Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 169211

March 6, 2013

STAR TWO (SPV-AMC), INC.,1 Petitioner,

vs.
PAPER CITY CORPORATION OF THE PHILIPPINES, Respondent.
DECISION
PEREZ, J.:
For review before this Court is a Petition for Review on Certiorari filed by Rizal
Commercial Banking Corporation now substituted by Star Two (SPV-AMC), Inc. by
virtue of Republic Act No. 91822 otherwise known as the "Special Purpose Vehicle Act
of 2002," assailing the 8 March 2005 Decision and 8 August 2005 Resolution of the
Special Fourth Division of the Court of Appeals (CA) in CA-G.R. SP No. 82022
upholding the 15 August 2003 and 1 December 2003 Orders of the Valenzuela
Regional Trial Court (RTC) ruling that the subject machineries and equipments of
Paper City Corporation (Paper City) are movable properties by agreement of the
parties and cannot be considered as included in the extrajudicial foreclosure sale of
the mortgaged land and building of Paper City.3

Branch Operation Head Joey P. Singh and Asst. Vice President Anita O. Abad over
the merchandise and stocks-in-trade covered by the continuing chattel mortgages.9
On 26 August 1992, RCBC, Metrobank and Union Bank (creditor banks with RCBC
instituted as the trustee bank) entered into a Mortgage Trust Indenture (MTI) with
Paper City. In the said MTI, Paper City acquired an additional loan of One Hundred
Seventy Million Pesos (P170,000,000.00) from the creditor banks in addition to the
previous loan from RCBC amounting to P110,000,000.00 thereby increasing the
entire loan to a total of P280,000,000.00. The old loan of P110,000,000.00 was partly
secured by various parcels of land covered by TCT Nos. T-157743, V-13515, V-1184,
V-1485, V-13518 and V-13516 situated in Valenzuela City pursuant to five (5) Deeds
of Real Estate Mortgage dated 8 January 1990, 27 February 1990, 19 July 1990, 20
February 1992 and 12 March 1992.10 The new loan obligation of P170,000,000.00
would be secured by the same five (5) Deeds of Real Estate Mortgage and additional
real and personal properties described in an annex to MTI, Annex "B." 11 Annex "B" of
the said MTI covered the machineries and equipments of Paper City.12
The MTI was later amended on 20 November 1992 to increase the contributions of
the RCBC and Union Bank toP80,000,000.00 and P70,000,000.00, respectively. As a
consequence, they executed a Deed of Amendment to MTI13 but still included as part
of the mortgaged properties by way of a first mortgage the various machineries and
equipments located in and bolted to and/or forming part of buildings generally
described as:
Annex "A"
A.

Office Building
Building 1, 2, 3, 4, and 5
Boiler House
Workers Quarter/Restroom
Canteen
Guardhouse, Parking Shed, Elevated Guard
Post and other amenities

B.

Pollution Tank Nos. 1 and 2.

Reserve Water Tank and Swimming Pool
Waste Water Treatment Tank
Elevated Concrete Water Tank
And other Improvements listed in Annex "A"

C.

Power Plants Nos. 1 and 2

Fabrication Building
Various Fuel, Water Tanks and Pumps
Transformers

The facts as we gathered from the records are:

Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust Co.
(Metrobank) and Union Bank of the Philippines (Union Bank) are banking
corporations duly organized and existing under the laws of the Philippines.
On the other hand, respondent Paper City is a domestic corporation engaged in the
manufacture of paper products particularly cartons, newsprint and clay-coated paper.4
From 1990-1991, Paper City applied for and was granted the following loans and
credit accommodations in peso and dollar denominations by RCBC: P10,000,000.00
on 8 January 1990,5 P14,000,000.00 on 19 July 1990,6P10,000,000.00 on 28 June
1991,7 and P16,615,000.00 on 28 November 1991.8 The loans were secured by four
(4) Deeds of Continuing Chattel Mortgages on its machineries and equipments found
inside its paper plants.
On 25 August 1992, a unilateral Cancellation of Deed of Continuing Chattel Mortgage
on Inventory of Merchandise/Stocks-in-Trade was executed by RCBC through its

Annex "B"

D.

D. Material Handling Equipment

Paper Plant No. 3

A Second Supplemental Indenture to the 26 August 1992 MTI was executed on 7

June 1994 to increase the amount of the loan from P280,000,000.00
to P408,900,000.00 secured against the existing properties composed of land,
building, machineries and equipments and inventories described in Annexes "A" and
"B."14
Finally, a Third Supplemental Indenture to the 26 August 1992 MTI was executed on
24 January 1995 to increase the existing loan obligation of P408,900,000.00
to P555,000,000.00 with an additional security composed of a newly constructed twostorey building and other improvements, machineries and equipments located in the
existing plant site.15
Paper City was able to comply with its loan obligations until July 1997. But economic
crisis ensued which made it difficult for Paper City to meet the terms of its obligations
leading to payment defaults.16 Consequently, RCBC filed a Petition for Extrajudicial
Foreclosure Under Act No. 3135 Against the Real Estate Mortgage executed by
Paper City on 21 October 1998.17 This petition was for the extra-judicial foreclosure of
eight (8) parcels of land including all improvements thereon enumerated as TCT Nos.
V-9763, V-13515, V-13516, V-13518, V-1484, V-1485, V-6662 and V-6663 included in
the MTI dated 26 August 1992, Supplemental
MTI dated 20 November 1992, Second Supplemental Indenture on the MTI dated 7
June 1994 and Third Supplemental Indenture on the MTI dated 24 January
1995.18 Paper City then had an outstanding obligation with the creditor banks adding
up to Nine Hundred One Million Eight Hundred One Thousand Four Hundred EightyFour and 10/100 Pesos (P901,801,484.10), inclusive of interest and penalty
charges.19
A Certificate of Sale was executed on 8 February 1999 certifying that the eight (8)
parcels of land with improvements thereon were sold on 27 November 1998 in the
amount of Seven Hundred Two Million Three Hundred Fifty-One Thousand Seven
Hundred Ninety-Six Pesos and 28/100 (P702,351,796.28) in favor of the creditor
banks RCBC, Union Bank and Metrobank as the highest bidders.20
This foreclosure sale prompted Paper City to file a Complaint 21 docketed as Civil
Case No. 164-V-99 on 15 June 1999 against the creditor banks alleging that the
extra-judicial sale of the properties and plants was null and void due to lack of prior
notice and attendance of gross and evident bad faith on the part of the creditor banks.
In the alternative, it prayed that in case the sale is declared valid, to render the whole
obligation of Paper City as fully paid and extinguished. Also prayed for was the return
of P5,000,000.00 as excessive penalty and the payment of damages and attorneys
fees.
In the meantime, Paper City and Union Bank entered into a Compromise Agreement
which was later approved by the trial court on 19 November 2001. It was agreed that
the share of Union Bank in the proceeds of the foreclosure shall be up to 34.23% of

the price and the remaining possible liabilities of Paper City shall be condoned by the
bank. Paper City likewise waived all its claim and counter charges against Union
Bank and agreed to turn-over its proportionate share over the property within 120
days from the date of agreement.22
On the other hand, the negotiations between the other creditor banks and Paper City
remained pending. During the interim, Paper City filed with the trial court a
Manifestation with Motion to Remove and/or Dispose Machinery on 18 December
2002 reasoning that the machineries located inside the foreclosed land and building
were deteriorating. It posited that since the machineries were not included in the
foreclosure of the real estate mortgage, it is appropriate that it be removed from the
building and sold to a third party.23
Acting on the said motion, the trial court, on 28 February 2003 issued an Order
denying the prayer and ruled that the machineries and equipments were included in
the annexes and form part of the MTI dated 26 August 1992 as well as its subsequent
amendments. Further, the machineries and equipments are covered by the Certificate
of Sale issued as a consequence of foreclosure, the certificate stating that the
properties described therein with improvements thereon were sold to creditor banks
to the defendants at public auction.24
Paper City filed its Motion for Reconsideration25 on 4 April 2003 which was favorably
granted by the trial court in its Order dated 15 August 2003. The court justified the
reversal of its order on the finding that the disputed machineries and equipments are
chattels by agreement of the parties through their inclusion in the four (4) Deeds of
Chattel Mortgage dated 28 January 1990, 19 July 1990, 28 June 1991 and 28
November 1991. It further ruled that the deed of cancellation executed by RCBC on
25 August 1992 was not valid because it was done unilaterally and without the
consent of Paper City and the cancellation only refers to the merchandise/stocks-intrade and not to machineries and equipments.26
RCBC in turn filed its Motion for Reconsideration to persuade the court to reverse its
15 August 2003 Order. However, the same was denied by the trial court through its 1
December 2003 Order reiterating the finding and conclusion of the previous Order.27
Aggrieved, RCBC filed with the CA a Petition for Certiorari under Rule 65 to annul the
Orders dated 15 August 2003 and 1 December 2003 of the trial court,28 for the
reasons that:
I. Paper City gave its conformity to consider the subject machineries and
equipment as real properties when the president and Executive Vice
President of Paper City signed the Mortgage Trust Indenture as well as its
subsequent amendments and all pages of the annexes thereto which
itemized all properties that were mortgaged.29
II. Under Section 8 of Act No. 1508, otherwise known as "The Chattel
Mortgage Law" the consent of the mortgagor (Paper City) is not required in
order to cancel a chattel mortgage. Thus the "Cancellation of Deed of
Continuing Chattel Mortgage on Inventory of Merchandise/Stocks-in-Trade"

dated August 25, 1992 is valid and binding on the Paper City even assuming
that it was executed unilaterally by petitioner RCBC.30
III. The four (4) Deeds of Chattel Mortgage that were attached as Annexes
"A" to "D" to the December 18, 2003 "Manifestation with Motion to Remove
and/or Dispose of Machinery" were executed from January 8, 1990 until
November 28, 1991. On the other hand, the "Cancellation of Deed of
Continuing Chattel Mortgage" was executed on August 25, 1992 while the
MTI and the subsequent supplemental amendments thereto were executed
from August 26, 1992 until January 24, 1995. It is of the contention of RCBC
that Paper Citys unreasonable delay of ten
(10) years in assailing that the disputed machineries and equipments were
personal amounted to estoppel and ratification of the characterization that
the same were real properties.31
IV. The removal of the subject machineries or equipment is not among the
reliefs prayed for by the Paper City in its June 11, 1999 Complaint. The
Paper City sought the removal of the subject machineries and equipment
only when it filed its December 18, 2002 Manifestation with Motion to
Remove and/or Dispose of Machinery.32

Paper City argued further that the subject machineries and equipments were not
included in the foreclosure of the mortgage on real properties particularly the eight (8)
parcels of land. Further, the Certificate of Sale of the Foreclosed Property referred
only to "lands and improvements" without any specification and made no mention of
the inclusion of the subject properties.37
In its Reply,38 RCBC admitted that there was indeed a provision in the MTI mentioning
a chattel mortgage in the amount of P13,800,000.00. However, it justified that its
inclusion in the MTI was merely for the purpose of ascertaining the amount of the loan
to be extended to Paper City.39 It reiterated its position that the machineries and
equipments were no longer treated as chattels but already as real properties following
the MTI.40
On 8 March 2005, the CA affirmed 41 the challenged orders of the trial court. The
dispositive portion reads:
WHEREFORE, finding no grave abuse of discretion committed by public respondent,
the instant petition is hereby DISMISSED for lack of merit. The assailed Orders dated
15 August and 2 December 2003, issued by Hon. Judge Floro P. Alejo are hereby
AFFIRMED. No costs at this instance.42
The CA relied on the "plain language of the MTIs:

V. Paper City did not specify in its various motions filed with the respondent
judge the subject machineries and equipment that are allegedly excluded
from the extrajudicial foreclosure sale.33
VI. The machineries and equipments mentioned in the four (4) Deeds of
Chattel Mortgage that were attached on the Manifestation with Motion to
Remove and/or Dispose of Machinery are the same machineries and
equipments included in the MTI and supplemental amendments, hence, are
treated by agreement of the parties as real properties.34
In its Comment,35 Paper City refuted the claim of RCBC that it gave its consent to
consider the machineries and equipments as real properties. It alleged that the
disputed properties remained within the purview of the existing chattel mortgages
which in fact were acknowledged by RCBC in the MTI particularly in Section 11.07
which reads:
Section 11.07. This INDENTURE in respect of the MORTGAGE OBLIGATIONS in the
additional amount not exceeding TWO HUNDRED TWENTY MILLION SIX
HUNDRED FIFTEEN THOUSAND PESOS (P220,615,000.00) shall be registered
with the Register of Deeds of Valenzuela, Metro Manila, apportioned based on the
corresponding loanable value of the MORTGAGED PROPERTIES, viz:
a. Real Estate Mortgage P206,815,000.00
b. Chattel Mortgage P13,800,000.0036

Undoubtedly, nowhere from any of the MTIs executed by the parties can we find the
alleged "express" agreement adverted to by petitioner. There is no provision in any of
the parties MTI, which expressly states to the effect that the parties shall treat the
equipments and machineries as real property. On the contrary, the plain and
unambiguous language of the aforecited MTIs, which described the same as personal
properties, contradicts petitioners claims.43
It was also ruled that the subject machineries and equipments were not included in
the extrajudicial foreclosure sale. The claim of inclusion was contradicted by the very
caption of the petition itself, "Petition for Extra-Judicial Foreclosure of Real Estate
Mortgage Under Act No. 3135 As Amended." It opined further that this inclusion was
further stressed in the Certificate of Sale which enumerated only the mortgaged real
properties bought by RCBC without the subject properties.44
RCBC sought reconsideration but its motion was denied in the CAs Resolution dated
8 August 2005.
RCBC before this Court reiterated all the issues presented before the appellate court:
1. Whether the unreasonable delay of ten (10) years in assailing that the
disputed machineries and equipments were personal properties amounted to
estoppel on the part of Paper City;

2. Whether the Cancellation of Deed of Continuing Mortgage dated 25

August 1992 is valid despite the fact that it was executed without the
consent of the mortgagor Paper City;

xxxx

3. Whether the subsequent contracts of the parties such as Mortgage Trust

Indenture dated 26 August 1992 as well as the subsequent supplementary
amendments dated 20 November 1992, 7 June 1992, and 24 January 1995
included in its coverage of mortgaged properties the subject machineries
and equipment; and

NOW, THEREFORE, this INDENTURE witnesseth:

4. Whether the subject machineries and equipments were included in the

extrajudicial foreclosure dated 21 October 1998 which in turn were sold to
the creditor banks as evidenced by the Certificate of Sale dated 8 February
1999.
We grant the petition.
By contracts, all uncontested in this case, machineries and equipments are included
in the mortgage in favor of RCBC, in the foreclosure of the mortgage and in the
consequent sale on foreclosure also in favor of petitioner.
The mortgage contracts are the original MTI of 26 August 1992 and its amendments
and supplements on 20 November 1992, 7 June 1994, and 24 January 1995. The
clear agreements between RCBC and Paper City follow:

GRANTING CLAUSE

THAT the MORTGAGOR in consideration of the premises and of the acceptance by

the TRUSTEE of the trust hereby created, and in order to secure the payment of the
MORTGAGE OBLIGATIONS which shall be incurred by the MORTGAGOR pursuant
to the terms hereof xxx hereby states that with the execution of this INDENTURE it
will assign, transfer and convey as it has hereby ASSIGNED, TRANSFERRED and
CONVEYED by way of a registered first mortgage unto RCBC x x x the various
parcels of land covered by several Transfer Certificates of Title issued by the Registry
of Deeds, including the buildings and existing improvements thereon, as well as of the
machinery and equipment more particularly described and listed that is to say, the
real and personal properties listed in Annexes "A" and "B" hereof of which the
MORTGAGOR is the lawful and registered owner.45 (Emphasis and underlining ours)
The Deed of Amendment to MTI dated 20 November 1992 expressly provides:
NOW, THEREFORE, premises considered, the parties considered have amended
and by these presents do further amend the Mortgage Trust Indenture dated August
26, 1992 including the Real Estate Mortgage as follows:
xxxx

The original MTI dated 26 August 1992 states that:

MORTGAGE TRUST INDENTURE
This MORTGAGE TRUST INDENTURE, executed on this day of August 26, 1992, by
and between:
PAPER CITY CORPORATION OF THE PHILIPPINES, x x x hereinafter referred to as
the "MORTGAGOR");
-andRIZAL COMMERCIAL BANKING CORPORATION, x x x (hereinafter referred to as
the "TRUSTEE").
xxxx
WHEREAS, against the same mortgaged properties and additional real and personal
properties more particularly described in ANNEX "B" hereof, the MORTGAGOR
desires to increase their borrowings to TWO HUNDRED EIGHTY MILLION PESOS
(P280,000,000.00) or an increase of ONE HUNDRED SEVENTY MILLION PESOS
(P170,000,000.00) xxx from various banks/financial institutions;

2. The Mortgage Trust Indenture and the Real Estate Mortgage are hereby amended
to include as part of the Mortgage Properties, by way of a first mortgage and for paripassu and pro-rata benefit of the existing and new creditors, various machineries and
equipment owned by the Paper City, located in and bolted to and forming part of the
following, generally describes as x x x more particularly described and listed in
Annexes "A" and "B" which are attached and made integral parts of this Amendment.
The machineries and equipment listed in Annexes "A" and "B" form part of the
improvements listed above and located on the parcels of land subject of the Mortgage
Trust Indenture and the Real Estate Mortgage.46 (Emphasis and underlining ours)
A Second Supplemental Indenture to the 26 August 1992 MTI executed on 7 June
1994 to increase the amount of loan from P280,000,000.00 to P408,900,000.00 also
contains a similar provision in this regard:
WHEREAS, the Paper City desires to increase its borrowings to be secured by the
INDENTURE from PESOS: TWO HUNDRED EIGHTY MILLION (P280,000,000.00) to
PESOS: FOUR HUNDRED EIGHT MILLION NINE HUNDRED THOUSAND
(P408,900,000.00) or an increase of PESOS: ONE HUNDRED TWENTY EIGHT
MILLION NINE HUNDRED THOUSAND (P128,900,000.00) x x x which represents
additional loan/s granted to the Paper City to be secured against the existing
properties composed of land, building, machineries and equipment and inventories
more particularly described in Annexes "A" and "B" of the INDENTURE x x x.47

(Emphasis and underlining ours)

Finally, a Third Supplemental Indenture to the 26 August 1992 MTI executed on 24
January 1995 contains a similar provision:
WHEREAS, in order to secure NEW/ADDITIONAL LOAN OBLIGATION under the
Indenture, there shall be added to the collateral pool subject of the Indenture
properties of the Paper City composed of newly constructed two (2)-storey building,
other land improvements and machinery and equipment all of which are located at the
existing Plant Site in Valenzuela, Metro Manila and more particularly described in
Annex "A" hereof x x x.48 (Emphasis and underlining ours)
Repeatedly, the parties stipulated that the properties mortgaged by Paper City to
RCBC are various parcels of land including the buildings and existing improvements
thereon as well as the machineries and equipments, which as stated in the granting
clause of the original mortgage, are "more particularly described and listed that is to
say, the real and personal properties listed in Annexes A and B x x x of which the
Paper City is the lawful and registered owner." Significantly, Annexes "A" and "B" are
itemized listings of the buildings, machineries and equipments typed single spaced in
twenty-seven pages of the document made part of the records.

loan, totaling hundreds of millions of pesos, Paper City had to offer all valuable
properties acceptable to the creditor banks.
The plain and obvious inclusion in the mortgage of the machineries and equipments
of Paper City escaped the attention of the CA which, instead, turned to another "plain
language of the MTI" that "described the same as personal properties." It was error
for the CA to deduce from the "description" exclusion from the mortgage.
1. The MTIs did not describe the equipments and machineries as personal property.
Had the CA looked into Annexes "A" and "B" which were referred to by the phrase
"real and personal properties," it could have easily noted that the captions describing
the listed properties were "Buildings," "Machineries and Equipments," "Yard and
Outside," and "Additional Machinery and Equipment." No mention in any manner was
made in the annexes about "personal property." Notably, while "personal" appeared in
the granting clause of the original MTI, the subsequent Deed of Amendment
specifically stated that:
x x x The machineries and equipment listed in Annexes "A" and "B" form part of the
improvements listed above and located on the parcels of land subject of the Mortgage
Trust Indenture and the Real Estate Mortgage.

As held in Gateway Electronics Corp. v. Land Bank of the Philippines, 49 the rule in this
jurisdiction is that the contracting parties may establish any agreement, term, and
condition they may deem advisable, provided they are not contrary to law, morals or
public policy. The right to enter into lawful contracts constitutes one of the liberties
guaranteed by the Constitution.

The word "personal" was deleted in the corresponding granting clauses in the Deed
of Amendment and in the First, Second and Third Supplemental Indentures.

It has been explained by the Supreme Court in Norton Resources and Development
Corporation v. All Asia Bank Corporation50 in reiteration of the ruling in Benguet
Corporation v. Cabildo51 that:

Article 2127 of the Civil Code provides:

x x x A court's purpose in examining a contract is to interpret the intent of the

contracting parties, as objectively manifested by them. The process of interpreting a
contract requires the court to make a preliminary inquiry as to whether the contract
before it is ambiguous. A contract provision is ambiguous if it is susceptible of two
reasonable alternative interpretations. Where the written terms of the contract are not
ambiguous and can only be read one way, the court will interpret the contract as a
matter of law. x x x

2. Law and jurisprudence provide and guide that even if not expressly so stated, the
mortgage extends to the improvements.

Art. 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation becomes
due, and to the amount of the indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the estate
remains in the possession of the mortgagor, or it passes into the hands of a third
person. (Underlining ours)

The case at bar is covered by the rule.

In the early case of Bischoff v. Pomar and Cia. General de Tabacos, 53 the Court ruled
that even if the machinery in question was not included in the mortgage expressly,
Article 111 of the old Mortgage Law provides that chattels permanently located in a
building, either useful or ornamental, or for the service of some industry even though
they were placed there after the creation of the mortgage shall be considered as
mortgaged with the estate, provided they belong to the owner of said estate. The
provision of the old Civil Code was cited. Thus:

The plain language and literal interpretation of the MTIs must be applied. The
petitioner, other creditor banks and Paper City intended from the very first execution
of the indentures that the machineries and equipments enumerated in Annexes "A"
and "B" are included. Obviously, with the continued increase in the amount of the

Article 1877 provides that a mortgage includes the natural accessions, improvements,
growing fruits, and rents not collected when the obligation is due, and the amount of
the indemnities granted or due the owner by the underwriters of the property
mortgaged or by virtue of the exercise of eminent domain by reason of public utility,

Then till now the pronouncement has been that if the language used is as clear as
day and readily understandable by any ordinary reader, there is no need for
construction.52

with the declarations, amplifications, and limitations established by law, in case the
estate continues in the possession of the person who mortgaged it, as well as when it
passes into the hands of a third person.54

The real estate mortgage over the machineries and equipments is even in full accord
with the classification of such properties by the Civil Code of the Philippines as
immovable property. Thus:

The case of Cu Unjieng e Hijos v. Mabalacat Sugar Co. 55 relied on this provision. The
issue was whether the machineries and accessories were included in the mortgage
and the subsequent sale during public auction. This was answered in the affirmative
by the Court when it ruled that the machineries were integral parts of said sugar
central hence included following the principle of law that the accessory follows the
principal.
Further, in the case of Manahan v. Hon. Cruz, 56 this Court denied the prayer of
Manahan to nullify the order of the trial court including the building in question in the
writ of possession following the public auction of the parcels of land mortgaged to the
bank. It upheld the inclusion by relying on the principles laid upon in Bischoff v. Pomar
and Cia. General de Tabacos57 and Cu Unjieng e Hijos v. Mabalacat Sugar Co.58

Article 415. The following are immovable property:

In Spouses Paderes v. Court of Appeals, 59 we reiterated once more the Cu Unjieng e

Hijos ruling and approved the inclusion of machineries and accessories installed at
the time the mortgage, as well as all the buildings, machinery and accessories
belonging to the mortgagor, installed after the constitution thereof.

(5) Machinery, receptacles, instruments or implements 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 which tend directly to meet the needs of the said industry or works;

3. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of Mortgage

includes the machineries and equipments of respondent. While captioned as a
"Petition for Extra-Judicial Foreclosure of Real Estate Mortgage Under Act No. 3135
As Amended," the averments state that the petition is based on "x x x the Mortgage
Trust Indenture, the Deed of Amendment to the Mortgage Trust Indenture, the
Second Supplemental Indenture to the Mortgage Trust Indenture, and the Third
Supplemental Indenture to the Mortgage Trust Indenture (hereinafter collectively
referred to as the Indenture) duly notarized and entered as x x x." 60 Noting that herein
respondent has an outstanding obligation in the total amount of Nine Hundred One
Million Eight Hundred One Thousand Four Hundred Eighty Four and 10/100 Pesos
(P901,801,484.10), the petition for foreclosure prayed that a foreclosure proceedings
"x x x on the aforesaid real properties, including all improvements thereon covered by
the real estate mortgage be undertaken and the appropriate auction sale be
conducted x x x."61
Considering that the Indenture which is the instrument of the mortgage that was
foreclosed exactly states through the Deed of Amendment that the machineries and
equipments listed in Annexes "A" and "B" form part of the improvements listed and
located on the parcels of land subject of the mortgage, such machineries and
equipments are surely part of the foreclosure of the "real estate properties, including
all improvements thereon" as prayed for in the petition.
Indeed, the lower courts ought to have noticed the fact that the chattel mortgages
adverted to were dated 8 January 1990, 19 July 1990, 28 June 1991 and 28
November 1991. The real estate mortgages which specifically included the
machineries and equipments were subsequent to the chattel mortgages dated 26
August 1992, 20 November 1992, 7 June 1994 and 24 January 1995. Without doubt,
the real estate mortgages superseded the earlier chattel mortgages.1wphi1

(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
xxxx

WHEREFORE, the petition is GRANTED. Accordingly, the Decision and Resolution of

the Court of Appeals dated 8 March 2005 and 8 August 2005 upholding the 15 August
2003 and 1 December 2003 Orders of the Valenzuela Regional Trial Court are hereby
REVERSED and SET ASIDE and the original Order of the trial court dated 28
February 2003 denying the motion of respondent to remove or dispose of machinery
is hereby REINSTATED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 155076

February 27, 2006

LUIS MARCOS P. LAUREL, Petitioner,

vs.
HON. ZEUS C. ABROGAR, Presiding Judge of the Regional Trial Court, Makati
City, Branch 150, PEOPLE OF THE PHILIPPINES& PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, Respondents.
DECISION
CALLEJO, SR., J.:
Before us is a Petition for Review on Certiorari of the Decision 1 of the Court of
Appeals (CA) in CA-G.R. SP No. 68841 affirming the Order issued by Judge Zeus C.
Abrogar, Regional Trial Court (RTC), Makati City, Branch 150, which denied the
"Motion to Quash (With Motion to Defer Arraignment)" in Criminal Case No. 99-2425
for theft.
Philippine Long Distance Telephone Company (PLDT) is the holder of a legislative
franchise to render local and international telecommunication services under Republic
Act No. 7082.2 Under said law, PLDT is authorized to establish, operate, manage,
lease, maintain and purchase telecommunication systems, including transmitting,
receiving and switching stations, for both domestic and international calls. For this
purpose, it has installed an estimated 1.7 million telephone lines nationwide. PLDT
also offers other services as authorized by Certificates of Public Convenience and
Necessity (CPCN) duly issued by the National Telecommunications Commission
(NTC), and operates and maintains an International Gateway Facility (IGF). The
PLDT network is thus principally composed of the Public Switch Telephone Network
(PSTN), telephone handsets and/or telecommunications equipment used by its
subscribers, the wires and cables linking said telephone handsets and/or
telecommunications equipment, antenna, the IGF, and other telecommunications
equipment which provide interconnections.3 1avvphil.net
PLDT alleges that one of the alternative calling patterns that constitute network fraud
and violate its network integrity is that which is known as International Simple Resale
(ISR). ISR is a method of routing and completing international long distance calls
using International Private Leased Lines (IPL), cables, antenna or air wave or
frequency, which connect directly to the local or domestic exchange facilities of the
terminating country (the country where the call is destined). The IPL is linked to
switching equipment which is connected to a PLDT telephone line/number. In the
process, the calls bypass the IGF found at the terminating country, or in some
instances, even those from the originating country.4

One such alternative calling service is that offered by Baynet Co., Ltd. (Baynet) which
sells "Bay Super Orient Card" phone cards to people who call their friends and
relatives in the Philippines. With said card, one is entitled to a 27-minute call to the
Philippines for about 37.03 per minute. After dialing the ISR access number
indicated in the phone card, the ISR operator requests the subscriber to give the PIN
number also indicated in the phone card. Once the callers identity (as purchaser of
the phone card) is confirmed, the ISR operator will then provide a Philippine local line
to the requesting caller via the IPL. According to PLDT, calls made through the IPL
never pass the toll center of IGF operators in the Philippines. Using the local line, the
Baynet card user is able to place a call to any point in the Philippines, provided the
local line is National Direct Dial (NDD) capable.5
PLDT asserts that Baynet conducts its ISR activities by utilizing an IPL to course its
incoming international long distance calls from Japan. The IPL is linked to switching
equipment, which is then connected to PLDT telephone lines/numbers and
equipment, with Baynet as subscriber. Through the use of the telephone lines and
other auxiliary equipment, Baynet is able to connect an international long distance call
from Japan to any part of the Philippines, and make it appear as a call originating
from Metro Manila. Consequently, the operator of an ISR is able to evade payment of
access, termination or bypass charges and accounting rates, as well as compliance
with the regulatory requirements of the NTC. Thus, the ISR operator offers
international telecommunication services at a lower rate, to the damage and prejudice
of legitimate operators like PLDT.6
PLDT pointed out that Baynet utilized the following equipment for its ISR activities:
lines, cables, and antennas or equipment or device capable of transmitting air waves
or frequency, such as an IPL and telephone lines and equipment; computers or any
equipment or device capable of accepting information applying the prescribed
process of the information and supplying the result of this process; modems or any
equipment or device that enables a data terminal equipment such as computers to
communicate with other data terminal equipment via a telephone line; multiplexers or
any equipment or device that enables two or more signals from different sources to
pass through a common cable or transmission line; switching equipment, or
equipment or device capable of connecting telephone lines; and software, diskettes,
tapes or equipment or device used for recording and storing information.7
PLDT also discovered that Baynet subscribed to a total of 123 PLDT telephone
lines/numbers.8 Based on the Traffic Study conducted on the volume of calls passing
through Baynets ISR network which bypass the IGF toll center, PLDT incurred an
estimated monthly loss of P10,185,325.96. 9 Records at the Securities and Exchange
Commission (SEC) also revealed that Baynet was not authorized to provide
international or domestic long distance telephone service in the country. The following
are its officers: Yuji Hijioka, a Japanese national (chairman of the board of directors);
Gina C. Mukaida, a Filipina (board member and president); Luis Marcos P. Laurel, a
Filipino (board member and corporate secretary); Ricky Chan Pe, a Filipino (board
member and treasurer); and Yasushi Ueshima, also a Japanese national (board
member).
Upon complaint of PLDT against Baynet for network fraud, and on the strength of two
search warrants10 issued by the RTC of Makati, Branch 147, National Bureau of

Investigation (NBI) agents searched its office at the 7th Floor, SJG Building, Kalayaan
Avenue, Makati City on November 8, 1999. Atsushi Matsuura, Nobuyoshi Miyake,
Edourd D. Lacson and Rolando J. Villegas were arrested by NBI agents while in the
act of manning the operations of Baynet. Seized in the premises during the search
were numerous equipment and devices used in its ISR activities, such as
multiplexers, modems, computer monitors, CPUs, antenna, assorted computer
peripheral cords and microprocessors, cables/wires, assorted PLDT statement of
accounts, parabolic antennae and voltage regulators.
State Prosecutor Ofelia L. Calo conducted an inquest investigation and issued a
Resolution11 on January 28, 2000, finding probable cause for theft under Article 308 of
the Revised Penal Code and Presidential Decree No. 401 12against the respondents
therein, including Laurel.
On February 8, 2000, State Prosecutor Calo filed an Information with the RTC of
Makati City charging Matsuura, Miyake, Lacson and Villegas with theft under Article
308 of the Revised Penal Code. After conducting the requisite preliminary
investigation, the State Prosecutor filed an Amended Information impleading Laurel (a
partner in the law firm of Ingles, Laurel, Salinas, and, until November 19, 1999, a
member of the board of directors and corporate secretary of Baynet), and the other
members of the board of directors of said corporation, namely, Yuji Hijioka, Yasushi
Ueshima, Mukaida, Lacson and Villegas, as accused for theft under Article 308 of the
Revised Penal Code. The inculpatory portion of the Amended Information reads:
On or about September 10-19, 1999, or prior thereto, in Makati City, and within the
jurisdiction of this Honorable Court, the accused, conspiring and confederating
together and all of them mutually helping and aiding one another, with intent to gain
and without the knowledge and consent of the Philippine Long Distance Telephone
(PLDT), did then and there willfully, unlawfully and feloniously take, steal and use the
international long distance calls belonging to PLDT by conducting International
Simple Resale (ISR), which is a method of routing and completing international long
distance calls using lines, cables, antennae, and/or air wave frequency which connect
directly to the local or domestic exchange facilities of the country where the call is
destined, effectively stealing this business from PLDT while using its facilities in the
estimated amount of P20,370,651.92 to the damage and prejudice of PLDT, in the
said amount.
CONTRARY TO LAW.13
Accused Laurel filed a "Motion to Quash (with Motion to Defer Arraignment)" on the
ground that the factual allegations in the Amended Information do not constitute the
felony of theft under Article 308 of the Revised Penal Code. He averred that the
Revised Penal Code, or any other special penal law for that matter, does not prohibit
ISR operations. He claimed that telephone calls with the use of PLDT telephone lines,
whether domestic or international, belong to the persons making the call, not to PLDT.
He argued that the caller merely uses the facilities of PLDT, and what the latter owns
are the telecommunication infrastructures or facilities through which the call is made.
He also asserted that PLDT is compensated for the callers use of its facilities by way
of rental; for an outgoing overseas call, PLDT charges the caller per minute, based on
the duration of the call. Thus, no personal property was stolen from PLDT. According

to Laurel, the P20,370,651.92 stated in the Information, if anything, represents the

rental for the use of PLDT facilities, and not the value of anything owned by it. Finally,
he averred that the allegations in the Amended Information are already subsumed
under the Information for violation of Presidential Decree (P.D.) No. 401 filed and
pending in the Metropolitan Trial Court of Makati City, docketed as Criminal Case No.
276766.
The
prosecution,
through
private
complainant
PLDT,
opposed
the
motion,14 contending that the movant unlawfully took personal property belonging to it,
as follows: 1) intangible telephone services that are being offered by PLDT and other
telecommunication companies, i.e., the connection and interconnection to their
telephone lines/facilities; 2) the use of those facilities over a period of time; and 3) the
revenues derived in connection with the rendition of such services and the use of
such facilities.15
The prosecution asserted that the use of PLDTs intangible telephone
services/facilities allows electronic voice signals to pass through the same, and
ultimately to the called partys number. It averred that such service/facility is akin to
electricity which, although an intangible property, may, nevertheless, be appropriated
and be the subject of theft. Such service over a period of time for a consideration is
the business that PLDT provides to its customers, which enables the latter to send
various messages to installed recipients. The service rendered by PLDT is akin to
merchandise which has specific value, and therefore, capable of appropriation by
another, as in this case, through the ISR operations conducted by the movant and his
co-accused.
The prosecution further alleged that "international business calls and revenues
constitute personal property envisaged in Article 308 of the Revised Penal Code."
Moreover, the intangible telephone services/facilities belong to PLDT and not to the
movant and the other accused, because they have no telephone services and
facilities of their own duly authorized by the NTC; thus, the taking by the movant and
his co-accused of PLDT services was with intent to gain and without the latters
consent.
The prosecution pointed out that the accused, as well as the movant, were paid in
exchange for their illegal appropriation and use of PLDTs telephone services and
facilities; on the other hand, the accused did not pay a single centavo for their illegal
ISR operations. Thus, the acts of the accused were akin to the use of a "jumper" by a
consumer to deflect the current from the house electric meter, thereby enabling one to
steal electricity. The prosecution emphasized that its position is fortified by the
Resolutions of the Department of Justice in PLDT v. Tiongson, et al. (I.S. No. 970925) and in PAOCTF-PLDT v. Elton John Tuason, et al. (I.S. No. 2000-370) which
were issued on August 14, 2000 finding probable cause for theft against the
respondents therein.
On September 14, 2001, the RTC issued an Order16 denying the Motion to Quash the
Amended Information. The court declared that, although there is no law that expressly
prohibits the use of ISR, the facts alleged in the Amended Information "will show how
the alleged crime was committed by conducting ISR," to the damage and prejudice of
PLDT.

Laurel filed a Motion for Reconsideration 17 of the Order, alleging that international
long distance calls are not personal property, and are not capable of appropriation.
He maintained that business or revenue is not considered personal property, and that
the prosecution failed to adduce proof of its existence and the subsequent loss of
personal property belonging to another. Citing the ruling of the Court in United States
v. De Guzman,18 Laurel averred that the case is not one with telephone calls which
originate with a particular caller and terminates with the called party. He insisted that
telephone calls are considered privileged communications under the Constitution and
cannot be considered as "the property of PLDT." He further argued that there is no
kinship between telephone calls and electricity or gas, as the latter are forms of
energy which are generated and consumable, and may be considered as personal
property because of such characteristic. On the other hand, the movant argued, the
telephone business is not a form of energy but is an activity.
In its Order19 dated December 11, 2001, the RTC denied the movants Motion for
Reconsideration. This time, it ruled that what was stolen from PLDT was its
"business" because, as alleged in the Amended Information, the international long
distance calls made through the facilities of PLDT formed part of its business. The
RTC noted that the movant was charged with stealing the business of PLDT. To
support its ruling, it cited Strochecker v. Ramirez, 20where the Court ruled that interest
in business is personal property capable of appropriation. It further declared that,
through their ISR operations, the movant and his co-accused deprived PLDT of fees
for international long distance calls, and that the ISR used by the movant and his coaccused was no different from the "jumper" used for stealing electricity.
Laurel then filed a Petition for Certiorari with the CA, assailing the Order of the RTC.
He alleged that the respondent judge gravely abused his discretion in denying his
Motion to Quash the Amended Information. 21 As gleaned from the material averments
of the amended information, he was charged with stealing the international long
distance calls belonging to PLDT, not its business. Moreover, the RTC failed to
distinguish between the business of PLDT (providing services for international long
distance calls) and the revenues derived therefrom. He opined that a "business" or its
revenues cannot be considered as personal property under Article 308 of the Revised
Penal Code, since a "business" is "(1) a commercial or mercantile activity customarily
engaged in as a means of livelihood and typically involving some independence of
judgment and power of decision; (2) a commercial or industrial enterprise; and (3)
refers to transactions, dealings or intercourse of any nature." On the other hand, the
term "revenue" is defined as "the income that comes back from an investment (as in
real or personal property); the annual or periodical rents, profits, interests, or issues of
any species of real or personal property."22
Laurel further posited that an electric companys business is the production and
distribution of electricity; a gas companys business is the production and/or
distribution of gas (as fuel); while a water companys business is the production and
distribution of potable water. He argued that the "business" in all these cases is the
commercial activity, while the goods and merchandise are the products of such
activity. Thus, in prosecutions for theft of certain forms of energy, it is the electricity or
gas which is alleged to be stolen and not the "business" of providing electricity or gas.
However, since a telephone company does not produce any energy, goods or
merchandise and merely renders a service or, in the words of PLDT, "the connection

and interconnection to their telephone lines/facilities," such service cannot be the

subject of theft as defined in Article 308 of the Revised Penal Code.23
He further declared that to categorize "business" as personal property under Article
308 of the Revised Penal Code would lead to absurd consequences; in prosecutions
for theft of gas, electricity or water, it would then be permissible to allege in the
Information that it is the gas business, the electric business or the water business
which has been stolen, and no longer the merchandise produced by such
enterprise.24
Laurel further cited the Resolution of the Secretary of Justice in Piltel v.
Mendoza,25 where it was ruled that the Revised Penal Code, legislated as it was
before present technological advances were even conceived, is not adequate to
address the novel means of "stealing" airwaves or airtime. In said resolution, it was
noted that the inadequacy prompted the filing of Senate Bill 2379 (sic) entitled "The
Anti-Telecommunications Fraud of 1997" to deter cloning of cellular phones and other
forms of communications fraud. The said bill "aims to protect in number (ESN) (sic) or
Capcode, mobile identification number (MIN), electronic-international mobile
equipment identity (EMEI/IMEI), or subscriber identity module" and "any attempt to
duplicate the data on another cellular phone without the consent of a public
telecommunications entity would be punishable by law." 26 Thus, Laurel concluded,
"there is no crime if there is no law punishing the crime."
On August 30, 2002, the CA rendered judgment dismissing the petition. 27 The
appellate court ruled that a petition for certiorari under Rule 65 of the Rules of Court
was not the proper remedy of the petitioner. On the merits of the petition, it held that
while business is generally an activity
which is abstract and intangible in form, it is nevertheless considered "property" under
Article 308 of the Revised Penal Code. The CA opined that PLDTs business of
providing international calls is personal property which may be the object of theft, and
cited United States v. Carlos 28 to support such conclusion. The tribunal also cited
Strochecker v. Ramirez,29 where this Court ruled that one-half interest in a days
business is personal property under Section 2 of Act No. 3952, otherwise known as
the Bulk Sales Law. The appellate court held that the operations of the ISR are not
subsumed in the charge for violation of P.D. No. 401.
Laurel, now the petitioner, assails the decision of the CA, contending that THE COURT OF APPEALS ERRED IN RULING THAT THE PERSONAL
PROPERTY ALLEGEDLY STOLEN PER THE INFORMATION IS NOT THE
"INTERNATIONAL LONG DISTANCE CALLS" BUT THE "BUSINESS OF
PLDT."
THE COURT OF APPEALS ERRED IN RULING THAT THE TERM
"BUSINESS" IS PERSONAL PROPERTY WITHIN THE MEANING OF ART.
308 OF THE REVISED PENAL CODE.30

Petitioner avers that the petition for a writ of certiorari may be filed to nullify an
interlocutory order of the trial court which was issued with grave abuse of discretion
amounting to excess or lack of jurisdiction. In support of his petition before the Court,
he reiterates the arguments in his pleadings filed before the CA. He further claims
that while the right to carry on a business or an interest or participation in business is
considered property under the New Civil Code, the term "business," however, is not.
He asserts that the Philippine Legislature, which approved the Revised Penal Code
way back in January 1, 1932, could not have contemplated to include international
long distance calls and "business" as personal property under Article 308 thereof.
In its comment on the petition, the Office of the Solicitor General (OSG) maintains
that the amended information clearly states all the essential elements of the crime of
theft. Petitioners interpretation as to whether an "international long distance call" is
personal property under the law is inconsequential, as a reading of the amended
information readily reveals that specific acts and circumstances were alleged
charging Baynet, through its officers, including petitioner, of feloniously taking,
stealing and illegally using international long distance calls belonging to respondent
PLDT by conducting ISR operations, thus, "routing and completing international long
distance calls using lines, cables, antenna and/or airwave frequency which connect
directly to the local or domestic exchange facilities of the country where the call is
destined." The OSG maintains that the international long distance calls alleged in the
amended information should be construed to mean "business" of PLDT, which, while
abstract and intangible in form, is personal property susceptible of
appropriation.31 The OSG avers that what was stolen by petitioner and his co-accused
is the business of PLDT providing international long distance calls which, though
intangible, is personal property of the PLDT.32
For its part, respondent PLDT asserts that personal property under Article 308 of the
Revised Penal Code comprehends intangible property such as electricity and gas
which are valuable articles for merchandise, brought and sold like other personal
property, and are capable of appropriation. It insists that the business of international
calls and revenues constitute personal property because the same are valuable
articles of merchandise. The respondent reiterates that international calls involve (a)
the intangible telephone services that are being offered by it, that is, the connection
and interconnection to the telephone network, lines or facilities; (b) the use of its
telephone network, lines or facilities over a period of time; and (c) the income derived
in connection therewith.33
PLDT further posits that business revenues or the income derived in connection with
the rendition of such services and the use of its telephone network, lines or facilities
are personal properties under Article 308 of the Revised Penal Code; so is the use of
said telephone services/telephone network, lines or facilities which allow electronic
voice signals to pass through the same and ultimately to the called partys number. It
is akin to electricity which, though intangible property, may nevertheless be
appropriated and can be the object of theft. The use of respondent PLDTs telephone
network, lines, or facilities over a period of time for consideration is the business that
it provides to its customers, which enables the latter to send various messages to
intended recipients. Such use over a period of time is akin to merchandise which has
value and, therefore, can be appropriated by another. According to respondent PLDT,
this is what actually happened when petitioner Laurel and the other accused below
conducted illegal ISR operations.34

The petition is meritorious.

