BORROMEO V COURT OF APPEALS same consideration, and this rule applies, although the invalidity is due to violation of a
statutory provision, unless the statute expressly or by necessary implication declares the
NATURE: PETITION for review by certiorari of a decision of the Court of Appeals
FACTS
- Before 1933, defendant [Jose A. Villamor] was a distributor of lumber belonging to Mr.
Miller who was the agent of the Insular Lumber Company in Cebu City. Defendant being
a friend and former classmate of plaintiff [Canuto O. Borromeo] used to borrow from the
latter certain amounts from time to time.
- On one occasion, defendant borrowed from plaintiff a large sum of money for which he
mortgaged his land and house in Cebu City to pay some pressing obligation with Mr.
Miller.
- Mr. Miller filed a civil action against the defendant and attached his properties including
those mortgaged to plaintiff, inasmuch as the deed of mortgage in favor of plaintiff could
not be registered because not properly drawn up.
- Plaintiff then pressed the defendant for settlement of his obligation, but defendant
instead offered to execute a document promising to pay his indebtedness even after the
lapse of ten years. Liquidation was made and defendant was found to be indebted to
plaintiff in the sum of P7,220.00, for which defendant signed a promissory note therefor
on November 29, 1933 with interest at the rate of 12% per annum, agreeing to pay as
soon as I have money'.
- The note further stipulates that defendant 'hereby relinguish, renounce, or otherwise
waive my rights to the prescriptions established by our Code of Civil Procedure for the
collection or recovery of the above sum of P7,220.00. * * * at any time even after the
lapse of ten years from the date of this intrument'.
- After the execution of the document, plaintiff limited himself to verbally requesting
defendant to settle his indebtedness from time to time. Plaintiff did not file any complaint
against the defendant within ten years from the execution of the document as there was
no property registered in defendant's name, who furthermore assured him that he could
collect even after the lapse of ten years. After the last war, plaintiff made various oral
demands, but defendants failed to settle his account
- CFI: Villamor ordered to pay Borromeo (represented by his heirs) the sum of P7,220.00
within ninety days from the date of the receipt of such decision with interest at the rate of
12% per annum from the expiration of such ninety-day period.
- CA: reversed CFI ruling
ISSUE: WON the CA erred in reversing the ruling of the CFI in finding the lack of
validity of the stipulation amounting to a waiver in line with the principle "that a person
cannot renounce future prescription"
HELD: YES
Ratio: Between two possible interpretations, that which saves rather than destroys is to
be preferred. It is a fundamental principle in the interpretation of contracts that while
ordinarily the literal sense of the words employed is to be followed, such is not the case
where they "appear to be contrary to the evident intention of the contracting parties,"
which "intention shall prevail." The terms, clauses and conditions contrary to law, morals
and public order (in this case the contested stipulation) should be separated from the valid
and legal contract when such separation can be made because they are independent of the
valid contract which expresses the will of the contracting parties. Reasoning There is
nothing implausible in the view that such language renouncing the debtor's right to the
prescription established by the Code of Civil Procedure should be given the meaning, as
noted in the preceding sentence of the decision of respondent Court, that the debtor could
be trusted to pay even after the termination of the ten-year prescriptive period. (so CA
should have interpreted the stipulation based on the context of the friendship between the
two parties)
- 'Where an agreement founded on a legal consideration contains several promises, or a
promise to do several things, and a part only of the things to be done are illegal, the
promises which, can be separated, or the promise, so far as it can be separated, from the
illegality, may be valid. The rule is that a lawful promise made for a lawful consideration
is not invalid merely because an unlawful promise was made at the same time and for the
entire contract void.
- The first ten years after November 29, 1933 should not be counted in determining when
the action of creditor, now represented by petitioners, could be filed. From the joint record
on appeal, it is undoubted that the complaint was filed on January 7, 1953. If the first ten-
year period was to be excluded, the creditor had until November 29, 1953 to start judicial
proceedings. After deducting the first tenyear period which expired on November 29,
1943, there was the additional period of still another ten years.29 Nor could there be any
legal objection to the complaint by the creditor Borromeo of January 7, 1953 embodying
not merely the fixing of the period within which the debtor Villamor was to pay but
likewise the collection of the amount that until then was not paid. Disposition Wherefore,
the decision of respondent Court of Appeals of March 7, 1964 is reversed, thus giving
full force and effect to the decision of the lower court of November 15, 1956. With costs
against private respondents.
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KASILAG v. RODRIGUEZ
FACTS: Marcial Kasilag and Emiliana Ambrosio entered a contract of mortgage of
improvements of land acquired as homestead to secure the payment of the indebtedness
of P1,000 plus interest. The parties stipulated that Emilina Ambrosio was to pay the debt
with interest within 4 ½ years., and in such case, mortgage would not have any effect.
They also agreed that Emiliana Ambrosio would execute a deed of sale if it would not be
paid within 4 ½ years and that she would pay the tax on the land. After a year, it turned
out that she was not able to pay the tax. Hence, they entered a verbal agreement whereby
she conveyed to the latter the possession of the land on the condition that they would not
collect the interest of the loan, would attend to the payment of the land tax, would benefit
by the fruits of the land, & would introduce improvement thereof.
These pacts made by the parties independently were calculated to alter the
mortgage a contract clearly entered into, converting the latter into a contract of
antichresis. The contract of antichresis, being a real encumbrance burdening the land, is
illegal and void because it is legal and valid.
ISSUE: W/N the petitioner should be deemed the possessor of the land in good faith
because he was unaware of any flaw in his title or in the manner of its acquisition by
which it is invalidated
RULING: Yes. From the facts found established by the Court of Appeals we can neither
deduce nor presume that the petitioner was aware of a flaw in his title or in the manner of
its acquisition, aside from the prohibition contained in section 116. This being the case,
the question is whether good faith may be premised upon ignorance of the laws.
Gross and inexcusable ignorance of law may not be the basis of good faith, but possible,
excusable ignorance may be such basis. It is a fact that the petitioner is not conversant
with the laws because he is not a lawyer. In accepting the mortgage of the improvements
he proceeded on the well-grounded belief that he was not violating the prohibition
regarding the alienation of the land. In taking possession thereof and in consenting to
receive its fruits, he did not know, as clearly as a jurist does, that the possession and
enjoyment of the fruits are attributes of the contract of antichresis and that the latter, as a
lien, was prohibited by section 116. These considerations again bring us to the conclusion
that, as to the petitioner, his
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SANTI vs. COURT of APPEALS
FACTS:
Esperanza Jose, a registered owner of a parcel of land, leased a portion of her property in
Cavite to spouses Eugenio Vitan and Beatriz Francisco for a period of 20 years
automatically extended for another 20 years. Spouses, in turn, sold all their rights and
interest to Augusto Reyes where a new lease contract was entered with Jose. In the
interim, Jose sold all his rights to plaintiff Vicente Santi, with a rental of 20 years
extendable for another 20 years. After Reyes’ expiration of lease, plaintiff Santi wrote to
Reyes’ heirs demanding recover of possession. Defendants refused on the contention that
there was automatic 20 years extension, and tendered to plaintiff the payment which the
latter refused to accept. Plaintiff filed a complaint against Reyes which the trial court
ruled in his favor. CA reversed the lower court’s decision.
ISSUE:
Whether the contract of lease contained automatic extension of lease
HELD: NO. The phrase, “automatically extended” did not appear and was not used in
the lease contract subsequently entered by Jose and Reyes since the lessor did not want
to be bound by the stipulation of automatic extension as provided in the previous contract.
It clearly shows that Jose did not intend to automatically extend the lease contract but to
ponder whether to do so. If the intention provided for an automatic extension, they could
have easily provided a 40 years contract instead to 20.
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DIEGO RAPANUT, petitioner,
vs.
THE COURT OF APPEALS and SUSAN
FLUNKER, respondents.
This is a petition for review on certiorari assailing the Decision of the Court of Appeals
in CA-G.R. CV No. 29944, which affirmed the Decision of the Regional Trial Court,
Branch 117, Pasay City in Civil Case No. 7224.
We grant the petition.
I the date of payment of the 10% interest and the number of years within which to pay the
On November 29, 1985, petitioner and private respondent executed a Deed of Conditional
Sale with Mortgage. Under the contract, private respondent agreed to sell to petitioner a
parcel of land in San Rafael, Pasay City, covered by TCT No. 77982 for P42,840.00,
payable in monthly installments of P500.00 to be paid not later than the fifth day of every
month and in semi-annual installments of P1,000.00 to be paid on June 30 and December
31 of every year, "with an interest of 10% per annum on the remaining balance until the
full amount is paid" (Rollo, p. 22).
In April 1986, petitioner and private respondent entered into a Supplemental Agreement
with the following stipulations:
WHEREAS, the VENDOR/MORTGAGEE is willing to sell said
portion of her lots to the VENDEE/MORTGAGOR for a total price
of P37,485.00 payable in monthly installments of P500.00 with an
interest of 10% per annum on the remaining balance until the full
amount is paid.
Payments of the monthly installments of P500.00 shall be made
not later than the fifth day of every month without need of demand
starting January, 1986. Failure to pay any of the monthly
installments when due for three months, shall be sufficient cause
for rescission of this contract and all payments made shall be
applied as corresponding rentals. (Rollo, pp. 25-26).
Petitioner, thus, had been making the P500.00 monthly installment payments until he
received a letter dated February 13, 1990 from private respondent' s counsel informing
him that for his failure to pay the monthly installments plus 10% per annum interest on
the balance, the Deed of Conditional Sale with Mortgage and the Supplemental
Agreement were rescinded "as of receipt hereof," and that payments made were
considered rentals. The letter further demanded that petitioner vacate the premises within
15 days from receipt thereof.
On March 14, 1990, private respondent filed a complaint against petitioner in the
Regional Trial Court, Branch 117, Pasay City for rescission of the contracts (Civil Case
No. 7224). After trial, the court a quo disposed:
WHEREFORE, in view of the foregoing, the Court renders
judgment in favor of [private respondent] against [petitioner] and
orders the rescission of the Deed of Conditional Sale with
Mortgage and Supplemental Agreement; [petitioner] is also
ordered to pay the amount of P5,000.00 by way of acceptance fee;
P1,000.00 for every court appearance as attorney's fees; and actual
damages in the amount of P2,000.00, plus costs (Rollo, pp. 48-49).
Petitioner appealed to the Court of Appeals, which affirmed the trial court's decision but
deleted the award of actual damages and attorney's fees.
II
Before us, petitioner raises the following issues: (1) whether the February 13, 1990 letter
resolving the two contracts was effective; and (2) whether petitioner has substantially
complied with his obligation.
Petitioner had paid private respondent the amount of P24,500.00, consisting of the
P500.00 monthly installments from January 1986 to January 1990.
The trial court and the appellate court agreed with private respondent's theory that the
above payments should be applied to the unpaid accrued interest (10% per annum on the
balance) for the years 1986 to 1989 totalling P10,966.18, pursuant to Article 1253 of the
Civil Code of the Philippines. Said Article provides that "[i]f the debt produces interest,
payment of the principal shall not be deemed to have been made until the interests have
been covered."
Thus, the courts a quo concluded that after such application of payment, petitioner had
unpaid installments in the amount of P23,751.18 representing 21 monthly installments.
Petitioner, on the other hand, contends that under the contracts, "the provision on the
payment of 10% should be understood to mean that the accrued and accumulated interest
will be added to the principal and petitioner will continue to pay the monthly installment
of P500.00 until the whole amount together with the interest are fully paid" (Rollo, p. 16).
He asserts that this contention finds support in the fact that the contracts did not specify
installments (Rollo, p. 16).
III
The controversial provision in the Supplemental Agreement reads: ". . . the
VENDOR/MORTGAGEE is willing to sell said portion of her lot to the
VENDEE/MORTGAGOR for a total price of P37,485.00 payable in monthly installments
of P500.00 with an interest of 10% per annum on the remaining balance until the full
amount is paid" (Rollo, pp. 25-26; Emphasis supplied).
Private respondent's view is that the 10% interest must be paid every year. Petitioner
posits that the P500.00 monthly installments include the 10% interest.
The interpretation of the provision in question having been put in issue, the Court is
constrained to determine which interpretation is more in accord with the intent of the
parties (cf. Capital Insurance & Surety Co., Inc. v. Central Azucarera del Danao, 221
SCRA 98 [1993]). To ascertain the intent of the parties, the Court shall look at their
contemporaneous and subsequent acts (Civil Code of the Philippines, Art. 1371).
The Deed of Conditional Sale with Mortgage categorically provides for the date of
payment of the P500.00 monthly installments, that is, not later than the fifth of every
month, and of the P1,000.00 semi-annual installment, that is, on June 30 and December
31. The Supplemental Agreement was likewise specific that petitioner shall pay private
respondent "monthly installments of P500.00 with an interest of 10% per annum on the
remaining balance until the full amount is paid" (Rollo, p 26).
A liberal interpretation of the contracts in question is that at the end of each year, all
payments made shall be deducted from the principal obligation. The 10% interest on the
balance is then added to whatever remains of the principal. Thereafter, petitioner shall
pay the monthly installments on the stipulated dates. In other words, the interest due are
added to and paid like the remaining balance of the principal. Thus, we must rule that the
parties intended that petitioner pay the monthly installments at predetermined dates, until
the full amount, consisting of the purchase price and the interests on the balance, is paid.
Significant is the fact that private respondent accepted the payments petitioner religiously
made for four years. Private respondent cannot rely on the clause in the contract stating
that no demand is necessary to explain her silence for four years as to the 10% interest,
as such clause refers to the P500.00 monthly installments.
Even granting as acceptable private respondent's theory that the monthly amortizations
shall first be applied to the payment of the interests, we must still rule for petitioner.
The contracts provided for private respondent's right of rescission which may be exercised
upon petitioner's failure to pay installments for three months. Private respondent's failure
to exercise her right of rescission after petitioner's alleged default constitutes a waiver of
such right. Her continued acceptance of the installment payments places her in estoppel.
In Angeles v. Calasanz, 135 SCRA 323 (1985), therein defendants appellants accepted
delayed installment payments from the plaintiffs-appellees, but subsequently rescinded
the contract to sell. Paragraph six of said contract provided for the vendor's right to rescind
the contract upon the vendee's failure to pay an installment, which can be exercised after
the lapse of a grace period of one month. We ruled that:
. . . We agree with the plaintiffs-appellees that when the
defendants-appellants, instead of availing of their alleged right to
rescind, have accepted and received delayed payments of
installments, though the plaintiffs-appellees have been in arrears
beyond the grace period mentioned in paragraph 6 of the contract,
the defendants-appellants have waived and are now estopped from
exercising their alleged right of rescission (at p. 332).
Angeles cites as precedent De Guzman v. Guieb 48 SCRA. 68 (1972). In De Guzman, the
"Option ton Purchase Real Property" provided that the option was rendered null and void
upon the failure of the grantee to pay the monthly rentals for six consecutive months. The
Court held:
But appellants do not deny that inspite of long arrearages, neither
they nor their predecessor . . . even took steps to cancel the option
or to eject the appellees from the home-lot in question. On the
contrary, it is admitted that the delayed payments were received
without protest or qualification. . . . Under these circumstances, We
cannot but agree with the lower court that at time appellees
exercised their option, appellants had already forfeited their right
to invoke the above-quoted provision regarding the nullifying
effect of the non-payment of six months rentals by appellees by
their having accepted without qualification on July 21, 1964 the
full payment of appellees of all their arrearages (at p.77).
After pondering on the meaning of Article 1253, we reach the conclusion that in a contract
involving installment payments with interest chargeable against the remaining balance of
the obligation, it is the duty of the creditor to inform of the amount of interest that falls
due and that he is applying the installment payments to cover said interest. Otherwise, the
creditor cannot apply the payments to the interest and then hold the debtor in default for
non-payment of installments on the principal.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals is
REVERSED and a new one entered as follows:
1 Private respondent's rescission of the contracts is ANNULLED; and
2 Private respondent is ORDERED to ACCEPT the monthly installments of petitioner
without penalty until the full amount of the contracts, including the accrued interest, is
paid in full.
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OIL AND NATURAL GAS COMMISSION v CA
FACTS:
This proceeding involves the enforcement of a foreign judgment rendered by the Civil
Judge of Dehra Dun, India in favor of the petitioner, against the private respondent,
PACIFIC CEMENT COMPANY, INCORPORATED. The petitioner is a foreign
corporation owned and controlled by the Government of India while the private
respondent is a private corporation duly organized and existing under the laws of the
Philippines.
The conflict between the petitioner and the private respondent rooted from the failure of
the respondent to deliver 43,000 metric tons of oil well cement to the petitioner even it
had already received payment and despite petitioner’s several demands. The petitioner
then informed the private respondent that it was referring its claim to an arbitrator
pursuant to Clause 16 of their contract which stipulates that he venue for arbitration shall
be at Dehra dun.
