G.R. No.

L-52831 July 29, 1983

MANUEL R. DULAY, petitioner,
vs.
HON. JUDGE GLICERIO V. CARRIAGA, Judge of the Court of First Instance of Cotabato, and
EUSEBIO C. TANGHAL, respondents.
Fructuoso S, Villarin for petitioner.
Miguel B. Albar for private respondent.

CONCEPCION JR., J.:

Petition for certiorari, with preliminary injunction, to annul and set aside the order of the respondent
judge which annulled the redemption of several parcels of land levied upon and sold at an execution
sale.
In Civil Case No. 2152 of the Court of First Instance of Cotabato, an action for the recovery of a sum
of money, the trial court rendered a decision ordering the defendant, Manuel R. Dulay, the petitioner
herein, to pay the plaintiff, Eusebio C. Tanghal, the herein private respondent, the sum of
P143,980.00. Seventeen (17) parcels of land belonging to the defendant were, consequently, levied
upon then sold at a public auction sale to the plaintiff, as the highest bidder thereof, at prices

Within the reglementary

period for redemption, the defendant redeemed eight (8) of the levied
properties by paying the prices at which they were actually sold in the auction
sale, for the sum of P17,017.00, and was issued a Certificate of
Redemption. Upon motion of the plaintiff, however, the trial court citing the
case of Development Bank of the Philippines vs. Dionisio Mirang, declared
the redemption as null and void on the ground that piece-meal redemption is
not allowed by law and that for redemption to be valid, the judgment debtor
should pay the entire judgment debt and not the purchase price. Hence, this
petition for certiorari with preliminary injunction, to annul and set aside the
order of the respondent judge. As prayed for, the Court issued a temporary
restraining order, restraining the respondents from enforcing the questioned
order.
profferred and fixed for each parcel, for the sum of P82,598.00.

There is merit in the petition. In the redemption of properties sold at an execution sale, the amount
payable is no longer the judgment debt, but the purchase price. In the case of Castillo vs.
Nagtalon, 6the

Court said:

The procedure for the redemption of properties sold at execution sale is prescribed in
Sec. 26, Rule 39 of the Rules of Court. Thereunder, the judgment debtor or
redemptioner may redeem the property from the purchaser within 12 months after
the sale, by paying the purchaser the amount of his purchase, with I % per month
interest thereon up to the time of redemption, together with the taxes paid by the
purchaser after the purchase, if any. In other words, in the redemption of properties
sold at an execution sale, the amount payable is no longer the judgment debt but the
purchase price. Considering that appellee tendered payment only of the sum of
P317.44, whereas the 3 parcels of land she was seeking to redeem were sold for the
sums of P1,240.00, P24.00 and P30.00, respectively, the aforementioned amount of
P317.44 is insufficient to effectively release the properties. However, as the tender of
payment was timely made and in good faith, in the interest of justice We incline to
give the appellee opportunity to complete the redemption purchase of the 3 parcels
as provided in Sec. 26, Rule 39 of the Rules of Court, within 15 days from the time
this decision becomes final and executory.
Should appellee fail to complete the redemption price, the sheriff may either release
to appellee the 2 smaller lots and return the entire deposit without releasing any of
the 3 lots, as the appellee may elect.
The case of DBP vs. Mirang, relied upon by the respondent judge, wherein the Court ruled that the
mortgagor whose property has been sold at public auction, either judicially or extrajudicially, shall
have the right to redeem the property by paying an the amounts owed to the mortgage on the date of
the sale, with interest thereon at the rate specified in the contract and not the amount for which the
property was acquired at the foreclosure sale is not controlling because of different factual settings.
The Mirang caseinvolves the redemption of mortgaged property sold at a foreclosure sale and the
mortgagor was ordered to pay his entire indebtedness to the mortgagee, plus the agreed interests
thereon, before redemption can be effected, because the charter of the mortgagee (DBP) required
the payment of such amount. The Court said:
The third issue has likewise been resolved by this Court in a similar case. The issue
posed there involved the price at which the mortgagor should redeem his property
after the same had been sold at public auction whether the amount for which the
property was sold, as contended by the mortgagor, or the balance of the loan
obtained from the banking institution, as contended by the mortgagee RFC. Cited in
that case was Section 31 of Com. Act No. 459, which was the special law applicable
exclusively to properties mortgaged with the RFC, as follows:
The mortgagor or debtor to the Agricultural and Industrial Bank whose real property
has been sold at public auction, judicially or extra-judicially, for the full or partial
payment of an obligation to said Bank, shall, within one year from the date of the
auction sale, have the right to redeem the real property by paying to the Bank an the
amount he owed the latter on the date of the sale, with interest on the total
indebtedness at the rate agreed upon in the obligation from said date, unless the
bidder has taken material possession of the property or unless this has been

delivered to him, in which case the proceeds of the property shall compensate the
interest. ...
The same provision applies in the instant case. The unavoidable conclusion is that
the appellant, in redeeming the foreclosed property, should pay the entire amount he
owed to the Bank on the date of the sale, with interest thereon at the rate agreed
upon.
The instant case, on the other hand, involves the redemption of property levied upon and sold at
public auction to satisfy a judgment and, unlike the Mirang case, there is no charter that requires the
payment of sums of money other than those provided for in Section 30 of Rule 39, Revised Rules of
Court.
Redemption of properties mortgaged with the Philippine National Bank and the Development Bank
of the Philippines and foreclosed either judicially or extrajudicially are governed by special laws
which provide for the payment of all the amounts owed by the debtor. This special protection given to
government lending institutions is not accorded to judgment creditors in ordinary civil actions,
WHEREFORE, the writ prayed for is GRANTED and the order issued on January 11, 1978 should
be, as it is hereby, ANNULLED and SET ASIDE. The temporary restraining order heretofore issued
is hereby. made permanent. With costs against the private respondent Eusebio C. Tanghal.
SOORDERED.
Makasiar (Chairman), Aquino, Guerrero, Abad Santos and Escolin, JJ., concur.
De Castro, J., is on leave.

G.R. No. 114418 September 21, 1995

ESTANISLAO BODIONGAN, petitioner,
vs.
COURT OF APPEALS and LEA SIMEON, respondents.

PUNO, J.:
This petition for review on certiorari seeks to annul and set aside the Decision dated October 25,
1993 and the Resolution dated March 3, 1994 of the Court of Appeals in CA-G.R. CV No. 36314.
The antecedent facts are as follows:
On October 4, 1982, respondent Lea Simeon obtained from petitioner Estanislao Bodiongan and his
wife a loan of P219,11739 secured by a mortgage on three (3) parcels of land with a four-storey
hotel building and personal properties located at Gango, Ozamiz City. The three (3) lots were
covered by Transfer Certificates of Title Nos. T-6530, T-6531 and T-6532 in the name of private
respondent.
Private respondent failed to pay the loan. Petitioner thus instituted against her Civil Case No. OZ1177 with the Regional Trial Court, Branch 15, Ozamiz City for collection of sum of money or
foreclosure of mortgage. Judgment was rendered by the trial court on October 11, 1984 ordering
private respondent to pay petitioner, P220,459.71, at the legal rate of interest and P5,000.00 as
attorney's fees, and in case of non-payment, to foreclose the mortgage on the properties. The
dispositive portion of the decision reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against
defendant LEA SIMEON ordering the defendant LEA SIMEON to pay the plaintiff the
following:
1. P220,459.71 with legal rate of interest starting March 30, 1983, until fully paid;
2. P5,000.00 as reimbursement of plaintiff's attorney's fees;
3. In case of non-payment of the above amounts, the equitable mortgage (Exhibit
"C") be ordered foreclosed and sold at public auction to settle the obligation; and
4. To pay the costs. 1
This decision was affirmed on March 21, 1986 by the Court of Appeals in AC-G.R. CV No. 05367
and later became final and executory.
Private respondent again failed to pay the judgment debt, hence, the mortgaged properties were
foreclosed and sold on execution on January 12, 1987. At the auction sale, petitioner submitted to

the sheriff a written bid of P309,000.00 and at the same time reserved in said bid a deficiency claim
of P439,710.57. 2 The properties were awarded to petitioner as sole bidder and a certificate of sale was
issued in his name and registered with the Register of Deeds of Ozamiz City.
Petitioner then took possession of the properties after filing, per order of the trial court, a guaranty
bond of P350,000.00 to answer for any damage thereon during the redemption period.
On January 8, 1988, private respondent offered to redeem her properties and tendered to the
Provincial Sheriff a check in the amount of P337,580.00. This amount was based on a tentative
computation by the sheriff. 3 The check was received by petitioner on the same day after which the
sheriff issued a certificate of redemption to private respondent also on the same day. 4
On January 11, 1988, petitioner, claiming additional interest at 38% per annum, moved to correct the
computation of the redemption price and to suspend the issuance of a writ of possession pending
computation. The motion was denied by the trial court. On July 8, 1988, the trial court issued the
said writ and private respondent took possession of her properties.
On October 4, 1988, petitioner instituted against private respondent Civil Case No. OZ-1480-R with
the Regional Trial Court, Branch 15, Ozamiz City for annulment of redemption and confirmation of
the foreclosure sale on the ground of insufficiency of the redemption price. On October 7, 1988,
petitioner consigned the redemption money with the court. 5
On November 25, 1991, the trial court dismissed the complaint but reduced the 12% interest rate on
the purchase price to 6%, and thus, on the counterclaim, ordered petitioner to refund private
respondent the excess 6% plus P10,000.00 and P5,000.00 for moral damages and attorney's fees,
as follows:
WHEREFORE, premises considered, plaintiff's complaint is hereby dismissed, with
costs against him.
On the counterclaim, plaintiff Engr. Estanislao Bodiongan is ordered to refund the 6%
interest in excess of the 12% granted him in the computation which is not the legal
rate allowed in the Civil Code, to pay defendant Lea Simeon the further sum of
P10,000.00 as moral damages and the sum of P5,000.00 as attorney's fees . 6
The Court of Appeals in CA-G.R. CV No. 36314 affirmed the trial court's decision except for the
refund of the 6% interest, to wit:
WHEREFORE premises considered, the judgment appealed from is hereby
AFFIRMED subject to the modification on the amount of interest due, such that, the
legal rate of interest due is 1% per month or 12% for 12 months in the case at bar
and not 6% as ruled by the trial court. Costs against appellant . 7
Hence, this petition.

Petitioner claims before us that under the Revised Rules of Court, the redemption price for the
mortgaged properties should be P351,080.00. Since private respondent actually tendered
P337,580.00 which is short by P13,500.00, this price was inadequate thereby rendering redemption
ineffectual.
The price for the redemption of properties at an extrajudicial foreclosure sale 8 is, according to Section
6 of Act 3135, fixed by Section 30 of Rule 39 of the Revised Rules of Court 9 which reads as follows:
Sec. 30. Time and manner of, and amounts payable on, successive redemptions.
Notice to be given and filed. The judgment debtor, or redemptioner, may redeem
the property from the purchaser, at any time within twelve (12) months after the sale,
on paying the purchaser the amount of his purchase, with one per centum per month
interest thereon in addition, up to the time of redemption, together with the amount of
any assessments or taxes which the purchaser may have paid thereon after
purchase, and interest on such last-named amount at the same rate; and if the
purchaser be also a creditor having a prior lien to that of the redemptioner, other than
the judgment under which such purchase was made, the amount of such other lien,
with interest. Property so redeemed may again be redeemed within sixty (60) days
after the last redemption upon payment of the sum paid on the last redemption, with
two per centum thereon in addition, and the amount of any assessments or taxes
which the last redemptioner may have paid thereon after redemption by him, with
interest on such last-named amount, and in addition, the amount of any liens held by
said last redemptioner prior to his own, with interest. The property may be again, and
as often as a redemptioner is so disposed, redeemed from any previous
redemptioner within sixty (60) days after the last redemption, on paying the sum paid
on the last previous redemption, with two per centum thereon in addition, and the
amounts of any assessments or taxes which the last previous redemptioner paid
after the redemption thereon, interest thereon, and the amount of any liens held by
the last redemptioner prior to his own, with interest.
Written notice of any redemption must be given to the officer who made the sale and
a duplicate filed with the registrar of deeds of the province, and if any assessments
or taxes are paid by the redemptioner or if he has or acquires any lien other than that
upon which the redemption was made, notice thereof must in like manner be given to
the officer and filed with the registrar of deeds; if such notice be not filed, the property
may be redeemed without paying such assessments, taxes, or liens.
In order to effect a redemption, the judgment debtor must pay the purchaser the redemption price
composed of the following: (1) the price which the purchaser paid for the property; (2) interest of 1%
per month on the purchase price; (3) the amount of any assessments or taxes which the purchaser
may have paid on the property after the purchase; and (4) interest of 1% per month on such
assessments and taxes. The redemption price must be for the full amount, otherwise the offer to
redeem will be ineffectual. 10 And if the tender is for less than the entire amount, the purchaser may justly
refuse acceptance thereof. 11 In the instant case, the redemption price covers the purchase price of
P309,000.00 plus 1% interest thereon per month for twelve months at P37,080.00. Petitioner does not
claim any taxes or assessments he may have paid on the property after his purchase. He, however, adds

P5,000.00 to the price to cover the attorney's fees awarded him by the trial court in Civil Case No. OZ1177.

In the redemption of property sold at an extrajudicial foreclosure sale, the amount payable is no
longer the judgment debt but the purchase price at the auction sale. 12 In other words, the attorney's
fees awarded by the trial court should not have been added to the redemption price because the amount
payable is no longer the judgment debt, but that which is stated in Section 30 of Rule 39. The redemption
price for the mortgaged properties in this case should therefore be P346,080.00, not P351,080.00.
Private respondent's tender was P337,580.00 which is still short by P8,500.00. The Provincial Sheriff
declared that private respondent ordered him to deduct from the redemption price the value of
certain personal properties in the hotel. During petitioner's possession of the lots, he sold some of
the furniture, water pump and electrical installations in the hotel and appropriated the proceeds to
himself without private respondent's knowledge and approval.
Petitioner does not deny the fact that he sold the personal properties and appropriated the proceeds
of P13,500.00 to himself. He has expressly admitted this in his written bid to the sheriff. He, however,
cannot be considered in estoppel because the deduction for the loss of the personal properties was
not authorized under Section 30 of Rule 39. In the first place, the sheriff should not have issued the
certificate of redemption without a final determination of the amount of the redemption price. 13 This
unauthorized deduction of the value of private respondent's personal properties and the sheriff's
overzealousness in issuing the certificate of redemption are aggravated by the fact that private
respondent later sought for and was actually compensated for the said loss.
After taking possession of the lots and hotel, private respondent moved in Civil Case No. OZ-1177 to
charge the loss of her personal properties to the guaranty bond posted by petitioner. The trial court
awarded her P108,246.00 with P23,246.00 for the "loss of her properties" and P85,000.00 for
"unrealized income of the hotel." 14 The order of the trial court was affirmed by the Court of Appeals in
CA-G.R. CV No. 31384 and this became final and executory after the Supreme Court dismissed
petitioner's petition for review in G.R. No. 112344. 15
Indeed, if we were to allow the deduction of the value of private respondent's personal properties
from the redemption price, this will amount to double compensation and unjust enrichment at the
expense of petitioner. 16On the other hand, it would be highly unjust to deprive private respondent of her
right to redeem by a strict application of the Rules of Court. It must be remembered that the policy of the
law is to aid rather than defeat the right of redemption. 17Inasmuch as in the instant case tender of the
redemption price was timely made and in good faith, and the deficiency in said price is not substantial, we
incline to give private respondent the opportunity to complete the redemption of her properties within
fifteen days from the time this decision becomes final. It is well to recall our earlier pronouncements on
this matter:
Considering that appellee tendered payment only of the sum of P317.44, whereas
the three parcels of land she was seeking to redeem were sold for the sums of
P1,240.00, P21,000.00 and P30,000.00, respectively, the aforementioned amount of
P317.44 is insufficient to effectively release the properties. However, the tender of
payment was timely made and in good faith, in the interest of justice we incline to
give the appellee opportunity to complete the redemption purchase of the three

parcels, as provided in Section 26, Rule 39 of the Rules of court, within fifteen (15)
days from the time this decision becomes final and executory. In this wise, justice is
done to the appellee who had been made to pay more than her share in the
judgment, without doing an injustice to the purchaser who shall get the
corresponding interest of 1% per month on the amount of his purchase up to the time
of redemption. 18
The rule on redemption is liberally interpreted in favor of the original owner of the
property. The fact alone that he is allowed the right to redeem clearly demonstrates the
tenderness of the law toward him in giving him another opportunity, should his fortunes
improve, to recover his lost property. This benign motivation would be frustrated by a tooliteral reading that would subordinate the warm spirit of the rule to its cold language . 19

IN VIEW WHEREOF, the petition is DENIED and the Decision in CA-G.R. CV No. 36314 is affirmed
with the modification that private respondent be allowed to complete the redemption price by paying
to petitioner the difference of P8,500.00 at 1% interest per month 20 from January 8, 1988 until full
payment thereof within fifteen (15) days from the time this decision becomes final and executory.
SO ORDERED.
Narvasa, C.J., Regalado, Mendoza and Francisco, JJ., concur.

G.R. No. 83139 April 12, 1989

ARNEL SY, petitioner,
vs.
HONORABLE COURT OF APPEALS, STATE INVESTMENT HOUSE, INC. and THE REGISTER
OF DEEDS OF RIZAL, respondents.
Manuel T. Ubarra for petitioner.
Vicente D. Minora co-counsel for petitioner.
Angara, Abello, Concepcion, Regala & Cruz for respondent State Investment House, Inc.

CORTES, J.:
For a resolution of the issues raised in the instant petition involving the amount required to redeem
the subject foreclosed property, the Court must first determine what law to apply. Is it Section 30,
Rule 39 of the Revised Rules of Court in relation to Act No. 3135 as amended, or Section 78 of Rep.
Act No. 337 (General Banking Act) as amended by P.D. No. 1828?
The facts of the case are as follows:
On March 2, 1979, Carlos Coquinco executed in favor of private respondent State Investment
House, Inc. (hereinafter referred to as SIHI) a real estate mortgage over a 952 square-meter parcel
of land in San Juan, Metro-Manila, together with all the improvements thereon, covered by TCT No.
2782 issued in his name, as security for the payment of a loan in the amount of P1,000,000.00. For
failure of Carlos Coquinco to pay his outstanding balance of P1,126,220.56 computed as of October
19, 1982 [Record, p. 217-E] the mortgaged property was extrajudicially foreclosed by SIHI and was
sold at public auction on February 10, 1983 for P760,000.00 to SIHI as the only bidder. The
certificate of sale in favor of SIHI was registered with the Registry of Deeds of Pasig on February 28,
1983.
On May 22, 1983, SIHI filed before the Regional Trial Court (RTC) of Manila an action against Carlos
Coquinco for the collection of the sum of P612,031.84, representing the deficiency of his
indebtedness as of February 10, 1983.
In the meantime, petitioner acquired by virtue of a deed of assignment Carlos Coquinco's right of
redemption for and in consideration of P500,000.00. Before the expiration of the one-year
redemption period, petitioner offered to redeem the foreclosed property from SIHI by tendering to the
latter two (2) manager's checks issued by SOLIDBANK, one for P760,000.00 representing the
purchase price, and another for P91,200.00 representing interest at the rate of 1% per month for 12
months, totalling P851,200.00. SIHI rejected this offer.

Thus, on February 20, 1984, petitioner filed an action for consignation of the aforesaid amount with
the RTC, docketed as Civil Case No. 84-22839, to compel SIHI to accept the P851,200.00 as
payment of the redemption price for the foreclosed property, to order SIHI to surrender the title over
the property and to issue a certificate of redemption in favor of petitioner.
On February 27, 1984, a day before the expiration of the redemption period, petitioner decided to
redeem the foreclosed property directly from the Ex-Officio Regional Sheriff of Rizal, who accepted
from him the amount of P851,200.00 as redemption price and P4,269.00 as percentage fee of
collection, and issued to him the corresponding certificate of redemption.
On March 30,1984, SIHI filed a motion to dismiss Civil Case No. 84-22839 on the ground of lack of
cause of action, alleging that the amount sought to be consigned was insufficient for purposes of
redemption pursuant to Section 78 of Rep. Act No. 337, otherwise known as the General Banking
Act.
In an order dated April 24, 1984, the RTC dismissed petitioner's action on the ground, among others,
that there being no valid tender of payment, there was no valid consignation. No appeal was
interposed by petitioner from this order.
After the dismissal of the aforementioned action, SIHI consolidated its ownership over the foreclosed
property, and caused the cancellation of TCT No. 2782 and the issuance of TCT No. 44775 covering
the same property in its name.
After learning of this development, petitioner instituted another action in the Regional Trial Court on
June 11, 1984, this time a complaint for annulment and cancellation of title, with damages, against
SIHI and the Register of Deeds for the Province of Rizal, docketed as Civil Case No. 51169.
During the pendency of the action, SIHI sold the subject property to spouses Domingo Lim and Lim
Siu Keng. Defendant Register of Deeds, thereafter, cancelled TCT No. 44775 and issued TCT No.
46409 in the name of the spouses.
On July 7, 1986, the court a quo dismissed petitioner's complaint holding that it stated no cause of
action because petitioner failed to effect a valid redemption as required under Section 78 of the
General Banking Act, as amended by P.D. No. 1828. The court accordingly ordered petitioner to pay
SIHI the following sums of money: P10,000.00 as temperate damages; P20,000.00 as exemplary
damages on the finding that petitioner had instituted the case in violation of the res judicata rule; and
P20,000.00 as attorney's fees [CA Decision, p. 4; Rollo, p. 32]. Petitioner's motion for
reconsideration was subsequently denied.
Petitioner then appealed to respondent appellate court, raising as errors: (1) the application of
Section 78 of the General Banking Act, as amended, instead of Act No. 3135, in relation to Section
30, Rule 39 of the Revised Rules of Court; (2) the holding that the dismissal of Civil Case No. 8422839 (consignation case) from which petitioner failed to appeal and wherein the court made a
finding that petitioner made no valid tender of payment of the redemption price, had the effect of res
judicata on the case at hand; (3) the finding that SIHI committed no actionable wrong in conveying

the subject property to spouses Domingo Lim and Lim Siu Keng; and, (4) the award of damages
assessed against petitioner [CA Decision, p. 5; Rollo, p. 33].
In its decision promulgated on April 28, 1988, respondent appellate court affirmed the trial court's
judgment with the modification that the award for temperate and exemplary damages assessed
against petitioner was set aside for lack of legal basis [CA Decision, p. 11; Rollo, p. 39].
Not satisfied with the above decision, petitioner filed the instant petition for review on certiorari,
raising basically the same errors he had raised in the appellate court.
The issues raised in this petition may be reduced into four, to wit:
I. Whether Act No. 3135, as amended, in relation to Section 30, Rule 39 of the
Revised Rules of Court, or Section 78 of Rep. Act No. 337 (General Banking Act), as
amended by P.D. No. 1828, is the applicable law in determining the redemption price;
II. Whether or not the dismissal of Civil Case No. 84-22839 (consignation case) had
the effect of res judicata with respect to Civil Case No. 51169;
III. Whether or not the Register of Deeds for the province of Rizal may be held liable
for damages for cancelling TCT No. 2782 and issuing TCT No. 44775 in favor of
SIHI; and,
IV. Whether or not the award of attorney's fees and expenses of litigation assessed
against petitioner is proper.
As regards the first issue, petitioner insists that the present case is governed by Act No. 3135, as
amended, in relation to Section 30, Rule 39 of the Revised Rules of Court which provides in part:
SEC. 30. Time and manner of, and amounts payable on, successive redemptions.
Notice to be given and filed. The judgment debtor, or redemptioner,, may redeem
the property from the purchaser, at any time within twelve months after the sale on
paying the purchaser the amount of his purchase, with one percentum per month
interest thereon in addition, up to the time of redemption, together with the amount of
any assessments or taxes which the purchaser may have paid thereon after
purchase, and interest on such last-named amount at the same rate... [Emphasis
supplied.]
Thus, petitioner contends that a valid redemption was made by him as assignee of the mortgagor's
right of redemption when he tendered and paid to the Sheriff of Rizal the amount of P851,000.00
representing the purchase price plus interest computed at the rate of 1% per month for a period of
twelve months. This was the same amount allegedly tendered to, and refused acceptance by, SIHI.
In support of his contention, petitioner invokes the case of Philippine National Bank v. The
Honorable Court of Appeals and Divina Alim [G.R. No. 60208, December 5, 1985,140 SCRA 360].

On the other hand, respondent appellate court, citing the case of Ponce de Leon v. Rehabilitation
Finance Corporation [G.R. No. L-24571, December 18, 1970, 36 SCRA 289], applied Section 78 of
the General Banking Act, as amended by P. D. No. 1828, and consequently held that no valid
redemption was effected by petitioner because the amount tendered to SIHI and thereafter paid to
the sheriff was insufficient, it being less than the amount due under the real estate mortgage contract
of Carlos Coquinco or the latter's outstanding balance, with interest as specified in the mortgage
contract plus expenses incurred by SIHI by reason of the foreclosure and sale of the subject
property.
The Court finds that respondent appellate court committed no reversible error, having acted in
accordance with the law and jurisprudence.
Section 78 of the General Banking Act, as amended by P.D. No. 1828, states that:
... In the event of foreclosure, whether judicially or extra-judicially, of any mortgage
on real estate which is security for any loan granted before the passage of this Act or
under the provisions of this Act, the mortgagor or debtor whose real property has
been sold at public auction, judicially or extra-judicially, for the full or partial payment
of an obligation to any bank, banking or credit institution, within the purview of this
Act shall have the right, within one year after the sale of the real estate as a result of
the foreclosure of the respective mortgage, to redeem the property by paying the
amount fixed by the court in the order of execution, or the amount due under the
mortgage deed, as the case may be, with interest thereon at the rate specified in the
mortgage and all the costs, and judicial and other expenses incurred by the bank or
institution concerned by reason of the execution and sale and as a result of the
custody of said property less the income received from the property. [Emphasis
supplied].
It must be emphasized that the above section is applicable not only to "banks and banking
institutions," but also to "credit institutions." And, as certified by the Central Bank,* SIHI is a credit
institution, i.e. financial intermediary engaged in quasi-banking functions within the purview of
Section 78, it being an entity authorized to engage in the lending of funds or purchasing of
receivables or other obligations with funds obtained from the public as provided in the General
Banking Act under Section 2-A (a); ** and, to lend, invest or place funds deposited with them,
acquired by them or otherwise coursed through them, either for their own account or for the account
of others under Section 2-D(c) *** [Record, p. 246].
Moreover, petitioner by virtue of the deed of assignment of Carlos Coquinco's right of redemption
must be deemed subrogated to the rights and obligations of his assignor, and bound by exactly the
same conditions, relative to the redemption of the subject property that bound the latter as debtor
and mortgagor [Gorospe v. Santos, G.R. No. L-30079, January 30, 1976, 69 SCRA 191]. Had Carlos
Coquinco attempted to redeem the subject foreclosed property, he would have had to pay "the
amount due under the mortgage deed ... with interest thereon at the rate specified in the mortgage
and all costs ... and other expenses incurred . . . by reason of the execution (or foreclosure] and sale
and as a result of the custody of said property less the income received from the property . . ."
pursuant to Section 78 of the General Banking Act in order to effect a valid redemption. Since

petitioner merely stepped into the shoes of Carlos Coquinco his assignor, petitioner should have
tendered and paid the same amount in order to redeem the property.
Contrary to petitioner's claim, the Court's decision in Ponce de Leon v. Rehabilitation Finance
Corporation, supra,is applicable. In that case, the Court had occasion to state that the General
Banking Act partakes of the nature of an amendment to Act No. 3135 insofar as the redemption price
is concerned, when the mortgagee is a bank or banking or credit institution, Section 6 of Act No.
3135 being, in this respect, inconsistent with Section 78 of the General Banking Act. Although the
foreclosure and sale of the subject property was done by SIHI pursuant to Act No. 3135, as
amended (whereby entities like SIHI are authorized to extrajudicially foreclose and sell mortgaged
properties only under a special power inserted in or annexed to the real estate mortgage contract,
and interested parties, like petitioner herein, are given one year from the date of sale within which to
redeem the foreclosed properties), Section 78 of the General Banking Act, as amended, provides the
amount at which the subject property is redeemable from SIHI, which is, in this case, the amount
due under the mortgage deed, or the outstanding obligation of Carlos Coquinco plus interest and
expenses.
The decision in the 1985 case of Philippine National Bank v. The Honorable Court of Appeals, supra,
invoked by petitioner is not determinative of the issues in the instant petition because that case is
applicable only to extrajudicial foreclosures by the PNB effected pursuant to a mortgage contract
entered into prior to the enactment in 1975 of the Revised Charter of the PNB, P.D. No. 694 (which
contained provisions on redemption), and deals specifically with the amount of interest to be
included in the computation of the redemption price.
Thus, inasmuch as petitioner failed to tender and pay the required amount for the redemption of the
subject property pursuant to Section 78 of the General Banking Act, as amended, no valid
redemption was effected by him. Consequently, there was no legal obstacle to the consolidation of
title by SIHI.
Considering that the Court has made the foregoing categorical finding that petitioner failed to effect a
valid redemption of the subject property, it is deemed unnecessary to pass upon the merits of the
second issue presented in the instant petition.
As regards the third issue, suffice it to say that the respondent Register of Deeds incurred no liability
when he cancelled TCT No. 2782 and issued in lieu thereof TCT No. 44775 in the name of SIHI, the
former having acted in fulfillment of his official functions and in accordance with law.
With regard to the fourth issue, petitioner contends that since respondent appellate court had set
aside the award of temperate and exemplary damages on the finding that petitioner had acted in
good faith in filing the present action, it should have also deleted the award of attorney's fees and
expenses of litigation assessed against him for lack of legal basis.
This contention is meritorious.
A perusal of Article 2208 of the New Civil Code will reveal that the award of attorney's fees as a form
of damages is the exception rather than the general rule for it is predicated upon the existence of

exceptional circumstances, such as a "clearly unfounded civil action or proceeding" or evident bad
faith on the plaintiffs part in instituting his action [Tan Ti v. Alvear, 26 Phil. 566 (1914); Buan v.
Camaganacan, G.R. No. L-21569, February 28, 1966,16 SCRA 321; Philippine National Bank v.
Court of Appeals, G.R. No. L-45770, March 20, 1988, 159 SCRA 433].
It cannot be said that the present action instituted by petitioner was clearly unfounded. Although the
theory upon which petitioner's complaint was based is untenable, he had raised legitimate issues on
the application of Section 78 of the General Banking Act to credit institutions like SIHI, and the import
of the decisions in the cases of Ponce de Leon v. Rehabilitation Finance Corporation and Philippine
National Bank v. The honorable Court of Appeals. Neither was it established that petitioner had
acted in bad faith in the filing of his action against SIHI notwithstanding the dismissal of his complaint
in Civil Case No. 84-22839 (consignation case). The Court agrees with the holding of the respondent
appellate court that the filing of the present action by petitioner was merely
... a misapprehension of a legal remedy as would normally be taken within the ambit
of permissible legal procedure. This, is a scene happening daily in our courts where
the opposing parties would avail of every conceivable rule in the statute books to
ventilate their claim or defenses. [Petitioner's] persistence to pay the redemption
petition price is an act which the court does not consider condemnable as to make
[him] liable for temperate and exemplary damages. We are inclined to presume that
[he] acted in good faith [CA Decision, p. 10; Rollo, P. 38.]
WHEREFORE, the decision of respondent Court of Appeals in CA-G.R. CV No. 13387 promulgated
on April 28, 1988, is hereby AFFIRMED with the modification that the award of attorney's fees and
expenses of litigation is set aside.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., and Bidin, JJ., concur.
Feliciano, J., is on leave.

G.R. No. 119247 February 17, 1997

CESAR SULIT, petitioner,
vs.
COURT OF APPEALS and ILUMINADA CAYCO, respondents.

REGALADO, J.:
The primary issue posed before the Court, in this appeal by certiorari from a decision 1 of the Court of
Appeals, is whether or not the mortgagee or purchaser in an extrajudicial foreclosure sale is entitled to the
issuance of a writ of possession over the mortgaged property despite his failure to pay the surplus
proceeds of the sale to the mortgagor or the person entitled thereto. Secondarily, it calls for a resolution of
the further consequences of such non-payment of the full amount for which the property was sold to him
pursuant to his bid.
The material facts, as found by respondent court, are not disputed:
It appears from the record that on 9 June 1992 petitioner (herein private respondent)
Iluminada Cayco executed a Real Estate Mortgage (REM) over Lot 2630 which is
located in Caloocan City and covered by TCT No. (23211) 11591 in favor of private
respondent (herein petitioner) Cesar Sulit, to secure a loan of P4 Million. Upon
petitioner's failure to pay said loan within the stipulated period, private respondent
resorted to extrajudicial foreclosure of the mortgage as authorized in the contract.
Hence, in a public auction conducted by Notary Public Felizardo M. Mercado on 28
September 1993 the lot was sold to the mortgagee, herein private respondent, who
submitted a winning bid of P7 Million. As stated in the Certificate of Sale executed by
the notary public (Annex B, petition), the mortgaged property was sold at public
auction to satisfy the mortgage indebtedness of P4 Million. The Certificate further
states as follows:
IT IS FURTHER CERTIFIED, that the aforementioned highest
bidder/buyer, CESAR SULIT, being the petitioner/mortgagee
thereupon did not pay to the undersigned Notary Public of Kalookan
City the said sum of SEVEN MILLION PESOS (P7,000,000.00),
Philippine Currency, the sale price of the above-described real estate
property together with all improvements existing thereon, which
amount was properly credited to the PARTIAL satisfaction of the
mortgage debt mentioned in the said real estate mortgage, plus
interests, attorney's fees and all other incidental expenses of
foreclosure and sale (par. 2, Annex B, petition).
On 13 December 1993 private respondent petitioned the Regional Trial Court of
Kalookan City for the issuance of a writ of possession in his favor. The petition was

docketed as LRC Case No. C-3462 and assigned to Branch 131, presided over by
public respondent.
On 17 January 1994 respondent Judge issued a decision (should have been
denominated as order), the dispositive part of which reads:
WHEREFORE, finding the subject petition to be meritorious, the
same is hereby GRANTED. As prayed for, let a Writ of Possession be
issued in favor of herein petitioner, Cesar Sulit, upon his posting of an
indemnity bond in the amount of One Hundred Twenty Thousand
(P120,000.00) Pesos (Annex C, petition).
On 28 March 1994 petitioner filed a Motion to have the auction sale of the mortgaged
property set aside and to defer the issuance of the writ of possession. She invited the
attention of the court a quoto some procedural infirmities in the said proceeding and
further questioned the sufficiency of the amount of bond. In the same Motion
petitioner prayed as an alternative relief that private respondent be directed to pay
the sum of P3 Million which represents the balance of his winning bid of P7 Million
less the mortgage indebtedness of P4 Million (Annex D, petition). This Motion was
opposed by private respondent who contended that the issuance of a writ of
possession upon his filing of a bond was a ministerial duty on the part of respondent
Judge (Annex E), to which Opposition petitioner submitted a Reply (Annex F,
petition).
On 11 May 1994 respondent Judge denied petitioner's Motion and directed the
issuance of a writ of possession and its immediate enforcement by deputy sheriff
Danilo Norberte (Annex G, petition)." 2(Emphasis words supplied for clarity).
From the aforesaid orders of the court a quo, herein private respondent Iluminada Cayco filed on
May 26, 1994 a petition for certiorari with preliminary injunction and/or temporary restraining order
before respondent Court of Appeals, which immediately issued a status quo order restraining the
respondent judge therein from implementing his order of January 17, 1994 and the writ of
possession issued pursuant thereto. Subsequently, respondent court rendered judgment on
November 11, 1994, as follows:
IN JUDGMENT, We grant the writ of certiorari and the disputed order of 17 January
1994 which precipitately directed the issuance of a writ of possession in favor of
private respondent and the subsequent order of 11 May 1994 which denied
petitioner's Motion for Reconsideration are hereby SET ASIDE.
Accordingly, private respondent is ordered to pay unto petitioner, through the notary
public, the balance or excess of his bid of P7 Million after deducting therefrom the
sum of P4,365,280 which represents the mortgage debt and interest up to the date of
the auction sale (September 23, 1993), as well as expenses of foreclosure based on
receipts which must be presented to the notary public.

In the event that private respondent fails or refuses to pay such excess or balance,
then the auction sale of 28 September 1993 is deemed CANCELLED and private
respondent may foreclose the mortgage anew either in a judicial or extrajudicial
proceeding as stipulated in the mortgage contract.
Corollary to the principal issue earlier stated, petitioner asserts that respondent Court of Appeals
gravely erred when it failed to appreciate and consider the supposed legal significance of the
bouncing checks which private respondent issued and delivered to petitioner as payment for the
agreed or stipulated interest on the mortgage obligation. He likewise avers that a motion for
reconsideration or an appeal, and not certiorari, is the proper remedy available to herein private
respondent from an order denying her motion to defer issuance of the writ of possession. Moreover,
it is claimed that any question regarding the propriety of the sale and the issuance of the writ of
possession must be threshed out in a summary proceeding provided for in Section 8 of Act 3135.
There is no merit in petitioner's contention that the dishonored checks amounting to a total of
P1,250,000.00, allegedly representing interest of 5% per month from June 9, 1992 to December 9,
1992, were correctly considered by the trial court as the written agreement between the parties.
Instead, we find the explanation of respondent court in rejecting such postulate, on the basis of
Article 1956 of the Civil Code, 3 to be more logical and plausible, to wit:
It is noteworthy that the Deed of Real Estate Mortgage executed by the parties on 9
June 1992 (Annex A, Petition) does not contain any stipulation for payment of
interest. Private respondent who maintains that he had an agreement with petitioner
for the payment of 5% monthly interest did not produce any other writing or
instrument embodying such a stipulation on interest. It appears then that if any such
agreement was reached by the parties, it was merely a verbal one which does not
conform to the aforequoted statutory provision. Certainly, the dishonored checks
claimed to have been issued by petitioner in payment of interest could not have been
the written stipulation contemplated in Article 1956 of the Code. Consequently, in the
absence of a written stipulation for the imposition of interest on the loan obtained by
petitioner, private respondent's assessment thereof has no legal basis. 4
It is elementary that in the absence of a stipulation as to interest, the loan due will now earn interest
at the legal rate of 12% per annum 5 which, according to respondent court, is equivalent to
P365,280.000.00 computed from December 10, 1992, after private respondent's obligation became due,
until September 23, 1993, the date of the auction sale. It is this amount which should further be deducted
from the purchase price of P7,000,000.00, together with any other expenses incurred in connection with
the sale, such as the posting and publication of notices, notarial and documentary fees, and assessments
or taxes due on the disputed property.
It baffles this Court, therefore, why petitioner has continually failed up to the present to submit
documentary evidence of the alleged expenses of the foreclosure sale, and this in spite of the
express requirement therefor in the certificate of sale 6 issued by the notary public for the purpose of
computing the actual amount payable by the mortgagor or redemptioner in the event of redemption. It
may thus be safely presumed that such evidence having been willfully suppressed, it would be adverse if
produced. 7

Coming now to the main issue in this case, petitioner argues that it is ministerial upon the court to
issue a writ of possession after the foreclosure sale and during the period of redemption, invoking in
support thereof Sections 7 and 8 of Act 3135 which conjointly provide:
Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition
the Court of First Instance of the province or place where the property or any part
thereof is situated, to give him possession thereof during the redemption period,
furnishing bond in an amount equivalent to the use of the property for a period of
twelve months, to indemnify the debtor in case it be shown that the sale was made
without violating the mortgage or without complying with the requirements of this Act.
Such petition shall be made under oath and filed in form of an ex parte motion in the
registration or cadastral proceedings if the property is registered, or in special
proceedings in the case of property registered under the Mortgage Law or under
section one hundred and ninety-four of the Administrative Code, or of any other real
property encumbered with a mortgage duly registered in the office of any register of
deeds in accordance with any existing law, and in each case the clerk of the court
shall, upon the filing of such petition, collect the fees specified in paragraph eleven of
section one hundred and fourteen of Act Numbered Twenty-eight hundred and sixtysix, and the court shall, upon approval of the bond, order that a writ of possession
issue, addressed to the sheriff of the province in which the property is situated, who
shall execute said order immediately.
Sec. 8. The debtor may, in the proceedings in which possession was requested, but
not later than thirty days after the purchaser was given possession, petition that the
sale be set aside and the writ of possession cancelled, specifying the damages
suffered by him, because the mortgage was not violated or the sale was not made in
accordance with the provisions hereof, and the Court shall take cognizance of this
petition in accordance with the summary procedure provided for in section one
hundred and twelve of Act Number Four hundred and ninety-six; and if it finds the
complaint of the debtor justified, it shall dispose in his favor of all or part of the bond
furnished by the person who obtained possession. Either of the parties may appeal
from the order of the judge in accordance with section fourteen of Act Numbered
Four hundred and ninety-six; but the order of possession shall continue in effect
during the pendency of the appeal.
The governing law thus explicitly authorizes the purchaser in a foreclosure sale to apply for a writ of
possession during the redemption period by filing an ex parte motion under oath for that purpose in
the corresponding registration or cadastral proceeding in the case of property with Torrens title.
Upon the filing of such motion and the approval of the corresponding bond, the law also in express
terms directs the court to issue the order for a writ of possession.
No discretion appears to be left to the court. Any question regarding the regularity and validity of the
sale, as well as the consequent cancellation of the writ, is to be determined in a subsequent
proceeding as outlined in Section 8, and it cannot be raised as a justification for opposing the
issuance of the writ of possession since, under the Act, the proceeding for this is ex parte. 8 Such

recourse is available to a mortgagee, who effects the extrajudicial foreclosure of the mortgage, even
before the expiration of the period of redemption provided by law and the Rules of Court. 9

The rule is, however, not without exception. Under Section 35, Rule 39 of the Rules of Court, which
is made applicable to the extrajudicial foreclosure of real estate mortgages by Section 6 of Act 3135,
the possession of the mortgaged property may be awarded to a purchaser in the extrajudicial
foreclosure "unless a third party is actually holding the property adversely to the judgment debtor." 10
Thus, in the case of Barican, et al. vs. Intermediate Appellate Court,
et al., 11 this Court took into account the circumstances that long before the mortgagee bank had sold the
disputed property to the respondent therein, it was no longer the judgment debtor who was in possession
but the petitioner spouses who had assumed the mortgage, and that there was a pending civil case
involving the rights of third parties. Hence, it was ruled therein that under the circumstances, the
obligation of a court to issue a writ of possession in favor of the purchaser in a foreclosure of mortgage
case ceases to be ministerial.
Now, in forced sales low prices are generally offered and the mere inadequacy of the price obtained
at the sheriff's sale, unless shocking to the conscience, has been held insufficient to set aside a sale.
This is because no disadvantage is caused to the mortgagor. On the contrary, a mortgagor stands to
gain with a reduced price because he possesses the right of redemption. When there is the right to
redeem, inadequacy of price becomes immaterial since the judgment debtor may reacquire the
property or sell his right to redeem, and thus recover the loss he claims to have suffered by reason
of the price obtained at the auction sale. 12
However, also by way of an exception, in Cometa, et al. vs. Intermediate Appellate Court, et
al. 13 where the properties in question were found to have been sold at an unusually lower price than their
true value, that is, properties worth at least P500,000.00 were sold for only P57,396.85, this Court, taking
into consideration the factual milieu obtaining therein as well as the peculiar circumstances attendant
thereto, decided to withhold the issuance of the writ of possession on the ground that it could work
injustice because the petitioner might not be entitled to the same.
The case at bar is quite the reverse, in the sense that instead of an inadequacy in price, there is due
in favor of private respondent, as mortgagor, a surplus from the proceeds of the sale equivalent to
approximately 40% of the total mortgage debt, which excess is indisputably a substantial amount.
Nevertheless, it is our considered opinion, and we so hold, that equitable considerations demand
that a writ of possession should also not issue in this case.
Rule 68 of the Rules of Court provides:
Sec. 4. Disposition of proceeds of sale. The money realized from the sale of
mortgaged property under the regulations hereinbefore prescribed shall, after
deducting the costs of the sale, be paid to the person foreclosing the mortgage, and
when there shall be any balance or residue, after paying off such mortgage or other
incumbrances, the same shall be paid to the junior incumbrancers in the order of
their priority, to be ascertained by the court, or if there be no such incumbrancers or
there be a balance or residue after payment of such incumbrancers, then to the
mortgagor or his agent, or to the person entitled to it.

The application of the proceeds from the sale of the mortgaged property to the mortgagor's
obligation is an act of payment, not payment by dation; hence, it is the mortgagee's duty to return
any surplus in the selling price to the
mortgagor. 14 Perforce, a mortgagee who exercises the power of sale contained in a mortgage is
considered a custodian of the fund, and, being bound to apply it properly, is liable to the persons entitled
thereto if he fails to do so. And even though the mortgagee is not strictly considered a trustee in a purely
equitable sense, but as far as concerns the unconsumed balance, the mortgagee is deemed a trustee for
the mortgagor or owner of the equity of redemption. 15
Commenting on the theory that a mortgagee, when he sells under a power, cannot be considered
otherwise than as a trustee, the vice-chancellor in Robertson vs. Norris (1 Giff . 421) observed: "That
expression is to be understood in this sense: that with the power being given to enable him to
recover the mortgage money, the court requires that he shall exercise the power of sale in a
provident way, with a due regard to the rights and interests of the mortgagor in the surplus money to
be produced by the sale." 16
The general rule that mere inadequacy of price is not sufficient to set aside a foreclosure sale is
based on the theory that the lesser the price the easier it will be for the owner to effect the
redemption. 17 The same thing cannot be said where the amount of the bid is in excess of the total
mortgage debt. The reason is that in case the mortgagor decides to exercise his right of redemption,
Section 30 of Rule 39 provides that the redemption price should be equivalent to the amount of the
purchase price, plus one per cent monthly interest up to the time of the redemption, 18 together with the
amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and
interest on such last-named amount at the same rate. 19
Applying this provision to the present case would be highly iniquitous if the amount required for
redemption is based on P7,000.000.00, because that would mean exacting payment at a price
unjustifiably higher than the real amount of the mortgage obligation. We need not elucidate on the
obvious. Simply put, such a construction will undeniably be prejudicial to the substantive rights of
private respondent and it could even effectively prevent her from exercising the right of redemption.
Where the redemptioner chooses to exercise his right of redemption, it is the policy of the law to aid
rather than to defeat his right. It stands to reason, therefore, that redemption should be looked upon
with favor and where no injury will follow, a liberal construction will be given to our redemption laws,
specifically on the exercise of the right to redeem. Conformably hereto, and taking into consideration
the facts obtaining in this case, it is more in keeping with the spirit of the rules, particularly Section
30 of Rule 39, that we adopt such interpretation as may be favorable to the private respondent.
Admittedly, no payment was made by herein petitioner, as the highest bidder, to the notary public
who conducted the extrajudicial foreclosure sale. We are not unmindful of the rule that it is not
necessary for the mortgagee to pay cash to the sheriff or, in this case, the notary public who
conducted the sale. It would obviously serve no purpose for the sheriff or the notary public to go
through the idle ceremony of receiving the money and paying it back to the creditor, under the truism
that the lawmaking body did not contemplate such a pointless application of the law in requiring that
the creditor must bid under the same conditions as any other bidder. 20 It bears stressing that the rule
holds true only where the amount of the bid represents the total amount of the mortgage debt.

