro Mota and Romana Ganzon agreed to increase the said mortgage credit by a further sum of 4,177.20 pesos; that this was duly paid to the debtor, whose total indebtedness thus amounted to 15,386.20 pesos, the said mortgage remaining as security for both amounts; that by another instrument executed on September 6, 1902, before the same notary, the loan or debt was further increased by the sum of 6,037.73 pesos, which Mota delivered to Ganzon; this last amount, added to the previous 15,386.20 pesos, makes a total of 21,423.93 pesos, and it was agreed upon between the parties in this last instrument that, if Ganzon was not able to pay the creditor Mota on or before July 20, 1904, the mortgaged hacienda would be disposed of at public auction, together with its buildings, machinery and agricultural implements, and the whole amount of the indebtedness would be collected from the proceeds thereof; that this instrument was entered in the registry of property on October 11, 1902; that by an instrument dated September 30, 1904, Lazaro Mota y Ayo unreservedly transferred the said credit, free of all incumbrance, together with all of the rights, to the Compaia General de Tabacos for the sum of P21,423.93, subrogating to the latter all his rights with respect to the collection of the debt from Ganzon; that by another instrument dated December 10, 1904, Roman Ganzon created a mortgage in favor of the said company on the aforesaid Hacienda of San Jose for all the amounts owed, which amounts are the said P21,423.93 transferred by Mota to the Compaia General de Tabacos, and P31,195.99 plus P422.61 as interest at 10 per cent on Mota's credit, making a grand total of P53,042.53, said instrument being entered in the registry of property; that the aforesaid steam sugar mill and portable 8-horsepower boiler, the tramway, with all its fittings, appurtenances, and rails, and all the cars upon the abovementioned Hacienda of San Jose, are fixtures thereon, and the machinery, vessels, implements, and utensils are necessary for the working of said hacienda and formed an integral part of the same when the said mortgages were executed; that the plaintiff Bischoff was informed and knew of said mortgages prior to making the alleged purchase of the goods mentioned in his complaint; that the property referred to in the complaint, together with the hacienda of San Jose, was mortgaged to the creditor company as security for its loan of P53,042.53; the said mortgage still stands because neither Romana Ganzon nor the plaintiff have paid it; that the credit of the Compaia General de Tabacos, secured by the said mortgages, is anterior and preferent to the purchase alleged by the plaintiff, and, therefore, the defendant prays that judgment be entered in his favor dismissing the complaint; that all the property claimed by the plaintiffs as his own property, be held to be included in the mortgage in favor of the Compaia General de Tabacos, and that the mortgage credit of the said Compaia General de Tabacos be declared as preferred. The other defendant, Juan Pomar, in his answer denied the allegations contained in the complaint, and as a defense set forth that by virtue of an order of the Court of First Instance of Occidental Negros, dated September 27, 1905, in the matter of The Compaia General de Tabacos vs. Romana Ganzon or Tanson, viuda de Vega, the deponent was appointed receiver of the property claimed in the complaint; that both of the petitioner and the Compaia Tabacalera had executed the bonds required by law in the amounts of P12,000 and P6,000, respectively, which bonds were approved on the 31st of October of the same year; that after being duly sworn, he was appointed receiver, assumed the duties of his office, and took charge of the said property with no other interest than the faithful and exact compliance of his duties; for this reason he prayed that the complaint be dismissed with costs. At the trial of the case evidence was adduced by both parties and their exhibits were made of record. On February 28, 1907, the court below rendered judgment, holding that the steam sugar mill and 8-horsepower portable boiler and fittings, the tramway, rails and cars upon the Hacienda of San Jose, should be considered as included in the mortgage executed by Romana Ganzon in favor of Lazaro Mota, which mortgage was transferred to the Compaia General de Tabacos and ratified in favor of the latter by the debtor; the defendants were therefore absolved of the complaint without costs, and such right of action was reserved to Samuel Bischoff as he may be entitled for the return from Romana Ganzon of whatever sum he paid for the said property.

163

From the above judgment the plaintiff appealed and moved that the same be set aside and a new trial granted; his motion was overruled, to which overruling he excepted and presented the corresponding bill of exceptions; the latter was approved by the court below submitted to this court. Supposing that the steam sugar mill and portable boiler, and the tramway with fifteen small wagons, rail, and other fittings, mounted at the Hacienda San Jose and in use thereon, were improvements upon said hacienda, are they to be considered for this sole reason as necessarily included in the mortgage of the said hacienda, even though not specifically described in the instruments as included therein? The plaintiff avers, without proof, that the said articles were excluded from the mortgage of the Hacienda San Jose were they are to be found, because in the instruments wherein the Hacienda San Jose was repeatedly mortgaged, far from it being stated that, by agreement between the contracting parties, the objects claimed the complaint should be understood to be positively excluded, in the successive mortgage deeds executed by Romana Ganzon in favor of Lazaro Mota y Ayo on July 20 and October 8, 1900, and September 6, 1902, Exhibit D, as security for the increasing loans made by the latter, the debtor mortgaged her Hacienda San Jose with the improvements thereon to guarantee the payment of the total sum of 21,423.93 pesos; in the last instrument, as well as in the previous ones, it is stated that the warehouse, farmhouse, furnaces, machinery, and the described land that constitutes the said hacienda shall be liable for the payment of her total indebtedness, the legal interest thereon, and loss and damages and costs in case of judicial proceedings having to be instituted; said instrument, like the previous ones, was recorded in the registry of property, and is should be noted that by express desire of the contracting parties, in the successive documents of indebtedness of 1900, the mortgage of the hacienda with the improvements thereon was maintained, and was afterwards repeated in the last instrument. Owing to the non -payment of the said sum of P21,423.93, notwithstanding the demands made upon and extensions of time granted to the debtor, on September 30, 1904, the creditor, Lazaro Mota, assigned and transferred the said Tabacos by means of a public instrument which was recorded in the registry, and appears as Exhibit B herein. In the private document marked as Exhibit A, dated September 10, 1902, it appears that the Compaia General de Tabacos opened an anual credit of P15,000 under the conditions therein stated, the debtor having offered as security the said hacienda with the cattle, buildings, and two steam engines, and stating in addition, that the said hacienda with its buildings, machinery, and cattle had already been mortgaged by her to Lazaro Mota. Moreover, even in the instrument on the 10th of December, 1904, when Romana Ganzon created a mortgaged in favor of the Compaia General de Tabacos to guarantee her debt of P53,042.53, she designated the said hacienda with all the improvements, buildings, machinery, and carabaos thereon, and in addition declared that the same hacienda and its dependencies were already mortgaged to the said Lazaro Mota. So that in the instruments of mortgage above referred to, three of which are anterior to the sale a retro, effected on the 8th of November, 1904, upon which the plaintiff bases his claim, the improvements on the Hacienda San Jose, among which is the machinery that was already mounted, appear as expressly mortgaged at the time of executing the instrument of mortgage of September 6, 1902, and later on, that of transfer of the mortgage credit on the 30th of September, 1904, to the Compaia General de Tabacos. From none of the said instruments does it appear that the contracting parties had expressly agreed to exclude the said machinery and tramway from the repeated mortgages, of said hacienda, so that no value would be given to the words written therein proving in an unquestionable manner that it was the will of the contracting parties to include the lien all the improvements upon the hacienda, among which was the machinery mounted thereon for the needs of the said hacienda: Article 110 of the Mortgage Law in force reads:

Credit Transactions Full Text Cases Atty. Adviento

A mortgage extends to natural increase, improvements, growing crop, and rents not collected when the obligation falls due, and the value of indemnities allowed or due the owner for insurance on the property mortgaged, or by virtue of condemnation by right of eminent domain. The same precept is repeated in detail and more extensively in the following article 111 of said law. Article 1877 of the Civil Code contains the same precept but treats as greater length than in the preinserted article 110 of the Mortgage Law; it is as follows: A mortgage includes the natural accessions, improvements, growing fruits, and rents not collected when the obligation is due, and the amount of the indemnities granted or due the owner by the underwriters of the property mortgaged or by virtue of the exercise of eminent domain by reason of public utility, with the declarations, amplifications, and limitations established by law, in case the estate continues in the possession of the person who mortgaged it, as well as when it passes into the hands of a third person. As may be seen from the doctrine established by the Supreme Court of Washington in its decision in the matter of The Royal Insurance Company vs. R. Miller, liquidator, and Amadeo (26 Sup. Ct. Rep., 461) the above quoted legal precepts in force in these Islands are in accord with the American laws: 3. Mortgage Right of Mortgagee to Insurance on Harvested Crop. The avails of insurance on sugar and molasses coming into the sugar house on a sugar plantation as the result of the manufacture of a crop growing thereon when the insurance was effected inure to the benefit of the mortgagee in a mortgage of the realty and the fruits thereof if the loss occurred after the execution of the mortgage, under the Porto Rico Mortgage Law of 1880, which subjects to a mortgage of real property the crops growing or harvested when the mortgage fails due, "but not yet removed or warehoused," and the indemnities awarded or due the owner of the realty either for the insurance or for the crops, provided the damage occurred after the creation of the mortgage. 4. Mortgage Right of Mortgage to Sue for Insurance without Exhausting Other Remedies. The mortgage creditor in a mortgage governed by the civil law may sue for the avails of the insurance subject to his mortgage without first exhausting his remedies against other property embraced by the mortgaged. So that even though no mention had been made of said machinery and tramway in the mortgage instrument, the mortgage of the property whereon they are located is understood by law to extend to them and they must be considered as included therein, as well as all other improvements, unless there was an express stipulation between the parties that they should be excluded. Such exclusion, however, certainly does not appear in the record; on the contrary, they are manifestly included in the mortgage. It has already been stated that the machinery in question was already mounted on said property and was in use thereon when the mortgage given to secure the debt of Romana Ganzon to the original creditor, Lazaro Mota was created; but even if these were not so, article 111 of the Mortgage Law, hereinbefore cited, provides that the following shall be considered as mortgaged with the estate, provided they belong to the owner of said estate, although they not be mentioned in the contract: 1. Chattels permanently located in a building, either useful or ornamental, or for the service of some industry even though they were placed there after the creation of the mortgage. It should be noted that the said machinery and tramway were exclusively owned by Romana Ganzon, the owner of the hacienda, and that at the time when the mortgage was made they had not yet been sold a retro to

164

the plaintiff Bischoff; this sale was effected on November 8, 1904, long after the property was mortgaged. Given the rights of dominion possessed by Romana Ganzon over the articles in question it is not possible to deny that she had the right to dispose of them, as she did, by sale under pacto de retro to the plaintiff, but the alienation thereof does not release them from the encumbrance to which they are subjected until the redeemed from the mortgage that weighs upon them, since the right of the creditor limits that the owner of the thing mortgaged, and the purchaser, is necessarily bond to acknowledge and respect the encumbrance to which is subjected the purchased thing and which is at the disposal of the said creditor in order that he, under the terms of the contract, may recover the amount of his credit therefrom. If it be true and inconvertible fact that at the time the plaintiff Bischoff acquired under pacto de retro the machinery and the tramway in question, they were already affected by and included in the mortgaged of the Hacienda San Jose, the placing of the said hacienda, together with all of the property existing thereon in the hands of a receiver at the instance of the creditor, the Compaia General de Tabacos, has not occasioned any damage to the plaintiff, inasmuch as the defendant limited itself to the duty of the plaintiff to respect the encumbrance that burdens of the property acquired by him under these conditions, and therefore, he cannot acquired any right to indemnity for loss and damages, for the reason that he purchased goods that were already liable to the credit of the company that was the creditor of Romana Ganzon and which latter sold them on pacto de retro; he therefore did not obtain possession of the same. For the above considerations, and accepting the conclusion contained in the judgment appealed from so far as they agree with the foregoing, it is our opinion that the same should be affirmed, without any ruling as to the costs of this instance. Arellano, C.J., Mapa, Carson, and Willard, JJ., concur. THIRD DIVISION Spouses RODRIGO PADERES and SONIA PADERES , Petitioners,

- versus -

The Hon. COURT OF APPEALS,[1] Hon. CARLOTA P. VALENZUELA, in her capacity as the Liquidator of Banco Filipino Savings and Mortgage Bank,[2] Respondents.

x---------------------------------------------x G. R. No. 147074

Spouses ISABELO BERGARDO and JUANA HERMINIA BERGARDO, Petitioners,

- versus -

Credit Transactions Full Text Cases Atty. Adviento

The Hon. COURT OF APPEALS,1 Hon. CARLOTA P. VALENZUELA, in her capacity as the Liquidator of Banco Filipino Savings and Mortgage Bank,2 Respondents.

165

On November 7, 1996, copies of the Writ of Possession dated November 5, 1996, together with a notice addressed to MICC 'and/or All persons claiming rights under them to voluntarily vacate the premises within 7 days from receipt thereof, were served on petitioners.[16]

G. R. No. 147075 Promulgated:

Instead of vacating the two lots, however, petitioners filed separate petitions before the Court of Appeals, docketed as C.A. G.R. Numbers 42470 and 42471 which were later consolidated,[17] assailing the validity of the Writ of Possession.

July 15, 2005 On September 20, 2000, the Court of Appeals promulgated its questioned Decision[18] dismissing the consolidated petitions for lack of merit and upholding the validity of the Writ of Possession. xx - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - xx Petitioners' Motion for Reconsideration of the appellate court's decision having been denied by Resolution of February 16, 2001, they jointly come before this Court arguing that: (1) having purchased their respective properties in good faith from MICC, they are third parties whose right thereto are superior to that of Banco Filipino; (2) they are still entitled to redeem the properties and in fact a binding agreement between them and the bank had been reached; (3) their respective houses should not have been included in the auction sale of the mortgaged properties; (4) on the contrary, as builders in good faith, they are entitled to the benefits of Article 448 of the Civil Code; and (5) the writ of possession issued by the RTC in 1996 had already lost its validity and efficacy.

DECISION

CARPIO MORALES, J.:

By their Petition for review on certiorari under Rule 45 of the Rules of Court, petitioners spouses Rodrigo and Sonia Paderes and spouses Isabelo and Juana Bergado seek the reversal of the September 20, 2000 Decision[3] and February 16, 2001 Resolution of the Court of Appeals, which dismissed their original Petition and denied their Motion for Reconsideration, respectively. On September 14, 1982, Manila International Construction Corporation (MICC) executed a real estate mortgage[4] over 21 registered parcels of land including the improvements thereon in favor of Banco Filipino Savings and Mortgage Bank (Banco Filipino) in order to secure a loan of P1,885,000.00. The mortgage was registered with the Registry of Deeds of Pasay City and annotated on the corresponding transfer certificates of title (TCTs) covering the properties on December 17, 1982.[5] The 21 mortgaged properties included two lots, one with an area of 264 square meters, and the other with an area of 263, both located in the then Municipality of Paraaque (now Paraaque City) covered by TCT Nos. 61062[6] and 61078,[7] respectively. Subsequently or in August 1983, MICC sold the lot[8] covered by TCT No. 61078, together with the house[9] thereon, to the petitioners in the first case, the Paderes spouses. And on January 9, 1984, MICC sold the house[10] built on the lot covered by TCT No. 61062 to the petitioners in the second case, the Bergado spouses. Neither sale was registered, however.[11] On January 25, 1985, for failure of MICC to settle its obligations, Banco Filipino filed a verified Petition[12] for the extrajudicial foreclosure of MICC's mortgage. At the auction sale of the foreclosed properties on March 25, 1985, Banco Filipino submitted a bid of P3,092,547.82 and was declared the highest bidder. A Certificate of Sale[13] was issued in its favor which was registered with the Registry of Deeds and annotated on the corresponding TCTs covering the mortgaged properties on July 29, 1985. No redemption of the foreclosed mortgage having been made within the reglementary period, Carlota P. Valenzuela, the then Liquidator of Banco Filipino, filed on October 16, 1987 an ex parte Petition[14] for the issuance of a Writ of Possession of the foreclosed properties with the Regional Trial Court (RTC) of Makati. After hearing, the Petition was granted by Order dated September 8, 1988[15] of Branch 59 of the RTC.

The petition must be denied.

In extra-judicial foreclosures of real estate mortgages, the issuance of a writ of possession, which is an order commanding the sheriff to place a person in possession of the foreclosed property,[19] is governed by Section 7 of Act No. 3135 (an act to regulate the sale of property under special powers inserted in or annexed to real estate mortgages), as amended:

Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.

That petitioners purchased their properties from MICC in good faith is of no moment. The purchases took place after MICC's mortgage to Banco Filipino had been registered in accordance with Article 2125[20] of the Civil Code and the provisions of P.D. 1529 (property registry decree).[21] As such, under Articles 1312[22] and 2126[23] of the Civil Code, a real right

Credit Transactions Full Text Cases Atty. Adviento

or lien in favor of Banco Filipino had already been established, subsisting over the properties until the discharge of the principal obligation, whoever the possessor(s) of the land might be.

166

against the judgment debtor and his successor-in-interest but not against persons whose right of possession is adverse to the latter. The rule was reiterated in Guevara v. Ramos [G.R. No. L-24358, March 31, 1971, 38 SCRA 194]. The rule in Belleza, although relating to the possession of property sold in execution sales under what is now Sec. 35, Rule 39 of the Revised Rules of Court, is also applicable to the possession of property sold at extrajudicial foreclosure sales pursuant to Sec. 6 of Act No. 3135 [see IFC Service Leasing and Acceptance Corp. v. Nera, supra]. Thus, as petitioner Roxas is not a party holding the property adversely to Valentin, being the latter's successor-in-interest, there was no bar to the respondent trial court's issuance of a writ of possession upon private respondent Buan's application. It does not matter that petitioner Roxas was not specifically named in the writ of possession, as he merely stepped into the shoes of Valentin, being the latter's successor-in-interest. On the other hand, petitioner de Guia was occupying the house as Roxas' alleged tenant [Rollo, p. 24]. Moreover, respondent court's decision granting private respondent Buan's petition for the issuance of a writ of possession ordered the Provincial Sheriff of Zambales or any of his deputies to remove Valentin 'or any person claiming interest under him from the property [Rollo, p. 16]. Undeniably, petitioners fell under this category.[27] (Emphasis supplied)

In rejecting a similar argument, this Court, in Philippine National Bank v. Mallorca,[24] ratiocinated:

1. Appellant's stand is that her undivided interest consisting of 20,000 square meters of the mortgaged lot, remained unaffected by the foreclosure and subsequent sale to PNB, and she 'neither secured nor contracted a loan with said bank. What PNB foreclosed, she maintains, 'was that portion belonging to Ruperta Lavilles only, not the part belonging to her.

Appellant's position clashes with precepts well-entrenched in law. By Article 2126 of the Civil Code, a 'mortgage directly and immediately subjects the property on which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. Sale or transfer cannot affect or release the mortgage. A purchaser is necessarily bound to acknowledge and respect the encumbrance to which is subjected the purchased thing and which is at the disposal of the creditor 'in order that he, under the terms of the contract, may recover the amount of his credit therefrom. For, a recorded real estate mortgage is a right in rem, a lien on the property whoever its owner may be. Because the personality of the owner is disregarded; the mortgage subsists notwithstanding changes of ownership; the last transferee is just as much of a debtor as the first one; and this, independent of whether the transferee knows or not the person of the mortgagee. So it is, that a mortgage lien is inseperable from the property mortgaged. All subsequent purchasers thereof must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. For, the mortgage, until discharge, follows the property.[25] (Emphasis and underscoring supplied; italics in the original; citations omitted)

As transferees of mortgagor MICC, petitioners merely stepped into its shoes and are necessarily bound to acknowledge and respect the mortgage it had earlier executed in favor of Banco Filipino.

As for petitioners' argument that they are still entitled to redeem the foreclosed properties, it must be rejected too.

The debtor in extra-judicial foreclosures under Act No. 3135, or his successor-in-interest, has, one year from the date of registration of the Certificate of Sale with the Registry of Deeds, a right to redeem the foreclosed mortgage,[28] hence, petitioners, as MICC's successors-ininterest, had one year from the registration of the Certificate of Sale on July 29, 1985 or until July 29, 1986 for the purpose.

And in Roxas v. Buan[26] this Court held: Petitioners, however, failed to do so. Ownership of the subject properties was thus consolidated in favor of Banco Filipino,[29] and TCT Nos. 112352 (in lieu of TCT No. 61078) and 112353 (in lieu of TCT No. 61062) were issued in its name.

Contending that petitioner Roxas is a party actually holding the property adversely to the debtor, Arcadio Valentin, petitioners argue that under the provisions of Act No. 3135 they cannot be ordered to vacate the property. Hence, the question of whether, under the circumstances, petitioner Roxas indeed is a party actually holding the property adversely to Valentin. It will be recalled that Roxas' possession of the property was premised on its alleged sale to him by Valentin for the amount of P100,000.00. Assuming this to be true, it is readily apparent that Roxas holds title to and possesses the property as Valentin's transferee. Any right he has to the property is necessarily derived from that of Valentin. As transferee, he steps into the latter's shoes. Thus, in the instant case, considering that the property had already been sold at public auction pursuant to an extrajudicial foreclosure, the only interest that may be transferred by Valentin to Roxas is the right to redeem it within the period prescribed by law. Roxas is therefore the successor-in-interest of Valentin, to whom the latter had conveyed his interest in the property for the purpose of redemption [Rule 39, Sec. 29 (a) of the Revised Rules of Court; Magno v. Viola, 61 Phil. 80 (1934); Rosete v. Prov. Sheriff of Zambales, 95 Phil. 560 (1954).] Consequently, Roxas' occupancy of the property cannot be considered adverse to Valentin. Thus, in Belleza v. Zandaga [98 Phil. 702 (1956)], the Court held that where the purchaser in an execution sale has already received the definitive deed of sale, he becomes the owner of the property bought and, as absolute owner, he is entitled to its possession and cannot be excluded therefrom by one who merely claims to be a successor-in-interest of the judgment debtor, unless it is adjudged that the alleged successor has a better right to the property than the purchaser at the execution sale. Stated differently, the purchaser's right of possession is recognized only as

As this Court held in F. David Enterprises v. Insular Bank of Asia and America:[30]

It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the period of one year after the registration of the sale. As such, he is entitled to the possession of the said property and can demand it at any time following the consolidation of ownership in his name and the issuance to him of a new transfer certificate of title. The buyer can in fact demand possession of the land even during the redemption period except that he has to post a bond in accordance with Section 7 of Act No. 3135 as amended. No such bond is required after the redemption period if the property is not redeemed. Possession of the land then becomes an absolute right of the purchaser as confirmed owner. Upon proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the court.[31] (Emphasis supplied)

Petitioners assert, however, that a binding agreement for the repurchase of the subject properties was reached with Banco Filipino as, so they claim, reflected in the following exchange of communications:

Credit Transactions Full Text Cases Atty. Adviento

October 17, 1996

167

We are addressing your goodself [sic] to inform the bank that the spouses Sonia and Rodrigo Paderes are exercising their right of redemption as subrogees of the defunct MICC under special laws.

Mrs. Luz B. Dacasin Asst. Vice-President Real Estate Dept. Banco Filipino Savings and Mortgage Bank 101 Paseo De Roxas cro. [sic] Dela Rosa Sts. Thank you very much. Makati City Very truly yours, Dear Madam: From reliable information, the bank had already made appraisal of the property and from that end, may we be informed [at] the soonest possible time the value of the property to enable the spouses to prepare for such eventuality. And, upon receipt of the said appraisal value we shall immediately inform you [of] our position on the matter.

I am writing to you, on behalf of spouses Sonia and Rodrigo Paderes re: TCT No. 61078 formerly owned by Manila International Construction Corporation (MICC for short) now TCT No. 112352, registered in the name of Banco Filipino Savings and Mortgage Bank in July 30, 1996 at the Register of Deeds of Paraaque, Metro Manila. Incidentally, the property is denominated as Block 48, Lot 5 located at Leon Florentino St., BF Executive , Paraaque, Metro Manila.

[SGD.] LUCIANO D. VALENCIA Counsel for Spouses Paderes JPA Subdivision, City of Muntinlupa[32]

The background facts of TCT No. 61078 are as follows: x x x (Emphasis supplied). In August 1983, the MICC executed a Deed of Absolute Sale of that lot covered by TCT No. 61078 in favor of spouses Sonia and Rodrigo Paderes which was acknowledged before a Notary Public on October 1, 1983. The value of the lot was P115,720.00. In the same year, the parties executed an addendum to the said deed of absolute sale which covered a house valued at P242,874.45. The net package price of the house and lot was fixed at P329,405.75. From this amount, the spouses Sonia and Rodrigo Paderes paid MICC inclusive of equity the amount of P125,437.35 leaving a balance of P212,985.60. The spouses moved in the house in November 1983.

October 25, 1996

Unknown to the spouses, MICC mortgaged TCT No. 61078 in favor of Banco Filipino Savings and Mortgage Bank for P1,885.00 duly inscribed in TCT No. 112352 on December 12, 1982. It was foreclosed by the bank for P3,092,547.82 pursuant to the certificate of sale executed by the sheriff as inscribed on TCT No. 112352 [should be TCT No. 61078] on July 29, 1985 ...

Mr. Luciano D. Valencia Counsel for Sps. Paderes JPA Subdivision, Muntinlupa

Dear Sir: Then came the news that Banco Filipino Savings and Mortgage Bank was under conservatorship by the Board of Liquidators. On the other hand, MICC became bankrupt and closed shop. The spouses were [sic] nowhere to go to then at the time to get the title of the property they purchased from MICC.

This is with regard to your letter dated October 17, 1996 concerning the property formerly owned by Manila International Construction Corporation (MICC) foreclosed by the Bank.

Until, the spouses received a letter dated April 6, 1987 from the Board of Liquidators via Alberto Reyes, Deputy Liquidator, informing the spouses that the property they purchased from MICC was already foreclosed by the bank. The spouses answered the letter and disclaimed any knowledge of the foreclosure. In their answer to the said letter, they emphasized that their unpaid balance with MICC was P188,985.60.

Please inform Sps. Rodrigo and Sonia Paderes to come to the bank to discuss said foreclosed property directly with the bank.

Thank you.

Very truly yours,

Credit Transactions Full Text Cases Atty. Adviento

Counsel for Spouses Paderes [SGD.] LUZ B. DACASIN Assistant Vice-President Real Estate Department[33] x x x (Emphasis supplied). JPA Subdivision, City of Muntinlupa[34]

168

x x x (Emphasis supplied; italics in the original).

November 8, 1996

Mrs. Luz B. Dacasin November 4, 1996 Asst. Vice-President Real Estate Department Mrs. Luz B. Dacasin Asst. Vice-President Real Estate Dept., Banco Filipino Makati City Re: Lot 18, Block 48 Gamboa St. BF Homes, Paraaque, MM (264 SQ.M.) Dear Madam: Occupied by Sps. Isabelo Bergado & Juana Herminia Bergado Thank you very much for your letter dated October 25, 1996, which was received on October 31, 1996, the contents of which had been duly noted. Pursuant thereto I advised my clients ' spouses Rodrigo and Sonia Paderes to see [you]. Banco Filipino Savings & Mortgage Bank Makati City

Lot 5, Block 48, L. Florentino St. BF Homes, Paraaque, MM (263 SQ.M.) Occupied by Sps. Rodrigo Paderes &

With your indulgence, I also advised my other clients ' spouses Isabelo and Juana Herminia Bergado to go along with the spouses Paderes, who are similarly situated with spouses Paderes property.

Sonia Paderes

Dear Madam Asst. Vice-President: Incidentally, on October 28, 1996, I also wrote your goodself another letter at the behest of spouses Isabelo and Juana Herminia Bergado whose property is equally footed with spouses Paderes. Pursuant to our conference this morning November 8, 1996, regarding our desire to redeem the properties above-captioned, which your good office accommodated, and per your advi[c]e, we submit the following facts taken out and our proposals:

It is hoped that, out of that conference per your invitation my clients abovenamed be informed formally the total amounts due the bank as a consequence of the right of redemption extended to them. Of course, whatever appraised value arrived at by the bank on the properties subject of redemption the same shall not be construed as my clients' committed liability.

1. Regarding the lot, you mentioned that, the cost per square meter was P7,500.00. To this price we are no-committal for the said price is high. Although, we are still to have the amount re-negotiated.

Thank you very much. 2. We appreciate very much your having excluded the house built in the said lot for purposes of fixing the redemption price. Very truly yours, 3. Your advi[c]e to subject the properties (house and lot) to a real-estate mortgage with the bank so that the amount to be loaned will be used as payment of the properties to be redeemed is accepted, and we are committed to it. [SGD.] LUCIANO D. VALENCIA

Credit Transactions Full Text Cases Atty. Adviento

Thank you very much

169

A reading of the above-quoted correspondence reveals the absence of both a definite offer and an absolute acceptance of any definite offer by any of the parties.

Very truly yours, The letters dated October 17, 1996 and November 4, 1996, signed by petitioners' counsel, while ostensibly proposing to redeem the foreclosed properties and requesting Banco Filipino to suggest a price for their repurchase, made it clear that any proposal by the bank would be subject to further action on the part of petitioners.

[SGD.] SPS. SONIA & RODRIGO PADERES

[SGD.] SPS. ISABELO & JUANA HERMINIA BERGADO[35] (Emphasis supplied).

The letter dated October 25, 1996 signed by Luz Dacasin, Assistant VicePresident of Banco Filipino, merely invited petitioners to engage in further negotiations and does not contain a recognition of petitioners' claimed right of redemption or a definite offer to sell the subject properties back to them.

Petitioners' assertion does not pass muster.

