1
evident that the intention of the parties was neither to set
FIRST DIVISION
[G.R. No. 43670. February 25, 1937.]
PEOPLES BANK & TRUST
COMPANY, plaintiff-appellee, vs. W. J.
ODOM, defendant-appellant.
Gibbs, McDonough & Ozaeta for appellant.
Ohnick & Opisso for appellee.
SYLLABUS
1. CIVIL CODE; CONTRACTS; EFFECT OF A
SUBSEQUENT CONTRACT EXECUTED BETWEEN THE
SAME PARTIES; INTERPRETATION. — The defendant
contends in his first assigned error that the contract Exhibit
D took the place of the previous contracts Exhibits B and
C. To resolve this point it is necessary to take into account
the intention of the parties expressed in the contract
Exhibit D and the terms in which it was drawn. It was
executed, according to the contract itself, as a result of the
increase of the overdraft to P165,000 as well as of the
additional guaranty given by the defendant consisting of
the assignment by the way of guaranty of his rights in the
contracts of lease of the Edward J. Nell Company Building
and of his rights in the land occupied by the said building.
Clause 3 of said contract stipulated that the contract
Exhibit C of April 26, 1928, was incorporated therein and
also constituted a guaranty of the payment of the overdraft
as increased to P165,000. In the light of these facts, it is
aside the previous contracts nor to substitute Exhibit D
therefor.
2. ID; ID; AN OBLIGATION WHICH BECOMES
DUE UPON DEMAND IS NOT ONE WITH A TERM. — In
his second assignment of error the defendant contends
that the court should have held that the obligation
contracted by him was with a term, and the parties not
having fixed the date of payment, the plaintiff should have
first brought an action to fix said date under article 1128 of
the Civil Code providing that, when it is to be inferred from
the nature and circumstances of the obligation that it was
intended to grant the debtor time to pay, and the term is
not otherwise stated, the courts should fix the date of the
maturity of the obligation. The contract Exhibit D is a
complement of the contracts Exhibits B and C, hence, its
language and the intention of the parties must be
interpreted in relation to and jointly with those of the latter
under the provisions of article 1285 of the same Code. It
was expressly stipulated in Exhibits B and C that the
obligation contracted by the defendant shall expire and be
due upon demand of the plaintiff, and in view of the fact
that the latter deed was incorporated in Exhibit D as above
stated and that the defendants as required by the plaintiff
to pay all his indebtedness, it is plain that the obligation
was without a term and that it became due and is
demandable. Wherefore, article 1128 of the Civil Code
relied upon is not applicable.
3. ID; ID; ASSIGNMENT OF RIGHTS TO SECURE
AN OBLIGATION IS IN EFFECT A MORTGAGE. — The
subject of the third assignment of error is the ruling of the
court that the contracts evidenced by Exhibits B, C and D
are one of mortgage and that the plaintiff's action is for the
foreclosure thereof. The defendant vigorously argued that
none of the three contracts is one of mortgage, but an
assignment of rights, because in none of said contracts did

the parties intend to constitute a mortgage. A careful
examination of the documents shows in our opinion that
they were really mortgage contracts inasmuch as they
were executed to guarantee the principal obligations of the
defendant consisting of the overdrafts or the indebtedness
resulting therefrom. It positively appears in each of them
that the defendant assigned to the plaintiff all his rights in
the contracts of lease, in the land, and in the insurance
policy, to guarantee his indebtedness resulting from the
overdrafts. An assignment to guarantee an obligation is in
effect a mortgage, and not an absolute conveyance of title
which confers ownership on the assignee. (Title Guaranty
& Surety Co. vs. Witmire, 195 Fed., 41, 44; Polhemus vs.
Trainer, 30 Cal., 685; Campbell vs. Woodstock Iron Co., 83
Ala., 351; Dunham vs. Whitehead, N. Y., 131; Woodward
vs. Crump, 32 S. W., 195.) In Exhibits C and D it was
stipulated, among other things, that if the defendant should
comply with all the conditions of the contracts and should
pay his indebtedness together with interest at 9 per cent
per annum, the assignments would become null and void,
otherwise they would remain in full force. If the parties'
intention, as contended by the defendant, were that the
assignments are absolute, and not by way of guaranty or
mortgage, the stipulation would not have been made
because it would be inconsistent with the will of the
contracting parties.
DECISION
IMPERIAL, J p:
The plaintiff brought this action to recover from the
defendant the balance of an overdraft owing to it from the
2
latter, and to foreclose the mortgage of properties to
guarantee his obligation. The defendant appealed from the
judgment of the Court of First Instance of Manila ordering
him to pay to the plaintiff the sum of P138,403.68, with 9
per cent interest per annum from January 4, 1934, until
fully paid, plus P500 as attorney's fees, and the costs. The
judgment decreed that the principal and interest should be
paid within three months, failing which the mortgaged
properties will be sold at public auction, consisting of the
rights title and interest of the defendant in the contracts of
lease of the buildings known as the "Sugar News Co.
Building" and "Edward J. Nell Co. Building" as well as his
rights, title, and interest in the land on which the two
buildings are constructed, and that the proceeds of the
sale should be applied to the payment of the amount of the
judgment.
On January 12, 1927, the defendant entered into a
contract with A. D. Gibbs (Exhibit E) whereby the latter
authorized him to construct two concrete buildings of three
floors each, upon his land on Loaisa Street, District of
Binondo, City of Manila, described in a certificate of title
No. 27584. Upon that date, the building known as the
Sugar News Co. Building was completely constructed and
its first floor was occupied by the Peoples Bank & Trust
Co., but the two upper floors were not fully equipped; the
other building known as the "Edward J. Nell Co. Building"
was then under construction. Under the contract the
defendant bore all the expenses of construction of the
"Sugar News Co. Building," and in consideration thereof
Gibbs assigned to him all the rents which the building may
produce for a period of eight (8) years from November 1,
1926, as to the first floor then already occupied, and as to
the other floors to be equipped, from the date they are thus
fully equipped. As to the other building, "Edward J. Nell Co.
Building", the parties agreed that the defendant would also
bear all the expenses of construction until it is fully

completed, and in consideration thereof Gibbs assigned to
him all the rents which it may produce for a period of eight
(8) years and three (3) months from the date of the
termination of its construction; this period, however, to be
counted from the completion of each floor in the event that
the floors composing the building should not be completed
and equipped at the same time.
By virtue of contracts entered into with the plaintiff,
the defendant obtained an overdraft from the former
amounting to P110,000. To secure this overdraft, the
defendant, on April 26, 1928, assigned to the plaintiff all
his rights, title and interest in the contracts of lease with the
Sugar News Company, Manila Machinery & Supply Co.,
Inc., and T. Yamamoto of the various portions of the
"Sugar News Company Building", as well as the rights, title
and interest which he had acquired in the land on which
the said building was constructed under the contract which
he had with A. D. Gibbs. As additional security, the
defendant also assigned to the plaintiff his insurance policy
No. 402894 for P100,000 issued by the Manufacturers Life
Insurance Company (Exhibit C).
The overdraft was increased to P150,000, and to
secure the payment thereof the defendant executed
Exhibit B on September 18, 1928, in favor of the plaintiff,
whereby he assigned to the latter also by way of guaranty
the same securities which he had given for the overdraft of
P110,000.
On January 20, 1931, the overdraft was again
increased to P165,000, and to guarantee the payment
thereof the defendant executed Exhibit D whereby he
assigned to the plaintiff his rights, title and interest in the
contracts of lease with Edward J. Nell Company, El
Progreso Inc., and France & Goulette of various portions of
the "Edward J. Nell Company Building"; in whatever
contracts of lease of any portion of the same building
3
which he may enter into in the future, and the rights, title
and interest which he had in the land occupied by the
building according to his contract with A. D. Gibbs on
January 12, 1927.
On the same date, January 20, 1931, the plaintiff
and the defendant executed Exhibit F, whereby the latter
assigned to the former his right to collect the rents of the
"Edward J. Nell Company Building" to secure the payment
of the overdraft of P165,000 with interest at 9 per cent per
annum. The annual rentals then produced by the building
were the following: from Edward J. Nell Company P1,300,
from El Progreso P300 and from the Lyric Film Exchange,
Inc., successor of France & Goulette, P800.
Pursuant to the aforesaid contracts, the defendant
drew funds upon the plaintiff by way of overdrafts, and on
January 4, 1934, his account showed a balance against
him in the amount of P138,403.68, including stipulated
interest up to said date.
The defendant contends in his first assigned error
that the contract Exhibit D took the place of the previous
contracts Exhibits B and C. To resolve this point, it is
necessary to take into account the intention of the parties
expressed in the contract Exhibit D and the terms in which
it was drawn. It was executed, according to the contract
itself, as a result of the increase of the overdraft to
P165,000 as well as of the additional guaranty given by the
defendant, consisting of the assignment by way of
guaranty of his rights in the contracts of lease of the
Edward J. Nell Company Building and of his rights in the
land occupied by the said building. Clause 3 of said
contract stipulated that the contract Exhibit C of April 26,
1928, was incorporated therein and also constituted a
guaranty of the payment of the overdraft as increased to
P65,000. In the light of all these facts, it is evident that the

intention of the parties was neither to set aside the
previous contracts nor to substitute Exhibit D therefor.
In his second assignment of error the defendant
contends that the court should have held that the
obligation contracted by him was with a term, and the
parties not having fixed the date of payment, the plaintiff
should have first brought an action to fix said date under
article 1128 of the Civil Code providing that, when it is to
be inferred from the nature and circumstances of the
obligation that it was intended to grant the debtor time to
pay, and the term is not otherwise stated, the courts should
fix the date of the maturity of the obligation. The contract
Exhibit D is a complement of the contracts Exhibits B and
C, hence, its language and the intention of the parties must
be interpreted in relation to and jointly with those of the
latter under the provisions of article 1285 of the same
Code. It was expressly stipulated in Exhibits B and C that
the obligation contracted by the defendant shall expire and
be due upon demand of the plaintiff, and in view of the fact
that the latter deed was incorporated in Exhibit D as above
stated and that the defendant was required by the plaintiff
to pay all his indebtedness, it is plain that the obligation
was without a term and that it became due and is
demandable. Wherefore, article 1128 of the Civil Code
relied upon is not applicable.
The subject of the third assignment of error is the
ruling of the court that the contracts evidenced by Exhibits
B, C and D are one of mortgage and that the plaintiff's
action is for the foreclosure thereof. The defendant
vigorously argues that none of the three contracts is one of
mortgage, but an assignment of rights, because in none of
said contracts did the parties intend to constitute a
mortgage. A careful examination of the documents shows,
in our opinion, that they were really mortgage contracts
4
inasmuch as they were executed to guarantee the principal
obligations of the defendant, consisting of the overdrafts or
the indebtedness resulting therefrom. It positively appears
in each of them that the defendant assigned to the plaintiff
all his rights in the contracts of lease, in the land, and in
the insurance policy to guarantee his indebtedness
resulting from the overdrafts. An assignment to guarantee
an obligation is in effect a mortgage and not an absolute
conveyance of title which confers ownership on the
assignee. (Title Guaranty & Surety Co vs. Witmire, Fed.,
41, 44; Polhemus vs. Woodstock Iron Co., 83 Ala., 351;
Dunham vs. Whitehead, 21 N. Y., 131; Woodward vs.
Crump, 32 S. W., 195.) In Exhibits C and D it was
stipulated, among other things, that if the defendant should
comply with all the conditions of the contracts and should
pay his indebtedness, together with interest at 9 per cent
per annum, the assignments would become null and void,
otherwise they would remain in full force. If the parties'
intention, as contended by the defendant, were that the
assignments are absolute, and not by way of guaranty or
mortgage, the stipulation would not have been made
because it would be inconsistent with the will of the
contracting parties. Wherefore, we hold that the third
assignment of error is untenable.
As a corollary of his theory that the contracts are
absolute conveyances, the defendant contends in his
fourth and last assignment of error that his civil liability has
ceased and that he does not owe the plaintiff anything.
The conclusions that we have reached in resolving the
next preceding assignment of error show that this last
contention of the defendant is equally untenable. The
assignments he made not being absolute, and the plaintiff
having established that he has not paid his total overdraft,
inasmuch as he still owes the amount of money above
stated, with interest, it is evident that he is not yet relieved
of his obligation.
 5

Before closing, it is necessary to pass upon an

aspect of the case which substantially affects the rights of ||| (Peoples Bank & Trust Co. vs. Odom, G.R. No. 43670,
the defendant. Under the contracts, the plaintiff was
[February 25, 1937], 64 PHIL 126-134)
authorized to collect the rents of the two buildings during
the period of the existence of the contracts of lease, which
period, in turn, might be that fixed in the contract entered
into between the defendant and A. D. Gibbs. We use the
conditional form because the contracts of lease have not
been put in evidence, hence, we cannot point out the
duration thereof with precision. On the other hand, the
plaintiff liquidated the account of the defendant up to
January 4, 1934, only, and in the appealed judgment it was
decreed that the mortgaged rights be sold at public auction
should the defendant fail to pay his indebtedness within
three months. If the indebtedness has already been paid
with the rents which the plaintiff failed to account for, then
there would be no ground to take this step. If the
indebtedness has not yet been fully paid, neither would it
be proper to sell any of the rights in the mortgage contracts
of lease because the latter have already matured
according to the contract with Gibbs. For this reason, it is
necessary to provide for the one and the other case. As to
the insurance policy, nothing can be said about it as the
appealed judgment is silent thereon.
‘
In view of the foregoing, we affirm the appealed
judgment, except that part ordering the public sale of the
mortgaged rights, with the costs to the defendant and
appellant. The plaintiff is ordered to account to the
defendant for the rents received from the two buildings
which have not been included in its liquidation, Exhibit G-4,
and within ten days from notice of this judgment by the
court of origin, it shall file a written liquidation showing the
final state of the account of the defendant. So ordered.
Avanceña, C. J., Villa-Real, Abad Santos, Diaz,
Laurel and Concepcion, JJ., concur.

EN BANC
[G.R. No. L-17500. May 16, 1967.]
PEOPLE'S BANK AND TRUST CO. and
ATLANTIC, GULF AND PACIFIC CO. OF
MANILA, plaintiffs and
appellants, vs. DAHICAN LUMBER
COMPANY, DAHICAN AMERICAN
LUMBER CORPORATION, and CONNELL
BROS. CO. (PHIL.), defendants and
appellants.
Angel S. Gamboa for defendants-appellants.
Laurel Law Offices for plaintiffs-appellants.
SYLLABUS
1. REAL ESTATE MORTGAGE; STIPULATION INCLUDING
IN THE LIEN AFTER ACQUIRED PROPERTIES; VALIDITY
THEREOF. — A stipulation including in the mortgage lien after
acquired properties is common and logical in all cases where
the properties given as collateral are perishable or subject to
inevitable wear and tear or were intended to be sold, or to be
used — thus becoming subject to the inevitable wear and tear
— but with the understanding that they shall be replaced with
others to be thereafter acquired by the mortgagor. Such
stipulation is neither unlawful nor immoral, its obvious purpose
being to maintain, to the extent allowed by circumstances, the
original value of the properties given as securities.
2. ID.; ID.; ID.; MACHINERIES INTENDED FOR AN
INDUSTRY; NATURE THEREOF. — Under Articles 334 and
6
1877 of the old Civil Code substantially reproduced in Articles
415 and 2127 respectively of the new Civil Code, the
properties in question being machinery, receptacles,
instruments or replacements intended by the owner of the
tenement for an industry or works which may be carried on in
a building or on a piece of land, and shall tend directly to meet
the needs of the said industry or works, are classified as
immovable properties, therefore not covered by the Chattel
Mortgage Law.
3. ID.; ID.; ID.; ID; ID.; SUPPLIERS NOT FINANCIERS
CONSIDERED UNPAID SELLERS. — Unpaid sellers who
were the suppliers or vendors of the after acquired properties
and not the financiers, like the defendants herein can claim a
right superior to the lien constituted on said properties by
virtue of the deeds of mortgage under foreclosure.
4. ID.; ID.; ID.; ID.; ID.; FORECLOSURE PRIOR TO
MATURITY OF PROMISSORY NOTE; WHEN PROPER. —
Although an extension of time was given to the debtor,
considering that when this complaint was filed the debtor was
insolvent, it follows that the debtor thereby lost the benefit of
the period unless he gives a guaranty or security for the debt
(Art. 1198, New Civil Code). Whereas in this case the guaranty
given was plainly inadequate, then the foreclosure was proper
because the collection of the notes were not premature.
DECISION
DIZON, J p:
On September 8, 1948, Atlantic Gulf & Pacific Company of
Manila, a West Virginia corporation licensed to do business in
the Philippines, — hereinafter referred to as ATLANTIC —

sold and assigned all its right in the Dahican lumber
concession to Dahican Lumber Company — hereinafter
referred to as DALCO — for the total sum of P500,000.00 of
which only the amount of $50,000.00 was paid. Thereafter, to
develop the concession, DALCO obtained various loans from
the People's Bank & Trust Company — hereinafter referred to
as the Bank — amounting, as of July 13, 1950, to
P200,000.00. In addition, DALCO obtained, through the Bank,
a loan of $250,000.00 from the Export-Import Bank of
Washington D.C., evidenced by five promissory notes of
$50,000.00 each, maturing on different dates, executed by
both DALCO and the Dahican American Lumber Corporation,
a foreign corporation and a stockholder of DALCO, —
hereinafter referred to as DAMCO, all payable to the BANK or
its order.
As security for the payment of the abovementioned loans, on
July 13, 1950 DALCO executed in favor of the BANK — the
latter acting for itself and as trustee for the Export, Import Bank
of Washington D. C. — a deed of mortgage covering live
parcels of land situated in the province of Camarines Norte,
together with all the buildings and other improvements existing
thereon and all the personal properties of the mortgagor
located in its place of business in the municipalities of
Mambulao and Capalonga, Camarines Norte (Exhibit D). On
the same date, DALCO executed a second mortgage on the
same properties in favor of ATLANTIC to secure payment of
the unpaid balance of the sale price of the lumber concession
amounting to the sum of $450,000.00 (Exhibit G). Both deeds
contained the following provision extending the mortgage lien
to properties to be subsequently acquired — referred to
hereafter as "after acquired properties" — by the mortgagor:
"All property of every nature and description
taken in exchange or replacement, and all
buildings, machinery, fixtures, tools,
equipment and other property which the
7
Mortgagor may hereafter acquire, construct,
install, attach, or use in, to, upon, or in
connection with the premises, shall
immediately be and become subject to the
lien of this mortgage in the same manner and
to the same extent as if now included therein,
and the Mortgagor shall from time to time
during the existence of this mortgage furnish
the Mortgagee with an accurate inventory of
such substituted and subsequently acquired
property."
Both mortgages were registered in the Office of the Register of
Deeds of Camarines Norte. In addition thereto DALCO and
DAMCO pledged to the BANK 7,296 shares of stock of
DALCO and 9,286 shares of DAMCO to secure the same
obligations.
Upon DALCO's and DAMCO's failure to pay the fifth
promissory note upon its maturity, the BANK paid the same to
the Export-Import Bank of Washington D.C. and the latter
assigned to the former its credit and the first mortgage
securing it. Subsequently, the BANK gave DALCO and
DAMCO up to April 1, 1953 to pay the overdue promissory
note.
After July 13, 1950 — the date of execution of the mortgages
mentioned above — DALCO purchased various machineries,
equipment, spare parts and supplies in addition to, or in
replacement of some of those already owned and used by it
on the date aforesaid. Pursuant to the provision of the
mortgage deeds quoted heretofore regarding "after acquired
properties", the BANK requested DALCO to submit complete
lists of said properties but the latter failed to do so. In
connection with these purchases, there appeared in the books
of DALCO as due to Connell Bros. Company (Philippines) — a
domestic corporation who was acting as the general
purchasing agent of DALCO — hereinafter called CONNEL —

the sum of P452,860.55 and to DAMCO, the sum of
P2,151,678.34.
On December 16, 1952, the Board of Directors of DALCO in a
special meeting called for the purpose, passed a resolution
agreeing to rescind the alleged sales of equipment, spare
parts and supplies by CONNELL and DAMCO to it. Thereafter,
the corresponding agreements of rescission of sale were
executed between DALCO and DAMCO, on the one hand, and
between DALCO and CONNELL, on the other.
On January 23, 1953, the BANK, in its own behalf and that of
ATLANTIC, demanded that said agreements be cancelled but
CONNELL and DAMCO refused to do so. As a result, on
February 12, 1953, ATLANTIC and the BANK, commenced
foreclosure proceedings in the Court of First Instance of
Camarines Norte against DALCO and DAMCO. On the same
date they filed an ex-parte application for the appointment of a
Receiver and/or for the issuance of a writ of preliminary
injunction to restrain DALCO from removing its properties. The
court granted both remedies and appointed George U. Evans
as Receiver. Upon defendants' motion, however, the court, in
its order of February 21, 1953, discharged the Receiver.
On March 2, 1953, defendants filed their answer denying the
material allegations of the complaint and alleging several
affirmative defenses and a counterclaim.
On March 4 of the same year, CONNELL filed a motion for
intervention alleging that it was the owner and possessor of
some of the equipments, spare parts and supplies which
DALCO had acquired subsequent to the execution of the
mortgages sought to be foreclosed and which plaintiffs
claimed were covered by their lien. In its order of March 18,
1953 the Court granted the motion, as well as plaintiffs' motion
to set aside the order discharging the Receiver. Consequently,
Evans was reinstated.
8
On April 1, 1953, CONNELL filed its answer denying the
material averments of the complaint, and asserting affirmative
defenses and a counterclaim.
Upon motion of the parties, the Court, on September 30, 1953,
issued an order transferring the venue of the action to the
Court of First Instance of Manila where it was docketed as
Civil Case No. 20987.
On August 30, 1958, upon motion of all the parties, the Court
ordered the sale of all the machineries, equipment and
supplies of DALCO, and the same were subsequently sold for
a total consideration of P175,000.00 which was deposited in
court pending final determination of the action. By a similar
agreement one half (P87,500.00) of this amount was
considered as representing the proceeds obtained from the
sale of the "undebated properties" (those not claimed by
DAMCO and CONNELL), and the other half as representing
those obtained from the sale of the "after acquired properties".
After due trial, the Court, on July 15, 1960, rendered Judgment
as follows:
"IN VIEW WHEREOF, the Court:
1. Condemns Dahican Lumber Co. to pay
unto People's Bank the sum of P200,000.00
with 7% interest per annum from July 13,
1950, plus another sum of P100,000.00 with
5% interest per annum from July 13, 1950;
plus 10% on both principal sums as attorney's
fees;
2. Condemns Dahican Lumber Co. to pay into
Atlantic Gulf the sum of P900,000.00 with 4%
interest per annum from July 13, 1950, plus
10% of the principal as attorney's fees;

3. Condemns Dahican Lumber Co. to pay
unto Connel Bros. the sum of P425,860.55,
and to pay unto Dahican American Lumber
Co. the sum of P2,151,678.34 both with legal
interest from the date of the filing of the
respective answers of those parties, plus 10%
of the principals as attorney's fees;
4. Orders that of the sum realized from the
sale of the properties of P175,000.00, after
deducting the recognized expenses, one half
thereof be adjudicated unto plaintiffs, the
Court no longer specifying the share of each
because of their announced intention under
the stipulation of facts to 'pool their
resources'; as to the other one-half, the same
should be adjudicated unto both plaintiffs, and
defendant Dahican American and Connell
Bros. in the proportion already set forth on
page 9, lines 21, 22 and 23 of the body of this
decision; but with the understanding that
whatever plaintiffs and Dahican American and
Connell Bros. should receive from the
P175,000.00 deposited in the Court shall be
applied to the judgments particularly rendered
in favor of each;
5. No other pronouncement as to costs; but
the costs of the receivership as to the
debated properties shall be borne by People's
Bank, Atlantic Gulf, Connell Bros. and
Dahican American Lumber Co., pro rata."
On the following day, the Court issued the following
supplementary decision:
9
"IN VIEW WHEREOF, the dispositive part of
the decision is hereby amended in order to
add the following paragraph 6:
6. If the sums mentioned in paragraphs 1 and
2 are not paid within ninety (90) days, the
Court orders the sale at public auction if the
lands object of the mortgages to satisfy the
said mortgages and costs of foreclosure."
From the above-quoted decision, all the parties appealed.
Main contentions of plaintiffs as appellants are the following:
that the "after acquired properties" were subject to the deeds
of mortgage mentioned heretofore; that said properties were
acquired from suppliers other than DAMCO and CONNELL;
that even granting that DAMCO and CONNELL were the real
suppliers, the rescission of the sales to DALCO could not
prejudice the mortgage lien in favor of plaintiffs; that
considering the foregoing, the proceeds obtained from the sale
of the "after acquired properties" as well as those obtained
from the sale of the "undebated properties" in the total sum of
P175,000.00 should have been awarded exclusively to
plaintiffs by reason of the mortgage lien they had thereon; that
damages should have been awarded to plaintiffs against
defendants, all of them being guilty of an attempt to defraud
the former when they sought to rescind the sales already
mentioned for the purpose of defeating their mortgage lien,
and finally, that defendants should have been made to bear all
the expenses of the Receivership, costs and attorney's fees.
On the other hand, defendants-appellants contend that the trial
court erred: firstly, in not holding that plaintiffs had no cause of
action against them because the promissory note sued upon
was not yet due when the action to foreclose the mortgages
was commenced; secondly, in not holding that the mortgages
aforesaid were null and void as regards the "after acquired
properties" of DALCO because they were not registered in

accordance with the Chattel Mortgage Law, the court erring,
as a consequence, in holding that said properties were subject
to the mortgage lien in favor of plaintiffs; thirdly, in not holding
that the provision of the fourth paragraph of each of said
mortgages did not automatically make subject to such
mortgages the "after acquired properties", the only meaning
thereof being that the mortgagor was willing to constitute a lien
over such properties; fourthly, in not ruling that said stipulation
was void as against DAMCO and CONNELL and in not
awarding the proceeds obtained from the sale of the "after
acquired properties" to the latter exclusively; fifthly, in
appointing a Receiver and in holding that the damages
suffered by DAMCO and CONNELL by reason of the
depreciation or loss in value of the "after acquired properties"
placed under receivership was damnum absque injuria and,
consequently, in not awarding to said parties the
corresponding damages claimed in their counterclaim; lastly,
in sentencing DALCO and DAMCO to pay the costs of the
Receivership, instead of sentencing plaintiffs to pay attorney's
fees.
Plaintiffs' brief as appellants submit six assignments of error,
while that of defendants also as appellants submit a total of
seventeen. However, the multifarious issues thus before Us
may be resolved, directly or indirectly, by deciding the
following issues:
Firstly, are the so-called "after acquired properties" covered by
and subject to the deeds of mortgage subject of foreclosure?;
secondly, assuming that they are subject thereto, are the
mortgages valid and binding on the properties aforesaid in
spite of the fact that they were not registered in accordance
with the provisions of the Chattel Mortgage Law?; thirdly,
assuming again that the mortgages are valid and binding upon
the "after acquired properties", what is the effect thereon, if
any, of the rescission of sales entered into, on the one hand,
between DALCO and DAMCO and between DALCO and
10
CONNELL, on the other?; and lastly, was the action to
foreclose the mortgages premature?
A. Under the fourth paragraph of both deeds of mortgage, it is
crystal clear that all property of every nature and description
taken in exchange or replacement, as well as all buildings,
machineries, fixtures, tools, equipments, and other property
that the mortgagor may acquire, construct, install, attach, or
use in, to, upon, or in connection with the premises — that is,
its lumber concession — "shall immediately be and become
subject to the lien" of both mortgages in the same manner and
to the same extent as if already included therein at the time of
their execution. As the language thus used leaves no room for
doubt as to the intention of the parties, We see no useful
purpose in discussing the matter extensively. Suffice it to say
that the stipulation referred to is common, and We might say
logical, in all cases where the properties given as collateral are
perishable or subject to inevitable wear and tear or were
intended to be sold, or to be used — thus becoming subject to
the inevitable wear and tear — but with the understanding —
express or implied — that they shall be replaced with others to
be thereafter acquired by the mortgagor. Such stipulation is
neither unlawful nor immoral, its obvious purpose being to
maintain, to the extent allowed by circumstances, the original
value of the properties given as security. Indeed, if such
properties were of the nature already referred to, it would be
poor judgment on the part of the creditor who does not see to
it that a similar provision is included in the contract.
B. But defendants contend that, granting without admitting,
that the deeds of mortgage in question cover the "after
acquired properties" of DALCO, the same are void and
ineffectual because they were not registered in accordance
with the Chattel Mortgage Law. In support of this and of the
proposition that, even if said mortgages were valid, they
should not prejudice them, the defendants argue (1) that the
deeds do not describe the mortgaged chattels specifically, nor

were they registered in accordance with the Chattel Mortgage
Law; (2) that the stipulation contained in the fourth paragraph
thereof constitutes "mere executory agreements to give a lien"
over the "after acquired properties" upon their acquisition; and
(3) that any mortgage stipulation concerning "after acquired
properties" should not prejudice creditors and other third
persons such as DAMCO and CONNELL.
The stipulation under consideration strongly belies defendants'
contention. As adverted to hereinafter, it states that all
property of every nature, buildings, machinery, etc. taken in
exchange or replacement by the mortgagor "shall immediately
be and become subject to the lien of this mortgage in the
same manner and to the same extent as if now included
therein". No clearer language could have been chosen.
Conceding, on the other hand, that it is the law in this
jurisdiction that, to affect third persons, a chattel mortgage
must be registered and must describe the mortgaged chattels
or personal properties sufficiently to enable the parties and
any other person to identify them, We say that such law does
not apply to this case.
As the mortgages in question were executed on July 13, 1950
with the old Civil Code still in force, there can be no doubt that
the provisions of said code must govern their interpretation
and the question of their validity. It happens, however, that
Articles 334 and 1877 of the old Civil Code are substantially
reproduced in Article 415 and 2127, respectively, of the new
Civil Code. It is, therefore, immaterial in this case whether we
take the former or the latter as guide in deciding the point
under consideration.
Article 415 does not define real property but enumerates what
are considered as such, among them being machinery,
receptacles, instruments or replacements intended by the
owner of the tenement for an industry or works which may be
11
carried on in a building or on a piece of land, and shall tend
directly to meet the needs of the said industry or works.
On the strength of the above-quoted legal provisions, the
lower court held that inasmuch as "the chattels were placed in
the real properties mortgaged to plaintiffs, they came within
the operation of Art. 415, paragraph 5 and Art. 2127 of the
new Civil Code."
We find the above ruling in agreement with our decisions on
the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that
Article 334, paragraph 5 of the Civil Code (old) gives the
character of real property to machinery, liquid containers,
instruments or replacements intended by the owner of any
building or land for use in connection with any industry or trade
being carried on therein and which are expressly adapted to
meet the requirements of such trade or industry.
(2) In Cu Unjieng Hijos vs. Mabalacat Sugar Co., 58 Phil. 439,
We held that a mortgage constituted on a sugar central
includes not only the land on which it is built but also the
buildings, machinery and accessories installed at the time the
mortgage was constituted as well as the
buildings, machinery andaccessories belonging to the
mortgagor, installed after the constitution thereof.
It is not disputed in the case at bar that the "after acquired
properties" were purchased by DALCO in connection with, and
for use in the development of its lumber concession and that
they were purchased in addition to, or in replacement of those
already existing in the premises on July 13, 1950. In law,
therefore, they must be deemed to have
been immobilized, with the result that the real estate
mortgages involved herein — which were registered as such
— did not have to be registered a second time as chattel
mortgages in order to bind the "after acquired properties" and
affect third parties.

But defendants, invoking the case of Davao Sawmill
Company vs. Castillo, 61 Phil. 709, claim that the "after
acquired properties" did not become immobilizedbecause
DALCO did not own the whole area of its lumber concession
all over which said properties were scattered.
The facts in the Davao Sawmill case, however, are not on all
fours with the ones obtaining in the present. In the former, the
Davao Sawmill Company, Inc. had repeatedly treated the
machinery therein involved as personal property by executing
chattel mortgages thereon in favor of third parties, while in the
present case the parties had treated the "after acquired
properties" as real properties by expressly and unequivocally
agreeing that they shall automatically become subject to the
lien of the real estate mortgages executed by them. In the
Davao Sawmill decision it was, in fact, stated that "the
characterization of the property as chattels by the appellant is
indicative of intention and impresses upon the property the
character determined by the parties" (61 Phil. 712, Emphasis
supplied). In the present case, the characterization of the "after
acquired properties" as real property was made not only by
one but by both interested parties. There is, therefore, more
reason to hold that such consensus impresses upon the
properties the character determined by the parties who must
now be held in estoppel to question it.
Moreover, quoted in the Davao Sawmill case was that of
Valdez vs. Central Altagracia Inc. (225 U.S. 58) where it was
held that while under the general law of Puerto Rico machinery
placed on property by a tenant does not become immobilized,
yet, when the tenant places it there pursuant to contract that it
shall belong to the owner, it then becomes immobilized as to
that tenant and even as against his assignees and creditors
who had sufficient notice of such stipulation. In the case at bar
it is not disputed that DALCO purchased the "after acquired
properties" to be placed on, and be used in the development
12
of its lumber concession, and agreed further that the same
shall become immediately subject to the lien constituted by the
questioned mortgages. There is also abundant evidence in the
record that DAMCO and CONNELL had full notice of such
stipulation and had never thought of disputing its validity until
the present case was filed. Consequently, all of them must be
deemed barred from denying that the properties in question
had become immobilized.
What We have said heretofore sufficiently disposes of all the
arguments adduced by defendants in support of their
contention that the mortgages under foreclosure are void, and,
that, even if valid, are ineffectual as against DAMCO and
CONNELL.
Now to the question of whether or not DAMCO and CONNELL
have rights over the "after acquired properties" superior to the
mortgage lien constituted thereon in favor of plaintiffs. It is
defendants' contention that in relation to said properties they
are "unpaid sellers"; that as such they had not only a superior
lien on the "after acquired properties" but also the right to
rescind the sales thereof to DALCO.
This contention — it is obvious — would have validity only if it
were true that DAMCO and CONNELL were the suppliers or
vendors of the "after acquired properties". According to the
record, plaintiffs did not know their exact identity and
description prior to the filing of the case at bar because
DALCO, in violation of its obligation under the mortgages, had
failed and refused therefore to submit a complete list thereof.
In the course of the proceedings, however, when defendants
moved to dissolve the order of receivership and the writ of
preliminary injunction issued by the lower court, they attached
to their motion the lists marked as Exhibits 1, 2 and 3
describing the properties aforesaid. Later on, the parties
agreed to consider said lists as identifying and describing the
"after acquired properties", and engaged the services of
auditors to examine the books of DALCO so as to bring out the

details thereof. The report of the auditors and its annexes
(Exhibits V, V-1 — V-4) show that neither DAMCO nor
CONNELL had supplied any of the goods of which they
respectively claimed to be the unpaid seller; that all items were
supplied by different parties, neither of whom appeared to be
DAMCO or CONNELL; that, in fact, CONNELL collected a 5
per cent service charge on the net value of all items it claims
to have sold to DALCO and which, in truth, it had purchased
for DALCO as the latter's general agent; that CONNELL had to
issue its own invoices in addition to those of the real suppliers
in order to collect and justify such service charge.
Taking into account the above circumstances together with the
fact that DAMCO was a stockholder and CONNELL was not
only a stockholder but the general agent of DALCO, their claim
to be the suppliers of the "after acquired properties" would
seem to be preposterous. The most that can be claimed on the
basis of the evidence is that DAMCO and CONNELL probably
financed some of the purchases. But if DALCO still owes them
any amount in this connection, it is clear that,
as financiers, they can not claim any right over the "after
acquired properties" superior to the lien constituted thereon by
virtue of the deeds of mortgage under foreclosure. Indeed, the
execution of the rescission of sales mentioned heretofore
appears to be but a desperate attempt to better or improve
DAMCO and CONNELL's position by enabling them to
assume the role of "unpaid suppliers" and thus claim a
vendor's lien over the "after acquired properties". The attempt,
of course, is utterly ineffectual, not only because they are not
the "unpaid sellers" they claim to be but also because there is
abundant evidence in the record showing that both DAMCO
and CONNELL had known and admitted from the beginning
that the "after acquired properties" of DALCO were meant to
be included in the first and second mortgages under
foreclosure.
13
The claim that Belden, of ATLANTIC, had given his consent to
the rescission, expressly or otherwise, is of no consequence
and does not make the rescission valid and legally effective. It
must be stated clearly, however, in justice to Belden, that, as a
member of the Board of Directors of DALCO, he opposed the
resolution of December 16, 1952 passed by said Board and
the subsequent rescission of the sales.
Finally, defendants claim that the action to foreclose the
mortgages filed on February 12, 1953 was premature because
the promissory note sued upon did not fall due until April 1 of
the same year, concluding from this that, when the action was
commenced, the plaintiffs had no cause of action. Upon this
question the lower court says the following in the appealed
judgment:.
"The other is the defense of prematurity of the
causes of action in that plaintiffs as a matter
of grace, conceded an extension of time to
pay up to 1 April, 1953 while the action was
filed on 12 February 1953, but as to this, the
Court taking it that there is absolutely no
debate that Dahican Lumber Co., was
insolvent as of the date of the filing of the
complaint, it should follow that the debtor
thereby lost the benefit to the period.
'. . . unless he gives a guaranty or security for
the debt . . .' (Art. 1198, New Civil Code);
and as the guaranty was plainly inadequate
since the claim of plaintiffs reached in the
aggregate, P1,200,000 excluding interest
while the aggregate price of the 'after-
acquired' chattels claimed by Connell under
the rescission contracts was P1,614,675.94,
Exh. 1, Exh. V, report of auditors, and as a
matter of fact, almost all the properties were

sold afterwards for only P175,000.00, page
47, Vol. IV, and the Court understanding that
when the law permits the debtor to enjoy the
benefits of the period notwithstanding that he
is insolvent by his giving a guaranty for the
debt, that must mean a new and efficient
guaranty, must concede that the causes of
action for collection of the notes were not
premature."
Very little need be added to the above. Defendants, however,
contend that the lower court had no basis for finding that,
when the action was commenced, DALCO was insolvent for
purposes related to Article 1198, paragraph 1 of the Civil
Code. We find, however, that the finding of the trial court is
sufficiently supported by the evidence particularly the
resolution marked as Exhibit K which shows that on December
16, 1952 — in the words of the Chairman of the Board —
DALCO was "without funds, neither does it expect to have any
funds in the foreseeable future" (p. 64, record on appeal).
The remaining issues, namely, whether or not the proceeds
obtained from the sale of the "after acquired properties" should
have been awarded exclusively to the plaintiffs or to DAMCO
and CONNELL, and if in law they should be distributed among
said parties, whether or not the distribution should be pro-rata
or otherwise; whether or not plaintiffs are entitled to damages;
and lastly, whether or not the expenses incidental to the
Receivership should be borne by all the parties on a pro-rata
basis or exclusively by one or some of them are of a
secondary nature as they are already impliedly resolved by
what has been said heretofore.
As regard the proceeds obtained from the sale of the "after
acquired properties" and the "undebated properties", it is clear,
in view of our opinion sustaining the validity of the mortgages
in relation thereto, that said proceeds should be awarded
14
exclusively to the plaintiffs in payment of the money
obligations secured by the mortgages under foreclosure.
On the question of plaintiffs' right to recover damages from the
defendants, the law (Articles 1313 and 1314 of the New Civil
Code) provides that creditors are protected in cases of
contracts intended to defraud them, and that any third person
who induces another to violate his contract shall be liable for
damages to the other contracting party. Similar liability is
demandable under Arts. 20 and 21 — which may be given
retroactive effect (Arts. 2252-53) — or under Arts. 1902 and
2176 of the Old Civil Code.
The facts of this case, as stated heretofore, clearly show that
DALCO and DAMCO, after failing to pay the fifth promissory
note upon its maturity, conspired jointly with CONNELL to
violate the provisions of the fourth paragraph of the mortgages
under foreclosure by attempting to defeat plaintiffs' mortgage
lien on the "after acquired properties". As a result, the plaintiffs
had to go to court to protect their rights thus jeopardized.
Defendants' liability for damages is therefore clear.
However, the measure of the damages suffered by the
plaintiffs is not what the latter claim, namely, the difference
between the alleged total obligation secured by the mortgages
amounting to around P1,200,000.00, plus the stipulated
interest and attorney's fees, on the one hand, and the
proceeds obtained from the sale of the "after acquired
properties", and of those that were not claimed neither by
DAMCO nor CONNELL, on the other. Considering that the
sale of the real properties subject to the mortgages under
foreclosure has not been effected, and considering further the
lack of evidence showing that the true value of all the
properties already sold was not realized because their sale
was under stress, We feel that We do not have before Us the
true elements or factors that should determine the amount of
 15

damages that plaintiffs are entitled to recover from defendants.

It is, however, our considered opinion that, upon the facts
established, all the expenses of the Receivership, which was
deemed necessary to safeguard the rights of the plaintiffs,
should be borne by all the defendants, jointly and severally, in
the same manner that all of them should pay to the plaintiffs,
jointly and severally, the attorney's fees awarded in the
appealed judgment.
In consonance with the portion of this decision concerning the
damages that the plaintiffs are entitled to recover from the
defendants, the record of this case shall be remanded below
for the corresponding proceedings.
Modified as above indicated, the appealed judgment is
affirmed in all other respects. With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal, Bengzon,
J.P., Zaldivar, Sanchez and Castro, JJ., concur.
||| (People's Bank and Trust Co. v. Dahican Lumber Co., G.R.
No. L-17500, [May 16, 1967], 126 PHIL 354-371)

FIRST DIVISION
[G.R. No. 54224-25. August 16, 1989.]
ANTONIO TAMBUNTING and AURORA
TAMBUNTING, petitioners, vs. REHABILITATION
FINANCE CORPORATION (now Development
Bank of the Philippines), HEIRS OF JOSE
ESCUETA AND ELEUTERIA ESCUETA,
DEMETRIO HERNANDEZ CANDELARIA
PAGUIO and THE COURT OF
APPEALS, respondents.
Jose W. Diokno for petitioners.
Teves, Campos & Lim for respondent Heirs of Jose
and Eleuteria Escueta.
Alberto, Salazar & Associates for respondent
Candelaria Paguio and Heirs of Demetrio Hernandez.
SYLLABUS
1. OBLIGATIONS AND CONTRACTS; CONTRACT, NOT
IMPAIRED BY ANY LEGAL INFIRMITIES, ENFORCEABLE
TO THE LETTER BY THE COURTS. — A contract is the law
between the parties and, absent any showing that its
provisions are wholly or in part contrary to law, morals, good
customs, public order, or public policy, will be enforced to the
letter by the Courts.
2. ID.; MORTGAGE; RIGHT OF MORTGAGOR TO SELL
PROPERTY SUBJECT TO MORTGAGE, NOT LOST. — A
mortgagor, by encumbering his property, does not ordinarily
lose the right to sell the same or create another mortgage over
16
it, although of course obliged, when exercising said right, to
preserve and maintain the superiority of the prior mortgagee's
rights.
3. ID.; ID.; STIPULATIONS FORBIDDING THE OWNER
FROM ALIENATING THE IMMOVABLE MORTGAGED,
EXPRESSLY DECLARED VOID BY LAW. — While covenants
prohibiting the owner from constituting a later over property
registered under the Torrens Act have been held to be legally
permissible, stipulations "forbidding the owner from alienating
the immovable mortgaged," are expressly declared void by
law. It is clear then that the stipulation against "subsequent
agreements" above mentioned had not been breached by the
assignment by the Escuetas (to the Hernandezes) of their right
of redemption in connection with the mortgage constituted in
favor of the R.F.C. The assignment was not a subsequent
mortgage or encumbrance, licitly comprehended by the
prohibitory stipulation, but was actually a sale or conveyance
of all their rights in the encumbered real property — in truth, an
alienation of the immovable — which could not lawfully be
forbidden.
4. ID.; ID.; RIGHTS OF FIRST AND SECOND
MORTGAGEES. — The execution by the Escuetas of a
second over their property had the effect of subjecting the
same property to the payment of two obligations. Both
mortgage debts had to be paid by the mortgagors. If they
failed to pay either or both, the unpaid mortgagee had the right
to look to the property for satisfaction. Each mortgagee had
the right to foreclose the mortgage; but obviously, the second
mortgagee's right was inferior and subordinate to the first.
Prior foreclosure by the second mortgagee could not affect the
first mortgagee's rights at all; and if the first mortgagee
foreclosed first, the second mortgagee had the right to
redeem; i.e., pay the first mortgagee's credit together with all
due interests and charges and thus acquire the property
mortgaged, subject to the right of redemption of the mortgagor.

DECISION
NARVASA, J p:
A contract is the law between the parties and,
absent any showing that its provisions are wholly or in part
contrary to law, morals, good customs, public order, or
public policy, will be enforced to the letter by the Courts.
Application of this fundamental principle is all that is
required to resolve the controversy at bar. 1
The root of the dispute is traceable to loans
obtained by the Spouses Jose and Eleuteria Escueta from
the Rehabilitation Finance Corporation (RFC) in the
aggregate sum of P59,000.00. The loan were secured by a
mortgage constituted by said spouses over land (and
improvements thereon) owned by them, covered by
Transfer Certificates of Title Numbered 493 (39774) and
494 (39775) of the Registry of Deeds of Pasay City. 2
Later, and with the consent of the RFC, the
Escuetas created a second mortgage over the same
property as security for a loan in the amount of P16,000.00
obtained by them from the Spouses Antonio and Aurora
Tambunting. 3 Both first and second mortgage were
recorded in the Registry of Deeds of Pasay City. 4
The Escuetas defaulted in the payment of both
loans. The Tambunting consequently instituted an action of
foreclosure of their second mortgage in the Court of First
Instance of Pasay City. 5 Some three months later, the
RFC commenced proceedings for the extra-judicial
foreclosure of its mortgage, which resulted in the sale at
public auction of the mortgaged property to the highest
bidder, the RFC itself, subject to the right of redemption of
the mortgagors, the Escuetas. 6 The RFC then applied for
and obtained a writ of possession from the proper Court
17
and in virtue thereof, took possession of the foreclosed
property. 7
About eight (8) months after the foreclosure sale,
the Tambuntings as second mortgagees, offered to
redeem the property. 8 The RFC agreed, subject to the
Escuetas' right of redemption as former thereof. 9 Their
agreement was reduced to writing, entitled "Deed of
Conditional Sale." Under it, the RFC sold the property in
question to the Tambuntings for P74,643.98, 20% of which
(P14,928.89) was given as down payment, and the
balance was amortized over a period of ten (10)
years. 10 The deed also contained the following
stipulation, 11 among others:
This contract may be evoked within one (1)
year from September 16, 1955 at the option
of the vendor should the former owner
exercise his right to redeem the property
herein sold. In case the property is redeemed
or repurchased within said period by the
former or his successor-in-interest, the vendor
shall refund to the vendees any and all
amounts that the vendees may have paid to
the vendor under the conditional sale with
interest as provided for by law, rendering,
thereby the instrument automatically null and
void and without effect.
The Tambuntings took possession, and
commenced to collect the rentals from the tenants thereof
after notifying them of the deed of conditional sale in their
favor. 12 In this connection , the deed also provided that in
the event of redemption by the former owner, "all rentals
collected will be deducted from the redemption price." 13
About a month later, the Escuetas learned of the
sale in favor of the Tambunting. Three (3) days before the
expiry of the stipulated redemption period, the Escuetas,

having been unable to raise the amount to effect
redemption, assigned their right to repurchase to the
spouses Demetrio Hernandez and Candelaria Paguio in
consideration of the sum of P15,000.00. 14 On the day
following, Hernandez went to the RFC and exercised the
right of redemption assigned to him by making a deposit of
P19,088.89, and formally undertaking to pay the balance
of the repurchase price in fixed monthly installments over a
period of ten (10) years at 6% interest per annum, these
being the terms specified by the RFC for redemption, set
out in its Chairman's letter sent to the Escuetas there
months after the foreclosure. 15
The RFC then notified the Tambunting that their
contract of conditional sale was deemed revoked in view of
the redemption by Hernandez, the Escuetas' successor-in-
interest. 16
On the same day the Tambunting wrote to the
RFC, "vehemently" protesting the acceptance by the RFC
of the redemption by the Hernandezes "as not in
accordance with law." 17 And some three weeks
afterwards, they instituted in the Court of First Instance of
Pasay City, an action against the RFC, the Escueta
Spouses, and the Hernandez Spouses, for (1) the
nullification of (a) the deed of assignment by the Escuetas
in favor of the Hernandez Spouses, (b) the latter's
redemption of the property in question, and (c) the RFC's
revocation of its deed of conditional sale with the
Tambunting; (2) the declaration of the validity of said deed
of conditional sale in their favor; (3) the payment of
damages by the defendants; and (4) the payment by the
Escuetas, particularly, of rentals in arrears for their use and
occupation of one of the apartments standing on the
mortgaged property. This action, docketed as Case No.
1686-P, was the Tambunting's second involving the same
property, their first, Case No. 1565-P, being one for the
foreclosure of their second mortgage. 18
18
The Tambuntings also amended their complaint in
the first action. 19 They alleged that —
1) the deed of assignment of the Escueta's
right of redemption in favor of the Hernandez
was null and void because "fictitious or
simulated," and violative of the Deed of
Second Mortgage of which the assignors and
the assignees had notice;
2) the redemption sought to be exercised by
the Hernandezes was invalid because (a) the
amount deposited (down payment of
P19,088.89 was not the full redemption price
(P55,000.00) exclusive of costs, insurance
premiums, interest, taxes, attorney's fees and
liquidated damages, and (b) was not
accompanied by an offer pay the
Tambuntings' mortgage credit; and
3) if the verdict in Civil Case No. 1686-P
uphold the redemption by the Hernandezes
and the RFC's right to revoke its contract of
conditional sale with the Tambuntings, then
the latter's second mortgage should be
enforced on the property in question.
The two cases were consolidated, 20 and decided
jointly. 21 The Trail Court's judgment went against the
Tambuntings, and disposed of the cases as follows:
1) the preliminary injunction earlier issued,
restraining the defendants from taking
possession of the property in question was
lifted and set aside;
2) the Deed of Conditional Sale between the
RFC (which had in the meantime become the
Development Bank of the Philippines [DBP])

and the Spouses Tambuntings was declared
null and void;
3) the Deed of Assignment of the Escuetas'
right of redemption in favor of the
Hernandezes was pronounced to be valid and
subsisting; and
4) the Tambuntings were ordered to refund to
the Escuetas and Hernandezes "whatever
excess rentals there may be from plaintiffs'
(Tambuntings') collection on the mortgaged
properties after deducting therefrom the down
payment of P14,928.80 and the monthly
amortizations paid by said defendant RFC
under said Deed of Conditional Sale, and . . .
to pay the costs."
The Tambuntings appealed to the Court Appeals,
but there they fared no better. That Court affirmed the Trail
Court's decision in toto 22 and subsequently denied the
Tambuntings motion for reconsideration. 23 Hence, their
present recourse to this Court.
The Tambuntings' submissions in this Court are
substantially the same as those they laid before both the
Trial Court and the Court of Appeals, to wit:
1) the Escuetas' deed of assignment in favor of the
Hernandez Spouses violated the terms of the
Tambuntings' mortgage' and was fictitious, to boot;
2) even if the assignment were valid had been no
valid exercise of the right of redemption thereby assigned;
and
3) the assignment was "designed to deprive
petitioners (Tambuntings of the credit they extended; so
19
that petitioners are also entitled to the damages prayed for
under the(ir) complaint."
The Tambuntings' appeal must be rejected and
dismissed for lack of merit.
In the first place, the matter of whether or not the
assignment was fictitious is an issue of facts and its
resolution by the Court of Appeals is, by firmly established
and long observed principle, final and conclusive on this
Court. Moreover, the Escuetas' right to redeem the
property within one (1) year from September 16, 1955 was
never in any doubt. As much is explicit in the Deed of
Conditional Sale already referred to which documented the
Tambuntings' redemption of the property as second
mortgagees and provided for its own automatic invalidation
upon the exercise by the Escuetas (or their successor-in-
interest) of their own right redemption said period.
Now, the theory of a factitious transfer of the
Escuetas, right of redemption is sustainable only on the
premise that such transfer somehow enlarged the scope of
the right or extended the period within it might be
exercised. It did neither, however. Its only effect was to put
the transferee in the shoes of the Escuetas, with exactly
the same obligations to fulfill as redemptioner and
precisely the same period of time within which to do so. As
far as the Escuetas were concurred, there was no
advantage to be gained, no benefit to be derived, no
premium in simulating a transfer which altered none of the
conditions for a valid redemption, whether exercised by
themselves or by a transferee.
In short, the Escuetas had nothing to gain by going
behind the scenes, as it were, and making redemption
through a dummy. And even if it be assumed that they in
fact did so, that the redemption had been made for them
and on their behalf by the Hernandezes to whom; they had
"fictitiously" assigned their right of redemption, this would

be utterly inconsequential, not only because as already
pointed out, there is no question about their (the Escuetas')
being entitled to redeem, but also because the redemption
was made strictly according to the terms — as to down
payment and other conditions — laid down by the RFC
itself, by the way, these terms were precisely the same as
those under the Tambuntings were initially allowed to
redeem, it is illogical and improper, to say the least, for the
latter not to impugn them.
Also untenable is the contention that the deed of
assignment executed by the Escuetas in favor of the
Hernandez Spouses was violative of the Tambuntings'
second mortgage and therefore, inefficacious. A
mortgagor, by encumbering his property, does not
ordinarily lose the right to sell the same or create another
mortgage over it, although of course obliged, when
exercising said right, to preserve and maintain the
superiority of the property of subsequent encumbrances is
implicit in the grant of the right of redemption by Section 6
of ACT 3135, as amended, in cases of extra-judicial
foreclosure of mortgage, to "any person having a lien on
the property subsequent to the mortgage or deed of trust
under which the property is sold," in addition to the "debtor,
his successor in interest or any judicial creditor or
judgment creditor of said debtor." 24
To be sure, the deed of second mortgage executed by the
Escuetas in favor of Aurora Tambunting married to Antonio L.
Tambunting, 25 does contain a provision that "the property
mortgaged shall not be . . . the subject of any new or
subsequent contracts or agreements, saving and excepting
those having connection with the first mortgage with the RFC,
without first securing the written permission and consent of the
MORTGAGES." But provision can only construed as directed
against subsequent mortgages or encumbrances, not to an
alienation of the immovable itself. For while covenants
prohibiting the owner from constituting a later over property
20
registered under the Torrens Act have been held to be legally
permissible, 26 stipulations "forbidding the owner from
alienating the immovable mortgaged," are expressly declared
void by law. 27 It is clear then that the stipulation against
"subsequent agreements" above mentioned had not been
breached by the assignment by the Escuetas (to the
Hernandezes) of their right of redemption in connection with
the mortgage constituted in favor of the R.F.C. The
assignment was not a subsequent mortgage or encumbrance,
licitly comprehended by the prohibitory stipulation, but was
actually a sale or conveyance of all their rights in the
encumbered real property — in truth, an alienation of the
immovable — which could not lawfully be forbidden. Moreover,
since the subject of the assignment to the Hernandezes had
"connection with the first mortgage with the R.F.C.," it did not
fall within, but was explicitly excepted from, the prohibitory
stipulation in question. Finally, it should not be forgotten that
since the Tambuntings, in their own deed of conditional sale
with the R.F.C., had accepted without demur the provision that
said contract could be revoked within one (1) year from
September 16, 1955 at the option of the RFC, as vendor,
should the former owner (Escueta) exercise his right to
redeem the property; and that the redemption of the property
within said period by "the former owner or his successor-in-
interest" would render their instrument of conditional sale
"automatically null and void and without effect" 28 they cannot
assume a position inconsistent with said provision.
The execution by the Escuetas of a second over
their property had the effect of subjecting the same
property to the payment of two obligations. Both mortgage
debts had to be paid by the mortgagors. If they failed to
pay either or both, the unpaid mortgagee had the right to
look to the property for satisfaction. Each mortgagee had
the right to foreclose the mortgage; but obviously, the
second mortgagee's right was inferior and subordinate to
the first. Prior foreclosure by the second mortgagee could

not affect the first mortgagee's rights at all; and if the first
mortgagee foreclosed first, the second mortgagee had the
right to redeem; i.e., pay the first mortgagee's credit
together with all due interests and charges and thus
acquire the property mortgaged, subject to the right of
redemption of the mortgagor. LexLib
On the other hand, the assignment by the Escuetas
of their right of redemption ( as regards both mortgage
obligations) to the Hernandezes Spouses operated as a
transfer of the property, together recorded encumbrances.
The acquisition by the Hernandezes of the Escuetas' right
over the property carried with it the assumption of the
obligations burdening the property, as recorded in the
Registry of Property, i.e., the mortgage debts in favor of
the RFC (DBP) and the Tambuntings. The Hernandezes,
by stepping into the Escuetas' shoes as assignees, had
the obligation to pay the mortgage debts. otherwise, these
debts would and could be enforced against the property
subject of the assignment. Stated otherwise, the
Hernandezes, by the assignment, obtained the right to
remove the burdens on the property subject thereof by
paying the obligation thereby secured; that is to say, they
had the right of redemption as regards the first mortgage,
to be exercised within the time and in the manner
prescribed by law and the mortgage deed; and as regards,
the second mortgage, sought to be judicially foreclosed but
yet unforeclosed, they had the so-called equity of
redemption. 29
The Tambunting were perfectly within their rights
when they offered to redeem the property in question after
it had been foreclosed and acquired at public auction by
the RFC. And it was correct for the RFC, in accepting the
Tambuntings' offer and acquiescing to their redemption of
the property, tomake such redemption subject to the
Escuetas' own right of redemption, which was eligible
,against the RFC itself . Hence it was that the Deed of
21
Conditional Sale executed consequent upon that
redemption between the RFC and the Tambuntings,
expressly provided in language that could not be made any
plainer that — 30
This contract may be revoked within one (1)
year from September 16, 1955 at the option
of the vendor should the former owner
exercise his right to redeem the property
herein sold. In case the property is redeemed
or repurchased within said period by the
former owner or hid successor-in-interest, the
vendor shall refund to the vendees any and
all amounts that the vendees may have paid
to the vendor under the conditional sale with
interest as provided for by law, rendering
thereby this instrument automatically null and
void and without effect.
The Court has been cited to no fact or argument
invalidating this stipulation. The Tambuntings make no
claim that their consent to the deed of conditional sale was
in any manner flawed, or that the stipulation is contrary to
law, morals, good customs, public order, or public
policy. 31 The stipulation is a perfectly legitimate one. The
Tambunting are bound by it.
There is no dispute either about the fact that the
redemption by the Hernandezes, as assignees of the
mortgagor spouses, the Escuetas, was made within the
time and in the manner laid down by law and the RFC
itself. Their redemption was deemed by the RFC to have
been properly exercised. The RFC therefore revoked its
contract with the Tambuntings, as it was bound to pursuant
to the explicit provision thereof above quoted — indeed,
that contract was, by its terms, rendered "automatically null
and void and without effect" by the redemption — and
executed in the Hernandezes' favor a deed of conditional
 22

sale, substantially identical to that earlier signed in favor of Hernandezes, as assignees of the Escuetas, are bound to
the Tambuntings. pay to the Tambuntings within ninety (90) days from finality
of that determination in default of which the property shall
be sold at public auction in accordance with the provisions
Nor can there be any question about the effects of of Rule 68 of the Rules of Court. Costs against
that redemption by the Hernandezes as far as the petitioners. LLjur
Tambuntings are concerned. By reason thereof —
Cruz, Gancayco, Griño-Aquino and Medialdea,
1) the Tambuntings acquired the right to a refund of JJ., concur
"any and all amounts that . . . (they) may have paid to the .
. . (RFC [DBP]) under the conditional sale with interest as ||| (Tambunting Rehabilitation Finance Corp., G.R. No. 54224-
provided for by law;" and 25, [August 16, 1989], 257 PHIL 503-515)
2) their credit against the Escuetas, and their right
to foreclose the second mortgage given as security
therefor — and now still subject of Civil Case No. 1656-P
of the CFI (now RFC) of Pasay City — remained
unaffected and intacts, subject, of course, to the equity of
redemption which the Hernandezes may exercise as
assignees of the Escuetas.
WHEREFORE, the petition for review
on certiorari is DENIED, and the judgment of the Court of
Appeals thereby challenged is AFFIRMED, with the
modification hereinafter decreed. The case is accordingly
remanded to the Trial Court for a determination not only of
(1) the "excess rentals there may be from plaintiffs' (the
Tambuntings') collection on the mortgaged properties" to
be refunded by said Tambuntings to the "defendants
spouses Escueta and Hernandez" — counted from the
date that the Tambuntings were notified in writing by the
RFC of the revocation of the deed of conditional sale
executed in their favor — "after deducting therefrom the
down payment of P14,928.80 and the monthly
amortizations paid by said plaintiffs to defendant RFC
under said Deed of Conditional Sale," as ordained by the
judgment of the Trial Court, but also (2) the balance of the
Tambuntings' mortgage credit against the Escuetas,
together with all stipulated interests and charges, which the