The issues for resolution are as follows: (a) whether or not the petition for certiorari is
the proper remedy of the petitioner in the Court of Appeals; (b) whether or not
international telephone calls using Bay Super Orient Cards through the
telecommunication services provided by PLDT for such calls, or, in short, PLDTs
business of providing said telecommunication services, are proper subjects of theft
under Article 308 of the Revised Penal Code; and (c) whether or not the trial court
committed grave abuse of discretion amounting to excess or lack of jurisdiction in
denying the motion of the petitioner to quash the amended information.
On the issue of whether or not the petition for certiorari instituted by the petitioner in
the CA is proper, the general rule is that a petition for certiorari under Rule 65 of the
Rules of Court, as amended, to nullify an order denying a motion to quash the
Information is inappropriate because the aggrieved party has a remedy of appeal in
the ordinary course of law. Appeal and certiorari are mutually exclusive of each other.
The remedy of the aggrieved party is to continue with the case in due course and,
when an unfavorable judgment is rendered, assail the order and the decision on
appeal. However, if the trial court issues the order denying the motion to quash the
Amended Information with grave abuse of discretion amounting to excess or lack of
jurisdiction, or if such order is patently erroneous, or null and void for being contrary
to the Constitution, and the remedy of appeal would not afford adequate and
expeditious relief, the accused may resort to the extraordinary remedy of
certiorari.35 A special civil action for certiorari is also available where there are special
circumstances clearly demonstrating the inadequacy of an appeal. As this Court held
in Bristol Myers Squibb (Phils.), Inc. v. Viloria:36
Nonetheless, the settled rule is that a writ of certiorari may be granted in cases
where, despite availability of appeal after trial, there is at least a prima facie showing
on the face of the petition and its annexes that: (a) the trial court issued the order with
grave abuse of discretion amounting to lack of or in excess of jurisdiction; (b) appeal
would not prove to be a speedy and adequate remedy; (c) where the order is a patent
nullity; (d) the decision in the present case will arrest future litigations; and (e) for
certain considerations such as public welfare and public policy.37
In his petition for certiorari in the CA, petitioner averred that the trial court committed
grave abuse of its discretion amounting to excess or lack of jurisdiction when it denied
his motion to quash the Amended Information despite his claim that the material
allegations in the Amended Information do not charge theft under Article 308 of the
Revised Penal Code, or any offense for that matter. By so doing, the trial court
deprived him of his constitutional right to be informed of the nature of the charge
against him. He further averred that the order of the trial court is contrary to the
constitution and is, thus, null and void. He insists that he should not be compelled to
undergo the rigors and tribulations of a protracted trial and incur expenses to defend
himself against a non-existent charge.
Petitioner is correct.
An information or complaint must state explicitly and directly every act or omission
constituting an offense38 and must allege facts establishing conduct that a penal

statute makes criminal;39 and describes the property which is the subject of theft to
advise the accused with reasonable certainty of the accusation he is called upon to
meet at the trial and to enable him to rely on the judgment thereunder of a
subsequent prosecution for the same offense.40 It must show, on its face, that if the
alleged facts are true, an offense has been committed. The rule is rooted on the
constitutional right of the accused to be informed of the nature of the crime or cause
of the accusation against him. He cannot be convicted of an offense even if proven
unless it is alleged or necessarily included in the Information filed against him.
As a general prerequisite, a motion to quash on the ground that the Information does
not constitute the offense charged, or any offense for that matter, should be resolved
on the basis of said allegations whose truth and veracity are hypothetically
committed;41 and on additional facts admitted or not denied by the prosecution.42 If the
facts alleged in the Information do not constitute an offense, the complaint or
information should be quashed by the court.43
We have reviewed the Amended Information and find that, as mentioned by the
petitioner, it does not contain material allegations charging the petitioner of theft of
personal property under Article 308 of the Revised Penal Code. It, thus, behooved the
trial court to quash the Amended Information. The Order of the trial court denying the
motion of the petitioner to quash the Amended Information is a patent nullity.
On the second issue, we find and so hold that the international telephone calls placed
by Bay Super Orient Card holders, the telecommunication services provided by PLDT
and its business of providing said services are not personal properties under Article
308 of the Revised Penal Code. The construction by the respondents of Article 308 of
the said Code to include, within its coverage, the aforesaid international telephone
calls, telecommunication services and business is contrary to the letter and intent of
the law.
The rule is that, penal laws are to be construed strictly. Such rule is founded on the
tenderness of the law for the rights of individuals and on the plain principle that the
power of punishment is vested in Congress, not in the judicial department. It is
Congress, not the Court, which is to define a crime, and ordain its punishment. 44 Due
respect for the prerogative of Congress in defining crimes/felonies constrains the
Court to refrain from a broad interpretation of penal laws where a "narrow
interpretation" is appropriate. The Court must take heed to language, legislative
history and purpose, in order to strictly determine the wrath and breath of the conduct
the law forbids.45 However, when the congressional purpose is unclear, the court must
apply the rule of lenity, that is, ambiguity concerning the ambit of criminal statutes
should be resolved in favor of lenity.46
Penal statutes may not be enlarged by implication or intent beyond the fair meaning
of the language used; and may not be held to include offenses other than those which
are clearly described, notwithstanding that the Court may think that Congress should
have made them more comprehensive.47 Words and phrases in a statute are to be
construed according to their common meaning and accepted usage.
As Chief Justice John Marshall declared, "it would be dangerous, indeed, to carry the
principle that a case which is within the reason or

mischief of a statute is within its provision, so far as to punish a crime not enumerated
in the statute because it is of equal atrocity, or of kindred character with those which
are enumerated.48 When interpreting a criminal statute that does not explicitly reach
the conduct in question, the Court should not base an expansive reading on
inferences from subjective and variable understanding.49
Article 308 of the Revised Penal Code defines theft as follows:
Art. 308. Who are liable for theft. Theft is committed by any person who, with intent
to gain but without violence, against or intimidation of persons nor force upon things,
shall take personal property of another without the latters consent.
The provision was taken from Article 530 of the Spanish Penal Code which reads:
1. Los que con nimo de lucrarse, y sin violencia o intimidacin en las personas ni
fuerza en las cosas, toman las cosas muebles ajenas sin la voluntad de su dueo.50
For one to be guilty of theft, the accused must have an intent to steal (animus furandi)
personal property, meaning the intent to deprive another of his ownership/lawful
possession of personal property which intent is apart from and concurrently with the
general criminal intent which is an essential element of a felony of dolo (dolus malus).
An information or complaint for simple theft must allege the following elements: (a)
the taking of personal property; (b) the said property belongs to another; (c) the taking
be done with intent to gain; and (d) the taking be accomplished without the use of
violence or intimidation of person/s or force upon things.51
One is apt to conclude that "personal property" standing alone, covers both tangible
and intangible properties and are subject of theft under the Revised Penal Code. But
the words "Personal property" under the Revised Penal Code must be considered in
tandem with the word "take" in the law. The statutory definition of "taking" and
movable property indicates that, clearly, not all personal properties may be the proper
subjects of theft. The general rule is that, only movable properties which have
physical or material existence and susceptible of occupation by another are proper
objects of theft.52 As explained by Cuelo Callon: "Cosa juridicamente es toda
sustancia corporal, material, susceptible de ser aprehendida que tenga un valor
cualquiera."53
According to Cuello Callon, in the context of the Penal Code, only those movable
properties which can be taken and carried from the place they are found are proper
subjects of theft. Intangible properties such as rights and ideas are not subject of theft
because the same cannot be "taken" from the place it is found and is occupied or
appropriated.
Solamente las cosas muebles y corporales pueden ser objeto de hurto. La
sustraccin de cosas inmuebles y la cosas incorporales (v. gr., los derechos, las
ideas) no puede integrar este delito, pues no es posible asirlas, tomarlas, para
conseguir su apropiacin. El Codigo emplea la expresin "cosas mueble" en el
sentido de cosa que es susceptible de ser llevada del lugar donde se encuentra,

como dinero, joyas, ropas, etctera, asi que su concepto no coincide por completo
con el formulado por el Codigo civil (arts. 335 y 336).54
Thus, movable properties under Article 308 of the Revised Penal Code should be
distinguished from the rights or interests to which they relate. A naked right existing
merely in contemplation of law, although it may be very valuable to the person who is
entitled to exercise it, is not the subject of theft or larceny. 55 Such rights or interests
are intangible and cannot be "taken" by another. Thus, right to produce oil, good will
or an interest in business, or the right to engage in business, credit or franchise are
properties. So is the credit line represented by a credit card. However, they are not
proper subjects of theft or larceny because they are without form or substance, the
mere "breath" of the Congress. On the other hand, goods, wares and merchandise of
businessmen and credit cards issued to them are movable properties with physical
and material existence and may be taken by another; hence, proper subjects of theft.
There is "taking" of personal property, and theft is consummated when the offender
unlawfully acquires possession of personal property even if for a short time; or if such
property is under the dominion and control of the thief. The taker, at some particular
amount, must have obtained complete and absolute possession and control of the
property adverse to the rights of the owner or the lawful possessor thereof. 56 It is not
necessary that the property be actually carried away out of the physical possession of
the lawful possessor or that he should have made his escape with it. 57 Neither
asportation nor actual manual possession of property is required. Constructive
possession of the thief of the property is enough.58
The essence of the element is the taking of a thing out of the possession of the owner
without his privity and consent and without animus revertendi.59
Taking may be by the offenders own hands, by his use of innocent persons without
any felonious intent, as well as any mechanical device, such as an access device or
card, or any agency, animate or inanimate, with intent to gain. Intent to gain includes
the unlawful taking of personal property for the purpose of deriving utility, satisfaction,
enjoyment and pleasure.60
We agree with the contention of the respondents that intangible properties such as
electrical energy and gas are proper subjects of theft. The reason for this is that, as
explained by this Court in United States v. Carlos61 and United States v.
Tambunting,62 based on decisions of the Supreme Court of Spain and of the courts in
England and the United States of America, gas or electricity are capable of
appropriation by another other than the owner. Gas and electrical energy may be
taken, carried away and appropriated. In People v. Menagas,63 the Illinois State
Supreme Court declared that electricity, like gas, may be seen and felt. Electricity, the
same as gas, is a valuable article of merchandise, bought and sold like other personal
property and is capable of appropriation by another. It is a valuable article of
merchandise, bought and sold like other personal property, susceptible of being
severed from a mass or larger quantity and of being transported from place to place.
Electrical energy may, likewise, be taken and carried away. It is a valuable
commodity, bought and sold like other personal property. It may be transported from
place to place. There is nothing in the nature of gas used for illuminating purposes
which renders it incapable of being feloniously taken and carried away.

In People ex rel Brush Electric Illuminating Co. v. Wemple, 64 the Court of Appeals of
New York held that electric energy is manufactured and sold in determinate quantities
at a fixed price, precisely as are coal, kerosene oil, and gas. It may be conveyed to
the premises of the consumer, stored in cells of different capacity known as an
accumulator; or it may be sent through a wire, just as gas or oil may be transported
either in a close tank or forced through a pipe. Having reached the premises of the
consumer, it may be used in any way he may desire, being, like illuminating gas,
capable of being transformed either into heat, light, or power, at the option of the
purchaser. In Woods v. People,65 the Supreme Court of Illinois declared that there is
nothing in the nature of gas used for illuminating purposes which renders it incapable
of being feloniously taken and carried away. It is a valuable article of merchandise,
bought and sold like other personal property, susceptible of being severed from a
mass or larger quantity and of being transported from place to place.
Gas and electrical energy should not be equated with business or services provided
by business entrepreneurs to the public. Business does not have an exact definition.
Business is referred as that which occupies the time, attention and labor of men for
the purpose of livelihood or profit. It embraces everything that which a person can be
employed.66 Business may also mean employment, occupation or profession.
Business is also defined as a commercial activity for gain benefit or
advantage.67 Business, like services in business, although are properties, are not
proper subjects of theft under the Revised Penal Code because the same cannot be
"taken" or "occupied." If it were otherwise, as claimed by the respondents, there
would be no juridical difference between the taking of the business of a person or the
services provided by him for gain, vis--vis, the taking of goods, wares or
merchandise, or equipment comprising his business.68 If it was its intention to include
"business" as personal property under Article 308 of the Revised Penal Code, the
Philippine Legislature should have spoken in language that is clear and definite: that
business is personal property under Article 308 of the Revised Penal Code.69
We agree with the contention of the petitioner that, as gleaned from the material
averments of the Amended Information, he is charged of "stealing the international
long distance calls belonging to PLDT" and the use thereof, through the ISR. Contrary
to the claims of the OSG and respondent PLDT, the petitioner is not charged of
stealing P20,370,651.95 from said respondent. Said amount of P20,370,651.95
alleged in the Amended Information is the aggregate amount of access, transmission
or termination charges which the PLDT expected from the international long distance
calls of the callers with the use of Baynet Super Orient Cards sold by Baynet Co. Ltd.
In defining theft, under Article 308 of the Revised Penal Code, as the taking of
personal property without the consent of the owner thereof, the Philippine legislature
could not have contemplated the human voice which is converted into electronic
impulses or electrical current which are transmitted to the party called through the
PSTN of respondent PLDT and the ISR of Baynet Card Ltd. within its coverage.
When the Revised Penal Code was approved, on December 8, 1930, international
telephone calls and the transmission and routing of electronic voice signals or
impulses emanating from said calls, through the PSTN, IPL and ISR, were still nonexistent. Case law is that, where a legislative history fails to evidence congressional
awareness of the scope of the statute claimed by the respondents, a narrow
interpretation of the law is more consistent with the usual approach to the

construction of the statute. Penal responsibility cannot be extended beyond the fair
scope of the statutory mandate.70

Penal Code. The Legislature did not. In fact, the Revised Penal Code does not even
contain a definition of services.

Respondent PLDT does not acquire possession, much less, ownership of the voices
of the telephone callers or of the electronic voice signals or current emanating from
said calls. The human voice and the electronic voice signals or current caused
thereby are intangible and not susceptible of possession, occupation or appropriation
by the respondent PLDT or even the petitioner, for that matter. PLDT merely transmits
the electronic voice signals through its facilities and equipment. Baynet Card Ltd.,
through its operator, merely intercepts, reroutes the calls and passes them to its toll
center. Indeed, the parties called receive the telephone calls from Japan.

If taking of telecommunication services or the business of a person, is to be

proscribed, it must be by special statute79 or an amendment of the Revised Penal
Code. Several states in the United States, such as New York, New Jersey, California
and Virginia, realized that their criminal statutes did not contain any provisions
penalizing the theft of services and passed laws defining and penalizing theft of
telephone and computer services. The Pennsylvania Criminal Statute now penalizes
theft of services, thus:
(a) Acquisition of services. --

In this modern age of technology, telecommunications systems have become so

tightly merged with computer systems that it is difficult to know where one starts and
the other finishes. The telephone set is highly computerized and allows computers to
communicate across long distances.71 The instrumentality at issue in this case is not
merely a telephone but a telephone inexplicably linked to a computerized
communications system with the use of Baynet Cards sold by the Baynet Card Ltd.
The corporation uses computers, modems and software, among others, for its ISR.72
The conduct complained of by respondent PLDT is reminiscent of "phreaking" (a
slang term for the action of making a telephone system to do something that it
normally should not allow by "making the phone company bend over and grab its
ankles"). A "phreaker" is one who engages in the act of manipulating phones and
illegally markets telephone services.73 Unless the phone company replaces all its
hardware, phreaking would be impossible to stop. The phone companies in North
America were impelled to replace all their hardware and adopted full digital switching
system known as the Common Channel Inter Office Signaling. Phreaking occurred
only during the 1960s and 1970s, decades after the Revised Penal Code took effect.
The petitioner is not charged, under the Amended Information, for theft of
telecommunication or telephone services offered by PLDT. Even if he is, the term
"personal property" under Article 308 of the Revised Penal Code cannot be
interpreted beyond its seams so as to include "telecommunication or telephone
services" or computer services for that matter. The word "service" has a variety of
meanings dependent upon the context, or the sense in which it is used; and, in some
instances, it may include a sale. For instance, the sale of food by restaurants is
usually referred to as "service," although an actual sale is involved.74 It may also
mean the duty or labor to be rendered by one person to another; performance of labor
for the benefit of another.75 In the case of PLDT, it is to render local and international
telecommunications services and such other services as authorized by the CPCA
issued by the NTC. Even at common law, neither time nor services may be taken and
occupied or appropriated.76 A service is generally not considered property and a theft
of service would not, therefore, constitute theft since there can be no caption or
asportation.77 Neither is the unauthorized use of the equipment and facilities of PLDT
by the petitioner theft under the aforequoted provision of the Revised Penal Code.78
If it was the intent of the Philippine Legislature, in 1930, to include services to be the
subject of theft, it should have incorporated the same in Article 308 of the Revised

(1) A person is guilty of theft if he intentionally obtains services for himself or for
another which he knows are available only for compensation, by deception or threat,
by altering or tampering with the public utility meter or measuring device by which
such services are delivered or by causing or permitting such altering or tampering, by
making or maintaining any unauthorized connection, whether physically, electrically or
inductively, to a distribution or transmission line, by attaching or maintaining the
attachment of any unauthorized device to any cable, wire or other component of an
electric, telephone or cable television system or to a television receiving set
connected to a cable television system, by making or maintaining any unauthorized
modification or alteration to any device installed by a cable television system, or by
false token or other trick or artifice to avoid payment for the service.
In the State of Illinois in the United States of America, theft of labor or services or use
of property is penalized:
(a) A person commits theft when he obtains the temporary use of property, labor or
services of another which are available only for hire, by means of threat or deception
or knowing that such use is without the consent of the person providing the property,
labor or services.
In 1980, the drafters of the Model Penal Code in the United States of America arrived
at the conclusion that labor and services, including professional services, have not
been included within the traditional scope of the term "property" in ordinary theft
statutes. Hence, they decided to incorporate in the Code Section 223.7, which defines
and penalizes theft of services, thus:
(1) A person is guilty of theft if he purposely obtains services which he knows are
available only for compensation, by deception or threat, or by false token or other
means to avoid payment for the service. "Services" include labor, professional
service, transportation, telephone or other public service, accommodation in hotels,
restaurants or elsewhere, admission to exhibitions, use of vehicles or other movable
property. Where compensation for service is ordinarily paid immediately upon the
rendering of such service, as in the case of hotels and restaurants, refusal to pay or
absconding without payment or offer to pay gives rise to a presumption that the
service was obtained by deception as to intention to pay; (2) A person commits theft
if, having control over the disposition of services of others, to which he is not entitled,

he knowingly diverts such services to his own benefit or to the benefit of another not
entitled thereto.
Interestingly, after the State Supreme Court of Virginia promulgated its decision in
Lund v. Commonwealth,80declaring that neither time nor services may be taken and
carried away and are not proper subjects of larceny, the General Assembly of Virginia
enacted Code No. 18-2-98 which reads:
Computer time or services or data processing services or information or data stored
in connection therewith is hereby defined to be property which may be the subject of
larceny under 18.2-95 or 18.2-96, or embezzlement under 18.2-111, or false
pretenses under 18.2-178.
In the State of Alabama, Section 13A-8-10(a)(1) of the Penal Code of Alabama of
1975 penalizes theft of services:
"A person commits the crime of theft of services if: (a) He intentionally obtains
services known by him to be available only for compensation by deception, threat,
false token or other means to avoid payment for the services "
In the Philippines, Congress has not amended the Revised Penal Code to include
theft of services or theft of business as felonies. Instead, it approved a law, Republic
Act No. 8484, otherwise known as the Access Devices Regulation Act of 1998, on
February 11, 1998. Under the law, an access device means any card, plate, code,
account number, electronic serial number, personal identification number and other
telecommunication services, equipment or instrumentalities-identifier or other means
of account access that can be used to obtain money, goods, services or any other
thing of value or to initiate a transfer of funds other than a transfer originated solely by
paper instrument. Among the prohibited acts enumerated in Section 9 of the law are
the acts of obtaining money or anything of value through the use of an access device,
with intent to defraud or intent to gain and fleeing thereafter; and of effecting
transactions with one or more access devices issued to another person or persons to
receive payment or any other thing of value. Under Section 11 of the law, conspiracy
to commit access devices fraud is a crime. However, the petitioner is not charged of
violation of R.A. 8484.
Significantly, a prosecution under the law shall be without prejudice to any liability for
violation of any provisions of the Revised Penal Code inclusive of theft under Rule
308 of the Revised Penal Code and estafa under Article 315 of the Revised Penal
Code. Thus, if an individual steals a credit card and uses the same to obtain services,
he is liable of the following: theft of the credit card under Article 308 of the Revised
Penal Code; violation of Republic Act No. 8484; and estafa under Article 315(2)(a) of
the Revised Penal Code with the service provider as the private complainant. The
petitioner is not charged of estafa before the RTC in the Amended Information.
Section 33 of Republic Act No. 8792, Electronic Commerce Act of 2000 provides:
Sec. 33. Penalties. The following Acts shall be penalized by fine and/or
imprisonment, as follows:

a) Hacking or cracking which refers to unauthorized access into or interference in a

computer system/server or information and communication system; or any access in
order to corrupt, alter, steal, or destroy using a computer or other similar information
and communication devices, without the knowledge and consent of the owner of the
computer or information and communications system, including the introduction of
computer viruses and the like, resulting on the corruption, destruction, alteration, theft
or loss of electronic data messages or electronic documents shall be punished by a
minimum fine of One hundred thousand pesos (P100,000.00) and a maximum
commensurate to the damage incurred and a mandatory imprisonment of six (6)
months to three (3) years.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The assailed Orders
of the Regional Trial Court and the Decision of the Court of Appeals are REVERSED
and SET ASIDE. The Regional Trial Court is directed to issue an order granting the
motion of the petitioner to quash the Amended Information.
SO ORDERED.

THIRD DIVISION
BPI FAMILY BANK,

G.R. No. 123498

Petitioner,
Present:

account had P1,000,000.00 with a maturity date of August 31, 1990. The total amount
of P2,000,000.00 used to open these accounts is traceable to a check issued by
Tevesteco allegedly in consideration of Francos introduction of Eladio Teves, [7]who
was looking for a conduit bank to facilitate Tevestecos business transactions, to
Jaime Sebastian, who was then BPI-FB SFDMs Branch Manager. In turn, the funding
for the P2,000,000.00 check was part of the P80,000,000.00 debited by BPI-FB from
FMICs time deposit account and credited to Tevestecos current account pursuant to
an Authority to Debit purportedly signed by FMICs officers.

YNARES-SANTIAGO,
It appears, however, that the signatures of FMICs officers on the Authority to Debit
Chairperson,
were forged.[8]On September 4, 1989, Antonio Ong,[9] upon being shown the Authority
AUSTRIA-MARTINEZ, to Debit, personally declared his signature therein to be a forgery. Unfortunately,
CHICO-NAZARIO,
Tevesteco had already effected several withdrawals from its current account (to which
NACHURA, and
had been credited the P80,000,000.00 covered by the forged Authority to Debit)
amounting to P37,455,410.54, including the P2,000,000.00 paid to Franco.
REYES, JJ.

- versus -

AMADO FRANCO and COURT OF APPEALS,

Respondents.

Promulgated:
November 23, 2007

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:

Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost
fidelity.We reiterate this exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the Court of
Appeals (CA) Decision[1] in CA-G.R. CV No. 43424 which affirmed with modification
the judgment[2] of the Regional Trial Court, Branch 55, Manila (Manila RTC), in Civil
Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI
Family Bank (BPI-FB) allegedly by respondent Amado Franco (Franco) in conspiracy
with other individuals,[3] some of whom opened and maintained separate accounts
with BPI-FB, San Francisco del Monte (SFDM) branch, in a series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a
savings and current account with BPI-FB. Soon thereafter, or on August 25, 1989,
First Metro Investment Corporation (FMIC) also opened a time deposit account with
the same branch of BPI-FB with a deposit of P100,000,000.00, to mature one year
thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a current,
[4]
savings,[5]and time deposit,[6] with BPI-FB. The current and savings accounts were
respectively funded with an initial deposit of P500,000.00 each, while the time deposit

On September 8, 1989, impelled by the need to protect its interests in light of

FMICs forgery claim, BPI-FB, thru its Senior Vice-President, Severino Coronacion,
instructed Jesus Arangorin[10]to debit Francos savings and current accounts for the
amounts remaining therein.[11] However, Francos time deposit account could not be
debited due to the capacity limitations of BPI-FBs computer.[12]
In the meantime, two checks [13] drawn by Franco against his BPI-FB current account
were dishonored upon presentment for payment, and stamped with a notation
account under garnishment. Apparently, Francos current account was garnished by
virtue of an Order of Attachment issued by the Regional Trial Court of Makati (Makati
RTC) in Civil Case No. 89-4996 (Makati Case), which had been filed by BPI-FB
against Franco et al.,[14] to recover the P37,455,410.54 representing Tevestecos total
withdrawals from its account.
Notably, the dishonored checks were issued by Franco and presented for
payment at BPI-FB prior to Francos receipt of notice that his accounts were under
garnishment.[15] In fact, at the time the Notice of Garnishment dated September 27,
1989 was served on BPI-FB, Franco had yet to be impleaded in the Makati case
where the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second Amended
Complaint in Civil Case No. 89-4996, that Franco was impleaded in the Makati case.
[16]
Immediately, upon receipt of such copy, Franco filed a Motion to Discharge
Attachment which the Makati RTC granted on May 16, 1990. The Order Lifting the
Order of Attachment was served on BPI-FB on even date, with Franco demanding the
release to him of the funds in his savings and current accounts. Jesus Arangorin, BPIFBs new manager, could not forthwith comply with the demand as the funds, as
previously stated, had already been debited because of FMICs forgery claim. As
such, BPI-FBs computer at the SFDM Branch indicated that the current account
record was not on file.
With respect to Francos savings account, it appears that Franco agreed to an
arrangement, as a favor to Sebastian, whereby P400,000.00 from his savings
account was temporarily transferred to Domingo Quiaoits savings account, subject to
its immediate return upon issuance of a certificate of deposit which Quiaoit needed in
connection with his visa application at the Taiwan Embassy. As part of the

arrangement, Sebastian retained custody of Quiaoits savings account passbook to

ensure that no withdrawal would be effected therefrom, and to preserve Francos
deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted
the amount ofP63,189.00 from the remaining balance of the time deposit account
representing advance interest paid to him.
These transactions spawned a number of cases, some of which we had already
resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount
of P80,000,000.00 debited from its account.[17] The case eventually reached this
Court, and in BPI Family Savings Bank, Inc. v. First Metro Investment Corporation,
[18]
we upheld the finding of the courts below that BPI-FB failed to exercise the degree
of diligence required by the nature of its obligation to treat the accounts of its
depositors with meticulous care. Thus, BPI-FB was found liable to FMIC for the
debited amount in its time deposit. It was ordered to pay P65,332,321.99 plus interest
at 17% per annum fromAugust 29, 1989 until fully restored. In turn, the 17% shall
itself earn interest at 12% from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica
(Buenaventura, et al.),[19] recipients of a P500,000.00 check proceeding from
the P80,000,000.00 mistakenly credited to Tevesteco, likewise filed suit.
Buenaventura et al., as in the case of Franco, were also prevented from effecting
withdrawals[20] from their current account with BPI-FB, Bonifacio Market, Edsa,
Caloocan City Branch. Likewise, when the case was elevated to this Court docketed
as BPI Family Bank v. Buenaventura, [21] we ruled that BPI-FB had no right to freeze
Buenaventura, et al.s accounts and adjudged BPI-FB liable therefor, in addition to
damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to
be the perpetrators of the multi-million peso scam. [22] In the criminal case, Franco,
along with the other accused, except for Manuel Bienvenida who was still at large,
were acquitted of the crime of Estafa as defined and penalized under Article 351, par.
2(a) of the Revised Penal Code. [23] However, the civil case[24] remains under litigation
and the respective rights and liabilities of the parties have yet to be adjudicated.
Consequently, in light of BPI-FBs refusal to heed Francos demands to unfreeze his
accounts and release his deposits therein, the latter filed on June 4, 1990 with the
Manila RTC the subject suit. In his complaint, Franco prayed for the following reliefs:
(1) the interest on the remaining balance [25]of his current account which was
eventually released to him on October 31, 1991; (2) the balance [26]on his savings
account, plus interest thereon; (3) the advance interest [27] paid to him which had been
deducted when he pre-terminated his time deposit account; and (4) the payment of
actual, moral and exemplary damages, as well as attorneys fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts
of Franco and refusing to release his deposits, claiming that it had a better right to the
amounts which consisted of part of the money allegedly fraudulently withdrawn from it
by Tevesteco and ending up in Francos accounts. BPI-FB asseverated that the
claimed consideration of P2,000,000.00 for the introduction facilitated by Franco

between George Daantos and Eladio Teves, on the one hand, and Jaime Sebastian,
on the other, spoke volumes of Francos participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of
which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby
rendered in favor of [Franco] and against [BPI-FB], ordering the
latter to pay to the former the following sums:
1. P76,500.00 representing the legal rate of interest on the amount
of P450,000.00 from May 18, 1990to October 31, 1991;
2. P498,973.23 representing the balance on [Francos] savings
account as of May 18, 1990, together with the interest thereon in
accordance with the banks guidelines on the payment therefor;
3. P30,000.00 by way of attorneys fees; and
4. P10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual
and legal anchor.
Costs against [BPI-FB].
SO ORDERED.[28]
Unsatisfied with the decision, both parties filed their respective appeals before the
CA. Franco confined his appeal to the Manila RTCs denial of his claim for moral and
exemplary damages, and the diminutive award of attorneys fees. In affirming with
modification the lower courts decision, the appellate court decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is
hereby AFFIRMED with modification ordering [BPI-FB] to pay
[Franco] P63,189.00 representing the interest deducted from the
time deposit of plaintiff-appellant. P200,000.00 as moral damages
and P100,000.00 as exemplary damages, deleting the award of
nominal damages (in view of the award of moral and exemplary
damages) and increasing the award of attorneys fees
from P30,000.00 to P75,000.00.
Cost against [BPI-FB].
SO ORDERED.[29]
In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a
better right to the deposits in the subject accounts which are part of the proceeds of a
forged Authority to Debit; (2) Franco is entitled to interest on his current account; (3)
Franco can recover the P400,000.00 deposit in Quiaoits savings account; (4) the

dishonor of Francos checks was not legally in order; (5) BPI-FB is liable for interest
on Francos time deposit, and for moral and exemplary damages; and (6) BPI-FBs
counter-claim has no factual and legal anchor.

and credited to Tevestecos, and subsequently traced to Francos account. In fact, this
is what BPI-FB did in filing the Makati Case against Franco, et al. It staked its claim
on the money itself which passed from one account to another, commencing with the
forged Authority to Debit.

The petition is partly meritorious.

It bears emphasizing that money bears no earmarks of peculiar ownership,
and this characteristic is all the more manifest in the instant case which involves
money in a banking transaction gone awry. Its primary function is to pass from hand
to hand as a medium of exchange, without other evidence of its title.[35] Money, which
had passed through various transactions in the general course of banking business,
even if of traceable origin, is no exception.

We are in full accord with the common ruling of the lower courts that BPI-FB cannot
unilaterally freeze Francos accounts and preclude him from withdrawing his
deposits. However, contrary to the appellate courts ruling, we hold that Franco is not
entitled to unearned interest on the time deposit as well as to moral and exemplary
damages.

[34]

First. On the issue of who has a better right to the deposits in Francos accounts, BPIFB urges us that the legal consequence of FMICs forgery claim is that the money
transferred by BPI-FB to Tevesteco is its own, and considering that it was able to
recover possession of the same when the money was redeposited by Franco, it had
the right to set up its ownership thereon and freeze Francos accounts.

Thus, inasmuch as what is involved is not a specific or determinate personal

property, BPI-FBs illustrative example, ostensibly based on Article 559, is inapplicable
to the instant case.

BPI-FB contends that its position is not unlike that of an owner of personal property
who regains possession after it is stolen, and to illustrate this point, BPI-FB gives the
following example: where Xs television set is stolen by Y who thereafter sells it to Z,
and where Z unwittingly entrusts possession of the TV set to X, the latter would have
the right to keep possession of the property and preclude Z from recovering
possession thereof. To bolster its position, BPI-FB cites Article 559 of the Civil Code,
which provides:
Article 559. The possession of movable property acquired in good
faith is equivalent to a title. Nevertheless, one who has lost any
movable or has been unlawfully deprived thereof, may recover it
from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been
unlawfully deprived, has acquired it in good faith at a public sale,
the owner cannot obtain its return without reimbursing the price
paid therefor.
BPI-FBs argument is unsound. To begin with, the movable property mentioned in
Article 559 of the Civil Code pertains to a specific or determinate thing. [30] A
determinate or specific thing is one that is individualized and can be identified or
distinguished from others of the same kind.[31]
In this case, the deposit in Francos accounts consists of money which, albeit
characterized as a movable, is generic and fungible.[32] The quality of being fungible
depends upon the possibility of the property, because of its nature or the will of the
parties, being substituted by others of the same kind, not having a distinct
individuality.[33]
Significantly, while Article 559 permits an owner who has lost or has been
unlawfully deprived of a movable to recover the exact same thing from the current
possessor, BPI-FB simply claims ownership of the equivalent amount of
money, i.e., the value thereof, which it had mistakenly debited from FMICs account

There is no doubt that BPI-FB owns the deposited monies in the accounts of
Franco, but not as a legal consequence of its unauthorized transfer of FMICs deposits
to Tevestecos account. BPI-FB conveniently forgets that the deposit of money in
banks is governed by the Civil Code provisions on simple loan or mutuum.[36] As there
is a debtor-creditor relationship between a bank and its depositor, BPI-FB ultimately
acquired ownership of Francos deposits, but such ownership is coupled with a
corresponding obligation to pay him an equal amount on demand.[37] Although BPI-FB
owns the deposits in Francos accounts, it cannot prevent him from demanding
payment of BPI-FBs obligation by drawing checks against his current account, or
asking for the release of the funds in his savings account. Thus, when Franco issued
checks drawn against his current account, he had every right as creditor to expect
that those checks would be honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the
accounts of Franco based on its mere suspicion that the funds therein were proceeds
of the multi-million peso scam Franco was allegedly involved in. To grant BPI-FB, or
any bank for that matter, the right to take whatever action it pleases on deposits which
it supposes are derived from shady transactions, would open the floodgates of public
distrust in the banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of
Appeals[38] continues to resonate, thus:
The banking system is an indispensable institution in the modern
world and plays a vital role in the economic life of every civilized
nation. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and
commerce, banks have become an ubiquitous presence among the
people, who have come to regard them with respect and even
gratitude and, most of all, confidence. Thus, even the humble
wage-earner has not hesitated to entrust his lifes savings to the
bank of his choice, knowing that they will be safe in its custody and
will even earn some interest for him. The ordinary person, with
equal faith, usually maintains a modest checking account for
security and convenience in the settling of his monthly bills and the
payment of ordinary expenses. x x x.

In every case, the depositor expects the bank to treat his account
with the utmost fidelity, whether such account consists only of a few
hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly
as possible. This has to be done if the account is to reflect at any
given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever
directs. A blunder on the part of the bank, such as the dishonor of
the check without good reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps even civil and
criminal litigation.
The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation
to treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship. x x x.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know
the signatures of its customers. Having failed to detect the forgery in the Authority to
Debit and in the process inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB
cannot now shift liability thereon to Franco and the other payees of checks issued by
Tevesteco, or prevent withdrawals from their respective accounts without the
appropriate court writ or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the
authenticity of the signature in the Authority to Debit, effected the transfer
of P80,000,000.00 from FMICs to Tevestecos account, when FMICs account was a
time deposit and it had already paid advance interest to FMIC. Considering that there
is as yet no indubitable evidence establishing Francos participation in the forgery, he
remains an innocent party. As between him and BPI-FB, the latter, which made
possible the present predicament, must bear the resulting loss or inconvenience.
Second. With respect to its liability for interest on Francos current account,
BPI-FB argues that its non-compliance with the Makati RTCs Order Lifting the Order
of Attachment and the legal consequences thereof, is a matter that ought to be taken
up in that court.
The argument is tenuous. We agree with the succinct holding of the
appellate court in this respect. The Manila RTCs order to pay interests on Francos
current account arose from BPI-FBs unjustified refusal to comply with its obligation to
pay Franco pursuant to their contract of mutuum. In other words, from the time BPIFB refused Francos demand for the release of the deposits in his current account,
specifically, from May 17, 1990, interest at the rate of 12% began to accrue thereon.
[39]

Undeniably, the Makati RTC is vested with the authority to determine the
legal consequences of BPI-FBs non-compliance with the Order Lifting the Order of
Attachment. However, such authority does not preclude the Manila RTC from ruling
on BPI-FBs liability to Franco for payment of interest based on its continued and

unjustified refusal to perform a contractual obligation upon demand. After all, this was
the core issue raised by Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoits account, we find
no reason to depart from the factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the deposits in his
account are actually owned by Franco who simply accommodated Jaime Sebastians
request to temporarily transferP400,000.00 from Francos savings account to Quiaoits
account.[40] His testimony cannot be characterized as hearsay as the records reveal
that he had personal knowledge of the arrangement made between Franco,
Sebastian and himself.[41]
BPI-FB makes capital of Francos belated allegation relative to this particular
arrangement. It insists that the transaction with Quiaoit was not specifically alleged in
Francos complaint before the Manila RTC. However, it appears that BPI-FB had
impliedly consented to the trial of this issue given its extensive cross-examination of
Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of
evidence. When issues not raised by the pleadings are tried
with the express or implied consent of the parties, they shall
be treated in all respects as if they had been raised in the
pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to
raise these issues may be made upon motion of any party at
any time, even after judgment; but failure to amend does not
affect the result of the trial of these issues. If evidence is
objected to at the trial on the ground that it is now within the issues
made by the pleadings, the court may allow the pleadings to be
amended and shall do so with liberality if the presentation of the
merits of the action and the ends of substantial justice will be
subserved thereby. The court may grant a continuance to enable
the amendment to be made. (Emphasis supplied)
In all, BPI-FBs argument that this case is not the right forum for Franco to recover
the P400,000.00 begs the issue. To reiterate, Quiaoit, testifying during the trial,
unequivocally disclaimed ownership of the funds in his account, and pointed to
Franco as the actual owner thereof. Clearly, Francos action for the recovery of his
deposits appropriately covers the deposits in Quiaoits account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor
of Francos checks respectively dated September 11 and 18, 1989 was legally in order
in view of the Makati RTCs supplemental writ of attachment issued on September 14,
1989. It posits that as the party that applied for the writ of attachment before the
Makati RTC, it need not be served with the Notice of Garnishment before it could
place Francos accounts under garnishment.

The argument is specious. In this argument, we perceive BPI-FBs clever but

transparent ploy to circumvent Section 4,[42] Rule 13 of the Rules of Court. It should be
noted that the strict requirement on service of court papers upon the parties affected
is designed to comply with the elementary requisites of due process. Franco was
entitled, as a matter of right, to notice, if the requirements of due process are to be
observed. Yet, he received a copy of the Notice of Garnishment only onSeptember
27, 1989, several days after the two checks he issued were dishonored by BPI-FB on
September 20 and 21, 1989. Verily, it was premature for BPI-FB to freeze Francos
accounts without even awaiting service of the Makati RTCs Notice of Garnishment on
Franco.
Additionally, it should be remembered that the enforcement of a writ of attachment
cannot be made without including in the main suit the owner of the property attached
by virtue thereof. Section 5, Rule 13 of the Rules of Court specifically provides that no
levy or attachment pursuant to the writ issued x x x shall be enforced unless it is
preceded, or contemporaneously accompanied, by service of summons, together with
a copy of the complaint, the application for attachment, on the defendant within the
Philippines.
Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC
had yet to acquire jurisdiction over the person of Franco when BPI-FB garnished his
accounts.[43] Effectively, therefore, the Makati RTC had no authority yet to bind the
deposits of Franco through the writ of attachment, and consequently, there was no
legal basis for BPI-FB to dishonor the checks issued by Franco.
Fifth. Anent the CAs finding that BPI-FB was in bad faith and as such liable for the
advance interest it deducted from Francos time deposit account, and for moral as well
as exemplary damages, we find it proper to reinstate the ruling of the trial court, and
allow only the recovery of nominal damages in the amount of P10,000.00. However,
we retain the CAs award of P75,000.00 as attorneys fees.
In granting Francos prayer for interest on his time deposit account and for moral and
exemplary damages, the CA attributed bad faith to BPI-FB because it (1) completely
disregarded its obligation to Franco; (2) misleadingly claimed that Francos deposits
were under garnishment; (3) misrepresented that Francos current account was not on
file; and (4) refused to return theP400,000.00 despite the fact that the ostensible
owner, Quiaoit, wanted the amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for
which the obligor who acted in good faith is liable shall be those
that are the natural and probable consequences of the breach of
the obligation, and which the parties have foreseen or could have
reasonable foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the
obligation.(Emphasis supplied.)

We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection
and not out of malevolence or ill will. BPI-FB was not in the corrupt state of mind
contemplated in Article 2201 and should not be held liable for all damages now being
imputed to it for its breach of obligation. For the same reason, it is not liable for the
unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it partakes of the
nature of fraud.[44] We have held that it is a breach of a known duty through some
motive of interest or ill will.[45] In the instant case, we cannot attribute to BPI-FB fraud
or even a motive of self-enrichment. As the trial court found, there was no denial
whatsoever by BPI-FB of the existence of the accounts. The computer-generated
document which indicated that the current account was not on file resulted from the
prior debit by BPI-FB of the deposits. The remedy of freezing the account, or the
garnishment, or even the outright refusal to honor any transaction thereon was
resorted to solely for the purpose of holding on to the funds as a security for its
intended court action,[46] and with no other goal but to ensure the integrity of the
accounts.
We have had occasion to hold that in the absence of fraud or bad faith, [47] moral
damages cannot be awarded; and that the adverse result of an action does not per se
make the action wrongful, or the party liable for it. One may err, but error alone is not
a ground for granting such damages.[48]
An award of moral damages contemplates the existence of the following requisites:
(1) there must be an injury clearly sustained by the claimant, whether physical, mental
or psychological; (2) there must be a culpable act or omission factually established;
(3) the wrongful act or omission of the defendant is the proximate cause of the injury
sustained by the claimant; and (4) the award for damages is predicated on any of the
cases stated in Article 2219 of the Civil Code.[49]
Franco could not point to, or identify any particular circumstance in Article 2219 of the
Civil Code,[50] upon which to base his claim for moral damages.
Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages
under Article 2220 of the Civil Code for breach of contract.[51]
We also deny the claim for exemplary damages. Franco should show that he is
entitled to moral, temperate, or compensatory damages before the court may even
consider the question of whether exemplary damages should be awarded to him.
[52]
As there is no basis for the award of moral damages, neither can exemplary
damages be granted.
While it is a sound policy not to set a premium on the right to litigate, [53] we, however,
find that Franco is entitled to reasonable attorneys fees for having been compelled to
go to court in order to assert his right. Thus, we affirm the CAs grant of P75,000.00 as
attorneys fees.
Attorneys fees may be awarded when a party is compelled to litigate or incur
expenses to protect his interest,[54] or when the court deems it just and equitable. [55] In
the case at bench, BPI-FB refused to unfreeze the deposits of Franco despite the
Makati RTCs Order Lifting the Order of Attachment and Quiaoits unwavering
assertion that the P400,000.00 was part of Francos savings account. This refusal

constrained Franco to incur expenses and litigate for almost two (2) decades in order
to protect his interests and recover his deposits. Therefore, this Court deems it just
and equitable to grant Franco P75,000.00 as attorneys fees. The award is reasonable
in view of the complexity of the issues and the time it has taken for this case to be
resolved.[56]
Sixth. As for the dismissal of BPI-FBs counter-claim, we uphold the Manila RTCs
ruling, as affirmed by the CA, that BPI-FB is not entitled to recover P3,800,000.00 as
actual damages. BPI-FBs alleged loss of profit as a result of Francos suit is, as
already pointed out, of its own making. Accordingly, the denial of its counter-claim is
in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision
datedNovember 29, 1995 is AFFIRMED with the MODIFICATION that the award of
unearned interest on the time deposit and of moral and exemplary damages
is DELETED.
No pronouncement as to costs.
SO ORDERED.