In case of a surplus in the purchase price, however, there is jurisprudence to the effect that while the
mortgagee ordinarily is liable only for such surplus as actually comes into his hands, but he sells on
credit instead of for cash, he must still account for the proceeds as if the price were paid in cash, and
in an action against the mortgagee to recover the surplus, the latter cannot raise the defense that no
actual cash was received. 21
We cannot simply ignore the importance of surplus proceeds because by their very nature, surplus
money arising from a sale of land under a decree of foreclosure stands in the place of the land itself
with respect to liens thereon or vested rights therein. They are constructively, at least, real property
and belong to the mortgagor or his assigns. 22 Inevitably, the right of a mortgagor to the surplus
proceeds is a substantial right which must prevail over rules of technicality.
Surplus money, in case of a foreclosure sale, gains much significance where there are junior
encumbrancers on the mortgaged property. Jurisprudence has it that when there are several liens
upon the premises, the surplus money must be applied to their discharge in the order of their
priority. 23 A junior mortgagee may have his rights protected by an appropriate decree as to the
application of the surplus, if there be any, after satisfying the prior mortgage. His lien on the land is
transferred to the surplus fund. 24 And a senior mortgagee, realizing more than the amount of his debt on
a foreclosure sale, is regarded as a trustee for the benefit of junior encumbrancers. 25
Upon the strength of the foregoing considerations, we cannot countenance the apparent paltriness
that petitioner persistently accords the right of private respondent over the surplus proceeds. It must
be emphasized that petitioner failed to present the receipts or any other proof of the alleged costs or
expenses incurred by him in the foreclosure sale. Even the trial court failed or refused to resolve this
issue, notwithstanding the fact that this was one of the grounds raised in the motion filed by private
respondent before it to set aside the sale. Since it has never been denied that the bid price greatly
exceeded the mortgage debt, petitioner cannot be allowed to unjustly enrich himself at the expense
of private respondent.
As regards the issue concerning the alleged defect in the publication of the notice of the sale, suffice
it to state for purposes of this discussion that a question of non-compliance with the notice and
publication requirements of an extrajudicial foreclosure sale is a factual issue and the resolution
thereof by the lower courts is binding and conclusive upon this Court, 26 absent any showing of grave
abuse of discretion. In the case at bar, both the trial court and respondent Court of Appeals have found
that the sale was conducted in accordance with law. No compelling reason exists in this case to justify a
rejection of their findings or a reversal of their conclusions.
There is likewise no merit in the argument that if private respondent had wanted to question the
validity of the sale, she should have filed a petition to set the same aside and to cancel the writ of
possession. These, it is argued, should have been disposed of in accordance with the summary
procedure laid down in Section 112 of the Land Registration Act, provided the petition is filed not
later than thirty days after the purchaser was given possession of the land. Considering, however,
that private respondent has filed a motion to set aside the sale and to defer the issuance of a writ of
possession before the court where the ex parte petition for issuance of such writ was then pending,
we deem the same to be substantial compliance with the statutory prescription.

We, however, take exception to and reject the last paragraph in the dispositive portion of the
questioned decision of respondent court, which we repeat:
In the event that private respondent fails or refuses to pay such excess or balance,
then the auction sale of 28 September 1993 is deemed CANCELLED and private
respondent (petitioner herein) may foreclose the mortgage anew either in a judicial or
extrajudicial proceeding as stipulated in the mortgage contract.
for lack of statutory and jurisprudential bases. The quoted phrase "as stipulated in the
mortgage contract" does not, of course, envision such contingency or warrant the suggested
alternative procedure.
Section 4 of Rule 64, hereinbefore quoted, merely provides that where there is a balance or residue
after payment of the mortgage, the same shall be paid to the mortgagor. While the expedient course
desired by respondent court is commendable, there is nothing in the cited provision from which it can
be inferred that a violation thereof will have the effect of nullifying the sale. The better rule is that if
the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this fact alone will
not affect the validity of the sale but simply gives the mortgagor a cause of action to recover such
surplus. 27 This is likewise in harmony with the decisional rule that in suing for the return of the surplus
proceeds, the mortgagor is deemed to have affirmed the validity of the sale since nothing is due if no valid
sale has been made. 28
In the early case of Caparas vs. Yatco, etc., et al., 29 it was also held that where the mortgagee has
been ordered by the court to return the surplus to the mortgagor or the person entitled thereto, and the
former fails to do so and flagrantly disobeys the order, the court can cite the mortgagee for contempt and
mete out the corresponding penalty under Section 3(b) of the former Rule 64 (now Rule 71) of the Rules
of Court.
WHEREFORE, the questioned decision of the Court of Appeals is MODIFIED by deleting the last
paragraph of itsfallo, but its disposition of this case in all other respects is hereby AFFIRMED.
SO ORDERED.
Romero, Puno, Mendoza and Torres, Jr., JJ., concur.

G.R. No. 115307 July 8, 1997

MANUEL LAO, petitioner,
vs.
COURT OF APPEALS and BETTER HOMES REALTY & HOUSING
CORPORATION, respondents.

PANGANIBAN, J.:
As a general rule, the main issue in an ejectment suit is possession de facto, not possession de jure.
In the event the issue of ownership is raised in the pleadings, such issue shall be taken up only for
the limited purpose of determining who between the contending parties has the better right to
possession. However, where neither of the parties objects to the allegation of the question of
ownership which may be initially improvident or improper in an ejectment suit and, instead,
both present evidence thereon, argue the question in their various submissions and participate in all
aspects of the trial without objecting to the Metropolitan (or Municipal) Trial Court's jurisdiction to
decide the question of ownership, the Regional Trial Court in the exercise of its original
jurisdiction as authorized by Section 11, Rule 40 of the Rules of Court may rule on the issue and
the corollary question of whether the subject deed is one of sale or of equitable mortgage.
These postulates are discussed by the Court as it resolves this petition under Rule 45 seeking a
reversal of the December 21, 1993 Decision 1 and April 28, 1994 Resolution 2 of the Court of Appeals in
CA-G.R. SP No. 92-14293.
The Antecedent Facts
The facts of this case are narrated by Respondent Court of Appeals as follows: 3
On June 24, 1992, (herein Private Respondent Better Homes Realty and Housing
Corporation) filed with the Metropolitan Trial Court of Quezon City, a complaint for
unlawful detainer, on the ground that (said private respondent) is the owner of the
premises situated at Unit I, No. 21 N. Domingo Street, Quezon City, evidenced by
Transfer Certificate of Title No. 22184 of the Registry of Deeds of Quezon City; that
(herein Petitioner Manuel Lao) occupied the property without rent, but on (private
respondent's) pure liberality with the understanding that he would vacate the property
upon demand, but despite demand to vacate made by letter received by (herein
petitioner) on February 5, 1992, the (herein petitioner) refused to vacate the
premises.
In his answer to the complaint, (herein petitioner) claimed that he is the true owner of
the house and lot located at Unit I, No. 21 N. Domingo Street, Quezon City; that the
(herein private respondent) purchased the same from N. Domingo Realty and
Development Corporation but the agreement was actually a loan secured by

mortgage; and that plaintiff's cause of action is for accion publiciana, outside the
jurisdiction of an inferior court.
On October 9, 1992, the Metropolitan Trial Court of Quezon City rendered judgment
ordering the (petitioner) to vacate the premises located at Unit I, No. 21 N. Domingo
Street, Quezon City; to pay (private respondent) the sum of P300.00 a day starting
on January 31, 1992, as reasonable rent for the use and occupation of the premises;
to pay plaintiff P5,000.00, as attorney's fees, and costs.
On appeal to the Regional Trial Court of Quezon City, 4 on March 30, 1993, the latter
court rendered a decision reversing that of the Metropolitan Trial Court, and ordering the
dismissal of the (private respondent's) complaint for lack of merit, with costs taxed
against (private respondent).
In its decision, the Regional Trial Court held that the subject property was acquired
by (private respondent) from N. Domingo Realty and Development Corporation, by a
deed of sale, and (private respondent) is now the registered owner under Transfer
Certificate of Title No. 316634 of the Registry of Deeds of Quezon City, but in truth
the (petitioner) is the beneficial owner of the property because the real transaction
over the subject property was not a sale but a loan secured by a mortgage thereon.
The dispositive portion of the Regional Trial Court's decision is quoted below: 5
WHEREFORE, judgment is hereby rendered reversing the appealed decision and
ordering the dismissal of plaintiffs complaint for lack of merit, with the costs taxed
against it.
IT IS SO ORDERED.
On April 28, 1993, private respondent filed an appeal with the Court of Appeals which reversed the
decision of the Regional Trial Court. The Respondent Court ruled:
The Metropolitan Trial Court has no jurisdiction to resolve the issue of ownership in
an action for unlawful detainer (B.P. 129, Sec. 33 [2]; Cf. Alvir vs. Vera, 130 SCRA
357). The jurisdiction of a court is determined by the nature of the action alleged in
the complaint (Ching vs. Malaya, l53 SCRA 412). In its complaint in the inferior court,
the plaintiff alleged that it is the owner of the premises located at Unit I, No. 21 N.
Domingo Street, Quezon City, and that defendant's occupation is rent free and based
on plaintiffs pure liberality coupled with defendant's undertaking to vacate the
premises upon demand, but despite demands, defendant has refused to vacate. The
foregoing allegations suffice to constitute a cause of action for ejectment (Banco de
Oro vs. Court of Appeals, 182 SCRA 464).
The Metropolitan Trial Court is not ousted of jurisdiction simply because the
defendant raised the question ownership (Bolus vs. Court of Appeals, 218 SCRA
798). The inferior court shall resolve the issue of ownership only to determine who is

entitled to the possession of the premises (B.P. 129, Sec. 33[2]; Bolus vs. Court of
Appeals, supra).
Here, the Metropolitan Trial Court ruled that as owner, plaintiff (herein private
respondent Better Homes Realty and Housing Corporation) is entitled to the
possession of the premises because the defendant's stay is by mere tolerance of the
plaintiff (herein private respondent).
On the other hand, the Regional Trial Court ruled that the subject property is owned
by the defendant, (herein petitioner Manuel Lao) and, consequently, dismissed the
complaint for unlawful detainer. Thus, the Regional Trial Court resolved the issue of
ownership, as if the case were originally before it as an action for recovery of
possession, or accion publiciana, within its original jurisdiction. In an appeal from a
decision of the Municipal Trial Court, or Metropolitan Trial Court, in an unlawful
detainer case, the Regional Trial Court is simply to determine whether the inferior
court correctly resolved the issue of possession; it shall not delve into the issue of
ownership (Manuel vs. Court of Appeals, 199 SCRA 603). What the Regional Trial
Court did was to rule that the real agreement between the plaintiff and the previous
owner of the property was not a sale, but an equitable mortgage. Defendant was only
a director of the seller corporation, and his claim of ownership could not be true. This
question could not be determined summarily. It was not properly in issue before the
inferior court because, as aforesaid, the only issue was possession de
facto(Manlapaz vs. Court of Appeals, 191 SCRA 795), or who has a better right to
physical possession (Dalida vs. Court of Appeals, 117 SCRA 480). Consequently, the
Regional Trial Court erred in reversing the decision of the Metropolitan Trial Court.
WHEREFORE, the Court hereby REVERSES the decision of the Regional Trial
Court. In lieu thereof, We affirm the decision of the Metropolitan Trial Court of
Quezon City sentencing the defendant and all persons claiming right under him to
vacate the premises situated at Unit I, No. 21 N. Domingo Street, Quezon City, and
to surrender possession to the plaintiff; to pay plaintiff the sum of P300.00, a day
starting on January 31, 1992, until defendant shall have vacated the premises; to pay
plaintiff P5,000.00 as attorneys fees, and costs.
SO ORDERED. 6
Manuel Lao's motion for reconsideration dated January 24, 1994 was denied by the Court of Appeals
in its Resolution promulgated on April 28, 1994. Hence, this petition for review before this Court. 7
The Issues
Petitioner Manuel Lao raises three issues:
3.1 Whether or not the lower court can decide on the issue of
ownership in the present ejectment case.

3.2 Whether or not private respondent had acquired ownership over

the property in question.
3.3 Whether or not petitioner should be ejected from the premises in
question 8
The Court's Ruling
The petition for review is meritorious.
First Issue: Jurisdiction to Decide the Issue of Ownership
The Court of Appeals held that as a general rule, the issue in an ejectment suit is possession de
facto, not possession de jure, and that in the event the issue of ownership is raised as a defense, the
issue is taken up for the limited purpose of determining who between the contending parties has the
better right to possession. Beyond this, the MTC acts in excess of its jurisdiction. However, we hold
that this is not a hard and fast rule that can be applied automatically to all unlawful detainer cases.
Section 11, Rule 40 of the Rules of Court provides that "[a] case tried by an inferior court without
jurisdiction over the subject matter shall be dismissed on appeal by the Court of First Instance. But
instead of dismissing the case, the Court of First Instance, in the exercise of its original jurisdiction,
may try the case on the merits if the parties therein file their pleadings and go to the trial without any
objection to such jurisdiction." After a thorough review of the records of this case, the Court finds that
the respondent appellate court failed to apply this Rule and erroneously reversed the RTC Decision.
Respondent Court cites Alvir vs. Vera to support its Decision. On the contrary, we believe such case
buttresses instead the Regional Trial Court's decision. The cited case involves an unlawful detainer
suit where the issue of possession was inseparable from the issue of transfer of ownership, and the
latter was determinable only after an examination of a contract of sale involving the property in
question. The Court ruled that where a "case was tried and heard by the lower court in the exercise
of its original jurisdiction by common assent of the parties by virtue of the issues raised . . . and the
proofs presented by them," any dismissal on the ground of lack of jurisdiction "would only lead to
needless delays and multiplicity of suits." The Court held:
In actions of forcible entry and detainer, the main issue is possession de facto,
independently of any claim of ownership or possession de jure that either party may
set forth in his pleading. . . . Defendant's claim of ownership of the property from
which plaintiff seeks to eject him is not sufficient to divest the inferior court of its
jurisdiction over the action of forcible entry and detainer. However, if it appears during
the trial that the principal issue relates to the ownership of the property in dispute and
any question of possession which maybe involved necessarily depends upon the
result of the inquiry into the title, previous rulings of this Court are that the jurisdiction
of the municipal or city court is lost and the action should be dismissed.
We have at bar a case where, in effect, the question of physical possession could not
properly be determined without settling that of lawful or de jure possession and of

ownership and hence, following early doctrine, the jurisdiction of the municipal court
over the ejectment case was lost and the action should have been dismissed. As a
consequence, respondent court would have no jurisdiction over the case on appeal
and it should have dismissed the case on appeal from the municipal trial court.
However, in line with Section 11, Rule 40 of the Revised Rules of Court, which
reads
Sec. 11. Lack of Jurisdiction. A case tried by an inferior court
without jurisdiction over the subject matter shall be dismissed on
appeal by the Court of First Instance. But instead of dismissing the
case, the Court of First Instance in the exercise of its original
jurisdiction, may try the case on the merits if the parties therein file
their pleadings and go to trial without objection to such jurisdiction.
this Court held in Saliwan vs. Amores, 51 SCRA 329, 337, that dismissal "on the said
ground of lack of appellate jurisdiction on the part of the lower court flowing from the
municipal court's loss of jurisdiction would lead only to needless delay and multiplicity
of suits in the attainment of the same result and ignores, as above stated, that the
case was tried and heard by the lower court in the exercise of its original jurisdiction
by common assent of the parties by virtue of the issues raised by the parties and the
proof presented by them thereon." 9
This pronouncement was reiterated by this Court through Mr. Justice Teodoro R. Padilla
in Consignado vs. Court of Appeals 10 as follows:
As the MTC of Laguna had no jurisdiction over the unlawful detainer case in view of
the raised question of title or ownership over the property in dispute, the RTC of
Laguna also had no appellatejurisdiction to decide the case on the merits. It should
have dismissed the appeal. However, it hadoriginal jurisdiction to pass upon the
controversy. It is to be noted, in this connection, that in their respective memoranda
filed with the RTC of Laguna, the petitioners and private respondents did not object
to the said court exercising its original jurisdiction pursuant to the aforequoted
provisions of Section 11, Rule 40 of the Rules of Court.
xxx xxx xxx
Petitioners now contend, among others, that the Court of Appeals erred in resolving
the question of ownership as if actual title, not mere possession of subject premises,
is involved in the instant case.
The petitioner's contention is untenable. Since the MTC and RTC of Laguna decided
the question of ownership over the property in dispute, on appeal the Court of
Appeals had to review and resolve also the issue of ownership. . . .
It is clear, therefore, that although an action for unlawful detainer "is inadequate for the ventilation of
issues involving title or ownership of controverted real property, [i]t is more in keeping with

procedural due process that where issues of title or ownership are raised in the summary
proceedings for unlawful detainer, said proceeding should be dismissed for lack of jurisdiction,
unless, in the case of an appeal from the inferior court to the Court of First Instance, the parties
agree to the latter Court hearing the case in its original jurisdiction in accordance with Section 11,
Rule 40 . . ." 11
In the case at bar, a determination of the issue of ownership is indispensable to resolving the rights
of both parties over the property in controversy, and is inseparable from a determination of who
between them has the right to possess the same. Indeed, the very complaint for unlawful detainer
filed in the Metropolitan Trial Court of Quezon City is anchored on the alleged ownership of private
respondent over the subject premises. 12 The parties did not object to the incongruity of a question of
ownership being brought in an ejectment suit. Instead they both submitted evidence on such question,
and the Metropolitan Trial Court decided on the issue. These facts are evident in the Metropolitan Trial
Court's decision:
From the records of the case, the evidence presented and the various arguments
advanced by the parties, the Court finds that the property subject matter of this case
is in the name of (herein private respondent) Better Homes and Realty Housing
Corporation; that the Deed of Absolute Sale which was the basis for the issuance of
said TCT No. 22184 is between N. Domingo Realty and Development Corporation
and Better Homes Realty and Housing Corporation which was signed by Artemio S.
Lao representing the seller N. Domingo and Realty Development Corporation; that a
Board Resolution of N. Domingo and Realty and Development Corporation (Exhibit
"D" position paper) shows that the Directors of the Board of the N. Domingo Realty
and Development Corporation passed a resolution selling apartment units I and F
located at No. 21 N. Domingo St., Quezon City and designating the (herein
petitioner) with his brother Artemio S. Lao as signatories to the Deed of Sale. The
claim therefore of the (herein petitioner) that he owns the property is not true . . . 13
When the MTC decision was appealed to the Regional Trial Court, not one of the parties questioned
the Metropolitan Trial Court's jurisdiction to decide the issue of ownership. In fact, the records show
that both petitioner and private respondent discussed the issue in their respective pleadings before
the Regional Trial Court. 14 They participated in all aspects of the trial without objection to its jurisdiction
to decide the issue of ownership. Consequently, the Regional Trial Court aptly decided the issue based on
the exercise of its original jurisdiction as authorized by Section 11, Rule 40 of the Rules of Court.
This Court further notes that in both of the contending parties' pleadings filed on appeal before the
Court of Appeals, the issue of ownership was likewise amply discussed. 15 The totality of evidence
presented was sufficient to decide categorically the issue of ownership.
These considerations, taken together with the fact that both the Metropolitan Trial Court and the
Regional Trial Court decided the issue of ownership, justify the review of the lower courts' findings of
fact and decision on the issue of ownership. This we now do, as we dispose of the second issue and
decide the case with finality to spare the parties the time, trouble and expense of undergoing the
rigors of another suit where they will have to present the same evidence all over again and where, in
all probability, the same ultimate issue of ownership will be brought up on appeal.

Second Issue: Absolute Sale or Equitable Mortgage?

Private Respondent Better Homes Realty and Housing Corporation anchored its right in the
ejectment suit on a contract of sale in which petitioner (through their family corporation) transferred
the title of the property in question. Petitioner contends, however that their transaction was not an
absolute sale, but an equitable mortgage.
In determining the nature of a contract, the Court looks at the intent of the parties and not at the
nomenclature used to describe it. Pivotal to deciding this issue is the true aim and purpose of the
contracting parties as shown by the terminology used in the covenant, as well as "by their conduct,
words, actions and deeds prior to, during and immediately after executing the agreement." 16 In this
regard, parol evidence becomes admissible to prove the true intent and agreement of the parties which
the Court will enforce even if the title of the property in question has already been registered and a new
transfer certificate of title issued in the name of the transferee. In Macapinlac vs. Gutierrez Repide, which
involved an identical question, the Court succintly stated:
. . . This conclusion is fully supported by the decision in Cuyugan vs. Santos (34
Phil., 100), where this court held that a conveyance in the form of a contract of sale
with pacto de retro will be treated as a mere mortgage, if really executed as security
for a debt, and that this fact can be shown by oral evidence apart from the instrument
of conveyance, a doctrine which has been followed in the later cases of Villa vs.
Santiago (38 Phil., 157), and Cuyugan vs. Santos (39 Phil., 970).
xxx xxx xxx
In the first place, it must be borne in mind that the equitable doctrine which has been
so fully stated above, to the effect that any conveyance intended as security for a
debt will be held in effect to be a mortgage, whether so actually expressed in the
instrument or not, operates regardless of the form of the agreement chosen by the
contracting parties as the repository of their will. Equity looks through the form and
considers the substance; and no kind of engagement can be adopted which will
enable the parties to escape from the equitable doctrine to which reference is made.
In other words, a conveyance of land, accompanied by registration in the name of the
transferee and the issuance of a new certificate, is no more secured from the
operation of this equitable doctrine than the most informal conveyance that could be
devised. 17
The law enumerates when a contract may be presumed to be an equitable mortgage:
(1) When the price of a sale with right to repurchase is unusually
inadequate;
(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right repurchase another
instrument extending the period of redemption or granting a new
period is executed;
(4) When the purchaser retains for himself a part of the purchase
price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.
xxx xxx xxx 18
The foregoing presumption applies also to a "contract purporting to be an absolute sale."

19

Applying the preceding principles to the factual milieu of this case, we find the agreement between
the private respondent and N. Domingo Realty & Housing Corporation, as represented by petitioner,
manifestly one of equitable mortgage. First, possession of the property in the controversy remained
with Petitioner Manuel Lao who was the beneficial owner of the property, before, during and after the
alleged sale. 20 It is settled that a "pacto de retro sale should be treated as a mortgage where the
(property) sold never left the possession of the vendors." 21 Second, the option given to Manuel Lao to
purchase the property in controversy had been extended twice 22 through documents executed by Mr. Tan
Bun Uy, President and Chairman of the Board of Better Homes Realty & Housing Corporation. The
wording of the first extension is a refreshing revelation that indeed the parties really intended to be bound
by a loan with mortgage, not by a pacto de retro. It reads, "On June 10, 88, this option is extended for
another sixty days to expired (sic) on Aug. 11, 1988. The purchase price is increased to P137,000.00.
Since Mr. Lao borrow (sic) P20,000.00 from me." 23These extensions clearly represent the extension of
time to pay the loan given to Manuel Lao upon his failure to pay said loan on its maturity. Mr. Lao was
even granted an additional loan of P20,000.00 as evidenced by the above-quoted document. Third,
unquestionably, Manuel Lao and his brother were in such "dire need of money" that they mortgaged their
townhouse units registered under the name of N. Domingo Realty Corporation, the family corporation put
up by their parents, to Private Respondent Better Homes Realty & Housing Corporation. In retrospect, it is
easy to blame Petitioner Manuel Lao for not demanding a reformation of the contract to reflect the true
intent of the parties. But this seeming inaction is sufficiently explained by the Lao brothers' desperate
need for money, compelling them to sign the document purporting to be a sale after they were told that
the same was just for "formality." 24 In fact, this Court, in various cases involving the same situation, had
occasion to state:
. . . In Jayme, et al. v. Salvador, et al., this Court upheld a judgment of the Court of
First Instance of Iloilo which found the transaction between the parties to be a loan
instead of a sale of real propertynotwithstanding the terminology used in the
document, after taking into account the surrounding circumstances of the transaction.
The Court through Justice Norberto Romualdez stated that while it was true that
plaintiffs were aware of the contents of the contracts, the preponderance of the
evidence showed however that they signed knowing that said contracts did not

express their real intention, and if they did so notwithstanding this, it was due to the
urgent necessity of obtaining fund."Necessitous men are not, truly speaking, free
men; but to answer a present emergency, will submit to any terms that the crafty may
impose upon them." 25
Moreover, since the borrower's urgent need for money places the latter at a disadvantage vis-avis the lender who can thus dictate the terms of their contract, the Court, in case of an ambiguity,
deems the contract to be one which involves the lesser transmission of rights and interest over the
property in controversy. 26
As aptly found and concluded by the regional trial court:
The evidence of record indicates that while as of April 4, 1988 (the date of execution
of the Deed of Absolute Sale whereby the N. Domingo and Realty & Development
Corporation purportedly sold the townhouse and lot subject of this suit to [herein
private respondent Better Homes Realty & Housing Corporation] for P100,000.000)
said N. Domingo Realty & Development Corporation (NDRDC, for short) was the
registered owner of the subject property under Transfer Certificate of Title (TCT) No.
316634 of the Registry of Deeds for Quezon City, (herein petitioner Manuel Lao) in
fact was and has been since 1975 the beneficial owner of the subject property and,
thus, the same was assigned to him by the NDRDC, the family corporation set up by
his parents and of which (herein petitioner) and his siblings are directors. That the
parties' real transaction or contract over the subject property was not one of sale but,
rather, one of loan secured, by a mortgage thereon is unavoidably inferrable from the
following facts of record, to (herein petitioner's) possession of the subject property,
which started in 1975 yet, continued and remained even after the alleged sale of April
4, 1988; (herein private respondent) executed an option to purchase in favor (herein
petitioner) as early as April 2, 1988 or two days before (herein private respondent)
supposedly acquired ownership of the property; the said option was renewed several
times and the price was increased with each renewal (thus, the original period for the
exercise of the option was up to June 11, 1988 and the price was P109,000.00; then,
on June 10, 1988, the option was extended for 60 days or until August 11, 1988 and
the price was increased to P137,000.00; and then on August 11, 1988, the option
was again extended until November 11,1988 and the price was increased to
P158,840.00); and, the Deed of Absolute Sale of April 4, 1988 was registered and the
property transferred in the name of (private respondent) only on May 10, 1989, per
TCT No. 22184 of the Registry of Deeds for Quezon City (Arts. 1602, nos. 2, 3, & 6,
& 1604, Civil Code). Indeed, if it were true, as it would have the Court believe, that
(private respondent) was so appreciative of (petitioner's) alleged facilitation of the
subject property's sale to it, it is quite strange why (private respondent) some two
days before such supposed sale would have been minded and inclined to execute an
option to purchase allowing (petitioner) to acquire the property the very same
property it was still hoping to acquire at the time. Certainly, what is more likely and
thus credible is that, if (private respondent) was indeed thankful that it was able to
purchase the property, it would not given (petitioner) any option to purchase at
all . . . 27

Based on the conduct of the petitioner and private respondent and even the terminology of the
second option to purchase, we rule that the intent and agreement between them was undoubtedly
one of equitable mortgage and not of sale.
Third Issue: Should Petitioner Be Ejected?
We answer in the negative. An action for unlawful detainer is grounded on Section 1, Rule 70 of the
Rules of Court which provides that:
. . . a landlord, vendor, vendee, or other person against whom the possession of any
land or building is unlawfully withheld after the expiration or termination of the right to
hold possession, by virtue of any contract, express or implied, or the legal
representatives or assigns of any such landlord, vendor, vendee, or other person,
may, at any time within one (1) year after such unlawful deprivation or withholding of
possession, bring an action in the proper inferior court against the person or persons
unlawfully withholding or depriving of possession, or any person or persons claiming
under them, for the restitution of such possession, together with damages and costs .
...
Based on the previous discussion, there was no sale of the disputed property. Hence, it still belongs
to petitioner's family corporation, N. Domingo Realty & Development Corporation. Private
respondent, being a mere mortgagee, has no right to eject petitioner. Private respondent, as a
creditor and mortgagee, " . . . cannot appropriate the things given by way of pledge
or mortgage, or dispose of them. Any stipulation to the contrary is null and void." 28
Other Matters
Private respondent in his memorandum also contends that (1) petitioner is not the real party in
interest and (2) the petition should be dismissed for "raising/stating facts not so found by the Court of
Appeals." These deserve scant consideration. Petitioner was impleaded as party defendant in the
ejectment suit by private respondent itself. Thus, private respondent cannot question his standing as
a party. As such party, petitioner should be allowed to raise defenses which negate private
respondent's right to the property in question. The second point is really academic.
This ponencia relies on the factual narration of the Court of Appeals and not on the "facts" supplied
by petitioner.
WHEREFORE, the petition is hereby GRANTED. The challenged Decision of the Court of Appeals is
REVERSED and SET ASIDE. The decision of the Regional Trial Court of Quezon City ordering the
dismissal of the complaint for ejectment is REINSTATED and AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
Narvasa, C.J., Davide, Jr. and Francisco, JJ., concur.
Melo, J., is on leave.

G.R. No. L-68010 May 30, 1986

FILIPINAS MABLE CORPORATION, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT, THE HONORABLE CANDIDO
VILLANUEVA, Presiding Judge of Br. 144, RTC, Makati, DEVELOPMENT BANK OF THE
PHILIPPINES (DBP), BANCOM SYSTEMS CONTROL, INC. (Bancom), DON FERRY, CASIMERO
TANEDO, EUGENIO PALILEO, ALVARO TORIO, JOSE T. PARDO, ROLANDO ATIENZA, SIMON
A. MENDOZA, Sheriff NORVELL R. LIM, respondents.
Vicente Millora for petitioner.
Jesus A. Avencena and Bonifacio M. Abad for respondents.

GUTIERREZ, JR., J.:

This petition for review seeks to annul the decision and resolution of the appellate court which
upheld the trial court's decision denying the petitioner's prayer to enjoin the respondent from
foreclosing on its properties.
On January 19, 1983, petitioner Filipinas Marble Corporation filed an action for nullification of deeds
and damages with prayer for a restraining order and a writ of preliminary injunction against the
private respondents. In its complaint, the petitioner alleged in substance that it applied for a loan in
the amount of $5,000,000.00 with respondent Development Bank of the Philippines (DBP) in its
desire to develop the fun potentials of its mining claims and deposits; that DBP granted the loan
subject, however, to sixty onerous conditions, among which are: (a) petitioner shall have to enter into
a management contract with respondent Bancom Systems Control, Inc. [Bancom]; (b) DBP shall be
represented by no less than six (6) regular directors, three (3) to be nominated by Bancom and three
(3) by DBP, in Filipinos Marble's board, one of whom shall continue to be the chairman of the board;
(c) the key officers/executives [the President and the officers for finance, marketing and purchasing]
to be chosen by Bancom for the corporation shall be appointed only with DBP's prior approval and
all these officers are to be made directly responsible to DBP; DBP shall immediately designate Mr.
Alvaro Torio, Assistant Manager of DBP's Accounting Department as DBP's Comptroller in the firm
whose compensation shall be borne by Filipinas Marble; and (d) the $5 Million loan shall be secured
by: 1) a final mortgage on the following assets with a total approved value of P48,630,756.00 ... ; 2)
the joint and several signatures with Filipinas Marble of Mr. Pelagio M. Villegas, Sr., Trinidad
Villegas, and Jose E. Montelibano and 3) assignment to DBP of the borrower firm's right over its
mining claims; that pursuant to these above- mentioned and other "take it or leave it" conditions, the
petitioner entered into a management contract with Bancom whereby the latter agreed to manage
the plaintiff company for a period of three years; that under the management agreement, the affairs
of the petitioner were placed under the complete control of DBP and Bancom including the
disposition and disbursement of the $5,000,000 or P37,600,000 loan; that the respondents and their
directors/officers mismanaged and misspent the loan, after which Bancom resigned with the
approval of DBP even before the expiration date of the management contract, leaving petitioner

desolate and devastated; that among the acts and omissions of the respondents are the following.
(a) failure to purchase all the necessary machinery and equipment needed by the petitioner's project
for which the approved loan was intended; (b) failure to construct a processing plant; (c)
abandonment of imported machinery and equipment at the pier, (d) purchase of unsuitable lot for the
processing plant at Binan; (e) failure to develop even a square meter of the quarries in Romblon or
Cebu; and (f) nearly causing the loss of petitioner's rights over its Cebu claims; and that instead of
helping petitioner get back on its feet, DBP completely abandoned the petitioner's project and
proceeded to foreclose the properties mortgaged to it by petitioner without previous demand or
notice.
In essence, the petitioner in its complaint seeks the annulment of the deeds of mortgage and deed of
assignment which it executed in favor of DBP in order to secure the $5,000,000.00 loan because it is
petitioner's contention that there was no loan at all to secure since what DBP "lent" to petitioner with
its right hand, it also got back with its left hand; and that, there was failure of consideration with
regard to the execution of said deeds as the loan was never delivered to the petitioner. The
petitioner further prayed that pending the trial on the merits of the case, the trial court immediately
issue a restraining order and then a writ of preliminary injunction against the sheriffs to enjoin the
latter from proceeding with the foreclosure and sale of the petitioner's properties in Metro Manila and
in Romblon.
Respondent DBP opposed the issuance of a writ of preliminary injunction stating that under
Presidential Decree No. 385, DBP's right to foreclose is mandatory as the arrearages of petitioner
had already amounted to P123,801,265.82 as against its total obligation of P151,957,641.72; that
under the same decree, no court can issue any restraining order or injunction against it to stop the
foreclosure since Filipinas Marble's arrearages had already reached at least twenty percent of its
total obligations; that the alleged non-receipt of the loan proceeds by the petitioner could, at best, be
accepted only in a technical sense because the money was received by the officers of the petitioner
acting in such capacity and, therefore, irrespective of whoever is responsible for placing them in their
positions, their receipt of the money was receipt by the petitioner corporation and that the complaint
does not raise any substantial controversy as to the amount due under the mortgage as the issues
raised therein refer to the propriety of the manner by which the proceeds of the loan were expended
by the petitioner's management, the allegedly precipitate manner with which DBP proceeded with
the foreclosure, and the capacity of the DBP to be an assignee of the mining lease rights.
After a hearing on the preliminary injunction, the trial court issued an order stating:
The Court has carefully gone over the evidence presented by both parties, and while
it sympathizes with the plight of the plaintiff and of the pitiful condition it now has
found itself, it cannot but adhere to the mandatory provisions of P.D. 385. While the
evidence so far presented by the plaintiff corporation appears to be persuasive, the
same may be considered material and relevant to the case. Hence, despite the
impressive testimony of the plaintiff's witnesses, the Court believes that it cannot
enjoin the defendant Development Bank of the Philippines from complying with the
mandatory provisions of the said Presidential Decree. It having been shown that
plaintiff's outstanding obligation as of December 31, 1982 amounted to
P151,957,641.72 and with arrearages reaching up to 81 % against said total

obligation, the Court finds the provisions of P.D. 385 applicable to the instant case. It
is a settled rule that when the statute is clear and unambiguous, there is no room for
interpretation, and all that it has to do is to apply the same.
On appeal, the Intermediate Appellate Court upheld the trial court's decision and held:
While petitioner concedes 'that Presidential Decree No. 385 applies only where it is
clear that there was a loan or where the loan is not denied' (p. 14-petition), it
disclaims receipt of the $5 million loan nor benefits derived therefrom and bewails the
onerous conditions imposed by DBP Resolution No. 385 dated December 7, 1977,
which allegedly placed the petitioner under the complete control of the private
respondents DBP and Bancom Systems Control Inc. (Bancom, for short). The
plausibility of petitioner's statement that it did Dot receive the $5 million loan is more
apparent than real. At the hearing for injunction before the counsel for DBP stressed
that $2,625,316.83 of the $5 million loan was earmarked to finance the acquisition of
machinery, equipment and spare parts for petitioner's Diamond gangsaw which
machineries were actually imported by petitioner Filipinas Marble Corporation and
arrived in the Philippines. Indeed, a summary of releases to petitioner covering the
period June 1978 to October 1979 (Exh. 2, Injunction) showed disbursements
amounting to millions of pesos for working capital and opening of letter of credits for
the acquisition of its machineries and equipment. Petitioner does not dispute that
releases were made for the purchase of machineries and equipment but claims that
such imported machineries were left to the mercy of the elements as they were never
delivered to it.
xxxxxxxxx
Apart from the foregoing, petitioner is patently not entitled to a writ of preliminary
injunction for it has not demonstrated that at least 20% of its outstanding arrearages
has been paid after the foreclosure proceedings were initiated. Nowhere in the
record is it shown or alleged that petitioner has paid in order that it may fall within the
exception prescribed on Section 2, Presidential Decree No. 385.
Dissatisfied with the appellate court's decision, the petitioner filed this instant petition with the
following assignments of errors:
1. There being 'persuasive' evidence that the $5 million proceeds of the loan were
not received and did not benefit the petitioner per finding of the lower court which
should not be disturbed unless there is grave abuse of discretion, it must follow that
PD 385 does not and cannot apply;
2. If there was no valid loan contract for failure of consideration, the mortgage cannot
exist or stand by itself being a mere accessory contract. Additionally, the chattel
mortgage has not been registered. Therefore, the same is null and void under Article
2125 of the New Civil Code; and

3. PD 385 is unconstitutional as a 'class legislation', and violative of the due process

clause.
With regard to the first assignment of error, the petitioner maintains that since the trial court found
"persuasive evidence" that there might have been a failure of consideration on the contract of loan
due to the manner in which the amount of $5 million was spent, said court committed grave abuse of
discretion in holding that it had no recourse but to apply P.D. 385 because the application of this
decree requires the existence of a valid loan which, however, is not present in petitioner's case. It
likewise faults the appellate court for upholding the applicability of the said decree.
Sections 1 and 2 of P.D. No. 385 respectively provide:
Section 1. It shall be mandatory for government financial institutions after the lapse of
sixty (60) days from the issuance of this Decree, to foreclose the collaterals and/or
securities for any loan, credit accommodation, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other
charges, amount to at least twenty (20%) of the total outstanding obligations,
including interest and other charges, as appearing in the book of accounts and/or
related records of the financial institution concerned. This shall be without prejudice
to the exercise by the government financial institution of such rights and/or remedies
available to them under their respective contracts with their debtors, including the
right to foreclose on loans, credits, accommodations, and/or guarantees on which the
arrearages are less than twenty percent (20%).
Section 2. No restraining order, temporary or permanent injunction shall be issued by
the court against any government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in Section 1 hereof,
whether such restraining order, temporary or permanent injunction is sought by the
borrower(s) or any third party or parties, except after due hearing in which it is
established by the borrower, and admitted by the government financial institution
concerned that twenty percent (20%) of the outstanding arrearages has been paid
after the filing of foreclosure proceedings.
Presidential Decree No. 385 was issued primarily to see to it that government financial institutions
are not denied substantial cash inflows, which are necessary to finance development projects all
over the country, by large borrowers who, when they become delinquent, resort to court actions in
order to prevent or delay the government's collection of their debts and loans.
The government, however, is bound by basic principles of fairness and decency under the due
process clause of the Bill of Rights. P.D. 385 was never meant to protect officials of government
lending institutions who take over the management of a borrower corporation, lead that corporation
to bankruptcy through mismanagement or misappropriation of its funds, and who, after ruining it, use
the mandatory provisions of the decree to avoid the consequences of their misdeeds.
The designated officers of the government financing institution cannot simply walk away and then
state that since the loans were obtained in the corporation's name, then P.D. 385 must be

peremptorily applied and that there is no way the borrower corporation can prevent the automatic
foreclosure of the mortgage on its properties once the arrearages reach twenty percent (20%) of the
total obligation no matter who was responsible.
In the case at bar, the respondents try to impress upon this Court that the $5,000,000.00 loan was
actually granted and released to the petitioner corporation and whatever the composition of the
management which received the loan is of no moment because this management was acting in
behalf of the corporation. The respondents also argue that since the loan was extended to the
corporation, the releases had to be made to the then officers of that borrower corporation.
Precisely, what the petitioner is trying to point out is that the DBP and Bancom people who managed
Filipinas Marble misspent the proceeds of the loan by taking advantage of the positions that they
were occupying in the corporation which resulted in the latter's devastation instead of its
rehabilitation. The petitioner does not question the authority under which the loan was delivered but
stresses that it is precisely this authority which enabled the DBP and Bancom people to misspend
and misappropriate the proceeds of the loan thereby defeating its very purpose, that is, to develop
the projects of the corporation. Therefore, it is as if the loan was never delivered to it and thus, there
was failure on the part of the respondent DBP to deliver the consideration for which the mortgage
and the assignment of deed were executed.
We cannot, at this point, conclude that respondent DBP together with the Bancom people actually
misappropriated and misspent the $5 million loan in whole or in part although the trial court found
that there is "persuasive" evidence that such acts were committed by the respondent. This matter
should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D.
385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for
the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's
properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross
mistake. It would unduly prejudice the petitioner, its employees and their families.
Only after trial on the merits of the main case can the true amount of the loan which was applied
wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan
where there was no failure of consideration and which may be properly satisfied by foreclosure
proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits. As
we have ruled in the case of Central Bank of the Philippines vs. Court of Appeals, (1 39 SCRA 46,
5253; 56):
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00
loan agreement on April 28, 1965, they undertook reciprocal obligations, the
obligation or promise of each party is the consideration for that of the othe. (Penacio
vs. Ruaya, 110 SCRA 46 [1981]; ...
xxxxxxxxx
The fact that when Sulpicio M. Tolentino executed his real estate mortgage, no
consideration was then in existence, as there was no debt yet because Island
Savings Bank had not made any release on the loan, does not make the real estate

mortgage void for lack of consideration. It is not necessary that any consideration
should pass at the time of the execution of the contract of real mortgage (Bonnevie
vs. Court of Appeals, 125 SCRA 122 [1983]. It may either be a prior or subsequent
matter. But when the consideration is subsequent to the mortgage, the mortgage can
take effect only when the debt secured by it is created as a binding contract to pay
(Parks vs. Sherman, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the extent of such failure
(Dow, et al. vs. Poore Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. C.J.S. p. 138). ...
Under the admitted circumstances of this petition, we, therefore, hold that until the trial on the merits
of the main case, P.D. 385 cannot be applied and thus, this Court can restrain the respondents from
foreclosing on petitioner's properties pending such litigation.
The respondents, in addition, assert that even if the $5 million loan were not existing, the mortgage
on the properties sought to be foreclosed was made to secure previous loans of the petitioner with
respondent and therefore, the foreclosure is still justified.
This contention is untenable. Two of the conditions imposed by respondent DBP for the release of
the $5 million loan embodied in its letter to petitioner dated December 21, 1977 state:
A. The interim loan of $289,917.32 plus interest due thereon which was used for the
importation of one Savage Diamond Gangsaw shall be liquidated out of the proceeds
of this $5 million loan. In addition, FMC shall also pay DBP, out of the proceeds of
above foreign currency loan, the past due amounts on obligation with DBP.
xxxxxxxxx
B. Conversion into preferred shares of P 2 million of FMCs total obligations with DBP
as of the date the legal documents for this refinancing shall have been exempted or
not later than 90 days from date of advice of approval of this accommodation.
The above conditions lend credence to the petitioner's contention that the "original loan had been
converted into 'equity shares', or preferred shares; therefore, to all intents and purposes, the only
'loan' which is the subject of the foreclosure proceedings is the $5 million loan in 1978. "
As regards the second assignment of error, we agree with the petitioner that a mortgage is a mere
accessory contract and, thus, its validity would depend on the validity of the loan secured by it. We,
however, reject the petitioner's argument that since the chattel mortgage involved was not
registered, the same is null and void. Article 2125 of the Civil Code clearly provides that the nonregistration of the mortgage does not affect the immediate parties. It states:
Art. 2125. In addition to the requisites stated in article 2085, it is indispensable, in
order that a mortgage may be validly constituted that the document in which it
appears be recorded in the Registry of Property. If the instrument is not recorded, the
mortgage is nevertheless binding between the parties.

xxxxxxxxx
The petitioner cannot invoke the above provision to nullify the chattel mortgage it executed in favor
of respondent DBP.
We find no need to pass upon the constitutional issue raised in the third assignment of error. We
follow the rule started in Alger Electric, Inc. vs. Court of Appeals, (135 SCRA 37, 45).
We see no necessity of passing upon the constitutional issues raised by respondent
Northern. This Court does not decide questions of a constitutional nature unless
absolutely necessary to a decision of a case. If there exists some other grounds of
construction, we decide the case on a non- constitutional determination. (See Burton
vs. United States, 196 U.S. 283; Siler vs. Luisville & Nashville R. Co., 123 U.S. 175;
Berta College vs. Kentucky, 211 U.S. 45).
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is GRANTED. The orders of the
Intermediate Appellate Court dated April 17, 1984 and July 3, 1984 are hereby ANNULLED and SET
ASIDE. The trial court is ordered to proceed with the trial on the merits of the main case. In the
meantime, the temporary restraining order issued by this Court on July 23, 1984 shall remain in
force until the merits of the main case are resolved.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Paras, JJ., concur.

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 BALUYUTMAGCALE, respondents.

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:
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
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).
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. 41-53), 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.
Teehankee, C.J., Narvasa, Cruz and Gancayco, JJ., concur.

G.R. No. L-17500

May 16, 1967

PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO. OF
MANILA, plaintiffs-appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION and
CONNELL BROS. CO. (PHIL.), defendants-appellants.
Angel S. Gamboa for defendants-appellants.
Laurel Law Offices for plaintiffs-appellants.
DIZON, J.:
On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation
licensed to do business in the Philippines hereinafter referred to as ATLANTIC sold and
assigned all its rights in the Dahican Lumber concession to Dahican Lumber Company hereinafter
referred to as DALCO for the total sum of $500,000.00, of which only the amount of $50,000.00
was paid. Thereafter, to develop the concession, DALCO obtained various loans from the People's
Bank & Trust Company hereinafter referred to as the BANK amounting, as of July 13, 1950, to
P200,000.00. In addition, DALCO obtained, through the BANK, a loan of $250,000.00 from the
Export-Import Bank of Washington D.C., evidenced by five promissory notes of $50,000.00 each,
maturing on different dates, executed by both DALCO and the Dahican America Lumber
Corporation, a foreign corporation and a stockholder of DALCO, hereinafter referred to as
DAMCO, all payable to the BANK or its order.
As security for the payment of the abovementioned loans, on July 13, 1950 DALCO executed in
favor of the BANK the latter acting for itself and as trustee for the Export-Import Bank of
Washington D.C. a deed of mortgage covering five parcels of land situated in the province of
Camarines Norte together with all the buildings and other improvements existing thereon and all the
personal properties of the mortgagor located in its place of business in the municipalities of
Mambulao and Capalonga, Camarines Norte (Exhibit D). On the same date, DALCO executed a
second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid
balance of the sale price of the lumber concession amounting to the sum of $450,000.00 (Exhibit G).
Both deeds contained the following provision extending the mortgage lien to properties to be
subsequently acquired referred to hereafter as "after acquired properties" by the mortgagor:
All property of every nature and description taken in exchange or replacement, and all
buildings, machinery, fixtures, tools equipment and other property which the Mortgagor may
hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with the
premises, shall immediately be and become subject to the lien of this mortgage in the same
manner and to the same extent as if now included therein, and the Mortgagor shall from time
to time during the existence of this mortgage furnish the Mortgagee with an accurate
inventory of such substituted and subsequently acquired property.

Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In
addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and
9,286 shares of DAMCO to secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK
paid the same to the Export-Import Bank of Washington D.C., and the latter assigned to the former
its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up
to April 1, 1953 to pay the overdue promissory note.
After July 13, 1950 the date of execution of the mortgages mentioned above DALCO
purchased various machineries, equipment, spare parts and supplies in addition to, or in
replacement of some of those already owned and used by it on the date aforesaid. Pursuant to the
provision of the mortgage deeds quoted theretofore regarding "after acquired properties," the BANK
requested DALCO to submit complete lists of said properties but the latter failed to do so. In
connection with these purchases, there appeared in the books of DALCO as due to Connell Bros.
Company (Philippines) a domestic corporation who was acting as the general purchasing agent of
DALCO thereinafter called CONNELL the sum of P452,860.55 and to DAMCO, the sum of
P2,151,678.34.
On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the
purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and
supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of
sale were executed between DALCO and DAMCO, on the one hand and between DALCO and
CONNELL, on the other.
On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said
agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12,
1953; ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First Instance
of Camarines Norte against DALCO and DAMCO. On the same date they filed an exparte application for the appointment of a Receiver and/or for the issuance of a writ of preliminary
injunction to restrain DALCO from removing its properties. The court granted both remedies and
appointed George H. Evans as Receiver. Upon defendants' motion, however, the court, in its order of
February 21, 1953, discharged the Receiver.
On March 2, 1953, defendants filed their answer denying the material allegations of the complaint
and alleging several affirmative defenses and a counterclaim.
On March 4 of the same year, CONNELL, filed a motion for intervention alleging that it was the
owner and possessor of some of the equipments, spare parts and supplies which DALCO had
acquired subsequent to the execution of the mortgages sought to be foreclosed and which plaintiffs
claimed were covered by the lien. In its order of March 18,1953 the Court granted the motion, as well
as plaintiffs' motion to set aside the order discharging the Receiver. Consequently, Evans was
reinstated.
On April 1, 1953, CONNELL filed its answer denying the material averment of the complaint, and
asserting affirmative defenses and a counterclaim.

Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the
venue of the action to the Court of First Instance of Manila where it was docketed as Civil Case No.
20987.
On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries,
equipment and supplies of DALCO, and the same were subsequently sold for a total consideration of
P175,000.00 which was deposited in court pending final determination of the action. By a similar
agreement one-half (P87,500.00) of this amount was considered as representing the proceeds
obtained from the sale of the "undebated properties" (those not claimed by DAMCO and CONNELL),
and the other half as representing those obtained from the sale of the "after acquired properties".
After due trial, the Court, on July 15, 1960, rendered judgment as follows:
IN VIEW WHEREFORE, the Court:
1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000,00 with
7% interest per annum from July 13, 1950, Plus another sum of P100,000.00 with 5%
interest per annum from July 13, 1950; plus 10% on both principal sums as attorney's fees;
2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of P900,000.00 with 4%
interest per annum from July 3, 1950, plus 10% on both principal as attorney's fees;
3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of P425,860.55, and
to pay unto Dahican American Lumber Co. the sum of P2,151,678.24 both with legal interest
from the date of the filing of the respective answers of those parties, 10% of the principals as
attorney's fees;
4. Orders that of the sum realized from the sale of the properties of P175,000.00, after
deducting the recognized expenses, one-half thereof be adjudicated unto plaintiffs, the court
no longer specifying the share of each because of that announced intention under the
stipulation of facts to "pool their resources"; as to the other one-half, the same should be
adjudicated unto both plaintiffs, and defendant Dahican American and Connell Bros. in the
proportion already set forth on page 9, lines 21, 22 and 23 of the body of this decision; but
with the understanding that whatever plaintiffs and Dahican American and Connell Bros.
should receive from the P175,000.00 deposited in the Court shall be applied to the
judgments particularly rendered in favor of each;
5. No other pronouncement as to costs; but the costs of the receivership as to the debated
properties shall be borne by People's Bank, Atlantic Gulf, Connell Bros., and Dahican
American Lumber Co., pro-rata.
On the following day, the Court issued the following supplementary decision:
IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to add
the following paragraph 6:

6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the
Court orders the sale at public auction of the lands object of the mortgages to satisfy the said
mortgages and costs of foreclosure.
From the above-quoted decision, all the parties appealed.
Main contentions of plaintiffs as appellants are the following: that the "after acquired properties" were
subject to the deeds of mortgage mentioned heretofore; that said properties were acquired from
suppliers other than DAMCO and CONNELL; that even granting that DAMCO and CONNELL were
the real suppliers, the rescission of the sales to DALCO could not prejudice the mortgage lien in
favor of plaintiffs; that considering the foregoing, the proceeds obtained from the sale of the "after
acquired properties" as well as those obtained from the sale of the "undebated properties" in the
total sum of P175,000.00 should have been awarded exclusively to plaintiffs by reason of the
mortgage lien they had thereon; that damages should have been awarded to plaintiffs against
defendants, all of them being guilty of an attempt to defraud the former when they sought to rescind
the sales already mentioned for the purpose of defeating their mortgage lien, and finally, that
defendants should have been made to bear all the expenses of the receivership, costs and
attorney's fees.
On the other hand, defendants-appellants contend that the trial court erred: firstly, in not holding that
plaintiffs had no cause of action against them because the promissory note sued upon was not yet
due when the action to foreclose the mortgages was commenced; secondly, in not holding that the
mortgages aforesaid were null and void as regards the "after acquired properties" of DALCO
because they were not registered in accordance with the Chattel Mortgage Law, the court erring, as
a consequence, in holding that said properties were subject to the mortgage lien in favor of plaintiffs;
thirdly, in not holding that the provision of the fourth paragraph of each of said mortgages did not
automatically make subject to such mortgages the "after acquired properties", the only meaning
thereof being that the mortgagor was willing to constitute a lien over such properties; fourthly, in not
ruling that said stipulation was void as against DAMCO and CONNELL and in not awarding the
proceeds obtained from the sale of the "after acquired properties" to the latter exclusively; fifthly, in
appointing a Receiver and in holding that the damages suffered by DAMCO and CONNELL by
reason of the depreciation or loss in value of the "after acquired properties" placed under
receivership was damnum absque injuria and, consequently, in not awarding, to said parties the
corresponding damages claimed in their counterclaim; lastly, in sentencing DALCO and DAMCO to
pay attorney's fees and in requiring DAMCO and CONNELL to pay the costs of the Receivership,
instead of sentencing plaintiffs to pay attorney's fees.
Plaintiffs' brief as appellants submit six assignments of error, while that of defendants also as
appellants submit a total of seventeen. However, the multifarious issues thus before Us may be
resolved, directly or indirectly, by deciding the following issues:
Firstly, are the so-called "after acquired properties" covered by and subject to the deeds of mortgage
subject of foreclosure?; secondly, assuming that they are subject thereto, are the mortgages valid
and binding on the properties aforesaid inspite of the fact that they were not registered in
accordance with the provisions of the Chattel Mortgage Law?; thirdly, assuming again that the
mortgages are valid and binding upon the "after acquired properties", what is the effect thereon, if

any, of the rescission of sales entered into, on the one hand, between DAMCO and DALCO, and
between DALCO and CONNELL, on the other?; and lastly, was the action to foreclose the
mortgages premature?
A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every
nature and description taken in exchange or replacement, as well as all buildings, machineries,
fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install,
attach; or use in, to upon, or in connection with the premises that is, its lumber concession
"shall immediately be and become subject to the lien" of both mortgages in the same manner and to
the same extent as if already included therein at the time of their execution. As the language thus
used leaves no room for doubt as to the intention of the parties, We see no useful purpose in
discussing the matter extensively. Suffice it to say that the stipulation referred to is common, and We
might say logical, in all cases where the properties given as collateral are perishable or subject to
inevitable wear and tear or were intended to be sold, or to be used thus becoming subject to the
inevitable wear and tear but with the understanding express or implied that they shall be
replaced with others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful
nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the
original value of the properties given as security. Indeed, if such properties were of the nature
already referred to, it would be poor judgment on the part of the creditor who does not see to it that a
similar provision is included in the contract.
B. But defendants contend that, granting without admitting, that the deeds of mortgage in question
cover the "after acquired properties" of DALCO, the same are void and ineffectual because they
were not registered in accordance with the Chattel Mortgage Law. In support of this and of the
proposition that, even if said mortgages were valid, they should not prejudice them, the defendants
argue (1) that the deeds do not describe the mortgaged chattels specifically, nor were they
registered in accordance with the Chattel Mortgage Law; (2) that the stipulation contained in the
fourth paragraph thereof constitutes "mere executory agreements to give a lien" over the "after
acquired properties" upon their acquisition; and (3) that any mortgage stipulation concerning "after
acquired properties" should not prejudice creditors and other third persons such as DAMCO and
CONNELL.
The stipulation under consideration strongly belies defendants contention. As adverted to
hereinbefore, it states that all property of every nature, building, machinery etc. taken in exchange or
replacement by the mortgagor "shall immediately be and become subject to the lien of this mortgage
in the same manner and to the same extent as if now included therein". No clearer language could
have been chosen.
Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a
chattel mortgage must be registered and must describe the mortgaged chattels or personal
properties sufficiently to enable the parties and any other person to identify them, We say that such
law does not apply to this case.
As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in force,
there can be no doubt that the provisions of said code must govern their interpretation and the
question of their validity. It happens however, that Articles 334 and 1877 of the old Civil Code are

substantially reproduced in Articles 415 and 2127, respectively, of the new Civil Code. It is, therefore,
immaterial in this case whether we take the former or the latter as guide in deciding the point under
consideration.
Article 415 does not define real property but enumerates what are considered as such, among them
being machinery, receptacles, instruments or replacements intended by owner of the tenement for
an industry or works which may be carried on in a building or on a piece of land, and shall tend
directly to meet the needs of the said industry or works.
On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the
chattels were placed in the real properties mortgaged to plaintiffs, they came within the operation of
Art. 415, paragraph 5 and Art. 2127 of the New Civil Code".
We find the above ruling in agreement with our decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of the Civil
Code (old) gives the character of real property to machinery, liquid containers, instruments or
replacements intended by the owner of any building or land for use in connection with any industry
or trade being carried on therein and which are expressly adapted to meet the requirements of such
trade or industry.
(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a mortgage constituted
on a sugar central includes not only the land on which it is built but also the buildings, machinery and
accessories installed at the time the mortgage was constituted as well as the buildings, machinery
and accessories belonging to the mortgagor, installed after the constitution thereof .
It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in
connection with, and for use in the development of its lumber concession and that they were
purchased in addition to, or in replacement of those already existing in the premises on July 13,
1950. In Law, therefore, they must be deemed to have been immobilized, with the result that the real
estate mortgages involved herein which were registered as such did not have to be registered
a second time as chattel mortgages in order to bind the "after acquired properties" and affect third
parties.
But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709, claim that
the "after acquired properties" did not become immobilized because DALCO did not own the whole
area of its lumber concession all over which said properties were scattered.
The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining in the
present. In the former, the Davao Sawmill Company, Inc., had repeatedly treated the machinery
therein involved as personal property by executing chattel mortgages thereon in favor of third
parties, while in the present case the parties had treated the "after acquired properties" as real
properties by expressly and unequivocally agreeing that they shall automatically become subject to
the lien of the real estate mortgages executed by them. In the Davao Sawmill decision it was, in fact,
stated that "the characterization of the property as chattels by the appellant is indicative of intention
and impresses upon the property the character determined by the parties" (61 Phil. 112, emphasis

supplied). In the present case, the characterization of the "after acquired properties" as real property
was made not only by one but by both interested parties. There is, therefore, more reason to hold
that such consensus impresses upon the properties the character determined by the parties who
must now be held in estoppel to question it.
Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia, Inc. (225
U.S. 58) where it was held that while under the general law of Puerto Rico, machinery placed on
property by a tenant does not become immobilized, yet, when the tenant places it there pursuant to
contract that it shall belong to the owner, it then becomes immobilized as to that tenant and even as
against his assignees and creditors who had sufficient notice of such stipulation. In the case at bar it
is not disputed that DALCO purchased the "after acquired properties" to be placed on, and be used
in the development of its lumber concession, and agreed further that the same shall become
immediately subject to the lien constituted by the questioned mortgages. There is also abundant
evidence in the record that DAMCO and CONNELL had full notice of such stipulation and had never
thought of disputed validity until the present case was filed. Consequently all of them must be
deemed barred from denying that the properties in question had become immobilized.
What We have said heretofore sufficiently disposes all the arguments adduced by defendants in
support their contention that the mortgages under foreclosure are void, and, that, even if valid, are
ineffectual as against DAMCO and CONNELL.
Now to the question of whether or not DAMCO CONNELL have rights over the "after acquired
properties" superior to the mortgage lien constituted thereon in favor of plaintiffs. It is defendants'
contention that in relation to said properties they are "unpaid sellers"; that as such they had not only
a superior lien on the "after acquired properties" but also the right to rescind the sales thereof to
DALCO.
This contention it is obvious would have validity only if it were true that DAMCO and CONNELL
were the suppliers or vendors of the "after acquired properties". According to the record, plaintiffs did
not know their exact identity and description prior to the filing of the case bar because DALCO, in
violation of its obligation under the mortgages, had failed and refused theretofore to submit a
complete list thereof. In the course of the proceedings, however, when defendants moved to dissolve
the order of receivership and the writ of preliminary injunction issued by the lower court, they
attached to their motion the lists marked as Exhibits 1, 2 and 3 describing the properties aforesaid.
Later on, the parties agreed to consider said lists as identifying and describing the "after acquire
properties," and engaged the services of auditors to examine the books of DALCO so as to bring out
the details thereof. The report of the auditors and its annexes (Exhibits V, V-1 V4) show that
neither DAMCO nor CONNELL had supplied any of the goods of which they respective claimed to be
the unpaid seller; that all items were supplied by different parties, neither of whom appeared to be
DAMCO or CONNELL that, in fact, CONNELL collected a 5% service charge on the net value of all
items it claims to have sold to DALCO and which, in truth, it had purchased for DALCO as the latter's
general agent; that CONNELL had to issue its own invoices in addition to those o f the real suppliers
in order to collect and justify such service charge.
Taking into account the above circumstances together with the fact that DAMCO was a stockholder
and CONNELL was not only a stockholder but the general agent of DALCO, their claim to be the

suppliers of the "after acquired required properties" would seem to be preposterous. The most that
can be claimed on the basis of the evidence is that DAMCO and CONNELL probably financed some
of the purchases. But if DALCO still owes them any amount in this connection, it is clear that,
as financiers, they can not claim any right over the "after acquired properties" superior to the lien
constituted thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the execution of
the rescission of sales mentioned heretofore appears to be but a desperate attempt to better or
improve DAMCO and CONNELL's position by enabling them to assume the role of "unpaid
suppliers" and thus claim a vendor's lien over the "after acquired properties". The attempt, of course,
is utterly ineffectual, not only because they are not the "unpaid sellers" they claim to be but also
because there is abundant evidence in the record showing that both DAMCO and CONNELL had
known and admitted from the beginning that the "after acquired properties" of DALCO were meant to
be included in the first and second mortgages under foreclosure.
The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or otherwise,
is of no consequence and does not make the rescission valid and legally effective. It must be stated
clearly, however, in justice to Belden, that, as a member of the Board of Directors of DALCO, he
opposed the resolution of December 15, 1952 passed by said Board and the subsequent rescission
of the sales.
Finally, defendants claim that the action to foreclose the mortgages filed on February 12, 1953 was
premature because the promissory note sued upon did not fall due until April 1 of the same year,
concluding from this that, when the action was commenced, the plaintiffs had no cause of action.
Upon this question the lower court says the following in the appealed judgment;
The other is the defense of prematurity of the causes of action in that plaintiffs, as a matter of
grace, conceded an extension of time to pay up to 1 April, 1953 while the action was filed on
12 February, 1953, but, as to this, the Court taking it that there is absolutely no debate that
Dahican Lumber Co., was insolvent as of the date of the filing of the complaint, it should
follow that the debtor thereby lost the benefit to the period.
x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code);
and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the
aggregate, P1,200,000 excluding interest while the aggregate price of the "after-acquired"
chattels claimed by Connell under the rescission contracts was P1,614,675.94, Exh. 1, Exh.
V, report of auditors, and as a matter of fact, almost all the properties were sold afterwards
for only P175,000.00, page 47, Vol. IV, and the Court understanding that when the law
permits the debtor to enjoy the benefits of the period notwithstanding that he is insolvent by
his giving a guaranty for the debt, that must mean a new and efficient guaranty, must
concede that the causes of action for collection of the notes were not premature.
Very little need be added to the above. Defendants, however, contend that the lower court had no
basis for finding that, when the action was commenced, DALCO was insolvent for purposes related
to Article 1198, paragraph 1 of the Civil Code. We find, however, that the finding of the trial court is
sufficiently supported by the evidence particularly the resolution marked as Exhibit K, which shows

that on December 16, 1952 in the words of the Chairman of the Board DALCO was "without
funds, neither does it expect to have any funds in the foreseeable future." (p. 64, record on appeal).
The remaining issues, namely, whether or not the proceeds obtained from the sale of the "after
acquired properties" should have been awarded exclusively to the plaintiffs or to DAMCO and
CONNELL, and if in law they should be distributed among said parties, whether or not the
distribution should be pro-rata or otherwise; whether or not plaintiffs are entitled to damages; and,
lastly, whether or not the expenses incidental to the Receivership should be borne by all the parties
on a pro-rata basis or exclusively by one or some of them are of a secondary nature as they are
already impliedly resolved by what has been said heretofore.
As regard the proceeds obtained from the sale of the of after acquired properties" and the
"undebated properties", it is clear, in view of our opinion sustaining the validity of the mortgages in
relation thereto, that said proceeds should be awarded exclusively to the plaintiffs in payment of the
money obligations secured by the mortgages under foreclosure.
On the question of plaintiffs' right to recover damages from the defendants, the law (Articles 1313
and 1314 of the New Civil Code) provides that creditors are protected in cases of contracts intended
to defraud them; and that any third person who induces another to violate his contract shall be liable
for damages to the other contracting party. Similar liability is demandable under Arts. 20 and 21
which may be given retroactive effect (Arts. 225253) or under Arts. 1902 and 2176 of the Old Civil
Code.
The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing to
pay the fifth promissory note upon its maturity, conspired jointly with CONNELL to violate the
provisions of the fourth paragraph of the mortgages under foreclosure by attempting to defeat
plaintiffs' mortgage lien on the "after acquired properties". As a result, the plaintiffs had to go to court
to protect their rights thus jeopardized. Defendants' liability for damages is therefore clear.
However, the measure of the damages suffered by the plaintiffs is not what the latter claim, namely,
the difference between the alleged total obligation secured by the mortgages amounting to around
P1,200,000.00, plus the stipulated interest and attorney's fees, on the one hand, and the proceeds
obtained from the sale of "after acquired properties", and of those that were not claimed neither by
DAMCO nor CONNELL, on the other. Considering that the sale of the real properties subject to the
mortgages under foreclosure has not been effected, and considering further the lack of evidence
showing that the true value of all the properties already sold was not realized because their sale was
under stress, We feel that We do not have before Us the true elements or factors that should
determine the amount of damages that plaintiffs are entitled recover from defendants. It is, however,
our considered opinion that, upon the facts established, all the expenses of the Receivership, which
was deemed necessary to safeguard the rights of the plaintiffs, should be borne by the defendants,
jointly and severally, in the same manner that all of them should pay to the plaintiffs, jointly a
severally, attorney's fees awarded in the appealed judgment.
In consonance with the portion of this decision concerning the damages that the plaintiffs are entitled
to recover from the defendants, the record of this case shall be remanded below for the
corresponding proceedings.

Modified as above indicated, the appealed judgment is affirmed in all other respects. With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro,
JJ., concur.
G.R. No. L-21953

March 28, 1969

ENCARNACION GATIOAN, plaintiff-appellee,

vs.
SIXTO GAFFUD ET AL., defendants,
PHILIPPINE NATIONAL BANK, defendant-appellant.
Felix Fernandez for plaintiff-appellee.
Tomas Besa and Jose B. Galang for defendant-appellant.
BARREDO, J.:
Appeal from the Court of First Instance of Isabela.
The facts as found by the said court are as follows:
The land in question was originally registered in the name of Rufina Permison under Original
Certificate of Title No. L-3432, dated December 18, 1935 on the basis of a free patent. In the year
1948, Permison sold it to Sibreno Novesteras, who in turn, conveyed it to appellee Encarnacion
Gatioan on April 1, 1949. Through the initiative of appellee, the said Original Certificate of Title No. L3432 in the name of Rufina Permison was cancelled on June 3, 1949 and in lieu thereof Transfer
Certificate of Title No. T-1212 was issued in favor of appellee.
On June 12, 1950, appellee obtained a loan in the amount of P900.00 from the appellant,
Philippine National, Bank, and as security therefor, mortgaged the land described in TCT No. T1212. Said mortgage was duly inscribed at the back of the title but was cancelled when it was fully
paid on June 3, 1953. Using the same land and title as collateral, appellee acquired another loan in
the sum of P1,100.00 from the same bank on May 3, 1954. The annotated incumbrance covering
this second loan was upon its being paid released on June 28, 1956. On July 18, 1957, appellee
secured, a third loan from the same bank, this time for a bigger amount P2,800,00. Again, she
remortgaged the same land and title. This third loan appears as Entry No. 8511 at the back of TCT
No. T-1212. The third loan not yet paid, she secured an additional loan of P3,170.00 from the same
bank on July 30, 1957, for which she, however, gave as collateral, another parcel of land covered by
TCT No. T-4807. The deed of mortgage covering the last amount was jointly and severally execution
by appellee and the other registered co-owners appearing in the last mentioned title.
On August 12, 1960, appellee paid P2,800.00, plus interest, in full payment of the last loan secured
by mortgage on the land covered by TCT No. T-1212, as per receipt No. 402272-B. Partial payment
was also given for the other joint obligation secured with the joint deed of mortgage on the other
land. Despite these payments, appellant executed no instrument releasing or discharging the
incumbrance on TCT No. T-1212.

In the meantime, on January 23, 1956, the defendant spouses Sixto Gaffud and Villamora Logan
procured a free patent covering the identical parcel of land described in TCT No. T-1212 of appellee,
on the basis of which Original Certificate of Title No. P-6038 was issued in their favor. On May 15,
1956 and January 8, 1957, they also obtained two loans from appellant Bank in the sum of
P1,400.00 and P300.00, respectively, and as collateral for both, they mortgaged the said land
covered by OCT No. P-6038. Without paying these two obligations, a consolidated mortgage in the
sum of P2,300.00 was executed by them on June 17, 1957, for which they gave as security in
addition to the land described in OCT No. P-6038, another parcel of land described in Original
Certificate of Title No. 3137, also in their names.
Subsequently, the Secretary of Agriculture and Natural Resources compared the technical
descriptions, areas, lot numbers and cadastral numbers of the land described in TCT No. T-1212
with that covered by OCT No. P-6088, and convinced that both titles covered the same identical
land, he recommended the cancellation of the latter.
lwphi1.et

On May 16, 1962, because of the existence of OCT No. P-6038 in the name of the defendant
spouses Gaffud and Logan, containing an annotation of the aforementioned consolidated mortgage
in favor of the appellant Bank, and the annotation on TCT No. T-1212 of the mortgage incumbrance
covering the already paid loan of P2,800.00 to the appellee, which appellant Bank refused to have
cancelled, appellee filed the complaint for quieting of title in this case.
The above facts were found by the lower court from the stipulations submitted by the parties,
except defendant spouses Gaffud and Logan who were declared in default. No oral evidence was
presented by any of the parties.
From a judgment favorable to the plaintiff thus:
WHEREFORE, the Court renders judgment:
(a) Declaring null and void ab initio the patent and certificate of title No. P-6038 issued in the
name of the defendant spouses Sixto Gaffud and Villamora Logan;
(b) Ordering the Register of Deeds of Isabela to cancel, upon payment of the fees, original
certificate of title No. P-6038 in the name of said spouses and ordering the Philippine
National Bank to surrender to the Register of Deeds of Isabela the owner's duplicate
certificate of said title for its cancellation;
(c) Declaring the real estate mortgage executed by the defendant spouses Sixto Gaffud and
Villamora Logan in favor of the Bank, recorded on OCT P-6038 null and void and
unenforceable as against the herein plaintiff, and ordering its cancellation, without prejudice
of the Bank's right to collect from the said spouses;
(d) Dismissing the complaint and its prayer, to order the defendant bank to immediately
cancel or release the mortgage recorded on Transfer Certificate of Title No. T-1212 in the
name of the plaintiff, unless the other joint obligation secured with the joint deed of mortgage
executed by the herein plaintiff together with her co-debtors has been full paid; and

(e) The court hereby sentences the defendant spouses Sixto Gaffud and Villamora Logan to
pay to the plaintiff as actual or compensatory and exemplary or corrective damages, and
attorney's fees, the total amount of ONE THOUSAND FIVE HUNDRED PESOS (P1,500.00),
and to pay the costs.
only the appellant Bank has come to Us on appeal on a sole question of law related to paragraphs
(a), (b) and (c) thereof. (See Notice of Appeal, p. 90, Record on Appeal.)
Appellant does not, however, impugn the lower court's ruling in declaring null and void and
cancelling OCT No. P-6038 in favor of the defendant spouses Gaffud and Logan; it only insists that
the lower court should have declared it an innocent mortgagee in good faith and for value as regards
the mortgages executed in its favor by said defendant spouses and duly annotated on their
abovementioned OCT P-6038 and that consequently, the said mortgage annotations should be
carried over to and considered as incumbrances on the land covered by TCT No. T-1212 of appellee
which, as already stated, is the identical land covered by OCT P-6038 of the Gaffuds. We find no
merit, whatsoever, in this contention, because the point raised was already passed upon by this
Court in no uncertain terms in Legarda v. Saleeby, 31 Phil. 590, way back on October 2, 1915 and in
subsequent cases of similar nature. 1 We unhesitatingly affirm the judgment of the lower court.
Indeed, upon the facts found by the trial court as above stated, there can be no question that the
decision of this Court in Legarda v. Saleeby, supra, is controlling herein. Therein this Court held:
We find statutory provisions which, upon first reading, seem to cast some doubt upon the
rule that the vendee acquires the interest of the vendor only. Sections 38, 56, and 112 of Act
No. 496 indicate that the vendee may acquire rights and be protected against the defenses
which the vendor would not. Said sections speak of available rights in favor of third parties
which are cut off by virtue of the sale of the land to an "innocent purchaser". That is to say,
persons who had had a right or interest in land wrongfully included in an original certificate
would be unable to enforce such rights against an "innocent purchaser", by virtue of the
provisions of said sections. In the present case Teus had his land, including the wall,
registered in his name. He subsequently sold the same to appellee an "innocent purchaser",
as the phrase is used in said sections? May those who have been deprived of their land by
reason of a mistake in the original certificate in favor of Teus be deprived of their right to the
same, by virtue of the sale by him to the appellee? Suppose the appellants had sold their lot,
including the wall, to an "innocent purchaser", would such purchaser be included in the
phrase "innocent purchaser", as the same is used in said sections? Under these examples
there would be two innocent purchasers of the same land, if said sections are to be applied.
Which of the two innocent purchasers, if they are both to be regarded as innocent
purchasers, should be protected under the provisions of said sections? These questions
indicate to difficulty with which we are met in giving meaning and effect to the phrase
"innocent purchaser", in said sections.
May the purchaser of the land which has been included in a "second original certificate"
ever be regarded as an "innocent purchaser", as against the rights or interest of the owner of
the first original certificate, his heirs, assigns or vendee? The first original certificate is
recorded in the public registry. It is never issued until it is recorded. The record is notice to all

the world. All persons are charged with the knowledge of what it contains. All persons dealing
with the land so recorded or any portion of it, must be charged with notice of whatever it
contains. The purchaser is charged with notice of every fact shown by the record and is
presumed to know every fact which the record discloses. This rule is so well established that
it is scarcely necessary to cite authorities in its support (Northwestern National Bank v.
Freeman, 171 U.S. 620, 629; Delvin on Real Estate, sections 710, 710-[a]).
When a conveyance has been properly recorded such record is constructive notice of its
contents and all interests, legal and equitable, included therein. (Grandin v. Anderson, 15
Ohio State, 286, 289; Orvis v. Newell 17 Conn. 97; Buchanan v. International Bank, 78 111.
500; Youngs v. Wilson, 27 N.Y. 351; McCabe v. Grey, 20 Cal. 509; Montefiore v. Browne, 7
House of Lords Cases, 341.)
Under the rule of notice, it is presumed that the purchaser has examined every instrument
of record affecting the title. Such presumption is irrebutable. He is charged with notice of
every fact shown by the record and is presumed to know every fact which an examination of
the record would have disclosed. This presumption cannot be overcome by proof of
innocence or good faith. Otherwise the very purpose and object of the law requiring a record
would be destroyed. Such presumption cannot be defeated by proof of want of knowledge of
what the record contains any more than one may be permitted to show that he was ignorant
of the provisions of the law. The rule that all persons must take notice of the facts which the
public record contains is a rule of law. The rule must be absolute. Any variation would lead to
endless confusion and useless litigation.
While there is no statutory provision in force here requiring that original deeds of
conveyance of real property, be recorded, yet there is a rule requiring mortgages to be
recorded. (Arts. 1875 and 606 of the Civil Code.) The record of a mortgage is indispensable
to its validity. (Art. 1875.) In the face of that statute, would the courts allow a mortgage to be
valid which had not been recorded, upon the plea of ignorance of the statutory provision,
when third parties were interested? May a purchaser of land, subsequent to the recorded
mortgage, plead ignorance of its existence, and by reason of such ignorance have the land
released from such lien? Could a purchaser of land, after the recorded mortgage, be relieved
from the mortgage lien by the plea that he was a bona fide purchaser? May there be a bona
fide purchaser of said land, bona fide in the sense that he had no knowledge of the existence
of the mortgage? We believe the rule that all persons must take notice of what the public
record contains is just as obligatory upon all persons as the rule that all men must know the
law: that no one can plead ignorance of the law. The fact that all men know the law is
contrary to the presumption. The conduct of men, at times, shows clearly that they do not
know the law. The rule, however, is mandatory and obligatory, notwithstanding. It would be
just as logical to allow the plea of ignorance of the law of affecting a contract as to allow the
defense of ignorance of the existence and contents of a public record.
In view, therefore, of the foregoing rules of law, may the purchaser of land from the owner
of the second original certificate be an "innocent purchaser" when a part or all of such land
had theretofore been registered in the name of another, not the vendor? We are of the
opinion that said sections 38, 55, and 112 should not be applied to such purchasers. We do

not believe that the phrase "innocent purchaser" should be applied to such a purchaser. He
cannot be regarded as an "innocent purchaser" because of the facts contained in the record
of the first original certificate. The rule should not be applied to the purchaser of a parcel of
land the vendor of which is not the owner of the original certificate, or his successors. He, in
no sense, can be an "innocent purchaser" of the portion of the land included in another
earlier original certificate. The rule of notice of what the record contains precludes the idea of
innocence. By reason of the prior registry there cannot be an innocent purchaser of land
included in a prior original certificate and in a name other than that of the vendor, or his
successors. In order to minimize the difficulties we think this is the safer rule to establish. We
believe the phrase "innocent purchaser", used in said sections, should be limited only to
cases where unregistered land has been wrongfully included in a certificate under the
torrens system. When land is once brought under the torrens system, the record of the
original certificate and all subsequent transfers thereof is notice to all the world. That being
the rule, could Teus even be regarded as the holder in good faith of that part of the land
included in his certificate which had theretofore been included in the original certificate of the
appellants? We think not. Suppose, for example, that Teus had never had his lot registered
under the torrens system. Suppose he had sold his lot to the appellee and included in his
deed of transfer the very strip of land now in question. Could his vendee be regarded as an
"innocent purchaser" of said strip? Certainly not. The record of the original certificate of the
appellants precludes the possibility. Has the appellee gained any right by reason of the
registration of the strip of land in the name of his vendor? Applying the rule of notice resulting
from the record of the title of the appellants, the question must be answered in the negative.
We are of the opinion that the rules are more in harmony with the purpose of Act No. 496
than the rule contended for by the appellee. We believe that the purchaser from the owner of
the later certificate, and his successors, should be required to resort to his vendor for
damages, in case of a mistake like the present, rather than to molest the holder of the first
certificate who has been guilty of no negligence. The holder of the first original certificate and
his successors should be permitted to secure in their title against one who had acquired
rights in conflict therewith and who had full and complete knowledge of their rights. The
purchaser of land included in the second original certificate, by reason of the facts contained
in the public record and the knowledge with which he is charged and by reason of his
negligence should suffer the loss, if any, resulting from such purchaser case rather than he
who has obtained the first certificate and who was innocent of any act of negligence. (31
Phil. 590, 599-603)
Moreover, it is a matter of judicial notice that before a bank grants a loan on the security of land, it
first undertakes a careful examination of the title of the applicant as well as a physical and on-thespot investigation of the land itself offered as security. Undoubtedly, had herein appellant Bank taken
such a step which is demanded by the most ordinary prudence, it would have easily discovered the
flaw in the title of the defendant spouses; and if it did not conduct such examination and
investigation, it must be held to be guilty of gross negligence in granting them the loans in question.
In either case, appellant Bank cannot be considered as a mortgagee in good faith within the
contemplation of the law. 2
A more factual approach would lead to the same result. From the stipulated facts, it can be seen
that prior to the execution of the mortgage between appellant and the defendant spouses, the

appellee had been mortgaging the land described in TCT No. T-1212 to it. She did this first in the
year 1950 for a loan of P900.00, and again in 1954 for a loan of P1,100.00. In both instances, the
appellant Bank had possession of, or at least, must have examined appellee's title, TCT No. T-1212,
wherein appear clearly the technical description, exact area, lot number and cadastral number of the
land covered by said title. In other words, by the time the defendant spouses offered OCT P-6038, in
their names, for scrutiny in connection with their own application for loan with appellant, the latter
was charged with the notice of the identity of the technical descriptions, areas, lot numbers and
cadastral numbers of the lands purportedly covered by the two titles and was in a position to know, if
it did not have such knowledge actually, that they referred to one and the same lot. Under the
circumstances, appellant had absolutely no excuse for approving the application of the defendant
spouses and giving the loans in question. To appellant, therefore, fittingly applies the following
pronouncement of this Court:
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 it afterwards develops that the title was in fact defective, and it
appears that he had such notice of the defect as would have led to its discovery had be
acted with that measure of precaution which may reasonably be required of a prudent man in
a like situation..... (Dayao v. Diez, supra; citing the case of Leung Yee v. Strong Machinery.
Co., 37 Phil; 644.)
Anyway, appellant Bank is not without any remedy. It appears that, defendant spouses have
another land covered by OCT 3137 which is also mortgaged to it and which perhaps may yet be
sufficient to cover the loans in question. In any event, again, the following ruling of this Court in the
recent case of De Villa v. Trinidad, G.R. No. L-24918, March 20, 1968, applies to appellant:
We have laid the rule that where two certificates of title around issued to different persons
covering the same land in whole or in part, the earlier in date must prevail as between
original parties and in case of successive registrations where more than one certificate is
issued over the land, the person holding under the prior certificate is entitled to the land as
against the person who rely on the second certificate. The purchaser from the owner of the
later certificate and his successors, should resort to his vendor for redress, rather than
molest the holder of the first certificate and his successors, who should be permitted to
resort secure in their title. (Citing Legarda v. Saleeby, 31 Phil. 590) [Emphasis supplied]
The recourse to the cases of Blanco, et al. v. Esquierdo, G.R. No. L-15182, December 28, 1960
and Director of Lands v. Abache, 73 Phil. 606, made by appellant in its brief is obviously unavailing.
The factual settings of those cases are entirely different from the one before Us now. In the case of
Abache, what happened was that the land which one Santiago Imperial and his mother claimed

during the cadastral proceedings was adjudicated by the cadastral court in its decision to other
parties, the Adornados, who had never made any claim thereto, and when the Imperials asked later
on, after the decree and title had been issued, for the annulment of such title in the name of said
non-claimants, it appeared that the latter had already mortgaged the land to one Luis Meneses. This
Court decreed that although the title of the Adornados was void and the Imperials were entitled to
the issuance of the title in their favor, the mortgage in favor of Meneses constituted a valid lien over
the land; the remedy of the Imperials was to go against the Assurance Fund. Thus, in that case,
there was nothing in the title itself which could indicate to Meneses that there was a flaw in the title
of the Adornados, because the error was committed by the court in the proceedings and not in the
issuance of the title, hence it contained on its face no circumstances of suspicion at all, from any
point of view, unlike in the present case wherein an examination of the title of the defendant spouses
was sufficient to put appellant on notice that the land described therein was identical with the land it
had previously dealt with under another title in the name of somebody else.
The same is true with the other cited case of Blanco, et al. v. Esquierdo, supra. The pertinent
portions of said decision are as follows:
That the certificate of title issued in the name of Fructuosa Esquierdo is a nullity, the same
having been secured thru fraud, is not here in question. The only question for determine
nation is whether the defendant bank is entitled to the protection accorded to "innocent
purchasers for value", which phrase, according to sec. 38 of the Land Registration Law,
includes an innocent mortgagee for value. The question, in our opinion, must be answered in
the affirmative.
The trial court, in the decision complained of, made no finding that the defendant
mortgagee bank was a party to the fraudulent transfer of the land to Fructuosa Esquierdo.
Indeed, there is nothing alleged in the complaint which may implicate said defendant
mortgagee in the fraud, or justify a finding that it acted in bad faith. On the other hand, the
certificate of title was in the name of the mortgagor Fructuosa Esquierdo when the land was
mortgaged by her to the defendant bank. Such being the case, the said defendant bank, as
mortgagee, had the right to rely on what appeared in the certificate and, in the absence of
anything to excite suspicion, was under no obligation to look beyond the certificate and
investigate the title of the mortgagor appearing on the face of said certificate. (De Lara, et al.,
vs. Ayroso, 50 Off. Gaz. 4838; Joaquin vs. Madrid, et al., G.R. No. L-13551, January 30,
1960.) Being thus an innocent mortgagee for value, its right or lien upon the land mortgaged
must be respected and protected, even if the mortgagor obtained her title thereto thru fraud.
The remedy of the persons prejudiced is to bring an action for damages against those
causing the fraud, and if the latter are insolvent, an action against the Treasurer of the
Philippines may be filed for the recovery of damages against the Assurance Fund. (De la
Cruz vs. Fabie, 35 Phil. 144; Blondeau vs. Nena, 61 Phil. 625; Sumira, et al. vs. Vistan, et
al., 74 Phil. 138; Raymundo et al., vs. Mayon Realty Corp., et al., 54 Off. Gaz. 4954; Avecilla
vs. Yatco, et al., 54 Off. Gaz. 6415.)
In this connection, it will be noted that the deceased Maximiano Blanco died way back in
1930 and the certificate of title pursuant to his homestead application was issued in the
name of his heirs sometime in 1934. Plaintiffs, however, took no steps for the settlement of

their late brother's estate and instead merely took possession of the land in question jointly
with Fructuosa Esquierdo. They also appear to have entrusted the owner's certificate to said
Fructuosa Esquierdo thus making it possible for her to fraudulently secure a transfer
certificate of title in her name. This should be emphasized, for in several cases it is what
impelled this Court to apply the principle of equity that "as between two innocent persons,
one of whom must suffer the consequences of a breach of trust, the one who. made it
possible by his act of confidence must bear the loss". (De Lara, et al. vs. Ayroso supra.)
Again, it is clear that in that case, the title examined by the bank had no indication, whatsoever, of
any, defect in it, unlike, as already stated, in this case.
By no means of reasoning, therefore, can anyone ever say that the case cited and relied upon by
appellant could have modified the doctrine in Legarda v. Saleeby, supra, and the other cases
wherein it was reiterated. In fact, no mention at all is made by appellant of the Legarda v. Saleeby
case in its brief by way of explaining way said appellant had to bring this case on appeal to Us in the
face of the said decision which explained clearly and in detail the law on the point appellant now
urges before Us. We are thus persuaded that appellant paid little heed to the merit or lack of merit of
this appeal which We find to be frivolous.
WHEREFORE, as appellant has not appealed from the judgment of the lower court insofar as
paragraphs (d) and (e) thereof are concerned, said paragraphs stand, and the rest of said judgment
is hereby affirmed. Double costs against appellant in this instance.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Fernando, Capistrano and
Teehankee, JJ., concur.
Castro, J., concurs in the result.

G.R. No. L-26371

September 30, 1969

MOBIL OIL PHILIPPINES, INC., plaintiff-appellant,

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

FERNANDO, J.:
It may very well be, as noted by jurists of repute, that to stress the element of a promise as the basis
of contracts is to acknowledge the influence of natural law. 1 Nonetheless, it does not admit of doubt
that whether under the civil law or the common law, the existence of a contract is unthinkable without
one's word being plighted. So the New Civil Code provides: "A contract is a meeting of minds
between two persons whereby one binds himself, with respect to the other, to give something or to
render some service." 2 So it is likewise under American law. Thus: "A contract is a promise or a set
of promises for the breach of which the law gives a remedy, or the performance of which the law in
some way recognizes as a duty." 3
The law may go further and require that certain formalities be executed. Thus, for a mortgage to be
validly constituted, "it is indispensable, ..., that the document in which it appears be recorded in the
Registry of Property." The same codal provision goes on: "If the instrument is not recorded, the
mortgage is nevertheless binding between the parties." 4
The question before us in this appeal from a lower court decision, one we have to pass upon for the
first time, is the effect, if any, to be given to a mortgage contract admittedly not registered, only the
parties being involved in the suit. The lower court was of the opinion that while it "created a personal
obligation [it] did not establish a real estate mortgage." 5 It did not decree foreclosure therefor.
Plaintiff-appellant appealed. We view the matter differently and reverse the lower court.
The case for the plaintiff, Mobil Oil Philippines, Inc., now appellant, was summarized in the lower
court order of February 25, 1966, subject of this appeal. Thus: "In its complaint plaintiff alleged that
on Feb. 9, 1965 defendants Ruth R. Diocares and Lope T. Diocares entered into a contract of loan
and real estate mortgage wherein the plaintiff extended to the said defendants a loan of P45,000.00;
that said defendants also agreed to buy from the plaintiff on cash basis their petroleum requirements
in an amount of not less than 50,000 liters per month; that the said defendants will pay to the plaintiff
9-1/2% per annum on the diminishing balance of the amount of their loan; that the defendants will
repay the said loan in monthly installments of P950.88 for a period of five (5) years from February 9,
1965; that to secure the performance of the foregoing obligation they executed a first mortgage on
two parcels of land covered by Transfer Certificates of Title Nos. T-27136 and T-27946, both issued
by the Register of Deeds of Bacolod City. The agreement further provided that in case of failure of
the defendants to pay any of the installments due and purchase their petroleum requirements in the
minimum amount of 50,000 liters per month from the plaintiff, the latter has the right to foreclose the

mortgage or recover the payment of the entire obligation or its remaining unpaid balance; that in
case of foreclosure the plaintiff shall be entitled to 12% of the indebtedness as damages and
attorney's fees. A copy of the loan and real estate mortgage contract executed between the plaintiff
and the defendants is attached to the complaint and made a part thereof. The complaint further
alleges that the defendant paid only the amount of P1,901.76 to the plaintiff, thus leaving a balance
of P43,098.24, excluding interest, on their indebtedness. The said defendants also failed to buy on
cash basis the minimum amount of petroleum which they agreed to purchase from the plaintiff. The
plaintiff, therefore, prayed that the defendants be ordered to pay the amount of P43,098.24, with
interest at 9-1/2% per annum from the date it fell due, and in default of such payment that the
mortgaged properties be sold and the proceeds applied to the payment of defendants' obligation." 6
Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees, admitted their indebtedness as
set forth above, denying merely the alleged refusal to pay, the truth, according to them, being that
they sought for an extension of time to do so, inasmuch as they were not in a position to comply with
their obligation. They further set forth that they did request plaintiff to furnish them with the statement
of accounts with the view of paying the same on installment basis, which request was, however,
turned down by the plaintiff.
Then came a motion from the plaintiff for a judgment on the pleadings, which motion was favorably
acted on by the lower court. As was stated in the order appealed from: "The answer of the
defendants dated October 21, 1965 did not raise any issue. On the contrary, said answer admitted
the material allegations of the complaint. The plaintiff is entitled to a judgment on the pleadings." 7
As to why the foreclosure sought by plaintiff was denied, the lower court order on appeal reads thus:
"The Court cannot, however, order the foreclosure of the mortgage of properties, as prayed for,
because there is no allegation in the complaint nor does it appear from the copy of the loan and real
estate mortgage contract attached to the complaint that the mortgage had been registered. The said
loan agreement although binding among the parties merely created a personal obligation but did not
establish a real estate mortgage. The document should have been registered. (Art. 2125, Civil Code
of the Phil.)" 8 The dispositive portion is thus limited to ordering defendants "to pay the plaintiff the
account of P43,098.24, with interest at the rate of 9-1/2% per annum from the date of the filing of the
complaint until fully paid, plus the amount of P2,000.00 as attorneys' fees, and the costs of the suit." 9
Hence this appeal, plaintiff-appellant assigning as errors the holding of the lower court that no real
estate mortgage was established and its consequent refusal to order the foreclosure of the
mortgaged properties. As set forth at the outset, we find the appeal meritorious. The lower court
should not have held that no real estate mortgage was established and should have ordered its
foreclosure.
The lower court predicated its inability to order the foreclosure in view of the categorical nature of the
opening sentence of the governing article 10 that it is indispensable, "in order that a mortgage may be
validly constituted, that the document in which it appears be recorded in the Registry of Property."
Note that it ignored the succeeding sentence: "If the instrument is not recorded, the mortgage is
nevertheless binding between the parties." Its conclusion, however, is that what was thus created
was merely "a personal obligation but did not establish a real estate mortgage."