EN BANC
[G.R. No. 130722. December 9, 1999.]
SPS. REYNALDO K. LITONJUA and
ERLINDA P. LITONJUA and PHIL. WHITE
HOUSE AUTO SUPPLY,
INC., petitioners, vs. L & R CORPORATION,
VICENTE M. COLOYAN in his capacity as
Acting Registrar of the Register of Deeds
of Quezon City thru Deputy Sheriff
ROBERTO R. GARCIA, respondents.
Bugaring, Piedad Oliva and Associates Law Offices for
petitioners.
Gancayco, Balasbas and Santos Law Offices for private
respondent.
SYNOPSIS
Petitioner spouses Litonjua obtained loans from private
respondent L & R Corporation. The loans were secured by
mortgage constituted by the spouses upon their two parcels of
land and the improvements thereon located in Cubao, Quezon
City. The mortgage was duly registered with the Register of
Deeds of Quezon City. The spouses Litonjua, however, sold to
Philippine Whitehouse Auto Supply, Inc. (PWHAS) the parcels
of land they had previously mortgaged to private respondent.
When the petitioners defaulted in the payment of their loans,
private respondent foreclosed the mortgage. At the auction
sale, private respondent was the highest bidder. When private
respondent presented the Certificate of Sale issued by the
Sheriff to the Register of Deeds for registration, it learned of
23
the prior sale of the properties by petitioners to PWHAS. It also
requested the Register of Deeds for the cancellation of the
annotation regarding the sale to PWHAS. It invoked a
provision in the mortgage contract with the spouses Litonjua
stating that the mortgagee's prior written consent was
necessary in case of subsequent encumbrance or alienation of
the subject properties. PWHAS was able to redeem the
mortgaged properties by tendering the redemption price to the
deputy sheriff because private respondent refused to accept
the payment. The Register of Deeds, however, refused to
annotate the Certificate of Redemption issued by the sheriff on
the copies of the titles of the subject properties. Petitioners
then filed a petition against private respondent Corporation for
the surrender of the owner's duplicate transfer certificates of
title. While the case was pending, private respondent executed
an Affidavit of Consolidation of Ownership. Thereafter, the
Register of Deeds cancelled Transfer Certificates of Title No.
197232 and 197233 and in lieu thereof issued Transfer
Certificates of Title No. 280054 and 28055 in favor of private
respondent corporation, free of any lien or encumbrance. A
complaint for Quieting of Title, Annulment of Title and
Damages with preliminary injunction was filed by the
petitioners spouses Litonjua and PWHAS against respondents
before the then Court of First Instance of Quezon City. The
lower court dismissed the complaint upon its finding that the
sale between the spouses Litonjua and PWHAS was null and
void and unenforceable against L & R Corporation and the
redemption made was also null and void. On appeal, the Court
of Appeals affirmed the decision of the trial court. Hence, the
present petition. The issue revolved on the validity and
enforceability of the provision in the mortgage contract
granting the mortgage the right of first refusal, and the validity
of the redemption effected by PWHAS on the account of the
spouses Litonjua.
The Supreme Court ruled that the provision in the mortgage
contract granting the mortgagee the right of first refusal is not

binding on the parties being contrary to law and a
circumvention of Article 2130 of the New Civil Code. According
to the Court, the provision creates an unconscionable
advantage for the mortgagee and amounts to a virtual
prohibition on the owner to sell his property. Accordingly, the
sale made by the spouses Litonjua to PWHAS,
notwithstanding the lack of prior written consent of L & R
Corporation, is valid. The Court also ruled that the redemption
effected by PWHAS to redeem the subject properties for the
account of the spouses Litonjua is valid. PWHAS merely
stepped into the shoes of the spouses Litonjua on account of
the sale and was in effect, their successor-in-interest. As such,
it has the right to redeem the property foreclosed by L & R
Corporation. The right of PWHAS to redeem the subject
properties finds support in Section 6 of Act 3135 which gives
not only the mortgagor-debtor the right to redeem, but also his
successor-in-interest. As the vendee of the subject properties,
PWHAS qualifies as such a successor-in-interest of the
spouses Litonjua.
SYLLABUS
1. CIVIL LAW; CONTRACTS; MORTGAGE; BEING
CONTRARY TO LAW; PARAGRAPH 8 OF THE SUBJECT
DEED OF REAL ESTATE MORTGAGE IS NOT BINDING
UPON THE PARTIES; THE SUBJECT PROVISION
CREATES AN UNCONSCIONABLE ADVANTAGE FOR THE
MORTGAGE AND AMOUNTS TO A VIRTUAL PROHIBITION
ON THE OWNER TO SELL HIS MORTGAGED PROPERTY
AND IN CIRCUMVENTION OF ARTICLE 2130 OF THE NEW
CIVIL CODE. — Insofar as the validity of the questioned
stipulation prohibiting the mortgagor from selling his
mortgaged property without the consent of the mortgagee is
concerned, therefore, the ruling in the Tambunting case is still
the controlling law. Indeed, we are fully in accord with the
24
pronouncement therein that such a stipulation violates Article
2130 of the New Civil Code. Both the lower court and the
Court of Appeals in its Amended Decision rationalized that
since paragraph 8 of the subject Deed of Real Estate
Mortgage contains no absolute prohibition against the sale of
the property mortgaged but only requires the mortgagor to
obtain the prior written consent of the mortgagee before any
such sale, Article 2130 is not violated thereby. This
observation takes a narrow and technical view of the
stipulation in question without taking into consideration the end
result of requiring such prior written consent. True, the
provision does not absolutely prohibit the mortgagor from
selling his mortgaged property; but what it does not outrightly
prohibit, it nevertheless achieves. For all intents and purposes,
the stipulation practically gives the mortgagee the sole
prerogative to prevent any sale of the mortgaged property to a
third party. The mortgagee can simply withhold its consent and
thereby, prevent the mortgagor from selling the property. In
other words, stipulations like those covered by paragraph 8 of
the subject Deed of Real Estate Mortgage is not binding upon
the parties. Accordingly, the sale made by the spouses
Litonjua to PWHAS, notwithstanding the lack of prior written
consent of L & R Corporation, is valid.
2. ID.; ID.; ID.; REDEMPTION EFFECTED BY THE
PURCHASER OF THE MORTGAGED PROPERTIES VALID;
AS VENDEE OF THE SUBJECT PROPERTIES; THE
PURCHASER QUALIFIES AS A SUCCESSOR-IN-INTEREST
OF THE MORTGAGOR-SPOUSES AND HAS THE RIGHT
TO REDEEM THE MORTGAGED PROPERTIES UNDER
SECTION 6 OF ACT 3135. — Coming now to the issue of
whether the redemption offered by PWHAS on account of the
spouses Litonjua is valid, we rule in the affirmative. The sale
by the spouses Litonjua of the mortgaged properties to
PWHAS is valid. Therefore, PWHAS stepped into the shoes of
the spouses Litonjua on account of such sale and was in
effect, their successor-in-interest. As such, it had the right to

redeem the property foreclosed by L & R Corporation.
Again, Tambunting, supra, clarified that — ". . . The acquisition
by the Hernandezes' of the Escuetas' rights over the property
carried with it the assumption of the obligations burdening the
property, as recorded in the Registry of the Property, ie.,
mortgage debts in favor of the RFC (DBP) and the
Tambuntings. The Hernandezes', by stepping into the
Escuetas' shoes as assignees, had the obligation the
obligation to pay the mortgage debts, otherwise, these debts
would and could be enforced against the property subject of
the assignment. Stated otherwise, the Hernandezes, by the
assignment, obtained the right to remove the burdens of the
property subject thereof by paying the obligations thereby
secured; that is to say, they had the right of redemption as
regards the first mortgage, to be exercised within the time and
in the manner prescribed by law and the mortgage deed; and
as regards the second mortgage, sought to be judicially
foreclosed but yet unforeclosed, they had the so-called equity
of redemption." The right of PWHAS to redeem the subject
properties finds supports in Section 6 of Act 3135 itself which
gives not only the mortgagor-debtor the right to redeem, but
also his successor-in-interest. As vendee of the subject
properties, PWHAS qualifies as such a successor-in-interest of
the spouses Litonjua. It is clear from the records that PWHAS
offered to redeem the subject properties seven (7) months
after the date of registration of the foreclosure sale, well within
the one year period of redemption.
3. ID.; ID.; ID.; WHILE THE SALE IS VALID, THE SAME IS
RESCISSIBLE BECAUSE THE MORTGAGORS IGNORED
THE MORTGAGEE'S RIGHT OF FIRST REFUSAL. — All
things considered, what then are the relative rights and
obligations of the parties? To recapitulate: the sale between
the spouses Litonjua and PWHAS is valid, notwithstanding the
absence of L & R Corporation's prior written consent hereto.
Inasmuch as the sale of PWHAS was valid, its offer to redeem
and its tender of the redemption price, as successor-in-interest
25
of the spouses Litonjua, within the one-year period should
have been accepted as valid by L & R Corporation. However,
while the sale is, indeed, valid, the same is rescissible
because it ignored L & R Corporation's right of first refusal.
Foreseeing a possible rescission of the sale, the spouses
Litonjua contend that with the restoration of the original status
quo, with no sale having been made, they should now be
allowed to redeem the subject properties, the period of
redemption having been suspended during the period of
litigation. In effect, the spouses Litonjua want to retain
ownership of the same. We cannot, however, sanction this
belated reversal of the spouses Litonjua's decision to sell. To
do so would afford them undue advantage on account of the
appreciation of the value of the subject properties in the
intervening years when they precisely were the ones who
violated and ignored the right of first refusal of L & R
Corporation over the same. Moreover, it must be stressed that
in rescinding the sale made to PWHAS, the purpose is to
uphold and enforce the right of first refusal of L & R
Corporation.
DECISION
YNARES-SANTIAGO, J p:
May a mortgage contract provide: (a) that the mortgagor
cannot sell the mortgaged property without first obtaining the
consent of the mortgagee and that, otherwise, the sale made
without the mortgagee's consent shall be invalid; and (b) for a
right of first refusal in favor of the mortgagee? LibLex

The controversy stems from loans obtained by the spouses
Litonjua from L & R Corporation in the aggregate sum of
P400,000.00; P200,000.00 of which was obtained on August
6, 1974 and the remaining P200,000.00 obtained on March 27,
1978. The loans were secured by a mortgage 1 constituted by
the spouses upon their two parcels of land and the
improvements thereon located in Cubao, Quezon City covered
by Transfer Certificates of Title No. 197232 and 197233, with
an area of 599 and 1,436 square meters, respectively. The
mortgage was duly registered with the Register of Deeds of
Quezon City.
On July 14, 1979, the spouses Litonjua sold to Philippine
White House Auto Supply, Inc. (PWHAS) the parcels of land
they had previously mortgaged to L & R Corporation for the
sum of P430,000.00. 2 The sale was annotated at the back of
the respective certificates of title of the properties. 3
Meanwhile, with the spouses Litonjua having defaulted in the
payment of their loans, L & R Corporation initiated extrajudicial
foreclosure proceedings with the Ex-Oficio Sheriff of Quezon
City. On July 23, 1980, the mortgaged properties were sold at
public auction to L & R Corporation as the only bidder for the
amount of P221,624.58. 4 When L & R Corporation presented
its corresponding Certificate of Sale issued by Deputy Sheriff
Roberto B. Garcia, to the Quezon City Register of Deeds for
registration on August 15, 1980, it learned for the first time of
the prior sale of the properties made by the spouses Litonjua
to PWHAS upon seeing the inscription at the back of the
certificates of title. Thus, on August 20, 1980, it wrote a
letter 5 to the Register of Deeds of Quezon City requesting for
the cancellation of the annotation regarding the sale to
PWHAS. L & R Corporation invoked a provision in its
mortgage contract with the spouses Litonjua stating that the
mortgagee's prior written consent was necessary in case of
subsequent encumbrance or alienation of the subject
properties. Thus, it argued that since the sale to PWHAS was
26
made without its prior written consent, the same should not
have been registered and/or annotated.
On March 10, 1981, or seven months after the foreclosure
sale, PWHAS, for the account of the spouses Litonjua,
tendered payment of the full redemption price to L & R
Corporation in the form of China Bank Manager's Check No.
HOF-M O12623 in the amount of P238,468.04. 6 L & R
Corporation, however, refused to accept the payment, hence,
PWHAS was compelled to redeem the mortgaged properties
through the Ex-Oficio Sheriff of Quezon City. On March 31,
1981, it tendered payment of the redemption price to the
Deputy Sheriff through China Bank Manager's Check No.
HOF-O14750 in the amount of P240,798.94. 7 The check was
deposited with the Branch Clerk of Court who issued Receipt
No. 7522484 8 for the full redemption price of the mortgaged
properties. Accordingly, the Deputy Sheriff issued a Certificate
of Redemption in favor of the spouses Litonjua dated March
31, 1981. 9
In a letter of the same date, the Deputy Sheriff informed L & R
Corporation of the payment by PWHAS of the full redemption
price and advised it that it can claim the payment upon
surrender of its owner's duplicate certificates of title. 10
On April 2, 1981, the spouses Litonjua presented for
registration the Certificate of Redemption issued in their favor
to the Register of Deeds of Quezon City. The Certificate also
informed L & R Corporation of the fact of redemption and
directed the latter to surrender the owner's duplicate
certificates of title within five days. 11
On April 22, 1981, L & R Corporation wrote a letter to the
Sheriff, copy furnished to the Register of Deeds, stating: (1)
that the sale of the mortgaged properties to PWHAS was
without its consent, in contravention of paragraphs 8 and 9 of
their Deed of Real Estate Mortgage; and (2) that it was not the
spouses Litonjua, but PWHAS, who was seeking to redeem

the foreclosed properties, when under Articles 1236 and 1237
of the New Civil Code, the latter had no legal personality or
capacity to redeem the same. 12
On the other hand, on May 8 and June 8, 1981, the spouses
Litonjua asked the Register of Deeds to annotate their
Certificate of Redemption as an adverse claim on the titles of
the subject properties on account of the refusal of L & R
Corporation to surrender the owner's duplicate copies of the
titles to the subject properties. With the refusal of the Register
of Deeds to annotate their Certificate of Redemption, the
Litonjua spouses filed a Petition 13 on July 17, 1981 against L
& R Corporation for the surrender of the owner's duplicate of
Transfer Certificates of Title No. 197232 and 197233 before
the then Court of First Instance of Quezon City, Branch IV,
docketed as Civil Case No. 32905.
On August 15, 1981, while the said case was pending, L & R
Corporation executed an Affidavit of Consolidation of
Ownership. 14 Thereafter, on August 20, 1981, the Register of
Deeds cancelled Transfer Certificates of Title No. 197232 and
197233 and in lieu thereof, issued Transfer Certificates of Title
No. 28005415 and 28055 16 in favor of L & R Corporation,
free of any lien or encumbrance.
With titles issued in its name, L & R Corporation advised the
tenants of the apartments situated in the subject parcels of
land that being the new owner, the rental payments should be
made to them, and that new lease contracts will be executed
with interested tenants before the end of August,
1981. 17 Upon learning of this incident from their tenants, the
spouses Litonjua filed an adverse claim 18 and a notice of lis
pendens 19 with the Register of Deeds. In the process, they
learned that the prior sale of the properties in favor of PWHAS
was not annotated on the titles issued to L & R.
A complaint for Quieting of Title, Annulment of Title and
Damages with preliminary injunction was filed by the spouses
27
Litonjua and PWHAS against herein respondents before the
then Court of First Instance of Quezon City, Branch 9,
docketed as Civil Case No. Q-33362. 20 On February 10,
1987, the lower court rendered its Decision 21 dismissing the
Complaint upon its finding that the sale between the spouses
Litonjua and PWHAS was null and void and unenforceable
against L & R Corporation and that the redemption made was
also null and void. LexLib
On appeal, the decision of the trial court was set aside by the
Court of Appeals in its Decision dated June 22, 1994, 22 on
the ground that the sale made to PWHAS as well as the
redemption effected by the spouses Litonjua were valid.
However, the same was subsequently reconsidered and set
aside in an Amended Decision dated September 11, 1997. 23
Hence, the instant Petition on the following issues:
(1) whether or not paragraphs 8 and 9 of the
Real Estate Mortgage are valid and
enforceable;
(2) whether or not the sale of the mortgaged
properties by the spouses Litonjua to
PWHAS, without the knowledge and
consent of L & R Corporation, is valid
and enforceable;
(3) whether or not PWHAS had the right to
redeem the foreclosed properties on
the account of the spouses Litonjua;
and
(4) whether or not there was a valid
redemption.
Paragraphs 8 and 9 of the subject Deed of Real Estate
Mortgage read as follows —

"8. That the MORTGAGORS shall not sell,
dispose of, mortgage, nor in any other
manner encumber the real property/properties
subject of this mortgage without the prior
written consent of the MORTGAGEE;
9. That should the MORTGAGORS decide to
sell the real property/properties subject of this
mortgage, the MORTGAGEE shall be duly
notified thereof by the MORTGAGORS, and
should the MORTGAGEE be interested to
purchase the same, the latter shall be given
priority over all the other prospective
buyers;"24
There is no question that the spouses Litonjua violated both
the aforesaid provisions, selling the mortgaged properties to
PWHAS without the prior written consent of L & R Corporation
and without giving the latter notice of such sale nor priority
over PWHAS.
Re: Validity of prohibition against subsequent
sale of mortgaged property without prior
written consent of mortgagee and validity of
subsequent sale to PWHAS.
Petitioners defend the validity of the sale between them by
arguing that paragraph 8 violates Article 2130 of the New Civil
Code which provides that "(A) stipulation forbidding the owner
from alienating the immovable mortgaged shall be void."
In the case of Philippine Industrial Co. v. El Hogar Filipino and
Vallejo, 25 a stipulation prohibiting the mortgagor from
entering into second or subsequent mortgages was held valid.
This is clearly not the same as that contained in paragraph 8
of the subject Deed of Real Estate Mortgage which also
forbids any subsequent sale without the written consent of the
mortgagee. Yet, in Arancillo v. Rehabilitation Finance
Corporation, 26 the case of Philippine Industrial Co.,supra,
28
was erroneously cited to have held that the prohibition in a
mortgage contract against the encumbrance, sale or disposal
of the property mortgaged without the consent of the
mortgagee is valid. No similar prohibition forbidding the owner
of mortgaged property from (subsequently) mortgaging the
immovable mortgaged is found in our laws, making the ruling
in Philippine Industrial Co., supra, perfectly valid. On the other
hand, to extend such a ruling to include subsequent sales or
alienation runs counter not only to Philippine Industrial Co.,
itself, but also to Article 2130 of the New Civil Code.
Meanwhile in De la Paz v. Macondray & Co., Inc., 27 it was
held that while an agreement of such nature does not nullify
the subsequent sale made by the mortgagor, the mortgagee is
authorized to bring the foreclosure suit against the mortgagor
without the necessity of either notifying the purchaser or
including him as a defendant. At the same time, the purchaser
of the mortgaged property was deemed not to have lost his
equitable right of redemption.
In Bonnevie v. Court of Appeals, 28 where a similar provision
appeared in the subject contract of mortgage, the petitioners
therein, to whom the mortgaged property were sold without the
written consent of the mortgagee, were held as without the
right to redeem the said property. No consent having been
secured from the mortgagee to the sale with assumption of
mortgage by petitioners therein, the latter were not validly
substituted as debtors. It was further held that since their rights
were never recorded, the mortgagee was charged with the
obligation to recognize the right of redemption only of the
original mortgagors-vendors. Without discussing the validity of
the stipulation in question, the same was, in effect, upheld.
Again, in Cruz v. Court of Appeals, 29 while a similar provision
was recognized and applied, no discussion as to its validity
was made since the same was not raised as an issue. LibLex

On the other hand, in Tambunting v. Rehabilitation
Finance Corporation, 30 the validity of a similar provision was
specifically raised and discussed and found as invalid. It was
there ratiocinated that —
"To be sure, the deed of second mortgage
executed by the Escuetas in favor of Aurora
Tambunting, married to Antonio L.
Tambunting, does contain a provision that 'the
property mortgaged shall not be . . . the
subject of any new or subsequent contracts of
agreements, saving and excepting those
having connection with the first mortgage with
the RFC, without first securing the written
permission and consent of the
MORTGAGEE'. But the provision can only be
construed as directed against subsequent
mortgages or encumbrances, not to an
alienation of the immovable itself. For while
covenants prohibiting the owner from
constituting a later mortgage over property
registered under the Torrens Act have been
held to be legally permissible (Phil. Industrial
Co. v. El Hogar Filipino, et al., 45 Phil. 336,
341-342; Bank of the Philippines v. Ty Camco
Sobrino, 57 Phil. 801), stipulations 'forbidding
the owner from alienating the immovable
mortgaged' are expressly declared void by
law (Art. 2130, Civil Code). It is clear that the
stipulation against 'subsequent agreements'
above mentioned had not been breached by
the assignment by the Escuetas (to the
Hernandezes) of their right of redemption in
connection with the mortgage constituted in
favor of the R.F.C. The assignment was not a
subsequent mortgage or encumbrance, licitly
comprehended by the prohibitory stipulation,
29
but was actually a sale or conveyance of all
their rights in the encumbered real property —
in truth, an alienation of the immovable —
which could not lawfully be forbidden.
Moreover, since the subject of the assignment
to the Hernandezes had 'connection with the
first assignment with the R.F.C.', it did not fall
within, but was explicitly excepted from, the
prohibitory stipulation in question. Finally, it
should not be forgotten that since the
Tambuntings, in their own deed of conditional
sale with the R.F.C., had accepted without
demur the provision that said contract could
be revoked within one (1) year from
September 16, 1955 at the option of the RFC,
as vendor, should the former owner (Escueta)
exercise his right to redeem the property; and
that the redemption of the property within said
period by 'the former owner or his successor-
in-interest' would render their instrument of
conditional sale 'automatically null and void
and without effect', they cannot now assume
a position inconsistent with said provision.
(emphasis, Ours)
Earlier, in PNB v. Mallorca, 31 it was reiterated that a real
mortgage is merely an encumbrance; it does not extinguish
the title of the debtor, whose right to dispose — a principal
attribute of ownership — is not thereby lost. Thus, a mortgagor
had every right to sell his mortgaged property, which right the
mortgagee cannot oppose.
In upholding the validity of the stipulation in question, the
amended Decision relied on the cases of Cruz v. Court of
Appeals, supra, and Medida v. Court of Appeals. 32 According
to the Court of Appeals, said cases, are not only more recent

that that of Tambunting, supra, but are also more applicable to
the issue at bar.
We are not convinced.
As we have mentioned, although a similar provision was
recognized and applied in Cruz v. Court of Appeals, supra, no
discussion as to its validity was made since the same was not
raised as an issue. Thus, it cannot be said that the specific
pronouncement in the Tambunting case that such a stipulation
can only be construed as against subsequent mortgages or
encumbrances but not to an alienation of the immovable itself,
which is prohibited under Article 2130, was abandoned
thereby. On the other hand, the facts in the case of Medida
v. Court of Appeals, are different from those in the present
case for what was in issue in the said case was a second
mortgage over a foreclosed property during the period of
redemption. Thus, the ruling in Medida quoted in the Amended
Decision that "what is delimited is not the mortgagor's jus
dispodendi, as an attribute of ownership, but merely the rights
conferred by such act of disposal which may correspondingly
be restricted," actually refers to the fact that the only rights
which a mortgagor can legally transfer, cede and convey after
the foreclosure of his properties are the right to redeem the
land, and the possession use and enjoyment of the same
during the period of redemption. It has no connection or
reference to the right of a mortgagor to sell his mortgaged
property without the required consent of the mortgagee. To be
sure, there is absolutely nothing in Medida that upholds the
validity of the stipulation in controversy.
Insofar as the validity of the questioned stipulation prohibiting
the mortgagor from selling his mortgaged property without the
consent of the mortgagee is concerned, therefore, the ruling in
the Tambunting case is still the controlling law. Indeed, we are
fully in accord with the pronouncement therein that such a
stipulation violates Article 2130 of the New Civil Code. Both
the lower court and the Court of Appeals in its Amended
30
Decision rationalize that since paragraph 8 of the subject Deed
of Real Estate Mortgage contains no absolute prohibition
against the sale of the property mortgaged but only requires
the mortgagor to obtain the prior written consent of the
mortgagee before any such sale, Article 2130 is not violated
thereby. This observation takes a narrow and technical view of
the stipulation in question without taking into consideration the
end result of requiring such prior written consent. True, the
provision does not absolutely prohibit the mortgagor from
selling his mortgaged property; but what it does not outrightly
prohibit, it nevertheless achieves. For all intents and purposes,
the stipulation practically gives the mortgagee the sole
prerogative to prevent any sale of the mortgaged property to a
third party. The mortgagee can simply withhold its consent and
thereby, prevent the mortgagor from selling the property. This
creates an unconscionable advantage for the mortgagee and
amounts to a virtual prohibition on the owner to sell his
mortgaged property. In other words, stipulations like those
covered by paragraph 8 of the subject Deed of Real Estate
Mortgage circumvent the law, specifically, Article 2130 of the
New Civil Code.
Being contrary to law, paragraph 8 of the subject Deed of Real
Estate Mortgage is not binding upon the parties. Accordingly,
the sale made by the spouses Litonjua to PWHAS,
notwithstanding the lack of prior written consent of L & R
Corporation, is valid. LLpr
Re: Validity of redemption effected by
PWHAS on the account of the spouses
Litonjua
Coming now to the issue of whether the redemption offered by
PWHAS on account of the spouses Litonjua is valid, we rule in
the affirmative. The sale by the spouses Litonjua of the
mortgaged properties to PWHAS is valid. Therefore, PWHAS
stepped into the shoes of the spouses Litonjua on account of
such sale and was in effect, their successor-in-interest. As

such, it had the right to redeem the property foreclosed by L &
R Corporation. Again, Tambunting, supra,clarifies that —
". . . . The acquisition by the Hernandezes of
the Escuetas' rights over the property carried
with it the assumption of the obligations
burdening the property, as recorded in the
Registry of Property, i.e., the mortgage debts
in favor of the RFC (DBP) and the
Tambuntings. The Hernandezes, by stepping
into the Escuetas' shoes as assignees, had
the obligation to pay the mortgage debts,
otherwise, these debts would and could be
enforced against the property subject of the
assignment. Stated otherwise, the
Hernandezes, by the assignment, obtained
the right to remove the burdens on the
property subject thereof by paying the
obligations thereby secured; that is to say,
they had the right of redemption as regards
the first mortgage, to be exercised within the
time and in the manner prescribed by law and
the mortgage deed; and as regards the
second mortgage, sought to be judicially
foreclosed but yet unforeclosed, they had the
so-called equity of redemption."
The right of PWHAS to redeem the subject properties finds
support in Section 6 of Act 3135 itself which gives not only the
mortgagor-debtor the right to redeem, but also his successors-
in-interest. As vendee of the subject properties, PWHAS
qualifies as such a successor-in-interest of the spouses
Litonjua.
Re: Validity of redemption made
31
It is clear from the records that PWHAS offered to redeem the
subject properties seven (7) months after the date of
registration of the foreclosure sale, well within the one year
period of redemption.
Re: Validity and enforceability of stipulation
granting the mortgagee the right of first
refusal
While petitioners question the validity of paragraph 8 of their
mortgage contract, they appear to be silent insofar as
paragraph 9 thereof is concerned. Said paragraph 9 grants
upon L & R Corporation the right of first refusal over the
mortgaged property in the event the mortgagor decides to sell
the same. We see nothing wrong in this provision. The right of
first refusal has long been recognized as valid in our
jurisdiction. The consideration for the loan-mortgage includes
the consideration for the right of first refusal. L & R Corporation
is in effect stating that it consents to lend out money to the
spouses Litonjua provided that in case they decide to sell the
property mortgaged to it, then L & R Corporation shall be given
the right to match the offered purchase price and to buy the
property at that price. Thus, while the spouses Litonjua had
every right to sell their mortgaged property to PWHAS without
securing the prior written consent of L & R Corporation, they
had the obligation under paragraph 9, which is a perfectly valid
provision, to notify the latter of their intention to sell the
property and give it priority over other buyers. It is only upon
failure of L & R Corporation to exercise its right of first refusal
could the spouses Litonjua validly sell the subject properties to
others, under the same terms and conditions offered to L & R
Corporation.
What then is the status of the sale made to PWHAS in
violation of L & R Corporation's contractual right of first
refusal? On this score, we agree with the Amended Decision
of the Court of Appeals that the sale made to PWHAS is

rescissible. The case of Guzman, Bocaling & Co
v. Bonnevie 33 is instructive on this point —
"The respondent court correctly held that the
Contract of Sale was not voidable
but rescissible. Under Article 1380 to 1381(3)
of the Civil Code, a contract otherwise valid
may nonetheless be subsequently rescinded
by reason of injury to third persons, like
creditors. The status of creditors could be
validly accorded the Bonnevies for they had
substantial interests that were prejudiced by
the sale of the subject property to the
petitioner without recognizing their right of first
priority under the Contract of Lease.
According to Tolentino, rescission is a
remedy granted by law to the contracting
parties and even to third persons, to secure
reparation for damages caused to them by a
contract, even if this should be valid, by
means of the restoration of things to their
condition at the moment prior to the
celebration of said contract. It is a relief
allowed for one of the contracting parties and
even third persons from all injury and damage
the contract may cause, or to protect some
incompatible and preferential right created by
the contract. Rescission implies a contract
which, even if initially valid, produces a lesion
or pecuniary damage to someone that
justifies its invalidation for reasons of equity."
(underscoring, Ours)
It was then held that the Contract of Sale there, which violated
the right of first refusal, was rescissible. cdasia
32
In the case at bar, PWHAS cannot claim ignorance of the right
of first refusal granted to L & R Corporation over the subject
properties since the Deed of Real Estate Mortgage containing
such a provision was duly registered with the Register of
Deeds. As such, PWHAS is presumed to have been notified
thereof by registration, which equates to notice to the whole
world.
We note that L & R Corporation had always expressed its
willingness to buy the mortgaged properties on equal terms as
PWHAS. Indeed, in its Answer to the Complaint filed, L & R
Corporation expressed that it was ready, willing and able to
purchase the subject properties at the same purchase price of
P430,000.00, and was agreeable to pay the difference
between such purchase price and the redemption price of
P249,918.77, computed as of August 13, 1981, the expiration
of the one-year period to redeem. That it did not duly exercise
its right of first refusal at the opportune time cannot be taken
against it, precisely because it was not notified by the spouses
Litonjua of their intention to sell the subject property and
thereby, to give it priority over other buyers.
All things considered, what then are the relative rights and
obligations of the parties? To recapitulate:, the sale between
the spouses Litonjua and PWHAS is valid, notwithstanding the
absence of L & R Corporation's prior written consent thereto.
Inasmuch as the sale to PWHAS was valid, its offer to redeem
and its tender of the redemption price, as successor-in-interest
of the spouses Litonjua, within the one-year period should
have been accepted as valid by L & R Corporation. However,
while the sale is, indeed, valid, the same is rescissible
because it ignored L & R Corporation's right of first refusal.
Foreseeing a possible rescission of the sale, the spouses
Litonjua contend that with the restoration of the original status
quo, with no sale having been made, they should now be
allowed to redeem the subject properties, the period of
redemption having been suspended during the period of

litigation. In effect, the spouses Litonjua want to retain
ownership of the same. We cannot, however, sanction this
belated reversal of the spouses Litonjua's decision to sell. To
do so would afford them undue advantage on account of the
appreciation of the value of the subject properties in the
intervening years when they precisely were the ones who
violated and ignored the right of first refusal of L & R
Corporation over the same. Moreover, it must be stressed that
in rescinding the sale made to PWHAS, the purpose is to
uphold and enforce the right of first refusal of L & R
Corporation.
WHEREFORE, the Decision appealed from is hereby
AFFIRMED with the following MODIFICATIONS:
(a) Ordering the rescission of the sale of the
mortgaged properties
between petitioners spouses Reynaldo
and Erlinda Litonjua and Philippine
White House Auto Supply, Inc. and
ordering said spouses to return to
Philippine White House Auto Supply,
Inc. the purchase price of
P430,000.00;
(c) Disallowing, due to the rescission of the
sale made in its favor, the redemption
made by Philippine White House Auto
Supply, Inc. and ordering Quezon City
Sheriff Roberto Garcia to return to it
the "redemption" check of
P240,798.94;
(d) Allowing respondent L & R Corporation to
retain its consolidated titles to the
foreclosed properties but ordering it to
pay to the Litonjua spouses the
additional sum of P189,201.96
33
representing the difference from the
purchase price of P430,000.00 in the
rescinded sale;
(e) Deleting the awards for moral and
exemplary damages and attorney's
fees to the respondents.
No pronouncement as to costs.
SO ORDERED.
Bellosillo, Melo, Puno, Kapunan, Panganiban, Quisumbing,
Purisima, Pardo, Buena, Gonzaga-Reyes and De Leon, Jr.,
JJ., concur.
Davide, Jr., C.J. and Mendoza, J., join Justice Vitug in his
concurring and dissenting opinion.
Separate Opinions
VITUG, J ., concurring and dissenting:
At the pith of the controversy are two stipulations in a real
estate mortgage contract, to wit: (a) that the mortgagor cannot
sell the mortgaged property without the written consent of the
mortgagee, and (b) that the latter has a "right of first refusal" in
any projected sale of the hypothecated property. LLphil
Outlined below is a factual backdrop of the case.
The spouses Reynaldo and Erlinda Litonjua (Litonjua spouses)
contracted a loan from L & R Corporation in the sum of
P400,000.00 drawn in two tranches — P200,000.00 on 06
August 1974 and the other P200,000.00 on 27 March 1978.
The loan was secured by a real estate mortgage constituted
by the spouses on their two parcels of land located in Cubao,
Quezon City, covered by Transfer Certificates of Title ("TCT")

No. 197232 and 197233, measuring 599 and 1,436 sq. m.,
respectively. The contract provided, inter alia, that the
mortgagors were enjoined from conveying the mortgaged
property without the written consent of the mortgagee and that
the mortgagee had a right of first refusal in the event the
mortgagors decided to sell the property. 1 The mortgage was
duly registered with the Register of Deeds of Quezon City.
While the mortgage obligation was still outstanding, the
Litonjua spouses sold the two parcels of land to Philippine
White House Auto Supply, Inc. (PWHAS), for the amount of
P430,000.00. The sale was annotated at the back of the
certificate of title.
When the Litonjuas defaulted in the payment of the loan, L & R
Corporation initiated extrajudicial foreclosure of the mortgage.
The mortgaged parcels were sold at public auction to L & R
Corporation, it being the sole bidder, on 23 July 1980. On 15
August 1980, when L & R presented its certificate of sale to
the Register of Deeds of Quezon City, it was informed of the
previous sale made by the Litonjua spouses to PWHAS. L & R
Corporation thereupon sought from the Register of Deeds the
cancellation of the annotation of sale to PWHAS calling
attention to the proviso in the mortgage agreement enjoining
the Litonjua spouses from selling the property.
Later, PWHAS, for the account of the Litonjua spouses,
tendered payment of the full redemption price to L & R
Corporation. Upon the latter's refusal to honor the redemption,
PWHAS tendered the amount with the Branch Clerk of Court;
correspondingly, the Deputy Sheriff issued a certificate of
redemption in favor of the Litonjua spouses. The Certificate of
Redemption, however, could not be registered because L & R
Corporation would not surrender the owner's duplicate
certificates of title. When the Register of Deeds likewise
refused to annotate the certificate of redemption as an adverse
claim on the titles covering the two parcels of land, the
Litonjuas filed a petition with the then Court of First Instance of
34
Quezon City to compel L & R Corporation to surrender the
duplicate certificates of title.
During the pendency of the case, L & R Corporation executed
an "Affidavit of Consolidation of Ownership," on the basis of
which the Register of Deeds cancelled TCT No. 197232 and
197233 and, in lieu thereof, issued TCT No. 280054 and
280055 in favor of L & R Corporation free from any lien or
encumbrance. L & R Corporation thereupon advised the
tenants of the apartment units on the subject lots to tender
rental payments to the corporation as being the new owner.
Apprised of the foregoing, the Litonjua spouses filed a
complaint for "Quieting of Title, Annulment of Title and
Damages." The trial court dismissed the complaint on the
thesis that the sale between the spouses Litonjua and
PWHAS, as well as the redemption subsequently made, was
null and void and unenforceable against L & R Corporation.
On appeal, the judgment of the trial court was set aside by the
Court of Appeals in its decision of 22 June 1994; however, on
11 September 1997, the appellate court reconsidered and
reversed its previous stand.
There appears to be some merit in the instant petition.
The stipulation in the real estate mortgage which prohibits the
mortgagor from selling the mortgaged property without the
written consent of the mortgagee contravenes the law. Article
2130 of the New Civil Code holds that a stipulation
forbidding the owner from alienating the immovable
mortgaged shall be void. The phrase "without (the) written
consent of the mortgagee," added by the parties in their
contract is of no real comfort to the mortgagee and did nothing
but to stress, indeed, the restriction against what should
otherwise be an unimpeded right of the mortgagor to alienate
the property. The clear intention of the law is to outlaw a

stipulation that would effectively prevent the mortgagor from
freely conveying the property during the life of the mortgage.
Needless to state, the injunction of the law may not be
circumvented, whether directly or indirectly, by the parties.
I am, therefore, in complete accord with the majority in
concluding that "the sale made by the spouses Litonjua to
PWHAS, notwithstanding the lack of prior written consent of L
& R Corporation, is valid," and that as such successor-in-
interest of the Litonjuas, PWHAS has a "right to redeem the
property foreclosed by L & R Corporation." LLphil
What I find quite difficult to accept, with all due respect, is the
pre-emptive and peremptory pronouncement in
the ponencia that the sale between the Litonjuas and PWHAS
is rescissible because it ignored the "right of first refusal" of L
& R Corporation. I must stress that a right of first refusal is not
a perfected contract. 2 Neither does it qualify as an option
under the second paragraph of Article 1479, 3 which itself
must be supported by a consideration separate and distinct
from the price itself, 4 nor an offer which Article 1319 5 of the
Code requires to be definitive and certain both as to object and
cause of the contemplated agreement. Even while the object
in a "right of first refusal" might be determinate, the exercise of
the right, nevertheless, would still be dependent not only on
the grantor's eventual intention to enter into a binding juridical
relation but also on terms, including the price, that obviously
are yet to be fixed. It would be absurd to suggest that a right of
first refusal can be the proper subject of an action for specific
performance but, of course, neither would it be correct to say
that a breach of such right would be totally inconsequential. A
grantor who unjustly discards his own affirmation violates the
basic dogma in human relations so well expressed as in Article
19 of the Civil Code to the effect that every person is expected
to act with justice, give another is due and observe honesty
and good faith. When ignored, the legal feasibility of an action
for damages is a matter now long settled.
35
Most importantly, a rescissory action in consonance with
Article 1380, in relation to Article 1381, paragraph (3), of the
New Civil Code 6 so invoked (by citing Guzman, Bocaling &
Co. vs. Bonnevie 7 ) as the authority for the rescission of the
sale between the Litonjua spouses and PWHAS is here off the
mark unfortunately. An action for rescission under said
provisions of the Code is merely subsidiary and relates to
the specific instance when a debtor, in an attempt to
defraud his creditor, enters into a contract with another
that deprives the creditor to recover his just claim and
leaves him with no other legal means, than by rescission,
to obtain reparation. 8 Hence, the rescission is only to the
extent necessary to cover the damages caused pursuant to
Article 1384 of the Civil Code. Verily, the case and factual
settings in the instant controversy (for "Quieting of Title,
Annulment of Title and Damages with Preliminary Injunction")
initiated by the Litonjua spouses and PWHAS against herein
respondents is neither the occasion nor the proper forum for
such an issue to be considered. 9
To sum up, the only matter called for to be said, in my view, is
that part of the ponencia which concludes that the sale
between the Litonjua spouses and PWHAS is a valid and
subsisting contract which has accorded to PWHAS, by
stepping into the shoes of the sellers, a corresponding
entitlement to redeem the foreclosed property.
WHEREFORE, I vote to REVERSE and SET ASIDE the
appealed amended judgment and to REINSTATE the original
decision, dated 22 June 1994, of the appellate court. prcd
||| (Spouses Litonjua v. L & R Corp., G.R. No. 130722,
[December 9, 1999], 378 PHIL 145-169)

EN BANC
[G.R. No. L-22538. October 31, 1967.]
PHILIPPINE NATIONAL BANK, petitioner-
appellee, vs. PRIMITIVA
MALLORCA, oppositor-appellant.
Ramon B. de los Reyes for petitioner-appellee.
Eugenio G. Gemarino for oppositor-appellant.
SYLLABUS
1. MORTGAGES; NATURE OF RECORDED MORTGAGE;
EFFECT OF CHANGES IN OWNERSHIP. — A recorded real
estate mortgage is a right in rem, a lien inseparable from the
property mortgaged. Until discharged, it follows the property. It
subsists notwithstanding changes of ownership; all
subsequent purchasers of the property must respect the
mortgage, whether the transfer to them be with or without the
consent of the mortgagee.
2. ID.; ID.; INDIVISIBILITY OF MORTGAGE. — A real estate
mortgage is indivisible. Each and every parcel of land under
mortgage answers for the totality of the debt.
3. ID.; EFFECT OF REGISTRATION. — Registration of the
mortgage in the Register of Deeds is notice to all persons of
the existence thereof.
4. ID.; RIGHT OF REDEMPTION; FAILURE TO EXERCISE.
— Failure of the owner of a parcel of land mortgaged to
exercise his right of redemption ends his interest in the land
and estops him from denying the mortgage lien thereon.
36
5. JURISDICTION; CANCELLATION OF CERTIFICATES OF
TITLE; WHEN CADASTRAL COURT HAS JURISDICTION. —
A cadastral court has jurisdiction to entertain a petition for the
cancellation of a certificate of title where the registered owner
has been lawfully divested of his title to the property and there
is no substantial controversy in regard thereto between the
petitioner and any other interested party.
DECISION
SANCHEZ, J p:
Disputed by appellant Primitiva Mallorca is the correctness of
the order of the Court of First Instance of Iloilo, sitting as a
Cadastral Court, 1 directing her to surrender to the Register of
Deeds her co-owner's copy of Transfer Certificate of Title No.
T-24256. This is necessary to enable the Philippine National
Bank 2to secure in its name Torrens title to the property
involved which it acquired in a foreclosure sale upon mortgage
executed in its favor.
The background facts may be recited as follows:
Way back in 1950, Ruperta Lavilles mortgaged a 48,965
square meter-parcel of land situate in Passi, Iloilo (Lot 1504,
Passi Cadastral Survey) to the PNB as security for a loan of
P1,800.00. The lot was covered by Transfer Certificate of Title
27070 in the name of Ruperta Lavilles. The mortgage was duly
recorded.
On January 12, 1958, while the mortgage above described
was in full force and effect, and without PNB's knowledge and
consent, Ruperta Lavilles sold to appellant Primitiva Mallorca
20,000 square meters of the mortgaged land.

On January 17, 1958, Mallorca moved the Iloilo cadastral court
to have the sale to her duly annotated on the title, 3 and, for
the purpose, to require PNB to surrender the owner's copy of
TCT 27070 to the Register of Deeds.
The court order of February 3, 1958 directed PNB to deliver
said TCT 27070 to the Register of Deeds, and warned that
"[t]he mortgage in favor of the Philippine National Bank is duly
registered in the Office of the Register of Deeds and to
whomsoever the land is sold the vendee will assume the
responsibility of complying with the provisions of the
mortgage."
The Register of Deeds then cancelled TCT 27070, issued a
new one, TCT 24256, making two co-owner's copies of the title
— one each for Ruperta Lavilles and for Primitiva Mallorca.
PNB's mortgage lien was annotated on both copies.
Ruperta Lavilles failed to pay her mortgage debt. PNB, on
April 16, 1958, foreclosed the mortgage extrajudicially. On
May 12, 1958, a certificate of sale was issued to PNB as the
highest bidder in the foreclosure sale. This certificate of sale
was registered with the Register of Deeds of Iloilo.
In March, 1959, Mallorca sued PNB to enforce her right of
redemption, with damages. 4
On February 9, 1960, judgment was rendered in the case just
stated, dismissing the claim for damages but declaring
Mallorca "entitled to exercise her right of redemption with
respect to the 20,000 square meters sold to her by Ruperta
Lavilles within the period specified by law."
Mallorca's appeal from this judgment was, on June 18, 1960,
denied by the lower court — it was filed out of time. Her move
to reconsider was rejected. She then went to the Court of
Appeals on mandamus. On January 14, 1961, the appellate
court denied the same for lack of merit. 5
37
Primitiva Mallorca failed to exercise her right of redemption as
decreed by the court.
Thus, the final deed of sale in favor of PNB, dated February
19, 1962, was presented to the Register of Deeds on April 10,
1962 for registration. The latter refused to register without
Mallorca's co- owner's copy of TCT 24256. By letter of May 18,
1962, the Register of Deeds required Mallorca to surrender
said copy. She did not comply.
And so, PNB lodged the present petition for consolidation of
title in the cadastral court. The bank prayed that Mallorca's co-
owner's copy of TCT 24256 be declared null and void, and that
the Register of Deeds be directed to cancel the same and to
issue a new title in the name of PNB, upon payment of the
legal fees.
By order of August 18, 1962, the court a quo required Mallorca
"to deliver the co-owner's duplicate copy of TCT 24256 to the
Register of Deeds within a period of five (5) days."
Mallorca appealed this order to the Court of Appeals. 6 The
latter, however, in its resolution of February 18, 1964, certified
the case to this Court, as the issues present questions of law.
1 Appellant's stand is that her undivided interest consisting of
20,000 square meters of the mortgaged lot, remained
unaffected by the foreclosure and subsequent sale to PNB.
Because, so she argues, she was not a party to the real estate
mortgage in favor of PNB, and she "neither secured nor
contracted a loan" with said bank. What PNB foreclosed, she
maintains, "was that portion belonging to Ruperta Lavilles
only", not the part belonging to her.
Appellant's position clashes with precepts well-entrenched in
law. By Article 2126 of the Civil Code, 7 a "mortgage directly
and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of
the obligation for whose security it was constituted." Sale or

transfer cannot affect or release the mortgage. A purchaser is
necessarily bound to acknowledge and respect the
encumbrance to which is subjected the purchased thing and
which is at the disposal of the creditor "in order that he, under
the terms of the contract, may recover the amount of his credit
therefrom." 8 For, a recorded real estate mortgage is a right in
rem, a lien on the property whoever its owner may
be. 9 Because the personality of the owner is disregarded; the
mortgage subsists notwithstanding changes of ownership; the
last transferee is just as much of a debtor as the first one; and
this, independent of whether the transferee knows or not the
person of the mortgagee. 10 So it is, that a mortgage lien
is inseparable from the property mortgaged. All subsequent
purchasers thereof must respect the mortgage, whether the
transfer to them be with or without the consent of the
mortgagee. For, the mortgage, until discharged, follows the
property. 11
And then, militating against appellant's cause is one other
special feature of a real mortgage — its indivisibility. 12 This
Court has understood mortgage indivisibility in the sense that
each and every parcel under mortgage answers for the totality
of the debt. 13
It does not really matter that the mortgagee, as in this case,
did not oppose the subsequent sale. Naturally, because the
sale was without PNB's knowledge. Even if such knowledge is
chargeable to PNB, its failure to object to the sale could not
have any impairing effect upon its rights as mortgagee. After
all, a real mortgage is merely an encumbrance; it does not
extinguish the title of the debtor, whose right to dispose — a
principal attribute of ownership — is not thereby lost. 14 And,
on the assumption that PNB recognized the efficaciousness of
the sale by Ruperta Lavilles of a portion of the mortgaged land
to Primitiva Mallorca, which Lavilles "had the right to make"
and which anyway PNB "cannot oppose", PNB cannot be
prejudiced thereby, for, at all events, "such sale could not
38
affect the mortgage, as the latter follows the property whoever
the possessor may be." 15
On Primitiva Mallorca's part, she cannot rightfully deny the
mortgage lien on the portion of the land she purchased. First.
Registration of the mortgage in the Register of Deeds is notice
to all persons of the existence thereof. 16 Second. By express
provision of Section 39 of the Land Registration Act, "every
subsequent purchaser of registered land who takes a
certificate of title for value in good faith shall hold the same
free of all encumbrance except those noted on said
certificate." 17 Clear implication exists that if an encumbrance
is so noted, that purchaser is bound thereby. Third. Mallorca
herself petitioned the court to order PNB to deliver the owner's
copy of TCT 27070 to the Register of Deeds for annotation of
Mallorca's interest, as heretofore adverted to. And the court, in
giving its stamp of approval to the petition, expressly directed
that "to whomsoever the land is sold the vendee will assume
the responsibility of complying with the provisions of the
mortgage." Fourth.Mallorca's own co-owner's copy of the title
issued to her carried PNB's mortgage lien. Fifth. The fact that
Mallorca failed to exercise her right of redemption, which she
sought to enforce in a judicial court, ends her interest to the
land she claims, and, doubtless, estops her from denying
PNB's mortgage lien thereon.
We, accordingly, rule that PNB has the right to consolidate its
title on the entire lot mortgaged by Ruperta Lavilles in its favor,
including the P20,000 square meter-undivided interest of
Primitiva Mallorca. And this, by virtue of the foreclosure sale
and the expiry of Mallorca's right of redemption.
2. In a final effort to overturn the order under review, appellant
espouses the thesis that the lower court, acting as a cadastral
court, is without jurisdiction in the premises. Her syllogism is
this: she is questioning the right of PNB to declare TCT 24256
 39

as null and void insofar as the 20,000 square meter-undivided Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon,
portion is concerned; the issue is thus raised to the level of J.P., Zaldivar, Castro, Angeles and Fernando. JJ., concur.
"contentious litigation"; and, going by jurisprudence, 18 a
cadastral court is devoid of power to act thereon. ||| (Philippine National Bank v. Primitiva Mallorca, G.R. No. L-
22538, [October 31, 1967], 128 PHIL 747-754)
The precedents appellant depends on cannot
serve as authority in her case. For, those cases
involved unresolved issues. Here, the question she
presents — whether her undivided share in the lot is
encumbered or unencumbered — has been definitely
passed upon in the redemption case she brought against
PNB (Civil Case 5149, Court of First Instance of Iloilo).
Mallorca herself acknowledged the validity of that
encumbrance when she commenced said civil case. Given
the facts, PNB's petition to consolidate title falls under the
rule that a cadastral court has jurisdiction to entertain a
petition for the cancellation of an outstanding certificate of
title where the registered owner has been lawfully
divested of his title thereof. 19 For, the truth is that this
case presents no substantial controversy. As held in the
case of Castillo vs. Ramos, supra, pp. 814-815 —
"where a petition concerning the cancellation
of any encumbrance noted on a Torrens
certificate of title is filed within the record of
the land registration case in which the basic
decree was entered and there is no
substantial controversy in regard thereto
between the petitioner and any other
interested party, such petition may be
considered as a mere incidental matter in
such land registration case and may therein
be acted upon by the proper court." 20
Upon the record as it stands, the lower court order of August
18, 1962 is, as it is hereby, affirmed.
Costs against oppositor-appellant. So ordered.

SECOND DIVISION
[G.R. No. 138292. April 10, 2002.]
KOREA EXCHANGE BANK, petitioner, vs.
FILKOR BUSINESS INTEGRATED, INC.,
KIM EUNG JOE, and LEE HAN
SANG, respondents.
Romulo Mabanta Buenaventura Sayoc & Delos Angeles for
petitioner.
Donardo R. Paglinawan for private respondents.
SYNOPSIS
Respondent Filkor Business Integrated, Inc. (Filkor)
incurred several obligations in the form of cash and letters
of credit from herein petitioner Korean Exchange Bank. In
order to secure payment of all its obligations, Filkor
executed a real estate mortgage of the improvements
constructed on a lot which it was leasing from the Cavite
Export Processing Zone Authority. Respondents Kim Eung
Joe and Lee Han Sang also executed continuing
suretyship binding them jointly and severally with Filkor to
pay the latter's obligations to petitioner. As the
respondents failed to make good on their obligations,
petitioner filed a civil case with the Regional Trial Court of
Cavite and moved for summary judgment. The trial court
granted the motion, then rendered judgment in favor of the
petitioner. The trial court, however, failed to order that the
property of Filkor be foreclosed and sold at public auction
in the event that Filkor fails to pay its obligations. Petitioner
filed a motion for partial reconsideration of the trial court's
40
order, praying that the relief of foreclosure and sale at
public auction be granted. The trial court denied the motion
and ruled that the petitioner deemed to have abandoned
its lien on the property mortgaged when it opted to file an
action for collection of a sum of money. Hence, this appeal
before the Supreme Court.
The Supreme Court granted the petition. According
to the Court, the allegations in the petitioner's complaint
and its prayer that the mortgaged property be foreclosed
and sold at public auction indicated that petitioner's action
was one for foreclosure of real estate mortgage. Thus, the
trial court erred in concluding that petitioner has
abandoned its mortgage lien on Filkor property, and that
what it had filed was an action for collection of a sum of
money. The Court modified the decision to include that the
mortgaged property of Filkor be ordered foreclosed and
sold at public auction in the event of respondent's failure to
pay its obligations within a certain period.
SYLLABUS
1. REMEDIAL LAW; ACTIONS; PLEADINGS; ALLEGATIONS
IN THE COMPLAINT AND THE CHARACTER OF THE
RELIEF SOUGHT DETERMINE THE NATURE OF AN
ACTION; APPLICATION IN CASE AT BAR. — Petitioner's
allegations in its complaint, and its prayer that the mortgaged
property be foreclosed and sold at public auction, indicate that
petitioner's action was one for foreclosure of real estate
mortgage. We have consistently ruled that what determines
the nature of an action, as well as which court or body has
jurisdiction over it, are the allegations of the complaint and the
character of the relief sought. In addition, we find no indication
whatsoever that petitioner had waived its rights under the real
estate mortgage executed in its favor. Thus, the trial court
erred in concluding that petitioner had abandoned its mortgage

lien on Filkor's property, and that what it had filed was an
action for collection of a sum of money. Petitioner's action
being one for foreclosure of real estate mortgage, it was
incumbent upon the trial court to order that the mortgaged
property be foreclosed and sold at public auction in the event
that respondent Filkor fails to pay its outstanding obligations.
This is pursuant to Section 2 of Rule 68 of the 1997 Rules of
Civil Procedure. ETaHCD
2. ID.; APPEAL; APPEAL TO THE SUPREME COURT; PURE
QUESTION OF LAW AS A GROUND, PRESENT IN CASE AT
BAR. — On the propriety of the present appeal, we note that
what petitioner impugns is the determination by the trial court
of the nature of action filed by petitioner, based on the
allegations in the complaint. Such a determination as to the
correctness of the conclusions drawn from the pleadings
undoubtedly involves a question of law. As the present appeal
involves a question of law, petitioner appropriately filed it with
this Court, pursuant to Section 1 of Rule 45 of the 1997 Rules
of Civil Procedure, which provides: SECTION 1. Filing of
petition with Supreme Court. – A party desiring to appeal
by certiorari from a judgment or final order or resolution of the
Court of Appeals, the Sandiganbayan, the Regional Trial Court
or other courts whenever authorized by law, may file with the
Supreme Court a verified petition for review on certiorari. The
petition shall raise only questions of law which must be
distinctly set forth. There is no dispute with respect to the fact
that when an appeal raises only pure questions of law, this
Court has jurisdiction to entertain the same.
DECISION
QUISUMBING, J p:
41
This petition assails the order 1 dated April 16, 1999 of the
Regional Trial Court of Cavite City, Branch 88, in Civil Case
No. N-6689. Said order denied petitioner's partial motion for
reconsideration of the trial court's order 2 dated March 12,
1999 whereby respondents were ordered to pay petitioner
various sums of U.S. dollars as payment of the former's
various loans with interest but omitted to state that the
property mortgaged as security for said loans be foreclosed
and sold at public auction in case respondents fail to pay their
obligations to petitioner ninety days from entry of judgment.
The facts are summarized from the findings of the trial court.
On January 9, 1997, respondent Filkor Business Integrated,
Inc. (Filkor), borrowed US$140,000 from petitioner Korea
Exchange Bank, payable on July 9, 1997. Of this amount, only
US$40,000 was paid by Filkor. 3
In addition, Filkor executed nine trust receipts in favor of
petitioner, from June 26, 1997 to September 11, 1997.
However, Filkor failed to turn over to petitioner the proceeds
from the sale of the goods, or the goods themselves as
required by the trust receipts in case Filkor could not sell
them. 4
In the period from June 9, 1997 to October 1, 1997, Filkor also
negotiated to petitioner the proceeds of seventeen letters of
credit issued by the Republic Bank of New York and the
Banque Leumi France, S.A. to pay for goods which Filkor sold
to Segerman International, Inc. and Davyco, S.A. When
petitioner tried to collect the proceeds of the letters of credit by
presenting the bills of exchange drawn to collect the proceeds,
they were dishonored because of discrepancies.5
Prior to all the foregoing, in order to secure payment of all its
obligations, Filkor executed a Real Estate Mortgage on
February 9, 1996. It mortgaged to petitioner the improvements
belonging to it constructed on the lot it was leasing at the
Cavite Export Processing Zone Authority. 6 Respondents Kim

Eung Joe and Lee Han Sang also executed Continuing
Suretyships binding themselves jointly and severally with
respondent Filkor to pay for the latter's obligations to
petitioner. 7
As respondents failed to make good on their obligations,
petitioner filed Civil Case No. N-6689 in the Regional Trial
Court of Cavite City, docketed as "Korea Exchange Bank vs.
Filkor Business Integrated, Inc." In its complaint, petitioner
prayed that (a) it be paid by respondents under its twenty-
seven causes of action; (b) the property mortgaged be
foreclosed and sold at public auction in case respondents
failed to pay petitioner within ninety days from entry of
judgment; and (c) other reliefs just and equitable be granted. 8
Petitioner moved for summary judgment pursuant to Section 1,
Rule 35 of the 1997 Rules of Civil Procedure. On March 12,
1999, the trial court rendered its order granting petitioner's
motion, reasoning as follows:
xxx xxx xxx
It appears that the only reason defendants
deny all the material allegations in the
complaint is because the documents attached
thereto are mere photocopies and not the
originals thereof. Section 7, Rule 8 of the
Rules of Court allows copies of documents to
be attached to the pleading as an exhibit.
Defendants are, therefore, deemed to have
admitted the genuineness and due execution
of all actionable documents attached to the
complaint inasmuch as they were not
specifically denied, pursuant to Section 8 of
the Rule 8 of the Rules of Court.
In the case at bar, there is clearly no
substantial triable issue, hence, the motion for
summary judgment filed by plaintiff is proper.
42
A summary of judgment is one granted by the
court upon motion by a party for an
expeditious settlement of the case, there
appearing from the pleadings, depositions,
admissions and affidavits that there are no
important questions or issues of fact involved
(except as to the amount of damages) and
that, therefore, the moving party is entitled to
a judgment as a matter of law (Sections 1, 2,
3, Rule 35, 1997 Rules of Civil Procedure).
The court having taken into account the
pleadings of the parties as well as the
affidavits attached to the motion for summary
judgment and having found that there is
indeed no genuine issue as to any material
fact and that plaintiff is entitled to a summary
of judgment as a matter of law, hereby
renders judgment for the plaintiff and against
the defendants, ordering said defendants
jointly and severally to pay plaintiff, as follows
...9
The trial court then rendered judgment in favor of petitioner,
granting its prayers under all its twenty-seven causes of
action. It, however, failed to order that the property mortgaged
by respondent Filkor be foreclosed and sold at public auction
in the event that Filkor fails to pay its obligations to petitioner.
Petitioner filed a motion for partial reconsideration of the trial
court's order, praying that the aforesaid relief of foreclosure
and sale at public auction be granted. In an order dated April
16, 1999, the trial court denied petitioner's motion, ruling as
follows:
Plaintiff, in opting to file a civil action for the
collection of defendants obligations, has

abandoned its mortgage lien on the property
subject of the real estate mortgage.
The issue has already been resolved
in Danao vs. Court of Appeals, 154 SCRA
446, citing Manila Trading and Supply Co. vs.
Co Kim, et al., 71 Phil. 448, where the
Supreme Court ruled that:
The rule is now settled that a
mortgage creditor may elect to waive
his security and bring, instead, an
ordinary action to recover the
indebtedness with the right to execute
a judgment thereon on all the
properties of the debtor including the
subject matter of the mortgage,
subject to the qualification that if he
fails in the remedy by him elected, he
cannot pursue further the remedy he
has waived. SHaATC
WHEREFORE, the Partial Motion for
Reconsideration filed by the plaintiff of the
Court's Order dated March 12, 1999 is hereby
denied for lack of merit.
SO ORDERED. 10
Hence, the present petition, where petitioner ascribes the
following error to the trial court.
THE REGIONAL TRIAL COURT OF CAVITE
CITY ERRED IN RULING THAT
PETITIONER HAD ABANDONED THE REAL
ESTATE MORTGAGE IN ITS FAVOR,
43
BECAUSE IT FILED A SIMPLE
COLLECTION CASE. 11
The resultant issue is whether or not petitioner's complaint
before the trial court was an action for foreclosure of a real
estate mortgage, or an action for collection of a sum of money.
In addition, we must also determine if the present appeal was
correctly lodged before us rather than with the Court of
Appeals.
In petitioner's complaint before the trial court, Paragraph 183
thereof alleges:
183. To secure payment of the obligations of
defendant Corporation under the First to the
Twenty-Seventh Cause of Action, on
February 9, 1996, defendant Corporation
executed a Real Estate Mortgage by virtue of
which it mortgaged to plaintiff the
improvements standing on Block 13, Lot 1,
Cavite Export Processing Zone, Rosario,
Cavite, belonging to defendant Corporation
covered by Tax Declaration No. 5906-1 and
consisting of a one-story building called
warehouse and spooling area, the
guardhouse, the cutting/sewing area building
and the packing area building. (A copy of the
Real Estate Mortgage is attached hereto as
Annex "SS" and made an integral part
hereof.) 12
This allegation satisfies in part the requirements of Section 1,
Rule 68 of the 1997 Rules of Civil Procedure on foreclosure of
real estate mortgage, which provides:
SECTION 1. Complaint in action for
foreclosure. – In an action for the foreclosure
of a mortgage or other encumbrance upon
real estate, the complaint shall set forth the

date and due execution of the mortgage; its
assignments, if any; the names and
residences of the mortgagor and the
mortgagee; a description of the mortgaged
property; a statement of the date of the note
or other documentary evidence of the
obligation secured by the mortgage, the
amount claimed to be unpaid thereon; and the
names and residences of all persons having
or claiming an interest in the property
subordinate in right to that of the holder of the
mortgage, all of whom shall be made
defendants in the action.
In Paragraph 183 above, the date and due execution of the
real estate mortgage are alleged. The properties mortgaged
are stated and described therein as well. In addition, the
names and residences of respondent Filkor, as mortgagor,
and of petitioner, as mortgagee, are alleged in paragraphs 1
and 2 of the complaint. 13 The dates of the obligations
secured by the mortgage and the amounts unpaid thereon are
alleged in petitioner's first to twenty-seventh causes of
action. 14 Moreover, the very prayer of the complaint before
the trial court reads as follows:
WHEREFORE, it is respectfully prayed that
judgment be rendered:
xxx xxx xxx
2. Ordering that the property mortgaged be
foreclosed and sold at public auction in case
defendants fail to pay plaintiff within ninety
(90) days from entry of judgment.
xxx xxx xxx 15
Petitioner's allegations in its complaint, and its prayer that the
mortgaged property be foreclosed and sold at public auction,
44
indicate that petitioner's action was one for foreclosure of real
estate mortgage. We have consistently ruled that what
determines the nature of an action, as well as which court or
body has jurisdiction over it, are the allegations of the
complaint and the character of the relief sought. 16 In addition,
we find no indication whatsoever that petitioner had waived its
rights under the real estate mortgage executed in its favor.
Thus, the trial court erred in concluding that petitioner had
abandoned its mortgage lien on Filkor's property, and that
what it had filed was an action for collection of a sum of
money.
Petitioner's action being one for foreclosure of real estate
mortgage, it was incumbent upon the trial court to order that
the mortgaged property be foreclosed and sold at public
auction in the event that respondent Filkor fails to pay its
outstanding obligations. This is pursuant to Section 2 of Rule
68 of the 1997 Rules of Civil Procedure, which provides:
SEC. 2. Judgment on foreclosure for payment
or sale. - If upon the trial in such action the
court shall find the facts set forth in the
complaint to be true, it shall ascertain the
amount due to the plaintiff upon the mortgage
debt or obligation, including interest and other
charges as approved by the court, and costs,
and shall render judgment for the sum so
found due and order that the same be paid to
the court or to the judgment obligee within a
period of not less than ninety (90) days nor
more than one hundred twenty (120) days
from entry of judgment, and that in default of
such payment the property shall be sold at
public auction to satisfy the judgment. (Italics
supplied.)
Accordingly, the dispositive portion of the decision of the trial
court dated March 12, 1999, must be modified to comply with
 45

the provisions of Section 2 of Rule 68 of the 1997 Rules of SO ORDERED.