EN BANC
G.R. No. L-11658

February 15, 1918

LEUNG YEE, plaintiff-appellant,

vs.
FRANK L. STRONG MACHINERY COMPANY and J. G. WILLIAMSON, defendantsappellees.
Booram and Mahoney for appellant.
Williams, Ferrier and SyCip for appellees.

favor of the sheriff in the sum of P12,000, in reliance upon which the sheriff sold the
property at public auction to the plaintiff, who was the highest bidder at the sheriff's
sale.
This action was instituted by the plaintiff to recover possession of the building from
the machinery company.
The trial judge, relying upon the terms of article 1473 of the Civil Code, gave
judgment in favor of the machinery company, on the ground that the company had its
title to the building registered prior to the date of registry of the plaintiff's certificate.
Article 1473 of the Civil Code is as follows:

CARSON, J.:
The "Compaia Agricola Filipina" bought a considerable quantity of rice-cleaning
machinery company from the defendant machinery company, and executed a chattel
mortgage thereon to secure payment of the purchase price. It included in the
mortgage deed the building of strong materials in which the machinery was installed,
without any reference to the land on which it stood. The indebtedness secured by this
instrument not having been paid when it fell due, the mortgaged property was sold by
the sheriff, in pursuance of the terms of the mortgage instrument, and was bought in
by the machinery company. The mortgage was registered in the chattel mortgage
registry, and the sale of the property to the machinery company in satisfaction of the
mortgage was annotated in the same registry on December 29, 1913.
A few weeks thereafter, on or about the 14th of January, 1914, the "Compaia
Agricola Filipina" executed a deed of sale of the land upon which the building stood to
the machinery company, but this deed of sale, although executed in a public
document, was not registered. This deed makes no reference to the building erected
on the land and would appear to have been executed for the purpose of curing any
defects which might be found to exist in the machinery company's title to the building
under the sheriff's certificate of sale. The machinery company went into possession of
the building at or about the time when this sale took place, that is to say, the month of
December, 1913, and it has continued in possession ever since.
At or about the time when the chattel mortgage was executed in favor of the
machinery company, the mortgagor, the "Compaia Agricola Filipina" executed
another mortgage to the plaintiff upon the building, separate and apart from the land
on which it stood, to secure payment of the balance of its indebtedness to the plaintiff
under a contract for the construction of the building. Upon the failure of the mortgagor
to pay the amount of the indebtedness secured by the mortgage, the plaintiff secured
judgment for that amount, levied execution upon the building, bought it in at the
sheriff's sale on or about the 18th of December, 1914, and had the sheriff's certificate
of the sale duly registered in the land registry of the Province of Cavite.
At the time when the execution was levied upon the building, the defendant
machinery company, which was in possession, filed with the sheriff a sworn statement
setting up its claim of title and demanding the release of the property from the levy.
Thereafter, upon demand of the sheriff, the plaintiff executed an indemnity bond in

If the same thing should have been sold to different vendees, the ownership
shall be transfer to the person who may have the first taken possession
thereof in good faith, if it should be personal property.
Should it be real property, it shall belong to the person acquiring it who first
recorded it in the registry.
Should there be no entry, the property shall belong to the person who first
took possession of it in good faith, and, in the absence thereof, to the person
who presents the oldest title, provided there is good faith.
The registry her referred to is of course the registry of real property, and it must be
apparent that the annotation or inscription of a deed of sale of real property in a
chattel mortgage registry cannot be given the legal effect of an inscription in the
registry of real property. By its express terms, the Chattel Mortgage Law
contemplates and makes provision for mortgages of personal property; and the sole
purpose and object of the chattel mortgage registry is to provide for the registry of
"Chattel mortgages," that is to say, mortgages of personal property executed in the
manner and form prescribed in the statute. The building of strong materials in which
the rice-cleaning machinery was installed by the "Compaia Agricola Filipina" was
real property, and the mere fact that the parties seem to have dealt with it separate
and apart from the land on which it stood in no wise changed its character as real
property. It follows that neither the original registry in the chattel mortgage of the
building and the machinery installed therein, not the annotation in that registry of the
sale of the mortgaged property, had any effect whatever so far as the building was
concerned.
We conclude that the ruling in favor of the machinery company cannot be sustained
on the ground assigned by the trial judge. We are of opinion, however, that the
judgment must be sustained on the ground that the agreed statement of facts in the
court below discloses that neither the purchase of the building by the plaintiff nor his
inscription of the sheriff's certificate of sale in his favor was made in good faith, and
that the machinery company must be held to be the owner of the property under the
third paragraph of the above cited article of the code, it appearing that the company
first took possession of the property; and further, that the building and the land were

sold to the machinery company long prior to the date of the sheriff's sale to the
plaintiff.
It has been suggested that since the provisions of article 1473 of the Civil Code
require "good faith," in express terms, in relation to "possession" and "title," but
contain no express requirement as to "good faith" in relation to the "inscription" of the
property on the registry, it must be presumed that good faith is not an essential
requisite of registration in order that it may have the effect contemplated in this article.
We cannot agree with this contention. It could not have been the intention of the
legislator to base the preferential right secured under this article of the code upon an
inscription of title in bad faith. Such an interpretation placed upon the language of this
section would open wide the door to fraud and collusion. The public records cannot
be converted into instruments of fraud and oppression by one who secures an
inscription therein in bad faith. The force and effect given by law to an inscription in a
public record presupposes the good faith of him who enters such inscription; and
rights created by statute, which are predicated upon an inscription in a public registry,
do not and cannot accrue under an inscription "in bad faith," to the benefit of the
person who thus makes the inscription.
Construing the second paragraph of this article of the code, the supreme court of
Spain held in its sentencia of the 13th of May, 1908, that:
This rule is always to be understood on the basis of the good faith
mentioned in the first paragraph; therefore, it having been found that the
second purchasers who record their purchase had knowledge of the
previous sale, the question is to be decided in accordance with the following
paragraph. (Note 2, art. 1473, Civ. Code, Medina and Maranon [1911]
edition.)
Although article 1473, in its second paragraph, provides that the title of
conveyance of ownership of the real property that is first recorded in the
registry shall have preference, this provision must always be understood on
the basis of the good faith mentioned in the first paragraph; the legislator
could not have wished to strike it out and to sanction bad faith, just to comply
with a mere formality which, in given cases, does not obtain even in real
disputes between third persons. (Note 2, art. 1473, Civ. Code, issued by the
publishers of the La Revista de los Tribunales, 13th edition.)
The agreed statement of facts clearly discloses that the plaintiff, when he bought the
building at the sheriff's sale and inscribed his title in the land registry, was duly notified
that the machinery company had bought the building from plaintiff's judgment debtor;
that it had gone into possession long prior to the sheriff's sale; and that it was in
possession at the time when the sheriff executed his levy. The execution of an
indemnity bond by the plaintiff in favor of the sheriff, after the machinery company had
filed its sworn claim of ownership, leaves no room for doubt in this regard. Having
bought in the building at the sheriff's sale with full knowledge that at the time of the
levy and sale the building had already been sold to the machinery company by the
judgment debtor, the plaintiff cannot be said to have been a purchaser in good faith;
and of course, the subsequent inscription of the sheriff's certificate of title must be
held to have been tainted with the same defect.

Perhaps we should make it clear that in holding that the inscription of the sheriff's
certificate of sale to the plaintiff was not made in good faith, we should not be
understood as questioning, in any way, the good faith and genuineness of the
plaintiff's claim against the "Compaia Agricola Filipina." The truth is that both the
plaintiff and the defendant company appear to have had just and righteous claims
against their common debtor. No criticism can properly be made of the exercise of the
utmost diligence by the plaintiff in asserting and exercising his right to recover the
amount of his claim from the estate of the common debtor. We are strongly inclined to
believe that in procuring the levy of execution upon the factory building and in buying
it at the sheriff's sale, he considered that he was doing no more than he had a right to
do under all the circumstances, and it is highly possible and even probable that he
thought at that time that he would be able to maintain his position in a contest with the
machinery company. There was no collusion on his part with the common debtor, and
no thought of the perpetration of a fraud upon the rights of another, in the ordinary
sense of the word. He may have hoped, and doubtless he did hope, that the title of
the machinery company would not stand the test of an action in a court of law; and if
later developments had confirmed his unfounded hopes, no one could question the
legality of the propriety of the course he adopted.
But it appearing that he had full knowledge of the machinery company's claim of
ownership when he executed the indemnity bond and bought in the property at the
sheriff's sale, and it appearing further that the machinery company's claim of
ownership was well founded, he cannot be said to have been an innocent purchaser
for value. He took the risk and must stand by the consequences; and it is in this
sense that we find that he was not a purchaser in good faith.
One who purchases real estate with knowledge of a defect or lack of title in his
vendor cannot claim that he has acquired title thereto in good faith as against the true
owner of the land or of an interest therein; and the same rule must be applied to one
who has knowledge of facts which should have put him upon such inquiry and
investigation as might be necessary to acquaint him with the defects in the title of his
vendor. A purchaser cannot close his eyes to facts which should put a reasonable
man upon his guard, and then claim that he acted in good faith under the belief that
there was no defect in the title of the vendor. His mere refusal to believe that such
defect exists, or his willful closing of his eyes to the possibility of the existence of a
defect in his vendor's title, will not make him an innocent purchaser for value, if
afterwards develops that the title was in fact defective, and it appears that he had
such notice of the defects as would have led to its discovery had he acted with that
measure of precaution which may reasonably be acquired of a prudent man in a like
situation. Good faith, or lack of it, is in its analysis a question of intention; but in
ascertaining the intention by which one is actuated on a given occasion, we are
necessarily controlled by the evidence as to the conduct and outward acts by which
alone the inward motive may, with safety, be determined. So it is that "the honesty of
intention," "the honest lawful intent," which constitutes good faith implies a "freedom
from knowledge and circumstances which ought to put a person on inquiry," and so it
is that proof of such knowledge overcomes the presumption of good faith in which the
courts always indulge in the absence of proof to the contrary. "Good faith, or the want
of it, is not a visible, tangible fact that can be seen or touched, but rather a state or
condition of mind which can only be judged of by actual or fancied tokens or signs."
(Wilder vs. Gilman, 55 Vt., 504, 505; Cf. Cardenas Lumber Co. vs. Shadel, 52 La.
Ann., 2094-2098; Pinkerton Bros. Co. vs. Bromley, 119 Mich., 8, 10, 17.)

We conclude that upon the grounds herein set forth the disposing part of the decision
and judgment entered in the court below should be affirmed with costs of this instance
against the appellant. So ordered.

A first class residential land Identffied as Lot No.

720, (Ts-308, Olongapo Townsite Subdivision)
Ardoin Street, East Bajac-Bajac, Olongapo City,
containing an area of 465 sq. m. more or less,
declared and assessed in the name of
FERNANDO MAGCALE under Tax Duration No.
19595 issued by the Assessor of Olongapo City
with an assessed value of P1,860.00; bounded
on the

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-50008 August 31, 1987
PRUDENTIAL BANK, petitioner,
vs.
HONORABLE DOMINGO D. PANIS, Presiding Judge of Branch III, Court of First
Instance of Zambales and Olongapo City; FERNANDO MAGCALE & TEODULA
BALUYUT-MAGCALE, respondents.

NORTH: By No. 6, Ardoin Street

SOUTH: By No. 2, Ardoin Street
EAST: By 37 Canda Street, and
WEST: By Ardoin Street.
All corners of the lot marked by conc. cylindrical monuments of the Bureau of
Lands as visible limits. ( Exhibit "A, " also Exhibit "1" for defendant).

PARAS, J.:
This is a petition for review on certiorari of the November 13, 1978
Decision * of the then Court of First Instance of Zambales and Olongapo City in Civil Case No.
2443-0 entitled "Spouses Fernando A. Magcale and Teodula Baluyut-Magcale vs. Hon. Ramon Y.
Pardo and Prudential Bank" declaring that the deeds of real estate mortgage executed by respondent
spouses in favor of petitioner bank are null and void.

The undisputed facts of this case by stipulation of the parties are as follows:
... on November 19, 1971, plaintiffs-spouses Fernando A. Magcale
and Teodula Baluyut Magcale secured a loan in the sum of
P70,000.00 from the defendant Prudential Bank. To secure
payment of this loan, plaintiffs executed in favor of defendant on the
aforesaid date a deed of Real Estate Mortgage over the following
described properties:
l. A 2-STOREY, SEMI-CONCRETE, residential building with
warehouse spaces containing a total floor area of 263 sq. meters,
more or less, generally constructed of mixed hard wood and
concrete materials, under a roofing of cor. g. i. sheets; declared and
assessed in the name of FERNANDO MAGCALE under Tax
Declaration No. 21109, issued by the Assessor of Olongapo City
with an assessed value of P35,290.00. This building is the only
improvement of the lot.
2. THE PROPERTY hereby conveyed by way of MORTGAGE
includes the right of occupancy on the lot where the above property
is erected, and more particularly described and bounded, as
follows:

Apart from the stipulations in the printed portion of the aforestated deed of
mortgage, there appears a rider typed at the bottom of the reverse side of the
document under the lists of the properties mortgaged which reads, as follows:
AND IT IS FURTHER AGREED that in the event the Sales Patent on the lot
applied for by the Mortgagors as herein stated is released or issued by the
Bureau of Lands, the Mortgagors hereby authorize the Register of Deeds to
hold the Registration of same until this Mortgage is cancelled, or to annotate
this encumbrance on the Title upon authority from the Secretary of Agriculture
and Natural Resources, which title with annotation, shall be released in favor
of the herein Mortgage.
From the aforequoted stipulation, it is obvious that the mortgagee (defendant
Prudential Bank) was at the outset aware of the fact that the mortgagors
(plaintiffs) have already filed a Miscellaneous Sales Application over the lot,
possessory rights over which, were mortgaged to it.
Exhibit "A" (Real Estate Mortgage) was registered under the Provisions of Act
3344 with the Registry of Deeds of Zambales on November 23, 1971.
On May 2, 1973, plaintiffs secured an additional loan from defendant
Prudential Bank in the sum of P20,000.00. To secure payment of this additional
loan, plaintiffs executed in favor of the said defendant another deed of Real
Estate Mortgage over the same properties previously mortgaged in Exhibit "A."
(Exhibit "B;" also Exhibit "2" for defendant). This second deed of Real Estate
Mortgage was likewise registered with the Registry of Deeds, this time in
Olongapo City, on May 2,1973.

On April 24, 1973, the Secretary of Agriculture issued Miscellaneous Sales

Patent No. 4776 over the parcel of land, possessory rights over which were
mortgaged to defendant Prudential Bank, in favor of plaintiffs. On the basis of
the aforesaid Patent, and upon its transcription in the Registration Book of the
Province of Zambales, Original Certificate of Title No. P-2554 was issued in the
name of Plaintiff Fernando Magcale, by the Ex-Oficio Register of Deeds of
Zambales, on May 15, 1972.
For failure of plaintiffs to pay their obligation to defendant Bank after it became
due, and upon application of said defendant, the deeds of Real Estate
Mortgage (Exhibits "A" and "B") were extrajudicially foreclosed. Consequent to
the foreclosure was the sale of the properties therein mortgaged to defendant
as the highest bidder in a public auction sale conducted by the defendant City
Sheriff on April 12, 1978 (Exhibit "E"). The auction sale aforesaid was held
despite written request from plaintiffs through counsel dated March 29, 1978,
for the defendant City Sheriff to desist from going with the scheduled public
auction sale (Exhibit "D")." (Decision, Civil Case No. 2443-0, Rollo, pp. 29-31).
Respondent Court, in a Decision dated November 3, 1978 declared the deeds of Real
Estate Mortgage as null and void (Ibid., p. 35).
On December 14, 1978, petitioner filed a Motion for Reconsideration (Ibid., pp. 4153), opposed by private respondents on January 5, 1979 (Ibid., pp. 54-62), and in an
Order dated January 10, 1979 (Ibid., p. 63), the Motion for Reconsideration was
denied for lack of merit. Hence, the instant petition (Ibid., pp. 5-28).
The first Division of this Court, in a Resolution dated March 9, 1979, resolved to
require the respondents to comment (Ibid., p. 65), which order was complied with the
Resolution dated May 18,1979, (Ibid., p. 100), petitioner filed its Reply on June
2,1979 (Ibid., pp. 101-112).
Thereafter, in the Resolution dated June 13, 1979, the petition was given due course
and the parties were required to submit simultaneously their respective memoranda.
(Ibid., p. 114).
On July 18, 1979, petitioner filed its Memorandum (Ibid., pp. 116-144), while private
respondents filed their Memorandum on August 1, 1979 (Ibid., pp. 146-155).
In a Resolution dated August 10, 1979, this case was considered submitted for
decision (Ibid., P. 158).
In its Memorandum, petitioner raised the following issues:
1. WHETHER OR NOT THE DEEDS OF REAL ESTATE MORTGAGE ARE VALID;
AND
2. WHETHER OR NOT THE SUPERVENING ISSUANCE IN FAVOR OF PRIVATE
RESPONDENTS OF MISCELLANEOUS SALES PATENT NO. 4776 ON APRIL 24,

1972 UNDER ACT NO. 730 AND THE COVERING ORIGINAL CERTIFICATE OF
TITLE NO. P-2554 ON MAY 15,1972 HAVE THE EFFECT OF INVALIDATING THE
DEEDS OF REAL ESTATE MORTGAGE. (Memorandum for Petitioner, Rollo, p. 122).
This petition is impressed with merit.
The pivotal issue in this case is whether or not a valid real estate mortgage can be
constituted on the building erected on the land belonging to another.
The answer is in the affirmative.
In the enumeration of properties under Article 415 of the Civil Code of the Philippines,
this Court ruled that, "it is obvious that the inclusion of "building" separate and distinct
from the land, in said provision of law can only mean that a building is by itself an
immovable property." (Lopez vs. Orosa, Jr., et al., L-10817-18, Feb. 28, 1958;
Associated Inc. and Surety Co., Inc. vs. Iya, et al., L-10837-38, May 30,1958).
Thus, while it is true that a mortgage of land necessarily includes, in the absence of
stipulation of the improvements thereon, buildings, still a building by itself may be
mortgaged apart from the land on which it has been built. Such a mortgage would be
still a real estate mortgage for the building would still be considered immovable
property even if dealt with separately and apart from the land (Leung Yee vs. Strong
Machinery Co., 37 Phil. 644). In the same manner, this Court has also established
that possessory rights over said properties before title is vested on the grantee, may
be validly transferred or conveyed as in a deed of mortgage (Vda. de Bautista vs.
Marcos, 3 SCRA 438 [1961]).
Coming back to the case at bar, the records show, as aforestated that the original
mortgage deed on the 2-storey semi-concrete residential building with warehouse and
on the right of occupancy on the lot where the building was erected, was executed on
November 19, 1971 and registered under the provisions of Act 3344 with the Register
of Deeds of Zambales on November 23, 1971. Miscellaneous Sales Patent No. 4776
on the land was issued on April 24, 1972, on the basis of which OCT No. 2554 was
issued in the name of private respondent Fernando Magcale on May 15, 1972. It is
therefore without question that the original mortgage was executed before the
issuance of the final patent and before the government was divested of its title to the
land, an event which takes effect only on the issuance of the sales patent and its
subsequent registration in the Office of the Register of Deeds (Visayan Realty Inc. vs.
Meer, 96 Phil. 515; Director of Lands vs. De Leon, 110 Phil. 28; Director of Lands vs.
Jurado, L-14702, May 23, 1961; Pena "Law on Natural Resources", p. 49). Under the
foregoing considerations, it is evident that the mortgage executed by private
respondent on his own building which was erected on the land belonging to the
government is to all intents and purposes a valid mortgage.
As to restrictions expressly mentioned on the face of respondents' OCT No. P-2554, it
will be noted that Sections 121, 122 and 124 of the Public Land Act, refer to land
already acquired under the Public Land Act, or any improvement thereon and
therefore have no application to the assailed mortgage in the case at bar which was
executed before such eventuality. Likewise, Section 2 of Republic Act No. 730, also a

restriction appearing on the face of private respondent's title has likewise no

application in the instant case, despite its reference to encumbrance or alienation
before the patent is issued because it refers specifically to encumbrance or alienation
on the land itself and does not mention anything regarding the improvements existing
thereon.
But it is a different matter, as regards the second mortgage executed over the same
properties on May 2, 1973 for an additional loan of P20,000.00 which was registered
with the Registry of Deeds of Olongapo City on the same date. Relative thereto, it is
evident that such mortgage executed after the issuance of the sales patent and of the
Original Certificate of Title, falls squarely under the prohibitions stated in Sections
121, 122 and 124 of the Public Land Act and Section 2 of Republic Act 730, and is
therefore null and void.
Petitioner points out that private respondents, after physically possessing the title for
five years, voluntarily surrendered the same to the bank in 1977 in order that the
mortgaged may be annotated, without requiring the bank to get the prior approval of
the Ministry of Natural Resources beforehand, thereby implicitly authorizing
Prudential Bank to cause the annotation of said mortgage on their title.
However, the Court, in recently ruling on violations of Section 124 which refers to
Sections 118, 120, 122 and 123 of Commonwealth Act 141, has held:
... Nonetheless, we apply our earlier rulings because we believe
that as in pari delicto may not be invoked to defeat the policy of the
State neither may the doctrine of estoppel give a validating effect to
a void contract. Indeed, it is generally considered that as between
parties to a contract, validity cannot be given to it by estoppel if it is
prohibited by law or is against public policy (19 Am. Jur. 802). It is
not within the competence of any citizen to barter away what public
policy by law was to preserve (Gonzalo Puyat & Sons, Inc. vs. De
los Amas and Alino supra). ... (Arsenal vs. IAC, 143 SCRA 54
[1986]).
This pronouncement covers only the previous transaction already alluded to and does
not pass upon any new contract between the parties (Ibid), as in the case at bar. It
should not preclude new contracts that may be entered into between petitioner bank
and private respondents that are in accordance with the requirements of the law. After
all, private respondents themselves declare that they are not denying the legitimacy
of their debts and appear to be open to new negotiations under the law (Comment;
Rollo, pp. 95-96). Any new transaction, however, would be subject to whatever steps
the Government may take for the reversion of the land in its favor.
PREMISES CONSIDERED, the decision of the Court of First Instance of Zambales &
Olongapo City is hereby MODIFIED, declaring that the Deed of Real Estate Mortgage
for P70,000.00 is valid but ruling that the Deed of Real Estate Mortgage for an
additional loan of P20,000.00 is null and void, without prejudice to any appropriate
action the Government may take against private respondents.

SO ORDERED.

The Facts
The undisputed facts are summarized by the Court of Appeals as
follows:[10]
THIRD DIVISION

On February 13, 1998, respondent PCI Leasing and Finance, Inc. (PCI Leasing for
short) filed with the RTC-QC a complaint for [a] sum of money (Annex E), with an
application for a writ of replevin docketed as Civil Case No. Q-98-33500.

[G.R. No. 137705. August 22, 2000]

On March 6, 1998, upon an ex-parte application of PCI Leasing, respondent judge

issued a writ of replevin (Annex B) directing its sheriff to seize and deliver the
machineries and equipment to PCI Leasing after 5 days and upon the payment of the
necessary expenses.

SERGS
PRODUCTS,
INC.,
and
SERGIO
T.
GOQUIOLAY, petitioners, vs. PCI LEASING AND FINANCE,
INC., respondent.
DECISION
PANGANIBAN, J.:
After agreeing to a contract stipulating that a real or immovable
property be considered as personal or movable, a party is estopped from
subsequently claiming otherwise. Hence, such property is a proper subject
of a writ of replevin obtained by the other contracting party.

The Case
Before us is a Petition for Review on Certiorari assailing the January
6, 1999 Decision[1] of the Court of Appeals (CA)[2] in CA-GR SP No. 47332
and its February 26, 1999 Resolution[3] denying reconsideration. The
decretal portion of the CA Decision reads as follows:
WHEREFORE, premises considered, the assailed Order dated February 18, 1998
and Resolution dated March 31, 1998 in Civil Case No. Q-98-33500 are
hereby AFFIRMED. The writ of preliminary injunction issued on June 15, 1998 is
hereby LIFTED.[4]
In its February 18, 1998 Order,[5] the Regional Trial Court (RTC) of
Quezon City (Branch 218)[6]issued a Writ of Seizure.[7] The March 18, 1998
Resolution[8] denied petitioners Motion for Special Protective Order, praying
that the deputy sheriff be enjoined from seizing immobilized or other real
properties in (petitioners) factory in Cainta, Rizal and to return to their
original place whatever immobilized machineries or equipments he may
have removed.[9]

On March 24, 1998, in implementation of said writ, the sheriff proceeded to petitioners
factory, seized one machinery with [the] word that he [would] return for the other
machineries.
On March 25, 1998, petitioners filed a motion for special protective order (Annex C),
invoking the power of the court to control the conduct of its officers and amend and
control its processes, praying for a directive for the sheriff to defer enforcement of the
writ of replevin.
This motion was opposed by PCI Leasing (Annex F), on the ground that the
properties [were] still personal and therefore still subject to seizure and a writ of
replevin.
In their Reply, petitioners asserted that the properties sought to be seized [were]
immovable as defined in Article 415 of the Civil Code, the parties agreement to the
contrary notwithstanding. They argued that to give effect to the agreement would be
prejudicial to innocent third parties. They further stated that PCI Leasing [was]
estopped from treating these machineries as personal because the contracts in which
the alleged agreement [were] embodied [were] totally sham and farcical.
On April 6, 1998, the sheriff again sought to enforce the writ of seizure and take
possession of the remaining properties. He was able to take two more, but was
prevented by the workers from taking the rest.
On April 7, 1998, they went to [the CA] via an original action for certiorari.

Ruling of the Court of Appeals

Citing the Agreement of the parties, the appellate court held that the
subject machines were personal property, and that they had only been
leased, not owned, by petitioners. It also ruled that the words of the

contract are clear and leave no doubt upon the true intention of the
contracting parties. Observing that Petitioner Goquiolay was an
experienced businessman who was not unfamiliar with the ways of the
trade, it ruled that he should have realized the import of the document he
signed. The CA further held:
Furthermore, to accord merit to this petition would be to preempt the trial court in
ruling upon the case below, since the merits of the whole matter are laid down before
us via a petition whose sole purpose is to inquire upon the existence of a grave abuse
of discretion on the part of the [RTC] in issuing the assailed Order and
Resolution. The issues raised herein are proper subjects of a full-blown trial,
necessitating presentation of evidence by both parties. The contract is being enforced
by one, and [its] validity is attacked by the other a matter x x x which respondent court
is in the best position to determine.
Hence, this Petition.

Court. It further alleges that the Petition erroneously impleaded Judge

Hilario Laqui as respondent.
There is no question that the present recourse is under Rule 45. This
conclusion finds support in the very title of the Petition, which is Petition for
Review on Certiorari.[13]
While Judge Laqui should not have been impleaded as a respondent,
substantial justice requires that such lapse by itself should not warrant
the dismissal of the present Petition. In this light, the Court deems it proper
to remove, motu proprio, the name of Judge Laqui from the caption of the
present case.
[14]

Main Issue: Nature of the Subject Machinery

[11]

The Issues
In their Memorandum, petitioners submit the following issues for our
consideration:
A. Whether or not the machineries purchased and imported by SERGS became real
property by virtue of immobilization.
B. Whether or not the contract between the parties is a loan or a lease.[12]
In the main, the Court will resolve whether the said machines are
personal, not immovable, property which may be a proper subject of a writ
of replevin. As a preliminary matter, the Court will also address briefly the
procedural points raised by respondent.

Petitioners contend that the subject machines used in their factory

were not proper subjects of the Writ issued by the RTC, because they
were in fact real property. Serious policy considerations, they argue,
militate against a contrary characterization.
Rule 60 of the Rules of Court provides that writs of replevin are
issued for the recovery of personal property only.[15] Section 3 thereof
reads:
SEC. 3. Order. -- Upon the filing of such affidavit and approval of the bond, the court
shall issue an order and the corresponding writ of replevin describing the personal
property alleged to be wrongfully detained and requiring the sheriff forthwith to take
such property into his custody.
On the other hand, Article 415 of the Civil Code enumerates
immovable or real property as follows:
ART. 415. The following are immovable property:
x x x....................................x x x....................................x x x

The Courts Ruling

The Petition is not meritorious.

(5) Machinery, receptacles, instruments or implements 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 which tend directly to meet the needs of the said industry or works;
x x x....................................x x x....................................x x x

Preliminary Matter:Procedural Questions

Respondent contends that the Petition failed to indicate expressly
whether it was being filed under Rule 45 or Rule 65 of the Rules of

In the present case, the machines that were the subjects of the Writ
of Seizure were placed by petitioners in the factory built on their own
land. Indisputably, they were essential and principal elements of their
chocolate-making industry. Hence, although each of them was movable or
personal property on its own, all of them have become immobilized by
destination because they are essential and principal elements in the

industry.[16] In that sense, petitioners are correct in arguing that the said
machines are real, not personal, property pursuant to Article 415 (5) of the
Civil Code.[17]
Be that as it may, we disagree with the submission of the petitioners
that the said machines are not proper subjects of the Writ of Seizure.
The Court has held that contracting parties may validly stipulate that
a real property be considered as personal.[18] After agreeing to such
stipulation,
they
are
consequently
estopped
from
claiming
otherwise. Under the principle of estoppel, a party to a contract is ordinarily
precluded from denying the truth of any material fact found therein.
Hence, in Tumalad v. Vicencio,[19] the Court upheld the intention of the
parties to treat a houseas a personal property because it had been made
the subject of a chattel mortgage. The Court ruled:
x x x. Although there is no specific statement referring to the subject house as
personal property, yet by ceding, selling or transferring a property by way of chattel
mortgage defendants-appellants could only have meant to convey the house as
chattel, or at least, intended to treat the same as such, so that they should not now be
allowed to make an inconsistent stand by claiming otherwise.
Applying Tumalad, the Court in Makati Leasing and Finance Corp. v.
Wearever Textile Mills[20]also held that the machinery used in a factory and
essential to the industry, as in the present case, was a proper subject of a
writ of replevin because it was treated as personal property in a
contract.Pertinent portions of the Courts ruling are reproduced hereunder:
x x x. If a house of strong materials, like what was involved in the above Tumalad
case, may be considered as personal property for purposes of executing a chattel
mortgage thereon as long as the parties to the contract so agree and no innocent
third party will be prejudiced thereby, there is absolutely no reason why a machinery,
which is movable in its nature and becomes immobilized only by destination or
purpose, may not be likewise treated as such. This is really because one who has so
agreed is estopped from denying the existence of the chattel mortgage.
In the present case, the Lease Agreement clearly provides that the
machines
in
question
are
to
be
considered as
personal
property. Specifically, Section 12.1 of the Agreement reads as follows:[21]
12.1 The PROPERTY is, and shall at all times be and remain, personal property
notwithstanding that the PROPERTY or any part thereof may now be, or hereafter
become, in any manner affixed or attached to or embedded in, or permanently resting
upon, real property or any building thereon, or attached in any manner to what is
permanent.
Clearly then, petitioners are estopped from denying the
characterization of the subject machines as personal property. Under the
circumstances, they are proper subjects of the Writ of Seizure.

It should be stressed, however, that our holding -- that the machines

should be deemed personal property pursuant to the Lease Agreement is
good only insofar as the contracting parties are concerned.[22] Hence, while
the parties are bound by the Agreement, third persons acting in good faith
are not affected by its stipulation characterizing the subject machinery as
personal.[23] In any event, there is no showing that any specific third party
would be adversely affected.

Validity of the Lease Agreement

In their Memorandum, petitioners contend that the Agreement is a
loan and not a lease.[24]Submitting documents supposedly showing that
they own the subject machines, petitioners also argue in their Petition that
the Agreement suffers from intrinsic ambiguity which places in serious
doubt the intention of the parties and the validity of the lease agreement
itself.[25] In their Reply to respondents Comment, they further allege that the
Agreement is invalid.[26]
These arguments are unconvincing. The validity and the nature of the
contract are the lis motaof the civil action pending before the RTC. A
resolution of these questions, therefore, is effectively a resolution of the
merits of the case. Hence, they should be threshed out in the trial, not in
the proceedings involving the issuance of the Writ of Seizure.
Indeed, in La Tondea Distillers v. CA,[27] the Court explained that the
policy under Rule 60 was that questions involving title to the subject
property questions which petitioners are now raising --should be
determined in the trial. In that case, the Court noted that the remedy of
defendants under Rule 60 was either to post a counter-bond or to question
the sufficiency of the plaintiffs bond. They were not allowed, however, to
invoke the title to the subject property. The Court ruled:
In other words, the law does not allow the defendant to file a motion to dissolve or
discharge the writ of seizure (or delivery) on ground of insufficiency of the complaint
or of the grounds relied upon therefor, as in proceedings on preliminary attachment or
injunction, and thereby put at issue the matter of the title or right of possession over
the specific chattel being replevied, the policy apparently being that said matter
should be ventilated and determined only at the trial on the merits.[28]
Besides, these questions require a determination of facts and a
presentation of evidence, both of which have no place in a petition for
certiorari in the CA under Rule 65 or in a petition for review in this Court
under Rule 45.[29]

WHEREFORE, the Petition is DENIED and the assailed Decision of

the Court of AppealsAFFIRMED. Costs against petitioners. SO
ORDERED.
Reliance on the Lease Agreement
It should be pointed out that the Court in this case may rely on the
Lease Agreement, fornothing on record shows that it has been nullified or
annulled. In fact, petitioners assailed it first only in the RTC proceedings,
which had ironically been instituted by respondent. Accordingly, it must be
presumed valid and binding as the law between the parties.
Makati Leasing and Finance Corporation[30] is also instructive on this
point. In that case, the Deed of Chattel Mortgage, which characterized the
subject machinery as personal property, was also assailed because
respondent had allegedly been required to sign a printed form of chattel
mortgage which was in a blank form at the time of signing. The Court
rejected the argument and relied on the Deed, ruling as follows:
x x x. Moreover, even granting that the charge is true, such fact alone does not render
a contract void ab initio, but can only be a ground for rendering said contract voidable,
or annullable pursuant to Article 1390 of the new Civil Code, by a proper action in
court. There is nothing on record to show that the mortgage has been
annulled. Neither is it disclosed that steps were taken to nullify the same. x x x

Alleged Injustice Committed on the Part of Petitioners

Petitioners contend that if the Court allows these machineries to be
seized, then its workers would be out of work and thrown into the streets.
[31]
They also allege that the seizure would nullify all efforts to rehabilitate
the corporation.
Petitioners arguments do not preclude the implementation of the
Writ. As earlier discussed, law and jurisprudence support its
propriety. Verily, the above-mentioned consequences, if they come true,
should not be blamed on this Court, but on the petitioners for failing to
avail themselves of the remedy under Section 5 of Rule 60, which allows
the filing of a counter-bond. The provision states:
SEC. 5. Return of property. -- If the adverse party objects to the sufficiency of the
applicants bond, or of the surety or sureties thereon, he cannot immediately require
the return of the property, but if he does not so object, he may, at any time before the
delivery of the property to the applicant, require the return thereof, by filing with the
court where the action is pending a bond executed to the applicant, in double the
value of the property as stated in the applicants affidavit for the delivery thereof to the
applicant, if such delivery be adjudged, and for the payment of such sum to him as
may be recovered against the adverse party, and by serving a copy bond on the
applicant.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-11139

April 23, 1958

SANTOS EVANGELISTA, petitioner,

vs.
ALTO SURETY & INSURANCE CO., INC., respondent.

house in question to petitioner herein and to pay him, jointly and severally, forty pesos
(P40.00) a month from October, 1952, until said delivery, plus costs.
On appeal taken by respondent, this decision was reversed by the Court of Appeals,
which absolved said respondent from the complaint, upon the ground that, although
the writ of attachment in favor of Evangelista had been filed with the Register of
Deeds of Manila prior to the sale in favor of respondent, Evangelista did not acquire
thereby a preferential lien, the attachment having been levied as if the house in
question were immovable property, although in the opinion of the Court of Appeals, it
is "ostensibly a personal property." As such, the Court of Appeals held, "the order of
attachment . . . should have been served in the manner provided in subsection (e) of
section 7 of Rule 59," of the Rules of Court, reading:

Gonzalo D. David for petitioner.

Raul A. Aristorenas and Benjamin Relova for respondent.

The property of the defendant shall be attached by the officer executing the
order in the following manner:

CONCEPCION, J.:

(e) Debts and credits, and other personal property not capable of manual
delivery, by leaving with the person owing such debts, or having in his
possession or under his control, such credits or other personal property, or
with, his agent, a copy of the order, and a notice that the debts owing by him
to the defendant, and the credits and other personal property in his
possession, or under his control, belonging to the defendant, are attached in
pursuance of such order. (Emphasis ours.)

This is an appeal by certiorari from a decision of the Court of Appeals.

Briefly, the facts are: On June 4, 1949, petitioner herein, Santos Evangelista,
instituted Civil Case No. 8235 of the Court of First, Instance of Manila entitled "
Santos Evangelista vs. Ricardo Rivera," for a sum of money. On the same date, he
obtained a writ of attachment, which levied upon a house, built by Rivera on a land
situated in Manila and leased to him, by filing copy of said writ and the corresponding
notice of attachment with the Office of the Register of Deeds of Manila, on June 8,
1949. In due course, judgment was rendered in favor of Evangelista, who, on October
8, 1951, bought the house at public auction held in compliance with the writ of
execution issued in said case. The corresponding definite deed of sale was issued to
him on October 22, 1952, upon expiration of the period of redemption. When
Evangelista sought to take possession of the house, Rivera refused to surrender it,
upon the ground that he had leased the property from the Alto Surety & Insurance
Co., Inc. respondent herein and that the latter is now the true owner of said
property. It appears that on May 10, 1952, a definite deed of sale of the same house
had been issued to respondent, as the highest bidder at an auction sale held, on
September 29, 1950, in compliance with a writ of execution issued in Civil Case No.
6268 of the same court, entitled "Alto Surety & Insurance Co., Inc. vs. Maximo
Quiambao, Rosario Guevara and Ricardo Rivera," in which judgment, for the sum of
money, had been rendered in favor respondent herein, as plaintiff therein. Hence, on
June 13, 1953, Evangelista instituted the present action against respondent and
Ricardo Rivera, for the purpose of establishing his (Evangelista) title over said house,
securing possession thereof, apart from recovering damages.
In its answer, respondent alleged, in substance, that it has a better right to the house,
because the sale made, and the definite deed of sale executed, in its favor, on
September 29, 1950 and May 10, 1952, respectively, precede the sale to Evangelista
(October 8, 1951) and the definite deed of sale in his favor (October 22, 1952). It,
also, made some special defenses which are discussed hereafter. Rivera, in effect,
joined forces with respondent. After due trial, the Court of First Instance of Manila
rendered judgment for Evangelista, sentencing Rivera and respondent to deliver the

However, the Court of Appeals seems to have been of the opinion, also, that the
house of Rivera should have been attached in accordance with subsection (c) of said
section 7, as "personal property capable of manual delivery, by taking and safely
keeping in his custody", for it declared that "Evangelists could not have . . . validly
purchased Ricardo Rivera's house from the sheriff as the latter was not in possession
thereof at the time he sold it at a public auction."
Evangelista now seeks a review, by certiorari, of this decision of the Court of Appeals.
In this connection, it is not disputed that although the sale to the respondent preceded
that made to Evangelists, the latter would have a better right if the writ of attachment,
issued in his favor before the sale to the respondent, had been properly executed or
enforced. This question, in turn, depends upon whether the house of Ricardo Rivera
is real property or not. In the affirmative case, the applicable provision would be
subsection (a) of section 7, Rule 59 of the Rules of Court, pursuant to which the
attachment should be made "by filing with the registrar of deeds a copy of the order,
together with a description of the property attached, and a notice that it is attached,
and by leaving a copy of such order, description, and notice with the occupant of the
property, if any there be."
Respondent maintains, however, and the Court of Appeals held, that Rivera's house
is personal property, the levy upon which must be made in conformity with
subsections (c) and (e) of said section 7 of Rule 59. Hence, the main issue before us
is whether a house, constructed the lessee of the land on which it is built, should be
dealt with, for purpose, of attachment, as immovable property, or as personal
property.

It is, our considered opinion that said house is not personal property, much less a
debt, credit or other personal property not capable of manual delivery, but immovable
property. As explicitly held, in Laddera vs. Hodges (48 Off. Gaz., 5374), "a true
building (not merely superimposed on the soil) is immovable or real property, whether
it is erected by the owner of the land or by usufructuary or lessee. This is the doctrine
of our Supreme Court in Leung Yee vs. Strong Machinery Company, 37 Phil., 644.
And it is amply supported by the rulings of the French Court. . . ."

We, therefore, declare that the house of mixed materials levied upon on
execution, although subject of a contract of chattel mortgage between the
owner and a third person, is real property within the purview of Rule 39,
section 16, of the Rules of Court as it has become a permanent fixture of the
land, which, is real property. (42 Am. Jur. 199-200; Leung Yee vs. Strong
Machinery Co., 37 Phil., 644; Republic vs. Ceniza, et al., 90 Phil., 544;
Ladera,, et al. vs. Hodges, et al., [C.A.] Off. Gaz. 5374.)" (Emphasis ours.)

It is true that the parties to a deed of chattel mortgage may agree to consider a house
as personal property for purposes of said contract (Luna vs. Encarnacion, * 48 Off.
Gaz., 2664; Standard Oil Co. of New York vs. Jaramillo, 44 Phil., 630; De Jesus vs.
Juan Dee Co., Inc., 72 Phil., 464). However, this view is good only insofar as
thecontracting parties are concerned. It is based, partly, upon the principle of
estoppel. Neither this principle, nor said view, is applicable to strangers to said
contract. Much less is it in point where there has been no contractwhatsoever, with
respect to the status of the house involved, as in the case at bar. Apart from this,
in Manarang vs. Ofilada (99 Phil., 108; 52 Off. Gaz., 3954), we held:

The foregoing considerations apply, with equal force, to the conditions for the levy of
attachment, for it similarly affects the public and third persons.

The question now before us, however, is: Does the fact that the parties
entering into a contract regarding a house gave said property the
consideration of personal property in their contract, bind the sheriff in
advertising the property's sale at public auction as personal property? It is to
be remembered that in the case at bar the action was to collect a loan
secured by a chattel mortgage on the house. It is also to be remembered
that in practice it is the judgment creditor who points out to the sheriff the
properties that the sheriff is to levy upon in execution, and the judgment
creditor in the case at bar is the party in whose favor the owner of the house
had conveyed it by way of chattel mortgage and, therefore, knew its
consideration as personal property.

The Record on Appeal, annexed to the petition for Certiorari, shows that petitioner
alleged, in paragraph 3 of the complaint, that he acquired the house in question "as a
consequence of the levy of an attachment and execution of the judgment in Civil
Case No. 8235" of the Court of First Instance of Manila. In his answer (paragraph 2),
Ricardo Rivera admitted said attachment execution of judgment. He alleged,
however, by way a of special defense, that the title of respondent "is superior to that
of plaintiff because it is based on a public instrument," whereas Evangelista relied
upon a "promissory note" which "is only a private instrument"; that said Public
instrument in favor of respondent "is superior also to the judgment in Civil Case No.
8235"; and that plaintiff's claim against Rivera amounted only to P866, "which is much
below the real value" of said house, for which reason it would be "grossly unjust to
acquire the property for such an inadequate consideration." Thus, Rivera impliedly
admitted that his house had been attached, that the house had been sold to
Evangelista in accordance with the requisite formalities, and that said attachment was
valid, although allegedly inferior to the rights of respondent, and the consideration for
the sale to Evangelista was claimed to be inadequate.