The chosen arbitrator, one Shri N.N. Malhotra, resolved the dispute in favour of the
petitioner setting forth the arbitral award. To enable the petitioner to execute the above
award, it filed a Petition before the Court of the Civil Judge in Dehra Dun. India praying
that the decision of the arbitrator be made "the Rule of Court" in India. This was objected
by the respondent but foreign court refused to admit the private respondent's objections
for failure to pay the required filing fees. Despite notice sent to the private respondent of
the foregoing order and several demands by the petitioner for compliance therewith, the
private respondent refused to pay the amount adjudged by the foreign court as owing to
the petitioner.
The petitioner filed a complaint with Branch 30 of the Regional Trial Court (RTC) of
Surigao City for the enforcement of the aforementioned judgment of the foreign court.
The private respondent moved to dismiss the complaint. RTC dismissed the complaint
for lack of a valid cause of action. The petitioner then appealed to the respondent Court
of Appeals which affirmed the dismissal of the complaint. In its decision, the appellate
court concurred with the RTC's ruling that the arbitrator did not have jurisdiction over the
dispute between the parties, thus, the foreign court could not validly adopt the arbitrator's
award. The petitioner filed this petition for review on certiorari,
ISSUE:
Whether or not the arbitrator had jurisdiction over the dispute between the petitioner and
the private respondent under Clause 16 of the contract.
RULING:
The constitutional mandate that no decision shall be rendered by any court without
expressing therein dearly and distinctly the facts and the law on which it is based does
not preclude the validity of "memorandum decisions" which adopt by reference the
findings of fact and conclusions of law contained in the decisions of inferior tribunals.
Furthermore, the recognition to be accorded a foreign judgment is not necessarily affected
by the fact that the procedure in the courts of the country in which such judgment was
rendered differs from that of the courts of the country in which the judgment is relied on.
If the procedure in the foreign court mandates that an Order of the Court becomes final
and executory upon failure to pay the necessary docket fees, then the courts in this
jurisdiction cannot invalidate the order of the foreign court simply because our rules
provide otherwise.
WHEREFORE, the instant petition is GRANTED, and the assailed decision of the Court
of Appeals sustaining the trial court's dismissal of the OIL AND NATURAL GAS
COMMISSION's complaint before Branch 30 of the RTC of Surigao City is
REVERSED,
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RIGOR V. CONSOLIDATED ORIX LEASING AND FINANCE
CORPORATION
FACTS:
Petitioners obtained a loan from private respondent Consolidated Orix
Leasing and Finance Corporation in the amount of P1,630,320.00. Petitioners executed
a promissory note promising to pay the loan in 24 equal monthly installments every fifth
day of the month commencing on September 5, 1996. The promissory note also provides
that default in paying any installment renders the entire unpaid amount due and payable.
To secure payment of the loan, petitioners executed in favor of private respondent a deed
of chattel mortgage over two dump trucks. Petitioners failed to pay several installments
despite demand from private respondent.
Private respondent sought to foreclose the chattel mortgage by filing a
complaint for Replevin with Damages against petitioners. After service of summons,
petitioners moved to dismiss the complaint on the ground of improper venue based on a
provision in the promissory note which states that, x x x all legal actions arising out of
this note or in connection with the chattels subject hereof shall only be brought in or
submitted to the proper court in Makati City, Philippines. Private respondent opposed
the motion to dismiss and argued that venue was properly laid in Dagupan City where it
has a branch office based on a provision in the deed of chattel mortgage which states that,
x x x in case of litigation arising out of the transaction that gave rise to this contract,
complete jurisdiction is given the proper court of the city of Makati or any proper court
within the province of Rizal, or any court in the city, or province where the
holder/mortgagee has a branch office, waiving for this purpose any proper venue. After
a further exchange of pleadings, the Dagupan trial court denied petitioners’ motion to
dismiss Not satisfied with the orders, petitioners filed a petition for certiorari before the
Court of Appeals imputing grave abuse of discretion by the Dagupan trial court in denying
the motion to dismiss which was denied.
ISSUE:
Whether or not venue was properly laid under the provisions of the chattel
mortgage contract in the light of Article 1374 of the Civil Code.
RULING:
The Court holds that private respondent is not barred from filing its case
against petitioners in Dagupan City where private respondent has a branch office as
provided for in the deed of chattel mortgage.
Art. 1374 of the Civil Code provides that the various stipulations of a contract
shall be interpreted together, attributing to the doubtful ones that sense which may result
from all of them taken jointly.
Applying the doctrine to the instant case, we cannot sustain petitioners’
contentions. The promissory note and the deed of chattel mortgage must be construed
together. Private respondent explained that its older standard promissory notes confined
venue in Makati City where it had its main office. After it opened a branch office in
Dagupan City, private respondent made corrections in the deed of chattel mortgage, but
due to oversight, failed to make the corresponding corrections in the promissory notes.
Petitioners affixed their signatures in both contracts. The presumption is applied that a
person takes ordinary care of his concerns. It is presumed that petitioners did not sign the
deed of chattel mortgage without informing themselves of its contents. As aptly stated in
a case, they being of age and businessmen of experience, it must be presumed that they
acted with due care and have signed the documents in question with full knowledge of
their import and the obligation they were assuming thereby. In any event, petitioners did
not contest the deed of chattel mortgage under Section 8, Rule 8 of the Revised Rules of
Civil Procedure.
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TOMAS K. CHUA vs. COURT OF APPEALS and
ENCARNACION VALDES-CHOY
FACTS: Chua agreed to purchase the paraphernal house of Valdes-Choy for a purchase
price ofP10, 800, 000.00 payable in cash. The latter received from Chua a check for P100,
000. 00 and agreed that the balance is payable on or before 15 July 1989. Failure to pay
balance on or before the said date forfeits the earnest money. On July 13, 1989, Valdes-
Choy as vendor and Chua as vendee signed two Deeds of Absolute Sale. The balance
of P10, 215, 000.00 was not actually paid to Valdes-Choy on the agreed date. On 13
July 1989, Chua did show to Valdes-Choy the PBCom manager’s check for
P10,215,000.00, with Valdes-Choy as payee. However, Chua refused to give this check
to Valdes-Choy until a new TCT covering the Property is registered in Chua’s name.
Chua filed a complaint for specific performance against Valdes-Choy. Chua contends that
there is a perfected contract of sale rather than a contract to sell, and that there was
no reservation in the contract of sale that Valdes-Choy shall retain title to the Property
until after the sale. There was no agreement for an automatic rescission of the contract in
case of Chua’s defaultHe argues that his payment of earnest money and itsacceptance by
Valdes-Choy precludes the latter from rejecting the binding effect of the contract of sale.
ISSUE:
1. Whether or not there is a perfected contract of sale by the payment of the earnest money
HELD:
NO. A perusal of the Receipt shows that the true agreement between the parties was a
contract to sell. Ownership over the Property was retained by Valdes-Choy and was not
to pass to Chua until full payment of the purchase price.
The Receipt provides that the earnest money shall be forfeited in case the buyer fails to
pay the balance of the purchase price on or before 15 July 1989. This is also similar to
giving the seller the right to rescind unilaterally the contract the moment the buyer fails
to pay within a fixed period. The agreement between Chua and Valdes-Choy was
embodied in a receipt rather than in a deed of sale, ownership not having passed between
them. The signing of the Deeds of Sale came later when Valdes-Choy was under the
impression that Chua was about to pay the balance of the purchase price. The absence of
a formal deed of conveyance is a strong indication that the parties did not intend
immediate transfer of ownership, but only a transfer after full payment of the purchase
price. Valdes-Choy retained possession of the certificate of title and all other documents
relative to the sale. In a contract to sell, the obligation of the seller to sell becomes
demandable only upon the happening of the suspensive condition. In this case,
the suspensive condition is the
full payment of the purchase price by Chua. Such full payment gives rise to Chua’s right
to demand the execution of the contract of sale Since Chua refused to pay the
consideration in full on the agreed date, which is a suspensive condition, Chua cannot
compel Valdes-Choy to consummate the sale of the Property.
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RIZAL COMMERCIAL BANKING
CORPORATION, petitioner, vs. COURT OF APPEALS
and FELIPE LUSTRE, respondents.
A simple telephone call and an ounce-of good faith on the part of petitioner could
have prevented the present controversy.
On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota
Corolla from Toyota Shaw, Inc. for which he made a down payment of P164,620.00, the
balance of the purchase price to be paid in 24 equal monthly installments. Private
respondent thus issued 24 postdated checks for the amount of P14,976.00 each. The first
was dated April 10, 1991; subsequent checks were dated every 10 th day of each
succeeding month.
To secure the balance, private respondent executed a promissory note[1] and a
contract of chattel mortgage[2] over the vehicle in favor of Toyota Shaw, Inc. The contract
of chattel mortgage, in paragraph 11 thereof, provided for an acceleration clause stating
that should the mortgagor default in the payment of any installment, the whole amount
remaining unpaid shall become due. In addition, the mortgagor shall be liable for 25% of
the principal due as liquidated damages.
On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the
chattel mortgage to petitioner Rizal Commercial Banking Corporation (RCBC).
All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed
and debited by RCBC from private respondent's account, except for RCBC Check No.
279805 representing the payment for August 10, 1991, which was unsigned. Previously,
the amount represented by RCBC Check No. 279805 was debited from private
respondent's account but was later recalled and re-credited to him.Because of the recall,
the last two checks, dated February 10, 1993 and March 10, 1993, were no longer
presented for payment. This was purportedly in conformity with petitioner bank's
procedure that once a client's account was forwarded to its account representative, all
remaining checks outstanding as of the date the account was forwarded were no longer
presented for payment.
On the theory that respondent defaulted in his payments, the check representing
the payment for August 10, 1991 being unsigned, petitioner, in a letter dated January 21,
1993, demanded from private respondent the payment of the balance of the debt,
including liquidated damages. The latter refused, prompting petitioner to file an action
for replevin and damages before the Pasay City Regional Trial Court (RTC). Private
respondent, in his Answer, interposed a counterclaim for damages.
After trial, the RTC[3] rendered a decision disposing of the case as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows:
I. The complaint, for lack of cause of action, is hereby DISMISSED and plaintiff RCBC
is hereby ordered,
A. To accept the payment equivalent to the three checks amounting to
a total of P44,938.00, without interest
B. To release/cancel the mortgage on the car xxx upon payment of the
amount of P44,938.00 without interest.
C. To pay the cost of suit
 II. On The Counterclaim
A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as
moral damages.
B. RCBC to pay P100,000.00 as exemplary damages.
C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's
fees. Atty. Lustre is not entitled to any fee for lawyering for
himself.
All awards for damages are subject to payment of fees to be assessed by the Clerk
of Court, RTC, Pasay City.
SO ORDERED.
On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC,
thus:
We xxx concur with the trial court's ruling that the Chattel Mortgage contract being a
contract of adhesion that is, one wherein a party, usually a corporation, prepares the
stipulations the contract, while the other party merely affixes his signature or his
"adhesion" thereto xxx - is to be strictly construed against appellant bank which prepared
the form Contract xxx. Hence xxx paragraph 11 of the Chattel Mortgage contract
[containing the acceleration clause] should be construed to cover only deliberate and
advertent failure on the part of the mortgagor to pay an amortization as it became due in
line with the consistent holding of the Supreme Court construing obscurities and
ambiguities in the restrictive sense against the drafter thereof xxx in the light of
Article 1377 of the Civil Code.
In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee
rested solely on the fact that the 5th check issued by appellee xxx was recalled for lack of
signature. However, the check was recalled only after the amount covered thereby had
been deducted from defendant-appellee's account, as shown by the testimony of plaintiff's
own witness Francisco Bulatao who was in charge of the preparation of the list and trial
balances of bank customers xxx. The "default" was therefore not a case of failure to pay,
the check being sufficiently funded, and which amount was in fact already debitted [sic]
from appellee's account by the appellant bank which subsequently re-credited the amount
to defendant-appellee's account for lack of signature. All these actions RCBC did on its
own without notifying defendant until sixteen (16) months later when it wrote its demand
letter dated January 21, 1993.
Clearly, appellant bank was remiss in the performance of its functions for it could have
easily called the defendant's attention to the lack of signature on the check and sent the
check to, or summoned, the latter to affix his signature. It is also to be noted that the
demand letter contains no explanation as to how defendant-appellee incurred arrearages
in the amount of P66,255.70, which is why defendant-appellee made a protest notation
thereon.
Notably, all the other checks issued by the appellee dated subsequent to August 10, 1991
and dated earlier than the demand letter, were duly encashed. This fact should have
already prompted the appellant bank to review its action relative to the unsigned check.
xxx[4]
We take exception to the application by both the trial and appellate courts of Article
1377 of the Civil Code, which states:
The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.
It bears stressing that a contract of adhesion is just as binding as ordinary
contracts.[5] It is true that we have, on occasion, struck down such contracts as void when
the weaker party is imposed upon in dealing with the dominant bargaining party and is
reduced to the alternative of taking it or leaving it, completely deprived of the opportunity
to bargain on equal footing.[6] Nevertheless, contracts of adhesion are not invalid per
se;[7] they are not entirely prohibited.[8] The one who adheres to the contract is in reality
free to reject it entirely; if he adheres, he gives his consent. [9]
While ambiguities in a contract of adhesion are to be construed against the party
that prepared the same,[10] this rule applies only if the stipulations in such contract are
obscure or ambiguous. If the terms thereof are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of its stipulations shall control. [11] In the
latter case, there would be no need for construction. [12]
Here, the terms of paragraph 11 of the Chattel Mortgage Contract[13] are clear. Said
paragraph states:
11. In case the MORTGAGOR fails to pay any of the installments, or to pay the interest
that may be due as provided in the said promissory note, the whole amount remaining
unpaid therein shall immediately become due and payable and the mortgage on the
property (ies) herein-above described may be foreclosed by the MORTGAGEE, or the
MORTGAGEE may take any other legal action to enforce collection of the obligation
hereby secured, and in either case the MORTGAGOR further agrees to pay the
MORTGAGEE an additional sum of 25% of the principal due and unpaid, as liquidated
damages, which said sum shall become part thereof. The MORTGAGOR hereby waives
reimbursement of the amount heretofore paid by him/it to the MORTGAGEE.
The above terms leave no room for construction. All that is required is the
application thereof.
Petitioner claims that private respondent's check representing the fifth installment
was "not encashed,[14] such that the installment for August 1991 was not paid. By virtue
of paragraph 11 above, petitioner submits that it "was justified in treating the entire
balance of the obligation as due and demandable."[15] Despite demand by petitioner,
however, private respondent refused to pay the balance of the debt. Petitioner, in sum,
imputes delay on the part of private respondent.
We do not subscribe to petitioner's theory.
Article 1170 of the Civil Code states that those who in the performance of their
obligations are guilty of delay are liable for damages. The delay in the performance of the
obligation, however, must be either malicious or negligent.[16] Thus, assuming that private
respondent was guilty of delay in the payment of the value of the unsigned check, private
respondent cannot be held liable for damages. There is no imputation, much less
evidence, that private respondent acted with malice or negligence in failing to sign the
check. Indeed, we agree with the Court of Appeals' finding that such omission was mere
"inadvertence" on the part of private respondent. Toyota salesperson Jorge Geronimo
testified that he even verified whether private respondent had signed all the checks and in
fact returned three or four unsigned checks to him for signing:
Atty. Obispo:
After these receipts were issued, what else did you do about the transaction?
A: During our transaction with Atty. Lustre, I found out when he issued to me the 24
checks, I found out 3 to 4 checks are unsigned and I asked him to sign these
checks.
Atty. Obispo:
What did you do?
A: I asked him to sign the checks. After signing the checks, I reviewed again all the
documents, after I reviewed all the documents and found out that all are
completed and the downpayments was completed, we released to him the
car.[17]
Even when the checks, were delivered to petitioner, it did not object to the unsigned
check. In view of the lack of malice or negligence on the part of private respondent,
petitioner's blind and mechanical invocation of paragraph 11 of the contract of chattel
mortgage was unwarranted.
Petitioners conduct, in the light of the circumstances of this case, can only be
described as mercenary. Petitioner had already debited the value of the unsigned check
from private respondent's account only to re-credit it much later to him. Thereafter,
petitioner encashed checks subsequently dated, then abruptly refused to encash the last
two. More than a year after the date of the unsigned check, petitioner, claiming delay and
invoking paragraph 11, demanded from private respondent payment of the value of said
check and. that of the last two checks, including liquidated damages. As pointed out by
the trial court, this whole controversy could have been avoided if only petitioner bothered
to call up private respondent and ask him to sign the check. Good faith not only in
compliance with its contractual obligations,[18] but also in observance of the standard in
human relations, for every person "to act with justice, give everyone his due, and observe
honesty and good faith."[19] behooved the bank to do so.