Such a conclusion does not commend itself for approval. The codal provision is clear and explicit.
Even if the instrument were not recorded, "the mortgage is nevertheless binding between the
parties." The law cannot be any clearer. Effect must be given to it as written. The mortgage subsists;
the parties are bound. As between them, the mere fact that there is as yet no compliance with the
requirement that it be recorded cannot be a bar to foreclosure.
1awphl.nt

A contrary conclusion would manifest less than full respect to what the codal provision ordains. The
liability of the mortgagor is therein explicitly recognized. To hold, as the lower court did, that no
foreclosure would lie under the circumstances would be to render the provision in question nugatory.
That we are not allowed to do. What the law requires in unambiguous language must be lived up to.
No interpretation is needed, only its application, the undisputed facts calling for it. 11
Moreover to rule as the lower court did would be to show less than fealty to the purpose that
animated the legislators in giving expression to their will that the failure of the instrument to be
recorded does not result in the mortgage being any the less "binding between the parties." In the
language of the Report of the Code Commission: "In article [2125] an additional provision is made
that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the
parties." 12 We are not free to adopt then an interpretation, even assuming that the codal provision
lacks the forthrightness and clarity that this particular norm does and, therefore, requires
construction, that would frustrate or nullify such legislative objective.
Nor is the reason difficult to discern why such an exception should be made to the rule that is
indispensable for a mortgage to be validly constituted that it be recorded. Equity so demands, and
justice is served. There is thus full acknowledgment of the binding effect of a promise, which must be
lived up to, otherwise the freedom a contracting party is supposed to possess becomes
meaningless. It could be said of course that to allow foreclosure in the absence of such a formality is
to offend against the demands of jural symmetry. What is "indispensable" may be dispense with.
Such an objection is far from fatal. This would not be the first time when logic yields to what is fair
and what is just. To such an overmastering requirement, law is not immune.
WHEREFORE, the lower court order of February 25, 1966 is affirmed with the modification that in
default of the payment of the above amount of P43,028.94 with interests at the rate of 9-1/2% per
annum from the date of the filing of the complaint, that the mortgage be foreclosed with the
properties subject thereof being sold and the proceeds of the sale applied to the payment of the
amounts due the plaintiff in accordance with law. With costs against defendants-appellees.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Capistrano, Teehankee and
Barredo, JJ., concur.
Reyes, J.B.L., J., is on leave.

G.R. No. L-38745 August 6, 1975

LUCIA TAN, plaintiff-appellee,
vs.
ARADOR VALDEHUEZA and REDICULO VALDEHUEZA, defendants-appellants.
Alaric P. Acosta for plaintiff-appellee.
Lorenzo P. de Guzman for defendants-appellants.

CASTRO, J.:
This appeal was certified to this Court by the Court of Appeals as involving questions purely of law.
The decision a quo was rendered by the Court of First Instance of Misamis Occidental (Branch I) in
an action instituted by the plaintiff-appellee Lucia Tan against the defendants-appellants Arador
Valdehueza and Rediculo Valdehueza (docketed as civil case 2574) for (a) declaration of ownership
and recovery of possession of the parcel of land described in the first cause of action of the
complaint, and (b) consolidation of ownership of two portions of another parcel of (unregistered) land
described in the second cause of action of the complaint, purportedly sold to the plaintiff in two
separate deeds of pacto de retro.
After the issues were joined, the parties submitted the following stipulation of facts:
1. That parties admit the legal capacity of plaintiff to sue; that defendants herein,
Arador, Rediculo, Pacita, Concepcion and Rosario, all surnamed Valdehueza, are
brothers and sisters; that the answer filed by Arador and Rediculo stand as the
answer of Pacita, Concepcion and Rosario.
2. That the parties admit the identity of the land in the first cause of action.
3. That the parcel of land described in the first cause of action was the subject matter
of the public auction sale held on May 6, 1955 at the Capitol Building in Oroquieta,
Misamis Occidental, wherein the plaintiff was the highest bidder and as such a
Certificate of Sale was executed by MR. VICENTE D. ROA who was then the ExOfficio Provincial Sheriff in favor of LUCIA TAN the herein plaintiff. Due to the failure
of defendant Arador Valdehueza to redeem the said land within the period of one
year as being provided by law, MR. VICENTE D. ROA who was then the Ex-Officio
Provincial Sheriff executed an ABSOLUTE DEED OF SALE in favor of the plaintiff
LUCIA TAN.
A copy of the NOTICE OF SHERIFFS SALE is hereby marked as 'Annex A', the
CERTIFICATE OF SALE is marked as 'Annex B' and the ABSOLUTE DEED OF

SALE is hereby marked as Annex C and all of which are made as integral parts of
this stipulation of facts.
4. That the party-plaintiff is the same plaintiff in Civil Case No. 2002; that the parties
defendants Arador, Rediculo and Pacita, all Valdehueza were the same partiesdefendants in the same said Civil Case No. 2002; the complaint in Civil Case No.
2002 to be marked as Exhibit 1; the answer as Exhibit 2 and the order dated May 22,
1963 as Exhibit 3, and said exhibits are made integral part of this stipulation.
5. That defendants ARADOR VALDEHUEZA and REDICULO VALDEHUEZA have
executed two documents of DEED OF PACTO DE RETRO SALE in favor of the
plaintiff herein, LUCIA TAN of two portions of a parcel of land which is described in
the second cause of action with the total amount of ONE THOUSAND FIVE
HUNDRED PESOS (P1,500.00), Philippine Currency, copies of said documents are
marked as 'Annex D' and Annex E', respectively and made as integral parts of this
stipulation of facts.
6. That from the execution of the Deed of Sale with right to repurchase mentioned in
the second cause of action, defendants Arador Valdehueza and Rediculo
Valdehueza remained in the possession of the land; that land taxes to the said land
were paid by the same said defendants.
Civil case 2002 referred to in stipulation of fact no. 4 was a complaint for injunction
filed by Tan on July 24, 1957 against the Valdehuezas, to enjoin them "from entering
the above-described parcel of land and gathering the nuts therein ...." This complaint
and the counterclaim were subsequently dismissed for failure of the parties "to seek
for the immediate trial thereof, thus evincing lack of interest on their part to proceed
with the case. 1
The Deed of Pacto de Retro referred to in stipulation of fact no. 5 as "Annex D" (dated August 5,
1955) was not registered in the Registry of Deeds, while the Deed of Pacto de Retro referred to as
"Annex E" (dated March 15, 1955) was registered.
On the basis of the stipulation of facts and the annexes, the trial court rendered judgment, as
follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff:
1. Declaring Lucia Tan the absolute owner of the property described in the first cause
of action of the amended complaint; and ordering the herein defendants not to
encroach and molest her in the exercise of her proprietary rights; and, from which
property they must be dispossessed;
2. Ordering the defendants, Arador Valdehueza and Rediculo Valdehueza jointly and
severally to pay to the plaintiff, Lucia Tan, on Annex 'E' the amount of P1,200, with
legal interest of 6% as of August 15, 1966, within 90 days to be deposited with the

Office of the Court within 90 days from the date of service of this decision, and that in
default of such payment the property shall be sold in accordance with the Rules of
Court for the release of the mortgage debt, plus costs;
3. And as regards the land covered by deed of pacto de retro annex 'D', the herein
defendants Arador Valdehueza and Rediculo Valdehueza are hereby ordered to pay
the plaintiff the amount of P300 with legal interest of 6% from August 15, 1966, the
said land serving as guaranty of the said amount of payment;
4. Sentencing the defendants Arador Valdehueza and Rediculo Valdehueza to pay
jointly and severally to the herein plaintiff Lucia Tan the amount of 1,000.00 as
attorney's fees; and .
5. To pay the costs of the proceedings.
The Valdehuezas appealed, assigning the following errors:
That the lower court erred in failing to adjudge on the first cause of action that there
exists res judicata; and
That the lower court erred in making a finding on the second cause of action that the
transactions between the parties were simple loan, instead, it should be declared as
equitable mortgage.
We affirm in part and modify in part.
1. Relying on Section 3 of Rule 17 of the Rules of Court which pertinently provides that a dismissal
for failure to prosecute "shall have the effect of an adjudication upon the merits," the Valdehuezas
submit that the dismissal of civil case 2002 operated, upon the principle of res judicata, as a bar to
the first cause of action in civil case 2574. We rule that this contention is untenable as the causes of
action in the two cases are not identical. Case 2002 was for injunction against the entry into and the
gathering of nuts from the land, while case 2574 seeks to "remove any doubt or cloud of the
plaintiff's ownership ..." (Amended complaint, Rec. on App., p. 27), with a prayer for declaration of
ownership and recovery of possession.
Applying the test of absence of inconsistency between prior and subsequent judgments, 2 we hold
that the failure of Tan, in case 2002, to secure an injunction against the Valdehuezas to prevent them from
entering the land and gathering nuts is not inconsistent with her being adjudged, in case 2574, as owner
of the land with right to recover possession thereof. Case 2002 involved only the possession of the land
and the fruits thereof, while case 2574 involves ownership of the land, with possession as a mere attribute
of ownership. The judgment in the first case could not and did not encompass the judgment in the
second, although the second judgment would encompass the first. Moreover, the new Civil Code provides
that suitors in actions to quiet title "need not be in possession of said property. 3
2. The trial court treated the registered deed of pacto de retro as an equitable mortgage but
considered the unregistered deed of pacto de retro "as a mere case of simple loan, secured by the
property thus sold underpacto de retro," on the ground that no suit lies to foreclose an unregistered

mortgage. It would appear that the trial judge had not updated himself on law and jurisprudence; he
cited, in support of his ruling, article 1875 of the old Civil Code and decisions of this Court circa 1910
and 1912.
Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of
a mortgage even as between the parties, but under article 2125 of the new Civil Code (in effect since
August 30,1950), this is no longer so. 4
If the instrument is not recorded, the mortgage is nonetheless binding between the
parties. (Article 2125, 2nd sentence).
The Valdehuezas having remained in possession of the land and the realty taxes having been paid
by them, the contracts which purported to be pacto de retro transactions are presumed to be
equitable mortgages, 5 whether registered or not, there being no third parties involved.
3. The Valdehuezas claim that their answer to the complaint of the plaintiff affirmed that they
remained in possession of the land and gave the proceeds of the harvest to the plaintiff; it is thus
argued that they would suffer double prejudice if they are to pay legal interest on the amounts stated
in the pacto de retro contracts, as the lower court has directed, and that therefore the court should
have ordered evidence to be adduced on the harvest.
The record does not support this claim. Nowhere in the original and the amended complaints is an
allegation of delivery to the plaintiff of the harvest from the land involved in the second cause of
action. Hence, the defendants' answer had none to affirm.
In submitting their stipulation of facts, the parties prayed "for its approval and maybe made the basis
of the decision of this Honorable Court. " (emphasis supplied) This, the court did. It cannot therefore
be faulted for not receiving evidence on who profited from the harvest.
4. The imposition of legal interest on the amounts subject of the equitable mortgages, P1,200 and
P300, respectively, is without legal basis, for, "No interest shall be due unless it has been expressly
stipulated in writing." (Article 1956, new Civil Code) Furthermore, the plaintiff did not pray for such
interest; her thesis was a consolidation of ownership, which was properly rejected, the contracts
being equitable mortgages.
With the definitive resolution of the rights of the parties as discussed above, we find it needless to
pass upon the plaintiffs petition for receivership. Should the circumstances so warrant, she may
address the said petition to the court a quo.
ACCORDINGLY, the judgment a quo is hereby modified, as follows: (a) the amounts of P1,200 and
P300 mentioned in Annexes E and D shall bear interest at six percent per annum from the finality of
this decision; and (b) the parcel of land covered by Annex D shall be treated in the same manner as
that covered by Annex E, should the defendants fail to pay to the plaintiff the sum of P300 within 90
days from the finality of this decision. In all other respects the judgment is affirmed. No costs.
Makalintal, C.J., Makasiar, Esguerra and Muoz Palma, JJ., concur.

Teehankee, J., is on leave.

Martin, J., took no part.

G.R. No. L-22331

June 6, 1967

IN RE: PETITION FOR CONSOLIDATION OF TITLE IN THE VENDEES OF A HOUSE AND THE
RIGHTS TO A LOT.
MARIA BAUTISTA VDA. DE REYES, ET AL., vendees-petitioners-appellees.
RODOLFO LANUZA, vendor,
vs.
MARTIN DE LEON, intervenor-appellant.
Erasmo R. Cruz and C. R. Pascual for intervenor-appellant.
Augusto J. Salas for vendees-petitioners-appellees.
REGALA, J.:
Rodolfo Lanuza and his wife Belen were the owners of a two-story house built on a lot of the Maria
Guizon Subdivision in Tondo, Manila, which the spouses leased from the Consolidated Asiatic Co.
On January 12, 1961, Lanuza executed a document entitled "Deed of Sale with Right to
Repurchase" whereby he conveyed to Maria Bautista Vda. de Reyes and Aurelia R. Navarro the
house, together with the leasehold rights to the lot, a television set and a refrigerator in consideration
of the sum of P3,000. The deed reads:
DEED OF SALE WITH RIGHT TO REPURCHASE KNOW ALL MEN BY THESE
PRESENTS:
That I, RODOLFO LANUZA, Filipino, of legal age, married to Belen Geronimo, and
residing at 783-D Interior 14 Maria Guizon, Gagalangin, Tondo, Manila, hereby
declare that I am the true and absolute owner of a new two storey house of strong
materials, constructed on a rented lot Lot No. 12 of the Maria Guizon Subdivision,
owned by the Consolidated Asiatic Co. as evidenced by the attached Receipt No.
292, and the plan of the subdivision, owned by said company.
That for and in consideration of the sum of THREE THOUSAND PESOS (P3,000.00)
which I have received this day from Mrs. Maria Bautista Vda. de Reyes, Filipino, of
legal age, widow; and Aurelia Reyes, married to Jose S. Navarro, Filipinos, of legal
ages, and residing at 1112 Antipolo St., Tondo, Manila, I hereby SELL, CEDE,
TRANSFER, AND CONVEY unto said Maria Bautista Vda. de Reyes, her heirs,
succesors, administrators and assigns said house, including my right to the lot on
which it was constructed, and also my television, and frigidaire "Kelvinator" of nine
cubic feet in size, under the following conditions:
I hereby reserve for myself, my heirs, successors, administrators, and assigns the
right to repurchase the above mentioned properties for the same amount of
P3,000.00, without interest, within the stipulated period of three (3) months from the
date hereof. If I fail to pay said amount of P3,000.00, within the stipulated period of
three months, my right to repurchase the said properties shall be forfeited and the
ownership thereto shall automatically pass to Mrs. Maria Bautista Vda. de Reyes, her
heirs, successors, administrators, and assigns, without any Court intervention, and
they can take possession of the same.
1wph1.t

IN WITNESS WHEREOF, we have signed this contract in the City of Manila, this 12th
day of January, 1961.
s/t RODOLFO LANUZA
Vendor

s/t MARIA BAUTISTA VDA. DE REYES

Vendee

s/t AURELIA REYES

Vendee

WITH MY MARITAL CONSENT:

s/t JOSE S. NAVARRO

When the original period of redemption expired, the parties extended it to July 12, 1961 by an
annotation to this effect on the left margin of the instrument. Lanuza's wife, who did not sign the
deed, this time signed her name below the annotation.
It appears that after the execution of this instrument, Lanuza and his wife mortgaged the same
house in favor of Martin de Leon to secure the payment of P2,720 within one year. This mortgage
was executed on October 4, 1961 and recorded in the Office of the Register of Deeds of Manila on
November 8, 1961 under the provisions of Act No. 3344.
As the Lanuzas failed to pay their obligation, De Leon filed in the sheriff's office on October 5, 1962 a
petition for the extra-judicial foreclosure of the mortgage. On the other hand, Reyes and Navarro
followed suit by filing in the Court of First Instance of Manila a petition for the consolidation of
ownership of the house on the ground that the period of redemption expired on July 12, 1961 without
the vendees exercising their right of repurchase. The petition for consolidation of ownership was filed
on October 19. On October 23, the house was sold to De Leon as the only bidder at the sheriffs
sale. De Leon immediately took possession of the house, secured a discharge of the mortgage on
the house in favor of a rural bank by paying P2,000 and, on October 29, intervened in court and
asked for the dismissal of the petition filed by Reyes and Navarro on the ground that the
unrecorded pacto de retro sale could not affect his rights as a third party.
The parties1 thereafter entered into a stipulation of facts on which this opinion is mainly based and
submitted the case for decision. In confirming the ownership of Reyes and Navarro in the house and
the leasehold right to the lot, the court said:
It is true that the original deed of sale with pacto de retro, dated January 12, 1961, was not
signed by Belen Geronimo-Lanuza, wife of the vendor a retro, Rodolfo Lanuza, at the time of
its execution. It appears, however, that on the occasion of the extension of the period for
repurchase to July 12, 1961, Belen Geronimo-Lanuza signed giving her approval and
conformity. This act, in effect, constitutes ratification or confirmation of the contract (Annex
"A" Stipulation) by Belen Geronimo-Lanuza, which ratification validated the act of Rodolfo
Lanuza from the moment of the execution of the said contract. In short, such ratification had
the effect of purging the contract (Annex "A" Stipulation) of any defect which it might have
had from the moment of its execution. (Article 1396, New Civil Code of the Philippines; Tang
Ah Chan and Kwong Koon vs. Gonzales, 52 Phil. 180)
Again, it is to be noted that while it is true that the original contract of sale with right to
repurchase in favor of the petitioners (Annex "A" Stipulation) was not signed by Belen
Geronimo-Lanuza, such failure to sign, to the mind of the Court, made the contract merely
voidable, if at all, and, therefore, susceptible of ratification. Hence, the subsequent

ratification of the said contract by Belen Geronimo-Lanuza validated the said contract even
before the property in question was mortgaged in favor of the intervenor.
It is also contended by the intervenor that the contract of sale with right to repurchase should
be interpreted as a mere equitable mortgage. Consequently, it is argued that the same
cannot form the basis for a judicial petition for consolidation of title over the property in
litigation. This argument is based on the fact that the vendors a retro continued in possession
of the property after the execution of the deed of sale with pacto de retro. The mere fact,
however, that the vendors a retro continued in the possession of the property in question
cannot justify an outright declaration that the sale should be construed as an equitable
mortgage and not a sale with right to repurchase. The terms of the deed of sale with right to
repurchase (Annex "A" Stipulation) relied upon by the petitioners must be considered as
merely an equitable mortgage for the reason that after the expiration of the period of
repurchase of three months from January 12, 1961.
Article 1602 of the New Civil Code provides:
"ART. 1602. The contract shall be presumed to be in equitable mortgage, in any of
the following cases;
xxx

xxx

xxx

"(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed.
xxx

xxx

xxx

In the present case, it appears, however, that no other instrument was executed between the
parties extending the period of redemption. What was done was simply to annotate on the
deed of sale with right to repurchase (Annex "A" Stipulation) that "the period to repurchase,
extended as requested until July 12, 1961." Needless to say, the purchasers a retro, in the
exercise of their freedom to make contracts, have the power to extend the period of
repurchase. Such extension is valid and effective as it is not contrary to any provision of law.
(Umale vs. Fernandez, 28 Phil. 89, 93)
The deed of sale with right to repurchase (Annex "A" Stipulation) is embodied in a public
document. Consequently, the same is sufficient for the purpose of transferring the rights of
the vendors a retro over the property in question in favor of the petitioners. It is to be noted
that the deed of sale with right to repurchase (Annex "A" Stipulation) was executed on
January 12, 1961, which was very much ahead in point of time to the execution of the real
estate mortgage on October 4, 1961, in favor of intervenor (Annex "B" Stipulation). It is
obvious, therefore, that when the mortgagors, Rodolfo Lanuza and Belen Geronimo Lanuza,
executed the real estate mortgage in favor of the intervenor, they were no longer the
absolute owners of the property since the same had already been sold a retro to the
petitioners. The spouses Lanuza, therefore, could no longer constitute a valid mortgage over
the property inasmuch as they did not have any free disposition of the property mortgaged.
(Article 2085, New Civil Code.) For a valid mortgage to exist, ownership of the property
mortgaged is an essential requisite. A mortgage executed by one who is not the owner of the
property mortgaged is without legal existence and the registration cannot validate.
(Philippine National Bank vs. Rocha, 55 Phil. 497).

The intervenor invokes the provisions of article 1544 of the New Civil Code for the reason
that while the real estate mortgage in his favor (Annex "B" Stipulation) has been registered
with the Register of Deeds of Manila under the provisions of Act No. 3344 on November 3,
1961, the deed of sale with right to repurchase (Annex "A" Stipulation) however, has not
been duly registered. Article 1544 of the New Civil Code, however, refers to the sale of the
same property to two or more vendees. This provision of law, therefore, is not applicable to
the present case which does not involve sale of the same property to two or more vendees.
Furthermore, the mere registration of the property mortgaged in favor of the intervenor under
Act No. 3344 does not prejudice the interests of the petitioners who have a better right over
the property in question under the old principle of first in time, better in right. (Gallardo vs.
Gallardo, C.B., 46 O.G. 5568)
De Leon appealed directly to this Court, contending (1) that the sale in question is not only voidable
but void ab initio for having been made by Lanuza without the consent of his wife; (2) that the
pacto de retro sale is in reality an equitable mortgage and therefore can not be the basis of a petition
for consolidation of ownership; and (3) that at any rate the sale, being unrecorded, cannot affect third
parties.
We are in accord with the trial court's ruling that a conveyance of real property of the conjugal
partnership made by the husband without the consent of his wife is merely voidable. This is clear
from article 173 of the Civil Code which gives the wife ten years within which to bring an action for
annulment. As such it can be ratified as Lanuza's wife in effect did in this case when she gave her
conformity to the extension of the period of redemption by signing the annotation on the margin of
the deed. We may add that actions for the annulment of voidable contracts can be brought only by
those who are bound under it, either principally or subsidiarily (art. 1397), so that if there was anyone
who could have questioned the sale on this ground it was Lanuza's wife alone.
We also agree with the lower court that between an unrecorded sale of a prior date and a recorded
mortgage of a later date the former is preferred to the latter for the reason that if the original owner
had parted with his ownership of the thing sold then he no longer had the ownership and free
disposal of that thing so as to be able to mortgage it again. Registration of the mortgage under Act
No. 3344 would, in such case, be of no moment since it is understood to be without prejudice to the
better right of third parties.2 Nor would it avail the mortgagee any to assert that he is in actual
possession of the property for the execution of the conveyance in a public instrument earlier was
equivalent to the delivery of the thing sold to the vendee. 3
But there is one aspect of this case which leads us to a different conclusion. It is a point which
neither the parties nor the trial court appear to have sufficiently considered. We refer to the nature of
the so-called "Deed of Sale with Right to Repurchase" and the claim that it is in reality an equitable
mortgage. While De Leon raised the question below and again in this Court in his second
assignment of error, he has not demonstrated his point; neither has he pursued the logical
implication of his argument beyond stating that a petition for consolidation of ownership is an
inappropriate remedy to enforce a mortgage.
De Leon based his claim that the pacto de retro sale is actually an equitable mortgage on the fact
that, first, the supposed vendors (the Lanuzas) remained in possession of the thing sold and,
second, when the three-month period of redemption expired the parties extended it. These are
circumstances which indeed indicate an equitable mortgage. 4 But their relevance emerges only
when they are seen in the perspective of other circumstances which indubitably show that what was
intended was a mortgage and not a sale.These circumstances are:

1. The gross inadequacy of the price. In the discussion in the briefs of the parties as well as in the
decision of the trial court, the fact has not been mentioned that for the price of P3,000, the supposed
vendors "sold" not only their house, which they described as new and as being made of strong
materials and which alone had an assessed value of P4,000, but also their leasehold right television
set and refrigerator, "Kelvinator of nine cubic feet in size." indeed, the petition for consolidation of
ownership is limited to the house and the leasehold right, while the stipulation of facts of the parties
merely referred to the object of the sale as "the property in question." The failure to highlight this
point, that is, the gross inadequacy of the price paid, accounts for the error in determining the true
agreement of the parties to the deed.
2. The non-transmission of ownership to the vendees. The Lanuzas, the supposed vendors did not
really transfer their ownership of the properties in question to Reyes and Navarro. What was agreed
was that ownership of the things supposedly sold would vest in the vendees only if the vendors
failed to pay P3,000. In fact the emphasis is on the vendors payment of the amount rather than on
the redemption of the things supposedly sold. Thus, the deed recites that
If I (Lanuza) fail to pay said amount of P3,000.00 within the stipulated period of three
months, my right to repurchase the said properties shall be forfeited and the ownership
thereto automatically pass to Mrs. Maria Bautista Vda. de Reyes . . . without any Court
intervention and they can take possession of the same.
This stipulation is contrary to the nature of a true pacto de retro sale under which a vendee acquires
ownership of the thing sold immediately upon execution of the sale, subject only to the vendor's right
of redemption.5 Indeed, what the parties established by this stipulation is an odious pactum
commissorium which enables the mortgages to acquire ownership of the mortgaged properties
without need of foreclosure proceedings. Needless to say, such a stipulation is a nullity, being
contrary to the provisions of article 2088 of the Civil Code. 6 Its insertion in the contract of the parties
is an avowal of an intention to mortgage rather than to sell. 7
3. The delay in the filing of the petition for consolidation. Still another point obviously overlooked in
the consideration of this case is the fact that the period of redemption expired on July 12, 1961 and
yet this action was not brought until October 19, 1962 and only after De Leon had asked on October
5, 1962 for the extra-judicial for closure of his mortgage. All the while, the Lanuzas remained in
possession of the properties they were supposed to have sold and they remained in possession
even long after they had lost their right of redemption.
Under these circumstances we cannot but conclude that the deed in question is in reality a
mortgage. This conclusion is of far-reaching consequence because it means not only that this action
for consolidation of ownership is improper, as De Leon claims, but, what is more that between the
unrecorded deed of Reyes and Navarro which we hold to be an equitable mortgage, and the
registered mortgage of De Leon, the latter must be preferred. Preference of mortgage credits is
determined by the priority of registration of the mortgages,8 following the maxim "Prior tempore
potior jure" (He who is first in time is preferred in right.)9 Under article 2125 of the Civil Code, the
equitable mortgage, while valid between Reyes and Navarro, on the one hand, and the Lanuzas, on
the other, as the immediate parties thereto, cannot prevail over the registered mortgage of De Leon.
Wherefore, the decision appealed from is reversed, hence, the petition for consolidation is
dismissed. Costs against Reyes and Navarro.
Concepcion, C.J., Dizon, Bengzon, J.P., Sanchez and Castro, JJ., concur.
Reyes, J.B.L., and Zaldivar, JJ., reserved their votes.
Makalintal, J., concurs in the result.

[G.R. No. 115548. March 5, 1996]

STATE INVESTMENT HOUSE INC., petitioner,

APPEALS, ET AL., respondents.

vs. COURT

OF

DECISION
FRANCISCO, J.:

The factual background of the case, aptly summarized in the decision of

the Office of the President and cited by respondent Court of Appeals in its
assailed decision, and which we have verified to be supported by the record is
herein reproduced as follows:
[1]

The uncontroverted facts of the case as recited in the decision of the Office of the
President are as follows:
Records show that, on October 15, 1969, Contract to Sell No. 36 was executed by the
SpousesCanuto and Ma. Aranzazu Oreta, and the Solid Homes, Inc. (SOLID),
involving a parcel of land identified as Block No. 8, Lot No. 1, Phase I of the Capitol
Park Homes Subdivision, Quezon City, containing 511 square meters for a
consideration of P39,347.00. Upon signing of the contract, the spouses Oreta made
payment amounting to P7,869.40, with the agreement that the balance shall be
payable in monthly installments of P45 1.70, at 12% interest per annum.
On November 4, 1976, SOLID executed several real estate mortgage contracts in
favor of State Investment Homes, (sic) Inc. (STATE) over its subdivided parcels of
land, one of which is the subject lot covered by Transfer Certificate of Title No.
209642.
For Failure of SOLID to comply with its mortgage obligations contract, STATE extrajudicially foreclosed the mortgaged properties including the subject lot on April 6,
1983, with the corresponding certificate of sale issued therefor to STATE annotated at
the back of the titles covering the said properties on October 13, 1983.

On June 23, 1984, SOLID thru a Memorandum of Agreement negotiated for the
deferment of consolidation of ownership over the foreclosed properties by committing
to redeem the properties from STATE.
On August 15, 1988, the spouses filed a complaint before the Housing and Land Use
Regulatory Board, HLRB, against the developer SOLID and STATE for failure on the
part of SOLID to execute the necessary absolute deed of sale as well as to deliver title
to said property x x x in violation of the contract to sell x x x, despite full payment of
the purchase price as of January 7, 1981. In its Answer, SOLID, by way of alternative
defense, alleged that the obligations under the Contract to Sell has become so difficult
x x x the herein respondents be partially released from said obligation by substituting
subject lot with another suitable residential lot from another subdivision which
respondents own/operates. Upon the other hand, STATE, to which the subject lot was
mortgaged, averred that unless SOLID pays the redemption price
of P125,1955.00, (sic) it has a right to hold on and not release the foreclosed
properties.
On May 23, 1989, the Office of Appeals, Adjudication and Legal Affairs (OAALA)
rendered a decision the decretal portion of which reads:
1. Ordering respondent, State Investment House, Inc. to execute a Deed of
Conveyance of Lot 1, B lock 8, in Capital Park Homes Subdivision in favor of
complainants and to deliver to the latter the corresponding certificate of title;
2. Ordering respondent, Solid Homes, Inc. to pay State Investment House, Inc. that
portion of its loan which corresponds to the value of the lot as collateral;
3. Ordering respondent, Solid Homes, Inc. to pay to this Board the amount of Six
Thousand Pesos (P6,000.00) as administrative fine in accordance with Section 25 in
relation to Section 38 of P.D.957.
Both the STATE and SOLID appealed to the Board of Commissioners, HLRB, which
affirmed on June 5, 1990 the OAALAs decision (Annex C of the Petition; ibid., p.
34). Again, both STATE and SOLID appealed the decision of the Board of
Commissioners, HLRB, to the Office of the President which dismissed the twin
appeals on February 26, 1993.

Petitioner filed with the Supreme Court this petition for review of decision of the
Office of the President where it was docketed as G.R. No. 109364. However, in a
resolution dated May 13, 1993, the Supreme Court referred this case to this Court for
proper disposition. On the other hand, SOLID does not appear to have joined herein
petitioner in this petition for review.
[2]

[Italics added.]
In a decision dated May 19, 1994, respondent court sustained the
judgment of the Office of the President. Hence, this petition substantially
anchored on these two alleged errors, namely: (1) error in ruling that private
respondent spouses Oretas unregistered rights over the subject property are
superior to the registered mortgage rights of petitioner State Investment
House, Inc. (STATE); and (2) error in not applying the settled rule that that
persons dealing with property covered by torrens certificate of title are not
required to go beyond what appears on the face of the title.
At the outset, we note that herein petitioner argues more extensively on
the second assigned issue, than on the first. In fact, petitioner admits the
superior rights of respondents-spouses Oreta over the subject property as it
did not pray for the nullification of the contract between respondents-spouses
and SOLID, but instead asked for the payment of the release value of the
property in question, plus interest, attorneys fees and costs of suit against
SOLID or, in case of the latters inability to pay, against respondents-spouses
before it can be required to release the title of the subject property in favor of
the respondent spouses. And even if we were to pass upon the first assigned
error, we find respondent courts ruling on the matter to be wellfounded. STATEs registered mortgage right over the property is inferior to that
of respondents-spouses unregistered right. The unrecorded sale between
respondents-spouses and SOLID is preferred for the reason that if the original
owner (SOLID, in this case) had parted with his ownership of the thing sold
then he no longer had ownership and free disposal of that thing so as to be
able to mortgage it again. Registration of the mortgage is of no moment since
it is understood to be without prejudice to the better right of third parties.
[3]

[4]

[5]

Anent the second issue, petitioner asserts that a purchaser or mortgagee

of land/s covered under the Torrens System is not required to do more than

rely upon the certificate of title [for] it is enough that the [purchaser or
mortgagee] examines the pertinent certificate of title [without] need [of]
look[ing] beyond such title.
[6]

As a general rule, where there is nothing in the certificate of title to indicate

any cloud or vice in the ownership of the property, or any encumbrance
thereon, the purchaser is not required to explore further than what the Torrens
Title upon its face indicates in quest for any hidden defect or inchoate right
that may subsequently defeat his right thereto.This rule, however, admits of an
exception as where the purchaser or mortgagee, has knowledge of a defect or
lack of title in his vendor, or that he was aware of sufficient facts to induce a
reasonably prudent man to inquire into the status of the title of the property in
litigation. In this case, petitioner was well aware that it was dealing with
SOLID, a business entity engaged in the business of selling subdivision lots.
In fact, the OAALA found that at the time the lot was mortgaged, respondent
State Investment House, Inc., [now petitioner] had been aware of the lots
location and that said lot formed part of Capital Park/Homes Subdivision.
In Sunshine Finance and investment Corp. v. Intermediate Appellate Court,
the Court, noting petitioner therein to be a financing corporation, deviated
from the general rule that a purchaser or mortgagee of a land is not required
to look further than what appears on the face of the Torrens Title. Thus:
[7]

[8]

[9]

Nevertheless, we have to deviate from the general rule because of the failure of
the petitioner in this case to take the necessary precautions to ascertain if there
was any flaw in the title of the Nolascos and to examine the condition of the
property they sought to mortgage. The petitioner is an investment and financing
corporation. We presume it is experienced in its business. Ascertainment of the
status and condition of properties offered to it as security for the loans it extends
must be a standard and indispensable part of its operations. Surely, it cannot
simply rely on an examination of a Torrens certificate to determine what the
subject property looks like as its condition is not apparent in the document. The
land might be in a depressed area. There might be squatters on it. It might be easily
inundated. It might be an interior lot, without convenient access. These and other
similar factors determine the value of the property and so should be of practical
concern to the petitioner.
xxx xxx xxx

Our conclusion might have been different if the mortgagee were an ordinary
individual or company without the expertise of the petitioner in the mortgage and sale
of registered land or if the land mortgaged were some distance from the mortgagee
and could not be conveniently inspected.But there were no such impediments in this
case. The facilities of the petitioner were not so limited as to prevent it from making a
more careful examination of the land to assure itself that there were no unauthorized
persons in possession.
[10]

[Emphasis supplied.]
The above-enunciated rule should apply in this case as petitioner admits
of being a financing institution. We take judicial notice of the uniform practice
of financing institutions to investigate, examine and assess the real property
offered as security for any loan application especially where, as in this case,
the subject property is a subdivision lot located at Quezon City, M.M. It is a
settled rule that a purchaser or mortgagee cannot close its 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 or
mortgagor. Petitioners constructive knowledge of the defect in the title of the
subject property, or lack of such knowledge due to its negligence, takes the
place of registration of the rights of respondents-spouses. Respondent court
thus correctly ruled that petitioner was not a purchaser or mortgagee in good
faith; hence petitioner can not solely rely on what merely appears on the face
of the Torrens Title.
[11]

[12]

ACCORDINGLY, finding no reversible error in the assailed judgment, the

same is hereby AFFIRMED
SO ORDERED.
Narvasa, C.J. (Chairman), Davide, Jr., Melo, and Panganiban, JJ., concur.

G.R. No. 110053 October 16, 1995

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS, CELEBRADA MANGUBAT and ABNER MANGUBAT, respondents.

REGALADO, J.:
This appeal by certiorari sprouted from the judgment of respondent Court of Appeals promulgated on
September 9, 1992 in CA-G.R. CV No. 28311, and its resolution dated April 7, 1993 denying
petitioner's motion for reconsideration. 1 Said adjudgments, in turn, were rooted in the factual
groundwork of this case which is laid out hereunder.
On July 20, 1981, herein petitioner Development Bank of the Philippines (DBP) executed a "Deed of
Absolute Sale" in favor of respondent spouses Celebrada and Abner Mangubat over a parcel of
unregistered land identified as Lot 1, PSU-142380, situated in the Barrio of Toytoy, Municipality of
Garchitorena, Province of Camarines Sur, containing an area of 55.5057 hectares, more or less.
The land, covered only by a tax declaration, is known to have been originally owned by one
Presentacion Cordovez, who, on February 4, 1937, donated it to Luciano Sarmiento. On June 8,
1964, Luciano Sarmiento sold the land to Pacifico Chica.
On April 27, 1965, Pacifico Chica mortgaged the land to DBP to secure a loan of P6,000.00.
However, he defaulted in the payment of the loan, hence DBP caused the extrajudicial foreclosure of
the mortgage. In the auction sale held on September 9, 1970, DBP acquired the property as the
highest bidder and was issued a certificate of sale on September 17, 1970 by the sheriff. The
certificate of sale was entered in the Book of Unregistered Property on September 23, 1970. Pacifico
Chica failed to redeem the property, and DBP consolidated its ownership over the same.
On October 14, 1980, respondent spouses offered to buy the property for P18,599.99. DBP made a
counter-offer of P25,500.00 which was accepted by respondent spouses. The parties further agreed
that payment was to be made within six months thereafter for it to be considered as cash payment.
On July 20, 1981, the deed of absolute sale, which is now being assailed herein, was executed by
DBP in favor of respondent spouses. Said document contained a waiver of the seller's warranty
against eviction. 2
Thereafter, respondent spouses applied for an industrial tree planting loan with DBP. The latter
required the former to submit a certification from the Bureau of Forest Development that the land is
alienable and disposable. However, on October 29, 1981, said office issued a certificate attesting to
the fact that the said property was classified as timberland, hence not subject to disposition. 3
The loan application of respondent spouses was nevertheless eventually approved by DBP in the
sum of P140,000.00, despite the aforesaid certification of the bureau, on the understanding of the
parties that DBP would work for the release of the land by the former Ministry of Natural Resources.

To secure payment of the loan, respondent spouses executed a real estate mortgage over the land
on March 17, 1982, which document was registered in the Registry of Deeds pursuant to Act No.
3344.
The loan was then released to respondent spouses on a staggered basis. After a substantial sum of
P118,540.00 had been received by private respondents, they asked for the release of the remaining
amount of the loan. It does not appear that their request was acted upon by DBP, ostensibly
because the release of the land from the then Ministry of Natural Resources had not been obtained.
On July 7, 1983, respondent spouses, as plaintiffs, filed a complaint against DBP in the trial
court 4 seeking the annulment of the subject deed of absolute sale on the ground that the object thereof
was verified to be timberland and, therefore, is in law an inalienable part of the public domain. They also
alleged that petitioner, as defendant therein, acted fraudulently and in bad faith by misrepresenting itself
as the absolute owner of the land and in incorporating the waiver of warranty against eviction in the deed
of sale. 5
In its answer, DBP contended that it was actually the absolute owner of the land, having purchased it
for value at an auction sale pursuant to an extrajudicial foreclosure of mortgage; that there was
neither malice nor fraud in the sale of the land under the terms mutually agreed upon by the parties;
that assuming arguendo that there was a flaw in its title, DBP can not be held liable for anything
inasmuch as respondent spouses had full knowledge of the extent and nature of DBP's rights, title
and interest over the land.
It further averred that the annulment of the sale and the return of the purchase price to respondent
spouses would redound to their benefit but would result in petitioner's prejudice, since it had already
released P118,540.00 to the former while it would be left without any security for the P140,000.00
loan; and that in the remote possibility that the land is reverted to the public domain, respondent
spouses should be made to immediately pay, jointly and severally, the total amount of P118,540.00
with interest at 15% per annum, plus charges and other expenses. 6
On May 25, 1990, the trial court rendered judgment annulling the subject deed of absolute sale and
ordering DBP to return the P25,500.00 purchase price, plus interest; to reimburse to respondent
spouses the taxes paid by them, the cost of the relocation survey, incidental expenses and other
damages in the amount of P50,000.00; and to further pay them attorney's fees and litigation
expenses in the amount of P10,000.00, and the costs of suit. 7
In its recourse to the Court of Appeals, DBP raised the following assignment of errors:
1. The trial court erred in declaring the deed of absolute sale executed between the
parties canceled and annulled on the ground that therein defendant-appellant had no
title over the property subject of the sale.
2. The trial court erred in finding that defendant-appellant DBP acted fraudulently and
in bad faith or that it had misrepresented facts since it had prior knowledge that
subject property was part of the public domain at the time of sale to therein plaintiffsappellees.

3. The trial court erred in finding said plaintiffs-appellees' waiver of warranty against
eviction void.
4. The trial court erred awarding to therein plaintiffs-appellees damages arising from
an alleged breach of contract.
5. The trial court erred in not ordering said plaintiffs-appellees to pay their loan
obligation to defendant-appellant DBP in the amount of P118,540. 8
As substantially stated at the outset, respondent Court of Appeals rendered judgment modifying the
disposition of the court below by deleting the award for damages, attorney's fees, litigation expenses
and the costs, but affirming the same in all its other aspects. 9 On April 7, 1993, said appellate court
also denied petitioner's motion for reconsideration. 10
Not satisfied therewith, DBP interposed the instant petition for review on certiorari, raising the
following issues:
1. Whether or not private respondent spouses Celebrada and Abner Mangubat
should be ordered to pay petitioner DBP their loan obligation due under the mortgage
contract executed between them and DBP; and
2. Whether or not petitioner should reimburse respondent spouses the purchase
price of the property and the amount of P11,980.00 for taxes and expenses for the
relocation Survey. 11
Considering that neither party questioned the legality and correctness of the judgment of the court a
quo, as affirmed by respondent court, ordering the annulment of the deed of absolute sale, such
decreed nullification of the document has already achieved finality. We only need
The Court of Appeals, after an extensive discussion, found that there had been no bad faith on the
part of either party, and this r, therefore, to dwell on the effects of that declaration of nullity.emains
uncontroverted as a fact in the case at bar. Correspondingly, respondent court correctly applied the
rule that if both parties have no fault or are not guilty, the restoration of what was given by each of
them to the other is consequently in order. 12 This is because the declaration of nullity of a contract
which is void ab initio operates to restore things to the state and condition in which they were found
before the execution thereof. 13
We also find ample support for said propositions in American jurisprudence. The effect of an
application of the aforequoted rule with respect to the right of a party to recover the amount given as
consideration has been passed upon in the case of Leather Manufacturers National Bank vs.
Merchants National Bank 14 where it was held that: "Whenever money is paid upon the representation of
the receiver that he has either a certain title in property transferred in consideration of the payment or a
certain authority to receive the money paid, when in fact he has no such title or authority, then, although
there be no fraud or intentional misrepresentation on his part, yet there is no consideration for the
payment, the money remains, in equity and good conscience, the property of the payer and may be
recovered back by him."

Therefore, the purchaser is entitled to recover the money paid by him where the contract is set aside
by reason of the mutual material mistake of the parties as to the identity or quantity of the land
sold. 15 And where a purchaser recovers the purchase money from a vendor who fails or refuses to
deliver the title, he is entitled as a general rule to interest on the money paid from the time of payment. 16
A contract which the law denounces as void is necessarily no contract whatever, and the acts of the
parties in an effort to create one can in no wise bring about a change of their legal status. The
parties and the subject matter of the contract remain in all particulars just as they did before any act
was performed in relation thereto. 17
An action for money had and received lies to recover back money paid on a contract, the
consideration of which has failed. 18 As a general rule, if one buys the land of another, to which the latter
is supposed to have a good title, and, in consequence of facts unknown alike to both parties, he has no
title at all, equity will cancel the transaction and cause the purchase money to be restored to the buyer,
putting both parties in status quo. 19
Thus, on both local and foreign legal principles, the return by DBP to respondent spouses of the
purchase price, plus corresponding interest thereon, is ineluctably called for.
Petitioner likewise contends that the trial court and respondent Court of Appeals erred in ordering the
reimbursement of taxes and the cost of the relocation survey, there being no factual or legal basis
therefor. It argues that private respondents merely submitted a "list of damages" allegedly incurred
by them, and not official receipts of expenses for taxes and said survey. Furthermore, the same list
has allegedly not been identified or even presented at any stage of the proceedings, since it was
vigorously objected to by DBP.
Contrary to the claim of petitioner, the list of damages was presented in the trial court and was
correspondingly marked as "Exhibit P." 20 The said exhibit was, thereafter, admitted by the trial court but
only as part of the testimonial evidence for private respondents, as stated in its Order dated August 16,
1988. 21
However, despite that admission of the said list of damages as evidence, we agree with petitioner
that the same cannot constitute sufficient legal basis for an award of P4,000.00 and P7,980.00 as
reimbursement for land taxes and expenses for the relocation survey, respectively. The list of
damages was prepared extrajudicially by respondent spouses by themselves without any supporting
receipts as bases thereof or to substantiate the same. That list, per se, is necessarily self-serving
and, on that account, should have been declared inadmissible in evidence as the factum probans.
In order that damages may be recovered, the best evidence obtainable by the injured party must be
presented. Actual or compensatory damages cannot be presumed, but must be duly proved, and so
proved with a reasonable degree of certainty. A court cannot rely on speculation, conjecture or
guesswork as to the fact and amount of damages, but must depend upon competent proof that they
have been suffered and on evidence of the actual amount thereof. If the proof is flimsy and
unsubstantial, no damages will be awarded. 22
Turning now to the issue of whether or not private respondents should be made to pay petitioner
their loan obligation amounting to P118,540.00, we answer in the affirmative.

In its legal context, the contract of loan executed between the parties is entirely different and discrete
from the deed of sale they entered into. The annulment of the sale will not have an effect on the
existence and demandability of the loan. One who has received money as a loan is bound to pay to
the creditor an equal amount of the same kind and quality. 23
The fact that the annulment of the sale will also result in the invalidity of the mortgage does not have
an effect on the validity and efficacy of the principal obligation, for even an obligation that is
unsupported by any security of the debtor may also be enforced by means of an ordinary action.
Where a mortgage is not valid, as where it is executed by one who is not the owner of the
property, 24 or the consideration of the contract is simulated 25 or false, 26 the principal obligation which it
guarantees is not thereby rendered null and void. That obligation matures and becomes demandable in
accordance with the stipulations pertaining to it.
Under the foregoing circumstances, what is lost is only the right to foreclose the mortgage as a
special remedy for satisfying or settling the indebtedness which is the principal obligation. In case of
nullity, the mortgage deed remains as evidence or proof of a personal obligation of the debtor, and
the amount due to the creditor may be enforced in an ordinary personal action. 27
It was likewise incorrect for the Court of Appeals to deny the claim of petitioner for payment of the
loan on the ground that it failed to present the promissory note therefor. While respondent court also
made the concession that its judgment was accordingly without prejudice to the filing by petitioner of
a separate action for the collection of that amount, this does not detract from the adverse effects of
that erroneous ruling on the proper course of action in this case.
The fact is that a reading of the mortgage contract 28 executed by respondent spouses in favor of
petitioner, dated March 17, 1982, will readily show that it embodies not only the mortgage but the
complete terms and conditions of the loan agreement as well. The provisions of said contract, specifically
paragraphs 16 and 28 thereof, are so precise and clear as to thereby render unnecessary the introduction
of the promissory note which would merely serve the same purpose.
Furthermore, respondent Celebrada Mangubat expressly acknowledged in her testimony that she
and her husband are indebted to petitioner in the amount of P118,000.00, more or less. 29 Admissions
made by the parties in the pleadings or in the course of the trial or other proceedings do not require proof
and can not be contradicted unless previously shown to have been made through palpable mistake. 30
Thus, the mortgage contract which embodies the terms and conditions of the loan obligation of
respondent spouses, as well as respondent Celebrada Mangubat's admission in open court, are
more than adequate evidence to sustain petitioner's claim for payment of private respondents'
aforestated indebtedness and for the adjudication of DBP's claim therefor in the very same action
now before us.
It is also worth noting that the adjustment and allowance of petitioner's demand by counterclaim or
set-off in the present action, rather than by another independent action, is favored or encouraged by
law. Such a practice serves to avoid circuitry of action, multiplicity of suits, inconvenience, expense,
and unwarranted consumption of the time of the court. The trend of judicial decisions is toward a
liberal extension of the right to avail of counterclaims or set-offs. 31

The rules on counterclaim are designed to achieve the disposition of a whole controversy of the
conflicting claims of interested parties at one time and in one action, provided all parties can be
brought before the court and the matter decided without prejudicing the rights of any party. 32
WHEREFORE, the judgment appealed from is hereby MODIFIED, by deleting the award of
P11,980.00 as reimbursement for taxes and expenses for the relocation survey, and ordering
respondent spouses Celebrada and Abner Mangubat to pay petitioner Development Bank of the
Philippines the amount of P118,540.00, representing the total amount of the loan released to them,
with interest of 15% per annum plus charges and other expenses in accordance with their mortgage
contract. In all other respects, the said judgment of respondent Court of Appeals is AFFIRMED.
SO ORDERED.
Narvasa, C.J., Puno, Mendoza and Francisco, JJ., concur.