Civil Procedure. This modification is subject to any appeal filed
by respondents of said decision. Bellosillo, Mendoza and De Leon, Jr., JJ., concur.

On the propriety of the present appeal, we note that what ||| (Korea Exchange Bank v. Filkor Business Integrated, Inc.,
petitioner impugns is the determination by the trial court of the G.R. No. 138292, [April 10, 2002], 430 PHIL 170-179)
nature of action filed by petitioner, based on the allegations in
the complaint. Such a determination as to the correctness of
the conclusions drawn from the pleadings undoubtedly
involves a question of law. 17 As the present appeal involves a
question of law, petitioner appropriately filed it with this Court,
pursuant to Section 1 of Rule 45 of the 1997 Rules of Civil
Procedure, which provides:
SECTION 1. Filing of petition with Supreme
Court. – A party desiring to appeal
by certiorari from a judgment or final order or
resolution of the Court of Appeals, the
Sandiganbayan, the Regional Trial Court or
other courts whenever authorized by law, may
file with the Supreme Court a verified petition
for review on certiorari. The petition shall raise
only questions of law which must be distinctly
set forth. (Italics supplied).
There is no dispute with respect to the fact that when an
appeal raises only pure questions of law, this Court has
jurisdiction to entertain the same. 18
WHEREFORE, the petition is GRANTED. The Order dated
March 12, 1999, of the Regional Trial Court of Cavite City,
Branch 88, in Civil Case No. N-6689 is hereby MODIFIED, to
state that the mortgaged property of respondent Filkor be
ordered foreclosed and sold at public auction in the event said
respondent fails to pay its obligations to petitioner within ninety
(90) days from entry of judgment.
No pronouncement as to costs. DASCIc

THIRD DIVISION
[G.R. No. 128567. September 1, 2000.]
HUERTA ALBA RESORT
INC., petitioner, vs. COURT OF APPEALS
and SYNDICATED MANAGEMENT GROUP
INC., respondents.
Benjamin C. Santos & Ofelia Calcetas-Santos and Santos
Parungao Aquino & Santos for petitioner.
Oben, Ventura Defensor.
Abola Associates for petitioner.
Atienza Tabora Del Rosario & Castillo Law Office for
respondents.
SYNOPSIS
Private respondent Syndicated Management Group, Inc.
(SMGI), as mortgagee-assignee of Intercom Fund Resource,
Inc., filed a complaint for judicial foreclosure of four parcels of
land mortgaged by petitioner Huerta Alba Resort, Inc. before
the Regional Trial Court of Makati City. The trial court ruled in
favor of private respondent and ordered the petitioner to pay
all its obligations within a period of not less than 150 days from
receipt of the decision. The appeals to the Court of Appeals as
well as the Petition for Certiorari to the Supreme Court filed by
petitioner were all dismissed. The dismissal became final and
executory and it was entered in the Book of Entries of
Judgment on March 14, 1994. Accordingly, a writ of execution
was issued and the auction sale of the subject properties was
set on September 6, 1994. The petitioner then questioned the
46
issuance of the said Writ of Execution by claiming that the
150-day period for petitioner to pay the judgment obligation
had not yet lapsed. This issue was again raised by petitioner
to the Court of Appeals. The Court of Appeals ruled that the
150-day period should be computed from the date the
petitioner was notified of the Entry of Judgment and it expired
on September 11, 1994. Subsequently, the trial court
confirmed the sale of subject properties to the private
respondent. When the private respondent filed a motion for a
Writ of Possession, again it was opposed by petitioner by filing
a motion to compel private respondent to accept redemption.
This is the first time petitioner asserted its right to redeem the
subject properties under Section 78 of R.A. No. 337 (General
Banking Act). The trial court allowed the petitioner to redeem
the subject properties. However, in a Petition for Certiorari,
Prohibition and Mandamus filed by private respondents, the
Court of Appeals set aside the said Order of the trial court.
Hence, this petition. THCSAE
The Court ruled that the claim that petitioner is entitled to the
beneficial provisions of Section 78 of R.A. No. 337 — since
private respondent's predecessor-in-interest is a credit
institution — is in the nature of a compulsory counterclaim
which should have been averred in petitioner's answer to the
complaint for judicial foreclosure. The failure of petitioner to
seasonably assert its alleged right under Section 78 of R.A.
No. 337 precludes it from so doing at this late stage of the
case. Estoppel may be successfully invoked if the party fails to
raise the question in the early stages of the proceedings.
Hence, in conformity with the ruling in Limpin vs. IAC (166
SCRA 87), the sale of the subject properties, operated to
divest the rights of all the parties to the action and to vest their
rights in private respondent. There then existed only what is
known as the equity of redemption, which is simply the right of
the petitioner to extinguish the mortgage and retain ownership
of the property by paying the secured debt within the 90-day
period after judgment became final. There being an explicit

finding by the Court of Appeals in its decision that the herein
petitioner failed to exercise its equity of redemption within the
prescribed period, redemption can no longer be effected. The
confirmation of the sale and the issuance of the transfer
certificates of title covering the subject properties to private
respondent was in order. The trial court, therefore, has the
ministerial duty to place private respondent in the possession
of subject properties.
SYLLABUS
1. REMEDIAL LAW; SPECIAL CIVIL ACTIONS;
FORECLOSURE OF REAL ESTATE MORTGAGE; EQUITY
OF REDEMPTION AND RIGHT OF REDEMPTION;
DISTINGUISHED. — On the distinction between the equity of
redemption and right of redemption, the case of Gregorio Y.
Limpin vs. Intermediate Appellate Court, comes to the fore.
Held the Court in the said case: "The equity of redemption is,
to be sure, different from and should not be confused with
the right of redemption. The right of redemption in relation to a
mortgage — understood in the sense of a prerogative to re-
acquire mortgaged property after registration of the foreclosure
sale — exists only in the case of the extrajudicial foreclosure
of the mortgage. No such right is recognized in
a judicialforeclosed of the mortgage. No such right is
recognized in a judicial foreclosed except only where the
mortgagee is the Philippine National Bank or a bank or
banking institution. Where a mortgage is foreclosed
extrajudicially, Act 3135 grants to the mortgagor the right of
redemption within one (1) year from the registration of the
sheriff's certificate of foreclosure sale. Where the foreclosure is
judicially effected, however, no equivalent right of redemption
exists. The law declares that a judicial foreclosure sale, when
confirmed by an order of the court, . . . shall operate to divest
the rights of all the parties to the action and to vest their rights
47
in the purchaser, subject to such rights of redemption as may
be allowed by law. Such rights exceptionally 'allowed by law'
(i.e., even after confirmation by an order of the court) are those
granted by the charter of the Philippine National Bank (Acts
No. 2747 and 2938), and the General Banking Act(R.A.
337). These laws confer on the mortgagor, his successors in
interest or any judgment creditor of the mortgagor, the right to
redeem the property sold on foreclosure — after confirmation
by the court of the foreclosure sale — which right may be
exercised within a period of one (1) year, counted from the
date of registration of the certificate of sale in the Registry of
Property. But, to repeat, no such right of redemption exists in
case of judicial foreclosure of a mortgage if the mortgagee is
not the PNB or a bank or banking institution. In such a case,
the foreclosure sale, 'when confirmed by an order of the court.
. . . shall operate to divest the rights of all the parties to the
action and to vest their rights in the purchaser.' There then
exists only what is known as the equity of redemption. This is
simply the right of the defendant mortgagor to extinguish the
mortgage and retain ownership of the property by paying the
secured debt within the 90-day period after the judgment
becomes final, in accordance with Rule 68, or even after the
foreclosure sale but prior to its confirmation.
2. ID.; ID.; ID.; BENEFICIAL PROVISIONS OF SECTION 78
OF GENERAL BANKING ACT MUST BE RAISED AS
COMPULSORY COUNTERCLAIM. — [A]t the earliest
opportunity, when it submitted its answer to the complaint for
judicial foreclosure, petitioner should have alleged that it was
entitled to the beneficial provisions of Section 78 of R.A. No.
337 but again, it did not make any allegation in its answer
regarding any right thereunder. It bears stressing that the
applicability of Section 78 of R.A. No. 337 hinges on the
factual question of whether or not private respondent's
predecessor in interest was a credit institution. As was held
in Limpin, a judicial foreclosure sale, "when confirmed by an
order of the court, . . . shall operate to divest the rights of all

the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be
allowed by law," which confer on the mortgagor, his
successors in interest of any judgment creditor of the
mortgagor, the right to redeem the property sold on
foreclosure after confirmation by the court of the judicial
foreclosure sale. Thus, the claim that petitioner is entitled to
the beneficial provisions of Section 78 of R.A. No. 337 — since
private respondent's predecessor-in-interest is a credit
institution — is in the nature of a compulsory counterclaim
which should have been averred in petitioner's answer to the
complaint for judicial foreclosure.
3. ID.; ID.; ID.; ID.; NOT ALLEGED BY PETITIONER IN
EARLY STAGES OF PROCEEDINGS. — [I]t was too late in
the day for petitioner to invoke a right to redeem under Section
78 of R.A. No. 337. Petitioner failed to assert a right to redeem
in several crucial stages of the proceedings. For instance, on
September 7, 1994, when it filed with the trial court an Ex-
parte Motion for Clarification, petitioner failed to allege and
prove that private respondent's predecessor in interest was a
credit institution . . . So also, when it presented before the trial
court an Exception to the Order and Motion to Set Aside said
Order dated October 13, 1994, petitioner again was silent on
its alleged right under Section 78 of R.A. No. 337 . . . Then,
too, nothing was heard from petitioner on its alleged right
under Section 78 of R.A. No. 337 and of the predecessor in
interest of private respondent as a credit institution, when the
trial court came out with an order on February 10, 1995,
confirming the sale of subject properties in favor private
respondent and declaring that all pending incidents with
respect to the Order dated September 26, 1994 had become
moot and academic. Similarly, when petitioner filed on
February 27, 1995 a Motion for Clarification with the Court of
Appeals, seeking "clarification" of the date of commencement
of the one (1) year redemption period for the subject properties
. . . If petitioner were really acting in good faith, it would have
48
ventilated, before the Court of Appeals in CA-G.R. No. 35086
its alleged right under Section 78 of R.A. No. 337; but
petitioner never did do so. cDAITS
4. ID.; ID.; ID.; ID.; ID.; PRINCIPLE OF ESTOPPEL APPLIES.
— The failure of petitioner to seasonably assert its alleged
right under Section 78 of R.A. No. 337precludes it from so
doing at this late stage of the case. Estoppel may be
successfully invoked if the party fails to raise the question in
the early stages of the proceedings. Thus, "a party to a case
who failed to invoke his claim in the main case, while having
the opportunity to do so, will be precluded, subsequently, from
invoking his claim, even if it were true, after the decision has
become final, otherwise the judgment may be reduced to a
mockery and the administration of justice may be placed in
disrepute."
5. ID.; CIVIL PROCEDURE; COUNTERCLAIM;
ELUCIDATED. — ". . . A counterclaim is, most broadly, a
cause of action existing in favor of the defendant against the
plaintiff. More narrowly, it is a claim which, if established,
will defeat or in some way qualify a judgment or relief to which
plaintiff is otherwise entitled. It is sometimes defined as any
cause of action arising in contract available against any action
also arising in contract and existing at the time of the
commencement of such an action. It is frequently defined by
the codes as a cause of action arising out of the contract or
transaction set forth in the complaint as the foundation of the
plaintiff's claim, or connected with the subject of the action."
"The counterclaim is in itself a distinct and independent cause
of action, so that when properly stated as such, the defendant
becomes, in respect to the matters stated by him, an actor,
and there are two simultaneous actions pending between the
same parties, wherein each is at the same time both a plaintiff
and a defendant. Counterclaim is an offensive as well as a
defensive plea and is not necessarily confined to the justice of

the plaintiffs claim. It represents the right of the defendant to
have the claims of the parties counterbalanced in whole or in
part, and judgment to be entered in excess, if any. A
counterclaim stands on the same footing, and is to be tested
by the same rules, as if it were an independent action."
6. ID.; ID.; ID.; PURPOSE. — ". . . The rules of counterclaim
are designed to enable the disposition of a whole controversy
of interested parties' conflicting claims, at one time and in one
action, provided all parties' be brought before the court and the
matter decided without prejudicing the rights of any
party." ScHADI
7. ID.; ID.; EXECUTION OF JUDGMENT; ERRONEOUS FOR
THE TRIAL COURT TO ALLOW A PARTY AT THIS STAGE
TO INTRODUCE EVIDENCE AND OVERRULE THE LAW OF
THE CASE. — [T]he trial court erred in still allowing petitioner
to introduce evidence that private respondent's predecessor-
in-interest was a credit institution, and to thereafter rule that
the petitioner was entitled to avail of the provisions of Section
78 of R.A. No. 337. In effect, the trial court permitted the
petitioner to accomplish what the latter failed to do before the
Court of Appeals, that is, to invoke its alleged right under
Section 78 of R.A. 337although the Court of Appeals in CA-
G.R. No. 35086 already found that 'the question of whether the
Syndicated Management Council Group, Inc. is a bank or
credit institution was never brought before (the Court of
Appeals) squarely." The said pronouncement by the Court of
Appeals unerringly signified that petitioner did not make a
timely assertion of any right under Section 78 of R.A. No.
337 in all the stages of the proceedings below.
8. ID.; ID.; ID.; LAW OF THE CASE; REMAINS AS IT IS,
WHETHER OR NOT IT IS ERRONEOUS IS IMMATERIAL. —
There is, . . . merit in private respondent's contention that to
allow petitioner to belatedly invoke its right under Section 78
of R.A. No. 337 will disturb the "law of the case." However,
private respondent's statement of what constitutes the "law of
49
the case" is not entirely accurate. The "law of the case" is not
simply that the defendant possesses an equity of redemption.
As the Court has stated, the "law of the case" holds that
petitioner has the equity of the redemption without any
qualification whatsoever, that is, without the right of
redemption afforded by Section 78 of R.A. No. 337. Whether
or not the "law of the case" is erroneous is immaterial, it still
remains the "law of the case." A contrary rule will contradict
both the letter and spirit of the rulings of the Court of Appeals
in CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-
G.R. 38747, which clearly saw through the repeated attempts
of petitioner to forestall so simple a matter as making the
security given for a just debt to answer for its
payment. HATICc
9. ID.; SPECIAL CIVIL ACTIONS; FORECLOSURE OF REAL
ESTATE MORTGAGE; EQUITY OF REDEMPTION CAN NO
LONGER BE EFFECTED FOR FAILURE TO EXERCISE
WITHIN THE PRESCRIBED PERIOD. — [T]he sale of the
subject properties, as confirmed by the Order dated February
10, 1995 of the trial court in Civil Case No. 89-5424 operated
to divest the rights of all the parties to the action and to vest
their rights in private respondent. There then existed only what
is known as the equity of redemption, which is simply the right
of the petitioner to extinguish the mortgage and retain
ownership of the property by paying the secured debt within
the 90-day period after the judgment became final. There
being an explicit finding on the part of the Court of Appeals in
its Decision of September 30, 1994 in CA-G.R. No. 35086 —
that the herein petitioner failed to exercise its equity of
redemption within the prescribed period, redemption can no
longer be effected. The confirmation of the sale and the
issuance of the transfer certificates of title covering the subject
properties to private respondent was then, in order. The trial
court therefore, has the ministerial duty to place private
respondent in the possession of subject properties.

DECISION
PURISIMA, J. p:
Litigation must at some time be terminated, even at the risk of
occasional errors. Public policy dictates that once a judgment
becomes final, executory and unappealable, the prevailing
party should not be denied the fruits of his victory by some
subterfuge devised by the losing party. Unjustified delay in the
enforcement of a judgment sets at naught the role of courts in
disposing justiciable controversies with finality.
The Case
At bar is a petition assailing the Decision, dated November 14,
1996, and Resolution, dated March 11, 1997, of the Court of
Appeals in CA-G.R. No. 38747, which set aside the Order,
dated July 21, 1995 and Order, dated September 4, 1997, of
the Regional Trial Court of Makati City, in Civil Case No. 89-
5424. The aforesaid orders of the trial court held that petitioner
had the right to redeem subject pieces of property within the
one-year period prescribed by Section 78 of Republic Act No.
337 otherwise known as the General Banking Act.
Section 78 of R.A. No. 337 provides that "in case of a
foreclosure of a mortgage in favor of a bank, banking or credit
institution, whether judicially or extrajudicially, the mortgagor
shall have the right, within one year after the sale of the real
estate as a result of the foreclosure of the respective
mortgage, to redeem the property."
The Facts
The facts that matter are undisputed:
In a complaint for judicial foreclosure of mortgage with
preliminary injunction filed on October 19, 1989, docketed as
Civil Case No. 89-5424 before the Regional Trial Court of
50
Makati City, the herein private respondent sought the
foreclosure of four (4) parcels of land mortgaged by petitioner
to Intercon Fund Resource, Inc. ("Intercon").
Private respondent instituted Civil Case No. 89-5424 as
mortgagee-assignee of a loan amounting to P8.5 million
obtained by petitioner from Intercon, in whose favor petitioner
mortgaged the aforesaid parcels of land as security for the
said loan.
In its answer below, petitioner questioned the assignment by
Intercon of its mortgage right thereover to the private
respondent, on the ground that the same was ultra vires.
Petitioner also questioned during the trial the correctness of
the charges and interest on the mortgage debt in question.
On April 30, 1992, the trial court, through the then Judge now
Court of Appeals Justice Buenaventura J. Guerrero, came out
with its decision "granting herein private respondent SMGI's
complaint for judicial foreclosure of mortgage", disposing as
follows: aSECAD
"WHEREFORE, judgment is hereby rendered
ordering defendant to pay plaintiff the
following:
(1) P8,500,000.00 representing the principal
of the amount due;
(2) P850,000.00 as penalty charges with
interest at 6% per annum, until fully paid;
(3) 22% per annum interest on the above
principal from September 6, 1998, until fully
paid;
(4) 5% of the sum total of the above amounts,
as reasonable attorney's fees; and,
(5) Costs.

All the above must be paid within a period of
not less than 150 days from receipt hereof by
the defendant. In default of such payment, the
four parcels of land subject matter of the suit
including its improvements shall be sold to
realize the mortgage debt and costs, in the
manner and under the regulations that govern
sales of real estate under execution." 1
Petitioner appealed the decision of the trial court to the Court
of Appeals, the appeal docketed as CA-G.R. CV No. 39243
before the Sixth Division of the appellate court, which
dismissed the case on June 29, 1993 on the ground of late
payment of docket fees.
Dissatisfied with the dismissal of CA-G.R. No. 39243,
petitioner came to this Court via a petition for certiorari,
docketed as G.R. No. 112044, which this court resolved to
dismiss on December 13, 1993, on the finding that the Court of
Appeals erred not in dismissing the appeal of petitioner.
Petitioner's motion for reconsideration of the dismissal of its
petition in G.R. No. 112044 was denied with finality in this
Court's Resolution promulgated on February 16, 1994. On
March 10, 1994, leave to present a second motion for
reconsideration in G.R. No. 112044 or to submit the case for
hearing by the Court en banc was filed, but to no avail. The
Court resolved to deny the same on May 11, 1994. LibLex
On March 14, 1994, the Resolution dated December 13, 1993,
in G.R. No. 112044 became final and executory and was
entered in the Book of Entries of Judgment.
On July 4, 1994, private respondent filed with the trial court of
origin a motion for execution of the Decision promulgated on
April 30, 1992 in Civil Case No. 89-5424. The said motion was
granted on July 15, 1994.
51
Accordingly, on July 15, 1994 a writ of execution issued and,
on July 20, 1994, a Notice of Levy and Execution was issued
by the Sheriff concerned, who issued on August 1, 1994 a
Notice of Sheriff's Sale for the auction of subject properties on
September 6, 1994.
On August 23, 1994, petitioner filed with the same trial court
an Urgent Motion to Quash and Set Aside Writ of Execution
ascribing to it grave abuse of discretion in issuing the
questioned Writ of Execution. To support its motion, petitioner
invited attention and argued that the records of the case were
still with the Court of Appeals and therefore, issuance of the
writ of execution was premature since the 150-day period for
petitioner to pay the judgment obligation had not yet lapsed
and petitioner had not yet defaulted in the payment thereof
since no demand for its payment was made by the private
respondent. In petitioner's own words, the dispute between the
parties was "principally on the issue as to when the 150-day
period within which Huerta Alba may exercise its equity of
redemption should be counted."
In its Order of September 2, 1994, the lower court denied
petitioner's urgent motion to quash the writ of execution in Civil
Case No. 89-5424, opining that subject judgment had become
final and executory and consequently, execution thereof was a
matter of right and the issuance of the corresponding writ of
execution became its ministerial duty.
Challenging the said order granting execution, petitioner filed
once more with the Court of Appeals another petition
for certiorari and prohibition with preliminary injunction,
docketed as C.A.-G.R. SP No. 35086, predicated on the same
grounds invoked for its Motion to Quash Writ of Execution.
On September 6, 1994, the scheduled auction sale of subject
pieces of properties proceeded and the private respondent
was declared the highest bidder. Thus, private respondent was

awarded subject bidded pieces of property. The covering
Certificate of Sale issued in its favor was registered with the
Registry of Deeds on October 21, 1994.
On September 7, 1994, petitioner presented an Ex-
Parte Motion for Clarification asking the trial court to "clarify"
whether or not the twelve (12) month period of redemption for
ordinary execution applied in the case.
On September 26, 1994, the trial court ruled that the period of
redemption of subject property should be governed by the rule
on the sale of judicially foreclosed property under Rule 68 of
the Rules of Court.
Thereafter, petitioner then filed an Exception to the Order
dated September 26, 1994 and Motion to Set Aside Said
Order, contending that the said Order materially altered the
Decision dated April 30, 1992 "which declared that the
satisfaction of the judgment shall be in the manner and under
the regulation that govern sale of real estate under execution."
Meanwhile, in its Decision of September 30, 1994, the Court of
Appeals resolved the issues raised by the petitioner in C.A.-
G.R. SP No. 35086, holding that the one hundred-fifty day
period within which petitioner may redeem subject properties
should be computed from the date petitioner was notified of
the Entry of Judgment in G.R. No. 112044; and that the 150-
day period within which petitioner may exercise its equity of
redemption expired on September 11, 1994.
Thus:
"Petitioner must have received the resolution
of the Supreme Court dated February 16,
1994 denying with finality its motion for
reconsideration in G.R. No. 112044 before
March 14, 1994, otherwise the Supreme
Court would not have made an entry of
judgment on March 14, 1994. While,
52
computing the 150-day period. Petitioner may
have until September 11, 1994. within which
to pay the amounts covered by the judgment,
such period has already expired by this
time, and therefore, this Court has no more
reason to pass upon the parties' opposing
contentions, the same having become moot
and academic." 2(underscoring
supplied). IcaHTA
Petitioner moved for reconsideration of the Decision of the
Court of Appeals in C.A.-G.R. SP No. 35086. In its Motion for
Reconsideration dated October 18, 1994, petitioner theorized
that the period of one hundred fifty (150) days should not be
reckoned with from Entry of Judgment but from receipt on or
before July 29, 1994 by the trial court of the records of Civil
Case No. 89-5424 from the Court of Appeals. So also,
petitioner maintained that it may not be considered in default,
even after the expiration of 150 days from July 29, 1994,
because prior demand to pay was never made on it by the
private respondent. According to petitioner, it was therefore,
premature for the trial court to issue a writ of execution to
enforce the judgment.
The trial court deferred action on the Motion for Confirmation
of the Certificate of Sale in view of the pendency of petitioner's
Motion for Reconsideration in CA-G.R. SP No. 35086.
On December 23, 1994, the Court of Appeals denied
petitioner's motion for reconsideration in CA-G.R. SP No.
35086. Absent any further action with respect to the denial of
the subject motion for reconsideration, private respondent
presented a Second Motion for Confirmation of Certificate of
Sale before the trial court.
As regards the Decision rendered on September 30, 1994 by
the Court of Appeals in CA G.R. SP No. 35086 it became final
and executory on January 25, 1995.

On February 10, 1995, the lower court confirmed the sale of
subject properties to the private respondent. The pertinent
Order declared that all pending incidents relating to the Order
dated September 26, 1994 had become moot and academic.
Conformably, the Transfer Certificates of Title to subject
pieces of property were then issued to the private respondent.
On February 27, 1995, petitioner filed with the Court of
Appeals a Motion for Clarification seeking "clarification" of the
date of commencement of the one (1) year period for the
redemption of the properties in question.
In its Resolution dated March 20, 1995, the Court of Appeals
merely noted such Motion for Clarification since its Decision
promulgated on September 30, 1994 had already become final
and executory; ratiocinating thus:
"We view the motion for clarification filed by
petitioner, purportedly signed by its proprietor,
but which we believe was prepared by a
lawyer who wishes to hide under the cloak of
anonymity, as a veiled attempt to buy time
and to delay further the disposition of this
case.
Our decision of September 30, 1994 never
dealt on the right and period of redemption of
petitioner, but was merely circumscribed to
the question of whether respondent judge
could issue a writ of execution in its Civil Case
No. 89-5424 . . . .
We further ruled that the one-hundred fifty
day period within which petitioner may
exercise its equity of redemption should be
counted, not from the receipt of respondent
court of the records of Civil Case No. 89-5424
but from the date petitioner was notified of
53
the entry of judgment made by the appellate
court.
But we never made any pronouncement on
the one-year right of redemption of petitioner
because, in the first place, the foreclosure in
this case is judicial. and as such the
mortgagor has only the equity not the right of
redemption . . . . While it may be true that
under Section 78 of R.A. 337 as amended,
otherwise known as the General Banking Act,
a mortgagor of a bank, banking or credit
institution, whether the foreclosure was
done judicially orextrajudicially, has a period
of one year from the auction sale within which
to redeem the foreclosed property, the
question of whether the Syndicated
Management Group, Inc., is a bank or credit
institution was never brought before us
squarely, and it is indeed odd and strange
that petitioner would now sarcastically ask a
rhetorical question in its motion for
clarification." 3 (Emphasis supplied).
Indeed, if petitioner did really act in good faith, it would have
ventilated before the Court of Appeals in CA-G.R. No. 35086
its pretended right under Section 78 of R.A. No. 337 but it
never did so.
At the earliest opportunity, when it filed its answer to the
complaint for judicial foreclosure, petitioner should have
averred in its pleading that it was entitled to the beneficial
provisions of Section 78 of R.A. No. 337; but again, petitioner
did not make any such allegation in its answer.
From the said Resolution, petitioner took no further step such
that on March 31, 1995, the private respondent filed a Motion

for Issuance of Writ of Possession with the trial
court. THCSEA
During the hearing called on April 21, 1995, the counsel of
record of petitioner entered appearance and asked for time to
interpose opposition to the Motion for Issuance of Writ of
Possession.
On May 2, 1995, in opposition to private respondent's Motion
for Issuance of writ of Possession, petitioner filed a "Motion to
Compel Private Respondent to Accept Redemption." It was the
first time petitioner ever asserted the right to redeem subject
properties under Section 78 of R.A. No. 337, the General
Banking Act; theorizing that the original mortgagee, being a
credit institution, its assignment of the mortgage credit to
petitioner did not remove petitioner from the coverage of
Section 78 of R.A. No. 337. Therefore, it should have the right
to redeem subject properties within one year from registration
of the auction sale, theorized the petitioner which concluded
that in view of its "right of redemption," the issuance of the
titles over subject parcels of land to the private respondent
was irregular and premature.
In its Order of July 21, 1995, the trial court, presided over by
Judge Napoleon Inoturan, denied private respondent's motion
for a writ of possession, opining that Section 78 of the General
Banking Act was applicable and therefore, the petitioner had
until October 21, 1995 to redeem the said parcels of land, said
Order ruled as follows:
"It is undisputed that Intercon is a credit
institution from which defendant obtained a
loan secured with a real estate mortgage over
four (4) parcels of land. Assuming that the
mortgage debt had not been assigned to
plaintiff, there is then no question that
defendant would have a right of redemption in
case of foreclosure, judicially or
54
extrajudicially, pursuant to the above quoted
Section 78 of RA 337, as amended.
However, the pivotal issue here is whether or not the
defendant lost its right of redemption by virtue of the
assignment of its mortgage debt by Intercon to plaintiff, which
is not a bank or credit institution. The issue is resolved in the
negative. The right of redemption in this case is vested by law
and is therefore an absolute privilege which defendant may not
lose even though plaintiff-assignee is not a bank or credit
institution (Tolentino versus Court of Appeals, 106 SCRA 513).
Indeed, a contrary ruling will lead to a possible circumvention
of Section 78 because all that may be needed to deprive a
defaulting mortgagor of his right of redemption is to assign his
mortgage debt from a bank or credit institution to one which is
not. Protection of defaulting mortgagors, which is the avowed
policy behind the provision, would not be achieved if the ruling
were otherwise. Consequently, defendant still possesses its
right of redemption which it may exercise up to October 21,
1995 only, which is one year from the date of registration of
the certificate of sale of subject properties (GSIS versus
Iloilo, 175 SCRA 19, citing Limpin versus IAC, 166 SCRA 87).
Since the period to exercise defendant's right
of redemption has not yet expired, the
cancellation of defendant's transfer
certificates of title and the issuance of new
ones in lieu thereof in favor of plaintiff are
therefore illegal for being premature, thereby
necessitating reconveyance (see Sec. 63
(a) PD 1529, as amended).
WHEREFORE, the Court hereby rules as
follows:
(1) The Motion for Issuance of Writ of
Possession is hereby denied;

(2) Plaintiff is directed to accept the
redemption on or before October 21,
1995 in an amount computed
according to the terms stated in the
Writ of Execution dated July 15, 1994
plus all other related costs and
expenses mentioned under Section
78, RA 337, as amended; and
(3) The Register of Deeds of
Valenzuela, Bulacan is directed (a) to
reconvey to the defendant the
following titles of the four (4) parcels of
land, namely TCT Nos. V-38878, V-
38879, V-38880, and V-38881, now in
the name of plaintiff, and (b) to register
the certificate of sale dated October 7,
1994 and the Order confirming the
sale dated February 10, 1995 by a
brief memorandum thereof upon the
transfer certificates of title to be issued
in the name of defendant, pursuant to
Sec. 63 (a) PD 1529, as amended.
The Omnibus Motion dated June 5, 1995,
together with the Opposition thereto, is now
deemed resolved.
SO ORDERED." 4
Private respondent interposed a Motion for Reconsideration
seeking the reversal of the Order but to no avail. In its Order
dated September 4, 1995, the trial court denied the same.
To attack and challenge the aforesaid order of July 21, 1995
and subsequent Order of September 4, 1995 of the trial court,
the private respondent filed with this court a Petition
for Certiorari, Prohibition and Mandamus, docketed as G.R.
No. 121893, but absent any special and cogent reason shown
55
for entertaining the same, the Court referred the petition to the
Court of Appeals, for proper determination.
Docketed as G.R. No. 387457 on November 14, 1996, the
Court of Appeals gave due course to the petition and set aside
the trial court's Order dated July 21, 1995 and Order dated
September 4, 1995.
In its Resolution of March 11, 1997, the Court of Appeals
denied petitioner's Motion for Reconsideration of the Decision
promulgated on November 14, 1996 in CA-G.R. No.
38747. ESCacI
Undaunted, petitioner has come to this Court via the present
petition, placing reliance on the assignment of errors, that:
I
THE RESPONDENT COURT OF APPEALS
ERRED GRAVELY IN HOLDING THAT THE
COURT OF APPEALS (TWELFTH DIVISION)
IN CA G.R. SP NO. 35086 HAD RESOLVED
"WITH FINALITY" THAT PETITIONER
HUERTA ALBA HAD NO RIGHT OF
REDEMPTION BUT ONLY THE EQUITY OF
REDEMPTION.
II
THE RESPONDENT COURT OF APPEALS
ERRED GRAVELY IN IGNORING THAT
PETITIONER HUERTA ALBA POSSESSES
THE ONE-YEAR RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 337 (THE
GENERAL BANKING ACT).
III
THE RESPONDENT COURT OF APPEALS
ERRED GRAVELY IN HOLDING THAT
 56

PRIVATE RESPONDENT SYNDICATED And by way of Reply, petitioner argued, that:

MANAGEMENT GROUP, INC. IS ENTITLED
TO THE ISSUANCE OF A WRIT OF I.
POSSESSION OVER THE SUBJECT THE COURT OF APPEALS IN CA G.R. SP
PROPERTY. 5 NO. 35086 COULD NOT HAVE POSSIBLY
In its comment on the petition, private respondent countered RESOLVED THEREIN — WHETHER WITH
that: FINALITY OR OTHERWISE — THE ISSUE
OF PETITIONER HUERTA ALBA'S RIGHT
"A. THE HONORABLE COURT OF OF REDEMPTION UNDER SECTION
APPEALS CORRECTLY HELD THAT 78, R.A. NO. 337.
IT RESOLVED WITH FINALITY IN
C.A.-G.R. SP NO. 35086 THAT II.
PETITIONER ONLY HAD THE RIGHT THERE IS NO ESTOPPEL HERE.
OF REDEMPTION IN RESPECT OF PETITIONER HUERTA ALBA INVOKED ITS
THE SUBJECT PROPERTIES. RIGHT OF REDEMPTION UNDER SECTION
B. THE PETITION IS AN INSIDIOUS AND 78, R.A. NO. 337 IN TIMELY FASHION, i.e.,
UNDERHANDED ATTEMPT TO AFTER CONFIRMATION BY THE COURT
EVADE THE FINALITY OF VARIOUS OF THE FORECLOSURE SALE, AND
DECISIONS, RESOLUTIONS AND WITHIN ONE (1) YEAR FROM THE DATE
ORDERS WHICH HELD THAT, OF REGISTRATION OF THE CERTIFICATE
PETITIONER ONLY POSSESSES OF SALE.
THE EQUITY OF REDEMPTION IN III.
RESPECT OF THE SUBJECT
PROPERTIES. THE PRINCIPLE OF 'THE LAW OF THE
CASE' HAS ABSOLUTELY NO BEARING
C. PETITIONER IS BARRED BY ESTOPPEL HERE:
FROM BELATEDLY RAISING THE
ISSUE OF ITS ALLEGED 'RIGHT OF (1)
REDEMPTION. THE RIGHT OF REDEMPTION UNDER
D. IN HOLDING THAT THE PETITIONER SECTION 78, R.A. NO. 337 IS IN FACT
HAD THE 'RIGHT OF REDEMPTION' PREDICATED UPON THE FINALITY AND
OVER THE SUBJECT PROPERTIES, CORRECTNESS OF THE DECISION IN
THE TRIAL COURT MADE A CIVIL CASE NO. 89-5424. AaHcIT
MOCKERY OF THE 'LAW OF THE (2)
CASE."' 6

THUS, THE RTC'S ORDER RECOGNIZING
PETITIONER HUERTA ALBA'S RIGHT OF
REDEMPTION UNDER SECTION 78, R.A.
NO. 337 DOES NOT IN ANY WAY HAVE
THE EFFECT OF AMENDING, MODIFYING,
OR SETTING ASIDE THE DECISION IN
CIVIL CASE NO. 89-5424.
The above arguments and counter-arguments advanced relate
to the pivotal issue of whether or not the petitioner has the
one-year right of redemption of subject properties under
Section 78 of Republic Act No. 337 otherwise known as
the General Banking Act.
The petition is not visited by merit.
Petitioner's assertion of right of redemption under Section 78
of Republic Act No. 337 is premised on the submission that
the Court of Appeals did not resolve such issue in CA-G.R. SP
No. 35086; contending thus:
(1)
BY NO STRETCH OF LOGIC CAN THE 20
MARCH 1995 RESOLUTION IN CA G.R. SP
NO. 35086 BE INTERPRETED TO MEAN
THE COURT OF APPEALS HAD RESOLVED
'WITH FINALITY' THE ISSUE OF WHETHER
PETITIONER HUERTA ALBA HAD THE
RIGHT OF REDEMPTION WHEN ALL THAT
THE RESOLUTION DID WAS TO MERELY
NOTE THE MOTION FOR CLARIFICATION.
(2)
THE 20 MARCH 1995 RESOLUTION IN CA
G.R. SP NO. 35086 IS NOT A FINAL
JUDGMENT, ORDER OR DECREE. IT IS
NOT EVEN A JUDGMENT OR ORDER TO
57
BEGIN WITH. IT ORDERS NOTHING; IT
ADJUDICATES NOTHING.
(3)
PETITIONER HUERTA ALBA'S RIGHT OF
REDEMPTION UNDER SECTION 78, R.A.
NO. 37 WAS NOT AN ISSUE AND WAS NOT
IN ISSUE, AND COULD NOT HAVE
POSSIBLY BEEN AN ISSUE NOR IN ISSUE,
IN CA G.R. SP NO. 35086.
(4)
THE 30 SEPTEMBER 1994 DECISION IN CA
G.R. SP NO. 35086 HAVING ALREADY
BECOME FINAL EVEN BEFORE THE
FILING OF THE MOTION FOR
CLARIFICATION, THE COURT OF
APPEALS NO LONGER HAD ANY
JURISDICTION TO ACT OF THE MOTION
OR ANY OTHER MATTER IN CA G.R. SP
NO. 35086, EXCEPT TO MERELY NOTE
THE MOTION.
II.
IN STARK CONTRAST, THE ISSUE OF
PETITIONER HUERTA ALBA'S RIGHT OF
REDEMPTION UNDER SECTION 78, R.A.
NO. 337 WAS DIRECTLY RAISED AND
JOINED BY THE PARTIES, AND THE SAME
DULY RESOLVED BY THE TRIAL COURT.
III.
THE RIGHT OF REDEMPTION UNDER
SECTION 78 OF R.A. NO. 337 IS
MANDATORY AND AUTOMATICALLY

EXISTS BY LAW. THE COURTS ARE DUTY-
BOUND TO RECOGNIZE SUCH RIGHT.
IV.
EQUITABLE CONSIDERATIONS WEIGH
HEAVILY IN FAVOR OF PETITIONER
HUERTA ALBA, NOT THE LEAST OF
WHICH IS THE WELL-SETTLED POLICY OF
THE LAW TO AID RATHER THAN DEFEAT
THE RIGHT OF REDEMPTION.
V.
THEREFORE THE 21 JULY 1995 AND 04
SEPTEMBER 1995 ORDERS OF THE TRIAL
COURT ARE VALID AND PROPER IN
ACCORDANCE WITH THE MANDATE OF
THE LAW.
From the various decisions, resolutions and orders a quo it
can be gleaned that what petitioner has been adjudged to
have was only the equity of redemption over subject
properties. On the distinction between the equity of redemption
and right of redemption, the case of Gregorio Y. Limpin vs.
Intermediate Appellate Court, 7 comes to the fore. Held the
Court in the said case:
"The equity of redemption is, to be sure,
different from and should not be confused
with the right of redemption.
The right of redemption in relation to a
mortgage – understood in the sense of a
prerogative to re-acquire mortgaged property
after registration of the foreclosure sale –
exists only in the case of
the extrajudicial foreclosure of the mortgage.
No such right is recognized in
58
a judicial foreclosure except only where the
mortgagee is the Philippine National Bank or
a bank or banking institution.
Where a mortgage is
foreclosed extrajudicially, Act 3135 grants to
the mortgagor the right of redemption within
one (1) year from the registration of the
sheriff's certificate of foreclosure sale.
Where the foreclosure is judicially effected,
however, no equivalent right of redemption
exists. The law declares that a judicial
foreclosure sale 'when confirmed be an order
of the court, . . . shall operate to divest the
rights of all the parties to the action and to
vest their rights in the purchaser, subject to
such rights of redemption as may be allowed
by law.' Such rights exceptionally 'allowed by
law' (i.e., even after confirmation by an order
of the court) are those granted by the charter
of the Philippine National Bank (Acts No.
2747 and 2938), and the General Banking
Act (R.A. 337). These laws confer on the
mortgagor, his successors in interest or any
judgment creditor of the mortgagor, the right
to redeem the property sold on foreclosure —
after confirmation by the court of the
foreclosure sale — which right may be
exercised within a period of one (1) year,
counted from the date of registration of the
certificate of sale in the Registry of Property.
But, to repeat, no such right of redemption
exists in case of judicial foreclosure of a
mortgage if the mortgagee is not the PNB or a

bank or banking institution. In such a case,
the foreclosure sale, 'when confirmed by an
order of the court. . . shall operate to divest
the rights of all the parties to the action and to
vest their rights in the purchaser.' There then
exists only what is known as the equity of
redemption. This is simply the right of the
defendant mortgagor to extinguish the
mortgage and retain ownership of the
property by paying the secured debt within
the 90-day period after the judgment
becomes final, in accordance with Rule 68, or
even after the foreclosure sale but prior to its
confirmation.
Section 2, Rule 68 provides that —
'. . . If upon the trial . . . the court shall find the
facts set forth in the complaint to be true, it
shall ascertain the amount due to the plaintiff
upon the mortgage debt or obligation,
including interest and costs, and shall render
judgment for the sum so found due and order
the same to be paid into court within a period
of not less than ninety (90) days from the date
of the service of such order, and that in
default of such payment the property be sold
to realize the mortgage debt and costs.'
This is the mortgagor's equity (not right) of
redemption which, as above stated, may be
exercised by him even beyond the 90-day
period 'from the date of service of the order,'
and even after the foreclosure sale itself,
provided it be before the order of confirmation
of the sale. After such order of confirmation,
no redemption can be effected any
longer." 8 (Emphasis supplied)
59
Petitioner failed to seasonably invoke its purported right under
Section 78 of R.A. No. 337.
Petitioner avers in its petition that the Intercon, predecessor in
interest of the private respondent, is a credit institution, such
that Section 78 of Republic Act No. 337 should apply in this
case. Stated differently, it is the submission of petitioner that it
should be allowed to redeem subject properties within one
year from the date of sale as a result of the foreclosure of the
mortgage constituted thereon.
The pivot of inquiry here therefore, is whether the petitioner
seasonably invoked its asserted right under Section 78 of R.A.
No. 337 to redeem subject properties.
Petitioner theorizes that it invoked its "right" in "timely fashion",
that is, after confirmation by the court of the foreclosure sale,
and within one (1) year from the date of registration of the
certificate of sale. Indeed, the facts show that it was only on
May 2, 1995 when, in opposition to the Motion for Issuance of
Writ of Possession, did petitioner file a Motion to Compel
Private Respondent to Accept Redemption, invoking for the
very first time its alleged right to redeem subject properties
under to Section 78 of R.A. No. 337.
In light of the aforestated facts, it was too late in the day for
petitioner to invoke a right to redeem under Section 78 of R.A.
No. 337. Petitioner failed to assert a right to redeem in several
crucial stages of the proceedings.
For instance, on September 7, 1994, when it filed with the trial
court an Ex-part Motion for Clarification, petitioner failed to
allege and prove that private respondent's predecessor in
interest was a credit institution and therefore, Section 78
of R.A. No. 337 was applicable. Petitioner merely asked the
trial court to clarify whether the sale of subject properties was
execution sale or judicial foreclosure sale.

So also, when it presented before the trial court an Exception
to the Order and Motion to Set Aside Said Order dated
October 13, 1994, petitioner again was silent on its alleged
right under Section 78 of R.A. No. 337, even as it failed to
show that private respondent's predecessor in interest is a
credit institution. Petitioner just argued that the aforementioned
Order materially altered the trial court's Decision of April 30,
1992.
Then, too, nothing was heard from petitioner on its alleged
right under Section 78 of R.A. No. 337 and of the predecessor
in interest of private respondent as a credit institution, when
the trial court came out with an order on February 10, 1995,
confirming the sale of subject properties in favor of private
respondent and declaring that all pending incidents with
respect to the Order dated September 26, 1994 had become
moot and academic.
Similarly, when petitioner filed on February 27, 1995 a Motion
for Clarification with the Court of Appeals, seeking
"clarification" of the date of commencement of the one (1) year
redemption period for the subject properties, petitioner never
intimated any alleged right under Section 78 of R.A. No.
337 nor did it invite attention to its present stance that private
respondent's predecessor-in-interest was a credit institution.
Consequently, in its Resolution dated March 20, 1995, the
Court of Appeals ruled on the said motion thus:
"But we never made any pronouncement on
the one-year right of redemption of petitioner
because, in the first place, the foreclosure in
this case is judicial, and as such. the
mortgagor has only the equity, not the right of
redemption, . . . While it may be true that
under Section 78 of R.A. 337 as amended,
otherwise known as the General Banking Act,
a mortgagor of a bank, banking or credit
institution, whether the foreclosure was
60
done judicially orextrajudicially, has a period
of one year from the auction sale within which
to redeem the foreclosed property, the
question of whether the Syndicated
Management Group. Inc., is bank or credit
institution was never brought before us
squarely, and it is indeed odd and strange
that petitioner would now sarcastically ask a
rhetorical question in its motion for
clarification." 9 (Emphasis supplied). AaHcIT
If petitioner were really acting in good faith, it would have
ventilated before the Court of Appeals in CA-G.R. No. 35086
its alleged right under Section 78 ofR.A. No. 337; but petitioner
never did do so.
Indeed, at the earliest opportunity, when it submitted its
answer to the complaint for judicial foreclosure, petitioner
should have alleged that it was entitled to the beneficial
provisions of Section 78 of R.A. No. 337 but again, it did not
make any allegation in its answer regarding any right
thereunder. It bears stressing that the applicability of Section
78 of R.A. No. 337 hinges on the factual question of whether
or not private respondent's predecessor in interest was a credit
institution. As was held in Limpin, a judicial foreclosure sale,
"when confirmed by an order of the court, . . . shall operate to
divest the rights of all the parties to the action and to vest their
rights in the purchaser, subject to such rights of redemption as
may be allowed by law'," 10 which confer on the mortgagor,
his successors in interest or any judgment creditor of the
mortgagor, the right to redeem the property sold on
foreclosure after confirmation by the court of the judicial
foreclosure sale. Thus, the claim that petitioner is entitled to
the beneficial provisions of Section 78 of R.A. No. 337 — since
private respondent's predecessor-in-interest is a credit
institution — is in the nature of a compulsory counterclaim

which should have been averred in petitioner's answer to the
compliant for judicial foreclosure.
". . . A counterclaim is, most broadly, a cause
of action existing in favor of the defendant
against the plaintiff. More narrowly, it is a
claim whic, if established,will defeat or in
some way qualify a judgment or relief to which
plaintiff is otherwise entitled. It is sometimes
defined as any cause of action arising in
contract available against any action also
arising in contract and existing at the time of
the commencement of such an action. It is
frequently defined by the codes as a cause of
action arising out of the contract or
transaction set forth in the complaint as the
foundation of the plaintiff's claim, or
connected with the subject of the
action." 11 (emphasis supplied)
"The counterclaim is in itself a distinct and
independent cause of action, so that when
properly stated as such, the defendant
becomes, in respect to the matters stated by
him, an actor, and there are two simultaneous
actions pending between the same parties,
wherein each is at the same time both a
plaintiff and a defendant. Counterclaim is an
offensive as well as a defensive plea and is
not necessarily confined to the justice of the
plaintiff's claim. It represents the right of the
defendant to have the claims of the parties
counterbalanced in whole or in part, and
judgment to be entered in excess, if any. A
counterclaim stands on the same footing, and
is to be tested by the same rules, as if it were
61
an independent
action." 12 (emphasis supplied)
The very purpose of a counterclaim would have been served
had petitioner alleged in its answer its purported right under
Section 78 of R.A. No. 337:
". . . The rules of counterclaim are designed to
enable the disposition of a whole controversy
of interested parties' conflicting claims, at one
time and in one action, provided all parties' be
brought before the court and the matter
decided without prejudicing the rights of any
party." 13
The failure of petitioner to seasonably assert its alleged right
under Section 78 of R.A. No. 337 precludes it from so doing at
this late stage case. Estoppel may be successfully invoked if
the party fails to raise the question in the early stages of the
proceedings. 14 Thus, "a party to a case who failed to invoke
his claim in the main case, while having the opportunity to do
so, will be precluded, subsequently, from invoking his claim,
even if it were true, after the decision has become final,
otherwise the judgment may be reduced to a mockery and the
administration of justice may be placed in disrepute." 15
All things viewed in proper perspective, it is decisively clear
that the trial court erred in still allowing petitioner to introduce
evidence that private respondent's predecessor-in-interest was
a credit institution, and to thereafter rule that the petitioner was
entitled to avail of the provisions of Section 78 of R.A. No. 337.
In effect, the trial court permitted the petitioner to accomplish
what the latter failed to do before the Court of Appeals, that is,
to invoke its alleged right under Section 78 of R.A. No.
337 although the Court of Appeals in CA-G.R. No. 35086
already found that 'the question of whether the Syndicated
Management Council Group, Inc. is a bank or credit institution
was never brought before (the Court of Appeals) squarely."

The said pronouncement by the Court of Appeals unerringly
signified that petitioner did not make a timely assertion of any
right under Section 78 of R.A. No. 337 in all the stages of the
proceedings below.
Verily, the petitioner has only itself to blame for not alleging at
the outset that the predecessor-in-interest of the private
respondent is a credit institution. Thus, when the trial court,
and the Court of Appeals repeatedly passed upon the issue of
whether or not petitioner had the right of redemption or equity
of redemption over subject properties in the decisions,
resolutions and orders, particularly in Civil Case No. 89-5424,
CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R.
SP No. 38747, it was unmistakable that the petitioner was
adjudged to just have the equity of redemption without any
qualification whatsoever, that is, without any right of
redemption allowed by law. HCITcA
The "law of case" holds that petitioner has the
equity of redemption without any qualification.
There is, therefore, merit in private respondent's contention
that to allow petitioner to belatedly invoke its right under
Section 78 of R.A. No. 337 will disturb the "law of the case."
However, private respondent's statement of what constitutes
the "law of the case" is not entirely accurate. The "law of the
case" is not simply that the defendant possesses an equity of
redemption. As the Court has stated, the "law of the case"
holds that petitioner has the equity of the redemption without
any qualification whatsoever, that is, without the right of
redemption afforded by Section 78 of R.A. No. 337. Whether
or not the "law of the case" is erroneous is immaterial, it still
remains the "law of the case". A contrary rule will contradict
both the letter and spirit of the rulings of the Court of Appeals
in CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and CA-
G.R. 38747, which clearly saw through the repeated attempts
62
of petitioner to forestall so simple a matter as making the
security given for a just debt to answer for its payment.
Hence, in conformity with the ruling in Limpin, the sale of the
subject properties, as confirmed by the Order dated February
10, 1995 of the trial court in Civil Case No. 89-5424 operated
to divest the rights of all the parties to the action and to vest
their rights in private respondent. There then existed only what
is known as the equity of redemption, which is simply the right
of the petitioner to extinguish the mortgage and retain
ownership of the property by paying the secured debt within
the 90-day period after the judgment became final. There
being an explicit finding on the part of the Court of Appeals in
its Decision of September 30, 1994 in CA-G.R. No. 35086 —
that the herein petitioner failed to exercise its equity of
redemption within the prescribed period, redemption can no
longer be effected. The confirmation of the sale and the
issuance of the transfer certificates of title covering the subject
properties to private respondent was then, in order. The trial
court therefore, has the ministerial duty to place private
respondent in the possession of subject properties. aSTAcH
WHEREFORE, the petition is DENIED, and the assailed
decision of the Court of Appeals, declaring null and void the
Order dated 21 July 1995 and Order dated 4 September 1997
of the Regional Trial Court of Makati City in Civil Case No. 89-
5424, AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Melo, Vitug, Panganiban and Gonzaga-Reyes, JJ., concur.
Footnotes
||| (Huerta Alba Resort Inc. v. Court of Appeals, G.R. No.
128567, [September 1, 2000], 394 PHIL 22-48)

THIRD DIVISION
[G.R. No. 137792. August 12, 2003.]
SPOUSES RICARDO ROSALES and
ERLINDA SIBUG, petitioners, vs. SPOUSES
ALFONSO and LOURDES SUBA, THE CITY
SHERIFF OF MANILA,respondents.
Bayani G. Diwa for petitioners.
David B. Agoncillo for respondents.
SYNOPSIS
After the petitioners-judgment debtors failed to pay the
judgment debt, the trial court issued a writ of execution
ordering the sale of the property subject of litigation for the
satisfaction of the judgment. The property was sold at public
auction and the respondents were the highest bidders. The
trial court issued an order confirming the sale of the property to
the respondents and subsequently granted respondent's
prayer for a writ of possession. The petitioners filed a motion
for reconsideration of the trial court's orders, but were denied.
The CA dismissed their petition for certiorari for lack of merit,
holding that there is no right of redemption in case of judicial
foreclosure of mortgage. Hence, this petition for review.
In denying the petition, thereby affirming the CA decision on
appeal, the Supreme Court ruled that since the parties'
transaction is an equitable mortgage and the trial court
ordered its foreclosure, execution of judgment is governed by
Sections 2 and 3, Rule 68 of the 1997 Rules of Civil
Procedure, as amended. There is no right of redemption in
63
case of a judicial foreclosure of a mortgage. The only
exemption is when the mortgagee is the Phil. National Bank or
a bank or a banking institution. Since the mortgagee in this
case is not one of those mentioned, no right of redemption
exists in favor of petitioners. They merely have an equity of
redemption which is their right, as mortgagor, to extinguish the
mortgage and retain ownership of the property by paying the
secured debt prior to the confirmation of the foreclosure sale.
Petitioners, in this case, failed to exercise this equity of
redemption.
SYLLABUS
REMEDIAL LAW; CIVIL PROCEDURE; EXECUTION OF
JUDGMENT; NO RIGHT OF REDEMPTION IN A JUDICIAL
FORECLOSURE OF MORTGAGE; EXEMPTION; CASE AT
BAR. — Since the parties' transaction is an equitable
mortgage and that the trial court ordered its foreclosure,
execution of judgment is governed by Sections 2 and 3, Rule
68 of the 1997 Rules of Civil Procedure, as amended . . .
Clearly, as a general rule, there is no right of redemption in a
judicial foreclosure of mortgage. The only exemption is when
the mortgagee is the Philippine National Bank or a bank or a
banking institution. Since the mortgagee in this case is not one
of those mentioned, no right of redemption exists in favor of
petitioners. They merely have an equity of redemption, which,
to reiterate, is simply their right, as mortgagor, to extinguish
the mortgage and retain ownership of the property by paying
the secured debt prior to the confirmation of the foreclosure
sale. However, instead of exercising this equity of redemption,
petitioners chose to delay the proceedings by filing several
manifestations with the trial court. Thus, they only have
themselves to blame for the consequent loss of their property.