These considerations notwithstanding, we hold that the rules on execution

do not allow, and, we should notinterpret them in such a way as to allow, the
special consideration that parties to a contract may have desired to impart to
real estate, for example, as personal property, when they are, not ordinarily
so. Sales on execution affect the public and third persons. The regulation
governing sales on execution are for public officials to follow. The form of
proceedings prescribed for each kind of property is suited to its character,
not to the character, which the parties have given to it or desire to give it.
When the rules speak of personal property, property which is ordinarily so
considered is meant; and when real property is spoken of, it means property
which is generally known as real property. The regulations were never
intended to suit the consideration that parties may have privately given to
the property levied upon. Enforcement of regulations would be difficult were
the convenience or agreement of private parties to determine or govern the
nature of the proceedings. We therefore hold that the mere fact that a house
was the subject of the chattel mortgage and was considered as personal
property by the parties does not make said house personal property for
purposes of the notice to be given for its sale of public auction. This ruling is
demanded by the need for a definite, orderly and well defined regulation for
official and public guidance and would prevent confusion and
misunderstanding.

It is argued, however, that, even if the house in question were immovable property, its
attachment by Evangelista was void or ineffective, because, in the language of the
Court of Appeals, "after presenting a Copy of the order of attachment in the Office of
the Register of Deeds, the person who might then be in possession of the house, the
sheriff took no pains to serve Ricardo Rivera, or other copies thereof." This finding of
the Court of Appeals is neither conclusive upon us, nor accurate.

Respondent, in turn, denied the allegation in said paragraph 3 of the complaint, but
only " for the reasons stated in its special defenses" namely: (1) that by virtue of the
sale at public auction, and the final deed executed by the sheriff in favor of
respondent, the same became the "legitimate owner of the house" in question; (2)
that respondent "is a buyer in good faith and for value"; (3) that respondent "took
possession and control of said house"; (4) that "there was no valid attachment by the
plaintiff and/or the Sheriff of Manila of the property in question as neither took actual
or constructive possession or control of the property at any time"; and (5) "that the
alleged registration of plaintiff's attachment, certificate of sale and final deed in the
Office of Register of Deeds, Manila, if there was any, is likewise, not valid as there is
no registry of transactions covering houses erected on land belonging to or leased
from another." In this manner, respondent claimed a better right, merely under the
theory that, in case of double sale of immovable property, the purchaser who first
obtains possession in good faith, acquires title, if the sale has not been "recorded . . .
in the Registry of Property" (Art. 1544, Civil Code of the Philippines), and that the writ

of attachment and the notice of attachment in favor of Evangelista should be

considered unregistered, "as there is no registry of transactions covering houses
erected on land belonging to or leased from another." In fact, said article 1544 of the
Civil Code of the Philippines, governing double sales, was quoted on page 15 of the
brief for respondent in the Court of Appeals, in support of its fourth assignment of
error therein, to the effect that it "has preference or priority over the sale of the same
property" to Evangelista.
In other words, there was no issue on whether copy of the writ and notice of
attachment had been served on Rivera.No evidence whatsoever, to the effect that
Rivera had not been served with copies of said writ and notice, was introduced in the
Court of First Instance. In its brief in the Court of Appeals, respondent did not aver, or
even, intimate, that no such copies were served by the sheriff upon Rivera. Service
thereof on Rivera had been impliedly admitted by the defendants, in their respective
answers, and by their behaviour throughout the proceedings in the Court of First
Instance, and, as regards respondent, in the Court of Appeals. In fact, petitioner
asserts in his brief herein (p. 26) that copies of said writ and notice were delivered to
Rivera, simultaneously with copies of the complaint, upon service of summons, prior
to the filing of copies of said writ and notice with the register deeds, andthe truth of
this assertion has not been directly and positively challenged or denied in the brief
filed before us by respondent herein. The latter did not dare therein to go beyond
making a statement for the first time in the course of these proceedings, begun
almost five (5) years ago (June 18, 1953) reproducing substantially the
aforementioned finding of the Court of Appeals and then quoting the same.
Considering, therefore, that neither the pleadings, nor the briefs in the Court of
Appeals, raised an issue on whether or not copies of the writ of attachment and
notice of attachment had been served upon Rivera; that the defendants had impliedly
admitted-in said pleadings and briefs, as well as by their conduct during the entire
proceedings, prior to the rendition of the decision of the Court of Appeals that
Rivera had received copies of said documents; and that, for this reason, evidently, no
proof was introduced thereon, we, are of the opinion, and so hold that the finding of
the Court of Appeals to the effect that said copies had not been served upon Rivera is
based upon a misapprehension of the specific issues involved therein and
goes beyond the range of such issues, apart from beingcontrary to the
aforementioned admission by the parties, and that, accordingly, a grave abuse of
discretion was committed in making said finding, which is, furthermore, inaccurate.
Wherefore, the decision of the Court of Appeals is hereby reversed, and another one
shall be entered affirming that of the Court of First Instance of Manila, with the costs
of this instance against respondent, the Alto Surety and Insurance Co., Inc. It is so
ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-40411

August 7, 1935

DAVAO SAW MILL CO., INC., plaintiff-appellant,

vs.
APRONIANO G. CASTILLO and DAVAO LIGHT & POWER CO.,
INC., defendants-appellees.
Arsenio Suazo and Jose L. Palma Gil and Pablo Lorenzo and Delfin
Joven for appellant.
J.W. Ferrier for appellees.
MALCOLM, J.:
The issue in this case, as announced in the opening sentence of the decision in the
trial court and as set forth by counsel for the parties on appeal, involves the
determination of the nature of the properties described in the complaint. The trial
judge found that those properties were personal in nature, and as a consequence
absolved the defendants from the complaint, with costs against the plaintiff.
The Davao Saw Mill Co., Inc., is the holder of a lumber concession from the
Government of the Philippine Islands. It has operated a sawmill in the sitio of Maa,
barrio of Tigatu, municipality of Davao, Province of Davao. However, the land upon
which the business was conducted belonged to another person. On the land the
sawmill company erected a building which housed the machinery used by it. Some of
the implements thus used were clearly personal property, the conflict concerning
machines which were placed and mounted on foundations of cement. In the contract
of lease between the sawmill company and the owner of the land there appeared the
following provision:
That on the expiration of the period agreed upon, all the improvements and
buildings introduced and erected by the party of the second part shall pass
to the exclusive ownership of the party of the first part without any obligation
on its part to pay any amount for said improvements and buildings; also, in
the event the party of the second part should leave or abandon the land
leased before the time herein stipulated, the improvements and buildings
shall likewise pass to the ownership of the party of the first part as though
the time agreed upon had expired: Provided, however, That the machineries
and accessories are not included in the improvements which will pass to the
party of the first part on the expiration or abandonment of the land leased.

In another action, wherein the Davao Light & Power Co., Inc., was the plaintiff and the
Davao, Saw, Mill Co., Inc., was the defendant, a judgment was rendered in favor of
the plaintiff in that action against the defendant in that action; a writ of execution
issued thereon, and the properties now in question were levied upon as personalty by
the sheriff. No third party claim was filed for such properties at the time of the sales
thereof as is borne out by the record made by the plaintiff herein. Indeed the bidder,
which was the plaintiff in that action, and the defendant herein having consummated
the sale, proceeded to take possession of the machinery and other properties
described in the corresponding certificates of sale executed in its favor by the sheriff
of Davao.
As connecting up with the facts, it should further be explained that the Davao Saw Mill
Co., Inc., has on a number of occasions treated the machinery as personal property
by executing chattel mortgages in favor of third persons. One of such persons is the
appellee by assignment from the original mortgages.
Article 334, paragraphs 1 and 5, of the Civil Code, is in point. According to the Code,
real property consists of
1. Land, buildings, roads and constructions of all kinds adhering to the soil;
xxx

xxx

xxx

5. Machinery, liquid containers, instruments or implements 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 of industry.
Appellant emphasizes the first paragraph, and appellees the last mentioned
paragraph. We entertain no doubt that the trial judge and appellees are right in their
appreciation of the legal doctrines flowing from the facts.
In the first place, it must again be pointed out that the appellant should have
registered its protest before or at the time of the sale of this property. It must further
be pointed out that while not conclusive, 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. In this connection the decision of this court in the
case of Standard Oil Co. of New Yorkvs. Jaramillo ( [1923], 44 Phil., 630),
whether obiter dicta or not, furnishes the key to such a situation.
It is, however not necessary to spend overly must time in the resolution of this appeal
on side issues. It is machinery which is involved; moreover, machinery not intended
by the owner of any building or land for use in connection therewith, but intended by a
lessee for use in a building erected on the land by the latter to be returned to the
lessee on the expiration or abandonment of the lease.
A similar question arose in Puerto Rico, and on appeal being taken to the United
States Supreme Court, it was held that machinery which is movable in its nature only
becomes immobilized when placed in a plant by the owner of the property or plant,

but not when so placed by a tenant, a usufructuary, or any person having only a
temporary right, unless such person acted as the agent of the owner. In the opinion
written by Chief Justice White, whose knowledge of the Civil Law is well known, it was
in part said:
To determine this question involves fixing the nature and character of the
property from the point of view of the rights of Valdes and its nature and
character from the point of view of Nevers & Callaghan as a judgment
creditor of the Altagracia Company and the rights derived by them from the
execution levied on the machinery placed by the corporation in the plant.
Following the Code Napoleon, the Porto Rican Code treats as immovable
(real) property, not only land and buildings, but also attributes immovability in
some cases to property of a movable nature, that is, personal property,
because of the destination to which it is applied. "Things," says section 334
of the Porto Rican Code, "may be immovable either by their own nature or
by their destination or the object to which they are applicable." Numerous
illustrations are given in the fifth subdivision of section 335, which is as
follows: "Machinery, vessels, instruments or implements intended by the
owner of the tenements for the industrial or works that they may carry on in
any building or upon any land and which tend directly to meet the needs of
the said industry or works." (See also Code Nap., articles 516, 518 et seq. to
and inclusive of article 534, recapitulating the things which, though in
themselves movable, may be immobilized.) So far as the subject-matter with
which we are dealing machinery placed in the plant it is plain, both
under the provisions of the Porto Rican Law and of the Code Napoleon, that
machinery which is movable in its nature only becomes immobilized when
placed in a plant by the owner of the property or plant. Such result would not
be accomplished, therefore, by the placing of machinery in a plant by a
tenant or a usufructuary or any person having only a temporary right.
(Demolombe, Tit. 9, No. 203; Aubry et Rau, Tit. 2, p. 12, Section 164;
Laurent, Tit. 5, No. 447; and decisions quoted in Fuzier-Herman ed. Code
Napoleon under articles 522 et seq.) The distinction rests, as pointed out by
Demolombe, upon the fact that one only having a temporary right to the
possession or enjoyment of property is not presumed by the law to have
applied movable property belonging to him so as to deprive him of it by
causing it by an act of immobilization to become the property of another. It
follows that abstractly speaking the machinery put by the Altagracia
Company in the plant belonging to Sanchez did not lose its character of
movable property and become immovable by destination. But in the concrete
immobilization took place because of the express provisions of the lease
under which the Altagracia held, since the lease in substance required the
putting in of improved machinery, deprived the tenant of any right to charge
against the lessor the cost such machinery, and it was expressly stipulated
that the machinery so put in should become a part of the plant belonging to
the owner without compensation to the lessee. Under such conditions the
tenant in putting in the machinery was acting but as the agent of the owner
in compliance with the obligations resting upon him, and the immobilization
of the machinery which resulted arose in legal effect from the act of the
owner in giving by contract a permanent destination to the machinery.
xxx

xxx

xxx

The machinery levied upon by Nevers & Callaghan, that is, that which was
placed in the plant by the Altagracia Company, being, as regards Nevers &
Callaghan, movable property, it follows that they had the right to levy on it
under the execution upon the judgment in their favor, and the exercise of
that right did not in a legal sense conflict with the claim of Valdes, since as to
him the property was a part of the realty which, as the result of his
obligations under the lease, he could not, for the purpose of collecting his
debt, proceed separately against. (Valdes vs. Central Altagracia [192], 225
U.S., 58.)
Finding no reversible error in the record, the judgment appealed from will be affirmed,
the costs of this instance to be paid by the appellant.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 120098

October 2, 2001

all the buildings and improvements now existing or which may hereafter exist
thereon, situated in . . .
"Annex A"
(Real and Chattel Mortgage executed by Ever Textile Mills in favor of
PBCommunications continued)
LIST OF MACHINERIES & EQUIPMENT

RUBY L. TSAI, petitioner,

vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R
VILLALUZ, respondents.

A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in

Hongkong:

x---------------------------------------------------------x

Serial Numbers Size of Machines

xxx

[G.R. No. 120109. October 2, 2001.]

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS and MAMERTO R
VILLALUZ, respondents.

xxx

xxx

B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan.

xxx

xxx

xxx

C. Two (2) Circular Knitting Machines made in West Germany.

QUISUMBING, J.:
These consolidated cases assail the decision1 of the Court of Appeals in CA-G.R. CV
No. 32986, affirming the decision2 of the Regional Trial Court of Manila, Branch 7, in
Civil Case No. 89-48265. Also assailed is respondent court's resolution denying
petitioners' motion for reconsideration.
On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX) obtained a
three million peso (P3,000,000.00) loan from petitioner Philippine Bank of
Communications (PBCom). As security for the loan, EVERTEX executed in favor of
PBCom, a deed of Real and Chattel Mortgage over the lot under TCT No. 372097,
where its factory stands, and the chattels located therein as enumerated in a
schedule attached to the mortgage contract. The pertinent portions of the Real and
Chattel Mortgage are quoted below:

(REAL AND CHATTEL)

xxx

xxx

xxx

D. Four (4) Winding Machines.

xxx

xxx

xxx
SCHEDULE "A"

I. TCT # 372097 - RIZAL

xxx

xxx

xxx

II. Any and all buildings and improvements now existing or hereafter to exist
on the above-mentioned lot.

MORTGAGE

xxx

xxx

xxx

The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First

Mortgage, to the MORTGAGEE, . . . certain parcel(s) of land, together with

III. MACHINERIES & EQUIPMENT situated, located and/or installed on the

above-mentioned lot located at . . .
(a) Forty eight sets (48) Vayrow Knitting Machines . . .
(b) Sixteen sets (16) Vayrow Knitting Machines . . .

(c) Two (2) Circular Knitting Machines . . .

of insolvent EVERTEX, therefore Tsai acquired no rights over such assets sold to her,
and should reconvey the assets.

(d) Two (2) Winding Machines . . .

(e) Two (2) Winding Machines . . .
IV. Any and all replacements, substitutions, additions, increases and
accretions to above properties.
xxx

xxx

xxx3

On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX.

The loan was secured by a Chattel Mortgage over personal properties enumerated in
a list attached thereto. These listed properties were similar to those listed in Annex A
of the first mortgage deed.
After April 23, 1979, the date of the execution of the second mortgage mentioned
above, EVERTEX purchased various machines and equipments.
On November 19, 1982, due to business reverses, EVERTEX filed insolvency
proceedings docketed as SP Proc. No. LP-3091-P before the defunct Court of First
Instance of Pasay City, Branch XXVIII. The CFI issued an order on November 24,
1982 declaring the corporation insolvent. All its assets were taken into the custody of
the Insolvency Court, including the collateral, real and personal, securing the two
mortgages as abovementioned.
In the meantime, upon EVERTEX's failure to meet its obligation to PBCom, the latter
commenced extrajudicial foreclosure proceedings against EVERTEX under Act 3135,
otherwise known as "An Act to Regulate the Sale of Property under Special Powers
Inserted in or Annexed to Real Estate Mortgages" and Act 1506 or "The Chattel
Mortgage Law". A Notice of Sheriff's Sale was issued on December 1, 1982.
On December 15, 1982, the first public auction was held where petitioner PBCom
emerged as the highest bidder and a Certificate of Sale was issued in its favor on the
same date. On December 23, 1982, another public auction was held and again,
PBCom was the highest bidder. The sheriff issued a Certificate of Sale on the same
day.
On March 7, 1984, PBCom consolidated its ownership over the lot and all the
properties in it. In November 1986, it leased the entire factory premises to petitioner
Ruby L. Tsai for P50,000.00 a month. On May 3, 1988, PBCom sold the factory, lock,
stock and barrel to Tsai for P9,000,000.00, including the contested machineries.
On March 16, 1989, EVERTEX filed a complaint for annulment of sale, reconveyance,
and damages with the Regional Trial Court against PBCom, alleging inter alia that the
extrajudicial foreclosure of subject mortgage was in violation of the Insolvency Law.
EVERTEX claimed that no rights having been transmitted to PBCom over the assets

Further, EVERTEX averred that PBCom, without any legal or factual basis,
appropriated the contested properties, which were not included in the Real and
Chattel Mortgage of November 26, 1975 nor in the Chattel Mortgage of April 23,
1979, and neither were those properties included in the Notice of Sheriff's Sale dated
December 1, 1982 and Certificate of Sale . . . dated December 15, 1982.
The disputed properties, which were valued at P4,000,000.00, are: 14 Interlock
Circular Knitting Machines, 1 Jet Drying Equipment, 1 Dryer Equipment, 1 Raisin
Equipment and 1 Heatset Equipment.
The RTC found that the lease and sale of said personal properties were irregular and
illegal because they were not duly foreclosed nor sold at the December 15, 1982
auction sale since these were not included in the schedules attached to the mortgage
contracts. The trial court decreed:
WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation
and against the defendants:
1. Ordering the annulment of the sale executed by defendant Philippine
Bank of Communications in favor of defendant Ruby L. Tsai on May 3, 1988
insofar as it affects the personal properties listed in par. 9 of the complaint,
and their return to the plaintiff corporation through its assignee, plaintiff
Mamerto R. Villaluz, for disposition by the Insolvency Court, to be done
within ten (10) days from finality of this decision;
2. Ordering the defendants to pay jointly and severally the plaintiff
corporation the sum of P5,200,000.00 as compensation for the use and
possession of the properties in question from November 1986 to February
1991 and P100,000.00 every month thereafter, with interest thereon at the
legal rate per annum until full payment;
3. Ordering the defendants to pay jointly and severally the plaintiff
corporation the sum of P50,000.00 as and for attorney's fees and expenses
of litigation;
4. Ordering the defendants to pay jointly and severally the plaintiff
corporation the sum of P200,000.00 by way of exemplary damages;
5. Ordering the dismissal of the counterclaim of the defendants; and
6. Ordering the defendants to proportionately pay the costs of suit.
SO ORDERED.4

Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which issued its
decision dated August 31, 1994, the dispositive portion of which reads:
WHEREFORE, except for the deletion therefrom of the award; for exemplary
damages, and reduction of the actual damages, from P100,000.00 to P20,000.00 per
month, from November 1986 until subject personal properties are restored to
appellees, the judgment appealed from is hereby AFFIRMED, in all other respects.
No pronouncement as to costs.5
Motion for reconsideration of the above decision having been denied in the resolution
of April 28, 1995, PBCom and Tsai filed their separate petitions for review with this
Court.
In G.R No. 120098, petitioner Tsai ascribed the following errors to the respondent
court:
I
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
EFFECT MAKING A CONTRACT FOR THE PARTIES BY TREATING THE
1981 ACQUIRED MACHINERIES AS CHATTELS INSTEAD OF REAL
PROPERTIES WITHIN THEIR EARLIER 1975 DEED OF REAL AND
CHATTEL MORTGAGE OR 1979 DEED OF CHATTEL MORTGAGE.
II
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
HOLDING THAT THE DISPUTED 1981 MACHINERIES ARE NOT REAL
PROPERTIES DEEMED PART OF THE MORTGAGE DESPITE THE
CLEAR IMPORT OF THE EVIDENCE AND APPLICABLE RULINGS OF
THE SUPREME COURT.
III
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
DEEMING PETITIONER A PURCHASER IN BAD FAITH.
IV
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
ASSESSING PETITIONER ACTUAL DAMAGES, ATTORNEY'S FEES AND
EXPENSES OF LITIGATION FOR WANT OF VALID FACTUAL AND
LEGAL BASIS.
V

THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN

HOLDING AGAINST PETITIONER'S ARGUMENTS ON PRESCRIPTION
AND LACHES.6

In G.R. No. 120098, PBCom raised the following issues:

I.
DID THE COURT OF APPEALS VALIDLY DECREE THE MACHINERIES LISTED
UNDER PARAGRAPH 9 OF THE COMPLAINT BELOW AS PERSONAL PROPERTY
OUTSIDE OF THE 1975 DEED OF REAL ESTATE MORTGAGE AND EXCLUDED
THEM FROM THE REAL PROPERTY EXTRAJUDICIALLY FORECLOSED BY
PBCOM DESPITE THE PROVISION IN THE 1975 DEED THAT ALL AFTERACQUIRED PROPERTIES DURING THE LIFETIME OF THE MORTGAGE SHALL
FORM PART THEREOF, AND DESPITE THE UNDISPUTED FACT THAT SAID
MACHINERIES ARE BIG AND HEAVY, BOLTED OR CEMENTED ON THE REAL
PROPERTY MORTGAGED BY EVER TEXTILE MILLS TO PBCOM, AND WERE
ASSESSED FOR REAL ESTATE TAX PURPOSES?
II
CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN QUESTION
IN GOOD FAITH, EXTENDED CREDIT FACILITIES TO EVER TEXTILE MILLS
WHICH AS OF 1982 TOTALLED P9,547,095.28, WHO HAD SPENT FOR
MAINTENANCE AND SECURITY ON THE DISPUTED MACHINERIES AND HAD TO
PAY ALL THE BACK TAXES OF EVER TEXTILE MILLS BE LEGALLY COMPELLED
TO RETURN TO EVER THE SAID MACHINERIES OR IN LIEU THEREOF BE
ASSESSED DAMAGES. IS THAT SITUATION TANTAMOUNT TO A CASE OF
UNJUST ENRICHMENT?7
The principal issue, in our view, is whether or not the inclusion of the questioned
properties in the foreclosed properties is proper. The secondary issue is whether or
not the sale of these properties to petitioner Ruby Tsai is valid.
For her part, Tsai avers that the Court of Appeals in effect made a contract for the
parties by treating the 1981 acquired units of machinery as chattels instead of real
properties within their earlier 1975 deed of Real and Chattel Mortgage or 1979 deed
of Chattel Mortgage.8 Additionally, Tsai argues that respondent court erred in holding
that the disputed 1981 machineries are not real properties. 9 Finally, she contends that
the Court of Appeals erred in holding against petitioner's arguments on prescription
and laches10 and in assessing petitioner actual damages, attorney's fees and
expenses of litigation, for want of valid factual and legal basis.11
Essentially, PBCom contends that respondent court erred in affirming the lower
court's judgment decreeing that the pieces of machinery in dispute were not duly
foreclosed and could not be legally leased nor sold to Ruby Tsai. It further argued that
the Court of Appeals' pronouncement that the pieces of machinery in question were

personal properties have no factual and legal basis. Finally, it asserts that the Court of
Appeals erred in assessing damages and attorney's fees against PBCom.
In opposition, private respondents argue that the controverted units of machinery are
not "real properties" but chattels, and, therefore, they were not part of the foreclosed
real properties, rendering the lease and the subsequent sale thereof to Tsai a nullity.12
Considering the assigned errors and the arguments of the parties, we find the
petitions devoid of merit and ought to be denied.
Well settled is the rule that the jurisdiction of the Supreme Court in a petition for
review on certiorari under Rule 45 of the Revised Rules of Court is limited to
reviewing only errors of law, not of fact, unless the factual findings complained of are
devoid of support by the evidence on record or the assailed judgment is based on
misapprehension of facts.13 This rule is applied more stringently when the findings of
fact of the RTC is affirmed by the Court of Appeals.14
The following are the facts as found by the RTC and affirmed by the Court of Appeals
that are decisive of the issues: (1) the "controverted machineries" are not covered by,
or included in, either of the two mortgages, the Real Estate and Chattel Mortgage,
and the pure Chattel Mortgage; (2) the said machineries were not included in the list
of properties appended to the Notice of Sale, and neither were they included in the
Sheriff's Notice of Sale of the foreclosed properties.15
Petitioners contend that the nature of the disputed machineries, i.e., that they were
heavy, bolted or cemented on the real property mortgaged by EVERTEX to PBCom,
make them ipso facto immovable under Article 415 (3) and (5) of the New Civil Code.
This assertion, however, does not settle the issue. Mere nuts and bolts do not
foreclose the controversy. We have to look at the parties' intent.
While it is true that the controverted properties appear to be immobile, a perusal of
the contract of Real and Chattel Mortgage executed by the parties herein gives us a
contrary indication. In the case at bar, both the trial and the appellate courts reached
the same finding that the true intention of PBCOM and the owner, EVERTEX, is to
treat machinery and equipment as chattels. The pertinent portion of respondent
appellate court's ruling is quoted below:
As stressed upon by appellees, appellant bank treated the machineries as
chattels; never as real properties. Indeed, the 1975 mortgage contract,
which was actually real and chattel mortgage, militates against appellants'
posture. It should be noted that the printed form used by appellant bank was
mainly for real estate mortgages. But reflective of the true intention of
appellant PBCOM and appellee EVERTEX was the typing in capital letters,
immediately following the printed caption of mortgage, of the phrase "real
and chattel." So also, the "machineries and equipment" in the printed form of
the bank had to be inserted in the blank space of the printed contract and
connected with the word "building" by typewritten slash marks. Now, then, if
the machineries in question were contemplated to be included in the real
estate mortgage, there would have been no necessity to ink a chattel

mortgage specifically mentioning as part III of Schedule A a listing of the

machineries covered thereby. It would have sufficed to list them as
immovables in the Deed of Real Estate Mortgage of the land and building
involved.
As regards the 1979 contract, the intention of the parties is clear and beyond
question. It refers solely tochattels. The inventory list of the mortgaged
properties is an itemization of sixty-three (63) individually described
machineries while the schedule listed only machines and 2,996,880.50 worth
of finished cotton fabrics and natural cotton fabrics.16
In the absence of any showing that this conclusion is baseless, erroneous or
uncorroborated by the evidence on record, we find no compelling reason to depart
therefrom.
Too, assuming arguendo that the properties in question are immovable by nature,
nothing detracts the parties from treating it as chattels to secure an obligation under
the principle of estoppel. As far back as Navarro v. Pineda, 9 SCRA 631 (1963), an
immovable may be considered a personal property if there is a stipulation as when it
is used as security in the payment of an obligation where a chattel mortgage is
executed over it, as in the case at bar.
In the instant case, the parties herein: (1) executed a contract styled as "Real Estate
Mortgage and Chattel Mortgage," instead of just "Real Estate Mortgage" if indeed
their intention is to treat all properties included therein as immovable, and (2)
attached to the said contract a separate "LIST OF MACHINERIES & EQUIPMENT".
These facts, taken together, evince the conclusion that the parties' intention is to treat
these units of machinery as chattels. A fortiori, the contested after-acquired
properties, which are of the same description as the units enumerated under the title
"LIST OF MACHINERIES & EQUIPMENT," must also be treated as chattels.
Accordingly, we find no reversible error in the respondent appellate court's ruling that
inasmuch as the subject mortgages were intended by the parties to involve chattels,
insofar as equipment and machinery were concerned, the Chattel Mortgage Law
applies, which provides in Section 7 thereof that: "a chattel mortgage shall be
deemed to cover only the property described therein and not like or substituted
property thereafter acquired by the mortgagor and placed in the same depository as
the property originally mortgaged, anything in the mortgage to the contrary
notwithstanding."
And, since the disputed machineries were acquired in 1981 and could not have been
involved in the 1975 or 1979 chattel mortgages, it was consequently an error on the
part of the Sheriff to include subject machineries with the properties enumerated in
said chattel mortgages.
As the auction sale of the subject properties to PBCom is void, no valid title passed in
its favor. Consequently, the sale thereof to Tsai is also a nullity under the elementary
principle of nemo dat quod non habet, one cannot give what one does not have.17

Petitioner Tsai also argued that assuming that PBCom's title over the contested
properties is a nullity, she is nevertheless a purchaser in good faith and for value who
now has a better right than EVERTEX.
To the contrary, however, are the factual findings and conclusions of the trial court
that she is not a purchaser in good faith. Well-settled is the rule that the person who
asserts the status of a purchaser in good faith and for value has the burden of proving
such assertion.18 Petitioner Tsai failed to discharge this burden persuasively.
Moreover, a purchaser in good faith and for value is one who buys the property of
another without notice that some other person has a right to or interest in such
property and pays a full and fair price for the same, at the time of purchase, or before
he has notice of the claims or interest of some other person in the property.19 Records
reveal, however, that when Tsai purchased the controverted properties, she knew of
respondent's claim thereon. As borne out by the records, she received the letter of
respondent's counsel, apprising her of respondent's claim, dated February 27,
1987.20 She replied thereto on March 9, 1987.21 Despite her knowledge of
respondent's claim, she proceeded to buy the contested units of machinery on May 3,
1988. Thus, the RTC did not err in finding that she was not a purchaser in good faith.
Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where the disputed
properties are located is equally unavailing. This defense refers to sale of lands and
not to sale of properties situated therein. Likewise, the mere fact that the lot where the
factory and the disputed properties stand is in PBCom's name does not automatically
make PBCom the owner of everything found therein, especially in view of EVERTEX's
letter to Tsai enunciating its claim.
Finally, petitioners' defense of prescription and laches is less than convincing. We find
no cogent reason to disturb the consistent findings of both courts below that the case
for the reconveyance of the disputed properties was filed within the reglementary
period. Here, in our view, the doctrine of laches does not apply. Note that upon
petitioners' adamant refusal to heed EVERTEX's claim, respondent company
immediately filed an action to recover possession and ownership of the disputed
properties. There is no evidence showing any failure or neglect on its part, for an
unreasonable and unexplained length of time, to do that which, by exercising due
diligence, could or should have been done earlier. The doctrine of stale demands
would apply only where by reason of the lapse of time, it would be inequitable to allow
a party to enforce his legal rights. Moreover, except for very strong reasons, this
Court is not disposed to apply the doctrine of laches to prejudice or defeat the rights
of an owner.22
As to the award of damages, the contested damages are the actual compensation,
representing rentals for the contested units of machinery, the exemplary damages,
and attorney's fees.
As regards said actual compensation, the RTC awarded P100,000.00 corresponding
to the unpaid rentals of the contested properties based on the testimony of John
Chua, who testified that the P100,000.00 was based on the accepted practice in
banking and finance, business and investments that the rental price must take into

account the cost of money used to buy them. The Court of Appeals did not give full
credence to Chua's projection and reduced the award to P20,000.00.
Basic is the rule that to recover actual damages, the amount of loss must not only be
capable of proof but must actually be proven with reasonable degree of certainty,
premised upon competent proof or best evidence obtainable of the actual amount
thereof.23 However, the allegations of respondent company as to the amount of
unrealized rentals due them as actual damages remain mere assertions unsupported
by documents and other competent evidence. In determining actual damages, the
court cannot rely on mere assertions, speculations, conjectures or guesswork but
must depend on competent proof and on the best evidence obtainable regarding the
actual amount of loss.24 However, we are not prepared to disregard the following
dispositions of the respondent appellate court:
. . . In the award of actual damages under scrutiny, there is nothing on
record warranting the said award of P5,200,000.00, representing monthly
rental income of P100,000.00 from November 1986 to February 1991, and
the additional award of P100,000.00 per month thereafter.
As pointed out by appellants, the testimonial evidence, consisting of the
testimonies of Jonh (sic) Chua and Mamerto Villaluz, is shy of what is
necessary to substantiate the actual damages allegedly sustained by
appellees, by way of unrealized rental income of subject machineries and
equipments.
The testimony of John Cua (sic) is nothing but an opinion or projection
based on what is claimed to be a practice in business and industry. But such
a testimony cannot serve as the sole basis for assessing the actual
damages complained of. What is more, there is no showing that had
appellant Tsai not taken possession of the machineries and equipments in
question, somebody was willing and ready to rent the same for P100,000.00
a month.
xxx

xxx

xxx

Then, too, even assuming arguendo that the said machineries and
equipments could have generated a rental income of P30,000.00 a month,
as projected by witness Mamerto Villaluz, the same would have been a
gross income. Therefrom should be deducted or removed, expenses for
maintenance and repairs . . . Therefore, in the determination of the actual
damages or unrealized rental income sued upon, there is a good basis to
calculate that at least four months in a year, the machineries in dispute
would have been idle due to absence of a lessee or while being repaired. In
the light of the foregoing rationalization and computation, We believe that a
net unrealized rental income of P20,000.00 a month, since November 1986,
is more realistic and fair.25
As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX which the
Court of Appeals deleted. But according to the CA, there was no clear showing that

petitioners acted malevolently, wantonly and oppressively. The evidence, however,

shows otherwise.It is a requisite to award exemplary damages that the wrongful act
must be accompanied by bad faith,26 and the guilty acted in a wanton, fraudulent,
oppressive, reckless or malevolent manner.27 As previously stressed, petitioner Tsai's
act of purchasing the controverted properties despite her knowledge of EVERTEX's
claim was oppressive and subjected the already insolvent respondent to gross
disadvantage. Petitioner PBCom also received the same letters of Atty. Villaluz,
responding thereto on March 24, 1987.28 Thus, PBCom's act of taking all the
properties found in the factory of the financially handicapped respondent, including
those properties not covered by or included in the mortgages, is equally oppressive
and tainted with bad faith. Thus, we are in agreement with the RTC that an award of
exemplary damages is proper.
The amount of P200,000.00 for exemplary damages is, however, excessive. Article
2216 of the Civil Code provides that no proof of pecuniary loss is necessary for the
adjudication of exemplary damages, their assessment being left to the discretion of
the court in accordance with the circumstances of each case.29 While the imposition
of exemplary damages is justified in this case, equity calls for its reduction.
In Inhelder Corporation v. Court of Appeals, G.R. No. L-52358, 122 SCRA 576, 585,
(May 30, 1983), we laid down the rule that judicial discretion granted to the courts in
the assessment of damages must always be exercised with balanced restraint and
measured objectivity. Thus, here the award of exemplary damages by way of example
for the public good should be reduced to P100,000.00.
By the same token, attorney's fees and other expenses of litigation may be recovered
when exemplary damages are awarded.30 In our view, RTC's award of P50,000.00 as
attorney's fees and expenses of litigation is reasonable, given the circumstances in
these cases.
WHEREFORE, the petitions are DENIED. The assailed decision and resolution of the
Court of Appeals in CA-G.R. CV No. 32986 are AFFIRMED WITH MODIFICATIONS.
Petitioners Philippine Bank of Communications and Ruby L. Tsai are hereby ordered
to pay jointly and severally Ever Textile Mills, Inc. the following: (1) P20,000.00 per
month, as compensation for the use and possession of the properties in question
from November 198631 until subject personal properties are restored to respondent
corporation; (2) P100,000.00 by way of exemplary damages, and (3) P50,000.00 as
attorney's fees and litigation expenses. Costs against petitioners.
SO ORDERED.

EN BANC
G.R. No. L-17870

(c) Lathe machine with motor, appearing in the attached

photograph, marked Annex "C";

September 29, 1962

MINDANAO BUS COMPANY, petitioner,

vs.
THE CITY ASSESSOR & TREASURER and the BOARD OF TAX APPEALS of
Cagayan de Oro City,respondents.

(d) Black and Decker Grinder, appearing in the attached

photograph, marked Annex "D";
(e) PEMCO Hydraulic Press, appearing in the attached photograph,
marked Annex "E";

Binamira, Barria and Irabagon for petitioner.

Vicente E. Sabellina for respondents.

(f) Battery charger (Tungar charge machine) appearing in the

attached photograph, marked Annex "F"; and

LABRADOR, J.:

(g) D-Engine Waukesha-M-Fuel, appearing in the attached

photograph, marked Annex "G".

This is a petition for the review of the decision of the Court of Tax Appeals in C.T.A.
Case No. 710 holding that the petitioner Mindanao Bus Company is liable to the
payment of the realty tax on its maintenance and repair equipment hereunder referred
to.

4. That these machineries are sitting on cement or wooden platforms as may

be seen in the attached photographs which form part of this agreed
stipulation of facts;

Respondent City Assessor of Cagayan de Oro City assessed at P4,400 petitioner's

above-mentioned equipment. Petitioner appealed the assessment to the respondent
Board of Tax Appeals on the ground that the same are not realty. The Board of Tax
Appeals of the City sustained the city assessor, so petitioner herein filed with the
Court of Tax Appeals a petition for the review of the assessment.

5. That petitioner is the owner of the land where it maintains and operates a
garage for its TPU motor trucks; a repair shop; blacksmith and carpentry
shops, and with these machineries which are placed therein, its TPU trucks
are made; body constructed; and same are repaired in a condition to be
serviceable in the TPU land transportation business it operates;

In the Court of Tax Appeals the parties submitted the following stipulation of facts:

6. That these machineries have never been or were never used as industrial
equipments to produce finished products for sale, nor to repair machineries,
parts and the like offered to the general public indiscriminately for business
or commercial purposes for which petitioner has never engaged in, to
date.1awphl.nt

Petitioner and respondents, thru their respective counsels agreed to the

following stipulation of facts:
1. That petitioner is a public utility solely engaged in transporting passengers
and cargoes by motor trucks, over its authorized lines in the Island of
Mindanao, collecting rates approved by the Public Service Commission;
2. That petitioner has its main office and shop at Cagayan de Oro City. It
maintains Branch Offices and/or stations at Iligan City, Lanao; Pagadian,
Zamboanga del Sur; Davao City and Kibawe, Bukidnon Province;
3. That the machineries sought to be assessed by the respondent as real
properties are the following:
(a) Hobart Electric Welder Machine, appearing in the attached
photograph, marked Annex "A";
(b) Storm Boring Machine, appearing in the attached photograph,
marked Annex "B";

The Court of Tax Appeals having sustained the respondent city assessor's ruling, and
having denied a motion for reconsideration, petitioner brought the case to this Court
assigning the following errors:
1. The Honorable Court of Tax Appeals erred in upholding respondents'
contention that the questioned assessments are valid; and that said tools,
equipments or machineries are immovable taxable real properties.
2. The Tax Court erred in its interpretation of paragraph 5 of Article 415 of
the New Civil Code, and holding that pursuant thereto the movable
equipments are taxable realties, by reason of their being intended or
destined for use in an industry.
3. The Court of Tax Appeals erred in denying petitioner's contention that the
respondent City Assessor's power to assess and levy real estate taxes on

machineries is further restricted by section 31, paragraph (c) of Republic Act

No. 521; and
4. The Tax Court erred in denying petitioner's motion for reconsideration.
Respondents contend that said equipments, tho movable, are immobilized by
destination, in accordance with paragraph 5 of Article 415 of the New Civil Code
which provides:
Art. 415. The following are immovable properties:
xxx

xxx

xxx

(5) Machinery, receptacles, instruments or implements 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 which tend directly to meet the needs of
the said industry or works. (Emphasis ours.)
Note that the stipulation expressly states that the equipment are placed on wooden or
cement platforms. They can be moved around and about in petitioner's repair shop. In
the case of B. H. Berkenkotter vs. Cu Unjieng, 61 Phil. 663, the Supreme Court said:
Article 344 (Now Art. 415), paragraph (5) of the Civil Code, gives the
character of real property to "machinery, liquid containers, instruments or
implements 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."
If the installation of the machinery and equipment in question in the central
of the Mabalacat Sugar Co., Inc., in lieu of the other of less capacity existing
therein, for its sugar and industry, converted them into real property by
reason of their purpose, it cannot be said that their incorporation therewith
was not permanent in character because, as essential and principle
elements of a sugar central, without them the sugar central would be unable
to function or carry on the industrial purpose for which it was established.
Inasmuch as the central is permanent in character, the necessary machinery
and equipment installed for carrying on the sugar industry for which it has
been established must necessarily be permanent. (Emphasis ours.)
So that movable equipments to be immobilized in contemplation of the law must first
be "essential and principal elements" of an industry or works without which such
industry or works would be "unable to function or carry on the industrial purpose for
which it was established." We may here distinguish, therefore, those movable which
become immobilized by destination because they are essential and principal
elements in the industry for those which may not be so considered immobilized
because they are merely incidental, not essential and principal. Thus, cash registers,
typewriters, etc., usually found and used in hotels, restaurants, theaters, etc. are
merely incidentals and are not and should not be considered immobilized by
destination, for these businesses can continue or carry on their functions without

these equity comments. Airline companies use forklifts, jeep-wagons, pressure

pumps, IBM machines, etc. which are incidentals, not essentials, and thus retain their
movable nature. On the other hand, machineries of breweries used in the
manufacture of liquor and soft drinks, though movable in nature, are immobilized
because they are essential to said industries; but the delivery trucks and adding
machines which they usually own and use and are found within their industrial
compounds are merely incidental and retain their movable nature.
Similarly, the tools and equipments in question in this instant case are, by their
nature, not essential and principle municipal elements of petitioner's business of
transporting passengers and cargoes by motor trucks. They are merely incidentals
acquired as movables and used only for expediency to facilitate and/or improve its
service. Even without such tools and equipments, its business may be carried on, as
petitioner has carried on, without such equipments, before the war. The transportation
business could be carried on without the repair or service shop if its rolling equipment
is repaired or serviced in another shop belonging to another.
The law that governs the determination of the question at issue is as follows:
Art. 415. The following are immovable property:
xxx

xxx

xxx

(5) Machinery, receptacles, instruments or implements 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 which tend directly to meet the needs of
the said industry or works; (Civil Code of the Phil.)
Aside from the element of essentiality the above-quoted provision also requires that
the industry or works be carried on in a building or on a piece of land. Thus in the
case of Berkenkotter vs. Cu Unjieng, supra, the "machinery, liquid containers, and
instruments or implements" are found in a building constructed on the land. A sawmill
would also be installed in a building on land more or less permanently, and the
sawing is conducted in the land or building.
But in the case at bar the equipments in question are destined only to repair or
service the transportation business,which is not carried on in a building or
permanently on a piece of land, as demanded by the law. Said equipments may not,
therefore, be deemed real property.
Resuming what we have set forth above, we hold that the equipments in question are
not absolutely essential to the petitioner's transportation business, and petitioner's
business is not carried on in a building, tenement or on a specified land, so said
equipment may not be considered real estate within the meaning of Article 415 (c) of
the Civil Code.
WHEREFORE, the decision subject of the petition for review is hereby set aside and
the equipment in question declared not subject to assessment as real estate for the
purposes of the real estate tax. Without costs.

So ordered.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-47943 May 31, 1982
MANILA ELECTRIC COMPANY, petitioner,
vs.
CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF
ASSESSMENT APPEALS OF BATANGAS and PROVINCIAL
ASSESSOR OF BATANGAS, respondents.

AQUINO, J.:
This case is about the imposition of the realty tax on two oil storage tanks installed in
1969 by Manila Electric Company on a lot in San Pascual, Batangas which it leased
in 1968 from Caltex (Phil.), Inc. The tanks are within the Caltex refinery compound.
They have a total capacity of 566,000 barrels. They are used for storing fuel oil for
Meralco's power plants.
According to Meralco, the storage tanks are made of steel plates welded and
assembled on the spot. Their bottoms rest on a foundation consisting of compacted
earth as the outermost layer, a sand pad as the intermediate layer and a two-inch
thick bituminous asphalt stratum as the top layer. The bottom of each tank is in
contact with the asphalt layer,
The steel sides of the tank are directly supported underneath by a circular wall made
of concrete, eighteen inches thick, to prevent the tank from sliding. Hence, according
to Meralco, the tank is not attached to its foundation. It is not anchored or welded to
the concrete circular wall. Its bottom plate is not attached to any part of the foundation
by bolts, screws or similar devices. The tank merely sits on its foundation. Each
empty tank can be floated by flooding its dike-inclosed location with water four feet
deep. (pp. 29-30, Rollo.)
On the other hand, according to the hearing commissioners of the Central Board of
Assessment Appeals, the area where the two tanks are located is enclosed with
earthen dikes with electric steel poles on top thereof and is divided into two parts as
the site of each tank. The foundation of the tanks is elevated from the remaining area.
On both sides of the earthen dikes are two separate concrete steps leading to the
foundation of each tank.