Failing thus, petitioner is liable for damages caused to private respondent.[20] These
include moral damages for the mental anguish, serious anxiety, besmirched reputation,
wounded feelings and social humiliation suffered by the latter. [21] The trial court found
that private respondent was
[a] client who has shared transactions for over twenty years with a bank xxx. The shabby
treatment given the defendant is unpardonable since he was put to shame and
embarrassment after the case was filed in Court. He is a lawyer in his own right, married
to another member of the bar. He sired children who are all professionals in their chosen
field. He is known to the community of golfers with whom he gravitates. Surely, the filing
of the case made defendant feel so bad and bothered.
To deter others from emulating petitioners callous example, we affirm the award
of exemplary damages.[22] As exemplary damages are warranted, so are attorney's fees.[23]
We, however, find excessive the amount of damages awarded by the trial court in
favor of private respondent with respect to his counterclaims and, accordingly, reduce the
same as follows:
(a) Moral damages - fromP200,000.00 to P100,000.00,
(b) (b)Exemplarydamages from P100,000.00 to P75,000.00,
(c) (c) Attorney's fees - from P 50,000,00 to P 30,000.00.
WHEREFORE, subject to these modifications, the decision of the Court of
Appeals is AFFIRMED.
SO ORDERED.
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GACOOOOS
---------------------------------------------------
PAULINO GARCIA, Plaintiff-Appellant, v. MARIA BISAYA, ET
AL., Defendants-Appellees.
Francisco P. Madlangbayan for Appellant.
Augusto L. Valencia for Appellees.
1. CONTRACTS; REFORMATION OF INSTRUMENT; PRESCRIPTION. — An
action to correct an alleged mistake in a deed of sale covering a piece of land, prescribes
in ten years counted from the day it could have been instituted. There being nothing in
the pleadings to show that the error was discovered more than ten years before the present
action was filed the action should not have been dismissed as having already prescribed
before the factual basis for prescription had been established and clarified by evidence.
2. PLEADING AND PRACTICE; REFORMATION OF INSTRUMENT;
ALLEGATION THAT INSTRUMENT DOES NOT EXPRESS INTENTION OF
PARTIES, ESSENTIAL. — Appellant’s complaint states no cause of action, for it fails
to allege that the instrument to be reformed does not express the real agreement or
intention of the parties. Such allegation is essential since the object sought in an action
for reformation is to make an instrument conform to be real agreement or intention of the
parties. It is not the function of the remedy to make a new agreement, but to establish and
perpetuate the true existing one.
On May 20, 1952, plaintiff filed a complaint against the defendants in the Court of First
Instance of Oriental Mindoro, alleging that on November 12, 1938, defendants executed
in favor of plaintiff a deed of sale covering a parcel of land therein described; that the said
land "was erroneously designated by the parties in the deed of sale as an unregistered land
(not registered under Act 496, nor under the Spanish Mortgage Law) when in truth and
in fact said land is a portion of a big mass of land registered under Original Certificate of
Title No. 6579 in the Office of the Register of Deeds of Oriental Mindoro" ; that despite
persistent demand from plaintiff to have the error corrected, defendants have refused to
do so. Plaintiff, therefore, prayed for judgment ordering defendants to make the aforesaid
correction in the deed of sale.
Answering the complaint, defendants denied having executed the alleged deed of sale and
pleaded prescription as a defense. Traversing the plea of prescription, plaintiff alleged,
among other things, that he "was without knowledge of the error sought to be corrected
at the time the deed of sale was executed and for many years thereafter," having
discovered the said error "only recently."
Without trial on the merits and merely upon motion, the lower court dismissed the case
on the ground that plaintiff’s action had already prescribed. From this order plaintiff has
appealed directly to this Court.
Both appellant and appellees apparently regard the present action as one for the
reformation of an instrument under Chapter 4, Title II, Book IV of the new Civil Code.
Specifically, the object sought is the correction of an alleged mistake in a deed of sale
covering a piece of land. The action being upon a written contract, it should prescribe in
ten years counted from the day it could have been instituted. Obviously, appellant could
not have instituted his action to correct an error in a deed until that error was discovered.
There being nothing in the pleadings to show that the error was discovered more than ten
years before the present action was filed on May 20, 1952, while, on the other hand, there
is allegation that the error was discovered "only recently", we think the action should not
have been dismissed as having already prescribed before the factual basis for prescription
had been established and clarified by evidence.
We note, however, that appellant’s complaint states no cause of action, for it fails to allege
that the instrument to the reformed does not express the real agreement or intention of the
parties. Such allegation is essential since the object sought in an action for reformation is
to make an instrument conform to the real agreement or intention of the parties. (Art.
1359, new Civil Code; 23 R. C. L., par. 2.) But the complaint does not even allege what
the real agreement or intention was. How then is the court to know that the correction
sought will make the instrument conform to what was agreed or intended by the parties?
It is not the function of the remedy of reformation to make a new agreement, but to
establish and perpetuate the true existing one. (23 R. C. L., par. 4, p. 311.)
Moreover, courts do not reform instruments merely for the sake of reforming them, but
only to enable some party to assert right under them as reformed. (23 R. C. L., par. 2). If
the instrument in the present case is reformed by making it state that the land therein
conveyed is already covered by a Torrens certificate of title, what right will the appellant,
as vendee, be able to assert under the reformed instrument when according to himself —
or his counsel states in his brief — said title is in the name of Torcuata Sandoval,
obviously a person other than the vendor? Would not the sale to him then be ineffective,
considering that he would be in the position of one who knowingly purchased property
not belonging to the vendor?
Perhaps appellant’s real grievance is that he has been led to enter into the contract of sale
through fraud or misrepresentation on the part of the vendor or in the mistaken belief that,
as stated in the deed, the property he was buying was unregistered land. But if that be the
case, article 1359 of the new Civil Code expressly provides that "the proper remedy is not
reformation of the instrument but annulment of the contract." Appellant’s complaint,
however, does not ask for the annulment of the deed; neither does it contain allegations
essential to an action for that purpose.
In view of the foregoing, the order of dismissal must be as it is hereby affirmed, not
because appellant’s action has already prescribed, but because his complaint states no
cause of action. Without pronouncement as to costs.
-----------------------------------------------------
BENTIR v LEANDA
Facts: On May 15, 1992, respondent Leyte Gulf Traders, Inc. (herein referred to as
respondent corporation) filed a complaint for reformation of instrument, specific
performance, annulment of conditional sale and damages with prayer for writ of
injunction against petitioners Yolanda Rosello-Bentir and the spouses Samuel and
Charito Pormida. Respondent corporation alleged that it entered into a contract of lease
of a parcel of land with petitioner Bentir for a period of twenty (20) years starting May 5,
1968. According to respondent corporation, the lease was extended for another four (4)
years or until May 31, 1992. On May 5, 1989, petitioner Bentir sold the leased premises
to petitioner spouses Samuel Pormada and Charito Pormada.
Respondent corporation questioned the sale alleging that it had a right of first refusal.
Rebuffed, it filed Civil Case No. 92-05-88 seeking the reformation of the expired contract
of lease on the ground that its lawyer inadvertently omitted to incorporate in the contract
of lease executed in 1968, the verbal agreement or understanding between the parties that
in the event petitioner Bentir leases or sells the lot after the expiration of the lease,
respondent corporation has the right to equal the highest offer.
Issue:
Whether the complaint for reformation filed by respondent Leyte Gulf Traders, Inc. has
prescribed
Whether it is entitled to the remedy of reformation sought
Held:
The remedy of reformation of an instrument is grounded on the principle of equity where,
in order to express the true intention of the contracting parties, an instrument already
executed is allowed by law to be reformed. The right of reformation is necessarily an
invasion or limitation of the parol evidence rule since, when a writing is reformed, the
result is that an oral agreement is by court decree made legally effective. The remedy,
being an extraordinary one, must be subject to limitations as may be provided by law.
Our law and jurisprudence set such limitations, among which is laches.
A suit for reformation of an instrument may be barred by lapse of time. The prescriptive
period for actions based upon a written contract and for reformation of an instrument is
ten (10) years under Article 1144 of the Civil Code. Prescription is intended to suppress
stale and fraudulent claims arising from transactions like the one at bar which facts had
become so obscure from the lapse of time or defective memory. In the case at bar,
respondent corporation had ten (10) years from 1968, the time when the contract of lease
was executed, to file an action for reformation. Sadly, it did so only on May 15, 1992 or
twenty-four (24) years after the cause of action accrued, hence, its cause of action has
become stale, hence, time-barred.
The prescriptive period of ten (10) years provided for in Art. 1144 applies by operation
of law, not by the will of the parties. Therefore, the right of action for reformation accrued
from the date of execution of the contract of lease in 1968.
Prescription; Reformation of an instrument is that remedy in equity by means of which a
written instrument is made or construed so as to express or conform to the real intention
of the parties when some error or mistake has been committed. It is predicated on the
equitable maxim that equity treats as done that which ought to be done. The rationale of
the doctrine is that it would be unjust and unequitable to allow the enforcement of a
written instrument which does not reflect or disclose the real meeting of the minds of the
parties. However, an action for reformation must be brought within the period prescribed
by law, otherwise, it will be barred by the mere lapse of time.
-----------------------------------------------------
PROCESO QUIROS and LEONARDA VILLEGAS vs.
MARCELO ARJONA, TERESITA BALARBAR, JOSEPHINE
ARJONA, and CONCHITA ARJONA
Facts: In Dec 1996, petitioners Proceso Quiros and Leonarda Villegas filed with the
office of the barangay captain of Labney, San Jacinto, Pangasinan, a complaint for
recovery of ownership and possession of a parcel of land located at Labney, San Jacinto,
Pangasinan. Petitioners sought to recover from their uncle Marcelo Arjona, one of the
respondents herein, their lawful share of the inheritance from their late grandmother Rosa
Arjona Quiros alias Doza. In 1997, an amicable settlement was reached between the
parties. By reason thereof, respondent Arjona executed a document denominated as
"PAKNAAN" ("Agreement", in Pangasinan dialect).
Petitioners filed a complaint with the MCTC with prayer for the issuance of a writ of
execution of the compromise agreement which was denied because the subject property
cannot be determined with certainty. The RTC reversed the decision of the municipal
court on appeal and ordered the issuance of the writ of execution. Respondents appealed
to the CA, which reversed the decision of the RTC and reinstated the decision of the
MCTC.
Issue: WON CA erred in reversing the decision of the RTC and reinstating that of the
MCTC.
Ruling: Petition denied.
Generally, the rule is that where no repudiation was made during the 10-day period, the
amicable settlement attains the status of finality and it becomes the ministerial duty of the
court to implement and enforce it. However, such rule is not inflexible for it admits of
certain exceptions. In the case at bar, the ends of justice would be frustrated if a writ of
execution is issued considering the uncertainty of the object of the agreement. To do so
would open the possibility of error and future litigations.
Both parties acknowledge that petitioners are entitled to their inheritance, hence, the
remedy of nullification, which invalidates the Paknaan, would prejudice petitioners and
deprive them of their just share of the inheritance. Respondent cannot, as an afterthought,
be allowed to renege on his legal obligation to transfer the property to its rightful heirs.
A refusal to reform the Paknaan under such circumstances would have the effect of
penalizing one party for negligent conduct, and at the same time permitting the other party
to escape the consequences of his negligence and profit thereby. No person shall be
unjustly enriched at the expense of another.
-----------------------------------------------------
ATILANO V ATILANO MAKALINTAL
NATURE Appeal from the decision of the Court of First Instance FACTS
- In 1916, Eulogio Atilano I acquired, by purchase from one Gerardo Villanueva, lot No.
535 of the then municipality of Zamboanga. The vendee thereafter obtained transfer
certificate of title No. 1134 in his name. In 1920 he had the land subdivided into five
parts. On May 18 of the same year, after the subdivision had been effected, Eulogio
Atilano I, for the sum of P150.00, executed a deed of sale covering lot No. 535-E in favor
of his brother Eulogio Atilano II, who thereupon obtained transfer certificate of title No.
3129 in his name. Three other portions, namely lots Nos. 535-B, 535-C and 535-D, were
likewise sold to other persons, the original owner, Eulogio Atilano I, retaining for himself
only the remaining portion of the land, presumably covered by the title to lot No. 535-A.
Upon his death the title to this lot passed to Ladislao Atilano, defendant in this case, in
whose name the corresponding certificate (No. T-5056) was issued.
- On December 6, 1952, Eulogio Atilano II and his children obtained transfer certificate
of title No. 4889 over lot No. 535-E in their names as co-owners. Then, on July 16, 1959,
desiring to put an end to the co-ownership, they had the land resurveyed so that it could
properly be subdivided; and it was then discovered that the land they were actually
occupying on the strength of the deed of sale executed in 1920 was lot No. 535-A and not
lot 535-E, as referred to in the deed, while the land which remained in the possession of
the vendor, Eulogio Atilano I, and which passed to his successor, defendant Ladislao
Atilano, was lot No. 535-E and not lot No. 535-A.
- On January 25, 1960, the heirs of Eulogio Atilano II, who was by then also deceased,
filed the present action in the CFI of Zamboanga, alleging, that they had offered to
surrender to the defendants the possession of lot No. 535-A and demanded in return the
possession of lot No. 535-E, but that the defendants had refused to accept the exchange.
The plaintiffs' insistence is quite understandable, since lot No. 535-E has an area of 2,612
sq m, as compared to the 1,808 squaremeter area of lot No. 535-A.
- In their answer to the complaint the defendants alleged that the reference to lot No. 535-
E in the deed of sale of May 18, 1920 was an involuntary error; that the intention of the
parties to that sale was to convey the lot correctly identified as lot No. 535-A; that since
1916, when he acquired the entirety of lot No. 535, and up to the time of his death, Eulogio
Atilano I had been possessing and had his house on the portion designated as lot No. 535-
E, after which he was succeeded in such possession by the defendants herein; and that as
a matter of fact Eulogio Atilano I even increased the area under his possession when on
June 11, 1920 he bought a portion of an adjoining lot, No. 536, from its owner Fruto del
Carpio. On the basis of the foregoing allegations the defendants interposed a
counterclaim, praying that the plaintiffs be ordered to execute in their favor the
corresponding deed of transfer with respect to lot No. 535-E.
- The trial court rendered judgment for the plaintiffs since the property was registered
under the Land Registration Act the defendants could not acquire it through prescription.
There can be no dispute as to the correctness of this legal proposition; but the defendants,
aside from alleging adverse possession in their answer and counterclaim, also alleged
error in the deed of sale of May 18, 1920
ISSUE: WON the trial court rendered proper judgment for the plaintiffs since the
property was registered under the Land Registration Act the defendants could not acquire
it through prescription
HELD: NO. The court erred in granting the plaintiffs the lot. Reasoning When one sells
or buys real property, one sells or buys the property as he sees it, in its actual setting and
by its physical metes and bounds, and not by the mere lot number assigned to it in the
certificate of title. The portion correctly referred to as lot No. 535-A was already in the
possession of the vendee, Eulogio Atilano II, who had constructed his residence therein,
even before the sale in his favor even before the subdivision of the entire lot No. 535 at
the instance of its owner, Eulogio Atillano I. In like manner the latter had his house on
the portion correctly identified, after the subdivision, as lot No. 535-E, even adding to the
area thereof by purchasing a portion of an adjoining property belonging to a different
owner. The two brothers continued in possession of the respective portions the rest of
their lives, obviously ignorant of the initial mistake in the designation of the lot subject
of the 1920 until 1959, when the mistake was discovered for the first time.
- The real issue here is not adverse possession, but the real intention of the parties to that
sale. From all the facts and circumstances we are convinced that the object thereof, as
intended and understood by the parties, was that specific portion where the vendee was
then already residing, where he reconstructed his house at the end of the war, and where
his heirs, the plaintiffs herein, continued to reside thereafter:
- The new Civil Code provides a remedy for such a situation by means of reformation of
the instrument. This remedy is available when, there having been a meeting of the funds
of the parties to a contract, their true intention is not expressed in the instrument
purporting to embody the agreement by reason of mistake, fraud, inequitable conduct on
accident (Art. 1359, et seq.) In this case, the deed of sale executed in 1920 need no longer
reformed. The parties have retained possession of their respective properties conformably
to the real intention of the parties to that sale, and all they should do is to execute mutual
deeds of conveyance. Disposition WHEREFORE, the judgment appealed from is
reversed. The plaintiffs are ordered to execute a deed of conveyance of lot No. 535-E in
favor of the defendants, and the latter in turn, are ordered to execute a similar document,
covering lot No. 595-A, in favor of the plaintiffs. Costs against the latter.
-----------------------------------------------------
CARRANTES vs. CA
Facts: Mateo Carantes, original owner of Lot No. 44 situated at Loakan, Baguio City,
died in 1913 leaving his widow Ogasia, and six children, namely, Bilad, Lauro, Crispino,
Maximino, Apung and Sianang,. In 1930, the government, in order to expand the landing
field of the Loakan Airport, filed for the expropriation of a portion of Lot. No. 44. Said
lot was subdivided into Lots. No. 44A to 44E for the purpose.