DECISION
SANDOVAL-GUTIERREZ, J p:
Challenged in the instant petition for review on certiorari are
the Resolutions 1 dated November 25, 1998 and February 26,
1999 of the Court of Appeals dismissing the petition
for certiorari in CA G.R. SP No. 49634, "Spouses
Ricardo Rosales and Erlinda Sibug vs. Alfonso and
Lourdes Suba."
On June 13, 1997, the Regional Trial Court, Branch 13, Manila
rendered a Decision 2 in Civil Cases Nos. 94-72303 and 94-
72379, the dispositive portion of which reads:
"WHEREFORE, judgment is rendered:
(1) Declaring the Deed of Sale of Exhibit D, G
and I, affecting the property in question, as an
equitable mortgage;
(2) Declaring the parties Erlinda Sibug and
Ricardo Rosales, within 90 days from finality
of this Decision, to deposit with the Clerk of
Court, for payment to the parties Felicisimo
Macaspac and Elena Jiao, the sum of
P65,000.00, with interest at nine (9) percent
per annum from September 30, 1982 until
payment is made, plus the sum of P219.76 as
reimbursement for real estate taxes;
(3) Directing the parties Felicisimo Macaspac
and Elena Jiao, upon the deposit on their
behalf of the amounts specified in the
foregoing paragraph, to execute a deed of
reconveyance of the property in question to
Erlinda Sibug, married to Ricardo Rosales,
64
and the Register of Deeds of Manila shall
cancel Transfer Certificate of Title No. 150540
in the name of the Macaspacs (Exh. E) and
issue new title in the name of Sibug;
(4) For non-compliance by Sibug
and Rosales of the directive in paragraph (2)
of this dispositive portion, let the property be
sold in accordance with the Rules of Court for
the release of the mortgage debt and the
issuance of title to the purchaser.
"SO ORDERED." 3
The decision became final and executory. Spouses Ricardo
and Erlinda Rosales, judgment debtors and herein petitioners,
failed to comply with paragraph 2 quoted above, i.e., to deposit
with the Clerk of Court, within 90 days from finality of the
Decision, P65,000.00, etc., to be paid to Felicisimo Macaspac
and Elena Jiao. This prompted Macaspac, as judgment
creditor, to file with the trial court a motion for execution.
Petitioners opposed the motion for being premature, asserting
that the decision has not yet attained finality. On March 5,
1998, they filed a manifestation and motion informing the court
of their difficulty in paying Macaspac as there is no correct
computation of the judgment debt.
On February 23, 1998, Macaspac filed a supplemental motion
for execution stating that the amount due him is P243,864.08.
Petitioners failed to pay the amount. On March 25, 1998, the
trial court issued a writ of execution ordering the sale of the
property subject of litigation for the satisfaction of the
judgment.
On May 15, 1998, an auction sale of the property was held
wherein petitioners participated. However, the property was
sold for P285,000.00 to spouses Alfonso and Lourdes Suba,

herein respondents, being the highest bidders. On July 15,
1998, the trial court issued an order confirming the sale of the
property and directing the sheriff to issue a final deed of sale in
their favor.
On July 28, 1998, Macaspac filed a motion praying for the
release to him of the amount of P176,176.06 from the
proceeds of the auction sale, prompting petitioners to file a
motion praying that an independent certified public accountant
be appointed to settle the exact amount due to movant
Macaspac.
Meanwhile, on August 3, 1998, the Register of Deeds of
Manila issued a new Transfer Certificate of Title over the
subject property in the names of respondents.
On August 18, 1998, respondents filed with the trial court a
motion for a writ of possession, contending that the
confirmation of the sale "effectively cut off petitioners' equity of
redemption." Petitioners on the other hand, filed a motion for
reconsideration of the order dated July 15, 1998 confirming the
sale of the property to respondents.
On October 19, 1998, the trial court, acting upon both motions,
issued an order (1) granting respondents' prayer for a writ of
possession and (2) denying petitioners' motion for
reconsideration. The trial court ruled that petitioners have no
right to redeem the property since the case is for judicial
foreclosure of mortgage under Rule 68 of the 1997 Rules of
Civil Procedure, as amended. Hence, respondents, as
purchasers of the property, are entitled to its possession as a
matter of right.
Forthwith, petitioners filed with the Court of Appeals a petition
for certiorari, docketed as CA-G.R. SP No. 49634, alleging that
the trial court committed grave abuse of discretion amounting
to lack or excess of jurisdiction in issuing a writ of possession
to respondents and in denying their motion for reconsideration
65
of the order dated July 15, 1998 confirming the sale of the
property to said respondents.
On November 25, 1998, the CA dismissed outright the petition
for lack of merit, holding that there is no right of redemption in
case of judicial foreclosure of mortgage. Petitioners' motion for
reconsideration was also denied.
Hence this petition.
In the main, petitioners fault the Appellate Court in applying
the rules on judicial foreclosure of mortgage. They contend
that their loan with Macaspac is unsecured, hence, its
payment entails an execution of judgment for money
under Section 9 in relation to Section 25, Rule 39 of the 1997
Rules of Civil Procedure, as amended, 4 allowing the
judgment debtor one (1) year from the date of registration
of the certificate of sale within which to redeem the
foreclosed property.
Respondents, upon the other hand, insist that petitioners are
actually questioning the decision of the trial court dated June
13, 1997 which has long become final and executory; and that
the latter have no right to redeem a mortgaged property which
has been judicially foreclosed.
Petitioners' contention lacks merit. The decision of the trial
court, which is final and executory, declared the transaction
between petitioners and Macaspac an equitable mortgage.
In Matanguihan vs. Court of Appeals, 5 this Court defined an
equitable mortgage as "one which although lacking in some
formality, or form or words, or other requisites demanded by a
statute, nevertheless reveals the intention of the parties to
charge real property as security for a debt, and contains
nothing impossible or contrary to law." An equitable mortgage
is not different from a real estate mortgage, and the lien
created thereby ought not to be defeated by requiring
compliance with the formalities necessary to the validity of a
voluntary real estate mortgage. 6 Since the parties' transaction

is an equitable mortgage and that the trial court ordered its
foreclosure, execution of judgment is governed by Sections 2
and 3, Rule 68 of the 1997 Rules of Civil Procedure, as
amended, quoted as follows:
SEC. 2. Judgment on foreclosure for payment
or sale. — If upon the trial in such action the
court shall find the facts set forth in the
complaint to be true, it shall ascertain the
amount due to the plaintiff upon the mortgage
debt or obligation, including interest and other
charges as approved by the court, and costs,
and shall render judgment for the sum so
found due and order that the same be paid to
the court or to the judgment obligee within a
period of not less that ninety (90) days nor
more than one hundred twenty (120) days
from the entry of judgment, and that in default
of such payment the property shall be sold at
public auction to satisfy the judgment.
SEC. 3. Sale of mortgaged property, effect. —
When the defendant, after being directed to
do so as provided in the next preceding
section, fails to pay the amount of the
judgment within the period specified therein,
the court, upon motion, shall order the
property to be sold in the manner and under
the provisions of Rule 39 and other
regulations governing sales of real estate
under execution. Such sale shall not effect
the rights of persons holding prior
encumbrances upon the property or a part
thereof, and when confirmed by an order of
the court, also upon motion, it shall operate to
divest the rights in the property of all the
66
parties to the action and to vest their rights in
the purchaser, subject to such rights of
redemption as may be allowed by law.
xxx xxx xxx."
In Huerta Alba Resort, Inc. vs. Court of Appeals, 7 we held
that the right of redemption is not recognized in a judicial
foreclosure, thus:
"The right of redemption in relation to a
mortgage-understood in the sense of a
prerogative to re-acquire mortgaged property
after registration of the foreclosure sale-exists
only in the case of the extrajudicial
foreclosure of the mortgage. No such right is
recognized in a judicial foreclosure except
only where the mortgagee is the Philippine
National bank or a bank or a banking
institution.
"Where a mortgage is foreclosed
extrajudicially, Act 3135 grants to the
mortgagor the right of redemption within one
(1) year from the registration of the sheriff's
certificate of foreclosure sale.
"Where the foreclosure is judicially
effected, however, no equivalent right of
redemption exists. The law declares that a
judicial foreclosure sale, 'when confirmed
by an order of the court, . . . shall operate
to divest the rights of all the parties to the
action and to vest their rights in the
purchaser, subject to such rights of
redemption as may be allowed by
law.' Such rights exceptionally 'allowed by
law' (i.e., even after the confirmation by an
order of the court) are those granted by the

charter of the Philippine National Bank (Act
Nos. 2747 and 2938), and the General
Banking Act (R.A. 337).These laws confer on
the mortgagor, his successors in interest or
any judgment creditor of the mortgagor, the
right to redeem the property sold on
foreclosure—after confirmation by the court of
the foreclosure sale—which right may be
exercised within a period of one (1) year,
counted from the date of registration of the
certificate of sale in the Registry of Property.
"But, to repeat, no such right of redemption
exists in case of judicial foreclosure of a
mortgage if the mortgagee is not the PNB or a
bank or banking institution. In such a case,
the foreclosure sale, 'when confirmed by an
order of the court, . . . shall operate to divest
the rights of all the parties to the action and to
vest their rights in the purchaser.' There then
exists only what is known as the equity of
redemption. This is simply the right of the
defendant mortgagor to extinguish the
mortgage and retain ownership of the
property by paying the secured debt within
the 90-day period after the judgment
becomes final, in accordance with Rule 68,
or even after the foreclosure sale but prior to
its confirmation.
xxx xxx xxx
"This is the mortgagor's equity (not right)
of redemption which, as above stated, may
be exercised by him even beyond the 90-day
period 'from the date of service of the order,'
and even after the foreclosure sale itself,
provided it be before the order of confirmation
67
of the sale. After such order of confirmation,
no redemption can be effected any
longer." (Italics supplied)
Clearly, as a general rule, there is no right of redemption in a
judicial foreclosure of mortgage. The only exemption is when
the mortgagee is the Philippine National Bank or a bank or a
banking institution. Since the mortgagee in this case is not one
of those mentioned, no right of redemption exists in favor of
petitioners. They merely have an equity of redemption, which,
to reiterate, is simply their right, as mortgagor, to extinguish
the mortgage and retain ownership of the property by paying
the secured debt prior to the confirmation of the foreclosure
sale. However, instead of exercising this equity of redemption,
petitioners chose to delay the proceedings by filing several
manifestations with the trial court. Thus, they only have
themselves to blame for the consequent loss of their property.
WHEREFORE, the petition is DENIED. The Resolutions of the
Court of Appeals dated November 25, 1998 and February 26,
1999 in CA G.R. SP No. 49634 are AFFIRMED. EaISDC
SO ORDERED.
Puno, Panganiban, Corona, and Carpio Morales, JJ ., concur.
||| (Spouses Rosales v. Spouses Suba, G.R. No. 137792,
[August 12, 2003], 456 PHIL 127-135)

THIRD DIVISION
[G.R. No. 170215. August 28, 2007.]
SPS. ESMERALDO and ELIZABETH
SUICO, petitioners, vs. PHILIPPINE
NATIONAL BANK and HON. COURT OF
APPEALS, respondents.
DECISION
CHICO-NAZARIO, J p:
Herein petitioners, Spouses Esmeraldo and Elizabeth Suico,
obtained a loan from the Philippine National Bank (PNB)
secured by a real estate mortgage 1 on real properties in the
name of the former. The petitioners were unable to pay their
obligation prompting the PNB to extrajudicially foreclose the
mortgage over the subject properties before the City Sheriff of
Mandaue City under EJF Case No. 92-5-15.
The petitioners thereafter filed a Complaint against the PNB
before the Regional Trial Court (RTC) of Mandaue City,
Branch 55, docketed as Civil Case No. MAN-2793 for
Declaration of Nullity of Extrajudicial Foreclosure of
Mortgage. 2
The Complaint alleged that on 6 May 1992, PNB filed with the
Office of the Mandaue City Sheriff a petition for the
extrajudicial foreclosure of mortgage constituted on the
petitioners' properties (subject properties) for an outstanding
loan obligation amounting to P1,991,770.38 as of 10 March
1992. The foreclosure case before the Office of the Mandaue
68
City Sheriff, which was docketed as EJF Case No. 92-5-15,
covered the following properties:
TCT NO. 13196
"A parcel of land (Lot 701, plan 11-5121 Amd-
2) situated at Mandaue City, bounded on the
NE., and SE., by lot no. 700; on the SW. by
lots nos. 688 and 702; on the NW. by lot no.
714, containing an area of 2,078 sq. m. more
or less."
TAX DECL. NO. 00553
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot No. 700-C-1; bounded on the
North by Lot No. 701 & 700-B; on the South
by Lot No. 700-C-3; on the East by lot no.
700-C-3 and on the West by Lot no. 688,
containing an area of 200 square meters,
more or less." HTaIAC
TAX DECL. NO. 00721
"Two (2) parcels of land situated at Tabok,
Mandaue City, Cad. lot nos. 700-C-3 and
700-C-2; bounded on the North by Lot Nos.
700-C-1 and 700-B; on the South by Lot No.
700-D; on the East by Lot Nos. 695 and 694;
and on the West by Lot Nos. 688 and 700-C-
1, containing an aggregate area of 1,683 sq.
m. more or less." IDaEHS
TAX DECL. NO. 0237
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot no. 700-B. Bounded on the NE.
by (Lot 699) 109, (Lot No. 69) 110, on the SE
(Lot 700-C) 115, on the NW. (Lot 700-A) 112

and on the SW. (Lot 701) 113; containing an
area of .1785 HA more or less." AaEcHC
TAX DECL. NO. 9267
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot no. 700-A. Bounded on the NE.
by (Lot 699) 109, on the South West by (Lot
701) 113, on the SE. by (Lot 700-B) 111, and
on the NW. by (lot 714) 040039; containing an
area of .1785 HA more or less." 3
Petitioners claimed that during the foreclosure sale of the
subject properties held on 30 October 1992, PNB, as the lone
bidder, offered a bid in the amount of P8,511,000.00. By virtue
of the said bid, a Certificate of Sale of the subject properties
was issued by the Mandaue City Sheriff in favor of PNB. PNB
did not pay to the Sheriff who conducted the auction sale the
amount of its bid which was P8,511,000.00 or give an
accounting of how said amount was applied against
petitioners' outstanding loan, which, as of 10 March 1992,
amounted only to P1,991,770.38. Since the amount of the bid
grossly exceeded the amount of petitioners' outstanding
obligation as stated in the extrajudicial foreclosure of
mortgage, it was the legal duty of the winning bidder, PNB, to
deliver to the Mandaue City Sheriff the bid price or what was
left thereof after deducting the amount of petitioners'
outstanding obligation. PNB failed to deliver the amount of
their bid to the Mandaue City Sheriff or, at the very least, the
amount of such bid in excess of petitioners' outstanding
obligation.
One year after the issuance of the Certificate of Sale, PNB
secured a Certificate of Final Sale from the Mandaue City
Sheriff and, as a result, PNB transferred registration of all the
subject properties to its name. HDAaIc
Owing to the failure of PNB as the winning bidder to deliver to
the petitioners the amount of its bid or even just the amount in
69
excess of petitioners' obligation, the latter averred that the
extrajudicial foreclosure conducted over the subject properties
by the Mandaue City Sheriff, as well as the Certificate of Sale
and the Certificate of Finality of Sale of the subject properties
issued by the Mandaue City Sheriff, in favor of PNB, were all
null and void.
Petitioners, in their Complaint in Civil Case No. MAN-2793,
prayed for: caSDCA
a) Declaring the Nullity of Extra-judicial
Foreclosure of Mortgage under EJF
Case No. 92-5-15 including the
certificate of sale and the final deed of
sale of the properties affected;
b) Order[ing] the cancellation of the
certificates of titles and tax declaration
already in the name of [herein
respondent] PNB and revert the same
back to herein [petitioners']
name; CAaSED
c) Ordering the [PNB] to pay [petitioners]
moral damages amounting to more
than P1,000,000.00; Exemplary
damages of P500,000.00; Litigation
expenses of P100,000.00 and
attorney's fees of P300,000.00. 4
PNB filed a Motion to Dismiss 5 Civil Case No. MAN-2793
citing the pendency of another action between the same
parties, specifically Civil Case No. CEB-15236 before the RTC
of Cebu City entitled, PNB v. Sps. Esmeraldo and Elizabeth
Suico where PNB was seeking the payment of the balance of
petitioners' obligation not covered by the proceeds of the
auction sale held on 30 October 1992. PNB argued that these
two cases involve the same parties. Petitioners opposed the
Motion to Dismiss filed by PNB. 6 Subsequently, the Motion to

Dismiss Civil Case No. MAN-2793 was denied in the Order of
the RTC dated 15 July 1997; 7 thus, PNB was constrained to
file its Answer. 8
PNB disputed petitioners' factual narration. PNB asserted that
petitioners had other loans which had likewise become due.
Petitioners' outstanding obligation of P1,991,770.38 as of 10
March 1992 was exclusive of attorney's fees, and other export
related obligations which it did not consider due and
demandable as of said date. PNB maintained that the
outstanding obligation of the petitioners under their regular and
export-related loans was already more than the bid price of
P8,511,000.00, contradicting the claim of surplus proceeds
due the petitioners. Petitioners were well aware that their total
principal outstanding obligation on the date of the auction sale
was P5,503,293.21. TIHCcA
PNB admitted the non-delivery of the bid price to the sheriff
and the execution of the final deed of sale, but claimed that it
had not transferred in its name all the foreclosed properties
because the petition to register in its name Transfer
Certificates of Title (TCT) No. 37029 and No. 13196 were still
pending.
On 2 February 1999, the RTC rendered its Decision 9 in Civil
Case No. MAN-2793 for the declaration of nullity of the
extrajudicial foreclosure of mortgage, the dispositive portion of
which states: CTSDAI
WHEREFORE, based on the foregoing,
judgment is rendered in favor of [herein
petitioners] Sps. Esmeraldo & Elizabeth Suico
and against [herein respondent], Philippine
National Bank (PNB), declaring the nullity of
Extrajudicial Foreclosure of Mortgage under
EJF Case No. 92-5-15, including the
certificate of sale and the final deed of sale of
the subject properties; ordering the
70
cancellation of the certificates of titles and tax
declaration already in the name of
[respondent] PNB, if any, and revert the same
back to the [petitioners'] name; ordering
[respondent] PNB to cause a new foreclosure
proceeding, either judicially or extra-judicially.
Furnish parties thru counsels copy of this
order. 10 DSETcC
In granting the nullification of the extrajudicial foreclosure of
mortgage, the RTC reasoned that given that petitioners had
other loan obligations which had not yet matured on 10 March
1992 but became due by the date of the auction sale on 30
October 1992, it does not justify the shortcut taken by PNB
and will not excuse it from paying to the Sheriff who conducted
the auction sale the excess bid in the foreclosure sale. To
allow PNB to do so would constitute fraud, for not only is the
filing fee in the said foreclosure inadequate but, worse, the
same constitutes a misrepresentation regarding the amount of
the indebtedness to be paid in the foreclosure sale as posted
and published in the notice of sale. 11 Such misrepresentation
is fatal because in an extrajudicial foreclosure of mortgage,
notice of sale is jurisdictional. Any error in the notice of sale is
fatal and invalidates the notice. 12
When the PNB appealed its case to the Court of
Appeals, 13 the appellate court rendered a Decision 14 dated
12 April 2005, the fallo of which provides: ADCIca
WHEREFORE, premises considered, the
instant appeal is GRANTED. The questioned
decision of the Regional Trial Court of
Mandaue City, Branch 55 dated February 2,
1999 is hereby REVERSED and SET ASIDE.
Accordingly, the extra judicial foreclosure of
mortgage under EJF 92-5-15 including the
certificate of sale and final deed of sale

executed appurtenant thereto are hereby
declared to be valid and binding. 15
In justifying reversal, the Court of Appeals held: DSacAE
A careful scrutiny of the evidence extant on
record would show that in a letter dated
January 12, 1994, [petitioners] expressly
admitted that their outstanding principal
obligation amounted to P5.4 Million and in
fact offered to redeem the properties at P6.5
Million. They eventually increased their offer
at P7.5 Million as evidenced by that letter
dated February 4, 1994. And finally on May
16, 1994, they offered to redeem the
foreclosed properties by paying the whole
amount of the obligation by installment in a
period of six years. All those offers made by
the [petitioners] not only contradicted their
very assertion that their obligation is merely
that amount appearing on the petition for
foreclosure but are also indicative of the fact
that they have admitted the validity of the
extra judicial foreclosure proceedings and in
effect have cured the impugned defect. Thus,
for the [petitioners] to insist that their
obligation is only over a million is unworthy of
belief. Oddly enough, it is evident from their
acts that they themselves likewise believe
otherwise.
Even assuming that indeed there was a
surplus and the [PNB] is retaining more than
the proceeds of the sale than it is entitled, this
fact alone will not affect the validity of the sale
but simply gives the [petitioners] a cause of
71
action to recover such surplus. In fine, the
failure of the [PNB] to remit the surplus, if any,
is not tantamount to a non-compliance of
statutory requisites that could constitute a
jurisdictional defect invalidating the sale. This
situation only gives rise to a cause of action
on the part of the [petitioners] to recover the
alleged surplus from the [PNB]. This ruling is
in harmony with the decisional rule that in
suing for the return of the surplus proceeds,
the mortgagor is deemed to have affirmed the
validity of the sale since nothing is due if no
valid sale has been made. 16 aIHCSA
Petitioners filed a Motion for Reconsideration 17 of the
foregoing Decision, but the Court of Appeals was not
persuaded. It maintained the validity of the foreclosure sale
and, in its Amended Decision dated 28 September 2005, it
merely directed PNB to pay the deficiency in the filing fees,
holding thus:
WHEREFORE, Our decision dated April 12,
2005 is hereby AMENDED. [Herein
respondent PNB] is hereby required to pay
the deficiency in the filing fees due on the
petition for extra judicial foreclosure sale to be
based on the actual amount of mortgage
debts at the time of filing thereof. In all other
respects, Our decision subject of herein
petitioners'] motion for reconsideration is
hereby AFFIRMED. 18 cda
Unflinching, petitioners elevated the case before this
Court via the present Petition for Review essentially seeking
the nullification of the extrajudicial foreclosure of the mortgage
constituted on the subject properties. Petitioners forward two
reasons for declaring null and void the said extrajudicial
foreclosure: (1) the alleged defect or misrepresentation in the

notice of sheriff's sale; and/or (2) failure of PNB to pay and
tender the price of its bid or the surplus thereof to the sheriff.
Petitioners argue that since the Notice of Sheriff's Sale stated
that their obligation was only P1,991,770.38 and PNB bidded
P8,511,000.00, the said Notice as well as the consequent sale
of the subject properties were null and void. SEIcAD
It is true that statutory provisions governing publication of
notice of mortgage foreclosure sales must be strictly complied
with, and that even slight deviations therefrom will invalidate
the notice and render the sale at least
voidable. 19 Nonetheless, we must not also lose sight of the
fact that the purpose of the publication of the Notice of
Sheriff's Sale is to inform all interested parties of
the date, time and place of the foreclosure sale of the real
property subject thereof. Logically, this not only requires that
the correct date, time and place of the foreclosure sale appear
in the notice, but also that any and all interested parties be
able to determine that what is about to be sold at the
foreclosure sale is the real property in which they have an
interest. 20
Considering the purpose behind the Notice of Sheriff's Sale,
we disagree with the finding of the RTC that the discrepancy
between the amount of petitioners' obligation as reflected in
the Notice of Sale and the amount actually due and collected
from the petitioners at the time of the auction sale constitute
fraud which renders the extrajudicial foreclosure sale null and
void. DTEAHI
Notices are given for the purpose of securing bidders and to
prevent a sacrifice of the property. If these objects are
attained, immaterial errors and mistakes will not affect the
sufficiency of the notice; but if mistakes or omissions occur in
the notices of sale, which are calculated to deter or mislead
bidders, to depreciate the value of the property, or to prevent it
from bringing a fair price, such mistakes or omissions will be
72
fatal to the validity of the notice, and also to the sale made
pursuant thereto. 21
All these considered, we are of the view that the Notice of Sale
in this case is valid. Petitioners failed to convince this Court
that the difference between the amount stated in the Notice of
Sale and the amount of PNB's bid resulted in discouraging or
misleading bidders, depreciated the value of the property or
prevented it from commanding a fair price. DaScCH
The cases cited by the RTC in its Decision do not apply
herein. San Jose v. Court of Appeals 22 refers to a Notice of
Sheriff's Sale which did not state the correct number of the
transfer certificates of title of the property to be sold. This
Court considered the oversight as a substantial and fatal error
which resulted in invalidating the entire notice. The case
of Community Savings and Loan Association, Inc. v. Court of
Appeals 23 is also inapplicable, because the said case refers
to an extrajudicial foreclosure tainted with fraud committed by
therein petitioners, which denied therein respondents the right
to redeem the property. It actually has no reference to a Notice
of Sale.
We now proceed to the effect of the non-delivery by PNB of
the bid price or the surplus to the petitioners. ISTECA
The following antecedents are not disputed:
For failure to pay their loan obligation secured by a real estate
mortgage on the subject properties, PNB foreclosed the said
mortgage. In its petition for foreclosure sale under ACT No.
3135 filed before the Mandaue City Sheriff, PNB stated therein
that petitioners' total outstanding obligation amounted to
P1,991,770.38. 24 PNB bidded the amount of P8,511,000.00.
Admittedly, PNB did not pay its bid in cash or deliver the
excess either to the City Sheriff who conducted the bid or to
the petitioners after deducting the difference between the
amount of its bid and the amount of petitioners' obligation in
the Notice of Sale. The petitioners then sought to declare the

nullity of the foreclosure, alleging that their loan obligation
amounted only to P1,991,770.38 in the Notice of Sale, and
that PNB did not pay its bid in cash or deliver to petitioner the
surplus, which is required under the law. 25 DTaSIc
On the other hand, PNB claims that petitioners' loan obligation
reflected in the Notice of Sale dated 10 March 1992 did not
include their other obligations, which became due at the date
of the auction sale on 10 October 1992; as well as interests,
penalties, other charges, and attorney's fees due on the said
obligation. 26
Pertinent provisions under Rule 39 of the Rules of Court on
extrajudicial foreclosure sale provide: DHTECc
SEC. 21. Judgment obligee as purchaser. —
When the purchaser is the judgment obligee,
and no third-party claim has been filed, he
need not pay the amount of the bid if it
does not exceed the amount of his
judgment. If it does, he shall pay only the
excess. (Emphasis supplied.)
SEC. 39. Obligor may pay execution against
obligee. — After a writ of execution against
property has been issued, a person indebted
to the judgment obligor may pay to the sheriff
holding the writ of execution the amount of his
debt or so much thereof as may be necessary
to satisfy the judgment, in the manner
prescribed in section 9 of this Rule, and the
sheriff's receipt shall be a sufficient discharge
for the amount so paid or directed to be
credited by the judgment obligee on the
execution. EICScD
Conspicuously emphasized under Section 21 of Rule 39 is that
if the amount of the loan is equal to the amount of the bid,
there is no need to pay the amount in cash. Same provision
73
mandates that in the absence of a third-party claim, the
purchaser in an execution sale need not pay his bid if it does
not exceed the amount of the judgment; otherwise, he shall
pay only the excess. 27
The raison de etre is that it would obviously be senseless for
the Sheriff or the Notary Public conducting the foreclosure sale
to go through the idle ceremony of receiving the money and
paying it back to the creditor, under the truism that the
lawmaking body did not contemplate such a pointless
application of the law in requiring that the creditor must bid
under the same conditions as any other bidder. It bears
stressing that the rule holds true only where the amount of the
bid represents the total amount of the mortgage
debt. 28 CDAHIT
The question that needs to be addressed in this case is:
considering the amount of PNB's bid of P8,511,000.00 as
against the amount of the petitioners' obligation of
P1,991,770.38 in the Notice of Sale, is the PNB obliged to
deliver the excess? ACETSa
Petitioners insist that the PNB should deliver the excess. On
the other hand PNB counters that on the date of the auction
sale on 30 October 1992, petitioners' other loan obligation
already exceeded the amount of P1,991,770.38 in the Notice
of Sale.
Rule 68, Section 4 of the Rules of Court provides: CDHacE
SEC. 4. Disposition of proceeds of sale. —
The amount realized from the foreclosure sale
of the mortgaged property shall, after
deducting the costs of the sale, be paid to the
person foreclosing the mortgage, and when
there shall be any balance or residue, after
paying off the mortgage debt due, the same
shall be paid to junior encumbrancers in the
order of their priority, to be ascertained by the

court, or if there be no such encumbrancers
or there be a balance or residue after
payment to them, then to the mortgagor or his
duly authorized agent, or to the person
entitled to it.
Under the above rule, the disposition of the proceeds of the
sale in foreclosure shall be as follows: TICAcD
(a) first, pay the costs
(b) secondly, pay off the mortgage
debt SCDaET
(c) thirdly, pay the junior encumbrancers, if
any in the order of priority
(d) fourthly, give the balance to the
mortgagor, his agent or the person
entitled to it. 29 EHScCA
Based on the foregoing, after payment of the costs of suit and
satisfaction of the claim of the first mortgagee/senior
mortgagee, the claim of the second mortgagee/junior
mortgagee may be satisfied from the surplus proceeds. The
application of the proceeds from the sale of the mortgaged
property to the mortgagor's obligation is an act of payment, not
payment by dacion; hence, it is the mortgagee's duty to return
any surplus in the selling price to the mortgagor. Perforce, a
mortgagee who exercises the power of sale contained in a
mortgage is considered a custodian of the fund and, being
bound to apply it properly, is liable to the persons entitled
thereto if he fails to do so. And even though the mortgagee is
not strictly considered a trustee in a purely equitable sense,
but as far as concerns the unconsumed balance, the
mortgagee is deemed a trustee for the mortgagor or owner of
the equity of redemption. 30
74
Thus it has been held that if the mortgagee is retaining more of
the proceeds of the sale than he is entitled to, this fact alone
will not affect the validity of the sale but simply give the
mortgagor a cause of action to recover such
surplus. 31 ECDaAc
In the case before us, PNB claims that petitioners' loan
obligations on the date of the auction sale were already more
than the amount of P1,991,770.38 in the Notice of Sale. In
fact, PNB claims that on the date of the auction sale,
petitioners' principal obligation, plus penalties, interests,
attorneys fees and other charges were already beyond the
amount of its bid of P8,511,000.00.
After a careful review of the evidence on record, we find that
the same is insufficient to support PNB's claim. Instead, what
is available on record is petitioner's Statement of Account as
prepared by PNB and attached as Annex A 32 to its Answer
with counterclaim. 33 In this Statement of Account, petitioners'
principal obligation with interest/penalty and attorney's fees as
of 30 October 1992 already amounted to
P6,409,814.92. cdphil
Although petitioners denied the amounts reflected in the
Statement of Account from PNB, they did not interpose any
defense to refute the computations therein. Petitioners' mere
denials, far from being compelling, had nothing to offer by way
of evidence. This then enfeebles the foundation of petitioners'
protestation and will not suffice to overcome the computation
of their loan obligations as presented in the Statement of
Account submitted by PNB. 34
Noticeably, this Statement of Account is the only piece of
evidence available before us from which we can determine the
outstanding obligations of petitioners to PNB as of the date of
the auction sale on 10 October 1992. CaHAcT
It did not escape the attention of this Court that petitioners
wrote a number of letters to PNB almost two years after the

auction sale, 35 in which they offered to redeem the property.
In their last letter, petitioners offered to redeem their
foreclosed properties for P9,500,000.00. However, these
letters by themselves cannot be used as bases to support
PNB's claim that petitioners' obligation is more than its bid of
P8,500,000.00, without any other evidence. There was no
computation presented to show how petitioners' obligation
already reached P9,500,000.00. Petitioners could very well
have offered such an amount on the basis of the value of the
foreclosed properties rather than their total obligation to PNB.
We cannot take petitioners' offer to redeem their properties in
the amount of P9,500,000.00 on its face as an admission of
the amount of their obligation to PNB without any supporting
evidence.
Given that the Statement of Account from PNB, being the only
existing documentary evidence to support its claim, shows that
petitioners' loan obligations to PNB as of 30 October 1992
amounted to P6,409,814.92, and considering that the amount
of PNB's bid is P8,511,000.00, there is clearly an excess in the
bid price which PNB must return, together with the interest
computed in accordance with the guidelines laid down by the
court in Eastern Shipping Lines v. Court of
Appeals, 36 regarding the manner of computing legal
interest, viz: HIaTDS
II. With regard particularly to an award of
interest in the concept of actual and
compensatory damages, the rate of interest,
as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it
consists in the payment of a sum of
money, i.e., a loan or forbearance of money,
the interest due should be that which may
have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest
75
from the time it is judicially demanded. In the
absence of stipulation, the rate of interest
shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial
demand under and subject to the provisions
of Article 1169 of the Civil Code. cDIHES
2. When an obligation, not constituting a loan
or forbearance of money, is breached, an
interest on the amount of damages awarded
may be imposed at the discretion of the
court at the rate of 6% per annum. No
interest, however, shall be adjudged on
unliquidated claims or damages except when
or until the demand can be established with
reasonable certainty. Accordingly, where the
demand is established with reasonable
certainty, the interest shall begin to run from
the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when
such certainty cannot be so reasonably
established at the time the demand is made,
the interest shall begin to run only from the
date the judgment of the court is made (at
which time the quantification of damages may
be deemed to have been reasonably
ascertained). The actual base for the
computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory,
the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such
finality until its satisfaction, this interim period

being deemed to be by then an equivalent to
a forbearance of credit. IEHaSc
In Philippine National Bank v. Court of Appeals, 37 it was held
that:
The rate of 12% interest referred to in Cir. 416
applies only to: CAcEaS
Loan or forbearance of money, or to cases
where money is transferred from one person
to another and the obligation to return the
same or a portion thereof is adjudged. Any
other monetary judgment which does not
involve or which has nothing to do with loans
or forbearance of any, money, goods or credit
does not fall within its coverage for such
imposition is not within the ambit of the
authority granted to the Central Bank. When
an obligation not constituting a loan or
forbearance of money is breached then an
interest on the amount of damages awarded
may be imposed at the discretion of the court
at the rate of 6% per annum in accordance
with Art. 2209 of the Civil Code. Indeed, the
monetary judgment in favor of private
respondent does not involve a loan or
forbearance of money, hence the proper
imposable rate of interest is six (6%) per cent.
Using the above rule as yardstick, since the responsibility of
PNB arises not from a loan or forbearance of money which
bears an interest rate of 12%, the proper rate of interest for the
amount which PNB must return to the petitioners is only 6%.
This interest according to Eastern Shipping shall be computed
from the time of the filing of the complaint. However, once the
judgment becomes final and executory, the "interim period
from the finality of judgment awarding a monetary claim and
76
until payment thereof, is deemed to be equivalent to a
forbearance of credit." Thus, in accordance with the
pronouncement in Eastern Shipping, the rate of 12% per
annum should be imposed, to be computed from the time the
judgment becomes final and executory until fully
satisfied. CIaHDc
It must be emphasized, however, that our holding in this case
does not preclude PNB from proving and recovering in a
proper proceeding any deficiency in the amount of petitioners'
loan obligation that may have accrued after the date of the
auction sale.
WHEREFORE, premises considered, the Decision of the
Court of Appeals dated 12 April 2005 is MODIFIED in that the
PNB is directed to return to the petitioners the amount of
P2,101,185.08 with interest computed at 6% per annum from
the time of the filing of the complaint until its full payment
before finality of judgment. Thereafter, if the amount adjudged
remains unpaid, the interest rate shall be 12% per
annum computed from the time the judgment became final and
executory until fully satisfied. Costs against private
respondent. cDCSET
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Nachura and Reyes,
JJ., concur.
||| (Spouses Suico v. Philippine National Bank, G.R. No.
170215, [August 28, 2007], 558 PHIL 265-284)

SECOND DIVISION
[G.R. No. 91779. February 7, 1991.]
GRAND FARMS, INC. and PHILIPPINE
SHARES
CORPORATION, petitioners, vs. COURT OF
APPEALS, JUDGE ADRIAN R. OSORIO, as
Presiding Judge of the Regional Trial
Court, Branch 171, Valenzuela Metro
Manila; ESPERANZA ECHIVERRI, as Clerk
of Court & Ex-Officio Sheriff of the
Regional Trial Court of Valenzuela, Metro
Manila; SERGIO CABRERA, as Deputy
Sheriff-in-Charge; and BANCO FILIPINO
SAVINGS AND MORTGAGE
BANK, respondents.
Balgos & Perez for petitioners.
Sycip, Salazar, Hernandez & Gatmaitan for private
respondent.
DECISION
REGALADO, J p:
The propriety of a summary judgment is raised in issue in the
instant petition, with herein petitioners appealing the decision 1
of respondent court in CA-G.R. SP No. 17535, dated
November 29, 1989, which found no grave abuse of discretion
77
on the part of respondent judge in denying petitioners' motion
for summary judgment. 2
The antecedents of this case are clear and undisputed.
Sometime on April 15, 1988, petitioners filed Civil Case No.
2816-V-88 in the Regional Trial Court of Valenzuela, Metro
Manila for annulment and/or declaration of nullity of the
extrajudicial foreclosure proceedings over their mortgaged
properties, with damages, against respondents clerk of court,
deputy sheriff and herein private respondent Banco Filipino
Savings and Mortgage Bank. 3
Soon after private respondent had filed its answer to the
complaint, petitioners filed a request for admission by private
respondent of the allegation, inter alia, that no formal notice of
intention to foreclose the real estate mortgage was sent by
private respondent to petitioners. 4
Private respondent, through its deputy liquidator, responded
under oath to the request and countered that petitioners were
"notified of the auction sale by the posting of notices and the
publication of notice in the Metropolitan Newsweek, a
newspaper of general circulation in the province where the
subject properties are located and in the Philippines on
February 13, 20 and 28, 1988." 5
On the basis of the alleged implied admission by private
respondent that no formal notice of foreclosure was sent to
petitioners, the latter filed a motion for summary judgment
contending that the foreclosure was violative of the provisions
of the mortgage contract, specifically paragraph (k) thereof
which provides:
"k) All correspondence relative to this
Mortgage, including demand letters,
summons, subpoena or notifications of any
judicial or extrajudical actions shall be sent to
the Mortgagor at the address given above or
at the address that may hereafter be given in

writing by the Mortgagor to the Mortgagee,
and the mere act of sending any
correspondence by mail or by personal
delivery to the said address shall be valid and
effective notice to the Mortgagor for all legal
purposes, and the fact that any
communication is not actually received by the
Mortgagor, or that it has been returned
unclaimed to the Mortgagee, or that no
person was found at the address given, or
that the address is fictitious, or cannot be
located, shall not excuse or relieve the
Mortgagor from the effects of such notice;" 6
The motion was opposed by private respondent which argued
that petitioners' reliance on said paragraph (k) of the mortgage
contract fails to consider paragraphs (b) and (d) of the same
contract, which respectively provide as follows:
"b) . . . For the purpose of extra-judicial
foreclosure, the Mortgagor (plaintiff) hereby
appoints the Mortgagee (BF) his attorney-in-
fact to sell the property mortgaged, to sign all
documents and perform any act requisite and
necessary to accomplish said purpose and to
appoint its substitutes as such attorney-in-
fact, with the same powers as above-
specified. The Mortgagor hereby expressly
waives the term of thirty (30) days or any
other term granted or which may hereafter be
granted him by law as the period which must
elapse before the Mortgagee shall be entitled
to foreclose this mortgage, it being specifically
understood and agreed that the said
Mortgagee may foreclose this mortgage at
any time after the breach of any conditions
hereof . . ."
78
xxx xxx xxx
"d) Effective upon the breach of any
conditions of the mortgage and in addition to
the remedies herein stipulated, the Mortgagee
is hereby likewise appointed attorney-in-fact
of the Mortgagor with full powers and
authority, with the use of force, if necessary,
to take actual possession of the mortgaged
property, without the necessity for any judicial
order or any permission of power to collect
rents, to eject tenants, to lease or sell the
mortgaged property, or any part thereof, at
public or private sale without previous notice
or advertisement of any kind and execute the
corresponding bills of sale, lease or other
agreement that may be deemed convenient,
to make repairs or improvement to the
mortgaged property and pay for the same and
perform any other act which the Mortgagor
may deem convenient . . ." 7
On February 27, 1989, the trial court issued an order, denying
petitioners' motion for summary judgment. 8 Petitioners'
motion for reconsideration was likewise denied by respondent
judge on the ground that genuine and substantial issues exist
which require the presentation of evidence during the trial, to
wit: (a) whether or not the loan has matured; (b) whether or not
private respondent notified petitioners of the foreclosure of
their mortgage; (c) whether or not the notice by publication of
the foreclosure constitutes sufficient notice to petitioners under
the mortgage contract; (d) whether or not the applicant for
foreclosure of the mortgage was a duly authorized
representative of private respondent; and (e) whether or not
the foreclosure was enjoined by a resolution of this Court. 9
Petitioners thereafter went on a petition for certiorari to
respondent court attacking said orders of denial as having

been issued with grave abuse of discretion. As earlier
adverted to, respondent court dismissed the petition, holding
that no personal notice was required to foreclose since private
respondent was constituted by petitioners as their attorney-in-
fact to sell the mortgaged property. It further held that
paragraph (k) of the mortgage contract merely specified the
address where correspondence should be sent and did not
impose an additional condition on the part of private
respondent to notify petitioners personally of the foreclosure.
Respondent court also denied petitioners motion for
reconsideration, hence the instant petition. LibLex
We rule for petitioners.
The Rules of Court authorize the rendition of a summary
judgment if the pleadings, depositions and admissions on file,
together with the affidavits, show that, except as to the amount
of damages, there is no issue as to any material fact and that
the moving party is entitled to a judgment as a matter of law.
10 Although an issue may be raised formally by the pleadings
but there is no genuine issue of fact, and all the facts are
within the judicial knowledge of the court, summary judgment
may be granted. 11
The real test, therefore, of a motion for summary judgment is
whether the pleadings, affidavits and exhibits in support of the
motion are sufficient to overcome the opposing papers and to
justify a finding as a matter of law that there is no defense to
the action or that the claim is clearly meritorious. 12
Applying said criteria to the case at bar, we find petitioners'
action in the court below for annulment and/or declaration of
nullity of the foreclosure proceedings and damages ripe for
summary judgment. Private respondent tacitly admitted in its
answer to petitioners' request for admission that it did not send
any formal notice of foreclosure to petitioners. Stated
otherwise, and as is evident from the records, there has been
no denial by private respondent that no personal notice of the
79
extrajudicial foreclosure was ever sent to petitioners prior
thereto. This omission, by itself, rendered the foreclosure
defective and irregular for being contrary to the express
provisions of the mortgage contract. There is thus no further
necessity to inquire into the other issues cited by the trial
court, for the foreclosure may be annulled solely on the basis
of such defect.
While private respondent was constituted as their attorney-in-
fact by petitioners, the inclusion of the aforequoted paragraph
(k) in the mortgage contract nonetheless rendered personal
notice to the latter indispensable. As we stated in Community
Savings & Loan Association, Inc., et al. vs. Court of Appeals,
at al., 13 where we had the occasion to construe an identical
provision:
"One other important point that militates
against the petitioners' first ground for this
petition is the fact that no notice of the
foreclosure proceedings was ever sent by
CSLA to the deceased mortgagor Antonio
Esguerra or his heirs in spite of an express
stipulation in the mortgage agreement to that
effect. Said Real Estate Mortgage provides, in
Sec. 10 thereof that:
'(10) All correspondence
relative to this mortgage, including
demand letters, summons,
subpoenas, or notifications of any
judicial or extrajudicial actions shall be
sent to the Mortgagor at the address
given above or at the address that
may hereafter be given in writing by
the Mortgagor to the Mortgagee, and
the mere act of sending any
correspondence by mail or by
personal delivery to the said

address shall be valid and effective
notice to the Mortgagor for all legal
purposes, . . .' (Emphasis in the
original text.)
"The Court of Appeals, in appreciating the
foregoing provision ruled that it 'is an
additional stipulation between the parties. As
such, it is the law between them and as it not
contrary to law, morals, good customs and
public policy, the same should be complied
with faithfully (Article 1306, New Civil Code of
the Philippines). Thus, while publication of the
foreclosure proceedings in the newspaper of
general circulation was complied with,
personal notice is still required, as in the case
at bar, when the same was mutually agreed
upon by the parties as additional condition of
the mortgage contract. Failure to comply with
this additional stipulation would render illusory
Article 1306 of the New Civil Code of the
Philippines' (p. 37, Rollo).
"On the issue of whether or not CSLA notified
the private respondents of the extrajudicial
foreclosure sale in compliance with Sec. 10 of
the mortgage agreement the Court of Appeals
found as follows:
'As the record is bereft of any
evidence which even impliedly indicate
that the required notice of the
extrajudicial foreclosure was ever sent
to the deceased debtor-mortgagor
Antonio Esguerra or to his heirs, the
extrajudicial foreclosure proceedings
80
on the property in question are fatally
defective and are not binding on the
deceased debtor-mortgagor or to his
heirs' (p. 37, Rollo)
"Hence, even on the premise that there was
no attendant fraud in the proceedings, the
failure of the petitioner bank to comply with
the stipulation in the mortgage document is
fatal to the petitioners' cause."
We do not agree with respondent court that paragraph (k) of
the mortgage contract in question was intended merely to
indicate the address to which the communications stated
therein should be sent. This interpretation is rejected by the
very text of said paragraph as above construed. We do not
see any conceivable reason why the interpretation placed on
an identically worded provision in the mortgage contract
involved in Community Savings & Loan Association, Inc.
should not be adopted with respect to the same provision
involved in the case at bar.
Nor may private respondent validly claim that we are
supposedly interpreting paragraph (k) in isolation and without
taking into account paragraphs (b) and (d) of the same
contract. There is no irreconcilable conflict between, as in fact
a reconciliation should be made of, the provisions of
paragraphs (b) and (d) which appear first in the mortgage
contract and those in paragraph (k) which follow thereafter and
necessarily took into account the provisions of the preceding
two paragraphs. 14 The notices respectively mentioned in
paragraphs (d) and (k) are addressed to the particular
purposes contemplated therein. Those mentioned in
paragraph (k) are specific and additional requirements
intended for the mortgagors so that, thus apprised, they may
take the necessary legal steps for the protection of their
interests such as the payment of the loan to prevent
 81

foreclosure or to subsequently arrange for redemption of the

property foreclosed.
What private respondent would want is to have paragraph (k)
considered as non-existent and consequently disregarded, a
proposition which palpably does not merit consideration.
Furthermore, it bears mention that private respondent having
caused the formulation and preparation of the printed
mortgage contract in question, any obscurity that it imputes
thereto or which supposedly appears therein should not favor
it as a contracting party. 15
Now, as earlier discussed, to still require a trial
notwithstanding private respondent's admission of the lack of
such requisite notice would be a superfluity and would work
injustice to petitioners whose obtention of the relief to which
they are plainly and patently entitled would be further delayed.
That undesirable contingency is obviously one of the reasons
why our procedural rules have provided for summary
judgments.
WHEREFORE, the decision appealed from is hereby
REVERSED and SET ASIDE and this case is REMANDED to
the court of origin for further proceedings in conformity with
this decision. This judgment is immediately executory. prLL
SO ORDERED.
Melencio-Herrera, Padilla and Sarmiento, JJ., concur.
Paras, J., took no part. Son is with respondent's counsel.
||| (Grand Farms, Inc. v. Court of Appeals, G.R. No. 91779,
[February 7, 1991], 271 PHIL 788-797)

SECOND DIVISION
[G.R. No. 178242. January 20, 2009.]
HEIRS OF NORBERTO J.
QUISUMBING, petitioners, vs. PHILIPPINE
NATIONAL BANK and SANTIAGO LAND
DEVELOPMENT
CORPORATION,respondents.
DECISION
CARPIO-MORALES, J p: *
From the Court of Appeals Decision 1 of February
14, 2007 denying petitioners' appeal from the Decision 2 of
the Regional Trial Court, Branch 62, Makati City in Civil
Case No. 10513, they come to this Court on petition for
review on certiorari. CSTcEI
Culled from the eight-volume records of the case
are the following facts:
In 1984, spouses Ricardo C. Silverio and Beatriz
Sison-Silverio (spouses Silverio) and Ricardo C. Silverio as
Chairman of the Board of the following companies, namely
Delta Motors Corporation (Delta Motors), Komatsu
Industries (Komatsu), R.C. Silverio Management
Corporation (RCSMC), through Deeds of
Assignment 3 dated April 11 and 12, 1985, assigned to
Atty. Norberto J. Quisumbing (Quisumbing) their rights of
redemption with respect to various real properties which
herein respondent Philippine National Bank (PNB) had
foreclosed and acquired as the highest bidder. The
82
properties included lots in Quezon City, Manila, Pampanga
and Bulacan in the name of Ricardo C. Silverio, married to
Beatriz Sison; a lot in Tagaytay in the name of Ricardo C.
Silverio; lots in Nueva Ecija in the name of RCSMC; lots in
Baguio and Benguet in the name of Delta Motors; a lot in
Zambales in the name of RCSMC; and a lot in Rizal
(actually Pasong Tamo, Makati) including improvements in
the name of Komatsu (hereafter referred to as Pasong
Tamo property). cACEHI
By letter 4 dated April 8, 1985, Quisumbing made a
formal tender of redemption to PNB for the
abovementioned properties, with the request that he be
informed within 10 days of the total amount of the
redemption prices so "he would know how much to pay".
Quisumbing furnished the sheriffs who conducted the
sales, as well as the registers of deeds in the various
localities where the properties are situated, with a copy of
said tender letter.
Acting on Quisumbing's tender of redemption, the
PNB, by letter of April 15, 1985, requested copies of the
Deeds of Assignment so that it may "have a basis to reply
to" his request. 5 Quisumbing furnished PNB with copies of
the Deeds, requesting a reply to his tender letter and
requested for the computation of the total amount of
redemption price for which he gave PNB until April 30,
1985 to do so. Before PNB could reply, however, or on
April 23, 1985, Quisumbing executed an Affidavit of
Redemption, 6 furnishing PNB, the sheriffs and the
registers of deeds a copy thereof.
Before the one-year redemption period expired,
PNB, by letter dated May 3, 1985, 7 denied Quisumbing's
offer of redemption on the ground that the Deeds of
Assignment were invalid for not having been registered
and for being against Art. 1491 (5) of the Civil Code; that
the tender was not proper because it was not

accompanied by actual money payment; and that the
amount Quisumbing offered was way below that required
under Sec. 25 of P.D. No. 694.
Quisumbing thus filed a Complaint 8 before the
Regional Trial Court (RTC) of Makati 9 against PNB to
compel it to allow him to exercise his right of redemption
over the foreclosed properties and to inform him of the total
amount of redemption price. At the same time, he caused
the annotation of a notice of lis pendens on the certificates
of title of the properties.
In its Answer, 10 PNB contended that Quisumbing
had no cause of action as his tender offer was "pro-forma",
as the same was unaccompanied by cash payment; that
the offer was not in accordance with Section 25 of P.D. No.
694, as amended; that the assignment of rights made in
Quisumbing's favor was ineffectual because the same was
not registered and annotated on the certificates of title of
the properties; that the Deeds of Assignment executed by
RSCMC, Komatsu and Delta Motors were defectively
acknowledged as public instruments; and that the
assignments were barred by Article 1491 (5) of the Civil
Code. 11 During the pendency of the case, Quisumbing
died, hence, he was substituted by his heirs-herein
petitioners on September 14, 1990.
On December 8, 1989, with the approval by Branch
149 of the Makati RTC, the herein other respondent
Santiago Land Development Corporation (SLDC)
intervened, it having purchased pendente lite from PNB
the Pasong Tamo property, and adopted in its Answer-in-
Intervention PNB's defenses as set forth in its Answer, and
raised additional defenses.
Petitioners thus filed before the appellate court a
Petition for Certiorari, docketed as CA-G.R. SP No. 25826,
questioning, inter alia, the trial court's grant of SLDC's
move to intervene, arguing that SLDC should have joined
83
as an additional defendant for it to be bound by all prior
proceedings.
By Decision dated July 6, 1992, the appellate court
granted the petition of petitioners and nullified the trial
court's Order granting SLDC's intervention. SLDC
appealed to this Court via certiorari, docketed as G.R. No.
106194.
By Decision 12 of January 28, 1997, the Court
dismissed SLDC's petition and affirmed the appellate
court's decision, ruling that SLDC is a transfereependente
lite and, as such, could no longer intervene as the law
already considers it joined or substituted in the pending
action, hence, bound by all prior proceedings and barred
from presenting a new or different claim. cdasia
SLDC thereupon filed a Motion for Partial
Substitution in Civil Case No. 10513, which was granted on
April 14, 1998.
By Decision 13 of October 24, 2000, the trial court
dismissed petitioner's Amended Complaint as against
PNB, as well as that against SLDC, ruling that Quisumbing
did not make a valid tender of redemption as it was not
accompanied by cash payment; that Sec. 25 of P.D. No.
694 is not unconstitutional and was applicable not only to
direct debtors/mortgagors but constructively also to
accommodation mortgagors following Nepomuceno v.
RFC. 14Aggrieved, petitioners appealed to the Court of
Appeals. cCESTA
By the assailed Decision of February 14, 2007, the
appellate court affirmed the trial court's decision, holding
that there was no valid offer to redeem the properties
owing to Quisumbing's failure to validly tender payment;
and that even if his filing of the complaint was considered
as judicial redemption, it was still ineffectual due to non-
tender of the redemption price. On account of such ruling,

the appellate court no longer ruled on the issue of the
constitutionality of Sec. 25 of P.D. 694 and on the validity
of the Deeds of Assignment. Petitioners' motion for
reconsideration having been denied by Resolution dated
June 5, 2007, this present petition was filed. HIAcCD
Petitioners insist that Quisumbing made a valid
tender of redemption because he did not have to tender
the redemption prices due to, so they claim, PNB's outright
refusal to accept or allow any redemption, and that he
perfected a 'judicial redemption' following Tioseco v.
CA. 15 They assail the ruling of the trial court that spouses
Silverio were accommodation mortgagors or direct
debtors/mortgagors and that Sec. 25 of P.D. No.
694 applies to accommodation mortgagors, as well as the
trial and appellate court's ruling that Sec. 25 is not
unconstitutional despite its being violative, so petitioners
contend, of the due process and equal protection clauses
of the Constitution.
Petitioners maintain that Sec. 25 applies only to
debtors-mortgagors, hence, the case at bar should have
been governed by the general law on redemption — Sec. 6
of Republic Act No. 3135 vis a vis Rule 39, Sec. 30. In
support of their position, they draw attention to the fact that
all the certificates of sale state that the proceedings/sale
were pursuant to an "extra-judicial foreclosure of real
estate mortgage under RA 3135 as amended", without any
mention whatsoever of P.D. No. 694. Petitioners thus
conclude that Sec. 25 of P.D. No. 694 should be struck
down for being void for vagueness; and that it is arbitrary
and unreasonable because it grants a preferred position to
PNB which may abuse to unjustly enrich itself at the
expense of mortgagors, hence, violative of the right to due
process.
At all events, they argue that assuming that Sec. 25
applies to accommodation mortgagors such as the
84
spouses Silverio still, the redemption price would be based
on the value of the properties foreclosed, not on the
obligations of the debtor, as what PNB insists on doing.
In its Comment, 16 PNB, averring that what
petitioners are raising are questions of fact, maintains that
the Deeds of Assignment are void for being against public
policy because at the time they were executed,
Quisumbing was already the lawyer not only of the
spouses Silverio but also of Komatsu and the other
companies, the properties of which were being foreclosed.
In its separate Comment, 17 SLDC argues that the
present petition, insofar as the Pasong Tamo property is
concerned, is barred by res judicata, the Court in Komatsu
Industries (Phils.) Inc. v. Philippine National Bank and
Santiago Land Development Corporation and Maximo
Contreras, (Komatsu case) 18having declared PNB's
extrajudicial foreclosure of the said property and eventual
sale to SLDC valid. It adds that, since in G.R. No. 106194
or the "Intervention Case", it was held that a
purchaser pendente lite — SLDC is bound by the outcome
of the case instituted by the transferor — PNB, then
Quisumbing, as transferee pendente lite of Komatsu's right
to redeem the Pasong Tamo property, "must also
necessarily be bound by the outcome of theKomatsu case"
— and that, perforce, "if he cannot intervene, then neither
can he be allowed to file or maintain a separate
case". HETDAa
Maintaining that Quisumbing's "judicial redemption"
should not be allowed, SLDC contends that since
redemption is inconsistent with the claim of invalidity of a
foreclosure sale, then Komatsu's act of assigning its right
of redemption to Quisumbing was incompatible with its
earlier remedy of contesting the validity of PNB's
foreclosure and is, therefore, prohibited.