G.R. No. L-49101 October 24, 1983

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

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

signing and delivery of the promissory note and the disbursement of the proceeds of the loan are
mere implementation of the basic consensual contract of loan.
After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie filed a
motion for intervention. The intervention was premised on the Deed of Assignment executed by
petitioner Honesto Bonnevie in favor of petitioner Raoul SV Bonnevie covering the rights and
interests of petitioner Honesto Bonnevie over the subject property. The intervention was ultimately
granted in order that all issues be resolved in one proceeding to avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as
follows:
WHEREFORE, all the foregoing premises considered, judgment is hereby rendered
dismissing the complaint with costs against the plaintiff and the intervenor.
After the motion for reconsideration of the lower court's decision was denied, petitioners appealed to
respondent Court of Appeals assigning the following errors:
1. The lower court erred in not finding that the real estate mortgage executed by Jose
Lozano was null and void;
2. The lower court erred in not finding that the auction sale decide on August 19,
1968 was null and void;
3. The lower court erred in not allowing the plaintiff and the intervenor to redeem the
property;
4. The lower court erred in not finding that the defendant acted in bad faith; and
5. The lower court erred in dismissing the complaint.
On August 11, 1978, the respondent court promulgated its decision affirming the decision of the
lower court, and on October 3. 1978 denied the motion for reconsideration. Hence, the present
petition for review.
The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby
adopt the facts found the trial court and found by the Court of Appeals to be consistent with the
evidence adduced during trial, to wit:
It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the
owners of the property which they mortgaged on December 6, 1966, to secure the
payment of the loan in the principal amount of P75,000.00 they were about to obtain
from defendant-appellee Philippine Bank of Commerce; that on December 8, 1966,
executed in favor of plaintiff-appellant the Deed of Sale with Mortgage ,, for and in
consideration of the sum of P100,000.00, P25,000.00 of which amount being payable
to the Lozano spouses upon the execution of the document, and the balance of

P75,000.00 being payable to defendant- appellee; that on December 6, 1966, when

the mortgage was executed by the Lozano spouses in favor of defendant-appellee,
the loan of P75,000.00 was not yet received them, as it was on December 12, 1966
when they and their co-maker Alfonso Lim signed the promissory note for that
amount; that from April 28, 1967 to July 12, 1968, plaintiff-appellant made payments
to defendant-appellee on the mortgage in the total amount of P18,944.22; that on
May 4, 1968, plaintiff-appellant assigned all his rights under the Deed of Sale with
Assumption of Mortgage to his brother, intervenor Raoul Bonnevie; that on June 10,
1968, defendant-appellee applied for the foreclosure of the mortgage, and notice of
sale was published in the Luzon Weekly Courier on June 30, July 7, and July 14,
1968; that auction sale was conducted on August 19, 1968, and the property was
sold to defendant-appellee for P84,387.00; and that offers from plaintiff-appellant to
repurchase the property failed, and on October 9, 1969, he caused an adverse claim
to be annotated on the title of the property. (Decision of the Court of Appeals, p. 5).
Presented for resolution in this review are the following issues:
I
Whether the real estate mortgage executed by the spouses Lozano in favor of
respondent bank was validly and legally executed.
II
Whether the extrajudicial foreclosure of the said mortgage was validly and legally
effected.
III
Whether petitioners had a right to redeem the foreclosed property.
IV
Granting that petitioners had such a right, whether respondent was justified in
refusing their offers to repurchase the property.
As clearly seen from the foregoing issues raised, petitioners' course of action is three-fold. They
primarily attack the validity of the mortgage executed by the Lozano spouses in favor of respondent
Bank. Next, they attack the validity of the extrajudicial foreclosure and finally, appeal to justice and
equity. In attacking the validity of the deed of mortgage, they contended that when it was executed
on December 6, 1966, there was yet no principal obligation to secure as the loan of P75,000.00 was
not received by the Lozano spouses "So much so that in the absence of a principal obligation, there
is want of consideration in the accessory contract, which consequently impairs its validity and fatally
affects its very existence." (Petitioners' Brief, par. 1, p. 7).

This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly
seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano
spouses. The fact that the latter did not collect from the respondent Bank the consideration of the
mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract,
the herein contract of loan was perfected at the same time the contract of mortgage was executed.
The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does
not indicate lack of consideration of the mortgage at the time of its execution.
Petitioners also argued that granting the validity of the mortgage, the subsequent renewals of the
original loan, using as security the same property which the Lozano spouses had already sold to
petitioners, rendered the mortgage null and void,
This argument failed to consider the provision 2 of the contract of mortgage which prohibits the sale,
disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent
of the mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged
property is sold, the vendee shall assume the mortgage in the terms and conditions under which it is
constituted. These provisions are expressly made part and parcel of the Deed of Sale with
Assumption of Mortgage.
Petitioners admit that they did not secure the consent of respondent Bank to the sale with
assumption of mortgage. Coupled with the fact that the sale/assignment was not registered so that
the title remained in the name of the Lozano spouses, insofar as respondent Bank was concerned,
the Lozano spouses could rightfully and validly mortgage the property. Respondent Bank had every
right to rely on the certificate of title. It was not bound to go behind the same to look for flaws in the
mortgagor's title, the doctrine of innocent purchaser for value being applicable to an innocent
mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48).
Another argument for the respondent Bank is that a mortgage follows the property whoever the
possessor may be and subjects the fulfillment of the obligation for whose security it was constituted.
Finally, it can also be said that petitioners voluntarily assumed the mortgage when they entered into
the Deed of Sale with Assumption of Mortgage. They are, therefore, estopped from impugning its
validity whether on the original loan or renewals thereof.
Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following
grounds:
a) petitioners were never notified of the foreclosure sale.
b) The notice of auction sale was not posted for the period required by law.
c) publication of the notice of auction sale in the Luzon Weekly Courier was not in
accordance with law.
The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not
being a party to the Deed of Sale with Assumption of Mortgage, it can validly claim that it was not
aware of the same and hence, it may not be obliged to notify petitioners. Secondly, petitioner
Honesto Bonnevie was not entitled to any notice because as of May 14, 1968, he had transferred

and assigned all his rights and interests over the property in favor of intervenor Raoul Bonnevie and
respondent Bank not likewise informed of the same. For the same reason, Raoul Bonnevie is not
entitled to notice. Most importantly, Act No. 3135 does not require personal notice on the mortgagor.
The requirement on notice is that:
Section 3. Notice shall be given by posting notices of the sale for not less than twenty
days in at least three public places of the municipality or city where the property is
situated, and if such property is worth more than four hundred pesos, such notice
shall also be published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city
In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July
14, 1968 and notices of the sale were posted for not less than twenty days in at least three (3) public
places in the Municipality where the property is located. Petitioners were thus placed on constructive
notice.
The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said
case involved a judicial foreclosure and the sale to the vendee of the mortgaged property was duly
registered making the mortgaged privy to the sale.
As regards the claim that the period of publication of the notice of auction sale was not in
accordance with law, namely: once a week for at least three consecutive weeks, the Court of
Appeals ruled that the publication of notice on June 30, July 7 and July 14, 1968 satisfies the
publication requirement under Act No. 3135 notwithstanding the fact that June 30 to July 14 is only
14 days. We agree. Act No. 3135 merely requires that such notice shall be published once a week
for at least three consecutive weeks." Such phrase, as interpreted by this Court in Basa vs.
Mercado, 61 Phil. 632, does not mean that notice should be published for three full weeks.
The argument that the publication of the notice in the "Luzon Weekly Courier" was not in accordance
with law as said newspaper is not of general circulation must likewise be disregarded. The affidavit
of publication, executed by the Publisher, business/advertising manager of the Luzon Weekly
Courier, stares that it is "a newspaper of general circulation in ... Rizal, and that the Notice of
Sheriff's sale was published in said paper on June 30, July 7 and July 14, 1968. This constitutes
prima facie evidence of compliance with the requisite publication. Sadang vs. GSIS, 18 SCRA 491).
To be a newspaper of general circulation, it is enough that "it is published for the dissemination of
local news and general information; that it has a bona fide subscription list of paying subscribers;
that it is published at regular intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not
have the largest circulation so long as it is of general circulation. Banta vs. Pacheco, 74 Phil. 67).
The testimony of three witnesses that they do read the Luzon Weekly Courier is no proof that said
newspaper is not a newspaper of general circulation in the province of Rizal.
Whether or not the notice of auction sale was posted for the period required by law is a question of
fact. It can no longer be entertained by this Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126).
Nevertheless, the records show that copies of said notice were posted in three conspicuous places
in the municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig

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

may be effected, not only the payment of the accrued interest is necessary but also the payment of
interest for the proposed period of renewal as well. Besides, whether or not a loan may be renewed
does not solely depend on the debtor but more so on the discretion of the bank. Respondent Bank
may not be, therefore, charged of bad faith.
WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby
AFFIRMED. Costs against petitioners.
SO ORDERED.
Aquino, J., concur.
Makasiar (Chairman), Abad Santos and Escolin, JJ., concurs in the result.
Concepcion J J., took no part.
De Castro, J., is on leave.

G.R. No. 78771

January 23, 1991

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), PACIFIC BANKING

CORPORATION, CHINA BANKING CORPORATION, PHILIPPINE BANKING CORPORATION,
PHILIPPINE BANK OF COMMUNICATIONS, SECURITY BANK AND TRUST CORPORATION,
ALLIED BANKING CORPORATION, EQUITABLE BANKING CORPORATION, FAR EAST BANK
AND TRUST COMPANY, AND TRADERS ROYAL BANK petitioners,
vs.
HONORABLE COURT OF APPEALS, HON. JOB B. MADAYAG, DEPUTY SHERIFF RUBEN S.
NEQUINTO AND STATE INVESTMENT HOUSE, INC., (SIHI), respondents.
G.R. No. 78891

January 23, 1991

BENGUET CORPORATION, petitioner,

vs.
COURT OF APPEALS AND STATE INVESTMENT HOUSE, INC., respondents.
G.R. No. 80063

January 23, 1991

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), PACIFIC BANKING

CORPORATION, CHINA BANKING CORPORATION, PHILIPPINE BANKING CORPORATION
PHILIPPINE BANK OF COMMUNICATIONS, SECURITY BANK AND TRUST CORPORATION,
RIZAL COMMERCIAL BANKING CORPORATION, ALLIED BANKING CORPORATION,
EQUITABLE BANKING CORPORATION FAR EAST BANK AND TRUST COMPANY, TRADERS
ROYAL BANK AND PRUDENTIAL BANK AND TRUST COMPANY, petitioners,
vs.
HONORABLE COURT OF APPEALS, HON. FELIX MAMENTA, in his capacity as Presiding
Judge of Iba, Zambales, Regional Trial Court, Branch 70, and STATE INVESTMENT HOUSE,
INC., (SIHI), respondents.
C.M. De los Reyes & Associates for petitioners in G.R. Nos. 78771 and 80063.
Sycip, Salazar, Hernandez & Gatmaitan for petitioner in G.R. No. 78891.
Jardeleza, Sobrevias, Diaz, Hayudini & Bodegon for respondent SIHI.

GUTIERREZ, JR., J.:

Before the Court are consolidated petitions docketed as G.R. Nos. 78771, 78891 and 80063. The
subject matter of these cases involves properties which were levied upon for the satisfaction of a
money judgment rendered against Consolidated Mines, Inc. in Civil Case No. 1421.
The pertinent facts as gleaned from the appended decisions are as follows:
On October 27, 1981, private respondent State Investment House, Inc. (hereinafter referred to as
SIHI) filed a complaint for a sum of money against Consolidated Mines Inc. (hereinafter referred to
as CMI) and Felipe Ollada in the then Court of First Instance of Pasig, Metro Manila, which was
docketed as Civil Case No. 43586.

On November 27, 1981, the trial court issued a writ of attachment against the real and personal
estate of CMI and Felipe Ollada. Pursuant to the writ of attachment, a notice of garnishment was
served on petitioner Benguet Corporation (hereinafter referred to as BENGUET) at its office in
Makati, Metro Manila: levying on all moneys, money receivables, deposits, goods, effects, shares,
interests, credits, stocks, debts etc., owing by BENGUET to CMI and Felipe Ollada, and any
personal property in its possession or under its control belonging to the said defendants to cover the
amount of P26,403,604.02 plus other fees; and requiring BENGUET to make a statement of the
above mentioned items and of any other personal property in its possession or under its control
belonging to the defendants, with a warning that if the required answer was not forthcoming within
five (5) days from receipt of notice, it could be examined under oath pursuant to Section 10, Rule 57
of the Rules of Court.
On December 16, 1981, a notice of levy with a copy of the writ of attachment was likewise served at
BENGUET's mining office in Masinloc, Zambales.
Thereafter, the trial court, acting on a motion filed by SIHI, issued an order on September 7, 1982
requiring BENGUET through its President or Treasurer to appear before it for examination under
oath respecting all debts owing to CMI, and other credits and properties belonging to CMI which are
in its possession or under its control.
On January 17, 1983, as a result of the reorganization of the Judiciary, the case was re-raffled to the
Regional Trial Court (RTC) of Makati, Branch 145 and docketed as Civil Case No. 1421.
On March 29, 1983, Benguet filed a verified manifestation alleging that, as far back as 1956, it
enjoyed as mining operator the exclusive right to possess and use the mining claims of CMI and the
buildings, equipments and other assets belonging to CMI located at the Zambales Mining
Reservations in the municipalities of Masinloc, Candelaria and Sta. Cruz, pursuant to a
memorandum of agreement and the amendments thereto, which had been duly registered with the
Bureau of Mines/Mining Registry (See Agreement dated July 8, 1956, Amendment to Agreement
dated December 5, 1975 and Agreement dated January 8, 1981, Record, pp. 33-73). The
manifestation was filed on the agreement of SIHI's and Benguet's counsel that it would be in lieu of
Benguet's examination as garnishee.
On December 5, 1983, the RTC issued a partial summary judgment against CMI, the dispositive
portion of which reads as follows:
WHEREFORE, partial judgment is hereby rendered against defendant Consolidated Mines,
Inc. and in favor of plaintiff ordering said defendant to pay plaintiff the principal amount of
P20,464,308.31 plus stipulated interest at the rate of 12% per annum and penalty of 2% per
month from date of default until full payment, as stipulated in the credit agreements and
promissory notes annexed to the Complaint. Judgment is also rendered entering the right of
plaintiff to collect attorney's fees in such amount as it may prove in a subsequent proceeding.
With costs against said defendant.
Pending appeal by the defendants, SIHI initiated proceedings to enforce the partial summary
judgment. Thus, on January 20, 1984, the RTC ordered the issuance of a writ of execution. On
February 6, 1984, a notice of garnishment was served by respondent deputy sheriff Ruben S.
Nequinto on BENGUET covering all assets of CMI in its possession. On the next day, February 7,
1984, a Notice of Levy and/or Sale [hereinafter referred to as NOTICE] was sent to BENGUET
setting the date of the public auction or sale on execution on February 16, 1984.

On February 8, 1984, Benguet, responding to the aforesaid notice and writ, filed a verified reply
reaffirming, among others, that it was holding the subject CMI properties under a right to the
exclusive possession, use and equipment thereof granted under the Benguet CMI operating
agreement.
On February 9, 1984, BENGUET filed a third-party claim with respondent deputy sheriff, a copy of
which was also filed in the RTC alleging its adverse interest in the personal properties referred to in
the notices, and stating by affidavit the estimated value of said properties at P91 Million. On the next
day, BENGUET filed a motion to nullify the NOTICE, reasserting its possessory right, as lessee
and/or usufructuary, over the personal properties listed in the NOTICE. On the other hand, because
the respondent deputy sheriff failed to secure entry into the CMI mine site occupied by BENGUET
for the purpose of taking possession of the subject properties, SIHI filed an urgent motion on
February 13, 1984 praying for the issuance of an order authorizing respondent deputy sheriff to
break open the gate of the CMI mine site at Masinloc, Zambales, and the buildings or enclosures
located therein, to wit:
. . . to cause the gate of CMI Mine Site at Koto, Masinloc, Zambales and/or the building
enclosure therein where the [subject] personal properties . . . may be found to be broken
open and take said properties into his possession in connection with the public sale
thereof . . . on February 16, 1984 . . .
On February 15, 1984, the RTC issued an order denying BENGUET's third-party claim and granting
SIHI's urgent motion for the issuance of a "break open" order, based on the following grounds" (1)
the fact that BENGUET claims the right of exclusive possession over the subject properties is no
legal obstacle to a valid levy under attachment or levy on execution of the properties, since the same
are undeniably owned by the judgment debtor CMI and the scheduled execution sale, at any rate,
shall be without prejudice to third-party claimant's interests, if any, over the properties; and, (2) the
proper forum for the resolution of BENGUET's third-party claim is not Civil Case No. 1421, but a
separate and independent civil action filed by the claimant as provided in Section 17, Rule 39 of the
Revised Rules of Court and consistent with the doctrine in Bayer Philippines, Inc. v. Agana, (G.R.
No. L-38701 & L-33801, April 8, 1975, 63 SCRA 355). Furthermore, after its review of the
stipulations in the mining operating agreements between CMI and BENGUET, the trial court denied
BENGUET's third-party claim, finding that BENGUET was merely acting as an agent of the judgment
debtor CMI.
By virtue of the above order, respondent deputy sheriff proceeded with the scheduled auction sale
on February 16, 1984 and sold to SIHI, as the highest bidder, the properties listed in Annexes D to
H, M to Z, AA and OO of the NOTICE for P21 Million. On February 17, 1984, the auction items listed
in Annexes A to C, I to L and FFF to KKK were also sold to SIHI as the highest bidder for
P250,000.00.
On February 17, 1984, BENGUET filed in the then Intermediate Appellate Court (IAC) a petition
for certiorari with preliminary injunction seeking to nullify the RTC order dated February 15, 1984.
This petition was docketed as CA-G.R. SP No. 02735. BENGUET prayed therein that a preliminary
restraining order be issued to restore to BENGUET possession of CMI properties that may have
been removed or seized from it, and that the NOTICE and all proceedings or transactions in
connection therewith be nullified or, in the alternative, that the same be declared to be without
prejudice to BENGUET's possessory interests in the subject properties.
On February 20, 1984, the IAC issued a temporary restraining order enjoining respondents from
carrying out or enforcing in any manner the RTC order dated February 15, 1984.

During the heraing on BENGUET's application for a writ of preliminary injunction conducted on
March 6, 1984, the counsel for respondent SIHI gave assurance that SIHI would maintain the status
quo until BENGUET's petition is finally resolved.
Meanwhile, a consortium of twelve Philippine banks led by Consolidated Bank and Trust Co.
(hereinafter referred to as CONSORTIUM) moved for leave to be allowed to be present during tills
hearing as observers and/or amici curiae.
In a resolution dated March 8, 1984, the IAC granted the motion and suggested to the
CONSORTIUM to formally file a motion to intervene. The IAC also reiterated the assurance given by
respondent SIHI that the status quowould be maintained by the parties concerned pending final
resolution of the case.
Thereafter, on March 9, 1984, the CONSORTIUM filed a motion for intervention alleging that it had a
valid and preferential lien over the levied personal properties superior to the rights of SIHI. It claimed
that the banks comprising the CONSORTIUM were mortgagees of CMI properties situated in the
mine site at Coto, Masinloc, Zambales, as evidenced by a Deed of Real Estate and Chattel
Mortgage with Assignment of Rights dated November 10, 1978 and executed by CMI, duly
registered in the Chattel and Real Estate Mortgage Registry of said province. The CONSORTIUM
further stated that on February 6, 1984, a few days before the execution sale conducted by
respondent deputy sheriff, the mortgaged properties were purchased by the banks in an extrajudicial foreclosure sale supervised by the Deputy Provincial Sheriff Romeo Enriquez of Zambales.
The CONSORTIUM thus prayed that all the properties enumerated and listed in the inventory of
fixed assets attached to its motion be declared as owned and belonging to the CONSORTIUM.
On January 29, 1987, the appellate court, now the Court of Appeals (CA), rendered its decision
denying BENGUET's petition for certiorari and the motion for intervention filed by the
CONSORTIUM, and lifting the restraining order dated February 20,1984.
BENGUET and the twelve-bank CONSORTIUM filed a motion for reconsideration, which was
subsequently set for hearing on March 11, 1987. At this hearing, the parties agreed to explore the
possibility of an amicable settlement. After several extensions, however, SIHI manifested on April 21,
1987 that efforts at amicable settlement had failed. Finally, on June 18, 1987, the CA issued a
resolution denying the petitioner's motion for reconsideration.
Hence, BENGUET and the CONSORTIUM filed their petitions in the Court, docketed as G.R. No.
78891 and G.R. No. 78771, respectively, and raffled to the Third Division.
With respect to G.R. No. 80663, there are specific and pertinent facts which should also be taken
into account, namely:
By virtue of the writ of execution issued by the RTC in Civil Case No. 1421, a levy on execution was
made on February 7, 1984 on the properties of CMI. One of these properties was a parcel of land,
with the improvements thereon, situated in Barrio Taltal, Masinloc, Zambales and covered by OCT
No. 6955 in the name of CMI. The next day, respondent deputy sheriff Nequinto issued a notice of
sheriff's sale on execution of CMI real properties covering, among others the said parcel of land
together with its improvements.
On March 8, 1984, respondent deputy sheriff Ruben Nequinto sold to private respondent SIHI, as
the highest bidder at the auction sale conducted on that day, the parcel of land with the
improvements thereon covered by OCT No. 6955 for and in consideration of P18,000,000.00. After
the lapse of the one (1) year redemption period, without CMI exercising its right of redemption,

respondent deputy sheriff executed in favor of SIHI the corresponding final deed of sale over the
parcel of land. Thereafter, SIHI demanded from CMI the surrender of its owner's copy of OCT No.
6955, but the latter refused to do so. As a consequence thereof, SIHI filed with the Regional Trial
Court of Zambales, Branch 70 a petition, docketed as LRC No. 288 G.L.R.O No. 50513, seeking the
cancellation of OCT No. 6955 and the issuance, in lieu thereof, of a new certificate of title in its
name.
SOLIDBANK in representation of the twelve-bank CONSORTIUM, intervened in this land registration
case. It filed an answer in intervention dated June 3, 1986, alleging that SIHI's petition should be
dismissed because the execution sale of March 8, 1984 was conducted in contravention of the
temporary restraining order and a resolution issued in CA-G.R. SP No. 02735 on February 20, 1984
and March 8, 1984, respectively. Moreover, the CONSORTIUM claimed that it was owner of various
mining machineries, equipments and facilities situated on the registered parcel of land, having earlier
purchased these properties in an extrajudicial foreclosure sale conducted on February 6, 1984 by
deputy provincial sheriff Romero Enriquez of the province of Zambales. Consequently, the
CONSORTIUM prayed that it be declared owner of said properties.
The issues having been joined, the RTC proceeded to hear the case.
Anticipating an unfavorable result in the proceedings, the CONSORTIUM filed another petition for
prohibition in the CA, docketed as CA-G.R. SP No. 09583. The CONSORTIUM sought to enjoin
respondent trial judge from continuing with the land registration case until after the petition
for certiorari in CA G.R. SP No. 02735 was finally decided by the appellate court.
On February 20, 1987, the CA dismissed the CONSORTIUM's petition, finding that the execution
sale for the properties covered under OCT No. 6955, conducted by respondent deputy sheriff
Nequinto on March 8, 1984, did not contravene the temporary restraining order, nor did the March 8,
1985 resolution, issued in CA-G.R. SP No. 02735 because the latter referred only to the status of
CMI properties listed in Annexes "A" to "YYYY" of the NOTICE, which did not include the registered
property. The CA further held that the claim of ownership asserted by the CONSORTIUM over
certain mining machineries, equipment and facilities situated on the parcel of land should be the
subject of a separate and independent action.
On November 10, 1987, the CA denied the CONSORTIUM's motion for reconsideration.
Hence, the CONSORTIUM filed a petition for review in the Court, docketed as G.R. No. 80663 and
assigned to the Second Division.
Upon motion of petitioners BENGUET and the CONSORTIUM, the Court ordered the consolidation
of G.R. No. 78891 with G.R. No. 78771, per resolutions dated November 25, 1987 and December 9,
1987. On August 15, 1988, the Court likewise resolved to consolidate G.R. No. 80663 with G.R. Nos.
78771 and 78891 pursuant to a February 1, 1988 resolution.
We will first discuss the controversy raised by BENGUET in G.R. No. 78891 before going on to the
issues in G.R. Nos. 78771 and 80663 respectively.
G.R. No. 78891
Petitioner BENGUET seeks the reversal of the decision of the appellate court in CA-G.R. SP No.
02735, which held that the trial court did not act in grave abuse of its discretion when it denied

BENGUET's third-party claim and authorized the deputy sheriff to dispossess it of personal
properties turned over to it by CMI.
The issues ultimately presented for resolution are procedural, to wit:
a) Whether or not the respondent CA erred in affirming the authority of the RTC to issue the order
dated February 15, 1984 which denied BENGUET's third-party claim and authorized respondent
deputy sheriff to dispossess BENGUET of the subject properties in order to facilitate the execution
sale thereof in Civil Case No. 1421; and,
b) Whether or not a valid levy under attachment or levy on execution was effected on the subject
properties by respondent deputy sheriff.
The appellate court ruled that the third-party claim of the petitioner is barred in Civil Case No. 1421
on the ground that it cannot prosecute its claim in the court issuing the writ of execution citing the
cases of Bayer Philippines, Inc., et al. v. Hon. Enrique Agana, et al. and San Francisco Oil and Paint
Co., Inc., et al. v. Bayer Philippines, Inc., et al., (63 SCRA 355 [1975]) and Bobis v. Provincial Sheriff
of Camarines Norte (121 SCRA 32 [1983]). The appellate court, further, ruled that the remedy of the
petitioner is to file a separate civil action as regards the petitioner's claim over the levied properties
under section 17, Rule 39 of the Rules of Court, to wit:
Sec. 17. Proceedings where property claimed by third person If property levied on be
claimed by any other person than the judgment debtor or his agent, and such person make
an affidavit of his title thereto or right to the possession thereof, stating the grounds of such
right or title, and serve the same upon the officer making the levy, and a copy thereof upon
the judgment creditor, the officer shall not be bound to keep the property, unless such
judgment creditor or his agent, on demand of the officer, indemnify the officer against such
claim by a bond in a sum not greater than the value of the property levied on. In case of
disagreement as to such value, the same shall be determined by the court issuing the writ of
execution.
The officer is not liable for damages, for the taking or keeping of the property, to any thirdparty claimant unless a claim is made by the latter and unless an action for damages is
brought by him against the officer . . . But nothing herein contained shall prevent such
claimant or any third person from vindicating his claim to the property by any proper action.
(Emphasis supplied)
The petitioner now submits that the appellate court erred in applying section 17, Rule 39 of the Rules
of Court in the instant case. The petitioner contends that section 17 applies to a situation where the
sheriff obtained custody over the subject property as a result of a valid levy in execution. In the
instant case, the petitioner submits that the levy on the CMI properties was void, hence, section 17
does not apply but section 45, Rule 39 of the Rules of Court.
Under section 17, Rule 39 it is immaterial as to whether or not the sheriff made a valid levy on
properties on execution before a person other than the judgment debtor claiming ownership or right
over the levied properties can file a separate action to prosecute his claim over the levied properties.
(See Bayer Philippines, Inc. v. Agana,supra, Sampaguita Pictures, Inc. v. Jalwindor Manufacturers,
Inc., 93 SCRA 420 [1979]; Roque v. Court of Appeals, 93 SCRA 540 [1979]; Tan Boon Bee and Co.
v. Jarencio, 163 SCRA 205 [1988]). Thus, in the cases ofSampaguita Pictures, Inc. v. Jalwindor
Manufacturers, Inc. supra, we ruled that a person other than the judgment debtor may file a separate
action to prosecute his claim over the levied properties despite the fact that the sheriff's levy on the

properties on execution was considered void. The issue as to whether or not there was illegal levy
on properties on execution can be threshed out in the separate action.
A person other than the judgment debtor who claims ownership or right over levied properties is not
precluded, however, from taking other legal remedies to prosecute his claim. Thus, in other cases,
we ruled that a third person claiming ownership or interest over levied properties on execution may
file a third-party claim in the same case under special circumstances:
The contention of private respondents that petitioner is not entitled to any relief as it was not
a party in Civil Case No. Q-16142 is not tenable. According to private respondent, if
complete relief is sought, petitioner should have brought a separate and independent action
as its claim involves an important legal issue. (Memorandum for Private Respondents, p. 7)
We do not agree. In Regino v. Estipona, the case relied upon by petitioner to support its
stand, the Court said:
Upon the levy by attachment of the property in question by order of the court in Civil Case
No. 4435, the said property fell into the custodia legis of that court for the purposes of that
civil case only. Any relief against such attachment and the execution and issuance of a writ of
possession that ensued subsequently could be disposed of only in that case. . .
As regards Felisa Rejuso who is a new party in Civil Case No. 5120, suffice it to say that her
remedy, if it has not yet been barred by the statute of limitations or become stale in some
other way is within Civil Case No. 4435. Indeed, it is superfluous to start a new action on a
matter which can be more simply and conveniently litigated within a former proceeding of
which it is more logically and legally an integral part. (Ipekdjian Merchandising Co. Inc. v.
CTA, 8 SCRA 59 [1963]) Actually, the court in which the former proceeding was pending has
exclusive jurisdiction thereof, (De Leon v. Salvador, 36 SCRA 567) the fact that the two
cases are in the same Branch of the same Court of First Instance and presided over by the
same Judge notwithstanding. After all, it is simpler and more convenient to observe such
practice, which insures also consistency in the resolutions of related questions because they
are to be determined in most if not all instances by the same judge. (Development Bank of
the Philippines v. Solano, 165 SCRA 63, [1988]).
xxx

xxx

xxx

While it is correct for the Court of Appeals to declare that there are other remedies available
to the government in connection with its tax claims, yet, the filing of a separate action, in
accordance with Section 17, Rule 39, of the Rules of Court would only delay final satisfaction
of the tax liabilities of the Maritime Company of the Philippines. The purpose of said rule is to
afford a claimant an opportunity to vindicate his ownership over the property levied upon by
the sheriff. . . . (Republic v. Enriquez, 166 SCRA 608 [1988])
The trial court has the competence to identify and to secure properties and interests therein held by
the judgment debtor for the satisfaction of a money judgment rendered against him. (Section 15,
Rule 39, Revised Rules of Court), The exercise of its authority is premised on one important factor:
that the properties levied upon, or sought to be levied upon, are properties unquestionably owned by
the judgment debtor and are not exempt by law from execution. For the power of the Court in the
execution of its judgment extends only over properties belonging to the judgment debtor. (See Reyes
v. Grey, 21 Phil. 73 [1911], Misut v. West Coast San Francisco Life Insurance Co., 41 Phil. 258,
[1920], Herald Publishing Co. v. Ramos, 88 Phil. 94 [1951]; and Bayer Philippines, Inc. v.
Agana supra).

As early as 1956, the petitioner was already operating the CMI mining claim in Masinloc, Zambales.
It had free and full use and exclusive possession of all equipments under the CMI-BENGUET mining
operating agreements registered with the Bureau of Mines which SIHI is now trying to take over
because of CMI's obligations. The petitioner is a complete stranger to the case where its interests
were ordered seized in favor of SIHI. After more than thirty (30) years of exclusive, free, and full use
of machineries and equipment its interests cannot be lightly disregarded without due process.
As far back as 1908, U.S. v. Ling Su Fan, (10 Phil. 104, 111. In a 1965 decision, Albert v.
University Publishing Co., L-19118 this definition of Webster was referred to Cf. Reyes,
J.B.L., J. con. in Carcia v. Salcedo, L-19748, Sept. 13, 1962) this Court affixed
the imprimatur of its approval on Webster's definition of procedural due process. Thus: "By
the law of the land is more clearly intended the general law, a law which hears before it
condemns, which proceeds upon inquiry and renders judgment only after trial." (47 Phil. 23,
32) This Court in a 1924 decision, Lopez v. Director of Lands after quoting the above added
that due process "contemplates notice and opportunity to be heard before judgment is
rendered, affecting one's person or property." It is satisfied according to another leading
decision: "If the following conditions are present, namely: (1) there must be a court or tribunal
clothed with judicial power to hear and determine the matter before it; (2) jurisdiction must be
lawfully acquired over the person of the defendant or over the property which is the subject
of the proceeding" (3) the defendant must be given an opportunity to be heard; and (4)
judgment must be rendered upon lawful hearing.' (Banco Espaol-Filipino v. Palanca, [1918]
37 Phil. 921, 934.)
xxx

xxx

xxx

A 1957 decision Cruzcosa v. Concepcion, (101 Phil. 147. In the excerpt quoted, the following
cases were referred to: Pobre v. Blanco, [1910] 17 Phil. 156; Tayzon v. Ycasiano, [1949] 83
Phil. 921; Galang v. Uytiepo, 1952] 92 Phil. 344. In the Galang decision, Omaa v.
Gatulayao, [1941] 73 Phil. 66; Santiago v. Sheriff, [1947] 77 Phil. 740 and Gozon v. De la
Rosa, [1947] Phil. 919 were cited) is even more illuminating in so far as the availability of the
remedy sought is concerned. In the language of this Court, speaking through Justice J.B.L.
Reyes: "The petition is clearly meritorious. Petitioners were conclusively found by the court
of Appeals to be co-owners of the building in question. Having an interest therein, they
should have been made parties to the ejectment proceedings to give them a chance to
protect their rights; and not having been made parties thereto they are not bound and can
not be affected by the judgment rendered therein against their co- owner Catalino Cruzcosa,
Jr. . . ." Two due process cases deal specifically with a writ of execution that could not validly
be enforced against a party who was not given his day in court, Sicat v. Reyes, (100 Phil.
505 [1956]) and Hamoy v. Batingolo, (L-18119, August 30, 1962) According to the former:
"The above agreement, which served as basis for the ejectment of Alipio Sicat, cannot be
binding and conclusive upon the latter, who is not a party to the case. Indeed, that order, as
well as the writ for execution, cannot legally be enforced against Alipio Sicat for the simple
reason that he was not given his day in court." From the latter: "The issue raised in the
motion to Rangar is not involved in the appeal for it concerns a right which he claims over
the property which has not so far been litigated for the reason that he was not made a party
to the case either as plaintiff or as defendant. He only came to know of the litigation when he
was forced out of the property by the sheriff, and so he filed the present motion to be heard
and prove his title to the property. This he has the right to do as the most expeditious manner
to protect his interest instead of filing a separate action which generally is long, tedious and
protracted. (Macabingkil v. Yatco, 21 SCRA 150 [1967])

In the instant case, the petitioner was the lawful possessor of the levied properties by virtue of the
CMI-Benguet operating mining agreement. The petitioner has the right to be respected in his
possession (Article 339, New Civil Code). The law provides that "in no case may possession be
acquired through force or intimidation as long as there is a possessor who objects thereto." (Article
536, New Civil Code). It can even be assumed that some of the equipments were replaced, acquired
or purchased by Benguet during its 30 years operation in the mining site. Too many factual issues
have been disregarded.
Accordingly, the "break open order" issued by the trial court which was affirmed by the appellate
court authorizing the deputy sheriff to break open the gate of the CMI mine site at Masinloc,
Zambales, and the building and enclosures therein for the purpose of taking possession of the CMI
properties under the lawful possession of the petitioner violated the petitioner's right to due process.
It is similar to a taking of real property against a lawful possessor without filing an ejectment suit
against him. The petitioner has the right to be heard on its claim of "free and full use" of the CMI
properties, a right it asserts against the whole world including CMI itself.
We rule that the levy under attachment or levy on execution of the CMI properties effected by the
deputy sheriff is null and void.
The well-settled doctrine is that a "proper levy is indispensable to a valid sale on execution. A sale
unless preceded by a valid levy is void. (Leath v. Deweese, 162 Ky 227; Jarbae v. Hall, 37 Md. 345
cited in Llenares v. Valdeavella and Zoreta 46 Phil. 358 [1924]) Therefore, since there was no
sufficient levy of the execution in question, the private respondent did not take any title to the
properties sold thereunder.
Given these circumstances, we agree with the petitioner that the applicable law is section 45, and
not section 17, Rule 39 of the Rules of Court, to wit:
Sec. 45. Proceedings when indebtedness denied or another person claims the property If
it appears that a person or corporation, alleged to have property of the judgment debtor or to
be indebted to him claims an interest in the property adverse to him or denies the debt, the
court or judge may authorize, by an order made to that effect, the judgment creditor to
institute an action against such person or corporation for the recovery of such interest or
debt, until an action can be commenced and prosecuted to judgment, and may punish
disobedience of such order as for contempt. Such order may be modified or vacated by the
judge granting the same, or by the court in which the action is brought, at any time, upon
such terms as may be just.
In effect, what the trial court should have done was to issue an order authorizing SIHI, the judgment
creditor to file a separate action for the recovery of properties under the lawful possession of the
petitioner and as claimed by Benguet, "not take the illegal shortcut of grabbing possession by the
expedient of obtaining a notice of levy on attachment or execution, serving it upon Benguet and
breaking open its premises if observance of the law is insisted upon." (Rollo, G.R. No. 78891, pp.
13-14)
G.R. No. 78771
Petitioner CONSORTIUM seeks the reversal of the decision of respondent Court of Appeals in CAG.R. SP No. 02735 which denied its motion for intervention filed in the same case.

The CONSORTIUM contends that the disallowance of its motion was a violation of its right to due
process of law since respondent Court of Appeals had earlier allowed its intervention in a resolution
of the Third Special Cases Division dated March 8,1984.
It is to be recalled that the CONSORTIUM's purpose in filing a motion for intervention was to assert
their valid and preferential lien over the levied properties, subject matter of CA-G.R. SP No. 02735
which are also the subject matter of G.R. No. 78891. The banks comprising the CONSORTIUM
claimed that they were mortgages of the CMI properties situated in, among others, the mine site at
Coto, Masinloc, Zambales under a Deed of Real Estate and Chattel Mortgage with Assignment of
Rights dated November 10, 1978 and executed by CMI duly registered in the Chattel and Real
Estate Mortgage registry of said province; that on February 6, 1984, a few days before the execution
sale conducted by respondent deputy sheriff, the mortgaged properties were purchased by the bank
in an extrajudicial foreclosure sale supervised by Deputy Sheriff Romeo Enriquez of Zambales.
Thus, the CONSORTIUM prayed that all the properties enumerated and listed in the inventory of
fixed assets attached to its motion be declared as owned and belonging to the CONSORTIUM.
Considering, however, our ruling in G.R. No. 78891 that the levy on attachment or execution on the
subject properties made by respondent deputy sheriff was improper and void and, therefore, private
respondent SIHI did not acquire any title over the said levied properties, the prayer for immediate
relief filed by the intervenors is also resolved. However, the basic issue of ownership of the disputed
properties is still open.
We, therefore, choose to discuss some of the merits of the instant petition in relation to our "duty to
formulate guiding and controlling constitutional principles, precepts, doctrines, or rules" as we have
"the symbolic function of educating bench and bar on the extent of protection given by constitutional
guarantees" (Salonga v. Cruz Pao, 134 SCRA 438 [1985]).
We have to clarify certain points because of a disturbing pattern observed in some earlier cases. A
failing corporation borrows huge sums of money from banks and other financial institutions. One of
the creditors, in this case it is SIHI, files an action for sum of money. The borrower who may be
bankrupt or has nothing to lose anyway, half-heartedly or totally does not defend his case. The
plaintiff wins on the basis of default or summary judgment. He tries to execute on properties already
owned by or mortgaged to third parties. The other creditors who may be owners or mortgagees with
earlier or superior rights over the property being executed cannot even come in as they were
unaware and were not made parties in the main case.
The CONSORTIUM states that it has prior and preferential rights over the attached properties by
virtue of the Deed of Real Estate and of Chattel Mortgage executed by CMI in their favor. The wellsettled rule is that a mortgage lien is inseparable from the property mortgaged. (Philippine National
Bank v. Mallorca, 21 SCRA 694 [1969]). As mortgagees, their ownership rights would possibly be
superior to that of SIHI (see Caltex Philippines, Inc. v. Intermediate Appellate Court, 176 SCRA 741
[1989]). In fact, the Banks claimed to be owners because of an earlier foreclosure of the items
covered by the chattel mortgage. The Banks state that SIHI may validly levy to satisfy
its unsecured claim only upon CMI's equity of redemption. In this case, the Banks were unaware of
the initial proceeding. A short period of intervention was granted only to be later reconsidered. The
appellate court ruled that it had no more jurisdiction over the intervention.
We said in the case of Director of Lands v. Court of Appeals, (93 SCRA 238 [1979]):
Rule 12, Section 2 of the Rules of Court provides the procedure for intervention. According to
Section 2 thereof, which reads:

Sec. 2. Intervention. A person may, before or during a trial, be permitted by the court, in its
discretion, to intervene in an action, if he has legal interest in the matter in litigation, or in the
success of either of the parties, or an interest against both, or when he is so situated as to be
adversely affected by a distribution or other disposition of property in the custody of the court
or of an officer thereof.
It is quite clear and patent that the motions for intervention filed by the movants at this stage
of the proceedings where trial has already been concluded, a judgment thereon had been
promulgated in favor of private respondent and on appeal by the losing party, the Director of
Lands, the same was affirmed by the Court of Appeals and the instant petition for certiorari to
review said judgment is already submitted for decision by the Supreme Court, are obviously
and manifestly late, beyond the period prescribed under the aforecoded Section 2, Rule 12
of the Rules of Court.
But Rule 12 of the Rules of Court like all other Rules therein promulgated, is simply a rule of
procedure, the whole purpose and object of which is to make the powers of the court fully
and completely available for justice. The purpose of procedure is not to thwart justice. Its
proper aim is to facilitate the application of justice to the rival claims of contending parties. It
was created not to hinder and delay but to facilitate and promote the administration of
justice. It does not constitute the thing itself which courts are always striving to secure to
litigants. It is designed as the means best adopted to obtain that thing. In other words, it is a
means to an end. (Manila Railroad Co. v. Attorney-General, 20 Phil. 523, 525).
It must be stressed that the CONSORTIUM has a legal interest in the levied properties by virtue of
their prior mortgage lien over the same, which are the subject matter in CA G.R. SP No. 02735. In
this regard, we have ruled:
Secondly, the same Section 2, Rule 12, further provides that intervention by a person may be
permitted "when he is so situated as to be adversely affected by a distribution or other
disposition of property in the custody of the court or of an officer thereof." On this point, the
Supreme Court observed:
We shall now speak of the case where the stranger desires to intervene for the
purpose of asserting a property right in the res, or thing, which is the subject matter
of the litigation, without becoming a formal plaintiff or defendant and without
acquiring the control over the course of a litigation, which is conceded to the main
actions (sic) therein. The mode of intervention to which reference is now made is
denominated pro interesse suo and is somewhat analogous to the trial of a right of
property in an action of law, its purpose being to enable a person whose property
gets into the clutches of a court, in a controversy between others, to go into court and
to procure it or its proceeds to be surrendered to him. It often happens that a person
who really owns property, or has a superior lien or other interest in it, sees a litigation
spring up between others who assert rights in or concerning it. If the court takes
possession of the res, or otherwise gets jurisdiction over it in such a controversy, the
real owner is not compelled to stand idly by and see the property disposed of without
asserting his rights. Though it be granted that the litigation would not be technically
binding on him, because of his not being a party, yet it might well happen that
complications would ensue whereby his rights would be materially prejudiced. For
instance, the subject-matter of the litigation might consist of a fund to be distributed,
and the conditions might be such that if it were turned over to the particular litigant
who should appear to have the better right in the original action, the person really
having a superior title might be left without redress. Accordingly, provision is made

whereby persons who have not been joined as parties in the original proceedings
may intervene and assert a right antagonistic or superior to that of one or both of the
parties. (Bosworth v. Terminal etc. Assoc. of St. Louis, 174 U.S., 182,187, 43 L. ed.,
941, 943). As regards the right to intervene in this manner, it may be stated that if the
party desiring to intervene shows a legitimate and proper interest in the fund or
property in question, the motion to intervene should be granted, especially if such
interest cannot be otherwise properly protected." (Joaquin v. Herrera, 37 Phil. 705,
722-724) (Republic of the Philippines v. Sandiganbayan, G.R. No. 85284, February
28, 1990)
It is not also clear why the appellate court should suddenly drop a case over which it had
already acquired jurisdiction simply because a subsequent law, Executive Order No. 33, was
issued on July 28, 1986. As stated by the consortium, a party litigant may not by dint of
naked legislation find himself no longer a party, foreclosed from rights he was entitled to
under existing law when he filed the case, without violating the constitutional guaranty of
substantive and procedural due process. The petitioner claims the property as owner
because it had earlier foreclosed preferred mortgage liens. It was also raising the important
issue of why the Sheriff included movable machineries and equipment introduced and used
on the land later than the time of registration, as part of the "improvements" on the real
estate levied upon. The decision, in effect, was like a default judgment where the petitioner
was knocked out of the litigation not through its own fault but because of the umpire's
interpretation of a rule enacted while the fight was in progress.
Under the circumstances surrounding the case and in the interest of substantial justice, the
Court of Appeals should have granted the CONSORTIUM's motion for intervention and
resolved the issues instead of leaving them open.
G.R. No. 80063
Petitioner CONSORTIUM seeks the reversal of a decision of respondent CA rendered in CA-G.R.
SP No. 09583 which dismissed its petition for prohibition seeking to enjoin respondent trial judge
from hearing LRC No. 288 G.R.L.O. No. 50133 during the pendency of CA-G.R. SP No. 02735.
The CONSORTIUM alleges that the anticipated cancellation of OCT No. 6955 covering a "parcel of
land (PLAN-PSU-65013) with the improvements thereon," situated on Barrio Taltal, Masinloc,
Zambales and the issuance of a new certificate of title in favor of SIHI in lieu thereof is prejudicial to
its legal interests, as owner, in various mining machineries, equipment and facilities situated on the
land [listed in Annex "B" of the petition Rollo, pp. 33-44], having purchased the same in an
extrajudicial foreclosure sale on February 6, 1984. The CONSORTIUM contends that since OCT No.
6955 covers not only a parcel of land, but also the "improvements thereon", the issuance of a new
title in favor of SIHI would result as well in an adjudication of ownership over the particular properties
in favor of the latter.
The records show that the parcel of land (PLAN-PSU-65013) and the improvements thereon, located
at Barrio Taltal, Masinloc, Zambales were among the levied properties in Civil Case No. 1421. These
properties are not among the properties claimed by Benguet in CA-G.R. SP No. 02735. However,
petitioner CONSORTIUM filed a motion to intervene in CA-G.R. SP No. 02735 by virtue of its prior
mortgage lien over the mining equipments and machineries which were among the levied properties
in Civil Case No. 1421. Considering, therefore, that the parcel of land sought to be registered by
private respondent SIHI in the land registration proceedings (LRC No. 288 G.R.L.O. No. 50153 filed
with the Regional Trial Court of Iba, Zambales) includes improvements and "improvements" on the
parcel of land was interpreted to include the mining equipments and other machineries being

claimed by CONSORTIUM in CA-G.R. SP No. 02735, the appellate court erred in not enjoining the
trial court from hearing the said land registration proceedings.
Indeed, in the event that levy on these properties is declared improper and void by virtue of the prior
mortgage lien of CONSORTIUM which the CONSORTIUM claimed in their motion for intervention in
CA-G.R. No. 02735, the land registration proceedings as far as these improvements are concerned
would not prosper in accordance with the principle that one does not take title over levied properties
improperly effected in a sale on execution. (Llenares v. Valdeavella and Zorete, supra).
Respondent SIHI urges in these petitions that the correct remedy is a separate reivindicatory action
against the execution creditor or a complaint for damages against the bond filed by the judgment
creditor in favor of the Sheriff.
Where there are conflicting but inextricably interconnected issues in one and the same complicated
case, it is best that these be resolved in one integrated proceeding where an overall picture of the
entirety of the case can be presented and examined Piecemeal determinations by several trial courts
on segments of the basic issue and disconnected appeals to different Divisions of the Court of
Appeals resulting in separate decisions each dealing with only part of the problem are discouraged.
Needless multiplicity of suits is something which is frowned upon.
The Supreme Court has more than enough work attending to the increasingly heavy influx of
significant cases without having to reconcile or make sense out of disparate decisions on the same
subject property rendered by different courts going tangentially in varying directions. We cannot
allow several decisions each dealing with only part of the problem to become final because the other
courts to whom the more basic issues are later tossed for subsequent and separate determinations
will be fettered by findings and conclusions already executory or executed.
Intervention is discouraged where it is likely to inject confusion into the issues with which the third
party claimant has nothing to do. In these petitions, however, intervention would have introduced
order into a confused situation. The private respondent won a P20,464,308.31 suit as a result of
a summary judgment. It levied upon and purchased properties which the third party claimant states
were acquired for P91,000,000.00, completely ignoring the rights of said claimant to these
properties. The Banks asserting preferred statutory mortgage liens do not claim as mere mortgagees
but as owners who had foreclosed on the properties even before the execution sale conducted by
the Deputy Sheriff. As stated in Northern Motors, Inc. v. Coquia (68 SCRA 374 [1975]), mortgaged
properties answer for the mortgage credit and not for the judgment credit of the mortgagor's
unsecured creditor. In this case, the mortgagees were completely unaware of the proceedings which
deprived them of their apparently superior liens. The defendant readily surrendered without
bothering to have a possessor of 30 years standing and several secured creditors brought into the
case. To require the mortgagees to file independent actions to enforce what appear to be superior or
preferred credits would defeat the purpose and structure of our system of mortgage credits. The lien
which is supposed to directly attach to the mortgaged property would be illusory.
To say that the Banks can anyway vindicate their rights in a reivindicatory suit or a damage claim
against a bond brought before still another court would indeed be oppressive and violative of simple
justice.
WHEREFORE, premises considered: (1) the petition in G.R. No. 78891 is GRANTED. The
questioned decision of the Court of Appeals is REVERSED and SET ASIDE; the questioned Order
dated February 15, 1984 is DECLARED NULL and VOID; (2) In G.R. No. 78771, the questioned
decision denying the petitioner intervenor's motion for intervention in CA-G.R. SP No. 02735 is SET
ASIDE as reversible error. The rights and interests of the petitioners are still to be determined; (3) In

G.R. No. 80063, the petition is GRANTED. The questioned decision and resolution of the Court of
Appeals are REVERSED and SET ASIDE. The Regional Trial Court of Iba, Zambales, Branch 70 is
enjoined and prohibited from further continuing with the land registration case (LRC No. 288
G.L.R.O. No. 50153) until after the rights of the parties in G.R. No. 78891, G.R. No. 78771 and in
G.R. No. 80063 itself are determined. These cases are hereby REMANDED to the Regional Trial
Court of Makati, Branch 145 which is directed to conduct a full length trial where the rights and
interests of all the parties in relation to the questioned mining properties are fully ventilated and all
the issues are resolved.
SO ORDERED.
Fernan , C.J. and Bidin, J., concur.
Feliciano, J., took no part.