Tank No. 2 is supported by a concrete foundation with an asphalt lining about an inch
thick. Pipelines were installed on the sides of each tank and are connected to the
pipelines of the Manila Enterprises Industrial Corporation whose buildings and
pumping station are near Tank No. 2.
The Board concludes that while the tanks rest or sit on their foundation, the
foundation itself and the walls, dikes and steps, which are integral parts of the tanks,
are affixed to the land while the pipelines are attached to the tanks. (pp. 60-61, Rollo.)
In 1970, the municipal treasurer of Bauan, Batangas, on the basis of an assessment
made by the provincial assessor, required Meralco to pay realty taxes on the two
tanks. For the five-year period from 1970 to 1974, the tax and penalties amounted to
P431,703.96 (p. 27, Rollo). The Board required Meralco to pay the tax and penalties
as a condition for entertaining its appeal from the adverse decision of the Batangas
board of assessment appeals.
The Central Board of Assessment Appeals (composed of Acting Secretary of Finance
Pedro M. Almanzor as chairman and Secretary of Justice Vicente Abad Santos and
Secretary of Local Government and Community Development Jose Roo as
members) in its decision dated November 5, 1976 ruled that the tanks together with
the foundation, walls, dikes, steps, pipelines and other appurtenances constitute
taxable improvements.
Meralco received a copy of that decision on February 28, 1977. On the fifteenth day, it
filed a motion for reconsideration which the Board denied in its resolution of
November 25, 1977, a copy of which was received by Meralco on February 28, 1978.
On March 15, 1978, Meralco filed this special civil action of certiorari to annul the
Board's decision and resolution. It contends that the Board acted without jurisdiction
and committed a grave error of law in holding that its storage tanks are taxable real
property.
Meralco contends that the said oil storage tanks do not fall within any of the kinds of
real property enumerated in article 415 of the Civil Code and, therefore, they cannot
be categorized as realty by nature, by incorporation, by destination nor by analogy.
Stress is laid on the fact that the tanks are not attached to the land and that they were
placed on leased land, not on the land owned by Meralco.
This is one of those highly controversial, borderline or penumbral cases on the
classification of property where strong divergent opinions are inevitable. The issue
raised by Meralco has to be resolved in the light of the provisions of the Assessment
Law, Commonwealth Act No. 470, and the Real Property Tax Code, Presidential
Decree No. 464 which took effect on June 1, 1974.
Section 2 of the Assessment Law provides that the realty tax is due "on real property,
including land, buildings, machinery, and other improvements" not specifically
exempted in section 3 thereof. This provision is reproduced with some modification in
the Real Property Tax Code which provides:

Sec. 38. Incidence of Real Property Tax. They shall be levied,

assessed and collected in all provinces, cities and municipalities an
annual ad valorem tax on real property, such as land, buildings,
machinery and other improvements affixed or attached to real
property not hereinafter specifically exempted.
The Code contains the following definition in its section 3:
k) Improvements is a valuable addition made to property or an
amelioration in its condition, amounting to more than mere repairs
or replacement of waste, costing labor or capital and intended to
enhance its value, beauty or utility or to adapt it for new or further
purposes.
We hold that while the two storage tanks are not embedded in the land, they may,
nevertheless, be considered as improvements on the land, enhancing its utility and
rendering it useful to the oil industry. It is undeniable that the two tanks have been
installed with some degree of permanence as receptacles for the considerable
quantities of oil needed by Meralco for its operations.
Oil storage tanks were held to be taxable realty in Standard Oil Co. of New Jersey vs.
Atlantic City, 15 Atl. 2nd 271.
For purposes of taxation, the term "real property" may include things which should
generally be regarded as personal property(84 C.J.S. 171, Note 8). It is a familiar
phenomenon to see things classed as real property for purposes of taxation which on
general principle might be considered personal property (Standard Oil Co. of New
York vs. Jaramillo, 44 Phil. 630, 633).
The case of Board of Assessment Appeals vs. Manila Electric Company, 119 Phil.
328, wherein Meralco's steel towers were held not to be subject to realty tax, is not in
point because in that case the steel towers were regarded as poles and under its
franchise Meralco's poles are exempt from taxation. Moreover, the steel towers were
not attached to any land or building. They were removable from their metal frames.
Nor is there any parallelism between this case and Mindanao Bus Co. vs. City
Assessor, 116 Phil. 501, where the tools and equipment in the repair, carpentry and
blacksmith shops of a transportation company were held not subject to realty tax
because they were personal property.
WHEREFORE, the petition is dismissed. The Board's questioned decision and
resolution are affirmed. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

require the removal or transfer of the pipes by and at the concessionaire's expense
should they be affected by any road repair or improvement.

G.R. No. L-46245 May 31, 1982

Pursuant to the Assessment Law, Commonwealth Act No. 470, the provincial
assessor of Laguna treated the pipeline as real property and issued Tax Declarations
Nos. 6535-6537, San Pedro; 7473-7478, Cabuyao; 7967-7971, Sta. Rosa; 98829885, Bian and 15806-15810, Calamba, containing the assessed values of portions
of the pipeline.

MERALCO
SECURITIES
INDUSTRIAL
CORPORATION, petitioner,
vs.
CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF ASSESSMENT
APPEALS OF LAGUNA and PROVINCIAL ASSESSOR OF LAGUNA, respondents.

Meralco Securities appealed the assessments to the Board of Assessment Appeals of

Laguna composed of the register of deeds as chairman and the provincial auditor as
member. That board in its decision of June 18, 1975 upheld the assessments (pp. 4749, Rollo).

AQUINO, J.:

Meralco Securities brought the case to the Central Board of Assessment Appeals. As
already stated, that Board, composed of Acting Secretary of Finance Pedro M.
Almanzor as chairman and Secretary of Justice Vicente Abad Santos and Secretary
of Local Government and Community Development Jose Roo as members, ruled
that the pipeline is subject to realty tax (p. 40, Rollo).

SECOND DIVISION

In this special civil action of certiorari, Meralco Securities Industrial Corporation

assails the decision of the Central Board of Assessment Appeals (composed of the
Secretary of Finance as chairman and the Secretaries of Justice and Local
Government and Community Development as members) dated May 6, 1976, holding
that Meralco Securities' oil pipeline is subject to realty tax.
The record reveals that pursuant to a pipeline concession issued under the Petroleum
Act of 1949, Republic Act No. 387, Meralco Securities installed from Batangas to
Manila a pipeline system consisting of cylindrical steel pipes joined together and
buried not less than one meter below the surface along the shoulder of the public
highway. The portion passing through Laguna is about thirty kilometers long.
The pipes for white oil products measure fourteen inches in diameter by thirty-six feet
with a maximum capacity of 75,000 barrels daily. The pipes for fuel and black oil
measure sixteen inches by forty-eight feet with a maximum capacity of 100,000
barrels daily.
The pipes are embedded in the soil and are firmly and solidly welded together so as
to preclude breakage or damage thereto and prevent leakage or seepage of the oil.
The valves are welded to the pipes so as to make the pipeline system one single
piece of property from end to end.
In order to repair, replace, remove or transfer segments of the pipeline, the pipes
have to be cold-cut by means of a rotary hard-metal pipe-cutter after digging or
excavating them out of the ground where they are buried. In points where the pipeline
traversed rivers or creeks, the pipes were laid beneath the bed thereof. Hence, the
pipes are permanently attached to the land.
However, Meralco Securities notes that segments of the pipeline can be moved from
one place to another as shown in the permit issued by the Secretary of Public Works
and Communications which permit provides that the government reserves the right to

A copy of that decision was served on Meralco Securities' counsel on August 27,
1976. Section 36 of the Real Property Tax Code, Presidential Decree No. 464, which
took effect on June 1, 1974, provides that the Board's decision becomes final and
executory after the lapse of fifteen days from the date of receipt of a copy of the
decision by the appellant.
Under Rule III of the amended rules of procedure of the Central Board of Assessment
Appeals (70 O.G. 10085), a party may ask for the reconsideration of the Board's
decision within fifteen days after receipt. On September 7, 1976 (the eleventh day),
Meralco Securities filed its motion for reconsideration.
Secretary of Finance Cesar Virata and Secretary Roo (Secretary Abad Santos
abstained) denied the motion in a resolution dated December 2, 1976, a copy of
which was received by appellant's counsel on May 24, 1977 (p. 4, Rollo). On June 6,
1977, Meralco Securities filed the instant petition for certiorari.
The Solicitor General contends that certiorari is not proper in this case because the
Board acted within its jurisdiction and did not gravely abuse its discretion and Meralco
Securities was not denied due process of law.
Meralco Securities explains that because the Court of Tax Appeals has no jurisdiction
to review the decision of the Central Board of Assessment Appeals and because no
judicial review of the Board's decision is provided for in the Real Property Tax Code,
Meralco Securities' recourse is to file a petition for certiorari.
We hold that certiorari was properly availed of in this case. It is a writ issued by a
superior court to an inferior court, board or officer exercising judicial or quasi-judicial
functions whereby the record of a particular case is ordered to be elevated for review
and correction in matters of law (14 C.J.S. 121-122; 14 Am Jur. 2nd 777).

The rule is that as to administrative agencies exercising quasi-judicial power there is

an underlying power in the courts to scrutinize the acts of such agencies on questions
of law and jurisdiction even though no right of review is given by the statute (73 C.J.S.
506, note 56).

Pipeline means a line of pipe connected to pumps, valves and control devices for
conveying liquids, gases or finely divided solids. It is a line of pipe running upon or in
the earth, carrying with it the right to the use of the soil in which it is placed (Note
21[10],54 C.J.S. 561).

"The purpose of judicial review is to keep the administrative agency within its
jurisdiction and protect substantial rights of parties affected by its decisions" (73
C.J.S. 507, See. 165). The review is a part of the system of checks and balances
which is a limitation on the separation of powers and which forestalls arbitrary and
unjust adjudications.

Article 415[l] and [3] provides that real property may consist of constructions of all
kinds adhered to the soil and everything attached to an immovable in a fixed manner,
in such a way that it cannot be separated therefrom without breaking the material or
deterioration of the object.

Judicial review of the decision of an official or administrative agency exercising quasijudicial functions is proper in cases of lack of jurisdiction, error of law, grave abuse of
discretion, fraud or collusion or in case the administrative decision is corrupt, arbitrary
or capricious (Mafinco Trading Corporation vs. Ople, L-37790, March 25, 1976, 70
SCRA 139, 158; San Miguel Corporation vs. Secretary of Labor, L-39195, May 16,
1975, 64 SCRA 56, 60, Mun. Council of Lemery vs. Prov. Board of Batangas, 56 Phil.
260, 268).
The Central Board of Assessment Appeals, in confirming the ruling of the provincial
assessor and the provincial board of assessment appeals that Meralco Securities'
pipeline is subject to realty tax, reasoned out that the pipes are machinery or
improvements, as contemplated in the Assessment Law and the Real Property Tax
Code; that they do not fall within the category of property exempt from realty tax
under those laws; that articles 415 and 416 of the Civil Code, defining real and
personal property, have no application to this case; that even under article 415, the
steel pipes can be regarded as realty because they are constructions adhered to the
soil and things attached to the land in a fixed manner and that Meralco Securities is
not exempt from realty tax under the Petroleum Law (pp. 36-40).
Meralco Securities insists that its pipeline is not subject to realty tax because it is not
real property within the meaning of article 415. This contention is not sustainable
under the provisions of the Assessment Law, the Real Property Tax Code and the
Civil Code.
Section 2 of the Assessment Law provides that the realty tax is due "on real property,
including land, buildings, machinery, and other improvements" not specifically
exempted in section 3 thereof. This provision is reproduced with some modification in
the Real Property Tax Code which provides:
SEC. 38. Incidence of Real Property Tax. There shall be levied,
assessed and collected in all provinces, cities and municipalities an
annual ad valorem tax on real property, such as land, buildings,
machinery and other improvements affixed or attached to real
property not hereinafter specifically exempted. *
It is incontestable that the pipeline of Meralco Securities does not fall within any of the
classes of exempt real property enumerated in section 3 of the Assessment Law and
section 40 of the Real Property Tax Code.

The pipeline system in question is indubitably a construction adhering to the soil (Exh.
B, p. 39, Rollo). It is attached to the land in such a way that it cannot be separated
therefrom without dismantling the steel pipes which were welded to form the pipeline.
Insofar as the pipeline uses valves, pumps and control devices to maintain the flow of
oil, it is in a sense machinery within the meaning of the Real Property Tax Code.
It should be borne in mind that what are being characterized as real property are not
the steel pipes but the pipeline system as a whole. Meralco Securities has apparently
two pipeline systems.
A pipeline for conveying petroleum has been regarded as real property for tax
purposes (Miller County Highway, etc., Dist. vs. Standard Pipe Line Co., 19 Fed. 2nd
3; Board of Directors of Red River Levee Dist. No. 1 of Lafayette County, Ark vs. R. F.
C., 170 Fed. 2nd 430; 50 C. J. 750, note 86).
The other contention of Meralco Securities is that the Petroleum Law exempts it from
the payment of realty taxes. The alleged exemption is predicated on the following
provisions of that law which exempt Meralco Securities from local taxes and make it
liable for taxes of general application:
ART. 102. Work obligations, taxes, royalties not to be changed.
Work obligations, special taxes and royalties which are fixed by the
provisions of this Act or by the concession for any of the kinds of
concessions to which this Act relates, are considered as inherent
on such concessions after they are granted, and shall not be
increased or decreased during the life of the concession to which
they apply; nor shall any other special taxes or levies be applied to
such concessions, nor shall 0concessionaires under this Act be
subject to any provincial, municipal or other local taxes or
levies; nor shall any sales tax be charged on any petroleum
produced from the concession or portion thereof, manufactured by
the concessionaire and used in the working of his concession. All
such concessionaires, however, shall be subject to such taxes as
are of general application in addition to taxes and other levies
specifically provided in this Act.

Meralco Securities argues that the realty tax is a local tax or levy and not a tax of
general application. This argument is untenable because the realty tax has always
been imposed by the lawmaking body and later by the President of the Philippines in
the exercise of his lawmaking powers, as shown in section 342 et seq. of the Revised
Administrative Code, Act No. 3995, Commonwealth Act No. 470 and Presidential
Decree No. 464.
The realty tax is enforced throughout the Philippines and not merely in a particular
municipality or city but the proceeds of the tax accrue to the province, city,
municipality and barrio where the realty taxed is situated (Sec. 86, P.D. No. 464). In
contrast, a local tax is imposed by the municipal or city council by virtue of the Local
Tax Code, Presidential Decree No. 231, which took effect on July 1, 1973 (69 O.G.
6197).
We hold that the Central Board of Assessment Appeals did not act with grave abuse
of discretion, did not commit any error of law and acted within its jurisdiction in
sustaining the holding of the provincial assessor and the local board of assessment
appeals that Meralco Securities' pipeline system in Laguna is subject to realty tax.
WHEREFORE, the questioned decision and resolution are affirmed. The petition is
dismissed. No costs.
SO ORDERED.

FIRST DIVISION
[G.R. No. 149420. October 8, 2003]
SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL.,
INC.,respondent.
DECISION
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation
engaged in the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing business
under the name and style Sans Enterprises, is a building contractor. On February 22,
1990, petitioner ordered scaffolding equipments from respondent worth P540,425.80.
[1] He paid a downpayment in the amount of P150,000.00. The balance was made
payable in ten monthly installments.

AndtheASSIGNORdoesherebygranttheASSIGNEE,itssuccessorsandassigns,thefull
powerandauthoritytodemand,collect,receive,compound,compromiseandgiveacquittance
forthesameoranypartthereof,andinthenameandsteadofthesaidASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its
successorsandassignsthatsaiddebtisjustlyowingandduetotheASSIGNORforJomero
RealtyCorporationandthatsaidASSIGNORhasnotdoneandwillnotcauseanythingtobe
donetodiminishordischargesaiddebt,ordelayortopreventtheASSIGNEE,itssuccessors
orassigns,fromcollectingthesame;
AndtheASSIGNORfurtheragreesandstipulatesasaforesaidthatthesaidASSIGNOR,his
heirs,executors,administrators,orassigns,shallandwillattimeshereafter,attherequestof
saidASSIGNEE,itssuccessorsorassigns,athiscostandexpense,executeanddoallsuch
furtheractsanddeedsasshallbereasonablynecessarytoeffectuallyenablesaidASSIGNEE
torecoverwhatevercollectiblessaidASSIGNORhasinaccordancewiththetrueintentand
meaningofthesepresents.xxx[5](Italicssupplied)

Respondent delivered the scaffoldings to petitioner.[2] Petitioner was able to pay

the first two monthly installments. His business, however, encountered financial
difficulties and he was unable to settle his obligation to respondent despite oral and
written demands made against him.[3]

However, when respondent tried to collect the said credit from Jomero Realty
Corporation, the latter refused to honor the Deed of Assignment because it claimed
that petitioner was also indebted to it.[6] On November 26, 1990, respondent sent a
letter[7] to petitioner demanding payment of his obligation, but petitioner refused to pay
claiming that his obligation had been extinguished when they executed the Deed of
Assignment.

On October 11, 1990, petitioner and respondent executed a Deed of

Assignment,[4] whereby petitioner assigned to respondent his receivables in the
amount of P335,462.14 from Jomero Realty Corporation. Pertinent portions of the
Deed provide:

Consequently, on January 10, 1991, respondent filed an action for recovery of a

sum of money against the petitioner before the Regional Trial Court of Makati, Branch
147, which was docketed as Civil Case No. 91-074.[8]

WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house
locatedatGreenmeadowAvenue,QuezonCityownedbyJomeroRealtyCorporation;
WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR
purchasedonaccountscaffoldingequipmentsfromtheASSIGNEEpayabletothelatter;
WHEREAS,uptothepresenttheASSIGNORhasanobligationtotheASSIGNEEforthe
purchaseoftheaforementionedscaffoldingsnowintheamountofThreeHundredThirtyFive
ThousandFourHundredSixtyTwoand14/100Pesos(P335,462.14);
NOW, THEREFORE, for andin considerationof thesum ofThree HundredThirty Five
ThousandFourHundredSixtyTwoand14/100Pesos(P335,462.14),PhilippineCurrency
which represents part of the ASSIGNORs collectible from Jomero Realty Corp., said
ASSIGNOR hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles
amountingtothesaidamountofP335,462.14;

During the trial, petitioner argued that his obligation was extinguished with the
execution of the Deed of Assignment of credit. Respondent, for its part, presented the
testimony of its employee,Almeda Baaga, who testified that Jomero Realty refused to
honor the assignment of credit because it claimed that petitioner had an outstanding
indebtedness to it.
On August 25, 1994, the trial court rendered a decision [9] dismissing the
complaint on the ground that the assignment of credit extinguished the obligation. The
decretal portion thereof provides:
WHEREFORE,inviewoftheforegoing,theCourtherebyrendersjudgmentinfavorofthe
defendantandagainsttheplaintiff,dismissingthecomplaintandorderingtheplaintifftopay
thedefendantattorneysfeesintheamountofP25,000.00.
Respondent appealed the decision to the Court of Appeals. On April 19, 2001,
the appellate court rendered a decision,[10] the dispositive portion of which reads:

WHEREFORE,findingmeritinthisappeal,thecourtREVERSEStheappealedDecisionand
enters judgment ordering defendantappellee Sonny Lo to pay the plaintiffappellant KJS
ECOFORMWORK SYSTEM PHILIPPINES, INC. Three Hundred Thirty Five Thousand
Four Hundred SixtyTwo and 14/100 (P335,462.14) with legal interest of 6% per annum
fromJanuary10,1991(filingoftheComplaint)untilfullypaidandattorneysfeesequivalent
to10%oftheamountdueandcostsofthesuit.
SOORDERED.[11]
In finding that the Deed of Assignment did not extinguish the obligation of the
petitioner to the respondent, the Court of Appeals held that (1) petitioner failed to
comply with his warranty under the Deed; (2) the object of the Deed did not exist at
the time of the transaction, rendering it void pursuant to Article 1409 of the Civil Code;
and (3) petitioner violated the terms of the Deed of Assignment when he failed to
execute and do all acts and deeds as shall be necessary to effectually enable the
respondent to recover the collectibles.[12]
Petitioner filed a motion for reconsideration of the said decision, which was
denied by the Court of Appeals.[13]
In this petition for review, petitioner assigns the following errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN
DECLARINGTHEDEEDOFASSIGNMENT(EXH.4)ASNULLANDVOIDFOR
LACKOFOBJECTONTHEBASISOFAMEREHEARSAYCLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
THE DEED OF ASSIGNMENT (EXH. 4) DID NOT EXTINGUISH
PETITIONERS OBLIGATION ON THE WRONG NOTION THAT
PETITIONER FAILED TO COMPLY WITH HIS WARRANTY
THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE TRIAL COURT AND IN ORDERING PAYMENT OF
INTERESTS AND ATTORNEYS FEES.[14]
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a credit,
known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or
donation, and without the consent of the debtor, transfers his credit and accessory

rights to another, known as the assignee, who acquires the power to enforce it to the
same extent as the assignor could enforce it against the debtor.[15]
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor
offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt.[16] In order that there be a valid dation in payment, the following are
the requisites: (1) There must be the performance of the prestation in lieu of payment
(animo solvendi) which may consist in the delivery of a corporeal thing or a real right
or a credit against the third person; (2) There must be some difference between
the prestation due and that which is given in substitution (aliud pro alio); (3) There
must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different from
that due.[17] The undertaking really partakes in one sense of the nature of sale, that is,
the creditor is really buying the thing or property of the debtor, payment for which is to
be charged against the debtors debt. As such, the vendor in good faith shall be
responsible, for the existence and legality of the credit at the time of the sale but not
for the solvency of the debtor, in specified circumstances.[18]
Hence, it may well be that the assignment of credit, which is in the nature of a
sale of personal property,[19] produced the effects of a dation in payment which may
extinguish the obligation.[20]However, as in any other contract of sale, the vendor or
assignor is bound by certain warranties.More specifically, the first paragraph of Article
1628 of the Civil Code provides:
Thevendoringoodfaithshallberesponsiblefortheexistenceandlegalityofthecreditatthe
timeofthesale,unlessitshouldhavebeensoldasdoubtful;butnotforthesolvencyofthe
debtor,unlessithasbeensoexpresslystipulatedorunlesstheinsolvencywaspriortothesale
andofcommonknowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant
the existence and legality of the credit at the time of the sale or
assignment. When Jomero claimed that it was no longer indebted to petitioner since
the latter also had an unpaid obligation to it, it essentially meant that its obligation to
petitioner has been extinguished by compensation. [21] In other words, respondent
alleged the non-existence of the credit and asserted its claim to petitioners warranty
under the assignment. Therefore, it behooved on petitioner to make good its warranty
and paid the obligation.
Furthermore, we find that petitioner breached his obligation under the Deed of
Assignment, to wit:
AndtheASSIGNORfurtheragreesandstipulatesasaforesaidthatthesaidASSIGNOR,his
heirs,executors,administrators,orassigns,shallandwillattimeshereafter,attherequestof
saidASSIGNEE,itssuccessorsorassigns,athiscostandexpense,executeanddoallsuch
furtheractsanddeedsasshallbereasonablynecessarytoeffectuallyenablesaidASSIGNEE
torecoverwhatevercollectiblessaidASSIGNORhasinaccordancewiththetrueintentand
meaningofthesepresents.[22](underscoringours)

Indeed, by warranting the existence of the credit, petitioner should be deemed to

have ensured the performance thereof in case the same is later found to be
inexistent. He should be held liable to pay to respondent the amount of his
indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay
respondent the sum of P335,462.14 with legal interest thereon. However, we find that
the award by the Court of Appeals of attorneys fees is without factual basis. No
evidence or testimony was presented to substantiate this claim. Attorneys fees, being
in the nature of actual damages, must be duly substantiated by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals
dated April 19, 2001 in CA-G.R. CV No. 47713, ordering petitioner to pay respondent
the sum of P335,462.14 with legal interest of 6% per annum from January 10,
1991 until fully paid is AFFIRMED with MODIFICATION. Upon finality of this Decision,
the rate of legal interest shall be 12% per annum, inasmuch as the obligation shall
thereafter become equivalent to a forbearance of credit.[23] The award of attorneys
fees is DELETED for lack of evidentiary basis.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

On the other hand, ARB is the owner and developer of Soldiers Hills Subdivision in
Bacoor, Cavite, which is composed of four phases. Phase I of the subdivision was
already accessible from the Marcos Alvarez Avenue. To provide the same
accessibility to the residents of Phase II of the subdivision, ARB constructed the
disputed road to link the two phases.
As found by the appellate court, petitioners' properties sit right in the middle of several
estates: Phase I of Soldiers Hills Subdivision in the north, a creek in the east and
Green Valley Subdivision the farther east, a road within Soldiers Hills Subdivision IV
which leads to the Marcos Alvarez Avenue in the west and Phase III of Soldiers Hills
Subdivision in the south.
Initially, petitioners offered to pay ARB P50,000 as indemnity for the use of the road.
Adamant, ARB refused the offer and fenced the perimeter of the road fronting the
properties of petitioners. By doing so, ARB effectively cut off petitioners' access to
and from the public highway.
After failing to settle the matter amicably, petitioners jointly filed a complaint 4 in the
RTC of Imus, Cavite to enjoin ARB from depriving them of the use of the disputed
subdivision road and to seek a compulsory right of way after payment of proper
indemnity. On November 24, 1995, the trial court rendered its decision in favor of
petitioners:
The reasons why this case is not one for a right of way as an easement are not
difficult to discern.

FIRST DIVISION
G.R. No. 157285

February 16, 2007

WOODRIDGE SCHOOL, INC., and MIGUELA JIMENEZ-JAVIER, Petitioners,

vs.
ARB CONSTRUCTION CO., INC., Respondent.

The questioned road is part and parcel of the road network of Soldiers Hills IV, Phase
II. This road was constructed pursuant to the approved subdivision plan of Soldiers
Hills IV, Phase II. As such, the road has already been withdrawn from the commerce
of men as the ownership of which was automatically vested in the government without
need of any compensation, although it is still registered in the name of the [ARB], the
moment the subdivision plan was approved. While it is not yet donated to the
government [,] [it] is of no moment for donating this road to the government is a mere
formality.

DECISION
CORONA, J.:
Petitioners Woodridge School, Inc. (Woodridge) and Miguela Jimenez-Javier come to
us assailing the decision1dated September 30, 2002 and resolution 2 dated February
14, 2003 of the Court of Appeals in CA-G.R. CV No. 515333 which, in turn, modified
the ruling of the Regional Trial Court (RTC) of Imus, Cavite awarding P500,000 to
respondent ARB Construction Co., Inc. (ARB) as reasonable indemnity for the use of
ARB's road lot.3
Woodridge is the usufructuary of a parcel of land covered by Transfer Certificate of
Title (TCT) No. T-363902 in the name of spouses Ernesto T. Matugas and Filomena
U. Matugas. Its co-petitioner, Miguela Jimenez-Javier, is the registered owner of the
adjacent lot under TCT No. T-330688.

Differently stated, the government automatically becomes the owner of the

subdivisions' roads the moment the subdivision plan is approved. From that time on,
the roads are withdrawn from the commerce of men even [if] the titles are still
registered in the name of the subdivision owners and the roads are not yet donated to
the government. Thus, the subdivision owner can no longer sell or alienate the roads
for they are already owned by the government; thus, even if [petitioners] want to buy
this road, and the [ARB] wants to sell the same, this transaction cannot materialize for
the above-stated reasons. Accordingly, [ARB] cannot prevent/prohibit plaintiffs from
using the road as the same belongs to the government.

xxx xxx xxx

WHEREFORE, [ARB] is ordered to cease and desist from preventing [petitioners]
in using the subject road or any other road in the subdivision.

Unsatisfied with the ruling of the appellate court, petitioners filed this petition for
review on certiorari insisting that ARB is not entitled to be paid any indemnity.

xxx xxx xxx

SO ORDERED. 5 (citations omitted)
6

ARB elevated the case to the Court of Appeals. Finding merit in the appeal, the
appellate court reversed the decision of the lower court. It explained that the 1991
case of White Plains Subdivision[7] did not apply to the present case which was
decided under a different factual milieu:
In the assailed Decision, the Court below relied on the ruling of the Supreme Court
in White Plains Association, Inc. vs. Legaspi (193 SCRA 765). The ruling is not
applicable. In the White Plains case, the disputed area was specifically set aside by
the Quezon City Government, with the concurrence of the owner and developer of the
White Plains Subdivision in Quezon City, for the purpose of constructing a major
thoroughfare open to the general public. The case was filed by the association of
homeowners of White Plains in Quezon City when the owner-developer sought to
convert the disputed lot to residential lots. The Supreme Court initially held that the
disputed lot was not longer within the commerce of men, it having been segregated
for a particular purpose, that of being used as "part of a mandatory open space
reserved for public use to be improved into the widened Katipunan Road". It was
within this context that the Supreme Court held that "ownership was automatically
vested in the Quezon City government and/or the Republic of the Philippines, without
need of paying any compensation".8
The appellate court went on to rule that a compulsory right of way exists in favor of
petitioners as "[t]here is no other existing adequate outlet to and from [petitioners']
properties to the Marcos Alvarez Avenue other than the subject existing road lot
designated as Lot No. 5827-F-1 belonging to [ARB]." 9 In addition, it
awarded P500,000 to ARB as reasonable indemnity for the use of the road lot.
Acting on petitioners' motion for reconsideration, the appellate court justified the
monetary award in this manner:
In [o]ur Decision, [w]e awarded the amount of P500,000.00 merely as reasonable
indemnity for the use of the road lot, not the alienation thereof. The amount was
based on equitable considerations foremost of which is that, while there is no
alienation to speak of, the easement is of long-standing, that is, until a shorter and
adequate outlet is established. Moreover, [ARB] should be compensated for the wear
and tear that [petitioners'] use of the road would contribute to; it is [ARB] which is
solely to be credited for the completion of the road lot. Going by the conservative
valuation of the Municipality of Bacoor, Cavite presented by [petitioners], the 4,760
sq. m. road lot would costP1,904,000 but as stated what is compensated is the use of
the road lot not its alienation.
[Petitioners'] original offer cannot be considered a reasonable indemnity, there being
a knotty legal question involved and it is not [ARB's] fault that the parties had to resort
to the courts for a resolution.10

Petitioners argue that the contested road lot is a property of public dominion pursuant
to Article 42011 of the Civil Code. Specifically, petitioners point out that the disputed
road lot falls under the category "others of similar character" which is the last clause
of Article 420 (1).12 Hence, it is a property of public dominion which can be used by
the general public without need for compensation. Consequently, it is wrong for ARB
to exclude petitioners from using the road lot or to make them pay for the use of the
same.
We disagree.
In the case of Abellana, Sr. v. Court of Appeals,13 the Court held that "the road lots in
a private subdivision are private property, hence, the local government should first
acquire them by donation, purchase, or expropriation, if they are to be utilized as a
public road."14 Otherwise, they remain to be private properties of the owner-developer.
Contrary to the position of petitioners, the use of the subdivision roads by the general
public does not strip it of its private character. The road is not converted into public
property by mere tolerance of the subdivision owner of the public's passage through
it. To repeat, "the local government should first acquire them by donation, purchase,
or expropriation, if they are to be utilized as a public road."15
Likewise, we hold the trial court in error when it ruled that the subject road is public
property pursuant to Section 2 of Presidential Decree No. 1216. 16 The pertinent
portion of the provision reads:
Section 2. xxx xxx xxx
Upon their completion as certified to by the Authority, the roads, alleys, sidewalks and
playgrounds shall be donated by the owner or developer to the city or municipality
and it shall be mandatory for the local governments to accept them provided,
however, that the parks and playgrounds may be donated to the Homeowners
Association of the project with the consent of the city or municipality concerned
The law is clear. The transfer of ownership from the subdivision owner-developer to
the local government is not automatic but requires a positive act from the ownerdeveloper before the city or municipality can acquire dominion over the subdivision
roads. Therefore, until and unless the roads are donated,17 ownership remains with
the owner-developer.18
Since no donation has been made in favor of any local government and the title to the
road lot is still registered in the name of ARB, the disputed property remains private.
This is not to say that ARB may readily exclude petitioners from passing through the
property. As correctly pointed out by the Court of Appeals, the circumstances clearly
make out a case of legal easement of right of way. It is an easement which has been

imposed by law and not by the parties and it has "for (its) object either public use or
the interest of private persons."19

countenance. The Civil Code has clearly laid down the parameters and we cannot
depart from them. Verba legis non est recedendum.

To be entitled to a legal easement of right of way, the following requisites must

concur: (1) the dominant estate is surrounded by other immovables and has no
adequate outlet to a public highway; (2) payment of proper indemnity; (3) the isolation
was not due to acts of the proprietor of the dominant estate and (4) the right of way
claimed is at the point least prejudicial to the servient estate.20

Having settled the legal issues, we order the remand of this case to the trial court for
reception of evidence and determination of the limits of the property to be covered by
the easement, the proper indemnity to be paid and the respective contributions of
petitioners.

The appellate and trial courts found that the properties of petitioners are enclosed by
other estates without any adequate access to a public highway except the subject
road lot which leads to Marcos Alvarez Avenue. 21 Although it was shown that the
shortest distance from the properties to the highway is toward the east across a
creek, this alternative route does not provide an adequate outlet for the students of
the proposed school. This route becomes marshy as the creek overflows during the
rainy season and will endanger the students attending the school.
All told, the only requisite left unsatisfied is the payment of proper indemnity.
Petitioners assert that their initial offer of P50,000 should be sufficient compensation
for the right of way. Further, they should not be held accountable for the increase in
the value of the property since the delay was attributable to the stubborn refusal of
ARB to accept their offer.22
Again, we are not persuaded.
In the case of a legal easement, Article 649 of the Civil Code prescribes the
parameters by which the proper indemnity may be fixed. Since the intention of
petitioners is to establish a permanent passage, the second paragraph of Article 649
of the Civil Code particularly applies:
Art 649. xxx xxx xxx
Should this easement be established in such a manner that its use may be
continuous for all the needs of the dominant estate, establishing a permanent
passage, the indemnity shall consist of the value of the land occupied and the
amount of the damage caused to the servient estate. xxx. (Emphasis supplied)
On that basis, we further hold that the appellate court erred in arbitrarily awarding
indemnity for the use of the road lot.
The Civil Code categorically provides for the measure by which the proper indemnity
may be computed: value of the land occupied plus the amount of the damage caused
to the servient estate. Settled is the rule in statutory construction that "when the law is
clear, the function of the courts is simple application." 23 Thus, to award the indemnity
using factors different from that given by the law is a complete disregard of these
clear statutory provisions and is evidently arbitrary. This the Court cannot

For the guidance of the trial court, the fact that the disputed road lot is used by the
general public may be taken in consideration to mitigate the amount of damage that
the servient estate is entitled to, in the sense that the wear and tear of the subject
road is not entirely attributable to petitioners.
WHEREFORE, this petition is partially GRANTED. The September 30, 2002 Decision
and February 14, 2003 resolution of the Court of Appeals in CA-G.R. CV No. 515333
are ANNULLED and SET ASIDE in so far as petitioners are ordered to pay an
indemnity of P500,000. The case is hereby remanded to the trial court for reception of
evidence and determination of the limits of the property to be covered by the
easement, the proper indemnity to be paid and the respective contributions of
petitioners.
SO ORDERED.

EN BANC
G.R. No. L-13334

March 18, 1919

LEONCIO ZARATE, applicant-appellant,

vs.
THE DIRECTOR OF LANDS, objector-appellee.
Aurelio Cecilio for appellant.
Office of the Solicitor-General Paredes for appellee.
MALCOLM, J.:
In a decision of this Court in the case of Zarate vs. Director of Lands, now appearing
in volume 34 of the Philippine Reports, at page 416, the dispositive part reads:
The judgment of the Court of Land Registration is hereby modified and it is
declared that the applicant has the right to register title to all of the lands
described in the application, with the exception of that portion claimed as a
homestead by Apolonio Gamido, which homestead shall be excluded from
registration by the applicant provided the Court of Land Registration shall
find that said Apolonio Gamido has obtained a patent for said land; but if the
Court of Land Registration finds that said Gamido has not yet obtained a
patent therefor, then the court shall register title in favor of the applicant to all
lands describe in the application.
On the return of the record to the Court of First Instance of Nueva Ecija, which court
after the dissolution of the Court of Land Registration had jurisdiction, an order was
issued by the judge, finding that a homestead patent had been issued to Apolonio
Gamido and consequently directing the exclusion of this portion of the land described
in the main decision in Zarate vs. Director of Lands [supra]. The applicant appeals
from this order, although his contention is not well grounded, resulting principally
through an erroneous conception of the original decision of this court as written in
English. In other words, Gamido having compiled with the express mandate of the
appellate court, his homestead should remain his property. As was said by the United
States Supreme Court in the case of St. Louis Smelting and Refining Co. vs. Kemp
([1881]), 104 U.S., 636), "The patent of the United States is the conveyance by which
the nation passes the title to portions of the public domain."
We are not insensible to the fact that the decision in Zarate vs. Director of Lands
[supra] announced the doctrine that "Under Act No. 926, a patent issued under the
homestead Law has all the force and effect of a Torrens title acquired under Act No.
496; and that being the case . . . we must respect the title so secured, provided it be a
fact that the patent has been secured in any of said homestead proceedings," and
that this doctrine has been modified (or reversed) by the later decisions of this court.
(See for instance De los Reyes vs. Razon [1918], 38 Phil., 480.) Recognition of the
expression 'Law of the Case" saves the situation.

A well-known legal principle is that when an appellate court has once declared the law
in a case, such declaration continues to be the law of that cae even on the
subsequent appeal. The rule made by an appellate court, while it may be reversed in
other cases, cannot be departed from in subsequent proceedings in the same case.
The "Law of the Case," as applied to a former decision of an appellate court, merely
expresses the practice of the courts in refusing to reopen what has been decided.
Such a rule is "necessary to en bale an appellate court to perform its duties
satisfactorily and efficiently, which would be impossible if a question, once considered
and decided by it, were to be litigated anew in the same case upon any and every
subsequent appeal." Again, the rule is necessary as a matter of policy in order to end
litigation. "There would be no end to a suit if every obstinate litigant could, by
repeated appeals, compel a court to listen to criticism on their opinions, or speculate
of chances from changes in its members." (See Great Western Tel. Co. vs. Burnham
[1895], 162 U.S., 339, 343; Roberts vs. cooper [1857], 20 How., 467, 481;
Messinger vs. Anderson [1912], 225 U.S., 436.)
The phrase "Law of the Case" is described in a decision coming from the Supreme
Court of Missouri in the following graphical language:
The general rule, nakedly and badly but, is that legal conclusions announced
on a first appeal, whether on the general law or the law as applied to the
concrete facts, not only prescribed the duty and limit the power of the trial
court to strict obedience and conformity thereto, but they become and
remain the law of the case in all after steps below or above on subsequent
appeal. The rule is grounded on convenience, experience, and reason.
Without the rule there would be no end to criticism, reagitation,
reexamination, and reformulation. In Short, there would be endless litigant
were allowed to speculate on changes in the personnel of a court, or on the
chance of our rewriting proposition once gravely ruled on solemn argument
and handed down as the law of a given case. An itch to reopen questions
foreclosed on a first appeal, would result in the foolishness of the inquisitive
youth who pulled up his corn to see how it grew. Courts are allowed, if they
so choose, to act like ordinary sensible persons. The Administration of
justice is a practical affair. The rule is a practical and a good one of frequent
and beneficial use. (Mangold vs. Bacon [1911], 237 Mo., 496, 512.)
Judgment is affirmed with costs against appellant. So ordered.
Arellano, C.J., Johnson, Carson, Street, Avancea and Moir, JJ., concur.
Separate Opinions
TORRES, J., concurring:
It has not been proven by the petitioner that the land occupied by Apolonio Gamido
was his own property, and in view of the fact that the said land is not public land, it
can not be the object of a homestead application, and for this reason it follows that
the judgment appealed from should be affirmed with costs.

Republic of the Philippines

Petitioners, LEONARDO-DE CASTRO, and

BRION, JJ.

Supreme Court
- versus Manila

EN BANC
MAYOR JOSE S. YAP, LIBERTAD
THE SECRETARY OF THE G.R. No. 167707

TALAPIAN, MILA Y. SUMNDAD, and

DEPARTMENT OF ENVIRONMENT

ANICETO YAP, in their behalf and Promulgated:

AND NATURAL RESOURCES, THE

in behalf of all those similarly situated,

REGIONAL EXECUTIVE Present:

Respondents. October 8, 2008

DIRECTOR, DENR-REGION VI,

REGIONAL TECHNICAL PUNO, C.J.,

x--------------------------------------------------x

DIRECTOR FOR LANDS, QUISUMBING,

LANDS MANAGEMENT BUREAU, YNARES-SANTIAGO,

DR. ORLANDO SACAY and G.R. No. 173775

REGION VI PROVINCIAL CARPIO,

WILFREDO GELITO, joined by

ENVIRONMENT AND NATURAL AUSTRIA-MARTINEZ,

THE LANDOWNERS OF

RESOURCES OFFICER OF KALIBO, CORONA,*

BORACAY SIMILARLY

AKLAN, REGISTER OF DEEDS, CARPIO MORALES,

SITUATED NAMED IN A LIST,

DIRECTOR OF LAND AZCUNA,

ANNEX A OF THIS PETITION,

REGISTRATION AUTHORITY, TINGA,

Petitioners,

DEPARTMENT OF TOURISM CHICO-NAZARIO,

SECRETARY, DIRECTOR OF VELASCO, JR.,
PHILIPPINE TOURISM NACHURA,**
AUTHORITY, REYES,

- versus -

declaratory relief filed by respondents-claimants Mayor Jose Yap, et al. and ordered
the survey of Boracay for titling purposes. The second is G.R. No. 173775, a petition
for prohibition, mandamus, and nullification of Proclamation No. 1064[3] issued by
President Gloria Macapagal-Arroyo classifying Boracay into reserved forest and
agricultural land.

THE SECRETARY OF THE

DEPARTMENT OF ENVIRONMENT

The Antecedents

AND NATURAL RESOURCES, THE

G.R. No. 167707

REGIONAL TECHNICAL

Boracay Island in the Municipality of Malay, Aklan, with its powdery white
sand beaches and warm crystalline waters, is reputedly a premier Philippine tourist
destination.The island is also home to 12,003 inhabitants [4] who live in the boneshaped islands threebarangays.[5]

DIRECTOR FOR LANDS, LANDS

MANAGEMENT BUREAU,

On April 14, 1976, the Department of Environment and Natural

Resources (DENR) approved the National Reservation Survey of Boracay
Island,[6] which identified several lots as being occupied or claimed by named
persons.[7]

REGION VI, PROVINCIAL

ENVIRONMENT AND NATURAL
RESOURCES OFFICER, KALIBO,
AKLAN,
Respondents.

x--------------------------------------------------x

DECISION

REYES, R.T., J.:

AT stake in these consolidated cases is the right of the present occupants

of BoracayIsland to secure titles over their occupied lands.
There are two consolidated petitions. The first is G.R. No. 167707, a petition
for review on certiorari of the Decision[1] of the Court of Appeals (CA) affirming
that[2] of the Regional Trial Court (RTC) in Kalibo, Aklan, which granted the petition for

On November 10, 1978, then President Ferdinand Marcos issued

Proclamation No.1801[8] declaring Boracay Island, among other islands, caves and
peninsulas in thePhilippines, as tourist zones and marine reserves under the
administration of the Philippine Tourism Authority (PTA). President Marcos later
approved the issuance of PTA Circular 3-82[9] dated September 3, 1982, to implement
Proclamation No. 1801.
Claiming that Proclamation No. 1801 and PTA Circular No 3-82 precluded
them from filing an application for judicial confirmation of imperfect title or survey of
land
for
titling
purposes,
respondents-claimants
Mayor Jose S. Yap, Jr., Libertad Talapian, Mila Y. Sumndad, and Aniceto Yap filed a
petition for declaratory relief with the RTC in Kalibo, Aklan.
In their petition, respondents-claimants alleged that Proclamation No. 1801
and PTACircular No. 3-82 raised doubts on their right to secure titles over their
occupied lands. They declared that they themselves, or through their predecessorsin-interest, had been in open, continuous, exclusive, and notorious possession and
occupation in Boracay since June 12, 1945, or earlier since time immemorial. They
declared their lands for tax purposes and paid realty taxes on them.[10]
Respondents-claimants posited that Proclamation No. 1801 and its
implementing Circular did not place Boracay beyond the commerce of man. Since
the Island was classified as a tourist zone, it was susceptible of private
ownership. Under Section 48(b) of Commonwealth Act (CA) No. 141, otherwise
known as the Public Land Act, they had the right to have the lots registered in their
names through judicial confirmation of imperfect titles.
The Republic, through the Office of the Solicitor General (OSG), opposed
the petition for declaratory relief. The OSG countered that Boracay Island was
an unclassified land of the public domain. It formed part of the mass of lands
classified as public forest, which was not available for disposition pursuant to Section

3(a) of Presidential Decree (PD) No. 705 or the Revised Forestry Code, [11] as
amended.