In 1913, Maximino Carrantes (MAX) was appointed the judicial administrator of the
estate of Mateo. Four heirs, namely, Bilad, Lauro, Sianang, and Crisipino, executed a
deed denominated “Assignment of Right to Inheritance” assigning to Max their rights
over said lot in 1939. The stated monetary consideration is P1.00. On same date, Max
sold Lot Nos. 44B and 44C to the government. One year later the Court of First Instance,
upon joint petition of the Carrantes heirs, issued an order cancelling O.C.T. No. 3 and
TCT No. 2533 was issued in its place.
On 16 March 1940, Max registered the deed of “Assignment of Right to
Inheritance”. Thus, TCT No. 2533 was cancelled and TCT 2540 was issued in the name
of Max. A formal deed of Sale was also executed by Max on the same date in favor of the
government. Hence, TCT 2540 was cancelled and new TCTs were issued in favor of the
government and Max, respectively. On 4 Sept. 1958, Bilad, Lauro, and Crispino, along
with the surviving heirs of Apung and Sianang filed complaint in the CFI.
They claimed that the execution of the deed of assignment was attended by fraud. The
trial court decided that the action of the heirs had already prescribed since an action on
fraud prescribes on four years from discovery of such, in this case, on 16 March 1940
when Max registered the deed of assignment. The Court of Appeals reversed and found
that a constructive trust was created. Hence, the present petition.
Issue: 1. whether a constructive trust involves a fiduciary relationship? 2. Whether action
had already prescribed?
Held: 1. The court, assuming that there was fraud, and in turn, a constructive trust in
favor of the other heirs, said that constructive trust does not involve a promise nor
fiduciary relations. Hence, the respondent court’s conclusion that the rule on constructive
notice does not apply because there was a fiduciary relationship between the parties lacks
the necessary premise.
2. Action had already prescribed because there was constructive notice to the heirs when
Maximino registered the deed of assignment with the register of deeds on 16 March 1940.
Such date is the reckoning point of counting prescription based on fraud.
Anent respondent court’s contention that constructive trust is imprescriptible, the court
said that it is untenable. It is already settled that constructive trusts prescribes in 10 years.
In this case, the ten year period started on 16 March 1940. And since the respondents
commenced the action only on 4 Sept. 1958, the same is barred by prescription.
-----------------------------------------------------
SARMING VS. DY
383 SCRA 131, JUNE 6, 2002
FACTS:
A controversy arose regarding the sale of Lot 4163 which was half-owned by
the original defendant, Silveria Flores, although it was solely registered under her name.
The other half was originally owned by Silveria’s brother, Jose. On January 1956, the
heirs of Jose entered into a contract with plaintiff Alejandra Delfino, for the sale of their
one-half share of Lot 4163 after offering the same to their co-owner, Silveria, who
declined for lack of money. Silveria did not object to the sale of said portion to Alejandra.
Atty. Deogracias Pinili, Alejandra’s lawyer then prepared the document of
sale. In the preparation of the document however, OCT no. 4918-A, covering Lot 5734,
and not the correct title covering Lot 4163 was the one delivered to Pinili.
Unaware of the mistake committed, Alejandra immediately took possession
of Lot 4163 and introduced improvements on the said lot.
Two years later, when Alejandra Delfino purchased the adjoinin portion of the
lot she had been occupying, she discovered that what was designated in the deed, Lot
5734, was the wrong lot. Thus, Alejandra and the vendors filed for the feformation of the
Deed of Sale.
ISSUE:
Whether or not reformation is proper in this case.
RULING:
The Court ruled that reformation is proper in the case at bar. Reformation is
that remedy in equity by means of which a written instrument is made or construed so as
to express or inform to the real intention of the parties.
An action for reformation of instrument under this provision of law may
prosper only upon the concurrence of the following requisites:
(1) there must have been a meeting of the minds of the parties to
the contract;
(2) the instrument does not express the true intention of the parties;
and
(3) the failure of the instrument to express the true intention of the
parties is due to mistake, fraud, inequitable conduct or accident.
All of these requisites are present in this case. There was a meeting of the
minds between the parties to the contract but the deed did not express the true intention
ot the parties due to the designation of the lot subject of the deed. There is no dispute as
to the intention of the parties to sell the land to Alejandra Delfino but there was a mistake
as to the designation of the lot intended to be sold as stated in the Settlement of Estate
and Sale.
-----------------------------------------------------
UNIVERSAL FOOD CORPORATION VS. CA
FACTS:
This is a petition for certiorari by the UFC against the CA decision of February 13, 1968
declaring the BILL OF ASSIGNMENT rescinded, ordering UFC to return to Magdalo
Francisco his Mafran sauce trademark and to pay his monthly salary of P300.00 from
Dec. 1, 1960 until the return to him of said trademark and formula.
In 1938, plaintiff Magdalo V. Francisco, Sr. discovered a formula for the manufacture of
a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN sauce.
It was used commercially since 1942, and in the same year plaintiff registered his
trademark in his name as owner and inventor with the Bureau of Patents. However, due
to lack of sufficient capital to finance the expansion of the business, in 1960, said plaintiff
secured the financial assistance of Tirso T. Reyes who, after a series of negotiations,
formed with others defendant Universal Food Corporation eventually leading to the
execution on May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1).
On May 31, 1960, Magdalo Francisco entered into contract with UFC stipulating among
other things that he be the Chief Chemist and Second Vice-President of UFC and shall
have absolute control and supervision over the laboratory assistants and personnel and in
the purchase and safekeeping of the chemicals used in the preparation of said Mafran
sauce and that said positions are permanent in nature.
In line with the terms and conditions of the Bill of Assignment, Magdalo Francisco was
appointed Chief Chemist with a salary of P300.00 a month. Magdalo Francisco kept the
formula of the Mafran sauce secret to himself. Thereafter, however, due to the alleged
scarcity and high prices of raw materials, on November 28, 1960, Secretary-Treasurer
Ciriaco L. de Guzman of UFC issued a Memorandum duly approved by the President and
General Manager Tirso T. Reyes that only Supervisor Ricardo Francisco should be
retained in the factory and that the salary of plaintiff Magdalo V. Francisco, Sr., should
be stopped for the time being until the corporation should resume its operation. On
December 3, 1960, President and General Manager Tirso T. Reyes, issued a memorandum
to Victoriano Francisco ordering him to report to the factory and produce "Mafran Sauce"
at the rate of not less than 100 cases a day so as to cope with the orders of the corporation's
various distributors and dealers, and with instructions to take only the necessary daily
employees without employing permanent employees. Again, on
December 6, 1961, another memorandum was issued by the same President and General
Manager instructing the Assistant Chief Chemist Ricardo Francisco, to recall all daily
employees who are connected in the production of Mafran Sauce and also some additional
daily employees for the production of Porky Pops. On December 29, 1960, another
memorandum was issued by the President and General Manager instructing Ricardo
Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting Superintendent,
to produce Mafran Sauce and Porky Pops in full swing starting January 2, 1961 with
further instructions to hire daily laborers in order to cope with the full blast operation.
Magdalo V. Francisco, Sr. received his salary as Chief Chemist in the amount of P300.00
a month only until his services were terminated on November 30, 1960. On
January 9 and 16, 1961, UFC, acting thru its President and General Manager, authorized
Porfirio Zarraga and Paula de Bacula to look for a buyer of the corporation including
its trademarks, formula and assets at a price of not less than P300,000.00. Due to these
successive memoranda, without plaintiff Magdalo V. Francisco, Sr. being recalled back
to work, he filed the present action on February 14, 1961. Then in a letter dated March
20, 1961, UFC requested said plaintiff to report for duty, but the latter declined the request
because the present action was already filed in court.
ISSUES:
1. Was the Bill of Assignment really one that involves transfer of the formula for Mafran
sauce itself?
2. Was petitioner’s contention that Magdalo Francisco is not entitled to rescission valid?
RULING:
1. No. Certain provisions of the bill would lead one to believe that the formula itself was
transferred. To quote, “the respondent patentee "assign, transfer and
convey all its property rights and interest over said Mafran trademark and formula for
MAFRAN SAUCE unto the Party of the Second Part," and the last
paragraph states that such "assignment, transfer and conveyance is absolute and
irrevocable (and) in no case shall the PARTY OF THE First Part ask, demand or sue
for the surrender of its rights and interest over said MAFRAN trademark and mafran
formula."
“However, a perceptive analysis of the entire instrument and the language employed
therein would lead one to the conclusion that what was actually ceded and transferred was
only the use of the Mafran sauce formula. This was the precise intention of the parties.”
The SC had the following reasons to back up the above conclusion. First, royalty was
paid by UFC to Magdalo Francisco. Second, the formula of said Mafran sauce was never
disclosed to anybody else. Third, the Bill acknowledged the fact that upon dissolution of
said Corporation, the patentee rights and interests of said trademark shall automatically
revert back to Magdalo Francisco. Fourth, paragraph 3 of the Bill declared only the
transfer of the use of the Mafran sauce and not the formula itself which was admitted by
UFC in its answer. Fifth, the facts of the case undeniably show that what was transferred
was only the use. Finally, our Civil Code allows only “the least transmission of right,
hence, what better way is there to show the least transmission of right of the transfer of
the use of the transfer of the formula itself.”
2. No. Petitioner’s contention that Magdalo Francisco’s petition for rescission should be
denied because under Article 1383 of the Civil Code of the Philippines rescission can not
be demanded except when the party suffering damage has no other legal means to
obtain reparation, was of no merit because “it is predicated on a failure to distinguish
between a rescission for breach of contract under Article 1191 of the Civil Code and a
rescission by reason of lesion or economic prejudice, under Article 1381, et seq.” This
was a case of reciprocal obligation. Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder was subordinated to anything other
than the culpable breach of his obligations by the defendant. Hence, the reparation of
damages for the breach was purely secondary. Simply put, unlike Art. 1383, Art. 1191
allows both the rescission and the payment for damages. Rescission is not given to the
party as a last resort, hence, it is not subsidiary in nature.
-----------------------------------------------------
SPS. FELIPE AND LETICIA CANNU versus SPS. GIL
AND FERNANDINA GALANG AND NATIONAL HOME
MORTGAGE FINANCE CORPORATION
FACTS:
Respondents-spouses Gil and Fernandina Galang obtained a loan from
Fortune Savings & Loan Association for P173,800.00 to purchase a house and lot located
at Pulang Lupa, Las Piñas, in the names of respondents-spouses. To secure payment, a
real estate mortgage was constituted on the said house and lot in favor of Fortune Savings
& Loan Association. In early 1990, NHMFC purchased the mortgage loan of
respondents-spouses from Fortune Savings & Loan Association for P173,800.00.
Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the
balance of the mortgage obligations with the NHMFC and with CERF Realty (the
Developer of the property).
A Deed of Sale with Assumption of Mortgage Obligation dated 20 August
1990 was made and entered into by and between spouses Fernandina and Gil Galang
(vendors) and spouses Leticia and Felipe Cannu (vendees) over the house and lot and
petitioners immediately took possession and occupied the house and lot. However,
despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of
P45,000.00 or in the alternative to vacate the property in question, petitioners refused to
do so. Because the Cannus failed to fully comply with their obligations, respondent
Fernandina Galang, on 21 May 1993, paid P233,957.64 as full payment of her remaining
mortgage loan with NHMFC.
From 1991 until the present, no other payments were made by plaintiffs-
appellants to defendants-appellees spouses Galang. Out of the P250,000.00 purchase
price which was supposed to be paid on the day of the execution of contract in July, 1990
plaintiffs-appellants have paid, in the span of eight (8) years, from 1990 to present, the
amount of only P75,000.00. Plaintiffs-appellants should have paid the P250,000.00 at
the time of the execution of contract in 1990. Eight (8) years have already lapsed and
plaintiffs-appellants have not yet complied with their obligation.
ISSUE:
Whether or not the action for rescission was subsidiary, and that there was a substantial
breach of the obligation.
RULING:
Rescission or, more accurately, resolution, of a party to an obligation under Article 1191
is predicated on a breach of faith by the other party that violates the reciprocity between
them. Art. 1191 states that the power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent upon him. The
injured party may choose between the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission, even after he
has chosen fulfillment, if the latter should become impossible. The court shall decree the
rescission claimed, unless there be just cause authorizing the fixing of a period.
Rescission will not be permitted for a slight or casual breach of the contract. Rescission
may be had only for such breaches that are substantial and fundamental as to defeat the
object of the parties in making the agreement. The question of whether a breach of
contract is substantial depends upon the attending circumstances and not merely on the
percentage of the amount not paid. Thus, the petitioners’ failure to pay the remaining
balance of P45,000.00 is substantial. Even assuming arguendo that only said amount was
left out of the supposed consideration of P250,000.00, or eighteen percent thereof, this
percentage is still substantial. Their failure to fulfill their obligation gave the respondents-
spouses Galang the right to rescission.
-----------------------------------------------------
IRINGAN V COURT OF APPEALS
NATURE Petition assailing decision of Court of Appeals.
FACTS
- On March 22, 1985 private respondent Antonio Palao sold to petitioner Alfonso Iringan
an undivided portion of Lot No. 992 of the Tuguegarao Cadastre, located in Poblacion of
Tuguegarao. Parties executed a Deed of Sale on same date with the purchase price of
P295K, payable as follows: a) P10K upon execution of this instrument, and vendor
acknowledges having received the amount; b) P140K on or before April 30, 1985; c)
P145K on or before December 31, 1985.
- When second payment was due, Iringan paid only P40K. On July 18, 1985, Palao sent
a letter to Iringan stating that he would not accept any further payment considering that
Iringan failed to comply with his obligation to pay full amount of second installment.
- On August 20, 1985, Iringan replied that they were not opposing the revocation of the
Deed of Sale, but asked for the reimbursement of the ff: • P50K –cash received; •
P3,200—geodetic engineer’s fee; • P500—attorney’s fee; • Interest on P53,700
- Palao declared he was not amenable to the reimbursements claimed by Iringan. Iringan
then proposed that the P50K which he had paid Palao be reimbursed, or Palao could sell
to Iringin an equivalent portion of the land.
- Palao replied that Iringan’s standing obligation had reached P61,600 representing
payment of arrears for rentals from October 1985 to March 1989.
- Spouses Iringan alleged that the contract of sale was a consummated contract, hence the
remedy for Palao was for collection of the balance of the purchase price and not
rescission. In addition they declared that they had always been ready and willing to
comply with their obligations to Palao.
- RTC ruled in favor of Palao and affirmed the rescission of the contract. Petitioner’s
Claim
- That no rescission was effected simply by virtue of the letter sent by respondent stating
that he considered the contract of sale rescinded.
- That a judicial or notarial act is necessary before one party can unilaterally effect a
rescission. Respondent’s Comment
- The right to rescind is vested by law on the obligee and since petitioner did not oppose
the intent to rescind the contract, Iringan in effect agreed to it and had the legal effect of
a mutually agreed rescission.
ISSUES
1. WON the contract of sale was validly rescinded;
2. WON the award of moral and exemplary damages is proper.
HELD
1. Ratio The contract of sale between the parties as far as the prescriptive period applies,
can still be, validly rescinded. Reasoning
- Art 1592 requires the rescinding party to serve judicial or notarial notice of his intent to
resolve the contract. ART. 1592. In the sale of immovable property, even though it may
have been stipulated that upon failure to pay the price at the time agreed upon the
rescission of the contract shall of right take place, the vendee may pay xxx as long as no
demand for rescission of the contract has been made upon him either judicially or by a
notarial act.
- Art 1592 “refers to a demand that the vendor makes upon the vendee for the latter to
agree to the resolution of the obligation and to create no obstacle to this contractual mode
of extinguishing obligations.” (Manresa)
- A judicial and notarial act is necessary before a valid rescission can take place, whether
or not automatic rescission has been stipulated. The phrase “even though” emphasizes
that when no stipulation is found on automatic rescission, the judicial or notarial
requirement still applies. ART. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with what is incumbent
upon him. The injured party may choose between the fulfillment and the rescission of the
obligation, with payment of damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become impossible. The court shall
decree the rescission claimed xxx.
- The right to resolve reciprocal obligations is deemed implied in case one of the obligors
shall fail to comply with what is incumbent upon him. But the right must be invoked
judicially. Even if the right to rescind is made available to the injured party, the obligation
is not ipso facto erased by the failure of the other party to comply with what is incumbent
upon him. The party entitled to rescind should apply to the court for a decree of rescission.
The operative act is the decree of the court.
- However, when private respondent filed an action for Judicial Confirmation of
Rescission and Damages before RTC, he complied with the requirement of the law for
judicial decree of rescission in stating that its purpose is: 1) To compel appellants to
formalize in public document, their mutual agreement of revocation and rescission; 2) To
have judicial confirmation.
2. Ratio The award of moral and exemplary damages is proper. Reasoning Petitioner
claimed he was ready to pay but never actually paid respondent, even when he knew that
the reason for selling the lot was for Palao to needed to raise money to pay his SSS loan.