G.R. No. 107554 February 13, 1997

CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, ROBERTO ONG AND ANG TAY, respondents.

KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks
to set aside the decision of the Court of Appeals in CA-G.R C.V. No. 26257 dated 2 July 1992 which
affirmed the decision of the Regional Trial Court in Civil Case No. CEB-6919, declaring the chattel
mortgage void and ordering petitioner and private respondent Robert Ong to pay damages to private
respondent Ang Tay. The Court of Appeals' resolution dated 30 September 1992 is similarly
impugned for denying petitioner's motion for reconsideration.
Gleaned from the records are the following facts:
On 4 March 1987, Jacinto Dy executed a Special Power of Attorney 1 in favor of private respondent
Ang Tay, authorizing the latter to sell the cargo vessel Owned by Dy and christened LCT "Asiatic."
On 28 April 1987, through a Deed of Absolute Sale, 2 Ang Tay sold the subject vessel to private
respondent Robert Ong (Ong) for P900,000.00. Ong paid the purchase price by issuing three (3) checks
in the following amounts: P150,000.000, P600,000.00 and P150,000.00. However, since the payment was
not made in cash, it was specifically stipulated in the deed of sale that the "LCT Asiatic shall not be
registered or transferred to Robert Ong until complete payment." 3 Thereafter, Ong obtained possession
of the subject vessel so he could begin deriving economic benefits therefrom. He, likewise, obtained
copies of the unnotarized deed of sale allegedly to be shown to the banks to enable him to acquire a loan
to replenish his (Ong's) capital. The aforequoted condition, however,which was handwritten on the original
deed of sale does not appear on Ong's copies.
Contrary to the aforementioned agreements and without the knowledge of Ang Tay, Ong had his
copies of the deed of sale (on which the aforementioned prohibition does not appear) notarized on
18 May 1987. 4 Ong presented the notarized deed to the Philippine Coast Guard which subsequently
issued him a Certificate of Ownership 5 and a Certificate of Philippine Register 6 over the subject vessel on
27 May 1987. Ong also succeeded in having the name of the vessel changed to LCT "Orient Hope."
On 29 October 1987, Ong acquired a loan from petitioner in the amount of P496,008.00 to be paid in
installments as evidenced by a promissory note of even date. 7
As security for the loan, Ong executed a chattel mortgage over the subject vessel, 8 which mortgage
was registered with the Philippine Coast Guard and annotated on the Certificate of Ownership. 9 In
paragraph 3 of the Deed of Chattel Mortgage, it was stated that:
3. The said sum of FOUR HUNDRED NINETY SIX THOUSAND EIGHT ONLY
(496,008.00) represents the balance due on of MORTGAGOR(S) from the

MORTGAGEE and is payable in the office of the MORTGAGEE at Cebu City or in

the office of the latter's assignee, in case the rights and interests of the
MORTGAGEE in the foregoing mortgage are assigned to a third person, under the
terms of said promissory note, as follows: (a) TWENTY THOUSAND SIX HUNDRED
SIXTY SEVEN ONLY** Pesos (P20,667.00) on or before . . . . . . and (b) the balance
in Twenty Four (24) equal successive monthly installments on the . . . . . . day of each
and every succeeding month thereafter until the amount is fully paid. The interest on
the foregoing installments shall be paid on the same date that the installments
become payable and additional interest at the rate of fourteen (14%) per cent per
annum will be charged on all amounts, principal and interest, not paid on due
date. 10(Emphasis ours.)
Ong defaulted in the payment of the monthly installments. Consequently, on 11 May 1988, petitioner
sent him a letter 11 demanding delivery of the mortgaged vessel for foreclosure or in the alternative to pay
the balance of P437,802.00 pursuant to paragraph 11 of the deed of chattel mortgage. 12
Meanwhile, the two checks (worth P600,000.00 and P150,000.00) paid by Ong to Ang Tay for the
purchase of the subject vessel bounced. Ang Tay's search for the elusive Ong and all attempts to
confer with him proved to be futile. A subsequent investigation and inquiry with the Office of the
Coast Guard revealed that the subject vessel was already in the name of Ong, in violation of the
express undertaking contained in the original deed of sale.
As a result thereof, on 13 January 1988, Ang Tay and Jacinto Dy filed a civil case for rescission and
replevin with damages against Ong and his wife (docketed as Civil Case No. CEB-6565) with the
Regional Trial Court of Cebu . City, Branch 10. The trial court issued a writ of replevin and the
subject vessel was seized and subsequently delivered to Ang Tay.
On 9 March 1988, petitioner filed a motion for intervention but withdrew the same on 29 April 1988.
Instead, on 26 May 1988, petitioner filed a separate case for replevin and damages against Ong and
"John Doe" (Ang Tay) with the same trial court, docketed as Civil Case No. CEB-6919.
The trial court granted petitioner's prayer for replevin. The vessel was seized and placed in the
custody of the trial court. However, Ang Tay posted a counterbond and the vessel was returned to
his possession.
On 3 October 1990 in CEB-6565, the trial court rendered a decision in favor of Ang Tay and Jacinto
Dy. The sale of the subject vessel was rescinded, the registration of the vessel with the Office of the
Coast Guard and other government agencies in Ong's name nullified and the vessel's registration in
Dy's name revived. Ong was, likewise, ordered to pay Jacinto Dy and Ang Tay actual damages for
lost income, moral damages, attorney's fees and litigation
expenses. 13
The Court of Appeals affirmed the trial court's decision and Ong's petition for review before this Court
was dismissed for lack of merit in a resolution dated 15 March 1993,

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

We grant the petition.

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

Q: Mr. Alfaro, as a financing institution, Cebu International finance

Corporation, how many kinds of lending transaction do you have in a
firm? Do you have financial leasing, discounting or whatever? Can
you explain briefly to the Honorable Court?
WITNESS:
A: We have direct loan transaction. We have financing transaction
and we have leasing transaction. Now, in the leasing transaction, the
document will show that we are the owner of the equipment and we
leased it out. In the financing transaction, where we used the same
Chattel Mortgage instrument, there are three parties involved, the
seller of the equipment. And then, the seller of the equipment would
sell or assign the contract with the financing company. That is the
financing transaction. And in the simple loan transaction, there
appears only two parties involved, the borrower and the lender.
ATTY. UY: (TO WITNESS)
Q: Now, Mr. Alfaro, the same document, Chattel Mortgage will apply
also to financing transaction, leasing transaction and simple loan
transaction?
WITNESS:
A: Simple loan and financing transactions.
ATTY. UY (TO WITNESS)
Q: Now, Mr. Alfaro, this paragraph 2 of Chattel Mortgage, can this
apply to a financing transaction?
WITNESS:
A: No, the paragraph 3 will be the one that is applicable to a financing
transaction. (Witness reading the document and after reading
continued) Paragraph 2 applies to both financing and simple loan
transaction.
ATTY. UY:
Q: And paragraph 3?
WITNESS:

A: Paragraph 3 applies to both financing and lending transactions but

paragraph 3 does not apply to Simple lending transaction.
xxx xxx xxx 21
ATTY. LOGRONIO: (TO WITNESS)
Q: You do not affirm the assertion made by your counsel that
paragraph 3 arise only in case that your rights to a mortgage were
assigned by you to a third person, do you agree that also?
WITNESS:
A: This form of chattel mortgage, in fact, you will notice that the
portion for mortgagor and mortgagee are all blank because this is the
same form which is used by the company, used for the parties when
there is a dealer involved, when there is installment buyer involved
and when we come in as third party purchaser of the document
because as practiced by the different dealer, this is the same form
used between the buyer and the dealer of the motor vehicle. After this
is being consummated already, it is assigned to a finance company
and these are the same documents used. Now, in this particular
case, this becomes already . . . this is a direct transaction between
the finance company and the borrower. We, the finance company
becomes the direct lender and Mr. Ong became the direct borrower.
As I explained earlier, this document is also the form used between a
dealer of a motor vehicle and an installment buyer wherein after
paying the down payment, the unpaid balance which is secured by
the chattel mortgage, the promissory note, and the disclosure
statement and this document is sold to a third party and that is the
finance company by the dealer.
ATTY. LOGRONIO:
Q: Up to this point, when you had the transaction with Mr. Ong, this
form that you executed, the Chattel Mortgage was in what kind of
form that was already used by the company?
WITNESS:
A: These are forms available to us.
ATTY. LOGRONIO:
Q: This is a form used when there is a buyer and a ...

WITNESS:
A: Third party or direct borrowing lender.
ATTY. LOGRONIO:
Q: And this refers to a direct borrower or lending transaction.
WITNESS:
A: Yes.
ATTY. LOGRONIO:
Q: No third party assignment has been involved so far?
WITNESS:
A: No.
xxx xxx xxx 22
Accordingly, the chattel mortgage contract between petitioner and Ong is valid and
subsisting.
The next issue for our determination is whether or not petitioner is a mortgagee in good faith whose
lien over the mortgaged vessel should be respected.
The prevailing jurisprudence is that a mortgagee has a right to rely in good faith on the certificate of
title of the mortgagor to the property given as security and in the absence of any sign that might
arouse suspicion, has no obligation to undertake further investigation. Hence, even if the mortgagor
is not the rightful owner of or does not have a valid title to the mortgaged property, the mortgagee or
transferee in good faith is nonetheless entitled to protection. 23 Although this rule generally pertains to
real property, particularly registered land, it may also be applied by analogy to personal property, in this
case specifically, since shipowners are, likewise, required by law to register their vessels with the
Philippine Coast Guard.
Private respondent Ang Tay, however, contends that the aforementioned rule does not apply in the
case at bar in the face of the numerous "badges of bad faith" on the part of petitioner.
Capitalizing on paragraph 3 of the chattel mortgage contract, Ang Tay argues as follows:
. . . The fraud and conspiracy by Robert Ong and some responsible employees of
CIFC against Jacinto Dy and Ang Tay are thus brought to the open by this stipulation.
Since CIFC appears in the registered chattel mortgage to have sold the vessel in
question to Robert Ong, the said contract is null and void because CIFC never for a

second or a moment became the owner of the vessel. CIFC was the one who
prepared the chattel mortgage and the one who registered the same without
contemporaneous or subsequent correction or modification; it cannot, after it notified
the public by means of registration that it acquired the vessel and became its owner,
now shy away from a stipulation which is the heart and nerve-center of the contract
and which it made and registered. This is both the essence and consequence of
estoppel. Applicable is Article 1459 of the Civil Code which provides inter-alia: ". . .
the vendor must have a right to transfer the ownership thereof (the thing sold) at the
time it is delivered."
2. Robert Ong, CIFC's mortgagor, did not acquire ownership of the vessel because of
an express stipulation which he signed that the vessel "shall not be registered or
transferred to Robert Ong until complete payment." (Exh. "7-C-1".) This stipulation is
expressly covered by Article 1478 of the Civil Code: "The parties may stipulate that
ownership in the thing shall not pass to the purchaser until he has fully paid the
price." Since Ong clearly was not the owner of the vessel at the time of the execution
of the mortgage, the said mortgage is null and void on that ground. 24
Ang Tay's contentions are unmeritorious. As previously discussed, paragraph 3 of the chattel
mortgage contract was erroneously but unintentionally filled up. The failure of petitioner to exercise
due care in filling up the necessary provisions in the chattel mortgage contract does not, however,
amount to bad faith. It was a mere oversight and not a deliberate and malicious act.
Petitioner's bad faith is further demonstrated, Ang Tay avers, by its failure to comply with the
following requirements of P.D. No. 1521 or the Ship Mortgage Decree of 1978:
1) The loan secured by the mortgaged vessel was not for any of purposes specified
in Sec. 2 of P.D. No. 1521, i.e., "financing the construction, acquisition, purchase of
vessels or initial operation of vessels" 25 and that petitioner failed to furnish the Central
Bank a copy of the mortgage; 26
2) The special affidavit of good faith required in Sec. 4 of P.D. No. 1521 was lacking;
and
3) Ong failed to disclose his creditors and lienors as provided in Sec. 6 of P.D. No.
1521.
There is no merit in private respondent's allegations. In the 9 November 1989 hearing, Ang Tay
confirmed his statement in his affidavit, executed in Civil Case No. CEB-6565, that Ong wanted to
obtain a loan to replenish his capital because he had used up his money in the purchase of the
subject vessel 27 and that the ship was delivered to Ong so that he could begin deriving economic
benefits therefrom. 28 Mr. Randolph Veloso petitioner's collector, processing clerk, credit investigator and
appraiser, further testified as follows:
xxx xxx xxx

Q: Do you know the purpose for that loan

A: Yes.
Q: What was his purpose?
A: He was going to mortgage the vessel to us.
Q: What was the purpose of the loan?
A: We don't usually ask our client what they will do with it.
Q: You don't ask the purpose?
A: It is understood that whenever a client approach the institution he
usually has a purpose for the money.
Q: Did not the corporation was what need has he for the money?
A: He is going to use it for his business in the boat.
Q: And that is his only statement? What was his specific statement?
ATTY. UY:
Already answered. He will use it in the business of his boat.
ATTY. LOGRONIO:
What was the purpose.
ATTY. UY:
Already answered Your Honor and besides it is immaterial.
ATTY. LOGRONIO:
Very material and it is important Your Honor as there is a violation of
the law. I am entitled to insist for the answer.
COURT:
Witness may answer, if he knows.
(TO WITNESS)

Q: Did he tell you what was the purpose?

A: For the business of the boat.
ATTY. LOGRONIO: (TO WITNESS)
Q: That's all, that he is going to use the money for the business of the
boat?
A: Yes.
xxx xxx xxx 29
From the foregoing, therefore, it can be readily deduced that the loan was for the initial operation of
the subject vessel and thus falls under the purposes laid down in the Ship Mortgage Decree.
The special affidavit of good faith, on the other hand, is required only for the purpose of transforming
an already valid mortgage into a "preferred mortgage." 30 Thus, the abovementioned affidavit is not
necessary for the validity of the chattel mortgage itself but only to give it a preferred status.
As to the disclosure requirement in Sec. 6 of the Ship Mortgage Decree, 31 it was intentional on Ong's
part not to inform petitioner that he had yet to pay in full the purchase price of the subject vessel. Ong
presented himself to petitioner as the absolute owner of the LCT "Orient Hope" ex "Asiatic." The
Certificate of Ownership in Ong's name showed that the ship was conveyed to him by means of a Deed of
Absolute Sale which gave the idea that the purchase price had been fully paid and the sale completed.
Petitioner had every right to rely on the Certificate of Ownership and Certificate of Philippine
Register duly issued by the Philippine Coast Guard in Ong's name. Petitioner had no reason to
doubt Ong's ownership over the subject vessel. The documents presented by Ong, upon petitioner's
insistence before accepting the said vessel as loan security, were all in order and properly issued by
the duly constituted authorities. There was no circumstance that might have aroused petitioner's
suspicion or alerted it to any infirmity committed by Ong. It had no participation in and was not privy
to the sale transaction between Jacinto Dy (through Ang Tay) and Ong. Petitioner, thus, had no
obligation to undertake further investigation since it had the necessary documents to prove Ong's
ownership. In addition petitioner even took pains to inspect the subject vessel which was in Ong's
possession. Mr. Benjamin C. Alfaro testified thus: . . .
xxx xxx xxx
ATTY. LOGRONIO:
Q: In your credit investigation of Mr. Robert Ong did you have a
chance yourself or any of your employees to verify the condition and
the location of the vessel at the very time?
WITNESS:

A: Yes.
ATTY. LOGRONIO:
Q: Will you tell the Court where was the vessel at the time that he
applied for a loan with your bank?
WITNESS:
A: It was under finishing touches in the drydock in . . . think in
Lapulapu or Mandaue.
ATTY. LOGRONIO:
Q: So, more or less, you are sure that at the time that he applied for a
loan and you approved the same, this vessel was still at the drydock?
WITNESS:
A: Yes finishing touches. In fact, it had pictures to support the
application. I don't know if we have it now.
ATTY. UY:
We have. (Counsel producing a picture of a vessel and handing it to
the witness).
WITNESS: (Cont)
This is the picture of the vessel because we required him to submit.
ATTY. LOGRONIO:
Q: You are referring to the picture which you asked the Court to mark
as Exhibit . . . .
ATTY. UY:
No, we are requesting now Your Honor. This has not been marked
yet. We asked that the picture showing the back portion of the vessel,
Orient Hope be marked as Exhibit "I" and the picture showing the
front portion of the vessel as Exhibit "I-1".
COURT: (TO INTERPRETER)
Mark it.

ATTY. LOGRONIO: (TO WITNESS)

Q: So, at the time that the vessel was submitted to you as collateral
for the loan, the condition of the vessel was as it is reflected in this
exhibit? (Cross- examiner referring to the picture).
WITNESS:
A: Yes.
xxx xxx xxx 32
Anent the last issue, although Ang Tay may also be an innocent person, a similar victim of Ong's
fraudulent machinations, it was his act of confidence which led to the present fiasco. Ang Tay readily
agreed to execute a deed of absolute sale in Ong's favor even though Ong had yet to make a
complete payment of the purchase price. It is true that in the copy of the said deed submitted by Ang
Tay there was an undertaking that ownership will not vest in Ong until full payment. 33 However, Ong
was able to obtain several copies of the deed 34 with Ang Tay's signature and had these notarized without
the aforementioned undertaking as evidenced by the copy of the deed of sale presented by
petitioner. 35 The Deed of Absolute Sale consisted of two (2) pages. The signatures of Ang Tay and Ong
appeared only on the first page of the deed. The Second page contained the continuation of the
acknowledgment and the undertaking. Ong could have easily reproduced the second page without the
undertaking since this page was not signed by the contracting parties. To complete the deception, Ang
Tay unwittingly allowed Ong to have possession of the ship. Hence, in consonance with our ruling that:
. . . as between two innocent persons, the mortgagee and the owner of the
mortgaged property, one of whom must suffer the consequence of a breach of trust,
the one who made it possible by his act of confidence must bear the loss. 36
it is Ang Tay and his principal Jacinto Dy who must, unfortunately, suffer the consequences
thereof. They are considered bound by the chattel mortgage on the subject vessel.
WHEREFORE, this Court GRANTS the Petition for Review and REVERSES the questioned decision
and resolution of the Court of Appeals. The validity of the chattel mortgage on the vessel LCT
ORIENT HOPE is hereby upheld without prejudice to whatever legal remedies private respondent
Ang Tay may have against private1 respondent Robert Ong in the premises.
SO ORDERED.
Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.

G.R. No. 98334 May 8, 1992

MANUEL D. MEDIDA, Deputy Sheriff of the Province of Cebu, CITY SAVINGS BANK (formerly
Cebu City Savings and Loan Association, Inc.) and TEOTIMO ABELLANA, petitioners,
vs.
COURT OF APPEALS and SPS. ANDRES DOLINO and PASCUALA DOLINO, respondents.
Gines N. Abellana for petitioners.
Dionisio U. Flores for private respondents.

REGALADO, J.:
The core issue in this case is whether or not a mortgagor, whose property has been extrajudicially
foreclosed and sold at the corresponding foreclosure sale, may validly execute a mortgage contract
over the same property in favor of a third party during the period of redemption.
The present appeal by certiorari assails the decision 1 of respondent Court of Appeals in CA-G.R. CV
No. 12678 where it answered the question posed by the foregoing issue in the negative and modified the
decision 2 of the then Court of First Instance of Cebu in Civil Case No. R-18616 wherein the validity of
said subsequent mortgage was assumed and the case was otherwise disposed of on other grounds.
The facts which gave rise to the institution of the aforesaid civil case in the trial court, as found by
respondent Court of Appeals, are as follows:
On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption
over lot 4731 of the Cebu City Cadastre and embraced under TCT No. 14272 from
Mr. Juan Gandioncho, purchaser of the aforesaid lot at the foreclosure sale of the
previous mortgage in favor of Cebu City Development Bank, went to Teotimo
Abellana, president of defendant Association, to obtain a loan of P30,000.00. Prior
thereto or on October 3, 1974, their son Teofredo Dolino filed a similar loan
application for Twenty-Five Thousand (P25,000.00) Pesos with lot No. 4731 offered
as security for the Thirty Thousand (P30,000.00) Pesos loan from defendant
association. Subsequently, they executed a promissory note in favor of defendant
association. Both documents indicated that the principal obligation is for Thirty
Thousand (P30,000.00) Pesos payable in one year with interest at twelve (12%)
percent per annum.
When the loan became due and demandable without plaintiff paying the same,
defendant association caused the extrajudicial foreclosure of the mortgage on March
16, 1976. After the posting and publication requirements were complied with, the land
was sold at public auction on April 19, 1976 to defendant association being the
highest bidder. The certificate of sale was issued on April 20, 1976 and registered on
May 10, 1976 with the Register of Deeds of Cebu.

On May 24, 1971 (sic, 1977), no redemption having been effected by plaintiff, TCT
No. 14272 was cancelled and in lieu thereof TCT No. 68041 was issued in the name
of defendant association. 3
xxx xxx xxx

On October 18, 1979, private respondents filed the aforestated Civil Case No. R-18616 in the
court a quo for the annulment of the sale at public auction conducted on April 19, 1976, as well as
the corresponding certificate of sale issued pursuant thereto.
In their complaint, private respondents, as plaintiffs therein, assailed the validity of the extrajudicial
foreclosure sale of their property, claiming that the same was held in violation of Act No. 3135, as
amended, and prayed, inter alia, for the cancellation of Transfer Certificate of Title No. 68041 issued
in favor of therein defendant City Savings and Loan Association, Inc., now known as City Savings
Bank and one of the petitioners herein.
In its answer, the defendant association therein denied the material allegations of the complaint and
averred, among others, that the present private respondent spouses may still avail of their right of
redemption over the land in question.
On January 12, 1983, after trial on the merits, the court below rendered judgment upholding the
validity of the loan and the real estate mortgage, but annulling the extrajudicial foreclosure sale
inasmuch as the same failed to comply with the notice requirements in Act No. 3135, as amended,
under the following dispositive part:
WHEREFORE, the foregoing premises considered and upon the view taken by the
Court of this case, judgment is hereby rendered, as follows:
1. Declaring ineffective the extrajudicial foreclosure of the mortgage over Lot No.
4731 of the Cadastral Survey of Cebu;
2. Ordering the cancellation of Transfer Certificate of Title No. 68041 of the Registry
of Deeds of the City of Cebu in the name of defendant Cebu City Savings and Loan
Association, Inc. the corresponding issuance of a new transfer certificate to contain
all the annotations made in TCT No. 14272 of the plaintiffs Pascuala Sabellano,
married to Andres Dolino;
3. Ordering the plaintiffs aforenamed to pay the defendant Cebu City Savings and
Loan Association, Inc. the unpaid balance of the loan, plus interest; and reimbursing
said defendant the value of any necessary and useful expenditures on the property
after deducting any income derived by said defendant from the property.
For this purpose, defendant Association is given 15 days from receipt hereof within
which to submit its statement of the amount due it from the plaintiffs Dolino, with
notice to them. The payment to be made by the plaintiffs shall be within ninety (90)

days from their receipt of the order approving the amount due the defendant Cebu
City Savings and Loan Association, Inc.
No award of damages or costs to either party.
SO ORDERED. 4
Not satisfied therewith, herein private respondents interposed a partial appeal to respondent court
with respect to the second and third paragraphs of the aforequoted decretal portion, contending that
the lower court erred in (1) declaring that the mortgage executed by the therein plaintiff spouses
Dolino is valid; (2) permitting therein Cebu City Savings and Loan Association, Inc. to collect interest
after the same foreclosure proceedings and auction sale which are null and void from the beginning;
(3) not ordering the forfeiture of the capital or balance of the loan with usurious interest; and (4) not
sentencing therein defendant to pay damages and attorney's fees to plaintiffs. 5
On September 28, 1990, respondent Court of Appeals promulgated its decision modifying the
decision of the lower court, with this adjudication:
WHEREFORE, PREMISES CONSIDERED, the decision appealed from is hereby
MODIFIED declaring as void and ineffective the real estate mortgage executed by
plaintiffs in favor of defendant association. With this modification, the decision is
AFFIRMED in other respects. 6
Herein petitioners then filed a motion for reconsideration which was denied by respondent court in its
resolution dated March 5, 1991, hence the present petition which, in synthesis, postulates that
respondent court erred in declaring the real estate mortgage void, and also impugns the judgment of
the trial court declaring ineffective the extrajudicial foreclosure of said mortgage and ordering the
cancellation of Transfer Certificate of Title No. 68041 issued in favor of the predecessor of petitioner
bank. 7
The first submission assailing the judgment of respondent Court of Appeals is meritorious.
Said respondent court declared the real estate mortgage in question null and void for the reason that
the mortgagor spouses, at the time when the said mortgage was executed, were no longer the
owners of the lot, having supposedly lost the same when the lot was sold to a purchaser in the
foreclosure sale under the prior mortgage. This holding cannot be sustained.
Preliminarily, the issue of ownership of the mortgaged property was never alleged in the complaint
nor was the same raised during the trial, hence that issue should not have been taken cognizance of
by the Court of Appeals. An issue which was neither averred in the complaint nor ventilated during
the trial in the court below cannot be raised for the first time on appeal as it would be offensive to the
basic rule of fair play, justice and due process. 8
Nonetheless, since respondent Court took cognizance thereof and, in fact, anchored its modificatory
judgment on its ratiocination of that issue, we are inclined to liberalize the rule so that we can in turn
pass upon the correctness of its conclusion. We may consider such procedure as analogous to the

rule that an unassigned error closely related to an error properly assigned, or upon which the
determination of the question properly assigned is dependent, may be considered by an appellate
court. 9 We adopt this approach since, after all, both lower courts agreed upon the invalidity of the
extrajudicial foreclosure but differed only on the matter of the validity of the real estate mortgage upon
which the extrajudicial foreclosure was based.
In arriving at its conclusion, respondent court placed full reliance on what obviously is an obiter
dictum laid down in the course of the disquisition in Dizon vs. Gaborro, et al. which we shall
analyze. 10 For, as explicitly stated therein by the Court, "(t)he basic issue to be resolved in this case is
whether the 'Deed of Sale with Assumption of Mortgage' and the 'Option to Purchase Real Estate,' two
instruments executed by and between petitioner Jose P. Dizon and Alfredo G. Gaborro (defendant below)
on the same day, October 6, 1959, constitute in truth and in fact an absolute sale of the three parcels of
land therein described or merely an equitable mortgage or conveyance thereof by way of security for
reimbursement or repayment by petitioner Jose P. Dizon of any and all sums which may have been paid
to the Development Bank of the Philippines and the Philippine National Bank by Alfredo G. Gaborro . . . ."
Said documents were executed by the parties and the payments were made by Gaborro for the debt of
Dizon to said banks after the Development Bank of the Philippines had foreclosed the mortgage executed
by Dizon and during the period of redemption after the foreclosure sale of the mortgaged property to said
creditor bank.
The trial court held that the true agreement between the parties therein was that Gaborro would
assume and pay the indebtedness of Dizon to the banks and, in consideration thereof, Gaborro was
given the possession and enjoyment of the properties in question until Dizon shall have reimbursed
him for the amount paid to the creditor banks. Accordingly, the trial court ordered the reformation of
the documents to the extent indicated and such particular relief was affirmed by the Court of
Appeals. This Court held that the agreement between the parties is one of those innominate
contracts under Article 1307 of the Civil Code whereby the parties agreed "to give and to do" certain
rights and obligations, but partaking of the nature of antichresis.
Hence, on appeal to this Court, the judgment of the Court of Appeals in that case was affirmed but
with the following pronouncements:
The two instruments sought to be reformed in this case appear to stipulate rights and
obligations between the parties thereto pertaining to and involving parcels of land
that had already been foreclosed and sold extrajudicially, and purchased by the
mortgage creditor, a third party. It becomes, therefore, necessary, to determine the
legality of said rights and obligations arising from the foreclosure and sale
proceedings not only between the two contracting parties to the instruments
executed between them but also in so far as the agreement affects the rights of the
third party, the purchaser Bank.
xxx xxx xxx
Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor remains
in possession of the property foreclosed and sold, during the period of redemption. If
the judgment debtor is in possession of the property sold, he is entitled to retain it,
and receive the fruits, the purchaser not being entitled to such possession. (Riosa vs.

Verzosa, 26 Phil. 86; Velasco vs. Rosenberg's, Inc., 32 Phil. 72; Pabico vs. Pauco,
43 Phil. 572; Power vs. PNB, 54 Phil. 54; Gorospe vs. Gochangco, L-12735, Oct. 30,
1959).
xxx xxx xxx
Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed
by the sheriff. (Section 27, Revised Rules of Court). After the termination of the
period of redemption and no redemption having been made, the purchaser is entitled
to a deed of conveyance and to the possession of the properties. (Section 35,
Revised Rules of Court). The weight of authority is to the effect that the purchaser of
land sold at public auction under a writ of execution has only an inchoate right to the
property, subject to be defeated and terminated within the period of 12 months from
the date of sale, by a redemption on the part of the owner. Therefore, the judgment
debtor in possession of the property is entitled to remain therein during the period for
redemption. (Riosa vs. Verzosa, 26 Phil. 86, 89; Gonzales vs. Calimbas, 51 Phil.
355).
In the case before Us, after the extrajudicial foreclosure and sale of his properties,
petitioner Dizon retained the right to redeem the lands, the possession, use and
enjoyment of the same during the period of redemption. And these are the only rights
that Dizon could legally transfer, cede and convey unto respondent Gaborro under
the instrument captioned Deed of Sale with Assumption of Mortgage (Exh. AStipulation), likewise the same rights that said respondent could acquire in
consideration of the latter's promise to pay and assume the loan of petitioner Dizon
with DBP and PNB.
Such an instrument cannot be legally considered a real and unconditional sale of the
parcels of land, firstly, because there was absolutely no money consideration
therefor, as admittedly stipulated, the sum of P131,831.91 mentioned in the
document as the consideration "receipt of which was acknowledged" was not actually
paid; and, secondly, because the properties had already been previously sold by the
sheriff at the foreclosure sale, thereby divesting the petitioner of his full right as
owner thereof to dispose and sell the lands. (Emphasis ours.)
It was apparently the second reason stated by the Court in said case which was relied upon by
respondent court in the present case on which to premise its conclusion. Yet, as demonstrated by
the relevant excerpts above quoted, not only was that obiter therein unnecessary since evidently no
sale was concluded, but even inaccurate, if not inconsistent, when considered in the context of the
discussion in its entirety. If, as admitted, the purchaser at the foreclosure sale merely acquired an
inchoate right to the property which could ripen into ownership only upon the lapse of the redemption
period without his credit having been discharged, it is illogical to hold that during that same period of
twelve months the mortgagor was "divested" of his ownership, since the absurd result would be that
the land will consequently be without an owner although it remains registered in the name of the
mortgagor.

That is why the discussion in said case carefully and felicitously states that what is divested from the
mortgagor is only his "full right as owner thereof to dispose (of) and sell the lands," in effect, merely
clarifying that the mortgagor does not have the unconditional power to absolutely sell the land since
the same is encumbered by a lien of a third person which, if unsatisfied, could result in a
consolidation of ownership in the lienholder but only after the lapse of the period of redemption.
Even on that score, it may plausibly be argued that what is delimited is not the mortgagor's jus
dispodendi, as an attribute of ownership, but merely the rights conferred by such act of disposal
which may correspondingly be restricted.
At any rate, even the foregoing considerations and arguments would have no application in the case
at bar and need not here be resolved since what is presently involved is a mortgage, not a sale, to
petitioner bank. Such mortgage does not involve a transfer, cession or conveyance of the property
but only constitutes a lien thereon. There is no obstacle to the legal creation of such a lien even after
the auction sale of the property but during the redemption period, since no distinction is made
between a mortgage constituted over the property before or after the auction sale thereof.
Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment or mortgage on
the property sold, or on some part thereof, subsequent to the judgment under which the property
was sold. 11 Of course, while in extrajudicial foreclosure the sale contemplated is not under a judgment
but the proceeding pursuant to which the mortgaged property was sold, a subsequent mortgage could
nevertheless be legally constituted thereafter with the subsequent mortgagee becoming and acquiring the
rights of a redemptioner, aside from his right against the mortgagor.
In either case, what bears attention is that since the mortgagor remains as the absolute owner of the
property during the redemption period and has the free disposal of his property, there would be
compliance with the requisites of Article 2085 of the Civil Code for the constitution of another
mortgage on the property. To hold otherwise would create the inequitable situation wherein the
mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds
wherewith to timely redeem his property through another mortgage thereon.
Coming back to the present controversy, it is undisputed that the real estate mortgage in favor of
petitioner bank was executed by respondent spouses during the period of redemption. We reiterate
that during said period it cannot be said that the mortgagor is no longer the owner of the foreclosed
property since the rule up to now is that the right of a purchaser at a foreclosure sale is merely
inchoate until after the period of redemption has expired without the right being exercised. 12 The title
to land sold under mortgage foreclosure remains in the mortgagor or his grantee until the expiration of the
redemption period and conveyance by the master's deed. 13 To repeat, the rule has always been that it is
only upon the expiration of the redemption period, without the judgment debtor having made use of his
right of redemption, that the ownership of the land sold becomes consolidated in the purchaser. 14
Parenthetically, therefore, what actually is effected where redemption is seasonably exercised by the
judgment or mortgage debtor is not the recovery of ownership of his land, which ownership he never
lost, but the elimination from his title thereto of the lien created by the levy on attachment or
judgment or the registration of a mortgage thereon. The American rule is similarly to the effect that
the redemption of property sold under a foreclosure sale defeats the inchoate right of the purchaser
and restores the property to the same condition as if no sale had been attempted. Further, it does

not give to the mortgagor a new title, but merely restores to him the title freed of the encumbrance of
the lien foreclosed. 15
We cannot rule on the plaint of petitioners that the trial court erred in declaring ineffective the
extrajudicial foreclosure and the sale of the property to petitioner bank. The court below spelled out
at length in its decision the facts which it considered as violative of the provisions of Act No. 3135, as
amended, by reason of which it nullified the extrajudicial foreclosure proceeding and its effects. Such
findings and ruling of the trial court are already final and binding on petitioners and can no longer be
modified, petitioners having failed to appeal therefrom.
An appellee who has not himself appealed cannot obtain from the appellate court any affirmative
relief other than the ones granted in the decision of the court below. 16 He cannot impugn the
correctness of a judgment not appealed from by him. He cannot assign such errors as are designed to
have the judgment modified. All that said appellee can do is to make a counter-assignment of errors or to
argue on issues raised at the trial only for the purpose of sustaining the judgment in his favor, even on
grounds not included in the decision of the court a quo nor raised in the appellant's assignment of errors
or arguments. 17
WHEREFORE, the decision of respondent Court of Appeals, insofar as it modifies the judgment of
the trial court, is REVERSED and SET ASIDE. The judgment of said trial court in Civil Case No. R18616, dated January 12, 1983, is hereby REINSTATED.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Nocon, JJ., concur.

G.R. No. L-27706 June 16, 1970

MARIA T. GUANZON, assisted by her husband Genaro Guanzon, petitioner,
vs.
HON. MANUEL ARGEL, Presiding Judge of the Court of First Instance of Antique, JUAN,
ERNESTO, ESTRELLA, BARTOLOME, HONORATO, all surnamed DUMARAOG, respondents.
Angel V. Sanchez and C. V. Pefianco for petitioner.
Jose Gaton for respondents Juan, Ernesto, et al.

REYES, J.B.L., J.:

Special civil action for certiorari, prohibition and mandamus to annul and set aside the orders issued
by the Court of First Instance of Antique, in its Civil Case No. 334, under date of 6 January and 4
March 1967, denying petitioner Guanzon's motions to require the Sheriff to convey and restore to
her the possession and ownership of Lot 5250 of the cadastral survey of San Jose, Antique.
The factual background of the case is as follows:
The respondents Dumaraogs filed an action against petitioner Guanzon for the redemption of a
parcel of rice land situated in barrio Inabasan, San Jose, Antique, which their mother, Ines Flores,
had mortgaged to defendant, and to recover damages, before the Antique Court of First Instance,
presided by respondent judge. They prayed that the purported pacto de retro sale be declared a
mortgage and that Guanzon be ordered to execute an instrument of reconveyance after payment by
Dumaraog of the loan of P1,500.00.
Guanzon denied the material allegations of the complaint and alleged that the document executed
by Flores was in fact a pacto de retro sale and that her title as vendee had been consolidated.
After trial, the lower court rendered judgment declaring the document involved to be one of equitable
mortgage, and ordered Guanzon to execute an instrument of reconveyance in favor of Dumaraog
upon payment by the latter of P1,500.00 within 20 days from the finality of the decision, otherwise
execution may issue and the Provincial Sheriff may execute the necessary document of
conveyance, with costs against Dumaraog. The trial court also declared that whatever additional
amounts were loaned to the vendor-a-retro, Flores, by Guanzon were offset by the value of the 30
cavans of palay a year she received from 1949 to 1962.
Thereafter, alleging that although the aforesaid decision had become final and that the Dumaraogs
had not paid to her P1,500.00 within 20 days from the date of the decision, Guanzon filed a motion
for execution wherein she prayed that the Provincial Sheriff be ordered to execute the necessary
conveyance of the property in question in her favor and that she be placed in the possession thereof.

Acting upon Guanzon's motion for execution, the trial court ordered the Dumaraogs to deposit the
P1,500.00 redemption price with the clerk of court, which Guanzon shall receive, and that Guanzon
shall within 10 days from receipt of the order execute the deed of reconveyance in favor of
Dumaraog, otherwise the Provincial Sheriff shall execute the necessary conveyance in favor of
Dumaraog and Guanzon could withdraw the said amount.
Dumaraog filed with the lower court a bill of costs for its approval which Guanzon opposed on the
ground that she could be liable for costs only if Dumaraog paid her P1,500.00 within 20 days from
the finality of the decision. Despite this opposition, the respondent judge by order approved the said
bill of costs and issued an execution of the same.
Meanwhile, in pursuance of the decision, Dumaraog filed a notice of deposit of the redemption price
of P1,500.00.
From the orders of the respondent judge (1) directing Dumaraog to deposit the P1,500.00
redemption price and for her to receive the said amount and to execute a deed of reconveyance in
favor of Dumaraog, and (2) approving the Dumaraog's bill of costs, Guanzon filed a motion for
reconsideration, alleging that the lower court has no jurisdiction to issue the said order for lack of
jurisdiction, considering that the decision has become final and executory, hence it becomes the
ministerial duty of the court to issue the writ of execution.
In an order dated 4 March 1967, the respondent judge denied Guanzon's motion for reconsideration
for lack of merit. Respondent judge stated that it is not contemplated in the decision that Guanzon is
entitled to a deed of conveyance, and that at most, she could withhold execution of the deed of
reconveyance until Dumaraog pays P1,500.00, otherwise the Provincial Sheriff shall execute the
necessary conveyance in her favor.
Guanzon filed this petition claiming that the respondent judge acted in excess of jurisdiction and with
grave abuse of discretion, arguing that the respondent judge altered his original decision, because
although she was directed to execute a reconveyance within 20 days in the original decision
declaring the questioned document as an equitable mortgage, in the order of 6 January 1967 herein
complained of she was given another additional 10 days to do so; and also in its order of 4 March
1967, the respondent judge allowed Dumaraog to deposit the redemption price of P1,500.00 even
after the lapse of 20 days after the finality of the judgment. The petitioner states that while the
decision of 31 August 1966 has become final and executory on 14 October 1966, it was only on 6
January 1967 that Dumaraog deposited the said amount with the clerk of court.
We find the charge of grave abuse of discretion not justified. The final decision of the respondent
court, in this operative clause, provided the following:
WHEREFORE, the Court hereby renders judgment:
1. Declaring the document executed on 26 April 1949 by Ines Flores in favor of
Maria T. Guanzon, Exhibit A (same as Exhibit 2) an equitable mortgage instead of a
pacto de retro sale;

2. Ordering the defendant Maria T. Guanzon to execute a reconveyance in favor

of the plaintiffs herein upon payment by the said plaintiffs of the amount of P1,500.00
within twenty (20) days from the finality of this decision otherwise execution may
issue and that Provincial Sheriff may execute the necessary conveyance, with costs
against the defendants.
3. Counterclaim is dismissed for lack of proof.
SO ORDERED.
While paragraph 2 is not as clear as it could have been, nevertheless, its purport is plain that should
the plaintiffs (now private respondents Dumaraog) fail to pay the P1,500.00 within the specified 20
days, petitioner Guanzon would be entitled to have execution issue to collect the said amount from
the properties of the respondents Dumaraog whereupon the deed of reconveyance would be
executed by Guanzon. A converso, should respondents Dumaraog deposit the money, but Guanzon
refused to reconvey, the reconveyance could then be made by the Provincial Sheriff. This is in
accord with the provisions of section 10, Rule 39, of the Revised Rules of Court:
SEC. 10. Judgment for specific acts; vesting title. If a judgment directs a party to
execute a conveyance of land, or to deliver deeds or other documents, or to perform
any other specific act, and the party fails to comply within the time specified, the
court may direct the act to be done at the costs of the disobedient party by some
other person appointed by the court and the act when so done shall have like effect
as if done by the party. If real or personal property is within the Philippines, the court
in lieu of directing a conveyance thereof may enter judgment divesting the title of any
party and vesting it in others and such judgment shall have the force and effect of a
conveyance executed in due form of law.
In no way can the judgment at bar be construed to mean that should the Dumaraogs fail to pay the
money within the specified period then the party would be conveyed by the Sheriff to Guanzon. Any
interpretation in that sense would contradict the declaration made in the same judgment that the
contract between the parties was in fact a mortgage and not a pacto de retro sale. The only right of a
mortgagee in case of non-payment of a debt secured by mortgage would be to foreclose the
mortgage and have the encumbered property sold to satisfy the outstanding indebtedness. The
mortgagor's default does not operate to vest in the mortgagee the ownership of the encumbered
property, for any such effect is against public policy, as enunciated by the Civil Code. 1 The court can
not be presumed to have adjudged what would be contrary to law, unless it be plain and inescapable from
its final judgment. No such purport appears or is legitimately inferable from the terms of the judgment
aforequoted. Hence, the orders of the court below refusing to command the sheriff to convey the property
to petitioner Guanzon, as she demanded, and instead ordering her to reconvey the property to
respondents Dumaraog and receive the P1,500.00 deposited by the latter, were in conformity with the
original decision that had become final and executory.
The writs prayed for are denied. Costs against the petitioner.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Villamor, JJ.,
concur.