SLDC further avers that Sec. 25 of PD No.
694 does not violate the due process clause, its provision
requiring the mortgagors to pay the redemption price being
in line with the purpose of the law, viz. "to protect the
investment of the government in the institution".
Aside from reiterating their previous arguments,
petitioners, in their Consolidated Reply, 19 refute SLDC's
and PNB's arguments. They contend that the action is not
barred by res judicata because in the Komatsu case, the
Court "contemplated" that the issue of validity of the
exercise of redemption would not be resolved in that case
but in Civil Case No. 10513, and the reason why
Quisumbing was not required to intervene in Komatsu was
because he was not a party thereto, and the case involved
annulment of the foreclosure sale, not the exercise of the
right of redemption.
Petitioners further maintain that the issue of
whether the assignment of rights made in Quisumbing's
favor was barred for being against public policy (under Art.
1491[5] of the Civil Code) can no longer be raised as an
issue, respondents having failed to raise it in the
proceedings below; and assuming arguendo that it had
been raised, said provision would not apply, as what were
assigned were merely the rights of redemption, not the
properties themselves, and Quisumbing did not represent
Komatsu or the other companies in the annulment of
foreclosure proceedings.
In a Supplemental Petition 20 filed on August 28,
2007, petitioners submit that the sale of the Philippine
Government's remaining minority shares (12.28%) in the
PNB on August 1, 2007 reinforces their argument that if
Sec. 25 of P.D. No. 694 is made applicable to
accommodation mortgagors, the same should be struck
down for being unconstitutional, as it would then be
violative of the equal protection clause. And they assert
85
that if, indeed, the purpose of said provision is to protect
the government's investment in PNB, then it has ceased to
exist due to the privatization of said institution and, as
such, Sec. 25 should be struck down. aDIHTE
The pivotal issue that needs to be resolved is
whether the original plaintiff, Atty. Norberto J. Quisumbing,
made a valid tender of redemption.
The Court rules in the negative.
Sec. 25 of P.D. No. 694 otherwise known as the
Revised Charter of the Philippine National Bank enacted
on May 8, 1975 provides:
Section 25. Right of redemption of foreclosed
property Right of possession during
redemption period. — Within one year from
the registration of the foreclosure sale of real
estate, the mortgagor shall have the right
to redeem the property by paying all
claims of the Bank against him on the date
of the sale including all the costs and
other expenses incurred by reason of the
foreclosure sale and custody of the
property, as well as charges and accrued
interests. HTSaEC
The Bank may take possession of the
foreclosed property during the redemption
period. When the Bank takes possession
during such period, it shall be entitled to the
fruits of the property with no obligation to
account for them, the same being considered
compensation for the interest that would
otherwise accrue on the account. Neither
shall the Bank be obliged to post a bond for
the purpose of such possession. (Emphasis
supplied)

On the other hand, under Act No. 3135, AN ACT
TO REGULATE THE SALE OF PROPERTY UNDER
SPECIAL POWERS INSERTED IN OR ANNEXED TO
REAL ESTATE MORTGAGES (which took effect on March
6, 1924), as amended by Act. No. 4118, redemption of
extra-judicially foreclosed properties is undertaken as
follows:
SEC. 6. In all cases in which an extrajudicial
sale is made under the special power
hereinbefore referred to, the debtor, his
successors in interest or any judicial creditor
or judgment creditor of said debtor, or any
person having a lien on the property
subsequent to the mortgage or deed of trust
under which the property is sold, may
redeem the same at any time within the
term of one year from and after the date of
the sale; and such redemption shall be
governed by the provisions of sections
four hundred and sixty-four to four
hundred and sixty-six, inclusive, of the
Code of Civil Procedure, in so far as these
are not inconsistent with the provisions of this
Act. (Emphasis supplied)
And the pertinent provision of the Code of Civil
Procedure, now Section 28 of Rule 39 of the Revised
Rules of Civil Procedure, reads:
SEC. 28. Time and manner of, and amounts
payable on, successive redemptions; notice
to be given and filed. — The judgment
obligor, or redemptioner, may redeem the
property from the purchaser, at any time
within one (1) year from the date of the
registration of the certificate of sale, by
paying the purchaser the amount of his
86
purchase, with one per centum per month
interest thereon in addition, up to the time
of redemption, together with the amount of
any assessments or taxes which the
purchaser may have paid thereon after
purchase, and interest on such last named
amount of the same rate; and if the
purchaser be also a creditor having a prior
lien to that of the redemptioner, other than
the judgment under which such purchase
was made, the amount of such other lien,
with interest. (Emphasis supplied) HICSaD
As to the requisites for a valid tender of redemption
in case of extra-judicially foreclosed properties by
banks, Banco Filipino Savings and Mortgage Bank, Inc., v.
Court of Appeals, 21 instructs:
Section 6 of Act 3135 provides for the
requisites for a valid redemption, thus:
SEC. 6. In all cases in which an
extrajudicial sale is made under the
special power hereinbefore referred to,
the debtor, his successors in interest
or any judicial creditor or judgment
creditor of said debtor, or any person
having a lien on the property
subsequent to the mortgage or deed
of trust under which the property is
sold, may redeem the same at any
time within the term of one year from
and after the date of sale; and such
redemption shall be governed by the
provisions of sections four hundred
and sixty-four to four hundred and
sixty-six, inclusive, of the Code of Civil
Procedure, insofar as these are not

inconsistent with the provisions of this
Act.
However, considering that petitioner is a
banking institution, the determination of the
redemption price is governed by Section 78 of
the General Banking Act which provides:
In the event of foreclosure, whether
judicially or extrajudicially, of any
mortgage on real estate which is
security for any loan granted before
the passage of this Act or under the
provisions of this Act, the mortgagor or
debtor whose real property has been
sold at public auction, judicially or
extrajudicially, for the full or partial
payment of an obligation to any bank,
banking or credit institution, within the
purview of this Act shall have the right,
within one year after the sale of the
real estate as a result of the
foreclosure of the respective
mortgage, to redeem the property by
paying the amount fixed by the court in
the order of execution, or the amount
due under the mortgage deed, as the
case may be, with interest thereon at
the rate specified in the mortgage, and
all the costs, and judicial and other
expenses incurred by the bank or
institution concerned by reason of the
execution and sale and as a result of
the custody of said property less the
income received from the
property. SHaIDE
87
Clearly, the right of redemption should be
exercised within the specified time limit, which
is one year from the date of registration of the
certificate of sale. The redemptioner should
make an actual tender in good faith of the
full amount of the purchase price as
provided above, i.e., the amount fixed by
the court in the order of execution or the
amount due under the mortgage deed, as
the case may be, with interest thereon at
the rate specified in the mortgage, and all
the costs, and judicial and other expenses
incurred by the bank or institution
concerned by reason of the execution and
sale and as a result of the custody of said
property less the income received from the
property.
xxx xxx xxx
In BPI Family Savings Bank, Inc. vs. Veloso,
we held:
The general rule in redemption is that it is
not sufficient that a person offering to
redeem manifests his desire to do so. The
statement of intention must be
accompanied by an actual and
simultaneous tender of payment. This
constitutes the exercise of the right to
repurchase. ISCDEA
xxx xxx xxx
Whether or not respondents were diligent in
asserting their willingness to pay is
irrelevant. Redemption within the period
allowed by law is not a matter of intent but
a question of payment or valid tender of

the full redemption price within said
period. (Emphasis supplied)
Evidently, whether the redemption is being made
under Act No. 3135 or the General Banking Act, as
amended by Presidential Decree No. 1828, or under P.D.
No. 694, the mortgagor or his assignee is required to
tender payment to make said redemption valid —
something which petitioners' predecessor failed to do. The
only instance when this rule may be construed
liberally, i.e., allow the non-simultaneous tender of
payment, is if a judicial action is instituted by the
redemptioner. 22 aDICET
Petitioner however claims, citing Banco
Filipino Savings and Mortgage Bank v. Court
of Appeals and Lee Chuy Realty Corporation
v. Court of Appeals that in case of
disagreement over the redemption price, the
redemptioner may preserve his right of
redemption through judicial action which must
be filed within the one-year period of
redemption. The filing of a court action to
enforce redemption, being equivalent to a
formal offer to redeem, would have the effect
of preserving his redemptive rights and
"freezing" the expiration of the one-year
period. Bona fide tender of the redemption
price, within the prescribed period is only
essential to preserve the right of redemption
for future enforcement beyond such period of
redemption and within the period prescribed
for the action by the statute of
limitations. Where the right to redeem is
exercised through judicial action within
the reglementary period, the offer to
redeem, accompanied by a bona
88
fide tender of the redemption price, while
proper, may be unessential. (Emphasis
supplied)
For this exception to apply, however, certain conditions
must be met, viz.:
It should, however, be noted that in Hi-Yield
Realty, Inc. v. Court of Appeals, we held that
the action for judicial redemption should
be filed on time and in good faith, the
redemption price is finally determined and
paid within a reasonable time, and the rights
of the parties are respected. Stated
otherwise, the foregoing interpretation has
three critical dimensions: (1) timely
redemption or redemption by expiration
date; (2) good faith as always, meaning,
the filing of the action must have been for
the sole purpose of determining the
redemption price and not to stretch the
redemptive period indefinitely; and (3)
once the redemption price is determined
within a reasonable time, the redemptioner
must make prompt payment in full.
(Emphasis supplied) EHACcT
While Quisumbing filed the Complaint on May 7,
1985, days or even weeks before the expiration of the one-
year redemption period reckoned from the dates of
registration of the different certificates of sale, it cannot be
said that he was motivated by good faith when he filed the
Complaint, as contemplated in the above ruling. For the
Complaint was filed not for the sole purpose of determining
the redemption price, but, as Quisumbing himself admitted
on direct examination, it was to seek the annulment of Sec.
25 of P.D. No. 694, thus:

Q: And what is the purpose of your
present suit?
A: To compel the redemption, because the
redemption were (sic) disallowed
unless the entire obligation rather than
just leaving the purchase price of the
foreclosure sale is paid. The purpose
of suit therefore, is to seek the
annulment of that provision of
Section 25 of the Revised
Chapter (sic)of the Philippine
National Bank, which provides that
redemption can be effected only by
paying the entire claim of the
Philippine National Bank, against in
this case, Delta Motors Corporation.
As the Complaint alleges the sale . . .
contrary to law, moral, customs, public
security, since the law favors in the
long line of decisions of the right of
redemption. Second, with such a
provision no one can get a fair price at
a foreclosure sale of an individual
property. 23 (Emphasis and
underscoring supplied)
And on cross-examination, when questioned why he wrote
to PNB on April 8, 1985 offering to redeem the property
when the Deeds of Assignment in his favor were not yet
executed, Quisumbing replied:
xxx xxx xxx
Q: The Deeds of Assignment were executed
either on April 12 or 11 in the case of
Komatsu, 1985. Why did you write
PNB a tender of letter as early as April
8 when the Deeds of Assignment were
89
not yet executed — have not yet been
executed?
A: Well, there might have been a delay in the
execution of the Deeds of
Assignment; but since I was certain
that PNB will reject a redemption,
not in accordance with Sec. 25 of
its charter. In other words, just
offering the purchase price derive from
. . . we began the process of
redemption early. Besides, the
Philippine National Bank, in some
cases, in other creditors of . .
. 24 IcTEAD
xxx xxx xxx (Emphasis and underscoring
supplied)
Clearly, from the admissions reflected in the testimony,
Quisumbing's filing of the Complaint was not solely due to
a mere disagreement in the redemption price; rather, it was
because he was not willing to pay whatever amount PNB
would compute on the basis of Sec. 25 of P.D. No. 694. By
questioning the constitutionality of said provision,
Quisumbing, wittingly delayed the redemption, since he
must have known that raising the issue of constitutionality
of a statute in any suit would result in a litigious process
which could stretch for an indefinite period as, in fact, the
history of the present case shows. More importantly, his
act of executing his Affidavit of Redemption on April 23,
1985 and alleging therein his oft-repeated excuse of
"PNB's refusal to allow him to redeem the subject
properties" even before PNB could provide him the
computations by April 30, 1985, as he himself requested in
his April 23, 1985 letter, and before PNB's actual refusal as
stated in its May 3, 1985 letter, reflected that from the very
beginning, his mindset was that if any redemption would
 90

be had, the same should be made according to his terms

and conditions and under Act No. 3135, not P.D. No. 694.
Indubitably, such actuations belie good faith and,
therefore, the exception as enunciated in Tolentino case
would not apply. aCASEH
Had Quisumbing believed in good faith that Act No.
3135 was applicable, he could have tendered the amount
as computed thereunder, if only to show that he was able
and willing to redeem the properties.
Respecting the issues raised by petitioners that
Sec. 25 of P.D. No. 694 is unconstitutional, the same has
been rendered moot and academic by the full privatization
of PNB pursuant to E.O. 80 25 which repealed said P.D.,
as well as the subsequent sale of the remaining shares of
the government on August, 2007 which converted it from a
government financial institution to a private banking
institution.
The foregoing discussions render it unnecessary to
address the other points pleaded by petitioners, such as
the validity of the Deeds of Assignment, whether the
Silverio spouses are accommodation mortgagors or direct
debtors/mortgagors, or whether the suit is barred by the
principle of res judicata.TCIHSa
WHEREFORE, the petition is DENIED. The
February 14, 2007 Decision of the Court of Appeals and
the June 5, 2007 Resolution in CA-G.R. CV No. 69337 are
AFFIRMED.
Costs against petitioner.
SO ORDERED.
Tinga, Chico-Nazario, ** Velasco, Jr. and Brion,
JJ., concur.
||| (Heirs of Quisumbing v. Philippine National Bank, G.R. No.
178242, [January 20, 2009], 596 PHIL 831-846)

FIRST DIVISION
[G.R. No. 195540. March 13, 2013.]
GOLDENWAY MERCHANDISING
CORPORATION, petitioner, vs. EQUITABLE
PCI BANK, respondent.
DECISION
VILLARAMA, JR., J p:
Before the Court is a petition for review on certiorari which
seeks to reverse and set aside the Decision 1 dated
November 19, 2010 and Resolution 2 dated January 31, 2011
of the Court of Appeals (CA) in CA-G.R. CV No. 91120. The
CA affirmed the Decision 3 dated January 8, 2007 of the
Regional Trial Court (RTC) of Valenzuela City, Branch 171
dismissing the complaint in Civil Case No. 295-V-01.
The facts are undisputed.
On November 29, 1985, Goldenway Merchandising
Corporation (petitioner) executed a Real Estate Mortgage in
favor of Equitable PCI Bank (respondent) over its real
properties situated in Valenzuela, Bulacan (now Valenzuela
City) and covered by Transfer Certificate of Title (TCT) Nos. T-
152630, T-151655 and T-214528 of the Registry of Deeds for
the Province of Bulacan. The mortgage secured the Two
Million Pesos (P2,000,000.00) loan granted by respondent to
petitioner and was duly registered. 4
As petitioner failed to settle its loan obligation, respondent
extrajudicially foreclosed the mortgage on December 13, 2000.
91
During the public auction, the mortgaged properties were sold
for P3,500,000.00 to respondent. Accordingly, a Certificate of
Sale was issued to respondent on January 26, 2001. On
February 16, 2001, the Certificate of Sale was registered and
inscribed on TCT Nos. T-152630, T-151655 and T-
214528. 5 aTcIAS
In a letter dated March 8, 2001, petitioner's counsel offered to
redeem the foreclosed properties by tendering a check in the
amount of P3,500,000.00. On March 12, 2001, petitioner's
counsel met with respondent's counsel reiterating petitioner's
intention to exercise the right of redemption. 6 However,
petitioner was told that such redemption is no longer possible
because the certificate of sale had already been registered.
Petitioner also verified with the Registry of Deeds that title to
the foreclosed properties had already been consolidated in
favor of respondent and that new certificates of title were
issued in the name of respondent on March 9, 2001.
On December 7, 2001, petitioner filed a complaint 7 for
specific performance and damages against the respondent,
asserting that it is the one-year period of redemption under Act
No. 3135 which should apply and not the shorter redemption
period provided in Republic Act (R.A.) No. 8791. Petitioner
argued that applying Section 47 of R.A. 8791 to the real estate
mortgage executed in 1985 would result in the impairment of
obligation of contracts and violation of the equal protection
clause under the Constitution. Additionally, petitioner faulted
the respondent for allegedly failing to furnish it and the Office
of the Clerk of Court, RTC of Valenzuela City with a Statement
of Account as directed in the Certificate of Sale, due to which
petitioner was not apprised of the assessment and fees
incurred by respondent, thus depriving petitioner of the
opportunity to exercise its right of redemption prior to the
registration of the certificate of sale.
In its Answer with Counterclaim, 8 respondent pointed out that
petitioner cannot claim that it was unaware of the redemption

price which is clearly provided in Section 47 of R.A. No. 8791,
and that petitioner had all the opportune time to redeem the
foreclosed properties from the time it received the letter of
demand and the notice of sale before the registration of the
certificate of sale. As to the check payment tendered by
petitioner, respondent said that even assuming arguendo such
redemption was timely made, it was not for the amount as
required by law.
On January 8, 2007, the trial court rendered its decision
dismissing the complaint as well as the counterclaim. It noted
that the issue of constitutionality of Sec. 47 of R.A. No.
8791 was never raised by the petitioner during the pre-trial and
the trial. Aside from the fact that petitioner's attempt to redeem
was already late, there was no valid redemption made
because Atty. Judy Ann Abat-Vera who talked to Atty. Joseph
E. Mabilog of the Legal Division of respondent bank, was not
properly authorized by petitioner's Board of Directors to
transact for and in its behalf; it was only a certain Chan Guan
Pue, the alleged President of petitioner corporation, who gave
instruction to Atty. Abat-Vera to redeem the foreclosed
properties. 9 EDcICT
Aggrieved, petitioner appealed to the CA which affirmed the
trial court's decision. According to the CA, petitioner failed to
justify why Section 47 of R.A. No. 8791 should be declared
unconstitutional. Furthermore, the appellate court concluded
that a reading of Section 47 plainly reveals the intention to
shorten the period of redemption for juridical persons and that
the foreclosure of the mortgaged properties in this case
when R.A. No. 8791 was already in effect clearly falls within
the purview of the said provision. 10
Petitioner's motion for reconsideration was likewise denied by
the CA.
In the present petition, it is contended that Section 47 of R.A.
No. 8791 is inapplicable considering that the contracting
92
parties expressly and categorically agreed that the foreclosure
of the real estate mortgage shall be in accordance with Act No.
3135. Citing Co v. Philippine National Bank 11 petitioner
contended that the right of redemption is part and parcel of the
Deed of Real Estate Mortgage itself and attaches thereto upon
its execution, a vested right flowing out of and made
dependent upon the law governing the contract of mortgage
and not on the mortgagee's act of extrajudicially foreclosing
the mortgaged properties. This Court thus held in said case
that "Under the terms of the mortgage contract, the terms and
conditions under which redemption may be exercised are
deemed part and parcel thereof whether the same be merely
conventional or imposed by law."
Petitioner then argues that applying Section 47 of R.A. No.
8791 to the present case would be a substantial impairment of
its vested right of redemption under the real estate mortgage
contract. Such impairment would be violative of the
constitutional proscription against impairment of obligations of
contract, a patent derogation of petitioner's vested right and
clearly changes the intention of the contracting parties.
Moreover, citing this Court's ruling in Rural Bank of Davao
City, Inc. v. Court of Appeals 12 where it was held that
"Section 119 prevails over statutes which provide for a shorter
period of redemption in extrajudicial foreclosure sales", and
in Sulit v. Court of Appeals, 13 petitioner stresses that it has
always been the policy of this Court to aid rather than defeat
the mortgagor's right to redeem his property.
Petitioner further argues that since R.A. No. 8791 does not
provide for its retroactive application, courts therefore cannot
retroactively apply its provisions to contracts executed and
consummated before its effectivity. Also, since R.A. 8791 is a
general law pertaining to the banking industry while Act No.
3135 is a special law specifically governing real estate
mortgage and foreclosure, under the rules of statutory
construction that in case of conflict a special law prevails over

a general law regardless of the dates of enactment of both
laws, Act No. 3135 clearly should prevail on the redemption
period to be applied in this case.HIAcCD
The constitutional issue having been squarely raised in the
pleadings filed in the trial and appellate courts, we shall
proceed to resolve the same.
The law governing cases of extrajudicial foreclosure of
mortgage is Act No. 3135, 14 as amended by Act No. 4118.
Section 6 thereof provides:
SEC. 6. In all cases in which an extrajudicial
sale is made under the special power
hereinbefore referred to, the debtor, his
successors-in-interest or any judicial creditor
or judgment creditor of said debtor, or any
person having a lien on the property
subsequent to the mortgage or deed of trust
under which the property is sold, may redeem
the same at any time within the term of one
year from and after the date of the sale; and
such redemption shall be governed by the
provisions of sections four hundred and sixty-
four to four hundred and sixty-six, inclusive, of
the Code of Civil Procedure, 15 in so far as
these are not inconsistent with the provisions
of this Act.
The one-year period of redemption is counted from the date of
the registration of the certificate of sale. In this case, the
parties provided in their real estate mortgage contract that
upon petitioner's default and the latter's entire loan obligation
becoming due, respondent may immediately foreclose the
mortgage judicially in accordance with the Rules of Court, or
extrajudicially in accordance with Act No. 3135, as amended.
93
However, Section 47 of R.A. No. 8791 otherwise known as
"The General Banking Law of 2000" which took effect on June
13, 2000, amended Act No. 3135. Said provision reads:
SECTION 47. Foreclosure of Real Estate
Mortgage. — In the event of foreclosure,
whether judicially or extrajudicially, of any
mortgage on real estate which is security for
any loan or other credit accommodation
granted, the mortgagor or debtor whose real
property has been sold for the full or partial
payment of his obligation shall have the right
within one year after the sale of the real
estate, to redeem the property by paying the
amount due under the mortgage deed, with
interest thereon at the rate specified in the
mortgage, and all the costs and expenses
incurred by the bank or institution from the
sale and custody of said property less the
income derived therefrom. However, the
purchaser at the auction sale concerned
whether in a judicial or extrajudicial
foreclosure shall have the right to enter upon
and take possession of such property
immediately after the date of the confirmation
of the auction sale and administer the same in
accordance with law. Any petition in court to
enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this
provision shall be given due course only upon
the filing by the petitioner of a bond in an
amount fixed by the court conditioned that he
will pay all the damages which the bank may
suffer by the enjoining or the restraint of the
foreclosure proceeding. CaASIc

Notwithstanding Act 3135, juridical
persons whose property is being sold
pursuant to an extrajudicial foreclosure, shall
have the right to redeem the property in
accordance with this provision until, but not
after, the registration of the certificate of
foreclosure sale with the applicable Register
of Deeds which in no case shall be more
than three (3) months after foreclosure,
whichever is earlier. Owners of property that
has been sold in a foreclosure sale prior to
the effectivity of this Act shall retain their
redemption rights until their expiration.
(Emphasis supplied.)
Under the new law, an exception is thus made in the case of
juridical persons which are allowed to exercise the right of
redemption only "until, but not after, the registration of the
certificate of foreclosure sale" and in no case more than three
(3) months after foreclosure, whichever comes first. 16
May the foregoing amendment be validly applied in this case
when the real estate mortgage contract was executed in 1985
and the mortgage foreclosed when R.A. No. 8791 was already
in effect?
We answer in the affirmative.
When confronted with a constitutional question, it is
elementary that every court must approach it with grave care
and considerable caution bearing in mind that every statute is
presumed valid and every reasonable doubt should be
resolved in favor of its constitutionality. 17 For a law to be
nullified, it must be shown that there is a clear and unequivocal
breach of the Constitution. The ground for nullity must be clear
and beyond reasonable doubt. 18 Indeed, those who petition
this Court to declare a law, or parts thereof, unconstitutional
94
must clearly establish the basis therefor. Otherwise, the
petition must fail. 19
Petitioner's contention that Section 47 of R.A. 8791 violates
the constitutional proscription against impairment of the
obligation of contract has no basis.
The purpose of the non-impairment clause of the
Constitution 20 is to safeguard the integrity of contracts
against unwarranted interference by the State. As a rule,
contracts should not be tampered with by subsequent laws
that would change or modify the rights and obligations of the
parties. 21 Impairment is anything that diminishes the efficacy
of the contract. There is an impairment if a subsequent law
changes the terms of a contract between the parties, imposes
new conditions, dispenses with those agreed upon or
withdraws remedies for the enforcement of the rights of the
parties. 22 cEISAD
Section 47 did not divest juridical persons of the right to
redeem their foreclosed properties but only modified the time
for the exercise of such right by reducing the one-year period
originally provided in Act No. 3135. The new redemption
period commences from the date of foreclosure sale, and
expires upon registration of the certificate of sale or three
months after foreclosure, whichever is earlier. There is
likewise no retroactive application of the new redemption
period because Section 47 exempts from its operation those
properties foreclosed prior to its effectivity and whose owners
shall retain their redemption rights under Act No. 3135.
Petitioner's claim that Section 47 infringes the equal protection
clause as it discriminates mortgagors/property owners who are
juridical persons is equally bereft of merit.
The equal protection clause is directed principally against
undue favor and individual or class privilege. It is not intended
to prohibit legislation which is limited to the object to which it is
directed or by the territory in which it is to operate. It does not

require absolute equality, but merely that all persons be
treated alike under like conditions both as to privileges
conferred and liabilities imposed. 23 Equal protection permits
of reasonable classification. 24 We have ruled that one class
may be treated differently from another where the groupings
are based on reasonable and real distinctions. 25 If
classification is germane to the purpose of the law, concerns
all members of the class, and applies equally to present and
future conditions, the classification does not violate the equal
protection guarantee. 26
We agree with the CA that the legislature clearly intended to
shorten the period of redemption for juridical persons whose
properties were foreclosed and sold in accordance with the
provisions of Act No. 3135. 27
The difference in the treatment of juridical persons and natural
persons was based on the nature of the properties foreclosed
— whether these are used as residence, for which the more
liberal one-year redemption period is retained, or used for
industrial or commercial purposes, in which case a shorter
term is deemed necessary to reduce the period of uncertainty
in the ownership of property and enable mortgagee-banks to
dispose sooner of these acquired assets. It must be
underscored that the General Banking Law of 2000, crafted in
the aftermath of the 1997 Southeast Asian financial crisis,
sought to reform the General Banking Act of 1949 by
fashioning a legal framework for maintaining a safe and sound
banking system. 28 In this context, the amendment introduced
by Section 47 embodied one of such safe and sound practices
aimed at ensuring the solvency and liquidity of our banks. It
cannot therefore be disputed that the said provision amending
the redemption period in Act 3135 was based on a reasonable
classification and germane to the purpose of the law. AETcSa
This legitimate public interest pursued by the legislature further
enfeebles petitioner's impairment of contract theory.
95
The right of redemption being statutory, it must be exercised in
the manner prescribed by the statute, 29 and within the
prescribed time limit, to make it effective. Furthermore, as with
other individual rights to contract and to property, it has to give
way to police power exercised for public welfare. 30 The
concept of police power is well-established in this jurisdiction.
It has been defined as the "state authority to enact legislation
that may interfere with personal liberty or property in order to
promote the general welfare." Its scope, ever-expanding to
meet the exigencies of the times, even to anticipate the future
where it could be done, provides enough room for an efficient
and flexible response to conditions and circumstances thus
assuming the greatest benefits. 31
The freedom to contract is not absolute; all contracts and all
rights are subject to the police power of the State and not only
may regulations which affect them be established by the State,
but all such regulations must be subject to change from time to
time, as the general well-being of the community may require,
or as the circumstances may change, or as experience may
demonstrate the necessity. 32 Settled is the rule that the non-
impairment clause of the Constitution must yield to the loftier
purposes targeted by the Government. The right granted by
this provision must submit to the demands and necessities of
the State's power of regulation. 33 Such authority to regulate
businesses extends to the banking industry which, as this
Court has time and again emphasized, is undeniably imbued
with public interest. 34
Having ruled that the assailed Section 47 of R.A. No. 8791 is
constitutional, we find no reversible error committed by the CA
in holding that petitioner can no longer exercise the right of
redemption over its foreclosed properties after the certificate of
sale in favor of respondent had been registered. aTIEcA
WHEREFORE, the petition for review
on certiorari is DENIED for lack of merit. The Decision dated
November 19, 2010 and Resolution dated January 31, 2011 of
 96

the Court of Appeals in CA-G.R. CV No. 91120 are

hereby AFFIRMED.
With costs against the petitioner.
SO ORDERED.
Sereno, C.J., Leonardo-de Castro, Bersamin and Reyes,
JJ., concur.
||| (Goldenway Merchandising Corp. v. Equitable PCI Bank,
G.R. No. 195540, [March 13, 2013], 706 PHIL 427-441)

SECOND DIVISION
[G.R. No. 98334. May 8, 1992.]
MANUEL D. MEDIDA, Deputy Sheriff of the
Province of Cebu, CITY SAVINGS BANK
(formerly Cebu City Savings and Loan
Association, Inc.) and TEOTIMO
ABELLANA, petitioners, vs. COURT OF
APPEALS and SPS. ANDRES DOLINO and
PASCUALA DOLINO, respondents.
Gines N. Abellana for petitioner.
Dionisio U. Flores for private respondent.
SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; EXECUTION OF
JUDGMENT; REDEMPTIONER; DEFINED. — A redemptioner
is defined as a creditor having a lien by attachment, judgment
or mortgage on the property sold, or on some part
thereof, subsequent to the judgment under which the property
was sold. Of course, while in extrajudicial foreclosure the sale
contemplated is not under a judgment but the proceeding
pursuant to which the mortgaged property was sold, a
subsequent mortgage could nevertheless be legally
constituted thereafter with the subsequent mortgagee
becoming and acquiring the rights of a redemptioner, aside
from his right against the mortgagor.
2. ID.; ID.; APPEAL; EFFECT ON PARTY NOT APPEALING
FROM THE DECISION OF THE LOWER COURT. — An
appellee who has not himself appealed cannot obtain from the
97
appellate court any affirmative relief other than the ones
granted in the decision of the court below. He cannot impugn
the correctness of a judgment not appealed from by him. He
cannot assign such errors as are designed to have the
judgment modified. All that said appellee can do is to make a
counter-assignment of errors or to argue on issues raised at
the trial only for the purpose of sustaining the judgment in his
favor, even on grounds not included in the decision of the
court a quo nor raised in the appellant's assignment of errors
or arguments.
3. CIVIL LAW; SPECIAL CONTRACTS; MORTGAGE; RIGHT
OF ABSOLUTE OWNERSHIP OVER THE MORTGAGED
PROPERTY BY MORTGAGOR; REMAINS DURING THE
PERIOD OF REDEMPTION. — Since the mortgagor remains
as the absolute owner of the property during the redemption
period and has the free disposal of his property, there would
be compliance with the requisites of Article 2085 of the Civil
Code for the constitution of another mortgage on the property.
To hold otherwise would create the inequitable situation
wherein the mortgagor would be deprived of the opportunity,
which may be his last recourse, to raise funds wherewith to
timely redeem his property through another mortgage thereon.
Coming back to the present controversy, it is undisputed that
the real estate mortgage in favor of petitioner bank was
executed by respondent spouses during the period of
redemption. We reiterate that during said period it cannot be
said that the mortgagor is no longer the owner of the
foreclosed property since the rule up to now is that the right of
a purchaser at a foreclosure sale is merely inchoate until after
the period of redemption has expired without the right being
exercised. The title to land sold under mortgage foreclosure
remains in the mortgagor or his grantee until the expiration of
the redemption period and conveyance by the master's deed.
To repeat, the rule has always been that it is only upon the
expiration of the redemption period, without the judgment
debtor having made use of his right of redemption, that the

ownership of the land sold becomes consolidated in the
purchaser. Parenthetically, therefore, what actually is effected
where redemption is seasonably exercised by the judgment or
mortgage debtor is not the recovery of ownership of his land,
which ownership he never lost, but the elimination from his title
thereto of the lien created by the levy on attachment or
judgment or the registration of a mortgage thereon. The
American rule is similarly to the effect that the redemption of
property sold under a foreclosure sale defeats the inchoate
right of the purchaser and restores the property to the same
condition as if no sale had been attempted. Further, it does not
give to the mortgagor a new title, but merely restores to him
the title freed of the encumbrance of the lien foreclosed.
DECISION
REGALADO, J p:
The core issue in this case is whether or not a mortgagor,
whose property has been extrajudicially foreclosed and sold at
the corresponding foreclosure sale, may validly execute a
mortgage contract over the same property in favor of a third
party during the period of redemption.
The present appeal by certiorari assails the decision 1 of
respondent Court of Appeals in CA-G.R. CV No. 12678 where
it answered the question posed by the foregoing issue in the
negative and modified the decision 2 of the then Court of First
Instance of Cebu in Civil Case No. R-18616 wherein the
validity of said subsequent mortgage was assumed and the
case was otherwise disposed of on other grounds.
98
The facts which gave rise to the institution of the aforesaid civil
case in the trial court, as found by respondent Court of
Appeals, are as follows:
"On October 10, 1974 plaintiff spouses,
alarmed of losing their right of redemption
over lot 4731 of the Cebu City Cadastre and
embraced under TCT No. 14272 from Mr.
Juan Gandioncho, purchaser of the aforesaid
lot at the foreclosure sale of the previous
mortgage in favor of Cebu City Development
Bank, went to Teotimo Abellana, president of
defendant Association, to obtain a loan of
P30,000.00. Prior thereto or on October 3,
1974, their son Teofredo Dolino filed a similar
loan application for Twenty-Five Thousand
(P25,000.00) Pesos with lot No. 4731 offered
as security for the Thirty Thousand
(P30,000.00) Pesos loan from defendant
association. Subsequently, they executed a
promissory note in favor of defendant
association. Both documents indicated that
the principal obligation is for Thirty Thousand
(P30,000.00) Pesos payable in one year with
interest at twelve (12%) percent per annum.
"When the loan became due and demandable
without plaintiff paying the same, defendant
association caused the extrajudicial
foreclosure of the mortgage on March 16,
1976. After the posting and publication
requirements were complied with, the land
was sold at public auction on April 19, 1976 to
defendant association being the highest
bidder. The certificate of sale was issued on
April 20, 1976 and registered on May 10,
1976 with the Register of Deeds of Cebu.

"On May 24, 1971 (sic, 1977), no redemption
having been effected by plaintiff, TCT No.
14272 was cancelled and in lieu thereof TCT
No. 68041 was issued in the name of
defendant association." 3
xxx xxx xxx
On October 18, 1979, private respondents filed the aforestated
Civil Case No. R-18616 in the court a quo for the annulment of
the sale at public auction conducted on April 19, 1976, as well
as the corresponding certificate of sale issued pursuant
thereto.
In their complaint, private respondents, as plaintiffs therein,
assailed the validity of the extrajudicial foreclosure sale of their
property, claiming that the same was held in violation of Act
No. 3135, as amended, and prayed, inter alia, for the
cancellation of Transfer Certificate of Title No. 68041 issued in
favor of therein defendant City Savings and Loan Association,
Inc., now known as City Savings Bank and one of the
petitioners herein.
In its answer, the defendant association therein denied the
material allegations of the complaint and averred, among
others, that the present private respondent spouses may still
avail of their right of redemption over the land in question.
On January 12, 1983, after trial on the merits, the court below
rendered judgment upholding the validity of the loan and the
real estate mortgage, but annulling the extrajudicial
foreclosure sale inasmuch as the same failed to comply with
the notice requirements in Act No. 3135, as amended, under
the following dispositive part:
"WHEREFORE, the foregoing premises
considered and upon the view taken by the
Court of this case, judgment is hereby
rendered, as follows:
99
1. Declaring ineffective the extrajudicial
foreclosure of the mortgage over Lot No.
4731 of the Cadastral Survey of Cebu;
2. Ordering the cancellation of Transfer
Certificate of Title No. 63041 of the Registry
of Deeds of the City of Cebu in the name of
defendant Cebu City Savings and Loan
Association, Inc. and the corresponding
issuance of a new transfer certificate to
contain all the annotations made in TCT No.
14272 of the plaintiffs Pascuala Sabellano,
married to Andres Dolino;
3. Ordering the plaintiffs aforenamed to pay
the defendant Cebu City Savings and Loan
Association, Inc. the unpaid balance of the
loan, plus interest; and reimbursing said
defendant the value of any necessary and
useful expenditures on the property after
deducting any income derived by said
defendant from the property.
For this purpose, defendant Association is
given 15 days from receipt hereof within
which to submit its statement of the amount
due it from the plaintiffs Dolino, with notice to
them. The payment to be made by the
plaintiffs shall be within ninety (90) days from
their receipt of the order approving the
amount due the defendant Cebu City Savings
and Loan Association, Inc.
No award of damages or costs to either party.
SO ORDERED." 4
Not satisfied therewith, herein private respondents interposed
a partial appeal to respondent court with respect to the second

and third paragraphs of the aforequoted decretal portion,
contending that the lower court erred in (1) declaring that the
mortgage executed by the therein plaintiff spouses Dolino is
valid; (2) permitting therein Cebu City Savings and Loan
Association, Inc. to collect interest after the same foreclosure
proceedings and auction sale which are null and void from the
beginning; (3) not ordering the forfeiture of the capital or
balance of the loan with usurious interest; and (4) not
sentencing therein defendant to pay damages and attorney's
fees to plaintiffs. 5
On September 28, 1990, respondent Court of Appeals
promulgated its decision modifying the decision of the lower
court, with this adjudication:
"WHEREFORE, PREMISES CONSIDERED,
the decision appealed from is hereby
MODIFIED declaring as void and ineffective
the real estate mortgage executed by
plaintiffs in favor of defendant association.
With this modification, the decision is
AFFIRMED in other respects." 6
Herein petitioners then filed a motion for reconsideration which
was denied by respondent court in its resolution dated March
5, 1991, hence the present petition which, in synthesis,
postulates that respondent court erred in declaring the real
estate mortgage void, and also impugns the judgment of the
trial court declaring ineffective the extrajudicial foreclosure of
said mortgage and ordering the cancellation of Transfer
Certificate of Title No. 68041 issued in favor of the
predecessor of petitioner bank. 7
The first submission assailing the judgment of respondent
Court of Appeals is meritorious. llcd
100
Said respondent court declared the real estate mortgage in
question null and void for the reason that the mortgagor
spouses, at the time when the said mortgage was executed,
were no longer the owners of the lot, having supposedly lost
the same when the lot was sold to a purchaser in the
foreclosure sale under the prior mortgage. This holding cannot
be sustained.
Preliminarily, the issue of ownership of the mortgaged property
was never alleged in the complaint nor was the same raised
during the trial, hence that issue should not have been taken
cognizance of by the Court of Appeals. An issue which was
neither averred in the complaint nor ventilated during the trial
in the court below cannot be raised for the first time on appeal
as it would be offensive to the basic rule of fair play, justice
and due process. 8
Nonetheless, since respondent Court took cognizance thereof
and, in fact, anchored its modificatory judgment on its
ratiocination of that issue, we are inclined to liberalize the rule
so that we can in turn pass upon the correctness of its
conclusion. We may consider such procedure as analogous to
the rule that an unassigned error closely related to an error
properly assigned, or upon which the determination of the
question properly assigned is dependent, may be considered
by an appellate court. 9 We adopt this approach since, after
all, both lower courts agreed upon the invalidity of the
extrajudicial foreclosure but differed only on the matter of the
validity of the real estate mortgage upon which the
extrajudicial foreclosure was based.
In arriving at its conclusion, respondent court placed full
reliance on what obviously is an obiter dictum laid down in the
course of the disquisition in Dizon vs. Gaborro, et al. which we
shall analyze. 10 For, as explicitly stated therein by the Court,
"(t)he basic issue to be resolved in this case is whether the
'Deed of Sale with Assumption of Mortgage' and the `Option to
purchase Real Estate,' two instruments executed by and

between petitioner Jose P. Dizon and Alfredo G. Gaborro
(defendant below) on the same day, October 6, 1959,
constitute in truth and in fact an absolute sale of the three
parcels of land therein described or merely an equitable
mortgage or conveyance thereof by way of security for
reimbursement or repayment by petitioner Jose P. Dizon of
any and all sums which may have been paid to the
Development Bank of the Philippines and the Philippine
National Bank by Alfredo G. Gaborro . . ." Said documents
were executed by the parties and the payments were made by
Gaborro for the debt of Dizon to said banks after the
Development Bank of the Philippines had foreclosed the
mortgage executed by Dizon and during the period of
redemption after the foreclosure sale of the mortgaged
property to said creditor bank. llcd
The trial court held that the true agreement between the
parties therein was that Gaborro would assume and pay the
indebtedness of Dizon to the banks and, in consideration
thereof, Gaborro was given the possession and enjoyment of
the properties in question until Dizon shall have reimbursed
him for the amount paid to the creditor banks. Accordingly, the
trial court ordered the reformation of the documents to the
extent indicated and such particular relief was affirmed by the
Court of Appeals. This Court held that the agreement between
the parties is one of those innominate contracts under Article
1307 of the Civil Code whereby the parties agreed "to give and
to do" certain rights and obligations, but partaking of the nature
of antichresis.
Hence, on appeal to this Court, the judgment of the Court of
Appeals in that case was affirmed but with the following
pronouncements:
"The two instruments sought to be reformed
in this case appear to stipulate rights and
obligations between the parties thereto
pertaining to and involving parcels of land that
101
had already been foreclosed and sold
extrajudicially, and purchased by the
mortgage creditor, a third party. It becomes,
therefore, necessary, to determine the legality
of said rights and obligations arising from the
foreclosure and sale proceedings not only
between the two contracting parties to the
instruments executed between them but also
in so far as the agreement affects the rights of
the third party, the purchaser Bank.
xxx xxx xxx
"Under the Revised Rules of Court, Rule 39,
Section 33, the judgment debtor remains in
possession of the property foreclosed and
sold, during the period of redemption. If the
judgment debtor is in possession of the
property sold, he is entitled to retain it, and
receive the fruits, the purchaser not being
entitled to such possession. (Riosa vs.
Verzosa, 26 Phil. 86; Velasco vs.
Rosenberg's, Inc., 32 Phil. 72; Pabico vs.
Pauco, 43 Phil. 572; Power vs. PNB, 54 Phil.
54; Gorospe vs. Gochangco, L-12735, Oct.
30, 1959).
xxx xxx xxx
"Upon foreclosure and sale, the purchaser is
entitled to a certificate of sale executed by the
sheriff. (Section 27, Revised Rules of Court).
After the termination of the period of
redemption and no redemption having been
made, the purchaser is entitled to a deed of
conveyance and to the possession of the
properties. (Section 35, Revised Rules of
Court). The weight of authority is to the effect

that the purchaser of land sold at public
auction under a writ of execution has only an
inchoate right to the property, subject to be
defeated and terminated within the period of
12 months from the date of sale, by a
redemption on the part of the owner.
Therefore, the judgment debtor in possession
of the property is entitled to remain therein
during the period for redemption. (Riosa vs.
Verzosa, 26 Phil. 86, 89; Gonzales vs.
Calimbas, 51 Phil. 355).
"In the case before Us, after the extrajudicial
foreclosure and sale of his properties,
petitioner Dizon retained the right to redeem
the lands, the possession, use and enjoyment
of the same during the period of redemption.
And these are the only rights that Dizon could
legally transfer, cede and convey unto
respondent Gaborro under the instrument
captioned Deed of Sale with Assumption of
Mortgage (Exh. A-Stipulation), likewise the
same rights that said respondent could
acquire in consideration of the latter's promise
to pay and assume the loan of petitioner
Dizon with DBP and PNB.
"Such an instrument cannot be legally
considered a real and unconditional sale of
the parcels of land, firstly, because there was
absolutely no money consideration therefor,
as admittedly stipulated, the sum of
P131,831.91 mentioned in the document as
the consideration `receipt of which was
acknowledged' was not actually paid; and,
secondly, because the properties had already
been previously sold by the sheriff at the
102
foreclosure sale, thereby divesting the
petitioner of his full right as owner thereof to
dispose and sell the lands." (Emphasis ours.)
It was apparently the second reason stated by the Court in
said case which was relied upon by respondent court in the
present case on which to premise its conclusion. Yet, as
demonstrated by the relevant excerpts above quoted, not only
was that obiter therein unnecessary since evidently no sale
was concluded, but even inaccurate, if not inconsistent, when
considered in the context of the discussion in its entirety. If, as
admitted, the purchaser at the foreclosure sale merely
acquired an inchoate right to the property which could ripen
into ownership only upon the lapse of the redemption period
without his credit having been discharged, it is illogical to hold
that during that same period of twelve months the mortgagor
was "divested" of his ownership, since the absurd result would
be that the land will consequently be without an owner
although it remains registered in the name of the mortgagor.
That is why the discussion in said case carefully and
felicitously states that what is divested from the mortgagor is
only his "full right as owner thereof to dispose (of) and sell the
lands," in effect, merely clarifying that the mortgagor does not
have the unconditional power to absolutely sell the land since
the same is encumbered by a lien of a third person which, if
unsatisfied, could result in a consolidation of ownership in the
lienholder but only after the lapse of the period of redemption.
Even on that score, it may plausibly be argued that what is
delimited is not the mortgagor's jus disponendi, as an attribute
of ownership, but merely the rights conferred by such act of
disposal which may correspondingly be restricted.
At any rate, even the foregoing considerations and arguments
would have no application in the case at bar and need not
here be resolved since what is presently involved is a
mortgage, not a sale, to petitioner bank. Such mortgage does
not involve a transfer, cession or conveyance of the property

but only constitutes a lien thereon. There is no obstacle to the
legal creation of such a lien even after the auction sale of the
property but during the redemption period, since no distinction
is made between a mortgage constituted over the property
before or after the auction sale thereof.
Thus, a redemptioner is defined as a creditor having a lien by
attachment, judgment or mortgage on the property sold, or on
some part thereof, subsequentto the judgment under which the
property was sold. 11 Of course, while in extrajudicial
foreclosure the sale contemplated is not under a judgment but
the proceeding pursuant to which the mortgaged property was
sold, a subsequent mortgage could nevertheless be legally
constituted thereafter with the subsequent mortgagee
becoming and acquiring the rights of a redemptioner, aside
from his right against the mortgagor. prcd
In either case, what bears attention is that since the mortgagor
remains as the absolute owner of the property during the
redemption period and has the free disposal of his property,
there would be compliance with the requisites of Article 2085
of the Civil Code for the constitution of another mortgage on
the property. To hold otherwise would create the inequitable
situation wherein the mortgagor would be deprived of the
opportunity, which may be his last recourse, to raise funds
wherewith to timely redeem his property through another
mortgage thereon.
Coming back to the present controversy, it is undisputed that
the real estate mortgage in favor of petitioner bank was
executed by respondent spouses during the period of
redemption. We reiterate that during said period it cannot be
said that the mortgagor is no longer the owner of the
foreclosed property since the rule up to now is that the right of
a purchaser at a foreclosure sale is merely inchoate until after
the period of redemption has expired without the right being
103
exercised. 12 The title to land sold under mortgage foreclosure
remains in the mortgagor or his grantee until the expiration of
the redemption period and conveyance by the master's
deed. 13 To repeat, the rule has always been that it is only
upon the expiration of the redemption period, without the
judgment debtor having made use of his right of redemption,
that the ownership of the land sold becomes consolidated in
the purchaser. 14
Parenthetically, therefore, what actually is effected where
redemption is seasonably exercised by the judgment or
mortgage debtor is not the recovery of ownership of his land,
which ownership he never lost, but the elimination from his title
thereto of the lien created by the levy on attachment or
judgment or the registration of a mortgage thereon. The
American rule is similarly to the effect that the redemption of
property sold under a foreclosure sale defeats the inchoate
right of the purchaser and restores the property to the same
condition as if no sale had been attempted. Further, it does not
give to the mortgagor a new title, but merely restores to him
the title freed of the encumbrance of the lien foreclosed. 15
We cannot rule on the plaint of petitioners that the trial court
erred in declaring ineffective the extrajudicial foreclosure and
the sale of the property to petitioner bank. The court below
spelled out at length in its decision the facts which it
considered as violative of the provisions of Act No. 3135, as
amended, by reason of which it nullified the extrajudicial
foreclosure proceeding and its effects. Such findings and
ruling of the trial court are already final and binding on
petitioners and can no longer be modified, petitioners having
failed to appeal therefrom. prLL
An appellee who has not himself appealed cannot obtain from
the appellate court any affirmative relief other than the ones
granted in the decision of the court below. 16 He cannot
impugn the correctness of a judgment not appealed from by
him. He cannot assign such errors as are designed to have the
 104

judgment modified. All that said appellee can do is to make a

counter-assignment of errors or to argue on issues raised at
the trial only for the purpose of sustaining the judgment in his
favor, even on grounds not included in the decision of the
court a quo nor raised in the appellant's assignment of errors
or arguments. 17
WHEREFORE, the decision of respondent Court of Appeals,
insofar as it modifies the judgment of the trial court, is
REVERSED and SET ASIDE. The judgment of said trial court
in Civil Case No. R-18616, dated January 12, 1983, is hereby
REINSTATED.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Nocon, JJ ., concur.
||| (Medida v. Court of Appeals, G.R. No. 98334, [May 8,
1992], 284-A PHIL 404-416)

EN BANC
[G.R. No. L-18816. December 29, 1962.]
PHILIPPINE BANK OF
COMMERCE, plaintiff-appellee, vs. TOMAS
DE VERA, defendant-appellant.
Natividad T . Perez for defendant-appellant.
Sumulong, Sumulong & Libongco for plaintiff-appellee.
SYLLABUS
1. MORTGAGE LAW; LAND REGISTRATION LAW;
EXTRAJUDICIAL FORECLOSURE. — Article 2131 of the
New Civil Code, provides that "form, extent and consequences
of a mortgage, both as to its constitution, modification and
extinguishment, and as to other matters not included in this
Chapter, shall be governed by the provision of the Mortgage
and of the Land Registration Law." Under the Mortgage Law,
which is still in force, the mortgagee has the right to claim for
the deficiency resulting between the price obtained in the sale
of the real property at public auction and the outstanding
obligation at the time of the foreclosure proceedings.
2. ID.; ID.; DEFICIENCY JUDGMENT. — Under the Rules of
Court (Sec. 6, Rule 70) upon the sale of any real property,
under an order for a sale to satisfy a mortgage or other
encumbrances thereon, if there be a balance due to the
plaintiff after applying the proceeds of the sale, the court, upon
motion, should render a judgment against the defendant for
any such balance for which, by the record of the case, he may
be personally liable to the plaintiff. It is true that this refers to a
105
judicial foreclosure, but the underlying principle is the same,
that the mortgage is but a security and not a satisfaction of
indebtedness.
3. ID.; ID.; ID.; EXTRAJUDICIAL FORECLOSURE UNDER
ACT NO. 3135 IS NOT WAIVER OF RIGHT TO PAYMENT
FOR WHOLE DEBT. — It can not be concluded that the
creditor loses his right given him under the Mortgage Law and
recognized in the Rules of Court, to take action for the
recovery of any unpaid balance on the principal obligation,
simply because he has chosen to foreclose his mortgage
extra-judicially, pursuant to a special power of attorney given
him by the mortgagor in the mortgage contract. As stated by
this Court in Medina vs. Philippine National Bank (56 Phil.
651), a case analogous to the one at bar, the step taken by the
mortgagee-bank in resorting to extra-judicial foreclosure under
Act No. 3135, was merely to find a proceeding for sale, and its
action can not be taken to mean a waiver of its right to
demand the payment of the whole debt."
DECISION
BARRERA, J p:
This is an appeal 1 taken by defendant Tomas de Vera from
the decision of the Court of First Instance of Manila (in Civil
Case No. 35169) ordering him to pay to plaintiff Philippine
Bank of Commerce, his outstanding obligation of P99,033.20,
with 6% interest from April 16, 1956 until fully paid, and
P5,000.00 as attorney's fees, plus costs. pred
The facts of the case, which are undisputed, are briefly stated
in the trial court's decision, to wit:

"By virtue of a contract (Exh. A), entitled
'Consolidation of First Real Estate Mortgage
and Deed of Assignment', executed on April
26, 1951, defendant Tomas de Vera is
indebted to the plaintiff in the total amount of
P127,312.24, guaranteed by a real estate
mortgage of the defendant's land, particularly
described in TCT No. 1631 of the Register of
Deeds of Pasay City and in TCT No. 37641 of
the Register of Deeds of the City of Rizal
(now Pasay City), with the same terms and
conditions embodied in the original Deed of
Real Estate Mortgage and the Deed of
Assignment of Real Estate Mortgage, both
dated February 28, 1947. Presumably, both
documents and the document Exh. A, were
registered in the Registry of Deeds of Pasay
City.
"Upon maturity of the defendant's obligation
on March 10, 1956, and despite several
demands, the defendant failed to pay the
outstanding balance of his obligation in the
amount of P99,033.20 as of January 31,
1958, under the contract Exh. A, for which
reason, the plaintiff filed a petition with the
Sheriff of Pasay City on March 14, 1956 (Exh.
B) to sell the properties, subject to the Real
Estate Mortgage executed and duly recorded
in the Registry of Deeds on May 17, 1949, for
the sum of P150,000.00. Another document,
Assignment of Real Estate Mortgage, was
executed on the same day, May 17, 1947,
which two documents, were later on
consolidated on April 26, 1951, in the
document Exh. A.
106
"The Sheriff, acting accordingly, sold at public
auction the two parcels of land covered by
TCT No. 1631 and No. 37641 to the highest
bidder, which was the plaintiff creditor in this
case, Philippine Bank of Commerce, for the
amount of P86,700.00, and the corresponding
certificate of sale was issued by the Sheriff of
Pasay City (Exh. C) dated April 16, 1956. The
plaintiff now, thru the present action, seeks to
recover from the defendant the balance of his
obligation after deducting the price of the land
sold at public auction, of which, together with
the interest up to January 31, 1958, there
remained an outstanding balance of
P99,033.20 as per the Statement of Account
(Exh. D). liblex
On the basis of the foregoing facts, the trial court rendered the
decision above adverted to.
The sole issue to be resolved in this case is whether the trial
court acted correctly in holding appellee Bank entitled to
recover from appellant the sum of P99,033.20 as deficiency
arising after the extrajudicial foreclosure, under Act No. 3135,
as amended, of the mortgaged properties in question. It is
urged, on appellant's part, that since Act No. 3135, as
amended, is silent as to the mortgagee's right to recover
deficiency arising after an extrajudicial foreclosure sale of
mortgage, he (mortgagee) may not recover the same.
A reading of the provisions of Act No. 3135, as amended, (re
extra-judicial foreclosure) discloses nothing, it is true, as to the
mortgagee's right to recover such deficiency. But neither do
we find any provision thereunder which expressly or impliedly
prohibits such recovery.
Article 2131 of the new Civil Code, on the contrary, expressly
provides that "the form, extent and consequences of a

mortgage, both as to its constitution, modification and
extinguishment, and as to other matters not included in this
Chapter, shall be governed by the provisions of the Mortgage
Law and of the Land Registration Law." Under the Mortgage
Law, which is still in force, the mortgagee has the right to claim
for the deficiency resulting from the price obtained in the sale
of the real property at public auction and the outstanding
obligation at the time of the foreclosure proceedings. (See
Soriano vs. Enriquez, 24 Phil. 584; Banco de Islas Filipinas vs.
Concepcion e Hijos, 53 Phil. 86; Banco Nacional vs. Barreto,
53 Phil. 101.) Under the Rules of Court (Sec. 6, Rule 70),
"Upon the sale of any real property, under an order for a sale
to satisfy a mortgage or other encumbrances thereon, if there
be a balance due to the plaintiff after applying the proceeds of
the sale, the court, upon motion, should render a judgment
against the defendant for any such balance for which, by the
record of the case he may be personally liable to the plaintiff, .
. . ." It is true that this refers to a judicial foreclosure, but the
underlying principle is the same, that the mortgage is but a
security and not a satisfaction of indebtedness. As the trial
court correctly observed:
". . . the real estate mortgage does not, in any
way, limit nor minimize the amount of the
obligation. Its only purpose is to guarantee
the fulfillment of said obligation and, in case
of default on the part of the debtor mortgagor,
the creditor mortgagee may execute the
obligation on the real property given as a
mortgage by way of judicial or extra-judicial
foreclosure, according to our statutes and
procedure. Therefore, by analogy and
applying the same principle of equity, if after
the sale of the mortgaged property at public
auction, there is a resulting deficiency in the
application for the payment of the obligation
of the debtor mortgagor to the creditor
107
mortgagee, the latter may proceed in a proper
action against the debtor mortgagor for the
deficiency of the former's obligation. It is of no
importance whether the buyer of the highest
bidder in the public auction is the creditor
itself.
"By following the defendant's theory, there
may occur a ridiculous situation in which,
when the amount of the loan is very much
bigger than the value of the mortgaged
property, by abandonment or default of the
debtor mortgagor, his obligation may
automatically be reduced in quantity, against
the will and consent of the creditor
mortgagee, and in prejudice of the latter,
which situation is absurd and not
contemplated by Act No. 3135, as
amended." cdasia
Let it be noted that when the legislature intends to foreclose
the right of a creditor to sue for any deficiency resulting from
the foreclosure of the security given to guarantee the
obligation, it so expressly provides. Thus, in respect to
pledges, Article 2115 of the new Civil Code expressly states: ".
. . . If the price of the sale is less (than the amount of the
principal obligation) neither shall the creditor be entitled to
recover the deficiency, notwithstanding any stipulation to the
contrary." Likewise, in the event of a foreclosure of a chattel
mortgage on the thing sold in installments "he (the vendor)
shall have no further action against the purchaser to recover
any unpaid balance of the price. Any agreement to the
contrary shall be void" (Article 1484, paragraph 3, ibid). It is
then clear that in the absence of a similar provision in Act No.
3135, as amended, it can not be concluded that the creditor
loses his right given him under the Mortgage Law and
recognized in the Rules of Court, to take action for the
 108

recovery of any unpaid balance of the principal obligation,

simply because he has chosen to foreclose his mortgage
extra-judicially pursuant to a special power of attorney given
him by the mortgagor in the mortgage contract. As stated by
this Court in Medina vs. Philippine National Bank (56 Phil.
651), a case analogous to the one at bar, the step taken by the
mortgagee-bank in resorting to extra-judicial foreclosure under
Act No. 3135, was "merely to find a proceeding for the sale,
and its action can not be taken to mean a waiver of its right to
demand the payment of the whole debt." pred

WHEREFORE, finding no reversible error in the decision

appealed from the court a quo, the same is hereby affirmed
with costs against the defendant appellant. So ordered.
Bengzon, C.J ., Padilla, Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L. and Paredes, JJ ., concur.
Dizon, Regala and Makalintal, JJ ., took no part.
||| (Philippine Bank of Commerce v. De Vera, G.R. No. L-
18816, [December 29, 1962], 116 PHIL 1326-1330)

THIRD DIVISION
[G.R. No. 170215. August 28, 2007.]
SPS. ESMERALDO and ELIZABETH
SUICO, petitioners, vs. PHILIPPINE
NATIONAL BANK and HON. COURT OF
APPEALS, respondents.
DECISION
CHICO-NAZARIO, J p:
Herein petitioners, Spouses Esmeraldo and Elizabeth Suico,
obtained a loan from the Philippine National Bank (PNB)
secured by a real estate mortgage 1 on real properties in the
name of the former. The petitioners were unable to pay their
obligation prompting the PNB to extrajudicially foreclose the
mortgage over the subject properties before the City Sheriff of
Mandaue City under EJF Case No. 92-5-15.
The petitioners thereafter filed a Complaint against the PNB
before the Regional Trial Court (RTC) of Mandaue City,
Branch 55, docketed as Civil Case No. MAN-2793 for
Declaration of Nullity of Extrajudicial Foreclosure of
Mortgage. 2
The Complaint alleged that on 6 May 1992, PNB filed with the
Office of the Mandaue City Sheriff a petition for the
extrajudicial foreclosure of mortgage constituted on the
petitioners' properties (subject properties) for an outstanding
loan obligation amounting to P1,991,770.38 as of 10 March
1992. The foreclosure case before the Office of the Mandaue
109
City Sheriff, which was docketed as EJF Case No. 92-5-15,
covered the following properties:
TCT NO. 13196
"A parcel of land (Lot 701, plan 11-5121 Amd-
2) situated at Mandaue City, bounded on the
NE., and SE., by lot no. 700; on the SW. by
lots nos. 688 and 702; on the NW. by lot no.
714, containing an area of 2,078 sq. m. more
or less."
TAX DECL. NO. 00553
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot No. 700-C-1; bounded on the
North by Lot No. 701 & 700-B; on the South
by Lot No. 700-C-3; on the East by lot no.
700-C-3 and on the West by Lot no. 688,
containing an area of 200 square meters,
more or less." HTaIAC
TAX DECL. NO. 00721
"Two (2) parcels of land situated at Tabok,
Mandaue City, Cad. lot nos. 700-C-3 and
700-C-2; bounded on the North by Lot Nos.
700-C-1 and 700-B; on the South by Lot No.
700-D; on the East by Lot Nos. 695 and 694;
and on the West by Lot Nos. 688 and 700-C-
1, containing an aggregate area of 1,683 sq.
m. more or less." IDaEHS
TAX DECL. NO. 0237
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot no. 700-B. Bounded on the NE.
by (Lot 699) 109, (Lot No. 69) 110, on the SE
(Lot 700-C) 115, on the NW. (Lot 700-A) 112

and on the SW. (Lot 701) 113; containing an
area of .1785 HA more or less." AaEcHC
TAX DECL. NO. 9267
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot no. 700-A. Bounded on the NE.
by (Lot 699) 109, on the South West by (Lot
701) 113, on the SE. by (Lot 700-B) 111, and
on the NW. by (lot 714) 040039; containing an
area of .1785 HA more or less." 3
Petitioners claimed that during the foreclosure sale of the
subject properties held on 30 October 1992, PNB, as the lone
bidder, offered a bid in the amount of P8,511,000.00. By virtue
of the said bid, a Certificate of Sale of the subject properties
was issued by the Mandaue City Sheriff in favor of PNB. PNB
did not pay to the Sheriff who conducted the auction sale the
amount of its bid which was P8,511,000.00 or give an
accounting of how said amount was applied against
petitioners' outstanding loan, which, as of 10 March 1992,
amounted only to P1,991,770.38. Since the amount of the bid
grossly exceeded the amount of petitioners' outstanding
obligation as stated in the extrajudicial foreclosure of
mortgage, it was the legal duty of the winning bidder, PNB, to
deliver to the Mandaue City Sheriff the bid price or what was
left thereof after deducting the amount of petitioners'
outstanding obligation. PNB failed to deliver the amount of
their bid to the Mandaue City Sheriff or, at the very least, the
amount of such bid in excess of petitioners' outstanding
obligation.
One year after the issuance of the Certificate of Sale, PNB
secured a Certificate of Final Sale from the Mandaue City
Sheriff and, as a result, PNB transferred registration of all the
subject properties to its name. HDAaIc
Owing to the failure of PNB as the winning bidder to deliver to
the petitioners the amount of its bid or even just the amount in
110
excess of petitioners' obligation, the latter averred that the
extrajudicial foreclosure conducted over the subject properties
by the Mandaue City Sheriff, as well as the Certificate of Sale
and the Certificate of Finality of Sale of the subject properties
issued by the Mandaue City Sheriff, in favor of PNB, were all
null and void.
Petitioners, in their Complaint in Civil Case No. MAN-2793,
prayed for: caSDCA
a) Declaring the Nullity of Extra-judicial
Foreclosure of Mortgage under EJF
Case No. 92-5-15 including the
certificate of sale and the final deed of
sale of the properties affected;
b) Order[ing] the cancellation of the
certificates of titles and tax declaration
already in the name of [herein
respondent] PNB and revert the same
back to herein [petitioners']
name; CAaSED
c) Ordering the [PNB] to pay [petitioners]
moral damages amounting to more
than P1,000,000.00; Exemplary
damages of P500,000.00; Litigation
expenses of P100,000.00 and
attorney's fees of P300,000.00. 4
PNB filed a Motion to Dismiss 5 Civil Case No. MAN-2793
citing the pendency of another action between the same
parties, specifically Civil Case No. CEB-15236 before the RTC
of Cebu City entitled, PNB v. Sps. Esmeraldo and Elizabeth
Suico where PNB was seeking the payment of the balance of
petitioners' obligation not covered by the proceeds of the
auction sale held on 30 October 1992. PNB argued that these
two cases involve the same parties. Petitioners opposed the
Motion to Dismiss filed by PNB. 6 Subsequently, the Motion to