The OSG moved for reconsideration but its motion was denied. [23] The
Republic then appealed to the CA.

The OSG maintained that respondents-claimants reliance on PD No. 1801

and PTACircular No. 3-82 was misplaced. Their right to judicial confirmation of title
was governed by CA No. 141 and PD No. 705. Since Boracay Island had not been
classified as alienable and disposable, whatever possession they had cannot ripen
into ownership.

On December 9, 2004, the appellate court affirmed in toto the RTC decision,
disposing as follows:

During pre-trial, respondents-claimants and the OSG stipulated on the

following facts:(1) respondents-claimants were presently in possession of parcels of
land in Boracay Island; (2) these parcels of land were planted with coconut trees and
other natural growing trees; (3) the coconut trees had heights of more or less twenty
(20) meters and were planted more or less fifty (50) years ago; and (4) respondentsclaimants declared the land they were occupying for tax purposes.[12]
The parties also agreed that the principal issue for resolution was purely
legal: whether Proclamation No. 1801 posed any legal hindrance or impediment to
the titling of the lands in Boracay. They decided to forego with the trial and to submit
the case for resolution upon submission of their respective memoranda.[13]
The RTC took judicial notice[14] that certain parcels of land in Boracay Island,
more particularly Lots 1 and 30, Plan PSU-5344, were covered by Original Certificate
of Title No. 19502 (RO 2222) in the name of the Heirs of Ciriaco S. Tirol. These lots
were involved in Civil Case Nos. 5222 and 5262 filed before the RTC of Kalibo, Aklan.
[15]
The titles wereissued on
August 7, 1933.[16]
RTC and CA Dispositions

WHEREFORE, in view of the foregoing premises,

judgment is hereby rendered by us DENYING the appeal filed in
this case and AFFIRMING the decision of the lower court.[24]
The CA held that respondents-claimants could not be prejudiced by a
declaration that the lands they occupied since time immemorial were part of a forest
reserve.
Again, the OSG sought reconsideration but it was similarly denied.[25] Hence,
the present petition under Rule 45.
G.R. No. 173775
On May 22, 2006, during the pendency of G.R. No. 167707, President Gloria
Macapagal-Arroyo issued Proclamation No. 1064[26] classifying Boracay Island into
four hundred (400) hectares of reserved forest land (protection purposes) and six
hundred twenty-eight and 96/100 (628.96) hectares of agricultural land (alienable and
disposable). The Proclamation likewise provided for a fifteen-meter buffer zone on
each side of the centerline of roads and trails, reserved for right-of-way and which
shall form part of the area reserved for forest land protection purposes.
On August 10, 2006, petitioners-claimants Dr. Orlando Sacay,[27] Wilfredo
Gelito, and other landowners[29] in Boracay filed with this Court an original petition
for prohibition, mandamus, and nullification of Proclamation No. 1064. [30] They
allege that the Proclamation infringed on their prior vested rights over portions of
Boracay. They have been in continued possession of their respective lots in Boracay
since time immemorial. They have also invested billions of pesos in developing their
lands and building internationally renowned first class resorts on their lots.[31]
[28]

On July 14, 1999, the RTC rendered a decision in favor of respondentsclaimants, with a fallo reading:
WHEREFORE, in view of the foregoing, the Court
declares that Proclamation No. 1801 and PTA Circular No. 3-82
pose no legal obstacle to the petitioners and those similarly situated
to acquire title to their lands in Boracay, in accordance with the
applicable laws and in the manner prescribed therein; and to have
their lands surveyed and approved by respondent Regional
Technical Director of Lands as the approved survey does not in
itself constitute a title to the land.
SO ORDERED.[17]
The RTC upheld respondents-claimants right to have their occupied lands
titled in their name. It ruled that neither Proclamation No. 1801 nor PTA Circular No.
3-82 mentioned that lands in Boracay were inalienable or could not be the subject of
disposition.[18] The Circular itself recognized private ownership of lands.[19] The trial
court cited Sections 87[20] and 53[21] of the Public Land Act as basis for acknowledging
private ownership of lands in Boracay and that only those forested areas in public
lands were declared as part of the forest reserve.[22]

Petitioners-claimants contended that there is no need for a proclamation

reclassifying Boracay into agricultural land. Being classified as neither mineral nor
timber land, the island is deemed agricultural pursuant to the Philippine Bill of 1902
and Act No. 926, known as the first Public Land Act. [32] Thus, their possession in the
concept of owner for the required period entitled them to judicial confirmation of
imperfect title.
Opposing the petition, the OSG argued that petitioners-claimants do not
have a vested right over their occupied portions in the island. Boracay is an
unclassified public forest land pursuant to Section 3(a) of PD No. 705. Being public
forest, the claimed portions of the island are inalienable and cannot be the subject of
judicial confirmation of imperfect title. It is only the executive department, not the
courts, which has authority to reclassify lands of the public domain into alienable and
disposable lands. There is a need for a positive government act in order to release
the lots for disposition.

On November 21, 2006, this Court ordered the consolidation of the two
petitions as they principally involve the same issues on the land classification
of Boracay Island.[33]

CAN RESPONDENTS BE COMPELLED BY MANDAMUS TO

ALLOW THE SURVEYAND TO APPROVE THE SURVEY
PLANS FOR PURPOSES OF THE APPLICATION FOR TITLING
OF THE LANDS OF PETITIONERS IN BORACAY?
[35]
(Underscoring supplied)

Issues
G.R. No. 167707
The OSG raises the lone issue of whether Proclamation No. 1801
and PTA Circular No. 3-82 pose any legal obstacle for respondents, and all those
similarly situated, to acquire title to their occupied lands in Boracay Island.[34]

In capsule, the main issue is whether private claimants (respondentsclaimants in G.R. No. 167707 and petitioners-claimants in G.R. No. 173775) have a
right to secure titles over their occupied portions in Boracay. The twin petitions pertain
to their right, if any, to judicial confirmation of imperfect title under CA No. 141, as
amended. They do not involve their right to secure title under other pertinent laws.
Our Ruling

G.R. No. 173775

Petitioners-claimants hoist five (5) issues, namely:
I.
AT THE TIME OF THE ESTABLISHED POSSESSION OF
PETITIONERS IN CONCEPT OF OWNER OVER THEIR
RESPECTIVE AREAS IN BORACAY, SINCE TIME IMMEMORIAL
OR AT THE LATEST SINCE 30 YRS. PRIOR TO THE FILING OF
THE PETITION FOR DECLARATORY RELIEF ON NOV. 19,
1997, WERE THE AREAS OCCUPIED BY THEM PUBLIC
AGRICULTURAL LANDS AS DEFINED BY LAWSTHEN ON
JUDICIAL CONFIRMATION OF IMPERFECT TITLES OR PUBLIC
FOREST AS DEFINED BY SEC. 3a, PD 705?
II.
HAVE PETITIONERS OCCUPANTS ACQUIRED PRIOR VESTED
RIGHT OF PRIVATE OWNERSHIP OVER THEIR OCCUPIED
PORTIONS OF BORACAY LAND, DESPITE THE FACT THAT
THEY HAVE NOT APPLIED YET FOR JUDICIAL CONFIRMATION
OF IMPERFECT TITLE?
III.
IS THE EXECUTIVE DECLARATION OF THEIR AREAS AS
ALIENABLE ANDDISPOSABLE UNDER SEC 6, CA 141 [AN]
INDISPENSABLE PRE-REQUISITE FOR PETITIONERS TO
OBTAIN TITLE UNDER THE TORRENS SYSTEM?
IV.
IS THE ISSUANCE OF PROCLAMATION 1064 ON MAY 22, 2006,
VIOLATIVE OF THE PRIOR VESTED RIGHTS TO PRIVATE
OWNERSHIP OF PETITIONERS OVER THEIR LANDS IN
BORACAY, PROTECTED BY THE DUE PROCESS CLAUSE OF
THE CONSTITUTION OR IS PROCLAMATION 1064 CONTRARY
TO SEC. 8, CA 141, ORSEC. 4(a) OF RA 6657.
V.

Regalian Doctrine and power of the executive

to reclassify lands of the public domain
Private claimants rely on three (3) laws and executive acts in their bid for
judicial confirmation of imperfect title, namely: (a) Philippine Bill of 1902 [36] in relation
to Act No. 926, later amended and/or superseded by Act No. 2874 and CA No. 141;
[37]
(b) Proclamation No. 1801[38] issued by then President Marcos; and (c)
Proclamation No. 1064[39] issued by President Gloria Macapagal-Arroyo. We shall
proceed to determine their rights to apply for judicial confirmation of imperfect title
under these laws and executive acts.
But first, a peek at the Regalian principle and the power of the executive to
reclassify lands of the public domain.
The 1935 Constitution classified lands of the public domain into agricultural,
forest or timber.[40] Meanwhile, the 1973 Constitution provided the following divisions:
agricultural, industrial or commercial, residential, resettlement, mineral, timber or
forest and grazing lands, and such other classes as may be provided by law, [41] giving
the government great leeway for classification.[42] Then the 1987 Constitution reverted
to the 1935 Constitution classification with one addition: national parks.[43] Of
these, only agricultural lands may be alienated.[44] Prior to Proclamation No. 1064
of May 22, 2006, Boracay Island had neverbeen expressly and administratively
classified under any of these grand divisions. Boracay was an unclassified land of the
public domain.
The Regalian Doctrine dictates that all lands of the public domain belong to
the State, that the State is the source of any asserted right to ownership of land and
charged with the conservation of such patrimony.[45] The doctrine has been
consistently adopted under the 1935, 1973, and 1987 Constitutions.[46]
All lands not otherwise appearing to be clearly within private ownership are
presumed to belong to the State. [47] Thus, all lands that have not been acquired from
the government, either by purchase or by grant, belong to the State as part of the
inalienable public domain.[48] Necessarily, it is up to the State to determine if lands of
the public domain will be disposed of for private ownership. The government, as the
agent of the state, is possessed of the plenary power as the persona in law to
determine who shall be the favored recipients of public lands, as well as under what

terms they may be granted such privilege, not excluding the placing of obstacles in
the way of their exercise of what otherwise would be ordinary acts of ownership.[49]
Our present land law traces its roots to the Regalian Doctrine. Upon the
Spanish conquest of the Philippines, ownership of all lands, territories and
possessions in thePhilippines passed to the Spanish Crown.[50] The Regalian doctrine
was first introduced in the Philippines through the Laws of the Indies and the Royal
Cedulas, which laid the foundation that all lands that were not acquired from the
Government, either by purchase or by grant, belong to the public domain.[51]
The Laws of the Indies was followed by the Ley Hipotecaria or the Mortgage
Law of 1893. The Spanish Mortgage Law provided for the systematic registration of
titles and deeds as well as possessory claims.[52]
The Royal Decree of 1894 or the Maura Law[53] partly amended the Spanish
Mortgage Law and the Laws of the Indies. It established possessory information as
the method of legalizing possession of vacant Crown land, under certain conditions
which were set forth in said decree. [54] Under Section 393 of the Maura Law,
an informacion posesoriaor possessory information title,[55] when duly inscribed in the
Registry of Property, is converted into a title of ownership only after the lapse of
twenty (20) years of uninterrupted possession which must be actual, public, and
adverse,[56] from the date of its inscription.[57]However, possessory information title had
to be perfected one year after the promulgation of the Maura Law, or until April 17,
1895. Otherwise, the lands would revert to the State.[58]
In sum, private ownership of land under the Spanish regime could only be
founded on royal concessions which took various forms, namely: (1) titulo real or
royal grant; (2)concesion especial or special grant; (3) composicion con el estado or
adjustment title; (4)titulo de compra or title by purchase; and (5) informacion
posesoria or possessory information title.[59]
The first law
governing
the
disposition
of
public
lands
in
the Philippines under American rule was embodied in the Philippine Bill of 1902.[60] By
this law, lands of the public domain in the Philippine Islands were classified into three
(3) grand divisions, to wit: agricultural, mineral, and timber or forest lands. [61] The act
provided for, among others, the disposal of mineral lands by means of absolute grant
(freehold system) and by lease (leasehold system).[62] It also provided the definition by
exclusion of agricultural public lands.[63] Interpreting the meaning of agricultural lands
under the Philippine Bill of 1902, the Court declared in Mapa v. Insular Government:[64]
x x x In other words, that the phrase agricultural land as
used in Act No. 926 meansthose public lands acquired
from Spain which are not timber or mineral lands. x x x[65](Emphasis
Ours)
On February 1, 1903, the Philippine Legislature passed Act No. 496,
otherwise known as the Land Registration Act. The act established a system of
registration by which recorded title becomes absolute, indefeasible, and
imprescriptible. This is known as the Torrenssystem.[66]

Concurrently, on October 7, 1903, the Philippine Commission passed Act

No. 926, which was the first Public Land Act. The Act introduced the homestead
system and made provisions for judicial and administrative confirmation of imperfect
titles and for the sale or lease of public lands. It permitted corporations regardless of
the nationality of persons owning the controlling stock to lease or purchase lands of
the public domain.[67] Under the Act, open, continuous, exclusive, and notorious
possession and occupation of agricultural lands for the next ten (10) years
preceding July 26, 1904 was sufficient for judicial confirmation of imperfect title.[68]
On November 29, 1919, Act No. 926 was superseded by Act No. 2874,
otherwise known as the second Public Land Act. This new, more comprehensive law
limited the exploitation of agricultural lands to Filipinos and Americans and citizens of
other countries which gave Filipinos the same privileges. For judicial confirmation of
title, possession and occupation en concepto dueo since time immemorial, or
since July 26, 1894, was required.[69]
After the passage of the 1935 Constitution, CA No. 141 amended Act No.
2874 onDecember 1, 1936. To this day, CA No. 141, as amended, remains as the
existing general law governing the classification and disposition of lands of the public
domain other than timber and mineral lands,[70] and privately owned lands which
reverted to the State.[71]
Section 48(b) of CA No. 141 retained the requirement under Act No. 2874 of
possession and occupation of lands of the public domain since time immemorial or
since July 26, 1894. However, this provision was superseded by Republic Act (RA)
No. 1942,[72]which provided for a simple thirty-year prescriptive period for judicial
confirmation of imperfect title. The provision was last amended by PD No. 1073,
[73]
which now provides for possession and occupation of the land applied
for since June 12, 1945, or earlier.[74]
The issuance of PD No. 892[75] on February 16, 1976 discontinued the use of
Spanish titles as evidence in land registration proceedings.[76] Under the decree, all
holders of Spanish titles or grants should apply for registration of their lands under Act
No. 496 within six (6) months from the effectivity of the decree on February 16,
1976. Thereafter, the recording of all unregistered lands[77] shall be governed by
Section 194 of the Revised Administrative Code, as amended by Act No. 3344.
On June 11, 1978, Act No. 496 was amended and updated by PD No. 1529,
known as the Property Registration Decree. It was enacted to codify the various laws
relative to registration of property.[78] It governs registration of lands under
the Torrens system as well as unregistered lands, including chattel mortgages.[79]
A positive act declaring land as alienable and disposable is required. In
keeping with the presumption of State ownership, the Court has time and again
emphasized that there must be a positive act of the government, such as an official
proclamation,[80] declassifying inalienable public land into disposable land for
agricultural or other purposes.[81] In fact, Section 8 of CA No. 141 limits alienable or
disposable lands only to those lands which have been officially delimited and
classified.[82]
The burden of proof in overcoming the presumption of State ownership of
the lands of the public domain is on the person applying for registration (or claiming

ownership), who must prove that the land subject of the application is alienable or
disposable.[83] To overcome this presumption, incontrovertible evidence must be
established that the land subject of the application (or claim) is alienable or
disposable.[84] There must still be a positive act declaring land of the public domain as
alienable and disposable. To prove that the land subject of an application for
registration is alienable, the applicant must establish the existence of a positive act of
the government such as a presidential proclamation or an executive order; an
administrative action; investigation reports of Bureau of Lands investigators; and a
legislative act or a statute.[85] The applicant may also secure a certification from the
government that the land claimed to have been possessed for the required number of
years is alienable and disposable.[86]
In the case at bar, no such proclamation, executive order, administrative
action, report, statute, or certification was presented to the Court. The records are
bereft of evidence showing that, prior to 2006, the portions of Boracay occupied by
private claimants were subject of a government proclamation that the land is alienable
and disposable. Absent such well-nigh incontrovertible evidence, the Court cannot
accept the submission that lands occupied by private claimants were already open to
disposition before 2006. Matters of land classification or reclassification cannot be
assumed. They call for proof.[87]
Ankron and De Aldecoa did not make the whole of Boracay Island, or
portions of it, agricultural lands. Private claimants posit that Boracay was already an
agricultural land pursuant to the old cases Ankron v. Government of the
Philippine Islands (1919)[88] and De Aldecoa v. The Insular Government (1909).
[89]
These cases were decided under the provisions of the Philippine Bill of 1902 and
Act No. 926. There is a statement in these old cases that in the absence of evidence
to the contrary, that in each case the lands are agricultural lands until the contrary is
shown.[90]
Private claimants reliance on Ankron and De Aldecoa is misplaced. These
cases did not have the effect of converting the whole of Boracay Island or portions of
it into agricultural lands. It should be stressed that the Philippine Bill of 1902 and Act
No. 926 merely provided the manner through which land registration courts would
classify lands of the public domain.Whether the land would be classified as timber,
mineral, or agricultural depended on proof presented in each case.
Ankron and De Aldecoa were decided at a time when the President of the
Philippines had no power to classify lands of the public domain into mineral, timber,
and agricultural. At that time, the courts were free to make corresponding
classifications in justiciable cases, or were vested with implicit power to do so,
depending upon the preponderance of the evidence.[91] This was the Courts ruling
in Heirs of the Late Spouses Pedro S. Palanca and Soterranea Rafols Vda. De
Palanca v. Republic,[92] in which it stated, through Justice Adolfo Azcuna, viz.:
x x x Petitioners furthermore insist that a particular land
need not be formally released by an act of the Executive before it
can be deemed open to private ownership, citing the cases
of Ramos v. Director of Lands and Ankron v. Government of the
Philippine Islands.
xxxx

Petitioners reliance upon Ramos v. Director of

Lands and Ankron v. Government is misplaced. These cases were
decided under the Philippine Bill of 1902 and the first Public Land
Act No. 926 enacted by the Philippine Commission on October 7,
1926, under which there was no legal provision vesting in the Chief
Executive or President of the Philippines the power to classify lands
of the public domain into mineral, timber and agricultural so that the
courts then were free to make corresponding classifications in
justiciable cases, or were vested with implicit power to do so,
depending upon the preponderance of the evidence.[93]
To aid the courts in resolving land registration cases under Act No. 926, it
was then necessary to devise a presumption on land classification. Thus evolved the
dictum in Ankronthat the courts have a right to presume, in the absence of evidence
to the contrary, that in each case the lands are agricultural lands until the contrary is
shown.[94]

But We cannot unduly expand the presumption in Ankron and De Aldecoa to

an argument that all lands of the public domain had been automatically reclassified as
disposable and alienable agricultural lands. By no stretch of imagination did the
presumption convert all lands of the public domain into agricultural lands.
If We accept the position of private claimants, the Philippine Bill of 1902 and
Act No. 926 would have automatically made all lands in the Philippines, except those
already classified as timber or mineral land, alienable and disposable lands. That
would take these lands out of State ownership and worse, would be utterly
inconsistent with and totally repugnant to the long-entrenched Regalian doctrine.
The presumption in Ankron and De Aldecoa attaches only to land
registration cases brought under the provisions of Act No. 926, or more specifically
those cases dealing with judicial and administrative confirmation of imperfect
titles. The presumption applies to an applicant for judicial or administrative
conformation of imperfect title under Act No. 926. It certainly cannot apply to
landowners, such as private claimants or their predecessors-in-interest, who failed to
avail themselves of the benefits of Act No. 926. As to them, their land remained
unclassified and, by virtue of the Regalian doctrine, continued to be owned by the
State.
In any case, the assumption in Ankron and De Aldecoa was not
absolute. Land classification was, in the end, dependent on proof. If there was proof
that the land was better suited for non-agricultural uses, the courts could adjudge it as
a mineral or timber land despite the presumption. In Ankron, this Court stated:
In the case of Jocson vs. Director of Forestry (supra), the
Attorney-General admitted in effect that whether the particular land
in question belongs to one class or another is a question of
fact. The mere fact that a tract of land has trees upon it or has
mineral within it is not of itself sufficient to declare that one is
forestry land and the other, mineral land. There must be some proof

of the extent and present or future value of the forestry and of the
minerals. While, as we have just said, many definitions have been
given for agriculture, forestry, and mineral lands, and that in each
case it is a question of fact, we think it is safe to say that in order to
be forestry or mineral land the proof must show that it is more
valuable for the forestry or the mineral which it contains than it is for
agricultural purposes. (Sec. 7, Act No. 1148.) It is not sufficient to
show that there exists some trees upon the land or that it bears
some mineral. Land may be classified as forestry or mineral today,
and, by reason of the exhaustion of the timber or mineral, be
classified as agricultural land tomorrow. And vice-versa, by reason
of the rapid growth of timber or the discovery of valuable minerals,
lands classified as agricultural today may be differently classified
tomorrow. Each case must be decided upon the proof in that
particular case, having regard for its present or future value for one
or the other purposes. We believe, however, considering the fact
that it is a matter of public knowledge that a majority of the lands in
the Philippine Islands are agricultural lands that the courts have a
right to presume, in the absence of evidence to the contrary, that in
each case the lands are agricultural lands until the contrary is
shown.Whatever the land involved in a particular land registration
case is forestry or mineral land must, therefore, be a matter of
proof. Its superior value for one purpose or the other is a question
of fact to be settled by the proof in each particular case. The fact
that the land is a manglar [mangrove swamp] is not sufficient for the
courts to decide whether it is agricultural, forestry, or mineral land. It
may perchance belong to one or the other of said classes of
land. The Government, in the first instance, under the provisions of
Act No. 1148, may, by reservation, decide for itself what portions of
public land shall be considered forestry land, unless private
interests have intervened before such reservation is made. In the
latter case, whether the land is agricultural, forestry, or mineral, is a
question of proof. Until private interests have intervened, the
Government, by virtue of the terms of said Act (No. 1148), may
decide for itself what portions of the public domain shall be set
aside and reserved as forestry or mineral land. (Ramos vs. Director
of Lands, 39 Phil. 175; Jocson vs. Director of Forestry,supra)
[95]
(Emphasis ours)
Since 1919, courts were no longer free to determine the classification of
lands from the facts of each case, except those that have already became private
lands.[96] Act No. 2874, promulgated in 1919 and reproduced in Section 6 of CA No.
141, gave the Executive Department, through the President, the exclusive prerogative
to classify or reclassify public lands into alienable or disposable, mineral or forest.96a
Since then, courts no longer had the authority, whether express or implied, to
determine the classification of lands of the public domain.[97]
Here, private claimants, unlike the Heirs of Ciriaco Tirol who were issued
their title in 1933,[98] did not present a justiciable case for determination by the land
registration court of the propertys land classification. Simply put, there was no
opportunity for the courts then to resolve if the land the Boracay occupants are now
claiming were agricultural lands. When Act No. 926 was supplanted by Act No. 2874

in 1919, without an application for judicial confirmation having been filed by private
claimants or their predecessors-in-interest, the courts were no longer authorized to
determine the propertys land classification. Hence, private claimants cannot bank on
Act No. 926.
We note that the RTC decision[99] in G.R. No. 167707 mentioned Krivenko v.
Register of Deeds of Manila,[100] which was decided in 1947 when CA No. 141, vesting
the Executive with the sole power to classify lands of the public domain was already
in effect.Krivenko cited the old cases Mapa v. Insular Government,[101] De Aldecoa v.
The Insular Government,[102] and Ankron v. Government of the Philippine Islands.[103]
Krivenko, however, is not controlling here because it involved a totally
different issue. The pertinent issue in Krivenko was whether residential lots were
included in the general classification of agricultural lands; and if so, whether an alien
could acquire a residential lot.This Court ruled that as an alien, Krivenko was
prohibited by the 1935 Constitution[104]from acquiring agricultural land, which included
residential lots. Here, the issue is whether unclassified lands of the public domain are
automatically deemed agricultural.
Notably, the definition of agricultural public lands mentioned
in Krivenko relied on the old cases decided prior to the enactment of Act No. 2874,
including Ankron and De Aldecoa.[105] As We have already stated, those cases cannot
apply here, since they were decided when the Executive did not have the authority to
classify lands as agricultural, timber, or mineral.
Private claimants continued possession under Act No. 926 does not create a
presumption that the land is alienable. Private claimants also contend that their
continued possession of portions of Boracay Island for the requisite period of ten (10)
years under Act No. 926[106] ipso facto converted the island into private
ownership. Hence, they may apply for a title in their name.
A similar argument was squarely rejected by the Court in Collado v. Court of
Appeals.[107] Collado, citing the separate opinion of now Chief Justice Reynato S.
Puno in Cruz v. Secretary of Environment and Natural Resources,107-a ruled:
Act No. 926, the first Public Land Act,
was passed in pursuance of the provisions of the
Philippine Bill of 1902. The law governed the
disposition of lands of the public domain. It
prescribed rules and regulations for the
homesteading, selling and leasing of portions of
the public domain of the Philippine Islands, and
prescribed the terms and conditions to enable
persons to perfect their titles to public lands in
the Islands. It also provided for the issuance of
patents to certain native settlers upon public
lands, for the establishment of town sites and
sale of lots therein, for the completion of
imperfect titles, and for the cancellation or
confirmation of Spanish concessions and grants
in the Islands. In short, the Public Land Act

operated on the assumption that title to public

lands in the Philippine Islands remained in the
government; and that the governments title to
public land sprung from the Treaty of Paris and
other subsequent treaties between Spain and the
United States. The term public land referred to all
lands of the public domain whose title still
remained in the government and are thrown open
to private appropriation and settlement, and
excluded the patrimonial property of the
government and the friar lands.
Thus, it is plain error for petitioners to argue that under the
Philippine Bill of 1902 andPublic Land Act No. 926, mere
possession by private individuals of lands creates the legal
presumption that the lands are alienable and disposable.
[108]
(Emphasis Ours)
Except for lands already covered by existing titles, Boracay was an
unclassified land of the public domain prior to Proclamation No. 1064. Such
unclassified lands are considered public forest under PD No. 705. The DENR[109] and
the
National
Mapping
and
Resource
Information
Authority[110] certify
that Boracay Island is an unclassified land of the public domain.
PD No. 705 issued by President Marcos categorized all unclassified lands
of the public domain as public forest. Section 3(a) of PD No. 705 defines a public
forest as a mass of lands of the public domain which has not been the subject of the
present system of classification for the determination of which lands are needed for
forest purpose and which are not. Applying PD No. 705, all unclassified lands,
including those in Boracay Island, are ipso factoconsidered public forests. PD No.
705, however, respects titles already existing prior to its effectivity.
The Court notes that the classification of Boracay as a forest land under PD
No. 705 may seem to be out of touch with the present realities in the island. Boracay,
no doubt, has been partly stripped of its forest cover to pave the way for commercial
developments. As a premier tourist destination for local and foreign tourists, Boracay
appears more of a commercial island resort, rather than a forest land.
Nevertheless, that the occupants of Boracay have built multi-million peso
beach resorts on the island;[111] that the island has already been stripped of its forest
cover; or that the implementation of Proclamation No. 1064 will destroy the islands
tourism industry, do notnegate its character as public forest.
Forests, in the context of both the Public Land Act and the
Constitution[112]classifying lands of the public domain into agricultural, forest or timber,
mineral lands, and national parks, do not necessarily refer to large tracts of wooded
land or expanses covered by dense growths of trees and underbrushes.[113] The
discussion in Heirs of Amunategui v. Director of Forestry[114] is particularly instructive:
A forested area classified as forest land of the public
domain does not lose such classification simply because loggers or
settlers may have stripped it of its forest cover.Parcels of land

classified as forest land may actually be covered with grass or

planted
to
crops
by kaingin cultivators
or
other
farmers. Forest lands do not have to be on mountains or in out of
the way places. Swampy areas covered by mangrove trees, nipa
palms, and other trees growing in brackish or sea water may also
be classified as forest land. The classification is descriptive of its
legal nature or status and does not have to be descriptive of what
the land actually looks like. Unless and until the land classified as
forest is released in an official proclamation to that effect so that it
may form part of the disposable agricultural lands of the public
domain, the rules on confirmation of imperfect title do not apply.
[115]
(Emphasis supplied)
There is a big difference between forest as defined in a dictionary and forest or timber
land as a classification of lands of the public domain as appearing in our
statutes. One is descriptive of what appears on the land while the other is a legal
status, a classification for legal purposes.[116] At any rate, the Court is tasked to
determine the legal status of BoracayIsland, and not look into its physical
layout. Hence, even if its forest cover has been replaced by beach resorts,
restaurants and other commercial establishments, it has not been automatically
converted from public forest to alienable agricultural land.
Private claimants cannot rely on Proclamation No. 1801 as basis for judicial
confirmation of imperfect title. The proclamation did not convert Boracay into an
agricultural land. However, private claimants argue that Proclamation No. 1801 issued
by then President Marcos in 1978 entitles them to judicial confirmation of imperfect
title. The Proclamation classified Boracay, among other islands, as a tourist
zone. Private claimants assert that, as a tourist spot, the island is susceptible of
private ownership.
Proclamation No. 1801 or PTA Circular No. 3-82 did not convert the whole of
Boracay into an agricultural land. There is nothing in the law or the Circular which
made BoracayIsland an agricultural land. The reference in Circular No. 3-82 to private
lands[117] and areas declared as alienable and disposable[118] does not by itself classify
the entire island as agricultural. Notably, Circular No. 3-82 makes reference not only
to private lands and areas but also to public forested lands. Rule VIII, Section 3
provides:
No trees in forested private lands may be cut without prior
authority from the PTA. All forested areas in public lands are
declared forest reserves. (Emphasis supplied)
Clearly, the reference in the Circular to both private and public lands merely
recognizes that the island can be classified by the Executive department pursuant to
its powers under CA No. 141. In fact, Section 5 of the Circular recognizes the then
Bureau of Forest Developments authority to declare areas in the island as alienable
and disposable when it provides:
Subsistence farming, in areas declared as alienable and
disposable by the Bureau of Forest Development.

Therefore, Proclamation No. 1801 cannot be deemed the positive act

needed to classifyBoracay Island as alienable and disposable land. If President
Marcos intended to classify the island as alienable and disposable or forest, or both,
he would have identified the specific limits of each, as President Arroyo did in
Proclamation No. 1064. This was not done in Proclamation No. 1801.
The Whereas clauses of Proclamation No. 1801 also explain the rationale
behind the declaration of Boracay Island, together with other islands, caves and
peninsulas in the Philippines, as a tourist zone and marine reserve to be administered
by the PTA to ensure the concentrated efforts of the public and private sectors in the
development of the areas tourism potential with due regard for ecological balance in
the marine environment. Simply put, the proclamation is aimed at administering the
islands for tourism and ecological purposes. It does not address the areas alienability.
[119]

More importantly, Proclamation No. 1801 covers not only Boracay Island, but
sixty-four (64) other islands, coves, and peninsulas in the Philippines, such as
Fortune and Verde Islands in Batangas, Port Galera in Oriental Mindoro, Panglao and
Balicasag Islands in Bohol, Coron Island, Puerto Princesa and surrounding areas in
Palawan, Camiguin Island in Cagayan de Oro, and Misamis Oriental, to name a
few. If the designation of Boracay Islandas tourist zone makes it alienable and
disposable by virtue of Proclamation No. 1801, all the other areas mentioned would
likewise be declared wide open for private disposition. That could not have been, and
is clearly beyond, the intent of the proclamation.
It was Proclamation No. 1064 of 2006 which positively declared part of
Boracay as alienable and opened the same to private ownership. Sections 6 and 7 of
CA No. 141[120]provide that it is only the President, upon the recommendation of the
proper department head, who has the authority to classify the lands of the public
domain into alienable or disposable, timber and mineral lands.[121]
In issuing Proclamation No. 1064, President Gloria Macapagal-Arroyo
merely exercised the authority granted to her to classify lands of the public domain,
presumably subject to existing vested rights. Classification of public lands is the
exclusive prerogative of the Executive Department, through the Office of the
President. Courts have no authority to do so.[122] Absent such classification, the land
remains unclassified until released and rendered open to disposition.[123]
Proclamation No. 1064 classifies Boracay into 400 hectares of reserved
forest land and 628.96 hectares of agricultural land. The Proclamation likewise
provides for a 15-meter buffer zone on each side of the center line of roads and trails,
which are reserved for right of way and which shall form part of the area reserved for
forest land protection purposes.
Contrary to private claimants argument, there was nothing invalid or
irregular, much less unconstitutional, about the classification of Boracay Island made
by the President through Proclamation No. 1064. It was within her authority to make
such classification, subject to existing vested rights.
Proclamation No. 1064 does not violate the Comprehensive Agrarian Reform
Law.Private claimants further assert that Proclamation No. 1064 violates the provision
of the Comprehensive Agrarian Reform Law (CARL) or RA No. 6657 barring
conversion of public forests into agricultural lands. They claim that since Boracay is a

public forest under PD No. 705, President Arroyo can no longer convert it into an
agricultural land without running afoul of Section 4(a) of RA No. 6657, thus:
SEC. 4. Scope. The Comprehensive Agrarian Reform Law
of 1988 shall cover, regardless of tenurial arrangement and
commodity produced, all public and private agricultural lands as
provided in Proclamation No. 131 and Executive Order No. 229,
including other lands of the public domain suitable for agriculture.
More specifically, the following lands are covered by the
Comprehensive Agrarian Reform Program:
(a) All alienable and disposable lands of the
public domain devoted to or suitable for
agriculture. No reclassification of forest or
mineral lands to agricultural lands shall be
undertaken after the approval of this Act
until Congress, taking into account
ecological, developmental and equity
considerations, shall have determined by
law, the specific limits of the public domain.
That Boracay Island was classified as a public forest under PD No. 705 did
not bar the Executive from later converting it into agricultural land. Boracay Island still
remained an unclassified land of the public domain despite PD No. 705.
In Heirs of the Late Spouses Pedro S. Palanca and Soterranea Rafols v.
Republic,[124]the Court stated that unclassified lands are public forests.
While it is true that the land classification map does not
categorically state that the islands are public forests, the fact that
they were unclassified lands leads to the same result. In the
absence of the classification as mineral or timber land, the land
remains unclassified land until released and rendered open to
disposition.[125] (Emphasis supplied)
Moreover, the prohibition under the CARL applies only to a reclassification of
land. If the land had never been previously classified, as in the case of Boracay, there
can be no prohibited reclassification under the agrarian law. We agree with the
opinion of the Department of Justice[126] on this point:
Indeed, the key word to the correct application of the
prohibition in Section 4(a) is the word reclassification. Where there
has been no previous classification of public forest [referring, we
repeat, to the mass of the public domain which has not been the
subject of the present system of classification for purposes of
determining which are needed for forest purposes and which are
not] into permanent forest or forest reserves or some other forest
uses under the Revised Forestry Code, there can be no
reclassification of forest lands to speak of within the meaning of
Section 4(a).

Thus, obviously, the prohibition in Section 4(a) of the

CARL against the reclassification of forest lands to agricultural
lands without a prior law delimiting the limits of the public domain,
does not, and cannot, apply to those lands of the public domain,
denominated as public forest under the Revised Forestry Code,
which have not been previously determined, or classified, as
needed for forest purposes in accordance with the provisions of the
Revised Forestry Code.[127]
Private claimants are not entitled to apply for judicial confirmation of
imperfect title under CA No. 141. Neither do they have vested rights over the
occupied lands under the said law. There are two requisites for judicial confirmation of
imperfect or incomplete title under CA No. 141, namely: (1) open, continuous,
exclusive, and notorious possession and occupation of the subject land by himself or
through his predecessors-in-interest under a bona fide claim of ownership since time
immemorial or from June 12, 1945; and (2) the classification of the land as alienable
and disposable land of the public domain.[128]
As discussed, the Philippine Bill of 1902, Act No. 926, and Proclamation No.
1801 did not convert portions of Boracay Island into an agricultural land. The island
remained an unclassified land of the public domain and, applying the Regalian
doctrine, is considered State property.
Private claimants bid for judicial confirmation of imperfect title, relying on the
Philippine Bill of 1902, Act No. 926, and Proclamation No. 1801, must fail because of
the absence of the second element of alienable and disposable land. Their
entitlement to a government grant under our present Public Land Act presupposes
that the land possessed and applied for is already alienable and disposable. This is
clear from the wording of the law itself.[129] Where the land is not alienable and
disposable, possession of the land, no matter how long, cannot confer ownership or
possessory rights.[130]

investments give them a vested right which cannot be unilaterally rescinded by

Proclamation No. 1064.
The continued possession and considerable investment of private claimants
do not automatically give them a vested right in Boracay. Nor do these give them a
right to apply for a title to the land they are presently occupying. This Court is
constitutionally bound to decide cases based on the evidence presented and the laws
applicable. As the law and jurisprudence stand, private claimants are ineligible to
apply for a judicial confirmation of title over their occupied portions in Boracay even
with their continued possession and considerable investment in the island.
One Last Note
The Court is aware that millions of pesos have been invested for the
development ofBoracay Island, making it a by-word in the local and international
tourism industry. The Court also notes that for a number of years, thousands of
people have called the island their home. While the Court commiserates with private
claimants plight, We are bound to apply the law strictly and judiciously. This is the law
and it should prevail. Ito ang batas at ito ang dapat umiral.
All is not lost, however, for private claimants. While they may not be eligible
to apply for judicial confirmation of imperfect title under Section 48(b) of CA No. 141,
as amended, this does not denote their automatic ouster from the residential,
commercial, and other areas they possess now classified as agricultural. Neither will
this mean the loss of their substantial investments on their occupied alienable
lands. Lack of title does not necessarily mean lack of right to possess.
For one thing, those with lawful possession may claim good faith as builders
of improvements. They can take steps to preserve or protect their possession. For
another, they may look into other modes of applying for original registration of title,
such as by homestead[131] or sales patent,[132] subject to the conditions imposed by
law.

Neither may private claimants apply for judicial confirmation of imperfect title
under Proclamation No. 1064, with respect to those lands which were classified as
agricultural lands. Private claimants failed to prove the first element of open,
continuous, exclusive, and notorious possession of their lands in Boracay since June
12, 1945.

More realistically, Congress may enact a law to entitle private claimants to

acquire title to their occupied lots or to exempt them from certain requirements under
the present land laws. There is one such bill[133] now pending in the House of
Representatives. Whether that bill or a similar bill will become a law is for Congress to
decide.

We cannot sustain the CA and RTC conclusion in the petition for declaratory
relief that private claimants complied with the requisite period of possession.

In issuing Proclamation No. 1064, the government has taken the step
necessary to open up the island to private ownership. This gesture may not be
sufficient to appease some sectors which view the classification of the island partially
into a forest reserve as absurd. That the island is no longer overrun by trees,
however, does not becloud the vision to protect its remaining forest cover and to strike
a healthy balance between progress and ecology.Ecological conservation is as
important as economic progress.

The tax declarations in the name of private claimants are insufficient to

prove the first element of possession. We note that the earliest of the tax declarations
in the name of private claimants were issued in 1993. Being of recent dates, the tax
declarations are not sufficient to convince this Court that the period of possession and
occupation commenced on June 12, 1945.
Private claimants insist that they have a vested right in Boracay, having been
in possession of the island for a long time. They have invested millions of pesos in
developing the island into a tourist spot. They say their continued possession and

To be sure, forest lands are fundamental to our nations survival. Their

promotion and protection are not just fancy rhetoric for politicians and activists. These
are needs that become more urgent as destruction of our environment gets prevalent
and difficult to control. As aptly observed by Justice Conrado Sanchez in 1968
in Director of Forestry v. Munoz:[134]

The view this Court takes of the cases at bar is but in

adherence to public policy that should be followed with respect to
forest lands. Many have written much, and many more have
spoken, and quite often, about the pressing need for forest
preservation,
conservation,
protection,
development
and
reforestation. Not without justification. For, forests constitute a vital
segment of any country's natural resources. It is of common
knowledge by now that absence of the necessary green cover on
our lands produces a number of adverse or ill effects of serious
proportions. Without the trees, watersheds dry up; rivers and lakes
which they supply are emptied of their contents. The fish disappear.
Denuded areas become dust bowls. As waterfalls cease to function,
so will hydroelectric plants. With the rains, the fertile topsoil is
washed away; geological erosion results. With erosion come the
dreaded floods that wreak havoc and destruction to property crops,
livestock, houses, and highways not to mention precious human
lives. Indeed, the foregoing observations should be written down in
a lumbermans decalogue.[135]
WHEREFORE, judgment is rendered as follows:
1. The petition for certiorari in G.R. No. 167707 is GRANTED and the Court
of Appeals Decision in CA-G.R. CV No. 71118 REVERSED AND SET ASIDE.
2. The petition for certiorari in G.R. No. 173775 is DISMISSED for lack of
merit.
SO ORDERED.

G.R. No. 191109

Republic of the Philippines

SUPREME COURT
Manila

On October 26, 2004, then President Gloria Macapagal-Arroyo issued E.O. No. 380
transforming PEA into PRA, which shall perform all the powers and functions of the
PEA relating to reclamation activities.

THIRD DIVISION

By virtue of its mandate, PRA reclaimed several portions of the foreshore and
offshore areas of Manila Bay, including those located in Paraaque City, and was
issued Original Certificates of Title (OCT Nos. 180, 202, 206, 207, 289, 557, and 559)
and Transfer Certificates of Title (TCT Nos. 104628, 7312, 7309, 7311, 9685, and
9686) over the reclaimed lands.

July 18, 2012

REPUBLIC OF THE PHILIPPINES, represented by the PHILIPPINE

RECLAMATION AUTHORITY (PRA),Petitioner,
vs.
CITY OF PARANAQUE, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, on pure questions of law, assailing the January 8, 2010 Order1 of the
Regional Trial Court, Branch 195, Parafiaque City (RTC), which ruled that petitioner
Philippine Reclamation Authority (PRA) is a government-owned and controlled
corporation (GOCC), a taxable entity, and, therefore, . not exempt from payment of
real property taxes. The pertinent portion of the said order reads:
In view of the finding of this court that petitioner is not exempt from payment of real
property taxes, respondent Paraaque City Treasurer Liberato M. Carabeo did not act
xxx without or in excess of jurisdiction, or with grave abuse of discretion amounting to
lack or in excess of jurisdiction in issuing the warrants of levy on the subject
properties.
WHEREFORE, the instant petition is dismissed. The Motion for Leave to File and
Admit Attached Supplemental Petition is denied and the supplemental petition
attached thereto is not admitted.
The Public Estates Authority (PEA) is a government corporation created by virtue of
Presidential Decree (P.D.) No. 1084 (Creating the Public Estates Authority, Defining
its Powers and Functions, Providing Funds Therefor and For Other Purposes) which
took effect on February 4,
1977 to provide a coordinated, economical and efficient reclamation of lands, and the
administration and operation of lands belonging to, managed and/or operated by, the
government with the object of maximizing their utilization and hastening their
development consistent with public interest.
On February 14, 1979, by virtue of Executive Order (E.O.) No. 525 issued by then
President Ferdinand Marcos, PEA was designated as the agency primarily
responsible for integrating, directing and coordinating all reclamation projects for and
on behalf of the National Government.