Petitioners emphasize that in item no. 3 of their letter dated November 8, 1996 they committed to 'subject the properties (house and lot) to a realestate mortgage with the bank so that the amount to be loaned will be used as payment of the properties to be redeemed. It is clear from item no. 1 of the same letter, however, that petitioners did not accept Banco Filipino's valuation of the properties at P7,500.00 per square meter and intended to 'have the amount [renegotiated].

Under Article 1318 of the Civil Code, there are three essential requisites which must concur in order to give rise to a binding contract: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is established. 'Consent is further defined in Article 1319 of the Code as follows:

Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer.

Moreover, while purporting to be a memorandum of the matters taken up in the conference between petitioners and Banco Filipino Vice-President Dacasin, petitioners' letter of November 8, 1996 does not contain the concurrence of Ms. Dacasin or any other authorized agent of Banco Filipino. Where the alleged contract document was signed by only one party and the record shows that the other party did not execute or sign the same, there is no perfected contract.[38]

The Court of Appeals, therefore, committed no error in concluding that nothing concrete came out of the meeting between petitioners and Banco Filipino. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (Emphasis supplied)

By 'offer is meant a unilateral proposition which one party makes to the other for the celebration of the contract. There is an 'offer in the context of Article 1319 only if the contract can come into existence by the mere acceptance of the offeree, without any further act on the part of the offeror. Hence, the 'offer must be definite, complete and intentional.[36]

Respecting petitioners' claim that their houses should have been excluded from the auction sale of the mortgaged properties, it does not lie. The provision of Article 448[39] of the Civil Code, cited by petitioners, which pertain to those who, in good faith, mistakenly build, plant or sow on the land of another, has no application to the case at bar.

Here, the record clearly shows that petitioners purchased their respective houses from MICC, as evidenced by the Addendum to Deed of Sale dated October 1, 1983 and the Deed of Absolute Sale dated January 9, 1984.

With regard to the 'acceptance, a learned authority notes that: Being improvements on the subject properties constructed by mortgagor MICC, there is no question that they were also covered by MICC's real estate mortgage following the terms of its contract with Banco Filipino and Article 2127 of the Civil Code:

To produce a contract, the acceptance must not qualify the terms of the offer. There is no acceptance sufficient to produce consent, when a condition in the offer is removed, or a pure offer is accepted with a condition, or when a term is established, or changed, in the acceptance, or when a simple obligation is converted by the acceptance into an alternative one; in other words, when something is desired which is not exactly what is proposed in the offer. It is necessary that the acceptance be unequivocal and unconditional, and the acceptance and the proposition shall be without any variation whatsoever; and any modification or variation from the terms of the offer annuls the latter and frees the offeror. [37] (Emphasis supplied)

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the

Credit Transactions Full Text Cases Atty. Adviento

estate remains in the possession of the mortgagor, or it passes into the hands of a third person. (Underscoring supplied). xxx

170

The early case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.[40] is illustrative. In that case, this Court held:

In a later case [Sta. Ana v. Menla, 111 Phil. 947 (1961)], the Court also ruled that the provision in the Rules of Court to the effect that judgment may be enforced within five years by motion, and after five years but within ten years by an action (Section 6, Rule 39) refers to civil actions and is not applicable to special proceedings, such as land registration cases. The Court said: "The second assignment of error is as follows:

. . . (1) That a mortgage constituted on a sugar central includes not only the land on which it is built but also the buildings, machinery, and accessories installed at the time the mortgage was constituted as well as all the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof (Bischoff vs. Pomar and Compaia General de Tabacos, 12 Phil. 690); (2) that the notice announcing the sale at public auction of all the properties of a sugar central extends to the machinery and accessories acquired and installed in its mill after the constitution of the mortgage; (3) that the court, that has ordered the placing of the mortgaged properties in the hands of a receiver in a foreclosure suit, has jurisdiction to order the sale at public auction of the said mortgaged properties even before the termination of the receivership; and (4) that the fact that the price at which the mortgaged properties were sold at public auction is inadequate, is not in itself sufficient to justify the annulment of the sale.[41] (Emphasis supplied)

'That the lower court erred in ordering that the decision rendered in this land registration case on November 28, 1931 or twenty six years ago, has not yet become final and unenforceable. We fail to understand the arguments of the appellant in support of the above assignment, except in so far as it supports his theory that after a decision in a land registration case has become final, it may not be enforced after the lapse of a period of 10 years, except by another proceeding to enforce the judgment or decision. Authority for this theory is the provision in the Rules of Court to the effect that judgment may be enforced within 5 years by motion, and after five years but within 10 years, by an action (Sec. 6, Rule 39). This provision of the Rules refers to civil actions and is not applicable to special proceedings, such as a land registration case. This is so because a party in a civil action must immediately enforce a judgment that is secured as against the adverse party, and his failure to act to enforce the same within a reasonable time as provided in the Rules makes the decision unenforceable against the losing party. In special proceedings the purpose is to establish a status, condition or fact; in land registration proceedings, the ownership by a person or a parcel of land is sought to be established. After the ownership has been proved and confirmed by judicial declaration, no further proceeding to enforce said ownership is necessary, except when the adverse or losing party had been in possession of the land and the winning party desires to oust him therefrom.[43] (Emphasis and underscoring supplied)

Petitioners finally proffer that the issuance, on Banco Filipino's mere motion, of the Writ of Possession on November 5, 1996, more than 8 years since the promulgation of the RTC Order granting its petition on September 8, 1988, violated Section 6, Rule 39 of the Rules of Court, viz:

Sec. 6. Execution by motion or by independent action. ' A final and executory judgment or order may be executed on motion within five (5) years from the date of its entry. After the lapse of such time, and before it is barred by the statute of limitations, a judgment may be enforced by action. The revived judgment may also be enforced by motion within five (5) years from the date of its entry and thereafter by action before it is barred by the statute of limitations.

Petitioners have not supplied any cogent reason for this Court to deviate from the foregoing ruling.

Hence, petitioners argue, the writ of possession had lost its validity and efficacy and should therefore be declared null and void.

The established doctrine that the issuance of a writ of possession is a ministerial function whereby the issuing court exercises neither discretion nor judgment bears reiterating. The writ issues as a matter of course upon the filing of the proper motion and, if filed before the lapse of the redemption period, the approval of the corresponding bond.[44] Petitioners, however, are not without remedy. As reflected in the challenged Court of Appeals decision, under Section 8[45] of Act No. 3135, as amended, petitioners, as successors-in-interest of mortgagor MICC, have 30 days from the time Banco Filipino is given possession of the subject properties to question the validity of the auction sale under any of the two grounds therein stated by filing a petition to set aside the same and cancel the writ of possession.

Petitioners' ultimate argument fails too. In Rodil vs. Benedicto,[42] this Court categorically held that the right of the applicant or a subsequent purchaser to request for the issuance of a writ of possession of the land never prescribes:

The respondents claim that the petition for the issuance of a writ of possession was filed out of time, the said petition having been filed more than five years after the issuance of the final decree of registration. In support of their contention, the respondents cite the case of Sorogon vs. Makalintal [80 Phil. 259 (1948)], wherein the following was stated: "It is the law and well settled doctrine in this jurisdiction that a writ of possession must be issued within the same period of time in which a judgment in ordinary civil actions may be summarily executed (section 17, Act 496, as amended), upon the petition of the registered owner or his successors in interest and against all parties who claim a right to or interest in the land registered prior to the registration proceeding."

WHEREFORE, the petition is hereby DENIED.

Costs against petitioners.

SO ORDERED.

The better rule, however, is that enunciated in the case of Manlapas and Tolentino vs. Lorente [48 Phil. 298 (1925)], which has not yet been abandoned, that the right of the applicant or a subsequent purchaser to ask for the issuance of a writ of possession of the land never prescribes. . .

FIRST DIVISION G.R. No. 150097 February 26, 2007

Credit Transactions Full Text Cases Atty. Adviento

DEVELOPMENT BANK OF THE PHILIPPINES, vs. ALEJANDRO and ADELAIDA LICUANAN, Respondents. DECISION CORONA, J.: In this petition for review on certiorari,1 petitioner Development Bank of the Philippines assails the February 9, 2001 decision2 and September 17, 2001 resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 37784. Respondent spouses Alejandro and Adelaida Licuanan were granted a piggery loan in the amount of P4,700 by petitioner, evidenced by a promissory note dated September 20, 1974 and secured by a real estate mortgage4 over a 980-square meter parcel of land with a two-storey building. The loans maturity date was September 23, 1979.5 Petitioner granted respondents an additional loan of P12,000 evidenced by a promissory note dated May 29, 1975 payable on or before the year 1980. This was secured by a real estate mortgage over four parcels of land situated in Pangasinan covered by TCT Nos. 109825, 109762, 109763 and 109764.6 On October 2, 1975, petitioner granted respondent spouses another loan of P22,000 evidenced by a promissory note maturing on October 3, 1985. This was secured by a real estate mortgage executed in favor of petitioner over three parcels of land covered by TCT Nos. 112608, 112607 and 112609, all of the Registry of Deeds of Pangasinan.7 On August 6, 1979, petitioner and respondents restructured the P12,000 loan, extending the maturity date from June 22, 1979 to June 22, 1982. On the same date, respondents executed a promissory note for P12,320.73 and another for P6,519.90.8 On July 6, 1981, petitioner sent a letter by registered mail to respondents informing them that, since the conditions of the mortgage had been breached, petitioner would have the mortgaged properties sold by the sheriff under Act 3135. The total amount due from the three loans had by then ballooned to P75,298.32.9 On July 20, 1981, petitioner filed an application for extrajudicial foreclosure.10 The mortgaged properties were sold in a public auction on December 16, 1981. Petitioner, as the highest bidder, acquired them for a total of P16,340. The certificate of sale was registered on January 25, 1982.11 On February 4, 1983, petitioner consolidated its ownership over the properties. After more than a year or on October 16, 1984, petitioner wrote respondents by registered mail, informing them that the properties (now acquired assets of the bank) would be disposed of by public auction. On November 11, 1984, petitioner published an advertisement stating that on November 14, 1984, the properties would be sold by oral bidding. On this date, however, there were no bidders.12 On November 16, 1984, petitioner sent respondents a letter informing them that the properties could be reacquired by negotiated sale for cash or installment.13 Three days later, however, on November 19, 1984, the properties were sold through negotiated sale to one Emelita A. Peralta. Respondents were informed of the sale by petitioner through a letter dated December 6, 1984. On the same day, petitioner executed a deed of conditional sale in favor of Peralta.14 On December 11, 1984, respondents offered to repurchase the properties from petitioner but they had already been sold to Peralta.15 Respondents then filed a complaint for recovery of real properties and damages on July 18, 1985 in the Regional Trial Court (RTC) of Lingayen, Pangasinan, Branch 39 against petitioner and Peralta. 16 The RTC rendered judgment dated September 17, 1991 in favor of respondents. Petitioner

171

The trial court found that there was no demand for payment prior to the extrajudicial foreclosure. Thus, the foreclosure proceedings were null and void. It ordered Peralta to reconvey the properties to respondents subject to Peraltas right to be paid by respondents the amount of P104,000 in consideration of such reconveyance. It also held that petitioner did not deal fairly with respondents making it liable for nominal and moral damages to the latter. The RTC further ordered petitioner to pay respondents attorneys fees and litigation expenses. On appeal, the CA affirmed the RTC but decreased the amount of nominal damages from P75,000 to P50,000.17 Hence this petition.18 The main issues to be resolved are the following: 1) whether a demand for payment of the loans was made before the mortgage was foreclosed; 2) whether demand is necessary to make respondents guilty of default; 3) whether or not respondents are liable for the deficiency claim of petitioner and 4) whether or not petitioner is liable for damages. The issue of whether demand was made before the foreclosure was effected is essential. If demand was made and duly received by the respondents and the latter still did not pay, then they were already in default and foreclosure was proper. However, if demand was not made, then the loans had not yet become due and demandable. This meant that respondents had not defaulted in their payments and the foreclosure by petitioner was premature. Foreclosure is valid only when the debtor is in default in the payment of his obligation.19 Whether or not demand was made is a question of fact. In petitions for review on certiorari under Rule 45, only questions of law may be raised by the parties and passed upon by this Court.20 Factual findings of the trial court, when adopted and confirmed by the CA, are binding and conclusive on this Court and will generally not be reviewed on appeal.21 Inquiry into the veracity of the CAs factual findings and conclusions is not the function of the Supreme Court for the Court is not a trier of facts.22 Neither is it our function to re-examine and weigh anew the respective evidence of the parties.23 While this Court has recognized several exceptions to this rule,24 none of these exceptions finds application here. Both the CA and RTC found that demand was never made. No compelling reason whatsoever has been shown by petitioner for this Court to review and reverse the trial courts findings and conclusions, as affirmed by the CA. Petitioner asserts that demand was unnecessary because the maturity dates of all loans were specified, i.e., the notes expressly stated the specific dates when the amortizations were to fall due.25 We disagree. Unless demand is proven, one cannot be held in default.26 Petitioners cause of action did not accrue on the maturity dates stated in the promissory notes. It is only when demand to pay is made and subsequently refused that respondents can be considered in default and petitioner obtains the right to file an action to collect the debt or foreclose the mortgage.27 As we held in China Banking Corporation v. Court of Appeals:28 Well-settled is the rule that since a cause of action requires, as essential elements, not only a legal right of the plaintiff and a correlative duty of the defendant but also "an act or omission of the defendant in violation of said

Credit Transactions Full Text Cases Atty. Adviento

legal right," the cause of action does not accrue until the party obligated refuses, expressly or impliedly, to comply with its duty. Otherwise stated, a cause of action has three elements, to wit, (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff. It bears stressing that it is only when the last element occurs that a cause of action arises. Accordingly, a cause of action on a written contract accrues only when an actual breach or violation thereof occurs. Applying the foregoing principle to the instant case, we rule that private respondents cause of action accrued only on July 20, 1995, when its demand for payment of the Home Notes was refused by petitioner. It was only at that time, and not before that, when the written contract was breached and private respondent could properly file an action in court. The cause of action cannot be said to accrue on the uniform maturity date of the Home Notes as petitioner posits because at that point, the third essential element of a cause of action, namely, an act or omission on the part of petitioner violative of the right of private respondent or constituting a breach of the obligation of petitioner to private respondent, had not yet occurred.29 (emphasis supplied) The acceleration clause of the promissory notes stated that "[i]n case of non-payment of this note or any portion of it on demand, when due, on account of this note, the entire obligation shall become due and demandable ."30 Hence, the maturity dates only indicate when payment can be demanded. It is the refusal to pay after demand that gives the creditor a cause of action against the debtor. Since demand, which is necessary to make respondents guilty of default, was never made on respondents, the CA and RTC correctly ruled that the foreclosure was premature and therefore null and void. In arguing that the foreclosure was valid, petitioner also avers that respondents are estopped from questioning the validity of the foreclosure sale since they offered to repurchase the foreclosed properties.31 We are not persuaded. The reason why respondents offered to repurchase the properties was clearly stated in their letter to petitioner: I am very much interested in repurchasing back these properties because they are the only properties which my family have and because our house is located inside this property and for this matter I am willing to pay [for] these properties in cash which I already told the bank when I went there.32 Besides, we have already ruled that an offer to repurchase should not be construed as a waiver of the right to question the sale.33 Instead, it must be taken as an intention to avoid further litigation and thus is in the nature of an offer to compromise.34 By offering to redeem the properties, respondents can attain their ultimate objective: to pay off their debt and regain ownership of their lands.35 Moreover, it was petitioner, in its November 16, 1984 letter, which informed respondents that the properties were available for sale. Respondents merely took up petitioners offer for them to reacquire their properties. Petitioner assigns as error the failure of the CA to rule on its deficiency claim. It alleged that the price the mortgaged property was sold for (P104,000) was less than the amount of respondents indebtedness (P131,642.33), thus it is entitled to claim the difference (P27,642.33) with interest. Respondents cannot be held liable for the deficiency claim. While it is true that in extrajudicial foreclosure of mortgage, the mortgagee has the right to recover the deficiency from the debtor,36 this presupposes that the foreclosure must first be valid.37 The last issue is whether the award of moral and nominal damages, expenses of litigation and attorneys fees is proper. Crucial to the

172

determination of the propriety of the award of damages are the findings of the RTC, which were affirmed by the CA, on the matter of bad faith: Apart from the precipitate foreclosure proceedings, the Court observes that certain acts of [petitioner] were most certainly less than fair and less than honest, which negates the rehabilitation (prior name of the bank) or development aspect or purpose of [petitioner]. These certainly caused serious anxiety and wounded feelings to [respondents]. They are: FIRST. [Petitioner] granted a loan of P4,700.00; then a second loan of P12,000.00 re-structured to P18,840.61; and a third loan of P22,200.00, or a total of P45,740.61 during the period from September 1974 to October 2, 1975. Obviously, these loans were granted because the market value of the collaterals exceeds P100,000.00 and [petitioners] appraisal value is more or less P80,000.00. However, six (6) years later, when the value must have appreciated in terms of pesos, the [petitioner] bidded for a [measly] P16,000.00 and [claimed] a deficiency. That it was [measly] and shocking to the conscience was conclusively proven by the fact that [Peralta] offered and did in fact buy the properties for P104,000.00 barely three (3) years later. To the mind of the Court, the actuations of the bank must have been revolting to [respondents] and to honest men, especially considering that [petitioner] is a government financial institution, capitalized with the money of the people, and created principally "to assist agricultural producers xxx in developing their farms xxx to accelerate national progress", more than to realize profit. SECOND. [Respondents] are simple-minded persons in the country side. It strikes the court as odd and certainly less than candid WHY on AUGUST 6, 1979, [petitioner] restructured the second loan which will mature on May 1980, but did not restructure the first loan which was due to mature on September 23, 1979 or barely one month hence. It appears that the result lulled [respondents] into a false sense of security and a feeling of relief that the entire loan accommodation will mature in 1985. And then like a bolt of lightning from a clear sky, [respondents] were hit with [foreclosure] proceedings, causing them to suffer sleepless nights. THIRD. A letter dated November 16, 1984 was addressed to [respondents] informing them practically that they are given the priority to recover their properties by negotiated sale. And yet before the letter was sent, or on November 14, 1984 the [petitioner] had already negotiated with [Peralta] for the latter to buy the assets for P104,000.00 in installment and as a matter of fact the Contract for Conditional Sale was executed on November 19, 1984 even before the letter was received by [respondents]. [Heart-rending] was the plea of [respondents] which we quote: "I am very much interested in repurchasing back these properties because they are the only properties which my family have and because our house is located inside this property and for this matter I am willing to pay [for] these properties in cash which I already told the bank when I went there." (underscoring supplied) Nevertheless, such supplications fell on deaf ears and did not even merit sympathy from a heartless [petitioner]. At the very least, the letter of 16 November 1984 was a very bad joke gleefully made in bad taste and foisted on the hapless [respondents]. It added insult to injury. And to top it all, [petitioner] even has the temerity to allege in paragraph 2 of its compulsory counterclaim "that as of November 7, 1984 the total obligations of [respondents] on account of their loans with [petitioner] amounted to P131,642.33" and making a deficiency claim of P27,642.33 plus daily interest of P9.61 beginning November 8, 1984 "which [respondents] are allegedly still liable to pay the [petitioner]".1avvphi1.net This is unconscionable.1awphi1.net Certainly, there is abundant evidence that the rights of [respondents] have been violated or invaded with unconcerned ruthlessness by the [petitioner].38

Credit Transactions Full Text Cases Atty. Adviento

Both the RTC and CA found that there was factual basis for the moral damages adjudged against petitioner. They found that petitioner was guilty of bad faith in its actuations against respondents. Again, this is a factual matter binding and conclusive on this Court: It is settled that bad faith must be duly proved and not merely presumed. The existence of bad faith, being a factual question, and the Supreme Court not being a trier of facts, the findings thereon of the trial court as well as of the Court of Appeals shall not be disturbed on appeal and are entitled to great weight and respect. Said findings are final and conclusive upon the Supreme Court except, inter alia, where the findings of the Court of Appeals and the trial court are contrary to each other.39 The lower court also found that respondents property rights were invaded or violated,40 hence the grant of nominal damages was also proper. Respondents are likewise entitled to the award of attorneys fees and expenses of litigation since the premature foreclosure by petitioner compelled them to incur expenses to protect their interest.41 WHEREFORE, we hereby AFFIRM the decision of the Court of Appeals in CA-G.R. CV No. 37784. Costs against petitioner. SO ORDERED. THIRD DIVISION G.R. No. 128567 September 1, 2000

173

respondent sought the foreclosure of four (4) parcels of land mortgaged by petitioner to Intercon Fund Resource, Inc. ("Intercon"). Private respondent instituted Civil Case No. 89-5424 as mortgageeassignee of a loan amounting to P8.5 million obtained by petitioner from Intercon, in whose favor petitioner mortgaged the aforesaid parcels of land as security for the said loan. In its answer below, petitioner questioned the assignment by Intercon of its mortgage right thereover to the private respondent, on the ground that the same was ultra vires. Petitioner also questioned during the trial the correctness of the charges and interest on the mortgage debt in question. On April 30, 1992, the trial court, through the then Judge now Court of Appeals Justice Buenaventura J. Guerrero, came out with its decision "granting herein private respondent SMGI's complaint for judicial foreclosure of mortgage", disposing as follows: "WHEREFORE, judgment is hereby defendant to pay plaintiff the following: rendered ordering

(1) P8,500,000.00 representing the principal of the amount due; (2) P850,000.00 as penalty charges with interest at 6% per annum, until fully paid; (3) 22% per annum interest on the above principal from September 6, 1998, until fully paid; (4) 5% of the sum total of the above amounts, as reasonable attorney's fees; and, (5) Costs. All the above must be paid within a period of not less than 150 days from receipt hereof by the defendant. In default of such payment, the four parcels of land subject matter of the suit including its improvements shall be sold to realize the mortgage debt and costs, in the manner and under the regulations that govern sales of real estate under execution."1 Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal docketed as CA-G.R. CV No. 39243 before the Sixth Division of the appellate court, which dismissed the case on June 29, 1993 on the ground of late payment of docket fees. Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via a petition for certiorari, docketed as G.R. No. 112044, which this court resolved to dismiss on December 13, 1993, on the finding that the Court of Appeals erred not in dismissing the appeal of petitioner. Petitioner's motion for reconsideration of the dismissal of its petition in G.R. No. 112044 was denied with finality in this Court's Resolution promulgated on February 16, 1994. On March 10, 1994, leave to present a second motion for reconsideration in G.R. No. 112044 or to submit the case for hearing by the Court en banc was filed, but to no avail. The Court resolved to deny the same on May 11, 1994. On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044 became final and executory and was entered in the Book of Entries of Judgment. On July 4, 1994, private respondent filed with the trial court of origin a motion for execution of the Decision promulgated on April 30, 1992 in Civil Case No. 89-5424. The said motion was granted on July 15, 1994. Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a Notice of Levy and Execution was issued by the Sheriff

HUERTA ALBA RESORT INC., petitioner, vs. COURT OF APPEALS and SYNDICATED MANAGEMENT GROUP INC., respondents. PURISIMA, J.: Litigation must at some time be terminated, even at the risk of occasional errors. Public policy dictates that once a judgment becomes final, executory and unappealable, the prevailing party should not be denied the fruits of his victory by some subterfuge devised by the losing party. Unjustified delay in the enforcement of a judgment sets at naught the role of courts in disposing justiciable controversies with finality. The Case At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution, dated March 11, 1997, of the Court of Appeals in CA-G.R. No. 38747, which set aside the Order, dated July 21, 1995 and Order, dated September 4, 1997, of the Regional Trial Court of Makati City, in Civil Case No. 89-5424. The aforesaid orders of the trial court held that petitioner had the right to redeem subject pieces of property within the one-year period prescribed by Section 78 of Republic Act No. 337 otherwise known as the General Banking Act. Section 78 of R.A. No. 337 provides that "in case of a foreclosure of a mortgage in favor of a bank, banking or credit institution, whether judicially or extrajudicially, the mortgagor shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property." The Facts The facts that matter are undisputed: In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on October 19, 1989, docketed as Civil Case No. 89-5424 before the Regional Trial Court of Makati City, the herein private

Credit Transactions Full Text Cases Atty. Adviento

concerned, who issued on August 1, 1994 a Notice of Sheriff's Sale for the auction of subject properties on September 6, 1994. On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash and Set Aside Writ of Execution ascribing to it grave abuse of discretion in issuing the questioned Writ of Execution. To support its motion, petitioner invited attention and argued that the records of the case were still with the Court of Appeals and therefore, issuance of the writ of execution was premature since the 150-day period for petitioner to pay the judgment obligation had not yet lapsed and petitioner had not yet defaulted in the payment thereof since no demand for its payment was made by the private respondent. In petitioner's own words, the dispute between the parties was "principally on the issue as to when the 150-day period within which Huerta Alba may exercise its equity of redemption should be counted." In its Order of September 2, 1994, the lower court denied petitioner's urgent motion to quash the writ of execution in Civil Case No. 89-5424, opining that subject judgment had become final and executory and consequently, execution thereof was a matter of right and the issuance of the corresponding writ of execution became its ministerial duty. Challenging the said order granting execution, petitioner filed once more with the Court of Appeals another petition for certiorari and prohibition with preliminary injunction, docketed as C.A.-G.R. SP No. 35086, predicated on the same grounds invoked for its Motion to Quash Writ of Execution. On September 6, 1994, the scheduled auction sale of subject pieces of properties proceeded and the private respondent was declared the highest bidder. Thus, private respondent was awarded subject bidded pieces of property. The covering Certificate of Sale issued in its favor was registered with the Registry of Deeds on October 21, 1994. On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification asking the trial court to "clarify" whether or not the twelve (12) month period of redemption for ordinary execution applied in the case. On September 26, 1994, the trial court ruled that the period of redemption of subject property should be governed by the rule on the sale of judicially foreclosed property under Rule 68 of the Rules of Court. Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994 and Motion to Set Aside Said Order, contending that the said Order materially altered the Decision dated April 30, 1992 "which declared that the satisfaction of the judgment shall be in the manner and under the regulation that govern sale of real estate under execution." Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the issues raised by the petitioner in C.A.-G.R. SP No. 35086, holding that the one hundred-fifty day period within which petitioner may redeem subject properties should be computed from the date petitioner was notified of the Entry of Judgment in G.R. No. 112044; and that the 150-day period within which petitioner may exercise its equity of redemption expired on September 11, 1994. Thus: "Petitioner must have received the resolution of the Supreme Court dated February 16, 1994 denying with finality its motion for reconsideration in G.R. No. 112044 before March 14, 1994, otherwise the Supreme Court would not have made an entry of judgment on March 14, 1994. While, computing the 150-day period. Petitioner may have until September 11, 1994. within which to pay the amounts covered by the judgment, such period has already expired by this time, and therefore, this Court has no more reason to pass upon the parties' opposing contentions, the same having become moot and academic."2 (Emphasis supplied). Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.-G.R. SP No. 35086. In its Motion for Reconsideration dated October 18, 1994, petitioner theorized that the period of one

174

hundred fifty (150) days should not be reckoned with from Entry of Judgment but from receipt on or before July 29, 1994 by the trial court of the records of Civil Case No. 89-5424 from the Court of Appeals. So also, petitioner maintained that it may not be considered in default, even after the expiration of 150 days from July 29, 1994, because prior demand to pay was never made on it by the private respondent. According to petitioner, it was therefore, premature for the trial court to issue a writ of execution to enforce the judgment. The trial court deferred action on the Motion for Confirmation of the Certificate of Sale in view of the pendency of petitioner's Motion for Reconsideration in CA-G.R. SP No. 35086. On December 23, 1994, the Court of Appeals denied petitioner's motion for reconsideration in CA-G.R. SP No. 35086. Absent any further action with respect to the denial of the subject motion for reconsideration, private respondent presented a Second Motion for Confirmation of Certificate of Sale before the trial court. As regards the Decision rendered on September 30, 1994 by the Court of Appeals in CA G.R. SP No. 35086 it became final and executory on January 25, 1995. On February 10, 1995, the lower court confirmed the sale of subject properties to the private respondent. The pertinent Order declared that all pending incidents relating to the Order dated September 26, 1994 had become moot and academic. Conformably, the Transfer Certificates of Title to subject pieces of property were then issued to the private respondent. On February 27, 1995, petitioner filed with the Court of Appeals a Motion for Clarification seeking "clarification" of the date of commencement of the one (1) year period for the redemption of the properties in question. In its Resolution dated March 20, 1995, the Court of Appeals merely noted such Motion for Clarification since its Decision promulgated on September 30, 1994 had already become final and executory; ratiocinating thus: "We view the motion for clarification filed by petitioner, purportedly signed by its proprietor, but which we believe was prepared by a lawyer who wishes to hide under the cloak of anonymity, as a veiled attempt to buy time and to delay further the disposition of this case. Our decision of September 30, 1994 never dealt on the right and period of redemption of petitioner, but was merely circumscribed to the question of whether respondent judge could issue a writ of execution in its Civil Case No. 89-5424 . . . We further ruled that the one-hundred fifty day period within which petitioner may exercise its equity of redemption should be counted, not from the receipt of respondent court of the records of Civil Case No. 89-5424 but from the date petitioner was notified of the entry of judgment made by the appellate court. But we never made any pronouncement on the one-year right of redemption of petitioner because, in the first place, the foreclosure in this case is judicial. and as such the mortgagor has only the equity not the right of redemption . . . While it may be true that under Section 78 of R.A. 337 as amended, otherwise known as the General Banking Act, a mortgagor of a bank, banking or credit institution, whether the foreclosure was done judicially or extrajudicially, has a period of one year from the auction sale within which to redeem the foreclosed property, the question of whether the Syndicated Management Group,. Inc., is a bank or credit institution was never brought before us squarely, and it is indeed odd and strange that petitioner would now sarcastically ask a rhetorical question in its motion for clarification."3 (Emphasis supplied).