1) Iringan knew Palao’s reason for selling the property, and still he did not pay Palao. 2)
Petitioner refused to formally execute an instrument showing their mutual agreement to
rescind the contract of sale, even when it was Iringan who breached the terms of their
contract, leaving Palao desperate to find other sources of funds to pay off the loan. 3)
Petitioner did not substantiate by clear and convincing proof that he was ready and willing
to pay respondent. It was more of an afterthought to evade the consequence of the breach.
-----------------------------------------------------
ADELFA S. RIVERA V. FIDELA DEL ROSARIO
FACTS:
Respondents Fidela, et al. were the registered owners of a parcel of land. Fidela borrowed
P250k from Mariano Rivera and to secure the loan, she and Mariano Rivera agreed to
execute a deed of REM and an agreement to sell the land. Mariano went to his lawyer to
have 3 documents drafted: the Deed of REM, a Kasunduan (Agreement to Sell), and a
Deed of Absolute Sale.
The Kasunduan provided that the children of Mariano Rivera, herein petitioners, would
purchase the land for a consideration of P2M, to be paid in 3 installments. It also provided
that the Deed of Absolute Sale would be executed only after the 2nd installment is paid
and a postdated check for the last installment is deposited with Fidela.
Mariano Rivera then went to his lawyer bringing with him the signed documents. He also
brought Fidela and her son Oscar, so that the latter two may sign the mortgage and the
Kasunduan there. Although Fidela intended to sign only the Kasunduan and the REM,
she inadvertently affixed her signature on all 3 documents. Mariano then gave Fidela the
amount for the 1st installment. Later, he also gave Fidela a check for the 2nd installment.
Mariano also gave Oscar several amounts upon the latter’s demand for the payment of
the balance despite his lack of authority to receive payments under the Kasunduan. Fidela
entrusted the owner’s copy of TCT to Mariano to guarantee compliance with the
Kasunduan.
When Mariano unreasonably refused to return the TCT, respondents caused the
annotation on TCT of an Affidavit of Loss of the owner’s duplicate copy of the title.
However, Mariano then registered the Deed of Absolute Sale and got anew TCT.
Respondents then filed a complaint asking that the Kasunduan be rescinded for failure
of the Riveras to comply with its conditions, with damages. They also sought the
annulment of the Deed of Absolute Sale on the ground of fraud.
Respondents claimed that Fidela never intended to enter into a deed of sale at the time of
its execution and that she signed the said deed on the mistaken belief that she was merely
signing copies of the Kasunduan.
ISSUE: WON the Deed of Absolute Sale is valid and binding?
HELD: NO. The deed is void in its entirety. Rescission of reciprocal obligations under
Article 1191 of the New Civil Code should be distinguished from rescission of contracts
under Article 1383 of the same Code. Both presuppose contracts validly entered into as
well as subsisting, and both require mutual restitution when proper, nevertheless they are
not entirely identical. While Article 1191 uses the term rescission, the original term used
in Article 1124 of the old Civil Code, from which Article 1191 was based, was resolution.
Resolution is a principal action that is based on breach of a party, while rescission under
Article 1383 is a subsidiary action limited to cases of rescission for lesion under Article
1381 of the New Civil Code. Obviously, the Kasunduan does not fall under any of those
situations mentioned in Article 1381. Consequently, Article 1383 is inapplicable. Hence,
we rule in favor of the respondents. May the contract entered into between the parties,
however, be rescinded based on Article 1191? A careful reading of the Kasunduan reveals
that it is in the nature of a contract to sell, as distinguished from a contract of sale. In a
contract of sale, the title to the property passes to the vendee upon the delivery of the
thing sold; while in a contract to sell, ownership is, by agreement, reserved in the vendor
and is not to pass to the vendee until full payment of the purchase price. In a contract to
sell, the payment of the purchase price is a positive suspensive condition, the failure of
which is not a breach, casual or serious, but a situation that prevents the obligation of the
vendor to convey title from acquiring an obligatory force. Respondents in this case bound
themselves to deliver a deed of absolute sale and clean title covering Lot No. 1083-C
after petitioners have made the second installment. This promise to sell was subject to
the fulfillment of the suspensive condition that petitioners pay P750,000 on August 31,
1987, and deposit a postdated check for the third installment of P1M. Petitioners,
however, failed to complete payment of the second installment. The non-fulfillment of
the condition rendered the contract to sell ineffective and without force and effect. It must
be stressed that the breach contemplated in Article 1191 of the New Civil Code is the
obligor’s failure to comply with an obligation already extant, not a failure of a condition
to render binding that obligation. Failure to pay, in this instance, is not even a breach but
an event that prevents the vendor’s obligation to convey title from acquiring binding
force. Hence, the agreement of the parties in the instant case may be set aside, but not
because of a breach on the part of petitioners for failure to complete payment of the
second installment. Rather, their failure to do so prevented the obligation of respondents
to convey title from acquiring an obligatory force. Coming now to the matter of
prescription. Contrary to petitioners’ assertion, we find that prescription has not yet set
in. Article 1391states that the action for annulment of void contracts shall be brought
within four years. This period shall begin from the time the fraud or mistake is
discovered. Here, the fraud was discovered in 1992 and the complaint filed in 1993. Thus,
the case is well within the prescriptive period.
-----------------------------------------------------
EQUATORIAL REALTY DEVELOPMENT, Inc. vs. MAYFAIR
THEATER, Inc.,
FACTS:
Carmelo & Bauermann, Inc. (Carmelo) used to own a parcel of land, together with two
2-storey buildings constructed thereon, located at Claro M. Recto Avenue, Manila, and
covered by TCT No. 18529 issued in its name by the Register of Deeds of Manila. On
June 1, 1967, Carmelo entered into a Contract of Lease with Mayfair Theater Inc.
(Mayfair) for a period of 20 years. Two years later, on March 31, 1969, Mayfair entered
into a second Contract of Lease with Carmelo for the lease of another portion of the
latter’s property -- namely, a part of the second floor of the two-storey building, and two
store spaces on the ground floor and the mezzanine. In that space, Mayfair put up another
movie house known as Miramar Theater. The Contract of Lease was likewise for a period
of 20 years. Both leases contained a provision granting Mayfair a right of first refusal to
purchase the subject properties. However, on July 30, 1978 - within the 20-year-lease
term -- the subject properties were sold by Carmelo to Equatorial Realty Development,
Inc. (“Equatorial”) for the total sum of P11,300,000, without their first being offered to
Mayfair.
As a result of the sale of the subject properties to Equatorial, Mayfair filed a Complaint
before the Regional Trial Court of Manila for the annulment of the Deed of Absolute Sale
between Carmelo and Equatorial, specific performance, and damages. After trial on the
merits, the lower court rendered a Decision in favor of Carmelo and Equatorial. On appeal
CA completely reversed and set aside the judgment of the lower court. The decision of
the Court became final and executory on March 17, 1997. On April 25, 1997, Mayfair
filed a Motion for Execution, which the trial court granted. However, Carmelo could no
longer be located. Thus, following the order of execution of the trial court, Mayfair
deposited with the clerk of court a quo its payment to Carmelo in the sum of P11,300,000
less P847,000 as withholding tax. The lower court issued a Deed of Reconveyance in
favor of Carmelo and a Deed of Sale in favor of Mayfair. On the basis of these documents,
the Registry of Deeds of Manila cancelled Equatorial’s titles and issued new Certificates
of Title in the name of Mayfair.
ISSUES:
1. Whether or not the contract of sale is validly rescinded though there was no actual
delivery made.
2. Whether or not the rentals paid concede actual delivery.
RULING:
A contract of sale is valid until rescinded, and ownership of the thing sold is not acquired
by mere agreement, but by tradition or delivery. In the case, it shows that delivery was
not actually effected; in fact, it was prevented by a legally effective impediment. Not
having been the owner, petitioner cannot be entitled to the civil fruits of ownership like
rentals of the thing sold. Furthermore, petitioner’s bad faith, as again demonstrated by
the specific factual milieu of said Decision, bars the grant of such benefits.
In this case, it is clear that petitioner never took actual control and possession of the
property sold, in view of respondent’s timely objection to the sale and the continued actual
possession of the property. The objection took the form of a court action impugning the
sale which, as we know, was rescinded by a judgment rendered by this Court in the mother
case. It has been held that the execution of a contract of sale as a form of constructive
delivery is a legal fiction. It holds true only when there is no impediment that may prevent
the passing of the property from the hands of the vendor into those of the vendee. When
there is such impediment, “fiction yields to reality - the delivery has not been effected.”
Hence, respondent’s opposition to the transfer of the property by way of sale to Equatorial
was a legally sufficient impediment that effectively prevented the passing of the property
into the latter’s hands.
-----------------------------------------------------
LILIA B. ADA, et.al. Petitioners, vs. FLORANTE BAYLON, Respondent.
FACTS:
Rita Baylon, was alleged to have been used the income ofbthe estate produced by parcels
of land co-owned by petitioners. They claimed that Rita took possession of the said
parcels of land and appropriated for herself the income from the same hence, this
prompted petitioners to file a Complaint for partition, accounting and damages against
the former. During the pendency of the case, Rita, through a Deed of Donation, donated
a lot in favor of Florante Baylon. Petitioners filed again a petition that the said donation
be rescinded in accordance with Article 1381(4) of the Civil Code.
 ISSUE:
Whether the deed of donation to Florante Baylon is subject for rescission.
HELD:
The kinds of rescissible contracts, according to the reason for their susceptibility to
rescission, are the following:
1. those which are rescissible because of lesion or prejudice;
2. those which are rescissible on account of fraud or bad faith;
3. those which, by special provisions of law, are susceptible to rescission.
In the case at bar, the lower court aptly ordered the rescission of the donation in favor of
Florante. It is undisputed that, at the time they were gratuitously conveyed by Rita, the
subject lot are among the properties that were the subject of the partition case then
pending with the RTC. Rita’s failure to inform and seek the approval of the petitioners or
the RTC regarding the conveyance gave the petitioners the right to have the said donation
rescinded pursuant to Article 1381(4) of the Civil Code.
-----------------------------------------------------
ADELFA S. RIVERA, CYNTHIA S. RIVERA, and JOSE S.
RIVERA, petitioners, vs. FIDELA DEL ROSARIO
(deceased and substituted by her co-respondents), and
her children, OSCAR, ROSITA, VIOLETA, ENRIQUE
JR., CARLOS, JUANITO and ELOISA, all surnamed
DEL ROSARIO, respondents.
Before us is a petition for review on certiorari of the Court of Appeals
decision[1], dated November 29, 1999, in CA-G.R. CV No. 60552, which affirmed the
judgment[2] of the Regional Trial Court (RTC) of Malolos, Bulacan, Branch 17, in Civil
Case No. 151-M-93. The RTC granted respondents complaint for nullity of contract of
sale and annulment of the transfer certificates of title issued in favor of petitioners.
The facts, as found by the Court of Appeals, are as follows:
Respondents Fidela (now deceased), Oscar, Rosita, Violeta, Enrique Jr., Carlos,
Juanito and Eloisa, all surnamed Del Rosario, were the registered owners of Lot No. 1083-
C, a parcel of land situated at Lolomboy, Bulacan. This lot spanned an area of 15,029
square meters and was covered by TCT No. T-50.668 (M) registered in the Registry of
Deeds of Bulacan.
On May 16, 1983, Oscar, Rosita, Violeta, Enrique Jr., Juanito, and Eloisa, executed
a Special Power of Attorney[3] in favor of their mother and co-respondent, Fidela,
authorizing her to sell, lease, mortgage, transfer and convey their rights over Lot No.
1083-C.[4] Subsequently, Fidela borrowed P250,000 from Mariano Rivera in the early
part of 1987. To secure the loan, she and Mariano Rivera agreed to execute a deed of real
estate mortgage and an agreement to sell the land. Consequently, on March 9, 1987,
Mariano went to his lawyer, Atty. Efren Barangan, to have three documents drafted: the
Deed of Real Estate Mortgage[5], a Kasunduan (Agreement to Sell)[6], and a Deed of
Absolute Sale.[7]
The Kasunduan provided that the children of Mariano Rivera, herein petitioners
Adelfa, Cynthia and Jose, would purchase Lot No. 1083-C for a consideration
of P2,141,622.50. This purchase price was to be paid in three installments: P250,000
upon the signing of the Kasunduan, P750,000 on August 31, 1987, and P1,141,622.50 on
December 31, 1987.[8] It also provided that the Deed of Absolute Sale would be executed
only after the second installment is paid and a postdated check for the last installment is
deposited with Fidela.[9] As previously stated, however, Mariano had already caused the
drafting of the Deed of Absolute Sale. But unlike the Kasunduan, the said deed stipulated
a purchase price of only P601,160, and covered a certain Lot No. 1083-A in addition to
Lot No. 1083-C.[10] This deed, as well as the Kasunduan and the Deed of Real Estate
Mortgage[11], was signed by Marianos children, petitioners Adelfa, Cynthia and Jose, as
buyers and mortgagees, on March 9, 1987.[12]
The following day, Mariano Rivera returned to the office of Atty. Barangan,
bringing with him the signed documents. He also brought with him Fidela and her son
Oscar del Rosario, so that the latter two may sign the mortgage and the Kasunduan there.
Although Fidela intended to sign only the Kasunduan and the Real Estate
Mortgage, she inadvertently affixed her signature on all the three documents in the office
of Atty. Barangan on the said day, March 10, 1987. Mariano then gave Fidela the amount
of P250,000. On October 30, 1987, he also gave Fidela a check for P200,000. In the
ensuing months, also, Mariano gave Oscar del Rosario several amounts totaling P67,800
upon the latters demand for the payment of the balance despite Oscars lack of authority
to receive payments under the Kasunduan.[13] While Mariano was making payments to
Oscar, Fidela entrusted the owners copy of TCT No. T-50.668 (M) to Mariano to
guarantee compliance with the Kasunduan.
When Mariano unreasonably refused to return the TCT,[14] one of the respondents,
Carlos del Rosario, caused the annotation on TCT No. T-50.668 (M) of an Affidavit of
Loss of the owners duplicate copy of the title on September 7, 1992. This annotation was
offset, however, when Mariano registered the Deed of Absolute Sale on October 13, 1992,
and afterwards caused the annotation of an Affidavit of Recovery of Title on October 14,
1992. Thus, TCT No. T-50.668 (M) was cancelled, and in its place was issued TCT No.
158443 (M) in the name of petitioners Adelfa, Cynthia and Jose Rivera.[15]
Meanwhile, the Riveras, representing themselves to be the new owners of Lot No.
1083-C, were also negotiating with the tenant, Feliciano Nieto, to rid the land of the latters
tenurial right. When Nieto refused to relinquish his tenurial right over 9,000 sq. m. of the
land, the Riveras offered to give 4,500 sq. m. in exchange for the surrender.Nieto could
not resist and he accepted. Subdivision Plan No. Psd-031404-052505 was then made on
August 12, 1992. Later, it was inscribed on TCT No. 158443 (M), and Lot No. 1083-C
was divided into Lots 1083 C-1 and 1083 C-2.[16]
To document their agreement with Feliciano Nieto, the Riveras executed
a Kasulatan sa Pagtatakwil ng Karapatan sa Pagmamay-ari ng Bahagi ng Isang Lagay
na Lupa (Written Abdication of Rights over a Portion of a Parcel of Land) [17] on
November 16, 1992. Four days later, they registered the document with the Registry of
Deeds. Two titles were then issued: TCT No. T-161784 (M) in the name of Nieto, for
4,500 sq. m. of land, and TCT No. T-161785 (M) in the name of petitioners Adelfa,
Cynthia and Jose Rivera, over the remaining 10,529 sq. m. of land.[18]
On February 18, 1993, respondents filed a complaint[19] in the Regional Trial Court
of Malolos, asking that the Kasunduan be rescinded for failure of the Riveras to comply
with its conditions, with damages. They also sought the annulment of the Deed of
Absolute Sale on the ground of fraud, the cancellation of TCT No. T-161784 (M) and
TCT No. T-161785 (M), and the reconveyance to them of the entire property with TCT
No. T-50.668 (M) restored.[20]
Respondents claimed that Fidela never intended to enter into a deed of sale at the
time of its execution and that she signed the said deed on the mistaken belief that she was
merely signing copies of the Kasunduan. According to respondents, the position where
Fidelas name was typed and where she was supposed to sign her name in
the Kasunduan was roughly in the same location where it was typed in the Deed of
Absolute Sale. They argued that given Fidelas advanced age (she was then around 72 at
the time)[21] and the fact that the documents were stacked one on top of the other at the
time of signing, Fidela could have easily and mistakenly presumed that she was merely
signing additional copies of the Kasunduan.[22] They also alleged that petitioners acquired
possession of the TCT through fraud and machination.