On February 19, 2003, then Paraaque City Treasurer Liberato M. Carabeo

(Carabeo) issued Warrants of Levy on PRAs reclaimed properties (Central Business
Park and Barangay San Dionisio) located in Paraaque City based on the
assessment for delinquent real property taxes made by then Paraaque City
Assessor Soledad Medina Cue for tax years 2001 and 2002.
On March 26, 2003, PRA filed a petition for prohibition with prayer for temporary
restraining order (TRO) and/or writ of preliminary injunction against Carabeo before
the RTC.
On April 3, 2003, after due hearing, the RTC issued an order denying PRAs petition
for the issuance of a temporary restraining order.
On April 4, 2003, PRA sent a letter to Carabeo requesting the latter not to proceed
with the public auction of the subject reclaimed properties on April 7, 2003. In
response, Carabeo sent a letter stating that the public auction could not be deferred
because the RTC had already denied PRAs TRO application.
On April 25, 2003, the RTC denied PRAs prayer for the issuance of a writ of
preliminary injunction for being moot and academic considering that the auction sale
of the subject properties on April 7, 2003 had already been consummated.
On August 3, 2009, after an exchange of several pleadings and the failure of both
parties to arrive at a compromise agreement, PRA filed a Motion for Leave to File and
Admit Attached Supplemental Petition which sought to declare as null and void the
assessment for real property taxes, the levy based on the said assessment, the public
auction sale conducted on April 7, 2003, and the Certificates of Sale issued pursuant
to the auction sale.
On January 8, 2010, the RTC rendered its decision dismissing PRAs petition. In
ruling that PRA was not exempt from payment of real property taxes, the RTC
reasoned out that it was a GOCC under Section 3 of P.D. No. 1084. It was organized
as a stock corporation because it had an authorized capital stock divided into no par
value shares. In fact, PRA admitted its corporate personality and that said properties
were registered in its name as shown by the certificates of title. Therefore, as a
GOCC, local tax exemption is withdrawn by virtue of Section 193 of Republic Act
(R.A.) No. 7160 Local Government Code (LGC) which was the prevailing law in 2001
and 2002 with respect to real property taxation. The RTC also ruled that the tax
exemption claimed by PRA under E.O. No. 654 had already been expressly repealed

by R.A. No. 7160 and that PRA failed to comply with the procedural requirements in
Section 206 thereof.

land owned by the Republic is titled in the name of a department, agency or

instrumentality.

Not in conformity, PRA filed this petition for certiorari assailing the January 8, 2010
RTC Order based on the following GROUNDS

Thus, PRA insists that, as an incorporated instrumentality of the National

Government, it is exempt from payment of real property tax except when the
beneficial use of the real property is granted to a taxable person. PRA claims that
based on Section 133(o) of the LGC, local governments cannot tax the national
government which delegate to local governments the power to tax.

I
THE TRIAL COURT GRAVELY ERRED IN FINDING THAT PETITIONER IS LIABLE
TO PAY REAL PROPERTY TAX ON THE SUBJECT RECLAIMED LANDS
CONSIDERING
THAT PETITIONER IS AN INCORPORATED INSTRUMENTALITY OF THE
NATIONAL GOVERNMENT AND IS, THEREFORE, EXEMPT FROM PAYMENT OF
REAL PROPERTY TAX UNDER SECTIONS 234(A) AND 133(O) OF REPUBLIC ACT
7160 OR THE LOCAL GOVERNMENT CODE VIS--VIS MANILA INTERNATIONAL
AIRPORT AUTHORITY V. COURT OF APPEALS.
II
THE TRIAL COURT GRAVELY ERRED IN FAILING TO CONSIDER THAT
RECLAIMED LANDS ARE PART OF THE PUBLIC DOMAIN AND, HENCE, EXEMPT
FROM REAL PROPERTY TAX.

It explains that reclaimed lands are part of the public domain, owned by the State,
thus, exempt from the payment of real estate taxes. Reclaimed lands retain their
inherent potential as areas for public use or public service. While the subject
reclaimed lands are still in its hands, these lands remain public lands and form part of
the public domain. Hence, the assessment of real property taxes made on said lands,
as well as the levy thereon, and the public sale thereof on April 7, 2003, including the
issuance of the certificates of sale in favor of the respondent Paraaque City, are
invalid and of no force and effect.
On the other hand, the City of Paraaque (respondent) argues that PRA since its
creation consistently represented itself to be a GOCC. PRAs very own charter (P.D.
No. 1084) declared it to be a GOCC and that it has entered into several thousands of
contracts where it represented itself to be a GOCC. In fact, PRA admitted in its
original and amended petitions and pre-trial brief filed with the RTC of Paraaque City
that it was a GOCC.

PRA asserts that it is not a GOCC under Section 2(13) of the Introductory Provisions
of the Administrative Code. Neither is it a GOCC under Section 16, Article XII of the
1987 Constitution because it is not required to meet the test of economic viability.
Instead, PRA is a government instrumentality vested with corporate powers and
performing an essential public service pursuant to Section 2(10) of the Introductory
Provisions of the Administrative Code. Although it has a capital stock divided into
shares, it is not authorized to distribute dividends and allotment of surplus and profits
to its stockholders. Therefore, it may not be classified as a stock corporation because
it lacks the second requisite of a stock corporation which is the distribution of
dividends and allotment of surplus and profits to the stockholders.

Respondent further argues that PRA is a stock corporation with an authorized capital
stock divided into 3 million no par value shares, out of which 2 million shares have
been subscribed and fully paid up. Section 193 of the LGC of 1991 has withdrawn tax
exemption privileges granted to or presently enjoyed by all persons, whether natural
or juridical, including GOCCs.

It insists that it may not be classified as a non-stock corporation because it has no

members and it is not organized for charitable, religious, educational, professional,
cultural, recreational, fraternal, literary, scientific, social, civil service, or similar
purposes, like trade, industry, agriculture and like chambers as provided in Section 88
of the Corporation Code.

The Court finds merit in the petition.

Hence, since PRA is a GOCC, it is not exempt from the payment of real property tax.
THE COURTS RULING

Section 2(13) of the Introductory Provisions of the Administrative Code of 1987

defines a GOCC as follows:
SEC. 2. General Terms Defined. x x x x

Moreover, PRA points out that it was not created to compete in the market place as
there was no competing reclamation company operated by the private sector. Also,
while PRA is vested with corporate powers under P.D. No. 1084, such circumstance
does not make it a corporation but merely an incorporated instrumentality and that the
mere fact that an incorporated instrumentality of the National Government holds title
to real property does not make said instrumentality a GOCC. Section 48, Chapter 12,
Book I of the Administrative Code of 1987 recognizes a scenario where a piece of

(13) Government-owned or controlled corporation refers to any agency organized as

a stock or non-stock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government directly
or through its instrumentalities either wholly, or, where applicable as in the case of
stock corporations, to the extent of at least fifty-one

(51) percent of its capital stock: x x x.

On the other hand, Section 2(10) of the Introductory Provisions of the Administrative
Code defines a government "instrumentality" as follows:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. x x x
From the above definitions, it is clear that a GOCC must be "organized as a stock or
non-stock corporation" while an instrumentality is vested by law with corporate
powers. Likewise, when the law makes a government instrumentality operationally
autonomous, the instrumentality remains part of the National Government machinery
although not integrated with the department framework.
When the law vests in a government instrumentality corporate powers, the
instrumentality does not necessarily become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate
powers.
Many government instrumentalities are vested with corporate powers but they do not
become stock or non-stock corporations, which is a necessary condition before an
agency or instrumentality is deemed a GOCC. Examples are the Mactan International
Airport Authority, the Philippine Ports Authority, the University of the Philippines, and
Bangko Sentral ng Pilipinas. All these government instrumentalities exercise
corporate powers but they are not organized as stock or non-stock corporations as
required by Section 2(13) of the Introductory Provisions of the Administrative Code.
These government instrumentalities are sometimes loosely called government
corporate entities. They are not, however, GOCCs in the strict sense as understood
under the Administrative Code, which is the governing law defining the legal
relationship and status of government entities.2
Correlatively, Section 3 of the Corporation Code defines a stock corporation as one
whose "capital stock is divided into shares and x x x authorized to distribute to the
holders of such shares dividends x x x." Section 87 thereof defines a non-stock
corporation as "one where no part of its income is distributable as dividends to its
members, trustees or officers." Further, Section 88 provides that non-stock
corporations are "organized for charitable, religious, educational, professional,
cultural, recreational, fraternal, literary, scientific, social, civil service, or similar
purposes, like trade, industry, agriculture and like chambers."
Two requisites must concur before one may be classified as a stock corporation,
namely: (1) that it has capital stock divided into shares; and (2) that it is authorized to
distribute dividends and allotments of surplus and profits to its stockholders. If only
one requisite is present, it cannot be properly classified as a stock corporation. As for

non-stock corporations, they must have members and must not distribute any part of
their income to said members.3
In the case at bench, PRA is not a GOCC because it is neither a stock nor a nonstock corporation. It cannot be considered as a stock corporation because although it
has a capital stock divided into no par value shares as provided in Section 7 4 of P.D.
No. 1084, it is not authorized to distribute dividends, surplus allotments or profits to
stockholders. There is no provision whatsoever in P.D. No. 1084 or in any of the
subsequent executive issuances pertaining to PRA, particularly, E.O. No. 525, 5 E.O.
No. 6546 and EO No. 7987 that authorizes PRA to distribute dividends, surplus
allotments or profits to its stockholders.
PRA cannot be considered a non-stock corporation either because it does not have
members. A non-stock corporation must have members.8 Moreover, it was not
organized for any of the purposes mentioned in Section 88 of the Corporation Code.
Specifically, it was created to manage all government reclamation projects.
Furthermore, there is another reason why the PRA cannot be classified as a GOCC.
Section 16, Article XII of the 1987 Constitution provides as follows:
Section 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability.
The fundamental provision above authorizes Congress to create GOCCs through
special charters on two conditions: 1) the GOCC must be established for the common
good; and 2) the GOCC must meet the test of economic viability. In this case, PRA
may have passed the first condition of common good but failed the second one economic viability. Undoubtedly, the purpose behind the creation of PRA was not for
economic or commercial activities. Neither was it created to compete in the market
place considering that there were no other competing reclamation companies being
operated by the private sector. As mentioned earlier, PRA was created essentially to
perform a public service considering that it was primarily responsible for a
coordinated, economical and efficient reclamation, administration and operation of
lands belonging to the government with the object of maximizing their utilization and
hastening their development consistent with the public interest. Sections 2 and 4 of
P.D. No. 1084 reads, as follows:
Section 2. Declaration of policy. It is the declared policy of the State to provide for a
coordinated, economical and efficient reclamation of lands, and the administration
and operation of lands belonging to, managed and/or operated by the government,
with the object of maximizing their utilization and hastening their development
consistent with the public interest.
Section 4. Purposes. The Authority is hereby created for the following purposes:
(a) To reclaim land, including foreshore and submerged areas, by dredging,
filling or other means, or to acquire reclaimed land;

(b) To develop, improve, acquire, administer, deal in, subdivide, dispose,

lease and sell any and all kinds of lands, buildings, estates and other forms
of real property, owned, managed, controlled and/or operated by the
government.
(c) To provide for, operate or administer such services as may be necessary
for the efficient, economical and beneficial utilization of the above properties.
The twin requirement of common good and economic viability was lengthily discussed
in the case of Manila International Airport Authority v. Court of Appeals, 9 the pertinent
portion of which reads:
Third, the government-owned or controlled corporations created through special
charters are those that meet the two conditions prescribed in Section 16, Article XII of
the Constitution.
The first condition is that the government-owned or controlled corporation must be
established for the common good. The second condition is that the governmentowned or controlled corporation must meet the test of economic viability. Section 16,
Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability.
The Constitution expressly authorizes the legislature to create "government-owned or
controlled corporations" through special charters only if these entities are required to
meet the twin conditions of common good and economic viability. In other words,
Congress has no power to create government-owned or controlled corporations with
special charters unless they are made to comply with the two conditions of common
good and economic viability. The test of economic viability applies only to
government-owned or controlled corporations that perform economic or commercial
activities and need to compete in the market place. Being essentially economic
vehicles of the State for the common good meaning for economic development
purposes these government-owned or controlled corporations with special charters
are usually organized as stock corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and
performing governmental or public functions need not meet the test of economic
viability. These instrumentalities perform essential public services for the common
good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "governmentowned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental

or public functions. Congress has plenary authority to create government

instrumentalities vested with corporate powers provided these instrumentalities
perform essential government functions or public services. However, when the
legislature creates through special charters corporations that perform economic or
commercial activities, such entities known as "government-owned or controlled
corporations" must meet the test of economic viability because they compete in the
market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of
the Philippines and similar government-owned or controlled corporations, which
derive their incometo meet operating expenses solely from commercial transactions
in competition with the private sector. The intent of the Constitution is to prevent the
creation of government-owned or controlled corporations that cannot survive on their
own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to
the Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past.
If a government corporation loses, then it makes its claim upon the taxpayers' money
through new equity infusions from the government and what is always invoked is the
common good. That is the reason why this year, out of a budget of P115 billion for the
entire government, about P28 billion of this will go into equity infusions to support a
few government financial institutions. And this is all taxpayers' money which could
have been relocated to agrarian reform, to social services like health and education,
to augment the salaries of grossly underpaid public employees. And yet this is all
going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they
become viable. And so, Madam President, I reiterate, for the committee's
consideration and I am glad that I am joined in this proposal by Commissioner Foz,
the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC TEST,"
together with the common good.1wphi1
Father Joaquin G. Bernas, a leading member of the Constitutional Commission,
explains in his textbook The 1987 Constitution of the Republic of the Philippines: A
Commentary:
The second sentence was added by the 1986 Constitutional Commission. The
significant addition, however, is the phrase "in the interest of the common good and
subject to the test of economic viability." The addition includes the ideas that they
must show capacity to function efficiently in business and that they should not go into
activities which the private sector can do better. Moreover, economic viability is more
than financial viability but also includes capability to make profit and generate benefits
not quantifiable in financial terms.

Clearly, the test of economic viability does not apply to government entities vested
with corporate powers and performing essential public services. The State is
obligated to render essential public services regardless of the economic viability of
providing such service. The non-economic viability of rendering such essential public
service does not excuse the State from withholding such essential services from the
public.
However, government-owned or controlled corporations with special charters,
organized essentially for economic or commercial objectives, must meet the test of
economic viability. These are the government-owned or controlled corporations that
are usually organized under their special charters as stock corporations, like the Land
Bank of the Philippines and the Development Bank of the Philippines. These are the
government-owned or controlled corporations, along with government-owned or
controlled corporations organized under the Corporation Code, that fall under the
definition of "government-owned or controlled corporations" in Section 2(10) of the
Administrative Code. [Emphases supplied]
This Court is convinced that PRA is not a GOCC either under Section 2(3) of the
Introductory Provisions of the Administrative Code or under Section 16, Article XII of
the 1987 Constitution. The facts, the evidence on record and jurisprudence on the
issue support the position that PRA was not organized either as a stock or a nonstock corporation. Neither was it created by Congress to operate commercially and
compete in the private market. Instead, PRA is a government instrumentality vested
with corporate powers and performing an essential public service pursuant to Section
2(10) of the Introductory Provisions of the Administrative Code. Being an incorporated
government instrumentality, it is exempt from payment of real property tax.
Clearly, respondent has no valid or legal basis in taxing the subject reclaimed lands
managed by PRA. On the other hand, Section 234(a) of the LGC, in relation to its
Section 133(o), exempts PRA from paying realty taxes and protects it from the taxing
powers of local government units.
Sections 234(a) and 133(o) of the LGC provide, as follows:
SEC. 234. Exemptions from Real Property Tax The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.
xxxx
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. [Emphasis supplied]
It is clear from Section 234 that real property owned by the Republic of the Philippines
(the Republic) is exempt from real property tax unless the beneficial use thereof has
been granted to a taxable person. In this case, there is no proof that PRA granted the
beneficial use of the subject reclaimed lands to a taxable entity. There is no showing
on record either that PRA leased the subject reclaimed properties to a private taxable
entity.
This exemption should be read in relation to Section 133(o) of the same Code, which
prohibits local governments from imposing "taxes, fees or charges of any kind on the
National Government, its agencies and instrumentalities x x x." The Administrative
Code allows real property owned by the Republic to be titled in the name of agencies
or instrumentalities of the national government. Such real properties remain owned by
the Republic and continue to be exempt from real estate tax.
Indeed, the Republic grants the beneficial use of its real property to an agency or
instrumentality of the national government. This happens when the title of the real
property is transferred to an agency or instrumentality even as the Republic remains
the owner of the real property. Such arrangement does not result in the loss of the tax
exemption, unless "the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person."10
The rationale behind Section 133(o) has also been explained in the case of the
Manila International Airport Authority,11 to wit:
Section 133(o) recognizes the basic principle that local governments cannot tax the
national government, which historically merely delegated to local governments the
power to tax. While the 1987 Constitution now includes taxation as one of the powers
of local governments, local governments may only exercise such power "subject to
such guidelines and limitations as the Congress may provide."
When local governments invoke the power to tax on national government
instrumentalities, such power is construed strictly against local governments. The rule
is that a tax is never presumed and there must be clear language in the law imposing
the tax. Any doubt whether a person, article or activity is taxable is resolved against
taxation. This rule applies with greater force when local governments seek to tax
national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming
the exemption. However, when Congress grants an exemption to a national
government instrumentality from local taxation, such exemption is construed liberally
in favor of the national government instrumentality. As this Court declared in Maceda
v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the
benefit of the government itself or its agencies. In such case the practical effect of an
exemption is merely to reduce the amount of money that has to be handled by

government in the course of its operations. For these reasons, provisions granting
exemptions to government agencies may be construed liberally, in favor of non taxliability of such agencies.
There is, moreover, no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of public funds from one
government pocket to another.
There is also no reason for local governments to tax national government
instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to tax
government instrumentalities for the delivery of essential public services for sound
and compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any
doubt whether such power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless otherwise
provided" in the Code, local governments cannot tax national government
instrumentalities. As this Court held in Basco v. Philippine Amusements and Gaming
Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in
any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (MC Culloch v. Maryland,
4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in
such a way as to prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them." (Antieau, Modern Constitutional
Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as "a tool for regulation." (U.S. v. Sanchez, 340 US 42)
The power to tax which was called by Justice Marshall as the "power to destroy"
(McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it. [Emphases
supplied]
The Court agrees with PRA that the subject reclaimed lands are still part of the public
domain, owned by the State and, therefore, exempt from payment of real estate
taxes.

Section 2, Article XII of the 1987 Constitution reads in part, as follows:

Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora
and fauna, and other natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be under the full control and
supervision of the State. The State may directly undertake such activities, or it may
enter into co-production, joint venture, or production-sharing agreements with Filipino
citizens, or corporations or associations at least 60 per centum of whose capital is
owned by such citizens. Such agreements may be for a period not exceeding twentyfive years, renewable for not more than twenty-five years, and under such terms and
conditions as may provided by law. In cases of water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of waterpower, beneficial use
may be the measure and limit of the grant.
Similarly, Article 420 of the Civil Code enumerates properties belonging to the State:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents,
ports and bridges constructed by the State, banks, shores, roadsteads, and
others of similar character;
(2) Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national
wealth. [Emphases supplied]
Here, the subject lands are reclaimed lands, specifically portions of the foreshore and
offshore areas of Manila Bay. As such, these lands remain public lands and form part
of the public domain. In the case of Chavez v. Public Estates Authority and AMARI
Coastal Development Corporation,12 the Court held that foreshore and submerged
areas irrefutably belonged to the public domain and were inalienable unless
reclaimed, classified as alienable lands open to disposition and further declared no
longer needed for public service. The fact that alienable lands of the public domain
were transferred to the PEA (now PRA) and issued land patents or certificates of title
in PEAs name did not automatically make such lands private. This Court also held
therein that reclaimed lands retained their inherent potential as areas for public use or
public service.
As the central implementing agency tasked to undertake reclamation projects
nationwide, with authority to sell reclaimed lands, PEA took the place of DENR as the
government agency charged with leasing or selling reclaimed lands of the public
domain. The reclaimed lands being leased or sold by PEA are not private lands, in the
same manner that DENR, when it disposes of other alienable lands, does not dispose
of private lands but alienable lands of the public domain. Only when qualified private
parties acquire these lands will the lands become private lands. In the hands of the
government agency tasked and authorized to dispose of alienable of disposable lands
of the public domain, these lands are still public, not private lands.

Furthermore, PEA's charter expressly states that PEA "shall hold lands of the public
domain" as well as "any and all kinds of lands." PEA can hold both lands of the public
domain and private lands. Thus, the mere fact that alienable lands of the public
domain like the Freedom Islands are transferred to PEA and issued land patents or
certificates of title in PEA's name does not automatically make such lands private.13
Likewise, it is worthy to mention Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, thus:
SEC 14. Power to Reserve Lands of the Public and Private Dominion of the
Government.(1)The President shall have the power to reserve for settlement or public use, and for
specific public purposes, any of the lands of the public domain, the use of which is not
otherwise directed by law. The reserved land shall thereafter remain subject to the
specific public purpose indicated until otherwise provided by law or proclamation.
Reclaimed lands such as the subject lands in issue are reserved lands for public use.
They are properties of public dominion. The ownership of such lands remains with the
State unless they are withdrawn by law or presidential proclamation from public use.
Under Section 2, Article XII of the 1987 Constitution, the foreshore and submerged
areas of Manila Bay are part of the "lands of the public domain, waters x x x and other
natural resources" and consequently "owned by the State." As such, foreshore and
submerged areas "shall not be alienated," unless they are classified as "agricultural
lands" of the public domain. The mere reclamation of these areas by PEA does not
convert these inalienable natural resources of the State into alienable or disposable
lands of the public domain. There must be a law or presidential proclamation officially
classifying these reclaimed lands as alienable or disposable and open to disposition
or concession. Moreover, these reclaimed lands cannot be classified as alienable or
disposable if the law has reserved them for some public or quasi-public use.
As the Court has repeatedly ruled, properties of public dominion are not subject to
execution or foreclosure sale.14Thus, the assessment, levy and foreclosure made on
the subject reclaimed lands by respondent, as well as the issuances of certificates of
title in favor of respondent, are without basis.
WHEREFORE, the petition is GRANTED. The January 8, 2010 Order of the Regional
Trial Court, Branch 195, Paraaque City, is REVERSED and SET ASIDE. All
reclaimed properties owned by the Philippine Reclamation Authority are hereby
declared EXEMPT from real estate taxes. All real estate tax assessments, including
the final notices of real estate tax delinquencies, issued by the City of Paraaque on
the subject reclaimed properties; the assailed auction sale, dated April 7, 2003; and
the Certificates of Sale subsequently issued by the Paraaque City Treasurer in favor
of the City of Paraaque, are all declared VOID.
SO ORDERED.

EN BANC

means developed by the Spanish legal system. The informals have

their own papers, their own forms of agreements, and their own
systems of registration, all of which are very clearly stated in the
maps which they use for their own informal business transactions.

HEIRS OF MARIO MALABANAN, G.R. No. 179987

Petitioner,
Present:
PUNO, C.J.,
QUISUMBING,
YNARES-SANTIAGO,
CARPIO,
- versus - AUSTRIA-MARTINEZ,
CORONA,
CARPIO MORALES,
TINGA,

If you take a walk through the countryside,

from Indonesia to Peru, and you walk by field after field--in each field
a different dog is going to bark at you. Even dogs know what private
property is all about. The only one who does not know it is the
government. The issue is that there exists a "common law" and an
"informal law" which the Latin American formal legal system does not
know how to recognize.

CHICO-NAZARIO,
VELASCO, JR.,
NACHURA,
LEONARDO DE CASTRO,
BRION,
REPUBLIC OF THE PHILIPPINES, PERALTA, and
Respondent. BERSAMIN, JJ.
Promulgated:
April 29, 2009
x--------------------------------------------------------------------------- x
DECISION
TINGA, J.:
One main reason why the informal sector has not become formal is
that from Indonesia toBrazil, 90 percent of the informal lands are not
titled and registered. This is a generalized phenomenon in the socalled Third World. And it has many consequences.
xxx

The question is: How is it that so many governments, from

Suharto's in Indonesia to Fujimori's in Peru, have wanted to title
these people and have not been able to do so effectively? One
reason is that none of the state systems in Asia or Latin America can
gather proof of informal titles. In Peru, the informals have means of
proving property ownership to each other which are not the same

- Hernando De Soto[1]
This decision inevitably affects all untitled lands currently in possession of
persons and entities other than the Philippine government. The petition, while
unremarkable as to the facts, was accepted by the Court en banc in order to provide
definitive clarity to the applicability and scope of original registration proceedings
under Sections 14(1) and 14(2) of the Property Registration Decree. In doing so, the
Court confronts not only the relevant provisions of the Public Land Act and the Civil
Code, but also the reality on the ground. The countrywide phenomenon of untitled
lands, as well as the problem of informal settlement it has spawned, has unfortunately
been treated with benign neglect. Yet our current laws are hemmed in by their own
circumscriptions in addressing the phenomenon. Still, the duty on our part is primarily
to decide cases before us in accord with the Constitution and the legal principles that
have developed our public land law, though our social obligations dissuade us from
casting a blind eye on the endemic problems.
I.
On 20 February 1998, Mario Malabanan filed an application for land registration
covering a parcel of land identified as Lot 9864-A, Cad-452-D, Silang Cadastre,
[2]
situated in Barangay Tibig, Silang Cavite, and consisting of 71,324 square meters.
Malabanan claimed that he had purchased the property from Eduardo Velazco, [3] and
that he and his predecessors-in-interest had been in open, notorious, and continuous
adverse and peaceful possession of the land for more than thirty (30) years.
The application was raffled to the Regional Trial Court of (RTC) Cavite-Tagaytay City,
Branch 18. The Office of the Solicitor General (OSG) duly designated the Assistant
Provincial Prosecutor of Cavite, Jose Velazco, Jr., to appear on behalf of the State.
[4]
Apart from presenting documentary evidence, Malabanan himself and his witness,
Aristedes Velazco, testified at the hearing. Velazco testified that the property was
originally belonged to a twenty-two hectare property owned by his great-grandfather,
Lino Velazco. Lino had four sons Benedicto, Gregorio, Eduardo and Estebanthe
fourth being Aristedess grandfather. Upon Linos death, his four sons inherited the
property and divided it among themselves. But by 1966, Estebans wife, Magdalena,
had become the administrator of all the properties inherited by the Velazco sons from
their father, Lino. After the death of Esteban and Magdalena, their son Virgilio

succeeded them in administering the properties, including Lot 9864-A, which

originally belonged to his uncle, Eduardo Velazco. It was this property that was sold
by Eduardo Velazco to Malabanan.[5]
Assistant Provincial Prosecutor Jose Velazco, Jr. did not cross-examine
Aristedes Velazco. He further manifested that he also [knew] the property and I affirm
the truth of the testimony given by Mr. Velazco. [6] The Republic of
the Philippines likewise did not present any evidence to controvert the application.
Among the evidence presented by Malabanan during trial was a Certification
dated 11 June 2001, issued by the Community Environment & Natural Resources
Office, Department of Environment and Natural Resources (CENRO-DENR), which
stated that the subject property was verified to be within the Alienable or Disposable
land per Land Classification Map No. 3013 established under Project No. 20-A and
approved as such under FAO 4-1656on March 15, 1982.[7]
On 3 December 2002, the RTC rendered judgment in favor of Malabanan,
the dispositive portion of which reads:
WHEREFORE, this Court hereby approves this application
for registration and thus places under the operation of Act 141, Act
496 and/or P.D. 1529, otherwise known as Property Registration
Law, the lands described in Plan Csd-04-0173123-D, Lot 9864-A
and containing an area of Seventy One Thousand Three Hundred
Twenty Four (71,324) Square Meters, as supported by its technical
description now forming part of the record of this case, in addition to
other proofs adduced in the name of MARIO MALABANAN, who is
of legal age, Filipino, widower, and with residence at Munting Ilog,
Silang, Cavite.
Once this Decision becomes final and executory, the
corresponding decree of registration shall forthwith issue.

Malabanan died while the case was pending with the Court of Appeals;
hence, it was his heirs who appealed the decision of the appellate court.
Petitioners, before this Court, rely on our ruling in Republic v. Naguit,[11] which was
handed down just four months prior to Herbieto. Petitioners suggest that the
discussion in Herbieto cited by the Court of Appeals is actually obiter dictum since the
Metropolitan Trial Court therein which had directed the registration of the property had
no jurisdiction in the first place since the requisite notice of hearing was published
only after the hearing had already begun. Naguit, petitioners argue, remains the
controlling doctrine, especially when the property in question is agricultural land.
Therefore, with respect to agricultural lands, any possession prior to the declaration of
the alienable property as disposable may be counted in reckoning the period of
possession to perfect title under the Public Land Act and the Property Registration
Decree.
[10]

The petition was referred to the Court en banc,[12] and on 11 November 2008,
the case was heard on oral arguments. The Court formulated the principal issues for
the oral arguments, to wit:
1. In order that an alienable and disposable land of the
public domain may be registered under Section 14(1) of Presidential
Decree No. 1529, otherwise known as the Property Registration
Decree, should the land be classified as alienable and disposable as
of June 12, 1945 or is it sufficient that such classification occur at
any time prior to the filing of the applicant for registration provided
that it is established that the applicant has been in open, continuous,
exclusive and notorious possession of the land under a bona
fide claim of ownership since June 12, 1945 or earlier?
2. For purposes of Section 14(2) of the Property
Registration Decree may a parcel of land classified as alienable and
disposable be deemed private land and therefore susceptible to
acquisition by prescription in accordance with the Civil Code?

SO ORDERED.
The Republic interposed an appeal to the Court of Appeals, arguing that
Malabanan had failed to prove that the property belonged to the alienable and
disposable land of the public domain, and that the RTC had erred in finding that he
had been in possession of the property in the manner and for the length of time
required by law for confirmation of imperfect title.
On 23 February 2007, the Court of Appeals rendered a Decision[8] reversing
the RTC and dismissing the application of Malabanan. The appellate court held that
under Section 14(1) of the Property Registration Decree any period of possession
prior to the classification of the lots as alienable and disposable was inconsequential
and should be excluded from the computation of the period of possession. Thus, the
appellate court noted that since the CENRO-DENR certification had verified that the
property was declared alienable anddisposable only on 15 March 1982, the Velazcos
possession prior to that date could not be factored in the computation of the period of
possession. This interpretation of the Court of Appeals of Section 14(1) of the
Property Registration Decree was based on the Courts ruling in Republic v. Herbieto.
[9]

3. May a parcel of land established as agricultural in

character either because of its use or because its slope is below that
of forest lands be registrable under Section 14(2) of the Property
Registration Decree in relation to the provisions of the Civil Code on
acquisitive prescription?
4. Are petitioners entitled to the registration of the subject
land in their names under Section 14(1) or Section 14(2) of the
Property Registration Decree or both?[13]
Based on these issues, the parties formulated their respective positions.
With respect to Section 14(1), petitioners reiterate that the analysis of the
Court inNaguit is the correct interpretation of the provision. The seemingly
contradictory pronouncement in Herbieto, it is submitted, should be considered obiter
dictum, since the land registration proceedings therein was void ab initio due to lack
of publication of the notice of initial hearing. Petitioners further point out that
in Republic v. Bibonia,[14]promulgated in June of 2007, the Court applied Naguit and
adopted the same observation that the preferred interpretation by the OSG of Section

14(1) was patently absurd. For its part, the OSG remains insistent that for Section
14(1) to apply, the land should have been classified as alienable and disposable as
of 12 June 1945. Apart from Herbieto, the OSG also cites the subsequent rulings
in Buenaventura
v.
Republic,[15] Fieldman
Agricultural
Trading
v.
Republic[16] and Republic v. Imperial Credit Corporation,[17] as well as the earlier case
ofDirector of Lands v. Court of Appeals.[18]
With respect to Section 14(2), petitioners submit that open, continuous,
exclusive and notorious possession of an alienable land of the public domain for more
than 30 years ipso jure converts the land into private property, thus placing it under
the coverage of Section 14(2). According to them, it would not matter whether the
land sought to be registered was previously classified as agricultural land of the public
domain so long as, at the time of the application, the property had already been
converted into private property through prescription. To bolster their argument,
petitioners cite extensively from our 2008 ruling inRepublic v. T.A.N. Properties.[19]
The arguments submitted by the OSG with respect to Section 14(2) are
more extensive. The OSG notes that under Article 1113 of the Civil Code, the
acquisitive prescription of properties of the State refers to patrimonial property, while
Section 14(2) speaks of private lands. It observes that the Court has yet to decide a
case that presented Section 14(2) as a ground for application for registration, and that
the 30-year possession period refers to the period of possession under Section 48(b)
of the Public Land Act, and not the concept of prescription under the Civil Code. The
OSG further submits that, assuming that the 30-year prescriptive period can run
against public lands, said period should be reckoned from the time the public land
was declared alienable and disposable.
Both sides likewise offer special arguments with respect to the particular
factual circumstances surrounding the subject property and the ownership thereof.
II.
First, we discuss Section 14(1) of the Property Registration Decree. For a full
understanding of the provision, reference has to be made to the Public Land Act.
A.
Commonwealth Act No. 141, also known as the Public Land Act, has, since
its enactment, governed the classification and disposition of lands of the public
domain. The President is authorized, from time to time, to classify the lands of the
public domain into alienable and disposable, timber, or mineral lands.[20] Alienable and
disposable lands of the public domain are further classified according to their uses
into (a) agricultural; (b) residential, commercial, industrial, or for similar productive
purposes; (c) educational, charitable, or other similar purposes; or (d) reservations for
town sites and for public and quasi-public uses.[21]
May a private person validly seek the registration in his/her name of
alienable and disposable lands of the public domain? Section 11 of the Public Land
Act acknowledges that public lands suitable for agricultural purposes may be
disposed of by confirmation of imperfect or incomplete titles through judicial
legalization.[22] Section 48(b) of the Public Land Act, as amended by P.D. No. 1073,
supplies the details and unmistakably grants that right, subject to the requisites stated
therein:
Sec. 48. The following described citizens of the
Philippines, occupying lands of the public domain or claiming to
own any such land or an interest therein, but whose titles have not

been perfected or completed, may apply to the Court of First

Instance of the province where the land is located for confirmation
of their claims and the issuance of a certificate of title therefor,
under the Land Registration Act, to wit:
xxx
(b) Those who by themselves or through their
predecessors in interest have been in open, continuous, exclusive,
and notorious possession and occupation of alienable and
disposable lands of the public domain, under a bona fide claim of
acquisition of ownership, since June 12, 1945, or earlier,
immediately preceding the filing of the application for confirmation
of title except when prevented by war or force majeure. These
shall be conclusively presumed to have performed all the
conditions essential to a Government grant and shall be entitled to
a certificate of title under the provisions of this chapter.
Section 48(b) of Com. Act No. 141 received its present wording in 1977 when the law
was amended by P.D. No. 1073. Two significant amendments were introduced by P.D.
No. 1073.First, the term agricultural lands was changed to alienable and disposable
lands of the public domain. The OSG submits that this amendment restricted the
scope of the lands that may be registered. [23] This is not actually the case. Under
Section 9 of the Public Land Act, agricultural lands are a mere subset of lands of the
public domain alienable or open to disposition. Evidently, alienable and disposable
lands of the public domain are a larger class than only agricultural lands.
Second, the length of the requisite possession was changed from possession for
thirty (30) years immediately preceding the filing of the application to possession
since June 12, 1945 or earlier. The Court in Naguit explained:
When the Public Land Act was first promulgated in 1936,
the period of possession deemed necessary to vest the right to
register their title to agricultural lands of the public domain
commenced from July 26, 1894. However, this period was amended
by R.A. No. 1942, which provided that the bona fide claim of
ownership must have been for at least thirty (30) years. Then in
1977, Section 48(b) of the Public Land Act was again amended, this
time by P.D. No. 1073, which pegged the reckoning date at June 12,
1945. xxx
It bears further observation that Section 48(b) of Com. Act No, 141 is virtually the
same as Section 14(1) of the Property Registration Decree. Said Decree codified the
various laws relative to the registration of property, including lands of the public
domain. It is Section 14(1) that operationalizes the registration of such lands of the
public domain. The provision reads:

SECTION 14. Who may apply. The following persons may

file in the proper Court of First Instance an application for
registration of title to land, whether personally or through their duly
authorized representatives:

(1)

those who by themselves or through their

predecessors-in-interest have been in
open, continuous, exclusive and notorious
possession and occupation of alienable and
disposable lands of the public domain
under abona fide claim of ownership since
June 12, 1945, or earlier.

Notwithstanding the passage of the Property Registration Decree and the

inclusion of Section 14(1) therein, the Public Land Act has remained in effect. Both
laws commonly refer to persons or their predecessors-in-interest who have been in
open, continuous, exclusive and notorious possession and occupation of alienable
and disposable lands of the public domain under a bona fide claim of ownership
since June 12, 1945, or earlier. That circumstance may have led to the impression that
one or the other is a redundancy, or that Section 48(b) of the Public Land Act has
somehow been repealed or mooted. That is not the case.
The opening clauses of Section 48 of the Public Land Act and Section 14 of
the Property Registration Decree warrant comparison:
Sec. 48 [of the Public Land Act]. The following described
citizens of the Philippines, occupying lands of the public domain or
claiming to own any such land or an interest therein, but whose
titles have not been perfected or completed, may apply to the
Court of First Instance of the province where the land is located for
confirmation of their claims and the issuance of a certificate of title
therefor, under the Land Registration Act, to wit:

than establishing the right itself for the first time. It is proper to assert that it is the
Public Land Act, as amended by P.D. No. 1073 effective 25 January 1977, that has
primarily established the right of a Filipino citizen who has been in open, continuous,
exclusive, and notorious possession and occupation of alienable and disposable lands
of the public domain, under a bona fide claim of acquisition of ownership, since June
12, 1945 to perfect or complete his title by applying with the proper court for the
confirmation of his ownership claim and the issuance of the corresponding certificate
of title.
Section 48 can be viewed in conjunction with the afore-quoted Section 11 of
the Public Land Act, which provides that public lands suitable for agricultural purposes
may be disposed of by confirmation of imperfect or incomplete titles, and given the
notion that both provisions declare that it is indeed the Public Land Act that primarily
establishes the substantive ownership of the possessor who has been in possession
of the property since 12 June 1945. In turn, Section 14(a) of the Property Registration
Decree recognizes the substantive right granted under Section 48(b) of the Public
Land Act, as well provides the corresponding original registration procedure for the
judicial confirmation of an imperfect or incomplete title.
There is another limitation to the right granted under Section 48(b). Section 47 of the
Public Land Act limits the period within which one may exercise the right to seek
registration under Section 48. The provision has been amended several times, most
recently by Rep. Act No. 9176 in 2002. It currently reads thus:
Section 47. The persons specified in the next following
section are hereby granted time, not to extend beyond December
31, 2020 within which to avail of the benefits of this
Chapter: Provided, That this period shall apply only where the area
applied for does not exceed twelve (12) hectares: Provided, further,
That the several periods of time designated by the President in
accordance with Section Forty-Five of this Act shall apply also to the
lands comprised in the provisions of this Chapter, but this Section
shall not be construed as prohibiting any said persons from acting
under this Chapter at any time prior to the period fixed by the
President.[24]

xxx

Accordingly under the current state of the law, the substantive right granted under
Section 48(b) may be availed of only until 31 December 2020.

Sec. 14 [of the Property Registration Decree]. Who may

apply. The following persons may file in the proper Court of First
Instance an application for registration of title to land, whether
personally or through their duly authorized representatives:

B.
Despite the clear text of Section 48(b) of the Public Land Act, as amended
and Section 14(a) of the Property Registration Decree, the OSG has adopted the
position that for one to acquire the right to seek registration of an alienable and
disposable land of the public domain, it is not enough that the applicant and his/her
predecessors-in-interest be in possession under abona fide claim of ownership since
12 June 1945; the alienable and disposable character of the property must have been
declared also as of 12 June 1945. Following the OSGs approach,all lands certified as
alienable and disposable after 12 June 1945 cannot be registered either under
Section 14(1) of the Property Registration Decree or Section 48(b) of the Public Land
Act as amended. The absurdity of such an implication was discussed in Naguit.

xxx
It is clear that Section 48 of the Public Land Act is more descriptive of the
nature of the right enjoyed by the possessor than Section 14 of the Property
Registration Decree, which seems to presume the pre-existence of the right, rather

Petitioner suggests an interpretation that the alienable and

disposable character of the land should have already been
established since June 12, 1945 or earlier. This is not borne out by
the plain meaning of Section 14(1). Since June 12, 1945, as used in
the provision, qualifies its antecedent phrase under a bonafide claim
of ownership. Generally speaking, qualifying words restrict or modify
only the words or phrases to which they are immediately associated,
and not those distantly or remotely located.[25] Ad proximum
antecedents fiat relation nisi impediatur sentencia.
Besides, we are mindful of the absurdity that would result if we adopt
petitioners position. Absent a legislative amendment, the rule would
be, adopting the OSGs view, that all lands of the public domain
which were not declared alienable or disposable before June 12,
1945 would not be susceptible to original registration, no matter the
length of unchallenged possession by the occupant. Such
interpretation renders paragraph (1) of Section 14 virtually
inoperative and even precludes the government from giving it effect
even as it decides to reclassify public agricultural lands as alienable
and disposable. The unreasonableness of the situation would even
be aggravated considering that before June 12, 1945,
the Philippines was not yet even considered an independent state.
Accordingly, the Court in Naguit explained:
[T]he more reasonable interpretation of Section 14(1) is
that it merely requires the property sought to be registered as
already alienable and disposable at the time the application for
registration of title is filed. If the State, at the time the application is
made, has not yet deemed it proper to release the property for
alienation or disposition, the presumption is that the government is
still reserving the right to utilize the property; hence, the need to
preserve its ownership in the State irrespective of the length of
adverse possession even if in good faith. However, if the property
has already been classified as alienable and disposable, as it is in
this case, then there is already an intention on the part of the State
to abdicate its exclusive prerogative over the property.
The Court declares that the correct interpretation of Section 14(1) is that
which was adopted in Naguit. The contrary pronouncement in Herbieto, as pointed
out in Naguit, absurdly limits the application of the provision to the point of virtual
inutility since it would only cover lands actually declared alienable and disposable
prior to 12 June 1945, even if the current possessor is able to establish open,
continuous, exclusive and notorious possession under a bona fide claim of ownership
long before that date.
Moreover, the Naguit interpretation allows more possessors under a bona
fide claim of ownership to avail of judicial confirmation of their imperfect titles than
what would be feasible under Herbieto. This balancing fact is significant, especially
considering our forthcoming discussion on the scope and reach of Section 14(2) of
the Property Registration Decree.