Credit Transactions Full Text Cases Atty. Adviento

Indeed, if petitioner did really act in good faith, it would have ventilated before the Court of Appeals in CA-G.R. No. 35086 its pretended right under Section 78 of R.A. No. 337 but it never did so. At the earliest opportunity, when it filed its answer to the complaint for judicial foreclosure, petitioner should have averred in its pleading that it was entitled to the beneficial provisions of Section 78 of R.A. No. 337; but again, petitioner did not make any such allegation in its answer. From the said Resolution, petitioner took no further step such that on March 31, 1995, the private respondent filed a Motion for Issuance of Writ of Possession with the trial court. During the hearing called on April 21, 1995, the counsel of record of petitioner entered appearance and asked for time to interpose opposition to the Motion for Issuance of Writ of Possession. On May 2, 1995, in opposition to private respondent's Motion for Issuance of writ of Possession, petitioner filed a "Motion to Compel Private Respondent to Accept Redemption." It was the first time petitioner ever asserted the right to redeem subject properties under Section 78 of R.A. No. 337, the General Banking Act; theorizing that the original mortgagee, being a credit institution, its assignment of the mortgage credit to petitioner did not remove petitioner from the coverage of Section 78 of R.A. No. 337. Therefore, it should have the right to redeem subject properties within one year from registration of the auction sale, theorized the petitioner which concluded that in view of its "right of redemption," the issuance of the titles over subject parcels of land to the private respondent was irregular and premature. In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon Inoturan, denied private respondent's motion for a writ of possession, opining that Section 78 of the General Banking Act was applicable and therefore, the petitioner had until October 21, 1995 to redeem the said parcels of land, said Order ruled as follows: "It is undisputed that Intercon is a credit institution from which defendant obtained a loan secured with a real estate mortgage over four (4) parcels of land. Assuming that the mortgage debt had not been assigned to plaintiff, there is then no question that defendant would have a right of redemption in case of foreclosure, judicially or extrajudicially, pursuant to the above quoted Section 78 of RA 337, as amended. However, the pivotal issue here is whether or not the defendant lost its right of redemption by virtue of the assignment of its mortgage debt by Intercon to plaintiff, which is not a bank or credit institution. The issue is resolved in the negative. The right of redemption in this case is vested by law and is therefore an absolute privilege which defendant may not lose even though plaintiff-assignee is not a bank or credit institution (Tolentino versus Court of Appeals, 106 SCRA 513). Indeed, a contrary ruling will lead to a possible circumvention of Section 78 because all that may be needed to deprive a defaulting mortgagor of his right of redemption is to assign his mortgage debt from a bank or credit institution to one which is not. Protection of defaulting mortgagors, which is the avowed policy behind the provision, would not be achieved if the ruling were otherwise. Consequently, defendant still possesses its right of redemption which it may exercise up to October 21, 1995 only, which is one year from the date of registration of the certificate of sale of subject properties (GSIS versus Iloilo, 175 SCRA 19, citing Limpin versus IAC, 166 SCRA 87). Since the period to exercise defendant's right of redemption has not yet expired, the cancellation of defendant's transfer certificates of title and the issuance of new ones in lieu thereof in favor of plaintiff are therefore illegal for being premature, thereby necessitating reconveyance (see Sec. 63 (a) PD 1529, as amended). WHEREFORE, the Court hereby rules as follows:

175

(1) The Motion for Issuance of Writ of Possession is hereby denied; (2) Plaintiff is directed to accept the redemption on or before October 21, 1995 in an amount computed according to the terms stated in the Writ of Execution dated July 15, 1994 plus all other related costs and expenses mentioned under Section 78, RA 337, as amended; and (3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to reconvey to the defendant the following titles of the four (4) parcels of land, namely TCT Nos. V-38878, V-38879, V-38880, and V-38881, now in the name of plaintiff, and (b) to register the certificate of sale dated October 7, 1994 and the Order confirming the sale dated February 10, 1995 by a brief memorandum thereof upon the transfer certificates of title to be issued in the name of defendant, pursuant to Sec. 63 (a) PD 1529, as amended. The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is now deemed resolved. SO ORDERED."4 Private respondent interposed a Motion for Reconsideration seeking the reversal of the Order but to no avail. In its Order dated September 4, 1995, the trial court denied the same. To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of September 4, 1995 of the trial court, the private respondent filed with this court a Petition for Certiorari, Prohibition and Mandamus, docketed as G.R. No. 121893, but absent any special and cogent reason shown for entertaining the same, the Court referred the petition to the Court of Appeals, for proper determination. Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due course to the petition and set aside the trial court's Order dated July 21, 1995 and Order dated September 4, 1995. In its Resolution of March 11, 1997, the Court of Appeals denied petitioner's Motion for Reconsideration of the Decision promulgated on November 14, 1996 in CA-G.R. No. 38747. Undaunted, petitioner has come to this Court via the present petition, placing reliance on the assignment of errors, that: I THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE COURT OF APPEALS (TWELFTH DIVISION) IN CA G.R. SP NO. 35086 HAD RESOLVED "WITH FINALITY" THAT PETITIONER HUERTA ALBA HAD NO RIGHT OF REDEMPTION BUT ONLY THE EQUITY OF REDEMPTION. II THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT PETITIONER HUERTA ALBA POSSESSES THE ONE-YEAR RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 (THE GENERAL BANKING ACT). III THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT PRIVATE RESPONDENT SYNDICATED MANAGEMENT GROUP, INC. IS ENTITLED TO THE

Credit Transactions Full Text Cases Atty. Adviento

ISSUANCE OF A WRIT OF POSSESSION OVER THE SUBJECT PROPERTY.5 In its comment on the petition, private respondent countered that: "A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT RESOLVED WITH FINALITY IN C.A.-G.R. SP NO. 35086 THAT PETITIONER ONLY HAD THE RIGHT OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES. B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO EVADE THE FINALITY OF VARIOUS DECISIONS, RESOLUTIONS AND ORDERS WHICH HELD THAT, PETITIONER ONLY POSSESSES THE EQUITY OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES. C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE ISSUE OF ITS ALLEGED 'RIGHT OF REDEMPTION. HDAECI D. IN HOLDING THAT THE PETITIONER HAD THE 'RIGHT OF REDEMPTION' OVER THE SUBJECT PROPERTIES, THE TRIAL COURT MADE A MOCKERY OF THE 'LAW OF THE CASE."'6 And by way of Reply, petitioner argued, that: I. THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY RESOLVED THEREIN WHETHER WITH FINALITY OR OTHERWISE - THE ISSUE OF PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337. II. THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IN TIMELY FASHION, i.e., AFTER CONFIRMATION BY THE COURT OF THE FORECLOSURE SALE, AND WITHIN ONE (1) YEAR FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE. III. THE PRINCIPLE OF 'THE LAW OF THE CASE' HAS ABSOLUTELY NO BEARING HERE: (1) THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT PREDICATED UPON THE FINALITY AND CORRECTNESS OF THE DECISION IN CIVIL CASE NO. 895424. (2) THUS, THE RTC'S ORDER RECOGNIZING PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 37 DOES NOT IN ANY WAY HAVE THE EFFECT OF AMENDING, MODIFYING, OR SETTING ASIDE THE DECISION IN CIVIL CASE NO. 89-5424. The above arguments and counter-arguments advanced relate to the pivotal issue of whether or not the petitioner has the one-year right of

176

redemption of subject properties under Section 78 of Republic Act No. 337 otherwise known as the General Banking Act. The petition is not visited by merit. Petitioner's assertion of right of redemption under Section 78 of Republic Act No. 337 is premised on the submission that the Court of Appeals did not resolve such issue in CA-G.R. SP No. 35086; contending thus: (1) BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 BE INTERPRETED TO MEAN THE COURT OF APPEALS HAD RESOLVED 'WITH FINALITY' THE ISSUE OF WHETHER PETITIONER HUERTA ALBA HAD THE RIGHT OF REDEMPTION WHEN ALL THAT THE RESOLUTION DID WAS TO MERELY NOTE THE MOTION FOR CLARIFICATION. (2) THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL JUDGMENT, ORDER OR DECREE. IT IS NOT EVEN A JUDGMENT OR ORDER TO BEGIN WITH. IT ORDERS NOTHING; IT ADJUDICATES NOTHING. (3) PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 37 WAS NOT AN ISSUE AND WAS NOT IN ISSUE, AND COULD NOT HAVE POSSIBLY BEEN AN ISSUE NOR IN ISSUE, IN CA G.R. SP NO. 35086. (4) THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY BECOME FINAL EVEN BEFORE THE FILING OF THE MOTION FOR CLARIFICATION, THE COURT OF APPEALS NO LONGER HAD ANY JURISDICTION TO ACT OF THE MOTION OR ANY OTHER MATTER IN CA G.R. SP NO. 35086, EXCEPT TO MERELY NOTE THE MOTION. EASIHa II. IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 WAS DIRECTLY RAISED AND JOINED BY THE PARTIES, AND THE SAME DULY RESOLVED BY THE TRIAL COURT. III. THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS MANDATORY AND AUTOMATICALLY EXISTS BY LAW. THE COURTS ARE DUTY-BOUND TO RECOGNIZE SUCH RIGHT. IV. EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER HUERTA ALBA, NOT THE LEAST OF WHICH IS THE WELL-SETTLED POLICY OF THE LAW TO AID RATHER THAN DEFEAT THE RIGHT OF REDEMPTION. V.

Credit Transactions Full Text Cases Atty. Adviento

THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE TRIAL COURT ARE VALID AND PROPER IN ACCORDANCE WITH THE MANDATE OF THE LAW. From the various decisions, resolutions and orders a quo it can be gleaned that what petitioner has been adjudged to have was only the equity of redemption over subject properties. On the distinction between the equity of redemption and right of redemption, the case of Gregorio Y. Limpin vs. Intermediate Appellate Court,7 comes to the fore. Held the Court in the said case: "The equity of redemption is, to be sure, different from and should not be confused with the right of redemption. The right of redemption in relation to a mortgage understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National Bank or a bank or banking institution. Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriff's certificate of foreclosure sale. Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale 'when confirmed be an order of the court. . . . shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.' Such rights exceptionally 'allowed by law' (i.e., even after confirmation by an order of the court) are those granted by the charter of the Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure after confirmation by the court of the foreclosure sale which right may be exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property. But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case, the foreclosure sale, 'when confirmed by an order of the court. . . shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser.' There then exists only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation. Section 2, Rule 68 provides that '. . If upon the trial . . the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and costs, and shall render judgment for the sum so found due and order the same to be paid into court within a period of not less than ninety (90) days from the date of the service of such order, and that in default of such payment the property be sold to realize the mortgage debt and costs.' This is the mortgagor's equity (not right) of redemption which, as above stated, may be exercised by him even beyond the 90-day period 'from the date of service of the order,' and even after the foreclosure sale itself, provided it be before the order of confirmation of the sale. After such order of confirmation, no redemption can be effected any longer."8 (Emphasis supplied)

177

Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337. Petitioner avers in its petition that the Intercom, predecessor in interest of the private respondent, is a credit institution, such that Section 78 of Republic Act No. 337 should apply in this case. Stated differently, it is the submission of petitioner that it should be allowed to redeem subject properties within one year from the date of sale as a result of the foreclosure of the mortgage constituted thereon. The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its asserted right under Section 78 of R.A. No. 337 to redeem subject properties. Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after confirmation by the court of the foreclosure sale, and within one (1) year from the date of registration of the certificate of sale. Indeed, the facts show that it was only on May 2, 1995 when, in opposition to the Motion for Issuance of Writ of Possession, did petitioner file a Motion to Compel Private Respondent to Accept Redemption, invoking for the very first time its alleged right to redeem subject properties under to Section 78 of R.A. No. 337. In light of the aforestated facts, it was too late in the day for petitioner to invoke a right to redeem under Section 78 of R.A. No. 337. Petitioner failed to assert a right to redeem in several crucial stages of the proceedings. For instance, on September 7, 1994, when it filed with the trial court an Ex-part Motion for Clarification, petitioner failed to allege and prove that private respondent's predecessor in interest was a credit institution and therefore, Section 78 of R.A. No. 337 was applicable. Petitioner merely asked the trial court to clarify whether the sale of subject properties was execution sale or judicial foreclosure sale. So also, when it presented before the trial court an Exception to the Order and Motion to Set Aside Said Order dated October 13, 1994, petitioner again was silent on its alleged right under Section 78 of R.A. No. 337, even as it failed to show that private respondent's predecessor in interest is a credit institution. Petitioner just argued that the aforementioned Order materially altered the trial court's Decision of April 30, 1992. Then, too, nothing was heard from petitioner on its alleged right under Section 78 of R.A. No. 337 and of the predecessor in interest of private respondent as a credit institution, when the trial court came out with an order on February 10, 1995, confirming the sale of subject properties in favor of private respondent and declaring that all pending incidents with respect to the Order dated September 26, 1994 had become moot and academic. Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the Court of Appeals, seeking "clarification" of the date of commencement of the one (1) year redemption period for the subject properties, petitioner never intimated any alleged right under Section 78 of R.A. No. 337 nor did it invite attention to its present stance that private respondent's predecessor-in-interest was a credit institution. Consequently, in its Resolution dated March 20, 1995, the Court of Appeals ruled on the said motion thus: "But we never made any pronouncement on the one-year right of redemption of petitioner because, in the first place, the foreclosure in this case is judicial, and as such. the mortgagor has only the equity. not the right of redemption . . . While it may be true that under Section 78 of R.A. 337 as amended, otherwise known as the General Banking Act, a mortgagor of a bank, banking or credit institution, whether the foreclosure was done judicially or extrajudicially, has a period of one year from the auction sale within which to redeem the foreclosed property, the question of whether the Syndicated Management Group. Inc., is bank or credit institution was never brought before us squarely, and it is indeed odd and strange that petitioner would now sarcastically ask a rhetorical question in its motion for clarification."9 (Emphasis supplied).

Credit Transactions Full Text Cases Atty. Adviento

If petitioner were really acting in good faith, it would have ventilated before the Court of Appeals in CA-G.R. No. 35086 its alleged right under Section 78 of R.A. No. 337; but petitioner never did do so. Indeed, at the earliest opportunity, when it submitted its answer to the complaint for judicial foreclosure, petitioner should have alleged that it was entitled to the beneficial provisions of Section 78 of R.A. No. 337 but again, it did not make any allegation in its answer regarding any right thereunder. It bears stressing that the applicability of Section 78 of R.A. No. 337 hinges on the factual question of whether or not private respondent's predecessor in interest was a credit institution. As was held in Limpin, a judicial foreclosure sale, "when confirmed by an order of the court, . . shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law',"10 which confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure after confirmation by the court of the judicial foreclosure sale. Thus, the claim that petitioner is entitled to the beneficial provisions of Section 78 of R.A. No. 337 since private respondent's predecessor-in-interest is a credit institution is in the nature of a compulsory counterclaim which should have been averred in petitioner's answer to the compliant for judicial foreclosure. ". . . A counterclaim is, most broadly, a cause of action existing in favor of the defendant against the plaintiff. More narrowly, it is a claim which. if established, will defeat or in some way qualify a judgment or relief to which plaintiff is otherwise entitled It is sometimes defined as any cause of action arising in contract available against any action also arising in contract and existing at the time of the commencement of such an action. It is frequently defined by the codes as a cause of action arising out of the contract or transaction set forth in the complaint as the foundation of the plaintiff's claim, or connected with the subject of the action."11 (emphasis supplied) "The counterclaim is in itself a distinct and independent cause of action, so that when properly stated as such, the defendant becomes, in respect to the matters stated by him, an actor, and there are two simultaneous actions pending between the same parties, wherein each is at the same time both a plaintiff and a defendant. Counterclaim is an offensive as well as a defensive plea and is not necessarily confined to the justice of the plaintiff's claim. It represents the right of the defendant to have the claims of the parties counterbalanced in whole or in part, and judgment to be entered in excess, if any. A counterclaim stands on the same footing, and is to be tested be the same rules, as if it were an independent action."12 (emphasis supplied) The very purpose of a counterclaim would have been served had petitioner alleged in its answer its purported right under Section 78 of R.A. No. 337: ". . . The rules of counterclaim are designed to enable the disposition of a whole controversy of interested parties' conflicting claims, at one time and in one action, provided all parties' be brought before the court and the matter decided without prejudicing the rights of any party."13 The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No. 337 precludes it from so doing at this late stage case. Estoppel may be successfully invoked if the party fails to raise the question in the early stages of the proceedings.14 Thus, "a party to a case who failed to invoked his claim in the main case, while having the opportunity to do so, will be precluded, subsequently, from invoking his claim, even if it were true, after the decision has become final, otherwise the judgment may be reduced to a mockery and the administration of justice may be placed in disrepute."15 All things viewed in proper perspective, it is decisively clear that the trial court erred in still allowing petitioner to introduce evidence that private respondent's predecessor-in-interest was a credit institution, and to thereafter rule that the petitioner was entitled to avail of the provisions of Section 78 of R.A. No. 337. In effect, the trial court permitted the petitioner to accomplish what the latter failed to do before the Court of Appeals, that

178

is, to invoke its alleged right under Section 78 of R.A. No. 337 although the Court of Appeals in CA-G.R. no. 35086 already found that 'the question of whether the Syndicated Management Council Group, Inc. is a bank or credit institution was never brought before (the Court of Appeals) squarely." The said pronouncement by the Court of Appeals unerringly signified that petitioner did not make a timely assertion of any right under Section 78 of R.A. No. 337 in all the stages of the proceedings below. Verily, the petitioner has only itself to blame for not alleging at the outset that the predecessor-in-interest of the private respondent is a credit institution. Thus, when the trial court, and the Court of Appeals repeatedly passed upon the issue of whether or not petitioner had the right of redemption or equity of redemption over subject properties in the decisions, resolutions and orders, particularly in Civil Case no. 89-5424, CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R. SP No. 38747, it was unmistakable that the petitioner was adjudged to just have the equity of redemption without any qualification whatsoever, that is, without any right of redemption allowed by law. The "law of case" holds that petitioner has the equity of redemption without any qualification. There is, therefore, merit in private respondent's contention that to allow petitioner to belatedly invoke its right under Section 78 of R.A. No. 337 will disturb the "law of the case." However, private respondent's statement of what constitutes the "law of the case" is not entirely accurate. The "law of the case" is not simply that the defendant possesses an equity of redemption. As the Court has stated, the "law of the case" holds that petitioner has the equity of the redemption without any qualification whatsoever, that is, without the right of redemption afforded by Section 78 of R.A. No. 337. Whether or not the "law of the case" is erroneous is immaterial, it still remains the "law of the case". A contrary rule will contradict both the letter and spirit of the rulings of the Court of Appeals in CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-G.R. 38747, which clearly saw through the repeated attempts of petitioner to forestall so simple a matter as making the security given for a just debt to answer for its payment. Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as confirmed by the Order dated February 10, 1995 of the trial court in Civil Case No. 89-5424 operated to divest the rights of all the parties to the action and to vest their rights in private respondent. There then existed only what is known as the equity of redemption, which is simply the right of the petitioner to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment became final. There being an explicit finding on the part of the Court of Appeals in its Decision of September 30, 1994 in CA-G.R. No. 35086 that the herein petitioner failed to exercise its equity of redemption within the prescribed period, redemption can no longer be effected. The confirmation of the sale and the issuance of the transfer certificates of title covering the subject properties to private respondent was then, in order. The trial court therefore, has the ministerial duty to place private respondent in the possession of subject properties. WHEREFORE, the petition is DENIED, and the assailed decision of the Court of Appeals, declaring null and void the Order dated 21 July 1995 and Order dated 4 September 1997 of the Regional Trial Court of Makati City in Civil Case No. 89-5424, AFFIRMED. No pronouncement as to costs. SO ORDERED. SECOND DIVISION [G.R. No. 143896. July 8, 2005] BANCO FILIPINO SSAVINGS AND MORTGAGE BANK, Petitioner, vs. COURT OF APPEALS and SANTIAGO (Isabela) MEMORIAL PARK, INC., Respondents. DECISION

Credit Transactions Full Text Cases Atty. Adviento

AUSTRIA-MARTINEZ, J.: Before us is a petition for review on certiorari filed by petitioner seeking to annul the Decision[1] of the Court of Appeals (CA) dated March 31, 2000 in CA-G.R. CV No. 47044, which reversed the Order of the trial court dated May 10, 1994, dismissing private respondent's complaint for failure to state a cause of action; and the Resolution dated July 3, 2000[2]chanroblesvirtuallawlibrary denying petitioner's motion for reconsideration. On December 20, 1993, private respondent Santiago (Isabela) Memorial Park, Inc. filed a complaint for redemption and specific performance with the Regional Trial Court of Santiago, Isabela, Branch 21, against herein petitioner Banco Filipino Savings & Mortgage Bank, the material and relevant allegations of which read as follows: COMPLAINT Plaintiff, by counsel, to this Honorable Court most respectfully alleges: 1. . 2. . 3. That in February 1981, plaintiff mortgaged the above described property in favor of defendant to secure a loan of P500,000.00 obtained by plaintiff from defendant; 4. That due to the failure of plaintiff to pay the aforementioned loan, defendant foreclosed the mortgage and in consequence thereof Sheriff David R. Medina of this Honorable Court issued a SHERIFF'S CERTIFICATE OF SALE in favor of defendant which is dated October 9, 1990 and which instrument was inscribed at the back of TCT T-128647 of Isabela on January 21, 1991; 5. That in a letter of the President of plaintiff dated August 6, 1991, plaintiff made manifest its interest to exercise its right of redemption and made an offer of P700,000.00 as redemption to defendant through the then Deputy Liquidator, ROSAURO NAPA; this started the negotiation for the redemption of the above described property; 6. That in a letter of the Deputy Liquidator dated January 23, 1992, plaintiff was given up to the end of March 1992 to negotiate and make special arrangement for any satisfactory plan of payment for the redemption; 7. That in a letter of the Deputy Liquidator dated March 12, 1992, plaintiff was directed to remit at least P50,000.00 to defendant which would manifest the interest and willingness of plaintiff to redeem the property, and forthwith on March 24, 1992, plaintiff remitted the sum of P50,000.00 to defendant which was duly receipted by the latter under Official Receipt No. 279968 A dated March 24, 1992; 8. That in a letter of the President of plaintiff dated January 20, 1993, plaintiff amended its first offer and made an offer of P1,000,000.00 as redemption which offer included a plan of payment; 9. That between January 20, 1993 to November 1993, plaintiff exerted earnest efforts in order to finally effect the redemption, but defendant dilly dallied on the matter. 10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice President of defendant, dated November 5, 1993, there is a turn-around by defendant and is now demanding P5,830,000.00 as purchase price of the property, instead of the original agreed redemption; 11. That the delay of the defendant in the finalization of the terms of redemption did not in any manner alter the right of plaintiff to redeem the property from defendant;

179

12. That plaintiff is still in actual possession of the property and intend to remain in actual possession of the property, while defendant was never in actual possession of said property; 13. That plaintiff is ready and willing to pay the redemption money, which is the total bank claim of P925,448.17 plus lawful interest and other allowable expenses incident to the foreclosure proceedings: 14. That the latest actuations of defendant are indicative of the refusal of defendant to allow the exercise of redemption by herein plaintiff, reason for which there is a need for judicial determination of the rights and obligations of the parties to this case; 15. That on account of the unlawful actuations of defendant in refusing the redemption of the property by plaintiff, the latter engaged the services of counsel for a fee of P30,000.00 which defendant should pay to plaintiff. WHEREFORE, it is respectfully prayed of this Honorable Court that, after due hearing, judgment be rendered: a. ordering defendant to accept from plaintiff the lawful redemption amount which shall be determined by this Honorable Court; b. ordering defendant to execute the necessary instrument in order to effect the redemption of the property; c. ordering defendant to pay to plaintiff the sum of P30,000.00 by way of attorney's fees; AND PLAINTIFF PRAYS for further reliefs just and equitable under the premises. Petitioner filed a motion to dismiss on the ground that the complaint does not state a cause of action. It alleges that assuming that the allegations in the complaint are true and correct, still there was no redemption effected within one year from the date of registration of the sheriff's certificate of sale with the Register of Deeds on January 21, 1991, thus private respondent had lost its right to redeem the subject land. Petitioner claimed that the letter cited in paragraph 5 of the complaint was a mere offer to redeem the property which was promptly answered by a letter dated August 28, 1991, which categorically denied private respondent's offer and stated that when it comes to redemption, the basis of payment is the total claim of the bank at the time the property was foreclosed plus 12% thereof and all litigation expenses attached thereto or its present appraised value whichever is higher; that the letter mentioned in paragraph 6 of the complaint dated January 23, 1992 of the Deputy Liquidator was about negotiation and special arrangement and not redemption for at that stage the period of redemption had already expired; that the letter mentioned in paragraph 7 dated March 12, 1992 was of the postponement of the consolidation of the subject property and not of any extension for the period of redemption; that the amount of P50,000.00 remitted by private respondent was in consideration of the postponement of the consolidation of the property in petitioner's name and as manifestation of private respondent's sincerity to repurchase the foreclosed property; that when private respondent remitted P50,000.00, the Deputy Liquidator of petitioner bank requested the legal counsel of petitioner to defer consolidation of property in petitioner's name; that in a letter dated November 5, 1993, petitioner's Senior Vice President declared that the subject property is available for repurchase in the amount of P5,830,600.00 to which private respondent in another letter asked for an extension of 30 days to make an offer. Private respondent filed its opposition to the motion to dismiss alleging among others that the complaint states a cause of action; that the annexes of the motion to dismiss should not be considered in the resolution of such motion. On May 10, 1994, the trial court rendered an Order[3] dismissing the complaint. It ratiocinated that (1) the letter dated August 6, 1991 was an offer to redeem for P700,000.00 without any tender of the money; (2) the reply letter of petitioner dated August 28, 1991 stated that the redemption

Credit Transactions Full Text Cases Atty. Adviento

price is P1,146,837.81 representing the bank's claim of P925,448.17 plus 12% interest and expenses of foreclosure or the appraised value which was P1,457,650.00; (3) the March 12, 1992 letter of the petitioner categorically informed private respondent that the period for redemption had expired, however, the bank agreed to postpone the consolidation of title of the land in the bank's name up to the end of March 1992 if the plaintiff shall deposit P50,000.00 in order to avoid consolidation. Under Section 6 of Act 3135, on redemption of foreclosed property, it is provided that a debtor may redeem the property at anytime within one year from and after the date of sale, i.e., one year period to be reckoned from the registration of the sheriff's certificate of sale. The registration of sheriff's sale was on January 21, 1991 so that the redemption period was until January 21, 1992; that although there was an offer to redeem the property for P700,000.00 on August 6, 1991, which was within the redemption period, there was no tender of redemption price and the P700,000.00 offered was not the correct redemption price. It found that the complaint did not state that private respondent tendered the correct redemption price within the redemption period as required under Section 30 of Rule 39 of the Rules of Court. Private respondent's motion for reconsideration was denied in an Order dated July 25, 1994.[4]chanroblesvirtuallawlibrary Private respondent filed its appeal with the CA which reversed the trial court in its assailed decision, the dispositive portion of which reads: WHEREFORE, the Orders of the respondent trial court dated May 10, 1994, and July 25, 1994 are hereby REVERSED and SET ASIDE. The appellants are declared entitled to repurchase the property in question within THIRTY (30) days from notice hereof which shall be effected upon payment of the repurchase price of P925,448.17 less P50,000.00, which is the deposit on the redemption price, with legal interest from March 24, 1992, the time the contract extending the period of redemption of the property took effect until it is fully paid.[5]chanroblesvirtuallawlibrary The CA ruled that: A perusal of the allegations in the complaint shows that there was sufficient basis to make out a case against Banco Filipino. The complaint alleged that as early as August 6, 1991 or about six (6) months before the statutory period for redemption would expire, the appellant had exerted earnest efforts to effect the redemption of the property in question and that after an agreement had been reached by the parties, with the corresponding deposit on the redemption price had been given by the appellant, the appellee bank led the appellant to believe that the appellee was negotiating with the former in good faith. However, the true intention of the appellee bank was to refuse the redemption of the property as manifested by its act of increasing the amount of the redemption price after the period for redemption had expired and after a deposit on the redemption price had been duly accepted by it as evidenced by a receipt issued by the appellee. Even assuming however that the appellant is now barred from exercising its right of redemption, yet it can still repurchase the property in question based on a new contract entered into between the parties extending the period within which to purchase the property as evidenced by the appellee's Deputy Liquidator Rosauro Napa's letter to Belen Jocson dated March 12, 1992 and the letter addressed to Atty. German M. Balot, Legal Counsel, Banco Filipino ' Santiago, Isabela dated April 7, 1992. ... In the case of Philippine National Bank vs. Court of Appeals, the Court held: Indeed under Article 1482 of the Civil Code, earnest money given in a sale transaction is considered part of the purchase price and proof of the perfection of the sale. This provision, however, gives no more than a disputable presumption that prevails in the absence of contrary or rebuttal evidence. In the instant case, the letter-agreements themselves are the evidence of an intention on the part of herein private parties to enter into negotiations leading to a contract of sale that is mutually acceptable as to absolutely bind them to the performance of their obligations thereunder. The letter-agreements are replete with substantial condition precedents, acceptance of which on the part of private respondent must first be made in order for petitioner to proceed to the next step in the negotiations. . . . [6]

180

In compliance with the CA decision, private respondent on April 27, 2000, made a tender of payment and consignation with the CA in the amount of P1,300,987.96 through a Philippine National Bank check which was duly receipted by the appellate court. [7] Hence, the herein petition for review on certiorari filed by petitioner alleging that the appellate court erred in holding that (1) the allegations in the complaint of private respondent against petitioner are sufficient to constitute a cause of action for redemption and specific performance; and (2) respondent was entitled to repurchase back from petitioner it's foreclosed property for only P925,448.17. The basic issue is whether private respondent's complaint for redemption and specific performance states a cause of action against petitioner. It is a well-settled rule that the existence of a cause of action is determined by the allegations in the complaint.[8] In resolving a motion to dismiss based on the failure to state a cause of action, only the facts alleged in the complaint must be considered. The test is whether the court can render a valid judgment on the complaint based on the facts alleged and the prayer asked for.[9] Indeed, the elementary test for failure to state a cause of action is whether the complaint alleges facts which if true would justify the relief demanded. Only ultimate facts and not legal conclusions or evidentiary facts, which should not be alleged in the complaint in the first place, are considered for purposes of applying the test. [10]chanroblesvirtuallawlibrary Based on the allegations in the complaint, we find that private respondent has no cause of action for redemption against petitioner. Paragraph 4 of the complaint states: 4. That due to the failure of plaintiff to pay the aforementioned loan, defendant foreclosed the mortgage and in consequence thereof Sheriff David R. Medina of this Honorable Court issued a SHERIFF'S CERTIFICATE OF SALE in favor of defendant which is dated October 9, 1990 and which instrument was inscribed at the back of TCT T-128647 of Isabela on January 21, 1991; The sheriff's certificate of sale was registered on January 21, 1991. Section 6 of Act 3135 provides for the requisites for a valid redemption, thus: SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure,[11] insofar as these are not inconsistent with the provisions of this Act. However, considering that petitioner is a banking institution, the determination of the redemption price is governed by Section 78 of the General Banking Act which provides: In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property.