Castro, J., took no part.

G.R. No. L-28658 October 18, 1979

VICENTE C. REYES, applicant-appellee,
vs.
FRANCISCO SIERRA, EMILIO SIERRA, ALEJANDRA SIERRA, FELIMON SIERRA, AURELIO
SIERRA, CONSTANCIO SIERRA, CIRILO SIERRA and ANTONIA SANTOS, oppositors-appellants.

DE CASTRO, J.:
Appeal from the decision dated December 29, 1966 of the Court of First Instance of Rizal Branch 1,
Pasig, which declared applicant Vicente Reyes the true and rightful owner of the land covered by
Plan Psu-189753 and ordered the registration of his title thereto.
On January 3, 1961, Vicente Reyes filed an application for registration of his title to a parcel of land
situated in Antipolo, Rizal and covered by Plan Psu-189753 of the Bureau of Lands. In his
application, he declared that he acquired the land by inheritance from his father who died sometime
in 1944. Applicant is one of the heirs of the deceased Vicente Reyes Sr. but the other heirs executed
a deed of quit claim in favor of the applicant.
The notice of initial hearing was published in the Official Gazette, and a copy thereof was posted in a
conspicuous place in the land in question and in the municipal building of Antipolo, Rizal. An
opposition was filed by the Director of Lands, Francisco Sierra and Emilio Sierra. An Order of
General Default was issued on June 28, 1962. A motion to set aside an interlocutory default order
was filed by Alejandra, Felimon, Aurelio, Apolonio, Constancio, Cirilo, all surnamed Sierra and
Antonia Santos, thru counsel, and the trial court issued an Order on February 4, 1966 amending the
general order of default so as to include the aforementioned movants as oppositors.
The case was set for hearing, and after trial the court rendered a decision, the dispositive portion of
which reads as follows:
IN VIEW OF THE ABOVE CONSIDERATIONS this Court declares Vicente Reyes the
true and rightful owner of the land covered by Plan, Psu-189753 and orders the
registration of his title thereto, provided that the title to be issued shall be subject to a
public easement of right of-way over a 2.00 meter-wide strip of the land along Lucay
Street for the latter's widening and improvement.
As soon as this decision is final let, the corresponding degree be issued in favor of
VICENTE REYES, widower, Pilipino, of legal age and resident of 1851 P. Guevarra
Street, Santa Cruz, Manila. (P. 25, Record on Appeal).
Oppositors appealed from the aforesaid decision, with the following assignment of errors:
I

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT ARTICLES

1134 AND 1137 OF THE NEW CIVIL CODE ARE APPLICABLE TO THIS INSTANT
CASE ALTHOUGH THERE WAS NO FORECLOSURE OR SALE OF THE
PROPERTY TO THE HIGHEST BIDDER.
II
THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT APPLICANTAPPELLEE AND HIS PREDECESSOR-IN-INTEREST HAD BEEN IN
CONSTRUCTIVE POSSESSION OF THE LAND FROM APRIL 19, 1926 UP TO THE
PRESENT AS SHOWING BY THE FACT THAT THEY HAD PAID THE REALTY
TAXES.
III
THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT BECAUSE
OPPOSITORS-APPELLANTS AND THEIR PREDECESSORS-IN-INTEREST HAD
NOT TAKEN ANY ACTIVE INTEREST TO PAY REALTY TAXES SINCE 1926 AND IT
WAS APPLICANT- APPELLEE AND HIS PREDECESSOR-IN-INTEREST THAT
PAID THE REALTY 'TAXES FROM THE SAME PERIOD, THIS CONSTITUTES
STRONG CORROBORATING EVIDENCE OF APPLICANT'S ADVERSE
POSSESSION.
IV
THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT DOCUMENT
EXH. "D" EXECUTED BY BASILIA BELTRAN IN 1926 WAS ALREADY A
CONVEYANCE OF THE LAND I N QUESTION TO VICENTE REYES AND THE
FAILURE OF BASILIA BELTRAN AND HER CHILDREN TO REDEEM THE SAME,
COULD BE CONSIDERED AS IF THE LAND HAD ALREADY BEEN SOLD TO HIM.
(p. 2 1, Rollo.)
The land applied for was originally owned by Basilia Beltran's parents, and upon their death in 1894,
Basilia inherited the property. On April 19, 1926, Basilia Beltran, a widow, borrowed from applicant's
father, Vicente Reyes, Sr. the amount of P100.00 and secured the loan with the piece of land in
question, AS evidenced by exhibit "D" quoted hereunder:
SA KAALAMAN NANG LAHAT NA BUMASA AT
NAKAKITA NITONG KASULATAN:
Kaming mag-kakapatid may sapat na gulang na nakalagda Sa kasulatan ito, bilang
katibayan nang pag papahintulot sa aming Ina na si Bacilia Beltran na ipananagutan
kay G. Vicente Reyes sa inutang ha halagang isang daan piso (P100.00) na walang
anopamang pakinabang; ang isang lagay na lupa sa kallehon Sukay, Antipolo, Rizal,
naliligiran nang mga lupang may titulo Torrents, expendientes Nos. 770, 1831, lote 1,

645 at 1839 lote 2, may kabu-uan humigit kumulang sa apat na raan metro; ito'y
aring naiwan ng ama naming namatay na si Melecio Sierra.
Ang katotohanan kahit isangla o ipag-bile man ng tuluyan ang nasabing pag-aaral' o
lupa wala kaming kinalaman, sapagkat ipinauubaya nang lubusan sa arming Ina ang
kapamahalaan.
Sa katunayan nagsilagda kaming mga anak, at apo kay Esteban, sa harap nang
saksing magpapatotoo.
Ngayon ika 19 nang Abril nang 1926. Antipolo, Rizal. K.P.
Lagda
ni
Bacilia
Beltran
Gregori
o Sierra
Saksi:
------------------------------------------------Since the execution of this document, Vicente Reyes, Sr. began paying the realty taxes up to the
time of his death in 1944, after which, his children continued paying the taxes. Basilia Beltran died in
1938 before Reyes could recover from the loan.
Applicant, in seeking the registration of the land, relied on his belief that the property belongs to his
father who bought the same from Basilia Beltran, as borne out by his testimony during the trial on
direct examination.
Q. Mr. Reyes, do you claim to be the owner of this property included
or described in your application?
A Yes, sir.
Q How did you acquire this property'?
A. Since 1926 we were the ones paying the land taxes.
Q. From whom did you acquire this property?

A. Basilia Beltran.
Q. Do you mean to say that you yourself bought this property.
A. My father was the one who bought the property.
Q. What is the name of your father?
A. Vicente C. Reyes.
Q. Where is he now?
A. He is already dead.
Q. Can you inform this Honorable Court, if you know, how your father
acquired this property?
A. Since 1926 my father bought that land.
Q. Was that transaction evidenced by a document?
A. Yes, there is a document.
Q. From whom did your father allegedly purchase the property?
A. Basilia Beltran.
From the above-quoted testimony of applicant, it is evident that he considered the document marked
Exhibit "D as contract of Sale and not as a mortgage. Oppositors contended that the words
"isinangla," "na ipananagutan sa inutang na halagang isang daang piso," "Kahit isangla o ipagbili,"
etc., manifest that the document should be treated as a mortgage, antichresis, or pactum
commission and not as an absolute sale or pacto de retro sale. (p. 28, Brief, Oppositors-Appellants).
The Court is of the opinion that Exhibit "D" is a mortgage contract. The intention of the parties at the
time of the execution of the contract must prevail, that is, the borrowing and lending of money with
security. The use of the word Debt (utang) in an agreement helps to point out that the transaction
was intended to be a loan with mortgage, because the term "utang" implies the existence of a
creditor-debtor relationship. The ' Court has invariably upheld the validity of an agreement or
understanding whereby the lender of money has taken a deed to the land as security for repayment
of the loan. Thus:
The fact that the real transaction between the parties was a borrowing and lending,
will, whenever, or however, it may appear, show that a deed, absolute on its face was
intended as a security for money; and whenever it can be ascertained to be a
security for money, it is only a mortgage, however artfully it may be disguised. (Villa
vs. Santiago, 38 Phil. 163).

The whole case really turns on the question of whether the written instrument in
controversy was a mortgage or a conditional sale. ... The real intention of the parties
at the time the written instrument was made must concern in the interpretation given
to it by the courts. ... The correct test, where it can be applied, is the continued
existence of a debt or liability between the parties. If such exists, the conveyance
may be held to be merely a security for the debt or an indemnity against the liability.
(Cuyugan vs. Santos, 34 Phil. 112).
The Cuyugan Case quoted some provisions in Jones' Commentaries on Evidence, vol. 3,
paragraphs 446-447 which are likewise applicable to the facts of the case at bar:
446. To show that instruments apparently absolute are only securities. ... It is an
established doctrine that a court of equity will treat a deed, absolute in form, as a
mortgage, when it is executed as security for loan of money, The court looks beyond
the terms of the instrument to the real transaction; and when that is shown to be one
of security and not of sale, it will give effect to the actual contract of the parties.
447. Same-Real intention of the parties to be ascertained ... As we have shown in the
preceding section, the intention of the parties must govern and it matters not what
peculiar form the transaction may have taken. The inquiry always is, Was a security
for the loan of money or other property intended? ... A debt owing to the mortgagee,
or a liability incurred for the grantor, either pre-existing or created at the time the
deed is made, is essential to give the deed the character of a mortgage. The relation
of debtor and creditor must appear. The existence of the debt is one on the tests. ...
In construing the deed to be a mortgage, its character as such must have existed
from its very inception, - created at the time the conveyance was made.
The same principle was laid down in a later case, that of Macapinlac vs. Gutierrez Rapide, 43 Phil.
781, quoting 3 Pomeroy's Equity Jurisdiction, Section .1195, wherein it was stated:
... The doctrine has been firmly established from an early day that when the
character of a mortgage has attached at the commencement of the transaction, so
that the instrument, whatever be its form, is regarded in equity as a mortgage, that
character of mortgage must and will always continue. If the instrument is in its
essence a mortgage, the parties cannot by any stipulations, however express and
positive, render it anything but a mortgage or deprive it of the essential attributes
belonging to a mortgage in equity.
Concerning the legal effects of such contract, Pomeroy observes:
... Whenever a deed absolute on its face is thus treated as a mortgage, the parties
are clothed with all the rights, are subject to all liabilities, and are entitled to all the
remedies of ordinary mortgagors and mortgagees. The grantee may maintain an
action for the foreclosure of the grantor equity of redemption; the grantor may
maintain an action to redeem and to compel a reconvayance upon his payment of

the debt secured. If the grantee goes into possession, and as such is liable to
account for the rents and profits.
Obviously, from the nature of the transaction, applicant's predecessor-in-interest is a mere
mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor. The
mortgagee, however, may recover the loan, although the mortgage document evidencing the loan
was non-registrable being a purely private instrument. Failure of mortgagor to redeem the property
does not automatically vest ownership of the property to the mortgagee, which would grant the latter
the right to appropriate the thing mortgaged or dispose of it. This violates the provision of Article
2088 of the New Civil Code, which reads:
The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose by them. Any stipulation to the contrary is null and void.
The act of applicant in registering the property in his own name upon mortgagor's failure to redeem
the property would amount to a pactum commissorium which is against good morals and public
policy.
In declaring applicant as the "true and rightful owner of the land in question," the trial court held that
applicant and his predecessor-in- interest acquired ownership over the property by means of
prescription having been in constructive possession of the land applied for since 1926, applying Arts,
1134 and 1137 of the New Civil Code:
Art. 1134. - Ownership and other real rights over immovable property are acquired by
ordinary prescription through possession of ten years.
Art. 1137. - Ownership and other real rights over immovables also prescribe through
uninterrupted adverse possession thereof for thirty years, without need of title or
good faith.
Applicant in his testimony on cross-examination, admitted that he and his father did not take
possession of the property but only made use of the same for the purpose of spending vacation
there, which practice they discontinued for the last 23 years. Possession of the property must. be in
the concept of an owner. This is a fundamental principle of the law of prescription in this jurisdiction.
In the case at bar, the possession of applicant was not adverse, nor continuous.
An applicant for registration of title must prove his title and should not rely on the absence or
weakness of the evidence of the oppositors. For purposes of prescription, there is just title when
adverse claimant came into possession of the property through one of the modes recognized by law
for the acquisition of ownership (Art. 1129, New Civil Code). Just title must be proved and is never
presumed (Art. 1131, New Civil Code). Mortgage does not constitute just title on the part of the
mortgagee. since ownership is retained by the mortgagor. When possession is asserted to convert
itself into ownership, a new right is sought to be created, and the law becomes more exacting and
requires positive proof of title. Applicant failed to present sufficient evidence to prove that he is
entitled to register the property. The trial court's finding that since applicant and his father had been
continuously paying the realty taxes, that fact "constitutes strong corroborating evidence of

applicant's adverse possession," does not carry much weight. Mere failure of the owner to pay the
taxes does not warrant a conclusion that there was abandonment of a right to the property. The
payment of taxes on property does not alone constitute sufficient evidence of title. (Elumbaring vs.
Elumbaring, 12 Phil. 389)
The belief of applicant that he owns the property in question which he inherited from his father
cannot overthrow the fact that the transaction is a mortgage. The doctrine "once a mortgage always
a mortgage" has been firmly established whatever be its form. (Macapinlac vs. Gutierrez Rapide,
supra) The parties cannot by any stipulation, however express and positive, render it anything but a
mortgage. No right passes to applicant except that of a mortgage since one cannot acquire a right
from another who was not in possession thereof A derivative right cannot rise higher than its source.
Applicant having failed to show by sufficient evidence a registrable title to the land in question, the
application for registration should be dismissed.
WHEREFORE, the decision appealed from is hereby set aside, and let another one be entered
ordering the registration of the title of the land in question in the name of the oppositors- appellants.
The said oppositors-appellants are hereby directed to pay the applicant- appellee within ninety (90)
days from the finality of this decision, the debt in the amount of P100.00 plus interest at the rate of
six per cent (6%) per annum from April 19, 1926 until paid. No pronouncement as to costs.
SO ORDERED.
Teehankee, Actg. C.J., (Chairman), Makasiar, Fernandez, Guerrero and Melencio- Herrera, JJ.,
concur.

ANDRES RAMOS, SPOUSES FELIPE BELMONTE, and AMALIA

BELMONTE, petitioners, vs. THE HONORABLE COURT OF
APPEALS, GOVERNMENT SERVICE INSURANCE SYSTEM
(GSIS), EDUARDO YUSECO, and DIONISIO PALLA, respondents.
DECISION
MENDOZA, J.:

On September 8, 1967, Eduardo Yuseco (now deceased) obtained a loan

ofP35,000.00 from the Government Service Insurance System. To guarantee
payment of the loan, Yuseco constituted a mortgage over his property covered
by TCT No. 123161 of the Register of Deeds of Quezon City in favor of
GSIS. Under the mortgage contract, Yuseco was prohibited from selling,
disposing of, mortgaging, or in any manner encumbering the mortgaged
property without the prior written consent of the GSIS.
On November 17, 1969, Yuseco executed a Contract to Sell (Exh. A) of
the mortgaged property in favor of petitioner Felipe Belmonte, by virtue of
which Belmonte agreed to assume Yusecos obligation to the GSIS. The
undertaking was to be performed within one year from the perfection of the
contract. Belmonte was, however, unable to comply with his obligation within
the period agreed upon, so that he requested an extension. His request was
granted and he was given until January 15, 1971 to comply with his
obligation. As Belmonte was still unable to comply with his obligation
notwithstanding the extension given to him, he and his wife asked Andres
Ramos to share in the payment of the amortizations to the GSIS. This was
made with the knowledge and consent of Yuseco who executed a Deed of
Absolute Sale with Assumption of Mortgage (Exh. D) in favor of all petitioners
on January 21, 1971. It was agreed that the spouses Belmonte and Ramos
would pay for all expenses for the preparation of documents and afterwards
submit the contract to the GSIS for its approval.
On February 26, 1971, the GSIS informed Yuseco that his request for
authority to execute the Deed of Absolute Sale with Assumption of Mortgage
could not be considered pending the return of the certificate of title which

Yuseco had borrowed from the GSIS.On July 26, 1971, however, the GSIS
notified Yuseco that its Board of Trustees had approved his request for
authority to execute the Deed of Absolute Sale with Assumption of Mortgage
even though Yusecos certificate of title had not been returned. The approval
was made subject to the following conditions:
1. That the account of the mortgagor-vendors with the System is up-to-date, including
the fire insurance premiums;
2. That the prospective vendees shall execute in favor of and submit to the System, the
corresponding Promissory Note on the obligation to be assumed;
3. That the vendees shall pay direct to the System the amount of P378.88
corresponding to the monthly amortization on the loan including the fire insurance
premiums; and
4. That the vendees shall pay to the System the amount of P40.00 as assumption and
service fees and shall pay all fees incidental to the registration of the Deed of Sale
with Assumption of Mortgage.

(Exh. G)
A copy of the letter of the GSIS to Yuseco was furnished petitioners
Andres Ramos and Amalia Belmonte.
On February 14, 1975, petitioners delivered to the GSIS a letter from
Eduardo Yuseco, informing the GSIS that the certificate of title had been lost
and, for this reason, requesting the GSIS to undertake the reconstitution of the
lost title and to charge the cost thereof to petitioners.
[1]

To protect their interest, petitioners at the same time registered an adverse

claim which was annotated on TCT No. 123161.
Since December 9, 1969, petitioners had been paying the GSIS the
monthly amortizations, but for some reason they stopped doing so on October
1, 1981, after paying a total of P27,430.16, although in the confirmation of
accounts sent by the GSIS, the total payments credited to them was
P30,903.52. The payments were all made in the name of Eduardo
Yuseco. (Exhs. E, E-1 to E-51)
[2]

[3]

On July 16, 1982, the GSIS informed Yuseco and the spouses Belmonte
of the arrearages amounting to P37,758.84 and warned them that if the
amount was not settled on time, the mortgage would be foreclosed. As no
settlement of the amount was made, the GSIS extrajudicially foreclosed the
mortgage on September 17, 1982. The GSIS purchased the property as the
highest bidder at the auction sale. It then informed the spouses Belmonte of
the foreclosure of the mortgage and demanded the payments of rents from
them for their use of the property. On October 19, 1982, the GSIS again wrote
the spouses Belmonte and asked them to file an application for the lease of
the property to formalize their stay on the property.
But the Belmontes did not do so. On April 27, 1983, the spouses and
Ramos wrote the GSIS that, as vendees of the property, they were exercising
their right to redeem the property (Exh. M). The GSIS replied that it would
consider any legal redemptioner who first exercised the right of
redemption (Exh. N).
At about the same time that petitioners signified their intention to redeem
the property, Yuseco negotiated for the sale of the foreclosed property to
private respondent Dionisio Palla, showing the latter a photocopy of his title to
the property.
Palla and his lawyer, Atty. Marte Sta. Elena, went to verify the authenticity
of Yusecos title in the Register of Deeds of Quezon City where they learned of
the adverse claim of petitioners. Upon assurance by his lawyer that the
adverse claim was not an impediment to the purchase of the property and
despite advice from Yuseco that there were tenants (the petitioners were
actually the occupants) on the property, Palla purchased the property from
Yuseco for P92,000.00 on May 20, 1983 (Exh. Q). Palla sought to redeem the
property from the GSIS but he was not allowed to do so in his own name.
Consequently, he advanced the redemption price, in the amount
of P53,000.00, to Yuseco who redeemed the property from the GSIS on June
14, 1983.
TCT No. 123161 in the name of Eduardo Yuseco was cancelled and, in
lieu thereof, TCT No. 302915 was issued in the name of Dionisio Palla (Exh.
R). As the new owner of the property, Palla sued Ramos and the spouses

Belmonte for ejectment in the Metropolitan Trial Court of Quezon City. The
case was, however, suspended and no further action was taken thereon.
Petitioners filed an action before the Regional Trial Court for Annulment of
Foreclosure Proceedings, Redemption and Sale, and Reconveyance. They
assailed the validity of the foreclosure proceedings, alleging that the GSIS had
acted in bad faith by withholding information on the reconstitution of TCT No.
123161 and the foreclosure of the mortgage. They charged that Yuseco had
acted in bad faith in selling the foreclosed property to Palla even if the same
had already been sold to them. Petitioners alleged that Palla was not a
purchaser in good faith because he had knowledge of petitioners adverse
claim on the property. They also charged the GSIS with bad faith, alleging that
it took part in the sale of the property to Palla despite its knowledge that the
property had previously been sold to petitioners.
The lower court gave judgment for petitioners and ruled that the Deed of
Absolute Sale with Assumption of Mortgage executed in favor of petitioners
prevailed over that made in favor of Palla. It ordered the GSIS to return the
redemption price of P53,000.00 to Palla, even as it ordered petitioners to pay
the same amount to GSIS and to reimburse Palla for the real estate tax paid
by him. The dispositive portion of the lower courts decision reads:
FOREGOING PREMISES FULLY CONSIDERED, judgment is hereby rendered:
1. Declaring that the Deed of Absolute Sale with Assumption of Mortgage, Exh. D,
executed by Eduardo Yuseco in favor of plaintiffs Andres Ramos, Felipe and Amalia
Belmonte stands and prevails over the Deed of Absolute Sale with Assumption of
Mortgage (Exh. 12) executed by Eduardo Yuseco in favor of Dionisio Palla;
2. Declaring as null and void the Absolute Deed of Sale with Assumption of
Mortgage, Exh. 12 executed by Eduardo Yuseco in favor of Dionisio Palla;
3. Directing the GSIS to return to defendant Dionisio Palla the amount of P53,000.00
paid for and in behalf of Eduardo Yuseco for the redemption of the property in
question sold to the GSIS after foreclosure of the mortgage constituted thereon;

4. Ordering the plaintiffs Andres Ramos and spouses Felipe and Amalia Belmonte to
pay the amount of P53,000.00 for the redemption of the property from the GSIS and
the latter to accept said payment and issue upon receipt of said amount the
corresponding certificate of redemption in their favor.
5. Ordering plaintiffs to reimburse to defendant Palla all payments for the real estate
taxes made on the property in question;
6. Ordering defendants, jointly and severally, to pay to plaintiffs by way of attorneys
fees the amount of Ten Thousand (P10,000.00) Pesos.
All other claims and counterclaims are hereby dismissed for lack of sufficient
evidence to support the same.
No pronouncement as to costs.
IT IS SO ORDERED.
Quezon City, Philippines, 30 June 1989.
The Court of Appeals reversed. It held that the Deed of Absolute Sale with
Assumption of Mortgage which Yuseco had made with petitioners was
unenforceable because of lack of approval by the GSIS; that the GSIS legally
foreclosed the mortgage for failure of Eduardo Yuseco to pay; and that
petitioners remedy is to bring an action against the estate of Yuseco. The
dispositive portion of the appellate courts decision reads:
WHEREFORE, premises considered, the appealed decision is hereby REVERSED,
and a new one is entered dismissing the complaint and the counterclaim, without
prejudice to plaintiffs-appellees recourse against the estate of the late Eduardo Yuseco,
should any of the estate be found to exist.No costs.
SO ORDERED.
Hence, this petition for review. Petitioners allege that:
1. THE RESPONDENT COURT OF APPEALS COMMITTED A GRAVE
MISAPPREHENSION OF THE FACTS AND GROSS MISAPPRECIATION OF THE
EVIDENCE WHEN IT RULED THAT THE EVIDENCE DOES NOT SUPPORT AN

INFERENCE OF FRAUD ON THE PART OF APPELLANT EDUARDO YUSECO

AND PRIVATE RESPONDENT GSIS.
2. THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
THE DEED OF ABSOLUTE SALE WITH ASSUMPTION OF MORTGAGE WAS
NOT PERFECTED BECAUSE OF THE ALLEGED NON-FULFILLMENT BY
PETITIONERS OF THE SUSPENSIVE CONDITION IMPOSED BY THE GSIS AS
WELL AS THE LACK OF WRITTEN CONSENT AND APPROVAL OF THE
MORTGAGEE GSIS OF THE SALE.
3. THE RESPONDENT COURT OF APPEALS SERIOUSLY ERRED IN NOT
HOLDING THAT THE PETITIONERS HAVE THE BETTER AND SUPERIOR RIGHT
OVER THE PRIVATE RESPONDENT DIONISIO PALLA AS REGARDS THE
MORTGAGED PROPERTY IN QUESTION.

Petitioners contentions are without merit. We hold that because of

petitioners failure to comply with the conditions imposed by the GSIS the
Deed of Absolute Sale with Assumption of Mortgage was not perfected so that
Yuseco remained the owner of the property, subject of the deed, and as such
had a right to sell it to private respondent Palla.
First. Petitioners contention that there was no valid reason to justify
foreclosure of the mortgaged property because the petitioners were not
delinquent and had not been shown to have been in receipt of demand for
payment of any balance due is contrary to the evidence. As of September 17,
1982, Eduardo Yuseco was in arrears for P40,547.05.Demands had been
made on him and on petitioners to pay this amount otherwise the mortgage
would be foreclosed. As they failed to pay the amount, the GSIS instituted
foreclosure proceedings. As the Court of Appeals found:
[4]

[5]

Despite such payments made, on July 16, 1982, the GSIS informed Yuseco and
appellee Belmonte of arrearages in the mortgage amounting to P37,758.84 warning
them of the intended foreclosure of said mortgage if settlement thereof is not promptly
made (Exhs. 13, 13-A, 13-B, & 13-C, GSIS). Since neither Yuseco nor the appellees
heeded the foregoing warning, the GSIS foreclosed the mortgage on September 17,
1982 (Exh. 16), GSIS), with it as the highest bidder during the auction sale.
Petitioner Andres Ramos himself admitted their delinquency. At the
hearing below on April 10, 1985, he said:
[6]

Court - But you were not able to comply with the obligation, updating your accounts
both with respect to the principal and the arrearages?
Witness - We still lack some amount, sir.

Second. Petitioners claim, however, that they failed to update their

account because the GSIS refused to accept payment from them unless
Yusecos certificate of title, which he had borrowed, was first returned. Indeed
the updating of account and payment of the current amortizations, as well as
the execution of a promissory note for the balance of the obligation, were the
principal conditions for the GSIS approval of the Deed of Absolute Sale with
Assumption of Mortgage. The return of the certificate of title, however, was not
a condition for acceptance of payment of the amortizations and arrearages.
The fact is that payments made by petitioners in the name of Eduardo Yuseco
from December 9, 1969 (Exh. E) to October 1, 1981 (Exh. E-52) were
accepted by the GSIS. If petitioners stopped paying it was not because the
GSIS later refused to accept further payments from them.
Indeed, the updating of account, payment of the monthly amortizations,
and execution of a promissory note were imposed by the GSIS as conditions
for its approval of the Deed of Absolute Sale with Assumption of Mortgage in
favor of petitioners, and it would be absurd for it to refuse compliance with
those conditions unless the certificate of title was first returned. That would be
to impose a condition (return of the certificate of title) on compliance with
conditions for GSIS approval of the sale with assumption of mortgage. The
fact is that the return of the title was required in the beginning, on February
26, 1971, as condition for considering Yusecos request for authority to sell the
mortgaged property to petitioner. Even without the return of the certificate of
title, however, the GSIS later gave its approval to the sale subject to the two
conditions stated.It is probable that it did so after being convinced that the
return of the certificate of title was no longer possible as petitioners
themselves on February 14, 1975 informed the GSIS that the title had been
lost, even as they asked it to undertake the reconstitution of the title for them.
There is therefore no basis for the claim that petitioners failed to update
their account and pay the arrearages because the GSIS refused to accept
payment from them. There was no reason for the GSIS to have done so. It

was for reason of their own that petitioners simply stopped paying on October
1, 1981.
Third. Because of petitioners failure to update their account and execute a
promissory note, GSIS conditional approval of the sale of the property and
assumption of mortgage never became effective. The Deed of Absolute Sale
with Assumption of Mortgage itself was not perfected since assumption of the
mortgage by petitioners was a condition precedent for the sale of the property
to them. Art. 1181 of the Civil Code provides that In conditional obligations,
the acquisition of rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes the
condition. Accordingly, in sales with assumption of mortgage, the assumption
of mortgage is a condition to the sellers consent so that without approval by
the mortgagee, no sale is perfected.
[7]

Indeed, no one can plausibly assert that with only P15,000.00 paid to
Yuseco and about P30,903.52 paid to the GSIS, petitioners became the
owners of the property when the consideration for the sale of the land and its
improvements was not only the amount paid to the seller but the payment of
his indebtedness to the GSIS as well. Since the Deed of Absolute Sale with
Assumption of Mortgage executed by Yuseco in favor of the petitioners was
ineffective, Yuseco legally remained as the owner and mortgagor of the
subject property and the debtor of the GSIS. In fact, the title to the property
(TCT No. 123161) remained in his name.
As such, Yuseco had the right to redeem, as he did in fact redeem, the
property on June 14, 1983, before the expiration on October 11, 1983 of the
one-year period of redemption under Act 3135, 6.
[8]

Fourth. Nor can petitioners assail the sale of the property after its
redemption to respondent Palla. As already stated, the Deed of Absolute Sale
with Assumption of Mortgage, on the basis of which they base their action in
this case, never became effective because of their non-compliance with the
conditions for approval of the sale by the GSIS. On the other hand, as pointed
out by the Court of Appeals, the foreclosure of the mortgage was a sufficient
justification for Pallas disregard of the petitioners adverse claim. Whether
petitioners can recover what they had paid to Yuseco and to the GSIS in his

behalf is a matter which is not now in issue but should be threshed out in any
proceeding which petitioners should commence against the estate of Eduardo
Yuseco.Suffice it to state that the estate is not a party in this appeal.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Regalado, (Chairman), Puno, and Torres, Jr., JJ., concur.

G.R. No. 97401 December 6, 1995

LUIS CASTRO, JR., MARISSA CASTRO, RAMON CASTRO, MARY ANN CASTRO, CATHERINE
CASTRO and ANTONIO CASTRO, petitioners,
vs.
HON. COURT OF APPEALS and UNION BANK OF THE PHILIPPINES, respondents.

VITUG, J.:
The instant petition for review on certiorari of the decision, 1 dated 11 October 1990, of the Court of
Appeals is focused on the issue of whether or not a residential house, which was constructed by a
lessee on a portion of the leased property theretofore encumbered under a real estate mortgage by the
lessor, can be rightly covered by a writ of possession following the foreclosure sale of the mortgaged
land.
The facts are not in any serious dispute.
On 15 August 1974, Cabanatuan City Colleges obtained a loan from the Bancom Development
Corporation. In order to secure the indebtedness, the college mortgaged to Bancom two parcels of
land covered by TCT No. T-45816 and No. T-45817 located in Cabanatuan City. The parcels were
both within the school site. While the mortgage was subsisting, the college board of directors agreed
to lease to petitioners a 1,000-square-meter portion of the encumbered property on which the latter,
eventually, built a residential house. Bancom, the mortgagee, was duly advised of the matter.
The school defaulted in the due payment of the loan. In time, Bancom extrajudicially foreclosed on
the mortgage, and the mortgaged property was sold at public auction on 22 August 1979 with
Bancom coming out to be the only bidder. A certificate of sale was accordingly executed by the
provincial sheriff in favor of Bancom. Subsequently, the latter assigned its credit to herein private
respondent Union Bank of the Philippines.
On 10 October 1984, following the expiration of the redemption period without the college having
exercised its right of redemption, private respondent consolidated title to the property.
On 08 May 1985, private respondent filed with the Regional Trial Court of Nueva Ecija,
Branch XXVIII in Cabanatuan City, an ex-parte motion for the issuance of a writ of
possession not only over the land and school buildings but also the residential house
constructed by petitioners. 2 On 10 May 1985, the lower court granted the motion and directed
the issuance of the corresponding writ.
The ex-officio provincial sheriff, in implementing the writ, thereby also sought the vacation of the
premises by petitioners. When the latter refused, private respondent filed an ex-parte motion for a
special order directing the physical ouster of the occupants.

On 23 May 1986, petitioners formally entered their appearance in the proceedings to oppose the exparte motion. Petitioners averred that, being the owners of the residential house which they
themselves had built on the foreclosed property with the prior knowledge of the mortgagee, they
could not be ousted simply on the basis of a petition for a writ of possession under Act No. 3135.
On 27 May 1986, the lower court, 3 nevertheless, issued an order granting private respondent's motion,
and it directed Atty. Luis T. Castro, in representation of petitioners, to deliver "all the keys to all the rooms
and premises" found on the property foreclosed and authorized, in the event petitioners would refuse to
surrender the keys, private respondent "to enter the premises in question and do what is best for the
preservation of the properties belonging to the Cabanatuan City Colleges." 4
Petitioners sought reconsideration of the order but the lower court denied the motion on 13 June
1986. 5 It ruled that the residential building was included in the writ of possession pursuant to Article 2127
of the Civil Code. Private respondent still sought clarification of the Order, praying that the court issue
another order specifically mentioning the residential house to be among the property which the sheriff
should deliver to it. 6 Although the court found no need to clarify its previous ruling, "in the interest of
justice and to obviate any possible misunderstanding between the parties, however, it issued its order of
18 June 1986 stating:
WHEREFORE, the Ex-Officio Provincial Sheriff, Atty. Numeriano Y. Galang should
implement the order of May 27, 1986 to include therein the residential house being
the subject of dispute between the parties hereto there being no compelling reasons
to exclude it.
SO ORDERED. 7
Petitioners elevated the case to the Court of Appeals, assailing the orders of the court a quo of 27
May 1986, 13 June 1986 and 18 June 1986. On 11 October 1990, the appellate court rendered
decision affirming the questioned orders. 8
There is merit in the instant petition for review on certiorari.
Shorn of unrelated matters, 9 the basic question raised in the petition relates to the proper application of
Article 2127 of the Civil Code. The law reads:
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 passes into the hands of a third
person.
This article extends the effects of the real estate mortgage to accessions and accessories
found on the hypothecated property when the secured obligation becomes due. The law is
predicated on an assumption that the ownership of such accessions and accessories also
belongs to the mortgagor as the owner of the principal. 10 The provision 11 has thus been seen

by the Court, in a long line of cases beginning in 1909 withBischoff vs. Pomar, 12 to mean that all
improvements subsequently introduced or owned by the mortgagor on the encumbered property
are deemed to form part of the mortgage. That the improvements are to be considered so
incorporated only if so owned by the mortgagor is a rule that can hardly be debated since a
contract of security, whether, real or personal, needs as an indispensable element thereof the
ownership by the pledgor or mortgagor of the property pledged or mortgaged. 13 The rationale
should be clear enough in the event of default on the secured obligation, the foreclosure sale
of the property would naturally be the next step that can expectedly follow. A sale would result in
the transmission of title to the buyer which is feasible only if the seller can be in a position to
convey ownership of the thing sold (Article 1458, Civil Code). It is to say, in the instant case, that
a foreclosure would be ineffective unless the mortgagor has title to the property to be
foreclosed. 14

It may not be amiss to state, in passing, that in respect of the lease on the foreclosed property, the
buyer at the foreclosure sale merely succeeds to the rights and obligations of the pledgor-mortgagor
subject, however, to the provisions of Article 1676 of the Civil Code on its possible termination. 15
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE, and a new one
is entered declaring the residential house owned by petitioners to have been improperly included in
the writ of possession issued by the court a quo. No costs.
SO ORDERED.
Feliciano, Romero, Melo and Panganiban, JJ., concur.
Footnotes
1 Penned by Associate Justice Luis A. Javellana and concurred in by Associate
Justices Celso L. Magsino and Filemon H. Mendoza.
2 G.L.R.O. Cad. Rec. 79.
3 Presided by Judge Quirino R. Sadang.
4 Record, p. 116.
5 Ibid., p. 137.
6 Ibid., p. 146.
7 Rollo, p. 56.
8 The Decision also ruled on the private respondent's motion to cite Atty. Luis Castro,
Sr. and Luis Castro, Jr. in contempt of court for concealing from the Court of Appeals
the fact that the Castros had filed an ejectment case against the private respondent
in the Municipal Trial Court of Cabanatuan City where the Castros were able to
secure a writ of preliminary injunction restoring Luis Castro, Jr. to the possession of

the residential building. In denying the petition for contempt, the Court of Appeals
held that the petition should be addressed to the cadastral court which issued the writ
of possession because the issuance of the writ of preliminary injunction constituted
interference with the former court's proceedings.
9 E.g., the dacion en pago executed in favor of the Central Bank by Bancom that
cannot necessarily conclude the basic issues brought up in the petition at bench.
10 "Art. 440. The ownership of property gives the right by accession to everything
which is produced thereby, or which is incorporated or attached thereto, either
naturally or artificially."
11 Taken from Article 1877 of the old Civil Code.
12 12 Phil. 691. See also Cea vs. Villanueva, 18 Phil. 538; Cu Unjieng vs. Mabalacat
Sugar Co., 58 Phil. 439; Berkenkotter vs. Cu Unjieng, 61 Phil. 663.
13 "Art. 2085. The following requisites are essential to the contracts of pledge and
mortgage:
"1. That they be constituted to secure the fulfillment of a principal obligation;
"2. That the pledgor or mortgagor be the absolute owner of the thing pledge or
mortgaged;
"3. That the persons constituting the pledge or mortgage have the free disposal of
their property, and in the absence thereof, that they be legally authorized for the
purpose.
"Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property," (Emphasis supplied.)
14 Section 35, Rule 39, in relation to Section 6 of Act No. 3135, only allows the
possession of a mortgaged property to be awarded to the purchaser in extrajudicial
foreclosures if there is no third party actually holding the property adversely to the
judgment debtor. See also IFC Service Leasing and Acceptance Corp. vs. Nera, 19
SCRA 181; Roxas vs. Buan, 167 SCRA 43.
15 "Art 1676. The purchaser of a piece of land which is under a lease that is not
recorded in the Registry of Property may terminate the lease, save when there is a
stipulation to the contrary in the contract of sale, or when the purchaser knows of the
existence of the lease.
"If the buyer makes use of this right, the lessee may demand that he be allowed to
gather the fruits of the harvest which corresponds to the current agricultural year and
that the vendor indemnify him for damages suffered.

"If the sale is fictitious, for the purpose of extinguishing the lease, the supposed
vendee cannot make use of the right granted if the first paragraph of this article. The
sale is presumed to be fictitious if at the time the supposed vendee demands the
termination of the lease, the sale is not recorded in the Registry of Property."

G.R. No. L-28617 January 31, 1973

SOLEDAD ARANGCO, LAURENTE ABAO, FATIMA ABAO and GRACITA ABAO
(Incompetent minors) represented by their guardian, LEONOR ABAO; CALIXTO, JOCELYN
and SORIANO, all surnamed "ABAO," represented by their natural guardian, ANACORITA
ANDES, plaintiffs-appellees,
vs.
GLORIA BALOSO, defendant-appellant.
Rodolfo A. Madrid for plaintiffs-appellees.
Jose Bernabe for defendant-appellant.

FERNANDO, J.:
It does appear at times, and this appeal on a question of law from a lower court decision is one of
them, that litigants manifest their resentment at losing cases by indulging their propensity for
elevating the matter to a higher tribunal in the hope of a successful outcome, notwithstanding the
absence of any clear illegality or rank injustice in the judgment thus rendered. Counsel, if faithful to
the command of legal ethics insofar as their duty to the judiciary is concerned, would do well to
temper such inclination on the part of clients. Otherwise, the result would be to clog further what is
already the crowded dockets of the courts. There is pertinence in the above observation in the
consideration of this appeal, as the most careful scrutiny of the decision of Judge Roberto Zurbano
fails to yield the slightest indication that in stamping with approval the consignation of the amount
equivalent to the mortgage debt and disregarding the claims of defendant Gloria Baloso, now
appellant, that there were additional sums advanced to plaintiffs, now appellees, 1 admittedly not
covered by such mortgage, there is a violation of the applicable legal norm. The appeal then cannot
prosper.
The antecedents of the case are set forth in the appealed decision thus: "Vicente Abao was married
to Soledad Arangco. Vicente begot (four) children with Soledad namely: Laurente, Jorge, Fatima and
Gracita. Vicente begot (three) children with Anacorita Andes namely: Calixto, Jocelyn and Soriano
after his marriage to Soledad. In 1946, Soledad was brought to the National Mental Hospital where
she is actually confined. On May 28, 1964, Vicente mortgaged to the defendant Gloria Baloso for
P960.00 the parcel of land which Vicente and Soledad acquired after their marriage. On July 24,
1964, another mortgage was executed by Vicente where the consideration was raised to P1,200.00.
On November 17, 1964, another mortgage was executed by Laurente Abao with the conformity of
Leonor Abao for P1,800.00. On June 16, 1966, the widow and the children of Vicente brought this
action seeking to redeem the land from the defendant. On May 4, 1966, the plaintiffs deposited with
the Clerk of Court the sum of P1,800.00 to redeem the land Leonor said that there are (two) houses
built on the land, one is owned by the defendant and the other house is owned by Salvacion who
pays the rental of the land to the defendant and her common-law husband, Piaka, a Chinaman. For
attorney's fees, the plaintiffs paid Atty. Madrid P500.00 aside from the miscellaneous expenses of
P200.00 they incurred in prosecuting the suit. Defendant's evidence is to the effect that she did not

allow the plaintiff to redeem the land because the amount they offered to pay her is only P1,800.00
when the amount that should be paid is P2,600.00. It appears that on July 4, 1964, Vicente
mortgaged the land (Lot No. 539 of the Cadastral Survey of Albay) to the defendant for P1,200.00.
The mortgage consideration was increased to P1,400.00 but the deed of mortgage was not renewed
as according to the defendant, Vicente just initialed the deed of mortgage that he executed on July
24, 1964, after he received the additional amount of P200.00 from her. On October 26, 1964,
Vicente obtained another amount of P100.00 from the defendant. On November 17, 1964, the
consideration of the mortgage was increased to P1,800.00 as shown in the deed of mortgage that
was executed by the plaintiff, Laurente Abao. On January 21, 1965, Leonor, the sister of Vicente
took another amount of P100.00 from the defendant. On February 9 and 14, 1965, Leonor, Jorge,
Fatima and Gracita took from the defendant the amount of P100.00. On March 10, 1965, Leonor,
Jorge, Fatima and Gracita took from the defendant another amount of P100.00. On August 16, 1965,
Jorge, Fatima and Gracita took from the defendant P500.00. Adding the amounts taken from the
defendant by Vicente, Leonor, Laurente, Jorge, Fatima and Gracita, the total sum is P2,600.00." 2
Why such amount of P800.00 could not be considered as included in the mortgage debt was
explained in such decision in this wise: "There is no question that the total amount of P800.00 was
taken by Leonor, Jorge, Fatima and Gracita from the defendant but they contend that they are not
liable for the said amount because at the time the various amounts were taken, Leonor was not yet
appointed guardian of the minor plaintiffs and that Jorge, Fatima and Gracita were then minors. The
Court is convinced that Leonor, Jorge, Fatima and Gracita received the amount of P800.00 from the
defendant. Considering, however, that at the time the amounts were taken, Leonor was not yet
appointed guardian of the minor plaintiffs while Jorge, Fatima and Gracita were minors, the Court
cannot compel them to pay the said amount in these proceedings. However, the Court noted that
Leonor has been appointed guardian of the person and estate of the minor plaintiffs in Special
Proceedings No. 50 pending before the City Court of Legaspi City. The Court, therefore, suggests to
the defendant to prosecute her claim against the minors in the guardianship proceedings so that the
Court may authorize the guardian to pay her the sum of P700.00. Relative to the amount of P100.00
which was taken by Leonor it is but fair and proper that she should be sentenced to pay the
aforesaid sum to the defendant." 3
Accordingly, in the dispositive portion of the decision of the lower court of November 23, 1967, the
redemption of the land subject to the deed of mortgage, the amount of P1,800.00 having been
consigned, was ordered. Likewise, one of the plaintiffs, Leonor Abao, was made to pay the sum of
P100.00, thus leaving only the amount of P700.00 which, according to the lower court, could be
sought from the minors in the proper guardianship proceedings. It would thus appear that the
decision is not susceptible to the indictment that justice, according to law, was not accorded the
parties. Nonetheless, defendant, unwilling to abide by the terms thereof, did prosecute this appeal at
a time when under the Judiciary Act, she could do so as long as questions of law were raised. In tenpage brief filed by her, characterized by brevity that hardly adds to its persuasive character, two
errors of such nature were assigned. Neither one, as will be made clear, suffices for the reversal of
the decision. For the first is so adroitly worded as to yield the misleading impression that the lower
court would not allow recovery of the P700.00 when all that the decision stated was that such a suit
should be prosecuted in the guardianship proceedings in view of the minority of the parties who
obtained the loan. Neither is there any merit to the second assigned error, not only because it

involves a question not passed upon by the lower court, but one essentially factual in character.
Accordingly, as set forth at the outset, this appeal is doomed to futility.
1. As noted, appellant would impute to the lower court the alleged error in holding that appellees
Jorge, Fatima and Gracita Abao "cannot be held liable for the various sums in the total amount of
P700.00 for the reason that the said appellees are minors". 4 Such a characterization of the ruling of
the lower court is, to repeat, misleading. It took some temerity for appellant to make such a flat assertion
when the very decision quoted in her brief clearly states: " `The Court is convinced that Leonor, Jorge,
Fatima and Gracita received the amount of P800.00 from the defendant. Considering however, that at the
time the amounts were taken, Leonor was not yet appointed guardian of the minor plaintiffs while Jorge,
Fatima and Gracita were minors, the Court cannot compel them to pay the said amounts in these
proceedings." " 5 Even the most cursory reading of the above should convince anyone, perhaps not
blinded by his own feeling of frustration, that all that was decided by the lower court was that the payment
of the sum in question, while in fact owing the defendant, could not be ordered in this suit for the
redemption of a mortgage debt. In reaching such a conclusion, the lower court, as it should, merely paid
deference to an am unbroken line of decisions of this Court. As early as 1909, in Nolan v. Majinay, 6this
Court, through Justice Torres, made clear that the recovery of the amount loaned and secured by the
mortgage could alone be the subject of a proceeding in foreclosure, the inference being that the payment
of such sum necessarily would suffice to release the mortgage. Such a doctrine was reiterated
categorically in Lim Julian v. Lutero 7 in the words: "The rule, of course, is well settled that an action to
foreclose a mortgage must be limited to the amount mentioned in the mortgage." 8 It is true, as set forth in
that case, that the exact amount for which the mortgage is given need not be specifically named, future
advancements being likewise covered. Such a contention on the part of the parties must be evident,
however, from a reading of the mortgage "from its four corners." 9 There was a restatement of the above
doctrine inTady-y v. Philippine National Bank, 10 in the opinion of the Court by Justice Regala, thus:
"Indeed, the provision in the mortgage deed, including as part of the obligation future amounts that may
be borrowed by the mortgagors-debtors from the Bank, is not improper. For this Court, in the case of Lim
Julian v. Lutero, 49 Phil. 703, held that the amounts named as consideration in a contract of mortgage do
not limit the amount for which the mortgage may stand as security, if from the four corners of the
instrument the intent to secure future and other indebtedness can be gathered." 11 In the decision now on
appeal, it was very clear that the parties left no doubt as to their true intention. Originally, the mortgage
debt secured was in the amount of P1,200.00. Then, it was increased to P1,400.00. Subsequently, it
reached the sum of P1,800.00. 12 That was the amount consigned. There was nothing in the mortgage to
indicate that the additional P800.00 sought by defendant was likewise included. The lack of any legal
support for the first error assigned, which perhaps led to its being so captiously phrased, is made evident
by its failure to cite any provision of the Civil Code on mortgages or any decision of this Court that would
lend persuasion to such a contention. There was no such citation because none could be found.
2. The second assigned error, to the effect that there was contemplated in the mortgage a fixed
period during which plaintiffs could not redeem the property, can be disposed of summarily. Such a
question was not ventilated before the lower court. As far back as 1904, in Tan Machan v.
Trinidad, 13 for the appellate tribunal to consider a legal question, it must be raised in the court below.
Such a principle has been consistently adhered to. 14 As was categorically announced in City of Manila v.
Roxas 15 by Justice Hull, "the rule is almost universal, and it has been repeatedly followed by this
court ... ." 16 What is worse is that in discussing this alleged error, appellant would have this Court inquire
into the facts to ascertain what the parties had in mind when the mortgage deed was executed. Nothing
can be clearer than that in a review on a question of law, "when a party appeals directly to the Supreme

Court, and submits his case there for decision, he is deemed to have waived the right to dispute any
finding of fact made by the trial court." 17 The second assigned error is thus clearly equally unfounded.