Petitioners make the salient observation that the contradictory passages

from Herbietoare obiter dicta since the land registration proceedings therein is
void ab initio in the first place due to lack of the requisite publication of the notice of
initial hearing. There is no need to explicitly overturn Herbieto, as it suffices that the
Courts acknowledgment that the particular line of argument used therein concerning
Section 14(1) is indeed obiter.
It may be noted that in the subsequent case of Buenaventura,[26] the Court,
citingHerbieto, again stated that [a]ny period of possession prior to the date when the
[s]ubject [property was] classified as alienable and disposable is inconsequential and
should be excluded from the computation of the period of possession That statement,
in the context of Section 14(1), is certainly erroneous. Nonetheless, the passage as
cited in Buenaventurashould again be considered as obiter. The application therein
was ultimately granted, citing Section 14(2). The evidence submitted by petitioners
therein did not establish any mode of possession on their part prior to 1948, thereby
precluding the application of Section 14(1). It is not even apparent from the decision
whether petitioners therein had claimed entitlement to original registration following
Section 14(1), their position being that they had been in exclusive possession under a
bona fide claim of ownership for over fifty (50) years, but not before 12 June 1945.
Thus, neither Herbieto nor its principal discipular ruling Buenaventura has
any precedental value with respect to Section 14(1). On the other hand, the ratio
of Naguit is embedded in Section 14(1), since it precisely involved situation wherein
the applicant had been in exclusive possession under a bona fide claim of ownership
prior to 12 June 1945. The Courts interpretation of Section 14(1) therein was decisive
to
the
resolution
of
the
case.
Any
doubt
as
to
which
between Naguit or Herbieto provides the final word of the Court on Section 14(1) is
now settled in favor of Naguit.
We noted in Naguit that it should be distinguished from Bracewell v. Court of
Appeals[27]since in the latter, the application for registration had been filed before the
land
was
declared
alienable
or
disposable.
The
dissent
though
pronounces Bracewell as the better rule between the two. Yet two years
after Bracewell, its ponente, the esteemed Justice Consuelo Ynares-Santiago,
penned the ruling in Republic v. Ceniza,[28] which involved a claim of possession that
extended back to 1927 over a public domain land that was declared alienable and
disposable only in 1980. Ceniza cited Bracewell, quoted extensively from it, and
following the mindset of the dissent, the attempt at registration in Ceniza should have
failed. Not so.
To prove that the land subject of an application for
registration is alienable, an applicant must establish the existence
of a positive act of the government such as a presidential
proclamation or an executive order; an administrative action;
investigation reports of Bureau of Lands investigators; and a
legislative act or a statute.
In this case, private respondents presented a certification
dated November 25, 1994, issued by Eduardo M. Inting, the
Community Environment and Natural Resources Officer in the
Department of Environment and Natural Resources Office in Cebu

City, stating that the lots involved were "found to be within the
alienable and disposable (sic) Block-I, Land Classification Project
No. 32-A, per map 2962 4-I555 dated December 9, 1980." This is
sufficient evidence to show the real character of the land subject of
private respondents application. Further, the certification enjoys a
presumption of regularity in the absence of contradictory
evidence, which is true in this case. Worth noting also was the
observation of the Court of Appeals stating that:
[n]o opposition was filed by the Bureaus
of Lands and Forestry to contest the application
of appellees on the ground that the property still
forms part of the public domain. Nor is there any
showing that the lots in question are forestal
land....
Thus, while the Court of Appeals erred in ruling that mere
possession of public land for the period required by law would
entitle its occupant to a confirmation of imperfect title, it did not err
in ruling in favor of private respondents as far as the first
requirement in Section 48(b) of the Public Land Act is concerned,
for they were able to overcome the burden of proving the
alienability of the land subject of their application.
As correctly found by the Court of Appeals, private
respondents were able to prove their open, continuous, exclusive
and notorious possession of the subject land even before the year
1927. As a rule, we are bound by the factual findings of the Court of
Appeals. Although there are exceptions, petitioner did not show that
this is one of them.[29]
Why did the Court in Ceniza, through the same eminent member who
authored Bracewell, sanction the registration under Section 48(b) of public domain
lands declared alienable or disposable thirty-five (35) years and 180 days after 12
June 1945? The telling difference is that in Ceniza, the application for registration was
filed nearly six (6) years after the land had been declared alienable or disposable,
while in Bracewell, the application was filed nine (9) years before the land was
declared alienable or disposable. That crucial difference was also stressed
in Naguit to contradistinguish it from Bracewell, a difference which the dissent seeks
to belittle.
III.
We next ascertain the correct framework of analysis with respect to Section 14(2).
The provision reads:

xxx

(2)

Those who have acquired ownership over

private lands by prescription under the
provisions of existing laws.
The Court in Naguit offered the following discussion concerning Section
14(2), which we did even then recognize, and still do, to be an obiter dictum, but we
nonetheless refer to it as material for further discussion, thus:
Did the enactment of the Property Registration Decree and
the amendatory P.D. No. 1073 preclude the application for
registration of alienable lands of the public domain, possession over
which commenced only after June 12, 1945? It did not, considering
Section 14(2) of the Property Registration Decree, which governs
and authorizes the application of those who have acquired
ownership of private lands by prescription under the provisions of
existing laws.
Prescription is one of the modes of acquiring ownership
under the Civil Code.[[30]] There is a consistent jurisprudential rule
that properties classified as alienable public land may be converted
into private property by reason of open, continuous and exclusive
possession of at least thirty (30) years.[[31]] With such conversion,
such property may now fall within the contemplation of private lands
under Section 14(2), and thus susceptible to registration by those
who have acquired ownership through prescription. Thus, even if
possession of the alienable public land commenced on a date later
than June 12, 1945, and such possession being been open,
continuous and exclusive, then the possessor may have the right to
register the land by virtue of Section 14(2) of the Property
Registration Decree.
Naguit did not involve the application of Section 14(2), unlike in this case where
petitioners have based their registration bid primarily on that provision, and where the
evidence definitively establishes their claim of possession only as far back as 1948. It
is in this case that we can properly appreciate the nuances of the provision.
A.
The obiter in Naguit cited the Civil Code provisions on prescription as the possible
basis for application for original registration under Section 14(2). Specifically, it is
Article 1113 which provides legal foundation for the application. It reads:

SECTION 14. Who may apply. The following persons may

file in the proper Court of First Instance an application for
registration of title to land, whether personally or through their duly
authorized representatives:

All things which are within the commerce of men are

susceptible of prescription, unless otherwise provided. Property of

the State or any of its subdivisions not patrimonial in character shall

not be the object of prescription.

It is clear under the Civil Code that where lands of the public domain are patrimonial in
character, they are susceptible to acquisitive prescription. On the other hand, among
the public domain lands that are not susceptible to acquisitive prescription are timber
lands and mineral lands. The Constitution itself proscribes private ownership of timber
or mineral lands.
There are in fact several provisions in the Civil Code concerning the
acquisition of real property through prescription. Ownership of real property may be
acquired by ordinary prescription of ten (10) years,[32] or through extraordinary
prescription of thirty (30) years.[33] Ordinary acquisitive prescription requires
possession in good faith,[34] as well as just title.[35]
When Section 14(2) of the Property Registration Decree explicitly provides
that persons who have acquired ownership over private lands by prescription under
the provisions of existing laws, it unmistakably refers to the Civil Code as a valid basis
for the registration of lands. The Civil Code is the only existing law that specifically
allows the acquisition by prescription of private lands, including patrimonial property
belonging to the State. Thus, the critical question that needs affirmation is whether
Section 14(2) does encompass original registration proceedings over patrimonial
property of the State, which a private person has acquired through prescription.
The Naguit obiter had adverted to a frequently reiterated jurisprudence
holding that properties classified as alienable public land may be converted into
private property by reason of open, continuous and exclusive possession of at least
thirty (30) years.[36] Yet if we ascertain the source of the thirty-year period, additional
complexities relating to Section 14(2) and to how exactly it operates would emerge.
For there are in fact two distinct origins of the thirty (30)-year rule.
The first source is Rep. Act No. 1942, enacted in 1957, which amended
Section 48(b) of the Public Land Act by granting the right to seek original registration
of alienable public lands through possession in the concept of an owner for at least
thirty years.
The following-described citizens of the Philippines,
occupying lands of the public domain or claiming to own any such
lands or an interest therein, but whose titles have not been
perfected or completed, may apply to the Court of First Instance of
the province where the land is located for confirmation of their
claims and the issuance of a certificate of title therefor, under the
Land Registration Act, to wit:
xxx

xxx

xxx

(b) Those who by themselves or through their

predecessors in interest have been in open, continuous, exclusive
and notorious possession and occupation of agricultural lands of
the public domain, under a bona fide claim of acquisition of
ownership, for at least thirty years immediately preceding the
filing of the application for confirmation of title, except when
prevented by war or force majeure. These shall be conclusively

presumed to have performed all the conditions essential to a

Government grant and shall be entitled to a certificate of title under
the provisions of this Chapter. (emphasis supplied)[37]
This provision was repealed in 1977 with the enactment of P.D. 1073, which
made the date 12 June 1945 the reckoning point for the first time. Nonetheless,
applications for registration filed prior to 1977 could have invoked the 30-year rule
introduced by Rep. Act No. 1942.
The second source is Section 14(2) of P.D. 1529 itself, at least by implication,
as it applies the rules on prescription under the Civil Code, particularly Article 1113 in
relation to Article 1137. Note that there are two kinds of prescription under the Civil
Codeordinary acquisitive prescription and extraordinary acquisitive prescription,
which, under Article 1137, is completed through uninterrupted adverse possession for
thirty years, without need of title or of good faith.
Obviously, the first source of the thirty (30)-year period rule, Rep. Act No.
1942, became unavailable after 1977. At present, the only legal basis for the thirty
(30)-year period is the law on prescription under the Civil Code, as mandated under
Section 14(2). However, there is a material difference between how the thirty (30)-year
rule operated under Rep. Act No. 1942 and how it did under the Civil Code.
Section 48(b) of the Public Land Act, as amended by Rep. Act No. 1942, did
not refer to or call into application the Civil Code provisions on prescription. It merely
set forth a requisite thirty-year possession period immediately preceding the
application for confirmation of title, without any qualification as to whether the property
should be declared alienable at the beginning of, and continue as such, throughout
the entire thirty-(30) years. There is neither statutory nor jurisprudential basis to assert
Rep. Act No. 1942 had mandated such a requirement, [38] similar to our earlier finding
with respect to the present language of Section 48(b), which now sets 12 June
1945 as the point of reference.
Then, with the repeal of Rep. Act No. 1942, the thirty-year possession period
as basis for original registration became Section 14(2) of the Property Registration
Decree, which entitled those who have acquired ownership over private lands by
prescription under the provisions of existing laws to apply for original registration.
Again, the thirty-year period is derived from the rule on extraordinary prescription
under Article 1137 of the Civil Code. At the same time, Section 14(2) puts into
operation the entire regime of prescription under the Civil Code, a fact which does not
hold true with respect to Section 14(1).
B.
Unlike Section 14(1), Section 14(2) explicitly refers to the principles on
prescription under existing laws. Accordingly, we are impelled to apply the civil law
concept of prescription, as set forth in the Civil Code, in our interpretation of Section
14(2). There is no similar demand on our part in the case of Section 14(1).
The critical qualification under Article 1113 of the Civil Code is thus: [p]roperty
of the State or any of its subdivisions not patrimonial in character shall not be the
object of prescription. The identification what consists of patrimonial property is
provided by Articles 420 and 421, which we quote in full:
Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals,

rivers, torrents, ports and bridges constructed by the State,
banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public
use, and are intended for some public service or for the
development of the national wealth.
Art. 421. All other property of the State, which is not of the
character stated in the preceding article, is patrimonial property
It is clear that property of public dominion, which generally includes property
belonging to the State, cannot be the object of prescription or, indeed, be subject of
the commerce of man.[39] Lands of the public domain, whether declared alienable and
disposable or not, are property of public dominion and thus insusceptible to
acquisition by prescription.
Let us now explore the effects under the Civil Code of a declaration by the President
or any duly authorized government officer of alienability and disposability of lands of
the public domain. Would such lands so declared alienable and disposable be
converted, under the Civil Code, from property of the public dominion into patrimonial
property? After all, by connotative definition, alienable and disposable lands may be
the object of the commerce of man; Article 1113 provides that all things within the
commerce of man are susceptible to prescription; and the same provision further
provides that patrimonial property of the State may be acquired by prescription.
Nonetheless, Article 422 of the Civil Code states that [p]roperty of public
dominion, when no longer intended for public use or for public service, shall form part
of the patrimonial property of the State. It is this provision that controls how public
dominion property may be converted into patrimonial property susceptible to
acquisition by prescription. After all, Article 420 (2) makes clear that those
property which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth are public dominion
property. For as long as the property belongs to the State, although already classified
as alienable or disposable, it remains property of the public dominion if when it is
intended for some public service or for the development of the national wealth.
Accordingly, there must be an express declaration by the State that the
public dominion property is no longer intended for public service or the
development of the national wealth or that the property has been converted into
patrimonial. Without such express declaration, the property, even if classified
as alienable or disposable, remains property of the public dominion, pursuant
to Article 420(2), and thus incapable of acquisition by prescription. It is only
when such alienable and disposable lands are expressly declared by the State
to be no longer intended for public service or for the development of the
national wealth that the period of acquisitive prescription can begin to run.
Such declaration shall be in the form of a law duly enacted by Congress or a
Presidential Proclamation in cases where the President is duly authorized by
law.
It is comprehensible with ease that this reading of Section 14(2) of the
Property Registration Decree limits its scope and reach and thus affects the

registrability even of lands already declared alienable and disposable to the detriment
of the bona fide possessors or occupants claiming title to the lands. Yet this
interpretation is in accord with the Regalian doctrine and its concomitant assumption
that all lands owned by the State, although declared alienable or disposable, remain
as such and ought to be used only by the Government.
Recourse does not lie with this Court in the matter. The duty of the Court is
to apply the Constitution and the laws in accordance with their language and intent.
The remedy is to change the law, which is the province of the legislative branch.
Congress can very well be entreated to amend Section 14(2) of the Property
Registration Decree and pertinent provisions of the Civil Code to liberalize the
requirements for judicial confirmation of imperfect or incomplete titles.
The operation of the foregoing interpretation can be illustrated by an actual
example. Republic Act No. 7227, entitled An Act Accelerating The Conversion Of
Military Reservations Into Other Productive Uses, etc., is more commonly known as
the BCDA law.Section 2 of the law authorizes the sale of certain military reservations
and portions of military camps in Metro Manila, including Fort Bonifacio and Villamor
Air Base. For purposes of effecting the sale of the military camps, the law mandates
the President to transfer such military lands to the Bases Conversion Development
Authority (BCDA)[40]which in turn is authorized to own, hold and/or administer them.
[41]
The President is authorized to sell portions of the military camps, in whole or in
part.[42] Accordingly, the BCDA law itself declares that the military lands subject
thereof are alienable and disposable pursuant to the provisions of existing laws and
regulations governing sales of government properties.[43]
From the moment the BCDA law was enacted the subject military lands have
become alienable and disposable. However, said lands did not become patrimonial,
as the BCDA law itself expressly makes the reservation that these lands are to be
sold in order to raise funds for the conversion of the former American bases
at Clark and Subic.[44] Such purpose can be tied to either public service or the
development of national wealth under Article 420(2). Thus, at that time, the lands
remained property of the public dominion under Article 420(2), notwithstanding their
status as alienable and disposable. It is upon their sale as authorized under the
BCDA law to a private person or entity that such lands become private property and
cease to be property of the public dominion.
C.
Should public domain lands become patrimonial because they are declared
as such in a duly enacted law or duly promulgated proclamation that they are no
longer intended for public service or for the development of the national wealth, would
the period of possession prior to the conversion of such public dominion into
patrimonial be reckoned in counting the prescriptive period in favor of the
possessors? We rule in the negative.
The limitation imposed by Article 1113 dissuades us from ruling that the period of
possession before the public domain land becomes patrimonial may be counted for
the purpose of completing the prescriptive period. Possession of public dominion
property before it becomes patrimonial cannot be the object of prescription according
to the Civil Code. As the application for registration under Section 14(2) falls wholly
within the framework of prescription under the Civil Code, there is no way that
possession during the time that the land was still classified as public dominion

property can be counted to meet the requisites of acquisitive prescription and justify
registration.
Are we being inconsistent in applying divergent rules for Section 14(1) and
Section 14(2)? There is no inconsistency. Section 14(1) mandates registration on
the basis ofpossession, while Section 14(2) entitles registration on the basis
of prescription.Registration under Section 14(1) is extended under the aegis of
the Property Registration Decree and the Public Land Act while registration
under Section 14(2) is made available both by the Property Registration Decree
and the Civil Code.
In the same manner, we can distinguish between the thirty-year period under Section
48(b) of the Public Land Act, as amended by Rep. Act No. 1472, and the thirty-year
period available through Section 14(2) of the Property Registration Decree in relation
to Article 1137 of the Civil Code. The period under the former speaks of a thirtyyear period of possession ,while the period under the latter concerns a thirtyyear period of extraordinary prescription. Registration under Section 48(b) of
the Public Land Act as amended by Rep. Act No. 1472 is based on thirty years
of possession alone without regard to the Civil Code, while the registration
under Section 14(2) of the Property Registration Decree is founded on
extraordinary prescription under the Civil Code.
It may be asked why the principles of prescription under the Civil Code should not
apply as well to Section 14(1). Notwithstanding the vaunted status of the Civil Code, it
ultimately is just one of numerous statutes, neither superior nor inferior to other
statutes such as the Property Registration Decree. The legislative branch is not
bound to adhere to the framework set forth by the Civil Code when it enacts
subsequent legislation. Section 14(2) manifests a clear intent to interrelate the
registration allowed under that provision with the Civil Code, but no such intent exists
with respect to Section 14(1).

IV.

the same time, there are indispensable requisitesgood faith and just title. The
ascertainment of good faith involves the application of Articles 526, 527, and 528, as
well as Article 1127 of the Civil Code, [45] provisions that more or less speak for
themselves.
On the other hand, the concept of just title requires some clarification. Under
Article 1129, there is just title for the purposes of prescription when the adverse
claimant came into possession of the property through one of the modes recognized
by law for the acquisition of ownership or other real rights, but the grantor was not the
owner or could not transmit any right. Dr. Tolentino explains:
Just title is an act which has for its purpose the
transmission of ownership, and which would have actually
transferred ownership if the grantor had been the owner. This vice or
defect is the one cured by prescription. Examples: sale with delivery,
exchange, donation, succession, and dacion in payment.[46]
The OSG submits that the requirement of just title necessarily precludes the
applicability of ordinary acquisitive prescription to patrimonial property. The major
premise for the argument is that the State, as the owner and grantor, could not
transmit ownership to the possessor before the completion of the required period of
possession.[47] It is evident that the OSG erred when it assumed that the grantor
referred to in Article 1129 is the State. The grantor is the one from whom the person
invoking ordinary acquisitive prescription derived the title, whether by sale, exchange,
donation, succession or any other mode of the acquisition of ownership or other real
rights.
Earlier, we made it clear that, whether under ordinary prescription or
extraordinary prescription, the period of possession preceding the classification of
public dominion lands as patrimonial cannot be counted for the purpose of computing
prescription. But after the property has been become patrimonial, the period of
prescription begins to run in favor of the possessor. Once the requisite period has
been completed, two legal events ensue: (1) the patrimonial property is ipso
jure converted into private land; and (2) the person in possession for the periods
prescribed under the Civil Code acquires ownership of the property by operation of
the Civil Code.

One of the keys to understanding the framework we set forth today is seeing how our
land registration procedures correlate with our law on prescription, which, under the
Civil Code, is one of the modes for acquiring ownership over property.

It is evident that once the possessor automatically becomes the owner of the
converted patrimonial property, the ideal next step is the registration of the property
under the Torrenssystem. It should be remembered that registration of property is not
a mode of acquisition of ownership, but merely a mode of confirmation of ownership.

The Civil Code makes it clear that patrimonial property of the State may be acquired
by private persons through prescription. This is brought about by Article 1113, which
states that [a]ll things which are within the commerce of man are susceptible to
prescription, and that [p]roperty of the State or any of its subdivisions not patrimonial
in character shall not be the object of prescription.

[48]

There are two modes of prescription through which immovables may be acquired
under the Civil Code. The first is ordinary acquisitive prescription, which, under Article
1117, requires possession in good faith and with just title; and, under Article 1134, is
completed through possession of ten (10) years. There is nothing in the Civil Code
that bars a person from acquiring patrimonial property of the State through ordinary
acquisitive prescription, nor is there any apparent reason to impose such a rule. At

Looking back at the registration regime prior to the adoption of the Property
Registration Decree in 1977, it is apparent that the registration system then did not
fully accommodate the acquisition of ownership of patrimonial property under the Civil
Code. What the system accommodated was the confirmation of imperfect title brought
about by the completion of a period of possession ordained under the Public Land Act
(either 30 years following Rep. Act No. 1942, or since 12 June 1945 following P.D.
No. 1073).
The Land Registration Act[49] was noticeably silent on the requisites for
alienable public lands acquired through ordinary prescription under the Civil Code,

though it arguably did not preclude such registration.[50] Still, the gap was lamentable,
considering that the Civil Code, by itself, establishes ownership over the patrimonial
property of persons who have completed the prescriptive periods ordained therein.
The gap was finally closed with the adoption of the Property Registration Decree in
1977, with Section 14(2) thereof expressly authorizing original registration in favor of
persons who have acquired ownership over private lands by prescription under the
provisions of existing laws, that is, the Civil Code as of now.
V.
We synthesize the doctrines laid down in this case, as follows:
(1) In connection with Section 14(1) of the Property Registration Decree, Section
48(b) of the Public Land Act recognizes and confirms that those who by themselves
or through their predecessors in interest have been in open, continuous, exclusive,
and notorious possession and occupation of alienable and disposable lands of the
public domain, under a bona fide claim of acquisition of ownership, since June 12,
1945 have acquired ownership of, and registrable title to, such lands based on the
length and quality of their possession.
(a) Since Section 48(b) merely requires possession since 12 June
1945 and does not require that the lands should have been alienable and
disposable during the entire period of possession, the possessor is entitled
to secure judicial confirmation of his title thereto as soon as it is declared
alienable and disposable, subject to the timeframe imposed by Section 47 of
the Public Land Act.[51]
(b) The right to register granted under Section 48(b) of the Public
Land Act is further confirmed by Section 14(1) of the Property Registration
Decree.
(2) In complying with Section 14(2) of the Property Registration Decree, consider that
under the Civil Code, prescription is recognized as a mode of acquiring ownership of
patrimonial property. However, public domain lands become only patrimonial property
not only with a declaration that these are alienable or disposable. There must also be
an express government manifestation that the property is already patrimonial or no
longer retained for public service or the development of national wealth, under Article
422 of the Civil Code. And only when the property has become patrimonial can the
prescriptive period for the acquisition of property of the public dominion begin to run.
(a) Patrimonial property is private property of the government. The
person acquires ownership of patrimonial property by prescription under the
Civil Code is entitled to secure registration thereof under Section 14(2) of the
Property Registration Decree.
(b) There are two kinds of prescription by which patrimonial
property may be acquired, one ordinary and other extraordinary. Under
ordinary acquisitive prescription, a person acquires ownership of a
patrimonial property through possession for at least ten (10) years, in good
faith and with just title. Under extraordinary acquisitive prescription, a
persons uninterrupted adverse possession of patrimonial property for at least
thirty (30) years, regardless of good faith or just title, ripens into ownership.

B.
We now apply the above-stated doctrines to the case at bar.
It is clear that the evidence of petitioners is insufficient to establish that Malabanan
has acquired ownership over the subject property under Section 48(b) of the Public
Land Act. There is no substantive evidence to establish that Malabanan or petitioners
as his predecessors-in-interest have been in possession of the property since 12
June 1945 or earlier. The earliest that petitioners can date back their possession,
according to their own evidencethe Tax Declarations they presented in particularis to
the year 1948. Thus, they cannot avail themselves of registration under Section 14(1)
of the Property Registration Decree.
Neither can petitioners properly invoke Section 14(2) as basis for registration. While
the subject property was declared as alienable or disposable in 1982, there is no
competent evidence that is no longer intended for public use service or for the
development of the national evidence, conformably with Article 422 of the Civil Code.
The classification of the subject property as alienable and disposable land of the
public domain does not change its status as property of the public dominion under
Article 420(2) of the Civil Code. Thus, it is insusceptible to acquisition by prescription.
VI.
A final word. The Court is comfortable with the correctness of the legal
doctrines established in this decision. Nonetheless, discomfiture over the implications
of todays ruling cannot be discounted. For, every untitled property that is occupied in
the country will be affected by this ruling. The social implications cannot be dismissed
lightly, and the Court would be abdicating its social responsibility to the Filipino people
if we simply levied the law without comment.
The informal settlement of public lands, whether declared alienable or not, is a
phenomenon tied to long-standing habit and cultural acquiescence, and is common
among the so-calledThird World countries. This paradigm powerfully evokes the
disconnect between a legal system and the reality on the ground. The law so far has
been unable to bridge that gap. Alternative means of acquisition of these
public domain lands, such as through homestead or free patent, have proven
unattractive due to limitations imposed on the grantee in the encumbrance or
alienation of said properties.[52] Judicial confirmation of imperfect title has emerged as
the most viable, if not the most attractive means to regularize the informal settlement
of alienable or disposable lands of the public domain, yet even that system, as
revealed in this decision, has considerable limits.
There are millions upon millions of Filipinos who have individually or exclusively held
residential lands on which they have lived and raised their families. Many more have
tilled and made productive idle lands of the State with their hands. They have been
regarded for generation by their families and their communities as common law
owners. There is much to be said about the virtues of according them legitimate
states. Yet such virtues are not for the Court to translate into positive law, as the law
itself considered such lands as property of the public dominion. It could only be up to
Congress to set forth a new phase of land reform to sensibly regularize and formalize
the settlement of such lands which in legal theory are lands of the public domain
before the problem becomes insoluble. This could be accomplished, to cite two
examples, by liberalizing the standards for judicial confirmation of imperfect title, or

amending the Civil Code itself to ease the requisites for the conversion of public
dominion property into patrimonial.
Ones sense of security over land rights infuses into every aspect of wellbeing not only of that individual, but also to the persons family. Once that sense of
security is deprived, life and livelihood are put on stasis. It is for the political branches
to bring welcome closure to the long pestering problem.
WHEREFORE, the Petition is DENIED. The Decision of the Court of Appeals
dated 23 February 2007 and Resolution dated 2 October 2007 are AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

EN BANC

LUIS MARCOS P. LAUREL, G.R. No. 155076

Petitioner,
Present:
Puno, C.J.,
Quisumbing,
Ynares-Santiago,
Carpio,
- versus - Austria-Martinez,

HON. ZEUS C. ABROGAR,

Presiding Judge of the Regional
Trial Court, Makati City, Branch 150,
PEOPLE OF THE PHILIPPINES Promulgated:
& PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY,
Respondents. January 13, 2009

By way of brief background, petitioner is one of the accused in Criminal

Case No. 99-2425, filed with the Regional Trial Court ofMakati City, Branch 150. The
Amended Information charged the accused with theft under Article 308 of the Revised
Penal Code, committed as follows:

Corona,
Carpio Morales,
Azcuna,
Tinga,
Chico-Nazario,
Velasco, Jr.,
Nachura,
Leonardo-De
Castro, and
Brion, JJ.

x ---------------------------------------------------------------------------------------- x

RESOLUTION
YNARES-SANTIAGO, J.:
On February 27, 2006, this Courts First Division rendered judgment in this case as
follows:
IN LIGHT OF ALL THE FOREGOING, the petition
is GRANTED. The assailed Orders of the Regional Trial Court and
the Decision of the Court of Appeals are REVERSED and SET
ASIDE. The Regional Trial Court is directed to issue an order
granting the motion of the petitioner to quash the Amended
Information. SO ORDERED.[1]

On or about September 10-19, 1999, or prior thereto in Makati City,

and within the jurisdiction of this Honorable Court, the accused,
conspiring and confederating together and all of them mutually
helping and aiding one another, with intent to gain and without the
knowledge and consent of the Philippine Long Distance Telephone
(PLDT), did then and there willfully, unlawfully and feloniously take,
steal and use the international long distance calls belonging to
PLDT by conducting International Simple Resale (ISR), which is a
method of routing and completing international long distance calls
using lines, cables, antenae, and/or air wave frequency which
connect directly to the local or domestic exchange facilities of the
country where the call is destined, effectively stealing this business
from PLDT while using its facilities in the estimated amount of
P20,370,651.92 to the damage and prejudice of PLDT, in the said
amount.
CONTRARY TO LAW.[2]
Petitioner filed a Motion to Quash (with Motion to Defer Arraignment), on the
ground that the factual allegations in the Amended Information do not constitute the
felony of theft. The trial court denied the Motion to Quash the Amended Information,
as well petitioners subsequent Motion for Reconsideration.
Petitioners special civil action for certiorari was dismissed by the Court of
Appeals. Thus, petitioner filed the instant petition for review with this Court.
In the above-quoted Decision, this Court held that the Amended Information
does not contain material allegations charging petitioner with theft of personal
property since international long distance calls and the business of providing
telecommunication or telephone services are not personal properties under Article
308 of the Revised Penal Code.
Respondent Philippine Long Distance Telephone Company (PLDT) filed a
Motion for Reconsideration with Motion to Refer the Case to the Supreme Court En
Banc. It maintains that the Amended Information charging petitioner with theft is valid
and sufficient; that it states the names of all the accused who were specifically
charged with the crime of theft of PLDTs international calls and business of providing
telecommunication or telephone service on or about September 10 to 19, 1999 in
Makati City by conducting ISR or International Simple Resale; that it identifies the
international calls and business of providing telecommunication or telephone service
of PLDT as the personal properties which were unlawfully taken by the accused; and
that it satisfies the test of sufficiency as it enabled a person of common understanding
to know the charge against him and the court to render judgment properly.
PLDT further insists that the Revised Penal Code should be interpreted in
the context of the Civil Codes definition of real and personal property. The
enumeration of real properties in Article 415 of the Civil Code is exclusive such that all

those not included therein are personal properties. Since Article 308 of the Revised
Penal Code used the words personal property without qualification, it follows that all
personal properties as understood in the context of the Civil Code, may be the subject
of theft under Article 308 of the Revised Penal Code. PLDT alleges that the
international calls and business of providing telecommunication or telephone service
are personal properties capable of appropriation and can be objects of theft.
PLDT also argues that taking in relation to theft under the Revised Penal
Code does not require asportation, the sole requisite being that the object should be
capable of appropriation. The element of taking referred to in Article 308 of the
Revised Penal Code means the act of depriving another of the possession and
dominion of a movable coupled with the intention, at the time of the taking, of
withholding it with the character of permanency. There must be intent to appropriate,
which means to deprive the lawful owner of the thing. Thus, the term personal
properties under Article 308 of the Revised Penal Code is not limited to only personal
properties which are susceptible of being severed from a mass or larger quantity and
of being transported from place to place.
PLDT likewise alleges that as early as the 1930s, international telephone
calls were in existence; hence, there is no basis for this Courts finding that the
Legislature could not have contemplated the theft of international telephone calls and
the unlawful transmission and routing of electronic voice signals or impulses
emanating from such calls by unlawfully tampering with the telephone device as
within the coverage of the Revised Penal Code.
According to respondent, the international phone calls which are electric
currents or sets of electric impulses transmitted through a medium, and carry a
pattern representing the human voice to a receiver, are personal properties which
may be subject of theft. Article 416(3) of the Civil Code deems forces of nature (which
includes electricity) which are brought under the control by science, are personal
property.
In his Comment to PLDTs motion for reconsideration, petitioner Laurel
claims that a telephone call is a conversation on the phone or a communication
carried out using the telephone. It is not synonymous to electric current or
impulses. Hence, it may not be considered as personal property susceptible of
appropriation. Petitioner claims that the analogy between generated electricity and
telephone calls is misplaced. PLDT does not produce or generate telephone calls. It
only provides the facilities or services for the transmission and switching of the
calls. He also insists that business is not personal property. It is not the business that
is protected but the right to carry on a business. This right is what is considered as
property. Since the services of PLDT cannot be considered as property, the same
may not be subject of theft.
The Office of the Solicitor General (OSG) agrees with respondent PLDT that
international phone calls and the business or service of providing international phone
calls are subsumed in the enumeration and definition of personal property under the
Civil Code hence, may be proper subjects of theft. It noted that the cases of United
States v. Genato,[3] United States v. Carlos[4] and United States v. Tambunting,[5]which
recognized intangible properties like gas and electricity as personal properties, are
deemed incorporated in our penal laws. Moreover, the theft provision in the Revised
Penal Code was deliberately couched in broad terms precisely to be all-

encompassing and embracing even such scenario that could not have been easily
anticipated.
According to the OSG, prosecution under Republic Act (RA) No. 8484 or
the Access Device Regulations Act of 1998 and RA 8792 or the Electronic Commerce
Act of 2000 does not preclude prosecution under the Revised Penal Code for the
crime of theft. The latter embraces unauthorized appropriation or use of PLDTs
international calls, service and business, for personal profit or gain, to the prejudice of
PLDT as owner thereof. On the other hand, the special laws punish the surreptitious
and advanced technical means employed to illegally obtain the subject service and
business. Even assuming that the correct indictment should have been under RA
8484, the quashal of the information would still not be proper. The charge of theft as
alleged in the Information should be taken in relation to RA 8484 because it is the
elements, and not the designation of the crime, that control.
Considering the gravity and complexity of the novel questions of law involved in this
case, the Special First Division resolved to refer the same to the Banc.
We resolve to grant the Motion for Reconsideration but remand the case to
the trial court for proper clarification of the Amended Information.
Article 308 of the Revised Penal Code provides:
Art. 308. Who are liable for theft. Theft is committed by any person
who, with intent to gain but without violence against, or intimidation
of persons nor force upon things, shall take personal property of
another without the latters consent.
The elements of theft under Article 308 of the Revised Penal Code are as
follows: (1) that there be taking of personal property; (2) that said property belongs to
another; (3) that the taking be done with intent to gain; (4) that the taking be done
without the consent of the owner; and (5) that the taking be accomplished without the
use of violence against or intimidation of persons or force upon things.
Prior to the passage of the Revised Penal Code on December 8, 1930, the definition
of the term personal property in the penal code provision on theft had been
established in Philippine jurisprudence. This Court, in United States v. Genato, United
States v. Carlos, and United States v. Tambunting, consistently ruled that any
personal property, tangible or intangible, corporeal or incorporeal, capable of
appropriation can be the object of theft.
Moreover, since the passage of the Revised Penal Code on December 8, 1930, the
term personal property has had a generally accepted definition in civil law. In Article
335 of the Civil Code of Spain, personal property is defined as anything susceptible
of appropriation and not included in the foregoing chapter (not real property). Thus,
the term personal property in the Revised Penal Code should be interpreted in the
context of the Civil Code provisions in accordance with the rule on statutory
construction that where words have been long used in a technical sense and have
been judicially construed to have a certain meaning, and have been adopted by the
legislature as having a certain meaning prior to a particular statute, in which they are
used, the words used in such statute should be construed according to the sense in

which they have been previously used. [6] In fact, this Court used the Civil Code
definition of personal property in interpreting the theft provision of the penal code
in United States v. Carlos.
Cognizant of the definition given by jurisprudence and the Civil Code of Spain to the
term personal property at the time the old Penal Code was being revised, still the
legislature did not limit or qualify the definition of personal property in the Revised
Penal Code. Neither did it provide a restrictive definition or an exclusive enumeration
of personal property in the Revised Penal Code, thereby showing its intent to retain
for the term an extensive and unqualified interpretation. Consequently, any property
which is not included in the enumeration of real properties under the Civil Code and
capable of appropriation can be the subject of theft under the Revised Penal Code.
The only requirement for a personal property to be the object of theft under the penal
code is that it be capable of appropriation. It need not be capable of asportation,
which is defined as carrying away.[7] Jurisprudence is settled that to take under the
theft provision of the penal code does not require asportation or carrying away.[8]
To appropriate means to deprive the lawful owner of the thing. [9] The word take in the
Revised Penal Code includes any act intended to transfer possession which, as held
in the assailed Decision, may be committed through the use of the offenders own
hands, as well as any mechanical device, such as an access device or card as in the
instant case. This includes controlling the destination of the property stolen to deprive
the owner of the property, such as the use of a meter tampering, as held in Natividad
v. Court of Appeals,[10] use of a device to fraudulently obtain gas, as held in United
States v. Tambunting, and the use of a jumper to divert electricity, as held in the cases
of United States v. Genato, United States v. Carlos, and United States v. Menagas.[11]
As illustrated in the above cases, appropriation of forces of nature which are brought
under control by science such as electrical energy can be achieved by tampering with
any apparatus used for generating or measuring such forces of nature, wrongfully
redirecting such forces of nature from such apparatus, or using any device to
fraudulently obtain such forces of nature. In the instant case, petitioner was charged
with engaging in International Simple Resale (ISR) or the unauthorized routing and
completing of international long distance calls using lines, cables, antennae, and/or
air wave frequency and connecting these calls directly to the local or domestic
exchange facilities of the country where destined.
As early as 1910, the Court declared in Genato that ownership over electricity (which
an international long distance call consists of), as well astelephone service, is
protected by the provisions on theft of the Penal Code. The pertinent provision of the
Revised Ordinance of the City ofManila, which was involved in the said case, reads
as follows:
Injury to electric apparatus; Tapping current; Evidence. No person
shall destroy, mutilate, deface, or otherwise injure or tamper with
any wire, meter, or other apparatus installed or used for generating,
containing, conducting, or measuring electricity, telegraph or
telephone service, nor tap or otherwise wrongfully deflect or take
any electric current from such wire, meter, or other apparatus.

No person shall, for any purpose whatsoever, use or enjoy

the benefits of any device by means of which he may fraudulently
obtain any current of electricity or any telegraph or telephone
service; and the existence in any building premises of any such
device shall, in the absence of satisfactory explanation, be deemed
sufficient evidence of such use by the persons benefiting thereby.
It was further ruled that even without the above ordinance the acts of subtraction
punished therein are covered by the provisions on theft of the Penal Code then in
force, thus:
Even without them (ordinance), the right of the ownership
of electric current is secured by articles 517 and 518 of the Penal
Code; the application of these articles in cases of subtraction of
gas, a fluid used for lighting, and in some respects resembling
electricity, is confirmed by the rule laid down in the decisions of the
supreme court of Spain of January 20, 1887, and April 1, 1897,
construing and enforcing the provisions of articles 530 and 531 of
the Penal Code of that country, articles 517 and 518 of the code in
force in these islands.
The acts of subtraction include: (a) tampering with any wire, meter, or other apparatus
installed or used for generating, containing, conducting, or measuring electricity,
telegraph or telephone service; (b) tapping or otherwise wrongfully deflecting or taking
any electric current from such wire, meter, or other apparatus; and (c) using or
enjoying the benefits of any device by means of which one may fraudulently obtain
any current of electricity or any telegraph or telephone service.
In the instant case, the act of conducting ISR operations by illegally connecting
various equipment or apparatus to private respondent PLDTs telephone system,
through which petitioner is able to resell or re-route international long distance calls
using respondent PLDTs facilities constitutes all three acts of subtraction mentioned
above.
The business of providing telecommunication or telephone service is likewise
personal property which can be the object of theft under Article 308 of the Revised
Penal Code. Business may be appropriated under Section 2 of Act No. 3952 (Bulk
Sales Law), hence, could be object of theft:
Section 2. Any sale, transfer, mortgage, or assignment of
a stock of goods, wares, merchandise, provisions, or materials
otherwise than in the ordinary course of trade and the regular
prosecution of the business of the vendor, mortgagor, transferor, or
assignor, or any sale, transfer, mortgage, or assignment of all, or
substantially all, of the business or trade theretofore conducted by
the vendor, mortgagor, transferor or assignor, or all, or substantially
all, of the fixtures and equipment used in and about the business of
the vendor, mortgagor, transferor, or assignor, shall be deemed to
be a sale and transfer in bulk, in contemplation of the Act. x x x.

In Strochecker v. Ramirez,[12] this Court stated:

With regard to the nature of the property thus mortgaged
which is one-half interest in the business above described, such
interest is a personal property capable of appropriation and not
included in the enumeration of real properties in article 335 of the
Civil Code, and may be the subject of mortgage.
Interest in business was not specifically enumerated as personal property in the Civil
Code in force at the time the above decision was rendered. Yet, interest in business
was declared to be personal property since it is capable of appropriation and not
included in the enumeration of real properties. Article 414 of the Civil Code provides
that all things which are or may be the object of appropriation are considered either
real property or personal property. Business is likewise not enumerated as personal
property under the Civil Code. Just like interest in business, however, it may be
appropriated. Following the ruling in Strochecker v. Ramirez, business should also be
classified as personal property. Since it is not included in the exclusive enumeration
of real properties under Article 415, it is therefore personal property.[13]
As can be clearly gleaned from the above disquisitions, petitioners acts
constitute theft of respondent PLDTs business and service, committed by means of
the unlawful use of the latters facilities. In this regard, the Amended Information
inaccurately describes the offense by making it appear that what petitioner took were
the international long distance telephone calls, rather than respondent PLDTs
business.
A perusal of the records of this case readily reveals that petitioner and respondent
PLDT extensively discussed the issue of ownership of telephone calls. The
prosecution has taken the position that said telephone calls belong to respondent
PLDT. This is evident from its Comment where it defined the issue of this case as
whether or not the unauthorized use or appropriation of PLDT international telephone
calls, service and facilities, for the purpose of generating personal profit or gain that
should have otherwise belonged to PLDT, constitutes theft.[14]
In discussing the issue of ownership, petitioner and respondent PLDT gave their
respective explanations on how a telephone call is generated.[15] For its part,
respondent PLDT explains the process of generating a telephone call as follows:
38. The role of telecommunication companies is not
limited to merely providing the medium (i.e. the electric current)
through which the human voice/voice signal of the caller is
transmitted. Before the human voice/voice signal can be so
transmitted, a telecommunication company, using its facilities, must
first break down or decode the human voice/voice signal into
electronic impulses and subject the same to further augmentation
and enhancements. Only after such process of conversion will the
resulting electronic impulses be transmitted by a telecommunication
company, again, through the use of its facilities. Upon reaching the
destination of the call, the telecommunication company will again
break down or decode the electronic impulses back to human
voice/voice signal before the called party receives the same. In

other
words,
a
telecommunication
company
both
converts/reconverts the human voice/voice signal and provides the
medium for transmitting the same.
39. Moreover, in the case of an international telephone
call, once the electronic impulses originating from a foreign
telecommunication company country (i.e. Japan) reaches the
Philippines through a local telecommunication company (i.e. private
respondent PLDT), it is the latter which decodes, augments and
enhances the electronic impulses back to the human voice/voice
signal and provides the medium (i.e. electric current) to enable the
called party to receive the call. Thus, it is not true that the foreign
telecommunication company provides (1) the electric current which
transmits the human voice/voice signal of the caller and (2) the
electric current for the called party to receive said human
voice/voice signal.
40. Thus, contrary to petitioner Laurels assertion, once the
electronic impulses or electric current originating from a foreign
telecommunication company (i.e. Japan) reaches private
respondent PLDTs network, it is private respondent PLDT which
decodes, augments and enhances the electronic impulses back to
the human voice/voice signal and provides the medium (i.e. electric
current) to enable the called party to receive the call. Without
private respondent PLDTs network, the human voice/voice signal of
the calling party will never reach the called party.[16]
In the assailed Decision, it was conceded that in making the international phone calls,
the human voice is converted into electrical impulses or electric current which are
transmitted to the party called. A telephone call, therefore, is electrical energy. It was
also held in the assailed Decision that intangible property such as electrical energy is
capable of appropriation because it may be taken and carried away. Electricity is
personal property under Article 416 (3) of the Civil Code, which enumerates forces of
nature which are brought under control by science.[17]
Indeed, while it may be conceded that international long distance calls, the matter
alleged to be stolen in the instant case, take the form of electrical energy, it cannot be
said that such international long distance calls were personal properties belonging to
PLDT since the latter could not have acquired ownership over such calls. PLDT
merely encodes, augments, enhances, decodes and transmits said calls using its
complex communications infrastructure and facilities. PLDT not being the owner of
said telephone calls, then it could not validly claim that such telephone calls were
taken without its consent. It is the use of these communications facilities without the
consent of PLDT that constitutes the crime of theft, which is the unlawful taking of the
telephone services and business.
Therefore, the business of providing telecommunication and the telephone
service are personal property under Article 308 of the Revised Penal Code, and the
act of engaging in ISR is an act of subtraction penalized under said article. However,
the Amended Information describes the thing taken as, international long distance
calls, and only later mentions stealing the business from PLDT as the manner by

which the gain was derived by the accused. In order to correct this inaccuracy of
description, this case must be remanded to the trial court and the prosecution
directed to amend the Amended Information, to clearly state that the property subject
of the theft are the services and business of respondent PLDT. Parenthetically, this
amendment is not necessitated by a mistake in charging the proper offense, which
would have called for the dismissal of the information under Rule 110, Section 14 and
Rule 119, Section 19 of the Revised Rules on Criminal Procedure. To be sure, the
crime is properly designated as one of theft. The purpose of the amendment is simply
to ensure that the accused is fully and sufficiently apprised of the nature and cause of
the charge against him, and thus guaranteed of his rights under the Constitution.
ACCORDINGLY, the motion for reconsideration is GRANTED. The assailed
Decision dated February 27, 2006 is RECONSIDERED and SET ASIDE. The
Decision of the Court of Appeals in CA-G.R. SP No. 68841 affirming the Order issued

by Judge Zeus C. Abrogar of the Regional Trial Court of Makati City, Branch 150,
which denied the Motion to Quash (With Motion to Defer Arraignment) in Criminal
Case No. 99-2425 for theft, is AFFIRMED. The case is remanded to the trial court
and the Public Prosecutor of Makati City is hereby DIRECTEDto amend the Amended
Information to show that the property subject of the theft were services and business
of the private offended party.
SO ORDERED.