Credit Transactions Full Text Cases Atty. Adviento

Clearly, the right of redemption should be exercised within the specified time limit, which is one year from the date of registration of the certificate of sale. The redemptioner should make an actual tender in good faith of the full amount of the purchase price as provided above, i.e., the amount fixed by the court in the order of execution or the amount due under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property. In case of disagreement over the redemption price, the redemptioner may preserve his right of redemption through judicial action which in every case must be filed within the one-year period of redemption.[12] The filing of the court action to enforce redemption, being equivalent to a formal offer to redeem, would have the effect of preserving his redemptive rights and 'freezing the expiration of the one-year period. In this case, the period of redemption expired on January 21, 1992. The complaint was filed on December 20, 1992. Moreover, while the complaint alleges that private respondent made an offer to redeem the subject property on August 6, 1991, which was within the period of redemption, it is not alleged in the complaint that there was an actual tender of payment of the redemption price as required by the rules. It was alleged that private respondent merely made an offer of P700,000.00 as redemption price, which however, as stated under paragraph 13 of the same complaint, the redemption money was the total bank claim of P925,448.17 plus lawful interest and other allowable expenses incident to the foreclosure proceedings. Thus, the offer was even very much lower than the price paid by petitioner as the highest bidder in the auction sale. In BPI Family Savings Bank, Inc. vs. Veloso,[13] we held: The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his desire to do so. The statement of intention must be accompanied by an actual and simultaneous tender of payment. This constitutes the exercise of the right to repurchase. ... Whether or not respondents were diligent in asserting their willingness to pay is irrelevant. Redemption within the period allowed by law is not a matter of intent but a question of payment or valid tender of the full redemption price within said period. Although the letter dated January 23, 1992 gave private respondent up to the end of March 1992, to negotiate and make special arrangement for a satisfactory plan of payment for the redemption, there was no categorical allegation in the complaint that the original period of redemption had been extended. Assuming arguendo that the period for redemption had been extended, i.e., up to end of March 1992, still private respondent failed to exercise its right within said period. This is shown by private respondent's allegation under paragraph 8 of its complaint that in a letter dated January 20, 1993, private respondent's President amended his first offer and made an offer of P1 million as redemption price. Notably, such offer was made beyond the end of the March 1992 alleged extended period. Thus, private respondent has no more right to seek redemption by force of law which petitioner was bound to accept. We find that the CA also erred in stating that assuming appellant is now barred from exercising its right of redemption, it can still repurchase the property in question based on a new contract entered into between the parties extending the period within which to purchase the property. The allegations in the complaint do not show that a new contract was entered into between the parties. The March 12, 1992 letter referred to by the CA as well as in the complaint only directed private respondent to remit at least P50,000.00 to petitioner as a manifestation of the former's interest and willingness to redeem the property. Thus, the P50,000.00 remitted by private respondent was only the first step to show its interest in redeeming the property. In no way did it establish that a contract of sale,

181

as found by the CA, had been perfected and that the P50,000.00 remitted by private respondent is considered as earnest money. Article 1475 of the Civil Code provides: The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. There was no showing in the complaint that private respondent and petitioner had already agreed on the purchase price of the foreclosed property. In fact, the allegations in paragraphs 8 to 10 of the complaint show otherwise, thus: 8. That in a letter of the President of plaintiff dated January 20, 1993, plaintiff amended its first offer and made an offer of P1,000,000.00 as redemption which offer included a plan of payment; 9. That between January 20, 1993 to November 1993, plaintiff exerted earnest efforts in order to finally effect the redemption, but defendant dilly dallied on the matter. 10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice President of defendant, dated November 5, 1993, there is a turnaround by defendant and is now demanding P5,830,000.00 as purchase price of the property, instead of the original agreed redemption; The complaint does not allege that there was already a meeting of the minds of the parties. Based on the foregoing, there is no basis for the order of the CA to allow private respondent to repurchase the foreclosed property in the amount of P925,448.17 plus the expenses incurred in the sale of the property, including the necessary and useful expenses made on the thing sold. WHEREFORE, the decision of the Court of Appeals dated March 31, 2000 is hereby REVERSED and SET ASIDE. The Order of the Regional Trial Court of Santiago, Isabela, Branch 21, dated May 10, 1994 in Civil Case No. 2036 dismissing the complaint for redemption and specific performance is REINSTATED and AFFIRMED. SO ORDERED. FIRST DIVISION G.R. No. 129644 September 7, 2001

CHINA BANKING CORPORATION, petitioner, vs. HON. COURT OF APPEALS, PAULINO ROXAS CHUA and KIANG MING CHU CHUA, respondents. RESOLUTION YNARES-SANTIAGO, J.: Private respondents Paulino Roxas Chua and Kiang Ming Chu Chua have filed before this Court a Motion for Reconsideration of the Decision dated March 7, 2000, the dispositive portion of which reads: WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals in CA-G.R. CV No. 46735 is REVERSED and SET ASIDE. The permanent injunction enjoining petitioner, the

Credit Transactions Full Text Cases Atty. Adviento

Sheriff of Manila, the Register of Deeds of San Juan, their officers, representatives, agents and persons acting on their behalf from causing the transfer of possession, ownership and title of the property covered by TCT No. 410603 in favor of petitioner is LIFTED. The Assignment of Rights to Redeem dated November 21, 1988 executed by Alfonso Roxas Chua in favor of Paulino Roxas Chua is ordered RESCINDED. The levy on execution dated February 4, 1991 and the Certificate of Sale dated April 30, 1992 in favor of petitioner are DECLARED VALID against the one-half portion of the subject property. SO ORDERED. Briefly, the facts are restated as follows: By virtue of the adverse decision of the Regional Trial Court of Manila, Branch 46, in Civil Case No. 82-14134, entitled "Metropolitan Bank and Trust Company v. Pacific Multi Commercial Corporation and Alfonso Roxas Chua," the residential land covered by Transfer Certificate of Title No. 410603 in the name of spouses Alfonso Roxas Chua and Kiang Ming Chu Chua was levied on execution. Kiang Ming Chu Chua filed an action questioning the levy on the ground that the land was conjugal partnership property. This resulted in a compromise agreement to the effect that the levy shall be valid only to the extent of the share pertaining to Alfonso Roxas Chua. Accordingly, an alias notice of levy was issued affecting the said undivided portion of the property. After the execution sale, a certificate of sale was executed in favor of Metrobank, the judgment creditor, and the same was annotated on TCT No. 410603 on December 22, 1987. Meanwhile, China Banking Corporation filed a complaint for sum of money against Pacific Multi Agro-Industrial Corporation and Alfonso Roxas Chua, docketed as Civil Case No. 85-31257 of the Regional Trial Court of Manila, Branch 29. On November 7, 1985, judgment was rendered ordering defendants to pay Chinabank the aggregate amount of P2,500,000.00 plus interests, penalties and attorneys fees. Defendants appealed to the Court of Appeals but the same was dismissed for failure to file appellants brief. Thus, notice of levy on execution was issued on February 4, 1991 against the right and interest of Alfonso Roxas Chua in TCT No. 410603. The same was later sold at public auction and a certificate of sale was executed in favor of Chinabank, and inscribed on TCT 410603 on May 4, 1992. Previously, however, on November 21, 1988, Alfonso Roxas Chua executed in favor of his son, Paulino Roxas Chua, an "Assignment of Right to Redeem," pertaining to his right to redeem the undivided portion of the land sold to Metrobank. On January 11, 1989, Paulino redeemed the property from Metrobank. On March 14, 1989, the Assignment of Right to Redeem and the redemption by Paulino Roxas Chua of the property from Metrobank were annotated on TCT No. 410603. Private respondents Paulino Roxas Chua and Kiang Ming Chu Chua filed Civil Case No. 63199 before the Regional Trial Court of Pasig, Branch 163, alleging that Paulino has a prior and better right over Chinabank inasmuch as the assignment to him of the right to redeem and his redemption of Alfonsos share in the property were inscribed on the title on an earlier date than the annotation of the notice of levy and certificate of sale in favor of Chinabank. Both the trial court and the Court of Appeals ruled in favor of private respondents and enjoined Chinabank, the Sheriff of Manila and the Register of Deeds of San Juan from causing the transfer of possession, ownership and certificate of title, or otherwise disposing of the property covered by TCT No. 410603 in favor of Chinabank or any other person. On March 7, 2000, we rendered the now assailed Decision reversing the judgment of the Court of Appeals and rescinding the Assignment of Right to Redeem executed by Alfonso in favor of Paulino Roxas Chua, for having been entered into in fraud of creditors. In their Motion for Reconsideration, private respondents raise the following grounds:

182

2.1. The Decision, with due respect, failed to consider vital facts showing that the assignment was indubitably: [a] for valuable consideration; and [b] In good faith; which if considered, would result in a complete reversal. 2.2. The dispositive portion of the decision rescinding the assignment of the right to redeem and validating the levy on execution dated April 30, 1992 in favor of petitioner, with due respect, cannot be enforced because: [a] rescission is late; and [b] levy on execution was on the wrong property. 2.3. The Petition was invalid and failed to vest the Honorable Court with the jurisdiction to review the decision by the Court of Appeals.1 Petitioner filed its Comment,2 and private respondents filed their Reply with leave of Court.3 Under their first ground, private respondents argue that there was sufficient evidence to overthrow the presumption that the assignment of the right to redeem was in fraud of creditors. After a re-examination of the evidence, we agree with private respondents. Indeed, Article 1387 of the Civil Code provides that alienations made by a debtor by gratuitous title are presumed fraudulent when the donor did not reserve sufficient property to pay his outstanding debts. Likewise, alienations by onerous title are presumed fraudulent when made by persons against whom some judgment has been rendered or some writ of attachment has been issued. These, however, are mere presumptions which are in no way conclusive. The presumption of fraud can be overthrown by evidence showing that the conveyance was made in good faith and for a sufficient and valuable consideration.4 In the case at bar, private respondents sufficiently established that the conveyance was made in good faith and for valuable consideration. Paulino maintains that he had no knowledge of his father Alfonsos financial problem with petitioner Chinabank until he was about to cause the cancellation of TCT No. 410603.5 Furthermore, he paid the sum of P100,000.00 to Alfonso for the right to redeem,6 and paid the redemption amount of P1,463,375.39 to Metrobank.7 Expectedly, petitioner refutes these, saying that the amounts paid by Paulino were grossly disproportionate to the right to redeem the property, which is a residential house and lot located in North Greenhills, San Juan, Metro Manila. But as correctly pointed out by private respondents, the amount of P100,000.00 paid by Paulino to Alfonso was not for the property itself, but merely for the right to redeem the same. As a matter of fact, Paulino still had to pay Metrobank the redemption price of P1,463,375.39. Whether or not the latter amount was adequate is beyond the scope of this inquiry. Suffice it to state that Metrobank accepted the same and reconveyed the property to Paulino. Moreover, only Alfonsos conjugal share in the property was affected, and the determination of its value was still subject to liquidation of debts and charges against the conjugal partnership. It must be emphasized that the reconsideration of our earlier Decision on this score does not depart from well-settled doctrines and jurisprudence. Rather, it entailed merely a re-evaluation of the evidence on record. Going now to the second ground, private respondent points out that the dispositive portion of our Decision can not be executed without affecting the rights of Metrobank inasmuch as Alfonsos right of redemption, which he assigned to Paulino, only had a lifetime of twelve months from the date

Credit Transactions Full Text Cases Atty. Adviento

of registration of the certificate of sale in favor of Metrobank. The rescission of the assignment of the right to redeem would have had the effect of allowing the twelve-month period of redemption to lapse, and thus confer on Metrobank the right to consolidate ownership over the property and to the execution of the sheriffs final deed of sale. The certificate of sale in favor of Metrobank was registered on December 22, 1987. Under the 1964 Rules of Court which were in effect at that time, the judgment debtor or redemptioner had the right to redeem the property from Metrobank within twelve months8from the date of registration of the certificate of sale.9 Chinabank was a redemptioner, being then a creditor with a lien by judgment on the property sold, subsequent to the judgment under which the property was sold.10 Upon the expiration of the twelve-month period of redemption and no such redemption is made, the purchaser shall be entitled to the final deed of sale over the property sold on execution. Deed and possession to be given at expiration of redemption period. By whom executed or given. --- If no redemption be made within twelve (12) months after the sale, the purchaser, or his assignee, is entitled to a conveyance and possession of the property; or, if so redeemed, whenever sixty (60) days have elapsed and no other redemption has been made, and notice thereof given, and the time for redemption has expired, the last redemptioner, or his assignee, is entitled to the conveyance and possession; but in all cases the judgment debtor shall have the entire period of twelve (12) months from the date of the sale to redeem the property. The deed shall be executed by the officer making the sale or by his successor in office, and in the latter case shall have the same validity, as though the officer making the sale had continued in office and executed it. Upon the execution and delivery of said deed, the purchaser, or redemptioner, or his assignee, shall be substituted to and acquire all the right, title, interest and claim of the judgment debtor to the property as of the time of the levy, except as against the judgment debtor in possession, in which case the substitution shall be effective as of the date of the deed. The possession of the property shall be given to the purchaser or last redemptioner by the same officer unless a third party is actually holding the property adversely to the judgment debtor.11 Hence, at the time Chinabank levied on Alfonso Roxas Chuas share in TCT No. 410603 on February 4, 1991, the said property was no longer his. The same had already been acquired by Metrobank and, later, redeemed by Paulino Roxas Chua. Even without the assignment of the right to redeem to Paulino, the subject share in the property would pertain to Metrobank. Either way, Chinabank would not stand to acquire the same. It is an established doctrine that a judgment creditor only acquires at an execution sale the identical interest possessed by the judgment debtor in the property which is the subject of the sale. It follows that if, at the time of the execution sale, the judgment debtor had no more right to or interest in the property because he had already sold it to another, then the purchaser acquires nothing.12 Otherwise stated, the rescission of the assignment of the right to redeem would have nullified Paulinos redemption of the property. Thus, Metrobanks inchoate right to the property would have become complete as of December 1988, when the twelve-month redemption period expired without the right of redemption having been exercised. As stated above, Chinabank was a redemptioner that could redeem the property from Metrobank. It was a judgment creditor with a lien on the property sold subsequent to the judgment under which the property was sold. Hence, what Chinabank could have done was to redeem the property ahead of Paulino. In the alternative, it could have moved for the rescission of the assignment to Paulino of the right to redeem, but within the twelve-month period of redemption. Beyond that, there would be no more right of redemption and, thus, no more assignment to rescind. Assuming that there was no valid assignment of the right to redeem, Paulino, as the son and compulsory heir of Alfonso, could still redeem his fathers share in the property from Metrobank. Under Rule 39, Section

183

29 (a) of the 1964 Rules of Court, the judgment debtor or his successor in interest may redeem real property sold on execution. Paulino is included within the term "successor in interest." The "successor-in-interest" contemplated by the above provisions includes a person to whom the judgment debtor has transferred his right of redemption, or one to whom he has conveyed his interests in the property for purposes of redemption, or one who succeeds to his property by operation of law, or a person with a joint interest in the property, or his spouse or heirs. A compulsory heir to the judgment debtor qualifies as a successor-in-interest who can redeem property sold on execution.13 In Director of Lands v. Lagniton,14 we held that "the right of a son, with respect to the property of a father or mother, is an inchoate or contingent interest, because upon the death of the father or the mother or both, he will have a right to inherit said conjugal property. If any holder of an inchoate interest is a successor in interest with right to redeem a property sold on execution, then the son is such a successor in interest, as he has an inchoate right to the property of his father." Thus, Paulinos redemption on January 11, 1989 from Metrobank of the share of Alfonso Roxas Chua in the property covered by TCT No. 410603, with or without the execution of the "Assignment of Right to Redeem", was valid. Necessarily, therefore, the said property no longer belonged to Alfonso Roxas Chua on February 4, 1991, when notice of levy was made against him pursuant to the judgment in Civil Case No. 85-31257 in favor of Chinabank. Petitioner should have levied on other properties of Alfonso Roxas Chua. Finally, it is not disputed that the property covered by TCT No. 410603 is a family home occupied by Kiang Ming Chu Chua and her children. The levy and execution sale in favor of Metrobank affected the undivided share thereof. In the instant petition, Chinabank prays that the assignment to Paulino of Alfonsos right to redeem be declared null and void and that the levy in its favor on the undivided portion of the property be declared valid. Ultimately, petitioner Chinabanks objective is to acquire ownership of the undivided portion of the property. However, the acquisition by Chinabank, or Metrobank for that matter, of the said portion will create an absurd co-ownership between a bank, on the one hand, and a family, on the other hand, of the latters family home. The rigid and technical application of the Rules may be relaxed in order to avoid an absurd result. After all, the Rules of Court mandates that a liberal construction of the Rules be adopted in order to promote their object and to assist the parties in obtaining just, speedy and inexpensive determination of every action and proceeding. This rule of construction is especially useful in the present case where adherence to the letter of the law would result in absurdity and manifest injustice.15 Therefore, we affirm the decision of the Court of Appeals in CA-G.R. CV No. 46735, except the awards of moral and exemplary damages, which are deleted. There is no proof of private respondents physical or mental suffering as a result of petitioners acts. Likewise, petitioner does not appear to have acted in a malevolent or oppressive manner towards private respondents. However, petitioner should be liable for the attorneys fees incurred by private respondents, since its act of resisting private respondents causes of action compelled private respondents to litigate. WHEREFORE, in view of the foregoing, our Decision dated March 7, 2000 is RECONSIDERED AND SET ASIDE. The decision of the Court of Appeals in CA-G.R. CV No. 46735 is AFFIRMED with MODIFICATION. Petitioner is ordered to pay private respondents the sum of P100,000.00 as attorneys fees and to pay the costs. Petitioner China Banking Corporation, the Sheriff of Manila, and the Register of Deeds of San Juan, Metro Manila, their officers, representatives, agents or persons acting on their behalf, are PERMANENTLY ENJOINED from causing the transfer of possession, ownership and title, or from otherwise disposing, of the property covered by Transfer Certificate of Title No. 410603 in favor of petitioner China Banking Corporation or to any other person acting on its behalf. The Register of Deeds of San Juan, Metro Manila is ordered to CANCEL all annotations on TCT No. 410603 in favor of China Banking Corporation pursuant to Civil Case No. 85-31257.1wphi1.nt SO ORDERED.

Credit Transactions Full Text Cases Atty. Adviento

THIRD DIVISION G.R. No. 141974 August 9, 2004

184

petition. From this decision, respondents came to this Court via a petition for review which was, however, denied in a resolution dated January 13, 1992. The resolution affirmed, in effect, petitioners right to the possession of the subject properties. On December 16, 1992, upon motion of respondents and despite the opposition of petitioner, Branch 94 ordered the release of P1,400,000 of the consigned amount to respondents, with the balance of P100,000 to take the place of the injunction bond to answer for whatever damages petitioner might suffer because of the issuance of the preliminary injunction (previously issued and later lifted) in favor of respondents. Finally, on August 18, 1995, after almost a decade of protracted litigation, the trial court rendered a decision declaring the validity of the extra-judicial foreclosure of the mortgaged properties of respondents but allowed the redemption of the same at a redemption price of P2,140,000. BPI elevated the matter to the Court of Appeals which affirmed the trial courts decision, with modification: WHEREFORE, subject to the modification declaring P2,678,639.80 as the redemption price due the appellant, the decision appealed from is hereby AFFIRMED in all other respects.3 Hence, the instant petition based on the following assigned errors: I THE HONORABLE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND THE APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT AND ALLOWED THE RESPONDENTS TO REDEEM THE FORECLOSED PROPERTY. II ASSUMING FOR THE SAKE OF ARGUMENT, BUT WITHOUT ADMITTING, THAT THE HONORABLE COURT OF APPEALS DID NOT ERR IN AFFIRMING THE DECISION OF THE TRIAL COURT, NEVERTHELESS IT DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND THE APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT FIXED THE REDEMPTION PRICE TO BE PAID BY RESPONDENTS TO PETITIONER AT ONLY P2,678,639.80 AND SHALL ONLY EARN 1% PER MONTH UNDER SECTION 28, RULE 39 OF THE 1997 RULES OF CIVIL PROCEDURE. The fact is that, at the time of the foreclosure sale on July 1, 1985, respondent spouses Veloso had already defaulted on their loan to petitioners predecessor-in-interest family bank. In a real estate mortgage, when the principal obligation is not paid when due, the mortgagee has the right to foreclose on the mortgage and to have the property seized and sold, and to apply the proceeds to the obligation.4 foreclosure is proper if the debtor is in default in the payment of his obligation.5 and in this case, the validity of the extra-judicial foreclosure on July 1, 1985 was confirmed by both the trial court and the court of appeals. We find no reason to question it. The sole question therefore that remains to be resolved is: did respondent spouses comply with all the requirements for the redemption of the subject properties? We answer in the negative. The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his desire to do so. The statement of intention must be accompanied by an actual and simultaneous tender of payment. This constitutes the exercise of the right to repurchase.6

BPI FAMILY SAVINGS BANK, INC., petitioner, vs. SPS. JANUARIO ANTONIO VELOSO AND NATIVIDAD VELOSO, respondents.

DECISION

CORONA, J.: Before us is a petition for review of the decision1 dated February 14, 2000 of the Court of Appeals affirming the decision of the Regional Trial Court, Branch 94, Quezon City,2 which upheld the validity of the extra-judicial foreclosure proceedings initiated by Family Bank and Trust Company (Family Bank) on the mortgaged properties of respondent spouses Januario Antonio Veloso and Natividad Veloso but allowed the latter to redeem the same properties. On January 8, 1983, respondent spouses obtained a loan of P1,300,000 from petitioners predecessor-in-interest Family Bank and Trust Company. To secure payment of the loan, respondent spouses executed in favor of the bank a deed of mortgage over three parcels of land, with improvements, registered in their names under TCT Nos. 272227, 272228 and 272229 of the Registry of Deeds of Quezon City. On February 9, 1983, respondents, for value received, executed a promissory note for P1,300,000. Subsequently, however, respondents defaulted in the monthly installments due on their loan. When efforts to update the account failed, Family Bank instituted extra-judicial foreclosure proceedings on the respondents mortgaged properties. On July 1, 1985, the properties were sold at public auction with Family Bank as the highest bidder for P2,782,554.66. On August 5, 1985, Family Bank assigned all its rights and interests in the foreclosed properties to petitioner BPI Family Bank, Inc. (BPI). On August 28, 1985, the sheriffs certificate of sale was registered with the Registry of Deeds of Quezon City. On July 24, 1986, respondents, through counsel, wrote BPI offering to redeem the foreclosed properties for P1,872,935. This was, however, rejected by petitioner. On August 27, 1986, respondents filed in the RTC of Quezon City, Branch 94, a complaint for annulment of foreclosure, with consignation and prayer for damages. On motion of respondents, the trial court, in an order dated August 27, 1986, allowed respondents to deposit with the clerk of court the sum of P1,500,000 representing the redemption price. Thereafter, trial on the merits ensued. Meanwhile, in Branch 76 of the Regional Trial Court of Quezon City, BPI was able to secure a writ of possession over the foreclosed properties. This prompted respondents to file with the Court of Appeals a petition for certiorari with preliminary injunction docketed as CA-G.R. SP No. 22681. On October 8, 1990, the Court of Appeals resolved to grant respondents motion for preliminary mandatory injunction. Eventually, however, in a decision promulgated Court of Appeals, in CA-G.R. SP No. 22681, possession in favor of BPI and accordingly mandatory injunction it had earlier issued, denying on May 31, 1991, the resolved the issue of lifted the preliminary altogether respondents

Credit Transactions Full Text Cases Atty. Adviento

In several cases7 decided by the Court where the right to repurchase was held to have been properly exercised, there was an unequivocal tender of payment for the full amount of the repurchase price. Otherwise, the offer to redeem is ineffectual.8 Bona fide redemption necessarily implies a reasonable and valid tender of the entire repurchase price, otherwise the rule on the redemption period fixed by law can easily be circumvented. As explained by this Court in Basbas vs. Entena:9 x x x the existence of the right of redemption operates to depress the market value of the land until the period expires, and to render that period indefinite by permitting the tenant to file a suit for redemption, with either party unable to foresee when final judgment will terminate the action, would render nugatory the period of two years fixed by the statute for making the redemption and virtually paralyze any efforts of the landowner to realize the value of his land. No buyer can be expected to acquire it without any certainty as to the amount for which it may be redeemed, so that he can recover at least his investment in case of redemption. In the meantime, the landowners needs and obligations cannot be met. It is doubtful if any such result was intended by the statute, absent clear wording to that effect. Consequently, in this case, the offer by respondents on July 24, 1986 to redeem the foreclosed properties for P1,872,935 and the subsequent consignation in court of P1,500,000 on August 27, 1986, while made within the period10 of redemption, was ineffective since the amount offered and actually consigned not only did not include the interest but was in fact also way below the P2,782,554.66 paid by the highest bidder/purchaser of the properties during the auction sale. In Bodiongan vs. Court of Appeals,11 we held: In order to effect a redemption, the judgment debtor must pay the purchaser the redemption price composed of the following: (1) the price which the purchaser paid for the property; (2) interest of 1% per month on the purchase price; (3) the amount of any assessments or taxes which the purchaser may have paid on the property after the purchase; and (4) interest of 1% per month on such assessments and taxes x x x. Furthermore, Article 1616 of the Civil Code of the Philippines provides: The vendor cannot avail himself of the right to repurchase without returning to the vendee the price of the sale x x x. It is not difficult to understand why the redemption price should either be fully offered in legal tender or else validly consigned in court. Only by such means can the auction winner be assured that the offer to redeem is being made in good faith. The sum of P1,400,000 consigned by respondents in Branch 94 was subsequently withdrawn by them, leaving only P100,000 to take the place of the injunction bond. This would have been tantamount to requiring petitioner to accept payment by installments as there would have necessarily been an indefinite extension of the redemption period.12 If a partial payment can bind the winning bidder or purchaser in an auction sale, by what rule can the payment of the balance be determined? Petitioner could not be expected to entertain an offer of redemption without any assurance that respondents could pay the repurchase price immediately. A contrary rule would leave the buyers at foreclosure sales open to harassment by expectedly angry debtors and cause unnecessary prolongation of the redemption period, contrary to the policy of the law. Whether or not respondents were diligent in asserting their willingness to pay is irrelevant. Redemption within the period allowed by law is not a matter of intent but a question of payment or valid tender of the full redemption price within said period. The disposition of the instant case in the trial court unnecessarily dragged for almost a decade. Now, it is on its 18th year and still respondents have not tendered the full redemption price. Nor have they consigned the full

185

amount, if only to prove their willingness and ability to pay. This would have evidenced their good faith. The law granted respondents the right of redemption. But in so granting that right, the law intended that their offer to redeem be valid and effective, accompanied by an actual tender of the redemption price. Fixing a definite term within which the property should be redeemed is meant to avoid prolonged economic uncertainty over the ownership of the thing sold. In the case at bar, the offer was not a legal and effective exercise of the right of redemption contemplated by law, hence, refusal of the offer by petitioner was completely justified. Finally, respondents cannot argue that the law on equity should prevail. Equity applies only in the absence of, and never against, statutory law or judicial rules of procedure.13 WHEREFORE, the appealed decision of the Court of Appeals is hereby REVERSED and SET ASIDE. The complaint filed by respondents, the spouses Veloso, is hereby dismissed. SO ORDERED. EN BANC G.R. No. L-15128 August 25, 1960

CECILIO DIEGO, plaintiff-appellee, vs. SEGUNDO FERNANDO, defendant-appellant. Espinosa Law Offices N.L. Dasig and C.L. Francisco for appellee. REYES, J.B.L., J.: Appeal by defendant Segundo Fernando from the judgment of the Court of First Instance of Nueva Ecija in its Civil Case No. 1694 for foreclosure of mortgage. The appeal was originally brought to the Court of Appeals, but was certified to us by that tribunal because it raises only questions of law. The facts are not disputed. On May 26, 1950, the defendant Segundo Fernando executed a deed of mortgage in favor of plaintiff Cecilio Diego over two parcels of land registered in his name, to secure a loan P2,000, without interest, payable within four years from the date of the mortgage (Exhibit "A"). After the execution of the deed, possession of the mortgaged properties were turned over to the mortagagee. The debtor having failed to pay the loan after four years, the mortagagee Diego made several demands upon him for payment; and as the demands were unheeded, Diego filed this action for foreclosure of mortgage. Defendant Fernando's defense was that the true transaction between him and plaintiff was one of antichresis and not of mortgage; and that as plaintiff had allegedly received a total of 120 cavans of palay from the properties given as security, which, at the rate of P10 a cavan, represented a value of P5,200, his debt had already been paid, with plaintiff still owing him a refund of some P2,720.00. The Court below, however, found that there was nothing in the deed of mortgage Exhibit "A" to show that it was not a true contract of mortgage, and that the fact that possession of the mortgaged properties were turned over to the mortgagee did not alter the transaction; that the parties must have intended that the mortgagee would collect the fruits of the mortgaged properties as interest on his loan, which agreement is not uncommon; and that the evidence showed that plaintiff had already received 55 cavans of palay from the properties during the period of his possession. Whereupon, judgment was rendered for plaintiff in the amount of P2,000, the loan he gave the defendant, with legal interest from the filing of the action until full payment, plus P500 as attorney's fees and the costs; and in case of for appellant.