3. Nor is this all. There is need, it would appear, for members of the Bar to temper their enthusiasm
in seeking appellate review whether by an ordinary appeal or through a writ of certiorari. It is well
that they keep ill mind that as officers of the court, they are required to exercise the utmost care and
to undertake the most thorough preparation to assure that all the learning at their command be
brought to bear on the legal questions that might be raised, or, in their opinion, could be raised, for
the resolution of a higher court. To act otherwise would show less than full compliance with their duty
to the bench. Moreover, in the end, it might only signify that in their unbounded optimism they plant
seeds of hope in their client's minds which, unfortunately, may never grow. For obviously unless they
could show the merit in such an appeal, all that they would have accomplished would be to increase
unnecessarily the burden on appellate tribunals. In the final analysis then, the utmost fidelity to a
client's cause requires a more discriminating appraisal of the matter, as in more cases than not, the
prospect for reversal is dim, not to say non-existent. A sense of realism should thus infuse their
actuation. Nor should there be any hesitancy in so informing the disappointed litigant that most likely
the verdict would not be altered. This observation has pertinence in a case like the present where
the lower court was commendably impelled to see to it that the children of the original mortgagor, all
of whom are still in their minority, enjoy the full benefit of the law, ever solicitous of the young. It is
not to be forgotten that appellees in this case had lost their father through a fatal accident, and the
mother was confined as an incompetent in a mental institution. Certainly, only a clear
misinterpretation or misapplication of the controlling legal norms would call for setting aside a
decision that did not only apply settled doctrines but also did manifest full fidelity to the laudable
policy of protecting the minors. 18There is, it must be stressed anew, no such failing in the appealed
judgment.
WHEREFORE, the decision of the lower court dated November 23, 1967 is affirmed. With costs
against defendant.
Makalintal, Zaldivar, Castro, Barredo, Makasiar, Antonio and Esguerra, JJ., concur.
Concepcion, C.J. and Teehankee, J., took no part.

CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA

and RENATO C. TAGUIAM, petitioners, vs. COURT OF APPEALS,
HON. PEDRO T. SANTIAGO, SPS. SO CHING and CRISTINA SO,
and
NATIVE
WEST
INTERNATIONAL
TRADING
CORP.,respondents.
DECISION
FRANCISCO, J.:

China Banking Corporation (China Bank) extended several loans to Native

West International Trading Corporation (Native West) and to So Ching, Native
Wests president. Native West in turn executed promissory notes in favor of
China Bank. So Ching, with the marital consent of his wife, Cristina So,
additionally executed two mortgages over their properties, viz., a real estate
mortgage executed on July 27, 1989 covering a parcel of land situated in
Cubao, Quezon City, under TCT No. 277797, and another executed on
August 10, 1989 covering a parcel of land located in Mandaluyong,
under TCT No. 5363. The promissory notes matured and despite due
demands by China Bank neither private respondents Native West nor So
Ching paid. Pursuant to a provision embodied in the two mortgage contracts,
China Bank filed petitions for the extra-judicial foreclosure of the mortgaged
properties before Notary Public Atty. Renato E. Taguiam for TCT No. 277797,
and Notary Public Atty. Reynaldo M. Cabusora for TCT No. 5363, copies of
which were given to the spouses So Ching and Cristina So. After due notice
and publication, the notaries public scheduled the foreclosure sale of the
spouses real estate properties on April 13, 1993. Eight days before the
foreclosure sale, however, private respondents filed a complaint with the
Regional Trial Court for accounting with damages and with temporary
restraining order against petitioners alleging the following causes of action:
[1]

[2]

[3]

[4]

[5]

[6]

[7]

A. Defendants failed to comply with the mandates of Administrative Order No. 3

of the Supreme Court dated October 19, 1984.
B. Defendants failed to comply with the mandates of Section 2 Presidential
Decree No. 1079 dated January 28, 1977.

C. MORTGAGORS liability limited to P6,500,000.00 and P3,500,000.00

respectively in the Mortgages Annexes A and B respectively, but the same are
not included in the notice of foreclosure.
D. Violation of Truth in Lending Act (RP Act No. 3765).
E. In all the loans granted by DEFENDANT-BANK to plaintiffs and Borrowers,
the Bank charged interests in excess of the rate allowed by the Central Bank.
F. Violation of Article 1308 of the Civil Code.

[8]

On April 7, 1993, the trial court issued a temporary restraining order to enjoin
the foreclosure sale. Thereafter counsels for the respective parties agreed to
file their pleadings and to submit the case, without further hearing, for
resolution. On April 28, 1993, the trial court, without passing upon the material
averments of the complaint, issued an Order granting the private respondents
prayer for the issuance of preliminary injunction with the following proffered
justification:
From the foregoing, it is quite apparent that a question of accounting poses a thorny
issue as between the litigants. Variance in the amounts involved relating to the loan
agreements must be judiciously passed upon by the Court and this is only possible if a
trial on the merits could be had as the matters appurtenant thereto are evidentiary in
nature.
Under the premises, the accounting issue being evidentiary in character calls for an
issuance of a writ of preliminary injunction pending the adjudication of the case. The
issuance thereof at this particular stage of the case is merely a preventive remedy
designed to protect from irreparable injury to property or other rights plaintiff may
suffer, which a court of equity may take cognizance of by commanding acts to be
done or prohibiting their commission, as in the instant suit, to restrain notaries public
Cabusora and Taguiam as well as defendant China Banking Corporation from
continuing with the auction sale of the subject properties, until further orders from this
Court.
Wherefore, premises considered, finding that the circumstances warrant the issuance
of a preliminary injunction, plaintiffs prayer is hereby GRANTED. Consequent

thereto, plaintiffs are hereby ordered to post a bond amounting to P1 (ONE) Million to
answer for whatever damages defendant may suffer as a consequence of the writ.
[9]

Petitioners moved for reconsideration, but it was denied in an Order

datedSeptember 23, 1993. To annul the trial courts Orders of April 28,
1993 and September
23,
1993,
petitioners
elevated
the
case
through certiorari and prohibition before public respondent Court of Appeals.
In a decision dated January 17, 1995, respondent Court of Appeals held that
Administrative Circular No. 3 is the governing rule in extra-judicial foreclosure
of mortgage, which circular petitioners however failed to follow, and with
respect to the publication of the notice of the auction sale, the provisions of
P.D. No. 1079 is the applicable statute, which decree petitioners similarly
failed to obey. Respondent Court of Appeals did not pass upon the other
issues and confined its additional lengthy discussion on the validity of the trial
courts issuance of the preliminary injunction, finding the same neither
capricious nor whimsical exercise of judgment that could amount to grave
abuse of discretion. The Court of Appeals accordingly dismissed the petition,
as well as petitioners subsequent motion for reconsideration. Hence, the
instant petition under Rule 45 of the Rules of Court reiterating the grounds
raised before respondent court, to wit:
[10]

[11]

[12]

[13]

[14]

I. PETITIONER CBCS PETITIONS TO EXTRA-JUDICIALLY FORECLOSE

THE REAL ESTATE MORTGAGES OF JULY 27,
1989 AND AUGUST 10, 1989 THRU PETITIONERS-NOTARIES
PUBLIC, AND THE SCHEDULED FORECLOSURE SALE ARE
VALID AND LAWFUL;
II. PRIVATE RESPONDENTS AND PETITIONER CBC HAD EXPRESSLY
AGREED TO CONSIDER THE SAME MORTGAGES AS VALID
SECURITIES FOR PROMPT AND FULL PAYMENT OF ALL AND
ANY OBLIGATIONS OF THE FORMER FROM THE LATTER;
III. THE SUPPOSED VARIANCE IN THE TOTAL AMOUNT OF UNPAID
LOANS IS NOT A VALID BASIS TO ENJOIN THE FORECLOSURE
OF THE QUESTIONED MORTGAGES. THE MERE FAILURE TO
PAY THE LOAN SECURED BY SAID MORTGAGES IS THE ONLY,
SINGLE REASON FOR THEIR LAWFUL FORECLOSURE;

IV. PETITIONER BANK HAD FURNISHED PRIVATE RESPONDENTS WITH

COPIES OF DISCLOSURE STATEMENTS IN COMPLIANCE WITH
THE TRUTH IN LENDING ACT, AND CHARGED THEM
INTERESTS IN ACCORDANCE WITH LAW AND PURSUANT TO
ITS EXPRESS AGREEMENT WITH THE LATTER;
V. THE P1.0 MILLION INJUNCTION BOND REQUIRED BY THE
HONORABLE COURT A QUO ON PRIVATE RESPONDENTS IS
GROSSLY AND PATENTLY INADEQUATE.
[15]

At the outset, the Courts attention is drawn to the fact that since the filing
of this suit before the trial court, none of the substantial issues have been
resolved. To avoid and gloss over the issues raised by the parties, as what the
trial court and respondent Court of Appeals did, would unduly prolong this
litigation
involving
a
rather
simple
case
of
foreclosure
of
mortgage. Undoubtedly, this will run counter to the avowed purpose of the
rules, i.e., to assist the parties in obtaining just, speedy and inexpensive
determination of every action or proceeding. The Court, therefore, feels that
the central issues of the case, albeit unresolved by the courts below, should
now be settled specially as they involved pure questions of law. Furthermore,
the pleadings of the respective parties on file have amply ventilated their
various positions and arguments on the matter necessitating prompt
adjudication.
[16]

Now to the core issues.

As the Court sees it, the crucial issues are: (1) whether or not the loans in
excess of the amounts expressly stated in the mortgage contracts can be
included as part of the loans secured by the real estate mortgages, (2)
whether or not petitioners can extrajudicially foreclose the properties subject
of the mortgages, (3) whether or not Administrative Order No. 3 should govern
the extrajudicial foreclosure of the properties, and (4) whether or not the writ
of preliminary injunction issued by the trial court is valid.
Petitioners aver that the additional loans extended in favor of private
respondents in excess of P6,500,000.00 and P3,500,000.00 amounts
respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage

contracts are also secured by the same collaterals or real estate properties,
citing as bases the introductory paragraph (whereas clause) of the mortgage
contracts, as well as the stipulations stated therein under the first and second
paragraphs. Private respondents for their part argue that the additional loans
are clean loans, relying on some isolated parts of the same introductory
paragraph and first paragraph of the contracts, and also of the third
paragraph.
As both parties offered a conflicting interpretation of the contract, then
judicial determination of the parties intention is thus, inevitable. Hereunder
are the pertinent identical introductory paragraphs and paragraphs 1 to 3 of
the July 27, 1989 and August 10, 1989 mortgage contracts:
[17]

WHEREAS, the MORTGAGEE has granted, and may from time to time hereafter
grant to the MORTGAGOR(S)/either of them/and/or NATIVE WEST
INTERNATIONAL TRADING CORP. hereinafter called the DEBTOR(S) credit
facilities not exceeding SIX MILLION FIVE HUNDRED THOUSAND PESOS
ONLY (P6,500,000.00) Philippine currency, and the MORTGAGEE had required the
MORTGAGOR(S) to give collateral security for the payment of any and all
obligations heretofore contracted/incurred and which may thereafter be
contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S), or any one of
them, in favor of the MORTGAGEE;
*

NOW, THEREFORE, as collateral security for the payment of the principal and
interest of the indebtedness/obligations herein referred to and the faithful performance
by the MORTGAGOR(S) of his (her, its) obligations hereunder, the
MORTGAGOR(S) hereby execute(s) a FIRST MORTGAGE, in favor of the
MORTGAGEE, free from all liens and encumbrances of any kind, that (those) certain
parcel(s) of land, together with all the buildings/machineries/equipment/
improvements now existing thereon, and which may hereafter be placed thereon,
described in the Schedule of mortgaged properties described hereunder and/or which
is hereto attached, marked Exhibit A and made a part thereof.
1. It is agreed that this mortgage shall respond for all the obligations
contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) or any one of them,
in favor of the MORTGAGEE up to the said sum of SIX MILLION FIVE
HUNDRED THOUSAND PESOS ONLY (P6,500,000.00) regardless of the manner in
*

which the said obligations may have been contracted/incurred by the

MORTGAGOR(S) and/or DEBTOR(S) whether by advances or loans made to him
(her, it) by the MORTGAGEE, by the negotiation of mercantile documents, including
trust receipts, by the execution by the MORTGAGOR(S) and/or DEBTOR(S) of
money market instruments/commercial papers, undertakings of guaranty of
suretyship, or by endorsement of negotiable instruments, or otherwise, the idea being
to make this deed a comprehensive and all embracing security that it is.
2. Payments on account of the principal and interest of the credit granted by the
MORTGAGEE to the MORTGAGOR(S) and/or DEBTOR(S) may be made from time
to time, and as often as the MORTGAGOR(S) may elect; provided, however, that in
the event of such payments being so made that the indebtedness to the MORTGAGEE
may from time to time be reduced the MORTGAGEE may make further advances and
all sums whatsoever advanced by the MORTGAGEE shall be secured by this
mortgage, and partial payments of said indebtedness from time to time shall not
thereby be taken to reduce by the amount of such payments the credit hereby secured.
The said credit shall extend to and account which shall, within the said limit
ofP6,500,000.00* exclusive of interest, be fluctuating and subject to increase or
decrease from time to time as the MORTGAGEE may approve, and this mortgage
shall stand as security for all indebtedness of the MORTGAGOR(S) and/or
DEBTOR(S), or any one of them, at any and all times outstanding, regardless of
partial or full payments at any time or times made by the MORTGAGOR(S) and/or
DEBTOR(S).
3. It is hereby agreed that the MORTGAGEE may from time to time grant the
MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the amount secured by this
mortgage, without affecting the liability of the MORTGAGOR(S) under this mortgage
up to the amount stipulated.
[18]

An important task in contract interpretation is the ascertainment of the

intention of the contracting parties which is accomplished by looking at the
words they used to project that intention in their contract, i.e., all the words,
not just a particular word or two, and words in context, not words standing
alone. Indeed, Article 1374 of the Civil Code, states that the various
stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken
jointly. Applying the rule, we find that the parties intent is to constitute the real
[19]

estate properties as continuing securities liable for future obligations beyond

the amounts of P6.5 million andP3.5 million respectively stipulated in the July
27, 1989 and August 10, 1989 mortgage contracts. Thus, while the whereas
clause initially provides that the mortgagee has granted, and may from time to
time hereafter grant to the mortgagors x x x credit facilities not exceeding six
million five hundred thousand pesos only (P6,500,000.00) yet in the same
clause it provides that the mortgagee had required the mortgagor(s) to give
collateral security for the payment of any and all obligations heretofore
contracted/incurred and which may thereafter be contracted/incurred by the
mortgagor(s) and/or debtor(s), or any one of them, in favor of the mortgagee
which qualifies the initial part and shows that the collaterals or real estate
properties serve as securities for future obligations. The first which ends with
the clause, the idea being to make this deed a comprehensive and all
embracing security that it is supports this qualification.
**

Similarly, the second provides that the mortgagee may take further
advances and all sums whatsoever advanced by the mortgagee shall be
secured by this mortgagee x x x. And although it was stated that [t]he said
credit shall extend to any account which shall, within the said limit
of P6,500,000.00 exclusive of interest, this part of the second sentence is
again qualified by its succeeding portion which provides that this mortgage
shall stand as security for all indebtedness of the mortgagor(s) and/or
debtor(s), or any one of them, at any and all times outstanding ... Again, under
the third paragraph, it is provided that the mortgagee may from time to time
grant the mortgagor(s)/debtor(s) credit facilities exceeding the amount
secured by this mortgage x x x. The fourth paragraph, in addition, states that
x x x all such withdrawals, and payments, whether evidenced by promissory
notes or otherwise, shall be secured by this mortgage which manifestly shows
that the parties principally intended to constitute the real estate properties as
continuing securities for additional advancements which the mortgagee may,
upon application, extend. It is well settled that mortgages given to secure
future advancements or loans are valid and legal contracts, and that the
amounts named as consideration in said contracts do not limit the amount for
which the mortgage may stand as security if from the four corners of the
instrument the intent to secure future and other indebtedness can be
gathered.
[20]

[21]

Anent the second issue, we find that petitioners are entitled to foreclose
the mortgages. In their complaint for accounting with damages pending with
the trial court, private respondents averred that:
8. Up to and until February, 1993, PLAINTIFF-CORPORATION had paid to the
DEFENDANT-BANK, the amount of THREE HUNDRED FIFTY THOUSAND
(P350,000.00) Pesos, Philippine Currency, and was willing to pay the balance in
installments of FOUR HUNDRED THOUSAND (P400,000.00) Pesos, Philippine
Currency, every month, in the meantime, but the DEFENDANT-BANK refused to
accept, demanding instead SEVEN HUNDRED MILLION (P700,000,000.00) Pesos,
Philippine Currency, a month.
9. Inspite of the expressed willingness and commitment of plaintiffs to pay their
obligation in a manner which they could afford, on March 11, 1993, MORTGAGORS
and DEFENDANT-CORPORATION, each received a Letter of Demand from
DEFENDANT-BANK, for the payment of P28,775,615.14 exclusive of interest and
penalty evidenced by 11 promissory notes enclosed therein x x x.
10. Upon receipt of the letter, PLAINTIFF-CORPORATION through its President
pleaded with the Chairman of the Board of the DEFENDANT-BANK, through whom
Defendant-Corporation was transacting business with, to accept its offer of payment
of FOUR HUNDRED THOUSAND (P400,000.00) Pesos, Philippine Currency, a
month, in the meantime, which was again refused by the said Chairman.
[22]

which allegations are a clear admission that they were unable to settle to the
fullest their obligation. Foreclosure is valid where the debtors, as in this case,
are in default in the payment of their obligation. The essence of a contract of
mortgage indebtedness is that a property has been identified or set apart from
the mass of the property of the debtor-mortgagor as security for the payment
of money or the fulfillment of an obligation to answer the amount of
indebtedness, in case of default of payment. It is a settled rule that in a real
estate mortgage when the obligation is not paid when due, the mortgagee has
the right to foreclose the mortgage and to have the property seized and sold in
view of applying the proceeds to the payment of the obligation. In fact, aside
from the mortgage contracts, the promissory notes executed to evidence the
loans also authorize the mortgagee to foreclose on the mortgages. Thus:
[23]

[24]

[25]

x x x CHINA BANKING CORPORATION is hereby authorized to sell at public or

private sales such securities or things of value for the purpose of applying their
proceeds to such payments.
[26]

And while private respondents aver that they have already paid ten million
pesos, an allegation which has still to be settled before the trial court, the
same cannot be utilized as a shield to enjoin the foreclosure sale. A mortgage
given to secure advancements, we repeat, is a continuing security and is not
discharged by repayment of the amount named in the mortgage, until the full
amount of the advancements are paid.
[27]

With respect to the third issue, we find private respondents contention that
Administrative Order No. 3 is the governing rule in foreclosure of mortgages
misplaced. The parties, we note, have stipulated that the provisions of Act No.
3135 is the controlling law in case of foreclosure. Thus:
17. The MORTGAGOR(S) hereby grant(s) unto the MORTGAGEE full and
irrevocable power of attorney coupled with interest, in the event of breach of any of
the conditions of this mortgage, to sell, in its discretion, the mortgaged properties at
public auction, for cash and to the highest bidder, in the Province or City where the
mortgaged properties are located, before the Sheriff, or a Notary Public, without court
proceedings, after posting notices of sale for a period of twenty days in three public
places in said place; and after publication of such notice in a newspaper of general
circulation in the said place once a week, for three consecutive weeks, and the
MORTGAGEE is hereby authorized to execute the deed of sale and all such other
documents as may be necessary in the premises all in accordance with the provisions
of Act No. 3135 of the Philippine Legislature,as amended, and Section 78 of Republic
Act No. 337; x x x. (Underscoring supplied. )
[28]

By invoking the said Act, there is no doubt that it must govern the manner in
which the sale and redemption shall be effected. Clearly, the fundamental
principle that contracts are respected as the law between the contracting
parties finds application in the present case, specially where they are not
contrary to law, morals, good customs and public policy.
[29]

[30]

Moreover, Administrative Order No. 3 is a directive for executive judges

and clerks of courts which, under its preliminary paragraph is [i]n line with the

responsibility of an Executive Judge, under Administrative Order No. 6, dated

June 30, 1975, for the management of courts within his administrative area,
included in which is the task of supervising directly the work of the Clerk of
Court, who is also the Ex-Oficio Sheriff, and his staff, x x x Surely, a petition
for foreclosure with the notary public is not within the contemplation of the
aforesaid directive as the same is not filed with the court. At any rate,
Administrative Order No. 3 cannot prevail over Act No. 3135, as amended. It
is an elementary principle in statutory construction that a statute is superior to
an administrative directive and the former cannot be repealed or amended by
the latter.
On the last issue, we find that the issuance of the writ of injunction by the
trial court unjustified. A writ of preliminary injunction, as an ancillary or
preventive remedy, may only be resorted to by a litigant to protect or preserve
his rights or interests and for no other purpose during the pendency of the
principal action. But before a writ of preliminary injunction may be issued,
there must be a clear showing by the complaint that there exists a right to be
protected and that the acts against which the writ is to be directed are violative
of the said right. In the case at bench, we fail to see any reason why the
foreclosure of the mortgages should be enjoined. On the face of the clear
admission by private respondents that they were unable to settle their
obligations which were secured by the mortgages, petitioners have a clear
right to foreclose the mortgages which is a remedy provided by law. Thus, in
Caltex Philippines, Inc. v. Intermediate Appellate Court, we reiterated the rule
that:
[31]

[32]

[33]

x x x where a debt is secured by a mortgage and there is a default in payment on the

part of the mortgagor, the mortgagee has a choice of one (1) or two (2) remedies, but
he cannot have both. The mortgagee may:
1) foreclosure the mortgage; or
2) file an ordinary action to collect the debt.
When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces
his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale
will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on

the property. In case of a deficiency, the mortgagee has the right to claim for the
deficiency resulting from the price obtained in the sale of the real property at public
auction and the outstanding obligation at the time of the foreclosure proceedings
(Soriano v. Enriquez, 24 Phil. 584; Banco de Islas Filipinas v.Concepcion Hijos, 53
Phil. 86; Banco Nacional v. Barreto, 53 Phil. 101).
On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby
waives his mortgage lien. He will have no more priority over the mortgaged
property. If the judgment in the action to collect is favorable to him, and it becomes
final and executory, he can enforce said judgment by execution. He can even levy
execution on the same mortgaged property, but he will not have priority over the latter
and there may be other creditors who have better lien on the properties of the
mortgagor.
[34]

WHEREFORE, the instant petition is hereby GRANTED. The assailed

Decision, as well as the Resolution, of the Court of Appeals dated January 17,
1995 and July 7, 1995, respectively, are hereby REVERSED and SET
ASIDE. The preliminary writ of injunction issued by the trial court is
hereby NULLIFIED. This case is REMANDED to the court of origin for further
proceedings in conformity with this decision.
SO ORDERED.
Narvasa C.J., (Chairman), Davide, Jr., Melo, and Panganiban, JJ., concur.

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COURT OF

APPEALS and THE SPOUSES ALEJANDRO and AMPARO
CASAFRANCA, respondents.
DECISION
DAVIDE, JR., J:

This petition for review on certiorari seeks: (1) a modification of the

decision of 29 April 1994 of the Court of Appeals in CA-G.R. CV No.
38332[1] affirming in toto the 20 April 1992 ruling of the Regional Trial Court
(RTC) of Cebu, Branch 16, in Civil Case No. CEB-6779;[2] and (2) a review of
the appellate courts resolution of 4 January 1995[3]denying the petitioners
Motion for Partial reconsideration[4] of the aforementioned decision.
The sole issue in this case is whether, in the foreclosure of a real estate
mortgage, the penalties stipulated in two promissory notes secured by the
mortgage may be charged against the mortgagors as part of the sums
secured, although the mortgage contract does not mention the said penalties.
The Court of Appeals adopted the trial courts findings of facts, to wit:
The following antecedental facts are supported by the pleadings and evidence on
record: Plaintiff spouses Alejandro and Amparo Casafranca, used to be the owners
of Lot 802-B-2-B-2-F-1 of the subdivision plan Psd-698545, located in Cebu City and
covered by TCT No. 32769 (Exh A). On 3 December 1976 they sold the lot to Carlos
Po who paid part of the agreed price. The latter, after securing a title in his name (TCT
No. 66446), mortgaged the lot to the Philippine Bank of Communications (PBCom for
short) to secure a loan of P330,000 (Exh B). It appears that in a civil action that
ensued between them, plaintiff spouses obtained a favorable judgment against Carlos
Po (Exh C). Later, in an auction sale to satisfy Carlos Pos judgment obligation,
plaintiff spouses acquired the aforesaid lot and a Certificate of Sale was executed in
their favor (Exh D).
Meanwhile, under date of 9 September 1980 PBCom applied for extrajudicial
foreclosure of the mortgage executed by Carlos Po (Exh E), and in the succeeding
auction sale held on 4 November 1980, it acquired the lot at its winning bid of

P1,006,540.56. The corresponding Certificate of Sale was then executed in its favor
(Exh F). It appears further that sometime in 1981 plaintiff Amparo Casafranca who
had stepped into the shoes of mortgagor Carlos Po by virtue of the auction sale in her
favor (Exh D) offered to redeem the property from PBCom by tendering to its
manager, Isidore Falek, a check in the amount of P500,000 which, in her estimate,
would be sufficient to settle the account of Carlos Po. PBCom did not accept the
check as it insisted that any such redemption should be at the price it acquired the lot
in the auction sale. In reaction, plaintiffs filed against PBCom Civil Case No. R-21700
in the RTC of Cebu for nullification of the foreclosure and auction sale (Exh M). In a
judgment which became final and executory on 17 September 1986 (Exh H) the Court
set aside the extrajudicial foreclosure and auction sale and declared that the obligation
secured by the mortgage executed by Carlos Po was only P330,000 plus stipulated
interest and charges (Exh G). Subsequently, in a letter dated 4 December 1986
PBCom advised plaintiff spouses to pay the sum of P884,281.38 purportedly
representing Carlos Pos principal account of P330,000, interest and charges thereon,
attorneys fee[s] and realty taxes which it paid for the lot (Exh. I). Plaintiffs, however,
did not agree with said Statement of Account and since the account remained unpaid,
PBCom again applied for extrajudicial foreclosure of mortgage (Exh J), which
culminated in an auction sale of the lot on 2 April 1987, during which it was sold to
Natalie Limchio for P1,184,000 (Exh L).
On 6 April 1988 plaintiffs commenced the present action to nullify the auction sale in
favor of Natalie Limchio. It is alleged in the complaint that the second foreclosure
was void as it was based on a bloated account. Plaintiffs further alleged that PBCom
refused to turn over the correct amount of residue after paying off the mortgage and
costs of the sale. Upon plaintiffs application, the Court issued on 7 April 1988 a TRO
enjoining defendant sheriffs from transferring the title of the lot in favor of defendant
Natalie Limchio and the latter, from taking possession of the lot. This was followed by
a preliminary injunctive writ which was issued after hearing and upon plaintiffs filing
of a bond. However, before the pre-trial conference could be held, plaintiffs signified
their intention to pursue only their alternative demand for the residue or balance of the
proceeds of the auction sale less the correct outstanding account which was secured
by the mortgage. For this purpose they filed an amended complaint only against
PBCom (pp. 296-305, rollo) which was admitted, in which they pray for recovery of
the sum of P625,724.90 as residue after paying off the outstanding account [to] the
tune of P558,275.80, realty taxes paid by PBCom and costs of the foreclosure

proceeding. Hence, what is left for the Court to ascertain is the true or correct account
of Carlos Po as of the auction sale on 2 April 1987 after which, the determination of
the residue would follow. . .[5]
As to the amounts due the parties, the trial court computed them as
follows:
The mortgage contract (Exh B) explicitly provides for interest of Twelve per cent
(12%) per annum or at such higher rate or rates as may be fixed by the MORTGAGEE
from time to time, and shall be payable at the end of every month or otherwise, as the
MORTGAGEE may elect and, if not so paid, shall be added to, and become part of,
the principal and shall earn interest at the same rate as the principal. It is then evident
that the parties agreed to capitalize the interest due and unpaid, which as added
principal, shall earn new interest. Herein lies the discrepancy in the computation
respectively submitted by plaintiffs (pp. 190-191; 204-209, Rollo) and PBCom (pp.
181-183, Rollo), for while the former assessed only conventional or simple interest,
the latter computed compound interest conformable to the mortgage contract. In this
connection, the Court finds PBComs computation of interest to be in accordance with
the contractual stipulations of the parties. It may be stressed that the increase in the
rate of interest from 12% to 14% as of 1 December 1979 is authorized in the mortgage
contract itself as sanctioned by CB Circular No. 705 dated 1 December 1979. PBCom
is further entitled to reimbursement for realty taxes it paid for the lot. But of course,
penalties and charges are not due for want of stipulation in the mortgage contract.
To recapitulate, the principal loan obtained by Carlos Po (now succeeded by plaintiffs)
on 15 December 1976 was P330,000. Interest thereon for the first year at 12% per
annum was retained or deducted from the proceeds of the loan. For the next two (2)
years or from 25 December 1977 to30 November 1979, compound interests earned at
the same rate reached P77,660. And then from 1 December 1979 to 2 April 1987 (date
of auction sale) the rate of interest was raised to 14% per annum, as authorized in the
mortgage contract. At such rate, compound interests for said period would be in the
sum of P343,805. Adding both interest earnings to the principal obligation, the total
account would then be P751,465. Additionally, the mortgage contract provides for
attorneys fee[s] equivalent to 10% of the amounts due. Hence, the sum of P75,146.50
in the concept of attorneys fee[s] would raise the account to P826,611.50. Finally, the
amount of P83,028.18 representing realty taxes paid by PBCom for the lot, inclusive

of interest, which must be reimbursed, will bring the grand total of the account to
P909,639.68.
On the other hand, the publication and other expenses incurred in the foreclosure and
auction sale [to] the tune of P707 should be deducted from the amount of P1,184,000
which Natalie Limchio paid for the lot, leaving net proceeds of P1,183,293.
Subtracting therefrom the total account due to PBCom, the residue would be
P273,653.32, which must be delivered to plaintiffs. [6]
In the light of the above, the trial court thus ruled:
WHEREFORE, foregoing premises considered, judgment is hereby rendered in favor
of plaintiffs Alejandro and Amparo Casafranca for the sum of P273,653.32
representing the residue or balance of the proceeds of the auction sale conducted on 2
April 1987 after deducting therefrom publication expenses and paying off the total
account due to defendant Philippine Bank of Communications, and ordering the latter
to pay unto plaintiffs the aforesaid amount.
SO ORDERED.[7]
Both parties appealed from the above judgment to the Court of Appeals.
The petitioner questioned the lower courts failure to include in its computation
the penalty stipulated in the aforementioned promissory notes. On the other
hand, the private respondents advanced that: (1) the interest on the sum due
to the petitioner should have stopped running on 31 July 1981; (2) the lower
court should have allowed twelve percent (12%) interest per annum on the
amount awarded to the private respondents from 3 April 1987 until the
obligation was fully paid; and (3) the lower court should have awarded the
private respondents moral and exemplary damages, attorneys fees, and
litigation expenses.
The Court of Appeals affirmed the decision of the trial court in toto and
subsequently denied the parties separate motions for reconsideration.
The petitioner and the private respondents then instituted with this Court
separate petitions for certiorari under Rule 45 of the Rules of Court. While that
of the petitioner was docketed as G.R. No. 118552 (this case), that of the

private respondents was docketed as G.R. No. 118809 and assigned to the
Second Division. However, the two actions were not consolidated.
The private respondents in this case filed their Comment [8] to the petition
as required in the resolution of 8 February 1995.[9]
On 13 March 1995, the Second
which dismissed G.R. No. 118809, thus:

Division

issued

resolution

[F]or failure to persuasively demonstrate any reversible error in the

challenged judgment of the Fourth Division of the Court of Appeals
promulgated on April 29, 1994 - affirming in toto that of the Regional Trial
Court of Cebu rendered by Judge (now Court of Appeals Justice) Godardo A.
Jacinto on April 20, 1992 (Civil Case No. CEB-6779) - it appearing on the
contrary, that both judgments correctly appreciated the evidence and applied
the relevant legal provisions in ruling, essentially, that there had been no valid
tender of payment by petitioners of the amount of the mortgage liability
burdening the property in question, and that the computation of the amount
rightly due said petitioners had been correctly made in accordance with the
law applicable to the case (Act No. 3135, as amended). Moreover, the record
discloses no important and special reason for the exercise by this Court of its
discretionary power of review in this case.[10]
On 9 May 1995, this Court received the
Manifestation[11]drawing our attention to this resolution.

private

respondents

On 23 August 1995, we gave due course to the petition [12] and required the
parties to submit their respective memoranda, which they subsequently did.
The private respondents contended that [a]ctually there are no more issues
left for this Honorable Court to decide because all the issues in controversy in
this case has [sic] already been decided with finality by the Second Division of
the Supreme Court in G.R. No. 118809.[13] To which, the petitioner
replied[14] that the G.R. No. 118809 resolution dispensed with only those issues
raised therein by the private respondents and did not touch on the questions
raised in this case.
The petition is not impressed with merit.

The two promissory notes in question, signed by Carlos Po, [15] are similarly
worded and their pertinent provisions read:
For value received, I/we jointly and severally, promise to pay the Philippine Bank of
Communications, at its office in the City of Cebu, Philippines the sum of THREE
HUNDRED THOUSAND PESOS (P300,000.00), Philippine Currency, together with
interest thereon at the rate of TWELVE % per annum until paid, which interest rate
the Bank may at any time without notice, raise within the limits allowed by law, and
I/we also agree to pay, jointly and solidarily 12% per annum penalty charge, by way
of liquidated damages should this note be unpaid or is not renewed on due date.
xxxxxxxxx
Should it become necessary to collect this note through an attorney-at-law, I/we
hereby expressly agree to pay, jointly and severally, ten per cent (10%) of the total
amount due on this note as attorneys fees which in no case shall be less than P 100.00
exclusive of all costs and fees allowed by law stipulated in the contract of real estate
mortgage if any there be.
while the mortgage contract provides in part:[16]
This mortgage is given as security for the payment to the MORTGAGEE on demand
or at maturity, as the case may be, of all promissory notes, letters of credit, trust
receipts, bills of exchange, drafts, overdrafts and all other obligations of every kind
already incurred or which hereafter may be incurred by the MORTGAGOR(S) and
Pos All Electrical Supply either as principal debtor(s) or as surety(ies) or in any other
capacity, including discounts of Chinese and other drafts, bills of exchange,
promissory notes, even without any further endorsements by the Mortgagor(s), said
property or properties to stand security for the payment of the said obligations to the
fullest extent and for all that it is (or they are) worth, to the extent of THREE
HUNDRED THIRTY THOUSAND PESOS (P330,003.00) Philippine Currency.
xxxxxxxxx
This mortgage shall be subject to the following conditions, to wit:
FIRST: The interest on the obligations secured by this mortgage shall be computed at
the rate of Twelve per cent (12%) per annum or at such other or higher rate or rates

as may be fixed by the MORTGAGEE from time to time, and shall be payable at the
end of every month or otherwise, as the MORTGAGEE may elect and if not so paid,
shall be added to, and become part of, the principal and shall earn interest at the
same rate as the principal.

xxxxxxxxx
EIGHTH: The MORTGAGOR(S) shall, during the existence of this mortgage, promptly
pay when due all taxes or assessments of every kind that may be levied upon the
property or properties hereby mortgaged and deliver the corresponding tax receipts
to the MORTGAGEE,.. . In case of failure on the part of the MORTGAGOR(S) to
comply with the provisions of this condition, the MORTGAGEE may and is hereby
authorized to pay such taxes or assessments and to have the buildings insured; and
any sum or sums so spent by the MORTGAGEE shall be fully secured hereby and
be subject to the terms hereof. .

xxxxxxxxx
ELEVENTH: The expenses incurred in the drafting, acknowledgment and the
registration of this mortgage and of its cancellation, shall be for the account of, and
shall be paid by, the MORTGAGOR(S).
TWELFTH: Should the MORTGAGEE find it necessary to resort to the courts in order
to collect any amount which may be due, the interest thereon or the expenses
incurred on account of the matters enumerated in the previous paragraphs, or
should the MORTGAGEE in any manner and for any reason be involved in litigation
on account of the property or properties mortgaged, or should foreclosure
proceedings be instituted in accordance with the fourth condition hereof or should
the MORTGAGOR(S) encumber the property or properties hereby mortgaged with a
second mortgage without the written consent of the MORTGAGEE, the
MORTGAGEE shall be allowed a sum equivalent to Ten Per Centum (10%) of all
the amounts due, but in no case less than THIRTY THREE THOUSAND PESOS as
attorneys fees, said amount to be considered part of the principal sum hereby
secured, this mortgage answering for its payment accordingly.

We immediately discern that the mortgage contract does not at all mention
the penalties stipulated in the promissory notes. However, the petitioner
insists that the penalties are covered by the following provision of the
mortgage contract:
This mortgage is given as security for the payment to the MORTGAGEE on
demand or at maturity, as the case may be, of all promissory notes, letters of
credit, trust receipts, bills of exchange, drafts, overdrafts and all other

obligations of every kind already incurred or which hereafter may be

incurred. . .
The petitioners insistence is based on the supposed rule:
[T]hat the determination of the mortgage debt would not be limited on the
mortgage contract itself if from the face thereof, it is apparent that other
obligations are also intended to be secured.
To bolster its argument, the petitioner relies on the cases represented
by Mojica vs. Court of Appeals[17] which held:
It has long been settled by a long line of decisions that mortgages to secure future
advancements are valid and legal contracts; that the amounts named as consideration
in said contract do not limit the amount for which the mortgage may stand as security
if from the four corners of the instrument the intent to secure future and other
indebtedness can be gathered.[18]
The Court is unconvinced for the cases relied upon by the petitioner are
inapplicable. The doctrine first laid down in Lim Julian vs. Lutero[19] pertains
only to mortgages securing future advancements.
The petitioner would not have been misled into thinking otherwise had it
properly quoted Mojica in its petition. The following explanation is helpful to
distinguish future advancements from the loan in the case at bench:
It is not uncommon that persons enter into a contract whereby they draw sums of
money from their creditors, usually banks, from time to time, and as security therefor
execute a mortgage on their property. Such contracts are sometimes executed for an
account smaller or larger than that actually borrowed. Thus, it may appear in the
contract that the loan secured by the mortgage is only for P10,000 when by reason of
advancements made by the creditor to the debtor the amount ultimately drawn and
borrowed is P20,000. Under these circumstances it is inequitable to consider that the
mortgage can be foreclosed only for the amount of P 10,000. Indeed, no bank or
creditor would be willing to make such advancements which are in excess of the
amount stipulated if the payment thereof is not secured . . . [20]

The obligation in this case was not a series of indeterminate sums

incurred over a period of time, but two specific amounts procured in a single
instance. Thus, the inapplicability of Lim Julian. Instead, what applies here is
the general rule that an action to foreclose a mortgage must be limited to the
amount mentioned in the mortgage.[21]
Aside from the foregoing, other factors militate against the petitioners
stance.
The mortgage provision relied upon by the petitioner is known in American
jurisprudence as a dragnet clause, which is specifically phrased to subsume
all debts of past or future origin. Such clauses are carefully scrutinized and
strictly construed.[22]
The mortgage contract is also one of adhesion as it was prepared solely
by the petitioner and the only participation of the other party was the affixing of
his signature or adhesion thereto. Being a contract of adhesion, the mortgage
is to be strictly construed against the petitioner, the party which prepared the
agreement. [23]
A reading, not only of the earlier quoted provision, but of the entire
mortgage contract yields no mention of penalty charges.[24] Construing this
silence strictly against the petitioner, it can fairly be concluded that the
petitioner did not intend to include the penalties on the promissory notes in the
secured amount. This explains the finding by the trial court, as affirmed by the
Court of Appeals, that penalties and charges are not due for want of
stipulation in the mortgage contract. [25]
Indeed, a mortgage must sufficiently describe the debt sought to be
secured, which description must not be such as to mislead or deceive, and an
obligation is not secured by a mortgage unless it comes fairly within the terms
of the mortgage.[26] In this case, the mortgage contract provides that it secures
notes and other evidences of indebtedness. Under the rule of ejusdem
generis,[27] where a description of things of a particular class or kind is
accompanied by words of a generic character, the generic words will usually
be limited to things of a kindred nature with those particularly
enumerated. [28] A penalty charge does not belong to the species of obligations

enumerated in the mortgage, hence, the said contract cannot be understood

to secure the penalty.
There is also sufficient authority to declare that any ambiguity in a contract
whose terms are susceptible of different interpretations must be read against
the party who drafted it.[29]
A mortgage and a note secured by it are deemed parts of one transaction
and are construed together,[30] thus, an ambiguity is created when the notes
provide for the payment of a penalty but the mortgage contract does not.
Construing the ambiguity against the petitioner, it follows that no penalty was
intended to be covered by the mortgage. The mortgage contract consisted of
three pages with no less than seventeen conditions in fine print; it included
provisions for interest and attorneys fees similar to those in the promissory
notes; and it even provided for the payment of taxes and insurance charges.
Plainly. the petitioner can be as specific as it wants to be, yet it simply did not
specify nor even allude to, that the penalty in the promissory notes would be
secured by the mortgage. This can then only be interpreted to mean that the
petitioner had no design of including the penalty in the amount secured.
It should also be noted that the private respondents consistently excluded
penalty charges in their computation of the amount due to the petitioner,
[31]
while the petitioner seemed indecisive in including the said charges.
In its Manifestation[32] of 14 May 1988 before the trial court, the petitioner
computed the penalty charge as follows:
Penalty charge on the principal
amount of P330,000.00 from
Dec. 25, 1977 to April 2, 1987
at the rate of 8% per annum . . . . . . . . . . . . . . . . . . . . . . (P)248,233.33
The promissory notes provided for a 12% per annum penalty,[33] not eight
percent (8%). The petitioner explained this discrepancy in its
Memorandum[34] submitted to the trial court, claiming:

On the contrary, the banks computation of the actual amount of the

mortgage debt should be upheld. In fact, the bank was lenient on the spouses
in computing the amount of the debt. For instance, the rate of charges
stipulated is 12% per annum.. . Yet the bank computed the charges at a much
lesser rate . . . thereby lessening the actual amount of the mortgage debt.[35]
The petitioner, however, included in its Offer of Exhibits :[36]
14. EXHIBIT 14- Promissory Note No. 3838 dated 25 October 1977.
14-A - Stipulation on penalty/bank charges.
PURPOSE:
. 3) It is stipulated that PBCom could impose penalty charges of 12% per annum; and
4) PBCom was liberal on plaintiffs as it did not impose the full extent of the stipulated
charges.
Far then from being a display of lenience or liberality, the above
circumstances evince the petitioners uncertainty as to whether penalty
charges were actually due it. In fact, in a statement of account [37] signed by the
petitioners Senior Vice-President, Isidore Falek, there was no mention of a
penalty charge, although there was an entry stating:
Interest:
xxxxxxxxx
8% Bank charges P248,233.33
Furthermore, the promissory notes are clear that the penalty shall be at
12% per annum, neither more nor less. Thus, when the petitioner claims that
under the same notes it could impose, as in fact it did, the lower penalty of 8%
- contrary to what was covenanted - the petitioner only reveals that it is wont
to stipulate what it does not mean. The private respondent then should not be
faulted for the petitioners imperfection, and the latter must bear the
consequences of its failings.

It is interesting to note that the petition in this case did not include a
computation of the sum due as penalty which is the very matter in dispute.
The petitioner merely pegged its claim at 12% per annum on the principal
amount of P330,000.00 computed from 1977,[38] which was likewise a
departure from the 8% interest rate which it insisted upon during trial.
After interpreting the mortgage contract strictly against the petitioner,
considering the intention of the parties as evidenced by their various
pleadings and assertions, the inescapable conclusion is that the mortgage
contract did not authorize the petitioner to include in the secured amount the
penalty stipulated in the promissory notes. The mortgage contract did not
contain a trace of the said penalty and, proceeding by the rule that an action
to foreclose a mortgage must be limited to the amount mentioned in the
mortgage, such penalty can not be recovered on the foreclosure of the
mortgage.
WHEREFORE, finding no reversible error on the part of respondent Court
of Appeals, its challenged decision of 29 April 1994 in CA-G.R. CV No. 38332
is hereby AFFIRMED in toto.
Costs against the petitioner.
SO ORDERED.
Narvasa, C.J. (Chairman), Melo, and Francisco, JJ., concur.