In their defense, petitioners denied the allegations and averred that the Deed of
Absolute Sale was validly entered into by both parties. According to petitioners, Fidela
del Rosario mortgaged Lot No. 1083-C to their predecessor in interest, Mariano Rivera,
on March 9, 1987. But on the following day Fidela decided to sell the lot to petitioners
for P2,161,622.50. When Mariano agreed (on the condition that Lot No. 1083-C will be
delivered free from all liens and encumbrances), the Kasunduan was consequently drawn
up and signed. After that, however, Fidela informed Mariano of the existence of Feliciano
Nietos tenancy right over the lot to the extent of 9,000 sq. m. When Mariano continued
to want the land, albeit on a much lower price of only P601,160, as he had still to deal
with Feliciano Nieto, the parties drafted the Deed of Absolute Sale on March 10, 1987,
to supersede the Kasunduan.
Petitioners likewise argued that respondents cause of action had been barred by
laches or estoppel since more than four years has lapsed from the time the parties executed
the Deed of Absolute Sale on March 10, 1987, to the time respondents instituted their
complaint on February 18, 1993.
Petitioners also filed a counterclaim asking for moral and exemplary damages and
the payment of attorneys fees and costs of suit.
After trial, the RTC ruled in favor of respondents:
WHEREFORE, in the light of all the foregoing, judgment is hereby rendered:
1. Declaring the Deed of Absolute Sale dated March 10, 1987 as null and
void;
2. Annulling TCT No. T-158443 (M) and TCT No. T-161785 (M) both in
the names of Adelfa, Cynthia and Jose, all surnamed Rivera;
3. Declaring the plaintiffs to be the legitimate owners of the land covered
by TCT No. T-161785 (M) and ordering defendant Adelfa,
 Cynthia, and Jose, all surnamed Rivera, to reconvey the same to
the plaintiffs;
4. Ordering the Register of Deeds of Bulacan to cancel TCT No. T-161785
(M) and to issue in its place a new certificate of title in the name
of the plaintiffs as their names appear in TCT No. T-50.668;
5. Declaring TCT No. T-161784 (M) in the name of Feliciano Nieto as
valid;
6. Ordering the defendant Riveras to pay the plaintiffs solidarily the
following amounts:
a) P191,246.98 as balance for the 4,500 square-meter portion given
to defendant Feliciano Nieto
b) P200,000.00 as moral damages
c) P50,000.00 as exemplary damages
d) P50,000.00 as attorneys fees
e) costs of the suit.
7. Dismissing the counterclaim of the defendant Riveras;
8. Dismissing the counterclaim and the crossclaim of defendant Feliciano
Nieto.
SO ORDERED.[23]
The trial court ruled that Fidelas signature in the Deed of Absolute Sale was
genuine, but found that Fidela never intended to sign the said deed. Noting the peculiar
differences between the Kasunduan and the Deed of Absolute Sale, the trial court
concluded that the Riveras were guilty of fraud in securing the execution of the deed and
its registration in the Registry of Deeds.[24] This notwithstanding, the trial court sustained
the validity of TCT No. T-161784 (M) in the name of Feliciano Nieto since there was no
fraud proven on Nietos part. The trial court found him to have relied in good faith on the
representations of ownership of Mariano Rivera. Thus, Nietos rights, according to the
trial court, were akin to those of an innocent purchaser for value. [25]
On the foregoing, the trial court rescinded the Kasunduan but ruled that
the P450,000 paid by petitioners be retained by respondents as payment for the 4,500 sq.
m. portion of Lot No. 1083-C that petitioners gave to Nieto.[26] The trial court likewise
ordered petitioners to pay P191,246.98 as balance for the price of the land given to
Nieto, P200,000 as moral damages, P50,000 as exemplary damages, P50,000 as attorneys
fees, and the costs of suit.[27]
On appeal to the Court of Appeals, the trial courts judgment was modified as
follows:
WHEREFORE, the judgment appealed from is hereby AFFIRMED with the
MODIFICATION that the Deed of Absolute Sale dated March 10, 1987 is declared null
and void only insofar as Lot No. 1083-C is concerned, but valid insofar as it conveyed
Lot No. 1083-A, that TCT No. 158443 (M) is valid insofar as Lot No. 1083-A is
concerned and should not be annulled, and increasing the amount to be paid by the
defendants-appellants to the plaintiffs-appellees for the 4,500 square meters of land
given to Feliciano Nieto to P323,617.50.
Costs against the defendants-appellants.
SO ORDERED.[28]
Petitioners motion for reconsideration was denied. Hence, this petition.
While this petition was pending, respondent Fidela del Rosario died. She was
substituted by her children, herein respondents.
In this petition, petitioners rely on the following grounds:
I
THE HONORABLE COURT OF APPEALS COMMITTED A SERIOUS, GRAVE
AND REVERSIBLE ERROR IN AWARDING LOT 1083-A IN FAVOR OF THE
PETITIONERS AND FELICIANO NIETO WHICH IS ADMITTEDLY A PART AND
PORTION OF THE EXISTING NORTH LUZON EXPRESSWAY AND AS SUCH
ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION, OR WITH GRAVE
ABUSE OF JUDICIAL DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION.
II
RESPONDENTS FAILED TO PAY THE CORRECT DOCKET, FILING AND
OTHER LAWFUL FEES WITH THE OFFICE OF THE CLERK OF COURT OF THE
COURT A QUO (RTC, MALOLOS, BULACAN) AT THE TIME OF THE FILING
OF THE ORIGINAL COMPLAINT IN 1993 PURSUANT TO THE
SIOL[29] DOCTRINE.
III
[THE] TRIAL COURT AWARDED RELIEFS NOT SPECIFICALLY PRAYED FOR
IN THE AMENDED COMPLAINT WITHOUT REQUIRING THE PAYMENT OF
THE CORRECT DOCKET, FILING AND OTHER LAWFUL FEES.
IV
THE COURT A QUO HAS NO JURISDICTION OVER THE RESPONDENTS
CAUSE OF ACTION AND OVER THE RES CONSIDERING THAT FELICIANO
NIETO IS AN AGRICULTURAL TENANT OF THE RICELAND IN QUESTION.
V
RESPONDENTS[] MAIN CAUSE OF ACTION [IS] FOR RESCISSION OF
CONTRACT WHICH IS SUBSIDIARY IN NATURE[,] AND ANNULMENT OF
SALE[,] BOTH OF WHICH HAVE ALREADY PRESCRIBED UNDER ARTICLES
1389 AND 1391 OF THE CIVIL CODE.[30]
Petitioners assignment of errors may be reduced into three issues: (1) Did the trial
court acquire jurisdiction over the case, despite an alleged deficiency in the amount of
filing fees paid by respondents and despite the fact that an agricultural tenant is involved
in the case? (2) Did the Court of Appeals correctly rule that the Deed of Absolute Sale is
valid insofar as Lot 1083-A is concerned? (3) Is the respondents cause of action barred
by prescription?
On the first issue, petitioners contend that jurisdiction was not validly acquired
because the filing fees respondents paid was only P1,554.45 when the relief sought was
reconveyance of land that was worth P2,141,622.50 under the Kasunduan. They contend
that respondents should have paid filing fees amounting to P12,183.70. In support of their
argument, petitioners invoke the doctrine in Sun Insurance Office, Ltd., (SIOL) v.
Asuncion[31] and attach a certification[32] from the Clerk of Court of the RTC of Quezon
City.
Respondents counter that it is beyond dispute that they paid the correct amount of
docket fees when they filed the complaint. If the assessment was inadequate, they could
not be faulted because the clerk of court made no notice of demand or reassessment,
respondents argue. Respondents also add that since petitioners failed to contest the
alleged underpayment of docket fees in the lower court, they cannot raise the same on
appeal.[33]
We rule in favor of respondents. Jurisdiction was validly acquired over the
complaint. In Sun Insurance Office, Ltd., (SIOL) v. Asuncion,[34] this Court ruled that the
filing of the complaint or appropriate initiatory pleading and the payment of the
prescribed docket fee vest a trial court with jurisdiction over the subject matter or nature
of the action. If the amount of docket fees paid is insufficient considering the amount of
the claim, the clerk of court of the lower court involved or his duly authorized deputy has
the responsibility of making a deficiency assessment. The party filing the case will be
required to pay the deficiency, but jurisdiction is not automatically lost.
Here it is beyond dispute that respondents paid the full amount of docket fees as
assessed by the Clerk of Court of the Regional Trial Court of Malolos, Bulacan, Branch
17, where they filed the complaint. If petitioners believed that the assessment was
incorrect, they should have questioned it before the trial court. Instead, petitioners
belatedly question the alleged underpayment of docket fees through this petition,
attempting to support their position with the opinion and certification of the Clerk of
Court of another judicial region. Needless to state, such certification has no bearing on
the instant case.
 Petitioners also contend that the trial court does not have jurisdiction over the case
because it involves an agricultural tenant. They insist that by virtue of Presidential Decree
Nos. 316 and 1038,[35] it is the Department of Agrarian Reform Adjudication Board
(DARAB) that has jurisdiction.[36]
Petitioners contention lacks merit. The DARAB has exclusive original jurisdiction
over cases involving the rights and obligations of persons engaged in the management,
cultivation and use of all agricultural lands covered by the Comprehensive Agrarian
Reform Law.[37] However, the cause of action in this case is primarily against the
petitioners, as indispensable parties, for rescission of the Kasunduan and nullification of
the Deed of Sale and the TCTs issued because of them. Feliciano Nieto was impleaded
merely as a necessary party, stemming from whatever rights he may have acquired by
virtue of the agreement between him and the Riveras and the corresponding TCT
issued. Hence, it is the regular judicial courts that have jurisdiction over the case.
On the second issue, contrary to the ruling of the Court of Appeals that the Deed
of Absolute Sale is void only insofar as it covers Lot No. 1083-C, we find that the said
deed is void in its entirety. Noteworthy is that during the oral arguments before the Court
of Appeals, both petitioners and respondents admitted that Lot No. 1083-A had been
expropriated by the government long before the Deed of Absolute Sale was entered
into.[38] Whats more, this case involves only Lot No. 1083-C. It never involved Lot 1083-
A.Thus, the Court of Appeals had no jurisdiction to adjudicate on Lot 1083-A, as it was
never touched upon in the pleadings or made the subject of evidence at trial.[39]
As to the third issue, petitioners cite Articles 1383,[40] 1389[41] and 1391[42] of the
New Civil Code. They submit that the complaint for rescission of the Kasunduan should
have been dismissed, for respondents failure to prove that there was no other legal means
available to obtain reparation other than to file a case for rescission, as required by Article
1383. Moreover, petitioners contend that even assuming respondents had satisfied this
requirement, prescription had already set in, the complaint having been filed in 1992 or
five years after the execution of the Deed of Absolute Sale in March 10, 1987.
Respondents counter that Article 1383 of the New Civil Code applies only to
rescissible contracts enumerated under Article 1381 of the same Code, while the cause of
action in this case is for rescission of a reciprocal obligation, to which Article 1191 [43] of
the Code applies. They assert that their cause of action had not prescribed because the
four-year prescriptive period is counted from the date of discovery of the fraud, which, in
this case, was only in 1992.
Rescission of reciprocal obligations under Article 1191 of the New Civil Code
should be distinguished from rescission of contracts under Article 1383 of the same
Code.Both presuppose contracts validly entered into as well as subsisting, and both
require mutual restitution when proper, nevertheless they are not entirely identical. [44]
In countless times there has been confusion between rescission under Articles 1381
and 1191 of the Civil Code. Through this case we again emphasize that rescission of
reciprocal obligations under Article 1191 is different from rescissible contracts under
Chapter 6 of the law on contracts under the Civil Code. [45] While Article 1191 uses the
term rescission, the original term used in Article 1124 of the old Civil Code, from which
Article 1191 was based, was resolution.[46] Resolution is a principal action that is based
on breach of a party, while rescission under Article 1383 is a subsidiary action limited to
cases of rescission for lesion under Article 1381 of the New Civil Code, [47] which
expressly enumerates the following rescissible contracts:
ART. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than one-fourth of the value
of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer
the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
Obviously, the Kasunduan does not fall under any of those situations mentioned in
Article 1381. Consequently, Article 1383 is inapplicable. Hence, we rule in favor of the
respondents.
May the contract entered into between the parties, however, be rescinded based on
Article 1191?
A careful reading of the Kasunduan reveals that it is in the nature of a contract to
sell, as distinguished from a contract of sale. In a contract of sale, the title to the property
passes to the vendee upon the delivery of the thing sold; while in a contract to sell,
ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until
full payment of the purchase price.[48] In a contract to sell, the payment of the purchase
price is a positive suspensive condition,[49] the failure of which is not a breach, casual or
serious, but a situation that prevents the obligation of the vendor to convey title from
acquiring an obligatory force.[50]
Respondents in this case bound themselves to deliver a deed of absolute sale and
clean title covering Lot No. 1083-C after petitioners have made the second
installment.This promise to sell was subject to the fulfillment of the suspensive condition
that petitioners pay P750,000 on August 31, 1987, and deposit a postdated check for the
third installment of P1,141,622.50.[51] Petitioners, however, failed to complete payment
of the second installment. The non-fulfillment of the condition rendered the contract to
sell ineffective and without force and effect. It must be stressed that the breach
contemplated in Article 1191 of the New Civil Code is the obligors failure to comply with
an obligation already extant, not a failure of a condition to render binding that
obligation.[52] Failure to pay, in this instance, is not even a breach but an event that
prevents the vendors obligation to convey title from acquiring binding force. [53] Hence,
the agreement of the parties in the instant case may be set aside, but not because of a
breach on the part of petitioners for failure to complete payment of the second
installment. Rather, their failure to do so prevented the obligation of respondents to
convey title from acquiring an obligatory force.[54]
Coming now to the matter of prescription. Contrary to petitioners assertion, we
find that prescription has not yet set in. Article 1391 states that the action for annulment
of void contracts shall be brought within four years. This period shall begin from the time
the fraud or mistake is discovered. Here, the fraud was discovered in 1992 and the
complaint filed in 1993. Thus, the case is well within the prescriptive period.
On the matter of damages, the Court of Appeals awarded respondents P323,617.50
as actual damages for the loss of the land that was given to Nieto, P200,000 as moral
damages, P50,000 as exemplary damages, P50,000 as attorneys fees and the costs of
suit. Modifications are in order, however.
Moral damages may be recovered in cases where one willfully causes injury to
property, or in cases of breach of contract where the other party acts fraudulently or in
bad faith.[55] Exemplary damages are imposed by way of example or correction for the
public good,[56] when the party to a contract acts in a wanton, fraudulent, oppressive or
malevolent manner.[57] Attorneys fees are allowed when exemplary damages are awarded
and when the party to a suit is compelled to incur expenses to protect his interest. [58]
While it has been sufficiently proven that the respondents are entitled to damages,
the actual amounts awarded by the lower court must be reduced because damages are not
intended for a litigants enrichment, at the expense of the petitioners. [59] The purpose for
the award of damages other than actual damages would be served, in this case, by
reducing the amounts awarded.
Respondents were amply compensated through the award of actual damages,
which should be sustained. The other damages awarded total P300,000, or almost
equivalent to the amount of actual damages. Practically this will double the amount of
actual damages awarded to respondents. To avoid breaching the doctrine on enrichment,
award for damages other than actual should be reduced. Thus, the amount of moral
damages should be set at only P30,000, and the award of exemplary damages at
only P20,000. The award of attorneys fees should also be reduced to P20,000, which
under the circumstances of this case appears justified and reasonable.
WHEREFORE, the assailed decision of the Court of Appeals is MODIFIED. The
Deed of Absolute Sale in question is declared NULL and VOID in its entirety. Petitioners
are ORDERED to pay respondents P323,617.50 as actual damages, P30,000.00 as moral
damages, P20,000.00 as exemplary damages and P20,000.00 as attorneys fees. No
pronouncement as to costs.
SO ORDERED
-----------------------------------------------------
SIGUAN V. LIM
FACTS:
Lim issued two Metrobank checks in the sums of P300,000 and P241,668, respectively,
payable to "cash." Upon presentment by petitioner with the drawee bank, the checks were
dishonored for the reason "account closed." Demands to make good the checks proved
futile. As a consequence, a criminal case for violation of Batas Pambansa were filed by
petitioner against Lim.
The court a quo convicted Lim as charged. The case is pending before this Court for
review and docketed as G.R. No. 134685. It also appears that on 31 July 1990, Lim was
convicted of estafa by the RTC of Quezon City in Criminal Case No. Q-89-22162 filed
by a certain Victoria Suarez. This decision was affirmed by the Court of Appeals. On
appeal, however, the Supreme Court, in a decision promulgated on 7 April 1997, acquitted
Lim but held her civilly liable in the amount of P169,000, as actual damages, plus legal
interest.
Meanwhile, on 2 July 1991, a Deed of Donation conveying parcels of land and
purportedly executed by Lim on 10 August 1989 in favor of her children, Linde, Ingrid
and Neil, was registered with the Office of the Register of Deeds of Cebu City. New
transfer certificates of title were thereafter issued in the names of the donees.