Credit Transactions Full Text Cases Atty. Adviento

default in payment, for the foreclosure of the mortgage. From this judgment, defendant took the present appeal. The main issue raised is whether the contract between the parties is one of mortgage or of antichresis. Appellant, while admitting that the contract Exhibit "A" shows a deed of mortgage, contends that the admitted fact that the loan was without interest, coupled with the transfer of the possession of the properties mortgaged to the mortgagee, reveals that the true transaction between him and appellee was one of antichresis. As correctly pointed out by appellee and the lower court, however, it is not an essential requisite of a mortgage that possession of the mortgaged premises be retained by the mortagagor (Legaspi and Salcedo vs. Celestial, 66 Phil., 372). To be antichresis, it must be expressly agreed between creditor and debtor that the former, having been given possession of the properties given as security, is to apply their fruits to the payment of the interest, if owing, and thereafter to the principal of his credit (Art. 2132, Civil Code, Barretto vs. Barretto, 37 Phil., 234; Diaz vs. De Mendezona, 48 Phil., 666); so that if a contract of loan with security does not stipulate the payment of interest but provides for the delivery to the creditor by the debtor of the property given as security, in order that the latter may gather its fruits, without stating that said fruits are to be applied to the payment of interest, if any, and afterwards that of the principal, the contract is a mortgage and not antichresis (Legaspi vs. Celestial, supra). The court below, therefore, did not err in holding that the contract Exhibit "A" is a true mortgage and not an antichresis. The above conclusion does not mean, however, that appellee, having received the fruis of the properties mortgaged, will be allowed to approprite them for himself and not be required to account for them to the appellant. For the contract of mortgage Exhibit "A" clearly provides that the loan of P2,000 was "without interest within four (4) years from date of this instrument"; and there being no evidence to show that the parties had intended to supersede such stipulation when the possession of the mortgaged properties were turned over to the appellee by another allowing the latter to collect, the fruits thereof as interest on the loan, the trial court is not authorized to infer from this transfer of possession alone that the loan was to be without interest for four years, and substituted another giving appellee the right to receive the fruits of the mortgaged properties as interests. The true position of appellee herein under his contract with appellant is a "mortgage in possession" as that term is understood in American equity jurisprudence; that is "one who has lawfully acquired actual or constructive possession of the premises mortgaged to him, standing upon his rights as mortgagee and not claiming under another title, for the purpose of enforcing his security upon such property or making its income help to pay his debt" (Diaz vs. De Mendezona, citing 27 Cyc. 1237, 48 Phil., 666). As such mortgagee in possession, his rights and obligations are, as pointed out by this Court in Macapinlac vs. Gutierrez Repide (43 Phil., 770), similar to those of an antichretic creditor: The respective rights and obligations of the parties to a contract of antichresis, under the Civil Code, appear to be similar and in many respects identical with those recognized in the equity jurisprudence of England and America as incident to the position of a mortgagee in possession, in reference to which the following propositions may be taken to be established, namely, that if the mortgagee acquires possession in any lawful manner, he is entitled to retain such possession until the indebtedness is satisfied and the property redeemed; that the non-payment of the debt within the term agreed does not vest the ownership of the property in the creditor; that the general duty of the mortgagee in possession towards the premises is that of the ordinary prudent owner; that the mortgagee must account for the rents and profits of the land, or its value for purposes of use and occupation, any amount thus realized going towards the discharge on the mortgage debt; that if the mortgage remains in possession after the mortgage debt has been satisfied, he becomes a trustee for the mortgagor as to the excess of the rents and profits over such debt; and lastly, that the mortgagor can only enforce his rights to the land by an equitable action for an account and to redeem. (3 Pom. Eq. Jur. secs. 1215-1218) Similarly, in Enriquez vs. National Bank, 55 Phil., 414, we ruled that a creditor with a lien on real property who took possession thereof with the

186

consent of the debtor, held it as an "antichretic creditor with the right to collect the credit with interest from the fruits, returning to the antichretic creditor the balance, if any, after deducting the expenses," because the fact that the debtor consented and asked the creditor to take charge of managing his property "does not entitle the latter to appropriate to itself the fruits thereof unless the former has expressly waived his right thereto." In the present case, the parties having agreed that the loan was to be without interest, and the appellant not having expressly waived his right to the fruits of the properties mortgaged during the time they were in appellee's possession, the latter, like an antichretic creditor, must account for the value of the fruits received by him, and deduct it from the loan obtained by appellant. According to the findings of the trial court, appellee had received a net share of 55 cavans of palay out of the mortgaged properties up to the time he filed the present action; at the rate of P9.00 per cavan (a rate admitted by the parties), the total value of the fruits received by appellee is P495.00. Deducting this amount from the loan of P2,000.00 received by appellant from appellee, the former has only P1,505.00 left to pay the latter. Appellant also claims that the lower court erred in ordering him to pay legal interest on his indebtedness to plaintiff from the filing of the action, since the latter is, up to the present, still in the possession of the properties mortgaged and still enjoying the fruits. The court did not err in so holding, since at the time the action was filed and up to the present, appellant has not discharged his indebtedness to appellee, and the law allows the latter, in the absence of stipulation as to payment of interest, legal interest from the time of the debtor's default (Art. 2209, New Civil Code, Art. 1108, old). However, appellee should be made to account for the fruits he received from the properties mortgaged from the time of the filing of this action until full payment by appellant, which fruits should be deducted from the total amount due him from appellant under this judgment. Wherefore, the judgment of the court below is modified in the sense that the amount of appellee's principal recovery is reduced to P1,505.00, with an obligation on the part of appellee to render an accounting of all the fruits received by him from the properties in question from the time of the filing of this action until full payment, or in case of appellant's failure to pay, until foreclosure of the mortgage thereon, the value of which fruits shall be deducted from the total amount of his recovery. No costs in this instance. Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Concepcion, Barrera and Gutierrez David, JJ., concur. FIRST DIVISION

G.R. No. 103576 August 22, 1996 ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs. HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY, respondents.

VITUG, J.:p Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant petition for review on certiorari. Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate loan of three million pesos

Credit Transactions Full Text Cases Atty. Adviento

(P3,000,000.00). A provision in the chattel mortgage agreement was to this effect (c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null and void. . . . In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after the constitution of this mortgage. 1 In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank additional financial accommodations totalling P2,700,000.00. 2 These borrowings were on due date also fully paid. On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity. 3 Respondent bank thereupon applied for an extra judicial foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage. Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed, "in all respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January 1992. The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss the petition while petitioner corporation filed a compliance and an opposition to private respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but granted a second motion for reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon. 5 Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court prescribing technical and other procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of the Court. These technical and procedural rules, however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for the existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and uphold the paramount and overriding interest of justice.

187

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debt or is secured by the personal commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit upon the essential condition that if the obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, 7 but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character 8 of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void. 9 While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, 10 a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed. A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in good faith 12), the fact, however, that the statute has provided that the parties to the contract must execute an oath that . . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud. 13 makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, 14 Inc., et al., the Court said . . . A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. 15 The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, 16 there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter.

Credit Transactions Full Text Cases Atty. Adviento

We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action taken by respondent bank against it." 17 This prayer is not reflected in its complaint which has merely asked for the amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc. vs. Court of Appeals, 19 we have said: Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life all of which cannot be suffered by respondent bank as an artificial person. 20 While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party in representation of petitioner corporation. Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private respondent's comment on the petition his so-called "One Final Word;" viz: In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be required to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and wellsettled jurisprudence of this Honorable Court; that in the event that its explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices. This is one positive step in ridding our courts of law of incompetent and dishonest magistrates especially members of a superior court of appellate jurisdiction. 21 (Emphasis supplied.) The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs. Villamor; 22 thus: (L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect due to the courts of justice and judicial officers and . . . (to) insist on similar conduct by others." This respectful attitude towards the court is to be observed, "not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme importance." And it is through a scrupulous preference for respectful language that a lawyer best demonstrates his observance of the respect due to the courts and judicial officers . . . 23 The virtues of humility and of respect and concern for others must still live on even in an age of materialism. WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured creditor. No costs. Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts. SO ORDERED. EN BANC [G.R. No. L-8133. May 18, 1956.]

188

MANUEL C. MANARANG and LUCIA D. MANARANG, PetitionersAppellants, vs. MACARIO M. OFILADA, Sheriff of the City of Manila and ERNESTO ESTEBAN, Respondents-Appellees.

DECISION LABRADOR, J.: On September 8, 1951, Petitioner Lucia D. Manarang obtained a loan of P200 from Ernesto Esteban, and to secure its payment she executed a chattel mortgage over a house of mixed materials erected on a lot on Alvarado Street, Manila. As Manarang did not pay the loan as agreed upon, Esteban brought an action against her in the municipal court of Manila for its recovery, alleging that the loan was secured by a chattel mortgage on her property. Judgment having been entered in Plaintiffs favor, execution was issued against the same property mortgaged. Before the property could be sold Manarang offered to pay the sum of P277, which represented the amount of the judgment of P250, the interest thereon, the costs, and the sheriffs fees, but the sheriff refused the tender unless the additional amount of P260 representing the publication of the notice of sale in two newspapers be paid also. So Defendants therein brought this suit to compel the sheriff to accept the amount of P277 as full payment of the judgment and to annul the published notice of sale. It is to be noted that in the complaint filed in the municipal court, a copy of the chattel mortgage is attached and mention made of its registration, and in the prayer request is made that the house mortgaged be sold at public auction to satisfy the debt. It is also important to note that the house mortgaged was levied upon at Plaintiffs request (Exhibit E). On the basis of the above facts counsel for Manarang contended in the court below that the house in question should be considered as personal property and the publication of the notice of its sale at public auction in execution considered unnecessary. The Court of First Instance held that although real property may sometimes be considered as personal property, the sheriff was in duty bound to cause the publication of the notice of its sale in order to make the sale valid or to prevent its being declared void or voidable, and he did not, therefore, err in causing such publication of the notice. So it denied the petition. There cannot be any question that a building of mixed materials may be the subject of a chattel mortgage, in which case it is considered as between the parties as personal property. We held so expressly in the cases of Luna vs. Encarnacion, et al., * 48 Off. Gaz., No. 7, p. 2664; chan roblesvirtualawlibraryStandard Oil Co. of New York vs. Jaranillo, 44 Phil., 630; chan roblesvirtualawlibraryand De Jesus vs. Guan Dee Co., Inc., 72 Phil., 464. The matter depends on the circumstances and the intention of the parties. cralaw The general principle of law is that a building permanently fixed to the freehold becomes a part of it, that prima facie a house is real estate, belonging to the owner of the land on which it stands, even though it was erected against the will of the landowner, or without his consent cralaw . The general rule is otherwise, however, where the improvement is made with the consent of the landowner, and pursuant to an understanding either expressed or implied that it shall remain personal property. Nor does the general rule apply to a building which is wrongfully removed from the land and placed on the land of the person removing it. (42 Am. Jur. 199200.) cralaw Among the principal criteria for determining whether property remains personally or becomes realty are annexation to the soil, either actual or construction, and the intention of the parties cralaw Personal property may retain its character as such where it is so agreed by the parties interested even though annexed to the realty, or where it is affixed in the soil to be used for a particular purpose for a short period and then removed as soon as it has served its purpose cralaw . (Ibid., 209210.) The question now before us, however, is:chanroblesvirtuallawlibrary Does the fact that the parties entering into a contract regarding a house gave said property the consideration of personal property in their contract, bind the sheriff in advertising the propertys sale at public auction as personal property? It is to be remembered that in the case at bar the action was to collect a loan secured by a chattel mortgage on the house. It is also to be

Credit Transactions Full Text Cases Atty. Adviento

remembered that in practice it is the judgment creditor who points out to the sheriff the properties that the sheriff is to levy upon in execution, and the judgment creditor in the case at bar is the party in whose favor the owner of the house and conveyed it by way of chattel mortgage and, therefore, knew its consideration as personal property. These considerations notwithstanding, we hold that the rules on execution do not allow, and we should not interpret them in such a way as to allow, the special consideration that parties to a contract may have desired to impart to real estate, for example, as personal property, when they are not ordinarily so. Sales on execution affect the public and third persons. The regulation governing sales on execution are for public officials to follow. The form of proceedings prescribed for each kind of property is suited to its character, not to the character which the parties have given to it or desire to give it. When the rules speak of personal property, property which is ordinarily so considered is meant; chan roblesvirtualawlibraryand when real property is spoken of, it means property which is generally known as real property. The regulations were never intended to suit the consideration that parties, may have privately given to the property levied upon. Enforcement of regulations would be difficult were the convenience or agreement of private parties to determine or govern the nature of the proceedings. We, therefore, hold that the mere fact that a house was the subject of a chattel mortgage and was considered as personal property by the parties does not make said house personal property for purposes of the notice to be given for its sale at public auction. This ruling is demanded by the need for a definite, orderly and well- defined regulation for official and public guidance and which would prevent confusion and misunderstanding. We, therefore, declare that the house of mixed materials levied upon on execution, although subject of a contract of chattel mortgage between the owner and a third person, is real property within the purview of Rule 39, section 16, of the Rules of Court as it has become a permanent fixture on the land, which is real property. (42 Am. Jur. 199-200; chan roblesvirtualawlibraryLeung Yee vs. Strong Machinery Co., 37 Phil., 644; chan roblesvirtualawlibraryRepublic vs. Ceniza, et al., 90 Phil., 544; chan roblesvirtualawlibraryLadera, et al. vs. Hodges, et al., [C. A], 48 Off. Gaz., 5374.). The judgment appealed from is hereby affirmed, with costs. SO ORDERED. Paras, C.J., Bengzon, Padilla., Montemayor, Reyes, A., Jugo, Bautista Angelo, Concepcion, Reyes, J.B.L. and Endencia, JJ., concur. EN BANC

189

WHEREFORE, the court hereby renders judgment in favor of the plaintiffs and against the defendants, ordering the latter to pay jointly and severally the former a monthly rent of P200.00 on the house, subject-matter of this action, from March 27, 1956, to January 14, 1967, with interest at the legal rate from April 18, 1956, the filing of the complaint, until fully paid, plus attorney's fees in the sum of P300.00 and to pay the costs. It appears on the records that on 1 September 1955 defendantsappellants executed a chattel mortgage in favor of plaintiffs-appellees over their house of strong materials located at No. 550 Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B, Block No. 2554, which were being rented from Madrigal & Company, Inc. The mortgage was registered in the Registry of Deeds of Manila on 2 September 1955. The herein mortgage was executed to guarantee a loan of P4,800.00 received from plaintiffs-appellees, payable within one year at 12% per annum. The mode of payment was P150.00 monthly, starting September, 1955, up to July 1956, and the lump sum of P3,150 was payable on or before August, 1956. It was also agreed that default in the payment of any of the amortizations, would cause the remaining unpaid balance to becomeimmediately due and Payable and the Chattel Mortgage will be enforceable in accordance with the provisions of Special Act No. 3135, and for this purpose, the Sheriff of the City of Manila or any of his deputies is hereby empowered and authorized to sell all the Mortgagor's property after the necessary publication in order to settle the financial debts of P4,800.00, plus 12% yearly interest, and attorney's fees... 2 When defendants-appellants defaulted in paying, the mortgage was extrajudicially foreclosed, and on 27 March 1956, the house was sold at public auction pursuant to the said contract. As highest bidder, plaintiffsappellees were issued the corresponding certificate of sale. 3 Thereafter, on 18 April 1956, plaintiffs-appellant commenced Civil Case No. 43073 in the municipal court of Manila, praying, among other things, that the house be vacated and its possession surrendered to them, and for defendantsappellants to pay rent of P200.00 monthly from 27 March 1956 up to the time the possession is surrendered. 4 On 21 September 1956, the municipal court rendered its decision ... ordering the defendants to vacate the premises described in the complaint; ordering further to pay monthly the amount of P200.00 from March 27, 1956, until such (time that) the premises is (sic) completely vacated; plus attorney's fees of P100.00 and the costs of the suit. 5 Defendants-appellants, in their answers in both the municipal court and court a quo impugned the legality of the chattel mortgage, claiming that they are still the owners of the house; but they waived the right to introduce evidence, oral or documentary. Instead, they relied on their memoranda in support of their motion to dismiss, predicated mainly on the grounds that: (a) the municipal court did not have jurisdiction to try and decide the case because (1) the issue involved, is ownership, and (2) there was no allegation of prior possession; and (b) failure to prove prior demand pursuant to Section 2, Rule 72, of the Rules of Court. 6 During the pendency of the appeal to the Court of First Instance, defendants-appellants failed to deposit the rent for November, 1956 within the first 10 days of December, 1956 as ordered in the decision of the municipal court. As a result, the court granted plaintiffs-appellees' motion for execution, and it was actually issued on 24 January 1957. However, the judgment regarding the surrender of possession to plaintiffs-appellees could not be executed because the subject house had been already demolished on 14 January 1957 pursuant to the order of the court in a separate civil case (No. 25816) for ejectment against the present defendants for non-payment of rentals on the land on which the house was constructed.

G.R. No. L-30173 September 30, 1971 GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffsappellees, vs. ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants. Castillo & Suck for plaintiffs-appellees. Jose Q. Calingo for defendants-appellants.

REYES, J.B.L., J.: Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824R) for the reason that only questions of law are involved. This case was originally commenced by defendants-appellants in the municipal court of Manila in Civil Case No. 43073, for ejectment. Having lost therein, defendants-appellants appealed to the court a quo (Civil Case No. 30993) which also rendered a decision against them, the dispositive portion of which follows:

Credit Transactions Full Text Cases Atty. Adviento

The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond and withdrawal of deposited rentals was denied for the reason that the liability therefor was disclaimed and was still being litigated, and under Section 8, Rule 72, rentals deposited had to be held until final disposition of the appeal. 7 On 7 October 1957, the appellate court of First Instance rendered its decision, the dispositive portion of which is quoted earlier. The said decision was appealed by defendants to the Court of Appeals which, in turn, certified the appeal to this Court. Plaintiffs-appellees failed to file a brief and this appeal was submitted for decision without it. Defendants-appellants submitted numerous assignments of error which can be condensed into two questions, namely: . (a) Whether the municipal court from which the case originated had jurisdiction to adjudicate the same; (b) Whether the defendants are, under the law, legally bound to pay rentals to the plaintiffs during the period of one (1) year provided by law for the redemption of the extrajudicially foreclosed house. We will consider these questions seriatim. (a) Defendants-appellants mortgagors question the jurisdiction of the municipal court from which the case originated, and consequently, the appellate jurisdiction of the Court of First Instance a quo, on the theory that the chattel mortgage is void ab initio; whence it would follow that the extrajudicial foreclosure, and necessarily the consequent auction sale, are also void. Thus, the ownership of the house still remained with defendantsappellants who are entitled to possession and not plaintiffs-appellees. Therefore, it is argued by defendants-appellants, the issue of ownership will have to be adjudicated first in order to determine possession. lt is contended further that ownership being in issue, it is the Court of First Instance which has jurisdiction and not the municipal court. Defendants-appellants predicate their theory of nullity of the chattel mortgage on two grounds, which are: (a) that, their signatures on the chattel mortgage were obtained through fraud, deceit, or trickery; and (b) that the subject matter of the mortgage is a house of strong materials, and, being an immovable, it can only be the subject of a real estate mortgage and not a chattel mortgage. On the charge of fraud, deceit or trickery, the Court of First Instance found defendants-appellants' contentions as not supported by evidence and accordingly dismissed the charge, 8 confirming the earlier finding of the municipal court that "the defense of ownership as well as the allegations of fraud and deceit ... are mere allegations." 9 It has been held in Supia and Batiaco vs. Quintero and Ayala 10 that "the answer is a mere statement of the facts which the party filing it expects to prove, but it is not evidence; 11 and further, that when the question to be determined is one of title, the Court is given the authority to proceed with the hearing of the cause until this fact is clearly established. In the case of Sy vs. Dalman, 12 wherein the defendant was also a successful bidder in an auction sale, it was likewise held by this Court that in detainer cases the aim of ownership "is a matter of defense and raises an issue of fact which should be determined from the evidence at the trial." What determines jurisdiction are the allegations or averments in the complaint and the relief asked for. 13 Moreover, even granting that the charge is true, fraud or deceit does not render a contract void ab initio, and can only be a ground for rendering the contract voidable or annullable pursuant to Article 1390 of the New Civil Code, by a proper action in court. 14 There is nothing on record to show that the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. Hence, defendants-appellants' claim of ownership on the basis of a voidable contract which has not been voided fails.

190

It is claimed in the alternative by defendants-appellants that even if there was no fraud, deceit or trickery, the chattel mortgage was still null and void ab initio because only personal properties can be subject of a chattel mortgage. The rule about the status of buildings as immovable property is stated in Lopez vs. Orosa, Jr. and Plaza Theatre Inc., 15 cited in Associated Insurance Surety Co., Inc. vs. Iya, et al. 16 to the effect that ... it is obvious that the inclusion of the building, separate and distinct from the land, in the enumeration of what may constitute real properties (art. 415, New Civil Code) could only mean one thing that a building is by itself an immovable property irrespective of whether or not said structure and the land on which it is adhered to belong to the same owner. Certain deviations, however, have been allowed for various reasons. In the case of Manarang and Manarang vs. Ofilada, 17 this Court stated that "it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property", citing Standard Oil Company of New York vs. Jaramillo. 18 In the latter case, the mortgagor conveyed and transferred to the mortgagee by way of mortgage "the following described personal property." 19 The "personal property" consisted of leasehold rights and a building. Again, in the case of Luna vs. Encarnacion, 20 the subject of the contract designated as Chattel Mortgage was a house of mixed materials, and this Court hold therein that it was a valid Chattel mortgage because it was so expressly designated and specifically that the property given as security "is a house of mixed materials, which by its very nature is considered personal property." In the later case of Navarro vs. Pineda, 21 this Court stated that The view that parties to a deed of chattel mortgage may agree to consider a house as personal property for the purposes of said contract, "is good only insofar as the contracting parties are concerned. It is based, partly, upon the principle of estoppel" (Evangelista vs. Alto Surety, No. L-11139, 23 April 1958). In a case, a mortgaged house built on a rented land was held to be a personal property, not only because the deed of mortgage considered it as such, but also because it did not form part of the land (Evangelists vs. Abad, [CA]; 36 O.G. 2913), for it is now settled that an object placed on land by one who had only a temporary right to the same, such as the lessee or usufructuary, does not become immobilized by attachment (Valdez vs. Central Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. vs. Castillo, et al., 61 Phil. 709). Hence, if a house belonging to a person stands on a rented land belonging to another person, it may be mortgaged as a personal property as so stipulated in the document of mortgage. (Evangelista vs. Abad, Supra.) It should be noted, however that the principle is predicated on statements by the owner declaring his house to be a chattel, a conduct that may conceivably estop him from subsequently claiming otherwise. (Ladera vs. C.N. Hodges, [CA] 48 O.G. 5374): 22 In the contract now before Us, the house on rented land is not only expressly designated as Chattel Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLS and TRANSFERS by way of Chattel Mortgage 23 the property together with its leasehold rights over the lot on which it is constructed and participation ..." 24 Although there is no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property by way of chattel mortgage defendants-appellants could only have meant to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which defendatsappellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personalty. Finally unlike in the Iya cases, Lopez vs. Orosa, Jr. and Plaza Theatre, Inc. 25 and Leung Yee vs. F. L. Strong Machinery and Williamson, 26 wherein third persons assailed the validity of the chattel mortgage, 27 it is

Credit Transactions Full Text Cases Atty. Adviento

the defendants-appellants themselves, as debtors-mortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-appellants, having treated the subject house as personalty. (b) Turning to the question of possession and rentals of the premises in question. The Court of First Instance noted in its decision that nearly a year after the foreclosure sale the mortgaged house had been demolished on 14 and 15 January 1957 by virtue of a decision obtained by the lessor of the land on which the house stood. For this reason, the said court limited itself to sentencing the erstwhile mortgagors to pay plaintiffs a monthly rent of P200.00 from 27 March 1956 (when the chattel mortgage was foreclosed and the house sold) until 14 January 1957 (when it was torn down by the Sheriff), plus P300.00 attorney's fees. Appellants mortgagors question this award, claiming that they were entitled to remain in possession without any obligation to pay rent during the one year redemption period after the foreclosure sale, i.e., until 27 March 1957. On this issue, We must rule for the appellants. Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No. 1508. 28 Section 14 of this Act allows the mortgagee to have the property mortgaged sold at public auction through a public officer in almost the same manner as that allowed by Act No. 3135, as amended by Act No. 4118, provided that the requirements of the law relative to notice and registration are complied with. 29 In the instant case, the parties specifically stipulated that "the chattel mortgage will be enforceable in accordance with the provisions of Special Act No. 3135 ... ." 30 (Emphasis supplied). Section 6 of the Act referred to 31 provides that the debtor-mortgagor (defendants-appellants herein) may, at any time within one year from and after the date of the auction sale, redeem the property sold at the extra judicial foreclosure sale. Section 7 of the same Act 32 allows the purchaser of the property to obtain from the court the possession during the period of redemption: but the same provision expressly requires the filing of a petition with the proper Court of First Instance and the furnishing of a bond. It is only upon filing of the proper motion and the approval of the corresponding bond that the order for a writ of possession issues as a matter of course. No discretion is left to the court. 33 In the absence of such a compliance, as in the instant case, the purchaser can not claim possession during the period of redemption as a matter of right. In such a case, the governing provision is Section 34, Rule 39, of the Revised Rules of Court 34 which also applies to properties purchased in extrajudicial foreclosure proceedings. 35 Construing the said section, this Court stated in the aforestated case of Reyes vs. Hamada. In other words, before the expiration of the 1-year period within which the judgment-debtor or mortgagor may redeem the property, the purchaser thereof is not entitled, as a matter of right, to possession of the same. Thus, while it is true that the Rules of Court allow the purchaser to receive the rentals if the purchased property is occupied by tenants, he is, nevertheless, accountable to the judgment-debtor or mortgagor as the case may be, for the amount so received and the same will be duly credited against the redemption price when the said debtor or mortgagor effects the redemption. Differently stated, the rentals receivable from tenants, although they may be collected by the purchaser during the redemption period, do not belong to the latter but still pertain to the debtor of mortgagor. The rationale for the Rule, it seems, is to secure for the benefit of the debtor or mortgagor, the payment of the redemption amount and the consequent return to him of his properties sold at public auction. (Emphasis supplied) The Hamada case reiterates the previous ruling in Chan vs. Espe. 36 Since the defendants-appellants were occupying the house at the time of the auction sale, they are entitled to remain in possession during the period of redemption or within one year from and after 27 March 1956, the

191

date of the auction sale, and to collect the rents or profits during the said period. It will be noted further that in the case at bar the period of redemption had not yet expired when action was instituted in the court of origin, and that plaintiffs-appellees did not choose to take possession under Section 7, Act No. 3135, as amended, which is the law selected by the parties to govern the extrajudicial foreclosure of the chattel mortgage. Neither was there an allegation to that effect. Since plaintiffs-appellees' right to possess was not yet born at the filing of the complaint, there could be no violation or breach thereof. Wherefore, the original complaint stated no cause of action and was prematurely filed. For this reason, the same should be ordered dismissed, even if there was no assignment of error to that effect. The Supreme Court is clothed with ample authority to review palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just decision of the cases. 37 It follows that the court below erred in requiring the mortgagors to pay rents for the year following the foreclosure sale, as well as attorney's fees. FOR THE FOREGOING REASONS, the decision appealed from is reversed and another one entered, dismissing the complaint. With costs against plaintiffs-appellees. SECOND DIVISION G.R. No. L-58469 May 16, 1983 MAKATI LEASING and FINANCE CORPORATION, petitioner, vs. WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS, respondents. Loreto C. Baduan for petitioner. Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner. Jose V. Mancella for respondent.