Dismiss Civil Case No. MAN-2793 was denied in the Order of
the RTC dated 15 July 1997; 7 thus, PNB was constrained to
file its Answer. 8
PNB disputed petitioners' factual narration. PNB asserted that
petitioners had other loans which had likewise become due.
Petitioners' outstanding obligation of P1,991,770.38 as of 10
March 1992 was exclusive of attorney's fees, and other export
related obligations which it did not consider due and
demandable as of said date. PNB maintained that the
outstanding obligation of the petitioners under their regular and
export-related loans was already more than the bid price of
P8,511,000.00, contradicting the claim of surplus proceeds
due the petitioners. Petitioners were well aware that their total
principal outstanding obligation on the date of the auction sale
was P5,503,293.21. TIHCcA
PNB admitted the non-delivery of the bid price to the sheriff
and the execution of the final deed of sale, but claimed that it
had not transferred in its name all the foreclosed properties
because the petition to register in its name Transfer
Certificates of Title (TCT) No. 37029 and No. 13196 were still
pending.
On 2 February 1999, the RTC rendered its Decision 9 in Civil
Case No. MAN-2793 for the declaration of nullity of the
extrajudicial foreclosure of mortgage, the dispositive portion of
which states: CTSDAI
WHEREFORE, based on the foregoing,
judgment is rendered in favor of [herein
petitioners] Sps. Esmeraldo & Elizabeth Suico
and against [herein respondent], Philippine
National Bank (PNB), declaring the nullity of
Extrajudicial Foreclosure of Mortgage under
EJF Case No. 92-5-15, including the
certificate of sale and the final deed of sale of
the subject properties; ordering the
111
cancellation of the certificates of titles and tax
declaration already in the name of
[respondent] PNB, if any, and revert the same
back to the [petitioners'] name; ordering
[respondent] PNB to cause a new foreclosure
proceeding, either judicially or extra-judicially.
Furnish parties thru counsels copy of this
order. 10 DSETcC
In granting the nullification of the extrajudicial foreclosure of
mortgage, the RTC reasoned that given that petitioners had
other loan obligations which had not yet matured on 10 March
1992 but became due by the date of the auction sale on 30
October 1992, it does not justify the shortcut taken by PNB
and will not excuse it from paying to the Sheriff who conducted
the auction sale the excess bid in the foreclosure sale. To
allow PNB to do so would constitute fraud, for not only is the
filing fee in the said foreclosure inadequate but, worse, the
same constitutes a misrepresentation regarding the amount of
the indebtedness to be paid in the foreclosure sale as posted
and published in the notice of sale. 11 Such misrepresentation
is fatal because in an extrajudicial foreclosure of mortgage,
notice of sale is jurisdictional. Any error in the notice of sale is
fatal and invalidates the notice. 12
When the PNB appealed its case to the Court of
Appeals, 13 the appellate court rendered a Decision 14 dated
12 April 2005, the fallo of which provides: ADCIca
WHEREFORE, premises considered, the
instant appeal is GRANTED. The questioned
decision of the Regional Trial Court of
Mandaue City, Branch 55 dated February 2,
1999 is hereby REVERSED and SET ASIDE.
Accordingly, the extra judicial foreclosure of
mortgage under EJF 92-5-15 including the
certificate of sale and final deed of sale

executed appurtenant thereto are hereby
declared to be valid and binding. 15
In justifying reversal, the Court of Appeals held: DSacAE
A careful scrutiny of the evidence extant on
record would show that in a letter dated
January 12, 1994, [petitioners] expressly
admitted that their outstanding principal
obligation amounted to P5.4 Million and in
fact offered to redeem the properties at P6.5
Million. They eventually increased their offer
at P7.5 Million as evidenced by that letter
dated February 4, 1994. And finally on May
16, 1994, they offered to redeem the
foreclosed properties by paying the whole
amount of the obligation by installment in a
period of six years. All those offers made by
the [petitioners] not only contradicted their
very assertion that their obligation is merely
that amount appearing on the petition for
foreclosure but are also indicative of the fact
that they have admitted the validity of the
extra judicial foreclosure proceedings and in
effect have cured the impugned defect. Thus,
for the [petitioners] to insist that their
obligation is only over a million is unworthy of
belief. Oddly enough, it is evident from their
acts that they themselves likewise believe
otherwise.
Even assuming that indeed there was a
surplus and the [PNB] is retaining more than
the proceeds of the sale than it is entitled, this
fact alone will not affect the validity of the sale
but simply gives the [petitioners] a cause of
112
action to recover such surplus. In fine, the
failure of the [PNB] to remit the surplus, if any,
is not tantamount to a non-compliance of
statutory requisites that could constitute a
jurisdictional defect invalidating the sale. This
situation only gives rise to a cause of action
on the part of the [petitioners] to recover the
alleged surplus from the [PNB]. This ruling is
in harmony with the decisional rule that in
suing for the return of the surplus proceeds,
the mortgagor is deemed to have affirmed the
validity of the sale since nothing is due if no
valid sale has been made. 16 aIHCSA
Petitioners filed a Motion for Reconsideration 17 of the
foregoing Decision, but the Court of Appeals was not
persuaded. It maintained the validity of the foreclosure sale
and, in its Amended Decision dated 28 September 2005, it
merely directed PNB to pay the deficiency in the filing fees,
holding thus:
WHEREFORE, Our decision dated April 12,
2005 is hereby AMENDED. [Herein
respondent PNB] is hereby required to pay
the deficiency in the filing fees due on the
petition for extra judicial foreclosure sale to be
based on the actual amount of mortgage
debts at the time of filing thereof. In all other
respects, Our decision subject of herein
petitioners'] motion for reconsideration is
hereby AFFIRMED. 18 cda
Unflinching, petitioners elevated the case before this
Court via the present Petition for Review essentially seeking
the nullification of the extrajudicial foreclosure of the mortgage
constituted on the subject properties. Petitioners forward two
reasons for declaring null and void the said extrajudicial
foreclosure: (1) the alleged defect or misrepresentation in the

notice of sheriff's sale; and/or (2) failure of PNB to pay and
tender the price of its bid or the surplus thereof to the sheriff.
Petitioners argue that since the Notice of Sheriff's Sale stated
that their obligation was only P1,991,770.38 and PNB bidded
P8,511,000.00, the said Notice as well as the consequent sale
of the subject properties were null and void. SEIcAD
It is true that statutory provisions governing publication of
notice of mortgage foreclosure sales must be strictly complied
with, and that even slight deviations therefrom will invalidate
the notice and render the sale at least
voidable. 19 Nonetheless, we must not also lose sight of the
fact that the purpose of the publication of the Notice of
Sheriff's Sale is to inform all interested parties of
the date, time and place of the foreclosure sale of the real
property subject thereof. Logically, this not only requires that
the correct date, time and place of the foreclosure sale appear
in the notice, but also that any and all interested parties be
able to determine that what is about to be sold at the
foreclosure sale is the real property in which they have an
interest. 20
Considering the purpose behind the Notice of Sheriff's Sale,
we disagree with the finding of the RTC that the discrepancy
between the amount of petitioners' obligation as reflected in
the Notice of Sale and the amount actually due and collected
from the petitioners at the time of the auction sale constitute
fraud which renders the extrajudicial foreclosure sale null and
void. DTEAHI
Notices are given for the purpose of securing bidders and to
prevent a sacrifice of the property. If these objects are
attained, immaterial errors and mistakes will not affect the
sufficiency of the notice; but if mistakes or omissions occur in
the notices of sale, which are calculated to deter or mislead
bidders, to depreciate the value of the property, or to prevent it
from bringing a fair price, such mistakes or omissions will be
113
fatal to the validity of the notice, and also to the sale made
pursuant thereto. 21
All these considered, we are of the view that the Notice of Sale
in this case is valid. Petitioners failed to convince this Court
that the difference between the amount stated in the Notice of
Sale and the amount of PNB's bid resulted in discouraging or
misleading bidders, depreciated the value of the property or
prevented it from commanding a fair price. DaScCH
The cases cited by the RTC in its Decision do not apply
herein. San Jose v. Court of Appeals 22 refers to a Notice of
Sheriff's Sale which did not state the correct number of the
transfer certificates of title of the property to be sold. This
Court considered the oversight as a substantial and fatal error
which resulted in invalidating the entire notice. The case
of Community Savings and Loan Association, Inc. v. Court of
Appeals 23 is also inapplicable, because the said case refers
to an extrajudicial foreclosure tainted with fraud committed by
therein petitioners, which denied therein respondents the right
to redeem the property. It actually has no reference to a Notice
of Sale.
We now proceed to the effect of the non-delivery by PNB of
the bid price or the surplus to the petitioners. ISTECA
The following antecedents are not disputed:
For failure to pay their loan obligation secured by a real estate
mortgage on the subject properties, PNB foreclosed the said
mortgage. In its petition for foreclosure sale under ACT No.
3135 filed before the Mandaue City Sheriff, PNB stated therein
that petitioners' total outstanding obligation amounted to
P1,991,770.38. 24 PNB bidded the amount of P8,511,000.00.
Admittedly, PNB did not pay its bid in cash or deliver the
excess either to the City Sheriff who conducted the bid or to
the petitioners after deducting the difference between the
amount of its bid and the amount of petitioners' obligation in
the Notice of Sale. The petitioners then sought to declare the

nullity of the foreclosure, alleging that their loan obligation
amounted only to P1,991,770.38 in the Notice of Sale, and
that PNB did not pay its bid in cash or deliver to petitioner the
surplus, which is required under the law. 25 DTaSIc
On the other hand, PNB claims that petitioners' loan obligation
reflected in the Notice of Sale dated 10 March 1992 did not
include their other obligations, which became due at the date
of the auction sale on 10 October 1992; as well as interests,
penalties, other charges, and attorney's fees due on the said
obligation. 26
Pertinent provisions under Rule 39 of the Rules of Court on
extrajudicial foreclosure sale provide: DHTECc
SEC. 21. Judgment obligee as purchaser. —
When the purchaser is the judgment obligee,
and no third-party claim has been filed, he
need not pay the amount of the bid if it
does not exceed the amount of his
judgment. If it does, he shall pay only the
excess. (Emphasis supplied.)
SEC. 39. Obligor may pay execution against
obligee. — After a writ of execution against
property has been issued, a person indebted
to the judgment obligor may pay to the sheriff
holding the writ of execution the amount of his
debt or so much thereof as may be necessary
to satisfy the judgment, in the manner
prescribed in section 9 of this Rule, and the
sheriff's receipt shall be a sufficient discharge
for the amount so paid or directed to be
credited by the judgment obligee on the
execution. EICScD
Conspicuously emphasized under Section 21 of Rule 39 is that
if the amount of the loan is equal to the amount of the bid,
there is no need to pay the amount in cash. Same provision
114
mandates that in the absence of a third-party claim, the
purchaser in an execution sale need not pay his bid if it does
not exceed the amount of the judgment; otherwise, he shall
pay only the excess. 27
The raison de etre is that it would obviously be senseless for
the Sheriff or the Notary Public conducting the foreclosure sale
to go through the idle ceremony of receiving the money and
paying it back to the creditor, under the truism that the
lawmaking body did not contemplate such a pointless
application of the law in requiring that the creditor must bid
under the same conditions as any other bidder. It bears
stressing that the rule holds true only where the amount of the
bid represents the total amount of the mortgage
debt. 28 CDAHIT
The question that needs to be addressed in this case is:
considering the amount of PNB's bid of P8,511,000.00 as
against the amount of the petitioners' obligation of
P1,991,770.38 in the Notice of Sale, is the PNB obliged to
deliver the excess? ACETSa
Petitioners insist that the PNB should deliver the excess. On
the other hand PNB counters that on the date of the auction
sale on 30 October 1992, petitioners' other loan obligation
already exceeded the amount of P1,991,770.38 in the Notice
of Sale.
Rule 68, Section 4 of the Rules of Court provides: CDHacE
SEC. 4. Disposition of proceeds of sale. —
The amount realized from the foreclosure sale
of the mortgaged property shall, after
deducting the costs of the sale, be paid to the
person foreclosing the mortgage, and when
there shall be any balance or residue, after
paying off the mortgage debt due, the same
shall be paid to junior encumbrancers in the
order of their priority, to be ascertained by the

court, or if there be no such encumbrancers
or there be a balance or residue after
payment to them, then to the mortgagor or his
duly authorized agent, or to the person
entitled to it.
Under the above rule, the disposition of the proceeds of the
sale in foreclosure shall be as follows: TICAcD
(a) first, pay the costs
(b) secondly, pay off the mortgage
debt SCDaET
(c) thirdly, pay the junior encumbrancers, if
any in the order of priority
(d) fourthly, give the balance to the
mortgagor, his agent or the person
entitled to it. 29 EHScCA
Based on the foregoing, after payment of the costs of suit and
satisfaction of the claim of the first mortgagee/senior
mortgagee, the claim of the second mortgagee/junior
mortgagee may be satisfied from the surplus proceeds. The
application of the proceeds from the sale of the mortgaged
property to the mortgagor's obligation is an act of payment, not
payment by dacion; hence, it is the mortgagee's duty to return
any surplus in the selling price to the mortgagor. Perforce, a
mortgagee who exercises the power of sale contained in a
mortgage is considered a custodian of the fund and, being
bound to apply it properly, is liable to the persons entitled
thereto if he fails to do so. And even though the mortgagee is
not strictly considered a trustee in a purely equitable sense,
but as far as concerns the unconsumed balance, the
mortgagee is deemed a trustee for the mortgagor or owner of
the equity of redemption. 30
115
Thus it has been held that if the mortgagee is retaining more of
the proceeds of the sale than he is entitled to, this fact alone
will not affect the validity of the sale but simply give the
mortgagor a cause of action to recover such
surplus. 31 ECDaAc
In the case before us, PNB claims that petitioners' loan
obligations on the date of the auction sale were already more
than the amount of P1,991,770.38 in the Notice of Sale. In
fact, PNB claims that on the date of the auction sale,
petitioners' principal obligation, plus penalties, interests,
attorneys fees and other charges were already beyond the
amount of its bid of P8,511,000.00.
After a careful review of the evidence on record, we find that
the same is insufficient to support PNB's claim. Instead, what
is available on record is petitioner's Statement of Account as
prepared by PNB and attached as Annex A 32 to its Answer
with counterclaim. 33 In this Statement of Account, petitioners'
principal obligation with interest/penalty and attorney's fees as
of 30 October 1992 already amounted to
P6,409,814.92. cdphil
Although petitioners denied the amounts reflected in the
Statement of Account from PNB, they did not interpose any
defense to refute the computations therein. Petitioners' mere
denials, far from being compelling, had nothing to offer by way
of evidence. This then enfeebles the foundation of petitioners'
protestation and will not suffice to overcome the computation
of their loan obligations as presented in the Statement of
Account submitted by PNB. 34
Noticeably, this Statement of Account is the only piece of
evidence available before us from which we can determine the
outstanding obligations of petitioners to PNB as of the date of
the auction sale on 10 October 1992. CaHAcT
It did not escape the attention of this Court that petitioners
wrote a number of letters to PNB almost two years after the

auction sale, 35 in which they offered to redeem the property.
In their last letter, petitioners offered to redeem their
foreclosed properties for P9,500,000.00. However, these
letters by themselves cannot be used as bases to support
PNB's claim that petitioners' obligation is more than its bid of
P8,500,000.00, without any other evidence. There was no
computation presented to show how petitioners' obligation
already reached P9,500,000.00. Petitioners could very well
have offered such an amount on the basis of the value of the
foreclosed properties rather than their total obligation to PNB.
We cannot take petitioners' offer to redeem their properties in
the amount of P9,500,000.00 on its face as an admission of
the amount of their obligation to PNB without any supporting
evidence.
Given that the Statement of Account from PNB, being the only
existing documentary evidence to support its claim, shows that
petitioners' loan obligations to PNB as of 30 October 1992
amounted to P6,409,814.92, and considering that the amount
of PNB's bid is P8,511,000.00, there is clearly an excess in the
bid price which PNB must return, together with the interest
computed in accordance with the guidelines laid down by the
court in Eastern Shipping Lines v. Court of
Appeals, 36 regarding the manner of computing legal
interest, viz: HIaTDS
II. With regard particularly to an award of
interest in the concept of actual and
compensatory damages, the rate of interest,
as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it
consists in the payment of a sum of
money, i.e., a loan or forbearance of money,
the interest due should be that which may
have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest
116
from the time it is judicially demanded. In the
absence of stipulation, the rate of interest
shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial
demand under and subject to the provisions
of Article 1169 of the Civil Code. cDIHES
2. When an obligation, not constituting a loan
or forbearance of money, is breached, an
interest on the amount of damages awarded
may be imposed at the discretion of the
court at the rate of 6% per annum. No
interest, however, shall be adjudged on
unliquidated claims or damages except when
or until the demand can be established with
reasonable certainty. Accordingly, where the
demand is established with reasonable
certainty, the interest shall begin to run from
the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when
such certainty cannot be so reasonably
established at the time the demand is made,
the interest shall begin to run only from the
date the judgment of the court is made (at
which time the quantification of damages may
be deemed to have been reasonably
ascertained). The actual base for the
computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory,
the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such
finality until its satisfaction, this interim period

being deemed to be by then an equivalent to
a forbearance of credit. IEHaSc
In Philippine National Bank v. Court of Appeals, 37 it was held
that:
The rate of 12% interest referred to in Cir. 416
applies only to: CAcEaS
Loan or forbearance of money, or to cases
where money is transferred from one person
to another and the obligation to return the
same or a portion thereof is adjudged. Any
other monetary judgment which does not
involve or which has nothing to do with loans
or forbearance of any, money, goods or credit
does not fall within its coverage for such
imposition is not within the ambit of the
authority granted to the Central Bank. When
an obligation not constituting a loan or
forbearance of money is breached then an
interest on the amount of damages awarded
may be imposed at the discretion of the court
at the rate of 6% per annum in accordance
with Art. 2209 of the Civil Code. Indeed, the
monetary judgment in favor of private
respondent does not involve a loan or
forbearance of money, hence the proper
imposable rate of interest is six (6%) per cent.
Using the above rule as yardstick, since the responsibility of
PNB arises not from a loan or forbearance of money which
bears an interest rate of 12%, the proper rate of interest for the
amount which PNB must return to the petitioners is only 6%.
This interest according to Eastern Shipping shall be computed
from the time of the filing of the complaint. However, once the
judgment becomes final and executory, the "interim period
from the finality of judgment awarding a monetary claim and
117
until payment thereof, is deemed to be equivalent to a
forbearance of credit." Thus, in accordance with the
pronouncement in Eastern Shipping, the rate of 12% per
annum should be imposed, to be computed from the time the
judgment becomes final and executory until fully
satisfied. CIaHDc
It must be emphasized, however, that our holding in this case
does not preclude PNB from proving and recovering in a
proper proceeding any deficiency in the amount of petitioners'
loan obligation that may have accrued after the date of the
auction sale.
WHEREFORE, premises considered, the Decision of the
Court of Appeals dated 12 April 2005 is MODIFIED in that the
PNB is directed to return to the petitioners the amount of
P2,101,185.08 with interest computed at 6% per annum from
the time of the filing of the complaint until its full payment
before finality of judgment. Thereafter, if the amount adjudged
remains unpaid, the interest rate shall be 12% per
annum computed from the time the judgment became final and
executory until fully satisfied. Costs against private
respondent. cDCSET
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Nachura and Reyes,
JJ., concur.
||| (Spouses Suico v. Philippine National Bank, G.R. No.
170215, [August 28, 2007], 558 PHIL 265-284)

SECOND DIVISION
[G.R. No. 176019. January 12, 2011.]
BPI FAMILY SAVINGS BANK,
INC., petitioner, vs.
GOLDEN POWER DIESEL SALES
CENTER, INC. and RENATO C.
TAN, respondents.
DECISION
CARPIO, J p:
The Case
This is a petition for review 1 of the 13 March 2006
Decision 2 and 19 December 2006 Resolution 3 of the
Court of Appeals in CA-G.R. SP No. 78626. In its 13 March
2006 Decision, the Court of Appeals denied
petitioner BPI Family Savings Bank, Inc.'s (BPI Family)
petition for mandamus and certiorari. In its 19 December
2006 Resolution, the Court of Appeals denied BPI Family's
motion for reconsideration.
The Facts
On 26 October 1994, CEDEC Transport, Inc.
(CEDEC) mortgaged two parcels of land covered by
Transfer Certificate of Title (TCT) Nos. 134327 and 134328
situated in Malibay, Pasay City, including all the
improvements thereon (properties), in favor of BPI Family
to secure a loan of P6,570,000. On the same day, the
mortgage was duly annotated on the titles under Entry No.
118
94-2878. On 5 April and 27 November 1995, CEDEC
obtained from BPI Family additional loans of P2,160,000
and P1,140,000, respectively, and again mortgaged the
same properties. These latter mortgages were duly
annotated on the titles under Entry Nos. 95-6861 and 95-
11041, respectively, on the same day the loans were
obtained.
Despite demand, CEDEC defaulted in its mortgage
obligations. On 12 October 1998, BPI Family filed with
the ex-officio sheriff of the Regional Trial Court of Pasay
City (RTC) a verified petition for extrajudicial foreclosure of
real estate mortgage over the properties under Act No.
3135, as amended. 4
On 10 December 1998, after due notice and
publication, the sheriff sold the properties at public
auction. BPI Family, as the highest bidder, acquired the
properties for P13,793,705.31. On 14 May 1999, the
Certificate of Sheriff's Sale, dated 24 February 1999, was
duly annotated on the titles covering the properties.
On 15 May 1999, the one-year redemption period
expired without CEDEC redeeming the properties. Thus,
the titles to the properties were consolidated in the name
of BPI Family. On 13 September 2000, the Registry of
Deeds of Pasay City issued new titles, TCT Nos. 142935
and 142936, in the name of BPI Family.
However, despite several demand letters, CEDEC
refused to vacate the properties and to surrender
possession to BPI Family. On 31 January 2002,BPI Family
filed an Ex-Parte Petition for Writ of Possession over the
properties with Branch 114 of the Regional Trial Court of
Pasay City (trial court). In its 27 June 2002 Decision, the
trial court granted BPI Family's petition. 5 On 12 July 2002,
the trial court issued the Writ of Possession. TcEAIH

On 29 July 2002, respondents
Golden Power Diesel Sales Center, Inc. and Renato C.
Tan 6 (respondents) filed a Motion to Hold Implementation
of the Writ of Possession. 7 Respondents alleged that they
are in possession of the properties which they acquired
from CEDEC on 10 September 1998 pursuant to the Deed
of Absolute Sale with Assumption of Mortgage (Deed of
Sale). 8 Respondents argued that they are third persons
claiming rights adverse to CEDEC, the judgment obligor
and they cannot be deprived of possession over the
properties. Respondents also disclosed that they filed a
complaint before Branch 111 of the Regional Trial Court of
Pasay City, docketed as Civil Case No. 99-0360, for the
cancellation of the Sheriff's Certificate of Sale and an order
to direct BPI Family to honor and accept the Deed of
Absolute Sale between CEDEC and respondents. 9
On 12 September 2002, the trial court denied
respondents' motion. 10 Thereafter, the trial court issued
an alias writ of possession which was served upon CEDEC
and all other persons claiming rights under them.
However, the writ of possession expired without
being implemented. On 22 January 2003, BPI Family filed
an Urgent Ex-Parte Motion to Order the Honorable Branch
Clerk of Court to Issue Alias Writ of Possession. In an
Order dated 27 January 2003, the trial court
granted BPI Family's motion.
Before the alias writ could be implemented,
respondent Renato C. Tan filed with the trial court an
Affidavit of Third Party Claim 11 on the properties. Instead
of implementing the writ, the sheriff referred the matter to
the trial court for resolution.
On 11 February 2003, BPI Family filed an Urgent
Motion to Compel Honorable Sheriff and/or his Deputy to
Enforce Writ of Possession and to Break Open the
properties. In its 7 March 2003 Resolution, the trial court
119
denied BPI Family's motion and ordered the sheriff to
suspend the implementation of the alias writ of
possession. 12 According to the trial court, "the order
granting the alias writ of possession should not affect third
persons holding adverse rights to the judgment obligor."
The trial court admitted that in issuing the first writ of
possession it failed to take into consideration respondents'
complaint before Branch 111 claiming ownership of the
property. The trial court also noted that respondents were
in actual possession of the properties and had been
updating the payment of CEDEC's loan balances
with BPI Family. Thus, the trial court found it necessary to
amend its 12 September 2002 Order and suspend the
implementation of the writ of possession until Civil Case
No. 99-0360 is resolved.
BPI Family filed a motion for reconsideration. In its
20 June 2003 Resolution, the trial court denied the
motion. 13
BPI Family then filed a petition
for mandamus and certiorari with application for a
temporary restraining order or preliminary injunction before
the Court of Appeals. BPI Family argued that the trial court
acted with grave abuse of discretion amounting to lack or
excess of jurisdiction when it ordered the suspension of the
implementation of the alias writ of possession. According
to BPI Family, it was the ministerial duty of the trial court to
grant the writ of possession in its favor considering that it
was now the owner of the properties and that once issued,
the writ should be implemented without delay.
The Court of Appeals dismissed BPI Family's
petition. The dispositive portion of the 13 March 2006
Decision reads:
WHEREFORE, the instant Petition for Writ of
Mandamus and Writ of Certiorari with
Application for a TRO and/or Preliminary

Injunction is hereby DENIED. The
twin Resolutions dated March 7, 2003 and
June 20, 2003, both issued by the public
respondent in LRC Case No. 02-0003,
ordering the sheriff to suspend the
implementation of the Alias Writ of
Possession issued in favor of the petitioner,
and denying its Urgent Omnibus
Motion thereof, respectively, are
hereby AFFIRMED.
SO ORDERED. 14
BPI Family filed a motion for reconsideration. In its
19 December 2006 Resolution, the Court of Appeals
denied the motion. CaAIES
The Ruling of the Court of Appeals
The Court of Appeals ruled that the trial court did
not commit grave abuse of discretion in suspending the
implementation of the alias writ of possession because
respondents were in actual possession of the properties
and are claiming rights adverse to CEDEC, the judgment
obligor. According to the Court of Appeals, the principle
that the implementation of the writ of possession is a mere
ministerial function of the trial court is not without
exception. The Court of Appeals held that the obligation of
the court to issue an ex parte writ of possession in favor of
the purchaser in an extrajudicial foreclosure sale ceases to
be ministerial once it appears that there is a third party in
possession of the property who is claiming a right adverse
to that of the debtor or mortgagor.
The Issues
BPI Family raises the following issues:
A.
120
The Honorable Court of Appeals seriously
erred in upholding the finding of the
Honorable Regional Trial Court that despite
the fact that private respondents merely
stepped into the shoes of mortgagor CEDEC,
being the vendee of the properties in
question, they are categorized as third
persons in possession thereof who are
claiming a right adverse to that of the
debtor/mortgagor CEDEC.
B.
The Honorable Court of Appeals gravely
erred in sustaining the aforementioned twin
orders suspending the implementation of the
writ of possession on the ground that the
annulment case filed by private respondents
is still pending despite the established ruling
that pendency of a case questioning the
legality of a mortgage or auction sale cannot
be a ground for the non-issuance and/or non-
implementation of a writ of possession. 15
The Ruling of the Court
The petition is meritorious.
BPI Family argues that respondents cannot be
considered "a third party who is claiming a right adverse to
that of the debtor or mortgagor" because respondents, as
vendee, merely stepped into the shoes of CEDEC, the
vendor and judgment obligor. According to BPI Family,
respondents are mere extensions or successors-in-interest
of CEDEC. BPI Family also argues that the pendency of an
action questioning the validity of a mortgage or auction
sale cannot be a ground to oppose the implementation of a
writ of possession.

On the other hand, respondents insist that they are
third persons who claim rights over the properties adverse
to CEDEC. Respondents argue that the obligation of the
court to issue an ex parte writ of possession in favor of the
purchaser in an extrajudicial foreclosure sale ceases to be
ministerial once it appears that there is a third party in
possession of the property who is claiming a right adverse
to that of the judgment obligor.
In extrajudicial foreclosures of real estate
mortgages, the issuance of a writ of possession is
governed by Section 7 of Act No. 3135, as amended,
which provides:
SECTION 7. In any sale made under the
provisions of this Act, the purchaser may
petition the Court of First Instance (Regional
Trial Court) of the province or place where the
property or any part thereof is situated, to give
him possession thereof during the redemption
period, furnishing bond in an amount
equivalent to the use of the property for a
period of twelve months, to indemnify the
debtor in case it be shown that the sale was
made without violating the mortgage or
without complying with the requirements of
this Act. Such petition shall be made under
oath and filed in form of an ex parte motion in
the registration or cadastral proceedings if the
property is registered, or in special
proceedings in the case of property registered
under the Mortgage Law or under section one
hundred and ninety-four of the Administrative
Code, or of any other real property
encumbered with a mortgage duly registered
in the office of any register of deeds in
accordance with any existing law, and in each
case the clerk of the court shall, upon the
121
filing of such petition, collect the fees
specified in paragraph eleven of section one
hundred and fourteen of Act Numbered Four
hundred and ninety-six, as amended by Act
Numbered Twenty-eight hundred and sixty-
six, and the court shall, upon approval of the
bond, order that a writ of possession issue,
addressed to the sheriff of the province in
which the property is situated, who shall
execute said order immediately. AcIaST
This procedure may also be availed of by the
purchaser seeking possession of the foreclosed property
bought at the public auction sale after the redemption
period has expired without redemption having been
made. 16
In China Banking Corporation v. Lozada, 17 we
ruled:
It is thus settled that the buyer in a
foreclosure sale becomes the absolute owner
of the property purchased if it is not redeemed
during the period of one year after the
registration of the sale. As such, he is entitled
to the possession of the said property and
can demand it at any time following the
consolidation of ownership in his name and
the issuance to him of a new transfer
certificate of title. The buyer can in fact
demand possession of the land even during
the redemption period except that he has to
post a bond in accordance with Section 7
of Act No. 3135, as amended. No such bond
is required after the redemption period if the
property is not redeemed. Possession of the
land then becomes an absolute right of the
purchaser as confirmed owner. Upon

proper application and proof of title, the
issuance of the writ of possession
becomes a ministerial duty of the
court. 18 (Emphasis supplied)
Thus, the general rule is that a purchaser in a
public auction sale of a foreclosed property is entitled to a
writ of possession and, upon an ex partepetition of the
purchaser, it is ministerial upon the trial court to issue the
writ of possession in favor of the purchaser.
There is, however, an exception. Section 33, Rule
39 of the Rules of Court provides:
Section 33. Deed and possession to be given
at expiration of redemption period; by whom
executed or given. — . . .
Upon the expiration of the right of redemption,
the purchaser or redemptioner shall be
substituted to and acquire all the rights, title,
interest and claim of the judgment obligor to
the property as of the time of the levy. The
possession of the property shall be given to
the purchaser or last redemptioner by the
same officer unless a third party is actually
holding the property adversely to the
judgment obligor. (Emphasis supplied)
Therefore, in an extrajudicial foreclosure of real
property, when the foreclosed property is in the possession
of a third party holding the same adversely to the judgment
obligor, the issuance by the trial court of a writ of
possession in favor of the purchaser of said real property
ceases to be ministerial and may no longer be done ex
parte. 19 The procedure is for the trial court to order a
hearing to determine the nature of the adverse
possession. 20 For the exception to apply, however, the
property need not only be possessed by a third party, but
122
also held by the third party adversely to the judgment
obligor.
In this case, BPI Family invokes the general rule
that they are entitled to a writ of possession because
respondents are mere successors-in-interest of CEDEC
and do not possess the properties adversely to CEDEC.
Respondents, on the other hand, assert the exception and
insist that they hold the properties adversely to CEDEC
and that their possession is a sufficient obstacle to the ex
parte issuance of a writ of possession in favor
of BPI Family.
Respondents' argument fails to persuade the Court.
It is clear that respondents acquired possession over the
properties pursuant to the Deed of Sale which provides
that for P15,000,000 CEDEC will "sell, transfer and
convey" to respondents the properties "free from all liens
and encumbrances excepting the mortgage as may be
subsisting in favor of the BPI FAMILY SAVINGS
BANK." 21 Moreover, the Deed of Sale provides that
respondents bind themselves to assume "the payment of
the unpaid balance of the mortgage indebtedness of the
VENDOR (CEDEC) amounting to P7,889,472.48, as of
July 31, 1998, in favor of the aforementioned mortgagee
(BPI Family) by the mortgage instruments and does hereby
further agree to be bound by the precise terms and
conditions therein contained." 22 THEDCA
In Roxas v. Buan, 23 we ruled:
It will be recalled that Roxas' possession of
the property was premised on its alleged sale
to him by Valentin for the amount of
P100,000.00. Assuming this to be true, it is
readily apparent that Roxas holds title to and
possesses the property as Valentin's
transferee. Any right he has to the property is
necessarily derived from that of Valentin. As

transferee, he steps into the latter's shoes.
Thus, in the instant case, considering that the
property had already been sold at public
auction pursuant to an extrajudicial
foreclosure, the only interest that may be
transferred by Valentin to Roxas is the right to
redeem it within the period prescribed by law.
Roxas is therefore the successor-in-interest of
Valentin, to whom the latter had conveyed his
interest in the property for the purpose of
redemption. Consequently, Roxas' occupancy
of the property cannot be considered adverse
to Valentin. 24
In this case, respondents' possession of the
properties was premised on the sale to them by CEDEC
for the amount of P15,000,000. Therefore, respondents
hold title to and possess the properties as CEDEC's
transferees and any right they have over the properties is
derived from CEDEC. As transferees of CEDEC,
respondents merely stepped into CEDEC's shoes and are
necessarily bound to acknowledge and respect the
mortgage CEDEC had earlier executed in favor
of BPI Family. 25 Respondents are the successors-in-
interest of CEDEC and thus, respondents' occupancy over
the properties cannot be considered adverse to CEDEC.
Moreover, in China Bank v. Lozada, 26 we
discussed the meaning of "a third party who is actually
holding the property adversely to the judgment obligor."
We stated:
The exception provided under Section 33 of
Rule 39 of the Revised Rules of
Court contemplates a situation in which a
third party holds the property by adverse title
or right, such as that of a co-owner, tenant or
usufructuary. The co-owner, agricultural
123
tenant, and usufructuary possess the property
in their own right, and they are not merely the
successor or transferee of the right of
possession of another co-owner or the owner
of the property. 27
In this case, respondents cannot claim that their
right to possession over the properties is analogous to any
of these. Respondents cannot assert that their right of
possession is adverse to that of CEDEC when they have
no independent right of possession other than what they
acquired from CEDEC. Since respondents are not holding
the properties adversely to CEDEC, being the latter's
successors-in-interest, there was no reason for the trial
court to order the suspension of the implementation of the
writ of possession.
Furthermore, it is settled that a pending action for
annulment of mortgage or foreclosure sale does not stay
the issuance of the writ of possession. 28The trial court,
where the application for a writ of possession is filed, does
not need to look into the validity of the mortgage or the
manner of its foreclosure. 29 The purchaser is entitled to a
writ of possession without prejudice to the outcome of the
pending annulment case. 30
In this case, the trial court erred in issuing its 7
March 2003 Order suspending the implementation of the
alias writ of possession. Despite the pendency of Civil
Case No. 99-0360, the trial court should not have ordered
the sheriff to suspend the implementation of the writ of
possession. BPIFamily, as purchaser in the foreclosure
sale, is entitled to a writ of possession without prejudice to
the outcome of Civil Case No. 99-0360.
WHEREFORE, we GRANT the petition. We SET
ASIDE the 13 March 2006 Decision and the 19 December
2006 Resolution of the Court of Appeals in CA-G.R. SP
 124

No. 78626. We SET ASIDE the 7 March and 20 June 2003

Resolutions of the Regional Trial Court, Branch 114, Pasay
City. We ORDER the sheriff to proceed with the
implementation of the writ of possession without prejudice
to the outcome of Civil Case No. 99-0360.
SO ORDERED. HcTDSA
Nachura, Peralta, Abad and Mendoza, JJ., concur.
||| (BPI Family Savings Bank v. Golden Power Diesel Sales
Center, Inc., G.R. No. 176019, [January 12, 2011], 654 PHIL
382-394)

SECOND DIVISION
[G.R. No. 146717. November 22, 2004.]
TRANSFIELD PHILIPPINES,
INC., petitioner, vs. LUZON HYDRO
CORPORATION, AUSTRALIA and NEW
ZEALAND BANKING GROUP LIMITED and
SECURITY BANK
CORPORATION, respondents.
DECISION
TINGA, J p:
Subject of this case is the letter of credit which has evolved as
the ubiquitous and most important device in international
trade. A creation of commerce and businessmen, the letter of
credit is also unique in the number of parties involved and its
supranational character.
Petitioner has appealed from the Decision 1 of the Court of
Appeals in CA-G.R. SP No. 61901 entitled "Transfield
Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated
on 31 January 2001. 2
On 26 March 1997, petitioner and respondent Luzon Hydro
Corporation (hereinafter, LHC) entered into a Turnkey
Contract 3 whereby petitioner, as Turnkey Contractor,
undertook to construct, on a turnkey basis, a seventy (70)-
Megawatt hydro-electric power station at the Bakun River in
the provinces of Benguet and Ilocos Sur (hereinafter, the
Project). Petitioner was given the sole responsibility for the
125
design, construction, commissioning, testing and completion of
the Project. 4
The Turnkey Contract provides that: (1) the target completion
date of the Project shall be on 1 June 2000, or such later date
as may be agreed upon between petitioner and respondent
LHC or otherwise determined in accordance with the Turnkey
Contract; and (2) petitioner is entitled to claim extensions of
time (EOT) for reasons enumerated in the Turnkey Contract,
among which are variations, force majeure, and delays caused
by LHC itself. 5 Further, in case of dispute, the parties are
bound to settle their differences through mediation, conciliation
and such other means enumerated under Clause 20.3 of the
Turnkey Contract. 6
To secure performance of petitioner's obligation on or before
the target completion date, or such time for completion as may
be determined by the parties' agreement, petitioner opened in
favor of LHC two (2) standby letters of credit both dated 20
March 2000 (hereinafter referred to as "the Securities"), to wit:
Standby Letter of Credit No. E001126/8400 with the local
branch of respondent Australia and New Zealand Banking
Group Limited (ANZ Bank) 7 and Standby Letter of Credit No.
IBDIDSB-00/4 with respondent Security Bank Corporation
(SBC) 8 each in the amount of US$8,988,907.00. 9
In the course of the construction of the project, petitioner
sought various EOT to complete the Project. The extensions
were requested allegedly due to several factors which
prevented the completion of the Project on target date, such
as force majeure occasioned by typhoon Zeb, barricades and
demonstrations. LHC denied the requests, however. This gave
rise to a series of legal actions between the parties which
culminated in the instant petition.
The first of the actions was a Request for Arbitration which
LHC filed before the Construction Industry Arbitration
Commission (CIAC) on 1 June 1999. 10 This was followed by

another Request for Arbitration, this time filed by petitioner
before the International Chamber of Commerce (ICC) 11 on 3
November 2000. In both arbitration proceedings, the common
issues presented were: [1] whether typhoon Zeb and any of its
associated events constituted force majeure to justify the
extension of time sought by petitioner; and [2] whether LHC
had the right to terminate the Turnkey Contract for failure of
petitioner to complete the Project on target date. CcHDSA
Meanwhile, foreseeing that LHC would call on the Securities
pursuant to the pertinent provisions of the Turnkey
Contract, 12 petitioner — in two separate letters 13 both dated
10 August 2000 — advised respondent banks of the arbitration
proceedings already pending before the CIAC and ICC in
connection with its alleged default in the performance of its
obligations. Asserting that LHC had no right to call on the
Securities until the resolution of disputes before the arbitral
tribunals, petitioner warned respondent banks that any
transfer, release, or disposition of the Securities in favor of
LHC or any person claiming under LHC would constrain it to
hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent
notice to petitioner that pursuant to Clause 8.2 14 of the
Turnkey Contract, it failed to comply with its obligation to
complete the Project. Despite the letters of petitioner,
however, both banks informed petitioner that they would pay
on the Securities if and when LHC calls on them. 15
LHC asserted that additional extension of time would not be
warranted; accordingly it declared petitioner in default/delay in
the performance of its obligations under the Turnkey Contract
and demanded from petitioner the payment of US$75,000.00
for each day of delay beginning 28 June 2000 until actual
completion of the Project pursuant to Clause 8.7.1 of the
Turnkey Contract. At the same time, LHC served notice that it
would call on the securities for the payment of liquidated
damages for the delay. 16
126
On 5 November 2000, petitioner as plaintiff filed a Complaint
for Injunction, with prayer for temporary restraining order and
writ of preliminary injunction, against herein respondents as
defendants before the Regional Trial Court (RTC) of
Makati. 17 Petitioner sought to restrain respondent LHC from
calling on the Securities and respondent banks from
transferring, paying on, or in any manner disposing of the
Securities or any renewals or substitutes thereof. The RTC
issued a seventy-two (72)-hour temporary restraining order on
the same day. The case was docketed as Civil Case No. 00-
1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued
an Order on 9 November 2000, extending the temporary
restraining order for a period of seventeen (17) days or until 26
November 2000. 18
The RTC, in its Order 19 dated 24 November 2000, denied
petitioner's application for a writ of preliminary injunction. It
ruled that petitioner had no legal right and suffered no
irreparable injury to justify the issuance of the writ. Employing
the principle of "independent contract" in letters of credit, the
trial court ruled that LHC should be allowed to draw on the
Securities for liquidated damages. It debunked petitioner's
contention that the principle of "independent contract" could be
invoked only by respondent banks since according to it
respondent LHC is the ultimate beneficiary of the Securities.
The trial court further ruled that the banks were mere
custodians of the funds and as such they were obligated to
transfer the same to the beneficiary for as long as the latter
could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a
writ of preliminary injunction, petitioner elevated the case to
the Court of Appeals via a Petition for Certiorari under Rule 65,
with prayer for the issuance of a temporary restraining order
and writ of preliminary injunction. 20 Petitioner submitted to
the appellate court that LHC's call on the Securities was
 127

premature considering that the issue of its default had not yet judgment which is not correctible by certiorari, unlike error of
been resolved with finality by the CIAC and/or the ICC. It jurisdiction.
asserted that until the fact of delay could be established, LHC
had no right to draw on the Securities for liquidated damages. Undaunted, petitioner filed the instant Petition for
Review raising the following issues for resolution:
Refuting petitioner's contentions, LHC claimed that petitioner
had no right to restrain its call on and use of the Securities as WHETHER THE "INDEPENDENCE
payment for liquidated damages. It averred that the Securities PRINCIPLE" ON LETTERS OF CREDIT MAY
are independent of the main contract between them as shown BE INVOKED BY A BENEFICIARY
on the face of the two Standby Letters of Credit which both THEREOF WHERE THE BENEFICIARY'S
provide that the banks have no responsibility to investigate the CALL THEREON IS WRONGFUL OR
authenticity or accuracy of the certificates or the declarant's FRAUDULENT.
capacity or entitlement to so certify. WHETHER LHC HAS THE RIGHT TO CALL
In its Resolution dated 28 November 2000, the Court of AND DRAW ON THE SECURITIES BEFORE
Appeals issued a temporary restraining order, enjoining LHC THE RESOLUTION OF PETITIONER'S AND
from calling on the Securities or any renewals or substitutes LHC'S DISPUTES BY THE APPROPRIATE
thereof and ordering respondent banks to cease and desist TRIBUNAL. HAaScT
from transferring, paying or in any manner disposing of the WHETHER ANZ BANK AND SECURITY
Securities. BANK ARE JUSTIFIED IN RELEASING THE
However, the appellate court failed to act on the application for AMOUNTS DUE UNDER THE SECURITIES
preliminary injunction until the temporary restraining order DESPITE BEING NOTIFIED THAT LHC'S
expired on 27 January 2001. Immediately thereafter, CALL THEREON IS WRONGFUL.
representatives of LHC trooped to ANZ Bank and withdrew the WHETHER OR NOT PETITIONER WILL
total amount of US$4,950,000.00, thereby reducing the SUFFER GRAVE AND IRREPARABLE
balance in ANZ Bank to US$1,852,814.00. DAMAGE IN THE EVENT THAT:
On 2 February 2001, the appellate court dismissed the petition
for certiorari. The appellate court expressed conformity with
the trial court's decision that LHC could call on the Securities A. LHC IS ALLOWED TO CALL AND
pursuant to the first principle in credit law that the credit itself is DRAW ON, AND ANZ BANK
independent of the underlying transaction and that as long as AND SECURITY BANK ARE
the beneficiary complied with the credit, it was of no moment ALLOWED TO RELEASE,
that he had not complied with the underlying contract. Further, THE REMAINING BALANCE
the appellate court held that even assuming that the trial OF THE SECURITIES PRIOR
court's denial of petitioner's application for a writ of preliminary TO THE RESOLUTION OF
injunction was erroneous, it constituted only an error of

THE DISPUTES BETWEEN
PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE
AMOUNTS IT HAD
WRONGFULLY DRAWN
FROM THE SECURITIES. 21
Petitioner contends that the courts below improperly relied on
the "independence principle" on letters of credit when this case
falls squarely within the "fraud exception rule." Respondent
LHC deliberately misrepresented the supposed existence of
delay despite its knowledge that the issue was still pending
arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the
proceeds of the Securities pursuant to the principle against
unjust enrichment and that, under the premises, injunction was
the appropriate remedy obtainable from the competent local
courts.
On 25 August 2003, petitioner filed a Supplement to the
Petition 22 and Supplemental Memorandum, 23 alleging that
in the course of the proceedings in the ICC Arbitration, a
number of documentary and testimonial evidence came out
through the use of different modes of discovery available in the
ICC Arbitration. It contends that after the filing of the petition
facts and admissions were discovered which demonstrate that
LHC knowingly misrepresented that petitioner had incurred
delays — notwithstanding its knowledge and admission that
delays were excused under the Turnkey Contract — to be able
to draw against the Securities. Reiterating that fraud
constitutes an exception to the independence principle,
petitioner urges that this warrants a ruling from this Court that
the call on the Securities was wrongful, as well as contrary to
law and basic principles of equity. It avers that it would suffer
grave irreparable damage if LHC would be allowed to use the
128
proceeds of the Securities and not ordered to return the
amounts it had wrongfully drawn thereon.
In its Manifestationdated 8 September 2003, 24 LHC contends
that the supplemental pleadings filed by petitioner present
erroneous and misleading information which would change
petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004, 25 petitioner
alleges that on 18 February 2004, the ICC handed down its
Third Partial Award, declaring that LHC wrongfully drew upon
the Securities and that petitioner was entitled to the return of
the sums wrongfully taken by LHC for liquidated damages.
LHC filed a Counter-Manifestation dated 29 June
2004, 26 stating that petitioner's Manifestation dated 12 April
2004 enlarges the scope of its Petition for Review of the 31
January 2001 Decision of the Court of Appeals. LHC notes
that the Petition for Review essentially dealt only with the issue
of whether injunction could issue to restrain the beneficiary of
an irrevocable letter of credit from drawing thereon. It adds
that petitioner has filed two other proceedings, to wit: (1) ICC
Case No. 11264/TE/MW, entitled "Transfield Philippines
Inc. v. Luzon Hydro Corporation," in which the parties made
claims and counterclaims arising from petitioner's
performance/misperformance of its obligations as contractor
for LHC; and (2) Civil Case No. 04-332, entitled "Transfield
Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56
of the RTC of Makati, which is an action to enforce and obtain
execution of the ICC's partial award mentioned in
petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File
Addendum to Petitioner's Memorandum, LHC stresses that the
question of whether the funds it drew on the subject letters of
credit should be returned is outside the issue in this appeal. At
any rate, LHC adds that the action to enforce the ICC's partial
award is now fully within the Makati RTC's jurisdiction in Civil

Case No. 04-332. LHC asserts that petitioner is engaged in
forum-shopping by keeping this appeal and at the same time
seeking the suit for enforcement of the arbitral award before
the Makati court.
Respondent SBC in its Memorandum, dated 10 March
2003 27 contends that the Court of Appeals correctly
dismissed the petition for certiorari. Invoking the independence
principle, SBC argues that it was under no obligation to look
into the validity or accuracy of the certification submitted by
respondent LHC or into the latter's capacity or entitlement to
so certify. It adds that the act sought to be enjoined by
petitioner was already fait accompli and the present petition
would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in
its Memorandum dated 13 March 2003 28 posits that its
actions could not be regarded as unjustified in view of the
prevailing independence principle under which it had no
obligation to ascertain the truth of LHC's allegations that
petitioner defaulted in its obligations. Moreover, it points out
that since the Standby Letter of Credit No. E001126/8400 had
been fully drawn, petitioner's prayer for preliminary injunction
had been rendered moot and academic.
At the core of the present controversy is the applicability of the
"independence principle" and "fraud exception rule" in letters
of credit. Thus, a discussion of the nature and use of letters of
credit, also referred to simply as "credits," would provide a
better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the
only way to understand all its facets is to recognize that it is an
entity unto itself. The relationship between the beneficiary and
the issuer of a letter of credit is not strictly contractual,
because both privity and a meeting of the minds are lacking,
yet strict compliance with its terms is an enforceable right. Nor
is it a third-party beneficiary contract, because the issuer must
129
honor drafts drawn against a letter regardless of problems
subsequently arising in the underlying contract. Since the
bank's customer cannot draw on the letter, it does not function
as an assignment by the customer to the beneficiary. Nor, if
properly used, is it a contract of suretyship or guarantee,
because it entails a primary liability following a default. Finally,
it is not in itself a negotiable instrument, because it is not
payable to order or bearer and is generally conditional, yet the
draft presented under it is often negotiable. 29
In commercial transactions, a letter of credit is a financial
device developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer, who wants
to have control of the goods before paying. 30 The use of
credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the
sale of goods. However, credits are also used in non-sale
settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale settings
have come to be known as standby credits. 31
There are three significant differences between commercial
and standby credits. First, commercial credits involve the
payment of money under a contract of sale. Such credits
become payable upon the presentation by the seller-
beneficiary of documents that show he has taken affirmative
steps to comply with the sales agreement. In the standby type,
the credit is payable upon certification of a party's
nonperformance of the agreement. The documents that
accompany the beneficiary's draft tend to show that the
applicant has not performed. The beneficiary of a commercial
credit must demonstrate by documents that he has performed
his contract. The beneficiary of the standby credit must certify
that his obligor has not performed the contract. 32

By definition, a letter of credit is a written instrument whereby
the writer requests or authorizes the addressee to pay money
or deliver goods to a third person and assumes responsibility
for payment of debt therefor to the addressee. 33 A letter of
credit, however, changes its nature as different transactions
occur and if carried through to completion ends up as a
binding contract between the issuing and honoring banks
without any regard or relation to the underlying contract or
disputes between the parties thereto. 34
Since letters of credit have gained general acceptability in
international trade transactions, the ICC has published from
time to time updates on the Uniform Customs and Practice
(UCP) for Documentary Credits to standardize practices in the
letter of credit area. The vast majority of letters of credit
incorporate the UCP. 35 First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the
latest of which was in 1993. 36
In Bank of the Philippine Islands v. De Reny Fabric Industries,
Inc., 37 this Court ruled that the observance of the UCP is
justified by Article 2 of the Code of Commerce which provides
that in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed by
usages and customs generally observed. More recently,
in Bank of America, NT & SA v. Court of Appeals, 38 this
Court ruled that there being no specific provisions which
govern the legal complexities arising from transactions
involving letters of credit, not only between or among banks
themselves but also between banks and the seller or the
buyer, as the case may be, the applicability of the UCP is
undeniable. IaSAHC
Article 3 of the UCP provides that credits, by their nature, are
separate transactions from the sales or other contract(s) on
which they may be based and banks are in no way concerned
with or bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the credit.
130
Consequently, the undertaking of a bank to pay, accept and
pay draft(s) or negotiate and/or fulfill any other obligation
under the credit is not subject to claims or defenses by the
applicant resulting from his relationships with the issuing bank
or the beneficiary. A beneficiary can in no case avail himself of
the contractual relationships existing between the banks or
between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller
or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called "independence
principle" assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main
contract is actually accomplished or not. Under this principle,
banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect
of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed
thereon, nor do they assume any liability or responsibility for
the description, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person
whomsoever. 39
The independent nature of the letter of credit may be: (a)
independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in
a commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying
agreement. In both cases the payment may be enjoined if in

the light of the purpose of the credit the payment of the credit
would constitute fraudulent abuse of the credit. 40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not
apply to the instant case and assuming it is so, it is a defense
available only to respondent banks. LHC, on the other hand,
contends that it would be contrary to common sense to deny
the benefit of an independent contract to the very party for
whom the benefit is intended. As beneficiary of the letter of
credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in
this case, where the credit is stipulated as irrevocable, there is
a definite undertaking by the issuing bank to pay the
beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied
with. 41 Precisely, the independence principle liberates the
issuing bank from the duty of ascertaining compliance by the
parties in the main contract. As the principle's nomenclature
clearly suggests, the obligation under the letter of credit is
independent of the related and originating contract. In brief,
the letter of credit is separate and distinct from the underlying
transaction.
Given the nature of letters of credit, petitioner's argument —
that it is only the issuing bank that may invoke the
independence principle on letters of credit — does not impress
this Court. To say that the independence principle may only be
invoked by the issuing banks would render nugatory the
purpose for which the letters of credit are used in commercial
transactions. As it is, the independence doctrine works to the
benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter
into commercial transactions, not for the benefit of the issuing
bank but mainly for the benefit of the parties to the original
transactions. With the letter of credit from the issuing bank, the
131
party who applied for and obtained it may confidently present
the letter of credit to the beneficiary as a security to convince
the beneficiary to enter into the business transaction. On the
other hand, the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of being
empowered to call on the letter of credit as a security in case
the commercial transaction does not push through, or the
applicant fails to perform his part of the transaction. It is for this
reason that the party who is entitled to the proceeds of the
letter of credit is appropriately called "beneficiary."
Petitioner's argument that any dispute must first be resolved
by the parties, whether through negotiations or arbitration,
before the beneficiary is entitled to call on the letter of credit in
essence would convert the letter of credit into a mere
guarantee. Jurisprudence has laid down a clear distinction
between a letter of credit and a guarantee in that the
settlement of a dispute between the parties is not a pre-
requisite for the release of funds under a letter of credit. In
other words, the argument is incompatible with the very nature
of the letter of credit. If a letter of credit is drawable only after
settlement of the dispute on the contract entered into by the
applicant and the beneficiary, there would be no practical and
beneficial use for letters of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of
credit, sheds more light on the issue:
The standby credit is an attractive commercial
device for many of the same reasons that
commercial credits are attractive. Essentially,
these credits are inexpensive and efficient.
Often they replace surety contracts, which
tend to generate higher costs than credits do
and are usually triggered by a factual
determination rather than by the examination
of documents. HTCISE