On 23 June 1993, petitioner filed an accion pauliana against Lim and her children before
Branch 18 of the RTC of Cebu City to rescind the questioned Deed of Donation and to
declare as null and void the new transfer certificates of title issued for the lots covered by
the questioned Deed. The complaint was docketed as Civil Case No. CEB-14181.
Petitioner claimed therein that sometime in July 1991, Lim, through a Deed of Donation,
fraudulently transferred all her real property to her children in bad faith and in fraud of
creditors, including her; that Lim conspired and confederated with her children in
antedating the questioned Deed of Donation, to petitioner's and other creditors' prejudice;
and that Lim, at the time of the fraudulent conveyance, left no sufficient properties to pay
her obligations. On the other hand, Lim denied any liability to petitioner. She claimed
that her convictions in Criminal Cases Nos. 22127-28 were erroneous, which was the
reason why she appealed said decision to the Court of Appeals. As regards the questioned
Deed of Donation, she maintained that it was not antedated but was made in good faith at
a time when she had sufficient property. Finally, she alleged that the Deed of Donation
was registered only on 2 July 1991 because she was seriously ill.
In its decision of 31 December 1994 the trial court ordered the rescission of the questioned
deed of donation; (2) declared null and void the transfer certificates of title issued in the
names of private respondents Linde, Ingrid and Neil Lim; (3) ordered the Register of
Deeds of Cebu City to cancel said titles and to reinstate the previous titles in the name of
Rosa Lim; and (4) directed the LIMs to pay the petitioner, jointly and severally, the sum
of P10,000 as moral damages; P10,000 as attorney's fees; and P5,000 as expenses of
litigation.
On appeal, the Court of Appeals, in a promulgated on 20 February 1998, reversed the
decision of the trial court and dismissed petitioner's accion pauliana. It held that two of
the requisites for filing an accion pauliana were absent, namely, (1) there must be a credit
existing prior to the celebration of the contract; and (2) there must be a fraud, or at least
the intent to commit fraud, to the prejudice of the creditor seeking the rescission.
According to the Court of Appeals, the Deed of Donation, which was executed and
acknowledged before a notary public, appears on its face to have been executed on 10
August 1989. Under Section 23 of Rule 132 of the Rules of Court, the questioned Deed,
being a public document, is evidence of the fact which gave rise to its execution and of
the date thereof. No antedating of the Deed of Donation was made, there being no
convincing evidence on record to indicate that the notary public and the parties did
antedate it.
Since Lim's indebtedness to petitioner was incurred in August 1990, or a year after the
execution of the Deed of Donation, the first requirement for accion pauliana was not met.
Anent petitioner's contention that assuming that the Deed of Donation was not antedated
it was nevertheless in fraud of creditors because Victoria Suarez became Lim’s creditor
on 8 October 1987, the Court of Appeals found the same untenable, for the rule is basic
that the fraud must prejudice the creditor seeking the rescission.
ISSUE:
Whether or not the deed of donation is valid.
RULING:
The Supreme Court upheld the validity of the deed of donation.
Article 1381 of the Civil Code enumerates the contracts which are rescissible, and among
them are "those contracts undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them."
The action to rescind contracts in fraud of creditors is known as accion
pauliana. For this action to prosper, the following requisites must be present:
(1) the plaintiff asking for rescission has a credit prior to the
alienation,
although demandable later;
(2) the debtor has made a subsequent contract conveying a
patrimonial
benefit to a third person;
(3) the creditor has no other legal remedy to satisfy his claim;
(4) the act being impugned is fraudulent;
(5) the third person who received the property conveyed, if it is by
onerous
title, has been an accomplice in the fraud.
The general rule is that rescission requires the existence of creditors at the time
of the alleged fraudulent alienation, and this must be proved as one of the bases of the
judicial pronouncement setting aside the contract. Without any prior existing debt, there
can neither be injury nor fraud. While it is necessary that the credit of the plaintiff in the
accion pauliana must exist prior to the fraudulent alienation, the date of the judgment
enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is
merely declaratory, with retroactive effect to the date when the credit was constituted.
In the instant case, the alleged debt of Lim in favor of petitioner was incurred
in August 1990, while the deed of donation was purportedly executed on 10 August 1989.
The Supreme Court is not convinced with the allegation of the petitioner that
the questioned deed was antedated to make it appear that it was made prior to petitioner's
credit. Notably, that deed is a public document, it having been acknowledged before a
notary public. As such, it is evidence of the fact which gave rise to its execution and of
its date, pursuant to Section 23, Rule 132 of the Rules of Court.
In the present case, the fact that the questioned Deed was registered only on 2
July 1991 is not enough to overcome the presumption as to the truthfulness of the
statement of the date in the questioned deed, which is 10 August 1989. Petitioner's claim
against Lim was constituted only in August 1990, or a year after the questioned alienation.
Thus, the first two requisites for the rescission of contracts are absent.
Even assuming arguendo that petitioner became a creditor of Lim prior to the
celebration of the contract of donation, still her action for rescission would not fare
well because the third requisite was not met. Under Article 1381 of the Civil Code,
contracts entered into in fraud of creditors may be rescinded only when the creditors
cannot in any manner collect the claims due them. Also, Article 1383 of the same
Code provides that the action for rescission is but a subsidiary remedy which cannot
be instituted except when the party suffering damage has no other legal means to
obtain reparation for the same. The term "subsidiary remedy" has been defined as
"the exhaustion of all remedies by the prejudiced creditor to collect claims due him
before rescission is resorted to." It is, therefore, essential that the party asking for
rescission prove that he has exhausted all other legal means to obtain satisfaction of
his claim. Petitioner neither alleged nor proved that she did so. On this score, her
action for the rescission of the questioned deed is not maintainable even if the fraud
charged actually did exist." The fourth requisite for an accion pauliana to prosper
is not present either.
-----------------------------------------------------
ORIA vs MCMIKING
Facts: Gutierrez Hermanos filed an action for recovery of a sum of money against Oria
Hermanos & Co. and herein plaintiff filed an action for recovery also for the same
defendant. Before the institution of the suits, members of the Company dissolved their
relations and entered into a liquidation. Tomas Oria y Balbas acting in behalf of his co-
owners entered into a contract with the herein plaintiff for the purpose of transferring and
selling all the property which the Oria Hermanos & Co. owned and among the goods
stated on that instrument was the steamship Serpantes and which the subject of this
litigation. When the Trail Court resolved the action for recovery filed by Gutierrez
Hermanos and jugdment was in his favor, The sheriff demanded to Tomas Oria y Balbas
to make payment but the latter said there were no funds to pay the same. The sheriff then
levied on the steamer, took possession of the same and announced it for public auction.
Herein plaintiff claimed that he is the owner of the steamer by virtue of the selling of all
the properties of the said Company.
Issue(s):
1. Whether or not there was a valid sale between Oria Hermanos & Co. to Manuel Oria y
Gonzales as against the creditors of the company.
2. Whether or not the sale was fraudulent.
Held: At the time of said sale the value of the assets of Oria Hermanos & Co., as stated
by the partners themselves, was P274,000. The vendee of said sale was a son of Tomas
Oria y Balbas and a nephew of the other two persons heretofore mentioned which said
three brothers together constituted all of the members of said company. The plaintiff is a
young man of 25 years old and has no property before the said selling. The court had laid
down the rules in determining whether a there has been fraud prejudicing creditors: 1)
consideration of conveyance is fictitious; 2) transfer was made while the suit against him
(Tomas Oria y Balbas) was pending; 3) sale by insolvent debtor; 4) evidence of
insolvency; 5) transfer of all properties; 6) the sale was made between father and son; 7)
and the failure of the vendee to take exclusive possession of the property. The case at bar
shows every one of the badges of fraud.
-----------------------------------------------------
SIGUAN VS LIM P 15
---------------------------------------------------------
SUNTAY V. COURT OF APPEALS
FACTS:
Respondent Federico Suntay is the owner of a parcel of land and a rice mill,
warehouse, and other improvements situated in the said land. A rice miller, Federico, in
a letter applied as a miller-contractor of the National Rice and Corn Corporation
(NARIC). He informed the NARIC that he had a daily rice mill output of 400 cavans of
palay and warehouse storage capacity of 150,000 cavans of palay. His application,
although prepared by his nephew-lawyer, Rafael Suntay, was disapproved, because at that
time he was tied up with several unpaid loans.
For purposes of circumvention, he had thought of allowing Rafael to make the
application for him. Rafael prepared an absolute deed of sale whereby Federico, for and
in consideration of P20,000.00 conveyed to Rafael said parcel of land with all its existing
structures. Said deed was notarized as Document No. 57 and recorded on Page 13 of Book
1, Series of 1962, of the Notarial Register of Atty. Herminio V. Flores. Less than three
months after this conveyance, a counter sale was prepared and signed by Rafael who also
caused its delivery to Federico. Through this counter conveyance, the same parcel of land
with all its existing structures was sold by Rafael back to Federico for the same
consideration of P20,000.00. Although on its face, this second deed appears to have been
notarized as Document No. 56 and recorded on Page 15 of Book 1, Series of 1962, of the
notarial register of Atty. Herminio V. Flores, an examination thereof will show that,
recorded as Document No. 56 on Page 13, is not the said deed of sale but a certain "real
estate mortgage on a parcel of land with TCT No. 16157 to secure a loan of P3,500.00 in
favor of the Hagonoy Rural Bank."
Nowhere on page 13 of the same notarial register could be found any entry
pertaining to Rafael's deed of sale. Testifying on this irregularity, Atty. Flores admitted
that he failed to submit to the Clerk of Court a copy of the second deed. Neither was he
able to enter the same in his notarial register. Even Federico himself alleged in his
Complaint that, when Rafael delivered the second deed to him, it was neither dated nor
notarized.
Upon the execution and registration of the first deed, Certificate of Title No.
0-2015 in the name of Federico was cancelled and in lieu thereof, TCT No. T-36714 was
issued in the name of Rafael. Even after the execution of the deed, Federico remained in
possession of the property sold in concept of owner. Significantly, notwithstanding the
fact that Rafael became the titled owner of said land and rice mill, he never made any
attempt to take possession thereof at any time, while Federico continued to exercise rights
of absolute ownership over the property.
In a letter, dated August 14, 1969, Federico, through his new counsel, Agrava
& Agrava, requested that Rafael deliver his copy of TCT No. T-36714 so that Federico
could have the counter deed of sale in his favor registered in his name. The request having
been obviously turned down, Agrava & Agrava filed a petition with the Court of First
Instance of Bulacan asking Rafael to surrender his owner's duplicate certificate of TCT
No. T-36714. In opposition thereto, Rafael chronicled the discrepancy in the notarization
of the second deed of sale upon which said petition was premised and ultimately
concluded that said deed was a counterfeit or "at least not a public document which is
sufficient to transfer real rights according to law." On September 8, 1969, Agrava &
Agrava filed a motion to withdraw said petition, and, on September 13, 1969, the Court
granted the same.
On July 8, 1970, Federico filed a complaint for reconveyance and damages
against Rafael. In his answer, Rafael scoffed at the attack against the validity and
genuineness of the sale to him of Federico's land and rice mill. Rafael insisted that said
property was "absolutely sold and conveyed . . . for a consideration of P20,000.00,
Philippine currency, and for other valuable consideration".
While the trial court upheld the validity and genuineness of the deed of sale
executed by Federico in favor of Rafael, which deed is referred to above as Exhibit A, it
ruled that the counter-deed, referred to as Exhibit B, executed by Rafael in favor of
Federico, was simulated and without consideration, hence, null and void ab initio.
Moreover, while the trial court adjudged Rafael as the owner of the property
in dispute, it did not go to the extent of ordering Federico to pay back rentals for the use
of the property as the court made the evidential finding that Rafael simply allowed his
uncle to have continuous possession of the property because or their understanding that
Federico would subsequently repurchase the same.
From the aforecited decision of the trial court, both Federico and Rafael
appealed. The Court of Appeals rendered judgment affirming the trial court's decision,
with a modification that Federico was ordered to surrender the possession of the disputed
property to Rafael. Counsel of Federico filed a motion for reconsideration of the
aforecited decision. While the motion was pending resolution, Atty. Ricardo M. Fojas
entered his appearance in behalf of the heirs of Rafael who had passed away on November
23, 1988. Atty. Fojas prayed that said heirs be substituted as defendants-appellants in the
case. The prayer for substitution was duly noted by the court in a resolution dated April
6, 1993. Thereafter, Atty. Fojas filed in behalf of the heirs an opposition to the motion for
reconsideration. The parties to the case were heard on oral argument on October 12,
1993. On December 15, 1993, the Court of Appeals reversed itself and rendered an
amended judgment.
ISSUE:
Whether or not the deed of sale executed by Federico in favor of Rafael is
simulated and fictitious and, hence, null and void.
RULING:
In the aggregate, the evidence on record demonstrate a combination of
circumstances from which may be reasonably inferred certain badges of simulation that
attach themselves to the deed of sale in question. The complete absence of an attempt on
the part of the buyer to assert his rights of ownership over the land and rice mill in question
is the most protuberant index of simulation.
The deed of sale executed by Federico in favor of his now deceased nephew,
Rafael, is absolutely simulated and fictitious and, hence, null and void, said parties having
entered into a sale transaction to which they did not intend to be legally bound. As no
property was validly conveyed under the deed, the second deed of sale executed by the
late Rafael in favor of his uncle, should be considered ineffective and unavailing.
The allegation of Rafael that the lapse of seven years before Federico sought
the issuance of a new title in his name necessarily makes Federico's claim stale and
unenforceable does not hold water. Federico's title was not in the hands of a stranger or
mere acquaintance; it was in the possession of his nephew who, being his lawyer, had
served him faithfully for many years. Federico had been all the while in possession of
the land covered by his title and so there was no pressing reason for Federico to have a
title in his name issued. Even when the relationship between the late Rafael and Federico
deteriorated, and eventually ended, it is not at all strange for Federico to have been
complacent and unconcerned about the status of his title over the disputed property since
he has been possessing the same actually, openly, and adversely, to the exclusion of
Rafael. It was only when Federico needed the title in order to obtain a collaterized loan
that Federico began to attend to the task of obtaining a title in his name over the subject
land and rice mill.
-----------------------------------------------------
CHINA BANKING CORPORATION, petitioner, vs. COURT OF
APPEALS, COMMISSIONER OF INTERNAL
REVENUE and COURT OF TAX
APPEALS, respondents.
 The Commissioner of Internal Revenue denied the deduction from gross income
of "securities becoming worthless" claimed by China Banking Corporation (CBC). The
Commissioners disallowance was sustained by the Court of Tax Appeals ("CTA"). When
the ruling was appealed to the Court of Appeals ("CA"), the appellate court upheld the
CTA. The case is now before us on a Petition for Review on Certiorari.
Sometime in 1980, petitioner China Banking Corporation made a 53% equity
investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in
financing and investment with "deposit-taking" function. The investment amounted to
P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share.
In the course of the regular examination of the financial books and investment
portfolios of petitioner conducted by Bangko Sentral in 1986, it was shown that First
CBC Capital (Asia), Ltd., has become insolvent. With the approval of Bangko Sentral,
petitioner wrote-off as being worthless its investment in First CBC Capital (Asia), Ltd.,
in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss deductible
from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and
assessed petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive
of surcharge, interest and compromise penalty. The disallowance of the deduction was
made on the ground that the investment should not be classified as being "worthless" and
that, although the Hongkong Banking Commissioner had revoked the license of First
CBC Capital as a "deposit-taping" company, the latter could still exercise, however, its
financing and investment activities. Assuming that the securities had indeed become
worthless, respondent Commissioner of Internal Revenue held the view that they should
then be classified as "capital loss," and not as a bad debt expense there being no
indebtedness to speak of between petitioner and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the CTA. The
tax court sustained the Commissioner, holding that the securities had not indeed become
worthless and ordered petitioner to pay its deficiency income tax for 1987 of
P8,533,328.04 plus 20% interest per annum until fully paid. When the decision was
appealed to the Court of Appeals, the latter upheld the CTA. In its instant petition for
review on certiorari, petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have become worthless
is based on a Profit and Loss Account for the Year-End 31 December 1987, and the
recommendation of Bangko Sentral that the equity investment be written-off due to the
insolvency of the subsidiary. While the matter may not be indubitable (considering that
certain classes of intangibles, like franchises and goodwill, are not always given
corresponding values in financial statements[1], there may really be no need, however, to
go of length into this issue since, even to assume the worthlessness of the shares, the
deductibility thereof would still be nil in this particular case. At all events, the Court is
not prepared to hold that both the tax court and the appellate court are utterly devoid of
substantial basis for their own factual findings.