DE CASTRO, J.: Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate Appellate Court) promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting aside certain Orders later specified herein, of Judge Ricardo J. Francisco, as Presiding Judge of the Court of First instance of Rizal Branch VI, issued in Civil Case No. 36040, as wen as the resolution dated September 22, 1981 of the said appellate court, denying petitioner's motion for reconsideration. It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing and Finance Corporation, the private respondent Wearever Textile Mills, Inc., discounted and assigned several receivables with the former under a Receivable Purchase Agreement. To secure the collection of the receivables assigned, private respondent executed a Chattel Mortgage over certain raw materials inventory as well as a machinery described as an Artos Aero Dryer Stentering Range. Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the properties mortgage to it. However, the Deputy Sheriff assigned to implement the foreclosure failed to gain entry into private respondent's premises and was not able to effect the seizure of the aforedescribed machinery. Petitioner thereafter filed a complaint for judicial foreclosure with the Court of First Instance of Rizal, Branch VI, docketed as Civil Case No. 36040, the case before the lower court. Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the enforcement of which was however subsequently restrained upon private respondent's filing of a motion for reconsideration.

Credit Transactions Full Text Cases Atty. Adviento

After several incidents, the lower court finally issued on February 11, 1981, an order lifting the restraining order for the enforcement of the writ of seizure and an order to break open the premises of private respondent to enforce said writ. The lower court reaffirmed its stand upon private respondent's filing of a further motion for reconsideration. On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private respondent and removed the main drive motor of the subject machinery. The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein private respondent, set aside the Orders of the lower court and ordered the return of the drive motor seized by the sheriff pursuant to said Orders, after ruling that the machinery in suit cannot be the subject of replevin, much less of a chattel mortgage, because it is a real property pursuant to Article 415 of the new Civil Code, the same being attached to the ground by means of bolts and the only way to remove it from respondent's plant would be to drill out or destroy the concrete floor, the reason why all that the sheriff could do to enfore the writ was to take the main drive motor of said machinery. The appellate court rejected petitioner's argument that private respondent is estopped from claiming that the machine is real property by constituting a chattel mortgage thereon. A motion for reconsideration of this decision of the Court of Appeals having been denied, petitioner has brought the case to this Court for review by writ of certiorari. It is contended by private respondent, however, that the instant petition was rendered moot and academic by petitioner's act of returning the subject motor drive of respondent's machinery after the Court of Appeals' decision was promulgated. The contention of private respondent is without merit. When petitioner returned the subject motor drive, it made itself unequivocably clear that said action was without prejudice to a motion for reconsideration of the Court of Appeals decision, as shown by the receipt duly signed by respondent's representative. 1 Considering that petitioner has reserved its right to question the propriety of the Court of Appeals' decision, the contention of private respondent that this petition has been mooted by such return may not be sustained. The next and the more crucial question to be resolved in this Petition is whether the machinery in suit is real or personal property from the point of view of the parties, with petitioner arguing that it is a personality, while the respondent claiming the contrary, and was sustained by the appellate court, which accordingly held that the chattel mortgage constituted thereon is null and void, as contended by said respondent. A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court, speaking through Justice J.B.L. Reyes, ruled: Although there is no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property by way of chattel mortgage defendants-appellants could only have meant to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which defendantsappellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personality. Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery & Williamson, wherein third persons assailed the validity of the chattel mortgage, it is the defendants-appellants themselves, as debtors-mortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-appellants, having treated the subject house as personality.

192

Examining the records of the instant case, We find no logical justification to exclude the rule out, as the appellate court did, the present case from the application of the abovequoted pronouncement. If a house of strong materials, like what was involved in the above Tumalad case, may be considered as personal property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only by destination or purpose, may not be likewise treated as such. This is really because one who has so agreed is estopped from denying the existence of the chattel mortgage. In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals lays stress on the fact that the house involved therein was built on a land that did not belong to the owner of such house. But the law makes no distinction with respect to the ownership of the land on which the house is built and We should not lay down distinctions not contemplated by law. It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is indicative of intention and impresses upon the property the character determined by the parties. As stated in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby. Private respondent contends that estoppel cannot apply against it because it had never represented nor agreed that the machinery in suit be considered as personal property but was merely required and dictated on by herein petitioner to sign a printed form of chattel mortgage which was in a blank form at the time of signing. This contention lacks persuasiveness. As aptly pointed out by petitioner and not denied by the respondent, the status of the subject machinery as movable or immovable was never placed in issue before the lower court and the Court of Appeals except in a supplemental memorandum in support of the petition filed in the appellate court. Moreover, even granting that the charge is true, such fact alone does not render a contract void ab initio, but can only be a ground for rendering said contract voidable, or annullable pursuant to Article 1390 of the new Civil Code, by a proper action in court. There is nothing on record to show that the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. On the other hand, as pointed out by petitioner and again not refuted by respondent, the latter has indubitably benefited from said contract. Equity dictates that one should not benefit at the expense of another. Private respondent could not now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has benefited therefrom, From what has been said above, the error of the appellate court in ruling that the questioned machinery is real, not personal property, becomes very apparent. Moreover, the case of Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied upon by said court is not applicable to the case at bar, the nature of the machinery and equipment involved therein as real properties never having been disputed nor in issue, and they were not the subject of a Chattel Mortgage. Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant case to be the more controlling jurisprudential authority. WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby reversed and set aside, and the Orders of the lower court are hereby reinstated, with costs against the private respondent. SO ORDERED. EN BANC G.R. No. L-19207 December 21, 1922 W. R. GIBERSON, plaintiff-appellee, vs. A. N. JUREIDINI BROS., INC., defendant-appellant.

Credit Transactions Full Text Cases Atty. Adviento

Del Rosario and Del Rosario for appellant. McVean and Vickers and Block, Johnston and Greenbaum for appellee.

193

MALCOLM, J.: This is an appeal from a judgment rendered by the Honorable Adolph Wislizenus, Judge of First Instance of Cebu, finding in favor of each of plaintiff's four causes of action, and authorizing the recovery by the plaintiff, the receiver in insolvency proceedings in civil case No. 3586, of various goods, wares, merchandise, credits, and money transferred by H. K. Motoomul & Co. to A. N. Jureidini Bros., Inc., on May 24, 1921, and June 13, 1921. H. K. Motoomul & Co. was, at the times mentioned in the complaint, a partnership doing business in the cities of Cebu and Iloilo. Sometime prior to May 24, 1921, the company became financially embarrassed. A. N. Jureidini Bros., Inc., a larger creditor of Motoomul & Co., became aware of the precarious condition of the latter, because of the diminishing payments on account of a debt. Ultimately, Motoomul & Co. delivered to Jureidini Brothers, on May 24, 1921, one of the debtor's Iloilo stores known as Bazar Aguila de Oro. On the same day also, credits receivable belonging to Motoomul & Co. were transferred to Jureidini Bros. Still later, on June 13, 1921, another stock of goods belonging to Motoomul & Co. passes to Jureidini Bros. The documents evidencing these transfer appears in the record. Within thirty days after these assignments were made, or, to be exact, on June 22, 1921, a number of creditors of H. K. Motoomul & Co. initiated successfully involuntary insolvency proceedings against it. Later, action was brought by the receiver appointed by the court, with the results above related. The above constitute the principal facts, which are accurately stated in the decision of the trial court. In so far as the ten assignments of error made in this court relate to question of fact, we may say, generally, that we agree with the findings of the trial judge. It would be possible to forego consideration of many of appellant's point, because he himself announces on page 46 of the bill of exceptions, "That the defendant has not filed the bond required by the court, because it agrees to the judgment being executed in accordance with law, except so far as concerns the second cause of action." We prefer, however, not to hold appellant to this allegation or admission in his own pleadings, and propose, therefore, to comment on the various assignments of error. Addressing attention directly to appellant's third, fifth, sixth, and eight assignments of error, the court clearly did not err in holding that the transfer or assignments must be revoked, because made for the purpose of giving A. N. Jureidini Bros., Inc., preference over the other creditors of H. K. Motoomul & Co. The provisions of section 70 of the Insolvency Law (Act No. 1956), were placed on the statute books to cover exactly such a situation, and to give equal rights to all of the creditors of the insolvent. The evidence discloses that A. N. Jureidini Bros., Inc. had reasonable cause to believe that H. K. Motoomul & Co. was insolvent. With reference to appellant's first and seventh assignments of error, no one denies that H. K. Motoomul & Co. was indebted to A. N. Jureidini Bros., Inc., for a considerable sum of money. This reason, alone, however, gives the creditor no right to a preference. But, in this connection, appellant relies on Exhibit 1, which purports to be a chattel mortgage executed in the sum of P100,000 by H. Dialdas Motoomul and A. N. Jureidini Bros., Inc., on December 1, 1919, but not registered until May 5, 1921. The operative words in the alleged mortgage make reference to the list A, and the only description of the property contained in this list is: "1. A store No. 79 on Magallanes Street, municipality of Cebu, formerly belonging to T. Thakurdas, with all the merchandise, effects, wares, and other bazar goods contained on the said store. 2. A store No. 19 on Real Street, Iloilo, Panay, P. I., formerly belonging to Guillermo Asayas, with all the merchandise, effects, wares and other bazar goods contained in the said store." The document contains no oath as required by our Chattel Mortgage Law.

The trial judge held, and properly, that Exhibit 1 was invalid because the oath required by law did not appear therein, and because the subjectmatter was not described therein with sufficient particularity. The Chattel Mortgage Law, in its section 5, in describing what shall be deemed sufficient to constitute a good chattel mortgage, includes the requirements of an affidavit of good faith appended to the mortgage and recorded therewith. It has been held by reputable courts that the absence of the affidavits vitiates a mortgage as against creditors and subsequent encumbrancers. (People vs. Burns [1910], 161 Mich., 169; 137 A. S. R., 466, and notes; Deseret National Bank vs. Kidman [1903], 25 Utah, 379; 95 A. S. R., 856.) Section 7 of the Chattel Mortgage Law provides that "The description of the mortgage property shall be such as to enable the parties to the mortgage, or any other person, after reasonable inquiry and investigation, to identify the same." Identification of the mortgaged property would be impossible in this case.lawphil.net Moreover, if there should exist any doubt on the questions we have just discussed, they should be thrashed out in the insolvency proceedings. Our constant ruling has been that the court having possession of the property of the insolvent has ancillary jurisdiction to hear and determine all questions concerning the title, possession, or control of the same. (De Amuzategui vs. Macleod [1915], 33 Phil., 80; De Krafft vs. Velez [1916], 34 Phil., 854; Mitsui Bussan Kaisha vs. Hongkong & Shanghai Banking Corporation [1917], 36 Phil., 27.) With reference to the proper valuation of the merchandise, which is the subject of appellant's second and fourth assignments of error, we find sufficient evidence in the record to support the findings of the trial court. The documents of transfer did not accurately appraise the value of the property. As to the credits amounting to P16,892.72, assigned by H. K. Motoomul & Co. to the defendant, the evidence discloses that with the possible exception of P1,117.06 paid by Florentino Espiritu and P400 paid by Panjoomul Fulsidas, none of the rest have been collected. Hence, appellant's ninth assignment of error should be sustained in part. The assignee takes the property in the same plight and condition that the bankrupt held it. (Winsor vs. McLellan [1843], 2 Story 492; Fed. Cas. No. 17887; Stewart vs. Platt [1879], 101 U. S., 739.) Judgment is affirmed, with the sole modification that the defendant, under plaintiff's second cause of action, shall turn over to the plaintiff only such portions of the credits as have been realized, but the evidences of indebtedness shall pass to the receiver for such action as may be proper. Without special finding as to costs in this instance, it is so ordered. Araullo, C. J., Street, Avancea, Villamor, Ostrand, Johns, and Romualdez, JJ., concur. FIRST DIVISION G.R. No. L-25771 March 29, 1982 URBANO JACA and BONIFACIO JACA, petitioners, vs. DAVAO LUMBER COMPANY and HONORABLE MANASES REYES, as Judge of the Court of First Instance of Davao, respondents.

FERNANDEZ, J.: This is a petition for certiorari with a prayer for a writ of preliminary injunction filed by Urbano Jaca and Bonifacio Jaca against the Davao Lumber Company and Honorable Manases Reyes as Judge of the Court of First Instance of Davao seeking the following relief: WHEREFORE, petitioners pray 1. That a writ of Preliminary Injunction be immediately issued restraining the respondent Judge from carrying

Credit Transactions Full Text Cases Atty. Adviento

out or enforcing the Orders (Annexes "Z" and "FF") complained of pending the hearing of the merits of the instant petition; 2. After due hearing, that this Honorable Court annuls and sets aside the complained Orders (Annexes "Z" and "FF"); Petitioners further pray for all other reliefs which are just and equitable in the premises. Davao City, Philippines, February 5, 1966. 1 In November, 1963, Urbano Jaca and Bonifacio Jaca filed with the Court of First Instance of Davao a complaint for Accounting, Return of Price Differentials and Damages against the Davao Lumber Company. The case was docketed as Civil Case No. 4189. The complaint alleges that the plaintiff Urbano Jaca has been, and still is, a licensee of a logging concession located in the City of Davao, and together with his co-plaintiff, Bonifacio Jaca, engaged in the logging business of producing timber and logs for export and/or domestic purposes; that the defendant is a business corporation with which plaintiffs had business dealings covering the sale and/or exportation of their logs; that sometime in 1954, the herein parties-litigants entered into an agreement whereby plaintiffs may secure, by way of advances, either cash or materials, foodstuffs, and/or equipment's from the defendant corporation; that the payment of such account was to be made either in cash and/or by plaintiff's turning over all the logs that they produce in the aforesaid concession to the defendant, and in the latter case, the current prices, either export or domestic, of the logs at the time of their delivery was to be considered; that while the aforesaid business relationship between the parties was subsisting, defendant made plaintiff Urbano Jaca execute in its favor a chattel mortgage, a copy of which instrument. however, plaintiffs were never furnished but that as far as they can recollect the primary conditions of such chattel mortgage were that plaintiffs would turn over to defendant corporation all the logs they may produce from the aforesaid concession the same to be priced either as export or domestic and their value to be applied by defendant to, and be credited for, the account of plaintiff's indebtedness, and further that in case of need, plaintiffs may secure, by way of advances, either cash, foodstuffs, materials or equipment's, under an "open credit account"; that under the aforementioned "open credit account" relationship between the plaintiffs and defendant, orders were secured by plaintiffs, by way of advances, from the defendant, this to be paid by them with plaintiffs' production from their concession, liquidating those old accounts and keeping all accounts current; that in pursuance to the agreement, as aforestated, plaintiff Urbano Jaca executed assignments of letters of credit in favor of the defendant, in order that the latter may be able to use, as defendant corporation did in fact use, the said letters of credit for bank negotiations of the former in the exportation of logs; that the plaintiffs and the defendant had this business relationship, as aforementioned, from 1954 up to sometime in August, 1963; that during this whole period of time, the plaintiffs had been faithfully delivering all their log production to the defendant for export or domestic purposes; that before the filing of this complaint, the plaintiff made repeated demands on the defendant for a formal accounting of their business relationship from 1954 up to August, 1963, but that the defendant failed and refused, and still fails and refuses, to effect such formal accounting, asserting that it had no time as yet to examine into all the details of the accounting; that sometime on October 30, 1963, much to their surprise, plaintiffs received letters of demand from the defendant in which they were requested to pay their accounts in favor of defendant, which according to the latter had long been overdue; (Copies of such letters are hereto attached marked as Annexes "A" and "B", and made integral parts of this complaint) that plaintiffs are no longer indebted to the defendant, and as a matter of act it is their belief that, if a formal accounting be made, there would still appear a claim in their favor in the amount of P250,000.00 more or less, representing the price differentials of logs which they delivered to the defendant from 1954 up to August, 1963; and that further, there was a deliberate fraud practiced by the defendant on them, especially in defendant's under grading and/or reclassification of logs delivered to it by plaintiffs; that further, there were many errors committed in the monthly statements submitted to the plaintiffs, arising from the fact that there were charges of cash, equipment's, materials and foodstuffs in said statements never ordered

194

and/or received by the plaintiffs; and still further that the proceeds of the letter of credit were not fully applied and/or credited to the account of plaintiffs; that defendant has up to the present denied the plaintiffs the benefits of a formal accounting and inasmuch as the invoices, receipts, vouchers, requisition slips and other pertinent papers and document of their business transactions are in the possession of defendant, it is difficult for plaintiffs to ascertain with accuracy the ledger balance between the parties, unless a detailed examination of the matter is had; that plaintiffs have thereby been constrained to file this case in Court in order to compel defendant to have a formal accounting between them, and that it is the desire of plaintiffs that pending the formal hearing of this case, three commissioners, constituting accountants be judicially appointed for the purpose of examining all the books, pertinent papers and documents and all other data in relation with their business transaction; that in order to protect their interest and to litigate this case, the plaintiffs were compelled to secure and retain the services of attorneys, and that they have thereby suffered damages in the sum of Twenty Thousand Pesos (P20,000.00) by way of attorney's fees. 2 In December, 1963, the Davao Lumber Company filed its Answer with Affirmative Defenses and Counterclaim. 3 In its counterclaim, the Davao Lumber Company alleged that Plaintiffs Urbano Jaca and Bonifacio Jaca are the ones indebted to the defendant in the sum of P756,236.52 and P91,651.97, respectively; that on January 24, 1961, the plaintiff Urbano Jaca executed a chattel mortgage in favor of the defendant to secure the payment of any and all obligations contracted by him in favor of the defendant covering several chattels valued at P532,000.00; that said obligation of Urbano Jaca totalling P756,236.52 is overdue and unpaid despite repeated formal demands for settlement thereof made by defendant; that the action brought by the plaintiffs is purely baseless and malicious for which the plaintiffs should be required to pay defendant damages and attorney's fees amounting to at least P20.000.00. 4 In June, 1965, the respondent Judge rendered a decision the dispositive portion of which reads: CONSIDERING THE FOREGOING, judgment is hereby rendered in favor of defendant and against the plaintiff, ordering that: 1. The complaint for accounting, return of price differentials and damages filed by plaintiffs Urbano Jaca and Bonifacio Jaca versus defendant Davao Lumber Company is dismissed, as it is hereby dismissed; 2. Ordering Urbano Jaca to pay defendant the amount of P756,236.52 with legal interest from the date of the filing of the counterclaim; 3. Ordering plaintiff Bonifacio Jaca to pay defendant the amount of P91,651.00 with legal interest; 4. Ordering that the chattel mortgage executed by Urbano Jaca in favor of defendant Exhibit "3", be foreclosed as it is hereby foreclosed; 5. Ordering plaintiffs to pay jointly and severally P20,000.00 as attorney's fees in favor of defendant. 6. With cost against plaintiffs. SO ORDERED. Given at Davao City, on this 11th day of June, 1965. 5 In September, 1965, the Davao Lumber Company filed a motion for execution pending appeal on the following grounds:

Credit Transactions Full Text Cases Atty. Adviento

3. There are good reasons to authorize an order of execution pending appeal pursuant to Rule 39, Section 2 of the Rules of Court, which provides: SEC. 2. Execution pending appeal. On motion of the prevailing party with notice to the adverse party the court may, in its discretion, order execution to issue before the expiration of the. time to appeal, upon good reasons to be stated in a special order. If a record on appeal is filed thereafter the motion and the special order shall be included therein. (a) In this same civil case,, the court issued an Order dated November 17, 1964 directing the plaintiffs 'to deliver to the receiver all the properties, chattels and equipment covered by the Chattel Mortgage, the delivery to be made within thirty (30) days', but plaintiffs did not, comply with said Order of November 17, 1964. (b) Defendant's counsel filed a 'Motion to Implement Order ordering Urbano Jaca to deliver Chattels to Receiver' dated July 28, 1965, but up this date, plaintiffs have not complied with said Order. (c) That there are various reports from the receiver, one of them dated April 19, 1965, stating that the Receiver has not taken custody of the mortgaged chattels due to the refusal or inability to mortgagor Urbano Jaca to deliver the same to him. (d) Despite the long lapse of time from the Order of November 17, 1964, the court in its Order of September 1, 1965, directed said mortgagor Urbano Jaca to comply forthwith with the Order dated November 17, 1964 'fifteen (15) days upon receipt of this Order', but up to this date there has been consistent refusal or failure to comply with said order of delivery. (2) Another good reason for execution pending appeal (Rule 39, Section 2) is the fact that plaintiff Urbano Jaca the mortgagor in the deed of chattel mortgage dated January 24, 1961, has violated Article 319 of the Revised Penal Code, for he has sold some of the mortgaged properties to third persons, particularly, a wrecker, to Teodoro M. Alagon of Davao City on February 12, 1962 for P10,000.00. A copy of the letter-complaint addressed by defendant's counsel to the City Fiscal of Davao, dated February 5, 1964 is attached hereto and made an integral part of this Motion as Annex "A". (3) Moreover, plaintiffs have not only failed to comply with the Order of the Honorable Court for the delivery of the properties under receivership to the Receiver (par. 3 of this Motion) and in fact has violated the Chattel Mortgage contract (Par. 4 of this Motion); but plaintiffs have no properties or assets with which to satisfy the judgment of this Honorable Court, which amounts to principal items of P756,326.52, P91,651.00 and P20,000.00, or a total of P867,887.52. (4) Obviously, the appeal interposed by the plaintiffs is to delay the enforcement and/or execution of the decision rendered by this Honorable Court, so that when the Decision correctly rendered by this Honorable Court should be affirmed on appeal the judgment will become nugatory. 6 The respondent judge granted the motion for execution pending appeal in an order dated November 29, 1965. 7

195

Urbano Jaca and Bonifacio Jaca filed a motion for reconsideration of the order granting execution pending appeal in December, 1965, 8 but the same was denied in an order dated January 10, 1966. 9 Petitioners Urbano Jaca and Bonifacio Jaca contend that the respondent Judge acted in excess of jurisdiction and/or with grave abuse of discretion in issuing the order granting execution pending appeal and the order denying the motion for reconsideration of the order granting execution pending appeal because said orders were issued in complete disregard of the applicable provisions of the Rules of Court, the laws, and the settled decisions of the Honorable Supreme Court. Petitioners assail the order granting execution pending appeal and the order denying the motion for execution pending appeal on the following grounds: 1) granting that execution pending appeal win issue in a foreclosure proceedings the respondent Judge acted in excess of jurisdiction when he considered, over the objection of petitioners, in the motion for reconsideration of the Order granting premature execution (Annex "AA") the alleged sale by Florentina Perez, wife of petitioner, Urbano Jaca of the two (2) chevrolet trucks which were not part of the mortgaged chattels to Atty. Raul Nengasca as a reason for execution pending appeal in his Order (Annex "FF") denying the motion for reconsideration, since this matter is not among the grounds stated in the motion for execution pending appeal (Annex "X") neither has it been brought out during the hearing of said motion, nor is it one of the reasons stated in the Order of execution pending appeal (Annex "Z") which is the Order sought to be reconsidered and it is a cardinal rule in pleadings that a motion should state the grounds upon which it is based (Section 3, Rule 15 of the Rules of Court) and the order sought to be obtained and that no other grounds can be entertained, passed upon and considered by the court over the objection of the adverse party; 2) the respondent judge acted with grave abuse of discretion equivalent to lack of jurisdiction in finding that there exists special or good reasons for execution pending appeal because discretionary execution under Section 2, Rule 39 of the Rules of Court will only issue if there are superior circumstances demanding urgency which outweigh the injury or damage that the losing party may suffer upon securing a reversal of the judgment on appeal considering the merits of his appeal (Moran, Com. on the Rules of Court Vol. 2, Part II, 1963 ed., p. 239 and p. 242, citing Aguilos vs. Barrios, et al. 72 Phil. 285: Ledesma vs. Teodoro, 52 O.G. 784; De Leon, et al. vs. Soriano, et al., L-7684, Sept. 17, 1954; City of Bacolod vs. Enriquez, 55 O.G. p. 10545), and in the instant case, the reasons ultimately relied upon by the respondent Judge in granting execution pending appeal as stated in the Order (Annex "FF"), denying petitioners motion for reconsideration of the Order granting execution, are not such superior circumstances demanding urgency of execution because: (a) the first reason that petitioner Urbano Jaca sold a wrecker to Teodoro M. Alagon is alleged to have been made yet on February 12, 1962, or about over one and half years prior to the filing of the instant case on November 22, 1963, and such sale would not show a fraudulent design on the part of petitioner Urbano Jaca to defeat the judgment against him by disposing of the mortgaged chattels and thus would demand urgency of execution of the judgment;

Credit Transactions Full Text Cases Atty. Adviento

(b) the second reason regarding the sale of the two chevrolet trucks (not alleged to be a part of the mortgaged chattels to the respondent Davao Lumber Company) to Atty. Raul Nengasca does not refer to the property of either of the petitioners, neither does it refer to a sale made by anyone of them; rather, it refers to a sale made by Florentina Perez (wife of petitioner Urbano Jaca), who is not a party to the action, regarding her own property; (c) the third and last reason that the orders of the court directing petitioner Urbano Jaca to deliver all the mortgaged chattels to the receiver are valid and must be complied with could not even be considered any reason at all for immediate execution, as it does not supply at all any element of a superior circumstance requiring urgency of execution for there is, in fact, no legal connection whatsoever in the validity of such Orders and their compliance with the propriety of an immediate execution of the judgment pending appeal; furthermore, the appeal of petitioners are based on good grounds and could never be said to be intended merely for delay, and that the amount involved in the judgment is huge; 3) That there are, in fact, good reasons for not allowing execution pending appeal considering (1) that the amount involved in the judgment is huge; (2) that the petitioners have challenged the Counterclaim, under which the judgment sought to be executed is rendered, for lack of cause of action; (3) that the petitioners have challenged the chattel mortgage, under which the judgment of foreclosure has been rendered, as null and void ab initio and that no cause of action can arise therefrom; (4) that the petitioners have challenged the Commissioner's Report to be null and void which is the primary, if not in fact the sole, evidence of said respondent on its Counterclaim and upon which the judgment sought to be executed is based; 4) no execution pending appeal, in fact, can issue on foreclosure proceedings because the ninety-day period provided in Section 2, Rule 68 of the Rules of Court is a substantive right granted to the mortgagordebtor which may not be omitted and that upon taking an appeal, said period is suspended and is not revived until the judgment is affirmed by the appellate court and the case returned to the trial court, and in the instant case, the respondent judge acted in excess of jurisdiction in allowing execution pending appeal when the Counterclaim under which the judgment sought to be executed is rendered, is for a foreclosure of chattel mortgage and that petitioners have taken an appeal to the judgment rendered against them ...; 5) granting arguendo, that the foreclosure proceedings is only against petitioner Urbano Jaca as mortgagor, but the action against petitioner Bonifacio Jaca is for a collection of a sum of money, the respondent Judge acted with grave abuse of discretion equivalent to lack of jurisdiction in allowing execution pending appeal as against said petitioner Bonifacio Jaca because in so far as said petitioner is concerned there is no showing of any special or good reasons, in fact, there is no showing of any reason at all anywhere in the records of the case, including the

196

Orders complained of, as a basis for which discretionary execution may be issued against him. 10 The private respondent maintains that the respondent judge acted in full compliance with the Rules of Court, the law and applicable decisions of this Honorable Court because: 1) The present case is an action for accounting and not a foreclosure proceeding. Therefore, execution pending appeal can be issued pursuant to Sec. 2 of Rule 39, Rules of Court. This provision of the Rules of Court applies in the present case for there are good and valid reasons for the issuance of a writ of execution pending appeal as stated in respondents' Motion (Annex "X"). Moreover, petitioners have no properties or assets with which to satisfy the judgment of P867,887.52 plus other items stated in the Decision. The respondent Judge, therefore, was correct in ordering the issuance of a writ of execution (Annex "1"). Furthermore, to stay execution, petitioners should have filed a supersedeas bond in accordance with Sec. 3 of Rule 3. a) Respondent denies the erroneous and gratuitous conclusion of alleged 'excess of jurisdiction' as alleged in par. 44(a) of the Petition. It further denies the other misleading statements alleged therein, the truth of the matter being the grounds enumerated in the Motion for Execution Pending Appeal (Annex "X") and the reasons mentioned in the Order (Annex "Z") granting said motion. b) Respondent denies the erroneous conclusion that the respondent Judge acted with grave abuse of discretion, equivalent to lack of jurisdiction' as alleged in par. 44(b) of the Petition, and states that the respondent Judge correctly acted in accordance with Sec. 2, Rule 39 of the Rules of Court. It further denies the misleading statement therein that the reasons ultimately relied upon by the respondent Judge are those stated in the Order (Annex "FF"), which is false, because the good and valid reasons relied upon by the respondent Judge are those stated in his Order (Annex "Z") granting the Motion for Execution Pending Appeal (Annex "X"). (1) Respondent admits the allegation that petitioner Urbano Jaca sold a wrecker to Teodoro M. Alagon on February 12, 1962 for P10,000.00; and denies the statement that such sale would not show a fraudulent design on his part to defeat the judgment against him. It further alleges that it is one of the good and valid reasons for execution pending appeal (Rule 39, Sec. 2), because said petitioner, the mortgagor in the deed of chattel mortgage dated January 24, 1961, has violated Article 319 of the Revised Penal Code in selling the said mortgaged property; (2) The misleading allegations contained in subparagraphs 2 and 3 of par. 44(b) of the Petition are false, for they are matters that arose in the petitioners' Motion for Reconsideration of the Order granting execution pending appeal. Respondent further states that they are not the original and valid reasons given by the respondent Judge in his Order (Annex "Z"); c) There are goods reasons for allowing execution pending appeal considering that (1) the amount involved in the judgment in favor of respondent Davao Lumber Company is P867,887.52 plus attorney's fees of P20,000.00, and the petitioners admitted at the hearing of the Motion for Execution Pending Appeal that they are insolvent (See Order, Annex "Z" );