Because parties and courts should not
confuse the different functions of the surety
contract on the one hand and the standby
credit on the other, the distinction between
surety contracts and credits merits some
reflection. The two commercial devices share
a common purpose. Both ensure against the
obligor's nonperformance. They function,
however, in distinctly different ways.
Traditionally, upon the obligor's default, the
surety undertakes to complete the obligor's
performance, usually by hiring someone to
complete that performance. Surety contracts,
then, often involve costs of determining
whether the obligor defaulted (a matter over
which the surety and the beneficiary often
litigate) plus the cost of performance. The
benefit of the surety contract to the
beneficiary is obvious. He knows that the
surety, often an insurance company, is a
strong financial institution that will perform if
the obligor does not. The beneficiary also
should understand that such performance
must await the sometimes lengthy and costly
determination that the obligor has defaulted.
In addition, the surety's performance takes
time.
The standby credit has different expectations.
He reasonably expects that he will receive
cash in the event of nonperformance, that he
will receive it promptly, and that he will
receive it before any litigation with the obligor
(the applicant) over the nature of the
applicant's performance takes place. The
standby credit has this opposite effect of the
132
surety contract: it reverses the financial
burden of parties during litigation.
In the surety contract setting, there is no duty
to indemnify the beneficiary until the
beneficiary establishes the fact of the obligor's
performance. The beneficiary may have to
establish that fact in litigation. During the
litigation, the surety holds the money and the
beneficiary bears most of the cost of delay in
performance.
In the standby credit case, however, the
beneficiary avoids that litigation burden and
receives his money promptly upon
presentation of the required documents. It
may be that the applicant has, in fact,
performed and that the beneficiary's
presentation of those documents is not
rightful. In that case, the applicant may sue
the beneficiary in tort, in contract, or in breach
of warranty; but, during the litigation to
determine whether the applicant has in fact
breached the obligation to perform, the
beneficiary, not the applicant, holds the
money. Parties that use a standby credit and
courts construing such a credit should
understand this allocation of burdens. There
is a tendency in some quarters to overlook
this distinction between surety contracts and
standby credits and to reallocate burdens by
permitting the obligor or the issuer to litigate
the performance question before payment to
the beneficiary. 42
While it is the bank which is bound to honor the credit, it is the
beneficiary who has the right to ask the bank to honor the
credit by allowing him to draw thereon. The situation itself

emasculates petitioner's posture that LHC cannot invoke the
independence principle and highlights its puerility, more so in
this case where the banks concerned were impleaded as
parties by petitioner itself.
Respondent banks had squarely raised the independence
principle to justify their releases of the amounts due under the
Securities. Owing to the nature and purpose of the standby
letters of credit, this Court rules that the respondent banks
were left with little or no alternative but to honor the credit and
both of them in fact submitted that it was "ministerial" for them
to honor the call for payment. 43
Furthermore, LHC has a right rooted in the Contract to call on
the Securities. The relevant provisions of the Contract read,
thus:
4.2.1. In order to secure the performance of
its obligations under this Contract, the
Contractor at its cost shall on the
Commencement Date provide security to the
Employer in the form of two irrevocable and
confirmed standby letters of credit (the
"Securities"), each in the amount of
US$8,988,907, issued and confirmed by
banks or financial institutions acceptable to
the Employer. Each of the Securities must be
in form and substance acceptable to the
Employer and may be provided on an
annually renewable basis. 44
8.7.1 If the Contractor fails to comply with
Clause 8.2, the Contractor shall pay to the
Employer by way of liquidated damages
("Liquidated Damages for Delay") the amount
of US$75,000 for each and every day or part
of a day that shall elapse between the Target
Completion Date and the Completion Date,
133
provided that Liquidated Damages for Delay
payable by the Contractor shall in the
aggregate not exceed 20% of the Contract
Price. The Contractor shall pay Liquidated
Damages for Delay for each day of the delay
on the following day without need of demand
from the Employer.
8.7.2 The Employer may, without prejudice to
any other method of recovery, deduct the
amount of such damages from any monies
due, or to become due to the Contractor
and/or by drawing on the Security." 45
A contract once perfected, binds the parties not only to the
fulfillment of what has been expressly stipulated but also to all
the consequences which according to their nature, may be in
keeping with good faith, usage, and law. 46 A careful perusal
of the Turnkey Contract reveals the intention of the parties to
make the Securities answerable for the liquidated damages
occasioned by any delay on the part of petitioner. The call
upon the Securities, while not an exclusive remedy on the part
of LHC, is certainly an alternative recourse available to it upon
the happening of the contingency for which the Securities have
been proffered. Thus, even without the use of the
"independence principle," the Turnkey Contract itself bestows
upon LHC the right to call on the Securities in the event of
default.
Next, petitioner invokes the "fraud exception" principle. It avers
that LHC's call on the Securities is wrongful because it
fraudulently misrepresented to ANZ Bank and SBC that there
is already a breach in the Turnkey Contract knowing fully well
that this is yet to be determined by the arbitral tribunals. It
asserts that the "fraud exception" exists when the beneficiary,
for the purpose of drawing on the credit, fraudulently presents

to the confirming bank, documents that contain, expressly or
by implication, material representations of fact that to his
knowledge are untrue. In such a situation, petitioner insists,
injunction is recognized as a remedy available to it. ICTHDE
Citing Dolan's treatise on letters of credit, petitioner argues
that the independence principle is not without limits and it is
important to fashion those limits in light of the principle's
purpose, which is to serve the commercial function of the
credit. If it does not serve those functions, application of the
principle is not warranted, and the commonlaw principles of
contract should apply.
It is worthy of note that the propriety of LHC's call on the
Securities is largely intertwined with the fact of default which is
the self-same issue pending resolution before the arbitral
tribunals. To be able to declare the call on the Securities
wrongful or fraudulent, it is imperative to resolve, among
others, whether petitioner was in fact guilty of delay in the
performance of its obligation. Unfortunately for petitioner, this
Court is not called upon to rule upon the issue of default —
such issue having been submitted by the parties to the
jurisdiction of the arbitral tribunals pursuant to the terms
embodied in their agreement. 47
Would injunction then be the proper remedy to restrain the
alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the
independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand for
payment under a standby credit may qualify as fraud sufficient
to support an injunction against payment. 48 The remedy for
fraudulent abuse is an injunction. However, injunction should
not be granted unless: (a) there is clear proof of fraud; (b) the
fraud constitutes fraudulent abuse of the independent purpose
of the letter of credit and not only fraud under the main
agreement; and (c) irreparable injury might follow if injunction
134
is not granted or the recovery of damages would be seriously
damaged. 49
In its complaint for injunction before the trial court, petitioner
alleged that it is entitled to a total extension of two hundred
fifty-three (253) days which would move the target completion
date. It argued that if its claims for extension would be found
meritorious by the ICC, then LHC would not be entitled to any
liquidated damages. 50
Generally, injunction is a preservative remedy for the
protection of one's substantive right or interest; it is not a
cause of action in itself but merely a provisional remedy, an
adjunct to a main suit. The issuance of the writ of preliminary
injunction as an ancillary or preventive remedy to secure the
rights of a party in a pending case is entirely within the
discretion of the court taking cognizance of the case, the only
limitation being that this discretion should be exercised based
upon the grounds and in the manner provided by law. 51
Before a writ of preliminary injunction may be issued, there
must be a clear showing by the complaint that there exists a
right to be protected and that the acts against which the writ is
to be directed are violative of the said right. 52 It must be
shown that the invasion of the right sought to be protected is
material and substantial, that the right of complainant is clear
and unmistakable and that there is an urgent and paramount
necessity for the writ to prevent serious damage. 53 Moreover,
an injunctive remedy may only be resorted to when there is a
pressing necessity to avoid injurious consequences which
cannot be remedied under any standard compensation. 54
In the instant case, petitioner failed to show that it has a clear
and unmistakable right to restrain LHC's call on the Securities
which would justify the issuance of preliminary injunction. By
petitioner's own admission, the right of LHC to call on the
Securities was contractually rooted and subject to the express
stipulations in the Turnkey Contract. 55 Indeed, the Turnkey

Contract is plain and unequivocal in that it conferred upon LHC
the right to draw upon the Securities in case of default, as
provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor
seven days' notice of calling upon any of the
Securities, stating the nature of the default for
which the claim on any of the Securities is to
be made, provided that no notice will be
required if the Employer calls upon any of the
Securities for the payment of Liquidated
Damages for Delay or for failure by the
Contractor to renew or extend the Securities
within 14 days of their expiration in
accordance with Clause 4.2.2. 56
8.7.2 The Employer may, without prejudice to
any other method of recovery, deduct the
amount of such damages from any monies
due, or to become due, to the Contractor
and/or by drawing on the Security. 57
The pendency of the arbitration proceedings would not per
se make LHC's draws on the Securities wrongful or fraudulent
for there was nothing in the Contract which would indicate that
the parties intended that all disputes regarding delay should
first be settled through arbitration before LHC would be
allowed to call upon the Securities. It is therefore premature
and absurd to conclude that the draws on the Securities were
outright fraudulent given the fact that the ICC and CIAC have
not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its
pleadings filed before the appellate court, did petitioner invoke
the fraud exception rule as a ground to justify the issuance of
an injunction. 58 What petitioner did assert before the courts
below was the fact that LHC's draws on the Securities would
be premature and without basis in view of the pending
135
disputes between them. Petitioner should not be allowed in
this instance to bring into play the fraud exception rule to
sustain its claim for the issuance of an injunctive relief.
Matters, theories or arguments not brought out in the
proceedings below will ordinarily not be considered by a
reviewing court as they cannot be raised for the first time on
appeal. 59 The lower courts could thus not be faulted for not
applying the fraud exception rule not only because the
existence of fraud was fundamentally interwoven with the
issue of default still pending before the arbitral tribunals, but
more so, because petitioner never raised it as an issue in its
pleadings filed in the courts below. At any rate, petitioner
utterly failed to show that it had a clear and unmistakable right
to prevent LHC's call upon the Securities.
Of course, prudence should have impelled LHC to await
resolution of the pending issues before the arbitral tribunals
prior to taking action to enforce the Securities. But, as earlier
stated, the Turnkey Contract did not require LHC to do so and,
therefore, it was merely enforcing its rights in accordance with
the tenor thereof. Obligations arising from contracts have the
force of law between the contracting parties and should be
complied with in good faith. 60 More importantly, pursuant to
the principle of autonomy of contracts embodied in Article
1306 of the Civil Code, 61 petitioner could have incorporated
in its Contract with LHC, a proviso that only the final
determination by the arbitral tribunals that default had occurred
would justify the enforcement of the Securities. However, the
fact is petitioner did not do so; hence, it would have to live with
its inaction.
With respect to the issue of whether the respondent banks
were justified in releasing the amounts due under the
Securities, this Court reiterates that pursuant to the
independence principle the banks were under no obligation to
determine the veracity of LHC's certification that default has
occurred. Neither were they bound by petitioner's declaration

that LHC's call thereon was wrongful. To repeat, respondent
banks' undertaking was simply to pay once the required
documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending
arbitration proceedings that LHC's draws upon the Securities
were wrongful due to the non-existence of the fact of default,
its right to seek indemnification for damages it suffered would
not normally be foreclosed pursuant to general principles of
law.
Moreover, in a Manifestation, 62 dated 30 March 2001, LHC
informed this Court that the subject letters of credit had been
fully drawn. This fact alone would have been sufficient reason
to dismiss the instant petition. HAICTD
Settled is the rule that injunction would not lie where the acts
sought to be enjoined have already become fait accompli or an
accomplished or consummated act. 63 In Ticzon v. Video Post
Manila, Inc. 64 this Court ruled that where the period within
which the former employees were prohibited from engaging in
or working for an enterprise that competed with their former
employer — the very purpose of the preliminary injunction —
has expired, any declaration upholding the propriety of the writ
would be entirely useless as there would be no actual case or
controversy between the parties insofar as the preliminary
injunction is concerned.
In the instant case, the consummation of the act sought to be
restrained had rendered the instant petition moot — for any
declaration by this Court as to propriety or impropriety of the
non-issuance of injunctive relief could have no practical effect
on the existing controversy. 65 The other issues raised by
petitioner particularly with respect to its right to recover the
amounts wrongfully drawn on the Securities, according to it,
could properly be threshed out in a separate proceeding.
136
One final point. LHC has charged petitioner of forum-shopping.
It raised the charge on two occasions. First, in its Counter-
Manifestation dated 29 June 2004 66LHC alleges that
petitioner presented before this Court the same claim for
money which it has filed in two other proceedings, to wit: ICC
Case No. 11264/TE/MW and Civil Case No. 04-332 before the
RTC of Makati. LHC argues that petitioner's acts constitutes
forum-shopping which should be punished by the dismissal of
the claim in both forums. Second, in its Comment to
Petitioner's Motion for Leave to File Addendum to Petitioner's
Memorandum dated 8 October 2004, LHC alleges that by
maintaining the present appeal and at the same time pursuing
Civil Case No. 04-332 — wherein petitioner pressed for
judgment on the issue of whether the funds LHC drew on the
Securities should be returned — petitioner resorted to forum-
shopping. In both instances, however, petitioner has
apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a
party repetitively avails of several judicial remedies in different
courts, simultaneously or successively, all substantially
founded on the same transactions and the same essential
facts and circumstances, and all raising substantially the same
issues either pending in, or already resolved adversely, by
some other court. 67 It may also consist in the act of a party
against whom an adverse judgment has been rendered in one
forum, of seeking another and possibly favorable opinion in
another forum other than by appeal or special civil action
of certiorari, or the institution of two or more actions or
proceedings grounded on the same cause on the supposition
that one or the other court might look with favor upon the other
party. 68 To determine whether a party violated the rule
against forum-shopping, the test applied is whether the
elements of litis pendentia are present or whether a final
judgment in one case will amount to res judicata in
another. 69 Forum-shopping constitutes improper conduct and
 137

may be punished with summary dismissal of the multiple

petitions and direct contempt of court. 70
Considering the seriousness of the charge of forum-shopping
and the severity of the sanctions for its violation, the Court will
refrain from making any definitive ruling on this issue until after
petitioner has been given ample opportunity to respond to the
charge.
WHEREFORE, the instant petition is DENIED, with costs
against petitioner.
Petitioner is hereby required to answer the charge of forum-
shopping within fifteen (15) days from notice.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ .,
concur.

||| (Transfield Philippines, Inc. v. Luzon Hydro Corp., G.R. No.

146717, [November 22, 2004], 485 PHIL 699-731)

THIRD DIVISION
[G.R. No. 74886. December 8, 1992.]
PRUDENTIAL BANK, petitioner, vs. INTERM
EDIATE APPELLATE COURT, PHILIPPINE
RAYON MILLS INC. and ANACLETO R.
CHI, respondents.
SYLLABUS
1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS;
LETTER OF CREDIT; CONSTRUED. — A letter of credit is
defined as an engagement by a bank or other person made at
the request of a customer that the issuer will honor drafts or
other demands for payment upon compliance with the
conditions specified in the credit. Through a letter of credit, the
bank merely substitutes its own promise to pay for the promise
to pay of one of its customers who in return promises to pay
the bank the amount of funds mentioned in the letter of credit
plus credit or commitment fees mutually agreed upon.
2. ID.; ID.; ID.; PRESENTMENT FOR ACCEPTANCE, NOT
NECESSARY IN CASE AT BAR. — The transaction in the
case at bar stemmed from Philippine Rayon's application for a
commercial letter of credit with the petitioner in the amount of
$128,548.78 to cover the former's contract to purchase and
import loom and textile machinery from Nissho Company, Ltd.
of Japan under a five-year deferred payment plan. Petitioner
approved the application. The drawee was necessarily the
herein petitioner. It was to the latter that the drafts were
presented for payment. There was no need for acceptance as
the issued drafts are sight drafts. They are, pursuant to
Section 7 of the Negotiable Instruments Law (NIL), payable on
demand. Presentment for acceptance is defined as the
138
production of a bill of exchange to a drawee for acceptance.
Contrary to both courts' pronouncements, Philippine Rayon
immediately became liable thereon upon petitioner's payment
thereof. Such is the essence of the letter of credit issued by
the petitioner. A different conclusion would violate the principle
upon which commercial letters of credit are founded because
in such a case, both the beneficiary and the issuer, Nissho
Company Ltd. and the petitioner, respectively, would be
placed at the mercy of Philippine Rayon even if the latter had
already received the imported machinery and the petitioner
had fully paid for it. Presentment for acceptance is necessary
only in the cases expressly provided for in Section 143 of
the Negotiable Instruments Law (NIL).
3. ID.; ID.; ACCEPTANCE OF A BILL, EXPLAINED. — The
acceptance of a bill is the signification by the drawee of his
assent to the order of the drawer; this may be done in writing
by the drawee in the bill itself, or in a separate instrument.
4. ID.; TRUST RECEIPTS LAW (P.D. 115), TRUST RECEIPT
TRANSACTION, DEFINED. — Under P.D. No. 115, otherwise
known as the Trust Receipts Law, which took effect on 29
January 1973, a trust receipt transaction is defined as "any
transaction by and between a person referred to in this Decree
as the entruster, and another person referred to in this Decree
as the entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods,
documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called the trust
receipt wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the
goods, instruments themselves if they are unsold or not

otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes
substantially equivalent to any one of the following: . . ."
5. ID.; ID.; VIOLATIONS THEREOF; PENDENCY OF
CRIMINAL ACTION, NOT A LEGAL OBSTACLE TO A
SEPARATE CIVIL ACTION. — Although petitioner
commenced a criminal action for the violation of the Trust
Receipts Law, no legal obstacle prevented it from enforcing
the civil liability arising out of the trust receipt in a separate civil
action. Under Section 13 of the Trust Receipts Law, the failure
of an entrustee to turn over the proceeds of the sale of goods,
documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in
the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance
with the terms of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article 315,
paragraph 1(b) of the Revised Penal Code. Under Article 33 of
the Civil Code, a civil action for damages, entirely separate
and distinct from the criminal action, may be brought by the
injured party in cases of defamation, fraud and physical
injuries. Estafa falls under fraud.
6. ID.; ID.; ID.; PENALTY WHEN VIOLATION COMMITTED
BY JURIDICAL ENTITIES. — A close examination of Sec. 13
of P.D. No. 115 reveals that the penalty referred to therein
which shall be imposed upon the directors, officers, employees
or other officials or persons of the corporation, partnership,
association or other judicial utility is imprisonment, the duration
of which would depend on the amount of the fraud as provided
for in Article 315 of the Revised Penal Code. The reason for
this is obvious: corporations, partnerships, associations and
other juridical entities cannot be put in jail. However, it is these
entities which are made liable for the civil liability arising from
the criminal offense. This is the import of the clause "without
139
prejudice to the civil liabilities arising from the criminal
offense."
7. CIVIL LAW; CONTRACTS; GUARANTY; VALIDITY
THEREOF. — The attestation by witnesses and the
acknowledgment before a notary public are not required by
law to make a party liable on the instrument. The rule is that
contracts shall be obligatory in whatever form they may have
been entered into, provided all the essential requisites for their
validity are present; however, when the law requires that a
contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that
requirement is absolute and indispensable. With respect to a
guaranty, which is a promise to answer for the debt or default
of another, the law merely requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified. While the acknowledgment of a
surety before a notary public is required to make the same a
public document, under Article 1358 of the Civil Code, a
contract of guaranty does not have to appear in a public
document.
8. ID.; ID.; ID.; DEFENSE OF EXCUSSION; NOT A
CONDITION SINE QUA NON FOR THE INSTITUTION OF
ACTION AGAINST GUARANTOR. — Under Article 2058 of
the Civil Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for the
obligation. However, excussion is not a condition sine qua non
for the institution of an action against the guarantor. In
Southern Motors, Inc. vs. Barbosa (99 Phil. 263, 268 [1956]),
this Court stated: "4. Although an ordinary personal guarantor
— not a mortgagor or pledgor — may demand the
aforementioned exhaustion, the creditor may, prior thereto,
secure a judgment against said guarantor, who shall be
entitled, however, to a deferment of the execution of said
judgment against him until after the properties of the principal

debtor shall have been exhausted to satisfy the obligation
involved in the case."
9. ID.; ID.; CONTRACT OF ADHESION; CONSTRUCTION
THEREOF. — Any doubt as to the import or true intent of the
solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned
solidary guaranty clause, is on a form drafted and prepared
solely by the petitioner; Chi's participation therein is limited to
the affixing of his signature thereon. It is, therefore, a contract
of adhesion; as such, it must be strictly construed against the
party responsible for its preparation.
10. REMEDIAL LAW; CIVIL PROCEDURE; PERMISSIVE
JOINDER OF PARTIES; RATIONALE. — There was then
nothing procedurally objectionable in impleading private
respondent Chi as a co-defendant in Civil Case No. Q-19312
before the trial court. Section 6, Rule 3 of the Rules
of Court on permissive joinder of parties explicitly allows it.
This is the equity rule relating to multifariousness. It is based
on trial convenience and is designed to permit the joinder of
plaintiffs or defendants whenever there is a common question
of law or fact. It will save the parties unnecessary work, trouble
and expense.
11. CIVIL LAW; CONTRACTS; GUARANTY; GUARANTOR;
LIABILITY IN CASE AT BAR. — Chi's liability is limited to the
principal obligation in the trust receipt plus all the accessories
thereof including judicial costs; with respect to the latter, he
shall only be liable for those costs incurred after being
judicially required to pay. Interest and damages, being
accessories of the principal obligation, should also be paid;
these, however, shall run only from the date of the filing of the
complaint. Attorney's fees may even be allowed in appropriate
cases. In the instant case, the attorney's fees to be paid by Chi
cannot be the same as that to be paid by Philippine Rayon
since it is only the trust receipt that is covered by the guaranty
and not the full extent of the latter's liability. All things
140
considered, he can be held liable for the sum of P10,000.00 as
attorney's fees in favor of the petitioner.
DECISION
DAVIDE, JR., J p:
Petitioner seeks to review and set aside the decision 1 of
public respondent Intermediate Appellate Court (now Court of
Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which
affirmed in toto the 15 June 1978 decision of Branch 9
(Quezon City) of the then Court of First Instance (now
Regional Trial Court) of Rizal in Civil Case No. Q-19312. The
latter involved an action instituted by the petitioner for the
recovery of a sum of money representing the amount paid by it
to the Nissho Company Ltd. of Japan for textile machinery
imported by the defendant, now private respondent, Philippine
Rayon Mills, Inc. (hereinafter Philippine Rayon), represented
by co-defendant Anacleto R. Chi.
The facts which gave rise to the instant controversy are
summarized by the public respondent as follows:
"On August 8, 1962, defendant-appellant
Philippine Rayon Mills, Inc. entered into a
contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a five-
year deferred payment plan (Exhibit B,
Plaintiff's Folder of Exhibits, p. 2). To effect
payment for said machineries, the defendant-
appellant applied for a commercial letter of
credit with the Prudential Bank and Trust
Company in favor of Nissho. By virtue of said

application, thePrudential Bank opened Letter
of Credit No. DPP-63762 for $128,548.78
(Exhibit A, Ibid., p. 1). Against this letter of
credit, drafts, were drawn and issued by
Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65,
66 to 76), which were all paid by
the Prudential Bank through its correspondent
in Japan, the Bank of Tokyo, Ltd. As indicated
on their faces, two of these drafts (Exhibits X
and X-1, Ibid., pp. 65-66) were accepted by
the defendant-appellant through its president,
Anacleto R. Chi, while the others were not
(Exhibits X-2 to X-11, Ibid., pp. 66 to 76).
Upon the arrival of the machineries,
the Prudential Bank indorsed the shipping
documents to the defendant-appellant which
accepted delivery of the same. To enable the
defendant-appellant to take delivery of the
machineries, it executed, by prior
arrangement with the Prudential Bank, a trust
receipt which was signed by Anacleto R. Chi
in his capacity as President (sic) of
defendant-appellant company (Exhibit
C, Ibid., p. 13).
At the back of the trust receipt is a printed
form to be accomplished by two sureties who,
by the very terms and conditions thereof,
were to be jointly and severally liable to
the Prudential Bank should the defendant-
appellant fail to pay the total amount or any
portion of the drafts issued by Nissho and
paid for by Prudential Bank. The defendant-
appellant was able to take delivery of the
textile machineries and installed the same at
141
its factory site at 69 Obudan Street, Quezon
City.
Sometime in 1967, the defendant-appellant
ceased business operation (sic). On
December 29, 1969, defendant-appellant's
factory was leased by Yupangco Cotton Mills
for an annual rental of P300,000.00 (Exhibit
I, Ibid., p. 22). The lease was renewed on
January 3, 1973 (Exhibit J, Ibid., p. 26). On
January 5, 1974, all the textile machineries in
the defendant-appellant's factory were sold to
AIC Development Corporation for
P300,000.00 (Exhibit K, Ibid., p. 29)
The obligation of the defendant-appellant
arising from the letter of credit and the trust
receipt remained unpaid and unliquidated.
Repeated formal demands (Exhibits U, V, and
W, Ibid., pp. 62, 63, 64) for the payment of the
said trust receipt yielded no result. Hence, the
present action for the collection of the
principal amount of P956,384.95 was filed on
October 3, 1974 against the defendant-
appellant and Anacleto R. Chi. In their
respective answers, the defendants
interposed identical special defenses, viz., the
complaint states no cause of action; if there
is, the same has prescribed; and the plaintiff
is guilty of laches." 2
On 15 June 1978, the trial court rendered its decision the
dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered
sentencing the defendant Philippine Rayon
Mills, Inc. to pay plaintiff the sum of
P153,645.22, the amounts due under Exhibits

"X" & "X-1", with interest at 6% per annum
beginning September 15, 1974 until fully
paid. LLphil
Insofar as the amounts involved in drafts
Exhs. "X" (sic) to "X-11", inclusive, the same
not having been accepted by defendant
Philippine Rayon Mills, Inc., plaintiff's cause of
action thereon has not accrued, hence, the
instant case is premature.
Insofar as defendant Anacleto R. Chi is
concerned, the case is dismissed. Plaintiff is
ordered to pay defendant Anacleto R. Chi the
sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine
Rayon Mills, Inc.
SO ORDERED." 3
Petitioner appealed the decision to the
then Intermediate Appellate Court. In urging the said court to
reverse or modify the decision, petitioner alleged in its Brief
that the trial court erred in (a) disregarding its right to
reimbursement from the private respondents for the entire
unpaid balance of the imported machines, the total amount of
which was paid to the Nissho Company Ltd., thereby violating
the principle of the third party payor's right to reimbursement
provided for in the second paragraph of Article 1236 of the
Civil Code and under the rule against unjust enrichment; (b)
refusing to hold Anacleto R. Chi, as the responsible officer of
defendant corporation, liable under Section 13 of P.D. No
115 for the entire unpaid balance of the imported machines
covered by the bank's trust receipt (Exhibit "C"); (c) finding that
the solidary guaranty clause signed by Anacleto R. Chi is not a
guaranty at all; (d) controverting the judicial admissions of
Anacleto R. Chi that he is at least a simple guarantor of the
said trust receipt obligation; (e) contravening, based on the
142
assumption that Chi is a simple guarantor, Articles 2059, 2060
and 2062 of the Civil Code and the related evidence and
jurisprudence which provide that such liability had already
attached; (f) contravening the judicial admissions of Philippine
Rayon with respect to its liability to pay the petitioner the
amounts involved in the drafts (Exhibits "X", "X-1" to "X-11");
and (g) interpreting "sight" drafts as requiring acceptance by
Philippine Rayon before the latter could be held liable
thereon. 4
In its decision, public respondent sustained the trial court in all
respects. As to the first and last assigned errors, it rules that
the provision on unjust enrichment, Article 2142 of the Civil
Code, applies only if there is no express contract between the
parties and there is a clear showing that the payment is
justified. In the instant case, the relationship existing between
the petitioner and Philippine Rayon is governed by specific
contracts, namely the application for letters of credit, the
promissory note, the drafts and the trust receipt. With respect
to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had
not been presented to and were not accepted by Philippine
Rayon, petitioner was not justified in unilaterally paying the
amounts stated therein. The public respondent did not agree
with the petitioner's claim that the drafts were sight
drafts which did not require presentment for acceptance to
Philippine Rayon because paragraph 8 of the trust receipt
presupposes prior acceptance of the drafts. Since the ten (10)
drafts were not presented and accepted, no valid demand for
payment can be made. LLphil
Public respondent also disagreed with the petitioner's
contention that private respondent Chi is solidarily liable with
Philippine Rayon pursuant to Section 13 of P.D. No. 115 and
based on his signature on the solidary guaranty clause at the
dorsal side of the trust receipt. As to the first contention, the
public respondent ruled that the civil liability provided for in
said Section 13 attaches only after conviction. As to the
 143

second, it expressed misgivings as to whether Chi's signature III. WHETHER OR NOT ON THE BASIS OF
on the trust receipt made the latter automatically liable thereon THE JUDICIAL ADMISSIONS OF
because the so-called solidary guaranty clause at the dorsal RESPONDENT CHI HE IS LIABLE
portion of the trust receipt is to be signed not by one (1) THEREON AND TO WHAT EXTENT;
person alone, but by two (2) persons; the last sentence of the
same is incomplete and unsigned by witnesses; and it is not IV. WHETHER OR NOT RESPONDENT CHI
acknowledged before a notary public. Besides, even granting IS MERELY A SIMPLE GUARANTOR; AND
that it was executed and acknowledged before a notary public, IF SO, HAS HIS LIABILITY AS SUCH
Chi cannot be held liable therefor because the records fail to ALREADY ATTACHED;
show that petitioner had either exhausted the properties of V. WHETHER OR NOT AS THE
Philippine Rayon or had resorted to all legal remedies as SIGNATORY AND RESPONSIBLE OFFICER
required in Article 2058 of the Civil Code. As provided for OF RESPONDENT PHIL. RAYON
under Articles 2052 and 2054 of the Civil Code, the obligation RESPONDENT CHI IS PERSONALLY
of a guarantor is merely accessory and subsidiary, LIABLE PURSUANT TO THE PROVISION
respectively. Chi's liability would therefore arise only when the OF SECTION 13, P.D. 115;
principal debtor fails to comply with his obligation. 5
VI. WHETHER OR NOT RESPONDENT
Its motion to reconsider the decision having been denied by PHIL. RAYON IS LIABLE TO THE
the public respondent in its Resolution of 11 June PETITIONER UNDER THE TRUST RECEIPT
1986, 6 petitioner filed the instant petition on 31 July 1986 (EXH. C);
submitting the following legal issues:
VII. WHETHER OR NOT ON THE BASIS OF
"I. WHETHER OR NOT THE THE JUDICIAL ADMISSIONS
RESPONDENT APPELLATE COURT GRIEV RESPONDENT PHIL. RAYON IS LIABLE TO
OUSLY ERRED IN DENYING PETITIONER'S THE PETITIONER UNDER THE DRAFTS
CLAIM FOR FULL REIMBURSEMENT (EXHS. X, X-1 TO X-11) AND TO WHAT
AGAINST THE PRIVATE RESPONDENTS EXTENT;
FOR THE PAYMENT PETITIONER MADE
TO NISSHO CO. LTD. FOR THE BENEFIT VIII. WHETHER OR NOT SIGHT DRAFTS
OF PRIVATE RESPONDENT UNDER ART. REQUIRE PRIOR ACCEPTANCE FROM
1283 OF THE NEW CIVIL CODE OF THE RESPONDENT PHIL. RAYON BEFORE THE
PHILIPPINES AND UNDER THE GENERAL LATTER BECOMES LIABLE TO
PRINCIPLE AGAINST UNJUST PETITIONER." 7
ENRICHMENT; In the Resolution of 12 March 1990, 8 this Court gave due
II. WHETHER OR NOT RESPONDENT CHI course to the petition after the filing of the Comment thereto by
IS SOLIDARILY LIABLE UNDER THE private respondent Anacleto Chi and of the Reply to the latter
TRUST RECEIPT (EXH. C); by the petitioner; both parties were also required to submit

their respective memoranda which they subsequently
complied with.
As We see it, the issues may be reduced as
follows:
1. Whether presentment for acceptance of the
drafts was indispensable to make Philippine
Rayon liable thereon;
2. Whether Philippine Rayon is liable on the
basis of the trust receipt;
3. Whether private respondent Chi is jointly
and severally liable with Philippine Rayon for
the obligation sought to be enforced and if
not, whether he may be considered a
guarantor; in the latter situation, whether the
case should have been dismissed on the
ground of lack of cause of action as there was
no prior exhaustion of Philippine Rayon's
properties. cdrep
Both the trial court and the public respondent ruled that
Philippine Rayon could be held liable for the two (2) drafts,
Exhibits "X" and "X-1", because only these appear to have
been accepted by the latter after due presentment. The liability
for the remaining ten (10) drafts (Exhibits "X-2" to "X-11"
inclusive) did not arise because the same were not presented
for acceptance. In short, both courts concluded that
acceptance of the drafts by Philippine Rayon was
indispensable to make the latter liable thereon. We are unable
to agree with this proposition. The transaction in the case at
bar stemmed from Philippine Rayon's application for a
commercial letter of credit with the petitioner in the amount of
$128,548.78 to cover the former's contract to purchase and
import loom and textile machinery from Nissho Company, Ltd.
144
of Japan under a five-year deferred payment plan. Petitioner
approved the application. As correctly ruled by the trial court in
its Order of 6 March 1975: 9
". . . By virtue of said Application and
Agreement for Commercial Letter of Credit,
plaintiff bank 10 was under obligation to pay
through its correspondent bank in Japan the
drafts that Nisso (sic) Company, Ltd.,
periodically drew against said letter of credit
from 1963 to 1968, pursuant to plaintiff's
contract with the defendant Philippine Rayon
Mills, Inc. In turn, defendant Philippine Rayon
Mills, Inc., was obligated to pay plaintiff bank
the amounts of the drafts drawn by Nisso (sic)
Company, Ltd. against said plaintiff bank
together with any accruing commercial
charges, interest, etc. pursuant to the terms
and conditions stipulated in the Application
and Agreement of Commercial Letter of Credit
Annex "A"."
A letter of credit is defined as an engagement by a bank or
other person made at the request of a customer that the issuer
will honor drafts or other demands for payment upon
compliance with the conditions specified in the
credit. 11 Through a letter of credit, the bank merely
substitutes its own promise to pay for the promise to pay of
one of its customers who in return promises to pay the bank
the amount of funds mentioned in the letter of credit plus credit
or commitment fees mutually agreed upon. 12 In the instant
case then, the drawee was necessarily the herein petitioner. It
was to the latter that the drafts were presented for payment. In
fact, there was no need for acceptance as the issued drafts
are sight drafts. Presentment for acceptance is necessary only
in the cases expressly provided for in Section 143 of

the Negotiable Instruments Law (NIL). 13 The said section
reads:
"SECTION 143. When presentment for
acceptance must be made. — Presentment
for acceptance must be made:
(a) Where the bill is payable
after sight, or in any other case, where
presentment for acceptance is
necessary in order to fix the maturity
of the instrument; or
(b) Where the bill expressly
stipulates that it shall be presented for
acceptance; or
(c) Where the bill is drawn
payable elsewhere than at the
residence or place of business of the
drawee.
In no other case is presentment for
acceptance necessary in order to render any
party to the bill liable."
Obviously then, sight drafts do not require presentment for
acceptance.
The acceptance of a bill is the signification by the drawee of
his assent to the order of the drawer; 14 this may be done in
writing by the drawee in the bill itself, or in a separate
instrument. 15
The parties herein agree, and the trial court explicitly ruled,
that the subject drafts are sight drafts. Said the latter: LLpr
". . . In the instant case the drafts being at
sight, they are supposed to be payable upon
acceptance unless plaintiff bank has given the
145
Philippine Rayon Mills Inc. time within which
to pay the same. The first two drafts (Annexes
C & D, Exh. X & X-1) were duly accepted as
indicated on their face (sic), and upon such
acceptance should have been paid forthwith.
These two drafts were not paid and although
Philippine Rayon Mills ought to have paid the
same, the fact remains that until now they are
still unpaid." 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable
on demand. Section 7 provides:
"SECTION 7. When payable on demand. —
An instrument is payable on demand —
(a) When so it is expressed to
be payable on demand, or at sight, or
on presentation; or
(b) In which no time for
payment is expressed.
Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand." (Emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our
liability for payment at maturity of any accepted draft, bill of
exchange or indebtedness shall not be extinguished or
modified" 17 does not, contrary to the holding of the public
respondent, contemplate prior acceptance by Philippine
Rayon, but by the petitioner. Acceptance, however, was
not even necessary in the first place because the drafts
which were eventually issued were sight drafts. And even if
these were not sight drafts, thereby necessitating
acceptance, it would be the petitioner — and not Philippine
Rayon — which had to accept the same for the latter was

not the drawee. Presentment for acceptance is defined as
the production of a bill of exchange to a drawee for
acceptance. 18 The trial courtand the public respondent,
therefore, erred in ruling that presentment for acceptance
was an indispensable requisite for Philippine Rayon's
liability on the drafts to attach. Contrary to both courts'
pronouncements, Philippine Rayon immediately became
liable thereon upon petitioner's payment thereof. Such is
the essence of the letter of credit issued by the petitioner.
A different conclusion would violate the principle upon
which commercial letter of credit are founded because in
such a case, both the beneficiary and the issuer. Nissho
Company Ltd. and the petitioner, respectively, would be
placed at the mercy of Philippine Rayon even if the latter
had already received the imported machinery and the
petitioner had fully paid for it. The typical setting and
purpose of a letter of credit are described in Hibernia Bank
and Trust Co. vs. J. Aron & Co., Inc., 19 thus:
"Commercial letters of credit have come into
general use in international sales transactions
where much time necessarily elapses
between the sale and the receipt by a
purchaser of the merchandise, during which
interval great price changes may occur.
Buyers and sellers struggle for the advantage
of position. The seller is desirous of being
paid as surely and as soon as possible,
realizing that the vendee at a distant point has
it in his power to reject on trivial grounds
merchandise on arrival, and cause
considerable hardship to the shipper. Letters
of credit meet this condition by affording
celerity and certainty of payment. Their
purpose is to insure to a seller payment of a
definite amount upon presentation of
documents. The bank deals only with
146
documents. It has nothing to do with the
quality of the merchandise. Disputes as to the
merchandise shipped may arise and be
litigated later between vendor and vendee,
but they may not impede acceptance of drafts
and payment by the issuing bank when the
proper documents are presented."
The trial court and the public respondent likewise erred in
disregarding the trust receipt and in not holding that Philippine
Rayon was liable thereon. In People vs. Yu Chi
Ho, 20 this Court explains the nature of a trust receipt by
quoting In re Dunlap Carpet Co., 21 thus:
"By this arrangement a banker advances
money to an intending importer, and thereby
lends the aid of capital, of credit, or of
business facilities and agencies abroad, to
the enterprise of foreign commerce. Much of
this trade could hardly be carried on by any
other means, and therefore it is of the first
importance that the fundamental factor in the
transaction, the banker's advance of money
and credit, should receive the amplest
protection. Accordingly, in order to secure that
the banker shall be repaid at the critical point
— that is, when the imported goods finally
reach the hands of the intended vendee —
the banker takes the full title to the goods at
the very beginning; he takes it as soon as the
goods are bought and settled for by his
payments or acceptances in the foreign
country, and he continues to hold that title as
his indispensable security until the goods are
sold in the United States and the vendee is
called upon to pay for them. This security is
not an ordinary pledge by the importer to the

banker, for the importer has never owned the
goods, and moreover he is not able to deliver
the possession; but the security is the
complete title vested originally in the bankers,
and this characteristic of the transaction has
again and again been recognized and
protected by the Courts. Of course, the title is
at bottom a security title, as it has sometimes
been called, and the banker is always under
the obligation to reconvey; but only after his
advances have been fully repaid and after the
importer has fulfilled the other terms of the
contract."
As further stated in National Bank vs. Viuda e Hijos de
Angel Jose, 22 trust receipts:
". . . [I]n a certain manner. . . partake of the
nature of a conditional sale as provided by the
Chattel Mortgage Law, that is, the importer
becomes absolute owner of the imported
merchandise as soon as he has paid its price.
The ownership of the merchandise continues
to be vested in the owner thereof or in the
person who has advanced payment, until he
has been paid in full, or if the merchandise
has already been sold, the proceeds of the
sale should be turned over to him by the
importer or by his representative or successor
in interest."
Under P.D. No. 115, otherwise known as the Trust Receipts
Law, which took effect on 29 January 1973, a trust receipt
transaction is defined as "any transaction by and between a
person referred to in this Decree as the entruster, and another
person referred to in this Decree as the entrustee, whereby the
147
entruster, who owns or holds absolute title or security interests
over certain specified goods, documents or instruments,
releases the same to the possession of the entrustee upon the
latter's execution and delivery to the entruster of a signed
document called the trust receipt wherein the entrustee binds
himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise
dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster or as appears
in the trust receipt or the goods, instruments themselves if they
are unsold or not otherwise disposed of, in accordance with
the terms and conditions specified in the trust receipt, or for
other purposes substantially equivalent to any one of the
following: . . . ."
It is alleged in the complaint that private respondents "not only
have presumably put said machinery to good use and have
profited by its operation and/or disposition but very recent
information that (sic) reached plaintiff bank that defendants
already sold the machinery covered by the trust receipt to
Yupangco Cotton Mills," and that "as trustees of the property
covered by the trust receipt, . . . and therefore acting in
fiduciary (sic) capacity, defendants have willfully violated their
duty to account for the whereabouts of the machinery covered
by the trust receipt or for the proceeds of any lease; sale or
other disposition of the same that they may have made,
notwithstanding demands therefor; defendants have
fraudulently misapplied or converted to their own use any
money realized from the lease, sale, and other disposition of
said machinery." 23 While there is no specific prayer for the
delivery to the petitioner by Philippine Rayon of the proceeds
of the sale of the machinery covered by the trust receipt, such
relief is covered by the general prayer for "such further and
other relief as may be just and equitable on the
premises." 24 And although it is true that the petitioner
commenced a criminal action for the violation of the Trust

Receipts Law, no legal obstacle prevented it from enforcing
the civil liability arising out of the trust receipt in a separate civil
action. Under Section 13 of theTrust Receipts Law, the failure
of an entrustee to turn over the proceeds of the sale of goods,
documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears in
the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance
with the terms of the trust receipt shall constitute the crime of
estafa, punishable under the provisions of Article 315,
paragraph 1(b) of the Revised Penal Code. 25 Under Article
33 of the Civil Code, a civil action for damages, entirely
separate and distinct from the criminal action, may be brought
by the injured party in cases of defamation, fraud and physical
injuries. Estafa falls under fraud. cdll
We also conclude, for the reason hereinafter discussed, and
not for that adduced by the public respondent, that private
respondent Chi's signature in the dorsal portion of the trust
receipt did not bind him solidarily with Philippine Rayon. The
statement at the dorsal portion of the said trust receipt, which
petitioner describes as a "solidary guaranty clause", reads:
"In consideration of the PRUDENTIAL BANK
AND TRUST COMPANY complying with the
foregoing, we jointly and severally agree and
undertake to pay on demand to
the PRUDENTIAL BANK AND TRUST
COMPANY all sums of money which the
said PRUDENTIAL BANK AND TRUST
COMPANY may call upon us to pay arising
out of or pertaining to, and/or in any event
connected with the default of and/or non-
fulfillment in any respect of the undertaking of
the aforesaid:
PHILIPPINE RAYON MILLS, INC.
148
We further agree that
the PRUDENTIAL BANK AND TRUST
COMPANY does not have to take any steps
or exhaust its remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI" 26
Petitioner insists that by virtue of the clear wording of the
statement, specifically the clause ". . . we jointly and severally
agree and undertake . . .," and the concluding sentence on
exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as
follows:
"With respect to the second argument, we
have our misgivings as to whether the mere
signature of defendant-appellee Chi of (sic)
the guaranty agreement, Exhibit "C-1", will
make it an actionable document. It should be
noted that Exhibit "C-1" was prepared and
printed by the plaintiff-appellant. A perusal of
Exhibit "C-1" shows that it was to be signed
and executed by two persons. It was signed
only by defendant-appellee Chi. Exhibit "C-1"
was to be witnessed by two persons, but no
one signed in that capacity. The last sentence
of the guaranty clause is incomplete.
Furthermore, the plaintiff-appellant also failed
to have the purported guarantee clause
acknowledged before a notary public. All
these show that the alleged guaranty
provision was disregarded and, therefore, not
consummated.

But granting arguendo that the guaranty
provision in Exhibit "C-1" was fully executed
and acknowledged still defendant-appellee
Chi cannot be held liable thereunder because
the records show that the plaintiff-appellant
had neither exhausted the property of the
defendant-appellant nor had it resorted to all
legal remedies against the said defendant-
appellant as provided in Article 2058 of the
Civil Code. The obligation of a guarantor is
merely accessory under Article 2052 of the
Civil Code and subsidiary under Article 2054
of the Civil Code. Therefore, the liability of the
defendant-appellee arises only when the
principal debtor fails to comply with his
obligation." 27
Our own reading of the questioned solidary guaranty clause
yields no other conclusion than that the obligation of Chi is
only that of a guarantor. This is further bolstered by the last
sentence which speaks of waiver of exhaustion, which,
nevertheless, is ineffective in this case because the space
therein for the party whose property may not be exhausted
was not filled up. Under Article 2058 of the Civil Code, the
defense of exhaustion (excussion) may be raised by a
guarantor before he may be held liable for the obligation.
Petitioner likewise admits that the questioned provision is
a solidary guaranty clause, thereby clearly distinguishing it
from a contract of surety. It, however, described the guaranty
as solidary between the guarantors; this would have been
correct if two (2) guarantors had signed it. The clause "we
jointly and severally agree and undertake" refers to the
undertaking of the two (2) parties who are to sign it or to the
liability existing between themselves. It does not refer to the
undertaking between either one or both of them on the one
hand and the petitioner on the other with respect to the liability
described under the trust receipt. Elsewise stated, their liability
149
is not divisible as between them, i.e., it can be enforced to its
full extent against any one of them.
Furthermore, any doubt as to the import or true intent of the
solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned
solidary guaranty clause, is on a form drafted and prepared
solely by the petitioner; Chi's participation therein is limited to
the affixing of his signature thereon. It is, therefore, a contract
of adhesion; 28 as such, it must be strictly construed against
the party responsible for its preparation. 29
Neither can We agree with the reasoning of the public
respondent that this solidary guaranty clause was effectively
disregarded simply because it was not signed and witnessed
by two (2) persons and acknowledged before a notary public.
While indeed, the clause ought to have been signed by two (2)
guarantors, the fact that it was only Chi who signed the same
did not make his act an idle ceremony or render the clause
totally meaningless. By his signing, Chi became the sole
guarantor. The attestation by witnesses and the
acknowledgment before a notary public are not required by
law to make a party liable on the instrument. The rule is that
contracts shall be obligatory in whatever form they may have
been entered into, provided all the essential requisites for their
validity are present; however, when the law requires that a
contract be in some form in order that it may be valid or
enforceable, or that it be proved in a certain way, that
requirement is absolute and indispensable. 30 With respect to
a guaranty, 31 which is a promise to answer for the debt or
default of another, the law merely requires that it, or some note
or memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified. 32 While the acknowledgment of
a surety before a notary public is required to make the same
a public document, under Article 1358 of the Civil Code, a
contract of guaranty does not have to appear in a public
document.

And now to the other ground relied upon by the petitioner as
basis for the solidary liability of Chi, namely the criminal
proceedings against the latter for the violation of P.C. No. 115.
Petitioner claims that because of the said criminal
proceedings, Chi would be answerable for the civil liability
arising therefrom pursuant to Section 13 of P.D. No. 115.
Public respondent rejected this claim because such civil
liability presupposes prior conviction as can be gleaned from
the phrase "without prejudice to the civil liability arising from
the criminal offense." Both are wrong. The said section reads:
"SECTION 13. Penalty Clause. — The failure
of an entrustee to turn over the proceeds of
the sale of the goods, documents or
instruments covered by a trust receipt to the
extent of the amount owing to the entruster or
as appears in the trust receipt or to return
said goods, documents or instruments if they
were not sold or disposed of in accordance
with the terms of the trust receipt shall
constitute the crime of estafa, punishable
under the provisions of Article Three hundred
and fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the
Revised Penal Code. If the violation or
offense is committed by a corporation,
partnership, association or other juridical
entities, the penalty provided for in this
Decree shall be imposed upon the directors,
officers, employees or other officials or
persons therein responsible for the offense,
without prejudice to the civil liabilities arising
from the criminal offense."
150
A close examination of the quoted provision reveals that it is
the last sentence which provides for the correct solution. It is
clear that if the violation or offense is committed by
a corporation, partnership, association or other juridical
entities, the penalty shall be imposed upon the directors,
officers, employees or other officials or persons therein
responsible for the offense. The penalty referred to is
imprisonment, the duration of which would depend on the
amount of the fraud as provided for in Article 315 of the
Revised Penal Code. The reason for this is obvious:
corporations, partnerships, associations and other juridical
entities cannot be put in jail. However, it is these entities which
are made liable for the civil liability arising from the criminal
offense. This is the import of the clause "without prejudice to
the civil liabilities arising from the criminal offense." And, as
We stated earlier, since that violation of a trust receipt
constitutes fraud under Article 33 of the Civil Code, petitioner
was acting well within its rights in filing an independent civil
action to enforce the civil liability arising therefrom against
Philippine Rayon.
The remaining issue to be resolved concerns the propriety of
the dismissal of the case against private respondent Chi. The
trial court based the dismissal, and the respondent Court its
affirmance thereof, on the theory that Chi is not liable on the
trust receipt in any capacity — either as surety or as guarantor
— because his signature at the dorsal portion thereof was
useless; and even if he could be bound by such signature as a
simple guarantor, he cannot, pursuant to Article 2058 of the
Civil Code, be compelled to pay until after petitioner has
exhausted and resorted to all legal remedies against the
principal debtor, Philippine Rayon. The records fail to show
that petitioner had done so. 33 Reliance is thus placed
on Article 2058 of the Civil Code which provides:
"ARTICLE 2058. The guarantor cannot be
compelled to pay the creditor unless the latter

has exhausted all the property of the debtor,
and has resorted to all the legal remedies
against the debtor."
Simply stated, there is as yet no cause of action against
Chi.
We are not persuaded. Excussion is not a condition sine qua
non for the institution of an action against a guarantor.
In Southern Motors, Inc. vs. Barbosa, 34this Court stated:
"4. Although an ordinary personal guarantor
— not a mortgagor or pledgor — may
demand the aforementioned exhaustion, the
creditor may, prior thereto, secure a judgment
against said guarantor, who shall be entitled,
however, to a deferment of the execution of
said judgment against him until after the
properties of the principal debtor shall have
been exhausted to satisfy the obligation
involved in the case."
There was then nothing procedurally objectionable in
impleading private respondent Chi as a co-defendant in Civil
Case No. Q-19312 before the trial court. As a matter of
fact, Section 6, Rule 3 of the Rules of Court on permissive
joinder of parties explicitly allows it. It reads:
"SECTION 6. Permissive joinder of parties. —
All persons in whom or against whom any
right to relief in respect to or arising out of the
same transaction or series of transactions is
alleged to exist, whether jointly, severally, or
in the alternative, may, except as otherwise
provided in these rules, join as plaintiffs or be
joined as defendants in one complaint, where
any gotten of law or fact common to all such
plaintiffs or to all such defendants may arise
in the action; but the court may make such
151
orders as may be just to prevent any plaintiff
or defendant from being embarrassed or put
to expense in connection with any
proceedings in which he may have no
interest."
This is the equity rule relating to multifariousness. It is based
on trial convenience and is designed to permit the joinder of
plaintiffs or defendants whenever there is a common question
of law or fact. It will save the parties unnecessary work, trouble
and expense. 35
However, Chi's liability is limited to the principal obligation in
the trust receipt plus all the accessories thereof including
judicial costs; with respect to the latter, he shall only be liable
for those costs incurred after being judicially required to
pay. 36 Interest and damages, being accessories of the
principal obligation, should also be paid; these, however, shall
run only from the date of the filing of the complaint. Attorney's
fees may even be allowed in appropriate cases. 37
In the instant case, the attorney's fees to be paid by Chi
cannot be the same as that to be paid by Philippine Rayon
since it is only the trust receipt that is covered by the guaranty
and not the full extent of the latter's liability. All things
considered, he can be held liable for the sum of P10,000.00 as
attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in
dismissing the complaint as against private respondent Chi
and condemning petitioner to pay him P20,000 00 as
attorney's fees.
In the light of the foregoing, it would no longer be necessary to
discuss the other issues raised by the petitioner.
WHEREFORE, the instant Petition is hereby GRANTED. The
appealed Decision of 10 March 1986 of the public respondent
in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9
 152

(Quezon City) of the then Court of First Instance of Rizal in

Civil Case No. Q-19312 are hereby REVERSED and SET
ASIDE and another is hereby entered:
1. Declaring private respondent Philippine
Rayon Mills, Inc. liable on the twelve drafts in
question (Exhibits "X", "X-1" to "X-11",
inclusive) and on the trust receipt (Exhibit "C'),
and ordering it to pay petitioner: (a) the
amounts due thereon in the total sum of
P956,384.95 as of 15 September 1974, with
interest thereon at six percent (6%) per
annum from 16 September 1974 until it is fully
paid, less whatever may have been applied
thereto by virtue of foreclosure of mortgages,
if any; (b) a sum equal to ten percent (10%) of
the aforesaid amount as attorney's fees; and
(c) the costs.
2. Declaring private respondent Anacleto R.
Chi secondarily liable on the trust receipt and
ordering him to pay the face value thereof,
with interest at the legal rate, commencing
from the date of the filing of the complaint in
Civil Case No Q-19312 until the same is fully
paid as well as the costs and attorney's fees
in the sum of P10,000.00 if the writ of
execution for the enforcement of the above
awards against Philippine Rayon Mills, Inc. is
returned unsatisfied.
Costs against private respondents.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ ., concur.
||| (Prudential Bank v. Intermediate Appellate Court, G.R. No.
74886, [December 8, 1992], 290-A PHIL 1-24)

THIRD DIVISION
[G.R. No. 94209. April 30, 1991.]
FEATI BANK & TRUST COMPANY (now
CITYTRUST BANKING
CORPORATION), petitioner, vs. THE
COURT OF APPEALS, and BERNARDO E.
VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.
Ezequiel S. Consulta for private respondent.
SYLLABUS
1. COMMERCIAL LAW; BANKING LAWS; LETTER OF
CREDIT; DOCUMENTS TENDERED MUST STRICTLY
CONFORM TO THE TERMS OF LETTER OF CREDIT. — It is
a settled rule in commercial transactions involving letters of
credit that the documents tendered must strictly conform to the
terms of the letter of credit. The tender of documents by the
beneficiary (seller) must include all documents required by the
letter. A correspondent bank which departs from what has
been stipulated under the letter of credit, as when it accepts a
faulty tender, acts on its own risks and it may not thereafter be
able to recover from the buyer or the issuing bank, as the case
may be, the money thus paid to the beneficiary. Thus the rule
of strict compliance.
2. ID.; ID.; ID.; UNIFORM CUSTOMS AND PRACTICE FOR
DOCUMENTARY CREDIT (U.C.P.); APPLICABILITY
JUSTIFIED BY ARTICLE 2 OF THE CODE OF
COMMERCE. — Moreover, the incorporation of the Uniform
153
Customs and Practice for Documentary Credit (U.C.P. for
short) in the letter of credit resulted in the applicability of the
said rules in the governance of the relations between the
parties. And even if the U.C.P. was not incorporated in the
letter of credit, we have already ruled in the affirmative as to
the applicability of the U.C.P. in cases before us. In Bank of
P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the
observance of the U.C.P. in this jurisdiction is justified by
Article 2 of the Code of Commerce. Article 2 of the Code of
Commerce enunciates that in the absence of any particular
provision in the Code of commerce, commercial transactions
shall be governed by the usages and customs generally
observed. There being no specific provision which governs the
legal complexities arising from transactions involving letters of
credit not only between the banks themselves but also
between banks and seller and/or buyer, the applicability of the
U.C.P. is undeniable.
3. ID.; ID.; ID.; IRREVOCABLE CREDIT AND CONFIRMED
LETTER OF CREDIT, DIFFERENTIATED.— An irrevocable
credits refers to the duration of the letter of credit. What it
simply means is that the issuing bank may not without the
consent of the beneficiary (seller) and the applicant (buyer)
revoke his undertaking under the letter. The issuing bank does
not reserve the right to revoke the credit. On the other hand, a
confirmed letter of credit pertains to the kind of obligation
assumed by the correspondent bank. In this case, the
correspondent bank gives an absolute assurance of the
beneficiary that it will undertake the issuing bank's obligation
as its own according to the terms and conditions of the credit.
(Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-
83) Hence, the mere fact that a letter of credit is irrevocable
does not necessarily imply that the correspondent bank in
accepting the instructions of the issuing bank has also
confirmed the letter of credit.