Subject to certain exceptions, such as the compensation income of individuals and
passive income subject to final tax, as well as income of non-resident aliens and foreign
corporations not engaged in trade or business in the Philippines, the tax on income is
imposed on the net income allowing certain specified deductions from gross income to
be claimed by the taxpayer. Among the deductible items allowed by the National Internal
Revenue Code ("NIRC") are bad debts and losses.[2]
An equity investment is a capital, not ordinary, asset of the investor the sale or
exchange of which results in either a capital gain or a capital loss. The gain or the loss
is ordinary when the property sold or exchanged is not a capital asset.[3] A capital asset
is defined negatively in Section 33(1) of the NIRC; viz:
(1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether
or not connected with his trade or business), but does not include stock in trade of the
taxpayer or other property of a kind which would properly be included in the inventory
of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business, or property
used in the trade or business, of a character which is subject to the allowance for
depreciation provided in subsection (f) of section twenty-nine; or real property used in
the trade or business of the taxpayer.
Thus, shares of stock; like the other securities defined in Section 20(t) [4] of the
NIRC, would be ordinary assets only to a dealer in securities or a person engaged in
the purchase and sale of, or an active trader (for his own account) in,
securities. Section 20(u) of the NIRC defines a dealer in securities thus:
"(u) The term 'dealer in securities' means a merchant of stocks or securities, whether an
individual, partnership or corporation, with an established place of business, regularly
engaged in the purchase of securities and their resale to customers; that is, one who as a
merchant buys securities and sells them to customers with a view to the gains and profits
that may be derived therefrom."
In the hands, however, of another who holds the shares of stock by way of an investment,
the shares to him would be capital assets. When the shares held by such investor
become worthless, the loss is deemed to be a loss from the sale or exchange of capital
assets. Section 29(d)(4)(B) of the NIRC states:
"(B) Securities becoming worthless. - If securities as defined in Section 20 become
worthless during the tax" year and are capital assets, the loss resulting therefrom shall,
for the purposes of his Title, be considered as a loss from the sale or exchange, on the last
day of such taxable year, of capital assets."
The above provision conveys that the loss sustained by the holder of the securities, which
are capital assets (to him), is to be treated as a capital loss as if incurred from a sale or
exchange transaction. A capital gain or a capital loss normally requires the concurrence
of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or
exchanged is a capital asset. When securities become worthless, there is strictly no sale
or exchange but the law deems the loss anyway to be "a loss from the sale or exchange of
capital assets.[5]A similar kind of treatment is given, by the NIRC on the retirement of
certificates of indebtedness with interest coupons or in registered form, short sales and
options to buy or sell property where no sale or exchange strictly exists.[6] In these cases,
the NIRC dispenses, in effect, with the standard requirement of a sale or exchange for the
application of the capital gain and loss provisions of the code.
Capital losses are allowed to be deducted only to the extent of capital gains,
i.e., gains derived from the sale or exchange of capital assets, and not from any other
income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a
subsidiary corporation of petitioner bank whose shares in said investee corporation are
not intended for purchase or sale but as an investment. Unquestionably then, any loss
therefrom would be a capital loss, not an ordinary loss, to the investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed only
to the extent provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid Section
29(d)(4)(A), read:
"Section 33. Capital gains and losses. -
x x x x x x x x x.
"(c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall
be allowed only to the extent of the gains from such sales or exchanges. If a bank or
trust company incorporated under the laws of the Philippines, a substantial part of whose
business is the receipt of deposits, sells any bond, debenture, note, or certificate or other
evidence of indebtedness issued by any corporation (including one issued by a
government or political subdivision thereof), with interest coupons or in registered
form, any loss resulting from such sale shall not be subject to the foregoing limitation an
shall not be included in determining the applicability of such limitation to other losses.
The exclusionary clause found in the foregoing text of the law does not include all
forms of securities but specifically covers only bonds, debentures, notes, certificates or
other evidence of indebtedness, with interest coupons or in registered form, which
are the instruments of credit normally dealt with in the usual lending operations of a
financial institution. Equity holdings cannot come close to being, within the purview of
"evidence of indebtedness" under the second sentence of the aforequoted
paragraph.Verily, it is for a like thesis that the loss of petitioner bank in its equity in
vestment in the Hongkong subsidiary cannot also be deductible as a bad debt. The
shares of stock in question do not constitute a loan extended by it to its subsidiary (First
CBC Capital) or a debt subject to obligatory repayment by the latter, essential elements
to constitute a bad debt, but a long term investment made by CBC.
One other item. Section 34(c)(1) of the NIRC , states that the entire amount of the
gain or loss upon the sale or exchange of property, as the case may be, shall
be recognized. The complete text reads:
SECTION 34. Determination of amount of and recognition of gain or loss.-
"(a) Computation of gain or loss. - The gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over the basis or adjusted basis for
determining gain and the loss shall be the excess of the basis or adjusted basis for
determining loss over the amount realized. The amount realized from the sale or other
disposition of property shall be to sum of money received plus the fair market value of
the property (other than money) received. (As amended by E.O. No. 37)
"(b) Basis for determining gain or loss from sale or disposition of property. - The basis of
property shall be - (1) The cost thereof in cases of property acquired on or before March
1, 1913, if such property was acquired by purchase; or
"(2) The fair market price or value as of the date of acquisition if the same was acquired
by inheritance; or
"(3) If the property was acquired by gift the basis shall be the same as if it would be in
the hands of the donor or the last preceding owner by whom it was not acquired by gift,
except that if such basis is greater than the fair market value of the property at the time of
the gift, then for the purpose of determining loss the basis shall be such fair market value;
or
"(4) If the property, other than capital asset referred to in Section 21 (e), was acquired for
less than an adequate consideration in money or moneys worth, the basis of such property
is (i) the amount paid by the transferee for the property or (ii) the transferor's adjusted
basis at the time of the transfer whichever is greater.
"(5) The basis as defined in paragraph (c) (5) of this section if the property was acquired
in a transaction where gain or loss is not recognized under paragraph (c) (2) of this
section. (As amended by E.O. No. 37)
(c) Exchange of property.
"(1) General rule.- Except as herein provided, upon the sale or exchange of property, the
entire amount of the gain or loss, as the case may be, shall be recognized.
"(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger
or consolidation (a) a corporation which is a party to a merger or consolidation exchanges
property solely for stock in a corporation which is, a party to the merger or consolidation,
(b) a shareholder exchanges stock in a corporation which is a party to the merger or
consolidation solely for the stock in another corporation also a party to the merger or
consolidation, or (c) a security holder of a corporation which is a party to the merger or
consolidation exchanges his securities in such corporation solely for stock or securities in
another corporation, a party to the merger or consolidation.
"No gain or loss shall also be recognized if property is transferred to a corporation by a
person in exchange for stock in such corporation of which as a result of such exchange
said person, alone or together with others, not exceeding four persons, gains control of
said corporation: Provided, That stocks issued for services shall not be considered as
issued in return of property."
The above law should be taken within context on the general subject of the
determination, and recognition of gain or loss; it is not preclusive of, let alone renders
completely inconsequential, the more specific provisions of the code. Thus, pursuant, to
the same section of the law, no such recognition shall be made if the sale or exchange is
made in pursuance of a plan of corporate merger or consolidation or, if as a result of an
exchange of property for stocks, the exchanger, alone or together with others not
exceeding four, gains control of the corporation.[7] Then, too, how the resulting gain might
be taxed, or whether or not the loss would be deductible and how, are matters properly
dealt with elsewhere in various other sections of the NIRC. [8] At all events, it may not be
amiss to once again stress that the basic rule is still that any capital loss can be deducted
only from capital gains under Section 33(c) of the NIRC.
In sum -
(a) The equity investment in shares of stock held by CBC of approximately 53%
in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness,
and it is a capital, not an ordinary, asset.[9]
(b) Assuming that the equity investment of CBC has indeed become "worthless,"
the loss sustained is a capital, not an ordinary, loss.[10]
(c) The capital loss sustained by CBC can only be deducted from capital gains if
any derived by it during the same taxable year that the securities have become
"worthless."[11]
WHEREFORE, the Petition is DENIED. The decision of the Court of Appeals
disallowing the claimed deduction of P16,227,851.80 is AFFIRMED.
SO ORDERED
-----------------------------------------------------
MR Holdings Ltd. vs. Sheriff Bajar
[GR 138104, April 11, 2002]
Facts: Under a "Principal Loan Agreement" and "Complementary Loan Agreement,"
both dated 4 November 1992, Asian Development Bank (ADB), a multilateral
development finance institution, agreed to extend to Marcopper Mining Corporation
(Marcopper) a loan in the aggregate amount of US$40,000,000.00 to finance the latter's
mining project at Sta. Cruz, Marinduque. The principal loan of US$15,000,000.00 was
sourced from ADB's ordinary capital resources, while the complementary loan of
US$25,000,000.00 was funded by the Bank of Nova Scotia, a participating finance
institution. On even date, ADB and Placer Dome, Inc., (Placer Dome), a foreign
corporation which owns 40% of Marcopper, executed a "Support and Standby Credit
Agreement" whereby the latter. agreed to provide Marcopper with cash flow support for
the payment of its obligations to ADB. To secure the loan, Marcopper executed in favor
of ADB a "Deed of Real Estate and Chattel Mortgage" dated 11 November 1992, covering
substantially all of its (Marcopper's) properties and assets in Marinduque.
It was registered with the Register of Deeds on 12 November 1992. When Marcopper
defaulted in the payment of its loan obligation, Placer Dome, in fulfillment of its
undertaking under the "Support and Standby Credit Agreement," and presumably to
preserve its international credit standing, agreed to have its subsidiary corporation, MR
Holding, Ltd., assumed Marcopper's obligation to ADB in the amount of
US$18,453,450.02. Consequently, in an "Assignment Agreement" dated 20 March 1997
ADB assigned to MR Holdings all its rights, interests and obligations under the principal
and complementary loan agreements, ("Deed of Real Estate and Chattel Mortgage," and
"Support and Standby Credit Agreement"). On 8 December 1997, Marcopper likewise
executed a "Deed of Assignment" in favor of MR Holdings. Under its provisions,
Marcopper assigns, transfers, cedes and conveys to MR Holdings, its assigns and/or
successors-in-interest all of its (Marcopper's) properties, mining equipment and facilities.
Meanwhile, it appeared that on 7 May 1997, Solidbank Corporation (Solidbank) obtained
a Partial Judgment against Marcopper from the RTC, Branch 26, Manila, in Civil Case
96-80083, ordering Marcopper to pay Solidbank he amount if PHP 52,970,756.89, plus
interest and charges until fully paid; to pay an amount equivalent to 10% of above-stated
amount as attorney's fees; and to pay the costs of suit. Upon Solidbank's motion, the RTC
of Manila issued a writ of execution pending appeal directing Carlos P. Bajar, sheriff, to
require Marcopper "to pay the sums of money to satisfy the Partial Judgment." Thereafter,
Bajar issued two notices of levy on Marcopper's personal and real properties, and over all
its stocks of scrap iron and unserviceable mining equipment. Together with sheriff
Ferdinand M. Jandusay of the RTC, Branch 94, Boac, Marinduque, Bajar issued two
notices setting the public auction sale of the levied properties on 27 August 1998 at the
Marcopper mine site. Having learned of the scheduled auction sale, MR Holdings served
an "Affidavit of Third-Party Claim" upon the sheriffs on 26 August 1998, asserting its
ownership over all Marcopper's mining properties, equipment and facilities by virtue of
the "Deed of Assignment." Upon the denial of its "Affidavit of Third-Party Claim" by the
RTC of Manila, MR Holdings commenced with the RTC of Boac, Marinduque, presided
by Judge Leonardo P. Ansaldo, a complaint for reivindication of properties, etc., with
prayer for preliminary injunction and temporary restraining order against Solidbank,
Marcopper, and sheriffs Bajar and Jandusay (Civil Case 98-13).
In an Order dated 6 October 1998, Judge Ansaldo denied MR Holdings' application for a
writ of preliminary injunction on the ground that (a) MR Holdings has no legal capacity
to sue, it being a foreign corporation doing business in the Philippines without license;
(b) an injunction will amount "to staying the execution of a final judgment by a court of
co-equal and concurrent jurisdiction;" and (c) the validity of the "Assignment Agreement"
and the "Deed of Assignment" has been "put into serious question by the timing of their
execution and registration." Unsatisfied, MR Holdings elevated the matter to the Court of
Appeals on a Petition for Certiorari, Prohibition and Mandamus (CA-GR SP 49226). On
8 January 1999, the Court of Appeals rendered a Decision affirming the trial court's
decision. MR Holdings filed the Petition for Review on Certiorari.
Issue: Whether MR Holdings' participation under the "Assignment Agreement" and the
"Deed of Assignment" constitutes “doing business.”
Held: Batas Pambansa 68, otherwise known as "The Corporation Code of the
Philippines," is silent as to what constitutes doing" or "transacting" business in the
Philippines. Fortunately, jurisprudence has supplied the deficiency and has held that the
term "implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of, the purpose and object for which
the corporation was organized." The traditional case law definition has metamorphosed
into a statutory definition, having been adopted with some qualifications in various pieces
of legislation in Philippine jurisdiction, such as Republic Act 7042 (Foreign Investment
Act of 1991), and Republic Act 5455. There are other statutes defining the term "doing
business," and as may be observed, one common denominator among them all is the
concept of "continuity." The expression "doing business" should not be given such a strict
and literal construction as to make it apply to any corporate dealing whatever. At this
early stage and with MR Holdings' acts or transactions limited to the assignment
contracts, it cannot be said that it had performed acts intended to continue the business
for which it was organized. Herein, at this early stage and with MR Holdings' acts or
transactions limited to the assignment contracts, it cannot be said that it had performed
acts intended to continue the business for which it was organized. It may not be amiss to
point out that the purpose or business for which MR Holdings was organized is not
discernible in the records. No effort was exerted by the Court of Appeals to establish the
nexus between MR Holdings' business and the acts supposed to constitute "doing
business." Thus, whether the assignment contracts were incidental to MR Holdings'
business or were continuation thereof is beyond determination. The Court of Appeals'
holding that MR Holdings was determined to be "doing business" in the Philippines is
based mainly on conjectures and speculation. In concluding that the "unmistakable
intention" of MR Holdings is to continue Marcopper's business, the Court of Appeals
hangs on the wobbly premise that "there is no other way for petitioner to recover its huge
financial investments which it poured into Marcopper's rehabilitation without it
(petitioner) continuing Marcopper's business in the country." Absent overt acts of MR
Holdings from which we may directly infer its intention to continue Marcopper's
business, the Supreme Court cannot give its concurrence. Significantly, a view subscribed
upon by many authorities is that the mere ownership by a foreign corporation of a property
in a certain state, unaccompanied by its active use in furtherance of the business for which
it was formed, is insufficient in itself to constitute doing business. Further, long before
MR Holdings assumed Marcopper's debt to ADB and became their assignee under the
two assignment contracts, there already existed a "Support and Standby Credit
Agreement" between ADB and Placer Dome whereby the latter bound itself to provide
cash flow support for Marcopper's payment of its obligations to ADB. Plainly, MR
Holdings' payment of US$18,453,450.12 to ADB was more of a fulfillment of an
obligation under the "Support and Standby Credit Agreement" rather than an investment.
That MR Holdings had to step into the shoes of ADB as Marcopper's creditor was just a
necessary legal consequence of the transactions that transpired. Also, the "Support and
Standby Credit Agreement" was executed 4 years prior to Marcopper's insolvency, hence,
the alleged "intention of MR Holdings to continue Marcopper's business" could have no
basis for at that time, Marcopper's fate cannot yet be determined. In the final analysis,
MR Holdings was engaged only in isolated acts or transactions. Single or isolated acts,
contracts, or transactions of foreign corporations are not regarded as a doing or carrying
on of business. Typical examples of these are the making of a single contract, sale, sale
with the taking of a note and mortgage in the state to secure payment therefor, purchase,
or note, or the mere commission of a tort. In these instances, there is no purpose to do any
other business within the country.

-----------------------------------------------------
Felipe v Heirs of Aldon

Facts: During the marriage of Maximo Aldon and Gemina Almorasa, they bought several
pieces of land. The lands were divided into three lots. Subsequently, Gemina sold the lots
to the spouses Eduardo Felipe and Hermogena Felipe without the consent of her husband.
Maximo died. Afterwhich, his heirs, namely Gemina and their children Sofia and
Salvador filed a complaint against the Felipes alleging that they are the owners of the lots.
The Felipes asserted that they had acquired the lots from the plaintiffs by purchase and
subsequent delivery to them. The trial court sustained the claim of the defendants. The
CA reversed the decision of the trial court.

Issue: WON the sale of the lots by Gemina without the consent of the husband is
defective.

Held: The sale made by Gemina is certainly a defective conract, that is, a voidable
contract.

According to Article 1390 of the NCC, among the voidable contracts are “Those where
one of the parties is incapable of giving consent to the contract.” In the instant case
Gemina had no capacity to give consent to the contract of sale. The capacity to give
consent belonged not even to the husband alone but to both spouses.