Credit Transactions Full Text Cases Atty. Adviento

(2) the petitioners have never challenged the Counterclaim of respondent Davao Lumber Company during the hearing on the merits; (3) the petitioners failed to present any evidence challenging the chattel mortgage under which the counterclaim for foreclosure has been rendered; (4) the petitioners have not disproved the Commissioner's Report (Annex "K"). In fact, they failed to present their own evidence before the Commissioner which might tend to controvert the undisputed documentary evidence of respondent Davao Lumber Company; (5.) execution pending appeal was properly issued in the present case, which is an ordinary civil action for accounting and not primarily a foreclosure of chattel mortgage the respondent Judge, therefore, acted in full compliance with the law and jurisprudence in allowing execution pending appeal; (6) the judgment sought to be executed pending appeal sentences petitioner Urbano Jaca to pay respondent Davao Lumber Company the amount of P756,236.52 with legal interest; sentences petitioner Bonifacio Jaca to pay said respondent the amount of P91,651.00 with legal interest; orders the Chattel Mortgage executed by Urbano Jaca in favor of said respondent foreclosed; orders petitioners to pay, jointly and severally, the amount of P20,000.00 as attorney's fees and costs; the said judgment was rendered after hearing on the merits of its action for accounting, which is not a proceeding for foreclosure of chattel mortgage; the provisions of the Rules of Court on foreclosure proceeding invoked by petitioners do not find any application in the case at bar; the respondent Judge, therefore, in allowing execution pending appeal, precisely acted in full compliance with Sec. 2 of Rule 39; (7) as above pointed out, the judgment rendered in this case is joint and several, and consequently, the respondent Judge was correct in ordering the execution thereof as against both petitioners who have no properties or assets to satisfy the judgment in favor of respondent company. 11 The basic issue in this case is whether or not there are good reasons justifying the issuance of an order granting premature execution. Section 2, Rule 39 of the Rules of Court provides that on motion of the prevailing party with notice to the adverse party the court may, in its discretion, order execution to issue even before the expiration of the time to appeal, upon good reasons to be stated in a special order. If a record on appeal is filed thereafter, the motion and the special order shall be included therein. The discretionary power of the Court of First Instance to grant or deny a motion for execution before the expiration of the time to appeal will not be interfered with by the appellate court, unless it be shown that there has been an abuse thereof or a subsequent change of conditions. 12 As provided in Sec. 2, Rule 39 of the New Rules of Court, the existence of good reasons is what confers discretionary power on a court of first instance to issue a writ of execution pending appeal. 13 The reasons allowing execution must constitute superior circumstances demanding urgency which will outweigh the injury or damage should the losing party secure a reversal of the judgment on appeal. 14 The decision in Civil Case No. 4189 requires petitioners to pay the enormous amount of P867,887.52. Clearly, premature execution of said decision wig result in irreparable damage to petitioners as the collection of said amount may be enforced through the seizure of money and/or sale of

197

properties used in the logging business of petitioners. In other words, execution of the decision in Civil Case No. 4189 may result in the termination of petitioner's business. Thus, any damage to the petitioners brought about by the premature execution of the decision will be justified only upon a finding that the appeal is being taken only for the purpose of delay and of rendering the judgment nugatory. The facts of record show that the petitioner's appeal is not frivolous and not intended for delay. The findings of the respondent judge that the petitioners are indebted to the respondent Davao Lumber Company are based solely on the report submitted by Estanislao R. Lagman, the commissioner appointed by the court. This report was assailed by the petitioners as null and void in a motion to strike out the report from the records of the case. According to petitioners, the report is null and void because: ... the so-called 'findings of the Commissioner in his report filed before this Honorable Court is the result of the exercise of certain highly irregular function not contemplated by the Rules of Court and therefore deprived Plaintiffs' their constitutional right to their day in court. ARGUMENTS: 1. That among other things, Section 3, Rule 33 of Rules of Court, provides: Section 3: ... Subject to the specifications and limitations stated in the order the commissioner has and shall exercise the power to regulate the proceedings in every hearing before him and to do all act and take measures necessary or proper for the efficient performance of his duties under the order, ... The trial or hearing before him shall proceed in all respect as though the same had been had before the Court. 2. That on August 22, 1964, without the proper notice to their respective counsels, the Plaintiffs received the following letter from the Commissioner, pertinent portions of which reads as follows: and, copy of which letter is attached hereto, forming an integral part in this Opposition, marked Annex "A" In compliance to the above order, I am now to proceed, as ordered by the Court, to examine your books of accounts and other records for the year 1962 and 1963. I will be dropping at your office on August 25, 1964. Kindly have our records ready. 3. That on August 25, 1964, the Commissioner went to Plaintiff's' office and asked to see the Books, and if possible to bring the same with him to his office; that, the plaintiffs' counsel refused to have said records examined in such manner; 4. That the Counsel for the Plaintiffs reminded the Commissioner on many occasions that, the examination of books and records of Accounts should be done in a manner provided for under the Rules of Court and, that in pursuance of said mandate, a hearing and/or proceedings be conducted in the presence of all parties, their witnesses and, their counsels and, the hearing be conducted as if it were taken before the court of justice, as said accounts being one controversial and contested in issues; 5. That said commissioner refused to conduct said hearing in accordance to law; 6. That report is void in law. 15

Credit Transactions Full Text Cases Atty. Adviento

In an order dated November 17, 1964, the respondent judge approved the commissioners' report in toto As to the allegation of the plaintiff that they were denied their day in court, the respondent judge stated that "plaintiffs deliberately ignored to comply with the lawful order of the court directing them to present the pertinent books of accounts on the 12th day of October, 1964, at 2:00 P.M. Sala of Branch 11, and therefore, their position that they are denied their day in court is clearly untenable." 16 Petitioners filed their motion for reconsideration of the order approving the commissioner's report in November, 1964, explaining that their failure to appear was due to the fact that they received the order requiring them to appear on October 12, 1964 already after said date when it was too late for them to comply with the order of appearance. 17 Notwithstanding the reasonable explanation of their absence in the hearing of October 12, 1964, the respondent judge denied the motion for reconsideration in an order dated December 4, 1964. 18 It is obvious that the refusal of the respondent judge to order a hearing before the commissioner was in clear violation of Section 3, Rule 33, Revised Rules of Court, which specifically provides "... that the trial or hearing before a commissioner shall proceed in all respects as though the same had been had before the court." For this purpose Section 5 of the same Rule provides that "upon receipt of the order of reference, unless otherwise provided therein, the commissioner shall forthwith set a time and place for the first meeting of the parties or their attorneys to be held within ten (10) days after the date of reference ..." Pertinent also is Section 10 of Rule 33 which provides that "... Objections to the report based upon grounds which were available to the parties during the proceedings before the commissioner, other than objections to the findings and conclusions therein set forth, shall not be considered by the court unless they were made before the commissioner." The respondent judge's refusal to order the commissioner to conduct a hearing in accordance with Section 5, Rule 33 was fatal to the cause of the petitioners. Under Section 10 of Rule 33, objections to the report based upon grounds which were available to the parties during the proceedings before the commissioner other than objections to the findings and conclusions therein set forth shall not be considered by the court, unless they were made before the commissioner. Objections to the report which were available to the parties during the proceedings refer to objections to the admissibility or non-admissibility of evidence to be considered by the commissioner. Since no meeting was held before the commissioner, petitioners never had the opportunity to object to the admissibility of evidence of cash, equipment, materials and foodstuff, which they alleged in their complaint, were never received by them. Also, they failed to question the failure of the commissioner to include in his examination the price quotations of the logs which, as claimed in the complaint, were under classified and undergraded. The records show that respondent Davao Lumber Company was able to prove its claim against petitioners because respondent judge refused to order the commissioner to hold a hearing as required by the rules. Thus, objections which petitioners may have against the claims of respondent were never considered. In the same manner, the claim of petitioner that respondent Davao Lumber Company is indebted to them was not also considered. The Commissioner limited his examination to the following: MR. URBANO LACAS ACCOUNTS: (a) From Feb. 17, 1961 to Oct. 31, 1962, Urbano Jaca purchased on account from the Merchandise Dept. of Davao Lumber Co. per statement attached, marked schedule 1.................................................................................... .. P190:010.41 (b) From July 2, 1960 to Oct. 31, 1962, Urbano Jaca purchased on account from the Sawmill Dept. of Davao Lumber Co. per statement hereto attached, marked schedule 2.................................................................................... ... P75,075.73

198

(c) Old vales or cash advances prior to July 25, 1963 which Urbano Jaca replaced with four (4) BPI Checks Nos. D-236619 to D-236622 P50,000.00 each as alleged by DLC .............................................................................. ............. P200,000.00 (d) From Nov. 3, 1962 to Aug. 30, 1963, Urbano Jaca purchased on accounts from the Sawmill Dept. various goods, per attached statement, marked Schedule 3 ................................................................................... ................ P57,459.27 (e) From Nov. 3, 1962 to Aug. 30, 1963, Urbano Jaca purchased from the Mds. Dept. of DLC various goods, per attached statement, marked Scheduled 4 ................................................................................... ............. P68,857.07 (f) From July 25, 1963 to Sept. 16, 1963 Urbano Jaca obtained cash advances or vales per attached statement, marked schedule 5............ P164,844.45 (g) Purchase of gasoline made by Urbano Jaca from Shell Co., under Davao Lumber Co.'s guaranty ...................................................................... P2,523.60 Total amount due Davao Lumber Co. from Urbano Jaca .......... P758,770.53 The amount of P2,523.60 due Shell Co. may be deducted from the total amount if Urbano Jaca can show proof that the account has been paid. MR. BONIFACIO JACAS ACCOUNTS: (a) From Nov. 3, 1962 to Aug. 8, 1963 Bonifacio Jaca purchased on account various goods from the Sawmill Dept. of DLC per attached statement,. marked schedule 6.................................................................................... .............. P39,999.69 (b) From Feb. 4, 1963 to Aug. 8, 1963 Bonifacio Jaca purchased on account from the Mdse. Dept. various goods, per attached statement marked schedule 7.................................................................................... ............................... P48,319.08 (c) Purchases of gasoline from Shell Co. guaranteed by Davao Lumber Co. ............................................................................... ................................. P5,252.12. (d) From Aug. 6, 1963 to Aug. 23, 1963, Bonifacio Jaca obtained cash advances or vales, per attached statement marked schedule 8........... P3,333.20 Total amount due Davao Lumber Co. from Mr. Bonifacio Jaca P96,904.09. 19 Clearly, the examination was only made on advances made to petitioners. There was not even an attempt to examine receipts of payments made by petitioners. It is hard to believe that the petitioners had not paid any amount for the advances made to them. In fact, the respondents stated in paragraph 4 of its answer to the complaint that the plaintiffs stopped delivering logs in August, 1963, 20 indicating that from 1962 to 1963, the years included in the report of the commissioner, the petitioners had delivered logs to the Davao Lumber Company.

Credit Transactions Full Text Cases Atty. Adviento

There is doubt that petitioners are really indebted to respondent Davao Lumber Company in such a big amount as found by the trial court. The appeal of the petitioner appears to be meritorious. The fear of respondent that the judgment of the trial court might not be satisfied if not executed at once is not well founded. If the judgment is executed now, and on appeal the same is reversed, although there are provisions for restitution, damages incurred by petitioners can not be fully compensated. 21 The reasons stated in the order of execution pending appeal are not well founded. The first reason stated in the order was the consistent refusal of petitioner to deliver the mortgaged chattels to the receiver. 22 The records disclose that respondent Davao Lumber Company is not even entitled to the appointment of a receiver. It is an established rule that the applicant for receivership must have an actual and existing interest in the property for which a receiver is sought to be appointed. 23 The Davao Lumber Company's proof of interest in the property is the deed of chattel mortgage executed by Urbano Jaca in favor of the Davao Lumber Company on January 24, 1961. This deed of chattel mortgage is void because it provides that the security stated therein is for the payment of any and all obligations herein before contracted and which may hereafter be contracted by the Mortgagor in favor of the Mortgagee. 24 In the case of Belgian Catholic Missionaries vs. Magallanes Press this Court held: A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage (11 CJ, 448; 5 RCL 420-421). ... Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contracted. (11 CJ. 448) 25 The second reason stated was the fact that petitioner Urbano Jaca violated Article 319 of the Revised Penal Code by selling to a certain Teodoro Alagon some of the mortgaged properties. 26 As already discussed, the deed of chattel mortgage executed by Urbano Jaca in favor of the Davao Lumber Company is void. Hence, petitioner Urbano Jaca could not have violated Article 319 of the Revised Penal Code. Moreover, the respondent Davao Lumber Company has not successfully refuted the allegation of the petitioners that the sale of the wrecker to Teodoro Alagon was exclusively negotiated by the lumber company's managing partner, Tian Se, and that the latter caused Urbano Jaca to sign the deed of sale because he was the owner of the wrecker. The third reason stated is the fact that petitioners have no properties and assets to satisfy the judgment. 27 The basis of respondent judge's conclusion that petitioners do not have sufficient assets is an unsubstantiated allegation in the motion for execution pending appeal of respondent lumber company. 28 To rectify this omission, respondent lumber company, in its opposition to the motion for reconsideration of the order of execution pending appeal, tried to point out that the sale of two chevrolet trucks by Urbano Jaca and their failure to file a counterbond indicate that they are without sufficient assets. 29 This later attempt to substantiate a baseless allegation in the motion for execution pending appeal is futile. The trucks alleged to be sold are not properties of petitioner Urbano Jaca They are paraphernalia properties of his wife, Florentina Perez, and the same trucks were in fact sold by her. And even if said trucks were owned by Urbano Jaca their sale to Atty. Raul Nengasca does not totally indicate insolvency. As has been repeatedly observed, petitioner Urbano Jaca is engaged in business. Sale of property used in business does not establish insolvency. The sale may have been prompted by the need for more modern equipment on account of obsolescence, or the need of to be directed to more profitable endeavor. The same reason applies to their failure to file a counterbound. The cash needed for the counterbound may be utilized for the continuance of the business or to increase business profits. In short, the acts of petitioner can not be always be interpreted as signs of insolvency but may also indicate sound business judgment prompted by the need to have liquid reserve of cash. In its answer to the petition, 30 respondent lumber company contends that petitioners, having availed of the remedy of appeal are barred form filling a

199

petition for certiorari. Although Section 1, Rule 65 of the Rules of Court provides that the special civil action of certiorari may only be invoked when "there is no appeal, nor any plain speedy and adequate remedy in the course of law," this rule is not without exception. The availability of the ordinary course of appeal does not constitute sufficient ground to prevent a party from making use of the extraordinary remedy of certiorari where the appeal is not an adequate remedy or equally beneficial, speedy and sufficient. 31 It is the inadequacy not the mere absence of all other legal remedies and the danger of failure of justice without the writ, that must usually determine the propriety of certiorari. In the case at bar, the remedy of appeal is inadequate. It will not immediately relieve petitioners from the injurious effect of the order granting execution. The slow and inexpensive remedy of appeal will not prevent respondent judge from executing his decision requiring petitioners to pay the huge amount of P867,887.52. Moreover, to dismiss the petition on the ground that petitioner has already availed of the remedy of appeal will only aggravate the patent injustice already inflicted on petitioners. The reasons stated in the order granting execution pending appeal are not sufficient. WHEREFORE, the petition for writ of certiorari is granted and the orders granting execution pending appeal dated November 29, 1965 and the order denying the motion for reconsideration of the order granting execution pending appeal dated January 10, 1966 are nullified and set aside, without pronouncement as to costs. SO ORDERED. FIRST DIVISION

G.R. No. 107554 February 13, 1997 CEBU INTERNATIONAL FINANCE CORPORATION, petitioner, vs. COURT OF APPEALS, ROBERTO ONG AND ANG TAY, respondents.

KAPUNAN, J.: In this petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to set aside the decision of the Court of Appeals in CA-G.R C.V. No. 26257 dated 2 July 1992 which affirmed the decision of the Regional Trial Court in Civil Case No. CEB-6919, declaring the chattel mortgage void and ordering petitioner and private respondent Robert Ong to pay damages to private respondent Ang Tay. The Court of Appeals' resolution dated 30 September 1992 is similarly impugned for denying petitioner's motion for reconsideration. Gleaned from the records are the following facts: On 4 March 1987, Jacinto Dy executed a Special Power of Attorney 1 in favor of private respondent Ang Tay, authorizing the latter to sell the cargo vessel Owned by Dy and christened LCT "Asiatic." On 28 April 1987, through a Deed of Absolute Sale, 2 Ang Tay sold the subject vessel to private respondent Robert Ong (Ong) for P900,000.00. Ong paid the purchase price by issuing three (3) checks in the following amounts: P150,000.000, P600,000.00 and P150,000.00. However, since the payment was not made in cash, it was specifically stipulated in the deed of sale that the "LCT Asiatic shall not be registered or transferred to Robert Ong until complete payment." 3 Thereafter, Ong obtained possession of the subject vessel so he could begin deriving economic benefits therefrom. He, likewise, obtained copies of the unnotarized deed of sale allegedly to be shown to the banks to enable him to acquire a loan to replenish his (Ong's) capital. The aforequoted condition, however,which

Credit Transactions Full Text Cases Atty. Adviento

was handwritten on the original deed of sale does not appear on Ong's copies. Contrary to the aforementioned agreements and without the knowledge of Ang Tay, Ong had his copies of the deed of sale (on which the aforementioned prohibition does not appear) notarized on 18 May 1987. 4 Ong presented the notarized deed to the Philippine Coast Guard which subsequently issued him a Certificate of Ownership 5 and a Certificate of Philippine Register 6 over the subject vessel on 27 May 1987. Ong also succeeded in having the name of the vessel changed to LCT "Orient Hope." On 29 October 1987, Ong acquired a loan from petitioner in the amount of P496,008.00 to be paid in installments as evidenced by a promissory note of even date. 7 As security for the loan, Ong executed a chattel mortgage over the subject vessel, 8 which mortgage was registered with the Philippine Coast Guard and annotated on the Certificate of Ownership. 9 In paragraph 3 of the Deed of Chattel Mortgage, it was stated that: 3. The said sum of FOUR HUNDRED NINETY SIX THOUSAND EIGHT ONLY (496,008.00) represents the balance due on of MORTGAGOR(S) from the MORTGAGEE and is payable in the office of the MORTGAGEE at Cebu City or in the office of the latter's assignee, in case the rights and interests of the MORTGAGEE in the foregoing mortgage are assigned to a third person, under the terms of said promissory note, as follows: (a) TWENTY THOUSAND SIX HUNDRED SIXTY SEVEN ONLY** Pesos (P20,667.00) on or before . . . . . . and (b) the balance in Twenty Four (24) equal successive monthly installments on the . . . . . . day of each and every succeeding month thereafter until the amount is fully paid. The interest on the foregoing installments shall be paid on the same date that the installments become payable and additional interest at the rate of fourteen (14%) per cent per annum will be charged on all amounts, principal and interest, not paid on due date. 10 (Emphasis ours.) Ong defaulted in the payment of the monthly installments. Consequently, on 11 May 1988, petitioner sent him a letter 11 demanding delivery of the mortgaged vessel for foreclosure or in the alternative to pay the balance of P437,802.00 pursuant to paragraph 11 of the deed of chattel mortgage. 12 Meanwhile, the two checks (worth P600,000.00 and P150,000.00) paid by Ong to Ang Tay for the purchase of the subject vessel bounced. Ang Tay's search for the elusive Ong and all attempts to confer with him proved to be futile. A subsequent investigation and inquiry with the Office of the Coast Guard revealed that the subject vessel was already in the name of Ong, in violation of the express undertaking contained in the original deed of sale. As a result thereof, on 13 January 1988, Ang Tay and Jacinto Dy filed a civil case for rescission and replevin with damages against Ong and his wife (docketed as Civil Case No. CEB-6565) with the Regional Trial Court of Cebu . City, Branch 10. The trial court issued a writ of replevin and the subject vessel was seized and subsequently delivered to Ang Tay. On 9 March 1988, petitioner filed a motion for intervention but withdrew the same on 29 April 1988. Instead, on 26 May 1988, petitioner filed a separate case for replevin and damages against Ong and "John Doe" (Ang Tay) with the same trial court, docketed as Civil Case No. CEB-6919. The trial court granted petitioner's prayer for replevin. The vessel was seized and placed in the custody of the trial court. However, Ang Tay posted a counterbond and the vessel was returned to his possession. On 3 October 1990 in CEB-6565, the trial court rendered a decision in favor of Ang Tay and Jacinto Dy. The sale of the subject vessel was rescinded, the registration of the vessel with the Office of the Coast Guard and other government agencies in Ong's name nullified and the vessel's

200

registration in Dy's name revived. Ong was, likewise, ordered to pay Jacinto Dy and Ang Tay actual damages for lost income, moral damages, attorney's fees and litigation expenses. 13 The Court of Appeals affirmed the trial court's decision and Ong's petition for review before this Court was dismissed for lack of merit in a resolution dated 15 March 1993, On the other hand, in CEB-6919, the subject of the present appeal, the trial court in a decision dated 14 February 1990, declared the chattel mortgage on the subject vessel null and void and ordered petitioner and Ong to pay Ang Tay damages. The dispositive portion states, thus: WHEREFORE, in view of all the foregoing, the chattel mortgage on the vessel LCT ORIENT HOPE is declared null and void, rendering its annotation and registration at the back of the Certificate of Ownership and Certificate of Philippine Registry respectively, to be of no force and effect. Plaintiff CIFC and defendant Robert Ong are hereby ordered to pay jointly and severally to defendant Ang Tay the following amounts: P50,000.00 as unrealized income during the five-day period when the vessel was take from Ang Tay's possession; P100,000.00, representing the premiums Ang Tay paid for the redelivery of the vessel to him and other expenses; P10,000.00 as actual expenses for the recovery of the vessel; P100,000.00 as moral damages; P50,000.00 as exemplary damages; P40,000.00 as actual expenses in attending trials and litigation expenses; and P30,000.00 as attorney's fees. SO ORDERED. 14 On 2 July 1992, the Court of Appeals affirmed in toto the above mentioned decision. 15 Hence, the present petition for review on certiorari. Petitioner enumerates the alleged errors oft he Court of Appeals as follows: I THE COURT OF APPEALS ERRED IN BASING ITS DECISION ON SPECULATION, CONJECTURE, AND SURMISE, WHEN IT DECLARED THAT THE CONTRACT BETWEEN CIFC AND ROBERT ONG WAS ONE OF SALE, AND NOT LOAN (MUTUUM) WITH MORTGAGE. II THE RULING OF THE COURT OF APPEALS IS CONTRARY TO EXISTING AND WELL-SETTLED JURISPRUDENCE THAT A MORTGAGEE HAS THE RIGHT TO RELY ON WHAT APPEARS IN THE CERTIFICATE OF OWNERSHIP (TITLE). III THE DECISION OF THE COURT OF APPEALS IS REPUGNANT TO THE CLEAR RULING OF THE HONORABLE COURT THAT BETWEEN TWO INNOCENT PERSONS, THE ONE WHO MADE THE DAMAGE POSSIBLE BY HIS ACT OF CONFIDENCE MUST BEAR THE LOSS. 16

Credit Transactions Full Text Cases Atty. Adviento

We grant the petition. In upholding the nullity of the chattel mortgage on the subject vessel, the Court of Appeals declared thus: In Par. 3 of the Chattel Mortgage Contract executed between appellants CIFC and Robert Ong, it was made to appear that the subject vessel was sold by the plaintiff Cebu International Finance Corporation to Robert Ong on installment. However, there is no showing that appellant CIFC acquired the vessel in question from either Jacinto Dy or Ang Tay, the owner of such vessel. Since, CIFC appears to have sold the vessel in question to Ong on installment basis, the said contract is null and void, because CIFC was never the owner of the vessel. Moreover, Robert Ong CIFC's mortgagor, did not acquire ownership of the vessel because of an express stipulation in the Deed of Sale that the vessel "shall not be registered or transferred to Robert Ong until complete payment." (Exh. "7-C-1".) Since Ong clearly was not the owner of the vessel at the time of the execution of the mortgage, the said mortgage is null and void on that ground. Furthermore, the evidence on record shows the chattel mortgage in question did not comply with the requirements of P.D. 1521, The Ship Mortgage Decree of 1978. . . . 17 The Court of Appeals nullified the chattel mortgage contract between petitioner and Ong because paragraph 3 of the said contract (where it appeared that petitioner sold the subject vessel to Ong on installment basis and that the amount supposedly loaned to Ong represented the balance due on the purchase price) seemed to indicate that the owner of the vessel mortgaged was petitioner although it had been duly established that another party (Jacinto Dy) was the true owner thereof. 18 We disagree with the aforequoted ruling of the Court of Appeals. The chattel mortgage contract should not be viewed in such a myopic context. The key lies in the certificate of ownership issued in Ong's name (which, along with the deed of sale, he submitted to petitioner as proof that he is the owner of the ship he gave as security for his loan). It was plainly stated therein that the ship LCT "Orient Hope" ex "Asiatic," by means of a Deed of Absolute Sale dated 28 April 1987, was "sold and transferred by Jacinto Dy to Robert Ong." 19 There can be no dispute then that it was Dy who was the seller and Ong the buyer of the subject vessel. Coupled with the fact that there is no evidence euphony transaction between Jacinto Dy or Ang Tay and petitioner, it follows, therefore, that petitioner's role in the picture is properly and logically that of a creditor-mortgagee and not owner-seller. It is paragraph 2 of the mortgage contract 20 which accurately expresses the true nature of the transaction between petitioner and Ong--that it is a simple loan with chattel mortgage. The amount petitioner loaned to Ong does not represent the balance of any purchase price since, as we have previously discussed, the aforementioned documents state that Ong is already the absolute owner of the subject vessel. Obviously, therefore, paragraph 3 of the said contract was filled up by mistake. Considering that petitioner used a form contract, it is not improbable that such an oversight may have been committed--negligently but unintentionally and without malice. As testified to by Mr. Benjamin C. Alfaro, petitioner's Senior Vice President for Operations they only use one form for several kinds of transaction: ATTY. UY: (TO WITNESS) Q: Mr. Alfaro, as a financing institution, Cebu International finance Corporation, how many kinds of lending transaction do you have in a firm? Do you have financial leasing, discounting or whatever? Can you explain briefly to the Honorable Court? xxx xxx xxx 21 ATTY. LOGRONIO: WITNESS) WITNESS:

201

A: We have direct loan transaction. We have financing transaction and we have leasing transaction. Now, in the leasing transaction, the document will show that we are the owner of the equipment and we leased it out. In the financing transaction, where we used the same Chattel Mortgage instrument, there are three parties involved, the seller of the equipment. And then, the seller of the equipment would sell or assign the contract with the financing company. That is the financing transaction. And in the simple loan transaction, there appears only two parties involved, the borrower and the lender. ATTY. UY: (TO WITNESS) Q: Now, Mr. Alfaro, the same document, Chattel Mortgage will apply also to financing transaction, leasing transaction and simple loan transaction? WITNESS: A: Simple loan and financing transactions. ATTY. UY (TO WITNESS) Q: Now, Mr. Alfaro, this paragraph 2 of Chattel Mortgage, can this apply to a financing transaction? WITNESS: A: No, the paragraph 3 will be the one that is applicable to a financing transaction. (Witness reading the document and after reading continued) Paragraph 2 applies to both financing and simple loan transaction. ATTY. UY: Q: And paragraph 3? WITNESS: A: Paragraph 3 applies to both financing and lending transactions but paragraph 3 does not apply to Simple lending transaction.