4. ID.; ID.; ID.; CLASSIFICATIONS OF CORRESPONDENT
BANK'S FUNCTIONS. — In commercial transactions involving
letters of credit, the functions assumed by a correspondent
bank are classified according to the obligations taken up by it.
The correspondent bank may be called a notifying bank, a
negotiating bank, or a confirming bank. In case of a notifying
bank, the correspondent bank assumes no liability except to
notify and/or transmit to the beneficiary the existence of the
letter of credit. (Kronman and Co., Inc. v. Public National Bank
of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import
Banking, p. 292, cited in Agbayani, Commercial Laws of the
Philippines, Vol. 1, p. 76) A negotiating bank, on the other
hand, is a correspondent bank which buys or discounts a draft
under the letter of credit. Its liability is dependent upon the
stage of the negotiation. If before negotiation, it has no liability
with respect to the seller but after negotiation, a contractual
relationship will then prevail between the negotiating bank and
the seller. (Scanlon v. First National Bank of Mexico, 162 N.E.
567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in
Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank
assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the
letter of credit. (Shaterian, Export-Import Banking, p. 294, cited
in Agbayani, Commercial Laws of the Philippines, Vol. 1, p.
77)
5. ID.; ID.; ID.; ID.; NOTIFYING BANK; CASE AT BAR. — In
this case, the letter merely provided that the petitioner "forward
the enclosed original credit to the beneficiary." Considering the
aforesaid instruction to the petitioner by the issuing bank, the
Security Pacific National Bank, it is indubitable that the
petitioner is only a notifying bank and not a confirming bank as
ruled by the courts below. A notifying bank is not privy to the
contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with
the beneficiary to whom he assumes no liability. It follows
154
therefore that when the petitioner refused to negotiate with the
private respondent, the latter has no cause of action against
the petitioner for the enforcement of his rights under the letter.
(See Kronman and Co., Inc. v. Public National Bank of New
York, supra)
6. CIVIL LAW; OBLIGATIONS AND CONTRACT; TRUST;
EXPLAINED. — A trust has been defined as the "right,
enforceable solely in equity, to the beneficial enjoyment of
property the legal title to which is vested to another." The
concept of a trust presupposes the existence of a specific
property which has been conferred upon the person for the
benefit of another. In order therefore for the trust theory of the
private respondent to be sustained, the petitioner should have
had in its possession a sum of money as specific fund
advanced to it by the issuing bank and to be held in trust by it
in favor of the private respondent. This does not obtain in this
case.
7. ID.; ID.; ID.; A LETTER OF CREDIT DOES NOT CONVEY
THAT A SUM OF MONEY IS BEING HELD IN TRUST. — The
mere opening of a letter of credit, it is to be noted, does not
involve a specific appropriation of a sum of money in favor of
the beneficiary. It only signifies that the beneficiary may be
able to draw funds upon the letter of credit up to the
designated amount specified in the letter. It does not convey
the notion that a particular sum of money has been specifically
reserved or has been held in trust.
8. ID.; ID.; GUARANTY; INCONSISTENT WITH AN
IRREVOCABLE CREDIT. — The theory of guarantee relied
upon the by the Court of Appeals has to necessarily fail. The
concept of guarantee vis-a-vis the concept of an irrevocable
credit are inconsistent with each other. In the first place, the
guarantee theory destroys the independence of the bank's
responsibility from the contract upon which it was opened. In
the second place, the nature of both contracts is mutually in
conflict with each other. In contracts of guarantee, the

guarantor's obligation is merely collateral and it arises only
upon the default of the person primarily liable. On the other
hand, in an irrevocable credit the bank undertakes a primary
obligation. (See National Bank of Eagle Pass, Tex. v.
American National Bank of San Francisco, 282 F. 73 [1922])
9. ID.; ID.; AGENCY; RELATIONSHIP BETWEEN ISSUING
BANK AND NOTIFYING BANK IS SIMILAR TO AGENCY. —
The relationship between the issuing bank and the notifying
bank, on the contrary, is more similar to that of an agency and
not that of a guarantee. It may be observed that the notifying
bank is merely to follow the instructions of the issuing bank
which is to notify or to transmit the letter of credit to the
beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It
does not undertake any assurance that the issuing bank will
perform what has been mandated to or expected of it. As an
agent of the issuing bank, it has only to follow the instructions
of the issuing bank and to it alone is it obligated and not to the
buyer with whom it has no contractual relationship.
10. STATUTORY CONSTRUCTION; CONTROVERSY IS
DECIDED ON WHAT THE LAW IS; LAW IS ALSO TO
GOVERN FUTURE RELATIONS AMONG PEOPLE. — We
are aware of the injustice committed by Christiansen on the
private respondent but we are deciding the controversy on the
basis of what the law is, for the law is not meant to favor only
those who have been oppressed, the law is to govern future
relations among people as well. Its commitment is to all and
not to a single individual. The faith of the people in our justice
system may be eroded if we are to decide not what the law
states but what we believe it should declare. Dura lex sed lex.
DECISION
155
GUTIERREZ, JR., J p:
This is a petition for review seeking the reversal of the decision
of the Court of Appeals dated June 29, 1990 which affirmed
the decision of the Regional Trial Court of Rizal dated October
20, 1986 ordering the defendants Christiansen and the
petitioner, to pay various sums to respondent Villaluz, jointly
and severally.
The facts of the case are as follows:
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the
then defendant Axel Christiansen 2,000 cubic meters of lauan
logs at $27.00 per cubic meter FOB.
After inspecting the logs, Christiansen issued purchase order
No. 76171.
On the arrangements made and upon the instructions of the
consignee, Hanmi Trade Development, Ltd., de Santa Ana,
California, the Security Pacific National Bank of Los Angeles,
California issued Irrevocable Letter of Credit No. IC-46268
available at sight in favor of Villaluz for the sum of $54,000.00,
the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust
Company (now Citytrust) with the instruction to the latter that it
"forward the enclosed letter of credit to the beneficiary."
(Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is
on Security Pacific National Bank and that it be accompanied
by the following documents:
"1. Signed Commercial Invoice in four copies
showing the number of the purchase order
and certifying that —

a. All terms and conditions of
the purchase order have been
complied with and that all logs are
fresh cut and quality equal to or better
than that described in H.A.
Christiansen's telex #201 of May 1,
1970, and that all logs have been
marked "BEV-EX".
b. One complete set of
documents, including 1/3 original bills
of lading was airmailed to Consignee
and Parties to be advised by Hans-
Axel Christiansen, Ship and
Merchandise Broker. cdll
c. One set of non-negotiable
documents was airmailed to Han Mi
Trade Development Company and
one set to Consignee and Parties to
be advised by Hans-Axel Christiansen,
Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of
Lading with Consignee and Parties to be
advised by Hans Axel Christiansen, showing
Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd.,
Santa Ana, California.
Letter of Credit No. 46268 dated June 7,
1971.
Han Mi Trade Development Company, Ltd.,
P.O. Box 10480, Santa Ana, California 92711
156
and Han Mi Trade Development Company,
Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen,
Ship and Merchandise Broker, stating that
logs have been approved prior to shipment in
accordance with terms and conditions of
corresponding purchase Order. (Record, Vol.
1 pp. 11-12)
Also incorporated by reference in the letter of credit is the
Uniform Customs and Practice for Documentary Credits (1962
Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory"
which was chartered by Christiansen. Before its loading, the
logs were inspected by custom inspectors Nelo Laurente,
Alejandro Cabiao, Estanislao Edera from the Bureau of
Customs (Records, Vol. I, p. 124) and representatives Rogelio
Cantuba and Jesus Tadena of the Bureau of Forestry
(Records, Vol. I, pp. 16-17) all of whom certified to the good
condition and exportability of the logs.
After the loading of the logs was completed, the Chief Mate,
Shao Shu Wang issued a mate receipt of the cargo which
stated the same are in good condition (Records, Vol. I, p. 363).
However, Christiansen refused to issue the certification as
required in paragraph 4 of the letter of credit, despite several
requests made by the private respondent.
Because of the absence of the certification by Christiansen,
the Feati Bank and Trust Company refused to advance the
payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended,
however up to July 31, 1971) without the private respondent
receiving any certification from Christiansen. LLpr

The persistent refusal of Christiansen to issue the certification
prompted the private respondent to bring the matter before the
Central Bank. In a memorandum dated August 16, 1971, the
Central Bank ruled that:
". . . pursuant to the Monetary Board
Resolution No. 1230 dated August 3, 1971, in
all log exports, the certification of the lumber
inspectors of the Bureau of Forestry . . . shall
be considered final for purposes of
negotiating documents. Any provision in any
letter of credit covering log exports requiring
certification of buyer's agent or representative
that said logs have been approved for
shipment as a condition precedent to
negotiation of shipping documents shall not
be allowed." (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were
received by the consignee, Hamni Trade Development
Company, to whom Christiansen sold the logs for the amount
of $37.50 per cubic meter, for a net profit of $10 per cubic
meter. Hanmi Trade Development Company, on the other
hand sold the logs to Taisung Lumber Company at Inchon,
Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen
to execute the certification proved futile, Villaluz, on
September 1, 1971, instituted an action for mandamus and
specific performance against Christiansen and the Feati Bank
and Trust Company (now Citytrust) before the then Court of
First Instance of Rizal. The petitioner was impleaded as
defendant before the lower court only to afford complete relief
should the court a quo order Christiansen to execute the
required certification.
The complaint prayed for the following:
157
1. Christiansen be ordered to issue the
certification required of him under the Letter
of Credit;
2. Upon issuance of such certification, or, if
the court should find it unnecessary, FEATI
BANK be ordered to accept negotiation of the
Letter of Credit and make payment thereon to
Villaluz;
3. Order Christiansen to pay damages to the
plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial,
Christiansen left the Philippines without informing the Court
and his counsel. Hence, Villaluz, filed an amended complaint
to make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the
amended complaint.
After trial, the lower court found:
"The liability of the defendant
CHRISTIANSEN is beyond dispute, and the
plaintiff's right to demand payment is
absolute. Defendant CHRISTIANSEN having
accepted delivery of the logs by having them
loaded in his chartered vessel the 'Zenlin
Glory' and shipping them to the consignee,
his buyer Han Mi Trade in Inchon, South
Korea (Art. 1585, Civil Code), his obligation to
pay the purchase order had clearly arisen and
the plaintiff may sue and recover the price of
the goods (Art. 1595, id). prLL
"The Court believes that the defendant
CHRISTIANSEN acted in bad faith and deceit
and with intent to defraud the plaintiff,

reflected in and aggravated by, not only his
refusal to issue the certification that would
have enabled without question the plaintiff to
negotiate the letter of credit, but his accusing
the plaintiff in his answer of fraud,
intimidation, violence and deceit. These
accusations said defendant did not attempt to
prove, as in fact he left the country without
ever notifying his own lawyer. It was to the
Court's mind a pure swindle.
"The defendant Feati Bank and Trust
Company, on the other hand, must be held
liable together with his (sic) co-defendant for
having, by its wrongful act, i.e., its refusal to
negotiate the letter of credit in the absence of
CHRISTIANSEN's certification (in spite of the
Central Bank's ruling that the requirement
was illegal), prevented payment to the
plaintiff. The said letter of credit, as may be
seen on its face, is irrevocable and
the issuing bank, the Security Pacific National
Bank in Los Angeles, California, undertook by
its terms that the same shall be honored upon
its presentment. On the other hand, the
notifying bank, the defendant Feati Bank and
Trust Company, by accepting the instructions
from the issuing bank, itself assumed the very
same undertaking as the issuing bank under
the terms of the letter of credit.
xxx xxx xxx
"The Court likewise agrees with the plaintiff
that the defendant BANK may also be held
liable under the principles and laws on both
trust and estoppel. When the defendant
BANK accepted its role as the notifying and
158
negotiating bank for and in behalf of the
issuing bank, it in effect accepted a trust
reposed on it, and became a trustee in
relation to plaintiff as the beneficiary of the
letter of credit. As trustee, it was then duty
bound to protect the interests of the plaintiff
under the terms of the letter of credit, and
must be held liable for damage and loss
resulting to the plaintiff from its failure to
perform that obligation.
"Furthermore, when the defendant BANK
assumed the role of a notifying and
negotiating BANK it in effect represented to
the plaintiff that, if the plaintiff complied with
the terms and conditions of the letter of credit
and presents the same to the BANK together
with the documents mentioned therein the
said BANK will pay the plaintiff the amount of
the letter of credit. The Court is convinced
that it was upon the strength of this letter of
credit and this implied representation of the
defendant BANK that the plaintiff delivered
the logs to defendant CHRISTIANSEN,
considering that the issuing bank is a foreign
bank with whom plaintiff had no business
connections and CHRISTIANSEN had not
offered any other Security for the payment of
the logs. Defendant BANK cannot now be
allowed to deny its commitment and liability
under the letter of credit: Cdpr
'A holder of a promissory note
given because of gambling who
indorses the same to an innocent
holder for value and who assures said
party that the note has no legal defect,

is in estoppel from asserting that there
had been an illegal consideration for
the note, and so, he has to pay its
value.' (Rodriguez v. Martinez, 5 Phil.
67).'
"The defendant BANK, in insisting upon the
certification of defendant CHRISTIANSEN as
a condition precedent to negotiating the letter
of credit, likewise in the Court's opinion acted
in bad faith, not only because of the clear
declaration of the Central Bank that such a
requirement was illegal, but because the
BANK with all the legal counsel available to it,
must have known that the condition was void
since it depended on the sole will of the
debtor, the defendant CHRISTIANSEN. (Art.
1182, Civil Code)" (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20,
1986, ruled in favor of the private respondent. The dispositive
portion of its decision reads:
'WHEREFORE, judgment is hereby rendered
for the plaintiff, ordering the defendants to pay
the plaintiff, jointly and severally, the following
sums:
"a) $54,000.00 (US), or its
peso equivalent at the prevailing rate
as of the time payment is actually
made, representing the purchase price
of the logs;
"b) P17,340.00, representing
government fees and charges paid by
159
plaintiff in connection with the logs
shipment in question;
"c) P10,000.00 as temperate
damages (for trips made to Bacolod
and Korea).
"All three foregoing sums shall be with
interest thereon at 12% per annum from
September 1, 1971, when the complaint was
filed, until fully paid:
"d) P70,000.00 as moral
damages;
"e) P30,000.00 as exemplary
damages; and
"f) P30,000.00 as attorney's
fees and litigation expense." (Rollo, p.
28)
The petitioner received a copy of the decision on November 3,
1986. Two days thereafter, or on November 5, 1986, it filed a
notice of appeal.
On November 10, 1986, the private respondent filed a motion
for the immediate execution of the judgment on the ground
that the appeal of the petitioner was frivolous and dilatory.
The trial court ordered the immediate execution of its judgment
upon the private respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a
motion to suspend the implementation of the writ of execution.
Both motions were, however, denied. Thus, petitioner filed
before the Court of Appeals a petition for certiorari and
prohibition with preliminary injunction to enjoin the immediate
execution of the judgment. LibLex

The Court of Appeals in a decision dated April 9, 1987 granted
the petition and nullified the order of execution, the dispositive
portion of the decision states:
"WHEREFORE, the petition for certiorari is
granted. Respondent Judge's order of
execution dated December 29, 1986, as well
as his order dated January 14, 1987 denying
the petitioner's urgent motion to suspend the
writ of execution against its properties are
hereby annulled and set aside insofar as they
are sought to be enforced and implemented
against the petitioner Feati Bank & Trust
Company, now Citytrust Banking Corporation,
during the pendency of its appeal from the
adverse decision in Civil Case No. 15121.
However, the execution of the same decision
against defendant Axel Christiansen who did
not appeal said decision may proceed
unimpeded. The Sheriff's levy on the
petitioner's properties, and the notice of sale
dated January 13, 1987 (Annex M), are
hereby annulled and set aside. (Rollo, p. 44)
A motion for reconsideration was thereafter filed by the private
respondent. The Court of Appeals, in a resolution dated June
29, 1987 denied the motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the
Court of Appeals was given due course. In its decision dated
June 29, 1990, the Court of Appeals affirmed the decision of
the lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and
negative defenses" section of its answer that
it was the bank to negotiate the letter of credit
issued by the Security Pacific National Bank
of Los Angeles, California. (Record, pp. 156,
160
157). Feati Bank did notify Villaluz of such
letter of credit. In fact, as such negotiating
bank, even before the letter of credit was
presented for payment, Feati Bank had
already made an advance payment of
P75,000.00 to Villaluz in anticipation of such
presentment. As the negotiating bank, Feati
Bank, by notifying Villaluz of the letter of
credit in behalf of the issuing bank (Security
Pacific), confirmed such letter of credit and
made the same also its own obligation. This
ruling finds support in the authority cited by
Villaluz:
"A confirmed letter of credit is one in which
the notifying bank gives its assurance also
that the opening bank's obligation will be
performed. In such a case, the notifying bank
will not simply transmit but will confirm the
opening bank's obligation by making it also its
own undertaking, or commitment, or guaranty
or obligation." (Ward & Harfield, 28-29, cited
in Agbayani, Commercial Laws, 1978 edition,
p. 77). LLphil
Feati Bank argues further that it would be
considered as the negotiating bank only upon
negotiation of the letter of credit. This stance
is untenable. Assurance, commitments or
guaranties supposed to be made by notifying
banks to the beneficiary of a letter of credit,
as defined above, can be relevant or
meaningful only with respect to a future
transaction, that is, negotiation. Hence, even
before actual negotiation, the notifying bank,
by the mere act of notifying the beneficiary of

the letter of credit, assumes as of that
moment the obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the
issuing bank and in effect also of the latter's
principal or client, i.e. Hans Axel-Christiansen.
(sic) Such being the case, when Christiansen
refused to issue the certification, it was as
though refusal was made by Feati Bank Itself
Feati Bank should have taken steps to secure
the certification from Christiansen; and, if the
latter should still refuse to comply, to hale him
to court. In short, Feati Bank should have
honored Villaluz's demand for payment of his
logs by virtue of the irrevocable letter of credit
issued in Villaluz's favor and guaranteed by
Feati Bank.
3. The decision promulgated by this Court in
CA-G.R. Sp No. 11051, which contained the
statement "Since Villaluz' draft was not drawn
strictly in compliance with the terms of the
letter of credit, Feati Bank's refusal to
negotiate it was justified," did not dispose of
this question on the merits. In that case, the
question involved was jurisdiction or
discretion, and not judgment. The quoted
pronouncement should not be taken as a
preemptive judgment on the merits of the
present case on appeal.
4. The original action was for "mandamus
and/ or specific performance." Feati Bank
may not be a party to the transaction between
Christiansen and Security Pacific National
Bank on the one hand, and Villaluz on the
other hand; still, being guarantor or agent of
Christiansen and or Security Pacific National
161
Bank which had directly dealt with Villaluz,
Feati Bank may be sued properly on specific
performance as a procedural means by which
the relief sought by Villaluz may be
entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals
reads:
WHEREFORE, the decision appealed from is
affirmed; and accordingly, the appeal is
hereby dismissed. Costs against the
petitioner. (Rollo. p. 33)
Hence, this petition for review.
The petitioner interposes the following reasons for the
allowance of the petition.
First Reason
THE RESPONDENT COURT
ERRONEOUSLY CONCLUDED FROM THE
ESTABLISHED FACTS AND INDEED, WENT
AGAINST THE EVIDENCE AND DECISION
OF THIS HONORABLE COURT, THAT
PETITIONER BANK IS LIABLE ON THE
LETTER OF CREDIT DESPITE PRIVATE
RESPONDENT'S NON-COMPLIANCE WITH
THE TERMS THEREOF.
Second Reason
THE RESPONDENT COURT COMMITTED
AN ERROR OF LAW WHEN IT HELD THAT
PETITIONER BANK, BY NOTIFYING
PRIVATE RESPONDENT OF THE LETTER
OF CREDIT, CONFIRMED SUCH CREDIT
AND MADE THE SAME ALSO ITS

OBLIGATION AS GUARANTOR OF THE
ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE
COMMITTED AN ERROR OF LAW WHEN IT
AFFIRMED THE TRIAL COURT'S
DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a
correspondent bank is to be held liable under the letter of
credit despite non-compliance by the beneficiary with the
terms thereof? llcd
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters
of credit that the documents tendered must strictly conform to
the terms of the letter of credit. The tender of documents by
the beneficiary (seller) must include all documents required by
the letter. A correspondent bank which departs from what has
been stipulated under the letter of credit, as when it accepts a
faulty tender, acts on its own risks and it may not thereafter be
able to recover from the buyer or the issuing bank, as the case
may be, the money thus paid to the beneficiary. Thus the rule
of strict compliance.
In the United States, commercial transactions involving letters
of credit are governed by the rule of strict compliance. In the
Philippines, the same holds true. The same rule must also be
followed.
The case of Anglo-South American Trust Co. v. Uhe et al. (184
N.E. 741 [1933]) expounded clearly on the rule of strict
compliance.
"We have heretofore held that these letters of
credit are to be strictly complied with, which
documents, and shipping documents must be
162
followed as stated in the letter. There is no
discretion in the bank or trust company to
waive any requirements. The terms of the
letter constitutes an agreement between the
purchaser and the bank." (p. 743)
Although in some American decisions, banks are granted a
little discretion to accept a faulty tender as when the other
documents may be considered immaterial or superfluous, this
theory could lead to dangerous precedents. Since a bank
deals only with documents, it is not in a position to determine
whether or not the documents required by the letter of credit
are material or superfluous. The mere fact that the document
was specified therein readily means that the document is of
vital importance to the buyer.
Moreover, the incorporation of the Uniform Customs and
Practice for Documentary Credit (U.C.P. for short) in the letter
of credit resulted in the applicability of the said rules in the
governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of
credit, we have already ruled in the affirmative as to the
applicability of the U.C.P. in cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we
pronounced that the observance of the U.C.P. in this
jurisdiction is justified by Article 2 of the Code of
Commerce. Article 2 of the Code of Commerce enunciates
that in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed by the
usages and customs generally observed.
There being no specific provision which governs the legal
complexities arising from transactions involving letters of credit
not only between the banks themselves but also between
banks and seller and or buyer, the applicability of the U.C.P. is
undeniable. LibLex

The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
"An irrevocable credit is a definite undertaking
on the part of the issuing bank and constitutes
the engagement of that bank to the
beneficiary and bona fide holders of drafts
drawn and or documents presented
thereunder, that the provisions for payment,
acceptance or negotiation contained in the
credit will be duly fulfilled, provided that all the
terms and conditions of the credit are
complied with.
"An irrevocable credit may be advised to a
beneficiary through another bank (the
advising bank) without engagement on the
part of that bank, but when an issuing bank
authorizes or requests another bank to
confirm its irrevocable credit and the latter
does so, such confirmation constitutes a
definite undertaking of the confirming bank . .
."
Article 7.
"Banks must examine all documents with
reasonable care to ascertain that they appear
on their face to be in accordance with the
terms and conditions of the credit."
Article 8.
"Payment, acceptance or negotiation against
documents which appear on their face to be
in accordance with the terms and conditions
of a credit by a bank authorized to do so,
163
binds the party giving the authorization to take
up documents and reimburse the bank which
has effected the payment, acceptance or
negotiation." (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may
only negotiate, accept or pay, if the documents tendered to it
are on their face in accordance with the terms and conditions
of the documentary credit. And since a correspondent bank,
like the petitioner, principally deals only with documents, the
absence of any document required in the documentary credit
justifies the refusal by the correspondent bank to negotiate,
accept or pay the beneficiary, as it is not its obligation to look
beyond the documents. It merely has to rely on the
completeness of the documents tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the
Court of Appeals that the petitioner is not a notifying bank but
a confirming bank, we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable
credit with that of a confirmed credit. In its decision, the trial
court ruled that the petitioner, in accepting the obligation to
notify the respondent that the irrevocable credit has been
transmitted to the petitioner on behalf of the private
respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an
irrevocable credit is not synonymous with a confirmed credit.
These types of letters have different meanings and the legal
relations arising from there varies. A credit may be an
irrevocable credit and at the same time a confirmed credit or
vice-versa. cdphil
An irrevocable credit refers to the duration of the letter of
credit. What is simply means is that the issuing bank may not
without the consent of the beneficiary (seller) and the applicant
(buyer) revoke his undertaking under the letter. The issuing
bank does not reserve the right to revoke the credit. On the

other hand, a confirmed letter of credit pertains to the kind of
obligation assumed by the correspondent bank. In this case,
the correspondent bank gives an absolute assurance to the
beneficiary that it will undertake the issuing bank's obligation
as its own according to the terms and conditions of the credit.
(Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-
83)
Hence, the mere fact that a letter of credit is irrevocable does
not necessarily imply that the correspondent bank in accepting
the instructions of the issuing bank has also confirmed the
letter of credit. Another error which the lower court and the
Court of Appeals made was to confuse the obligation assumed
by the petitioner.
In commercial transactions involving letters of credit, the
functions assumed by a correspondent bank are classified
according to the obligations taken up by it. The correspondent
bank may be called a notifying bank, a negotiating bank, or a
confirming bank.
In case of a notifying bank, the correspondent bank assumes
no liability except to notify and or transmit to the beneficiary
the existence of the letter of credit. (Kronman and Co., Inc. v.
Public National Bank of New York, 218 N.Y.S. 616 [1926];
Shaterian, Export-Import Banking, p. 292, cited in Agbayani,
Commercial Laws of the Philippines, Vol. 1, p. 76) A
negotiating bank, on the other hand, is a correspondent bank
which buys or discounts a draft under the letter of credit. Its
liability is dependent upon the stage of the negotiation. If
before negotiation, it has no liability with respect to the seller
but after negotiation, a contractual relationship will then prevail
between the negotiating bank and the seller. (Scanlon v. First
National Bank of Mexico, 162 N.E. 667 [1928]; Shaterian,
Export-Import Banking, p. 293, cited in Agbayani, Commercial
Laws of the Philippines, Vol. 1, p. 76)
164
In the case of a confirming bank, the correspondent bank
assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the
letter of credit. (Shaterian, Export-Import Banking, p. 294, cited
in Agbayani Commercial Laws of the Philippines, Vol. 1, p. 77)
In this case, the letter merely provided that the petitioner
"forward the enclosed original credit to the beneficiary."
(Records, Vol. I, p. 11) Considering the aforesaid instruction to
the petitioner by the issuing bank, the Security Pacific National
Bank, it is indubitable that the petitioner is only a notifying
bank and not a confirming bank as ruled by the courts
below. cdphil
If the petitioner was a confirming bank, then a categorical
declaration should have been stated in the letter of credit that
the petitioner is to honor all drafts drawn in conformity with the
letter of credit. What was simply stated therein was the
instruction that the petitioner forward the original letter of credit
to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility
was solely to notify and or transmit the documentary of credit
to the private respondent and its obligation ends there.
The notifying bank may suggest to the seller its willingness to
negotiate, but this fact alone does not imply that the notifying
bank promises to accept the draft drawn under the
documentary credit.
A notifying bank is not a privy to the contract of sale between
the buyer and the seller, its relationship is only with that of the
issuing bank and not with the beneficiary to whom he assumes
no liability. It follows therefore that when the petitioner refused
to negotiate with the private respondent, the latter has no
cause of action against the petitioner for the enforcement of
his rights under the letter. (See Kronman and Co., Inc. v.
Public National Bank of New York, supra)

In order that the petitioner may be held liable under the letter,
there should be proof that the petitioner confirmed the letter of
credit.
The records are, however, bereft of any evidence which will
disclose that the petitioner has confirmed the letter of credit
The only evidence in this case, and upon which the private
respondent premised his argument, is the P75,000.00 loan
extended by the petitioner to him.
The private respondent relies on this loan to advance his
contention that the letter of credit was confirmed by the
petitioner. He claims that the loan was granted by the
petitioner to him, "in anticipation of the presentment of the
letter of credit."
The proposition advanced by the private respondent has no
basis in fact or law. That the loan agreement between them be
construed as an act of confirmation is rather far-fetched, for it
depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance
on the part of the petitioner that it will undertake the issuing
bank's obligation as its own. Verily, the loan agreement it
entered into cannot be categorized as an emphatic assurance
that it will carry out the issuing bank's obligation as its own.
The loan agreement is more reasonably classified as an
isolated transaction independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the
money to the private respondent in anticipation that it would
later be paid by the latter upon the receipt of the letter. Yet, we
would have no basis to rule definitively that such "act" should
be construed as an act of confirmation.
The private respondent no doubt was in need of money in
loading the logs on the ship "Zenlin Glory" and the only way to
satisfy this need was to borrow money from the petitioner
165
which the latter granted. From these circumstances, a logical
conclusion that can be gathered is that the letter of credit was
merely to serve as a collateral.
At the most, when the petitioner extended the loan to the
private respondent, it assumed the character of a negotiating
bank. Even then, the petitioner will still not be liable, for a
negotiating bank before negotiation has no contractual
relationship with the seller.
The case of Scanlon v. First National Bank
(supra) perspicuously explained the relationship between the
seller and the negotiating bank, viz:
"It may buy or refuse to buy as it chooses.
Equally, it must be true that it owes no
contractual duty toward the person for whose
benefit the letter is written to discount or
purchase any draft drawn against the credit.
No relationship of agent and principal, or of
trustee and cestui, between the receiving
bank and the beneficiary of the letter is
established." (P. 568)
Whether therefore the petitioner is a notifying bank or a
negotiating bank, it cannot be held liable. Absent any definitive
proof that it has confirmed the letter of credit or has actually
negotiated with the private respondent, the refusal by the
petitioner to accept the tender of the private respondent is
justified.
In regard to the finding that the petitioner became a "trustee in
relation to the plaintiff (private respondent) as the beneficiary
of the letter of credit," the same has no legal basis.

A trust has been defined as the "right, enforceable solely in
equity, to the beneficial enjoyment of property the legal title to
which is vested to another." (89 C.J.S. 712)
The concept of a trust presupposes the existence of a specific
property which has been conferred upon the person for the
benefit of another. In order therefore for the trust theory of the
private respondent to be sustained, the petitioner should have
had in its possession a sum of money as specific fund
advanced to it by the issuing bank and to be held in trust by it
in favor of the private respondent. This does not obtain in this
case. LibLex
The mere opening of a letter of credit, it is to be noted, does
not involve a specific appropriation of a sum of money in favor
of the beneficiary. It only signifies that the beneficiary may be
able to draw funds upon the letter of credit up to the
designated amount specified in the letter. It does not convey
the notion that a particular sum of money has been specifically
reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the
correspondent bank does not receive in advance the sum of
money from the buyer or the issuing bank. On the contrary,
when the correspondent bank accepts the tender and pays the
amount stated in the letter, the money that it doles out comes
not from any particular fund that has been advanced by the
Issuing bank, rather it gets the money from its own funds and
then later seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may
not be considered a trustee. As the petitioner is only a
notifying bank, its acceptance of the instructions of the issuing
bank will not create estoppel on its part resulting in the
acceptance of the trust. Precisely, as a notifying bank, its only
obligation is to notify the private respondent of the existence of
the letter of credit. How then can such create estoppel when
that is its only duty under the law?
166
We also find erroneous the statement of the Court of Appeals
that the petitioner "acted as a guarantor of the issuing bank
and in effect also of the latter's principal or client, i.e., Hans
Axel Christiansen."
It is a fundamental rule that an irrevocable credit is
independent not only of the contract between the buyer and
the seller but also of the credit agreement between the issuing
bank and the buyer. (See Kingdom of Sweden v. New York
Trust Co., 96 N.Y.S. 2d 779 [1949]) The relationship between
the buyer (Christiansen) and the issuing bank (Security Pacific
National Bank) is entirely independent from the letter of credit
issued by the latter.
The contract between the two has no bearing as to the
noncompliance by the buyer with the agreement between the
latter and the seller. Their contract is similar to that of a
contract of services (to open the letter of credit) and not that of
agency as was intimated by the Court of Appeals. The
unjustified refusal therefore by Christiansen to issue the
certification under the letter of credit should not likewise be
charged to the issuing bank.
As a mere notifying bank, not only does the petitioner not have
any contractual relationship with the buyer, it has also nothing
to do with the contract between the issuing bank and the buyer
regarding the issuance of the letter of credit. LibLex
The theory of guarantee relied upon by the Court of Appeals
has to necessarily fail. The concept of guarantee vis-a-vis the
concept of an irrevocable credit are inconsistent with each
other.
In the first place, the guarantee theory destroys the
independence of the bank's responsibility from the contract
upon which it was opened. In the second place, the nature of
both contracts is mutually in conflict with each other. In
contracts of guarantee, the guarantor's obligation is merely
collateral and it arises only upon the default of the person

primarily liable. On the other hand, in an irrevocable credit the
bank undertakes a primary obligation. (See National Bank of
Eagle Pass, Tex v. American National Bank of San Francisco,
282 F. 73 [1922])
The relationship between the issuing bank and the notifying
bank, on the contrary, is more similar to that of an agency and
not that of a guarantee. It may be observed that the notifying
bank is merely to follow the instructions of the issuing bank
which is to notify or to transmit the letter of credit to the
beneficiary. (See Kronman v. Public National Bank of New
York, supra). Its commitment is only to notify the beneficiary. It
does not undertake any assurance that the issuing bank will
perform what has been mandated to or expected of it. As an
agent of the issuing bank, it has only to follow the instructions
of the issuing bank and to it alone is it obligated and not to
buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the
documents required under the letter of credit, may refuse to
negotiate or accept the drafts drawn thereunder and it will still
not be held liable for its only engagement is to notify and or
transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming
bank, the petitioner cannot be forced to pay the amount under
the letter. As we have previously explained, there was a failure
on the part of the private respondent to comply with the terms
of the letter of credit.
The failure by him to submit the certification was fatal to his
case. The U.C.P. which is incorporated in the letter of credit
ordains that the bank may only pay the amount specified
under the letter if all the documents tendered are on their face
in compliance with the credit. It is not tasked with the duty of
ascertaining the reason or reasons why certain documents
have not been submitted, as it is only concerned with the
167
documents. Thus, whether or not the buyer has performed his
responsibility towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on
the private respondent but we are deciding the controversy on
the basis of what the law is, for the law is not meant to favor
only those who have been oppressed, the law is to govern
future relations among people as well. Its commitment is to all
and not to a single individual. The faith of the people in our
justice system may be eroded if we are to decide not what the
law states but what we believe it should declare. Dura lex sed
lex. llcd
Considering the foregoing, the materiality of ruling upon the
validity of the certificate of approval required of the private
respondent to submit under the letter of credit, has become
insignificant.
In any event, we affirm the earlier ruling of the Court of
Appeals dated April 9, 1987 in regard to the petition before it
for certiorari and prohibition with preliminary injunction, to wit:
"There is no merit in the respondent's
contention that the certification required in
condition No. 4 of the letter of credit was
"patently illegal." At the time the letter of credit
was issued there was no Central Bank
regulation prohibiting such a condition in the
letter of credit. The letter of credit (Exh. C)
was issued on June 7, 1971, more than two
months before the issuance of the Central
Bank Memorandum on August 16, 1971
disallowing such a condition in a letter of
credit. In fact the letter of credit had already
expired on July 30, 1971 when the Central
Bank memorandum was issued. In any event,
it is difficult to see how such a condition could
be categorized as illegal or unreasonable
 168

since all that plaintiff Villaluz, as seller of the

logs, could and should have done was to
refuse to load the logs on the vessel "Zenlin
Glory", unless Christiansen first issued the
required certification that the logs had been
approved by him to be in accordance with the
terms and conditions of his purchase order.
Apparently, Villaluz was in too much haste to
ship his logs without taking all due
precautions to assure that all the terms and
conditions of the letter of credit had been
strictly complied with, so that there would be
no hitch in its negotiation." (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the
petition and hereby NULLIFIES and SETS ASIDE the decision
of the Court of Appeals dated June 29, 1990. The amended
complaint in Civil Case No. 15121 is DISMISSED.
SO ORDERED.
Feliciano, Bidin and Davide, Jr., JJ., concur.
Fernan, C.J., took no part.

||| (Feati Bank & Trust Co. v. Court of Appeals, G.R. No.
94209, [April 30, 1991], 273 PHIL 832-855)

FIRST DIVISION
[G.R. No. L-24821. October 16, 1970.]
BANK OF THE PHILIPPINE
ISLANDS, plaintiff-appellee, vs. DE RENY
FABRIC INDUSTRIES, INC., AURORA T.
TUYO and AURORA
CARCERENYalias AURORA C.
GONZALES, defendants-appellants.
Aviado & Aranda for plaintiff-appellee.
S. Emiliano Calma for defendants-appellants.
SYLLABUS
1. COMMERCIAL LAW; LETTERS OF CREDIT; TERMS OF
COMMERCIAL LETTER OF CREDIT AGREEMENTS,
BINDING. — Where appellants agreed, under the terms of the
Commercial Letter of Credit Agreements, that the Bank shall
not be responsible for the existence, character, quality,
quantity, conditions, packing, value or delivery of the property
purporting to be represented by the documents; nor, for any
difference in character, quality, quantity, condition, or value of
the property from that expressed in documents, or for partial or
incomplete shipment, etc., said appellants have no recourse
but to comply with the covenant.
2. ID.; ID.; CUSTOMS AND USAGES IN INTERNATIONAL
BANKING AND FINANCIAL CIRCLES. — Where it is proven
as a fact that a custom exists to the effect that a bank is not
duty bound to verify whether what has been described in the
letters of credit or drafts or shipping documents actually tallies
169
with what was loaded aboard the ship, appellants cannot shift
the burden of loss to the bank arising from the violation by
their vendor of its presentation. Article 10 of the Uniform
Customs and Practices for Documentary Credits Fixed for the
Thirteenth Congress of International Chamber of Commerce to
which the Philippines is a signatory nation provides that, "in
documentary credit operations, all parties concerned deal in
documents and not in goods. Payment, negotiation or
acceptance against documents in accordance with the terms
and conditions of a credit by a Bank authorized to do so binds
the party giving the authorization to-take up the documents
and reimburse the Bank making the payment, negotiation or
acceptance."
DECISION
CASTRO, J.:
This is an appeal from the decision of the Court of First
Instance of Manila ordering the defendants-appellants to pay
to the Bank of the Philippine Islands (hereinafter referred to as
the Bank), jointly and severally, the value of the credit it
extended to them in several letters of credit which the Bank
opened at the behest of the defendants-appellants to finance
their importation of dyestuffs from the United States, which
however turned out to be mere colored chalk upon arrival and
inspection thereof at the port of Manila.
The record shows that on four (4) different occasions in 1961,
the De Reny Fabric Industries, Inc., a Philippine corporation
through its co-defendants-appellants, Aurora
Carcereny, alias Aurora C. Gonzales, and Aurora T. Tuyo,
president and secretary, respectively of the corporation,
applied to the Bank for four (4) irrevocable commercial letters

of credit to cover the purchase by the corporation of goods
described in the covering L/C applications as "dyestuffs of
various colors" from its American supplier, the J.B. Distributing
Company. All the applications of the corporation were
approved, and the corresponding Commercial L/C Agreements
were executed pursuant to banking procedures. Under these
agreements, the aforementioned officers of the corporation
bound themselves personally as joint and solidary debtors with
the corporation. Pursuant to banking regulations then in force,
the corporation delivered to the Bank peso marginal deposits
as each letter of credit was opened.
The dates and amounts of the L/Cs applied for and approved
as well as the peso marginal deposits made were,
respectively, as follows:
Date Application Amount
Marginal
& L/C No Deposit
Oct. 10, 1961 61/1413
$57,658.38 P 43,407.33
Oct. 23, 1961 61/1483
$25,867.34 19,473.64
Oct. 30, 1961 61/1495
$19,408.39 14,610.88
Nov. 10, 1961 61/1564
$26,687.64 20,090.90
TOTAL $129,621.75 P97,582.75
By virtue of the foregoing transactions, the Bank issued
irrevocable commercial letters of credit addressed to its
correspondent banks in the United States, with uniform
instructions for them to notify the beneficiary thereof, the J.B.
Distributing Company, that they have been authorized to
negotiate the latter's sight drafts up to the amounts mentioned
170
therein, respectively, if accompanied, upon presentation, by a
full set of negotiable clean "on board" ocean bills of lading,
covering the merchandise appearing in the L/Cs, that is,
dyestuffs of various colors. Consequently, the J.B. Distributing
Company drew upon, presented to and negotiated with these
banks, its sight drafts covering the amounts of the
merchandise ostensibly being exported by it, together with
clean bills of lading, and collected the full value of the drafts up
to the amounts appearing in the L/Cs as above indicated.
These correspondent banks then debited the account of the
Bank of the Philippine Islands with them up to the full value of
the drafts presented by the J.B. Distributing Company, plus
commission thereon, and, thereafter, endorsed and forwarded
all documents to the Bank of the Philippine Islands.
In the meantime, as each shipment (covered by the
abovementioned letters of credit) arrived in the Philippines, the
De Reny Fabric Industries, Inc. made partial payments to the
Bank amounting, in the aggregate, to P90,000. Further
payments were, however, subsequently discontinued by the
corporation when it became established, as a result of a
chemical test conducted by the National Science Development
Board, that the goods that arrived in Manila were colored
chalks instead of dyestuffs.
The corporation also refused to take possession of these
goods, and for this reason, the Bank caused them to be
deposited with a bonded warehouse paying therefor the
amount of P12,609.64 up to the filing of its complaint with the
court below on December 10, 1962.
On October 24, 1963 the lower court rendered its decision
ordering the corporation and its co-defendants (the herein
appellants) to pay to the plaintiff-appellee the amount of
P291,807.46, with interest thereon, as provided for in the L/C
Agreements, at the rate of 7% per annum from October 31,
1962 until fully paid, plus costs.

It is the submission of the defendants-appellants that it was
the duty of the foreign correspondent banks of the Bank of the
Philippine Islands to take the necessary precaution to insure
that the goods shipped under the covering L/Cs conformed
with the item appearing therein, and, that the foregoing banks
having failed to perform this duty, no claim for recoupment
against the defendants-appellants, arising from the losses
incurred for the non-delivery or defective delivery of the
articles ordered, could accrue.
We can appreciate the sweep of the appellants' argument, but
we also find that it is nestled hopelessly inside a salient where
the valid contract between the parties and the internationally
accepted customs of the banking trade must prevail. 1
Under the terms of their Commercial Letter of Credit
Agreements with the Bank, the appellants agreed that the
Bank shall not be responsible for the "existence, character,
quality, quantity, conditions, packing, value, or delivery of the
property purporting to be represented by documents; for any
difference in character, quality, quantity, condition, or value of
the property from that expressed in documents," or for "partial
or incomplete shipment, or failure or omission to ship any or all
of the property referred to in the Credit," as well as "for any
deviation from instructions, delay, default or fraud by the
shipper or anyone else in connection with the property the
shippers or vendors and ourselves [purchasers] or any of us."
Having agreed to these terms, the appellants have, therefore,
no recourse but to comply with their covenant. 2
But even without the stipulation recited above, the appellants
cannot shift the burden of loss to the Bank on account of the
violation by their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial
below that banks, in providing financing in international
business transactions such as those entered into by the
appellants, do not deal with the property to be exported or
171
shipped to the importer, but deal only with documents. The
Bank introduced in evidence a provision contained in the
"Uniform Customs and Practices for Commercial Documentary
Credits Fixed for the Thirteenth Congress of International
Chamber of Commerce," to which the Philippines is a
signatory nation. Article 10 thereof provides:
"In documentary credit
operations, all parties concerned deal in
documents and not in goods.—
Payment, negotiation or acceptance
against documents in accordance with
the terms and conditions of a credit by a
Bank authorized to do so binds the party
giving the authorization to take up the
documents and reimburse the Bank
making the payment, negotiation or
acceptance."
The existence of a custom in international banking and
financing circles negating any duty on the part of a bank to
verify whether what has been described in letters of credits or
drafts or shipping documents actually tallies with what was
loaded aboard ship, having been positively proven as a fact,
the appellants are bound by this established usage. They
were, after all, the ones who tapped the facilities afforded by
the Bank in order to engage in international business.
ACCORDINGLY, the judgment a quo is affirmed, at
defendants-appellants' cost. This is without prejudice to the
Bank, in proper proceedings in the court below in this same
case, proving and being reimbursed additional expenses, if
any, it has incurred by virtue of the continued storage of the
goods in question up to the time this decision becomes final
and executory.
 172

Reyes, J.B.L., Actg. C.J., Dizon, Makalintal, Zaldivar,

Fernando, Teehankee, Barredo, Villamor and Makasiar,
JJ., concur.
Concepcion, C.J., is on official leave.
||| (Bank of the Philippine Islands v. De Reny Fabric Industries,
Inc., G.R. No. L-24821, [October 16, 1970], 146 PHIL 269-
275)

FIRST DIVISION
[G.R. No. 160732. June 21, 2004.]
METROPOLITAN WATERWORKS AND
SEWERAGE SYSTEM, petitioner, vs. HON.
REYNALDO B. DAWAY, in his capacity as
Presiding Judge of the Regional Trial
Court of Quezon City, Branch 90 and
MAYNILAD WATER SERVICES,
INC., respondents.
DECISION
AZCUNA, J p:
On November 17, 2003, the Regional Trial Court (RTC) of
Quezon City, Branch 90, made a determination that the
Petition for Rehabilitation with Prayer for Suspension of
Actions and Proceedings filed by Maynilad Water Services,
Inc. (Maynilad) conformed substantially to the provisions
of Sec. 2, Rule 4 of the Interim Rules of Procedure on
Corporate Rehabilitation (Interim Rules). It forthwith issued a
Stay Order 1 which states, in part, that the court was thereby:
xxx xxx xxx
2. Staying enforcement of all claims, whether
for money or otherwise and whether
such enforcement is by court action or
otherwise, against the petitioner, its
guarantors and sureties not solidarily
liable with the petitioner;
173
3. Prohibiting the petitioner from selling,
encumbering, transferring, or
disposing in any manner any of its
properties except in the ordinary
course of business;
4. Prohibiting the petitioner from making any
payment of its liabilities, outstanding
as at the date of the filing of the
petition;
xxx xxx xxx
Subsequently, on November 27, 2003, public respondent,
acting on two Urgent Ex Parte motions 2 filed by respondent
Maynilad, issued the herein questioned Order 3 which stated
that it thereby:
"1. DECLARES that the act of MWSS in
commencing on November 24, 2003 the
process for the payment by the banks of
US$98 million out of the US$120 million
standby letter of credit so the banks have to
make good such call/drawing of payment of
US$98 million by MWSS not later than
November 27, 2003 at 10:00 P.M. or any
similar act for that matter, is violative of the
above-quoted sub-paragraph 2.) of the
dispositive portion of this Court's Stay Order
dated November 17, 2003.
2. ORDERS MWSS through its
officers/officials to withdraw under pain of
contempt the written certification/notice of
draw to Citicorp International Limited dated
November 24, 2003 and DECLARES void any
payment by the banks to MWSS in the event
such written certification/notice of draw is not
withdrawn by MWSS and/or MWSS receives

payment by virtue of the aforesaid standby
letter of credit."
Aggrieved by this Order, petitioner Manila Waterworks &
Sewerage System (MWSS) filed this petition for review by way
of certiorari under Rule 65 of the Rules of Court questioning
the legality of said order as having been issued without or in
excess of the lower court's jurisdiction or that the court a
quo acted with grave abuse of discretion amounting to lack or
excess of jurisdiction. 4
Antecedents of the Case
On February 21, 1997, MWSS granted Maynilad under a
Concession Agreement a twenty-year period to manage,
operate, repair, decommission and refurbish the existing
MWSS water delivery and sewerage services in the West
Zone Service Area, for which Maynilad undertook to pay the
corresponding concession fees on the dates agreed upon in
said agreement 5 which, among other things, consisted of
payments of petitioner's mostly foreign loans.
To secure the concessionaire's performance of its obligations
under the Concession Agreement, Maynilad was required
under Section 6.9 of said contract to put up a bond, bank
guarantee or other security acceptable to MWSS.
In compliance with this requirement, Maynilad arranged on
July 14, 2000 for a three-year facility with a number of foreign
banks, led by Citicorp International Limited, for the issuance of
an Irrevocable Standby Letter of Credit 6 in the amount of
US$120,000,000 in favor of MWSS for the full and prompt
performance of Maynilad's obligations to MWSS as
aforestated.
Sometime in September 2000, respondent Maynilad requested
MWSS for a mechanism by which it hoped to recover the
losses it had allegedly incurred and would be incurring as a
result of the depreciation of the Philippine Peso against the US
174
Dollar. Failing to get what it desired, Maynilad issued a Force
Majeure Notice on March 8, 2001 and unilaterally suspended
the payment of the concession fees. In an effort to salvage the
Concession Agreement, the parties entered into a
Memorandum of Agreement (MOA) 7 on June 8, 2001 wherein
Maynilad was allowed to recover foreign exchange losses
under a formula agreed upon between them. Sometime in
August 2001 Maynilad again filed another Force Majeure
Notice and, since MWSS could not agree with the terms of
said Notice, the matter was referred on August 30, 2001 to the
Appeals Panel for arbitration. This resulted in the parties
agreeing to resolve the issues through an amendment of the
Concession Agreement on October 5, 2001, known as
Amendment No. 1, 8 which was based on the terms set down
in MWSS Board of Trustees Resolution No. 457-2001, as
amended by MWSS Board of Trustees Resolution No. 487-
2001, 9 which provided inter alia for a formula that would allow
Maynilad to recover foreign exchange losses it had incurred or
would incur under the terms of the Concession Agreement.
As part of this agreement, Maynilad committed, among other
things, to:
a) infuse the amount of UD$80.0 million as
additional funding support from its
stockholders;
b) resume payment of the concession fees;
and
c) mutually seek the dismissal of the cases
pending before the Court of Appeals
and with Minor Dispute Appeals Panel.
However, on November 5, 2002, Maynilad served upon
MWSS a Notice of Event of Termination, claiming that MWSS
failed to comply with its obligations under the Concession
Agreement and Amendment No. 1 regarding the adjustment
mechanism that would cover Maynilad's foreign exchange
 175

losses. On December 9, 2002, Maynilad filed a Notice of Early THE PRIVATE RESPONDENT
Termination of the concession, which was challenged by MAYNILAD SUBJECT TO
MWSS. This matter was eventually brought before the REHABILITATION.
Appeals Panel on January 7, 2003 by MWSS. 10 On
November 7, 2003, the Appeals Panel ruled that there was no 2. DID THE HONORABLE PRESIDING
Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) JUDGE ACT WITH LACK OR
of the Concession Agreement and that, therefore, Maynilad EXCESS OF JURISDICTION OR
should pay the concession fees that had fallen due. COMMIT A GRAVE ERROR OF LAW
IN HOLDING THAT THE
The award of the Appeals Panel became final on November PERFORMANCE BOND
22, 2003. MWSS, thereafter, submitted a written notice 11 on OBLIGATIONS OF THE BANKS
November 24, 2003, to Citicorp International Limited, as agent WERE NOT SOLIDARY IN NATURE.
for the participating banks, that by virtue of Maynilad's failure
to perform its obligations under the Concession Agreement, it 3. DID THE HONORABLE PRESIDING
was drawing on the Irrevocable Standby Letter of Credit and JUDGE GRAVELY ERR IN
thereby demanded payment in the amount of ALLOWING MAYNILAD TO IN
US$98,923,640.15. EFFECT SEEK A REVIEW OR
APPEAL OF THE FINAL AND
Prior to this, however, Maynilad had filed on November 13, BINDING DECISION OF THE
2003, a petition for rehabilitation before the court a quo which APPEALS PANEL.
resulted in the issuance of the Stay Order of November 17,
2003 and the disputed Order of November 27, 2003. 12 In support of the first issue, petitioner maintains that as a
matter of law, the US$120 Million Standby Letter of Credit and
Petitioner's Case Performance Bond are not property of the estate of the debtor
Petitioner hereby raises the following issues: Maynilad and, therefore, not subject to the in rem rehabilitation
jurisdiction of the trial court.
1. DID THE HONORABLE PRESIDING
JUDGE GRAVELY ERR AND/OR Petitioner argues that a call made on the Standby Letter of
ACT PATENTLY WITHOUT Credit does not involve any asset of Maynilad but only assets
JURISDICTION OR IN EXCESS OF of the banks. Furthermore, a call on the Standby Letter of
JURISDICTION OR WITH GRAVE Credit cannot also be considered a "claim" falling under the
ABUSE OF DISCRETION purview of the stay order as alleged by respondent as it is not
AMOUNTING TO LACK OR EXCESS directed against the assets of respondent Maynilad.
OF JURISDICTION IN Petitioner concludes that the public respondent erred in
CONSIDERING THE declaring and holding that the commencement of the process
PERFORMANCE BOND OR ASSETS for the payment of US$98 million is a violation of the order
OF THE ISSUING BANKS AS PART issued on November 17, 2003.
OR PROPERTY OF THE ESTATE OF

Respondent Maynilad's Case
Respondent Maynilad seeks to refute this argument by
alleging that:
a) the order objected to was strictly and precisely worded and
issued after carefully considering/evaluating the import of the
arguments and documents referred to by Maynilad, MWSS
and/or creditors Chinatrust Commercial Bank and Suez in
relation to admissions, pleadings and/or pertinent
records 13 and that public respondent had the authority to
issue the same;
b) public respondent never considered nor held that the
Performance bond or assets of the issuing banks are part or
property of the estate of respondent Maynilad subject to
rehabilitation and which respondent Maynilad has not and has
never claimed to be; 14
c) what is relevant is not whether the performance bond or
assets of the issuing banks are part of the estate of
respondent Maynilad but whether the act of petitioner in
commencing the process for the payment by the banks of
US$98 million out of the US$120 million performance bond is
covered and/or prohibited under sub-paragraphs 2.) and 4.) of
the stay order dated November 17, 2003; HATICc
d) the jurisdiction of public respondent extends not only to the
assets of respondent Maynilad but also over persons and
assets of "all those affected by the proceedings . . . upon
publication of the notice of commencement; 15 " and
e) the obligations under the Standby Letter of Credit are not
solidary and are not exempt from the coverage of the stay
order.
Our Ruling
176
We will discuss the first two issues raised by petitioner as
these are interrelated and make up the main issue of the
petition before us which is, did the rehabilitation court sitting as
such, act in excess of its authority or jurisdiction when it
enjoined herein petitioner from seeking the payment of the
concession fees from the banks that issued the Irrevocable
Standby Letter of Credit in its favor and for the account of
respondent Maynilad?
The public respondent relied on Sec. 1, Rule 3 of the Interim
Rules on Corporate Rehabilitation to support its jurisdiction
over the Irrevocable Standby Letter of Credit and the banks
that issued it. The section reads in part "that jurisdiction over
those affected by the proceedings is considered acquired upon
the publication of the notice of commencement of proceedings
in a newspaper of general circulation" and goes further to
define rehabilitation as an in remproceeding. This provision is
a logical consequence of the in rem nature of the proceedings,
where jurisdiction is acquired by publication and where it is
necessary that the assets of the debtor come within the court's
jurisdiction to secure the same for the benefit of creditors. The
reference to "all those affected by the proceedings" covers
creditors or such other persons or entities holding assets
belonging to the debtor under rehabilitation which should be
reflected in its audited financial statements. The banks do not
hold any assets of respondent Maynilad that would be material
to the rehabilitation proceedings nor is Maynilad liable to the
banks at this point.
Respondent Maynilad's Financial Statement as of December
31, 2001 and 2002 do not show the Irrevocable Standby Letter
of Credit as part of its assets or liabilities, and by respondent
Maynilad's own admission it is not. In issuing the clarificatory
order of November 27, 2003, enjoining petitioner from claiming
from an asset that did not belong to the debtor and over which
it did not acquire jurisdiction, the rehabilitation court acted in
excess of its jurisdiction.

Respondent Maynilad insists, however, that it is Sec. 6(b),
Rule 4 of the Interim Rules that supports its claim that the
commencement of the process to draw on the Standby Letter
of Credit is an enforcement of claim prohibited by and under
the Interim Rules and the order of public respondent.
Respondent Maynilad would persuade us that the above
provision justifies a leap to the conclusion that such an
enforcement is prohibited by said section because it is a "claim
against the debtor, its guarantors and sureties not solidarily
liable with the debtor" and that there is nothing in the Standby
Letter of Credit nor in law nor in the nature of the obligation
that would show or require the obligation of the banks to be
solidary with the respondent Maynilad.
We disagree.
First, the claim is not one against the debtor but against an
entity that respondent Maynilad has procured to answer for its
non-performance of certain terms and conditions of the
Concession Agreement, particularly the payment of
concession fees.
Secondly, Sec. 6(b) of Rule 4 of the Interim Rules does not
enjoin the enforcement of all claims against guarantors and
sureties, but only those claims against guarantors and sureties
who are not solidarily liable with the debtor. Respondent
Maynilad's claim that the banks are not solidarily liable with the
debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of
Appeals 16 that the concept of guarantee vis-à-vis the concept
of an irrevocable letter of credit are inconsistent with each
other. The guarantee theory destroys the independence of the
bank's responsibility from the contract upon which it was
opened and the nature of both contracts is mutually in conflict
with each other. In contracts of guarantee, the guarantor's
obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand, in an
177
irrevocable letter of credit, the bank undertakes a primary
obligation. We have also defined a letter of credit as an
engagement by a bank or other person made at the request of
a customer that the issuer shall honor drafts or other demands
of payment upon compliance with the conditions specified in
the credit. 17
Letters of credit were developed for the purpose of insuring to
a seller payment of a definite amount upon the presentation of
documents 18 and is thus a commitment by the issuer that the
party in whose favor it is issued and who can collect upon it
will have his credit against the applicant of the letter, duly paid
in the amount specified in the letter. 19 They are in
effect absolute undertakings to pay the money advanced or
the amount for which credit is given on the faith of the
instrument. They are primary obligations and not accessory
contracts and while they are security arrangements, they are
not converted thereby into contracts of guaranty. 20 What
distinguishes letters of credit from other accessory contracts,
is the engagement of the issuing bank to pay the seller once
the draft and other required shipping documents are presented
to it. 21 They are definite undertakings to pay at sight once the
documents stipulated therein are presented.
Letters of Credits have long been and are still governed by the
provisions of the Uniform Customs and Practice for
Documentary Credits of the International Chamber of
Commerce. In the 1993 Revision it provides in Art. 2 that "the
expressions Documentary Credit(s) and Standby Letter(s) of
Credit mean any arrangement, however made or described,
whereby a bank acting at the request and on instructions of a
customer or on its own behalf is to make payment against
stipulated document(s)" and Art. 9 thereof defines the liability
of the issuing banks on an irrevocable letter of credit as a
"definite undertaking of the issuing bank, provided that the
stipulated documents are presented to the nominated bank or
the issuing bank and the terms and conditions of the Credit are

complied with, to pay at sight if the Credit provides for sight
payment." 22
We have accepted, in Feati Bank and Trust Company v. Court
of Appeals 23 and Bank of America NT & SA v. Court of
Appeals, 24 to the extent that they are pertinent, the
application in our jurisdiction of the international credit
regulatory set of rules known as the Uniform Customs and
Practice for Documentary Credits (U.C.P) issued by the
International Chamber of Commerce, which we said in Bank of
the Philippine Islands v. Nery 25 was justified under Art. 2 of
the Code of Commerce, which states:
"Acts of commerce, whether those who
execute them be merchants or not, and
whether specified in this Code or not should
be governed by the provisions contained in it;
in their absence, by the usages of commerce
generally observed in each place; and in the
absence of both rules, by those of the civil
law."
The prohibition under Sec. 6(b) of Rule 4 of the Interim Rules
does not apply to herein petitioner as the prohibition is on the
enforcement of claims against guarantors or sureties of the
debtors whose obligations are not solidary with the debtor. The
participating banks' obligation are solidary with respondent
Maynilad in that it is a primary, direct, definite and an absolute
undertaking to pay and is not conditioned on the prior
exhaustion of the debtor's assets. These are the same
characteristics of a surety or solidary obligor.
Being solidary, the claims against them can be pursued
separately from and independently of the rehabilitation case,
as held in Traders Royal Bank v. Court of Appeals 26 and
reiterated in Philippine Blooming Mills, Inc. v. Court of
Appeals, 27 where we said that property of the surety cannot
be taken into custody by the rehabilitation receiver (SEC) and
178
said surety can be sued separately to enforce his liability as
surety for the debts or obligations of the debtor. The debts or
obligations for which a surety may be liable include future
debts, an amount which may not be known at the time the
surety is given.
The terms of the Irrevocable Standby Letter of Credit do not
show that the obligations of the banks are not solidary with
those of respondent Maynilad. On the contrary, it is issued at
the request of and for the account of Maynilad Water Services,
Inc., in favor of the Metropolitan Waterworks and Sewerage
System, as a bond for the full and prompt performance of the
obligations by the concessionaire under the Concession
Agreement 28 and herein petitioner is authorized by the banks
to draw on it by the simple act of delivering to the agent a
written certification substantially in the form Annex "B" of the
Letter of Credit. It provides further in Sec. 6, that for as long as
the Standby Letter of Credit is valid and subsisting, the Banks
shall honor any written Certification made by MWSS in
accordance with Sec. 2, of the Standby Letter of Credit
regardless of the date on which the event giving rise to such
Written Certification arose. 29
Taking into consideration our own rulings on the nature of
letters of credit and the customs and usage developed over
the years in the banking and commercial practice of letters of
credit, we hold that except when a letter of credit specifically
stipulates otherwise, the obligation of the banks issuing letters
of credit are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary,
absolute and definite undertaking to pay the beneficiary upon
the presentation of the set of documents required therein.
The public respondent, therefore, exceeded his jurisdiction, in
holding that he was competent to act on the obligation of the
banks under the Letter of Credit under the argument that this
was not a solidary obligation with that of the debtor. Being a
solidary obligation, the letter of credit is excluded from the

jurisdiction of the rehabilitation court and therefore in enjoining
petitioner from proceeding against the Standby Letters of
Credit to which it had a clear right under the law and the terms
of said Standby Letter of Credit, public respondent acted in
excess of his jurisdiction.
Additional Issues
We proceed to consider the other issues raised in the oral
arguments and included in the parties' memoranda:
1. Respondent Maynilad argues that petitioner had a plain,
speedy and adequate remedy under the Interim Rules itself
which provides in Sec. 12, Rule 4 that the court may on motion
or motu proprio, terminate, modify or set conditions for the
continuance of the stay order or relieve a claim from coverage
thereof. We find, however, that the public respondent had
already accomplished this during the hearing set for the two
Urgent Ex Parte motions filed by respondent Maynilad on
November 21 and 24, 2003, 30 where the parties including the
creditors, Suez and Chinatrust Commercial "presented their
respective arguments." 31 The public respondent then ruled,
"after carefully considering/evaluating the import of the
arguments and documents referred to by Maynilad, MWSS
and/or the creditors Chinatrust Commercial Bank and Suez in
relation to the admissions, the pleadings, and/or pertinent
portions of the records, this court is of the considered and
humble view that the issue must perforce be resolved in favor
of Maynilad." 32 Hence to pursue their opposition before the
same court would result in the presentation of the same
arguments and issues passed upon by public respondent.
Furthermore, Sec. 5, Rule 3 of the Interim Rules would
preclude any other effective remedy questioning the orders of
the rehabilitation court since they are immediately executory
and a petition for review or an appeal therefrom shall not stay
the execution of the order unless restrained or enjoined by the
179
appellate court." In this situation, it had no other remedy but to
seek recourse to us through this petition for certiorari.
In Silvestre v. Torres and Oben, 33 we said that it is not
enough that a remedy is available to prevent a party from
making use of the extraordinary remedy ofcertiorari but that
such remedy be an adequate remedy which is equally
beneficial, speedy and sufficient, not only a remedy which at
some time in the future may offer relief but a remedy which will
promptly relieve the petitioner from the injurious acts of the
lower tribunal. It is the inadequacy — not the mere absence —
of all other legal remedies and the danger of failure of justice
without the writ, that must usually determine the propriety
of certiorari. 34
2. Respondent Maynilad argues that by commencing the
process for payment under the Standby Letter of Credit,
petitioner violated an immediately executory order of the court
and, therefore, comes to Court with unclean hands and should
therefore be denied any relief.
It is true that the stay order is immediately executory. It is also
true, however, that the Standby Letter of Credit and the banks
that issued it were not within the jurisdiction of the
rehabilitation court. The call on the Standby Letter of Credit,
therefore, could not be considered a violation of the Stay
Order.
3. Respondent's claim that the filing of the petition pre-empts
the original jurisdiction of the lower court is without merit. The
purpose of the initial hearing is to determine whether the
petition for rehabilitation has merit or not. The propriety of the
stay order as well as the clarificatory order had already been
passed upon in the hearing previously had for that purpose.
The determination of whether the public respondent was
correct in enjoining the petitioner from drawing on the Standby
Letter of Credit will have no bearing on the determination to be
made by public respondent whether the petition for
 180

rehabilitation has merit or not. Our decision on the instant

petition does not pre-empt the original jurisdiction of the
rehabilitation court.
WHEREFORE, the petition for certiorari is GRANTED. The
Order of November 27, 2003 of the Regional Trial Court of
Quezon City, Branch 90, is hereby declared NULL AND VOID
and SET ASIDE. The status quo Order herein previously
issued is hereby LIFTED. In view of the urgency attending this
case, this decision is immediately executory.
No costs.
SO ORDERED. AIaSTE
Davide, Jr., C .J ., Panganiban and Carpio, JJ ., concur.
Ynares-Santiago, J ., is on leave.

||| (Metropolitan Waterworks and Sewerage System v. Daway,

G.R. No. 160732, [June 21, 2004], 476 PHIL 659-678)