(TO

Credit Transactions Full Text Cases Atty. Adviento

Q: You do not affirm the assertion made by your counsel that paragraph 3 arise only in case that your rights to a mortgage were assigned by you to a third person, do you agree that also? WITNESS: A: Yes. A: This form of chattel mortgage, in fact, you will notice that the portion for mortgagor and mortgagee are all blank because this is the same form which is used by the company, used for the parties when there is a dealer involved, when there is installment buyer involved and when we come in as third party purchaser of the document because as practiced by the different dealer, this is the same form used between the buyer and the dealer of the motor vehicle. After this is being consummated already, it is assigned to a finance company and these are the same documents used. Now, in this particular case, this becomes already . . . this is a direct transaction between the finance company and the borrower. We, the finance company becomes the direct lender and Mr. Ong became the direct borrower. As I explained earlier, this document is also the form used between a dealer of a motor vehicle and an installment buyer wherein after paying the down payment, the unpaid balance which is secured by the chattel mortgage, the promissory note, and the disclosure statement and this document is sold to a third party and that is the finance company by the dealer. ATTY. LOGRONIO: Q: Up to this point, when you had the transaction with Mr. Ong, this form that you executed, the Chattel Mortgage was in what kind of form that was already used by the company? WITNESS: A: These are forms available to us. ATTY. LOGRONIO: Q: This is a form used when there is a buyer and a ... WITNESS: A: Third party or direct borrowing lender. ATTY. LOGRONIO: ATTY. LOGRONIO:

202

Q: And this refers to a direct borrower or lending transaction. WITNESS:

Q: No third party assignment has been involved so far? WITNESS: A: No. xxx xxx xxx 22 Accordingly, the chattel mortgage contract between petitioner and Ong is valid and subsisting. The next issue for our determination is whether or not petitioner is a mortgagee in good faith whose lien over the mortgaged vessel should be respected. The prevailing jurisprudence is that a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor to the property given as security and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful owner of or does not have a valid title to the mortgaged property, the mortgagee or transferee in good faith is nonetheless entitled to protection. 23 Although this rule generally pertains to real property, particularly registered land, it may also be applied by analogy to personal property, in this case specifically, since shipowners are, likewise, required by law to register their vessels with the Philippine Coast Guard. Private respondent Ang Tay, however, contends that the aforementioned rule does not apply in the case at bar in the face of the numerous "badges of bad faith" on the part of petitioner. Capitalizing on paragraph 3 of the chattel mortgage contract, Ang Tay argues as follows: . . . The fraud and conspiracy by Robert Ong and some responsible employees of CIFC against Jacinto Dy and Ang Tay are thus brought to the open by this stipulation. Since CIFC appears in the registered chattel mortgage to have sold the vessel in question to Robert Ong, the said contract is null and void because CIFC never for a second or a moment became the owner of the vessel. CIFC was the one who prepared the chattel mortgage and the one who registered the same without contemporaneous or subsequent correction or modification; it cannot, after it notified the public by means of registration that it acquired the vessel and became its owner, now shy away from a stipulation which is the heart and nervecenter of the contract and which it made and registered. This is both the essence and consequence of estoppel. Applicable is Article 1459 of the Civil Code which provides inter-alia: ". . . the vendor must have a right to transfer the ownership thereof (the thing sold) at the time it is delivered." 2. Robert Ong, CIFC's mortgagor, did not acquire ownership of the vessel because of an express stipulation which he signed that the vessel "shall not

Credit Transactions Full Text Cases Atty. Adviento

be registered or transferred to Robert Ong until complete payment." (Exh. "7-C-1".) This stipulation is expressly covered by Article 1478 of the Civil Code: "The parties may stipulate that ownership in the thing shall not pass to the purchaser until he has fully paid the price." Since Ong clearly was not the owner of the vessel at the time of the execution of the mortgage, the said mortgage is null and void on that ground. 24 Ang Tay's contentions are unmeritorious. As previously discussed, paragraph 3 of the chattel mortgage contract was erroneously but unintentionally filled up. The failure of petitioner to exercise due care in filling up the necessary provisions in the chattel mortgage contract does not, however, amount to bad faith. It was a mere oversight and not a deliberate and malicious act. Petitioner's bad faith is further demonstrated, Ang Tay avers, by its failure to comply with the following requirements of P.D. No. 1521 or the Ship Mortgage Decree of 1978: 1) The loan secured by the mortgaged vessel was not for any of purposes specified in Sec. 2 of P.D. No. 1521, i.e., "financing the construction, acquisition, purchase of vessels or initial operation of vessels" 25 and that petitioner failed to furnish the Central Bank a copy of the mortgage; 26 2) The special affidavit of good faith required in Sec. 4 of P.D. No. 1521 was lacking; and 3) Ong failed to disclose his creditors and lienors as provided in Sec. 6 of P.D. No. 1521. There is no merit in private respondent's allegations. In the 9 November 1989 hearing, Ang Tay confirmed his statement in his affidavit, executed in Civil Case No. CEB-6565, that Ong wanted to obtain a loan to replenish his capital because he had used up his money in the purchase of the subject vessel 27 and that the ship was delivered to Ong so that he could begin deriving economic benefits therefrom. 28 Mr. Randolph Veloso petitioner's collector, processing clerk, credit investigator and appraiser, further testified as follows: xxx xxx xxx Q: Do you know the purpose for that loan A: Yes. Q: What was his purpose? A: He was going to mortgage the vessel to us. Q: What was the purpose of the loan? A: We don't usually ask our client what they will do with it. Q: You don't ask the purpose? A: It is understood that whenever a client approach the institution he usually has a purpose for the money. Q: Did not the corporation was what need has he for the money? xxx xxx xxx 29

203

A: He is going to use it for his business in the boat. Q: And that is his only statement? What was his specific statement? ATTY. UY: Already answered. He will use it in the business of his boat. ATTY. LOGRONIO: What was the purpose. ATTY. UY: Already answered Your Honor and besides it is immaterial. ATTY. LOGRONIO: Very material and it is important Your Honor as there is a violation of the law. I am entitled to insist for the answer. COURT: Witness may answer, if he knows. (TO WITNESS) Q: Did he tell you what was the purpose? A: For the business of the boat. ATTY. LOGRONIO: WITNESS) (TO

Q: That's all, that he is going to use the money for the business of the boat? A: Yes.

From the foregoing, therefore, it can be readily deduced that the loan was for the initial operation of the subject vessel and thus falls under the purposes laid down in the Ship Mortgage Decree. The special affidavit of good faith, on the other hand, is required only for the purpose of transforming an already valid mortgage into a "preferred mortgage." 30 Thus, the abovementioned affidavit is not necessary for the validity of the chattel mortgage itself but only to give it a preferred status. As to the disclosure requirement in Sec. 6 of the Ship Mortgage Decree, 31 it was intentional on Ong's part not to inform petitioner that he had yet to pay in full the purchase price of the subject vessel. Ong presented himself to petitioner as the absolute owner of the LCT "Orient Hope" ex "Asiatic." The Certificate of Ownership in Ong's name showed that the ship was conveyed to him by means of a Deed of Absolute Sale which gave the idea that the purchase price had been fully paid and the sale completed.

Credit Transactions Full Text Cases Atty. Adviento

Petitioner had every right to rely on the Certificate of Ownership and Certificate of Philippine Register duly issued by the Philippine Coast Guard in Ong's name. Petitioner had no reason to doubt Ong's ownership over the subject vessel. The documents presented by Ong, upon petitioner's insistence before accepting the said vessel as loan security, were all in order and properly issued by the duly constituted authorities. There was no circumstance that might have aroused petitioner's suspicion or alerted it to any infirmity committed by Ong. It had no participation in and was not privy to the sale transaction between Jacinto Dy (through Ang Tay) and Ong. Petitioner, thus, had no obligation to undertake further investigation since it had the necessary documents to prove Ong's ownership. In addition petitioner even took pains to inspect the subject vessel which was in Ong's possession. Mr. Benjamin C. Alfaro testified thus: . . . xxx xxx xxx ATTY. LOGRONIO: ATTY. LOGRONIO:

204

Q: You are referring to the picture which you asked the Court to mark as Exhibit . . . . ATTY. UY: No, we are requesting now Your Honor. This has not been marked yet. We asked that the picture showing the back portion of the vessel, Orient Hope be marked as Exhibit "I" and the picture showing the front portion of the vessel as Exhibit "I-1". COURT: (TO INTERPRETER)

Q: In your credit investigation of Mr. Robert Ong did you have a chance yourself or any of your employees to verify the condition and the location of the vessel at the very time? WITNESS: A: Yes. ATTY. LOGRONIO: Q: Will you tell the Court where was the vessel at the time that he applied for a loan with your bank? WITNESS: A: It was under finishing touches in the drydock in . . . think in Lapulapu or Mandaue. ATTY. LOGRONIO: Q: So, more or less, you are sure that at the time that he applied for a loan and you approved the same, this vessel was still at the drydock? WITNESS: A: Yes finishing touches. In fact, it had pictures to support the application. I don't know if we have it now. ATTY. UY: We have. (Counsel producing a picture of a vessel and handing it to the witness). WITNESS: (Cont) This is the picture of the vessel because we required him to submit. xxx xxx xxx 32

Mark it. ATTY. LOGRONIO: WITNESS) (TO

Q: So, at the time that the vessel was submitted to you as collateral for the loan, the condition of the vessel was as it is reflected in this exhibit? (Crossexaminer referring to the picture). WITNESS: A: Yes.

Anent the last issue, although Ang Tay may also be an innocent person, a similar victim of Ong's fraudulent machinations, it was his act of confidence which led to the present fiasco. Ang Tay readily agreed to execute a deed of absolute sale in Ong's favor even though Ong had yet to make a complete payment of the purchase price. It is true that in the copy of the said deed submitted by Ang Tay there was an undertaking that ownership will not vest in Ong until full payment. 33 However, Ong was able to obtain several copies of the deed 34 with Ang Tay's signature and had these notarized without the aforementioned undertaking as evidenced by the copy of the deed of sale presented by petitioner. 35 The Deed of Absolute Sale consisted of two (2) pages. The signatures of Ang Tay and Ong appeared only on the first page of the deed. The Second page contained the continuation of the acknowledgment and the undertaking. Ong could have easily reproduced the second page without the undertaking since this page was not signed by the contracting parties. To complete the deception, Ang Tay unwittingly allowed Ong to have possession of the ship. Hence, in consonance with our ruling that: . . . as between two innocent persons, the mortgagee and the owner of the mortgaged property, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss. 36 it is Ang Tay and his principal Jacinto Dy who must, unfortunately, suffer the consequences thereof. They are considered bound by the chattel mortgage on the subject vessel. WHEREFORE, this Court GRANTS the Petition for Review and REVERSES the questioned decision and resolution of the Court of Appeals. The validity of the chattel mortgage on the vessel LCT ORIENT HOPE is hereby upheld without prejudice to whatever legal remedies

Credit Transactions Full Text Cases Atty. Adviento

private respondent Ang Tay may have against private1 respondent Robert Ong in the premises. SO ORDERED. EN BANC 2 Showcases (big, with

205
mirrors).

1 Rattan sala set with 4 chairs, 1 table and 3 sidetables . 1 1 1 DECISION January 29, 1960 2 1 1 1 Gas Beds Freezer range (magic Freezer Tocador Wooden (brown Aparador (single (deep chef, with 4 with drawer. mirror). . type). freeze). burners). (G.E.).

G.R. No. L-13194 BUENAVENTURA T. SALDANA, plaintiff-appellant, vs. PHILIPPINE GUARANTY COMPANY, INC., et al., defendants-appellees. Gatchalian & Padilla for appellant. Emiliano Tabasondra for appellee Company.Teodoro Padilla for the other appellees. , J.:

On January 31, 1957, the plaintiff-appellant Saldana filed a third-party claim asserting that the above-described properties levied are subject to his chattel mortgage of May 8, 1953. In virtue thereof, the sheriff released only some of the property originally included in the levy of January 28, 1957, to wit: 1 8 32 1 Radio, Tables, Chromiun G.E. chairs, Zenith, cabinet stateside stateside Deep type. aQK0x. z4XIN3oS91. freezer.

This case arose from a complaint for damages filed by Buenaventura Saldana (docketed as Civil Case No. 32703 of the Court of First Instance of Manila) that was dismissed by order of the Court dated August 20, 1957, for lack of sufficient cause of action. In another order of September 30, 1957 of the same court, plaintiff's motion for reconsideration was denied, and the case was appealed to this Court. The facts are that on May 8, 1953, in order to secure an indebtedness of P15,000.00, Josefina Vda. de Aleazar executed in favor of the plaintiffappellant Buenaventura Saldana a chattel mortgage covering properties described as follows: A building of strong materials, used for restaurant business, located in front of the San Juan de Dios Hospital at Dewey Boulevard, Pasay City, and the following personal properties therein contained: 1 1 1 1 1 8 32 1 1 Sala Bedroom Chromium set Electric Frigidaire, G.E. Tables, chairs, upholstered, set, 6 6 range, 8 stateside, 4 cubic Radio, Zenith, cabinet type. Cooler. burners. feet. Deepfreezer. stateside. stateside. pieces. pieces.

To proceed with the execution sale of the rest of the properties still under levy, the defendants-appellees Hospital de San Juan de Dios, Inc. and the Philippine Guaranty Co., Inc., executed an indemnity bond to answer for any damages that plaintiff might suffer. Accordingly, on February 13, 1957, the said properties were sold to the defendant hospital as the highest bidder, for P1,500.00. Appellants claims that the phrase in the chattel mortgage contract "and all other furnitures, fixtures and equipment found in the said premises", validly and sufficiently covered within its terms the personal properties disposed of in the auction sale, as to warrant an action for damages by the plaintiff mortgagee. There is merit in appellant's contention. Section 7 of Act No. 1508, commonly and better known as the Chattel Mortgage Law, does not demand a minute and specific description of every chattel mortgaged in the deal of mortgage but only requires that the description of the properties be such "as to enable the parties in the mortgage, or any other person, after reasonable inquiry and investigation to identify the same". Gauged by this standard, general description have been held by this Court. (See Stockholder vs. Ramirez, 44 Phil. 993; Pedro de Jesus vs. Guam Bee Co., Inc., 72 Phil. 464). A similar rule obtains in the United States courts and decisions there have repeatedly upheld clauses of general import in mortgages of chattels other than goods for trade, and containing expressions similar to that of the contract now before us. Thus, "and all other stones belonging to me and all other goods and chattels" (Russel vs. Winne, 97 Am. Dec. 755); "all of the property of the said W.W. Allen used or situated upon the leased premises" (Dorman vs. Crooks State Bank, 64 A.L.R. 614); "all goods in the store where they are doing business in E. City, N.C." (Davis vs. Turner, 120 Fed. 605); "all and singular the goods, wares, stock, iron tools manufactured articles and property of every description, being situated in or about the shop or building now occupied by me in Howley Stree" (Winslow vs. Merchants Ins. Co., 38 Am. Dec. 368,) were held sufficient description, on the theory that parol evidence could supplement it to render identification rule is expressed in Walker vs. Johnson (Mont.) 1254 A.L.R. 937: The courts and textbook writers have developed several rules for determination of the sufficiency of the description in a chattel mortgage. The rules are general in nature and are different where the controversy is between the parties to the mortgage from the situation where third parties with out actual notice come in. In 11 C.J. 457, it is said: "Ad against third persons the description in the mortgage must point out its subject matter so that such person may identify the chattels observed, but it is not

And all other furniture's, fixtures or equipment found in the said premises. Subsequent to the execution of said mortgage and while the same was still in force, the defendant Hospital de San Juan de Dios, Inc. obtained, in Civil Case No. 1930 of the Municipal Court of Pasay City, a judgment was duly Josewfina Vda. de Eleazar. A writ of execution was duly issued and, on January 28, 1957, the same was served on the judgment debtor by the sheriff of Pasay City; whereupon the following properties of Josefina Eleazar were levied upon: 8 1 1 1 Tables Table Table Radio-phono with with (large) 4 (upholstered) 4 with (Zenith, 8 chairs each. chairs. chairs. tubes).

(wooden) 5

Credit Transactions Full Text Cases Atty. Adviento

essential that the description be so specific that the property may be identified by it alone, if such description or means of identification which, if pursued will disclose the property conveyed." In 5 R.C.L. 423 the rule is stated that a description which will enable a third person, aided by inquires which the instrument itself suggest to identify the property is sufficiently definite." In 1 Jones on Chattel Mortgages and Conditional Sales, Bowers Edition, at page 95 the writer says: "As to them (third persons), the description is sufficient if it points to evidence whereby the precise thing mortgaged may be ascertained with certainty." Here there is nothing in the description "873 head of sheep" from which anyone, the mortgagee or third persons, could ascertain with any certainty what chattels were covered by the mortgage. In many instances the courts have held the description good where, though otherwise faulty, the mortgage explicity states that the property is in the possession of the mortgagor, and especially where it is the only property of that kind owned by him. The specifications in the chattel mortgage contract in the instant case, we believe, in substantial compliance with the "reasonable description rule" fixed by the chattel Mortgage Act. We may notice in the agreement, moreover, that the phrase in question is found after an enumeration of other specific articles. It can thus be reasonably inferred therefrom that the "furnitures, fixture and equipment" referred to are properties of like nature, similarly situated or similarly used in the restaurant of the mortgagor located in front of the San Juan de Dos Hospital at Dewey Boulevard, Pasay City, which articles can be definitely pointed out or ascertain by simple inquiry at or about the premises. Note that the limitation found in the last paragraph of section 7 of the Chattel Mortgage Law1 on "like or subsituated properties" make reference to those "thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged", not to those already existing and originally included at the date of the constitution of the chattel mortgage. A contrary view would unduly impose a more rigid condition than what the law prescribes, which is that the description be only such as to enable identification after a reasonable inquiry and investigation. The case of Giberson vs. A.N. Jureidini Bros., 44 Phil. 216, 219, cited by the appellees and the lower court, cannot be likened to the case at bar, for there, what were sought to be mortgaged included two stores wit all its merchandise, effects, wares, and other bazar goods which were being constantly disposed of and replaced with new supplies in connection with the business, thereby making any particular or definite identification either impractical or impossible under the circumstances. Here, the properties deemed overed were more or less fixed, or at least permanently situated or used in the premises of the mortgagor's restaurant. The rule in the Jureidini case is further weakened by the court's observation that (44 Phil. p. 220) Moreover, if there should exist any doubts on the questions we have just discussed, they should be treshed out in the insolvency proceedings, which appears inconsistent with the definitive character of the rulings invoked. We find that the ground for the appealed order (lack of cause of action) does not appear so indubitable as to warrant a dismissal of the action without inquiry into the merits and without the description in the deed of mortgage (Nico vs. Blanco, 81 Phil. 213; Zobel vs. Abreau, 52 O.G. 3592). Wherefore, the orders appealed from are set aside and the case remanded to the lower court for further proceedings. Costs against appellee. Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia, Barrera and Gutierrez David, J., concur. THIRD DIVISION

206

vs. HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES, respondents.

GONZAGA-REYES, J.: Before Us for review on certiorari is the decision of the respondent Court of Appeals in C.A. G.R. C.V. No. 27861, promulgated on April 23, 1992, 1 affirming in toto the decision of the Regional Trial Court of Makati 2 to a award respondent bank's deficiency claim, arising from a loan secured by chattel mortgage. The antecedents of the case are as follows: On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner PAMECA, through its President, petitioner Herminio C. Teves, executed a promissory note for the said amount, promising to pay the loan by installment. As security for the said loan, a chattel mortgage was also executed over PAMECA's properties in Dumaguete City, consisting of inventories, furniture and equipment, to cover the whole value of the loan. On January 18, 1984, and upon petitioner PAMECA's failure to pay, respondent bank extrajudicially foreclosed the chattel mortgage, and, as sole bidder in the public auction, purchased the foreclosed properties for a sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint for the collection of the balance of P4,366,332.46 3 with Branch 132 of the Regional Trial Court of Makati City against petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA under the promissory note. On February 8, 1990, the RTC of Makati rendered a decision on the case, the dispositive portion of which we reproduce as follows: WHEREFORE, judgment is hereby rendered ordering the defendants to pay jointly and severally plaintiff the (1) sum of P4,366,332.46 representing the deficiency claim of the latter as of March 31, 1984, plus 21% interest per annum and other charges from April 1, 1984 until the whole amount is fully paid and (2) the costs of the suit. SO ORDERED." 4 The Court of Appeals affirmed the RTC decision. Hence, this Petition. The petition raises the following grounds: 1. Respondent appellate court gravely erred in not reversing the decision of the trial court, and in not holding that the public auction sale of petitioner PAMECA's chattels were tainted with fraud, as the chattels of the said petitioner were bought by private respondent as sole bidder in only 1/6 of the market value of the property, hence unconscionable and inequitable, and therefore null and void. 2. Respondent appellate court gravely erred in not applying by analogy Article 1484 and Article 2115 of the Civil Code by reading the spirit of the law, and taking into consideration the fact that the contract of loan was a contract of adhesion. 3. The appellate court gravely erred in holding the petitioners Herminio Teves, Victoria Teves and Hiram Diday R. Pulido solidarily liable with PAMECA Wood Treatment Plant, Inc. when the intention of the parties was that the loan is only for the corporation's benefit.

G.R. No. 106435 July 14, 1999 PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO, petitioners,

Credit Transactions Full Text Cases Atty. Adviento

Relative to the first ground, petitioners contend that the amount of P322,350.00 at which respondent bank bid for and purchased the mortgaged properties was unconscionable and inequitable considering that, at the time of the public sale, the mortgaged properties had a total value of more than P2,000,000.00. According to petitioners, this is evident from an inventory dated March 31, 1980 5, which valued the properties at P2,518,621.00, in accordance with the terms of the chattel mortgage contract 6 between the parties that required that the inventories "be maintained at a level no less than P2 million". Petitioners argue that respondent bank's act of bidding and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their actual value in a public sale in which it was the sole bidder was fraudulent, unconscionable and inequitable, and constitutes sufficient ground for the annulment of the auction sale. To this, respondent bank contends that the above-cited inventory and chattel mortgage contract were not in fact submitted as evidence before the RTC of Makati, and that these documents were first produced by petitioners only when the case was brought to the Court of Appeals. 7 The Court of Appeals, in turn, disregarded these documents for petitioners' failure to present them in evidence, or to even allude to them in their testimonies before the lower courtr. 8 Instead, respondent court declared that it is not at all unlikely for the chattels to have sufficiently deteriorated as to have fetched such a low price at the time of the auction sale. 9 Neither did respondent court find anything irregular or fraudulent in the circumstance that respondent bank was the sole bidder in the sale, as all the legal procedures for the conduct of a foreclosure sale have been complied with, thus giving rise to the presumption of regularity in the performance of public duties. 10 Petitioners also question the ruling of respondent court, affirming the RTC, to hold private petitioners, officers and stockholders of petitioner PAMECA, liable with PAMECA for the obligation under the loan obtained from respondent bank, contrary to the doctrine of separate and distinct corporate personality. 11 Private petitioners contend that they became signatories to the promissory note "only as a matter of practice by the respondent bank", that the promissory note was in the nature of a contract of adhesion, and that the loan was for the benefit of the corporation, PAMECA, alone. 12 Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that Articles 1484 13 and 2115 14 of the Civil Code be applied in analogy to the instant case to preclude the recovery of a deficiency claim.
15

207

registering the officer's return shall be taxed as a part of the costs of sale, which the officer shall pay to the Register of Deeds. The return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgage, shall be paid to the mortgagor or persons holding under him on demand. (Emphasis supplied). It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and costs. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at public auction. As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co. 17, cited in Ablaza vs. Ignacio, supra: While it is true that section 3 of Act No. 1508 provides that "a chattel mortgage is a conditional sale", it further provides that it "is a conditional sale of personal property as security for the payment of a debt, or for the performance of some other obligation specified therein." The lower court overlooked the fact that the chattels included in the chattel mortgage are only given as security and not as a payment of the debt, in case of a failure of payment. The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage, given as security, should sell for more than the amount of the indebtedness secured, that the creditor would be entitled to the full amount for which it might be sold, even though that amount was greatly in excess of the indebtedness. Such a result certainly was not contemplated by the legislature when it adopted Act No. 1508. There seems to be no reason supporting that theory under the provision of the law. The value of the chattels changes greatly from time to time, and sometimes very rapidly. If for example, the chattels should greatly increase in value and a sale under that condition should result in largely overpaying the indebtedness, and if the creditor is not permitted to retain the excess, then the same token would require the debtor to pay the deficiency in case of a reduction in the price of the chattels between the date of the contract and a breach of the condition. Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on the question of chattel mortgages, have said, that "in case of a sale under a foreclosure of a chattel mortgage, there is no question that the mortgagee or creditor may maintain an action for the deficiency, if any should occur." And the. fact that Act No. 1508 permits a private sale, such sale is not, in fact, a satisfaction of the debt, to any greater extent than the value of the property at the time of the sale. The amount received at the time of the sale, of course, always requiring good faith and honesty in the sale, is only a payment,

Petitioners are not the first to posit the theory of the applicability of Article 2115 to foreclosures of chattel mortgage. In the leading case of Ablaza vs. Ignacio 16, the lower court dismissed the complaint for collection of deficiency judgment in view of Article 2141 of the Civil Code, which provides that the provisions of the Civil Code on pledge shall also apply to chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage Law. It was the lower court's opinion that, by virtue of Article 2141, the provisions of Article 2115 which deny the creditor-pledgee the right to recover deficiency in case the proceeds of the foreclosire sale are less than the amount of the principal obligation, will apply. This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law regarding the effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article 2115, in relation to Article 2141, may not be applied to the case. Sec. 14 of Act No. 1508, as amended, or the chattel Mortgage Law, states: xxx xxx xxx The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the Registry of Deeds where the mortgage is recorded, and the Register of Deeds shall record the same. The fees of the officer for selling the property shall be the same as the case of sale on execution as provided in Act Numbered One Hundred and Ninety, and the amendments thereto, and the fees of the Register of Deeds for

Credit Transactions Full Text Cases Atty. Adviento

pro tanto, and an action may be maintained for a deficiency in the debt. We find no reason to disturb the ruling in Ablaza vs Ignacio, and the cases reiterating it. 18 Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As correctly pointed out by the trial court, the said article applies clearly and solely to the sale of personal property the price of which is payable in installments. Although Article 1484, paragraph (3) expressly bars any further action against the purchaser to recover an unpaid balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing sold, should the vendee's failure to pay cover two or more installments, this provision is specifically applicable to a sale on installments. To accommodate petitioners' prayer even on the basis of equity would be to expand the application of the provisions of Article 1484 to situations beyond its specific purview, and ignore the language and intent of the Chattel Mortgage Law. Equity, which has been aptly described as "justice outside legality", is applied only in the absence of, and never against, statutory law or judicial rules of procedure. 19 We are also unable to find merit in petitioners' submission that the public auction sale is void on grounds of fraud and inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of Appeals did they attempt to prove inadequacy of price through the documents, i.e., the "Open-End Mortgage on Inventory" and inventory dated March 31, 1980, likewise attached to their Petition before this Court. Basic is the rule that parties may not bring on appeal issues that were not raised on trial. Having nonetheless examined the inventory and chattel mortgage document as part of the records, We are not convinced that they effectively prove that the mortgaged properties had a market value of at least P2,000,000.00 on January 18, 1984, the date of the foreclosure sale. At best, the chattel mortgage contract only indicates the obligation of the mortgagor to maintain the inventory at a value of at least P2,000,000.00, but does not evidence compliance therewith. The inventory, in turn, was as of March 31, 1980, or even prior to April 17, 1980, the date when the parties entered into the contracts of loan and chattel mortgage, and is far from being an accurate estimate of the market value of the properties at the time of the foreclosure sale four years thereafter. Thus, even assuming that the inventory and chattel mortgage contract were duly submitted as evidence before the trial court, it is clear that they cannot suffice to substantiate petitioners' allegation of inadequacy of price.1wphi1.nt Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged properties in the public sale does not warrant the conclusion that the transaction was attended with fraud. Fraud is a serious allegation that requires full and convincing evidence, 20 and may not be inferred from the lone circumstance that it was only respondent bank that bid in the sale of the foreclosed properties. The sparseness of petitioners' evidence in this regard leaves Us no discretion but to uphold the presumption of regularity in the conduct of the public sale. We likewise affirm private petitioners' joint and several liability with petitioner corporation in the loan. As found by the trial court and the Court of Appeals, the terms of the promissory note unmistakably set forth the solidary nature of private petitioners' commitment. Thus: On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT PLANT, INC., a corporation organized and existing under the laws of the Philippines, with principal office at 304 El Hogar Filipina Building, San Juan, Manila, promise to pay to the order of DEVELOPMENT BANK OF THE PHILIPPINES at its office located at corner Buendia and Makati Avenues, Makati, Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN THOUSAND EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$ 267,881.67) with interest at the rate of three per cent (3%) per annum over DBP's borrowing rate for these funds. Before the date

208

of maturity, we hereby bind ourselves, jointly and severally, to make partial payments as follows: xxx xxx xxx In case of default in the payment of any installment above, we bind ourselves to pay DBP for advances . . . xxx xxx xxx We further bind ourselves to pay additional interest and penalty charges on loan amortizations or portion thereof in arrears as follows: xxx xxx xxx In addition to the above, we also bind ourselves to pay for bank advances for insurance premiums, taxes . . . xxx xxx xxx We further bind ourselves to reimburse DBP on a prorata basis for all costs incurred by DBP on the foreign currency borrowings from where the loan shall be drawn . . . xxx xxx xxx In case of non-payment of the amount of this note or any portion of it on demand, when due, or any other amount or amounts due on account of this note, the entire obligation shall become due and demandable, and if, for the enforcement of the payment thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is constrained to entrust the case to its attorneys, we jointly and severally bind ourselves to pay for attorney's fees as provided for in the mortgage contract, in addition to the legal fees and other incidental expenses. In the event of foreclosure of the mortgage securing this note, we further bind ourselves jointly and severally to pay the deficiency, if any. (Emphasis supplied) 21 The promissory note was signed by private petitioners in the following manner: PAMECA WOOD TREATMENT PLANT, INC. By: (Sgd) HERMINIO G. TEVES (For himself corporation) & as President of above-named

(Sgd) HIRAM DIDAY PULIDO (Sgd) VICTORIA V. TEVES 22 From the foregoing, it is clear that private petitioners intended to bind themselves solidarily with petitioner PAMECA in the loan. As correctly submitted by respondent bank, private petitioners are not made to answer for the corporate act of petitioner PAMECA, but are made liable because they made themselves co-makers with PAMECA under the promissory note.

Credit Transactions Full Text Cases Atty. Adviento

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against petitioners. SO ORDERED.

209